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U.S. PATENT LAW.
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Impact of technological innovations, economics, competition, public goods, intellectual property, cost & legal barriers, compared to Japanese patent law.... More...
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Paper Abstract:
Impact of technological innovations, economics, competition, public goods, intellectual property, cost & legal barriers, compared to Japanese patent law.

Paper Introduction:
ECONOMICS AND THE LAW: AN EXAMINATION OF CONTEMPORARY CONTROVERSIES RELATED TO THE UNITED STATES PATENT SYSTEM Introduction This research examines the contemporary controversies related to the United States patent system. The most significant of these controversies are those related to restrictions that patent holders are allowed to placed on the use of legally protected intellectual property, the economic harm suffered by patent holders as a result of infringements on patents, and the legal life of patents. Michael Greenfield (1992, pp. 10511094) contends that emerging technological innovation (in fields such as biotechnology and information systems) is being hampered by requirements of the existing American patent system. This proble

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63-75). This chain of thoughtprovides the primary basis for the patent system as it exists (not as it isenvisioned) in the United States in the twentieth century. A new look at the patent system. (1991). Thus, in Japan, a competitor may capitalize on another'sinnovation through the patent of some quite minor modification to thetechnology. Thus, profit seeking was, according toSchumpeter, the key element promoting innovation, and innovation wouldcontinue to occur because profits from a technology are only earned to anysignificant degree during the innovation stage. An industrial policy attempts toprovide an economic environment which either (1) supports industrialdevelopment generally, or (2) promotes the development of specificindustries or sectors of an economy. American Economic Review, 78(3), 59-75.Grossman, G. 199-2 2). ECONOMICS AND THE LAW: AN EXAMINATION OF CONTEMPORARY CONTROVERSIES RELATED TO THE UNITED STATES PATENT SYSTEM Introduction This research examines the contemporary controversies related to theUnited States patent system. This aspect ofJapanese patent law encourages innovators to maintain secrecy, which, inturn, inhibits innovation. The economic effects of intellectual property right infringements. (1988a). Patent law is the primary means by which the developers oftechnological innovation may protect their intellectual property as a meansof profiting from such development (Slind-Flor, 1992b, p. Conclusion American corporations are divided over the issue of patent law reform. In the United States in such instances, publicly electedmunicipal councils determine the type and quantity of street lighting whichwill be provided by a private utility. National defense, street lighting, generalpolice protection, and scientific theory are all examples of public goods. The Constitution clearly states that patent protection may be grantedfor a limited time. These generaltypes are as follows: 1. In additionto seeking an optimal use of resources, there are other reasons for theselection of a form of economic organization other than competitiveenterprise. It does cause technology to bespread quickly throughout Japanese industry with a minimum of cost andlegal action. ReferencesButler, Alison. Most other industrial countries attempt to a much greater extentthan is true of the United States to diffuse technological innovationwithin the economy (Butler, 199 , pp. Americans tend to the opinion that the Japanese approach to patentprotection amounts to a restraint of international trade--an additionalbarrier to the conduct of international trade. Thus, the costs associated with theacquisition of patent licenses, specialized equipment, economies of scaleproduction facilities, and skills may be cost barriers to entry into amarket. The term socialbenefits may be used in two ways. In the case of intellectual property protected by patent, however, theexpected diffusion of the technological innovation creates somecharacteristics of a public good (Levin, 1986, pp. Eventually, too much capital would be invested in thepursuit of profits from the particular technological innovation, and ashort depression would ensue. 811). (199 ). Schumpeter thought that capitalism could maintainits forward momentum only so long as capitalists behaved as pioneers. Thus, in the example of street lightingprovided by a private sector electrical utility on a contract basis, thecost of providing the service would be supplied by the taxing jurisdictioncontracting for the service. Normative values associatedwith equity and the value of the diffusion of technological innovation willlikely prevail. Legalbarriers are the most powerful barriers to market entry, because they maynot be breached, regardless of the willingness of a new firm to attempt toovercome any cost or product differentiation barriers to market entry whichmay exist. The typical timeperiod in which a patent is pending in Japan is 72 months. Benefits and costs are classifiedgenerally as either (1) real, or (2) pecuniary. The action of patent flooding sets the stage for the thirdstrategy, in which the Japanese firm acquiring the technology seeks tonegotiate cross-licensing agreements with the existing patent holder.Under these cross-licensing agreements, the patent holder acquires theright to the more or less useless minor modifications to the basictechnology, and to the underlying technology which is actually in thepublic domain. The first of thesediscussions considers the role of patent law in relation to technologicalinnovation, while the second discussion reviews the differences betweenAmerican patent law and the patent law of other countries. Quarterly Journal of Economics, 1 3, 79-1 .Helfgott, S. 1). 1 51-1 94) contends that emergingtechnological innovation (in fields such as biotechnology and informationsystems) is being hampered by requirements of the existing American patentsystem. Patent protection of technological innovation, thus, both can and doesspur the innovative process. The law was changed in 1861 to make the term ofpatent protection 17 years with no possibility of extension. Precedence in American patent law is based on the concept ofthe first to invent (Butler, 199 , pp. Second, theJapanese firm acquiring the technology of another initiates a policy ofpatent flooding. Thisapproach to externalities may be referred as the contemporary concept, andsuch effects may be referred to as technological externalities. (1992). Stanford Law Review, 44(5), 1 51-1 94.Grossman, G. Bothapproaches are used in the United States. Barriers to entry refer to factors which makeit difficult for new firms to enter a market. Thus, patent protection ofintellectual property is a two-edged sword within an economic context. Cost/benefit analysisis an attempt to evaluate economic decisions with respect to these benefitsand costs. In the application of cost/benefit analysis to economic policydecision-making, it is generally held that society should attempt to attainthe greatest good for the greatest number of people in the society.Ideally, a specific economic decision would make someone better off, whileleaving no one worse off. Technology,thus, is indispensable with respect to economic growth. From an economicperspective, thus, a first to file patent system appears to be desirable.Safeguards would be required, however, to prohibit the patent of trivialchanges to existing technologies such as occurs in Japan. Therefore, the service would be funded by tax revenues raisedin the jurisdiction where the service was provided. The philosophy upon which American patent law is basedenvisions intellectual property as having some characteristics of a publicgood, although property rights are afford patent protection to enhance thepotential for innovator profit (Levin, 1986, pp. A major strength of cost/benefit analysis is that the procedureprovides a comprehensive framework for incorporating all costs and benefitsin the analysis, including externalities. The original patent law provided for the protection oftechnological innovation for a period of 14 years with the possibility of aseven year extension. 36-46). Journal of Business, 63(1), pt. 812). (1988). Thus, an American patent holderanticipating American-style intellectual property protection in Japan isusually in for a disillusioning surprise, while Japanese firms become morethan a little annoyed when American patent holders refuse to settleinfringement challenges in line with traditional Japanese businesspractice. 7 ). the estimation and measurement of spillover effects of R&D investment. Dealing with externalities in economic analysis requires that one (1)identify and (2) evaluate the (3) social benefits and (4) social costs of(5) a proposed public action (such as patent protection). (1988). National Law Journal, 14(49), 1, 46, 48-51.Slind-Flor, Victoria. There are two general typesof entry barriers that are affected by patent protection. Without taxation, there is no way to assure that all individualsreceiving a public good will help pay for its provision. These contemporary controversies surrounding the patent system in theUnited States are examined in two major discussions. The protection of intellectual property wasconsidered in the late-eighteenth century to be essential to the economicdevelopment of the United States. Inconjunction with other provisions of the Japanese patent law, the first tofile concept can be significant. 8 3-842). The Japanese intent, of course, is to promote industrialcooperation and technology sharing. When industrial policy is translated into patent law in Japan, theresult is quite different from American patent law. Legal barriers to market entry are laws relatedto zoning, patents, franchising, licensing, and other factors. A revisor of Americanpatent law to provide patents on the basis of first to file would lead to agreater diffusion within the economy of technological innovation. (199 ). The abilityof the innovator within the realm of patent law to charge a royalty for theuse of the innovation spreads the payment base in a way that is alsosimilar to that for a public good. Japanese firms follow three primary strategies in the acquisition oftechnology developed by others. With respect tonatural resource requirements, it is said that society is engaged in a racebetween technology and the exponentially rising demand for raw materials.With respect to most firms, an essential resource is human capital.Advances in technology enable firms to utilize available human capital inmore productive ways. 82 ). As it isenvisioned, the American patent system protects an innovator's control overher or his technological innovation, while expecting the innovator todisclose the details of the innovation for the use of all. Most such infringements, however, result from differencesbetween American patent law and the patent law of other countries (Merges,1988, p. 199-2 2). The patent infringement problem resulting from the illegalcounterfeiting of goods is a much smaller part of the equation (Grossmanand Shapiro, 1988a, pp. Schumpeter also thought that successful innovators would be imitatedby large numbers of other firms in an economy in an attempt to profit froma new technology. Whether this private monopoly in knowledge was created through dejure process of patents and copyrights, or through a de facto process ofsecrecy and exclusive possession was immaterial with respect to thefostering of innovation. Althoughexternalities are most often thought of in terms of adverse effects, it isimportant to remember that, in an economic context, an externality may beeither a positive or a negative outcome. Differences Between American Patent Law and the Patent Law of Other Countries Differences between American patent law and the patent law of othercountries is the basis of most charges of infringement by American patentholders (Feinberg and Rousslang, 199 , pp. Concern has also been expressed related to the life of intellectualproperty protection afforded by American patent law (Chou and Shy, 1991, p.811). 419-423).Spillover effects are frequently referred to as externalities. Others,particularly in the high technology industries, view existing Americanpatent law as an impediment to economic welfare. American patent lawtends to create monopolies that the patent laws of other countriesprohibit. 811). California Law Review, 76, 8 3-842. Commercial success and patent standards: Economic perspectives on innovation. Japanese are stung on patents. Computer technology, in the last-quarter of thetwentieth century, is one form of technological innovation that isperforming this role in firms of all sizes. Cost barriers. American Economic Review, 76(5), 199-2 2.Merges, Robert P. (1986). Foreign counterfeiting of status goods. During thepending period, the technological innovation is not protected (Helfgott,199 , p. (1988b). The abilitywithin American patent law for an innovator to restrict the use anddiffusion of technological innovation, however, makes a mockery of thephilosophical assumption upon which American patent law is based (Levin,1986, pp. First, a Japanese firm targets thetechnological innovation of another (Thomas, 1989, p. Victoria Slind-Flor (1992a, p. Southern Economic Journal, 57(1), 811-821.Cockburn, Iain, & Griliches, Zvi. In Japan, this process of accepted. Slind- Flor, Victoria. The introduction of newtechnology tends to lower production costs over the long-term. Cost barriers to entry refer to the expendituresthat must be made by a firm desiring to enter a market to acquire thecharacteristics which will permit it to compete with firms alreadyparticipating in the market. New product development and the optimal duration of patents. While competition generally results in higher efficiency in terms ofcost, some disagreement exists as to whether this form of economicorganization always provides an optimal use of all resources. Many corporations and some economists advocate an extension ofpatent life (Chou and Shy, 1991, p. In a cost/benefit analysis,positive externalities are treated as benefits, while negativeexternalities are treated as costs. 34-46). (1988). This provisionis seldom enforced in Japan, however, and abuses are frequent. Further, the municipal governmentwill pay for the street lighting on an aggregate basis. (1989). The objective ofAmerican patent law is to protect and reward individual entrepreneurs andinnovative businesses, to encourage innovation and the advancement ofknowledge. Such depressions, Schumpeter said, were notunmitigated social evils, but, rather, were necessary to restore balance tothe economic system. There will alwaysbe some individuals who would volunteer to pay for a public good, whileothers, likely the majority, would refuse. Japanese still uneasy on patents. The trade-related aspects of intellectual property rights: What is at stake? Suchaction is prohibited under American patent law. It appears unlikely, however, thatthe Constitution will be changed to reflect the conclusions of thisparticular instance of economic positivism. The concept of social costs is closely relatedto the concept of externalities. Rather, pecuniary benefitsand costs reflect (1) gains for some elements of society, which are offsetby (2) losses for other elements of society. The Japanese company seeking to acquire the new technology,of course, gains the right to employ the new technology without beingchallenged for patent infringement. In laylanguage, externalities may be described as side-effects and fringe-benefits. Innovation, in an economic context, is the introduction of newproducts, or production processes. Michael Greenfield (1992, pp. Counterfeit-product trade. Cultural differences between the U.S. 79). As an example, streetlighting could be provided by a private sector electrical utility on acontract basis. Article 1, Section 8 of the Constitution grants to theCongress the power "to promote the progress of science and useful arts besecuring for limited times to authors and inventors the exclusive right totheir respective writings and discoveries." The American patent system wascreated in 179 with the enactment of a patent law based on this provisionof the Constitution. The definition of public goods does not demand that the actual provisionof the good must be performed in the public sector. Underlying the differences in the patent laws of the United States andJapan are the philosophical differences between the two countries in theways in which they approach the conduct of industrial business--theindustrial policies of the countries. Thus, competitors are provided with an opportunity to becomewell acquainted with a new technology, and to incorporate it into theiroperations. Externalities, both positiveand negative, however, are also related to patent protection. The essence of thisconcept is that economic externalities are created when private costs orbenefits fail to equal social costs or benefits. Social benefits, in this alternativecontext, are viewed as externalities. In Japan, also, patent applications are published in full in theJapanese Patent Gazette 18 months subsequent to a filing. The term social costs refers to the total costs borne by society as awhole as a result of a specific economic decision (such as patentprotection). The argument supporting this position holds thatthe economic importance speedier technological innovation is greater thanthe welfare loss that would result from monopoly distortion of the pricesystem (Chou and Shy, 1991, p. Thus, social costs consist of (1) the opportunity costsassociated with resources used, (2) the value of any loss in welfareassociated with a specific economic decision, and (3) any increase in costsfor those in society other than the decision-maker, which results from aspecific economic decision. What the definition of public goods does demand, however, is that thegood must be paid for communally. The patentsystem, thus, may "be viewed as a method of assigning property rights toinnovators in order to encourage research and development" (Chou and Shy,1991, p. 79-1 ).Nevertheless, patent infringement related to the counterfeiting of goodsexacts significant economic costs for American patent holders (Feinberg andRousslang, 199 , p. Bycontrast to real benefits and costs, pecuniary benefits and costs do notreflect overall changes to societal welfare. By contrast, the objective of Japanese patent law is to promotethe sharing of technology. The protection of intellectual property rights through the patentsystem, however, has spillover effects that are both positive and negativewithin an economic context (Cockburn and Rousslang, 1988, pp. Real benefits, thus, represent a net increase in societalwelfare, while real costs represent a net decrease in societal welfare. In most situations, however, economic decisionswill create both social benefits and social costs. Many desire to retain the provisions of the existing system. The American patent system, however, does notguarantee that technological innovation will be diffused within the economyduring the life of the patent. Technology is, in effect,assisting these firms to eliminate limits to their growth. Within the contextof welfare economics, economic efficiency requires that it must not bepossible to change an existing resource allocation in such as way thatsomeone is made better off and no one is made worse off. There would be no way for the electricalutility to deny the street lighting to individuals unable or unwilling topay for it. M., & Shapiro, C. Recombinant DNA technology: A science struggling with the patent law. and Japanese patent systems. 82 ). Further, Japanese patentlaw permits the claim to patent on very minor variations from existingtechnology. Economic Review (Federal Reserve Bank of St. In economics, an externality exists when an activity by one or moreparties affects, for good or for bad, another one or more parties who arenot a part of, or are external to, the activity. M., & Shapiro, C. Sharing technology implies that innovation willnot be protected, as such protection is understood in the United States.Beyond the objective of assuring the sharing of technology, Japanese patentlaw is designed to encourage the rapid spread of technological know-howamong competitors in a manner that avoids litigation, encourages broad-scale cooperation, and promotes Japanese industry as a whole. In otherinstances, such as the provision of electrical power, the provision of anadequate supply at justifiable costs may not be able to be assured throughthe use of competitive enterprise. (1992a). 19). Japanese patent law does require anapplicant for a patent to disclose any known existing technology or priorart related to the technology for which a patent is sought. The general assumption is thatmost individuals would refuse to pay a so-called fair share for a publicgood, if they believed it would be provided, regardless of what they did. 1) reports that American patent holdersare suffering economic harm stemming from patent infringements by foreignmanufacturers. In the late-twentieth century, however, someeconomists are advocating patent protection with an unlimited life (Chouand Shy, 1991, p. 59-75; Grossman and Shapiro, 1988b, pp. Real benefits and costsrepresent changes in society's satisfaction derived from production andconsumption. American Economic Review, 78(5), 419-423.Feinberg, Robert M., & Rousslang, Donald J. (1992b). First, social benefits may be consideredto be all of the gains in welfare that are derived from a specific economicdecision. This problem is held to be most acute in relation to restrictionsthat American law permits patent holders to place on the use of theirintellectual property. Schumpeter also thought that innovation was more likely to occurwithin an economy where private monopoly in knowledge was tolerated andexisted. With respect to public goods, however, theone-to-one relationship does not exist, because both payment andconsumption are collective and aggregate. At this stage, the Japanese company files numerouspatents claiming some minor modification of the basic technology, orrequesting a patent on some underlying technology which, in Westerncountries, is considered to be in the public domain, and therefore,unpatentable. In this alternative approach, social benefitsare contrasted to private benefits. 2. Pure public goods, such as national defense, as an example,cannot be effectively provided through competitive enterprise. It is the last stage in a three-stageprocess that begins with invention (the discovery or devising of newproducts or processes) and is followed, in turn, by development (theprocess of converting new ideas and principles emerging from the inventionstage into marketable and usable products and techniques), and innovation. Thus, in theUnited States, the type and quantity of street lighting tends to vary fromcommunity to community. The social costs associated with aspecific economic decision differ, in theory, from the private costsassociated with such a decision by the amount of the value of any externaleconomies or diseconomies associated with the economic decision. These points may beillustrated through a consideration of the differences between patent lawin Japan and the United States. According to Schumpeter, the economy would eventuallybe rescued from depression by the introduction of yet another newtechnological innovation. 1, 79-9 .Greenfield, Michael S. At the heart of the matter are significantly different approaches tothe conduct of industrial business in the two countries that, in turn, haveresulted in patent laws in the two countries that are not compatible inmost instances (Thomas, 1989, pp. In these cases, it is possible forgovernment, or a quasi government agency, to provide the goods andservices, or they may be provided through a regulated monopoly. By contrast, precedence inJapanese patent law is based on the concept of first to file. The American patent system is based on the Constitution of the UnitedStates of America. This ability to restrict the diffusion oftechnological innovation often has the effect of retarding furtherinnovation in the same technological area. Louis), 72(6), 34-46.Chou, Chien-Fu, & Shy, Oz. The consequences of anyexternalities thus created are economic inefficiencies. Alternatively, social benefits may be viewed in a more narrowcontext as being only those benefits accruing to those in a society otherthan the decision-maker(s). In turn,this diffusion would lead to an acceleration of further innovation in thetechnologies made available on a wider basis. Japanese patent law, unlike Americanpatent law, permits the patent of technology that has long been in thepublic domain, if that technology has not been previously patented. 199-2 2). Positive externalities may be viewed as fringe-benefits, whilenegative externalities may be viewed as side-effects. In recent years, the concept of economic externalities has, more oftenthan not, been applied to activities involving some sort of adverseenvironmental impact, such as smoke from a factory, odors from a packingplant, or waste discharges in to a stream. At this stage,the company acquires a product incorporating the technology, an initiates aprocess of reverse engineering to determine how the technology works.Alternatively, if the product is not available prior to the time a patentapplication is published in full in the Japanese Patent Gazette, thedetails of the technology are acquired in this manner. The Role of Patent Law in Relation to Technological Innovation Technology is one of the means by which productivity may be increasedwithin an economy, an industry, or a firm. In the United States, only an essential technology is subjectto patent. National Law Journal, 15(13), 1, 12.Thomas, J. Economist Joseph Schumpeter argued that, in an absence of innovation,a mature, capitalistic economy would reach a point of static equilibrium,in which a circular flow of goods and services would occur, but where nonet growth would occur. New technologies, such as computer technology, motivate autonomousinvestment on the part of individual firms. Journal of Marketing, 53 (1989): 63-75. There are other important differences between Japanese and Americanpatent law. Patent infringements of innovation By foreign competitors. Public goods are those which, because their benefits or use may not bewithheld from a single person without withholding them from all persons,must be supplied communally. When competitive enterprise is the basis for the production of goodsand services, a one-to-one correspondence exists with respect to paymentbetween consumer and producer. It also, however, tends to allow large and financiallypowerful firms to exploit a new technology at the expense of the innovator. Among the more significant of the economic costs associated withpatent protection are those associated with barriers to entry to a market(Merges, 1988, pp. The autonomous investmentdecisions made by firms are made with an expectation of profit improvementsthat will result from the application of technological advances. Inhis view, it was through innovation that capitalist entrepreneurs becamepioneers. The most significant of these controversiesare those related to restrictions that patent holders are allowed to placedon the use of legally protected intellectual property, the economic harmsuffered by patent holders as a result of infringements on patents, and thelegal life of patents. Journal of the Patent and Trademark Office Society, (3), 14-25.Levin, Richard C. 79-9 ). Legal barriers. In the United States, such an action would be regarded as aninfringement of the original patent.

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