THE COST OF NOVELTY - Columbia Law Review

Patent law tries to spur the development of new and better innovative technology. But it focuses much more on “new” than “better”—and it turns out that “new” carries real social costs. I argue that patent law promotes innovation that diverges from existing technology, either a little (what I call “differentiating innovation”) or a lot (“exploring innovation”), at the expense of innovation that tells us more about existing technology (“deepening innovation”). Patent law’s focus on newness is unsurprising, and fits within a well-told narrative of innovative diversity accompanied by market selection of the best technologies. Unfortunately, innovative diversity brings not only the potential benefits of technological advances but also the costs: incompatibility between different technologies; a spread-out, shallow pool of knowledge; and the underlying costs of developing parallel technologies that aren’t actually better. These costs matter.

Biomedical innovation illustrates the high costs of divergence. Although pharmaceuticals are touted as a poster child for patents, the world is rife with me-too drugs that drive up costs with little to show for it. Biomedical innovation often suffers from a particular trap: Patent incentives push innovators toward “new,” but incentives from Food and Drug Administration approval and insurer reimbursement push innovators toward “not too new.” In this space, artificially constricted markets do a poor job of selecting better technologies. The result is a proliferation of technologies that are “new for the sake of new,” giving us the costs of divergence without much in the way of benefits.

This Essay presents an original spectrum of innovative divergence, illuminates how various patent doctrines drive divergence, and lays out the substantial costs of divergence through biomedical examples. It analyzes the complex interactions between three different incentives for biomedical innovation and presents policy prescriptions to help avoid the trap of “new for the sake of new.” In the process, it lays out how innovation scholars and policymakers alike should take into account the cost of novelty.

The full text of this Essay can be found by clicking the PDF link to the left.

* Professor of Law, University of Michigan Law School. JD, Columbia Law School, 2011. PhD (Biology), Columbia University, 2010. For helpful comments and conversations, I wish to thank Clark Asay, Sam Bagenstos, Ana Bracic, Sarah Burstein, Adam Candeub, Kevin Collins, Rebecca Curtin, Rochelle Dreyfuss, Rebecca Eisenberg, Gary Fox, Janet Freilich, Erin Fuse Brown, Shubha Ghosh, Paul Gugliuzza, Yaniv Heled, Don Herzog, Cynthia Ho, Dmitry Karshtedt, Mark Lemley, Jake Linford, Kyle Logue, Joe Miller, Lisa Larrimore Ouellette, Kevin Outterson, Sean Pager, Laura Pedraza-Fariña, Govind Persad, Anya Prince, Gabriel Rauterberg, Greg Reilly, Alex Roberts, Rachel Sachs, Ana Santos Rutschman, Jake Sherkow, Ted Sichelman, Norman Siebrasse, Jessica Silbey, Deepa Varadarajan, Patti Zettler, and the participants at the Junior IP Scholars Gnocchi Workshops at Florida International University and the University of Oklahoma, PatCon VII at Northwestern University, BioLawLaPaLooza 2017 at Stanford University, the RIBS Workshops at the University of Michigan and Washington University in St. Louis, Junior Scholars in IP at Michigan State University, and the bioip workshop at Georgia State University. Megan Andersen, Erin Edgerton, Brian Jacobsmeyer, Gabrielle Stephens, and Jonathan Tietz provided excellent research assistance. All errors are my own.

Introduction

Patent law promotes innovations that are different from what the world already knows. This may seem a truism: What is innovation other than the search for new things? 1 Innovation policy scholars often distinguish invention—the process of creating a new technology—from innovation—the process of commercializing a new invention. See, e.g., Yale Brozen, Invention, Innovation, and Imitation, 41 Am. Econ. Rev. 239, 239 (1951). I use innovation here to describe the entire process, assuming a unified innovator whose inventive and commercialization efforts are driven by a desire to profit from the innovation. But mere novelty is not the aim of innovation policy—improvement is. Put more plainly, what we want is “better”; what we get is “new.” Often, in fact, we get innovations that are new purely for the sake of being new, and not better at all. Sometimes they are worse. This Essay explores how patent law promotes what I call divergent innovation—innovation that develops significant or minor changes to existing technology rather than learning more about that technology—drawing from examples in the field of biomedical innovation.

Patent law can drive divergent innovation even when other incentives suggest focusing on developing an older technology. Known drugs provide a useful case. If a known chemical would make an effective drug, companies typically still won’t develop it, because it isn’t new, and therefore, isn’t patentable. 2 See Benjamin N. Roin, Unpatentable Drugs and the Standard of Patentability, 87 Tex. L. Rev. 503, 513 (2009) [hereinafter Roin, Unpatentable Drugs] (“[I]t is well known that pharmaceutical companies generally refuse to develop new drugs unless they have strong patent protections over them.”); infra section II.A.1. New use patents may be available but provide relatively weak incentives. See infra section II.A.1; see also Rebecca S. Eisenberg, The Problem of New Uses, 5 Yale J. Health Pol’y L. & Ethics 717, 724–25 (2005) [hereinafter Eisenberg, New Uses] (describing the limited incentives provided by new use patents); Erika Lietzan, Paper Promises for Drug Innovation, 26 Geo. Mason L. Rev. 168, 182–95 (2018) (arguing that protections for new uses are inadequate). Instead, they may make minor changes (or seek out a totally different chemical), even if those changes might make the drug worse, because the patent incentive is so important to the innovative process. 3 See infra section III.A. Patent doctrines focus incentives on the search for new and different innovation without emphasizing improving technology or increasing welfare. Novelty, nonobviousness, and utility doctrines all drive innovations’ newness when innovators seek patent protection. 4 While the title of this Essay refers to “novelty,” it addresses newness in general, not just the novelty doctrine of patent law. And in a mirror image of patent incentives to create new innovations, innovators “invent around” patents on existing technology not because inventing around will improve a product but to avoid the cost imposed by existing patents. 5 See infra section III.B.

Divergent innovation may bring benefits, but it also brings costs that differ from the cost of patent exclusivity itself. I identify three here. First, the process of inventing around existing patents is itself costly. To develop a new drug similar to an existing drug, the developer needs to undergo the entire process of preclinical work, clinical trials, and Food and Drug Administration (FDA) approval, at a cost of many millions of dollars. Second, divergent innovation can lead to incompatible technologies, the absence of standards, and the loss of network effects and economies of scale. Third, when the path of innovation is deliberately forked, we lose the ability to draw from existing stocks of knowledge about a particular technology because the new technology is different for the sake of being different. Those new clinical trials mean that we know less about both the new drug and the old drug than we would have known if we had simply developed more knowledge about the old drug. Even when divergent innovation effectively moves technology forward, the costs of divergent innovation should be weighed against its benefits. 6 Patent law creates these costs by prioritizing divergent innovation, as I argue here, but these costs are not dependent on patent law; if a grant system or prize system similarly promoted technological divergence, the same sorts of divergence costs would arise.

The costs of divergent innovation have gone understudied partly because divergence fits so neatly within a patent-driven market theory of innovation. Patent law relies on the market to sort out the value of inventions. Patents are only worthwhile if the protected goods are valuable in the marketplace, so the market will work to sort out the valuable innovations from a mélange of patented inventions. 7 Note that while patent law permits the patenting of useless new things, see infra section II.A.3, it does not permit the patenting of useful old things, see infra section II.A.1. As John Duffy puts it, “[P]atent law has no aversion to awarding commercially worthless property rights.” 8 John F. Duffy, Rethinking the Prospect Theory of Patents, 71 U. Chi. L. Rev. 439, 453 (2004). But firms, with their private knowledge about markets and consumers, can predict market value (to some extent), and use that information to drive their innovation investment decisions. Under this account, while patent law does not require superiority for individual inventions, 9 See infra section II.A.3. patent law and markets together should lead to overall improvements over time.

Unfortunately, markets aren’t always great at identifying innovating improvements. Consumers select goods for many reasons besides quality. 10 See, e.g., Jake Linford, Placebo Marks, 47 Pepp. L. Rev. 45, 53–62 (2019) (explaining how trademarks can drive economically irrational consumer behavior but can also alter consumer experience of the branded product); Irina D. Manta, Hedonic Trademarks, 74 Ohio St. L.J. 241, 264–66 (2013) (describing how brand names can contribute to consumers’ hedonic experiences of goods). For additional information, see generally Deborah J. MacInnis, C. Whan Park & Joseph R. Priester, Handbook of Brand Relationships (2019) (describing relationships between consumers and brands). We might therefore expect the costs of divergence—the source of the variety from which markets pick the winners—to be more problematic where market mechanisms do a poor job of incentivizing, selecting, and adopting superior innovations.

Markets are especially bad at selecting superior biomedical technologies. Efficient markets require informed consumers who can choose goods. But biomedical technologies, which make up a trillion-dollar annual industry with tremendous health implications, are often “credence goods,” meaning that their users cannot evaluate the innovations’ quality independently. 11 Ariel Dora Stern, Innovation Under Regulatory Uncertainty: Evidence from Medical Technology, 145 J. Pub. Econ. 181, 182 (2017). The nature of health technology as a credence good, among other factors, drives the need for FDA regulation. See id. at 183–84; see also Stephen Breyer, Regulation and Its Reform 26–29 (1982) (using drugs as an example to argue that information failures can justify regulation). Even with FDA regulation, information about biomedical technologies’ quality is frequently poor or unavailable. 12 See infra section III.D.2. Finally, patients, doctors, and insurers split the consumer functions of selecting, paying for, and benefiting from goods, each with their own incentives. Since market mechanisms for selecting superior technologies underperform for biomedical innovations, the costs of divergent innovation matter more. These costs are particularly significant because biomedical technology encompasses drugs, which are presented as the exemplar of an industry where patents are truly important and work as designed. 13 Roin, Unpatentable Drugs, supra note 2, at 504.

Patents create incentives within a broader innovation ecosystem, where some policy tools, like patents, promote divergence, but others discourage innovators from diverging. For biomedical technology, consider two among many: 14 Other levers could and should be considered in future work. Prestigious journals, for instance, prioritize novel, surprising results over confirmations or refinements of existing work; government grants may go either to new research pathways or to existing areas with which grant reviewers are comfortable. See generally John P.A. Ioannidis, Why Most Published Research Findings Are False, 2 PLoS Med. 696 (2005) (discussing publication incentives); W. Nicholson Price II, Grants, 34 Berkeley Tech. L.J. 1 (2019) [hereinafter Price, Grants] (discussing grant incentives). Market approval by FDA and health insurer reimbursement decisions each create substantial innovation incentives. Each can penalize divergence. At FDA, specialized processes ease market access for new medical devices that resemble existing devices; if the technology is substantially different, getting premarket approval can be much harder. 15 See infra section IV.A. Similarly, winning insurer reimbursement for a new technology is easier if the insurer is familiar with the technology, such that the innovator need not make their case from scratch. 16 See infra section IV.B. The interaction between these incentive systems can lead to bad outcomes: Patent incentives pushing for newness can be partially counterbalanced by reimbursement and regulatory incentives pushing against too much newness, resulting in a spate of technologies that are different enough to bring the costs of divergence, without being sufficiently different to bring substantial benefits.

Good innovation policy depends on understanding innovation, and the costs of divergence are a part of that. This Essay makes a general claim: Patent law drives divergent innovation, and that divergence carries costs. As to this picture of innovation in general, the only prescription I offer is that scholars and policymakers take divergence costs into account when analyzing innovation incentives, benefits, and costs.

This Essay also makes a specific claim: Divergence is especially costly for biomedical innovations, which patents and other incentives can drive toward an unhappy medium of differentiating, proliferating, nonsuperior technologies. This specific problem may be amenable to solutions. Within patent law, strengthening the nonobviousness requirement could reduce close imitators of existing technology. Outside patent law, FDA or insurer requirements for superiority could do the same.

This Essay proceeds in five Parts. Part I describes the ways in which innovation paths can diverge or not. Part II lays out how several patent doctrines can drive divergent innovation. Part III provides three cases to illustrate divergent innovation and the costs it can bring: me-too drugs, including statins; insulin pumps for diabetics; and epinephrine auto-injectors like the EpiPen. Part IV places patent law into a broader context in the case of biomedical innovation, addressing how the incentives provided by FDA approval and insurer reimbursement can drive innovation to follow the path of existing technology. It also considers how these combined incentives can perversely lead to innovation landing in an unhappy middle: close enough to existing technology that we derive little social benefit from diversity but far enough from that technology that we see the costs of divergence. Part V describes potential solutions to the problems specific to biomedical innovation, located either within or outside patent doctrine.