Understanding Patenting Decisions: A Classroom Exercise

Abstract

Although many students have some knowledge of patents, it can be difficult for them to understand the components of an innovator's decision-making process. Key issues, such as whether to patent or to use trade secrecy, how broad a scope to claim, and what to do in the event of patent infringement, can be difficult to grasp from a standard lecture. The authors present a classroom exercise in which students assume the role of an innovator and their decisions at each stage have direct consequences on the profits they earn. Realistic probabilities are used to determine whether patents are infringed or court cases are won. The exercise is additionally useful in providing lessons on behavior under risk and uncertainty and the profit-maximizing goal of firms.

Keywords:

• patent infringement and invalidation
• patents breadth
• risk and uncertainty

JEL codes:

• A22
• D81
• O34

Acknowledgments

The authors thank two anonymous referees for their comments.

Notes

^aInfringed or reverse-engineered, as appropriate.

^bNo students wanted to change to trade secret.

1. The tradeoff facing innovators when deciding on the breadth of their patents is captured in the following quote by Jerome Lemelson, owner of 558 patents: “You have to stake the four corners of your invention broadly enough so that they give you maximum protection. … Of course, if you write too broadly you may invalidate your claim. … But if you write too narrowly you may miss the thing about the technology that turns out to be truly valuable” (quoted by Varchaver 2001, 207).

2. Classes are often shown some examples from the U.S. Patent Office Web site (http://www.uspto.gov/) for them to consider whether the requirements hold. Some controversial ones—including #6004596 (Uncrustables), #6368227 (Swing method), and #6360693 (Animal toy)—often lead to lively discussions.

3. All profiles have an optimal strategy of going to trial if a patent is infringed. Parameters where not going to trial is the best option also can be constructed. Readers interested in more profiles can use the equations in appendix C or contact the authors for details.

4. The exercise can be run in very large classes with a simplification. Rather than having each student performing independent draws for the probabilities, conduct just three sets of drawings and have each set hold for all students who select that option. For example, if a trade secret is reverse-engineered in Period 3, then it is true for all students who choose trade secrecy.

5. For ease and time, a set of bags for each group can be set up in advance. A full set for a profile includes 5 bags representing all the possible probabilities necessary: Trade Secret, Narrow Patent, Broad Patent, Narrow Court Case, and Broad Court Case.

6. We also have successfully tried letting different students draw each time for each other. This may be a good strategy in classes where keeping all students engaged is a concern.

7. The instructor must decide how much, if any, detail about the determination of the expected values is covered. This will depend on the nature of the course and the learning goals.

8. The option of licensing the innovation can be discussed separately here as well. The possibility is not included in the exercise in order to avoid extra complexity.