Patents as Incomplete Contracts: Aligning Incentives for R&D Investment with Incentives to Disclose Prior Art

Abstract

In high technology areas such as biotechnology and computer software, the U.S. Patent and Trademark Office (PTO) is poorly informed about the relevant prior art. In these cases, it may be optimal for the PTO to provide incentives to the patentee to produce a complete prior art disclosure. Such incentives could accord a specific, high presumption of validity to the prior art disclosed by the patentee, thereby limiting the use of the disclosed prior art for invalidation purposes in subsequent (i.e., post-issuance) litigation. Building upon Grossman and Hart's model of incomplete contracts, we show that a regime that trades a reduction in post-issuance litigation uncertainty for a complete prior art disclosure maximizes social welfare because it benefits both the patentee and the PTO. The patentee favorably views the reduction in litigation uncertainty and greater control over the possibility of the public's perspective, a fuller prior art disclosure may allow the PTO to grant patent rights commensurate with innovation and to avoid the detrimental consequences of an overbroad patent grant. In sum, this proposal is an incentive-capatible trade that maximizes joint social surplus. The optimal policy for high technology inventions (characterized by asymmetric information and high productivity effects) provides incentives for well-informed patentees to reveal information regarding the relevant prior art to the PTO during patent prosecution. This is consonant with a body of contracting literature that proposes that when parties are asymmetrically informed, default rules that penalize the more informed party will be welfare-enhancing by inducing that party to reveal information. However, in our case, we do not impose a penalty on the better-informed party, the patentee. Rather, we permit a transfer of ex post bargaining rights (i.e., reduce the public's residual right to invalidate the patent) in order to induce the better-informed party to reduce the informational asymmetry between the patentee and the PTO.