First-to-invent versus first-to-file:
Invention, and international patent law harmonization
Kaz Miyagiwa*
Osaka University and Emory University
Abstract:
The U.S. has been under pressure to abandon the unique first-to-invent feature of its patent law
for awarding patents. The opposition to reform argues that switching to a first-to-file rule, the
international norm, will undermine innovation. We evaluate this argument in a dynamic
stochastic model of a patent race that captures the key features of the U.S. patent system. The
model also explains the puzzle why there is much filing activity in the U.S., when in first-toinvent the inventor never has to file for a patent unless he must sue.
JEL Classification numbers: L3, O31, O34
Keywords: first-to-file, first-to-invent, patent law harmonization, innovation, U.S. patent law
Please send correspondences to: Kaz Miyagiwa, The Institute of Social and Economic
Research, Osaka University, Mihogaoka, Ibaraki, Osaka 567-0047, Japan. E-mail:
kmiyagiwa@gmail.com
*
The Institute of Social and Economic Research, Osaka University, and the Department of Economics, Emory
University. I thank C.O.R.E. at the Unversite Catholique de Louvain at Louvain-la-neuve for the hospitality and the
research environment. I also benefited from comments on earlier versions by Yuka Ohno, and seminar participants
at Hitotsubashi, Kobe, and Okayama Universities. A research grant from Microsoft’s Academic Research Program
is gratefully acknowledged. Any opinions expressed as well as remaining errors are the author’s.
2
1. Introduction
Despite recent successes in harmonizing patent law internationally, the U.S. patent law
still retains some unique and peculiar features. In this paper we focus on one such feature,
namely, the first-to-invent rule.1 When two people apply for a patent on the same invention, the
person who filed his application first gets the patent virtually everywhere else in the world.2 In
the U.S., however, determination is made as to priority of invention, and a patent is awarded to
the person who can demonstrate to have discovered the invention first. Although the U.S. has
repeatedly expressed its willingness to conform to the first-to-file rule, the international norm,
the opposition to reform remains strong.3
The opposition in the U.S. embraces two arguments. One is that the first-to-invent rule
protects small inventors who may take longer time to prepare patent applications and who
therefore would in a first-to-file system lose to major corporate inventors capable of hiring an
army of patent lawyers.4 However, Lerner (2003) asserts that this argument is spurious since
the recent patent law reform in the U.S. has created a new provisional patent application, which
is much simpler to file. Further, in the U.S., disputes over priority of invention are settled in a
legal proceeding called interference, which involves examining laboratory logbooks,
establishing dates for prototypes, and so on at a hearing before the USPTO (U.S. Patent and
1
Another prominent feature of the U.S. patent law was its confidential filing system. Until the Intellectual Property
and Communications Omnibus Reform Act of 1999, all patent applications were kept secret until patents were
granted. This has since been changed and now applications are published 18 months after their filing dates, the
international norm (see Aoki and Prusa 1996, and Aoki and Spiegel 2003). However, inventors choosing not to file
for a foreign patent can opt for non-publication of their applications, leaving open the possibility of notorious
“submarine” patents; see Graham and Mowrey (2004).
2
The exception is the Philippines, which uses a first-to-invent rule due to its colonial legacy with the U.S.
3
A first-to-file rule is contained in the Patent Act of 2005, introduced by Rep. Lamar Smith, R-Texas. This bill
however, has not been approved, as of this writing. Also at the 2007 G8 Summit meeting in Germany, President
George W. Bush formally stated his support for a first-to-file rule.
4
See, e.g., Stephenson (2005).
3
Trademark Office) Board.5 In one estimate the adjudication of the average interference costs
over one hundred thousand dollars (Kingston 1992). Since the costs of interferences are borne
equally by the parties involved, a first-to-invent rule does not necessarily protect financially
constrained small inventors. This point is confirmed in an empirical study of Cohen and Ishii
(2005), which finds that interference does not help small individual inventors against large
corporate inventors. Thus, concludes Lerner (2003), “the greatest beneficiary from the first-toinvent system is the small subset of the patent bar that specializes in international law.”
This leads us to the opposition group’s second argument; that is, switching to a first-tofile rule will undermine innovation because a patent issues not to the inventor but to the
individual who is fastest in filing a patent application. Although the precise mechanism by
which first-to-file undermines innovation is never spelled, the opposition often bolsters its
argument by adducing the undeniable fact that the U.S. has led the world in inventions for more
than a century, and attributing that remarkable record to the first-to-invent feature of the patent
law that the nation has had since 1836.6
The main objective of the present paper is to evaluate the opposition’s argument that a
first-to-file rule undermines innovation relative to a first-to-invent rule. In doing so, we focus
on two types of risks faced by an inventor. One is the risk of losing his invention to someone
who discovers it later. First-to-invent diminishes this risk, giving an inventor time and security
to experiment with and perfect his invention without the fear of losing it to later inventors. On
the other hand, first-to-invent exposes the inventor to the risk of duplication. Since the inventor
5
See Cohen and Ishii (2005) for a detailed study of the interference process.
For example, “It should be understood that it is because the U.S. has a first to invent structure and the rest of the
world has a first to file structure that the U.S. is the production and employment machine that it is.” (See
http//www.piausa.org/layout/set/print/patent_reform_issue.)
6
4
can establish his priority of invention at any time under the first-to-invent rule, he can delay
filing for a patent. In such an environment, the inventor in general bears the risk of reinventing
something that has already been discovered, wasting time and resources and being sued in the
end. Due to these two conflicting risks, it is not a priori clear whether first-to-invent is more
conducive to invention than first-to-file.
In addition, first-to-invent also poses a puzzle. Given that, in reality, filing for a patent is
costly in terms of legal fees and the time to write the patent application, it is not clear why
inventors should file for a patent at all in first-to-invent unless they must sue. And yet we see so
much filing activity in the U.S., even though only a small fraction of patentees end up suing for
patent infringements.
In this paper we examine these issues in a dynamic model of a patent race. The model
has two stages. In the first stage, each firm chooses a level of investment in R&D, which
determines its probability of discovery in the second-stage game. This assumption is consistent
with the finding of Cohen and Ishii (2005) that most patent races are among major corporate
research laboratories chasing well-defined research topics, where initial setups are of utmost
importance in conducting research.
The second stage consists of an infinite time horizon. At each instant, the firms
simultaneously decide whether to carry out R&D activity at a fixed cost c, representing, e.g.,
the cost of running the lab. If they proceed with R&D activity, nature chooses a “success” or a
“failure” for each firm according to the probability of discovery determined in stage 1. Each
firm learns what nature chose for it, but not what nature chose for the rival. Thus, there is an
informational asymmetry in the model.
5
Once having made a discovery (at a stochastic date), a firm decides whether to file for a
patent immediately or improve the quality of the invention. The improvement process is not
stochastic but time-consuming. For simplicity we assume the process requires a fixed time.
After completing the improvement process, the firm again decides whether to file for a patent
or delay until it has to sue (this decision is irrelevant in first-to-file, because there the inventor
must establish his priority by filing). A strong novelty requirement or scope protection is
assumed, so the unimproved and the improved version cannot be patented separately.
Our results can now be summarized. The first-to-file rule yields two types of purestrategy equilibria, depending on the parameter values. In one, the firms file immediately, in
another, they improve the invention. There is also the mixed-strategy equilibrium. The first-toinvent rule also yields these two pure-strategy equilibria. However, the equilibrium with firms
improving the invention is risk-dominant. The model possesses another equilibrium, in which
the inventor delays filing after the improvement. This equilibrium however exists only if the
cost of interferences being sufficiently low relative to the patent application fee, an unlikely
scenario, given the extremely high cost of interferences in reality, as we saw above. Thus, our
model explains why there is much filing activity in the U.S. when there is no need to file for a
patent.
Our analysis shows that the firms invest more in R&D when they improve the
invention. Since the firms always improve the invention in first-to-invent but not necessarily so
in first-to-file, our result suggests that first-to-invent is more conducive than first-to-file when
the improvement adds little to the value of the invention.
The paper contributes to the existing literature that examined various aspects of patent
6
law; for example, patent length and breath (Nordhaus 1969, Gilbert and Shapiro 1990,
Klemperer 1990, O’Donoghue, Scotchmer and Thisse 1998), novelty requirements (Scotchmer
and Green 1990), patent renewal rules (Scotchmer 1999, Cornelli and Schankerman 1999), and
pre-grant patent publication (Aoki and Prusa 1996, Aoki and Spiegel 2003). However, there is,
to the best of the author’s knowledge, no formal analysis of the first-to-invent feature of the
U.S. patent law, with the exception of Scotchmer and Green (1990). Their work however
differs significantly from the work on hand both in focus and setup.
Scotchmer and Green (1990) consider the setup in which two firms races to improve
some base-level technology already patented to a third-party. There are two innovations:
intermediate and final. Two features set their work apart from the present study. First, there, the
probability of innovation is exogenous so the relative effect of the two rules on the levels of
R&D investment is unexamined. More importantly, in their model there is complete
information; the firm learn immediately when the rival discovered the innovation, whether it is
patented or not. So, unlike in this paper, firms do not face the risk of duplication.
As regards focus, Scotchmer and Green (1990) are more concerned with the varying
degrees of novelty requirements of patent law than with the patent awarding rules. In their
model, patenting the intermediate invention reveals its content to the rival firm, enabling the
rival to bypass the intermediate step, thereby accelerating discovery of the final innovation. If
the novelty requirement is so strong that the intermediate innovation infringes the existing
patent on the base-level technology, however, the intermediate innovation is not patented,
thereby retarding the discovery of the final innovation. Even with a weaker novelty
requirement, the inventor may forgo patenting the intermediate invention to force the rival out
7
of competition. However, such a shakeout is less likely to arise in first-to-file because the rival
could get a patent on the intermediate innovation if the inventor does not. Scotchmer and Green
(1990) thus conclude that first-to-file accelerates discovery of the final innovation relative to
first-to-invent in a broader set of parameter values they consider.
The remainder of the paper is organized in five sections. The next section gives a more
detailed description of the model. Sections 3 and 4 are devoted to the study of first-to-file, and
first-to-invent, respectively. In Section 5 we compare the incentives to innovate under these two
rules. Section 6 concludes.
2. Environment
We consider an R&D race between two symmetric firms, i = A, B. The model has two
stages. In the first stage each firm simultaneously chooses a level ki of investment in R&D,
which determines the probability of discovery to be explained in detail below. The second stage
has an infinite time horizon, with time running continuously from t = 0. There, the first-stage
R&D investment generates a Poison process, with the cumulative probability of discovery by
time t given by
prob(τ > t) = 1 − e− hi t ,
where the hazard rate hi = h(ki) is determined by the first-stage R&D investment.
The invention generates the flow m of revenues without the improvement and the flow
µ with the improvement. The improvement process is non-stochastic and takes a fixed length of
time Δ to complete. The premature abandonment of improvement adds nothing to the value of
the invention. A patent is issued immediately whenever the inventor files for it with the
8
application fee f > 0. We assume strong novelty or scope requirements in patent law so that the
original and the improved invention cannot be patented separately been patented. Finally, not to
make the model trivial, we assume that
e-rΔ(µ/r – f) > m – f,
where r is the instantaneous rate of interest. The left-hand side of the inequality denotes the net
value of the improved invention. Thus, the above inequality says that the invention is worth
improving in the absence of rivalry. However, that need not be the case under rivalry.
In contrast to Scotchmer and Green (1990) this paper assumes incomplete information.
Nature reveals the outcomes of R&D activities to each firm but not to its rival. Thus, a firm
knows of the rival’s discovery only if the latter files for a patent.7 Since the firms play a game
of incomplete information, we look for a perfect Bayesian-Nash equilibrium, according to
which the equilibrium strategies are sequentially rational, given beliefs, while beliefs are
Bayes-consistent with the equilibrium strategies. In solving the models we focus on a stationary
equilibrium of the game, i.e., a strategy that specifies a time-independent action for all t ≥ 0.
3. First-to-file
Under the first-to-file rule, because priority of invention must be established by filing
for a patent, not filing (unless the inventor must sue) is never an equilibrium outcome. This
points to two symmetric pure-strategy equilibria: one in which both firms file for a patent
immediately, and one in which both improve the invention.
7
In contrast, we assume that the firm that already has the invention knows it when its rival makes a discovery, even
if neither invention is patented. That may be because the profits diminish when there are two competing inventions.
This assumption is needed when we later discuss the possibility of the firms never filing for a patent under the firstto-invent rule.
9
3.A. Equilibrium in which firms file immediately for a patent
In perfect Bayesian-Nash equilibrium, the firms form beliefs as to the probability that
the rival has made the discovery to date. The equilibrium under consideration implies the
following beliefs: when a patent has not been issued to the rival before t, the firm believes that
the rival has not discovered the invention yet. Using such beliefs, we proceed to describe the
equilibrium profit. Given the Poison process, R&D activity by firm A results in a discovery
with the probability (1 - e− ha ε ) during a brief time interval [t, t + ε), where ε > 0 is arbitrarily
short, and the hazard rate ha is pre-determined. It can be showed that the expected profit to firm
A approaches ha(m/r – f) – c when ε approaches zero. This profit of course is conditional on the
invention not having yet discovered before t. Given the independent Poison processes, neither
firm has discovered the invention before time t with the joint probability that exp[– (ha + hb)t].
Summing these conditional expected profits over time t ≥ 0, we obtain the total expected profit
for the second-stage game as
∞
∫e
− rt −(ha + hb )t
e
[ha (m / r − f ) − c)dt .
0
Turning to the first stage, the exposition simplifies considerably if we let the firms
directly choose the hazard rate hi instead of the R&D investments ki. Evaluating the above
integral, and subtracting the cost of R&D investment, we obtain the expected net profit:
(1)
ha (m / r − f ) − c
− k(ha )
r + ha + hb
10
where k(hi) denotes the cost of investment in R&D. In the first stage, firm A chooses ha to
maximize (1), given hb. The first term in (1) is concave in ha. To ensure an interior optimum,
assume that k(hi) satisfies the Inada conditions: i.e., k(0) = 0, k’ > 0, k” > 0, k’(0) = k(1) = ∞,
where primes denote differentiation.
The first-order condition can be arranged to yield the following equation:
(2)
(m / r − f )(r + hb ) + c − k '(ha )(r + ha + hb )2 = 0 .
This implicitly defines A’s best response function r0(hb), where subscript “0” reminds us that
the firms file for a patent without no (zero) improvement on the invention. Firm B solves the
symmetric problem. The symmetric Nash equilibrium levels of investment (hazard rates)
obtain by putting ha = hb in (2). We denote this common equilibrium value by h0*.
In the equilibrium, no firms should have the unilateral incentive to deviate from it. If A
deviates, improving the invention would yield the profit exp(-rΔ)(µ/r – f) in the absence of
rivalry, but with rivalry that profit is realized only if B does not discover the invention while A
improves the invention. Should B make a discovery before A completes the improvement, B
will file immediately and get a patent. Since B fails to discover the invention during the interval
Δ with the probability exp(- hbΔ), the expected profit to A of a deviation equals
e− hb Δ e− rΔ ( µ / r − f ) .
A has no incentive to deviate if and only if this is less than the equilibrium profit; i.e.,
m / r − f ≥ e− h0 *Δ ( µ / r − f )e− rΔ ,
where we replaced hb with the equilibrium hazard rate, h0*.
11
Although the invention is worth improving, in first-to-file the inventor faces the risk of
losing the invention to the rival who discovers the invention second but files first. Thus, if the
probability of discovery during the improvement process is large, or exp(- h0*Δ) is small, then
the firms prefer to file immediately to minimize this risk
3.B. Equilibrium in which the invention is improved
We next consider the equilibrium in which each firm improves the invention. In this
case, at time t ≥ Δ, the firm does not know whether the rival has discovered the invention
during the preceding interval [t - Δ, t). However, the rival would have filed for a patent before t
if he made a discovery before t - Δ. Thus, the firm has incomplete information only over the
interval [t - Δ, t).
If B made the discovery during this interval, B will surely file for a patent before A
completes its improvement process. Therefore, A earns the revenue only if B did not make the
discovery during the preceding interval, which occurs with probability exp(-hbΔ). Thus, A’s net
profit from doing R&D at t ≥ Δ is
(3)
ha e− hb Δ e− rΔ ( µ / r − f ) − c
This of course is conditional on A not having made a discovery before t and B not having made
its discovery before t - Δ ≥ 0, which occurs with the joint probability exp(-hat)exp[-hb(t - Δ)].
Weighting the profit (3) with these probabilities and summing over t ≥ Δ, we obtain the
expected profit to A
12
∞
(4)
∫e
− rt − ha t − hb (t − Δ )
e
e
[ha e− hb Δ ( µ / r − f )e− rΔ − c]dt
Δ
=
e−(r + ha + hb )Δ [ha ( µ / r − f )e− rΔ − cehb Δ ]
.
r + ha + hb
(t ≥ Δ)
For t < Δ, the situation is similar except that firm A is ignorant about the rival’s
discovery over the shorter interval [0, t) < Δ. As B fails to make the discovery with the
probability exp(- hbt) in this interval, the corresponding expected profit is given by
Δ
(5)
∫e
− rt − ha t
e
[ha e− hb t ( µ / r − f )e− rΔ − c]dt
0
=
(1 − e−(r + ha + hb )Δ )ha ( µ / r − f )e− rΔ c(1 − e−(r + ha )Δ )
.
−
r + ha + hb
r + ha
Adding up (4) and (5) and subtracting the cost of investment in R&D, we obtain the total net
profit for A in stage 1:
(6)
ha ( µ / r − f )e− rΔ c(1 − e−(r + hb )Δ ) ce−(r + hb )Δ
−
−
− k(ha )
r + ha + hb
r + ha
r + ha + hb
The first-order condition for the maximum of (6) yields
(7)
(r + hb )e− rΔ ( µ / r − f ) + cN − k '(ha )(r + ha + hb )2 = 0 ,
where
(8)
N ≡ e−(r + hb )Δ + (1 − e−(r + hb )Δ )(1 +
hb 2
) > 1.
r + ha
The symmetric Nash equilibrium obtains by setting ha = hb in (7) and is denoted by h1*.
We next check the inventor’s incentive to deviate. Suppose that A, having discovered
the invention at t, files for a patent immediately instead of improving the technology as in the
13
equilibrium. Then, filing first, A gets the patent and the payoff of m/r – f, whether or not B has
already discovered the invention. This profit should be compared with the equilibrium profits,
which are either e− h1 *Δ e− rΔ ( µ / r − f ) if t ≥ Δ, or e− h1 *t e− rΔ ( µ / r − f ) if t < Δ. It follows that A
has no incentive to deviate at any t ≥ 0, if
m/r - f ≤ e− h1 *Δ e− rΔ ( µ / r − f ) .
We have obtained the following result.
Proposition 1: In first-to-file:
(A) The model possesses the equilibrium in which both firms choose to file immediately for a
patent on the original invention, if the equilibrium probability h0* satisfies
(9)
m/r− f
≥ e− h0 *Δ .
e (µ / r − f )
− rΔ
(B) The model possesses the equilibrium in which both firms choose to improve the quality of
the invention if the equilibrium probability h1* satisfies
m/r− f
≤ e− h1 *Δ .
e (µ / r − f )
− rΔ
Finally, it is straightforward to check that there is no asymmetric equilibrium in first-tofile as the firm has no incentive to postpone filing if the rival files immediately for a patent.
Also, the model does not possess the equilibrium in which the firms never file for a patent, for
in first-to-file filing is necessary for establishment of priority of invention.
14
3.C. A comparison of the two equilibrium R&D efforts
We now compare the levels of investment in R&D in the two equilibrium outcomes
above. Since the proof of the next result does not offer useful insight, we relegate it to the
appendix and report only the conclusion.
Proposition 2: h1* > h0*; that is, in first-to-file firms invest more in R&D when they improve
the invention than when they file immediately for a patent.
Since the improved invention is more valuable, this conclusion seems obvious, but not so given
the fact that the inventor takes the risk of duplication and hence incurs higher R&D costs (N >
1 in Equation (8)).
The next question we examine is what determines which equilibrium to occur. Note
that h0* < h1* implies exp(- h0*Δ) > exp(- h1*Δ). Thus, if
m/r− f
≥ e− h0 *Δ > e− h1 *Δ
e (µ / r − f )
− rΔ
the firms file for a patent right away, while if
e− h0 *Δ > e− h1 *Δ ≥
m/r− f
,
e (µ / r − f )
− rΔ
the firms improve the invention, as we stated in Proposition 1. However, Propositions 1 and 2
give rise to the case in which
(10)
e− h0 * >
m/r− f
> e− h1 * .
e (µ / r − f )
− rΔ
15
If (10) holds, the both conditions in Proposition 1 fail, implying there is no equilibrium in pure
strategies. However, as we show in the appendix, there is an equilibrium in mixed strategies;
i.e., the firms randomize between filing immediately and improving the invention. In this
mixed-strategy equilibrium, the equilibrium expected profit equals m/r – f, implying that the
firms invest h0* in R&D. The next proposition then summarizes the findings of this section.
Proposition 3: In first-to-file, the firms invest h1* in R&D if
m/r− f
≤ e− h1 *Δ ,
e (µ / r − f )
− rΔ
and h0* (< h1*) if the inequality above is reversed.
4. First-to-invent
We turn next to the first-to-invent rule, one of the main features of the American patent
law. In first-to-invent, when both firms apply for a patent, priority is determined through
interferences as explained in the introduction. As noted there, both firms equally share the cost
of an interferences hearing. We let I denote the cost of the interference per firm. For the next
two subsections we assume that the inventor files for a patent after the improvement process.
The assumption is relaxed in Subsequent 4.C.
4.A. Equilibrium in which firms file immediately for a patent
The equilibrium outcome is the same that we obtained and discussed for first-to-file.
Here, we need only to check the incentive to deviate under the first-to-invent rule. Thus,
16
suppose that, having discovered the invention in period t, firm A deviates, choosing to improve
the invention instead of filing immediately. Then, with the probability [1 - exp(- hbΔ)], B will
make a discovery and file for a patent before A does. While this reduces the profit to A to zero
in first-to-file, in first-to-invent A can establish its priority before an interference hearing at the
additional cost of I. This suggests that a deviation yields:
e− hb Δ e− rΔ ( µ / r − f ) + (1 − e− hb Δ )e− rΔ ( µ / r − f − I )
= e− rΔ [( µ / r − f ) − (1 − e− hb Δ )I ] .
That is, in first-to-invent firm A’s priority is secure, now matter what, but the cost of the
interference must be borne when firm B files for a patent before A completes the improvement.
Now the no-deviation condition can be stated as:
(11)
m / r − f ≥ e− rΔ [( µ / r − f ) − (1 − e− hb Δ )I ] ,
or in this equivalent form:
(12)
m/r− f
(1 − eh0 *Δ )I
≥
1
−
.
e− rΔ ( µ / r − f )
µ/r− f
A comparison of this condition with that in (9) under the first-to-file rule indicates that, if µ/r – f
> I, or the cost of the interference hearing is less than the value of the improved innovation,
valued at the time of filing, then the right-hand side of (12) exceeds that of (9), meaning that the
firms file immediately for a patent in first-to-invent for a narrower ranges of parameters than
they do in first-to-file.
4.B. Equilibrium in which the invention is improved
17
The equilibrium outcome is the same that we obtained in Subsection 3.B under the
first-to-file rule. The difference between the two rules again manifests itself in the inventor’s
incentive to deviate. Filing immediately for a patent, A would obtain m/r – f only if B did not
discover the invention during the preceding interval [t - Δ, t) for t ≥ Δ. If B has made the
discovery before A, B will challenge A in an interference and get the patent, requiring A only to
foot the bill of an interference hearing. Thus, a deviation yields
e− h1 *Δ (m / r − f ) − (1 − e− h1 *Δ )( f + I ) .8
Subtracting this from the equilibrium profit, we obtain the following no-deviation condition
e− h1 *Δ e− rΔ ( µ / r − f ) – [ e− h1 *Δ m / r − f − (1 − e− h1 *Δ )I ]
= e− h1 *Δ [e− rΔ (µ / r − f ) − (m / r − f )] + (1 − e− h1 *Δ )( f + I ) > 0.
Since this always holds, improving the invention is the equilibrium in first-to-invent for all the
relevant parameter values.
To sum the discussion of this section so far, if (11) fails, improving the invention is the
only equilibrium outcome. In contrast, if (11) holds, filing immediately for a patent is also the
equilibrium outcome. In the latter case, however, the latter is risk-dominated by the equilibrium
in which they improve the invention. Thus, we conclude
Proposition 4: In first-to-invent, the equilibrium with firms improving the invention riskdominates the one with firms filing immediately.
8
Strictly speaking, B will claim its priority when it finishes the improvement, that is, between t and t + Δ, so the cost
I should be discounted by the expected date of the interference. Since this does not matter for our result as seen
below, we ignore this detail to keep the notation simple.
18
4. C. Equilibrium in which firms never file for a patent
We have so far assumed that an inventor always patents his/her invention. It is easily
seen that filing for a patent is the equilibrium behavior in first-to-file, for the inventor must file
to claim priority. However, in first-to-invent the first inventor never has to file for a patent
unless he must sue. Given that there is the filing cost, then, it is not all too clear why there is so
much filing activity in the U.S. In the remainder of this section we examine this puzzle.
For this purpose we need the following additional assumption. If the two firms have the
inventions, the flow profits to each are less than when only one inventor possesses the
invention. A decrease in profit alerts the first inventor of the rival’s discovery, even if neither
has patented the invention. Without this assumption the relationship between the firms ceases to
be rivalrous.
With this additional assumption, consider the equilibrium in which an inventor never
files for a patent unless to sue for a patent infringement. As before, we first describe the
equilibrium and then check the incentive to deviate. In the equilibrium, firm A improves the
invention but does not file for a patent until firm B files for a patent. If B has not discovered the
invention yet, then firm A, on completing the improvement process, receives the revenue µ
until B makes a discovery. When that happens, A, altered by falling profits of the rival’s
discovery, files for a patent and establishes priority at an interference hearing. This suggests the
following profit to A, valued at the time of the completion of the improvement:
µ + hb ( µ / r − f − I )
h ( f + I)
= µ/r− b
.
r + hb
r + hb
As the first inventor, A is assured of the revenue µ/r, but must incur the additional costs (f + I)
of filing and the interference whenever B makes a discovery.
19
We have so far assumed that firm A discovers the invention before B. Suppose instead
that B discovers the invention first. Then, firm A will be challenged in an interference hearing
and will lose the case, incurring the loss of (f + I). Since B would have discovered the invention
before t with the probability 1 – exp(– hbt), we obtain the following expected profit to A:
e− hb t ( µ / r −
hb ( f + I )
) − (1 − e− hb t )( f + I )
r + hb
= e− hb t µ / r − ( f + I )(1 − e− hb t +
hb e− hb t
) ≡ U.
r + hb
This is the value of the invention to A at the time of discovery. The rest of the modeling adds no
insight to our understanding, we relegate it to the appendix. Here we simply denote the
equilibrium level of investment in R&D by h2*.
Now, consider a deviation by A, who files for a patent after the improvement at t + Δ. If
B has the invention before t, B will respond by calling for an interference hearing, and B will
win the case. If B did not have the invention before t, A receives the patent and B immediately
drops out of the race. Thus, the expected profit to A from the deviation is
(1 − e− h2 *t )(−I ) + e− h2 *t µ / r − f .
Subtracting this from U, we have the following no-deviation condition for never filing for a
patent
e− h2 *t
rf − h2 * I
≥ 0.
r + h2 *
or more simply
(13)
rf > h2*I.
20
Proposition 5: In the first-to-invent rule, the firms file for a patent after the improvement if and
only if
(14)
rf ≤ h2*I.
Intuitively, since the first-to-invent rule guarantees priority of invention for the first
inventor, there seems little need to file for a patent unless the inventor must sue. However, an
interference hearing is a very costly choice. Alternatively, filing for a patent, the inventor can
send a clear signal, prompting the rival to drop out of the race, and obviating interference
hearings forever. Given that interferences are extremely costly in reality, (14) is likely to hold.
This may explain why there is much filing activity in the U.S. without suing, when the
inventors never really have to file to establish priority of invention.
5. A comparison of first-to-file and first-to-invent
We now answer the question whether first-to-invent furthers innovation relative to firstto-file in the next proposition.
Proposition 6:
(A) If in first-to-file the firms file immediately for a patent (with positive probability), first-toinvent induces more efforts in R&D than first-to-file does.
(B) Suppose that in first-to-file the firms improve the invention. If (14) holds, first-to-file and
first-to-invent are equally conducive to R&D.
21
(C) If (13) holds, inventors file only when they sue. First-to-invent is more conducive to R&D
than first-to-file.
The first two parts of the proposition are simply the summary of what we have already
established. First, suppose that (14) holds, so the firms file for a patent on competing the
improvement. Suppose further that the value of the patent on the improved invention is
sufficiently large. Then, the firms invest h1* under the first-to-file and first-to-invent rules. On
the other hand, if first-to-file induces the inventor to file immediately for a patent, then, h1* >
h0*; the firms invest more in R&D under the first-to-invent rule than under the first-to-file rule.
Part (C) of Proposition 6 compares the levels of investment in R&D when (13) holds. If
(13) holds, the inventor finds saving the filing fee worthwhile relative to incurring the cost of
interference. However, delaying filing for a patent also exposes the inventor to the increased
uncertainty, because he never finds out whether the rival has discovered the invention until he
discovers his own. Despite this, we can show in appendix that h2* > h1*, which is part (C).
Our main findings are based on the following intuition. In our model firms prefer the
improved version to the original and would exert more effort in R&D if they could agree to
commit to taking time to improve. Although such a commitment is impossible to make, firstto-invent guarantees such a result by eliminating the risk of losing the invention to a latecomer.
In contrast, first-to-file does not provide such guarantee. As we saw, if the improvement results
in insufficient value added, firms choose to file immediately for a patent in the fear of losing the
patent to the late inventors. But the reduced value of invention diminishes the incentive to
invest in R&D.
22
5. Concluding remarks
Despite considerable pressure from the international community to conform to the
international norm, the first-to-invent feature of its patent law draws much support in the U.S.
One supporting argument is that the first-to-invent feature makes the U.S. the innovation
powerhouse that it is. In this paper we evaluate this claim in a stochastic model of R&D
competition. When there is a discovery, the inventor can file immediately for a patent or take
time to improve the invention for an increased value before filing. We find that when this
incremental value is substantial there is no difference between first-to-file and the first-to-invent
rule. If the incremental value is less substantial, however, the first-to-invent rule induces more
efforts in R&D than the first-to-file rule.
In first-to-invent, inventors never have to file for a patent unless to sue. Yet, there is,
despite the filing fees, much filing activity in the U.S. that does not involve suing. Our model
also addresses this empirical puzzle. We find that such a result arises in equilibrium only if the
filing fee is expensive relative to the interference fee, the condition unlikely to be met in reality.
Thus, our analysis suggests that firms file for a patent to avoid having to sue the rival. If that
condition is satisfied, however, it only reinforces our result: first-to-invent induces strictly
greater efforts in R&D than first-to-file.
Our results are derived under some simplifying assumptions. One is the assumption
that the operating cost is constant at c. Should it increase with investment in R&D, maybe
because a larger lab requires more maintenance cost, then that would make investment in R&D
less attractive. However, it would be unlikely to reverse our finding because one can invest just
23
as much in first-to-invent as in first-to-file and still get greater profit due to the improvement.
On the other hand, should the operating costs fall with R&D investment, perhaps because the
greater investment in R&D the more efficient the lab is to operate daily, then our case is likely
to be strengthened.
In this paper we focus on individual firms’ incentive to invest in R&D for some welldefined R&D target under the two rules, where strategic interactions are important. In the real
world, innovations can give rise to innovation cycles or subsequent innovations, some of which
may be inconceivable before the original innovations are discovered (see, e.g., Green and
Scotchmer, 1995, and O’Donoghue 1998, on some issues). In this case, the issue is less on the
strategic interaction of the rival firms but on how fast the original invention spawns successive
inventions in society. It is important that the two rules be compared in such a context. It is also a
worthwhile exercise to construct a growth model to examine the effect of the two rules on the
growth rate. Finally, while we compare the two rules as two alternatives in one country, it
would be useful to investigate the effect of patent law harmonization in a model of two
countries, letting one country switch from the first-to-invent rule to the first-to-file rule, which
is already in use in the other countries. We leave these exercises for future research.
24
Appendix
A. Proof of Proposition 2
Let Ga(ha, hb) denote the left-hand expression of (2). This vanishes when ha is evaluated at the
optimal value, r0(hb), i.e., Ga(r0(hb), hb) = 0. Similarly, let Ha(hA, hB) denote the left-hand side
of (7). Now, we compute
Ha(r0(hb), hB) - Ga(r0(hb), hb)
= [e− rΔ ( µ / r − f ) − (m / r − f )](r + hb ) + (N − 1)c > 0 .
since N > 0 as shown in the text. Given that Ga[r0(hb), hb] = 0, the inequality implies Ha[r0(hb),
pb] > 0. Then, since Ha is concave with respect to ha (satisfying the second-order condition)
and Ha[r1(hb), hb] = 0, we conclude that r1(hb) > r0(hb), i.e., firm A’s best-response function
lies further out when both inventors improve the inventions than when both file for a patent on
discovery. The same holds true for B. Proposition 2 follows.
B: The mixed-strategy equilibrium in first-to-file
Focusing on the symmetric mixed-strategy equilibrium, suppose that, having made a discovery
at t, an inventor improves the invention with constant probability λ ∈[0, 1]. If he discovers the
invention at t, by filing immediately he guarantees the profit m/r – f. By improving the
invention he expects to earn {exp(-hbΔ) + λ[1 – exp(-hbΔ)]}exp(-rΔ)µ/r – f. In the mixedstrategy equilibrium these two profits are equal. Thus A’s expected profit equals m/r – f. As this
is the same as that in the equilibrium in which the firms file for a patent immediately, the
equilibrium investment in R&D for the present case is also given by h0*. Then
25
m ={exp(-h0*Δ) + λ[1 – exp(-h0*Δ)]}exp(-rΔ)µ
determines the value of λ:
λ=
m − e−(h0 *+ r )Δ µ
(1 − e− h0 *Δ )e− rΔ µ
which lies strictly between zero and unity as required.
C: Risk dominance in first-to-invest
Consider the following bimatrix, where two firms simultaneously choose between F = file
immediately and W = wait to improve the invention.
F
W
F
a, a
b1, b2
W
b2,b1 d, d
The payoffs, taken from the text, are as follows:
a = m/r – f ≥ b2 = ( µ / r − f )e− rΔ − (1 − e− h0 *Δ )I
d = e− h0 *Δ e− rΔ ( µ / r − f ) > b1 = e− h0 *Δ (m / r − f ) − (1 − e− h0 *Δ )( f + I ) .
When the firms have chosen h0*, the game has two equilibria (F, F) and (W,W). (W,W) riskdominates (F, F) if the product of the deviation losses is higher for (W, W), i.e., if the following
inequality holds (Harsanyi and Selten, 1988):
(b1 – d)2 - (b2 – a)2 > 0 .
This condition holds because, rewriting the let-hand side as
26
(b1 – d + b2 – a)(b1 – b2 – d + a),
we find the first term negative, and also the second term, since
b1 – b2 – d + a = (1 + e− h0 *Δ )[(m / r − f ) − ( µ / r − f )e− rΔ ] − (1 − e− h0 *Δ ) f < 0.
D: The equilibrium R&D investments when the firms delay filing for a patent in first-to-invest
The first-stage profit to A is written
∞
∫e
− rt − ha t
e
(ha e− rΔU − c)dt − k(ha ) ,
0
where U is defined in the text. Substituting for U and evaluating the integral, we write the
above as
ha e− rΔ {µ / r + ( f + I )(
r
)}
r + hb
r + ha + hb
ha e− rΔ ( f + I ) + c
–
- k(ha).
r + ha
Maximizing this with respect to ha, we obtain the first-order condition:
(A1)
(r + hb )e− rΔ µ / r − {1 − (1 +
hb 2 − rΔ
h
) }re ( f + I ) + c(1 + b )2
r + ha
r + ha
- (r + ha + hb )2 k '(ha ) = 0.
Setting ha = hb and solving the above equation yields the equilibrium R&D investment, h2*. To
compare that with h1* we evaluate the right-hand side of (A1) at h1* and subtract it from the
right-hand side of (7). The result is
(A2)
{hb + r(1 +
hb 2
h
) } f + {(1 + b )2 − 1}(I + ce−(r + hb )Δ ) > 0
r + ha
r + ha
27
where hb = h1*. Since the right-hand side of (7) vanishes at h1*, (A2) implies that the marginal
profit (the right-hand side of (A1) is positive at h1*, implying that h2* > h1*.
28
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