Nonobviousness and the incentive to innovate: an economic analysis of intellectual property reform

U.S. patent law protects only inventions that are nontrivial advances of the prior art. The legal requirement is called nonobviousness. During the 1980s, the courts relaxed the nonobviousness requirement for all inventions, and a new form of intellectual property, with a weaker nonobviousness requirement, was created for semiconductor designs. Supporters of these changes argue that a less stringent nonobviousness requirement encourages private research and development (R&D) by increasing the probability that the resulting discoveries will be protected from imitation. This paper demonstrates that relaxing the standard of nonobviousness creates a tradeoff--raising the probability of obtaining a patent, but decreasing its value. The author shows that weaker nonobviousness requirements can lead to less R&D activity, and this is more likely to occur in industries that rapidly innovate.