protecting inventors' intellectual property rights in...

Protecting Inventors' IntellectualProperty Rights in Biotechnology

Terence J. Centner and Fred C. White

Institutional devices encouraging biotechnological innovation may not be providingadequate returns or protection for inventors. This article identifies an optimal degreeof patent protection and employs sensitivity analysis to link demand and supplycharacteristics and investment productivity. Four contemporary policy issues areidentified to provide a foundation for future research.

Key words: biotechnology, invention, patents, plant variety protection.

To encourage innovation, governments of mostdeveloped countries have adopted a patentsystem that rewards inventors through the es-tablishment and protection of intellectualproperty rights in new inventions. United Statesfederal legislation governing inventors' prop-erty rights contains special provisions for plantinventions. The limited protection availableunder some of the legislation raises the ques-tion whether U.S. law provides adequate en-couragement for biotechnological discoveriesof living organisms.' More specifically, are ex-isting infringement provisions sufficient toprotect asexual and sexual plant discoveries,is additional protection needed for asexualplant parts, would it be advantageous to relaxthe requirements of the general patent law forliving matter, or could additional legislationfor multicellular animal inventions fostergreater innovation?

Several authors have recently investigatedissues concerning the nature and function ofinvention incentives and the use of patents inprotecting property rights. Wright summarizes

Terence J. Centner is an associate professor and Fred C. White isa professor, Department of Agricultural Economics, University ofGeorgia.

New living organisms may arise from biotechnological inven-tions involving changes in cell or protoplast structure, plant re-generation, somatic hybridization, hybridoma production, recom-binant DNA, embryo transfers and rescues, gene insertion, andgrowth regulators and hormones. Although in its broadest sensebiotechnology refers to the use of living organisms in industrial ortechnical processes and products, the definition employed in thisarticle is more narrow and refers to the above-referenced newtechniques.

the extensive literature on the economics ofpatents and discusses some shortcomings con-cerning specific institutional devices. DeBrockaddresses the issue of an optimal patent lifeincorporating the problem of rivalry wherebythere are duplicative costs in the form of ex-penditures by persons who are unsuccessful inbeing the first to obtain patent protection. Ear-lier research by Kamien and Schwartz; Scher-er; and Kitch also contributes to an under-standing of invention incentives.

A good descriptive analysis of institutionaldevices available to protect property rights re-lating to biotechnological discoveries in livingorganisms has been provided by Cooper; Bag-will; Plant; Schlosser; and Williams. This lit-erature provides keen insights into researchincentives, although recent judicial decisionsmodify some of the assessments. However, theliterature confers little consideration of alter-native types and degrees of property rights pro-tection or the adequacy of protection affordedby existing legislation.

The objective of this article is to examinethe adequacy of the United States' intellectualproperty legislation for encouraging innova-tion in living subject matter, with an emphasison products of biotechnology as applied tocommercial agriculture. The analysis com-mences with the identification of the institu-tional devices for protecting intellectual prop-erty interests. A model is developed andsensitivity analysis is used to prescribe the so-cially optimal level of patent protection. Theanalysis leads to the conclusion that the cur-

Western Journal ofAgricultural Economics, 14(2): 189-199Copyright 1989 Western Agricultural Economics Association.

Western Journal of Agricultural Economics

rent allowable property rights coverage is in-adequate. In response to this analysis, infor-mation from the model and distinctions in thevarious institutional devices are examinedthrough a discussion of four policy issues: (a)protection against infringement, (b) descrip-tion and enablement requirements, (c) non-obviousness requirement, and (d) developingan animal patent statute. Enhanced infringe-ment protection, relaxed description and en-ablement requirements, a moderated interpre-tation of obviousness, and a new animal patentstatute are suggested as options for encourag-ing invention. These issues also constitute top-ics that various firms and interest groups mayplace on future legislative agendas in an at-tempt to garner increased property rights pro-tection.

Institutional Framework

The United States' institutional framework toencourage beneficial biotechnological discov-eries is grounded upon a constitutional pro-vision granting Congress the power to enactlegislation to "promote the Progress of Scienceand the useful Arts, by securing for limitedtimes to authors and inventors the exclusiveright to their respective writing and discov-eries" (U.S. Constitution). Both state and fed-eral governments have enacted laws that op-erate to encourage scientific discovery and newideas through the establishment of intellectualproperty rights. The promotion and protectionof intellectual property rights embodied in thesedevices is believed to be an important factorin scientific achievements.

Patents and certificates of plant variety pro-tection offer the most viable institutional de-vices for protecting intellectual property in-terests and compensating inventors ofbiotechnological discoveries. A patent estab-lishes proprietary rights by providing for theexclusive control over making, using, and sell-ing the subject material for a period of 17 years.Congress has enacted the Patent Act (PA) forpatenting novel, useful, and nonobvious qual-ifying subject matter and the Plant Patent Act(PPA) for patenting asexually reproducedplants (U.S. Code, tit. 35). In addition, thePlant Variety Protection Act (PVPA) enablesinventors of self-pollinating plants to apply forcertificates of plant variety protection that pro-

vide patent-like protection for 18 years (U.S.Code, tit. 7).2

Choice of Protection

In some cases, inventors have some flexibilityto choose from among the statutes for protec-tion of a new invention. A recent Patent andTrademark Office administrative decision, Exparte Hibberd, allows inventors a choice of se-lecting between two statutes, the PA and thePPA or the PA and the PVPA, for protectingtheir discoveries. Thus, the Hibberd decisionopened the doors in the U.S. for patenting seed-propagated plants under the PA.

The superior property rights protection ofthe PA as opposed to the PVPA is expected tolead private industry to patent new plant va-rieties rather than file for certificates of plantvariety protection. However, many discover-ies, especially products of "traditional" plantbreeding, will not qualify under the PA andthus are likely to be protected under the PVPA(Diepenbrock; Elliott). This development tendsto disrupt the international plant variety pro-tection system established under the Union forthe Protection of New Varieties of Plants(UPOV).3 The superior property rights avail-able under the PA interfere with the free mar-keting of varieties developed from protectedvarieties and weaken the application ofUPOV. 4

Hibberd's acknowledgement that an inventormay have a choice of selecting a statute for theprotection of property rights in man-made liv-ing organisms means that inventors will wantto weigh the positive and negative features ofthe statutes before selecting the protection mostamenable to their invention.

Distinguishing Provisions

Distinct statutory provisions and doctrinesembodied in the PA, the PPA, and the PVPA

2 For a discussion of these acts, see Cooper.3 This international system is adhered to by Belgium, Denmark,

France, Germany-Federal Republic, Hungary, Ireland, Israel, It-aly, Japan, the Netherlands, New Zealand, South Africa, Spain,Sweden, Switzerland, the United Kingdom, and the United Statesas of July 1, 1983 (UPOV Publication). Conflicts between UPOV'splant variety protection and patent protection have crystallizedinto a controversial problem (Straus). The UPOV Convention isdisrupted by the fact that a majority of nations do not adhere toits provisions.

4 Recognition that patent law offers greater property rights pro-tection has weakened UPOV by the fact that nonsignatories aredeclining to initial the Convention (Straus).

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Property Rights in Biotechnology 191

disclose important differences in qualificationsfor protection and the scope of protection ofinventors' property rights. These include de-scription and enablement requirements, thenonobviousness requirement, and the equiv-alency doctrine.

The description requirement of the PA man-dates a description that adequately describesthe invention so that others may recognize thesubject matter. This may be too exacting forbiotechnological inventions of living organ-isms. The PPA relaxes the description require-ment. The PVPA as a registration statute doesnot involve major problems with a descriptionrequirement. The enablement provision of thePA requires the patent application to presentsufficient information to enable a person ofordinary skill in the pertinent act to make anduse the invention. Unduly extensive experi-mentation to practice the invention means thatthe patent disclosure is not enabling, whichthereby precludes the issuance of letters pat-ent. 5 The enablement requirement of the PAmay be overly demanding for living organ-isms.

The nonobviousness requirement of the PAprecludes the issuance of letters patent for anyinvention that is found to be obvious. In therecent case of Ex parte Allen, the patent ex-aminer and the administrative tribunal foundthe creation of polyploidy in Pacific Crassos-trea gigas oysters involving the use of hydro-static pressure was obvious from published re-search on polyploidy of a different species ofoyster using chemical treatment and thus pre-cluded a patent. The examiner reached thisdecision even though the published procedureinvolved a different process and failed to pro-duce polyploidy on the Pacific C. gigas oyster.Neither the PPA nor the PVPA embody thisrequirement.

Another doctrine, the equivalency doctrine,is embedded in the PA but not the PPA or thePVPA. This doctrine involves the scope of"claiming." If an unauthorized composition ofmatter is substantially similar to an existingpatent, the patent holder has a "claim" andmay maintain an infringement action. The

5 In Ex parte Forman, the judicial tribunal declined to find aliving vaccine to be enabling in the absence of direct control overthe various mating and transconjugation procedures set forth inthe specification and the absence of a deposit. Other inventorshave had to appeal the findings of patent examiners in order tosurmount the "undue experimentation" hurdle. See Hybritech, Inc.v. Monoclonal Antibodies, Inc.

equivalency doctrine thereby operates to pre-clude others from using minor or inconse-quential alterations to patented products as abasis for claiming a new product.

Such distinctions among the statutory pro-visions raise policy issues concerning en-hanced property rights protection, which arediscussed after the development of a modeland sensitivity analysis.

Property Rights

Through patents, the government grants ex-clusive control of the rights to make, use, andsell products resulting from scientific discov-eries as a means of encouraging scientific dis-coveries, as well as making the informationopen to public inspection. Patent laws arepremised upon the theory that society benefitsfrom the prompt disclosure of inventions, sinceothers can then proceed to refine the discoveryor use it for further innovations. In order tocompensate scientific inventors for the disclo-sure of their invention, patent law grants in-ventors a negative right to exclude others frommaking, using, or selling the claimed inventionfor a specified period of time. A negative prop-erty right in patent law provides a frameworkfor financial remuneration in the case of in-fringement. An additional feature of the patentsystem is that any invention drawing upon pat-ented inventions will require permission of thepatent owners before the invention can bemarketed without fear of an infringement ac-tion.

Numerous examples can be cited of howfailure to protect the property rights associatedwith a discovery has adversely affected the re-lease and, hence, adoption of important dis-coveries. Burge alleges that the absence of pat-ent protection precluded manufacturers fromcommercializing Sir Alexander Fleming's in-vention of penicillin for several years. The pro-posed manufacturer of a malaria vaccine wasunwilling to manufacture the vaccine withoutestablishing property rights (Plant).

An innovating firm may not capture themaximum potential benefits from innovationfor a number of reasons. First, the governmentmay not grant exclusive control to the firm.For example, an exception allows patentedmaterials to be used for experimental use. Inaddition, exclusive control is not possible forthose biotechnology discoveries which cannotmeet the requirements for patenting under cur-

Centner and White


Figure 1. Economic rents associated with in-novation and exclusive control

rent law. Second, the innovating firm's ex-penses of securing a patent or of ensuring theenforcement of property rights under a patentmay outweigh the benefits. In such cases, aninnovative firm may not acquire a patent and/or may not ensure the enforcement of an ex-isting patent. Finally, other firms may legallyand/or illegally infringe on the rights of a firmthat has a patent, which reduces the benefitsfrom the patent. Under the PVPA, a crop ex-ception for farmers reduces the benefits toowners of certificates of plant variety protec-tion.

Conceptual Framework

The economic impact of useful discoveries inbiotechnology can be measured by (a) changesin consumer surplus, (b) changes in economicrents to producers, (c) changes in economicrents to input suppliers and/or market inter-mediaries, and (d) the social cost ofdisplacedlabor, if applicable. Some of these componentsmay be positive, while others may be negative.From a public perspective, the greater the ex-pected net benefits, the more desirable the in-vestment in research, ceteris paribus. From theperspective of a private entrepreneur, thosebenefits that can be internalized, accruing tothe inventor, are most important. The mag-

nitude of the benefits that accrue to the inven-tor is directly related to the inventor's controlof making, using, and selling the discovery. Agrant of exclusive rights to an inventor max-imizes the inventor's benefits for given levelsof exclusivity and enforceability.

Economic returns to investment in inno-vation can be described under certainty usingthe industry supply and demand curves de-picted in figure 1. Assuming static analysis anda fixed demand for a given product (e.g., corn),the demand curve is D, and the initial supplycurve is S. Under competitive equilibrium, theprice initially would be Pc. Consumer surplusis area a and producer surplus is area b + c.Assume that innovation has improved thequality of one of the inputs used in the pro-duction process, such as an improved varietyof seed being used in crop production. As aresult of the innovation, the supply curve shiftsto S', resulting in a new lower price of Pc anda larger output of Qc. Consumer surplus wouldincrease by the area b + d + e, which is ob-viously a positive change for consumers.Changes in producer surplus would be area f+ g minus area b, which could be positive,zero, or negative depending upon the elasticityof demand, the elasticity of supply, and thenature of the shift in the supply curve.

In a perfectly competitive environment, theinnovating supply firm would not be able tocapture the increased economic surplus re-sulting from the innovation (assuming the ab-sence of trade secrets). If competing input sup-pliers could also supply the same improvedinput without incurring investment in inno-vation, the innovating firm would not have anincentive to innovate. In order to compensatefirms for investing in innovation, the govern-ment offers patent protection for qualified in-novations.

It is assumed that patent protection wouldallow the innovating input supplier to chargea higher price in order to receive a royalty onits run-of-the-mill or ordinary innovation. Therun-of-the-mill or ordinary innovation is de-scribed as one for which the final equilibriumis assumed to be back at the preinvention equi-librium price, Pc, and the preinvention equi-librium quantity, Qc, (Arrow; Nordhaus).6 Theinnovating input supplier is assumed to cap-

6 For unique innovations, the quantity could be restricted to alower level than the preinvention equilibrium. Although the pos-sibility of unique innovations are recognized, no further analysisof this type of innovation is undertaken in this study.

192 December 1989


ture the net addition to producer surplus rep-resented by area d + f In this situation, thereis a deadweight loss of area e + g. With patentprotection, the level of economic surplus thataccrues to consumers and producers after in-novation is the same as before. The additionaleconomic surplus generated from the inno-vation accrues to the innovating firm.

Failure to qualify for a patent or infringe-ment from competitors would reduce privatereturns to innovation. Some of the returns frominnovation not captured by the innovatorwould accrue to consumers and some to com-petitors. The proportion of the benefits accru-ing to competitors would depend on their mar-ket power.

The actual degree of patent protection forany particular innovation may vary dependingupon whether the innovation qualifies for pro-tection and upon the level of protection pro-vided for by the patent law. Referring to figure1, the final equilibrium may be somewherebetween the two extremes ofpreinvention andpostinvention equilibriums depending uponthe degree of patent protection provided forthe innovation. As the price approaches thepreinvention equilibrium, P,, more of the ben-efits would accrue to the innovating firm, butthe deadweight loss would increase. Converse-ly, as the price approaches the postinventionequilibrium, P', less of the benefits would ac-crue to the innovating firm, and society wouldexperience a smaller deadweight loss. How-ever, without patent protection there would beinadequate incentives to innovate.

Optimal Patent Protection

Current legislation includes three patent lawswith each having approximately the samelength of patent life. However, the level of pat-ent protection varies considerably among theselaws. This section describes a model of theoptimal degree of patent protection rather thanoptimal patent life as a basis to understanddifferences in patent laws.

An increase in the degree of patent protec-tion tends to increase the profits of an indi-vidual inventor. However, accompanyingdeadweight loss may result in a reduction ofaggregate social welfare. This trade-off be-tween inventor profits and economic surplusindicates that society's optimal level of patentprotection could be identified given relevant

criteria (Nordhaus; Scherer; DeBrock). Thesolution to the problem would be a Nash equi-librium that reflects maximum economic sur-plus attainable for society given profit-maxi-mizing actions of inventors.

The Model

Consider a situation in which initial industrysupply and demand curves are given:

(la)(lb)

P = D(Q);P = S(Q, I;

where P is price, Q is quantity, and I is in-vestment in research and development (R &D). The supply curve can be shifted down andoutward by investment in R & D which re-duces marginal costs. With complete patentprotection, it is assumed that the inventor couldextract the additional producer surplus result-ing from innovation. Following Nordhaus, itis assumed that a run-of-the-mill innovationand complete patent protection would resultin the same price and quantity as under thecompetitive equilibrium.

However, it may be economically efficientfrom society's viewpoint to grant only partialprotection, i.e., to allow firms to recoup onlya portion of the maximum potential royaltiesresulting from patenting. For this purpose, apatent protection parameter, X, is defined asthe proportion of maximum potential royaltiesthat accrue to the innovating firm. 'Values forX are determined by the government and canrange from zero for no royalties to one formaximum potential royalties. For any level ofpatent protection, revenue (R) is assumed tobe an increasing concave function of invest-ment (I), inferring RI > 0 and R, < 0. Thecost of production (C) is assumed to be relatedto investment as C, > 0 and C,, - 0. The firmwill maximize profits from investment in R &D as follows:

(2a) = R(I, X) - C() - I,

where ir is profit; R is revenue; I is investmentin R & D; X is the patent protection parameter,0 < X < 1; and C is cost of production. Com-puting the total differential of the profit func-tion with respect to changes in I and X andsetting dir = 0 defines the slope of an isoprofitcurve as follows:

(2b) d l = - R x

dX R, - (C, + 1)

Centner and White

Western Journal ofAgricultural Economics

oped and analyzed to measure the influence ofsupply and demand characteristics on optimalpatent protection. The stochastic nature of theresearch output effect is recognized but con-sidered explicitly only through a sensitivityanalysis using alternative effects. Linear in-dustry supply and demand curves are assumedwith investment entering the model as follows:

Ridge Line (la') Demand: P = a + bQ.(lb') Supply: P= c + dQ + gIl2 .

Alternative values for the coefficients a, b, c,d, and g will be considered. The quantity trad-ed, Qx, is assumed to be established within therange of the preinvention equilibrium quantity(Qc) and the postinvention equilibrium quan-tity (Qc),

(4)

,* 1.0

Degree of PatentProtection

Figure 2. Optimal patent protection derivedfrom isoprofit and isoefficiency curves

The denominator of this expression is zero atmaximum profit conditions (MR = MC), sothe isoprofit curve is vertically sloped whenprofit is maximized. Connecting optimal in-vestment levels for various levels of patentprotection yields a ridge line or private reac-tion function as shown in figure 2.

Net economic surplus is assumed to be mea-sured by:

(3) W = Sc(, X) + S(I, ) - I,

where W is net economic surplus, Sc is con-sumer surplus, and Sp is producer surplus.Computing the total differential of the net eco-nomic surplus function with respect to changesin I and X and setting dW = 0 defines the slopeof an isoefficiency curve. The highest level ofsurplus attainable is defined by the tangencybetween the ridge line of the inventor and theisoefficiency curve for society (see fig. 2). Thistangency identifies the optimal degree of pat-ent protection.

Sensitivity Analysis

In this section an operational model involvinga hypothetical innovating supplier is devel-

where X is the patent protection parameter de-termining the degree of patent protection. Themarket price, P,, is determined from the quan-tity traded, Q. Equations (la') and (lb') canbe used to determine Qc when I is zero andQc when I is nonzero. Using this approach, thequantity traded is:

(4')c - a + (1 - X)gI

QA b-d

The innovative supply firm's revenue is as-sumed to be only a fraction of the additionalproducer surplus, depending upon the patentprotection parameter, X. The cost of the in-novative firm is assumed to be given by in-vestment in R & D. Hence, the profit for theinnovating supply firm is given by:

(2') 7 = X AS(I, X) - I,

where ASp(I, X) is change in producer surplus.In determining maximum profit conditions,

the preinvention producer surplus is assumedto be unaffected by investment in R & D. Fromthe first-order conditions for maximum profitfor a given level of patent protection, the op-timal level of investment, I*, is given by thefollowing:

I(b - d)(a - c)+ [(a- c))(5) I* = + (2b - d)(c - a)]( - X)

2(b- d)2 /g + [2g(b - d){+ (d - 2b)g(l - X)](1 - X)J

The complete model is based on equations(la') and (lb') which depict the market supply

Investment($)

IsoefficiencyCurves

IsoprofitCurves

!

194 December 1989

QX = XQC + (i - X)Qc~

(


Table 1. Optimal Patent Protection under Alternative Supply and Demand Relationships

OptimalOptimal Levels of Investment

Price Elasticity of with MaximumInvestment Patent Patent

Demand Supply Productivity Protection Investment ProtectionEd Es g X* * I* (X = 1)

$----Base Scenario -1.0 1.0 -.010 0.94 23,660 25,000Alternative Ed -0.2 1.0 -.010 1.00 25,000 25,000

-2.0 1.0 -. 010 0.78 22,020 25,000Alternative E, -1.0 0.2 -.010 0.78 23,350 25,000

-1.0 2.0 -.010 0.93 22,920 25,000Alternative g -1.0 1.0 -. 005 0.98 6,130 6,250

- 1.0 1.0 -.015 0.81 47,810 56,250

and demand characteristics, equation (2') whichdepicts the profit equation for the innovatingsupply firm and its derivative, and equation(3) which depicts net social welfare. The in-novating supply firm maximizes profits by se-lecting the optimal level of investment for agiven and known level of patent protection.Net economic surplus is maximized by select-ing the optimal patent protection parameter.

Initially, assume that the hypothetical sup-ply firm has $1 million in sales at a price of$1 per unit with no investment in R & D.Under this base scenario, the elasticities of de-mand and supply are assumed to be -1 and1, respectively, with no investment; and g, thecoefficient on productivity of investment, isassumed to be -. 01. In this case the optimaldegree of patent protection would be 94% withan optimal investment of $23,660 (table 1). Ifthe firm had patent protection resulting inpreinvention competitive pricing, the optimalinvestment would be $25,000.

Results from three other selected scenariosare reported in table 1. Optimal patent pro-tection would be 100% for an elasticity of de-mand of -. 2 and 78% for an elasticity of de-mand of -2.0. Optimal patent protectionwould be 78% for an elasticity of supply of .2and 93% for an elasticity of supply of 2.0. Achange in the productivity of research, as mea-sured by the coefficient g, has a relatively largeimpact on both the optimal degree of patentprotection and the optimal level of researchinvestment. For g = - .005, the optimal patentprotection would be 98% compared to 81% forg = -. 015. It is recognized that the researcheffect (g) is stochastic, and these results indi-cate that this type of uncertainty can be im-portant in determining the optimal degree ofpatent protection. These results indicate that

the optimal degree of patent protection is de-pendent on supply and demand characteristicsin addition to productivity of investment.

A similar model also was applied to selectedU.S. commodities for alternative levels of re-search productivity. This analysis might con-ceivably be addressed at any one of severalvertically related markets. For example, theinnovation considered might be an improvedvariety of seed corn. The analysis could bedirected to either the input market or the out-put market with similar results (Just, Hueth,and Schmitz). The output market is selectedfor analysis in this study because of the avail-ability of supply and demand parameters.

International trade is accounted for in thismodel by using long-run general equilibriumprice elasticities, which would reflect both ex-ports and imports. With this formulation, con-sumer surplus includes both domestic and for-eign consumer surplus. For the cases in whicha commodity is both imported and produceddomestically, it is assumed that the patent al-lows the innovating firm to capture a share ofonly the increased domestic producer surplus.However, both domestic and foreign producersurpluses are accounted for in measuring ag-gregate economic surplus.

The results for the optimal degree of U.S.patent protection for selected commodities arereported in table 2. A high degree of patentprotection (X > .95) would be appropriate foreconomically important commodities with lowelasticities of demand such as beef, dairy, andhogs. Under similar conditions of researchproductivity, corn ideally would be given ahigher degree of patent protection than wheatbecause of corn's inelastic demand. Althoughwool accounts for the smallest amount of cashreceipts of any commodity considered, its in-

Centner and White


Table 2. Optimal Patent Protection for Selected U.S. Commodities

Optimal Patent Protection1985 for Alternative Levels of

Imports Research ProductivityImportsSupply Cash to Cash Low Medium HighElas- Demand Pricesb Receipts Receipts (g = (g = (g =

Commodity ticitya Elasticitya ($) ($ bil.)b Ratioc -.005) -. 01) -.015)

Wheat .5 -3.0 3.20 7.9 .00 0.76 0.58 0.37Rice .6 -2.2 7.85 0.9 .00 0.87 0.86 1.00Corn .4 -. 75 2.49 16.0 .00 0.94 0.78 0.62Sorghum .4 -1.45 3.98 1.9 .00 0.95 0.95 0.94Barley .7 -1.4 2.10 1.0 .00 0.97 0.96 0.91Oats .7 -3.7 1.41 0.3 .00 0.96 0.93 0.70Cotton .5 -. 5 0.56 3.8 .00 0.86 0.64 0.48Soybeans .6 -3.0 5.42 10.8 .00 0.98 0.75 0.58Tobacco .5 -1.5 1.60 2.7 .40 1.00 1.00 0.99Peanuts .3 -1.5 0.23 1.0 .00 0.33 0.13 0.10Sugar .4 -. 2 1.54 1.5 .61 1.00 1.00 1.00Potatoes .5 -. 5 3.91 1.6 .00 0.95 0.95 0.99Beef .6 -1.0 54.57 28.8 .04 1.00 1.00 1.00Dairy .5 -. 65 12.73 18.1 .04 1.00 1.00 1.00Hogs .6 -.6 43.88 8.9 .09 0.99 0.96 1.00Eggs .8 -. 43 0.57 3.3 .00 0.91 0.76 0.61Wool .2 -.8 0.63 0.1 .35 0.97 1.00 1.00

a Source: B. L. Gardner.b Source: U.S. Department of Agriculture, Economic Research Service.c Source: U.S. Department of Agriculture, Agricultural Statistics 1986.

elastic demand and supply and relatively largeimports call for a high degree of patent pro-tection. A high degree of patent protectionwould be appropriate for sugar and tobaccobecause competition from imports is high forthese commodities. While it may not be fea-sible in policy making to distinguish betweensmall differences in X such as .05, many of thedifferences reported in table 2 appear to beeconomically important. These results are in-structive pointing out that differences in eco-nomic characteristics of the market call fordifferences in the optimal degree of patent pro-tection.

Patent Policy Issues

The distinct statutory provisions and doctrinesembodied in the Patent Act, Plant Patent Act,and the Plant Variety Protection Act createdistinguishable categories for inventions andinfringement protection. The results reportedin table 2 indicate that some differences incoverage are warranted. However, the cover-age under the current statutes does not appearto be justified by some combinations of supply,demand, and investment productivity mea-sures. In particular, although the current prop-

erty rights protection for animal innovationsis clearly less than the coverage for crops be-cause of the absence of provisions comparableto the PPA and the PVPA, the empirical anal-ysis indicates greater protection is needed forlivestock. Furthermore, there is currently asimilar degree of coverage for such crops asgrains, but the empirical analysis indicates thatdifferences in coverage may be warranted fromthe supply and demand parameters. Potatoesare excluded from protection under the PPA,but the empirical results indicate that the op-timal degree of patent protection is relativelyhigh.7 These disparities in coverage as well asother policy issues suggest that additional con-sideration of property rights protection is war-ranted.

The economic model presented above pro-vides a rationale for the existence of differencesin optimal patent protection for various com-modities. Existing legislation provides for dif-ferences in patent protection, but the degreeof patent protection currently provided maynot be optimal. The following sections will at-tempt to identify situations in which current

7 Although potatoes may be patented under the PA, problemswith meeting the description and enablement requirements andwith assuming the responsibility of defending the validity of autility patent may cause the PA to be inapposite for protection.

196 December 1989


patent protection is not optimal and to suggestalternatives for modifying patent protection.Such alternatives are suggested as operation-ally feasible strategies for modifying the degreeof patent protection.

Protection Against Infringement

Five infringement limitations of the PPA andthe PVPA operate to diminish the propertyrights protection of these statutes when com-pared to the PA. First, although inventors mayhave the choice of applying for a utility patent,the rigid description and enablement require-ments may pose additional problems in ob-taining property rights protection. The abilityto meet description and enablement require-ments was not a factor in the economic modelfor differentiating patent protection. From aneconomic perspective, limiting benefits for aninnovation that does not meet description andenablement requirements is not justified.Hence, there is a basis for addressing theseinfringement issues and establishing enhancedproperty rights protection through legislativechanges related to the PPA and the PVPA.

Second, the doctrine of equivalency embod-ied in general patent law may offer broad pro-tection for patents granted under the PA, whileinventors' proprietary property rights receiveless protection if the innovation is patented orcertified under the PPA or the PVPA. Not onlydo the PPA and the PVPA require definitiveproof of use of the patented subject matter, butthe registration requirements of these acts onlyprovide limited infringement protection.

The third and fourth limitations are em-bodied in the provisions of the PVPA. An ex-emption for experimental use allows research-ers to use and reproduce the protected varietythereby decreasing the scope of property rightsprotection. A crop exception allows cropfarmers to save, use, and sell certified seed incertain situations without compensating theinventor.

A fifth infringement limitation is the inter-pretation of the PPA to apply only to entireplants as opposed to plant parts. This inter-pretation has resulted in cut flowers repro-duced from patented plant varieties in foreigncountries being imported into the U.S. withoutpayment of royalties.

Infringement limitations embodied in theproof of derivation requirement of the PPAhave been considered by the Plant Patent

Committee of the Patent, Trademark, andCopyright section of the American Bar Asso-ciation. The Committee has proposed that thePPA infringement requirement "be based upona comparison of the depiction and descriptionof the variety as set forth in the patent to thecharacteristics of the accused plant . ." (Coo-per, section 8.15). The Committee's proposalnot only removes the derivation requirementbut may operate to extend the protection ofthe PPA by incorporating an examination re-quirement. A similar amendment to the PVPAcould broaden the infringement protection forplants certified under that statute. An alter-native approach would be to amend the PPAor the PVPA to incorporate an examinationstandard or some type of equivalency require-ment. As explained in the conceptual frame-work, broader protection under the PPA or thePVPA would tend to increase market powerof innovators and, hence, increase the returnsto innovation.

Description and Enablement Requirements

Problems with meeting the description and en-abling requirements of the PA may restrict thequalification of some inventions for patentprotection. Two major policy options exist toextend patent protection to a broader range ofbiotechnological discoveries. First, the rigiddescription and enablement requirementscould be relaxed for living organisms to allowmore materials to qualify for patents under thePA. However, a significant limitation accom-panies this option. If the patented materialsare not adequately identified, the enforcementof infringement actions and the judicial reso-lution of patent disputes will be more difficult.

The second option concerns the establish-ment of a proprietary or public depository forpatented multicellular asexual plants whichwould allow more discoveries to qualify forPA patents. The floriculture and ornamentalhorticulture industries, in particular, wouldbenefit from this development. The projectedresponse of monopolistic pricing to either orboth of these options would increase returnsto innovations thereby encouraging biotech-nological scientific discoveries.

Nonobvious Requirement

The recent finding by a patent examiner in Exparte Allen that a multicellular oyster was not

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Western Journal ofAgricultural Economics

patentable raises the issue of obviousness.Under the PA, letters patent for a product-by-process claim can be issued only if the inven-tion is nonobvious. If the Allen's exactinginterpretation of nonobviousness is not re-versed, it will limit the ability of inventors tosecure patents and preclude inventors of bio-technological innovations from receiving ben-efits from their scientific discoveries. As in-dicated in the economic model, such adistinction in patent protection is not justified.

Developing an Animal Patent Statute

Scientists are expected to make new biotech-nological discoveries for animal agriculture be-yond the current advances in protein produc-tion, vaccines, gene insertion, and embryotransplants. Although current patent law mayadequately protect inventors' property inter-ests in existing inventions, the absence of spe-cial legislative provisions for animals com-parable to the PPA or the PVPA raises thequestion of whether the PA can adequatelyprotect property interests involving animal in-ventions. Results from the economic modelindicated that a distinction in patent protec-tion between plants and animals is not justi-fied. Hence, greater patent protection than cur-rently exists for animals is warranted.

The problems associated with the enable-ment provisions of the PA were disclosed inIn re Merat. The Court of Customs and PatentAppeals found that the description for a newspecies of chicken in a patent application wasinadequate, so no patent was issued. The de-velopment of new technology regarding ani-mals suggests that a new statute, altering theenablement requirement so that the descrip-tion of the animal need only be as completeas reasonably possible, may be desirable.

New statutory provisions extending patentcoverage for animals might provide an exclu-sive patenting procedure for animals or couldbe supplementary to the existing provisions ofthe PA. One possibility would be to patternthe procedure after the PVPA which is ad-ministered by the U.S. Department of Agri-culture and offers patent-like protectionthrough certificates to protect new varieties.Such a statute would only offer limited pro-tection since the PVPA does not incorporatean equivalency doctrine providing broad ex-clusionary rights. In addition, any legislativeenactment should more fully define require-

ments for the characterization of a new organ-ism.8 The development of new patent provi-sions facilitating protection for animals wouldimpact inventors and consumers in a similarmanner as the relaxation of description andenablement requirements; the encouragementof innovation and exclusivity might promotereturns from investment through monopolisticpricing.

Concluding Comments

Public intrigue and the investment of venturecapital in biotechnology firms have led to thegrowth of a significant private sector in geneticengineering research. Existing legislative pro-visions of the three patent and patent-like stat-utes encourage biotechnological innovation byproviding a mechanism for the protection ofsome intellectual property. However, difficul-ties in securing patents for man-made livingorganisms and distinctions among infringe-ment provisions suggest that inventors may beexpected to seek legislative amendments tostrengthen property rights in future discover-ies.

The expansion of patent protection alters theassignment of property rights between privatefirms and the public. Adopting the premisethat legislative changes should be founded uponenhanced social welfare rather than the max-imization of profits or revenues, an optimaldegree of patent protection occurs at the tan-gency of the ridge line of the inventor and theisoefficiency curve for society. This frameworkprovides a standard against which the perfor-mance of patent laws can be measured.Through a sensitivity analysis, this article de-lineates a method to link optimal patent pro-tection to demand and supply characteristicsand investment productivity. The results fromthis model indicate that market conditions suchas supply and demand characteristics and ex-pected productivity of research investment in-fluence the optimal degree of patent protec-tion. Hence, there is an economic rationale formaintaining differences in patent protection.

A review of patent legislation revealed thatthere are major differences in patent protec-tion. However, the actual differences do not

8 Cooper suggests incorporation of the term "novel variety,"modified to cover animal breeds, be used to avoid the use of theundefined term "breed."

198 December 1989


correspond to the theoretical differences in-dicated by the economic model. Many actualdifferences are based on whether or not an in-novation meets the description and enable-ment requirements of the PA. There is notsufficient economic justification for this dis-tinction. Hence, the protection under the PPAand the PVPA should be liberalized.

Enhanced infringement protection under thePPA and the PVPA, relaxed PA descriptionand enablement requirements, a moderatedinterpretation of obviousness, and a new an-imal patent statute appear to offer operation-ally feasible alternatives for eliminating someof the nonoptimal differences in patent pro-tection. Additional research on the optimal de-gree of patent protection of innovations is war-ranted. Such research might expand the analysisto account for various firms racing to developsimilar innovations (Scotchmer and Green).The expected productivity effects of researchcould also be broadened so that uncertaintycould be addressed. Finally, the deadweightloss might be measured differently using a so-cial welfare function other than consumer andproducer surplus.

[Received January 1989;final revision receivedJune 1989.]

References

Arrow, K. J. "Economic Welfare and the Allocation ofResources for Invention," in The Rate and Directionof Inventive Activity: Economic and Social Factors.New York: Arno Press, 1962.

Bagwill, R. E. "The Legal Aspects of Plant Tissue Cultureand Patents." Environ. Exp. Bot. 21(1981):383-87.

Burge, D. A. Patent and Trademark Tactics and Practice.2nd ed. New York: John Wiley & Sons, 1984.

Cooper, I. P. Biotechnology and the Law. New York:Clark Boardman & Co., 1982.

DeBrock, L. M. "Market Structure, Innovation, and Op-timal Patent Life." J. Law and Econ. 28(1985):223-44.

Diepenbrock, A. B. "Which Route, Patents, Plant Patentsor Breeders' Rights?" C.I.O.P.O.R.A. Proceedings-Vth International Colloquium on the Protection ofPlantBreeders' Rights, pp. 213-20. Geneva: InternationalCommunity of Breeders ofAsexually Reproduced Or-namental and Fruit-Tree Varieties, 1987.

Elliott, W. H., Jr. "Crystal Gazing the Next Decade."C.IO.P.O.R.A. Proceedings- Vth International Col-loquium on the Protection of Plant Breeders' Rights,pp. 241-65. Geneva: International Community ofBreeders of Asexually Reproduced Ornamental andFruit-Tree Varieties, 1987.

Gardner, B. L. "Causes of U.S. Farm Commodity Pro-grams." J. Polit. Econ. 95(1987):290-310.

Just, R. E., D. L. Hueth, and A. Schmitz. Applied WelfareEconomics and Public Policy. Englewood Cliffs NJ:Prentice-Hall, Inc., 1982.

Kamien, M. I., and N. L. Schwartz. "Patent Life and R& D Rivalry." Amer. Econ. Rev. 64(1974):183-87.

Kitch, E. W. "The Nature and Function of the PatentSystem." J. Law and Econ. 20(1977):265-90.

Nordhaus, W. D. Invention, Growth, and Welfare-ATheoretical Treatment of Technological Change.Cambridge MA: The MIT Press, 1969.

Plant, D. W. "The Impact of Biotechnology on PatentLaw." Tech. in Society 5(1983):95-106.

Scherer, F. M. "Nordhaus' Theory of Optimal PatentLife: A Geometric Reinterpretation." Amer. Econ.Rev. 62(1972):422-27.

Schlosser, S. D. "Patenting Biological Inventions." To-ledo Law Rev. 12(1981):925-44.

Scotchmer, S., and J. Green. "Novelty and Disclosure inPatent Law." Hoover Institution Working Paper inEconomics E-89-2, Stanford University, January 1989.

Straus, J. "The Relationship Between Plant Variety Pro-tection and Patent Protection for Biotechnological In-ventions from an International Viewpoint." Int. Rev.IndustrialProperty and Copyright Law 18(1987):723-37.

UPOV Publication. "International Union for the Protec-tion of New Varieties of Plants." No. 408(E), Geneva,July 1983.

U.S. Code. Title 7, Sections 2321-2583 (PVPA); Title 35,Sections 101 et seq. (PA), Sections 161-164 (PPA).1982 & Supp. 1986.

U.S. Constitution. Article 1, Section 8.U.S. Department of Agriculture. Agricultural Statistics

1986. Washington DC: Government Printing Office,1986.

U.S. Department of Agriculture, Economic Resource Ser-vice. Economic Indicators of the Farm Sector-FarmSector Review, 1985. Washington DC: GovernmentPrinting Office, January 1987.

Williams, S. B., Jr. "Protection of Plant Varieties andParts as Intellectual Property." Science 225(1984): 18-23.

Wright, B. D. "The Economics of Invention Incentives:Patents, Prizes, and Research Contracts." Amer. Econ.Rev. 73(1983):691-707.

Referenced Cases

ExparteAllen, 2 U.S.P.Q. 2d 1425 (P.T.O. Bd. of Appeals1987).

Ex parte Forman, 230 U.S.P.Q. 546 (P.T.O. Bd. of Ap-peals 1986).

Ex parte Hibberd, 227 U.S.P.Q. 443 (P.T.O. Bd. of Ap-peals 1985).

Hybritech, Inc. v. MonoclonalAntibodies, Inc. 231 U.S.P.Q.81 (Fed. Cir. 1986).

In re Merat, 519 F.2d 1390 (C.C.P.A. 1975).

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