The social welfare case for imitation is strongest when the defendant devel-
ops an embodiment in F that improves on the technology in E.208 Merges and
Nelson write approvingly about courts who highlight technical advances in the
accused device as a way of limiting the scope of the DOE.209 This policy
preference can be implemented when judges rule as a matter of law that an
improved device does not satisfy the test of equivalency.210 Regardless of
whether the defendant is found to infringe, the possibility of patenting the
improvement remains as a source of incentive for improvers.211
B. TWO PERIOD EXTENSION
We extend the basic model by adding a second period to the development and
refinement process. As before, in the first period, the inventor enjoys an
opportunity to refine the technology before the potential entrant has a chance to
imitate. In the second period, the two firms have a simultaneous chance to
develop the technology with the possibility of lower development costs in the
second period. What does the greater complication buy us? Originally we
discussed the question of whether refinement was socially desirable—now we
can ask the additional questions: who should refine and when? The extended
model allows us to contribute to the debate about whether patent law should
encourage centralized or decentralized development of technology. And it al-
lows us to discuss the important policy question of whether the DOE should
apply to later-developed technology.
Two related insights emerge from the two period model. First, the DOE
encourages orderly development of an invention, which brings social benefits
first recognized by Kitch.212 Kitch’s prospect theory of patents favors broad
patent scope because it discourages premature and redundant development of an
invention by competitors.213 Second, the benefits of centralized control are
smallest when the nature of development and the identity of the most efficient
developer is uncertain.214 In such cases the central control facilitated by the
DOE causes social harm, which leads us to oppose application of the DOE to
unforeseeable later-developed technology.
Proposition 5. The DOE encourages orderly development. The DOE pro-
tects the inventor from entry and allows the inventor to defer refinement to a
later date when the costs of refinement are lower. Furthermore, the entry barrier
created by the DOE promotes licensing designed to assist the inventor develop
an invention. The inventor may wish to contract for development of the
invention by a competitor with lower costs. Absent the DOE the inventor loses
the option of deferred refinement. The inventor has a natural lead-time advan-
tage applicable to first period refinement. That advantage disappears in later
periods. If there is no DOE, then the inventor must preempt in the first period, if
at all. The DOE is socially desirable if it mitigates the harm arising because the
inventor spends a lot of money refining inferior technologies. Notice the
asymmetry here—when there is no DOE an imitator has to find only one
desirable, unclaimed embodiment, but the inventor must claim them all.