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Agency Theory of Patent Law:. Linking Innovators and Invention Users Richard Gruner Professor of Law Whittier Law School 7th Annual CIPLIT® Symposium 2007 DePaul University College of Law . Main Themes.

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Agency Theory of Patent Law:

Linking Innovators and Invention Users

Richard Gruner

Professor of Law

Whittier Law School

7th Annual CIPLIT® Symposium2007

DePaul University College of Law


Main Themes

  • Enhanced Rewards Theory: Patent Rewards to Economize on the Time of Talented Individuals

  • The Basic Agency Model: Patent-Mediated Agency Relationships

  • The Extended Agency Model: Employers and Employees as Allocated Risk Takers in Innovative Enterprises


Towards an Improved Reward Theory

  • Most Patentable Advances are Produced by Parties with Exceptional Knowledge or Skills

    • Domain-Specific Knowledge About Practical Problems

    • Technology-Specific Knowledge About Capabilities of Engineering Design Approaches

  • Same Special Knowledge and Skills Are Often Valuable in Other Tasks

    • Diverse Other Engineering Efforts

    • Academic Research

    • Business Management


Towards an Improved Reward Theory (Cont.)

  • Patent Rewards Must Trump Second Largest Rewards Available to Talented Parties

    • Mere “Reasonable Return” Over Costs of Innovation Will Not Be Enough

    • Rewards Up to Full Social Benefit of Innovation Will be Socially Advantageous

    • Even These Rewards will Not Ensure that All Cost-Effective Innovations are Encouraged

    • Other Rewards Presented to Talented Parties May Still Trump Innovation Rewards and Preclude Innovation


Towards an Improved Reward Theory (Cont.)

  • Patent Rewards Scaled to Social Benefit of an Innovation Will Aid in Economizing Time Allocations of Talented Parties

    • Work on Patentable Advance is “Priced” at Social Benefit Amount

    • Prioritizes this Effort Relative to Social Gain

    • Rewards Should Attract the Attention of Talented Innovator Except Where Another Party or Reward Scheme Makes a Higher “Bid”

    • Improves Allocation of Scarce Resource Involved in Talented Individual’s Efforts


Agency Theory of Patent Law

  • The Basic Model: Patent-Mediated Agency Relationships

  • Key Features of Agency Theory

  • Agency Implications of Patent Incentives

  • Boundaries of Patentable Subject Matter from an Agency Perspective

  • Agency Impacts of Other Patent Features


The Basic Model: Patent Rights as Contractual Substitutes

  • Innovators Generally Seek to Advance Interests of Invention Users

  • Innovation Efforts Undertaken as Agents of Potential Users

  • Contract Efforts Suffice to Link Innovators and Users in Small Scale Environments

  • Patents Serve as Contract Substitutes in Settings Where Contracts Fail


The Basic Model: Essential Agency Relationship Features

  • Actions of One Person on Behalf of Another

  • Incentives Presented to Actor Encouraging Furtherance of Second Party’s Interests

  • Information Gathering and Analysis to Determine if Rewards Should be Paid to Agent

  • Criteria for Rewards May be Agent’s Efforts or Results Achieved


The Basic Model: Contractual Agency Relationships

  • Contract Between Principal and Agent Dictates Scope of Agent’s Rewards and When They Are Due

  • Examples of Contractual Agency Relationships

    • Homeowner Promises to Pay Individual to Mow Lawn

    • Client Engages Lawyer to Provide Legal Services

    • Patient Seeks Medical Assistance from a Doctor


The Basic Model: Agency Relationships Without Contracts

  • External Framework Dictates Nature of Agent’s Rewards and When They are Due

  • Examples of Non-Contractual Agency Relationships

    • Prevention of Harmful Pollution Under Threat of Criminal Fines

    • Care to Prevent Accidents Harming Others Under Threat of Negligence Liability

    • Innovation for the Benefit of Invention Users Under the Encouragement of Patent Rights and Rewards


The Basic Model: Distinguishing Agency Law

  • Agency Law Addresses Relationships Formed By Contract

    • Authority of Agents to Bind Principals to Obligations or Liability

    • Default Terms Regarding Relationships Between Principals and Agents

    • Protections Afforded to Third Parties When Principals Choose to Act Through Agents


The Basic Model: Distinguishing Agency Law (Cont.)

  • Agency Behavior Does Not Depend on Agency Law

    • Agency Present When One Party Pursues Interests of Another

    • Concern is How to Influence Agents to Pursue Principal’s Interests Effectively and Efficiently

    • Further Issues Regarding How to Monitor Agents’ Actions and Provide Rewards in Appropriate Circumstances


Key Features of Agency Theory

  • Focuses on Means to Create Optimal Principal-Agent Relationships

  • Optimal Relationships Encourage Agents to Pursue All Actions that Are Cost-Effective for Principals

  • Transaction Costs May Limit Otherwise Optimal Solutions


Key Features of Agency Theory(Cont.)

  • Typical Problems Addressed

    • Sources of Goal Incongruence Between Principals and Agents

    • Means to Efficiently Organize Information Gathering and Transfers in Principal-Agent Relationships

    • Optimal Allocations of Risks in Principal-Agent Relationships

    • Means to Adjust Risks Between Principals and Agents


Agency Theory Implications for Patent Incentives

  • Identifies Factors Influencing Agents’ Incentives:

    • Innovation Outcomes And Perceived Values

    • Probability of Outcomes

    • Linkages Between Efforts and Outcomes

    • Principals’ Observations of Agents’ Efforts

    • Fees Paid to Agents Based on Efforts or Outcomes or Both

    • Agents’ Utility Functions


Agency Theory Implications for Patent Incentives (Cont.)

  • Patent-Mediated Rewards Will Be Optimal If:

    • The Expected Aggregate Utility to Invention Users is Maximized Over Alternative Reward Schemes

    • An Innovator Achieves Her Maximum Reward Via Effort Promoting the Maximum User Utility; and

    • The Innovator’s Reward is at Least As Large as Rewards Available Through Alternative Activity


Boundaries of Patentable Subject Matter: An Agency Interpretation

  • Patentable Subject Matter Determines When Patent Rewards Encourage Innovation

  • Patent Rewards Needed Where Contracting to Encourage Innovating Agents is Likely to Fail

  • Circumstances of Likely Contract Failure Include:

    • Large Groups That Are Foreseeable Targets of Innovation, But are Unlikely to Establish Effective Contracting Groups; or

    • Narrow Sets of Innovators Who May be Difficult to Locate to Establish Contracts


An Expanded Agency Model: Innovation by Employees

  • Corporate Innovation by Employees is Accomplished by a Combination of Agent (Corporation) and Subagent (Employee)

  • Goals of Corporation are Similar to Those of Agent in Basic Model

    • Incentives Measured by Social Gain and Patent Rewards

    • Corporate Payoffs from Patents Obtained Via Assignments

  • Goals of Employees Must be Secured Via Additional Agency Processes

    • Establishing Incentives to Pursue Corporation’s Patent Interests

    • Providing Payoffs for Successful Results


An Expanded Agency Model: Innovation by Employees (Cont.)

  • Multi-Agent Model Illuminates Innovation Risks Accepted by Corporations And Employees

  • Corporations Can Bear Large Innovation Risks on a Risk-Neutral Basis

    • Ability to Raise Large Capital Amounts

    • Ability to Organize Applications of Large Amounts to Innovation

    • Competing Pressures for Internal Capital Allocations Ensure Risk-Neutral Allocations to Potential Innovation


An Expanded Agency Model: Innovation by Employees (Cont.)

  • Employees Can Pursue Innovation With Varying Degrees of Risk-Aversion

    • Work on Innovation for Salary is Risk-Averse Choice

    • Small Salary/Large Potential Bonus Combination Entails Higher Risk Taking By Employee

    • Mix of Salary Size and Bonus for Innovation Can be Adjusted to Fit Risk Preferences of Particular Employees With Key Skills or Knowledge


Conclusion: Advantages of Agency Theory for Patent Analyses

  • Focuses on Patent System Goal of Enhanced Utility for Invention Users

  • Views Patent Features As Means to Encourage Efficient Enhancement Of Invention Users’ Utility

  • Emphasizes Influence of Patent Rights on Innovation Process, Not Asset Control


Conclusion: Advantages of Agency Theory for Patent Analyses (Cont.)

  • Provides Established Framework for Considering the Implications of Incentives, Information, and Risk Sharing in Innovation Relationships

  • Defines Desirable Scope of Contractual and Patent Inducements for Innovation

  • Suggests Strategies that Corporations and Universities May Use to Encourage Optimal Innovation Efforts


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