The Interplay Between User Innovation, the Patent System and Product Liability Laws: Policy Implications

The Interplay Between User Innovation, the Patent System and Product Liability Laws: Policy Implications

Stijepko Tokic, J.D., LL.M.

Innovation is a heavily used buzzword in the United States of America, and the fixation with innovation has deep roots in American society. It was even suggested that “America is innovation.” The “innovate or die” mindset, famously articulated by Bill Gates in his Congressional testimony in 1998, has been mentioned in at least ten books going back to 1958. Over time, the popularity of the slogan “Innovate or Die” made the slogan itself a business, as it is now commercially sold as a poster.

One of the primary issues in innovation debates is the role of the patent system in promoting innovation. Recognizing the importance of stimulating innovation, the Framers of the Constitution authorized the United States Congress (Congress) “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The Patent Act of 1790 was the first act enacted by Congress, and the law gave inventors rights to their creations for the first time in American history. While the notion that intellectual property rights are designed to create incentives to innovate, and ultimately to promote innovation, has been repeatedly acknowledged by the Supreme Court of the United States (Supreme Court), many scholars continue to question that notion and argue that the patent system currently does the exact opposite: stifles innovation.

The criticism of the patent system today is vast. To begin with, multiple studies have shown that the quality of issued patents is very questionable, as many litigated patents were found to be invalid. The skyrocketing number of issued patents represents another concern because it makes it more difficult to commercialize new technology due to a risk of a potential infringement. On a more substantive side, commentators have pointed out that patent rights receive overprotection, while the standards to grant patents decrease, which inherently shrinks the public domain and deters innovative activity by others. Furthermore, lawsuits involving so-called “patent trolls,” defined as “somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced,” have garnered a significant attention in various mainstream media outlets, ranging from the President’s State of the Union Address to popular comedy shows. Finally, a great deal of attention has been devoted to settlements in the pharmaceutical industry, known as reverse-payment settlements, where a plaintiff—a branded drug company—provides a payment to the defendant— a generic drug company—in exchange for the generic manufacturer’s agreement to drop the lawsuit and stay out of the market for a period on time.

Within the last decade or so, courts, including the Supreme Court, and legislators, including Congress, have addressed many of the underlying issues with the patent system. For example, the Supreme Court has heard multiple cases on patentable subject matter and, arguably, limited patent rights in terms of patentable subject matter. Other decisions have made it easier to invalidate patents based on obviousness, and provided more economic incentives to challenge patent validity, which can all help with eliminating “bad” patents from the market place. Furthermore, a number of decisions have limited the ability of “patent trolls” to enforce their patents and “extort” settlements. Finally, a fairly recent Supreme Court decision has significantly changed the framework for evaluating the antitrust implications of reverse payment settlements, which could discourage such settlements.

In addition to court decisions, multiple legislative acts have been introduced to improve the patent system. Namely, the long awaited Leahy-Smith America Invents Act (AIA) enacted in 2011 provides a major overhaul of the patent system, as it requires many substantive and procedural reforms of the patent system, such as new mechanisms for third parties to challenge patent validity, various filing reforms, patent examination reforms, including a new definition of “prior” art, and many others. In addition to Federal legislation, multiple states have enacted creative statues to combat the issue of patent trolls. Federal legislation dealing with patent trolls is also currently pending.

While commentators still analyze the intended and unintended effects of the efforts to improve the patent system, this Article has a different focus. In particular, this Article addresses the question of whether the patent system is even necessary to incentivize innovation. The influential empirical studies of MIT’s Eric von Hippel and his colleagues suggest that innovation can thrive without the patent system altogether, which only retards innovation. Relying on the empirical evidence of thriving “user innovation,” scholars challenge the notion that only profit-motivated producers innovate. The essence of their arguments is that private users are motivated solely by the private return they get from using their own innovation without expecting to profit from selling it, and thriving user innovation casts into question the role of the patent system in promoting innovation.

This Article acknowledges that the patent system fails in many respects. However, the Article challenges the notion that innovation can thrive without the patent system. The Article argues that the patent system does more than simply provide incentives to innovate, as the patent system encourages competition, stimulates and attracts investments and, ultimately, promotes general welfare through innovations. With respect to claims that thriving “user innovation” is proof that the patent system is not essential to stimulating innovation, the Article points out that debates and empirical studies concerning “user innovation” largely ignore the interplay between product liability laws and innovation. The Article suggests that the evolution of product liability laws greatly affects innovation because it is proven that expected product liability costs, if too high, might depress innovation and marketing of certain products. However, user innovation stands largely outside of the scope of product liability laws, so user-innovators can be more innovative than producers/manufacturers, which can possibly explain why user innovation currently thrives. The Article warns that calls to reevaluate intellectual property rights fueled by research on user innovation should be taken with much caution not only because of the barefaced issues related to promoting and diffusing innovation, but also because of latent issues related to product liability laws.

The Article is divided as follows: Part II reviews the literature on user innovation, provides a brief overview of the origins, goals, and policy behind patent laws, and analyses the interplay between the patent system and user innovation. Part III first provides a brief overview of the evolution of product liability laws, and examines the interplay between product liability laws and innovation. Part III then discusses the very current debate about diffusion and adoption of user innovation, and explores the insufficiently explored interplay between product liability laws and user innovation. Part IV discusses the interplay between the patent system and product liability laws.

99 J. Pat. & Trademark Off. Soc’y 20(2017)

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