Patent law and new product development: does priority claim basis make a difference

INTRODUCTION

For many years, the structure of patent law in various countries has been the subject of discipline-specific debate. Although new issues arise and some changes are made to the law, many of the arguments remain both unchanged and unresolved. In the United States, for example, proposals to change from a First-To-Invent (FTI) priority claim basis to a First-To-File (FTF) basis seem to reappear every fifteen to twenty years. The literature contains many opinions on the expected legal implications of changes in the law, but few analyze whether the law has an impact on the day-to-day activities of inventors. Alternatively, a tremendous amount of work has been done on best practices in new product planning and development, but little of it recognizes the specific legal environment under which innovation is conducted.

This article seeks to bring an interdisciplinary perspective to the discussion on the structure of patent law, utilizing a legal framework but adding empirical evidence from marketing, management, and economic studies on innovation. By bringing together each of the disparate streams of scholarship, we can better address specific policy issues such as whether priority claim basis really does make a difference. After a brief review of this literature, the article will provide background on the U.S. and other patent systems, focusing on the terms of the debate on priority claim basis. The article then will consider evidence on how new product development is conducted, as well as how such evidence contributes to the discussion on the legal issues.

BACKGROUND

Priority claim basis has been considered at some length in the legal literature. The United States is currently almost unique in the world in holding on to a First-To-Invent (FTI) system. The FTI system promises patent rights to the first party to conceive of the invention, regardless of whom first files the application. In both the late sixties (General Revision of Patent Laws 1968) and the early nineties (Advisory Commission on Patent Law Reform 1992

The arguments among legal scholars over the two systems have developed to the point where they are “so familiar they are referred to in shorthand” ((Patent System Harmonization Act of 1992 1992, p. 2 (statement of Professor Robert Merges, School of Law, Boston University)). Wiggs (1991) presents a fine summary of the arguments. The pro-FTF faction tends to stress the ease of determining priority (and avoiding lengthy and expensive court battles), the efficiency of processing international patents, and the fact that in the vast majority of cases the first inventor and the first filer are the same party (Curesky 1989

Most of this discussion, however, is founded either in broad generalizations (on both sides) and/or anecdotal evidence. Indeed, a good deal of the legal discussion focuses more on “what if circumstances which may never occur (e.g., Gholz 1990), rather than on the likely impact of policies on the concrete activities of typical inventors or classes of inventors. Thus, the managerial studies found in other disciplines may provide much to enlighten the debate, as is evidenced by the advent of national innovation system (NIS) studies in the past decade.

Rosenberg’s (1982) historical studies prompted interest in the conditions which impact the development and diffusion of new technologies. This led to the NIS studies which were formulated by Winter (1984) and developed by Nelson (1993). NIS work considers the overall environment within which innovation takes place. The impetus for this was the readily apparent difference in innovation output between countries that had seemingly similar inputs. The largest divergence, for example, among major trading nations is found between the United States and Japan. Both countries spend substantial amounts on R&D, have adequate numbers of trained scientists and engineers, and access to domestic and foreign markets for successful innovations. The nature of their inventive output and inventive communities, however, is very different. Japan produces many more patents per head, sees most of the work done in large corporations, and produces primarily incremental and/or process-oriented innovations. The United States produces fewer patents per capita, has a more diverse inventive community, and, while certainly also participating in incremental innovation, produces a greater share of pioneering, new-to-the world and/or product-oriented innovations (Erickson 1995

What’s the explanation for these differences? Basically, the differences are found in the NIS of each country. Matters such as government subsidies for R&D, tax policy toward R&D spending, government procurement, antitrust attitudes, market receptivity to innovations, economic culture (entrepreneurial or collective), and, yes, even the type of patent system, are part of these systems. While a patent system, in and of itself, will not push a country toward innovations of a certain type, it certainly can fit with the rest of a consistent NIS to encourage particular types of inventive activity and output. Indeed, at least some evidence suggests that a strengthening of the patent system can lead, in a relatively short time, to specific results. For example, in the early eighties the U.S. moved to a specialized court of appeals for patent cases, strengthening the patent system (Silverstein 1991), and apparently encouraging more total and small entity inventor applications (Kastriner 1991

Moreover, a nation’s culture can have an impact on the legal framework. The entrepreneurial U.S. economic culture, for example, celebrates the idea of uncovering a new technology, gaining exclusive rights to its use, and venturing out on one’s own to make a fortune. Individuals from Thomas Edison to Bill Gates have become well-known popular culture figures because of their ability to innovate and profit from their ideas. However, in a more collective economic culture such as Japan, “[T]he nail that sticks out is hammered down.” ((Effect of Japanese Patent System on American Business 1988, p.69 (statement of U.S. Senator John J. Rockefeller)). Individuals are expected to contribute to the group (including firm and nation), rather than seek personal enrichment or celebrity. These cultural differences are reflected in the patent laws (Herbig and McCarty 1993

NIS analysis, however, can raise as many questions as it answers. These macro-level studies focus on inputs, outputs, and broad societal, industrial, and governmental structures. However, they do not yet provide explanations as to how all of these forces interact to produce the observed results. If a specific patent system does help to encourage a greater amount of pioneering innovation, how does it do so? In order to affect output, the law and its surrounding environment must change behavior in some way. If so, in what ways are the day-to-day activities of inventors affected by the environment?

In answering such questions, we can turn to a fairly detailed literature on how new product development takes place and how to best manage the process. In both the marketing literature (e.g., Montoya-Weiss and Calantone 1994

Even here, however, we do not have the entire story. In spite of these illuminating case studies, such scholarship generally has not addressed the environmental concepts implicit in NIS studies, or the more theoretical arguments of the legal profession about the impact of a given patent system on the conduct of innovation. Thus, a fairly substantial gap exists in the literature–matching up the macro and micro perspectives of innovation research in order to address such issues as whether a particular legal structure might engender different individual and firm behavior, hence accounting for differences among nations. Moreover, as proposals to change the environmental structures (such as patent law) proliferate, it becomes particularly important to understand how such changes may impact innovation.

PRIORITY CLAIM BASIS

Essentially, patents are a deal between an inventor and the government which represents society and industry at large. The inventor is granted exclusive rights to the manufacture, use, sale, and importation of the invention

As with a number of economic analyses, however, it can be somewhat problematic to translate the theoretical patent into the actual structure practiced in the real world. Patent systems differ in terms of both statute and practice. One major difference is in priority claim, which determines entitlement to patent protection in disputed cases.

The manner in which the First-To-File (FTF) system, as practiced in Europe and Japan, diverges from the First-To-Invent (FTI) system, as practiced in the United States, is often seen as providing protection for the first to file an application versus protection for the first to conceive of the invention. This division into two categories, however, is overly simplistic. For example, both Japan and Germany have FTF systems, but the practice of each country is noticeably dissimilar.

To thoroughly understand the priority claim issue, we first must have a basic understanding of the specific differences between patent systems. This warrants taking a closer look at the United States and Japan. The patent systems in these two countries have been the subject of the most attention, not only because they belong to the countries generally considered most technologically-advanced, but also because their systems are the most different among the major trading nations. Indeed, the U.S. patent system and the Japanese patent system can be viewed as two ends of a continuum of patent systems in the industrialized world, with the European patent systems falling somewhere between these two extremes. Since all European systems are FTF, they tend to the Japanese side of the continuum, but do provide more breadth of protection than the Japanese system.

The United States’ FTI system theoretically promises the patent to the inventor at the point of conception, when the idea is first formed. Proof of conception has traditionally been provided by dated laboratory notebooks, though a 1995 move to a provisional patent application (Miller 1996) has enabled willing inventors to more firmly establish the conception date in such a preliminary filing. To be patentable, the invention must be novel, useful, and non-obvious. Using due diligence, the inventor then must reduce the concept to practice, essentially proving it works, either by building a working model or by explaining its workings according to generally-accepted engineering principles. If the inventor is happy with the invention in this form, he or she can proceed to filing the application. The patent application must reveal and describe the best mode of practicing the invention, describe any prior art incorporated within it, and enumerate the specific claims of the inventor as to why the invention is patentable, as well as the areas in which protection is deserved. The application is examined at the U.S. Patent & Trademark Office (USPTO) and, if found deserving of protection, the patent is awarded. Currently, the technology is not disclosed until the awarding of the patent, though considerable momentum is behind a proposal to automatically publish all applications after eighteen months, whether granted or not. As a result, opposition by competing inventors (that the applicant is not the FTI inventor or that the invention is not novel, useful, or non-obvious) is on a post-grant basis only. The U.S. also recently moved from a seventeen-year post-grant term for patents to a twenty-year post-application term (35 U.S.C. 154 (a)(2)).

The Japanese FTF system also requires a novel, useful, and non obvious invention. Conception obviously must take place, but it is not a determinant in awarding the patent rights. Reduction-to-practice does not need to take place, so applications can be filed on inventions, even if not yet proven to work. The technology is publicly disclosed eighteen months after filing, and, until recently, both pre-grant and post-grant oppositions were pursued by any number of interested parties, including competitors. The application itself is similar to that in the U.S. However, the Japanese Patent & Trademark Office (JPTO) only recently (1988) allowed more than a single “head claim.” The tendency is still to favor fewer rather than more claims in the application. If the patent is granted, post-grant oppositions are still allowed for a limited time (six months), and the standard term of protection is for twenty years from the date of application (“Views From Across the Pacific” 1990).

While there are significant differences in the law, in practice the two systems are even more dissimilar (for a more complete discussion, see sources such as Kotabe 1992

U.S. government concerns that Japanese patent practices may constitute an unfair administrative trade barrier, however, have resulted in recent years in some changes in the Japanese system. A 1994 bilateral agreement between the U.S. and Japan, which took effect in January 1996, ended the Japanese practice of pre-opposition grants and included a promise to process, within thirty-six months, all foreign applications requesting expedited treatment (Cooper 1994). The Japanese Patent Office later announced that it would seek, by the year 2000, to decrease processing times for all applications to twelve months. Such actions should reduce the administrative burden for foreign applicants, although some observers remain concerned that the actual administration of the system will favor even more narrow patents given the pressure to push applications more quickly through the process (Motsenbocker 1996).

The nature of each system easily can lead one to believe that the priority claim basis seems to “fit” with the other provisions of patent law in each country, as well as with the overall national innovation system. Indeed, it appears that the protection mechanisms have evolved to match the needs of inventors operating under each NIS. Japan, for example, not only has the FTF priority claim basis that encourages rapid filings, but also the more limited scope of protection–both of which suit a country used to sharing technological information and competing on manufacturing and marketing expertise, rather than protecting unique access to a given invention. The quick disclosure provisions not only more quickly disseminate information, but also lead to opposition filings and patent floodings by competitors, both of which tend to undermine the scope of the eventual patent grant. Thus, the Japanese patent system uniquely fits a nation whose NIS values a more cooperative approach to technological innovation (Erickson 1996b).

The U.S. system better fits the individualistic economic culture found in this country. The FTI priority claim basis that encourages more care in preparing the invention and its filing, provides a broader scope of protection, and limits administrative tools open to competitors, works to guarantee better protection to U.S. inventors than their Japanese counterparts. Again, it seems that the system evolved to fit its milieu.

Because the patent system in each country and its environment are so intertwined, one must consider the damage that could occur if one makes changes in the law that are inconsistent with the cultural milieu. Consider, for example, the proposed change in U.S. disclosure law. Currently, U.S. filings are not disclosed until the patent is granted, on average eighteen months after filing. Discussions have begun on disclosing all applications after eighteen months, regardless of whether the patent has been granted, seemingly a small change for most patentees. In terms of the overall system, however, the change

could cause some major disruptions for some participants. The current disclosure term gives applicants a choice. Once the application is filed, there is usually some give-and-take with the USPTO examiner over the claims of the patent–essentially over what will be allowed in the final document. If the inventor is not satisfied with the examiner’s final decision on the scope of coverage in the patent, the application can be withdrawn and the technological details will not be revealed. That choice disappears under a system of automatic disclosure at eighteen months. It seems a small change, but it does remove at least one avenue of protection from the U.S. inventor–a choice of how to best protect the invention. As a result, it reduces inventors’ abilities to appropriate their technologies and moves closer to the dissemination model as used in Japan.

Another characteristic of the U.S. system is the range of options available to protect innovations, from trade secrets to strong patents. Entities can choose the mechanism appropriate to their technology, industry, or position in the industry. One little discussed aspect of FTI is that it permits the first inventor to bar patents by later inventors, even if a patent is never filed and the idea is held as a trade secret. As the true inventor, the first party may lose its own patenting rights by not filing with “due diligence,” but may always retain a block against competitive filings. Alternatively, under FTF, a first inventor conceivably could be barred from using its own technology if a later inventor chooses to pursue the patent eschewed by the first. The dilemma created is whether to file, and expose the technology, or not to file and risk losing it to a later filer. Again, the bias of the system is to dissemination, not protection. Does such a system fit the U.S. economic culture? To answer such questions, we need a further exploration of how such changes will affect behavior.

So what are the implications for us in determining whether the legal structure itself can cause such differences? As with the NIS evidence, we see different outputs from two recognizably dissimilar systems. We have some general ideas about why the differences exist, but, again, no detailed explanations concerning the activities of inventors. Can evidence from other fields concerning the conduct of the innovation process help us in pinning down how a priority claim basis might impact inventive behavior?

INVENTIVE ACTIVITIES

Empirical research in economics, marketing, and management does provide some support for the impact of an NIS in general, as well as the impact of a priority claim basis in particular. In this article, the focus will be on two key themes found in the literature. First, there is a growing recognition that incremental and pioneering innovations are very different matters and probably should be managed differently. Second, speed to market, which is related to the choice between incremental and pioneering innovation, focuses on the circumstances when one should move quickly with the innovation process. What both themes have in common is evidence of an increasing realization among scholars that invention is, indeed, environment-dependent, especially the commercial aspects of gaining returns to invention, which if successful turns the concept into a successful innovation. Circumstances will dictate how inventors will respond to the issues raised by these two themes

Pioneering vs. Incremental Innovation

The discussion of the distinction between pioneering (“new-to-the-world”) and incremental (“me-too”) innovation has been with us for quite some time (Ali 1994), but in recent years increasing attention is being given this topic. For example, Griffin’s (1997) work now breaks the divisions down even more finely, with pioneering and incremental innovations as the anchors of a full spectrum of strategies.

Why does the distinction matter? Basically, patent systems very well may favor different types of innovation (Silverstein 1991). We know from past studies that both the innovation management strategy and the intellectual property protection strategy may differ, for a number of reasons, from case to case. One of the primary ways strategy may differ seems to be the type of innovation undertaken ((see Krubasik 1988 for an interesting discussion of the differences in IBM’s development of the PC (incremental) and Boeing’s work on the 767 (more pioneering)). A well-known piece of research, the “Yale Study,” published in the late eighties (Levin, et al. 1987), showed that a large sample of corporations considered patent protection relatively unimportant, rating alternatives such as secrecy, speed to market, and rapidly building scale as significantly more important methods for protecting their intellectual property. The overall conclusion was that perhaps patents are not really worth all the trouble, thereby rendering the patent system unimportant.

Mansfield (1986), however, found such conclusions to be highly industry-specific. In fields such as pharmaceuticals and chemicals, a substantial number of innovations would not have occurred without patent protection. Note that these industries, and others such as aerospace and biotechnology, are precisely those in which the innovation is more likely to be of the pioneering than the incremental type. Thus, we have some industries which face a great deal of risk in trying to make substantial inventive jumps. These types of innovations generally take a substantial time period to bring to market (Griffin 1997) and use a significant portion of the R&D budget. In these industries, inventors will want the strongest possible protection in order to better insure ownership of the inventions’ proceeds. These factors explain the preference for patents in some industries, such as pharmaceuticals

However, in industries in which inventive leaps are minor, in which risk is relatively minor, and the market is moving very quickly, considerations such as secrecy, speed to market, and rapidly building scale may be much more important. Given the realities of patent filings, (eighteen months processing time on average in the U.S., four to five years historically in Japan, though the nation committed to a three-year goal starting in 1996), certain technologies may be developed, introduced to market, and rendered obsolete before a patent is even issued. In these situations, the preference presumably would be for weak patents, at best, and perhaps no real patent protection at all, but rather more dependence on other alternatives as specified in the Yale Study.

The Yale Study did not address whether the conclusions about the value of a patent system varied for different types of inventors depending on their size. Only large corporations were included in the Yale Study. Mansfield (1986) did address the issue, but even he examined only firms with a minimum of $25 million in sales. Thus, we have little information about small entity inventors for whom speed to market (limited resources), secrecy (dependence on larger suppliers/customers), and rapidly building scale may be problematic. The USPTO tracks only statistics on the number of individual inventors, not on small entities, per se. However, an examination of more than 1,300 inventors listed in the May 27, 1997 Official Gazette of the USPTO showed a full 50 percent of domestic patentees came from entities with one thousand employees or less, or from the nonprofit sector (Erickson 1998). While large corporations are obviously an important piece of the innovation community, they also have more options than the smaller entities and are probably less dependent on the patent system in the first place (as suggested by the Yale Study). For whom do we design the patent system? Presumably we have designed it for those that depend upon it, the pioneering inventors and the small entity inventors, both of whom are so much more prominent under the current United States NIS and its complimentary patent structure.

Speed to Market

As previously noted, in some fields the technology moves so quickly as to render immaterial legal protection of the underlying intellectual property of innovations. Indeed, a substantial amount of work has been done on how to speed up the innovation process in order to be first to market with a product (e.g., Gupta and Wilemon 1990

Thus, the question arises as to whether the speed to market decision is environment-dependent? It certainly seems so, especially when we consider the underpinnings of the speed to market strategies. It long has been recognized that a time/cost tradeoff exists (Scherer 1965

Concurrent engineering can drastically speed up the process, but it also may result in tremendous inefficiencies. Innovation is inherently uncertain, of course, and moving away from a sequential process means that a task may be undertaken whose results may be impossible to implement given results from a different task occurring at the same time. Preparing manufacturing plans based on a given model of an invention, for example, may come to nothing if that particular model proves to be non-optimal. Any such dead end will sink not only the activity that uncovered it, but all concurrent activities that were based on the assumption that it would have a successful outcome. Thus, the increased costs of speeding up the innovation process with concurrent engineering are found in situations when inherently risky activities do not pan out. In addition, when the uncertainties are highest (pioneering innovation), the likelihood of these inefficiencies grows.

This time/cost tradeoff has further implications. Assuming R&D budgets are fixed, spending more on speeding up the high-priority project means decreased spending somewhere else. Similarly, within a given project increased spending on speeding up approaches means less spending on less-promising approaches

IMPLICATIONS FOR POLICY

The implications for policy are clear. Not all types of innovation are the same. Depending on the industry, standing in that industry, risktaking orientation, and numerous other matters, different entities pursue different types of innovations along a continuum ranging from pioneering to incremental innovations. Currently, these entities have choices in terms of how to protect these activities, including patents, trade secrets, speed to market, and rapidly building scale. They also have choices, for example, in terms of how hard to push the innovation process, whether to move sequentially through conception, workability, or to engineer concurrently.

The United States’ FTI system promotes the ability to seek pioneering innovations, protect them with strong, broad patents, and investigate a wide range of technological alternatives in sequence. Protection for innovation starts at conception, so any activities undertaken until filing conceivably are done without worries about losing patent rights to another filer. Further, there is no danger of losing rights to a technology that has been protected as a trade secret rather than through a patent. In a number, perhaps a substantial majority of industries, this protection is not important because the market demands that the inventors move as quickly as possible, regardless of the legal requirements of the patent system. However, for certain industries, certain innovations, and certain types of innovators, the leeway provided by the FTI system does make a difference. The stronger, broader patents gained at the end of the process also may make a difference in defending that innovation in the marketplace. Griffin’s (1997) study suggests that the time is, indeed, taken for the more pioneering types of innovations, and evidence also exists that small entity inventors recognize the realities of this type of patent system and take advantage of the opportunity to proceed deliberately and fully prove out their ideas before filing (Erickson 1996a).

Further, this author has carried out studies on inventive activities relative to U.S. patent law including exploratory qualitative research, a pilot quantitative study, and a recently completed full-scale quantitative study. The data are still preliminary and subject to further study, but several items are of interest to this analysis. First, throughout this research program, respondents have indicated that the process of moving from conception, to reduction-to-practice, to a decision to file a patent, to actual filing is quite time consuming. The average from all the studies (approximately 175 respondents, all domestic participants in the U.S. patent system) appears to be around two years, though highly variable. This finding matches up with Griffin’s (1997) estimates. Thus, under the U.S. system, inventors on average spend about two years under the cover of patent protection while moving from conception to filing. This time may be substantially longer for pioneering innovations, shorter for incremental ones.

What are they doing with this time? The in-depth interviews identified a number of common activities relevant to each stage of the process. In moving from conception to reduction-to-practice, for example, inventors tend to manipulate constituent variables and test the effects of external variables in seeking a workable prototype. From reduction-to-practice to the decision to file an application on a particular version of the invention, inventors might investigate scale up options for manufacturing, do market assessment and evaluation, and seek the optimal form of the invention in terms of manufacturing efficiency, market receptivity, and protectability. From the decision to file to the actual filing, inventors carry out a number of activities with their patent attorneys related to the prosecution of the patent, seeking to file the best application in terms of gaining the broadest protection while revealing the least detail.

The quantitative work suggests that inventors recognize the value of all these activities, rating them very highly on a five-point Likert scale. Of particular interest is the fact that the ratings for the last stage, patent prosecution, were unambiguously highest. The process of writing up the application, structuring the claims, etc., was seen as absolutely critical to gaining a strong patent and appropriate protection for the underlying invention. The users of the system do seem to adapt their activities to the nature of the legal requirements and value the protections of the resulting patent (Erickson 1996a).

CONCLUSIONS

What does all this mean? The aim of this article is to bring together available information from a variety of disciplines in order to provide some guidance in terms of structuring patent law. National level output evidence, theoretical explanations, and data from economics, marketing, and management, as well as preliminary empirical evidence, suggest that something different may be going on in the U.S. because of a demonstrably different U.S. patent system. The macro viewpoint establishes that different national innovation systems seem to encourage different results in terms of output quantity, output quality, and the makeup oft he inventive community. The theoretical explanations and empirical results from the various scholarly disciplines suggest compelling explanations for why we see these differences. Finally, the initial results reported at the end of this article suggest that inventors are aware of and take advantage (when appropriate) of the requirements and protections found in the system, adding further credibility to the concept that activities respond to the legal environment.

Would a move by the U.S. to First-To-File be disastrous, as some claim (e.g., Katona 1991

Policy makers need to balance the size of the impact and the size of the groups helped or hurt by a change. They also may wish to think about which groups have other options available to them. Does it really make sense to craft a patent system that is ideal for the incremental innovations and large, efficient organizations that do not really need patent protection in the first place? Keeping the current system would result in a bit less efficiency for multinationals, but recent changes may help with most of the significant problems listed as justifications for the change. “Submarine” patents, for example, which are withheld from examination in order to extend their term and then resurface to block a competitive filing, should disappear under the new term structure because the twenty-year term of protection begins with filing.

What is the best approach for the U.S. patent system? We need to wait until we have done more research to definitively answer this question. For example, studies are being done on the relationship between inventive activity and innovation environment. In addition, we have the advantage of examining the case study taking place just across the border to the north. Canada switched to FTF in 1989, and data on their continuing experiences should enlighten us all. Priority claim basis is not the end-all and be-all of patent law. The current FTI system seems to fit well with the rest of the patent system and, indeed, the overall NIS. Changing that “fit” very well may affect new product development. Thus, we need to be more certain of the impact before we dabble with the statutes. Much more compelling evidence of a clear cost-benefit advantage should be provided before any switch to FTF is contemplated.

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SCOTT ERICKSON, Assistant Professor of Marketing, School of Management, Marist College. Copyright 1998 Scott Erickson.