The Value of Giving Away Secrets

By Oren Bar-Gill (Harvard) and Gideon Parchomovsky (University of Pennsylvania)
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--Summary by the authors

Summary

In recent years a growing number of firms have elected to forego patent protection and have chosen instead to publish their research findings openly. More than 1,000 companies have adopted this strategy. The leading specialized journal, Research Disclosure, publishes about 400 disclosures each month, and several Web sites dedicated to publishing research results have been launched.

This article attempts to explain the shift from patenting to unprotected publication. Our theory is based on the counterintuitive idea that stronger patent protection may in fact harm the inventor. Broad patents may be particularly detrimental in cumulative innovation settings, where researchers make incremental improvements on an original invention.

In such settings, licensing is an important source of revenues for existing inventors, but the need to negotiate licenses poses a barrier to future inventors, who hope to develop follow-on inventions. A broad patent on the original invention forces follow-on inventors to bargain for a license under unfavorable conditions. Broad protection lets the original inventor extract the lion’s share of the value created by the cumulative invention. At first glance, it seems that the original inventor would favor this kind of patent protection. We show, however, that this intuition may often be misleading.

Specifically, the assumption that the original inventor would prefer a broader patent presumes that the cumulative invention will in fact be developed.  But this is by no means a given. Generally, the cumulative inventor would need to make significant investments in development before she could approach the original inventor and bargain for a license. If a broad patent protects the original invention and the cumulative inventor expects to be held-up in the bargaining stage, she might decide to forego developing the cumulative invention altogether.

The breadth of the original patent determines the division of profits between the original and cumulative inventors. If the share that the cumulative inventor expects to receive does not cover her development costs, then she will not develop the invention. This result is clearly detrimental, not only to the cumulative inventor but to the original inventor, too.[1]

Publication provides a mechanism for redistributing the bargaining surplus between the original inventor and cumulative innovators. Instead of opting for a broader patent, the original inventor can choose to publish some part of the information that constitutes her discovery. By publishing part of her discovery, the original inventor weakens her bargaining position at the licensing negotiations stage and commits a larger share of the profits to the cumulative inventor. However, this larger share could induce the creation of cumulative inventions that may not have been produced otherwise.[2] By ceding some of the bargaining surplus, the original inventor increases the potential rewards, both for cumulative inventors and for herself.

In our model, publication maintains a critical element of the patenting process—the dissemination of new information. However, while conventional wisdom views the publication that accompanies a patent as a necessary evil for the inventor, we argue that the original inventor will often find it in her best interest simply to publish the information rather than protecting it with a patent. Publication allows the original inventor to send a credible signal that she will not try to appropriate all of the cumulative innovator’s gains later and thereby encourages innovators to develop follow-on inventions.

The article has several important implications for patent theory and practice. First, it calls into question the standard assumption among patent scholars and practitioners that patentees always prefer to seek broad protection. When innovation is cumulative—as is almost always the case today—patentees can often increase their returns by giving up some protection and publishing research results. As it turns out, for many inventors, less can actually be more.

Second, we demonstrate that narrower patents coupled with publication align inventors’ profits more closely with social welfare. Economists recognize that broad patent protection in cumulative innovation settings may impede subsequent innovation and thus diminish social welfare (see, e.g., Machlup & Penrose 1950, Scotchmer 1991, Chang 1995, Gallini & Scotchmer 2001). Our analysis suggests that broad patents make sense for only a relatively small set of firms, under particular circumstances. Most other firms should find it in their interest to restrict their patent protection and actively encourage cumulative innovation.

Third, we argue that the increased willingness to publish research findings will enhance the efficiency of innovation incentives. The pro-publication trend guarantees that some technological and scientific information will remain available to all. The recent spate of publications may serve as a counter-force to the much-lamented “anti-commons” problem, which stems from the over-protection of scientific knowledge.

The publication strategy may promote dynamic efficiency in another way. Often, a basic discovery may hold little value without cumulative improvements. By promoting cumulative innovation, the publishing strategy increases the return from investment in the initial invention.

Finally, the article calls for a modest but crucial reform in patent law. Currently, inventors are allowed to publish research findings and seek patent protection for them later, as long as they file for a patent no later than a year after the publication date. The right to patent previously published results dilutes the signal sent by publishing and is likely to ward off cumulative innovators. Patent applications are published eighteen months after filing date, and until then aspiring improvers are unlikely to rely on publications. To realize the full beneficial effect of publications and to prevent abuse, the law should let inventors credibly commit not to patent research results after they publish them.

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