Research Handbook on the Economics of Intellectual Property Law: Vol 1: Theory and Vol 2: Analytical Methods 9781789903997, 1789903998

Table of contents :
Front Matter
Copyright
Contents
List of contributors
Part I: Intellectual Property as Property
1 Intellectual property as property
2 Anticommons, transaction costs, and patent aggregators
3 Governing intellectual property
Part II: IP and Incentives
4 Philosophical foundations of IP law: the law and economics paradigm
5 Intellectual property law and the promotion of welfare
6 Economic models of innovation: stand-alone and cumulative creativity
7 Economic analysis of network effects and intellectual property
8 Intellectual property and competition
9 Intellectual property and the economics of product differentiation
10 Price discrimination and intellectual property
11 When are IP rights necessary? Evidence from innovation in IP’s
12 Open innovation and ex ante licensing
13 Prize and reward alternatives to intellectual property
Part III: IP Costs
14 Tailoring intellectual property rights to reduce uniformity cost
15 Intellectual property enforcement costs
16 Economic analysis of intellectual property notice and disclosure
Part IV: IP and Institutions
17 Patent institutions: shifting interactions between legal actors
18 The economics of collective management
19 ‘The common law’ in the law and economics of intellectual property
20 In the shadow of the law: the role of custom in intellectual property
21 Infrastructure theory and IP
Part V: IP, Development, and International Trade
22 Creative development: copyright and emerging creative industries
23 Intellectual property and economic development: a guide for scholarly and policy research
24 Economic development and intellectual property rights: key analytical results from economics
Index
RESEARCH HANDBOOK ON THE ECONOMICS OF INTELLECTUAL PROPERTY LAW VOLUME 2
Copyright
Contents
List of contributors
Part I: Empirical Methods
1 Data sources on patents, copyrights, trademarks, and other intellectual property
Part II: Empirical Studies Relating to Patents
Section A Metrics
2 Patent citation data in social science research: overview and best practices
3 Patent value
Section B Patent Institutions and Litigation
4 Empirical scholarship on the prosecution process at the USPTO
5 The USPTO’s Patent Trial and Appeal Board
6 The Federal Circuit as an institution
7 Empirical studies of claim construction
8 Empirical studies of the International Trade Commission
9 Technical standards, standards-setting organizations, and intellectual property: a survey of the literature (with an emphasis on empirical approaches)
10 Empirical studies of patent pools
11 Empirical analyses related to university patenting
Part III: Patent Law Doctrines
12 Empirical studies in patentability
13 Patent duration
14 Infringement
15 Presumption of validity
16 Inequitable conduct and patent misuse
17 Remedies
Part IV: Technology-Specific Studies
18 Patent rights and innovation: evidence from the semiconductor industry
19 Patent trolls
20 Patents and innovation in economic history
21 The political economy of intellectual property reforms
Part V: Empirical Studies Relating to Copyright
22 Empirical studies of copyright litigation
23 Empirical studies of copyright registration
24 Copyright and technological change in music, movies, and books
25 Music copyright
26 Experiments in intellectual property
27 The effect of copyright law on access to works
Part VI: Empirical Studies of Trademark Law
28 Empirical studies of trademark law
Part VII: Empirical Methods in Trade Secret Research
29 Empirical methods in trade secret research
Part VIII: Knowledge Commons
30 Knowledge commons
Index

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RESEARCH HANDBOOK ON THE ECONOMICS OF INTELLECTUAL PROPERTY LAW

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RESEARCH HANDBOOKS IN LAW AND ECONOMICS Series Editors: Richard A. Posner, Judge, United States Court of Appeals for the Seventh Circuit and Senior Lecturer, University of Chicago Law School, USA and Francesco Parisi, Oppenheimer Wolff and Donnelly Professor of Law, University of Minnesota, USA and Professor of Economics, University of Bologna, Italy Edited by highly distinguished scholars, the landmark reference works in this series offer advanced treatments of specific topics that reflect the state-of-the-art of research in law and economics, while also expanding the law and economics debate. Each volume’s accessible yet sophisticated contributions from top international researchers make it an indispensable resource for students and scholars alike.   Titles in this series include: Research Handbook on the Economics of Property Law Edited by Kenneth Ayotte and Henry E. Smith Research Handbook on the Economics of Family Law Edited by Lloyd R. Cohen and Joshua D. Wright Research Handbook on the Economics of Antitrust Law Edited by Einer R. Elhauge Research Handbook on the Economics of Corporate Law Edited by Brett McDonnell and Claire A. Hill Research Handbook on the Economics of European Union Law Edited by Thomas Eger and Hans-Bernd Schäfer Research Handbook on the Economics of Criminal Law Edited by Alon Harel and Keith N. Hylton Research Handbook on the Economics of Labor and Employment Law Edited by Michael L. Wachter and Cynthia L. Estlund Research Handbook on Austrian Law and Economics Edited by Todd J. Zywicki and Peter J. Boettke Research Handbook on Behavioral Law and Economics Edited by Joshua C. Teitelbaum and Kathryn Zeiler Research Handbook on the Economics of Intellectual Property Law Volume 1: Theory Edited by Ben Depoorter and Peter S. Menell Research Handbook on the Economics of Intellectual Property Law Volume 2: Analytical Methods Edited by Peter S. Menell and David L. Schwartz

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Research Handbook on the Economics of Intellectual Property Law Volume 1: Theory

Edited by

Ben Depoorter University of California, Hastings College of Law, USA and Ghent University, Belgium

Peter S. Menell University of California, Berkeley School of Law, USA

RESEARCH HANDBOOKS IN LAW AND ECONOMICS

Cheltenham, UK • Northampton, MA, USA

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© The Editors and Contributors Severally 2019 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2019945636 This book is available electronically in the Law subject collection DOI 10.4337/9781789903997

ISBN 978 1 84844 536 9 (2 volume set) ISBN 978 1 78990 399 7 (eBook)

06

Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

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Contents List of contributorsvii PART I  INTELLECTUAL PROPERTY AS PROPERTY   1 Intellectual property as property Molly Shaffer Van Houweling

2

  2 Anticommons, transaction costs, and patent aggregators Rebecca S. Eisenberg

27

  3 Governing intellectual property Henry E. Smith

47

PART II  IP AND INCENTIVES   4 Philosophical foundations of IP law: the law and economics paradigm Robert P. Merges

72

  5 Intellectual property law and the promotion of welfare Christopher Buccafusco and Jonathan S. Masur

98

  6 Economic models of innovation: stand-alone and cumulative creativity Peter S. Menell and Suzanne Scotchmer

119

  7 Economic analysis of network effects and intellectual property Peter S. Menell

157

  8 Intellectual property and competition Herbert Hovenkamp

231

  9 Intellectual property and the economics of product differentiation Christopher S. Yoo

262

10 Price discrimination and intellectual property Michael J. Meurer and Ben Depoorter

281

11 When are IP rights necessary? Evidence from innovation in IP’s negative space Kal Raustiala and Christopher Jon Sprigman

309

12 Open innovation and ex ante licensing Michael J. Burstein

330

13 Prize and reward alternatives to intellectual property Michael Abramowicz

350

v

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vi  Research handbook on the economics of IP law volume 1 PART III  IP COSTS 14 Tailoring intellectual property rights to reduce uniformity cost Michael W. Carroll

377

15 Intellectual property enforcement costs Ben Depoorter

407

16 Economic analysis of intellectual property notice and disclosure Peter S. Menell

424

PART IV  IP AND INSTITUTIONS 17 Patent institutions: shifting interactions between legal actors Arti K. Rai

473

18 The economics of collective management Daniel Gervais

489

19 ‘The common law’ in the law and economics of intellectual property Shyamkrishna Balganesh

508

20 In the shadow of the law: the role of custom in intellectual property Jennifer E. Rothman

526

21 Infrastructure theory and IP Brett Frischmann

551

PART V  IP, DEVELOPMENT, AND INTERNATIONAL TRADE 22 Creative development: copyright and emerging creative industries Sean A. Pager

582

23 Intellectual property and economic development: a guide for scholarly and policy research Shubha Ghosh

636

24 Economic development and intellectual property rights: key analytical results from economics Keith E. Maskus

656

Index677

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Contributors Michael Abramowicz, Professor of Law, George Washington University, USA Shyamkrishna Balganesh, Professor of Law, University of Pennsylvania Law School, USA Christopher Buccafusco, Professor of Law and Director of the Intellectual Property and Information Law Program, Cardozo School of Law, Yeshiva University, New York, USA Michael J. Burstein, Professor of Law, Cardozo School of Law, Yeshiva University, New York, USA Michael W. Carroll, Professor of Law and Director of the Program on Information Justice and Intellectual Property, American University Washington College of Law, USA Ben Depoorter, Max Radin Chair and Distinguished Professor of Law, University of California, Hastings College of the Law and Affiliate Scholar, Stanford Law School, Center for Internet and Society, USA; CASLE, Ghent University, Belgium Rebecca S. Eisenberg, Robert and Barbara Luciano Professor of Law, Michigan Law, University of Michigan, USA Brett Frischmann, Charles Widger Endowed University Professor in Law, Business and Economics Charles Widger School of Law, Villanova University, Villanova, Philadelphia, USA Daniel Gervais, Milton R. Underwood Chair in Law and Director of the Vanderbilt Intellectual Property Program, Vanderbilt University Law School, USA Shubha Ghosh, Crandall Melvin Professor of Law and Director, Syracuse Intellectual Property Law Institute (SIPLI) and IP & Tech Commercialization Curricular Law Program, Syracuse University College of Law, USA Herbert Hovenkamp, James G. Dinan University Professor, Penn Law and the Wharton School, University of Pennsylvania, USA Keith E. Maskus, Arts and Sciences Professor of Distinction, Economics Department, University of Colorado, Boulder, USA Jonathan S. Masur, John P. Wilson Professor of Law and David and Celia Hilliard Research Scholar at the University of Chicago Law School, USA Peter S. Menell, Koret Professor of Law and Director of the Berkeley Center for Law and Technology, Berkeley School of Law, University of California, USA Robert P. Merges, Wilson Sonsini Goodrich and Rosati Professor of Law and Director of the Berkeley Center for Law and Technology, University of California, Berkeley, USA Michael J. Meurer, Abraham and Lillian Benton Scholar and Professor of Law, Boston University School of Law, USA vii

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viii  Research handbook on the economics of IP law volume 1 Sean A. Pager, Professor of Law and Associate Director of the Intellectual Property, Information and Communications Law Program, Michigan State University College of Law, USA Arti K. Rai, Elvin R. Latty Professor of Law, Duke Law School, Faculty Director of the Duke Law Center for Innovation Policy, and Duke Innovation and Entrepreneurship Initiative Research Fellow, USA Kal Raustiala, Professor and Director of the UCLA Ronald W. Burkle Center for International Relations, UCLA Law School, USA Jennifer E. Rothman, Professor of Law and Joseph Scott Fellow, Loyola Law School, Loyola Marymount University, Los Angeles, USA Suzanne Scotchmer, formerly Professor of Economics, Public Policy, and Law, University of California, Berkeley, USA, who died in 2014 Henry E. Smith, Fessenden Professor of Law and Director of the Project on the Foundations of Private Law, Harvard Law School, USA Christopher Jon Sprigman, Professor, New York University School of Law and Co-Director of the Engelberg Center on Innovation Law and Policy, USA Molly Shaffer Van Houweling, Harold C. Hohbach Distinguished Professor of Patent Law and Intellectual Property, Director of the Berkeley Center for Law and Technology, and Associate Dean for J.D. Curriculum and Teaching, University of California, Berkeley, USA Christopher S. Yoo, John H. Chestnut Professor of Law, Communication, and Computer and Information Science, University of Pennsylvania, USA

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PART I INTELLECTUAL PROPERTY AS PROPERTY

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1.  Intellectual property as property Molly Shaffer Van Houweling* 1

Contents I. Introduction II. ‘Property’ and IP III. Distinguishing Tangible and Intellectual Resources as Objects of Property A. Rivalry B. Excludability C. Costs IV. Three Cross-Cutting Themes A. Property and Possession 1. Possession, property origins, and the public domain 2. The challenges of non-possessory property B. Property and Information C. Property and Time V. Conclusion References

I. INTRODUCTION First-year law students learn early on that lawyers think of property not ‘as a relationship between a person (the owner) and a thing (that is owned)’ but rather as ‘relationships among people with respect to things’ (Dukeminier et al., 2014, p. 51, n. 33). This corrective appears perhaps to reorient legal thinking away from a layperson’s preoccupation with things and toward a more sophisticated focus on people and their legal relations (see Grey, 1980, for an extreme example of this view). But, in fact, what makes property law distinctive—in both its lay and expert formulations—is that the human relationships it governs (unlike the human relationships governed by the law of torts or contracts) are always mediated by things (see Smith, 2012). That these things carry legal implications with them

*  Harold C. Hohbach Distinguished Professor of Patent Law and Intellectual Property; Associate Dean, J.D. Curriculum and Teaching, University of California, Berkeley. Thanks to James Hicks for excellent research assistance. This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International (CC BY-NC 4.0) license, with attribution to Molly Shaffer Van Houweling as the author and to the original publication venue: Peter S. Menell and Ben Depoorter, eds. 2019. Research Handbook on the Economics of Intellectual Property Law. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. The terms of the CC BY-NC 4.0 license are available at https://creativecommons.org/licenses/by-nc/4.0/ (last accessed March 19, 2019).

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Intellectual property as property  3 yields the notion that property is in rem, not in personam. That these legal implications can affect anyone who encounters the thing means that they are good against the world. The things to which property rights attach are the locus of their owners’ rights to exclude. The alert law student will also note that the specific nature of a thing governed by property law can have consequences for the design of that law. The rules of acquisition by capture might sensibly differ depending on whether the thing at issue is a fox or a whale. The strength of the right to exclude might differ depending on whether the thing from which outsiders are excluded is a home or a shopping mall. The differences can be even more dramatic when the ‘thing’ at issue is not a tangible object at all, but rather an intangible work of authorship or invention. This chapter will explore how important aspects of property jurisprudence apply to the fields of law that have come to be known as ‘intellectual property’ or ‘IP’—focusing primarily on copyright and patent law.1 I aim to illustrate both the relevance of enduring property themes to these areas of law and the ways in which the nature of the intangible things governed by IP should force us to resist easy analogies to tangible property. I start by tackling the contentious question of whether IP should be considered property at all, in light of key differences between tangible resources and intellectual works. Finding the property frame a useful one despite these differences, I proceed by exploring three themes that have been important to the legal and economic analysis of tangible property, and that can usefully be brought to bear on IP: the role of possession in establishing and signaling property rights; the problem of information costs related to property rights; and, finally, the relationship between property rights and time. In each of these cases, careful attention to concepts that inform the design of sensible tangible property rules can help to inform scholarship and policymaking about IP rules as well.

II.  ‘PROPERTY’ AND IP The US Constitution authorizes Congress to ‘promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries’ (U.S. Const. art. I, § 8, cl. 8). This constitutional authorization for our federal copyright and patent laws is often referred to as the ‘Intellectual Property Clause’ (Walterscheild, 1994).2 Indeed, the term ‘intellectual property’ is now ubiquitous in discussions about patent, copyright, and related fields of law. But the term is controversial.3 Advocates of strong rights for authors and inventors often characterize copyrights and patents as property rights. They tend to use that characterization to argue that these rights should be stronger and more vigorously enforced (e.g. Epstein, 2010; Epstein, 2005; Mossoff, 2005; Easterbrook, 1990). Others reject the property characterization, emphasizing that 1   This chapter builds upon and incorporates some of my earlier work at the intersection of tangible and intangible property (Van Houweling, 2002, 2007, 2008, 2010, 2011, 2012a, 2012b, 2013, 2016a, 2016b, 2017). 2   On the history of the term ‘intellectual property,’ see Lemley (2005) and Hughes (2012). 3   For discussion of commentary critiquing and embracing the idea of IP as property, see generally Liivak and Peñalver (2013).

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4  Research handbook on the economics of IP law volume 1 copyrights and patents are, and should be, more limited than the rights of owners of tangible objects; and resisting the expansion of property-based arguments beyond copyright and patent to trademark and trade secret law (e.g. Lemley, 2005; Lemley, 1999; Lunney, 1999; Samuelson, 1989). Advocates and scholars in this group worry about the rhetorical force of property-based arguments, sensing that they tend to prompt facile thinking about absolute dominion (e.g. Lemley, 1997; Bessen and Meurer, 2008; Vaidhyanathan, 2001). A third group embraces the property paradigm but emphasizes that property rights are always contingent, contextual, and shaped by policy concerns about market failure and distributive justice. A nuanced view of property, according to these scholars, can enhance rather than distort conversations about rights in intangible things (e.g. Carrier, 2004; Chander, 2003; Cohen, 2014; Ghosh, 2007; Liivak and Peñalver, 2013; Menell, 2007b, 2011; Merges, 2011; Oliar and Stern, 2019). Scholars of tangible property have entered this conversation as well. They tend, like the third group of IP scholars, to offer a view of property that does not get carried away with notions of absolute dominion. Interestingly, some of them look to IP as a model from which tangible property law can borrow mechanisms for limiting property rights in tangible things (e.g. Dagan, 2012; Depoorter, 2011; Singer, 2014a; Singer, 2014b). My own view, from the perspective of a scholar working at the intersection of tangible and intangible property, is that the law of tangible property can be an important source of insights about both the benefits and costs of granting people rights to control the use of valuable resources, and about the various ways those rights and corresponding remedies can be structured (see Van Houweling 2002, 2007, 2008, 2010, 2011, 2012a, 2012b, 2013, 2016a, 2016b, 2017). This chapter highlights some of the many insights from tangible property law and doctrine that can helpfully be applied in the field that has come to be known as intellectual property. This application should of course be done with care. To properly apply lessons from tangible property law to IP requires assiduous attention to the special characteristics of the things—intangible creations and inventions—to which this body of property law applies, and to the specific environments in which IP rights are exercised.

III. DISTINGUISHING TANGIBLE AND INTELLECTUAL RESOURCES AS OBJECTS OF PROPERTY The most widely accepted rationale for property rights is that they promote efficient use of, and investment in, resources by internalizing the costs and benefits of that use and investment (Demsetz, 1967). This is a corollary of the tragedy of the commons, the notion that in the absence of property rights everyone with access to a resource will use it without regard to the full costs of that use while failing to make investments that would benefit other users (Hardin, 1968). This logic is most compelling when applied to resources that are scarce (thus making overuse problematic), that are difficult to produce and/or maintain (thus making underinvestment likely), and for which self-help cannot easily be deployed to avoid overuse and undercultivation (thus justifying the costs of establishing and enforcing property rights). On each of these dimensions, there are relevant differences between tangible resources and intellectual creations that should be kept firmly in mind when using a tangible property frame to guide understanding of IP.

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Intellectual property as property  5 A. Rivalry Start with scarcity and the specter of overuse. Tangible resources are generally rivalrous: if fully consumed by one person, they cannot be consumed by another. Their stocks are therefore subject to depletion if consumption is left unchecked. Intellectual resources, by contrast, tend to be nonrivalrous (see, e.g., Boyle, 2003). That is, their consumption by one person does not interfere with their consumption by others; it does not contribute to scarcity. This distinction leads many commentators to argue that IP rights are on shakier normative ground than tangible property rights, because they cannot be justified by the overuse aspect of the tragedy of the commons (e.g. Breyer, 1970; Carrier, 2004; Ghosh, 2007; Lemley, 2005; Menell, 2007a, 2011; Rose, 2003; Sterk, 1996) and because, as Henry Smith observes, ‘excluding others from information when they could use it at zero marginal cost seems wasteful’ (Smith, 2009b, p. 2084). This distinction and its normative implications should not be overstated, however (as noted by Nachbar, 2007). On the one hand, some intellectual resources can become less valuable when overused. Trademarks cannot achieve their function of reducing consumer confusion if they are used indiscriminately on different products from different producers. So too, the value of a celebrity endorsement could be undermined by indiscriminate association with many goods. These are intangible objects of IP protection the value of which could be diminished by overuse (see Landes and Posner 2003, pp. 485–7). Looking to the other side of the comparison, tangible resources are not always rivalrous as a practical matter. They can often be enjoyed simultaneously by multiple users who neither interfere with each other nor diminish the availability of the resource for future users (see Rose, 1986). Across resource types, nonrivalry undermines the logic of the tragedy of overuse. In the tangible realm as well as the intellectual realm, commons can produce comedy (to use Carol Rose’s (1986) term) instead of tragedy. As I will explain below, this helps to explain doctrinal rules that promote the growth of the unowned public domain. B. Excludability Property rights are often lauded as promoting investment in resources: they help investors secure rewards on their investments by excluding others from the benefits of those investments. It is often especially difficult for investors in intangible works to exclude other people. This characteristic is referred to as non-excludability, and is often offered as an especially powerful justification for IP. Note, however, that the starkness of the term non-excludability can be misleading (as noted by Parchomovsky and Siegelman, 2002). It is not as difficult to exclude people from enjoying the benefits of a work of creativity or invention as it is to exclude people from enjoying the benefits of a lighthouse, the classic nonexcludable public good. The author of a book could keep the book in her reading room, for example, to be read only by the people to whom she grants permission to enter.4 This rather ungainly type of

4   It was common during the Middle Ages for monasteries to charge fees for permission to copy manuscripts in their collections. Once a manuscript was copied, its owner lost control of

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6  Research handbook on the economics of IP law volume 1 exclusion has its drawbacks, of course. It limits the author’s ability to realize a return on her investment to the meager returns from her reading room invitees; and it limits the number of readers who can benefit from her work. The heart of the problem is not so much that intellectual works are nonexcludable. It is that exclusion is difficult to combine with wide dissemination, and therefore with extracting the full benefits of intellectual investments for both the author and the public (see generally Arrow, 1962). On the other side of the comparison, the classic lighthouse example reveals that the benefits of investing in tangible resources can also be nonexcludable. Both tangible and intellectual resources can present a public goods problem in which we worry that the market will not provide sufficient incentives to invest in a resource. In both cases, granting private property rights is a possible solution to the problem, albeit an imperfect one that entails its own costs and should be considered in light of alternatives (see generally Kapczynski, 2012). C. Costs There are also several distinctions between tangible and intellectual resources that are relevant to the costs of establishing and maintaining a property system (see generally Menell, 2011). One is the relative difficulty of delineating the boundaries that are important to the healthy functioning of a legal system premised on the right to exclude. Intellectual creations are notoriously difficult to define in ways that give clear notice that can help promote transactions and avoid inadvertent trespasses (Smith, 2009b). On this front, rights that attach to intellectual resources are similar to non-possessory rights that attach to tangible resources—think of servitudes and future interests. These rights can be similarly difficult to notice and comprehend in that they do not correspond to possession of a physical parcel or tangible object but rather interfere with the rights of people in possession (Van Houweling, 2008). The costs of property rights also include the distributive injustices perpetrated by the allocation of resources based on ability to pay (see generally, e.g., Ghosh, 2007; Van Houweling, 2005; Chander, 2003). Of course, neither property rights in tangible nor intellectual resources necessarily require or produce market-based allocation of those resources, at least as an initial matter. But free alienability is one hallmark of private property (albeit subject to important exceptions as noted by, e.g., Calabresi and Melamed (1972), Fennell (2009), and Radin (1987)). Thus property tends overwhelmingly to be distributed via the price mechanism. Here, tangible and intellectual property share the potential for tragic consequences when the market denies basic necessities to those unable to pay. But the tragedy is especially pronounced for nonrivalrous resources that could be distributed to everyone at little or no marginal cost (Kapczynski, 2012). Both tangible and intellectual property rights affect the distribution of physical resources, some of which are embedded with intellectual content (e.g. patented tools and medicine, books). IP rights are noteworthy in their potential to affect the distribution

the text embodied in it (Rose, 1995). This proto-copyright was valuable, however, in an age before mechanical reproduction, when an owner could charge a premium based on the superior quality of his manuscript compared to error-ridden copies (Van Houweling, 2010).

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Intellectual property as property  7 of inventive and creative opportunities as well, insofar as IP rights can limit cumulative invention and creativity by those who do not acquire permission to build upon what has come before. Once again, the distinction can be overstated. In the tangible realm, too, distribution of resources can dramatically impact opportunities for creativity, invention, and all other aspects of self-realization.

IV.  THREE CROSS-CUTTING THEMES Despite their differences, tangible and intellectual resources are both managed—in part—by legal institutions that can usefully be characterized as property regimes. The characteristics that make these regimes property—in rem rights that are good against the world and allow their owners to exclude others from valuable resources—pose some recurring questions and challenges that cut across the resource realms in which they operate. I proceed by exploring these questions and challenges as embedded in three themes: the role of possession in establishing and signaling property rights; the problem of information costs related to property rights; and, finally, the relationship between property rights and time. These themes have long been important to the legal and economic analysis of property law. All can usefully be brought to bear on IP as well, with the distinctions above kept carefully in mind. A.  Property and Possession 1.  Possession, property origins, and the public domain Possession operates as both a source and a signal of property rights in land and physical objects. The importance of possession has been traced back at least to Roman law and across legal traditions around the world (Fraley, 2011; Lueck, 1995); it has been explained as psychologically embedded (Barros, 2011; Friedman and Neary, 2009; Merrill and Smith, 2007) and even the product of evolution (Stake, 2004). Ambiguity about the meaning of possession is likely as old and widespread (Drassinower, 2006; Rose, 1985; Smith, 2003). Theorists have cited a number of different rationales in an effort to help explain the importance and meaning of possession as applied to particular property controversies.5 Some of these rationales are particularly helpful for understanding and perhaps improving the mechanisms by which authors and inventors seize ‘possession’ of the intangible subject matter of IP. One rationale for possession as an origin of property rights is that acquiring possession typically requires labor, which is both a moral justification for property rights from a Lockean labor-desert perspective and also worth incentivizing in order to promote the productive use of resources from a utilitarian perspective. A difficulty that often arises 5   The classic case of Pierson v. Post, 3 Cai. 175 (N.Y. 1805) is the most typical case study. The competing views offered by the majority, dissent, and innumerable commentators deploy arguments emphasizing labor, investment, notice, custom, and more, in an effort to explain what constitutes possession adequate to establish initial property rights in a wild fox (see, e.g., Rose, 1985; Epstein, 1979).

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8  Research handbook on the economics of IP law volume 1 in the tangible property context is that multiple people can claim that they labored in a deserving and socially productive way to reduce something to possession, but the rule of first possession aims to declare only one of them the winner. As Richard Epstein notes, ‘[s]ome labor goes unrequited when two pursue and one loses’ (1979, p. 1225). And yet, a rule that does its best to decide between two competing pursuers can be justified in the tangible property context by the benefits of individual ownership, and by the difficulty of fairly dividing the fruits of a joint pursuit. In his qualified defense of the first possession rule, Epstein contrasts the rule with what he sees as the only alternative, original common ownership coupled with a system of public control to ‘decide how the rights in question are to be packaged and divided amongst individuals’ (1979, p. 1239). In light of the challenges of establishing such a system and the potential for its abuse, Epstein argues that ‘[o]n balance the case tilts strongly for the first possession theories, whatever their infirmities’ (1979, p. 1238). How do these insights translate to IP? Here too, rules that award ownership on the basis of original acquisition would appear to reward and incentivize socially beneficial activity. But in the IP context there are special difficulties with identifying the ‘things’ subject to original acquisition and the acts that amount to possession. The intangible subject matter of copyright and patent protection is quite different from the parcels of land and wild animals that provide classic examples of the first possession rule in action. And yet there are clear analogs to first possession for purposes of acquiring rights in intellectual creations.6 Consider two examples: an original musical melody and a newfangled (i.e., novel and nonobvious) mousetrap. These are the types of creative and inventive works that copyright and patent law should incentivize. They required mental labor and were perhaps the result of costly failed experiments. At what point are these intangible creations ‘possessed’ in a way that should trigger a rule based on first possession? Arguably the mental labor that we want to reward and incentivize has already been expended by the time the author and inventor have captured the melody and mousetrap in their brains. But these are not the rules of first possession that IP law has adopted. In order to qualify for protection, the melody would have to be fixed in a tangible medium of expression (e.g. the notes written down or captured in a sound recording) (17 U.S.C. § 102). The mousetrap would have to be either actually or constructively ‘reduced to practice’ (e.g. Ariad Pharmaceuticals, Inc. v. Eli Lilly & Co., 598 F.3d 1336, 1352 (2010)). In some ways, these IP requirements are fully consistent with the rules and rationales of first possession that emerge from the tangible property context. These rules arguably require the type of possession that makes a resource available for a socially beneficial purpose. Merely giving chase to a fox—as laborious as that may be—does not result in ownership if the fox is still alive and hunting chickens. Similarly, a melody or mousetrap that exists merely in one individual’s head does not yet benefit society. In theory, copyright and patent both withhold their rewards until the intangible work is at least capable of being communicated to and used by other people. Where in practice they do not—for example, where patents are awarded based on constructive reduction to practice that does

6   On the connection between possession and intellectual property, see, e.g., Yen (1990); Drassinower (2006); Holbrook (2009, 2006, 2016); Oliar and Stern (2019); Smith (2007).

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Intellectual property as property  9 not in fact establish that the invention works—they are subject to critique (e.g. Lemley, 2016) that very much echoes arguments regarding the proper definition of possession of tangible property. In patent, something else is required in addition to reduction to practice. To establish patent rights, an inventor must file a timely patent application that discloses how to practice her invention (35 U.S.C. § 112). Patent’s disclosure requirements are consistent with a utilitarian rationale for first possession, under the theory that the public does not receive the full benefit of patentable inventions unless their details are adequately disclosed (Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974)). By requiring that the inventor describe her invention in sufficient detail to establish that she has in fact captured it in her own mind, disclosure requirements also provide objective evidence that she has in fact done sufficient intellectual labor (not just abstract daydreaming) to merit reward and encouragement (Holbrook, 2006). Note, however, that not just any disclosure will do. Disclosure via a timely patent application is required. By contrast, disclosure via a printed publication, public use, or public sale does not establish patent rights. Just the opposite: these disclosures by the inventor deposit the invention into the public domain unless the inventor-discloser files a patent application within a year (35 U.S.C. § 102(a)–(b)). Does anything within the theory of first possession justify denying property rights to an inventor who has captured his invention by reducing it to practice and delivered its benefits to the public by disclosing it? Without more, the theory of possession as labor and productive use does not seem adequate to the task. Indeed, this IP example appears to confirm Epstein’s observation about the inadequacy of such theories: just as the unsuccessful chaser expended reward-worthy labor but was denied the fox, the patent-barred inventor expends reward-worthy ingenuity but is denied his IP. Both the tangible and IP examples suggest that the type of possession that triggers property rights must involve more than productive labor, which suggests that another rationale is at work. One candidate is notice: possession can provide clear notice of an owner’s claim. This idea is central to Carol Rose’s persuasive explanation in Possession as the Origin of Property, in which she observes that: [p]ossession as the basis of property ownership . . . seems to amount to something like yelling loudly enough to all who may be interested. The first to say, ‘This is mine,’ in a way that the public understands, gets the prize, and the law will help him keep it against someone else who says, ‘No, it is mine.’ (1985, p. 81)

For patentable inventions, merely disclosing an invention to the public via a public use, sale, or printed publication provides some notice—that is, notice regarding the nature of the invention and the inventor’s intellectual possession of it. As Holbrook (2006) notes: [D]emonstrating the possession of an intangible idea is difficult. One could describe an idea but not necessarily truly be in possession of it. For example, the idea of teleportation has existed in science fiction, such as in Star Trek, for some time. Simply having the idea of teleportation, however, does not mean that those authors are in possession of a teleportation device. Instead, the key aspect of possession is whether or not the author can actually make a functioning device. Thus, the best evidence of possession would be either the inventor physically creating the invention or, at least, providing a description that is clear enough to enable someone else to build it (2006, p. 146–7).

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10  Research handbook on the economics of IP law volume 1 Unless that description comes in the form of a patent application, however, it is insufficient to establish property rights in the invention. Why must an invention hunter, unlike a fox hunter, both demonstrate that she has grasped her prey and submit a bunch of paperwork to establish her claim to it?7 Here is an instance in which the distinct nature of the thing that is the subject matter of property has important consequences. Because of the nonrivalrous nature of an invention, the inventor’s possession of it does not prevent others from encountering it ‘in the wild.’ Another inventor might conceive of the same mousetrap idea; or he might encounter one of many coexisting physical embodiments of the invention. In either case, he may not recognize that the invention is the subject of patent rights unless there is some indication—either on the embodiment itself or in a centralized registry—that it has been claimed. For physical objects possession alone may be enough to communicate the signal that ‘this is mine!’ For intangible inventions that can be possessed by many people at the same time, something else is required. This is not to say that the functional equivalents of possession that we observe in the IP context—including both requirements that the IP owner has captured her intangible creation in a concrete way and has signaled her claim to others—are sufficient to serve possession’s purposes. The failure of patents to provide adequate notice to rival inventors is a notorious shortcoming of the contemporary patent system (see, e.g., Bessen and Meurer, 2008; Fromer, 2009; Long, 2004; Menell and Meurer, 2013). As for copyrights, the requirement that claims to works of authorship be communicated to the public via a centralized registry or marked embodiments has been abandoned (see, e.g., Ginsburg, 2010; Litman, 2016; Sprigman, 2004). Now fixation of an original work of authorship is all that is required, and works are eligible for the longest possible duration with no renewal paperwork (Samuelson, 2016). Even where the existence and ownership of a copyright is clear, its boundaries are subject to the vagaries of the idea/expression dichotomy, fair use, and other aspects of copyright scope and defenses (Fromer, 2009; Liu, 2016; Long, 2004; Menell, 2016). Works of authorship are even easier to claim than foxes, but copyright claims are much more difficult to observe. Many critics of contemporary copyright law lament this development and advocate for policy changes that would require (or at least more strongly incentivize) copyright notice and registration (e.g., Gibson, 2005; Landes and Posner, 2003; Samuelson et al., 2010; Samuelson, 2016; Sprigman, 2004). These calls are consistent with the notice-based rationales that property theorists have offered for possession as a trigger for tangible property rights; they also recognize that the unique characteristics of intangible property might require different mechanisms of notice provision. For the sake of argument, assume that these critics are right to argue that copyright (like patent) should require some form of ‘claiming’ that provides notice to the public in a way roughly equivalent to physical possession of tangible objects.8 What should the consequences of a failure to claim property be? In tangible property, the consequences 7   Note that paperwork is not irrelevant in the tangible property context, as Rose (1985) notes in her discussion of possession as notice. But recording of possession-based claims to tangible property is not generally required to establish them in the first instance, as discussed in Van Houweling (2013). 8   On the different claiming requirements of patent and copyright law, see generally Fromer (2009); Oliar and Stern (2019).

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Intellectual property as property  11 are typically that a rival claimant has an opportunity to become a property owner. Post failed to capture the fox, but the ‘saucy intruder’ Pierson succeeded.9 By contrast, in the copyright and patent contexts the analogs to first possession are not merely questions of who was first (or has anyone been first yet)—that is, who was first as between two ‘would-be’ owners, or when is the thing at issue still unpossessed and subject to capture and ownership by someone new? In the IP context, unlike in most tangible property contexts, it is possible for a failed or incomplete attempt at possession to make a work of authorship or invention forever unownable by anyone. Under US patent law, an invention that has been in public use for more than a year cannot thereafter be patented—by the inventor or anyone else (17 U.S.C. § 102). It has permanently entered the public domain. For the first two-plus centuries of US copyright law, a similar situation obtained: works that were published without proper notice entered the public domain and could not thereafter be captured for copyright purposes by their authors or anyone else (Samuelson, 2016; Sprigman, 2004). Can these IP doctrines be squared with first possession theory? Indeed they can, if we are attentive to the special qualities of intangible works. Consider Epstein’s defense of first possession: it relies on the assumption that it is desirable for tangible objects ultimately to be owned by someone. If the identity of that someone were not determined based on who was the first to possess an object, then the government would have to take over and figure out some more heavy-handed way to divvy things up. Why is this divvying necessary? Because of the tragedy of the commons, so the theory goes. Things without owners are unlikely to be carefully husbanded; they are instead likely to be overused. By contrast, once an intellectual work has been created, its nonrivalrous nature means it is not subject to dissipation.10 It therefore makes perfect sense that in the IP context the result of a failure adequately to possess something (and clearly signal that possession in a way that communicates an ownership claim) does not necessarily make that thing subject to ownership by one’s rivals, but might instead deliver it to the public domain. This explanation also helps to make sense of some of those tangible property contexts in which we do find a permanent public domain: they involve resources that are relatively nonrivalrous, where the risk of tragic overuse is low (Rose, 2003, p. 96). Note that not all forms of IP have the feature of falling inexorably into the public domain when inadequately claimed. For example, abandoned trademarks can be reclaimed by new owners who use them in commerce as source identifiers (which is the rights-triggering analog to possession in the trademark context). So too for potential trademarks that were unsuccessfully claimed by merchants who had not used them enough to qualify for protection. In these ways trademarks are treated like nearly captured foxes, where patents and copyrights are not. This too makes sense if we keep in mind key distinctions on the dimension of rivalrousness. Trademarks are unusual within the IP realm in the degree to which they are subject to congestion externalities—that is, they are subject to overuse. Although it is possible for many people to use the same trademark, if they do it is likely to lose its value as a trademark. Trademarks are effectively rivalrous

  See n. 5.   But see Landes and Posner (2003, p. 487), arguing that the value of a creative work might be depleted by overuse.  9 10

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12  Research handbook on the economics of IP law volume 1 resources. Their value can be maintained (and rebuilt) only if they are kept out of the public domain of indiscriminate use. In sum, looking to the role of possession in the law of tangible property helps to explain analogous mechanisms of rights acquisition in the realm of IP, and to diagnose their shortcomings. Perhaps more interesting, it also helps to explain a feature that is especially associated with (some forms of) IP: the permanent public domain. 2.  The challenges of non-possessory property Although possession is a touchstone for the acquisition and signaling of property rights, property and possession do not always go hand in hand. Consider the challenges posed for both tangible and IP regimes when property rights are held by non-possessors.11 These challenges arise in the tangible property context when, for example, the claims of current possessors are challenged by prior possessors—with the results often reflecting the enduring notion of ‘first in time, first in right,’ but sometimes prioritizing recent claims over stale ones (as with adverse possession, marketable title acts, and protection for bona fide purchasers). More striking, perhaps, are controversies over property rights held by people who may never have been in possession, but who nonetheless claim the right to control some aspect of a resource. Land servitudes are a classic example, and the anxiety and doctrinal complexity that has marked the body of law governing them (see French, 1982; Rose, 2011; Van Houweling, 2008) serve to reinforce the importance of possession as a touchstone of property reasoning. To see the relevance of these types of non-possessory property rights to IP, start with a classic passage from Justice Holmes’ 1908 concurrence in White-Smith Music Publishing Company v. Apollo Company, in which he considers that nature of copyright as a property right: The notion of property starts, I suppose, from confirmed possession of a tangible object and consists in the right to exclude others from interference with the more or less free doing with it as one wills. But in copyright property has reached a more abstract expression. The right to exclude is not directed to an object in possession or owned, but is in vacuo, so to speak. It restrains the spontaneity of men where but for it there would be nothing of any kind to hinder their doing as they saw fit. It is a prohibition of conduct remote from the persons or tangibles of the party having the right. It may be infringed a thousand miles from the owner and without his ever becoming aware of the wrong. It is a right which could not be recognized or endured for more than a limited time, and therefore, I may remark in passing, it is one which hardly can be conceived except as a product of statute, as the authorities now agree. (209 U.S. 1, 19 (1908) (Holmes, J., concurring))

In drawing the contrast between copyright and paradigmatic possessory property rights in tangible objects, Justice Holmes here emphasizes the non-possessory, ‘in vacuo’ nature of copyright and the way in which copyright owners can control strangers from afar, unconnected to any object possessed by the copyright owner. Copyright owners are thus unlike owners of possessory fee simple interests in land, whose rights to exclude generally impact the limited universe of people who come into contact with the physical boundaries of the owner’s parcel. 11   This section draws on my previous work on non-possessory property rights (Van Houweling, 2002, 2007, 2008, 2010, 2011, 2012a, 2013).

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Intellectual property as property  13 Justice Holmes alludes to another apparent copyright anomaly: although copyright owners are not necessarily possessors, the people whose spontaneity is restrained by copyright are typically in possession of tangible objects—books, sheet music, or other manifestations of the copyrighted work. As to these tangible objects, copyright operates not as an instrument of freedom from interference for the possessor but rather the opposite: an instrument of constraint operated by strangers (copyright owners) via remote control. Copyright thus strikes Justice Holmes as an odd sort of property right in that instead of liberating people to use their possessions it ‘restrains [their] spontaneity . . . where but for it there would be nothing of any kind to hinder their doing as they saw fit’ (White-Smith Music Publ’g Co. v. Apollo Co., 209 U.S. 1, 19 (1908)). Copyright owners’ power to control how remote strangers use objects in their possession is not as extraordinary as this passage suggests, however. Of course copyright shares this characteristic with patent and trademark. Beyond IP, copyrights are similar in this regard to a whole set of ‘remote control’ property interests that give their owners the right to control use of assets possessed by other people. Servitudes are the most prominent example.12 A servitude (which can take the form of an easement, real covenant, or equitable servitude) is a non-possessory property interest that gives its holder the right to use an asset (typically land) in specified ways, or to object to specified uses of it, or to insist on specified behavior connected to it. The asset is encumbered by the servitude, such that the servitude’s burdens ‘run with’ the asset, ‘pass[ing] automatically to successive owners or occupiers’ (American Law Institute, 2000, § 1.1). Unlike a mere contractual agreement to, say, refrain from operating a gas station in a residential neighborhood, a servitude is enforceable against successors in interest. Therefore, if you grant your neighbor an effective servitude she will be able to enforce the restriction against you and subsequent owners of your land. The benefit of a servitude typically runs to successors as well—from your neighbor to the next owner of her house. As Carol Rose puts it, ‘[t]he greatest overall advantage of servitudes is that they give stability to property arrangements over both time and space’ (Rose, 2011, p. 297). The stability that servitudes produce can be especially valuable for land use planning. Land is, of course, immobile and enduring. It is therefore often important for people who invest in land to be able to predict how surrounding land will be used far into the future, in order to make investments that will coordinate rather than conflict with adjacent activities. In recognition of these benefits, land servitudes and other varieties of remote control property rights have long been enforced by courts. Nonetheless, Justice Holmes’ contention that property rights with such features could only be the product of statute rings somewhat true. Judges have greeted most non-possessory property rights with suspicion and hemmed them in with doctrinal limitations. Servitudes came to be classified into the three major categories of easements, real covenants, and equitable servitudes, with each category subject to convoluted rules limiting formation, subject matter, and enforceability (French, 1982). As I describe in prior work, tracing the evolution of modern servitude law reveals several rationales for this type of hostility and the limiting doctrines that it produced.

12   Other examples include the future interests that accompany various types of defeasible estates. See generally Korngold (1988).

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14  Research handbook on the economics of IP law volume 1 I have organized these rationales into three broad categories: those related to notice and information costs; those related to dead hand control and other aspects of the ‘problem of the future’; and those related to harmful externalities (Van Houweling, 2008).13 Turning to IP, the basic anxiety and confusion associated with non-possessory property rights is perhaps unavoidable (unless we abandon IP for some alternative regime), because the structure of modern IP divorces ownership of physical objects embodying works of authorship and novel inventions from ownership of the corresponding copyrights and patents. This suggests that IP law should be acutely attentive to the problems that I associate with non-possessory property rights. Indeed, IP has developed an entire body of doctrine that attempts to mediate the tension between the rights of IP owners and the rights of owners of physical objects embodying IP. This is known as IP ‘exhaustion,’ and has emerged as one of the most contested areas of IP law in an era in which more and more objects of everyday life are burdened with non-possessory IP rights (see, e.g., Perzanowski and Schultz, 2016; Van Houweling, 2016a, 2016b).14 To better understand exhaustion and other limitations on remote control property rights, I turn in the next section to one of the key categories of concerns I associate with non-possessory property: notice and information costs. B.  Property and Information Information costs include the costs of conveying and comprehending information and also the costs imposed by failures to communicate. The monetary cost of a ‘no trespassing’ sign that effectively communicates the location of a land boundary is one type of property-related information cost, as is the mental energy that a passerby expends to read and understand that sign, and the aggravation that arises from inadvertent trespass after the sign falls down. Information costs overlap with transaction costs, a term typically used more generally (and seldom very precisely) to describe the information costs, negotiation costs, and enforcement costs related to voluntary exchanges.15 There are many ways in which the doctrines of property law have been shaped by concerns about information costs. Indeed, some scholars suggest that one of the most 13   Carol Rose offers a similar but not identical categorization, identifying the concerns as involving information or notice, renegotiability, and value (including third-party effects) (Rose, 2011). 14   The Supreme Court has addressed (and generally reaffirmed the importance of) IP exhaustion repeatedly in recent years. See Impression Products v. Lexmark, Inc., 137 S. Ct. 1523 (2017); Kirtsaeng v. John Wiley & Sons, 568 U.S. 519 (2013); Bowman v. Monsanto, 569 U.S. 278 (2013); Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008); see also Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), aff’d by an evenly divided Court, Costco Wholesale Corp. v. Omega S.A., 562 U.S. 40 (2010). 15   This characterization is an extreme simplification of the variety of ways in which the term ‘transaction costs’ has been used, as Lee Anne Fennell documents (2013). It maps—roughly—the categories emphasized by Coase (1960) and around which incomplete definitional consensus has formed. As Fennell observes, ‘[t]here is broad agreement that the costs people incur to get together, communicate with each other, and draw up and police contracts represent transaction costs. But the status of some other elements is contested’ (2013, p. 1484). Ellickson characterizes transaction costs within ‘three somewhat overlapping functional categories: (1) get-together costs, (2) decision and execution costs, and (3) information costs’ (1989, p. 615).

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Intellectual property as property  15 fundamental characteristics of property rights is their potential to impose undesirably high information costs, if not properly designed. From this perspective, property doctrine is and should be structured to mitigate information problems.16 The argument that information costs are of special concern in property law—­ compared, for example, to the law of contracts—is based in large part on the observation that property rights are ‘in rem,’ or ‘good against the world.’ That is, the obligations that arise from property rights (my obligation to avoid driving past a ‘no trespassing’ sign and onto the land beyond, for example) are not based upon any special ­relationship between owners and nonowners. These obligations bind complete strangers who encounter things to which property rights attach, regardless of whether they have agreed to be bound. As Thomas Merrill and Henry Smith, leading proponents of an information-costcentric theory of property, summarize: The in rem nature of such rights means all actors in the relevant community must recognize that they are subject to a duty to abstain from interfering with such rights insofar as they are held by any other member of the community. This generalized duty, in turn, creates an enormous information cost and collective action problem. The rights must be defined in such a way that their attributes can be easily understood by a huge number of persons of diverse experience and intellectual skills. The identity of the persons who hold such rights must be capable of communication by signals that can be immediately grasped and processed by an equally large multitude (2007, p. 1853).

Merrill and Smith use these observations about the in rem nature of property rights to generate a design principle: ‘the rights must be defined in such a way that their attributes can be easily understood’ (2007, p. 1853). Specifically, Merrill and Smith (2000) argue that property rights do and should conform to a limited, standardized set of easy-tounderstand forms—not ‘one size fits all,’ but a small menu that resists customization and idiosyncrasy in order to economize on information costs. Information costs do not always create problems worth solving through adjustments to legal doctrine, however. And even in circumstances in which they might, standardization of easy-to-understand property forms is only one mechanism through which to address those problems. But thinking about the special virtues of standardization and clarity where rights are good against the (vast, heterogenous) world is a good starting point for thinking about the relationship between information costs and rights regimes that govern both tangible and intangible resources. What if the nature of the resource at issue makes it extremely difficult to specify rights to it in a clear, standardized way? Thinking about this dynamic in relation to the nature of the resource helps us to think critically about the design of the law. IP scholars often contrast tangible and intangible property schemes on the basis of how much information is readily available about the identity of property owners and the nature of their rights. Typically, the comparison holds up tangible property—real property in particular—as the model of successful information provision. Physical signs can provide clues that a piece of land is owned by someone (often the person in possession). Customs 16   Note that not all information costs (or transaction costs more generally) constitute problems to be solved (Cooter, 1982, p. 28; Fennell, 2013, p. 1473).

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16  Research handbook on the economics of IP law volume 1 in the relevant neighborhood can shape how those signs are understood.17 Public records indicate exactly who that someone is and reveal details about the physical dimensions of the parcel, how its ownership has changed over time, and whether express encumbrances (liens, servitudes, and so on) complicate ownership.18 These sources of information help to prevent inadvertent trespass by those who wish to avoid invading private land; they facilitate consensual transactions for those who seek permission to use or buy it. IP rights, by contrast, do not so neatly correspond either to physical things in the world or to public records signifying ownership and identifying owners. Anxiety about the inadequacy of information regarding IP rights has increased in recent years due to statutory changes that have made the situation worse (e.g. the elimination of registration and notice as prerequisites for copyright protection) and to technological changes that have raised the stakes and thickened thickets of (often hidden) rights. In copyright, this anxiety is manifest in policy debates about the status of ‘orphan works’ whose owners cannot be identified and located (e.g. Chiang, 2016; Hansen, 2013; Loren, 2012; Urban, 2012; U.S. Copyright Office, 2006; U.S. Copyright Office, 2015). In patent, critics are alarmed when innovators’ investments are jeopardized by allegations that they have infringed unclear and thus difficult-to-avoid patent claims—especially in the realms of software and Internet business methods (Bessen and Meurer, 2008; Long, 2004; Menell and Meurer, 2013). In both the copyright and patent contexts, informational inadequacies can contribute to inadvertent infringement and then to surprising and costly disputes. Or fear of potential infringement—combined with the inability to identify, locate, and negotiate with relevant rights-holders—can chill productive endeavors (see Federal Trade Commission, 2011, p. 3; U.S. Copyright Office, 2006, p. 15). One approach to alleviating the information cost challenges that plague IP would be to try to replicate real property’s formal systems of centralized information provision. Copyright reformers, in particular, have called for statutory changes modeled on the centralized ownership information provided by land recording systems and the titleclearing function performed by marketable title acts (e.g. Lessig, 2010, p. 29). This could be accomplished, some argue, by ‘reformalizing copyright’ (e.g. Sprigman, 2004). The formal, centralized, and sometimes error-prone information mechanisms associated with land titles are not the only models offered by the law of tangible property, however. These structures coexist with other legal mechanisms—including rules about the form of property rights and the remedies triggered by their infringement—that are attentive to information costs concerns. As I have explained elsewhere (Van Houweling, 2013), this common law tradition features a wide variety of doctrinal tools. Even (or perhaps especially) if the formal, centralized informational structures of the land law are never fully replicated for intangible property, this set of tools may prove a valuable source of ideas for addressing contemporary IP challenges. For example, the touch and concern doctrine has traditionally constrained the subject matter of land servitudes in a way that helps to limit the information cost burden imposed by these potentially confusing non-possessory property rights. Like the other

  On custom in property and IP, see, e.g., Smith (2009a) and Rothman (2007, 2012).   For a helpful summary of formal information infrastructures in tangible property (with comparison to copyright), see van Gompel (2011, pp. 244–6). 17 18

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Intellectual property as property  17 ­ roperty-standardizing doctrines discussed by Merrill and Smith (2000), touch and concern p polices just how idiosyncratically the sticks in the bundle of property can be arranged. By limiting permissible servitudes to those that have a connection to the land they burden (and typically to a neighboring benefitted parcel) the doctrine helps to ensure that servitudes will be relatively easy to discover upon physical inspection, and that the owner of the beneficial interest will be relatively easy to identify and locate (Van Houweling, 2016a, 2016b). As I have argued elsewhere (Van Houweling 2008, 2011, 2013, 2016a, 2016b), IP exhaustion similarly helps to limit the information cost burden imposed by non-possessory IP rights. It generally allows owners of objects embodying copyrighted works and patented inventions to transfer those objects and to make normal consumer uses of them, consistent with reasonable expectations about what it means to own objects of personal property (see generally Perzanowski and Schultz, 2015, 2016). The upshot of this comparison is open to debate in light of developments in the law of servitudes, where the trend has been toward liberalization of doctrines like touch and concern in favor of enforcement of even idiosyncratic servitudes. Some observers take this to suggest that IP exhaustion should be similarly liberalized in favor of enforcement of idiosyncratic running restrictions on how IP-burdened objects may be used and transferred (see, e.g., Robinson (2004), but see Van Houweling (2008)). But on this point of comparison we should be careful to keep in mind key differences between tangible property and IP. The doctrinal liberalization in the law of land servitudes has happened in response to the establishment and improvement of recording systems that provide notice of even unusual servitudes. The logic of this doctrinal development might suggest, ironically, quite a different evolution in the law of IP, where digital age developments appear thus far to have exacerbated rather than alleviated information cost problems. In sum, the nature of property rights poses a recurring set of information cost challenges that are relevant to both tangible property and IP. Although difficult-to-define works of creativity and invention come with special information cost burdens, longstanding doctrines within tangible property law suggest useful tools that might be deployed to mitigate information cost concerns. Doctrines like intellectual property exhaustion, whose analogs and progenitors in the land law are being discarded, remain important for managing IP rights in an increasingly complex information environment. C.  Property and Time This section focuses on how IP compares to other types of property on the dimension of time—that is, how long the exclusive rights associated with copyrights and patents last compared with the exclusive rights associated with property rights in land and other tangible objects.19 One oft-cited distinction between copyright and patent law and the laws governing property in tangible things like land and chattels is evident on the face of the constitutional language limiting the duration of authors’ and inventors’ rights, which may only be secured ‘for limited Times’ (U.S. Const. art. I, § 8, cl. 8).20 To those skeptical of

  This section is derived in part from my previous work (Van Houweling, 2017).   For commentary emphasizing this distinction, see, e.g., Sterk (2005, pp. 446–59) and Bell and Parchomovsky (2002, p. 41). 19 20

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18  Research handbook on the economics of IP law volume 1 the notion of copyright and patent as forms of ‘property,’ this finite duration of authors’ and inventors’ rights is one of many ways in which those rights do not and should not operate like property. These skeptics point to the expansion in the duration of copyright as a way in which copyright is becoming more like tangible property and violating the spirit if not the letter of the constitutional limitation.21 Conversely, some of those who most fully embrace the concept of intellectual property argue that copyrights and patents should—like other forms of property—last forever.22 All of these scholars and advocates share a similar starting assumption: tangible property rights are potentially infinite in duration, while copyrights and patents are constitutionally required to be for ‘limited times.’ This characterization is ripe for refinement. While the duration of rights to land and other tangible objects may be theoretically infinite, a variety of limiting doctrines operate to terminate these rights when they threaten to prevent societally beneficial use of valuable resources. Long-lived property claims trigger fears about ‘dead hand control,’ a label that reflects underlying anxiety about special types of information and transaction costs that arise as owners move and proliferate and their claims become entangled over time, about threats to the autonomy of the living imposed by enforcing the preferences of prior generations, and about unfair distribution of resources caused by dynastic wealth accumulation. A variety of property doctrines are attentive to these fears. Indeed, the infamous Rule Against Perpetuities is arguably important as a topic of study for property students more for the powerful way that it illustrates the force of the concern with dead hand control than for its contemporary doctrinal significance. The law of adverse possession is similarly important in part for the way in which it illustrates problems caused by the assertion of stale claims. As for IP, despite express limits on the duration of copyrights and patents, the problems posed by stale, obsolete, and hopelessly entangled rights nonetheless loom large where technology is advancing so rapidly, where there is no natural limit on the proliferation of property claims, and where the public interest in access to the relevant resources often lasts far longer than the property owners’ interest in making available the rights-related information necessary to facilitate voluntary transactions. The issue of time is especially pressing in the copyright context. While the duration of copyright is theoretically limited, for many works it might as well be infinite. This is true, for example, for some so-called ‘orphan works’ whose owners cannot be located. These works may be underused during 21   For example, Lawrence Lessig laments that ‘though the founders never used that term, “intellectual property,” . . . to us, copyright and patents are clearly property rights, and clearly deserve all the absolute and permanent protection that ordinary property deserves’ (2001, p. 1068). Similarly, Simon Stern observes that ‘advocates of heightened copyright protection find it hard to resist the analogy with tangible property when challenging the limited duration of copyright’ (2012, p. 87). 22   Justin Hughes (2003, pp. 784–5) has documented such arguments:

  Motion Picture Association of America President Jack Valenti, for example, has stated publicly that copyrights should be permanent, like any other property right. He has been joined by at least one member of the U.S. Congress, Representative Mary Bono. Ms. Bono and Mr. Valenti carry on the legacy of many nineteenth-century U.S. authors who were advocates of perpetual copyright protection. There is some (many would say, superficial) appeal to their position: If one views a copyright as just another form of property, it makes sense to ask why it is treated differently than the enduring property rights in real estate, chattels, and financial instruments.

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Intellectual property as property  19 their long copyrights because permission to use them in ways subject to copyright cannot be obtained from unfindable owners (U.S. Copyright Office, 2006, p. 15). If such underuse includes a failure to properly preserve or duplicate existing copies of the works (fragile books or films, for example) then their use will also be effectively restricted even after the copyrights have expired.23 Thus the duration of copyright’s restrictions can be practically infinite, and yet tragically worthless in the long run to both lost copyright owners and society at large (Bibb, 2009, pp. 169–71). The problems associated with orphan works and other unintended consequences of ever-longer copyright terms are well-documented (e.g. Boyle, 2008; Chiang, 2016; Hansen, 2013; Loren, 2012; Urban, 2012; U.S. Copyright Office, 2006; U.S. Copyright Office, 2015). A wide variety of proposals has been offered to address them—including ex ante durational limits (Khanna, 2014), more comprehensive recording to help keep track of copyright owners (Landes and Posner, 2003), and time-sensitive application of doctrines like fair use (Hughes, 2003; Liu, 2002). But these proposals are often met with objections framed in terms of property rights, based on the assertion that tangible property rights are infinite and copyrights should be infinite as well (or at least as close to infinite as the Constitution’s ‘limited times’ language will bear) (Hughes, 2003, p. 784–5 (citing examples)). On closer inspection, it is clear that there are many ways that the duration of property rights in tangible things is in fact limited (Harding, 2009, pp. 292–3). This is especially common for those property rights that—like IP—allow their owners to exercise remote control over resources possessed by others. Return to the passage from White-Smith v. Apollo quoted above. Justice Holmes claims that because copyright is a non-possessory, ‘in vacuo,’ property right that exerts remote control over strangers, it ‘could not be recognized or endured for more than a limited time’ (White-Smith Music Publ’g Co. v. Apollo Co., 209 U.S. 1, 19 (1908)). His observation is also aptly applied to the other forms of ‘remote control’ property discussed above. On the one hand, servitudes and other non-possessory interests in tangible property (e.g. future interests accompanying defeasible fees) are designed to be durable, and thus to facilitate efficient long-term land use planning that would be difficult to accomplish through bilateral contractual measures alone. (Copyrights, too, are more durable than attempts to control copying of books by extracting express promises from each recipient of a copy.24) And yet, this durability can undermine efficiency when land use needs change and transaction costs make the restrictions difficult to renegotiate. Consider, for example, a residential use restriction imposed on a pocket of land hemmed in by noisy new highways. Because the likelihood of changed circumstances and of transactional difficulties increases with the passage of time, the durability of non-possessory property

23   For examples of these types of failures, see Reese (2012, pp. 292–7). Note that these are failures arguably attributable to living copyright owners. In a thought-provoking article, Eva Subotnik has therefore rejected the ‘dead hand’ as a way of conceptualizing the problems attributable to long (specifically, postmortem) copyright duration, identifying the problem as suboptimal stewardship by the living (2015, pp. 118–24). 24   Contemporary mass market ‘agreements’ imposed via click-wrap and other mechanisms that purport to attach to copies of intellectual works and thereby to establish privity of contract with whoever obtains possession of a copy are a different story (see Van Houweling, 2008).

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20  Research handbook on the economics of IP law volume 1 rights contributes to ambivalence about them.25 The specter of ‘dead hand control’ enforcing obsolete restrictions on living landowners and sacrificing socially beneficial use of resources thus explains much of the longstanding judicial hostility to enforcement of non-possessory property restrictions. Although no constitutional ‘limited times’ constraint applies to ‘non-intellectual’ property rights, judges and legislators have nonetheless imposed a collection of durational limitations on non-possessory property rights attached to land. Some of these limits (including some versions of the Rule Against Perpetuities) operate ab inicio to invalidate non-possessory property rights that purport to be perpetual or potentially perpetual. Some serve as durational limits that cause property rights to expire automatically after a certain period of time. Some allow property owners to save their rights from automatic expiration only by recording them periodically. Others operate ex post to extinguish property rights that have outlived their usefulness. There remain theoretically perpetual non-possessory property rights, but they are vulnerable to invalidation on a number of different grounds that are facially not about duration but appear to be influenced by concerns related to dead hand control. I will save consideration of the Rule Against Perpetuities and other limitations on future interests for another day (see Van Houweling, 2017) and focus here on durational limits on servitudes. A few states have enacted strict durational limits on servitudes, winning praise from some commentators (e.g. Rose, 1982, pp. 1413–16; Sweeney, 1995, p. 691; Winokur, 1989, p. 78). In Minnesota, for example, ‘covenants, conditions, or restrictions’ (with some exceptions) expire after 30 years. (Minn. Stat. Ann. § 500.20(2) (2002)). The relevant Massachusetts statute effectively forbids perpetual restrictions by imposing a 30-year default term on any restriction that does not specify its own duration (184 Mass. Gen. Laws 23). As the Supreme Judicial Court has explained, this provision ‘expressly precludes the imposition of perpetual restrictions on land’ and serves to ‘provide definitive endpoints to the term of such restrictions’ (Brear v. Fagan, 447 Mass. 68, 77 (2006)). Many states impose recording and renewal requirements instead of, or in conjunction with, durational limitations on servitudes. In many states, these requirements are imposed by marketable title acts that apply to various types of clouds on title. These statutory provisions generally declare that a landowner whose chain of title goes back for a specified period of time (typically from 20 to 40 years) has marketable title to that land free and clear of any contrary claims that have not been recorded (Van Houweling, 2017, pp. 68–9, n. 82 (citing examples)). Some states make all of this more explicit, with statutory provisions separate from their general marketable title acts that expressly provide for the automatic expiration of servitudes and/or future interests unless they are periodically recorded. For instance, the Iowa ‘stale use statute’ applies to both future interests and servitudes that restrict the use of land (Iowa Code Ann. § 614.24). The statute limits the duration of land restrictions to 21 years from initial recording unless a claim to extend them is recorded before the expiration of those 21 years. Similarly, in Massachusetts, restrictive servitudes with express durations of more than 30 years nonetheless automatically expire after 30 years 25

  Julia Mahoney (2002, 2004) is an especially vocal critic of this type of dead hand control.

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Intellectual property as property  21 unless they are recorded (with renewal recordation required every 20 years thereafter) (184 Mass. Gen. Laws 27).26 Ironically, the rise of marketable title acts and similar recording and renewal requirements during the second half of the twentieth century coincided with the elimination of the renewal requirement in US copyright law. Recognition of the unintended negative consequences of that shift have motivated calls to reinstitute some type of registration requirement as a prerequisite for long-lasting copyrights. For example, while serving as Register of Copyrights, Maria Pallante suggested that ‘a formal registration requirement near the end of term may be beneficial to the larger legal framework’ of copyright (Pallante, 2013, p. 1419). The details of her proposal mirror the operation of some of the state law recording schemes just described: Congress could shift the burden of the last twenty years of protection . . . from the user to the copyright owner, so that at least near the end of the term, the copyright owner would have to file with the Copyright Office as a condition of continued protection. Otherwise, the work would enter the public domain. (Pallante, 2013, p. 1419)

Pallante’s suggestion echoes other proposals to fix copyright by ‘reformalizing’ it, as discussed above. The examples from the tangible property realm suggest that formal requirements that help to justify and track long-lasting remote control rights would not only restore some advantages of historical copyright practice, but also unite copyright with the law that helps to discipline similar rights attached to land. And in the twenty-first century, technology might ease the process of complying with formal requirements, thus avoiding the traps and travails of the earlier era. In addition to ex ante durational limits that set a pre-determined expiration date for restrictive future interests and servitudes or impose an expiration date on those that have not been properly recorded, there are also both common law doctrines and state statutory provisions that operate ex post to terminate non-possessory use restrictions once they have outlived their usefulness. Underlying these ex post termination rules is the idea that circumstances may change in the years following imposition of a restriction in ways that render what was once a beneficial land use control into an unjustifiable hindrance that is nonetheless difficult to remove through voluntary negotiations. In the case of servitudes, the relevant doctrine transparently reflects this logic: restrictive servitudes can be terminated (or modified, or enforced only with damages as opposed to injunctions) due to ‘changed conditions.’ As the Ninth Circuit put it, ‘[t]he doctrine of changed conditions operates to prevent the perpetuation of inequitable and oppressive restrictions on land use and development that would merely harass or injure one party without benefiting the other’ (Cortese v. United States, 782 F.2d 845, 850–51 (9th Cir. 1986)). What would it mean to borrow the changed circumstances concept and apply it to copyright? The most straightforward way to incorporate this idea would be for judges applying the case-by-case analysis of the fair use doctrine to include in that inquiry a consideration of the age and continued importance of the copyright at issue. Several scholars have suggested this approach, tying it persuasively to fair use’s statutory factors 26   This is in addition to the Massachusetts provision discussed above, which imposes a 30-year limitation on any use restriction that does not specify its own duration.

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22  Research handbook on the economics of IP law volume 1 (Hughes, 2003; Liu, 2002). Here we see that this approach has a property law pedigree as well. In sum, courts and legislatures have deployed a range of techniques to limit the problems caused by long-lasting remote control property rights. These techniques include invalidation of some purportedly perpetual or long-lasting interests, mandatory term limits, periodic recording requirements, and ex post invalidation of obsolete restrictions. These are in addition to duration-related doctrines that apply to both possessory and remote control property interests (namely, adverse possession and statutes of limitation). Proposals for addressing problems caused by long-lived IP rights are met with objections often framed in terms of tangible property rights, with some vocal copyright and patent owners insisting that their property should not be uniquely burdened with durational limits, recording obligations, or doctrines that consider the possibility that their rights have outlived their usefulness. But looking carefully at the law of tangible property reveals that such burdens would be far from unique, especially when we examine the law’s treatment of non-possessory remote control property rights that are most analogous to IP. There is a long property tradition of looking ambivalently on remote control property— recognizing its potential to serve goals associated with long-term investment in valuable resources but guarding against its potential to unjustifiably constrain resource use long after those goals are accomplished or obsolete.

V. CONCLUSION Property rights are uniquely powerful and problematic because of the way they attach to, run with, and exclude people from things. The powers and the problems follow patterns, but also vary depending on the nature of the thing at issue. Keeping this variance in mind as we explore analogies between tangible property and IP allows us to use those analogies to distinguish and diagnose the novel and yet familiar challenges of contemporary IP. As explored in this chapter, attention to both the history of property possession and the special challenges of possession of IP helps to understand and diagnose the shortcomings of doctrines of IP acquisition and signaling. Looking at the special information cost challenges posed by rights that are good against the world helps us to understand how IP might harness more of the doctrinal tools that have traditionally helped mitigate these costs. And examining how the law governing non-possessory rights to tangible property is sensitive to how those rights can cause problems over time helps us to see how durational limits in IP are not confiscatory but rather consistent with property tradition. In sum, understanding IP as property can illuminate rather than obscure the special nature of rights in intellectual creations.

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26  Research handbook on the economics of IP law volume 1 Van Houweling, Molly Shaffer. 2011. ‘Touching and Concerning Copyright,’ 51 Santa Clara Law Review 1063–85. Van Houweling, Molly Shaffer. 2012a. ‘Technology and Tracing Costs: Lessons from Real Property,’ in Shyamkrishna Balganesh, ed., Intellectual Property and the Common Law. Cambridge, UK: Cambridge University Press. Van Houweling, Molly Shaffer. 2012b. ‘Atomism and Automation,’ 27 Berkeley Technology Law Journal 1417–501. Van Houweling, Molly Shaffer. 2013. ‘Land Recording and Copyright Reform,’ 28 Berkeley Technology Law Journal 1497–510. Van Houweling, Molly Shaffer. 2016a. ‘Exhaustion and Personal Property Servitudes,’ in Irene Calboli and Edward Lee, eds., Research Handbook on IP Exhaustion and Parallel Imports. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Van Houweling, Molly Shaffer. 2016b. ‘Exhaustion and the Limits of Remote-Control Property,’ 93 Denver Law Review 951–74. Van Houweling, Molly S. 2017. ‘Disciplining the Dead Hand of Copyright: Durational Limits on Remote Control Property,’ 30 Harvard Journal of Law & Technology 53–74. van Gompel, Stef. 2011. Formalities in Copyright Law. Alphen ann den Rijn, The Netherlands: Kluwer Law International. Walterscheild, Edward C. 1994. ‘To Promote the Progress of Science and Useful Arts: The Background and Origin of the Intellectual Property Clause of the United States Constitution,’ 2 Journal of Intellectual Property Law 1–56. Winokur, James L. 1989. ‘The Mixed Blessings of Promissory Servitudes: Toward Optimizing Economic Utility, Individual Liberty, and Personal Identity,’ 1989 Wisconsin Law Review 1–97. Yen, Alfred C. 1990. ‘Restoring the Natural Law: Copyright as Labor and Possession,’ 51 Ohio State Law Journal 517–59.

Legislative Materials U.S. Const. art. I, § 8, cl. 8. 17 U.S.C. § 102. 35 U.S.C. § 102(a)–(b), § 112. 184 Mass. Gen. Laws 23. 184 Mass. Gen. Laws 27. Iowa Code Ann. § 614.24. Minn. Stat. Ann. § 500.20(2).

Cases Ariad Pharmaceuticals, Inc. v. Eli Lilly & Co., 598 F.3d 1336 (2010). Bowman v. Monsanto, 569 U.S. 278 (2013). Brear v. Fagan, 447 Mass. 68 (2006). Cortese v. United States, 782 F.2d 845 (9th Cir. 1986). Costco Wholesale Corp. v. Omega S.A., 562 U.S. 40 (2010). Impression Products v. Lexmark, Inc., 137 S. Ct. 1523 (2017). Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974). Kirtsaeng v. John Wiley & Sons, 568 U.S. 519 (2013). Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008). Pierson v. Post, 3 Cai. 175 (N.Y. 1805). Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). White-Smith Music Publishing Company v. Apollo Company, 209 U.S. 1 (1908).

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2.  Anticommons, transaction costs, and patent aggregators Rebecca S. Eisenberg*

27

Contents Theory of the Anticommons Empirical Studies A. Impact on Upstream Research B. Impact on Downstream Product Development III. The Rise of Patent Aggregators IV. Changes to Mitigate Anticommons Risks A. Limits on ‘Upstream’ Rights and Assertions B. Limits on Injunctions C. Lowering Information Costs D. Lowering the Costs of Patent Challenges References I. II.

I.  THEORY OF THE ANTICOMMONS An anticommons is a fragmented allocation of property rights in which resources are prone to underuse because it is too costly to assemble all the necessary permissions to put the resources to use (Heller, 1997; Heller and Eisenberg, 1998). The anticommons metaphor harkens back to the more familiar ‘tragedy of the commons’ (Hardin, 1968), in which resources made freely available in a commons (such as open fisheries and pastures) are prone to overuse because too many people hold privileges of use and nobody has a right to exclude anyone else. Privatization may solve a tragedy of the commons by giving a property owner a right to exclude others, thus providing the means and incentive to prevent wasteful overuse. But a poorly designed property regime that creates too many fragmented rights to exclude could lead to wasteful underuse in a tragedy of the anticommons. In a world of costless transactions, people could avoid both commons and anticommons tragedies by trading their rights (Fennell, 2004). But transaction costs, strategic holdouts, and information problems present a risk of persistent bargaining failures. The larger the number of rights holders and the more varied their entitlements, the more challenging it is to avoid waste through bargaining (Heller and Eisenberg, 1998; Eisenberg, 2001). Heller (1997) offered as an example empty storefronts in post-Soviet Moscow, alongside robust retail trade out of flimsy metal sidewalk kiosks. Heller attributed the

*  Robert and Barbara Luciano Professor of Law, Michigan Law, University of Michigan.

27

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28  Research handbook on the economics of IP law volume 1 underutilization of storefronts to fragmented allocation of the rights necessary to open up shop to a diverse group of owners (including private or quasi-private enterprises, workers’ collectives, privatization agencies, and local, regional, and federal governments) in the course of post-socialist privatization. Heller and Eisenberg (1998) extended the metaphor to fragmented ownership of intellectual property (IP) rights that an innovating firm must clear in order to develop a new product.1 They noted complaints about a proliferation of ‘upstream’ IP claims to biomedical research tools that serve as inputs to future ‘downstream’ product development following a shift in US government policy to promote the patenting of inventions made in the course of federally sponsored research (Eisenberg, 1996). Both illustrations happened to involve the creation of property rights following a transition from a more communal form of ownership (state ownership in the case of Soviet-era storefronts; free availability in the scientific commons in the case of research tools) to a new property rights regime. The creation of a new property regime, although not the only way that an anticommons might arise, may be especially fraught with possibilities for poor design of initial rights. Moreover, new property owners accustomed to a regime of communal ownership may initially lack the skills necessary to evaluate their rights and to transfer them at reasonable cost to users who could get more value out of them. These difficulties may eventually give way to successful bundling of rights through bargaining, perhaps with the assistance of intermediaries who figure out strategies for lowering transaction costs to realize potential gains from exchange (Merges, 1996; Heller and Eisenberg, 1998; Eisenberg, 2001). Bargaining may be costly, but not necessarily tragic (Barnett, 2015). At any given moment it can be difficult to tell the difference between transitory and enduring bargaining obstacles (Eisenberg, 2001). An anticommons may be more likely to persist if transaction costs are high, if heterogeneous rights are dispersed among diverse owners, and if information asymmetries and cognitive biases prevent agreement on relative values (Heller and Eisenberg, 1998). These conditions seem more likely with patent rights than with real property entitlements, because the patent system continuously creates new rights of indeterminate value for new claimants, with limited opportunity to establish consensus valuations of existing entitlements as new rights arise in the face of ongoing technological change. On the other hand, because patents are wasting assets that expire after 20 years and may lose value before that time as a result of technological obsolescence, owners may feel some urgency to enter into timely bargains before licensing options disappear (Epstein and Kuhlik, 2004). Subsequent commentators have sharpened and formalized the model of the tragedy of the anticommons and noted its similarities to a tragedy of the commons (Buchanan and Yoon, 2000; Fennell, 2004; Parisi et al., 2005; Schulz et al., 2003). Both tragedies could in theory be resolved through bargaining, and in both cases bargaining faces obstacles. These obstacles include the costs of identifying owners and users and determining the validity and infringement of rights, as well as the costs of evaluating heterogeneous rights and of bargaining over terms of exchange. In both contexts individual rights

1   Other commentators have used the term ‘patent thickets’ to describe numerous and overlapping patent rights that threaten to stifle rather than encourage innovation (Shapiro, 2001; Galasso and Shankerman, 2010). Both terms describe similar phenomena.

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Anticommons, transaction costs, and patent aggregators  29 holders bargaining independently are likely to charge more in the aggregate than would a single party who held the entire bundle of complementary rights because of the ‘double marginalization problem’: each individual rights holder will fail to internalize the full costs and benefits of its bargaining behavior on the overall price of the bundle (Parisi et al., 2005). In both contexts, there is a risk that an overall deal will be derailed by strategic behavior by one or more rights holders seeking to capture a larger share of the potential surplus (Fennell, 2004; David, 2011). Some experimental results support these intuitions (Depoorter and Vanneste, 2006; Stewart and Bjornstad, 2002; Parente and Winn, 2012). Other commentators maintain that market institutions can and do avoid anticommons tragedies (Barnett, 2015; Lichtman, 2006; Epstein and Kuhlik, 2004). Much of the anticommons literature focuses on the patent system, but some of it considers problems arising from fragmentation of ownership of copyright (Parisi and Sevcenko, 2001; Hunter, 2003; Loren, 2003; Depoorter, 2004; Van Houweling, 2010; McLeod and DiCola, 2011; Lee, 2016) and associated transaction costs (Depoorter and Parisi, 2002). US copyright law has mechanisms for avoiding an anticommons that have no counterpart in the US patent system, including statutory compulsory licensing provisions,2 well-established collective rights organizations (Gervais, 2015), and the fair use doctrine (Depoorter and Parisi, 2002).3 Nonetheless, recent controversies have highlighted salient examples of cultural innovations that have been significantly impeded by the complexity of licensing numerous copyrights. These include mass digitization of libraries of copyrighted works such as the Google Books project (Hofmann, 2013; Samuelson, 2011; U.S. Copyright Office, 2015), digital music sampling (McLeod and DiCola, 2011), and documentary film production (Aufderheide and Jaszi, 2004).

II.  EMPIRICAL STUDIES Much of the patent literature uses the term ‘anticommons’ loosely to lament various effects of patents that are only indirectly related to the problem of clearing numerous rights. For example, Murray and Stern (2007) characterize as ‘anticommons effects’ an observed relative decline in the rate of citations to scientific articles after the inventions they disclose are patented and thus removed from the public domain, even though each observation may involve the effects of only a single patent. An extensive literature purports to test the ‘anticommons’ by looking for negative effects of patents on the ‘upstream’ activities of biomedical research scientists, as distinguished from the more specific focus of Heller and Eisenberg (1998) on the impact of a proliferation of ‘upstream’ IP claims on ‘downstream’ product development. Despite these imprecisions in usage

2   17 U.S.C. §§ 115 (nondramatic musical compositions), 118 (public broadcasting), 111(c) (cable retransmission), 114(d)(2) (subscription digital audio transmission), 114(d)(1) (nonsubscription internet radio). Royalty rates are set by a Copyright Royalty Board established by statute (Copyright Royalty and Distribution Reform Act of 2004, Pub. L. No. 108-419, 118 Stat. 2341, codified at 17 U.S.C. §§ 801–805). For a history of the compulsory licensing provisions for nondramatic musical compositions and an explanation of their limitations see Peters (2004). 3   17 U.S.C. § 107. See also 17 U.S.C. § 110 (permitting unauthorized public performances under specific circumstances).

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30  Research handbook on the economics of IP law volume 1 and differences in focus, some of this literature illuminates the anticommons model in useful ways. A smaller literature focuses more directly on the impact of ‘patent thickets’ on product development in a variety of technological fields. But the search for empirical evidence of such an impact suffers from a lack of salience: it is challenging to measure or observe innovations that never happened. The following discussion considers separately studies of the impact of patents on upstream research and on downstream product development. Section III then considers growing concerns that in recent years have eclipsed debate about disaggregated ownership of fragmented patents: a distinct set of problems posed by the rise of patent aggregators. While patent aggregation seems like it would be an effective market solution to the bargaining challenge presented by fragmented ownership, it seems to have done more to reduce the costs of assertion by patent owners than to reduce the costs faced by technology users for clearing rights. The result on balance may be a greater risk of underuse as subsequent innovators need to incur more transaction costs to evaluate and clear rights that they might otherwise have ignored with little risk of assertion in the absence of aggregation. A.  Impact on Upstream Research The metaphor of the tragedy of the anticommons has had great resonance with science policy makers whose primary concern was not the impact of IP on future product development, but rather its impact on research science itself. This concern motivated a series of studies using surveys of research scientists from around the world, primarily in academia, to determine how much IP interferes with their work (Eisenberg, 2008). Although not directly relevant to the problem of the anticommons as pictured by Heller and Eisenberg (1998), these studies shed an interesting light on that problem. The most interesting finding of these studies was that academic scientists for the most part simply ignore any patents they might be infringing, and for the most part they get away with it (Walsh et al., 2003; Eisenberg, 2001; Nicol and Nielsen, 2003; Straus et al., 2004; American Ass’n for the Advancement of Science, 2007).4 An important exception to the obliviousness of academic scientists to patents was the impact of patented genes on clinical research using genetic tests in academic medical centers (Soini et al., 2008; Cho, 2003; Walsh et al., 2003). In telephone survey interviews with directors of laboratories performing genetic tests in the US, Cho (2003) found that 25 percent had stopped performing a genetic test and 53 percent had decided not to develop a new genetic test because of a patent or license. Of those respondents that had been contacted about potential infringement, 71 percent of those in commercial laboratories and 24 percent of those in universities reported that they had been prevented from performing a test (Cho, 2003). Patents on the BRCA1 and BRCA2 genes associated with susceptibility to breast cancer were a recurring source of complaints (Gold and Carbone, 2010), but not unique (Merz et al., 2002). Although relatively few academic scientists reported that patents constrained their

4   A rare but salient counterexample in which a university was held liable for patent infringement is the case of Madey v. Duke University, 307 F.3d 1351 (Fed. Cir. 2002), U.S. cert. denied sub nom. Duke University v. Madey, 539 U.S. 958 (2003).

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Anticommons, transaction costs, and patent aggregators  31 research activities outside of genetic testing, many scientists reported that their work was impeded by practical restrictions on access to proprietary materials and databases that they could not readily duplicate on their own (Cohen and Walsh, 2008; Walsh et al., 2003, 2007). The distinction between patent licenses and agreements for access to materials and databases is not entirely crisp. Mowery and Ziedonis (2007) found that materials transfer agreements were often associated with patented inventions. Some notoriously difficult negotiations have arisen over access to patented materials, such as genetically engineered mice (Murray, 2006). Academic agricultural biologists surveyed by Lei et al. (2009) associated an observed proliferation of materials transfer agreements with concerns about preserving IP protection. In a review of the literature, Herder (2012) noted that different authors have characterized quantitatively similar findings quite differently. For example, Walsh et al. (2007), finding that 1 in 9 researchers abandoned one research project every two years because of patents, concluded that worries about patent-related transaction costs are overstated, while Huang and Murray (2009), finding that genetic researchers forego about 1 in 10 research projects (or, more precisely, research publications) through the causal negative impact of a gene patent grant, concluded that there was reason to worry about the effects of gene patents on knowledge flows. Survey results also appear to be sensitive to the form of the questions. The agricultural biologists surveyed by Lei et al. (2009) gave broadly similar responses to the scientists surveyed by Cohen and Walsh (2008) and Walsh et al. (2007) on similar questions, but only Lei et al. asked respondents to evaluate the impact of intellectual property on their field, leading the agricultural biologists to ‘report that the IP protection of research tools is, on balance, having a negative impact on their research areas.’ Perhaps other respondents in the other surveys would have given similar responses to the same question. Other scholars have used less impressionistic data to gauge the impact of patents on subsequent research. Murray and Stern (2007) studied forward citations of patent-paper pairs involving papers published in the journal Nature Biotechnology between 1997 and 1999 and patents associated with the same work. They found that the grant of a patent was associated with a modest (10–20 percent) decline in future citations to the corresponding paper relative to expected citations for papers of similar quality that were not paired with a patent. Huang and Murray (2009) examined a larger data set of patent-paper pairs on gene discoveries from 1988–2006 and observed a relative decline in citations after patent issuance of about 5 percent, with the decline increasing with number of claims in the patent. Of particular relevance to the anticommons, the authors observed that the negative impact of patent grant was greater in the presence of patent thickets and when ownership of cited patents was fragmented (as suggested by prior art citations in the patent documents). It is difficult to reconcile the observations in citation studies of a relative decline in citations after patent issuance with the observations in the survey studies that scientists ignore patents (Herder, 2012; McManis and Yagi, 2014). Williams (2013) used a different empirical approach to test the impact of the IP strategy of the gene sequencing firm Celera, which relied on database access agreements as well as patents. Celera sequenced the human genome in a race with the publicly funded Human Genome Project (which required grantees to disclose their data in the publicly accessible GenBank database) and made the proprietary Celera database available only to paying subscribers during a period when the GenBank version was incomplete.

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32  Research handbook on the economics of IP law volume 1 Williams ­compared subsequent publications and diagnostic applications of genes that were first identified only in the commercial Celera database with subsequent research and diagnostic applications of genes that were first identified in the freely accessible GenBank database and found a reduction in subsequent research and product development associated with the Celera genes of 20–30 percent. Some observers have concluded from these studies that the effects predicted by the anticommons model are not borne out by the available data (Caulfield et al., 2006; McManis and Yagi, 2014). But the data are inadequate to support this conclusion because most of these studies merely investigated encounters of research scientists with IP rights without regard to the existence of conditions that would set the stage for anticommons effects. With the notable exception of Huang and Murray (2009), who found a greater decline in citations following patent issuance in the presence of patent thickets, these studies did not attempt to measure the existence of fragmented or overlapping IP rights held by different owners, nor did they ask about the impact of such rights on product development. Although not directly relevant to the impact of a proliferation of IP claims on commercial product development, these studies nonetheless shed an interesting light on transaction costs in the setting of negotiations over access to upstream research tools that could have implications in other settings that require users to negotiate with multiple rights holders. The studies provide considerable evidence of high transaction costs. Murray (2006) documented protracted negotiations for dealing with just one counterparty over a high-value research tool. Maurer (2006) recounts ultimately unsuccessful efforts of a community of academic biologists to overcome bargaining and information obstacles to pool their data on genetic mutations in a shared database with industry support. Williams (2013) found further evidence of significant transaction costs in negotiations between Celera and its database subscribers in the fact that the parties did not address patent licensing issues ex ante, before subscribers had invested in research that might be covered by Celera’s patents, but instead waited to negotiate licenses until after further inventions had been made, when Celera was in a stronger bargaining position. This contradicts the prediction of Green and Scotchmer (1995) that ex ante licenses will produce optimal incentives and will therefore be negotiated. Williams (2013) attributed the use of ex post licensing to transaction costs associated with scarcity of ideas, asymmetric information about development costs, and the risk that Celera would engage in competitive R&D based on unpatented information disclosed by prospective licensees in the course of negotiations. The observation that practical excludability had a greater impact on scientists than patents alone led Eisenberg (2008) to propose a refinement of the anticommons hypothesis to consider which side bears the burden of overcoming transaction costs. In the case of patents, rights holders must incur significant costs in order to identify infringers and assert their rights against them. The higher these costs, the more likely that transaction costs will protect users against detection and liability, particularly for low-value users like academic scientists whose activities pose little threat to the commercial interests of rights holders. In this context high transaction costs on rights holders mitigate the risk of underuse in an anticommons. On the other hand, for ‘practically excludable’ resources such as biological materials and databases, users themselves must incur transaction costs to find rights holders and negotiate for access, while rights holders may avoid search costs and wait for users to come to them. In this context high transaction costs work against users, aggravating the risk of underuse in an anticommons. (The effects may be

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Anticommons, transaction costs, and patent aggregators  33 quite different for high-value users such as commercial product developers, considered in the next section.) In other words, the presence of high transaction costs does not necessarily increase the risk of underuse in an anticommons. Depending on where the burden of overcoming transaction costs falls, high transaction costs could either aggravate or mitigate the risk of underuse. A corollary is that aggregation of rights could lead to both greater transaction costs and less use than disaggregated ownership if aggregators face lower assertion costs than disaggregated owners. This is because an aggregator might be expected to assert rights that users could otherwise safely ignore. This possibility is considered in Section III below. B.  Impact on Downstream Product Development There are reasons to predict that the risk of an anticommons could be either greater or lesser in the context of product development than it is in the context of scientific research. On one hand, rights holders that are willing to ignore the activities of academic researchers may be more likely to assert their rights when a product of commercial value is in sight. Moreover, commercial firms that hope to bring a product to market may be more concerned about potential infringement liability (and therefore less willing to ignore patents) than academic scientists. Rights that might go ignored and unasserted in the context of low-value research may therefore be more likely to require bargaining and clearance in the context of high-value product development, setting the stage for a possible anticommons. On the other hand, the higher values at stake in product development may provide greater motivation for the parties to reach bargains in order to avoid waste, making bargaining breakdowns less likely. Although the studies reviewed in the last section focused primarily on the impact of IP on the work of scientists rather than on product development, some of the studies included data from scientists in commercial firms and from institutional representatives other than research scientists. Walsh et al. (2003) included interviews with 12 lawyers, 3 scientists, and 9 business managers from the pharmaceutical industry; 7 lawyers, 4 scientists, and 7 business managers from the biotechnology industry; 7 outside lawyers; and 5 government and trade association personnel. Nicol and Nielsen (2003) included interviews of CEOs, IP personnel, and bench scientists from private industry and directors of research groups in diagnostic testing facilities, as well as outside patent attorneys, licensing consultants, and government and trade representatives. Although these small numbers raise questions about whether the data are generalizable, those studies that included commercial respondents and distinguished them from academic respondents found that commercial scientists were more likely to report difficulties in negotiating licenses and a need to alter their research plans because of patents (Walsh et al., 2003; Nicol and Nielsen, 2003; Hansen et al., 2007). Scientists responding to surveys may not be in as good a position to observe the impact of IP on product development as those people who are more directly involved in clearing rights and deciding which projects to develop. Interviews reported in the literature suggest that firms incur significant costs in culling through multiple patents to determine what licenses are necessary, and that these costs are greater in fields characterized by more extensive patenting (Eisenberg, 2008). For example, a lawyer for a pharmaceutical firm told Walsh et al. (2003) that lawyers in the small molecule division in his firm were responsible for eight

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34  Research handbook on the economics of IP law volume 1 projects each, while those in the biotechnology division of the same firms only handled about two projects each because of the greater complexity of the licensing issues that they had to manage in clearing rights for their projects. Respondents told Nicol and Nielsen (2003) that because of the increasing breadth of patent claims, it is now necessary to analyse more patents in detail in order to determine whether they must be licensed; however, at the end of this analysis, the number of patents that require licensing generally remains small. One Australian respondent estimated that a typical freedom to operate search might uncover anywhere from a dozen to 30 or 40 patents that are relevant, but that upon closer analysis ‘there may be only one or two or a few more that are blocking’ and that ‘[a]nything beyond three is probably too many’ (Nicol and Nielsen, 2003). Walsh et al. (2003), characterizing the reports of about 10 US industry respondents, said that an initial search would turn up hundreds of patents that they would have to consider, a number that was surely higher than in the past, but that after analysis the number that they would need to address would range from zero to a dozen. As Epstein and Kuhlik (2004) note, a proliferation of patents may represent competing alternative stepping stones to production rather than a blockade of overlapping rights. But a firm may need to incur significant information costs in order to figure that out. How many patents it takes to derail a project evidently depends not only on what the patents cover, but also on the stage at which they are identified. In both the US and Australia, respondents indicated that numerous patents would be more likely to deter a firm from pursuing a project at the outset than they would be to cause the same firm to abandon a project once it was already underway. A lawyer for a biotechnology firm told Walsh et al. (2003) that the firm assesses the patent landscape early on, and if it appears too formidable, ‘the project never gets off the ground,’ but that if patent issues arise later they are ‘not the show stopper that you would identify early on.’ Reviewing similar stories from Australian respondents, Nicol and Nielsen (2003) concluded ‘that it is possible that a number of potentially anticommons-affected projects do not come onto the radar, because such projects will have been abandoned well before any difficulty of negotiating with multiple parties is encountered.’ As noted in the last section, some studies have shown a negative effect of patents and licensing on the development and use of clinical genetic tests (Cho, 2003; Merz et al., 2002; Walsh et al., 2003; Soini et al., 2008), although it is not clear that the problems highlighted in these studies necessarily involve fragmented property rights and anticommons tragedies. Some genetic tests may be vulnerable to anticommons risks, such as DNA microarray products that simultaneously test for multiple genes or mutations covered by multiple patents (Barton, 2006). This is similar to the challenge of negotiating multiple copyright licenses for digital sampling of music (McLeod and DiCola, 2011). Industries may differ in their capacity to manage complex patent landscapes. Ziedonis (2004) studied patenting in the semiconductor industry, a capital-intensive industry with considerable patenting. Ziedonis used patent citation data from patents issued to 67 semiconductor firms between 1975 and 1996 to estimate the extent of fragmentation of ownership of technological inputs, and found that firms acquire patents more aggressively when fragmentation of ownership is more extensive. The difference was significantly more pronounced for more capital-intensive firms. Ziedonis explained that amassing a large patent portfolio could be a strategy for safeguarding capital investments while foregoing the costs and delays associated with ex ante contracting, by increasing the likelihood that the firm can threaten others with reciprocal lawsuits (Ziedonis, 2004).

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Anticommons, transaction costs, and patent aggregators  35 Barnett (2015) observes that although information and communications technology markets would appear to be fertile ground for an anticommons to arise, in that products require assembly of multiple components covered by patents with dispersed ownership, R&D spending and patenting have grown steadily, while consumer prices have declined. Barnett attributes the avoidance of anticommons effects to the capacity of markets to arrive at patent pooling and cross-licensing arrangements, and reviews the historical evidence of institutions that arose to aggregate patents on a variety of technologies that had generated patent thickets. Barnett also sees a pattern of limited pursuit and enforcement of patent rights within an industry as a kind of market response to overpropertization that limits anticommons risks (Barnett, 2009).

III.  THE RISE OF PATENT AGGREGATORS If fragmentation of rights creates obstacles to licensing and threatens to interfere with efficient use, an obvious potential solution is the aggregation of fragmented rights by one or more owners (Epstein and Kuhlik, 2004; Barnett, 2015). Aggregation reduces the number of entities that a product developer must bargain with and thereby reduces the number of potential holdouts, allowing patent owners and technology users to clear rights with a smaller number of transactions (Lemley and Melamed, 2013). Moreover, aggregating all the necessary rights in a single owner would solve the double marginalization problem because that owner would consider the full impact of royalty demands under multiple patents (assuming that aggregation reduced the number of owners to one). If transaction costs stand in the way of efficient use of patented inventions, one might expect entrepreneurs to figure out ways to reduce these costs in order to realize gains from licensing. Examples abound in the literature of patent pools, cross-licensing arrangements, and copyright collectives that have reduced the transaction costs associated with a proliferation of IP rights and facilitated the clearing of rights (Merges, 1996; Barnett, 2015). Patent aggregators have proliferated over the past 20 years under liberalized antitrust rules (Gilbert, 2004; Ewing and Feldman, 2012). But this phenomenon has not been uniformly welcomed as an efficient means of forestalling or correcting an anticommons. Many commentators have instead lamented the rise of patent aggregators as a new source of holdup against innovators rather than as an efficient mechanism for clearing rights (Ewing and Feldman, 2012; Bessen et al., 2011–12; Chien, 2009). Antitrust scholars have worried that patent pools may have anticompetitive effects if they bring into common ownership patents that cover substitutes that would otherwise compete in the market rather than complements that must be combined for use (Shapiro, 2001; Carrier, 2013). So far, patent aggregators have focused primarily on patents in the information and communications technology sectors (Hagiu and Yoffie, 2013). But Feldman and Price (2014) find that conditions are ripe for patent aggregators to play a larger role in the biotechnology and pharmaceutical sectors by acquiring patents currently held in university patent portfolios. Patent aggregators vary in their business models (Hagiu and Yoffie, 2013; Schwartz, 2014). Many firms that innovate and operate in technologically advanced fields accumulate large patent portfolios to preserve their own freedom to operate across a broader technological domain. Patent portfolios enhance their bargaining position in negotiations over

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36  Research handbook on the economics of IP law volume 1 patents held by other firms, and thus protect them from costly litigation (Parchomovsky and Wagner, 2005; Ziedonis, 2004). Critics have expressed more concerns about so-called non-practicing entities (NPEs) that make a business out of buying, selling, licensing, and asserting patent rights, sometimes on a very large scale, without practicing the underlying technology themselves (and therefore without exposing themselves to counter-assertion of patents held by other firms) (Bessen et al., 2011–12; Bessen and Meurer, 2014). But it is not clear in principle that patent portfolios held by NPEs are more pernicious than those held by operating companies (Lemley and Melamed, 2013). The distinction between NPEs and operating companies may be illusory, as NPEs may be acting on behalf of the operating companies that sell patents to them, obtain licenses from them, and invest in them (Ewing and Feldman, 2012; Lemley and Melamed, 2013). To the extent that patent aggregators lower the transaction costs of patent assertion, they may aggravate risks of underuse in fields characterized by extensive patenting. This is because transaction costs faced by those who assert patents (e.g., the costs of identifying infringers and pursuing them with demand letters and lawsuits) protect users by making assertions less likely, thus mitigating the risk of underuse (Eisenberg, 2008, 2011). Patent aggregators may be acquiring patents from owners that would otherwise be unlikely to assert their rights (McDonough, 2006), perhaps because they lack resources for litigation. Transfer of these rights to aggregators increases the liability risks faced by operating companies and shifts to technology users the burden of clearing rights that they might otherwise have safely ignored. Sale of these patents may increase the rewards to innovators by providing a market for their rights, but it also increases the risk of an anticommons. Indeed, Lemley and Melamed (2013) argue that the growth of a secondary market for patents has likely increased incentives for inventors to seek patents, thus contributing to an increase in the total number of patents. There are many reasons why patent aggregators may face lower assertion costs than the prior owners whose rights they acquire. They may have greater expertise in the strategic moves of patent assertion. At the same time, if they are NPEs they may feel undeterred by industry norms of forbearance from infringement litigation. Litigation costs may also be higher for operating firms that need to divert the attention of personnel who would ­otherwise be available for other more valuable tasks than for firms whose primary business is patent assertion. Aggregators may also enjoy economies of scale in patent assertion. If a user receives a demand letter asserting a single patent, it may be worth investing in a prior art search or opinion letter to determine whether the patent is valid or infringed, but if the demand letter comes from an aggregator with a large number of patents in its portfolio, the cost of such scrutiny could be prohibitive. Increasing portfolio size thus diminishes the likelihood that patent owners will face effective pushback for asserting low quality patents (Eisenberg, 2011) or patents that are not infringed.5 Put differently, in the absence of a robust secondary market for patents, fragmentation 5   Studies suggest that large non-practicing entities target defendants based on ability to pay cash settlements rather than likelihood of infringement of asserted patents. See, e.g., Risch (2012) at 484 (findings of infringement are rare in merits rulings in litigation by non-practicing entities, consistent with other studies); Cohen et al. (2015) at 17–24 (large non-practicing entities are more likely to target defendants that are flush with cash irrespective of infringement).

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Anticommons, transaction costs, and patent aggregators  37 of rights may leave many patents in the hands of owners that are unlikely to overcome the transaction costs of enforcing their rights. These patents may do little to promote innovation if they are never asserted or licensed, but they also are unlikely to lead to underuse of technology, because users can ignore them with little risk of liability. The rise of patent aggregators creates a market for these patents and consolidates them in the hands of owners that can enforce the rights at lower cost. This makes assertion more likely, which in turn increases the transaction costs and information costs facing users who can no longer assume that it is safe to ignore patents. As the number of patents that might be asserted against a user grows, the burden of identifying relevant patents and determining whether they are valid and infringed also grows. Aggregation may diminish the number of distinct owners of the rights that a user might be infringing, but if aggregation makes assertion more likely, it could nonetheless increase the transaction costs burden on users compared to the situation of fragmented ownership of the same rights. Moreover, new patents are constantly arising, and in the current market there are likely to be multiple aggregators asserting rights against the same operating firms. It is thus unlikely that aggregation will entirely relieve users of the risk of strategic holdouts and royalty-stacking. On the other hand, operating firms may be more likely than NPEs to use their patent rights for strategic purposes that result in excessive burdens on competitors (Lemley and Melamed, 2013). More generally, as large patent portfolios become more common and even necessary for operating technology companies, firms will continue to pursue larger numbers of patents, overwhelming the quality control mechanisms of the Patent and Trademark Office, disadvantaging small firms and new entrants, and adding to the information costs and transaction costs associated with innovation and the use of new technologies (Parchomovsky and Wagner, 2005). The growing size of patent portfolios owned by aggregators will also increase the cost of discerning whether included patents are complements or substitutes, calling into question the feasibility of using antitrust law to prevent the use of aggregation for improper anticompetitive purposes (Shapiro, 2001). If patent aggregation increases transaction costs rather than reducing them, it may prove more difficult for markets to figure out strategies to mitigate the inefficiencies arising from a proliferation of patent rights in a field. On the other hand, as Barnett (2015) and others have recounted, many innovative fields have flourished in the face of extensive patenting, including information and communications technology in the current era. Perhaps these fields would have seen even more innovation without having to face the transaction costs and strategic holdout problems arising from patent thickets. But the rate of actual technological progress suggests that these problems on balance have not been tragic in these fields.

IV.  CHANGES TO MITIGATE ANTICOMMONS RISKS The foregoing discussion suggests reasons to worry that the transaction costs of clearing numerous IP rights might pose an obstacle to socially valuable innovations in some circumstances. These costs arise not only from the burden of finding and bargaining with multiple rights holders who hold overlapping and fragmented rights, but also from the need to determine which rights are valid and infringed. The burden of determining ­validity

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38  Research handbook on the economics of IP law volume 1 and infringement is particularly significant for the patent system because the scope and validity of patent rights is often unclear (Bessen and Meurer, 2008). Aggregation of patent rights in the hands of a smaller number of owners may reduce the burden of finding and negotiating with multiple rights holders and reduce bargaining externalities that can lead to excessive royalty demands but it does not diminish the costs of determining the scope and validity of asserted rights. A number of changes have occurred since the publication of Heller and Eisenberg (1998) that have mitigated these risks. Some of these changes have come about through administrative and judicial restrictions on ‘upstream’ patents, some have been byproducts of legislative and judicial efforts to curtail the power of ‘patent trolls,’ and some have come from initiatives to improve patent quality. This section reviews some of these changes that may have forestalled anticommons risks. A.  Limits on ‘Upstream’ Rights and Assertions The picture of an anticommons as the result of fragmentation suggests poorly designed rights that are not properly scaled and have boundaries that do not correspond to likely uses. Heller and Eisenberg (1998) highlighted the example of expressed sequence tags, or gene fragments, that were unlikely to be useful as standalone products but would only be used in combinations that could be difficult to assemble in the presence of disaggregated ownership of rights. More generally, they worried that too many patents on ‘upstream’ research discoveries might impede ‘downstream’ product development. A number of initiatives sought to curtail a proliferation of patents in the specific context of genomic discoveries. The US National Institutes of Health (NIH), in cooperation with counterparts from around the world, undertook concerted efforts to ensure that genomic data generated in the course of the Human Genome Project would be made promptly and freely available in the public domain (Contreras, 2014). The US Patent and Trademark Office (PTO) further addressed the particular problem of patent applications on gene fragments at a time when many such patent applications were pending through implementing examiner training materials and guidelines that provided a framework for examiners to reject these applications (US Patent and Trademark Office, 2001). In an approach that was ultimately approved by the Court of Appeals for the Federal Circuit (Federal Circuit), the PTO expanded upon its interpretation of the ‘utility’ requirement for patentability so as to prevent allowance of patents on newly discovered gene fragments without disclosure of particular biological functions associated with those genes (In re Fisher, 421 F.3d 1365 (Fed. Cir. 2005)). Restrictions on the patenting of gene fragments was also the focus of a trilateral study by the European Patent Office, the Japan Patent Office, and the US PTO (Trilateral Study B3b, 2000). More generally, Heller and Eisenberg (1998) worried that too many ‘upstream’ patents procured by recipients of federal research funding following the Bayh-Dole Act of 1980 could paradoxically interfere with ‘downstream’ product development as a result of aggressive patent assertions. NIH promptly sought to discourage restrictive patenting and licensing practices on the part of its grantees through a variety of hortatory statements (Rai and Eisenberg, 2003; Department of Health and Human Services, 1999). Leaders in the university technology transfer community also sought to address this problem through dissemination of best practices to promote widespread availability of research

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Anticommons, transaction costs, and patent aggregators  39 results and to control aggressive assertions of ‘upstream’ patents that might interfere with downstream product development (California Institute of Technology et al., 2007). In addition to these efforts within the research community and the science agencies, the Federal Circuit invalidated a number of prominent university patents through its interpretations of patent law.6 In particular, the Federal Circuit fortified the statutory requirement that a patent application must include a ‘written description’ of the invention in a series of decisions invalidating broad university patents on basic research discoveries with claims that potentially dominated the products of drug companies (Mueller, 1998). More recently, the US Supreme Court has limited the availability of patents on fundamental research discoveries through robust enforcement of traditional exclusions from patentable subject matter for natural laws, natural products, and abstract ideas.7 The effect is to limit the power of upstream patents over downstream products, protecting product developing firms against patent assertions and limiting the number of upstream rights that they need to clear. B.  Limits on Injunctions A prominent worry in the anticommons literature is that individual patent holders will try to use their exclusionary rights to extract excessive shares of the potential gains from aggregation, creating a risk that valuable deals will not get done (Lemley and Shapiro, 2007). This concern has been diminished by the decision of the US Supreme Court in eBay v. MercExchange (2006), which made it more difficult for patent holders to obtain injunctions against infringers. Prior to that decision, the general rule in the Federal Circuit was that a prevailing patent holder was ordinarily entitled to a permanent injunction. After eBay, a patent holder seeking injunctive relief must demonstrate (1) that it has suffered an irreparable injury, (2) that money damages are inadequate to compensate for that injury, (3) that the balance of hardships indicates that the equitable remedy of an injunction is warranted, and (4) that the public interest would not be disserved by an injunction. In a concurring opinion, four justices noted in particular that a near-automatic injunctive remedy might give too much power to opportunistic patent holders to hold out for excessive settlement payments.8 6   See, e.g., Regents of the University of California v. Eli Lilly, 119 F.3d 1333 (Fed. Cir. 1997); University of Rochester v. G.D. Searle, 358 F.3d 916 (Fed. Cir. 2004); Ariad Pharmaceuticals v. Eli Lilly, 598 F.3d 1336 (Fed. Cir. 2010). 7   See, e.g., Mayo Collaborative Services v. Prometheus Laboratories, 566 U.S. 66 (2012); Ass’n for Molecular Pathology v. Myriad Genetics, 569 U.S. 576 (2013). 8   See eBay v. MercExchange (2006), 547 U.S. at 396–97:

  An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. . ..For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patents. [ ] When the patent invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest. (concurring opinion of Justice Kennedy, joined by Justice Stevens, Justice Souter, and Justice Breyer).

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40  Research handbook on the economics of IP law volume 1 This controversial decision arguably puts US patent law in violation of international agreements that set limits on compulsory licensing of patents (Cotropia, 2008; Dinwoodie and Dreyfuss, 2012). On the other hand, it diminishes the risks faced by unlicensed users by weakening the holdup power of patent owners. Product developing firms might therefore be more willing to invest in fields characterized by patent thickets without clearing all potentially infringed rights through ex ante licensing, if they figure that courts will give them a better deal in setting damages than patent holders would require to relinquish their injunctions. C.  Lowering Information Costs Another source of costs for subsequent innovators arising from a proliferation of patents is the sheer burden of figuring out what patent rights are relevant to a particular project (Bessen and Meurer, 2008). Although patents are public documents that typically disclose the identity of the inventor and initial assignee, it is costly to search for relevant patents, to analyse validity and infringement to determine which rights are necessary to clear, and to identify current owners (Eisenberg, 2011). These costs may be worth incurring if a firm is about to launch a lucrative new drug, but not if the values at stake are uncertain and speculative. Some of these costs could be lowered through law reform measures to make the scope of patent rights clearer and to maintain updated records of ownership and assignments. Although the US patent statute requires that patents include claim language ‘particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention,’ (35 U.S.C. § 112), claim interpretation in the courts has become a highly indeterminate practice, leaving substantial uncertainty as to what a patent covers until the conclusion of appellate review (Saunders, 2007; Schwartz, 2008). The Federal Circuit left considerable room for ambiguity by minimizing the requirement for definiteness of claim language, holding that a patent claim was invalid for lack of definiteness only when its language was ‘not amenable to construction’ or ‘insolubly ambiguous’ (Exxon Research and Engineering Co. v. United States, 265 F.3d 1371, 1375 (2001)). Recent Supreme Court decisions reversed this approach, replacing the ‘insolubly ambiguous’ standard with a new rule that ‘a patent is invalid for indefiniteness if its claims, read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty those skilled in the art about the scope of the invention’ (Nautilus v. Biosig Instruments, 134 S. Ct. 2120, 2124 (2014)). Shortly thereafter, the Supreme Court again reversed the Federal Circuit’s approach to claim interpretation, holding that the Federal Circuit must defer to factual determinations made by District Courts in the course of claim interpretation (such as determinations of the meaning of claim language to a person working in the field of the invention) (Teva Pharmaceuticals USA v. Sandoz, 135 S. Ct. 831 (2015)). Taken together, these two decisions promised to make claim interpretation more predictable and to provide greater certainty at an earlier stage in litigation without the need for appellate review, thus reducing the costs to innovators of determining whether they are infringing any patent rights. Initial observations suggest, however, that these decisions have had minimal impact on the claim interpretation practices of the Federal Circuit (Rantanen, 2015).

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Anticommons, transaction costs, and patent aggregators  41 On the other hand, the Federal Circuit has been more willing than the Supreme Court to reduce uncertainty about the scope of patent coverage through restrictions on the doctrine of equivalents. The doctrine of equivalents is an old infringement doctrine that predates modern patent claiming practice and allows infringement liability even when the defendant’s technology is not covered by the literal language of the patent claims if the differences are insubstantial (Warner-Jenkinson v. Hilton Davis Chemical, 520 U.S. 17 (1997)). The Federal Circuit has significantly curtailed the operation of the doctrine of equivalents over the years, making the coverage of patents correspond more closely to the claims (Allison and Lemley, 2007). But literal claim interpretation itself has remained a stubbornly indeterminate exercise, leaving considerable uncertainty about the technological scope of patents. Uncertainty about the coverage of patent claims is partly due to the inherent difficulty of defining new technologies in words. But it is also partly a result of strategic use of ambiguous language by patent applicants in order to retain flexibility in asserting their patents against future competitors who may use unforeseen technological variations. This flexibility comes at a considerable cost of uncertainty. The burden and risk for future innovators rise quickly as the number of patents that might be asserted against them increases. To the extent that courts make clear that they are unwilling to expand the effective reach of patents, whether through flexible interpretation of vague claim language or through liberal use of the doctrine of equivalents, future patent applicants may find it advantageous to do a better job of defining their inventions clearly in their claims. If this happens, users will be able to determine more easily just what a patent covers. Some reformers have also argued for legal changes that would increase publicly available information about patent ownership, assignments, and licenses (US Patent and Trademark Office, 2011). Although current law permits the parties to record a patent assignment and thereby cut off the interest of any subsequent bona fide purchaser (35 U.S.C. § 261), assignments are rarely recorded, leaving uncertainty about the current ownership of patents. Recording requirements are more common for interests in real property. As secondary markets for patents have grown with the rise of patent assertion entities, this gap in the public record has become more problematic. Future innovators who cannot determine who owns patents they may be infringing may be unable to clear rights ex ante, leaving them more vulnerable to holdup after they have incurred sunk costs  (Green and  Scotchmer, 1995). Federal recording requirements for patents would reduce the information costs facing potential infringers who want to clear rights (Glovsky, 2012). D.  Lowering the Costs of Patent Challenges The Leahy-Smith America Invents Act (2011) introduced new administrative procedures for challenging the validity of issued patents before an ­ administrative tribunal within the PTO.9 These proceedings are quicker and cheaper than

 9   These new proceedings include post-grant review during the first nine months after patent issuance, codified as amended at 35 U.S.C. §§ 321–9, inter partes review more than nine months

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42  Research handbook on the economics of IP law volume 1 litigation10 and have been surprisingly popular and effective as a means of invalidating patents (Carniaux and Sander, 2015). They offer a number of benefits for patent challengers relative to litigation, including an accelerated time frame for resolution (12 months from institution of the proceeding until final decision (35 U.S.C. §§ 316(a)(11), 326(a)(11)), rather than years for litigation), and a lower burden of proof (preponderance of the evidence (35 U.S.C. §§ 316(e), 326(e)), rather than the clear and convincing evidence required to establish invalidity at trial (Microsoft v. i4i Ltd, 131 S. Ct. 2238 (2011))). But even with these advantages, using these new proceedings can still cost hundreds of thousands of dollars per patent (American Intellectual Property Law Association, 2015). The goal of these new proceedings was to address the problem of patent quality, while the primary concern in the anticommons story is about excessive quantities of patents. But quantity and quality are related. As the quantity of patent applications has increased, PTO resource constraints make it more difficult for examiners to scrutinize each application with care, setting the stage for allowance of patents that closer scrutiny would reveal to be invalid. This may be tolerable if most patents are never asserted, and if users can, at reasonable cost, evaluate those patents that are asserted for validity and infringement before agreeing to pay royalties. But an opinion letter evaluating validity and infringement costs approximately $15,000 per patent (American Intellectual Property Law Association, 2015). As the quantity of asserted patents increases, it becomes unrealistic for users to provide an effective quality check at the point of assertion. If information costs are high enough, quantity in effect becomes a substitute for quality, giving patent aggregators the power to extract payments from risk-averse firms without regard to the merits of their patent infringement claims. The problems created by large numbers of patents are not limited to the costs of negotiating with multiple owners and are not resolved by aggregation of patents in the hands of a smaller number of owners. Quite the contrary, aggregation may increase the risk of underuse by facilitating assertion of patents that could otherwise be ignored. Some of these patents may be valid, and these rights should be licensed in order to provide a return to their owners, but others may be invalid or irrelevant to the activities of firms against which they are asserted. Large numbers of patents threaten to overwhelm the quality control mechanisms that allow patent owners, technology users, and antitrust authorities to separate the wheat from the chaff. Determinations of validity and infringement have remained stubbornly unpredictable, defying efforts to develop lower cost strategies for figuring out which rights need to be cleared.

after patent issuance, codified as amended at 35 U.S.C. §§ 311–19, and a transitional program in effect until 2020 utilizing post-grant review for covered business method patents (Leahy-Smith America Invents Act of 2011, Pub. L. No. 112-29, § 18(a), 125 Stat. 284). See U.S. Patent and Trademark Office (2012); Menell et al. (2015) at 14-29–14-33. 10   Recent estimates from the American Intellectual Property Law Association (2015) give a median cost of $350 million for pursuing post-grant proceedings through appeal, and a cost range for defending a patent infringement action of $500,000 to $375,000.

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Anticommons, transaction costs, and patent aggregators  43

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Anticommons, transaction costs, and patent aggregators  45 Maurer, Stephen M. 2006. ‘Inside the Anticommons: Academic Scientists’ Struggle to Build a Commercially Self-Supporting Human Mutations Database, 1999–2001,’ 35 Research Policy 839–53. McDonough, James F. III. 2006. ‘The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy,’ 56 Emory Law Journal 189–228. McLeod, Kembrew, and Peter DiCola. 2011. Creative License: The Law and Culture of Digital Sampling. Durham and London: Duke University Press. McManis, Charles R., and Brian Yagi. 2014. ‘The Bayh-Dole Act and the Anticommons Hypothesis: Round Three,’ 21 George Mason Law Review 1049–91. Menell, Peter, et al. 2015. Patent Case Management Judicial Guide. 3d ed. Clause 8 Publishing. Merges, Robert P. 1996. ‘Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,’ 84 California Law Review 1293–393. Merz, Jon F., Antigone T. Kriss, Debra G.B. Leonard, and Mildred K. Cho. 2002. ‘Diagnostic Testing Fails the Test: The Pitfalls of Patents Are Illustrated by the Case of Haemochromatosis,’ 415 Nature 577–99. Mowery, David C., and Arvids A. Ziedonis. 2007. ‘Academic Patents and Materials Transfer Agreements: Substitutes or Complements?,’ 32 Journal of Technology Transfer 157–72. Mueller, Janice M. 1998. ‘The Evolving Application of the Written Description Requirement to Biotechnological Inventions,’ 13 Berkeley Technology Law Journal 615–52. Murray, Fiona. 2006. ‘The Oncomouse that Roared: Resistance and Accommodation to Patenting in Academic Science,’ retrieved on March 22, 2019, http://fmurray.scripts.mit.edu/docs/THE_ONCOMOUSE_THAT_ ROARED_FINAL.pdf. Murray, Fiona, and Scott Stern. 2007. ‘Do Formal Intellectual Property Rights Hinder the Free Flow of Scientific Knowledge? An Empirical Test of the Anti-Commons Hypothesis,’ 63 Journal of Economic Behavior and Organization 647–87. Nicol, Dianne, and Jane Nielsen. 2003. ‘Patents and Medical Biotechnology: An Empirical Analysis of Issues Facing the Australian Industry,’ retrieved on April 3, 2019, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2583508. Parchomovsky, Gideon, and R. Polk Wagner. 2005. ‘Patent Portfolios,’ 154 University of Pennsylvania Law Review 1–77. Parente, Michael, and Abel M. Winn. 2012. ‘Bargaining Behavior and the Tragedy of the Anticommons,’ 84 Journal of Economic Behavior & Organization 475–90. Parisi, Francesco, Norbert Schulz, and Ben Depoorter. 2005. ‘Duality in Property: Commons and Anticommons,’ 25 International Review of Law and Economics 578–91. Parisi, Francesco and Catherine Sevcenko. 2001–02. ‘Lessons from the Anticommons: The Economics of New York Times Co. v. Tasini,’ 90 Kentucky Law Journal 295–328. Peters, Marybeth. 2004. ‘Statement of Marybeth Peters the Register of Copyrights before the Subcommittee on Courts, the Internet and Intellectual Property of the House Committee on the Judiciary,’ 108th Congress, 2d Session, retrieved on Dec. 17, 2015, http://copyright.gov/docs/regstat031104.html. Rai, Arti K., and Rebecca S. Eisenberg. 2003. ‘Bayh-Dole Reform and the Progress of Biomedicine,’ 66 Law & Contemporary Problems 289–314. Rantanen, Jason. 2015. ‘Teva, Nautilus, and Change without Change,’ 18 Stanford Technology Law Review 375–93. Risch, Michael. 2012. ‘Patent Troll Myths,’ 42 Seton Hall Law Review 4267–99. Samuelson, Pamela. 2011. ‘The Google Book Settlement as Copyright Reform,’ 2011 Wisconsin Law Review 479–562. Saunders, Michael. 2007. ‘A Survey of Post-Phillips Claim Construction Cases,’ 22 Berkeley Technology Law Journal 215–40. Schulz, Norbert, Francesco Parisi, and Ben Depoorter. 2003. ‘Fragmentation of Property: Towards a General Model,’ 159 Journal of Institutional and Theoretical Economics 594–613. Schwartz, David L. 2008. ‘Practice Makes Perfect? An Empirical Study of Claim Construction Reversal Rates in Patent Cases,’ 107 Michigan Law Review 223–84. Schwartz, David L. 2014. ‘On Mass Patent Aggregators,’ 114 Columbia Law Review Sidebar 51–69. Shapiro, Carl. 2001. ‘Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting,’ in Adam Jaffe, Josh Lerner, and Scott Stern, eds., Innovation Policy and the Economy, vol. 1. Cambridge, MA: MIT Press. Soini, Sirpa, Segolene Ayme, and Gert Matthijs. 2008. ‘Patenting and Licensing in Genetic Testing: Ethical, Legal and Social Issues,’ 16 European Journal of Human Genetics S10–S50. Stewart, Steven, and David J. Bjornstad. 2002. ‘An Experimental Investigation of Predictions and Symmetries in the Tragedies of the Commons and Anticommons,’ Joint Institute for Energy and Environment Report No. JIEE 2002–07, retrieved on Apr. 3, 2019, http://isse.utk.edu/pdf/jieepubs/2002_07Experiment.pdf. Straus, Joseph, H. Holzapfel, and M. Lindenmeir. 2004. Genetic Inventions and Patent Law: An Empirical Survey of Selected German R&D Institutions. Munich: Verlag Medien Design. Trilateral Study B3b. 2000. Comparative Study on Biotechnology Patent Practices: Theme – Patentability of

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46  Research handbook on the economics of IP law volume 1 DNA Fragments, retrieved on Dec. 21, 2015, http://www.trilateral.net/projects/biotechnology/patentability. pdf. U.S. Copyright Office. 2015. Orphan Works and Mass Digitization, retrieved on Dec. 15, 2015, http://copyright. gov/orphan/reports/orphan-works2015.pdf. U.S. Patent and Trademark Office. 2001. Utility Examination Guidelines, 66 Federal Register 1092–9. U.S. Patent and Trademark Office. 2011. Request for Comments on Eliciting More Complete Patent Assignment Information, 76 Federal Register 72372–4. U.S. Patent and Trademark Office. 2012. Changes to Implement Inter Partes Review Proceedings, Post-Grant Review Proceedings, and Transitional Program for Covered Business Method Patents, 77 Federal Register 48680–731. Van Houweling, Molly Shaffer. 2010. ‘Author Autonomy and Atomism in Copyright Law,’ 96 Virginia Law Review 549–642. Vanneste, Sven, Alain Van Hiel, Francesco Parisi, and Ben Depoorter. 2006. ‘From “Tragedy” to “Disaster”: Welfare Effects of Commons and Anticommons Dilemmas,’ 26 International Review of Law and Economics 104–22. Walsh, John P., Ashish Arora, and Wesley M. Cohen. 2003. ‘Effects of Research Tool Patents and Licensing on Biomedical Innovation,’ in Wesley M. Cohen and Stephen A. Merrill, eds., Patents in the Knowledge-Based Economy. Washington: National Academies Press. Walsh, John P., Wesley M. Cohen, and Charlene Cho. 2007. ‘Where Excludability Matters: Material versus Intellectual Property in Academic Biomedical Research,’ 36 Research Policy 1184–203. Williams, Heidi L. 2013. ‘Intellectual Property Rights and Innovation: Evidence from the Human Genome,’ 121 Journal of Political Economy 1–27. Yeh, Brian T. 2015. ‘Copyright Licensing in Music Distribution, Reproduction, and Public Performance,’ Congressional Research Service, retrieved on Dec. 17, 2015, https://www.fas.org/sgp/crs/misc/RL33631.pdf. Ziedonis, Rosemarie H. 2004. ‘Don’t Fence Me In: Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms,’ 50:6 Management Science 804–20.

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3.  Governing intellectual property Henry E. Smith* 1

Contents I. Property as Platform II. Fluid Property and the Need for Governance III. Governance of Intellectual Property A. Patent Versus Copyright B. Licensing C. Governance Through Equity D. Group Institutions IV. Conclusions References The ‘property’ in intellectual property has been nothing if not controversial. Stressing the property element in intellectual property is often assumed to amount to a call for overly strong protection for creators and inventors. Intellectual property skeptics believe that an overemphasis on property in this area results from rent-seeking, mistaken thinking, or misplaced metaphors from the world of tangible property. Information is different. Because information is nonrival, exclusion rights over it come at the cost of preventing harmless use. As long as they do not incur the costs of exclusion rights thought to be characteristic of property, other institutions already have a head start. An apparent counterpoint to property talk and property thinking is the notion of governance. Although ‘governance’ is a term with many meanings, several related notions stand out in potential contrast to exclusion rights. A commons is often governed by a group of user-participants, and accordingly Nobel laureate Elinor Ostrom’s (1990) landmark book exploring this institutional arrangement is titled Governing the Commons (see also Rose, 2011). What constitutes governance more generally covers a wide spectrum. We speak of corporate governance and governance in a public law setting. Closest to intellectual property, information-related activities can be governed through many types of institutions. These include public regulation and private contract. They even include customs and norms. Putting the idea of governance together with the inherent drawbacks of exclusive rights in property, and one might say that there is a presumption in favor of commons or the public domain, which then can be ‘governed’ in various ways.

*  Fessenden Professor of Law and Director of the Project on the Foundations of Private Law, Harvard Law School. Email: [email protected]. I thank the participants at the Research Handbook Conference at the University of California, Berkeley, School of Law for helpful comments and Andrew Lewis for excellent research assistance. All errors are mine.

47

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48  Research handbook on the economics of IP law volume 1 This picture, while in many ways admirably broad, is still incomplete. Far from being at odds with property, governance is an important aspect of property itself. Exclusion and governance are typically mixed together in regular property (Smith, 2002). In order to understand what property does and does not offer in the area of information, we need to be clear on how these strategies work – and how they can work together. In this chapter, I will revisit the question of the governance of informational resources from the point of view of property and systems theory. Instead of being contradictory or mutually exclusive, property and governance overlap. The governance of uses is one end of a spectrum of strategies employed within property law. What sets intellectual property apart is the fluid nature of the resource. As in oil and gas, water, and radio spectrum, the separation of uses is more difficult and less desirable in general than in the case of land and tangible personal property. Indeed, property can be seen in part as a law of separation: it manages conflict and allows for specialization by separating things from their surroundings, classes of uses from each other, and various functions from each other (e.g. management and beneficial use) (Smith, 2017). Particularly prominent is the separation into modules associated with thinghood and the adoption of exclusion strategies for delineating rights. In the case of fluid resources, the problems with and difficulties of separation and exclusion lead the law to shift more readily to governance strategies than in the case of non-fluid property. This chapter will explore the structure of property and governance in intellectual property. Section I will set the stage by noting several notions of governance and the role they play in property theory. Regular property mixes exclusion and governance, and provides a modular structure for managing the interaction of actors with respect to things. Section II draws out the special challenges of fluid property, of which intellectual property is a prominent type, and will show how these special challenges call for complex forms of governance to facilitate use by multiple parties while containing opportunism. Governance is often required where multiple regimes overlap in fluid property, especially when common and private rights interact, in a semicommons. In Section III, I apply this framework to intellectual property. The role of governance in managing multiple use explains some differences between patent and copyright, patterns in intellectual property licensing, the role of equity in intellectual property, and the importance of collectiverights organizations.

I.  PROPERTY AS PLATFORM Property is such a controversial notion that contention even surrounds what property is. I will argue for the usefulness of a notion of property that takes the notion of separation as central. Characteristic of property law is the separation of clusters of resource-related activities for treatment in partial isolation of their context, in modular fashion. Most basic and prominent is the separation from legal things from their background context. This is far from the end of the story, though. Even in the definition of a legal thing, intellectual property is partially (but only partially) similar to tangible property (Madison, 2005; Smith, 2007a, 2012; Van Houweling, this volume). What property law requires is a legal ontology – a set of persons, activities, and things that are the units in which the law is framed. In a world of zero transaction

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Governing intellectual property  49 costs (Coase, 1960), we could imagine that the notion of thing would be far less important than it is in our world. For all possible activities of all people in society, the potential conflicts between and among them could be handled directly by contract – directly in the sense that the contracts would make reference to persons and activities without the need to define more abstract and formal notions like a thing. Proceeding in this fashion would likely be intractable (can intractability be overcome by contract in the zero transaction world?), and so in our world separating out clusters of activities into chunks – modules – through the definition of things is a massive shortcut (Lee and Smith, 2012). Thus, a person can be protected in a wide variety of activities with respect to a car from a wide variety of activities of others generally, by defining the rights and duties availing between the possessor (or owner) and everyone else through the car (Penner, 1997). Not literally through the car, but through a legal thing that closely corresponds to a car. Indeed, the legal ontology tracks everyday ontology closely in the case of personal property (although we need the law of accession to know, for example, that a calf goes to the owner of its mother) (Smith, 2015a).1 In the case of real property, more effort at legal delineation is required: physical boundary markers and surveys help define the legal thing we call a parcel. There is likely to be more error and more dispute here precisely because there is more delineation required to get from the world of actual things to legal things (Libecap and Lueck, 2011). Intangibles and intellectual property are, as is well known, even more difficult to delineate in legal terms (Fromer, 2009; Menell, 2011). Defining things is notoriously challenging in intellectual property, although, as we will see, these difficulties differ by area of intellectual property. Thus, copyright things (expressions) are quite ethereal, and copyright law defines rights more in terms of use than does patent law. In principle, an invention may be easier to define than an expression – and it serves as more of a shorthand over a wide range of uses (make, use, sell), but the delineation is quite problematic compared to personal and even real property (Bessen and Meurer, 2008; Menell and Meurer, 2013). The difficulty of delineating things in this area is closely related to the extended notion of ‘possession’ required for intangibles, which must key off notions of notice (copyright) and enablement and other disclosure (patent) (Van Houweling, this volume; Holbrook, 2006). And violations of rights do not announce themselves in the area of rights in intangibles, the way they do with rights over rival, tangible resources. Nevertheless, what thing-definition is doing here, however well or poorly, is to pick out sets of activities for bulk treatment. To see how indirect thing-definition can be in patent law, consider patents on tennis rackets. The tennis racket is an everyday object and not a very controversial item in most people’s ontology, even if there may be borderline cases (a squash racket used for a tennis game?). When it comes to incremental inventions relating to tennis rackets, the story is different. In Athletic Alternatives, Inc. v. Prince Mfg., Inc., 73 F.3d 1573 (Fed. Cir. 1996), a string system design company sued a racket manufacturer, alleging infringement of a patent on a splayed racket with a string pattern of offsetting attachment locations to the

1   In recent times there has been an upsurge in interest in how the law of accession intersects with intellectual property (Lee, 2011; Merrill, 2009, pp. 468–9; Newman, 2011; Smith, 2007a, pp. 1766–77).

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50  Research handbook on the economics of IP law volume 1 racket in which the offset distance ‘varies between’ a minimum and maximum distance. The allegedly infringing racket had two positions for string attachment that alternated, and the Federal Circuit upheld summary judgment of no infringement because on a narrow reading two positions do not ‘vary’ according to the specification. The case involved a complicated prosecution history and possibly ambiguity in the claim, and the court was perhaps penalizing ambiguity by adopting the narrower reading. The point in terms of delineation is that little of this tracks everyday understanding, and as a method of picking out various activities – by using the ‘invention’ as defined in part by this exercise in construction – it is very indirect and delicate indeed. As we will see, because thing-definition in intellectual property does not get as far as in regular property, governance plays a larger role relative to exclusion in intellectual property. In patent law, much of the definition has to occur ex post, where uses can be evaluated. Prominently and controversially, the doctrine of equivalents sometimes adds scope to prevent evasion of the literal boundaries, and in an earlier era the doctrine of equivalents played a larger role in cutting back on scope for potentially opportunistic patentees (Ellis, 1949, § 216). Alternatively, one might say that thing-definition itself is more a matter of governance in intellectual property (Collins, 2008). This is dramatically true of trademark. Is the mark a thing, and if so in what sense? We cannot really know what the thing is unless we know what others are doing in the ‘vicinity’ – what kinds of marks they are using for what kinds of business in what locations. Nonetheless, it is safe to say that governance is doing more work here than it would if it were possible to define a robust thing less tied to the context of use. By separating out clusters of activities, we can use a relatively easy-to-measure activity with respect to a thing as a proxy for harm that triggers the violation of a right over those activities. This is dramatically so in the case of exclusion strategies. Thus, crossing the boundary of Blackacre, damaging (or sometimes harmfully touching) an item of personal property, and making, using, or selling a patented invention, trigger violations in a way less costly to delineate, observe, and enforce than if one had to separately track the activities they stand in for. The exclusion strategy has the advantage of relative cheapness, and it allows the owner to become the residual claimant over those activities. Characteristically, property law begins with things and defines rough and ready exclusion strategies to protect their use value: torts like trespass and actions like replevin use relatively simple on/ off signals for violation of the holder’s right. But there is a big price. Because the activities that serve as a basis for finding violations of the right are just proxies for harm, the proxies will be over- and underinclusive with respect to the underlying activities we care about. This is true in the case of tangible property and even more true of intellectual property. The proxies are underinclusive in that many uses can be interfered with, without the triggering of the boundary crossing: not all nuisances involve boundary crossing by tangible objects – for example loud noises. The boundary-related proxies are overinclusive in the sense that not all intruders barred by the law of trespass would cause actual harm to the possessor’s uses (Ellickson, 1993). And more subtle coordination of uses, such as uniform door color, cannot be brought about by employing exclusion strategies. Here is where governance comes in. When a problem involving use conflicts becomes important enough, it makes sense to shift to the more costly but more refined governance strategies, which unlike exclusion strategies, do condition violation on proxies closely

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Governing intellectual property  51 tied to types of uses (Smith, 2004, 2007a). Rights to exclude are not absolute in regular property (Carrier, 2004). Exclusion gives way at some point to governance, and one form this can take is exceptions to the right to exclude (Merrill and Smith, 2010, pp. 74–84). The strategies fall along a spectrum; in a sense, exclusion is very crude governance and governance is fine-grained exclusion. Thus, nuisance, covenants, and zoning all zoom in on proper use. As we will see, when it comes to fluid property, the move from exclusion to governance happens not only more quickly, but in characteristic ways. The goal is to find the least bad proxies in light of both benefits and costs. In the case of regular property, many, including virtually all law-and-economics commentators, see property as serving the interest in the use of things. (This should be construed broadly to include preservation and existence value.) In the case of rival resources, uses conflict, and property serves in part to resolve those conflicts. If property employs an exclusion strategy, it is not because there is an inherent value to exclusion; exclusion is only justified if it is the most cost-effective method of resolving conflicts over uses. Exclusion as a strategy is indirect (Smith, 2009, 2011): we could imagine, in a zero transaction cost world, a law that directly resolved the conflict between any two activities. In our world, this would be prohibitively expensive, though. In addition, property in general and exclusion strategies in particular serve to protect owners’ investments and to provide a foundation for contract. The indirectness of the strategy is clear when we consider how these investments could be rewarded publicly or contracted over privately on a case-by-case basis. This more direct strategy would require an elaborate system of tracing the contribution of investment to consumer welfare, and, again proceeding this way would be prohibitively expensive most of the time. How does exclusion fit, if at all, into intellectual property? First, there is no allocation problem because the use of information itself is nonrival.2 Thus ‘conflicting uses’ cannot have the same meaning or role as it does in regular property. Nevertheless, how to pick proxies in order to protect investments and allow people to contract over their information-related activities does present a problem for which exclusion can in principle play some role, leaving open important empirical questions. Thus, in some areas of intellectual property, with patent law being the most prominent example, some theorists argue that commercialization is important in addition to or instead of the ‘reward’ that conventionally forms the rationale for intellectual property (Rich, 1942; Kieff, 2001; Sichelman, 2010). Exclusion has an asset-partitioning function in intellectual property (Heald, 2005). By employing proxies that give a residual claim over the return from a cluster of attributes of information, one can indirectly define rights to the return from rival inputs to commercialization, such as labor and materials that go into marketing. Moreover, this ability to appropriate the return from a cluster of attributes can be packaged and transferred, and it is likewise easier to transfer this bundle than a bundle of residual claims to articulated rival resources (which would otherwise require tracing through the commercialization 2   The nonrivalness of information counts in favor of certain alternatives to intellectual property, if the question is rewards for invention (Abramowicz, 2003; Duffy, 2004). Commercialization theory, as an alternative to reward theory, is a much more complex question, to which I return below. Nonrivalness of information also presents problems in getting people to reveal their values (Yoo, 2007).

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52  Research handbook on the economics of IP law volume 1 process) (Merges, 2005; Liivak, 2013). In general, exclusion promotes alienability in regular property law and contributes to the function of promoting transactions identified in the literature on patents. Exclusion’s indirectness is a double-edged sword. It is a relatively low-cost way to get at the commercialization activities we care about. It protects residual claims and allows contracting over them. When negotiations fail or a contract is breached, the baseline is there. The flipside – and major downside – is that the cruder this proxy is with respect to what is truly valuable, the greater is the distance between the exclusion strategy and a fully articulated system of governance or unfair competition and the greater is the waste in terms of foregone use that the intellectual property skeptics rightly point to as a cost of intellectual property in the first place. The question is what combination of exclusion and governance – and no protection – will be best. This is ultimately an empirical question, but simple institutional models can make a few predictions and allow for some rough guesses. To start with, aside from some very narrow detachable problems, it is difficult to serve commercialization using governance only. I will argue that the shift to governance happens more quickly in the case of copyright than in patent, but copyright still involves a thing – protected expression – and is, however tenuously, a property regime. Why is status as property important at all? Generally speaking, property law manages the complexity of private interactions over resources by employing the technique of modularity. In general, modular systems break down complex interactions in a way that provides for components called modules that contain intense interaction, and the modules are connected by interfaces that capture relatively sparser interactions (Baldwin and Clark, 2000; Langlois, 2002). Because the connections between modules are relatively sparse, work can take place within one or few modules without destabilizing and hard-to-foresee ripple effects. Indeed, modularity allows for ‘information hiding,’ in which module-internal information is not relevant to outside processes. In a car, much of the internal workings of the brake system are invisible to the windshield wiper and air conditioning systems. Modularization thus permits specialization. Much of the characteristic modularity of property law starts with the definition of legal things: defining a legal thing involves setting boundaries around clumps of interactions (modules) and defining the permitted interface between them (Smith, 2012; Sichelman and Smith, 2017). The kind of separation involved in modularity is typically partial: the system of interactions is not totally decomposable into freestanding non-interacting components; instead algorithms can be used to choose modularizations in which interaction is relatively intense within modules but relatively sparse across interfaces (Simon, 1981; Arora and Barak, 2009). As with modularity in general, managing complexity in this fashion allows for specialization. In property, recognizing the owner as being in charge (up to a point) of a legal thing permits the owner to specialize in investing in and becoming familiar with the asset. The separation involved in property is a separation into modules and extends to ‘entity property,’ which is based on asset definition and the separation of control from use (Merrill and Smith 2017, pp. 616–799). Such separation into functional modules facilitates specialization of management and various monitoring functions. Modularization in property is also vulnerable to strategic behavior when actors take regard only for what is internalized to them through modularization.

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Governing intellectual property  53 What is internalized is not just what is internal to the legal thing according to the exclusion regime; internalization also occurs though the governance regime at the interface. Thus, in real property, the legal things corresponding to Blackacre not only have boundaries protected by trespass and the like, but they also feature the rights and duties of nuisance law, duties of lateral support, any easements and covenants, zoning regulations, and so on. Without this interface of governance between legal things, owners would specialize, but myopically, engaging in a lot of overall welfare-reducing behavior. Employing legal things has to be compared with other methods of managing complexity, such as defining types of activity and using notions of foreseeability and proximate cause to resolve conflict, as in the law of torts. The question in intellectual property is not whether thing-definition is a good first cut or lends itself to delineation compared to regular property – it is definitely worse – but rather how these other more activityoriented methods of delineation for information would work. In the case of unfair competition, they perhaps work better. So the first question at the root of intellectual property is whether it is more advantageous to take a first cut at defining a thing and using an exclusion strategy, rather than doing nothing or directly governing in tort-like fashion. Likewise, in the question of whether intellectual property is property or regulation (Lemley, 2014; Mossoff, 2013), simply pointing to regulation does not answer that question: some regulation picks up where exclusion leaves off, and like exclusion keys off the things of a property regime. Other regulation is more free-floating and makes no special use of thing-based entitlements at all. This question of choice of strategy cannot be answered in isolation. Two factors are worth singling out. First, different things could form the platform for further property institutions. A thing could be defined narrowly or broadly, for example. Second, different thing-definitions could form a better platform for further governance than others. That is, ultimately, exclusion and governance work in tandem. Focusing in on particular uses to make exceptions or supplements to the exclusion regime can partially overcome the problems of under- and (especially) over-inclusion inherent in an exclusion regime. By the same token, governance can also make exclusion more effective when it targets strategic behavior designed to undermine the exclusionary regime. Examples include various equitable interventions and aspects of the law of nuisance (Kelly, 2011; Smith, 2015b). Thus, the institutional questions of exclusion and governance arise as a matter of total costs and benefits and at the margin (Coase, 1960). As in all institutional analysis, we must compare feasible alternatives. Because these institutions vary along many margins, we have to consider the total net benefit from any of them. However, when considering small changes, especially along one relatively isolated dimension, we can make predictions and recommendations along the one margin (Alston and Mueller, 2014; Smith, 2018). From a dynamic point of view, modular structures promote evolvability but only through a range. Thus, if the system is modularized a certain way, one of its great virtues is that one module can be tweaked or even replaced without causing havoc with the rest of the system (Simon, 1981; Baldwin and Clark, 2000). One can redesign the brakes on a car without worrying about the implications for fuel injection or air conditioning. Likewise, in the patent system, one could add a wider defense of research use to patent infringement or for satire in copyright or one could get rid of business method patents or extend patents to sports moves. All of these would be major changes in intellectual property, but because of the modular structure of entitlements and the legal doctrines, none of them would

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54  Research handbook on the economics of IP law volume 1 implicate every other corner of an area of intellectual property or intellectual property as a whole. While there is good reason to question whether courts and legislatures get it right when it comes to intellectual property, the modular structure facilitates change by making it more feasible without upsetting the entire apple cart. Modularity’s benefits in terms of facilitating change have their limits: major changes may not be achievable by local modular tweaks and instead may require remodularization. In general, modular systems under a wide variety of circumstances do evolve to achieve their goals more cost-effectively, but they can become trapped at a local maximum (Ethiraj and Levinthal, 2004). There may simply not be a path through the addition, subtraction, and modification of existing modules to climb a higher nearby ‘hill.’ For this, remodularization is required. Some major changes in property and intellectual property cannot come from the type of evolution facilitated through modularity. Instead, in the area of property, remodularizations, such as a redesign of the style of a property system, have been achieved on rare occasions by legislatures and autocrats. Examples include the Napoleonic Code and the 1925 legislation in England abolishing the machinery of the estate system and setting up national registration of land titles (Chang and Smith, 2012). These changes might be seen as out of equilibrium and are certainly harder to predict than are more ordinary changes. It is at the margin that predictions are most feasible. As usual, it is easier to measure a phenomenon and to make predictions about it when some things can be treated under the heading ‘all else equal.’ Under a variety of circumstances, there can be a Demsetzian evolution toward governance. The Demsetz Thesis holds that as potential externalities emerge with higher resource value, property rights will emerge to internalize them (Demsetz, 1967). Demsetz’s prime example was the emergence of property rights among the indigenous people of the Labrador Peninsula with the rise of the fur trade. As beavers became more valuable, family hunting territories emerged to prevent overhunting.3 Property rights can also emerge because the cost of internalizing externalities drops, as where the invention of barbed wire led to the fencing of open range in the American West (Anderson and Hill, 1975). By the same token, falling resource values and rising costs of delineation lead to an attenuation or abandonment of property rights (Anderson and Hill, 1975; Haddock and Kiesling, 2002). The emergence of ‘more property’ can, however, take the form of governance, and if the modular theory is correct, we should expect change to take place first at the interface of modules. One way for this to occur is to deal with interactions between modules not well handled by the exclusionary structure. Hence we get the law of nuisance, various exceptions to trespass, and the like. In intellectual property, the rise of particular problems can lead to exceptions to intellectual property, as with the doctrine of fair use, first in the courts and later through codification. I do not claim that any of these changes is optimal. What the theory does suggest is that, to the extent the process responds to efficiency, modular evolution will move locally in 3   Interestingly, the arrangement was more like a semicommons, because others still had the privilege to take a beaver for personal food consumption (as a sort of insurance against famine). The norm was to leave the pelt, but the access afforded by this own-consumption privilege was hard to police (Smith, 2000). And indeed the hunting territories were of such limited effectiveness that the Hudson Bay Company invested its own resources in conservation (McManus, 1972).

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Governing intellectual property  55 that direction. Thus, we can expect locally efficient in-group contracting over intellectual property rights (with the possibility of out-group externalities and collusion of the sort that is of concern in antitrust) (Ellickson, 1991). The locality of custom counsels caution in taking it up into the law of intellectual property (Rothman, 2013).

II.  FLUID PROPERTY AND THE NEED FOR GOVERNANCE What is special about intellectual property is that it manages a fluid resource. Other fluid resources include oil and gas, water, and radio spectrum, and, as we will see, the special costs and benefits of delineating rights in this family of resources lead to characteristic institutional solutions. Just as a legal thing is not the same as a physical thing, legal fluidity is like, but only like, physical fluidity. A fluid continually deforms under shearing stress, and fluids ‘flow’ in the familiar way, making individual parts of the fluid hard to track. In the physical domain, a fluid is more difficult to divide than is a solid. A legally fluid resource is one that is likewise difficult to separate into things – and hence to subject to exclusion strategies. The proxies one might use to delineate uses are leaky, in the sense that they do not stably pick out the class of uses we are interested in. This difficulty of separation of uses is related to the public good characteristics of these resources: they are hard to bound, but multiple use is very valuable. For fully nonrival resources, the value of the uses is additive, not mutually subtracting. Separating classes of uses or even things in the case of fluid resources is particularly difficult because of the potential for strategic behavior. Because of their nature, fluid resources are difficult to separate into things. This means that rights defined in terms of such things will be leaky. When separation works relatively well, we speak of regulating ‘access’: this is what exclusion strategies aim for. In constrast, neither narrow clusters of uses nor clusters that depend on less strict separation are suited to preventing actors from using the resource based on regulating access. These more-fingrained approaches to uses have the benefit of allowing for multiple use, but they leave the door open (as it were) to harmful uses under the guise of permitted uses (Ellickson, 1993; Smith, 2000). That is, the more directly rights and duties are defined in terms of narrower classes of uses and less categorically on the basis of exclusion from a thing, the more we have to police the specific use classes more closely, which is costly. Often this cost is worth incurring, and sometimes the strategic behavior is simply not worth curbing at all. The forms of governance for fluid property carry a signature that stems from the costs and benefits of delineating property in these resources (Smith, 2016). Because fluid resources make coordinating uses more important but more difficult in characteristic ways, we can make better predictions than simply that governance is relatively more important in intellectual property than in regular property. There is some truth to this simple generalization (Smith, 2007a), but it leaves a lot out of the picture. First, the shift to governance is nonetheless true of regular property, and the problems of strategic behavior in regular property are not wholly unrelated, if less severe than the ones that arise in intellectual property. One reason for the emphasis on governance in fluid property is that fluid property often requires hybrid regimes, mixing public, common, and private elements. Where two or

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56  Research handbook on the economics of IP law volume 1 more property systems apply to different aspects of the same resource, we have to worry about arbitrage-style behavior. Thus, in a semicommons, a resource is subject to common and private property and the two interact: actors’ behavior in the commons may be done with a view to private advantage, and use of private attributes can damage the commons (Smith, 2000). The prototypical example of a semicommons is the open-field system of early modern England (and other parts of Europe). There peasants had private rights to use land for grain-growing in long thin strips but would be required to throw these open as a common grazing area after harvests and during fallow periods. Ownership in the private period for grain-growing in bunches of scattered narrow strips has long been a puzzle, and one possible explanation is that this pattern made the strategic behavior in the commons more difficult. Individuals could not direct animals in a common herd to benefit their parcels with manure and damage others’ parcels with excessive trampling. The configuration in long thin scattered strips was quite inconvenient, but it made the boundaries effectively invisible during the commons periods (which they would not have been with compact contiguous parcels). This boundary configuration was a supplement to the governance rules (stinting) that are frequently found in successful common pool arrangements (Ostrom, 1990). Fluid property is particularly likely to be subject to hybrid regimes like the semicommons (Heverly, 2003; Yu, 2005; Loren, 2007; Smith, 2007a, 2007b; Frischmann, 2012; Barnett, 2010). The virtue of a semicommons is that it allows multiple access, and different institutions govern access on different scales, at different times, or with respect to different attributes. The problem is that multiple access precludes heavy reliance on boundaries to separate the uses. Thus, either we have to put up with use in one regime that is done with damaging regard to use in another regime, or we need governance strategies to constrain such behavior. In the case of water, both riparianism and (even) prior appropriation rely heavily on governance to deal with strategic behavior (Smith, 2007b; Freyfogle, 1989). Water is partially a public good: some uses are more consumptive than others, and it is hard to keep them separate. Thus, diversion for consumptive use is not the only purpose for water; it can be used for navigation, power generation, and so on, some of which have partial public goods features (Rose, 1990). In the case of water, these various uses and the rights that track them are highly intertwined. Prior appropriation is considered more parcelized or exclusionary than riparianism, and there is some truth in this (although riparianism is exclusionary in the sense that water rights are tied to the package of rights in riparian land). And yet consider the governance aspects of prior appropriation. In prior appropriation, what an appropriator for a beneficial use gets is a use right: it is measured by use and is lost by non-use. It also does not cover non-used water. Water that returns to the watercourse is appropriable by downstream appropriators. Even if the downstream appropriators are junior (later in time), a shift of use by the senior upstream appropriator or a transfer to a new user is not allowed to impact the junior appropriated rights to the return flow. This highly interlocking and evaluative scheme of governance allows for more intense appropriation of the water, at the cost of greater inconvenience for transfers and greater difficulty in shifting to new uses. If institutions respond to considerations of benefits and costs, we should expect governance where particular uses are especially important and conflicting, and where they are relatively easy to treat in separate fashion. First and most straightforwardly, if individual uses are particularly valuable, they are candidates for separate treatment. In the law of

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Governing intellectual property  57 nuisance, there is a shift from focusing trespass-style on obviously intrusive uses to reconciling conflicting uses, through rules of thumb or some kind of balancing (Smith, 2004). Easements and covenants pick out very specific sets of uses. And zoning often prescribes use, historically through separation into discrete areas, and now through land-use regulation or a form of contracting with developers. Although the institutional suppliers are very different, all of these devices are more fine-grained in terms of the uses they target than is the exclusionary regime of ad coelum and trespass.4 Again, a Demsetzian trend toward more property can take the form of more governance rather than more exclusion. In intellectual property, the nonrivalness of information and the cumulative benefits of the public domain lead to picking out uses directly. Thus, to take an extreme example, fair use is a highly complex free compulsory license for the public (Gordon, 1982; Leval, 1990). The uses involved are very valuable and make it worth incurring high delineation costs, especially in terms of governance. This governance can take the form of affirmative rights in the public to use information in certain ways, rather than undelineated privileges that would be more easily displaced. Off-the-rack law is not the only source of governance. Below we will return to the question of intellectual property licensing and collective-rights organizations. For simple models like that in Demsetz (1967) to hold, much has to be held constant. For one thing, the Demsetz account is a demand-side story: it treats the supply of property rights as a black box, and any difficulties in establishing rights are undifferentiated costs. The problematic dynamic of establishing property rights in groups or society as a whole is left unexplored. Others have brought supply considerations in (Libecap, 1989; Ostrom, 1990; Wyman, 2005). For fluid resources, a more fine-grained look at supply is required. Indeed, controversy has raged in intellectual property circles about whether licensing is likely and whether potential anticommons can be overcome (see below). Further, skepticism about intellectual property sometimes extends to suspicion of licensing itself: might licensing be used not to bargain over relaxing exclusion but rather to extend the owner’s control beyond the optimal point, or at least the one that Congress has decided upon (compare Burk and Cohen, 2001; Cohen, 2003 with Friedman, 1998)? Individual licensing and collective-rights organizations are thus central to whether intellectual property is a success or a failure. These are all governance regimes, but their costs and benefits are closely associated with their institutional sources. Nevertheless, the value of uses does not point unambiguously to more articulated governance. We need to compare the costs and benefits of separating out a narrow class of uses, versus affording owners broader exclusion rights, perhaps with defined exceptions. Exclusion rights are less good at solving use questions directly, but they economize on delineating uses in a fine-grained fashion. Exclusion rights also do not preclude governance by contract, individual, or group, and where contracting is lower (higher) cost, exclusion becomes more (less) attractive. Ultimately, to put it in economic, terms, the question is what combination of exclusion and governance, produced by which institution, is the most efficient.

4  The ad coelum principle is based on the maxim ‘cujus est solum, ejus est usque ad coelum et ad inferos,’ which translates as ‘one who owns the soil owns also to the sky and to the depths’), and provides that the boundaries of a parcel at least presumptively extend upwards and downwards, with adjustments – notably for airplane overflights (Merrill and Smith, 2017, pp. 10–16, 142–50).

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58  Research handbook on the economics of IP law volume 1

III.  GOVERNANCE OF INTELLECTUAL PROPERTY Because of its fluid nature, subjecting information to property rights is both controversial and challenging. As we will see, fluidity tends to require more extreme solutions than in the case of regular property. Depending on the type of use and the cost of contracting, we expect a greater role for the public domain, broader exclusion rights, or more detailed governance, or some combination of the three. What combination will actually occur is in large part an empirical question. Especially where multiple use is very important, hybrid rights regimes are valuable and require extra intervention to protect them from strategic behavior. In this section, I focus on several applications of this framework that highlight the importance of governance in intellectual property. First, the different costs and benefits of delineating classes of uses will help solve the puzzle of why patent and copyright are quite different, especially in that the former is – in a sense we can now define – more property-like than the latter. Second, the promise and perils of licensing in intellectual property and its crucial differences from regular property licenses will receive an explanation. Third, I will show how the system of rights in information is protected by equity as a second-order intervention where the law fails. Fourth and finally, as with fluid property regimes like water law, governance also is effected through collective-rights organizations. A.  Patent Versus Copyright Patent is overall more property-like than copyright. Theories of governance can help us explain why. All intellectual property, like property in general, is aimed at protecting uses. The activities that count as uses in the area of invention (patent) and expression (copyright) are different, and they vary in the ease with which they can be addressed. When it comes to inventions, the invention itself is nonrival, but the resources that go into creating and commercializing inventions are rival. (Although the uses of the information do not conflict, the uses of these other resources involved in commercialization would conflict.) The need to address these more remote rival input resources can push toward some form of property rights in information (Kitch, 1977, pp. 275–6), but this still leaves the question of what form these rights will take. The form of property in patent and copyright is very different: both are, like most property regimes, a mixture of exclusion and governance, but the emphasis is more toward exclusion in the case of patent and more toward governance for copyright (Smith, 2007a). The activities surrounding inventions – especially those involved in commercialization – are uncertain and interacting. Correspondingly, we have a large specialty of expert valuation in patent but less so in copyright. Indeed, now that in patent law there is a greater emphasis on damages relative to injunctions than there was ten years ago, the question of how to value the contribution of a patent to an overall product cannot be avoided (Lemley and Shapiro, 2007, 2013; Golden, 2010, pp. 582–6; Sidak, 2013; Sichelman, 2014), and the current state of the law is widely regarded as inadequate (Taylor, 2014). That a patent, especially in the hands of a ‘troll,’ might ex post be costly to avoid violating – factories have been built, standards have been set – and yet the patent contributes only in a small way to the value of a product (and could have been avoided at much lower costs ex ante than ex post) is the very problem that leads to a suspicion of injunctions in the first place. To date no clean solution for this valuation

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Governing intellectual property  59 problem has been found (Golden, 2010, p. 508). Again, this is characteristic of patent, and aside from works incorporating many copyrighted works, it is much less true of copyright. Correspondingly, the role of commercialization theory is much greater in patent than in copyright in the first place. Because the set of these invention-related activities is broad and uncertain, and many such activities must be coordinated, patent law bunches these uses together in a more exclusionary regime. Rights are based on a notional thing – the invention – and making, using, or selling the invention constitutes the violation (35 U.S.C. § 271). That is not to say that the violation is harmful itself. Rather, the system of rights based on this system of proxies – here the legal thing and violation defined in terms of any use of it – serves indirectly to protect the rival resources used in the creation and commercial development of the information. In copyright, by contrast, individual uses are not as hard to pick out. The basic entitlement in copyright is a list of use rights (17 U.S.C. §§ 106–106A) – very unlike property in general. In property, we can say that the essence of property is indefiniteness.5 The bundle of rights conceived as a list of use rights has come in for criticism for not capturing well how we actually delineate most property (for a variety of views see Symposium, 2011). But it does a reasonable job of capturing copyright. At the same time, defining a thing in copyright is not particularly easy (Long, 2004), and relative to focusing in on the activities we are interested in – in a governance regime – putting heavy emphasis on defining an expression as a thing does not make sense. Even some of the pathologies of copyright stem from this greater emphasis on governance. The story of copyright is a series of enactments for and against protection, lobbied for by interested parties at various points (Litman, 1987). One reason this is possible is that individual uses can be separated out and legislatively bargained over and delineated in legislation. Examples include the compulsory licenses set forth in the copyright act (see below). Also, if lobbying effort can coalesce upon a well-defined narrow set of uses, this helps in organizing the lobbying groups and in making their pitch. Within patent and copyright, the relative emphasis on exclusion and governance also tracks the predictions of information theory. In patent law, chemical invention is less problematic from a notice point of view than are patents in electronics or software (Bessen and Meurer, 2008; Menell and Meurer, 2013). Exclusion regimes depend on simple and stable proxies to define violations. Stating the invention in terms of a chemical formula and formulating violation in terms of any use of a substance describable with that formula is a prime example of an exclusion regime. Note that at the same time we allow such claims some indefiniteness and breadth on the dimension of function: if an inventor comes up with a new substance, the patent covers undisclosed and even heretofore unknown uses of that substance. In copyright, governance breaks down where we expect. Thus, the part of copyright that involves the most uncertain and interlocking set of activities is the area of derivative works. A new derivative work can incorporate many copyrighted works. Here valuation problems start looking more like they do in patent law. And when it comes to derivative

5   Austin (1873, p. 827) (‘[I]ndefiniteness is of the very essence of the right; and implies that the right . . . cannot be determined by exact and positive circumscription’).

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60  Research handbook on the economics of IP law volume 1 works, commercialization theory starts being cited as a rationale for protection. These notorious difficulties with derivative works stem partly from trying to solve with a governance regime the problems of multiple hard-to-foresee uses. Some well-known differences between patent and copyright line up along the exclusiongovernance spectrum. In patent law, independent invention is usually not a defense, which makes the proxy upon which violation is based much simpler, thus contributing to the exclusionary aspect of the regime. In copyright, independent creation is a defense, and it requires evaluation of access and similarity in order to tell whether a violation of the copyright has occurred. Likewise, the greater reliance on compulsory licenses in copyright is consistent with an emphasis on governance. In copyright, statutory provisions provide for compulsory licenses for secondary transmission by cable television (17 U.S.C. § 111(c)–(e)), production and distribution of phonorecords of musical works (§ 115), use by noncommercial broadcasters (§ 118), satellite retransmission (§ 119), and manufacturing and importing of digital audiotape devices (Audio Home Recording Act of 1992, Pub. L. No. 102-563, 106 Stat. 4237 (codified at 17 U.S.C. §§ 1001–10)). Delineating licenses requires specifying a class of covered uses, and compulsory licenses that are liability rules – one can use the copyright and pay a statutory fee – require measurement of uses in terms of value. That is relatively easier where the use is separable, and harder where it is uncertain and intertwined with other uses. By contrast, compulsory licenses were (at least until recently) rare in patent law despite some obvious immediate benefits.6 Finally, fair use is a complex governance regime, which we find only in copyright. Despite occasional calls for fair use in patent and regular property (O’Rourke, 2000; Depoorter, 2011), fair use is characteristic of copyright. Fair use requires a multifactor evaluation of the use in question: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. (17 U.S.C. § 107)

Fair use in patent law would require measurement of uses in a way that has so far proved difficult. Although exclusion and governance can sometimes substitute at the margin, we have to consider multiple approaches to combining exclusion and governance. Thus the strength (and weakness) of patent law is its indirectness, which allows one to capture the return from commercializing information. Nothing requires that this be done in one regime. Extending the approach in the legislation on orphan drugs, Ted Sichelman (2010)

6   ‘[C]ompulsory licensing is a rarity in our patent system,’ and ‘compulsory licensing of patents has often been proposed but never enacted on a broad scale’ (Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 215 and n.21 (1980) (citations omitted)). A limited amount of compulsory licensing is allowed under TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights, art. 8, 1994, 33 I.L.M. 81). One could see the decision in eBay v. MercExchange as a move toward compulsory licensing. I return to this question below.

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Governing intellectual property  61 proposes a regime for exclusive rights targeted just to commercialization. This is more fine-grained in two respects: it requires two regimes rather than one, and it requires an estimate of the incentive needed to commercialize. Whether to incur these costs – rather than to stick with a cruder regime that depends more on the indirect residual claim of the current patent – is an empirical question. It is not obvious whether and to what extent judges should be asked to calibrate intellectual property rights (Chiang, 2017). Brett Frischmann (2012, pp. 253–305) proposes that in light of a framework based on intellectual property as a semicommons, patent should look more like copyright. Again, the advisability of this turns on whether new conditions, for example in software, call for more governance to override the exclusion regime in patent law. B. Licensing Licensing illustrates the promise and limits of governance of intellectual property. Licenses pick out specific uses and allow for modification of the basic exclusion right, transaction costs permitting (Barnett, 2010, 2017; Feldman and Lemley, 2015). Compared with licenses in real property, intellectual property licenses are often more robust and are comparable in some ways to easements in land. Like licenses in regular property, intellectual property licenses allow for a regime that combines property and contract. Interestingly, also as in regular property, there is a lot of confusion about what exactly a license is. Because many licenses in real property and most licenses in intellectual property are created by contract, there is a natural tendency to equate licenses and contracts. This is not entirely accurate, and it can matter greatly in some contexts (Newman, 2013). Licenses are more property-related than the contracts that create them. Thus, if a copyright licensee exceeds the terms of its license, the copyright holder could seek the remedies available for a breach of copyright, including in many cases an injunction, even if the contract itself would not be eligible for enforcement by specific performance (Newman, 2013). Further, if the copyright holder transfers the copyright to another, it is subject to existing licenses. In real property this running with the asset would happen automatically with easements appurtenant and would happen for some covenants that pass certain tests. Covenants on personal property have always had an ambiguous status, especially when it comes to whether they run (Chafee, 1928, 1956; Robinson, 2004; Van Houweling, 2008). Licenses also raise issues particular to governance of information. Thus, one way of thinking about easements, covenants, and licenses, is as sticks in the bundle held by the owner and ready for distribution or retention. Some have objected that this is an unrealistic picture of these lesser interests (or non-interest permissions in the case of real property licenses) (Penner, 2013). Instead, the owner is exercising a power to create a new legal relation. In the case of an easement, the owner is creating a new in rem right, which in theory could be enforced against third parties. Licenses, in real property and in intellectual property, are not in rem, although through technological means they start looking that way. In the famous case of ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), Judge Easterbrook found that the copyright license was (or was like) a contract, and because it was in personam it could not be similar enough to the in rem copyright for purposes of preemption. Nevertheless, despite the heavy reliance in ProCD on the distinction between in rem and in personam rights,

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62  Research handbook on the economics of IP law volume 1 questions remain about how they differ in practice and how governance can become a means of achieving exclusion. One mode of governance is technological. The holder of information can ration access using Digital Rights Management. If this method is cheap and effective enough, does it become possible to achieve not just exclusion but in rem rights – good against everyone else – by means of mass producing more in personam governance relations? If one can bring it about through technological means that each individual using the information has to agree to the ‘owner’s’ terms, does this mean that the latter has achieved property? Does this upset the balance struck by copyright legislation? Consider fair use. If an author or publisher could restrict access to a book such that a reviewer could not read it, would that violate a right of the reviewer’s? It does, if we take seriously fair use as a robust affirmative regime governing use. Governance through licenses presents a problem of information costs for third parties. The more that licenses avail against third parties and the more they run with assets, the more impact they will have from an informational point of view. In the case of real property, even easements which are theoretically enforceable against third parties are constrained so that they do not present much more of an informational burden than the underlying fee in the land itself. An easement cannot easily govern behavior occurring off the land in question. (Negative easements are strictly rationed, in part for these reasons of open-endedness and potential lack of notice.) Thus, because of the nature of the resource (spatial) and reinforced by certain doctrines in the case of covenants (e.g. touch and concern), servitudes have few implications for third parties beyond the basic message sent by boundaries and trespass law. Licenses in real property are not enforceable against third parties and do not run, so they too present few third-party information costs. Further, real property servitudes and licenses do not present huge problems when parcels are split and combined. Because servitudes and licenses apply to a given area, they simply add up. If there is an easement over Parcel A in favor of Parcel B, and then Parcel A is merged with Parcel C, the easement is still located where it was. Nothing about the scope of the easement changes. The main problem is one of potential misuse. If O owns Parcel A with an easement over Parcel B and then acquires Parcel D next to A, the traditional rule mandated that O not use the easement to get to Parcel D. Such use would be misuse. This is clearly not easy to police, and proposals have been made to measure use by reasonableness, rather than location (Strang, 2008). Either way, as parcels are scaled up and down, there is not much in the way of confusion or contradiction. The situation is very different with intellectual property licenses. The special challenge of servitudes in fluid property-like intellectual property is well illustrated in Molly Van Houweling’s (2008) analysis of the ‘new servitudes’ in intellectual property. In addition to exacerbated problems of notice in intellectual property, she shows how licenses can conflict downstream. For example, the GPL Version 2, under which the original Linux kernel was created and licensed, and the Wikipedia GNU Free Documentation License require downstream users creating works incorporating the licensed material to make available the new work on the same terms as the input work. However, the terms requiring openness are detailed, and later versions of the license sometimes require conflicting actions. A downstream work thus may incorporate works with conflicting mandates. And like other fluid property, we want the governance rules to interlock tightly, but the problem then becomes dynamic change. Indeed, an involved and controversial process

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Governing intellectual property  63 was required to make it possible for the Wikimedia Foundation to relicense in order to overcome this problem (Elkin-Koren, 2011, pp. 340–41). In addition, as with other fluid property, the high cost of exclusion – based on a legal thing – leads to governance being built on a shakier foundation of exclusion. Indeed, as Van Houweling points out, we should worry when intellectual property servitudes exceed the entitlement baseline. Thus, while the Creative Commons license employs the (admittedly fuzzy) copyright baseline, Microsoft’s Vista EULA, by contrast, exceeded the scope of its copyright. Because this complicates the modularity of the legal rights, it comes at a cost not internalized to its creator. In a sense, intellectual property poses a special problem of standardization (numerus clausus, Merrill and Smith, 2000) that the ‘bubbles’ around parcels of land and items of personal property prevent in the case of regular property. First sale in copyright and exhaustion in patent respond in part to these problems of third-party information costs. If that is their role, it suggests that current doctrine may be too strong. In copyright, first sale doctrine allows the purchaser of a copyrighted work to resell it free from restrictions of the copyright holder. Similarly in patent law, the purchase of a patented article from the patentee ‘exhausts’ the patentee’s rights, and the owner of the good can resell it without restriction. These doctrines resonate with the traditional suspicion of servitudes on personal property (see above). As with servitudes on personal property, the problem is that these restrictions do not announce themselves and there is no registry to publicize them. Marking on the good itself is not standardized. However, as we have seen, intellectual property holders often try to accomplish through licensing what cannot be accomplished through property law, in effect substituting elaborate governance for exclusion or for the law’s version of governance. What if the intellectual property holder licenses the buyer but refuses to license those contracting with the buyer, especially if the good itself is not sold but manufactured under a license? Can the intellectual property owner go after the licensee’s customers? After some ambiguity, in Quanta Computer v. LG Electronics, Inc., 553 U.S. 617 (2008), the answer from the US Supreme Court is an undertheorized no. Moreover, like first sale, exhaustion is a mandatory rather than a default rule; it cannot be contracted around through licensing (Impression Products, Inc. v. Lexmark International, Inc., 137 S. Ct. 1523 (2017)). The institutional and informational approach can shed some light on the question of why we have first sale and exhaustion doctrines and how strong they should be. (Again, we are in the realm of empirical guesswork for now.) One possible position is the pre-Quanta Federal Circuit’s contractarianism, in which exhaustion would not apply to a method patent, leaving it open to a patent holder to license a firm but not the firm’s ­customers and to require them to acquire their own licenses. In reversing in Quanta, the US Supreme Court took the opposite approach, holding that exhaustion is a mandatory rule precluding restrictions of any kind further downstream from a licensee. Both positions are problematic. Full contractarianism does not reckon with the notice problems, especially to consumers, of licensing restrictions, and it foregoes the convenience of the anchor of a physical object as a locus of restriction-free use. The holding in Quanta, however, precludes more fine-grained multi-party governance regimes, which could be valuable in multiple stages of production among parties that are well aware of the need for a license. And there is no shortage of potential positions between these poles that could trade off notice costs and governance benefits. For example, Van Houweling (2008, pp. 932–9) argues for the

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64  Research handbook on the economics of IP law volume 1 distinction made in earlier Supreme Court cases between complex licensing that allows for restrictions on downstream commercial producing entities on the one hand and prohibits them for individual consumers (and perhaps bailees like repair shops) on the other. The former can be expected to be aware of the need for a license more than the latter, who have pre-existing expectations of being able to use the items of personal property they own. C.  Governance Through Equity Exclusion is sometimes vulnerable to opportunism, and to counter such opportunism, a characteristic governance regime comes into play: equity. Although not all such opportunism calls for equitable intervention, we generally have to worry about actors who are too aware of property law’s modular structures and can exploit misalignment of proxies and true value. Thus, in a fish catch limit, we need to address the potential strategic behavior of fishers who might kill and throw back small fish in order to ‘meet’ their quota with only more valuable larger fish. In intellectual property, strategic behavior is a major problem. In general, equity can be seen as a second-order intervention when problems like opportunism show the weakness in the regular law (Smith, 2015b). Equity in this sense is much like the civilian doctrine of abuse of right. Much of the problem of strategic behavior or opportunism in intellectual property surfaces in the area of remedies. And this problem of opportunism points to the usefulness of traditional equitable standards. Opportunism can take the form of unexpected and unfair use of leverage. The problem of excessive leverage is not unique to intellectual property, even though it may be more severe. The problem of coupling an injunction with exclusion is that the severity of the remedy can call forth opportunism, in which the right holder inflicts harm on a good faith violator out of all proportion to the injury or the blameworthiness of the violation. In real property, an injunction will not issue for a mere trespass, but repeated and continuous violations do presumptively lead to injunctions. If, however, the violation was in good faith and the injunction would inflict disproportionate hardship – that is, much more harm on the violator than it would benefit the movant – a court can withhold the injunction and just give damages (a general approach in equity, see Laycock, 2011). Bad faith violators still face injunctions. This scheme of shifting presumptions is designed to afford protection to rights, with a safety valve for certain good faith violations, which prevents excessive precaution on the one side and overenforcement on the other. The problem of so-called patent trolls exhibits a similar structure. Unfortunately, instead of applying the traditional equitable set of presumptions, modified perhaps to make good faith easier to find where patent notice is problematic, the US Supreme Court devised what it termed a ‘traditional’ equitable four-part test for injunctions in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), which is actually based on the test for preliminary relief. Under this test, the movant must show: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. (547 U.S. at 391)

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Governing intellectual property  65 This test is problematic for many reasons. It makes no reference to good faith, which was one of the main methods of targeting in the traditional test. Moreover, ‘disproportionate hardship’ meant overwhelming disparity: it is a safety valve, not a balancing test seeking equipoise.7 The Federal Circuit may well have been wrong to apply a near-automatic presumption for injunctions, but the eBay test’s implicit agnosticism about violation and the lack of presumption for an injunction in cases of violation are not necessary as long as the (targeted) safety valve of disproportionate hardship is wide enough. Disproprtionate hardship is one possible tool to deal with holdup.8 Indeed there is an economic case to be made for the traditional disproportionate hardship defense in the area of patents (Schwartz, 1964, pp. 1045–6; Denicolò et al., 2008; Smith, 2009, pp. 2125–33). Disproportionate hardship is a proxy for opportunism, and is a targeted way to ‘reset’ the balance of leverage or achieve ‘proportionality’ between rights and leverage (cf. Merges, 2011, pp. 165–9). Moreover the (actually) traditional approach to injunctions took into account the potential for opportunism on both sides: make the safety valve too large, and opportunistic violators would use the possibility of undercompensation by a court as a weapon (Miller, 2007, p. 390). As with any liability rule, we have to worry that a violator will cherry-pick undervalued assets, and take advantage of the difficulty of proving damages – as would be the case with a patent that has not been licensed before. D.  Group Institutions As in other fluid property regimes, the need for governance often calls for collective-action organizations. In regular property, common property is located between private property and open access. Unlike open access, in common property a group manages the resource. Unlike with private property, this group is larger than the usual groups of co-owners (and the group does not create an artificial person to own the asset). Instead, the exclusion regime over the thing and group membership serve as a foundation for the group to build an often elaborate regime of governance. This is ‘governance’ in Ostrom’s (1990) sense and also ‘governance’ in the sense that these group-initiated regimes are couched in terms

7   Thus, interestingly, from a traditional equitable point of view all sides in eBay were off the mark. Disproportionate hardship did not mean asking which party would be would hurt more by an injunction, as the skeptics of injunctive relief argued (eBay, Inc. v. MercExchange, L.L.C., 2006 WL 1785363 (Appellate Brief) (U.S. Jun. 26, 2006); Brief Amici Curiae of 52 Intellectual Property Professors in Support of Petitioners (NO. 05-130), at 9). On the other hand, the Federal Circuit’s automatic injunction rule ignores the extent of the disproportionate hardship defense, as did its proponents in the Supreme Court, who ironically looked to building encroachments as an analogy for automatic injunctions. Epstein et al.’s amici brief analogized patent infringement to trespass and stated that ‘[t]he rule [for injunctions in building encroachment cases] is virtually automatic when the infringement is deliberate, and strict even when it is not’ (eBay, Inc. v. MercExchange, L.L.C., 2006 WL 639164 (Appellate Brief) (U.S. Mar. 10, 2006) Brief of Various Law & Economics Professors as Amici Curiae in Support of Respondent (NO. 05-130) (Richard A. Epstein, F. Scott Kieff & R. Polk Wagner); Epstein (2010, pp. 488–9)). However, Epstein had advocated disproportionate hardship as exception to a presumption for property rules in an earlier paper (1997, p. 2102). 8   Other possible tools include other equitable devices like estoppel (Smith, 2013), as well as denying injunctions in a more categorical fashion (Lee and Melamed, 2016).

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66  Research handbook on the economics of IP law volume 1 of use. After all, the members of the group have access; the question is how they will coordinate their use. The Ostrom framework is now being applied to problems of knowledge dissemination and use, of which intellectual property is only a part. (See the case studies in Frischmann et al., 2014.) Whether exclusion is needed as a platform for governance depends in part on how easy the knowledge problem is to modularize in the first place. Thus, in open source software, Wikipedia, and other realtively open, collaborative undertakings, the overall project can be broken down into small freestanding tasks (Benkler, 2002; Vetter, 2004). Where modularization needs to be imposed, there is more of a role for intellectual property or organizations (entity property). Governance can also be used by groups to overcome the drawbacks of exclusion. One potential problem with exclusion stems from the need in a larger project to use information subject to many rights. This could happen because a final product involves many patents. Where this occurs, it has been termed an anticommons: just as in a commons too many use rights lead toward overuse, in an anticommons too many exclusion rights promote underuse (Heller, 1998, 2008; Heller and Eisenberg, 1998). In addition to licensing, a large anticommons sometimes calls forth collective-rights organizations. Patent pools and copyright organizations are famous examples (Gervais, 2011). These organizations often overcome exclusion and achieve a shift from property rules to liability rules (Merges, 1996a), and indeed governance strategies, keyed as they are to uses, are often paired with liability rules. Once one is delineating a use, it often makes sense to value it rather than use a more on/off remedy like an injunction. Rights organizations are one reason anticommons problems have not loomed as large or persisted as long as many initially feared (Barnett, 2015; see also Eisenberg, this volume). Often these group institutions or sets of industry norms involve a semicommons. Information is often more common or public for some uses and more private for other uses. In a more diffuse context, scientists have (or at least had) a norm as described by Merges (1996b), in which scientists would be expected to share information and materials with other scientists but could demand payment from commercial actors. In a more organized setting, firms can form joint ventures in which intellectual assets are common for some purposes and private for others (Smith, 2000). In between are standard-setting organizations (SSOs), which separate out one function of property law, setting standards, and treat that as common while allowing members to control their intellectual property subject to FRAND obligations (to license on a ‘fair, reasonable, and non-discriminatory’ basis) (Lemley, 2002; Miller, 2007; Sidak, 2013; Smith, 2013; Contreras, 2017). Finally, we can consider the possibility of governance without exclusion. In regular property, this is closest to being true of what Carol Rose (1986) calls ‘inherently public’ property. Here no one – neither a private party nor a group nor the government – ­manages the resource. Instead, the unorganized public spontaneously, possibly through custom, uses the resource with high benefits of multiple use and a low enough level of conflict to make the shift to more organized management undesirable. For example, various doctrines of navigation and historic examples like maypoles illustrate inherently public property. The public domain of information is another example (Rose, 2003).

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IV. CONCLUSIONS Governance is not at odds with property; it is part of the overall institution of property. Because of their fluid nature, informational resources tend to involve a great emphasis on governance of uses in comparison to regular property. Exploring the problem of governance of property and the hybrid regimes we actually see has become a major avenue of work in regular property, and it is spreading to intellectual property. This focus is welcome because the problems of use are more difficult and more ethereal in this area.

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68  Research handbook on the economics of IP law volume 1 Epstein, Richard A. 1997. ‘A Clear View of The Cathedral: The Dominance of Property Rules,’ 106 Yale Law Journal 2091–120. Epstein, Richard A. 2010. ‘The Disintegration of Intellectual Property? A Classical Liberal Response to a Premature Obituary,’ 62 Stanford Law Review 455–521. Ethiraj, Sendil K., and Daniel Levinthal. 2004. ‘Modularity and Innovation in Complex Systems,’ 50 Management Science 159–73. Feldman, Robin, and Mark A. Lemley. 2015. ‘Do Patent Licensing Demands Mean Innovation?,’ 101 Iowa Law Review 137–89. Freyfogle, Eric T. 1989. ‘Context and Accommodation in Modern Property Law,’ 41 Stanford Law Review 1529–56. Friedman, David. 1998. ‘In Defense of Private Orderings: Comments on Julie Cohen’s “Copyright and the Jurisprudence of Self-Help,”’ 13 Berkeley Technology Law Journal 1151–72. Frischmann, Brett M. 2012. Infrastructure: The Value of Shared Resources. New York: Oxford University Press. Frischmann, Brett M., Michael J. Madison, and Katherine J. Strandburg. 2014. Governing Knowledge Commons. New York: Oxford University Press. Fromer, Jeanne C. 2009. ‘Claiming Intellectual Property,’ 76 University of Chicago Law Review 719–96. Gergen, Mark P., John M. Golden, and Henry E. Smith. 2012. ‘The Supreme Court’s Accidental Revolution? The Test for Permanent Injunctions,’ 112 Columbia Law Review 203–49. Gervais, Daniel. 2011. ‘The Landscape of Collective Management,’ 24 Columbia Journal of Law & the Arts 423–49. Golden, John M. 2010. ‘Principles for Patent Remedies,’ 88 Texas Law Review 505–92. Gordon, Wendy J. 1982. ‘Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and its Predecessors,’ 82 Columbia Law Review 1600–657. Haddock, David D., and Lynne Kiesling. 2002. ‘The Black Death and Property Rights,’ 31 Journal of Legal Studies S545–87. Heald, Paul J. 2005. ‘A Transaction Costs Theory of Patent Law,’ 66 Ohio State Law Journal 473–509. Heller, Michael. 1998. ‘The Tragedy of the Anticommons: Property in the Transition from Marx to Markets,’ 111 Harvard Law Review 621–88. Heller, Michael. 2008. The Gridlock Economy. New York: Basic Books. Heller, Michael, and Rebecca S. Eisenberg. 1998. ‘Can Patents Stifle Innovation? The Anticommons in Biomedical Research,’ 280 Science 698–701. Heverly, Robert A. 2003. ‘The Information Semicommons,’ 18 Berkeley Technology Law Journal 1127–89. Holbrook, Timothy R. 2006. ‘Possession in Patent Law,’ 59 SMU Law Review 123–76. Kelly, Daniel B. 2011. ‘Strategic Spillovers,’ 111 Columbia Law Review 1641–721. Kieff, F. Scott. 2001. ‘Property Rights and Property Rules for Commercializing Inventions,’ 85 Minnesota Law Review 697–754. Kitch, Edmund W. 1977. ‘The Nature and Function of the Patent System,’ 20 Journal of Law & Economics 265–90. Langlois, Richard N. 2002. ‘Modularity in Technology and Organization,’ 49 Journal of Economic Behavior & Organization 19–37. Laycock, Douglas. 2011. ‘The Neglected Defense of Undue Hardship (and the Doctrinal Train Wreck in Boomer v. Atlantic Cement),’ 4 Journal of Tort Law 1–35. Lee, Brian Angelo, and Henry E. Smith. 2012. ‘The Nature of Coasean Property,’ 59 International Review of Economics 145–55. Lee, Peter. 2011. ‘The Accession Insight and Pent Infringement Remedies,’ 110 Michigan Law Review 175–241. Lee, William F., and A. Douglas Melamed. 2016. ‘Breaking the Vicious Cycle of Patent Damages,’ 101 Cornell Law Review 385–466. Lemley, Mark A. 2002. ‘Intellectual Property Rights and Standard-Setting Organizations,’ 90 California Law Review 1889–980. Lemley, Mark A. 2014. ‘Taking the Regulatory Nature of IP Seriously,’ 92 Texas Law Review See Also 107–19, accessed February 26, 2019 at http://texaslawreview.org/wp-content/uploads/2015/08/Lemley-92-SeeAlso.pdf. Lemley, Mark A., and Carl Shapiro. 2007. ‘Patent Holdup and Royalty Stacking,’ 85 Texas Law Review 1991–2050. Lemley, Mark A., and Carl Shapiro. 2013. ‘A Simple Approach to Setting Reasonable Royalties for StandardEssential Patents,’ 28 Berkeley Technology Law Journal 1135–66. Leval, Pierre N. 1990. ‘Toward a Fair Use Standard,’ 103 Harvard Law Review 1105–36. Libecap, Gary D. 1989. Contracting for Property Rights. Cambridge: Cambridge University Press. Libecap. Gary D., and Dean Lueck. 2011. ‘The Demarcation of Land and the Role of Coordinating Property Institutions,’ 119 Journal of Political Economy 426–67. Liivak, Oskar. 2013. ‘Establishing an Island of Patent Sanity,’ 78 Brooklyn Law Review 1335–89. Litman, Jessica D. 1987. ‘Copyright, Compromise, and Legislative History,’ 72 Cornell Law Review 857–904. Long, Clarisa. 2004. ‘Information Costs in Patent and Copyright,’ 90 Virginia Law Review 465–550.

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Governing intellectual property  69 Loren, Lydia Pallas. 2007. ‘Building a Reliable Semicommons of Creative Works: Enforcement of Creative Commons Licenses and Limited Abandonment of Copyright,’ 14 George Mason Law Review 271–328. McManus, John C. 1972. ‘An Economic Analysis of Indian Behavior in the North American Fur Trade,’ 32 Journal of Economic History 36–53. Madison, Michael J. 2005. ‘Law as Design: Objects, Concepts, and Digital Things,’ 56 Case Western Reserve Law Review 381–478. Menell, Peter S. 2011. ‘Governance of Intellectual Resources and Disintegration of Intellectual Property in the Digital Age,’ 26 Berkeley Technology Law Journal 1523–59. Menell, Peter S., and Michael J. Meurer. 2013. ‘Notice Failure and Notice Externalities,’ 5 Journal of Legal Analysis 1–59. Merges, Robert P. 1996a. ‘Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,’ California Law Review 1293–393. Merges, Robert P. 1996b. ‘Property Rights Theory and the Commons: The Case of Scientific Research,’ 13 (Summer) Social Philosophy and Policy 145–67. Merges, Robert P. 2005. ‘A Transactional View of Property Rights,’ 20 Berkeley Technology Law Journal 1477–520. Merges, Robert P. 2011. Justifying Intellectual Property. Cambridge, Mass: Harvard University Press. Merrill, Thomas W. 2009. ‘Accession and Original Ownership,’ 1 Journal of Legal Analysis 459–510. Merrill, Thomas W., and Henry E. Smith. 2000. ‘Optimal Standardization in the Law of Property: The Numerus Clausus Principle,’ 110 Yale Law Journal 1–70. Merrill, Thomas W., and Henry E. Smith. 2010. The Oxford Introductions to U.S. Law: Property. New York: Oxford University Press. Merrill, Thomas W., and Henry E. Smith. 2017. Property: Principles and Policies. New York: Foundation Press, 3rd ed. Miller, Joseph Scott. 2007. ‘Standard Setting, Patents, and Access Lock-In: RAND Licensing and the Theory of the Firm,’ 40 Indiana Law Review 351–96. Mossoff, Adam. 2013. ‘Introduction,’ in Adam Mossoff, ed., Intellectual Property and Property Rights. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Newman, Christopher M. 2011. ‘Transformation in Property and Copyright,’ 56 Villanova Law Review 251–325. Newman, Christopher M. 2013. ‘A License is Not a “Contract Not to Sue”: Disentangling Property and Contract in the Law of Copyright Licenses,’ 98 Iowa law Review 1101–62. O’Rourke, Maureen A. 2000. ‘Toward a Doctrine of Fair Use in Patent Law,’ 100 Columbia Law Review 1177–250. Ostrom, Elinor. 1990. Governing the Commons. Cambridge: Cambridge University Press. Penner, J.E. 1997. The Idea of Property in Law. Oxford: Clarendon Press. Penner, James. 2013. ‘On the Very Idea of Transmissible Rights,’ in James Penner and Henry E. Smith, eds., Philosophical Foundations of Property Law. Oxford: Oxford University Press. Rich, Giles S. 1942. ‘The Relation between Patent Practices and the Anti-Monopoly Laws,’ 24 Journal of the Patent Office Society 159–81. Robinson, Glen O. 2004. ‘Personal Property Servitudes,’ 71 University of Chicago Law Review 1449–523. Rose, Carol. 1986. ‘The Comedy of the Commons: Custom, Commerce, and Inherently Public Property,’ 53 University of Chicago Law Review 711–81. Rose, Carol M. 1990. ‘Energy and Efficiency in the Realignment of Common-Law Water Rights,’ 19 Journal of Legal Studies 261–96. Rose, Carol M. 2003. ‘Romans, Roads, and Romantic Creators: Traditions of Public Property in the Information Age,’ 66 (Winter/Spring) Law and Contemporary Problems 89–110. Rose, Carol M. 2011. ‘Ostrom and the Lawyers: The Impact of Governing the Commons on the American Legal Academy,’ 5 International Journal of the Commons 28–49, accessed on February 26, 2019 at https:// www.thecommonsjournal.org/articles/10.18352/ijc.254/. Rothman, Jennifer E. 2013. ‘Copyright, Custom and Lessons from the Common Law,’ in Shyamkrishna Balganesh, ed., Intellectual Property and the Common Law. Cambridge: Cambridge University Press. Schwartz, Herbert F. 1964. ‘Injunctive Relief in Patent Infringement Suits,’ 112 University of Pennsylvania Law Review 1025–48. Sichelman, Ted. 2010. ‘Commercializing Patents,’ 62 Stanford Law Review 341–412. Sichelman, Ted. 2014. ‘Purging Patent Law of “Private Law” Remedies,’ 92 Texas Law Review 516–71. Sichelman, Ted, and Henry E. Smith. 2017. ‘Modeling Legal Modularity,’ (draft), accessed on February 26, 2019 at https://extranet.sioe.org/uploads/sioe2017/sichelman_smith.pdf. Sidak, J. Gregory. 2013. ‘The Meaning of FRAND, Part I: Royalties,’ 9 Journal of Competition Law & Economics 931–1055. Simon, Herbert A. 1981. The Sciences of the Artificial. Cambridge, Mass.: MIT Press, 2nd ed. Smith, Henry E. 2000. ‘Semicommon Property Rights and Scattering in the Open Fields,’ 29 Journal of Legal Studies 131–69.

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70  Research handbook on the economics of IP law volume 1 Smith, Henry E. 2002. ‘Exclusion versus Governance: Two Strategies for Delineating Property Rights,’ 31 Journal of Legal Studies S453–87. Smith, Henry E. 2004. ‘Exclusion and Property Rules in the Law of Nuisance,’ 90 Virginia Law Review 965–1049. Smith, Henry E. 2007a. ‘Intellectual Property as Property: Delineating Entitlements in Information,’ 116 Yale Law Journal 1742–822. Smith, Henry E. 2007b. ‘Governing Water: The Semicommons of Fluid Property Rights,’ 50 Arizona Law Review 445–78. Smith, Henry E. 2009. ‘Institutions and Indirectness in Intellectual Property,’ 157 University of Pennsylvania Law Review 2083–133. Smith, Henry E. 2011. ‘Toward an Economic Theory of Property in Information,’ in Kenneth Ayotte and Henry E. Smith, eds., Research Handbook on the Economics of Property Law. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Smith, Henry E. 2012. ‘Property as the Law of Things,’ 125 Harvard Law Review 1691–726. Smith, Henry E. 2013. ‘Property as Platform: Coordinating Standards for Technological Innovation,’ 9 Journal of Competition Law and Economics 1057–89. Smith, Henry E. 2015a. ‘The Elements of Possession,’ in Yun-Chien Chang, ed., The Law and Economics of Possession. Cambridge: Cambridge University Press. Smith, Henry E. 2015b. ‘Equity as Second-Order Law: The Problem of Opportunism,’ (January 15, 2015), SSRN, accessed on February 26, 2019 at http://ssrn.com/abstract=2617413 or http://dx.doi.org/10.2139/ssrn.2617413. Smith, Henry E. 2016. ‘Semicommons in Fluid Resources,’ 20 Marquette Intellectual Property Law Review 195–212 (2015 Annual Helen Wilson Nies Lecture in Intellectual Property). Smith, Henry E. 2017. ‘The Economics of Property Law,’ in Francesco Parisi, eds., The Oxford Handbook of Law and Economics, Volume 2: Private and Commercial Law. Oxford: Oxford University Press, 148–77. Smith, Henry E. 2018. ‘Complexity and the Cathedral: Making Law and Economics more Calabresian,’ European Journal of Law and Economics (2018), accessed on February 26, 2019 at https://doi.org/10.1007/ s10657-018-9591-x. Strang, Lee J. 2008. ‘Damages as the Appropriate Remedy for “Abuse” of an Easement: Moving toward Consistency, Efficiency, and Fairness in Property Law,’ 15 George Mason Law Review 933–74. Symposium. 2011. ‘Property: A Bundle of Rights?,’ 8 Econ Journal Watch, accessed on February 26, 2019 at https://econjwatch.org/issues/volume-8-issue-3-september-2011. Taylor, David O. 2014. ‘Using Reasonable Royalties to Value Patented Technology,’ 49 Georgia Law Review 79–162. Van Houweling, Molly S. 2008. ‘The New Servitudes,’ 96 Georgetown Law Journal 885–950. Van Houweling, Molly S. This volume. ‘Intellectual Property as Property.’ Vetter, Greg R. 2004. ‘The Collaborative Integrity of Open-Source Software,’ 2004 Utah Law Review 563–700. Wyman, Katrina M. 2005. ‘From Fur to Fish: Reconsidering the Evolution of Private Property,’ 80 New York University Law Review 117–240. Yoo, Christopher S. 2007. ‘Copyright and Public Good Economics: A Misunderstood Relation,’ 155 University of Pennsylvania Law Review 635–716. Yu, Peter K. 2005. ‘Intellectual Property and the Information Ecosystem,’ 2005 Michigan State Law Review 1–20.

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PART II IP AND INCENTIVES

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4.  Philosophical foundations of IP law: the law and economics paradigm Robert P. Merges*

Contents I. Introduction A. Consequentialism versus Deontology: Rudiments 1. Deontology II. Consequentialism and its Critique A. The Macro Theory B. Consequentialism ‘All the Way Down’: Micro-Consequentialist Roots of Macro-Consequentialism 1. Consequentialism with nuance C. Critiques of Consequentialism 1. The calculability critique D. An Illustration of the Problem: New Theories, Pro and Con E. Modest Consequentialism III. Deontological Theories, and Their Critics A. The Critique of Subjective Moral Intuitionism 1. A shared moral sense B. Empirical Studies of Moral Judgment 1. Studies of children’s judgments about ownership 2. Summary: a universal ‘intellectual property instinct’? IV. Reconciling Consequentialism and Deontological Approaches A. The Two-Level Approach 1. But is it not inconsistent? V. Conclusion References

I. INTRODUCTION This chapter describes various philosophical perspectives on the law and economic paradigms in intellectual property (IP). It begins with a description of utilitarianism, which is the philosophical foundation on which law and economics is built. It then describes an alternative way that law and economics can be understood: as a highly effective set of tools that are useful even if one is not convinced that IP law can be justified at the foundational *  Wilson Sonsini Goodrich and Rosati Professor of Law and Director of the Berkley Center for Law and Technology, University of California, Berkeley.

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Philosophical foundations of IP law  73 level by a utilitarian account. Various alternatives to foundational utilitarianism are described; the chapter seeks to explain how a law and economics approach to issues in the IP field is consistent with these alternative foundational justifications for IP law. A.  Consequentialism versus Deontology: Rudiments Utilitarianism is one form of consequentialism, which is the label applied to philosophies that direct us to choose from among alternative courses of action by deciding which will produce the best consequences in the world (Smart and Williams, 1973; Darwall, 2003; Scheffler, 1988; Kaplow and Shavell, 2006. We look at one course of action and add up all the positive effects it would have on all the people involved, then look at all the negative effects on all involved. Then we do the same with all other courses of action. The best course of action is the one that produces the highest ‘net positive.’ ‘Best consequences’ in this analysis can be described in a number of ways, but what they all have in common is the assumption that we can assess the state of the world using some sort of impersonal measuring stick. In other words, we can assess positive and negative effects using a common denominator, some measure that allows us to take account of the effects of the action on all persons, taken together. Put differently, this common measuring stick applies across all people and allows us to reach an aggregated result. Philosophers over the years have used various measuring sticks in this analysis. Utility, or hedonic pleasure, was the original one, suggested by Jeremy Bentham (with an assist from John Stuart Mill). A more generalized measure called ‘happiness’ is often invoked in more recent theories; this measure abstracts somewhat from the pure physical pain and pleasure of the Benthamite form of hedonism. The corollary measure of ‘welfare’ was proposed in the nineteenth century, and quickly taken up by economists, who found it more susceptible to mathematical modeling and therefore more tractable for their particular purposes (Harsanyi, 1990). This in turn gave rise to what is now known as ‘welfare economics’ (Feldman and Serrano, 2006). Because of the dominance of this form of social science analysis in the contemporary academy, it is safe to say that for many scholars outside philosophy proper, consequentialism equals utilitarianism, which equals welfare economics. This three-way approximation certainly prevails in the field of IP law. In its most frequent usage, utilitarianism means the use of economic principles and empirical evidence to determine what is the best course of action when confronted with a particular policy choice in the IP field. It is of course also defined partly in opposition: utilitarianism is the opposite of deontological theories. Legal scholars began applying economic logic to legal doctrines in the 1960s. The usual origin story centers on the University of Chicago (Rowley, 2005). Almost from the beginning, there was debate over how closely ‘law and economics’ followed the tenets of utilitarian philosophy. Some of the debates simply tracked traditional debates about the viability of utilitarianism itself, most notably the question whether interpersonal utility assessments can be aggregated or compared. There was also a robust early discussion over whether law and economics was a positive methodology (merely describing, and not evaluating, the content of legal rules) or had instead (or in addition) a normative agenda as well. This culminated in an oft-cited exchange concerning welfare: is it a neutral measuring stick? Is it an independent value that needs to compete with other values such as fairness or justice, when it comes to the final calculus for deciding on legal

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74  Research handbook on the economics of IP law volume 1 rules? Richard Posner, a founding figure in the movement, has expressed slightly different answers to these questions over time (compare Posner, 1979; Posner, 1980; Posner, 1988; Posner, 1998; Parisi, 2005). Because of this, and because consistent philosophical justification is not that central to the law and economics discipline, there is no strong consensus about these issues. Instead, there is general agreement on a loose set of understandings: rationality (perfect or constrained) drives most behavior; data-driven empirical findings (‘evidence-based reasoning’) take precedence over ‘value-laden’ analyses; and, above all, some generalized sense of welfare maximization (perhaps leavened at times with fairness considerations) is the proper organizing principle and operational methodology for legal scholarship. 1. Deontology A deontological theory is one, quite simply, based on notions of right and wrong. In this type of theory, a moral principle determines right and wrong; violating a principle cannot (in general) be justified by the fact that such a violation would produce good consequences. Deontological theories speak of individuals and their rights, and they are not in general oriented toward interpersonal aggregations or measures to figure out a correct course of action. These are, as the title suggests, rudimentary statements of each type of theory. The reality is much more complex, which should not be surprising, because philosophers have been debating these issues since at least the eighteenth century. Just to take some examples of many that might be chosen: there are consequentialist theories that try not to force individuals to make choices that override their own deeply held principles or values. And there are deontologists who defend vigorously the notion that part of being a moral person is taking account of how one’s actions affect other people – a form of interpersonal consideration, if not outright aggregation. But it is beyond the ken of this chapter to go too deeply into these nuances. For the most part I will take the conventional, rudimentary views at face value as they are used in the IP field. The goal here is simply to explain how these different foundational principles – consequentialism versus deontology – work as justifications for IP law, and as guides to policymaking with respect to discrete questions in IP law.

II.  CONSEQUENTIALISM AND ITS CRITIQUE The prevailing view is that US IP law has always had a utilitarian orientation.1 What has not received as much attention is the precise relationship between utilitarian foundations, law and economics as a scholarly orientation or methodology, and empirical evidence for various propositions about IP law. Those are the topics I take up in this section.

1

  See, for example, Fromer (2012, p. 1752):

  At bottom, utilitarian theories of intellectual property rest on the premise that the benefit to society of creators crafting valuable works offsets the costs to society of the incentives the law offers to creators. Because this utilitarian framework establishes a cost-benefit analysis, the leading scholarly analysis of intellectual property has used an economic lens.

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Philosophical foundations of IP law  75 In reality there are two varieties of consequentialist justification for contemporary IP systems. They are related in a general way, but quite different once one pokes beneath the surface of things. The first operates at the macro level, and asserts simply that the presence of a functioning IP system is correlated with (i.e., very often observed in conjunction with) objective indications of economic growth, such as rising Gross National Product (GNP). The second provides that the best way to decide about proper IP policy is to weigh the positive and negative effects of any proposed course of action, and then choose the action with the greatest net positive outcome. This second theory is what can be termed micro-level IP consequentialism. It is the unstated, but widely shared, philosophical orientation of many (if not most) US-based IP scholars. A.  The Macro Theory The first argument depends largely on macro-level studies showing a correlation between patenting behavior, copyright registrations, and so on, and well-respected indicators of economic growth and health: research and development (R&D) spending, GNP growth, and the like. We will therefore begin with these macro-level data. As we will see, while there is a fairly clear correlation between accepted indicators of economic growth and the presence of an IP system, the devilish problem is to determine which way causation runs. Put simply, it is just not clear if people file more patents because they are more prosperous; or if prosperity flows from having filed more patents. As two highly skilled, and neutral, observers put it: ‘[T]he availability of intellectual property for innovation creates incentives for investment as well as potential impediments to diffusion and cumulative innovation. The net effects are quite complex to sort out from both theoretical and empirical perspectives’ (Menell and Scotchmer, 2005). Let us put causation aside for a moment, however, and begin with correlation. Many scholars over the years have shown that there is a close relationship between productivity and economic growth. The basic idea is that economies grow when people learn to get more output from a fixed supply of inputs. Economic growth, in turn, is closely related to all sorts of positive trends such as improved health, longevity, greater personal autonomy, and so on. The next link in the chain centers around innovation. The key to productivity increase is to get new technologies that multiply the output from a given stock of inputs. The classic studies by Robert Solow showed that most of the increase in per capita GNP over time stems from increased productivity, as opposed to increases in the stocks of tangible resources (Solow, 1957). Technology is the key to this process. And, given that old technologies are quickly incorporated into the production function of an economy, new technologies are required if productivity is to grow. Thus the classic triad: economic growth; productivity; and innovation. Studies of innovation are based on empirical survey data. Over time, innovation research has expanded from an original focus on new products and processes; it now includes organizational innovations (new ways of arranging work flows, for example) and new marketing methods (OECD, 2005). Within this formulation, the typical proxy for investment in innovation is spending on R&D. R&D spending has been studied exhaustively, primarily because it is a

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76  Research handbook on the economics of IP law volume 1 ­ ell-accepted statistical measure, and it is represented in data gathered by many national w governments. The connection between IP protection and R&D spending is robust, and has been established in a variety of economies over an extended period of time. As usual for this sort of study, the results are stronger for patents than copyrights. But overall, IP can be said to be correlated with standard indicators of economic growth. If correlation were causation, this would be enough to show that IP is a beneficial social institution. It would answer what has been termed the foundational question in IP: whether society ought to establish an IP system at all (beyond foundations – the details of such a system – are another matter.) The problem is that causation is a tricky issue in this case. Perhaps stronger IP protection causes – or helps to cause – economic growth. But perhaps it is the other way around: as wealth increases, people seek to protect their intellectual creations more vigorously. The first description has IP causing growth. The second has growth leading to a demand for more IP protection. Disentangling the two has proven quite difficult. While some claim the macro evidence shows IP helps cause growth, it is also clear that IP alone does no such thing. Very poor countries that pass stronger IP laws have no positive net gain at all. The best that can be said, then, is that IP protection may help cause some part of a nation’s growth, when combined with other policies. Development economist Keith Maskus emphasizes in particular that a positive impact for IP rights depends on institutions that otherwise support economic competition: The evidence supports the view that product innovation is sensitive to IPRs in developing countries, while [foreign direct investment] and technology transfer go up when patent rights are strengthened. Overall, there is a positive impact on growth, but this impact depends on the competitive nature of the economy. (Maskus, 2000, p. 472)

Other scholars stress that IP is helpful only when it is strengthened at the ‘right’ moment in a country’s development trajectory (Kim et al., 2012). One key aspect of this is that a country must have evolved IP enforcement mechanisms, as well as having passed IP laws, to foster actual development (Eicher and Newiak, 2013). To summarize the macro case, we might say this. Although the data is incomplete, it is possible to put together a plausible case that IP law has proven to be an effective part of modern economic systems. IP law might be said then to have made a positive contribution to economic development. At a minimum, IP law has certainly not slowed economic development, at least not convincingly, in a way that empirics have been able to capture. Either argument might be enough to establish that the costs of having a patent system have not been proven to outweigh the benefits,2 thus making out a basic macro-level case for IP.

2   It is obvious from the formulation that this way of stating the issue favors the existence of a patent system. If the burden of proof was on someone trying to establish that the patent system actually confers net benefits, this would favor those who oppose patents. On this general point, David McGowan (2004) discusses the same point with respect to the copyright system, and argues that this points toward nonconsequentialist justifications for copyright.

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Philosophical foundations of IP law  77 B. Consequentialism ‘All the Way Down’: Micro-Consequentialist Roots of Macro-Consequentialism The methodology of macro-consequentialism leads directly to the application of consequentialist analysis to the details of an IP system. Indeed, the macro case can be seen as simply the aggregate result of the application of all the discrete rules and details of the IP system. This is not to say that every particular rule in an IP system is optimal, or even net positive; just that the aggregate result of all the detailed rules exerts a net positive effect on growth. The macro picture, in other words, in no way obviates the need to search for detailed data that might help determine correct choices concerning specific policy issues. This combination of macro-level faith in the IP system, together with a commitment to a consistent consequentialist approach to all detailed issues might be described as the working theoretical orientation of many US IP scholars. They take the macro case as more or less given, and then proceed to look for the best available data to help answer questions about the details of the IP system. Most scholars in effect combine macro consequentialist foundations with an aspirational micro-consequentialist orientation to specific policy issues. Despite this working consensus, micro consequentialism is actually compatible with two different views of the macro issue just described. As mentioned, one who believes that macro data prove IP is a net positive institution simply applies the empirical method ‘all the way down’: each micro-level decision within the system is made with reference to the best data available. Because one believes, for example, that copyright law makes overall economic sense, one applies consequentialist reasoning to the question of whether copyright law ought to include a ‘fair use’ privilege; and if so, how far that privilege should extend. Or one applies economic/consequentialist analysis to the question of how long the term of copyright protection ought to be. Indeed, a theoretically consistent consequentialist would say that the macro case is simply the outcome or sum of all the individual micro cases; the aggregate positive social welfare contribution of IP law is a product of the fact that each micro-level policy is maximized in terms of net positive social welfare, so that the net positive macro-level outcome is foreordained. It simply follows from the consequentialist approach to each micro-level issue. 1.  Consequentialism with nuance There are modifications and variations on consequentialism too numerous to detail here. Even so, a few of the more nuanced accounts bear directly on justifications for IP, so I will provide a brief sense of several relevant variants. One variant worth noting is the class of utilitarian theories that incorporates generalization. Utilitarian generalization is a form of utilitarianism under which an action is judged according to the effects that would follow if everyone acted similarly. The best-known form is rule utilitarianism; according to this approach, utilitarianism, ‘the rightness or wrongness of particular acts can (or must) be determined by reference to a set of rules having some utilitarian defence, justification, or derivation’ (Lyons, 1965, p. 11). (So-called ‘act utilitarianism’ looks instead at the non-generalized consequences only of one’s own individual action.) Utilitarian generalization is relevant in that it bears some similarity to Kantian ethics, in particular the categorical imperative. Both involve a universalizing step: actions are determined with reference to whether they would be

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78  Research handbook on the economics of IP law volume 1 desirable if pursued by all people. The difference, of course, is that for Kant the effects of actions generally do not matter, only their intrinsic rightness or wrongness. In any event Kantian style analysis has been applied both to a basic justification for IP rights (Merges, 2011), as well as to a number of specific problems within IP (see, e.g., Haemmerli, 1999; Treiger-Bar-Am, 2008). And utilitarian generalization is also related to contractarian models of government and social justice, though the contours of the fit are debated (Mueller et al., 1974; Mueller, 2002). Yet even though there is some family resemblance between generalized utilitarianism, Kant’s ethics, and contractarianism, in the end even this form of consequentialism encounters problems. The main one is that in some situations there is no single rule that both produces good consequences and complies with a basic sense of morality. The typical example involves cooperative interactions where multiple people must interact to produce a benefit, but adjustments are in order regarding situation-specific contributions by individuals. As Lyons (1965) shows, in such cases simple distributional rules (such as taking turns accessing a shared resource) are capable of both producing greater total benefits and complying with a basic sense of fairness. No single utilitarian rule does as well (if everyone acts first, there is congestion and overuse; if everyone refrains from acting, the benefits of access and use are lost) (Lyons, 1965, pp. 167–70). The general point is that under a number of plausible conditions rule utilitarianism, just as with act utilitarianism, leads to outcomes that seem unfair or unreasonable or both. The second variant worth mentioning concerns the special problem of how the individual treats him or herself. Utilitarianism requires that one’s personal preferences not be weighted in any way that distorts the consequentialist calculus. This seems implausible, in the sense that humans faced with a decision would seem to just naturally overweight the decision’s impact on themselves. In addition, it strikes some observers as unfair, in that it will often deprive the individual of the ability to shape his or her own life prospects; the relentless need to account for total consequences (i.e., the impact on everyone, not just one’s self) would seem a real burden. The relevance to IP law is that this is a branch of law that has often been understood as one that has special regard for the individual. Artists, writers, inventors, and all creators are involved in acts that not only benefit others but that also (and sometimes primarily) lead to self-fulfillment. In this context, the imperative to always include others (i.e., everyone else) in one’s decisional calculus seems especially onerous. Fortunately for the individual, at least one philosopher has addressed the issue. Samuel Scheffler (1994) provides a modified form of consequentialism that gives far greater leeway to the particularism of individuals. With what he calls an ‘agent-centered prerogative,’ Scheffler permits individuals in a consequentialist framework to weight the outcomes of their own projects more heavily than they weight general consequences, that is, outcomes with respect to everyone else. Indeed, Scheffler even provides that individuals can maximize value as calculated from their personal point of view. There is an upper bound, however; individuals cannot exceed some threshold level of cost imposed on others. Individual value calculations are permitted, in other words, but not beyond some level of ‘social’ cost. Agent-centered valuation is permitted, up to some level of socially determined (i.e., ‘impersonally valued’) cost. In addition, Scheffler says that it is always acceptable for people to maximize total benefits; they may, if they choose, be thoroughgoing consequentialists, with no special regard to their own projects.

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Philosophical foundations of IP law  79 Here is a form of consequentialism with real promise for the IP field. Under it, one may seek IP protection for a work that appeals to many people, and hence for which the restricted access that follows from IP protection might produce net negative social consequences. (Up to some threshold, anyway; at some point under Scheffler’s individualadjusted consequentialism the costs become too high and protection must be eschewed.) Yet this protection will be bounded, as mentioned, so that the individual IP right cannot harm others too much. It should be mentioned, however, that the self-regarding values Scheffler describes have a good deal of overlap with deontological considerations. ‘I want to protect that work despite (some) negative effects on others; I place a very high personal value on it’ comes awfully close to saying ‘That work has intrinsic value to me and it deserves protection; seeking protection for it is the right thing to do for me.’ Idiosyncratic valuation bumps up here against basic issues of fairness, or right and wrong. In that sense, Scheffler’s views can be seen as quite consistent with some justifications for IP rights that are not normally thought of as consequentialist in nature. Locke, for example, by virtue of his three provisos, explicitly recognizes the rights and needs of others when discussing the right of an individual to obtain property rights (Merges, 2011, ch. 2). Kant too, through his Universal Principle of Right, seeks to reconcile strong individual property claims with the need to account for the freedom of others (Merges, 2011, ch. 3). In this sense, Scheffler’s brand of consequentialism comes very close to philosophical views that treat property claims as more of an intrinsic right. If Scheffler’s notion of personal or idiosyncratic value can be expanded to include a sense of intrinsic right and wrong; or if the ‘third party effects’ recognized by Locke and Kant can be conceptualized as taking into account negative consequences for all others, the two families of theories might even be reconciled. C.  Critiques of Consequentialism There are two basic objections to consequentialism. One is that it can lead to outcomes that are morally reprehensible. The other is that it is impractical. I address them both briefly. In its pure form, utilitarian thinking can lead to things like this: given a certain demand for literature in a society, it could be plausible that the best way to obtain a steady stream of consumable literature would be to enslave a small group of high-output writers. Under threat of death or severe punishment, put them on a strict quota of words per day or chapters per month of novels, plays, short stories, and so on. Feed them and house them but otherwise pay them nothing. If the literature they produce is even mediocre, many dedicated readers might be tolerably satisfied. The cost of each book or story would be minimal; just the cost of confining and supporting the writers, spread over all the readers of their literature. How could this be defended? In a large enough society, the aggregated satisfaction of the readers might well outweigh the intense and concentrated disutility (i.e., agony) of the writers. If net total satisfaction is all that matters, the small pleasure of the many could dominate the deep pain of the few. Of course, it might bother some people that their literature is generated in such a fashion. That might reduce their utility in consuming it. But maybe not enough to make the practice overall net negative in terms of total utility. (One also wonders whether being

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80  Research handbook on the economics of IP law volume 1 ‘bothered’ in this way contains at least a hint of feelings of intrinsic right and wrong – shades of a deontological pull?) The point is not to predict what the net utility numbers would be. It is to point out the simple fact that if the numbers came out net positive, a consistent utilitarian would have to approve of the practice. The motto ‘live by the numbers, die by the numbers’ might be appropriate. In short: all sorts of things most of us find morally repulsive might be possible under a strictly utilitarian setup. It is that sense of moral repulsion that in effect constitutes the counterargument to pure-form utilitarianism. 1.  The calculability critique The second critique of consequentialist theories such as utilitarianism is that it is impractical. It is too difficult to determine the net consequences of almost any simple action, which means it is hopeless to attempt to make consequentialism the comprehensive basis for all social policy. This objection is about the limits of calculability. There are several dimensions to this. First, it is very difficult to predict all the consequences of a given action. This is of course well known in the literature on causation. Even deciding on what is an ‘important’ or ‘proximate’ cause of a downstream event is fraught with complexity. Matters become even more difficult when we take into account interaction effects – when we try to predict how one decision may affect others, and how related actions may interact with the first decision to produce final outcomes. Here is an example of this dimension of calculability. Let us say we are deciding whether the owners of internet platforms have to take responsibility for the copyright status of material that users post on the platforms. One proposal is to generally shield the platform owner from liability, subject to a duty to shut down the online posting activity of specifically identified, high-volume copyright violators. The other proposal is to raise the platform owners’ level of responsibility – to make them liable in more circumstances for online postings that infringe copyrights, whether the person posting the material can be identified or not. What are the consequences of this decision? The high-shield proposal will certainly benefit the platform owner; it need not worry much about ruinous copyright infringement liability. But perhaps the creators of copyrighted works will suffer if this shielding cuts into their ability to make money? Perhaps. But then again the relative openness of the platform may provide a forum for more creators. Perhaps amateur creators will gain a larger audience. Perhaps users of the platforms will benefit from a greater diversity of creative works in the low-copyright-enforcement milieu? On the other hand, perhaps the low-shield/high-liability option will lead to the creation of sophisticated filtering software that helps to identify copyrighted works. Maybe this software will abet censorship. Maybe it will lead to automated compensation mechanisms that help identify specific instances where copyrighted works are used, and provide direct small payments to creators. And perhaps this will lead to more creators entering the field in hopes of making a living. But then again if platform companies have to pay copyright infringement claims on a regular basis they may innovate less. They may not have the money to invest in creating their own studios for making videos and music. This may cause artists who would have benefitted from these investments to be worse off than they otherwise would be. Perhaps some of these artists who would have benefitted will leave creative industries and the world will

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Philosophical foundations of IP law  81 lose out on a masterpiece or two. One or more may even die in despair, fail to have children they otherwise would have had. Maybe one of these unborn children would have been the scientist to cure cancer or discover cheap, safe fusion energy. And so on. When we spin out the potential consequences in this way, what jumps out is the hopelessness of comprehensive consequentialism. As one philosopher put it: ‘We may not be strictly without a clue, but we are virtually without a clue. The trouble for consequentialism then is that the foreseeable consequences of an action are so often a drop in the ocean of its actual consequences’ (Lenman, 2000, p. 350) (emphasis in original). Even an attempt to mitigate the problem by assigning probabilities to various outcomes will not save the day. This just moves the necessary complexity to a different task (assigning weights to events), it does not eliminate it. Put simply, ‘if utilitarians are worried about the impracticality objection, they should not turn to expected utility utilitarianism. That theory does not provide the basis for a cogent reply to the objection’ (Feldman, 2006, p. 49). It is easy to see the force of this critique when applied to IP law. To begin, there is almost no area of IP law that has been studied extensively enough to warrant a ‘net grand total’ conclusion. The many empirical studies in this field often consider only one isolated doctrine or practice; very few are anywhere near comprehensive (Buccafusco and Heald, 2013; Budish et al., 2015; and generally Merges, 2016). There is, however, one possible exception. It seems safe to say that removing patent protection from the pharmaceutical and chemical industries would work a serious hardship on those industries as currently constituted (see Graham et al., 2010). Even here though, conclusions can only be tentative, because the studies concentrate on the industries in their current form. It is quite conceivable some fundamental restructuring (e.g., government subsidies; or strict regulation of consumer advertising expenditures relative to R&D investments) might work such changes that patent protection is no longer essential. So even in this canonical case we cannot conclude that we have sufficient data on which to base a permanent and comprehensive decision about the consequences of eliminating IP protection for these industries. D.  An Illustration of the Problem: New Theories, Pro and Con To show why there is uncertainty about the net benefits of IP law, it may help to review two waves of recent IP scholarship. One develops ideas about the benefits of patents that are a modern variant of the classic ‘incentive to invent’ theory. The other examines carefully industries where IP has largely not been available – and argues that thriving innovation in these industries demonstrates that IP rights are not necessary in them, and possibly in other industries as well. Both theories are interesting and innovative. But from the perspective of determining whether IP is a net positive or negative social institution, they are of no help. They point in precisely opposite directions. One new branch of literature emphasizes patent-related benefits in the form of enhanced incentives to disclose, exchange, and license information. Briefly put, this research emphasizes the transactional role IP rights play in economic activity. Traditional theory simplified research activity as taking place inside a large firm; the role of patents was to allow a firm to recoup expensive R&D costs. This newer literature emphasizes patents as facilitators of exchange. Thus, patents are said to make small, independent ‘idea shops’ more viable, because patents make possible a specialized market in pure ideas.

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82  Research handbook on the economics of IP law volume 1 Patents affect not only the overall volume of innovation, but, critically, they affect where innovation takes place. Because small companies have some recognizable benefits, patents may indirectly affect the overall volume and quality of innovative ideas. But they do so indirectly: by making it easier for more innovative small firms to earn income through the licensing of innovative ideas to other firms that engage in actual production. In some related research, two economists have shown that the availability of published patent applications (which came into US law in 2000) led to (1) a higher volume of patent licensing, and (2) more rapid licensing of inventions than in earlier periods (Hegde and Luo, 2016). These results show that patents tend to speed the transfer of ideas, and promote more rapid diffusion of innovations throughout the economy. Again, the effect of patents on innovation is positive but in a way different in kind from the classic treatment of patents as incentive to aggregate R&D spending. The other branch of theory I want to mention looks at industries where IP rights are not available, but which seem to foster significant innovation nevertheless. From French chefs (Fauchart and von Hippel, 2008) to stand-up comics (Sprigman and Oliar, 2008) and from fashion designers (Sprigman and Raustiala, 2006) to tattoo artists (Perzanowski, 2013), creative people working in various industries develop norms and practices that provide an adequate, and perhaps often superior, alternative to formal IP protection. Some have taken to calling these areas, collectively, IP’s ‘negative spaces’ (Rosenblatt, 2011). From these studies, a consensus theory has begun to emerge, which holds that IP law is far less necessary than many have traditionally supposed. The absence of IP, they say, not only fails to impede creative contributions in these areas; in some cases at least there is more activity. From a descriptive or positive beginning, in other words, negative space theory often moves to a more normative point: the essential wrongheadedness of the traditional story that IP rights are always and everywhere necessary to call forth creative works. One note of caution is in order here. Though the negative space literature looks impressive, the truth is that taken together, the ‘negative space’ industries studied to date (other than fashion) total roughly $12.75 billion in revenue per year (tattoos, French cooking, and stand-up comedy). The fashion industry is much larger – but the problem is that many believe the ‘negative space’ story (thriving innovation without IP rights) does not fit the industry at all (see, e.g., Hemphill and Suk, 2009). And if we remove fashion from the list of negative space industries, the fields studied in this research represent only a small percentage of the economic activity that appears closely tied to IP protection. The International Intellectual Property Protection Alliance (IIPPA), for example, estimates that the ‘copyright industries’ alone add $1 trillion to the US economy each year.3 It is very difficult to arrive at similar estimates for the ‘patent industries’ because companies in so many industries obtain large numbers of patents every year. But we can say that the pharmaceutical industry is worth nearly $300 billion per year alone (Statista, 2015) and that the chemical industry totals roughly $800 billion (Seijo, 2017). Add in medical devices, not to mention information technology, and it is apparent that the accounts of negative space fields show we have a long way to go before deciding that many other industries would benefit from the elimination of IP rights.

3   Figures such as these should always be taken with a grain of salt as they are (1) based on large aggregate data sources, and (2) prepared by interest groups with a string agenda (Verrier, 2013).

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Philosophical foundations of IP law  83 Yet another area where new data is available is in the area of small companies and patents. Here again a patent-positive story competes with one that is far less sanguine (Reidenberg et al., 2015). On the positive side, Reidenberg et al. constructed a random sample of small companies in the smartphone industry to assess how patents have affected them. The authors found that holding a small number of patents was associated with firm survival, financing, and other positive outcomes, and in addition that these firms were not subject to excessive patent litigation, as some had feared in this patent-intensive industry where many patents are held by large companies. On the other hand, Colleen Chien found that non-practicing entities or ‘patent trolls’ disproportionately harmed small companies with their activities (Chien, 2014). She reported that: Most unique defendants to [patent] troll suits are small. Companies with $100M of annual revenue or less represent at least 66% of unique defendants to troll suits and at least 55% of unique defendants in troll suits make $10M or less per year. . ..To the extent patent demands ‘tax’ innovation, then, they appear to do so regressively, with small companies targeted more as unique defendants, and paying more in time, money and operational impact, relative to their size, than large firms. (Chien, 2014, pp. 461, 462)

Chien even found that in at least one case, a formerly innovative startup, OpenWave, Inc., had shifted its own business model to become a patent troll itself (Chien, p. 479, n. 71). The point here is not to scrutinize the new research topics just mentioned. Instead, the object is to simply notice the enormous complexity of the economic landscape within which IP rights operate. And to observe that sometimes it seems in the IP literature as though one consequentialist/empirical step in one direction (either defending IP, or ­showing its inefficiency) is met immediately by a step in the opposite direction. E.  Modest Consequentialism So it is no wonder that many scholars are agnostic about the macro level; perhaps IP makes economic sense, in total, perhaps not. For these skeptics, the best approach in either case is to take each particular issue and maximize net social welfare based on the best available data about that particular issue. This view is closely compatible with the famous admonition by the Austrian economist Fritz Machlup, to the effect that it would be unwise based on current data to establish a patent system, based on what we know; but that it would also be unwise to do away with the patent system as we know it, now that it has been around for so long (Machlup, 1958). The idea is to maximize the net social welfare stemming from any particular decision about IP policy, notwithstanding an admission of ignorance regarding (and perhaps even the impossibility of knowing) the ultimate systemic net social welfare determination. When it comes to the macro question, Machlup himself falls right in between a ringing endorsement and a harsh rebuke. Yet this tepid assessment is still – many years after it was made – the starting point for most discussions of the field’s Big Question: are patents justified on the economic evidence, or are they not? The same conundrum has plagued copyright law (Breyer, 1971). And in copyright, even the micro-consequentialist theory has been called into doubt. As David McGowan states it:

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84  Research handbook on the economics of IP law volume 1 [O]ne cannot justify one or another copyright policy solely with consequentialist arguments. We do not even know such basic facts as how many people use the DeCSS program to make unauthorized copies of movies, or how much people who use file ‘sharing’ software to copy music would pay for that music if they had to. Worse yet, without some consensus on normative principles we could not make sense of the data even if we had them. If people who would not pay the lowest price a record company would accept for music copy the music on their own, is this bad or good? Should policy encourage or discourage it? (McGowan, 2004, p. 2) (footnotes omitted)

Other scholars agree (Zimmerman, 2011, p. 32; Boyle, 2008, pp. 207–8). A slightly different flavor of skepticism was described by Posner in 1998. He wrote: What the economist can say, which is a lot but not everything, is that if a society values prosperity (or freedom or equality), these are the various policies that will conduce to that goal, and these are the costs associated with each. The economist cannot take the final step and say that a society’s ultimate goal should be growth, equality, happiness, survival, conquest, stasis, social justice, or what have you. An economist discussing a ‘hot’ topic, such as whether human cloning should be permitted, might estimate the private benefits and social costs of human cloning, and even advise on the consequences of ignoring costs and benefits in fashioning public policy. But he could not tell the policymaker how much weight to give costs and benefits as a matter of social justice. (Posner, 1998, p. 1670)

Either Posner is saying that empirical data are ultimately inputs into a more value-laden welfare calculus, or that welfare itself must be subsumed into a more comprehensive decision-making process (based, perhaps, on deontological considerations). Either way, this is a more modest form of welfarism than strict micro-summing-to-macro-consequentialism as described earlier.

III.  DEONTOLOGICAL THEORIES, AND THEIR CRITICS Deontological theory is based on the simple idea of moral duties. We base our decisions on moral rules, on ideas of right and wrong, as opposed to basing them strictly on the consequences of our actions. Decisions about what to do are tested against compliance with rules of morality. Those rules inform whether an act is required, permitted, or prohibited. So for example, a deontological approach to murder would say it is wrong intrinsically. Thus even if the net consequences of a murder would be demonstrably positive (because the murdered person is very bad, for example, or because the murdered person is a billionaire who has pledged to leave his money to hundreds of people who are in great need), in general a deontological theory would prohibit it. Kantian deontological ethics are for the most part absolutist: rules of behavior do not change with context or circumstances. Lying, stealing, murder, and so on, are simply wrong – and that is it. Other forms of deontology are less absolute. They permit the pursuit of net positive outcomes, a la consequentialism, but subject to constraints. So for example, the pursuit of net positive welfare might be subject to the constraint that people should not be harmed in the process. Even these constraints may be overridden in some cases if enough good or bad is at stake; it may be permissible, for example, to kill a person in order to save the lives of hundreds or thousands of other people (Kagan, 1998; Zamir and Medina, 2008). As Rawls puts it ‘[D]eontological theories are defined . . . not

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Philosophical foundations of IP law  85 as views that characterize the rightness of institutions and acts independently from their consequences. All ethical doctrines worth our attention take consequences into account in judging rightness’ (Rawls, 1999, p. 26). The obvious question, however, is this: where do these deontological duties come from; how do we know what they are? Critics of deontological theories are quick to point out that these are inherently subjective judgments, that they will often differ among different people, and that they are not a trustworthy basis for making decisions, either individually or collectively. This is both a critique of deontology per se, and, indirectly, a defense of even a limited form of consequentialism. The implicit point is a version of the old academic adage, ‘it takes a theory to beat a theory.’ If consequentialism – whatever its deficiencies – is a real theory, while deontological theory is purely mush, then consequentialism wins by default. This is true regardless of its faults and limitations. Various forms of this argument can be found throughout the literature on law and economics. In the IP field, the strongest version calls one non-consequentialist theory a ‘retreat from evidence,’ and labels it with the pejorative of ‘faith-based IP’ (Lemley, 2015, p. 1337). It goes on to attack the theory by saying its ‘adherents are taking the validity of the IP system on faith and . . . the rationale for doing so is a form of religious belief’ (Lemley, 2015, p. 1337). Lemley in no way originated the claim that consequentialism has a unique and privileged status as a normative theory of law. In fact, this is a very old claim, in philosophy as well as law. As one commentator puts it: If normative law and economics is only one possible position in normative legal philosophy, then any suggestion that one should cede terrain in favor of the other seems out of place. However, economic lawyers might want normative law and philosophy to be the final position in normative legal theorizing, the ‘end of public ethics,’ so to speak. Interestingly, this tenet could not be grounded on any number of theoretical or empirical advances made in positive law and economics. Whatever its degree of explanatory or predictive success, positive law and economics cannot yield normative consequences. This is just a way of rephrasing Hume’s famous motto that ‘is’ does not imply ‘ought.’ A similar idea was defended in twentieth-century metaethics by claiming that—without assuming the proper naturalist definition—it is fallacious to draw moral judgments from a set of premises only containing factual statements. Normative law and economics, like any other consequentialist moral theory, is not ‘naturally’ true. It is absurd to attack nonconsequentialism as implausible or irrational just by noting that its results are at odds with consequentialism. In the absence of further argumentation, it is question-begging to dismiss nonconsequentialism by taking a stand on consequentialism. By the same token, it is question-begging to attack fairness-based theories of law by relying on the welfare maximization thesis of normative law and economics. (Spector, 2004, pp. 349–50)

The argument goes back much further however – to the debate over whether ‘wealth is a value’ that took place in the early days of law and economics ascendance in US law schools. From time to time, lawyers and judges seeking to promote economic values such as efficiency and wealth-maximization have taken the further step of arguing that competing paradigms of jurisprudence based on commonsense notions of justice are theoretically inadequate bases on which to ground a system of legal rights and obligations. [Oliver Wendell] Holmes himself is a leading example of this tendency. [Richard] Posner’s book (Posner, 1999) is perhaps the most ambitious attempt yet by a judge to attack the foundations of natural justice in order to promote the law and economics movement in this way. It contains many telling criticisms of

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86  Research handbook on the economics of IP law volume 1 recent ­professional moral philosophy, delivered with a force and directness only a secure outsider can provide. Nonetheless, the book’s central arguments are remarkably unsuccessful. In his zeal to criticize philosophers, Posner commits surprising mistakes that suggest he misunderstands basic questions, not only of moral philosophy, but of jurisprudence as well. (Mikhail, 2002, pp. 1057–8; for Holmes’s views, see Alschuler, 2000)

A.  The Critique of Subjective Moral Intuitionism The critique of deontology I have been describing boils down to the idea that notions of right and wrong are rooted in subjective judgments. They are the product of intuition, whim, or taste. And so they cannot form the firm foundation of any kind of rigorous, consistent theory about how people should act. Defenders of deontological theories have made various responses to this objection over the years. The most thorough perhaps comes from Kant, who wrote at great length about separating mere inclinations or intuitions from considered moral judgments (Kant, 1785). The key for Kant is the notion that every person has not just inclinations and preferences, but also an elaborate internal construct that seeks the good. This construct can be cultivated and consulted; it is a rational part of the self, distinct from pleasure-seeking aspects of the self. Kant said that we can use this rational apparatus to generalize any proposed action – to envision what the world would be like if, when we choose to act, that choice was embodied in a universal principle applicable to all. According to Kant, our internal reasoning mechanism can be combined with this universalizing step to produce the famous categorical imperative. This in turn provides a rational and consistent set of rules to govern human action (O’Neil, 1990). Another answer to the subjectivity critique of deontological systems takes a similar form. The philosopher John Rawls asks us to imagine making a list of moral rules, and then testing and refining them against moral judgments about specific acts or decisions. The back-and-forth between rules and applications produces what Rawls calls ‘reflective equilibrium,’ which is a much more refined and rational set of judgments as compared with initial, simple moral intuitions (Rawls, 1971, pp. 44–5). Others have extended this idea to more explicitly consider generalizing the equilibrium across a number of people (Scanlon, 2000). And there are of course defenders of a shared sense of morality who argue that this sense emanates from outside people and can be recognized and developed using spiritual practices (Kwall, 2009, pp. 139–40). 1.  A shared moral sense The elaborate procedures just described are meant to show that deontology need not be based on a primitive form of moral intuitionism. In fact the word ‘deontology’ derives from ‘duty’ (deon) and ‘the study or science of’ (logia). It is meant to be systematic, not ad hoc. Even so, without taking anything away from the systematic approaches described, a separate defense of deontology proceeds from the fact that people make moral judgments all the time. Despite the critics’ point that intuition is inherently subjective, whimsical, and unreliable, proponents of an innate deontology show that there is more overlap among people regarding moral intuitions than is sometimes supposed. Though deontology makes great efforts to distinguish between ‘raw’ moral intuitions and a refined system of

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Philosophical foundations of IP law  87 well-considered moral rules, there is solid evidence that some moral intuitions are in fact very widely shared. B.  Empirical Studies of Moral Judgment Evidence has mounted in the past 25 years or so that there are very extensive overlaps in people’s basic moral intuitions. Indeed, it has become common in some circles to speak confidently of ‘moral universals.’ And in general, recent research suggests that quick first impressions – based on intuition – are more reliable bases of judgment than many would suppose (Gladwell, 2007). Consider, for example, a well-known hypothetical situation designed to explore moral judgments. In the basic version of this scenario, called ‘the trolley problem,’ a person observes that an out-of-control trolley is heading for five people and will kill them unless it is diverted (Thomson, 1985; Kamm, 1989). The only way to divert it is to pull a switch that turns the train onto a different track – where it will kill one person. In another basic variation, the only way to save the five people is to throw a large person, standing on a walkway above the train track, in front of the trolley to stop it. Students of moral theory use these (and many other) variations to explore moral judgments. But an empirical branch of this field uses the trolley problem to test moral judgment across cultures, age groups, and other demographic categories. In one study, researchers asked people from many countries about two simple variations on the famous ‘trolley problem,’ and found widespread agreement about which actions were right and wrong across many ethnicities, religions, ages, and backgrounds: [A]cross a variety of nationalities, ethnicities, religions, ages, educational backgrounds (including exposure to moral philosophy), and both genders, shared principles exist. That is, across every subpopulation tested, scenario 1 (turning the train) elicited a significantly higher proportion of permissibility judgments than scenario 2 (shoving the man), suggesting that one of . . . three [common moral] principles . . ., or their combination, guided the moral judgments made by each group. (Hauser et al., 2007, p. 16)4

A number of influential scholars have also documented what they call ‘human universals’ – consistent moral judgments across cultures about important subjects such as murder, rape, and theft. Anthropologists, in particular, have revised the widespread view of ‘cultural relativism’ that prevailed in an earlier era, in part by revisiting some famous case

  The three principles are explained by the authors:

4

  [T]he observed pattern of judgments was consistent with at least three possible moral distinctions: (1) Foreseen versus intended harm (Principle of the double effect): it is less permissible to cause harm as an intended means to an end than as a foreseen consequence of an end; (2) Redirection versus introduction of threat: it is less permissible to cause harm by introducing a new threat (e.g. pushing a man) than by redirecting an existing threat (e.g. turning an out-of-control train onto a man); and (3) Personal versus impersonal: it is less permissible to cause harm by direct physical contact than by an indirect means. The first two distinctions have been discussed in the philosophical literature as the content of plausible moral principles, while the third has emerged from considerations of both behavioral and neurophysiological evidence (Hauser et al., 2007, p. 15).

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88  Research handbook on the economics of IP law volume 1 studies purporting to show aberrant practices, and revising those findings in light of more detailed research (see, e.g., Pinker, 2003; Brown, 1991). But some philosophers are less than convinced (Alfano and Loeb, 2014). Part of the misunderstanding about moral intuition has to do with the nature of intuition itself. Many casual observers equate ‘intuition’ with a ‘retreat from evidence,’ meaning a substitute for empirical observation or even scientific fact (Lemley, 2015, p. 1337). But this view seriously misunderstands the nature of moral reasoning. One prominent explanation of moral judgments is that they are based not on ‘irrational’ intuitions, but instead on a ‘universal moral grammar’ that is inherent to all human beings. This concept is based on an analogy to Noam Chomsky’s famous finding that all humans are born with a common human template for grammar and language (Mikhail, 2013). The key point is how researchers learned of this template. It was not itself invented speculatively, but instead was induced from extensive empirical observations. In the world of language, the universal grammar notion came to prominence because researchers constantly observed that native speakers without sophisticated language training ‘just knew’ proper word usage and sentence structure, even with regard to words and sentence-types they had never encountered before (Cook and Newson, 1996; Jackendoff, 1994; Pinker, 1994). This led linguists to look for further evidence of an ingrained, ‘hard-wired’ capacity for language and language structure – evidence which has mounted ever since. Moral philosophers familiar with empirical studies of moral judgment across cultures posited a similar type of template, only in the moral sphere. Observations, such as those centered on the trolley problem, confirm that people from all cultures and with all education backgrounds share similar judgments concerning right and wrong actions in several basic human situations (see also Pinker, 2008). These studies are not, unfortunately, widely known in law and economics circles – or perhaps among consequentialist thinkers generally. Leading law and economics pioneer and theorist Richard Posner, for example, has stated that ‘there are no general moral principles, just particular moral intuitions’ (Posner, 1999, p. 11). Moral philosopher John Mikhail critiques the Posner view this way: Posner takes for granted the standard ‘particularist’ assumption that moral judgments are made on a case-by-case basis, without the support of moral principles. This assumption is incompatible with the best explanation of the properties of moral judgment. To explain how the normal individual is able to make stable and systematic moral judgments about an indefinite number of novel cases, we must assume she is guided, implicitly, by a system of principles or rules. Without this assumption, her ability to make these judgments—and our ability to predict them—would be inexplicable. Posner’s insistence that the capacity for moral judgment consists of nothing more than ‘theoretically ungrounded and ungroundable preferences and aversions’ is therefore suspect from the start. (Mikhail, 2002, p. 1092)

To paraphrase: even if I could not explain an ‘objective’ set of moral principles to skeptics of deontology, that does not mean they do not exist. Mikhail once again explains: There is no justification for Posner to insist that the normal individual must be fully aware of the operative principles which constitute her moral knowledge, or that she can become aware of them through introspection, or that her statements about them are necessarily accurate. On the contrary, he should recognize that just as normal people are typically unaware of the principles guiding their linguistic or visual intuitions, so too might they be unaware of the principles guiding their moral intuitions. In any event, the important point is that, as with the

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Philosophical foundations of IP law  89 theory of language or of vision, the theory of moral cognition attempts to describe the operative principles of moral competence, not what experimental subjects may or may not report about them. (Mikhail, 2002, p. 1094)

1.  Studies of children’s judgments about ownership A different strain of empirical research has some important things to say about moral judgments concerning IP. Psychologists who study children’s responses to moral issues are interested in a number of issues, including the way moral sensibility develops as children grow. But one subfield in the area of children’s moral judgment is of particular relevance to issues of right and wrong as they pertain to IP. A group of studies with children subjects centers on questions of ownership. A brief review of these studies will be helpful in exploring further the issue of shared moral intuitions. One set of studies deals with judgments about ownership. In a typical experiment, pre-school age children are exposed to a person handling an object. The object is then left, and picked up by another person. A robust finding is that children infer ownership from first possession: [T]he first possession heuristic guides children’s ownership inferences. The findings provide the first evidence that preschoolers can infer who owns what, when not explicitly told, and when not reasoning about objects with which they are personally acquainted. (Friedman and Neary, 2008, p. 829)

Research shows that the first possession heuristic extends to ideas as well as physical objects. As one article title in this field says, ‘Children Apply Principles of Physical Ownership to Ideas’ (Shaw et al., 2012). At the same time, children are also able to distinguish ownership from possession. In studies where an object moves among a group of people, children track the person that others look to for permission to take possession. This person they infer is the owner. In this and other studies, it has been demonstrated that even very young children make sophisticated judgments about issues of ownership. The authors of one study put it this way: [C]hildren (6–8 years old) determine ownership of both objects and ideas based on who first establishes possession of the object or idea. Study 2 shows that children use another principle of object ownership, control of permission—an ability to restrict others’ access to the entity in question—to determine idea ownership. In Study 3, we replicate these findings with different idea types. In Study 4, we determine that children will not apply ownership to every entity, demonstrating that they do not apply ownership to a common word. Taken together, these results suggest that, like adults, children as young as 6 years old apply rules from ownership not only to objects but to ideas as well. (Shaw et al., 2012)

Other studies, concentrated on creative labor, are also highly pertinent to moral judgments about IP. For example, when presented with a conflict between someone who abandons an object and someone who finds it, adults are more likely to endorse the first owner when he or she has invested creative labor in the object (Beggan and Brown, 1993). In one study, children were shown an object, such as modeling clay, owned by person A; then observed as person B expended labor in making something creative (like a small figure) with the clay. In this and similar studies, ‘creative labor increases the likelihood that 3-year-old and 4-year-old children will endorse the creator and not the original owner of materials as the

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90  Research handbook on the economics of IP law volume 1 owner of a final product’ (Kanngiesser et al., 2010, p. 1238). And the instinct to recognize creative effort extends both to children’s own creations and those of others: [W]e found that children applied the same rules to their own property and to the property of the person they were directly interacting with. Although this behavior may have arisen as a by-product of the cooperative social setting of the experiment, our results do indicate that young children are able to overcome a previously established bias to maximize their own gain . . . (Kanngiesser et al., 2010, p. 1240)

Beyond the general assimilation of ideas to objects when it comes to notions of ownership, children also have a distinct reaction to plagiarism. In one article, the authors show that adults, older children (9–11 years old), and children from age 5 and up, all respond with negative moral judgments about plagiarism (Olson and Shaw, 2011). Original creativity is more highly valued, and one who copies and claims credit is assessed negatively even by these very young children. The study authors found that only 3- and 4-year-old children fail to distinguish between original creators and plagiarists. As the authors conclude, ‘by age 5 years old, children understand that others have ideas and dislike the copying of these ideas’ (Olson and Shaw, 2011, p. 431). 2.  Summary: a universal ‘intellectual property instinct’? What these studies show is that there are strong regularities in people’s thinking about ownership, fairness, and the importance of creative labor. And because the studies are cross-cultural, involve children, or both, they support the idea that moral judgments about these issues may be less due to socialization in a particular culture and more due to a basic shared moral sense. What these studies tend to prove is that moral judgments about ownership and creative labor are highly idiosyncratic and unstable. Critics of deontological theories, who argue against it as being ‘unscientific,’ should take note. As one commentator put it, in traversing the arguments of the critic Richard Posner: Posner fails to come to terms in any serious way with the hypothesis that human beings share a sense of justice rich enough to support a universal system of rights and obligations, ­including the right not to be murdered. This hypothesis is plausible and supported by a considerable body of empirical evidence. Throughout [his book] Problematics, Posner adopts the mantle of science and pokes fun at philosophers for being unscientific. But in truth, it is his relativism, not their universalism, that seems out of touch with modern science. (Mikhail, 2002, p. 1062)

The same may well be said of those who criticize deontological theories of IP law. It is they who are out of touch with modern science. Hence, even if one rejects the systematic deontological systems of Kant or Rawls, one must still confront the fact that, empirically speaking, when it comes to issues of property rights many people revert to a common, innate template for making moral judgments. Empirically speaking, when it comes to moral issues, people are not primarily empiricists. They rely on a set of moral judgments so common and pervasive they are close to being universal.

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Philosophical foundations of IP law  91

IV. RECONCILING CONSEQUENTIALISM AND DEONTOLOGICAL APPROACHES For many IP scholars the choice between deontology and consequentialism is difficult; each seems to capture something important about the field. Their instinct is to fight the binary choice, the compromise, to reconcile, to integrate. There are three ways to do that. The first two rely primarily on one methodology, using the other as a constraint. The other divides the methodological problem into two sharply delineated halves or levels. The threshold approach works like this: you begin by saying ‘I am consequentialist – but not all the way down the line. In the right circumstance, I might yield to a moral judgment, sacrificing some positive consequences because not to do so feels wrong.’ Or you say, ‘I am deontological in my approach – but not all the way down the line. In the right circumstances I might permit something that feels wrong in general, if there are overwhelming positive consequences for doing so’ (Kagan, 1998; Zamir and Medina, 2008). The other approach is to say, ‘I am not sure if there is an airtight consequentialist case for the existence of IP rights; but if I think IP is a morally just institution, something that would be included in any fair society, then I think the rules of IP should in general be designed to maximize positive consequences.’ This divides the problem of justifying IP into two distinct levels: the foundational level and a more policy-oriented, more operational level. A.  The Two-Level Approach The two-level approach is appealing because it recognizes the computational limits that plague the consequentialist argument for the existence of IP, yet preserves plenty of room for efficiency considerations. But is this too neat, or does the two-level approach suffer from a sort of fatal incompatibility between the two levels? To see how the two-level approach might hold together, consider the everyday problem of choosing whether to rent a home or buy one. Many people will say there is a solid, rational case for buying over renting. Given reasonable assumptions about interest rates, tax rates, the future trajectory for apartment rents, and real estate appreciation, buying just makes sense. There is, in other words, a solid foundation for this decision based on hard-headed, empirically-verified ‘dollars and cents’ considerations. One who is a bit skeptical, or who does not easily accept certain assumptions, might not be so sure. Maybe rental costs will be lower than projected; maybe the home mortgage deduction will be changed; maybe when one factors in the risk of uninsurable or expensive catastrophes, the case for ownership is not so solid after all. Within this latter group, even if one were to decide that the financial/economic case for home ownership is inconclusive based on available data, one might still decide to buy. This decision would simply be based on criteria other than strict dollars and cents calculations. Maybe ownership would bring a sense of accomplishment, or send a signal of commitment, that renting would not do. Whatever the alternate criteria, they would constitute the basic justification for the decision to buy. However, once the buy decision was made, cost minimization would provide a very important operational principle that should exert significant influence on the way the

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92  Research handbook on the economics of IP law volume 1 decision is implemented – that is, on exactly which house to rent or buy. The key distinction is that dollars and cents considerations – efficiency – is to be seen here as a tool in the service of some other, ultimate criterion. Efficiency is an operational principle meant to best implement a decision made for other (non-efficiency) reasons. If you are an IP scholar who is skeptical of the thorough consequentialist case for the existence of IP, then for you law and economics (or the efficiency principle) serves the same role in IP law as efficiency does in the case of a home buyer/renter who rejects the adequacy of the purely economic case for home ownership. It is a highly useful operational principle that can be deployed to help shape the precise contours of the IP system. It is not so powerful as to justify the system as a whole, but it is powerful enough to exert a strong influence on the way the system should be organized and administered. 1.  But is it not inconsistent? There are several references above to ‘consequentialism all the way down.’ It is also possible of course to be a deontologist ‘all the way down.’ Neither may seem ideal; but aren’t they both preferable to being nothing all the way down? Put differently, how can one defend switching approaches ‘mid-stream,’ as suggested by the two-level solution just described? This is of course a reasonable view. It has the obvious appeal of consistency. Yet it also makes sense to employ different theoretical tools at the two levels of analysis. To see why, consider those two levels again. The foundational question is whether the existence of any IP system can be justified or defended. Should a fair and well-organized society have IP protection? The book Justifying Intellectual Property (‘JIP’) (Merges, 2011) sets out a detailed discussion of this question, together with some attempts at an answer. JIP makes two basic points about the foundation level. First, reasonable people disagree. Some believe a good consequentialist defense of IP can be made. Others believe in foundational consequentialism in general, but are skeptical or agnostic about whether the consequentialist case has been made adequately. Others identify strong deontological roots for the IP field, and justify IP systems on this basis. Still others explain IP as consistent with conventional religious morality. JIP makes one observation on this topic. Although this level of disagreement may seem troubling, it is not a very big issue in the day-to-day debates in the field. This is because the debates take place on a different plane from that of foundational justification. Policy arguments employ standard themes that are distinct from the rigorous requirements needed to ground foundational justifications for the field. These themes are general principles. They are common policy tenets that are embodied in many diverse doctrines and rules. A good example is the principle of proportionality, which dictates that an IP right must be roughly commensurate in scope with the merit or value of the IP-protected work covered by the right. This principle can be found throughout patent law (nonobviousness, enablement, injunctions), copyright law (substantial similarity, thin copyright, fair use), and even trademark law (strength of marks, remedies). This principle is a general theme of IP law, and it does not depend for its force on any particular foundational justification. It is compatible with consequentialist and deontological theories alike. And it both transcends individual doctrines and shapes and guides the application of those doctrines.

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Philosophical foundations of IP law  93 Other general or ‘midlevel’ principles (so-called because they mediate between foundational justifications and specific doctrines) are efficiency, nonremoval (or solicitude for the public domain), and dignity (Merges, 2011). This is a nonexhaustive list; there are undoubtedly other primary themes in IP law that span specific doctrines and rules. One way to think about general or midlevel principles is that they are like a shared public space within which people holding divergent foundational belief can come together to discuss policy and reach consensus. They have been analogized to John Rawls’ idea of an ‘overlapping consensus’ among people holding different beliefs regarding religion and other fundamental life issues. Just as Rawls observed that the ‘public sphere’ can bring together people with divergent basic beliefs, so too JIP theorizes that the general or midlevel principles constitute a shared space that makes possible policy debate and consensus among people with differing opinions about the basic justifications for IP law (Merges, 2011; Rawls, 1971, p. 340). Another analogy is to Cass Sunstein’s idea of ‘incompletely theorized agreements,’ which in a similar way promotes consensus-building (Sunstein, 1995). For Sunstein, the solution comes by avoiding generalities and seeking consensus on specific, particular cases. But the result is the same: a procedure, vocabulary, or norm that permits consensus-building by avoiding the need to resolve issues at the most fundamental (and therefore most contentious) level. So the observation in JIP is that general policy principles allow us to avoid contentious arguments over the foundations of IP rights. The argument in JIP is something different. That book argues that we cannot justify IP rights based on current knowledge of their costs and benefits. The data is inadequate to the task. But, given the decision to have IP rights, important features of our current IP regime can be explained by recourse to the principle of efficiency. Using the best data and analytic techniques at our disposal, we as a society try to maximize the net benefits of IP rights. Put simply, the argument is that we do not have IP rights because we are sure they are efficient, but given that we have them – because they are justified by Lockean, Kantian, or other deontological normative precepts – we strive to make our IP system as efficient as possible. So, efficiency explains and ties together important aspects of the IP system as practiced, even though we cannot be sure of the utilitarian case for IP. To state this simply, one might say that efficiency is a good quality or feature for an IP system, but not an acceptable rationale for it (Merges, 2011, 2013). This has important implications for the way IP research is conducted. If one is a utilitarian or consequentialist, striving to rationalize each aspect of IP on the grounds of total social welfare or utility, a concern with efficiency is of course essential. If one does not agree that the consequentialist case has been made adequately to date, one can still take a great interest in efficiency. It is an important tool in the operation of an effective IP system. Even if the foundations of that system lie outside the realm of net consequences, efficiency considerations may still be highly relevant.

V. CONCLUSION Some scholars see little need for a deep discussion of whether IP law is necessary. It is obviously here, part of our world; why not just take it as it is, try to make the best of it given that it is here, and save the mental anguish of trying to justify it.

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94  Research handbook on the economics of IP law volume 1 For others, it only seems reasonable to sound the depths of the field. In this camp there are two primary options. The inquiry can center on whether the IP system as a whole leaves the world better or worse off. This measures the desirability of IP by looking at the consequences of having these rights. The good effects are weighed out with the bad ones; a net figure or assessment is made; and that is that. There are pluses and minuses to this. The other main avenue of inquiry looks to notions of right and wrong, to some set of moral or deontological rules. Different facets or qualities of the IP system are considered, and a general judgment is reached: IP either is, or is not, an institution that a good society would foster and support. Each of these two formulations has its attractions and problems. Toting up consequences gets very complicated, and it may prove difficult to reach a net determination. Deontology faces the criticism that it is too subjective, too unstable to support a viable justification. Each of these criticisms has answers. Calculability may be a problem, but at least consequentialism strives for precision and reproducibility; it has the aura of science and empirical fact on its side. Deontological judgments are more reliable than they appear, because they can be made systematically, and because even to the extent they are based on intuition, there is more consensus about moral intuitions than most critics believe. One way to bring these opposing justifications into greater harmony is to cordon off the foundational question – whether society should have an IP system – from the level of basic principles that are to operate if such a system is established. For a thoroughgoing consequentialist, this entails simply a two-step process; the net merits of each aspect of the IP system are plumbed, and then, in a separate step, a grand (net) total is arrived at. For one who relies on deontological foundations, such a procedure works especially well. He or she can arrive at an answer to the foundational question; if it is positive, then efficiency is one important tool that can be brought to bear on the running of the IP system in practice. Though consequentialist theory might seem lacking as a way to justify the IP system, consequentialist tools can be deployed once an IP system is established. This two-level solution to the problem of justifying IP has one attractive feature. It permits people to disagree about foundational justifications, while cooperating fully in the development of IP policies inside an actual IP system. It has the potential for us to hold to our deepest intellectual commitments, while debating policy on a more operational plane. So we can disagree, without being disagreeable.

REFERENCES Alfano, Mark, and Don Loeb. 2014. ‘Experimental Moral Psychology,’ Stanford Encyclopedia of Philosophy, accessed March 31, 2019 at https://plato.stanford.edu/entries/experimental-moral/. Alschuler, Albert W. 2000. Law without Values: The Life, Work, and Legacy of Justice Holmes. Chicago, IL: University of Chicago Press. Beggan, James K., and Ellen M. Brown. 1993. ‘Association as a Psychological Justification of Ownership,’ 128 The Journal of Psychology 365–80. Boyle, James. 2008. The Public Domain: Enclosing the Commons of the Mind. New Haven, CT: Yale University Press, 205–207. Breyer, Stephen. 1970. ‘The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and Computer Programs,’ 84 Harvard Law Review 281–351. Brown, Donald. 1991. Human Universals. New York, NY: McGraw-Hill Education.

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Philosophical foundations of IP law  95 Buccafusco, Christopher, and Paul J. Heald. 2013. ‘Do Bad Things Happen When Works Enter the Public Domain? Empirical Tests of Copyright Term Extension,’ 28 Berkeley Technology Law Journal 1–43. Budish, Eric, Benjamin N. Roin, and Heidi Williams. 2015. ‘Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials,’ 105 American Economic Review 2044–85. Chien, Colleen. 2014. ‘Startups and Patent Trolls,’ 17 Stanford Technology Law Review 461–506. Cook, Vivian J., and Mark Newson. 1996. Chomsky’s Universal Grammar: An Introduction. Maiden, MA: Blackwell Publishing. Darwall, Stephen. 2003. Deontology. Hoboken, NJ: John Wiley & Sons. Eicher, Theo S., and Monique Newiak. 2013. ‘Intellectual Property Rights as Development Determinants,’ 46 Canadian Journal of Economics 4–22. Fauchart, Emmanuelle, and Eric von Hippel. 2008. ‘Norms-Based Intellectual Property Systems: The Case of French Chefs,’ 19 Organization Science 187–201. Feldman, Alan M., and Roberto Serrano. 2006. Welfare Economics and Social Choice Theory, 2d ed. New York, NY: Spring Science + Business Media, Inc. Feldman, Fred. 2006. ‘Actual Utility, the Objection from Impracticality, and the Move to Expected Utility,’ 129 Philosophical Studies 49–62. Friedman, Ori, and Karen R. Neary. 2008. ‘Do Children Infer Ownership from First Possession,’ 107 Cognition 829–49. Fromer, Jeanne C. 2012. ‘Expressive Incentives in Intellectual Property,’ 98 Virginia Law Review 1745–824. Gladwell, Malcolm. 2007. Blink: The Power of Thinking Without Thinking. New York, NY: Back Bay Books. Graham, Stuart J.H., Robert P. Merges, Pamela Samuelson, and Ted Sichelman. 2010. ‘High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey,’ 24 Berkeley Technology Law Journal 1256–327. Haemmerli, Alice. 1999. ‘Whose Who? The Case for a Kantian Right of Publicity,’ 49 Duke Law Journal 383–491. Harsanyi, John C. 1990. ‘Interpersonal Utility Comparisons,’ in John Eatwell, Murray Milgate, and Peter Newman, eds., Utility and Probability. The New Palgrave. London: Palgrave Macmillan. Hauser, Marc, Fiery Cushman, Liane Young, R. Kang-Xing Jin, and John Mikhail. 2007. ‘A Dissociation between Moral Judgments and Justifications,’ 22 Mind & Language 1–21. Hegde, Deepak, and Hong Luo. 2016. ‘Imperfect Information, Patent Publication, and the Market for Ideas,’ 14-019 Harvard Business School working Paper (Feb. 8, 2016), accessed April 1, 2019 at http://www.hbs.edu/ faculty/Publication%20Files/14-019_726e14eb-8ebb-49d9-ae75-f368916cdf60.pdf. Hemphill, C. Scott, and Jeannie Suk. 2009. ‘The Law, Culture, and Economics of Fashion,’ 61 Stanford Law Review 1147–99. Jackendoff, Ray. 1994. Patterns in the Mind: Language and Human Nature. New York, NY: BasicBooks. Kagan, Shelly. 1998. Normative Ethics. Boulder, CO: Westview Press. Kamm, Francis M. 1989. ‘Harming Some to Save Others,’ 57 Philosophical Studies 227–60. Kanngiesser, Patricia, Nathalia Gjersoe, and Bruce M. Hood. 2010. ‘The Effect of Creative Labor on PropertyOwnership Transfer by Preschool Children and Adults,’ 21 Psychological Science 1236–41. Kant, Immanuel. 1785. Groundwork for the Metaphysics of Morals. New Haven, CT: Yale University Press. Kaplow, Louis, and Steven Shavell. 2006. Fairness Versus Welfare. Cambridge, MA: Harvard University Press. Kim, Yee Kyoung, Keun Lee, Walter G. Park, and Kineung Choo. 2012. ‘Appropriate Intellectual Property Protection and Economic Growth in Countries at Different Levels of Development,’ 41 Research Policy 358–75. Kwall, Roberta. 2009. The Soul of Creativity: Forging a Moral Rights Law for the U.S. Stanford, CA: Stanford University Press. Lemley, Mark A. 2015. ‘Faith-Based Intellectual Property,’ 62 UCLA Law Review 1328–46. Lenman, James. 2000. ‘Consequentialism and Cluelessness,’ 29 Philosophy & Public Affairs 342–70. Lyons, David. 1965. Forms and Limits of Utilitarianism. Oxford: Oxford University Press. Machlup, Fritz. 1958. ‘An Economic Review of the Patent System, Study of the Subcommittee on Patent, Trademarks and Copyrights,’ Committee on the Judiciary, U.S. Senate, 85th Congress, 2nd Session. Maskus, Keith E. 2000. ‘Intellectual Property Rights and Economic Development,’ 32 Case Western Reserve Journal of International Law 471–505. McGowan, David. 2004. ‘Copyright Nonconsequentialism,’ 69 Missouri Law Review 1–72. Menell, Peter S., and Suzanne Scotchmer. 2005. ‘Intellectual Property,’ in A. Mitchell Polinsky and Steven Shavell, eds., 2 Handbook of Law and Economics. Oxford: North-Holland. Merges, Robert P. 2011. Justifying Intellectual Property. Cambridge, MA: Harvard University Press. Merges, Robert P. 2013. ‘Foundations and Principles Redux: A Reply to Professor Blankfein-Tabachnick,’ 101 California Law Review 1361–86. Merges, Robert P. 2016. ‘Economics of Intellectual Property Law,’ in Francesco Parisi, ed., The Oxford Handbook of Law and Economics. Oxford: Oxford University Press.

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96  Research handbook on the economics of IP law volume 1 Mikhail, John. 2002. ‘Law, Science, and Morality: A Review of Richard Posner’s the Problematics of Moral and Legal Theory,’ 54 Stanford Law Review 1057­–127. Mikhail, John. 2013. Elements of Moral Cognition: Rawls’ Linguistic Analogy and the Cognitive Science of Moral and Legal Judgment. Cambridge: Cambridge University Press. Mueller, Christian. 2002. ‘The Methodology of Contractarianism in Economics,’ 113 Public Choice 465–83. Mueller, Dennis C., Robert D. Tollison, and Robert D. Willett. 1974. ‘The Utilitarian Contract: A Generalization of Rawls’ Theory of Justice,’ 4 Theory and Decision 345–67. OECD (United Nations Organisation for Economic Co-operation and Development). 2005. Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data. Paris, France: OECD Publishing. O’Neil, Onora. 1990. Constructions of Reason: Explorations of Kant’s Practical Philosophy. Cambridge: Cambridge University Press. Olson, Kristina R., and Alex Shaw. 2011. ‘“No Fair, Copycat!”: What Children’s Response to Plagiarism Tells Us about Their Understanding of Ideas,’ 14 Developmental Science 431–9. Parisi, Francesco. 2005. ‘Methodological Debates in Law and Economics: The Changing Contours of a Discipline,’ in Francesco Parisi and Charles K. Rowley, eds., The Origins of Law and Economics. Cheltenham: Edward Elgar Publishing. Perzanowski, Aaron. 2013. ‘Tattoos and IP Norms,’ 98 Minnesota Law Review 511–91. Pinker, Steven. 1994. The Language Instinct: How the Mind Creates Language. New York, NY: Harper Perennial Modern Classics. Pinker, Steven. 2003. The Blank Slate: The Modern Denial of Human Nature. New York, NY: Penguin Books. Pinker, Steven. 2008. ‘The Moral Instinct,’ The New York Times Magazine (Jan. 13, 2008), accessed April 1, 2019 at http://www.nytimes.com/2008/01/13/magazine/13Psychology-t.html. Posner, Richard A. 1979. ‘Utilitarianism, Economics, and Legal Theory,’ 8 Journal of Legal Studies 103–40. Posner, Richard A. 1980. ‘The Ethical and Political Basis of the Efficiency Norm in Common Law Adjudication,’ 8 Hofstra Law Review 487–507. Posner, Richard A. 1988. ‘The Ethics of Wealth Maximization,’ 36 University of Kansas Law Review 261–5. Posner, Richard. 1998. ‘The Problematics of Moral and Legal Theory,’ 111 Harvard Law Review 1637–717. Posner, Richard A. 1999. The Problematics of Moral and Legal Theory. Cambridge, MA: Harvard University Press. Rawls, John. 1971. A Theory of Justice. Cambridge, MA: Harvard University Press. Rawls, John. 1999. A Theory of Justice. Cambridge, MA: Harvard University Press. Reidenberg, Joel R., N. Cameron Russell, Maxim Price, and Anand Mohand. 2015. ‘Patents and Small Participants in the Smartphone Industry,’ 18 Stanford Technology Law Review 375­–429. Rosenblatt, Elizabeth L. 2011. ‘A Theory of IP’s Negative Space,’ 34 Columbia Journal of Law & the Arts 317–65. Rowley, Charles K. 2005. ‘An Intellectual History of Law and Economics: 1739–2003,’ in Franceso Parisi and Charles K. Rowley, eds., The Origins of Law and Economics. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Scanlon, Thomas. 2000. What We Owe to Each Other. Cambridge, MA: Belknap Press. Scheffler, Samuel. 1988. Consequentialism and Its Critics (Oxford Readings in Philosophy). Oxford: Oxford University Press. Scheffler, Samuel. 1994. The Rejection of Consequentialism: A Philosophical Investigation of the Considerations Underlying Rival Moral Conceptions. Oxford: Clarendon Press. Shaw, Alex, Vivian Li, and Kristina R. Olson. 2012. ‘Children Apply Principles of Physical Ownership to Ideas,’ 36 Cognitive Science 1383–403. Seijo, Bibiana Campos. 2017. ‘The business of chemistry,’ 95 Chemical & Engineering News (No. 19) 2 (May 8, 2017), accessed April 1, 2019 at https://cen.acs.org/articles/95/i19/business-chemistry.html. Smart, J.J.C., and Bernard Williams. 1973. Utilitarianism: For and Against. Cambridge: Cambridge University Press. Solow, Robert M. 1957. ‘Technical Change and the Aggregate Production Function,’ 39 Review of Economics and Statistics 312–20. Spector, Horacio. 2004. ‘Foreword: Law and Economics and Legal Scholarship,’ 79 Chicago-Kent Law Review 345–54. Sprigman, Christopher, and Dotan Oliar. 2008. ‘There’s No Free Laugh (Anymore): The Emergence of Intellectual Property Norms and the Transformation of Stand-Up Comedy,’ 94 Virginia Law Review 1787–867. Sprigman, Christopher, and Cal Raustiala. 2006. ‘The Piracy Paradox: Innovation and Intellectual Property in Fashion Design,’ 92 Virginia Law Review 1687–777. Statista. 2015. ‘Domestic and International Revenue of the U.S. Pharmaceutical Industry between 1975 and 2015 (in Million U.S. Dollars),’ accessed April 1, 2019 at https://www.statista.com/statistics/275560/domestic​ -and-international-revenue-of-the-us-pharmaceutical-industry/. Sunstein, Cass. 1995. ‘Commentary: Incompletely Theorized Agreements,’ 108 Harvard Law Review 1733–72.

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Philosophical foundations of IP law  97 Thomson, Judith J. 1985. ‘The Trolley Problem,’ 94 Yale Law Journal 1395–415. Treiger-Bar-Am, Kim. 2008. ‘Kant on Copyright: Rights of Transformative Authorship’, 25 Cardozo Arts & Entertainment Law Journal 1059–103. Verrier, Richard. 2013. ‘U.S. Copyright Industries Add $1 Trillion to GDP,’ Los Angeles Times (Nov. 19, 2013), accessed April 1, 2019 at http://articles.latimes.com/2013/nov/19/business/la-fi-ct-intellectual-prop​ erty-20131119. Zamir, Eyal, and Barak Medina. 2008. ‘Law, Morality, and Economics: Integrating Moral Constraints with Economic Analysis of Law,’ 96 California Law Review 323–91. Zimmerman, Diane L. 2011. ‘Copyrights as Incentives: Did We Just Imagine That?,’ 12 Theoretical Inquiries in Law 29–58.

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5.  Intellectual property law and the promotion of welfare Christopher Buccafusco* and Jonathan S. Masur** 5

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Contents I. Introduction II. IP Law and Consequentialism III. Versions of IP Consequentialism—What Should Congress Promote? A. Promoting Science and Useful Arts B. Promoting Social Welfare 1. Preferences/wealth 2. Objective approaches 3. Happiness IV. Implications for IP of Varying Approaches to Welfare A. Consumer-Side Welfare Effects 1. Patent law 2. Copyright B.  Producer-Side IP Effects 1. Creativity as benefit 2. Employment effects V. Conclusion References

I. INTRODUCTION The US Constitution grants Congress the power ‘to Promote the Progress of Science and the Useful Arts’ by granting copyrights and patents to authors and inventors (U.S. Const. art. I, § 8, cl. 8). This language is understood by most courts and scholars to entail a utilitarian or consequentialist approach to intellectual property (IP) law. The possibility of obtaining copyrights and patents encourages creators to produce new innovations that ultimately redound to the public good. By providing incentives to creators that are balanced with the interests of the public and with subsequent creators, IP laws can optimize creative

**  Professor of Law and Director of the Intellectual Property and Information Law Program, Cardozo School of Law, Yeshiva University. **  John P. Wilson Professor of Law and David and Celia Hilliard Research Scholar at the University of Chicago Law School. Masur thanks the Wachtell, Lipton, Rosen & Katz Program in Behavioral Law, Finance and Economics and the David and Celia Hilliard Fund for financial support.

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Intellectual property law and the promotion of welfare  99 and innovative production. Unlike IP systems in other parts of the world, US IP law generally eschews so-called ‘moral’ or deontological considerations such as justice and fairness. Although there is considerable consensus regarding IP law’s philosophical orientation, there has been little discussion of its deeper normative goals. Most courts and scholars agree with the idea that IP law should provide incentives to creators, but there has been almost no analysis of why creativity and innovation are good. This is simply taken as given. But what, exactly, are the interests that IP law should promote? How should we understand what constitutes ‘the Progress of Science and the Useful Arts?’ Various answers to these questions exist. One possibility would be to interpret the constitutional language literally and narrowly. On this view, IP laws should encourage developments in knowledge and technology irrespective of broader interests. Another option would be to interpret the constitutional language broadly to encompass a general social welfare calculus: IP laws should be subjected to some form of cost-benefit analysis to determine whether they ultimately make people better off. In this chapter, we discuss a variety of ways of understanding the normative goals of a consequentialist IP regime. We argue that the best approach derives from recent work in the field of hedonic psychology. The principal consequentialist goal of IP laws should be to maximize social welfare, where welfare is understood as subjective well-being. We do not argue that IP laws cannot have other interests beyond consequentialism; there may be room for concerns about fairness and justice, as well. But where IP law is motivated by welfare considerations, it should be evaluated in light of how laws and policies will affect people’s happiness. We begin by reviewing the commitments of US courts and scholars to a consequentialist orientation for IP law. Although there is a broad consensus that the law should promote good outcomes, there has been less discussion of the kinds of outcomes that the law should be promoting. In Section III, we address different ways in which IP law could promote good outcomes. For example, IP law could be narrowly focused on promoting creativity and innovation or it could be more broadly directed toward general social welfare. We argue that the latter, broader focus is more appropriate. We then consider three different accounts of human welfare and how the law can promote it: preferentist, objectivist, and hedonic. We support the hedonic account of human welfare and describe its strengths over the other options. Then, in Section IV, we discuss what a hedonically oriented IP policy would look like.

II.  IP LAW AND CONSEQUENTIALISM The constitutional text provides the foundation for IP law in the US, but, like most provisions of that document, it leaves considerable room for debate and interpretation. Most important for our purposes is the language ‘To Promote the Progress of Science and the Useful Arts.’ Each of the principal terms has been discussed by scholars at considerable length (Solum, 2002; O’Connor, 2015; Oliar, 2006). For example, scholars have questioned whether this text imposes a meaningful limitation on Congress’s power or whether, instead, it is simply preambular and non-limiting. They have also attempted to define ‘Science’ and ‘useful Arts’ and to understand their relations to copyright and patent law. One way or another, however, most courts and scholars have agreed that IP law in the

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100  Research handbook on the economics of IP law volume 1 US should be governed by some version of consequentialism. That is, IP laws exist to promote certain goals rather than, for example, to vindicate natural rights. This stands in stark contrast to the philosophical foundations of most European IP systems, where the moral rights of authors and inventors provide justification for the legal system. In the US, IP rights are merely the means to a desired end. As the Supreme Court has explained: The monopoly privileges that Congress may authorize are neither unlimited nor primarily designed to provide a special private benefit. Rather, the limited grant is a means by which an important public purpose may be achieved. It is intended to motivate the creative activity of authors and inventors by the provision of a special reward, and to allow the public access to the products of their genius after the limited period of exclusive control has expired. . ..The copyright law, like the patent statute, makes reward to the owner a secondary consideration. (Sony Corp. v. Universal Studios, 464 U.S. 417 (1984) (internal citations and quotations omitted))

In the patent context, the Court has offered similar reasoning: The  patent  laws promote this progress by offering a right of exclusion for a limited period as an incentive to inventors to risk the often enormous costs in terms of time, research, and development. The productive effort thereby fostered will have a positive effect on society through the introduction of new products and processes of manufacture  into the economy, and the emanations by way of increased employment and better lives for our citizens. In return for the right of exclusion—this ‘reward for inventions,’—the patent laws impose upon the inventor a requirement of disclosure. (Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974))

On this view, the ‘rights’ that authors and inventors receive do not devolve from the spiritual connection between creators and their works, nor are they representative of the Lockean intellectual labor that creators have mixed with the common. Instead, copyrights and patents are an administrative solution to an economic problem (Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979)). The difference between these approaches is evident in a variety of legal doctrines. In US copyright law, for example, authors generally do not receive the right to attribution for their works or the right to prevent their destruction or defacement. These are important components of European systems that protect droit d’auteur, or moral rights. In the US, they are thought to excessively impinge upon speech interests, sequential creation, and creativity markets (Adler, 2009). In patent law, inventors must be named in patent filings, but US law imposes no further requirements that inventors be named in products commercializing inventions. To the extent that US IP law does incorporate non-consequentialist concerns, such as in the Visual Artists Rights Act (17 U.S.C. § 106A (2018)) or in the ability of authors to terminate transfers of their copyrights, these injections of justice and fairness concerns are the exceptions that prove the consequentialist rule. Academics in the US have generally followed the Supreme Court, and they have fleshed out the economic theory behind the rights (Landes and Posner, 2003; Cass and Hylton, 2013). Both in copyright and patent law, rights are understood to flow from the state’s desire to promote certain valuable outcomes by providing incentives to individuals and corporations (Lemley, 2005). Because creating new works and inventions is costly, and because the works and inventions can be cheaply copied, creators would not have sufficient incentives to invest in innovative activity. Copyrights and patents provide periods of exclusivity during which rights holders can charge supracompetitive prices to offset

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Intellectual property law and the promotion of welfare  101 the costs of their creative investments. Providing rights is costly, however, because they create deadweight losses and can inhibit further innovation. Accordingly, IP regimes seek to balance the rights given to creators with those available to subsequent creators and to the public. Although scholars often differ sharply with respect to how the law should maintain this balance, they generally concur in the belief that this is IP law’s overriding goal. And while important and forceful arguments in favor of natural rights or deontic approaches to IP law have been made (Hughes, 1988; Merges, 2011; Kwall, 2009), these approaches have yet to find consistent support.

III. VERSIONS OF IP CONSEQUENTIALISM—WHAT SHOULD CONGRESS PROMOTE? We join the belief that IP is best understood in consequentialist terms rather than deontic ones. The IP Clause seems to speak in consequentialist terms, and most courts and commentators to have considered the question have described the purposes behind IP in consequentialist terms as well. But the notion that IP is consequentialist raises as many questions as it answers. What, precisely, is IP meant to promote? What is the maximand, or across what factors should IP be maximizing? There is a wide variety of different options, and those options have significantly divergent ramifications for the shape of intellectual property law. In this section, we consider the various possibilities and highlight which of them have gained the greatest currency within the judicial and scholarly communities. A.  Promoting Science and Useful Arts First, as the Constitution suggests, IP could be meant to promote science and the useful arts, full stop. In other words, the Constitution could be dictating that IP be structured to maximize the production of useful innovations (patents) and creative works (copyright), with those innovations and works viewed as ends in and of themselves. This type of approach might be justified on a number of different theoretical grounds. First, it may be that the Constitution does not mean to instantiate one vision of the good, be it welfarist (in any of its forms) or non-welfarist. Accordingly, to avoid taking sides, the Constitution—and the law that springs from it—should perhaps be interpreted to maximize some other worthwhile quantities without striving for any greater theoretical ambitions. Innovation and creativity might be those quantities. Alternatively, one might imagine that it is too difficult for any social planner—court, Congress, or otherwise—to fashion rules that are effective at increasing welfare. Every rule will create too many unforeseen effects—too many ripples in the pond. Any attempt to manage welfare directly is doomed to failure through unintended consequences. Accordingly, it might be that social planners are advised to concentrate on more easily identifiable or obtainable quantities, such as innovative and creative works. We believe that these are defensible but ultimately unpersuasive arguments. Innovation and creativity are not ends in and of themselves under any view of the good. While we do not wish to minimize the difficulty involved in promoting welfare-enhancing law and

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102  Research handbook on the economics of IP law volume 1 policy, this is a task that policymakers regularly undertake. Indeed, the entire enterprise of cost-benefit analysis, which now pervades the regulatory state, is geared toward enhancing welfare. Moreover, if the goal were simply to maximize the production of innovation and creative works, patent and copyright law would likely assume very different shapes. Generally speaking, the longer the intellectual property term, the greater the incentive to innovate because the greater the rewards. We say ‘generally speaking’ because in some cases extensive IP protections might retard follow-on innovation, as when blocking patents or patent thickets increase the costs to subsequent inventors trying to follow in the footsteps of an initial inventor. In addition, there is reason to doubt the incentive effects of IP beyond a certain time horizon (Balganesh, 2009). Nonetheless, if the goal were only to maximize innovation and creativity, the patent term would likely be substantially longer, at least for certain types of inventions such as pharmaceuticals. (The copyright term is already extremely long and ever-increasing.) Accordingly, we are not surprised that this view of the IP Clause has acquired few adherents within either the courts or the scholarly literature. B.  Promoting Social Welfare If IP does not exist to promote science and the useful arts alone, then it must be geared toward promoting some view of social welfare. However, that very basic conclusion immediately raises a more vexing question: what is the proper measure of welfare? What, precisely, should IP law be maximizing? 1. Preferences/wealth The most widely adopted view of welfare is that it consists of the satisfaction of individual preferences—typically fully informed, rational preferences, but occasionally simple expressed preferences (Sumner, 1996). This view prevails among the vast majority of economists. It relies on a straightforward logic: if a person obtains what she desires, that must make her better off—otherwise, why would she desire it? Many economists would impose the additional limitation that the preference must be self-interested in order to cope with the issue of individuals with preferences for helping others at their own expense (Adler and Posner, 2006). Economists believe that an individual’s preferences are best measured by using market transactions: if an individual chooses to purchase a good for some amount of money, the transaction reveals that the individual values the good more than she values the money used to obtain it (Boyle, 2003). Accordingly, this theory of welfare comes with a mechanism for obtaining some understanding of how much welfare a society possesses, and whether that welfare is increasing or decreasing. This conception of welfare as preferences is the dominant view within intellectual property as well (Demsetz, 1969; Menell and Scotchmer, 2007; Boyle, 2007; Kapczynski and Syed, 2013; Tur-Sinai, 2016). Essentially all economists who study IP subscribe to it, and many legal scholars do as well. Indeed, the entire structure of IP in the United States seems to favor a preferentist account of social welfare. The market is the mechanism through which IP is meant to incentivize innovation. By rewarding inventors and creators with monopoly rights over their innovations and creative works, IP allows them to reap supracompetitive profits. But the owners of IP can only realize these profits if individuals are actually willing to purchase their products and services. If there are no market

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Intellectual property law and the promotion of welfare  103 participants with preferences for the patented or copyrighted goods, their creators earn nothing and IP is irrelevant. The value of IP is linked to the market value of the underlying good, and thus to individual preferences (Beebe, 2017). Contrast this system of intellectual property with alternative mechanisms for encouraging creativity and innovation, such as government-sponsored grants or prizes (Hemel and Ouellette, 2013). Mechanisms of promoting innovation that do not rely on the market similarly do not rely on preference satisfaction as the measure of whether an innovation should be produced or will be funded. The policymakers choosing which projects to fund could rely upon any other type of criteria, including deontic criteria. While there is a substantial amount of public grant-based funding for science and the arts, the vast majority of funding incentives for innovation and creativity are provided through intellectual property. Accordingly, while it is not the case that every type of innovation policy rests upon preferentist foundations, intellectual property—at least as currently conceived—generally does. Nevertheless, preferentist approaches to welfare are subject to trenchant critiques. Some opponents, typically from a philosophical tradition, argue that there is more to the good life—more to welfare—than realizing the things that an individual wants. These scholars locate human welfare in a more objective notion of human flourishing: either possessing a set of objective capabilities and entitlements (Sen, 1993) or doing well the things that humans should do (Foot, 2001). We discuss flourishing and objective approaches at greater length in the following section. A second type of objection, arising primarily from the disciplines of psychology and behavioral economics, observes that individuals often desire things that turn out not to make their lives better off by any observable measure (Bronsteen, Buccafusco, and Masur, 2014). A typical example involves a family that trades an apartment in the city, close to the parents’ offices, for a large house and a yard in the suburbs. In many cases it turns out that the larger house offers few hedonic benefits to the family. They do not appear happier living in it than they were in their smaller apartment, and they quickly adapt to the size of the house so that it soon feels as though it is not especially large. However, the move to the suburbs is tremendously costly in psychological terms. The parents must now drive in traffic an hour each direction, and driving in traffic makes them miserable. Not only is the experience itself very unpleasant, it also takes them away from their children—the entire purpose of moving to the suburbs in the first place. While this example is hypothetical, the data behind it are very real and well documented (Kahneman et al., 2004; Stutzer and Frey, 2008). And this is only one example of what is variously termed an ‘affective forecasting error’ or an instance of ‘mis-wanting.’ The upshot of this significant body of research is that individual preferences cannot be relied upon to increase well-being according to any other measure. Unless one accepts preferences as a tautological definition of well-being, there is ample evidence that preference satisfaction does not necessarily lead to the improvement of an individual’s life. For the most part, these critiques have not penetrated intellectual property. Most scholars persist in equating welfare with preference satisfaction for purposes of measuring the effectiveness of intellectual property. And as noted above, the intellectual property system continues to be organized predominantly around market mechanisms that rely upon preference satisfaction. But that should not obscure the fact that cracks are showing.

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104  Research handbook on the economics of IP law volume 1 2.  Objective approaches The leading alternative to preference-based conceptions of welfare is a set of loosely related philosophical approaches that are commonly grouped under the heading of ‘objective accounts.’ Some of these approaches, following Sen (2005) and Nussbaum (2001), describe welfare as the possession of a set of goods enumerated in a list. These ‘objective list’ theories of welfare do not always perfectly correspond, but they typically involve a related and overlapping list of objective goods as their measure of welfare (Lewinsohn-Zamir, 2003). Other objectivist theories borrow more heavily from the Aristotelian concept of flourishing, typically understood as ‘doing well that which it is characteristically human to do’ (Foot, 2001). These ‘flourishing’ or ‘virtue ethics’ conceptions of welfare tie individual well-being to participation in a set of positive or ‘virtuous’ activities. Here, too, there is substantial overlap with objective list approaches. While virtue ethics does not typically specify in advance the particular activities that lead to flourishing and a good life, the goods and activities that form the basis of ­objective list theories are commonly viewed as constitutive of flourishing by Aristotelians. What these two flavors of ethical theory have in common is that they locate welfare in a set of objective considerations outside of the subjective preferences or desires of any given individual. For the objectivist theorist, the goods on the objective list, or the activities constitutive of flourishing, are valuable regardless of whether (or how much) the individual desires them. The individual’s welfare is determined by the existence or non-existence of those quantities and activities, without reference to the individual’s own views. This approach has sown the seeds of criticism by preferentists (and hedonists, as we will describe below), who point out the incoherence of relating individual welfare—which would seem to be the most subjective and individual of quantities—to external objective considerations (Adler and Posner, 2006). Other scholars have observed that the selection of the particular items found on objective lists will typically reflect the preferences of the philosophers who put them there (Sumner, 1996). In addition, most objective theories do not offer mechanisms for weighing the various welfare goods against one another or for making inter- or intra-personal welfare comparisons. Regardless, objectivist theories are the principal competitor to preferentist theories of welfare, and they have gained significant currency within the philosophical and legal communities. Objectivist theories have recently begun to make their way into intellectual property as well. Some scholars have begun with objective approaches to welfare and argued that they should be imported directly into IP, equally with any other area of law (Frischmann, 2014; Derclaye, 2013; Derclaye, 2012; Fisher and Syed, 2007). Others have argued in reverse, claiming that IP cannot be justified or defended on preferentist or hedonic grounds (Tur-Sinai, 2016). These scholars argue instead that IP is best conceived as furthering and representing an objectivist conception of welfare and should be reformulated to better accomplish those ends. The connection between IP and objective theories of welfare is not difficult to understand. Creativity and innovation, the foundations of copyright and patent law, are canonically ‘virtuous’ activities that are commonly thought of as partially constitutive of a good life according to essentially every objective conception of welfare. If one imagines IP from the producer side—IP should exist to encourage and enable individuals to produce creative and innovative works—then it becomes natural to envision IP in objectivist terms.

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Intellectual property law and the promotion of welfare  105 In addition, numerous scholars have pointed to failures and shortcomings in the market for innovation and the ways in which ability to pay does not always map onto welfare (Kapczynski, 2012). For instance, pharmaceutical drugs that produce substantial benefits for poorer individuals—such as citizens of developing nations—might increase welfare dramatically by improving the lives of many people. But the market for such drugs might be quite meager because of the limited purchasing power of the individuals who could consume them. By contrast, pharmaceuticals that cater to wealthy individuals might be highly valuable in the marketplace even if they improve few lives (and improve those lives only marginally). In light of these pathologies, the natural step for many scholars is to argue that IP should be reformulated to advance a set of ends chosen objectively, without reference to the particular preferences of the affected individuals as expressed through their wealth. The problem with these objective welfare theories of intellectual property is that they are typically tied very closely to the outcomes of individual lives (Tur-Sinai, 2016). To proponents of objective conceptions of welfare and IP, what makes a particular innovation worth pursuing is that it improves the lives of some group of individuals—witness the emphasis on medicines, particularly medicines for the poor. Advocates for objectivist conceptions of IP have not offered independent justifications for these normative goals beyond the fact that they promise to improve the lives of the individuals concerned. In other words, these objective considerations are actually founded in traditional subjective conceptions of welfare—preferences or hedonics (Griffin, 1986). Proponents of objective conceptions of IP welfare have succeeded in demonstrating that the market, as it currently exists, is not the ideal mechanism for generating welfare-enhancing outcomes. They have not succeeded in demonstrating that objective conceptions of welfare are superior to hedonics-based formulations. Indeed, the fact that arguments regarding objective conceptions of welfare for IP inevitably resort to reliance upon subjective improvement of life is suggestive of the objective view’s inherent weakness. 3. Happiness In recent years, a third conception of welfare as based in subjective hedonic experience has returned to prominence within philosophy and legal academia (Bronsteen, Buccafusco, and Masur, 2014). This conception of welfare as subjective well-being (or ‘happiness’) dates back to Jeremy Bentham but fell largely out of favor over the course of nearly two centuries. It has lately been resurrected in part due to work by psychologists, who have innovated new mechanisms for measuring individual happiness (Kahneman et al., 1999). Their work has been followed by normative arguments from philosophers and legal scholars who press the point that happiness is the best way to understand what it means for an individual to live a good life. As these philosophers and legal scholars have pointed out, the subjective well-being conception of welfare holds several substantial advantages over preferentist and objectivist conceptions of welfare (Bronsteen, Buccafusco, and Masur, 2014). First, it accounts for the fact that individuals often desire goods that do not appear to improve their lives and that they cannot predict the types of things that will improve their well-being. Most notably, while individuals typically strive for ever-greater levels of wealth and material possessions, these goods do not appear to impact individuals’ subjective well-being significantly (Bronsteen, Buccafusco, and Masur, 2013). This is different from a claim, which

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106  Research handbook on the economics of IP law volume 1 objectivists might make, that there is nothing worthwhile or valuable in material wealth and possessions for theoretical normative reasons. Rather, it is an empirical observation that wealthier people do not lead lives that are substantially happier or better even by their own lights than people of more modest means. Second, unlike objectivist approaches the subjective well-being approach treats welfare as intimately related to an individual’s own well-being and desires, not an outsider’s. That is, whether a good or experience is welfare-enhancing for a given individual depends upon the feeling it produces in that individual and how that individual relates to it, not upon whether a third party judges the good or experience as valuable. Third, it possesses a close, intuitive tie to standard notions of welfare: if an experience makes a person happy or produces good feelings, it makes intuitive sense to say that it has increased her welfare. Fourth, it is just as easy to make inter- or intra-personal hedonic comparisons as it is to make such comparisons from a preferentist standpoint, and generally easier than such comparisons are within any type of objectivist account of welfare. Fifth and finally, the hedonic account of welfare does not rely upon any theoretically difficult constructs, such as ‘fully informed preferences,’ which are impossible to determine in practice. A policymaker or legal decision maker who wishes to assess whether some legal rule or project will increase subjective well-being need not engage in complicated and normatively fraught laundering of individual preferences (Adler and Posner, 2006). She need only measure the happiness of an affected population before and after a policy intervention to know whether the intervention produced a positive effect on well-being (Bronsteen, Buccafusco, and Masur, 2014). A hedonic approach to IP would in many respects resemble the objectivist approach described above. One of the fundamental precepts of a hedonic conception of welfare is that individuals often (mistakenly) desire things that do not make them happy and do not improve their own welfare, and they frequently fail to desire things that will make them happy and improve their welfare. This is true even when people’s desires are motivated by the goal of increasing their own happiness (Adler, Dolan, and Kavestos, 2015). Thus, markets cannot be relied upon to produce welfare-maximizing outcomes when participants are not making fully informed, rational, and self-interested decisions about which goods to consume. Accordingly, a happiness-based IP policy could be used to help determine the types of goods that are most likely to increase well-being, rather than simply relying upon market participants to select the goods they prefer. Policymakers could then structure IP law to help facilitate the production of those goods. The crucial difference between a hedonic approach to IP and an objectivist approach lies in how one determines the types of goods whose production IP law should be designed to promote. An objective approach would rely upon the intuition and reasoning of the policymaker, informed by philosophical theory. A hedonic approach would instead rely on empirical data: policymakers would study which goods and activities improve overall cumulative individual subjective well-being over time and then promote or advance the development of those goods and activities. The hedonic approach would be tied to lived individual experiences; the objectivist approach would be divorced from the experiences or feelings of the people who will be affected by IP. Given that welfare is intuitively understood as a subjective concept, tethered to the individual’s own life, we view this distinction as a decisive advantage for the hedonic conception. Partly because the study of law’s effects on subjective well-being is in its infancy (Bronsteen, Buccafusco, and Masur, 2014), relatively few scholars have adopted a hedonic

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Intellectual property law and the promotion of welfare  107 approach to IP. There is, however, a growing cohort who have at least explored the possibility that IP law might be reoriented in a hedonic direction (Manta, 2013; Derclaye, 2013; Rai, 2007). As we noted above, IP law in its current instantiation adopts a fundamentally preference-based approach to welfare. In the following section, we will sketch the outlines of how a hedonic-centered view of IP law might be constructed.

IV. IMPLICATIONS FOR IP OF VARYING APPROACHES TO WELFARE We have already alluded to the various ways in which different conceptions of welfare will affect IP policy differentially, and in this part of the chapter we sketch such competing conceptions more directly. Due to space limitations we focus on patent and copyright law, the two major areas of IP, although similar analyses of trademark, trade secret, design law, and others would undoubtedly be illuminating. IP law has typically focused on creating consumer welfare by giving producers economic incentives to do things they would not do without those incentives. The law thus affects welfare in two distinct ways: on the consumer side and on the producer side. This part differentiates between the two ways in which IP law affects welfare, turning first to consumer welfare and then to producer welfare. A.  Consumer-Side Welfare Effects 1.  Patent law One of the central teachings of the voluminous literature on hedonic psychology is that individuals are often mistaken as to what will improve their lives. People often believe that certain goods or experiences will increase their happiness, only to find their happiness unchanged or even diminished. The implication of this research is that the sorts of choices that individuals make in the marketplace—the goods or experiences they purchase—may not be a perfectly reliable indicator of what will improve these individuals’ welfare. On the contrary, there might be particular types of goods or services that will increase individual well-being much more than others, and much more than market-based decisions would indicate. This suggests that intellectual property policy should self-consciously favor innovation in welfare-enhancing technological sectors, even at the expense of other areas of technology that do not have the same effect on individual welfare. Which areas of technology are most likely to lead to gains in well-being? The leading candidates are technologies that improve health and prolong life. There is ample evidence that health is one of the primary drivers of well-being (Powdthavee and van den Berg, 2011). An individual’s health status is highly correlated with her well-being, and because most people’s lives are happy even through old age, extending their lives will typically provide significant boosts in their lifetime welfare. Improvements in pharmaceutical and medical device technology should thus lead to improvements in human welfare, perhaps more so than advances in any technological sector. A policymaker who has adopted a hedonic view of welfare would thus favor legal rules that optimize innovation in these technological fields. Because pharmaceutical drugs and medical

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108  Research handbook on the economics of IP law volume 1 devices have large up-front research costs and low copying costs, scholars tend to believe that progress in those fields is best served by longer patent terms and stronger IP rights (Burk and Lemley, 2009). There is also evidence to indicate that strong patent protection for pharmaceuticals does not significantly inhibit follow-on innovation (Sampat and Williams, 2015). And because most Americans are covered by health insurance, patented drugs and medical devices remain widely available despite monopoly prices. There is thus a plausible case for strong patent protection for medical technologies as a matter of hedonic welfare. The problem with attempting to favor health-related technologies is that patent law is generally technology-neutral. The same patent law that governs pharmaceutical drugs and medical devices also governs semiconductors, consumer electronics, and every other type of technology. Burk and Lemley (2009) have observed that in some cases judges can tailor patent law to fit the particular needs of a particular industry or technological field, but this is a marginal effect. To first approximation, patent law functions similarly across technologies. And while strong patents might increase innovation in pharmaceuticals and medical devices, the same might not be true in computers, software, or electronics. These fields of technology suffer more from problems of overlapping patents—thickets and anticommons problems—than medical fields (Burk and Lemley, 2009). Excessively strong and numerous patents might eventually begin to retard innovation. If courts or legislators were to make patents more powerful, this would likely inhibit progress in computers and consumer electronics at the same time that it promoted innovation in pharmaceuticals and medical devices. Under typical assumptions, scholars and policymakers would face significant uncertainty as to the proper course of action in the face of such competing considerations. There is no a priori reason to favor either electronics or pharmaceuticals over the other. The market heavily rewards innovation in both sectors, as evidenced by the volume and value of sales. On a preferentist account of welfare, a policymaker would be forced to conduct a complicated calculation to determine which area of technology yields the greatest returns, and thus whether increasing or decreasing patent strength would increase overall welfare. This type of cost-benefit analysis is extraordinarily difficult if not entirely impossible in the patent context (Masur, 2016). Yet a hedonic approach to welfare may offer an answer to this difficult problem. In contrast to health-related fields, some technologies—including computers and e­ lectronics— likely have relatively minor impact (if any) on overall welfare. A great deal of innovation in the computer, software, and consumer electronics sectors is directed at expensive consumer products (smartphones, tablets, plasma televisions, and so on) available only to individuals above a certain level of income. At the same time, there is mounting evidence that increases in wealth have only extremely minor impacts on happiness (Kahneman and Deaton, 2010; Oswald and Powdthavee, 2008). Even individuals who dramatically increase their income realize only marginal gains in well-being (Bronsteen, Buccafusco, and Masur, 2013). This implies that these consumer electronic devices are contributing very little to well-being, particularly given how much they are being used. The average American watches several hours of television per day, and smartphone users average more than an hour of daily use (Nielsen, 2014). If high-tech televisions and smartphones were contributing positively to our well-being, it should be reflected in higher hedonic levels for wealthier people. Yet the data reveal no such trend. In fact, at least one study has linked

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Intellectual property law and the promotion of welfare  109 smartphone use to depression, although the finding is correlative and not necessarily causal (Saeb et al., 2015). Accordingly, from a hedonic perspective it could be beneficial to pursue stronger patent protection in the interest of increasing innovation in pharmaceuticals and medical devices, even if this resulted in harm to other industries such as computers and electronics. If all technologies are not created equal for purposes of improving welfare, then policymakers need not refrain from taking steps that maximize innovation in some at the expense of others. Macro-level hedonic understandings of welfare provide a means for answering difficult policy questions without a full-blown cost-benefit analysis. A patent policy formulated on hedonic terms might thus be structured very differently than the status quo, and this could be accomplished while holding patents facially neutral with respect to technology. In addition to drugs and medical devices, there are other types of technology that likely have a meaningful impact on human welfare, measured hedonically. In particular, any technology that reduces environmental pollution—and thus morbidity and mortality from harmful exposure—should significantly improve welfare (Bronsteen, Buccafusco, and Masur, 2013). This is especially true in light of the catastrophic welfare effects predicted from global climate change (Masur and Posner, 2011). Likewise for technologies that improve automobile safety or reduce other types of everyday risks. And there are even more commonly overlooked types of technology with the potential for meaningful welfare impacts. For instance, hedonic studies have demonstrated that the manner, time, and distance of individuals’ commutes to and from work can dramatically affect individual welfare (Gilbert, 2006). Driving in traffic is one of the least pleasurable activities in which an individual can engage (Kahneman et al., 2004). If an individual moves an hour further away from her workplace, she substitutes two hours of leisure per day—during which she might engage in a pleasant activity—for two hours of unhappy driving in traffic. The diminution in overall well-being could be very substantial. Thus, a hedonic approach to welfare would support whatever intellectual property rules would maximize innovation in technologies to improve or shorten commutes, including driverless cars, more intelligent traffic management, railroad technology, telecommuting equipment, and the like. These industries have not been the subject of sufficient study to allow us to determine whether stronger or weaker patents would be more productive of innovation and development. Accordingly, it is possible that the same patent rules that are helpful for pharmaceuticals might be harmful for environmental technologies and other welfare-enhancing improvements. Regardless, the broader point is that a hedonic conception of welfare offers a set of prescriptions for patent law that differ substantially from the status quo. Once policymakers come to understand welfare in hedonic terms, a similar rethinking of patent law should not be far behind. 2. Copyright Understanding copyright law’s effects on human welfare is considerably more complex than understanding those of patent law. Few would doubt that contemporary science and technology are much better than they were in the past. Almost no one would choose nineteenth-century surgical practice over twenty-first century medicine. But there is not nearly the same uniformity of judgment about the superiority of Taylor Swift over

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110  Research handbook on the economics of IP law volume 1 Beethoven.1 Although many people accept that science and technology are capable of ‘progressing,’ it is difficult in the modern world to argue the same for the arts (Beebe, 2017). Assuming that one of the goals of creative production is to improve people’s lives, how could we know if it does so? The difficulty of answering questions like this one has led to nearly total dominance of copyright jurisprudence by preferentist thinking. If consumers are willing to spend money to purchase the latest books, albums, and movies, they must think that doing so will make them happier. Why should the law judge for people which works will most add to their happiness? De gustibus non est disputandum—in matters of taste, there can be no dispute. As Oliver Wendell Holmes, Jr. warned in his famous Bleistein opinion, ‘It would be a dangerous undertaking for persons trained only to the law to constitute themselves final judges of the worth of pictorial illustrations, outside the narrowest and most obvious limits’ (Bleistein v. Donaldson Lithographic Co., 188 U.S. 239 (1903)). Creative works have value to the extent that they ‘command the interests of any public.’ As Barton Beebe (2017) has recently argued, copyright law’s approach to aesthetic progress has largely been accumulative—more works and more sales equal more value and more welfare. From the perspective of consumer welfare, this approach seems difficult to debate. How could we measure whether television programs contribute more to happiness than sculpture and dance? Some people prefer television, and some dance. According to this approach, copyright law should encourage all of these products equally and let consumers choose. But do people make accurate judgments about their own welfare when it comes to consuming content? And do more options lead to more happiness? At least some evidence of television watching suggests otherwise. Heavy television viewing seems to be associated with lower levels of subjective well-being, although testing causality is often difficult when measuring people’s behaviors in the real world (Frey et al., 2007; Bruni and Stanca, 2008). There is some evidence that people who watch a lot of television do so at the expense of ‘relational’ activities with others that tend to make them happier (Bruni and Stanca, 2008). And some people, especially heavy television watchers, seem to do far worse when they have more channels to watch (Benesch et al., 2010). While we do not think that these studies are strong enough to recommend removing or reducing copyright protection for television programs, they are important because they illustrate potential limitations with the preferentist approach that dominates the field. The ‘more is better’ approach to creative production assumes that allowing people to find products that precisely match their tastes is valuable. Because consumer tastes are heterogeneous, people are more likely to find things that maximize their welfare if they have more options to choose from. But empirical social science research has called this view into question. Studies have shown that having more choices of products may not create greater happiness with the product chosen and, in fact, more choices may diminish happiness (Schwartz, 2003; Hsee and Hastie, 2006; Scheibehenne et al., 2010). When confronted with an enormous variety of goods, people struggle to decide which to choose, and they focus on irrelevant aspects of goods. In some cases, the people choosing from a wider set of options are less happy with their choices than those choosing from a narrower set. 1

  Even the authors of this chapter disagree.

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Intellectual property law and the promotion of welfare  111 In addition, the value that people obtain from creative works arises in part from the fact that they are often embedded within a larger shared cultural experience. Watching television is fun, but talking about a new episode with friends is often just as much fun. Copyright law’s accumulationist approach to creativity risks creating smaller and smaller pockets of cultural and social interaction over new works. Although people may be able to find works that satisfy their unique preferences, they may find that they have no one with whom to discuss them. If cultural heterogeneity becomes cultural atomization, people may lose out on the sorts of relational experiences that are most conducive to happiness. These concerns raise challenging questions for IP law’s accumulationist approach. More creative production will not necessarily produce more welfare. Unfortunately, given the current state of our knowledge, it is difficult to suggest how copyright law can strike the right balance between heterogeneous tastes and social cohesion. Further research is needed to more precisely understand the relationship between choice and welfare. Consumer preferences and consumer welfare may also diverge with respect to the pace of creative production in certain fields. In many areas, consumers seem to demand rapid replacement of existing cultural goods with new ones. Fashion design is the leading example. But consumers’ preferences for novelty may not be consistent with their subjective well-being. People buy clothes in order to stay on trend even though their old clothes are still functional (Hemphill and Suk, 2009). As William Shakespeare explained ‘fashion wears out more apparel than the man’ (Shakespeare, 2004). In these situations, works become ‘obsolete’ before they lose their function and before people stop getting pleasure from them. In fact, the very thing that makes them obsolete is the existence of new products to consume. To the extent that this is true (and it may be in many other creative fields as well), copyright law should not promote rapid cultural ‘progress.’ Unlike for cancer treatments, where we typically want the pace of innovation to be incredibly high,2 in these areas, slower rates of creation and replacement may be optimal. If the rate of innovation is slower, existing works will not lose their hedonic value as quickly, and consumers will not need to purchase new works to obtain the same amounts of pleasure. From a demandside perspective, this is preferable. In the context of fashion design, extending copyrights might, counterintuitively, improve consumer well-being by slowing down the pace of innovation. Raustiala and Sprigman (2006) argue that the current lack of protection leads to shorter fashion cycles as new designs get rapidly copied and become obsolescent. Giving designers protection for their creations could mean that they are not copied as rapidly and stay on trend longer, thereby allowing consumers to slow down their purchasing of new clothes. In other contexts, as well, copyright law might pay closer attention to how its doctrines affect the pace of creative production and obsolescence. For example, book publishers have little interest in maintaining consumer demand for older fictional works that are available in cheap used editions if that demand cuts into consumers’ desire for expensive editions of new works (Maurer, 2015). In fact, a similar dynamic might exist in the context of some patented goods such as consumer electronics. A piece of technology such as an iPod or iPhone becomes

2   In fact, we want the pace of innovation to be such that the benefits of a given pace exceed its costs. Innovation could arise too rapidly even for cancer treatments if the costs associated with a faster pace exceed its benefits.

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112  Research handbook on the economics of IP law volume 1 obsolete not just when it breaks or cannot handle modern song formats, but also when it is surpassed by newer and more exciting versions of itself. Yet, as we note above, there is scant evidence that these newer types of technology are contributing much, if anything, to happiness. If stronger patent rights slowed the pace of innovation in the computer and consumer electronics sectors and reduced the rate at which technologies became obsolete, this might impose little or no welfare cost while preserving resources that could be employed for other purposes. Such is the paradoxical conclusion we draw from the fact that improvements in these types of technology do not appear to be making our lives better. B.  Producer-Side IP Effects Thus far we have largely concentrated on demand- or consumer-side welfare effects of IP law and policy. That is, most of the discussion has centered on the consequences of various policy choices for the well-being of the individuals who consume the fruits of innovation and creativity. Yet there is an important second half to this question: the effects of IP on the well-being of the many individuals who produce innovative and creative works. Many millions of Americans work in industries that are shaped by patent and copyright law, and their welfare is in some ways dependent upon the form and substance of those laws. In the sections that follow, we survey how different conceptions of welfare might compel different types of IP law and policy. To be sure, there are limits on the strength of the effects that IP policy changes can generate. The work and responsibilities of a software engineer or semiconductor designer are not likely to change substantially in response to changes in patent law. The life of a visual artist may or may not undergo drastic revision if courts amend copyright law at the margin. But IP can impact well-being on the producer side as well, as explained below. Here, we believe that patent and copyright law can in many ways produce similar types of effects. Accordingly, we discuss patent and copyright law together and focus on the different types of welfare benefits that creative and innovative production can generate for those individuals on the production side. 1.  Creativity as benefit In the standard law and economics account of IP, the process of creation or invention is generally viewed as costly. Creating new works or inventions takes time and resources that people and firms would be unwilling to expend unless they were given the opportunity to obtain supracompetitive prices for their creations. On this view of creators’ cost-benefit calculations, the activities associated with creation enter exclusively on the costs side of the equation. Yet even without the benefit of happiness research it seems evident that this picture is too narrow. Many people create and invent for the joy that they experience while doing so (Devlin and Sukhatme, 2009). From the perspective of subjective well-being, however, we can more fully account for the positive value that creators experience while engaged in new challenges. Researchers studying well-being have observed that one of the most pleasurable experiences is ‘flow,’ the sense of being totally engulfed in a challenging task (Csikszentmihalyi, 1990). One of the most reliable ways of experiencing flow is to be involved in the process of creating something new. Writers, musicians, computer programmers, and scientists

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Intellectual property law and the promotion of welfare  113 often experience enormous positive affect when they are engaged in activities that prove difficult but susceptible to completion and mastery. To many of them, the hours spent writing, coding, and thinking are not costly; they are not simply the means to some other valuable ends. Instead, the activities associated with creating and inventing are often ends in their own right. The works and goods generated by these activities often seem to be by-products of the truly valuable goal. Once we see the processes of creativity and innovation not simply as costs that must be borne on the way to generating valuable goods but rather as goods in their own right, our perspective on IP law and policy changes. Most obviously, the law and economics account of costs and benefits is likely to go awry if it neglects the substantial benefits that creators and innovators experience. The addition of exclusive rights as an incentive to create will often be supernumerary when creators have derived sufficient benefits from the act of creating in the first place. This is not to suggest that monetary incentives are never necessary for creative work. There is bound to be substantial variation in the extent to which authors and inventors experience positive welfare from creating. Love poems rarely need monetary incentives to be produced, but databases might always need them. And even though creators might generate substantial amounts of joy from creating, they still need to live and eat. IP law would do well to understand and adapt to the variations in producers’ need for external stimuli. In addition, although creativity itself may need little incentive in many cases, other costly resources may be necessary to actually produce and distribute the goods associated with creative production. Although some number of screenplays would likely be written in the absence of copyright protection, movie studios will not produce movies unless they have a chance to recoup their investments. If we think that certain kinds of creativity and innovation demand the expenditure of significant capital resources to emerge, then we need to make sure that those supplying the capital have sufficient reason to do so. Thus, when analysing the kinds of IP rights that should be provided, the law should pay attention at least as much to production and distribution costs as it does to creation costs (Cohen, 2011). Finally, IP rights impose restrictions on creators’ opportunities to engage in the kinds of activities that produce flow. Drastic reductions in the costs of creative production, particularly in the form of digital technologies, have opened up opportunities for creative engagement to a larger proportion of the population. One of the principal ways in which creators engage with one another is through each other’s works. Creative engagement may take the form of individuals producing separate, independent works that they then share with one another. Increasingly, however, creators engage with their cultures by explicitly manipulating works within their cultures (Lee, 2008; von Hippel, 2005). In many contexts, creativity involves reworking and remixing existing ideas and inventions (Banks and Deuze, 2009). But IP laws, and copyright law’s derivative works doctrine in particular, can put creators at risk when they interact with protected works. Although copyright and patent laws might not affect artists who draw for private consumption and pleasure or inventors who enjoy tinkering but have no interest in making and selling their inventions, the law may limit their abilities to share their efforts with others. For example, an aspiring musician may derive considerable happiness from manipulating and editing existing works and sharing them on the Internet as a way of demonstrating mastery and connecting with a community (Silbey, 2014). But when she posts her work online, she

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114  Research handbook on the economics of IP law volume 1 may have infringed one or more copyrights. By limiting the uses that others can make of creative and innovative works, IP laws impede the potential benefits that follow-on creators experience from interacting with existing works and ideas. Just as the law needs to account for the pleasure that creators experience when generating new works, it needs to account for how IP laws potentially hinder the happiness of others who want to creatively engage with those works. 2.  Employment effects Patent and copyright law’s primary function is to redistribute surplus from the production of creative and innovative goods from consumers to producers. Instead of the goods being sold at the competitive price—which maximizes consumer surplus—patents and copyrights permit producers to sell at monopoly prices, which maximizes producer surplus at the expense of significant consumer surplus. This surplus is typically thought of in monetary terms, which reinforces the connection to a preference-based conception of welfare. For preference-satisfaction theories of welfare, patent and copyright law thus have significant first-order effects on welfare. If stronger IP laws enable producers—the owners (and employee-owners) of technology companies—to get rich from their inventions, this will increase their welfare significantly. As weaker IP rules diminish the returns from innovation and creativity, so too would producer-side welfare gains diminish. For this reason, IP scholars often describe stronger IP rules as benefitting large corporations (by which they mean the owners of those corporations) at the expense of individual consumers. From a hedonic perspective, however, the picture is not so clear. As we explained above, even significant increases in wealth have only minor effects on subjective well-being. Thus, marginally greater returns on investment will do little to improve the happiness of those who are already well off. It might seem, then, that IP law will not substantially affect the welfare of innovators. There is, however, one respect in which IP law could meaningfully affect producer-side welfare from a hedonic perspective. The mechanism is the role of IP rules, and innovation and creativity more generally, in promoting employment. Unemployment has dramatic negative effects on individual well-being, above and beyond its effects on income and wealth (Bronsteen, Buccafusco, and Masur, 2013). That is, not only does involuntary unemployment reduce an individual’s wealth and income, often to the point at which those reductions begin to affect well-being, it can also exact a psychological toll, lead to depression, and generally produce unhappiness. While patent and copyright laws that increase wealth will not have significant hedonic effects on people who are already relatively well off, laws that increase employment very well might. Patent law can, of course, affect overall employment if it affects economic growth and development. Policymakers should endeavor to select patent rules that maximize economic growth, though of course this will be extremely difficult (United States Patent and Trademark Office, 2013). At a more administrable level, patent law can also be used to favor certain industries over others, as we described in the previous section. There, we explained that certain types of technologies might produce greater welfare gains than others among the consumer population. Similarly, some technological industries might be more labor-intensive, and others might be more capital-intensive. A shift of R&D investment from a capital-intensive to a labor-intensive technology sector will increase overall technology-based employment, all other things being equal. There is now ample evidence

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Intellectual property law and the promotion of welfare  115 that these types of investments can affect overall employment and that labor markets do not function perfectly (Masur and Posner, 2012). Consequently, shifts in patent law that reroute R&D investment could conceivably increase employment at the margin and thus increase welfare, particularly when viewed from a hedonic perspective. Of course, it is difficult to know the magnitude of this effect. In addition, policymakers and courts would need detailed data on the relative labor intensity of various areas of technology. But the potential for beneficial policy intervention exists. Similar effects are likely present with respect to production of creative works. Stronger copyright rules will likely increase the production of some types of works—blockbuster movies, or mass-market novels, for instance—but decrease the production of others, such as fan fiction or other types of derivative works. Some of these types of works might be more or less labor-intensive than others; some might also generate more full-time employment than others.3 We do not have enough data to offer any definitive prescriptions yet. But a hedonically oriented policymaker would be well-advised to study the employment effects of various types of creative production and incorporate the welfare effects of employment and unemployment into the formulation of IP law and policy.

V. CONCLUSION IP laws exist to improve the quality of people’s lives by providing creations and innovations that make them better off. Although legal scholars have spent lots of time debating whether particular doctrines succeed in this goal, they have spent comparatively little time analysing what it means to improve the quality of people’s lives. IP law is committed to welfarism, but it has not grappled with what human welfare is. In this chapter, we have explained three competing conceptions of welfare and defended one of them—welfare as subjective well-being. Moreover, we have begun to suggest ways in which these different conceptions of welfare might affect IP law and policy. Definitions of welfare are not abstract philosophical questions; they have real-world significance that scholars should care about. Although sufficient data is still lacking to answer most IP law questions, new advances in data gathering and analysis will soon provide opportunities for rethinking many core doctrines.

REFERENCES Adler, Amy. 2009. ‘Against Moral Rights,’ 97 California Law Review 263–300. Adler, Matthew D., and Eric A. Posner. 2006. New Foundations of Cost-Benefits Analysis. Cambridge, MA: Harvard University Press. Adler, Matthew D., Paul Dolan, and Georgios Kavestos. 2015. ‘Would You Choose to Be Happy? Tradeoffs between Happiness and the Other Dimensions of Life in a Large Population Survey,’ accessed at https:// papers.ssrn.com/sol3/papers.cfm?abstract_id=2640117 (February 24, 2019).

3   To some extent, the suggestion above that copyright doctrine should consider slowing the pace of creativity to produce consumer-side benefits could conflict with the suggestion here about employment and producer-side benefits. As with most things, the devil will be the in the details of data that we do not yet have.

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116  Research handbook on the economics of IP law volume 1 Balganesh, Shyamkrishna. 2009. ‘Foreseeability and Copyright Incentives,’ 122 Harvard Law Review 1569–633. Banks, John, and Mark Deuze. 2009. ‘Co-Creative Labour,’ 12 International Journal of Cultural Studies 419–31. Beebe, Barton. 2017. ‘Bleistein: The Problem of Aesthetic Progress, and the Making of American Copyright Law,’ 117 Columbia Law Review 319–97. Benesch, Christine, Bruno S. Frey, and Alois Stutzer. 2010. ‘TV Channels, Self-Control and Happiness,’ 10 B.E. Journal of Economic Analysis and Policy 1–33. Boyle, James. 2003. ‘Enclosing the Genome? What the Squabbles over Genetic Patents Could Teach Us,’ in F. Scott Kieff, ed., Perspectives on Properties of the Human Genome Project. New York, NY: Academic Press. Boyle, James. 2007. ‘Cultural Environmentalism and Beyond,’ 70 Law and Contemporary Problems 5–21. Bronsteen, John, Christopher Buccafusco, and Jonathan S. Masur. 2013. ‘Well-Being Analysis vs. Cost-Benefit Analysis,’ 63 Duke Law Journal 1603–89. Bronsteen, John, Christopher Buccafusco, and Jonathan S. Masur. 2014. Happiness and the Law. Chicago, IL: University of Chicago Press. Bruni, Luigino, and Luca Stanca. 2008. ‘Watching Alone: Relational Goods, Television and Happiness,’ 65 Journal of Economic Behavior and Organization 506–28. Burk, Dan L., and Mark A. Lemley. 2009. The Patent Crisis and How the Courts Can Solve It. Chicago, IL: University of Chicago Press. Cass, Ronald A., and Keith N. Hylton. 2013. Laws of Creation: Property Rights in the World of Ideas. Cambridge, MA: Harvard University Press. Cohen, Julie. 2011. ‘Copyright as Property in the Post-Industrial Economy: A Research Agenda,’ 2011 Wisconsin Law Review 141–65. Csikszentmihalyi, Mihaly. 1990. Flow: The Psychology of Optimal Experience. New York: Harper & Row. Demsetz, Harold. 1969. ‘Information and Efficiency: Another Viewpoint,’ 12 Journal of Law and Economics 1–22. Derclaye, Estelle. 2012. ‘Eudemonic Intellectual Property: Patents and Related Rights as Engines of Happiness, Peace, and Sustainability,’ 14 Vanderbilt Journal of Entertainment and Technology Law 495–543. Derclaye, Estelle. 2013. ‘What Can Intellectual Property Law Learn from Happiness Research?,’ in Graeme B. Dinwoodie, ed., Methods and Perspectives in Intellectual Property. New York, NY: Edward Elgar. Devlin, Alan, and Neel Sukhatme. 2009. ‘Self-Realizing Inventions and the Utilitarian Foundation of Patent Law,’ 51 William and Mary Law Review 897–955. Fisher, William W., and Talha Syed. 2007. ‘Global Justice in Healthcare: Developing Drugs for the Developing World’, 40 U.C. Davis Law Review 581–678. Foot, Philippa. 2001. Natural Goodness. Oxford: Clarendon Press. Frey, Bruno S., Christine Benesch, and Alois Stutzer. 2007. ‘Does Watching TV Make Us Happy?,’ 28 Journal of Economic Psychology 283–313. Frischmann, Brett M. 2017. ‘Capabilities, Spillovers, and Intellectual Progress: Toward a Human Flourishing Theory for Intellectual Property,’ 14 Review of Economic Research on Copyright Issues 1–38. Gilbert, Dan. 2006. Stumbling on Happiness. New York, NY: Knopf. Griffin, James. 1986. Well-Being. Oxford: Oxford University Press. Hemel, Daniel J., and Lisa Larrimore Ouellette. 2013. ‘Beyond the Patent-Prizes Debate,’ 92 Texas Law Review 303–82. Hemphill, C. Scott, and Jeannie Suk. 2009. ‘The Law, Culture, and Economics of Fashion,’ 61 Stanford Law Review 1148–99. Hsee, Christopher K., and Reid Hastie. 2006. ‘Decision and Experience: Why Don’t We Choose What Makes Us Happy?,’ 10 Trends in Cognitive Sciences 31–7. Hughes, Justin. 1988. ‘The Philosophy of Intellectual Property,’ 77 Georgetown Law Journal 287–330. Kahneman, Daniel, and Angus Deaton. 2010. ‘High Income Improves Evaluation of Life but Not Emotional Well-Being,’ 107 PNAS 16489–93. Kahneman, Daniel, Ed Diener, and Norbert Schwarz. 1999. ‘Preface,’ in Daniel Kahneman, Ed Diener, and Norbert Schwarz, eds., Well-Being: The Foundations of Hedonic Psychology. New York: Russell Sage Foundation. Kahneman, Daniel, Alan B. Krueger, David A. Schkade, Norbert Schwartz, and Arthur A. Stone. 2004. ‘A Survey Method for Characterizing Daily Life Experience: The Day Reconstruction Method,’ 306 Science 1776–80. Kapczynski, Amy. 2012. ‘The Cost of Price: Why and How to Get beyond Intellectual Property Internalism,’ 59 UCLA Law Review 970–1026. Kapczynski, Amy, and Talha Syed. 2013. ‘The Continuum of Excludability and the Limits of Patents,’ 122 Yale Law Journal 1900–63. Kwall, Roberta Rosenthal. 2009. The Soul of Creativity: Forging a Moral Rights Law for the United States. Palo Alto, CA: Stanford University Press. Landes, William M., and Richard A. Posner. 2003. The Economic Structure of Intellectual Property Law. Cambridge: Belknap Press.

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Intellectual property law and the promotion of welfare  117 Lee, Edward. 2008. ‘Warming Up to User-Generated Content,’ 2008 University of Illinois Law Review 1459–548. Lemley, Mark A. 2005. ‘Property, Intellectual Property, and Free Riding’, 83 Texas Law Review 1031–75. Lewinsohn-Zamir, Daphna. 2003. ‘The Objectivity of Well-Being and the Objectives of Property Law’, 78 NYU Law Review 1669–753. Manta, Irina. 2013. ‘Hedonic Trademarks,’ 74 Ohio State Law Journal 241–83. Masur, Jonathan S. 2016. ‘CBA at the PTO,’ 65 Duke Law Journal 1701–35. Masur, Jonathan S., and Eric A. Posner. 2011. ‘Climate Regulation and the Limits of Cost-Benefit Analysis,’ 99 California Law Review 1557–600. Masur, Jonathan S., and Eric A. Posner. 2012. ‘Regulation, Unemployment, and Cost-Benefit Analysis,’ 98 Virginia Law Review 579–634. Maurer, Stephen. 2015. ‘The Economics of Memory: How Copyright Decides Which Books Do (and Don’t) Become Classics,’ 14 John Marshall Review of Intellectual Property Law 521–63. Menell, Peter S., and Suzanne Scotchmer. 2007. ‘Intellectual Property Law,’ in A. Mitchell Polinsky and Steven Shavell, eds., Handbook of Law and Economics, Vol. II. Amsterdam: North Holland. Merges, Robert P. 2011. Justifying Intellectual Property. Cambridge, MA: Harvard University Press. Nielsen. 2014. ‘How Smartphones Are Changing Consumers’ Daily Routines around the Globe,’ accessed at http://www.nielsen.com/us/en/insights/news/2014/how-smartphones-are-changing-consumers-daily-routinesaround-the-globe.html (February 24, 2019). Nussbaum, Martha C. 2001. Women and Human Development: The Capabilities Approach. Cambridge: Cambridge University Press. O’Connor, Sean M. 2015. ‘The Overlooked French Influence on the Intellectual Property Clause,’ 82 University of Chicago Law Review 733–830. Oliar, Dotan. 2006. ‘Making Sense of the Intellectual Property Clause: Promotion of Progress as a Limitation on Congress’s Intellectual Property Power,’ 94 Georgetown Law Journal 1771–845. Oswald, Andrew J., and Nattavudh Powdthavee. 2008. ‘Does Happiness Adapt? A Longitudinal Study of Disability with Implications for Economists and Judges,’ 92 Journal of Public Economics 1061–77. Powdthavee, Nattavudh, and Bernard van den Berg. 2011. ‘Putting Different Price Tags on the Same Health Condition: Re-Evaluating the Well-Being Valuation Approach,’ 30 Journal of Health Economics 1032–43. Rai, Arti. 2007. ‘The Ends of Intellectual Property: Health as a Case Study,’ 70 Law and Contemporary Problems 125–30. Raustiala, Kal, and Christopher Sprigman. 2006. ‘The Piracy Paradox: Innovation and Intellectual Property in Fashion Design,’ 92 Virginia Law Review 1687–777. Saeb, Sohrab, Mi Zhang, Christopher J. Karr, Stephen M. Schueller, Marya E. Corden, Konrad P. Kording, and David C. Mohr. 2015. ‘Mobile Phone Sensor Correlates of Depressive Symptom Severity in Daily-Life Behavior: An Exploratory Study,’ 17 Journal of Medical Internet Research e175, 1–11. Sampat, Bhaven N., and Heidi L. Williams. 2015. ‘How Do Patents Affect Follow-On Innovation? Evidence from the Human Genome,’ accessed at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2679705 (February 24, 2019). Scheibehenne, Benjamin, Rainer Greifeneder, and Peter M. Todd. 2010. ‘Can There Ever be Too Many Options? A Meta-Analytic Review of Choice Overload,’ 37 Journal of Consumer Research 409–25. Schwartz, Barry. 2003. The Paradox of Choice: Why More Is Less. New York, NY: Ecco. Sen, Amartya. 1993. ‘Capability and Well-Being,’ in Martha Nussbaum and Amartya Sen, eds., The Quality of Life. Oxford: Clarendon Press. Sen, Amartya. 2005. ‘Human Rights and Capabilities,’ 6 Journal of Human Development 151–66. Shakespeare, William. 2004. Much Ado about Nothing. New York: Washington Square Press. Silbey, Jessica. 2014. The Eureka Myth: Creators, Innovators and Everyday Intellectual Property. Palo Alto, CA: Stanford Law Books. Solum, Lawrence B. 2002. ‘Congress’s Power to Promote the Progress of Science: Eldred v. Ashcroft,’ 36 Loyola Los Angeles Law Review 1–83. Stutzer, Alois, and Bruno S. Frey. 2008. ‘Stress that Doesn’t Pay: The Commuting Paradox,’ 110 Scandinavian Journal of Economics 339–66. Sumner, L.W. 1996. Welfare, Happiness, and Ethics. Oxford: Clarendon Press. Tur-Sinai, Ofer M. 2016. ‘Technological Progress and Well-Being,’ 48 Loyola University of Chicago Law Journal 145–204. United States Patent and Trademark Office. 2013. ‘Regulatory Impact Analysis, Setting and Adjusting Patent Fees in Accordance with Section 10 of the Leahy-Smith America Invents Act,’ accessed at http://www. uspto.gov/sites/default/files/aia_implementation/AC54_Final_Regulatory_Impact_Analysis.pdf (February 24, 2019). von Hippel, Eric. 2005. Democratizing Innovation. Cambridge, MA: MIT Press.

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118  Research handbook on the economics of IP law volume 1 Cases Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979). Bleistein v. Donaldson Lithographic Co., 188 U.S. 239 (1903). Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974). Sony Corp. v. Universal Studios, 464 U.S. 417 (1984).

Legislative Materials U.S. Const. art. I, § 8, cl. 8. 17 U.S.C. § 106A (2018).

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6.  Economic models of innovation: stand-alone and cumulative creativity Peter S. Menell* and Suzanne Scotchmer** 4

5

Contents Economic Models of Technical Change Stand-Alone Innovation A. Threshold for Protection B. Duration C. Breadth D. Rights of Others (and Defenses) 1. Rights arising from independent invention 2. Rights after sale 3. Rights to share copyrighted works E. Remedies F. Channeling Doctrines III. Cumulative Innovation A. A Preliminary Model: The Virtues of Licensing B. Duration C. Threshold Requirements and Breadth 1. Evolving doctrines regarding subject matter 2. Adequacy of disclosure requirements D. Rights of Others (and Limitations and Defenses) 1. Experimental use 2. Fair use 3. Reverse engineering 4. Other limitations: exemptions, compulsory licenses, voluntary licenses, open source, and dedication to the public domain I. II.

**  Koret Professor of Law and Director, Berkeley Center for Law and Technology, Berkeley School of Law, University of California. **  Formerly Professor of Economics, Public Policy, and Law, University of California, Berkeley, who died in 2014. Thanks to Concord Cheung, Amit Elazari, Megan McKnelly, and Reid Whitaker for excellent research assistance. This chapter updates Parts 1.1 and 1.3 of Peter S. Menell and Suzanne Scotchmer. 2007. ‘Intellectual Property Law,’ in A. Mitchell Polinsky and Steven Shavell, eds., Handbook of Law and Economics, vol. II. Amsterdam: North-Holland. Aspects of Parts 1.1 and 1.3 are reprinted with permission from Elsevier, © 2007. http://www.elsevier.com. This chapter is dedicated to Professor Scotchmer for her seminal contributions to the economics of intellectual property rights. Professor Menell bears responsibility for any mistakes in this updating of the prior work.

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120  Research handbook on the economics of IP law volume 1 E. Remedies F. Channeling Doctrines References Intellectual property law seeks to promote progress in science, technology, and expressive creativity (U.S. Const. art. I, § 8, cl. 8). The principal economic justification for intellectual property derives from a fundamental problem: the inability of a competitive market to support an efficient level of innovation. In a competitive economy, profits will be driven to zero, not accounting for sunk costs such as research and development (R&D) or costs of authorship. From an ex post point of view, this is a good outcome, as it keeps prices low for consumers and avoids deadweight loss. But from an ex ante point of view, it produces a sub-optimal level of investment in R&D. Most firms would not invest in developing new technologies, and potential creators might not spend their time on creative works, if rivals could enter the market and dissipate the profits. Unlike tangible goods, knowledge and creative works are public goods in the sense that their use is nonrival (Arrow, 1962; Nelson, 1959). One agent’s use does not limit another agent’s use. Indeed, in its natural state (cartooned in the digital age as ‘bits want to be free’), knowledge is also ‘nonexcludable.’ That is, even if someone claims to own the knowledge, it is difficult to exclude others from using it. Intellectual property law is an attempt to solve that problem by legal means; it grants exclusive use of the protected knowledge or creative work to the creator. For other forms of property, exclusion is often accomplished by physical means, such as building a fence. Intellectual property is a legal device by which the inventor can control entry and exclude users from intangible assets. Intellectual property results in deadweight loss to consumers, and that is its main defect. Two other defects are that it may inhibit the use of scientific or technological knowledge for further research, and, from an ex ante point of view, that there is no guarantee that the research effort will be delegated efficiently to the most efficient firms or even to the right number of firms. Commentators have been lamenting the defects of intellectual property since the nineteenth century, in more or less the same terms as today (Machlup and Penrose, 1950). But intellectual property also has virtues, of which we mention three powerful ones. Probably the greatest virtue is that every invention funded with intellectual property creates a Pareto improvement. No one is taxed more than her willingness to pay for any unit she buys; else, she would not buy it. In contrast, funding out of general revenue runs the risk of imposing greater burdens on individual taxpayers than the benefits they receive. A second great virtue is decentralization. Probably the most important obstacle to effective public procurement is in finding the ideas for invention that are widely distributed among firms and inventors. The lure of intellectual property protection does that automatically. Decentralization is especially important if private inventors are more likely than public sponsors to spawn good ideas for innovations. The third virtue is that intellectual property is an effective screening device (Long, 2002 (emphasizing the role of patents as a signaling device)). Since the private value of the invention often reflects the social value, inventors should be willing to bear higher costs for inventions of higher value. But these are not determinative, since other incentive mechanisms such as prizes and government funding may share the same virtues while at the same time reducing deadweight

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Economic models of innovation  121 loss. Whereas the earlier economics literature proceeded as if intellectual property protection was the self-evident solution to the R&D incentive problem, the modern literature has sought to understand when that is true and when other incentive mechanisms might dominate (Wright, 1983; Abramowicz, 2019; Price, 2018). The choice among incentive mechanisms, and even the optimal design of intellectual property laws, depends on the nature of the creative process or, in economists’ jargon, on the model of knowledge creation. Thus, this chapter proceeds in three stages. Section I sketches the principal economic models of technical change. Section II traces the economic modeling of stand-alone innovation. These models provide the foundation for cumulative innovation, the most prevalent and significant driver of economic activity, addressed in Section III. A recurrent theme is that advances in digital and network technologies have vastly eased access to prior works and reduced the costs of using them in new works.

I.  ECONOMIC MODELS OF TECHNICAL CHANGE Four principal models of technological change have been proposed in the economics literature: an evolutionary model, a model of induced technical change, a production function for knowledge, and an exogenous process of idea formation, with incentives determining investments. In the evolutionary model proposed by Nelson and Winter (1982) (see also Mokyr, 1990, ch. 11), technology develops through a process in which R&D investments occur whenever profit drops below a specified level. Hence, the evolutionary model is not set up to investigate incentives since investment is automatic. In the model of induced technical change, innovation occurs in response to changes in factor prices: ‘A change in the relative prices of the factors of production is itself a spur to invention and inventions of a particular kind—directed at economizing the use of a factor which has become relatively expensive’ (Hicks, 1932, pp. 124–5; see also Ruttan, 2001). Thus, rising energy prices can be expected to spur technological advances in energy conservation (Newell et al., 1999). In the production function model of discovery, which is the basis of almost all of the patent race literature, there is an exogenously given relationship which determines, as a function of research inputs or the number of researchers, either the quality of invention (de Laat, 1996; Shavell and van Ypersele, 2001; Che and Gale, 2003) or the likelihood of success in each time period (Loury, 1979; Lee and Wilde, 1980; Reinganum, 1982, 1985, 1989; Wright, 1983; Denicolò, 1996, 1997). In both the induced technical change model and the production function model, the profit opportunities are common knowledge. Decentralization is not important. The ‘ideas’ model of O’Donoghue et al. (1998) (see also Scotchmer, 1999; Maurer and Scotchmer, 2004) focuses directly on the scarcity of ideas. The basis of research is ‘imagination,’ and to achieve an innovation, a researcher must both have the idea for the innovation and an incentive to invest in it. Although it is the most widely used model, the production function model does not lead naturally to intellectual property as superior to other incentive schemes. For example, the advantages of decentralization are more important in a model where ideas are scarce than where they are common knowledge.

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II.  STAND-ALONE INNOVATION Much of the early economic modeling of the role of intellectual property in promoting innovation posed the following question: what system of incentives or rewards would best promote the attainment of a particular invention? Such models provide the basis for analyzing legal protection for a distinct and relatively narrow class of inventions which do not ultimately generate follow-on innovation. Examples from this class include the safety razor, the ballpoint pen, and pharmaceutical innovations for which the scientific mechanism is poorly understood (Nelson and Winter, 1982; von Hippel, 1988, p. 53). Even where inventors depend on prior knowledge, which is almost inevitable, the lag may be such that prior rights have expired so that the incentive system treats inventions as standalone. Examples are the bicycle and the early development of the light bulb (Dyson, 2001). Models focusing on stand-alone innovation can also be helpful in analyzing legal protection for expressive creativity. Although such works often draw upon prior works for inspiration or common reference points for the work’s audience, many authors, musicians, and artists have not traditionally built so extensively upon the work of prior creators as to require express permission. This proposition obviously turns on the underlying right structures—copyrights tending to be relatively narrow in comparison to utility patents—but it also reflects a fundamental difference between the fields of technological and expressive innovation: Science and technology are centripetal, conducing toward a single optimal result. One water pump can be better than another water pump, and the role of patent and trade secret law is to direct investment toward such improvements. Literature and the arts are centrifugal, aiming at a wide variety of audiences with different tastes. We cannot say that one novel treating the theme, say, of man’s continuing struggle with nature is in any ultimate sense ‘better’ than another novel—or musical composition or painting—on the same subject. The aim of copyright is to direct investment toward abundant rather than efficient expression. (Goldstein, 1986)

As copyright has expanded into functional subject matters, such as the design of useful articles, computer software, and architectural works, however, this distinction breaks down. Channeling doctrines aim to steer technological advances into the utility patent regime (Menell, 1987). The critical inquiry in seeking to promote stand-alone innovation is how much profit an inventor or creator should receive and how it should be structured. The focus for standalone innovation, therefore, is upon ex ante incentives. As we will emphasize below, all of the results in this area depend sensitively on what is assumed about licensing (see also Gallini and Scotchmer, 2002). Collaboration and the exchange of technological knowledge across firm boundaries encounter substantial transaction costs. Arora et al. (2001) find evidence that changes in the technology of technical change—most notably the growing use of digital information technologies—facilitate greater partitioning of innovation tasks across traditional firm boundaries. They foresee markets for t­ echnology—licensing and specialized technology transfer and innovation service firms—playing a more significant role in the production of innovation. (When we turn to cumulative innovation in Section III, ex post incentives enter the analysis.) The principal policy levers affecting incentives to invent are the threshold for protection, duration, breadth, rights of others (and defenses), remedies, and channeling doctrines.

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Economic models of innovation  123 A.  Threshold for Protection Because intellectual property protection results in deadweight loss to consumers (and can interfere with cumulative innovation), it should only be available for significant ­innovation—works that are new and would not be readily forthcoming without legal encouragement—that is, requiring substantial cost and substantial technological risk. Works already in the public domain should not be protectable and the threshold for protection should be sufficiently high (or the rights sufficiently narrow) to prevent easily achieved (‘obvious’) advances from being insulated from free market competition. Intellectual property regimes erect several types of threshold doctrines before protection is granted: (1) subject matter rules—categorical limitations on eligibility; (2) substantive requirements—minimum criteria for protection; and (3) formal requirements—­administrative and technical rules that must be complied with in order to obtain and maintain protection. Utility patent protection is available for nearly all forms of technological innovation (processes, machines, manufactures, and compositions of matter), but applies relatively stringent standards (utility, novelty, nonobviousness (or inventive step), and adequate disclosure) through a formal examination system. By contrast, copyright protection applies a very low threshold for protection—a work need only be fixed in a tangible medium of expression and reflect a modicum of ­originality—and does not require examination (registration is optional). Such a low threshold is counterbalanced by a relatively narrow scope of protection and limiting doctrines excluding protection for technological features. Design patent protection is similar to copyright protection for pictorial, graphic, and sculptural copyrighted works. Its ornamentality/non-functionality doctrine guards against protecting technological innovation as opposed to aesthetic creativity. Trade secret law requires merely that information derives economic value from not being generally known or readily ascertainable (by proper means) by others and from being the subject of reasonable efforts under the circumstances to maintain its secrecy. Trade secret protection does not, however, stand in the way of independent invention or reverse engineering. Utility patent law’s threshold requirements have received the most economic scrutiny. Due to the relatively uniform nature of patent protection, some have argued that certain classes of innovation (such as computer software and business methods) that may not require such lengthy protection should be subject to a sui generis form of protection (Menell, 1987 (software)) or excluded from intellectual property protection altogether (Thomas, 1999 (business methods); Dreyfuss, 2000; Menell, 2007, 2011). The basic contours of patent law were established during an age of mechanical innovation and were designed with this model (and the guild system that predominated) in mind (Menell et al., 2018, vol. I, ch. III). Mechanical innovation continued to comprise the bulk of patent applications well into the twentieth century. During the past half century, however, various newer fields—such as software, business methods, and biotechnology—have increasingly come into the patent system (Allison and Lemley, 2002), calling into question the premises on which patent law was built. If specialized protection systems are not developed to address new and distinctive fields of innovation (as was partially done in the case of semiconductor chip designs in the Semiconductor Chip Protection Act of 1984), the challenge remains of reshaping the relatively uniform

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124  Research handbook on the economics of IP law volume 1 patent system to accommodate the growing heterogeneity of inventive activity (compare Burk and Lemley, 2002, 2003). Patent law’s novelty requirement—what it means to be ‘first’—turns on the location of the ‘finish line’ in the race to invent. Most patent systems in the world apply a first-to-file standard. Until 2013, the United States determined the winner on the basis of who was the first to invent. In principle, the first-to-invent system rewards the first inventor to discover new knowledge, even if they lack the specialized patent filing resources of others. Thus, many small inventors defended the first-to-invent system as a means of leveling the playing field relative to large companies which have more resources available and personnel in place to file applications expeditiously. The first-to-file system significantly reduces the administrative costs of operating a patent system—priority depends solely on the time and date stamped on an application. Evidentiary disputes over the subtle nuances of who was first to grasp an invention can be quite costly to resolve (Macedo, 1990). Empirical studies cast doubt on the notion that small inventors tend to do better under a first-to-invent system, likely reflecting the high costs of resolving priority disputes (Mossinghoff, 2002; Lemley and Chien, 2003). The first-to-invent system also has incentive effects as to the choice between trade secrecy and disclosure (Scotchmer and Green, 1990). Inventors may be inclined to delay their applications in order to effectively extend the expiration date of a patent (20 years from the date of filing). In order to counteract this effect and promote prompt filing, US patent law adds an additional layer of legal complexity (and hence uncertainty and cost): requiring that an inventor file an application within one year after the invention is disclosed (either through patenting or publication anywhere in the world or in public use or on sale in the United States). This reduces the delay in disclosure of new knowledge, but does not eliminate it. The first-to-file system promotes earlier disclosure of technological advances. Grushcow (2004) finds that the growing interest in patenting by academic institutions since 1980 has delayed the publication of research, potentially increasing the risk of wasteful duplication of research. On March 16, 2013, the United States shifted from the first-to-invent system to a first-to-file system that recognizes a one-year grace period for inventor disclosure (35 U.S.C. § 102, as amended by the America Invents Act of 2011). The grace period serves to encourage prompt disclosure while affording inventors leeway to get their patent applications filed. Such pre-filing disclosure even by the inventor, however, will bar patenting in most other parts of the world. From an economic standpoint, patent law’s nonobviousness standard plays the most important role in determining which innovations qualify for protection (and hence what type of innovation patent law encourages). Patent law specifies that a claimed invention must go beyond readily predictable or conventional solutions to technical, engineering, or business problems. Articulating an objective and determinative standard for nonobviousness, however, has proven elusive. In the 1940s, US courts interpreted the law to require a ‘flash of creative genius’ (Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84 (1941)). Such a demanding formulation generated a backlash within the patent community, leading Congress to frame the standard in the following manner: a patent may not be obtained ‘if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill

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Economic models of innovation  125 in the art to which the claimed invention pertains’ (35 U.S.C. § 103, as amended by the America Invents Act of 2011).What raises the nonobviousness hurdle above the novelty standard is that the patent examiner may consider multiple references simultaneously and use logical inferences and common sense. The examiner must also consider circumstantial evidence of nonobviousness (so-called ‘secondary considerations’)—long-felt but unsolved need, commercial success of the claimed invention, failed efforts by others, copyright by others, praise for the invention, unexpected results, and disbelief of experts—but only to the extent that such factors are connected to the inventive aspects of the patent. In its actual formulation and application, the nonobviousness rule falls short of implementing the economic gatekeeping principle. Whereas an economist would consider paramount among relevant considerations the R&D expense in making an invention (Merges, 1992), the US Patent Act states that patentability ‘shall not be negated by the manner in which the invention was made,’ implying that inventions requiring minimal effort (and hence likely to be obtained even without protection) may nonetheless qualify for protection. In addition, R&D are not among the traditional secondary considerations, although several court decisions on nonobviousness take note of such factors (Merges, 1992 (noting that the threshold for patentability should be lowered with regard to highcost research); Oddi, 1989, p. 1127 (recommending that courts expressly consider ‘qualitative and quantitative investment in research and development’ among the secondary factors)). The legal standard for nonobviousness does consider the level of uncertainty involved in research. In practice, the test depends on the number of parameters and the extent to which the relevant prior art guides the experimentation process. The role of commercial success in the nonobviousness determination has produced conflicting economic analyses and prescriptions. Drawing upon historical and empirical research on the innovation process, Merges (1988) finds commercial success to be a poor proxy for technical advance. What succeeds in the market tends to reflect product strategy and marketing more than technical advances over the prior art. Hence, Merges argues for downplaying this factor and scrutinizing the connection between market success and the technical advance. By contrast, Kitch (1977, p. 283) sees market success as consistent with the prospect theory. By using subsequent economic success as a factor favoring patentability, patent law increases ‘the security of the investment process necessary to maximize the value of the patent.’ Both analyses support the idea that the consideration of market success in assessing nonobviousness promotes commercialization, although it is not clear that a patent system is needed to achieve this end. Where adequate incentives exist to invent, free market forces should be adequate to promote commercialization (but compare Sichelman, 2010 (proposing a ‘commercialization’ patent); Kieff, 2001a (articulating a commercialization theory of patent law)). The nonobviousness standard may have some perverse collateral effects on the nature and timing of disclosure of new knowledge. By preemptively publishing work in progress, a firm that is ahead may induce a shake-out among rivals by raising the level of prior art to render a rival’s subsequent invention obvious (Scotchmer and Green, 1990); a laggard in a patent race may be able to reduce the likelihood that a leader will be able to obtain a patent by raising the level of the prior art sufficiently to defeat patentability by a leader (Lichtman et al., 2000; Parchomovsky, 2000; compare Bar-Gill and Parchomovsky, 2003).

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126  Research handbook on the economics of IP law volume 1 This possibility might also lead competitors to collude or collaborate to maximize patent opportunities. Under this theoretical account, a higher standard of nonobviousness increases the viability of a preemptive patenting strategy. The likelihood that such a strategy would be pursued by rivals has been questioned on doctrinal and practical grounds (Merges, 2004a, pp. 195–6; Eisenberg, 2000; compare Hicks, 1995). Much of the economics literature on trade secrets addresses the optimal level of expenditures to maintain secrecy—that is, what constitutes ‘reasonable efforts’ under the circumstances. Kitch (1980) argues that all such ‘fencing costs’ are inefficient and would require only such expenses as are necessary to provide evidence of the existence of a trade secret—that is, a notice or marking function. Friedman et al. (1991) make the related point that trade secret protection should be available when it is cheaper than the physical precautions that would be necessary to protect a particular piece of information. B. Duration Nordhaus (1969) offers the first formal model of the optimal duration of intellectual property protection. Nordhaus asks why the life of the intellectual property right should be limited, since a longer right leads to more innovation and more innovation creates social benefit. He argues that there is a countervailing cost. The longer right might increase innovation, but it also increases deadweight loss on all the inframarginal innovations that would occur even with shorter protection—that is, innovations that would be forthcoming even in the absence of the longer right. The optimal duration of a patent or copyright should balance the incentive effect against the deadweight loss in order to maximize social welfare. Many economists believe that copyright duration (life of the author plus 70 years) is much longer than justified to provide an appropriate ex ante incentive for creation of new works (see Akerlof et al., 2003; but compare Landes and Posner, 2003, p. 218 (noting that the deadweight loss from copyright protection is relatively small due to the narrow scope of copyright protection)). To see the Nordhaus argument, suppose that there is a universe of ‘ideas’ available for investment. Let an idea be a pair (s, c) where s measures the value of the resulting innovation and c is its cost. An idea with higher s can be interpreted as leading to a larger market; a higher s means that the demand curve is shifted out. Let Π(s, T) be the profit available to a right holder with an intellectual property right of length T and an idea of quality s. Π is increasing in both T and s. Let W(s, T) be the corresponding social welfare associated with investment in the idea. The welfare W(s, T) is the sum of consumers’ surplus for the infinite life of the innovation, sold at the competitive price, minus the deadweight loss during the period of protection. Thus, W is increasing in s and decreasing in T. Finally, suppose that for each R&D cost c, the distribution of ‘ideas’ is given by a distribution function F with density f, where F(s|c) is the fraction of ideas with cost c that have value less than s. Then the social value of investment in ideas with cost c is Ẇ(T, c) defined below, where s(T) is the minimum value that will elicit investment (Π(s(T), T) 5 c). That is,

W (T, c) 5 3

#

`

s (T )

[ W (s,T ) 2c ] f (s 0 c) ds

0 #  W (T, c) 5 3 [ W (s,T ) 2c ] f (s 0 c) ds 2W (s (T ) ,T ) (T ) 0T s (T ) `

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W (T, c) 5 3

#

`

s (T )

[ W (s,T ) 2c ] f (s 0 c) dsEconomic models of innovation  127

Notice that s’(T) , 0. A marginal increase in T will increase investment in amount 2W(s(T), T)s’(T). However, even though investment goes up with T, total social welfare Ẇ(T, c) may go down. The change in social welfare is 0 #  W (T, c) 5 3 [ W (s,T ) 2c ] f (s 0 c) ds 2W (s (T ) ,T ) (T ) 0T s (T ) `



The last term represents the welfare due to new innovations called forth by longer protection, but the first term, which is negative, represents the loss in consumers’ surplus on all the inframarginal innovations that would have been achieved even with shorter duration. As T becomes large DD and s(T) becomes small, it is reasonable to think that the first term 3 5 becomes largeRrelative to the last term. Increasing the duration T beyond that point will DC not be in the social interest. Of course the best length T must be established by adding up the marginal effects for all c. Depending on the distributions of (s, c) in different product classes, the one-size-fits-all nature of the patent system may provide excessive protection in some product classes and deficient incentives in others. Races for the intellectual property right introduce another inquiry as to how profitable the intellectual property right should be, regardless of how the profit is achieved.1 Unlike the Nordhaus argument, the inquiry leads to an argument for limited duration that applies even if the profit is given as a prize out of general revenue and involves no deadweight loss. The argument concerns the optimal amount of R&D effort. A more profitable right will encourage more entry into the race (the extensive margin) or more collective effort as each participant accelerates its effort (the intensive margin). The potential benefits of inciting more effort by offering more profit depend on the creative environment—the nature of the R&D process. Nordhaus implicitly addresses a creative environment where ‘ideas are scarce’ so that duplication of costs is not the focus. Suppose, however, that more than one potential innovator can serve the same market niche. Then there is a second reason to limit duration. Not only will there be excessive deadweight loss on inframarginal innovations, but the disparity between profit and cost will also lead to duplication of R&D cost as firms vie for the very profitable rights. Thus, part of the inquiry into the optimal strength (profitability) of an intellectual property right concerns the extent to which additional effort is duplicative. This issue takes us back to the question, what is the right model of the creative environment? If ‘ideas are scarce,’ then races are not an issue. But if all investment opportunities are commonly known, then races may or may not be efficient, depending on the ‘production function for knowledge.’ If successes and failures in the R&D process are perfectly correlated, then a race is duplicative. If successes and failures are independent, then a race increases the probability of at least one success or, in another interpretation, accelerates progress

1   Innovation races are more suited to patentable subject matter than to expressive works. Such races can only occur if several rivals are vying for a right that only one of them will receive. Rights to expressive works are generally narrow enough in scope that several authors can obtain protection for works that have some similarity (and hence can compete). Thus, an author may fear a reduced market due to competition from another author but does not generally fear that he or she will be wholly excluded from the market through a rival completing their work first.

M4754-Math Eqn.indd 1

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128  Research handbook on the economics of IP law volume 1 (Loury, 1979; Lee and Wilde, 1980; Reinganum, 1982, 1985, 1989). Further, if the creative environment is one in which different firms have different unobservable ideas for how to address a given need, then entrants to a race need not be the most efficient firms or those with the best ideas (Scotchmer, 2004, ch. 2). The number of entrants in a race may be too large or too small, as compared to the efficient number, depending on the size of the private reward. Suppose, for example, that two firms have different ideas about how to fill a market niche with value s. Suppose that each firm’s cost is c, and that each has probability 1/2 of succeeding. Suppose that the value of the property right will be Π(s, T), and that the firms’ prospects for success are independent. If both firms succeed, each will receive the property right with probability 1/2. Then a second firm will enter the patent race if Π(s, T)(3/8) . c, since its probability of receiving the patent is 3/8. On the other hand, entry by the second firm is only efficient if W(s,  T)(3/4) 2 2c . W(s,  T)/2 2 c or W(T, s)/4 . c. Thus, if Π(s, T)(3/8) . c . W(s,  T)/4, there will be excess entry to the patent race—the second firm will enter even though that is not efficient—and if Π(s, T)(3/8) , c , W(s, T)/4 there will be too little entry. Entry into a race may provide a private value to the entrant that is greater than the social value of the entry and always provides a private value that is greater than the increment to private value of both firms. The latter is because of the ‘business-stealing effect.’ The second entrant’s expected profit is Π(s, T)(3/8) 2 c, while the increment to joint profit is only Π(s, T)(1/4) 2 c. The second entrant’s chance of winning the race and getting the patent comes partly at the first entrant’s expense. It is this externality that may lead to excessive entry into a race. It also implies that if the reward were as large as the social value, there would be too much entry. In fact, the only thing that is clear in this environment, without imposing additional structure, is that the optimal reward is smaller than the social value of the innovation. But this is not a very useful design principle because rewards given as intellectual property will have that attribute almost inevitably. Landes and Posner (2003, pp. 222–8) suggest that some works may be diminished by a congestion externality. They illustrate their point by reference to the Disney Corporation’s self-imposed restraint on commercialization: To avoid overkill, Disney manages its character portfolio with care. It has hundreds of characters on its books, many of them just waiting to be called out of retirement. . ..Disney practices good husbandry of its characters and extends the life of its brands by not overexposing them. . . . They avoid debasing the currency. (Britt, 1990)

Landes and Posner (2003) assert that this concern justifies perpetual protection for some works. To balance the costs of protection, they advocate a system of indefinitely renewable copyright protection, with the renewal fee acting as policy lever for diverting works not subject to congestion externalities into the public domain. They note that a similar over-saturation can arise with regard to some rights of publicity (use of persona in advertising) and trademarks. C. Breadth The breadth or scope of an intellectual property right has critical bearing on its economic value, and hence its incentive effect. A broader right preempts more substitutes than a narrow right.

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Economic models of innovation  129 The scope of a utility patent is determined by the language of the claims, which define the boundaries of literal infringement, and the extent to which such boundaries will be stretched to cover similar, but not quite literal, embodiments. Under the ‘doctrine of equivalents,’ courts will find infringement where the accused device ‘performs substantially the same function in substantially the same way to obtain the same result’ (Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 608 (1950) (quoting Sanitary Refrigerator Co. v. Winters, 280 U.S. 30, 42 (1929)); Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17 (1997)). The scope of copyright is determined by the substantial similarity test in conjunction with copyright’s limiting doctrines (e.g., originality, scènes à faire, non-protectability of ideas and facts, fair use)—is the defendant’s work substantially similar to the protected elements of the plaintiff’s work? In practice, a copyright is quite narrow. J.K. Rowling can prevent others from copying Harry Potter novels, but she has no control over other stories about wizards. It is unlikely that different authors operating from the same ideas will produce substantially similar novels. Breadth issues can arise, however, with regard to works built on copyrighted works, such as sequels and film adaptations. We deal with these issues in the context of cumulative innovation. Breadth does not generally arise in the context of trade secrets. These legal tests do not map directly onto the economic concepts of breadth. Economic models of breadth have been developed for two market contexts: where an innovation is threatened by horizontal competition and where an innovation might be supplanted by an improved innovation. We take up the latter question in the analysis of cumulative innovation. For horizontal competition, breadth has been modeled in two ways: in ‘product space,’ defining how ‘similar’ a product must be to infringe a patent, and in ‘technology space,’ defining how costly it is to find a noninfringing substitute for the protected market. In the first notion of breadth, introduced by Klemperer (1990) using a spatial model, the size of the market for the patented product depends on the closeness of noninfringing substitutes. A broader patent covers more of the product space, meaning that more substitutes infringe. The right to keep a substitute out of the market is profitable for the patent holder in two ways: by shifting the demand for the protected good outward (where the intellectual property owner excludes the substitute from the market) or by allowing the intellectual property owner to charge higher prices for both the patented good and the infringing substitute. The second notion of breadth for horizontal substitutes, developed by Gallini (1992), is that it determines the cost of entering the market. In this conception, the goods are exact substitutes, and breadth implicitly refers to the technology of production (process innovation) rather than closeness of substitutes in the market. Entry by a second firm does not cause demand curves to shift, but instead causes the firms to compete in a given market. A narrower utility patent (lower cost of entry) will lead to more entry and lower prices. Entry stops when the cost of entry can no longer be covered by competing in the market. In both conceptions of breadth, a narrower utility patent leads to lower per-period profit. Thus, breadth might be conceived as a policy lever that governs profit, as described above, in a one-size-fits-all system where the duration of protection cannot be tailored to the cost of innovation. In the utility patent system, such tailoring is not generally done in any systematic way by the Patent Office. Examiners focus solely on ensuring that the

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130  Research handbook on the economics of IP law volume 1 application meets the threshold criteria and that the claims are clear. They do not adjust the ‘breadth’ of claims (Menell, 2013, 2019a). The courts exercise a modest degree of tailoring. In applying the doctrine of equivalents, courts accord ‘pioneering’ inventions greater scope than more modest inventions. Such a rule increases the reward for major breakthroughs. The copyright system does not systematically vary the scope of protection with the cost or importance of the work. Even within the one-size-fits-all system, there is a policy question as to whether, on average, rights designed to give a pre-specified reward should be structured as long and narrow or short and broad. The inquiry into how market rewards should be structured has led in several papers to a ratio test: a policy reform is desirable if it increases the ratio of profit to deadweight loss. The ratio test was devised by Kaplow (1984) in the patent/ antitrust context and was also used by Ayres and Klemperer (1999) in the enforcement context. It reappears in the cited discussions of patent breadth. The basic notion is that deadweight loss is the consumer cost of raising money through proprietary pricing. If the ratio of profit to deadweight loss is higher, the money being raised through proprietary pricing is raised more efficiently. In a broad class of demand curves including linear ones, any price reduction from the monopoly price will increase the profit-to-deadweight-loss ratio but will also reduce profit, thus necessitating a compensation such as longer protection. This can be seen in Figure 6.1, where the monopoly price is 1/2 and the lower price 1/3 is the duopoly price. At the price 1/3, the ratio of profit to deadweight loss is the ratio of the light grey areas (of size 2 × C) to the triangle D. At the monopoly price 1/2, the ratio of profit to deadweight loss is the ratio of the outlined box that represents monopoly profit to the triangle (B+M+D). One can see by inspection that the ratio of profit to deadweight loss is smaller at the monopoly price 1/2 than at the lower price 1/3. In fact, with the linear demand curve, this argument generalizes for any reduction in price: the lower the price, the higher the ratio of profit to deadweight loss. This is the argument given by Tandon (1982), arguing for compulsory licenses to lower prices, and Gilbert and Shapiro (1990), p

Demand q (P) = 1-p 1/2 A

B

1/3

C

M 1/3

1/2

D 2/3

q

Figure 6.1  Monopoly pricing and deadweight loss

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Economic models of innovation  131 arguing for narrow patents, which they interpret as lower prices, although they do not say how price reductions in a given market might flow from narrower scope. How, though, do narrow patents lower the price in a given market? In Gallini’s (2002) conception, breadth determines the cost that an imitator must pay to enter a proprietary market. Entry is only tempting if the market will be protected long enough so that the entrant, in competition with the patent holder, can still cover the cost of entry. If entry occurs, competition between the entrant and the right holder will lower the price. Figure 6.1 can be used to compare a relatively short period of protection where entry by an imitator is not tempting, with a longer period of protection, where entry is tempting even though the imitator must pay a cost. With the shorter period of protection, say TM, consumers will pay the monopoly price 1/2, but with the longer period of protection, say TD > TM, they will pay the duopoly price 1/3. Suppose that TM and TD are chosen so that the patent holder makes the same discounted profit in both regimes, and the cost of entry is such that exactly one imitator will enter if the patent lasts for length TD. Then by the above argument, consumers would be better off in the duopoly regime, despite the longer period of protection, because of the lower price. However, that argument does not account for the fact that the imitator must pay real resource costs to enter the market. Gallini (1992) argues that the duplication of costs is severe enough to overturn the above argument. Given that the price can only be reduced by costly entry, it is better for society as a whole—including consumers, the patent holder, and the imitator—to have a short period of monopoly pricing than a longer period that attracts entry. However, we have already stressed that the best design of intellectual property rights depends importantly on what one assumes about licensing. In this case, licensing again overturns the conclusion. Maurer and Scotchmer (2002) argue that the patent holder will anticipate entry and offer a license instead of tolerating unlicensed entry. In this way, the patent holder can increase his own profit without reducing the profit of the entrant, and at the same time can eliminate the wasteful duplication. The narrow patent thus has the effect of lowering price without imposing the social cost of duplication, and the above welfare analysis is restored. The better policy is a narrow patent for a relatively long time. D.  Rights of Others (and Defenses) The rights afforded others in protected works directly affect the profits from intellectual property. Many of these rules—such as blocking rights (patent and copyright) and exceptions for experimental use (patent), fair use (copyright), and reverse engineering (copyright and trade secret)—find their economic justification in the cumulativeness of innovation and hence are covered in Section III. Doctrines relating to independent invention, prior user rights, and ‘first sale’ (or exhaustion of rights) relate to stand-alone invention, as do proposals about extending user rights to limited sharing of copyrighted works. 1.  Rights arising from independent invention A right of independent invention means that, provided the independent inventor was actually an ‘inventor’ (and, in particular, did not learn the invention from any other party, such as a prior inventor), he or she is free to practice the invention. Both copyright law and trade secret law immunize independent inventors from liability, but patent law does not.

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132  Research handbook on the economics of IP law volume 1 In the case of trade secrets, it would be impossible for an independent inventor to know what had previously been invented. In the case of copyrights, which protect expression, any re-expression escapes liability (broadly speaking). In the case of patent law, the right is defined with respect to claims and (broadly speaking) not with respect to how a potential infringer achieved the potentially infringing innovation. Scholars have made three types of economic arguments about independent invention. First, in the context of trade secrecy, the absence of an independent invention defense would stifle innovation because inventors would be uncertain as to whether they could practice the new knowledge they create. Second, a right of independent invention can reduce the duplication of R&D costs in patent races (La Manna et al., 1989; Blair and Cotter, 2002; Maurer and Scotchmer, 2002; Leibovitz, 2002; Ottoz and Cugno, 2004). If the value of an exclusive right in the market is $100, and the R&D cost is $20, five firms may enter a race. But if all five firms have rights ex post, competition will reduce the private value of the right below $100, and fewer than five firms will enter. The right of independent invention reduces the duplication of costs and at the same time affords lower prices to users, all without undermining the incentive to invent. Landes and Posner (2003, pp. 361–2) make a similar argument for trade secrets. They compare the American rule, under which the owner of a trade secret loses his right to the invention if someone else patents it (W.L. Gore & Assocs. v. Garlock, Inc., 721 F.2d 1540 (Fed. Cir. 1983)), to the prior user right that prevails in some other nations. The prior user right divides the entitlement, enabling multiple independent inventors to share its value through an effective oligopoly structure. As in the foregoing argument, duplicative entry will only occur to the extent that all firms cover their costs. Third, giving rights to independent inventors can induce patent holders to license ex post on terms that reduce market price, in order to discourage ex post entry through independent invention (Maurer and Scotchmer, 2002). Suppose that a single patent holder is in the market. Then, whether or not the patent holder licenses, a right of independent invention will reduce the price in the market below the proprietary price. Without licensing, the price will fall due to entry by independent inventors. Instead, the patent holder can license at a fee equal to the cost of independent invention. Then independent inventors are indifferent to paying the license fee or paying the costs of independent invention, but the patent holder prefers licensing. The price reduction in the market (determined by the terms of license and number of licensees) must be large enough to deter further entry. The market price with licensing will thus depend on the cost of independent invention. If the cost is high enough, the right of independent invention can benefit users without undermining the incentive to invent. In fact, in plausible models, the cost of independent invention only needs to be greater than half the cost of the original innovator (Maurer and Scotchmer, 2002; Ottoz and Cugno, 2004). Nevertheless, Blair and Cotter (2002) rightly point out that the economic consequences depend critically on the relative costs of first inventors and imitators, which will differ across technologies. Giving a right of independent invention can have harmful consequences on innovation if imitation or independent invention is too cheap. Lichtman (1997) makes a similar argument in the context of unpatented inventions, advocating on grounds of cost that independent inventors be allowed to copy but not

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Economic models of innovation  133 clone them. Armond (2003) proposes that independent discovery be available as a defense to a preliminary injunction motion. Although independent inventors are not generally exempted from liability under US patent law, US law provides a limited prior user right where the technology was ‘commercially used . . . in the United States, either in connection with an internal commercial use or an actual arm’s length sale or other arm’s length commercial transfer of a useful end result of such commercial use’ and ‘such commercial use occurred at least 1 year before the earlier of either—(A) the effective filing date of the claimed invention; or (B) the date on which the claimed invention was disclosed to the public in a manner that qualified for the [grace period]’ (35 U.S.C. § 273(a)). In addition, state employment law provides an employer with a royalty-free, non­ exclusive, non-transferable license (‘shop right’) to use an employee’s invention where the employee makes a patented invention using the employer’s facilities. In most research environments today, employers require employees involved in research-related activities to assign their inventions to the employer, although some state laws limit such agreements to inventions developed within the scope of employment or developed using the employer’s facilities (e.g., Cal. Labor Code § 2870). Even where no express agreement has been signed by an employee, patents invented by the employee may nonetheless be deemed to have been assigned where an employee has specifically been employed to invent in the field in which the invention was made. In these circumstances, a court may imply an assignment clause into the employment contract. 2.  Rights after sale Under what is commonly referred to as the ‘first sale’ or ‘exhaustion’ doctrine, the intellectual property owner ‘exhausts’ the legal monopoly in a product by selling it to the public, thereby enabling the purchaser to use the work and resell it without infringing. Such a default right structure reduces transaction costs for subsequent transactions. Similarly, purchasers of patented products are deemed to have an implied license to make repairs, although this license does not extend to ‘reconstruction’ of the patented product. Intellectual property owners can, subject to anti-competitive restrictions, circumvent the first sale doctrine by imposing licensing restrictions upon the conveyance of a product. 3.  Rights to share copyrighted works Even though the purpose of copyright law is to prevent copying, a controversial idea that keeps resurfacing is that copying or sharing is less harmful to creators than meets the eye, at least where the sharing of each legitimate copy is limited. Where it is unlimited, such as in peer-to-peer networks or when users make copies of copies, sharing poses a greater threat to appropriability. The reason that sharing might be less harmful is that the proprietor will price in a way that anticipates sharing. Sharing allows the proprietor to charge a higher price, since demand is determined by the willingness to pay several parties. Limitations on sharing may arise because copies of copies degrade (Liebowitz, 1982, 1985; Liebowitz and Margolis, 1982 (arguing in the era of analog copies)) or because it is less costly to facilitate sharing than to produce a copy for every user, as in a video rental market (Varian, 2000), or because the probability of detection increases with the size of the sharing group.

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134  Research handbook on the economics of IP law volume 1 The earlier set of papers in this vein relied on the fact that copying is costly. Novos and Waldman (1984) and Johnson (1985) argue that proprietors may reduce price to avoid copying, but the cost of copying will nevertheless preserve the proprietor’s market. The market price will be lower than without copying, reducing the deadweight loss of excluding users, but the per-period reward to creative works will also be reduced, especially when there is heterogeneity in tastes as well as in copying costs. The welfare effects are different according to whether the cost of copying is per copy or per user, as when it requires the purchase of a copying device. Scholars have also argued that copying can have an affirmative benefit for right holders because it builds network effects (Conner and Rumelt, 1991; Shy and Thisse, 1999). A second set of papers focus on the fact that prices can be tailored to the groups that form. Liebowitz (1985) emphasizes price discrimination according to whether the purchaser will make the copy available to many users, as libraries do (see also Ordover and Willig, 1978). Bakos et al. (1999) argue that, depending on the groups, sharing might actually be more profitable than selling to individual users. This is true if, first, the willingnesses to pay within groups are negatively correlated or, second, if there is variance in the sizes of groups. Thus, whether sharing enhances profit depends on what governs group formation. However, Scotchmer (2005) argued that sharing groups will not be formed exogenously or even randomly, and if they form in a way that is efficient for the group members conditional on the proprietors’ prices, then group formation has no effect at all on profit opportunities. Sharing is neither profit-reducing nor profit-enhancing. Given that copying can have salutary effects as well as deleterious effects, these arguments have led authors to consider an additional set of policy levers specific to the copying context. These include taxes and subsidies on prices of legitimate copies, and taxes and subsidies on copying devices, as well as the optimal mix of enforcement activities and other incentives (Besen and Kirby, 1989a, 1989b; Chen and Png, 2003; Netanel, 2003; Fisher, 2004). E. Remedies As in other bodies of law, the remedial opportunities in intellectual property law are injunctions and damages. There are two branches of thought about the relative efficacy of these rules, one branch focusing on whether remedies will lead to efficient use of the property ex post and the other branch focusing on the ex ante effects. The first set of arguments (Calabresi and Melamed, 1972; Polinsky, 1980; Kaplow and Shavell, 1996) for the general framework, and Blair and Cotter (1998) for the intellectual property context, considered whether property rules (injunctions) are more or less likely than judicially imposed liability to encourage bargaining to an efficient outcome ex post. For example, property rules (injunctions) may be preferred when transaction costs of exchange are low and the costs of valuing violations of rights by courts are high. For the intellectual property context, Ayres and Klemperer (1999) add the consideration that ‘soft’ remedies, which do not actually restore the proprietary price, can be socially beneficial because they increase consumers’ surplus without impinging much on profit, at least for small price reductions. The second set of arguments are not concerned with what would happen in the out of equilibrium event of infringement but focus instead on how potential remedies affect

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Economic models of innovation  135 equilibrium profits and the ex ante incentives for R&D (Schankerman and Scotchmer, 2001; Anton and Yao, 2007). In these arguments, remedies are only important because they do or do not deter infringement, and because they determine the terms of an ex ante license. The terms of license that will be accepted by a potential licensee/infringer depend on the consequences of infringement, and this threat has an effect on the ex ante division of profit. Schankerman and Scotchmer (2001) argue that if infringement leads to profiteroding competition between the infringer and right holder, a wide range of remedies will deter infringement, at least for stand-alone innovations, and are therefore equivalent from an ex ante point of view. However, this is not necessarily true for research tools and other potentially licensed intellectual property where infringement does not dissipate profit. Merges and Duffy (2002) and Blair and Cotter (1998) argue, again from the ex post perspective, that patent and copyright law are better suited to a property-rule paradigm than a liability-rule paradigm. Since intellectual property rights are relatively well defined, disputants or potential disputants should have little trouble resolving their differences by negotiating licenses against the backdrop of an injunction. In contrast, if the setting of damages (an ex post ‘compulsory license’) is left to a generalist judicial institution under a liability rule, the court may have difficulty placing a value on the intellectual property or on the injuries caused by infringement. Further, judicially imposed licenses can undermine the prospect function of patent law (Kitch, 1977). Merges (1996) argues that for complex transactions involving many players, a property rule will facilitate the creation of private exchange institutions, such as patent pools, that can evolve in response to changing circumstances and draw upon industry and institutional expertise. Although infringed right holders generally have a right to enjoin unauthorized use, injunctions are backed up by compensatory damages for past violations. These may include enhanced (punitive) damages for patent infringement, statutory damages for copyright infringement, and attorney fees and costs in ‘exceptional cases.’ In several areas such as the covers of musical compositions, juke boxes, cable television broadcasts, satellite retransmission of television signals, and webcasting, copyright law provides for compulsory licensing. These regimes arguably economize on transaction costs, although commentators are divided on the economic effects of such compulsory licenses (compare Merges (1996, 2004b) with Netanel (2003)). Consistent with traditional economic analysis of damages (harm internalization), patent and copyright law award intellectual property owners the greater of lost profits or a reasonable royalty for the defendant’s unauthorized use of the protected works (Blair and Cotter, 1998). Calculating these measures, however, is quite complex, involving numerous subtle determinations of how markets would have evolved had infringement not taken place (Graham et al., 2017). It follows from general economic principles that enhanced damages should be awarded where improper behavior is costly to detect and where full compensatory damages are costly to prove (Polinsky and Shavell, 1997; Cooter, 1982; Cotter, 2004). Excessive damages (i.e., where expected damages exceed actual damages) could lead to overdeterrence in the sense that parties may exercise caution in order to avoid a risk of liability. Several studies indicate that courts may well be overdeterring patent infringement based on the high rate of enhanced damages awards (Lemley and Shapiro, 2007; U.S. Federal Trade Commission, 2003; Cotter, 2004; Moore, 2000). Due to the very different nature of trade secret protection, the remedies available for unauthorized use and dissemination of a trade secret are more limited. Where the secret

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136  Research handbook on the economics of IP law volume 1 has not been disclosed to the public, courts will generally enjoin further use of the secret by a misappropriating entity. But where the secret has been disclosed, the trade secret owner will be limited to damage remedies or limited injunctive relief against the entity that misappropriated the trade secret (such as a ‘head start’ injunction which excludes the misappropriator from the market for a designated period). Disclosure to the public destroys the secret and therefore it would be inappropriate (and infeasible) to enjoin use of the information by others. Nonetheless, Sidak (2008) argues an injunction against a misappropriating entity should be perpetual in order to encourage efficient post-litigation bargaining over the value of continued use. Such a rule would also avoid the expense and difficulty (error costs) of having courts adjudicate the option value of a trade secret. F.  Channeling Doctrines The various modes of intellectual property provide overlapping protection. For example, utility patent, copyright, and trade secret law all cover computer software. As noted earlier, however, copyright doctrines exclude ideas, processes, and methods of operation. Thus, software developers cannot gain copyright’s long duration of protection for the functional aspects of computer software. Such inventions must comply with utility patent law’s formal examination requirements and surpass utility patent law’s higher thresholds in order to obtain legal protection. In this way, intellectual property law prevents inventors from obtaining protection for functional features through the ‘backdoor’ of the copyright system. The relationship between patent and trade secret law is somewhat more complicated. Both regimes cover technological innovation. Where an inventor obtains a patent before a subsequent researcher invents the same technology, the patent trumps the subsequent inventor, regardless of whether the subsequent inventor seeks to protect the invention as a trade secret. (Such secrecy may well conceal infringement, particularly in the case of process inventions, but that does not suggest that the trade secret would have any validity vis-á-vis the patent.) A somewhat more complicated issue arises where the first inventor chooses to protect a particular technology as a trade secret. If a subsequent inventor independently discovers the same invention and obtains a patent, two overlapping issues arise: (1) does the trade secret invalidate the patent (on novelty grounds); and (2) if the patent is valid, can the trade secret owner continue to practice the invention—in essence, does the first inventor enjoy a prior user right. As suggested earlier, the trade secret will not invalidate the patent because it does not fall within the body of prior art that may be considered in judging novelty. Therefore, assuming the second inventor meets the other requirements of patentability, she will obtain a valid patent. As regards the rights of a trade secret owner, as noted previously, US patent law provides a limited prior user right (35 U.S.C. § 273(a)). The prior user right in this circumstance places the technology under duopoly rather than monopoly control. The profits available to the patentee are reduced accordingly. It can be argued, however, that such a structure of rights might partially improve the screening function of utility patent law—inventions that have been independently developed may not have needed as much of an ex ante incentive in the first place. To the extent that ex ante incentives are more than sufficient to generate the innovation, duopoly improves social welfare by reducing the deadweight loss from exclusive exploitation.

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III.  CUMULATIVE INNOVATION In the context of stand-alone inventions or creations, intellectual property rewards reflect the social value of the contribution, since the profit is determined by demand. That is one of the main virtues of intellectual property as an incentive system. However, when innovation is cumulative, the most important social benefit of an innovation may be the boost given to later innovators, and this may make the benefits harder to appropriate (Scotchmer, 1991). Moreover, the innovation may enable rivals to enter with improved products. In that case, social success may mean private failure—the boost given to the rivals may cause the innovation’s own demise (Scotchmer, 1991, 1996; Green and Scotchmer, 1995; Chang, 1995; O’Donoghue et al., 1998; O’Donoghue, 1998; Bessen and Maskin, 2009; Hunt, 1999, 2004). Merges and Nelson (1990) give an opposite perspective on the cumulative problem. Instead of worrying that later improvers pose a threat to earlier innovators, they worry that earlier innovators (earlier patents) pose a threat to later improvers. Galasso and Schankerman (2015) find that patent rights block follow-on innovation in a few specific technology fields (computers, electronics, and medical instruments), but not in drugs, chemicals, or mechanical technologies. They caution, however, against concluding that removing patent protection would be beneficial due to adverse incentive effects on upstream innovation (Green and Scotchmer, 1995), the benefits of signaling (Conti et al., 2013), and a shift toward trade secrecy (and less disclosure). The intellectual property system must resolve these contradictions. In general, the problem of appropriating benefits has two facets: the overall level of profit and how it is divided among the sequential innovators. The roles of the policy levers are closely intertwined in the cumulative context, and the best design of the system will depend on the transaction costs of licensing. Many scholars have emphasized the importance of cumulativeness in the process of knowledge creation, especially economic historians. As expressed by David (1985, p. 20), ‘Technologies . . . undergo . . . a gradual, evolutionary development which is intimately bound up with the course of their diffusion.’ Secondary inventions—including essential design improvements, refinements, and adaptations to a variety of uses—are often as crucial to the generation of social benefits as the initial discovery (Nelson and Winter, 1982; Taylor and Silberston, 1973; Mak and Walton, 1972; Rosenberg, 1972). Cumulative technologies tend to involve multiple components, serve as building blocks for further incremental innovation, and often spur wide-ranging applications. Automobiles, aircraft, electric light systems, semiconductors, and computers fall within this category. Some chemical technologies are hybrids of discrete and cumulative models. New chemical compounds are typically discrete in terms of the product market that they serve, but they can suggest promising new lines of research (e.g., penicillin, Teflon) (Nelson and Winter, 1982). The biotechnology field reflects several cumulative features. The development of research tools provides the means for decoding genomic information. Research decoding genomes provides the input for downstream biomedical research. Cumulativeness also extends to expressive creativity. All authors and artists draw, to some extent, on prior works. Sequels, translations, and screenplays build directly upon prior works. Parodies and satires comment on or employ other works. Most musical compositions reflect rhythm and other elements of established genres. The hip-hop and rap musical genres embody prior recordings through the use of digital sampling.

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138  Research handbook on the economics of IP law volume 1 A.  A Preliminary Model: The Virtues of Licensing One of the lessons that emerges powerfully below is that the best design of the intellectual property system depends on the fluidity of the market for licenses. Before turning to a more detailed analysis of design issues and how licensing affects them, we illustrate the importance of licensing by modifying the ‘reduced form’ model of Landes and Posner (2003), where a variable z is taken as the ‘strength’ of a right. For example, the strength of the right may be affected by breadth or exemptions such as fair use. Let q(·) be the demand function for a protected innovation, where q(p) is decreasing with p. Referring back to our discussion of copying, and how the threat of copying affects the market price, let y(p, z) be the supply of illicit copies. Then the net demand faced by the proprietor is q(p) 2 y(p, z). Assuming for convenience that the marginal cost of copies is zero, the proprietor maximizes p[q(p) 2 y(p, z)], and sets a profit-maximizing price p*(z) that depends on the strength of protection through the threat of copying. Now consider how the profit-maximizing price and the proprietor’s profit depend on the strength of protection, z. Assume that the supply y(p, z) of illicit copies increases with p and decreases with z. Because the supply of imitations y(p*(z), z) depends on the proprietor’s price as well as the level of protection, there is a potential indeterminacy in the model. An increase in protection could conceivably lead to a decrease in price and an increase in illicit copying. However, under reasonable assumptions we can assume that the profit-maximizing price increases with the level of protection, even though the increase in price has a feedback effect of increasing imitation or copying. Nevertheless, the profitability of creations and hence their supply will not necessarily increase with the level of protection z. This is because the cost of creation can also depend on z, for example, by creating a burden to innovate outside the scope of other rights. Suppose, in fact, that each potential innovator faces an R&D cost k plus additional costs e(z) that reflect the burdens imposed by other intellectual property rights. The creation is profitable if p*(z)[q(p*(z)) 2 y(p*(z), z)] 2 k 2 e(z) . 0 If potential creations differ in their markets (e.g., if we introduce a quality variable s into the demand function q), then the more valuable ideas will call forth investment, while the less valuable ones will not. Without formalizing this idea, we will let N(z|k) describe the number of profitable creations with cost k. The supply of new creations N(z|k) is not monotonic in the strength of protection z because raising z increases the creator’s costs. The punch line of this model is that too much protection can be bad for creators as well as for imitators. The point we would like to make, however, is that the punch line is largely reversed if firms can license to avoid conflicting property rights, rather than being forced into the costly activity of avoiding them. Following the perspective in O’Donoghue, et al. (1998), assume that each innovating firm will initially be in the position of paying license fees on the discoveries of its predecessors and then in the position of collecting license fees from its followers. The effect of strong rights, z, is to increase the licensing obligations, rather than to increase the real resource cost of avoiding prior rights. The essential point is that licensing also creates claims against future innovators.

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Economic models of innovation  139 Suppose, in fact, that all innovators are in symmetric positions: they pay for the same number of licenses and are paid by the same number of licensees. Then, since all the money must go somewhere in the end, symmetry means each innovator pays as much in licensing fees as it earns in licensing fees, say, l(z) on both sides of the ledger. The profitmaximizing decision is then to invest in the potential creation if p*(z)[q(p*(z)) 2 y(p*(z), z)] 1 l(z) 2 k 2 l(z) . 0 or equivalently, p*(z)[q(p*(z)) 2 y(p*(z), z)] 2 k . 0 Hence (assuming that the revenue p*(z)[q(p*(z)) 2 y(p*(z), z)] is increasing in z), the ambiguous effect of strong protection on innovation disappears. A strengthening of protection leads to more creations. Thus, with licensing, we are cast back to the same consideration as with stand-alone inventions, namely that there is a tradeoff between deadweight loss and innovation but no tension between protecting early innovators and protecting the later innovators who use the knowledge they create. Licensing will largely resolve that tension, to everyone’s benefit. These points about the salutary effects of licensing have mostly been made in models that distinguish between the policy levers of intellectual property, rather than lumping the policy levers into a single variable called the ‘strength’ of the right. We now turn to that more disaggregated discussion. B. Duration Although the length of protection has an obvious effect on the overall level of profit, the statutory length may be irrelevant. When innovations are under threat of being supplanted by improved innovations, market incumbency only lasts until that happens. O’Donoghue et al. (1998) define a notion of ‘effective patent life’ that focuses on the rate of market turnover and argue that the effective life of the patent may be determined by the breadth of the right, rather than its statutory length. This is because breadth determines how long it will take before the product is supplanted. In fact, there is considerable evidence that the ‘effective’ lives of most patents are shorter than their statutory lives. Mansfield (1986) reports, using survey evidence, that in some industries 60 percent of patents are effectively terminated within four years. The literature on patent renewals carries a similar message (Pakes and Schankerman, 1984; Schankerman and Pakes, 1986; Pakes, 1986; Schankerman, 1998; Lanjouw, 1998). For example, Schankerman (1998) reports that half of patents in France are not renewed beyond the tenth year, even though renewal fees are very low. Bessen and Maskin (2009) present a model of sequentialness where this endogeneity of patent life is absent (because the products do not compete in the market) but argue that statutory life should be shorter when innovators learn from previous innovators. Their model has sequentialness in innovation (because innovators learn from each other) but the resulting products are ‘stand-alone’ and live out their statutory lives. They argue that

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140  Research handbook on the economics of IP law volume 1 the optimal statutory life should be shorter if innovators learn from each other than if not, because the loss from impeding future innovation is greater. (This result depends sensitively on the absence of licensing; see below for an argument that all results in this arena turn on what is assumed about licensing.) For the case of basic and applied research, Green and Scotchmer (1995) argue that patent lives must last longer if the research is divided between sequential innovators rather than concentrated in a single firm, because of the problem of dividing profit in a way that respects the costs of both parties. To the extent that transaction costs may impede licensing and first stage inventors do not need large ex ante rewards to induce innovation, a shorter duration of intellectual property protection promotes cumulative innovation. Legal protection for computer software fits this profile (Menell, 1987). There are relatively strong non-intellectual property incentives for developing operating system and other platform technology for many product markets. Interoperability with widely adopted platforms is often critical to secondary innovation, such as application programs and peripheral devices. Owners of the intellectual property rights in widely adopted proprietary platform technologies can exercise tremendous market power due to network effects and consumer lock-in. Shortening the duration of protection for such technologies is one mechanism for constraining such market power and better equilibrating the incentives of first- and second-generation innovators. C.  Threshold Requirements and Breadth The status of an invention that builds on other inventions can be: (1) protected and noninfringing, (2) unprotected and noninfringing, (3) protected and infringing, or (4) unprotected and infringing (Scotchmer, 1996; Denicolò, 2002a). Thus, the economic effects of threshold (patentability) and breadth are hard to disentangle. Scenario (1) gives the best incentive for second-generation innovators but does not force the second-generation innovator to share the profit with the prior innovator. Scenario (2) will clearly stymie second-generation innovation unless there is a mechanism other than intellectual property to protect the innovator. In scenario (3)—which is possible under patent law—the works are considered ‘blocking’: the later work infringes the prior innovation and cannot be exploited without a license, and the later work is protected and cannot be exploited by the pioneering inventor without a license. Such a scenario encourages the inventors to share profit from the subsequent invention. Scenario (4), which approximates the treatment of derivative works under copyright law, discourages improvements or adaptations by subsequent inventors in the absence of ex ante bargaining. However, there is less difference between scenario (3) and scheme (4) than meets the eye. Even if the later product is not protectable, it can be protected by an exclusive license on the innovation it infringes. The literature draws widely differing conclusions about the optimal way to organize the rights of sequential innovations, largely because authors make different assumptions about when and whether licenses will be made and who can be party to the negotiation. Kitch (1977) was the earliest, and perhaps most extreme, licensing optimist. Licenses can be made either ex ante, before the follow-on innovator invests in his project, or ex post. If licenses must be negotiated ex post, after both innovations have been achieved, scenario (4) may stifle innovation, since the second innovator will fear that

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Economic models of innovation  141 the first innovator will simply appropriate it (Green and Scotchmer, 1995). On the other hand, if the second innovator can approach the first innovator for an ex ante license before investing in his idea, the second innovation is not in jeopardy under either of scenario (3) or (4). However, the first innovator will typically collect more of the profit in scheme (4) because the second innovator will have less bargaining power (Scotchmer, 1996). Denicolò (2002) considers a model where ideas are common knowledge, and asks how the various scenarios affect patent races, assuming that there will be ex post licenses but no ex ante licenses. He finds that the choice should depend on the relative costs of the innovators. If, for example, the cost of the first innovation is low and the cost of the second is relatively high, it may be better not to let the first innovator share in the second innovator’s profit. Of course, this also depends on whether the first innovation can earn profit in the market or only through licensing. Chang (1995) also considers a context where the firms could make ex post licenses, but not ex ante licenses, and concludes that the choice between (1) and (3) should depend on the relative costs of the innovators. The worst situation is when licensing may fail entirely, and when, in any case, the earlier innovator does not need to profit from licensing in order to cover his costs. Merges and Nelson (1990) draw on many actual examples to argue that such circumstances are quite plausible. A defect of the one-size-fits-all intellectual property regime is that it cannot distinguish cases where blocking rights are unnecessary for cost recovery from cases where earlier innovators would not invest unless they can profit from licensing. In part on this basis, Burk and Lemley (2002) argue that it would be better to make intellectual property protection more finely attuned to industrial contexts. But even in those cases where earlier innovators should be allowed to profit from the later innovations they enable, blocking rights are a blunt instrument for dividing profit. Profit shares will not necessarily reflect the cost shares. This is especially true if the licenses will be negotiated ex post, after all innovators’ costs are sunk (Green and Scotchmer, 1995), although Chang (1995) argues that the problem can be mitigated by making the infringement (breadth) responsive to cost. In copyright law, blocking rights are not available as a tool at all. Follow-on creators may not prepare infringing derivative works without permission of the owner of the copyright in the underlying work. Copyright law therefore has less flexibility than patent law in how it balances the incentives for sequential innovators (Lemley, 1997). In the case of product improvements, there is a question of whether a patent’s breadth can extend to slightly better products that have not yet been invented or only to inferior products. O’Donoghue et al. (1998) define a notion of ‘leading breadth’ that determines when there will be blocking rights in the cumulative context and also establishes the ‘effective life’ of the patent right. To see why leading breadth is useful as a policy lever, suppose to the contrary that every trivial infringement is noninfringing, even if patentable. A potential improver may discard ideas for small improvements because they lead to price-eroding competition between close, vertical substitutes. It is only the relatively big ideas that will become innovations. This problem can be solved by making the small improvements infringing. Firms may then be willing to invest in them, since control of the improvement and its predecessor can then be consolidated through licensing in the same firm. Instead of competing, both will be marketed together. Further, if the small improvements are infringing, and if it takes a relatively long time for large ideas to come along, the ‘effective life’ of each patent is prolonged. These effects cannot be achieved

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142  Research handbook on the economics of IP law volume 1 by choosing the patentability standard alone; the opportunity to consolidate successive improvements in the hands of a single firm arises because the patents are infringing. In the ‘ideas’ model, there is not much role for a nuanced patentability standard. However, in a ‘production function’ model, a patentability standard can make each successive innovator more ambitious in the size of improvement he invests in. This may be socially beneficial (O’Donoghue, 1998). Hunt (1999, 2004) presents a production function model motivated by the Semiconductor Chip Protection Act, in which eligibility for protection coincides with noninfringement of previous innovations (as with copyright). He argues that the standard for protection should be increasing in the ‘dynamicness’ of the industry. Since noninfringement coincides with protection, it is hard to sort out their respective roles. Whereas the effective patent life is determined by breadth in the model of O’Donoghue et al. (1998), it is determined in the Hunt model by both. Finally, we return to the idea of Kitch (1977), who argues that strong patent rights should be given to pioneers so that they can coordinate the subsequent development of the technology. These are called ‘prospect’ patents. The theory is not focused on the reward purpose of the patent, since it would apply even if the pioneer innovation were costless to achieve and no incentive for R&D were required. The theory thus rejects the line of reasoning that says intellectual property is at best a necessary evil, due to deadweight loss. The prospecting theory rests on the premise that social interests and the private interests of the patent holder are aligned. Scotchmer (2004, sec. 5.6) shows that this may be true in some ways, but is not true in other ways, and, in particular, that strong pioneer patents can preempt competition policy. As in later theories of cumulativeness, the prospector’s profit comes from getting the intellectual property into use. For this reason, the pioneer has an incentive to encourage use at a fee. Further, the pioneer can profit from delegating research effort to the most productive researchers and avoiding bad projects, as are socially efficient.2 These are ways in which the pioneer’s interest is aligned with the broader public interest. However, the pioneer can preempt competition policy in two ways: by avoiding competition in the ‘innovation market’ for second-generation products and by avoiding competition among second-generation innovators once the second-generation innovations exist. The first of these may or may not be socially harmful depending on the patent/antitrust interplay, but the second is clearly harmful to competition, assuming that patent law is well designed in the first place. If these harms to competition are important, it might be better to avoid pioneer patents even if second-generation innovators must then duplicate the cost of achieving the pioneer innovation. As with all intellectual property, the case for pioneer patents is strongest if the pioneer innovation is costly to achieve and the patent is actually needed as a reward. For radical improvements that read on existing patents, Merges (1994) suggests that it may be socially advantageous to exempt an improver from infringement under the ‘reverse doctrine of equivalents.’ Under this doctrine, a radical improvement may be deemed noninfringing even though it literally reads upon an existing patent. The doctrine would allow the radical improver to avoid a holdup by the underlying patent holder and to avoid

2   In fact, this is always true if the prospector can make deals with consumers as well as followon inventors, for example, if consumers can pay the prospector not to retard progress.

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Economic models of innovation  143 a potential bargaining breakdown (see also Lemley, 1997). This is again an argument that relies on difficulties in licensing. Such a doctrine avoids over-rewarding a first-generation inventor (who did not foresee a much greater advance) while providing strong encouragement to visionary subsequent inventors. The rule has rarely been applied in actual cases, although the possibility of its application may well have fostered licensing. 1.  Evolving doctrines regarding subject matter We turn now to how these economic arguments have been reflected in legal doctrines. Notwithstanding the broad scope of utility patents set forth in the Patent Act (‘any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof’), the courts have barred inventors from claiming patents on natural physical phenomena (e.g., the properties of lightning), laws of nature (e.g., the theory of general relativity), mental processes, and abstract intellectual concepts (e.g., algorithms). Courts have noted that allowing exclusive rights for such fundamental discoveries would unduly impede future inventors—a cumulative innovation rationale (O’Reilly v. Morse, 56 U.S. (15 How.) 62 (1854)). Implicit in this justification is the notion that transaction costs could impede licensing. The courts have thus realized, as is more explicit in the economic models discussed above, that licensing plays an important role in balancing the rights of sequential innovators. Heller and Eisenberg (1998) argue that patenting of gene sequences generates a tragedy of the anticommons, a fragmentation of rights which vastly increases transaction costs, thereby impeding downstream research for medical advances. This is also, at root, an argument about the ease of licensing. Walsh et al. (2003) report survey research indicating that university research has not been impeded by concerns about patents on research tools as a result of licenses, inventing around patents, infringement (often informally invoking a research exemption), developing and using public tools, and challenging patents in court. The opening of the ‘business method’ patent floodgates raised concerns about whether patent protection is needed at all to promote such innovation and, more troubling, whether such protection is chilling innovation and competition. The idea of protecting business plans runs counter to a core premise of the free market system by offering a form of antitrust immunity for business models. As the rising tide of prior art raises the threshold for protection, such adverse effects may abate and innovation could well produce valuable new business methods. The Supreme Court has sought to restrain overbroad patent protection through a series of decisions tightening eligibility standards. The Court’s 2012 decision in Mayo Collaborative Services v. Prometheus Laboratories, 566 U.S. 66 (2012), imposed a new limitation on the scope of the patent system: that a useful application of a scientific discovery is ineligible for patent protection unless the inventor also claims an ‘inventive’ application of the discovery. The following year, the Court ruled that discoveries of the location and sequence of DNA compositions that are useful in diagnosing diseases are ineligible for patent protection (Ass’n for Molecular Pathology v. Myriad Genetics, 569 U.S. 576 (2013)). And in its 2014 Alice Corp. v. CLS Bank International, 573 U.S. 208, decision, the Court ruled that software-related claims are ineligible for patent protection unless the abstract ideas or mathematical formulas disclosed are inventively applied. The Court explained these interpretations on concern about impinging upon (‘preempting’) cumulative innovation (Mayo, 566 U.S. at 71).

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144  Research handbook on the economics of IP law volume 1 These decisions, however, conflate eligibility with other patentability requirements. An eligibility requirement of ‘inventive application’ eligibility threshold substantially overlaps the Patent Act’s Section 103 nonobviousness standard. In fact, it arguably is broader in that the Court’s articulation of ‘inventive application’ excludes consideration of scientific discoveries and algorithms, whereas Section 103 looks at the claimed invention as a whole. The Patent Act’s Section 112 provides the tools for ensuring that patents do not extend beyond their proper scope. That an inventor’s claim might practically preempt all use of a discovery will ‘show more clearly the great importance of his discovery, but it will not invalidate his patent’ (Dolbear v. Am. Bell Tel. Co., 126 U.S. 1, 535 (1888)). Thus, the Supreme Court’s recent eligibility jurisprudence raises serious concerns for medical diagnostic research and other innovation fields that build directly on scientific discoveries (Lefstin et al., 2018). These decisions directly confront the tension between promoting pioneering and follow-on innovation. Copyright law applies a different rights structure than patent law, with significant implication for the direction of cumulative innovation (Lemley, 1997). Unlike utility patent law, which allows anyone to patent improvements to patented technology, copyright owners have the exclusive right to prepare derivative works. Therefore, a novelist can prevent others from translating their work into another language, adapting the story for the stage or a motion picture, selling the story in narrated form (e.g., books on tape), and developing sequels that draw extensively on the protectable elements (including possibly character names and attributes—e.g., Rocky IV or the next James Bond film). As we will see below, some borrowing is tolerated under the fair use doctrine and various exemptions and compulsory licenses, but pioneers generally have exclusive authority to pursue the further development of their expressive work. Copyright law wholly excludes protection for ideas and functional attributes of a work but protects creators against direct or near exact copying of even a significant fragment of the whole for a tremendously long duration (life of the author plus 70 years), reflecting the notion that society prefers to have 100 different war novels embodying similar themes, ideas, and facts than 100 versions of War and Peace that differ only in their final chapter. Consequently, copyright protection for an author’s expression of ideas and the relatively long period of its duration effectuates a different balance than patent law. Patent law encourages cumulative innovation by allowing follow-on to secure rights on improvements and to enable any competitor to build upon the innovation in its entirety within a comparatively short period of time (20 years from the time of the application). By contrast, copyright law, with its narrow scope of protection, allows subsequent creators to pursue competing works using the same ideas as the ‘pioneer,’ but copyright law also allows the pioneer exclusive rights over the development of the expressed ideas. Fishman (2015) identifies a creativity paradox: that limits on follow-on expression can promote robust original pioneering creativity. He notes, for example, that George Lucas developed the plot for Star Wars only after he failed to get a license for a remake of Flash Gordon. Constraints of freedom to build on the works of others can promote creative breakthroughs. 2.  Adequacy of disclosure requirements Both patent law and copyright law provide for the disclosure and dissemination of knowledge, which promotes cumulative innovation (Menell, 2019a). Patent law requires

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Economic models of innovation  145 disclosure as the quid pro quo for patent protection. In the software field, however, disclosure of source code is not required under the best mode requirement—the inventor need only disclose the functions of the software on the grounds that a person of ordinary skill in the art could write software to perform the functions without undue experimentation. In practice, however, the knowledge protected by many software patents would be difficult and costly to decipher without access to the source code, which is usually maintained as a trade secret. This slows the process by which follow-on inventors can build upon earlier generations. In the case of most copyrighted works, the knowledge contained in the work may be comprehended from direct inspection (Menell, 2016a). Therefore, the publication of a work discloses and disseminates. Furthermore, the Copyright Act requires those who register a work, which is optional, to deposit a copy with the Library of Congress. Some copyrighted works, however, do not lend themselves to visual inspection and comprehension. Computer software cannot typically be perceived unless it is available in source code. Copyright Office regulations, however, do not require disclosure of the entirety of source code in order to secure copyright registration. Thus, as with utility patent law, copyright law allows protection of software without providing access to the underlying knowledge. As a result, follow-on invention is stifled, although such rules may deter infringement that would otherwise be difficult to detect. D.  Rights of Others (and Limitations and Defenses) Several doctrines provide safety valves, beyond the limitations embodied in scope of protection, for promoting cumulative innovation. These include the patent law’s experimental use doctrine, copyright law’s fair use doctrine, and the reverse engineering doctrines of trade secret law and copyright law. In addition, copyright law provides for several exemptions for educational and related purposes which can be viewed as promoting basic education for new authors and artists. Copyright law also provides several compulsory licenses. 1.  Experimental use A subsequent inventor who wants to improve a patented technology may benefit from experimenting with it. United States patent law has had a common law exemption for ‘philosophical experiments’ and research to ascertain ‘the sufficiency of [a] machine to produce its described effects’ (Whittemore v. Cutter, 29 F. Cas. 1120 (C.C.D. Mass. 1813)).3 Subsequent cases, however, have declared the defense to be ‘truly narrow’ and applicable solely to activities ‘for amusement, to satisfy idle curiosity, or for strictly philosophical inquiry,’ (Roche Prods., Inc. v. Bolar Pharm. Co., 733 F.2d 858, 863 (Fed. Cir. 1984); Madey v. Duke Univ., 307 F.3d 1351 (2002)), prompting several scholars to warn that patent law unduly hinders academic and basic research and unduly supplants academic and scientific norms promoting progress, disclosure, and cumulative innovation. Eisenberg (1989) proposes to exempt research that could potentially lead to improvements or design-arounds of patented technology, but she also points out the inherent

3   Article 27(b) of the European Patent Convention exempts ‘acts done for experimental purposes relating to the subject matter of the patented invention.’

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146  Research handbook on the economics of IP law volume 1 contradiction that arises when further research is the main use of the patented invention. A broad exemption could entirely undermine the profitability of the patent. However, the effect of a research exemption depends on an ancillary doctrinal question, namely, whether the invention that is achieved by using the prior invention will infringe the prior patent (Scotchmer, 2004, ch. 5). If so, the exemption may (counterintuitively) increase the patent holder’s profit. Exercising the research exemption can put the improver in the position of bargaining for a license ex post (after he has sunk his costs) rather than ex ante. This strengthens the bargaining position of the first patent holder. Kieff (2001b) contends that the exclusive rights provided by patents promote university research by increasing private investment in research and improving the efficiency of academic research environments. His analysis does not, however, directly address whether a more permissive experimental use doctrine would adversely affect the flow of private research investment into universities. Based on survey research, Walsh et al. (2003) find little evidence that patents on research tools have significantly impeded university research. There is one notable exception: the field of genetic diagnostics. Cai (2004) notes that the chilling effect of a narrow experimental use defense may not be very significant due to patent holders’ rational forbearance in enforcing against universities as well as legal constraints (sovereign immunity) on suing state actors (compare Menell, 2000). Many legal scholars in addition to Eisenberg propose alterations to existing law. Mueller (2001) endorses a broadened experimental use defense along the lines of the European system as well as compulsory licensing. Feit (1989) proposes a compulsory license for patents infringed during experimentation to improve patented technology. These authors, like Eisenberg, raise particular concerns about patents on upstream research tools, particularly in the bioscience field. O’Rourke (2000) proposes a fair use doctrine for patents that would go beyond the similar doctrine for copyright by allowing courts to judge permissible conduct and impose compulsory royalties. Dreyfuss (2003) proposes to allow experimental use if the investigator’s institution promptly waives patents on subsequent discoveries, subject to a ‘buyout’ provision. In cases where a patentee has refused to license to a nonprofit on reasonable terms, Nelson (2004) proposes a research exemption, provided the researcher agrees to publish his results and agrees either not to patent his own results or to license them on nonexclusive and reasonable terms. Strandburg (2004) proposes to exempt improvement patents and to provide for compulsory licensing of research tools. Other authors (Epstein, 2003; Merges, 1996) counter that such proposals would entail significant administrative costs and have complex effects upon licensing markets and the formation of licensing institutions. 2.  Fair use The fair use doctrine in copyright law exempts a user from liability for infringement when copyrighted works are used for criticism, comment, news reporting, teaching, scholarship, research, and other transformative uses (17 U.S.C. § 107). In applying this doctrine, courts balance the purpose and character of the use (including whether such use is of a commercial nature or is for nonprofit educational purposes), the nature of the copyrighted work, the amount of copying, and, most importantly, the effect of the use upon the potential market for or value of the copyrighted work. Transformative or product uses are more likely to be permissible, whereas uses that merely supplant the underlying work are disfavored. In this way, the fair use doctrine promotes significant creative advances while

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Economic models of innovation  147 protecting the pioneer from direct market competition. The fair use doctrine can also be seen as an efficient means for permitting uncompensated use of copyrighted material where the transactions costs of licensing or other means of exchange would prevent a transfer through the market (Gordon, 1982). Courts have applied the fair use doctrine to enable software developers to make copies of protected programs for purposes of learning how such software functions (Samuelson and Scotchmer, 2002). With such code deciphered, the rivals can discern unprotectable elements (e.g., interoperability specifications) which they can implement, using a clean room process,4 in their own commercial products. In this way, the fair use doctrine operates as a form of ‘experimental use’ exemption. The long duration of copyright protection can impede cumulative creativity. Liu (2002) and Hughes (2003) suggest that courts can ameliorate this concern by expanding the scope of fair use as copyrights age. Menell (1987, 2019b) advocates a genericide doctrine for software interface features that become widely adopted as a means to promote positive network externalities. 3.  Reverse engineering As with copyright law, trade secret law allows others not bound by contractual constraints to reverse engineer technology in order to determine how it functions. To the extent that they decipher trade secrets, they undermine the inventor’s advantage. By disclosing the information, they destroy the trade secret. The reverse engineering limitation on trade secret protection thus exposes the trade secret owner to free riding by others. Nonetheless, most commentators believe that it strikes a salutary balance between protection on the one hand and competition and the dissemination of knowledge on the other (Landes and Posner, 2003; Samuelson and Scotchmer, 2002). The trade secret owner can ‘purchase’ greater protection against this risk by investing in higher levels of security (e.g., more effective encryption for software-encoded technology). The inventor can also pursue patent protection, which proscribes reverse engineering, although only for the limited duration of the patent, and mandates disclosure of the invention to the public. By declining to pursue patent protection (or failing to satisfy the requirements thereof), however, inventors should not be able to secure potentially perpetual rights in technologies merely by encrypting them or otherwise obscuring how they function. To do so would undermine the larger balance of the federal intellectual property system. 4. Other limitations: exemptions, compulsory licenses, voluntary licenses, open source, and dedication to the public domain Intellectual property regimes can afford cumulative creators freedom to pursue follow-on projects through statutory exemptions and licensing options. In addition, intellectual property owners can sometimes benefit by promoting collaboration and widespread adoption of their technology or works.

4   Using only functional specifications that are outside of copyright protection (17 U.S.C. § 102(b)), clean room programmers can independently produce code that accomplishes the same functions as a target program without infringing copyright protection in the target program’s code (Sammi et al., 2013).

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148  Research handbook on the economics of IP law volume 1 The utility patent system has strong rights with relatively few limitations. Nonetheless, a variety of proprietors have chosen to share their technology with competitors and downstream innovators (Rice, 2015; Merges, 2004a). These firms can benefit through network effects (Menell 2019b) and preempting or undermining adversaries. These initiatives are often coordinated through open source or standard-setting organizations (SSOs) (Contreras, 2019; Mattioli, 2012). The free and open source software (FOSS) movement promotes ex ante dedication of technological advances to the public domain and commitment to open development principles. A growing number of companies have joined these efforts on an ex post basis by pledging their patents to the public. Technology companies have developed the Defensive Patent License and License on Transfer pledges as a means of reducing the costs and risks of opportunistic patent assertions (Schultz and Urban, 2012). SSOs seek to lessen the tension between employing the best technological solutions in industry standards and ensuring widespread access to standards by requiring members to disclose standard-essential patents (SEPs) and license them on fair, reasonable, and non-discriminatory (FRAND) terms (Contreras, 2019). The Copyright Act provides numerous exemptions for public interest (performance rights for designated educational, religious, and civic uses, reproduction for people with disabilities) and transaction cost (sound recording performance rights for small businesses, running software on computers) purposes. It also affords compulsory licenses to promote dissemination of existing works (juke boxes, cable television, satellite retransmission, public broadcasting, and webcasting) and cumulative creativity. The compulsory license mechanism for cover versions of musical compositions has spurred tremendous cumulative innovation in sound recordings. Once a musical composition has been released with consent of the copyright owner as a sound recording, any sound recording artist may record and distribute copies of that composition without consent of any copyright owner. This privilege is made possible by limiting the scope of the sound recording copyright to exact duplication5 and establishing a compulsory license rate for copies made of the underlying musical composition (currently 9.1 cents per copy) (17 U.S.C. § 115). The creative freedom associated with this privilege, however, is constrained by the statute—the follow-on recording artist may make ‘a musical arrangement of the work to the extent necessary to conform it to the style or manner of interpretation of the performance involved, but the arrangement shall not change the basic melody or fundamental character of the work’ (17 U.S.C. § 115(a)(2)). This privilege also does not extend to the use of prior sound recordings—as, for example, in digital sampling—without the consent of both the musical composition copyright owner and the sound recording copyright owner. Nonetheless, this compulsory license has fostered a wider body of interpretations of musical compositions than would have occurred if musical composition copyright owners held exclusive (blocking) rights. Menell (2016b) proposes bringing order to music mashup through a new compulsory license. 5   ‘The exclusive right of the owner of copyright in a sound recording . . . is limited to the right to prepare a derivative work in which the actual sounds fixed in the sound recording are rearranged, remixed, or otherwise altered in sequence or quality. The exclusive rights of the owner of copyright in a sound recording . . . do not extend to the making or duplication of another sound recording that consists entirely of an independent fixation of other sounds, even though such sounds imitate or simulate those in the copyrighted sound recording . . .’ (17 U.S.C. § 114(b)).

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Economic models of innovation  149 Building on the open source model, Creative Commons provides tools to assist authors in promoting the reuse and remixing of their works at the time of creation by opting into a different set of defaults than those provided by the Copyright Act (Van Houweling, 2008). Creative Commons also provides tools to assist creators in finding licensed works that can be shared, remixed, or reused. E. Remedies As noted above, the main remedies for patent and copyright infringement are injunctions and compensation for past injury, possibly compounded to treble damages in case of willfulness. As these laws are interpreted, courts operate from a baseline of prospective injunctive relief and compensatory damages for past injury. Hence, they do not generally adjust the level of damages as a policy lever, except in the context of enhanced damages, which we discuss below. With regard to awarding damages for past infringement, the court will often be in the position of having to decide whether, absent the infringement, the right holder would have licensed. If not, the lost profit may be the value lost to the patent holder because the follow-on product was preempted by the infringer. If licensing would (should) have occurred, the lost profit is lost royalty. These are two different inquiries. Lost royalty is even more speculative in the cumulative context than in the stand-alone context, for a sound theoretical reason (Schankerman and Scotchmer, 2001). On one hand, the potential damage award establishes the maximum license fee. On the other hand, the equilibrium license fee establishes the damage award. Hence, there is an inherent circularity that leads to multiple equilibria. Because of multiple equilibria, the profitability of the patent is unknowable in advance to a researcher investing in it. This problem is especially acute for research tools and will be less acute for inventions where infringement leads to competition and dissipates total profit. Because of the dissipation, infringement is its own punishment, and infringement is more easily deterred. The awarding of enhanced damages in patent law (up to treble) and statutory damages in copyright law can be a policy lever, although it is restricted to penalizing willful infringement. It is not generally seen as a way of addressing the cumulative innovation problem. The patent law standard for awarding enhanced damages produces a deleterious effect upon cumulative innovation. To reduce exposure for treble damages (which is based upon a finding of willfulness), patent attorneys routinely advise their clients (including research engineers and scientists) to avoid reading patent prior art, in effect negating a valuable aspect of the disclosure function of the patent system (Lemley and Tangri, 2003). This is a form of overdeterrence of socially beneficial behavior—learning from prior discoveries. The dissuasion to consult patent prior art undoubtedly results in duplication of research and may lead a researcher to overlook valuable potential solutions to scientific and technical problems. The growing use of SSOs to establish technical standards subject to FRAND licensing has promoted follow-on innovation by reducing the potential for exclusionary and extortionate remedies. Although most SSOs have not expressly barred injunctive relief or set FRAND licensing schedules, the Institute of Electrical and Electronics Engineers (IEEE) barred its members from holding patents covering IEEE standards from seeking or threatening to seek injunctions or exclusion orders against potential licensees who are

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150  Research handbook on the economics of IP law volume 1 willing to negotiate for licenses (IEEE, 2015). Furthermore, courts take FRAND commitments into account in evaluating requests for injunctive relief under the eBay standard (see Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1331–2 (Fed. Cir. 2014); but compare Apple Inc. v. Samsung Elecs. Co., 809 F.3d 633 (Fed. Cir. 2015) (emphasizing right to exclude and the importance of injunctions)). Moreover, although SSOs do not set the FRAND license rates, courts have interpreted the principal goal of standard-setting agreements to be widespread adoption of the standard and barring FRAND licensors from capturing the coordination and network value of the standard (CSIRO v. Cisco Sys., Inc., 809 F.3d 1295 (Fed. Cir. 2015); Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1229–35 (Fed. Cir. 2014); Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 U.S. Dist. LEXIS 60233, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013); In re Innovatio IP Ventures LLC Patent Litig., No. 11 C 9308, 2013 U.S. Dist. LEXIS 144061, 2013 WL 5593609 (N.D. Ill. Oct. 3, 2013)). F.  Channeling Doctrines Channeling doctrines play a critical role in ensuring that foundational technologies are protected unless they meet patent law’s relatively high innovation thresholds. Furthermore, patent law has a relatively short duration. In addition, SSOs and open licensing have promoted widespread adoption of network technologies. This rational hierarchical structure of the intellectual property system has been undermined by the Federal Circuit’s interpretation of copyright and design patent channeling doctrines. In Oracle America, Inc. v. Google Inc., 750 F.3d 1339 (Fed. Cir. 2014), the Federal Circuit’s narrow interpretation of copyright law’s channeling doctrines enabled Oracle to assert control over functional elements of the Java application program interface elements (Menell, 2018). As a result of this decision, the safe harbor of clean room implementation of functional specifications is no longer secure. The Oracle v. Google precedent creates the potential for software developers to assert long-lived copyright protection over interface specifications without meeting a substantial threshold of technological advance. In Apple Inc. v. Samsung Elecs Co., 786 F.3d 983 (Fed. Cir. 2015), the Federal Circuit’s narrow interpretation of design patent law’s functionality limitation enabled Apple to assert control over functional design elements of smartphone technology. This decision affords Apple protection for the rounded, rectangular shape of its iPhone and iPod devices and visual icons without any showing that they constituted novel and nonobvious technological advances.

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154  Research handbook on the economics of IP law volume 1 Merges, Robert P. 1988. ‘Commercial Success and Patent Standards: Economic Perspectives on Innovation,’ 76 California Law Review 803–76. Merges, Robert P. 1992. ‘Uncertainty and the Standard of Patentability,’ 7 High Technology Law Journal 1–70. Merges, Robert P. 1994. ‘Intellectual Property Rights and Bargaining Breakdown: The Case of Blocking Patents,’ 62 Tennessee Law Review 75–106. Merges, Robert P. 1996. ‘Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,’ 84 California Law Review 1293–393. Merges, Robert P. 2004a. ‘A New Dynamism in the Public Domain,’ 71 University of Chicago Law Review 183–203. Merges, Robert P. 2004b. ‘Compulsory Licensing vs. The Three “Golden Oldies”: Property Rights, Contracts, and Markets,’ CATO Institute Policy Analysis No 508, accessed March 18, 2019 at http://www.cato.org/pubs/ pas/pa508.pdf. Merges, Robert P., and John F. Duffy. 2002. Patent Law and Policy: Cases and Materials. San Francisco, CA: Matthew Bender. Merges, Robert P., and Richard R. Nelson. 1990. ‘On the Complex Economics of Patent Scope,’ 90 Columbia Law Review 839–916. Mokyr, Joel. 1990. The Lever of Riches: Technological Creativity and Economic Progress. New York, NY: Oxford University Press. Moore, Kimberly A. 2000. ‘Judges, Juries, and Patent Cases: An Empirical Peek inside the Black Box,’ 99 Michigan Law Review 365–409. Mossinghoff, Gerald J. 2002. ‘The First-to-Invent System Has Provided No Advantage to Small Entities,’ 84 Journal of the Patent and Trademark Office Society 425–31. Mueller, Janice M. 2001. ‘No ‘Dilettante Affair’: Rethinking the Experimental Use Exception to Patent Infringement for Biomedical Research Tools,’ 76 Washington Law Review 1–66. Nelson, Richard R. 1959. ‘The Simple Economics of Basic Scientific Research,’ 67 Journal of Political Economy 297–306. Nelson, Richard R. 2004. ‘The Market Economy, and the Scientific Commons,’ 33 Research Policy 455–71. Nelson, Richard R., and Sidney G. Winter. 1982. An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press. Netanel, Neil Weinstock. 2003. ‘Impose a Noncommercial Use Levy to Allow Free Peer-to-Peer File Sharing,’ 17 Harvard Journal of Law and Technology 1–84. Newell, Richard G., Adam B. Jaffe, and Robert N. Stavins. 1999. ‘The Induced Innovation Hypothesis and Energy-Saving Technological Change,’ 114 The Quarterly Journal of Economics 941–75. Nordhaus, William D. 1969. Invention, Growth and Welfare: A Theoretical Treatment of Technological Change. Cambridge, MA: The MIT Press. Novos, Ian E., and Michael Waldman. 1984. ‘The Effects of Increasing Copyright Protection: An Analytic Approach,’ 92 Journal of Political Economy 236–46. O’Donoghue, Ted. 1998. ‘A Patentability Requirement for Sequential Innovation,’ 29 Journal of Industrial Economics 654–79. O’Donoghue, Ted, Suzanne Scotchmer, and Jacques-François Thisse. 1998. ‘Patent Breadth, Patent Life and the Pace of Technological Progress,’ 7 Journal of Economics and Management Strategy 1–32. O’Rourke, Maureen A. 2000. ‘Toward a Doctrine of Fair Use in Patent Law,’ 100 Columbia Law Review 1177–250. Oddi, A. Samuel. 1989. ‘Beyond Obviousness: Invention Protection in the Twenty-First Century,’ 38 American University Law Review 1097–148. Ordover, Janusz A., and Robert D. Willig. 1978. ‘On the Optimal Provisions of Journals qua Sometimes Shared Goods,’ 68 American Economic Review 324–39. Ottoz, Elisabetta, and Franco Cugno. 2004. ‘The Independent Invention Defence in a Cournot-Duopoly Model,’ 12 Economics Bulletin 1–7. Pakes, Ariel. 1986. ‘Patents as Options: Some Estimates of the Value of Holding European Patent Stocks,’ 54 Econometrica 755–84. Pakes, Ariel, and Mark Schankerman. 1984. ‘The Rate of Obsolescence of Patents, Research Gestation Lags, and the Private Rate of Return to Research Resources,’ in Zvi Griliches, ed., R&D, Patents, and Productivity. Chicago, IL: University of Chicago Press. Parchomovsky, Gideon. 2000. ‘Publish or Perish,’ 98 Michigan Law Review 926–52. Polinsky, A. Mitchell. 1980. ‘Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies,’ 32 Stanford Law Review 1075–112. Polinsky, A. Mitchell, and Steven Shavell. 1997. ‘Punitive Damages: An Economic Analysis,’ 111 Harvard Law Review 869–962. Price, W. Nicholson. 2018. ‘Grants,’ forthcoming Berkeley Technology Law Journal. Reavis, Conner Kathleen, and Richard P. Rumelt. 1991. ‘Software Piracy: An Analysis of Protecting Strategies,’ 37 Management Science 125–39.

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Economic models of innovation  155 Reinganum, Jennifer F. 1982. ‘A Dynamic Game of R&D: Patent Protection and Competitive Behavior,’ 50 Econometrica 671–88. Reinganum, Jennifer F. 1985. ‘Innovation and Industry Evolution,’ 100 Quarterly Journal of Economics 81–99. Reinganum, Jennifer F. 1989. ‘The Timing of Innovation: Research, Development and Diffusion,’ in Richard Schmalensee and Robert D. Willig, eds., Handbook of Industrial Organization. Amsterdam: Elsevier. Rice, James M. 2015. ‘The Defensive Patent Playbook,’ 30 Berkeley Technology Law Journal 725–76. Rosenberg, Nathan. 1972. ‘Factors Affecting the Diffusion of Technology,’ 10 Explorations in Economic History 3–33. Ruttan, Vernon W. 2001. Technology, Growth and Development: An Induced Innovation Perspective. Oxford: Oxford University Press. Sammi, P. Anthony, Christopher A. Lisy, and Andrew Gish. 2013. ‘Good Clean Fun: Using Clean Room Procedures in Intellectual Property Litigation,’ 25 Intellectual Property and Technology Law Journal 3–14. Samuelson, Pamela, and Suzanne Scotchmer. 2002. ‘The Law and Economics of Reverse Engineering,’ 111 Yale Law Journal 1575–663. Schankerman, Mark. 1998. ‘How Valuable Is Patent Protection? Estimates by Technology Field,’ 29 The RAND Journal of Economics 77–107. Schankerman, Mark, and Ariel Pakes. 1986. ‘Estimates of the Value of Patent Rights in European Countries during the Post-1950 Period,’ 97 Economic Journal 1052–76. Schankerman, Mark, and Suzanne Scotchmer. 2001. ‘Damages and Injunctions in Protecting Intellectual Property,’ 32 The RAND Journal of Economics 199–220. Schultz, Jason, and Jennifer M. Urban. 2012. ‘Protecting Open Innovation: The Defensive Patent License as a New Approach to Patent Threats, Transaction Costs, and Tactical Disarmament,’ 26 Harvard Journal of Law and Technology 1–68. Scotchmer, Suzanne. 1991. ‘Standing on the Shoulders of Giants: Cumulative Research and the Patent Law,’ 5 Journal of Economic Perspectives 29–41. Scotchmer, Suzanne. 1996. ‘Protecting Early Innovators: Should Second-Generation Products be Patentable?,’ 27 Journal of Industrial Economics 322–31. Scotchmer, Suzanne. 1999. ‘On the Optimality of the Patent System,’ 30 The RAND Journal of Economics 181–96. Scotchmer, Suzanne. 2004. Innovation and Incentives. Cambridge, MA: The MIT Press. Scotchmer, Suzanne. 2005. ‘Consumption Externalities, Rental Markets and Purchase Clubs,’ 25 Economic Theory 235–53. Scotchmer, Suzanne, and Jerry Green. 1990. ‘Novelty and Disclosure in Patent Law,’ 21 Journal of Industrial Economics 131–46. Shavell, Steven, and Tanguy van Ypersele. 2001. ‘Rewards versus Intellectual Property Rights,’ 44 Journal of Law and Economics 525–47. Shy, Oz, and Jacques-François Thisse. 1999. ‘A Strategic Approach to Software Protection,’ 8 Journal of Economics and Management Strategy 163–90. Sichelman, Ted. 2010. ‘Commercializing Patents,’ 62 Stanford Law Review 341–414. Sidak, J. Gregory. 2008. ‘Trade Secrets and the Option Value of Involuntary Exchange,’ accessed March 18, 2019 at http://ssrn.com/abstract=577244. Strandburg, Katherine J. 2004. ‘What Does the Public Get? Experimental Use and the Patent Bargain,’ 2004 Wisconsin Law Review 81–153. Tandon, Pankaj. 1982. ‘Optimal Patents with Compulsory Licensing,’ 90 Journal of Political Economy, 470–86. Taylor, Christopher Thomas, Aubrey Silberston, and Z.A. Silberston. 1973. The Economic Impact of the Patent System. London, England: Cambridge University Press. Thomas, John R. 1999. ‘The Patenting of the Liberal Professions,’ 40 Boston College Law Review 1139–85. Van Houweling, Molly Shaffer. 2008. ‘The New Servitudes,’ 96 The Georgetown Law Journal 885–950. Varian, Hal R. 2000. ‘Buying, Renting, Sharing Information Goods,’ 48 Journal of Industrial Economics 473–88. von Hippel, Eric. 1988. The Sources of Innovation. Oxford: Oxford University Press. Walsh, John P., Ashish Arora, and Wesley M. Cohen. 2003. ‘Effects of Research Tool Patents and Licensing on Biomedical Innovation’, in Wesley M. Cohen and Stephen A. Merrill, eds., Patents in the Knowledge-Based Economy. Washington, D.C.: National Academy Press. Wright, Brian D. 1983. ‘The Economics of Invention Incentives: Patents, Prizes and Research Contracts,’ 73 American Economic Review 691–707.

Legislative Materials 17 U.S.C. § 101, § 102(b), § 107, § 114(b), § 115, § 115(a)(2). 35 U.S.C. § 102, § 103, § 112, § 273(a).

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156  Research handbook on the economics of IP law volume 1 Cal. Labor Code § 2870. America Invents Act of 2011. Semiconductor Chip Protection Act of 1984.

Administrative and Other Materials Institute of Electrical and Electronics Engineers (IEEE). 2015. IEEE-SA Standards Board Bylaws, accessed March 18, 2019 at http://standards.ieee.org/develop/policies/bylaws/approved-changes.pdf. U.S. Federal Trade Commission. 2003. To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (Oct. 2003), accessed March 18, 2019 at https://www.ftc.gov/sites/default/files/documents/reports/ promote-innovation-proper-balance-competition-and-patent-law-and-policy/innovationrpt.pdf.

Cases Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014). Apple Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014). Apple Inc. v. Samsung Electronics Co., 809 F.3d 633 (Fed. Cir. 2015). Apple Inc. v. Samsung Electronics Co., 786 F.3d 983 (Fed. Cir. 2015). Association for Molecular Pathology v. Myriad Genetics, 569 U.S. 576 (2013). CSIRO v. Cisco Systems, Inc., 809 F.3d 1295 (Fed. Cir. 2015). Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84 (1941). Dolbear v. American Bell Telephone Co., 126 U.S. 1 (1888). Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (Fed. Cir. 2014). Graver Tank & Manufacturing Co. v. Linde Air Products Co., 339 U.S. 605 (1950). In re Innovatio IP Ventures LLC Patent Litigation, No. 11 C 9308, 2013 U.S. Dist. LEXIS 144061, 2013 WL 5593609 (N.D. Ill. Oct. 3, 2013). Madey v. Duke University, 307 F.3d 1351 (2002). Mayo Collaborative Services v. Prometheus Laboratories, 566 U.S. 66 (2012). Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 U.S. Dist. LEXIS 60233, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013). O’Reilly v. Morse, 56 U.S. (15 How.) 62 (1854). Oracle America, Inc. v. Google Inc., 750 F.3d 1339 (Fed. Cir. 2014). Roche Products, Inc. v. Bolar Pharmaceutical Co., 733 F.2d 858 (Fed. Cir. 1984). Sanitary Refrigerator Co. v. Winters, 280 U.S. 30 (1929). W.L. Gore & Associates v. Garlock, Inc., 721 F.2d 1540 (Fed. Cir. 1983). Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17 (1997). Whittemore v. Cutter, 29 F. Cas. 1120 (C.C.D. Mass. 1813).

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7.  Economic analysis of network effects and intellectual property Peter S. Menell* 6

Contents I. Introduction II. Functioning of Network Markets III. Interplay of Business Strategy, Contract, Standard Setting, Intellectual Property, and Competition Policy IV. Ramifications for Intellectual Property and Competition Policy A. Parsimony Principle: No Intellectual Property Protection for Functional Attributes Absent Significant Technological Advance B. Proportionality Principle: Overcoming Excess Inertia without Undue Protection C. Deterrence Principle: Discouraging Overreach with Balanced Remedies V. Intellectual Property Protection for Network Features A. Trade Secret Protection B. Copyright Protection 1. Software copyright legislation: the Copyright Act of 1976, the CONTU Final Report, and the 1980 amendments 2. Software copyright jurisprudence: the first wave 3. Software licensing 4. Interoperability exception to the DMCA’s anti-circumvention prohibition 5. Software copyright jurisprudence: the Oracle v. Google litigation 6. Standards and codes C. Trademark Protection, Unfair Competition Law, and False Advertising Protection D. Patent Protection 1. Patentability requirements 2. Scope 3. Licensing 4. Remedies

*  Koret Professor of Law and Director, Berkeley Center for Law and Technology, Berkeley School of Law, University of California. Thanks to participants at the 2015 Economics of Intellectual Property Research Handbook Conference, the 2017 Intellectual Property Scholars Conference, and especially Michael Carrier for their comments on this project. I am grateful to Alex Barata, Louise Decoppet, Amit Elazari, Andrea Hall, Reid Whitaker, and Samantha Vega for research assistance.

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158  Research handbook on the economics of IP law volume 1 5. Design patents VI. Interplay of Intellectual Property Protection and Competition Policy in Network Industries A. Private Enforcement 1. Misuse doctrines 2. The principle of exhaustion 3. Ambush of standard setting processes 4. Breach of contract for failure to license SEPs on FRAND terms 5. Private antitrust liability B. Public Enforcement 1. Intellectual property licensing guidelines 2. Significant network market enforcement actions VII. Assessment of Intellectual Property Protection and Competition Policy for Network Technologies A. Institutional Considerations B. Measuring Progress Based on the Normative Principles 1. Parsimony principle 2. Proportionality principle 3. Deterrence principle VIII. Future Research Directions References

I. INTRODUCTION The economics of intellectual property begins with the classic appropriability problem: in a competitive economy, imitators can enter markets for information goods after inventors and authors have incurred research and development (R&D) costs and sell the innovative or creative product at the cost of reproduction. Without means for appropriating an adequate return on investment in R&D, the market will under-produce technological advances and creative expression (Menell and Scotchmer, 2007). The provision of intellectual property protection for technological advances and creative expression affords inventors and authors a mechanism to recoup their investments, although not without imposing the deadweight loss of monopoly exploitation and potentially interfering with cumulative creativity (Menell et al., 2018). Conventional analysis of intellectual property seeks to balance the duration and scope of intellectual property rights in order to optimize these tradeoffs (Nordhaus, 1969; Gallini, 1992). The conventional framework applies to goods and services for which consumer demand is independent—that is, where one consumer’s utility from consuming a good or service does not depend on choices of other consumers. Yet consumer demand for information goods and services can be interdependent, especially in the digital age. The value to consumers of systems technologies—such as telecommunication networks (including telephone networks, cable systems, satellite systems, and Internet protocols), interconnected devices (e.g., mobile phones, operating systems and application programs, printers and replacement cartridges, audio-video devices and media), databases (e.g., Internet searches), and electric charging stations

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Economic analysis of network effects and IP  159 (e.g., Tesla superchargers)—often depends upon other consumers’ choices. For example, a smartphone platform with many adopters will attract more app developers, thereby increasing the functionality and value of that platform for consumers, developers of complementary goods (e.g., apps), and the platform sponsor. Platforms function like a common language. Devices that ‘speak’ a common language (such as a programming language, application program interface (API), or set of graphical user icons) can communicate with other devices and humans familiar with that language. Innovators can more easily design peripheral equipment that expands the functionality of existing devices. Over time, users internalize how a computer language or application program represents functions, often memorizing the most commonly used series of keystrokes or developing macros customized to perform their most common tasks. These human capital investments commit users to particular languages and platforms and encourage employers to adopt systems that are widely known by prospective employees so as to recruit promising candidates and reduce training costs (Gandal, 1994). Thus, it is common for people seeking jobs in programming, accounting, and design fields to list those computer languages and application programs that they have mastered on their resumes. Network externalities arise from the enhanced labor mobility and reduced training costs produced by shared, or at least compatible, computer systems across different work environments. When people in different places can communicate more efficiently through compatible file formats, network externalities result. The value of networks grows disproportionately with their adoption bases. Such positive feedback dynamics drive a growing number of markets in the information economy (Shapiro and Varian, 1999), from computer operating systems to mobile phones, printers (and ink cartridges), video game consoles, Internet search engines (such as Google), Internet commerce (such as eBay and Amazon), social networks (such as Facebook, LinkedIn, and Tinder), cloud computing, the Internet of Things, and shared economy platforms (such as Airbnb and Uber). Advances in digital and network technologies have dramatically reshaped the competitive and innovative landscape. As a consultant for the Internet dating industry has remarked, ‘It’s never been cheaper to start a dating site and never been more expensive to grow one’ (Tugend, 2016). Dating apps usually start by offering free services to new users, seeking to build a viral bandwagon. If they gain traction through innovative features or marketing, they then face the daunting task of monetizing the network, typically through advertising or membership fees. Monetization, however, can reverse the positive feedback effects, thereby reducing the network’s size, unraveling the network’s benefits, and jeopardizing the platform’s sustainability. Finding the right balance between viral growth and monetization is the principal challenge of a growing range of enterprises in the Internet Age. The interdependence of consumer demand has important ramifications for the design of intellectual property and competition policy. In a static economic model (i.e., one without innovation), consumers benefit from robust competition within product standards. Open access to product standards encourages realization of network externalities. Although bandwagon effects can enhance consumer welfare in a static context, they can also make it more difficult for developers of improved platforms to enter the market. Consumers and suppliers of complementary products can face significant switching costs in migrating from one platform to another. For example, once businesses have invested

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160  Research handbook on the economics of IP law volume 1 heavily in developing programs to run on a software platform (e.g., macros for the Lotus 1-2-3 spreadsheet), it becomes much more difficult for a competitor offering an enhanced spreadsheet (e.g., Borland Quattro Pro) to enter the market unless they can provide a low-cost migration path. Facebook’s widespread success and user investment made it difficult for even Google to build a sustainable competing social network. Orkut, Google Buzz, Google Friend Connect, and Google+ have failed or languished. The technical standards governing access to platforms, commonly referred to as application program interfaces (APIs) in the software industry, play a critical role in consumer and programmer adoption decisions, market entry, and competition. Those who control a widely adopted platform can obstruct new innovative platforms and complementary products and services (such as refilling and repair). Familiarity with the user interface and features, connections to other network adopters (such as Facebook friends), and investments in complementary assets (such as macros that run on the platform) can keep consumers on an otherwise inferior platform. The human capital investment in learning an API can lock programmers into a platform, and sunk costs in manufacturing facilities, fabrication designs, and contracts with suppliers and customers can lock manufacturers into design choices. At the same time, the ability to secure an innovative platform can be vital to investing in the R&D needed to advance systems technologies. Without the prospect of earning a significant return on research, development, and marketing of a new platform, investors have little incentive to take on the risk of investing the substantial resources necessary to challenge an entrenched platform. Therefore, the availability, scope, and remedies for intellectual property protection for network features of systems technologies and platforms (e.g., interface specifications) provide both a key strategic asset for controlling network markets and a critical mechanism for promoting advances in network technologies. Demand-side or network effects, therefore, complicate the design of an optimal intellectual property regime. Control of interface specifications and other network features of computer technologies through intellectual property protection has become the key to market dominance in a growing number of important Information Age markets. Nearly all of the major software copyright disputes, as well as a key exception to the Digital Millennium Copyright Act of 1998’s (DMCA) anti-circumvention provisions, have revolved around the protectability of interface specifications. Patent protection for network technologies has also become a critical battleground with some disputes centered on licensing network technologies through standard setting organizations. Trade secrecy, trademark protection, and contract law are also important tools for regulating ­competition in network markets. This chapter explores the critical role of intellectual property in network markets as well as the ramifications of network effects for the design of intellectual property regimes. Section II describes the functioning of network markets. Section III examines the interplay of business strategy, contract, standard setting organizations, intellectual property, and competition policy. Section IV presents three principles for tailoring intellectual property regimes and competition policy for network technologies. Section V traces the evolution of intellectual property protection for network features of systems and platforms. Section VI discusses the interplay of intellectual property protection and competition policy. Section VII assesses the extent to which intellectual property protection and competition policy align with normative design principles. Section VIII identifies promising areas for future research.

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Economic analysis of network effects and IP  161

II.  FUNCTIONING OF NETWORK MARKETS In many market settings, consumers’ utility functions are independent. Take, for example, the market for ice cream. My enjoyment of a particular flavor (e.g., hazelnut chocolate chip), style (e.g., gelato), or brand (e.g., Talenti) does not depend significantly on the utility that other consumers derive from the purchase and consumption of ice cream. It is possible that greater popularity of a flavor, style, or brand makes that combination more widely available or lowers the price due to economies of scale on the production side, but competition usually ensures efficient allocation of resources in these circumstances. The effects are more likely pecuniary, which work through the market and only affect the distribution of value, than technological, which affect the economic efficiency of the economy (Liebowitz and Margolis, 1994). By contrast, some market equilibria depend critically on the number of consumers that have joined or are likely to join a particular platform. Take, for example, a social network like Facebook. A new entrant to this market, say Google+, might offer enhanced functionality. But if most of my social network is already on Facebook and I cannot easily bridge the two networks, then I am far less likely to switch. Network effects have long been central to human civilization and market economies. Languages, measurement systems (metric versus imperial), electrical equipment standards (alternating current versus direct current; computer networking protocols), driving conventions (left side versus right side), and railroad gauges (the width between and across rails) are notable examples where demand-side coordination greatly influences consumer welfare, economic efficiency, and social discourse. Standardized railroad gauge, for example, supported far-reaching railroad networks, promoted competition in locomotive and railcar markets, and enabled interconnected rail services (Puffert, 2000, pp. 944–7). Section III focuses on how such coordination or standardization occurs through business strategy, technological innovation, intellectual property law, industry and consumer coordination, and government policies (including antitrust law). The economic and social value of network effects can be substantial. According to Metcalfe’s Law—attributed to Robert Metcalfe, co-inventor of the Ethernet, a local computer network platform that foreshadowed and ushered in the Internet—the value of a telecommunications network is proportional to the square (n2) of the number of devices (or nodes (n)) of the system. This economic ‘law’ reflects the potential number of contacts within a network and assumes that they are each of equal value. Even though this theoretical maximum is unlikely to be obtained in the real world (Briscoe et al., 2006), the powerful growth potential of network systems drives much of the information economy. The net value, of course, also depends on the cost per user. In many telecommunications and computer applications, such costs are low and have declined over time because of Moore’s Law—Intel co-founder Gordon Moore’s audacious, yet remarkably accurate, prediction that the number of transistors on an integrated circuit would double every two years (later reduced to 18 months) (Moore, 1965; Borwein and Bailey, 2015). Both real and virtual networks can produce these effects (Shapiro and Varian, 1999, p. 183; Katz and Shapiro, 1985, p. 424). Real networks entail physical connectivity enabling a user to interact or communicate directly with others. They include transportation systems (such as railroad gauges), telecommunication systems (such as a telephone or broadcast network), and media systems (such as data storage devices). By contrast, virtual

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162  Research handbook on the economics of IP law volume 1 networks operate through the evolution of markets for complementary products. The supply of complementary goods typically drives these markets. For example, by enabling programmers to develop apps for the iOS platform, Apple promotes a virtual network surrounding its iPhone and other computer devices. The availability of apps on the iOS drives demand for iOS devices, which in turn attracts app developers. More apps generate a wide range of functionality, thereby spurring increased demand for iPhones. Other examples of virtual networks include application programs that enable users to share data files with other programs and users, ATM cards and automatic teller machines, credit cards, and the merchants who accept them, and next generation payment systems such as Apple Pay and Square. The defining feature of virtual networks is that the demand for the product depends significantly on the availability of complementary goods and services. The magnitude of network effects depends on several considerations: interdependencies of consumer utility functions, range of complementary products or services, availability of alternative platforms, switching costs, business strategies, and legal limits (such as intellectual property protection and competition policy) on leveraging network markets. In some cases, physical limitations govern network access—for example, where a device must physically or digitally interoperate with other devices. In others, the network is not physically constrained, but instead driven by consumer familiarity or ease of use. The design determinants of a network market—interoperability or compatibility standards—are shaped by the type and degree of ownership, sponsorship, and governance of network access. Some network standards are established or authorized by a government or international organization or formal standard setting organization (SSO). These are sometimes referred to as de jure standards as they have an official backing and can be enforced by law. Such enforcement can limit or afford access to standards. Individual companies or consortiums sponsor many important network standards. These are sometimes referred to as de facto standards, although they might be backed by patent, copyright, trademark, or false advertising law. A third important distinction in network markets relates to whether a standard is ‘free,’ open, closed (i.e., proprietary), or somewhere in the middle (Meeker, 2015, pp. 31–47; West, 2007). The free software movement allows other users to run, study, share, copy, and modify the software so long as these users permit use of any derivative works on the same terms. ‘Open source’ software typically connotes that the software or interface is freely available to any market participant, but there might or might not be restrictions on the availability of complementary goods embodying the standard. A closed or proprietary standard is one in which a sponsoring enterprise or organization regulates access, typically through licensing of intellectual property rights. Thus, the distinction between open and closed standards can be ambiguous. For example, many SSOs require that participating enterprises license standard-essential patents on fair, reasonable, and non-discriminatory (FRAND) terms. Which patents are ‘standard-essential’ and the license terms on which they are available are rarely fully specified in advance, creating substantial uncertainty (Contreras and Gilbert, 2015). On the other hand, ‘free’ software licensed pursuant to the General Public License (GPL) requires users to make available any software incorporating the licensed code under the same ‘share and share alike’ restriction (Carver, 2005). The controversy over the Java API platform illustrates the complexity that can arise surrounding intermediate—that is, partially open—platforms (Menell, 2018; Lemley and

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Economic analysis of network effects and IP  163 McGowan, 1998). Sun Microsystems released the Java programming language without restriction in part to prevent Microsoft from leveraging its Windows desktop computer operating system monopoly into dominance of website functionality. Sun’s Java strategy promoted the ‘Write Once, Run Anywhere’ (WORA) principle: the notion that any browser can execute Java applets (small application programs, such as those used for animated web pages)—including on Microsoft Windows, Unix, macOS, and Linux. Over time, Sun developed pre-written API packages to facilitate Java programming. Sun developed the Java Community Process (JCP), a quasi-public formalized administrative process, for developing technical specifications for Java technology and extensions. Sun used the JCP and licensing of the Java trademark to promote collaboration and commitment to the WORA principle. When Google sought to use some, but not all, of the Java APIs to develop the Android platform and licensed Android using a less restrictive licensing regime (i.e., not requiring that derivative works be shared on a ‘free’ basis), Sun and Oracle (which acquired Sun Microsystems in 2010) objected, resulting in one of the costliest intellectual property battles (Menell, 2018). Network effects arise whenever the value that consumers place on a product or service depends upon the number of other consumers or programmers purchasing that product or using that service. As the number of adopters (or the installed base) of a platform grows, the benefits of being part of that platform increase. For example, consumers generally prefer telephone networks or protocols offering the largest user bases. Like economies of scale (declining unit costs with increased production) on the supply side of a market, the value of a network generally increases with widespread adoption. The availability of better application programs to run on an operating system platform will lead more consumers to prefer that operating system, which in turn will spur a greater quantity and quality of application programs for that operating system. Whereas economies of scale typically fall off at some point due to technical or organizational limits, positive feedback on the demand side generally continues to increase with the size of the installed base. For this reason, one or a very small number of standards are likely to predominate in markets with strong network effects, as reflected in Microsoft’s dominance in microcomputer operating systems, Google’s dominance among Internet search engines, and Facebook’s dominance as a social network. The high value that consumers place upon standardization, however, can make it particularly difficult for improved products to break into the market. Such bandwagon effects can stifle development and diffusion of improved technology platforms (Farrell and Saloner, 1985).

III. INTERPLAY OF BUSINESS STRATEGY, CONTRACT, STANDARD SETTING, INTELLECTUAL PROPERTY, AND COMPETITION POLICY The dynamics of network technologies produce a particularly complex strategic playing field. Firms typically choose among three strategies when competing in network markets: (1) market dominance through establishing and controlling a new proprietary standard; (2) adopting an existing standard either through imitation (where it is legally permissible) or licensing; or (3) working with other firms in the industry—either informally,

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164  Research handbook on the economics of IP law volume 1 c­ ontractually, through formal industry organizations, or through governmental standardization bodies—to develop an open or quasi-open standard (Farrell and Saloner, 1998; Besen and Farrell, 1994; Shapiro and Varian, 1999; Farrell and Simcoe, 2012). Among the strategies firms use to establish their product or service as the de facto industry standard are: massive advertising campaigns; penetration pricing (pricing products or services below cost or giving them away in order to speed adoptions by consumers); issuing impressive product preannouncements to entice consumers and discourage competitors; providing adopters with various forms of insurance (such as short term leases or pricing arrangements that tie the price of the system to the number of adopters); licensing of the product in order to grow the network more rapidly (and to create competition in the expansion of the network); and vertical integration and strategic investments into markets for complementary products to assure consumers that valuable application programs will be available (Farrell and Simcoe, 2012; Farrell and Klemperer, 2007; Shapiro and Varian, 1999; Baseman et al., 1995; Farrell and Saloner, 1986; Dybvig and Spatt, 1983). Adopting an existing standard enlarges the size of a network comprising both the entrant’s product and its rival’s—the existing platform—products. This increases the desirability of the rival’s products to consumers, thereby reducing the adopter’s market share (although of a larger market) relative to what it would have been had the firm adopted an incompatible product standard. Thus, even though the net social welfare of adopting a rival’s standard may exceed the net social welfare of introducing an incompatible standard, the entrant may nonetheless prefer to adopt an incompatible standard because the entrant cannot appropriate all of the benefits of compatibility, some of which accrue to past and present purchasers of the rival’s products (Katz and Shapiro, 1985, p. 435; Katz and Shapiro, 1986). Firms often pursue Strategy 2 (adopting an existing standard) and Strategy 3 (collaborating with other firms in establishing a standard) in tandem. Both strategies create a more traditional market setting in which firms compete over price, quality, and services to win market share on a common platform. This achieves greater competition on a particular platform and fosters the realization of network externalities, but may impair competition to innovate better platforms (Katz and Shapiro, 1994). The market dominance strategy is often riskier but can produce the highest payoff for the winner. A firm’s strategy will depend on a range of factors, including its reputation among consumers for serving the type of network market that it has targeted, its available resources (and access to capital markets) to make the investments in distribution and marketing necessary to persuade consumers that the firm will prevail in the standard battle, the strength of its technology for establishing a standard (although such technology need not be superior to others on the market), and complementary assets within the firm or strong strategic alliances in vertical markets. The firm’s strategy will also depend upon the availability of intellectual property protection, contractual means, and technological controls (e.g., encryption technology) for precluding, limiting, or delaying access by competitors to the firm’s standard. IBM successfully pursued the market dominance strategy when it entered the microcomputer market in the early 1980s. IBM combined its reputation for serving the mainframe market and technological and marketing capabilities with copyright and trade secrecy protection for its basic instruction operating system (BIOS) chip. IBM’s

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Economic analysis of network effects and IP  165 strategic hold on the industry quickly unraveled, however, when competitors successfully reverse engineered the BIOS chip (Moy, 2000, pp. 72–3; Menell, 1987), making much less expensive, fully compatible IBM clones available on the market by the mid to late 1980s. IBM exited the microcomputer hardware industry soon thereafter. Microsoft emerged as the winner in the microcomputer industry during this upheaval. Its DOS operating system, on which IBM had previously built its microcomputers, emerged as the de facto standard. Robust competition in microcomputers using DOS and a growing array of application programs (including several Microsoft flagship products such as Word and later Excel) drove adoption of DOS-based computers and fueled Microsoft’s dominance. Microsoft skillfully migrated users from DOS to Windows, withstanding Apple’s assertion of intellectual property control of the Mac desktop graphical user interface. By the mid-1990s, Microsoft dominated the microcomputer industry through its control of the Windows platform. Apple was a distant second and fading. The emergence of the Internet in the mid-1990s opened new modes of competition in computer markets. Netscape’s Navigator Internet browser and Sun’s highly interoperable Java platform threatened Microsoft’s dominance in the microcomputer and software marketplace (Lemley and McGowan, 1998). Microsoft responded by integrating its browser technology, Internet Explorer, into the Windows operating system and engaging in restrictive licensing agreements with microcomputer manufacturers, thereby reducing the effective price of its browser to zero. Consequently, the market for Netscape’s browser evaporated. Microsoft also undermined Java’s efforts to establish a universal metaplatform for software application programs by offering a proprietary, non-interoperable version (Sun Microsystems, Inc. v. Microsoft Corp., 46 U.S.P.Q. 2d 1531 (N.D. Cal. March 24, 1998)). Network effects have allowed particular firms to dominate many Internet markets, including search (Google), social networks (Facebook), mobile (iOS, Android), and sharing networks (Airbnb, Uber). Apple successfully regained prominence in critical digital markets through its mobile and App Store network market strategies. Formal standardization plays a tremendous role in many electronics and telecommunications markets (Contreras, 2019; Lemley, 2002). Russell (2006) traces electrical standardization through formal standard-setting organizations over more than a century. These processes have relied on engineers and scientists seeking to promote the best engineering solutions to technical challenges. They form key infrastructure for the electronics and telecommunications industries. Engineers from major technology companies participate in dozens of standard-setting organizations, including many of the leading professional engineering societies, such as the Institute of Electrical and Electronics Engineers (IEEE) Standards Association and the Internet Engineering Task Force (IETF). These processes have carried over to semiconductor designs, mobile phones, Internet protocols, and computer devices. A typical laptop computer today embodies more than 250 technical standards (Contreras, 2019). Intellectual property protection for network technologies can significantly influence the development of standards, follow-on innovation, and market competition. Patents in the information and communication technology fields (semiconductors, computers, and mobile phones) have presented the most salient concerns. Building on Williamson’s (1985) classic treatment of economic holdup—whereby asymmetric information, transaction costs, and incomplete contracts create the potential

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166  Research handbook on the economics of IP law volume 1 for a contracting party to extract the value of sunk or locked in, relationship-specific investments—Lemley and Shapiro (2007a) posit a patent bargaining model in the shadow of strong potential remedies (automatic injunctive relief and large monetary awards) that generates an analogous inefficient dynamic. Companies that unwittingly sink large investments into infringing products are subject to having such investments extracted through patent infringement litigation. Such extraction can greatly exceed the contribution of the patented technology relative to the best non-infringing alternative. The presence of multiple patents covering a single product—what has been referred to as the patent thicket problem (Shapiro, 2001)—exacerbates holdup effects, creating a royalty stacking problem: total patent royalty demands may exceed the contribution of patented technologies to the market demand for the product. Various scholars have questioned Lemley and Shapiro’s assumptions and empirical basis for royalty stacking (Elhauge, 2008; Sidak, 2008; Geradin et al., 2008; Geradin and Rato, 2007; Geradin, 2007; Golden, 2007; but see Lemley and Shapiro, 2007b (responding to Golden, 2007)). They note that royalty stacking is unlikely to occur with full information and low transaction costs. There is good reason, however, to question optimism about ex ante bargaining. Ziedonis (2004), for example, finds that firms acquire patents more aggressively when the patents for numerous component technologies of an industry—like the semiconductor industry—are widely distributed. The proliferation of patent litigation over information and communication technology indicates that intellectual property protection imposes at least some implicit tax on these network industries. Nonetheless, more recent empirical research raises doubts about the severity of royalty stacking. Galetovic and Gupta (2016), for example, find that mobile wireless prices have fallen, quantities have grown, and the industry has become less concentrated over time, indicating that royalty stacking may not be as serious as prior research had claimed. Barnett (2017) surveys the growing literature and concludes that the evidence of royalty stacking is weak. All would agree, however, that industry coordination through patent pooling and SSOs can alleviate these problems (National Research Council of the National Academies, 2013). Such pools, however, can facilitate collusion, raise barriers to entry, and spark other public policy concerns. Notwithstanding the widespread use of standard-setting processes and agreements on technical standards, the rules governing access to standards and the licensing of patented technologies are rarely specified in advance. SSOs exercise caution to avoid violating antitrust laws barring price-fixing. In addition, many companies participating in standard setting processes do not wish to reveal their patent prosecution strategies or pre-commit to price terms. Thus, most technical standard setting organizations require only that participants disclose their patented technologies and agree to license standard-essential patents (SEPs) on FRAND terms. The potential for holdup and royalty stacking remains (Contreras, 2019; Federal Trade Commission, 2011; Lemley and Shapiro, 2007a). Some sectors of the software industry have alleviated or avoided these risks by committing to open source policies (Merges, 2004). Viral forms of open source licensing, such as the GPL, however, can discourage investment in downstream innovation by limiting direct appropriability for technological advances. For this reason, Google chose a more permissive open source license for Android (Menell, 2018). This fostered collaboration and rapidly expanded the Android network while encouraging innovation by handset makers and telecommunications companies.

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Economic analysis of network effects and IP  167

IV. RAMIFICATIONS FOR INTELLECTUAL PROPERTY AND COMPETITION POLICY As the preceding analysis suggests, intellectual property protection can play a critical role in network markets. As one software entrepreneur metaphorically explained, creating an API is analogous to building a city: First you try to persuade applications programmers to come and build their businesses on [your tract of land]. This attracts users, who want to live there because of all the wonderful services and shops the programmers have built. This in turn causes more programmers to want to rent space for their businesses, to be near the customers. When this process gathers momentum, it’s impossible to stop.   Once your city is established, owning the API is like being the king of the city. The king gets to make the rules: collecting tolls for entering the city, setting the taxes that the programmers and users have to pay, and taking first dibs on any prime locations (by keeping some APIs confidential for personal use). (Kaplan, 1996)

This section discusses the general economic considerations bearing on whether and to what extent intellectual property ought to protect network features of systems ­technologies—those features that affect access to or interoperability with a system. There are two market failures in play in optimizing intellectual property protection. First, network features of system technologies, like any other technology, are subject to the classic appropriability problem. Without intellectual property protection, inventors of more advanced platform technologies will be subject to being undercut by new entrants who imitate the innovations without bearing R&D costs. First-mover advantages, effective marketing, trade secrecy, and other strategies might provide sufficient motivation for some R&D, but there is reason to be concerned that the unregulated market will underproduce potentially high value, but risky and costly, innovation in network technologies. Demand-side effects in network markets, however, complicate the conventional analysis of intellectual property protection. Because of the dynamics of network markets, some firms might be motivated to limit access to their platforms to reap the outsize profits from controlling a network market. This strategy, however, can hinder the realization of network benefits by raising prices, limiting access by third parties, and discouraging innovation because of the high barriers to entry. Consumers benefit when they and their devices, systems, and programs ‘speak’ the most widely adopted platform—the lingua franca—or can translate that code into language their devices understand. This often provides for greater functionality, such as more software that will run on their platform and larger communication networks. At the same time, widely adopted product standards can strand the industry on an obsolete platform (Farrell and Saloner, 1985). Consumers resist switching costs—from learning new tools and languages to acquiring new devices. They demand substantial improvements in efficiency or functionality to jettison comfortable, well-worn devices and software tools for new tools and systems. Thus, the installed base built upon the dominant platform—reflected in durable goods and human capital (training) specific to the old standard—can create an inertia that makes it much more difficult for any one producer to break away from the prevailing standard by introducing a noncompatible product, even if the new standard offers a

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168  Research handbook on the economics of IP law volume 1 s­ignificant technological improvement over the current standard (Farrell and Saloner, 1986). In this way, network externalities can retard innovation and slow or prevent adoption of improved product standards. Therefore, companies seeking to leapfrog a widely adopted standard face substantial risk. They must not only invent an improved platform, but they must also devise and execute a successful strategy to migrate consumers from the dominant platform. They also face the challenge of encouraging other software and complementary product developers to build for the new platform. One strategy is to steeply discount the costs of the new platform or provide free access. This strategy is not sustainable unless the platform developer has ancillary revenue streams—such as bundled advertising or ties to other products and services—to cover their research, development, product, and support costs. Intellectual property protection can contribute to and alleviate the network externality dilemma. On the one hand, intellectual property protection for the network features of computer technology can discourage realization of positive network externalities by limiting access to network technologies. The sponsor of a particular network technology can use intellectual property protection to exclude competitors or charge a high licensing fee for access, thereby raising costs. The intellectual property owner can also limit innovation by restricting how the network technology evolves. On the other hand, intellectual property protection can provide valuable incentives for overcoming bandwagon effects that entrench obsolete standards (Menell, 1987, p. 1343). Without the potential for a large reward, inventors contemplating innovative new platforms might not be willing to make the substantial, risky R&D and marketing investments needed to challenge, and hopefully leapfrog, the incumbent platform. These considerations suggest three principles for intellectual property protection of APIs and other functional features of platform technologies: (A) a parsimony principle to prevent firms from establishing protection for product standards without providing a significant technological advance; (B) a proportionality principle to ensure that firms can appropriate a fair return on technological advances in platform innovation sufficient to overcome the excess inertia of network markets, but not so large as to stunt network externalities; and (C) a deterrence principle to discourage deceptive practices and overreach in network markets. A. Parsimony Principle: No Intellectual Property Protection for Functional Attributes Absent Significant Technological Advance Consumers benefit from access to platforms that produce network benefits. Those benefits can increase over time through positive feedback effects and the development of aftermarket enhancements and complementary products. The incentives for firms adopting product standards, however, are distorted. New entrants might choose an incompatible standard to differentiate their products from established brands, even where growing the established network would enhance consumer welfare (Katz and Shapiro, 1985, 1986). Intellectual property protection affects such choices by setting the ground rules for establishing proprietary platforms. Firms will be more inclined to build competing platforms where the thresholds for acquisition of intellectual property protection—and hence the power to exclude subsequent entrants and those seeking to bridge platforms—are low. Thus, intellectual property regimes should discourage platform adoption choices that undermine realization of network externalities unless there is a large countervailing ben-

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Economic analysis of network effects and IP  169 efit, such as substantial technological advance. Affording meaningful intellectual property protection for network technologies without requiring a significant technological advance encourages wasteful differentiation and increases the risk of undeserved monopoly power. With easy access to intellectual property protections—for example, by merely using arbitrary lock-out codes—firms can fragment platforms that would otherwise foster competition in the non-network product features and in downstream products competing on the platform. Through serendipity, first-mover advantage, clever marketing, or simply luck, market power can emerge through positive feedback effects without discernible consumer benefits. Therefore, intellectual property law should not simply reward novel (but obvious) or expressive functional features of network goods or services. Rather, strong protection should be reserved for substantial advances. B.  Proportionality Principle: Overcoming Excess Inertia without Undue Protection While low thresholds for intellectual property protection for network technologies undermine realization of network externalities, balanced protection for substantial technological advances may be necessary for entrants to overcome the strong inertial forces driving network markets. Switching costs discourage consumers from making the leap to a new platform. For network products and services, those costs can be particularly high due to network effects. The leap is likely not worth the cost for modest technological improvements. At some point, however, overall consumer welfare will be enhanced by migration to an alternative platform. The efficient tipping point depends on R&D and marketing costs as well as the contours of consumer demand. The excess inertia of network effects can hinder, delay, and possibly prevent the technological shift to a substantially more advanced technological platform. If all such advances were freely available to entrants, the free-rider problem would discourage the needed R&D and marketing investment needed to displace the obsolete platform. Yet providing strong intellectual property protection for such advances can lead to robust returns as the market tips to the new platform. The shift from ‘feature phones’—mobile phones ‘featuring’ voice and text messaging with rudimentary Internet access—to true ‘smartphones’ with email and robust web functionality illustrates the challenges and opportunities surrounding network markets. Through the 1990s, Motorola, Nokia, and a few other vendors established the first generation of mobile devices. Sun, Microsoft, and Symbian vied to establish the platform for mobile devices that integrated email and Internet capabilities. By 2005, Java’s Micro Edition (ME) was faring well, with adoption by Palm and Blackberry. As the first-generation smartphone battle was resolving, Apple was secretly investing heavily in an ambitious new platform. Intellectual property played a significant role in motivating Apple’s R&D. As Steve Jobs noted during the historic January 2007 iPhone announcement, ‘boy have we patented it!’ Meanwhile, Google was at work on its own skunkworks1 smartphone play: the Android

1   Derived from Lockheed’s code-named secret World War II project to develop a new fighter jet (‘Skunk Works’), which was taken from Al Capp’s Li’l Abner comic strip, a ‘skunkworks’ project brings together a small group of highly skilled researchers to pursue radical innovations.

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170  Research handbook on the economics of IP law volume 1 smartphone platform. Given Google’s concern that its success in search and online advertising could be displaced if Microsoft or Apple gained dominance in the shift to mobile devices, Google sought to develop an open platform that would perpetuate Google’s search and other services on mobile devices (Menell, 2018). This standards war illustrates the dynamism of network markets as well as the complex role of intellectual property protection. In the space of just a few years, the market shifted dramatically from feature phones to rudimentary smartphones and then to advanced smartphones. By 2011, Apple and Google dominated the market. Intellectual property protection played a central role in encouraging investment, but also resulted in massive resources devoted to intellectual property acquisition, coalition building, standard setting on upstream technologies, and litigation. There is no simple answer to the question of how much protection is enough, especially given the range of business strategies, institutions, and intellectual property regimes that can deliver appropriate returns on investment, the dynamism of network markets, and concerns about anti-competitive leveraging network technology dominance. Lichtman (2000) emphasizes strong property rights to promote platform competition, but this analysis assumes low transaction costs, overlooks consumers’ cognitive limitations stemming from lock-in, and risks leveraging monopoly power and inhibiting cumulative innovation. The optimal level of intellectual property protection has a dynamic quality, with the level of protection dissipating as network technologies and platforms become dominant. Menell (1987) recommends a limited patent-type regime to protect the functional features of computer software, although with shorter duration and more flexibility to promote access to platforms that become widely adopted. Menell (1989) advocates a genericide-type doctrine,2 which could protect emerging platforms but give way to broader access when a platform becomes dominant and risks affording the proprietor the ability to leverage that control to hinder cumulative innovators (Langlois, 2001). This analysis anticipated Microsoft’s rise and its abusive market tactics in undermining Netscape and Sun. At the same time, scholars have opposed copyright protection for the functional and interoperable aspects of computer technology so as to avoid large returns to first movers that win a standards battle without offering significant technological innovation (Menell, 1987; Karjala, 1987; Samuelson et al., 1994). Such limitations on copyright protection afford competitors freedom to use and build on unpatented methods of operation. In some circumstances, compulsory licensing of patents might be desirable. This can be achieved through injunctive relief. The proportionality principle ensures that platform innovators who choose proprietary strategies (as opposed to more collaborative approaches) have the potential to reap significant rewards if they prevail in a standards competition, but that their ability to control the platform (and charge monopoly prices) declines as the network becomes entrenched. Such a regime creates optimal conditions for overcoming excess inertia while promoting the realization of network benefits. It also allows for competition to enhance and improve established platforms. 2   A trademark can become generic and thereby lose protection if it becomes associated in the public’s mind with a category of product rather than the source of a particular brand of the product. See, e.g., The Murphy Door Bed Co., Inc. v. Interior Sleep Systems, Inc., 874 F.2d 95 (2d Cir. 1989) (‘Murphy bed’ for a bed that folds up into a wall cabinet); King-Seely Thermos Co. v. Aladdin Indus., Inc., 321 F.2d 577 (2d Cir. 1963) (‘Thermos’ vacuum insulated bottle).

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Economic analysis of network effects and IP  171 C.  Deterrence Principle: Discouraging Overreach with Balanced Remedies Intellectual property law and competition policy should also protect against deceptive practices and leveraging intellectual property rights to control network markets. The integrity of standard setting processes is particularly critical to efficient collaboration among enterprises and innovators working in network industries. The choice of standards depends on a range of factors, including potential restrictions on practicing technological standards. Hence, standard setting bodies should require disclosure of all potential intellectual property encumbrances or, at a minimum, advance commitment by SSO members to licensing such technologies on fair and reasonable terms. Courts should penalize efforts to reduce transparency in standard setting processes and take failure to abide by such commitments into consideration in enforcing patent rights. Antitrust law and competition policy should also take network effects into account in assessing monopoly power, scrutinizing collaborations and contractual agreements, and fashioning remedies. The consumer, competitive, and innovation ramifications of network markets are especially complex. What might appear to be benign and welfare-improving behaviors—such as integrating a ‘free’ browser into an operating system product or bundled aftermarket services—might ultimately lead to monopolization of important emerging and downstream markets. Hence, antitrust law must be vigilant in assessing the dynamism and path-dependence of network technologies. For example, advance determination of licenses for SEPs can promote competition in downstream products and services. In some circumstances, antitrust authorities should tolerate some collusive behaviors—such as ex ante negotiation of FRAND license rates by SSOs—that resemble forbidden price-setting. The Sherman Antitrust Act bars contracts and conspiracies that unreasonably restrain competition. In network markets, some collaboration promotes economic efficiency. The crafting of remedies to combat abusive and anti-competitive behavior in network markets requires careful consideration of effects on consumers and competitors. Once a standard has taken root and is generating substantial network benefits, traditional remedies—such as enjoining the offensive activities of breaking up dominant firms—can cause adverse effects on the consumers who have adopted the standard as well as other downstream users—such as programmers and competitors who have incurred sunk costs in joining the platform. Leveraging intellectual property rights to control network markets might also produce countervailing innovative efficiencies. Hence, antitrust authorities and courts should consider remedies that promote the realization of network benefits while promoting enhanced competition and innovation. In some circumstances, these considerations favor compulsory licenses, which can be flexible and adaptable, over injunctive remedies.

V. INTELLECTUAL PROPERTY PROTECTION FOR NETWORK FEATURES In view of the tremendous economic significance of controlling access to systems technologies by exploiting demand-side effects and excluding competition in complementary goods and services, such as repair services, replacement parts, and ancillary

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172  Research handbook on the economics of IP law volume 1 markets (e.g., advertising and consumer data), platform developers and entrepreneurs have sought to use intellectual property to protect APIs and other means to exclude competitors from their platforms and systems. As an alternative approach, computer programmers and a growing number of commercial enterprises in the open source community have deployed intellectual property protection as a tool for sharing technology and precluding proprietary control of core Internet and computer operating system technologies. Since the principal forms of intellectual property protections developed long before the advent of digital technology, which made network effects so important, the intellectual property statutes do not expressly reflect the aforementioned policy principles for APIs and other functional features of platform technologies. Nonetheless, the mixed statutory/ common law heritage of intellectual property law (Menell, 2013) has afforded courts discretion to interpret statutory provisions, adapt common law doctrines, and apply equitable enforcement principles to address network effects. Moreover, more recent legislation has integrated network economics into intellectual property law (see Section V(B)(4) exploring the DMCA interoperability exemption). Although patents have long protected platform technologies, such as electrical standards (e.g., AC/DC, phonogram, color television, and telecommunications) (Shapiro and Varian, 1999, pp. 210–23), the contours of intellectual property protection for network features of systems and platforms centers around software technology. Trade secrecy and contract law provided relatively effective protection for much of the software developed during the mainframe and minicomputer eras. And although advances in computer hardware fell squarely within the patent domain, there were significant doubts about the patentability of computer software into the 1990s. Hence, as microcomputers emerged, which spurred retail distribution of computer software, copyright law emerged as the primary battleground for computer software by the mid-1980s. This section begins by discussing how trade secrecy can protect the network features of systems technologies. It then traces the evolution of copyright protection for computer software. Almost all of the major computer software battles have focused on the extent to which copyright protection afforded protection to the network features of computer software. Section C discusses the role of trademark and related protections for network technologies. Section D examines the role of patent protection for network technologies, which emerged as a more robust and controversial form of protection for computer software in the 1990s. A.  Trade Secret Protection Trade secret protection protects against the misappropriation of confidential information that is subject to reasonable efforts to maintain secrecy, such as security and non-­disclosure agreements with employees and contractors (Menell et al., 2017, ch. II). Trade secret protection can last indefinitely, but once trade secrets become public, they lose protection. Trade secret protection came into common usage in the software industry as a tool for protecting algorithms, software design, and coding—including APIs. Trade secret protection of passwords is also commonly used today to control access to websites and cloud servers.

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Economic analysis of network effects and IP  173 Trade secret protection does not provide absolute protection for information. It only protects against misappropriation through improper means and unauthorized disclosure. Therefore, competitors do not violate trade secrecy protection through reverse engineering of publicly available products and websites. The reverse engineering limitation on trade secret protection thus exposes the trade secret owner to free riding by others. This limitation, however, strikes a salutary balance between protection on the one hand and competition and the dissemination of knowledge on the other (Landes and Posner, 2003; Samuelson and Scotchmer, 2002; Chisum et al., 1989). The trade secret owner can ‘purchase’ greater protection against this risk by investing in higher levels of security (e.g., more effective encryption for software-encoded technology). The inventor can also pursue patent protection, which proscribes reverse engineering, although only for the limited duration of the patent, and mandates disclosure of the invention to the public. By declining to pursue patent protection (or failing to satisfy the requirements thereof), however, inventors should not be able to secure potentially perpetual rights in technologies merely by encrypting them or otherwise obscuring how they function. To do so would undermine the larger balance of the federal intellectual property system. As the next section explains, courts have interpreted copyright law to permit multiple reproductions of copyrighted software programs as a means for reverse engineering unprotected (by copyright), but secret, elements of code necessary for interoperability. B.  Copyright Protection As the proliferation of microcomputers seeded a market for computer programs, software entrepreneurs saw copyright as an effective strategy to protect their programs from unauthorized reproduction and distribution. Computer software, however, does not fit easily within the copyright mold. Copyright law had long denied protection to functional elements. Although written in text, computer software provides the gears and levers for digital machines—which fits more naturally within the utility patent system (cf. Baker v. Selden, 101 U.S. 99, 102 (1879) (‘The claim to an invention or discovery of an art or manufacture must be subjected to the examination of the Patent Office before an exclusive right therein can be obtained; and it can only be secured by a patent from the government’). The rapid emergence of the computer software marketplace in the early 1970s posed a dilemma for intellectual property policymakers. Computer software could be expensive to develop and was easily pirated, creating a severe appropriability problem for the nascent, yet critical, software industry (Gates, 1976). Patent law, which had long served as the primary form of protection for technological advances in machines and processes, was thought to be too costly, time-consuming, stringent, and uncertain as a means for protecting software products against piracy (Menell, 1987, pp. 1347–51). Copyright law had long provided an effective means of protecting literary works from piracy, but its doctrines excluding ideas and functional elements from protection raised serious questions about its appropriateness for protecting inherently utilitarian works. Copyright’s low threshold for protection (mere originality), broad array of rights (including the right to adapt), and long duration created a high risk of overbroad protection for computer software products, in direct opposition to the parsimony principle. On the other hand, copyright law’s limiting principles, such as the idea-expression dichotomy (denying

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174  Research handbook on the economics of IP law volume 1 copyright protection to expression that encumbers the use of ideas) and the fair use doctrine, provided tools for aligning copyright protection with the parsimony principle. The interplay of copyright protection and network effects has played out on several fronts during the past four decades. Section 1 explains the principal legislation undergirding copyright protection for computer software. Section 2 traces the development of software copyright jurisprudence relating to APIs through 2010. Section 3 explores software licensing and the emergence and growth of the free and open source movements—key drivers of network technology markets. Section 4 explores the interoperability exception to the anti-circumvention provisions added to the copyright law in 1998. Section 5 picks up where Section 2 left off by examining the Oracle v. Google litigation. Section 6 examines copyright protection for standards and codes. 1. Software copyright legislation: the Copyright Act of 1976, the CONTU Final Report, and the 1980 amendments The software protection controversy of the early 1970s emerged at an inopportune time. Congress had been working for nearly two decades to overhaul the Copyright Act of 1909 and was nearing closure in the early to mid-1970s. Faced with the challenge of fitting computer and other new information technologies under the existing umbrella of intellectual property protection, Congress established the National Commission on New Technological Uses of Copyrighted Works (CONTU) to study the implications of the new technologies and recommend revisions to federal intellectual property law. As a stopgap, Congress included computer software within the scope of ‘literary works’ in the Copyright Act of 1976 (1976 Act). The House Report explains that [t]he term ‘literary works’ does not connote any criterion of literary merit or qualitative value: it includes catalogs, directories, and similar factual, reference, or instructional works and compilations of data. It also includes computer data bases, and computer programs to the extent that they incorporate authorship in the programmer’s expression of original ideas, as distinguished from the ideas themselves. (H.R. Rep. No. 94-1476, 94th Cong., 2d Sess. 54 (1976) (emphasis added))

Other provisions of the 1976 Act, however, maintained traditional exclusions for ideas and functional features. (17 U.S.C. § 102(b) (‘In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery’)). The CONTU Final Report concluded that copyright law should protect the intellectual work embodied in computer software, notwithstanding the fundamental principle that copyright cannot protect ‘any idea, procedure, process, system, method of operation, concept, principle, or discovery’ and the Supreme Court’s foundational decision in Baker v. Selden (CONTU, 1979, p. 1). Nonetheless, CONTU recommended that Congress immunize rightful possessors of a computer program from liability for using the program (which typically results in reproduction of computer code) and making a backup copy of computer programs, which Congress largely adopted in 1980 legislation (Act to amend the patent and trademark laws, Pub. L. No. 96-517, 94 Stat. 3015, 3028 (1980) (codified at 17 U.S.C. §§ 101, 117)). In keeping with copyright law’s fundamental limiting principles, the CONTU Final Report explained that while ‘one is always free to make a machine perform any conceivable process (in the absence of a patent), [] one is not free to take another’s program,’

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Economic analysis of network effects and IP  175 subject to copyright’s limiting doctrines—originality and the idea/expression dichotomy (CONTU, 1979, p. 20). The Report further explained that The ‘idea-expression identity’ exception provides that copyrighted language may be copied without infringing when there is but a limited number of ways to express a given idea. This rule is the logical extension of the fundamental principle that copyright cannot protect ideas. In the computer context this means that when specific instructions, even though previously copyrighted, are the only and essential means of accomplishing a given task, their later use by another will not amount to an infringement. (CONTU, 1979, p. 20 (footnote omitted))

Thus, while recognizing important limitations on copyright protection for computer software, including the § 102(b) limitations, Congress intended that software programmers would garner protection for their programming design and coding choices to the extent that the expression was separable from the underlying ideas. In this way, the general programming ideas and unoriginal programming choices remain free for others to use while the creative effort in particularized programming choices and compilations, especially in complex programs, gains protection from copyists. 2.  Software copyright jurisprudence: the first wave The 1976 Copyright Act, as well as the CONTU Final Report, pushed the availability and scope of copyright protection for computer software to the courts. The treatment of APIs under copyright law emerged over the next two decades as courts interpreted and applied the § 102(b) limitations (including the idea-expression dichotomy), infringement standards, the fair use defense, and other legal doctrines standards. Courts confronted battles across various software markets—from microcomputer operating systems to job scheduling software for mainframe computers, mobile phone networks, computer-user interfaces, video game devices, printer cartridges, garage door openers, and all manner of application programs (such as business systems, design programs, video games, and spreadsheets). Nearly every major software copyright litigation involved interoperability elements. After an inauspicious start, the federal courts implemented a balanced framework for both protecting computer software against piracy and interpreting the idea/expression doctrine to ensure that copyright law excludes functional features of computer technology (Menell, 1998). These decisions effectuated the subtle balance to which the CONTU Final Report referred. The courts came to appreciate that ‘creativity’ must be understood contextually. While programming a computer can unquestionably be termed ‘creative’ in a general sense, it is not necessarily ‘creative’ in a copyright sense. Just as the design of an efficient mechanical machine can be creative, such devices are not eligible for copyright protection unless the aesthetic features can be separated from the functional attributes (17 U.S.C. § 101 (‘“Pictorial, graphic, and sculptural works” include two-dimensional and three-dimensional works . . .; the design of a useful article . . . shall be considered a pictorial, graphic, or sculptural work only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article’). Lines of code are the gears and levers of digital machines. The fact that computer software, like a sculptural work, is eligible for copyright protection does not authorize protection for functional features. The courts came to recognize that APIs have significant functional dimensions. They serve in many contexts as the basis for interoperability of computer technologies.

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176  Research handbook on the economics of IP law volume 1 The First Circuit held that the particular functional specifications, as opposed to the implementing code, can be fairly characterized as ‘methods of operation.’ Although the Supreme Court’s split decision in Lotus v. Borland (Lotus Dev. Corp. v. Borland Int’l, Inc., 516 U.S. 233 (1996) (affirming, without opinion by an equally divided vote, the First Circuit’s decision holding that the menu command structure for a spreadsheet is an uncopyrightable method of operation under § 102(b))) left some uncertainty, the resolution of that litigation marked the end of the major API copyright litigations that had raged since the early 1980s. This section traces that evolution. Section (i) examines the emergence of jurisprudence excluding functional and network features of computer software. Section (ii) explores the related issue of whether competitors can reproduce computer software as a means of learning unprotectable code elements. i.  Unprotectability of functional and network features    The first major cases to address copyright protection for interoperable features of computer software pitted Apple Computer Corporation, then a young, break-out microcomputer company, against cavalier, unscrupulous competitors offering discount ‘interoperable’ Apple II clones (Apple Computer, Inc. v. Franklin Computer Corp., 545 F. Supp. 812 (E.D. Pa. 1982), rev’d, 714 F.2d 1240 (3d Cir. 1983); Apple Computer, Inc. v. Formula Int’l, Inc., 562 F. Supp. 775 (C.D. Cal. 1983), aff’d, 725 F.2d 521 (9th Cir. 1984)). The clone makers quickly entered the market by simply copying, bit by bit, Apple’s operating system and application programs. The defendants in these cases argued that copyright protection did not extend to nonhuman readable (object code) formats of computer software and that the idea-expression doctrine barred copyright protection for operating system programs. They further argued that copyright protection should not stand in the way of their selling computers that can run programs written for the Apple II. The courts had little trouble validating Apple’s complaint that verbatim copying of millions of bits of code constituted copyright infringement. The 1976 Act, in conjunction with the CONTU Final Report, clearly extended copyright protection in this circumstance. Unfortunately, the Third Circuit’s decision included language suggesting that copyright protection could encompass the functional requirements for interoperability: ‘total compatibility with independently developed application programs . . . is a commercial and competitive objective which does not enter into the somewhat metaphysical issue of whether particular ideas and expressions have merged’ (Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d at 1253 (3d Cir. 1983)). Since two entirely different programs can achieve the same ‘certain result[s]’—for example, generate the same set of protocols needed for interoperability—the court was not justified in making such an expansive statement about the scope of copyright protection for computer program elements. CONTU was clear that ‘[o]ne is always free to make the machine do the same thing as it would if it had the copyrighted work placed in it, but only by one’s own creative effort rather than by piracy’ (CONTU, 1979, p. 21). Given the verbatim copying of millions of bits of object code, there was no need to address the interoperability issue. The defendant offered no explanation for which elements of the program were protectable and which were not. The Third Circuit’s decision in Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 797 F.2d 1222 (3d Cir. 1986), further expanded copyright protection for computer

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Economic analysis of network effects and IP  177 software. In that case, Jaslow Dental Laboratory had hired Whelan Associates, a custom software company, to develop a computer program to organize its bookkeeping and administrative tasks. When Jaslow developed and marketed its own program for managing a dental laboratory, Whelan sued Jaslow for copyright infringement. The evidence at trial showed that, although Jaslow had not literally copied Whelan’s code, there were overall structural similarities between the two programs. As a means of distinguishing protectable expression from unprotectable idea, the court reasoned: [T]he purpose or function of a utilitarian work would be the work’s idea, and everything that is not necessary to that purpose or function would be part of the expression of the idea. Where there are many means of achieving the desired purpose, then the particular means chosen is not necessary to the purpose; hence, there is expression, not idea (797 F.2d at 1236 (emphasis in original; citations omitted)).

In applying this rule, the court defined the idea as ‘the efficient management of a dental laboratory,’ which countless programs could express (797 F.2d at 1236, n. 28). Drawing the idea/expression dichotomy at such a high level of abstraction implied an expansive scope of copyright protection. Although the case did not directly address copyright protection for interoperable features of computer code, the court’s mode of analysis expanded the scope of copyright protection to all aspects of computer programs. If everything below the general purpose of the program were protectable under copyright law, then it would follow that particular protocols were protectable because there would be other ways to accomplish the program’s same general purpose. Such a result would effectively bar competitors from developing interoperable programs and computer systems. Commentators roundly criticized the Whelan test (Chisum et al., 1989, pp. 20–21; Menell, 1989, p. 1074; Englund, 1990, p. 881), and other courts developed alternative approaches. A few months after Whelan, the Fifth Circuit confronted a similar claim of copyright infringement based upon structural similarities between two programs designed to provide cotton growers with information regarding cotton prices and availability, accounting services, and a means for conducting cotton transactions electronically (Plains Cotton Coop. Ass’n v. Goodpasture Computer Serv., Inc., 807 F.2d 1256 (5th Cir. 1987)). In declining to follow the Whelan approach, the court found that the similarities in the programs were dictated largely by standard practices in the cotton market—what the court called ‘externalities’—such as the ‘cotton recap sheet’ for summarizing basic transaction information, which constitute unprotectable ideas. The court found persuasive the decision in Synercom Technology, Inc. v. University Computing Co., 462 F. Supp. 1003, 1013 (N.D. Tex. 1978), which analogized the ‘input formats’ of a computer program (the organization and configuration of information to be inputted into a computer) to the ‘figure-H’ pattern of an automobile stick shift. Drawing on the Fifth Circuit’s approach and Judge Learned Hand’s foundational test for analyzing copyright infringement (Nichols v. Universal Pictures Corp., 45 F.2d 119 (2d Cir. 1930)), the Second Circuit crafted what has become the leading framework for analysing infringement of computer software code (Computer Assocs. Int’l v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992)). Computer Associates (CA), a leading mainframe software provider, had developed a job scheduling program (SCHEDULER) for IBM mainframe computers. Part of the success of this program was that it had a sub-component (ADAPTER) which interoperated with any of the three IBM mainframes. Thus, the user

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178  Research handbook on the economics of IP law volume 1 did not need to customize its programs for each of the IBM mainframes. CA’s ADAPTER program ensured that programs written for SCHEDULER would run on any of the three IBM mainframes. CA sued Altai, a competitor that pursued a similar strategy for designing its job scheduling software for the IBM mainframes. Unbeknownst to Altai’s management, one of its key programmers copied 30 percent of ADAPTER code into Altai’s job scheduling software product. When Altai management learned of the copying, the company initiated a ‘clean room’ process to insulate its programmers from copyright-protected code so as to ensure that the resulting program interoperated with the IBM mainframes without copying any ADAPTER code (Sammi et al., 2013). Altai accepted responsibility for copyright infringement based on the early version. Nonetheless, drawing on the Third Circuit’s Whelan decision, CA claimed that the clean room version was also infringing due to structural similarities at various levels, such as flow charts, inter-modular relationships, parameter lists, and macros. The Second Circuit rejected Whelan’s approach. The Second Circuit fleshed out a detailed analytical framework for determining copyright infringement of computer code: In ascertaining substantial similarity . . . a court would first break down the allegedly infringed program into its constituent structural parts. Then, by examining each of these parts for such things as incorporated ideas, expression that is necessarily incidental to those ideas, and elements that are taken from the public domain, a court would then be able to sift out all non-protectable material. Left with a kernel, or perhaps kernels, of creative expression after following this process of elimination, the court’s last step would be to compare this material with the structure of an allegedly infringing program (982 F.2d at 706).

The court’s ‘abstraction-filtration-comparison’ test recognized that an idea could exist at multiple levels of a computer program and not solely at the most abstract level. Furthermore, the ultimate comparison is not between the programs in their entirety. Rather, courts must focus solely on whether protectable elements of the program were copied. Of most importance for fostering interoperability, the court held that copyright protection did not extend to those program elements where the programmer’s ‘freedom to choose’ is circumscribed by extrinsic considerations such as (1) the mechanical specifications of the computer on which a particular program is intended to run; (2) compatibility requirements of other programs with which a program is designed to operate in conjunction; (3) computer manufacturers’ design standards; (4) demands of the industry being serviced; and (5) widely accepted programming practices within the computer industry (982 F.2d at 709–10).

Directly rejecting the Third Circuit’s dictum in Apple v. Franklin that achieving ‘total compatibility with independently developed application programs . . . is a commercial and competitive objective which does not enter into the somewhat metaphysical issue of whether particular ideas and expressions have merged,’ the Second Circuit recognized that external factors such as interface specifications, de facto industry standards, and accepted programming practices are not protectable under copyright law. The formulation of the Second Circuit test judges these external factors when the allegedly infringing activities (i.e., ex post) occur, not when the first program is written. The court emphasized that the first company to write a program for a particular application should not be able to ‘“lock up” basic programming techniques as implemented in programs to perform particular tasks’ (982 F.2d at 712 (quoting Menell, 1989, p. 1087)).

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Economic analysis of network effects and IP  179 Other circuits embraced the Second Circuit’s Altai framework (Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 836–43 (10th Cir. 1993); Eng’g Dynamics, Inc. v. Structural Software, Inc., 26 F.3d 1335 (5th Cir. 1994); Apple Computer, Inc. v. Microsoft Corp., 35 F.3d 1435 (9th Cir. 1994); Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1547 (11th Cir. 1996); Mitel, Inc. v. Iqtel, Inc., 124 F.3d 1366 (10th Cir. 1997)). The Altai case addressed programmers’ freedom to write code to interoperate with externally established APIs—in that case by IBM. IBM had not challenged CA’s or Altai’s use of its interface specifications. It welcomed other companies to develop software for its mainframes. Thus, the case did not specifically address whether the API developer could assert a copyright infringement claim based on unauthorized use of their interface specifications. That issue would emerge in a series of cases involving video games and spreadsheets. The Ninth Circuit’s decision in Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992), expressly recognized the legitimacy of deciphering and copying particular lock-out codes for purposes of developing interoperable products. Sega developed a successful video game platform (Genesis) for which it licensed access to video game developers. Accolade, a video game manufacturer, wanted to distribute versions of its game on the Genesis platform. It did not, however, want to limit distribution exclusively to Genesis, as Sega required. Rather than license access to Sega’s code, Accolade reverse engineered the access code through a painstaking effort that entailed making hundreds of intermediate copies of Sega’s computer code. Accolade then incorporated only those code elements (approximately 25 bytes in games containing between 500,000 and 1.5 million bytes) that were necessary to achieve interoperability with the Genesis platform into Accolade game cartridges. Sega sued Accolade for copyright infringement. Given the relatively small amount of Sega code in the Accolade game cartridges, Sega focused its copyright claim on Accolade’s reproduction of the entirety of Sega’s program code for purposes of isolating those code elements needed to interoperate with the Genesis console. The district court rejected Accolade’s argument that such intermediate copies—made solely for the purpose of reverse engineering the platform—constituted fair use and granted a preliminary injunction. The Ninth Circuit held that ‘disassembly of object code in order to gain an understanding of the ideas and functional concepts embodied in the code is a fair use that is privileged by section 107 of the Act’ (977 F.2d at 1518). Balancing these factors, the Ninth Circuit ruled that ‘the functional requirements for compatibility with the Genesis [video game console are] aspects of Sega’s programs that are not protected by copyright’ (977 F.2d at 1522 (citing 17 U.S.C. § 102(b))). In effect, the court held that copyright law does not protect the particular code or process needed for interoperating with a copyrighted computer program (such as lock-out code). The Ninth Circuit reaffirmed and expanded the Sega decision in Sony Computer Entertainment, Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000). The Northern District of California and the Ninth Circuit applied the Altai framework to the graphical user interface features of a computer program in Apple Computer, Inc. v. Microsoft Corp., 799 F. Supp. 1006 (N.D. Cal. 1992), aff’d in part, rev’d in part, 35 F.2d 1435 (9th Cir. 1994). Apple alleged that Microsoft’s Windows operating system infringed copyrights in the desktop graphical user interface of its Macintosh computer system. A licensing agreement authorizing Microsoft to use aspects of Apple’s graphical user interface muddied the copyright issue. The court determined, however, that the licensing

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180  Research handbook on the economics of IP law volume 1 agreement was not a complete defense to the copyright claims and therefore undertook an analysis of the scope of copyright protection for a large range of audiovisual elements of computer screen displays. In framing the analysis, the district court expressly recognized the relevance of network externalities and the cumulative nature of innovation to the scope of copyright protection: Copyright’s purpose is to overcome the public goods externality resulting from the nonexcludability of copier/free riders who do not pay the costs of creation. Peter S. Menell, An Analysis of the Scope of Copyright Protection for Application Programs, 41 Stan. L. Rev. 1045, 1059 (1989). But overly inclusive copyright protection can produce its own negative effects by inhibiting the adoption of compatible standards (and reducing so-called ‘network externalities’). Such standards in a graphical user interface would enlarge the market for computers by making it easier to learn how to use them. Id. at 1067–70. Striking the balance between these considerations, especially in a new and rapidly changing medium such as computer screen displays, represents a most ambitious enterprise. Cf. Lotus Dev. Corp. v. Paperback Software Int’l, 740 F. Supp. 37 (D. Mass. 1990).   While the Macintosh interface may be the fruit of considerable effort by its designers, its success is the result of a host of factors, including the decision to use the Motorola 68000 microprocessor, the tactical decision to require uniform application interfaces, and the Macintosh’s notable advertising. And even were Apple to isolate that part of its interface’s success owing to its design efforts, lengthy and concerted effort alone ‘does not always result in inherently protectible expression.’ [quoting Computer Assocs. Int’l v. Altai, Inc. 982 F.2d at 711]   By virtue of having been the first commercially successful programmer to put these generalized features together, Apple had several years of market dominance in graphical user interfaces until Microsoft introduced Windows 3.0, the first DOS-based windowing program to begin to rival the graphical capability of the Macintosh. . ..To accept Apple’s ‘desktop metaphor’/‘look and feel’ arguments would allow it to sweep within its proprietary embrace not only Windows and NewWave but, at its option, also other desktop graphical user interfaces which employ the standardized features of such interfaces, and to do this without subjecting Apple’s claims of copyright to the scrutiny which courts have historically employed. Apple’s copyrights would hold for programs in existence now or in the future—for decades. One need not profess to know for sure where should lie the line between expression and idea, between protection and competition to sense with confidence that this would afford too much protection and yield too little competition.   The importance of such competition, and thus improvements or extensions of past expressions, should not be minimized. The Ninth Circuit has long shown concern about the uneasy balance which copyright seeks to strike: ‘What is basically at stake is the extent of the copyright owner’s monopoly—from how large an area of activity did Congress intend to allow the copyright owner to exclude others?’ 799 F. Supp. at 1025–26 (quoting Herbert Rosenthal Jewelry Corp. v. Kalpakian, 446 F.2d 738, 742 (9th Cir.1971)).

The court found that most of the similar icons between Apple’s graphical user interface and Microsoft’s Windows that were not authorized by the licensing agreements were either not lacking originality or subject to one or more of copyright’s limiting doctrines. Drawing on the principle that compilations of largely uncopyrightable elements are only protected against ‘bodily appropriation of expression’ (see Harper House, Inc. v. Thomas Nelson, Inc., 889 F.2d 197, 205 (9th Cir. 1989)) the court applied a ‘virtual identity’ standard to compare the works as a whole and determined that no infringement had occurred. On appeal, the Ninth Circuit affirmed the district court’s dissection of the works to determine which elements are protectable, its filtering of unprotectable elements, and its application of the ‘virtual identity’ standard. The copyrightability of command systems for computer software arose most directly in

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Economic analysis of network effects and IP  181 Worksheet

Global

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Figure 7.1  Lotus 1-2-3 menu command hierarchy litigation surrounding spreadsheet technology. Building upon the success of the VisiCalc program developed for the Apple II computer, Lotus Corporation marketed an enhanced operating spreadsheet program incorporating many of VisiCalc’s features and commands into its 1-2-3 program for the IBM PC platform. Lotus 1-2-3 quickly became the market leader for spreadsheets running on IBM and IBM-compatible machines, and knowledge of the program became a valuable skill in the accounting and management fields. The 1-2-3 command hierarchy was particularly attractive because it logically structured more than 200 commands (see Figure 7.1). Users could create custom programs (called macros) to automate particular accounting and business planning tasks. Businesses and users increasingly became ‘locked-in’ to the 1-2-3 command structure as they invested time to learn the system and their libraries of macros grew (Gandal, 1994). By the late 1980s, software developers seeking to enter the spreadsheet market could not ignore the large premiums that consumers placed on their investments in the 1-2-3 system (Menell, 1998). After three years of intensive development efforts, Borland International, developer of several successful software products including Turbo Pascal and Sidekick, introduced Quattro Pro, its entry into the spreadsheet market. Quattro Pro offered improved design and graphics over Lotus 1-2-3. Computer magazines praised its innovation. Quattro Pro offered a new interface for its users, which many preferred over the 1-2-3 interface. Nonetheless, because of the large number of users already familiar with the 1-2-3 command structure and those who had made substantial investments in developing 1-2-3 macros, Borland considered it essential to offer an operational mode based on the 1-2-3 command structure as well as macro compatibility. Nonetheless, Borland’s visual representation of the 1-2-3 command mode substantially differed from the 1-2-3 screen displays. Lotus sued Borland for copyright infringement based on Quattro Pro’s emulation of the 1-2-3 menu command hierarchy. The First Circuit viewed the case as one of first impression: ‘[w]hether a computer menu command hierarchy constitutes copyrightable subject matter.’ (Lotus Dev. Corp. v. Borland Int’l, Inc., 49 F.3d 807, 813 (1st Cir. 1995)). The court distinguished Altai as dealing with protection of computer code as opposed to the results of such code. Instead, the First Circuit saw the subject matter of the Lotus case as a ‘method of operation’ falling directly within the exclusions from copyright protection set forth in 17 U.S.C. § 102(b). The court held the Lotus menu command hierarchy is an uncopyrightable ‘method of operation.’

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182  Research handbook on the economics of IP law volume 1 The Lotus menu command hierarchy provides the means by which users control and operate Lotus 1-2-3. If users wish to copy material, for example, they use the ‘Copy’ command. If users wish to print material, they use the ‘Print’ command. Users must use the command terms to tell the computer what to do. Without the menu command hierarchy, users would not be able to access and control, or indeed make use of, Lotus 1-2-3’s functional capabilities.   The Lotus menu command hierarchy does not merely explain and present Lotus 1-2-3’s functional capabilities to the user; it also serves as the method by which the program is operated and controlled. . ..(49 F.3d. at 815)

The US Supreme Court affirmed without opinion by an equally divided vote (Lotus Dev. Corp. v. Borland Int’l, Inc., 516 U.S. 233 (1996)). Subsequent appellate decisions reached similar outcomes, although they did not fully adopt the First Circuit’s categorical exclusion of menu command hierarchies from copyright protection. In MiTek Holdings, Inc. v. ARCE Engineering Co., 89 F.3d 1548 (11th Cir. 1996), the holder of a copyright in an application program that designed and arranged wood trusses for the framing of building roofs brought an infringement action against the maker of a competing program that featured a similar menu command tree and user interface. Affirming the lower court’s decision, the Eleventh Circuit held that the menu and submenu command structure of the truss design program was uncopyrightable under § 102(b) of the 1976 Act because it represents a process. The court did not need to reach the broader question, addressed in Lotus, of whether all menu command structures are uncopyrightable as a matter of law. In Mitel, Inc. v. Iqtel, Inc., 124 F.3d 1366 (10th Cir. 1997), Mitel, the maker of a widely adopted computer system for automating the selection of a particular telephone long distance carrier and remotely activating optional telecommunications features such as speed dialing, sued Iqtel, a competing firm that used the identical command codes, for copyright infringement. Because Mitel’s system had become a de facto standard, Iqtel defended its use of compatible controller codes on the ground that ‘technicians who install call controllers would be unwilling to learn Iqtel’s new set of instructions in addition to the Mitel command code set, and the technician’s employers would be unwilling to bear the cost of additional training.’ As Borland had done, Iqtel’s product included both its own set of command codes as well as a ‘Mitel Translation Mode.’ While commenting that a method of operation may in some circumstances contain copyrightable expression, the Tenth Circuit nonetheless concluded that the Mitel command codes, which were arbitrarily assigned, lacked the minimal degree of creativity necessary to qualify for copyright protection. The court further held that Mitel’s command codes should be denied copyright protection under the scènes à faire doctrine because external factors such as compatibility requirements and industry practices largely dictated the codes. There were no further cases reported addressing copyright protection for APIs over the next 15 years. We address the Federal Circuit’s decision upholding copyright protection for APIs in the Oracle v. Google case in subsection 5. ii.  Permissibility of reverse engineering    As discussed in section V(A), network system developers can use encryption and trade secret law to protect computer code. Distributing computer programs in object code (binary) format typically constitutes a reasonable effort to maintain secrecy. As noted, however, competitors can lawfully gain access to such information through reverse engineering. One such method is to experiment with object code

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Economic analysis of network effects and IP  183 to determine which bits are necessary for interoperability. Such forensic work typically requires the investigator to make many copies, raising the risk of copyright infringement. The LaST Frontier Final Report (Chisum et al., 1989), a consensus statement of leading intellectual property scholars, opined that ‘limited copying of programs for the purpose of examination and study . . . falls within the rigorous terms of the fair use provisions in section 107 of the Copyright Act’ (Chisum et al., 1989, p. 25; Samuelson and Scotchmer, 2002). In addition to holding that computer code necessary for interoperability is unprotectable under § 102(b), the Ninth Circuit’s Sega decision authorized the copying of entire computer programs for purposes of deciphering unprotectible code elements. In explaining why disassembly and reproduction of object code constitute fair use, the court reasoned that the ‘functional specifications’ of a computer program are unprotectable. The Ninth Circuit based its analysis on the architecture of the intellectual property system: [D]isassembly of the object code in Sega’s video game cartridges was necessary in order to understand the functional requirements for Genesis compatibility. The interface procedures for the Genesis console are distributed for public use only in object code form, and are not visible to the user during operation of the video game program. Because object code cannot be read by humans, it must be disassembled, either by hand or by machine. If disassembly of copyrighted object code is per se an unfair use, the owner of the copyright gains a de facto monopoly over the functional aspects of his work—aspects that were expressly denied copyright protection by Congress. 17 U.S.C. § 102(b). In order to enjoy a lawful monopoly over the idea or functional principle underlying a work, the creator of the work must satisfy the more stringent standards imposed by the patent laws. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 159–64 (1989). Sega does not hold a patent on the Genesis console. (Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510, 1526 (9th Cir. 1993))

The Ninth Circuit reaffirmed and expanded the Sega analysis in Sony Computer Entertainment, Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000). 3.  Software licensing Copyright law grants authors exclusive rights to copy, adapt, distribute, publicly perform, and publicly display protected works, subject to various limitations. The early computer industry, however, did not rely on proprietary control over their customers’ use or adaptation of their software programs. Nor did companies restrict customers’ access to source code. Rather, the industry—led by IBM and followed by Burroughs, UNIVAC, NCR, Control Data, General Electric, and RCA (often referred to as the ‘Seven Dwarfs’ due to IBM’s dominance in the computer industry)—bundled software with their mainframes and derived revenues from leasing computer usage and sales of complementary products and services (Ceruzzi, 2003, ch. 5). In this era, IBM actively facilitated sharing of software among its users as a way of increasing usage of its computers. The structure of the computer industry and copyright’s role dramatically changed during the 1970s. With technological advances creating a minicomputer market and IBM’s 1969 decision to unbundle software from mainframe leasing in the face of antitrust charges, computer hardware vendors and independent software developers came to use copyright licenses to protect computer programs. The opening of a competitive proprietary software marketplace ended an era in which software was freely shared (Phillips, 2009, pp. 113–15).

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184  Research handbook on the economics of IP law volume 1 This shift produced a backlash within the programmer community that continues to reverberate throughout the computer and software industries. The rapid rise of a robust microcomputer industry followed by the creation of the Internet generated a robust, independent software marketplace. These technologies had strong and complex network effects, which have been substantially affected by software licensing practices. While many hardware and software enterprises continue to rely heavily on proprietary software licensing agreements, the programmers’ backlash against restrictive software licensing as well as business strategies aimed at disrupting proprietary standards have dramatically reshaped software licensing institutions, practices, and patterns. This section explores this evolving landscape. Section (i) traces the emergence of the free software movement, which resourcefully uses copyright licensing to promote open platforms. The movement’s innovative licensing framework produced a form of network effects. Section (ii) examines the open source movement, based on a more permissive licensing model, which broadened the shift away from proprietary software licensing. Section (iii) discusses the use of dedication of software copyrights to the public domain as a third alternative for promoting network effects. Section (iv) surveys federal copyright preemption of licensing restrictions. i.  The free software movement (General Public License)   Many independent and academic programmers, who had long enjoyed free access to source code, viewed the shift to proprietary software licensing as a debilitating restriction on collaborative research, programming freedom, and software innovation. Beginning in the early 1980s, Richard Stallman, then a researcher in MIT’s Artificial Intelligence Laboratory, began a grass-roots ‘free software’ movement. Although Stallman was vehemently opposed to intellectual property protection for computer software, he came to see that the same copyright protections that exclude competitors could be deployed to prohibit restrictions on adaptation and reuse of code and to foster open platforms (Weber, 2004, pp. 47–9). Stallman established the Free Software Foundation (FSF) in 1985 to promote users’ rights to use, study, copy, modify, and redistribute computer programs. The FSF devised the GPL to prevent programmers from building proprietary limitations into software. The GPL guarantees end users the freedoms to run, study, share (copy), and modify the software so long as the users permit use of any derivative works on the same terms (Carver, 2005). In this way, GPL software ‘infects’ derivative works with user rights and virally spreads these rights through the collaborative software ecosystem. Stallman targeted the development of a viable UNIX-compatible open source operating as FSF’s initial goal. The UNIX operating system, developed by researchers at MIT, AT&T’s Bell Labs, and General Electric in the late 1960s and early 1970s, offered innovative time-sharing capability. It became a foundation for modern computer operating system design (McKusick, 1999). In 1972, two Bell Labs researchers—Dennis Ritchie, inventor of the C programming language, and Ken Thompson—rewrote UNIX in C, enabling UNIX to be installed on any advanced computer system. AT&T held the copyright to UNIX, which restricted its use and adaptation. Stallman sought to liberate UNIX through the GNU (‘GNU’s Not Unix’) GPL independent re-implementation project. Many programmers throughout the world contributed to this effort on a voluntary basis, and by the late 1980s most of the components had been assembled. The project

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Economic analysis of network effects and IP  185 reached fruition in 1991 when Linus Torvalds developed a UNIX-compatible kernel—the central core of the operating system. Torvalds structured the evolution of his component on the GPL model. The resulting UNIX-compatible free software program, dubbed ‘Linux,’ has become widely used throughout the computing world. While attractive to many independent, non-commercial programmers, the so-called ‘copyleft’ GPL licensing model posed a serious problem for many commercial software vendors. Although it afforded free access to GPL software, it prevented these cumulative developers from charging a royalty for their modifications and subjected further modifications by licensees to GPL restrictions (Determann, 2006, p. 1484). ii.  The open software movement (permissive licenses)    The ‘open source’ movement emerged as a middle ground between proprietary software distribution and the ‘free’ software movement. Like Linux, the open source movement traces its roots to efforts to liberate UNIX. In the mid-1970s, Ken Thompson at the University of California, Berkeley, spearheaded an effort by Berkeley faculty and students to enhance UNIX capabilities. In contrast to the GPL, the Berkeley Software Development (BSD) project offered its software on a ‘permissive’ basis: licensees could distribute modifications of the BSD software whether or not the modifications were freely licensed. Nonetheless, the licensee was still obliged to obtain a license from AT&T for the underlying UNIX code. As the Internet took off in the late 1990s, a growing number of hardware and software vendors embraced ‘free’ and ‘open source’ development and distribution strategies. They saw these non- or less-proprietary licensing models as means to prevent Microsoft from expanding its influence into the Internet and other platform technologies while simultaneously promoting competition and innovation (Lerner and Tirole, 2004, 2005; Merges, 2004; Benkler, 2002, 2004; McGowan, 2001). There is now a wide variety of permissive open source licensing models (Meeker, 2015, Appendix B). Free (GPL) and open source software play strong and increasing roles in network technologies, such as operating systems (e.g., Linux), Internet infrastructure (e.g., Apache Web Server) and mobile devices (e.g., Android), but have been less successful in penetrating consumer as opposed to programmer-centric product areas (Phillips, 2009, pp. 156, 158–68; Lerner and Tirole, 2005). Notwithstanding the proliferation of free and open source licenses, there have been relatively few litigated disputes (Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008); Phillips, 2009, pp. 120–21). iii.  Dedication to the public domain    A further distribution alternative that has been especially important in the proliferation of network benefits is outright dedication of computer software copyrights (and other forms of intellectual property) to the public domain. Tim Berners-Lee, the developer of the World Wide Web (WWW), was initially attracted to releasing his hypertext software platform under the GPL (Berners-Lee, 2000, pp. 72–3). Internet engineers, however, raised the concern that any restrictions attached to its usage could limit its adoption and use. Some large companies were rumored to be opposed to allowing usage of any software that could trigger license restrictions, including GPL copyleft requirements. Berners-Lee ultimately chose to dedicate the WWW to the public domain. Notwithstanding concerns that unprotected software could be fragmented and captured through proprietary ­extensions, the WWW has thrived and

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186  Research handbook on the economics of IP law volume 1 remained remarkably stable (Phillips, 2009, p. 174). This is attributable to the very strong network effects of Internet protocols and the community and technically driven, open, standard setting processes administered by the WWW Consortium (W3C) headed by Berners-Lee and the IETF. iv.  Federal preemption of contractual restrictions   In contrast to the free and open software movements, some software developers use licensing provisions to restrict the use of their copyrighted software. Some licenses, for example, bar reverse engineering of software programs. Such a restriction affords the copyright owner greater control over the development of interoperable products. The courts are divided, however, on whether federal copyright law and intellectual property policies preempt such state law contractual provisions. In Vault Corp. v. Quaid Software, Ltd., 847 F.2d 255 (5th Cir. 1988), the Fifth Circuit Court of Appeals held that the Louisiana Software License Enforcement Act clause permitting a copyright owner to prohibit software decompilation or disassembly was preempted by the Copyright Act, and was therefore unenforceable. A more recent case interpreted the scope of federal copyright protection more narrowly, enforcing licensing restrictions that bar activities that would otherwise fall within copyright’s fair use privilege (Bowers v. Baystate Techs., 320 F.3d 1317 (Fed. Cir. 2003)). The dissenting opinion in that case, however, indicates that the scope of federal preemption of licensing restrictions that contract around the fair use privilege remains unsettled (Band and Katoh, 2011, pp. 121–33). Section VI examines the related questions of whether antitrust law or misuse doctrines further restrict licensing provisions that leverage intellectual property rights to hinder downstream innovation or competition. 4.  Interoperability exception to the DMCA’s anti-circumvention prohibition The permissibility of reverse engineering software to achieve interoperability arose during the legislative deliberations over the enactment of anti-circumvention prohibitions. With the emergence of the Internet in the mid-1990s, motion picture studios, record labels, publishers, and other content owners came to see encryption and other digital rights management technologies as a promising self-help means to discourage unauthorized distribution of their works. They recognized, however, that such technologies would be vulnerable to unauthorized circumvention of technological protection measures. Thus, they sought to expand copyright protection beyond its traditional prohibitions against infringement to include limits on the decrypting or circumventing of technological protection systems and the trafficking in such decryption tools. They contended that without such protection, they would be unwilling to release content onto the Internet, which in turn would hamper the adoption of broadband services. Various other interests—ranging from consumer electronics manufacturers, library associations, computer scientists, and law professors—expressed concern about potential chilling effects of such an expansion of copyright law upon those who wish to make fair use of copyrighted works. Congress crafted a compromise in the DMCA (17 U.S.C. § 1201). Section 1201(a) bans circumvention of technological protection measures put in place by copyright owners to protect copyrighted works. Section (b) prohibits trafficking in anti-circumvention tools. Section 1201(f)(1) provides that:

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Economic analysis of network effects and IP  187 a person who has lawfully obtained the right to use a copy of a computer program may circumvent a technological measure that effectively controls access to a particular portion of that program for the sole purpose of identifying and analyzing those elements of the program that are necessary to achieve interoperability of an independently created computer program with other programs, and that have not previously been readily available to the person engaging in the circumvention, to the extent any such acts of identification and analysis do not constitute infringement under this title.

The legislative history notes that this provision is intended to allow legitimate software developers to continue engaging in certain activities for the purpose of achieving interoperability to the extent permitted by law prior to the enactment of this chapter. The objective is to ensure that the effect of current case law interpreting the Copyright Act is not changed by enactment of this legislation for certain acts of identification and analysis done in respect of computer programs. See, Sega Enterprises Ltd. v Accolade, Inc., 977 F.2d 1510, 24 U.S.P.Q. 2d 1561 (9th Cir. 1992.). The purpose of this section is to foster competition and innovation in the computer and software industry. (S. Rep. No. 105-190, p. 13 (1998))

Because violations of the DMCA are not acts of copyright infringement, but rather separate offenses, courts have held that the defenses available under the Copyright Act, including fair use, do not apply to anti-circumvention violations (Universal City Studios, Inc. v. Corley, 273 F.3d 429 (2d Cir. 2001); 321 Studios v. Metro-Goldwyn-Mayer Studios, Inc., 307 F. Supp. 2d 1085 (N.D. Cal. 2004)). While § 1201(c)(1) provides that ‘nothing in this law’ shall interfere with ‘fair use’ among other defenses, the courts have reasoned that the DMCA does not interfere with fair use but merely renders it irrelevant by allowing copyright owners to bring a non-copyright claim. Furthermore, the larger structure of the DMCA provides additional safeguards to address free expression and other concerns. Beyond the statutory exemptions to the anti-circumvention ban, the DMCA established a triennial rulemaking process for exempting particular categories of works from the anti-circumvention ban for which ‘noninfringing uses by persons who are users of a copyrighted work are, or are likely to be, adversely affected’ (17 U.S.C. § 1201(a)(1)(B)– (D)). Several of the granted exemptions authorize decryption for purposes of developing interoperable products. Smartphones, tablets, other mobile computing devices, and smart TVs, all of which have networking aspects, have attracted particular attention. Several major manufacturers of these products have sought to use encryption technologies to bundle the devices in telecommunications service plans. In a series of rulemaking proceedings, the Copyright Office has exempted unlocking or ‘jail-breaking’ of these products from the anticircumvention ban. (Library of Congress, 2018). Congress and the FCC have reinforced, extended, and expanded these exemptions (Band, 2017, pp. 79–109; Unlocking Consumer Choice and Wireless Competition Act, Pub. L. 113-144, 128 Stat. 1751 (2014)). The DMCA’s anti-circumvention provisions have generated several cases involving the use of technological protection measures to exclude competitors from aftermarkets— goods or services supplied for a durable product after its initial sale (e.g., replacement ink for printers). Several companies embedded digital code into their products and aftermarket components that must interoperate to function as a means of exerting control over such aftermarkets. When competitors in these aftermarkets decrypted such digital

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188  Research handbook on the economics of IP law volume 1 codes to manufacture their own components, these durable product manufacturers sued, alleging violation of the anti-circumvention provisions of the DMCA. Some courts have declined to find liability, emphasizing that the careful balance that Congress sought to achieve between the interests of content creators and information users would be upset if the anti-circumvention prohibitions could be applied to activities that did not facilitate copyright infringement (Chamberlain Group, Inc. v. Skylink Techs., Inc., 381 F.3d 1178, 1202 (Fed. Cir. 2004) (holding that ‘section 1201 prohibits only forms of access that bear a reasonable relationship to the protections that the Copyright Act otherwise affords copyright owners’); Lexmark Int’l, Inc. v. Static Control Components, Inc., 387 F.3d 522 (6th Cir. 2005) (holding that the lock-out technology at issue did not effectively control access to a copyrighted work); Storage Technology Corp. v. Custom Hardware Eng’g & Consulting, Inc., 421 F.3d 1307 (Fed. Cir. 2005) (holding that decryption (by third-party software repair entity) to perform software maintenance activities is not actionable); but see MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928, 948‒52 (9th Cir. 2010) (finding that only an incidental relation must exist between circumvention and copyright infringement)). i.  GPL 3.0—DRM provision    To bar intellectual property restrictions on software use and promote sharing of code, the FSF added a provision to the GPL 3.0 (released in 2007) barring licensors and those who use the licensed code from enforcing anti-circumvention prohibitions (GNU General Public License 3.0, 2007, § 3). GPL 3.0 has not been as widely adopted as prior GPL versions, particularly among commercial enterprises (Section D(3) (iii); Meeker, 2015, ch. 10). 5.  Software copyright jurisprudence: the Oracle v. Google litigation After the Lotus v. Borland case resolved, litigation subsided over copyright protection for the functional specifications of APIs and other network features of computer software (Menell, 1998). The Sega, Altai, and Borland decisions and software industry norms accorded competitors the ability to develop interoperable code and devices so long as they independently implemented the functional specifications of the target platform (Menell, 2018). If the programs were encrypted or only released in object code form, the competitor would need to reverse engineer the code, which could be costly and timeconsuming. Beyond the drudgery of reverse engineering, copyright did not stand in the way of developing and distributing interoperable code and devices. A shift in business strategy in the Internet Age reinforced these legal principles and industry norms. Whereas most software vendors in the pre-Internet era sought to appropriate a return on their investments directly through software and device sales and licenses, the Internet expanded the potential for multi-sided markets and indirect appropriability—principally through advertising, service plans, and use of customer data (Campbell-Kelly et al., 2015; Evans, 2003; Shapiro and Varian, 1999). These strategies harnessed the positive feedback effects of network technologies. Beginning with Netscape, a growing number of Internet Age entrepreneurs valued adoptions over revenues in the start-up phase of their enterprises. The Internet provided a low-cost means of distributing information and software, goods that had zero marginal reproduction cost. For example, Sun Microsystems released the Java programming language to the public as a means of promoting its hardware sales and forestalling

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Economic analysis of network effects and IP  189 Microsoft’s dominance of website development tools (Menell, 2018). Google developed a robust revenue stream for its search technologies without ever charging users. It profited handsomely from bundling search results with keyword-generated advertisements. Thus, many software and Internet companies welcomed adoption of their platforms, including interoperability with their APIs. Sun Microsystems dedicated the Java programing language to the public domain early on, and in 2006 licensed the Java Standard Edition, Enterprise Edition, and ME platforms—comprising packages of pre-written APIs— under the GPL. Unlike Sega, it published its API specifications for the world to see, adopt, and emulate. Its primary concern was maintaining the WORA interoperability of these platforms. Hence, it required licensees to verify that implementations satisfied the particular Java Technology Compatibility Kit (TCK) test. When Google ventured into mobile platform development, it sought to take advantage of the millions of programmers intimately familiar with Java, the most widely used programming language and platform for web development. But unlike Borland, which sought to achieve perfect interoperability with the Lotus 1-2-3 menu command hierarchy so that Lotus macros could run on Borland’s Quattro system, Google sought to customize Java for the smaller chip size of mobile handsets and add additional features, such as location tools and a camera. Consequently, Google did not plan to include all the Java APIs, which meant that the resulting system would not pass the Java TCK test. Moreover, Google and its open handset alliance partners did not believe that the GPL would provide sufficient flexibility for the range of players it believed would be needed to establish a robust new mobile platform. They worried that the viral share and share alike provision would discourage Google’s handset manufacturer and telecommunications partners from investing in innovative features. The members of the Android Open Handset Alliance believed that a more permissive licensing model, in which downstream suppliers could make proprietary extensions on top of the base platform, would better promote robust competition and innovation. When licensing negotiations between Google and Sun reached an impasse, Google chose to re-implement a subset of Java API packages independently to take advantage of the vast Java programming community and the decade of testing that the Java APIs had undergone. Google did not need to reverse engineer the Java API functional specifications because Sun disclosed them. Nonetheless, Google had to devote substantial resources to re-implementing the code using a clean room process. When Google introduced Android in late 2007, Sun’s CEO publicly praised the adoption of Java. Privately, however, he and other Sun leaders seethed at Google’s cavalier approach and forking of the Java platform. Nonetheless, Sun refrained from blocking Android through legal action (Menell, 2018). With its hardware business in decline and unable to monetize Java, Sun’s viability as an independent company came into question. Oracle Corporation, which had built many of its software products on the Java platform, acquired Sun in 2010. Oracle immediately pressured Google to license Java and when Google declined, sued alleging that Android infringed Java-related patents and copyrights. Oracle focused its copyright claim on Google’s copying of function labels, functional specifications (declarations), and the structure, sequence, and organization of 37 Java API packages. After the jury rejected Oracle’s patent causes of action, the district court ruled that the Java APIs were not copyrightable (Oracle America, Inc. v. Google, Inc., 872 F. Supp. 2d

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190  Research handbook on the economics of IP law volume 1 974 (N.D. Cal. 2012)). Judge Alsup cautioned that the ruling did not hold ‘Java API packages are free for all to use without license’ or that ‘the structure, sequence and organization of all computer programs may be stolen.’ He grounded his decision in the particular and distinctive functional attributes of the 37 Java APIs and that Google independently wrote its own implementing code using a clean room process. The principal copying concerned the lines of declarations, which are necessary to operate the particular methods of the APIs. As Judge Alsup explained, Significantly, the rules of Java dictate the precise form of certain necessary lines of code called declarations, whose precise and necessary form explains why Android and Java must be identical when it comes to those particular lines of code. That is, since there is only one way to declare a given method functionality, everyone using that function must write that specific line of code in the same way. (872 F. Supp. at 979 (emphasis in original))

While acknowledging that the overall structure of the Java API packages is creative, original, and ‘resembles a taxonomy,’ Judge Alsup nonetheless concluded that it functions as ‘a command structure, a system or method of operation—a long hierarchy of over six thousand commands to carry out pre-assigned functions.’ Applying copyright’s limiting doctrines as the Ninth Circuit has interpreted them, emphasizing the Sega decision, and following CONTU’s guidance that when specific computer instructions, ‘even though previously copyrighted, are the only and essential means of accomplishing a given task, their later use by another will not amount to an infringement,’ (872 F. Supp. 2d at 986 (quoting CONTU, 1979, p. 20) (emphasis added by Judge Alsup)), Judge Alsup determined that Google was free to write code that accomplished the same functionality as the Java APIs at issue even if it did not achieve complete compatibility with the full Java platform. Later developers can achieve the particular functionality or method of operation of an API subsystem (and even groups of subsystems) so long as they write their own code and no patent protects that method. Oracle appealed the copyright issues to the US Court of Appeals for the Federal Circuit. (Menell, 2016 (explaining and questioning the Federal Circuit’s jurisdiction over appeals from district court cases involving patent infringement allegations even if neither party challenges the district court’s patent rulings)). The Federal Circuit is bound by regional circuit law when reviewing questions that involve law and precedent not exclusively assigned to the Federal Circuit. Notwithstanding the Ninth Circuit’s holding in Sega and Sony v. Connectix that copyright law does not prohibit the precise coding necessary to achieve interoperability (Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510, 1525 (9th Cir. 1993); Sony Computer Entertainment, Inc. v. Connectix Corp., 203 F.3d at 603 (‘There is no question that the Sony BIOS contains unprotected functional elements’), the Federal Circuit reversed the district court’s determination that the structure, sequence, and organization of the 37 Java APIs were not copyrightable (Oracle America, Inc. v. Google, Inc., 750 F.3d 1339 (Fed. Cir. 2014); Menell, 2018). The appellate court determined that even high-level API design choices—including function labeling choices and compilation of functions—satisfy copyright law’s low originality threshold. The court side-stepped the Sega and Sony cases by construing Ninth Circuit law to hold that ‘copyrightability is focused on the choices available to the plaintiff at the time the computer program was created,’ not the defendant’s desire to achieve interoperability. The court concluded that Google’s interoperability

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Economic analysis of network effects and IP  191 argument comes into play only as part of a fair use defense, an issue on which the jury had hung. Consequently, the court remanded the case for a fair use trial. On remand, the jury concluded that Android’s use of Java API declarations and structure, sequence, and organization constituted fair use. The Federal Circuit once again reversed, holding that the fair use balance tilted in Oracle’s favor (Oracle America, Inc. v. Google LLC, 886 F.3d 1179 (Fed. Cir. 2018)). The Federal Circuit’s decision gives no weight to the second fair use factor based on a questionable reading of Ninth Circuit jurisprudence.3 The Federal Circuit’s decision rejecting Judge Alsup’s API copyrightability ruling is the most significant recent federal appellate decision to confront the copyrightability of APIs. Given the proliferation of software patents, there is a high likelihood that a company with a widely-used set of APIs would be able to pursue both patent and copyright causes of action in the same litigation, thereby bringing the Federal Circuit’s exclusive jurisdiction over patent cases into play. Google is seeking Supreme Court review of both the Federal Circuit’s 2014 API copyrightability decision and its 2018 fair use decision. 6.  Standards and codes Copyright protection extends to any work of authorship fixed in a tangible medium of expression, subject to various limiting doctrines, such as the idea-expression dichotomy and fair use. Standard setting bodies generally promote access to their standards and codes. Sun (and later Oracle) published the Java API declarations. Their members typically wish to encourage widespread adoption of sponsored standards. Some developers of standards seek to control access to their specifications. As reflected in the Sega case, Sega controlled the access codes for the Genesis game platform through trade secret law. After Accolade successfully reverse engineered the interoperability code, Sega sought to bar its use by Accolade (and recover for copyright infringement). The Ninth Circuit held, however, that software code elements necessary for interoperability are unprotectable by copyright law. Various technical, building, and other standards development seek to control access to their work product principally to earn publication royalties. They contend that the royalty income provides vital funding for coordinating standard development, resulting in better formulated and maintained codes (Shannon, 2012). Scholars have questioned the need for copyright protection to promote standards developments. Professor Paul Goldstein contends that ‘[i]t is difficult to imagine an area 3   Oracle America, Inc. v. Google LLC, 886 F.3d 1179, 1205 (Fed. Cir. 2018) (explaining that “[t]he Ninth Circuit has recognized . . . that th[e] second factor ‘typically has not been terribly significant in the overall fair use balancing.’ Dr. Seuss Enters., L.P. v. Penguin Books USA, Inc., 109 F.3d 1394, 1402 (9th Cir. 1997) (finding that the ‘creativity, imagination and originality embodied in The Cat in the Hat and its central character tilts the scale against fair use’); Mattel[, Inc. v. Walking Mountain Prods., 353 F.3d 792, 803 (9th Cir. 2003)] (similar)”). The Federal Circuit’s reliance on Dr. Seuss Enters. and Mattel is misplaced. Those cases addressed familiar children’s stories and dolls; neither involved functional works, let alone computer software. By contrast, the Ninth Circuit’s decisions in Sega (977 F.2d at 1524-27 (9th (extensive discussion of the second factor connecting fair use to Baker v. Selden and § 102(b)) and Sony Comput. Entm’t (203 F.3d at 602-05 (leading its discussion of fair use with the second fair use factor and affording it great significance)), provide a far sounder footing for analyzing fair use in Oracle v. Google.

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192  Research handbook on the economics of IP law volume 1 of creative endeavor in which the copyright incentive is needed less. Trade organizations have powerful reasons stemming from industry standardization, quality control, and self-regulation to produce these model codes; it is unlikely that, without copyright, they will cease producing them’ (Goldstein, 2000, § 2.5.2). The accessibility of edicts of law raises fundamental constitutional and policy questions (Malamud, 2014). Federal, state, and local laws, judicial opinions, and regulations incorporate these codes. The Copyright Act expressly exempts works of the federal government from copyright protection (17 U.S.C. § 105). Court decisions on copyrightability of non-federal edicts of law have been mixed. The Fifth Circuit held that model codes enter the public domain when they enter into law (Veeck v. S. Bldg. Code Congress Int’l, Inc., 293 F.3d 791 (5th Cir. 2002) (en banc)). Building on that precedent, the Eleventh Circuit held that state law and the annotated compilation of such law are sufficiently law-like to be regarded as sovereign work constructively authored by the citizens and thus not copyrightable. (Code Revision Comm’n for General Assembly of Georgia v. Public.Resource.Org, Inc., 906 F.3d 1229, 1233, 1243-54 (11th Cir. 2018). By contrast, the First Circuit recognized that copyright law could potentially protect building codes (Building Officials & Code Admin. v. Code Technology, Inc., 628 F.2d 730, 736 (1st Cir. 1980)). The Ninth Circuit held that incorporation of a classification system (taxonomy) for medical procedures in Medicare and Medicaid regulations does not make them uncopyrightable (Practice Mgmt. Info. Corp. v. American Med. Assoc., 121 F.3d 516, 518–20 (9th Cir. 1997)). Nonetheless, the court held that the copyright misuse doctrine limited the ability of the AMA to enforce its copyright against a health maintenance organization that used the taxonomy to comply with federal law (see Section VI(A)(2)). Most recently, the D.C. Circuit overturned and remanded issuance of a permanent injunction barring a non-profit organization from distributing copies of technical standards produced by a private organization based on copyright and trademark grounds. (American Society for Testing and Materials, et al. v. Public.Resource. Org, Inc., 896 F.3d 437 (D.C. Cir. 2018)). As the court noted, ‘[f]ederal, state, and local governments . . . have incorporated by reference thousands of these standards into law.’ (Id. at 440.). The court avoided a constitutional ruling by finding that the district court ‘failed to adequately consider whether, in certain circumstances, distributing copies of the law for purposes of facilitating public access could constitute transformative use.’ (Id. at 450.). C.  Trademark Protection, Unfair Competition Law, and False Advertising Protection In contrast to patent, copyright, and trade secret protection—which seek to promote innovation—trademark, unfair competition law, and false advertising protection focus primarily on ensuring the integrity of the commercial marketplace (Menell et al., 2017, ch. V; Menell and Scotchmer, 2007). The federal Lanham (Trademark) Act as well as analogous state statutes and common law protects words, symbols, and other attributes, such as designs, slogans, and colors, that serve to identify the source of goods or services. Certification marks certify conformity with centralized standards. Collective marks connote that a product or service is manufactured or distributed by a member of a collective organization (e.g., Florists’

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Economic analysis of network effects and IP  193 Transworld Delivery Association (FTD)) or that a product or service provider is a member of a collective organization (e.g., American Automobile Association (AAA)). To receive trademark protection, a mark need not be new or previously unused, but it must represent a particular source of the good or service to consumers. It cannot merely describe the good (e.g., hotel) or represent a generic term (e.g., thermos) for the class of goods or services offered. Further, the identifying mark may not be a functional element of the product itself but must serve a purely identifying purpose. Trademarks do not expire, but continue in force unless their owner abandons them or they become generic. Unlike patents or copyrights, trademarks do not directly protect the technology, good, or work, but rather prevent others from creating a likelihood of consumer confusion as to the source of goods. Thus, competitors may use the trademark of other companies in nonconfusing ways, such as comparative advertising and descriptive usages. Furthermore, like copyright law, trademark law does not protect functional features of products. Thus, trademark law does not protect the shape of shredded wheat biscuits (Kellogg Co. v. National Biscuit Co., 305 U.S. 111, 122 (1938) (noting that the pillow-shaped form reduces the cost of manufacturing the biscuit and affects its quality)). Patent law provides the sole means of excluding competitors from utilitarian features of products. Similarly, trademark law cannot protect aesthetically functional features of goods or packaging. Thus, trademark law does not protect a red, heart-shaped box for packaging chocolates (Restatement of Torts, § 742, comment a). The Lanham Act and state laws prohibit false or misleading advertising. The Supreme Court applied the functionality doctrine in a case involving network effects (Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844 (1982)). Ives Laboratories manufactured and marketed a patented prescription drug using distinctively colored capsules: a blue capsule for its 200-mg dosage and a combination blue-red capsule for its 400-mg dosage. Consumers and pharmacists came to associate the distinctive appearance of the capsules with the particular patented compound and dosages. Thus, a consumer could identify whether they were taking the proper drug and dosage from its appearance. In that way, the packaging served as a very simple language. Following expiration of the utility patent, generic drug manufacturers marketed the chemical compound using the same color capsules. Ives sued generic drug makers for indirect trademark infringement, alleging that they bore responsibility for pharmacists that mislabeled the source of the drugs. Many pharmacies distribute capsules in pharmacist-branded bottles. The pharmacists violated trademark law by filling requests for Ives capsules with generic versions. The generic companies, however, only bore liability if they intentionally induced pharmacists to infringe the Ives trademark or if it continued to supply its product to pharmacists that it knew were engaging in infringement. In finding that Ives had not proven that the generic manufacturers were indirectly liable for trademark infringement, the Supreme Court observed that ‘a product feature is functional if it is essential to the use or purpose of the article or if it affects the cost or quality of the article’ (456 U.S. at 850, n. 10). A concurring opinion goes further, noting that a finding of functionality offers a complete affirmative defense to a contributory infringement claim predicated solely on the reproduction of a functional attribute of the product. A functional characteristic is ‘an important ingredient in the commercial success of the product,’ and, after expiration of a patent, it is no more the property of the originator than the product itself. It makes no more sense to base contributory infringement upon the copying of

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194  Research handbook on the economics of IP law volume 1 functional colors than on the petitioners’ decision to use the same formulation of the drug, or even to market the generic substitute in the first place. To be sure, the very existence of generic drugs ‘facilitates’ illegal substitution. But Ives no longer has a patent for cyclandelate, ‘and the defendants have a right to reproduce it as nearly as they can.’ Saxlehner v. Wagner, 216 U.S. 375, 380 (1910) (Holmes, J.). Reproduction of a functional attribute is legitimate competitive activity. (Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. at 862–3 (White, J., concurring) (some citations omitted))

Trademark and unfair competition regimes play a variety of roles in controlling and regulating information technology network markets by enabling platform sponsors to regulate the usage of terms and symbols that signal interoperability and compatibility with particular standards and interfaces (Lemley et al., 2011, ch. 4). Platform sponsors and standard setting organizations routinely establish certification and collective markets and use trademark law to police use of these designations. As noted above, Sun Microsystems (and now Oracle Corporation) uses the Java TCK test as well as certification marks to ensure that products using the Java trademark meet WORA interoperability standards. In the mid to late 1990s, Sun used the ‘100% Pure Java’ initiative to establish Java as a de facto industry standard (Floren, 1997). Sun successfully sued Microsoft for violating its agreement not to adhere to Java’s standardized application environment and compliance tests so as to ensure interoperability (Sun Microsystems, Inc. v. Microsoft Corp., 87 F. Supp. 2d 992 (N.D. Cal. 2000)). Platform sponsors have used trademark and false advertising law to combat confusing product names or packaging and police compatibility and interoperability claims. Apple Computer, for example, successfully prevented a competitor for using the term ‘Pineapple’ for its clone device (Apple Computer v. Formula Int’l, 562 F. Supp. 775 (C.D. Cal. 1983)). As another example, Hewlett-Packard blocked an ink refiller from using confusingly similar packaging for replacement cartridges (Hewlett-Packard Co. v. Nu-Kote Intern., Inc., 2000 WL 33992123 (N.D. Cal. 2000)). In an interesting application of trademark’s genericide doctrine, Intel Corporation sought to protect the ‘x86’ suffix from confusing use by a competitor. The court determined, however, that the ‘x86’ designation had become generic among buyers and sellers of microprocessor chips (Intel v. Advanced Micro Devices, 765 F. Supp. 1292 (N.D. Cal. 1991)). Consequently, Intel designated its fifth generation design the Pentium. By contrast, notwithstanding the serious questions a court raised about whether ‘Windows’ was generic for a graphical user interface, (Microsoft Corp. v. Lindows.com, Inc., 2002 WL 32153471 (W.D. Wash. 2002)), Microsoft obtained federal registration for the Windows term. Google has successfully fended off claims that ‘google’ has become a generic term for Internet search (Elliott v. Google, Inc., 860 F.3d 1151 (9th Cir. 2017)). Platform sponsors and complementary product manufacturers have used trademark and false advertising law to police use of compatibility and interoperability claims. In Princeton Graphics Operating, L.P. v. NEC Home Electronics (U.S.A.), Inc., 732 F. Supp. 1258 (S.D.N.Y. 1990), the court applied a restrictive definition of compatibility because of the importance of precise definitions in the computer industry (see also Creative Labs, Inc. v. Cyrix Corp., 42 U.S.P.Q. 2d 1872 (N.D. Cal. 1997)). In another interesting application of trademark law’s functionality doctrine, the Ninth Circuit declined to allow Sega to use trademark law to prevent Accolade from selling interoperable products that displayed Sega’s trademark as part of its lock-out code (Sega

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Economic analysis of network effects and IP  195 Enterprises, Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992)). The basis for the ­trademark claim was that the initialization code prompted a visual display for approximately three seconds that read ‘PRODUCED BY OR UNDER LICENSE FROM SEGA ENTERPRISES LTD.’ The court rejected the false labeling claim as inconsistent with the purposes of the Lanham Act. It also held that Sega could not use trademark law to prevent competitors from marketing interoperable devices if the software design required display of what might otherwise be confusing trademark information. The court ruled that Sega failed to prove the existence of a feasible alternative to using the particular lock-out code that produced the misleading label. Furthermore, Accolade had placed text on its packaging materials disclaiming any association with Sega. D.  Patent Protection Patents have long provided the potential for exclusive rights for network technologies. For example, Alexander Graham Bell, who edged out Elisha Gray in a patent race over the telephone, gained monopoly control over the quintessential network technology (Bruce, 1990). As the Supreme Court noted in Dolbear v. Am. Bell Tel. Co., 126 U.S. 1, 535 (1888), although an inventor’s claim might practically preempt all use of a discovery for the duration of the patent, this fact will ‘show more clearly the great importance of his discovery, [] it will not invalidate [the preempting] patent.’ Patents tracing back to Guglielmo Marconi wireless communications technology played a central role in the developments of the radio and television industries (Aitken, 1985). Xerox controlled the photocopying industry for several decades in the mid-20th century. Intel built its microprocessor juggernaut on patents. Other network technology industries—from modems (Gandal et al., 2007) to cell phones (Code Division Multiple Access (CDMA)) (Mock, 2005)—were built on patent portfolios. Concern over patents affects many standard setting processes (Contreras, 2019). The extent to which patents enable control of network technologies depends on a range of factors, including the extent to which the patent controls network features (patent scope), the effective duration of patent protection, licensing structures (including patent pools) (Mattioli, 2019), and antitrust constraints. The advent of computer software introduced several additional complicating factors. As courts limited copyright protection for network features of computer software and the Federal Circuit expanded patent eligibility for software-related inventions in the 1990s, the patent system emerged as a battleground for software-related network technologies. Patent law’s higher protection threshold compared to other intellectual property modes seeks to ensure that trivial advances remain available to the public while potentially providing substantial advances robust protection, thereby motivating platform developers to take on the challenge of overcoming the excess inertia of entrenched, but obsolete, platforms. Patent law’s disclosure requirements enable the public to learn from technological advances. Nonetheless, patent protection’s 20-year duration, although far less than copyright protection, might still be excessive for software technologies (Menell, 1987). The uncertain scope of patent protection also poses some concern. Patent remedies can be especially strong, although standard setting processes have tempered their effects and promoted collaboration. Finally, design patent protection has recently added a new weapon to the network technology arsenal.

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196  Research handbook on the economics of IP law volume 1 This section examines patent protection for network technologies. It emphasizes the most salient and contested area: computer software. Section 1 traces the evolution of patent protection for software-related inventions. Section 2 examines the complicated scope of patent protection. Section 3 discusses patent licensing. Section 4 explores patent remedies. Section 5 examines design patents and their emergence in network markets. 1.  Patentability requirements The Patent Act sets forth five patentability requirements: (1) patentable subject matter; (2) utility; (3) novelty; (4) nonobviousness; and (5) disclosure (35 U.S.C. §§ 101, 102, 103, 112; Menell et al., 2017, ch. III). Two of these requirements have been particularly pertinent to network industries: subject matter eligibility and nonobviousness. i.  Subject matter eligibility   As noted above, the patent system has long afforded protection for network and systems technologies, ranging from the telephone to wireless communication and xerography. These technologies fit comfortably within the traditional scope of patent protection. The patent system has, however, struggled to accommodate software-related inventions. As illustrated above, APIs and other software technologies are increasingly important in network industries. Notwithstanding that the patent statute expressly authorizes patenting of processes and machines (35 U.S.C. § 101), the availability of patent protection for software-related inventions has been in flux since the beginning of the computer age. The issue emerged in the 1960s as computer systems became more versatile, software languages developed, and computer programming emerged from the shadow of electrical engineering. The Patent Office struggled to fit software inventions within the traditional classification system and struggled to keep up with the tremendous volume of prior art being generated. In 1965, President Johnson appointed a commission to assess the overall efficacy of the patent system (Executive Order No. 11,215, 30 Fed. Reg. 4661 (1965)). In recommending that Congress exclude computer programs from patent eligibility, the Commission of government officials, leading scientists, and representatives of industry (including IBM) noted that ‘the creation of programs has undergone substantial and satisfactory growth in the absence of patent protection’ and that ‘copyright protection for programs is presently available’ (President’s Commission on the Patent System, 1967). But as discussed above, copyright excluded protection for functional features of expressive works. Congress did not act on this recommendation, and the eligibility of software-related inventions fell to the Patent Office and the courts. Although granting a smattering of software-related inventions in the mid to late 1960s, the Patent Office took a skeptical view of software eligibility. This in part reflected concerns about the Patent Office’s ability to examine this new and rapidly developing technological field. The Supreme Court was soon brought into the fray. An inventor challenged the PTO’s rejection of his claim to an algorithm that converted binary-coded decimal numerals into pure binary numerals on subject matter grounds (Gottschalk v. Benson, 409 U.S. 63 (1972)). The Court held that ‘[p]henomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work’ (409 U.S. at 67). The Court noted, however, it was not categorically excluding software-related inventions from patent eligibility. Yet six years later, the Court ruled that even newly discovered algorithms should be treated as in the

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Economic analysis of network effects and IP  197 prior art, rendering software claims ineligible unless they contained some other inventive concept (Parker v. Flook, 437 U.S. 584, 594 (1978)). The Supreme Court reversed course in 1980, holding that software claims should be viewed as a whole and that the touchstone for patentability of a process embodying a mathematical formula was whether there was significant post-solution activity, that is, ‘transforming or reducing an article to a different state or thing’ (Diamond v. Diehr, 450 U.S. 175, 188–9, 191–2 (1981)). Over the ensuing 25 years, the Court of Appeals for the Federal Circuit loosened patent eligibility limitations. Building on Diehr, the Federal Circuit chipped away at the postsolution activity necessary to bring software-related claims within § 101 (In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) (holding that the display of data on a computer screen could suffice)). In 1998, the Federal Circuit held that business methods were eligible for patent protection so long as they produced a ‘useful, concrete, and tangible result’ (State Street Bank v. Signature Financial Group, 149 F.3d 1368, 1373 (Fed. Cir. 1998) (quoting In re Alappat)). In the aftermath of the Federal Circuit’s State Street Bank decision, the PTO shifted its position from skepticism about expansive patent eligibility to openness and even enthusiasm. Patents for software and business methods flooded the PTO. Entrepreneurs and venture capitalists saw patenting as a valuable tool for developing (or at least claiming) Internet businesses. The late 1990s witnessed unprecedented growth of start-up businesses based on speculative initial public offerings secured, in part, on patent portfolios. The bursting of the Internet (dot-com) stock bubble in 2000 produced a dramatic shakeout. Bankruptcies and, subsequently, the auctioning and trading of Internet-related patents, became widespread. Entities whose sole purpose was to assert these patents emerged. Patent holding companies and non-practicing entities sought to monetize their Internet patents, often purchased at bankruptcy auctions. Lawsuits by patent assertion entities produced a tidal wave of patent validity challenges as well as calls by Silicon Valley companies, policymakers, and scholars for policy reform. These concerns led the Federal Circuit to reinvigorate patent eligibility limitations (see, e.g., In re Nuijten, 500 F.3d 1346 (Fed. Cir. 2007) (holding that a watermarked electromagnetic signal does not fall into any of the four categories of patent-eligible subject matter); In re Comiskey, 554 F.3d 967 (Fed. Cir. 2009) (affirming rejection of a business method patent under § 101 as merely relying on mental steps)). In an en banc ruling, the Federal Circuit synthesized the Supreme Court’s Benson, Flook, and Diehr precedents into the ‘machine-or-transformation test’: a claimed process is patent-eligible under § 101 if it is tied to a particular machine or if it transforms a particular article into a different state or thing (In re Bilski, 545 F.3d 943, 961 (Fed. Cir. 2008) (en banc)). Applying this test, the Federal Circuit affirmed the Patent Office’s rejection of a claim for a method for managing the consumption risk costs of a commodity. The Supreme Court upheld the Federal Circuit’s decision, although it characterized the machine-or-transformation test as a ‘useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under § 101,’ but too rigid a test of the Patent Act’s broad statutory definition of ‘process’ (Bilski v. Kappos, 561 U.S. 593, 604 (2010); 35 U.S.C. § 100(b)). The Court declined to rule that business methods are categorically ineligible for patent protection (Menell, 2011). Two years later, the Supreme Court revived the Flook decision’s rule that for a claim embodying a natural discovery or algorithm to be eligible for patentability, it must

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198  Research handbook on the economics of IP law volume 1 contain a sufficiently inventive concept beyond the natural law or algorithm, even where the ­patentee discovered the natural law or algorithm (Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 66 (2012); Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014)). These decisions have dramatically shifted the patent eligibility landscape, resulting in the invalidation of a vast swath of software-related claims and eliminating patent protection for pure business methods. The decisions have also reduced the availability of patent protection for software-based network technologies. ii. Nonobviousness  To ensure that patents are not granted to routine or conventional applications of known principles, the Patent Act requires that ‘the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the [invention was made] to a person having ordinary skill in the art to which the claimed invention pertains’ (35 U.S.C. § 103). This requirement has long been difficult to apply due to the difficulty of ignoring the fact of the claimed invention. To avoid such hindsight bias, the Federal Circuit interpreted § 103 to require that the prior art teach, suggest, or motivate ordinary skilled artisans to combine prior art references to achieve the claimed invention. Absent such evidence, the claimed invention was nonobvious (Teleflex, Inc. v. KSR Intern. Co., 119 Fed. Appx. 282 (Fed. Cir. 2005); In re Dembiczak, 175 F.3d 994, 998 (Fed.Cir.1999); Application of Bergel, 292 F.2d 955, 956–7 (C.C.P.A. 1961) (predecessor court to the Federal Circuit)). While such suggestions can be relatively common in scientific publications—through cross-references of other publications—they are not readily found in more commercial and applied fields, such as software engineering. Software products do not typically cross-reference other products. As a result, many seemingly obvious inventions from the standpoint of common knowledge were able to clear the Federal Circuit’s nonobviousness test. As software patent litigation exploded following the burst of the Internet bubble in 2000, the Federal Circuit’s standard for determining whether an invention was sufficiently inventive came under scrutiny. In KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007), the Supreme Court tightened the nonobviousness standard by holding that the teachingsuggestion-motivation test was too rigid. When there is a design need or market pressure to solve a problem and there are a finite number of identified, predictable solutions, a person of ordinary skill has good reason to pursue the known options within his or her technical grasp. If this leads to the anticipated success, it is likely the product not of innovation but of ordinary skill and common sense. In that instance the fact that a combination was obvious to try might show that it was obvious. (550 U.S. at 421)

The KSR decision raised the patentability bar, especially for software-related technologies for which market factors and advances in collateral technologies are likely to drive new products and processes. 2. Scope The extent to which patents control network technologies depends upon the scope of the patent claims. Pioneering patents can stake broad claims without fear of being anticipated by prior art, whereas incremental inventions in crowded technology fields only garner narrow protection. Moreover, pioneering inventors can often develop improvement patents that expand their control and duration of protection. Xerox successfully followed

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Economic analysis of network effects and IP  199 this strategy to monopolize the photocopying industry for several decades (Scherer, 1987, at 1016–17; Bresnahan, 1985). The resulting ‘patent thicket’ delayed entry into the plain paper copy industry. Software patentees have used broad, vague functional claim language to obtain broad coverage for their inventions (Menell and Meurer, 2013; Federal Trade Commission, 2011). By avoiding the statutory phrases ‘means’ or ‘step’ in their claims—which limit the scope of their claims to the particular embodiments in the specification and ‘equivalents thereof’ (35 U.S.C. § 112(f))—and instead using broad terms that lack structural limits such as ‘module,’ patent drafters have sought to control all software solutions to particular technological problems (Lemley, 2013). Such claims have caused substantial problems in the Internet Age, and have resulted in a proliferation of demand letters, costly litigation, and nuisance value settlements. The courts and the PTO have sought to rein in these problems. The Supreme Court invigorated the claim indefiniteness doctrine, enforcing the patent statute’s requirement to ‘particularly point[] out and distinctly claim[] the subject matter’ sought to be patented (35 U.S.C. §  112(b); Nautilus, Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014); Menell and Meurer, 2013). The Federal Circuit has interpreted claims terms like ‘module’ and other vague terms (which it refers to as ‘nonce’ words) to invoke the limitations of § 112(f) (Williamson v. Citrix Online LLC, 792 F.3d 1339 (Fed. Cir. 2015) (en banc)). This interpretation limits claim scope to the embodiments in the specification and equivalents thereof. Further upstream, the Patent Office is pursuing administrative efforts to improve claim clarity (General Accountability Office, 2016; Menell, 2013). 3. Licensing Patent licensing plays a critical role in many network industries. Patents afford patent owners the power to prevent others from making, using, offering to sell, selling, or importing the patented invention in the United States during the term of the patent (35 U.S.C. § 271). They do not, however, ensure that patentees can practice their own patented invention. The owner of a patent that improves on patented technologies controlled by others would need a license from the upstream patent owner to make, use, or sell the improvement. Licensing provides the key. Many network technologies employ patented technologies. Several distinctive licensing issues have developed to address network effects: (i) standard setting and commitments to license patents on FRAND terms; (ii) insurance pools and license on transfer commitments; and (iii) GPL viral license commitments. Over-reaching licensing provisions can raise misuse and antitrust issues addressed in Section VI. i.  Standard setting and FRAND commitments   SSOs seek to lessen the tension between employing the best technological solutions in industry standards and ensuring widespread access to standards by requiring members to disclose SEPs and license them on FRAND terms (Contreras, 2019; National Research Council, 2013). Most SSOs, however, have not expressly barred injunctive relief or set FRAND licensing schedules. In 2015, the IEEE barred its members from holding patents covering IEEE standards from seeking or threatening to seek injunctions or exclusion orders against potential licensees who are willing to negotiate for licenses (IEEE, 2015).

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200  Research handbook on the economics of IP law volume 1 ii.  Insurance pools and license on transfer (LOT) commitments   In response to widespread assertion of patents by non-practicing entities following the bursting of the Internet bubble in early 2000, several enterprises emerged to reduce patent risk (Rice, 2015, pp. 752–3). Since 2008, RPX (Rational Patent Exchange) Corporation has functioned as a consortium of technology companies that acquires patents that pose potential risks. RPX has promised not to assert patents in its portfolio. As a further pre-commitment strategy to prevent patent holdup, a growing number of technology companies have promised not to assert their patents under specified conditions (Rice, 2015, pp. 747–52). Google has led an initiative whereby companies agree to prevent their patents from ever being used by a non-practicing entity (NPE) against other member companies through a license on transfer (LOT) pledge (Rice, 2015; Shultz and Urban, 2012). The LOT network produces a network benefit. As more companies join the pact, the freedom to be insulated from NPE patent assertion entities expands. iii.  GPL 3.0    As noted earlier, patents did not play a substantial role in the software industry until the mid-1990s, after the GPL (1989) and the GPL 2 (1991) were established. Although neither of these versions of the GPL expressly licensed patents, the FSF took the position that the GPL 2 created an implied license (Meeker, 2015, p. 127). GPL 3.0 took aim at this issue. Section 10 provides that the licensee may not impose any further restrictions on the exercise of the rights granted or affirmed under this License. For example, you may not impose a license fee, royalty, or other charge for exercise of rights granted under this License, and you may not initiate litigation (including a cross-claim or counterclaim in a lawsuit) alleging that any patent claim is infringed by making, using, selling, offering for sale, or importing the Program or any portion of it.

Section 11 goes further: each ‘contributor’ to code governed by the GPL 3 grants a ‘a nonexclusive, worldwide, royalty-free patent license under the contributor’s essential patent claims, to make, use, sell, offer for sale, import and otherwise run, modify, and propagate the contents of its contributor version.’ That provision defines a contributor’s ‘essential patent claims’ to include ‘all patent claims owned or controlled by the contributor, whether already acquired or hereafter acquired, that would be infringed by some manner, permitted by this License, of making, using, or selling its contributor version.’ Section 11 does not extend to ‘claims that would be infringed only as a consequence of further modification of the contributor version.’ Section 11 further provides that a licensee who is aware of a patent license governing GPL 3.0 code must make the corresponding source code to run the object code and modify the work publicly available or extend the patent license to downstream recipients. Alternatively, the licensee must deprive itself of the benefit of the license. Section 11 further includes a non-discrimination provision ensuring that any patent licenses are extended to all recipients of the GPL 3 work and works based on it. These provisions pose several serious concerns to many commercial software developers (Meeker, 2015, pp. 129–30). For example, many patent litigation settlements provide only limited, non-sublicensable, and possibly royalty-bearing rights that would not comply with GPL 3.0 requirements. Thus, commercial enterprises have been reluctant to embrace GPL 3.0. As of February 2017, GPL 3.0 was the fourth most widely adopted open source license (8 percent of open source projects), behind the MIT License (a simple

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Economic analysis of network effects and IP  201 permissive) (31 percent), GPL 2.0 (18 percent), and Apache 2.0 (15 percent) (Black Duck Opensource Knowledge Base, 2017; see also Goldstein, 2018 (noting that use of permissive open source licenses are on the rise; reporting that in 2018, 64 percent of open source components have permissive licenses, an 8 percent rise over 2017). 4. Remedies Patent remedies play a critical role in the control of network technologies that are subject to patent assertions. The proliferation of software patents and litigation in the Internet Age generated tremendous exposure for network industry companies, leading to calls for statutory reform of patent remedies (Federal Trade Commission, 2011, 2003). i.  Injunctive relief    The patent right—the right to exclude others from practicing the patented technology— has historically been protected by injunctive relief. Courts traditionally viewed patent rights like other property interests and routinely protected them through a ‘property’ rule—barring transgressors from trespassing or using the ‘property.’ Thus, for most of the history of patent law, courts awarded a permanent injunction as the prospective infringement remedy absent extraordinary circumstances. The embrace of software and business method patents during the dot-com bubble of the mid to late 1990s gave way to concerns about injunctions threatening major technology companies in the aftermath of the NASDAQ market crash in the early 2000s. Patents that had been acquired to attract venture capital were auctioned off in bankruptcy sales to patent monetization entities. The proliferation of demand letters and patent lawsuits led scholars, technology companies, policymakers, and jurists to reconsider the traditional view of patents as property interests that deserve near-automatic injunctive relief (Lee and Melamed, 2016; Menell, 2007, 2011; Lemley and Shapiro, 2007a). The costs of identifying patent holders, negotiating among potentially hundreds of patent holders, and the disruption and delay of litigation created leverage for patent owners. The threat of injunctive relief and high monetary damages enabled holders of dubious patents to extract unwarranted and disproportionate value. In a watershed decision, the Supreme Court ruled in eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), that the award of injunctive relief in patent cases turns on balancing of the traditional equitable factors associated with preliminary relief: (1) whether the harm is irreparable; (2) adequacy of monetary damages to compensate for the harm; (3) balance of hardships between the parties; and (4) the public interest. (Gergen et al., 2012, at 208–9). The eBay decision has changed patent remedies dramatically. Seaman (2016) finds that the overall rate of permanent injunctions being ordered as a remedy for patent infringement has dropped from near 100 percent to 72.5 percent. The drop is most significant in software cases (53 percent). Patent assertion entities (i.e., non-practicing patent owners) obtained permanent injunctions in just 16 percent of their victories. Courts take SSO FRAND commitments into account in evaluating requests for injunctive relief under the eBay standard. Although many SSO policies do not expressly address whether SEP owners can seek injunctive relief or exclusion orders, courts consider FRAND commitments in weighing the irreparable harm prong of the eBay equitable relief test (Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1331–32 (Fed. Cir. 2014) (noting that absent unusual circumstances, such as an infringer refusing a FRAND royalty or unreasonably delaying negotiations, it will be difficult for a patent owner subject to a

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202  Research handbook on the economics of IP law volume 1 FRAND commitment to establish irreparable harm or that damages are not an adequate remedy, and that even when an infringer has refused to accept any license offer, that does not necessarily justify injunctive relief); cf. Apple Inc. v. Samsung Elecs. Co., 809 F.3d 633 (Fed. Cir. 2015) (emphasizing right to exclude and the importance of injunctions)). The eBay decision does not, however, leave the patent owner without a prospective remedy. The court will fashion a prospective monetary damage measure, such as a running royalty or a permanent damage amount—essentially a compulsory license. The eBay decision has led to a rise in patent enforcement filings at the International Trade Commission, which enforces infringement findings with exclusion orders barring importation of infringing articles (Chien and Lemley, 2012). ii.  Monetary relief   The Patent Act authorizes the award of ‘damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer’ (35 U.S.C. § 284). Thus, patentees can recover lost profits or a reasonable royalty resulting from infringing activity. The Patent Act further authorizes judges to increase damages awards up to three times the compensatory level where the infringer has acted willfully or recklessly (35 U.S.C. § 284; Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016)). Policymakers and scholars see the goal of patent damages to restore the parties to the position they would have achieved had they negotiated a patent license before the infringement occurred (Lee and Melamed, 2016). Patent law has long struggled to deal with apportioning patent value when a patent covers only one component of a larger product or system (Cincinnati Car Co. v. New York Rapid Transit Corp., 66 F.2d 592, 593 (2d Cir. 1933) (Learned Hand, J.) (observing that the allocation of profits among multiple components ‘is in its nature unanswerable’)). The problem has become particularly acute in platform technologies involving multiple components and patented technologies. The serial nature of patent litigation, the economic complexity of multi-component products, and court-imposed time limits on the presentation of evidence make it difficult for juries to apportion value among multiple components and factors driving market demand for infringing products (Graham et al., 2017). In theory, a wide range of royalty bases can be used with appropriately calibrated royalty rates to account for the myriad factors affecting consumer demand. In practice, however, the open-ended nature of the inquiry (Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) (identifying 15 factors)) can lead to a very large royalty range across comparable cases. The Federal Circuit has sought to rationalize awards by using the smallest saleable patent-practicing unit (SSPPU), as opposed to the entire market value of the product or system, as the royalty base (LaserDynamics Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012); Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279 (N.D.N.Y. 2009) (Rader, J., sitting by designation); Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1320 (Fed. Cir. 2011); Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009); Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014) (citing VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014) (‘[W]here multicomponent products are involved, the governing rule is that the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more’))). As noted above, SSOs have sought to alleviate the tension between technological progress and widespread access to standards by requiring members to disclose SEPs during

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Economic analysis of network effects and IP  203 the standard setting process and license them to standards implementers on FRAND terms (National Research Council, 2013). Nonetheless, the valuation of SEPs is difficult, especially when industry standards encompass multiple technologies and hundreds of patents. The challenge lies in separating the value of the particular technologies and patents from the often tremendous value from standardization, which is attributable to network effects. Once consumers adopt a product, they become locked in to the standard to varying degrees. This can provide patentees with tremendous leverage. Courts have surmounted this challenge by interpreting the principal goal of standard setting agreements to be widespread adoption of the standard and barring FRAND licensors from capturing the coordination and network value of the standard (CSIRO v. Cisco Sys., Inc., 809 F.3d 1295 (Fed. Cir. 2015); Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1229–35 (Fed. Cir. 2014); Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 U.S. Dist. LEXIS 60233, 2013 WL 2111217 (W.D. Wash. April 25, 2013); In re Innovatio IP Ventures LLC Patent Litig., No. 11 C 9308, 2013 U.S. Dist. LEXIS 144061, 2013 WL 5593609 (N.D. Ill. October 3, 2013)). 5.  Design patents Design patents—which afford 15 years of protection for ‘new, original and ornamental designs for an article of manufacture’ (35 U.S.C. § 171)—have come into play in some network technology markets. As with copyright and trademark protection, design patents do not extend to the functionality of useful articles (Buccafusco and Lemley, 2016; Du Mont and Janis, 2012). Only utility patent protection can protect such elements. Separating ornamental from functional features has proven difficult. The Federal Circuit will invalidate a design patent only if the claimed design is dictated solely by the function of the article of manufacture (Best Lock Corp. v. Ilco Unican Corp., 94 F.3d 1563, 1566 (Fed. Cir. 1996)). Some decisions have applied a looser balancing test: asking whether a design is ‘primarily functional’ (L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1123 (Fed. Cir. 1993) (‘[T]he utility of each of the various elements that comprise the design is not the relevant inquiry with respect to a design patent. In determining whether a design is primarily functional or primarily ornamental the claimed design is viewed in its entirety, for the ultimate question is not the functional or decorative aspect of each separate feature, but the overall appearance of the article, in determining whether the claimed design is dictated by the utilitarian purpose of the article’); Lee v. Dayton-Hudson Corp., 838 F.2d 1186, 1188 (Fed. Cir. 1988)). The difficulty lies in the fact that functionality is often intertwined with ornamentality, especially in minimalist designs that merge form with function. Furthermore, compilations of design features can themselves be functional. Some Federal Circuit decisions address this challenge by dissecting the claimed design through a process that aligns with copyright law’s treatment of the idea-expression dichotomy (see Section V(B)(2) (i)). Thus, if a claimed design contains ‘both functional and ornamental features, the patentee must show that the perceived similarity is based on the ornamental features of the design’ (OddzOn Prods., Inc. v. Just Toys, Inc., 122 F.3d 1396, 1405 (Fed. Cir. 1997). The courts ‘factor[] out the functional aspects of [the claimed design] as part of its claim construction’ (122 F.3d at 1405; Richardson v. Stanley Works, Inc., 597 F.3d 1288, 1293 (Fed. Cir. 2010)). This approach, however, is in tension with the Federal Circuit’s holding that claimed designs should be evaluated as a whole (Egyptian Goddess, Inc. v. Swisa,

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204  Research handbook on the economics of IP law volume 1 Inc., 543 F.3d 665, 679 (Fed. Cir. 2008) (en banc) (rejecting focusing on a design’s ‘pointof-novelty’; Crocs, Inc. v. Int’l Trade Comm’n, 598 F.3d 1294, 1302–03 (Fed. Cir. 2010)). Some decisions have suggested that courts can surmount the separability challenge by considering whether the protected design represents the best design; whether alternative designs would adversely affect the utility of the specified article; whether there are any concomitant utility patents; whether the advertising touts particular features of the design as having specific utility; and whether there are any elements in the design or an overall appearance clearly not dictated by function. (Berry Sterling Corp. v. Pescor Plastics, 122 F.3d 1452, 1456 (Fed. Cir. 1997); see also PHG Techs., LLC v. St. John Cos., 469 F.3d 1361 (Fed. Cir. 2006))

This standard parallels an earlier formulation of trademark law’s functionality doctrine (In re Morton-Norwich Prods., Inc., 671 F.2d 1332, 1340-41 (C.C.P.A. 1982); see also Amini Innovation Corp. v. Anthony Cal., Inc., 439 F.3d 1365, 1371 (Fed. Cir. 2006) (stating that an ‘aspect’ of a patented design is functional ‘if it is essential to the use or purpose of the article or if it affects the cost or quality of the article,’ a trademark functionality standard articulated in Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 850, n.10 (1982), discussed in Section V(C)). This approach reflects a concern with design patents preempting competition. A design is functional if there are no alternative designs that accomplish a function equally well (Rosco, Inc. v. Mirror Lite Co., 304 F.3d 1373, 1378 (Fed. Cir. 2002) (reasoning that ‘if other designs could produce the same or similar functional capabilities, the design of the article in question is likely ornamental, not functional’); Seiko Epson Corp. v. Nu-Kote Int’l, Inc., 190 F.3d 1360, 1368 (Fed. Cir. 1999) (explaining that ‘the design must not be governed solely by function, i.e., that this is not the only possible form of the article that could perform its function’); L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1123 (Fed. Cir. 1993) (‘When there are several ways to achieve the function of an article of manufacture, the design of the article is more likely to serve a primarily ornamental purpose’)). The Federal Circuit applied these principles in a case involving interoperability. In Best Lock Corp. v. Ilco Unican Corp., 94 F.3d 1563 (Fed. Cir. 1996), Best Lock claimed an unusual profile for a key blade blank, the form used for manufacturing (cutting) keys. Ilco distributed key blanks with that key blade shape. The Federal Circuit found that function alone dictated the key blade design because ‘no alternative blank key blade would fit the corresponding lock’ (94 F.3d at 1566). The integration of form and function in many product markets has brought design patents into play in some network technology markets. Most notably, Apple successfully asserted design patents covering the rounded rectangular shape of mobile communications devices against Samsung (Apple Inc. v. Samsung Elecs. Co., 786 F.3d 983 (Fed. Cir. 2015)) (holding that iPhone and iPad designs were functional (and hence unprotectable under trademark law) but not functional under design patent law). Technology companies and designers have also obtained design patents on virtual designs, patents that cover the designs of graphical user interfaces for smartphones, tablets, and other products, as well as the designs of icons or other artifacts of various virtual environments (Du Mont and Janis, 2012). The strong monetary remedies available for design patents further encourages seeking design patents to protect features of network technologies. The Patent Act provides

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Economic analysis of network effects and IP  205 for recovery of the ‘total profit’ on the sale of ‘any article of manufacture to which [a protected design] has been applied’ (35 U.S.C. § 289). Although the Supreme Court held that the term ‘article of manufacture’ encompasses both a product and a component of that product (Samsung Elecs. v. Apple Inc., 137 S. Ct. 429 (2016)), the apportionment of damages in design patent cases is uncertain.

VI. INTERPLAY OF INTELLECTUAL PROPERTY PROTECTION AND COMPETITION POLICY IN NETWORK INDUSTRIES The Sherman Antitrust Act prohibits contracts in restraint of trade and monopolization or attempts to monopolize markets. The courts have long recognized that patent and copyright protections—government-authorized rights to exclude others from using protected technologies and copying works of authorship—as exceptions to antitrust law. Yet, patent and copyright protections can concentrate economic power in ways that undermine competition. This is especially true in network technology markets, where positive feedback effects often lead to strong and durable monopolies. At the same time, high concentration can promote desirable network effects. These considerations ameliorate and complicate the interplay of intellectual property protection and competition policy. Section A explores limitations on improper leveraging of intellectual property rights that arise in private enforcement of intellectual property and contracts. Section B examines public enforcement of antitrust law and competition policy in network markets. A.  Private Enforcement Courts have recognized limits on the exercise of patent and copyright protection that apply with special force in network industries. As we have already seen, various internal intellectual property doctrines—such as copyright’s fair use doctrine and the use of equitable balancing in dispensing remedies—bring competition policy concerns into intellectual property law. In addition, courts have developed equitable and contract-based defenses to prevent anti-competitive abuses of intellectual property rights. 1.  Misuse doctrines Drawing on tort law’s ‘unclean hands’ doctrine, courts developed the patent misuse doctrines as a common law equitable defense to an infringement claim (Bohannan, 2011). Unlike the purely equitable defense of ‘unclean hands,’ the misuse doctrines apply to suits for damages as well as equitable relief. The misuse doctrine bars patent owners from expanding the scope or term of the intellectual property right through licensing restrictions. The Supreme Court prevented Thomas Edison from leveraging a patent on motion picture projectors to control what films could be exhibited using that projector (Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917) (refusing to enforce a licensing provision restricting use of the machine to motion pictures licensed by Edison’s film company); see also Carbice Corp. v. American Patents Development Corp., 283 U.S. 27 (1931); Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942)). The doctrine bars

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206  Research handbook on the economics of IP law volume 1 enforcement of the patent until the anti-competitive effects of the restriction have been purged. The patent misuse doctrine applies whether or not an antitrust violation has been established. The expansion of the patent misuse doctrine in the 1940s led Congress to exclude contributory patent infringement claims from the ambit of patent misuse in the 1952 Patent Act. (35 U.S.C. § 271(d)(1)–(3)). Nonetheless, the uncertain scope and severe remedy of patent misuse continued to generate criticism, especially as economists and courts came to question categorical antitrust prohibitions in favor of rule of reason balancing (Hovenkamp, 2015, 2017; Bohannan, 2011; Lemley, 1990; but see Feldman, 2003; Merges, 1988 (noting that ‘the often very limited (or “thin”) markets for patented technology make it difficult to apply antitrust law’s consumer-demand definition of the relevant market’)). Congress amended the Patent Act in 1988 to codify two additional patent misuse limitations (Patent Misuse Reform Act of 1988, Pub. L. No. 100-703, 102 Stat. 4674 (H.R. 4972)). Congress insulated refusals to license any rights to a patent from charges of patent misuse (35 U.S.C. § 271(d)(4)). This provision, however, can effectively be side-stepped through contract, such as a FRAND commitment. In that circumstance, the third-party beneficiary of the SSO agreement has a breach of contract action for failure to license SEPs on FRAND terms (see Section VI(A)(4)). Furthermore, Congress barred application of the patent misuse doctrine to tying arrangements unless the patentee has market power in the relevant market for the patent or has patented tying a product on which the license or sale is conditioned (35 U.S.C. § 271(d)(5)), thereby bringing patent misuse more closely in line with antitrust liability (Hovenkamp, 2017). The courts have struggled to disentangle patent misuse doctrine from antitrust analysis (Bohannan, 2011; Feldman, 2003; Mueller, 2002; Pitofsky, 2001). Although the two fields share common concerns, the misuse doctrine has sought to promote intellectual property policies of encouraging innovation, freedom to operate outside of intellectual property protections, and access to the public domain even when objectionable practices do not violate antitrust law (Bohannan, 2011). In a case echoing the Motion Picture Patents case, a music copyright licensor sought to require theaters to obtain a performance license before they even knew what music would be incorporated into the films they would show (M. Witmark & Sons v. Jensen, 80 F. Supp. 843 (D. Minn. 1948), appeal dismissed sub nom., M. Witmark & Sons v. Berger Amusement Co., 177 F.2d 515 (8th Cir. 1949)). The district court found that such a license agreement improperly asserted control over all films and hence constituted copyright misuse. As a result, the court barred enforcement against the theater owner. As the emergence of computer software brought copyright more directly into play in innovation markets, the copyright misuse doctrine has come into wider use. In Lasercomb America, Inc. v. Reynolds (911 F.2d 970 (4th Cir. 1990)), a software copyright licensor prohibited licensees from ‘writing, developing, producing or selling computer assisted die making software, directly or indirectly without Lasercomb’s prior written consent’ for a term of 99 years. Drawing on the principles underlying intellectual property protection as well as patent misuse jurisprudence, the court determined that copyright misuse is a valid defense and barred Lasercomb’s infringement action. In this case, the licensor sought to foreclose competition in computer software innovation. The copyright misuse doctrine has since been raised in a variety of settings, including tying arrangements, anti-competitive clauses in licensing agreements, mandatory blanket

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Economic analysis of network effects and IP  207 licenses, and refusals to license, but it remains murky (Herrell, 2011; Fellmeth, 1998). Several cases in which copyright misuse has been found to be viable involve network effects. For example, the Ninth Circuit found copyright misuse in Practice Mgmt. Info. Corp. v. American Med. Assoc., 121 F.3d 516, amended by, 133 F.3d 1140 (9th Cir. 1997). The court held that the licensing terms of the AMA’s Physician’s Current Procedural Terminology to the Health Care Financing Administration gave the AMA a substantial and unfair advantage over its competitors and hence constituted copyright misuse. The Fifth Circuit in DSC Communications Corp. v. DGI Technologies, Inc. held that the copyright misuse doctrine might be viable to defend assertions of copyright protection over interoperable features of computer software (681 F.3d 597 (5th Cir. 1996)). The Seventh Circuit in Assessment Techs., LLC v. WIREdata, Inc. held that licensing restrictions on a tax assessment database to control access to public domain data inputted by public tax assessors could constitute copyright misuse (350 F.3d 640, 647 (7th Cir. 2003)). As with the patent misuse doctrine, the interplay of copyright misuse doctrine and antitrust liability remains unclear. Courts applying the copyright misuse doctrine generally evaluate whether the conduct thwarts the underlying policies of copyright law. Some courts, however, mistakenly view the doctrine as co-extensive with antitrust law (Fellmeth, 1998, pp. 22–3). 2.  The principle of exhaustion With some resemblance to misuse, the long-standing common law doctrine of exhaustion (also known as first-sale) preserves the public interest in free competition by limiting the ability of intellectual property (IP) owners to control secondary markets for patented products and copyrights works (17 U.S.C. § 109(a), Adams v. Burke, 84 U.S. 453 (1873)). The idea is straightforward: the first authorized sale of the patented or copyrighted product exhausts the monopolistic power given to the owner as a reward for his efforts and contribution to society. Following the first-sale, the owner can no longer control the manner in which the product is sold or used in secondary markets, either by downstream purchasers or subsequent sellers. This limitation on monopoly, which traces back to the common law’s general hostility toward restraints on alienation, fosters competition in secondary markets for innovative and creative works. Recently, in a much-debated decision involving Lexmark cartridges, the Supreme Court emphasized the destructive anti-competitive effects post-sale restrictions (with servitude-like features) that ‘run with’ the product have on free commerce (Impression Prods. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1532 (2017); Van Houweling, 2008, 2019). Refusing to allow patentees to ‘[sputter] the smooth flow of commerce,’ the Court held that the principle of exhaustion prevents the enforcement of contractual post-sale restrictions through patent law. The patentee can impose contractual restrictions on secondary markets, but cannot use patent law to control how the product is being used or sold downstream after the point of the first sale. The Lexmark decision reaffirmed the vital role IP limiting doctrines such as preemption, exhaustion, and misuse play in limiting IP owners’ ability to hinder downstream innovation thorough over-reaching, often boilerplate, contractual language (Elazari Bar-On, 2019; Perzanowski and Schultz, 2016, chs 9–10).

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208  Research handbook on the economics of IP law volume 1 3.  Ambush of standard setting processes As highlighted in Section V(D)(3), SSOs play a critical role in addressing the market failures surrounding network technologies. These organizations require companies that participate in standard setting processes to disclose relevant information about actual and potential patents implicated by draft standards and commit to license such technologies on FRAND terms (Patterson, 2012, pp. 513–21). Given the dynamic nature of technological progress, such conditions can be open to interpretation. The two most prominent cases alleging that SSO participants engaged in deceptive practices—one involving Rambus and the other involving Qualcomm—reached different conclusions. The Rambus litigation grew out of standards development for dynamic random-access memory (DRAM) chips, a memory technology that was widely adopted throughout the computer industry. In 1990, Rambus sought patents on its architecture for such chips. Around that time, the Joint Electron Device Engineering Council (JEDEC) organized an open standard setting process with a broad range of industry participants including Rambus. As would be revealed in later litigation, Rambus used information gained at the meetings to amend its patent applications so that the standards would read on its patents. Rambus concealed these efforts and subsequently withdrew from JEDEC. After the JEDEC standards gained widespread acceptance in products, Rambus began making royalty demands from implementers and, beginning in 2000, brought a series of enforcement actions. The jury in one of the key cases found that Rambus committed fraud and breached JEDEC obligations by failing to disclose its patents. The Federal Circuit reversed in a divided opinion, with the majority finding that the JEDEC policy statements were too vague to support a fraud finding (Rambus Inc. v. Infineon Technologies AG, 318 F.3d 1081, 1098 (Fed. Cir. 2003)). The Qualcomm litigation grew out of the development of the Joint Video Team (JVT) standard for video compression technology. Qualcomm, a pioneer in semiconductor design for mobile communications devices and various other technologies, participated in the JVT standard setting process. It later sought to enforce several patents applicable to that standard against Broadcom. Broadcom successfully defended on the ground that Qualcomm had waived its rights to enforce the patent as a result of its failure to disclose the patents as part of the standard setting process (Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004 (Fed. Cir. 2008)). The court barred Qualcomm from enforcing the patents at issue against any products implementing the pertinent JVT standard. The different results in these litigations reflect several factors. SSO policies in the early 1990s varied in how clearly they set forth disclosure requirements. Furthermore, defendants in these cases faced a variety of complex evidentiary requirements and heightened pleading standards to equitable defenses such as laches, waiver, actual or implied license, equitable estoppel, and fraud (Royall et al., 2009). The Rambus controversy led to public enforcement actions in the United States and Europe that are discussed in Section VI(B) (2). 4.  Breach of contract for failure to license SEPs on FRAND terms As explored earlier (Section V(D)(3)–(4)), SSOs typically require companies participating in standard setting processes to commit to license SEPs on FRAND terms. The litigation between Microsoft and Motorola established key principles regarding the determination of FRAND licensing terms and provided for the award of contract damages for breach of

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Economic analysis of network effects and IP  209 the FRAND commitment. Motorola participated in standard setting processes governed by the IEEE and the International Telecommunication Union (ITU) establishing Wi-Fi (802.11) and video compression (H.264) standards. As part of its participation in these processes, Motorola agreed to license its patents that are essential to those standards on reasonable and non-discriminatory (RAND)4 terms. The controversy began in October 2010 when Microsoft filed actions in the U.S. International Trade Commission and the Western District of Washington alleging that Motorola was infringing several Microsoft smartphone patents. Those filings immediately led to settlement negotiations involving cross-licensing of patents between the two companies. Later that month, Motorola sent letters to Microsoft requesting royalties equal to 2.25 percent of Microsoft’s sales revenues from Windows and Xbox products incorporating the standards. Microsoft declined and immediately filed suit in the Western District of Washington alleging that Motorola’s offer breached its RAND commitment. Microsoft asserted that it was a third-party beneficiary of the SSO agreements. Thereupon Motorola filed patent enforcement suits with the ITC, seeking an exclusion order against importing Microsoft’s Xbox products into the United States, and with a German court, seeking an injunction against sales of Microsoft’s H.264-compliant products. The German action threatened all of Microsoft’s Windows and Xbox European sales because its distribution center was located in Germany. As a result, Microsoft immediately relocated its distribution center to the Netherlands at substantial cost. Judge Robart adapted the Georgia-Pacific reasonable royalty framework to the FRAND context (Microsoft Corp. v. Motorola, Inc., 2013 WL 2111217 (W.D. Wash. 2013)). In so doing, he set forth the following principles: (1) ‘A RAND royalty should be set at a level consistent with the SSOs’ goal of promoting widespread adoption of their standards’; (2) a proper methodology should ‘recognize and seek to mitigate the risk of patent hold-up that RAND commitments are intended to avoid’; (3) ‘a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer’; (4) ‘At the same time, a RAND royalty should be set with the understanding that SSOs include technology intended to create valuable standards,’ which requires that the RAND commitment [] guarantee that holders of valuable intellectual property will receive reasonable royalties on that property’; and (5) ‘From an economic perspective, a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard’ (2013 WL 2111217 at 12; Page, 2014). Applying these economic guideposts, Judge Robart concluded that the reasonable royalty should be approximately 1/100th of Motorola’s 2.25 percent license offer. Motorola’s

4   FRAND and RAND are used interchangeably in the technology industries. FRAND is the more common usage.

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210  Research handbook on the economics of IP law volume 1 patents constituted less than 10 percent of the WiFi 802.11 pool and none were shown to be of special importance. Judge Robart noted that if each of 92 companies that owned SEPs for the 802.11 and H.264 standards demanded a royalty rate comparable to Motorola’s offer, the sum of the royalties would exceed the selling price of the Xbox (2013 WL 2111217 at 52, 72–73). In a later proceeding, a jury awarded Microsoft $14.52 million ($11.49 million for relocating its distribution center and $3.03 million in attorneys’ fees and litigation costs) for Motorola’s breach of its contractual commitment to license its SEPs on RAND terms. The Ninth Circuit upheld these determinations, expressly recognizing the key role of RAND commitments in ‘mitigating the risk that a SEP holder will extract more than the fair value of its patented technology . . . Under these agreements, an SEP holder cannot refuse a license to a manufacturer who commits to paying the RAND rate’ (Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024, 1031 (9th Cir. 2015) (affirming Judge Robart’s decision)). 5.  Private antitrust liability Section 4 of the Clayton Antitrust Act of 1914 authorizes recovery of damages by ‘any person injured in his business or property by reason of anything forbidden in the antitrust laws,’ including the Sherman Act (15 U.S.C. § 4 (1914)). Companies have used this private right of action to combat anti-competitive practices in network industries. Three issues are particularly relevant to network technology markets: (i) refusal to license patented technologies; (ii) patent thickets; and (iii) leveraging of monopoly power. i.  Refusals to license patented technologies and copyright-protected works   As noted above, the Patent Act grants patentees the exclusive right to use patented technologies. Congress reinforced that power by expressly providing that a refusal to license a patent cannot be the basis for a patent misuse defense. The courts are divided over whether a refusal to license patented technology can constitute an antitrust violation. The so-called ‘essential facilities’ doctrine, which holds that ‘an owner of a crucial input cannot deny access if a firm seeking access cannot practicably obtain the input elsewhere’ (Ratner, 1988, p. 330; Otter Tail Power Co. v. United States, 410 U.S. 366 (1973)), has lost favor among commentators (Areeda, 1990; Ratner, 1988) and the courts (see Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992) (declining to apply essential facilities doctrine); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) (same)). The courts focus on whether the defendant has a legitimate business justification for its conduct (Baker, 1999). The key modern cases involve the control of service and replacement part aftermarkets. In the late 1980s, a variety of companies that had entered the market to service Kodak photocopiers found themselves cut off from replacement parts. Kodak ended its practice of licensing and selling replacement parts to competing service companies and required that its original equipment manufacturers not sell parts to independent service operators. The independent service organizations brought suit, claiming that Kodak unlawfully tied the sale of service for Kodak machines with the sale of parts in violation of § 1 of the Sherman Act, and monopolized or attempted to monopolize the sale of service for Kodak machines in violation of § 2 of the Sherman Act. Kodak defended in part on its intellectual property rights.

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Economic analysis of network effects and IP  211 While recognizing that patent and copyright owners have exclusive rights to their protected works, the Ninth Circuit nonetheless held that these laws only afford the intellectual property owner a rebuttable ‘presumptively valid business justification’ for consumer harm (Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1218 (9th Cir. 1997) (quoting Data General Corp. v. Grumman Systems Support Corp., 436 F.3d 1147, 1187 (1st Cir. 1994))). The court upheld a jury verdict finding Kodak liable for monopolizing or attempting to monopolize the service aftermarket for Kodak copiers. In an analogous case involving Xerox’s refusal to sell patented parts and copyrighted manuals and to license copyrighted software, the Federal Circuit declined to follow the Ninth Circuit’s analysis (In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000); see also Intergraph Corp. v. Intel Corp., 195 F.3d 1346 (Fed. Cir. 1999)). The Federal Circuit limited its focus to whether Xerox’s refusal to sell its patented parts exceeded the scope of the patent grant. Finding that it did not, ‘Xerox was under no obligation to sell or license its patented parts and did not violate the antitrust laws by refusing to do so’ (203 F.3d at 1328). The court ruled that so long as a patent infringement suit would not have been objectively baseless, the patentee’s motivations for asserting its statutory right to exclude are immaterial. Similarly, the Federal Circuit further held that so long as Xerox’s copyrights were not ‘obtained by unlawful means or were used to gain monopoly power beyond the statutory grant,’ then ‘Xerox’s refusal to sell or license its copyrighted works was squarely within the rights granted by Congress to the copyright holder and did not constitute a violation of the antitrust laws’ (203 F.3d at 1329). ii.  Patent thickets    In a related vein, competitors have sought to challenge the accumulation of a broad portfolio of patents on antitrust grounds. Accumulation and pooling of patents can broaden the effective scope and reduce the uncertainty surrounding inventions, thereby enhancing appropriability (Parchomovsky and Wagner, 2005, pp. 32–41). Nonetheless, strong and broad patent portfolios can discourage innovation and entry by potential competitors (Hall et al., 2016; Hovenkamp, 2012, p. 1130 (discussing the costs of defending against many patents of ambiguous scope); Rubinfeld and Maness, 2005). The leading case involved Xerox Corporation, which built a portfolio of over 1,000 patents relating to its plain paper copying technology. Xerox only used 35 to 40 percent of those patents in actual Xerox products (Sobel, 1984), relying on the balance to erect a defensive thicket around its photocopier technology (Saunders, 2002). Xerox refused to grant licenses for plain paper copying, although it did grant some licenses for other fields, including coated paper copiers. SCM Corporation, which had licensed some of Xerox’s patents for coated paper copies, filed an antitrust claim against Xerox alleging that ‘Xerox’s acquisition of its patents and subsequent exercise of the exclusionary power in them violated the antitrust laws and injured SCM’ (SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1203 (2d Cir. 1981)). SCM asserted that Xerox’s patent accumulation strategy was intended to forestall competition, as reflected in its failure to use many of its patents. SCM claimed that ‘Xerox’s patents were so numerous and complex that they created a “thicket” that prevented [SCM from] designing around the patents.’ The Second Circuit acknowledged that ‘tension between the objectives of preserving economic incentives to enhance competition while at the same time trying to contain the power a successful competitor acquires is heightened tremendously when the patent laws come into play,’ emphasizing

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212  Research handbook on the economics of IP law volume 1 that the Xerox case ‘demonstrate[s that] the acquisition of a patent can create the potential for tremendous market power’ (645 F.2d at 1205). Nonetheless, the court ultimately ruled that ‘where a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger any liability under the antitrust laws’ (645 F.2d at 1206). The anti-competitive concerns relating to patent thickets are exacerbated by the ambiguity of many software patent claims (Bessen, 2004). Cross-licensing and patent pools can, however, alleviate concerns about patent thickets (Barnett, 2014, 2015; Gilbert, 2004; Shapiro, 2001; Merges, 2001). Economists generally believe that the inclusion of complementary and potentially blocking patents in a patent pool promotes competition by reducing the transaction costs and promoting licensing (Shapiro, 2001, p. 144). iii.  Improper leveraging of market power  In the mid-1990s, Microsoft Corporation held a dominant position in the desktop software marketplace just as the Internet emerged as an economic platform. Sun Microsystems’s Java programming language for websites was rapidly gaining salience as a technology for easily transforming static webpages into engaging, animated, interactive websites. After failing to develop its own web development package, Microsoft entered into a Technology License and Distribution Agreement (TLDA) with Sun that allowed Microsoft to use, modify, and adapt Java technology in developing MS Internet Explorer 4.0 and other software products. To safeguard Sun’s WORA interoperability principle, the TLDA required that Microsoft adhere to Java’s standardized application environment and compliance tests. Microsoft’s deployment of its own version of Java, compatible only with other Microsoft products in violation of the WORA principle, threatened Sun’s Java development strategy. In October 1997, Sun sued Microsoft for breach of contract, trademark infringement, copyright infringement, false advertising, and unfair competition (Markoff, 1997). In early 2002, Microsoft agreed to pay Sun $20 million and was permanently prohibited from using ‘Java compatible’ trademarks on its products (Shankland, 2002a). The following year, Sun brought an antitrust and patent infringement action against Microsoft resulting in an award of over $1 billion (Pruitt and Roberts, 2004; Shankland, 2002b). B.  Public Enforcement Federal and state antitrust authorities have long played substantial roles in policing network market competition. The US Department of Justice’s filing of an antitrust action against IBM in 1969 reshaped the competitive landscape of the computer hardware industry and paved the way for a vibrant software industry. At the time, IBM bundled software and services into the cost of leasing use of its hardware, making it difficult for competitors to charge for software development and products. Immediately following the filing of the enforcement action, IBM unbundled software and services from its hardware sales thereby opening up markets for software products (Grad, 2002). Although the antitrust case dragged on for more than a decade and was ultimately dropped, IBM’s unbundling decision in conjunction with the emergence of mini- and microcomputers markets revolutionized the computer industry. Similarly, the US Department of Justice’s filing of antitrust litigation against AT&T in 1974 led to the breakup of the largest corporation in the United States nearly a decade later and hastened the modern competitive and highly innovative telecommunications marketplace.

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Economic analysis of network effects and IP  213 Advances in the information, financial, and communications technologies have vastly increased the significance of network markets as well as the government’s role in regulating these markets. As highlighted in Sections II and III, network technologies are prone to high concentration levels that can enhance consumer welfare through network effects. Therefore, antitrust authorities have had to shift their focus away from market concentration toward anti-competitive tactics such as leveraging market power into new markets and stifling innovation. This section summarizes the major contours of this shift. Section 1 discusses the evolution of Department of Justice and Federal Trade Commission guidelines for intellectual property licensing. Section 2 discusses significant network market enforcement actions and the challenges of crafting remedies. 1.  Intellectual property licensing guidelines Beginning in the 1930s, antitrust regulators took a skeptical view of intellectual property (Briggs, 2009, pp. 67–8). By the early 1970s, these concerns reached their apex in the US Department of Justice Antitrust Division’s ‘Nine No-No’s’: (1) It is unlawful to require a licensee to purchase unpatented materials from the licensor; (2) It is unlawful for a patentee to require a licensee to assign to the patentee any patent which may be issued to the licensee after the licensing arrangement is executed; (3) It is unlawful to attempt to restrict a purchaser of a patented product in the resale of that product; (4) A patentee may not restrict his licensee’s freedom to deal in the products or services not within the scope of the patent; (5) It is unlawful for a patentee to agree with his licensee that he will not, without the licensee’s consent, grant further licenses to any other person; (6) Mandatory package licensing is an unlawful extension of the patent grant; (7) It is unlawful for a patentee to insist, as a condition of the license, that his licensee pay royalties in an amount not reasonably related to the licensee’s sales of products covered by the patent—for example, royalties on the total sales of products of the general type covered by the licensed patent; (8) It is unlawful for the owner of a process patent to place restrictions on his licensee’s sales of products made by the use of the patented process; and (9) It is unlawful for a patentee to require a licensee to adhere to any specified or minimum price with respect to the licensee’s sale of the licensed products. (Wilson, 1970)

Furthermore, even if a patent-related restraint was not per se unlawful under one of the Nine No-No’s, the Department of Justice would still consider bringing an enforcement action if the particular provision was not necessary to the patentee’s exploitation of its lawful monopoly and there were less restrictive alternatives to the restrictions that were more likely to foster competition (Briggs, 2009; Wilson, 1970). These enforcement principles focused on attempts by patent holders to extend their patent monopolies to unpatented supplies, to gain control over improvements of their innovations, to determine prices for resale of their patented products, or to engage in market allocations. With the growing importance of intellectual property assets in the 1970s and 1980s and the dawning of the digital age, economists came to see unconstrained patent licensing as an innovation driver (Gilbert and Shapiro, 1997, p. 286). In 1988, the Antitrust Division shifted from absolute (per se) opposition to licensing restrictions to a ‘rule of reason’ approach to patent licensing that balanced the pro-competitive effects of licensing against potential anti-competitive effects in related markets (U.S. Dep’t. Justice, 1988). In 1995, the Department of Justice and the Federal Trade Commission (FTC) expanded upon

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214  Research handbook on the economics of IP law volume 1 the 1988 guidelines in crafting the ‘Antitrust Guidelines for the Licensing of Intellectual Property’ (U.S. Dep’t. Justice and Federal Trade Commission, 1995; U.S. Dep’t. Justice and Federal Trade Commission, 2007). These guidelines expressly recognized the generally pro-competitive nature of licensing arrangements, rejected the presumption that intellectual property necessarily creates market power in the antitrust context, and endorsed applying the same general antitrust approach to the analysis of conduct involving intellectual property that the agencies apply to conduct involving other forms of tangible or intangible property. With the growing role of patents in network industries, the Department of Justice and the FTC increasingly recognized the importance of licensing standards-essential patents on FRAND terms (U.S. Dep’t. Justice and PTO, 2013; Federal Trade Commission, 2012a; Federal Trade Commission, 2011; U.S. Dept. of Justice and Federal Trade Commission, 2007). Accordingly, the Department of Justice and the FTC have been far more receptive to patent pools (see, e.g., U.S. Dep’t. Justice, 2006; U.S. Dep’t. Justice, 2007; U.S. Dep’t. Justice, 2015; In re Negotiated Data Solutions LLC (N-Data), No. C-4234, 2008 WL 4407246 (F.T.C.); In re Motorola Mobility LLC, F.T.C. File No. C-4410 (2013)). As Gilbert (2010) explains: Competition policy toward patent pools has focused on the prevention of anticompetitive practices by patent pool members—individually or collectively through the licensing policies of the pool—and has generally paid little attention to the question of how to encourage the formation and stability of patent pools that benefit consumers. While patent pools have substantial procompetitive benefits when the manufacture or use of products may infringe multiple patents, powerful economic forces prevent beneficial patent pools from forming or limit the patents in the pool to only a fraction of the patents that cover the products.   Competition policy should recognize the fragility of patent pools and ensure that patent pool members acting collectively have the same latitude to determine royalties and licensing terms as a single licensor, provided that the pool does not harm lawful competition that would have occurred in the absence of the pool’s licenses. In determining which types of patents should be allowed in a pool, competition policy should recognize that a patent pool confers potential benefits if it includes two or more valid complementary patents, and need not harm competition if it has at least one valid patent that is essential to make, sell, or use a product. Inclusion of inessential patents raises potential concerns about foreclosure of alternative technologies and higher royalties for some licenses than would have occurred if these patents were excluded from the pool. However, these concerns should be balanced against the costs of excluding potentially essential patents from the pool.

Disappointingly, the US Dep’t of Justice and the FTC’s updated intellectual property guidelines (U.S. Dep’t. Justice and Federal Trade Commission, 2017) (largely reaffirming and modestly updating the 1995 guidelines)) omit mention of SEPs and FRAND (Comments of Law and Business Scholars Submitted to the U.S. Department of Justice and Federal Trade Commission Regarding a Proposed Update to the Antitrust Guidelines for the Licensing of Intellectual Property, 2016). 2.  Significant network market enforcement actions Notwithstanding the Department of Justice’s and FTC’s loosening of licensing restrictions, antitrust authorities have pursued several notable enforcement actions in network industries over the past two decades. In 1996, the FTC alleged that Dell Computer Corporation had violated the Federal

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Economic analysis of network effects and IP  215 Trade Commission Act by failing to disclose its patent rights during the Video Electronics Standards Association standard setting process and then threatening to enforce those rights against others involved in that process (Matter of Dell Computer Corp., 121 F.T.C. 616, 1996 WL 33412055 (May 20, 1996)). The resulting consent decree barred Dell from enforcing its patent against computer manufacturers incorporating the pertinent standard. In 1998, the FTC issued a complaint against Intel Corporation alleging that Intel had sought to maintain its dominance in the microprocessor marketplace by denying essential technical information and product samples of new microprocessors to companies that, because of intellectual property disputes, had initiated or threatened to initiate litigation against Intel or Intel’s customers (In re Intel Corp., No. 9288, 1999 F.T.C. LEXIS 145 (Aug. 3, 1999); Pitofsky, 2001). The resulting consent decree recognized Intel’s right to withhold licenses of its product or information, but limited Intel’s ability to retract licenses when customers sought to vindicate its intellectual property rights. Most significantly, the Department of Justice and 18 states brought actions against Microsoft in 1998 alleging that Microsoft’s bundling of its browser (Internet Explorer) with its Windows operating system along with restrictive licensing agreements with original equipment manufacturers (such as pricing use of its operating system based on a per processor basis) violated antitrust law (United States v. Microsoft Corp., No. 98-1232 (D.D.C. May 18, 1998); New York v. Microsoft Corp., No. 98-1233 (D.D.C. May 18, 1998)). The government specifically targeted Microsoft’s efforts to exclude Netscape from the browser market and to suppress Sun’s Java web programming platform. The federal government settled its claims with Microsoft in 2001. The consent decree required Microsoft to share its application programming interfaces with third-party companies and established a process for supervising compliance with the agreement over a five year period. Nine states proceeded to trial and ultimately implemented somewhat greater oversight over Microsoft’s activities. Crafting a remedy proved especially difficult due to the strong consumer benefits attributable to Microsoft’s widely adopted and highly integrated computing platform (see United States v. Microsoft Corp., 253 F.3d 34, 102 (D.C. Cir. 2001) (reversing the district court order that would have broken Microsoft up because it failed to address Microsoft’s contention that such an order would ‘lower [] rates of innovation and disrupt [] the evolution of Windows as a software development platform’)). Breaking up the company would certainly have caused substantial consumer harm. In the end, the rapid emergence of the Internet Age and mobile computing—along with the ascendance of a new set of competitors such as Google and Facebook, as well as the resurgence of Apple—eroded Microsoft’s dominance. In 2012, the FTC required that Robert Bosch GmbH sell SPX Service Solutions, a business that makes equipment used to recharge vehicle air conditioning systems, grant licenses to key patents needed to compete in the market for such equipment on the ground that SPX harmed competition by reneging on a commitment to license SEPs on FRAND terms. The FTC declared that ‘[p]atent holders that seek injunctive relief against willing licensees of their FRAND-encumbered SEPs should understand that in appropriate cases the Commission can and will challenge this conduct as an unfair method of competition under Section 5 of the FTC Act’ (Federal Trade Commission, 2012b). The Department of Justice has conditioned its approval of acquisitions of

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216  Research handbook on the economics of IP law volume 1 s­ ubstantial patent portfolios by firms with substantial market presence on the commitments to license SEPs on FRAND terms. Prominent examples include: (1) Google’s acquisition of Motorola Mobility’s portfolio of 17,000 patents and 6,800 patent applications; (2) Apple’s acquisition of the nearly 900 patents originally held by Novell and purchased in 2010 by a coalition including Apple, EMC, Microsoft, and Oracle; and (3) acquisition by the ‘Rockstar’ group (made up of Apple, Microsoft, and RIM) of the 6,000 patents and applications made available in the Nortel bankruptcy auction (Carrier, 2014).

VII. ASSESSMENT OF INTELLECTUAL PROPERTY PROTECTION AND COMPETITION POLICY FOR NETWORK TECHNOLOGIES Drawing on the evolution of intellectual property protection and competition policy explored in Sections V and VI, this section assesses how the various legal, market, and policy institutions have adapted to the emergence of network technologies in the Information Age. Section A discusses institutional and policy economy considerations. Section B then assesses the performance of legal and policy institutions against the normative principles highlighted in Section IV. A.  Institutional Considerations Intellectual property is not a single, monolithic protective system but rather a complex, overlapping set of protections. Inventors and platform developers can utilize various modes of protecting their innovative endeavors. In addition, they can coordinate with other entrepreneurs to promote and leverage network effects, subject to antitrust constraints. Protectionist entrepreneurs will naturally exploit the weakest link within the intellectual property chain to gain market advantage. As a result, the efficacy of the intellectual property system depends critically upon intellectual property gatekeepers—judges, patent examiners, and antitrust enforcers—to ensure that the system coheres. Therefore, the intellectual property system can be strained and fail to promote balanced protection where critical gatekeepers lack adequate understanding of the overall system or the technologies and economics at issue. The structure of the federal courts creates two opposing vulnerabilities. On the one hand, the regional circuit courts—which handle most copyright and trademark disputes—lack specialization and technological training. They can struggle to understand the complexities of computer software and other technical subject matter in the network technology fields. On the other hand, the Federal Circuit— which handles all patent appeals and some copyright and trademark appeals—is specialized, which can skew their perspective. As numerous scholars have explored, specialty courts, such as the Federal Circuit, are prone to tunnel vision and political capture which could lead to more protectionist interpretations of intellectual property law (Dreyfuss, 1989, p. 26; Allison and Lemley, 1998, p. 251; Merges, 2000, p. 2224; Landes and Posner, 2003, pp. 334–53; Landes and Posner, 2004, p. 128). As the Open Handset Alliance and the open source movement have demonstrated, free

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Economic analysis of network effects and IP  217 market institutions can check overbroad intellectual property protection. Entrepreneurs can contract around intellectual property systems in creative ways (Merges, 2004). B.  Measuring Progress Based on the Normative Principles The past half century, spanning the birth and ascendancy of the Information Age, has included dramatic evolution of intellectual property protection for network technologies. The process has not always been smooth, but has generally been inclined toward more efficient and effective rules and institutions. Nonetheless, the complexity of the intellectual property system and the dynamism of network technologies has produced persistent pathologies. Fortunately, the flexibility afforded by free market competition and new technologies (such as cloud-based computing) have been valuable antidotes and alternatives to unwarranted intellectual property protection and the accompanying market power. The evolutionary process continues to unfold and adherence to the key normative principles will benefit from the lessons of the past and ongoing vigilance. 1.  Parsimony principle The parsimony principle aims to promote realization of network benefits by denying intellectual property protection for functional attributes of network technologies absent significant technological advance. This principle comes into conflict with the motivation of some platform developers to control platform development and profit from network effects. Thus, leading platform technology companies advocate robust intellectual property protection for network features of computer software and other technologies through copyright, trademark, and design patent law. These legal regimes do not require assessment of novelty or nonobviousness. In an effort to garner long-lived copyright protection for interface and other software components, they have characterized software code as ‘high-tech poetry’ and analogized computer programs to epic poems and great literature (Clapes et al., 1987, p. 1500, 1584; see also Clapes, 1994). Some general jurisdiction judges, with little technical background, were initially receptive to such arguments. They perceived the textual form of software code as more analogous to more conventional literary works than the gears and levers of machines and were less attuned to the broader intellectual property landscape channeling protection for functional features to the utility patent system. Dicta in the Apple v. Franklin decision opined that ‘total compatibility with independently developed application programs . . . is a commercial and competitive objective which does not enter into the somewhat metaphysical issue of whether particular ideas and expressions have merged’ (Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1253 (3d Cir. 1983)). In Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 797 F.2d 1222 (3d Cir. 1986), the Third Circuit’s conflation of merger analysis and the idea-expression dichotomy implicitly allowed copyright protection of procedures, processes, systems, and methods of operation that are expressly excluded under § 102(b). Fortunately, a series of cases in the early to mid-1990s better appreciated the distinction between functionality and creative expression (see Computer Assocs. Int’l v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992); Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1993); Apple Computer, Inc. v. Microsoft Corp., 799 F. Supp. 1006 (N.D. Cal 1992),

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218  Research handbook on the economics of IP law volume 1 aff’d in part, rev’d in part, 35 F.2d 1435 (9th Cir. 1994); Lotus Dev. Corp. v. Borland Int’l, Inc., 49 F.3d 807, 813 (1st Cir. 1995), aff’d by equally divided Court, 516 U.S. 233 (1996)). As a result, while programming a computer can unquestionably be considered ‘creative’ in a general sense, limiting doctrines ensure that the functional aspects are unprotectable under copyright law. The design of an efficient mechanical machine likewise can be creative, but such devices are not eligible for copyright protection unless the aesthetic features can be separated from the functional attributes under the useful article doctrine (17 U.S.C. § 101 (definition of ‘Pictorial, graphic, and sculptural works’ excludes functional features)). Lines of code are the gears and levers of digital machines. The fact that computer software, like a sculptural work, is eligible for copyright protection does not authorize protection for functional features (17 U.S.C. § 102(b)). Several major technological advances beginning in the mid-1990s de-emphasized the role of copyright protection for computer software. The emergence of the Internet as a low-cost, highly scalable distribution ecosystem in the mid to late 1990s vastly expanded the potential for indirect appropriability (e.g., through keyword advertising), and shifted software developers toward open source development. Advances in mobile, Internetconnected digital devices in the early-2000 period paved the way for using software to promote sales of hardware and vastly expanded software distribution through app stores. The new app economy opened a vast array of non-copyright-based business models, such as new forms of advertising ranging (e.g., Yelp). The emergence of cloud-based computing (Software as a Service) reinvigorated digital rights management. These shifts, in combination with the norms that took hold following the Lotus v. Borland litigation, produced a period of relative peace with regard to copyright protection of network features of computer software (Profitt, 2011 (observing that ‘[h]istorically, APIs have been regarded as not falling under copyright—the reasoning being that APIs are not creative implementations but rather statements of fact,’ but also noting the issue had been clouded by the distinction of ‘open’ and ‘closed’); Menell, 1998). The parsimony principle prevailed. That peace was shattered in 2010 with Oracle’s filing of a copyright (and patent) infringement lawsuit against Google alleging that the Android operating system infringed copyright protection for the declarations (function names and definitions) in the Java APIs. Drawing on the strategy of the first wave of API copyright litigation, Oracle analogized the labels and code used in the Java APIs to the chapter titles, character names, and plot elements of Harry Potter novels (Opening Brief and Addendum of PlaintiffAppellant, Oracle America, Inc. v. Google, Inc., 2013, pp. 12–13). Based on a questionable interpretation of Ninth Circuit precedent (Menell, 2018), the Federal Circuit ruled that the structure, sequence, and organization of the 37 Java APIs were copyrightable and remanded the fair use issue for retrial (Oracle America, Inc. v. Google, Inc., 750 F.3d 1339 (Fed. Cir. 2014)). Apple’s garnering of design patent protection for the rounded, rectangle shape of its iPhone and iPod devices and visual icons also undercut the parsimony principle (U.S. Design Patent Nos. D618,677, D593,087, and D604,305; Apple Inc. v. Samsung Elecs. Co., 786 F.3d 983 (Fed. Cir. 2015) (affirming decision that design patents were valid and had been infringed)). These functional elements garnered substantial protection without any showing that they constituted novel and nonobvious technological advances.

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Economic analysis of network effects and IP  219 These decisions directly undermine the parsimony principle. As a result of the Oracle v. Google decision, the safe harbor of clean room implementation of functional specifications is no longer safe. The Oracle v. Google precedent creates the potential for software developers to assert long-lived copyright protection over interface specifications without meeting a substantial threshold of technological advance. Thus, the Oracle v. Google decision warns innovators to steer clear of proprietary software in developing platforms and extensions. Future developers will be careful to avoid using APIs that are vulnerable to copyright assertion. This will reduce the flexibility to join or interoperate with platforms that are not open, but will encourage greater use of open platforms, collaboration, and ex ante resolution of legal rights. Thus, even though the parsimony principle has been undermined, the flexibility to work around copyright protection through open source and collaborative solutions limits its adverse effects. 2.  Proportionality principle The proportionality principle is the flip side of the parsimony principle coin. Balanced protection for true technological advances in network technologies might be needed to overcome the excess inertia generated by network bandwagons. Patent law provides protection for novel, nonobvious, and adequately disclosed advances in computer systems, processes, and interface design, and other network technologies. Unlike copyright, trademark, or design patent law, utility patent protection protects the functional aspects for network technologies. In theory, therefore, patent protection can provide meaningful protection for overcoming excess inertia. Its efficacy, however, depends on whether it provides the right balance. In practice, patent protection for interface design and other network technologies has been decidedly mixed. The standards for patent protection might be too low or too high and the duration of protection might be too short or long to provide the optimal incentive. Moreover, unlike lock-out code, the scope of patent protection does not necessarily align with network features. Furthermore, the costs of pursuing and enforcing patents can distort incentives. Patent protection of computer software, a principal source of network effects, has experienced a roller coaster over the past four decades. The Patent Office resisted patent protection for computer software in the 1960s and only grudgingly afforded such protection in the 1970s and 1980s (Moskowitz, 1982, pp. 281–2, 309–11). The Supreme Court struggled to resolve the eligibility of patent protection for computer software in the 1970s (Gottschalk v. Benson, 409 U.S. 63 (1972); Parker v. Flook, 437 U.S. 584 (1978)), but ultimately cautiously held that computer programs were eligible in 1981 (Diamond v. Diehr, 450 U.S. 175 (1981)). Nonetheless, software companies were reluctant to pursue such protection, preferring technical protection measures and copyright protection. Several factors shifted the software industry toward patent acquisition in the early 1990s. Fading hardware companies turned to patent licensing and enforcement campaigns (Phelps and Kline, 2010; Jaffe and Lerner, 2004, pp. 14–15; Rivette and Kline, 1999). In addition, some smaller software companies succeeded in enforcing software patents against larger software companies (see, e.g., Stac Elec. v. Microsoft Corp., No. 93-0413 (S.D. Cal. 1994), appeal dismissed per stipulation, 38 F.3d 1222 (Fed. Cir. 1994)). These developments prompted software companies to pursue defensive patenting (Federal Trade Commission, 2011, pp. 43–5, 56 (discussing defensive patenting)). Furthermore,

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220  Research handbook on the economics of IP law volume 1 the Federal Circuit liberalized the standards for protecting computers software (see In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994); State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998)), just as the Internet (dot-com) era was taking off. This led to a software patenting gold rush in which start-up companies sought patents as signals for raising venture capital and established companies stockpiled patents for defensive purposes. As discussed in Section V(D), the bursting of the dot-com bubble in 2000 resulted in many software patents falling into the hands of patent aggregators, such as Intellectual Ventures, which produced an unprecedented wave of costly and disruptive patent assertion activity. The low quality and amorphous scope of many of these patents imposed tremendous costs on the software industry and complicated entry into many network technology markets. In addition, new network technologies, such as smart phones, developed in a patent thicket ecosystem. The effects of patent aggregation and assertion were somewhat alleviated by standard setting organizations requiring FRAND cross-licensing, the emergence of defensive buying funds, such as RPX and Allied Security Trust, and patent pledges (Schultz and Urban, 2012). Moreover, the Supreme Court substantially reduced the risk of injunctive relief (eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006)), tightened the nonobviousness standard (KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007)), promoted clearer patent boundaries (Nautilus, Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014)), and restricted patent eligibility (Bilski v. Kappos, 561 U.S. 593, 604 (2010); Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 66 (2012); Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014)). Congress passed legislation streamlining administrative patent review (America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011)). Nonetheless, patent protection for network technologies has proven to be a complex and costly tool for achieving proportional appropriability for network technology innovations. The system has, however, become more balanced and predictable, with improved screening of patent applications, more timely and cost-effective means for invalidating dubious patents through inter partes review at the Patent Trial and Appeal Board, and improved coordination through standard setting and FRAND licensing. 3.  Deterrence principle The deterrence principle stems from, and interacts with, the proportionality principle. Network effects often lead to high market concentration levels, which bring market power with them. The deterrence principle seeks to stunt abuse of such power while promoting network benefits. One of the main antidotes to market dominance by a single platform sponsor is collaboration through standard setting organizations and licensing agreements, such as FRAND commitments. While such private solutions can promote innovation and downstream competition, they create the potential for anti-competitive behavior. The past several decades have witnessed substantial evolution of antitrust doctrines and enforcement policies toward a balanced innovation and competitive ecosystem. Antitrust enforcers have come to appreciate the economic benefits of high concentration in network technology markets while also focusing on abusive practices, such as failure to disclose essential patents to standard setting organizations. Standard setting organizations have developed more sophisticated disclosure requirements. In addition,

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Economic analysis of network effects and IP  221 courts have broadened their assessment of antitrust, contract, and patent remedies in view of network effects. The dynamism of network technologies and markets, however, will continue to challenge enforcers, policymakers, and courts. As reflected in the Sun v. Microsoft and Oracle v. Google litigation, there is a subtle line between promoting interoperability and encouraging innovative forking of established standards (cf. Farrell, 2007).

VIII.  FUTURE RESEARCH DIRECTIONS Following Moore’s and Metcalfe’s ‘Laws,’ network technologies are growing at exponential rates. Digital technologies increasingly drive economic growth. Due in substantial part to the Internet and advances in digital technology, network effects are rapidly diffusing across the economic landscape. Consequently, the interplay of network technologies and intellectual property will continue to evolve rapidly in the coming years and decades. The opportunities for further research in this field are nearly limitless. Network effects are increasingly important across a growing swath of industries: consumer and industrial products (Internet of Things), energy (smartgrid, autonomous driving, renewable energy), bioinformatics, machine learning, social media, advertising, content creation, and science (database development). The interactions with the range of economic modes (such as contract, business associations, and multi-sided markets), as well as other areas of law (such as privacy and civil liberties) provide a wealth of important research opportunities to explore.

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228  Research handbook on the economics of IP law volume 1 In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc). In re Comiskey, 554 F.3d 967 (Fed. Cir. 2009). In re Dembiczak, 175 F.3d 994 (Fed. Cir. 1999). In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000). In re Innovatio IP Ventures LLC Patent Litig., No. 11 C 9308, 2013 U.S. Dist. LEXIS 144061, 2013 WL 5593609 (N.D. Ill. Oct. 3, 2013). In re Intel Corp., No. 9288, 1999 F.T.C. LEXIS 145 (Aug. 3, 1999). In re Morton-Norwich Prods., Inc., 671 F.2d 1332 (C.C.P.A. 1982). In re Motorola Mobility LLC, F.T.C. File No. C-4410 (2013). In re Negotiated Data Solutions LLC (N-Data), No. C-4234, 2008 WL 4407246 (F.T.C.) (2008). In re Nuijten, 500 F.3d 1346 (Fed. Cir. 2007). Intel v. Advanced Micro Devices, 765 F. Supp. 1292 (N.D. Cal. 1991). Intergraph Corp. v. Intel Corp., 195 F.3d 1346 (Fed. Cir. 1999). Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844 (1982). Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008). Kellogg Co. v. National Biscuit Co., 305 U.S. 111 (1938). King-Seely Thermos Co. v. Aladdin Indus., Inc., 321 F.2d 577 (2d Cir. 1963). KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007). L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d 1117 (Fed. Cir. 1993). Lasercomb America, Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990). LaserDynamics Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012). Lee v. Dayton-Hudson Corp., 838 F.2d 1186 (Fed. Cir. 1988). Lexmark Int’l, Inc. v. Static Control Components, Inc., 387 F.3d 522 (6th Cir. 2005). Lotus Dev. Corp. v. Borland Int’l, Inc., 516 U.S. 233 (1996). Lotus Dev. Corp. v. Borland Int’l, Inc., 49 F.3d 807 (1st Cir. 1995), aff’d equally divided Court, 516 U.S. 233 (1996). Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009). M. Witmark & Sons v. Jensen, 80 F. Supp. 843 (D. Minn. 1948), appeal dismissed sub nom., M. Witmark & Sons v. Berger Amusement Co., 177 F.2d 515 (8th Cir. 1949). Matter of Dell Computer Corp., 121 F.T.C. 616, 1996 WL 33412055 (May 20, 1996). Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 66 (2012). MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928 (9th Cir. 2010). Microsoft Corp. v. Lindows.com, Inc., 2002 WL 32153471 (W.D. Wash. 2002). Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 U.S. Dist. LEXIS 60233, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013). Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024 (9th Cir. 2015). MiTek Holdings, Inc. v. ARCE Engineering Co., 89 F.3d 1548 (11th Cir. 1996). Mitel, Inc. v. Iqtel, Inc., 124 F.3d 1366 (10th Cir. 1997). Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942). Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917). Nautilus, Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014). New York v. Microsoft Corp., No. 98-1233 (D.D.C. May 18, 1998). Nichols v. Universal Pictures Corp., 45 F.2d 119 (2d Cir. 1930). OddzOn Prods., Inc. v. Just Toys, Inc., 122 F.3d 1396 (Fed. Cir. 1997). Oracle America, Inc. v. Google, Inc., 872 F. Supp. 2d 974 (N.D. Cal. 2012). Oracle America, Inc. v. Google, Inc., 750 F.3d 1339 (Fed. Cir. 2014). Oracle America, Inc. v. Google LLC, 886 F.3d 1179 (Fed. Cir. 2018). Oracle America, Inc. v. Google, Inc., 750 F.3d 1339 (Fed. Cir. 2014) (Opening Brief and Addendum of PlaintiffAppellant, Oracle America, Inc. v. Google, Inc., 2013, pp. 12–13). Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). Parker v. Flook, 437 U.S. 584 (1978). PHG Techs., LLC v. St. John Cos., 469 F.3d 1361 (Fed. Cir. 2006). Plains Cotton Coop. Ass’n v. Goodpasture Computer Serv., Inc., 807 F.2d 1256 (5th Cir. 1987). Practice Management Information Corporation v. American Medical Assoc., 121 F.3d 516, as amended, 133 F.3d 1140 (9th Cir. 1997). Princeton Graphics Operating, L.P. v. NEC Home Electronics (U.S.A.), Inc., 732 F. Supp. 1258 (S.D.N.Y. 1990). Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004 (Fed. Cir. 2008). Rambus Inc. v. Infineon Technologies AG, 318 F.3d 1081 (Fed. Cir. 2003). Richardson v. Stanley Works, Inc., 597 F.3d 1288 (Fed. Cir. 2010). Rosco, Inc. v. Mirror Lite Co., 304 F.3d 1373 (Fed. Cir. 2002).

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Economic analysis of network effects and IP  229 Samsung Elecs. v. Apple Inc., 137 S. Ct. 429 (2016). SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981). Sega Enterprises, Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992). Seiko Epson Corp. v. Nu-Kote Int’l, Inc., 190 F.3d 1360 (Fed. Cir. 1999). Sony Computer Entertainment, Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000). Stac Elec. v. Microsoft Corp., No. 93-0413 (S.D. Cal. decided Feb. 23, 1994), appeal dismissed per stipulation, 38 F.3d 1222 (Fed. Cir. 1994). State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). Storage Technology Corp. v. Custom Hardware Eng’g & Consulting, Inc., 421 F.3d 1307 (Fed. Cir. 2005). Sun Microsystems, Inc. v. Microsoft Corp., 46 U.S.P.Q. 2d 1531 (N.D. Cal. Mar. 24, 1998). Sun Microsystems, Inc. v. Microsoft Corp., 87 F.Supp. 2d 992 (N.D. Cal. 2000). Synercom Technology, Inc. v. University Computing Co., 462 F. Supp. 1003 (N.D. Tex. 1978). Teleflex, Inc. v. KSR Intern. Co., 119 Fed.Appx’ 282 (Fed.Cir. 2005). The Murphy Door Bed Co., Inc. v. Interior Sleep Systems, Inc., 874 F.2d 95 (2d Cir. 1989). Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011). United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001). United States v. Microsoft Corp., No. 98-1232 (D.D.C. May 18, 1998). Universal City Studios, Inc. v. Corley, 273 F.3d 429 (2d Cir. 2001). Vault Corp. v. Quaid Software, Ltd., 847 F.2d 255 (5th Cir. 1988). Veeck v. S. Bldg. Code Congress Int’l, Inc., 293 F.3d 791 (5th Cir. 2002) (en banc). VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014). Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 797 F.2d 1222 (3d Cir. 1986). Williamson v. Citrix Online LLC, 792 F.3d 1339 (Fed. Cir. 2015) (en banc).

Legislative Materials 17 U.S.C. § 101, § 102(b), § 105, §109(a), § 117, § 1201 35 U.S.C. § 100(b), § 101, § 102, § 103, § 112, § 171, § 271(d)(1)–(3), § 271(d)(4), § 271(d)(5), § 284, § 289 Act to amend the patent and trademark laws, Pub. L. No. 96-517, 94 Stat. 3015 (1980). America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011). Clayton Antitrust Act, Pub. L. No. 63-212, 38 Stat. 730, codified at 15 U.S.C. §§ 12–27 (1914). Copyright Act of 1976, Pub. L. 94-553, 90 Stat. 254, codified at 17 U.S.C. § 101 et seq. Establishing the President’s Commission on the Patent System, Executive Order No. 11, 215, 30 Fed. Reg. 4661 (1965)). Federal Trade Commission Act, Pub. L. No. 63-203, 38 Stat. 717 (1914). H.R. Rep. No. 94-1476, 94th Cong., 2d Sess. (1976). Institute of Electrical and Electronics Engineers (IEEE), 2015. IEEE-SA Standards Board Bylaws, accessed March 21, 2019 at http://standards.ieee.org/develop/policies/bylaws/approved-changes.pdf. Lanham (Trademark) Act (Pub. L. 79-489, 60 Stat. 427, codified at 15 U.S.C. § 1051 et seq. Patent Act of 1952, Pub. L. 93-596, 66 Stat. 792, codified at 15 U.S.C. § 1 et seq. Patent Misuse Reform Act of 1988, Pub. L. No. 100-703, 102 Stat. 4674 (H.R. 4972). President’s Commission on the Patent System, To Promote the Progress of Useful Arts, Report to the Senate Judiciary Committee, S. Doc. No. 5, 90th Cong., 1st sess. (1967). S. Rep. No. 105-190 (1998). Sherman Antitrust Act, Pub. L. No. 103-325, 26 Stat. 209, codified at 15 U.S.C. §§ 1–7 (1890). The Digital Millennium Copyright Act of 1998, Pub. L. No. 105-304, 112 Stat. 2860 (1998) (codified in scattered sections of 5, 17, 28, and 35 U.S.C.). United States General Accountability Office. 2016. Intellectual Property: Patent Office Should Define Quality, Reassess Incentives, and Improve Clarity, GAO-16-490. Unlocking Consumer Choice and Wireless Competition Act, Pub. L. 113-144, 128 Stat. 1751 (2014).

Administrative and Other Materials Comments of Law and Business Scholars Submitted to the U.S. Department of Justice and Federal Trade Commission Regarding a Proposed Update to the Antitrust Guidelines for the Licensing of Intellectual Property (2016). Federal Trade Commission. 2003. To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (Oct. 2003), accessed March 21, 2019 at https://www.ftc.gov/sites/default/files/documents/reports/ promote-innovation-proper-balance-competition-and-patent-law-and-policy/innovationrpt.pdf.

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230  Research handbook on the economics of IP law volume 1 Federal Trade Commission. 2011. The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition (Mar. 2011), accessed March 21, 2019 at https://www.ftc.gov/reports/evolving​-ip​-marketplace​ -aligning-patent-notice-remedies-competition. Federal Trade Commission. 2012a. FTC Order Restores Competition in U.S. Market for Equipment Used to Recharge Vehicle Air Conditioning Systems (Nov. 26, 2012), accessed March 21, 2019 at http://www.ftc.gov/ news-events/press-releases/2012/11/ftc-order-restores-competition-us-market-equipment-used-recharge. Federal Trade Commission. 2012b. Third Party Statement on the Public Interest, In re Certain Gaming and Entertainment  Related Software, and Components Thereof, ITC Investigation No. 337-TA-752 (June 6, 2012), accessed March 21, 2019 at https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftccomment-united-states-international-trade-commission-concerning-certain-wireless-communication/1206ftcw​i​ relesscom.pdf. Library of Congress. 2018. U.S. Copyright Office, Exemption to Prohibition on Circumvention of Copyright Protection Systems for Access Control Technologies, 83 Federal Register 54010 (Oct. 26, 2018). Restatement of Torts, § 742. U.S. Dep’t. Justice. 1988. Antitrust Enforcement Guidelines for International Operations (Nov. 10, 1988). U.S. Dep’t. Justice. 2006. Business Review Letter relating to VMEbus International Trade Association. U.S. Dep’t. Justice. 2015. Business Review Letter relating to IEEE from Acting Assistant Attorney General Renata B. Hesse to Michael A. Lindsay. U.S. Dep’t. Justice and Federal Trade Commission. 1995. Antitrust Enforcement Guidelines for International Operations. U.S. Dep’t. Justice and Federal Trade Commission. 2007. ‘Letter from Assistant Attorney General, Thomas O. Barnett, to Dorsey & Whitney Partner, Michael A. Lindsay’ (Apr. 30, 2007). U.S. Dep’t. Justice and Federal Trade Commission. 2017. Intellectual Property Guidelines. U.S. Dep’t. Justice and PTO. 2013. Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary FRAND Commitments.

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8.  Intellectual property and competition Herbert Hovenkamp*

5

Contents I. II.

Introduction: The Political Economy of Intellectual Property Law The Relationship Between the IP Policy and Antitrust Policy A. Approaches to Market Diversity B. Changing Attitudes toward Antitrust and IP C. Assessing Anticompetitive Restraints: ‘Scope-of-the-Patent’ Test III. IP and Antitrust: Specific Issues and Applications A. Assessing Market Power in IP-Intensive Markets B. Horizontal Restraints: Price Fixing and Market Division C. Vertical Restraints Involving IPRs D. Patent Pools E. Exclusionary Practices 1. Walker process and unreasonable infringement claims 2. Acquisitions 3. Refusal to license IV. IP Law’s Own Internal Rules for Facilitating Competition A. The First Sale (Exhaustion) Doctrine B. ‘Misuse’ C. Competition-Based Limitations on ‘Functionality’ Protection References

I. INTRODUCTION: THE POLITICAL ECONOMY OF INTELLECTUAL PROPERTY LAW A legal system that relies on private property rights to promote economic development and progress must consider that profits can come from two different sources. First, both competition under constant technology and innovation promote economic growth by granting some returns to the successful developer and some to society. An effective innovation policy will ensure developer returns adequate to compensate for its investment and risk. Competition and innovation both increase output. Second, however, profits can also come from practices that reduce output, in some cases by reducing quantity, or in others by reducing innovation. Intellectual property rights (IPRs) and competition policy were once regarded as being

*  James G. Dinan University Professor, Penn Law and the Wharton School, University of Pennsylvania. Thanks to Peter S. Menell and Erik Hovenkamp for comments.

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232  Research handbook on the economics of IP law volume 1 in conflict. IPRs create monopoly, which was thought to be inimical to competition. By contrast, competition policy favors free entry and asset mobility, which IPRs limit in order to create incentives. Today our view of this relationship is more complex. First, most IPRs are insufficient to produce durable monopoly, although they do facilitate product differentiation. Second, we tend to see intellectual property (IP) rules as creating a property rights system in which competition exists for the property rights themselves. Firms compete by innovating and appropriating whatever payoffs they can capture, including IPRs. Third, and most importantly, we define competition in terms of output or welfare rather than simple rivalry. A market structure or practice that increases output is more ‘competitive’ than a lower output alternative, even though the amount of immediate rivalry among firms is less. For example, output in the cellular phone market is much higher because hardware, software, and telecommunications links are all networked by cooperative agreements and standard setting. Under conventional neoclassical assumptions, both innovation and competition increase output, whether measured by the number of units or their quality. At the same time, however, excessive IP protection limits competition by reducing asset mobility further than necessary to facilitate innovation. The policy trick is to find the ‘sweet spot’ where the aggregate effects of IP competition and exclusion are optimized. It is firmly established that innovation contributes significantly more to economic growth than does competition under constant technology (Solow, 1957; Bohannan and Hovenkamp, 2012; Grossman and Helpman, 1994; Aghion and Howitt, 1998). While the theoretical and empirical literature employ different and sometimes inconsistent models, all agree on this basic conclusion (Helpman, 2004; Schumpeter, 1943; Solow, 1956; Romer, 1990; Aghion and Howitt, 2007). In addition, the ‘debate’ between Joseph Schumpeter’s (1943) position that monopoly is more favorable to innovation and Kenneth Arrow’s (1962) position that competition is more favorable is somewhat settled, mainly in Arrow’s favor. A broad consensus today is that the market structure/innovation curve is a lopsided, inverted ‘U’ (Scott and Scott, 2014; Arai, 2013; Aghion et al., 2005). Neither monopoly nor atomistic competition is especially conducive to innovation. Rather, most innovation occurs in moderately competitive, product differentiated markets. Some more recent literature tilts the inverted U more to the competitive side, concluding that on balance more competition yields more innovation (Hashmi, 2011; Schmitz and Holmes, 2010; Menell and Scotchmer, 2007, pp. 1526–30)). Although the relationship between innovation and economic growth is clear, the relationship between innovation rates and particular IPR systems is not. One problem is that while IP systems may encourage innovation, they also act as impediments to the diffusion or cumulation of ideas through the economy (Menell and Scotchmer, 2007; Moser, 2013). The literature on the relationship between the strength of patent systems and the rate of economic growth is at best inconclusive, with most of it suggesting little or no correlation (Gould and Gruben, 1996; Park and Ginarte, 1997; Belleflamme, 2006).1 Relatively little

1   One study finds a correlation between the existence of a patent system and total factor production (TFP) growth, but also concludes that there is an inverse correlation between the strength of patent rights and TFP growth (Chang et al., 2014). The authors conclude that while patent rights lead to more patents,

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Intellectual property and competition  233 literature exists that correlates innovation or growth rates with the existence or strength of any specific patent doctrine, although there is a robust ‘meta’ empirical literature on the behavior of courts or judges with respect to certain doctrines (Rantanen, 2013; Mojibi, 2010; Anderson and Menell, 2013; Seaman, 2012; Crouch, 2010). Further, the innovation effect of IPRs is market specific, just as is true of other market characteristics such as economies of scale, product differentiation, ease of entry, or nature of information flow. The competitive impact of IPRs also varies with differences in industry structure and the market position of the rights owners. For example, for a dominant firm additional IP protection may serve to entrench or prolong its monopoly position, while the same right held by a small rival might serve to destabilize the dominant firm and make the industry more competitive. Therefore, who gets a particular IPR can be important for competition policy. That IPR performance varies from one market to another seems beyond dispute. For example, chemical and pharmaceutical innovations tend to benefit from a robust patent system with protection of fairly long duration. By contrast, in some markets for information technologies the patent system is much less valuable and may even produce greater harms than benefits. The same thing is true of copyright. For example, many books have long economic lives and can benefit from a lengthy term of protection, while more journalistic writing and software does not. The optimal term may also vary with the degree of market competitiveness, with greater competition conducive to shorter terms. Further, a trade-off exists between duration and breadth: a patent with a shorter life but broader protection may provide the same incentives as one with longer life but narrower protection (Gilbert and Shapiro, 1990; Merges and Nelson, 1990; Khoury, 2010). Unfortunately, our knowledge about market diversity has had little impact on the creation or application of intellectual property law, which is not particularly sensitive to issues of market structure, information transmittal, ease of copying, and other barriers to market entry or mobility. This is in very sharp contrast to antitrust law, which is acutely sensitive to market differences, perhaps overly so. For example, questions concerning the legality of a merger or allegedly monopolistic practice can be answered only after a detailed expert inquiry into the markets at issue and the rationally expected results of certain practices. By contrast, questions of patent validity, scope, and infringement are largely indifferent to the markets in which these queries occur. Likewise, the legislated term of IPR protections is largely invariant to the particular market in which the protected product is sold. Because our information about the relationship between innovation and specific IP rules is so inadequate, opinions often go to extremes. Some believe that the patent or other IP systems are worthless or even harmful because they hinder rather than promote   our findings also suggest that patent rights slow the diffusion of new innovations throughout the economy, as we find that the effect of patents on TFP growth is weaker in countries with stronger patent rights. Our results suggest that finding the optimum level of patent protections requires the consideration of these two offsetting effects. (Falvey, 2006)   According to Falvey (2006), at least in middle income countries, IPRs cause more harm by restricting the dissemination of technology than they contribute to economic growth. In Torrance and Tomlinson (2011), an experimental test showed an inverse relationship between innovation and patenting.

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234  Research handbook on the economics of IP law volume 1 i­nnovation (Boldrin and Levine, 2008), while others defend IPRs enthusiastically (Epstein, 2010; Mossoff, 2013). Even within the United States Supreme Court these views have gyrated from periods when the Court was extremely tolerant of patenting and patent practices, to periods in which it struck down nearly every patent it encountered and held exaggerated views about the anticompetitive effects of patent practices (Hovenkamp, 2015d). Further, IPRs are hardly the only inducement to innovation, and their relative importance varies from one market to another. When firm managers are questioned, a plurality believe that the biggest inducement is first mover advantages, while patent protection is at best secondary (Bohannan and Hovenkamp, 2012, pp. 100–102).2 In some markets, such as digital content, copying is so cheap and quick that little innovation would occur but for IP protection. Innovations in processes that are not readily observable or reverse engineered might be better protected by simple first mover advantages or trade secrets. Patent protection is secondary and may even be counterproductive to the extent that patenting requires disclosure. Some markets exhibit high rates of innovation without any intellectual property protection at all (Raustiala and Sprigman, 2012). The lack of empirical validation for specific IP rules is troublesome, because some rules may be far from optimal. A good example is the way that patent law’s requirement of nonobvious subject matter (35 U.S.C. § 103) is administered. Because patent infringement does not require copying or even knowledge of another’s patent, it is crucial that the nonobviousness requirement be interpreted strictly, keeping patent issuance within proper bounds: we do not want to give patents on things that independent entrepreneurs would develop on their own. An empirically based inquiry into nonobviousness would consider the extent to which new technology results from copying rather than independent invention, a forward-looking inquiry. Whether one can infer nonobviousness from commercial success is debatable, but doubtful (Merges, 1988). But in any event, that is not how nonobviousness subject matter is actually determined. Patent examiners or courts deciding infringement cases assess nonobviousness, or ‘inventive step,’ by looking backward through prior art. By contrast, entrepreneurs think forward, considering new things to try from their current position. The likely result is that far too many patents are granted on things that other businesses develop on their own in the ordinary course of competition. The recent experience with non-practicing patent holders in information technology markets suggests as much. Most of the defendants in those cases are independent developers rather than copyists. The statutory systems of competition law and IPRs differ significantly from one another. Most of the United States antitrust laws are highly general and do not reflect specific ‘deals’ between legislators and particular special interests. The Sherman and Clayton Acts simply condemn practices that ‘restrain trade,’ ‘monopolize,’ or have effects that ‘may be substantially to lessen competition’ (15 U.S.C. §§ 1, 2, 14, 18).3 As a result, assessment of specific practices is left largely to judges. In addition, after more than 30 2   On the use of alternative funding mechanisms, such as prizes or direct government finance of research (Menell and Scotchmer, 2007, pp. 1530–34). 3   One exception is the Robinson-Patman Act, which was in fact the product of a deal between retailers and Congress during the Great Depression (15 U.S.C. § 13; Hovenkamp, 2015d, pp. 225–32).

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Intellectual property and competition  235 years of redefinition and retrenchment, antitrust policy in the United States has become much more focused on promoting consumer welfare, which it does by facilitating structures or practices that maximize output, measured by quantity or quality (Bohannan and Hovenkamp, 2012). By contrast, most IPR systems are detailed codes that reflect considerable producer involvement but relatively little input from consumers. The 1976 Copyright Act currently in force, together with the Copyright Term Extension Act, are examples (Bohannan, 2006; Patry, 1996), but the patent laws are not far behind (Merges, 2000). For example, over history Congress has repeatedly granted retroactive term extensions to both patents and copyrights (Ochoa, 2001; Hovenkamp, 2016c). Retroactive extensions do not facilitate innovation to the extent that the inventions to which they apply have already been created. They are pure rent seeking, prolonging exclusive rights, and reducing output. Such extensions have come to the Supreme Court twice, 150 years apart. In Bloomer v. McQuewan, 55 U.S. 539 (1852), the Supreme Court held that retroactive patent extensions could not be applied to patented articles that had already been sold, thus creating the foundation for the modern patent ‘exhaustion’ doctrine (Hovenkamp, 2016b, 2016c). In Eldred v. Ashcroft, 537 U.S. 186 (2003), the Supreme Court upheld a retroactive extension of the copyright term. This history is unsettling because consumer welfare should be the ultimate goal of innovation policy just as it is of traditional competition policy. Consumers profit from lower prices and higher innovation rates, giving them the correct set of incentives to determine optimal IP rules. By contrast, producer incentives are more mixed. While producers profit from lower costs and increased innovation, they also profit from increased protection for their own IPRs or reduced protection for the innovations of rivals, whether or not these protection levels are optimal (Hovenkamp, 2014).

II. THE RELATIONSHIP BETWEEN THE IP POLICY AND ANTITRUST POLICY A.  Approaches to Market Diversity While the antitrust laws do not explicitly require different analysis for different markets, the spare, highly general statutes have been interpreted that way at least since the Supreme Court’s Chicago Board of Trade decision in 1918. That decision approved an agreement that literally fixed prices for after-hours trading occurring after the open market had closed. Such price-fixing was unique to that market and, in the Court’s view, promoted rather than restricted competition. The antitrust merger provision contained in the Clayton Act, 15 U.S.C. § 18, condemns acquisitions whose ‘effect may be substantially to lessen competition or tend to create a monopoly’—a requirement that has always been held to require highly specific market analysis. For well over a half-century the law of monopolization under Sherman Act § 2, 15 U.S.C. § 2, has required detailed inquiries into market structure, producing different outcomes in different industries (United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945); United States v. E.I. du Pont de Nemours and Co., 351 U.S. 377 (1956); Brooke Group Ltd. v. Brown and Williamson Tobacco Corp., 509 U.S. 209 (1993)). By contrast, IP law largely disregards market differences (Burk and Lemley, 2003;

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236  Research handbook on the economics of IP law volume 1 Menell and Scotchmer, 2007). Terms of protection are largely invariant to the industry, even though rates of technological turnover vary widely. If protected technology or expression routinely becomes obsolete in the market before IPRs expire, then the Constitution’s provision authorizing Congress to create patents or copyrights only for ‘limited times’ (U.S. Const. art. I, § 8, cl. 8) is largely meaningless. The premise of that provision is that the protection period should be sufficient to induce innovation, but after expiration the protected good goes into the public domain. Even requirements such as nonobvious subject matter for patents generally avoid market specific questions about how information is disseminated in a particular market. An ideal IP policy truly concerned with innovation would need to develop more empirically driven, market specific rules, reflecting how innovation works in different situations, what amount and nature of inducement is required, and the extent of harm caused by the resulting exclusion. Offsetting this, of course, would be the higher transaction and enforcement costs involved in enforcing a system that contemplates greater market diversity. B.  Changing Attitudes toward Antitrust and IP Competition policy and IP policy should be regarded as complements. They share economic welfare as a goal, and an optimal policy includes elements of both. Public policy has been erratic, however, and the two legal systems have not always accommodated each other in socially beneficial ways. Prior to 1917 the Supreme Court approved nearly every patent practice that had been alleged to restrict competition, including toleration of product price-fixing in a patent pool (E. Bement & Sons v. Nat’l Harrow Co., 186 U.S. 70 (1902)); granting a dominant firm an injunction against infringement of an externally acquired but unpracticed patent (Cont’l Paper Bag Co. v. E. Paper Bag Co., 210 U.S. 405 (1908)); and permitting tying of patented and unpatented goods (Henry v. A.B. Dick Co., 224 U.S. 1 (1912)). One important exception was Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20 (1912), which condemned a product price fix covering the entire bathroom fixture industry. The price stipulation was included in a patent license for an enameling process that represented a minor component of the finished product. A single mention of patents in the 1914 Clayton Act, 15 U.S.C. § 14, provoked a dramatic change. Beginning in the 1917 Motion Picture Patents case, which overruled Henry, the Supreme Court embarked on a war against patent practices thought to be anticompetitive, in the process developing an expansive, judge-made doctrine of patent ‘misuse,’ of which more later (Motion Picture Patents Co. v. Universal Film Co., 243 U.S. 502 (1917); Henry v. A.B. Dick Co., 224 U.S. 1 (1912)). Beginning in the late 1930s the Supreme Court applied increasingly harsh standards for patent issuance, eliciting Justice Robert H. Jackson’s famous complaint that ‘the only patent that is valid is one which this Court has not been able to get its hands on’ (Jungersen v. Ostby & Barton Co., 335 U.S. 560 (1949)). Three dispersed events gradually turned the tide again. First was the 1952 Patent Act, a significant revision, which restated the patentability requirement as ‘nonobvious’ subject matter and also limited the reach of patent misuse law (Duffy, 2007; Hovenkamp, 2015d). The second was the establishment of the Federal Circuit Court of Appeals in 1982, with a mandate to unify and strengthen patent law (Dreyfuss, 1989, 2008). The third development, which occurred more gradually and within antitrust and patent

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Intellectual property and competition  237 misuse law, was a doctrinal reformulation that required much more explicit proof of anticompetitive effects (Bohannan and Hovenkamp, 2012). The high point of antitrust hostility toward perceived patent abuses was 1970, when the US Antitrust Division issued its ‘nine no nos’ of patenting that were almost certain to provoke an antitrust challenge (Wilson, 1970; Hovenkamp, 2015d). Today nearly all of the ‘nine no nos,’ including such things as mandatory packaging licensing, grantback clauses, reach through royalties, and resale price maintenance, are widely regarded as competitively benign in most situations (Hovenkamp, 2015a). Antitrust courts and scholars increasingly came to believe that many post-issuance patent practices that had been condemned as ‘misuse’ were in fact competitively harmless. This was particularly true of tying arrangements, the most frequent generator of misuse findings, as well as vertical price and nonprice restraints, package licensing, provisions that tied royalty payments to unpatented goods, and most unilateral refusals to license (Bowman, 1973; Hovenkamp, 2018a). One important result of significant antitrust revision is that overreaching is less likely to occur today than it was 30 years ago. By contrast, patent law has continued on an expansion course in both issuance and doctrine that until recently seemed unstoppable. Today antitrust law is in a much better position to accommodate concerns about innovation than patent law is to accommodate concerns for competition. Antitrust law’s sensitivity to innovation manifests itself in several ways. One is a very broad rule that innovation itself can almost never be an antitrust violation, no matter how exclusionary, as several courts have held (Allied Orthopedic Appliances, Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991 (9th Cir. 2010); In re Apple iPod iTunes Antitrust Litig., 2014 WL 6783763 (N.D. Cal. 2014); Areeda and Hovenkamp, 2009–15). One limited exception is situations where the cost of product changes is very small in relation to competitive harm and the changes are readily reversible. This is true mainly of software, where a minor change in code can serve to make rivals’ products incompatible (Newman, 2012). Another area is the deferential treatment that the courts have afforded to settlements of IP lawsuits. For example, in Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50 (2d Cir. 1997), the court approved a market division agreement settling a trademark dispute (Hovenkamp, 2015a). A third area is increasingly strict limitations on the use of antitrust to challenge anticompetitive IP infringement actions, as created by the Supreme Court in Walker Process Equip., Inc. v. Food Mach. and Chem. Corp., 382 U.S. 172 (1965), but limited by Dippin’ Dots, Inc. v. Mosey, 476 F.3d 1337 (Fed. Cir. 2007) (Bohannan and Hovenkamp, 2012, pp. 290–324). Yet another is deferential treatment of technology sharing agreements under antitrust law, which rarely condemns them unless they involve explicit restraints in the product market (Hovenkamp, 2015a). By contrast, patent case law sometimes operates as if competition were the affirmative evil to be resisted. One example is the Federal Circuit’s 2014 decision in Trebro Mfr., Inc. v. Firefly Equip., LLC, 748 F.3d 1159 (Fed. Cir. 2014) (Hovenkamp and Cotter, 2015). The court permitted a dominant firm in a concentrated market to enjoin patent infringement on unpracticed patents. The dominant firm had purchased two patents from a third party that covered an alternative technology to that in its own product. After the acquisition, it continued to use its older technology and brought an infringement suit against the defendant, a recent entrant whose technology very likely infringed the acquired patents. The Federal Circuit distinguished a line of lower court decisions which had refused injunctions to non-practicing entities, following the Supreme Court’s decision in eBay Inc.

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238  Research handbook on the economics of IP law volume 1 v. MercExchange, L.L.C., 547 U.S. 388 (2006) (Sichelman, 2014). In this case the patentee was actually competing in the market, even though it was not practicing the patent whose infringement was claimed. No one apparently raised an antitrust issue. Nevertheless, the Court’s lack of foresight did considerable harm to competition by giving dominant firms an excuse to buy up competing technologies in order to keep them out of production, thus limiting the avenues through which new entry can occur. C.  Assessing Anticompetitive Restraints: ‘Scope-of-the-Patent’ Test Historically, competition policy presumed that an IP practice that increased the profitability of an IP right would also increase the incentive to innovate. Competition law enforcers should stand aside if the practice fell ‘within the scope of the patent’ (Hovenkamp, 2015e). This formulation originated in the nineteenth century as a rationale for the exhaustion, or ‘first sale,’ doctrine, which held that ‘when the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly’ (Bloomer v. McQuewan, 55 U.S. 539 (1852)). For example, even if a patent license limited the geographic range over which a good could be used, once the good was sold that right could no longer be enforced against the purchaser by means of a patent infringement suit (Adams v. Burke, 84 U.S. 453 (1873)). Later on, the Supreme Court used the ‘beyond the scope’ formulation to describe overly broad patent claim constructions, as in Coupe v. Royer, 155 U.S. 565 (1895); or overly broad interpretations of the patent doctrine of equivalents, which extended patent coverage to things that did not literally fall within the patent’s claims. Johnson & Johnston Assocs., Inc. v. R.E. Serv. Co., 285 F.3d 1046 (Fed. Cir. 2002) concluded that a broad infringement claim under the doctrine of equivalents was an attempt to extend patent beyond its rightful scope (Sarnoff, 2005). Beginning in the 1930s, the formulation was also employed in patent ‘misuse’ cases, particularly those involving the tying of unpatented goods. The tie was said to extend the patent’s power beyond its proper scope by bringing the unpatented tied product within the patent monopoly. For example, in Carbice Corp. of Am. v. Am. Patents Dev. Corp., 283 U.S. 27 (1931), the Supreme Court held that a patentee’s tie of unpatentable dry ice to its patented ice box was an attempt to control ‘unpatented material’ and thus ‘beyond the scope of the patentee’s monopoly.’ The scope-of-the-patent formulation was also used defensively, however, to exonerate practices challenged as anticompetitive but that were found to be within the patent’s scope. For example, in 1926 the Supreme Court upheld product price-fixing contained in patent licenses on the theory that setting the product price was the patentee’s right, and the license agreement did no more than retain that right, while transferring the right to produce to the licensee (United States v. General Electric Co., 272 U.S. 476 (1926)). In the 1970s Ward Bowman’s important book on patent and antitrust law envisioned the patent as a walled garden protecting everything within its scope, but not necessarily activities that spilled outside (Bowman, 1973). In its decision in United States v. Line Material Co., 333 U.S. 287 (1948), however, the majority condemned a product price fix in a cross-license, over the dissent of three Justices who objected that the price fix was within the scope of the patent. The dissenters in the Supreme Court’s 2013 Actavis decision would have exonerated a settlement agreement in which a patentee paid an accused infringer a large sum to delay its entry into production, provided that the permitted entry date was prior to the expiry of the patent (F.T.C. v. Actavis, Inc., 570 U.S. 136 (2013)). In that case, the

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Intellectual property and competition  239 settlement agreement would be no more exclusionary than a judicial determination of validity and infringement; thus, the agreement fell within the scope of the patent (F.T.C. v. Actavis, Inc., 570 U.S. 136 (2013); Edlin et al., 2015). Pay-for-delay settlements came into existence with the passage of the Hatch-Waxman Act, which rewards a generic firm for being the first to challenge a pioneer’s patent or entering upon that patent’s expiry. Under the Act, no subsequent generic can enter the market until 180 days after the first generic to file an Abbreviated New Drug Application (ANDA) actually starts producing. Prior to generic production the patent is virtually immune from challenge by other potential competitors, because they have no right to produce in any event. The situation gives the patentee and the generic infringement defendant a strong incentive to share the patent monopoly, thus largely eliminating adversity between them. Under the ‘scope-of-the-patent’ test the equilibrium duration of such an agreement is the remaining term of the patent, assuming that the antitrust laws permit such an agreement (Edlin et al., 2014; Hovenkamp, 2015e). That is, the joint-maximizing agreement for the settling parties would share the returns permitted by the patent for its full period. But the Actavis majority rejected a scope-of-the-patent approach, perhaps heralding an important change in antitrust analysis of patent practices. If patent rights are presumed to be valid, valuable, and clearly defined, then the scope-of-the-patent formulation functions much like similar scope formulations might do for, say, real property. But if patents are of questionable validity, dubious value, or ambiguous scope, then the scope-of-thepatent formulation can permit significant anticompetitive overreaching. This issue was highlighted in Actavis because the legislative framework largely immunized suspiciously weak patents from challenge while the pay-for-delay agreement was pending. Further, because the owner of a robust patent would not pay much more than avoided litigation costs in order to enforce its rights, the high pay-for-delay payment (often several hundred million dollars) is a strong signal that the patent is invalid or, in a few cases, not infringed (Edlin et al., 2013; Edlin, et al., 2014). For example, a landowner attempting to exclude a trespasser would not pay the trespasser a large sum of money to stay off her land unless she had serious doubts about the validity of her legal claim. If her title were good she could exclude the trespasser by paying nothing more than litigation costs. In other cases, the scope-of-the-patent formulation fails, not because the patents in question are invalid, but because their value is very low in relation to the restraints in question. Licenses that include product price-fixing are a good illustration. Even for relatively sound patents, license fees range from 0.5 to 6 percent of sales, with rates below 3 percent being the norm. The rates on individual patents can be much lower in patent intensive technologies such as computers and telecommunications. Further, these rates are for licensed patents, and only a small percentage of patents are ever licensed. By contrast, the markups of successful cartels often run in the range of 10 to 50 percent (Connor, 2014). If the firms in an industry cross-license their patents and also fix the product price, the agreement as measured by a scope-of-the-patent test attributes the value of the entire cartel markup to the patents. Justice Breyer’s majority opinion in Actavis held that courts evaluating such settlements need not address questions of patent validity or infringement. That proposition is consistent with long-standing reluctance by federal judges to review the IP merits when considering competition-based challenges to settlements, except for obvious cases of

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240  Research handbook on the economics of IP law volume 1 patents that are almost certainly invalid or not infringed. Most of those cases go on to uphold the settlement, however, while the Actavis decision did not. More importantly, as Actavis recognized, antitrust’s economic approach is designed to create appropriate incentives at the point of decision. The relevant question is not the ex post one whether the patent was valid and infringed, but rather the ex ante question of what the parties’ expectations were at the time the settlement was entered. By settling, the parties have already implicitly agreed that getting a judicial determination of patent validity and infringement is not worth the cost and attendant risk of a judicial determination. As a result, it makes little sense to insist on that same query before passing judgment on the settlement (Edlin, et al., 2015). Of course, most settlements raise no competition issues because the settlements themselves tend to increase rather than decrease output. The most common settlement of an IP infringement dispute is a production license under which the defendant pays the plaintiff for the right to produce. Such a license is likely to increase rather than decrease output, but in any event production licenses are explicitly authorized by § 261 of the Patent Act. They are legal whether or not they are in settlement of litigation. The more problematic settlements are those that fix product prices, divide product markets (as in Actavis), or in some cases that involve an agreement among the settlors not to license to or otherwise deal with third parties, such as the Supreme Court condemned in United States v. Singer Mfg. Co., 374 U.S. 174 (1963). Finally, one thing that makes an Actavis style pay-for-delay settlement unusual is that it does not involve a license at all, but at most an agreement to license at some future date. That is why Justice Breyer’s opinion for the Court observed that, while the Patent Act explicitly permits licensing, the agreement providing for delayed entry was not authorized by the Patent Act. Indeed, an equilibrium agreement under the scope-of-the-patent test advocated by the dissenters would never be a license: for the entire remaining duration of the patent the generic would not produce. Once the patent expires the generic is free to produce without a license. Until actual production under a license occurs, the settlement is nothing more than a naked market division agreement. Even so, Actavis held that the agreement in question should be addressed under antitrust’s rule of reason, which requires proof of market power and anticompetitive effects. It also held, however, that both power and harmful effects could be inferred from the large payment itself.4

III. IP AND ANTITRUST: SPECIFIC ISSUES AND APPLICATIONS Prior to patent issuance the patent process operates under intensive government supervision and control. To be sure, improper conduct in patent prosecution is not rare, but the patent system itself has tools for policing it. Further, riding herd on the procedures and rules of other federal agencies is not antitrust’s purpose. Even if we believe that the existing system issues too many patents, that too many of these are worthless, or that

4   Reverse payments in the context of adjudication before the Patent Trial and Appeal Board (PTAB) can raise analogous issues (Hovenkamp and Lemus, 2016).

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Intellectual property and competition  241 the process has other flaws, these are virtually never antitrust problems. This position is mandated by the ordinary antitrust rules of implied immunity, which limit or remove antitrust involvement from activities that are actively regulated by other federal agencies (Areeda and Hovenkamp, 2009–15). Once a patent is issued, however, the situation is much different. Patents are largely treated as property rights requiring little government supervision, other than the United States Patent and Trademark Office’s (USPTO) power to re-examine, collect renewal fees, and a few other housekeeping matters (Hovenkamp, 2015c). Because issued patents are largely subject to private control, antitrust policy becomes relevant. One important factor is whether the practice in question is expressly authorized by the Patent Act. Under the rules of express immunity, a practice that is compelled or authorized by a federal statute cannot be an antitrust violation, provided that the practice stays within the expressly authorized boundaries. After considering how market power should be assessed in IP-intensive markets, this section briefly addresses specific intellectual property practices that might also be challenged as antitrust violations. All are post-issuance practices and most of them are either not authorized by the Patent Act itself, or else they fall outside the scope of the authorization. As a result, antitrust analysis is appropriate. Of course, this does not mean that they are unlawful. Nor does it entail that the presence of an IP right or license is irrelevant (Cotter, 2015). A.  Assessing Market Power in IP-Intensive Markets No anticompetitive practice can succeed unless its participants have significant market power, which is the power profitably to raise prices above cost by reducing output. This requirement applies both to anticompetitive exclusion and anticompetitive collusion. To be sure, certain practices such as price-fixing are said to be unlawful ‘per se,’ which means that proof of illegality does not require a showing of market power. This is not because market power is irrelevant, however. To the contrary, naked practices such as price-fixing, which produce no efficiency gains to the participants, are profitable only on the premise that power exists. As a result, proper identification of the practice eliminates the need to assess market power separately (Areeda and Hovenkamp, 2009–15). In 2006 the Supreme Court overruled a half-century old presumption that a patent conferred sufficient market power on its owner to make certain anticompetitive practices such as tying unlawful (Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006), overruling International Salt Co. v. United States, 332 U.S. 392 (1947)). In United States v. Loew’s, Inc., 371 U.S. 38 (1962), the Supreme Court had also extended the presumption to copyrights, and a few lower courts had applied it to trademarks (Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971)). Most courts limited the presumption to tying cases, but where it applied the challenger needed to show only that the challenged restraint involved an IPR-protected product, and the requisite market power would then be presumed. All these decisions are now overruled. The end of the power presumption hardly means that IPRs are irrelevant to inquiries about market power. Today, they are properly regarded as an important factor in establishing power (Areeda and Hovenkamp, 2009–15). A few very powerful patents and some software copyrights may have so much exclusionary power that they give their owners

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242  Research handbook on the economics of IP law volume 1 dominant market positions. One likely historical example is Microsoft’s Windows operating system, which is protected from duplication by copyright and some patents (United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)). Other good historical examples are the patents that protected Polaroid’s self-developing camera and film system, which Kodak tried in vain to invent around (Fierstein, 2015), and the array of patents that Xerox acquired from outside inventors that led to its long-held dominance of plain paper copying technology (SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981)). Some aggregations of patents can become so essential to operation that they give significant market power to their owners, at least when the aggregation is owned by a single firm. Of course, aggregations of essential patents are often owned by pools in which a large number of firms have nonexclusive rights. Good examples are MPEG-LA, a patent pool and standards association whose members control standards for digital video technology; and 3GPP, whose members control the technology for 3G and 4G wireless telecommunications. Once a particular patent in such a pool is declared ‘standards essential,’ it may be necessary for any firm wishing to compete in that technology to purchase a license. That obligation can confer significant market power, limited by the fact that standards-essential patents, or SEPS, are also typically subject to FRAND (‘fair, reasonable, and non-discriminatory’) licensing obligations, which are generally interpreted to require licensing to willing participants at fair and nondiscriminatory rates (Contreras, 2015). So far there have been few antitrust cases challenging the creation and enforcement of SEPs or FRAND obligations, and these have been largely unsuccessful. For example, Golden Bridge Tech., Inc. v. Motorola, Inc., 547 F.3d 266 (5th Cir. 2008), rejected the antitrust claim of an inventor whose technology was rejected by a standard setting organization (SSO) in favor of alternative technologies. Legal control of SEPs lies largely with patent law, contract law, or the court’s general equity powers. In Apple, Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014), the court held that the owner of a SEP could not obtain an injunction against a user; and in Qualcomm, Inc. v. Broadcom Corp., 548 F.3d 1004 (Fed. Cir. 2008), the court applied the judge-made doctrine of estoppel against one who reneged on its promise to subject its patents to a FRAND commitment. At this writing Qualcomm is facing separate lawsuits brought by the Federal Trade Commission and Apple, claiming that Qualcomm is tying SEPs to devices that it sells, or licensing only on the condition that its patents be used exclusively with Qualcomm devices (E. Hovenkamp, 2018). IPRs of all forms can limit asset mobility and facilitate product differentiation. In such markets prices will be higher than short-run marginal cost, even though the market has several competing firms. The impact of IPRs in these situations depends heavily on the number of firms in a market and the strength of the IPRs in question. Suffice it to say that many products from automobiles to computers to kitchen appliances contain numerous patents but are yet sold in moderately competitive, product differentiated markets. One technical difficulty for assessing power is that IP development often requires high fixed costs invested at the front end, and fairly low marginal costs. Whether acquisition costs are fixed or variable depends heavily on whether the IPRs in question are developed internally or licensed from outside inventors. For example, internal research often is very costly at the front end and these costs, once invested, do not vary with output. By contrast, licensing in the same technology by per unit or per dollar royalties becomes a variable

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Intellectual property and competition  243 cost to the licensee. Most of the technical tools used for market power measurement examine the relationship between price and marginal cost. The result can be false positives, depending on the prevalence of IPRs and the extent of fixed costs. For example, an unpatented living room chair with a patented recliner button may sell at a small markup over cost, reflecting licensing of the button patent. At the other extreme, purely digital products such as streamed e-books, songs, or software may have distribution costs very close to zero, meaning that the licensor’s entire price is markup. In that case, any measure of market power based on the relationship between price and short-run marginal cost will exaggerate the seller’s power. Because digital content is so easily duplicated, the ability to sell at a substantial markup over short-run cost is largely a result of IP protection. For example, one can obtain an e-book version of Moby Dick at a price of zero, even though it is very famous and widely read. Moby Dick is in the public domain, which means that no one is earning a royalty on its sales and copying is free. By contrast, the e-book version of a mediocre but recent novel will be much higher because royalties must be paid and it cannot be copied without a license from the publisher or author. For antitrust purposes, the main takeaway from these situations is that assessment of price-cost margins is rarely a useful way of assessing market power in markets for purely digital goods. Theoretically, one could address the problem by querying whether the returns to a product are significantly positive over its entire life. For example, the fact that a digital computer program sells at a high ratio of price to short-run cost tells us nothing if the product becomes obsolete or loses its commercial viability before recouping development costs. As a practical matter, these measurements can be very difficult to make, particularly when the IP right in question is a copyright with an effective duration of a century (Hovenkamp, 2016a). With some exceptions, non-patent IPRs make even smaller contributions to power than do patents. Copyrights and trademarks are easier to obtain than patents are. A few highly popular publications or computer programs are counterexamples, but generally one cannot infer significant power merely from the existence of an IPR of any kind (Areeda and Hovenkamp, 2009–15). B.  Horizontal Restraints: Price Fixing and Market Division A restraint is ‘horizontal’ if the participants are competitors or would be competitors but for the restraint. Identification of firms as ‘competitors’ is usually a reference to the product or service markets in which the firms operate, although it may also refer to the technologies that they develop or license. In any event, it is always important to distinguish restraints in the patent and licensing market from restraints in the product market. An example is price-fixing. Setting a price is inherent in licensing and rarely anticompetitive. If firms cross-license, they must necessarily agree on the price that each will charge to the others, even if the price is zero. Price-fixing in the product market is another matter and is highly suspicious. For example, firms with worthless patents or other IPRs might use licenses or cross-licenses as a cover for price-fixing, as Judge Posner observed in his opinion in Asahi Glass Co. v. Pentech Pharm., Inc., 289 F. Supp. 2d 986 (N.D. Ill. 2003). As noted previously, the competition problem with product price-fixing actually reaches far beyond invalid patents. Even if a patent is valid and essential, it may contribute

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244  Research handbook on the economics of IP law volume 1 only a small amount to a product’s value. As a result, the market price of the license can be far less than the cartel markup on the product. For this reason, product price fixes in IP licenses should be regarded as competitively harmful whether or not the IPRs in question are valid. The corollary is that product price fixes in patent licenses can be condemned without inquiry into patent validity or infringement. Market division agreements operate economically much like price-fixing. By dividing up the market (by territory, customer, or product) a group of firms can create individual monopolies for themselves. As a cartel device, market division can be superior to pricefixing if the firms have differing costs or, for other reasons, disagree about the price that a cartel should charge. One important difference between price-fixing and market division is that the Patent Act expressly authorizes patentees to grant exclusive licenses to ‘any part’ of the United States (35 U.S.C. § 261), thus making most domestic territorial division agreements lawful. While the Patent Act says nothing about licenses restricted to specific customers or products, these ‘field of use’ restrictions are treated leniently, mainly because they are viewed as organizers of production enabling the patentee to take advantage of the unique characteristics of different producers. For example, in Gen. Talking Pictures Corp. v. W. Elec. Co., 304 U.S. 175 (1938), the Supreme Court upheld an arrangement in which the patentee reserved to itself the market for commercial use of its patented sound amplifier, while other licensees were authorized to make the amplifiers only for residential customers. The Federal Circuit Court of Appeals has held that field of use restrictions must be evaluated under antitrust’s rule of reason (B. Braun Med., Inc. v. Abbott Labs., 124 F.3d 1419 (Fed. Cir. 1997)). Field of use restrictions become more suspect, however, if they take the form of product market division among competing manufacturers. It is also worth noting that while § 261 of the Patent Act authorizes an exclusive territory agreement between a patent owner and a licensee, it does not authorize agreements among the licensees themselves. As is true of price-fixing, the tolerance for market division agreements applies to the IP right, not to products that might include it. For example, suppose that Ford patents a desirable windshield wiper blade and licenses Chrysler to sell cars with the patented blade in any state except California. That would be a territorially restricted license expressly authorized by the Patent Act. Ford could very likely also authorize Chrysler to put the blade only on its pickup trucks, but not its cars. That would be a field of use restriction and would ordinarily be lawful under antitrust law’s rule of reason. What Ford could not do, however, is agree that Chrysler would not sell any pickup trucks in California, whether or not they contain the patented blade. That would be a restraint on the product market rather than on use of the patent. Unless other factors suggesting joint development were present, that agreement would be unlawful per se under the antitrust laws. C.  Vertical Restraints Involving IPRs A restraint is purely vertical when the parties stand in a buyer-seller relationship but are not actual or potential competitors in either the product market or the licensing market. Because every license agreement has a buyer and seller, they are all vertical as to the IPR license itself. The more important question is the relationship of the parties in the underlying product (or service) market. Today the antitrust attitude toward vertical restraints is

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Intellectual property and competition  245 benign, although it was not always so (Hovenkamp, 2015d). Resale price maintenance (RPM), vertical nonprice restraints, and tying were all once unlawful per se. Vertical restraints come in two classes, generally called ‘intrabrand’ and ‘interbrand,’ even though at least some of the products and services that they control are not branded at all. A restraint is said to be intrabrand if it controls distribution only of the supplier’s own product. It is interbrand if it places limits on the products of rivals. The principal intrabrand price restraint is RPM, or seller dictation of the price at which its own product can be resold. As a general rule, the fact that the price restraints are included in an IP license is irrelevant, and when the per se rule against RPM was in place it applied to patented and copyrighted goods, as well as those protected by trade secrets (Areeda and Hovenkamp, 2009–15). Since 2007, RPM has been assessed under the rule of reason (Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877 (2007)). Today, few instances are found to be unlawful. Vertical nonprice restraints restrict a dealer’s or retailer’s sale of the supplier’s own product in some way other than by setting price. The most common ones are territorial restrictions, customer restrictions, and product restrictions. There are also numerous others, such as restrictions regulating the hours that a firm is open for business, fast food franchise restrictions dictating menu items, employee uniforms, hours of operation, and the like. Section 261 of the Patent Act expressly permits territorial restrictions in patent licenses, but in any event the Supreme Court has been applying the rule of reason to purely vertical nonprice restraints since its decision in Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977). They are rarely found to be unlawful. The Copyright Act expressly permits many nonprice restrictions, both horizontal and vertical, by making separate statutory authorizations for the right to reproduce, to prepare derivative works, to distribute, to perform, and to display, depending on the nature of the copyrighted good (17 U.S.C. § 106). However, even a purely vertical licensing restriction that is not expressly authorized by the Copyright Act would probably be legal under the antitrust laws. Restrictions that attached to a copyrighted article after it is sold might not be enforceable under copyright law’s statutory first sale doctrine (Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013)). These are not antitrust challenges, however. Interbrand vertical restraints, which include tying and exclusive dealing, have historically been treated with greater suspicion than intrabrand restraints, mainly because they can reduce the opportunities of rivals. Under exclusive dealing a firm, typically a retailer or other intermediary, promises to deal exclusively in the supplier’s product or service. An ‘output contract’ does the same thing except that it places the exclusivity obligation on the seller rather than the buyer. In the IP context, the exclusive license is a form of output contract, under which the IP holder promises to license only one firm for all or a particular subset of production under the license. The Patent Act expressly authorizes domestic exclusive patent licenses in 35 U.S.C. § 261. The Copyright Act also authorizes exclusive licenses, although without an express territorial limitation (17 U.S.C. § 106). By contrast, § 3 of the Clayton Act makes it unlawful to sell a good or article, ‘whether patented or unpatented,’ on the condition that the buyer not deal in the goods of a competitor, provided that the agreement’s effect ‘may be to substantially lessen competition or tend to create a monopoly . . .’ (15 U.S.C. § 14). In addition, anticompetitive exclusionary contracts are prohibited by § 1 of the Sherman Act, as well as § 2 if the firm imposing them is a monopolist (United States v. Dentsply Int’l, Inc., 399 F.3d 181 (3d Cir. 2005)).

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246  Research handbook on the economics of IP law volume 1 The Patent Act’s explicit authorization of exclusive licenses exists in some tension with the Sherman Act’s prohibition of anticompetitive contracts. The tension is partly reduced by the first sale doctrine (patent exhaustion), which exhausts the patents in any good once it is sold, thus preventing many instances of post-sale exclusivity enforced by infringement actions. However, that solution is incomplete because it is still possible to license or lease patented goods, and the first sale doctrine does not apply unless there is a sale. The best view is that the antitrust laws qualify the Patent Act in those cases where competitive harm can be shown. This is consistent with the general rule of statutory interpretation in this area, which is that the simple statutory authority to do something is not authority to do so in violation of the antitrust laws. For example, numerous state and some federal corporation acts authorize corporations to acquire the stock or assets of other corporations, but that does not mean that they can make an anticompetitive stock or asset acquisition in violation of § 7 of the Clayton Act, which condemns anticompetitive mergers. In F.T.C. v. Phoebe Putney Health Sys., Inc., 568 U.S. 216 (2013), the Supreme Court held that a hospital corporation’s statutory power to acquire other hospitals did not immunize an anticompetitive acquisition. Already in the 1916 antitrust decision in United States v. Am. Can Co., 230 F. 859 (D. Md. 1916), the court held that it was unlawful for the defendant to purchase exclusive rights to patented can making machinery when the effect was to deny mechanization to rivals. Because American Can made no can making machinery itself, these agreements were purely vertical. In any event, after a lengthy period of hostility the courts now accept that exclusivity provisions in sale or license contracts are only infrequently anticompetitive, depending on such factors as the market share foreclosed by the agreement, ease of entry, the duration of the contracts and frequency of rebidding, and offsetting efficiencies that might justify an exclusive deal (Areeda and Hovenkamp, 2009–15). A tying arrangement occurs when a firm conditions the sale of one product or service (the ‘tying’ product) on the purchaser’s taking of a second product or service (the ‘tied’ product). The courts first confronted tying arrangements in patent law cases, long before the antitrust laws were enacted (Hovenkamp, 2018a). Most ties are contractual, which means that the tie is imposed by agreement. A few are ‘technological,’ or ‘tech ties,’ which means that tying is accomplished by a technological design or feature that makes the seller’s tying product incompatible with the tied products of rivals. Well-known examples are Microsoft’s ‘commingling’ of the code for the Internet Explorer browser into the Windows operating system in United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001); or Apple’s technological tying of its iTunes content and devices so that they worked best only when used together, in Apple iPod iTunes Antitrust Litig., 2014 WL 4809288 (N.D. Cal. 2014). Another was Kodak’s introduction of the Instamatic pocket camera, which was compatible only with its own film cartridges, approved in Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979). Because product design is a unilateral act, technological ties are usually treated under antitrust’s monopolization provision, § 2 of the Sherman Act. By contrast, ordinary contractual ties are addressed under § 1 of the Sherman Act or § 3 of the Clayton Act, both of which require an agreement. Today legal and scholarly opinion has shifted dramatically from the belief expressed in the mid-1900s that tying arrangements serve ‘hardly any purpose beyond the suppression of competition,’ to the view that most ties are competitively benign or beneficial (Standard Oil Co. of Calif. v. United States, 337 U.S. 293 (1949). The Patent Act expressly addresses

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Intellectual property and competition  247 tying arrangements in the 1988 Patent Misuse Reform Act (35 U.S.C. § 271(d)(5)), which provides that patent ties are not unlawful unless the tying firm has market power in the tying product. This provision was passed in response to serious excesses in the application of misuse doctrine, which refused to enforce patent ties in markets where there was no serious risk of competitive harm. For example, Justice Brandeis’s opinion in Carbice Corp. of Am. v. Am. Patents Dev. Corp., 283 U.S. 27 (1931) found patent misuse when the manufacturer of a patented ice box required purchasers of the box to use its own unpatentable dry ice. The market for the unmechanized boxes was competitive and dry ice was a common commodity produced in ‘carbonic’ plants in many places. Proving unlawful tying under the antitrust laws requires proof of tying product market power. In Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006), the Supreme Court held that this power may not be inferred simply from the existence of a patent covering the tying product. Beyond that, the analysis depends in part on whether the tying and tied products are used in fixed or variable proportions. The tie of Microsoft’s Windows computer operating system and its Internet Explorer browser is a fixed proportion tie. A buyer purchases one copy of each, although she might use them in different proportions. The most common anticompetitive rationale for such a tie is exclusion of rivals in the tied product market, which requires that the firm employing the tie have dominance in the tying market. For example, by tying Windows and Internet Explorer (initially by contract and later by technological integration of the code), Microsoft was able to dry up the market for independent web browser Netscape. However, fixed proportion ties can also be beneficial when joint production or distribution reduces costs or makes a product work better. Many fixed proportion ties are a consequence of nothing more than technological improvement, which often proceeds by making products more integrated (Hovenkamp, 2018a). For example, IBM’s desktop computers were attacked as tying arrangements to the extent that they merged processors, motherboards, controllers, storage devices, and memory into a single box. Previously these products had been sold separately and connected by cables, making it possible for one person to sell the processing box and another the disc drive, and so on. But the new systems were more reliable, faster, and cheaper (Fisher, 1983). In sum, overly aggressive use of the law governing technological tying can serve to limit innovation. Thus, the decision in California Computer Prod., Inc. v. IBM Corp., 613 F.2d 727 (9th Cir. 1979) rejected the claim that innovative product integration resulting in a technological tie was simple ‘design manipulation’ intended to ruin competing disc drive manufacturers. Variable proportion ties can serve all of the same functions as fixed proportion ties. In addition, however, variable proportioning can operate as metering or price discrimination devices. These are usually either competitively harmless or beneficial to the extent that they increase overall output. For example, the manufacturer of a printer that uses ink cartridges might tie the printer and the cartridges, either by contract or technological design. It then drops the price of the printer, often substantially and sometimes even to zero, but charges a premium for the ink cartridges. The result of this practice is that the firm obtains a higher overall return from high intensity users who consume more ink. This is a form of second degree price discrimination which results in larger printer sales to the extent the printer price is lower, but also captures more revenue from higher intensity users. In most cases consumers as a group are better off, although high intensity consumers may be injured (Hovenkamp and Hovenkamp, 2015). While such ties may

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248  Research handbook on the economics of IP law volume 1 reduce welfare if the firm has an absolute monopoly in the tying product and the tie reduces output (Elhauge and Nalebuff, 2017), they clearly increase welfare in cases where the seller is not a monopolist or in collusion with the other sellers in the market. In such cases any purchaser required to pay a monopoly price will purchase from a different seller (Hovenkamp, 2018a). In virtually all litigated variable proportion tie cases the seller is not a monopolist, and often it is not even among the largest firms in the market. For example, in Impression Prod., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523 (2017), a variable proportion tying case that the Supreme Court decided under the patent exhaustion doctrine, Lexmark’s share of the highly competitive computer printer market was less than 5 percent (Hovenkamp, 2018b). Variable proportion ties are also commonly used by franchisors, such as those in the fast food industry, where the tying product is commonly trademarked or occasionally copyrighted rather than patented. For example, the franchisor might charge a very low price or even zero for the right to a franchise, but then place an overcharge on various food products or supplies that the franchisee uses in variable proportions. As a result, the franchisor makes more money from franchisees that sell more (Queen City Pizza Inc. v. Domino’s Pizza Inc., 124 F.3d 430 (3d Cir. 1997)). Importantly, the profitability of these variable proportion ties does not depend on the seller’s market power, but only on sufficient product differentiation or branding to make its tying product attractive. Many of the defendants in franchise tying claims have been relatively minor firms. For example, Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971) found antitrust liability for a variable proportion franchise by a struggling, minor fast food franchisor. The market power requirement was thought to be met because the defendant’s name was trademarked. As noted earlier, that legal conclusion has now been overruled. D.  Patent Pools In a patent pool, several patent holders license their patents into a common ‘pool,’ or organization that relicenses them out to members. The pool may also license to outside manufacturers who do not own relevant patents of their own. While patent pools have existed for a long time, in recent decades their growth has been exponential, thanks largely to the rapid development of networked products sold by multiple firms. The products include telecommunications and other digital devices as well as computer and video technology. A patent pool is a ‘horizontal’ restraint to the extent that its participants are competitors in the product market or license competing technologies. The relationship among the parties is often more complex, however. First of all, one important value of patent pooling is to facilitate the coordinated use of complementary technologies, but firms that produce pure complements are not competitors. Another use, equally or more important in some markets, is to minimize the transaction costs of patent management. For such savings to occur the pool members can have any relationship, from competitor, to vertically related, or complementary. Historical rationales for pooling focused on the differences between complements and substitutes (Gilbert, 2004; Santore, 2010). Pooling or cross-licensing among different producers in the same industry was thought to be procompetitive if the shared patents were complements with one another, but more likely to be anticompetitive if they were

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Intellectual property and competition  249 substitutes (Shapiro, 2001). If a patent is a discrete unit of innovation whose validity and boundaries are easily assessed, this distinction makes sense. Complements are ordinarily used together, meaning that joining them can create social benefits. For example, if one firm owns a patent on a desirable lawn mower motor and another owns a patent on a desirable throttle, pooling will enable the two firms to produce mowers that have both improvements. By contrast, substitutes are used in the alternative rather than together. This makes price-fixing a more likely explanation. The distinction between complements and substitutes is less important, however, in a world where patents are numerous and complex, with many claims, costly to interpret, and of uncertain quality (Lerner and Tirole, 2004). In such a setting, the economics of transaction costs and boundary enforcement dominates other explanations. That is to say, the modern patent pool in information technologies is a type of commons for which sharing with management rules is cheaper and more effective than individual appropriation and enforcement. Patent pools for complex information technologies can contain thousands of patents. For example, the MPEG-LA pool for digital video technology controls about 5,000.5 Subsequent to issuance, most of these patents have never been assessed for validity and scope. Even getting a legal opinion on these issues can be very costly. Many of the patents have numerous claims, often making the relationship among different patents far more complex than simple substitutes or complements. Further, the substitute/complement question often cannot be answered until one examines the device that intends to use them. For example, the licensees of the MPEG-LA pool include multiple competing makers of digital cameras and phones, but also producers of complementary products such as flash memories, video displays or projectors, film or photo editing software, and the like. Whether two patents are substitutes, complements, or simply not practiced at all can depend on the type of device that the manufacturer produces. One illustration of these complex relationships is the Princo litigation in the Federal Circuit, which involved shared technology for developing rewritable digital discs (Princo Corp. v. Int’l Trade Comm’n, 616 F.3d 1338 (Fed. Cir. 2010)). A feature that located the stylus on a rewritable disc came in both patented analog and digital versions. The two versions were substitutes in the product market, because a manufacturer would use one of them but not both. However, at least one claim of the analog version wrote on the digital patent, making the two patents legal complements as well. Regardless of their function, two patents are complements if someone cannot practice one without infringing the other (Princo Corp. v. Int’l Trade Comm’n, 616 F.3d 1338 (Fed. Cir. 2010); Bohannan, 2011, pp. 510–11). Indeed, not until after costly claim construction would we know how the patents relate to one another. Even then, claim construction reversal rates are unacceptably high (Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., 2014 WL 2885379 (U.S.) (U.S., 2014)) (amicus brief). Finally, the relationship between substitutes and complements is relevant to one additional factor: in markets where multiple technological alternatives exist, the pooling of substitutes may serve to deny access to outsiders. For example, if there are three known technological alternatives for solving a particular problem a pool that acquires   See http://www.mpegla.com/main/Pages/AboutHistory.aspx.

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250  Research handbook on the economics of IP law volume 1 the patents to all three may be in a position to exclude non-pool members from the product market. A more robust explanation for pooling in high tech information markets comes from the theory of commons development (Bohannan and Hovenkamp, 2012). As Ronald Coase argued in The Nature of the Firm (Coase, 1937), the boundaries of a firm are determined by its costs of doing business. A firm makes for itself or buys from others, depending on which alternative is more profitable. When it makes something for itself its boundaries expand, and when it buys from others they contract (Hovenkamp, 2011a). Property rights, including IPRs, provide the legal power to exclude, but they do not always make individual exclusion the best choice. The traditional property world is full of instances, ranging from shared driveways and party walls to community owned tennis courts and swimming pools, where individuals share because sharing is cheaper or more productive than exclusion. The same thing has been true for many centuries of so-called common pool resources such as fisheries, irrigation rights, or grazing rights. One hundred fishermen who own a large lake could if they wished build fences cutting the lake into 100 pieces. But subdividing would be costly, would very likely produce many disputes, and would be devastating to the yield of a mobile species of fish (Ostrom, 1990). Patent rights in information technologies are similar. While firms are certainly entitled to own patents individually, defining and defending boundaries might be much less productive than sharing them reciprocally with others. While patent pools created to limit boundary problems have some similarities to common pool resources, they are not identical and some differences are critical to competitive impact. Most traditional common pool resources are ‘rivalrous,’ which means that each unit taken depletes what is left. Uncontrolled sharing leads to overuse, as shown by the fate of the American Bison as well as chronic overfishing in many fishing commons. For this reason, catch or harvest limitations are essential if the commons is to operate efficiently. Indeed, a principal difficulty in commons management is making and enforcing access or harvest rules (Ostrom, 1990). By contrast, IPRs are generally nonrivalrous. An IP right such as a patent can be used many times without depleting what is left over. As a result, output restraints in the product market are more suspicious in IP commons than in traditional commons (Bohannan and Hovenkamp, 2012). Another difference between modern information technology patent pools and traditional commons is the diversity of the participants. All those sharing rights on a common fishery or pasture are likely to be fishermen and ranchers with relatively undifferentiated businesses. By contrast, given the nature of multi-claim patents, those who practice them might be highly diverse, producing complements or unrelated technologies as much as they produce substitutes. That is clearly true of the previously described MPEG-LA pool. A complex device such as a digital video camera might practice many patents in the pool, while a simple device such as a memory chip or photo editing software employs only a few. These differences have led to claims akin to anticompetitive tying. A firm that is required to license all of a pool’s package of 5,000 patents may complain that it really uses only 200 of the patents. In this case, the patents it uses are the ‘tying product,’ while the unwanted patents are the ‘tied product.’ These antitrust claims nearly always fail, for the simple reason that competition is not injured. Forcing someone to take a bigger product than he might want—such as 100 acres of land instead of a single residential lot—might present a bargaining problem. It is not anticompetitive, however, because no one is being

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Intellectual property and competition  251 excluded. Further, the cost of determining which of the pool’s patents the complaining licensee actually practiced could be much greater than the cost of the license fee itself. As one court observed in rejecting such an antitrust claim, ‘[I]t is not anticompetitive for a patent pool to include numerous potentially blocking patents, patents which may or may not be essential but which are more efficient to license as part of the pool than to risk the expense of future litigation’ (Nero AG v. MPEG LA, LLC, 2010 WL 4366448 (C.D. Cal. 2010)). E.  Exclusionary Practices 1.  Walker process and unreasonable infringement claims By their nature IPRs create a power to exclude. Asserting that right is protected by § 271(d)(3) of the Patent Act as well as constitutional protections of the right of access to the courts (Areeda and Hovenkamp, 2009–15). No protection exists, however, for ‘baseless’ claims having no foundation in fact or law. The Supreme Court’s decision in Walker Process Equip., Inc. v. Food Mach. and Chem. Corp., 382 U.S. 172 (1965) recognized that improper patent infringement actions could violate § 2 of the Sherman Act if they excluded another firm unreasonably. As noted previously, antitrust has little or no role in policing pre-issuance patent applicant conduct. Many Walker Process cases, including Walker Process itself, involve some pre-issuance conduct. In Walker Process, the patent applicant failed to inform the patent examiner about sales made prior to patent application that, if disclosed, would have barred the patent. See 35 U.S.C. § 102(a) (1). Other cases have involved other forms of inequitable conduct before the USPTO, including failures to inform the examiner of known prior art that would have defeated patentability (Nobelpharma AB v. Implant Innovations, Inc., 129 F.3d 1463 (Fed. Cir. 1997)). Importantly, however, merely obtaining a patent improperly is not an antitrust violation. Further the patent system has numerous remedies for improper conduct before the USPTO. Walker Process itself involves the post-issuance practice of filing an infringement suit, or engaging in other enforcement activity such as a threat to sue, on a patent that the owner should reasonably have known to be invalid or unenforceable under the circumstances. Antitrust liability for Walker Process violations requires not only the improper infringement action, but also a structural basis for thinking that the lawsuit either perpetuates or threatens to create a market monopoly. This makes the antitrust remedy much less readily available than the ‘exceptional case’ remedy in § 285 of the Patent Act, which authorizes a judge to award attorney’s fees against a patentee who makes an improper claim or commits other litigation misconduct. The Supreme Court’s decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) made such awards easier to obtain. At this writing, it remains to be seen if this decision will have any impact on the availability of antitrust remedies. One 2014 decision did find some basis for comparison (Tyco Healthcare Group LP v. Mutual Pharma. Co., Inc., 762 F.3d 1338 (Fed. Cir. 2014)). As formulated, Walker Process reaches no more than a small portion of socially harmful infringement actions. It applies in cases where questions of validity or infringement are relatively clear and, given that, the patent holder has sued unreasonably. A far larger number of harmful infringement actions arise out of problems of ‘notice failure’ (Menell and Scotchmer, 2007; Hovenkamp, 2011b). Because patent infringement does not require

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252  Research handbook on the economics of IP law volume 1 advance notice of someone else’s patents, many innocent innovators are later caught by surprise simply because the cost of searching patents or interpreting their claims is so high and the results so unreliable. These are features of the patent system itself, however, and generally cannot be remedied by the antitrust laws. 2. Acquisitions Section 261 of the Patent Act expressly authorizes patentees to assign their patents to others, although it does not authorize anticompetitive assignments. Even monopolists should be entitled to acquire technology that they need to improve their own products or processes. Nevertheless, a few qualifications are important. First, to improve its own technology a dominant firm requires no more than a nonexclusive license. Second, acquiring a patent in order to improve one’s own technology necessitates practicing the patent; acquisition and nonuse does nothing to improve the acquirer’s own product, but may serve to exclude rivals from access to alternative technologies. Third, under some circumstances the acquisition of exclusive rights in competing patents can be a significant threat to competition, particularly when the patents represent all of the best alternatives for operating in some market. Suppose, for example, that patent portfolios Alpha, Beta, and Gamma represent the only three commercially feasible ways of providing a particular service. If a dominant firm acquired exclusive rights in all three it would be able to exclude competitors from the market even though it would likely be practicing only one of the three alternatives. Such acquisitions of competing portfolios should be challengeable as unlawful mergers under § 7 of the Clayton Act, which expressly applies to asset as well as stock acquisitions. The courts have repeatedly held that a patent is a qualifying ‘asset,’ provided that anticompetitive effects are shown (Areeda and Hovenkamp. 2009–15). If market dominance results, the acquisitions could also be unlawful monopolization under § 2 of the Sherman Act, at least if followed by an infringement action. For example, in Intellectual Ventures I, LLC v. Capital One Financial Corp., 99 F. Supp. 3d 610 (D. Md. 2015), the court held that a non-practicing entity’s acquisition of some 3,500 patents covering an entire segment of the banking industry and subsequent enforcement could amount to unlawful monopolization (Hovenkamp and Hovenkamp, 2017; Areeda and Hovenkamp, 2009–15). If the firm has acquired only one or two patents, however, the courts have been willing to sustain infringement actions even if one or more of the patents are unused, as the Supreme Court held in Cont’l Paper Bag Co. v. E. Paper Bag Co., 210 U.S. 405 (1908), and the Federal Circuit much more recently confirmed in Trebro Mfr., Inc. v. Firefly Equip., LLC, 748 F.3d 1159 (Fed. Cir. 2014). Neither case raised an antitrust issue (Hovenkamp and Cotter, 2015). 3.  Refusal to license Neither United States antitrust law nor the Patent Act recognizes a general duty to license a patent or to share patented technology. Indeed, § 271(d)(4) of the Patent Act provides that a refusal to license is not ‘misuse or illegal extension of the patent right. . . .’ This language appears to refer to unilateral refusals to deal, but some language in a Federal Circuit dissent in Princo Corp. v. Int’l Trade Comm’n, 616 F.3d 1338 (Fed. Cir. 2010), suggested that it could reach concerted refusals to deal as well (Bohannan and Hovenkamp, 2011). That rule, if accepted, would be unfortunate, for concerted refusals

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Intellectual property and competition  253 have significantly more anticompetitive potential than unilateral refusals (Areeda and Hovenkamp, 2009–15). In its decision in Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), the Ninth Circuit held that the antitrust laws did give Kodak a duty to sell patented parts to independent repair persons who wished to fix its high-speed photocopiers. The decision has been widely criticized and was expressly rejected by the Federal Circuit in the ISO Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000), a similar case involving Xerox. As of this writing the Supreme Court has not resolved the split (Areeda and Hovenkamp, 2009–15). Currently the courts have not settled on the scope of a patentee’s duty to license a patent encumbered by a FRAND commitment, or a promise made as part of a standard setting process to license on ‘fair reasonable, and nondiscriminatory terms.’ Patentees generally make these commitments as a condition of having their patents declared ‘standards essential,’ or part of the technology to be adopted by a network. In Apple, Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014), a panel of the Federal Circuit split three ways on the question. Nonetheless, it seems clear that if the owner of a FRAND-encumbered patent has executed a contractual promise to license to all on FRAND terms, then an infringement suit in conflict with that contractual obligation would be improper, as the court found in Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024 (9th Cir. 2015). It could occasion antitrust liability, although antitrust would not necessarily be the best vehicle for assessing it because the challenger must also establish market power and the creation of monopoly. The Patent Act’s own remedial measures, such as the previously discussed ‘exceptional case’ provision, would provide a more direct route to relief, although not treble damages. One must also distinguish between simple and conditional refusals to grant an IP license or sell a good covered by an IP right. Section 3 of the Clayton Act, discussed above, expressly limits certain conditional licensing contracts that threaten competition, and expressly covers goods that are patented as well as unpatented. For example, a tying arrangement can readily be construed as a refusal to sell or license a tying product unless the buyer also takes the tied product. The legality of a conditional refusal depends on the legality of the underlying condition. Another important distinction is between compulsory licensing as a general antitrust duty and compulsory licensing as a remedy for some other antitrust violation. In many antitrust cases the courts have determined that compulsory licensing is the best way to undo the effects of some other violation. Merger remedies often require IP licensing as a condition for approval and many structural breakups, such as the one that dismantled the nationwide AT&T telephone network, could not have succeeded unless each of the spun off companies received nonexclusive licenses to the parent’s intellectual property portfolio (United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1982)). Finally, it is worth noting that the question of compulsory licensing duties is an important and controversial one, raising serious questions in market dominating networks, lifesaving pharmaceuticals, national defense, and other areas involving questions about patent social value. Antitrust is a poor vehicle for resolving most of these issues. It offers no useful tools for determining when such a dealing obligation is socially necessary. Nor does it have any mechanisms for setting a price, other than through ordinary damages measurement tools.

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254  Research handbook on the economics of IP law volume 1

IV. IP LAW’S OWN INTERNAL RULES FOR FACILITATING COMPETITION Intellectual property law also has internal rules for facilitating competition in the scope or use of IPRs (Cotter, 2006). Most of these rules are quite different from antitrust rules. IP law’s internal competition rules do not require a market definition, proof of anticompetitive market exclusion, or even an attempt to measure the impact of a particular practice on price or output. Rather they are best seen as rules that limit IP ‘overreaching’ of various kinds. A.  The First Sale (Exhaustion) Doctrine Patent and copyright law’s ‘first sale,’ or exhaustion rule, limits the power of a right holder to restrict the use or resale of a protected good once it has been sold. Both the patent and copyright exhaustion rules were originally judge-made, but subsequently Congress enacted the copyright first sale doctrine into the statute, at 17 U.S.C. §109(a). In its simplest form the exhaustion rule states that the sale, not the license or lease, of a patented or copyrighted good exhausts the right holder’s legal interest in that particular copy. The exhaustion doctrine has been used to strike down resale price restrictions, under both copyright (Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908)); and patent (United States v. Univis Lens Co., 316 U.S. 241 (1942)). It has been applied to quasiexclusive dealing restrictions in patents (Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008)), and has also been used to strike down limitations on where purchased goods can be sold, in both copyright (Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013)) and patents (Adams v. Burke, 84 U.S. 453 (1873)); Hovenkamp, 2011c). In 2017 the Supreme Court held that a patentee could not avoid exhaustion by making its sale ‘conditional’ on certain post-sale restrictions, no matter how clearly the condition was stated (Impression Products, Inc. v. Lexmark, Inc., 137 S. Ct. 1523 (2017)). The Court located the policy rationale for this concern in the common law rules limiting restraints on alienation. Even though the first sale rule reaches many of the same practices that antitrust law reaches, such as tying, exclusive dealing, or RPM, it cannot be counted as an antitrust provision. Its application is completely indifferent to competitive effects, requiring only that there be a qualifying ‘sale.’ Once such a sale has been found6 the post-sale restraint becomes unenforceable per se, without regard to competitive effects. One view of the doctrine is that it is intended to limit the reach of patent law in order to leave space for other bodies of commercial law (Duffy and Hynes, 2016; Hovenkamp, 2011c). Another view is that it is a creature of federalism, limiting the reach of federal IP supremacy in order to ensure that states retain the power to control post-sale restraints on protected goods (Hovenkamp, 2016b).

6   Bowman v. Monsanto Co., 133 S. Ct. 1761 (2013) held that exhaustion did not apply to selfreplicating seed where the replanted seed was a subsequent generation and not the selfsame seed that the infringement defendant had purchased.

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Intellectual property and competition  255 B. ‘Misuse’ The misuse doctrine originated in patent law and was later expanded to copyright. It is entirely judge-made, and the only references to it in the Patent Act are limitations contained in the Patent Misuse Reform Act, 35 U.S.C. § 271(d), rather than recognition. Almost from the beginning misuse doctrine got off to a troublesome start. The Supreme Court’s decision in the Motion Picture Patents Co. v. Universal Film Co., 243 U.S. 502 (1917) case, where a version of the doctrine was first recognized, almost surely involved an anticompetitive restraint. The owner of a market dominant projector sold it subject to a license restriction permitting projection only of its own films. But the Clayton Act had already been passed, and in 15 U.S.C. § 14 it expressly prohibited patent ties that injured competition. To be sure, the competition issue was raised as a defense to an infringement action rather than an antitrust claim, but by this time the Supreme Court had already held in Cont’l Wall Paper Co. v. Louis Voight and Sons Co., 212 U.S. 227 (1909) that illegality under the antitrust laws was a complete defense to an enforcement action, such as a breach of contract suit. Therefore, a patent-law-generated misuse doctrine was unnecessary. In subsequent decades, misuse doctrine was applied aggressively to patent tying, exclusive dealing, royalty extensions, and other licensing arrangements where injury to competition was nowhere in view. It is no wonder that during a later era of antitrust contraction both courts and commentators severely criticized ‘misuse’ unless its application was limited to conduct that violated the antitrust laws (USM Corp. v. SPS Tech., Inc., 694 F.2d 505 (7th Cir. 1982); Bohannan, 2011; Lim, 2013). The courts have also recognized copyright ‘misuse’ where the copyright infringement plaintiff had attempted to ‘sequester’ uncopyrightable public data in a copyrighted database program. Judge Posner made clear that the violation in question was not of the antitrust laws. It was a unilateral act and there was no finding that the infringement plaintiff had sufficient market power (Assessment Tech. of Wisconsin., LLC v. Wiredata, Inc., 350 F.3d 640, 646 (7th Cir. 2003)).7 Rather, the concern was strictly one of copyright law, which both protects copyrighted content but also seeks to ensure that material in the public domain can be accessed. In 2015, the Supreme Court breathed new life into one particular variation of the misuse doctrine. In Kimble v. Marvel Entm’t Co., LLC, 135 S. Ct. 2401 (2015), it adhered to the much-criticized rule adopted by the Supreme Court in Brulotte v. Thys Co., 379 U.S. 29 (1964), that a license agreement basing royalties on post-expiration patent use is unenforceable per se. Kimble did not attempt to justify the original Brulotte rule, but held only that reliance plus stare decisis required adherence (Hovenkamp, 2015b). The overuse and subsequent undermining of ‘misuse’ doctrine was an opportunity lost. Courts have legitimate concerns about IP overreaching as a matter of intellectual property law. The 70-year-long escapade, stretching from the 1917 Motion Picture Patents case 7   The court also relied on the Fourth Circuit’s decision in Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990), which found misuse in a restriction on a copyright licensee’s development of new technology, even though that restraint did not violate the antitrust laws. The concurring opinion in Omega S.A. v. Costco Wholesale Corp., 776 F.3d 692 (9th Cir. 2015) argued that a copyright holder committed misuse by trying to leverage copyrighted design into prohibition on product sale in the United States.

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256  Research handbook on the economics of IP law volume 1 to the 1988 Patent Misuse Reform Act, represented gross overreaching in tying doctrine under both misuse and antitrust, including the doctrine developed in Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942), that someone who was misusing its patent as against one firm could not sue anyone else, even an admitted infringer. In U.S. Gypsum Co. v. National Gypsum Co., 352 U.S. 457 (1957), the Supreme Court globalized that remedy, holding that once misuse was found the patent would be unenforceable against the entire world until the misuse was ‘purged.’ A revitalized doctrine of patent misuse should do two things. First, it should identify conduct that is socially harmful because it threatens the balance between exclusion and access created by the intellectual property laws themselves. Second, the remedy should ordinarily be limited to an injunction against the practice, or recognition that violation of the practice is not an act of infringement (Bohannan, 2011). C.  Competition-Based Limitations on ‘Functionality’ Protection One important limiting principle of IP law is that protection of a ‘function’ must come by means of a utility patent, which is more difficult to obtain than other IPRs and has a shorter duration than copyrights or trademarks. For this purpose, design patents are treated more like copyrights and trademarks rather than patents. The fundamental principle undergirding functionality limitations is that people should not be able to use IPRs to create product monopolies any more than is justified by the limitations inherent in utility patents. An important corollary is that people should not be able to turn other IPRs into quasi-patent rights in order to broaden their scope or duration. The grandparent of the doctrine is Baker v. Selden, 101 U.S. 99 (1879), which held that a copyrighted book teaching the author’s method of accounting served to protect against making unauthorized copies of the book, but not against using or teaching the method itself. That decision was followed in Bikram’s Yoga College of India, L.P. v. Evolation Yoga, LLC, 803 F.3d 1032 (9th Cir. 2015), holding that a book illustrating yoga poses and movements did not prohibit someone from teaching those motions in a class. In the area of trademark or trade dress, the Supreme Court’s important decision in TrafFix Devices, Inc. v. Market Displays, Inc., 532 U.S. 23 (2001) held that a traffic sign support that was an essential element of an expired utility patent could not be grandparented into a trademark, effectively extending the right over this functional design indefinitely (Rosetta Stone, Ltd. v. Google, Inc., 676 F.3d 144 (4th Cir. 2012); 1-800-CONTACTS, Inc. v. WhenU.Com, Inc., 414 F.3d 400 (2d Cir. 2005)).8 Similarly, copyright protection does not extend to purely functional names or commands in computer programs if good alternatives are lacking and the result serves to limit the ability of rival programmers to replicate that function (Lotus Dev. Corp. v. Borland Int’l, Inc., 49 F.3d 807 (1st Cir. 1995); Oracle Am., Inc. v. Google Inc., 750 F.3d 1339 (Fed. Cir. 2014)). Several lower courts have also held that design patents cannot be expanded so as to perform a utility function, thus excluding the products of rivals. For example, in Chrysler

8   The so-called ‘trademark use’ doctrine in its most extreme form would make it unlawful under the Lanham Act to use the trademarked name of a competitor for purposes such as comparative advertising.

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Intellectual property and competition  257 Motors Corp. v Auto Body Panels of Ohio, Inc., 908 F.2d 951 (Fed. Cir. 1990), and Best Lock Corp. v. Ilco Unican Corp., 94 F.3d 1563 (Fed. Cir. 1996), the Federal Circuit held that the owner of design patents could not use a design feature to exclude complementary products. In the first, it rejected Chrysler’s attempt to enforce a design patent on an automobile bumper mount so as to exclude competing bumper makers who could not make a Chrysler-compatible bumper without infringing the design patent (Chrysler Motors Corp. v Auto Body Panels of Ohio, Inc., 908 F.2d 951 (Fed. Cir. 1990)). In the second it prevented the owner of a design patent on a door key from enforcing a patent so as to make competitors’ keys incompatible with its locks (Best Lock Corp. v. Ilco Unican Corp., 94 F.3d 1563 (Fed. Cir. 1996)). In both cases the design patentees were attempting to create ‘technological ties.’ No determination of the patentee’s market power was made, and the ties may or may not have been antitrust violations. But that is beside the point. The issue was sequestration, not monopoly. Utility patents may permit firms to keep rivals out of the product market, but design patents should not.

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Intellectual property and competition  261 SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981). Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971). Standard Oil Co. of Calif. v. United States, 337 U.S. 293 (1949). Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20 (1912). Teva Pharmaceuticals USA, Inc. v. Sandoz Inc., 2014 WL 2885379 (U.S.) (U.S., 2014). TrafFix Devices, Inc. v. Market Displays, Inc., 532 U.S. 23 (2001). Trebro Mfr., Inc. v. Firefly Equip., LLC, 748 F.3d 1159 (Fed. Cir. 2014). Tyco Healthcare Group LP v. Mutual Pharma. Co., Inc., 762 F.3d 1338 (Fed. Cir. 2014). U.S. Gypsum Co. v. National Gypsum Co., 352 U.S. 457 (1957). United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945). United States v. Am. Can Co., 230 F. 859 (D. Md. 1916). United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1982). United States v. Dentsply Int’l, Inc., 399 F.3d 181 (3d Cir. 2005). United States v. E.I. du Pont de Nemours and Co., 351 U.S. 377 (1956). United States v. General Electric Co., 272 U.S. 476 (1926). United States v. Line Material Co., 333 U.S. 287 (1948). United States v. Loew’s, Inc., 371 U.S. 38 (1962). United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001). United States v. Singer Mfg. Co., 374 U.S. 174 (1963). United States v. Univis Lens Co., 316 U.S. 241 (1942). USM Corp. v. SPS Tech., Inc., 694 F.2d 505 (7th Cir. 1982). Walker Process Equip., Inc. v. Food Mach. and Chem. Corp., 382 U.S. 172 (1965).

Legislative Materials U.S. Const. art. I, § 8, cl. 8. 15 U.S.C. §§ 1, 2, 13, 14, 18, 68b–68c, 70b. 17 U.S.C. §§ 106, 109(a). 35 U.S.C. §§ 102(a)(1), 103, 261, 271, 271(d)(3), 271(d)(4), 271(d)(5), 285. Copyright Act of 1976, Pub. L. No. 94-533, 90 Stat. 2541 (1976), 17 U.S.C. § 101 et seq. Copyright Term Extension Act of 1998, Pub. L. No. 105-298, 112 Stat. 2827 (1998), codified in relevant part at 17 U.S.C. § 302.

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9.  Intellectual property and the economics of product differentiation Christopher S. Yoo*

9

Contents I. Introduction II. The Economics of Product Differentiation A. Monopolistic Competition B. Spatial Competition C. Implications III. Patent IV. Copyright A. Differentiated Products Competition between Different Works B. Spatial Competition and Impure Public Goods V. Trademark VI. Conclusion References

I. INTRODUCTION To date, economic analyses of intellectual property (IP) have been dominated by models that frame IP as monopolies and/or public goods. These approaches have given rise to general policy inferences, such as systematic underproduction, deadweight losses resulting from pricing above marginal cost, and the supposedly inevitable tradeoff between access to IP and the incentives to create it. These inferences in turn have led many commentators to call for calibrating different aspects of IP protection to mitigate these problems. A new literature is emerging that relaxes the assumption implicit in these models that the relevant products are homogeneous and instead proceeds from the premise that all IP faces competition from imperfect substitutes. Allowing for the possibility of product differentiation provides new insights into the economics of IP. It helps explain persistent features of IP markets that the traditional approaches cannot. It challenges the extent to which IP allows rightsholders to earn monopoly profits. It makes the market dynamics more complex by opening up new dimensions along which companies can compete. This in turn allows for possible sources of welfare outside of price and quantity and yields equilibria with different welfare characteristics. The inevitable tendency towards systematic underproduction is replaced by a more contingent world in which either underproduction *  John H. Chestnut Professor of Law, Communication, and Computer and Information Science, University of Pennsylvania.

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Intellectual property and the economics of product differentiation  263 or overproduction is possible. It also suggests a broader range of policy options for promoting optimality in IP markets. These insights have led some commentators to call this literature ‘the most important development in the economic analysis of copyright in recent years’ (Bracha and Syed, 2014, p. 1842). This chapter will review the economics of product differentiation and the literature applying that literature to IP. Section II introduces the economics of product differentiation. Sections III, IV, and V survey the literature applying these approaches to patent, copyright, and trademark respectively.

II.  THE ECONOMICS OF PRODUCT DIFFERENTIATION The seminal works in the economies of product differentiation are the monopolistic competition theory advanced by Edward Chamberlin (1933) and the spatial competition models pioneered by Harold Hotelling (1929). Each approach emphasizes different aspects of the underlying economics. Monopolistic competition models the market dynamics in the traditional price-quantity space of Marshallian economics and takes product differentiation indirectly. Conversely, spatial competition portrays differentiation directly and deals with price and quantity indirectly. A.  Monopolistic Competition Monopolistic competition retains most of the assumptions underlying perfect competition, including free entry and the presence of a substantial number of sellers.1 The key difference is that monopolistic competition relaxes the assumption that products are homogeneous and serve as perfect substitutes for one another. When products are differentiated, the structure of demand for any particular product allows producers to raise their prices without losing all of their demand, because they will be able to retain those customers who place the highest value on the particular variant that they offer. Product differentiation thus provides each producer with a degree of power over price sufficient to justify modeling each product as facing a downward-sloping demand curve. Monopolistic competition theory simplifies the analysis by assuming that consumer preferences are symmetric with respect to each product in the group. The differences across different products were abstracted away by product differentiation as consumer demand as reflecting a generic preference for variety rather than for any particular form of differentiated product. Most importantly for the purposes of this chapter, Chamberlin (1933, pp. 57–64) regarded patents, copyrighted works, and trademarks as examples of differentiated products to which his theory applied. The primary effect of this assumption is to place each product in equal competition with all other products in the group rather than in localized competition with a smaller set of near neighbors. Chamberlin’s original formulation also assumed that each producer

1   Robinson (1933) proposed a related theory of imperfect competition at roughly the same time as Chamberlin. Chamberlin’s approach focused explicitly on product differentiation and provides the more appropriate focus for this chapter.

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264  Research handbook on the economics of IP law volume 1 faced identical cost curves. This allowed him to employ a single graph portraying the price-quantity response of a representative firm to model the entire market, although relaxing the symmetry assumptions were later shown not to affect the core analysis (Kaldor, 1935; Archibald, 1961). Because monopolistic competition portrays market interactions in a classic pricequantity space, it is quite easily integrated into a conventional welfare analysis based on economic surplus. In the short run, profit-maximizing producers will produce at the quantity (QSR) where their marginal revenue (MRSR) and marginal cost (MC) curves intersect. Because monopolistically competitive producers face downward-sloping demand curves (DSR), in the short run they will set prices in the same manner as a monopolist (PSR), as depicted in Figure 9.1. This results in a significant short-run deadweight loss (DWLSR). Should price exceed average cost (AC), producers may also earn short-run supracompetitive profits (ProfitSR). Were entry impossible, this short-run equilibrium would be stable, and the long-run outcome would be the same as under the monopoly analysis. Monopolistic competition, however, assumes that entry by close substitutes is always possible. As a result, the presence of supracompetitive profits attracts other producers selling similar products. Because all of the products in the market are in equal competition with one another, new entrants take business equally from each of the incumbents, with the demand and supply curves representing the decision confronting a representative firm, with the entire industry constituting the sum of all such graphs. Entry causes the demand curve confronting each incumbent to shift inwards (DLR), as customers substitute purchases of the new product for those of the incumbents. Although some have suggested that the demand curve could either increase or decrease in slope, the increase in the number of imperfect substitutes should generally cause demand to become more elastic (Varian, 2010). The resulting long-run equilibrium is depicted in Figure 9.2. Entry continues until no profits remain, at which point the long-run equilibrium price $

PSR ProfitSR

DWLSR AC MC DSR QSR

Q MRSR

Figure 9.1  Short-run equilibrium under monopolistic competition

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Intellectual property and the economics of product differentiation  265 $

PSR PLR DWLLR

AC DLR

QLR

QSR

MC DSR Q

Figure 9.2  Long-run equilibrium under monopolistic competition (PLR) will be lower than the short-run equilibrium price (PSR). Under Chamberlin’s original formulation, this occurs when the surplus appropriated by each producer is just enough to cover the fixed costs of entry, a condition which exists when the long-run demand curve (DLR) is tangent to the average cost curve (AC). There is, however, a wellknown exception to Chamberlin’s zero-profit result. The indivisibility of fixed costs may create a situation in which n products would earn small profits while n + 1 products would run losses. This so-called ‘integer problem’ allows for an equilibrium in which n products each earn sustainable profits (Kaldor, 1935). So long as the economy is sufficiently ‘large’ (i.e., so long as n is relatively sizeable), such profits will be negligible (Eaton and Lipsey, 1989). As entry causes the demand curve to flatten, long-run deadweight loss shrinks (DWLLR). Note that whether the market will reach long-run equilibrium on a flatter portion of the demand curve depends on the assumption that the relevant demand curve is linear. If the demand function is curved, it could be tangent to the average cost curve at any one of a number of points. In that case, it is no longer inevitable that the market will reach equilibrium at a place where the spread between price and marginal cost is narrower. In addition, the tangency solution also presupposes that the producer is charging the same price to all consumers. Allowing for price discrimination raises the possibility that a firm might still earn supracompetitive profits even at the point of tangency, meaning that further entry would occur. The equilibrium number of products can be determined by dividing the total surplus associated with the entire market by the fixed costs needed for entry. Indeed, as the size of the market expands or the size of the fixed costs declines, the number of products asymptotically approaches infinity and the deadweight loss approaches zero. In this way, as Yoo (2004) pointed out, that access to existing products may be promoted indirectly by stimulating entry instead of being promoted directly by reducing the scope of the entitlement. Whether an economy is ‘large’ in this manner does not depend upon the size of the fixed costs relative to the size of the marginal costs,

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266  Research handbook on the economics of IP law volume 1 as suggested by the traditional approach. Instead, it depends on the magnitude of the fixed costs relative to the overall market. Markets for differentiated products are also biased against products whose demands are structured in a way that makes it difficult for the producer to appropriate surplus (Spence, 1976a, 1976b; Koenker and Perry, 1981; Beath and Katsoulacos, 1991). Chamberlin regarded the welfare characteristics of the resulting equilibrium as demonstrating the systematic inefficiency of markets. For example, Chamberlin observed that monopolistically competitive markets necessarily set prices above marginal cost. In addition, the fact that markets reach equilibrium on the declining portion of the average cost curve implied that the monopolistically competitive markets exhibit a sustainable tendency towards excess capacity and that overall costs could be reduced if the total number of sellers were reduced and the existing sellers were permitted to increase their production. He also implied that many forms of product differentiation, particularly those associated with trademarks, are spurious and represent attempts to increase profits that do not yield any consumer benefits. The models demonstrated the existence of ‘wastes of competition’ that can be as severe as the ‘wastes of monopoly’ and required regulatory correction (Chamberlin, 1933, pp. 104–109). Chamberlin’s work prompted a vigorous attack from the Chicago School, who appeared to regard its finding of endemic market failure as an attack on perfect competition as the benchmark for optimal economic performance (see, e.g., Stigler, 1949; Friedman, 1953; see Chamberlin, 1957, for his response). Subsequent development of the literature on monopolistic competition appears to have narrowed the scope of some of these disagreements. For example, Chamberlin’s excess capacity theorem, which is often regarded as the theory’s most significant result, is based entirely on measuring welfare on the price-quantity space. It ignores the fact that there may be compensating welfare gains from the product characteristics space (Bishop, 1967; Spence, 1976a; Dixit and Stiglitz, 1977), as Chamberlin (1950, p. 89) recognized in his later work. A more trenchant criticism offered centers on monopolistic competition’s failure to generate testable hypotheses (Archibald, 1961). As Paul Samuelson (1967) has noted, a theory should be measured by the insights that it provides, not for its elegance or for the simplicity of the policy inferences it is able to generate. Commentators have noted the difficulties in measuring monopolistic competition empirically (Spence, 1976a). B.  Spatial Competition The fact that monopolistic competition depicts market interactions in the classic pricequantity space of microeconomics allows for a natural representation of economic welfare associated with total surplus. This approach does not portray product differentiation directly. Spatial competition models, in contrast, adopt the opposite tack, making product differentiation the primary variable instead of price and quantity. The original formulations assumed that, rather than competing on price, firms instead vie for business by choosing a location along a linear geographic space. Because of transportation costs, customers derive greater utility from purchasing from sellers that are closer to their locations. Utility declines as the distance from the store increases until the entire surplus is completely consumed by transportation costs, at which point the customer decides not to purchase from that vendor. Spatial differentiation thus gives sellers a degree of power

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Intellectual property and the economics of product differentiation  267 utility

A

B

C

A

B

C

D

E

F

G

Figure 9.3  Impact of fixed costs on the equilibrium under spatial competition over price, as they can increase price without losing those customers who are situated closest (Hotelling, 1929). Economists quickly recognized that the same framework could be used to model competition among products distributed along a characteristics space rather than a geographic space (Hotelling, 1929; Chamberlin, 1933; Kaldor, 1935; see generally Lancaster, 1979). Under this approach, customers decide whether to purchase a particular product based on how closely that product matches their ideal preferences. The decline in utility represented by transportation costs in geographic location models is replaced by divergence from a consumer’s preferred characteristics. Examples of two such characteristics spaces are depicted in Figure 9.3. The horizontal dimension depicts where along the continuum of characteristics a particular product is located. The vertical dimension in the graph represents the net surplus available from consumers occupying any particular location. Consumers’ ideal preferences are assumed to be distributed uniformly across the characteristics space. Each product is produced by a different firm, and the surplus captured by each product is depicted by a triangle. The decline in utility resulting from the good’s divergence from the consumer’s ideal preferences is represented by the slope of the triangle’s sides. The slope of this line is determined by the structure of demand, as reflected in the relevant cross-price elasticities. If a product serves as a relatively good substitute for similar products, the slope will be relatively flat. If not, the slope will be relatively steep. Consumers are assumed to purchase whichever product lies closest to their ideal preferences. As noted earlier, the symmetric preference assumption posits that all products within a group are in equal competition with one another and that entry by a new product takes business from all incumbents evenly. This assumption is represented in spatial models either by positing that all products enter simultaneously or by assuming that incumbent products respond to product entry by costlessly shifting their position. The result is an equilibrium in which products are evenly distributed across the relevant product space. To ensure the existence of equilibrium, the characteristics space is typically

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268  Research handbook on the economics of IP law volume 1 modeled as a unit line or a unit circle. Moreover, firms face competition in the areas where two triangles overlap, but will act as monopolists in the areas closer to the peaks of the triangles, which effectively means that they will face a kinked demand curve and the accompanying difficulties with defining equilibrium in terms of tangency (Salop, 1979).2 As was the case under monopolistic competition, entry by additional products divides the available surplus into increasingly smaller fragments until the size of those fragments equals the fixed costs of entry, at which point no product earns supracompetitive profits, subject again to a mild exception for fixed-cost indivisibilities. Again, the equilibrium number of products can be determined by dividing the total surplus by the fixed costs of entry. If the total surplus is significantly greater than the fixed costs of entry, the economy will be relatively ‘large’ and the competition among sellers will be relatively substantial. As the available surplus increases or the size of the fixed costs approaches zero, the number of products will approach infinity and all customers will purchase products exactly matched to their tastes. If the total surplus is small relative to the fixed costs, the economy will be relatively ‘small’ and products may well enjoy a degree of local monopoly or oligopoly power. Although entry by competitors remains possible under these conditions, the volume may be too low to support additional sellers (Eaton and Wooders, 1985; Eaton and Lipsey, 1989). Spatial competition provides for a direct representation of product differentiation, although the fact that these models do not employ the price-quantity space of neoclassical economics means that price competition must be modeled separately and makes it more difficult to integrate spatial models into conventional analyses of economic welfare. In addition, spatial competition models are subject to a number of qualifications and refinements. Not all products can be organized into a simple spectrum of characteristics. Furthermore, while the assumption that utility falls linearly with distance is natural when measuring the impact of distance in a geographic space, it appears to be less plausible in a characteristics space, where the decay in utility could take just about any shape. As it turns out, the assumption that utility falls linearly is a strong one. For example, the assumption that utility decays quadratically instead of linearly leads to radically different results (d’Aspremont et al., 1979). The two different depictions in Figure 9.3 illustrate how the relative size of the total available surplus affects the degree of competition. The available surplus in the right-hand graph is 50 percent larger than that in the left-hand graph. In both graphs, each individual product captures an identical surplus. As the graphs illustrate, increasing the size of the overall market yields a fairly substantial increase in the degree of competition. More sophisticated models that allow for price reactions among competitors further underscore the importance of the relative size of the economy. These models demonstrate that so

2   Interestingly, the assumption that prices are constant and endogenously determined can give rise to a different equilibrium in which products, rather than being spread evenly across the characteristics space, divide the market by entering at the same point (Hotelling, 1929). The oddities resulting from refusing to allow for price competition are well recognized. For example, the assumption that firms do not compete on price necessarily implies that effective competition exists only with respect to consumers located equidistantly from two works. This effect disappears, however, if the model is broadened to allow for endogenous pricing in which price competition is possible.

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Intellectual property and the economics of product differentiation  269 long as marginal costs are nonzero, increases in the size of the economy cause prices to approach marginal cost and reduce profits by bringing the revenue captured by each producer more into line with fixed costs. Furthermore, the analysis becomes significantly more complicated when one relaxes the rather restrictive assumptions that typify the basic model of spatial competition described above. More refined models allow for the possibility of sunk costs in location and sequential entry (Baumol, 1967; Hay, 1976; Prescott and Visscher, 1977; Eaton and Lipsey, 1980; Lane, 1980; Bonanno, 1987; Neven, 1987; Bhaskar and To, 2004). Other models relax the assumption that prices are fixed and allow prices to be determined endogenously (Salop, 1979; Eaton and Wooders, 1985). Still other models allow for the possibility that a single firm might produce multiple products occupying multiple locations (Schmalensee, 1978; Eaton and Lipsey, 1979; Brander and Eaton, 1984; Judd, 1985; Bonanno, 1987). Still other models allow for the possibility that consumers base their purchases on multiple dimensions of characteristics, which means that firms compete with more than just two adjacent competitors. For example, if spatial competition takes place on three dimensions, each work may compete with as many as six adjacent neighbors. If competition expands to four dimensions, works may theoretically compete with as many as half the works operating in the product group (Archibald and Rosenbluth, 1975). An empirical assessment of the automobile industry concluded that differentiated products compete in as many as six dimensions (Feenstra and Levinsohn, 1995). Finally, the results change significantly when one allows for the possibility that consumer preferences are not distributed equally across the characteristics space (Kaldor, 1935; Eaton and Lipsey, 1976). The basic model is nonetheless sufficient to capture the key intuitions about how differentiated products compete and to provide useful insights into markets for differentiated products. As was the case with monopolistic competition, leading commentators on spatial competition have noted the difficulty in determining whether any particular equilibrium is optimal (Lancaster, 1979; Eaton and Lipsey, 1989). C. Implications Compared with the traditional approach, the predictions of the differentiated products approach to copyright fit better with features of real-world markets for IP. One of the most interesting aspects of the differentiated products approach is that it reconceptualizes the tension between access and incentives that motivates much of the economic analysis of IP. Chamberlin’s primary point is that the fact that equilibrium prices in markets for differentiated products exceed marginal cost raises questions whether marginal cost pricing represents the appropriate benchmark for efficiency. In addition, two complementary insights reveal how product differentiation both creates and limits the degree of market power that producers enjoy. The downwardsloping nature of demand curves associated with product differentiation also provides an explanation of how producers can maintain the power over price to engage in price discrimination in markets that are open to free entry and subject to competition (for the seminal work, see Spulber, 1979, 1981; Katz, 1984; and Borenstein, 1985; for a recent survey, see Stole, 2007). At the same time, the fact that products serve as imperfect substitutes for one another allows multiple producers to coexist and prevent markets from collapsing into natural monopolies even when average costs are constantly declining by

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270  Research handbook on the economics of IP law volume 1 permitting producers to compete on dimensions other than price (Maurer and Scotchmer, 2002). In so doing, product differentiation appears to provide a more realistic description of real-world markets. At the same time, in contrast to perfect competition, in which entry generally promotes economic welfare, product differentiation gives rise to the possibility that entry may be excessive or insufficient. Whether a market will tend towards too much or too little entry depends on the extent to which the surplus that a new entrant appropriates is the result of demand creation, that is incremental sales to new customers who previously were not in the market or incremental welfare by permitting purchasers to consume products that provide a better fit with their preferences, or demand diversion, that is surplus redistributed from producers already in the market.3 The entrant simply compares the total surplus it appropriates to its costs and enters whenever the former equals or exceeds the latter. While demand creation represents an incremental contribution to welfare, demand diversion does not. This causes firms to enter even when the fixed costs of entry exceed incremental benefits of doing so, in which case, entry is excessive. The greater the proportion of surplus comes from demand diversion, the greater the tendency towards excess entry. Indeed, Salop (1979) estimates that if surplus falls off linearly with distance, the equilibrium number of producers will exceed the optimum by a factor of two. As Eaton and Lipsey (1989) note, there is thus no invisible hand inexorably pushing markets for differentiated products towards optimality. While demand diversion in homogeneous product markets unambiguously produces excess entry, differentiated product markets may create either excess or insufficient entry (Mankiw and Whinston, 1986). Yoo (2004) points out that the tendency towards excess entry created by demand diversion may be offset by the tendency towards insufficient entry created by producers’ inability to appropriate the surplus they create. Whether entry levels will exceed or fall short of the optimum depends upon which effect dominates.4 The possibility of insufficient entry created by incomplete appropriability also opens up the policy space by suggesting that access and incentives need not always be in conflict. If, on the one hand, entry is excessive, any strengthening of IP rights will push incentives to create in the wrong direction. If, on the other hand, entry is insufficient, strengthening IP rights can push incentives in the right direction while simultaneously indirectly promoting access by stimulating greater price competition among the differentiated products.

3   The terminology used in this discussion is taken from Borenstein (1985). For similar analyses using other terminology, see Mankiw and Whinston (1986) (‘business stealing effect’) and Beath and Katsoulacos (1991) (‘cannibalisation’). For other works recognizing the concept without employing a distinctive moniker, see Spence (1976a, 1976b); Koenker and Perry (1981). 4   Although demand diversion allows a new product to capture the same number of buyers as would result under complete appropriability, it does not result in the capture of the same buyers. Instead, demand diversion substitutes buyers who already were purchasing other products for new buyers whose purchases represent incremental sales. Thus, although the total number of sales may reach optimal levels, the total surplus generated by those sales is likely to fall somewhat short of welfare-maximizing levels because the buyers who actually purchase the product are not necessarily those who place the highest value on the good. Some consumers may purchase goods that provide a better fit with their ideal preferences, while others may purchase goods in which the fit is worse. As a result, the equilibrium amounts to a close approximation of a first-best outcome that falls somewhat short of maximizing welfare.

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III. PATENT During the early 1990s, economists produced a vibrant body of scholarship applying the economics of product differentiation to IP. This literature focused on the tradeoff between patent length, measured in the number of years of exclusivity included in the patent grant, and breadth, determined by the extent to which patents foreclose others from using similar technologies. For example, Gilbert and Shapiro (1990) offer a model that measured product differentiation by the ability to raise price above marginal cost to find that welfare would be maximized if patents were infinitely lived and patent breadth were adjusted to provide the appropriate reward for investment. This is because adjusting patent duration gives rise to the familiar access-incentives tradeoff by both increasing the surplus contained within the patent grant and permitting increases in price, whereas Gilbert and Shapiro’s measure of breadth implicates only the latter.5 Gallini (1992) defines breadth in terms of the size of the cost to invent around a patent to present a model finding short-lived, broad patents would be optimal because longer terms hurt patent holders by increasing competitors’ incentives to invent around the patent.6 Klemperer (1990) models production differentiation directly in a Hotelling-style model, characterizing patent scope as the size of the characteristics space over which the patent gives the patentee exclusivity rights. He concludes that if consumer preferences are homogeneous across all products, infinitely lived, narrow patents would maximize welfare. If consumers have strong preferences for particular product characteristics, short, broad patents would improve welfare. This literature recognizes the existence of additional policy instruments that would calibrate the strength of the patent grant. Gilbert and Shapiro define breadth in a way that effectively focuses on appropriability of surplus. Klemperer demonstrates the ambiguous impact of demand diversion by showing how a high level of substitution among goods favors granting a narrow patent.7 The result is a policy space that is richer and more nuanced than the previous literature which focused exclusively on calibrating patent duration (Nordhaus, 1969; Scherer 1972). Later scholars extended this literature in important ways. Matutes et al. (1996) look at the proper patent regime for basic innovations that benefit multiple markets. In order to minimize the period during which the inventor postpones disclosing its invention in order to have more time to develop the expertise to commercialize these multiple markets, Matutes et al. prefer a patent that is short in duration, but broad in scope. O’Donoghue et al. (1998) apply a conventional spatial competition model with substitutes from alternative technologies distributed along a quality scale to distinguish between lagging breadth, which is breadth that forecloses low-cost imitations, and leading breadth, which forecloses higher-quality innovations. They found patents that protected lagging breadth provided sufficient incentives for R&D. With respect to leading breadth, a long, narrow patent was superior in reducing R&D costs, while a short, broad patent would reduce market distortions. The authors conclude that a long, narrow patent is preferable when the hit rate of 5   Tandon (1982) proposed a similar model favoring infinitely lived patents limited by a compulsory license. 6   Denicolò (1996) presents a model yielding a similar result. 7   See also Waterson (1990), using a similar spatial competition model to show how demand diversion can lead to excess entry.

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272  Research handbook on the economics of IP law volume 1 new innovations is high. Maurer and Scotchmer (2002) focus on independent invention, arguing for narrow breadth protection because the threat of independent invention would encourage licensing of the patent and discourage duplicative investments in R&D.8 Beschorner (2008) frames his analysis as a tradeoff among patent length, breadth, and what he terms height, which is the degree of novelty required to justify receiving a patent, to conclude that a finite patent length would maximize welfare and that a monopolist would require a lower level of novelty than would be socially optimal. Further explorations of the other aspects of product differentiation theory are likely to follow.

IV. COPYRIGHT An equally dynamic body of scholarship has emerged applying product differentiation theory to copyright, this time conducted primarily by legal academics. The initial analyses used product differentiation to analyse competition between a work and inferior quality copies of the same work (Johnson, 1985; Liebowitz, 1986; Besen and Kirby, 1989), analyse competition between creative and noncreative works (Lunney, 1996a), or to briefly mention the impact of demand diversion (Meurer, 2001). A.  Differentiated Products Competition between Different Works More complete analyses of competition between different copyrighted works began with Yoo (2004), who offered the most complete exploration of the dynamics and welfare characteristics of both the monopolistic competition and spatial competition approaches to product differentiation that has yet appeared in the literature. Importantly, it applies the traditional length versus breadth tradeoff to copyright, while adding a third dimension termed intensity, which refers to the proportion of the available surplus that copyright holders can appropriate through price discrimination and other similar mechanisms. He also notes that the size of the market relative to fixed cost determines the number of works in equilibrium. As the size of the market increases and the size of fixed costs decreases, pricing converges to the perfectly competitive outcome, although the problems of excess entry become worse, which opens the possibility of promoting access by increasing the number of surplus-generating activities contained within the copyright and facilitating copyright holders’ ability to engage in price discrimination and relying on the ensuing price competition to reduce prices, although doing so could exacerbate problems of excess entry. He then analyses the implications for copyright doctrines such as fair use, the firstsale doctrine, digital rights management, and derivative works. Abramowicz (2004) employs a spatial competition model to analyse the impact of demand diversion on optimal entry. Although he recognizes that a market can reach equilibrium with too much or too little entry, he relies on the findings of the circle model put forth by Salop (1979) and a simulation to suggest that excess entry is the more likely outcome. He acknowledges that Salop’s result depends on the assumption that the welfare that individual consumers derive from consuming a particular work falls off linearly with 8

  See Lemley and McKenna (2012) for a related argument appearing in the legal literature.

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Intellectual property and the economics of product differentiation  273 distance in the characteristics space. He also addresses a wide range of other economic issues, including wealth distribution, winner-take-all markets, positional goods, and externalities, and noneconomic issues, such as democracy. Faulhaber (2006) similarly applies the Salop model along with sunk costs in location to provide a model finding excess entry in music. Lemley and McKenna (2012) are similarly concerned about excess entry, arguing for narrowing breadth by increasing the degree of similarity required to find infringement and narrowing leading breadth by construing fair use and derivative works doctrines to provide greater latitude to works that provide incremental contributions. The divergent emphases of these two lines of research underscore the ambiguity of the welfare characteristics of differentiated product models, which both authors recognize. Bracha and Syed (2014) acknowledge the contribution of the Yoo and Abramowicz papers, but criticize both for drawing overly simple policy inferences. While both papers emphasize different sides of the divergent possible results, both acknowledge the inherent ambiguity of the differentiated products equilibria.9 The welfare ambiguity of product differentiation underscores the importance of the small empirical literature exploring the economic performance of markets for creative works. Like the theoretical literature, the empirical literature is divided. On the one hand, Goettler and Shachar (2001) empirically assess the spatial competition among the three major US television networks, concluding that the networks’ program offerings nearly fully achieved the optimum suggested by the underlying Nash equilibrium and that the shortfall was largely (but not completely) explained by the networks’ adherence to the rules of thumb against airing sitcoms after 10:00 p.m. and against airing news magazines before 10:00 p.m. On the other hand, Berry and Waldfogel (1999) empirically study entry patterns in the radio industry, finding that the deadweight losses attributable to excess entry may be substantial. They acknowledge that their study focuses exclusively on advertisers and therefore ignores potential benefits to users and that their assumption that the radio market is composed of homogeneous products causes them to ignore potential welfare benefits resulting from product differentiation. B.  Spatial Competition and Impure Public Goods A small literature also exists connecting the economics of product differentiation with the theory of impure public goods. The conventional wisdom is that IP is a pure public good and that as such exhibits a systematic tendency towards underproduction. Although most attribute that to the pricing problems inherent in zero marginal cost goods, a review of seminal works on public goods indicates that the problem is one of incentive compatibility inherent in the Samuelson condition (1954), stemming from the inability to get consumers to reveal their marginal preference for public goods. The literature on impure public goods associated with club goods (Buchanan, 1965) or local public goods (Tiebout, 1956) adds a congestion function to the standard public

9   Bracha and Syed (2014) also place great weight on the distinction between the impact of product differentiation on supramarginal versus inframarginal works. All of this is taken into account by the symmetry assumption, and the literature has long recognized that relaxing this assumption leads to inferences that are more ambiguous that Bracha and Syed suggest.

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274  Research handbook on the economics of IP law volume 1 goods set up. The resulting equilibria trade off the incurrence of additional fixed costs against the reduction in congestion costs associated with creating an additional impure public good. Unlike the Samuelson condition, congestion is potentially incentive compatible. Numerous Nobel laureates have identified the connection between spatial competition and impure public goods, with the congestion function being replaced with the transportation costs function in the product characteristics space (Samuelson, 1958; Buchanan, 1965; Stiglitz, 1977). Yoo (2007) applies the insights of impure public goods theory to copyright. As is the case with product differentiation, simple policy inferences disappear for impure public goods, including the systematic tendency towards underproduction. It similarly opens up the possibility of alternative policy approaches, such as promoting access by increasing the size of the market and stimulating entry that induces greater price competition. Because the shape of the congestion function can take any form, there is no necessary reason to believe that the equilibrium induced by the congestion function will prove optimal. Like markets for differentiated products, markets for impure public goods can produce too many works or too few.10

V. TRADEMARK Of all of the forms of IP, Chamberlin (1933) devoted the most attention to trademarks, presenting an extended discussion of them in Appendix E of his book. He regarded the differentiation associated with trademarks as motivated primarily to promote monopoly and argued that lowering the standard for infringement would bring markets closer to the competitive ideal. He particularly questioned the need for extending trademark protection to descriptive words, color, shape, design, packaging, and labels, when an ‘inconspicuous identification mark or the name and address of the producer’ would suffice. Anything more simply conveys monopoly power to the mark holder. Chamberlin acknowledged that free imitation of trademarks would harm consumers by eliminating incentives to maintain product quality, but thought that an alternative regime centered on ‘defining quality standards by law’ ‘has large possibilities’ and ‘would be equally effective.’ He also acknowledged that trademarks can stimulate variety and give consumers wider choice, but such variety came at the cost of higher prices. Although Chamberlin conceded that theory provides no basis for how best to strike this tradeoff, on balance he nonetheless came down squarely against trademarks, arguing that weakening trademark protection would discourage ‘[u]seless innovation,’ would reduce the ‘wastes of advertising,’ and would focus producers less on creating monopoly and more on production, which in turn would create ‘[f]ewer “business” men and more laborers.’ Innovations would still be protected by patent law and by first-mover advantages. If this were insufficient, trademark protection should be only of limited duration, say five years (Chamberlin, 1933, app. E). Chamberlin launched a tradition of scholars largely critical of trademarks as a source of spurious differentiation (see, e.g., Brown, 1948; Scherer, 1970, 1976; Comanor and

10   For a related analysis, see Barnes (2011) arguing that impure public goods theory does not support strengthening copyright protection.

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Intellectual property and the economics of product differentiation  275 Wilson, 1979; Schmalensee, 1979). Contemporary antitrust scholars raised similar concerns (Bain, 1956). These concerns reached their zenith in the late 1970s, exemplified by the Federal Trade Commission’s (FTC’s) case against Borden’s ReaLemon lemon juice (for an overview, see Mensch and Freeman, 1990; McClure, 1996). The initial 1974 complaint and 1976 decision by the administrative law judge alleged that Borden’s trademark promotion and advertising had created an entry barrier and required Borden to license its ReaLemon trademark to anyone wishing to compete with it. When the full Commission reviewed this decision, it similarly concluded that ReaLemon represented a classic case study of spurious and artificial product differentiation created by advertising and not by the superiority of its product or its greater efficiency. The Commission declined to impose compulsory licensing of the trademark, concluding that the remedy of preventing Borden from engaging in selective price reductions was sufficient. The US Court of Appeals for the Sixth Circuit upheld this decision over a strong dissent from Judge Cornelia Kennedy. The advent of the Reagan Administration led the FTC to reverse itself and support Borden’s request to vacate and remand the Sixth Circuit’s decision. The Commission’s revised 1983 order repudiated the reasoning of its initial 1978 order, concluding instead that trademark-driven product differentiation can promote competition, particularly by reducing search costs. Combined with the FTC’s abandonment of its Cereals case in 1981, which included similar claims of artificial product differentiation through advertising, and the Maxwell House case in 1984, the ReaLemon case is widely regarded as signaling the downfall of the Chamberlinian critique of trademarks as a form of spurious product differentiation (Mensch and Freeman, 1990; McClure, 1996; Weinberg, 2005). Since that time, the economics of trademark has generally come to regard trademarks as a way to reduce search costs and to promote investment (for the leading statement, see Landes and Posner, 1987). Some scholars have continued to advocate a Chamberlinian approach (Lunney, 1996b). Others have taken a more balanced approach, acknowledging that trademarks can represent a positive source of product differentiation and information for consumers, but looking for ways to limit the potential abuses of power (Barnes, 2009; Lemley and McKenna, 2012).

VI. CONCLUSION Product differentiation has represented a generative force in the economic analysis of IP. Not only does it offer a better theoretical explanation for a number of market features, it also provides a basis for formalizing both the access and incentives sides of the tradeoff in a way that yields insights into their structural interrelationship. Product differentiation also creates the possibility of excess entry. It also demonstrates the existence of circumstances under which strengthening IP protection can promote both access and incentives simultaneously. This stands in stark contrast to the position that dominates existing scholarship, which views these two considerations as being in inexorable tension. It may seem counterintuitive that protection should be the greatest when high fixed costs and low substitutability cause the market to become the most concentrated, but this apparent paradox is resolved once one understands the complex manner in which access and incentives interact with one another. In this sense, the differentiated products

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276  Research handbook on the economics of IP law volume 1 approach captures some of the insights of classic property theory, which emphasizes the importance of well-defined property rights in ensuring optimal investment and deployment. In so doing, it corrects for the blind spot that results when markets for IP are treated as monopolies and allows for serious consideration of the role of short-run profits in stimulating entry and promoting economic efficiency. At the same time, it moves beyond classic property theory by identifying ways in which a property right can be too strong. It bears noting that the differentiated products approach cannot completely resolve the tension between access and incentives. The presence of a downward-sloping demand curve renders some degree of deadweight loss endemic. In addition, the fact that perfect price discrimination is impossible prevents rightsholders from appropriating the entire surplus created by their IP. As a result, markets may exhibit a systematic tendency towards having too few products. However, demand diversion makes it possible that the market will produce the optimal number of products. Any such solution to the incentives side of the tradeoff necessarily requires accepting a degree of inefficiency in terms of access. As the theory of the comparative second-best aptly points out, the differentiated products approach’s inability to generate first-best outcomes is not by itself sufficient to justify rejecting it. In addition, the differentiated products approach allows for a more nuanced analysis by making it possible for policymakers to distinguish among different aspects of IP protection. This represents a substantial improvement over the traditional approach, which tends to represent all aspects of the strength of IP with a single variable and fails to distinguish among different aspects of protection. In so doing, it identifies circumstances under which efficiency might best be served by making the right large (in terms of surplusgenerating activities within its scope) and intense (in terms of the proportion of that surplus that producers are able to appropriate), but narrow (in terms of how close another product can come to an existing product without infringing the IP). Thus, the differentiated products approach does not amount to a blanket endorsement for strengthening IP protection. On the contrary, the resulting theory allows for a degree of subtlety that is impossible under other approaches. Although the application of product differentiation to IP has yielded some interesting insights, considerable additional work remains to be done before it can be fully operationalized. As noted earlier, further work should incorporate elements of cumulative innovation that take into account the extent to which existing IP serves as inputs to subsequent products. Furthermore, the differentiated products approach should be broadened to account for endogenous pricing as well as the preemptive strategies available when entry is sequential and when firms can occupy more than one location. The models also should consider the implications of relaxing the symmetrical preferences assumption, either by allowing for variations in the distribution of consumers across the characteristics space or by allowing the extent to which particular products serve as substitutes for other products to vary. Relaxing the symmetry assumption allows for the possibility that the impact of entry by a new product will no longer be spread evenly across all of the incumbents. Instead, it suggests that the entry will affect only some of the products. This localization of competition has the effect of dividing the relevant market into subsegments, with the overall competitiveness of each subsegment determined by the size of the total surplus of the subsegment relative to the fixed cost. The lack of robust competition within a subsegment may limit the extent to which entry can push price

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Intellectual property and the economics of product differentiation  277 towards marginal cost. It can also allow the ‘integer problem’ to arise simultaneously with respect to multiple portions of the overall market, as the single ‘large economy’ is chopped into a series of ‘small economies’ that each are capable of supporting sustainable profits.11 If these effects arise with respect to multiple subsegments, the combined adverse impact may be quite substantial, although the resulting policy prescription may be the same as when consumer preferences are assumed to be symmetric. Countervailing considerations exist as well. The discussion of spatial competition assumes that product characteristics vary along a single dimension, in which case products compete exclusively with their two adjacent neighbors. The localized nature of differentiated products competition can be substantially mitigated if spatial competition occurs along more than one dimension. The inherent ambiguity of the outcomes under product differentiation suggests that the early fight between Chamberlin and the Chicago School may have been somewhat overstated. It also underscores that the study of product differentiation would benefit from more empirical work. Moreover, the policy instruments that follow from the differentiated products approach are by their nature extremely contextual and do not lend themselves to simple inferences. In addition, the interrelationships among the available policy instruments make calibrating them simultaneously an extremely difficult empirical exercise. The fact that the differentiated products approach is contextual and nuanced should not obscure its basic analytical power. Indeed, the intuitions that the theory reveals about the relationship between access and efficiency, the manner in which the various aspects of IP protection interrelate, and the true relationship between IP and public goods theory are sufficient to justify further inquiry.

REFERENCES Abramowicz, Michael. 2004. ‘An Industrial Organization Approach to Copyright,’ 46 William and Mary Law Review 33–125. Archibald, G.C. 1961. ‘Chamberlin versus Chicago,’ 29 Review of Economic Studies 2–28. Archibald, G.C., and G. Rosenbluth. 1975. ‘The “New” Theory of Consumer Demand and Monopolistic Competition,’ 89 Quarterly Journal of Economics 569–90. Bain, Joe S. 1956. Barriers to New Competition: Their Character and Consequences in Manufacturing Industries. Cambridge, MA: Harvard University Press. Barnes, David W. 2009. ‘One Trademark per Source,’ 18 Texas Intellectual Property Law Journal 1–54. Barnes, David W. 2011. ‘Congestible Intellectual Property and Impure Public Goods,’ 9 Northwestern Journal of Technology and Intellectual Property 533–63. Baumol, William J. 1967. ‘Calculation of Optimal Product and Retailer Characteristics: The Abstract Product Approach,’ 75 Journal of Political Economy 674–85. Beath, John, and Yannis Katsoulacos. 1991. The Economic Theory of Product Differentiation. Cambridge: Cambridge University Press. Berry, Steven T., and Joel Waldfogel. 1999. ‘Free Entry and Social Inefficiency in Radio Broadcasting,’ 30 RAND Journal of Economics 397–420. 11   Interestingly, the market need not be divided into discrete subsegments in order for this effect to occur. Variations in the density of firms across the product space can balkanize the industry into a chain of ‘overlapping oligopolies,’ each comprised of a small number of firms engaged in localized competition regardless of how many firms are operating in the overall market. This can give rise to the same problems even in the absence of actual gaps in the product continuum (Kaldor, 1934; Eaton and Lipsey, 1989).

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278  Research handbook on the economics of IP law volume 1 Beschorner, Patrick F.E. 2008. ‘Optimal Patent Length and Height,’ 35 Empirica 233–40. Besen, Stanley M., and Sheila Nataraj Kirby. 1989. ‘Private Copying, Appropriability, and Optimal Copyright Royalties,’ 32 Journal of Law and Economics 255–80. Bhaskar, V., and Ted To. 2004. ‘Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry,’ 35 RAND Journal of Economics 762–76. Bishop, Robert L. 1967. ‘Monopolistic Competition and Welfare Economics,’ in Robert E. Kuenne, ed., Monopolistic Competition Theory: Studies in Impact. New York: John Wiley & Sons. Bonanno, Giacomo. 1987. ‘Location Choice, Product Proliferation and Entry Deterrence,’ 54 Review of Economic Studies 37–45. Borenstein, Severin. 1985. ‘Price Discrimination in Free-Entry Markets,’ 16 RAND Journal of Economics 380–97. Bracha, Oren, and Talha Syed. 2014. ‘Beyond the Incentive-Access Paradigm? Product Differentiation and Copyright Revisited,’ 92 Texas Law Review 1841–920. Brander, James A., and Jonathan Eaton. 1984. ‘Product Line Rivalry,’ 74 American Economic Review 323–34. Brown, Ralph S., Jr. 1948. ‘Advertising and the Public Interest: Legal Protection of Trade Symbols,’ 57 Yale Law Journal 1165–205. Buchanan, James M. 1965. ‘An Economic Theory of Clubs,’ 32 Economica (new series) 1–14. Chamberlin, Edward Hastings. 1933. The Theory of Monopolistic Competition: A Re-Orientation of the Theory of Value, 1st ed. Cambridge, MA: Harvard University Press. Chamberlin, Edward Hastings. 1950. ‘Product Heterogeneity and Public Policy,’ 40 American Economic Review 85–92. Chamberlin, Edward Hastings. 1957. Towards a More General Theory of Value. New York: Oxford University Press. Comanor, William S., and Thomas A. Wilson. 1979. ‘The Effect of Advertising on Competition: A Survey,’ 17 Journal of Economic Literature 453–76. d’Aspremont, C., J. Jaskold Gabszewicz, and Jean-François Thisse. 1979. ‘On Hotelling’s “Stability in Competition,”’ 47 Econometrica 1145–50. Denicolò, Vincent. 1996. ‘Patent Races and Optimal Patent Breadth and Length,’ 44 Journal of Industrial Economics 249–65. Dixit, Avinash K., and Joseph E. Stiglitz. 1977. ‘Monopolistic Competition and Optimum Product Diversity,’ 67 American Economic Review 297–308. Eaton, B. Curtis, and Richard G. Lipsey. 1976. ‘The Non-Uniqueness of Equilibrium in the Löschian Location Model,’ 66 American Economic Review 71–93. Eaton, B. Curtis, and Richard G. Lipsey. 1979. ‘The Theory of Market Pre-Emption: The Persistence of Excess Capacity and Monopoly in Growing Spatial Markets,’ 46 Economica 149–58. Eaton, B. Curtis, and Richard G. Lipsey. 1980. ‘Exit Barriers Are Entry Barriers: The Durability of Capital as a Barrier to Entry,’ 11 Bell Journal of Economics 721–9. Eaton, B. Curtis, and Richard G. Lipsey. 1989. ‘Product Differentiation,’ in Richard Schmalensee and Robert D. Willig, eds., Handbook of Industrial Organization, vol. 1. New York: North-Holland. Eaton, B. Curtis, and Myrna Holtz Wooders. 1985. ‘Sophisticated Entry in a Model of Spatial Competition,’ 16 RAND Journal of Economics 282–97. Faulhaber, Gerald R. 2006. ‘File Sharing, Copyright, and the Optimal Production of Music,’ 13 Michigan Telecommunications and Technology Law Review 77–113. Feenstra, Robert C., and James A. Levinsohn. 1995. ‘Estimating Markups and Market Conduct with Multidimensional Product Attributes,’ 62 Review of Economic Studies 19–52. Friedman, Milton. 1953. Essays in Positive Economics. Chicago: University of Chicago Press. Gallini, Nancy T. 1992. ‘Patent Policy and Costly Imitation,’ 44 RAND Journal of Economics 52–63. Gilbert, Richard, and Carl Shapiro. 1990. ‘Optimal Patent Length and Breadth,’ 21 RAND Journal of Economics 106–12. Goettler, Ronald L., and Ron Shachar. 2001. ‘Spatial Competition in the Network Television Industry’, 32 RAND Journal of Economics 624–56. Hay, D.A. 1976. ‘Sequential Entry and Entry-Deterring Strategies in Spatial Competition,’ 28 Oxford Economic Papers 240–57. Hotelling, Harold. 1929. ‘Stability in Competition,’ 39 Economic Journal 41–57. Johnson, William R. 1985. ‘The Economics of Copying,’ 93 Journal of Political Economy 158–74. Judd, Kenneth L. 1985. ‘Credible Spatial Preemption,’ 16 RAND Journal of Economics 153–66. Kaldor, Nicholas. 1934. ‘Mrs. Robinson’s “Economics of Imperfect Competition,”’ 1 Economica 335–41. Kaldor, Nicholas. 1935. ‘Market Imperfection and Excess Capacity,’ 2 Economica 33–50. Katz, Michael L. 1984. ‘Price Discrimination and Monopolistic Competition,’ 52 Econometrica 1453–71. Klemperer, Paul. 1990. ‘How Broad Should the Scope of Patent Protection Be?,’ 21 RAND Journal of Economics 113–30. Koenker, Roger W., and Martin K. Perry. 1981. ‘Product Differentiation, Monopolistic Competition, and Public Policy’, 12 Bell Journal of Economics 217–31.

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Intellectual property and the economics of product differentiation  279 Lancaster, Kelvin. 1979. Variety, Equity, and Efficiency. New York: Columbia University Press. Landes, William M., and Richard A. Posner. 1987. ‘Trademark Law: An Economic Perspective’, 30 Journal of Law and Economics 265–309. Lane, W.J. 1980. ‘Product Differentiation in a Market with Endogenous Sequential Entry,’ 11 Bell Journal of Economics 237–60. Lemley, Mark A., and Mark P. McKenna. 2012. ‘Is Pepsi Really a Substitute for Coke? Market Definition in Antitrust and IP,’ 100 Georgetown Law Journal 2055–117. Liebowitz, S.J. 1986. ‘Copyright Law, Photocopying, and Price Discrimination,’ 8 Research in Law and Economics 181–200. Lunney, Glynn S., Jr., 1996a. ‘Reexamining Copyright’s Incentives-Access Paradigm,’ 49 Vanderbilt Law Review 483–656. Lunney, Glynn S., Jr. 1996b. ‘Trademark Monopolies,’ 48 Emory Law Journal 367–486. Mankiw, N. Gregory, and Michael D. Whinston. 1986. ‘Free Entry and Social Inefficiency,’ 17 RAND Journal of Economics 48–58. Matutes, Carmen, Pierre Regibeau, and Katharine Rockett. 1996. ‘Optimal Patent Design and the Diffusion of Innovations,’ 27 RAND Journal of Economics 60–83. Maurer, Stephen M., and Suzanne Scotchmer. 2002. ‘The Independent Invention Defence in Intellectual Property,’ 69 Economica 535–47. McClure, Daniel M. 1996. ‘Trademarks and Competition: The Recent History,’ 59 Law and Contemporary Problems 13–43. Mensch, Elizabeth, and Alan Freeman. 1990. ‘Efficiency and Image: Advertising as an Antitrust Issue,’ Duke Law Journal 321–73. Meurer, Michael J. 2001. ‘Copyright Law and Price Discrimination,’ 23 Cardozo Law Review 55–148. Nordhaus, William D. 1969. Invention, Growth, and Welfare: A Theoretical Treatment of Technological Change. Cambridge, MA: MIT Press. Neven, Damien J. 1987. ‘Endogenous Sequential Entry in a Spatial Model,’ 5 International Journal of Industrial Organization 419–34. O’Donoghue, Ted, Suzanne Scotchmer, and Jean-François Thisse. 1998. ‘Patent Breadth, Patent Life, and the Pace of Technological Progress,’ 7 Journal of Economics & Management Strategy 1–32. Prescott, Edward C., and Michael Visscher. 1977. ‘Sequential Location among Firms with Foresight,’ 8 Bell Journal of Economics 378–93. Robinson, Joan. 1933. The Economics of Imperfect Competition. London: Macmillan & Co. Salop, Steven C. 1979. ‘Monopolistic Competition with Outside Goods,’ 10 Bell Journal of Economics 141–56. Samuelson, Paul A. 1954. ‘The Pure Theory of Public Expenditure,’ 36 Review of Economics and Statistics 387–89. Samuelson, Paul A. 1958. ‘Aspects of Public Expenditure Theories,’ 40 Review of Economic Studies 332–8. Samuelson, Paul A. 1967. ‘The Monopolistic Competition Revolution,’ in Robert E. Kuenne, ed., Monopolistic Competition Theory: Studies in Impact. New York: John Wiley & Sons. Scherer, F.M. 1970. Industrial Market Structure and Economic Performance. Chicago: Rand McNally & Co. Scherer, F.M. 1972. ‘Nordhaus’ Theory of Optimal Patent Life: A Geometric Reinterpretation,’ 62 American Economic Review 422–27. Scherer, F.M. 1976. ‘Predatory Pricing and the Sherman Act: A Comment,’ 89 Harvard Law Review 869–90. Schmalensee, Richard. 1978. ‘Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry,’ 9 Bell Journal of Economics 305–27. Schmalensee, Richard. 1979. ‘On the Use of Economic Models in Antitrust: The ReaLemon Case,’ 127 University of Pennsylvania Law Review 994–1050. Spence, Michael. 1976a. ‘Product Differentiation and Welfare,’ 66 American Economic Review 407–14. Spence, Michael. 1976b. ‘Product Selection, Fixed Costs, and Monopolistic Competition,’ 43 Review of Economic Studies 217–35. Spulber, Daniel F. 1979. ‘Non-Cooperative Equilibrium with Price Discriminating Firms,’ 4 Economics Letters 221–7. Spulber, Daniel F. 1981. ‘Spatial Nonlinear Pricing,’ 71 American Economic Review 923–33. Stigler, George J. 1949. ‘Monopolistic Competition in Retrospect,’ in Five Lectures on Economic Problems. London: Longmans, Green & Co. Ltd. Stiglitz, Joseph E. 1977. ‘The Theory of Local Public Goods,’ in Martin S. Feldstein and Robert P. Inman, eds., The Economics of Public Services. London: Macmillan & Co. Stole, Lars. 2007. ‘Price Discrimination in Competitive Environments,’ in Mark Armstrong and Robert Porter, eds., Handbook of Industrial Organization, vol. 3. New York: North-Holland. Tandon, Pankaj. 1982. ‘Optimal Patents with Compulsory Licensing,’ 90 Journal of Political Economy 470–86. Tiebout, Charles M. 1956. ‘A Pure Theory of Local Expenditures,’ 64 Journal of Political Economy 416–24. Varian, Hal R. 2010. Intermediate Microeconomics: A Modern Approach, 8th ed. New York: W.W. Norton & Co.

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280  Research handbook on the economics of IP law volume 1 Waterson, Michael. 1990. ‘The Economics of Product Patents,’ 80 American Economic Review 860–69. Weinberg, Harold R. 2005. ‘Is the Monopoly Theory of Trademarks Robust or a Bust?,’ 13 Journal of Intellectual Property Law 137–78. Yoo, Christopher S. 2004. ‘Copyright and Product Differentiation,’ 79 New York University Law Review 212–80. Yoo, Christopher S. 2007. ‘Copyright and Public Good Economics: A Misunderstood Relation,’ 155 University of Pennsylvania Law Review 635–715.

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10.  Price discrimination and intellectual property Michael J. Meurer*and Ben Depoorter** 12

Contents I. Introduction II. Price Discrimination: Overview A. Pigou’s Classification B. Product Differentiation and Second Degree Price Discrimination C. Differences between Second and Third Degree Price Discrimination D. Tying, Merchandising, and Bundling III. When is Price Discrimination Profitable? IV. Social Welfare Issues V. A Social Welfare Analysis of Price Discrimination in the IP Context A. Copyright B. Patents VI. The Many Forms of Price Discrimination by Way of IP Rights A. Geographic Price Discrimination B. Restrictions on Type of Use C. Intensity of Use: Tying, Merchandising, and Bundling D. Sharing VII. Conclusion Bibliography

I. INTRODUCTION This chapter provides an overview of the literature on price discrimination with special attention to the relationship between intellectual property (IP) rights and price discrimination. There are several reasons why a serious student of intellectual property law should understand the theory of price discrimination. First, although many IP owners practice price discrimination, these practices come in many guises that may not be apparent to a casual observer. For instance, patent licensors sometimes price discriminate across uses of the patented technology and in different geographic regions. Similarly, trademarks support product differentiation and brand loyalty in ways that often facilitate price **  Abraham and Lillian Benton Scholar and Professor of Law, Boston University School of Law. I thank workshop participants at the University of California-Berkeley for their helpful comments. **  Max Radin Chair and Distinguished Professor of Law, University of California, Hastings College of the Law; Affiliate Scholar, Stanford Law School, Center for Internet and Society; CASLE, Ghent University, Belgium. Contact: [email protected].

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282  Research handbook on the economics of IP law volume 1 ­ iscrimination. Trademark lawsuits have been used (not always successfully) to support d price discrimination across geographic regions, or within aftermarkets. Price discrimination is also widespread in the market for copyrighted works. Movie tickets, magazine and book prices, computer software prices, and music performance licenses are subject to price discrimination strategies. Magazine subscribers pay much less than newsstand buyers, movie theaters offer cheaper tickets for daylight or mid-week showings, software is sold at a discount to students and educators, and establishments offering public music performances pay widely varying fees for identical blanket licenses. Second, price discrimination is becoming increasingly common in markets for digital copyrighted works (Shapiro and Varian, 1999). Third, intellectual property laws influence the profitability and practice of price discrimination in many ways. As we will demonstrate below, intellectual property law offers unusually fertile ground for analysis of policies that facilitate or discourage price discrimination. Roughly speaking, price discrimination occurs when a seller sets more than one price for a good or service. More precisely, Stigler (1987) specifies that price discrimination arises when the ratio of prices differs from the ratio of marginal costs for the products offered by a seller.1 Price discrimination is evident, for instance, to air travelers who may find the passenger next to them paid a different price to travel the same route. Price discrimination is less evident when the price for two products is the same but the marginal cost of providing them differs, or when multiple products are sold together, or when differentiated products are offered at prices that diverge from the ratio identified by Stigler. In what follows we consider various strategies used by IP owners to achieve price discrimination. We keep formal economics to a minimum and recommend Stole (2007) to readers seeking a more comprehensive and rigorous review of the price discrimination literature. Readers may also find the chapter by Christopher Yoo on product differentiation in this volume to be a helpful complement to this chapter, because sellers sometimes differentiate their products to discriminate across different market segments.

II.  PRICE DISCRIMINATION: OVERVIEW Successful price discrimination relies on sellers sorting buyers in terms of willingness to pay; those willing to pay more are charged more. Discrimination will not succeed if the disfavored buyers can make purchases from, or otherwise gain access to, products that are sold at a lower price to favored buyers. Thus, a price discriminator must block arbitrage that could erode the price differential between favored and disfavored buyers. This section

1   Price discrimination is challenging to define. Prohibitions of price discrimination in antitrust laws provide an implicit definition. Antitrust laws generally operate on the intuitive notion that price discounts are discriminatory when they are not justified by cost differentials. Such a definition does not match up well with the economist’s definition of price discrimination (Baker, 1997, pp. 177 ff.). Economists point out that charging a uniform price can also be discriminatory (e.g., when delivery costs vary, a uniform delivered price discriminates in favor of distant customers) and that product quality or other differences between sales should be accounted for in the definition.

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Price discrimination and intellectual property  283 outlines the various forms of price discrimination, using examples drawn from markets in which intellectual property often plays an important role. A.  Pigou’s Classification Pigou’s (1932) classic description of price discrimination distinguishes three practices. In third degree price discrimination, price differentials are tied to a characteristic of a buyer that is correlated with the buyer’s valuation.2 For instance, movie exhibitors offer senior discounts and thereby use the age of the buyer to discriminate. They assume that senior citizens have a weaker demand than other buyers do. This practice requires that sellers can observe buyers’ characteristics. In second degree price discrimination, the price differentials are tied to the choices by the buyer. The pattern of discrimination reflects the seller’s belief that a certain choice will be made by a low valuation buyer and a different choice will be made by a high valuation buyer. For example, movie exhibitors offer a discount for Tuesday movies to sort between movie patrons who are flexible about when they see a movie and those who are not. This hidden characteristic of flexibility is supposedly correlated with less intense demand for movies. Second degree price discrimination is used when a seller cannot directly observe buyers’ characteristics.3 Overall, sellers may care about a mix of observable and hidden buyer characteristics and may engage in second or third degree price discrimination or a mix of the two. In first degree price discrimination the seller knows or learns the exact valuation of all buyers. This of course is an idealized benchmark.

2   Third degree price discrimination does not always depend on variable characteristics like age. It can also depend on buyer attributes that cannot be changed easily. Textbook publishers discriminate between college and other bookstores. Movie distributors discriminate based on the size and location of a theater. These attributes reflect past choices of buyers that will not be altered just to avoid price discrimination. 3   The standard treatment of second degree price discrimination from information economics studies the characteristics of an optimal pricing mechanism and product design choice for a monopolist facing two types of customers. One type of customer has a higher marginal valuation of quality than the other. The results show that the socially optimal quality is offered to the high valuation customer. The low valuation customer is provided with quality that is less than the social optimum. Furthermore, the low valuation customer is left indifferent between participating in the market or not. The high valuation customer gains positive surplus. Since the seller cannot distinguish high and low valuation customers he or she has to offer one price and quality combination that attracts one type of customer and another combination that will attract the other type. An artful choice of quality and price pairs solves both the arbitrage and measurement problem. The high valuation customers prefer higher quality despite the higher price; the low valuation customers prefer lower quality and price. If the seller could distinguish high and low valuation customers and practice third degree price discrimination, then the seller would choose the socially optimal quality level for both types of customers. Under second degree price discrimination the quality is degraded to low valuation customers to make it easier to sort the two types. When the quality gap is large, the seller can raise the price differential and gain a higher mark-up from the more profitable market niche containing the high valuation customers.

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284  Research handbook on the economics of IP law volume 1 B.  Product Differentiation and Second Degree Price Discrimination The movie exhibitor in our senior discount example of price discrimination offered every buyer an opportunity to see the same movie, but at different prices. Implicit in Stigler’s definition of price discrimination is the possibility of a price discriminator that offers two or more versions of its product for sale. Offering multiple product versions may increase the profitability of second degree price discrimination. Price discrimination occurs when the seller marks up the price of one version (over marginal cost) more than the other. Thus, sellers may combine price discrimination and product differentiation. The price discriminating seller allows customers to choose the high quality or low quality version of the product and sort themselves into a high value segment and a low value segment (or possibly multiple segments if there are more than two products offered). Products can be differentiated in many ways. The term vertical product differentiation is used to describe products that range from low to high quality, for example, limited and full-feature software. The term horizontal product differentiation is used to describe other types of product differentiation in which buyers have different preferences over different products’ attributes. It is easy to see that vertical product differentiation may be helpful for sorting buyers into high and low value segments. Horizontal product differentiation may likewise be helpful in sorting if higher valuation buyers happen to prefer a particular set of attributes. Movies exhibited at noon may be more valuable to some customers than movies exhibited in the evening, but most customers prefer the latter, and form the high value segment that typically bears the higher price. Different physical attributes can be used to differentiate products, but products can also be differentiated in terms of delivery date, quantity, and contractual restrictions. Delivery date differentiation is used frequently in markets for copyrighted works, such as movies and books. A movie viewer can choose between a first-run or second-run showing in the theater, DVD sales, pay-per-view, premium cable, streaming services, free cable, or free broadcast. Similarly, the price of novels declines over time. Eager readers pay a higher price for hard cover books, and more patient readers wait for the later publication of the cheaper soft cover version. For both movies and novels there are quality as well as timing differences that roughly correspond with the price and release date. Viewing quality is higher in a theater than on television, and first-run theaters are usually more pleasant than second-run theaters. Pay-per-view, premium cable, and videotapes do not have commercials. Hard cover books are more durable, more attractive, and have larger print. The price of these choices usually declines with the viewing date. No arbitrage is possible. Buyers cannot buy cheap and travel back in time to sell the item at a premium. Similarly, software is often offered at a lower price when subjected to consumer or educational use restrictions, while identical software without those restrictions is sold at a higher price. Patent licenses often entail price differences depending on the type of use, include geographic use restrictions, single or multiple uses, or with or without resale rights. Note that arbitrage is not possible if the products are differentiated by physical attributes. Arbitrage is possible, however, against quantity restrictions if a portion of a purchase can be resold. Arbitrage is possible also when differentiation is created through contract terms—by violation of the restrictions. For example, a buyer might violate an educational use restriction on software by using the software for business tasks. Alternatively, such a buyer might resell it to a business user.

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Price discrimination and intellectual property  285 C.  Differences between Second and Third Degree Price Discrimination Three main principles are paramount to an optimal second degree price discrimination strategy. First, prices respond to marginal cost. If the product with the more attractive attributes is costlier, then its price should be higher. This relationship between price and marginal cost applies whether or not a seller price discriminates. Second, market power allows a seller to mark up prices above marginal cost. A price discriminating seller is especially interested in marking up the price to the high valuation segment of the market. Third, prices are subject to a sorting constraint. If a seller is too aggressive and selects an excessive mark-up for the more attractive product, then high valuation buyers will switch to the other product. The sorting constraint keeps the difference between the two prices small enough so that buyers will sort themselves. Note that there is a tension between the second and third principle. The profitability of second degree price discrimination is limited because the sorting condition restricts the mark-up that can be levied against the high valuation buyers. The sorting constraint does not apply to third degree price discrimination, however, since the buyer characteristic used for sorting is observable to the seller. Thus, third degree price discrimination is more profitable given the superior information available to the seller, all else being equal.4 Besides the sorting constraint, the two forms of price discrimination also differ in terms of their relationship to arbitrage. Resale can be used to arbitrage against both types of price discrimination.5 But with second degree price discrimination there is an additional method of arbitrage; a low-price buyer can engage in personal arbitrage. Personal arbitrage means that the buyer recovers some or all of the benefit of the high-priced product by ‘modifying’ the low-priced product. For instance, sophisticated buyers may circumvent technology that limits how a product is used—for example, refilling printer cartridges or modifying software to unlock restricted features. Such uses and modifications by buyers may violate license terms or intellectual property rights. If the violation is undetected, however, then the buyer gets the benefit of a low price and unrestricted use. D.  Tying, Merchandising, and Bundling Sellers can also implement second degree price discrimination by bundling or tying products together, or simply through the exclusive right to sell complementary products. Specifically, tying arises when a seller conditions the sale of one product or service (the 4   This comparison holds if arbitrage is not possible. The comparison may be reversed if arbitrage is more difficult to control under third degree price discrimination compared to second degree. 5   Many copyrighted products subject to second and third degree price discrimination are services. Resale is difficult or impossible if the product is a service. For example, a buyer cannot purchase an extra viewing of a movie and resell it. It may be possible to resell the ticket, but inexpensive enforcement methods can limit that type of arbitrage. If the product is a good, then resale is more of a problem. Resale is often used to arbitrage against geographic (third degree) price discrimination. Resale can arbitrage against second degree price discrimination based on quantity or contract restrictions. A high volume buyer can arbitrage quantity discounts by purchasing extra units at a discounted price and reselling to low volume buyers. A buyer can arbitrage contractual restrictions by purchasing a low price product and flouting the resale restriction.

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286  Research handbook on the economics of IP law volume 1 tying good or service) on the purchase of a different product or service (the tied sale). Some of the most prominent tying disputes in antitrust law involve patented products.6 Also, much of the case law involving the doctrine of patent misuse involves tying. Bundling arises when a seller sells products X and Y as a bundle but not separately (at least for certain customers). Bundling of content by media companies and multiple software products by software publishers is common and sometimes controversial. Merchandising refers to the sale of relatively low value products that are complementary to a high value copyrighted work, franchise, or a high value trademark. Sports teams sell hats, T-shirts, and so on. Movie copyright owners sell toys, posters, and the like. Tying, bundling, and merchandising might be used to implement price discrimination, but could serve other goals as well, which could either have pro-competitive or anti-­ competitive effects. Tied sales may be used to measure (often the term ‘meter’ is used instead of measure) the intensity of use of the tying product by observing the volume of purchases of the tied product (Elhauge and Nalebuff, 2017). The mark-up on the tied product results in discrimination against high intensity users of the tying product. Similarly, merchandising can be used to meter intensity of support for a sports team, music group, or movie. Mark-ups on merchandise can implement price discrimination against loyal fans. Pricing bundles is relatively complicated. Bundle pricing helps sellers extract greater consumer surplus when consumers disagree over which product in a bundle is more valuable. Sellers can keep customers in the market for products they do not value as much, and at the same time price more aggressively on products they do value highly.

III.  WHEN IS PRICE DISCRIMINATION PROFITABLE? Casual intuition might suggest that price discrimination is always profitable because discriminatory prices allow a seller to capture a greater share of a consumer surplus than uniform prices. This intuition ignores two factors that could make price discrimination unprofitable. First, when there are multiple sellers in a market it is possible for price discrimination to intensify competition between sellers and drive down profits. Second, it is costly to segment customers and block arbitrage, and these costs may exceed the benefits of price discrimination (Leeson and Sobel, 2008).7 The profitability of price discrimination changes over time as technologies evolve. The impact of new technologies can either strengthen or weaken a seller’s opportunity to engage in price discrimination. For instance, virtual private network (VPN) services hide the location of internet users, making it more difficult for sellers to engage in geographic price discrimination. For the most part, however, since the 1990s, digital technologies have

6   See, e.g., Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006); U.S. Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610 (1977); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 14 (1984). 7   Additionally, experimental work suggests that a fairness constraint limits the potential scope of third degree price discrimination (Englmaier et al., 2012). More research is needed to examine the robustness of this finding, however. Also there is an open question whether fairness is less salient, and therefore less constraining when discrimination is hidden, for example in the case of metering via tied sales.

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Price discrimination and intellectual property  287 advanced the opportunities for sellers to engage in price discrimination. For instance, by measuring the frequency and duration of the use of a work by consumers, metering and on-line licensing technologies enable publishers to obtain much more precise measures of the demand for their products (Goldstein, 1994, p. 200). The availability of this information opens the door to highly refined price discrimination (Netanel, 1996, p. 295; Bell, 1998; Meurer, 1997, p. 880; Manta and Olson, 2015). Furthermore, technological measures such as digital rights management (DRM) may limit the alteration, copying, or transfer of digital products (Hughes, 2016). These technologies restrict the opportunity for buyers to circumvent price discrimination practices. Similarly, the development of sterile seeds can prevent seeds from sprouting in consecutive years (Jasanoff, 2013), limiting reproduction and arbitrage opportunities in the market for genetically modified seeds. Mortimer (2008b) finds that bar code scanners and the internet increased price discrimination in the video rental industry. Also, the increased collection of personal data and the emergence of big data may facilitate improved customer sorting and increase the potential profits from discrimination—unless privacy regulation blocks this approach to price discrimination. The profitability of price discrimination also changes as the strength of intellectual property law waxes and wanes. At its zenith, patent law gives an inventor a monopoly in a market—best illustrated by patented blockbuster drugs. During the term of the patent, the inventor can exclude competing drug makers who could disrupt price discrimination by catering to discriminated-against customers. It is important to recognize that most patents, and other forms of intellectual property, do not lead to monopoly and might not even create much market power. But monopoly is certainly not a precondition to profitable price discrimination. Demsetz (1970) explores the use of price discrimination in competitive markets.8 Thisse and Vives (1988), Corts (1998), Holmes (1989), Armstrong and Vickers (2001), and others model various forms of price discrimination in oligopoly settings. Rather than market power, intellectual property law more often influences the profitability of price discrimination by helping or hindering sellers to block arbitrage and sort customers. Intellectual property law may allow sellers to control supply chains in ways that minimize arbitrage, and directly control uses and resale by end users. We provide many examples in the sections that follow.9

IV.  SOCIAL WELFARE ISSUES Economists usually examine the social welfare effects of price discrimination by comparing it to uniform pricing. The main focus is on: static effects on output and misallocation 8   Levine (2000) analyses use of price discrimination to recover sunk costs in a competitive environment, and Hovenkamp (1999) discusses the limited market power required to engage in price discrimination. 9   Market power itself may also increase a seller’s ability to limit arbitrage. One avenue to limit arbitrage is self-help, whereby a seller punishes users and distributors engaged in arbitrage. Because measures to deter arbitrage are unpopular among distributors and customers, a seller with market power, especially a monopolist, is more likely to be willing and able to incur this cost.

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288  Research handbook on the economics of IP law volume 1 of goods across consumers; dynamic effects on product design, entry, and innovative investment; and distributional effects. Third degree price discrimination may increase efficiency by increasing output, especially when price discrimination results in new buyers entering a market who would be foreclosed from the market by a high uniform price (Varian, 1985). In these circumstances, discrimination can leave output in the ‘stronger’ market unchanged while expanding output in the ‘weaker’ market that would otherwise not be served (Robinson, 1933).10 However, output expansion is only a necessary but not a sufficient condition for welfare improvement; output must expand more in the weak market than it contracts in the strong one because each unit is more highly valued in the latter (Schmalensee, 1981). To elaborate, price discrimination causes the marginal rates of substitution to differ across buyers, and disfavored buyers have a higher marginal valuation than favored buyers. Disfavored buyers would get a greater marginal benefit from one more unit than favored buyers would lose from giving up one unit. This presents an opportunity to increase total surplus via trade, but this opportunity is lost because arbitrage is blocked. This foregone opportunity represents a source of allocative loss. Overall then, any efficiency gains from an increase in output may be offset by efficiency losses caused by differences in the marginal rates of substitution between favored and disfavored buyers (Viscusi et al., 1992, pp. 279–83; Tirole, 1988, pp. 137–9). The static welfare effects of second degree price discrimination are likewise unclear, but perfect price discrimination provides unambiguous gains in allocative efficiency. All consumers can be served to the point that marginal utility equals marginal cost, and thus, marginal rates of substitution are equalized and no consumers are rationed. Uniform monopoly pricing might still have a social welfare advantage over perfect price discrimination, but that depends on the dynamic and distributional effects that we turn to now. The additional profits that may be created by price discrimination may induce socially valuable investment or socially harmful rent dissipation. Many commentators have noted that price discrimination may augment the reward to authors and inventors and induce a valuable boost in creative or innovative investment (for example, Demsetz, 1970). Though of course it is possible for this reward to be too large and induce overinvestment. Furthermore, by increasing rents, price discrimination may induce socially wasteful rent-seeking investments. Firms may engage in socially wasteful lobbying, litigation, and entry deterring practices that work to preserve their right and ability to engage in price discrimination (Posner, 1986; Meurer, 1997). Patents or copyrights may create entry barriers and allow firms to earn positive economic profits, but this is not always the case.11 When entry barriers are absent, increased rents from price discrimination will drive entry into the market until profits fall to zero. This entry may be socially valuable because of added product variety, or socially harmful if entrants make duplicative investments to enter the market without providing significant social benefits in the form of greater variety or quality improvement (Katz, 1984). 10   Additionally, discounts and other forms of two-part pricing can increase social welfare (Tirole, 1988, pp. 145–6). 11   Intellectual property laws raise the cost of creation and innovation when a new work depends on older works in such a way that permission is required to create or exploit the new work (Landes and Posner, 1989, p. 332; Lemley, 1997; Scotchmer, 1991; Gordon, 1992).

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Price discrimination and intellectual property  289 Finally, price discrimination may give rise to various social costs from measuring consumer attributes and blocking arbitrage. Direct social losses arise from the cost of identifying customer attributes and choices, writing and enforcing contracts that prevent arbitrage, and designing special distribution systems.12 Indirect costs arise from the sorting constraints associated with second degree price discrimination13 by which a seller may sort buyers by offering a menu of delivery dates, qualities, quantities, and permissible uses of the product (Meurer, 1997, 2001). If delivery is the choice variable, then the sorting cost arises from the delivery delay. For many products the optimal delivery policy is immediate availability. If quality is the choice variable, then the sorting cost arises from degraded quality for lower valuation buyers14 (for instance, software with code that disables certain features; see Deneckere and McAfee, 1996). If quantity is the choice variable, then the sorting cost comes from rationing of low valuation buyers (Maskin and Riley, 1984). The seller designs quantity discounts in such a way that low valuation buyers purchase less than they would under third degree price discrimination. The rationing is introduced to ease the sorting constraint and to enable the seller to charge a higher price to the high valuation segment of consumers. If use restriction is the choice variable, then the sorting cost is the restriction itself. Consumer surplus is lost to low valuation buyers who are constrained in their use of a product. The sorting constraint imposes an implicit cost on the seller because it restricts the freedom of the seller to select the optimal attributes. With third degree price discrimination the seller can avoid sorting costs and select the optimal attributes for the two classes of consumers independently. Besides efficiency, social welfare depends on the distributional effects of price discrimination. Generally, the impact of price discrimination is felt differently across various potential buyers. Buyers with higher valuations (or more precisely lower elasticity) tend to lose and buyers with lower valuations (higher elasticity) tend to gain. High elasticity customers, often the poorer segments of the consumer base, are especially likely to benefit from third degree price discrimination (Tirole, 1988, pp. 137–9). Two special cases are often discussed in the literature. First, perfect price discrimination transfers all consumer surplus to a monopoly seller. Thus, efficiency is in tension with a pro-consumer distributional goal, and social welfare may be higher under a uniform monopoly price if the social welfare function places sufficient weight on consumer surplus as compared to profit. Second, there are instances of imperfect price discrimination that are Pareto-improvements over a uniform monopoly price.15 For example, if a uniform monopoly price excludes a low valuation segment from a market, and optimal third degree price discrimination keeps the original monopoly price in place for the high value 12   Implementation costs are most problematic when there are entry barriers and few sellers. Implementation costs are apt to decline as the number of discriminating firms in a market grows (Stole, 1995). 13   By contrast, under third degree price discrimination, a monopolist seller treats each market niche separately and no product design or sale distortions are caused. The seller extracts rents solely on the basis of pricing differences. 14   Economic theory shows that a seller should set the optimal attribute for the high valuation consumers and a suboptimal attribute for the low valuation consumers. This inefficiency creates a hidden social cost of sorting. 15   Conditions such that all prices fall under discrimination or rise only for the relatively welloff are discussed in Stole (2003) and Schwartz (1990).

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290  Research handbook on the economics of IP law volume 1 segment of the market and offers a lower price that induces purchases by the low value segment, then high valuation consumers are indifferent between the two schemes, low valuation consumers are better off with price discrimination, the seller is better off with price discrimination, and allocative efficiency is improved. The social welfare comparison between perfect price discrimination and uniform monopoly pricing generates interesting insights but other comparisons are also useful. An intellectual property scholar may be interested in a welfare comparison between two different forms of price discrimination that are practiced before and after a substantive change in intellectual property law. In the following sections we consider several examples of how a change in the law may lead a seller to switch the form of price discrimination it practices because arbitrage or metering has become harder or easier.

V. A SOCIAL WELFARE ANALYSIS OF PRICE DISCRIMINATION IN THE IP CONTEXT As discussed in detail in the following section, copyright and patent law contain a wide range of doctrines that facilitate or impede price discrimination.16 In this section we review the law and economics literature that abstracts from doctrinal details and considers broad normative questions about the interaction between price discrimination and copyright or patent protection. A. Copyright One strand of literature takes a generally positive view toward price discrimination. These authors focus on the power of digital technologies to better measure preferences and limit arbitrage and thereby make price discrimination more attractive to sellers of copyrighted works.17 The price discrimination optimists emphasized two social benefits that might flow from finer grained price discrimination in digital markets. First, increased product variety and a more detailed menu of prices could improve access of poor or other underserved consumers (Fisher, 1997).18 Second, assuming the price discrimination enabled by digital technology would increase profit,19 this would bolster the incentives to create (Hardy, 1996; Besen and Raskind, 1991, p. 5). Fisher noted that ‘we are getting much more bang for our buck—a much larger incentive for creative activity per unit of 16   The first studies to recognize the link between copyright doctrine and price discrimination include Fisher (1998), Besen and Kirby (1989), Besen et al., (1992), and Lunney (1996). For a comprehensive analysis of the relationship between copyright law and price discrimination, see Meurer (2001). 17   The pioneering writing by Goldstein envisioned a ‘celestial jukebox’ from which consumers could listen to any song in exchange for a micropayment (1994). 18   On the increase of output and new buyers entering a market that would otherwise be foreclosed by a high uniform price, see generally, Viscusi et al., 1992, pp. 282–3. In the context of software sales, see ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1449 (7th Cir. 1996); Manta and Olson (2015). On the positive impact of price discrimination on developing countries that publishers might otherwise ignore, see Netanel (1998, p. 224). 19   Empirical evidence can be found in Leslie (2004) and Mortimer (2008a, 2008b).

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Price discrimination and intellectual property  291 social cost. Such a system of rules, applied to the Internet, should move us faster than a copyright-based system in the direction of an informational society and rich artistic tradition’ (Fisher, 1997, p. 1240).20 Besides making price discrimination more profitable, certain new technologies reduced transaction costs and diminished one of the justifications for the fair use defense and certain statutory limits on the rights of copyright owners. New technologies also made it easier to limit resale of copyrighted content, and copyright owners bolstered technical barriers to resale with contractual limits.21 Several scholars applauded these developments and argued that copyright law should accommodate efforts by sellers to block arbitrage in digital markets (Bell, 1998; Friedman, 1998; Fisher, 1997; Merges, 1997; O’Rourke, 1997; Kitch, 1999), including scaling back the scope of fair use (Bell, 1998; Kitch, 1999).22 Critics contend the alleged benefits of price discrimination arise in market conditions very different from those that apply to creative and informational works (Gordon, 1998, p. 1389; Boyle, 2000) or apply only to specific markets (Lunney, 2008). A monopolist with the capacity to price discriminate might be preferable to a monopolist that charges a single, uniform price. But perhaps the correct comparison would be with a system that permits lawful free copying and a resulting range of prices. In other words, highlighting the benefits of a monopoly with price discrimination compared to monopoly without price discrimination is misleading (Gordon, 1998, pp. 1383–4). This second strand of literature takes a generally skeptical view of the social benefits of price discrimination.23 Digital technology, especially the growth of the internet, enabled massive amounts of unauthorized copying and dissemination of copyrighted content. Courts and legislatures responded by expanding the scope of copyright to combat piracy. Critics complained that anti-piracy reforms also promoted socially harmful price discrimination. Cohen (1998, 2000) emphasizes copyright law’s limitations and exemptions generate public benefits that likely would be underproduced by a system of centralized, strictly market-based control. She argues that copyright law is balanced to serve nonmonetizable and distributional concerns that are central to the creative and social progress (Cohen, 1998, p. 1128; Merges, 1997). Full-fledged price discrimination might upset the existing balance of rights and the ecosystem of tolerated uses that have been identified in various writings (Boyle, 2000; Tehranian, 2007; Wu, 2008; Balganesh, 2013). In doing so, cumulative creation might slow down if a legally sanctioned price discrimination regime, bolstered by technology and contract rights, reduces access to information that was previously available due to the limited enforceability of contracts of adhesion, first sale, fair use, and so on (Boyle, 2000, p. 2032; Cohen, 1998, p. 1809).

20   Fisher also suggests a series of reforms designed to preserve the public benefits of specified types of access and/or use (Fisher, 1998). See also Merges (1997). 21   For a critique of these tactics, see Perzanowski and Schultz (2001) (misalignment with goals of copyright law); Perzanowski and Hoofnagle (2016) (consumer protection). 22   Others point out, however, that such technologies do not eliminate bilateral monopoly (Merges, 1997) or anticommons issues (Depoorter and Parisi, 2002). 23   For a discussion of the diverging views on price discrimination among copyright optimists and pessimists, see Netanel (1996).

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292  Research handbook on the economics of IP law volume 1 Another social welfare loss of enhanced price discrimination that should be considered is the elimination of free access to previously non-excludable aspects of information works. This might reduce the variety and diversity of works produced (Cohen, 1998; Benkler, 1999). Overall, the loss of free access ‘may or may not outweigh the welfare gained from access to newly excludable aspects of the work at a lower price than previously available’ (Benkler, 2000, p. 2076). Free access might be particularly relevant for (1) works with uses for which it is hard to predict the value ex ante; (2) high positive externality productive uses; and (3) public domain works produced for free distribution (Benkler, 2000). Moreover, increasing the reward to copyright holders by promoting price discrimination may distort the pattern of investments in creative products. For instance, if price discrimination is easier for copyrighted works than for other products it may lead to overinvestment in copyrighted works (Lunney, 1996, p. 633; 2008) or the types of works that enable price discrimination or allow a producer to cover the fixed costs of price discrimination (Baker, 1997, p. 344).24 Also, since price discrimination may lead a firm to produce multiple products to implement discrimination through quality differentiation, bundling, and tying, multiproduct firms will do better when legal obstacles to price discrimination are removed (Baker, 1997, p. 346). On a more granular level, Meurer (2001) distinguishes situations where price discrimination may be socially desirable (and copyright law should promote it), from instances where price discrimination is undesirable (and copyright law should discourage it).25 Sound policy must consider whether price discrimination can be controlled. Whenever IP law enables arbitrage, there is a risk that doing so displaces benign price discrimination into other more pernicious forms. For instance, if a seller cannot rely on copyright law to block arbitrage it might rely instead on DRM technologies, product design, marketing methods, and vertical integration. Similarly, a seller may degrade product quality to sort customers (Deneckere and McAfee, 1996), or a seller may over-rely on leasing or conversion of durable goods into services to block arbitrage. Also, a firm that sells intermediate goods might inefficiently integrate downstream displacing low value consumers so that it can set a high price to high value consumers with no concern about arbitrage. Finally, price discrimination may engender additional social costs, such as loss of privacy, personal autonomy, and foregone ethical or distributional commitments (Boyle, 2000, p. 2027) unless effective regulation of personal data retention and analysis is put in place (Bar-Gill, 2018). B. Patents In the context of innovation and patents, discussion of price discrimination is also polarized across optimists and pessimists. Optimists point to increased profitability for the patentee (Sidak, 1981) and the increased incentive to innovate (Bowman, 1973, pp. 56, 112; Klein and Wiley, 2003a), or to

  On product diversity more generally, see Dixit and Stiglitz (1977).   Katz (2014) argues that post-sale restraints are beneficial when coproducing or collaborating firms are imperfectly vertically integrated. 24 25

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Price discrimination and intellectual property  293 increase product variety (Wright, 2005). Grennan (2013) documents increased competition resulting from price variations. Hausman and MacKie-Mason (1998) emphasize the potential for price discriminators to serve new markets and achieve scale and learning economies. They also make the important point that, if the optimal policy solution is to apply the least costly manner of rewarding innovators, if patentees are allowed to benefit from price discrimination, this would enable other socially desirable adjustments, such as the reduction of the patent term (Hausman and MacKie-Mason, 1998, pp. 263–4). Kaplow makes a similar argument (1985, p. 524). Pessimists highlight output restrictions (Sullivan, 1977) and other inefficiencies caused by charging different prices (Baxter, 1966; Kaplow, 1984). Others point to how the rents from price discrimination may induce socially wasteful rent-seeking (Posner, 1975) and lead to excessive investments (Sykes, 2002) as well as socially wasteful patent races that may include potentially duplicative R&D costs (Rai, 2001, p. 199; Sykes, 2002; Scotchmer, 2004, p. 98; Abramowicz, 2003, p. 129). Rent-seeking is aggravated by the enhanced risk of frivolous or anti-competitive litigation created by patent and also copyright rights. The difference between a simple contract claim, on the one hand, and a patent or copyright infringement claim, on the other hand, is that the latter provides the IP owner significant strategic advantages because of the threat of preliminary and permanent injunction, fee-shifting, and treble damages for willful infringement. Furthermore, IP rights can be asserted against innocent strangers (perhaps importers) who might be vulnerable to an opportunistic IP suit. These rent-seeking costs need to be balanced against any incentive benefit before IP rights are expanded to support price discrimination (Meurer, 2003b, pp. 1881–2). As reflected in our previous discussion of the social welfare effects of price discrimination in copyright dependent markets, normative conclusions in the patent context depend on assumptions regarding the appropriate scope and social desirability of the patent reward for optimal innovation. Since there is a variety of opinions on the dynamic welfare effects of patent rewards, there are likewise a variety of opinions about the desirability of price discrimination practices that increase the reward for patentees.

VI. THE MANY FORMS OF PRICE DISCRIMINATION BY WAY OF IP RIGHTS A.  Geographic Price Discrimination Sellers commonly establish exclusive territories in order to facilitate third degree geographic price discrimination but also to encourage investment by distributors in local goodwill and service. In response, gray markets emerge to arbitrage away price differentials that are caused by exclusive national territories. Empirical evidence establishes that geographic price discrimination is common, and probably the most important cause of gray market transactions (Gallini and Hollis, 1999, p. 6; Malueg and Schwartz, 1994, pp. 173–4). Because transportation costs are relatively low for most copyrighted works and many patented inventions, sellers may need to rely on the force of law to prevent arbitrage. Legislative bans on parallel importation as well as contractual restrictions are some

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294  Research handbook on the economics of IP law volume 1 common instruments that reduce arbitrage and help implement price discrimination. These trade restrictions run counter to some intellectual property doctrines, however. In copyright law, the ‘first sale’ doctrine (17 U.S.C. § 109(a)) provides the owner of a lawfully made copy of a work the right to sell it without the copyright holder’s authorization. This doctrine seems at odds with section 602(a) which prohibits the unauthorized importation of a copyrighted work. In Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135, 118 S. Ct. 1125; 140 L. Ed. 2d 254 (1998) the United States adopted a partial exclusion of international price discrimination, permitting exclusion of gray market goods that are manufactured abroad. The application of the exhaustion principle only to goods produced domestically provided a perverse incentive to shift domestic production abroad (Goldberg, 2012). In Kirtsaeng v. Wiley, 568 U.S. 519, 133 S. Ct. 1351 (2013) the US Supreme Court did away with this distinction based on the location of manufacture and held that the first sale doctrine applied to all legally produced goods, regardless of origin of manufacture. This precedent effectively eliminated the opportunity for sellers to use copyright law to block gray market goods in support of geographic price discrimination. Kirtsaeng probably had a particularly significant impact on the music and movie industries. It is hard to use product differentiation to support price discrimination for these products. Additionally, customer service and warranties are not relevant to serve as a basis of price discrimination. One possibility at the disposal of producers is to dub movies and shows into foreign languages. Another possibility is to encode movies or music, so they can only be played on devices manufactured for a particular country or region. The movie industry has taken steps in that direction with country codes embedded in DVD movies. Such measures are costly of course both with regard to the costs of implementation and the loss of consumer satisfaction (Meurer, 2001). Similarly, in the area of patents, sellers of patented products commonly charge higher prices in the United States than abroad. To maintain these price differences, such sellers prohibit the resale of their goods in the United States. The U.S. Patent Act defines infringement in 35 U.S.C. § 271(a) by imposing liability on ‘whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent . . .’ The doctrine of patent exhaustion, however, offers a defense to importers, users, and sellers of a patented invention if the patent holder has either authorized a first sale of a patented item or licensed its use or sale. Accordingly, whenever a patentee sells an item, it ‘is no longer within the limits of the [patent] monopoly’ and instead becomes the ‘private, individual property’ of the purchaser (Bloomer v. McQuewan, 55 U.S. 539 1852). The hostility toward restraints on alienation is highlighted in Impression Products v. Lexmark, 137 S. Ct. 1523 (2017). The Supreme Court held that a purchaser has the right to use, sell, or import an item because those are the rights that come along with ownership, regardless of a patentee’s desire to expressly limit the purchaser’s rights in this regard. In the dispute, Impression Products imported patented printer cartridges that Lexmark sold abroad. Impression Products refurbished the cartridges and undercut the price that Lexmark was charging for the cartridges in the US. This arbitrage was permitted under the exhaustion doctrine. Interestingly, Lexmark may have been using cartridge sales to

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Price discrimination and intellectual property  295 measure the frequency of use of Lexmark printers, in pursuit of a form of second degree price discrimination that we will discuss more in Section VI.C. For commentators who embrace a global social welfare perspective, geographic price discrimination may have desirable distributional effects, for example, facilitating lower pharmaceutical prices in poor countries. Though, sellers might lower prices of patented goods in the United States and raise prices abroad (Hemel and Ouellette, 2016). The benefit from low prices in poor countries might be eroded if sellers design lower quality products to market in countries with weaker demand (Meurer, 2001, n. 397). Finally, in the area of trademarks, goods bearing identical trademarks are regularly sold at different prices in different geographical regions. Trademark owners seek to protect against arbitrage by arguing that use of the trademark on the imported (gray market) goods is unauthorized and infringes the exclusive right to use of a trademark on a particular product in a specific geographic area (Lansing and Gabriella, 1993).26 Supporters of geographic price discrimination by trademark holders argue that gray marketeers unfairly free-ride on the advertising and goodwill developed by trademark owners and authorized distributors (Liebeler, 1987, pp. 756–7). Gray markets may also be harmful to consumers because goods are not sold with the same warranties and quality assurances as products sold through authorized channels (Higgins and Rubin, 1986, pp. 228–9; Landes and Posner, 1987, pp. 308–9; Liebeler, 1987, p. 755; Lipner, 1990). They claim that territorial divisions enable producers to provide consumers with improved services and assurances of quality. Excess profits resulting from territorial division and restricted competition can be used to improve the quality of goods purchased by consumers (Philips, 1981; Tirole, 1988). Moreover, price differentials might be driven by differences in tastes, technologies, and government regulations across regions (Peterman, 1993; Lansing and Gabriella, 1993). Critics of geographic price discrimination point to consumer benefits resulting from lower prices (Rubin, 1992, pp. 618–22), free trade (Lipner, 1990), and intrabrand competition (Gallini and Hollis, 1999) enabled by gray markets. To the extent that geographic price differentials reflect monopoly power, gray markets help erode barriers to trade (Dam, 1964, pp. 53–60). Ghosh (1994) provides a formal model to suggest that the most efficient result is to permit gray market goods that have alternative labels. Additionally, prohibiting gray markets imposes considerable public enforcement costs (Ghosh, 1994, pp. 378–9). B.  Restrictions on Type of Use Software sellers often charge different prices for commercial versus personal or academic use. Contract law can be used to enforce the restriction limiting low-priced software purchasers to non-commercial use (ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1449 (7th Cir. 1996)). But these sorts of restrictions are more robust when intellectual property law can

26   A US trademark holder may bar the importation of goods bearing the same trademark when manufactured by a foreign manufacturer but cannot stop importation of goods made under the control of the domestic trademark holder. See K-Mart Corp. v. Cartier, Inc., 486 U.S. 281, 292 (1987).

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296  Research handbook on the economics of IP law volume 1 be used to enforce the restrictions. Intellectual property remedies are often stronger than contract remedies, and intellectual property claims are available against arbitrageurs who are strangers to the seller, thereby overcoming the privity limitation on contract claims. Patent law broadly facilitates restrictions on type of use. A patent owner has the right to exclude others from use of a patented invention. The predominant view in patent law states that because the patent owner can exclude all use, the statute gives an implied right to grant permission for some uses and still sue the licensee for infringement if she engages in an unauthorized use (Bowman, 1973, pp. 140–42).27 For example, DuPont imposed a field of use restriction and charged different prices for a patented synthetic fiber depending on the end use intended by the customers (Akzo v. Int’l Trade Comm., 808 F.2d 1471 (Fed. Cir. 1986)). Copyright gives somewhat limited support for restrictions on the type of use.28 Much of the value from movie and music copyrights comes from the public performance right which allows copyright owners to control public performances of their works (17 U.S.C. § 106(4)). This right facilitates price discrimination in the movie and music markets between home users and buyers who want to engage in a public performance, for example, exhibiting a movie in a theater or broadcasting music on the radio (Besen and Kirby, 1989; 1992). It also facilitates the fine-grained price discrimination practiced by ASCAP, BMI, and SESAC (collective rights organizations that administer blanket public performance licenses on behalf of music composition copyright owners). The royalties associated with the blanket licenses vary according to the size and revenue of the establishment using the license. The potent threat created by a possible copyright suit helps assure compliance with the price discrimination schemes used for the public performance of music and movies. In this manner, copyright law channels sellers into choosing a relatively socially beneficial form of price discrimination rather than a more socially harmful form. If the public performance right were deleted from the statute, music and movie producers would need to find another, likely costlier, way to discriminate between buyers intending to publicly perform the work, and buyers intending only private use. One possibility would be a very high initial sales price followed, after a significant delay, with a lower sales price targeted at home users. Another possibility would be vertical integration into movie exhibition or radio broadcast. The public performance right allows discrimination and avoids the high implementation costs associated with the other strategies (Meurer, 2003b, pp. 1883–4). Finally, we note that the performance right is limited by certain exemptions that have the effect of limiting the scope of price discrimination. For instance, 17 U.S.C. § 110 exempts educational and nonprofit performances from the reach of the public performance right. These exemptions might be justified by relatively high transaction costs compared to the private value of these sorts of public performances to purchasers. In effect, through these exemptions copyright brings about price discrimination for users intending a public performance, while sheltering certain users who might generate positive externalities (Meurer, 2003b, p. 1883).

27   But see Kaplow (1984, p. 1846). The implied right is made explicit regarding restrictions on location of use. See 35 U.S.C. § 261. 28   Lunney (1996) analyses how the right to create derivative works enables price discrimination.

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Price discrimination and intellectual property  297 C.  Intensity of Use: Tying, Merchandising, and Bundling Price discriminating sellers often link prices to a direct or indirect measure of the intensity of use of a durable product. Ideally for the seller, buyers would truthfully respond to queries about how frequently they will use a product and how many people will benefit from the use. Most often the high intensity users would be willing to pay more for the product, and prices would be set accordingly. Typically, price discrimination relies on indirect measures of intensity of use because direct measures are hard to implement. Usually it is costly to monitor use, easy to evade restrictions, and usage-based measures and monitoring sometimes annoy consumers. Nevertheless, sellers of software often set prices for enterprise or site licenses based on the number of users or machines that are licensed. Arbitrage may be discouraged by contract terms that allow the software vendors to audit customers’ facilities. In some cases, technology intrinsic to the product or added to the product can be used to facilitate monitoring. The odometer on a rented car or a usage meter on office equipment can be used to set rental prices based on intensity of usage. Today, sellers can monitor usage of any equipment connected to the internet, for example, mobile phone data plans. Additionally, patent and copyright law can be used to bolster contract-based approaches to usage-based pricing. As we discussed in the previous section, IP infringement claims against strangers and strong IP remedies strengthen the enforcement power of sellers against arbitrage. Infringement claims are well grounded in patent law because the patent owner has broad control over use. To illustrate, in Brulotte v. Thys Co., 379 U.S. 29 (1964), the patent owner sold patented farm equipment and included a license term that required royalty payments based on the bushels of harvested crop. Copyright law does not offer a comparably broad use right but in some important settings unauthorized use is infringing. Computers (and other consumer electronic devices) usually make a temporary copy of digital content or software during use. Even though temporary, such a copy may be infringing. Thus, a digital copyright owner can sue a buyer who violates a frequency of use restriction for breach of contract, and also for copyright infringement because of the unauthorized temporary reproductions. Copyright law imposes two important limits on these infringement claims. Section 117 gives software owners the right to make copies as an essential step in using a program, and the copyright misuse doctrine may restrict sellers from using this strategy in certain settings. Sellers use a variety of tactics to indirectly measure intensity of use by measuring consumption of some complementary product that is used with the durable product. For example, a patent owner leased a patented canning machine and required lessors to purchase the salt that they needed for canning from the patent owner (International Salt Co. v. United States, 332 U.S. 392 (1947)). Tying rental of the machine to sales of salt offered the patent owner a method to measure intensity of use—assuming those who used the machine more needed to use more salt. Besides tying agreements, a seller might design its durable products in such a way that it has an advantage selling a complementary product because of a proprietary interface between the durable product and the complementary product. Additionally, a seller might use the threat of an IP lawsuit against the maker or seller of the complementary product to achieve exclusivity in the market for the complementary sales. Some sellers use all three of these tactics to control sales of the complementary product.

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298  Research handbook on the economics of IP law volume 1 In a tying arrangement, the seller charges a supra-competitive price for the tied product and then measures the intensity of use of the tying product on the basis of the sales of the tied product. Because the price for the tied product is usually marked up beyond the competitive price, high-volume users are effectively charged a higher price for the tying product (Klein and Wiley, 2003a, pp. 604–5; Butler et al., 1984, p. 190; Hansen and Roberts, 1980). This creates a social loss as all buyers purchase too little of the tied good. This loss might be offset by a reduction in the price of the tying product that induces new buyers to enter the market (Lichtman, 2000). Classic cases include IBM Corp. v. United States, 298 U.S. 131 (1936) where IBM leased patented tabulator machines on the condition that the lessee purchase all of the punch cards needed for use in the machines from IBM. Punch card purchases measured frequency of use. Rather than charging a rental rate that varied directly with frequency of use, IBM charged a premium over the competitive price for punch cards, and thereby indirectly collected a rental rate that increased with the frequency of use. In Motion Pictures Patents Co. v. Universal Film Mfg., 243 U.S. 502 (1917) movie projectors were tied to film, and the patent owner derived most of its profit from the sale of film. In Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 489–90 (1942), the lease of a patented canning machine was tied to the sale of salt tablets and salt sales metered the intensity of use of the canning machine. Rather than a tying agreement, a seller may use the design of a product interface to gain control over the sale of a complementary product. In Sega v. Accolade, 977 F.2d 1510 (9th Cir. 1992), Sega sold video game consoles that were used in conjunction with game cartridges. Sega controlled the cartridge market via software required to make the cartridges function in the console. By earning a licensing fee on authorized cartridges, Sega could indirectly distinguish between purchasers of the console who bought only a few cartridges and those who bought many, and it could use this system to implement usage-based price discrimination. Ultimately this strategy failed because Accolade was able to reverse engineer the interface and make and sell compatible cartridges that were not authorized by Sega. Sega sued Accolade for copyright and trademark infringement and lost on both grounds. In other contexts, a seller may have better luck if the interface is difficult and costly to reverse engineer, or if the interface is protected by a patent. Sellers can block all use of a patented interface, they have had mixed success enforcing contracts that preclude reverse engineering, but reverse engineering is typically permitted under trade secret and copyright law. A third approach to controlling frequency of use relies on the threat of IP suits against competing suppliers of the complementary product. For example, in MAI Systems v. Peak Computer, 991 F.2d 511 (9th Cir. 1993), MAI threatened copyright litigation to discourage third parties like Peak from providing maintenance services to buyers of MAI computers. MAI computers relied on an operating system copyrighted by MAI and they contended that when Peak turned on the computer to perform a maintenance service, a copy of at least a part of the operating system software was necessarily made in the computer’s random access memory (RAM). The court found that copying infringed on the reproduction right.29 Until

29   Specifically, the court held that a computer’s RAM satisfies the fixation requirement and a temporary RAM copy is a reproduction within the meaning of section 106(1).

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Price discrimination and intellectual property  299 Congress adopted legislation to reverse this outcome,30 the plaintiff was able to use the ruling to exclude the defendant from the maintenance market. Similarly, in certain cases, patent law may facilitate control over a complementary product by allowing contributory infringement suits against competing suppliers of the complementary product (Meurer, 2003b). In other contexts, the threat of copyright and trademark lawsuits can be used against makers and sellers of merchandise that is consumed as a complement to a copyrighted work. Movies and television series producers have succeeded in ‘merchandising’ products derived from their audiovisual works. Merchandising implements usage-based price discrimination if the highest valuation consumers are the ones who buy the most merchandise. Trademark law may protect the title and characters from movie or television series, and copyright law protects the use of images from these audiovisual works. The threat of IP suits gives the movie and television producers the chance to control the markets for posters, clothing, toys, games, and other merchandise based on the copyrighted work. In general, the social welfare effects of usage-based pricing can be positive or negative. Output-based pricing tends to draw new customers into a market, specifically, ­customers who are infrequent users who are attracted by the relatively low price charged for infrequent use. At the same time, consumption tends to fall among current customers who formerly consumed as much as they wanted, and now face a positive price for each additional use. The social welfare effects of tying arrangements, in particular, have been widely debated. Pessimists fear that tie-ins restrict competition in the tied product market. Tying can be used to leverage monopoly power from the primary market (tying product) to a secondary market (tied product) (Carlton and Waldman, 2002, p. 194; Leslie, 2004). Tying arrangements may distort competition by deterring entry into the market for the tied product. In markets with incumbents that sell tied products, competitors may face an uphill battle in order to achieve sufficient scale to compete or even cover fixed costs (Nalebuff, 2004; Whinston, 1990; Elhauge, 2009, pp. 413–14). Optimists are skeptical that monopolists can increase their total market power by way of tying, since price increases in one market are likely to lead to lost profits in the other market (Bork, 1978, pp. 366–7, 372; Posner, 2001, p. 201). Others maintain that tie-in metering protects goodwill, promotes quality control (Meese, 1997), can increase product quality (Dana and Spier, 2015), and may bolster research and development by enabling patent holders to recover more of the social value of their inventions (Wright, 2005; Grill, 2006), and that improved information may increase producer and consumer surplus (Hylton and Salinger, 2001). Metered tying has also been associated with social welfare benefits if it leads to improved sales of durable goods (Elhauge and Nalebuff, 2017). Similar to the issue of tying, any normative assessment of merchandising and the appropriate scope of copyright and trademark support of merchandising will depend on one’s view on the optimal reward for the copyright owner. Skeptics argue, however, that broad exclusive rights on merchandising distort creative activities, causing excessive investments in story lines and productions with an eye on toys and other merchandise

30   Congress reversed this result in the Digital Millennium Copyright Act. See 17 U.S.C.A. §§ 117(a), (c)–(d) (West 1999) (these sections reflect the amendments to 17 U.S.C.A. by § 301 of the Digital Millennium Copyright Act).

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300  Research handbook on the economics of IP law volume 1 that can be derived from the movie (Lunney, 1996, pp. 640–41; Sterk, 1996, p. 121; Meurer, 2001, pp. 128–9; Wyatt, 1994, p. 149; Litwak, 1997, p. xii). An interesting question exists whether a patentee of a tying product has an incentive to stifle or bolster innovation in the tied product market. On the one hand, a tying seller would benefit from innovation in the tied product market since improvements of a complementary product likely increase demand for the patentee’s product. On the other hand, innovation in the tied product market could potentially undermine the patentee’s dominant position and profitability in the tying product market (Feldman, 1999, pp. 2091–3; Leslie, 2011, pp. 834–5; Choi, 2004). For that reason, patent tying can reduce the incentives for innovation in the tied product market (Hovenkamp, 2007; Choi and Stefanadis, 2001, 2006). Additionally, by forcing rivals to enter two markets concurrently, tying can stifle competition and innovation in the tied product market (Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 485 (1992) (citing Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 14 (1984)). We close this section by discussing a related method of price discrimination known as bundling. We distinguish tying agreements that bundle a complementary product that helps a seller measure the intensity of demand for some durable product, with other bundles that serve to smooth demand by heterogeneous consumers over multiple products. Bundling naturally aligns with the goal of copyright law to promote broad diffusion of creative works. Bundling promotes diffusion because bundles are easier to price. Averaging consumer demand over multiple products reduces the variance in demand. This means there are fewer buyers in the ‘tail’ of the demand curve who get excluded. Bundling creates several other possible benefits. The clearest benefit is a reduction in transaction and enforcement costs. The blanket licensing practice of the copyright collectives provides the best illustration. The US Supreme Court suspended the per se rule against price fixing in an antitrust case against BMI due to the difficulty of enforcing the public performance right (Broadcast Music, Inc. v. Columbia Broadcast. Sys. Inc., 441 U.S. 1 (1979)). Bundling may also avoid wasteful investment in measuring the value of the components of a bundle (Kenney and Klein, 1983), to lower distribution costs (Hanssen, 2000) and problems associated with anticommons fragmentation (Depoorter and Parisi, 2003). A bleaker perspective is that bundling may reduce consumer surplus and reduce entry into digital information goods markets by competitors (Bakos and Brynjolfsson, 2000a). Nalebuff (2004) claims that bundling enables a company with market power in two goods to make it harder for a rival with only one of these goods to enter the market.31 Bakos and Brynjolfsson (2000b) predicted correctly that digital technologies and distribution would amplify both disaggregation-based pricing strategies, such as Itunes, and aggregation strategies, whereby information goods will be offered in bundles, site licenses, and subscriptions, such as Spotify, Hulu, Netflix, and so on (Roin, 2014; Liebowitz and Margolis, 2009).

31   For a critique of theoretical ligature on bundling and, specifically, the lack of empirical grounding, see Kobayashi (2005).

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Price discrimination and intellectual property  301 D. Sharing A highly contentious issue in copyright is the type and extent of sharing by users without permission from copyright owners. Especially in the digital era, private copying and sharing of movies, music, and software has become commonplace. The music industry in particular aggressively pursued the sharing of copyrighted works on file-sharing networks (Depoorter et al., 2011). Sharing can be defined as any activity such that (1) a single copy of a work provides utility to more than one end-user, and (2) the number of sharing users is relatively small. Copyright markets feature three common types of sharing: joint use through performance; reproduction leading to simultaneous use; and consecutive use through lending or resale. Consumers often buy, sell, and lend used books, movies, and music. Public libraries lend books and other copyrighted works to the public at no charge. Sharing impacts the feasibility and profitability of price discrimination. It can be used to circumvent price discrimination. Software sharing, for instance, is a common route for arbitrage. It may bring together two different classes of buyers that the seller would like to keep separate for the purpose of price discrimination. Software sellers often discriminate between the academic and business markets, or between the home and business markets. This sort of discrimination is less effective if business users routinely share with academic or home users (Meurer, 2003b). Though sharing may cause losses to sellers, a number of factors help mitigate these losses. With consumers doing some of the work, sharing copyrighted works may provide a cost-effective method of production, distribution (Besen and Kirby, 1989, p. 255; Novos and Waldman, 1984), and marketing. Additionally, sharing may induce network effects that raise the value to users (Conner and Rumelt, 1991; Takeyama, 1994; Shy and Thisse, 1999).32 These benefits from sharing can be deliberately attained if the copyright owner authorizes sharing and sets prices to capture some of the benefits. Sharing poses a particular threat to profit when sharing decreases distribution costs (Bakos et al., 1999) or when authorized purchasers do not appropriate (or otherwise account for) much of the value derived by other users (Meurer, 2001, pp. 133–40). Formally, copyright law allows users to engage in certain sharing activities without permission from copyright owners. Consider, for example, the type of sharing enabled by the VCR. The Supreme Court permitted private videotaping of televised movies under the fair use doctrine in Sony Corp. of America v. Universal City Studios, Inc. (464 U.S. 417 (1984)). Additionally, Congress refused to prohibit unauthorized commercial rental of videotapes. Informally, copyright owners tolerate many private, non-commercial sharing activities (Tehranian, 2007; Wu, 2008). Restrictions on sharing may be socially harmful if (1) the owner blocks socially valuable sharing because it is unprofitable, or (2) the owner inefficiently distorts the nature of sharing to gain more profit, especially if profits exceed levels necessary to stimulate the c­ reation 32   Varian (2000) identifies three situations where sharing will prompt a content producer to sell a smaller amount at higher prices and see an increase in profits: (1) when the transactions cost of sharing is less than the marginal cost of production; (2) when content is viewed only a few times and transactions costs of sharing are low; and (3) when a sharing market provides a way to segment high value and low value users.

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302  Research handbook on the economics of IP law volume 1 and distribution of works (Meurer, 1997, pp. 1183–9; 2001, pp. 132–40). Optimally, copyright law should permit sharing when the profit-based incentives of copyright owners are misaligned with the social incentive in maximizing ex post total surplus, provided the social cost in terms of lost productive incentive is not too great (Meurer, 2004, pp. 910–12).

VII. CONCLUSION The literature we have reviewed has allowed us to compile an intriguing compendium of connections between intellectual property law and price discrimination. We think that new technologies are expanding the range of such connections and present new topics that should be addressed in more depth by intellectual property law scholars. In particular, we expect to see growing commentary on copyright and trademark liability of e-commerce platforms and how that connects to arbitrage and price discrimination. Further, we expect to see growing commentary on the connection between intellectual property, privacy, and antitrust laws and incentives to build and use databases and algorithms in support of price discrimination. To conclude we note a severe imbalance between empirical and theoretical work on intellectual property and price discrimination. The extensive normative analysis we have reviewed is usually inconclusive because commentators lack the evidence to balance the social costs and benefits that theory tells us are created by price discrimination. More troubling, there is relatively little empirical evidence demonstrating that changes in intellectual property cause significant changes in the practice or profitability of price discrimination. Intuition and anecdote point to strong connections but rigorous empirical work needs to be done to confirm our intuitions.

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304  Research handbook on the economics of IP law volume 1 Danzon, Patricia M., and Adrian Towse. 2003. ‘Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents,’ 3 International Journal of Health Care Finance and Economics 183–205. Demsetz, Harold. 1970. ‘The Private Production of Public Goods,’ 13 The Journal of Law and Economics 293–306. Deneckere, Raymond J., and R. Preston McAfee. 1996. ‘Damaged Goods,’ 5 Journal of Economics and Management Strategy 149–74. Depoorter, Ben, and Francesco Parisi. 2002. ‘Fair Use and Copyright Protection: A Price Theory Explanation,’ 21 International Review of Law & Economics 453–73. Depoorter, Ben, and Francesco Parisi. 2003. ‘The Market for Intellectual Property: The Case of Complementary Oligopoly,’ in Wendy Gordon and Richard Watts, eds., The Economics of Copyright: Developments in Research and Analysis, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Depoorter, Ben, Alain Van Hiel, and Sven Vanneste. 2011. ‘Copyright Backlash’ 84 Southern California Law Review 1251–92. Dixit, Avinash, and Joseph Stiglitz. 1977. ‘Monopolistic Competition and Optimum Product Diversity,’ 67 American Economic Review 297–308. Elhauge, Einer. 2003. ‘Defining Better Monopolization Standards,’ 56 Stanford Law Review 253–344. Elhauge, Einer. 2009. ‘Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory,’ 123 Harvard Law Review 397–481. Elhauge, Einer, and Barry Nalebuff. 2017. ‘The Welfare Effects of Metering Ties,’ 33 Journal of Law, Economics, and Organization 68–104. Englmaier, Florian, Linda Gratz, and Markus Reisinger. 2012. ‘Price Discrimination and Fairness Concerns’ (February 5, 2012), accessed April 3, 2019 at http://ssrn.com/abstract=1999757. Feldman, Robin Cooper. 1999. ‘Defensive Leveraging in Antitrust,’ 87 Georgetown Law Journal 2079–115. Fisher III, William W. 1988. ‘Reconstructing the Fair Use Doctrine,’ 101 Harvard Law Review 1659–795. Fisher III, William W. 1997. ‘Property and Contract on the Internet,’ 73 Chicago-Kent Law Review 1203–56. Fisher III, William W. 2007. ‘When Should We Permit Differential Pricing of Information,’ 55 UCLA Law Review 1–38. Friedman, David. 1998. ‘In Defense of Private Orderings: Comments on Julie Cohen’s “Copyright and the Jurisprudence of Self-Help,”’ 13 Berkeley Technology Law Journal 1151–72. Gallini, Nancy T., and Aidan Hollis. 1999. ‘A Contractual Approach to the Gray Market,’ 19 International Review of Law and Economics 1–21. Ghosh, Shubha. 1994. ‘An Economic Analysis of the Common Control Exception to Gray Market Exclusion,’ 15 University of Pennsylvania Journal of International Business Law 373–439. Goldberg, Melissa. 2012. ‘A Textbook Dilemma: Should the First Sale Doctrine Provide a Valid Defense for Foreign-Made Goods?,’ 80 Fordham Law Review 3057–92. Goldstein, Paul. 1994. Copyright’s Highway: From Gutenberg to the Celestial Jukebox, NYC, NY: Farrar, Straus & Giroux. Gordon, Wendy J. 1992. ‘On Owning Information: Intellectual Property and the Restitutionary Impulse,’ 78 Virginia Law Review 149–281. Gordon, Wendy J. 1998. ‘Intellectual Property as Price Discrimination: Implications for Contract,’ 73 Chicago‑Kent Law Review 1367–90. Grennan, Matthew. 2013. ‘Price Discrimination and Bargaining: Empirical Evidence from Medical Devices,’ 103 American Economic Review 145–77. Grill, Brian T. 2006. ‘The Treatment of Metering in Antitrust Law: The Supreme Court’s Apparent Abolition of the Per Se Rule against Metering in Illinois Tool Works, Inc. v. Independent Ink, Inc.,’ 2006 Wisconsin Law Review 1465–92. Hansen, Robert S., and R. Blaine Roberts. 1980. ‘Metered Tying Arrangements, Allocative Efficiency and Price Discrimination,’ 47 Southern Economic Journal 73–83. Hanssen, F. Andrew. 2000. ‘The Block Booking of Films Re-Examined,’ 43 Journal of Law and Economics 395–426. Hardy, Trotter. 1996. ‘Property (and Copyright) in Cyberspace,’ 1996 University of Chicago Legal Forum 217–60. Hausman, Jerry A., and Jeffrey K. MacKie-Mason. 1998, ‘Price Discrimination and Patent Policy,’ 19 The RAND Journal of Economics 253–65. Hemel, Daniel J., and Lisa L. Ouellette. 2016. ‘Trade and Tradeoffs: The Case of International Patent Exhaustion,’ 116 Columbia Law Review Sidebar 17–31 Hendel, Igal, and Aviv Nevo. 2013. ‘Intertemporal Price Discrimination in Storable Goods Markets,’ 103 American Economic Review 2722–51. Higgins, Richard S., and Paul H. Rubin. 1986. ‘Counterfeit Goods,’ 29 Journal of Law and Economics 211–30. Holmes, Thomas J. 1989. ‘The Effects of Third-Degree Price Discrimination in Oligopoly,’ 79 American Economic Review 244–50. Hovenkamp, Herbert. 1999. Federal Antitrust Policy: The Law of Competition and Its Practice, New York, NY: West Publishing Co.

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Price discrimination and intellectual property  305 Hovenkamp, Herbert. 2007. ‘Restraints on Innovation,’ 29 Cardozo Law Review 247–60. Hovenkamp, Herbert, Mark D. Janis, Christopher R. Leslie, and Mark A. Lemley. 2009. IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law, vol. II, New York, NY: Wolters Kluwer Law and Business. Hughes, Justin. 2016. ‘Motion Pictures, Markets, and Copylocks,’ 23 George Mason Law Review 941–66. Hylton, Keith N., and Michael Salinger. 2001. ‘Tying Law and Policy: A Decision-Theoretic Approach,’ 69 Antitrust Law Journal 469–526. Jasanoff, S. 2013. ‘Epistemic Subsidiarity: Coexistence, Cosmopolitanism, Constitutionalism,’ 4 European Journal of Risk Regulation 133–41.
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306  Research handbook on the economics of IP law volume 1 Liu, Qihong, and Konstantinos Serfes. 2013. ‘Price Discrimination in Two-Sided Markets,’ 22 Journal of Economics and Management Strategy 768–86. Lunney, Glynn S. Jr. 1996. ‘Reexamining Copyright’s Incentives-Access Paradigm,’ 49 Vanderbilt Law Review 483–656. Lunney, Jr., Glynn S. 2008. ‘Copyright’s Price Discrimination Panacea,’ 21 Harvard Journal of Law and Technology 387–456. Malueg, David A. 1993. ‘Bounding the Welfare Effects of Third-Degree Price Discrimination,’ 83 American Economic Review 1011–21. Malueg, David A., and Marius Schwartz. 1994. ‘Parallel Imports, Demand Dispersion, and International Price Discrimination,’ 37 Journal of International Economics 167–95. Manta, Irina D., and David S. Olson. 2015. ‘Hello Barbie: First They Will Monitor You, then They Will Discriminate against You. Perfectly,’ 67 Alabama Law Review 135–87. Maskin, Eric, and John Riley. 1984. ‘Monopoly with Incomplete Information,’ 15 The RAND Journal of Economics 171–96. Maskus, Keith E. 2001. ‘Parallel Imports in Pharmaceuticals: Implications for Competition and Prices in Developing Countries,’ Final Report to World Intellectual Property Organization, accessed December 20, 2018 at http://www.wipo.int/export/sites/www/about-ip/en/studies/pdf/ssa_maskus_pi.pdf. Meese, Alan J. 1997. ‘Tying Meets the New Institutional Economics: Farewell to the Chimera of Forcing,’ 146 University of Pennsylvania Law Review 1–98. Merges, Robert P. 1996. ‘Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,’ 84 California Law Review 1293–393. Merges, Robert P. 1997. ‘The End of Friction? Property Rights and Contract in the “Newtonian” World of On-Line Commerce,’ 12 Berkeley Technology Law Journal 115–36. Meurer, Michael J. 1997. ‘Price, Personal Use and Piracy: Copyright Protection of Digital Works,’ 45 Buffalo Law Review 845–89. Meurer, Michael J. 2001. ‘Copyright Law and Price Discrimination,’ 23 Cardozo Law Review 55–131. Meurer, Michael J. 2003a. ‘Too Many Markets or Too Few: Copyright Policy towards Shared Works,’ 77 Southern California Law Review 903–74. Meurer, Michael J. 2003b. ‘Vertical Restraints and Intellectual Property Law: Beyond Antitrust,’ 87 Minnesota Law Review 1871–905. Mortimer, Julie Holland. 2008a. ‘Price Discrimination, Copyright Law, and Technological Innovation: Evidence from the Introduction of DVDs,’ 122 Quarterly Journal of Economics 1307–50. Mortimer, Julie H. 2008b. ‘Vertical Contracts in the Video Rental Industry,’ 75 The Review of Economic Studies 165–99. Nahata, Babu, Krzysztof Ostaszewski, and Prasanna K. Sahoo. 1990. ‘Direction of Price Changes in ThirdDegree Price Discrimination,’ 80 American Economic Review 1254–8. Nalebuff, Barry. 2004. ‘Bundling as an Entry Barrier,’ 119 Quarterly Journal of Economics 159–87. Netanel, Neil Weinstock. 1996. ‘Copyright and a Democratic Civil Society,’ 106 Yale Law Journal 283–387. Netanel, Neil Weinstock. 1998. ‘Asserting Copyright’s Democratic Principles in the Global Arena,’ 51 Vanderbilt Law Review 217–329. Ning, Lizhi, Shubha Ghosh, and Wei Zhou. 2015. ‘Price Discrimination in Patent Licensing and the Application of FRAND,’ 3 Journal of Antitrust Enforcement i207–27. Novos, Ian E., and Michael Waldman. 1984. ‘The Effects of Increased Copyright Protection: An Analytic Approach,’ 92 Journal of Political Economy 236–46. O’Rourke, Maureen A. 1997. ‘Copyright Preemption after the ProCD Case: A Market-Based Approach,’ 12 Berkeley Technology Law Journal 53–91. Perzanowski, Aaron, and Chris J. Hoofnagle. 2016. ‘What We Buy When We “Buy Now,”’ UC Berkeley Public Law Research Paper, No. 2778072. Perzanowski, Aaron, and Jason Schultz. 2010. ‘Digital Exhaustion,’ 58 UCLA Law Review 889–946. Peterman, Brian W. 1993. ‘The Gray Market Solution: An Allocation of Economic Rights,’ 28 Texas International Law Journal 159–90. Philips, Louis. 1981. The Economics of Price Discrimination, Cambridge: Cambridge University Press. Pigou, Arthur, C. 1932. Economics of Welfare, 4th edn, London: MacMillan and Co., Limited. Posner, Richard A. 1975. ‘The Social Costs of Monopoly and Regulation,’ 83 Journal of Political Economy 807–28. Posner, Richard A. 1986. Economic Analysis of Law, 3rd edn, Boston, MA: Little, Brown, and Co. Posner, Richard A. 2001. Antitrust Law, 2nd edn, Chicago, IL: University of Chicago Press. Posner, Richard A. 2005. ‘Vertical Restraints and Antitrust Policy,’ 72 The University of Chicago Law Review 229–41. Raff, Horst, and Nicolas Schmitt. 2007. ‘Why Parallel Trade May Raise Producers’ Profits,’ 71 Journal of International Economics 434–47.

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Price discrimination and intellectual property  307 Rai, Arti K. 2001. ‘The Information Revolution Reaches Pharmaceuticals: Balancing Innovation Incentives, Cost, and Access in the Post-Genomics Era,’ 2001 University of Illinois Law Review 173–210. Reichman, Jerome H., and Jonathan A. Franklin. 1999. ‘Privately Legislated Intellectual Property Rights: Reconciling Freedom of Contract with Public Good Uses of Information,’ 147 University of Pennsylvania Law Review 875–970. Robinson, Joan. 1933. The Economics of Imperfect Competition, London: Macmillan. Roin, Benjamin N. 2014. ‘Intellectual Property versus Prizes: Reframing the Debate,’ 81 The University of Chicago Law Review 999–1078. Rubin, Harry. 1992. ‘Destined to Remain Grey: The Eternal Recurrence of Parallel Imports,’ 26 International Law 597–622. Schmalensee, Richard. 1981. ‘Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination,’ 71 American Economic Review 242–7. Schwartz, Marius. 1990. ‘Third-Degree Price Discrimination and Output: Generalizing a Welfare Result, 80 American Economic Review 1259–62. Scotchmer, Suzanne. 1991. ‘Standing on the Shoulders of Giants: Cumulative Research and Patent Law,’ 5 Journal of Economic Perspectives 29–41. Scotchmer, Suzanne. 2004. Innovation and Incentives, Cambridge, MA: MIT Press. Shapiro, Carl, and Hal R. Varian. 1999. Information Rules: A Strategic Guide to the Network Economy, Brighton, MA: Harvard Business Review. Shepard, Andrea. 1991. ‘Price Discrimination and Retail Configuration,’ 99 Journal of Political Economy 30–53. Shiller, Benjamin Reed. 2014. ‘First-Degree Price Discrimination Using Big Data,’ Working Papers 58, Brandeis University, Department of Economics and International Business School. Shy, Oz, and Jacques-Francois Thisse. 1999. ‘A Strategic Approach to Software Protection,’ 8 Journal of Economics and Management Strategy 163–90. Sidak, J. Gregory. 1981. ‘Rethinking Antitrust Damages,’ 33 Stanford Law Review 329–52. Spinks, S.O. 2000. ‘Exclusive Dealing, Discrimination, and Discounts under EC Competition Law,’ 67 Antitrust Law Journal 641–70. Sterk, Stewart E. 1996. ‘Rhetoric and Reality in Copyright Law,’ 94 Michigan Law Review 1197–249. Stigler, George. 1987. A Theory of Price, New York, NY: Macmillan. Stokey, Nancy L. 1979. ‘Intertemporal Price Discrimination,’ 93 The Quarterly Journal of Economics 355–71. Stole, Lars A. 1995. ‘Nonlinear Pricing and Oligopoly,’ 4 Journal of Economics and Management Strategy 529–62. Stole, Lars A. 2003. ‘Price Discrimination and Imperfect Competition,’ in Richard Schmalensee and Robert Willig, eds., Handbook of Industrial Organization, vol. I, Amsterdam, Netherlands: North Holland Publishing. Stole, Lars A. 2007. ‘Price Discrimination and Competition,’ 3 Handbook of Industrial Organization 2221–99. Sullivan, Lawrence A. 1977. Handbook of the Law of Antitrust, St. Paul, MN: West Publishing Co. Sykes, Alan O. 2002. ‘TRIPS Pharmaceuticals, Developing Countries, and the Doha “Solution,”’ 3 Chicago Journal of International Law 47–68. Takeyama, Lisa. 1994. ‘The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Network Externalities,’ 62 The Journal of Industrial Economics 155–66. Takeyama, Lisa N. 1997. ‘The Intertemporal Consequences of Unauthorized Reproduction of Intellectual Property,’ 40 The Journal of Law and Economics 511–22. Tehranian, John. ‘Infringement Nation: Copyright Reform and the Law/Norm Gap,’ 2007 Utah Law Review 537–50. Thisse, Jacques, and Xavier Vives. 1988 ‘On the Strategic Choice of Spatial Price Policy,’ 78 American Economic Review 122–37. Tirole, Jean. 1988. The Theory of Industrial Organization, 1st edn, Cambridge, MA: MIT Press. Varian, Hal R. 1985. ‘Price Discrimination and Social Welfare,’ 75 American Economic Review 870–75. Varian, Hal R. 1989. ‘Price Discrimination,’ 1 Handbook of Industrial Organization 597–654. Varian, Hal R. 2000. ‘Buying, Sharing, and Renting Information Goods,’ 8 Journal of Industrial Economics 473–88. Viscusi, W. Kip, Joseph E. Harrington, and John M. Vernon. 1992. Economics of Regulation and Antitrust, Lexington, MA: D.C. Health and Co. Whinston, Michael D. 1990. ‘Tying, Foreclosure, and Exclusion,’ 80 American Economic Review 837–59. Wolinsky, Asher. 1987. ‘Brand Names and Price Discrimination,’ 35 The Journal of Industrial Economics 255–68. Wright, Joshua D. 2005. ‘Missed Opportunities in Independent Ink,’ 2005–06 Cato Supreme Court Review 333–59. Wu, Tim. 2008. ‘Tolerated Use,’ 31 Columbia Journal of Law & the Arts 617–36. Wyatt, Justin. 1994. High Concept: Movies and Marketing in Hollywood, Austin, TX: University of Texas Press. Yoo, Christopher S. 2014. ‘Public Good Economics and Standard Essential Patents,’ Faculty Scholarship Paper, No. 1371, accessed on June 14, 2018 at http://scholarship.law.upenn.edu/faculty_scholarship/1371.

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308  Research handbook on the economics of IP law volume 1 Legislation 17 U.S.C. § 106(4), 109(a), 110, 602(a). 35 U.S.C. § 154(a), 261, 271(a). 17 U.S.C.A. § 117(a), (c)–(d) (West 1999).

Case Law Akzo v. Int’l Trade Comm., 808 F.2d 1471 (Fed. Cir. 1986). Bloomer v. McQuewan, 55 U.S. 539 (1852). Broadcast Music, Inc. v. Columbia Broadcast. Sys. Inc., 441 U.S. 1 (1979). Brulotte v. Thys Co., 379 U.S. 29 (1964). Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451 (1992). IBM Corp. v. United States, 298 U.S. 131 (1936). Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 1281 (2006). Impression Products, Inc. v. Lexmark International, Inc., 137 S. Ct. 1523 (2017). International Salt Co. v. United States, 332 U.S. 392 (1947). Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). K-Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1987). Kirtsaeng v. John Wiley & Sons, 568 U.S. 519 (2013). MAI Systems v. Peak Computer, 991 F.2d 511 (9th Cir. 1993). Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942). Motion Pictures Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917). ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135 (1998). Sega v. Accolade, 977 F.2d 1510 (9th Cir. 1992). Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984). U.S. Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610 (1977).

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11.  When are IP rights necessary? Evidence from innovation in IP’s negative space Kal Raustiala* and Christopher Jon Sprigman** 3

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Contents I. Introduction II. The Concept of Negative Space III. Mapping the Negative Space of IP A. Social Norms B. First-Mover Advantage 1. Football 2. Computer databases 3. Software C. Products versus Performances D. Creativity-Enhancing Copying E. Market Power Unrelated to IP IV. Implications and New Directions A. The Negative Space Literature and the Law’s Unintended Consequences B. Unexplored Negative Space—Industrial Design V. Conclusion References

I. INTRODUCTION The law and economics of intellectual property has long rested on a foundational, if implicit, premise: that intellectual property (IP) law is best understood by studying how legal rules operate in actual markets for creative work. To understand copyright, for instance, scholars have explored copyright-dependent fields such as music, film, and publishing, seeking to understand how copyright law shapes innovation in these particular contexts. In other words, IP scholars have generally studied creative fields that rely on IP. The assumption that we best understand a body of legal rules by looking at the fields they directly address is eminently reasonable and seemingly so obvious that, until recently,

**  Professor and Director of the UCLA Ronald W. Burkle Center for International Relations, UCLA Law School. **  Professor, New York University School of Law and Co-Director of the Engelberg Center on Innovation Law and Policy. Thanks to our research assistants, Sydney Sherman and Jaclyn A. Hall, and to the Filomen D’Agostino and Max E. Greenberg Research Fund and the University of California Faculty Senate for grants that supported this work.

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310  Research handbook on the economics of IP law volume 1 it was almost never questioned. Yet this way of analysing the effects of IP is incomplete. IP rules are purposive; the core goal and rationale of IP is to incentivize creative and innovative production. Put differently, IP rights are granted and enforced by the state because they are believed to have significant effects on behavior, spurring innovation that would not occur in their absence. Thought of this way, looking only at the creative fields that IP law addresses is misguided.1 It leaves open, or at least incomplete, a host of important and fascinating questions. Can innovation flourish in the absence of IP protection? Can market incentives, psychological factors, social norms, first-mover advantages, or any number of other causes, including path-dependency or even happenstance, serve as whole or partial substitutes for IP rights? And is it possible that, under some conditions and in some industries, IP protection is counterproductive—that is, it inhibits more innovation than it promotes? To answer these questions, we must look beyond the space affirmatively covered by IP law. We must look instead at what we call the ‘negative space’ of IP. By ‘negative space’ we mean those creative and innovative fields that, for historical, doctrinal, or other reasons, are not addressed by IP law (Raustiala and Sprigman, 2006). In fashion, cuisine, tattoo artistry, professional magic, financial services, sports, and many other innovative endeavors, IP rights are absent or highly limited. IP as a causal variable either is out of the picture or is marginalized, even if IP rights sometimes apply as a formal matter. As a result, these fields provide an illuminating and sometimes arresting take on the relationship between IP and innovation. In this chapter, we explore the concept of IP’s negative space and the scholarship that has begun to grow around it. This literature is barely more than a decade old, but in important ways it has shaped how scholars today think about IP. The negative space literature is predominantly focused on copyright, but there is no reason it cannot apply to at least some industries that are within the domain of patent, which shares copyright’s incentive justification.2 Because the underlying rationales for trademark are so different, insights for trademark law are more limited. But the reverse is not true. One implication of much of the negative space scholarship is that the role of brands and marks in shaping innovation and innovative industries may be quite powerful, especially in those fields where copyright and patent are absent or weak. In the remainder of this chapter we first briefly define the concept of negative space. We then explore what has been learned thus far, surveying the growing range of research into ‘intellectual production without intellectual property’ (Dreyfuss, 2010). We conclude with an assessment of this line of inquiry and offer some key questions for future research.

II.  THE CONCEPT OF NEGATIVE SPACE IP rights, particularly in the American context, are fundamentally incentive-based. They are predicated on the theory that restraints on copying are necessary to motivate c­ reativity, 1   In social science terms, it is selecting on the dependent variable. Gary King, Robert Keohane, and Sidney Verba, Designing Social Inquiry: Scientific Inference in Qualitative Research, section 4.3.1 (1994). 2   Indeed, a number of works have done so. See, e.g., Rosenblatt (2013), discussing negative space as applied to the creation of innovative medical techniques.

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When are IP rights necessary?  311 lest copyists seize the returns from creation and destroy the incentive to create in the first place. The degree to which this theory is true is a question of tremendous importance for both law and policy. Innovation is a substantial part of any flourishing contemporary economy; it is arguably the key source of growth in advanced economies today. And it is widely believed that innovation rests upon—and indeed requires—strong IP protection. Given this, it is surprising how little empirical evidence supports this theory. Indeed, some prominent IP scholars have gone so far as to call IP’s rationale fundamentally ‘faithbased’ (Lemley, 2016). The most important task that law and economics research can undertake in the IP field is to shed light on how well IP law’s core incentives model holds up in the real world. The study of IP’s negative space is part of this endeavor. If healthy innovation is observed in IP’s negative space, understanding why is essential. IP’s negative space is perhaps most simply identified by contrasting it with IP’s positive space. The positive space encompasses all those creative activities that IP law addresses, such as novels, poems, films, television shows, music, software, painting, and video games.3 The negative space of IP, by contrast, encompasses any other creative art, craft, or act that does not enjoy or at least does not ordinarily rely on IP rights against copyists, either because IP is formally inapplicable or because something—perhaps a social norm against IP enforcement, or a legal or economic barrier that discourages resort to formal IP—limits its salience. Jessica Litman (1994) was characteristically prescient in identifying such areas of creativity as potentially valuable objects of study. In her article The Exclusive Right to Read, Litman suggested an interesting counterfactual: Imagine for a moment that some upstart revolutionary proposed that we eliminate all intellectual property protection for fashion design. No longer could a designer secure federal copyright protection for the cut of a dress or the sleeve of a blouse. Unscrupulous mass-marketers could run off thousands of knock-off copies of any designer’s evening ensemble, and flood the marketplace with cheap imitations of haute couture . . . The dynamic American fashion industry would wither, and its most talented designers would forsake clothing design for some more remunerative calling like litigation. And all of us would be forced either to wear last year’s garments year in and year out, or to import our clothing from abroad.

Then Litman brought the argument home: ‘Of course, we don’t give copyright protection to fashions . . . We never have.’4 Despite this, the fashion industry remains creative and economically vibrant: nothing like Litman’s dystopian and satirical scenario. Doctrinally, the reason fashion is unprotected by IP is that clothing is viewed as functional, and functional items, under IP law, cannot be protected by copyright.5 Yet 3   For the purposes of this chapter, we will broadly define this realm consistent with American IP law and generally focus on copyright. But, of course, there are some important variations elsewhere in the world, and we will mention one or two along the way. 4   In the United States. Elsewhere in the world, fashion design is often covered by copyright or other IP laws, but the net effect of those laws is very hard to discern, and the American industry is certainly just as vibrant and successful as its major foreign counterparts. 5   Patent, by contrast, is intended to cover functional inventions. But the bar for patentability is so high, and the fashion industry’s cycle of innovation so fast (partly endogenously; see Raustiala and Sprigman (2006) for more) that patent is almost never used for apparel outside of a few specialized items like waterproof fabrics. The one small exception, perhaps growing, is the use of design

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312  Research handbook on the economics of IP law volume 1 the field features sustained and high levels of creativity and investment in the creation of new works. The ability of the fashion industry to continually produce creative work runs counter, as Litman noted, to the conventional wisdom that IP rights are essential to spur investment in the creation of new works.6 In years past others too have observed that some areas of creative endeavor—areas such as cuisine, that are arguably just as dynamic and creative as music or motion ­pictures— were not protected by copyright (Das, 2000; Jesien, 2007; Pollack, 1991). For the most part this fact was simply mentioned; occasionally it was bemoaned. Apparel design in particular was the subject of several articles in the 1990s and 2000s that decried the lack of protection for fashion designs and generally proposed some doctrinal fix (Mencken, 1997; Sanchez-Roig, 1989). This work had value in that it identified, sometimes implicitly, a gap in our understanding regarding how IP operates empirically. Yet this early literature generally failed to take seriously the idea that these innovative and unusual fields might offer important evidence about the strength of IP’s incentive justification. IP’s negative space was largely treated as a curiosity or a problem to be fixed through doctrinal change; not as a unique window on foundational questions. What distinguishes the newer line of research we focus on in this chapter is precisely this orientation: a concern not only with delineating how hitherto un- or under-explored creative fields operate, but also with examining the larger implications of negative space for our understanding of IP theory, doctrine, and practice. By looking at a sufficient number of low-IP creative areas, we can perhaps begin to understand the various ways in which innovation incentives can succeed or fail. And ultimately, it may be possible to say something deeper about the strength and breadth of IP’s incentives justification. While this may not be the goal of all the scholarship we gather here under the rubric of negative space, we think it is important to most—and is the primary reason this research has drawn so much attention. At a foundational level this line of scholarship draws deeply from the well of ideas associated with Robert Ellickson (1991) and his influential book, Order without Law. Ellickson famously studied the cattle ranchers of Shasta County, California, a community that one would predict would be aware of and would rely upon formal rules of property. (Cattle stray, and, when they do, they damage fences and crops.) Ellickson found that the Shasta County ranchers often behaved as if the legal rules were irrelevant to their disputes. The ranchers instead developed and enforced a set of social norms regarding responsibility for straying cattle. Some of these norms looked efficient relative to the formal property rules they displaced; some did not. The central point was that particular communities can and often patents. Design patents differ from ordinary utility patents in that they cover ornamental designs. We have seen increased use in areas such as athletic and ‘athleisure’ wear, but to date very little use in conventional apparel. 6   A few years later, Lloyd Weinreb (1998, p. 1235) similarly noted that:   It may be difficult to imagine how, in an industry in which copyright is taken for granted, authors and the commercial marketers of their works could survive if copyright were eliminated. But, without more to go on, one may question whether that does not mistake the familiar for the necessary. The fashion industry has thrived despite the absence of protection for designs and the prevalence of ‘knock-offs.’

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When are IP rights necessary?  313 do achieve order using social norms rather than formal rules. In Ellickson’s study, law certainly existed, and was sometimes even employed (or served as a backdrop, casting a shadow over informal norms) (Mnookin and Kornhauser, 1979). But for the most part, legal rules were not significant to the settlement of actual disputes. Much like the relational contracting literature of the 1960s, Ellickson found that the informal norms developed within a given community mattered far more (Macaulay, 1963). Ellickson’s work, and much of the now-substantial literature on law and social norms that he helped spawn, had nothing directly to do with IP (Bernstein, 1992; Posner, 2002). Yet it has guided much of the growing negative space scholarship. Scholarship on negative space highlights the limitations of law, the frequent disconnect between formal law and actual social practice, and the importance of careful empirical and even anthropological research into how markets and communities work. It focuses directly on the creative ways communities, industries, and individuals structure relations without relying on legal rules or institutions. Most importantly, negative space scholarship reverses the lens of traditional IP scholarship. Rather than study how IP law works (or does not), it looks where IP is not and tries to understand how innovation occurs nonetheless.

III.  MAPPING THE NEGATIVE SPACE OF IP What falls within and what falls without IP’s domain remains largely unexplained. In this sense one of the most fundamental questions about IP’s negative space—what explains its contours—remains ripe for future research. (We say more about this below.) While some theories of the scope of IP’s negative space have been advanced, empirical support remains, as of this writing, unfortunately scant (Raustiala and Sprigman, 2012; Rosenblatt, 2011). That fundamental questions remain unanswered is not, of course, unusual in IP. Whether, when, or even where IP rules should be tightened or relaxed is similarly unclear. One could say the same about IP’s entire incentive justification, though, as we describe below, the recent wave of negative space scholarship has certainly shed some light on this question. Whatever larger insights have emerged from studies of negative space, this literature has undeniably generated a clutch of fascinating case studies. At a minimum, these studies substantially enhance our understanding of the empirics of innovation across a strikingly wide range of human endeavor. Studies of the fashion industry (Barnett, 2005; Barnett, et al., 2010; Hemphill and Suk, 2009, 2014; Raustiala and Sprigman, 2006, 2009), cuisine (Buccafusco, 2007; Fauchart and von Hippel, 2008), fan fiction (Tushnet, 2009), pornography (Darling, 2014), nineteenth-century US commercial publishing (Spoo, 2013), video games featuring significant user-generated content (Lastowka, 2014), stand-up comedy (Oliar and Sprigman, 2008), roller derby (Fagundes, 2012; Magliocca, 2009),7 software (Benkler, 2007; Fisk, 2006; Garon, 2010; Lerner and Tirole, 2005), jam bands (Schultz, 2006), tattoos (Perzanowski, 2013), magic (Loshin, 2010), and the flu vaccine (Kapczynski, 2016) detail an extraordinary variety of creative and innovative work, and

7   See also Magliocca (2009), discussing industry norms against patenting and arguing that business method patents should not be expanded to cover industries where such norms exist.

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314  Research handbook on the economics of IP law volume 1 show the ways in which creative production can flourish with relatively little or no IP protection.8 Related studies of scientific innovation document communal practices that emphasize sharing, and resist the full potential for propertization of research (Murray et al., 2009; Strandburg, 2005). And as Eric von Hippel (2005) and others have shown, a lot of innovation is generated by users, in contexts as varied as extreme sports, surgery, library science, and commercial high-tech manufacturing, who work mostly in the absence of IP incentives, and who often willingly and openly share the fruits of their creativity with others (de Jong and von Hippel, 2009; Gault and von Hippel, 2009). Relevant markets, incentives, participants, practices, and norms vary enormously across the negative space literature. In many respects the only shared quality is that creative production occurs in an environment that can be characterized as at least low-IP, and sometimes no-IP. Still, some broad features across cases can be discerned, and a certain taxonomic order can be imposed. In what follows, we briefly describe some of this work and highlight its broad themes, commonalities, and contrasts. A.  Social Norms Many negative space studies have documented the powerful role social norms play in stimulating innovation and constraining appropriation. In many of these cases IP law is formally relevant but for disparate reasons is often displaced, in an Ellicksonian fashion, by the social norms of a particular creative community. These social norms are almost exclusively producer norms, and typically reflect a shared sense of professional or artistic identity that allows such norms to develop and become entrenched.9 A large body of work has developed over the past decade analysing creative industries that feature relatively robust social norms. For example, an early study by one of us (Sprigman) and Dotan Oliar (2008) on copying among stand-up comedians is in this vein. Technically copyright law covers comedy. The issue then, as now, is that copyright protection only adheres to a specific formulation of a joke or routine, and not to the general premise or structure. In practice this means that a joke can easily be rewritten; hence infringement claims are thus difficult to bring and rarely cost-effective. Oliar and Sprigman (2008) describe the development of social norms among comics through two eras: the post-vaudeville era of joke slingers like Henny Youngman, Milton Berle, and Phyllis Diller, and the modern age of personalized comedy which started with people like Lenny Bruce and Mort Sahl and is today represented by comedians such as Sarah Silverman, Amy Schumer, and Louis C.K. The post-vaudeville era was marked by two features. The currency of comedy was the joke (understood as a one-liner, or maybe a simple premise + punchline). And comedians of the day freely appropriated whatever jokes they desired. Jokes were part of a commons that comedians could access. A famed Milton Berle quip summed up this state of affairs: Berle, known as ‘the Thief of Bad Gags,’ would come up on stage and say about the

8   See also the collection of essays in Making and Unmaking Intellectual Property (Mario Biagioli, Peter Jaszi and Martha Woodmansee, eds., Chicago: University of Chicago, 2011). 9   An interesting exception is in the jam-band community associated with acts such as Phish and the Grateful Dead (Schultz, 2006).

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When are IP rights necessary?  315 previous act, ‘I laughed so hard I nearly dropped my pencil.’ In short, post-vaudeville era comics operated on a norm of open copying. By the 1960s, however, comedy was undergoing major change. Whereas the first era was largely about the rapid-fire slinging of jokes, the second era featured longer, individualized narratives that were tied to a particular comedic persona. And as the nature of comedy changed, so too did the social norms. Comedians still do not sue one another over copying. Instead, contemporary comics operate via a set of well-developed and widely accepted social norms governing appropriation. Oliar and Sprigman describe norms that address copying, ownership, co-authorship, and joke transfer. These norms are backed by a surprisingly stiff regime of community-imposed, extra-legal sanctions. For the most part, these sanctions are reputational, but they appear to be effective in policing jokestealing. On rare occasions, norm-breakers are subject to group boycotts (i.e., cooperative refusal by comedians to work with a perceived joke thief) and even violence. The overall result is a fairly robust, but thoroughly private and extra-legal, system of rules governing the appropriation of creative work.10 And comedy remains a highly creative and very productive field. In a similar vein, Aaron Perzanowski (2013) has studied tattoo artists and the ownership of tattoo designs. As with comedy, nominally tattoo designs fall within copyright’s positive space. But in practice, they are rarely if ever governed by the laws of IP.11 Instead, a complex set of social norms operates to govern tattoo artists and their designs. There are, Perzanowski argues, five core norms: First, tattooers as a rule recognize the autonomy interests of their clients both in the design of custom tattoos and their subsequent display and use. Second, tattooers collectively refrain from reusing custom designs—that is, a tattooer who designs an image for a client will not apply that same image on another client. Third, tattooers discourage the copying of custom designs—that is, a tattooer generally will not apply another tattooer’s custom images to a willing client. Fourth, tattooers create and use pre-designed tattoo imagery, or ‘flash’, with the understanding that it will be freely reproduced. Finally, tattooers generally embrace the copying of works that originate outside of the tattoo industry, such as paintings, photos, or illustrations. In some ways, these norms unintentionally echo familiar concepts from copyright law, but they differ from formal law in important respects as well.

As with comics, tattoo artists around the United States are generally familiar with and subscribe to these norms, despite the fact that there is no legal sanction for failing to do so.12 Looking further back in history, in his book Without Copyrights, Robert Spoo (2013) tells the fascinating story of the nineteenth-century American publishing industry, which operated in a legal regime where foreign works were largely unprotected by US law and free to be pirated. Conventional copyright theory predicts that the low-IP environment 10   As this suggests, social norms systems are subject to serious problems of due process; scholars in this tradition do not necessarily view them as normatively superior. 11   Litigation is rare but not nonexistent (Whitmill v. Warner Bros. Entertainment, 4:11-cv-752 (E.D. Mo. 2013)). The case, which settled, involved the appearance of a tattoo look-alike, copied from boxer Mike Tyson, on the face of actor Ed Helms. 12   An interesting question is whether there is a difference in the power or scope of such norms since comics travel widely and tattoo artists are generally local.

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316  Research handbook on the economics of IP law volume 1 Spoo describes will lead to chaos: a free-for-all that provides no return to foreign authors and publishers. What Spoo finds instead is quite a bit of order without law. He describes a detailed and fluid system of ‘trade courtesy’ under which American publishers made what looked like purely gratuitous payments to foreign publishers and foreign authors, and agreed among themselves to a sort of ‘first-among-pirates’ rule governing distribution of foreign works in the US. It is by no means certain that the trade courtesy system Spoo describes provided the level of return to foreign authors that the expanded US copyright system eventually would. Nonetheless, trade courtesy provided substantial recompense to foreign authors, illustrating that the alternative to copyright is not unmitigated piracy— nor the collapse of creative work. High-end chefs also exhibit substantial adherence to social norms governing appropriation. Whereas tattoo designs and comedy routines are formally covered by copyright, if in practice rarely addressed by it, cuisine is much like fashion: it is unprotected in its two core features: the recipe and the finished dish. A creative chef who develops an original and delicious recipe can try to keep it from rivals as a trade secret. But since talented chefs can often reverse-engineer a dish they have eaten, the utility of this strategy is limited. Moreover, for many top chefs, cookbooks provide substantial income and are part of a larger brand-building effort. And by definition, cookbooks supply recipes for any reader to recreate. In short, recipes are legally open to appropriation by others. In practice, however, chefs—at least at the higher levels—have developed a set of norms and practices to constrain appropriation and reward ingenuity. Both Chris Buccafusco (2007) and the team of Emmanuelle Fauchart and Eric von Hippel (2008) have documented these practices and the ways they sustain high levels of culinary innovation. In particular, they note the strong norm of attribution, in which a given dish may be copied freely as long as the originator is noted (sometimes directly on the menu; even more often in a cookbook recipe’s notes). For example, Figure 11.1 shows famed New York chef David Chang citing directly on his menu the pioneering New York chef Wylie Dufresne of the now-defunct wd-50 restaurant. Many diners would surely miss the reference; it is a dog whistle to a special few. But for the intended audience—other chefs, culinary professionals, food fanatics—it is an important signal that Chang, himself a renowned innovator, has copied a terrific dish from Dufresne, and that he acknowledges the innovation it contains. Attribution is the central value here, not exclusivity, and chefs, unlike comedians, are far more comfortable with appropriation—as long as it is acknowledged as such. In short, social norms have been found to play a powerful, innovation-facilitating role in a host of creative industries in the negative space, from chefs and comedians to roller derby, magicians, and jam bands (Fagundes, 2012; Schultz, 2006). To be sure, many of these industries are small, though not all are. Modest size appears to help create the sort of community of interest and sense of shared professional identity that can originate and perpetuate robust social norms. And it is important to underscore that in most of these studies these norms develop and are sustained among producers of creative content. To the degree content producers lack a shared professional identity norms may tend to break down, or perhaps work only in a local or regional context. Or, as with chefs, norms may segment by category. Truly world-class chefs, for example, are loathe to copy because much of their reputation rests on their innovative capacity. And when they do, as the Chang menu above illustrates, they tend to attribute creations to originators. But

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Figure 11.1  Menu, Momofuku Daisho, Toronto further down the food chain, these norms are less apparent and copying becomes much more prevalent. If you have ever eaten a ‘molten chocolate cake,’ you have observed this process in action. One more important limitation must be stressed. In much of the research into social norms in IP’s negative space the industries involved tend to feature relatively low costs of innovation. Low-cost innovation is important because it is likely to facilitate the effective operation of social norms. If innovation were extremely expensive—as is the case, for example, in pharmaceutical development or blockbuster filmmaking—the power of producerpoliced, reputation-based social norms might be wholly insufficient to constrain copying to an appreciable degree. In short, the extant literature suggests, if only by the topics most widely covered, that social norms are more robust and meaningful in creative fields where the field is small and ideally tight-knit and investment in creation is relatively low. B.  First-Mover Advantage Sometimes industries rely on first-mover advantage to create and preserve innovation incentives. This segment of the negative space literature is embryonic; much work remains to be done to investigate the range of creative industries in which first-mover advantage may conceivably play a role in incentivizing or otherwise protecting and spurring innovation. But at very least, the few case studies that we have thus far suggest that the area merits exploration. The concept of first-mover advantage is often understood to mean the period of de facto exclusivity that an innovator enjoys due to the practical difficulties of copying a

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318  Research handbook on the economics of IP law volume 1 particular innovation. In other words, if it takes time for copyists to successfully copy a creation, the creator may have a first-mover advantage—particularly if being first can provide enough of a head start to lock in markets or at least make it hard for latecomers to compete. In some cases, first-mover advantage can offer a sufficient incentive to engage in meaningful innovation, even without the prospect of IP rights to protect that innovation. This should not be surprising. First-mover advantage is at the core of IP rights: the central feature of IP rights is that they extend any period of de facto exclusivity by making it illegal to copy an innovation for a set period of time. Patent and copyright are not perpetual; anyone can copy the work of another innovator eventually, but the law is meant to be calibrated so that the gain to the first mover (i.e., the creator/inventor) is large enough that it will incentivize continued innovation. Under IP law, the state, in short, creates and enforces a specified period of first-mover advantage. The interesting question here is how much a creator can benefit from ‘natural’ (that is, nonlegal) barriers to copying, what we will simply refer to as first-mover advantage, as opposed to those barriers created by legal restraints. In previous work, we described several examples of first-mover advantage incentivizing significant innovation in the absence of IP (Raustiala and Sprigman, 2012). There are likely other examples, and future work may seek to identify and assess creative work for which first-mover advantage is an important contributor to innovation incentives. Here we very briefly summarize a few prominent first-mover examples. 1.  Football American football features substantial innovation, and first-mover advantage, coupled to strong competitive incentives, seems to be a primary driver. New formations and plays can offer meaningful advantages to creative coaches and teams, even though nothing in American law stops other teams from copying those innovations. In fact, some football coaches openly teach other coaches their plays and approach. The precise mechanisms here are not well established. But it appears that coaches keep innovating despite the prospect of copying because they face short-term incentives to win a game every week and because winning now trumps the possibility of losing over the longer term as (hypothetically) their idea spreads. But there is another reason that copying does not deter innovation in football. Football formations and plays sometimes depend on a certain kind of team and player, and teams cannot be reconstituted quickly. Given this, an innovative coach can achieve substantial success in the near term with a new formation even if opponents ultimately adopt it later. The window in which the innovating team is the only one using the new system—or at least, using it well—may be large enough to make continued innovation worthwhile. 2.  Computer databases Databases also exhibit some degree of first-mover advantage. Like an innovative football team deploying a new formation, a successful database can remain competitive due to the need to train users in the new interface. We can explain this with an example from our own professional lives. As law professors, we rely heavily on legal databases such as Westlaw. These databases charge paying customers a substantial fee, and they require extensive training to learn to use well. That training typically begins in law school, and the big database companies allow students to use their products for free as a way to get them to

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When are IP rights necessary?  319 learn—and to become hooked. Once a law student becomes comfortable with Westlaw (or its primary competitor, Lexis-Nexis) he or she is unlikely to shift to another database. The result is that even if we create a new database tomorrow with all the federal and state cases and other materials contained in Westlaw—and lower prices—we will have a hard time competing with the incumbent firms, who know that lawyers who have spent years, if not decades, using one system are unlikely to start over unless the savings are very substantial. That does not mean, of course, that law students who have not yet invested in the learning required to become skilled in the use of a particular database are not up for grabs. But the difficulty of penetrating the existing market substantially raises the costs of entry. 3.  Software Probably the most common example of first-mover advantage is found in certain software markets that exhibit network effects. Being first—and creating a network of users that all rely on the same program and, as a result, can easily share files or data or documents—can give decisive and durable advantages to the first mover’s product. And that can lead to substantial market power and lasting profits. Only a few industries exhibit such positive network externalities; that is, benefits that accrue to users from the fact that others are using the same the network. The simplest example of network externalities is a telephone: a single phone is useless, two phones on a network are nice, but thousands of connected phones are much, much better. Each additional phone on the network makes the other phones more valuable. First-mover advantages can certainly accrue in the absence of positive network externalities. But when these externalities exist, the power of first-mover advantage is even greater. The ability to lock consumers in a network that they do not want to leave makes it easier to defeat new entrants into a market, even those that mimic or improve an existing product. Think of the short history of social networks. Perhaps Facebook, so dominant today, will give way to another social network. But Facebook has already seen off a challenge from Google +, which tweaked the Facebook approach and arguably improved it. People were hesitant to shift to Google + because their friends are all on Facebook. It is not impossible to dislodge a leading product even when network externalities exist. Friendster and Myspace, after all, were pathbreaking firms that were ultimately buried by Facebook. But it is more difficult. In sum, first-mover advantage is an important area of future study for scholarship. The fundamental purpose of copyright and patent is to create first-mover advantage: IP laws regulate second movers so the first mover has ample time to make money. A goal of future research should be to document instances where first-mover advantage exists even when IP law is absent or ineffective, and to determine whether and when first-mover advantage is powerful enough to sustain a meaningful level of innovation. C.  Products versus Performances Sometimes industries preserve creative incentives by shifting away from forms of creativity that are easily copied, refocusing on forms of creativity that are more resistant to appropriation. The online pornography industry is instructive of this dynamic. Adult entertainment is currently protected by copyright, though (under American law at least) prior to the Fifth Circuit’s 1979 decision in Mitchell Bros Film Group v. Cinema Adult

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320  Research handbook on the economics of IP law volume 1 Theater, 604 F.2d 852, 854–5, 858 (5th Cir. 1979), its IP status was unclear (holding that the Copyright Act neither explicitly nor implicitly prohibits protection of ‘obscene materials,’ such as the films at issue there, and rejecting the defendant’s affirmative defense of ‘unclean hands’). Perhaps because pornography for so long resided in the negative space of IP, the industry is a comparatively light user of IP litigation today and lives with very high rates of free and pirated content. As Kate Darling (2014) described, ready access to free online content, most notably through the ubiquitous ‘porntube’ sites,13 has affected the industry’s output of new content. Darling argues that production in the industry has shifted away from pornographic feature films and toward cheaper scenes (i.e., shorter bits of recorded pornography, not embedded in any larger story). These are designed to be viewed, for free, on the porntube sites, which have entered into deals with many producers to split associated ad revenue. Darling also documents the rise of ‘cam girls’—women (and men) who perform live over the internet using webcams. Clients pay to watch these performances, and sometimes pay more to essentially direct them. The revenue stream that results is resistant to piracy for much the same reason that live music performances are resistant to piracy—what is valuable is the immediacy of the live (streamed) performance. This is true even when the performance is made over an internet connection, because a feature of these performances is interactivity—ask (and pay) for the performer to engage in a particular sex act, and you might receive it. In earlier work, we argued that a similar phenomenon explained the continuing creativity of contemporary bartenders, despite the fact that drink recipes, like food recipes, are wholly unprotected from copying: Bars and high-end cocktails epitomize this phenomenon of performance over narrowly defined creative product. Why else do people pay upward of $15 for a drink that may cost less than $2 to make? As a sage bartender once said, you are not really buying a drink, you are renting a bar stool. And the rent varies, as you would expect, with the quality of the experience. In short, the high-end bar is a live performance venue. The drink is the ticket to the show. Anything that is a live performance must be experienced to be appreciated, and that experience can shelter creativity from the pernicious effects of copying. Why? Because copying all the facets of the experience is very difficult and often extremely costly—and sometimes impossible, as many would-be restaurateurs and bar owners have discovered to their peril. (Raustiala and Sprigman, 2012)

When the performance is a significant element of the total offering, the product can be copied with fewer negative ramifications. And in cocktails, as in cuisine, the level of innovation is quite high despite the absence of any legal barrier to appropriation. As discussed earlier, social norms among producers often play an important role in constraining appropriation, or mitigating its putative negative effects. The emphasis on performance over product attacks the problem of appropriation in a different way: reducing the ability of the consumer to find a true copy, rather than (as with social norms) constraining producers’ willingness to copy one another. The product-performance continuum has been highlighted by work focused on the negative space of IP, but the insights that result are not limited to it. As just noted, the 13   Websites, such as pornhub.com, redtube.com, and xvideos.com, that offer clips of pornographic content in a format similar to the way non-pornographic content is offered by YouTube.

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When are IP rights necessary?  321 music industry demonstrates the same tendencies. It is undeniable that music sales are down more than 50 percent from their peak in 1999 of approximately $14.5 billion—in fact, adjusted for inflation, almost 67 percent lower. It is also clear that, despite the appeal of legitimate streaming services such as Spotify and Apple Music, many consumers continue to pirate (or share) music. And yet recorded music continues to thrive. Online music piracy has not reduced the quantity of music produced, or indeed its quality, as a series of studies by Joel Waldfogel (2011, 2012) demonstrates. And, importantly, even as the recorded music business has withered, revenues from live music have boomed—in 2014, North American revenues from concert ticket sales grew to approximately $6.3 billion, rising from less than $1.5 billion in 1999—more than a threefold increase, adjusted for inflation.14 The music industry is re-configuring to emphasize performance and experience over product—a shift in the industry’s output that is provoked by piracy, but that does not appear to have blunted incentives to create new music. Indeed, recorded music is increasingly seen as advertising for live performance, rather than the other way around.15 This inversion of the traditional relationship renders copying far less harmful, and, arguably, even beneficial. The centrality of performance and experience helps explain the coexistence of some otherwise-contradictory trends in a number of industries. Consider the willingness of customers to pay ever higher prices for movie tickets in some theaters, even as streaming video in the comfort of one’s home grows ever more common. Why pay to go out to a movie theater when you can watch the exact same film on your widescreen high-definition television, thanks to one of the many torrent websites that feature illegal content? One answer is that the experience is quite different, and many smart theater owners have been rapidly moving to accentuate that difference as dramatically as they can. D.  Creativity-Enhancing Copying Sometimes creative incentives co-exist relatively easily with copying, because copying sets trends that accelerate consumption of creative goods and, in turn, their production. The fashion industry, for example, is rife with copies. They are part of the ecosystem in fashion. Take Forever 21, a multibillion-dollar retailer that is a major presence in the US and now also in Europe. Forever 21’s entire business model is based on appropriating others’ designs and selling them, perhaps slightly tweaked, for far less. In the US, this practice is entirely legal; fashion is a paradigmatic negative space industry. Knockoffs are ubiquitous in the industry, and expected if not demanded by consumers. What is striking, however, is how even rampant copying fails to drive down the level of creativity and creative production in the apparel industry. Fashion seems to dramatically violate the fundamental premise of IP rights. In earlier work, we argued that this result was not due to the role of social norms, 14  http://www.statista.com/statistics/306065/concert-ticket-sales-revenue-in-north-america/ (accessed March 18, 2019). 15   E.g., a 2015 review of the EP ‘Big Grams’ in Rolling Stone argued that even star guest musicians could not make it ‘feel like anything more than an attempt at landing a better festival slot.’ David Turner, ‘Review of Big Grams,’ September 25, 2015, accessed March 18, 2019 at http://www. rollingstone.com/music/albumreviews/big-grams-big-grams-20150925.

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322  Research handbook on the economics of IP law volume 1 first-mover advantages, or other factors. Rather, the freedom to copy not only did not destroy the creative impulse; it actually incentivized and accelerated it (Raustiala and Sprigman, 2006). Fashion is a status-laden good, whose value, for many, is dependent on its scarcity and novelty. When a design is fresh and new it is desirable. But as it spreads into the marketplace, and becomes more common, the early adopters no longer value it and seek to move on to newer designs. By allowing designs to be widely copied, and thereby stimulating demand for new designs, the regime of free appropriation that exists in the apparel world actually spurs innovation in design. Copying is thus a basic element of the industry’s trend-driven business model. This is implicit in the cycle just described; designs are adopted by others once there is some (often very early) evidence of their market appeal. The result, if copying is widespread enough, is a trend, and trends are the centerpiece of the fashion world. Copying first helps to set or identify trends, and then to anchor consumers’ expectations about what is in style at a given moment. This benefits the fashion industry by lowering consumers’ information costs about what is and is not currently in style and easing the decision about what to wear—which, in turn, encourages more apparel purchases by lowering the risk of purchase. And as copying spreads still further, the regime of free ­appropriation helps to kill the trend that it birthed. As a design becomes very widely copied, its cachet typically falls. Copying is, in short, the engine that drives the fashion cycle faster. Are there other creative fields that sustain incentives to innovate based on trends? Certainly, trends feature in a number of industries. For example, trends have been identified in the design of new typefaces (Raustiala and Sprigman, 2012). Likewise, there are trends in the music industry, although it is unclear how much they are connected to either consumers’ consumption decisions or incentives to innovate. As in the case of first-mover advantage, more work remains to be done for the negative space literature to offer a more complete understanding of when trend-driven consumption might be relevant to extra-IP incentives to create. E.  Market Power Unrelated to IP One hypothesis that has received only limited attention—but we believe should receive more—is that market power unrelated to IP might help to create and maintain innovation incentives in the absence of IP protections. What we mean here is market power in a conventional sense, that is, that may arise in a market that features weak competition paired with barriers to entry. One plausible example is the financial services industry, which has been the source of many innovations despite the fact that for much of its history IP protections were either difficult or impossible to obtain or enforce (Raustiala and Sprigman, 2012). The financial service industry’s creative output has included thousands of varieties of derivatives, bonds, credit and currency swaps, collateralized debt obligations, the BlackScholes option pricing formula, the formation of index mutual funds, the use of highyield or ‘junk’ bonds as means of financing mergers and acquisitions, and much more. And for much of the industry’s history the most plausible form of legal protection, patent, was unavailable. Nor could innovators rely on trade secret law for financial innovations that related to publicly traded securities. Because virtually all the details of a new security

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When are IP rights necessary?  323 become public once the offering is filed with the Securities and Exchange Commission, secrecy is typically impossible.16 In 1998, however, State Street Bank and Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368 (Fed. Cir. 1998) established for the first time that novel methods of doing business were patentable. State Street had some important effects for the industry. But whether it transformed the level or type of innovation is unclear. For example, the National Science Foundation, which tracks research and development (R&D) spending, measured no significant increase in financial industry R&D investment in the wake of State Street (Raustiala and Sprigman, 2012). A survey of data from the US Bureau of Labor Statistics also revealed no trend in the financial services industry of hiring more R&D workers, as we might expect if the availability of those patents was making a significant difference in resources devoted to innovation (Hunt, 2010, pp. 322–52). So how do we explain intellectual production without intellectual property in the financial services industry? Previous research posits a number of interacting reasons. Financial firms may innovate to satisfy the unmet needs of particular customers; to lower transaction costs; to avoid taxes and regulation; to take advantage of rating agencies’ rules for assessing the quality of debt; and to take advantage of opportunities offered by new technologies (Tufano, 2002). And for many of these kinds of innovations, patent protection would be counterproductive, because sharing with rivals is helpful or even necessary to grow markets to the size at which they become efficient and lucrative. To understand this point, consider the market for a new type of investment security. In most cases, new securities are likely to be most lucrative if they trade in markets big enough to become standardized and deeply capitalized. In practice, this typically requires a number of firms to enter the market. Patents, however, can act as a barrier to entry. If the innovator patents the new security, potential market participants may hesitate to enter the market for fear that the patent might be used against them. This fear might persist even if the innovator is willing to license the patent to its rivals.17 The bottom line is that IP rights do not seem to matter much to success in this market or to incentives to innovate. Financial firms that introduce a new and unpatented type of security typically retain a dominant market share for several years, even though rival firms rapidly copy the innovation (Tufano, 2002). Why? One hypothesis looks to in-house expertise developed in the process of innovation. Like a football team that has trained and recruited to run a particular offense—and is thereby better able to implement that offense than are its rivals—the innovating firm is more likely (at least until rival firms catch up or hire away key personnel) to have specialized in-house expertise in using the security that will advantage it over rivals. But perhaps a deeper explanation relates to the market power of large banks. Financial services are dominated by a small number of very large firms. These firms control large shares in particular lines of business. Investment banking is also driven by relationships, and many clients have long-term ties to their bankers that span a variety of product areas. 16   Trade secrecy is more viable for other types of financial investments, such as pricing models, but even in these cases, financial firms often are better off sharing information than keeping it secret. 17   Especially if those rivals worry that, as a consequence of the license fees, they will face higher costs in marketing the security compared to the innovator.

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324  Research handbook on the economics of IP law volume 1 As a result, even if innovations can freely be copied, a large bank can capture a significant share of the return on its investment in innovation simply by virtue of its dominance of the particular business at issue and its enduring client relationships (Merges, 2003, pp. 1–14). Consistent with this hypothesis, the leading innovators in financial services have been the biggest firms. When a small bank innovates, it has a strong incentive to partner with a large bank—the larger institution is able to capture a greater share of the returns from the innovation, which the smaller institution will share. In some instances, banks will be incentivized to sell innovations to the institution that has a leading role in the particular line of business addressed by the innovation (Battacharyya and Nanda, 2000, pp. 1101–27). Financial innovation is a complex topic. But the bottom line is relatively simple. Much of the innovation that we see in the financial services industry has been led by firms responding to market incentives, rather than the incentives created by IP rules. As these innovations are introduced, they quickly spread. The prospect that rivals will copy the inventions does not destroy the incentive to create them in the first place, and indeed in some situations copying enhances the value of these innovations by creating a larger market for them. Investment firms locked in a competitive market for clients innovate to serve clients better, and their rivals imitate those innovations to remain competitive.

IV.  IMPLICATIONS AND NEW DIRECTIONS A.  The Negative Space Literature and the Law’s Unintended Consequences Taken together, the studies we have described suggest that the incentives created by IP rights are not nearly as central to innovation as conventional wisdom suggests. They may be sufficient, but they are clearly not necessary. To be sure, there are limitations to extrapolating larger lessons from forays into IP’s negative space. As noted, many of the industries studied thus far feature relatively low-cost investments and often fast innovation cycles. Low-IP equilibria also can be unstable, and lead to a variety of non-optimal outcomes, including inefficient non-IP strategies for maintaining competitive advantage and exploitation of knowledge workers (Dreyfuss, 2010). These are all serious critiques, and they point out the difficulty, at least given current research, of drawing strong normative conclusions from the negative space literature that would lead to concrete recommendations for policy. The negative space literature has nonetheless succeeded, we believe, in displacing what previously was far too automatic an association between innovation incentives and intellectual property rules. The negative space literature has begun to explore another facet of IP’s effect on realworld creativity that could turn out to be very important. The principal justification for IP protection, at least in the US, has been closely linked to the quantity of innovation. That is, the dominant question has been: how much creative work will be produced by a particular set of monopoly rights? In a world without restraints on copying, IP theory tells us to expect too little innovation—that is, an amount less than the social optimum. Yet much of the negative space literature calls into question whether IP serves as the exclusive or even primary determinant of the quantity of innovation. Some of the studies also point to a different and equally interesting effect—an effect on what kind of creative

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When are IP rights necessary?  325 work is produced. In other words, this research suggests that legal rules can affect the ­quality of innovations we see, not merely the quantity.18 We might get certain kinds of creative work versus other kinds depending on whether we have strong levels of IP protection, weak levels, or none at all. To see this, take the example of stand-up comedy. At a general level, comedians’ norms about appropriation and attribution appear to achieve an important end. They restrain copying enough that incentives to invest in the creation of new comedic material remain robust. Yet the history of stand-up comedy does not suggest that there was a dearth of comedic production before the norm system took hold in comedy. Lots of jokes were created during the era of the Henny Youngman-type joke-slinger. After the norms system takes hold, what we see is not more material; what we see is different material. Comics begin to develop material that is more personalized, that is more narrative in nature, that is more individually tailored to individual comedians, and that arguably represents a higher level of creative investment. The idea that IP protection may impact the quality as well as the quantity of innovation should not be surprising, but it has profound implications. Seen in this light, IP policy, especially as it relates to copyright, implicates difficult normative questions about what kind of culture we want. In the old stand-up community, with its comedic commons that could be freely raided by any participant, the kinds of jokes that were heard were perhaps not amazingly original. But they were easy to remember and recount to others. If you think of comedy as serving as a social lubricant and providing a shared vocabulary, you probably like the one-liners that the post-vaudeville era produced. If, on the other hand, you think of comedy as a platform for political statements or individual artistic ­exploration—that is, the kind of deeply original, individualized, diverse, richly narrative, and persona-driven comedy we get today—you probably like the informal regime of norms that accompanies this sort of comedic work and that helped to cement it into place. The recent history of the music business likewise raises the question whether the primary real-world effect of IP rights is the quantity of output or quality of output. Over the past 15 years the music industry has involuntarily slipped into low-IP status due to the diffusion of digital technologies. Yet the overall output of recorded music does not seem to have changed. Indeed, if anything, the total musical output, and certainly actual consumer access to music, is higher than ever. As the famed musician David Byrne recently wrote, ‘more of it is being found, made, distributed, and listened to than ever before’ (Byrne, 2015). Of course, even as more music is being made and consumed, consumers are paying less for it. They are paying less in part because the music they pirate is free. But probably a bigger part of why consumers are paying less is that the market has shifted, massively, from a la carte purchasing to all-you-can-eat renting. The latter is what one purchases with a subscription to a streaming service such as Spotify. Streaming services are a great anti-piracy tool for the same reason Netflix is—once you purchase a subscription, there’s a lot of content available for zero marginal cost, so why pirate? And, because trying out new music is free, streaming services are a friendlier environment for new music than are traditional record stores or even iTunes. And as all this good news (for consumers) has   We mean quality in a non-normative way; i.e., not high or low quality but type or kind.

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326  Research handbook on the economics of IP law volume 1 occurred, the industry has shifted its product mix from something that is easily pirated— recordings—to something that is not: live concerts. The latter is growing, faster than it probably otherwise would if the former were not comparatively vulnerable to piracy. The music industry’s shift to a more performance-based business model has been of course highly disruptive to the traditional market structure of the music industry. There are winners (the firms that control live performance, such as Live Nation) and losers (the traditional major record companies). And there is the appearance of crisis, not least because the losers have a big megaphone, and, from their narrow perspective, the new reality is a hostile one. Yet from a broader social perspective, music is thriving despite moving in the direction of a low-IP industry. We can argue about whether the industry’s renewed focus on live performances is a good thing—especially if it comes at the expense of investment in great recordings. Or one might speculate that the rising importance of the live show to musicians’ incomes might subtly shift the sort of recorded music we get—and shift it toward music that is more impactful when performed live. But there is little evidence that recorded music and its live counterpart are opposed in some sort of zero-sum game. Great recordings fill the seats for live performances, and live shows make money. That is the new music industry business model. B.  Unexplored Negative Space—Industrial Design We will end by mentioning a very significant area of potentially fruitful investigation that the negative space literature has of yet not explored. This is not the only such field, but we believe it is particularly ripe for new research. Industrial design is a very broad area of creativity encompassing the design of articles—kitchen appliances, hair dryers, bicycles, machine tools, and many more product categories—that are not ‘art’ in the pure sense but are rather made for practical use. Manufacturers often direct considerable effort into making industrial design articles attractive. And yet the aesthetic content of industrial design is protected only peripherally by US IP law. The application of US copyright to industrial design is limited by the useful articles doctrine, which denies protection to most articles which contain aesthetic content that cannot be separated from the design’s utility. US design patent law protects only ‘novel’ designs. And US trademark law protects only designs which can be shown to have obtained ‘secondary meaning’—that is, that are understood by consumers to designate the source of products, rather than merely functioning as an attractive element of product appearance (Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S. 205 (2000)). In contrast to the US, Europe has a legal regime of encompassing protection for many industrial designs, including sui generis protections for both registered and unregistered designs. Moreover, in some European countries copyright protection is far broader in its application to industrial design than it is in the US So with respect to industrial design, we have something of a natural experiment. Encompassing protection in the EU; peripheral protection in the US. Does the difference in legal regimes lead to different levels (or types) of innovation across the broad diversity of industrial design fields? Do we see a higher level of design creativity in Europe versus in the United States? Do companies that market designs in both jurisdictions understand the incentives differently in each? Do they behave differently? And what about sequential

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When are IP rights necessary?  327 innovation in these fields? Do second-comers behave differently in Europe versus the United States—that is, do we see more activity in the US dedicated to improving existing designs that the peripheral IP system leaves unprotected? Of course, fashion is a form of industrial design, and, as noted above, faces very difference legal regimes in the EU (protective) versus the US (permissive of copying). We saw no evidence that the EU-based fashion industry is more innovative than its US counterpart—or indeed, that fashion firms behave differently in the two jurisdictions. Some of the most productive fashion copyists—fast fashion firms like H&M, Zara, and Topshop—are based in Europe. And indeed we see in Europe and the US broadly the same form of copying combined with tweaking that leads to the creation of fashion trends. The industry’s basic innovation practice appears to be very similar on both sides of the Atlantic, despite the very different nominal IP rules. In the US, IP is not relevant. In the EU, it is mostly ignored. Does the same observation hold for the broad range of other sorts of industrial design? These industries await study. We have no predictions, except that we are sure the questions will be worth exploring.

V. CONCLUSION In his 2014 Nimmer Lecture, Mark Lemley (2016) provocatively referred to intellectual property law as ‘faith-based.’ Given the continued absence of compelling evidence of its efficacy, Lemley argued, proponents of stringent IP protection were essentially operating on belief. And indeed, he suggested, some seemed to have almost given up on the search for evidence itself. Whether one agrees that Lemley accurately characterized the state of IP theory or not, there is no question that the empirical underpinnings of IP rights and rules remain surprisingly unclear and contested. Moreover, this is true even as IP looms larger in economic and political discourse than ever before, and as innovation and creativity increasingly serve as the critical drivers of contemporary economies. The recent move to explore IP’s negative space directly confronts the strong belief that protections against copying are a necessary feature of robust innovation. By getting closer to the ground in previously unexplored creative areas, negative space scholarship has done several important things. It has given us valuable and often closely observed detail about how vibrant, innovative industries and markets work and how they can often achieve innovation—and order—without law. It has demonstrated that sustained and high levels of intellectual production can take place in the absence of strong and effective intellectual property rights. And in doing both of these things, it has called into question the central tenet of IP theory, even as IP law is increasingly harmonized and strengthened around the world via new domestic laws as well as the increasingly common and stringent IP provisions found in major trade accords. Negative space scholarship by no means has decided the question of whether IP rights can be justified on more than faith—or, indeed, on the basis of the deontological justifications that have been offered as adjuncts to, or indeed sometimes as replacements for, empirical grounding. While the existing negative space research is important and suggestive, it arguably remains too scant, and too concentrated in small industries that often feature what is essentially artisanal production. Yet this line of scholarship has

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328  Research handbook on the economics of IP law volume 1 ­ rovided—and we have some grounds to believe that it will continue to provide—an unup sual and important lens on the most significant of foundational questions about IP rights.

REFERENCES Barnett, Jonathan M. 2005. ‘Shopping for Gucci on Canal Street: Reflections on Status Consumption, Intellectual Property, and the Incentive Thesis,’ 91 Virginia Law Review 1381–423. Barnett, Jonathan M., Gilles Grolleau, and Sana El Harbi. 2010. ‘The Fashion Lottery: Cooperative Innovation in Stochastic Markets,’ 39 The Journal of Legal Studies 159–200. Battacharyya, Sugato, and Vikram Nanda. 2000. ‘Client Discretion, Switching Costs, and Financial Innovation,’ 13 Review of Financial Studies 1101–27. Benkler, Yochai. 2007. The Wealth of Networks: How Social Production Transforms Markets and Freedom. New Haven, CT: Yale University Press. Bernstein, Lisa. 1992. ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry,’ 21 Journal of Legal Studies 115–57. Buccafusco, Christopher J. 2007. ‘On the Legal Consequences of Sauces: Should Thomas Keller’s Recipes Be per se Copyrightable?,’ 24 Cardozo Arts & Entertainment Law Journal 1121–56. Byrne, David. 2015. ‘Open the Music Industry’s Black Box,’ New York Times (July 31). Darling, Kate. 2014. ‘IP without IP? A Study of the Online Adult Entertainment Industry,’ 17 Stanford Technology Law Review 655–717. Das, Proloy K. 2000. ‘Offensive Protection: The Potential Application of Intellectual Property Law to Scripted Sports Plays,’ 75 Indiana Law Journal 1073–101. De Jong, Jeroen P.J., and Eric von Hippel. 2009. ‘Transfers of User Process Innovations to Process Equipment Producers: A Study of Dutch High-Tech Firms,’ 38 Research Policy 1181–91. Dreyfuss, Rochelle Cooper. 2010. ‘Does IP Need IP? Accommodating Intellectual Production outside the Intellectual Property Paradigm,’ 31 Cardozo Law Review 1437–73. Ellickson, Robert C. 1991. Order without Law: How Neighbors Settle Disputes. Cambridge, MA: Harvard University Press. Fagundes, David. 2012. ‘Talk Derby to Me: Intellectual Property Norms Governing Roller Derby Pseudonyms,’ 90 Texas Law Review 1093–153. Fauchart, Emmanuelle, and Eric von Hippel. 2008. ‘Norms-Based Intellectual Property Systems: The Case of French Chefs,’ 19 Organization Science 187–201. Fisk, Catherine L. 2006. ‘Credit where It’s Due: The Law and Norms of Attribution,’ 95 Georgia Law Journal 49–117. Garon, Jon M. 2010. ‘Wiki Authorship, Social Media, and the Curatorial Audience,’ 1 Harvard Journal of Sports & Entertainment Law 95–144. Gault, Fred, and Eric von Hippel. 2009. ‘The Prevalence of User Innovation and Free Innovation Transfers: Implications for Statistical Indicators and Innovation Policy,’ MIT Sloan School of Management Research Paper No. 4722-09, accessed March 18, 2019 at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337232. Hemphill, C. Scott, and Jeannie Suk. 2009. ‘The Law, Culture, and Economics of Fashion,’ 61 Stanford Law Review 1147–99. Hemphill, C. Scott, and Jeannie Suk. 2014. ‘The Fashion Originators’ Guild of America: Self-Help at the Edge of IP and Antitrust,’ in Rochelle Dreyfuss and Jane Ginsburg, eds., Intellectual Property at the Edge. Cambridge: Cambridge University Press. Hunt, Robert M. 2010. ‘Business Method Patents and U.S. Financial Services,’ 28 Contemporary Economic Policy 322–52. Jesien, Karolina. 2007. ‘Don’t Sweat It: Copyright Protection for Yoga . . . Are Exercise Routines Next?,’ 5 Cardozo Public Law, Policy and Ethics Journal 623–54. Kapczynski, Amy. 2016. ‘Order without Intellectual Property Law: The Flu Network as a Case Study in Open Science,’ 102 Cornell Law Review 1539–648. Lastowka, Greg. 2014. ‘Minecraft as Web 2.0: Amateur Creativity & Digital Games,’ accessed March 18, 2019 at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1939241. Lemley, Mark A. 2016. ‘Faith-Based Intellectual Property,’ 62 UCLA Law Review 1328–46. Lerner, Josh, and Jean Tirole. 2005. ‘The Economics of Technology Sharing: Open Source and Beyond,’ 19 Journal of Economic Perspectives 99–120. Litman, Jessica. 1994. ‘The Exclusive Right to Read,’ 13 Cardozo Arts and Entertainment Law Journal 29–54. Loshin, Jacob. 2010. ‘Secrets Revealed: Protecting Magicians’ Intellectual Property without Law,’ in Christine Corcos, ed., Law and Magic: A Collection of Essays. Durham, N.C.: Carolina Academic Press.

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When are IP rights necessary?  329 Macaulay, Stewart. 1963. ‘Non-Contractual Relations in Business: A Preliminary Study,’ 28 American Sociological Review 55–67. Magliocca, Gerard N. 2009. ‘Patenting the Curve Ball: Business Methods and Industry Norms,’ 4 BYU Law Review 875–904. Mencken, Jennifer. 1997. ‘A Design for the Copyright of Fashion,’ Boston College Intellectual Property & Technology Forum (Dec. 12). Merges, Robert P. 2003. ‘The Uninvited Guest: Patents on Wall Street,’ 88 Economic Review 1–14. Mnookin, Robert H., and Lewis Kornhauser. 1979. ‘Bargaining in the Shadow of the Law: The Case of Divorce,’ 88 Yale Law Journal 950–97. Murray, Fiona, Phillipe Aghion, Mathias Dewatripont, Julian Kolev, and Scott Stern. 2009. ‘Of Mice and Academics: Examining the Effect of Openness on Innovation,’ National Bureau of Economic Research Working Paper No. 14819, accessed March 18, 2019 at http://www.nber.org/papers/w14819. Oliar, Dotan, and Christopher Jon Sprigman. 2008. ‘There’s No Free Laugh (Anymore): The Emergence of Intellectual Property Norms and the Transformation of Stand-Up Comedy,’ 94 Virginia Law Review 1787–867. Perzanowski, Aaron. 2013. ‘Tattoos and IP Norms,’ 98 Minnesota Law Review 511–91. Pollack, Malla. 1991. ‘Intellectual Property Protection for the Creative Chef, or How to Copyright a Cake: A Modest Proposal,’ 12 Cardozo Law Review 1477–523. Posner, Eric A. 2002. Law and Social Norms. Cambridge, MA: Harvard University Press. Raustiala, Kal, and Christopher Jon Sprigman. 2006. ‘The Piracy Paradox: Innovation and Intellectual Property in Fashion Design,’ 92 Virginia Law Review 1687–777. Raustiala, Kal, and Christopher Jon Sprigman. 2009. ‘The Piracy Paradox Revisited,’ 61 Stanford Law Review 1201–26. Raustiala, Kal, and Christopher Jon Sprigman. 2012. The Knockoff Economy: How Imitation Sparks Innovation. Oxford: Oxford University Press. Rosenblatt, Elizabeth L. 2011. ‘A Theory of IP’s Negative Space,’ 34 Columbia Journal of Law and Arts 317–65. Rosenblatt, Elizabeth L. 2013. ‘Intellectual Property’s Negative Space: Beyond the Utilitarian,’ 40 Florida State University Law Review 441–86. Sanchez-Roig, Rebeca. 1989. ‘Putting the Show Together and Taking It on the Road: Copyright, the Appropriate Protection for Theatrical Scenic and Costume Designs,’ 40 Syracuse Law Review 1089. Schultz, Mark F. 2006. ‘Fear and Norms and Rock & Roll: What Jambands Can Teach about Persuading People to Comply with Copyright Law,’ 21 Berkeley Technology Law Journal 651–728. Spoo, Robert. 2013. Without Copyrights: Piracy, Publishing, and the Public Domain. Oxford: Oxford University Press. Strandburg, Katherine J. 2005. ‘Curiosity-Driven Research and University Technology Transfer,’ in Gary D. Libecap, ed., University Entrepreneurship and Technology Transfer: Process, Design, and Intellectual Property. New York, NY: Elsevier JAI. Tufano, Peter. 2002. ‘Financial Innovation,’ in George M. Constantinides, Milton Harris, and Rene Stulz, eds., The Handbook of the Economics of Finance. Amsterdam: Elsevier. Tushnet, Rebecca. 2009. ‘Economics of Desire: Fair Use and Marketplace Assumptions,’ 51 William & Mary Law Review 513–46. von Hippel, Eric. 2005. Democratizing Innovation. Cambridge, MA: The MIT Press. Waldfogel, Joel. 2011. ‘Bye, Bye, Miss American Pie? The Supply of New Recorded Music since Napster,’ National Bureau of Economic Research Working Paper No. w16882, accessed March 18, 2019 at http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=1789463. Waldfogel, Joel. 2012. ‘And the Bands Played On: Digital Disintermediation and the Quality of New Recorded Music,’ accessed March 18, 2019 at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2117372. Weinreb, Lloyd L. 1998. ‘Copyright for Functional Expression,’ 111 Harvard Law Review 1149–254.

Cases Mitchell Bros Film Group v. Cinema Adult Theater, 604 F.2d 852 (5th Cir. 1979). State Street Bank and Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368 (Fed. Cir. 1998). Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S. 205 (2000). Whitmill v. Warner Bros. Entertainment, 4:11-cv-752 (E.D. Mo. 2013).

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12.  Open innovation and ex ante licensing Michael J. Burstein*

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Contents I. Introduction II. The Centrality of Information Sharing and its Challenges III. Collaborative Innovation and its Institutions A. Ex Ante Licensing B. Open Innovation C. User Innovation D. Peer Production E. Knowledge Commons IV. Conclusion—Information Exchange and IP Pluralism References

I. INTRODUCTION The traditional economic theory of intellectual property (IP) is based on an atomistic model of innovation. Innovators in that model are solo practitioners—the lone genius toiling in a garage or the vertically integrated firm with a famous research lab. But that model describes a limited and increasingly rare innovation ecosystem. Most innovation today takes place in a more distributed fashion, in which individuals and firms draw upon innovations that originated elsewhere or actively seek to disseminate their own technologies for the purpose of developing and commercializing new products and processes. This activity takes place in a variety of institutional settings. The business world recognizes it as ‘open innovation’ (Chesbrough, 2003). Innovators as varied as medical doctors, software engineers, and windsurfers engage in ‘user innovation’ (von Hippel, 2005). And participants in open source software projects like Linux engage in decentralized, distributed innovation at tremendous scale (Benkler, 2006). This chapter surveys the roles that intellectual property plays—both positive and ­negative—in innovation environments marked by the importance of sharing and collaboration. In the classic model, intellectual property is thought necessary to solve the problem of underproduction that arises from the public goods character of information (Menell and Scotchmer, 2007; Scotchmer, 2004). In collaborative models, this problem often (though not always) fades into the background; indeed one of the most salient critiques of the rewards-based theory of intellectual property is that it fails to explain the persistence of innovation in areas where IP is unavailable or foresworn (Sprigman and Raustiala, 2018). *  Professor of Law, Cardozo School of Law, Yeshiva University, New York.

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Open innovation and ex ante licensing  331 But sharing information presents a different economic challenge—how to accomplish technology transfer. Each of the modes of innovation described briefly above requires parties to come together and exchange technical information and know-how. This chapter takes an integrated approach to the problem of collaboration. It begins by articulating the economic challenges of information sharing and technology transfer. It then explains how various innovation environments overcome these challenges, with a focus on the roles that intellectual property plays in these arrangements. The literature to date suggests that whether intellectual property helps or hurts the collaboration necessary to sustain open innovation is highly context- and situation-specific. The presence of significant non-market mechanisms for information exchange, that are not tied to property or contract, suggests that we ought to be cautious in our approach to intellectual property policy.

II. THE CENTRALITY OF INFORMATION SHARING AND ITS CHALLENGES The usual starting point for economic analyses of innovation is the observation that inventors and creators often have suboptimal incentives to invest in acts of invention or creation. Innovation is risky and expensive, but its product—information—is cheap and easy to copy (Arrow, 1962; Nelson, 1959). That is because information is usually thought to be both nonrivalrous and non-excludable. After information is produced, it is difficult to keep others from accessing it and using it, and the marginal cost of copying tends toward the (usually low) cost of reproduction. A grant of exclusive rights in information allows those engaged in research and development potentially to recoup their investment by excluding others from the information for a set period of time (Arrow, 1962). This is thought, in turn, to provide an ex ante incentive to innovate (Menell and Scotchmer, 2007; Scotchmer, 2004). Patents and copyrights are usually posited as solutions to the particular problem of underproduction of information goods in an unregulated market. This justification is commonly referred to as the ‘reward’ theory of intellectual property. The intellectual property incentive comes with significant social costs (Lemley, 2005). For one, the ability of the rightsholder to price her good above marginal cost results in deadweight loss (Scotchmer, 2004). For another, because innovation is cumulative and information is a critical input into the downstream production of further innovation (Scotchmer, 1991), increasing the cost of that input also yields dynamic social welfare losses (Arrow, 1962; Merges and Nelson, 1990). This cost is especially troublesome when considering the need for collaboration. The reward theory of intellectual property assumes that individuals or firms engage in inventive activity by themselves. In this account, a single decision maker faces a choice to innovate or not, and that choice depends on her ability to recoup her investment. Even in models of cumulative innovation, the central question is how a subsequent—but still ­singular—inventor incorporates previous innovation into her own subsequent work. These assumptions are highly contestable. It is rare that innovation takes place in a vacuum, subject to decisions by firms or individuals acting alone (Lemley, 2011). Some scholars have complicated the atomistic model by focusing not just on the initial production of information, but also on its further development and commercialization. The central insight of this line of work, derived in part from Schumpeter (1947), is that

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332  Research handbook on the economics of IP law volume 1 there is a difference between invention and innovation. The former is only the first step to bringing an intellectual product into the world. The latter is the broader process of developing, improving, adopting, and commercializing new processes or products. Bringing an idea to commercial fruition requires many activities beyond invention and, importantly, many of those activities may not be within the skill or ability of the initial inventor—things like developing a working prototype, market testing, distribution, and follow-on improvements (Sichelman, 2010). The challenge of commercializing inventions has been recognized by scholars and policy makers alike (Kieff, 2001; Abramowicz, 2007; U.S. Congress Office of Technology Assessment, 1995). And meeting that challenge is particularly important. Every innovation that fails for lack of commercialization deprives the public of a potentially beneficial technological advance.1 Commercialization is one particularly prominent example of the benefits of technology transfer. In order for commercialization to take place, inventors and their development partners must communicate; they must engage in information exchange sufficient for further technological development to take place (Burstein, 2012). This is true as well with respect to any part of the invention or innovation process in which actors with differentiated skills would find it useful to utilize those skills together. It is also true even in the absence of differentiated skill sets. Cohen and Levinthal (1989), for example, articulate the benefits of learning to research and development (R&D). In short, exposure to new technological ideas builds individuals’ and firms’ capacities to innovate themselves. The diffusion of technological innovations begets further innovation as multiple individuals or firms utilize nonrivalrous technology in more than one way. There are two challenges that must be overcome for information transfer to occur. The first is a particular kind of transaction cost that arises from the public goods nature of information. Arrow (1962) described a ‘fundamental paradox’ that arises when two parties try to exchange information (p. 615). The buyer of information must know enough about the subject of the trade to determine the price she is willing to pay. But of course, once the seller has disclosed the information, then the cat is out of the bag, and the buyer no longer has a reason to pay. This ‘disclosure paradox’ or ‘information paradox’ acts as a kind of transaction cost, interfering with the parties’ ability to reach a negotiated exchange. It is worth noting in this context that information transactions are subject to the usual range of ordinary transaction costs—difficulty in finding and negotiating with potential partners, the possibility of holdup, and so on. The disclosure paradox compounds these well-understood difficulties. The second challenge arises because, even if the parties can reach agreement, information is costly and difficult to transfer. Economic models of information often treat it as a discrete product like an apple. To be sure, some kinds of information may behave as discrete objects—stock tips, for example. But most information does not. Instead, information tends to be, in von Hippel’s (1994) formulation, ‘sticky.’ Information exists in the world in artifacts (Baldwin and Clark, 2000). Some of these artifacts are tangible, like objects that instantiate the information or books and writings that attempt to explain

1   The authors cited above view the commercialization problem as one of incentives, similar to the underproduction problem that can plague initial invention. My focus here is on the economically distinct challenge of exchanging information for the purpose of collaboration.

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Open innovation and ex ante licensing  333 it; others are intangible such as the information embedded in organizations, processes, and, most importantly, persons. Tangible artifacts themselves sometimes reveal the information contained therein on their faces—think, for example, of the design of a pencil, most of which can be determined by careful observation of a pencil. Others are less ‘self-revealing,’ such as the formula for Coca Cola (Strandburg, 2004). Regardless, these artifacts are often imperfect. There is much knowledge that cannot be embodied in something tangible but is instead tacit—it is the ‘know how’ that remains uncodified and difficult to access (Polanyi, 1966; von Hippel, 1994; Arora et al., 2001). Tacit, sticky knowledge is costly to transfer. It requires not codification, but social interaction and learning. Winter (1987) articulates a set of characteristics of information that determine how easy it is to transfer—whether it is: tacit or articulable; not teachable or teachable; not articulated or articulated; not observable in use or observable in use; complex or simple; and whether it comprises elements in a system or is independent (pp. 170–73). The theory of knowledge production and learning described above is fundamentally social in nature. As Benkler (2016) writes, ‘[i]nnovation is a collective, not individual process. It is a process of learning, and therefore depends crucially on communication. . .. It is therefore sticky, local, and social’ (p. 3). The social nature of innovation has been demonstrated as an empirical matter as well. In a study of biotechnology, Powell et al. (1996) show how innovation takes place through repeated interactions in networks that exist independently of institutional boundaries. And the literature on economic geography (Saxenian, 1994; Gilson, 1999) takes the cluster as its fundamental unit of organization rather than the firm, demonstrating that movement among and interactions between individuals and firms in the cluster are critical drivers of innovation performance. The next section describes several paradigms of collaborative innovation. Each paradigm addresses the transaction and information costs described above in different ways and with different strategies. But what links them together is the need to communicate information from one party to another.

III.  COLLABORATIVE INNOVATION AND ITS INSTITUTIONS The challenges described above are not insurmountable, of course. Much scholarly attention in recent years has been paid to the various institutional mechanisms by which parties come together to exchange information in productive ways. This section draws a thread through these various literatures—on licensing, open innovation, user innovation, peer production, and knowledge commons. A.  Ex Ante Licensing We begin with the simplest model of collaboration: the bilateral license. In this setting, two firms or individuals seek to enter a contract for the exchange of technological ­know-how.2

2   The term ‘license’ in this section is used to signify not only the licensing of positive law intellectual property rights like patents or copyrights, but also licensing of trade secrets, know-how, and other forms of unprotected or unprotectable knowledge.

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334  Research handbook on the economics of IP law volume 1 This kind of license is often described as an ‘ex ante’ license. It is an agreement entered into before the purchaser has obtained the technology through other means, such as independent invention (Federal Trade Commission, 2011). Ex ante licenses are fundamentally about technology transfer.3 The discussion below assumes that the firms, when they become aware of the opportunity to collaborate, want to do so. In some bilateral circumstances, intellectual property may facilitate the completion of an agreement, both by helping to overcome transaction costs and by lowering the cost of information transfer. But intellectual property appears to be neither necessary nor sufficient in every case. Most basically, exclusive rights appear to solve the disclosure paradox described above (Arrow, 1962; Kitch, 1977; Merges, 2005). The disclosure paradox arises because information is nonexcludable—once the seller reveals the information to the buyer, the buyer is in possession of the subject of the trade regardless of whether she has paid for it. Exclusive legal rights like patents or copyrights make the information excludable; the buyer might know the information, but she cannot make, use, or sell it without the seller’s consent. The seller therefore can engage in free revealing backed by sanction of law. In this way, the intellectual property becomes the subject of the trade (Gallini and Winter, 1985). The parties can bargain over a legally delimited sphere of information that can be freely disclosed. This account of intellectual property fits neatly into the framework of transaction cost economics pioneered by Coase (1937) and elaborated by Williamson (1985) and others. In that framework, the question whether production happens in firms or markets depends on the transaction costs of market exchange. When those transaction costs exceed the costs associated with managerial hierarchy, we expect to see production moved inside the boundary of a firm. The classic example is the threat of opportunism. If this danger cannot be mitigated through contractual mechanisms, which is often the case since contracts cannot be theoretically complete, the parties must instead vertically integrate. But there is a third option—assigning a residual property right in the subject of the transaction makes up for contractual incompleteness. This explanation of the make or buy decision maps neatly onto the dynamics described above (Burk and McDonnell, 2007; Heald, 2005). The disclosure paradox functions as a kind of transaction cost, preventing parties from engaging in market transactions. Assigning a property right to the subject of the trade makes it so that the parties understand the residual allocation of rights should the contract fail. One consequence of this reasoning is that we should be able to test it empirically. Strong property rights ought to be correlated with the existence of relatively disaggregated R&D supply chains. The logic is that if intellectual property makes it easier to transact in information, then protectable innovation will take place within smaller, specialty firms that engage in trade with respect to their innovations while unprotectable innovation will take place only in contexts of vertical integration (Arora and Merges, 2004; Bar-Gill and Parchomovsky, 2004; Barnett, 2011). There is some evidence that this is the case. Arora et

3   Ex ante licenses stand in contradistinction to ex post licenses. Ex post licenses, usually expressly of intellectual property rights, require payment of rents to the rightsholder after the licensee has already obtained the technology through other means (Federal Trade Commission, 2011).

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Open innovation and ex ante licensing  335 al. (2001) demonstrate statistically that innovative labor in many high-tech industries such as chemicals and biotech is increasingly specialized, and Barnett (2011) offers a case study of fabless semiconductor manufacturing that suggests that intellectual property rights facilitate the entry of specialized research firms and vertical disintegration of that industry. Intellectual property could also help alleviate some of the stickiness of information that makes its exchange difficult. IP laws can perform this function in two related ways. First, at least with respect to patents, the very process of filing a patent application requires codification (Burk, 2008). Codifying knowledge is not without economic cost (Bessen, 2011), so the prospect of exclusivity offered by a patent can serve as an incentive to overcome that cost. Second, patents can form a kind of focal point around which negotiation over more tacit or less transferable forms of knowledge can take place. Bundling patent-excludable assets with the transfer of know-how helps both to overcome the possibility of holdup over the non-protectable knowledge and provide the parties with a concrete platform to begin the process of transferring tacit knowledge (Arora et al., 2001; Gans and Stern, 2003). Because the more- and less-excludable information assets are complementary, the ability to withdraw the excludable asset provides the parties with sufficient assurance to contract over the less-excludable asset. Arora et al. (2001) provide some empirical evidence of this phenomenon, drawing upon a data set of licensing agreements to demonstrate that physical assets and know-how are often transferred as part of a package. A patent can also serve as a kind of ‘beacon’ to signal available technology and begin a relationship that might eventually lead to transfer of both tangible and tacit knowledge (Kieff, 2006; Long, 2002). All that said, it does not appear that intellectual property is necessary for transactions in information goods (Burstein, 2012), nor is intellectual property always sufficient for effective technology transfer. There is evidence from practice of a mix of strategies being employed in different contexts. For one thing, the disclosure paradox does not always operate in practice as the theoretical literature described above predicts. That is because information is not always perfectly nonexcludable, and because it is layered and multifaceted and communicates value in complicated ways. Putting these two characteristics together yields a range of strategies by which parties can manipulate the information that flows to counterparties in the context of commercial transactions. Burstein (2012) describes two strategies employed in the biotech industry: staged disclosure with increasingly formal trust and commitment measures, and wholesale disclosure of replicable information while holding back tacit knowledge until formal commitments are in place. Contractual innovations also can, in the right circumstances, decrease the parties’ need to rely on intellectual property for information transfer. Anand and Khanna (2000), for example, draw upon a data set of licensing contracts to demonstrate significant variation in contractual terms by industry, in a manner that roughly correlates with the strength and relevance of intellectual property protection in that industry. This finding suggests that contractual adaptability rather than the strength of IP rights may be a key determinant of success in technology transfer. Indeed, in some cases, IP rights may not be necessary at all. Gilson et al. (2009) describe ‘contracts for innovation’ found in many disaggregated supply chains. These contracts amount to governance mechanisms that the parties erect to build sufficient trust over time to exchange highly appropriable information in the course of product development.

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336  Research handbook on the economics of IP law volume 1 At the same time, evidence suggests that, in many contexts, intellectual property is not a sufficient condition for information exchange either. Although the disclosure of the invention required in a patent application is often thought to be the central quid pro quo upon which the system relies to promote follow-on invention, in practice it tends to underperform that function (Fromer, 2009). The legal requirements for disclosure are easily manipulated so that clever drafters can get away with disclosing very little useful information. And to the extent that they do disclose such information, it is unlikely to be read or understood—for a variety of reasons, scientists in many fields (though not all), do not routinely read patents for technical information (Ouellette, 2012). Even where disclosure does serve a technically useful function, it often is not enough to promote real technology transfer. In an empirical study of university technology licensing, Lee (2012) concludes that much of technology licensing that results in actual product development couples formal IP licenses under the Bayh-Dole Act of 1980 with relationship-based exchange of tacit knowledge and, in some cases, organizational integration between the university researchers and their commercialization partners. This suggests that to be successful, technology collaborations must often be actual ­collaborations—deeply social and local. In the bilateral context, then, intellectual property is a mixed bag. It can be helpful in facilitating collaboration, but is neither necessary nor sufficient in many cases. The next section considers multilateral collaboration. B.  Open Innovation The simple bilateral model of collaboration described above often is a more accurate depiction of innovation in practice than the atomistic view of solo inventors. But it too is incomplete in important ways. This section moves from bilateral collaborations to multilateral and distributed models of innovation. Within the firm production paradigm, this kind of collaboration is usually referred to as ‘open innovation,’ following Chesbrough (2003, 2006).4 Outside of the firm production paradigm, collaborative innovation takes a variety of forms that are discussed in the sections that follow. At its core, open innovation is a business strategy. It is distinguished from ‘closed’ innovation models in which R&D is vertically integrated within the firm (Chandler, 1977). Famous twentieth-century corporate research centers like Bell Labs and Xerox PARC are quintessential examples of the closed model. In those institutions, R&D managers within the firm selected promising internal research projects for development, and shepherded developed projects through product launch. By and large, the ideas chosen for development came from within the lab, and those ideas that were not selected for further development were discarded (Chesbrough, 2003). The underlying management theory was that internal R&D created economies of scale that would lower the cost of 4   Outside the management literature, ‘open innovation’ is a term with many meanings (de Beer, 2015). It is useful to distinguish ‘open innovation’ as business strategy, which is the use of the term with which this section is primarily concerned, from ‘open’ intellectual property strategy. The latter term usually refers to innovations for which ‘all information related to the innovation is a public good—nonrivalrous and nonexcludable’ (Baldwin and von Hippel, 2011, p. 1400), as in ‘open collaborative innovation’ (p. 1400), ‘open source’ (Raymond, 1999), or ‘open science.’

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Open innovation and ex ante licensing  337 innovation, and that exchanging ideas outside the firm would only increase costs and benefit competitors. Open innovation models, by contrast, start from the premise that information is widely distributed in society and that a firm’s innovation strategy does not require that all good ideas be generated from within. Instead, open innovation ‘is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively’ (Chesbrough, 2006). As Chesbrough writes, ‘[o]pen innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology’ (p. 1). More recently, Chesbrough and his collaborators have expanded the definition of open innovation further to recognize and incorporate the diversity of strategies that firms may utilize. In this framing, open innovation is ‘a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and nonpecuniary mechanisms in line with the organization’s business model’ (Chesbrough and Bogers, 2014, p. 17). Much of the literature on open innovation is devoted to case studies and frameworks that explain the various ways in which firms implement open strategies (West et al., 2014; West and Bogers, 2014.) There are, broadly speaking, three modes of open innovation. The first is ‘outside-in,’ in which companies open their internal innovation processes to inputs and contributions that originate outside the firm, leveraging the distributed nature of technological innovation and knowledge to drive their own R&D efforts. Companies do this with a number of mechanisms, including scouting, in-licensing IP, collaborating with universities and research institutions, funding startup companies in an industry to get an early look into new technologies, or working with users,5 suppliers, or customers. Increasingly popular are mechanisms like crowdsourcing (Howe, 2006) or innovation prizes (Boudreau et al., 2011), that draw on wide and previously unknown audiences to solve innovation problems collectively. By contrast, inside-out open innovation happens when companies take underutilized ideas developed in-house and pursue external means of development or commercialization. In other words, a firm allows others to make use of its inventions. As discussed in further detail below, companies can do this either by selling or revealing, depending on the choice of business model for appropriating the returns to the initial R&D investment. Specific mechanisms to enable this sort of open innovation include out-licensing IP, donating IP, spinning out technological assets into new companies, engaging in corporate venture capital investing, and all manner of corporate external innovation strategies including incubators, joint ventures, and the like. There is a third open innovation strategy, referred to in the management literature as ‘coupled’ open innovation, that essentially links the outside-in and inside-out models (Piller and West, 2014). In this model, collaborators manage mutual flows of knowledge across multiple organization boundaries and engage in joint investment and commercialization activities. As Lakhani et al. (2013) argue, managing the boundaries of the firm

5   User innovation in particular is a mode of open innovation but also a phenomenon unto itself, described in the next section.

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338  Research handbook on the economics of IP law volume 1 amidst increasingly decentralized networks of collaboration is a central challenge for managers. Indeed, as transaction costs decline and the ease of communicating knowledge increases, the case for the centrality of the firm as the relevant economic entity, as opposed to the network, begins to fade (Benkler, 2016). The role for intellectual property law in this environment is ambiguous. That is because the management question whether to pursue a closed or an open innovation strategy is distinct from the set of operational choices around how to do so. Open innovation strategies—collaboration outside the firm—can be accomplished through different IP strategies. Early work on the open innovation paradigm emphasized the importance of appropriability over free revealing (Chesbrough, 2003). This was particularly true with respect to inside-out strategies, which were defined more-or-less completely in terms of out-licensing patents (West et al., 2014). The argument in favor of this position is grounded in the classic argument for intellectual property rights, that firms need exclusivity to recoup the cost of their investment in research, even if (or especially if) the development of that research into a viable product takes place outside the firm (West, 2006). In that circumstance, retaining an exclusive right that gives rise to a royalty stream enables the originating firm to participate in the upside should the licensee firm succeed in marketing the product. Chesbrough and Ghafele (2014) draw an explicit link between open innovation and markets for technology. They draw from previous work that argues that strong IP rights enable ‘intermediate’ markets for technology to form because such rights represent loci for bargaining, on both the buy side and the sell side (Federal Trade Commission, 2011; Gans and Stern, 2003; Arora et al., 2001). For buyers, a well-functioning market for technology enables them to readily determine what technologies are available at what prices. For sellers, such a market provides an easy source of liquidity for technologies that they do not wish to develop in-house. The link between markets and open innovation is relatively straightforward—well-functioning markets would ease the way toward open innovation. Chesbrough and Ghafele (2014) therefore call for policy changes to improve the functioning of IP markets. Burstein (2015), however, calls into question the link between markets for technology and markets for patents. He argues that patent markets may be welfare enhancing to the extent that they accurately represent markets for the underlying technology, but may generate significant social welfare losses when the two diverge, which may often be the case. While it therefore may be true that IP can facilitate market-based open innovation strategies, it is also possible that the optimal social policy may diverge from the private value associated with a firm-centric open innovation paradigm (West and Lakhani, 2008). In all events, Teece (1986) has long made the argument that IP is not the only source of appropriability for innovating firms. Just as important in many cases are first mover advantages or ownership of complementary assets. Firms may have a variety of mechanisms for appropriating their investments in R&D even while eschewing strong exclusive rights in the fruits of those investments. Those alternatives mean that ‘[e]ven within a single organization’s strategy . . . the trade-off between strong intellectual property and open collaboration is not clear cut’ (Benkler, 2017, p. 237). In particular, firms may choose free revealing rather than intellectual property in order ‘to build reputation, gain market share, attract third party contributions, or to grow the market’ (West et al., 2014, p. 808). Consider, for example, Tesla’s 2014 decision to make all of its patents available

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Open innovation and ex ante licensing  339 for free.6 The underlying logic of this decision was to use patents for inclusion rather than exclusion, and to foster the development of a market for the products for which Tesla believed it had a technological lead (Chien, 2016). There are demand-side economies of scale in the market for electric cars because more users mean higher demand for the kinds of services—charging stations and the like—that sustain even further use. By opening up its patents to competitors, Tesla sought to generate a large enough market that these network effects could begin to take hold. A similar dynamic is at work where markets are organized around open standards (Simcoe, 2006). In those cases, interoperability benefits all of the relevant players in an industry. It is also frequently the case that a firm may benefit more from reciprocal openness than it will lose in contributing to that openness. Henkel et al. (2014) demonstrate how computer component manufacturers drove stronger collaborations by shifting from a high- to a low-appropriability regime; similarly, Laursen and Salter (2014) draw upon survey data to find that strong appropriability is associated with greater external search, but that high levels of protection are associated with lower levels of collaboration. The choice between appropriability and free revealing therefore is highly contextspecific. It will depend on the relevant industry structure and the firm’s strategic choices within that structure (de Beer, 2015). C.  User Innovation The previous two sections explored collaboration under the classic assumptions of innovation economics: that innovation takes place among producers who then seek to profit from their innovations by selling them. This classic account does not take account of innovation by a distinct group of economic actors: users. Eric von Hippel, who has long pioneered the study of user innovators and their communities, defines user innovators as ‘firms or individual consumers that expect to benefit from using a product or service’ that they invent (von Hippel, 2005, p. 3).7 Unlike producer innovation, in which inventors benefit by selling their inventions, user innovation is motivated primarily by use. Examples of this sort of innovation are legion: scientific instruments invented by researchers, various kinds of sporting equipment invented by participants, open source software, medical devices, medical procedures, and off-label drug uses invented by medical practitioners or patents and caregivers, banking and healthcare services invented by users, financial services invented by smartphone users in developing countries, and manufacturing processes invested by manufacturers. (Strandburg, 2018, (draft) pp. *3–4)

Von Hippel and his collaborators have amassed significant evidence about the frequency and prevalence of user innovation (Baldwin and von Hippel, 2011, p. 1400; von Hippel, 2005, pp. 19–22 and tbl. 2.1). In short, it is pervasive. In a range of fields, many of the most important inventions originated with users. And the percentage of users in certain   For more on the enforceability of such patent pledges, see Contreras (2015).   User innovation can and does happen within profit-making firms. For example, machinists working for a manufacturing company frequently develop new tools for use in industrial production. This is user rather than producer innovation because the firm will use the tools in its business rather than sell the tools for a profit. 6 7

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340  Research handbook on the economics of IP law volume 1 fields who report that they themselves engage in innovation is high—10–40 percent across several fields in which user innovation is thought to play an important role (von Hippel, 2005). User innovation is likely to grow in importance as barriers to its exercise fall. Falling design and communication costs make it easier for user innovators to reach one another and to exchange information and ideas, and modular design architectures enable users to innovate with respect to discrete use cases (Baldwin and von Hippel, 2011; Benkler, 2017). User innovation also tends to be qualitatively different from producer innovation, because users’ incentives and abilities are different from producers’ incentives and abilities. More specifically, users typically are motivated to invent when the existing technology does not meet their particularized needs, whereas producers are motivated to invent where a market signal suggests significant profit opportunity. User innovators therefore tend either to be ‘lead users,’ who are at the leading edge of market trends and therefore dissatisfied with the state of mainstream technology (von Hippel, 2005), or users who have non-mainstream needs (Strandburg, 2018). These users therefore develop innovations that would otherwise go ignored in the producer innovation paradigm. User innovators appear to rely little on intellectual property. To the contrary, they often engage in free revealing of their inventions. In part this is because the nature of the innovations makes them difficult to protect either through formal intellectual property or through secrecy (Harhoff et al., 2003). But in part this is because the cost-benefit calculus often favors free revealing. The benefits include ‘network effects, the possibility that others will test, comment upon, and help to improve the invention, the potential for reciprocal access to other users’ inventions, benefits from a shared innovation process (such as learning from others), reputational rewards and altruistic and other hedonic benefits’ (Strandburg, 2018, (draft) p. *20). As was the case with respect to open innovation, described above, free revealing in the user innovation context may help to unlock network effects or generate open standards that advantage the initial innovator (von Hippel, 2005). The costs of free revealing usually are minimal, particularly in noncompetitive settings. Of course, a user must incur the cost of codification and transmission of information and these should not be minimized—some user innovations are ‘lost to secrecy’ because users may not have an incentive to reveal or disseminate (Strandburg, 2018). That disincentive is reduced in part because user innovation often takes place in discrete communities (von Hippel, 2005; West and Lakhani, 2008). In these communities, users create distinct governance mechanisms for the production and sharing of user innovations.8 Free revealing is the norm in these communities in no small part because of an ethos of reciprocal sharing. Strandburg (2018) collects several case studies that detail the phenomenon. This leads to an argument in favor of openness—in the strict sense (Baldwin and von Hippel, 2011)—when it comes to user innovation (West et al., 2014). In the user innovation mode, intellectual property does not appear to be necessary to motivate innovation in the first instance. Because the motivation to produce depends on the user’s direct benefit rather than appropriation through external sales, the possibility of free riding does not depress innovative activity. Instead, the relevant policy question is whether intellectual

8  See infra Section III.E and the separate contribution of Frischmann in Chapter 21 of this volume for a deeper discussion.

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Open innovation and ex ante licensing  341 property hinders or helps the kind of collaboration that marks user innovation, particularly as it takes place within the user communities described above. Von Hippel (2005) argues that strong appropriability hinders collaborative processes. He cites a range of strategic behaviors by patent holders that can inhibit the cumulative innovation that marks user-based collaboration. Anticommons (Heller and Eisenberg, 1998) and patent thickets (Shapiro, 2001) that create opportunities for holdup and significant risk of infringement litigation across wide fields, respectively, inhibit the free exchange of information that tends to be critical for user communities to build upon and improve upon each other’s inventions. These problems may be particularly acute for user innovators because such innovators tend to be highly distributed with relatively few innovations per user and little intellectual property of their own. That decreases their ability to withstand strategic behavior from larger IP holders. Fisher (2010) highlights the potential legal responses of producers whose goods are improved by users. Those producers, particularly when they hold significant intellectual property, are in a position to squelch user innovation. The user innovation literature is broadly skeptical about the utility of intellectual property. Indeed, it more frequently cites the dis-utility that arises from inhibiting downstream innovation and collaboration. D.  Peer Production Peer production is another mode of distributed, collaborative innovation. Like user innovation, it takes place outside the context of firms and managerial hierarchies. Unlike some forms of user innovation, it also takes place entirely outside the context of marketmediated exchange. Peer production thus represents an organizational innovation distinct from markets or hierarchies, focused instead on distributed innovation in networks and marked by openness (Benkler, 2016; Baldwin and von Hippel, 2011). The study of commons-based peer production began with free and open source software (Ghosh, 1998; Lerner and Tirole, 2002) but was generalized most prominently by Benkler (2002, 2006), who drew from varied additional examples including Wikipedia, open science, and others. Peer production combines three core characteristics: ‘(a) decentralization of conception and execution of problems and solutions, (b) harnessing diverse motivations, and (c) separation of governance and management from property and contract’ (Benkler, 2016). The difficulty of information transfer in certain circumstances is central to Benkler’s (2002, 2016) account of the rise of peer production. Indeed, peer production may best be understood as an alternative institutional mechanism for achieving intellectual production in circumstances where markets and hierarchies are suboptimal. In order to preserve this mechanism, moreover, openness is key. Many peer production projects preserve openness through the creative use of intellectual property to preserve the ‘commons’ nature of innovation in the relevant ecosystems (Reichman and Uhlir, 2003; Schultz and Urban, 2012). Peer production thus presents a paradox with respect to IP. It is a viable—and increasingly successful—alternative means to ensure information exchange and collaboration among highly distributed actors working toward a common innovation goal. But in some circumstances, it is built upon the very IP it purports to eschew. Peer produced projects are highly distributed and decentralized. There is no central authority allocating tasks to different people, or even determining what the right tasks to

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342  Research handbook on the economics of IP law volume 1 perform might be. Instead, the distribution and completion of tasks happens within the network, supplemented by governance mechanisms that fall short of market or hierarchy. Consider Wikipedia. The world’s largest encyclopedia is staffed by a dispersed group of thousands of volunteers who draft and edit articles using an open source software tool. Open source software itself is similarly structured: communities of coders collaborate to improve upon software products like Linux or Apache that supplant proprietary competitor products (Benkler, 2002). The rise of this organizational form can be explained in part with a gloss on the traditional transaction cost theory of organization described in Section II above. Baldwin and von Hippel (2011), for example, argue that organizational form in innovation is a function of the cost of communication and the cost of design. Where both are high, production within firm-based hierarchies tends to dominate because there are significant capital requirements and information aggregation and decision-making costs are internalized through managerial behavior. On the contrary, when design costs are high and communications costs are low, peer production becomes a highly efficient means of organization. That is because low communications costs enable easy modularization and collaboration among disparate parties, and the high costs of design can be spread over a large population of collaborators. To this model, Benkler (2016) adds the insight that relevant information for innovation can be highly distributed and sticky. With respect to the former characteristic, low communication costs allow the holders of distributed information to disseminate and link that information with ease. Peer production also allows tacit information to be used efficiently without incurring the losses associated with attempts to codify it. Tacit knowledge is generally not well utilized either by markets or by hierarchies, each of which must formalize such knowledge in order to price it (for market allocation) or to specify it (for managerial allocation). But tacit, sticky knowledge resists such ­formalization. The advantage of peer production for the exchange and use of such knowledge is that formalization is not required. Instead, distributed innovation allows the holders of tacit knowledge to self-identify and bring the full scope of their ­knowledge to bear. This is especially important in innovation environments marked by complexity and uncertainty. In those cases, distributed forms of production enable diverse actors to ‘experiment, learn, and iterate on solutions and their refinement without requiring intermediate formalizations to permit and fund the process’ (Benkler, 2016). The result is that as the networked information economy—with its associated low cost of transmission and minimal capital structure—has come to dominate economic activity, commons-based peer production has become a viable alternative means of production in many key areas of economic activity and an important mechanism for solving the problem of collaborating for innovation.9 9   The literature on peer production is also focused on what motivates participants in distributed innovation. Because price signals are not generally employed in these projects, participants tend to be motivated by a variety of non-pecuniary benefits, including the value associated with using the product, the hedonic pleasure of participating in the project, reputational gains or accumulated human capital, and social status within the peer group of participants (Lerner and Tirole, 2002; Benkler, 2002). Though not the subject of this review, the prevalence of these diverse motivations

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Open innovation and ex ante licensing  343 As the above account suggests, information exchange is critical for peer production to succeed. Production mediated without price or managerial signals requires that all participants be able to access and share the relevant information and fruits of the innovative process, to build upon, edit, experiment, and iterate. Yet most of the products of peer production are protected by intellectual property as a default. Copyright arises in software, for example, upon its fixation in a tangible medium. To ensure continued openness, peer production communities have relied upon contractual mechanisms. There is a wide variety of these open licenses (Lerner and Tirole, 2005), but the most common and most studied is the GNU General Public License (GPL) developed by Richard Stallman for free and open source software. This license grants users the right to copy, alter, and distribute the software source code in its original or modified form. But it also obligates downstream users—makers of derivative works, in copyright parlance—to grant these same rights to users of the derivative software (Weber, 2004). In other words, it obligates users to license their own works on the same terms. This arrangement is often called ‘copyleft,’ in contradistinction to copyright, because it uses the tools of copyright law to ensure that software remains open as it develops. The success of this licensing regime has led to its expansion to domains other than software. The Creative Commons organization makes available a number of licenses that creators can use to set the terms for use of their own work. These licenses tend to favor open use, but allow creators to restrict use in a variety of ways, including to noncommercial purposes. Similar efforts have been made to develop ‘open source’-style patent licenses (Schultz and Urban, 2012). These licenses would require the original user to take the affirmative steps necessary to patent her invention but then to license it on open terms with a copyleft-style requirement. Although experience with these licenses has been mixed, they have enjoyed success in some patent-based scientific fields, including synthetic biology (Torrance, 2017). E.  Knowledge Commons10 Open innovation, user innovation, and peer production may sometimes be thought of as instantiations of the broader phenomenon of governing the production of knowledge through a commons, rather than through either market or government production. ‘Knowledge commons’ is ‘shorthand for the institutionalized community governance of the sharing of and, in some cases, creation of information, science, knowledge, [or] data’ (Madison et al., 2010). These are self-governing arrangements in which information is shared among participants for the purpose of innovation, usually without IP. In recent years, a number of scholars have demonstrated that Ostrom’s (1990) classic work on self-governing natural resource commons can be adapted to study the production of information-based goods. Instead of the tragedy of the commons, the problem to be overcome with respect to managing information resources is the underproduction

and the empirical fact that they are sufficient in many cases to sustain innovative activity calls into doubt the classic incentive theory of intellectual property. 10   This section draws from Burstein (2016). For additional detail, see Chapter 21 by Frischmann (2019) in this volume.

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344  Research handbook on the economics of IP law volume 1 problem described above: the nonrivalrous and nonexcludable nature of information presents a disincentive to innovate because the fruits of investment in research and development can be taken by others freely. And just as in the natural resources context, the conventional wisdom holds that this underproduction problem must be remedied either through privatization—in the form of intellectual property rights—or through government provision, like research grants. Noting that ‘cultural production is an inherently social phenomenon, taking place over a wide range of scales and within a complex, overlapping variety of formal and informal institutional structures,’ Madison et al. (2010) posit that there are institutional structures intermediate between exclusive rights and government provision that allow for collective action to produce intellectual goods even in the face of the economic challenges described above. Examples abound: in addition to the already-discussed examples of free and open source software and Wikipedia, patent pools, the Associated Press, jamband fan communities, and others can all be conceived of as knowledge commons. Each of these communities utilizes a set of institutional rules—sometimes intertwined with formal law, sometimes not—to manage the production and dissemination of information. To be sure, Ostrom’s (1990) framework for research into collective action to manage natural resource communities does not map perfectly onto innovation environments. This is particularly so because such environments involve not only management of resources, but the production of intellectual goods. Nevertheless, the analogy remains a good one. Collective action problems in the natural environment may lead to overuse of resources in the absence of a governance structure; so too in the cultural or innovative environment may collective action problems lead to underproduction. Barriers to collective action for the production of innovation can be lowered through governance mechanisms. To investigate systematically the nature of those governance structures, Madison et al. (2018) set forth a series of questions to answer about the relevant communities, actors, and activities. Broadly speaking, they include questions about: the background environment, such as the legal context and the ‘default’ role of intellectual property in respect of the resources to be produced; the various attributes of the community, including the characteristics of the resource sought to be produced and managed, the profiles of the relevant communities members and their varying roles, and the goals and objectives of the commons and its members; the governance mechanisms, formal and informal, of the commons, including things like institutional and technological architectures, legal structures, and decision rules; and finally the patterns and outcomes of the commons including the benefits and costs to various members. These attributes combine in various arrangements to enable collaborative innovation usually outside the mechanisms of intellectual property. Determining more specifically how they work is, as an empirical matter, highly context-specific. The methodology that accompanies study of knowledge commons is therefore primarily case study-based. *  *  * In each of these institutional contexts, participants in an innovation ecosystem exchange information for the purpose of collaboration. It is important to note that none of these mechanisms for collaboration is exclusive of the others, and hybrids often exist. User innovations migrate into firms practicing open innovation, where they are c­ ommercialized

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Open innovation and ex ante licensing  345 by producers. For-profit firms often engage as participants in open source software communities for a variety of business and strategic purposes. And so on. The point of articulating these separate phenomena is to draw attention to the variety of contexts in which collaborative innovation takes place, and the variety of roles that intellectual property can play in that process.

IV. CONCLUSION—INFORMATION EXCHANGE AND IP PLURALISM Innovation is a fundamentally social activity. It is rarely carried out by solo inventors or firms. Focusing on intellectual property law’s incentive effects therefore neglects half of the story. The common thread that runs through the institutional arrangements described above is that they all enable collaboration among inventors or creators. Some are facilitated through IP; others eschew IP entirely; and yet others fall somewhere in between, utilizing IP in some but not all stages of the innovation process or in some but not all industry structures. To the extent that IP law ought to be configured to encourage collaboration in all of its varying forms, a one-size-fits-all approach would seem to be problematic. After all, strong IP could interfere with non-IP-based information exchange and vice versa. The literature has evolved several suggestions or approaches to this problem. Most broadly, Dreyfuss (2010) argues that traditional IP law ought to be ‘accommodating’ of these new modes of intellectual production. In this view, there is no necessary reason why IP-based collaboration cannot exist side-by-side with non-IP-based collaboration. That is certainly correct so far as it goes. But law still can privilege one type of innovation over another. Because it is difficult to evaluate the social utility of different innovation regimes, the key legal recommendations in the open innovation literature(s) revolve around leveling the playing field (von Hippel, 2005). There are two ways in which IP law can be changed to take account of and even promote collaboration. First, IP law ought to be structured in a manner that does not unduly inhibit non-IP-based information exchange. Second, IP law can be structured actively to promote information exchange in those models in which it plays a significant role. As to the first, several authors have suggested changes to the existing positive law of IP that can smooth the path for non-IP-based collaboration. These changes usually involve scaling back or slowing what has been a significant expansion of the coverage of IP within the last couple of decades. For example, the expansion of patentable subject matter to encompass processes that appear not to require IP for either initial production or downstream development ought to be reconsidered. Other tweaks to existing patent law could take account of users in setting the standard for obviousness or in crafting an experimental use exemption that covers innovation in user communities (Dreyfuss, 2010; Strandburg, 2008). In the other direction, some scholars have explained how the IP system could better serve the goal of facilitating information exchange. Chien (2016) focuses on patent law’s ‘diffusionary levers’—the ways in which patents can be used actively to spread information. She suggests (a) changes to patent law’s disclosure requirements to make the patent document itself a better vehicle for the transmission of information, (b) improvements to

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346  Research handbook on the economics of IP law volume 1 the infrastructure of patent licensing to make it easier for parties that want to transact to find each other and do so, and (c) changes to the law of waiver that make patent pledges to the public domain and open licensing schemes easier to enforce. Yelderman (2016) focuses on the coordination function of patents and suggests a series of legal changes that would better enable that function. The role of intellectual property in collaborative innovation is highly context-specific. At the very least, therefore, high-quality empirical research is needed to continue to identify the environments in which IP is helpful or harmful, and policy makers ought to be cautious about and sensitive to these different contexts.

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Open innovation and ex ante licensing  347 Chesbrough, Henry. 2006. ‘Open Innovation: A New Paradigm for Understanding Industrial Innovation,’ in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., Open Innovation: Researching a New Paradigm. Oxford: Oxford University Press. Chesbrough, Henry, and Marcek Bogers. 2014. ‘Explicating Open Innovation: Clarifying an Emerging Paradigm for Understanding Innovation,’ in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., New Frontiers in Open Innovation. Oxford: Oxford University Press. Chesbrough, Henry, and Roya Ghafele. 2014. ‘Open Innovation and Intellectual Property: A Two-Sided Market Perspective,’ in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., New Frontiers in Open Innovation. Oxford: Oxford University Press. Chien, Colleen V. 2016. ‘Opening the Patent System: Diffusionary Levers in Patent Law,’ 89 Southern California Law Review 793–862. Coase, R.H. 1937. ‘The Nature of the Firm,’ 4 Economica 386–405. Cohen, Wesley M., and Daniel A. Levinthal. 1989. ‘Innovation and Learning: The Two Faces of R&D,’ 99 The Economic Journal 569–96. Contreras, Jorge L. 2015. ‘Patent Pledges,’ 47 Arizona State Law Journal 543–608. De Beer, Jeremy. 2015. ‘Open’ Innovation Policy Frameworks: Intellectual Property, Competition, Investment & Other Market Governance Issues. Ottawa: Prepared for Industry Canada. Dreyfuss, Rochelle Cooper. 2010. ‘Does IP Need IP? Accommodating Intellectual Production outside the Intellectual Property Paradigm,’ 31 Cardozo Law Review 1437–73. Federal Trade Commission. 2011. The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition. Washington, D.C.: Federal Trade Commission. Fisher, William W. 2010. ‘The Implications for Law of User Innovation,’ 94 Minnesota Law Review 1417–77. Fromer, Jeanne C. 2009. ‘Patent Disclosure,’ 94 Iowa Law Review 539–600. Gallini, Nancy T., and Ralph A. Winter. 1985. ‘Licensing in the Theory of Innovation,’ 16 RAND Journal of Economics 237–52. Gans, Joshua S., and Scott Stern. 2003. ‘The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs,’ 32 Research Policy 333–50. Ghosh, R.A. 1998. ‘Cooking Pot Markets: An Economic Model for the Trade in Free Goods and Services on the Net,’ First Monday (March 2), accessed March 21, 2019 at http://firstmonday.org/ojs/index.php/fm/article/ view/580/501. Gilson, Ronald J. 1999. ‘The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete,’ 74 New York University Law Review 575–628. Gilson, Ronald J., Charles F. Sabel, and Robert E. Scott. 2009. ‘Contracting for Innovation: Vertical Disintegration and Interfirm Collaboration,’ 109 Columbia Law Review 431–502. Harhoff, Dieter, Joachim Henkel, and Eric von Hippel. 2003. ‘Profiting from Voluntary Information Spillovers: How Users Benefit by Freely Revealing Their Innovations,’ 32 Research Policy 1753–69. Heald, Paul J. 2005. ‘A Transaction Costs Theory of Patent Law,’ 66 Ohio State Law Journal 473–508. Heller, Michael A., and Rebecca S. Eisenberg. 1998. ‘Can Patent Deter Innovation? The Anticommons in Biomedical Research,’ 280 Science 698–701. Henkel, Joachim, Simone Schöberl, and Oliver Alexy. 2014. ‘The Emergence of Openness: How and Why Firms Adopt Selection Revealing in Open Innovation,’ 43 Research Policy 879–90. Howe, Jeff. 2006. Crowdsourcing: Why the Power of the Crowd is Driving the Future of Business. New York, NY: Three Rivers Press. Kieff, F. Scott. 2001. ‘Property Rights and Property Rules for Commercializing Inventions,’ 85 Minnesota Law Review 697–754. Kieff, F. Scott. 2006. ‘Coordination, Property, and Intellectual Property: An Unconventional Approach to Anticompetitive Effects and Downstream Access,’ 56 Emory Law Journal 327–437. Kitch, Edmund W. 1977. ‘The Nature and Function of the Patent System,’ 20 Journal of Law and Economics 265–90. Lakhani, Karim R., Hila Lifshitz-Assof, and Michael L. Tushman. 2013. ‘Open Innovation and Organizational Boundaries: Task Decomposition, Knowledge Distribution and the Locus of Innovation,’ in Anna Grandori, ed., Handbook of Economic Organization: Integrating Economic and Organization Theory. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Laursen, Keld, and Ammon J. Salter. 2014. ‘The Paradox of Openness: Appropriability, External Search, and Collaboration,’ 43 Research Policy 867–78. Lee, Peter. 2012. ‘Transcending the Tacit Dimension: Patents, Relationships, and Organizational Integration in Technology Transfer,’ 100 California Law Review 1503–72. Lemley, Mark A. 2005. ‘Property, Intellectual Property, and Free Riding,’ 83 Texas Law Review 1031–75. Lemley, Mark A. 2011. ‘The Myth of the Sole Inventor,’ 110 Michigan Law Review 709–60. Lerner, Josh, and Jean Tirole. 2002. ‘Some Simple Economics of Open Source,’ 50 Journal of Industrial Economics 197–234.

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348  Research handbook on the economics of IP law volume 1 Lerner, Josh, and Jean Tirole. 2005. ‘The Scope of Open Source Licensing,’ 21 Journal of Law, Economics, and Organization 20–56. Long, Clarisa. 2002. ‘Patent Signals,’ 69 University of Chicago Law Review 625–79. Madison, Michael J., Brett M. Frischmann, and Katherine J. Strandburg. 2010. ‘Constructing Commons in the Cultural Environment,’ 95 Cornell Law Review 657–708. Madison, Michael J., Katherine J. Strandburg, and Brett M. Frischmann. 2018. ‘Knowledge Commons,’ in, Peter S. Menell and David L. Schwartz, eds., Research Handbook on the Economics of Intellectual Property, vol. II. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Menell, Peter S., and Suzanne Scotchmer. 2007. ‘Intellectual Property Law,’ in A. Mitchell Polinsky and Steven Shavell, eds., Handbook of Law and Economics, vol. II. Amsterdam: Elsevier. Merges, Robert P. 2005. ‘A Transactional View of Property Rights,’ 20 Berkeley Technology Law Journal 1477–520. Merges, Robert P., and Richard R. Nelson. 1990. ‘On the Complex Economics of Patent Scope,’ 90 Columbia Law Review 839–916. Nelson, Richard R. 1959. ‘The Simple Economics of Basic Scientific Research,’ 67 Journal of Political Economy 297–306. Ostrom, Elinor. 1990. Governing the Commons: The Evolution of Institutions for Collective Action. New York, NY: Cambridge University Press. Ouellette, Lisa Larrimore. 2012. ‘Do Patents Disclose Useful Information?,’ 25 Harvard Journal of Law and Technology 545–601. Piller, Frank, and Joel West. 2014. ‘Firms, Users, and Innovation: An Interactive Model of Coupled Open Innovation’, in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., New Frontiers in Open Innovation. Oxford: Oxford University Press. Polanyi, Michael. 1966. The Tacit Dimension. Chicago, IL: University of Chicago Press. Powell, Walter W., Kenneth W. Koput, and Laurel Smith-Doerr. 1996. ‘Interorganizational Collaboration and the Locus of Innovation: Networks of Learning in Biotechnology,’ 41 Administrative Science Quarterly 116–45. Raymond, Eric S. 1999. The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary. Beijing, China: O’Reilly. Reichman, J.H., and Paul F. Uhlir. 2003. ‘A Contractually Reconstructed Research Commons for Scientific Data in a Highly Protectionist Intellectual Property Environment,’ 66 Law and Contemporary Problems 315–462. Saxenian, AnnaLee. 1994. Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Cambridge, MA: Harvard University Press. Schultz, Jason, and Jennifer Urban. 2012. ‘Protecting Open Innovation: The Defensive Patent License as a New Approach to Patent Threats, Transaction Costs, and Tactical Disarmament,’ 26 Harvard Journal of Law and Technology 1–67. Schumpeter, Joseph A. 1947. Capitalism, Socialism & Democracy. New York, NY: Harper & Brothers. Scotchmer, Suzanne. 1991. ‘Standing on the Shoulders of Giants: Cumulative Research and the Patent Law,’ 5 Journal of Economic Perspectives 29–41. Scotchmer, Suzanne. 2004. Innovation and Incentives. Cambridge, MA: MIT Press. Shapiro, Carl. 2001. ‘Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting,’ in Adam B. Jaffe, Josh Lerner, and Scott Stern, eds., Innovation Policy and the Economy. Cambridge, MA: MIT Press. Sichelman, Ted. 2010. ‘Commercializing Patents,’ 62 Stanford Law Review 341–411. Simcoe, Timothy S. 2006. ‘Open Standards and Intellectual Property Rights,’ in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., Open Innovation: Researching a New Paradigm. Oxford: Oxford University Press. Sprigman, Christopher Jon, and Kal Raustiala. 2018. ‘When Are IP Rights Necessary? Evidence from Innovation in IP’s Negative Space,’ in Peter S. Menell and Ben Depoorter, eds., Research Handbook on the Economics of Intellectual Property, vol. I. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Strandburg, Katherine J. 2004. ‘What Does the Public Get? Experimental Use and the Patent Bargain,’ 2004 Wisconsin Law Review 81–152. Strandburg, Katherine J. 2008. ‘Users as Innovators: Implications for Patent Doctrine,’ 79 University of Colorado Law Review 467–540. Strandburg, Katherine J. 2018. ‘Users, Patents, and Innovation Policy,’ forthcoming, in Rochelle Dreyfuss and Justine Pila, eds., Oxford Handbook of Intellectual Property Law, accessed March 21, 2019 at https://papers. ssrn.com/sol3/papers.cfm?abstract_id=2828758. Teece, David J. 1986. ‘Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy,’ 15 Research Policy 285–305. Torrance, Andrew W. 2017. ‘Better to Give than to Receive: An Uncommon Commons in Synthetic Biology,’ in

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Open innovation and ex ante licensing  349 Katherine J. Strandburg, Brett M. Frischmann, and Michael J. Madison, eds., Governing Medical Knowledge Commons. Cambridge: Cambridge University Press. U.S. Congress, Office of Technology Assessment. 1995. Innovation and Commercialization of Emerging Technologies. Washington, DC: U.S. Government Printing Office. Von Hippel, Eric. 1994. ‘“Sticky Information” and the Locus of Problem Solving: Implications for Innovation,’ 40 Management Science 429–39. Von Hippel, Eric. 2005. Democratizing Innovation. Cambridge, MA: MIT Press. Weber, Steven. 2004. The Success of Open Source. Cambridge, MA: Harvard University Press. West, Joel. 2006. ‘Does Appropriability Enable or Retard Open Innovation?,’ in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., Open Innovation: Researching a New Paradigm. Oxford: Oxford University Press. West, Joel, and Marcel Bogers. 2014. ‘Leveraging External Sources of Innovation: A Review of Research on Open Innovation,’ 31 Journal of Product Innovation Management 814–31. West, Joel, and Karim Lakhani. 2008. ‘Getting Clear about Communities in Open Innovation,’ 15 Industry and Innovation 223–61. West, Joel, Ammon Salter, Wim Vanhaverbeke, and Henry Chesbroug. 2014. ‘Open Innovation: The Next Decade,’ 43 Research Policy 805–11. Williamson, Oliver. 1985. The Economic Institutions of Capitalism. New York, NY: Free Press. Winter, Sidney G. 1987. ‘Knowledge and Competence as Strategic Assets,’ in David J. Teece, ed., The Competitive Challenge: Strategies for Industrial Innovation and Renewal. New York, NY: Harper & Row. Yelderman, Stephen. 2016. ‘Coordination-Focused Patent Policy,’ 96 Boston University Law Review 1565–616.

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13.  Prize and reward alternatives to intellectual property Michael Abramowicz* 1

Contents I. Introduction II. History and Seminal Scholarship III. Administrative Design Issues A. Timing of Payment B. Cash Versus Other Incentives C. Variable Versus Fixed Payments D. Mandatory Versus Optional E. General Versus Targeted F. International Coordination IV. Valuation of Inventions and Works A. Measurement Based on Use B. Market Mechanisms C. Flexible Ex Post Valuation and Hybrid Mechanisms V. Comparison with Traditional Intellectual Property Systems and Other Alternatives A. Effects on Innovation B. Effects on Redundant Innovation C. Effects on Commercialization D. Effects on Consumers 1. Deadweight loss 2. Distribution and labor incentives E. Transactions Costs F. Rent-Seeking Costs G. Other Policy Options 1. Grants 2. Governmental purchases and tax credits VI. Conclusion References

I. INTRODUCTION This chapter surveys the literature on alternatives to intellectual property, focusing especially on alternatives to patent law, but with some attention as well to copyright. It does *  Professor of Law, George Washington University.

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Prize and reward alternatives to intellectual property  351 not consider the question whether intellectual property rights are justified, but assumes that absent some form of governmental innovation, inventions and works of authorship might be underproduced relative to the social optimum. The chapter thus considers how institutions besides traditional property rights compare relative to one another and to traditional intellectual property systems. The chapter considers only briefly the possibility that government itself might produce inventions and works of authorship or that government might indirectly produce these by funding research. A considerable literature already exists on governmental peer review and research administration, and so these mechanisms are considered only insofar as they compare to the institutions that are the primary focus of this chapter, prize and reward systems. A prize or reward system is one in which the government gives an award to a person or entity that has produced an invention or work deemed socially valuable, based on an assessment of the contribution of that invention or work. The chapter will use the word ‘prize’ to describe systems that give an award only to a single contributor or small group of contributors, based, for example, on who has given the best contribution in a designated area or who is first to have solved a particular problem. A ‘reward system,’ by contrast, will be used to refer to a system in which funds are available for a large number of contributors, to be distributed based on assessments of the quality of their contributions. As Burstein and Murray (2015) note, much of the academic focus has been on reward systems, but prizes have enjoyed more recent policy prominence. As the prize-reward distinction suggests, there are many ways in which prize and reward systems can be structured. The form of the award may vary, consisting usually of cash but sometimes of other governmental benefits. In some proposals, the total award is a fixed amount, but in others, the total award may vary depending on the assessed quality of the contributions. An award system may be an optional alternative to an intellectual property system, or could be instituted as an exclusive alternative. A system may cover a wide range of possible inventions or works, or it may target a particular type of invention or work, such as pharmaceuticals or songs. Perhaps most importantly, prize and reward systems may differ in the mechanisms used to assess the quality of the contributions. One approach is for the government to observe market behavior in an effort to estimate the demand for a new invention or work and the improvement in social welfare produced by its release into the public domain. Such observation might be conducted by an administrative agency or through judicial proceedings, for example in a takings suit. Some commentators have sought to identify the specific formulas that government should use in conducting valuation, while others have argued that the government should have substantial freedom to take into account a wide range of considerations in making assessments of contributions. Meanwhile, other contributors have argued that, to restrict dangers associated with governmental discretion, a market mechanism should be used to assess contributions. The effectiveness of the valuation mechanism is critical to an assessment of how alternatives to intellectual property compare to traditional intellectual property systems. If the government miscalibrates awards, then these awards can lead to production of inventions and works that add little to social welfare and may thus produce lower value than alternative uses of governmental funds, including tax reductions. On the other hand, if the government can accurately measure social welfare, then a prize or reward system may contribute substantially to social value. If social benefits of an invention or work are

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352  Research handbook on the economics of IP law volume 1 a substantial multiple of the cost of incentivizing its production, then the social benefits of a prize or reward program may be positive. A full accounting, however, must account for any reduction in social welfare attributable to the need to raise sufficient tax revenue to accomplish the program. In the real world, of course, neither a prize or reward system nor a system of intellectual property rights will perfectly calibrate incentives and lead private parties to undertake all investments in the creation of inventions and works that have a positive social return. A critical virtue of intellectual property systems is that they minimize governmental discretion in assessing the value of works. But the need to determine when to grant intellectual property rights and to adjudicate the propriety of and infringement of such rights dictates a considerable governmental role. Thus, the effectiveness of a patent office and the courts are critical to assessing how existing intellectual property systems compare to prize or reward systems. To the extent that intellectual property systems do constrain administrative and judicial discretion with rules, the question becomes to what extent the rules successfully align creator incentives with social welfare. In principle, the ultimate comparison of prize systems with intellectual property systems is an empirical one. This chapter will provide some historical context, but there is little empirical data, particularly on the prize or reward system side of the ledger. And even to the extent some experimentation with prize or reward systems has occurred, the heterogeneity of such systems counsels restraint in attributing the virtues or vices of any one such system to all of them. Of course, it is also important not to compare some hypothetical ideal prize or reward system against a functioning intellectual property system. After all, there are many competing proposals to improve patent and copyright law, and even if there were broad scholarly agreement about the design of an ideal system, political considerations may make suboptimal intellectual property inevitable—and would likely mean the same for a prize or reward system. This review thus does not seek to determine whether intellectual property systems should be abandoned in favor of prize or reward systems or whether the latter should be introduced as a complement to the former. Rather, it is to provide an overview of the theoretical terrain, to identify the potential weaknesses of prize or reward systems and to point out analogous imperfections in our existing intellectual property system. The chapter will highlight some considerations, such as incentives to commercialize inventions or works, transactions and administrative costs, and rent-seeking costs, which are sometimes omitted from the intellectual property calculus, but must be taken into account in a full comparison of intellectual property to prize or reward systems. The chapter proceeds as follows. Section II will provide an overview of the history and early scholarship on prize and reward systems, including nineteenth-century antecedents and contemporary prizes and proposals. Section III considers administrative design issues, other than valuation. This includes questions such as the choice between prizes and rewards, whether awards should be general or targeted, and how international coordination of prize or reward systems could work. Section IV then turns to valuation mechanisms, considering traditional administrative and judicial mechanisms, as well as market mechanisms. Finally, Section V compares prize or reward systems to the existing intellectual property system.

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Prize and reward alternatives to intellectual property  353

II.  HISTORY AND SEMINAL SCHOLARSHIP Governmental prizes at one time represented a significant component of governmental innovation policy and appeared to be a serious competitor to traditional intellectual property systems. As documented by Burrell and Kelly (2014), Parliament gave numerous invention awards from 1732 to 1840 based on its institutional assessment of the contribution of inventions. Parliament was also in the business of granting patent term extensions on an ad hoc basis and thus used its discretion in both types of systems. Burrell and Kelly argue that the shift from prizes to patents changed not so much because of a perception that intellectual property systems were inherently superior to prize systems, but because Parliament’s ‘role began to shift from that of a grand tribunal for the nation to something more like that of a dedicated legislature’ (p. 885). Parliament’s failure, however, to vest prize discretion in some other administrative institution, along with the failure of other countries to create prize systems on the scale of England’s, suggests the existence of some distrust of prize systems. In the heyday of prizes, Parliament did not always reserve to itself the right to adjudicate prizes, but instead often resorted to administrative determinations. This was true of what is undoubtedly the most famous invention prize in history, the prize for a method for precise determination of longitude at sea. The Board of Longitude gave awards for two rival approaches to the problem, one involving a method of lunar distance calculation, and the other depending on accurate time-keeping (Howse, 1998). Navigators could identify high noon local time, so if a timepiece informed them of the time at the port of origin, they could extrapolate the extent of a ship’s progress around the globe. A modern debate relevant to prize systems generally is whether the Board was excessively stingy with John Harrison, who invented a timepiece allegedly capable of functioning on water, perhaps because he was a carpenter rather than a member of the scientific establishment. Sobel (1995) intimates that the Board failed to discharge its duty properly, though Siegel (2009) argues that the Board’s reluctance to grant a full award to Harrison resulted from Harrison’s inability to provide a method of replicating his timepieces. Siegel argues: Even in the relatively simple case wherein the legislature sought to promote a solution to a single, specific problem, and in which a single, discrete product embodied the sought-after innovation, Parliament could not usefully specify the test that would determine whether the invention had won the prize in a way that would eliminate the need for administrative discretion. (p. 61)

The tale can thus be seen as a cautionary one about governmental abuse of discretion or as one highlighting the difficulty of constructing ex ante rules and the advantages of flexibility inherent in prize systems. Prizes had a less central role in England in the second half of the nineteenth century, but prizes were still given in some sectors. Brunt et al. (2012) analyse annual competitions held by the Royal Agricultural Society from 1839–1939, including 1,986 awards from 15,032 entries (p. 658). It is difficult to use econometrics to assess the incentive effects of prizes, for the same reason that it is difficult to assess the incentive effects of intellectual property; ordinarily, there is no control group. Brunt et al., however, exploit a system by which the areas in which prizes were offered rotated from year to year over a 15-year period, and they find that the availability of prizes in a particular year increased inventions in the relevant art. Because the prize system was a complement to the patent system, the increase

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354  Research handbook on the economics of IP law volume 1 in invention was manifested by an increase in patenting activity in the area covered by the prize system in the time around the show. Similarly, Moser and Nicholas (2013) analyse the effects of prizes at the Crystal Palace Exhibition in 1851. They show that technologies that won prizes were more likely to receive patents than technologies that did not win a prize. This may demonstrate that there were positive reputational benefits from receiving prizes beyond the money offered or that judges were skilled at identifying patentable inventions. Moser and Nicholas argue for the former interpretation. Prizes also existed in other countries. Indeed, a number of countries had offered a longitude prize before the prize that Harrison claimed. Nicholas (2013) documents an extensive system of prizes in nineteenth-century Japan. Adopting an approach similar to that of Brunt et al., Nicholas exploits variation in the size of prizes over time to estimate the degree to which prizes affected innovation. He finds a significant effect when measuring innovation based on patenting activity. Prizes were granted in individual prefectures rather than nationally, and Nicholas argues that ‘within the host prefecture the cost of the prize contests was high relative to the value of patent capital they created’ (p. 596). Adjoining prefectures enjoyed significant knowledge spillovers from these competitions. Nicholas’s historical account highlights a potential problem with prize proposals that we will consider below: that a jurisdiction that sponsors a prize may not be able to appropriate a high percentage of the benefits from invention. This problem is, of course, particularly acute in the modern world as a result of international information flows. Intellectual property systems gradually began to dominate prize systems throughout the world in the nineteenth century. Perhaps this occurred in part because patent systems were constructed in a general way so that any inventor meeting the specified criteria could benefit from them, while prizes were given sporadically and in an ad hoc manner. Some commentators, however, urged the prizes be given in lieu of monopoly rights granted by patents. Macfie (1883, p. vi), for example, argued: In every patent there should be a condition that the State, from public moneys, or moneys supplied by individuals, shall be entitled to demand that the value of the invention be estimated, and, on this value being paid (with a liberal percentage added in consideration of ‘compulsory sale’), the use of the invention should become free to all the Queen’s subjects (even in the Colonies, so far as privileges granted there do not clash).

Macfie collects early commentary on prize systems, including a proposal by Sir John Sinclair that recognized the international dimension of the problem and proposed an agreement among the European powers and the United States to reward inventors, as well as a proposal by Sir David Brewster for creating a board of ‘scientific and practical’ men to administer a prize system (pp. 33–4) By the twentieth century, prizes largely faded in the public consciousness as a method for encouraging invention, but there were occasional proposals to revive them. For example, Polanvyi (1944) adopted a theme similar to Macfie’s, highlighting the costs of monopoly. He argued that ‘[i]n order that inventions may be used freely by all, we must relieve inventors of the necessity of earning their rewards commercially and must grant them instead the right to be rewarded from the public purse’ (p. 65). Polanvyi envisioned not eliminating the patent system, but grafting onto it a system of compulsory licenses. Meanwhile, the modern economic literature on prizes dates to Wright (1983), who

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Prize and reward alternatives to intellectual property  355 compares the costs and benefits of patents, prizes, and research grants. Wright formalizes Macfie’s and Polanvyi’s concerns about monopolization, showing that prizes can improve efficiency by eliminating the deadweight loss associated with pricing of patented products and services above marginal cost. He also addresses a number of other issues that we will explore below, such as the danger of excessive research into particular inventions. The law and economics of prizes began to receive sustained academic attention in literature beginning in the 1990s. There was also a concomitant increase in the use of prizes as a mechanism for encouraging innovation. Prior to that, there were some instances in which governments encouraged research through prizes. For example, the United States Atomic Energy Act of 1946, Pub. L. No. 79-585, 60 Stat. 755 (codified as amended at 42 U.S.C. §§ 2011–2297g), created a board to give rewards for military energy innovations, but there are few other examples. In recent years, the Defense Advanced Research Projects Agency (DARPA) has offered numerous prizes (Scotchmer, 2004, p. 2). Other governmental prizes include the Department of Defense Wearable Power Prize, the Department of Energy Grand Challenges, and the NASA Centennial Challenges (Stine, 2009). Congress required the National Science Foundation to create a program to fund innovation inducement prizes (Science, State, Justice, Commerce, and Related Agencies Appropriations Act, Pub. L. No. 109-108 (109th Cong. 2006)). Meanwhile, Senator Bernie Sanders proposed replacing the patent system for pharmaceuticals with a reward system (Medical Innovation Prize Fund Act, S. 1137, 112th Cong. (2011)). The lack of any other apparent support in Congress highlights, however, that while prize systems have received support as accessories to the patent system in discrete areas, there appears to be little chance of instituting a comprehensive reward system, especially one that would displace the patent system, in the near future. There has also been increased private interest in prizes, particularly for philanthropic purposes. For example, the Virgin Earth Challenge offers a $25 million prize for inventions that might combat global warning by anthropogenic greenhouse gases (Adler, 2011). The Ansari X-Prize has offered $10 million for the development of reusable manned aircraft, and numerous other prizes exist as well (McKinsey & Co., 2009). Murray et al. (2012, p. 1791) argue that the various private prizes ‘blend a myriad of complex goals, including attention, education, awareness, credibility and demonstrating the viability of alternatives.’ Burstein and Murray (2015) offer a detailed study of one such prize, the Progressive Insurance Automotive X Prize, explaining how it achieves innovation goals that help to overcome information asymmetries and significant uncertainty. Because prizes are still relatively rare, they may generate more publicity than other means of privately funding innovation, such as research grants. Adler (2011, p. 16) notes that this has sometimes led to investments much larger in total than the value of the prize. This also may help explain the relative popularity of prize systems compared to reward systems. A caution is that if benefits are attributable to publicity, any successes attributable to prizes might not scale if a prize or reward system were increased to near the size of the patent system. Burstein and Murray (2015) argue that prize systems may not scale as well as the patent system or other reward systems.

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III.  ADMINISTRATIVE DESIGN ISSUES A.  Timing of Payment Both prize and reward systems generally make awards after the relevant research, inventions, or work are complete, in contrast to research grants, which are generally given ex ante based on a specification of the research to be conducted. Because awards are granted ex post, inventors or creators must raise funds necessary to conduct the research or create the work. Bakker (2013, p. 1811) argues that, before 1750, the time lag made prizes a relatively ineffective method of inducing inventive activity. With capital markets, however, prizes in theory should be capable of encouraging activity to be performed before awards will be made. Venture capitalists or banks thus serve a role in assessing research plans under a prize system, and a cost of the system is that they must be compensated for their labor and the risk that they undertake. This may also make it difficult to offer exceptionally large prizes; Kalil (2006, p. 7) speculates that a prize system might not be able to induce sufficient private investment in a new particle accelerator for theoretical physics research. Brennan et al. (2012, p. 4) argue that an assessment of who can best bear risk is essential to evaluation of a prize system, stating that ‘prizes are likely to be better when the needs can be specified, necessary or preferred technological solutions are not known, and the procuring party needs to share the risk by guaranteeing a minimum return to the first successful innovator.’ The payment of prizes and rewards after research is complete still leaves a number of decisions concerning the payout approach. The payout can occur as soon as research is complete, though Abramowicz (2003) argues that payments should be delayed to provide better information to decisionmakers about the contribution of inventions. Especially if the intellectual property system is retained and a prize or reward system is an option, this can reduce the danger of an adverse selection problem in which only those inventors with ‘lemons’ agree to forego their intellectual property rights in exchange for a prize or reward. Love and Hubbard (2007, pp. 1539–40) suggest that payouts be made over time, with subsequent payments changing based on observation of markets. Similarly, Williams (2012, p. 772) urges that some payment be made based on adherence to technical requirements, but additional payments should be based on whether an invention achieves sufficient market acceptance. B.  Cash Versus Other Incentives Virtually all proposals assume that the benefits to be granted by the government will come in the form of cash. Galle (2014, p. 881) notes, however, that some cash prizes may ‘reduce positive contributions from inframarginal producers by crowding out their internal motivation’ and thus noncash prizes may sometimes be superior. Prizes can also provide financial benefits without directly providing cash. Ridley et al. (2006) suggest that a prize might be the right to obtain expedited review of another drug. This proposal was adopted into law, with respect to specified diseases, by the Food and Drug Administration Amendments Act of 2007, § 1102, codified at 21 U.S.C. § 360n, which created a system of priority review vouchers. Similarly, Fisher and Syed (2012, p. 16) note the possibility that pharmaceutical companies might be rewarded for creating a medication for poor

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Prize and reward alternatives to intellectual property  357 c­ onsumers by having patent life extended on some other drug. Of course, the government would need to exercise discretion in determining how much patent life to grant. Wright (1983) notes that the fact that the government does not generally tailor patent terms to inventions suggests a concern that government may not exercise its discretion well, a concern that might affect both cash and other prizes. Another alternative to cash prizes is for the government to purchase innovative products and services for itself or to help consumers with such purchases. Lichtman (1997) argues that the government might be able to reduce deadweight loss more cheaply by giving coupons for pharmaceuticals to the poorest consumers than by buying out the patent. His model assumes linear demand and that the government knows the most each consumer is willing to pay for a product (pp. 131, 135). If the government gives coupons to just one-quarter of customers, in magnitudes just large enough to bring them up to the top of the bottom quartile, then the pharmaceutical patent owner’s incentive will be to lower the price so that it can gain sales from these customers, as well as from the next quartile of consumers (p. 135). Of course, Lichtman recognizes that the government will not have perfect information, but he argues that if the government can spend just 1 in 8 dollars correctly, this approach may be more effective dollar-for-dollar than a patent buyout (p. 136). Lichtman also notes that the government may have tax data and other data enabling the government to make fine-grained assessments of consumer valuations. If, however, the government gives coupons to some consumers who would not need them, then that would not merely undermine the government’s plan by leading to unnecessary spending, but would also reduce the pharmaceutical patent owner’s incentive to lower prices to capture the consumers with coupons. Abramowicz (2003) offers a simulation model varying the quality of the government’s estimates of demand. With sufficiently good governmental information, coupons will be cheaper per dollar of deadweight loss removed than patent buyouts. But below some point, patent buyouts are likely to be more expensive. This simulation still assumes linear demand, however. Fisher and Syed (2012, p. 21) argue that this assumption is unrealistic in the context of drugs in the developing world, because the vast majority of consumers are able to pay very little in comparison to consumers in the developed world. One could argue that their poverty gives these consumers low valuations of the drugs, however, and that the deadweight loss from their exclusion from the market is low. Fisher and Syed’s argument depends on the proposition that willingness to pay is not a valid basis for assessing social welfare and that alternative means of achieving redistribution are not viable. C.  Variable Versus Fixed Payments Concerns about governmental exercise of discretion are also central to the decision of whether to grant a fixed prize or a variable reward. Clancy and Moschini (2013) offer a model showing that ideally the government would offer rewards equal to the social innovation value. With a guaranteed prize at a certain level, the system cannot take advantage of private researchers’ information about the expected value of inventions that they might create; Wright (1983, p. 704) notes that the absence of such information creates an informational advantage of patents over prizes. A guaranteed prize may also be problematic if the winner of a contest may opt for some other form of compensation, such as the patent or copyright system, instead of the contest. Ding and Wolfstetter (2011)

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358  Research handbook on the economics of IP law volume 1 note that if a prize is set too low, only those with low contributions that would not fare well on the market will submit their work for the prize. Another approach, initially suggested by Abramowicz (2003), is to have a fixed ‘pot’ to be distributed among an unknown number of contributions in proportion to assessments of the value of the contributions. Hollis and Pogge (2008) elaborate how this might be used in the context of pharmaceuticals. Love and Hubbard (2007, p. 1536) argue that a benefit of this approach is that it provides a government assurance of how much it will have to pay. A fixed pot reduces the risk, cited by Wright (1983, p. 703), that with a variable prize, the government may lowball its evaluation in the hope of saving money. As Wright recognizes, however, if a reward system is repeated over time, the government will have at least some reputational incentives not to renege on its commitments. Another disadvantage of both the fixed pot and the fixed single prize relative to variable prizes is that these mechanisms do not tend to move the system toward the point where the marginal benefit of prizes equals the marginal cost. If the government can be trusted to value inventions based on social welfare, then the system should equilibrate at this point without further governmental invention to increase the size of the prize pool. D.  Mandatory Versus Optional Whether payments are fixed or variable, a critical question is whether participation in the system is mandatory, or optional, in which case participants may choose whether to seek traditional intellectual property rights instead. Shavell and van Ypersele (2001) note that adverse selection is a potential drawback of an optional system. They assume that an inventor knows the demand for an invention created, but the government does not, so the only inventors to choose a prize will be those who expect to be overcompensated relative to the patent system. To the extent that the patent system’s valuations are correlated with social value, this creates a lemons problem. To combat this problem, the government can offer a reward corresponding to the lowest possible demand for the inventor’s product, based on the government’s calculations. Alternatively, the government might offer higher rewards, thus inducing greater participation (and greater reduction of deadweight loss) but at some cost of unnecessary payments. Love and Hubbard (2007) defend a mandatory system, particularly in the pharmaceuticals context. A mandatory system eliminates the transactions costs associated with patents and guarantees to researchers and entrepreneurs that they need not clear rights to existing technology. A disadvantage of a mandatory system is that it makes it more difficult to experiment and transition, though a mandatory system might be introduced for some relatively small class of inventions. An additional disadvantage is that if the government pays too little, there will be no alternative system for encouraging innovation. With an optional system, low governmental payments may reduce social welfare, but only by reducing the benefits associated with the prize system; the traditional intellectual property system can continue to function. E.  General Versus Targeted In principle, proposals that target pharmaceuticals could be broadened to cover any form of intellectual property. Indeed, commentators often argue that intellectual property

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Prize and reward alternatives to intellectual property  359 works relatively well in the context of pharmaceuticals in contrast to other areas of patent law, because patent scope can be relatively clearly defined, so the focus on pharmaceuticals may seem inappropriate. Kremer and Williams (2010), however, argue that an alternative to the intellectual property system might be tried in specific sectors before it is generalized, and Fisher and Syed (2012) argue that there are some factors that make pharmaceuticals a particularly appropriate area for experimentation. They note that ‘government agencies regularly collect and assess data concerning the incidence and impact of diseases and thus are well positioned to ascertain the welfare gains that could be reaped by developing and distributing vaccines or treatments for each ailment’ (p. 3). The advantage of a more general system is that it may be able to stimulate precisely those innovations that are underfunded by the patent system. Abramowicz (2003) notes that with a fixed pot, inventors are most likely to opt in if they believe that the inventions that they will produce will have high measured social welfare relative to the private gains that could be appropriated through a patent. This could reflect a form of adverse selection, but only if there are reasons to believe that the social welfare calculations will be systematically inaccurate. Fisher and Syed likewise argue that targeting a fund toward specific diseases, rather than to pharmaceuticals in general, might be a mistake, because a more general prize fund will tend to stimulate work on inventions that are expected to have large impacts on welfare that cannot easily be monetized by the patent system. F.  International Coordination International harmonization has reduced the ability of countries to free-ride on the intellectual property system, though at the cost of greatly reduced access to inventions, particularly pharmaceutical inventions, in the developed world. If individual countries gave prizes or rewards to inventors or creators of works in an uncoordinated way, then there would be incentives to free-ride. Duffy (2004a, p. 54) notes that each government ‘has incentives to behave strategically in contributing toward the reward.’ A government might not give prizes or rewards but still reap the benefits of innovations generated from prizes or rewards. A partial response for this is to grant prizes or rewards solely based on contribution to the jurisdiction providing the prizes or rewards. Calandrillo (1998, p. 354) suggests offering awards based on use and utility as observed in the jurisdiction providing awards. If, for example, the United States alone offered prizes, innovators would still be able to exploit their intellectual property in other countries. This would have the benefit of reducing free-riding, but of course would mean continued difficulty in the developed world accessing patented inventions. If, however, countries can choose whether to offer intellectual property or rewards, then there may be a strategic incentive to offer rewards but then to undervalue the rewards. In principle, a system of harmonization could seek to ensure that countries (or perhaps, only developed countries) that offer rewards offer them at a sufficiently high level and also that countries do not discriminate against foreign inventors and creators in paying rewards. Meanwhile, if some countries offered rewards while others offered intellectual property, this could mean that inventors would face increased transactions costs, reducing some of the benefits that have been achieved from international cooperation among patent offices. These issues would be reduced if inventors and creators could opt into a prize or reward system but still retain their intellectual property rights.

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360  Research handbook on the economics of IP law volume 1 In theory, it might be possible to create a system of international coordination and harmonization for prize and reward systems. It also might be possible that the developed countries would agree to underwrite an international prize fund to benefit the developing world, as suggested by Stiglitz (2006). But any such initiatives could require a long time and a great deal of diplomatic effort. Under current law, it is not clear whether it is even permissible for a country to abandon intellectual property for a reward system. Fisher and Syed (2012, p. 34) argue that a mandatory system would violate the Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS), article 27 of which requires that ‘patents shall be available for any inventions . . . in all fields of technology.’ Article 30, however, permits ‘limited exceptions [that] do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner.’ Perhaps the alternative revenue provided by a prize or reward system would lead to a conclusion that such a system would not prejudice rights holders’ interests.

IV.  VALUATION OF INVENTIONS AND WORKS By far the most important practical problem in the design of a reward system is the challenge of valuing contributions. A prize system avoids this problem to some extent by setting fixed prizes in advance, though that means that the government must at least be able to determine how much to offer for particular types of inventions. As Roin (2014, p. 1035) notes, ‘Social value is notoriously difficult to measure objectively in most circumstances, and measuring the social value of innovations—which are unique goods by definition—may be particularly difficult.’ While we will explicitly compare prize and reward systems to traditional intellectual property in Section V, the question whether a particular prize or reward system would track social value better than traditional intellectual property looms large in the calculation. As a preliminary matter, one must have a handle on what counts as the social value that a prize or reward system should be awarding. Several points are worth making. First, the baseline target is the gross social surplus from invention. One should not subtract the inventor’s direct costs or the cost of risk facing the inventor. The assumption underlying both traditional intellectual property and a prize or reward system is that private incentives will align with social ones if creators expect to receive the gross social surplus, because they will invest until the marginal increase in expected gross social surplus increases the marginal cost of investment. To be sure, what ultimately matters is the net surplus, but we will assume that if the inventor receives an award equivalent to gross surplus, the inventor will have incentives to optimize net surplus. Consistent with this observation, existing intellectual property systems do not concern themselves with how much the inventor has invested. Second, a payment to a creator should ideally net out the value of any independent rents that the creator receives for the creation. Suppose, for example, that by inventing a new flying car, an inventor would receive substantial first-mover advantages, aided by the trademark system. If a reward system is used as an alternative to a patent system, then the ideal reward would be equal to the social benefits of the flying car minus the rents the inventor receives naturally or with the help of trademark law. A reward system that paid the full social value of an invention and also allowed inventors to appropriate value for it

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Prize and reward alternatives to intellectual property  361 in other ways would be overcompensating inventors, leading to investments past the point at which the marginal social benefits justified the cost. Third, and more subtly, the payment should also net out gross social surplus that would have been achieved absent the invention without the incentive of the reward system but will not be achieved as a result of the invention. This can be relevant when an inventor’s diligence leads to a discovery shortly before it would have been made in the absence of a patent or reward system. Because invention is cumulative, sometimes Invention A makes it possible to invent Invention B. If Invention B would have been invented soon even if no patent or reward incentive existed, then the only increase in social welfare that should be attributable to Invention B should be any acceleration in invention that occurred as a result of the reward system. The analogous point in the patent context is that the ­nonobvious doctrine should depend on whether an invention was induced by the patent system (see Graham v. John Deere Co., 383 U.S. 1, 11 (1966); Abramowicz and Duffy, 2011). A.  Measurement Based on Use Perhaps the most obvious approach to assessing the social value of an invention is to measure use of the product by consumers. This might be accomplished either by forcing some consumers to pay for the product or to consider purchases by consumers of the product once it is placed in the public domain. Guell and Fischbaum (1995, p. 225), who propose patent buyouts for pharmaceutical products, suggest that the pharmaceutical be sold initially in a test market. Shavell and van Ypersele (2001) suggest that the government wait until the product is placed in the public domain and the government observes the goods sold. This approach runs into at least three significant difficulties. First, there is not an identity between a patented invention and a consumer product (Abramowicz, 2003, p. 143). (There often is an identity, however, between a copyrighted work and a consumer product, so this approach may be easier to implement in the copyright context.) Often, many innovations are inputs into a single product, and an innovation may be an input into many different products (Hopenhayn et al., 2006, p. 1047). A further complication, identified by Chari et al. (2012), is that producers may have an incentive to manipulate market signals about the value of their inventions, for example by bribing other producers. Chari et al. conclude that the relative strength of patent and reward systems depends on how costly it is for producers to manipulate market signals. Second, measurement can be difficult even when there is an identity between product and contribution. One problem, identified by Coase (1946) and applied to the patent reward context by Duffy (2004a), is that buyouts can cause misallocations of resources even where a good is used. For example, government transportation may lead consumers to live inefficiently far from a city. The fact that consumers take advantage of the transport does not mean that they value it at the cost of the production. The relevant question is how much consumers ‘would have demanded the good if government policy were different and they had expected to pay the full cost of the product’ (p. 43). Duffy points out that we should like to know the most that consumers would pay for a product, but ‘the government will have no data to answer that question because consumers are not paying full costs and never expected to do so’ (Duffy, 2004a, p. 43). Meanwhile, manipulation by producers

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362  Research handbook on the economics of IP law volume 1 can cause distortions. Roin (2014, p. 1037 n. 174, pp. 1059–60) observes that producers may sell goods below marginal cost to inflate apparent demand, not only thwarting value measurement but also leading to inefficient overuse. Third, even measurement of use may face administrative complications. For a pharmaceutical, whose use is probably considerably easier to measure than many other inventions, we would need to be able to determine total manufacturing by generic firms, perhaps not an insurmountable problem but one requiring some degree of coordination. Sometimes, once use is known, it may be possible to estimate consumer value, subject to the objections above, but often, the government may take shortcuts, such as assuming benefits based on clinical trials. Hollis and Pogge (2008, pp. 30–31) point out that this approach may be flawed, because clinical trials may feature the consumers most likely to benefit from an invention. B.  Market Mechanisms An alternative approach, or perhaps sometimes a complementary one, is to use a market mechanism to estimate the value of intellectual property forfeited by its owner in exchange for a buyout price. Of course, such a system can function only as an adjunct to the existing intellectual property system. The mechanism in the literature that has received the most attention is offered by Kremer (1998), who suggests allowing an optional system in which an inventor can submit an invention for an auction to the public. With some small probability, the auction is consummated; the rest of the time, the invention is placed in the public domain (p. 1147). The virtue of this system is that the government can harness private information. The government pays the patent owner an amount based on the bids when the auction is not consummated. The system, however, invites a number of objections. A patentee might make side payments to bidders. Collusion can even occur implicitly; a company might bid often on another company’s intellectual property in the hope of reciprocation. Kremer suggests combating this by paying some multiple of the third-highest bid (p. 1158). The effectiveness of this solution depends on the number of plausible bidders. More generally, an auction might not be competitive, especially for exceptionally valuable intellectual property. It may not be worthwhile to undertake the expense of researching the value of intellectual property if there is only a small probability that the sale will be consummated. Clancy and Moschini (2013, p. 229) note also that potential bidders must have sufficient information to make meaningful evaluations. In addition, truly random assignment will lead to some patents being kept in private hands. ‘The government must be willing to allow the cure for AIDS to remain in private hands if random chance would have it’ (Duffy, 2004a, p. 48). A more complex problem that Kremer addresses is that different patents may be substitutes or complements. If two patents are complements, rewards may be too high if they are auctioned separately; given the high probability each of two perfect complements will be assigned to the public domain, the other will command nearly the full value of both together. Meanwhile, the value of one patent will be greatly lowered if a substitute patent will likely be placed in the public domain. Kremer responds by suggesting joint randomization, that is, that all close complements and substitutes be auctioned simultaneously, with all either randomized to the public domain or to private ownership, though

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Prize and reward alternatives to intellectual property  363 not necessarily by the same owners. This may, however, not always be administratively feasible, if different inventions are produced at different times. An alternative market mechanism, still subject to concerns about substitutes and complements but avoiding some of the other difficulties, is suggested in a footnote by Duffy (2004a, p. 47 n. 37). Under this mechanism, the government announces an intention to take some intellectual property owned by a publicly traded firm, but it does not announce the precise time at which this taking will occur. At some moment, trading is suspended and the government announces that it has taken the property, but that the takings amount will be paid to the shareholders of record at the moment of the taking. Trading is then resumed. Because the rights to the takings payment are no longer attached to the stock, the stock price should fall. The total takings payment would be equal to the decline in net capitalization. An advantage of this mechanism is that it relies on a firm’s own shareholders to value its intellectual property. It seems likely to work effectively, however, only with relatively high value intellectual property, and there is some danger of noise associated with contemporaneous market events. A variation might be for the government to sell derivatives whose value is equal to the stock price decline observed over a set time interval and then to reimburse shareholders based on the expectation of the stock price decline. Of course, the government must guard against stock manipulation; it might help to randomize the exact time to be used for measurement of stock value. C. Flexible Ex Post Valuation and Hybrid Mechanisms A final approach is to allow for a relatively unconstrained assessment of social value to be made ex post. This ex post evaluation could be made judicially, for example in takings litigation as suggested by Guell and Fischbaum (1995), or through some form of administrative process. The case for flexible ex post valuation is that even if the government makes large ex post errors, these errors will have effects on ex ante investments only to the extent that they are systematic and can thus be anticipated (Abramowicz 2003, pp. 218–24). Some systematic errors might exist, however. For example, Khan and Sokoloff (2009, p. 25) demonstrated in an empirical study of prize awards that they often depended on factors such as elite education and geographical proximity. Perhaps decisionmakers also would favor consumer products relative to products that are inputs into other products. It is also possible that decisionmakers might adjust based on distributional considerations, favoring the poor. Arguably, such adjustments would help ameliorate inequality, though whether a reward system is an efficient mechanism for redistribution depends on the suboptimality of the existing distribution of wealth, as well as on the relative efficiency and plausibility of this mechanism in comparison to other vehicles for redistribution, such as taxation. Duffy (2004a, p. 50) points out that if this worked ‘it could also be applied to other fields of natural monopoly or even to government procurement.’ That such an approach has not been applied even in those contexts may suggest that policymakers care about ex post fairness rather than just ex ante efficiency, or that policymakers believe that such a mechanism would not be effective. It is also possible that ex post valuation is less needed with natural monopoly or government procurement, because alternative approaches may be more viable than the patent system. Duffy also expresses a concern that flexible ex post valuation systems might invite rent-seeking (pp. 50–51), citing the pioneer preference

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364  Research handbook on the economics of IP law volume 1 program of the Federal Communications Commission. This concern is reduced if assessments are to be made judicially rather than administratively. The most significant advantage of ex post valuation relative to other valuation mechanisms is that decisionmakers can in principle take into account the full range of potentially relevant considerations. Kapczynski and Syed (2013, p. 1955) argue that a principal justification for reward systems is that existing intellectual property systems, such as patent law, may distort inventor incentives toward contributions where excludability is high and away from contributions where intellectual property owners will not be able to police violations. For example, the patent system may undervalue inventions whose value will be realized only with a long time delay; while the patent system appropriately causes potential inventors to discount anticipated revenues to the present, they will ignore anticipated use beyond the patent term. Market mechanisms also will not work as a mechanism for encouraging subpatentable inventions, that is, small contributions that would not be worth the social cost of a patent but are nonetheless worth encouraging. A market mechanism that simply attempts to replicate the private value that would be achieved by the patent system cannot overcome the limits of such a system. It is possible, however, to envision a hybrid system. For example, the government might hold a Kremer-like auction to provide a baseline for private valuation, but then use flexible ex post decisionmaking to determine the ultimate amount to be paid. This would allow the decisionmakers to focus specifically on the factors that would cause deviation between private and social value under a traditional intellectual property system. Similarly, if the Duffy taking system were employed, the government might be allowed to deviate up or down from the stock market valuation of a patent based on such considerations. Of course, an auction mechanism could also be combined with estimates based on sales (Kremer, 1998, pp. 1160–61). A flexible ex post valuation could take into account a market valuation as well as a valuation based on sales.

V. COMPARISON WITH TRADITIONAL INTELLECTUAL PROPERTY SYSTEMS AND OTHER ALTERNATIVES The above sketch of the history of prize and reward systems and description of design choices hint at the comparison between those systems and existing intellectual property institutions. The case for each approach focuses on the flaws of the other. A patent or reward system will seem attractive to those who look at the patent system and see deadweight loss, inefficient races, and high transactions costs. The patent system will seem preferable for those who believe that government would be ineffective in determining the appropriate size of awards. John Stuart Mill (1858) stated this case most famously and perhaps most persuasively: [I]n general, an exclusive privilege, of temporary duration, is preferable, because it leaves nothing to anyone’s discretion; because the reward conferred by it depends upon the invention’s being found useful, and the greater the usefulness, the greater the reward; and because it is paid by the very persons to whom the service is rendered, the consumers of the commodity. So decisive, indeed, are these considerations, that if the system of patents were abandoned for that of rewards by the State, the best shape which these could assume would be that of a small temporary tax, imposed for the inventor’s benefit, on all persons making use of the invention.

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Prize and reward alternatives to intellectual property  365 The advocate of prizes might suggest the reverse deconstruction, recommending that the state alter the rewards of the market to account for its imprecision in rewarding social value, until ultimately there would be no remaining need to grant an exclusive property right and much savings from eliminating the patent apparatus. We will not adopt either of these polar opposite positions, but instead will consider the comparison along a number of dimensions, with attention to the many ways we have identified that prize and reward systems can be structured. A.  Effects on Innovation Mill’s quotation embraces the position that patent law is well calibrated to reward social value, because private returns will depend on success in the market. The views of consumers spending their own money should be preferred to the views of bureaucrats spending the money of others, for they may be more influenced by political considerations than economic ones. Spulber (2014), for example, highlights the Hayekian role that prices serve in a patent system and the difficulty that government will have in replicating the invisible hand. Partisans of both positions generally agree that the increase in consumer surplus created by an invention should count as an increase in social welfare, and so a system that provides inventors with some proportion of this increase is generally effective. On the other hand, one may argue that ‘the social worth of a good depends (at least in part) on values that are distinct from its utility to consumers’ (Roin, 2014, p. 1029). This motivates especially proposals regarding pharmaceuticals. Advocates of prizes, however, emphasize the imperfection in the correlation between social value created by an invention and the amount that can be appropriated by inventors. Appropriability, Kapczynski and Syed (2013) argue, depends largely on excludability. Many innovations—such as hospital checklists and the provision of information that drugs do not work—are not easily excludable, and so these will tend to be underproduced by the patent system (p. 1908). Meanwhile, it may be difficult to monitor infringement with some inventions (p. 1917). Some inventions, such as vaccines, may produce high positive externalities that the patent system does not value (Fisher and Syed, 2012, p. 4). Others may produce a high percentage of their social value after the duration of any exclusive right, and will thus be underprovided. Finally, relative to social value, there will be relatively little incentive to produce discoveries and inventions that have high spillovers. Basic research exemplifies this. Patent law rejects patents on abstract ideas in part because of the difficulties of defining property rights on such ideas, but a prize or reward system can easily incentivize research that cannot be easily monetized through the patent system. Thus, a critical inquiry is to examine what proportion of useful research—not necessarily research being conducted, but research that might be incentivized either by patents or by prizes or rewards in a hypothetical optimal system—is not easily excludable. The higher this proportion, the stronger the case for a prize or reward system, though the possibility that other systems might be used to encourage such research (such as research grants, to be considered below) must also be considered. The above are concerns about false negatives—that the patent system does not incentivize progress on much important research. But one can also argue for a reward system on the ground that patent systems have too many false positives. An examination of the literature on the effectiveness of patent offices in weeding out low-quality patents is

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366  Research handbook on the economics of IP law volume 1 well beyond this chapter’s scope. One who perceives that many patents provide outsized rewards for minimal contributions may believe that a reward system may be more effective in preventing such distortions. A significant challenge in administering a patent system is rendering determinations of whether patents are nonobvious. Part of the problem may be that nonobviousness in patent law is a binary determination; in a reward system, by contrast, small rewards could be given for small degrees of nonobviousness and large rewards for greater degrees of innovation. In principle, patent law can adjust scope based on the degree of innovativeness of an invention, but this may not be easy to accomplish administratively, and patent offices may not have strong incentives to push back against applicants who have made small innovations but claim broad scope. Even if these are problems of the patent system, however, the question becomes whether the best course is to abandon the patent system or to work to improve the patent system from within, for example by increasing the rigor of the nonobviousness standard, reforming patent scope, or changing patent litigation procedure. In principle, a reward system can consider all forms of social welfare produced by an invention, including relatively nonexcludable forms. (A prize system, meanwhile, can also be used to reward any sort of creation, but the tendency of prize systems to specify one or more areas of interest in advance means that they will necessarily exclude consideration of many important discoveries outside their scope.) The heart of the objection to a reward system is that such a system may not effectively capture the benefits that the patent system misses and moreover may misestimate the benefits that the patent system captures. Calandrillo (1998, p. 340 n. 155) notes that, historically, prize systems have been rejected for largely this reason. Skepticism among economists about prizes stems largely from distrust of bureaucracies. Scherer (1970, p. 398) argues, ‘[A]ny bureaucratic council entrusted with the job is bound to make mistakes and perpetuate inequities.’ Similarly, Tirole (1988, p. 401) notes that ‘[i]nformation about demand is crucial for determining the size of the award, which, in turn, influences the research incentives.’ It may be difficult to estimate demand when a product is offered for free. Virtually no empirical progress has been made in addressing these questions. Part of the problem, of course, is that we do not have reward systems. In principle, however, governmental officials or laboratory subjects might be tasked with estimating social value for experimental purpose. But such experiments might not be useful. It would be difficult to assess whether estimates of social value were correct, though it might be possible to determine whether subjects could accurately estimate the private value created by certain discoveries. Perhaps one could determine whether subjects were relatively consistent in their evaluations. But as long as rewards are given ex post, what matters are ex ante forecasts of evaluations, and even highly inconsistent decisionmakers might come close to approximating social value in expected value terms. Even if one could measure expectations of what average decisionmakers would decide, it may be impossible to know whether these expectations represent an improvement over expectations of what the market would reward. Market mechanisms, like those described in Section IV.B, largely avoid the debate on whether patents or rewards are better calibrated to social welfare. Such a market mechanism seeks to buy out intellectual property at its private value, so it does not entail the risk that government officials will systematically misestimate invention value, nor does such a mechanism offer the potential of government officials steering inventive activity toward

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Prize and reward alternatives to intellectual property  367 what is socially valuable. Thus, those mechanisms must be assessed primarily on their effectiveness at capturing private value and on benefits such as reduction in deadweight loss. Such a mechanism could be used to provide a baseline compensation level, with governmental officials permitted to deviate from that level only within some range. One might distrust the government to generate social value estimates of innovations being placed in the public domain but believe that governmental adjustments to the baseline of private value may improve the correlation between social value and private value. A final point is that such correlations are not all that matters. A system for promoting intellectual property might reward contributions in exact proportion to their social value yet still fail if the size of the total contributions is too low or too high. An additional consideration is thus whether total incentives to innovate will be higher with rewards or with traditional intellectual property. Assuming private appropriation is likely to be less than social welfare on average with either system, the system that produces greater total rewards may be preferable. Reward system advocates highlight that rewards could be augmented to capture social value better. Kremer (1998, p. 1411) notes that patent buyouts may be at a multiple of private value and suggests that a markup between 2.5 and 3.33 may be socially desirable, and Shavell and van Ypersele (2001) point out that if government knows the demand curve, government can play social surplus and achieve a first-best outcome. Of course, what the government could do is not necessarily what the government will do. Kalil (2006, p. 11) notes that uncertainty of whether the government will pay reduces the effectiveness of a prize or reward. If government is thought likely to cheat or renege on open-ended commitments, then the optimal policy may be for the government to commit to a fixed pot (Abramowicz, 2003). This eliminates the potential benefit of increasing total funds offered for innovation but also reduces the danger of underproviding for innovation, and it may be useful as a transitional mechanism, perhaps as a complement to the patent system. B.  Effects on Redundant Innovation Both traditional systems of intellectual property and prize or reward systems may lead to inefficient redundant research. In a patent race, multiple competitors may attempt the same approaches, though sometimes they will attempt different strategies. Sometimes redundant efforts can be welfare-improving, especially where an invention has very high social value, but it is not a free lunch. Although patent races can lead to earlier invention, the anticipation of competition reduces potential participants’ estimates of the expected payout from a race. In equilibrium, this can lead to later racing (Duffy, 2004b). Meanwhile, attempts to invent around an invention can also lead to inefficient duplication. Redundancy can also occur with a prize or reward system. If there is a single prize, the dynamics of racing will be quite similar to those in a patent system. With rewards, redundancy may still occur, whether competitors believe only the first to complete an achievement will receive a reward or whether competitors anticipate that the reward will be shared among all participants. Thus, patents, prizes, and rewards may all be inferior in this particular respect to a program of centralized government research, which can allocate funds to various research programs in a way that attempts to minimize or optimize redundancy. As this analysis suggests, commentators generally agree that prizes and rewards do not necessarily solve the common pool problem. Calandrillo (1998, p. 353) notes that a

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368  Research handbook on the economics of IP law volume 1 ‘government-run reward system will not solve the race to be the first party to generate a given piece of information in order to obtain the reward for it,’ and Wright (1983) observes that an inefficiently high number of firms may respond to a prize incentive. In principle, however, operators of a reward system might seek to adjust rewards or prizes to combat redundancy, just as rewards in principle could be adjusted for any other purpose (Roin, 2014, p. 1033). The problem is that it is not obvious exactly what adjustments should be made. One possibility is to give considerably lower rewards where interest in a particular inventive path was stimulated by an exogenous shock, such as the emergence of a complementary invention. If Invention A enables Invention B, then the payment to the first to invent B need not be the full social welfare value of B over A. As noted above, social value is better measured against a baseline of what would have been invented absent an incentive, and an extension to this principle is that even if some incentive is necessary to encourage innovation, sometimes that incentive may be much lower than the full social value of the invention. Those operating the reward system might reduce the ex post award to the level that they believe would have produced optimal ex ante entry into the race. Of course, this introduces the risk of hindsight bias. Another possibility is for the reward judges to provide strong incentives for very rapid release of information. If Inventor A performs Step X but does not report it, so Inventor B repeats Step X unnecessarily, then the reward judge might allocate the proportion of the reward attributable to Step X between Inventor A and Inventor B. If Inventor A reports Step X and is the first to complete Steps Y and Z necessary to produce the invention, then the case for sharing the reward with a later inventor who replicates A’s steps is greatly reduced. Of course, a risk for Inventor A is that Inventor B will replicate and invent first. In this case, however, there is a strong case for giving Inventor A at least the credit for the portion of the reward attributable to Step X and perhaps more, if there was no reason to think that Inventor B would make a stronger contribution. A broader observation is that reward systems can provide incentives for taking intermediate steps on the way to a discovery, and more granular rewards can reduce redundancy. Reward systems may also choose to reward negative results. This presents a danger that inventors will choose paths that they believe are unlikely to be successful, but also encourages information sharing. With this determination as with others, it is difficult to identify principles to determine just how much credit should be given. A reward system will generally be more attractive if such micro-adjustments successfully adjust for distortions attributable to inefficient racing, and less attractive if the government is poorly situated to make the adjustments and may overcompensate. C.  Effects on Commercialization Although the goal of the patent system is generally viewed as being encouraging research and invention, some commentators have emphasized that intellectual property may serve an important purpose in encouraging commercialization of invention. The patent prospect theory is widely associated with Kitch (1977, p. 277), who argues, ‘Only in the case of a patented product is a firm able to make the expenditures necessary to bring the advantages of the product to the attention of the customer without fear of competitive appropriation if the product proves successful.’ Kieff (2001) extends this insight to the

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Prize and reward alternatives to intellectual property  369 literature on prizes and rewards, noting that if payments are given for inventive effort alone, but consumer demand is highly uncertain, then second-mover advantages may dominate first-mover advantages. Kieff emphasizes that patents serve a role in coordinating inventors and market players. A recent literature has assessed how intellectual property rights might be used to further the commercialization function (see Abramowicz and Duffy, 2008; Sichelman, 2010). Hrdy (2015) emphasizes that in fact states frequently give awards to encourage commercialization, and these awards can be seen as analogous to a reward system. It is possible to imagine channeling such awards into a quasi-judicial process. Entrepreneurs might be rewarded for bringing products to market where consumer demand is highly uncertain and second movers can be expected to enter the market. The question becomes whether reward judges can effectively determine the magnitude of such rewards and whether inaccurate rewards or insufficient attention to the commercialization function might lead to inferior performance relative to a patent system. D.  Effects on Consumers 1.  Deadweight loss The most common justification for a prize or reward system alternative to the patent system is that a patent or reward system can reduce or eliminate the deadweight loss attributable to patents. The observation that monopolists will set output at a level that is inefficiently low from a social perspective is elementary. Wright (1983) was the first to develop this advantage of a prize or reward system in a rigorous analytical way. One question is how important deadweight loss is relative to other systemic imperfections. Arguably, static inefficiency is not as important as ensuring that the patent system generates as much economic growth as possible, though the dynamic benefits of intellectual property and prizes or rewards must be discounted to present value. Another question is how serious the problem of deadweight loss is. Leslie (2011, p. 813) notes that patentees may reduce deadweight loss by engaging in price discrimination, for example through tying arrangements if permitted by antitrust laws. Love and Hubbard (2007, pp. 1548–9) counter that price discrimination is difficult, arguing that many pharmaceuticals are sold only to the world’s richest group of consumers, because pharmaceutical companies worry about arbitrage. Roin (2014, pp. 1024–5) agrees that the difficulty of stopping arbitrage, combined with the challenge of identifying who is unwilling to pay the monopoly price, may make price discrimination difficult. But prescription drug insurance produces a two-part pricing that may make the two-part pricing achieved by a prize or reward system unnecessary (pp. 1048–9). The deadweight losses associated with patents must in any event be compared against the deadweight losses associated with taxation. Wright’s original model featured the simplifying assumption that ‘lump sum taxation is possible (or the marginal welfare cost of general revenue is negligible)’ (Wright, 1983, p. 693). But the literature highlights that taxation causes economic distortions (Calandrillo, 1998, p. 337; Abramowicz, 2003, 200-201). Roin (2014, pp. 1026–7) notes the possibility that the loss from taxation might be even higher than the loss from patents. On the other hand, Calandrillo (1998, p. 314) suggests that taxes are less distortionary, because they apply to all goods or income rather than to just some subset of them. Hemel and Ouellette (2013, p. 315) counter

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370  Research handbook on the economics of IP law volume 1 that ‘­numerous deductions and exclusions . . . upset this equivalence and increase the distortionary effect of income taxation.’ Whatever the actual distortionary cost of taxation, commentators widely agree that there is political resistance to taxation. Hemel and Ouellette (p. 312) note that patents are unique in that they do not ‘necessarily impose a budgetary cost on the government (apart from the costs of administering the patent system).’ If taxpayers prefer, or are more easily fooled by, the implicit taxation associated with intellectual property than the explicit taxation necessary for prizes or rewards, then prizes or rewards might be politically infeasible. This is not necessarily an argument on the merits against prize or reward systems, but a corollary may be that prize or reward systems are likely to be underfunded because of their tax cost. 2.  Distribution and labor incentives A prize or reward system might benefit some consumers at the expense of others. Most obviously, if the social value is judged independently of consumers’ willingness to pay, for example because health benefits to the poor and rich are counted alike rather than based on willingness to pay, then a prize or reward system would tend to encourage innovation that benefits all people, rather than simply innovation that benefits the wealthy. Even if the reward is based on willingness to pay, there may be a progressive redistributive effect. If marginal cost is sufficiently low, the poor can consume a product placed in the public domain, regardless of whether their utility is taken into account in the reward calculation. Hemel and Ouellette (2013, p. 308) argue that any redistribution’s normative desirability may depend on the type of good; that the patent system is subsidized by users may be more justifiable for luxury goods (say, improved boat hull designs) than for life-saving pharmaceuticals. Of course, a normative analysis of any distributional consequences depends on one’s views about the existing distribution. In principle, one might argue that distribution in favor of the poor would reduce incentives to work and thus harm efficiency, though the general assumption in the reward literature has been that ­progressive redistributions would be desirable. Not all of a reward system’s distributional effects can be classified entirely in terms of effects on the wealthy or the poor. The copyright system can be seen as a tax on readers, and the patent system as a tax on users of inventions. Reward or prize alternatives continue to provide benefits to those same groups, but the costs are imposed more broadly. Whether it is socially desirable, independent of efficiency effects, to redistribution from nonreaders to readers or from Luddites to those who enjoy the fruits of invention, is ultimately a normative question. Duffy (2004a, p. 44) cites Coase (1946, p. 176) in observing that rewards ‘would redistribute income in favor of those who consume declining average cost goods.’ Of course, if consumers are relatively homogeneous in their preference for declining average cost goods, this may be of little concern. E.  Transactions Costs The costs of administering either a traditional intellectual property system or a system of rewards of prizes reduce social welfare. Calandrillo (1998, p. 341) argues that ‘the reward regime would save on the legal, private, and social enforcement costs involved in protecting property rights from theft, infringement, or copying by others.’ These

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Prize and reward alternatives to intellectual property  371 costs are especially significant in the context of the patent system, encompassing both governmental and private costs associated with the prosecution and litigation of patents. Calandrillo argues that transaction costs for both copyright and patent are high in part because of complex doctrine (pp. 331–4). Of course, a reward system must evaluate every invention or work and this entails some administrative costs as well. Though such evaluations might not track traditional doctrinal argument, they might involve complex economic analysis. Economists may not come cheaper than lawyers, who no doubt would find a way to become involved. Burrell and Kelly (2014, p. 887) argue that, historically, the administrative costs of prizes may be higher than those of patents. A full accounting must take into account not only the costs involved in dealings with government agencies and courts, but also the costs associated with private negotiation and evaluation. The patent system encourages private ordering, but private ordering depends on negotiation by private parties. Those parties may be able to find means of reducing their costs, for example by joining patent pools. A reward system may reduce the need for private negotiation, because intellectual property placed in the public domain can be used without charge. This may be especially important in the context of ‘patent thickets’ (Heller and Eisenberg, 1998). If a sufficient number of inventions are placed into the public domain, especially in a mandatory system, enough of the thicket may be cleared to facilitate follow-on invention. Market-based reward systems must be evaluated separately, because they combine elements of the other approaches. Because a market-based reward system requires that traditional intellectual property institutions still exist and that patents still be obtained, the transactions costs associated with the patent office remain. Litigation, however, may be greatly reduced with respect to the patents randomized to the public domain. But the market mechanism itself involves transactions costs, as auction theory predicts that the private parties participating in a Kremer auction will lower their bids to account for their research costs. Such transactions costs may be reduced with the Duffy market valuation approach, because each individual shareholder has only a limited incentive to engage in research. But the downside of that may be less accurate market valuation. As long as shareholders value patents correctly on average, however, this should not adversely affect ex ante investments in research, except to the extent that it makes them somewhat riskier. F.  Rent-Seeking Costs Perhaps one of the great achievements of the patent system is that it has greatly reduced rent-seeking by inventors seeking special treatment for their individual inventions. In principle, Congress can grant patent term extensions on an invention-by-invention basis, but because the patent system exists and imposes uniform rules governing patent term, this rarely occurs. A concern with the creation of a prize or reward system is that owners of rights to inventions might lobby for those inventions to receive high rewards. Hemel and Ouellette (2013, p. 327) worry that rewards might lead to ‘politicization, rent-seeking, and mismanagement,’ pointing out that ‘the social rate of return on R&D funded through government grants has been estimated to be lower than on private R&D.’ Duffy (2004a) also points out that consumers might lobby for the government to choose products that they use to be placed in the public domain. The investments in such lobbying would be social losses, and they might distort decisionmaking. In a judicialized reward process, however, it

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372  Research handbook on the economics of IP law volume 1 may be possible to maintain decisionmaker independence. In that case, rent-seeking could be accomplished only by persuading the reward judges of the worth of one’s invention. Inventors, however, may have incentives to mislead judges about the value of their contributions, for example by suppressing negative studies about their inventions’ effectiveness. G.  Other Policy Options 1. Grants Most of this chapter has compared traditional intellectual property systems to a range of possible prize or reward systems. But these are, of course, not the only means by which the government can encourage innovation. An approach closely related to that of rewards is grants. Grant decisions are made by centralized agencies ex ante based on research proposals. Adler (2011) argues that prize or reward systems may be preferable, because the centralized grant decisions limit ‘the range of promising ventures that may receive funding.’ Hanson (1998) argues that grants have become more important than prizes because they tend to concentrate power in the hands of scientific rather than political leaders. While legislatures would like to maintain such power in their own hands, the power to administer prizes is more likely executive than legislative, and legislatures prefer to grant power to scientific leaders than to the executive. The general normative case for grants, particularly for basic research, is that ‘a large share of the most valuable uses of basic research will take highly abstract, intangible forms, rendering the output of such research highly nonexcludable’ (Kapczynski and Syed, 2013, p. 1951). 2.  Governmental purchases and tax credits Above, we noted that the government might create something akin to a prize system by giving coupons to low-income consumers. There may also be other ways by which the government can help consumers obtain patented products in a way that reduces deadweight loss, yet possibly without the need to evaluate the contributions of individual inventions. For example, the US government subsidizes health insurance through its tax code. Roin (2014, p. 1051) argues that this may be administratively much simpler than giving coupons to individual consumers. Health insurance creates a two-part pricing scheme for pharmaceuticals. Consumers pay a fixed amount for health insurance and then a copayment for individual prescriptions. This copayment may be relatively close to marginal cost. Roin also argues that the government might combine subsidies for health insurance with price controls to ensure that the consumer price ends up relatively close to marginal cost. Many national health systems help to drive prices for consumers to levels near marginal cost without creating a formal prize system. The effect, he argues, is to create the benefits of a patent buyout scheme while retaining the system of intellectual property and arguably reducing the informational demands on the government. It may not be easy to apply the same logic outside the health insurance context, though in principle a combination of private ordering and governmental subsidies could reduce consumer costs for other goods. Consumers often buy goods (such as cable television subscriptions) with a high fixed and low marginal price component, and government policy could further encourage this. We have, of course, only scratched the surface of the ways in which the government can create innovation through its own purchases. Carroll (2009, p. 1369–70) offers an expanded taxonomy of means by which the government can encourage innovation, noting

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Prize and reward alternatives to intellectual property  373 the possibility of ‘direct provision of creators or innovators employed by the government.’ Kalil (2006, p. 7) argues that a benefit of prize and reward systems is that they avoid the complexities associated with procurement regulations and can thus attract teams who otherwise would not be positioned to do business with the government. Brennan et al. (2012, p. 27) offer some guidance on when procurement may be appropriate. While grants will be useful when the government wishes to reduce the risks of inventors but does not know the best approach to take, procurement will work better for a known objective and solution. Prizes may reduce risk somewhat and may be especially appropriate where a specific objective is known but the means to obtain that objective is unknown. Hemel and Ouellette (2013) argue that tax credits also have potential advantages as means of funding innovation. Tax credits require less direct governmental involvement and supervision than any of the other methods of encouraging innovation. Tax credits, they argue, ‘may be optimal where potential innovators have private information about project prospects and limited access to outside capital’ (p. 303). Tax credits can be structured as deductions or as refundable, which provides stronger incentives for startup companies. Tax credits can either be administered at a national level or at a state level. Hrdy (2013) argues that in part because a variety of doctrines limit the ability of states to create patent policies, states have focused largely on providing tax credits as a mechanism for encouraging innovation. As Hrdy’s argument suggests, a significant drawback of tax credits relative to rewards is that they provide the government relatively little ability to adjust for ways in which the patent system may not align private and social incentives.

VI. CONCLUSION The arguments for and against prize and reward systems are many and all depend on empirical considerations that, without experimentation, are difficult to assess with confidence. On one hand, there are strong theoretical reasons that an ideal prize or reward system could dominate an ideal patent system because of the reduction of deadweight loss and because rewards can be adjusted to encourage or discourage any desired or disfavored activity. But no system is ideal. As Kremer (1998, pp. 1162–3) points out, new mechanisms will have ‘risks and shortcomings,’ but ‘existing mechanisms of encouraging innovation have serious flaws’ as well. Thus, a full comparison depends on considerations such as which system can better encourage commercialization, which system entails larger transactions costs, and which system can best reduce inefficient rent-seeking. Perhaps limited governmental experimentation with prize or reward systems can reduce some of the uncertainty about these costs, but individual governments may have only limited incentives to experiment, particularly given their obligations to maintain intellectual property rights under existing trade laws. Perhaps the increased scholarly interest in prize and reward systems anticipates increased governmental interest in these systems. Levmore (2013) argues that the increasing importance of ideas in the modern economy and the difficulty of creating property rights in ideas and the drawbacks in enforcing such property rights mean that prizes and rewards will take on increasing importance in the future. Pharmaceuticals may be the most likely target for experimentation (pp. 156–7), given concerns about deadweight loss, scholarly and policy interest in that area, and the already large spending and research by governments on health.

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REFERENCES Abramowicz, Michael. 2003. ‘Perfecting Patent Prizes,’ 56 Vanderbilt Law Review 115–236. Abramowicz, Michael, and John F. Duffy. 2008. ‘Intellectual Property for Market Experimentation,’ 83 New York University Law Review 337–410. Abramowicz, Michael, and John F. Duffy. 2011. ‘The Inducement Standard of Patentability,’ 120 Yale Law Journal 1590–680. Adler, Jonathan H. 2011. ‘Eyes on a Climate Prize: Rewarding Energy Innovation to Achieve Climate Stabilization,’ 35 Harvard Environmental Law Review 1–45. Bakker, Gerben. 2013. ‘Money for Nothing: How Firms Have Financed R&D-Projects since the Industrial Revolution,’ 42 Research Policy 1793–814. Brennan, Timothy J., Molly K. Macauley, and Kate S. Whitefoot. 2012. ‘Prizes or Patents for Technology Procurement: An Assessment and Analytical Framework,’ Resources for the Future, Discussion Paper No. 11-21-REV, http://www.rff.org/research/publications/prizes-patents-and-technology-procurement-proposedanalytical-framework (last accessed Mar. 11, 2019). Brunt, Liam, Josh Lerner, and Tom Nicholas. 2012. ‘Inducement Prizes and Innovation,’ 60 The Journal of Industrial Economics 657–96. Burrell, Robert, and Catherine Kelly. 2014. ‘Public Rewards and Innovation Policy: Lessons from the Eighteenth and Early Nineteenth Centuries,’ 77 The Modern Law Review 858–87. Burstein, Michael J., and Fiona E. Murray. 2015. ‘Governing Innovation Prizes,’ unpublished manuscript, http:// static.squarespace.com/static/528679bee4b0fb796a381814/t/5357f587e4b04cbb643a8790/1398273415651/Bur​ stein-Murray%20Governing%20Innovation%20Prizes.pdf (accessed Sept. 24, 2015). Calandrillo, Steve P. 1998. ‘An Economic Analysis of Property Rights in Information: Justifications and Problems of Exclusive Rights, Incentives to Generate Information, and the Alternative of a Government-Run Reward System,’ 9 Fordham Intellectual Property, Media & Entertainment Law Journal 301–60. Carroll, Michael W. 2009. ‘One Size Does Not Fit All: A Framework for Tailoring Intellectual Property Rights,’ 70 Ohio State Law Journal 1361–434. Chari, V.V., Mikhail Golosov, and Aleh Tsyvinski. 2012. ‘Prizes and Patents: Using Market Signals to Provide Incentives for Innovations,’ 147 Journal of Economic Theory 781–801. Clancy, Matthew S., and GianCarlo Moschini. 2013. ‘Incentives for Innovation: Patents, Prizes, and Research Contracts,’ 35 Applied Economic Perspectives and Policy 206–41. Coase, R.H. 1946. ‘The Marginal Cost Controversy,’ 13 Economica 169–82. Ding, Wei, and Elmar G. Wolfstetter. 2011. ‘Prizes and Lemons: Procurement of Innovation under Imperfect Commitment,’ 42 RAND Journal of Economics 664–80. Duffy, John F. 2004a. ‘The Marginal Cost Controversy in Intellectual Property,’ 71 University of Chicago Law Review 37–56. Duffy, John F. 2004b. ‘Rethinking the Prospect Theory of Patents,’ 71 University of Chicago Law Review 439–510. Fisher, William, and Talha Syed. 2012. ‘Prizes,’ in Infection: The Health Crisis in the Developing World and What We Should Do About It, unpublished manuscript, http://cyber.law.harvard.edu/people/tfisher/Infection.htm (last accessed Mar. 11, 2019). Galle, Brian. 2014. ‘Tax, Command . . . or Nudge?: Evaluating the New Regulation,’ 92 Texas Law Review 837–94. Guell, Robert C., and Marvin Fischbaum. 1995. ‘Toward Allocative Efficiency in the Prescription Drug Industry,’ 73 The Milbank Quarterly 213–30. Hanson, Robin. 1998. ‘Patterns of Patronage: Why Grants Won Over Prizes in Science,’ Working paper, http:// www.atriumtech.com/muic2008/icsc302/papers/WhyGrantsOverPrizes.pdf (accessed Sept. 24, 2015). Heller, Michael A., and Rebecca S. Eisenberg. 1998. ‘Can Patents Deter Innovation? The Anticommons in Biomedical Research,’ 280 Science 698–701. Hemel, Daniel J., and Lisa Larrimore Ouellette. 2013. ‘Beyond the Patents-Prizes Debate,’ 92 Texas Law Review 303–82. Hollis, Aidan, and Thomas Pogge. 2008. The Health Impact Fund: Making New Medicines Accessible for All, Incentives for Global Health, http://healthimpactfund.org/wp-content/uploads/2012/11/hif_book.pdf (accessed Sept. 24, 2015). Hopenhayn, Hugo, Gerard Llobet, and Matthew Mitchell. 2006. ‘Rewarding Sequential Innovators: Prizes, Patents, and Buyouts,’ 114 Journal of Political Economy 1041–68. Howse, Derek. 1998. ‘Britain’s Board of Longitude: The Finances, 1714–1828,’ 84 The Mariner’s Mirror 400–17. Hrdy, Camilla A. 2013. ‘State Patents as a Solution to Underinvestment in Innovation,’ 62 University of Kansas Law Review 487–548. Hrdy, Camilla A. 2015. ‘Commercialization Awards,’ 2015 Wisconsin Law Review 13–86. Kalil, Thomas. 2006. ‘Prizes for Technological Innovation,’ Brookings Institution, Discussion Paper 2006-08, http://www.brookings.edu/research/papers/2006/12/healthcare-kalil (accessed Sept. 24, 2015).

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Prize and reward alternatives to intellectual property  375 Kapczynski, Amy, and Talha Syed. 2013. ‘The Continuum of Excludability and the Limits of Patents,’ 122 Yale Law Journal 1900–63. Khan, B. Zorina, and Kenneth L. Sokoloff. 2009. ‘A Tale of Two Countries: Innovation and Incentives among Great Inventors in Britain and the United States, 1750–1930,’ in Roger E.A. Farmer, ed., Macroeconomics in the Small and the Large. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Kieff, F. Scott. 2001. ‘Property Rights and Property Rules for Commercializing Inventions,’ 85 Minnesota Law Review 697–754. Kitch, Edmund W. 1977. ‘The Nature and Function of the Patent System,’ 20 Journal of Law & Economics 265–90. Kremer, Michael. 1998. ‘Patent Buyouts: A Mechanism for Encouraging Innovation,’ 113 The Quarterly Journal of Economics 1137–67. Kremer, Michael, and Heidi Williams. 2010. ‘Incentivizing Innovation: Adding to the Tool Kit,’ in Josh Lerner and Scott Stern, eds., Innovation Policy and the Economy, Volume 10. Chicago, IL: University of Chicago Press. Leslie, Christopher R. 2011. ‘Patent Tying, Price Discrimination, and Innovation,’ 77 Antitrust Law Journal 811–54. Levmore, Saul. 2013. ‘The Impending iPrize Revolution in Intellectual Property Law,’ 93 Boston University Law Review 139–62. Lichtman, Douglas Gary. 1997. ‘Pricing Prozac: Why the Government Should Subsidize the Purchase of Patented Pharmaceuticals,’ 11 Harvard Journal of Law & Technology 123–39. Love, James, and Tim Hubbard. 2007. ‘The Big Idea: Prizes to Stimulate R&D for New Medicines,’ 82 ChicagoKent Law Review 1519–54. Macfie, R.A. 1883. Copyright and Patents for Inventions. Edinburgh: T. & T. Clark. McKinsey & Company. 2009. ‘And the Winner Is . . .’: Capturing the Promise of Philanthropic Prizes, https://www. mckinsey.com/~/media/mckinsey/industries/social%20sector/our%20insights/and%20the%20winner%20is%20 philanthropists%20and%20governments%20make%20prizes%20count/and-the-winner-is-philanthropists-and​ -governments-make-prizes-count.ashx (last accessed Mar. 11, 2019). Mill, John Stuart. 1858. Principles of Political Economy. Stephen Nathanson, ed., 2004. Indianapolis, IN: Hackett Publishing. Moser, Petra, and Tom Nicholas. 2013. ‘Prizes, Publicity and Patents: Non-Monetary Awards as a Mechanism to Encourage Innovation,’ 61 The Journal of Industrial Economics, 763–88. Murray, Fiona, Scott Stern, Georgina Campbell, and Alan MacCormack. 2012. ‘Grand Innovation Prizes: A Theoretical, Normative, and Empirical Evaluation,’ 41 Research Policy 1779–92. Nicholas, Tom. 2013. ‘Hybrid Innovation in Meiji, Japan,’ 54 International Economic Review 575–600. Polanvyi, Michael. 1944. ‘Patent Reform,’ 11 The Review of Economic Studies 61–76. Ridley, David B., Henry G. Grabowski, and Jeffrey L. Moe. 2006. ‘Developing Drugs for Developing Countries,’ 25 Health Affairs 313–24. Roin, Benjamin N. 2014. ‘Intellectual Property versus Prizes: Reframing the Debate,’ 81 University of Chicago Law Review 999–1078. Scherer, F.M. 1970. Industrial Market Structure and Economic Performance. Chicago, IL: Rand McNally. Scotchmer, Suzanne. 2004. Innovation and Incentives. Cambridge, MA: MIT Press. Shavell, Steven, and Tanguy van Ypersele. 2001. ‘Rewards Versus Intellectual Property Rights,’ 44 Journal of Law and Economics 525–47. Sichelman, Ted. 2010. ‘Commercializing Patents,’ 62 Stanford Law Review 341–411. Siegel, Jonathan R. 2009. ‘Law and Longitude,’ 84 Tulane Law Review 1–66. Sobel, Dava. 1995. Longitude. New York, NY: Penguin Books. Spulber, Daniel F. 2014. ‘Prices versus Prizes: Patents, Public Policy, and the Market for Inventions,’ Northwestern Law & Economics, Research Paper No. 14-15, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2488095 (accessed Sept. 24, 2015). Stiglitz, Joseph E. 2006. ‘Scrooge and Intellectual Property Rights: A Medical Prize Fund Could Improve the Financing of Drug Innovations,’ 333 BMJ: British Medical Journal 1279–80. Stine, Deborah D. 2009. ‘Federally Funded Innovation Inducement Prizes,’ Congressional Research Service Report, R40677, June 29, 2009. Tirole, Jean. 1988. The Theory of Industrial Organization. Cambridge, MA: MIT Press. Williams, Heidi. 2012. ‘Innovation Inducement Prizes: Connecting Research to Policy,’ 31 Journal of Policy Analysis and Management 752–76. Wright, Brian D. 1983. ‘The Economics of Invention Incentives: Patents, Prizes, and Research Contracts,’ 73 The American Economic Review 691–707.

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14.  Tailoring intellectual property rights to reduce uniformity cost Michael W. Carroll*

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Contents I. Introduction II. Intellectual Property’s Uniformity Presumption III. The Problem of Uniformity Cost IV. The Argument for One-Size-Fits-All V. Minimizing Uniformity Cost A. Tailoring Through Private Ordering B. Standards Instead of Rules i. Standards in patent law ii. Standards in copyright law C. Tailoring Through Real Option Pricing VI. Tailoring Exclusive Rights VII. A Framework for Tailoring A. Alternative Incentives to Create or Innovate and Distribute B. Alternative Appropriability Mechanisms C. Overlapping Rules and Rights D. Demand-Side Features—Positive Spillovers VIII. Industrial Innovation Decision Structures IX. Conclusion References

I. INTRODUCTION This chapter focuses on solutions to a second-order problem that arises with the creation of intellectual property (IP) rights—the problem of uniformity cost. The incentives created by one-size-fits-all patents and copyrights often are misaligned with those necessary to attract the optimal level of investment of capital and creative labor. Uniformity cost is the social cost attributable to this uniform approach to institutional design. Licensing and other forms of private ordering minimize some uniformity cost. Current intellectual property law also deploys a range of strategies to minimize residual uniformity cost: (1) defining rights through adaptable standards; (2) some use of real options instead of direct

*  Professor of Law and Director of the Program on Information Justice and Intellectual Property, American University Washington College of Law.

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378  Research handbook on the economics of IP law volume 1 entitlement grants; and (3) selective use of tailored exclusive rights. After brief discussion of these first two strategies, the remainder of this chapter focuses on the last. The economic reasoning supporting tailoring of exclusive rights is a logical extension of the basic economic justification for intellectual property. In a competitive economy, we should expect underinvestment in creative and inventive endeavors without some form of government assistance because of declining marginal cost. Once an author, inventor, or financier has paid for the creation, commercialization, and distribution of a valuable creative or innovative work, competitors can reproduce and distribute that work at prices too low for those who invested in the creation to recoup their investments (Menell and Scotchmer, 2007). Some scholars qualify their views or disagree that this baseline appropriability problem is present in markets for works of authorship (Bracha and Syed, 2014; Lunney, 2009; Yoo, 2008). The standard economic solution to this appropriability problem is government action. For some, creating exclusive rights to stimulate market exchange is the obvious response. But, this move from problem to property is socially expensive (Macaulay, 1900) and merits a more robust justification because policymakers may select from, or combine, six types of policy intervention to solve the appropriability problem: 1. direct provision of creators or innovators employed by the government; 2. direct compensation ex ante to the innovator for producing the information (leaving the costs of reproduction and distribution to be borne by participants in a competitive market), such as through a grant to a promising innovator; 3. direct compensation to the innovator ex post through a reward or prize system for innovations already created, such as prizes awarded by a number of federal government science agencies; 4. indirect compensation to the innovator through tax policy, by, for example, giving tax credits for investments in research and development; 5. protection of innovators from competition through the grant of exclusive production and distribution rights (thereby encouraging monopoly pricing), by creating patent and copyright law; or other forms of protection from competition or misappropriation by increasing 6.  excludability of valuable information, by, for example, prohibiting circumvention of technological protection measures (Fisher, 2004; Frischmann, 2000; Lessig, 2001). These strategies can be, and usually are, combined in a number of ways. Discussion of how to determine the optimal mix of strategies has begun (Hemel and Ouellette, 2013), and it is now clear that the intellectual property strategy must compete with these others for its place in the policy mix (Burstein, 2012). The early law and economics literature equated a property-based solution with capitalism (Menell and Scotchmer, 2007). Arrow (1962), for example, declared that ‘[i]n an ideal socialist economy, the reward for invention would be completely separated from any charge to the users of the information’ whereas ‘[i]n a free enterprise economy, inventive activity is supported by using the invention to create property rights’ (emphasis added). By framing the choice as between socialism and ‘free enterprise,’ readers were instructed that a reward system for invention and a free enterprise economy are incompatible options. Today, the case for intellectual property rights cannot disregard the direct-­

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Tailoring intellectual property rights to reduce uniformity cost  379 compensation  alternatives so summarily. For example, traditional economic analysis offered only equivocal support for the efficiency of the patent system (Machlup, 1958). More radical economists have reformulated an older critique (Janis, 2001; Machlup et al., 1950) and have concluded that Machlup was too timid and that the absence of historical data sufficient to support the case leads to the conclusion that ‘intellectual property is an unnecessary evil’ (Boldrin and Levine, 2008). Even if government intervention is justified, direct compensation to innovators appears to be preferable to intellectual property rights at first glance because this strategy avoids the social costs of underutilization (Kesan and Gallo, 2009; Polanvyi, 1944). In the modern context, an emerging literature supports this view, advocating for a range of institutional forms of direct compensation (Abramowicz, 2003; Kremer, 1998; Lichtman, 1997; Shavell and van Ypersele, 2001). Stiglitz (2006b) has endorsed the use of prizes in the drug discovery context, and Shavell (2004) further observes that ‘in many plausible situations, the reward system would be superior to the property rights system.’ Shavell and Ypersele (2001) show that giving the innovator the option to choose either a reward calculated from ex post data, such as sales figures, or exclusive rights would be preferable to the current patent system. However, in rebuttal, Roin (2014) argues that even if the government’s information is as good as private innovators,’ a range of reasons supports supplementing intellectual property rights with various government interventions rather than replacing intellectual property rights with prizes.

II. INTELLECTUAL PROPERTY’S UNIFORMITY PRESUMPTION Notwithstanding the advantages of competing strategies, the case for intellectual property rights retains its vitality in light of three practical considerations necessary to assessing the feasibility and desirability of the various strategies for solving the appropriability problem: (1) the government’s ability, relative to private actors, to value certain types or classes of creation or innovation (Shavell and van Ypersele, 2001); (2) the comparative administrative cost of a strategy; and (3) considerations of political economy associated with a particular strategy. By testing the case for intellectual property in relation to these practical metrics, the empirical and practical premises of the case are laid bare. The economics of innovation make direct investments of public funds challenging. Investments in innovation and new cultural works often are uncertain and risky because the likelihood of any success is often difficult to predict and the distribution of returns on investment is highly skewed (Scherer, 2001b). While, in theory, the government can manage this uncertainty through post hoc rewards or prizes, the government will have difficulty in many circumstances calibrating the reward to the social value contributed by the creator or inventor. These characteristics give rise to the information-asymmetry justification for intellectual property rights. The government’s relative ignorance about the incentives required to lure particular creators or innovators into the information production and distribution game and to keep them in it justifies the social costs imposed by intellectual property rights. Inventors or creators will have, on average, marginally better information about their potential success in the markets for their respective intellectual outputs, and government

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380  Research handbook on the economics of IP law volume 1 strategies for socializing this private information through some form of mechanism design or otherwise are not likely to fully succeed. For this reason, increasing an innovator’s ability to exclude (or at least deter) competitors through exclusive rights is superior to a reward system because the intellectual property system is driven by the marginally superior private information that innovators enjoy (Kitch, 2000; Lunney, 2003; Shavell and van Ypersele, 2001). The cognate risk-spreading justification focuses on the costs of failure. If the government opts for direct procurement of innovation through employment or grants, the government assumes the risk of incurring these costs. Intellectual property rights spread this risk among potential rightsholders, who either may fail to produce information that qualifies for protection or who may succeed in acquiring rights only to have the market deem these rights worth less than the cost of acquisition. Spreading the risk of failure among investors with relatively superior private information is likely to allocate resources marginally more efficiently than concentrating this risk in the government. Some argue that the risk-spreading justification is not a persuasive comparative justification for the intellectual property strategy because the reward or prize strategy also enables the government to spread the risk of failure among potential innovators while avoiding the social costs of intellectual property rights. However, prizes or rewards must be designed to produce the desired expected value in the mind of innovators and creators, and there are three types of risk that the government must manage: (1) identifying the kinds of inventions and creative works eligible for reward; (2) identifying the stage of development at which to grant rewards; and (3) quantifying the reward. The prize or reward strategy concentrates the risk of error in any of these three decision points in the government. When designing intellectual property rights, the government still risks error at each of these same decision points, but the magnitude of risk is reduced because markets enabled by intellectual property rights have flexible features that correct to some degree for misallocation of rights. These markets potentially spread decisions about which risks should be undertaken and who should bear them. Markets also spread discipline for those who waste assets in pursuit of creative or innovative goals. Finally, a less tangible risk that intellectual property rights spreads is the risk of counterparties cheating. For a prize or reward strategy to succeed, potential innovators must trust that the government will pay when a reward has been earned. In the markets enabled by intellectual property rights, the potential sources of revenue are spread among consumers, and the risks that they will take valuable information without paying also is spread. One significant limit on the efficiency of markets enabled by intellectual property rights should be recognized. The gap between willingness-to-pay and ability-to-pay poses a significant obstacle for the standard argument favoring decentralization through private investment and market exchange and is a drawback that receives insufficient attention in the literature (Frischmann, 2001). The information and product markets supported by intellectual property rights operate on the basis of users’ ability to pay rather than willingness to pay to reflect the social value of innovation. As a result, the innovations or innovators selected for reward by market exchange will skew toward the interests of those with an ability to pay. Using prices to allocate access to goods and services does not accurately reflect how relatively important this access is to different individuals because of the declining value of the marginal dollar (Shaver, 2014).

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Tailoring intellectual property rights to reduce uniformity cost  381 Reliance on patents to facilitate financing of drug discovery is the case that draws the most attention to the selection effects of ability to pay. The patent system directs significant resources to the discovery and development of so-called ‘me-too’ and ‘lifestyle’ drugs for which wealthy consumers in industrialized economies are able to pay a hefty premium (Love and Hubbard, 2007). These resources are not directed toward discovery and development of cures for tropical diseases because the likely beneficiaries lack the ability to pay such premiums, even though their willingness to pay for a drug that would keep a child alive almost certainly is greater than what an aging consumer in the industrialized world would be willing to pay to enhance his or her sexual performance (Fisher and Syed, 2006). The likely distortionary effects on resource allocation that follow from the gap between willingness-to-pay and ability-to-pay for innovation should serve as a signal for policymakers when choosing the right mix of intellectual property and direct-compensation approaches. For fields of creativity or innovation in which the gap is significant, the direct-compensation strategy, coupled perhaps with a tax strategy, is likely to perform better (Saulo et al., 2008). In sum, as against a centralized government compensation scheme or prize fund, the intellectual property strategy offers the benefits of decentralization (Lunney, 2003; Wu, 2006). This strategy harnesses the sometimes superior private information that creators and innovators have about the value of their cultural or technological contributions and spreads the risk that they and their financial backers may be mistaken about the practical feasibility of a creative or innovative idea and about its market valuation if realized (Knight, 1921). It also spreads the risk of mismeasuring the timing or amount of reward necessary to induce desired innovations and creative works. The social cost of this strategy is that resources are channeled to innovations likely to serve those with an ability to pay, and these innovations are likely to be underutilized by those who are priced out of the market by monopoly prices or by those who are denied licenses because the transaction costs are too high or the rightsholder refuses to license. The market also is likely to skew toward production of consumption information goods rather than productive information goods because of the problem of valuing positive spillovers (Frischmann and Lemley, 2007). After balancing these costs and benefits, policymakers must then assess whether whatever net benefits this strategy yields are comparatively worth the administrative cost. The literature is relatively silent about how the above justification for the intellectual property strategy informs the institutional design of intellectual property rights. The consensus supports the proposition that the subject matter, scope, and duration of intellectual property rights should be no more robust than necessary to induce the desired level of investment in cultural and technological innovation (Fisher, 1998; Lunney, 2003; Wasserman, 2013). Some scholars disagree about the degree to which the scope of intellectual property rights can explain market behavior (Duffy, 2005; Lemley, 2005). And, most commentators recognize that the magnitude of the appropriability problems that these rights are designed to remedy varies considerably across and even within industries (Burk and Lemley, 2009; Cotropia and Gibson, 2010). From these two propositions, one would expect an institutional design that relies on context. Instead, two aspects of current law are generally assumed rather than justified: (1) patents and copyright appropriately offer different levels of protection (Dinwoodie, 2010; Karjala, 2003; Long, 2004); and (2) within each branch of law, exclusive rights are generally uniform across all protected subject matter.

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III.  THE PROBLEM OF UNIFORMITY COST From a theoretical perspective, this policy of one-size-fits-all patents and copyrights necessarily is inefficient (Carroll, 2007). In particular, this policy imposes a uniformity cost on society, defined as the social costs attributable to the misalignment between the general level of exclusion provided by uniform rights and the specific level of exclusion that would be optimal with respect to any given author or inventor (Carroll, 2007; Lunney, 2003). Early literature recognized uniformity cost with respect to certain dimensions of intellectual property rights—in particular the costs imposed by a uniform patent term (Cornelli and Schankerman, 1999), discussed more fully in Chapter 13 of volume II (Love, 2018). But, the generality of the problem and modes of analysing solutions beyond formal modeling are more recent developments. Lunney (2003) models uniformity cost by assessing the trade-offs between strictly uniform rights, rights tailored to individual innovations, and certain intermediate options. Adams (2002) adds that an economy’s technological capacity must also be considered when assessing these options. At bottom, Lunney shows that ‘[e]ven where an innovative product represents the most valuable use of available resources . . . an optimal uniform scheme of protection will provide protection that will leave some desirable innovative products unprofitable’ (Lunney, 2003; Abramson, 2001). Carroll’s (2007) model applies to both patents and copyrights to similar effect. Bracha and Syed (2014) and Cotropia and Gibson (2010) refine the description of both static and dynamic uniformity cost. Some empirical data provide industry-specific examples of uniformity cost. Mansfield (1986) interviewed research and development managers from 100 randomly selected firms to ask what percentage of each firm’s inventions would have been developed and brought to market in the absence of patent protection. Although any counterfactual query introduces certain biases and uncertainties, especially when posed to interested parties, Mansfield’s data indicate that: (1) a significant percentage of inventions would have been developed and brought to market without the prospect of patent protection; (2) this effect varies significantly by industry; and (3) the availability of protection resulted in 80 percent of patentable inventions being patented in industries with high patent-dependencies (pharmaceuticals, chemicals, petroleum, machinery, and fabricated metal products) and 60 percent of inventions being patented in less patent-dependent industries (primary metals, electrical equipment, instruments, office equipment, motor vehicles, rubber, and textiles) (Mansfield, 1986). Similar results have been found in the semiconductor manufacturing industry (Hall and Ziedonis, 2001; Ziedonis, 2004). Similarly, W. Cohen et al. (2000) and Levin et al. (1987) found respondent R&D managers in their respective surveys to be skeptical about the contribution of patents to the firm’s ability to ­appropriate returns on investment. The scope of the uniformity-cost problem is exacerbated by the fact that the distribution of rewards from both cultural and technological innovation is highly skewed (Scherer, 2001b; Scherer et al., 2000). For example, uncertainty about demand or about feasibility leads recording companies, motion picture studios, pharmaceutical companies, and biotechnology research firms to invest millions of dollars that will never be recouped in innovation (Grabowski, 2002; Mansfield et al., 1977). In these industries, profits from chart-topping songs, blockbuster movies, and blockbuster drugs must be sufficient to cover the losses incurred on other investments (DeVany and Walls, 2004). Consequently,

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Tailoring intellectual property rights to reduce uniformity cost  383 industries such as these demand robust intellectual property rights to maximize the profitability of successful innovations. When these rights apply uniformly, the social costs are magnified.

IV.  THE ARGUMENT FOR ONE-SIZE-FITS-ALL The literature lacks a clear defense of uniform patents and copyrights that responds to the uniformity-cost problem. This section attempts to extrapolate the best economic argument for adopting one-size-fits-all patents and copyrights from the basic justification for intellectual property, at least as a matter of initial entitlement design. Acknowledging that uniform rights are a second best approach to institutional design, the argument for uniformity, at bottom, is that resort to the second best in both cases is grounded in the same information-asymmetry and risk-spreading justifications (DeBrock, 1985). For the government to tailor rights according to subject matter (e.g., software) or the status of the innovator (e.g., a university researcher), the government would require some basis for distinguishing among classes of innovation or innovators. The informationasymmetry justification for intellectual property rights also justifies adopting uniform rights targeted at the average level of exclusion needed to stimulate the desired level of investment in innovation throughout the economy. The government initially lacks the information necessary to make principled distinctions among innovators or classes of innovation. Moreover, innovation is inherently dynamic (Merges and Nelson, 1990). Even if the government were able to gather information sufficient to make a principled distinction between the rights accorded to innovation category A and innovation category B, the boundaries of those categories are likely to change and are subject to legal arbitrage (Burk and Lemley, 2009). Technology-specific or subject matter-specific laws will become outdated quickly and therefore fail to provide the efficiency gains sought by tailoring rights. The uniform rights proponent, acknowledging difficulties in measuring the total social costs of intellectual property rights, is likely to rely on an intuitive sense that evidence of robust intellectual property licensing activity combined with legal entrepreneurship to reduce transaction costs through innovative licensing structures means that the magnitude of uniformity cost is not significant enough to justify very much tailoring. The proponent is likely to argue that broadly defined uniform rights facilitate licensing and enforcement, and so the policy choice really is one between tailoring through public or private ordering. On this view, the intellectual property system is rendered more administrable through broadly defined rights. Smith (2007) and Long (2004) each offer versions of this argument. Acknowledging the theoretical case in favor of rewards or perfectly tailored rights, Smith (2007) concludes that broadly defined rights of exclusion are more efficient in practice because they render a complex innovation system wieldy by limiting the information required by officials entrusted to administer it. On his view, rights of exclusion create a modular system in which those who administer it must only attend to boundaries and need not gather information necessary to govern activities taking place within the boundaries. Long (2004) similarly concludes that the administrative benefits of uniform rights in the patent system outweigh the benefits that more finely tailored rights would provide.

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384  Research handbook on the economics of IP law volume 1 For example, she acknowledges that certain classes of patentable subject matter, such as business methods and software, are qualitatively different from the paradigmatic inventions that informed the structure of patent’s uniform rights. She recognizes that tailoring might reduce the information costs associated with transactions and enforcement. She nevertheless concludes that the trade-offs associated with tailoring rights may not be cost-justified on information-cost grounds. Others argue that the benefits of broadly defined rights are illusory, particularly with respect to patent scope, and that tailoring could improve efficiency in multiple contexts (Bessen and Meurer, 2009; Carrier, 2007; Sarnoff, 2004). All participants in this debate agree that weighing the relative administrative costs, including transaction costs, of a system of broadly defined or more tailored rights is largely an empirical matter. Certain considerations of political economy also counsel in favor of uniformity as the default position for domestic policy.1 The strongest argument is that domestic uniformity increases the costs of rent-seeking by industries and other interest groups. Copyright and patent legislation serves for some as a paradigm public-choice case because such legislation generally is the product of bargaining among industry groups with little or no user or consumer representation because they cannot overcome the costs of collective action (Litman, 2001; Patry, 1996). Commentators suggest that interest group involvement in copyright and patent legislation has intensified in recent years (Burk and Lemley, 2003; Merges, 2000). With uniform patents or copyrights, legislative change must submit to what Olson (1989) calls the ‘iron law of consensus,’ by which all industries affected by the law must agree for an amendment to pass through the many veto points in the legislative process. The argument holds that even if a particular tailoring measure would produce a superior partial equilibrium, legislative practice that would routinely grant additional rewards or create special carve-outs for individual interest groups would intensify the social costs resulting from successful rent-seeking already apparent in the process (Long, 2004). One final argument a uniform rights proponent might rely on—advanced primarily and independently by Abramowicz (2004, 2005, 2011) and Yoo (2004)—is that the overall social costs of intellectual property, at least in copyright law, are less than often claimed because monopolistic competition tends to dissipate copyright-generated rents and that broader rights might better manage this competition while driving price close to marginal cost. If this is correct, then even if uniformity cost remains a component of copyright’s social cost, its magnitude is small enough to be tolerated. Bracha and Syed (2014) agree that copyright may be attracting inefficient entry, but they assert that this is an ineluctable

1   The argument for the relative efficiency of domestic uniformity is distinct from the political economy argument for uniform rights in international law. Evidence that would support the political discipline argument for domestic legislative policy does not equally support the argument for international harmonization. On the contrary, the average level of exclusion needed in any particular economy will vary in part on the extent to which it is a net importer or exporter of goods or services embodying protected information (Scotchmer, 2004). Thus, the push for international harmonization, which imposes the same average level of exclusion and is now encoded in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), can be viewed as successful rent-seeking spearheaded by multinational rightsholding corporations headquartered in the United States, Europe, and Japan (Braithwaite and Drahos, 2007; Correa, 2006; Rajec, 2013).

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Tailoring intellectual property rights to reduce uniformity cost  385 by-product of granting copyright owners rent-generating power over price. From the uniform rights perspective, although these commentators draw opposing conclusions about proper doctrinal responses, their proposals favor a general rather than tailored approach to managing entry through the design of exclusive rights.

V.  MINIMIZING UNIFORMITY COST Other commentators are less sanguine about the relative efficiency of uniform rights. Emphasizing the need to devise institutional design approaches that minimize uniformity cost, these commentators have drawn attention to three undertheorized strategies already found in contemporary patent and copyright law. A.  Tailoring Through Private Ordering Implicit in the case for uniform exclusive rights is recognition of three features of market exchange that mitigate uniformity cost: demand elasticity, price discrimination, and Coasean bargaining (Carroll, 2009). As Arrow (1962) recognized, the social costs of intellectual property rights arise only when there is demand for protected information (Mansfield et al., 1977). Along with the other social costs of intellectual property, uniformity cost rises with demand (Carroll, 2009; Lunney, 1996). Even when uniformity cost arises, under traditional economic analysis, perfect price discrimination theoretically would eliminate the underdistribution of protected information. That is, if intellectual property owners are able to engage fully in first-degree price discrimination—selling or licensing to each user willing to pay more than marginal cost—static deadweight loss would be zero (Demsetz, 1970; Kaplow, 1984; Shapiro and Varian, 1999). As others have shown, however, even as a matter of theory, perfect price discrimination would not eliminate all social costs of intellectual property rights (Bhaskar and To, 2004; Cohen, J., 2000; Edlin et al., 1998; Frischmann, 2005; Lunney, 2008; Meurer, 2001). Moreover, even if perfect price discrimination would theoretically avoid reduction in social value, perfect first-degree price discrimination in the intellectual property context is a practical impossibility (Farber and McDonnell, 2003; Yoo, 2004). Finally, when demand is positive and price discrimination is imperfect, the Coase Theorem asserts that uniformity cost will affect allocative efficiency only if reallocation or reapportionment of uniform entitlements by contract is too costly (Coase, 1960). Through licensing and non-enforcement of intellectual property rights, those who need to use another’s information will obtain access and the practical ability to use it. Most commentators agree that difficulties in valuing patents and copyrights raise transaction costs to the point that allocative efficiency will depend upon how the subject matter, scope, and duration of intellectual property entitlements are defined (Barnett, 2009; Burk and McDonnell, 2007; Burstein, 2012; Carroll, 2009; Long, 2000). This is particularly true because the externalities that justify patent and copyright law differ fundamentally from those that inspired Coase (Lemley, 2005), and the law’s choice is not between granting an entitlement to party A or to party B, but between granting an entitlement to party A or to the public at large, comprised of an unknown and often unknowable proportion of

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386  Research handbook on the economics of IP law volume 1 higher- and lower-valued users (Carroll, 2009). Consequently, allocative inefficiency in intellectual property law potentially imposes a far more significant social cost than it does with respect to tangible property (Frischmann and Lemley, 2007). B.  Standards Instead of Rules Intellectual property law defines the exclusive rights in patent and copyright law through a mix of rules and standards.2 Duration is defined primarily by rules, although some commentators have shown that courts can use their discretion over scope to limit or enhance the effective duration of protection (Hughes, 2003; Liu, 2002). As is discussed below, the patent system mitigates the uniformity cost that arises from rules’ inflexibility by using real options to vary the actual distribution of protection (Weeds, 2001). With respect to scope, however, patent and copyright laws define rights with flexible standards that allow relevant decisionmakers to minimize uniformity cost. Legal standards confer interpretive discretion on adjudicators and, generally, the more broadly a standard is stated, the more discretion adjudicators have. This interpretive discretion can be deployed ad hoc or systematically. With respect to the scope of intellectual property rights, courts can choose to use flexible doctrines to strike the incentives-access balance either on a per-work (Cooper, 1993) or per-invention basis, or more broadly along industry-specific or technology-specific lines (Burk and Lemley, 2009; Wagner, 2003). With regard to subject matter, for example, courts have a certain amount of discretion to determine whether a work is sufficiently original or to draw the line between unprotected idea and protected expression (Hardy, 2001). Similarly, determining whether a process is protectable or whether a biological organism is a ‘machine,’ a ‘manufacture,’ or ‘composition of matter,’ requires the exercise of interpretive discretion through which the courts can tailor protection. i.  Standards in patent law Burk and Lemley (2009) argue that this is where the solution to the problem of uniformity costs lies—at least in patent law. In sum, they argue: (1) that a purely unitary patent system no longer fits the extraordinarily diverse needs of innovators in today’s technology industries; (2) that the solution is not to split the patent system into industry-specific statutes, but to tailor the unitary patent rules on a case-by-case basis to the needs of different industries; and (3) that it is the courts, not Congress or the United States Patent and Trademark Office (USPTO), that are best positioned to do this tailoring. In patent law, the formally uniform statutory definition of patentable subject matter is

2

  For present purposes, the following definitions make the point:

  1. Rules—A legal directive is ‘rule’-like when it binds a decisionmaker to respond in a determinate way to the presence of delimited triggering facts.   2. Standards—A legal directive is ‘standard’-like when it tends to collapse decisionmaking back into the direct application of the background principle or policy to a fact situation (Sullivan, 1992).   The rules/standards literature is substantial (Kaplow, 1992; Kelman, 1987; Kennedy, 1976; Posner, 1997; Radin, 1989; Rose, 1988; Schauer, 1991; Schlag, 1985; Sunstein, 1995).

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Tailoring intellectual property rights to reduce uniformity cost  387 broadly stated. Courts could use this to identify categorical exclusions from patentable subject matter, but courts have resisted invitations to do so other than for ‘abstract ideas, natural phenomena, and laws of nature.’ As a result, in the name of uniformity, the courts have extended patent protection to living organisms (Diamond v. Chakrabarty, 447 U.S. 303, 308–9 (1980)), methods of doing business (State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998)), and software (AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d 1352, 1356 (Fed. Cir. 1999)). Nonetheless, courts retain discretion to reduce uniformity cost on a per-patent basis through flexible subject matter doctrines including the limitation on patenting ‘abstract ideas’ (O’Reilly v. Morse, 56 U.S. 62 (1853)), the utility doctrine (Burk and Lemley, 2009), novelty’s requirement of a prior ‘public’ use (Bernhardt, L.L.C. v. Collezione Europa USA, Inc., 386 F.3d 1371, 1381 (Fed. Cir. 2004)), and the non-obviousness standard (35 U.S.C. § 103). Application of other eligibility doctrines, such as the disclosure requirements of enablement, and written description, as well as the triggers for statutory bars, all supply tools for the courts to assess and reduce uniformity cost (Burk and Lemley, 2009). For example, non-obviousness and the disclosure doctrines vary to a certain degree along technology-specific or industry-specific lines because these are applied with reference to a ‘person having ordinary skill in the art’ (PHOSITA) (Burk and Lemley, 2002, 2009; Kesan and Gallo, 2006; Wagner, 2004). When specifying eligibility through the PHOSITA device, the law requires a court or a patent examiner to make a variety of judgments concerning the level of skill in the art and the set of background knowledge that the PHOSITA would be able to rely upon when drafting or reading a patent (Burk and Lemley, 2002, 2009). Allison and Tiller (2003) note that ‘[w]hen one realizes that an ordinarily skilled practitioner may range from an experienced mechanic or electrician to a person with a Ph.D. and much experience in molecular biology or computer science, the conclusion is inescapable that not all rules can be applied exactly the same in every case.’ The courts can and do vary patent eligibility for different industries or technologies by the amount of information and the kinds of technical skills that a patentee can incorporate by reference (In re GPAC, Inc., 57 F.3d 1573, 1579 (Fed. Cir. 1995)). Reliance on the PHOSITA also provides a basis for tailoring patent scope, particularly through the doctrines of non-obviousness, enablement, and written description (Burk and Lemley, 2002, 2009; Eisenberg, 2004; Merges and Nelson, 1990). Patent scope also can vary along industry-specific or technology-specific lines through application of the doctrine of equivalents (Cohen, J., and Lemley, 2001; Cotropia, 2005). Finally, in the case of patent injunctions, the flexibility in the standard for relief should lead to industryspecific patterns because of industry-specific differences in facts that are salient under the standard (Carroll, 2007; Sarnoff, 2009). ii.  Standards in copyright law Copyright law also uses standards to define the subject matter and scope of its exclusive rights to reduce uniformity cost. With respect to subject matter, copyright law provides courts with even greater doctrinal flexibility than does patent law. Principally, these doctrines are the idea/expression dichotomy, the functionality exception, and the merger doctrine. Copyright applies only to the author’s original expression and not the abstract ideas embodied in the copyrighted work (17 U.S.C. § 102). Likewise, facts are not copyrightable but an author’s expression in relating facts usually will be sufficiently original

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388  Research handbook on the economics of IP law volume 1 to be copyrightable. Similar line-drawing difficulties arise and may be resolved differently depending on subject matter. The merger doctrine holds that if there are limited means to express ideas or facts, then the expression merges with the uncopyrightable element and the whole of the author’s work is either uncopyrightable or the copyright in the expression is unenforceable (Joyce et al., 2016). The functionality doctrine is related to the merger doctrine and holds that protection for expressive sculptural, pictorial, and graphic works that are combined with functional goods is limited only to expressive elements that are physically or conceptually separable from the functional good (17 U.S.C. § 101). The scope of rights under copyright is determined in relation to a number of context-sensitive standards. For example, whenever the defendant’s work does not literally reproduce the plaintiff’s work, the court must resolve whether the two works are ‘substantially similar’ from the ‘ordinary observer’s’ perspective (Samuelson, 2013). Both of these judgments are context-sensitive and can be applied to reduce uniformity cost. The most notable example of a court using this flexibility is Computer Assocs. Int’l, Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992), which endorsed the use of an abstractionfiltration-comparison method for determining substantial similarity in software cases. Even when literal copying takes place, the copyright owner’s rights are limited by flexible standards, such as fair use (17 U.S.C. § 107). This doctrine is flexible enough to grant courts substantial tailoring discretion (Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 552 (1985)), as are less-frequently invoked infringement doctrines such as de minimis use (Newton v. Diamond, 388 F.3d 1189, 1193–4 (9th Cir. 2004)), scènes à faire (Walker v. Time Life Films, Inc., 784 F.2d 44, 50 (2d Cir. 1986)), and the useful article doctrine. Moreover, courts have license to be flexible with the choice of a remedy (17 U.S.C. § 502(a)). C.  Tailoring Through Real Option Pricing To further minimize uniformity cost, intellectual property law supplements the private tailoring of intellectual property rights through market exchange by using ‘real options’ in entitlement design. Policymakers have three choices when allocating entitlements: (1) directly granting the entitlement to all eligible holders; (2) granting an option to acquire the entitlement to all eligible holders (a call option); or (3) granting multi-tiered options to acquire the entitlement, that is, an automatic grant of an option to acquire an option to acquire the full entitlement, etcetera (Ayres, 2005). Whenever intellectual property law requires potential owners to take affirmative, costly acts to acquire, maintain, or enforce their rights, it effectively requires these potential owners to place an option value on the prospect of protection. When the option price exceeds the owner’s expected value, the owner will forgo or give up their rights, thereby reducing uniformity cost (Carroll, 2006). Option prices also reveal information about the value of the entitlement. One goal of entitlement design can be to force private actors to reveal their private valuations of options regulated by legal rules (Fennell, 2005). In patent and copyright law, call options serve two important economic functions: (1) limiting the number of entitlement holders and thereby reducing social costs by tailoring the number of entitlements granted; and (2) producing coarse-grained information about the private valuation of the entitlement. Of course, the substantial cost of litigation also functions as a real option that can either reduce or increase uniformity cost (Depoorter and Walker, 2013).

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Tailoring intellectual property rights to reduce uniformity cost  389 Patent law deploys call options along both the subject matter and duration dimensions. With respect to subject matter, not every inventor of a new, useful, and non-obvious process, machine, manufacture, or composition of matter receives a patent because a potential patentee must undergo a time-consuming and expensive process to prosecute his or her claim to a patent (Long, 2002). The potential patentee must assess the option value or strike price of patent protection and compare that to the costs of exercising the option through patent prosecution (Lemley and Sampat, 2008). The option value of patent protection in a given case usually is comparative because the potential patentee generally also has the options to keep trade secret protection or acquire the benefits of defensive publication (Eisenberg, 2000; Denton and Heald, 2003). When a potential patentee forgoes protection, society is spared the associated costs. Real options reduce uniformity cost by filtering out low-value inventions across all industries (Long, 2002). Empirical research indicates that real options also reduce uniformity cost because the value placed on patent protection generally varies by industry (Cohen, W., et al., 2000; Levin et al., 1987). Call options in the form of maintenance fees effectively tailor patent duration (Lunney, 2003). A patent owner’s decision not to pay the relatively modest maintenance fees is a decision to dedicate the invention to the public domain. One study shows that the owners of more than half of all patents choose to dedicate their inventions to the public domain prior to the expiration of the full 20-year term (Moore, 2006). Data for fee payments during the ten-year period from 1994 to 2003 show that, on average, 18 percent of patent owners placed little value on their patents and permitted protection to lapse at the 3.5 year mark; 42 percent of patent owners who had proceeded past the first stage chose not to extend protection at the 7.5 year mark; and of those patentees who previously had purchased extended protection fully, 64 percent chose to end the patent term at the 11.5 year mark (Parchomovsky and Wagner, 2005). A more recent study of patents allowed to expire between January 1, 2008 and December 31, 2012 found that among this group, patent expiration generally coincided with the due date of the second maintenance payment (mean age of 8.18 years), but that there was some variation by patent class (O’Donoghue, 1998; Vishnubhakat, 2015). By viewing these rules as filters, the uniformity-cost perspective reframes at least two debates that have engaged economically oriented scholars. First, the ‘patent quality’ debate can be recast as a debate about setting the right price for the option of patent protection. Most commentators appear to agree that some real option should be placed on patent acquisition (Partnoy, 2001). There also seems to be consensus that the option price should be relatively high, by requiring prosecution and examination rather than mere registration (Duffy, 2002; Ghosh, 2004; Kieff, 2003). Most scholarly debate has focused on whether the mesh of the current examination filter should be made smaller to restrict the flow of invalid patents into the system (Ghosh and Kesan, 2004). Alternatively, the examination option could be tiered to force greater revelation of an inventor’s private valuation of the invention (Lemley et al., 2005). In general, improving quality control in the USPTO would tend to increase the option value necessary to make pursuing patent protection cost-justified.3

3   The portfolio strategy used by many firms suggests that the option value has to be calculated not only in reference to potential revenues from the exploitation of individual inventions but also

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390  Research handbook on the economics of IP law volume 1 Second, as is explained more fully in Chapter 13 of volume II, the extensive economic literature on optimal patent duration generally overlooks the role of real options either by assuming a uniform term or contemplating variability without analysis of how it might be implemented (Love, 2018). Some analysts seek to make the case for the efficiency of a uniform term, not recognizing that real options render actual terms heterogeneous (McFetridge and Rafiquzzaman, 1986). The bulk of the literature, however, demonstrates theoretically that uniform duration for all patents is inefficient because optimal patent life is conditional (Berkowitz and Kotowitz, 1982; Nordhaus, 1969) and that patent terms should be tailored to vary by industry (Gallini, 1992; Dore et al., 1993; Scherer, 1972; Waterson, 1990; Wright, 1999) or per invention (Dasgupta and Stiglitz, 1980; DeBrock, 1985; Denicolò, 1996; Gilbert and Shapiro, 1990). The uniformity-cost perspective suggests that future research on the patent system should analyse option pricing rather than either assuming a uniform term or modeling per-invention variability (Scotchmer, 1999; Duffy, 2003). In copyright law, the uniformity-cost perspective reveals how recent changes that eliminate or constrict real options have increased its social costs. Policymakers reduced the effectiveness of the filtering function that the registration-and-notice requirements played when the United States chose to adhere to the Berne Convention, which requires that member states grant the entitlement itself rather than an option to acquire the entitlement (17 U.S.C. § 102(a)). Current law, however, has not entirely abandoned real options. Instead, authors of works in the United States must still register their respective claims to copyright to enforce their rights in federal court (17 U.S.C. § 411(a)), and they have the option to abandon protection through public dedication (Patry, 2016). Matters are worse with respect to copyright duration. Until 1976, copyright law divided duration into two terms, which served to vary the effective term of protection because the renewal procedure acted as a real option similar to patent law’s maintenance fees. The Copyright Act of 1976 removed this filter by adopting a life-plus-fifty term, recently extended to life-plus-seventy (17 U.S.C. § 302). This change has rendered the duration dimension of copyright law particularly insensitive to context, as was made evident by the economists’ submissions to the Supreme Court in Eldred v. Ashcroft, 537 U.S. 186 (2003). The increase in social costs imposed by a substantively uniform term of copyright protection led even Landes and Posner, who had once praised the life-plus-fifty term as economically efficient (Landes and Posner, 1989), to call for reestablishing a real option along copyright law’s duration dimension (Landes and Posner, 2003). The full range of tailoring through real options as a policy tool to reduce uniformity cost has not been explored in the literature. Although some commentators have wrestled with the merits of registration versus examination procedures along the subject matter dimension, and others have discussed the relative merits of renewable terms or maintenance fees along the duration dimension, few have discussed how the benefits of real options could be realized along the scope dimension of copyright or patent entitlements. Consider the scope of copyright law, for example. Copyright prohibits four kinds

from revenues associated with the marginal increase in portfolio value (Parchomovsky and Wagner, 2005). Portfolio value likely varies by industry, particularly because some individual pharmaceutical patents carry significant value (Allison et al., 2004).

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Tailoring intellectual property rights to reduce uniformity cost  391 of copying: (1) complete duplication; (2) partial duplication; (3) creation of a work substantially similar to the whole; and (4) creation of a work with a substantially similar part (Patry, 2016). At a minimum, a copyright owner should receive the right to prohibit complete duplication as part of the initial grant if copyright is to serve as any kind of solution to the appropriability problem. It would be possible to impose a call option filter by conditioning the grant of the right to control the other three kinds of copying on either payment of a modest fee and/or registration of the claim to control these uses. Even though scope options potentially would reduce uniformity costs, the administrative costs of implementation could be quite significant. Bell and Parchomovsky (2014) have focused on the potential for scope options, arguing that real options could completely mitigate uniformity cost. In their model, inventors and authors would be required to register to opt in to patent or copyright protection. The registrant would receive the current entitlements for a one-year period, after which continued protection would require re-registration. At re-registration, the registrant would be offered tailored packages of rights that would rely on current law but unbundle the exclusive rights, types of infringers, period of protection, and remedies. The packages would be paid for at the time of enforcement and priced at some percentage of the price of infringement. In defending their claim, the authors rely upon, but partially misconstrue, some of the uniformity-cost literature.4 In sum, real options are a useful mechanism for reducing uniformity cost, and there is need for continued research into the performance of existing options as well as research that would support greater use of options and option pricing as means of reducing uniformity cost. Exploration of option designs that would affect the scope of intellectual property rights seem to be particularly rich in possibility.

VI.  TAILORING EXCLUSIVE RIGHTS Explicitly tailoring intellectual property rights is a more direct strategy for minimizing uniformity cost than relying on the application of standards or the filtering effects of

4   Bell and Parchomovsky (2014) position their model as a superior alternative to Burk and Lemley’s (2009) argument for judicial tailoring in patent law or Carroll’s (2009) evidentiary taxonomy for tailoring patent and copyright law. In this author’s view, Burk and Lemley do not argue for judicial tailoring to the exclusion of other forms of uniformity-cost mitigation. This author’s prior work is misconstrued in two ways. First, the economic justification for uniform rights set forth in prior work and reprised above in this chapter is an attempt to extrapolate from economic first principles the argument that would justify a one-size-fits-all policy response to a problem known to vary significantly across and within industries. Although widely assumed in the literature, the assumption has not been explicitly defended except in the work of Smith and Long cited above. This is an attempt to give the best version of the explicit argument, but it is not this author’s intent to persuade the reader with the argument. Second, identifying the economic conditions favorable to tailoring, described in Carroll (2009), was part of a larger analysis of existing policy strategies for mitigating uniformity cost. Bell and Parchomovsky treat the tailoring framework in isolation without engaging with the discussion of this author’s endorsement of the real option strategy—and the opportunity to explore scope options in particular—set forth in prior work (Carroll, 2006).

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392  Research handbook on the economics of IP law volume 1 real options. However, this strategy usually also requires a stronger justification than use of flexible standards or real options because of the information asymmetries between creators and policymakers. For this discussion, tailoring intellectual property rights means varying the subject matter, scope, or duration of intellectual property rights for some defined subject matter or for specific categories of creators (e.g., federally funded researchers) or users (e.g., musicians making a sound recording of a musical composition). The policy tools to tailor rights include: (1) legislation; (2) judicial interpretation and evidentiary presumptions; and (3) administrative rules, statutory interpretation, and adjudication. Tailoring proponents argue that the information-asymmetry objection is overstated and that, in a dynamic system, rules change in response to lessons rulemakers learn about the effects of prior decisions. The economic analysis of intellectual property law lacks a model of a general information feedback framework for assessing and adjusting regulation, by, for example, tailoring the law. But, even without such a model, a framework for assessing when the government has sufficiently reliable information to justify tailoring can be inferred from the work of a number of commentators. All three forms of tailoring already are present in current law, but there is no general theory of tailoring by which these measures can be assessed for their economic efficiency. Unless one is committed to the view that all existing forms of tailoring must be the product of successful rent-seeking, it is important to develop a framework for assessing the economic effects of existing and proposed tailoring measures. Examples of existing legislative tailoring measures include those that apply sui generis rights to certain subject matter (17 U.S.C. §§ 901–14; Kastenmeier and Remington, 1985), as well as certain provisions of the Patent Act applicable to the term of patent for certain pharmaceutical drugs (35 U.S.C. § 155), that are aimed at overcoming differential treatment caused by regulatory approval processes (Outlook, 2009) and making uniform the effective term of protection (Lunney, 2003). In patent law, the Hatch-Waxman Act grants immunity for a generic drug manufacturer’s use of a patented invention to pursue regulatory approval for a drug to compete with a patented drug six months prior to the patent’s expiration, making it likely the most economically significant tailoring measure (35 U.S.C. § 271(e)). Also potentially significant is the Bayh-Dole Act, which permits grantees to pursue patent protection for inventions created with the support of federal funds but limits scope by providing the government with ‘march-in’ rights (35 U.S.C. §§ 200–212). This tailored measure is specifically aimed at reducing uniformity cost. Federal grantees face differential appropriability problems because the government has supplied both direct financial support and exclusive rights to induce the investment. Congress also has tailored the scope of process patents for medical method claims and business method claims in response to perceived uniformity costs (35 U.S.C. §§ 273, 287(c)), and has indirectly eliminated patents on tax strategies by declaring them to be in the prior art (Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 § 14(a) (2011)). In the Copyright Act, Congress has tailored the scope of protection, primarily by replacing the right to exclude with statutory licenses for certain uses of certain classes of works. Examples of these provisions include one that tailors rights in musical works to permit garage bands and other musicians the right to record cover versions of their favorite songs without the songwriter’s permission (17 U.S.C. § 115). Others tailor performance rights to permit cable and satellite companies to retransmit network television

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Tailoring intellectual property rights to reduce uniformity cost  393 programming without prior consent of the copyright owners (17 U.S.C. §§ 111, 119, 122). In addition, for certain authors, such as recognized visual artists, Congress has granted additional rights (17 U.S.C. § 106A), while for other classes of authors, such as architects (17 U.S.C. § 120) and authors of sound recordings (17 U.S.C. § 106(6)), Congress has limited the exclusive rights available. Similarly, Congress has limited the scope of rights in functional pictorial, graphical, or sculptural works (17 U.S.C. §§ 101, 113). Congress also has tailored copyright scope by identifying certain privileged users, primarily persons with visual disabilities, librarians, educators, and Internet service providers, who enjoy certain additional limits on liability or available remedies (17 U.S.C. §§ 110, 121, 504(c), 512). Liu (2004) and Wu (2005) have remarked upon how underanalysed these features of copyright law have been. Judicial tailoring is a built-in feature of intellectual property law. For the purposes of this chapter, judicial tailoring requires more systematic differentiation in the application or interpretation of formally uniform rights. For example, copyright law treats books and source code as literary works, which can be infringed by other works that are ‘substantially similar’ where there is evidence of copying. But the scope of how much expression the other work must borrow to fall within the zone of substantial similarity is noticeably different between the two types of literary work. The effectiveness of judicial tailoring for making intellectual property law more context-sensitive depends on the dimension of rights being adapted. Burk and Lemley (2009) argue in favor of judicial tailoring to reduce uniformity cost in patent law, particularly when applied to software and biotechnology. They further assert that the Federal Circuit already has applied the PHOSITA-based eligibility doctrines in technology-specific fashion to software and biotechnology inventions (Burk and Lemley, 2004, 2009). They argue that the Federal Circuit has not explicitly chosen to tailor patent law in this way, but that it should (Burk and Lemley, 2004, 2009). Some commentators reinforce their argument (Laakmann, 2012), while others disagree with their reading of the cases (Wagner, 2004). Others have extended the argument by identifying new flexible doctrines, primarily fair use for patent law, that should be introduced to facilitate judicial tailoring (O’Rourke, 2000; Strandburg, 2011), or how European patent law provides analogous policy levers (van Overwalle, 2011). Administrative tailoring has been implemented to a limited degree. Administrative tailoring has greater potential effect in patent law because protection does not commence until the USPTO has issued a patent, and tailoring can be accomplished during the examination process. As with judicial tailoring, mere differential treatment—such as the issuance of patents for obvious software inventions because of the absence of prior art—does not amount to administrative policy to tailor the subject matter or scope of protection to better balance incentives and access (Abramson, 2001). The USPTO also arguably applies the Patent Act in tailored fashion. For example, evidence shows that potential patentees in certain industries encounter more demanding prosecution than others, and that this is a relatively recent development (Burk and Lemley, 2009). Indeed, the USPTO’s examination guidelines for biotechnological inventions or business method patents reflect a tailored interpretation of the requirements of patentability (Allison and Tiller, 2003). Congress also responded to allegations of uniformity cost by delegating authority to the USPTO to conduct post-grant review of ‘covered business methods’ (Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284, 18(a) (2011)).

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394  Research handbook on the economics of IP law volume 1 In copyright law, Congress has delegated limited tailoring authority to the Copyright Office (17 U.S.C. § 1201(a)(1)(B); 17 U.S.C. § 1201(a)(1)(C)). For example, the Copyright Office’s determination that the deposit requirement for source code should be altered to enable copyright owners to enjoy both copyright and trade secret protection (37 C.F.R. § 202.20(c)(2)(vii)) is a tailoring of copyright law’s disclosure function. The Copyright Office has made the judgment that incentives are more important than access for software and implemented that judgment within the discretion granted by the Copyright Act (17 U.S.C. § 408(c)). Some argue that expanding an agency’s power to tailor copyright law would outperform legislative or judicial tailoring in some contexts (Greenberg, 2016). The fact that patent and copyright law have been tailored by all three branches of government suggests that the case for uniform intellectual property rights has some weaknesses. The cause for tailoring by policymakers must be either a response to rent-seeking by special interest groups, an ignorant but well-intentioned response to perceived uniformity cost, or an informed response to real and substantial uniformity cost. The effects of these measures must be that they: (1) increase the social costs of intellectual property rights by harming incentives, reducing access, or imposing additional administrative cost with no offsetting benefit; (2) do not affect the social costs of intellectual property rights because the tailored rights are of relatively little economic significance or because the degree of tailoring is minor enough to be immeasurable; or (3) make the intellectual property strategy more efficient by establishing a better fit between the appropriability problem and its solution either by accident or by design. The case for uniform intellectual property rights set forth above predicts that the motive to tailor is most likely rent-seeking, and that the likely effects have been either to make matters worse or to be relatively meaningless. But, perhaps, policymakers in the dynamic intellectual property system have made the law more efficient by responding to evidence of uniformity cost. Analysts currently lack a framework for assessing existing and proposed tailoring measures to ascertain their effects.

VII.  A FRAMEWORK FOR TAILORING From a range of commentary, one can glean a set of economic conditions that favor tailoring intellectual property rights. Most commentary focuses on the mismatch between the baseline uniform rights and the appropriability problem in different settings. These conditions include: A.  Alternative Incentives to Create or Innovate and Distribute The literature demonstrates that innovative activity has many complicated motivations, and society may receive the benefits of certain forms of innovation even without extending rights sufficient to induce a rational, selfish actor to innovate (Amabile, 1996; Cohen, J., 2007; Frey and Jegan, 2001). Moreover, even when one holds firm to the rational actor thesis, in some cases anticipated prestige, notoriety, or other ‘nonpecuniary income’ would serve as a sufficient return on the investment to induce initial production in the absence of copyright or patent (Burk and Lemley, 2009; Oliar and Sprigman, 2008; Raustalia and Sprigman, 2006; Rosenblatt, 2011; Shavell and van Ypersele, 2001). Alternatively,

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Tailoring intellectual property rights to reduce uniformity cost  395 the investment in initial production may serve as a loss leader to increase other revenue streams, such as speaker’s fees (Landes and Posner, 1989). Finally, firms in a competitive economy are under constant pressure to innovate to differentiate their products and services from their competitors even without the promise of exclusive rights (Baker, 2007). In copyright, for example, scholars and researchers do not receive royalties for their journal articles, and it is likely that they would continue to research and to write even without copyright in their articles because they receive direct compensation to do research and there are a variety of indirect benefits that flow from publication (Tuckman and Leahy, 1975; Shavell and van Ypersele, 2001). In patent law, there is a real question about whether the extension of patent rights to business methods was necessary on incentive grounds (Meurer, 2002; Samuelson and Schultz, 2011). Software is protected by patents, copyrights, and trade secrets. It is a favored target of tailoring proposals on multiple grounds, including the alternative incentive ground (Bitzer et al., 2007; Lerner and Tirole, 2002; Menell, 1986, 1989, 1994; Samuelson et al., 1994; Samuelson, 2011). B.  Alternative Appropriability Mechanisms Even when innovators and their investors require appropriability, the availability of alternative mechanisms to intellectual property rights may justify tailoring these rights. It is likely that tailoring will have to be done on an industry-specific or technology-specific basis (Levin et al., 1987). One alternative that commentators draw attention to is direct cost subsidies for innovators. Government funding is the most common form of these. In the United States, the federal government funds approximately 25 percent of research and development, and in OECD countries, public sector investment approaches 50 percent (Menell and Scotchmer, 2007). Tailoring protection for intellectual property arising from public investment is likely to be a reasonable response (Rai and Eisenberg, 2003; Golden, 2001). The Bayh-Dole amendments to the Patent Act (35 U.S.C. §§ 200–212) are the clearest signal that policymakers are at least nominally responsive to evidence-based arguments concerning the effects of direct subsidies. Responding to arguments that commercializers lacked sufficient incentives to build on unpatented discoveries made by federal grantees, Congress made clear that these grantees could seek and receive patent protection subject to some tailoring of scope to reduce the social costs of monopoly under particular conditions. In response to these developments, the patent literature has seen the emergence of two related cottage industries. One is specifically focused on proposals to revise the Bayh-Dole Act (de Larena, 2007; Eisenberg, 1996; Mireles, 2006; Rai and Eisenberg, 2003; Kieff, 2001; Mowery et al., 2004; Rai, 1999; Strandburg, 2005), and the other embraces a range of related proposals to tailor patent law for universities (Bagley, 2006; Bouchard, 2007; Lemley, 2008; Osenga, 2007; Rowe, 2006). The argument in both cases is that the fact of direct subsidies is the kind of evidence likely to give rise to substantial uniformity cost because baseline patent rights are premised on an assumption that innovators need to recoup most of their costs in the market through the promise of monopoly pricing (Menell and Scotchmer, 2007). The other form of direct subsidy that should be squared with uniform intellectual property rights is prizes and rewards. As discussed above, direct compensation in the form of prizes or rewards is a well-established policy option. Many of the modern implementations of this option, however, use it as a supplement rather than a substitute

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396  Research handbook on the economics of IP law volume 1 for intellectual property protection (National Research Council. 2007. Innovation Prizes at the National Science Foundation). Commentators also identify certain market-specific economic features, primarily leadtime advantage and network effects, that can supply a sufficient degree of appropriability to justify tailoring intellectual property rights. Research indicates that the value of lead time often is industry-specific (Lieberman and Montgomery, 1998; Robinson et al., 1994), and that in product markets with patentable goods incumbents often enjoy significant market share advantages even after competitors have entered a market (Barnett, 2004). The value of the lead-time advantage is affected not only by its duration but also by competitors’ copying costs. One study shows that imitation costs for patentable goods can run at about 65 percent of the costs of innovation (Mansfield et al., 1981). However, about 70 percent of the goods studied were patented and ‘imitation costs’ included the costs of inventing around the patent. Consequently, this data does not translate immediately into the costs of competition in markets without intellectual property rights. Additionally, when one accounts for the monetary value of time, reflected as a competitor’s opportunity costs, the necessary level of protection would be further reduced. If expected profits derived from this lead-time or first-mover advantage are sufficient to recoup the costs of initial production, the case for government intervention largely disappears (Reichman, 1994). The best case for tailoring based on lead-time profits would be one in which intellectual property rights should be treated as superfluous on both sides of the ledger, but rightsholders use the rights to engage in strategic litigation that squeezes additional rents from competitors and consumers with no offsetting social benefits (Bessen and Meurer, 2009). Strong network effects can also serve as an alternative source of appropriability.5 Economists distinguish between markets involving actual networks, virtual networks, and positive feedback effects, and these distinctions could impact the strength of a tailoring proposal (Lemley and McGowan, 1998). Some argue that evidence of network externalities may support a shift from a property to a liability rule to provide a form of rate-of-return regulation of a ‘natural’ monopoly (Lemley and Weiser, 2007). Unauthorized copying can serve to strengthen the market share of an information provider in a ‘tippy’ market (Shapiro and Varian, 1999; Takeyama, 1994). Even where network effects are not strong enough to induce a desired level of investment in information production, network effects can amplify the market power that exclusive rights can confer. Lemley and McGowan (1998) suggest that evidence of a market exhibiting strong network effects because of demand for standardization may support proposals to permit reverse engineering to allow competitive entry. Patent law currently does not recognize a reverse engineering defense, although some scholars have offered proposals either for a generalized fair use defense that could be adapted to market 5   Network effects, as manifested by the ‘superstar’ effect, is a version of the phenomenon. Although Rosen (1981) explains the skew distribution of popularity in the cultural sphere as reflecting a skewed distribution of talent in the population, a more convincing account would focus on the signaling function that certain forms of consumption play. Once momentum builds behind a particular book, movie, song, entertainer, athlete, or fashion design, consumers’ purchasing decisions will be influenced more by the importance of signaling membership in the herd than by any subjective evaluation of the good’s quality (Frank and Cook, 1995).

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Tailoring intellectual property rights to reduce uniformity cost  397 circumstances or more tailored proposals to permit reverse engineering (O’Rourke, 2000; Samuelson and Scotchmer, 2002; Strandburg, 2011). C.  Overlapping Rules and Rights Two common legal features that intellectual property owners factor into their appropriability calculus is the availability of other legal rights of exclusion, such as trade secret, trademark, or contract law, and regulatory requirements in the marketing and distribution of creations or innovations. Product differentiation strategies supported by trademark law supply an important source of power over price. Some scholars argue that the effects of trademark and trade secret protection may be sufficient to induce the desired level of investment even in the absence of copyright or patent rights in some cases (Kieff, 2006). Moreover, the exclusivity provided by copyright or patent rights facilitates the producer’s ability to establish strong, highly distinctive marks (Parchomovsky and Siegelman, 2002). In markets in which this effect is particularly strong, the level of protection may be reduced by, for example, reducing the term of protection without significantly reducing the incentive effects the protection supplies. D.  Demand-Side Features—Positive Spillovers Some argue that efficient patent and copyright law must be limited and leaky to encourage or allow certain types of uncompensated demand-side sharing of valuable information (Frischmann, 2005, 2009; Frischmann and Lemley, 2007; Lohr, 2003). Their arguments call for tailoring to ensure that the law is particularly permissive with respect to patented or copyrighted information that functions as ‘infrastructure.’ In particular, Frischmann (2012) argues that information should be managed as a commons rather than through private, exclusive rights when: (1) the resource may be consumed nonrivalrously; (2) social demand for the resource is driven primarily by downstream productive activity that requires the resource as an input; and (3) the resource may be used as an input into a wide range of goods and services, including private goods, public goods, and nonmarket goods. But some information that would fall within the subject matters of patent and copyright, respectively, also may function as nonrivalrous, generic inputs that supply social and public goods, such as public health or public education, for which markets are either absent or incomplete. In such cases, the opportunity cost of an exclusive right may be greater than its benefit (Lessig, 2005). In these cases, the argument for solving the appropriability problem through some combination of prize, reward, or tax strategy is likely to be particularly strong. Alternatively, a tailoring proponent may seek to propose limitations or exceptions for the producers of public goods while leaving exclusive rights intact as against the producers of private goods. Much of the recent commentary calling for a revitalized experimental use exception to patent infringement or for tailoring of patent law with respect to university researchers follows this line (Hagelin, 2006). The proponent should also be prepared to answer the argument advanced by Wagner that even ‘complete’ rights of exclusion are unable to prevent positive spillovers, and—to the extent that more robust, uniform rights encourage production of additional information—the total amount of spillovers will increase with broad exclusive rights (Wagner, 2003).

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VIII.  INDUSTRIAL INNOVATION DECISION STRUCTURES Economic analysis to date suggests that the magnitude of appropriability problems varies by industry. Merges and Nelson (1990) and Wu (2006) independently suggest that policymakers should recognize the effect on industry structure and degree of competitive entry influenced by the subject matter and scope of intellectual property rights and that policymakers should tailor rights to modulate the degree of entry depending upon industry maturity and other competitive conditions. Merges and Nelson (1990) made a significant contribution to the patent literature first by calling attention to the role courts must play in tailoring the scope of patents through application of the law’s flexible scope doctrines and second by ‘show[ing] that the issues at stake regarding patent scope depend on the nature of technology in an industry. This dependence includes two characteristics: the relationship between technical advances in the industry, and the extent to which firms license technologies to each other.’ By studying and categorizing the effects of patent scope on follow-on invention, Merges and Nelson (1990) generally reject the ‘prospect’ theory of patent scope that would delegate control over follow-on innovation to early inventors in favor of greater entry tailored to the characteristics of what they label ‘cumulative technologies,’ ‘chemical industries,’ and ‘science-based industries.’ Wu (2006) makes a related argument concerning the role that the presence or absence of intellectual property rights and the delineation of their scope will shape the ‘decision architecture’ for innovation within particular industries. In short, he argues that where intellectual property rights are robust, innovation decisions are likely to be made within hierarchal firms that own these rights, and the willingness of these firms to grant licenses to follow-on innovators who may become competitors is suspect. In contrast, where intellectual property rights are subject to significant limitations or exceptions, innovation decisions are likely to be made polyarchically. Wu (2006) argues that policymakers should employ presumptions that favor limited intellectual property rights in new industries to favor decentralized development unless the risk of misappropriation is so significant that investments in new development will be deterred. In contrast, he argues that policymakers should be more solicitous of claims for more robust rights applicable to ‘dead’ industries unless overpropertization was one of the causes of death (Wu, 2006). Others argue that tailoring should increase available patent rights when lead time is insufficient to encourage market experimentation (Abramowicz and Duffy, 2008) or when the costs of commercialization justify additional protection (Sichelman, 2010).

IX. CONCLUSION Decisions about intellectual property policy should be evidence-based. Posner is correct to say that gathering and assessing evidence about the performance of uniform patents and copyrights is difficult. But gathering and assessing evidence about the social costs of uniform rights and how these could be tailored to perform better is far more plausible and effective. This should be a primary focus for the economic analysis of intellectual property. While the general problem of uniformity cost has been recognized relatively recently, early analysis by Plant (1934) and Breyer (1970) in copyright law laid the groundwork

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Tailoring intellectual property rights to reduce uniformity cost  399 for the above analysis. In sum, uniformity cost can be reduced through private ordering, entitlement design, and the use of real options in place of direct entitlement grants. The types of evidence most likely to support a tailoring proposal are those showing innovator incentives that depart from the standard rationale for intellectual property rights, the availability of alternative appropriability mechanisms, the role of overlapping legal rights that influence appropriability, the magnitude of positive spillovers generated by certain types of innovative activity, and industry-specific effects on follow-on innovation from uniform rights.

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402  Research handbook on the economics of IP law volume 1 Joyce, Craig, Tyler Ochoa, Michael Carroll, Marshall Leaffer, and Peter Jaszi. 2016. Copyright Law (10th ed.). Durham, NC: Carolina Academic Press. Kaplow, Louis. 1984. ‘The Patent-Antitrust Intersection: A Reappraisal,’ 97 Harvard Law Review 1813–92. Kaplow, Louis. 1992. ‘Rules versus Standards: An Economic Analysis,’ 42 Duke Law Journal 557–629. Karjala, Dennis S. 2003. ‘Distinguishing Patent and Copyright Subject Matter,’ 35 Connecticut Law Review 439–524. Kastenmeier, Robert W., and Michael J. Remington. 1985. ‘The Semiconductor Chip Protection Act of 1984: A Swamp or Firm Ground?,’ 70 Minnesota Law Review 417–70. Kelman, Mark A. 1987. Guide to Critical Legal Studies. Boston, MA: Harvard University Press. Kennedy, Duncan. 1976. ‘Form and Substance in Private Law Adjudication,’ 89 Harvard Law Review 1685–778. Kesan, Jay P., and Andres A. Gallo. 2006. ‘Why “Bad” Patents Survive in the Market and How Should We Change? The Private and Social Costs of Patents,’ 55 Emory Law Journal 61–140. Kesan, Jay P., and Andres A. Gallo. 2009. ‘The Political Economy of the Patent System,’ 87 North Carolina Law Review 1341–419. Kieff, F. Scott. 2001. ‘Facilitating Scientific Research: Intellectual Property Rights and the Norms of Science: A Response to Rai and Eisenberg,’ 95 Northwestern University Law Review 691–705. Kieff, F. Scott. 2003. ‘The Case for Registering Patents and the Law and Economics of Present Patent-Obtaining Rules,’ 45 Boston College Law Review 55–123. Kieff, F. Scott. 2006. ‘Coordination, Property and Intellectual Property: An Unconventional Approach to Anticompetitive Effects and Downstream Access,’ 56 Emory Law Journal 327–438. Kitch, Edmund W. 2000. ‘Elementary and Persistent Errors in the Economic Analysis of Intellectual Property,’ 53 Vanderbilt Law Review 1727–41. Knight, Frank H. 1921. Risk, Uncertainty and Profit. Ithaca, NY: Cornell University Library. Kremer, Michael. 1998. ‘Patent Buyouts: A Mechanism for Encouraging Innovation,’ 113 Quarterly Journal of Economics 1137–67. Laakmann, Anna B. 2012. ‘An Explicit Policy Lever for Patent Scope,’ 19 Michigan Telecommunications and Technology Law Review 43–97. Landes, William M., and Richard A. Posner. 1989. ‘An Economic Analysis of Copyright Law,’ 18 The Journal of Legal Studies 325–63. Landes, William M., and Richard A. Posner. 2003. The Economic Structure of Intellectual Property. Cambridge, MA: Belknap Press. Lemley, Mark A. 2005. ‘What’s Different about Intellectual Property?,’ 83 Texas Law Review 1097–104. Lemley, Mark A. 2008. ‘Are Universities Patent Trolls?,’ 18 Fordham Intellectual Property Media & Entertainment Law Journal 611–32. Lemley, Mark A., and David McGowan. 1998. ‘Legal Implications of Network Economic Effects,’ 86 California Law Review 479–612. Lemley, Mark A., and Bhaven Sampat. 2008. ‘Is the Patent Office a Rubber Stamp?,’ 58 Emory Law Journal 181–206. Lemley, Mark A., and Philip J. Weiser. 2007. ‘Should Property or Liability Rules Govern Information?,’ 85 Texas Law Review 783–841. Lemley, Mark A., Douglas Lichtman, and Bhaven N. Sampat. 2005. ‘What To Do About Bad Patents,’ 28 Regulation 10–13. Lerner, Joshua, and Jean Tirole. 2002. ‘Some Simple Economics of Open Source,’ 50 The Journal of Industrial Economics 197–234. Lessig, Lawrence. 2001. The Future of Ideas: The Fate of the Commons in a Networked World. New York, NY: Vintage Books. Lessig, Lawrence. 2005. ‘Re-Marking the Progress in Frischmann,’ 89 Minnesota Law Review 1031–43. Levin, Richard C., Alvin K. Klevorick, Richard R. Nelson, and Sidney G. Winter. 1987. ‘Appropriating the Returns from Industrial Research and Development,’ 1987 Brookings Papers on Economic Activity 783–831. Lichtman, Douglas Gary. 1997. ‘Pricing Prozac: Why the Government Should Subsidize the Purchase of Patented Pharmaceuticals,’ 11 Harvard Journal of Law and Technology 123–39. Lieberman, Marvin B., and David B. Montgomery. 1998. ‘First-Mover (Dis)Advantages: Retrospective and Link with the Resource-Based View,’ 19 Strategic Management Journal 1111–25. Litman, Jessica. 2001. Digital Copyright: Protecting Intellectual Property on the Internet. Amherst, NY: Prometheus Books. Liu, Joseph P. 2002. ‘Copyright and Time: A Proposal,’ 101 Michigan Law Review 409–81. Liu, Joseph P. 2004. ‘Regulatory Copyright,’ 83 North Carolina Law Review 87–166. Lohr, Steve. 2003. ‘Steal This Book? A Publisher Is Making It Easy,’ The New York Times C4 (Jan. 13, 2003), accessed March 20, 2019 at http://www.nytimes.com/2003/01/13/business/technology-steal-this-book-a-publi​ sher-is-mak​ing-it-easy.html. Long, Clarisa. 2000. ‘Proprietary Rights and Why Initial Allocations Matter,’ 49 Emory Law Journal 823–36.

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Tailoring intellectual property rights to reduce uniformity cost  403 Long, Clarisa. 2002. ‘Patent Signals,’ 69 University of Chicago Law Review 625–80. Long, Clarisa. 2004. ‘Information Costs in Patent and Copyright,’ 90 Virginia Law Review 465–550. Love, Brian J. 2018. ‘Patent Duration,’ in Peter S. Menell and David L. Schwartz, eds., Research Handbook on the Economics of Intellectual Property, vol. II. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Love, James, and Tim Hubbard. 2007. ‘The Big Idea: Prizes to Stimulate R&D for New Medicines,’ 82 ChicagoKent Law Review 1519–54. Lunney, Glynn S. Jr. 1996. ‘Reexamining Copyright’s Incentives-Access Paradigm,’ 49 Vanderbilt Law Review 557. Lunney, Glynn S. Jr. 2003. ‘Patent Law, the Federal Circuit, and the Supreme Court: A Quiet Revolution,’ 11 Supreme Court Economic Review 1–80. Lunney, Glynn S. Jr. 2008. ‘Copyright’s Price Discrimination Panacea,’ 21 Harvard Journal of Law & Technology 387–456. Lunney, Glynn S. Jr. 2009. ‘Copyright, Private Copying, and Discrete Public Goods,’ 12 Tulane Journal of Technology & Intellectual Property 1–34. Macaulay, Thomas Babington. 1900. ‘Speech in the House of Commons,’ in Speeches and Legal Studies: The Complete Works of Thomas Babington Macaulay. Boston, MA: Houghton, Mifflin, Harcourt. Machlup, Fritz. 1958. ‘An Economic Review of the Patent System,’ Study No. 15, The Subcommittee on Patents, Trademarks and Copyrights, Committee on the Judiciary, U.S. House of Representatives, 85th Congress, 2d Session. Machlup, Fritz, and Edith Penrose. 1950. ‘The Patent Controversy in the Nineteenth Century,’ 10 The Journal of Economic History 1–29. Mansfield, Edwin. 1986. ‘Patents and Innovation: An Empirical Study,’ 32 Management Science 173–81. Mansfield, Edwin, John Rapoport, Anthony Romeo, Samuel Wagner, and George Beardsley. 1977. ‘Social and Private Rates of Return from Industrial Innovations,’ 91 Quarterly Journal of Economics 221–40. Mansfield, Edwin, Mark Schwartz, and Samuel Wagner. 1981. ‘Imitation Costs and Patents: An Empirical Study,’ 91 Economic Journal 907–18. McFetridge, D.G., and M. Rafiquzzaman. 1986. ‘The Scope and Duration of the Patent Right and the Nature of Research Rivalry,’ 8 Research in Law and Economics 91–129. Menell, Peter S. 1986. ‘Tailoring Legal Protection for Computer Software,’ 39 Stanford Law Review 1329–72. Menell, Peter S. 1989. ‘An Analysis of the Scope of Copyright Protection for Application Programs,’ 45 Stanford Law Review 1045–2004. Menell, Peter S. 1994. ‘The Challenges of Reforming Intellectual Property Protection for Computer Software,’ 94 Columbia Law Review 2644–54. Menell, Peter S., and Suzanne Scotchmer. 2007. ‘Intellectual Property,’ in A. Mitchell Polinsky and Steven Shavell, eds., Handbook of Law and Economics. Oxford: North-Holland. Merges, Robert P. 2000. ‘One Hundred Years of Solicitude: Intellectual Property Law, 1900–2000,’ 88 California Law Review 2187–240. Merges, Robert P., and Richard Nelson. 1990. ‘On the Complex Economics of Patent Scope,’ 90 Columbia Law Review 839–916. Meurer, Michael J. 2001. ‘Copyright Law and Price Discrimination,’ 23 Cardozo Law Review 55–148. Meurer, Michael. 2002. ‘Business Method Patents and Patent Floods,’ 8 Washington University Journal of Law and Policy 309–40. Mireles, Michael S. Jr. 2006. ‘States as Innovation System Laboratories: California, Patents, and Stem Cell Technology,’ 28 Cardozo Law Review 1133–212. Moore, Kimberly A. 2006. ‘Worthless Patents,’ 20 Berkeley Technology Law Journal 1521–52. Mowery, David C., Richard R. Nelson, Bhaven N. Sampat, and Arvids A. Ziedonis. 2004. Ivory Tower and Industrial Innovation: University-Industry Technology Transfer Before and After the Bayh-Dole Act. Stanford, CA: Stanford University Press. Nordhaus, William D. 1969. Invention, Growth, and Welfare: A Theoretical Treatment of Technological Change. Cambridge, MA: The MIT Press. O’Donoghue, Ted, Suzanne Scotchmer, and Jacques-François Thisse. 1998. ‘Patent Breadth, Patent Life, and the Pace of Technological Progress,’ 7 Journal of Economics & Management Strategy 1–32. Oliar, Dotan, and Christopher Sprigman. 2008. ‘There’s No Free Laugh (Anymore): The Emergence of Intellectual Property Norms and the Transformation of Stand-Up Comedy,’ 94 Virginia Law Review 1787–868. Olson, Thomas P. 1989. ‘The Iron Law of Consensus: Congressional Responses to Proposed Copyright Reforms Since the 1909 Act,’ 36 Journal of the Copyright Society of the U.S.A.109–37. O’Rourke, Maureen A. 2000. ‘Toward a Doctrine of Fair Use in Patent Law,’ 100 Columbia Law Review 1177–250. Osenga, Kristen. 2007. ‘Rembrandts in the Research Lab: Why Universities Should Take a Lesson from Big Business to Increase Innovation,’ 59 Maine Law Review 407–38.

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404  Research handbook on the economics of IP law volume 1 Outlook. 2009. Tufts Center for the Study of Drug Development. Boston, MA: Tufts University. Parchomovsky, Gideon, and Peter Siegelman. 2002. ‘Towards an Integrated Theory of Intellectual Property,’ 88 Virginia Law Review 1455–528. Parchomovsky, Gideon, and R. Polk Wagner. 2005. ‘Patent Portfolios,’ 154 University of Pennsylvania Law Review 1–78. Partnoy, Frank. 2001. ‘Finance and Patent Length,’ University of San Diego Law and Economic Research Paper No. 19, accessed March 20, 2019 at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=285144. Patry, William F. 1996. ‘Copyright and the Legislative Process: A Personal Perspective,’ 14 Cardozo Arts & Entertainment Law Journal 139–52. Patry, William F. 2016. Patry on Copyright. New York, NY: Thomson West Publishing. Plant, Arnold. 1934. ‘The Economic Aspects of Copyright in Books,’ 1 Economica 167–95. Polanvyi, Michael. 1944. ‘Patent Reform,’ 11 The Review of Economic Studies 61–76. Posner, Eric A. 1997. ‘Standards, Rules, and Social Norms,’ 21 Harvard Journal of Law and Public Policy 101–18. Radin, Margaret Jane. 1989. ‘Reconsidering the Rule of Law,’ 69 Boston University Law Review 781–822. Rai, Arti Kaur. 1999. ‘Regulating Scientific Research: Intellectual Property Rights and the Norms of Science,’ 94 Northwestern University Law Review 77–152. Rai, Arti K., and Rebecca S. Eisenberg. 2003. ‘Bayh-Dole Reform and the Progress of Biomedicine,’ 66 Law and Contemporary Problems 289–314. Rajec, Sarah R. 2013. ‘Evaluating Flexibility in International Patent Law,’ 65 Hastings Law Journal 153–210. Raustiala, Kal, and Christopher Sprigman. 2006. ‘The Piracy Paradox: Innovation and Intellectual Property in Fashion Design,’ 92 Virginia Law Review 1687–777. Reichman, Jerome H. 1994. ‘Legal Hybrids Between the Patent and Copyright Paradigms,’ 94 Columbia Law Review 2432–558. Robinson, William T., Gurumurthy Kalyanaram, and Glen L. Urban. 1994. ‘First-Mover Advantages from Pioneering New Markets: A Survey of Empirical Evidence,’ 9 Review of Industrial Organization 161–78. Roin, Benjamin N. 2014. ‘Intellectual Property Versus Prizes: Reframing the Debate,’ 81 University of Chicago Law Review 999–1078. Rose, Carol M. 1988. ‘Crystals and Mud in Property Law,’ 40 Stanford Law Review 577–610. Rosen, Sherwin. 1981. ‘The Economics of Superstars,’ 71 American Economic Review 845–58. Rosenblatt, Elizabeth L. 2011. ‘A Theory of IP’s Negative Space,’ 34 Columbia Journal of Law and the Arts 317–66. Rowe, Elizabeth A. 2006. ‘The Experimental Use Exception to Patent Infringement: Do Universities Deserve Special Treatment?,’ 57 Hastings Law Journal 921–54. Samuelson, Pamela. 2011. ‘The Uneasy Case for Software Copyright Revisited,’ 79 George Washington Law Review 1746–82. Samuelson, Pamela. 2013. ‘A Fresh Look at Tests for Nonliteral Copyright Infringement,’ 107 Northwestern University Law Review 1821–50. Samuelson, Pamela, and Jason Schultz. 2011. ‘“Clues” for Determining Whether Business and Service Innovations are Unpatentable Abstract Ideas,’ 15 Lewis & Clark Law Review 109–31. Samuelson, Pamela, and Suzanne Scotchmer. 2002. ‘The Law and Economics of Reverse Engineering,’ 111 Yale Law Journal 1575–664. Samuelson, Pamela, Randall Davis, Mitchell D. Kapor, and J.H. Reichman. 1994. ‘A Manifesto Concerning the Legal Protection of Computer Programs,’ 94 Columbia Law Review 2308–431. Sarnoff, Joshua D. 2004. ‘Abolishing the Doctrine of Equivalents and Claiming the Future after Festo,’ 19 Berkeley Technology Law Journal 1157–226. Sarnoff, Joshua D. 2009. ‘Flexible Application of Injunctive Relief in Intellectual Property Enforcement,’ in Edward Xuan Li and Carlos M. Correa, eds., Intellectual Property Enforcement. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Saulo, Eleanor C., Birger C. Forsberg, Zul Premji, Scott M. Montgomery, and Anders Björkman. 2008. ‘Willingness and Ability to Pay for Artemisinin-Based Combination Therapy in Rural Tanzania,’ 7 Malaria Journal 185–96. Schauer, Frederick. 1991. Playing by the Rules: A Philosophical Examination of Rule-Based Decisionmaking in Law and in Life. Oxford: Clarendon Press. Scherer, F.M. 1972. ‘Nordhaus’ Theory of Optimal Patent Life: A Geometric Reinterpretation,’ 62 American Economic Review 422–7. Scherer, F.M. 2001a. ‘Economics of Innovation and Technological Change,’ in Neil J. Smelser and Paul B. Baltes, eds., International Encyclopedia of the Social & Behavioral Sciences. Oxford: Pergamon Press. Scherer, F.M. 2001b. ‘The Innovation Lottery,’ in Rochelle Cooper Dreyfuss, Diane Leenheer Zimmerman, and Harry First, eds., Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society. Oxford: Oxford University Press. Scherer, F.M., Dietmar Harrhoff, and Jörg Kukies. 2000. ‘Uncertainty and the Size Distribution of Rewards from Innovation,’ 10 Journal of Evolutionary Economics 175–201.

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Tailoring intellectual property rights to reduce uniformity cost  405 Schlag, Pierre. 1985. ‘Rules and Standards,’ 33 UCLA Law Review 379–430. Scotchmer, Suzanne. 1999. ‘On the Optimality of the Patent Renewal System,’ 30 The RAND Journal of Economics 181–96. Scotchmer, Suzanne. 2004. ‘The Political Economy of Intellectual Property Treaties,’ 20 Journal of Law, Economics, and Organization 415–37. Shapiro, Carl, and Hal Varian. 1999. Information Rules: A Strategic Guide to the Network Economy. Boston, MA: Harvard Business Review Press. Shavell, Steven. 2004. Foundations of Economic Analysis of Law. Cambridge, MA: Belknap Press. Shavell, Steven, and Tanguy van Ypersele. 2001. ‘Rewards versus Intellectual Property Rights,’ 44 The Journal of Law and Economics 525–48. Shaver, Lea. 2014. ‘Copyright and Inequality,’ 92 Washington University Law Review 117–68. Sichelman, Ted M. 2010. ‘Commercializing Patents,’ 62 Stanford Law Review 341–413. Smith, Henry E. 2007. ‘Intellectual Property as Property: Delineating Entitlements in Information,’ 116 Yale Law Journal 1742–823. Stiglitz, Joseph. 2006a. ‘Give Prizes Not Patents,’ New Scientist (Sept. 16, 2006). Stiglitz, Joseph. 2006b. ‘Scrooge and Intellectual Property Rights: A Medical Prize Fund Could Improve the Financing of Drug Innovations,’ 333 British Medical Journal 1279–80. Strandburg, Katherine J. 2005. ‘Curiosity-Driven Research and University Technology Transfer,’ in Gary D. Libecap, ed., University Entrepreneurship and Technology Transfer: Process, Design, and Intellectual Property. Bradford: Emerald Group Publishing. Strandburg, Katherine J. 2011. ‘Patent Fair Use 2.0,’ 1 UC Irvine Law Review 265–306. Sullivan, Kathleen M. 1992. ‘The Justices of Rules and Standards,’ 106 Harvard Law Review 22–123. Sunstein, Cass R. 1995. ‘Problems with Rules,’ 83 California Law Review 953–1026. Takeyama, Lisa N. 1994. ‘The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities,’ 42 The Journal of Industrial Economics 155–66. Tuckman, Howard P., and Jack Leahy. 1975. ‘What Is an Article Worth?,’ 83 Journal of Political Economy 951–68. Wasserman, Melissa Feeney, and Michael Frakes. 2013. ‘Does Agency Funding Affect Decisionmaking? An Empirical Assessment of the PTO’s Granting Patterns,’ 66 Vanderbilt Law Review 67–148. Van Overwalle, Geertrui. 2011. ‘Policy Levers Tailoring Patent Law to Biotechnology: Comparing U.S. and European Approaches,’ 1 UC Irvine Law Review 433–514. Vishnubhakat, Saurabh. 2015. ‘Expired Patents,’ 64 Catholic University Law Review 419–62. Wagner, R. Polk. 2003a. ‘Information Wants to Be Free: Intellectual Property and the Mythologies of Control,’ 103 Columbia Law Review 995–1034. Wagner, R. Polk. 2003b. ‘(Mostly) against Exceptionalism,’ in F. Scott Kieff, ed., Perspectives on Properties of the Human Genome Project. San Diego, CA: Elsevier Academic Press. Wagner, R. Polk. 2003c. ‘Of Patents and Path Dependency: A Comment on Burk and Lemley,’ 18 Berkeley Technology Law Journal 1341–60. Wagner, R. Polk. 2004. ‘Exactly Backwards: Exceptionalism and the Federal Circuit,’ 54 Case Western Reserve Law Review 749–56. Waterson, Michael. 1990. ‘The Economics of Product Patents,’ 80 American Economic Review 860–69. Weeds, Helen. 2001. ‘Strategic Delay in a Real Options Model of R&D Competition,’ 69 The Review of Economic Studies 729–47. Wright, Donald J. 1999. ‘Optimal Patent Breadth and Length with Costly Imitation,’ 17 International Journal of Industrial Organization 419–36. Wu, Timothy. 2005. ‘Copyright’s Communications Policy,’ 103 Michigan Law Review 278–366. Wu, Tim. 2006. ‘Intellectual Property, Innovation, and Decision Architectures,’ 92 Virginia Law Review 123–48. Yoo, Christopher S. 2004. ‘Copyright and Product Differentiation,’ 79 New York University Law Review 212–80. Yoo, Christopher S. 2008. ‘Copyright and Public Good Economics: A Misunderstood Relation,’ 155 University of Pennsylvania Law Review 635–716. Ziedonis, Rosemarie Ham. 2004. ‘Don’t Fence Me In: Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms,’ 50 Management Science 804–20.

Legislative Materials 17 U.S.C. § 101, § 102, § 106, § 107, § 110, § 111, § 113, § 115, § 119, § 120, § 121, § 122, § 302, § 408, § 411, § 502, § 504, § 512, §§ 901–14, § 1201. 35 U.S.C. § 103, § 155, §§ 200–212, § 271, § 273, § 287. 37 C.F.R. § 202.20.

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406  Research handbook on the economics of IP law volume 1 Cases AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d 1352 (Fed. Cir. 1999). Bernhardt, L.L.C. v. Collezione Europa USA, Inc., 386 F.3d 1371 (Fed. Cir. 2004). Computer Assocs. Int’l, Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992). Diamond v. Chakrabarty, 447 U.S. 303 (1980). Eldred v. Ashcroft, 537 U.S. 186 (2003). Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539 (1985). In re GPAC, Inc., 57 F.3d 1573 (Fed. Cir. 1995). Newton v. Diamond, 388 F.3d 1189 (9th Cir. 2004). O’Reilly v. Morse, 56 U.S. 62 (1853). State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). Walker v. Time Life Films, Inc., 784 F.2d 44 (2d Cir. 1986).

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15.  Intellectual property enforcement costs Ben Depoorter*

Contents I. Introduction II. Costly Intellectual Property Enforcement The Effect of Enforcement Costs III. A. Negative Effects B. Benefits of Enforcement Costs C. Distributive Effects of Enforcement Costs IV. Adjusting Intellectual Property Rights in Light of Costly Enforcement V. Enforcement of Copyright Law A. Innovation Spillovers of Copyright Enforcement B. Social Norm Complications C. Statutory Damages D. Small Claims Courts VI. Enforcement of Patent Law VII. Enforcement of Trademark Law VIII. Conclusion References

I. INTRODUCTION Conventional economic wisdom is that an appropriation problem plagues markets for information goods (Posner, 2005, 2014).1 Because information goods can be easily copied and distributed illegally,2 creative and innovative markets are at risk. By providing a time-limited monopoly right, intellectual property laws seek to protect creators and innovators against competition from copyright pirates, trademark counterfeiters, and patent infringers who did not incur the cost of creation or innovation. Ideally, intellectual property (IP) enforcement discourages intellectual property

*  Max Radin Chair and Distinguished Professor of Law, University of California, Hastings College of the Law; Affiliate Scholar, Stanford Law School, Center for Internet and Society; CASLE, Ghent University. I express my gratitude to participants of the roundtables convened by Northwestern University Law School, U.C. Berkeley School of Law (BCLT), and U.C. Hastings College of the Law for useful suggestions and comments. Contact: depoorter@uchast​ ings.edu. 1   On the utilitarian philosophical theory of intellectual property law and the economic account of copyright law more specifically, see Hadfield (1992), Goldstein (1995). 2   For a discussion, see Syed and Bracha (2014).

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408  Research handbook on the economics of IP law volume 1 ­violations ex ante while compensating rights holders for any lost profits due to infringements ex post.3 Intellectual property enforcement has become a matter of great controversy over the past few decades. Concerns with the private and social costs of enforcing IP rights have instigated intense discussions and a substantial body of literature. Part II first describes the various costs of IP enforcement. Part III reviews the various negative, positive, and distributive effects of costly IP enforcement. Part IV discusses the optimal scope of IP rights in light of enforcement costs. Parts V, VI, and VII review several area-specific enforcement issues. Part VIII concludes.

II.  COSTLY INTELLECTUAL PROPERTY ENFORCEMENT Enforcing IP rights is big business in a globalized marketplace. Since information goods and services are so valuable in information markets, the potential gains from infringing IP rights have increased over time. As the scale of infringements expands over time, so do the enforcement efforts by right holders who stand to lose more from infringing activities. There is a widespread perception that enforcement has increased exponentially in the area of patent law in the past two decades. The growth in the number of patent lawsuits is instructive. Studies that control for the rapid increase in patenting itself and a shift toward more litigious technology areas confirm that patent litigation has increased in impressive numbers (Lanjouw and Schankerman, 2004).4 Several studies indicate that patent litigation is becoming increasingly difficult to avoid in many innovative sectors (Eisenberg, 1989; Hall and Ziedonis, 2001; Shapiro, 2001).
Likewise, in other areas of IP law, enforcement has evolved in an upward direction. Enhanced by digital technologies, global piracy and counterfeiting markets have elevated enforcement efforts by the copyright owners (Depoorter et al., 2011) and trademark holders (Grinvald, 2011; Port, 2008). Enforcing IP rights is an expensive affair. Survey evidence indicates that the median litigation costs (including, primarily, attorney fees and expenses related to evidentiary burdens) for patent infringement suits on claims below $1 million are $650,000. When $1 million to $25 million is at stake, total litigation costs are $2.5 million. For a claim with over $25 million in controversy, the median legal cost is $5 million. The median cost to litigate a copyright infringement lawsuit with less than $1 million at stake through appeal is $350,000 (AIPLA, 2011, p. 35). Another study estimated that the average duration of IP litigation in a home jurisdiction is 3 years with an average cost of $475,000. For litigation in another jurisdiction, the average duration and costs increases to 3.5 years with legal fees of just over $850,000 (de Castor and Schallnau, 2013). The overall level and cost of enforcing IP rights are influenced by several factors, some of which are endogenous to the legal system, while others are exogenous. First, the scope of legal protection influences enforcement costs. The potential for

3   Infringers are discouraged ex ante by disgorging the infringer’s profits and imposing punitive measures. 4   Lanjouw and Schankerman (2004) also find that litigation is concentrated in important ways in firms and patents with particular characteristics.

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Intellectual property enforcement costs  409 enforcement increases as the level of IP protection expands. In patent law, for instance, if restrictions on patentability are relaxed, the increase of patents is likely to induce more enforcement, as there will be more rights holders and closely related patents that are likely to overlap. In this regard, practices at the US patent and trademark office (USPTO) affect enforcement levels. Second, doctrinal complexity and legal uncertainty about IP protection contribute to enforcement costs. In copyright law, for example, the use of open-ended standards (Ehrlich and Posner, 1974; Kaplow, 1995) increases uncertainty. Open-ended standards provide courts with the much-needed flexibility to adapt copyright doctrine to technological advances (Depoorter, 2009; Menell, 2002) but increase ex ante uncertainty and litigation costs. For instance, the open-ended fair use standard leaves more room for optimism and disputes among potential litigants. Similarly, doctrines in patent and trademark law that leave more ambiguity are likely to increase litigation costs. Third, enforcement costs are influenced by substantive and procedural doctrinal developments. For instance, when federal courts rejected the broad application of indirect liability for copyright infringement in cases involving internet service providers, this rejection reduced the ability of copyright holders to economize on enforcement costs by targeting the middleman (Lichtman and Landes, 2003). By reducing the role of gate-keeping liability, the burden to identify infringement remains with the rights holders. Although IP rights holders can more easily identify infringing content, the removal of infringing material and identification of infringers is handled more efficiently by the hosting party. Similarly, doctrinal developments in civil procedure often have a major effect on enforcement costs. For instance, when courts rejected the application of joinder concerning peer-to-peer file-sharing infringements, lawsuits against multiple unrelated parties had to be filed separately, ramping up enforcement costs (Sag, 2015; Sag and Haskell, 2018; Balganesh, 2013). Similarly, when the American Invents Act revised the rules on joinder, the aggregation of infringement lawsuits became more difficult, ­rendering it more ­burdensome to engage in patent trolling (35 U.S.C. § 299 (2012)). Other enforcement costs determinants are exogenous to legal doctrine. For instance, technological advances have a major effect on enforcement costs. Some technologies are enforcement cost ‘loading’ while others are enforcement cost ‘dumping.’5 Some technological changes clearly increase enforcement costs. In the area of copyright law, for instance, the internet and digital technology vastly increased the number of infringements. In response to a more decentralized ‘digital’ piracy, enforcement costs ramped up substantially (Menell, 2002). Additionally, the geographical distance and relative anonymity of online IP i­nfringers have increased overall enforcement costs. Similarly, in the area of trademark law, the internet’s erosion of geographic restrictions increased potential confusion between trademarks globally, increasing the need for trademark policing and other enforcement costs. In other instances, new technologies may reduce enforcement costs. For instance, web search tools and automated bots enhance copyright and trademark enforcement6 by

5   For an application in the context of tort liability, see Grady (1988). For a formal model, see Depoorter and De Mot (2011). 6   On the potential for and costs of scaling copyright enforcement, see Bridy (2010).

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410  Research handbook on the economics of IP law volume 1 making search and notice efforts more comprehensive and less costly. Digital enforcement tools provide IP rights holders a means to counteract the massive scale of non-commercial infringements online. Such instruments are criticized, however, for producing false positives and public backlash (Depoorter and Walker, 2013; Perel and Elkin-Koren, 2016), On another dimension, digital rights management technologies (such as encryption and other piracy protection tools) potentially reduce the need for legal enforcement by making infringements pragmatically more difficult (Hughes, 2016).

III.  THE EFFECT OF ENFORCEMENT COSTS A.  Negative Effects Since IP infringements are the basis for private action by rights holders, the costs of enforcement are an important determinant of the overall level of IP enforcement. While enforcement costs entail various elements, including the costs of identifying infringements, the economic literature on legal enforcement focuses on litigation costs in the broad sense (costs of discovery, legal fees to lawyers, and so on). The basic economic model of litigation describes a plaintiff (p) with a potential claim against a defendant (d). The plaintiff’s estimate of the net expected value (NEV) of the claim consists of his or her estimation of the probability (P) that he or she will succeed in trial (Pp) multiplied by the expected award (Dp), minus the costs of litigation of the plaintiff (Cp) (Gould, 1973; Landes and Posner, 1975, 1979).7 The net expected value (NEV) of a lawsuit is the primary determinant of whether or not a plaintiff will file a suit to enforce their rights. Although the value of a lawsuit is determined primarily by the expected award in court (Dp), the benefits of filing suit might also follow from other factors, such as the precedential value of the lawsuit, the expectation that the defendant will settle in order to avoid the publicity (Daughety and Reinganum, 1999), the costs of trial (Rosenberg and Shavell, 1985), and the political mobilizing effect of a lawsuit (Depoorter, 2013). Litigation costs may create what economists term ‘negative value claims.’ Even though an infringement claim might have merit, litigation costs might render the plaintiff’s threat to litigate non-credible. For instance, even if the probability of the plaintiff prevailing in court is 80 percent and the likely damage award is $10,000, the plaintiff has no financial incentive to pursue the claim if the litigation costs exceed $8,000. The value of the claim is negative for the plaintiff if litigation costs are $9,000 (-$1,000). Negative value claims are not a credible basis for litigation. Moreover, negative value suits create a potential gap between the private and social incentives to enforce (Shavell, 1982). Although the social benefits of enforcement might be substantial, an individual rights holder may lack the incentive to bear the costs of

7   Conversely, the defendant’s estimated expected loss (EL) equals his or her estimate of the probability the plaintiff will prevail (Pd) times the expected award (Dd) plus the defendant’s costs of litigation (Cd).

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Intellectual property enforcement costs  411 enforcement (Hazard, 1989; Kaplow, 1986; Menell, 1983; Priest, 1982; Rose-Ackerman and Geistfeld, 1987; Schwartz and Tullock, 1975; Williams and Williams, 1994). Given that enforcement increases the overall deterrent effect of the legal system, private enforcement can be conceived as a public good subject to a collective action problem. For instance, in the context of IP enforcement, rights holders as a group benefit from the enforcement of infringement claims. Each individual rights holder, however, would prefer that another incurs the expense of the positive external effects of enforcement. This ­collective action problem creates a potential problem of under-enforcement. More generally, this divergence between the private and social incentives of enforcement undermines the deterrent effect of IP laws and remedies. Public enforcement of IP rights can fill the gap. Public prosecutions of IP law violations are relatively uncommon, however, except for some high-profile cases (Haber, 2015). Moreover, the efficacy of cross-border enforcement of trademark and patent violations remain a topic of contention and widespread ­dissatisfaction (Yu, 2012). Another negative effect of enforcement costs is the potential for opportunistic enforcement practices by plaintiffs (Bebchuk, 1988, 1996; Bone, 1997; Katz, 1990; Miceli, 1993; Rosenberg and Shavell, 1985). When litigation costs are high, aggressive litigants might obtain generous settlements. Although defendants might have a high probability of successfully challenging the infringement claim, the litigation costs might be prohibitive to many defendants due to, for instance, liquidity constraints or negative publicity effects, and so on. As such, the cost of defending against dubious enforcement actions are fertile soil for opportunistic enforcement practices by copyright and patent trolls (Sag, 2015). When based on dubious claims, such enforcement practices operate as a tax on creative and innovative practices (Sag, 2015; Sag and Haskell, 2018). B.  Benefits of Enforcement Costs The analysis above is based on the premise that IP protection is set at socially optimal levels. In the utilitarian perspective, the scope of IP rights should optimize the access-incentive trade-off: at a level where the marginal incentive benefits of additional protection equal the marginal costs of any further reduction of access to the public and follow-up creators and innovators (Syed and Bracha, 2014). Given the inherent difficulties in measuring incentive effects in creative and innovative industries, as well as new evidence on alternative drivers of creativity and innovation,8 the notion that IP laws drive creativity is called into question. Some observers have argued that the exclusive rights granted by IP laws have become overly strong (Jaffe and Lerner, 2004; Maskus and Reichman, 2004).9

8   A growing literature shows, however, that creativity is often driven by motives unaffected by copyright protection. For a collection of recent work, see Darling and Perzanowski (2017). Similarly, an ongoing literature has pointed to ways in which authorship can be commercialized outside of a copyright framework. Seminal contributions include Plant (1934) and Hurt and Schuchman (1966). Empirical accounts of the minimal effects of copyright law on creative output include Waldfogel (2012) and Ku et al. (2009). But see on the commercialization side of IP rights, Sichelman (2010) and Barnett (2013). 9   Potential causes include the creation of a specialized patent court (Posner and Landes, 2003) and the political rent-seeking in copyright law (Litman, 1996).

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412  Research handbook on the economics of IP law volume 1 In this regard, costly enforcement might have the unintended yet beneficial effect of reducing the overall level of enforcement and, as a result, bringing intellectual property protection closer to the socially optimal level. For instance, it has been stated that underenforcement ‘operates as an important safety valve that introduces an informal breathing space into copyright’s functioning’ (Balganesh, 2013, p. 723). Such gaps between the rights conveyed (‘de jure’) and what is enforced (in practice) have been documented in various areas of IP law. In the area of copyright, digital technologies and the internet facilitated a wide variety of uses that are copyright infringing in theory yet tolerated pragmatically by right holders in practice (Tehranian, 2007; Wu, 2008). In patent law, many innovators tend to ignore existing patents since most patents remain unenforced anyway and/or have limited validity (Lemley, 2008). Similarly, in trademark law some rights are conveyed ‘de jure’ but enforced only in limited circumstances.10 Finally, empirical work reveals a major gap between law in the books and law in action in the area of criminal enforcement of IP law, indicating that criminal copyright prosecutions are relatively rare, especially given the amount of criminal copyright legislation in effect (Haber, 2015). C.  Distributive Effects of Enforcement Costs On a basic level, enforcement costs harm all holders of IP rights. Upon closer inspection, however, enforcement costs impact some IP stakeholders more than others. As a general observation, legal rights are ‘relationally contingent,’ providing protection primarily against challengers who face higher litigation costs than the rights holders. Conversely, ‘challengers who can litigate more cheaply than a right holder can force the right holders to forfeit the right and thereby render the right ineffective’ (Parchomovsky and Stein, 2012). Like in other areas of law, larger stakeholders can scale enforcement costs and gain an expertise in enforcement techniques as repeat players (Galanter, 1974).11 In copyright law, for instance, some have observed that the costs of exercising statutorily defined rights can be prohibitive and disproportionally affect non-professional creators who do not have the capacity to scale out the costs of exercising these rights. In this vein, it has been observed that many smaller creators and innovators are more risk averse, inducing them to engage in generous licensing concessions rather than vigorously defend rights preserved to the public (Gibson, 2007). Over time, such ‘settlements outside of the law’ (Depoorter, 2010) may become part of a trend of rights accretion since courts will recognize such customary licensing practices as accepted within an industry (Gibson, 2007; Rothman, 2007). Similarly, in patent law, repeat players and large firms have certain advantages in managing IP enforcement costs. Large, innovative firms can protect patent rights and defend against patent infringement claims more easily because (1) their reputation as repeat players may induce bargaining and settlement (Bernheim and Whinston, 1990; Siegelman and Waldfogel, 1999; Tirole, 1994) and (2) a larger patent portfolio enables countersuits and may 10   For instance, Long (2006) describes how, prior to the amendments of the Federal Trademark Dilution Act (15 U.S.C. § 1125(c), 1127), federal courts were relatively unreceptive to enforcing the doctrine of trademark dilution. 11   For empirical evidence on the effect of repeat player on litigation, see Siegelman and Waldfogel (1999).

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Intellectual property enforcement costs  413 work as a deterrent in litigation. Empirical work by Lanjouw and Schankerman (2004) finds that a larger patent portfolio reduces the probability of litigation on any individual patent in the portfolio, suggesting there are beneficial ‘enforcement spillovers within a given firm in enforcing its different patents’ (p. 4). This finding suggests that it is less costly to protect any given patent when it is a fragment of a bigger patent portfolio. As a result, the litigation risk is more pronounced for patents owned by individuals and firms with small patent portfolios. The distributive effect of enforcement costs may have a significant dynamic effect. Enforcement costs can have the inadvertent consequence of moving innovation away from smaller firms. For example, Lerner (1995) shows that small firms avoid R&D areas where the threat of litigation from larger firms is high. Lanjouw and Lerner (2001) argue that the use of preliminary injunctions by large firms can negatively affect the incentives of small firms to undertake R&D (Lanjouw and Schankerman, 2004).12 The threat of enforcement may also induce more frequent trading of IP and, therefore, create a desire to obtain patents as bargaining chips in future negotiations (Hall and Ziedonis, 2001).

IV. ADJUSTING INTELLECTUAL PROPERTY RIGHTS IN LIGHT OF COSTLY ENFORCEMENT Economic theory posits that private property rights adapt to changes in underlying costs and benefits. In Harold Demsetz’s words, ‘[p]roperty rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization’ (Demsetz, 1967, p. 350) In his seminal account of the Montagnes Indians of the Labrador Peninsula, Demsetz described how private rights in land and forest animals developed in response to heightened opportunities in the commercial fur trade. Because overhunting presented a serious problem once fur became commercially valuable, a strong incentive existed to internalize costs by way of property rights protection. This story of the maturation of property rights emphasizes that, with increases in value and economic activity, property rights evolve to become stronger and increasingly more private. Applied to IP rights, this positive economic theory of property rights suggests that the observed expansion of IP over time aligns with the increase of the economic value of information goods because of new technologies and the maturation of information markets (Depoorter, 2005). Enforcement costs figure prominently as a factor of influence in the overall evolution of property rights. For instance, in his classic writing, Demsetz attributes the relative absence of private property rights on the Southwestern plains to the high costs of containing wide range, migratory animals. For Indians of the Labrador Peninsula, by contrast, fencing forest animals was relatively less expensive. Variance in the degree of private property rights protection can be explained in relation to the costs involved in the ‘fencing’ of those assets (Demsetz, 1967, p. 353).13 12   On the basis of data regarding patent suits and settlements during 1978–99, linking information from the US patent office, the federal courts, and industry sources, the authors find that litigation risk is much higher for patents owned by individuals and firms with small patent portfolios. 13   For other analytical accounts on the costs of excluding and enforcing rights for the emergence of private property, see Field (1989), Ellickson (1993), Lueck (2002), Anderson and Hill (1975, 1983), and Libecap and Smith (2002).

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414  Research handbook on the economics of IP law volume 1 In the context of copyright law, for instance, technological changes have led to calls to expand as well as reduce the scope of IP protection. On the one hand, when digital rights management and encryption technologies promised seamless exclusion and enforcement of copyrighted content, it was held that copyright exceptions should be constricted (Bell, 1998; Hardy, 1996; Kitch, 1999). On the other hand, technological change may also bring about a move from private property back to open-access arrangements (Levmore, 2002). For instance, file-sharing technologies made it substantially more difficult to enforce copyright online. In light of these enforcement complications, copyright law becomes costlier to society. Various steps toward an ‘information commons’ have been advocated in the literature, including the exemption of personal, non-commercial uses of content (Litman, 1996) reducing the statutory damage range as it applies to non-commercial infringements (Samuelson and Wheatland, 2009), and a tolerance for small value infringements online (Tehranian, 2007; Wu, 2008).

V.  ENFORCEMENT OF COPYRIGHT LAW Traditionally, copyright enforcement has focused on commercial pirates and bootleg recorders that produced and/or distributed creative works on a large scale. However, the digital revolution fundamentally altered the modern landscape of copyright enforcement (Cohen, 2006). Faced with rampant online infringements, copyright holders aggressively protect their rights, targeting internet service providers, software developers, amateur artists, home copyists, or others who previously did not come to the attention of copyright industries. This Part describes several copyright-specific enforcement issues. A.  Innovation Spillovers of Copyright Enforcement Many uses of copyrighted content—both legitimate and unauthorized uses—are enabled by technologies. Whenever a new technology emerges, copyright holders are alarmed by the potentially negative impact of these technologies on already existing business models (Lemley, 2011). To halt, or at least control, infringing uses of these technologies, copyright industries target the developers of new technologies based on intermediary liability doctrines (Ginsburg, 2002; Lichtman and Landes, 2003). In doing so, copyright enforcement influences the path of development of new technologies—its availability, permitted uses, and commercial future. For instance, qualitative evidence suggests that the ex ante effect of copyright enforcement costs runs much deeper, affecting investment in new technologies going forward. In-depth interviews with chief executive officers, company founders, and vice presidents from technology companies and venture capital firms suggest that the injunction in the Napster case had a debilitating effect on venture capital investments in technologies involving copyrighted content (Carrier, 2012). B.  Social Norm Complications Motivated by rampant online infringements, copyright holders have waged an aggressive legal campaign against online piracy since the early 2000s. In doing so, the record industry made an unprecedented shift in enforcement by targeting individual, non-commercial

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Intellectual property enforcement costs  415 infringers for direct copyright infringement (Depoorter and Van Hiel, 2015; Giblin, 2011). The phenomena of massive amounts of low value infringements on P2P networks presented a vexing enforcement dilemma for copyright holders, however. On the one hand, to attain some level of deterrence, stringent sanctions are needed to offset the rather low probability of the enforcement; especially given the vast number of infringers and the pragmatic obstacles to enforcement. On the other hand, in the effort to establish some measure of deterrence, enforcement may come to be regarded as being disproportionate or excessive. Social psychologists have shown that legal obedience is ‘morality-based’ and/ or ‘legitimacy-based’ (Carroll, 1987; James et al., 2001; Wenzel, 2005). Individuals tend to observe laws more readily when doing so is perceived as the right thing to do (Tyler, 1990). Moreover, individuals are more likely to disregard legal commands if they believe that the law is out of touch or unjust. Some individuals will ignore the risks of noncompliance more easily and some may even disobey the legal rule as a matter of principle. In the context of tax compliance, for example, several studies indicate that stringent enforcement measures may backfire, inducing increased tax evasion (Carroll, 1987; Grasmick and Green, 1980; Lederman, 2003; Smith, 1990). This normative aspect of compliance likely complicated enforcement of copyright law in the P2P era. Empirical evidence has documented the personal beliefs and social norms that sharing private content is socially desirable (Feldman and Nadler, 2006; Gervais, 2004). Experimental evidence suggests that the stringent enforcement of copyright law may have had the unintended effect of reinforcing and strengthening the belief that copyright law is unjust, especially if legal sanctions are perceived as excessive relative to the infringing behavior (Depoorter and Vanneste, 2005, 2011; Depoorter and Van Hiel, 2015).14 C.  Statutory Damages In pursuing a copyright infringement claim, the Copyright Act does not require that all plaintiffs provide evidence of injury from infringement. Once infringement has been established, copyright holders of registered works can elect that the jury sets a statutory damage award (17 U.S.C. § 504(c)). This litigation cost-reducing effect of statutory damages helps reduce the issue of negative value suits and, in doing so, fosters deterrence even for violations of works by small artists. In recent years, however, many commentators claim that the statutory damage system is understood to be out of step with the digital age (Samuelson and Wheatland, 2013). At the time of the 1976 Copyright Act, piracy typically involved the sale of multiple copies of the same work. Since the advent of P2P networks and BitTorrent applications, however, online infringements typically involve infringers that copy many different works. Since the 1976 Copyright Act provides a statutory award for each infringed work, statutory damages can quickly add up for online infringements. For instance, one file-sharer was ordered to pay $222,000 in statutory damages for sharing 24 songs online (Capitol Records, Inc. v. Thomas-Rasset, 692 F.3d 899 (8th Cir. 2012)). In another case, a jury

14   For a discussion of the alternative, soft ‘nudge’ approach to mass copyright infringements in the United States, see Bridy (2012). For an empirical examination of the graduate response systems, see Depoorter and Van Hiel (2015).

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416  Research handbook on the economics of IP law volume 1 imposed $675,000 in statutory damages for the sharing of 30 songs (Sony BMG Music Entm’t v. Tenenbaum, 719 F.3d 67 (1st Cir. 2013)). Critics observe that the system of statutory damages facilitates copyright trolling, enabling plaintiffs to assert rights they do not have and making poorly substantiated claims (Sag, 2015). Although dubious infringement claims are likely to be negated in litigation, many defendants prefer to settle the dispute and avoid incurring the costs of combatting the claim in court. Empirical analysis of dockets and case law reveal that statutory damages claims are commonplace in virtually all areas of copyright law (Depoorter, 2019a). Plaintiffs assert enhanced damages in 81 percent of all copyright disputes in the examined period, yet courts awarded enhanced damages in less than 2 percent of all cases that moved to verdict. One possible explanation is that the claims for enhanced damages serve the goal of subduing alleged infringers into making settlement concessions. These findings support reforming the statutory damage framework (Samuelson and Wheatland, 2009). D.  Small Claims Courts There is a widespread belief that the area of copyright has a small claims problem. Litigation in federal court is prohibitively expensive for most copyright stakeholders. The time, effort, and legal costs involved with litigation outweigh the resources available to many copyright holders; especially given the modest amounts at stake in most disputes. One promising solution to copyright’s problem of negative value suits is to establish a small claims court (Lemley and Reese, 2004, 2005; Depoorter, 2019b). A small claims process can provide a smoother, more cost-effective forum to decide minor, straightforward infringements. Ideally, such a process enables sympathetic plaintiffs, such as individual photographers and independent fashion designers, to obtain relief against infringers, while also enabling accused infringers to mount a more efficient defense against dubious accusations by opportunistic plaintiffs.

VI.  ENFORCEMENT OF PATENT LAW It is well documented that the cost of enforcing patents is often very steep. According to a 2009 economic survey by the American Intellectual Property Law Association, average infringement litigation costs exceed $3 million when the amount in dispute is between $1 million and $25 million (AIPLA, 2011). Litigation costs are especially high for information technology industries, where the boundaries between potentially infringing patents are often unclear or hard to disentangle from an information cost perspective (Bessen and Meurer, 2009; Menell and Meurer, 2014). The landscape of patent enforcement has changed significantly since 2000–08. During that period, practicing entities and industry competitors filed a majority of lawsuits. Since 2008, however, patent holders who do not manufacture products themselves have been initiating a high number of patent lawsuits.15 This heterogeneous group of patent

15   A number of studies document the spectacular rise of lawsuits initiated by patent assertion companies early this decade, especially in the information technology (IT) industries (Chien, 2009,

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Intellectual property enforcement costs  417 holders (referred to as non-practicing entities, (NPEs), patent assertion entities (PAEs), patent monetization entities (PMEs), or patent trolls) includes universities, failed startups, speculators who purchase patents from others, and companies formed by venture capitalists in order to exploit the inventions by others (Allison et al., 2009; Chien, 2012; Cotropia et al., 2014; Risch, 2012). Patent owners whose primary business is to obtain income from alleged infringers of their patents are a topic of intensive discussion; both in the public arena and the academic literature. In the most benign version of this enforcement model, NPEs simply set about a more efficient model of enforcing patents. Specializing in patent enforcement, these entities can scale enforcement and gain expertise in evaluating allegations of infringement. Along these lines, the presence of NPEs provides an avenue for inventors to monetize innovative activity. For instance, individual inventors who do not otherwise commercialize their patents can obtain some return on their inventions by selling their patent rights to enforcement entities. In this positive outlook on enforcement intermediaries, NPEs pursue meritorious claims that yield recoveries in excess of out-of-pocket litigation expenses (Shrestha, 2010). In the more negative interpretation of specialized enforcement entities, litigants leverage the defendant’s prospective litigation costs in order to obtain a settlement. The most socially wasteful variation involves NPEs that assert frivolous and extortionary claims.16 Such ‘bottom-feeder’ trolls seek quick settlements far below the expensive cost of patent litigation, which typically costs millions of dollars (Lemley and Melamed, 2013). 17 As a general observation, NPEs can be expected to engage in aggressive forms of patent enforcement. Specialized enforcers benefit from obtaining a reputation as ferocious litigants and tough negotiators. An operation or manufacturing company, by contrast, may be more likely to moderate its enforcement strategies in light of long-term business relationships with potential infringers, or out of fear of countersuits for infringement. The empirical evidence on litigation by specialized enforcement entities is somewhat mixed. Several empirical studies have examined the characteristics of enforcement by patent trolls and NPEs.18 NPEs are documented to win both larger judgments and larger settlements than do practicing entities (PwC, 2012). And trolls do so despite complaints

2012; Feldman and Ewing, 2012) as well as the increasingly more complex and organized practices of so-called ‘super-trolls’ or ‘troll aggregators’ in the gathering and asserting or licensing of massive amounts of patents (Feldman and Ewing, 2012; Allison et al., 2009). 16   Using the decline of stock values as a benchmark, one study calculated that trolls cost society approximately $30 billion per year (Bessen and Meurer, 2014) and have cost a total of $500 billion over the past 20 years (Bessen et al., 2012). More generally, patent enforcement costs are stated to outweigh the benefits of patent rights more generally in areas, such as IT industries, where potentially overlapping rights are hard to disentangle from an information cost perspective (Bessen and Meurer, 2009). In these circumstances, the suggestion is that, due to the enforcement costs, society and innovators would be better off without patents (Boldrin and Levine, 2009), unless enforcement costs can be moderated. 17   Lemley and Melamed (2013) associate patent trolling with patent fragmentation issues (Heller and Eisenberg, 1998; Lemley and Shapiro, 2007). The disaggregation of complementary patents into different hands, as opposed to the aggregation by non-practicing entities as such, amplifies the problems associated with patent trolls. 18   On the predictability of patent litigation, see Mazzeo et al. (2013).

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418  Research handbook on the economics of IP law volume 1 that they often assert weak patents (Merges, 2009),19 despite some evidence that trollowned patents are more likely than other patents to lose in court (Allison et al., 2011; Miller, 2013).20 Several valuable studies have made strides, carefully analyzing various types of specific litigants within the broad and diverse group of NPEs (Cotropia et al., 2014; Lemley and Melamed; 2013; Schwartz, 2012).21

VII.  ENFORCEMENT OF TRADEMARK LAW Trademark law incentivizes trademark owners to engage in enforcement. Besides the common law equity principles of laches and estoppel that also apply to other areas of IP law, trademark holders are under doctrinal pressure to enforce their rights. For instance, because failure to control the use of a trademark by third parties can lead to a loss of rights, strong or famous trademarks receive stronger protection (Beebe and Hemphill, 2017), and the doctrine of genericide encourages very aggressive policing (Desai and Rierson, 2007; Dreyfuss, 1990).22 Although active enforcement of trademark law is the modus operandi of trademark holders, trademark holders are sometimes accused of crossing the line from aggressive to abusive practices of trademark enforcement. Trademark bullying has been defined as enforcement of ‘an unreasonable interpretation by a large corporation of its trademark rights against a small business or individual through the use of intimidation tactics’ (Grinvald, 2011; Greene, 2004). Empirical research on trademark litigation documents potentially opportunistic uses of strike suits to deter market entrants (Port, 2008) or to obtain settlements on weak infringement claims (Gallagher, 2012). From an economic perspective, these trademark enforcement tactics mimic strategies by incumbents to raise the costs of market entry for prospective competitors (Milgrom and Roberts, 1982; Salop and Scheffman, 1986; Waldman, 1987). In light of these developments, scholars have proposed to implement stronger trademark infringement defenses (Dinwoodie, 2009; Grynberg, 2009; McGeveran, 2008) and doctrines of IP misuse (Ridgway, 2006). Such measures might help counteract the negative effects of aggressive enforcement on competition and free speech (Ramsey, 2003; Schlosser, 2001).

VIII. CONCLUSION Intellectual property enforcement has become a matter of great controversy over the past few decades. Concerns with the private and social costs of enforcing IP rights have instigated intense discussions and a substantial literature.

  But see Miller (2010) (citation-based finding of higher-quality patents in litigation by NPEs).   But see, for evidence to the contrary, Miller (2013). 21   For a further distinction among various types of mass aggregators and their practices, see Cotropia et al. (2014) and Risch (2014). For an empirical description of mass aggregators, see Ewing and Feldman (2012). 22   Some substantive rules in trademark law have been explained in light of the goal of reducing enforcement costs and the costs of administration of justice overall (Bone, 2004). A similar argument has been made in the context of copyright law (Lichtman, 2003). 19

20

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Intellectual property enforcement costs  419 At least three major trends feature prominently in the literature. First, as markets have developed more fully on a global scale, IP infringements have exploded over time, reaching more consumers of infringing materials. The geographic dispersion of infringers significantly increases enforcements costs overall. Second, technologies have a doubleedged effect on enforcement costs. On the one hand, technologies facilitate the ease and appeal of infringing activities. On the other hand, technological advances enable scaled enforcement. Third, especially regarding patents, the explosion of intellectual property rights granted over time has prompted enforcement acceleration by enforcement intermediaries. These new entities have ramped up enforcement considerably. The nuances of these enforcement practices are being teased out and the overall effect on innovation remain topics of further exploration.

REFERENCES AIPLA (American Intellectual Property Law Association). 2011. Report of the Economic Survey. Allison, John R., Mark A. Lemley, and Joshua Walker. 2009. ‘Extreme Value or Trolls on Top: The Characteristics of the Most-Litigated Patents,’ 158 University of Pennsylvania Law Review 1–38. Allison, John R., Mark A. Lemley, and Joshua Walker. 2011. ‘Patent Quality and Settlement among Repeat Patent Litigants,’ 99 Georgetown Law Journal 677–712. Anderson, Terry L., and Peter J. Hill. 1975. ‘The Evolution of Property Rights: A Study of the American West,’ 18 Journal of Law & Economics 163–80. Anderson, Terry L., and Peter J. Hill. 1983. ‘Privatizing the Commons: An Improvement?,’ 50 Southern Economic Journal 438–50. Balganesh, Shyamkrishna. 2013. ‘The Uneasy Case Against Copyright Trolls,’ 86 Southern California Law Review 723–82. Barnett, Jonathan M. 2013, ‘Copyright Without Creators,’ 9 Review of Law & Economics 389–438. Bebchuk, Lucian A. 1988. ‘Suing Solely to Extract a Settlement Offer,’ 17 Journal of Legal Studies 437–50. Bebchuk, Lucian A. 1996. ‘A New Theory Concerning the Credibility and Success of Threats to Sue,’ 25 Journal of Legal Studies 1–26. Beebe, Barton, and C. Scott Hemphill. 2017. ‘The Scope of Strong Marks: Should Trademark Law Protect the Strong More Than the Weak,’ 92 New York University Law Review 1339–98. Bell, Tom W. 1998. ‘Fair Use vs. Fared Use: The Impact of Automated Rights Management on Copyright’s Fair Use Doctrine,’ 76 North Carolina Law Review 557–620. Bernheim, B. Douglas, and Michael D. Whinston. 1990, ‘Multimarket Contact and Collusive Behavior,’ 21 The RAND Journal of Economics 1–26. Bessen, James, and Michael J. Meurer. 2009. Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk. Princeton, NJ: Princeton University Press. Bessen, James, and Michael J. Meurer. 2014. ‘The Direct Costs from NPE Disputes,’ 99 Cornell Law Review 387–424. Bessen, James E., Jennifer Laurissa Ford, and Michael J. Meurer. 2012. ‘The Private and Social Costs of Patent Trolls,’ 34 (4) Regulation 26–35. Boldrin, Michele, and David K. Levine. 2009. Against Intellectual Monopoly. Cambridge: Cambridge University Press. Bone, Robert G. 1997. ‘Modeling Frivolous Suits,’ 145 University of Pennsylvania Law Review 519–605. Bone, Robert G. 2004. ‘Enforcement Costs and Trademark Puzzles,’ 90 Virginia Law Review 2099–186. Bridy, Annemarie. 2010. ‘Is Online Copyright Enforcement Scalable?,’ 13 Vanderbilt Journal of Entertainment & Technology Law 695–737. Bridy, Annemarie. 2012. ‘Graduated Response American Style: “Six Strikes” Measured against Five Norms,’ 23 Fordham Intellectual Property Media & Entertainment Law Journal 1–67. Carrier, Michael A. 2012. ‘Copyright and Innovation: The Untold Story,’ 2012 Wisconsin Law Review 891–962. Carroll, John S. 1978, ‘A Psychological Approach to Deterrence: The Evaluation of Crime Opportunities,’ 36 Journal of Personality & Social Psychology 1512–20. Carroll, John S. 1987. ‘Compliance with the Law: A Decision-Making Approach to Taxpaying,’ 11 Law and Human Behavior 319–35. Chien, Colleen V. 2009. ‘Of Trolls, Davids, Goliaths, and Kings: Narratives and Evidence in the Litigation of High-Tech Patents,’ 87 North Carolina Law Review 1571–616.

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Intellectual property enforcement costs  421 Gould, John P. 1973. ‘The Economics of Legal Conflicts,’ 2 Journal of Legal Studies 279–300. Grady, Mark F. 1988. ‘Why Are People Negligent? Technology, Nondurable Precautions, and the Medical Malpractice Explosion,’ 82 Northwestern University Law Review 293–334. Grasmick, Harold G., and Donald E. Green. 1980. ‘Legal Punishment, Social Disapproval and Internalization as Inhibitors of Illegal Behavior,’ 17 Journal of Criminal Law & Criminology 325–35. Greene, K.J. 2004. ‘Abusive Trademark Litigation and the Incredible Shrinking Confusion Doctrine: Trademark Abuse in the Context of Entertainment Media and Cyberspace,’ 27 Harvard Journal of Law & Public Policy 609–42. Grinvald, Leah Chan. 2011. ‘Shaming Trademark Bullies,’ 2011 Wisconsin Law Review 625–90. Grynberg, Michael. 2009. ‘Things Are Worse than We Think: Trademark Defenses in a Formalist Age,’ 24 Berkeley Technology Law Journal 897–970. Haber, Eldar. 2015. ‘The Criminal Copyright Gap,’ 18 Stanford Technology Law Review 247–88. Hadfield, Gillian. 1992, ‘The Economics of Copyright: An Historical Perspective,’ 38 Copyright Law Symposium (ASCAP) 1–46. Hall, Bronwyn, and Rosemarie Ziedonis. 2001. ‘The Patent Paradox Revisited: An Empirical Study of Patenting in the Semiconductor Industry, 1979–1999,’ 32 The RAND Journal of Economics 101–28. Hardy, Trotter. 1996. ‘Property (and Copyright) in Cyberspace,’ 1996 University of Chicago Legal Forum 217–60. Hazard, Jr., Geoffrey C. 1989. ‘Authority in the Dock,’ 69 Boston University Law Review 469–76. Heller, Michael A., and Rebecca S. Eisenberg. 1998. ‘Can Patents Deter Innovation? The Anticommons in Biomedical Research,’ 280 Science 698–701. Hughes, Justin. 2016. ‘Motion Pictures, Markets, and Copylocks,’ 23 George Mason Law Review 941–66. Hurt, Robert M., and Robert M. Schuchman. 1966. ‘The Economic Rationale of Copyright,’ 56 The American Economic Review 421–32. Jaffe, Adam B., and Josh Lerner. 2004. Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do About It. Princeton, NJ: Princeton University Press. James, Simon, John Hasseldine, Peggy Hite, and Marika Toumi. 2001. ‘Developing a Tax Compliance Strategy for Revenue Services,’ 55 Bulletin for International Fiscal Documentation 158–64. Kaplow, Louis. 1986. ‘Private versus Social Costs in Bringing Suit,’ 15 Journal of Legal Studies 371–85. Kaplow, Louis. 1995. ‘A Model of the Optimal Complexity of Legal Rules,’ 11 Journal of Law, Economics and Organization 150–63. Katz, Avery. 1990. ‘The Effect of Frivolous Lawsuits on the Settlement of Litigation,’ 10 International Review of Law and Economics 3–27. Kitch, Edmund W. 1999. ‘Can the Internet Shrink Fair Use,’ 78 Nebraska Law Review 880–90. Ku, Raymond Shih Ray, Jiayang Sun, and Yiying Fan. 2009. ‘Does Copyright Law Promote Creativity: An Empirical Analysis of Copyright’s Bounty,’ 62 Vanderbilt Law Review 1667–746. Landes, William M., and Richard A. Posner. 1975. ‘The Private Enforcement of Law,’ 4 Journal of Legal Studies 1–46. Landes, William M., and Richard A. Posner. 1979. ‘Adjudication as a Private Good,’ 8 Journal of Legal Studies 235–84. Lanjouw, Jean O., and Josh Lerner. 2001. ‘Tilting the Table? The Predatory Use of Preliminary Injunctions,’ 44(2) The Journal of Law and Economics 573–603. Lanjouw, Jean O., and Mark Schankerman. 2004. ‘Protecting Intellectual Property Rights: Are Small Firms Handicapped?,’ 47 Journal of Law and Economics 45–74. Lederman, Leandra. 2003. ‘The Interplay Between Norms and Enforcement in Tax Compliance,’ 64 Ohio State Law Journal 1453–514. Lemley, Mark A. 2001. ‘Rational Ignorance at the Patent Office,’ 95 Northwestern Law Review 1–34. Lemley, Mark A. 2008. ‘Ignoring Patents,’ 2008 Michigan State Law Review 19–34. Lemley, Mark A. 2011. ‘Is the Sky Falling on the Content Industries?,’ 9 Journal on Telecommunications & High Technology Law 125–36. Lemley, Mark A., and Douglas Melamed. 2013. ‘Missing the Forest for the Trolls,’ 113 Columbia Law Review 2117–90. Lemley, Mark A., and Anthony R. Reese. 2004. ‘Reducing Digital Copyright Infringement without Restricting Innovation,’ 56 Stanford Law Review 1345–426. Lemley, Mark A., and Anthony R. Reese. 2005. ‘A Quick and Inexpensive System for Resolving Digital Copyright Disputes,’ 23 Cardozo Arts & Entertainment Law Journal 1–20. Lemley, Mark A., and Carl Shapiro. 2007. ‘Patent Holdup and Royalty Stacking,’ 85 Texas Law Review 1991–2050. Lerner, Joshua, 1995. ‘Patenting in the Shadow of Competitors,’ 38 Journal of Law and Economics 463–96. Levmore, Saul. 2002. ‘Two Stories about the Evolution of Property Rights,’ 31 Journal of Legal Studies 421–52. Libecap, Gary D., and James L. Smith. 2002. ‘The Economic Evolution of Petroleum Property Rights in the United States,’ 31 Journal of Legal Studies 589–608.

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Intellectual property enforcement costs  423 Samuelson, Pamela, and Tara Wheatland. 2009. ‘Statutory Damages in Copyright Law: A Remedy in Need of Reform,’ 51 William and Mary Law Review 439–512. Samuelson, Pamela, Phil Hill, and Tara Wheatland. 2013. ‘Statutory Damages: A Rarity in Copyright Laws Internationally—But for How Long?,’ 60 Journal of the Copyright Society 529–53. Schlosser, Sarah Mayhew. 2001. ‘The High Price of (Criticizing) Coffee: The Chilling Effect of the Federal Trademark Dilution Act on Corporate Parody,’ 43 Arizona Law Review 931–64. Schwartz, David L. 2012. ‘The Rise of Contingent Fee Representation in Patent Litigation,’ 62 Alabama Law Review 335–88. Schwartz, Warren F., and Gordon Tullock. 1975. ‘The Costs of a Legal System,’ 4 Journal of Legal Studies 75–82. Shapiro, Carl. 2001. Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard-Setting. Cambridge, MA: The MIT Press. Shavell, Steven. 1982. ‘The Social Versus the Private Incentive to Bring Suit in a Costly Legal System,’ 11 Journal of Legal Studies 333–9. Shrestha, Sannu K. 2010. ‘Trolls or Market-Makers: An Empirical Analysis of Nonpracticing Entities,’ 110 Columbia Law Review 114–60. Sichelman, Ted M. 2010. ‘Commercializing Patents,’ 62 Stanford Law Review 341–413. Siegelman, Peter, and Joel Waldfogel. 1999. ‘Toward a Taxonomy of Disputes: New Evidence through the Prism of the Priest/Klein Model,’ 18 Journal of Legal Studies 101–30. Smith, Kent W. 1990. ‘Integrating Three Perspectives on Noncompliance: A Sequential Decision Model,’ 17 Criminal Justice & Behavior 350–69. Syed, Talha, and Bracha Oren. 2014. ‘Beyond the Incentive-Access Paradigm: Product Differentiation & Copyright Revisited,’ 92 Texas Law Review 1841–920. Tehranian, John. 2007. ‘Infringement Nation: Copyright Reform and the Law/Norm Gap,’ 2007 Utah Law Review 537–50. Tirole, Jean. 1994. The Theory of Industrial Organization. Cambridge, MA: The MIT Press.
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Case List Capitol Records, Inc. v. Thomas-Rasset, 692 F.3d 899 (8th Cir. 2012). Sony BMG Music Entm’t v. Tenenbaum, 719 F.3d 67 (1st Cir. 2013).

Legislative Materials 17 U.S.C. § 504(c) (1976). 35 U.S.C. § 299 (2012). 15 U.S.C. § 1125(c), 1127 (1995).

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16.  Economic analysis of intellectual property notice and disclosure Peter S. Menell* 23

Contents Notice Functions A. Knowledge Dissemination B. Signaling C. Freedom to Operate D. Cumulative Creativity II. Notice Frameworks A. Costs B. Rules and Institutions C. Incentives and Pathologies 1. Costs of describing and disclosing intangible resources 2. Notice externalities 3. Interplay with remedies 4. Subversion of public policy III. Policy Analysis A. Utility Patent 1. Disclosure timing 2. Claim clarity 3. Ownership transparency 4. Systematic judicial procedures for determining patent scope 5. Internalizing and counteracting adjustments 6. Fostering licensing 7. Depropertization B. Copyright 1. Mandatory registration 2. Optimal specificity 3. Preclearance institutions 4. Systematic judicial procedures for determining copyright scope 5. Substantive reforms 6. Voluntary licensing regimes 7. Depropertization

I.

*  Koret Professor of Law and Director of the Berkeley Center for Law and Technology, Berkeley School of Law, University of California. I am grateful to Michael Meurer for his collaboration on related work and to Amit Elazari, Concord Cheung, and Megan McKnelly for research assistance.

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Economic analysis of intellectual property notice and disclosure  425 C. Design Patent D. Trademark E. Trade Secret References Notice of intellectual property content, ownership, boundaries, scope of rights (and limitations), enforcement institutions, and remedial consequences plays a central role in resource planning and other economic and social functions. Developers of resources— whether tangible or intangible—ideally seek to know all potential encumbrances in advance of investing their time, effort, and money into a project. Just as contracting parties would ideally operate with fully specified contracts, resource developers would like to know all contingencies affecting their choices before they incur development costs. Such information includes the boundaries and holders of neighboring properties as well as the extent to which those rights affect ‘neighboring’ resources and activities—for example, nuisance law for non-trespassory activities, copyright law’s fair use doctrine, and patent law’s doctrine of equivalents. Legislatures, jurists, and intellectual property scholars have long looked to real property law and institutions as models and a toolbox for designing intellectual property rules and institutions (Van Houweling, 2019). Landowners record property interests with government registries, which inform the public of property boundaries, owners, restrictions, and encumbrances. Prospective purchasers, neighbors, land developers, contractors, lenders, property tax assessors, zoning authorities, and other interested parties consult these records to plan resource use and fund government activities. Thus, public notice of real estate ownership functions as a critical governance institution. It has become more reliable and less costly over time as a result of advances in surveying technologies, geographical information systems, and publicly available computer databases. There is much to be gained from looking to real property notice rules and institutions in analyzing notice rules and institutions for intangible resources. Inventors and authors seeking to appropriate a return on their investments wish to attract investors, users, and consumers. Furthermore, developers of new technologies and works of authorship need to determine whether their projects can be commercialized without running afoul of the rights of others. Disclosure of technological knowledge and creative works promotes further development of knowledge. Yet notice in the intellectual property realm introduces distinctive challenges (Van Houweling, 2019; Menell, 2011). Although patent and copyright law principally rely upon market mechanisms to promote innovation and expressive creativity, various technological, economic, and social factors require a nuanced mix of regulatory adjustments as well as government oversight. Trademark law serves primarily as a complement to free competition by protecting source-identifying symbols against confusing use by others. Thus, notice of the connection between such indicia and associated products and services plays a critical role in the functioning of trademark law. In contrast to patent, copyright, and trademark law, trade secret protection is destroyed by public disclosure. Therefore, it depends upon those obtaining access to trade secrets to keep proprietary information confidential. Unlike land, intangible resources cannot typically be mapped onto two-dimensional grids. Inventors draft patent claim boundaries using words, which introduces inherent

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426  Research handbook on the economics of IP law volume 1 linguistic ambiguities. Inventors, authors, artists, and musicians draw upon the works of others in inventing new technologies and expressing their own creativity. Marketers often seek to associate common terms and shapes with their wares and services as a means to attract consumers. Thus, the various intellectual property regimes face substantial challenges in informing the public about the contours and limits of intellectual property rights. This chapter examines the function, design, and economic effects of intellectual property notice rules and institutions. Section I discusses the principal functions served by notice of intellectual property notice and disclosure. Section II surveys the economic frameworks for analyzing intellectual property notice costs, institutions, pathologies, and policy approaches. Section III traces the ramifications of these frameworks for patent, copyright, trademark, and trade secret regimes, highlighting reforms for promoting the efficacy of these regimes as well as broader social goals.

I.  NOTICE FUNCTIONS Notice of the content, ownership, boundaries/scope, and legal standards governing intellectual property protection serve several functions: (A) knowledge dissemination; (B) signaling; (C) freedom to operate; and (D) cumulative creativity. These functions vary among the various stakeholders: inventors/creators, investors, competitors, complementors (aftermarket entrants/participants), potential collaborators (including alliances and standard setting organizations (SSOs)), purchasers, employees/contractors, potential whistleblowers, the general public, and the government. A.  Knowledge Dissemination In contrast to real and chattel (personal) property protections, which flow from state statutes and common law, patent and copyright law protections derive from the US Constitution’s conferral of legislative power ‘To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries’ (U.S. Const. art I, § 8, cl. 8). The Framers believed that dissemination of scientific and technological knowledge and creative expression were critical to encourage advancements and the flourishing of society. Thus, knowledge dissemination serves a central role in the provision of patent and copyright protection (Menell, 2007a). Such dissemination is often characterized as the quid pro quo for the grant of patent protection, which ‘allows the [USPTO] to examine applications effectively; courts to understand the invention, determine compliance with the statute, and construe the claims; and the public to understand and improve upon the invention and to avoid the claimed boundaries’ (Ariad Pharmaceuticals v. Eli Lilly and Co., 598 F.3d 1336, 1345 (Fed. Cir. 2010)). Burk (2008) suggests that the disclosure function of the patent system can be conceived more capaciously as a means for codifying what would otherwise be tacit knowledge. In order to obtain a patent, the applicant is required to describe ‘the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it

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Economic analysis of intellectual property notice and disclosure  427 is most nearly connected, to make and use the same . . .’ (35 U.S.C. § 112(a)). The Patent Act further requires that the applicant conclude the patent specification ‘with one or more claims particularly pointing out and distinctly claiming the subject matter which the inventor . . . regards as the invention’ (35 U.S.C. § 112(b)). Several scholars question whether the patent system serves this function well. Devlin (2010) contends that patent disclosure is largely ineffective and ought to take a back seat to promoting ex ante incentives to innovate and commercialization. Fromer (2009) argues that knowledge dissemination is central to the effective functioning of the patent system, although in desperate need of invigoration. Based on a survey of nanotechnology researchers and several case studies, Larrimore Ouellette (2012) finds that patents provide valuable technical information for many early-stage researchers, although the value of patent disclosures could be improved to better align patent system disclosure with general scientific disclosure norms. Seymore (2010) proposes the greater use of working examples to enhance the teaching function of patent specifications. Although copyright law also derives from the same constitutional clause, most expressive works typically function as disclosure.1 Nonetheless, the scope of such protection is often difficult to discern due to the many limitations on copyright protection (Menell, 2016b). Similarly, trademarks are also readily apparent on their face. By contrast, trade secret law is premised on keeping knowledge secret. Unlike patent protection, however, trade secrecy does not afford the holder exclusive rights, only rights against misappropriation through improper means or breach of confidence. Therefore, those who reverse engineer or independently develop the knowledge are free to use and disclose the information. Therefore, patent law provides stronger protection, but subject to the quid pro quo of public disclosure. B. Signaling Intangible resource developers often seek to disseminate knowledge as a means of signaling promising investment opportunities and business collaborations. As President Abraham Lincoln eloquently captured, the patent system ‘added the fuel of interest to the fire of genius[] in the discovery and production of new and useful things’ (Lincoln, 1953). The ‘fuel of interest’ refers to venture finance. To attract the capital investment necessary to pursue and commercialize technological inventions, inventors must disclose their ideas to potential investors. As Arrow (1962) recognized, such investors will want to know the details of the technology prior to making a financial commitment. But once exposed to the knowledge, they have the information goods and can proceed, in the absence of intellectual property protection, to commercialize the technology (or expressive work) without compensating the inventor (or author). Patent and copyright protection can solve Arrow’s Information Paradox by establishing rights in the knowledge. Patents provide a means for credibly publicizing information

1   Computer software can be an exception, where the know-how underlying the software can be obscured through release or registration of only the binary code and not human-decipherable source code.

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428  Research handbook on the economics of IP law volume 1 (Long, 2002). Patents can reduce informational asymmetries between inventors and prospective funders. Lemley (2000) and Conti et al. (2013) highlight the signaling role in modern venture capital. Acquisition of a patent signals the potential for an excludable intangible resource as well as the fact that the Patent Office deems the claimed invention novel, nonobvious, and adequately disclosed. Contractual agreements, such as nondisclosure agreements (NDAs) and agreements to compensate the inventor for use of an idea, can also solve Arrow’s Information Paradox. (Burstein, 2012; Anton and Yao, 2002). Courts have developed various doctrines for this purpose (Smith v. Dravo, 203 F.2d 369 (7th Cir. 1953) (recognizing implied confidential relationships as a basis for trade secret protection); Restatement (Third) of Unfair Competition § 41; Desny v. Wilder, 46 Cal. 2d 715 (Cal. S. Ct. 1956) (recognizing impliedin-fact contract); Blaustein v. Burton, 88 Cal. Rptr. 319 (Cal. Ct. App. 1970) (extending Desny doctrine)). Nonetheless, the costs of negotiating express agreements can be prohibitive. Many venture capitalists refuse to sign NDAs. Furthermore, start-up inventors often have difficulty gaining access to major funders and established corporations. Patent protection enables them to establish protection for implementations of ideas and signal the potential to exclude competitors. Inventors might also use strategic disclosure of knowledge to communicate with potential business partners and competitors. The patent system provides a database for technology and finance enterprises to study the intangible resource landscape and explore business opportunities. Patents provide assets that can be bought, sold, and cross-licensed to realize gains from trade and collaboration. Patents also play a critical role in standard setting activities, which are critically important to network industries (Menell, 2019). SSOs seek to lessen the tension between employing the best technological solutions in industry standards and ensuring widespread access to standards by requiring members to disclose standard-essential patents (SEPs) and license them on fair, reasonable, and non-discriminatory (FRAND) terms (Contreras, 2019). Thus, disclosure of patents plays a critical role in the development of technology standards, which can be critical to promoting interoperability, coordination, and collaboration. C.  Freedom to Operate Like real property, patents and copyrights can encumber competitors’ freedom to operate. Inventors risk substantial liability, including injunctions barring their operations, even if they unknowingly infringe patented technologies. Hence, inventors and investors often engage in freedom to operate searches of patent records before introducing products and services. Thus, patent disclosures and the searchability of Patent Office records play a critical role in technology ventures. They also come into play during due diligence searches accompanying corporate mergers and acquisitions. Furthermore, recordation of transfers of patent assets protects purchasers of patents from the risk of loss of ownership due to subsequent purchases (Menell, 2007b). The patent system’s recordation of transfer regime largely mirrors transfer recordation of real estate and chattels. Copyright law also operates to constrain freedom to operate. Unlike patent law, however, copyright liability requires actual copying as an element of infringement. Therefore, independent development serves as a defense to copyright infringement

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Economic analysis of intellectual property notice and disclosure  429 (Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49, 54 (2d Cir. 1936)). This defense, however, is unlikely to succeed where a later developed work is substantially similar to a widely available expressive work. Subconscious copying is actionable and courts will infer actual copying where there is a high objective basis for access to the protected work and probative similarity between the works (Bright Tunes Music Corp. v. Harrisongs Music, Ltd., 420 F. Supp. 177, 181 (S.D.N.Y. 1976); Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49, 54 (2d Cir. 1936) (L. Hand, J.) (‘Yet unconscious plagiarism is actionable quite as much as deliberate’)). Copyright registration is not required for protection, although it is recommended and commonly obtained to facilitate enforcement and expand potential remedies. Nonetheless, Copyright Office registration records can be difficult to track, especially for works that lack clearly marked titles (such as photographs). Furthermore, older works may have forfeited protection through publication without proper notice or failure to renew. Thus, conducting freedom to operate searches for copyrighted works can be costly and unreliable. As with patents (and real and chattel property interests), recordation of transfers of copyright assets, including particular rights (such as the right to prepare a derivative work), protects purchasers of copyright interests and financiers from the risk of loss of ownership due to subsequent transfers. The copyright system’s recordation of transfer regime largely mirrors transfer recordation of real and chattel property (Menell, 2007b). Film financiers, for example, conduct careful searches of the various copyrighted works— novels, scripts, musical compositions, sound recordings, images, props—featured in film projects. Tracing the provenance of these works can be a complex task. Companies introducing new goods and services risk trademark liability for using terms that are confusingly similar to established trademarks. Thus, before marketing, manufacturers routinely conduct trademark searches. Such searches are complicated by the fact that trademark registration is optional in the United States. Both federally registered trademarks and common law trademarks are enforceable. D.  Cumulative Creativity Intellectual property notice plays a vital role in promoting cumulative innovation and creativity. (Menell and Scotchmer, 2007). Rather than re-invent the wheel or create an entirely new genre, inventors and creators can usefully build upon the work of those who have come before them. Intellectual property licenses as well as building on unprotected elements of the prior art reduces wasteful duplicative research and promotes collaboration. Thus, clear and accessible notice of prior knowledge, the scope of rights, and the person or persons with whom a cumulative creator must license rights promotes transactional efficiency, productive collaboration, technological progress, and cumulative creativity.

II.  NOTICE FRAMEWORKS While conceptually straightforward, the provision of resource notice, especially of intangible resources, can be complex. As background for analyzing intellectual property notice regimes, this section contrasts notice costs for tangible and intangible resources,

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430  Research handbook on the economics of IP law volume 1 summarizes intangible resource notice rules and institutions, and analyses the incentives (and disincentives) to provide accurate, accessible, and timely notice. A. Costs Resource notice can entail five types of social costs: (1) describing and disclosing resource ownership and scope; (2) determining owners of potentially conflicting property rights; (3) ascertaining boundaries of those properties; (4) assessing the scope of those property rights and the ramifications of infringing those rights; and (5) dispute resolution costs (Menell, 2016b; Menell and Meurer, 2013). The first type of notice cost is borne by the resource claimant. The second, third, and fourth types—what can be characterized as tracing costs—are borne by neighboring developers or, in the case of intangible resources, cumulative creators. The fifth is shared by resource claimants and those who might violate the claimants’ rights. In some contexts, such as conventional real estate development, these costs are manageable because the resources are easily described, the number and complexity of ‘nearby’ property rights is small, and reliable publicly accessible registries record the resources. Thus, the cost of evaluating relevant property rights is a small fraction of the value of the development project. Notice costs rise when the resources become more difficult to describe (as is the case with many intangible resources), the number of ‘neighbors’ grows (making it more difficult to identify relevant counterparties), and the legal rights and remedies are more difficult to evaluate. Notably, notice costs also tend to rise with the value of the development project because the returns to enforcement of property rights tends to grow with value. Unsuccessful projects rarely attract enforcement whereas commercially successful projects often do. The familiar Hollywood quip—‘where there’s a hit, there’s a Writ’—reflects this dispute selection phenomenon (Menell and Depoorter, 2014). Blockbusters attract more lawsuits than box office flops. Inefficient notice regimes raise development costs and generate wasteful litigation. When a land or factory developer sets out to build a structure or a business considers introducing a new product, they would ideally like to know the full range of potential impediments to their projects. The land developer does not want to encroach neighbors’ lands. The factory developer does not want to cause a nuisance. And the product developer does not want to infringe patents, copyrights, or trademarks. Each of these developers will likely retain a resource specialist (e.g., land surveyor, land use consultant, environmental lawyer, patent adviser, copyright clearance professional, trademark consultant) to determine whether the proposed project invades or infringes the rights of others. They would like to know, to the extent feasible, the rights of others before sinking their investment. But like the contract theorist’s fully specified contract, the economist’s world of costless transactions, and the physicist’s vacuum, full knowledge of all potential constraints on resource development might not be achievable in the real world. Neither property law nor property deeds can fully specify the scope of all potential non-trespassory invasions (nuisances). Nor can copyright law or copyright registrations fully delineate all potential fair uses of the protected work. Yet this baseline provides a valuable construct for assessing the sources of notice failure and a goal for policy intervention. We can usefully divide the range of notice issues into two categories: (1) ‘deed’ ­information—factual information relating to the actual resource boundaries and the

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Economic analysis of intellectual property notice and disclosure  431 identity of the owner(s); and (2) scope of property rights—information relating to the legal scope of the rights pertaining to the particular resource claim (such as nuisance, fair use, and so on). The first category comports with a more conventional definition of notice information for land and chattels in large part because the rights associated with tangible property are relatively straightforward. Land and chattel boundaries are physical, measurable, and directly observable. Default rules, such as the ad coelum doctrine which affords a landowner control over the three-dimensional column defined by the deed, provide added clarity. Standardization and modularity of real estate further enhance boundary precision (Merrill and Smith, 2000). The adverse possession doctrine and good faith improver statutes provide mechanisms to resolve disputes over clouded title (Dwyer and Menell, 1998, pp. 76–84, 292–6). Uncertainty about the scope of tangible property resources rarely arises in modern experience2 outside of nuisance issues, which are resolved through the application of a murky balancing standard (Dwyer and Menell, 1998, pp. 296–318). The tangible, geographic, and rivalrous characteristics of land provide relatively reliable and inexpensive means for verifying potential real property conflicts (Smith, 2011; Merrill and Smith, 2000 (extolling the virtues of modularity in property systems)). Thanks to advances in land surveying technology, land claims can be and typically are specified with numerical geographic precision. Signs, fences, and other structures are also available to communicate boundary and ownership information efficiently. Moreover, most rectangular land parcels have relatively few abutting property, often no more than four to eight, thereby limiting the number of abutting neighbors with whom most land developers must interact in planning projects and making it relatively easy to identify owners of neighboring parcels. Furthermore, mandatory public recording systems and related institutions (such as finance and title insurance) promote easy availability of land notice information.3 By contrast, the boundaries and scope of intangible rights are frequently far more difficult to establish, mark, and communicate. Ideas, which form the basis for intangible 2   Prior to the establishment of the Public Land Survey System (based on a rectangular grid) in the western territories shortly after the Revolutionary War, surveying was relatively expensive and imprecise, leading to frequent boundary disputes on the American frontier. The lack of an overall framework for coordinating land demarcation, the vagueness of boundaries, and the irregular shapes of parcels were major contributors to property disputes (Libecap and Lueck, 2011a, 2011b). 3   This is not to suggest that notice problems do not arise in modern real property settings (Heller, 2008). The principal problems, however, relate to assessing permissible uses of land in more densely populated communities. Neighbors can object to development projects that negatively affect the value of their land. Zoning seeks to encourage coordinated and compatible land use. Nuisance law also addresses conflicting land use by granting neighboring land owners protection against noxious uses of land. These rules introduce some uncertainty into land use planning. But even so, notice costs are usually not severe and zoning institutions enable developers to determine whether a development project passes muster before the major construction costs are incurred. Furthermore, some uncertainty about permissible uses is not necessarily an obstacle to early, efficient resolution of disputes among affected parties. Land developers can typically identify relevant counterparties relatively easily. Uncertainty about liability by itself usually does not cause bargaining failure. Rather, breakdowns tend to be driven by private information about a dispute or divergent beliefs about the likely trial outcomes. Such breakdowns might be related to notice, but are more commonly attributable to other factors.

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432  Research handbook on the economics of IP law volume 1 resources, can be multi-dimensional and amorphous. Unlike land resources, intangible resources cannot generally be mapped to two-dimensional grids.4 Patents generally rely upon textual descriptions, which opens boundary drawing to interpretation. Furthermore, patent claims often use ambiguous terminology. In addition, outside of a few markets (such as some pharmaceutical products), there is not a one-to-one relationship between a patent and a product. Inventors and companies frequently develop large patent portfolios surrounding their products, further complicating the task of mapping protected intangible resources (Parchomovsky and Wagner, 2005). Moreover, many inventors and some companies patent technologies that they do not ultimately commercialize. Therefore, the fact that no product embodies a technology does not mean that the intangible space is not occupied. Only by searching the patent registry can a new entrant assess freedom to operate. And even then, the fact that patent applications are typically not publicly available until 18 months after filing creates unknowable infringement risks. Thus, a smartphone or app developer must sift through a bewildering, opaque, multi-dimensional minefield of patented technologies to assess freedom to operate. They might also need to assess copyright protection of application program interfaces and trademark protection for compatibility standards. While the outer ‘boundaries’ of copyrighted works are readily apparent—for example, a manuscript, painting, musical composition, computer program, architectural ­drawing—the scope of copyright protection is complicated by the unprotectability of elements within the larger work. Thus, it can be difficult to determine what aspects of copyrighted work are not protected, and hence free for others to use. Copyright law’s protection of original compilations (selection and arrangement) of unprotected elements further complicates the determination of the scope of copyright protection. Design patents pose similar challenges as their scope excludes the functional features of articles of manufacture (Menell and Yablon, 2019). Moreover, unlike physical resources, intangible resources are generally not rivalrous. Unlike a plot of land or an ice cream cone, multiple people can share an idea (like a wireless email system) or a story (like the adventures of a young wizard and his friends) without interfering with the use of that idea or information by others. Hence, intangible resource conflicts are far less observable than trespass upon land or theft of personal property. An independent inventor of a wireless email system would not necessarily know that another inventor claimed that technology, whereas a land owner can use fences, direct observation, and cameras to investigate and monitor trespassory invasions. Even though patented technologies are examined by the Patent Office and contained in registries, the classification of patented technologies is typically far more difficult to search than land registries. Furthermore, copyrights and trademarks need not be registered to garner protection. In addition, copyright registries can be difficult to trace. While trademark registries for word marks are relatively straightforward to search, the same cannot be said for trade dress, graphic image marks, and design patents. Finally, the legal rules establishing and limiting protection for intangible resources are far more complex than those applicable to land and other tangible resources. In contrast to

4   Chemical compositions can be classified systemically by reference to standardized nomenclature, molecular structure, and the Periodic Table.

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Economic analysis of intellectual property notice and disclosure  433 the broad, uniform, and intuitive land rights bundle, intellectual property regimes employ far more variegated and limited bundles of rights (Menell, 2007c). These more complex rights structures reflect a range of countervailing legislative and constitutional purposes: (1) promoting cumulative creativity; (2) restricting monopoly exploitation; (3) avoiding impairment of free expression; (4) accommodating access by underserved constituencies; and (5) limiting overreaching by publishers. As a result, intellectual property regimes employ numerous doctrines that involve complexity, balancing, and inherent subjectivity, such as: utility patent law’s doctrine of equivalents, exhaustion doctrine, durational limits, remedial standards, and misuse doctrine; design patent law’s ornamentality/ non-functionality limitation; copyright’s infringement standard (substantial similarity of protected expression), first-sale doctrine, termination of transfer provision, compulsory licenses, statutory exemptions, fair use defense, and statutory damages regime; and trademark law’s infringement standard (likelihood of confusion) and defenses. In addition, intellectual property law deploys various complex channeling doctrines (idea/expression dichotomy, useful article doctrine, functionality doctrine, preemption rules) to prevent interference among the modes of intellectual property protection and harmonize them with contract and antitrust law. B.  Rules and Institutions Notice of property interests can arise through the acts of resource owners as well as pursuant to legal requirements. Furthermore, the nature of resources affects resource owners’ options for informing the public about the resource claim. Land can be physically marked with signposts or fences to communicate ownership claims. Land claims can and are legally required to be registered with local recording offices using prescribed registration systems (grantor/grantee or geographic indices). As noted above, the boundaries of land claims are typically specified with geographic precision on tract indices with geographic coordinates (such as rectangular plat maps) or through metes and bounds (measurements from particular corner point).5 Registration of ownership claims (including security interests such as mortgages and liens) protects bona fide purchasers of property interests from the claims of prior grantees who have not recorded their interests. In addition, land title insurers and other private actors maintain their own registries, some of which are private and others that are public or accessible for a fee. Landowners can also provide notice of ownership by inspecting their property and excluding trespassers. Similarly, owners of chattels can mark their personal property and control access. Pursuant to Article 9 of the Uniformed Commercial Code, states maintain registries of security interests in personal property. Those who lend money secured against personal 5   For example, ‘beginning with a corner at the intersection of two stone walls near an apple tree on the north side of Muddy Creek road one mile above the junction of Muddy and Indian Creeks, north for 150 rods [a rod is a surveyor tool measuring 5.5 yards] to the end of the stone wall bordering the road, then northwest along a line to a large standing rock on the corner of the property now or formerly belonging to John Smith, thence west 150 rods to the corner of a barn near a large oak tree, thence south to Muddy Creek road, thence down the side of the creek road to the starting point’ (Metes and Bounds, Wikipedia, https://en.wikipedia.org/wiki/Metes_and_bounds).

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434  Research handbook on the economics of IP law volume 1 property can register their claim with the state recording office, thereby providing notice to subsequent security interest claimants. Intangible resources vary in the practicality of marking, fencing, and physical control. By distributing products protected by patents, copyrights, or trademarks with marking of the intellectual property claims, intellectual property owners can provide direct notice to those who come in contact with goods bearing intellectual property markings. Furthermore, patent law, copyright law, and trademark law have public recordation systems. The patent system requires examination of patent applications to obtain protection. Patent protection attaches upon issuance of the patent and entry of the issued patent in the Patent Office’s official, publicly available records. Notice of the patent is published in the Official Gazette of the United States Patent and Trademark Office (USPTO). In addition, the patent system encourages marking of patented products by authorizing recovery of damages from infringers for up to six years of infringement prior to the date of the lawsuit so long as the infringer was actually aware of the patent or if patented products bore the patent number. Notwithstanding mandatory patent examination and recordation of issued patents, those searching patent records cannot be assured that they can find all patents affecting freedom to operate due to the inherent imprecision of patent claims and limitations of patent database classification. The digitization of patent records and availability of Boolean search have improved access (Schwartz and Sichelman, 2019). Furthermore, private entities have developed additional search tools, some of which are public or accessible for a fee. The only way to determine patent scope definitively is through adjudication. This can arise through patent enforcement proceedings or where there is a substantial controversy between parties having adverse legal interests of sufficient immediacy to warrant the issuance of a declaratory judgment (MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007)). In such litigation, district courts typically conduct a pre-trial hearing, commonly referred to as a Markman hearing (Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996)), to construe the patent claims (Menell et al., 2010). Many district courts have established through local rules and standing orders a detailed procedure for preparing for and conducting Markman hearings (Northern District of California Patent Local Rules; Menell et al., 2016, ch. 5.1). The claim construction ruling can provide the basis for summary judgment determinations. It also serves a critical role in trial preparation. Expert technical witnesses and damages experts rely on the court’s claim construction ruling in preparing their reports. In jury trials, the Markman order also serves as a critical part of the jury instructions, on which the jury bases its infringement and validity determinations. Although copyright protection arises without formal registration of claims, US copyright law encourages registration through procedural, evidentiary, enforcement, and remedial inducements (Menell et al., 2018, vol. II, ch. IV). Nonetheless, searching the Copyright Office’s registry can be expensive, difficult, and time-consuming. Those seeking to determine the copyright status must know how to identify the work. Works registered prior to 1978 can only be found in the Copyright Public Records Reading Room. For post-1978 registrations, the Copyright Office provides an online database for identifying registrations, but searches of records can be expensive. Some private registries exist for particular copyright industries (such as music publishing). A few firms maintain private databases of copyright ownership information and conduct searches.

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Economic analysis of intellectual property notice and disclosure  435 The Music Modernization Act of 2018 addresses this collective action problem. This legislation directs the U.S. Copyright Office to designate a mechanical licensing collective. Among its principal responsibilities will be to ‘establish and maintain a database containing information relating to musical works (and shares of such works) and, to the extent known, the identity and location of the copyright owners of such works (and shares thereof) and the sound recordings in which the musical works are embodied.’ (17 U.S.C. § 115(d)(3)(E)(i)). The database shall include the title of the work, the copyright owner(s) and ownership percentage(s), contact information for the copyright owner (if known), and ‘to the extent reasonably available,’ ‘the international standard musical work code’ for the work, and ‘identifying information for sound recordings in which the musical work is embodied,’ including titles, featured artists, sound recording copyright owners, producers, and international standard recording code (17 U.S.C. § 115(d)(3)(E)(ii)). Even after a copyrighted work is traced to its owner and copyright subsistence is verified, the scope of copyright protection is often difficult to assess. Beyond determining whether a work is registrable, the Copyright Office does not provide guidance on the scope of protection of particular works. Unlike patent law’s pre-trial claim construction process, the courts do not follow a standardized process for assessing the scope of copyright protection. Similarly, registration of trademarks is not required to establish protection. US trademark protection arises from use of marks in commerce. The USPTO and state trademark offices, however, play a significant role in recording valid trademarks. As with federal copyright registration, federal recordation of trademarks offers various procedural, evidentiary, enforcement, and remedial advantages (Menell et al., 2018, vol. II, ch. V). The USPTO examines trademark applications (and intent-to-use applications) for compliance with statutory requirements. After examination, the USPTO trademark applications are published in the Official Gazette for opposition. Following that process (and use in interstate commerce in the case of intent-to-use applications), valid trademarks are placed on the Principal Register, which can be searched through an online portal.6 In addition, several private search firms provide a range of search-related services. C.  Incentives and Pathologies At first blush, there is good reason to believe that most resource claimants would prefer clear boundaries and accessible notice information. First, claimants will want to secure their property and will therefore seek to comply with applicable legal requirements. For example, claimants will specify land boundaries using the Public Land Survey System, write claim language in a patent application, or include drawings in a design patent application. Second, claimants prefer to invest in boundary information when that will increase the value of their resources—for example, through sale, financing, collaboration with other developers, rental, or licensing. Land developers are likely to find that subdivisions with clear boundaries and covenants will maximize the sale price of the land parcels contained in the development. In addition, the developer may feel competitive pressure to

6   The USPTO also maintains a Supplemental Register which allows registration of descriptive terms that have not yet acquired meaning among consumers.

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436  Research handbook on the economics of IP law volume 1 make efficient investments in notice (Smith, 2003). Third, resource claimants sometimes produce boundary information as a byproduct of efforts to deter trespass or infringement via self-help measures like fences, locks, and encryption. Yet, there are circumstances in which notice costs, opportunistic behavior, and unintended doctrinal rules override these salutary instincts. 1.  Costs of describing and disclosing intangible resources As discussed above, intangible resources are often difficult to characterize. Unlike land, which can typically be characterized precisely by reference to geographic coordinates within a two-dimensional map, and chattels, which have objective physical boundaries, intangible resources are multi-dimensional and judged by reference to the claimant’s description, prior art, and other contextual factors. Patented inventions are expressed as multi-dimensional, linguistic representations. The boundaries and scope of patents are based on the patent claim language, the specification, and prosecution history. US patents are typically claimed using a ‘peripheral’ format whereby the drafter delineates the outer boundaries of the claimed invention. As an example, U.S. Patent No. 5,205,473 claims an insulated recyclable beverage container sleeve as: A recyclable, insulating beverage container holder, comprising a corrugated tubular member comprising cellulosic material and at least a first opening therein for receiving and retaining a beverage container, said corrugated tubular member comprising fluting means for containing insulating air; said fluting means comprising fluting adhesively attached to a liner with a recyclable adhesive. (U.S. Patent No. 5,205,473 col. 4-5 (filed April 27, 1993))

Like other peripheral claims, this claim begins with a preamble (‘A recyclable, insulating beverage container holder’) followed by a transitional phrase (‘comprising’) and the claim body setting forth the claim restrictions (or elements). The open transitional phrase ‘comprising’ signifies that the patentee claims all structures containing the claim restrictions and anything else (Menell et al., 2010, pp. 759–60). In general, patent claims are not limited to the particular embodiments or prophetic examples except in particular circumstances, such as means-plus-function claim forms (35 U.S.C. § 112(f)). And even in that circumstance, the claim element extends to ‘equivalents’ of the embodiments contained in the patent specification. Exacerbating the challenge of claiming patented inventions with precision, the patent system rewards the first applicant to file for protection.7 This encourages applicants to file claims as early as possible, in some cases before the inventor has a complete grasp of the invention. Such premature filing, or gun-jumping, contributes to the vagueness of patent claims. This motivation, as well as the inherent ambiguity of language and other strategic considerations discussed in the following sub-section, makes patent claim scope especially difficult to assess (Anderson and Menell, 2014). The scope of copyright protection suffers from a somewhat different pathology. Like 7   Until March 15, 2013, the US based priority on a first-to-invent system, although inventors seeking protection outside of the United States were subject to a first-to-file standard (Menell et al., 2018, vol. I, ch. II). Hence, they jeopardized their non-US rights by not filing as early as possible. And even for those filing only in the US, there were substantial difficulties in proving an invention date prior to the filing date (Lemley and Chien, 2003).

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Economic analysis of intellectual property notice and disclosure  437 chattels, copyrighted works have a physical form. To be protectable, a work of authorship must be fixed in a tangible medium of expression (17 U.S.C. § 102(a)). Thus, the physical boundaries of copyrighted works can be directly perceived. Yet, unlike a real estate parcel, a copyrighted work does not exclude other authors and artists from copying elements from within the work. And unlike patent law, which protects the claimed combination of elements, copyright law allows for even the full combinations of elements to be used by others under various circumstances. Copyright owners cannot exclude subsequent creators from ‘any idea, procedure, process, system, method of operation, concept, principle, or discovery’ (17 U.S.C. § 102(b)). Nor can they control elements of their own work that lack originality. Nor can they bar any similarity or overlap, only those resulting in ‘substantial similarity’ of protected expression. And even where another work is substantially similar to protected expression, the copyright owner cannot prevent others from commenting on, parodying, or sufficiently transforming their protected work (17 U.S.C. § 107). The bounds of these limitations can be murky. Furthermore, the litigation process adds further uncertainty. Outcomes depend on how a jury or judge perceives the works. Thus, even though the public at large is on notice that a work is protected by copyright law, cumulative creators cannot readily determine from registration materials or the underlying work which particular elements or compilations of elements are protected and to what extent. Whereas a real estate deed or patent claim can be analogized to a bounded parcel from which interlopers are excluded, the copyright claim is more like a wedge, or in some cases a thin slice, of Swiss cheese (Menell, 2016b). Cumulative creators have a clear understanding of the block or narrow slice as a whole. They are on notice that reproducing the entirety of the block or slice risks infringement, although subject to a fair use claim. But what the cumulative creator often cannot easily evaluate are the fermentation holes in the cheese. They may freely operate within those holes. And even some compilations of those holes can be fair game to the extent that the holes lack originality. Nonetheless, uncertainty about the scope of what is not protected within a copyrighted work creates a minefield for cumulative creators. In theory, a notice system would apprise would-be developers or creators of which resources or portions of resources are off-limits without authorization and where they may freely operate. The copyright system does not, however, require the copyright owner to designate those elements of their work that are unprotected.8 To do so would be impractical. Almost all works reflect prior art ideas and concepts. For example, a graphic work depicting the human body undoubtedly contains arms, legs, and torso, all of which are found in human anatomy and hence are not entirely original to the artist’s expression. 8   The copyright registration process provides a limited exception. Registration forms require applicants to identify preexisting material from which a work is derived and briefly explain the original material added to the work for which copyright is claimed if the registered work is a ‘derivative work’ (Copyright Office, Form VA, line 6). The Copyright Office does not require registrants to identify aspects of a claimed work which are not protected by copyright. By contrast, the trademark registration directly addresses this issue by encouraging registrants to disclaim unregistrable portions of marks. Trademark applicants include statements that ‘No claim is made to the exclusive right to use “______” apart from the mark as shown’ (U.S. Patent and Trademark Office, https://www.uspto.gov/trademark/laws-regulations/how-satisfy-disclaimer-requirement). Common disclaimers refer to generic terms. Failure to include such disclaimers will lead the trademark examiner to refuse registration. The disclaimer statement will appear on the registration certificate.

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438  Research handbook on the economics of IP law volume 1 The lack of standardized procedures for determining the scope of copyright claims further complicates the challenge of determining the freedom to operate surrounding copyrighted works. The long duration of copyright presents another difficulty (Samuelson, 2016). The ownership of works will undoubtedly change over the life of copyright protection, which extends 70 years beyond the life of the author or 95 years in the case of works made for hire. 2.  Notice externalities Beyond the inherent difficulties of describing and disclosing intellectual property, resource claimants can in several circumstances gain strategic advantages from obfuscating the existence of property interests, the scope of their intellectual property protection, and the identity of the resource owners. Menell and Meurer (2013) characterize the phenomena as a form of externality in which the private and social interests diverge.9 Patent applicants are able to take advantage of the patent system by intentionally filing ambiguous claims, updating claims during prosecution to target competitors’ products, and leveraging the differential between ex ante negotiating (before investments have been sunk) and ex post injunctive relief and monetary damages by obfuscating discovery of their patents. They can also flood the Patent Office with patents on interrelated technologies, producing patent thickets (Shapiro, 2001; Heller and Eisenberg, 1998). The first circumstance overlaps with the difficulty of fully specifying intangible resource claims. The high cost of specifying patent boundaries inevitably results in ambiguous claims. But it is the strategic benefits of stretching or contracting patent claims after a patent issues that fuels an externality. Risch (2007, p. 188) explains that ‘[p]atent applicants have an incentive to allow claims to remain vague so that they can mold the claims to fit the future product of a currently unknown, potential infringer or to avoid invalidation if previously undiscovered prior art comes to light.’ Patent prosecution guides preach these strategies (Sheldon, 2005, pp. 6–114 (including a section entitled ‘Include Ambiguous Claims,’ which offers numerous ‘strategies’ for ‘intentionally writ[ing] ambiguous claims’); Fish, 2007, pp. 7–35 (advising drafters to ‘[a]void . . . like the plague’ claim language that clearly identifies the ‘gist of the invention’ or the ‘factor’ that makes it ‘unique’); Wheeler, 2003, pp. 40–45 (advising prosecutors to draft broad claims, minimally, and without disclaimers); Pressman, 2012, p. 204; McJohn, 2008, p. 971 (noting that ‘experts in claim drafting advise patent drafters: “Do not define the terms used in your claims; do not identify the category of invention in the preamble to the claims; do not identify features of the invention as ‘important’ . . .”’; and noting that such claim drafting has been described as a trend toward ‘intentional obscurity’ (footnote omitted))). The ability to revise patent claims during prosecution provides a further opportunity to

9   Such divergences can also arise in the real estate context, but are less common, especially with modern surveying methods and recordation systems. Libecap and Lueck (2011a) explain that under metes and bounds land systems—which affords greater leeway in the specification of boundaries than formal marked boundaries or rectangular survey systems—settlers had had at least two incentives to leave boundaries vague and flexible: (1) ‘in a wilderness it was costly to locate precise boundaries during the initial land claim, and hence difficult for the surveyor who followed to find those boundary markers’; and (2) ‘given the lack of information about the location of the most desirable lands at the time of the initial land entry, claimants did not want to be bound to absolute markers.’

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Economic analysis of intellectual property notice and disclosure  439 game the patent system (Lemley and Moore, 2004; Chiang, 2010, p. 526). Applicants can amend their claims as competitors introduce new products, thereby improving the likelihood that the competitor falls within the scope of the claimed invention. Although the courts seek to police such opportunism through the written description doctrine (Gentry Gallery, Inc. v. Berkline Corp., 134 F.3d 1473 (Fed. Cir. 1998)), the incentive to update claims as the market evolves remains strong. Perhaps most significantly, patent applicants and patentees can gain tremendous leverage over independent inventors through hiding the existence of patent claims. The emergence of wireless email technology illustrates this type of notice externality, which is commonly referred to as the patent troll problem. In the early 1990s, Research in Motion (RIM) set out to develop mobile email devices. In mid-1995, the time that RIM attracted substantial institutional and venture capital, there were no apparent ‘neighbors’ in this technological marketplace. Nor had any patents on wireless email communication systems issued. Unfortunately for RIM, a non-practicing entity received a patent covering ‘Electronic Mail System with RF [Radio Frequency] Communications to Mobile Processors and Method of Operation Thereof’ (U.S. Patent No. 5,436,960 (filed July 25, 1995)). Even though RIM’s business strategy was publicly known and successfully introduced in its BlackBerry device in 1999, NTP lay low. NTP sent RIM a cease and desist letter in early 2000. RIM conducted a review of the patents and reached the conclusion that the NTP patents were invalid and not infringed by the BlackBerry. In November 2001, NTP sued RIM for patent infringement in the Eastern District of Virginia, a district known for its ‘rocket docket.’ RIM requested that the USPTO re-examine the patents at issue. Following trial a year later, the jury found infringement on all asserted claims and awarded damages of $33 million. The re-examination process bogged down. Facing shutdown of its BlackBerry service, RIM settled the case for $612.5 million in March 2006 (Krazit and Broache, 2006).10 The problems reflected in this case—identifying patent neighbors and ascertaining patent boundaries—have increasingly plagued the information technology sector, adding substantially to the costs and risks of technological resource development (Bessen and Meurer, 2008). Copyright owners can also benefit from lying low. Whereas copyrighted works—such as a photograph, a sound recording, or an audiovisual clip—might be readily available, developers can encounter great cost and difficulty in identifying, locating, and contacting the rights holders of such works. In the extreme, the work is an apparent ‘orphan’—­ lacking an identifiable owner—thereby presenting the cumulative creator seeking to incorporate the prior work with a stark choice: omit the props of uncertain provenance, thereby resulting in a less satisfying project, or run the risk of an owner emerging and threatening to block the entire integrated work (or extract a high price). Even though the cost of licensing copyrighted works for use as film props or set design is often relatively low before a film is shot because the director will have alternative props and designs available, the threat of an injunction on the eve of theatrical release—after the film has been produced and marketed—places the infringer over a barrel.

10   Most of NTP’s patent claims were ultimately invalidated in re-examination, but these decisions came too late to benefit RIM (In re NTP, 654 F.3d 1279, 1289–90 (Fed. Cir. 2011); Bessen and Meurer, 2014).

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440  Research handbook on the economics of IP law volume 1 3.  Interplay with remedies Particular features of intellectual property remedies cause additional notice-related pathologies. Patent law authorizes courts to enhance damages awards up to triple the actual damages based significantly on whether the defendant willfully infringed the patent (35 U.S.C. § 284; Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016)). Hence, knowledge that a technology is patented can result in substantially greater patent liability. Similarly, courts consider willfulness in exercising their discretion to award attorney fees (35 U.S.C. § 285; Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545 (2014)). These ramifications discourage many technology companies, particularly those in the digital technology fields, from searching for patents out of concern that such knowledge can result in greater liability for infringement11 (Lemley, 2008; Note, 2007; Lee and Cogswell, 2004; Lemley and Tangri, 2003). Copyright remedies also have caused unintended consequences on cumulative creativity and the deployment of advanced distribution platforms. US copyright law has long used statutory damages to deter small-scale infringements that would not be economical to enforce. This regime worked well to encourage restaurants, bars, and other small establishments to obtain public performance licenses. With the specter of large-scale infringement in the digital age, however, Congress substantially ramped up the high end of statutory damages to $150,000 per work in cases of willful ­infringement. This much higher level of damages exposes distribution platforms to crushing liability. It can also expose cumulative creators who use multiple copyrighted works in the mistaken belief that their uses qualify as fair use to potentially massive liability. 4.  Subversion of public policy Trade secrets are the most pervasive form of intellectual property in the economy. Nearly every enterprise seeks to protect information about its operations, strategy, technology, funding, personnel, and customers. Employers of all types routinely require their employees and contractors to sign restrictive nondisclosure agreements (NDAs) and return confidential information upon their departure or completion of services. Without such restrictions, these enterprises would jeopardize trade secret protection and risk violating privacy and other laws. As noted earlier, trade secrecy protection functions as an anti-notice regime. While trade secret protection is generally viewed as a means for promoting technological innovation, overbroad NDAs barring employees and contractors from reporting illegal activity to the government subvert public policy. Such restrictions on disclosure outside of the commercial trade secrecy context undermine law enforcement, compliance with civil rights, worker safety, environmental protections, and reporting of fraud and tax evasion (Menell, 2017).

11   Companies in the pharmaceutical industry are less prone to this perverse effect because the benefits from searching for patents and assessing patent validity and scope typically outweigh the risk of enhanced exposure. Pharmaceutical patents are more easily found and typically cover specific chemical structures.

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Economic analysis of intellectual property notice and disclosure  441

III.  POLICY ANALYSIS Resource notice is a jointly produced public good. The government provides the foundational legal infrastructure for establishing and enforcing resource rights. The market operates on top of these rules and institutions. Private parties acquire, buy, sell, divide, and develop such rights through private transactions. The interaction of the state and private parties produces resource rights and notice of their existence, contours, and extent. Thus, the government is uniquely situated to establish the authoritative registry of resource claims. If infrastructure is adequate to prevent notice failure, as is typical in the real property context, then notice externalities do not arise. Many intellectual property claimants confront a difficult task of describing the scope of their advance. Relatedly, developers of many intangible resource projects face significant problems identifying potentially conflicting rights, ascertaining the boundaries of those properties that they can find, locating the owners of potentially conflicting properties, and assessing the scope of potentially conflicting rights. Unlike county land recording offices, neither the USPTO nor the Copyright Office can look up an intellectual property development tract and provide the names, addresses, and contours of all ‘neighboring’ property owners. The courts cannot quiet title among all intangible rights holders. The developer cannot typically gain pre-development clearance of identified potentially conflicting rights short of negotiating a license. Nor can developers easily obtain insurance against infringement risks. These problems undermine the coordination that can be critical to resource planning and development. They can hamper progress in technological innovation and expressive creativity by encouraging some resource claimants to hide and obfuscate notice information. As a result, the ratio of notice costs to overall development cost can be inefficiently high for intangible resource projects. The foregoing discussion highlights the importance of publicly accessible, easily searchable registries. They provide the primary tool for tracing ownership and assessing the scope of intangible resources. There remains, however, a difficult question regarding the specificity of disclosure. Just as ‘[f]ully specifying a contract is not ordinarily possible’ and ‘[t]he benefits of nailing down a particular allocation of risk to cover most extremely unlikely events will often not be worth the costs,’ (Coleman, 1992, p. 80) the effort to specify ex ante all of the elements and exclusions of intangible resources would be unduly costly. Thus, the optimal specificity of notice varies across the intellectual property domain. Furthermore, the various ways of internalizing notice externalities will depend on the contours of the intellectual property regime. The remainder of this section traces the ramifications for the principal modes of intellectual property protection. A.  Utility Patent Disclosure of the content, boundaries, and ownership of utility patents can be improved through prompt publication of patent applications, standardization and clearer explication of patent boundaries, and timely updating of ownership information. Patent notice can be further enhanced by the provision of better search and mapping tools, calibration of filing fees and substantive rules, and fostering of patent licensing.

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442  Research handbook on the economics of IP law volume 1 1.  Disclosure timing Patent applications are generally not disclosed until 18 months after filing.12 Menell and Meurer (2013) question the basis for such a rule, which prevents market entrants from being able to assess the potential impediments to pursuing new products and services. 2.  Claim clarity There is critical trade-off between examination screening costs and the social costs of poorly specified or examined patent claims. Menell (2013, 2015) advocates that the Patent Office implement a standardized web-based claiming system aimed at clarifying claim construction. As illustrated in Figure 16.1, such a system would streamline patent examination, provide efficient tools for office actions, and generate a transparent Limitation

Preamble

Transitional comprising Clause

comprising consisting of consisting essentially of

Claim Limitation 1 novel Means/Step + Function §112(f) • hyperlink to corresponding structure, material, acts Claim Limitation 2 novel Means/Step + Function §112(f) • hyperlink to corresponding structure, material, acts ***

combination of limitations - novel

Glossary of Defined Terms: Claim Term

Claim Meaning

default general dictionary: default technical dictionary:

Figure 16.1  Proposed claim filing template 12   US law allows applicants seeking only US protection to opt out of the 18-month publication rule (35 U.S.C. § 122). Therefore, such applications remain secret for the full duration of patent prosecution. If the patent is never issued, the application remains confidential.

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Economic analysis of intellectual property notice and disclosure  443 ­ rosecution history. Furthermore, a standardized presentation of patent claim elements p would promote the development of better search and mapping tools, reduce searching and assessment costs, and facilitate compliance with early case management disclosures. Such conventional uses of word processing and visualization technology could greatly improve the accessibility of patent boundaries and knowledge at relatively low cost. The claim filing template in Figure 16.1 would easily resolve various commonly litigated claim scope issues: (1) whether the claim preamble is a limitation; (2) whether a claim term is intended to be ‘means-plus-function’; (3) the precise ‘corresponding structure, material, or acts’ associated with ‘means-plus-function’ claim limitations; (4) whether embodiments in a claim are intended as illustrations or limitations; and (5) the identification and delineation of claim restrictions. The designation of a default dictionary would reduce later disputes about which dictionary to consult (Miller, 2005; Miller and Hilsenteger, 2005) A more costly, but potentially valuable requirement, would be to compel applicants to disclose the relevance of prior art set forth in their Information Disclosure Statement. The Patent Office can improve the transparency of examination as well as the context for disclaimers by recording all interviews with applicants and placing such recordings on the public record. 3.  Ownership transparency The obfuscation of patent ownership increases the risks and costs of developing new products and services. Patent Office records provide poor notice of current patent ownership, making it difficult for companies to trace the true owners of patents (FTC, 2011, pp. 130–31). Some non-practicing entities utilize shell companies and complex assignments to avoid having the identities revealed. In 2014, the Patent Office proposed the establishment of rules to better disclose and update patent ownership (Anderson, 2015). Although the USPTO dropped the proposal out of concern for the regulatory burden, there are valid concerns warranting consideration of less burdensome alternatives. 4.  Systematic judicial procedures for determining patent scope The construction of patent claims plays a critical role in nearly every patent case. It is central to the evaluation of infringement and validity, and can affect or determine the outcome of other significant issues such as unenforceability, enablement, and remedies. As Judge Giles Rich poignantly captured, ‘the name of the [patent] game is the claim’ (Rich, 1990, p. 499). Claim construction is central to the evaluation of infringement and validity, and can affect or determine the outcome of other significant issues such as unenforceability, enablement, and remedies. The process by which courts interpret patent claims thus represents one of the most important aspects of patent litigation. As the use of juries in patent cases has grown since 1980 (Anderson and Menell, 2014), whether the judge or the jury should construe the terms of patent claims has emerged as a pressing issue. Until 1996, it was common for courts to charge juries with claim construction. Resolving the scope of patent claims in this manner, however, significantly increased the complexity and uncertainty of trials. In Markman v. Westview Instruments (517 U.S. 370 (1996)), the Supreme Court held that claim construction is a matter for the court and hence beyond the province of the jury. The Court emphasized that judges are better equipped than

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444  Research handbook on the economics of IP law volume 1 juries to construe the meaning of patent claim terms, given their training and experience in interpreting written instruments (such as contracts and statutes). Since 1996, district courts routinely conduct a pre-trial hearing (commonly referred to as a ‘Markman hearing’) to resolve claim construction (Menell et al., 2016, ch. 5.1). Timing is critical. A majority of courts have found that the most opportune time to hold the Markman hearing is midway through, or before the close of, fact discovery, and prior to expert discovery. This timing affords the parties sufficient discovery in advance of the claim construction hearing to gain an understanding of the liability issues and accurately identify the terms needing construction. It also leaves time for the parties to finish fact discovery and to focus on expert discovery after the court has issued its claim construction ruling. This timing also avoids requiring an expert to base his or her opinion on alternative claim constructions or to do a new report if the court does not adopt either party’s construction. Early Markman hearings can be appropriate where there is a well-crystallized question of claim construction that can resolve liability without extensive discovery. The primary goals of the procedures before a Markman hearing are to: (1) ensure that the parties’ claim construction positions are squarely joined; and (2) resolve any disputes about how the Markman hearing should be conducted so the hearing is efficient, helpful to the court, and without procedural disarray. Courts typically request technical tutorials in conjunction with the Markman hearing. To structure and facilitate the claim construction process, more than 30 districts have adopted patent local rules (PLRs) setting forth a standardized timeline and framework for disclosures and submissions leading up to a Markman hearing. While the specific timing, sequence, and content of disclosures and submissions vary among districts, PLRs share a basic principle—they seek to present the court with a limited set of actual and meaningful disputes (Menell et al., 2016, ch. 2.1; Ware and Davy, 2009). PLRs require parties to disclose asserted claims, infringement contentions, and invalidity contentions (and associated prior art references) through a structured process in preparation for the Markman hearing. These disclosures force parties to crystallize their theories early in the case and thereby identify matters that the Markman hearing must resolve. They also help streamline discovery by mandating the disclosures that are core to patent cases, thus reducing the need for interrogatories, document requests, and contention depositions. Some courts will consider summary judgment motions in conjunction with the claim construction process so as to bring to the surface and address dispositive issues in a timely manner (Menell et al., 2016, ch. 6.1). This integrated approach requires the parties to state the reasons for seeking construction of any terms that are litigated in the Markman process, regardless of whether they are asserted for summary judgment purposes. It affords courts the context for making important rulings in the Markman process and also provides a useful tool for reducing disputes. Figure 16.2 illustrates a claim construction chart. The development and implementation of standardized claim construction rules have vastly improved the efficiency and quality of patent litigation. It has improved patent notice and enhanced the transparency of judicial review. 5.  Internalizing and counteracting adjustments Due to inherent uncertainties surrounding patent resources, improvements to patent disclosure and registries alone cannot fully address the incentives of resource owners to

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Economic analysis of intellectual property notice and disclosure  445 Claim Term “steering wheel”

Plaintff’s Construction Ramifications “any device for directing a vehicle”

Defendant’s Construction “a circular device for directing a vehicle”

Ramifications Noninfringement: Accused device lacks a circular steering device. Invalidity: Reference XYZ anticipates the claims as a matter of law so the patent [or specific claim] is invalid.

Figure 16.2  Claim construction chart overclaim, confusingly claim, obscure, and opportunistically assert patent rights. Drawing upon the toolbox for addressing other forms of externalities, other adjustments to the activities of the Patent Office, the patent fee structure, and patent liability and remedies can internalize notice externalities and otherwise counteract or balance the adverse effects of inadequate notice (Menell and Meurer, 2013). i.  Patent landscape mapping and search tools   The availability of a transparent, accessible, and easily searchable registry provides one of the best antidotes to notice externalities. Intellectual property law should strive to empower developers to identify all potential impediments to their projects and the counterparties with whom they can resolve differences. Thus, subsidizing the development, maintenance, and evolution of intellectual property registry search tools and portals can play an important role in supporting accessible notice information. The government further contributes to good notice by standardizing the way that new property rights are claimed and by developing taxonomies and classifying property rights. The USPTO maintains the Acceptable Identification of Goods and Services Manual to classify trademarks and the United States Patent Classification Manual to classify patents. The government could make investments in infrastructure to reduce the cost of searching for patents and copyright. These investments would produce public goods that tend to be underprovided by the private sector. One of the most pressing needs in the patent field is the development of standard terminology for use in software inventions. Chemical patent boundaries are more easily understood and searchable because patent attorneys and inventors rely heavily on a system of chemical nomenclature developed and maintained by the International Union for Pure and Applied Chemistry. There is no guarantee that an equally successful system can be developed for software inventions but the idea has drawn the attention of the Institute of Electrical and Electronics Engineers (IEEE) Standards Association and other non-governmental organizations who are working on developing standard software nomenclature. One bit of evidence suggesting progress could be made on this front comes from semiconductor patents where the Texas Instruments TTL Data Book has become a de facto standard for naming certain components of semiconductor inventions.

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446  Research handbook on the economics of IP law volume 1 Technology groups within the Patent Office could develop default glossaries for commonly used terms of art that arise frequently in applications within their field. Applications would be interpreted based on those definitions unless applicants set forth their own definitions. ii. Fees  Likewise, notice costs in the patent system can be controlled through the use of fees. Economists find that the volume of patent applications falls in response to an increase in application fees, and the decision to maintain an issued patent in force is sensitive to the magnitude of maintenance fees. Even the very low maintenance fees imposed cause the majority of US patents to lapse before their full term has run (Moore, 2005). Higher maintenance fees can be a desirable way to clear away patents on inventions that have not been commercialized so as to provide greater freedom for developers who are willing to take on the costs of commercializing products (Parchomovsky and Wagner, 2005). Patent application and maintenance fees (as well as copyright and trademark registration fees) should be set so that applicants internalize not only the costs that they impose on the government, but also the costs that they impose on third parties. Ideally, fees should be relatively higher on inventions that are apt to generate higher notice costs. Software patents, for example, are likely to impose greater notice costs than chemical composition patents. The number of inventions per product tend to be much greater for software than for chemical compositions (Bessen and Meurer, 2008). Furthermore, software patent boundaries tend to be much harder to discern causing more claim construction disputes and more inadvertent infringement. Thus, strictly on notice grounds, stiffer fees should be imposed on software patents than on chemical composition patents. The larger point is that fees are tools that can and should be used to influence the decision to apply for a patent, the number of claims to include, and the length of time for which the patent is maintained in force. Internalization can also be implemented through a system of tradeable patent permits (Ayres and Parchomovsky, 2007). In an ideal world, a policymaker with full information could equally well regulate private decisionmakers by collecting patent fees or by specifying the quantity of patents that can be granted. Permits alone or a permit-fee hybrid system would alleviate notice externalities and in theory could be superior to regulation by fees alone. iii.  Substantive doctrines   A third approach to internalizing notice externalities is to limit the harm to those resource developers who cannot reasonably determine the landscape of encumbrances. Real property law has developed various doctrines for decreasing the disruption caused by notice failure. The doctrine of adverse possession is one tool the law uses to prevent stale claims from being asserted (Merrill, 1985). Courts are also disinclined to read property interests broadly when they suspect claimants are engaging in opportunistic behavior (Faus v. City of Los Angeles, 67 Cal. 2d 350, 431 P.2d 849, 62 Cal. Rptr. 193 (Cal. S. Ct. 1967)). In some states, good faith improvers of land can take title to improved property subject to compensating the original owner for the value of the land prior to the improvements (Good Faith Improver Act, Cal. C. Civ. Proc. §§ 871.1–7; Raab v. Casper, 124 Cal. Rptr. 590 (Ct. App. 1975)). Limitations on the running of non-possessory interests promote notice and constrain assertion of remote property

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Economic analysis of intellectual property notice and disclosure  447 interests (French, 1982, 1998; Sterk, 1985; Tulk v. Moxhay (1848) 41 Eng. Rep. 1143 (Ch.), 1143–5; Ames, 1904; Van Houweling, 2008, pp. 891–9); Restatement (Third) of Property: Servitudes (2000)). Policies aimed at reducing the harms associated with notice failure already play a significant role in intangible resource law. Liability standards cover a wide range of policy levels: required liability elements, defenses, exemptions, compulsory licenses, and safe harbors. Patents can be infringed through entirely independent activities. In fact, relatively few patent infringement cases outside of Hatch-Waxman actions (which inherently involve copying to provoke a challenge) involve copying (Cotropia and Lemley, 2009; Bessen and Meurer, 2008). Given the difficulty of determining the patent neighborhood due to confidential patent applications, the proliferation of patents, and ambiguity of claims, a strong case can be made for prior user rights and/or an independent creation defense. At a minimum, such policy reforms appear justified in the software field where various ­conditions—such as alternative means of appropriability (first-mover advantages, copyright protection, trade secret protection), low capital costs, and relatively low technological risk (Menell, 1987)—obviate patent protection and opportunistic enforcement has been rampant. The independent invention defense would go a long way toward limiting the risk posed by opportunistic entities. It would also improve the conditions needed to support a robust insurance market for spreading the risks of patent claims. By contrast, given the high capital costs of pharmaceutical research, the risk of near-simultaneous invention in conjunction with an independent invention defense could reduce invention incentives by diminishing appropriability. The costs of notice problems can also be alleviated by tightening the doctrine of equivalents. The doctrine of equivalents allows for a finding of infringement where the accused product or process is close to the patented invention, but does not literally infringe. The doctrine of equivalents evolved in response to the concern that an ‘unscrupulous copyist’ could avoid literal infringement of a patented invention by making insubstantial changes to the invention (Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605, 607–08 (1950)). The doctrine is judge-made and has long served to provide courts some leeway to ensure that insubstantial variations do not destroy the value of patents. Unfortunately, the doctrine of equivalents undermines the notice function of patent claims. Cumulative creators must assess not only the literal boundaries of patent claims but must also assess whether a process or product ‘performs substantially the same function in substantially the same way to obtain the same “result.”’ Although the Federal Circuit and the Supreme Court have reduced the uncertainty surrounding this doctrine—Festo Corp. v. Shoketsu Kinzoku Kabushiki Co., 535 U.S. 722 (2002) (restricting the scope of the doctrine of equivalents in the context of amended claims to equivalents that would not have been foreseeable at the time of amendment); Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17 (1997) (requiring that the accused product or process contain each claim limitation or its equivalent)—more can be done to better calibrate the reach of the doctrine of equivalents. In particular, the doctrine should only be available to reach equivalents that were unforeseeable as of the effective filing date of the application or at the time of amendment. iv. Remedies  The type and size of remedies greatly affect the chilling effects of notice failure (Hovenkamp, 2011; FTC, 2011 (the Federal Trade Commission (FTC) report drew

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448  Research handbook on the economics of IP law volume 1 heavily on a presentation of an early version of Menell and Meurer (2013)). The Supreme Court’s eBay decision affords courts substantial discretion to consider opportunistic enforcement of intellectual property rights (eBay v. MercExchange, 547 U.S. 388 (2006)). Justice Kennedy’s concurring opinion expressed concern about patent owners using the threat of an injunction ‘as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent’ (p. 396). He went on to note that injunctive relief ‘may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test’ (p. 397). The awarding of injunctive relief and damages presents a useful place to integrate concerns about notice externalities (Graham, 2017; Siebrasse and Cotter, 2016; Lemley and Shapiro, 2007). There is also good reason to discount damage awards in those circumstances in which it is particularly difficult to identify and evaluate intellectual property encumbrances, the boundaries surrounding the plaintiff’s rights are amorphous, or where the law is ambiguous (e.g., doctrine of equivalents). In addition, courts should consider notice concerns—such as opportunistic assertion—in determining the award of attorney fees (Robinson, 2016). 6.  Fostering licensing Patent pools and other licensing institutions play a critical role in counteracting and ameliorating patent notice and thicket issues (Rice, 2015; Mattioli, 2012; Barnett, 2009; Merges, 1996, 2004). Coordination is critical in the growing array of network industries (Menell, 2018). SSOs facilitate the development of FRAND licenses among competitors to optimize and harmonize network product development and avoid costly patent battles. In addition, the free and open source software (FOSS) movement promotes ex ante dedication of technological advances to the public domain and commitment to open development principles. A growing number of companies have joined these efforts on an ex post basis by pledging their patents to the public. Most recently, technology companies have developed the Defensive Patent License and License on Transfer pledges as a means of reducing the costs and risks of opportunistic patent assertions (Schultz and Urban, 2012). Chien (2016) advocates that patents disclose contextual information, such as regulatory information, FRAND commitments, and patent pledges. 7. Depropertization The most extreme reform strategy calls for a shift away from proprietary rights systems altogether. Demsetz (1967) theorized that private property rights emerge over time as the value of the asset subject to the property rights increases, and as the costs of measuring, monitoring, and enforcing private property rights decreases. By extension, as the costs of identifying and avoiding property rights rise, then policy should move away from propertization (Smith, 2002). This line of analysis supports legislative abolition or significant recalibrating—for example, much shorter duration—of patent protection for computer software and business methods on notice and other grounds (Menell, 1987, 2007d; Bessen and Meurer, 2008).

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Economic analysis of intellectual property notice and disclosure  449 B. Copyright Copyright faces two sets of notice challenges: tracing of copyright ownership and assessing the scope of copyright protection (Menell, 2016b). Tracing issues—linking copyrighted works to subsistence information about the works and contact information about their owners—are largely solvable through implementation of existing and developing technological means (such as digital content recognition), international standardization, and reform of obsolete legal rules, most notably the Berne Convention limits on formalities. The inherent uncertainty surrounding copyright scope, however, stands in the way of copyright notice nirvana—a transparent database of fully specified copyright resources and reliable tools for determining liability exposure ex ante. Unlike tracing of subsistence and ownership information, current or foreseeable technology alone cannot solve the problem of forewarning the public of the precise boundaries of copyright interests. Nonetheless, other notice failure-based adjustments to the copyright system can ameliorate scope clarity concerns. 1.  Mandatory registration In contrast to patents, copyright resources share the uniqueness attribute of real estate. Their protection emanates from a particular work of authorship that can be inspected. Unlike land resources, however, copyrighted works are neither geographically unique nor are they limited to a singular instantiation. Copyright governs both the fixed work created by the author as well as reproductions and performances. Unlike trespass, which can occur only at the situs of the land resource, copyright infringement can manifest in distant locales as well as across international borders. The practical aspects of protecting copyrights across the globe led authors to eschew registration (recordation), marking, and other formalities as requirements for copyright protection in the primitive technological age of the early twentieth century (Menell, 2016b, pp. 985–6; van Gompel, 2011; Sprigman, 2004). As reuse and adaptation of preexisting works became more feasible in the mid- to late-twentieth century, the demand to trace and clear use of those works increased concomitantly. During this same time period, the duration of copyright protection expanded significantly, further increasing the costs of tracing copyright ownership and the need for better notice institutions. The concept of orphan works—copyrights that are very costly or impossible to trace—emerged as a central challenge for promoting progress in the expressive arts (Hargreaves, 2011). The advent, rapid advance, and diffusion of digital technologies over the past quartercentury have revolutionized the creation and dissemination of expressive creativity. The shift from analog to digital storage media transformed the creative process. Authors and artists can costlessly and instantaneously reproduce preexisting works and seamlessly manipulate and edit digital sound tracks and video images. These features have generated new art forms, such as mashup music, and have greatly expanded the creative community in ways that vastly expand cumulative creativity. The development of computer network technology, leading to the Internet, revolutionized cumulative creativity in other ways. With the diffusion of powerful search engines—beginning with text and leading to images, music, and video—authors and artists obtained the ability to find all manner of preexisting works and combine them in novel, creative ways.

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450  Research handbook on the economics of IP law volume 1 The Internet revolutionized the creative industries in an even more profound way: by enabling creators to reach vast audiences without working through traditional media companies. Anyone with access to the Internet can now post works for the world to see, hear, and copy. Authors can self-publish books and anyone can inexpensively develop their own web portal. More significantly, a new industry of Internet service providers (ISPs) and crowd-sourced web portals has emerged to regulate dissemination of all manner of information goods. This shift in content gatekeeping has fundamentally changed the need for and modalities of copyright notice. Whereas traditional media companies relied upon tight-knit, insular, professional networks to clear works prior to release and used a conservative screen (‘if in doubt, leave it out’), the new breed of gatekeepers (ISPs) rely on different methods (notice and takedown procedures and, in the case of large portals like YouTube, content identification pre-screening technologies) for regulating what reaches the vast and growing Internet community. Advances in digital technology have not only expanded the need for better tracking of and greater access to up-to-date copyright information, they have revolutionized tracing, tracking, and updating such information. Had such tools been available at the turn of the twentieth century, the Berne Union would likely not have prohibited formalities as prerequisites to the ‘enjoyment and the exercise’ of copyright (Paris Act relating to the Berne Convention for the Protection of Literary and Artistic Works of September 9, 1886, as amended on July 24, 1971, § 5(2)). To the contrary, such technology could have improved international copyright enforcement and promoted progress in the expressive arts. The arrival of the Internet initially created tremendous, unprecedented copyright enforcement challenges. The first decade of the World Wide Web can be characterized as a new Wild West, in which the rule of (copyright) law barely operated. Napster largely ignored the rampant copyright infringement on its service. YouTube initially operated in a cavalier manner. MegaUpload turned a blind eye to rampant infringement. The Pirate Bay operated in open defiance of copyright protection. Grooveshark employees were instructed to upload infringing material. Several waves of enforcement litigation brought down the more egregious operators. More importantly for copyright notice, the chaos of the Wild West inspired remarkable technological innovation. Advances in digital identification technologies over the past decade have created promising means for tracking, tracing, and updating copyright information. These technologies have the ability to identify audio, textual, and visual works at low cost and with high precision. Audible Magic Corporation was among the first to develop sophisticated acoustic fingerprinting technologies. It now provides audio and content identification tools to companies seeking to track digital media and identify and block infringing content. Shazam offers an application that allows a mobile phone to identify almost any sound recording. Gracenote developed innovative, versatile, and standardized audio databases. YouTube’s Content ID (Audio ID and Video ID) system enables content owners to block, monetize, and track usage of their works within YouTube’s expanding online ecosystem. These technologies provide the framework for an inexpensive, universal copyright notification system. Furthermore, by tying notice information to a work’s unique digital fingerprint rather than copies of the work, third parties could independently determine whether a work that they have encountered is governed by copyright, the duration and

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Economic analysis of intellectual property notice and disclosure  451 terms of its protection, who owns it, and how to contact the owner. With a modest legal requirement, such information could be updated by the owner. If all copyrighted works were digitized and registered, potential users of copyrighted works could employ relatively inexpensive and now commonplace optical scanning and audio devices to identify the copyright status of any registered work. The technological advances of the past quarter-century provide the foundation for instituting an effective and efficient system of notice and recordation for promoting expressive creativity and free expression. We now have the tools for creating unique digital fingerprints for nearly all types of copyrighted works using widely available and reliable digital technologies. And unlike traditional marking, which can become obsolete or disengaged from a copyrighted work, a digitized version of the work would serve as the digital fingerprint and could be linked to an official, updateable, universally accessible registry. Copyright owners would be able to embed standardized meta-tags or other digital dossiers containing subsistence information and ownership information and linking to an official registry. User-based systems would allow copyright owners to update this information easily through secure systems as ownership information changes. A digital registration requirement could also serve to build a universal digital library. Nearly all copyrighted works—from visual art to sound recordings and three-dimensional objects—can be digitized at reasonable cost. Such digital works would serve as both the basis for digital fingerprinting and digital deposits. A modern Copyright Office would be built around server farms as opposed to dusty and costly physical libraries and warehouses. The Music Modernization Act of 2018 (MMA) powerfully moves the world toward such a resource through an outsourced copyright database. The MMA directs the Copyright Office to designate a collective institution to develop a comprehensive publicly accessible database of copyrighted musical compositions and sound recordings along with detailed ownership information. The MMA affords digital music providers, such as Spotify, with access to a blanket license and limitations on liability. Hence, the legislation motivates copyright owners to provide such information to the database as a means to be paid for streaming of their copyrighted works. Menell and Meurer (2013, pp. 50–51) propose a general digital registration system. Once such a system was available, any person could scan a copy of a work, such as a photograph or sound recording file, into a standard computer system and conduct a search of the global database. Just as YouTube’s Content ID system is able to run uploaded videos against countless audiovisual works in its archive to find a match and determine whether to allow the video to be publicly available and how to distribute advertising revenue, the Copyright Office could, with sustainable funding, provide pertinent subsistence and tracing information. The next steps in developing a modern copyright notice system are technical, institutional, and political. Many of the elements of an ideal system are already in use in the private sector. Audible Magic and Google have implemented highly sophisticated systems for digitizing works and searching for matches. International SSOs have developed systems for recording various classes of copyrightable works. For example, the sound recording industry in conjunction with the International Organization for Standardization has developed the International Standard Recording Code for uniquely identifying sound recordings and music video recordings.

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452  Research handbook on the economics of IP law volume 1 Other standardized unique identification number systems exist for books, audiovisual works, and musical works. Such identifiers can be assigned to digitized works of authorship and associated digital dossiers in meta-data or other formats (Van Houweling, 2012). The Copyright Office, or another designated entity, could host these materials on secure servers. Copyright registrants could have supervised ability to maintain and update identifying information. The principal obstacles are political. There would be start-up costs to developing such a system and inputting the data. Most major copyright industry participants in the US already register their works, and a growing number of these companies are working with Google, Audible Magic, and other services for identification, monetization, and policing their works. The larger challenge would be at the international level, where formalities have not been used for over a century (Sprigman, 2004). As online licensing grows, the advantages of participation in a standardized, well-functioning global registration system will increase. A fully digitized registration and notice system can be implemented relatively easily for new works of authorship. Ideally, however, the system would also capture prior works that are still subject to copyright. Part of the challenge lies in motivating the copyright owners to come forward and input their works into the universal database. The Copyright Office could also work with Google, the Internet Archive, or other digitization projects to pull in such works. Google’s Book Search project has already scanned a large portion of library materials. A mandatory copyright registration and digital deposit system would provide the foundation for a robust digital clearance system for copyright owners and users. Suppose, for example, that a documentary filmmaker was seeking to use photographic works of unknown provenance. Under a decentralized safe harbor regime (and assuming no actual knowledge of the photograph’s copyright status and ownership), the filmmaker would scan the work using approved technology. If the scan did not produce a match, then she would be able to use the work without fear of injunctive relief. Furthermore, the scan would reduce costs in locating true owners if a universal registration system was in place. As with other orphan work proposals (Pallante, 2012; U.S. Copyright Office, 2006), various forms of liability rules could be developed (ranging from zero to fair market value) to address any claim by a legitimate copyright holder who comes forward. Aspects of this system are in limited use. Audible Magic’s Automatic Content Recognition technology and Google’s Content ID screening and monetization system show that effective digital fingerprints can be implemented and scaled. The Google Books Library Project has successfully scanned a substantial portion of published books. Digital tags are increasingly embedded into photographs and other works (Van Houweling, 2012). 2.  Optimal specificity The optimal specificity of copyright registration depends on the relative costs and benefits. Copyright registration has never required anywhere near full specification of what is excluded from the copyright claim—that is, the Swiss cheese holes—because the costs of doing so fall well below any realizable benefit. While it would be useful to know the freedom to operate surrounding a copyrighted work based on ex ante disclosure,

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Economic analysis of intellectual property notice and disclosure  453 the ambiguity surrounding copyright doctrines and the myriad possible uses make such specification highly speculative. Thus, requiring copyright claimants to specify all or even many of the non-protected elements and compilations of elements would be both excessively burdensome and of relatively little practical utility. Disclosure of the registered work and the general limiting principles and doctrines of copyright law are close to the optimal ex ante level. There may, however, be some net benefits of requiring explication of the claimed protectable elements or disclaimers of unprotectable elements with the registration of useful articles, computer software, architectural works, and other works that garner relatively limited copyright protection (Denicola, 1983, p. 720 (observing that ‘the line Congress attempted to draw between copyrightable art and noncopyrightable design “was neither clear nor new”’ (quoting H.R. Rep. No. 1476, 94th Cong. (2d Sess., 54, 55, 1976))). With regard to other works, copyright law can better address the notice scope challenges through other adjustments to the copyright system rather than ex ante specification of the Swiss cheese holes. 3.  Preclearance institutions Even when copyright resources can be traced to particular owners, the inherent uncertainties surrounding the scope of copyright protection can make it difficult for cumulative creators to plan their investments. There can be significant risks in proceeding with projects that the developer considers to be fair use. Insurance for creative projects, which is often required by investors, can be especially difficult to obtain. Therefore, as with other areas involving significant risk, there are advantages to being able to clear usage before undertaking substantial investments. Land use zoning institutions make extensive use of such permitting. Similarly, the Internal Revenue Service’s opinion letter and the Securities and Exchange Commission’s ‘no-action’ letter processes provide mechanisms for testing tax treatment prior to important planning decisions. Various scholars have proposed comparable preclearance mechanisms for copyright resources (Carroll, 2007, pp. 1123–7; Mazzone, 2009, pp. 415–21; Nimmer, 2006, p. 12; Simon 2010, pp. 527–50 (focusing on teaching resources)). A copyright preclearance institution could significantly reduce the risk posed by uncertain copyright scope and potentially massive liability. Nonetheless, preclearance institutions entail substantial administrative costs and would need to be aligned with copyright protection, due process concerns, and cumulative creators’ temporal constraints. 4.  Systematic judicial procedures for determining copyright scope Due to the substantial limitations on copyright protection—such as the originality doctrine, idea/expression dichotomy, and useful article doctrine—as well as the fair use privilege, it is often difficult to assess the scope of copyright protection. As with patent law, the only way to determine violation of copyright protection is through a judicial determination. The process for making that determination, however, is far less predictable. There is no standardized process used in copyright cases, although some courts have used informal versions of the patent process (see, e.g., Harbor Software v. Applied Sys., 925 F. Supp. 1042, 1046 (S.D.N.Y. 1996) (observing that copyright ‘filtration analysis is a matter of law for the Court, rather than for the jury’ based on an analogy to the Markman case)). Such procedures should be followed in copyright litigations that turn on issues of protectability, infringement, and fair use (Lemley and McKenna, 2016).

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454  Research handbook on the economics of IP law volume 1 Table 16.1  Copyright infringement—protectable/unprotectable elements: doll drawings Protectable Elements Include:

Unprotectable Elements Include:

The precise shape, size, and placement The resemblance or similarity to human form (the of the dolls’ anatomical features presence of hair, head, eyes, a nose, mouth, lips, ears, a neck, legs, arms, and a torso) Hair-dos Exaggerated features, including but not limited to an oversized head, oversized eyes, large lips, oversized feet, slim arms, a diminished nose, and a long torso Face paint Idealized features, such as luscious lips, high cheekbones, almond-shaped eyes, a slim waist, a small nose, and long limbs Fashion outfits and accessories The idea of a young, fashion-forward female with an attitude, and the expression traditionally associated with that idea, including but not limited to heavy make-up, an ‘urban’ look, defiant poses, defiant gazes, angular eyebrows, trendy clothing, shoes and accessories The precise combination of features Features shared by a particular race or ethnicity (e.g., skin tone) Source:  Bryant v. Mattel, Inc., 2011 WL 13238416 (C.D. Cal. Apr. 21, 2011) (Instruction No. 47)).

The litigation concerning whether the Bratz line of fashion dolls infringe the drawings on which the dolls were based (Mattel, Inc. v. MGA Entertainment, Inc., 616 F.3d 904 (9th Cir. 2010)) illustrates how such copyright claim construction can usefully be conducted.13 The drawings in question were based significantly on human features and prior works. After extensive pre-trial briefing, the court provided the jury instruction shown in Table 16.1 to aid the jury in evaluating whether the Bratz dolls infringed the protectable elements of Carter Bryant’s drawings. 5.  Substantive reforms The inherent subjectivity of copyright scope stands in the way of a transparent database of fully specified copyright resources and reliable tools for determining liability exposure ex ante. Unlike content recognition technologies for tracing of subsistence and ownership information, current or foreseeable technology alone cannot solve the problem of forewarning the public of the precise internal boundaries of copyrighted works. Copyright scope is far too multi-faceted. Artificial intelligence might one day assist in reducing the uncertainty, but doctrines like the idea/expression dichotomy, substantial similarity, fair use, and remedies are well beyond current (and foreseeable) capabilities. Other noticefailure-based adjustments to the copyright system can, nonetheless, ameliorate scope clarity concerns.

13

  The author served as a consultant to MGA in this litigation.

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Economic analysis of intellectual property notice and disclosure  455 i.  Compulsory licensing regimes    Compulsory licensing regimes provide a default that avoids transaction costs of licensing. The Copyright Act provides several compulsory licenses that have substantially relieved pressure on the uncertain scope of copyrighted works. Over a century ago, Congress established the nation’s first compulsory license as part of the 1909 Copyright Act (Copyright Act of 1909, § 1(e)). The provision authorized anyone to sell piano rolls of musical compositions that had been released for a statutory fee of two cents per copy. With the emergence of the sound recording industry over the next several years, the compulsory mechanical license morphed into a mechanism for recording artists to record their own versions of previously released musical compositions, often referred to as a ‘cover’ license—for a prescribed statutory fee. As updated by the omnibus Copyright Act of 1976, the ‘compulsory license includes the privilege of making a musical arrangement of the work to the extent necessary to conform it to the style or manner of interpretation of the performance involved, but the arrangement shall not change the basic melody or fundamental character of the work’ (17 U.S.C. § 115(a)(2)). The statutory rate for the ‘cover’ license has gradually risen over the past century. It now stands at 9.1 cents or 1.75 cents per minute of playing time or fraction thereof, whichever is greater (U.S. Copyright Office, 2010). As a result of the ‘cover’ license, recording artists have enjoyed substantial freedom to record and distribute their own versions of musical compositions, resulting in many of the more memorable sound recordings. The cover license sidesteps complex scope issues that might otherwise complicate infringement and fair use analysis. The statutory default provides a convenient mechanism for facilitating cumulative creativity and free expression while dividing the resulting revenue (Ginsburg, 2014; Kozinski and Newman, 1999). Over the past century, the United States has enacted compulsory licenses for jukeboxes, cable and satellite retransmission of publicly available broadcasts, ephemeral recordings by broadcasters, and streaming of musical compositions and sound recordings. These regimes economize on transaction costs and promote greater access to copyrighted works. The rates are set through adjudicatory administrative processes. The MMA significantly expands the use of compulsory licenses with regard to music streaming services. The need for and appropriate scope of compulsory license regimes reemerged recently as a result of the growth of mashup art in the digital age (McLeod and DiCola, 2011). A new generation of disc jockeys (or mashup artists) using digital sampling technology has developed a vibrant new musical genre based on slicing, dicing, and mashing previously released sound recordings into musical mosaics. Many of the samples are relatively short, and the resultant works reflect innovative soundscapes. There is wide division in scholarship on whether these types of works qualify as fair use. The current market equilibrium is far from ideal, with much of this work circulating outside of authorized channels. This has alienated new generations of artists and fans from the copyright system. I have proposed bringing order to this chaos through a new compulsory license (Menell, 2016a). Such an approach directly responds to the uncertain scope of copyright protection and promotes free expression by sidestepping the inherent uncertainty of litigation through a balanced authorized distribution channel. ii.  Uncertain scope adjustments    Where tracing the provenance of prior work is difficult or the scope of copyright protection for a prior work is murky, copyright law can reduce the adverse effects of tracing costs and uncertain scope through adjustments to ­substantive rights and remedies.

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456  Research handbook on the economics of IP law volume 1 a.  Fair Use    The open-ended quality and subjective nature of the fair use doctrine contributes to scope uncertainty. At the same time, the flexibility afforded by fair use provides a means to harmonize copyright’s uncertain scope of protection with the goals of promoting creativity and free expression (Gordon, 1982). In particular, courts should promote ex ante bargaining over cumulative creativity by encouraging fair bargaining. That appears to be a substantial factor in how the district court and the Second Circuit in Bill Graham Archives v. Dorling Kindersley Ltd., 386 F.Supp.2d 3244 (S.D.N.Y. 2005), aff’d, 48 F.3d 605 (2d Cir. 2006), resolved whether using entire concert posters and ticket artwork as small illustrative components of a comprehensive anthology about the life and times of the Grateful Dead constituted fair use. Both courts went out of their way to discuss the copyright owner’s stinginess in the bargaining process, even though such facts do not play an express role in the fair use statutory analysis (17 U.S.C. § 107; Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 592 (1994)). In essence, the courts were signaling that fair bargaining is a part of fair use (Menell and Depoorter, 2014). By making this consideration explicit, courts can effectively reduce copyright’s scope uncertainty by promoting fair bargaining. Uses that do not directly compete or result in lost sales ought to be resolved through ex ante accommodation rather than litigation. Relatedly, outright refusals to bargain for non-copyright market purposes, such as political commentary, censorship, and reputational harm, should be strongly disfavored. The case law on this later point is mixed, as some judges have been loath to permit musical works and sound recordings strongly associated with their authors to be used as theme songs for politicians with opposing viewpoints (Moser, 2013; Gardner, 2011 (identifying several copyright disputes in the context of political campaigns and noting instances of capitulation); Henley v. DeVore, 733 F. Supp. 2d 1144 (C.D. Cal. 2010)). b.  Remedies   Tailoring copyright remedies can significantly ameliorate the chilling effects of uncertain copyright scope. Even a small risk of crushing liability can deter cumulative creativity and free expression (Gibson, 2007). Equitable and monetary relief can be better tailored to reduce the adverse effects of uncertain copyright scope. The Supreme Court’s decision in eBay, Inc. v. MercExchange, 547 U.S. 388 (2006), holding that the granting of injunctive relief in intellectual property cases is not automatic and turns on a balancing of equitable factors, affords district courts greater discretion in awarding injunctive relief. Courts can now split the baby, so to speak, where a cumulative creator has significantly added to the expressive works of others but might not warrant a fair use finding. By withholding injunctive relief in these situations, courts can enable more works to propagate while still affording compensation to the owner of the infringed work. The uncertainty created by the eBay framework, however, can be reduced by expressly recognizing that injunctions should be rare outside of the piracy context (Sterk, 2005, pp. 455–62). Liability rules are a particularly supple device for balancing competing considerations and thus can be especially effective in dealing with the uncertainty surrounding copyright scope. Current liability standards are too open-ended, thereby contributing to larger potential exposure than is appropriate. The Copyright Act authorizes the copyright owner to elect between the actual damages and disgorgement of any additional profits of the infringer or statutory damages where the prerequisite for statutory damages (registration) has been satisfied (17 U.S.C. § 504(a)). Copyright law could require copyright owners

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Economic analysis of intellectual property notice and disclosure  457 to meet a working requirement, analogous to the patent working requirement used in Europe (Wegner, 2006, pp. 158–61 (tracing the history of the working requirement)) in order to pursue disgorgement or injunctive relief for non-piratical infringement. Limiting disgorgement to piracy cases would remove some of the sting of the uncertain legal standard. The infringing party has something valuable to offer the owner of the infringed work and the consuming public. Copyright law takes notice into consideration by barring statutory damages and attorneys’ fees where the copyright owner has not registered the work prior to the infringing activity (17 U.S.C. § 504(c)). More should be done to prevent over-deterrence of activities that fall into copyright law’s substantial scope uncertainty. Statutory damages ought not be available outside of piratical activity (Menell, 2016b). Where an author undertakes efforts to transform prior works by adding substantial independent creative elements, ordinary compensatory damages should apply if the resulting work is found to be infringing. Moreover, copyright law ought to cabin or eliminate statutory damages with respect to noncommercial educational and experimental uses of copyrighted works. Often the best way to learn a musical instrument or develop artistic or creative writing skill is to imitate the works of others. Yet these acts, if publicly performed or recorded and uploaded to a social media website, create risk of copyright liability. Copyright owners need not worry about these uses. Fan fiction has often enriched their coffers. More importantly, there is no better way to promote progress than to nurture artistic, musical, and literary skills among the next generation of creators. Furthermore, Congress should recalibrate statutory damages to avoid the risk of highly disproportionate damage awards (Menell, 2014, pp. 313–17). Web 2.0 services can involve thousands of works. Viacom’s lawsuit against YouTube, for example, alleged infringement of 79,000 works (Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19, 26 (2d Cir. 2012)), creating a liability range of $50 million to nearly $12 billion. Under the Supreme Court’s decision in Feltner v. Columbia Pictures Television, Inc., 523 U.S. 340 (1998) the determination of statutory damages is a question for a jury, which potentially increases the unpredictably of exposure. The theoretical availability of astronomical statutory damages undermines the balance sought by copyright law. A more rational damages regime could have produced more rational litigation, with parties identifying the gains from compromise. Instead, the potential for vast, undeserved transfers of Internet-generated wealth produced a scorched-earth court battle and deepened distrust between the content and technology sectors. At a minimum, Congress should set a limit on the number of works for which statutory damages are available and/or set an overall cap for statutory damages. In a related vein, the procedural rules (including fee shifting rules) and remedies for infringement should be re-equilibrated to make declaratory relief more prompt and effective. Given the attorneys’ fees, injury to reputation, and distraction of defending a copyright lawsuit as well as the risks to the project and financial exposure for liability, many cumulative creators take a cautious approach to using other works without authorization (Donaldson, 2008, pp. 363–7). Yet, cumulative creators often have little leverage to bring copyright holdouts to the table. Witness the reluctance of filmmakers, Hollywood studios, restaurants, and other businesses to challenge Warner/Chappell Music’s long-doubted claim to copyright protection for the song ‘Happy Birthday’ (Gardner, 2015; Brauneis, 2009). Many filmmakers and recording artists over the years have agreed to significant license fees rather than challenge the basis of the copyright claim. The availability of class

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458  Research handbook on the economics of IP law volume 1 action status in such cases could potentially motivate greater efforts to invalidate dubious copyright claims. Menell and Depoorter (2014) propose a novel mechanism that would afford a limited, cost-effective process for preclearing works, promote fair negotiation over cumulative uses of copyrighted works, and reduce the exposure of cumulative creators to the inherent risks of relying on copyright’s de minimis and/or fair use doctrines. Under this mechanism, a cumulative creator would have the authority to make a formal offer of settlement to use copyrighted material for a project. If the copyright owner does not respond to the offer, the cumulative creator would be permitted to use the work provisionally by paying the settlement amount into escrow. If the copyright owner rejects the proposed license fee and sues for infringement, the copyright owner will bear the cumulative creator’s litigation costs if (1) the court determines that the use of the material qualifies as fair use, or (2) the court determines that the fair use doctrine does not excuse the use but the cumulative creator’s offer of settlement (the proposed license fee) exceeded the amount of damages that the court determined to be appropriate. In the former case, the escrow amount would be returned to the cumulative creator. In the latter case, the copyright owner would receive the infringement award from the escrow account, and the remainder would be returned to the cumulative creator. This fee shifting proposal would encourage copyright owners to take settlement offers seriously and negotiate around the fair use doctrine’s inherent uncertainties. In so doing, this mechanism protects the reliance costs of cumulative creators, reduces transaction costs, and discourages holdout behavior. Overall, this mechanism would enrich cultural production by increasing the use of copyrighted content in follow-on works while fostering markets for cumulative creativity and providing fair compensation to copyright owners of underlying works. 6.  Voluntary licensing regimes As highlighted by the compulsory licensing discussion above, low transaction cost licensing sidesteps the challenges of uncertain copyright scope. In addition to statutory licenses, a variety of efficient voluntary licensing regimes has emerged to foster cumulative creativity and dissemination of copyrighted works. The organizations developing and evolving these regimes play a vital role in promoting economic efficiency and expressive creativity (Merges, 2004, 1996). Some of these licensing institutions are specific to particular artistic fields; others function across fields. Several music industry organizations have resolved important classes of bargaining through collective licensing systems (Merges, 1996). The American Society of Composers, Authors, and Publishers (ASCAP) pioneered the development of blanket licensing that greatly facilitated authorized public performance of copyrighted works. The Harry Fox Agency, established by the National Music Publishers’ Association, has long served as an efficient clearinghouse for mechanical licenses of musical compositions for sound recordings. These institutions have greatly facilitated commerce in, and dissemination of, musical works and sound recordings. ASCAP and Broadcast Music, Inc. (BMI), competing performance rights consortia, for example, operate within consent decrees supervised by the United States District Court for the Southern District of New York (U.S. Department of Justice, 2014). These arrangements are coming under increasing strain as major record labels and music publishers have sought to withdraw some of their works from these collective

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Economic analysis of intellectual property notice and disclosure  459 licenses in an effort to extract greater value from distribution outlets (Pandora Media, Inc. v. Am. Soc’y of Composers, Authors, and Publishers, 785 F.3d 73 (2d Cir. 2015) (affirming decision barring ASCAP members from partially withdrawing rights as violative of the ASCAP consent decree); U.S. Copyright Office, 2015, pp. 162–4; Internet Policy Task Force, 2013, pp. 80–98). Such withdrawals fragment already tenuous music platforms at a time when attracting more paid subscribers is vital to persuading music fans to join authorized services as opposed to pirate channels (Menell, 2014, pp. 292–7; Van Houweling, 2010, pp. 561–64; Heller, 1998, p. 624 (highlighting that ‘[w]hen there are too many owners holding rights of exclusion, the resource is prone to underuse—a tragedy of the anticommons’)). The MMA addresses some of these concerns by bringing interactive streaming of music compositions within a blanket compulsory licensing regime and shifting the ratesetting standard from an amorphous ‘reasonableness’ standard to a market-based ‘willing buyer/willing seller’ standard (see LaFrance, 2018, pp. 323–4). The MMA also improves the framework for setting the compulsory license for non-interactive streaming of sound recordings. The new regime eliminates arbitrary distinctions between older (SiriusXM, Muzak) and newer services (Pandora) (LaFrance, 2018, p. 324). The MMA leaves the setting of rates for interactive streaming of sound recordings to free market negotiation between sound recording owners and music services. In addition to collective licensing within creator communities, technology companies have developed platforms that enable users to upload content for widespread distribution. Google’s YouTube platform is a prime example. As discussed previously, YouTube has developed a sophisticated pre-screening process to prevent unauthorized distribution of copyrighted works. The Content ID system works most productively when it screens exact copies of copyrighted works that merely substitute for the original. The copyright owner has the choice of blocking the upload or permitting the work to be uploaded subject to a claim to the advertising revenue. The Content ID screening/monetization system is more controversial, however, when the uploader is a true cumulative creator—someone who is reworking, augmenting, or commenting on the underlying work. The Content ID screen is effectively conducting an infringement and fair use analysis, which, for the reasons previously canvassed, is unlikely to be reliable. When the owner of the sampled copyrighted work(s) agrees to the work being uploaded and monetized, the cumulative work reaches a broad audience—but potentially at the cost of losing the revenue that might rightfully be attributable to a fair use. The cumulative creator would, of course, have the option of posting the work elsewhere, but would not gain access to YouTube’s extensive network of users. The most serious notice-related concern arises where the copyright owner of the sampled work blocks the cumulative work (Sawyer, 2009). If the cumulative work is a fair use, then the Content ID screening algorithm has interfered with cumulative creativity and free expression. Although the Copyright Act provides a mechanism to penalize copyright owners who ‘knowingly materially misrepresent[] . . . that material or activity is infringing’ (17 U.S.C. § 512(f)), this deterrent has proven ineffective as a practical matter. As illustrated by the leading case addressing remedies under § 512(f), the litigation costs and modest remedies discourage those individuals unfairly accused of infringing copyright law from pursuing a misrepresentation claim (Lenz v. Universal Music Corp., 572 F. Supp. 2d 1150 (N.D. Cal. 2008), aff’d, 815 F.3d 1145 (9th Cir. 2016)).

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460  Research handbook on the economics of IP law volume 1 In view of the uncertainties attendant to copyright scope and the ease of issuing takedown requests, copyright law should afford enhanced damages for improper takedown notices so as to encourage greater care and bargaining as opposed to costly litigation (Menell, 2014, p. 358). In addition to these industry-based institutions, open source projects provide an alternative licensing model that has been especially important in the computer software industry (Van Houweling, 2008; Merges, 2004). Open source software traces its origins to the early 1970s and the culture of collaborative research on computer software (Weber, 2004). To perpetuate that model in the face of increasingly proprietary software, Richard Stallman, a former researcher in MIT’s Artificial Intelligence Laboratory, established the Free Software Foundation (FSF) to promote users’ rights to use, study, copy, modify, and redistribute computer programs. Such rights obviously conflict with the default bundle of rights of copyright law. For that reason, FSF developed the GNU General Public License (GPL), a complex licensing agreement designed to prevent programmers from building proprietary limitations into ‘free’ software. Stallman set forth a task list for the development of a viable UNIX-compatible open source operating system. Many programmers from throughout the world contributed to this effort on a voluntary basis, and by the late 1980s most of the components had been assembled. The project gained substantial momentum in 1991 when Linus Torvalds developed a UNIX-compatible kernel, which he called ‘Linux.’ Torvalds structured the evolution of his component on the GNU GPL ‘open source’ model. The integration of the GNU and Linux components resulted in a UNIX-compatible open source program (referred to as GNU/Linux) and has since become widely used throughout the computing world. In the process, it has spawned a large community of computer programmers and service organizations committed to the principles of open source development. The growth and success of Linux has brought the open source movement into the mainstream computer software industry. Today, a variety of vendors, such as Red Hat, Caldera, and Ubuntu, distribute open source software, and it has tens of millions of users worldwide. Building on the open source model, Creative Commons provides tools to assist authors in promoting the reuse and remixing of their works at the time of creation by opting into a different set of defaults than those provided by the Copyright Act (Van Houweling, 2008). Creative Commons licenses distinguish among four categories of permissions: (1) attribution—requires users to attribute the original author; (2) modification—the author can designate whether the work can be modified; (3) share and share alike—anyone using the work agrees to make the resulting work available on the same basis; and (4) noncommercial use—the work may be used for noncommercial purposes. Creative Commons provides tools to assist creators in finding licensed works that can be shared, remixed, or reused. 7. Depropertization As with patent law, there may be circumstances in which the notice problems associated with a class of copyrighted works outweigh the social benefits of affording protection. The most significant problems involve orphan works. The MMA addresses the orphan works concern in several ways. First, it authorizes noncommercial use of pre-1972 sound recordings if: (A) the person ‘makes a good faith, reasonable search for, but does not find, the sound recording’ either in the records of the

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Economic analysis of intellectual property notice and disclosure  461 Copyright Office, or ‘on services offering a comprehensive set of sound recordings for sale or streaming’; (B) the person files a notice identifying the sound recordings and the nature of the use in the Copyright Office; and (C) within 90 days after the notice ‘is indexed into the public records of the Copyright Office,’ the rights owner does not file a notice opting out of the noncommercial use (17 U.S.C. §1401(c)(1)). This provision provides a model for other orphan works. Second, the MMA distributes royalties for online streamlining of musical compositions attributable to orphan works that are unclaimed after three years to other musical work copyright owners ‘in a transparent and equitable manner based on data indicating the relative market shares of such copyright owners’ (17 U.S.C. §115(d) (3)(J)(i)(II)). A mandatory digital notice regime would effectively depropertize those works as discussed above. Instituting a mandatory digital notice system poses a problem for unpublished works—everything from personal letters or photographs to trade secret manuals and object code. Demanding that such works be registered and included within searchable digital databases for clearance matches would impose new costs and jeopardize the privacy of these materials. This issue highlights whether copyright protection is a public system which brings responsibilities with its protections (Menell, 2016b, p. 1004). The real property system requires owners to provide means for the public to know definitively whether land is encumbered. Copyright protection should also entail such notice elements. A personal letter or trade secret document could leak onto the Internet, and an unwitting copier of such information might have no way to determine its provenance. While current copyright law provides a cause of action and remedies for such acts, it is not at all clear that the copyright system is well attuned to the real sources of harm, which sound more in privacy violations and possibly hacking of computer systems. There is little reason to believe that copyright’s market-based remedies are well suited to compensating authors who do not intend to publish their works. Moreover, exempting authors of unpublished letters and trade secret documents from responsibility to inform the public of their copyright claims undermines a public copyright system. It is useful to distinguish between unpublished works that are intended for publication (such as books, films, or sound recordings in production) and those that are not intended for publication (such as personal letters and trade secrets). The copyright system is designed for the former. And, in fact, Congress has established a preregistration process to deal with the growing risk of works intended for publication being leaked to the public (Family Entertainment and Copyright Act of 2005, Pub. L. No. 109-9, § 104(b), 119 Stat. 218, 222 (amending 17 U.S.C. § 411(a))). Such preregistration systems, as well as liability for purloined materials that interfere with planned publication, fit well within a publicregarding copyright system. Using copyright remedies for this narrow, but important, set of works makes sense. We are typically not dealing with cumulative creators so much as pirates—individuals or entities that seek to undermine the public release of costly and highly anticipated works of authorship. The harms associated with accessing (and copying) unpublished works that the author intends to keep private fit better within privacy and anti-hacking regimes. Rather than undermine the increasingly important notice function of copyright protection, Congress could better address the problem of accessing and copying unpublished works through suitable reforms of privacy, trade secrecy, and computer law protections and remedies.

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462  Research handbook on the economics of IP law volume 1 Similarly, there are serious questions about whether photography should enjoy the full duration and range of protections afforded other copyrighted works (Hughes, 2012). C.  Design Patent Despite their name, design patents are much more similar to copyrights—in particular, pictorial, graphic, and sculptural copyrighted works—than utility patents. Congress established the design patent system in 1841 to provide protection for original ornamental features of articles of manufacture (Hudson, 1948). The textile industry was developing and concern arose about piracy of patterns depicted on rugs and fabrics. In addition, metal industries sought protection for the surface ornamental and shape of stoves, radiators, and other articles of manufacture. Copyright protection at that time did not extend to useful articles. Although copyright protection was eventually expanded to cover the expressive features of pictorial, graphic, and sculptural works (to the extent such designs ‘can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article’ (17 U.S.C. § 101 (definition of ‘[p]ictorial, graphic, and sculptural works’))), Congress retained the largely overlapping design patent regime (Mazer v. Stein, 347 U.S. 201, 218–19 (1954) (concluding that both regimes can cover pictorial, graphic, and sculptural elements of useful articles)). The principal design patent notice issue concerns the scope of protection. The scope of design patents is based upon two-dimensional drawings. Courts will find infringement of a design patent ‘if, in the eye of an ordinary observer, giving such attention as a purchaser usually gives, two designs are substantially the same, if the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other’ (Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665, 670 (Fed. Cir. 2008) (quoting Gorham Co. v. White, 81 U.S. 511, 528 (1871))). The application of this test is complicated by the need to protect only the ornamental, and not functional, aspects of the design. The Federal Circuit interprets this to require that a design patent be ‘primarily ornamental’ and not ‘dictated by the utilitarian purpose of the article’ (L.A. Gear Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1123 (Fed. Cir. 1993) (‘In determining whether a design is primarily functional or primarily ornamental the claimed design is viewed in its entirety, for the ultimate question is not the functional or decorative aspect of each separate feature, but the overall appearance of the article, in determining whether the claimed design is dictated by the utilitarian purpose of the article’); Avia Group International Inc. v. L.A. Gear California Inc., 853 F.2d 1557, 1563 (Fed. Cir. 1988) (‘[A] distinction exists between the functionality of an article or features thereof and the functionality of the particular design of such article or features thereof that perform a function’); Manual of Patent Examining Procedure, § 1504.01(c) (‘The design for the article cannot be assumed to lack ornamentality merely because the article of manufacture would seem to be primarily functional’)).14 14   Based on the inherent logic of the intellectual property system as reflected in the Supreme Court’s Baker v. Selden decision (101 U.S. 99 (1879)) and other seminal cases (Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989) and TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001)) as well as legislative history of the intellectual property statutes, Menell and Yablon (2017) contend that only the utility patent statute can protect functionality. Their

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Figure 16.3  Design patent drawing Determining whether a design is functional is especially difficult where form and function are intertwined (Richardson v. Stanley Works, 597 F.3d 1288 (Fed. Cir. 2010) (concluding that the ‘overall effect’ of allegedly infringing design was very different after ‘discounting’ the functional aspects of the claimed design); OddzOn Products, Inc. v. Just Toys, Inc., 122 F.3d 1396, 1405 (Fed. Cir. 1997) (‘[w]here a design contains both functional and non-functional elements, the scope of the claim must be construed in order to identify the non-functional aspects of the design as shown in the patent’); compare Amini Innovation Corp. v. Anthony Cal., Inc., 439 F.3d 1365, 1372 (Fed. Cir. 2006) (holding that while it is proper to factor out the functional aspects of various design elements, that discounting of functional elements must not convert the overall infringement test to an element-byelement comparison)). Design patent applicants limit the scope of their design patent drawings through the use of broken or phantom lines to illustrate the environment, but not claimed aspects, of the design (Manual of Patent Examining Procedure, § 1504.04). Only the solid lines constitute the claimed design. As Figure 16.3 illustrates, the applicant sought protection only for the design of the shank portion of the drill bit (Application of Hajo Zahn, 617 F.2d 261 (C.C.P.A. 1980)). Design patent applicants can strengthen the reach of their claim by focusing on unique portions of the article and omitting features or by disclaiming them by the use of broken lines (Katz, 2002). This allows them to assert infringement actions against products containing only a portion of the claimant’s entire article of manufacture. Burstein (2016) explains how applicants can expand the scope of protection through strategic use of claiming techniques in conjunction with continuation practice: The PTO also allows design patent applicants to broaden their claims—in amendments or later applications—by changing solid lines to broken lines. Sophisticated applicants exploit this rule, using a ‘keep [one] “in the oven”’ strategy. First, the applicant files an application that claims the entire design of a new product. ‘Then, while that application is pending, the company files one or more continuation [or divisional applications] that claim [a smaller] portion[] of the design.’ Assuming the new application could claim priority to the original application, this strategy allows a design patent applicant to go back to the PTO and capture competing products that were introduced after the first design patent application was filed—even if those competing products did not infringe the original patent claim. Importantly, there is no requirement that the smaller portion or portions claimed in a continuation (or divisional) represent an important, distinctive or otherwise salient design feature. (Burstein, 2016, pp. 115–16 (footnotes omitted))

analysis questions the Federal Circuit’s apparent view that a design patent can protect functional elements of a design if those features are embodied in a ‘primarily ornamental’ overall design.

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D504,889

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Figure 16.4  Apple design patents The murkiness of the Federal Circuit’s functionality jurisprudence as well as the Patent Office’s flexible claiming and continuation rules create tremendous uncertainty regarding the scope of design patents. As with copyright protection, design patents are like Swiss cheese. Although the solid lines of the design patent claim are easily perceived, the unprotected elements—unoriginal, obvious, and functional aspects—are not readily apparent. Even though the drill bit depicted above contained broken lines, it is unclear what aspects of the shank are protected. Burstein (2016, pp. 125–8) highlights numerous ‘trite, uncreative, or obviously unpatentable designs’ issued by the Patent Office. Menell and Yablon (2019) present empirical evidence showing a gradual, but substantial, shift from ornamental surface ornamentation toward more functional, shape-based designs over the century and a half of the design patent regime. The risks associated with the uncertain scope of design patents are exacerbated by the potential for outsize damages created by design patent law’s disgorgement remedy (35 U.S.C. § 289 (liability for ‘total profit’)). Apple’s smartphone and tablet design patents (shown in Figure 16.4) illustrate the design patent notice problems. It is difficult to see how rounded rectangle designs were considered original and nonobvious in light of prior tablets and conventional geometric shapes (Monroe, 2017; Compaq TC1000, Wikipedia, https://en.wikipedia.org/wiki/ Compaq_TC1000). It is also difficult to see how these minimalist, shock-resistant designs were found to be ‘primarily ornamental.’ They lack surface ornamentation and the shapes are closely tied to their function, conventional screen, paper, and pocket sizes, and engineering considerations. (The shapes of these products were ruled functional under trade dress law. (Apple Inc. v. Samsung Electronics Co., Ltd., 786 F.3d 983 (Fed. Cir. 2015).) Yet the courts upheld the validity of these design patents, found that Samsung infringed both, and ordered damages of more than half a billion dollars. Thus, trade dress protection creates severe notice challenges. The costs of these problems have become more salient as a result of the protection afforded to Apple’s minimalist consumer devices and growing recognition of the large potential recovery. These problems can be addressed at multiple levels. The Patent Office should implement more robust design patent examination and require applicants seeking protection for product shape to expressly disclaim functional elements. The Federal Circuit should re-examine its functionality jurisprudence. The ‘primarily ornamental’ and ‘dictated by

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Economic analysis of intellectual property notice and disclosure  465 functionality’ standards misapprehend the preemptive supremacy of the utility patent system in protection of functional advances. Product designers should not be able to camouflage functional elements with ornamental flourishes. Where the form and function are inextricably intertwined, then design patent protection should not be available. Barring such scrutiny, the Supreme Court should look more carefully at the Federal Circuit’s lax standard for determining functionality. It is out of step with the standards that the Supreme Court has applied to copyright and trade dress protection, and conflicts with the logic of the overall intellectual property system (Menell and Yablon, 2017). D. Trademark The notice issues surrounding trademarks are far less significant than in utility patent, design patent, and copyright fields. Nonetheless, the geographic and product/service scope of trademarks can be ambiguous. Trademark notice could be significantly enhanced through a mandatory public registration system and the implementation of digital tools for scanning/searching graphic and trade dress marks. E.  Trade Secret Trade secrets function as an anti-notice regime. Disclosing the information destroys trade secrecy. Hence, the notice concerns raised with the other intellectual property regimes have no analog in the trade secret system. Nonetheless, as highlighted above in section II(C)(4), the overbroad scope of conventional NDAs can subvert public policy by discouraging employees and consultants from reporting illegal activity within corporations and other organizations. The Defend Trade Secrets Act of 2016 (DTSA) addresses this problem by immunizing whistleblowers who disclose trade secrets to the government confidentially (Menell, 2017). One of the challenges in achieving the worthy goal of the whistleblower immunity provision is in providing the target audience with information about their immunity. DTSA addresses this problem by requiring that employers ‘provide notice of the immunity . . . in any contract or agreement with an employee that governs the use of a trade secret or other confidential information’ (18 U.S.C. § 1833(b)(3); Menell, 2017, p. 54).

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Economic analysis of intellectual property notice and disclosure  469 Robinson, W. Keith. 2016. ‘Awarding Attorney Fees and Deterring “Patent Trolls,”’ 20 Lewis & Clark Law Review 281–302. Samuelson, Pamela. 2016. ‘Notice Failures Arising from Copyright Duration Rules,’ 96 Boston University Law Review 667–90. Sawyer, Michael S. 2009. ‘Filters, Fair Use and Feedback: User-Generated Content Principles and the DMCA,’ 24 Berkeley Technology Law Journal 363–404. Schultz, Jason, and Jennifer M. Urban. 2012. ‘Protecting Open Innovation: The Defensive Patent License as a New Approach to Patent Threats, Transaction Costs, and Tactical Disarmament,’ 26 Harvard Journal of Law & Technology 1–68. Schwartz, David L., and Ted Sichelman. 2019. ‘Data Sources on Patents, Copyrights, Trademarks, and Other Intellectual Property,’ in Peter S. Menell and David L. Schwartz, eds., Research Handbook on the Economics of Intellectual Property, vol. II. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Seymore, Sean B. 2010. ‘The Teaching Function of Patents,’ 85 Notre Dame Law Review 621–70. Shapiro, Carl. 2001. ‘Navigating the Patent Thicket: Cross Licensing, Patent Pools, and Standard Setting,’ in, Adam B. Jaffe, Josh Lerner, and Scott Stern, eds., Innovation Policy and the Economy. Cambridge, MA: MIT Press. Sheldon, Jeffrey G. 2005. How to Write a Patent Application. New York, NY: Practicing Law Institute. Siebrasse, Norman V., and Thomas F. Cotter. 2016. ‘A New Framework/or Determining Reasonable Royalties in Patent Litigation,’ 68 Florida Law Review 929–99. Simon, David A. 2010. ‘Teaching without Infringement: A New Model for Educational Fair Use,’ 20 Fordham Intellectual Property, Media & Entertainment Law Journal 453–562. Smith, Henry E. 2002. ‘Exclusion Versus Governance: Two Strategies for Delineating Property Rights,’ 31 Journal of Legal Studies S453–88. Smith, Henry E. 2003. ‘The Language of Property: Form, Context, and Audience,’ 55 Stanford Law Review 1105–92. Smith, Henry E. 2011. ‘Standardization in Property Law,’ in Kenneth Ayotte and Henry E. Smith, eds., Research Handbook on the Economics of Property Law. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Sprigman, Christopher. 2004. ‘Reform(aliz)ing Copyright,’ 57 Stanford Law Review 485–568. Sterk, Stewart E. 1985. ‘Freedom from Freedom of Contract: The Enduring Value of Servitude Restrictions,’ 70 Iowa Law Review 615–62. Sterk, Stewart E. 2005. ‘Intellectualizing Property: The Tenuous Connections between Land and Copyright,’ 83 Washington University Law Quarterly 417–70. van Gompel, Stef. 2011. Formalities in Copyright Law: An Analysis of their History, Rationales and Possible Futures. Alphen aan den Rijn: Kluwer Law International. Van Houweling, Molly Shaffer. 2008. ‘The New Servitudes,’ 96 Georgetown Law Journal 885–950. Van Houweling, Molly Shaffer. 2010. ‘Author Autonomy and Atomism in Copyright Law,’ 96 Virginia Law Review 549–642. Van Houweling, Molly Shaffer. 2012. ‘Atomism and Automation,’ 27 Berkeley Technology Law Journal 1471–502. Van Houweling, Molly Shaffer. 2019. ‘Intellectual Property as Property,’ in Peter S. Menell and Ben Depoorter, eds., Research Handbook on the Economics of Intellectual Property, vol. I. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. U.S. Copyright Office. 2006. Report on Orphan Works, accessed March 21, 2019 at http://www.copyright.gov/ orphan/orphan-report.pdf. U.S. Copyright Office. 2010. Mechanical License Royalty Rates, accessed March 21, 2019 at http://www. copyright.gov/licensing/m200a.pdf. U.S. Copyright Office. 2015. Copyright and the Music Marketplace, accessed March 21, 2019 at https://copy​ right.gov/docs/musiclicensingstudy/copyright-and-the-music-marketplace.pdf. U.S. Department of Justice. 2014. Antitrust Consent Decree Review: ASCAP and BMI, accessed March 21, 2019 at https://www.justice.gov/atr/ascap-bmi-decree-review. U.S. Patent and Trademark Office. 2019. How to Satisfy a Disclaimer Requirement, accessed March 21, 2019 at https://www.uspto.gov/trademark/laws-regulations/how-satisfy-disclaimer-requirement. U.S. Patent No. 5,205,473 col. 4-5 (filed April 27, 1993). U.S. Patent No. 5,436,960 (filed July 25, 1995). Ware, James, and Brian Davy. 2009. ‘The History, Content, Application and Influence of the Northern District of California’s Patent Local Rules,’ 25 Santa Clara Computer & High Technology Law Journal 965–1032. Weber, Steven. 2004. The Success of Open Source. Cambridge, MA: Harvard University Press. Wegner, Harold C. 2006. ‘Injunctive Relief: A Charming Betsy Boomerang,’ 4 Northwestern Journal of Technology and Intellectual Property 156–170. Wheeler, George F. 2003. ‘Creative Claim Drafting: Claim Drafting Strategies, Specification Preparation, and Prosecution Tactics,’ 3 John Marshall Review of Intellectual Property Law 34–60.

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470  Research handbook on the economics of IP law volume 1 Wikipedia, ‘Compaq TC1000,’ accessed March 21, 2019 at https://en.wikipedia.org/wiki/Compaq_TC1000. Wikipedia, ‘Metes and Bounds,’ accessed March 21, 2019 at https://en.wikipedia.org/wiki/Metes_and_bounds.

Cases Amini Innovation Corp. v. Anthony Cal., Inc., 439 F.3d 1365 (Fed. Cir. 2006). Apple Inc. v. Samsung Electronics Co., Ltd., 786 F.3d 983 (Fed. Cir. 2015). Application of Hajo Zahn, 617 F.2d 261 (C.C.P.A. 1980). Ariad Pharmaceuticals v. Eli Lilly and Co., 598 F.3d 1336 (Fed. Cir. 2010). Avia Group International Inc. v. L.A. Gear California Inc., 853 F.2d 1557 (Fed. Cir. 1988). Baker v. Selden, 101 U.S. 99 (1879). Bill Graham Archives v. Dorling Kindersley Ltd., 386 F.Supp.2d 3244 (S.D.N.Y. 2005), aff’d, 48 F.3d 605 (2d Cir. 2006). Blaustein v. Burton, 88 Cal. Rptr. 319 (Cal. Ct. App. 1970). Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989). Bright Tunes Music Corp. v. Harrisongs Music, Ltd., 420 F. Supp. 177 (S.D.N.Y. 1976). Bryant v. Mattel, Inc., 2011 WL 13238416 (C.D. Cal. Apr. 21, 2011). Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994). Desny v. Wilder, 46 Cal. 2d 715 (Cal. S. Ct. 1956). eBay v. MercExchange, 547 U.S. 388 (2006). Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008). Faus v. City of Los Angeles, 67 Cal. 2d 350, 431 P.2d 849, 62 Cal. Rptr. 193 (Cal. S. Ct. 1967). Feltner v. Columbia Pictures Television, Inc., 523 U.S. 340 (1998). Festo Corp. v. Shoketsu Kinzoku Kabushiki Co., 535 U.S. 722 (2002). Gentry Gallery, Inc. v. Berkline Corp., 134 F.3d 1473 (Fed. Cir. 1998). Gorham Co. v. White, 81 U.S. 511 (1871). Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605 (1950). Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016). Harbor Software v. Applied Sys., 925 F. Supp. 1042 (S.D.N.Y. 1996). Henley v. DeVore, 733 F. Supp. 2d 1144 (C.D. Cal. 2010). In re NTP, 654 F.3d 1279 (Fed. Cir. 2011). L.A. Gear Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1123 (Fed. Cir. 1993). Lenz v. Universal Music Corp., 572 F. Supp. 2d 1150 (N.D. Cal. 2008), aff’d, 815 F.3d 1145 (9th Cir. 2016). Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996). Mattel, Inc. v. MGA Entertainment, Inc., 616 F.3d 904 (9th Cir. 2010). Mazer v. Stein, 347 U.S. 201 (1954). MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545 (2014). OddzOn Products, Inc. v. Just Toys, Inc., 122 F.3d 1396 (Fed. Cir. 1997). Pandora Media, Inc. v. Am. Soc’y of Composers, Authors, and Publishers, 785 F.3d 73 (2d Cir. 2015). Raab v. Casper, 124 Cal. Rptr. 590 (Ct. App. 1975). Richardson v. Stanley Works, 597 F.3d 1288 (Fed. Cir. 2010). Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49 (2d Cir. 1936). Smith v. Dravo, 203 F.2d 369 (7th Cir. 1953). TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001). Tulk v. Moxhay (1848) 41 Eng. Rep. 1143 (Ch.). Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012). Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17 (1997).

Legislative Materials 17 U.S.C. § 101, § 102(a), § 102(b), § 107, § 115(a)(2), § 115(d)(3)(E)(i), § 115(d)(3)(E)(ii), § 504(a), § 504(c), § 512(f). 18 U.S.C. § 1833(b)(3). 35 U.S.C. § 112(a), § 112(b), § 112(f), § 122, § 284, § 285, § 289. Copyright Act of 1909, § 1(e). Copyright Office, Form VA, line 6. Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, 130 Stat. 376 (codified in scattered Sections of 18 and 34).

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Economic analysis of intellectual property notice and disclosure  471 Family Entertainment and Copyright Act of 2005, Pub. L. No. 109-9, § 104(b), 119 Stat. 218, 222 (amending 17 U.S.C. § 411(a)). Good Faith Improver Act, Cal. C. Civ. Proc. §§ 871.1-7. H.R. Rep. No. 1476, 94th Cong. (2d Sess. 1976). Manual of Patent Examining Procedure, § 1504.01(c). Manual of Patent Examining Procedure, § 1504.04. Music Modernization Act of 2018, Pub. L. 115–264, 132 Stat. 3676, codified at §§ 114, 115, 801, 803, 1401. Northern District of California Patent Local Rules. Paris Act relating to the Berne Convention for the Protection of Literary and Artistic Works of September 9, 1886, as amended on July 24, 1971, § 5(2). Restatement (Third) of Property: Servitudes (2000). Restatement (Third) of Unfair Competition § 41. U.S. Const. art I, § 8, cl. 8.

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PART IV IP AND INSTITUTIONS

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17.  Patent institutions: shifting interactions between legal actors Arti K. Rai* 15

Contents I. Introduction II. Institutional Actors A. The Era of Federal Circuit Supremacy, 1982–2002 B. The Supreme Court and Executive Branch Strike Back C. The Role of Congress D. The Role of Inferior Tribunals: Article III Trial Courts, the International Trade Commission (ITC), and the PTAB III. Normative Analysis A. The Federal Circuit and Inferior Tribunals B. The Supreme Court IV. Future Research Questions A. The Supreme Court B. PTAB C. Comparison with Other Technically Complex Areas References

I. INTRODUCTION As demonstrated by multiple relevant contributions in Volumes I and II, the literature on patent institutions is voluminous. To keep the inquiry tractable, this contribution covers only research on actors responsible for the development and implementation of US patent law. Moreover, because Part II of this Volume addresses in detail the empirical literature on several very important legal actors – most notably the Court of Appeals for the Federal Circuit (Federal Circuit) and the US Patent and Trademark Office (USPTO) – I focus on interactions between legal actors. I consider both legalist and strategic perspectives on these interactions. I turn to this topic about a decade after having written several articles (Rai, 2000, 2003) making a strong normative claim that Congress missed the mark when it decided in 1982 to enhance expertise solely at the appellate court level. I argued that many of the most *  Elvin R. Latty Professor Law, Duke Law School; Faculty Director, Duke Law Center for Innovation Policy; Duke Innovation and Entrepreneurship Initiative Research Fellow. I thank participants at the ‘Research Handbook: Economics of Intellectual Property Rights – Volume 1 Theory’ conference for extremely helpful comments.

473

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474  Research handbook on the economics of IP law volume 1 important inquiries associated with determinations of patent validity and infringement involve relatively technical adjudicative facts. Moreover, under conventional legal process principles (Hart and Sacks, 1994), this reality counseled in favor of deploying greater expertise and resources at the administrative and trial court levels. With deployment of such expertise and resources, the Federal Circuit would have no cause to act as a fact-finder in its review of the USPTO and trial courts. Further, the Federal Circuit’s predisposition towards a rule-formalism that was largely insensitive to policy goals – previously justified by the limited competence of inferior actors in the patent system – would lose its justification. Over the intervening years, some of this ‘devolution’ has arguably occurred. Congressional intervention, intervention by the Supreme Court allocating power to lower tribunals, and even aggressive ‘competition’ for patent cases by certain district courts have taken power away from the Federal Circuit. But devolution has not necessarily been accompanied by fortification of expertise and resources. And even where devolution has been accompanied by such fortification, such as through the creation of the USPTO Patent Trial and Appeals Board (PTAB), the results have been controversial. Meanwhile, many questions persist regarding whether current interactions between patent institutions are creating either appropriate results in individual cases or appropriate policy for the system as a whole. Perhaps as a consequence, the Supreme Court continues its active supervision of institutional interactions. A review of interactions between legal actors in the system is thus quite timely. Although my prior work and this contribution focus on the period after the creation of the Federal Circuit, the Constitution of course mentions patents and Congress saw fit to create a patent system as early as 1790. Through the centuries, however, Congressional involvement on central substantive matters has often been limited to articulation of some very basic language (Nard, 2010). Given the many gaps in statutory law, Congress has arguably delegated authority to other institutions (Rai, 2003; Burk and Lemley, 2003; Nard, 2010). In any event, these other institutions have either implicitly or explicitly developed patent law beyond the statutory text. Particularly since the creation of the Federal Circuit in 1982, the courts have been the primary institution (Nard, 2010). Although the USPTO has been conducting examination since 1836, its very longevity as an institution means that the agency substantially predates the rise of the modern administrative state (Duffy, 2000). As discussed below, path-dependence from the USPTO’s original limited role; a suite of concerns surrounding administrative regulation of ‘property rights’; aggressive review by the Federal Circuit; and persistent problems in managing workflow that undermine the agency’s reputation have all conspired to keep the USPTO from exercising significant control over questions of law and policy. The USPTO’s limited power vis-à-vis other institutional actors has had a number of follow-on effects. In general, because the courts rather than the USPTO have maintained the standards by which applications are judged, concerns about USPTO workload have not entered the calculus for these standards. The resulting influx of new, and repeat, applications has further taxed the USPTO’s already limited and uncertain financial resources. That said, the USPTO, together with other executive agencies, has in recent years had some influence over the powerful Office of the Solicitor General. The net result has been some recent USPTO influence over the Supreme Court. The USPTO also has a first mover advantage that it is sometimes able to exploit. Finally, the powers, and additional

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Patent institutions: shifting interactions between legal actors  475 resources, conferred on the agency by the America Invents Act of 2011 (AIA) may give it broader authority going forward. This broader authority has already raised, and will continue to raise, a plethora of interesting research questions. Within the court system, the Federal Circuit was the predominant player from 1982 through the early 21st century. The elimination of appeals to regional circuits did not, however, eliminate litigants’ desire to seek out particular district courts (Moore, 2001). To the contrary, litigants’ predilection for forum shopping accelerated (Lemley, 2010), with the evidence indicating that non-practicing entities in particular sought out the Eastern District of Texas (Anderson, 2015; Klerman and Reilly, 2016). With district courts of course come the institution of juries, and many have questioned the considerable power given to juries (Lemley, 2013). In the last decade, the Federal Circuit has also shared the spotlight with the Supreme Court. The emergence of the Supreme Court as a relevant actor has begun to generate research on its role and also on strategic interactions between the Federal Circuit and the Supreme Court. As the preceding discussion may suggest, the relevant descriptive and normative literatures are quite rich. To keep the normative discussion tractable, I adopt the standard, if narrow, economic account that patent law exists to promote innovation. From an institutional and procedural standpoint, achieving innovation requires that patent law institutions promote efficiency and accuracy in rights allocation. Efficiency and accuracy of course map directly on to the familiar goal of minimizing the sum of administrative costs and error costs emphasized by standard economic analyses of legal procedure. Many patent scholars also note that institutional predictability and consistency are particularly important for reducing the sum of administrative and error costs. Finally, I address what I view as the most pressing open research questions. Some of these questions have been addressed in part, but more research needs to be done. In other cases, the events in question are of recent vintage, and a full institutional account must await further developments. Section II reviews descriptive accounts of patent law’s institutional actors. Section III reviews normative accounts. Section IV presents open research questions.

II.  INSTITUTIONAL ACTORS In 1982, Congress set up the Court of Appeals for the Federal Circuit to hear all appeals in patent cases. The current institutional debate continues to focus heavily on the Federal Circuit. Discussions of other important patent institutions, such as the Supreme Court, the USPTO, other agencies, and trial courts often refer to the Federal Circuit. For purposes of the historical and descriptive account, the creation of the Federal Circuit in 1982 thus serves as a useful point of demarcation. A.  The Era of Federal Circuit Supremacy, 1982–2002 As Ryan Vacca’s contribution to Volume II discusses in detail, momentum to create the Federal Circuit emerged in part from a more general project on reducing appellate court caseload and improving legal consistency undertaken by the Hruska Commission (see

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476  Research handbook on the economics of IP law volume 1 references cited in Vacca, pp. 733–61). Although the Commission’s main recommendation of a new appellate court to handle cases referred by the Supreme Court was rejected, and the Commission itself rejected creating a specialized court for patent appeals, the policy community paid substantial attention to the Commission’s determination that existing regional appellate courts had particular difficulty with patent law. The Congressional decision to create the Federal Circuit was driven by arguments that regional appellate courts had created highly undesirable levels of unpredictability and inconsistency in patent law. Congress also found persuasive claims that ‘strong’ patents – that is, patents that were easy to acquire and enforce – were critical for national competitiveness and economic growth (references in Vacca, pp. 733–61). The Federal Circuit quickly made a number of changes to strengthen patents and unify patent law. Within the first five years of its formation, the court adopted a strong presumption of validity for issued patents. The Court also made clear its view that, contrary to certain Supreme Court suggestions, inventions that represented combinations of prior art did not create any need for a special non-obviousness standard. Further, the Court adopted a strong presumption of validity for issued patents (Dreyfuss, 1989). For its part, the Supreme Court largely withdrew from the patent field for almost two decades. To the extent the Court intervened, it did so primarily not on issues of substantive patent law but on allocation of power questions (Janis, 2001). Perhaps not surprisingly, the Congressional attempt to concentrate all expertise – on questions of fact as well as law and policy – at the appellate level produced some challenges for conventional legal process principles regarding allocation of power. Indeed, the first Federal Circuit decision reviewed by the Supreme Court, Dennison Manufacturing v. Panduit, 475 U.S. 809 (1986), involved a complaint that the Federal Circuit was exercising plenary power over the non-obviousness determination. The Supreme Court vacated the Federal Circuit’s decision and remanded the case to the Federal Circuit with instructions to the court to explain why Federal Rule of Civil Procedure 52(a) did not mandate deference to the trial court’s factual determinations regarding non-obviousness. However, this rebuke by the Supreme Court did not appear dramatically to change Federal Circuit practice. Although commentators discussed the Federal Circuit’s aggressive review of trial court fact-finding in many areas of patent law (Rooklidge and Weil, 2000; Rai, 2003), the focal point for scholarly criticism was the Federal Circuit’s aggressive review of district court claim construction. Because claim construction is critical for purposes of determining both patent validity and infringement, aggressive review can have many follow-on effects. For example, if appellate reversal on claim construction occurs after a full district court determination of validity and infringement, the district court must once again determine validity and infringement (Rai, 2003). In fairness to the Federal Circuit, most district courts were not necessarily constituted to handle patent cases. District courts were particularly problematic because judges frequently turned complex and important exercises like claim construction over to lay juries. Notably, rates of jury trial use, which had begun to rise in the 1970s, had reached over 70 percent by the early 1990s (Anderson and Menell, 2013). In Markman v. Westview Instruments, 52 F.3d 967 (Fed. Cir. 1995) the Federal Circuit determined that claim construction was a question of law for the judge and that such constructions should therefore be reviewed de novo. The next year, in another one of the

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Patent institutions: shifting interactions between legal actors  477 ‘allocation-of-power’ interventions that the Supreme Court conducted during this period, the Court agreed with the Federal Circuit’s conclusion that claim construction was a question for the judge (Markman v. Westview Instruments, 517 U.S. 370 (1996)). However, the Court explicitly stated that claim construction represented a mixed question of law and fact and relied on functional considerations rather than the fact/law distinction to assign the inquiry to judges. Despite the Supreme Court’s statements, the Federal Circuit’s en banc 1998 decision in Cybor Corp. v. FAS Technologies, 138 F.3d 1448 (Fed. Cir. 1998) once again declared claim construction a pure question of law to be reviewed de novo. Invoking the Supreme Court among other authorities, scholars vigorously challenged this view, arguing that patent law’s reference to the ‘person having ordinary skill in the art’ required attention not only to text but also to context and industry custom (Nard, 2000). Controversies over claim construction leading to Cybor (1998), as well as the Cybor decision itself, generated several empirical studies of the Federal Circuit’s reversal rate on claim construction (Moore, 2001; Chu, 2001). These studies found that for the subset of cases in which parties elected to go through the full appeal process (and thus subject to any selection bias for this subset of cases), de novo review appeared to operate not only in theory but also in practice – about one-third of all claim decisions appealed to the Federal Circuit were reversed. Henry and Turner (2006) provided a perspective on Federal Circuit interaction with trial courts that focused not on particular doctrines but on whether the court was more ‘pro-patent’ than its predecessors. As it happened, the question of pro-patent bias had implications not only for assessment of the Federal Circuit but also for interactions between the district courts and the Federal Circuit. Based on a large-scale empirical analysis of district and appellate court opinions from 1953–2002, Henry and Turner found that the Federal Circuit was significantly more reluctant than its predecessors to affirm district court findings of invalidity. However, it was not more reluctant to affirm ‘not infringed’ decisions. Henry and Turner argued that because of the Federal Circuit’s tendencies, district courts decided patents to be invalid significantly less often, patentees appealed decisions of invalidity significantly more often, and infringement frequently became the dispositive inquiry at the trial court. Scholars have not conducted large-scale studies comparing Federal Circuit review of the USPTO with that of its predecessor, the Court of Customs and Patent Appeals (CCPA). In any event, because the Federal Circuit adopted the decisions of the CCPA and included many of its judges (Lefstin, 2010), the Federal Circuit’s creation did not represent a structural break vis-à-vis the USPTO. Scholars have noted, however, that during the era of Federal Circuit supremacy, the court’s direct review of USPTO patent decision making generally took place in the context of patent denials. Thus, Federal Circuit reversal of the USPTO necessarily expanded the bounds of patentability (Rai, 2000; Masur, 2011; Wasserman, 2011). Through the 1990s, this dynamic played out in both biotechnology and software. Specifically, as detailed in Rai (1999), in the area of gene sequence patents, the Federal Circuit repeatedly overruled the USPTO’s view that, for the average scientist working in the area, knowing a general method for selecting genes through the use of nucleotide probes, as well as the complete or partial amino acid of the protein for which a gene of interest coded, would render the DNA base sequence for the gene obvious. The Federal

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478  Research handbook on the economics of IP law volume 1 Circuit also repeatedly overturned the USPTO’s position that an algorithm run on a general-purpose computer was not patent-eligible subject matter. The latter set of decisions laid the foundation for State Street Bank v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), in which the Federal Circuit essentially equated the patentable subject matter requirement of patentability with the utility requirement. While Rai (1999) focused on repeated reversals of USPTO patent denials by the Federal Circuit, some commentators deployed strategic models to argue that patent expansion could happen even without actual reversal of the USPTO by the Federal Circuit. Specifically, such expansion could occur if the USPTO’s incentives led it primarily to fear reversal by the Federal Circuit, with the consequence that the USPTO denied patents only in cases where the most ‘pro-patent’ Federal Circuit judge would agree with the denial (Masur, 2011; Wasserman, 2011). As these analyses would suggest, Federal Circuit supremacy had particularly concentrated effects on the USPTO. Hall (2005) deployed rigorous empirical analysis to argue that the creation of the Federal Circuit was in part responsible for the surge in patent applications that occurred in the 1980s. Federal Circuit decisions through the 1990s lowering the non-obviousness standard and essentially eliminating patentable subject matter as a separate requirement of patentability may have prompted yet more patent applications. From 1990 to 2000, the number of applications increased by almost 80 percent (as contrasted with about 58 percent from 1980 to 1990). At the same time, about $750 million in fee-based revenue that could have been used to hire additional examiners was diverted by Congress from USPTO coffers. The application backlog thus increased through the 1990s (Long, 2009). Of course, as discussed in Volume II, backlog and other challenges were also exacerbated by various longstanding structural features of the USPTO system for managing workflow. One of these structural features – the ability of applicants before the USPTO (uniquely among patent offices around the globe) to file an unlimited number of repeat, or continuation, applications (Moore and Lemley, 2004) – directly implicates the institutional interaction and power questions on which this contribution focuses. Although the USPTO attempted in 2007 to place limits on continuations, the agency ultimately backed down in the face of a vigorous litigation challenge asserting that the limits represented improper expansion of the USPTO’s relatively narrow rulemaking authority (Rai, 2009). Another axis of ‘court-watching’ assessed the court’s jurisprudential approach. A number of scholars noted the court’s predilection for rule-formalism (Rai, 2003; Thomas, 2003). While some of these bright-line rules were specific to particular technologies, Thomas (2003) emphasized a trans-technological bright-line rule on non-obviousness imposed by many three-judge panels of the Federal Circuit. This requirement moved well beyond the modest statement made in the early years of the Federal Circuit that combination inventions did not have to comply with a higher standard of non-obviousness. Rather, under this requirement, the USPTO examiner (and trial courts) had to identify a specific documentary ‘teaching, suggestion, or motivation’ to combine prior art references when using these references for purposes of demonstrating obviousness. While noting that Federal Circuit language often abjured policy considerations, Burk and Lemley (2003) argued that some of its decisions were implicitly driven by policy concerns relevant to particular areas of technology. For example, the rule lowering the non-obviousness standard in biotechnology essentially to a test of novelty emerged

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Patent institutions: shifting interactions between legal actors  479 from the court’s view that patents needed to be available for gene sequences that encode therapeutic proteins. Without these patents, the biopharmaceutical sector would not be able to secure the patents necessary to drive investment through expensive regulatory approval processes. Burk and Lemley (2003) did note, however, that the Federal Circuit was not transparent about its policy-based reasoning. Yet another axis of Federal Circuit ‘court-watching’ has assessed uniformity and clarity in its jurisprudence. For example, based on extensive coding of opinions, Wagner and Petherbridge (2004) argued that the court’s claim construction jurisprudence depended heavily on the panel that rendered the claim construction. In contrast, Nard and Duffy (2007) argued that the court had shown very significant (and, in their view, undesirable) uniformity. In response to the descriptive claim made by Nard and Duffy, other scholars used frequency of dissents and frequency of en banc opinions to argue that diversity of opinion was apparent within the Federal Circuit, both on particular issues such as the doctrine of equivalents (Petherbridge, 2009) and also as compared to other appellate courts (Vacca, 2011). Notably, the 2007 publication of the Nard and Duffy article happened just as the Federal Circuit was beginning to take more cases en banc. For example, as a comprehensive listing by Vacca (2011) shows, the court took 28 cases en banc during the 21 years after its creation – an average of about 1.3 cases a year. During the five-year period from 2007 to 2011, by contrast, it took 13 cases en banc – an average of 2.6 a year. This ramp-up may have been a response to emerging interest in the patent system by other legal actors, including the Supreme Court. Indeed, Golden (2009) explicitly nominated the Supreme Court as the ‘prime percolator’ – an institution well suited for the purpose of dislodging any stagnation on the part of the Federal Circuit. I turn next to the prominent role that the Supreme Court and the executive branch (including, but not limited to, the USPTO) have played over the last 10–15 years. B.  The Supreme Court and Executive Branch Strike Back Although Federal Circuit supremacy in patent law obviously did not end on a date certain, by the 2001 term, an increase in Supreme Court interest in patent law was clear (Duffy, 2010). Additionally, by this time, the emergence of large numbers of patent applications and grants on inventions such as business methods (software-enabled and otherwise) and scientific research tools had attracted policy and scholarly criticism. The Federal Trade Commission (FTC) conducted an inquiry focused in significant part on institutional challenges, and on interactions between institutions (FTC, 2003). It criticized the Federal Circuit’s requirement that patent challengers marshall clear and convincing evidence to overturn granted patents as well as its formalist directive that inferior institutions that examined patents for non-obviousness – whether USPTO examiners or district courts – show a specific teaching, suggesting, and motivation (TSM) to combine prior art references. The FTC also recommended the creation of a robust administrative system to review granted patents. A prominent report by the National Academy of Sciences (NAS, 2004) also criticized the TSM test and discussed in detail the rationale for administrative review as a robust alternative to patent litigation. By the end of the first decade of the 21st century, the Supreme Court had issued opinions rejecting a bright-line TSM approach (KSR International Co. v. Teleflex, 550 U.S. 398

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480  Research handbook on the economics of IP law volume 1 (2007)), holding that injunctive relief was not mandatory upon a finding of validity and infringement (eBay Inc. v. MercExchange, LLC, 547 U.S. 338 (2006)), and stating that patentable subject matter doctrine in fact excluded certain categories of invention (Bilski v. Kappos, 561 U.S. 593 (2010)). The Supreme Court’s decisions to take certiorari, and its substantive positions, usually reflected intervention by the Solicitor General (Duffy, 2010). The Solicitor General, in turn, was influenced by a number of agencies in the executive branch, including but not limited to, the USPTO (Rai, 2012). In general, the Supreme Court moved the case law away from bright line rules and towards more flexible standards (Lee, 2010). One of the most important Supreme Court decisions, not only for purposes of substantive patent law, but also for purposes of institutional interaction, was KSR International Co. v. Teleflex Inc. (2007). According to Rantanen (2013), in the 10 years prior to the grant of certiorari in KSR, the Federal Circuit found 54 percent of patent claims on appeal non-obvious. Since then, it has found 43 percent non-obvious. Notably, the shift was driven by greater reluctance on the part of the Federal Circuit to reverse district court findings of obviousness. Indeed, according to Nock and Gadde (2011), during the 2.5year period immediately after KSR that they studied, the Federal Circuit did not reverse a single lower tribunal determination that a patent was obvious. As the Nock and Gadde (2011) study suggests, KSR was quite significant not only for Federal Circuit review of trial courts but also of the USPTO. In KSR, the government had filed an amicus brief detailing the ways in which a rigid requirement that examiners show ‘teaching, suggestion, or motivation’ – particularly in documentary form – posed an unnecessary burden and was contrary to accepted administrative law principles of official notice. In its unanimous opinion, the Supreme Court agreed. KSR’s embrace of conventional principles of administrative review was consistent with its decision in Dickinson v. Zurko, 527 U.S. 150 (1999). In that decision, the Court held that the USPTO was an agency under the Administrative Procedure Act and thus the Federal Circuit’s review of USPTO fact-finding was subject to a standard of review even more deferential than appellate review of trial court fact-finding. The Supreme Court’s approach stood in significant contrast to the approach to administrative law taken by the Federal Circuit (Nard, 1995; Benjamin and Rai, 2007). Similarly, in contrast to the Federal Circuit, the Supreme Court’s decision in eBay Inc. v. MercExchange (2006) purported to embrace ordinary principles of remedies law. And in two recent cases respectively involving attorneys’ fees and claim construction, Highmark Inc. v. Allcare Health Mgmt. Sys. Inc., 572 U.S. __ (2014) and Teva Pharm. USA, Inc. v. Sandoz Inc., 135 S. Ct. 831 (2015), the Court emphasized conventional principles of deferential appellate review with respect to discretionary findings and findings of fact by lower tribunals. These cases indicate that the Supreme Court not only prefers standards to rules but also prefers standards that are not specific to patent law. C.  The Role of Congress As Supreme Court interest in the patent system grew, so did Congressional interest. Starting in 2005, Congress began holding a series of hearings on legislative patent reform. As the literature on Congressional veto gates would have predicted, the process of legislative reform was blocked at many turns by confrontation between rent-seeking interest groups large and small. By the time the AIA was finally passed, many of the

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Patent institutions: shifting interactions between legal actors  481 substantive patent law recommendations made by bodies like the FTC and the National Academies, ended up being addressed through Supreme Court opinions and also by en banc determinations by the Federal Circuit (Burk and Lemley, 2009). Congress did, however, ultimately pass legislation – the AIA – that had the effect of changing institutional structure significantly. Congress did not follow the conventional modern model of conferring on the administrative agency in question (i.e. the USPTO) broad rulemaking authority. But it did create a relatively robust system of post-grant review within the USPTO (Matal, 2012). As I discuss further in the normative analysis, to the extent the PTAB can correct the USPTO’s initial errors in a manner that is both accurate and relatively inexpensive, it should fulfill the standard economic goal of minimizing the sum of administrative costs and error costs. D. The Role of Inferior Tribunals: Article III Trial Courts, the International Trade Commission (ITC), and the PTAB As scholars have noted (Anderson, 2015), even when substantive law is uniform, differences in norms and procedures among district courts as well as local differences in the composition of prospective jury pools can motivate litigants to shop for favorable district court fora. Indeed, a study conducted during the period of Federal Circuit supremacy (Moore, 2001) found significant clustering of cases outside traditional technology centers. This clustering has increased substantially in recent years (Lemley, 2010), and several scholars have argued that certain district courts, particularly the Eastern District of Texas, actively compete for patent plaintiffs (Anderson, 2015; Klerman and Reilly, 2016). How these trial courts, which have presumably watched closely Supreme Court decisions that confer more power upon trial courts, will respond to these decisions remains to be seen. While some of these decisions apply only to Article III trial courts, the Teva v. Sandoz (2015) decision will also confer power on the International Trade Commission, which has recently become a popular venue for seeking exclusion orders of imported goods based on alleged patent infringement (Chien, 2008; Schwartz, 2009; Kumar, 2011). As for the USPTO’s PTAB, it has been, and will be, affected not only by Teva v. Sandoz, but also multiple Supreme Court decisions that involve direct challenges to its procedures. The most dramatic of these cases, Oil States Energy Services v. Greene’s Energy Grp. (2018), rejected an argument that the PTAB was unconstitutional because only Article III institutions could properly decide the validity of granted patents. But given shifting currents in administrative law, how much power the PTAB will be able to exercise over the long term is unclear.

III.  NORMATIVE ANALYSIS The literature addressed in Section II generally includes normative conclusions and recommendations. As noted in the Introduction, patent scholars typically view accuracy and efficiency as the normative criteria against which the institutional and procedural features of the system should be evaluated. The patent scholars’ frame of accuracy and efficiency maps onto the frame of minimizing the sum of error costs and administrative costs emphasized by economic analysts of legal procedure. Although patent scholars

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482  Research handbook on the economics of IP law volume 1 generally agree on these standard economic goals, they often differ substantially on how interactions between patent institutions should be structured to best achieve accuracy and efficiency. This section discusses the diverse perspectives in the literature. This section surveys normative recommendations, stressing those recommendations that focus on interactions between legal actors. I first address interactions between the Federal Circuit with lower tribunals. I then address the Supreme Court. A.  The Federal Circuit and Inferior Tribunals In an early assessment, Dreyfuss (1989) evaluated Federal Circuit decisions on the metrics of accuracy and predictability. While she acknowledged potential tensions between these goals, she used examples like the Federal Circuit’s elevation of secondary considerations in the area of non-obviousness to argue that, at least on questions of patent validity, the court had largely achieved both goals. Within a decade or so of this early assessment, the court’s success in achieving either goal was questioned. As with the descriptive analysis, claim construction served as a focal point for the normative discussion. Scholars questioned whether the Federal Circuit’s often high reversal rates on claim construction (and attendant consequences for vertical predictability) were consistent with the Congressional desire to create predictability and efficiency in patent law (Moore, 2001). Empirical studies noting inconsistencies among Federal Circuit panel decisions on claim construction methodology (Wagner and Petherbridge, 2004) also called into question whether the Federal Circuit was creating predictable law. In contrast to the standard view favoring uniformity and perceiving insufficient levels of uniformity, other scholars equated uniformity not with desirable predictability and certainty but with undesirable stagnation (Nard and Duffy, 2007). The critique alleging excess Federal Circuit rule-formalism (Rai, 2003; Thomas, 2003) also viewed the Federal Circuit as sacrificing accuracy on the altar of predictability. Although the rule-formalism and stagnation critiques agreed that the system had failed to achieve accuracy, their prescriptions pointed in different directions. After conceding that rule-formalism might be justified by the Federal Circuit’s desire to give clear instructions to inferior actors of questionable competence, Rai (2003) called for a ‘first-best’ (if politically challenging) solution in which inferior actors were endowed with considerable competence in technical fact-finding, including through limits on juries. At that point, the Federal Circuit’s rule-formalism would no longer be justified, and other actors, such as the Supreme Court, could intervene to dislodge the Federal Circuit’s formalism. In contrast, Nard and Duffy (2007) prescribed a regime in which the Federal Circuit would be forced to compete with a few additional appellate courts. On this view, while the earlier system in which all regional appellate courts could hear patent cases was too unpredictable, and a single court was too uniform, a few courts would be just right. The availability of a few appellate courts would not only introduce appropriate levels of competition in post-issuance litigation, but it would also remove the Federal Circuit’s monopoly control over USPTO determinations. In Rai (2003), I also suggested a regime in which an expert, specialized trial court – and appropriate deference thereto on questions of fact-finding – be used to generate vertical predictability. Empirical work by Schwartz (2008, 2011) strikes a cautionary note about the extent to which specialization in the form of repeated exposure to patent cases at the

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Patent institutions: shifting interactions between legal actors  483 trial level will improve such vertical predictability. Schwartz’s data on claim construction indicate that, at least when the standard of review is de novo (as it was during the time period studied by Schwartz), there is little correlation between a trial judge’s prior experience with claim construction and the judge’s reversal rate at the Federal Circuit. Kesan and Ball (2011) report similar results on claim construction but do find that a judge’s increased patent-specific experience lowers reversal rates on a number of other issues, such as preliminary injunctions, judgments as a matter of law, and infringement. The Kesan and Ball data suggest that for purposes of understanding institutional interactions in the patent arena, claim construction, though very important, may not necessarily be representative. In the wake of recent Supreme Court decision making, the patent system has moved towards employing fact-intensive standards and to greater deference to lower tribunals. As Holbrook (2011) observes, however, because fact-intensive standards decrease notice and predictability, they might best be viewed as a check on the presumptions created by legalistic rules. Also worrisome is the reality that devolution to lower tribunals has not necessarily been accompanied by fortification of the actual capacity of these tribunals. To the contrary, in the case of patent-heavy tribunals such as the Eastern District of Texas and perhaps the District of Delaware, any expertise acquired by attracting very large numbers of patent cases may be overwhelmed by the judicial bias that arguably caused plaintiffs to file in that tribunal (Anderson, 2015). Some scholars have suggested restricting venue to districts where the defendant has its primary place of business, arguing that such venue restriction would not only reduce forum shopping but would also create technology-specific expertise within particular trial courts (Fromer, 2010). As noted, others have discussed the creation of a single specialized trial court. Still others have suggested that more incremental measures like randomization of judge selection within a district or the existing Patent Pilot Program, under which judges can volunteer for patent cases, may have salutary effects (Anderson, 2015). Going forward, empirical data on both the Patent Pilot Program and the impact of the Supreme Court’s decision in TC Heartland LLC v. Kraft Food Brands LLC, 137 S. Ct. 1514 (2017) restricting forum shopping by patentees will provide scholars with fodder for continued research on improving district court adjudication. Scholars have also discussed whether Article III litigation represents the best mechanism for addressing errors in individual cases, particularly with respect to erroneously granted patents. While some have argued that most erroneous grants are not commercially significant, and have endorsed litigation as a good mechanism for targeting the small percentage of erroneous grants that are commercially significant (Lemley, 2001), others have emphasized collective action and other barriers to socially optimal use of Article III litigation by defendants (Merges and Farrell, 2004; Benjamin and Rai, 2007). On the latter view, even if the USPTO does not, or cannot, do more to ensure that erroneous grants do not occur, these errors should be corrected through an ex post administrative process. As discussed in Section IV, the emergence of a robust ex post administrative process as a major competitor to Article III litigation is a development that needs close monitoring. Scholars have also discussed how to evaluate accuracy in patent law decision making. Beyond the difficulty of ensuring that the system reaches the correct result in a particular case lies the larger question of whether the system as a whole is set up to develop law and policy accurately. While Burk and Lemley (2009) are optimistic about the capacity of courts, the conventional argument that courts have limited resources to make policy,

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484  Research handbook on the economics of IP law volume 1 and can do so only in the context of highly selected cases that arise ex post, has led various scholars to advocate that Congress consider a standard administrative approach to patents – delegating rulemaking authority to an agency, presumably but not necessarily the USPTO (Burstein, 2011; Masur, 2010). The Federal Circuit’s recent interest in en banc decision making, and the policyoriented questions it has asked in some of its recent en banc orders, leads Vacca (2011) to argue that policymaking by the Federal Circuit is not only normatively desirable but actually happening. Nard (2010) and Burk and Lemley (2009), both writing before the passage of the AIA, stress the USPTO’s alleged capture by patent applicants as a reason to favor courts. Vertinsky (2010) focuses on transition costs associated with patent reform, arguing that policymaking by courts is desirable because changes implemented by courts are likely to be smaller and more specific than changes implemented by other institutions. Congressional creation of a strong system of administrative review for granted ­patents – the PTAB – has also begun to generate normative discussion. The creation of the PTAB, which can be reversed not only when it rejects patents but also when it upholds them, responds in part to the concerns of Masur (2011) and Wasserman (2011) regarding asymmetric review. Wasserman (2013) further argues that the PTAB’s procedures are best seen as formal adjudications. Thus, under Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984) and its progeny, the Federal Circuit should defer not only to PTAB fact-finding (as it is already required to do) but also to the PTAB’s findings on ultimate legal questions. On an optimistic read, the result would be a significant PTAB role in improving accuracy not only in individual cases but also system wide. Golden (2014) argues that, even without formal deference, the USPTO has a first mover advantage that it has sometimes been able to exploit to shape law and policy, particularly in the context of patent denials. Rai (2013) argues that the AIA gives the PTAB the power to exercise this first mover advantage in the context of both patent grants and denials. Finally, prior to recent interventions by the Supreme Court, some commentators on the Federal Circuit stressed that its review of inferior actors, as well as its behavior more generally, was motivated by an undesirable ‘pro-patent’ bias (Jaffe and Lerner, 2004). On this view, the Federal Circuit listened primarily to patent lawyers, and a pervasive role for patents in the national economy enhanced the court’s power and prestige. However, the Federal Circuit’s tendency to read patent scope narrowly – indeed, even more narrowly than the Supreme Court (Rai, 2003) – does call into question a simple bias narrative. Allegations of bias also pose familiar baseline problems. In the case of the Federal Circuit, the baseline problem may be particularly severe given that the legislation establishing the court was arguably motivated by a ‘pro-patent’ view. B.  The Supreme Court Scholars have delivered mixed assessments of the Supreme Court’s recent activism in the patent arena. Some early assessments tended to be relatively favorable. Duffy (2010) argued that the Court is highly influenced by the Solicitor General and that this influence could be beneficial so long as executive branch views were not subject to significant election-related shifts. Dreyfuss (2010) concluded that the interaction between the two tribunals (Supreme Court and Federal Circuit) was ‘highly salutary.’

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Patent institutions: shifting interactions between legal actors  485 Lee (2010) cautioned, however, that the Supreme Court’s embrace of fact-intensive standards over bright-line rules might impose significant cognitive burden on inferior actors. Rai (2012) noted that the highly ex post nature of Supreme Court decision making had the potential to impose significant retroactive changes. Eisenberg (2013) observed that the Supreme Court’s extended foray into questions of patentable subject matter appears likely to have a particularly dramatic impact.

IV.  FUTURE RESEARCH QUESTIONS The highly dynamic institutional ecosystem that has emerged in the last decade raises numerous questions for further research. As noted in Section III, the shifting geographic dynamics of district court power over patent cases merit study. Here I suggest three additional areas ripe for inquiry. One involves the institutional dynamics that shape patent law decision making at the Supreme Court. Second, the PTAB’s decision making provides rich territory to mine. A third area of research might compare institutional interactions in patent law with institutional interactions and power relationships in other technically complex areas. A.  The Supreme Court As scholars have discussed, Supreme Court review of the Federal Circuit has often followed the recommendations of the Solicitor General and has generally emphasized standards and ‘standard law.’ Future work on the Supreme Court, and on the relationship between the Supreme Court and the Federal Circuit, might engage further the enormous legal and political science literature on Supreme Court decision making. One potential axis of engagement, ideology, may not be immediately fruitful. Although political scientists and legal scholars agree that ideology often plays a significant role at the Supreme Court (Epstein et al., 2013), the Court’s patent decisions have not generally split along obvious ideological lines. Indeed, many of the decisions have been unanimous, or nearly unanimous. The exception to this general statement may lie in cases that operate at the patent-antitrust intersection, such as FTC v. Actavis, 133 S. Ct. 2223 (2013) and Kimble v. Marvel Entertainment, LLC, 576 U.S. __ (2015). Unanimity or near unanimity is coupled with a heavy emphasis on showing the internal coherence and external dominance of the Court’s own prior case law on patents. In the Court’s view, its case law (including case law from the 19th century) has either not been affected by, or has in fact been adopted by, legislative enactments. Scholars might explore whether these phenomena arise because the Court wishes its message of power over the Federal Circuit to be clear; because individual members of the Court do not have particularly differentiated views on patents and are therefore not interested in expending the effort and political capital necessary to write dissents; or for other reasons. B. PTAB The first decisions from the PTAB post-grant proceedings set up by Congress in the AIA have now made their way to the Federal Circuit. The PTAB’s popularity also ensures that the PTAB will be a major source of appeals to the Federal Circuit. Thus far, the USPTO

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486  Research handbook on the economics of IP law volume 1 has not argued for Chevron (1984) deference to the substantive results of its post-grant validity determinations. However, it has successfully argued for Chevron deference for procedural rules, such as its controversial rule requiring PTAB judges to conduct claim construction under a ‘broadest reasonable interpretation’ standard that is different from that used by the district courts. USPTO assertions that certain decisions of the PTAB are not subject to judicial review have also been controversial. Questions about allocation of power between the PTAB, Article III district courts, and the Federal Circuit are likely to make their way to the Supreme Court and represent a fruitful area of study. Another area ripe for study is the empirical question of whether PTAB proceedings are in fact improving the system by serving as an efficient and accurate substitute for Article III litigation over validity and/or by allowing appropriate challenges to validity that would simply not occur in Article III courts. In Volume II, my co-authors and I present empirical data that may help inform such analysis. C.  Comparison with Other Technically Complex Areas A third area of research might compare institutional interactions in patent law with such interactions in other technically complex areas. To the extent scholars (myself included) have engaged this question, we have generally argued that the administrative model of decision making should apply. Because a full-fledged administrative model is likely to be a political non-starter, however, scholars should consider whether other technically complex areas successfully employ administrative procedure only in part. Finding the appropriate comparison area may also require further thinking about why patent law represents such a profound institutional challenge. To what extent does complexity emerge because of law, because of scientific or technological facts, or because findings of law and fact need to serve as imperfect proxies for promoting the economic goal of innovation? Even more fundamentally, to the extent the proxies we choose can involve different combinations of law and facts, can other complex areas give us insight into how to create proxies that our imperfect institutions can implement?

REFERENCES Anderson, Jonas. 2015. ‘Court Competition for Patent Cases,’ 163 University of Pennsylvania Law Review 631–98. Anderson, Jonas, and Peter S. Menell. 2013. ‘Informal Deference: A Historical, Empirical, and Normative Analysis of Patent Claim Construction,’ 108 Northwestern Law Review 1–84. Benjamin, Stuart, and Arti Rai. 2007. ‘Who’s Afraid of the APA: What the Patent System Can Learn from Administrative Law,’ 95 Georgetown Law Journal 269‒336. Burk, Dan, and Mark Lemley. 2003. ‘Policy Levers in Patent Law,’ 89 Virginia Law Review 1575–696. Burk, Dan, and Mark Lemley. 2009. The Patent Crisis and How Courts Can Solve It. Chicago: University of Chicago Press. Burstein, Michael. 2011. ‘Rules for Patents,’ 52 William & Mary Law Review 1747–806. Chien, Colleen. 2008. ‘Patently Protectionist? An Empirical Analysis of Patent Cases at the International Trade Commission,’ 50 William & Mary Law Review 63‒114. Chu, Christian. 2001. ‘Empirical Analysis of the Federal Circuit’s Claim Construction Trends,’ 16 Berkeley Technology Law Journal 1075–164. Dreyfuss, Rochelle. 1989. ‘The Federal Circuit: A Case Study in Specialized Courts,’ 64 New York University Law Review 1–74. Dreyfuss, Rochelle. 2010. ‘What the Federal Circuit can Learn from the Supreme Court ‒ and Vice Versa.’ 59 American University Law Review 787‒807.

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Patent institutions: shifting interactions between legal actors  487 Duffy, John F. 2000. ‘The FCC and the Patent System: Progressive Ideals, Jacksonian Realism, and the Technology of Regulation,’ 71 University of Colorado Law Review 1071–151. Duffy, John F. 2010. ‘The Federal Circuit in the Shadow of the Solicitor General,’ 78 George Washington Law Review 518–52. Eisenberg, Rebecca. 2013. ‘Prometheus Rebound: Diagnostics, Nature, and Mathematical Algorithms,’ 122 Yale Law Journal Online 341–49. Epstein, Lee, William M. Landes, and Richard A. Posner. 2013. The Behavior of Federal Judges: A Theoretical and Empirical Study of Rational Choice. Cambridge: Harvard University Press. Farrell, Joseph, and Robert P. Merges. 2004. ‘Incentives to Challenge and Defend Patents: Why Litigation Won’t Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help,’ 19 Berkeley Tech. L.J. 943–70. Fromer, Jeanne. 2010. ‘Patentography,’ 85 New York University Law Review 1444–520. FTC (Federal Trade Commission). 2003. To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy. Washington D.C.: U.S. Federal Trade Commission. Golden, John. 2009. ‘The Supreme Court as “Prime Percolator”: A Prescription for Appellate Review of Questions in Patent Law,’ 56 UCLA Law Review 657–724. Golden, John. 2014. ‘The USPTO’s Software Power: Who Needs Chevron Deference?,’ 66 Southern Methodist University Law Review 541–58. Hall, Bronwyn. 2005. ‘Exploring the Patent Explosion,’ 30 Journal of Technology Transfer 35–48. Hart, Henry M. and Albert M. Sacks. 1994. The Legal Process: Basic Problems in the Making and Application of Law. New York: Foundation Press. (William N. Eskridge, Jr. and Philip P. Frickey, eds.) (prepared for publication from 1958 Tentative Edition). Henry, Matthew D., and John Turner. 2006. ‘The Court of Appeals for the Federal Circuit’s Impact on Patent Litigation,’ 35 Journal of Legal Studies 85‒117. Holbrook, Tim. 2011. ‘Patents, Presumptions, and Public Notice,’ 86 Indiana Law Journal 779‒826. Jaffe, Adam, and Josh Lerner. 2004. Innovation and Its Discontents. Princeton: Princeton University Press. Janis, Mark. 2001. ‘Patent Law in the Era of the Invisible Supreme Court,’ 2001 University of Illinois Law Review 387–420. Kesan, Jay P., and Gwendolyn G. Ball. 2011. ‘Judicial Experience and the Efficiency and Accuracy of Patent Adjudication: An Empirical Analysis of the Case for a Specialized Patent Trial Court,’ 24 Harvard J. of Law & Tech. 394‒468. Klerman, Daniel M., and Greg Reilly. 2016. ‘Forum Selling,’ 89 Southern California Law Review 241‒315. Kumar, Sapna. 2011. ‘The Other Patent Agency: Congressional Regulation of the ITC,’ 61 Fla. L.Rev. 529‒80. Lee, Peter. 2010. ‘Patent Law and the Two Cultures,’ 120 Yale Law Journal 2–82. Lefstin, Jeffrey. 2010. ‘The Constitution of Patent Law: The Court of Customs and Patent Appeals and the Shape of the Federal Circuit’s Jurisprudence,’ 43 Loyola of Los Angeles Law Review 843–92. Lemley, Mark A. 2001. ‘Rational Ignorance at the Patent Office,’ 95 Northwestern University Law Review 1–34. Lemley, Mark A. 2010. ‘Where to File Your Patent Case,’ 38 AIPLA Quarterly Journal 1–37. Lemley, Mark. 2013. ‘Why Do Juries Decide if Patents Are Valid?,’ 99 Virginia Law Review 1673‒735. Long, Clarisa. 2009. ‘The PTO and the Market for Influence in Patent Law,’ 157 University of Pennsylvania Law Review 1965–99. Masur, Jonathan. 2010. ‘Regulating Patents,’ 2010 The Supreme Court Review 275–326. Masur, Jonathan. 2011. ‘Patent Inflation,’ 121 Yale Law Journal 470–532. Matal, Joseph. 2012. ‘A Guide to the Legislative History of the America Invents Act,’ 21 The Federal Circuit Bar Journal 435–513, 539–653. Moore, Kimberly A. 2001. ‘Are District Court Judges Equipped to Resolve Patent Cases?,’ 15 Harvard Journal of Law & Technology 1–39. Moore, Kimberly A., and Mark A. Lemley. 2004. ‘Ending Abuse of Patent Continuations,’ 84 Boston University Law Review 63–123. Nard, Craig Allen. 1995. ‘Deference, Defiance, and the Useful Arts,’ 56 Ohio State Law Journal 1415–509. Nard, Craig Allen. 2000. ‘A Theory of Claim Interpretation,’ 14 Harvard Journal of Law & Technology 1–82. Nard, Craig Allen. 2010. ‘Legal Forms and the Common Law of Patents,’ 90 Boston University Law Review 51–108. Nard, Craig Allen, and John F. Duffy. 2007. ‘Rethinking Patent Law’s Uniformity Principle,’ 101 Northwestern University Law Review 1619–76. NAS (National Academy of Sciences). 2004. A Patent System for the 21st Century. Washington, DC: The National Academies Press. (Stephen A. Merrill, Richard C. Levin, and Mark B. Myers, eds.) Nock, Jennifer P., and Sreekar Gadde. 2011. ‘Raising the Bar for Nonobviousness: An Empirical Study of Federal Circuit Case Law Following KSR,’ 20 Federal Circuit Bar Journal 369–408. Petherbridge, Lee. 2009. ‘Patent Law Uniformity?,’ 22 Harvard Journal Law & Technology 421–73. Rai, Arti K. 2000. ‘Addressing the Patent Gold Rush: The Role of Deference to PTO Patent Denials,’ 2 Washington University Journal of Law and Public Policy 199–227.

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488  Research handbook on the economics of IP law volume 1 Rai, Arti K. 2003. ‘Engaging Facts and Policy: A Multi-Institutional Approach to Patent System Reform,’ Columbia Law Review 1035–135. Rai, Arti K. 2009. ‘Growing Pains in the Administrative State: The Patent Office’s Troubled Quest for Managerial Control,’ 157 University of Pennsylvania Law Review 2051–81. Rai, Arti K. 2012. ‘Patent Validity Across the Executive Branch: Ex Ante Foundations for Policy Development,’ 61 Duke Law Journal 1237–81. Rai, Arti K. 2013. ‘Improving (Software) Patent Quality through the Administrative Process,’ 51 Houston Law Review 503‒43. Rantanen, Jason. 2013. ‘The Federal Circuit’s New Obviousness Jurisprudence: An Empirical Study,’ 16 Stanford Technology Law Review 709–68. Rooklidge, William C., and Matthew F. Weil. 2000. ‘Judicial Hyperactivity: The Federal Circuit’s Discomfort with Its Appellate Role,’ 15 Berkeley Technology Law Journal 725–52. Schwartz, David L. 2008. ‘Practice Makes Perfect: An Empirical Study of Claim Construction Reversal Rates in Patent Cases,’ 107 Michigan Law Review 223–84. Schwartz, David L. 2009. ‘Courting Specialization: An Empirical Study of Claim Construction Comparing Patent Litigation before Federal District Courts and the International Trade Commission,’ 50 William & Mary Law Review 1699–1737. Thomas, John R. 2003. ‘Formalism at the Federal Circuit,’ 52 American University Law Review 771–810. Vacca, Ryan. 2011. ‘Acting Like an Administrative Agency: The Federal Circuit En Banc,’ 76 Missouri Law Review 733–61. Vertinsky, Liza. 2010. ‘Comparing Alternative Institutional Paths to Patent Reform,’ 61 Alabama Law Review 501‒52. Wagner, R. Polk, and Lee Petherbridge. 2004. ‘Is the Federal Circuit Succeeding? An Empirical Assessment of Judicial Performance,’ 152 University of Pennsylvania Law Review 1105–80. Wasserman, Melissa F. 2011. ‘The USPTO’s Asymmetric Incentives: Pressure to Expand Substantive Patent Law,’ 72 Ohio State Law Journal 379–435. Wasserman, Melissa F. 2013. ‘The Changing Guard of Patent Law: Chevron Deference for the PTO.’ 54 William & Mary Law Review 1959‒2019.

Cases Bilski v. Kappos, 561 U.S. 593 (2010). Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984). Cybor Corp. v. FAS Technologies, 138 F.3d 1448 (1998). Dennison Manufacturing v. Panduit, 475 U.S. 809 (1986). Dickinson v. Zurko, 527 U.S. 150 (1999). eBay Inc. v. MercExchange, LLC, 547 U.S. 338 (2006). FTC v. Actavis, 133 S. Ct. 2223 (2013). Highmark Inc. v. Allcare Health Mgmt. Sys. Inc., 572 U.S. __ (2014). Kimble v. Marvel Entertainment, LLC., 576 U.S. __ (2015). KSR International Co. v. Teleflex, 550 U.S. 398 (2007). Markman v. Westview Instruments, 52 F.3d 967 (1995). Markman v. Westview Instruments, 517 U.S. 370 (1996). Oil States Energy Services LLC v. Green’s Energy Grp. LLC, 584 U.S. __ (2018). State Street Bank v. Signature Financial Group, Inc., 149 F.3d 1368 (1998). TC Heartland LLC v. Kraft Food Brands LLC, 137 S. Ct. 1514 (2017). Teva Pharm. USA, Inc. v. Sandoz Inc., 135 S. Ct. 831 (2015).

Legislative Materials Administrative Procedure Act, 5 U.S.C.A. §§ 500 et seq. Federal Rule of Civil Procedure 52(a). Leahy-Smith America Invents Act of 2011, Pub. L. No 112-29, 125 Stat. 284 (codified in scattered sections of 35 U.S.C.).

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18.  The economics of collective management Daniel Gervais*

Contents I.

Defining Collective Management A. Collective Management Organizations B. Collective Management Functions 1. Core functions 2. Ancillary functions II. Economic Analysis of Collective Management A. The Economic Justification for Collective Management B. Valuing a Repertory of Works in a Collective Management Context C. Economic Models D. Valuing Individual Works in a Collective Management Context E. Measuring the Efficiency of CMOs III. Collective Management of Online Uses References

I.  DEFINING COLLECTIVE MANAGEMENT A.  Collective Management Organizations One should begin by defining the object of the chapter. What is a copyright ‘­ collective’— or what I prefer to refer to as a Collective Management Organization (CMO)?1 The World Intellectual Property Organization (WIPO) Glossary mentions that there are various models of collective management, but that at its most generic meaning a CMO is a form of exercise of rights ‘where licenses are available from a single source’ (WIPO,

*  Milton R. Underwood Chair in Law and Director of the Vanderbilt Intellectual Property Program, Vanderbilt University Law School. The author is grateful to Jean Y. Xiao, PhD candidate (Law and Economics) at Vanderbilt Law School for her most useful research assistance. All errors are the author’s sole responsibility. 1   National laws using this more modern expression are now fairly common, especially in countries that amended their copyright legislation recently. The term ‘Collective Management Organization’ is used (as of June 2015) in at least the laws of Andorra, Azerbaijan, Bosnia and Herzegovina, Burkina Faso, Cambodia, Cameroon, Georgia, Mongolia, Niger, Nigeria, Poland, Romania, Slovakia and Zimbabwe. It is also the term used in Directive 2014/26/EU of the European Parliament and of the Council of 26 February 2014 on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online use in the internal market, 84/72, 2014 O.J. (Eur.) (2014 EU Directive).

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490  Research handbook on the economics of IP law volume 1 2003, p. 275). There are also a number of national statutes that define the notion directly or indirectly. An example of a direct definition is contained in the Canadian Copyright Act, which defines ‘collective society’ as a ‘society, association or corporation that carries on the business of collective administration of copyright [. . .] for the benefit of those who, by assignment, grant of license, appointment of it as their agent or otherwise, authorize it to act on their behalf in relation to that collective administration.’2 It adds that a collective society operates a licensing scheme and/or ‘carries on the business of collecting and distributing royalties or levies payable pursuant to this Act.’ The US Copyright Act by contrast only defines ‘performing rights society’ as an ‘association, corporation, or other entity that licenses the public performance of nondramatic musical works on behalf of copyright owners of such works’ (17 U.S.C. §101). A number of national laws define CMOs indirectly by requiring that an entity be approved before operating as a CMO, which then requires an administrative decision that the entity applying for approval is in fact a CMO—even absent a formal statutory definition.3 If one were to limit the analysis to these definitions, many types of entities could qualify as CMOs. Book and music publishers come to mind, for example: They obtain transfers or exclusive control of and manage the rights of book and music authors. Yet they are not considered as CMOs. The question is, why? The answer lies in defining CMOs using elements of the statutory definitions above as describing only one side, which one could call the positive side, of the ‘CMO coin.’ CMOs are indeed in the business of licensing a repertoire of copyright rights (on works or other objects created by several authors or other right holders), as other types of entities do as well.4 There is, however, a negative side to the definitional coin, which is that a CMO is not in the primary business of commercially exploiting individual works or objects of related rights. It licenses others (users) who then commercially exploit the works. This explains why a book publisher, for example, is not a CMO even though it does manage a repertoire of rights, because the publisher also (and primarily) exploits the copyright works in the marketplace. While this negative aspect (i.e., non-exploitation) is not present in the two statutory definitions above, it is reflected in the definition contained in the 2014 EU Directive on collective management (2014 EU Directive, art. 3). The Directive defines a CMO as an organization that manages ‘copyright or rights related to copyright on behalf of more than one right holder, for the collective benefit of those right holders, as its sole or main purpose.’

  Copyright Act, R.S.C., c. C-42, s. 2. (1985) (Can.).   This is the case in several national laws. Some provide detailed criteria for approval; some do not. Compare Australia, section 135ZZI of the Copyright Act, which defines a collecting society (for purposes of retransmission) as ‘a body that is, for the time being, declared to be a collecting society under section 135ZZT,’ see also sections 135ZZZF and 182B (Copyright Act (Act No. 63/1968) (Austl.)); in Kenya, Part VII of the Copyright Regulations, 2004 (Copyright Regulations (Act No. 9/2004) (Kenya)); in Malta, Control of the Establishment and Operation of Societies for the Collective Administration of Copyright Regulations (Copyright Regulations (Act No. 239/2016) (Malta)); in Saint Lucia, section 109A of the Copyright Act (Copyright Act (Act No. 7/2000) (St. Lucia)). 4   Here, to simplify, this includes related rights. That is, the rights of performers and sound recording producers, where they exist as distinct rights. It might also include the rights of ‘producers of the first fixation of films’ and also broadcasters in certain jurisdictions (WIPO, 2003, p. 307). The expression may also include the rights of makers of databases protected by a sui generis right in Europe. 2 3

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The economics of collective management  491 These two (positive/negative) sides of the coin are functional in nature. Are there structural components to the definition as well? The 2014 EU Directive suggests that there are—at least in the EU context. The definition contained in the Directive also requires that a CMO be (a) owned or controlled by its members and (b) organized on a not-for-profit basis (WIPO, 2003, p. 307). This rule is not observed uniformly worldwide, however. Hence, it seems better for our purposes to focus primarily on functions rather than structure to define collective management (WIPO, 2003, p. 307). B.  Collective Management Functions CMOs perform several functions. Those functions can be separated into core and ancillary functions. ‘Ancillary’ should not be understood in this context to mean secondary or unimportant; it only means that the functions on this list are not essential to the operation of all CMOs. 1.  Core functions Let us begin with the core functions. They are: (i) Obtaining the authority to license and/or collect remuneration; (ii) Setting prices; (iii) Licensing users;5 (iv) Obtaining relevant usage data, if necessary by developing and applying survey or similar statistical methodologies; (v) Developing and applying a method to distribute funds to represented right holders and distributing payments with appropriate data reporting. Each of these functions require some explanation. (i) Most CMOs operate by delegation of authority to license (including by assignment in certain cases) from those who own the rights. For example, music authors and publishers authorize CMOs that manage music performing rights (ASCAP, BMI and SESAC in the United States, PRS in the UK, GEMA in Germany, JASRAC in Japan, and so on) to license on their CMO’s repertoire on their behalf. The terms are generally set in the contract signed when an author or publisher ‘joins’ the organization (as a member, affiliate, or the like). However, some rights are merely rights to obtain remuneration, not exclusive rights to authorize or prohibit a use. For example, in several countries record producers and/or performers only receive an equitable remuneration for the broadcasting of their sound recordings, as provided for in the Rome Convention.6 In such cases, a CMO will typically be appointed by law or the holders of the equitable remuneration right to receive and distribute the payment. This is also typical in the 5   As discussed later, this includes enforcement of licensing contracts with the CMO (e.g., if the user refuses to pay) but does not necessarily include broader enforcement efforts. 6   International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, done at Rome on October 26, 1961, art. 12. As of June 2015, 92 countries were party to this Convention, but not the United States.

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492  Research handbook on the economics of IP law volume 1 case of a compulsory license, such as the license for certain non-interactive digital transmissions of sound recordings under US law, which led the Recording Industry Association of America, Inc. (RIAA) to set up SoundExchange, Inc., to collect and distribute the payments received from Pandora and others.7 However, CMOs often operate only within the borders of their country. They obtain foreign rights by signing contracts with similar organizations located in other jurisdictions. These agreements, known as reciprocal representation agreements, provide for an exchange of rights and most often also for the exchange of payments, that is, fees for the use of works from country A used in country B will be paid by the CMO in country B to the CMO in country A which will then pay the right holder(s) in country A. In some cases, CMOs especially in very small markets may decide to lower costs by exchange only the authority to license without reporting back, under so-called ‘B’ agreements (Pavel, 2006, p. 226). This type of agreement is best seen as a temporary crutch for new CMOs in smaller markets and, as normative matter should be discontinued as soon as possible, a view which the 2014 EU Directive seems to support (WIPO, 2003, p. 281). (ii) The second function is to set repertory prices. In the case of equitable remuneration and compulsory licenses, a judicial or administrative mechanism usually sets the price. The CMO may well be party to the relevant proceedings. In other cases (i.e., where the CMO manages ‘exclusive’ rights), users and the CMO may agree on a price, or they may not. If they do not, the CMO may need to initiate a process to get a governmental authority to set the price and perhaps other conditions of the applicable rate or tariff. In the United States, ASCAP and BMI are governed by different antitrust consent decrees, each of which appoints a federal judge in the Southern District of New York to set rates (tariffs) for the use of musical works, while SoundExchange operates under an explicitly separate system, outside of antitrust scrutiny, to set prices for use of the sound recording on which the music is used (Gervais, 2011, pp. 423–9). It is obvious to several observers that this discombobulated system makes little economic sense.8 (iii) The third function is identifying and licensing users. If no rate or tariff exists (e.g., for a transactional use), this will include pricing, which may be set by the right holder.9 This function includes decisions about filing lawsuits against users, by which I mean both test cases that may be necessary if genuine debates exist about the scope of exceptions and limitations,10 and simpler collection cases against  7   See 37 C.F.R. § 260 (2003); Determination of Reasonable Rates and Terms for the Digital Performance of Songs, 68 Fed. Reg. 117, 36469-70 (June 18, 2003) (to be codified at 37 C.F.R. § 260) (noting that the proposed terms shall govern SoundExchange, the collecting rights entity that was formed from the designated RIAA collective, in its capacity as the sole agent designated to receive royalty payments from the three subscription services that were parties to the proceeding).  8   See U.S. Copyright Office (2015). One of the many recommendations in the report is to migrate all rate-setting to the Copyright Royalty Board; 37 C.F.R. § 260, p. 4.  9   Indeed, even if there is a tariff, the law may allow a mutual agreement to override it (17 U.S.C. §112(e)(5)). 10   This happened in the United States in cases concerning photocopying (Am. Geophysical Union v. Texaco Inc., 60 F.3d 913 (2d Cir. 1994); Patry, 1995). It was also the case more recently in Canada, where the Supreme Court issued five opinions on the same day (July 12, 2012) all dealing with collective management and the scope of exceptions and limitations (Gervais, 2013).

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The economics of collective management  493 recalcitrant users who refuse to pay. The latter set of decisions (about filing lawsuits against individual users who refuse to pay) forms part of a broader equation. CMOs can spend more money to license and obtain usage data from smaller users. This increases collections and costs. It may also create a backlash. Indeed, this type of reaction is arguably what led the US Congress to exempt home-style equipment used in bars, hotels, restaurants and supermarkets from paying music performing rights in the United States, a decision which was later found to be in violation of the United States’ obligations as a member of the World Trade Organization (17 U.S.C. § 115(b); Yu, 2003, p. 238). There is a flip side to this coin, however. If a CMO reduces costs and political tension by limiting its licensing efforts to major users, then right holders, especially larger ones, may see little value in working with the CMO and may prefer direct licensing because they too can reach major users. Reducing transaction costs in licensing multiple users and operating as a part of a global network of CMOs is arguably the raison d’être of CMOs.11 It is also worth noting in connection with the licensing function that CMOs rarely operate under a legal regime that actually obliges users to pay them. Some systems offer a liability regime that limits the users’ obligation to pay the tariff and take up a license, if the user so chooses. Nothing prevents a user from not paying if she thinks that she can validly assert an exception or limitation. (iv) The fourth function concerns usage data. Those data will be collected in one of two ways: capture of all or almost all usage data, on the one hand, or surveys, on the other hand. This means that some users will report all or almost all usage, for example when a transactional license is obtained. For example, a university producing paper or electronic ‘course packs’ will license from a reprographic organization (in the United States, Copyright Clearance Center, Inc.) and pay the per page fee set by the right holder in each publication used.12 Even a large user such as a radio broadcaster is often able to electronically report material used automatically because codes and/or detection software are used to identify what was used. In such cases, the CMO can match payments to material used and pay the relevant right holder, making it easier to ‘follow the dollar.’13 If actual usage data are not reported, surveys and other statistical methodologies will be used. This is often necessary when a repertoire or blanket license is used.14 For example, for use of music in bars, hotels and restaurants, this approach may be used.   It seems fair to posit that the more data are obtained, the higher the quality of the distribution to right holders of material used, but the higher the cost. Comparing 11   The WIPO Glossary (2003, pp. 274–5) notes that collective management is used where ‘the exercise of rights is impossible or highly impracticable on an individual basis.’ 12   See Copyright Clearance Center, Pay-Per-Use Permissions (May 15, 2018), accessed March 27, 2019 at http://www.copyright.com/academia/pay-per-use/. 13   The expression often used to match every dollar to the use of a work and pay its right holder (Massarsky, 2013). 14   The term repertoire license to designate the right to sue all rights to works or other objects in the repertoire of the CMO is correct. The term ‘blanket’ suggests that all material in the relevant category is covered. This is usually incorrect, unless users are protected by law for use of material not formally part of the CMO’s repertoire but of the same nature, such as in the Extended Collective License (or Extended Repertoire) scenario.

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494  Research handbook on the economics of IP law volume 1 ASCAP and BMI, two of the US CMOs in the field of music performing rights, a commentator noted that: ‘While ASCAP is dedicated to great precision generated from small samples, BMI looks to include a greater number of performances absent the rigorous precision [. . .] BMI’s recognized performances is over eight times greater than ASCAP’s’ (Massarsky, 2013). (v) Finally, distribution must be made to represented parties. This includes methods of aggregating and reporting usage data to right holders, making decisions about payments of small sums, how much and for how long to look for right holders who have moved and failed to notify the CMO or cannot otherwise be located, etc. CMOs also may decide to use the funds for purposes other than paying individual right holders, typical for social or cultural purposes. Because this function is common but not essential, it is considered an ancillary function, as discussed below. 2.  Ancillary functions As noted above, the ancillary functions are those that are not essential per se to operate as a CMO, but they are common and, in some cases, are almost necessary unless performed by a third party. Many CMOs devote part of the funds collected to social and cultural purposes (Gervais, 2018). These vary greatly in scope, from award ceremonies and stipends to group medical insurance and even a pension scheme (WIPO, 2003, p. 281). The conventional view is that these functions are acceptable if desired by the right holders and decided as such by a democratic process (WIPO, 2003, p. 281). Another key ancillary function is education. When a new CMO is set up, particularly in a new market such as a developing country, users who never had to pay for a license to use copyright material may need to understand why they need to pay. This includes telling them fairly about the law but also explaining the relevance of copyright, for example to the country’s cultural production.

II.  ECONOMIC ANALYSIS OF COLLECTIVE MANAGEMENT From an economic viewpoint, copyright exists to solve the problem of underproduction of creative works. Underproduction results from copyright owners not being able to appropriate value from their works. If a CMO operates as an unregulated cartel (i.e., an effective monopoly), then there is distortion in the form of a loss to welfare (deadweight loss). Whether it is efficient to have collective management (assuming there is a right that needs to be licensed for a user to operate legally) depends on whether the gain from capturing the secondary demand from unauthorized uses outweighs the distortion. In other words, competition in the primary market of traditional, authorized uses may still be beneficial and welfare-enhancing (in part due to lower transaction costs of individual enforcement), and the efficiency lies in having a collective to exploit secondary demand where transaction costs make individual enforcement almost impossible (Smith, 1986). That leaves a number of questions to be examined: How does one define efficiency in this context? How does it apply to the value of individual works managed by a CMO and to the value of a repertory of works licensed (as a bundle), and, last but not least, how does one measure efficiency?

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The economics of collective management  495 A.  The Economic Justification for Collective Management The traditional economic justification for collective management is the reduction in transaction costs and related economies of scale in administering copyrights when a single source holds the information needed to administer and enforce copyrights. In simple terms, if there are n right holders, then n −1 rounds of license negotiation costs can be saved (Snow and Watt, 2005). Costs of licensing typically arise from locating copyright owners and obtaining the information needed to negotiate a price. Copyrights are typically negotiated before works are used or performed, so most licenses are based on information such as a licensee’s past use of music, potential signals of the work’s popularity and the parties’ subjective predictions. CMOs typically reduce transaction costs by issuing repertory licenses. This decreases the time and effort involved in licensing negotiations. Due to the CMOs’ seriousness about enforcing licenses, they deter users from infringement and, in turn, lower enforcement costs (Thorpe, 1998). However, aggressive enforcement, coupled with the monopolistic behavior of CMOs, can lead to increased prices and lower consumption. Then, because CMOs are natural monopolies, inefficiencies may occur due to pricing incentives. There is an overall welfare gain if total savings in transaction costs, which should translate to lower licensing prices, offset higher prices due to the monopoly power of collecting societies. Other factors that can mitigate the monopolistic inefficiencies include regulation, bilateral monopoly (i.e., where users aggregate into a negotiating entity or form their own CMO15) and price discrimination (with a view to extracting as much surplus as possible from each user willing to license) (Handke and Towse, 2007). Analyses of economic efficiency should not overshadow other aspects of collective management. For individual authors, a CMO may provide direct access to licensing markets in which they have (individually) little clout and expertise. The CMO allows them to join forces and have increased clout, which some large users and scholars lament, arguing that copyright owners are those who are too powerful (Lunney, 2001). In such cases, a CMO is best seen as a trade organization or a union (Kretschmer, 2002). Indeed, that was the rationale initially used by the Court of Justice of the European Union to accept that CMOs’ contracts with users were not anticompetitive, based on the rationale that collectives needed to protect their members from powerful users (e.g., major broadcasting companies) (Cohen Jehoram, 2001). The next step in the analysis is to see how CMOs set prices for the repertory of works they license, the economic efficiency of this valuation process and how individual works within that repertory can be valued. The final step will be to see whether, and if so how, the efficiency of CMOs can be measured. B.  Valuing a Repertory of Works in a Collective Management Context How does one value the use of a repertoire (say, the world’s repertoire of music)? Background music adds to a user’s experience in a store, for example, but how much is it

15   As was the case in the United States with BMI (BMI’s Timeline through History, accessed March 27, 2019 at http://www.bmi.com/about/75_years).

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496  Research handbook on the economics of IP law volume 1 worth? Empirical studies showing an increase in consumption of n percent when music of a particular genre is played can be used to establish a reference point. For a user whose business involves dealing in protected works (e.g., a music station on broadcast radio), the user has an incentive to lower the cost of the input. In a normal market situation, a user would look at alternatives. In the first case above (background music), the user may decide to opt not for a CMO license but rather for alternative services offering ‘pre-cleared’ (pre-licensed or originally composed) music services such as Muzak. In contrast, for a broadcaster of music, the road to the CMO is a passage obligé. The alternative of letting each songwriter negotiate with each radio station (suggested by a few academics) hardly seems realistic both on feasibility and normative grounds. The former because of transaction costs; the latter because of the relative clout and copyright expertise of the parties. Intermediation is essential in that context and CMOs can provide it. Should CMOs be the answer? One way to look at this question from an economic perspective is to ask whether repertory licensing and pricing are structurally inefficient. Even beyond transaction costs reduction for both right holders and users, the answer seems negative. As Landes and Posner (2003) note, if there are declining average costs and marginal cost pricing is not a feasible option, setting a price in a way that is discriminatory (extracting consumer surplus) is not less efficient than setting a price to average total cost. The only situation in which antitrust authorities would then need to step in is when the price discrimination has an additional exclusionary effect. Efficiency considerations aside, setting the value and/or prices for a repertory is often difficult, owing mostly to the absence of comparable markets. What compares to the value of music for a radio broadcaster, for example? The market for downloads or streams is related to the use of music in radio broadcasts, but it is not fully comparable. Thus, mispricing is arguably more likely and/or more severe (Liebowitz, 2005). There are of course some applicable parameters. First, the prices in the market for music performing rights are tied to the overall size of the market in which they are licensed. Second, operators of streaming services or broadcasters will normally attempt to maximize revenue, but how much of that is music? Should, say, music be a fixed priced input independent of the licensee’s income (like power or rent)? Or is it better and fairer to ask the licensee to pay a portion of its income? One might intuit that users would prefer a fixed price. Indeed, in the Pandora-related rebates in the United States, the licensee opted for the latter, for a variety of reasons from which it is difficult to draw hard and fast conclusions (Marshall, 2013). One way or the other, however, a decision must be made on sharing the surplus generated by the exploitation of the rights. C.  Economic Models Organizations whose business is to determine the value of repertories of rights have created useful models. For example, an interesting approach was used by the New Zealand Copyright Tribunal in a 2010 case. It discussed the game theory model suggested by Lloyd Shapley (as presented to the tribunal by Richard Watts), noting the following: The Shapley model is based on game theory and is named after the economist who created it, Lloyd Shapley. The model measures the contribution of each participant to a licensing

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The economics of collective management  497 a­ rrangement and then calculates a split of the surplus. The outcome of this split is what is known as the Shapley value. The willing buyer and willing seller premise means that the model operates on the basis of co-operation between the parties. [. . .] Dr. Watt summarized the steps to calculating the Shapley value as follows: derive Radio’s maximum willingness to pay (WTP) derive PPNZ and APRA’s [the music PRO’s] minimum willingness to accept (WTA) derive the sharable surplus share the surplus and derive a revenue tariff [. . .] The surplus is WTP − WTA. Sharing the surplus is based on the premise that none of the parties can achieve any surplus at all unless the others are present. [. . .] We are persuaded by the Respondents’ experts’ comments that the Shapley model was the better and more applicable of the two models, although as noted above they doubted that sufficient data was available to justify the use of the model at present. There are some aspects of the model suggesting that it is not the only way that we should calculate what a reasonable royalty in the circumstances is. Other circumstances are relevant. In any event, the model is just that, a model. Its utility is to assist in arriving at the reasonable rate. (Phonographic Performances (NZ) Ltd v. Radioworks Limited, NZCOP 1 (2010))

At bottom, this model does what any such model should do, namely identify the shareable surplus and acknowledge that factors must be found to share it appropriately. Even if the CMO asks for all of the shareable surplus and the user/exploiter says it wants to keep all of it, they both know an equilibrium must be found, hence the potential role of economic models. The CMO and the user are fighting to move the needle on the percentage of the surplus that will be paid to the CMO and, via the CMO, to the creators of the licensed content. Clearly, they also fight over WTP and WTA. The Canadian Copyright Board has also discussed applicable models in a number of decisions. In a 2009 decision, it considered and rejected the willingness to pay model because ‘the willingness-to-pay for a particular input does not appear to be a reliable proxy for the willingness-to-pay of another’ (Copyright Board of Canada, 2009, para. 138). In the same decision, it refused to apply the Shapley approach to value of the music because, while interesting, it ‘relies heavily on data from a survey where respondents were questioned on hypothetical scenarios,’ adding that ‘[u]nfortunately, we do not have enough information to be able to test the variations and the stability of this model’ (para. 146). The Board then considered what it termed an ‘efficiency’ approach presented by two expert witnesses, Drs. Agrawal and McHale. They determined in their report to the Board the size of the ‘trade-off between the loss of subscribers arising from higher subscription costs and the increase of music production resulting from increased revenues for the industry’ (para. 152). The Board did not reject their model. It found the approach useful and interesting but, in the case at hand, found that the dataset was insufficiently convincing to justify using the proposed methodology. The Board ended up applying digital pay audio as a proxy benchmark (para. 185). In a 2012 decision, the Board discussed whether it should use a Nash equilibrium to split the surplus equally among parties to a rate-setting case concerning digital audio services (Copyright Board of Canada, 2012, para. 70). The Board provided six reasons not to use this model:

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498  Research handbook on the economics of IP law volume 1 –  F  irst, the record companies were not part of the bargaining mode presented by the experts (paras. 72, 74); – Second, in some cases the model generated a negative surplus and the ‘Nash bargaining model cannot yield negative benefits for any of the players’ (para. 76); – Third, the model presented did not factor correctly the relationship between mechanical and performance royalties, an issue identified as problematic also in the United States in a Copyright Office report;16 – Fourth, the model did not properly account for costs relating to collection of both types of royalties (para. 76); – Fifth, the model as presented did not offer a convincing value or ‘normal profit’ to deduct from the shareable surplus (para. 77); and – Finally, and relatedly, ‘profit’ data are inherently suspect, since online music services operate as business lines within larger corporations. In addition, data from business lines are never audited; they can thus be subject to manipulation for the purpose of minimizing the liability under the tariff (para. 78). The model was not rejected per se, but the Board did not find the application suggested in the case convincing enough. This strongly suggests that the application of economic models to the valuation of repertoires of licensed content is an area in need of further research and refinement. D.  Valuing Individual Works in a Collective Management Context In the case of many CMOs that operate repertoire licenses, the value of the license from the user’s perspective is the value of the input in aggregate (i.e., the repertoire). It may be hard to measure individual works that form part of the repertoire. From the right holder’s standpoint, aggregating her works in a repertoire is far from economically neutral. In the case of a music CMO licensing on behalf of songwriters and publishers, the total surplus (i.e., total value minus the license fees and other costs) is usually shared equally in the sense that each song has the same value, under a principle of ‘nondiscrimination.’ It has been argued that, in a situation where membership is closed and the CMO maximizes surplus per member, it produces fewer than the socially efficient number of songs (Besen et al., 1992). In other words, if membership is open or unlimited, then the membership will grow until the surplus is dissipated; at this point, the collective produces more than the socially efficient number of songs. From the licensee’s (user) perspective, a repertory license is second best because cooperative pricing is not perfectly competitive pricing (i.e., marginal cost equals marginal benefit). Licensees do not benefit because the fee does not always reflect variations in the repertory. Even repertory licenses are imperfect, because new members typically do not do promotional pricing, and these licenses may favor certain technologies (Handke and Towse, 2007). An increase in membership increases administrative costs even if authors or right ­holders whose works are not used will not get paid. Moreover, if the user uses the same amount of music, the interchangeability of the songs or works from her perspective 16

  See U.S. Copyright Office, 2015, p. 5.

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The economics of collective management  499 means that having more songs or works may not add value. Yet there will be less surplus to distribute to right holders. This suggests that offering options to licensees (how many songs will be used, and so on) may produce more efficient outcomes. But is it efficient for the individual author or right holder? If one were to see the world as meeting the following three conditions, (a) imperfect product differentiation (many differentiated works but often with the same value), (b) the number of market participants/creators is endogenous (i.e., market participants can enter and leave) and (c) joint production (i.e., works are used jointly—seemingly in a complementary way to produce other works), then the circulation of works for which rights are offered individually would decrease, while the circulation of works for which rights are offered collectively would increase—that is, if the demand in the collective market is not affected by royalty rates of other markets. This admittedly may not be how the actual world functions—as with any theoretical model. Still, it is useful to see that in a world in which these three conditions are met, a welfare analysis here leads to ambiguous results. The result depends on how much consumers marginally value product variety versus monetary incentive to create another product (Hollander, 1984). This strengthens the call for additional research mentioned at the end of the previous section. One can build on this analysis and argue that copyright’s purpose, and, therefore, a function of licensing, is to promote the creation of a particular type of works. Professor Lunney (2001), for example, has argued that marginal works (as opposed to non-marginal popular works) are the ones that the US Constitution aims to incentivize. He also suggests that more copyright revenue may in some cases mean excess incentives to create, leading to overproduction, which in turn may lead to a lack of allocative efficiency—that is, scarce resources not being used in places that society values more. Excess incentives may increase popular works at the cost of ‘great’ works and result in popular creators having more access to leisure goods, which may distract them from working more. If that is seen as a problem, it is so for all of copyright not just those works that are managed collectively. Was Dan Brown paid too much for the Da Vinci Code? By far the bulk of his income came from his contract with his publisher and from sales managed directly by the publisher, not via a CMO. In fact, a CMO may rebalance this inequality if it so wishes by using some of its funds for social and cultural purposes or by adjusting its distribution key. For example, the Norwegian music CMO TONO adds a multiplier to so-called serious music and also to works first performed in Norway, thus ‘overpaying’ composers of serious music and, more often than not, Norwegian ones, as a form of cultural subsidy.17 In a variation on this theme, Snow and Watt (2005) proposed a model that suggests that proportional distribution (i.e., where each right holder represented by the CMO is paid in direct proportion to the intensity of the use of her work minus the member’s share of the transaction costs) does not benefit collective members from a risk-sharing perspective (Bouchard, 2010). A distribution rule where the collective pays each member an equal share of the final net income Pareto dominates the follow-the-dollar approach (which they term ‘learn-and-distribute’). The equal-sharing rule can be modified to be more risk

17   Naturally, this must be done in accordance with national treatment obligations (Melichar, 1991).

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500  Research handbook on the economics of IP law volume 1 effective if each member receives a portion of the net income that is determined by the member’s risk tolerance level divided by the sum of risk tolerance levels of all members. They also suggest that the reason that many collectives still use the learn-then-distribute model and not an equal-sharing rule is because of moral hazard (i.e., no incentive to produce a successful work if success is not tied to earnings) and/or adverse selection (i.e., when the composers are better informed of the probability of success of the work than the collective, the ones who will be successful are not likely to join the collective if success is not tied to earnings). Further, copyright holders may be overly optimistic and overvalue their works. The authors suggest that a solution to adverse selection and/or moral hazard would be to tie part of the royalties to song performance (to solve the adverse selection/ moral hazard problem) and part of the royalties to the success of the collective’s repertory as a whole (to provide a risk-related benefit). Other interesting approaches have been proposed to refine valuation equations. In their discussion of the value of individual works, Parisi and Depoorter (2003) suggest that a major difference exists between what they termed complementary works and substitutive works. If two or more works (A and B) are needed to produce a third, the lack of price coordination between owners of rights in A and B will lead to inefficiencies. As they note: If the copyrights are in a relationship of complementarity in the production of a derivative work, the competitive Nash equilibrium would generate an anticommons pricing problem. [. . .] The anticommons equilibrium pricing is simply the outcome of a prisoner’s dilemma that individual copyright sellers face when pricing their copyrights independently. As in a traditional prisoner’s dilemma, the inability of copyright holders to co-ordinate prices produces both private and social inefficiencies. Quite strikingly, in this case the competitive outcome is socially inefficient, even if compared to the alternative monopoly equilibrium. Competitive pricing of complementary goods generates a substantially larger social loss than the monopolistic equilibrium. (Parisi and Depoorter, 2003, p. 168)

Their model shows that, in the case of complementary products, competition actually increases prices, decreases consumer surplus and decreases overall welfare. By contrast, in the case of substitutes, competition decreases prices, increases consumer surplus and increases overall welfare. This model can then be used to explore effects of collective management on pricing. To quote Parisi and Depoorter again: [C]opyright collectives’ [. . .] independent authority to fix the price of licences has an obvious effect on the two equilibria considered above. In the complements scenario, the intermediary would choose prices that are lower than the prices copyright holders would have chosen if pricing independently from one another. The salient point is that the lower price charged by the intermediary is beneficial to all individual copyright sellers, since it allows them to maximise the total profit from the sale of their licences, improving upon the alternative anticommons result reached in the absence of price co-ordination. The paradox—that the intermediaries’ price is lower than one that would have been chosen by the owners and yet it increases their total profits from the sale—can be understood by recalling that the anticommons equilibrium pricing is the direct outcome of a ‘prisoner’s dilemma’ that individual copyright holders face when pricing copyrights independently. (Parisi and Depoorter, 2003, p. 170)

In the case of substitutes, however, price-fixing authority renders monopolistic pricing sustainable in a Nash equilibrium. The resulting equilibrium favours copyright owners, who are able to maximise total profit from the

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The economics of collective management  501 sale of their licenses, as would happen in a cartel. But such co-ordination is socially inefficient compared to the alternative competitive (or oligopolistic) equilibrium, since it prevents beneficial competition with the creation of a social deadweight loss. (Parisi and Depoorter, 2003, p. 171)

This leads one to the conclusion that competition between CMOs and right holders will lead to lower repertory prices in the case of substitutive works, which seems verified in that US prices (where music CMOs are nonexclusive licensees of right holders) tend to be lower than in other jurisdictions (caeteris paribus) though other factors are also at play. This does not, however, necessarily lead to the conclusion that CMOs should offer limited licenses (sub-repertory or per work). There are transaction costs (which may need to be absorbed by all right holders represented by the CMO) issues. It is, once again, an issue of pricing: ‘As long as consumers may acquire cheaper bundled licenses, the availability of a per-use license does not constitute an impediment to the solution of the complementary oligopoly problem’ (Parisi and Depoorter, 2003, p. 173). Should pricing models be regulated? Regulation is inextricably linked to values (cultural, economic or otherwise) that the regulator may wish to enforce. If the regulator wishes to infuse more funds into the creation of new works by domestic authors, then abovecompetitive pricing or distribution rules that favor, say, new works first disseminated in the country in question may be considered desirable. This form of regulation may be seen as a form of subsidy. The subsidization argument is not sufficient to negate the benefits of collective management. Unless one wishes to argue that creators should work for free, the actual issue is valuing and monetizing their input, which in turn means valuing the surplus they helped create and parameters for sharing it. Clearly, users value music, films and books. Non-right holder intermediaries (Facebook, Google, and the like) monetize this content to the tune of billions of dollars each year, and one rarely hears opposition in academic circles or elsewhere to that monetization. If the creator chooses to disseminate without payment because she is ‘just trying to be heard,’ as a blog poster might for example, or because she is otherwise paid independently of the exploitation of her work (a university researcher or professor) then monetization of her work to her benefit may not occur at all. Authors are and have always been free not to exercise, or to assign, their right, in whole or in part (Gervais, 2015). If, however, one believes, as a normative matter, that high quality content requires an investment of time and resources—including the years necessary to master one’s craft—and that on the whole this is welfare-enhancing, then societally we need to develop ways to nurture this, and a market-driven solution which monetizes at least part of the value enjoyed by users and exploited by intermediaries for the benefit of the creators of that content must be found.18 The interests of those creators is to maximize use and, consequently, to minimize unnecessary restrictions on use. Licensing content through CMOs that represent them (exclusively or jointly with other right holders) is often a good means to that end.

18   While this is admittedly a normative argument, it is not less normative to say, even as a form of technological determinism, that professional creators should not be paid and that only major Internet intermediaries are allowed to monetize their inputs because they hold the keys to the Internet kingdom.

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502  Research handbook on the economics of IP law volume 1 E.  Measuring the Efficiency of CMOs A key aspect of the economic analysis of collective management is to devise adequate metrics to gauge the efficiency of CMOs. Inefficient CMOs cost more, and they are likely to offer poorer services to both represented right holders and users. Hence, even if the collective management model makes sense in a given context—especially if repertory pricing is more efficient than individual transactions with individual right holders—an inefficient CMO may negate any such benefits. This leads one, quite naturally, to ask how to measure the efficiency of a CMO. Rochelandet’s work has shown that determining the measure of the efficiency of a CMO, even if one excludes soft criteria such as educational inputs and social and cultural effects, is a multifaceted analysis (Rochelandet, 2003). Variables that can be considered include management ratio, annual variation of collected sums, annual variation of distributable sums, elasticity of distributions compared to collections, annual variation of administration expenses, gross distribution ratio, net distribution ratio, collected sums per employee (COPE), annual variation of COPE, distributed sums per employee, average cost of an employee and collected sums per member (Rochelandet, 2003, p. 187). Which measure is considered most appropriate is partly driven by normative concerns (e.g., how much should the CMO spend on non-purely financial operations, if any) and partly by context. For example, an open CMO that any right holder can join will not learn much by using the revenue per member ratio. Within a similar field, however, there may be useful comparables. CMOs in comparable markets administering the same right may be comparable, up to a point, and excluding unusual short-term variations caused by, for example, adaptation to and involvement in major changes in case law or legislation. Typical efficiency analyses use distributions (D) and total collections (C), as in R1 = D/C. This basically measures overall administrative expenses. Because represented right holders can agree to use some of the receipts for social and cultural purposes (SCP), a more complete picture may be provided by R2 = D + SCP/C. In the absence of recognized standards determining how to calculate SCP, however, comparisons between two CMOs using R2 are potentially problematic. While the ratio of collections to expenses seems a solid starting point, it also involves analytical shortcomings. A CMO can go for the low-hanging fruit at lower cost but, as already noted, it then reduces the incentive of larger right holders to work within its collective scheme because they too can license those uses directly without paying the CMO fee. It may be precisely in going after harder dollars that overall efficiency gains can be made. For example, if CMOs A and B operate in similar markets, if total collections of CMO A are $10 million and its costs $1 million (leaving $9 million for distribution), while CMO B has collections of $12 million and costs of $2 million (leaving $10 million for distribution), which one is more ‘efficient’ is not necessarily obvious. The 10 percent expense ratio of CMO A seems better, but CMO B extracted (as a high cost but still at a net gain for its represented right holders) an extra $1 million from a similar market by working harder. A CMO could also decide to use less data in preparing distributions, or could decide to report less thoroughly and pay less frequently, thus improving its ratio but perhaps not in a way that optimally serves right holders. They may prefer monthly or quarterly payments

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W (T, c) 5 3

#

`

s (T )

[ W (s,T ) 2c ] f (s 0 c) ds

The economics of collective management  503 to annual payments, for example, but this increases costs. Along similar lines, the speed ` 0 # around into distributions may also affect with which receipts are processed and turned  W (T, c) 5 3 [ W (s,T ) 2c ] f (s 0 c) ds 2W (s (T ) ,T ) (T ) expenses and the quality of services in an 0T inverse relationship. s (T ) One of Rochelandet’s most interesting ratios tracks variations in distribution over collections. Gains in performance and efficiency should be reflected using this ratio. If D is distribution and C is collections, is can be expressed as

R3 5

DD  DC

A CMO might usefully measure variations in the ratio of its collections per employee over time to measure improvements of efficiency within that CMO, and compare the ratio to those of CMOs operating in similar markets. Rochelandet acknowledges the limits of all his proposed ratios, in part because they tend to aggregate and compare a number of non-commensurate performance indicators (e.g., collections and membership). He suggests an alternative, namely, a data envelopment analysis (DEA), which he defines as a ‘non-parametric non-stochastic approach frequently applied in the field of non-profit organizations such as hospitals and schools’ (Rochelandet, 2003, pp. 187–8). This approach identifies collections, costs, employees and the number of members as inputs, and distribution as the output. The approach can be used to measure either output maximization or input minimization. Rochelandet applied his analysis to a large dataset of major European CMOs. Not surprisingly, it identified governance as a key factor affecting efficiency. According to him, if a number of major right holders are involved in governance, greater efficiency (measured according to the ratio above or the DEA method) will result. This, as already noted, is likely a multifactorial effect and thus outcomes may vary significantly. It may be because ‘professional’ right holders will pick better management, or because the management wants to keep those major right holders ‘happy’ (in turn, because they may have other options), and/or because those major right holders will provide useful inputs into the operations of the CMO as an efficient ‘business.’ There is a significant downside to giving major right holders such a degree of control, however. Namely, this is the risk that the interests of other, non-major right holders will be neglected. A policy proposal can be derived from this analysis. An optimal governance policy (including one imposed by regulation) should provide represented right holders, especially major or more ‘professional’ ones, with direct—though not overbearing because that may be counterproductive—oversight of the CMO’s operations, but with appropriate regulation to ensure that all represented right holders are treated fairly. It also requires transparency and assurances that management is independent. Interestingly, this is not far from what is contained in the 2014 EU Directive.

III.  COLLECTIVE MANAGEMENT OF ONLINE USES It is trite to say that the Internet has radically changed the way in which copyright material is created, distributed and licensed. The technology itself allows individual right holders M4754-Math Eqn.indd to connect with and license individual users1 reducing, but certainly not eliminating,

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504  Research handbook on the economics of IP law volume 1 transaction costs.19 If copyright is to serve its purpose online, it will not be, at least not primarily, by taking down content. Content must be available; it must be found, accessed (by download, streaming, and so on), and the author or other right holder might then try to get paid, whether per work or as part of a subscription. It is the era of what Professor Ginsburg has referred to as ‘permitted but paid’ (Ginsburg, 2014). In that world, as I have discussed elsewhere (Gervais, 2004), the scarcity is not of physical carriers of copyrighted material, but of connections between works and users who will value them most. There is another scarcity, that of creators who have the time to create professionally, and for this they require an income stream.20 New intermediaries whose business is predicated on keeping users online to view a maximum number of ads are essential players in creating connections and value. However, unlike traditional publishers or producers who acted as copyright holders, they are not licensed users of the ‘content,’ often claiming a safe harbor as mere connectors. Excluding access to content that a right holder considers infringing is not important to them as it might have been to a traditional copyright intermediary. It may be counterproductive. Whether the content is authorized or not is irrelevant, provided the user accesses it with paid ads. Naturally, the notice-and-take-down system and other similar ones negotiated in exchange for safe harbors means that they do take down content. The point is that this is not something they would do if they did not have to. If healthy and sustainable financial flows are to be created, content must be available and accessible. Taking it down is not the priority of authors, either. Therefore, monetization is. Here, copyright can find a new way of achieving its purpose. When it was used to exclude (e.g., pirated physical copies), excludability was essential to maintain physical scarcity but the real end was to have a successful marketplace. The online marketplace responds differently. If it is correct to picture it as the coexistence of a large zone of free content (blogs; professional content viewed in exchange for accepting ads) and paid content, then many services may compete to provide access to that content. They will need to be licensed, and that points to repertoire licensing. If CMOs play their cards well, their relevance could thus increase. For CMOs, this is nothing new. Whenever a right is managed collectively, excludability is often illusory (Gervais, 2012). Essentially, users pay to use works in the collective’s repertoire, and the CMO often has no legal right to stop a user willing to pay the applicable fee (Maurushat and Gervais, 2003). Indeed, why would a CMO say no to a user willing to pay the applicable fee? What does this mean for CMOs and online copyright? Copyright should not be seen as a tool to stop (exclude) content or end-users. Copyright remains an exclusion tool for dealings between (competing) professional entities or against major pirates. In the case of pirates, however, the reach of copyright in the case of non-physical, Internet-based distribution is restricted by the technology itself. Copyright works best as an exclusion tool when rules are internalized by stakeholders (professional publishers, producers or 19   There was indeed much hype around Digital Rights Management as a substitute for collective management 10–15 years ago, but it seems to have at least partly dissipated (Korman and Koenigsberg, 1986). 20   Professor Mackaay (1990) has argued that there is a related scarcity in the resources necessary to gather and generate certain types of information.

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The economics of collective management  505 broadcasters presumably want to be seen as obeying the rules of the road—they are also easy to sue) or when physical objects are involved (the typical example would be pirated CDs or DVDs). Pirates are excluded from this possibility, which explains the ‘whack-amole’ issue with efforts to curtail online piracy. New legal services (e.g., e-books or music streaming) need to be licensed and can be shut down if they do not operate legally. But, they may reappear. Here, one could argue that the most efficient outcome will be reached if anyone is free to compete easily in the space, that is, if licenses are available for anyone willing to pay applicable fees, as opposed to having a few major right holders pick winners and losers by using their exclusive right. Now that futile judicial attempts to prohibit end-users from using the Internet’s power have been mostly abandoned, copyright can and perhaps should best be seen as a basis for an entitlement to remuneration when use reaches the level of interference with ‘normal commercial exploitation,’ the main limit set by the three-step test (Geiger et al., 2015). The test, which sets limits in many international intellectual property instruments for exceptions and limitations to copyright and other rights, is useful in this context because it rests on two keys notions: a dynamic notion of normalcy (of commercial exploitation) and a notion of commercial harm. Their combination allows authors and other right holders to claim payment for massive Internet uses not covered by an exception such as fair use or fair dealing. Collective licensing is not antithetical with adequate exceptions and limitations. Indeed, it may be easier to safeguard space for those exceptions and limitations by setting uniform tariffs than in adhesion-type end-user licenses that often restrict available exceptions. Whether or not such terms are enforceable, they can have a chilling effect on users. For instance, if a tariff was sought for reprographic use and Internet access in schools and universities, the tariff-setting authority could exclude from the license (or at least in calculating the payment) any use covered by research or educational exceptions. This is precisely what happened in Canada in 2015 (Copyright Board of Canada, 2015). Exclusion was, and is, a means to an end. Part of that end, with respect to the online exploitation of copyrighted content, is to ensure proper financial flows to professional authors, those whose livelihood depends on monetizing access to their creative output, when their works are successful in the marketplace (generating surplus). Copyright can best serve this goal by allowing online uses but generating financial flows to creators. This, in turn, depends on the availability of efficient intermediaries that can license the necessary rights.

REFERENCES Besen, Stanley, Sheila Kirby, and Steven Salop. 1992. ‘An Economic Analysis of Copyright Collectives,’ 78 Virginia Law Review 383–411. Bouchard, Mario. 2010. ‘An Essay on Monetizing Copyright Over the Internet’, 11:6 Internet and E-Commerce Law in Canada 45–52. Cohen Jehoram, Herman. 2001. ‘The Future of Copyright Collecting Societies,’ 23 European Intellectual Property Review 134–9. Geiger, Christophe, Daniel Gervais, and Martin Senftleben. 2015. ‘The Three-Step Test,’ in Daniel Gervais, ed., International Intellectual Property: A Handbook of Contemporary Research. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing.

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506  Research handbook on the economics of IP law volume 1 Gervais, Daniel. 2004. ‘The Price of Social Norms: Towards a Liability Regime for File-Sharing,’ 12 Intellectual Property Journal 39–74. Gervais, Daniel. 2011. ‘The Landscape of Collective Management,’ 34 Columbia Journal of Law and the Arts 591–618. Gervais, Daniel. 2012. ‘Individual and Collective Management of Rights Online,’ in Johan Axhamn, ed., Copyright in a Borderless Online Environment. Stockholm: Norstedts Juridik. Gervais, Daniel. 2013. ‘The Internet Taxi: Collective Management of Copyright and the Making Available Right, after the Pentalogy,’ in Michael Geist, ed., The Copyright Pentalogy: How the Supreme Court of Canada Shook the Foundations of Canadian Copyright Law. Ottawa: University of Ottawa Press. Gervais, Daniel. 2015. ‘Authors, Online,’ 38 Columbia Journal of Law and the Arts 385–96. Gervais, Daniel. 2018. ‘The Cultural Role(s) of Collective Management Organizations,’ 6 European Intellectual Property Review 349–56. Ginsburg, Jane C. 2014. ‘Fair Use for Free, or Permitted-but-Paid?,’ 29 Berkeley Technology Law Journal 1383–446. Handke, Christian, and Ruth Towse. 2007. ‘Economics of Copyright Collecting Societies,’ 38 International Review of Intellectual Property & Competition Law 937–57. Hollander, Abraham. 1984. ‘Market Structure and Performance in Intellectual Property,’ 2 International Journal of Industrial Organization 199–216. Korman, Bernard, and Fred I. Koenigsberg. 1986. ‘Performing Rights in Music and Performing Rights Societies,’ 33 Journal of the Copyright Society of the U.S.A. 332–67. Kretschmer, Martin. 2002. ‘The Failure of Property Rules in Collective Administration: Rethinking Copyright Societies as Regulatory Instruments,’ 24 European Intellectual Property Review 126–37. Landes, William M., and Richard A. Posner. 2003. The Economic Structure of Intellectual Property. Cambridge, MA: Harvard University Press. Liebowitz, Stan. 2005. ‘MP3s and Copyright Collectives: A Cure Worse than the Disease?,’ in Lisa N. Takeyama, Wendy J. Gordon, and Ruth Towse, eds., Developments in the Economics of Copyright: Research and Analysis. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Lunney, Glynn S. 2001. ‘The Death of Copyright: Digital Technology, Private Copying, and the Digital Millennium Copyright Act,’ 87 Virginia Law Review 813–920. Mackaay, Ejan. 1990. ‘Economic Incentives in Markets for Information and Innovation,’ 13 Harvard Journal of Law and Public Policy 867–909. Marshall, Rick. 2013. ‘The Quest for “Parity”: An Examination of the Internet Radio Fairness Act,’ 60 Journal of the Copyright Society of the U.S.A. 445–74. Massarsky, Barry M. 2013. ‘The Operating Dynamics behind ASCAP, BMI and SESAC, the U.S. Performing Rights Societies,’ accessed March 27, 2019 at http://old.cni.org/docs/ima.ip-workshop/Massarsky.html. Maurushat, Alana, and Daniel Gervais. 2003. ‘Fragmented Copyright, Fragmented Management: Proposals to Defrag Copyright Management,’ 2 Canadian Journal of Law & Technology 15–34. Melichar, Ferdinand. 1991. ‘Deductions Made by Collecting Societies for Social and Cultural Purposes in the Light of International Copyright Law,’ 22 International Review of Industrial Property and Copyright Law 47–60. Parisi, Francesco, and Ben Depoorter. 2003. ‘The Market for Intellectual Property: The Case of Complementary Oligopoly,’ in Wendy J. Gordon and Richard Watt, eds., The Economics of Copyright: Developments in Research and Analysis. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Patry, William. 1995. ‘COPYRIGHT: American Geophysical Union v. Texaco, Inc.: Copyright and Corporate Photocopying,’ 61 Brooklyn Law Review 429–51. Richardson, Megan, and Sam Ricketson. 2017. ‘The Cultural Role of Copyright Collectives,’ in M. Richardson, ed., Research Handbook on Intellectual Property in Media and Entertainment. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Rochelandet, Fabrice. 2003. ‘Are Copyright Collecting Societies Efficient Organizations? An Evaluation of Collective Administration of Copyright in Europe,’ in Wendy J. Gordon and Richard Watt, eds., The Economics of Copyright: Developments in Research and Analysis. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Smith, Douglas A. 1986. ‘Collective Administration of Copyright: An Economic Analysis,’ in John Palmer, ed., Research in Law and Economics. Greenwich, CN: JAI Press. Snow, Arthur, and Richard Watt. 2005. ‘Risk Sharing and the Distribution of Copyright Collective Income,’ in Lisa N. Takeyama, Wendy J. Gordon, and Ruth Towse, eds., Developments in the Economics of Copyright: Research and Analysis. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Thorpe, Jeremy. 1998. ‘Regulating the Collective Exploitation of Copyright,’ 16 Prometheus: Critical Studies in Innovation 317–29. Tuma, Pavel. 2006. ‘Pitfalls and Challenges of the EC Directive on the Collective Management of Copyright and Related Rights,’ 28 European Intellectual Property Review 220–29.

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The economics of collective management  507 U.S. Copyright Office. 2015. Copyright and the Music Marketplace: A Report of the Register of Copyrights, accessed March 27, 2019 at https://www.copyright.gov/policy/musiclicensingstudy/copyright-and-the-musicmarketplace.pdf. Yu, Peter K. 2003. ‘The Harmonization Game: What Basketball Can Teach about Intellectual Property and International Trade,’ 26 Fordham International Law Journal 218.

Case List Am. Geophysical Union v. Texaco Inc., 60 F.3d 913 (2d Cir. 1994). Phonographic Performances (NZ) Ltd v. Radioworks Limited, NZCOP 1 (2010).

Legislative Materials 17 U.S.C. § 101, §112(e)(5), § 115(b). 37 C.F.R. § 260 (2003). Copyright Act (Act No. 63/1968) (Austl.). Copyright Act (Act No. 7/2000) (St. Lucia). Copyright Act, R.S.C., c. C-42, s. 2. (1985) (Can.). Copyright Board of Canada. 2009. ‘Collective Administration of Performing Rights and of Communication Rights,’ Statement of Royalties to Be Collected by SOCAN, NRCC and CSI in Respect of Multi-Channel Subscription Satellite Radio Services, accessed March 27, 2019 at http://cb-cda.gc.ca/decisions/2009/20090408m-b.pdf (Can.). Copyright Board of Canada. 2012. ‘Collective Administration of Performing Rights and of Communication Rights,’ Statements of Royalties to Be Collected by SOCAN and CMRRA/SODRAC INC. for the Communication to the Public by Telecommunication or the Reproduction, in Canada, of Musical Works, accessed March 27, 2019 at http://cb-cda.gc.ca/decisions/2012/socan-csi-reasons.pdf (Can.). Copyright Board of Canada. 2015. ‘Collective Administration of Performing Rights and of Communication Rights,’ Statement of Royalties to Be Collected by Access Copyright for the Reprographic Reproduction, In Canada, of Works in its Repertoire: Decision of the Board, accessed March 27, 2019 at http://cb-cda.gc.ca/ decisions/2015/DEC-2015-03-22.pdf (Can.). Copyright Regulations (Act No. 9/2004) (Kenya). Copyright Regulations (Act No. 239/2016) (Malta). Directive 2014/26/EU of the European Parliament and of the Council of 26 February 2014 on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online use in the internal market, 84/72, 2014 O.J. (Eur.). WIPO. 2003. Guide to the Copyright and Related Rights Treaties Administered by WIPO and Glossary of Copyright and Related Rights Terms, accessed March 27, 2019 at http://www.wipo.int/edocs/pubdocs/en/ copyright/891/wipo_pub_891.pdf.

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19.  ‘The common law’ in the law and economics of intellectual property Shyamkrishna Balganesh * 21

Contents I. Introduction II. Efforts to Understand the Common Law as a Unified Whole III. The Common Law as a Method of Lawmaking IV. The Common Law as Judge-made Law V. The Common Law as Substantive Law A. Freestanding Common Law Intellectual Property B. Interstitial Common Law Intellectual Property VI. The Common Law as State Law VII. Conclusion References

I. INTRODUCTION As applied to the context of intellectual property thinking today, ‘the common law’ refers to a variety of different analytical ideas, each of which contributes to a particular normative vision for the institution. These myriad understandings of the term in turn draw from different structural, institutional, and jurisprudential ideas that the common law has come to be associated with over the last several centuries. Accordingly, this chapter attempts to unbundle these different usages of the term in order to show what they each bring to the discussion of intellectual property. As a general matter, discussions of the common law within intellectual property can be classified into four analytically distinct strands. This distinction certainly does not suggest that these strands do not overlap or indeed that in practice the use of the term does not implicate more than one. Instead, each strand brings a different dimension of economic thought and analysis to the discussion, which in turn generates its own set of normative implications when applied. In the first strand, the common law is seen as a particular method of lawmaking, associated primarily with the ideals of pragmatism and incrementalism, when employed as a method of reasoning. In the second, the common law is treated as representing a particular locus of institutional authority for lawmaking: courts. Here, it is used as a synonym for ‘judge-made law.’ While the first and second strands ordinarily go together, it is important to recognize that they are nevertheless *  Professor of Law, University of Pennsylvania Law School. Many thanks to Lydia Franzek, University of Pennsylvania Law School Class of 2020 for research assistance.

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‘The common law’ in the law and economics of IP  509 distinct and that instances can and do arise when the overlap ceases. This divergence is especially true in areas where an agency such as the United States Patent and Trademark Office (USPTO) or the Copyright Office starts assuming a lawmaking role as well. The third strand treats the common law of intellectual property as referring to bodies/areas of substantive law that are usually produced through the mechanisms reflected in the first two strands. In other words, this strand is associated with the product/output of the processes and ideals reflected in the prior two. As discussed below, it in turn has two variants: freestanding common and interstitial common law. The fourth strand is best described as jurisdictional and associates the common law in intellectual property with the ability and power of states to create intellectual property rules, either with or without the processes and ideals reflected in the other strands. Each of these strands—legal reasoning, institutional authority, substantive, and jurisdictional—plays an important role in framing and directing discussions of the common law in intellectual property and accordingly relates to different facets of the economic analysis of law and lawmaking as applied to the common law. While each of these legal strands finds a correlate in the law and economics literature, it is important to note (as described more fully below) that the latter approaches the economic analysis of the common law in overtly normative—rather than purely positive—terms. Economic analyses of the common law thus begin with an effort to test a hypothesis about the connection between the common law and efficiency/utility-maximization and to that end go on to adopt varying conceptions of the common law and institutional dynamics therein. This mode of analysis is worth bearing in mind in the correlations made below, since the correspondence between the positive analysis seen in the general legal literature and the normative analysis seen in the law and economics literature is attenuated as a result. Yet, rarely ever do references to ‘the common law’ in intellectual property elucidate on the precise variant being employed, in the process giving usages of the term a degree of analytical imprecision that generates varying levels of suspicion among courts and scholars. The discussion below is divided into six sections. Section II introduces some of the seminal literature on ‘the common law,’ both in the traditional legal literature and in the economic analysis of law. Sections III, IV, V, and VI collectively unbundle the term as applied in the intellectual property setting, with each elaborating on a particular strand of usage reflected in the idea, drawing on examples from within intellectual property and relating them to established theoretical insights from law and economics as pertains to judge-made law. Section VII then ends by discussing some fruitful directions that future research in the area might take.

II. EFFORTS TO UNDERSTAND THE COMMON LAW AS A UNIFIED WHOLE Efforts to understand the common law as a unitary whole, that is, as ‘the common law,’ can be traced back to the 17th and 18th centuries, during which time Coke’s Institutes and Blackstone’s Commentaries were produced. Due to the nature of lawmaking that existed in England at the time, both works contain fairly little discussion of the comparative costs and benefits of the common law and focus less on the common law from a phenomenological perspective, instead treating the common law as but a stand-in for ‘law’

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510  Research handbook on the economics of IP law volume 1 more generally. It therefore is not until the late 19th century, and owing to the work of American legal scholars who were engaged in the task of critically evaluating the reception of English law in the United States, that we begin to see attempts to understand and evaluate the common law as a distinct body of law and mechanism of lawmaking. The Common Law by Oliver Wendell Holmes, Jr. (1881) is traditionally taken to be the starting point of the modern American engagement with the common law. Yet, Holmes is largely content with an analytical and historical exegesis of different substantive common law rules, in some ways falling back on the models put forth by Coke and Blackstone. Holmes also restricts himself to the main areas of the substantive common law and in the process finds little time for any discussion of intellectual property. The first truly analytical engagement with the common law, one that transcends its role as a repository of substantive rules and looks to it as a method of lawmaking, is to be seen a few years later in the work of Benjamin Cardozo. In The Nature of the Judicial Process and The Growth of the Law, Cardozo (1921, 1924) develops an account of common law reasoning and the role of the judge therein best described as constructive and pragmatic. In this account, we also see the use of ideas from sociology, philosophy, and economics in the study of the common law for the first time. Cardozo’s work marked the onset of Legal Realism, an approach to legal thinking that questioned the autonomy of legal discourse. Following Cardozo, several prominent Legal Realists began engaging the common law process in an effort to elucidate their core jurisprudential theses. Prominent among these efforts were Roscoe Pound’s (1906) The Spirit of the Common Law, which was part historical and part normative, and Karl Llewellyn’s (1960) The Common Law Tradition: Deciding Appeals. Llewellyn’s account is particularly noteworthy in that it attempts to discern a rational coherence in the working of the common law, using what he famously describes as the idea of ‘situation sense’ to determine the applicability of prior precedent to any given dispute. When the law and economics movement began to gain momentum in the 1970s, the common law became an obvious area for it to test its core hypothesis. Richard Posner’s (1973) Economic Analysis of Law famously argues that ‘[t]he common law method is to allocate responsibilities between people engaged in interacting activities in such a way as to maximize the joint value, or, what amounts to the same thing, minimize the joint cost of the activities.’ This approach would become the core of the economic analysis of the common law, with scholars within the tradition then attempting to discern why, how, and where common law rules work to produce efficient outcomes. A more recent effort to offer a unified account of the common law is seen in Mel Eisenberg’s (1988) The Nature of the Common Law. While steeped in the Realist tradition, Eisenberg consciously attempts to transcend the economic analysis by offering an account of ‘the institutional principles that govern the way in which the common law is established.’ The work focuses on the interaction between ‘doctrinal’ and ‘social’ propositions, that in his account figure in all forms of common law adjudication. Among the more recent non-economic efforts to understand the common law as a whole, Alan Brudner’s (1995) classic, The Unity of the Common Law, deserves special mention. In it, Brudner develops a theory of the common law that combines its formal and instrumental aspects, as well as its roots in private law and public law. Relying on Hegel’s concept of the geist, Brudner seeks to explain and justify the common law as a coherent set of rules and practices that deserves independent legal scrutiny.

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‘The common law’ in the law and economics of IP  511 The law and economics literature on the common law has, for the most part, revolved around trying to understand the systemic efficiencies of judge-made law as an enterprise of law production. Well before the advent of law and economics, Hayek hypothesized that the common law was more efficient than statutory law, and, in the years since, scholars have attempted to either validate or refute this hypothesis. Prominent in this genre are seminal works by Richard Posner (1992), Paul Rubin (1977), George Priest (1977), Bob Cooter (1979), Lewis Kornhauser (1989), and Paul Mahoney (2001). Most of this literature examines the efficiency-related hypothesis through individual legal doctrines, undertakes a demand- or supply-side analysis of the process through which the common law generates rules, looks at efficiencies relating to certain artifacts and processes within the common law (e.g., stare decisis or multi-panel judges), or relates the idea of efficiency to the common law’s ability to change and adapt to new circumstances in a timely manner. Sadly enough, though, none of these unified studies of the common law, whether in the traditional legal literature or in law and economics, make much of an effort to study intellectual property through the common law, or indeed to examine the connection between the two. While Posner’s (1973) work does contain a discussion of patent and copyright, its primary goal is to study these subjects through the tools of economic analysis rather than through the common law as such. Yet, this critique is hardly to suggest that efforts to study aspects of intellectual property through the common law are altogether absent; they just remain few and far between. The Supreme Court’s 1918 decision in International News Service v. Associated Press, 248 U.S. 215 (1918) provided some momentum for the idea that the common law might have some lessons of importance for intellectual property. A good amount of scholarship attempting to make sense of the Court’s decision and its theory of ‘misappropriation’ therefore chose to engage with the interface between the common law and intellectual property. Unfortunately, though, much of this scholarship was restricted to the narrow domain of the misappropriation doctrine, and never quite examined what the common law as a freestanding whole might bring to bear on intellectual property discussions. Most recently, some scholars have begun examining the general connection between the common law and intellectual property more directly, in the process engaging with some of the themes on which the next few sections elaborate.

III.  THE COMMON LAW AS A METHOD OF LAWMAKING The first sense in which the phrase ‘common law’ is routinely used is largely analytical. It refers to a particular method of contextualized lawmaking that English common law courts were historically seen as adopting. This method was in turn characterized by being both pragmatic and incremental. Common law courts came to generate legal rules and principles from within the context of individual cases, using the particular dispute at hand before them as the basis on which to either apply a rule from a prior case directly or to adapt such a prior rule to fit the particulars of the dispute involved. The process thus placed great emphasis on the use of precedent and stare decisis. Deductive and inductive methods of reasoning took second place to analogical reasoning, and with it the processes of abstraction and extension. All the same, the need to decide the individual dispute at hand had an important disciplining effect on courts in individual cases. It ensured that in

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512  Research handbook on the economics of IP law volume 1 the development of their rules/principles, courts were acutely aware of (i) how any particular rule/principle would play out in practice and (ii) the effects that it would generate for the parties involved and other similarly situated parties. Indeed, it is for this reason that Holmes famously observed that ‘[i]t is the merit of the common law that it decides the case first and determines the principle afterwards’ (Holmes, 1870, p. 1). The common law method of lawmaking has often been characterized as ‘pragmatic,’ a term that is used to capture three essential attributes of the process (Balganesh, 2010). The first is its overt instrumentalism, or its emphasis on the consequences—immediate and long-term—of the decision at hand. The second is its anti-foundationalism, or its unwillingness to emphasize any single foundational value, such as autonomy or efficiency, during the rule-development and adaptation processes. Instead, the process recognizes the existence of multiple normative goals being served by the law and chooses to contextually balance them out. The third attribute is its contextualization, wherein the rule/law is developed by reference to its social situatedness rather than in the abstract. This attribute relates back to the disciplining effect of case-based lawmaking referred to earlier. In addition to being pragmatic, the common law method of reasoning and lawmaking is also overtly incrementalist. Incrementalism refers to the gradual or accretive nature in which the law (or an institution) develops over time. The process involves testing a rule in individual cases over time and adapting it situationally with minimal modification, so as to balance consistency and predictability with the need for flexibility. These four attributes together result in the common law method of legal development being best characterized as pragmatically incrementalist. Within the law and economics literature, this strand of common law thinking was initially seen in the work of Richard Posner (1973), who argued that the common law was efficient through an examination of individual legal doctrines. These initial conclusions produced a good amount of discomfort among economists, who were more predisposed towards examining the efficiency or otherwise of a process, rather than the outcome of that process. In this more process-oriented economic examination, the focus thus shifted to two fruitful sources of analysis: the extent to which judges were utility-maximizers and the extent to which the process of litigation (which generated the rules of the common laws) was itself efficient. It is the latter of these two that found a close analog to noneconomic claims about the common law process (Rubin, 1999). Paul Rubin (1980), who pioneered this form of economic analysis of the common law, characterizes it as an ‘evolutionary’ approach. The core claim of these studies is that the common law veers towards the selection of an efficient rule (over inefficient ones) because of the adversarial process and the incentives of the litigating parties. Assuming the parties’ relative stakes in a dispute are symmetrical, a case gets settled when the expected value to the plaintiff in the case is less than the expected cost to the defendant. When laws are inefficient, the stakes become asymmetrical and generate a loss to one side that is greater than the gain to the other, owing to its effect on future cases. This in turn makes litigation more likely when rules are inefficient, making them likely to be litigated and modified/ overturned through the judicial process. Variants of this argument developed in the literature in due course. Evolutionary theorizing in the law and economics of the common law may not be the dominant strand within that arena today, yet its principal contribution lay in emphasizing ‘the litigation decision as driving legal evolution’ (Rubin, 1999). As Rubin puts it, these

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‘The common law’ in the law and economics of IP  513 theories ‘were the first to focus on the motives of litigants, realizing that judges can decide only those cases that come before them.’ Relating these theories back to the non-economic literature, evolutionary theorizing thus claimed that the pragmatism and incrementalism of the common law method of theorizing and rule development were as much an artifact of the litigation process and the parties’ incentives therein as they were the product of some innate or unspecified wisdom underlying the common law. In this important respect, the non-economic and economic versions of this form of common law thus complement each other fairly well. Returning to intellectual property, one argument that deploys the common law here is that the institution (i.e., various forms of intellectual property) would stand to benefit from this pragmatic incremental method of rule development. The pragmatic incrementalism inherent in the process is seen as virtuous for the field, in so far as it is directed at maximizing efficiency through minimizing inefficient rules (Balganesh, 2010). To begin, the technologically dependent nature of intellectual property makes it ideally suited to incremental rule development. Patent, copyright, trade secrets, and, to a lesser extent, other forms of intellectual property attempt to regulate the production, consumption, and dissemination of new technology in society. All the same, predicting the precise direction and speed of such technological change is notoriously difficult given its intrinsically stochastic nature. A one-size-fits-all approach that attempts to make radical changes by predicting the future trajectory of technological development runs the risk of proving to be either under- or over-determinative. Instead, an incremental approach that takes ‘one case at a time’ and moves gradually based on empirical evidence drawn from the circumstances of an individual case introduces an element of regulatory caution and modesty in the face of pervasive technological uncertainty. In addition, the normative value, pluralism, associated with intellectual property is best served through the common law’s commitment to practical reasoning. While intellectual property is today defended in principally utilitarian terms, the fact remains that several other non-instrumental goals are just as important to its functioning, be they autonomy, fairness, or distributive justice. The fundamental anti-foundationalism of the common law method allows these plural normative goals to be balanced situationally through the generation of a reflective equilibrium deeply embedded within the common law’s commitment to practical reasoning. Indeed, many have characterized the common law as epitomizing the ideal of practical reasoning, and intellectual property’s normative uncertainty would stand to benefit from it. Turning now to the law and economics literature on this conception of the common law, to the extent that the evolutionary models’ assumptions about asymmetrical incentives carry over to rules that are seen as systemically undesirable owing to their long-term effects that can be understood in both economic and non-economic terms (not just owing to their inefficiencies), we begin to see the resonance behind applying the common law ‘method’ to intellectual property rule development. We therefore begin to see a good degree of correspondence between evolutionary theorization in the law and economics literature and claims about the superiority of the common law method within traditional legal analyses. We see this strand of common law thought at work in intellectual property most prominently in copyright’s fair use doctrine, 17 U.S.C. § 107. As a creation of the federal courts in the 19th century, Congress came to codify the doctrine in 1976. Yet, in so doing, Congress continued to insist that its codification was hardly comprehensive, noting that:

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514  Research handbook on the economics of IP law volume 1 The bill endorses the purpose and general scope of the judicial doctrine of fair use, but there is no dispo­sition to freeze the doctrine in the statute, especially during a period of rapid technological change. Beyond a very broad statutory explana­tion of what fair use is and some of the criteria applicable to it, the courts must be free to adapt the doctrine to particular situations on a caseby-case basis. Section 107 is intended to restate the present judi­cial doctrine of fair use, not to change, narrow, or enlarge it in any way. (H.R. 94-1476, 94th Cong. (2d Sess. 1976))

In essence, Congress was endorsing the common law method of lawmaking through which the fair use doctrine had evolved and was insisting that the same method continue to be applied in adapting the doctrine to new and evolving situations. As is apparent from the record, ‘technological change’ was an obvious reason for this endorsement, given the common law’s cautionary and gradual approach. The emphasis on ‘case-by-case’ further highlights Congress’s insistence on the situated and contextual nature through which the law develops. Additionally, as has been revealed over time, one of the added virtues of utilizing the common law method for fair use proved to be the reality that fair use itself serves a variety of important purposes relating to free speech, downstream economic incentives, distributive justice, and the like. The common law’s case-by-case approach has allowed these myriad goals to be balanced and simultaneously affirmed.

IV.  THE COMMON LAW AS JUDGE-MADE LAW Within intellectual property and beyond, ‘the common law’ is also routinely used to signify an area (or body) of law or legal rules that is principally or exclusively judge-made. In this sense, it refers primarily to rules developed by courts—either federal or statutory— through the process of accretive rule development. The process is not just an expansive interpretation of statutory directives, but instead involves the lawmaking process itself coming to be delegated to courts. Of course, in an overwhelming majority of cases, the common law method previously described accompanies the process of judicial lawmaking. As an analytical matter though, the two need not always go hand in hand. In developing the law on their own, or with limited legislative guidance, courts are routinely driven by the normative ideals commonly believed to be associated with any given area at hand. Learned Hand’s famous ‘Hand formula’ for negligence liability is a good example as it developed almost entirely in the belief that negligence law was directed at efficiently deterring dangerous activities (United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947)). These ideals are in turn instantiated in the application and development of a rule that is applied to the facts of the case before the court. Consequently, judge-made law invariably develops incrementally, even though it need not adhere to the ideals of pragmatism. Many bodies of American law remain principally (or entirely) judge-made to this day: contract, tort, and property law in the state context and antitrust and admiralty law in the federal. Ordinarily, judge-made law in any given area is inherently susceptible to legislative override. In other words, if the legislative branch is unhappy with any particular rule, or indeed body of rules developed by a court, it can choose to override it by simply enacting legislation to that effect. In this regard, judge-made law can be seen as operating with the often tacit acquiescence of the legislature. In some areas, of course, the legislature expressly delegates its lawmaking function to courts within a statute, thereby making an

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‘The common law’ in the law and economics of IP  515 overt commitment not to override courts, barring some major exceptions. These statutory delegations are sometimes referred to as ‘common law statutes,’ and scholars continue to debate the precise interpretive rules that ought to govern them. Judicial lawmaking of this kind has certain inherent advantages. To the extent that it is incremental in growth, it allows the law to move in new directions based on social changes as refracted through the lens of the dispute before a court. In addition, it produces an extended conversation over a period of time during the development of any rule, thereby allowing the reform process itself to have multiple avenues for its ideas to be tested. Perhaps most importantly, though, judicial lawmaking allows for a legal system to fill certain important gaps in the system of formal rules, thereby ensuring that potentially harmful (or inefficient) defaults that could result from the absence of legislative intervention are minimized. In addition to exhibiting obvious process-related benefits, judge-made law is also oftentimes defended in terms of institutional competence and expertise. To the extent that the judicial office is taken to embody certain virtues that inure to the benefit of the lawmaking process in any given area, judge-made law in that area is seen as superior to legislative (or indeed executive) rulemaking. A defense of the common law along these lines has become less popular over the years, especially given concerns with anti-majoritarianism and the undemocratic nature of judging. All the same, we see traces of it in early accounts of the common law, where the system was defended as much for the virtues of its primary protagonists (i.e., judges) as for its unique techniques and methods. As a situated member of society, taken to embody a certain amount of common ‘wisdom’ in turn reflected in a commitment to practical reasoning, judges, in this account, were seen as uniquely positioned to develop the law in domains that tended to elide broad generalization. More recently, this argument has renewed in a call for ‘virtue jurisprudence,’ or an Aristotelian conception of law, which places just as much focus on the virtues of the lawmaker as it does on the content and normative commitments of the law itself (Solum, 2004). Judicial lawmaking, however, is hardly without its own flaws and critics. While some of this criticism is institutional/political, emanating from a deep suspicion of unelected judges and the usurpation of power by the judiciary, the more analytical side of the critique originates in the idea that the common law’s focus on the individual dispute at hand distorts the construction and framing of the law. Early versions of this argument are seen in the writings of Jerome Frank (1930) and Karl Llewellyn (2011), who both claimed that the particularized nature of the controversy before the court provided judges with the real reasons for their decisions and rules. While Llewellyn and Frank saw this as largely unproblematic, more recently some scholars have argued that this focus on the individual characteristics of a case produces a series of cognitive biases among judges, which diverts their attention away from understanding the true medium- and long-term consequences of any legal rule that they are involved in framing. Fred Schauer (1989) thus argues that this form of lawmaking invariably relies on the availability heuristic, an anchoring bias, and issue framing, both of which result in the process being less than fully rational in outcome. To the extent that this account of the common law relies on the attributes of judges for its validation, its closest analog in the law and economics literature was work that treated judges as rational utility-maximizers and, in that vein, associated the common law with the overall goal of utility-maximization, seen through the agency of judges. Richard

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516  Research handbook on the economics of IP law volume 1 Posner’s (1973) early work epitomized this thinking, wherein he argued that judges were insulated from personal factors and interest group politics, enabling them to focus on efficiency maximization. Others have since followed suit and modified the initial model by introducing elements of practical relevance to the role of judging, such as the judge’s incentives relating to promotions and their employment conditions. Despite having some traction within the world of law and economics, however, this strand of common law thinking has been largely relegated to the margins, mostly because of its unverified assumptions about judicial incentives, preferences, and behavior, all of which are hard to theorize about and generalize from in the aggregate. We nevertheless see important aspects of these debates at play in the context of judicial lawmaking within intellectual property. On the one hand, the judicial crafting of a legal rule from the context of an individual dispute may indeed be informed by a keener sense of the direction in which future change is likely to take (or the sheer uncertainty of that process instead). Indeed, it may well result in judges, who are presented with intellectual property disputes with a degree of regularity, coming to develop an amount of specialized expertise in an area, which renders them more capable of crafting an ideal rule, unlike a legislative body that is by definition more generalized in its agenda. Some argue that encouraging judicial expertise was precisely the thinking behind the creation of the Federal Circuit within the patent law arena, though the evidence is obviously mixed on whether patent law (and the legal system more generally) benefited from this specialization. Similarly, copyright’s fair use doctrine was (and remains) principally the creation of courts. Developed by Justice Story in Folsom v. Marsh, 9 F. Cas. 342 (C.C.D. Mass. 1841) from within the context of a particular dispute, the boundaries of the doctrine continue to be policed by courts and adapted to newer contexts. It is in this vein that the Supreme Court came to adopt the ‘transformative use’ variant of the Court in Campbell v. AcuffRose Music, Inc., 510 U.S. 569 (1994), a move that some argue breathed new life into the fair use doctrine and allowed for its expansion to the digital context where the reuse and modification of existing works occurs on a rather regular basis. As an illustration of the converse phenomenon, even within the working of fair use, consider more recent efforts to apply the doctrine to appropriation art, that is, art that is created by modifying protected works in new forms—sometimes insubstantially. In Cariou v. Prince, 714 F.3d 694 (2d Cir. 2013), the Second Circuit concluded that the defendant’s artwork, which entailed taking the plaintiff’s ethnographic photographs and airbrushing a few elements onto the images there, qualified as fair use because the defendant had added new meaning to the work by converting the photograph into a work of art, even if only with minimal modification. The court was unquestionably driven by the prominence of the defendant’s art—which had received a good amount of notoriety in the press and elsewhere—and, in so doing, paid surprisingly little attention to how/when the fair use doctrine should be applied to other instances of appropriation art. As a consequence, the extent to which fair use applies to appropriation art continues to remain unclear. None of this discussion is to suggest that the costs of particularity in the judge-made approach to fair use outweigh the benefits of nimbleness and potential judicial expertise. It merely points to the advantages and disadvantages of the common law—understood as judicial lawmaking—manifesting themselves in the intellectual property setting.

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‘The common law’ in the law and economics of IP  517

V.  THE COMMON LAW AS SUBSTANTIVE LAW A third and frequently used sense in which the term is employed identifies it with various bodies of substantive legal rules and principles that are largely (even if not exclusively) developed incrementally, and usually by courts. Whereas the prior two conceptions focused on the process—reasoning and institutional basis—for the development of these rules, this conception focuses on the product of that method and institutional authority. Separating the two, that is, the process and the product, is nonetheless analytically critical since the substantive law comes to assume an independent life of its own, once brought into existence. In other words, once created, courts and scholars rarely ever look back into the method through which the common law developed or the institutional basis behind its creation. Even when understood as substantive law, the common law comes in two different forms (Balganesh, 2013). The first is freestanding substantive common law, which refers to bodies of law that emerge spontaneously, and usually through courts’ reliance on custom and norms within a particular domain of activity, to craft new rules when presented with an individual dispute. In this form, the common law takes no guidance (or delegation of authority) from the legislature and cares very little about potentially conflicting with statutes or other forms of government regulation. As should be obvious, most of the foundational areas of the law, such as property law, contract law, and tort law, developed in this fashion, even though there exist numerous statutory adaptations and incorporations of these original common law rules today (e.g., the Uniform Commercial Code (U.C.C.)). What is important to appreciate with freestanding common law is that the freestanding nature is more than just an issue of temporal priority. In other words, it is not just that the law came to be developed by courts before the legislature stepped in. Rather, the fact that it was developed by courts, who assumed principal responsibility for the development, adaptation, and maintenance of the law on its own, resulted in it earning a degree of deference from the other branches of government such that they remain unwilling to expressly override the common law unless it produces consequences or outcomes that are seen as palpably egregious or inefficient. Even when the law in one of these domains comes to be codified, the common law origins of the rule are seen as a license to courts to continue to develop and adapt the law as circumstances demand. In contrast to freestanding substantive common law is interstitial common law. Interstitial common law refers to substantive law—also judge-made and usually incrementally developed—produced within a domain that is primarily legislative in orientation and focus. Statutes in a variety of different substantive areas consciously refrain from providing actors with elaborate guidance in the nature of bright line rules. Instead, they are framed principally in terms of legal standards, which are then treated as active delegations of law- and policy-making to courts to be done on an ex post basis. Oftentimes, a review of the legislative history behind the enactment of a particular statute reveals Congress’s express desire to delegate such rulemaking power to courts, either for institutional reasons (of the kind discussed previously) or because courts had previously assumed primary responsibility for the rules in that area and were seen as doing a good job in developing them. Interstitial common law, however, is oftentimes hard to identify as such. Since it exists

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518  Research handbook on the economics of IP law volume 1 within a predominantly statutory domain, it is common practice for courts to couch their lawmaking and rule development in the language of interpretation and application of existing law, rather than in terms of making new law. The politics of this analytical move and the problems it produces for the legal system have been the subject of extensive debate by jurists for decades now. The Legal Realists famously claimed that this approach, that is, masking rulemaking in the language of rule interpretation and application, was deceptive and served to undermine the legitimacy of legal rules. In addition, they took it to suggest that legal rules had no constraining (or cabining) effect on judicial reasoning, which in turn fed into the basic legal indeterminacy thesis with which the Realists were associated. Much of this extreme version of the argument has since been rejected. Legal philosophers critical of positivism as a jurisprudential theory came to argue that the is/ ought divide in the law was artificial at best and that this did not imply that law and rules were necessarily indeterminate or normatively vacuous in their content. While the precise contours of these debates need not detain us here, they nonetheless highlight the reality that interstitial common law is much more than just an outlier in the legal system and has served as the site for several well-known disagreements about the very role of law, legal reasoning, and rules. Discussions of substantive common law within the law and economics literature emerged during the first generation of theorizing about the common law therein. It arose principally in the claims of those like Posner (1973), who argues that specific doctrines of the common law—the product of the common law process—are efficiencymaximizing and thus directed at promoting utilitarian and wealth-maximizing ideals. In the years since, others have followed suit. As Rubin (1999) points out, this method of legal analysis, while standard today in the law and economics literature, remains a major departure from economic theorizing more generally, which focuses on a process (e.g., competition or regulation) to measure its efficiency rather than a product. Yet, this approach to theorizing in the law and economics literature remains fairly common and has been extended to discussions about intellectual property as well. It is worth pointing out that the law and economics literature does not, as best as one can tell, deal with the distinction between free standing and interstitial common law, which one sees in the traditional legal literature. Both forms of substantive common law remain well-known and indeed, rather influential, in the world of intellectual property. A.  Freestanding Common Law Intellectual Property Within intellectual property, freestanding common law is perhaps the easiest to identify. Several well-known substantive areas of intellectual property are entirely the product of judicial lawmaking, developed incrementally from within the context of individual disputes. The law of trade secrets, publicity rights, common law copyright, hot news misappropriation, and idea protection remain the foremost examples of such law. While each of these areas today is conceived of as complex and specialized, in their origins they came to be developed through courts’ reliance on certain basic rules and ideas from other more foundational domains of the common law, such as tort and property law. Consequently, their development showed strong signs of a phenomenon that currently receives fairly little scholarly attention: inter-doctrinalism. Inter-doctrinalism refers

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‘The common law’ in the law and economics of IP  519 to the use of concepts, devices, and mechanisms in one area of law to (i) understand disputes in another area, and in the process (ii) develop new rules for the latter area through the incorporation of these devices therein. Inter-doctrinalism remained an important hallmark of the early common law, where today’s rigid divisions between different subject areas did not exist and courts felt at liberty to seek guidance from allied or adjacent legal fields of inquiry. A good example is the rule of ‘foreseeability,’ which contract law came to incorporate as a limiting principle for liquidated damages based on its utility and role within tort law. Trade secret law is in many ways the most well-developed and robust area of freestanding common law intellectual property today. Situated at the interface of contract law, property law, and tort law, its rules embody elements of all three areas, which contemporary scholars consider a demerit for the most part. Indeed, some even suggest that the inter-doctrinal nature of the area, and its obvious overlap with other more foundational ones, should militate in favor of eliminating trade secret law as an independent area altogether. This approach misunderstands the basic role of inter-doctrinalism in the common law and sets a rather ambitious disciplinary boundary for individual intellectual property areas—namely, that they each need to have independently identifiable normative goals that cannot be served by cognate fields. Trade secret law also exhibits a feature previously mentioned: the continuing role of courts in the further development of the law, despite codification by statute. Today, most states around the country have adopted the Uniform Trade Secrets Act (UTSA), which seeks to harmonize and codify trade secret doctrine in an effort to stabilize it and ensure national uniformity. Despite the reality of codification, courts continue to play a primary role in the further development of the law. State legislatures rarely ever have problems with this approach and are instead seen as acquiescing in the principally court-driven approach to the area. Despite codification then, trade secret law remains a body of common law. Freestanding common law intellectual property also differs from its interstitial variant in one other important respect—it is susceptible to complete elimination by courts over time. Much like legislation, where one institutional authority is responsible for the creation and management of the law, to the extent that courts assume primary control over lawmaking in an area, they remain perfectly at liberty to declare (usually over time) that the area is no longer a viable cause of action or repository of rules that should be followed. This of course assumes that there has been no legislative intervention in the area, which would make such a move problematic. But, in the absence of legislation, such an evisceration poses few problems. We see such elimination and constriction in the areas of ‘hot news misappropriation’ and common law copyright, both areas of freestanding common law intellectual property. In being entirely a creation of courts (initially federal, and then state), the true scope and applicability of the misappropriation doctrine have remained something of a mystery. Most recently, however, the Second Circuit in effect rendered the misappropriation doctrine altogether inert by interpreting its domain as being excessively narrow, thereby confining the scope to what are effectively exceptionally rare instances (Barclays Capital, Inc. v. Theflyonthewall.com, Inc., 650 F.3d 876 (2d Cir. 2011)). It appears to be but a matter of time before courts put the doctrine to rest altogether. A similar story may perhaps be told with regard to common law copyright as well.

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520  Research handbook on the economics of IP law volume 1 The law and economics literature on trade secret law represents a good example of economic theorizing around freestanding common law. In their well-known work, David Friedman, William Landes, and Richard Posner (1991) argue, through an examination of individual trade secret doctrines, that the body of law as a whole represents good economic sense. They further speculate that it might have ‘surprising efficiency p ­ roperties’ when viewed as a whole. Of note in their analysis is their observation that their approach connects trade secret law to ‘broader issues in the positive economic theory of the common law.’ B.  Interstitial Common Law Intellectual Property Interstitial common law is far more common within intellectual property and therefore harder to pinpoint and identify. It is easiest to note in areas where a statute in question is either altogether silent on a question or seen as actively delegating further lawmaking to courts. Both within intellectual property and outside, interstitial common law is often confused with judicial gap filling, and it is worth noting the difference between the two. Whereas gap filling operates as essentially a second-best option to fill an oversight or a void left by an incomplete statute, interstitial common law is both more enduring and almost never seen as a lesser (or temporary) alternative to legislative action in the area. In this sense, gap filling is an interpretive exercise in the expansive sense of the term, whereas interstitial common law ordinarily does not hide behind the interpretation/lawmaking divide and embraces its function within the latter category in that divide. There are of course instances when gap filling morphs into active lawmaking, and there are myriad statutory techniques and methods that courts use to this end. Yet, this practice is different from interstitial substantive common law. In intellectual property, the fair use doctrine is perhaps the best known example of such interstitial common law. Within the otherwise comprehensive morass of the Copyright Act, Congress consciously chose to delegate the crafting of limitations and exceptions to copyright’s exclusive rights—under the rubric of ‘fair use’—to courts. Further, Congress has done very little in the three decades since the enactment of the statute to interfere with the courts’ approach in this area. Patent law’s doctrine of nonobviousness is another good example of this phenomenon (35 U.S.C. § 103). While the doctrine/requirement finds mention in the Patent Act, both courts and Congress agree that it should be left to courts to build it through a ‘case-by-case development.’ Despite strongly held views on the doctrine and its applicability to particular contexts, Congress has continued to stay out of the process and acquiesced in the courts’ management of the doctrine. While both fair use and non-obviousness represent instances when a statute covers an issue and actively delegates lawmaking in the sub-area to courts, there are other areas where the statute in question is altogether silent. In these instances, Congress’s acquiescence is inferred from the fact that, despite its repeated updating of the statute, the statute continues to make no mention whatsoever of the topic, despite its centrality to the area. Consider copyright law’s test for infringement. The copyright statute has historically never once made any mention of how courts (and juries) are to approach the analysis and comparison of works in order to determine infringement. And, it is hardly the case that the question is insignificant, since the infringement analysis comes up in an

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‘The common law’ in the law and economics of IP  521 ­ verwhelming majority of copyright infringement lawsuits. The infringement analysis o is, however, entirely a creation of courts. Since the Supreme Court has never weighed in on the subject, we today have multiple common ‘laws’ on the issue, each limited to a particular circuit. Owing to the importance of the issue, it can be fairly assumed that Congress chose to have the statute stay out of the question and acquiesced in the courts’ continuing development of the standards for it. A similar story may be told about patent law’s ‘doctrine of equivalents,’ patent law’s analog to copyright’s substantial similarity analysis for non-literal infringement. Again, the doctrine finds no mention in the patent statute, and yet it has been around for many decades now, such that Congress’s failure to make mention of it in the statute can be reasonably taken to represent its tacit approval of the judicial role in creating and maintaining the doctrine. Interestingly, scholars of law and economics have begun applying economic analysis to several interstitial common law intellectual property doctrines in order to examine their efficiency. The doctrine of equivalents, for instance, has been subjected to significant scrutiny under the rubric of economic efficiency over the years, as has copyright’s fair use doctrine.

VI.  THE COMMON LAW AS STATE LAW The last, and perhaps least frequently employed conception of the common law, is simply a synonym for state law in any given substantive area. The reason for this nominalism originates in US constitutional rules relating to federalism, specifically, the Erie doctrine that originated in the Supreme Court’s case of Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), where the Court famously declared that ‘there is no federal general common law.’ In so doing, the Court effectively concluded that federal courts could no longer apply rules that they, as federal courts, spontaneously developed through the common law method, but instead had to apply common law rules developed by state courts located in the state jurisdictionally related to the dispute. The obvious result of Erie was that the term ‘common law’ came to be associated in certain contexts—especially those related to federalism—with state law rules in the relevant substantive area. In due course, however, numerous substantive areas of state law came to be codified by state legislatures. Nonetheless, the Erie doctrine, as a rule of horizontal federalism, continues to apply in these settings, too. The doctrine cared little about the distinction between judge-made state law and legislative state law, being principally a rule that limited federal court (and Congressional) jurisdiction. In some states, like California, previously common law areas have since come to be codified into statutes, and courts developing the law there rely on a mix of common law precedent and statutory text to craft new rules for the disputes that arise before them. In such instances, it is equally common to simply refer to the state origins of the law as ‘the common law’ despite the codification. In this understanding then, the common law operates as a proxy for a fundamental precept of federalism. This conception of the common law is seen most frequently in areas that are predominantly federal in origin. Intellectual property law is therefore an obvious member of that set. While patent law, copyright law, and trademark law are primarily federal in origin,

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522  Research handbook on the economics of IP law volume 1 there nonetheless exist numerous other intellectual property regimes that are entirely state law in origin. Examples include areas discussed previously such as trade secret law, common law copyright, and misappropriation. It is therefore somewhat common for the term ‘common law’ in the intellectual property context to refer to this set of areas, whose most obvious commonality remains their state law origin. Perhaps the most important legal principle that continues to determine the scope and extent of state intellectual property regimes is that of federal preemption, or the idea that federal law in any given area of overlap trumps and displaces state law. The principle originates in a provision of the US Constitution, which categorically declares that US law, that is, federal law, is to be the ‘supreme’ law of the land. The law of preemption is a complex area of federal law, an area, like so many other constitutional questions, fraught with a lack of clear guidance. Nonetheless, federal preemption is generally understood to be of three different kinds, each of which has direct applicability in the intellectual property context. The first is known as express preemption and comes into play whenever a federal statute expressly preempts and displaces state law on an area of its coverage. The federal copyright statute contains such a provision in 17 U.S.C. § 301, which provides in relevant part that: On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright . . . and come within the subject matter of copyright . . . whether created before or after that date and whether published or unpublished, are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.

Again, the precise contours of this provision have been the subject of various court decisions, especially as they relate to common law copyright and state misappropriation doctrine. Quite independent of express preemption, however, is a principle known as implied preemption, which, as the name suggests, covers situations where the statute is silent on the question of displacement, but the broader context/intent behind the federal statute strongly suggests such displacement. Implied preemption is in turn of two kinds: conflict preemption—situations where a state law is in direct conflict/contravention of a federal law such that it is impossible to comply with both or where a state law creates an obstacle to the working of federal law—and field preemption—where the enactment of the federal statute suggests that Congress chose to occupy the entire field such that its decision not to engage certain areas or questions is deemed to be conscious. Implied preemption remains an issue in the intellectual property setting as well. In one well-known case, the Supreme Court invalidated a Florida state law that granted protection for unpatented boat hull designs using implied preemption (Bonito Boats v. Thunder Craft Boats, 489 U.S. 141 (1989)). The Court’s opinion recognized that in the intellectual property setting, Congress’s decision to protect certain areas/subject matter evinced a conscious decision that areas/subject matter not protected were meant to remain in the public domain, that is, continue unprotected. Preemption within intellectual property is therefore a tricky question in so far as every omission from the coverage of the federal patent, copyright, and trademark laws can be understood as reflective of a Congressional decision to avoid protection for the areas omitted. Determining when and how such state laws survive—especially in the absence of

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‘The common law’ in the law and economics of IP  523 an express preemption provision—remains a complex endeavor which has had the discernible effect of impeding state legislatures’ and courts’ willingness to recognize new rules, rights, and doctrines within state intellectual property. Consequently, federal preemption law operates as more than just a jurisdictional principle in intellectual property. Instead, it works to shape the substantive content of state intellectual property regimes by requiring courts (and legislatures) to find creative ways of differentiating state rules from the federal landscape and justifying such rules on grounds that remain compatible with the overall balance struck by Congress in its enactments. A prime example of such maneuvering is seen in the Second Circuit’s revival of the hot news misappropriation doctrine as a part of New York common law in the case of NBA v. Motorola, 105 F.3d 841 (2d Cir. 1997). By situating the doctrine within the domain of unfair competition, even though it indirectly related to an informational asset, the court successfully managed to carve out some space for the doctrine to work and in the process effectively resurrected it in true common law style. Later courts, however, have been less willing to exhibit such creativity in their opinions. The law and economics literature on the common law does not directly address or adopt this conception of the common law in its analysis, despite intermittently and implicitly examining different state law subjects for their efficiency (e.g., trade secret law, misappropriation). Beyond this substantive examination, however, there remains an important and underappreciated respect in which the state law variant of the common law has correspondence in the law and economics literature relating to the idea of jurisdictional competition. Deriving from the work of the economist Charles Tiebout (1956) on jurisdictional competition, scholars of law and economics have developed theories of ‘legal federalism’ to show how variations in state laws promote robust competition among states, enabling citizens and businesses to vote with their feet and produce an efficient market equilibrium for the public goods at issue (Bratton and McCahery, 1997). Tiebout’s original model begins with the idea that citizen mobility is driven by rational preference revelations such that decisions about relocation are incentivized and motivated by preferences for public goods, which encompass local laws and regulations. This in turn produces local (i.e., state) governments to compete with each other over their public goods offerings to attract citizens making their locational decisions. In the legal literature, this economic idea has been applied over the years to different subjects such as corporate law, banking, and tort law, among others. While it has only ever infrequently been extended to discussions about state intellectual property regimes (i.e., common law intellectual property), the Tieboutian analysis has obvious application within this domain. As states vary their laws relating to trade secrets, publicity rights, misappropriation, and other areas of intellectual property protection, they clearly do so with the intention of both protecting existing interests within their jurisdiction and attracting out-of-state businesses and investments. While a few scholars have begun to explore this line of analysis within intellectual property, it represents an obvious one where insights from public goods economics can inform and motivate the analysis fruitfully.

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VII. CONCLUSION As described in this chapter, the term ‘common law’ has multiple connotations within the law and economics of intellectual property. Each of these connotations brings something unique to the analysis, both descriptively and normatively, a reality that is worth bearing in mind in discussions about the subject. Somewhat disappointingly, the subject has thus far received little systematic analysis and scrutiny from scholars of intellectual property, despite its embodying a variety of theoretical, normative, institutional, and practical lessons.

REFERENCES Balganesh, Shyamkrishna. 2010. ‘The Pragmatic Incrementalism of Common Law Intellectual Property,’ 63 Vanderbilt Law Review 1543–616. Balganesh, Shyamkrishna. 2013. ‘Stewarding the Common Law of Copyright,’ 60  Journal of the Copyright Society of U.S.A. 103–26. Blackstone, William. 1765. Commentaries on the Laws of England. Oxford: The Clarendon Press. Bratton, William, and Joseph McCahery. 1997. ‘The New Economics of Jurisdictional Competition: Devolutionary Federalism in a Second-Best World,’ 68 Georgetown Law Journal 201–78. Brudner, Alan. 1995. The Unity of the Common Law. Berkeley, CA: University of California Press. Cardozo, Benjamin. 1921. The Nature of the Judicial Process. New Haven, CT: Yale University Press. Cardozo, Benjamin. 1924. The Growth of the Law. New Haven, CT: Yale University Press. Coke, Edward. 1794. Coke’s Institutes of the Laws of England. London: E. and R. Brooke. Cooter, Robert. 1979. ‘Liability Rules, Limited Information, and the Role of Precedent,’ 10 Bell Journal of Economics 366–73. Eisenberg, Melvin. 1988. The Nature of the Common Law. Cambridge, MA: Harvard University Press. Frank, Jerome. 1930. Law and the Modern Mind. New York, NY: Brentano’s. Friedman, David, William Landes, and Richard Posner. 1991. ‘Some Economics of Trade Secret Law,’ 5 Journal of Economic Perspectives 61–72. Holmes, Oliver Wendell. 1870. ‘Codes, and the Arrangement of the Law,’ 5 American Law Review 1–13. Holmes, Jr, Oliver Wendell. 1881. The Common Law. Boston, MA: Little, Brown and Company. Kornhauser, Lewis. 1989. ‘An Economic Perspective on Stare Decisis,’ 65 Chicago-Kent Law Review 63–92. Llewellyn, Karl. 1960. The Common Law Tradition: Deciding Appeals. Boston, MA: Little, Brown and Company. Llewellyn, Karl. 2011. The Theory of Rules. Chicago, IL: University of Chicago Press. Mahoney, Paul. 2001. ‘The Common Law and Economic Growth: Hayek Might Be Right,’ 30 Journal of Legal Studies 503–25. Posner, Richard. 1973. Economic Analysis of Law. Boston, MA: Little, Brown and Company. Posner, Richard. 1992. Economic Analysis of Law. Boston, MA: Little, Brown and Company. 4th ed. Pound, Roscoe. 1906. The Spirit of the Common Law. Boston, MA: The Boston Book Company. Priest, George. 1977. ‘The Common Law Process and the Selection of Efficient Rules,’ 6 Journal of Legal Studies 65–82. Rubin, Paul. 1977. ‘Why Is the Common Law Efficient?,’ 6 Journal of Legal Studies 51–63. Rubin, Paul. 1980. ‘Decision Making and the Efficiency of Law: A Comment on Rizzo,’ 9 Journal of Legal Studies 219–334. Rubin, Paul. 1999. ‘Judge-Made Law,’ in Boudewijn Bouckaert and Gerrit de Geest, eds., Encyclopedia of Law and Economics, Volume V. The Economics of Crime and Litigation. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Schauer, Frederick. 1989. ‘Is the Common Law Law?,’ 77 California Law Review 455–72. Solum, Lawrence. 2004. ‘Procedural Justice,’ 8 Southern California Law Review 181–231. Tiebout, Charles. 1956. ‘A Pure Theory of Local Expenditures,’ 65 The Journal of Political Economy 416–24.

Case List Barclays Capital, Inc. v. Theflyonthewall.com, Inc., 650 F.3d 876 (2d Cir. 2011). Bonito Boats v. Thunder Craft Boats, 489 U.S. 141 (1989). Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994).

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‘The common law’ in the law and economics of IP  525 Cariou v. Prince, 714 F.3d 694 (2d Cir. 2013). Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). Folsom v. Marsh, 9 F. Cas. 342 (C.C.D. Mass. 1841). International News Service v. Associated Press, 248 U.S. 215 (1918). NBA v. Motorola, 105 F.3d 841 (2d Cir. 1997). United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947).

Legislative Materials 17 U.S.C. § 107. 17 U.S.C. § 301. 35 U.S.C. § 103. H.R. 94-1476, 94th Cong. (2d Sess. 1976).

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20.  In the shadow of the law: the role of custom in intellectual property Jennifer E. Rothman* 2

Contents I. Introduction II. The Role of Custom Outside IP III. Industry Practices and Social Norms in the IP Space A. Informal Industry Practices and Social Norms 1. Clearance culture 2. IP-adjacent norms B. Formalized Practices and Guidelines 1. Classroom Guidelines 2. In-house guidelines 3. Best practices statements 4. Creative Commons IV. The Role of Custom in Formal Law A. Custom as Evidence of Market Effects, Commerciality, and Damages B. Custom as a Proxy for What Should Be Done C. Custom as a Proxy for What Is Reasonable D. Custom as Evidence of What Is Usually Done E. Custom as Evidence of What Parties Intended V. Questioning Reliance on Custom A. The Questionable Optimality of Industry-Driven IP Practices B. Expectations Should Not Determine IP Rights C. Autonomy Interests Do Not Justify Reliance on Custom VI. Valuing Custom A. Certainty of the Custom B. Motivation for Custom C. Representativeness D. Implications VII.  Lessons for IP Policy References

*  Professor of Law and Joseph Scott Fellow, Loyola Law School, Loyola Marymount University, Los Angeles. I consider many of the issues raised in this chapter in greater detail in ‘The Questionable Use of Custom in Intellectual Property,’ 93 Virginia Law Review 1899 (2007).

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I. INTRODUCTION Custom encompasses many different things, from regularly occurring industry practices, to social norms, to ongoing practices that have existed from time ‘immemorial.’ Custom in all these senses has had a tremendous influence on intellectual property (‘IP’) law, from affecting what happens outside of the courts in the trenches of the creative, and technology- and science-based industries, to influencing how courts analyse infringement and defenses in IP cases. For decades, many scholars overlooked or dismissed the impact of custom on IP law. This happened in part because of a belief that the dominant statutory frameworks that govern IP left little room for custom, and also because of a view that ‘intellectual goods’ lacked the ‘longstanding’ customs and norms that exist in the context of real property (Carter, 1992, p. 131; Long, 2004, p. 484). In the last ten to fifteen years, however, the landscape has shifted and more attention has been given to considering how custom affects IP entitlements both outside and inside the courtroom. Scholars like myself have brought attention to the profound impact custom has in IP. My work has particularly focused on the theoretical frames that inform the incorporation of custom into the law, as well as on documenting some of the practices and norms of various communities that use IP (Rothman, 2007). In this chapter, I provide an overview of the role of custom in IP, and the scholarship in the field. I first situate the discussion in the broader context of the treatment of custom outside of IP, and then consider some of the dominant practices and norms within IP, focusing particularly on those involved in copyright law. I discuss the incorporation of custom by the courts and criticize the often unreflected reliance on custom. After providing this background, I question the relevance of most customs to set legal standards in IP disputes, and suggest limits on custom’s role in IP cases. Finally, I suggest implications that flow from this analysis, as well as recommend future areas of research for scholars.

II.  THE ROLE OF CUSTOM OUTSIDE IP To understand the role of custom in IP, one must first contextualize the treatment of custom in the law more broadly. The importance of custom in determining governing law has a long tradition in Anglo-American law. One of the foundational features of English common law was its use of custom to set legal rules. Prior to the institution of an organized legal system, practices and norms regulated local behavior and facilitated the resolution of disputes. As more formal legal systems developed in England, custom shaped and sometimes defined the law. The incorporation of custom by courts served an important role in getting communities to support the authority of the growing judiciary. Under common law dating back to at least the late 1400s in England, ‘general customs’ formed the basis of the law. William Blackstone (1765), one of the foremost commentators on the early common law, defined the common law in his influential eighteenth-century Commentaries on the Laws of England as ‘[t]hat ancient collection of unwritten maxims and customs [that] had subsisted immemorially.’ The two main advantages of using longstanding community customs (either local or kingdom-wide) were that they were thought to be ‘universally known’ and were viewed as originating with the communities and people rather than being imposed by the king. Communities therefore were more willing to defer

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528  Research handbook on the economics of IP law volume 1 to custom-based legal rules that largely reflected their prior understanding of appropriate conduct (pp. 17, 45, 63–4, 67–8, 76–8; Baker, 2002, pp. 1–10; Postema, 1986, pp. 3–4). Much of the Blackstonian discussion of custom focused on its role in defining the scope of public use and access rights to private land. In contrast to property doctrines like prescription, custom permitted access and use not by a particular person but by the public at large. In a number of instances, the public obtained access and use rights to private property on the basis of prior customary uses of that land. English courts held that the public could hold annual dances, conduct horse races, play cricket, fish, gather wood, and graze animals on private lands because they had customarily used the land for those purposes (Blackstone, 1765, 76–8; Rose, 1986, pp. 739–41, 758–9). Carol Rose has described some of these customary uses as ‘recreational’ in nature and preferred because they supported social engagement and connections within a community (Rose, 1986, pp. 723, 767–70, 779–81). Many of the customary uses were also related to providing basic subsistence needs. During the enclosure movement in England beginning in the sixteenth and seventeenth centuries, landowners increasingly excluded citizens from land that they had previously relied on for food and fuel. The English historian E.P. Thompson (1991) describes custom during this period as a response to this enclosure of the land. The customary use arguments challenged efforts by property owners to move property in the direction of a virtually absolute right of the landowners with no permissible public use or access (Thompson, 1991, pp. 106–84). Rather than being the preferred starting point for legal rules, today the status of custom is contested and debated. Different areas of law (and different inquiries within those areas) treat custom differently. In tort law, for example, there are longstanding debates about whether the development of customary safety precautions by a particular industry should be an absolute defense to tort liability, no defense at all, or simply some evidence of negligence or lack thereof. The dominant contemporary principle is that custom should be some evidence of reasonable care, but not its measure (The T.J. Hooper, 60 F.2d 737 (2d Cir. 1932); Landes and Posner, 1987, pp. 132–3; Epstein, 1992a; Morris, 1942). In contract law, there is a developed literature analysing whether industry practices should be read into contracts as implied terms and also, less controversially, whether such practices should inform the interpretation of existing contract terms (Bernstein, 1999; Epstein, 1999). In property law, custom primarily arises as a basis to assert public access to land that has long been used despite competing private property claims, often in the context of beaches (State ex. rel. Thornton v. Hay, 462 P.2d 671, 676–8 (Or. 1969); Rose, 1986, pp. 713–14). Scholars who have considered custom and the law largely have focused on how custom can govern various communities without regard to formal laws or adjudicatory mechanisms. Robert Ellickson’s (1991) influential book Order without Law: How Neighbors Settle Disputes considered the ranching practices of cattle ranchers in Northern California, and determined that social norms and longstanding practices trumped more formal legal rules and discouraged resort to the legal system. The political scientist Elinor Ostrom (1990), in her book Governing the Commons: The Evolution of Institutions for Collective Action, similarly analysed the way various communities develop systems of self-government and self-organization to manage and control the use of common-pool resources. Lisa Bernstein (1992; 2001), in a series of articles, documented a variety of

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In the shadow of the law: the role of custom in IP  529 industry practices that govern relationships in different commercial fields, including the diamond and cotton industries. Over the last decade, scholars have begun to recognize that IP is not an exception to these narratives about custom, but instead yet another example of the influence of custom on both de facto and de jure rights. Custom has a powerful impact on what is happening in the trenches of creative and other IP-dominated industries and also influences the governing legal regimes. Just as the enclosure movement in England sparked arguments in favor of granting customary use rights to the public, concerns over the increased propertization of intangible works has generated efforts to articulate similar justifications for public use of works that can form crucial pieces of our identities and culture.

III. INDUSTRY PRACTICES AND SOCIAL NORMS IN THE IP SPACE Numerous industry practices and norms govern how IP and quasi-IP rights function as a de facto matter. In copyright law, custom has affected determinations of authorship, ownership, copyrightability (such as whether something is original), and whether a use is infringing—especially whether something is an idea or expression, or composed of scènes à faire (unprotectable stock or commonplace elements). Uncertainties in IP law incentivize the creation of custom. Some of this uncertainty is generated by the significant impact that changing technology has had on the production and distribution of IP. Other uncertainties in IP law are generated by flexible, and sometimes unpredictable, legal standards. The best example of this is copyright’s fair use defense. A four-factor analysis is used to evaluate whether a use is fair and therefore not infringing. The multi-factor analysis has often been criticized as ‘muddled,’ ‘troublesome,’ and ‘ad hoc’ (Weinreb, 1990, pp. 1138–140; Dellar v. Samuel Goldwyn, Inc., 104 F.2d 661, 662 (2d Cir. 1939); Leval, 1990, p. 1105). Because of the unpredictability and expense of litigating fair use defenses, many players in the IP industries prefer to agree among themselves on some boundaries of fair use or play it safe by conforming to industry practices, such as licensing, rather than risk adverse court decisions if they guess wrong about a potential fair use (Rothman, 2014, pp. 1602–5). I consider a variety of practices that have developed in the IP space, particularly those that have arisen in the context of copyright law, and the navigation of its fair use defense. A.  Informal Industry Practices and Social Norms 1.  Clearance culture One of the most influential set of practices is the common licensing of works, marks, inventions, and identities. Producers, publishers, and distributors often require creators and inventors to license or ‘clear’ all potentially protected IP, even when there are strong defenses for the use of works, trademarks, or inventions, or when the protectability of the work, mark, or invention at issue is questionable. Instead of challenging the validity of the copyright, trademark, or patent, or relying on fair use, First Amendment, or other defenses, IP users often seek clearance. Patricia Aufderheide and Peter Jaszi (2004) have dubbed this preference for licensing the ‘clearance culture’ (p. 22; Heins and Beckles, 2005,

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530  Research handbook on the economics of IP law volume 1 pp. 5–6). The clearance culture is primarily motivated by efforts to avoid litigation and operates without regard to what IP law requires or what, as a normative matter, should be protected by IP rights. As the Sixth Circuit has observed, it is ‘cheaper to license than to litigate’ (Bridgeport Music v. Dimension Films, 410 F.3d 792, 802 (6th Cir. 2005)). When works, marks, or people’s identities cannot be licensed, gatekeepers often demand their removal. These clearance practices are firmly entrenched in all media, including music, fine arts, and publishing. Clearance culture can be seen, for example, in limits on the content of biographies. Even though courts have traditionally given great latitude to authors to refer to individuals, trademarks, and copyrighted works without permission in historical, nonfiction works, publishers routinely demand clearance of a subject’s copyrights, trademarks, and publicity rights (Max, 2006, pp. 34, 37–8). Many of the potential IP claims in such circumstances are facially meritless, but risk-averse publishers and authors nevertheless abandon projects or follow the restrictions set forth by alleged property holders (Max, 2006, pp. 34, 37–8; Max, 2007, pp. 54, 66). The film and television industry similarly clears potentially copyrighted or trademarked works or marks, as well as images and references to individuals, especially well-known public figures, even when the uses would likely be determined fair if litigated (Rothman, 2007, pp. 1912–15). Inventors and developers also often license patents when the validity of a patent is questionable or the infringing status of an inventor’s product is uncertain. Companies license to avoid costly patent litigation and hold-up problems with a product that has already been developed or marketed (Farrell and Merges, 2004, pp. 955–60; Lemley and Shapiro, 2007, pp. 1992–3). Clearance culture practices have a profound influence on what gets made and the content of such works. When licensing is not an option, either because it is cost-prohibitive or an IP owner does not like the way its IP will be used, creators and inventors often alter their works or forgo some projects altogether. Clearance culture practices are enforced extrajudicially by fear of litigation costs, in-house policies mandating clearance, concerns over forfeiting large investment or start-up costs, and by limits on funding, insurance, and distribution. 2.  IP-adjacent norms Several recent scholarly works have analysed communities in which traditional IP law does not function well or participants choose not to pursue legal remedies, even when they are available. Much of this literature focuses on critiquing the incentive rationale for protecting IP by demonstrating that creative works and inventions are produced in the absence of IP protection (Raustiala and Sprigman, 2006). But this scholarship also reveals the myriad ways in which communities can erect customary protections for creative and inventive works outside the judicial system and enforce them using community norms. Economists Emmanuelle Fauchart and Eric von Hippel (2008) have documented norms to protect food recipes in the absence of effective formal IP law. They found that a variety of customs govern French chefs, including norms that the chefs should not copy or share recipes without permission. The chefs also encourage and seek attribution for their recipes and innovations. Shaming and ostracizing serve to enforce these norms. Dotan Oliar and Christopher Sprigman (2008) have identified similar practices in the world of stand-up comedy. They found norms that discourage joke-stealing and encourage originality. These norms are enforced by obstructing employment, shaming, and the occasional use of

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In the shadow of the law: the role of custom in IP  531 v­ iolence. David Fagundes (2012) has studied norms surrounding the adoption and policing of roller derby names using a master roster kept by community members and enforced by positive reinforcement and shaming. Drawing on the work of Elinor Ostrom in the world of common-pool resources, Michael Madison, Brett Frischmann, and Katherine Strandburg (2010) have surveyed a variety of IP-based communities, such as those that use open-source software, or that contribute to Wikipedia and the Associated Press. They identify practices that help manage these ‘cultural commons.’ Norms governing the use of IP have also developed in a variety of subcultures that rely on uses of others’ IP. In the world of online fan fiction, for example, norms require that attribution be given when material is borrowed from another fan’s website. Copyright laws have little sway in fan-fiction communities. Instead, fan-fiction authors conform to their own social norms, such as that the sites be nonprofit, add creative material to the original material, and provide appropriate credit. Deviation from the fan-fiction norms may lead to shaming within that subculture, which is usually enough of a deterrent to keep the norms intact (Tushnet, 2007). B.  Formalized Practices and Guidelines More formal customary practices have also been used in an effort to avoid litigation. Many of these guidelines and agreements have developed in the context of copyright’s fair use doctrine. Some industries and user groups have sought to insulate themselves from liability for copyright infringement by agreeing in a more formal manner to a set of standard copying practices. I highlight some of the most influential of these policies, guidelines, and ‘best practices’ statements. 1.  Classroom Guidelines The most influential of the extralegal copyright guidelines is the ‘Agreement on Guidelines for Classroom Copying in Not-For-Profit Educational Institutions,’ commonly referred to as the ‘Classroom Guidelines.’ While drafting the fair use section of the 1976 Copyright Act, Congress recruited industry representatives, in particular publishers, to develop their own guidelines for what constituted fair use of writings and music in educational settings. The chairman and other members of the subcommittee working on the copyright revision ‘urged the parties to meet together independently in an effort to achieve a meeting of the minds as to permissible educational uses of copyrighted material’ (H.R. Rep. No. 94-1476, p. 67). Congress contended that ‘workable voluntary arrangements’ were the preferable solution to questions regarding the scope of fair use, at least in the context of educational uses (H.R. Rep. No. 90-83, pp. 33, 36; H.R. Rep. No. 94-1476, pp. 67–8). The Classroom Guidelines take a narrow view of what sort of uses of copyrighted works are permissible in the educational context. The Guidelines provide that single copies may be made for or by teachers for use in teaching or research. These copies are limited to those of ‘a chapter from a book, an article from a periodical or newspaper, a short story, short essay or short poem [and a] chart, graph, diagram, drawing, cartoon or picture from a book, periodical or newspaper.’ Multiple copies, not exceeding one copy per enrolled student, are permitted under limited circumstances in which such uses meet tests for brevity, spontaneity, and cumulative effect. Brevity is defined as less than 250 words of a poem and 500–2500 words of a prose work. The copies must also include a

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532  Research handbook on the economics of IP law volume 1 notice of copyright (H.R. Rep. No. 94-1476, pp. 68–9). Although the Guidelines purport to set forth the minimum allowable uses, many universities, other educational institutions, and libraries have followed them as if they represent the maximum allowable uses (Rothman, 2007, pp. 1920–21). Many universities have handed out the Guidelines to their professors and mandated conformity with them. In 2006, William W. Fisher and William McGeveran (2006) estimated that 80 percent of American universities comply with the Guidelines (p. 57). Recently, a few universities have moved away from this conservative approach. The University of Minnesota, for example, recently agreed to defend professors if they reasonably believe that their use of a copyrighted work is fair, even if the use exceeds the Classroom Guidelines (University of Minnesota, 2017). At the beginning of 2014, New York University also withdrew its requirement that faculty comply with the Classroom Guidelines and now allows its faculty to conduct an independent fair use analysis (compare New York University (2014) with New York University (1983)). 2.  In-house guidelines Many companies and organizations have developed internal guidelines that govern the treatment of IP within their own institutions. In both the public and private sectors, guidelines have been developed to control internal copying and the use of others’ inventions, works, marks, and identities. The clearance practices that occur as an informal practice are often specifically mandated by in-house guidelines. In the film and television industry, for example, networks, studios, and production companies develop ‘Standards and Practices’ which control content, including the use of copyrightable works, trademarks, names, and images. Most film studios mandate the clearance of all copyrighted works regardless of the manner in which they appear, the elimination of any references to trademarks in dialogue, the removal of or blurring of trademarks that appear on screen, and the clearance or removal of proper names. Many libraries also have developed in-house guidelines to regulate photocopying, interlibrary loans, and journal purchases. The primary purpose of these guidelines is to reduce the likelihood of a lawsuit, and, if sued, to reduce the likelihood of findings of bad faith or ‘willfulness’ on the basis of compliance with such internal guidelines. In the context of the entertainment industry, some of these practices also facilitate product placement and advertising deals (Rothman, 2007, p. 1922). 3.  Best practices statements Scholars and various use communities have recently sought out custom as a way to define and establish fair use. This interest in custom is not only driven by efforts to persuade courts to accept defenses in individual cases, but also by efforts to encourage individuals and organizations to assert fair use rather than to conform with the dominant, risk-averse clearance culture. Most notably, the best practices statements developed by Peter Jaszi, Patricia Aufderheide, and others at American University and its Center for Social Media seek to establish boundaries of fair use in the context of communities that frequently use copyrighted works owned by others. The Documentary Filmmakers’ Statement of Best Practices (Center for Social Media, American University, 2005) is the most well known of these statements. This statement was the first one released by the Center and sets forth categories of uses of others’ copyrighted works that its drafters consider fair in the context of documentary films. The privileged categories are critique or commentary, illustrative quoting, incidental

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In the shadow of the law: the role of custom in IP  533 uses (those captured during the filming process), and uses in historical sequences. Each of these categories contains a number of ‘limitations.’ In the context of the illustrative category―in which uses are generally considered fair if the use ‘illustrate[s] an argument or point’―such preferred uses are limited to instances in which documentarians: assure that: the material is properly attributed . . . [; that] quotations are drawn from a range of different sources[; that] each quotation . . . is no longer than is necessary to achieve the intended effect; [and that] the quoted material is not employed merely in order to avoid the cost or inconvenience of shooting equivalent footage.

These and the other limitations dramatically contract the scope of permissible uses under these statements. The Filmmakers’ Statement appears to have encouraged more reliance on fair use. After its adoption, various film industry gatekeepers, such as errors and omissions (‘E & O’) insurers and production companies, reconsidered their policies and have become more willing to insure and distribute documentary films that have not licensed all copyrighted material used in the films (Aufderheide and Jaszi, 2007). It is difficult, however, to know exactly how much influence the statements had, given that a number of other changes in the IP landscape occurred during this same time period. For example, legal clinics at major law schools and nonprofit organizations offered to provide free legal representation to those asserting fair use, and advocacy groups lobbied E & O companies to change their procedures (Rothman, 2010a). 4.  Creative Commons Some efforts to encourage the use of copyrighted works have focused on creators, rather than users. A subsection of creators prefer a more permissive copyright regime than the default—one that makes it easier for third parties to use and share works. One of the most successful of these creator-focused efforts is Creative Commons, a nonprofit organization formed in 2001 with the idea of layering an alternative, formalized licensing regime on top of existing copyright law. Hundreds of millions of works have been licensed using Creative Commons licenses. Major bands and recording artists, such as Nine Inch Nails and David Byrne, have used these licenses, as have Al Jazeera, Google, the California Digital Open Source Library, and the White House (Creative Commons Brief as Amici Curiae, Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008); Creative Commons, 2015; Rothman, 2014, p. 1625). The most common Creative Commons licenses require attribution, but allow noncommercial derivative works or adaptations if the new work is distributed in a share-alike manner—meaning under the same Creative Commons licensing regime under which it is licensed (Creative Commons, 2015). Thus, these licenses alter the usual baseline of copyright protection which does not require attribution for uses to be determined fair, and does not allow uses of noncommercial works that do not otherwise meet the criteria for finding that they are a fair use of the work.

IV.  THE ROLE OF CUSTOM IN FORMAL LAW These customary practices have not only affected how things operate on the ground, but also the formal law, largely by influencing courts in IP cases. Courts sometimes point to

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534  Research handbook on the economics of IP law volume 1 nonconformity with industry practices as a basis to find infringement or to reject defenses to infringement. Only rarely have courts referred to conformity with industry practices as a possible basis for a defense. When courts incorporate custom, either implicitly or explicitly, they often use customary practices as proxies for other considerations, such as what constitutes a ‘reasonable’ or ‘ethical’ use of another’s IP or what will be the market impact of allowing such uses. I consider here the primary ways that courts use custom when deciding IP issues, and raise some concerns with the current treatment of custom. A.  Custom as Evidence of Market Effects, Commerciality, and Damages Courts often consider what is customarily done as evidence of whether there is a negative market effect caused by the use of another’s IP. The most prominent example of this is when courts look at ‘customary pricing’ in evaluating copyright’s fair use defense. Two of the four statutory factors for determining fair use involve consideration of the market for a copyrighted work. The first factor looks at the character of the use and in particular whether the use is commercial. A nonprofit or noncommercial use weighs in favor of a finding of fair use, while a commercial use weighs against such a finding. The fourth enumerated factor also considers the market by asking courts to consider how the relevant use will affect the market for the copyrighted work (17 U.S.C. § 107). Courts view both existing and potential licensing markets as an indication of whether a use is for profit (or ‘commercial’) and also whether a given use is likely to harm the market for the work at issue. Courts have sometimes used custom to determine the existence of such markets. In Ringgold v. Black Entm’t Television, 126 F.3d 70 (2d Cir. 1997), for example, the United States Court of Appeals for the Second Circuit rejected a fair use defense when a television sitcom used the plaintiff’s artwork in the background of a set without permission. The court pointed to the custom in the TV and film industries of licensing copyrighted works used as set-dressing. If not for the consideration of these industry clearance practices, Black Entertainment Television (‘BET’) had a convincing fair use defense—the poster containing the plaintiff’s artwork was visible for less than 30 seconds, was never the focus of any shot, and was not referred to in the dialogue. The Ringgold court, however, concluded that BET had failed to pay the ‘customary price’ for using Ringgold’s work by not licensing her art and therefore could not avail itself of the fair use defense. Courts have relied on similar industry licensing practices to evaluate the legitimacy of photocopying for educational and research purposes. In Princeton Univ. Press v. Mich. Document Servs., 99 F.3d 1381, 1391 (6th Cir. 1996), the Sixth Circuit Court of Appeals rejected a fair use defense in the context of university course packets in large part because the defendant did not follow the industry practice of licensing works used in such packets. Similarly, in Am. Geophysical Union v. Texaco, Inc., 60 F.3d 913 (2d Cir. 1994), the Second Circuit rejected Texaco’s fair use defense largely because of noncompliance with industry custom. The court was persuaded that the copying of journal articles by Texaco’s research scientists was unfair at least in part because many major corporations got licenses for similar copying. Nonconformity with industry practices in both cases convinced the courts that the uses were commercial and caused market harm. These courts’ analyses stem in part from the Supreme Court’s decision in Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539 (1985). In Harper & Row, the Court concluded that: ‘[t]he crux of the profit/nonprofit distinction is not whether the sole

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In the shadow of the law: the role of custom in IP  535 motive of the use is monetary gain but whether the user stands to profit from exploitation of the copyrighted material without paying the customary price’ (p. 562). When a defendant is found to have not paid the ‘customary price,’ the defendant’s use is often judged ‘unfair.’ There are numerous problems with relying on the customary pricing analysis. The fact that licensing may be common should not be used to determine that a use is for profit. Even ‘educational’ and religious uses can be viewed by courts as commercial under such a ‘customary price’ analysis (Soc’y of Holy Transfiguration Monastery v. Gregory, 689 F.3d 29, 61 (1st Cir. 2012); Cambridge Univ. Press v. Patton, 769 F.3d 1232, 1261–268 (11th Cir. 2014)). Several scholars, including myself, and a number of jurists have criticized this reliance on licensing evidence and have warned of the circularity dangers inherent in considering licensing opportunities as a basis for market harm. If a use is fair, there will be no licensing market, and if a use is not fair, a licensing market will develop. When courts rely on such licensing markets, particularly in an era of clearance culture, they abdicate their role as independent evaluators of what uses are fair (Rothman, 2007, pp. 1933–4; Princeton Univ. Press v. Mich. Document Servs., 99 F.3d 1381, 1391 (6th Cir. 1996); id. at 1397 (Merritt, J., dissenting); id. at 1400–404 (Ryan, J., dissenting) (Am. Geophysical Union v. Texaco, Inc., 60 F.3d 913, 929, 931 (2d Cir. 1994); id. at 936–9 (Jacobs, J., dissenting); Gibson, 2007, pp. 895–8; Pallas Loren, 1997, pp. 38–41). B.  Custom as a Proxy for What Should Be Done Courts often view failure to conform with industry practices as both unethical and unfair. In Roy Exp. Co. Establishment of Vaduz v. CBS, 503 F. Supp. 1137 (S.D.N.Y. 1980) and Roy Exp. Co. Establishment of Vaduz v. CBS, 672 F.2d 1095 (2d Cir. 1982), both a district court and the Second Circuit Court of Appeals held that failing to license film clips when it is industry custom to do so was unethical and a basis for rejecting both fair use and First Amendment defenses to copyright infringement. In Roy Export, CBS aired a retrospective on the great film actor and director Charlie Chaplin soon after his death. CBS incorporated in its broadcast footage from Chaplin’s films. In upholding a $700,000 jury verdict against CBS, the district court found persuasive the fact that ‘CBS’[s] conduct violated not only its own guidelines but also industry standards of ethical behavior.’ The court pointed to the industry’s licensing practices as evidence of harm to the potential market for the plaintiffs’ copyrighted works and of ‘bad faith’ (Roy Exp. Co. Establishment of Vaduz v. CBS, 503 F. Supp. 1137, 1146–7 (S.D.N.Y. 1980)). Although the issue of fair use was not raised on appeal, the Second Circuit, in affirming the district court decision, pointed to CBS’s violation of its in-house guidelines and industry licensing practices as evidence of ‘commercial immorality’ and a basis for rejecting its First Amendment defense against unfair competition and copyright infringement claims (Roy Exp. Co. Establishment of Vaduz v. CBS, 672 F.2d 1095, 1100, 1105 (2d Cir. 1982) (emphasis added)). The Supreme Court in Harper & Row cited Roy Export when it set forth its ‘customary price’ standard, suggesting that the customary price analysis is more of a normative concept than an economic one (Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 562 (1985); Roy Exp. Co. Establishment of Vaduz v. CBS, 503 F. Supp. at 1144). Even though the Classroom Guidelines are not legally binding and were intended to state a minimum floor of allowable educational uses of copyrighted works, courts have

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536  Research handbook on the economics of IP law volume 1 often viewed copying exceeding the Guidelines as unfair and done in bad faith. In Basic Books v. Kinko’s Graphics, 758 F. Supp. 1522 (S.D.N.Y. 1991), a federal district court considered the copy shop Kinko’s infringement in bad faith partly because Kinko’s inhouse handbook conceded that its copying practices for course packets exceeded those permissible under the Guidelines (pp. 1544–5). Defendants are also sometimes found to have acted willfully or recklessly when they fail to conform with customary practices. Such findings can generate higher statutory damages, punitive damages, and possibly criminal liability. By contrast, conformity with custom often provides a basis for a finding of good faith even if infringement is ultimately found, thereby limiting damages and avoiding the danger of criminal penalties. C.  Custom as a Proxy for What Is Reasonable Sometimes courts try to figure out whether a use of another’s IP is reasonable or appropriate, particularly in the context of copyright’s fair use defense. Although this is not strictly speaking part of the fair use analysis, it often cuts to the heart of the evaluation a court is trying to make. It is not easy to define what constitutes a reasonable use of another’s IP. A reasonable use is not the same as a just or moral use; instead, like the reasonable person standard in tort law, such a consideration asks more generally what is appropriate in a given circumstance. Because it is difficult to determine when a use of another’s IP is reasonable, courts often use custom as a shortcut or proxy for such a determination. Nowhere is this approach more evident than in copyright’s fair use doctrine. The traditional common law fair use standard asked courts to evaluate whether a use was ‘reasonable and customary’ (Shapiro, Bernstein & Co. v. P.F. Collier & Son Co., 26 U.S.P.Q. 40, 42 (S.D.N.Y. 1934); Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 550 (1985); De Wolf, 1925, p. 143). Although this traditional formulation of fair use asks courts to consider both what is reasonable and what is customary, modern courts often conflate the two inquiries so that what is customary becomes what is reasonable. Courts have judged uses fair solely on the basis that such uses have customarily been practiced. This approach turns on a court’s conclusion that a use that has long been allowed is reasonable. One example of this analysis is the common acceptance of the use of copyrighted works in biographical works because such uses are considered ‘customary’ (New Era Publ’ns Int’l, ApS v. Carol Publ’g Grp., 904 F.2d 152, 157 (2d Cir. 1990); Rosemont Enters. v. Random House, Inc., 366 F.2d 303, 307 (2d Cir. 1966)). Another area where courts have relied on custom as a proxy for what is reasonable is in the context of copyright’s work-for-hire doctrine. Many universities expressly allow faculty members to retain copyrights over their lectures, course materials, and scholarly works. In the few instances in which such faculty ownership has been contested, courts have often concluded that such ownership is an appropriate exception to the usual work-for-hire rules given the longstanding nature and commonality of the norm allowing faculty to retain such rights (Hays v. Sony Corp. of Am., 847 F.2d 412, 416–17 (7th Cir. 1988); Weinstein v. Univ. of Illinois, 811 F.2d 1091, 1094 (7th Cir. 1987); but see Forasté v. Brown Univ., 290 F. Supp. 2d 234, 238–9 (D.R.I. 2003); Pittsburgh State Univ. v. Kansas Bd. of Regents, 122 P.3d 336, 345–7 (Kan. 2005)). Courts have also looked to customary practices as an indication of what uses reasonable authors would permit of their works―a consideration that some courts treat as highly indicative of

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In the shadow of the law: the role of custom in IP  537 whether a use is fair (Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 550–51 (1985)). D.  Custom as Evidence of What Is Usually Done Sometimes courts look at evidence of custom simply to determine what is usually done in a particular industry without using custom for second-order evaluations of what is reasonable, ethical, or optimal. A number of legal issues in IP law legitimately require consideration of industry practices. For example, whether particular features of a work are common stock or standard elements, not capable of infringing another’s copyright under the scènes à faire doctrine, turns in part on customary practices. Whether one can use copyright law to protect characters that are mutant superheroes with special powers turns on the conventions of the superhero genre. Because it is customary for superheroes to have such qualities, a copyright holder cannot prevent others from also creating superheroes who are mutants with extraordinary powers (Twentieth Century Fox Film v. Marvel Enters., 155 F. Supp. 2d 1, 37–8, 42–3 (S.D.N.Y. 2001)). Similarly, in the context of computer software, the doctrine of externalities denies copyright protection to aspects of software that are standard programming features. Custom determines what programming practices are considered standard programming features (Dun & Bradstreet Software Servs. v. Grace Consulting, 307 F.3d 197, 214–16 (3d Cir. 2002); Comput. Assocs. Int’l v. Altai, Inc., 982 F.2d 693, 709–10 (2d Cir. 1992)). Custom also matters in trademark infringement and false endorsement cases, which turn on consumer confusion. Consumer perceptions about whether permission is usually required for a particular use of a trademark or celebrity name will likely influence whether consumers will think the use was sponsored or endorsed. E.  Custom as Evidence of What Parties Intended Finally, courts consider custom when determining parties’ intentions in explicit and implied contracts related to IP rights, in claim construction of patents, and when interpreting statutory language (May v. Morganelli-Heumann & Assocs., 618 F.2d 1363, 1367–8 (9th Cir. 1980); Jim Henson Prods. v. John T. Brady & Assocs., 16 F. Supp. 2d 259, 262, 267–77, 282, 285–6, 288–90 (S.D.N.Y. 1997)). Such straightforward uses of custom are usually appropriate and not controversial (Rothman, 2007, pp. 1945–6, 1974, 1978–9).

V.  QUESTIONING RELIANCE ON CUSTOM Given courts’ frequent consideration and incorporation of custom, it is important to consider both whether and when it is appropriate to rely on industry practices and social norms to determine the scope of IP rights. Three main justifications have been advanced for incorporating custom into other areas of the law: First, that a given industry can best determine its optimal governing rules; second, that incorporating custom fulfills parties’ expectations; and finally, that individuals or industries should establish their own rules to further their autonomy-based interests. To the extent that these are legitimate bases to

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538  Research handbook on the economics of IP law volume 1 incorporate custom elsewhere, they are less convincing in the context of IP. I will briefly consider each of these justifications, and how well they fit with considerations in the IP realm. A.  The Questionable Optimality of Industry-Driven IP Practices If an industry or community is likely to establish optimal practices, or at least rules preferable to those that would independently develop in the courts or through legislation, it makes sense to defer to industry practices. In the IP context, however, practices are likely to develop in suboptimal ways and ultimately be inferior to court or legislative resolutions. Defining what is meant by optimal practices in the context of IP is challenging. Nevertheless, any IP regime requires a balancing of IP owners’ interests and those of users. The incentive rationale (one of the primary justifications for IP) has a built-in argument for allowing access to and use of works. Under the incentive-rationale theory, copyrightable works and patentable inventions and discoveries are protected in part to encourage their production and distribution. This justification rests not on authorial or inventor rights, but instead on the encouragement of production for the public’s benefit. Under this rubric, IP ownership rights should not be absolute, because then the goal of promoting broader progress for the public good would be thwarted. The incentive rationale also has a built-in ceiling—there is no need to provide additional protection once no further incentive to produce is created. Accordingly, fulfilling the goals of the incentive rationale requires consideration of the interests of both IP creators and users. Personality-based justifications for IP protection also require the allowance of some use of others’ copyrighted works both for creative, artistic purposes, and because users and subsequent creators have their own personality-based interests in using others’ IP to adequately express themselves and to describe their own reality (Rothman, 2010b). When the integrity of the underlying work is not damaged and the creator’s interests are satisfied through attribution, these personality-based approaches encourage the use of others’ IP. Perhaps a pure labor-reward rationale—based solely on compensating creators or distributors—would exclude all uses done without permission if it were the only justification for IP laws. But it is not a stand-alone theory. In addition, under the logic of the labor-reward rubric, users who exercise their own labor when reworking others’ creations and inventions should reap the rewards of their own labor. Even if a labor-reward analysis adequately explained IP laws and was the only justification for such laws, IP rights must still be limited by free speech, free expression, and liberty interests. Accordingly, some uses of others’ IP would be allowed. The question then of how best to allocate IP centers on whether a decentralized, industry-governed IP system is likely to adequately incentivize the production and distribution of inventions and works and protect and reward authors and inventors, while at the same time guaranteeing adequate use and access to other’s IP by authors, inventors, and the public. Trademark protection similarly must balance the protection of businesses’ goodwill and the prevention of consumer confusion, with the need for both consumers and competitors to reference and use others’ trademarks. In the context of publicity rights, the law must balance both the need for the public to comment on and refer to real people with the rights of those individuals to control and profit from the use of their identities. How exactly one would divide up these rights is a matter of much debate, but

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In the shadow of the law: the role of custom in IP  539 most people would agree that an optimal allocation of IP rights requires consideration of these sometimes competing interests. Given this model of optimal IP rules, customary practices on their own are not likely to best reflect when exclusive rights should yield to permit access and use. Many of the prevalent customs have developed to avoid litigation or preserve relationships by avoiding conflict. These practices (such as those of the clearance culture) are not developed to be optimal governing rules, but instead simply to promote harmony outside of the legal system. The danger of allowing such risk-averse customs to define the scope of IP rights should be apparent. As discussed, incorporating such behavior can greatly expand infringement findings. Industry practices can establish a restrictive IP regime—one in which virtually nothing is free and no uses are fair. IP owners and users do not view most licensing practices and copying guidelines as optimal, nor as an expression of their preferred allocations of rights. Instead, even those who routinely license want the latitude to contest, and sometimes litigate, when a license is not granted or is prohibitively expensive. Inequalities in IP markets and the underrepresentation of the public increase the likelihood that suboptimal practices will develop. One of the main arguments against the incorporation of custom into tort law is that the market cannot adequately protect the interests of third parties or the public because they have no role in the production of the practices. Even plaintiffs who are in a direct relationship with a potential defendant, such as a consumer of a defective product or an employee, may still lack bargaining power or sufficient market options to exert pressure on potential tortfeasors. When parties do not have equal bargaining power and are not in reciprocal positions, suboptimal practices and norms are likely to develop. As Eric Posner has observed in his critique of the reliance on norms as a source for legal rules, ‘once one abandons the unrealistic assumption that parties have symmetrical positions, traditional theories of the efficiency of norms lose their power’ (Posner, 1996, p. 1709). He suggests that ‘highly unequal endowments of group members may be evidence of inefficient norms. The more powerful members may prefer and enforce norms that redistribute wealth to them, even when those norms are inefficient’ (Posner, 1996, p. 1727). Incorporation of custom also can prevent the continued evolution of custom by producing a lock-in effect—the incorporation of custom further entrenches the same suboptimal customs. James Gibson, among others, has identified the troubling ‘doctrinal feedback’ and rights accretion that stems from the consideration of licensing practices in the context of IP. When courts consider licensing evidence, parties are more likely to license, which makes courts more likely to once again rely on licensing evidence. As more and more companies and individuals follow the licensing and other litigation-avoidance practices, these customs drive conformity rather than the evolution of optimal practices (Gibson, 2007, pp. 884–5; Rothman, 2007, p. 1955). Even if various practices are efficient between the parties when weighing litigation versus licensing costs, they should not be extrapolated to define IP rights more generally or even in future transactions between the same parties. This is similar to the situation that arises when parties to a contract wish to be bound by gap-filling terms based on custom for efficiency’s sake. These gap-filling terms will not bind nonparties or outsiders, and even the parties themselves can opt out of the custom in future contracts. Some of the scholarly support for preferring custom over congressional and courtmade law is driven by reasonable concerns over the influence of special interest groups

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540  Research handbook on the economics of IP law volume 1 in the drafting and passage of legislation. Richard Epstein, for example, contends that reliance on custom ‘provides an effective bulwark against [the] bias and corruption’ that pervade the legislative system (Epstein, 1992b, p. 86). Unfortunately, the same powerful parties who influence legislation often also control the creation and development of customary practices. Worse yet, the development of industry practices lacks the established procedure for encouraging open debate and public commentary that exists in the context of pending legislation. As Lloyd Weinreb has observed, the result of reliance on custom is that ‘the better financed private interest’ will prevail, rather than that a ‘careful, systematic’ rule will develop to ‘serve the community as a whole’ (Weinreb, 1992, pp. 146–7). Many of the practices and norms that I have discussed demonstrate this skewed development. The Classroom Guidelines, for example, were negotiated and drafted primarily by publishers and therefore unsurprisingly forward the agenda of publishing companies rather than those of scholars, educators, students, or research institutions. The Guidelines were adopted over the opposition of major universities and scholarly organizations, such as the American Association of Law Schools (H.R. Rep. No. 94-1476, p. 72; Basic Books v. Kinko’s Graphics, 758 F. Supp. 1522, 1535 (S.D.N.Y. 1991)). Similarly, the clearance culture is driven by large corporations. To the extent optimal customs have been identified in other areas of law, they usually have developed in the context of close-knit communities in which community members have ongoing relationships and in which the same types of transactions are repeatedly conducted. Richard Epstein (1992b) has advocated that ‘custom should be followed in those cases in which there are repeat and reciprocal interactions between the same parties, for then their incentives to reach the correct rule are exceedingly powerful’ (p. 126). Robert Ellickson (1991) has similarly concluded that close-knit communities are most likely to develop welfare-maximizing norms (pp. 167, 187, 228, 267, 283). Henry Smith (2009), using his information-costs model of property law, has also contended that custom’s value dissipates outside of the close-knit communities in which it develops because parties are no longer familiar with the practices. In criticizing the enforcement of norms in the context of the Internet, Mark Lemley (1998) has emphasized that ‘[i]t is no accident that virtually all of the empirical work on norms has taken place in small, close-knit communities with little change in membership over time.’ As a community becomes larger and more diverse, there is less likely to be a ‘commonality of interest’ and norms are both less likely to develop and more likely to develop without uniform agreement (Lemley, 1998, pp. 1267–9). IP markets are exactly these sorts of disaggregated spaces. Many IP transactions do not involve repeat players or individuals who have any relationship with one another. A documentary filmmaker may have no relationship with the Elvis estate or a major movie studio, and neither the studio nor the Elvis estate is as likely to subsequently want to license or use any material created by the documentarian. Nor does a person sitting at home remixing video or music files usually have a relationship with particular production companies, bands, or record companies, other than as a generic consumer. Those who argue that the private sector is superior at allocating rights because it is free to ‘independently’ develop ideal rules also overlook the legal shadow in which IP transactions take place. In the context of IP, the governing customs are often generated in response to legal regimes rather than on a clean slate. Despite such concerns, some, such as Richard Epstein (2008), have argued in response to my work that the reliance on custom

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In the shadow of the law: the role of custom in IP  541 in copyright cases involving negotiated licenses and other clearance culture practices sometimes does reflect optimal private ordering based on mutually agreed upon pricing. Epstein is more optimistic than I am that the clearance culture and other private-ordering mechanisms will result in optimal delineations of use rights and pricing in the context of copyrighted works. Negotiating licensing agreements is challenging, especially for smaller players or when a potential user has a limited amount of time to obtain permission for the use. Content owners sometimes cannot be located or do not respond (or at least not in a timely manner) to requests. These challenges lead to significant transaction costs that warp the market for these licenses. Content owners sometimes refuse to license at any price or charge a prohibitively high or simply unreasonable fee for use. In addition, because copyright furthers the overall public interest in generating more works and more knowledge, we cannot simply look at an individual transaction and evaluate the optimality between the owner and user, as compared to litigation costs—we must also consider the costs to society more generally. Optimality in the sense of maximizing wealth is not the only consideration at issue. We must also maximize creativity and knowledge. In short, custom is unlikely to independently establish optimal allocations of IP, or to provide the best balance between the exclusionary rights of owners and the use rights of other creators and the public. B.  Expectations Should Not Determine IP Rights A second justification for incorporating custom is that doing so satisfies parties’ expectations. In tort law there has been significant scholarly debate about this very issue with regard to the standard for negligence and, in particular, whether the negligence standard should be governed by parties’ expectations or by a more objective standard. Richard Posner views tort law not as furthering broad public policy goals, but instead as a mechanism for fulfilling parties’ expectations when no formal contract governs a transaction. ‘[T]he principle function of tort law,’ he has written from the bench, ‘is to protect ­customers’ reasonable expectations that the firms with which they deal are complying with the standard of care customary in the industry’ (Rodi Yachts v. Nat’l Marine, 984 F.2d 880, 889 (7th Cir. 1993)). Epstein similarly contends that customary practices should be the standard of negligence when parties have some relationship to one another, even when the relationship is inequitable, such as between employer and employee and retailer and consumer (Epstein, 1992a, pp. 4–5, n. 14). In the context of tort law, conformity with an industry practice may best reflect parties’ expectations, but as a matter of public policy there is concern that safety precautions will lag if an expectations- or custom-based standard is adopted. The fact that a plaintiff was on notice of a danger should not in and of itself end the inquiry. Tort law, like IP law, is not another form of contract law in which individual parties’ expectations drive the law. Instead, both bodies of law are in service to a higher purpose. Tort liability is not solely about the parties before the court but is also about making society safer, protecting third parties, and deterring bad or dangerous behavior. Given the bargaining power and knowledge base of potential tort victims, it makes sense to protect consumers from the possible race to the bottom that may result from deference solely to industry standards. As a result, in most instances tort law requires an objective, external evaluation of what is a reasonable standard of care.

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542  Research handbook on the economics of IP law volume 1 Much of the literature supporting the incorporation of custom into contract law reflects the goal of furthering contracting parties’ intentions and expectations. It makes sense to incorporate custom into contracts, if it reflects the contracting parties’ understanding. As Lisa Bernstein (1999) has noted, however, the mere existence of practices does not indicate that parties would expect or want them to govern in ‘end-game’ disputes when both a contract and relationship are breached. In the context of traditional property rights, scholars have similarly debated whether expectations should drive property rights. Property rights often have been justified on the basis of expectations of entitlement to particular property. Carol Rose (2000a; 2000b) has highlighted, however, that even though a party may expect certain property rights, those rights should yield when they are unjust or otherwise not deserving of enforcement. Rose emphasizes that expectations must often be frustrated to manage or protect scarce resources or to promote social justice, tasks that often require limits on property rights (2000a, pp. 485–6; 2000b, pp. 19, 22). An analysis of IP law supports the views held by scholars critical of relying on expectations-based models for tort, contract, and property law. Neither the expectations of IP owners nor risk-averse IP users should govern the scope of IP rights. Patent and copyright protection are provided by constitutional grant and explicitly require consideration of the public interest separate from the property rights of IP owners. Copyright and patent laws do not have as their primary purpose the promotion of authors’ rights, but instead the promotion of the public interest more broadly. The United States Constitution expressly states that the ‘exclusive Right to . . . Writings and Discoveries’ is granted for the purpose of ‘promot[ing] the Progress of Science and useful Arts’ (U.S. Const. art. I, § 8, cl. 8). Accordingly, courts have often noted that they must ‘subordinate the copyright [or patent] holder’s interest in maximum financial return to the greater public interest in the development of art, science and industry’ (Rosemont Enters. v. Random House, Inc., 366 F.2d 303, 307 (2d Cir. 1966)). IP law therefore requires consideration of negative externalities worked on third parties. An IP holder might expect, especially given the clearance culture, that no unlicensed uses would be made of her work, yet public policy demands the use of some material for commentary, scholarship, and for new works. If the public or IP owners have a narrow view of the scope of IP rights, these expectations should not alter the congressional or constitutional judgment about how best to balance IP holders’ rights with the public’s right to use and access IP. For example, the New York Times licenses its news stories for use in television shows and movies (Manly, 2006). The Times’ expectation that it can extract compensation for news, however, should not alter copyright law’s guarantee that facts remain in the public domain. The more attenuated nature of the IP markets also suggests that there are fewer shared expectations between the likely parties in IP disputes. Most IP cases involve parties who have no direct relationship with one another and often no shared set of expectations. One only needs to listen to the United States Patent and Trademark Office’s roundtables on the legitimacy of mash-ups to see the lack of common expectations. Large content providers, such as Disney, think virtually no uses are fair, while some user-focused groups, such as the Organization for Transformative Works, think virtually all uses are fair (Dep’t of Commerce Internet Policy Task Force, 2014, pp. 64–142). Expectations also are driven by customs and therefore lock in existing property regimes,

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In the shadow of the law: the role of custom in IP  543 even when they are unjust and even if the parties would prefer alternative rules. In sum, furthering parties’ expectations does not justify the wholesale incorporation of custom into IP law. C.  Autonomy Interests Do Not Justify Reliance on Custom The final common justification for incorporating custom is the furtherance of autonomy interests. Early justifications for the common law expressed a preference for communities being governed by their own customary laws that had evolved over a period of time. These laws not only furthered parties’ expectations, but also promoted self-governance and autonomy in a world that otherwise was dominated by rules instituted by the monarchy without any community input. Today, the democratic process allows communities to contribute in a more orderly fashion to the creation of governing laws, so there is less of a need to rely on private ordering to protect citizens in the law-making process. Most importantly, autonomy interests do not support reliance on custom because there are conflicting autonomy interests at stake. It is not just initial creators and inventors who have autonomy interests. Users, and subsequent creators and inventors, also have liberty and autonomy-based interests. In the context of copyright, for example, copyrighted works become a part of the personal and cultural world of others. The autonomy interests of an author must therefore sometimes yield to the competing autonomy and libertybased interests of her audience (Rothman, 2010b).

VI.  VALUING CUSTOM The foregoing analysis suggests that custom should rarely be dispositive of questions involving the scope of IP rights. Nevertheless, custom may provide some guidance about what is reasonable or appropriate in a particular context. In the past, I have developed six vectors that courts and scholars should consider when evaluating practices or norms in the context of IP (Rothman, 2007, pp. 1967–80). Here, I will focus only on four primary areas of evaluation: (1) the certainty of the custom; (2) the motivation for the custom; (3) the representativeness of the custom; and (4) the implications of adopting the custom. A.  Certainty of the Custom To have any value, a custom must be identifiable, in terms of what constitutes the practice itself, and the practice must be widely accepted and followed. This analysis tracks the traditional common law requirement that practices be certain before meriting judicial consideration (Blackstone, 1765, p. 78; Browne, 1875, pp. 21–4; Lawson, 1881, pp. 32–6; Rothman, 2013). Several considerations help to evaluate how certain a particular custom is. First, if there is unanimity as to the contours of the custom among diverse parties it is more likely to exist and to have definable boundaries. Such agreement about the practice also likely indicates the consent of the community. Second, customs that are longstanding are more stable and have weathered the test of time. Because the best practices statements, such as the Filmmakers’ Statement, are more wishful than descriptive and have fuzzy boundaries, they are not particularly certain.

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544  Research handbook on the economics of IP law volume 1 Although the best practices statements purport to set forth the practices of the relevant communities, they instead set forth what the drafters think the community should be doing. In the context of the Filmmakers’ Statement, the report leading up to the statement and the statement itself both reveal that the dominant practice was to license or cut out copyrighted materials from documentaries. Additionally, many of the inquiries in the Filmmakers’ Statement and other best practices statements do not provide certain guidelines. Instead, they leave the same ambiguities of the existing fair use system, but add an additional layer of complexity to the already uncertain fair use analysis. For example, the OpenCourseWare Code requires evaluations of whether the ‘extent of the use [is] appropriate,’ and requires attribution when ‘reasonably possible’ (Center for Social Media, American University, 2009, pp. 13–14). The Filmmakers’ Statement requires that quotations be ‘no longer than is necessary’ (Center for Social Media, American University, 2005, pp. 4–5). In other instances, conflicting customs are at work. For example, in the Roy Export case—in which courts rejected fair use and First Amendment defenses for the use of clips of Charlie Chaplin films in a TV obituary of Chaplin—the district court rejected a fair use claim in part because it decided that the defendant did not conform to customary licensing practices (Roy Exp. Co. Establishment of Vaduz v. CBS, 503 F. Supp. 1137 (S.D.N.Y. 1980); Roy Exp. Co. Establishment of Vaduz v. CBS, 672 F.2d 1095 (2d Cir. 1982)). The court failed to consider, however, that there was more than one custom at work. Clips were not usually licensed for obituaries even though they were often licensed in other contexts for news projects with more lead time or in scripted series. Such conflicting customs suggest either that the court needed to more carefully scrutinize which custom was applicable or that there was no single, dominant, and widely accepted custom worthy of consideration. B.  Motivation for Custom Although motivation was not a common law limit on custom; custom was long thought to reflect the preferences of a particular community. In other words, if the community had been asked to sit around and agree to what the rule should be, this is likely the rule they would have come up with—or at least if such a rule had been suggested to them they would have agreed to it. In the context of copyright, the most valuable practices and norms reflect preferred allocations between copyright holders and users, rather than litigation-avoidance or relationship-preservation strategies. Reactive and risk-averse customs, like those of the clearance culture, are not the sort of aspirational, independently developed customs that we should adopt. When customs develop with aspirational motives they are better indications of what is appropriate. In the context of fair use, practices and norms should primarily be relevant only to the extent that they are indicative of what is actually deemed ‘fair’ by the relevant community, rather than what that community thinks is safe, or simply ‘cheaper’ than risking possible litigation. When considering the motivation for a particular custom, courts should particularly identify whether the custom was intended to provide a reasonable balance between competing interests. As a check on this analysis, courts should independently evaluate whether reasonable people would agree to such rules if they knew neither whether they

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In the shadow of the law: the role of custom in IP  545 would be powerful or minor players in the market, nor whether they would own or instead want to use the relevant content. C. Representativeness Customs that represent only one party’s or one group’s interests are suspect. By contrast, when a custom develops with input and participation by both owners and users, and large and small players, it is more valuable. Practices and norms should also only apply to those within the community that developed them. The Classroom Guidelines and best practices statements were both developed in an unrepresentative way. They are therefore less valuable guidelines and should not be wielded against those who did not participate (or were not represented) in their development. As discussed, the Classroom Guidelines were developed without the participation of educators, universities, and students. Similarly, the best practices statements were developed without representation of the content providers whose work is most likely to be used in documentaries. The fact that some of the ­participating users were also authors does not remedy this one-sidedness. Even though the Department of Commerce has stated its support of such use guidelines in theory, it has appropriately noted that such guidelines need to be developed with the participation of a variety of parties on different sides of the issues before such guidelines deserve serious consideration (Dep’t of Commerce Internet Policy Task Force, 2013, p. 23). The proponents of the best practices statements are likely correct that if they had invited major content owners to participate, very little would have been agreed to. The very likelihood that the parties could not have agreed on common principles, however, raises serious flags about using the best practices statements to affect entitlements outside of the community that developed them. Even within various use communities, there have been reasonable objections to applying the standards against a party who was not directly involved in their development (Rothman, 2014, pp. 1620–22). D. Implications Courts must also independently scrutinize the implications of adopting any customary practice or norm as a legal rule. When evaluating the worth of a particular custom, a court must consider what the end result of incorporating that custom would be. If followed to its logical conclusion, will the custom result in a slippery slope, such that no uses will be allowed, or, alternatively, that too many uses will be allowed? Consider, for example, two extremes. If it is customary to license everything, then no fair uses remain. On the flipside, consider the peak of peer-to-peer file-sharing in which the custom was not to pay for music downloaded from the Internet. Using such a custom to set the standard of fair use could have destroyed the market for online music, and perhaps have obstructed the development of today’s successful streaming services. In the best practices statement related to user-generated content (‘UGC’) (in the context of online video) virtually any use is deemed fair because the commentary and critique category is read very broadly. In the report supporting the Online Video Code, the drafters suggest that a mash-up titled Clint Eastwood’s ‘The Office’—which mixed together clips from the television series The Office with the movie Evan Almighty—falls within the favored category of negative or critical commentary. This category and

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546  Research handbook on the economics of IP law volume 1 its exemplars suggest that all mash-ups are fair (Center for Social Media, American University, 2008, pp. 7–9). This means that there can be no market for licensing such mash-ups; a conclusion that limits new media markets and makes copyright law largely irrelevant in the context of UGC. Many mash-ups may well be fair ones, but one cannot simply wish them all to be so. In sum, if custom is certain, representative, motivated by aspirational purposes, and would result in a reasonable allocation of use and ownership rights, then that custom provides meaningful guidance. Otherwise, such practices and norms should be met with skepticism and little deference.

VII.  LESSONS FOR IP POLICY Despite the many reasons discussed to be cautious about jumping on the custom bandwagon, custom provides a number of lessons for IP policy. First, massive disobedience of IP laws can signal market failure or overreaching by IP owners. The IP system needs public buy-in to work. Public support requires people to think that on some level the law is fair. When laws are wildly out of sync with community practices, there sometimes will be value in interpreting the law to conform to those understandings or amending the laws to better reflect some of those norms. Second, customary uses may demonstrate a consensus about preferred rights that may not currently be recognized under the law. Such locations of commonality are promising areas for legislation. For example, many norms in the copyright world favor giving attribution to authors when their work is used, but the law does not generally recognize such a right. Similarly, it may be worth addressing the potential conflict between the workfor-hire provision and the widely accepted norms of faculty ownership of scholarship and teaching materials. Third, custom may demonstrate areas of need by users and creators that should be accommodated either through a reasonable market mechanism or through fair use. Finally, because the value of custom is based on its reflection of a commonly agreed upon norm, it is important to dissent from dominant and restrictive practices in IP markets. Although IP laws should continue to provide room for private ordering, these private efforts should not alter IP’s boundaries. The clearance culture in the publishing and film worlds should not influence courts’ independent analyses of whether particular uses are fair. Nor should a small cross-section of documentary filmmakers decide when fair use applies in that context. Creative Commons licenses can encourage the use of copyrighted works in ways that creators support, but the fact that a use breaches such a license should not weigh against a finding of fair use. Recent scholarship has turned a prying eye on the worlds of fashion, chefs, comedians, roller derby, fan fiction, and many other IP-based or IP-adjacent communities in which creativity sometimes flourishes without reliance on the governing formal IP structures (Raustiala and Sprigman, 2006; Fauchart and von Hippel, 2008; Fagundes, 2012; Tushnet, 2007; Madison et al., 2010). Sometimes these industries are categorized as producing ‘creativity without law’ and used to support arguments that creativity can take place without needing IP rights and enforcement (Darling and Perzanowski, 2017). But the law influences even these purportedly IP-free zones. The scope of IP laws determines

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In the shadow of the law: the role of custom in IP  547 when and how alternative protection schemes develop. Aspects of recipes not protected by copyright law will by necessity be protected by alternative mechanisms—such as attribution enforced by shaming. Fashion designs that are not protected by trademark or copyright law will be protected through other mechanisms or will be altered (for example, through a cycle of rapid change, or in ways that allow for trademark or copyright protection). Those within communities that use alternative regimes to protect their creations do not always shun more formal IP protection. Roller derby players, for example, use a community-based registry of derby names, but try to register their names with the Patent and Trademark Office when they become better known, and such registrations have also become more common as roller derby has become more popular. Chefs and comedians sometimes rely on copyright law when they write cookbooks and produce recordings of their routines (Fauchart and von Hippel, 2008; Oliar and Sprigman, 2008). The norms of these various communities develop with an awareness of IP law, operate in its shadow, and often are efforts to work around its contours. As we look back on more than a decade of robust attention to custom, norms, and practices in the context of intellectual goods and IP laws, and celebrate many of them, it is important to contextualize them in the broader framework of the interplay of law with these extralegal activities. Those who favor expansive use rights cannot simply point to all the practices that they like without acknowledging the practices that they do not like—those that promote owners’ interests—as well as the way courts have long considered custom. Courts are just as likely—perhaps more likely—to incorporate restrictive practices (such as clearance culture norms and restrictive use guidelines, like the Classroom Guidelines) rather than more permissive ones. To the extent that we want to distinguish between customs, we cannot do so based on a gut instinct about which practices are preferable. Instead, a detailed framework like the one set forth here must be used to evaluate the worth of each custom to determine if it merits incorporation into the law. As the project of documenting norms in various creator, inventor, and user communities continues, it would be helpful to gather data about what knowledge or awareness (accurate or not) community members have about the law and to what extent those understandings influence their practices and norms. It would also be useful to collect information about whether the characteristics that make custom more or less worthy of consideration are present. For example, are the practices uniformly known, certain, and longstanding? Are the practices motivated by efforts to set appropriate boundaries for use and ownership, or by risk aversion, relationship preservation, or wishful thinking (by owners or users)? Are the practices representative of a variety of parties, or only of one particular group? Custom can provide valuable information, but its usefulness depends on independently evaluating the worthiness of the custom and particularly scrutinizing its reasonableness. The unarticulated incorporation of custom threatens to swallow up IP law and replace it with industry-led IP regimes that give the public and other creators more limited rights to access and use IP. If we take seriously the notion that IP is protected in the public interest, then we cannot abdicate the boundaries of IP rights to delineation by privately developed customary practices. This does not mean that we cannot appreciate community norms that have developed in the IP space; but it does demonstrate that we cannot simply bask in their glory without recognizing their place in a larger ecosystem of custom in the IP world and beyond.

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550  Research handbook on the economics of IP law volume 1 Rothman, Jennifer E. 2014. ‘Copyright’s Private Ordering and the “Next Great Copyright Act,”’ 29 Berkeley Technology Law Journal 1595–649. Smith, Henry E. 2009. ‘Community and Custom in Property,’ 10 Theoretical Inquiries in Law 5–41. Thompson, E.P. 1991. Customs in Common. London: Penguin Books. Tushnet, Rebecca. 2007. ‘Payment in Credit: Copyright Law and Subcultural Creativity,’ Spring 70 Law and Contemporary Problems 135–74. University of Minnesota. 2017. ‘University of Minnesota Instructors Rights & Responsibilities,’ accessed at https://www.lib.umn.edu/copyright/university-minnesota-instructors/ (last visited April 7, 2019). Weinreb, Lloyd L. 1990. ‘Fair’s Fair: A Comment on the Fair Use Doctrine,’ 103 Harvard Law Review 1137–61. Weinreb, Lloyd L. 1992. ‘Custom, Law, and Public Policy: The INS Case as an Example for Intellectual Property,’ 78 Virginia Law Review 141–7.

Legislative Materials 17 U.S.C. § 107 (2015). H.R. Rep. No. 90-83 (1967). H.R. Rep. No. 94-1476 (1976). U.S. Const. art. I, § 8, cl. 8.

Cases Am. Geophysical Union v. Texaco, Inc., 60 F.3d 913 (2d Cir. 1994). Basic Books v. Kinko’s Graphics, 758 F. Supp. 1522 (S.D.N.Y. 1991). Bridgeport Music v. Dimension Films, 410 F.3d 792 (6th Cir. 2005). Cambridge Univ. Press v. Patton, 769 F.3d 1232 (11th Cir. 2014). Comput. Assocs. Int’l v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992). Dellar v. Samuel Goldwyn, Inc., 104 F.2d 661 (2d Cir. 1939). Dun & Bradstreet Software Servs. v. Grace Consulting, 307 F.3d 197 (3d Cir. 2002). Forasté v. Brown Univ., 290 F. Supp. 2d 234 (D.R.I. 2003). Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539 (1985). Hays v. Sony Corp. of Am., 847 F.2d 412 (7th Cir. 1988). Jim Henson Prods. v. John T. Brady & Assocs., 16 F. Supp. 2d 259 (S.D.N.Y. 1997). May v. Morganelli-Heumann & Assocs., 618 F.2d 1363 (9th Cir. 1980). New Era Publ’ns Int’l, ApS v. Carol Publ’g Grp., 904 F.2d 152 (2d Cir. 1990). Pittsburgh State Univ. v. Kansas Bd. of Regents, 122 P.3d 336 (Kan. 2005). Princeton Univ. Press v. Mich. Document Servs., 99 F.3d 1391 (6th Cir. 1996). Ringgold v. Black Entm’t Television, 126 F.3d 70 (2d Cir. 1997). Rodi Yachts v. Nat’l Marine, 984 F.2d 880 (7th Cir. 1993). Rosemont Enters. v. Random House, Inc., 366 F.2d 303 (2d Cir. 1966). Roy Exp. Co. Establishment of Vaduz v. CBS, 503 F. Supp. 1137 (S.D.N.Y. 1980). Roy Exp. Co. Establishment of Vaduz v. CBS, 672 F.2d 1095 (2d Cir. 1982). Shapiro, Bernstein & Co. v. P.F. Collier & Son Co., 26 U.S.P.Q. 40 (S.D.N.Y. 1934). Soc’y of the Holy Transfiguration Monastery v. Gregory, 689 F.3d 29 (1st Cir. 2012). State ex. rel. Thornton v. Hay, 462 P.2d 671 (Or. 1969). The T.J. Hooper, 60 F.2d 737 (2d Cir. 1932). Twentieth Century Fox Film v. Marvel Enters., 155 F. Supp. 2d 1 (S.D.N.Y. 2001). Weinstein v. Univ. of Illinois, 811 F.2d 1091 (7th Cir. 1987).

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21.  Infrastructure theory and IP Brett Frischmann*

Contents I. Introduction II. An Overview of Infrastructure Theory A. A Shift in How We Think About Infrastructure B. Characteristics of Infrastructural Resources C. Demand-Side Market Failures that Infrastructural Resources Help Resolve and Why They Arise D. Why Commons Management of Infrastructure Resources can Help Avert Market Failures III. Applying Infrastructure Theory to Intellectual-Cultural Resources A. The Cultural Environment as Infrastructure B. Economic Characteristics of Intellectual Resources 1. Conventional supply-side problems 2. Intellectual resources and activities, products, and processes C. Intellectual Property Laws as Semi-Commons Arrangements IV. Conclusion References

I. INTRODUCTION This chapter explores how infrastructure theory applies to cultural-intellectual resources. It begins with a summary of infrastructure theory and then discusses how the theory applies to intellectual-cultural resources. Applying the theory reveals a series of demandside complications for conventional law and economic theories of intellectual property and related governance institutions. These complications arise vividly in modern debates about intellectual property rules that exclude certain subject matter or otherwise limit the scope of intellectual property rights and sustain commons (public access). The chapter is an adaptation of ‘Intellectual Infrastructure,’ chapter 12 of Frischmann (2012). Accordingly, it summarizes the theory developed in Frischmann (2012) and does not provide as comprehensive an intellectual history as other chapters or the original source, which has an extensive bibliography covering various fields of economics, law, and innovations studies.1 Benkler (2013) describes many of the important works in intellectual *  Charles Widger Endowed University Professor in Law, Business and Economics Charles Widger School of Law, Villanova University. 1   I included many of the sources that bear on intellectual infrastructure and intellectual property in the reference list at the end of this chapter.

551

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552  Research handbook on the economics of IP law volume 1 property that strongly influenced infrastructure theory. Besides the intellectual property laws themselves, this chapter does not examine various infrastructures that support the production and distribution of intellectual resources.

II.  AN OVERVIEW OF INFRASTRUCTURE THEORY A.  A Shift in How We Think About Infrastructure ‘Infrastructure’ generally conjures up the notion of a large-scale physical resource made by humans for public consumption. Standard definitions of infrastructure refer to the underlying framework or foundation of a system. Familiar examples of ‘traditional infrastructure’ include (1) transportation systems, such as highway systems, railway systems, airline systems, and ports; (2) communication systems, such as telephone networks and postal services; (3) governance systems, such as court systems; and (4) basic public services and facilities, such as schools, sewers, and water systems. The list could be expanded considerably; daily, we rely on a wide range of traditional infrastructure resources. Following the suggestion of the National Research Council (1987), Frischmann (2012) argues a more capacious understanding of infrastructure is warranted for functional economic analysis. In particular, recognizing that infrastructural resources are shared means to many ends expands the definitional scope beyond traditional infrastructure categories. A host of ‘nontraditional infrastructure’ resources exist and also serve as the underlying frameworks or foundations of various economic and social systems. Examples include environmental infrastructure, such as oceans and the atmosphere, as well as intellectual infrastructure, such as basic research, ideas, and languages. Both traditional and nontraditional infrastructures function as infrastructural capital (Button, 1996; Frischmann, 2005; Frischmann and Lemley, 2007; Frischmann, 2012; Benkler, 2013; on different forms of capital, see Bourdieu, 1986). In various fields of economics, there is widespread recognition that infrastructure is special. Macroeconomics recognizes that infrastructure is important for economic development and a key ingredient for economic growth (Aschauer, 2000; Ghosh and Meagher, 2004). Microeconomics recognizes that infrastructural resources often generate substantial social gains and that markets for infrastructure often fail and call for government intervention in one form or another (Branscomb and Keller, 1996; David and Foray, 1996; Justman and Teubal, 1996; Kahn, 1988). Increasingly, there is recognition that market failures arise on both the supply and demand sides and demand-side failures also create obstacles for government provisioning (Frischmann, 2012; Frischmann and Hogendorn, 2015). Development economics, which applies both micro- and macroeconomics to the process of development, recognizes similar ideas. Yet there are some gaping holes in our understanding of how infrastructural resources generate substantial social gains and contribute to development and economic growth. In particular, the importance of open infrastructure and user-generated spillovers at the microeconomic level and their relationships to technological innovation and growth at the macroeconomic level deserve attention (Tassey, 1996; Helpman, 1998; see also Romer, 1986, 1996; Jones, 1998; Schmidt, 2003). Legal scholar Carol Rose (1986) recognized the importance of these issues in her seminal article, ‘The Comedy of the Commons: Custom, Commerce, and Inherently

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Infrastructure theory and IP  553 Public Property.’ She explained that a ‘comedy of the commons’ arises where open access to an infrastructure resource leads to scale returns—greater social value with greater use of the resource. For example, managing road systems in an open, nondiscriminatory manner is the key to sustaining and increasing participation in commerce, and commerce is itself a productive activity that generates significant positive externalities. Commerce generates private value that is easily observed and captured by participants in economic transactions, as buyers and sellers exchange goods and services, but it also generates social value that is not easily observed and captured by participants—value associated with socialization, cultural exchange, trust, and other such processes. Following Rose, intellectual property and communications scholars extended her ideas to information. Yochai Benkler (2013) describes the intellectual history, tracing the important contributions of Fisher (1988), Litman (1990), Samuelson (1990), Boyle (1996), Cohen (1998), Benkler (1998a, 1998b, and 1999), Lessig (2001), and Lemley (2005), among many others.2 These and other scholars recognized that intellectual and cultural resources of various kinds were special in a manner similar to infrastructure (without necessarily making the comparison explicit) because the resources are strictly nonrivalrous in consumption and often inputs into further production of such resources (Nelson, 1959; Arrow, 1962; Merges and Nelson, 1990; Scotchmer, 1991). Section II explores this connection more fully. Benkler (2013) also situates this line of scholarship in the broader and in some respects different literature on commons (Hess and Ostrom, 2003, 2007; Ostrom, 1990, 2005, 2007; Frischmann et al., 2014). This chapter does not cover the commons literature. B.  Characteristics of Infrastructural Resources Infrastructural resources are intermediate capital resources that often serve as critical foundations for productive behavior within economic and social systems. Infrastructural resources effectively structure in-system behavior at the micro level by providing and shaping the available opportunities of many actors. In some cases, infrastructural resources make possible what would otherwise be impossible, and in other cases, infrastructural resources reduce the costs and/or increase the scope of participation for actions that are otherwise possible. In addition, infrastructural resources structure in-system behavior in a manner that leads to spillovers. That is, infrastructural resources facilitate productive behaviors by users that affect third parties, including other users and even non-users of the infrastructure. The third party effects often are accidental, incidental, and not especially relevant to the infrastructure provider or user. To put it another way, the social returns on infrastructure investment and use may exceed the private returns because society realizes benefits above and beyond those realized by providers and users (Steinmueller, 1996; Frischmann and Lemley, 2007). According to Frischmann (2012), Infrastructural resources satisfy the following criteria: (1)  The resource may be consumed nonrivalrously for some appreciable range of demand.

2   Benkler (2013) discusses other works as well. I have highlighted those that relate most closely to the infrastructure theory.

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554  Research handbook on the economics of IP law volume 1 (2) Social demand for the resource is driven primarily by downstream productive activities that require the resource as an input. (3) The resource may be used as an input into a wide range of goods and services, which may include private goods, public goods, and social goods.

The first criterion captures the consumption attribute of public and impure public goods (Samuelson, 1954; Musgrave and Musgrave, 1984; Cornes and Sandler, 1996). In short, this characteristic describes the ‘sharable’ nature of infrastructural resources. Infrastructural resources are sharable in the sense that the resources can be accessed and used by multiple users at the same time. Infrastructural resources vary in their capacity to accommodate multiple users, and this variance in capacity differentiates purely nonrival (infinite capacity) resources from partially nonrival (finite but renewable capacity) resources (Frischmann, 2012; Benkler, 2013 (‘nonscarce over substantial ranges of their use’ instead of partially (non)rival)). Nonrivalry opens the door to widespread access and productive use of the resource. For nonrival resources of infinite capacity, the marginal cost of allowing an additional person to access the resource is zero (Cornes and Sandler, 1996). For partially nonrival resources of finite capacity, the cost-benefit analysis is more complicated because of the possibility of congestion (Cornes and Sandler, 1996; Frischmann, 2012; Benkler, 2013). The second and third criteria focus on the manner in which infrastructural resources create social value. The second criterion emphasizes that infrastructural resources are capital goods that create social value when utilized productively downstream and that such use is the primary source of social benefits. Thus, societal demand for infrastructure is derived demand. The third criterion emphasizes both the variance of downstream outputs (the genericness of the input) and the nature of those outputs, particularly public goods and social goods.3 C. Demand-Side Market Failures that Infrastructural Resources Help Resolve and Why They Arise Infrastructural resources enable many (market and nonmarket) systems to function and satisfy demand derived from many different types of users. Infrastructural resources are not special-purpose resources, optimized for a particular user or use to satisfy the demand derived from a particular downstream market. Instead, and importantly, they provide basic, multipurpose functionality. An electricity grid, for example, delivers power to the public, supporting an incredibly wide range of uses, users, markets, and technologies. It is not specially designed or optimized for any particular use, user, market, technology, or appliance; it provides nondiscriminatory service for a toaster and a computer, for Staples and a pizzeria, and so on. The same could be said of the national highway system, the Internet, contract law, or 3   ‘Social goods generate value through their impact on social systems and interdependencies . . ..Their value is inherently social because it depends on the existence and nature of interdependent social relations. . ..Social goods change environmental conditions and social interdependencies in ways that affect social welfare’ Frischmann, 2012, ch. 3 (providing a detailed examination of various social goods, including nonmarket goods, merit goods, social capital, and irreducibly social goods).

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Infrastructure theory and IP  555

Infrastructure User Activities within economic, cultural, political, and other systems

User Generated Outputs Private Goods

Output Markets

Public Goods

Social Goods

Spillovers

Figure 21.1  Infrastructure even a language. These resources provide basic functionalities and thereby support and structure more complex systems of user activities, but the resources (or the owners and managers of such resources) do not determine what users do. See Figure 21.1. Users determine what to do with the capabilities that infrastructure provides. Genericness implies a range of capabilities, options, opportunities, choices, freedoms. Subject to standardized compatibility requirements, users decide what to plug in, run, use, work with, play with. Users decide which roads to travel, where to go, what to do, who to visit. Users choose their activities; they can choose to experiment, to innovate, to roam freely. Users decide whether and what to build. Users decide how to use their time and other complementary resources. To understand societal demand and how value is created and realized, it is necessary to pay closer attention to the nature of the user activities and the outputs users produce; the value of an infrastructural resource is realized by producers and consumers of these outputs. It is thus the demand for these outputs that determines demand for the infrastructure. For this reason, the third criterion emphasizes the nature of the downstream outputs and, more specifically, the potential production of public and social goods. When infrastructure supports these productive activities, markets will not work well in assessing demand and supplying infrastructural resources; a gap between private demand and social demand arises because the social value created by allowing users to access and use the resource to produce public and social goods is underrepresented in the prices people are willing to pay for infrastructure (Musgrave and Musgrave, 1984). The social value may be substantial but extremely difficult to measure. The reason for the gap is relatively straightforward: Infrastructure users’ willingness to pay reflects private demand—the value that they expect to realize—and does not take into account value that others might realize as a result of their use. That is, it does not account for external effects associated with the production of public and social goods. This means that infrastructure users who produce public and social goods are not necessarily optimal purchasers of access and use rights, because they do not themselves capture the full social value of their use.

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556  Research handbook on the economics of IP law volume 1 Special purpose input? Commercial infrastructure?

Infrastructure Infra User Activities within economic, cultur cultural, political, and other systems

User Gen Generated Outputs P Private Goods

Pu Public Goods

Output Markets

Social Goods

Spillovers

Figure 21.2  Infrastructure with optimization Not only is there a gap between private and social demand, but to make matters even more complex, the shape of the social demand curve can be quite different from that of the private demand curve due to the variance in producers and outputs. This added complexity gives rise to specific and substantial demand-side market failures that have static and dynamic consequences; however, they are beyond the scope of this chapter (Frischmann, 2012). Difficulties in measuring and appropriating value generated in output markets translates into a problem for infrastructure suppliers and, consequently, the public. This ‘demand-manifestation’ problem may affect infrastructure allocation, design, investment, and management, as well as other supply-side decisions. At least in market contexts, infrastructure suppliers base such decisions in large part on the prospect of foreseeable returns in downstream markets. Demand signals manifested in those markets, aggregated and, in a sense, communicated upstream by dynamic operation of the price mechanism, provide critical raw information for making assessments about prospective returns. To society’s detriment, demand-manifestation problems can lead to the undersupply of infrastructure essential to various producers of public and social goods, and this undersupply can lead to an optimization of infrastructure design or prioritization of access and use of the infrastructure for a narrower range of uses than would be socially optimal. See Figure 21.2. D. Why Commons Management of Infrastructure Resources can Help Avert Market Failures In this context, commons management is a mode of governance for infrastructure that can be especially attractive from an economic and social perspective. The core principle of commons management is sustainable sharing on nondiscriminatory terms within a

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Infrastructure theory and IP  557 defined community (Frischmann et al., 2014). With respect to infrastructure,4 this means nondiscrimination among users and uses, and the corresponding preservation of equality, flexibility, and general purposiveness. From an economic perspective, it makes sense to manage certain infrastructural resources in an openly accessible manner because doing so permits a wide range of downstream producers of private, public, and social goods to flourish. As Benkler (2001) noted, ‘[t]he high variability in value of using both transportation and communications facilities from person to person and time to time have made a commons-based approach to providing the core facilities immensely valuable.’ The point is not that all infrastructural resources (traditional or nontraditional) should be managed in an openly accessible manner. Rather, for certain classes of resources, the economic arguments for managing the resources in an openly accessible manner vary in strength and substance (Frischmann, 2012; Benkler, 2013). By precluding optimization and prioritization based on market demands alone, commons management sustains the social option value of the infrastructure; it retains ‘flexibility’ (Benkler, 2013) or ‘breathing room’ (Cohen, 2012) in the face of uncertainty.5 But commons management is not only a buffer from market pressures. It also serves as a buffer from government pressures to optimize or prioritize infrastructure (use), which may originate from market actors lobbying for government interventions or from other pressures to regulate. Finally, managing public infrastructure as commons also reduces reliance on government to pick winners and direct subsidies to users who produce public and social goods.6 In the end, as shown in Figure 21.3, the basic idea is that commons management leverages nonrivalry and the sharable nature of the infrastructure (first criterion) to sustain the general-purpose nature of the infrastructure and support the wide range of user activities that generate private, public, and social goods (second and third criteria).

III. APPLYING INFRASTRUCTURE THEORY TO INTELLECTUAL-CULTURAL RESOURCES Applying the infrastructure criteria to intellectual-cultural resources delineates a broad set of resources that create benefits for society primarily through the facilitation of downstream productive activities, many of which generate spillovers. The definition of infrastructure can be reduced as follows to fit intellectual infrastructure: nonrival input into a wide variety of outputs. This seems incredibly capacious. Like many other types of 4   The defined community may be the public, in which case commons management converges with open access. The community might also be more limited in scope, in which case there may be members and nonmembers (Ostrom, 1990, 2005; Hess and Ostrom, 2007; Frischmann, 2012; Frischmann et al., 2014). 5   Where future sources of social value are uncertain, there are good reasons to sustain infrastructure as commons. See Frischmann, 2012, ch. 5. 6   In other words, there is less reliance on government grants and subsidies. The government also faces demand-manifestation problems because it does not know the shape of the demand curve and may struggle to identify which public or social goods to subsidize and which producers to fund. Government is often better off supporting open infrastructure as a means for supporting the capabilities of productive users. See id.

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Infrastructural Resources 1. The resource may be consumed nonrivalrously;

ng gi g ra in ve in le sta su

COMMONS MANAGEMENT

2. social demand for the resource is driven primarily by downstream productive activity that requires the resource as an input; and 3. the resource is used as an input into a wide range of goods and services, including private goods, public goods and/or social goods. Figure 21.3  Infrastructure with commons management interface

infrastructure, intellectual infrastructure can be identified and analysed at various levels of abstraction, ranging from the meta-environment itself to a discrete general-purpose input, such as a basic idea, to a specific expression that has broad communicative power and social meaning. The resource set is much more highly and diversely populated than traditional infrastructure. Each of the following categories, for example, contains innumerable examples: ●

Basic research

●

General-purpose technologies

● Ideas

● Languages

These categorical examples of intellectual infrastructure create benefits for society primarily by facilitating a wide range of downstream productive activities, including information production, innovation, and the development of products and services, as well as education, community building and interaction, democratic participation, socialization, and many other socially valuable activities. The foundational role of these intellectual infrastructures in cumulative, dynamic, and complex systems merits attention. Courts and commentators frequently refer to intellectual infrastructure resources as ‘building blocks’ to capture their role as basic inputs. The ‘building blocks’ metaphor is evocative, but it oversimplifies and fails to fully reflect the complex relationships among participants in intellectual systems that derive value from intellectual infrastructures as producers, users, consumers, or incidental beneficiaries. Applying infrastructure concepts to cultural-intellectual resources is more difficult in some respects than applying them to other resources. The difficulties stem in part from the fluid, continuous, and dynamic nature of cultural-intellectual systems. Distorting reductionism seems inevitable when we attempt to delineate clear boundaries around discrete cultural-intellectual resources or to separate resources (inputs, outputs, products, things) from activities (processes, practices, uses) (Madison, 2005). Intellectual infrastructures, such as basic research, often seem to be both resources and activities.

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Infrastructure theory and IP  559 Difficulties also stem from the fact that infrastructure appear to exist on many different scales within cultural-intellectual systems.7 The infrastructure concept has a fractal nature when applied to intellectual resources because one can identify infrastructure at various scales and observe repeating patterns, similar characteristics, and governance dilemmas. The dynamic, cumulative, and interactive features of cultural-intellectual resources and practices may mean that more cultural-intellectual resources potentially function as infrastructure. Keep in mind that the infrastructure criteria describe functional economic relationships and are only part of the broader resource management question. That the functional economic relationships repeat at different scales means that choosing the appropriate scale for evaluating resource management options and trade-offs is critical. Different types of governance rules may be appropriate at different scales; for example, a default open-access-style rule (ex ante, broadly applicable) may be appropriate for intellectual infrastructure at high levels of abstraction, while a less demanding rule, such as an essential-facilities-style rule (ex post, case-specific), may be appropriate for intellectual infrastructure at lower levels of abstraction. This Section is organized into three subsections.8 Subsection A begins with the idea of the cultural environment as infrastructure. This discussion establishes a context for examining intellectual-cultural resource systems and governance institutions. It also explains some of the complex relationships between intellectual-cultural resources and people—for example, the mutual dynamic shaping that takes place as society lives within, interacts with, shapes, and is shaped by its interactions with the cultural environment. Subsection B describes the economic characteristics of intellectual resources. The economic analysis of intellectual resources is quite complex, and other chapters discuss most of the general issues, particularly as they relate to the institutions of intellectual property. Accordingly, this subsection only highlights a few specific concerns. First, it explains how (non)excludability and nonrivalry give rise to distinct economic considerations concerning systematic risk of undersupply of some intellectual resources. Next, it considers the added layer of complexity associated with ‘information [being] both input and output of its own production process. . ..known to economists as the “on the shoulders of giants” effect’ (Benkler, 2006, p. 37; Scotchmer, 1991). The added complexity centers on the dynamics of intellectual processes and systems and how intellectual progress occurs. An appreciation of the ‘on the shoulders of giants’ effect is critical to understanding how productive use of intellectual infrastructure generates spillovers (Benkler, 2006; Scotchmer, 1991). Subsection C considers intellectual property laws. It examines intellectual property laws as a semi-commons regime (Smith, 2000; Heverly, 2003; Loren, 2007). It shows first how intellectual property laws are targeted exceptions/interventions to the default commons regime for the cultural environment. The laws enclose and regulate a select (albeit very broad) set of intellectual resources to overcome supply-side market failures. Given   Of course, these difficulties arise for most theories.   Again, this chapter is an adaptation of chapter 12 of Frischmann (2012). In addition to abbreviating much of the discussion, it leaves out the entire section that delineated intellectual infrastructure, focused on ideas as an example, and examined how the First Amendment, copyright, and patent laws govern ideas as commons. In addition to the need for brevity, the reason for excluding this material is that it would have required an extensive discussion of recent developments in patent law regarding patentable subject matter, and that would have been beyond the scope of this chapter. 7 8

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560  Research handbook on the economics of IP law volume 1 tremendous difficulties in establishing and maintaining boundaries around this set and the dynamic and complex nature of cultural-intellectual resource systems, the laws also sustain semi-commons arrangements for enclosed resources. This leads to a second point. Many intellectual infrastructure resources are excluded from the enclosed set—that is, the resources remain in the public domain and are not patentable or copyrightable, but many other intellectual infrastructures are patentable or copyrightable. For these resources, intellectual property laws seem to recognize the social demand for commons management and mediate access to intellectual infrastructure (Lee, 2008). A.  The Cultural Environment as Infrastructure We can identify infrastructure at a very high level of abstraction and broad scale—the cultural environment—and at progressively lower levels of abstraction, on smaller scales, and within different systems or fields. In parallel with such efforts, we can study different commons management institutions. Thus, we analyse both infrastructure and commons as ‘nested phenomena’ operating at different levels that may interact with one another (Madison et al., 2010, p. 674; Ostrom, 2005, pp. 58–62). At a relatively abstract level, the basic similarities between the natural and cultural environments concern the functional and relational meanings of the common term ‘environment.’ An environment might be defined as a complex system of interconnected and/ or interdependent resources (or even resource systems) that comprise the ‘surroundings,’ ‘setting,’ or ‘context’ that we inherit, live within, use, interact with, change, and pass on to future generations. We inherit the natural physical environment; we live within, use, interact with, and change it; and we pass it on to future generations. Similarly, we inherit, live within, use, interact with, change, and pass on to future generations a cultural-intellectual environment, comprised of many overlapping sub-environments, if one would like to distinguish culture(s), science(s), and so on. The world we live in comprises multiple, complex, overlapping, and interdependent resource systems with which we interact and that constitute our environments—the natural environment is one type, and (socially) constructed environments, such as the cultural environment, are another. Thus, we can envision a cultural environment that consists of the various cultural, intellectual, and social resource systems that we inherit, use, experience, interact with, change, and pass on to future generations (Boyle, 2003, 1997, 1996; Opderbeck, 2009). The cultural environment provides us with resources and capabilities to act, participate, be productive, and ‘make and pursue life plans that can properly be called our own’ (Benkler, 2006, p. 146). It also shapes our very beliefs and preferences regarding our lives (life plans) and relationships with each other and the world we share (DeMartino, 2000, pp. 77–9; Krackhardt, 1998; North, 2005, pp. 46–7). Human beings are not born with fully formed preferences, knowledge, and beliefs about the world they enter; rather, preferences, knowledge, and beliefs are learned and experienced and thus contingent to a degree on the cultural environment a person experiences (Cohen, 2001, 2007, 2012). We have an incredibly complex and dynamic relationship with the cultural environment. Science and culture, for example, are cumulative and immersive systems that develop with society, while simultaneously developing society. Put another way, the cultural environment provides for, shapes, and reflects us, and at the same time, we provide, shape, and reflect it. The cultural environment has a normative dimension that is sometimes lost

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Infrastructure theory and IP  561 in the sense that it can be understood as a society’s answer to a series of ‘fundamental questions’ about what it values. ‘Cultural’ captures the contextual, contingent, and social/relational aspects of the resources that constitute the meta-environment; the resources are resources vis-à-vis their meaning to and among people. As Benkler (2006, p. 282) suggests, ‘[Culture] is a frame of meaning from within which we must inevitably function and speak to each other, and whose terms, constraints, and affordances we always negotiate. There is no point outside of culture from which to do otherwise.’ Viewed through the infrastructure lens, two points are clear: First, the cultural environment constitutes mixed infrastructure. Human beings produce an incredible diversity of private, public, and social goods simply by living in and interacting with the cultural environment. It would be a mistake to assume that such productivity is inevitable or natural. In some respects, some may be; human beings experience their lives, and ‘[e]xperience constitutes an important intellectual resource that simultaneously relates human beings to their inherited and evolving environment(s) and constitutes a resource that may shape the intellectual environment’ (Madison et al., 2010, p. 685). But the fact that the cultural environment shapes both our capabilities to be culturally or intellectually productive and our beliefs and preferences regarding the exercise of such capabilities is a reason to pay close attention to the dynamic relationships between users and the cultural environment (Sen, 1993, 2009; Frischmann, 2017). Whether people are active participants in intellectual, cultural, and social resource production, actively shaping the cultural environment, or passive consumers shaped by the cultural environment (or by those who are shaping it) depends on the cultural environment and how it is managed (Benkler, 2006). Different evolutionary paths are possible—for our environment and for us: [People] may become more aware, conscious of their (potential) roles as listeners, voters, and speakers, but also as consumers and producers, as political, cultural, and social beings, as members of communities. They may learn to be productive—or learn to want to be productive, if such desire is not simply latent. This very awareness that one can play different roles and that the environment is not fixed or fully determined by others is encouraging. It encourages participation and the development of facilitative social practices, and perhaps over time, the adoption of a participatory culture. . ..(Frischmann, 2007a, pp. 1123–8)

Second, the case for commons management is incredibly strong. Managing the cultural environment as a public commons maintains flexibility and maximizes the social option value of the infrastructure. At this scale and level of abstraction, commons management aims to limit both government and market shaping of the environment and our lives, plans, beliefs, and preferences. In other words, commons management is a strong default position for the cultural environment because users—autonomous individuals as well as social groups and communities—get to shape the environment and choose what to say and do and how to plan their lives, experiences, and interactions with each other and the environment. The cultural environment is spillover-rich because of the many different user activities that produce, distribute, use, and reuse public and social goods. Support for commons as a default governance regime at this macro level seems to be reflected in both the First Amendment, which restricts the exercise of government power to control the cultural environment, and the related conception of a robust public domain,

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562  Research handbook on the economics of IP law volume 1 which limits private ownership, control, and exclusion over swaths of cultural, intellectual, and social resources (Litman, 1990; Benkler, 1999; Lessig, 2001; Samuelson, 2006). Markets and government have played and will continue to play incredibly important roles in shaping the cultural environment. These social systems and institutions depend on and are essential to the cultural environment. As Benkler (2006) aptly describes (and critiques), the reality of our modern existence is that the industrial information economy and mass media system have had a tremendous influence on both the cultural environment and the American people. Yet this does not undermine the case for commons management; government and market interventions and institutional structures should be understood as targeted exceptions. The cultural environment as infrastructure has an intergenerational dimension. Each generation is blessed beyond measure with the intellectual and cultural resources it receives from past generations; each generation experiences and changes the cultural environment and passes it on to future generations. That we ‘stand on the shoulders of giants’ is often noted to emphasize the cumulative nature of cultural or scientific progress (Scotchmer, 1991, p. 29). But ‘the expression also reflects an understanding of intergenerational dependence: each generation is both dwarf and giant; the current generation stands on the shoulders of the past and also serves as the shoulders for the future’ (Frischmann and McKenna, 2015; Gordon, 1993). Essentially, ‘shoulders’ refers to the ‘fundamental blessings’ of resources preserved, created, and transmitted. While each generation faces supply-side problems (discussed below), it does so within the existing cultural environment, while also shaping the cultural environment for the future. B.  Economic Characteristics of Intellectual Resources The economic characteristics of intellectual resources are complex. To start, intellectual resources are public goods, often a form of capital, and often the source of various types of externalities. Intellectual resources often are infrastructural and face the demand-side concerns common to infrastructure. An added layer of complexity is the fact that intellectual resources are part of cultural, intellectual, and social progress, and thus a part of our complex and evolving cultural environment. This subsection briefly explains the supply-side problems that flow from the public goods nature of intellectual resources;9 it highlights how the conventional supply-side problems are complicated by demand-side concerns. It then discusses the added layer of complexity. 1.  Conventional supply-side problems Intellectual resources face well-known supply-side problems, common to public goods, discussed in other chapters. First, the inability to (cheaply) exclude competitors and nonpaying consumers (free riders) presents a risk to investors perceived ex ante (prior to production of the good), and this risk may lead to undersupply. This problem is a function of (non)excludability. Second, even if exclusion is feasible at low cost, nonrivalry suggests that markets still undersupply various intellectual resources. 9

  Other chapters discuss these issues, but the infrastructure lens reveals nuances worth noting.

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Infrastructure theory and IP  563 a. (Non)excludability  (Non)excludability is not a fixed or inherent characteristic of a resource; the costs of exclusion vary considerably with technology and context. In the absence of some institutional solution, there would be a significant underinvestment in some types of intellectual resources because of the risk that competitors would appropriate the value of the resources and undermine the ability of investors to recover their costs. Whether private incentives are in fact inefficiently suppressed by this potential misappropriation risk depends substantially on the type of investment, the intellectual resource in question, and the particular context. Many intellectual resources are not subject to this particular supply-side concern; we generate the resources without being disabled by concerns over misappropriation. In fact, many people make investments because the expected private benefits exceed the fixed costs, regardless of whether or not others free ride. Appropriating benefits through market exchange of the intellectual resource or some derivative product may not be relevant to the investor. For example, we engage in many intellectually productive activities because participation itself provides sufficient private benefits. Participation can be fun, intellectually stimulating, educational, or serviceoriented, among other things. Participation may not be effortless or free; it may require substantial investment. Regardless, the private value derived from participation may be sufficient, and external benefits conferred to others that use or consume the output (i.e., the intellectual resource) may be irrelevant to incentives to invest. Even if those benefits could be internalized, such internalization could potentially decrease incentives to invest and prove quite costly (Pink, 2010; Amabile, 1996; Benkler, 2006). In many situations, people create, invent, and innovate because the anticipated returns from their own use of the results are sufficient to justify the investment. Von Hippel (2005) pioneered a rich literature on user innovation that demonstrates quite clearly how many significant innovations result from users seeking to solve their own particular problems, needs, or curiosities without disabling concern over free riding. In some contexts, people produce intellectual resources and welcome free riding by others. Sharing intellectual resources can be a viable strategy for increasing returns generated through other means. Benkler (2006) describes different examples, ranging from lawyers who write articles to attract clients to software developers who share software and make money by providing services to users. Sharing may help attract attention, build a reputation, or lead to reciprocal sharing. Even where free riding is a concern and appropriating benefits through market exchange of the intellectual resource or some derivative product is relevant to investment decisions, self-help mechanisms, such as lead-time advantages and barriers to entry, may provide sufficient protection against free riding by competitors to support the investment. In some instances and in certain industries, self-help mechanisms are preferred for gaining a competitive advantage. Surveys of R&D managers show that factors such as securing lead-time advantages, increasing learning, developing complementary products, and ensuring secrecy are more relevant to incentives to invest in R&D than any perceived ability to secure traditional intellectual property protection (Mansfield et al., 1981, Mansfield, 1986; Levin et al., 1987; Cohen et al., 2000; Barnett, 2004). The extent of the benefits that inure from such self-help mechanisms vary by industry and depend on a multitude of external factors, including technology-enhanced access and copying opportunities. Such mechanisms are imperfect and do not suffice for many types of intellectual resources, but when relevant, they can be quite important and should be evaluated in comparison with each other and alternative institutions.

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564  Research handbook on the economics of IP law volume 1 Intellectual property laws are a prominent but by no means exclusive means of addressing the supply-side problem where free riding is a concern and appropriating benefits through market exchange of the intellectual resource or some derivative product is relevant to investment decisions. Consider patent law. In the absence of patent law, there would be a significant underinvestment in some types of inventions because of the risk that competitors would appropriate the value of the inventions. Granting inventors patents lessens the costs of exclusion, raises the costs of free riding, encourages licensing, and, as a result, makes a greater portion of the surplus generated by the invention appropriable by the inventor. The exclusivity provided by patent law does more than affect investment in invention, however. Patents affect the supply-side functioning of markets for inventions as well as markets for derivative products, including additional improvements, innovations, and commercial end-products. The reward, prospect, and commercialization theories of patent law take patent-enabled exclusivity as the relevant means for fixing a supply-side problem—the undersupply of private investment in the production of patentable subject matter or in the development and commercialization of patentable subject matter that would occur in the absence of patent-enabled exclusivity (Landes and Posner, 2003; Kitch, 1977; Kieff, 2001; Ghosh, 2004, pp. 1353–7).The theories differ largely in terms of where in the supply chain patent-enabled exclusivity is needed, and in terms of the degree of control/exclusivity needed. In reality, these needs vary by industry and context, giving each of the theories some support. As the next subsection explains, intellectual property laws also set boundaries around intellectual resources in a manner that reduces transaction costs and reduces information costs. This boundary-setting function creates legal ‘things’ that can be more easily subject to market exchange (Madison, 2005). The supply-side benefits provided by patent law are not costless. The appropriation of a greater portion of the surplus presumes an increase in price. Absent exclusivity, competitive distribution and use of the invention would drive the price to marginal cost (zero), in which case consumers would capture the full consumer surplus. When relevant, patents may enable pricing above marginal cost and, as a result, introduce deadweight losses. Keep in mind, however, that the magnitude of the deadweight losses depends on both the strength of the legal rights conferred and the market conditions. Other chapters explain this further. b. Nonrivalry  Addressing the excludability problem for intellectual resources through intellectual property or other means does not eliminate the nonrival nature of the resources or ensure efficient market provisioning (Lunney, 2008; Samuelson, 1954). Some scholars have suggested that private property rights convert the public good into a private good, but this is not correct (Samuelson, 1958, p. 335). (Non)excludability should not be confused or conflated with nonrivalry. It may be the case that exclusion can prevent sharing, but that in no way affects the capacity of the resource or the corresponding option to share among many users. Consider three important implications.10 First, nonrivalry enables sharing and an extra degree of freedom in managing or allocating the intellectual resource. For purely consumptive ideas, this prompts the classic

10   These implications and their relationships to the infrastructure theory are why the chapter discusses (non)excludability and nonrivaly despite the coverage given by other chapters.

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Infrastructure theory and IP  565 trade-off between static and dynamic efficiencies—for an existing idea, open sharing generally maximizes social welfare because the marginal cost of sharing with someone is zero, but such sharing may have consequences for dynamic efficiency if it lessens investment incentives. Exclusion does not eliminate this trade-off; it simply provides the entity with the capability to exclude with the opportunity to decide whether or not to do so. For ideas, nonrivalry prompts a more complicated trade-off among static efficiency and various types of dynamic efficiencies. In sum, the private and public opportunity to leverage nonrivalry remains an important economic consideration, even when the costs of exclusion are minimal. Second, even when the costs of exclusion are minimal, demand-measurement problems still lead to undersupply by markets. There are two notable demand-measurement problems, one focused on ‘optimality conditions’ and difficulties in accurately measuring consumer preferences, and one focused on externalities. With respect to the first demandmeasurement problem, Paul Samuelson (1954) noted that a second type of free riding occurs when consumers strategically misrepresent their true preferences in the hope that other consumers will bear a greater proportion of the costs. This strategic behavior problem, however, is independent of exclusion. Demand-measurement problems associated with externalities do not depend upon strategic behavior or exclusion. The bottom line is while exclusion facilitates market provisioning, markets still systematically undersupply some public goods because market demand fails to accurately reflect social demand.11 Third, reducing exclusion costs fixes an important supply-side problem and brings the supply-side analysis of market provisioning of intellectual resources in line with provisioning of most other infrastructural goods with similar cost structures—high fixed costs coupled with low marginal costs (Frischmann and Hogendorn, 2015). The cost structure of supply still can impact incentives to invest and impose deadweight losses during fixed cost recovery, and excludability does not eliminate these issues. The economic baseline for evaluating the sufficiency of market incentives to invest should be average cost recovery. (There has been a vigorous debate on this point: Lemley, 2005; Duffy, 2005; Frischmann, 2007b; Frischmann and Lemley, 2007; Demsetz, 2008; Frischmann, 2009b; Barron, 2010; see also Demsetz, 1967.) Sufficient incentives to invest depend on an expectation of recovering total costs, including a competitive return on capital investment. The cost structure suggests that incentives to invest will be insufficient and undersupply will result, unless pricing above marginal cost and (at least) approximating average cost is sustainable. Without exclusion enabled by intellectual property or other means, it might be impossible for suppliers to recover their average costs because freeriding competitors would drive prices to marginal cost. Exclusion can enable sustainable

11   Some argue in favor of exclusion coupled with perfect price discrimination. I do not address this argument in this chapter, but I do elsewhere. Simply put, the argument only works in very limited contexts with much of which is most important in reality assumed away for purposes of making the argument (Lunney, 2008; Lipsey and Lancaster, 1956). One of the lessons from the infrastructure theory is that the allocation of surplus between producers and consumers can have important implications for efficiency, productivity, and social welfare and should not be casually disregarded as a mere wealth transfer, pecuniary externality, or distributional issue (Frischmann, 2012). I am working with economists Alain Marciano and Giovanni Ramello on ‘Relevantly Irrelevant Externalities,’ a paper that will elaborate on this point.

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566  Research handbook on the economics of IP law volume 1 average cost pricing and competition, in a sense facilitating markets. Enabling average cost pricing does not ensure actual cost recovery, however. There are a number of practical obstacles to effectively implementing average cost pricing (Frischmann, 2012, ch. 8). Moreover, competition and innovation can jeopardize cost recovery, for example, when a new entrant figures out a way to compete with lower fixed costs. If exclusion is limited in scope to actual misappropriation (free riding on the fixed cost investment of the first entrant), then whether the first entrant is capable of recovering its costs will depend on the fixed cost investments that others must make to enter the market as well as lead-time advantages and other possible barriers to entry.12 On the other hand, exclusion also can enable monopoly pricing and eliminate competition. What exclusion enables depends on the strength and scope of exclusion and the market context. The legal right to exclude can be narrowly or broadly constructed along various dimensions. For example, it can be limited to actual copying of an entire intellectual work, broadened to block copying of parts of the work, broadened to block similar but not identical copying, or broadened beyond instances of copying to block independent creation, among other things. It can also vary in other dimensions such as duration, the strength of remedies, and so on. At the extreme, government could grant monopoly franchises with legal entry barriers. Exclusion can vary in strength, scope, and market impact. A difficult supply-side question is whether patent or copyright law should do more than address actual free-riding risks (Le, 2004; Lemley, 2005; Duffy, 2005; Frischmann and Lemley, 2007; Liivak, 2010). If patent and copyright laws aim to facilitate competitive markets for intellectual resources and derivative products, a narrow focus on such risks would be appropriate. However, if the laws aim to induce investment in intellectual resources above and beyond what competitive markets would provide, a broader focus on conveying market power and the ability to appropriate supra-competitive returns might be appropriate. If the latter objective is chosen, however, then one would have to both justify the need for extra inducement—why put a thumb on the scale in favor of investments in intellectual resources rather than other types of investments? Is the increase in deadweight losses worth the gain?—and explain from a comparative institutional standpoint why intellectual property laws are the preferred institution for making this social investment—why intellectual property rights rather than government subsidies, a prize system, or other alternatives (Frischmann, 2000; Barnett, 2004; Fisher, 2004; Burstein, 2012; Hemel and Ouellette, 2013; Sarnoff, 2013; see also Komesar, 1994, 2001). This is an area in need of sophisticated and sustained research (Frischmann and McKenna, 2015). 2.  Intellectual resources and activities, products, and processes The subsection focuses on the added complexity associated with ‘the other crucial quirkiness . . . that information is both input and output of its own production process.’ 12   People sometimes emphasize the magnitude of fixed costs. In many cases, this does not really matter so long as a second comer would have to sink the same amount. High fixed costs can be a decent barrier to entry, provided that misappropriation is precluded and average cost pricing is feasible. What seems to matter in such circumstances is the rate of fixed-cost-reducing innovation—whether a second comer can figure out a way to enter more cheaply. Of course, this is true in all sorts of markets. Certainly in some cases, incredibly high fixed costs may exceed capital constraints for any single firm, but that raises a different problem altogether.

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Infrastructure theory and IP  567 As noted, this effect is interesting and complex because it reveals necessary dependence among generations, but there is more to it than that. It implicates the cumulative, dynamic, and evolutionary nature of progress in intellectual-cultural systems, or, more broadly, in the cultural environment. Benkler (2006) focuses on how the ‘on the shoulders of giants’ effect makes ‘propertylike exclusive rights less appealing’ because it increases the deadweight losses from pricing above the marginal cost of zero by making productive use of the nonrival resources more costly. He notes: ‘Today’s users of information are not only today’s readers and consumers. They are also today’s producers and tomorrow’s innovators.’ Simply put, users are both consumers and producers. The fact that many intellectual resources are a form of nonrival capital that supports production of even more nonrival capital suggests the possibility of increasing returns to investing in such resources and leveraging nonrivalry (Romer, 1996; Ochoa, 1996; Schmidt, 2003). To the extent that this effect is taken seriously in economic and legal scholarship, attention is devoted to the relationship between two stages, the first- and second-generation producers, the pioneer and improver. For example, Scotchmer (1991, 1996) has focused on this effect. She emphasizes the importance of licensing intellectual property between first- and second-generation inventors, and adequately compensating and maintaining investment incentives to both stages of inventorship, given that many products are the result of numerous improvements on previous inventions (Scotchmer, 1991, 1996; Green and Scotchmer, 1995; Lemley, 1997; Merges and Nelson, 1994, 1990). Yet we often take the ‘on the shoulders of giants’ effect for granted. For example, we often take for granted the intellectual or cultural environment within which and on which we (and others) build; this may be due to a romantic notion of authorship, an inflated sense of self, or any number of things (Litman, 1990; Boyle, 2010; Lessig, 2001; Vaidhyanathan, 2001). Similarly, we often take for granted the various intellectual outputs that emerge from our experience and engagement with the cultural environment; we only have so much time and attention. Regardless, we use, make, and reuse intellectual resources continuously in our lives. This seemingly trivial observation has some ­interesting implications. First, we need intellectual inputs to be intellectually productive and to make intellectual progress in our lives. Second, the intellectual resources to which we have access will shape the intellectual outputs we are capable of producing as well as our beliefs and desires about what to produce; in a sense, they shape who we become (our beliefs, knowledge, preferences) as we engage with the environment. Third, each producer and producer’s output is thus dependent or contingent on various infrastructural inputs. ‘In order to write today’s academic or news article, I need access to yesterday’s articles and reports. In order to write today’s novel, movie, or song, I need to use and rework existing cultural forms, such as story lines and twists’ (Benkler, 2006, p. 37). As Julie Cohen suggests, we are situated within the cultural environment, shaping it while being shaped by it (Cohen, 2005, p. 370; Cohen, 2012). Continuous situated engagement implies a stream of input-output relationships (i.e., input → output/input → output/input . . .). In many contexts, it may not be worth the effort to pay attention to the continuous streams of relationships. Surely, we do not need to acknowledge and consider each incremental addition associated with sensory experience or thinking. Instead, we may conflate many input-output relationships into a

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568  Research handbook on the economics of IP law volume 1 process (activity or practice) and pay attention only to particular outputs that are worthy of attention. It is common to talk about intellectual resources as identifiable, discrete things with known properties and boundaries. The very notion of a ‘resource’ or ‘public good’ implies such features. But this is a significant oversimplification. Intellectual resources often have a dual nature—creation, invention, and innovation may be resources and activities. Consider basic research: Is it a thing—a result, an input, an output, both—or is it a process or activity that one engages in? It is both, right? Maybe this seems like a semantic point, but isolating one from the other (product from process) for purposes of the law, economic analysis, or just discussion loses something quite valuable. Can we ‘discretize’ cumulative intellectual processes of creation, invention, and innovation in a manner that makes analytic sense? We try to do so regularly within copyright and patent law, but are we truly granting patents and copyrights over discrete outputs—over discrete ‘things’? When we are dealing with streams of input-output relationships that may or may not culminate in a consumer good, it can be difficult to isolate the ‘thing’ we might identify as the invention or work of authorship, much less the intellectual contribution made by the person claiming patent or copyright (Madison, 2005). We recognize and enforce (artificial) boundaries for purposes of constructing property rights and facilitating exclusion, coordination, and market provisioning, but our focus on ‘things’ (inputs, outputs, resources, goods, and so on) often obscures the continuity and complexity of the system. Even if we reduce the number of input-output relationships we are willing to entertain, we must acknowledge that intellectual progress involves a stream of such relationships, and this requires acknowledgment of a potential stream of spillovers, or what we might refer to as cascading spillovers. This is the case even if we assume a simple string of single public good input-output relationships, where a single public good is produced at each stage. In reality, each stage of production may involve multiple input and outputs, each of which can be used productively to produce different outputs and potentially support different production paths by many people. Many intellectual and cultural activities yield social goods as well, in which cases the diffusion of a different set of externalities cascade as well. The conventional model of intellectual production represents progress in a linear fashion, for example, from basic research to applied research and finally to commercial application; or, alternatively, from idea conception to invention to commercial development; or something similar. Linear models are intuitive and qualitatively appealing because many economic and social policy questions that follow seem to have straightforward answers. For example, the government should support basic research as a form of public goods production; the basic research pool should supply inputs for applied research; private firms should step in at some point and bring the benefits of research results to the public through commercialization. Yet the linear model is not an actual scientific model of innovation or intellectual progress. Rather, as Benoît Godin (2006) explains, a host of different actors—scientists seeking funding, economists advising government agencies—constructed the linear model of innovation to classify research activities, establish a connection between basic and applied research and eventually commercial activities, and advance political and other agendas. Godin explains that the simple three-stage ‘basic research → applied research → ­development’ model became

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Infrastructure theory and IP  569 standardized when official government statisticians appropriated the three-stage model as a means for classification of research to aid in statistical categorization, measurement, and quantitative analysis (Godin, 2006; OECD, 1962). Yet the linear model has been roundly criticized and rejected (Kline and Rosenberg, 1986). As Nathan Rosenberg claimed in 1994, ‘Everyone knows that the linear model of innovation is dead’ (Rosenberg, 1994, p. 139). Yet as Godin shows, the linear model remains intact in the discourse despite its many criticisms. He observes that alternative models have struggled to replace the linear model because they pose more difficult measurement issues, and ‘with their multiple feedback loops look more like modern artwork or “a plate of spaghetti and meatballs” than a useful analytical framework’ (Godin, 2006, p. 639). Intellectual production processes, and intellectual progress more generally, are often nonlinear, multidirectional, stochastic, full of feedback loops, and difficult to model (Dreyfuss, 2010; Godin, 2006; Knudsen, 2003, pp. 13, 24). There are various nonlinear innovation models that incorporate dynamic interactions between different types of research and even nonresearch activities as well as the background cultural environment within which such interactions take place. For example, the ‘Chain-Linked Model,’ developed by S.J. Kline, incorporates feedback loops between research and the ‘existing corpus of knowledge’ and emphasizes the importance of various different activities, procedures, and external influences that play a role in innovative progress; there are multiple paths, feedback loops, and various actors (Kline and Rosenberg, 1986; Kline, 1991a, 1991b). As Kline and Rosenberg point out, the linear model’s omission of feedback loops, learning from ‘short-coming and failures,’ and other features renders it incapable of dealing with radical and incremental innovation. The dynamic nature of progress often leads to unexpected spillover effects. For example, an idea developed in one sector may lead to beneficial progress in another unrelated (or marginally related) sector. The practice of science is becoming increasingly interdisciplinary, and scientific progress in one discipline is often propelled by advances in other, often apparently unrelated, fields. For example, who would have thought that nuclear physics research (the study of the inner workings and properties of the atomic nucleus) and data gathering techniques developed for experiments on elementary particles (quarks and such) would lead to a device that has advanced the boundaries of biomedical research and health care? Yet both of these lines of inquiry led ultimately to Magnetic Resonance Imaging (MRI), a tool now used in laboratories and hospitals around the world both to conduct basic biological research and also to diagnose illness. Such cross-over between fields is yet another example of the unexpected payoffs that can come from basic research. (Staff of House Comm. On Science, 1998)

There are countless examples in science, technology, and innovation, but these phenomena are equally relevant in cultural systems too (Boyle, 2010, pp. 122–5; McLeod and DiCola, 2011; Schatz, 1981, 1977, p. 44; Altman, 1987;  Doll and Faller, 1986; Miller, 2007). The cultural environment and its constituent innovation, science, culture, knowledge, and other systems are dynamic evolutionary systems. Since how and what direction the systems, environment, and consequently society evolve are not predetermined or inevitable, institutions and social policies matter considerably; the cultural environment we construct and sustain reflects deep normative values.

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570  Research handbook on the economics of IP law volume 1 The dynamic, nonlinear, and multidirectional nature of these processes/activities involves considerable uncertainty. This can be daunting, and for many, it is something we hope to control, diminish, or eliminate over time. Infrastructure theory suggests a very different outlook. When coupled with the nonrival nature of intellectual resources, it suggests considerable social opportunity. The nonrival nature of the resources means that intellectual capital generated at different points in the ‘stream’ may flow along many paths, potentially being used simultaneously by different people in different settings as an input into multiple intellectual-cultural processes. There are a variety of obstacles to the free flow and use of intellectual capital (e.g., limited absorptive capacity, education, or capabilities to productively use the resources) (Lobel, 2015; Bontis, 2005, pp. 134–5). In particular contexts, there may be good reasons to restrict the free flow and use of intellectual capital (e.g., to prevent misappropriation and protect supply-side incentives to invest). But in light of nonrivalry and the ‘on the shoulders of giants’ effect, the social opportunity deserves recognition and further attention. The complex, dynamic, nonlinear, and multidirectional nature of intellectual progress and the prevalence and variety of external effects in the cultural environment suggest that focusing on optimality conditions may be a red herring (or worse). We are inevitably in what economists call a second-best world because of the incredible number of incomplete and missing markets in the cultural environment (Lipsey and Lancaster, 1956). Rather than focus on achieving optimal government or market selection of public good investments, society is likely much better off focusing on indirect interventions that (1) support public capabilities to participate in intellectual-cultural activities and (2) aim to lower the costs of public goods production for a wide range of public goods while (3) maintaining flexibility in the opportunities available to potential participants. In other words, supporting open infrastructure would better leverage nonrivalry, facilitate progress along many paths, and sustain a spillover-rich cultural environment in which and with which members of society are capable of interacting productively. This shift in focus has important implications for appreciating intellectual property laws as semi-commons arrangements. Here I summarize what this would mean for intellectual property laws: First, the laws should focus on misappropriation risks with an aim to facilitate average cost recovery and competition, rather than market power or monopoly; to the extent that certain areas warrant subsidies, then targeted subsidies seem more direct and less distorting than adjusting the legal system for all areas, and such subsidies can be directed at infrastructural investments in the targeted area—for example, basic research in biotech or even directly funding shared clinical trial infrastructure. This first point suggests that exclusion is important but should be limited in scope. Second, in addition to facilitating exclusion, intellectual property systems should aim to reduce information and transaction costs because such cost reductions would apply to a wide range of public goods investments. This can be done in a manner similar to traditional property law systems, by providing recordation, registration, dispute resolution, and so on. Also, given the multitude of intellectual property owners, private ordering solutions to collective management problems should be facilitated as well. Third, and related to the first point, it should be understood that the division of surplus often has efficiency consequences (rather than mere distributional or equity consequences) because consumers are often productive users, even if their productive use does not immediately generate a marketable good. This has consequences for a variety of economic issues in intellectual property law. Fundamentally, and in stark

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Infrastructure theory and IP  571 contrast with the conventional economic perspective, intellectual property systems should be understood as exceptional, targeted interventions that construct semi-commons and sustain a spillover-rich cultural environment. C.  Intellectual Property Laws as Semi-Commons Arrangements The intellectual property laws construct semi-commons arrangements, complex mixtures of interdependent private rights and commons (Heverly, 2003; Madison et al., 2010; Frischmann and Lemley, 2007; Frischmann, 2007b; Yu, 2005, pp. 6–8; Loren, 2007; Vetter, 2007; Smith, 2000). Semi-commons exist at different scales. At a macro level, the cultural environment constitutes mixed infrastructure that should be managed as a commons. As discussed, commons management aims to limit both government and market shaping of the cultural environment and our lives, plans, beliefs, and preferences. Commons management is a strong default position for the cultural environment because users—autonomous individuals as well as social groups and ­communities—get to shape the environment and choose what to say and do and how to plan their lives, experiences, and interactions with each other and the environment. Yet, as in the context of the natural environment, a pure open-access or commons regime can lead to tragedy, in this context associated with undersupply of certain types of intellectual resources. Consequently, intellectual property systems enclose and regulate a select (albeit very broad) set of intellectual resources. Thus, an identifiable semi-commons emerges at the macro level, with commons being the default form of management and intellectual property enclosure being exceptional, albeit of broad scope and significant importance. The unenclosed and enclosed are highly interdependent; much of which exists in either space/environment/category depends substantially on complex interactions and various inputs/contributions from the other space/environment/category. Given tremendous difficulties in establishing and maintaining boundaries, and the dynamic and complex nature of cultural-intellectual resource systems, the intellectual property laws also mediate the relationships between the enclosed and unenclosed. With respect to ideas, for example, the First Amendment, copyright, and patent interact with each other and the public domain. The discussion of ideas demonstrates the semi-commons structure and associated interdependence between private and public at the macro level; at the same time, it reveals the semi-commons structure at the meso (or intermediate) level of the copyright and patent systems. Though both legal systems construct private rights and enclose a set of intellectual resources, neither constitutes pure private rights nor enclosure. Rather, both copyright and patent laws themselves are semi-commons arrangements that mix both private rights and commons. Both legal systems are designed to sustain incentives and spillovers (Frischmann and Lemley, 2007; Frischmann, 2007b, p. 659). Copyright law creates a semi-commons arrangement—a complex mix of private rights and commons. The rights granted by copyright law—specifically, the 17 U.S.C. § 106 rights to reproduce, display, perform, distribute, and make derivative works—provide incentives to create and disseminate works by facilitating transactions and lowering the costs of excluding competitors from using the expression. The supply-side incentives affected by copyright extend beyond the initial investment in creation to investments in content development and dissemination. What must be encouraged is not only works’

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572  Research handbook on the economics of IP law volume 1 creation but also their publication, dissemination, and productive use. Like traditional property rights, copyright facilitates transactions over certain uses of creative expression, and thereby enables rights holders to appropriate some of the surplus generated by their investments in creation, development, and dissemination. In this fashion, the private rights component of copyright law improves investment incentives through the operation of the market mechanism; in a sense, it uses the market to achieve a broader set of economic and social ends. The commons component of copyright law promotes spillovers; or, to put it another way, the commons component of copyright law avoids market or government allocation of resources for certain ranges of uses and for certain elements of a copyrighted work. Through a variety of leaks and limitations on the private rights granted, copyright law sustains common access to and use of resources needed to participate in a wide variety of intellectually productive activities. Many of these activities generate socially valuable spillovers: benefits realized by consumers, users, and third parties that are external to a creator’s decision to produce the work and to any transactions involving the work. For example, due to its limited duration, copyright has generated temporal externalities. A work that enters the public domain is free for public use, and any value derived from this use is external to both the creator’s decision to produce the work and any transactions involving the work. Similarly, due to copyright’s limited scope, copyright generates externalities that accrue to other creators, even competitors, as these entities can freely use various unprotected elements of a work, such as an idea, theme, or functional feature. Copyright’s limited scope may also generate externalities in complementary technology markets: for example, companies can design and build products such as DVD players and iPods that facilitate the enjoyment of copyrighted works. Finally, copyright produces externalities when consumers productively use or reuse works. Creating and consuming creative expression of different types develops human capital, educates, and socializes in a manner that benefits not only creators and consumers but also nonparticipants. Patent law, like copyright, is a semi-commons that promotes both ownership of rights and spillovers, but the particular ways in which patent law and copyright law permit ‘leakage’ differ significantly. Patent law protections have a much shorter duration than copyright, permitting inventions to enter the public domain more quickly. Patent law also excludes some inventions from protection because requirements for obtaining protection are stricter. Once inventors do obtain protection, however, the right they obtain is much stronger and less leaky than that afforded by copyright law. Patent law promotes spillovers in several ways. Patents generate externalities by facilitating learning and disclosure. Indeed, patent law, unlike copyright law, requires the patent owner to teach the public how to make and use the invention, and this is often identified as a central function of the patent system, though in practice it is considerably less important than the system’s incentive effects. Patents lead to temporal externalities—spillovers occur when the patent expires. Temporal spillovers are quite significant. For example, the overwhelming majority of the social benefit associated with the telephone (and, for that matter, the paper clip) occurred after the basic patents on those technologies expired. These legal systems sustain commons by excluding resources and designating them unprotectable, but also by sustaining public access to privately owned resources for certain types of uses (Litman, 1990; Landes and Posner, 2003). In a sense, the legal systems also construct semi-commons at the micro level of the protected expression or invention.

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Infrastructure theory and IP  573 At this micro level, copyright law appears to be more sensitive to and accommodating of social demand for commons management of infrastructural expression than patent law is with respect to infrastructural invention. ‘Copyright encourages and sustains participation in intellectually productive activities that both generate and use expressive works to communicate, entertain, teach, and engage us in many different ways. Many of these activities—e.g., education, community development, democratic discourse, political participation—generate socially valuable . . . spillovers’ (Frischmann, 2007b, p. 672). For example, fair use is a particularly important copyright law doctrine that aims to preserve public capabilities to use copyright protected expression in various ways (Frischmann and Lemley, 2007, pp. 286–90). As Lemley and I explain: Many paradigmatic uses deemed fair involve use of a work to engage in activities that yield diffuse, small-scale spillovers to a community. Using a work for educational purposes, for example, not only benefits the users themselves, but also, in a small way, benefits others in the users’ community with whom users have interdependent relations—reading and learning builds socially valuable human capital. Critiquing a work similarly benefits not only the user but also, in a small way, others in the users’ community—not only because those others may read the critique itself, but also because engaging in critical commentary is a form of creative and cultural activity that builds socially valuable human capital. We recognize that observing and measuring these spillover benefits is probably an impossible task. That is our point, in fact. As a society, on the whole, we recognize the value of active, wide-spread participation in these types of activities, and we know that creative expression is essential to participation. Thus, we encourage common access to and use of expression for these types of activities.

Other features of copyright law, such as constraints on the exclusive scope of rights (e.g., private display and performance is permissible) or judicial willingness to provide ‘thinner’ protection for certain types of works, also provide breathing space. The levels-ofabstraction framework described above permits judges to adjust the scope of copyright based on the context and nature of the work, and judges routinely filter infrastructural elements of a work in addition to ideas (e.g., stock literary elements) (Lee, 2008). Patent law is not as sensitive to social demand for commons management of infrastructural invention. Lee (2008) provides an excellent account of how trademark, copyright, and patent law accommodate social demand for access to infrastructural works. The primary commons components of patent law are its mechanisms for exclusion and conferral to the public domain (e.g., disclosure, strict qualification criteria, and duration). There is no fair use or functionally equivalent doctrine. Courts implicitly engage in levels-ofabstraction analysis when construing claims and determining infringement, and that provides an opportunity to adjust patent scope, but the analysis is not sensitive to social demand or the infrastructural characteristics of the invention. Scholars have advanced arguments for a patent fair use doctrine, a more robust experimental use defense, and adjusting remedies when patents on infrastructural inventions are infringed (O’Rourke, 2000 (fair use); Strandburg, 2011 (same); Mueller, 2001, 9–10 (experimental use); Caruso, 2003 (same); Lee, 2008 (exploring the concept of intellectual infrastructure, and proposing that ‘courts should consider the infrastructural use of a patented invention when determining infringement remedies and, in certain circumstances, allow such use to continue by a downstream user contingent upon providing compensation to the patentee’)).

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IV. CONCLUSION Infrastructure theory reflects a combination of ideas drawn from multiple disciplines within economics and law. Though not fully explored in this short chapter, it also is intimately connected to the commons field of study. This adaptation of a book chapter necessarily provided a limited view. Readers are encouraged to draw on the extensive reference list.

REFERENCES There is an extensive literature that spans multiple disciplines. Most of this short chapter is derived directly from Frischmann (2012), which provides a much more extensive bibliography. In the spirit of compiling a list of sources for those interested in infrastructure theory, I have provided some additional sources not cited in the text of the chapter. Altman, Rick. 1987. The American Film Musical. Bloomington, IN: Indiana University Press. Amabile, Teresa M. 1996. Creativity in Context. Routledge. Arrow, Kenneth. 1962. ‘Economic Welfare and the Allocation of Resources for Inventions,’ in R.R. Nelson, ed., The Rate and Direction of Inventive Activity. Princeton, NJ: Princeton University Press. Arrow, Kenneth J. 1970. ‘The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Nonmarket Allocation,’ in Robert H. Haveman and Julius Margolis, eds., Public Expenditure and Policy Analysis. Chicago, IL: Markham Publishing Co. Aschauer, David Alan. 2000. ‘Public Capital and Economic Growth: Issues of Quantity, Finance, and Efficiency,’ 48 Journal of Economic Development and Cultural Change 391–406. Balkin, Jack M. 2012. ‘The First Amendment is an Information Policy,’ 41 Hofstra Law Review 1–30. Barnett, Jonathan. 2004. ‘Private Protection of Patentable Goods,’ 25 Cardozo Law Review 1251–313. Barron, Anne. 2010. ‘Copyright Infringement, “Free-Riding” and the Lifeworld,’ in Lionel Bently, Jennifer Davis, and Jane Ginsburg, eds., Copyright and Piracy: An Interdisciplinary Critique. Cambridge: Cambridge University Press. Benkler, Yochai. 1998a. ‘Overcoming Agoraphobia: Building the Commons of the Digitally Networked Environment,’ 11 Harvard Journal of Law and Technology 287–400. Benkler, Yochai. 1998b. ‘The Commons as a Neglected Factor of Information Policy,’ Remarks at the Telecommunications Policy Research Conference, Arlington VA (Sept. 1998), available at http://www.benkler. org/commons.pdf (last visited Jan. 1, 2012). Benkler, Yochai. 1999. ‘Free as the Air to Common Use: First Amendment Constraints on Enclosure of the Public Domain,’ 74 New York University Law Review 354–446. Benkler, Yochai. 2001. ‘Property, Commons, and the First Amendment: Towards a Core Common Infrastructure,’ White Paper for the First Amendment Program, Brennan Center for Justice at NYU Law School, available at http://www.benkler.org/WhitePaper.pdf (last visited Jan. 1, 2012). Benkler, Yochai. 2006. The Wealth of Networks: How Social Production Transforms Markets and Freedom. New Haven, CT: Yale University Press. Benkler, Yochai. 2013. ‘Commons and Growth: The Essential Role of Open Commons in Market Economies,’ 80 University of Chicago Law Review 1499–555. Bontis, Nick. 2005. ‘National Intellectual Capital Index: The Benchmarking of Arab Countries,’ in Ahmed Bounfour and Leif Edvinsson, eds., Intellectual Capital for Communities. Oxford, UK: ButterworthHeinemann. Bourdieu, Pierre. 1986. ‘The Forms of Capital,’ in John G. Richardson, ed., Handbook of Theory and Research for the Sociology of Education. Westport, CT: Greenwood Press. Boyle, James. 1996. Shamans, Software, and Spleens: Law and the Construction of the Information Society. Cambridge, MA: Harvard University Press. Boyle, James. 1997. ‘A Politics of Intellectual Property: Environmentalism for the Net?,’ 47 Duke Law Journal 87–116. Boyle, James. 2003. ‘The Second Enclosure Movement and the Construction of the Public Domain,’ 66 Law and Contemporary Problems 33–74. Boyle, James. 2010. The Public Domain: Enclosing the Commons of the Mind. New Haven, CT: Yale University Press. Branscomb, Lewis M., and James H. Keller. 1996. ‘Introduction,’ in Lewis M. Branscomb and James H. Keller,

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Infrastructure theory and IP  579 Rose, Carol. 1986. ‘The Comedy of the Commons: Custom, Commerce, and Inherently Public Property,’ 53 University of Chicago Law Review 711–81. Rose, Carol. 2003. ‘Romans, Roads, and Romantic Creators: Traditions of Public Property in the Information Age,’ 66 Law and Contemporary Problems 89–110. Rosenberg, Nathan. 1994. Exploring the Black Box: Technology, Economics, and History. Cambridge: Cambridge University Press. Samuelson, Pamela. 1990. ‘Benson Revisited: The Case against Patent Protection for Algorithms and Other Computer Program-Related Inventions,’ 39 Emory Law Journal 1025–401. Samuelson, Pamela. 2006. ‘Enriching Discourse on Public Domains,’ 55 Duke Law Journal 783–834. Samuelson, Paul A. 1954. ‘A Pure Theory of Public Expenditure,’ 36 Review of Economics and Statistics 387–9. Samuelson, Paul A. 1958. ‘Aspects of Public Expenditure Theories,’ 40 Review of Economics and Statistics 332–8. Sarnoff, Joshua. 2013. ‘Government Choices in Innovation Funding (with Reference to Climate Change),’ 62 Emory Law Journal 1087–613. Schatz, Thomas G. 1977. ‘New Directions in Film Genre Studies (a Response to Charles F. Altman),’ in Ben Lawton and Janet Staiger, eds., Film Historical-Theoretical Speculations (The 1977 Film Studies Annual: Part 2). Pleasantville, NY: Redgrave Publishing. Schatz, Thomas G. 1981. Hollywood Genres: Formulas, Filmmaking, and the Studio System. New York, NY: McGraw-Hill. Scherer, Frederic M. 1984. Innovation and Growth: Schumpeterian Perspectives. Cambridge, MA: MIT Press. Scherer, Frederic M., and David Ross. 1990. Industrial Market Structure and Economic Performance. Boston, MA: Houghton Mifflin. Schmalensee, Richard. 1981. ‘Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination,’ 71 American Economic Review 242–7. Schmidt, Gordon W. 2003. Dynamics of Endogenous Economic Growth: A Case Study for the Romer Model. Amsterdam: Elsevier. Schultz, Jason, and Pamela Samuelson. 2011. ‘Clues for Determining Whether Business and Service Innovations are Unpatentable Abstract Ideas,’ 15 Lewis and Clark Law Review 109–1107. Scotchmer, Suzanne. 1991. ‘Standing on the Shoulders of Giants: Cumulative Research and the Patent Law,’ 5 Journal of Economic Perspectives 29–41. Scotchmer, Suzanne. 1996. ‘Protecting Early Innovators: Should Second-Generation Products be Patentable?,’ 27 RAND Journal of Economics 322–31. Sen, Amartya. 1993. ‘Capability and Well-Being,’ in Martha C. Nussbaum and Amartya Sen, eds., The Quality of Life. New York, NY: Oxford Clarendon Press. Sen, Amartya. 2009. The Idea of Justice. Cambridge, MA: The Belknap Press of Harvard University Press. Shapiro, Carl, and Hal R. Varian. 1998. Information Rules: A Strategic Guide to the Network Economy. Boston, MA: Harvard Business School Press. Smith, Henry E. 2000. ‘Semicommon Property Rights and Scattering in the Open Fields,’ 29 Journal of Legal Studies 131–69. Staff of House Comm. on Science. 1998. 105th Cong., 1st sess., ‘Unlocking Our Future: Toward a New National Science Policy’ 8 (Comm. Print 1998), available at http://www.access.gpo.gov/congress/house/science /Cp105-b/science105b.pdf (last visited Jan. 1, 2012). Steinmueller, W. Edward. 1996. ‘Technological Infrastructure in Information Technology Industries,’ in Morris Teubal, Dominique Foray, Moshe Justman, and Ehud Zuscovitch, eds., Technological Infrastructure Policy: An International Perspective. Dordrecht: Springer Science+Business Media. Stole, Lars A. 2007. ‘Price Discrimination and Competition,’ in Mark Armstrong and Robert K. Porter, eds., Handbook of Industrial Organization. Amsterdam: Elsevier. Tassey, Gregory. 1996. ‘Infratechnologies and Economic Growth,’ in Morris Teubal, Dominique Foray, Moshe Justman, and Ehud Zuscovitch, eds., Technological Infrastructure Policy: An International Perspective. Dordrecht: Springer Science+Business Media. Taylor, Charles. 1995. Philosophical Arguments. Cambridge, MA: Harvard University Press. Taylor, John G., and Akila Weerapana. 2009. Principles of Economics (7th edn). Boston, MA: Cengage. Teubal, Morris, Dominique Foray, Moshe Justman, and Ehud Zuscovitch. 1995. Technological Infrastructure Policy: An International Perspective. Dordrecht: Springer Science+Business Media. Tirole, Jean. 1988. The Theory of Industrial Organization. Cambridge, MA: MIT Press. Van Schewick, Barbara. 2010. Internet Architecture and Innovation. Cambridge, MA: MIT Press. Vaidhyanathan, Siva. 2001. Copyrights and Copywrongs: The Rise of Intellectual Property and How it Threatens Creativity. New York: NYU Press. Varian, Hal R. 1985. ‘Price Discrimination and Social Welfare,’ 75 American Economic Review 870–75. Varian, Hal R. 1996. ‘Differential Pricing and Efficiency,’ 1 First Monday, available at http://ojphi.org/ojs/index. php/fm/article/view/473/829 (last visited Jan. 1, 2012).

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580  Research handbook on the economics of IP law volume 1 Vetter, Greg R. 2007. ‘Open Source Licensing and Scattering Opportunism in Software Standards,’ 47 Boston College Law Review 225–891. Von Hippel, Eric. 2005. Democratizing Innovation. Cambridge, MA: MIT Press. Weiser, Phillip J. 2003. ‘The Internet, Innovation, and Intellectual Property Policy,’ 103 Columbia Law Review 534–613. Williamson, Oliver E. 1971. ‘The Vertical Integration of Production: Market Failure Considerations,’ 61 American Economic Review 112–23. Yen, Alfred C. 2003. ‘Eldred, the First Amendment, and Aggressive Copyright Claims,’ 40 Houston Law Review 673. Yoo, Christopher S. 2007. ‘Copyright and Public Good Economics: A Misunderstood Relation,’ 155 University of Pennsylvania Law Review 635–715. Yoshida, Yoshihiro. 2000. ‘Third-Degree Price Discrimination in Input Markets: Output and Welfare,’ 90 American Economic Review 240–46. Yu, Peter K. 2005. ‘Intellectual Property and the Information Ecosystem,’ 2005 Michigan State Law Review 1–20.

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PART V IP, DEVELOPMENT, AND INTERNATIONAL TRADE

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22.  Creative development: copyright and emerging creative industries Sean A. Pager*

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Contents I. Introduction II. Emerging Creative Industries in the Global South A. Home-Grown Media and Cultural Progress B. Digital Technology Overthrows Cultural Hegemony C. Nigeria D. India E. China III. State Support for Creative Industries A. Copyright 1. Production incentives 2. Allocative efficiency 3. Private ordering 4. Autonomy 5. Prior commitments and path dependencies 6. Summing up B. State Patronage and Other Subsidy Mechanisms 1. Direct patronage 2. Collective licensing, rewards and indirect subsidies C. Commons-Based Creativity Models 1. Non-commercial creativity 2. Alternative business models 3. Copyright futility IV. Copyright and Creative Development: Reviewing the Record A. Thriving or Surviving? 1. Pirate innovators 2. Depressed revenues 3. Copyright’s positive role B. Pursuing ‘Copyright’ by Other Means C. The Hidden Drawbacks of Copyright Alternatives 1. Lack of scalability 2. Abuse of power 3. Distorting effects of alternative revenue sources *  Professor of Law and Associate Director of the Intellectual Property, Information and Communications Law Program, Michigan State University College of Law.

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Copyright and emerging creative industries  583 D. Distribution of Benefits E. Context-Specific Copyright F. The Formalization Imperative G. Taking Stock V. Copyright and Cultural Diversity A. Diversity Effects in Developed Markets 1. Commodity culture 2. Market structure 3. Anticompetitive abuse 4. Effects of digitization 5. Restrictions on downstream creativity B. Recontextualizing to the Development Context: Evidence from Case Studies C. Global Diversity 1. Overview of diversity concerns 2. The role of copyright 3. Cross-cultural remakes, parallel imports and versioning VI. Conclusion References

I. INTRODUCTION Western commentators celebrate the transformative potential of digital media in empowering amateur creativity—blogs, remixes, mash-ups, and the like. Yet, the effects of digital technologies on commercial creativity in the developing world have been just as profound. Nigeria went from producing an average of three films per year in the 1980s and early 1990s to producing roughly a thousand movies annually in the years since 2000 (Pager, 2012a). China has seen similarly exponential growth in home-grown content (Priest, 2016). Indian content producers have exploited new media to capture a global following (Athique, 2008). Commercial content industries have proliferated elsewhere on a smaller scale across the developing world (Pager, 2012a). Such burgeoning creative content industries hold powerful implications for debates over global intellectual property (IP). The ‘IP and Development’ debate has tended to focus on patent law to the exclusion of other IP rights and to privilege the perspective of foreign investors over domestic innovators (Schultz and van Gelder, 2008). When copyright does feature in development debates, it is generally seen as a negative influence, an access barrier to knowledge rather than an engine of creativity (Pager, 2012a). The content industries emerging in the Global South present a very different context in which to frame debates over global copyright policy. But what exactly is the role that copyright plays in the development of such industries? When Western commentators acknowledge the existence of creative industries in the developing world, they have a tendency to project upon them narratives shaped by ideological debates at home. Copyright proponents emphasize how piracy harms such emerging content industries, presenting them as windows into a dystopian future that may materialize in developed markets next (Priest, 2014). Copyright skeptics unsurprisingly paint an inverse

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584  Research handbook on the economics of IP law volume 1 picture: They argue that the ability of these industries to prosper despite high rates of piracy shows that copyright incentives are no longer needed (Anderson, 2009). Drawing on case studies of emerging content industries in China, India, and Nigeria, this chapter offers a more nuanced account of the interaction between copyright law and development: While copyright law may not be a sine qua non for creative development, it offers important advantages over alternative funding models. Copyright’s benefits may be realized in different ways and to varying degrees as content industries develop. In this respect, the account here builds on earlier narratives that posited a ‘crossover point’ whereby countries reach a stage of development at which the net benefits of copyright protection outweigh the costs (Yu, 2007). More recent commentary has suggested that there may be multiple ‘crossover points’ as countries develop (Yu, 2009).1 This chapter adds a further refinement: Rather than emphasizing specific inflection points at which copyright protection takes off, it suggests copyright formalization functions as more of an asymptotic process. The logic and external benefits of copyright formalization exert a gradual pull over time, and embrace of formal copyright norms, when it comes, often remains partial, selective, and contextually contingent. The remainder of this chapter proceeds as follows: Section II provides an overview of creative industries in the developing world and then a closer look at film and music industries in three countries—Nigeria, India, and China.2 Section III surveys competing models by which governments subsidize creative production: copyright, state patronage, as well as commons-based alternatives. Section IV examines how de facto commons models have functioned in the development context based on the case studies, and highlights the comparative advantages of copyright. Section V considers how copyright law affects cultural diversity both at the national and global levels. Section VI concludes.

II. EMERGING CREATIVE INDUSTRIES IN THE GLOBAL SOUTH A.  Home-Grown Media and Cultural Progress A wealth of scholarship and policy studies testify to the benefits of home-grown creative industries. Such industries—including music, film, television, and publishing—contribute to both economic and cultural development in a variety of ways. As pillars of the knowledge economy, creative industries promise well-paying jobs, above-average economic growth, sustainable development, and positive effects on the balance of trade (UNCTAD, 2010). Other indirect benefits include boosts to tourism, potential marketing tie-ins, and a reversal of brain drain (Pager, 2011). 1   Yu describes how attitudes to IP rights can differ even within a single country due to disparities in regional development. He also points to sectoral disparities that can arise as different content-producing industries adopt diverging views of copyright’s value (2007, 2009). Indeed, the case study of Nollywood in this chapter shows that such sharply diverging viewpoints can arise even within a single industry. 2   This chapter will use the terms ‘content industries,’ ‘creative industries,’ and ‘cultural industries’ largely interchangeably and will focus primarily on music and film industries.

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Copyright and emerging creative industries  585 The cultural benefits of such home-grown industries are equally compelling. Beyond the intrinsic value of cultural innovation in expanding horizons, provoking insight, and enriching cultural heritage, such industries also makes vital contributions to public discourse and democratic governance (Netanel, 1996; Baker, 2002), foster national cohesiveness and social inclusion (Voon, 2007) and nourish personal autonomy and identity formation in ways that facilitate human flourishing (Sunder, 2012). What role does copyright play in fostering such development? According to the formulation enshrined in the US Constitution and influential elsewhere, copyright law aims to further ‘progress’ in the creative arts. On its face, ‘progress’ sounds remarkably consonant, if not synonymous with ‘development.’ Yet, just as the preceding paragraphs demonstrate the multiple dimensions on which economic and cultural development can be measured, so, too, ‘progress’ from a copyright standpoint is susceptible to competing normative interpretations. Some question whether copyright is the right vehicle to achieve developmental aims at all. Skeptics have cast doubt on the extent to which extrinsic incentives for commercial culture industries are justified in the digital age and argue that copyright blocks more expression than it fosters.3 From the standpoint of developing countries, copyright faces additional objections: Some worry that the benefits of copyright protection flow primarily to foreign producers (Story, 2003).4 Others fret that copyright harms cultural diversity, channeling production toward globally homogenized expression at the expense of more authentic local voices.5 Here, the question may not be does copyright foster development, but rather development of what? Copyright doctrine itself provides little help in answering this question. Ever since the Bleistein decision (Bleistein v. Donaldson Lithographing Co., 188 U.S. 239 (1903)), copyright law has espoused an ethos of non-discrimination. In contrast to patent law, where the non-obviousness test explicitly probes inventive achievement, copyright doctrine deliberately eschews assessment of artistic merit (Walker and Depoorter, 2015). Such assessments are unavoidably subjective and fraught with value judgments. For example, how do we decide which furthers ‘progress’ more: a commercial feature film or an amateur video mash-up? Are we concerned only with the number of eyeballs impacted, or do we care how deeply the works affect viewers? If the latter, should we measure short-term effects or long-term? Do we only care about consumption, or is participation in production an important value (Skladany, 2008)? Different answers to these questions dictate diverging implications for copyright policy. B.  Digital Technology Overthrows Cultural Hegemony Arguments over copyright policy are also embedded in a broader discourse of imperialism. Copyright protection has long been seen as the handmaiden of Western hegemony (Story, 2003). Critics denounce copyright law as an alien appendage that tramples on   See infra Section III-C.   Policy-makers may also see copyright protection as an expensive distraction from other more pressing social needs. Such comparative balancing of social priorities, however, lies outside the scope of this chapter. 5   See infra Section V. 3 4

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586  Research handbook on the economics of IP law volume 1 local traditions (Gana, 1995) and unfairly privileges Western-centric forms of creativity (Coombe, 1998). Others decry the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the harmonization of global IP law as a ‘royalty extraction vehicle’ designed to enrich powerful multinational corporations at the expense of poor people in the Global South (Pager, 2006). This ‘neocolonial’ narrative posits innovation as almost exclusively the product of developed countries, with the developing world relegated to the role of consumer, or, at best, the source of raw inputs from which information goods would be fashioned elsewhere (Boyle, 1997). In the realm of creative expression, the discourse of cultural imperialism reinforces such neocolonial narratives. Dominant messages emanating from the ‘center’ through the vehicle of American/Western popular culture are seen as passively consumed in the ‘periphery’ (Pager, 2012c). Marxist diagnoses ascribing such one-sided cultural flows to capitalist hegemony were supplemented by empirical models by media economists which showed that the country with the largest home market—which for most of the twentieth century meant the United States—was destined to dominate global markets (Wildman and Siwek, 1988). Either way, the implications were the same: the market was rigged. Yet, further work by media scholars has shown that market size alone is not the only relevant variable. Audiences everywhere prefer locally produced expression, but the strength of this preference varies according to the audience’s ‘cultural distance’ from the dominant global supplier. Accordingly, for developing countries with cultural traditions and present-day contexts radically different from the West, a substantial ‘cultural discount’ applies to imports of global culture (Fu, 2012). In other words, the demand in developing countries for local content is strong. All that was missing was supply (Schultz, 2012). Digital technologies have changed that. While some feared digital communications would merely supply a fatter set of pipes through which popular culture exports could penetrate the developing world (Schiller, 1999), in fact, digital media have served to level the playing field. The case studies that follow illustrate the transformative effects of digital technologies in democratizing global creative content production. Nigeria, India, and China are each home to burgeoning content industries whose successes potentially recast the terms of global debate.6 Yet, the question remains: Are they thriving because of or in spite of copyright law? C. Nigeria The origin of Nigeria’s video film industry—Nollywood—reflects a confluence of factors specific to the Nigeria context: the macro-economic crisis of the late 1980s, the closing of cinema houses due to urban violence, the collapse of Nigeria television production (Miller, 2016). Yet, there is also an element of technological determinism to the tale: Earlier efforts to market filmed productions of Yoruba folk theater—perhaps Nollywood’s closest

6   Nigeria, India, and China are all countries with large domestic markets. Nigeria and India, in particular, are global exporters of popular culture and regional hegemons. Accordingly, one would expect them to have strong creative industries. Yet, as we will see, even with these advantages, they have sometimes struggled to reach their potential.

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Copyright and emerging creative industries  587 cultural antecedent—had foundered on the high costs and logistical hurdles associated with celluloid films. Nollywood’s shift to video media—initially analog VHS tapes then later digital VCD discs—proved a game-changer. Perhaps not coincidentally, Kenneth Nnebue, an electronics dealer who imported VCR equipment and blank videotapes, is credited with discovering the medium’s potential.7 Nnebue bet that his tape stock would sell better filled with content than empty. His 1992 hit film, Living in Bondage, galvanized attention, and a direct-to-video film industry sprang up almost overnight (Miller, 2016). Within a decade, Nollywood had grown to become Africa’s dominant film producer, churning out hundreds of films each year, watched by millions daily across Africa (Pager, 2012c).8 By volume of production, it is widely hailed as the world’s second most prolific film industry.9 As a world-leading fully digital film industry, Nollywood exemplifies the potential for developing countries to leapfrog outdated technologies (Arewa, 2015). With annual revenues numbering in the hundreds of millions (in US dollars), Nollywood has become the country’s largest private employer (Economist, 2010).10 It serves as a ‘model of entrepreneurial achievement’ in a country plagued by corruption and rent-seeking (McCall, 2002). Nollywood’s success has inspired similar film industries in other African countries and among expatriate Nigerian communities (Pager, 2012a; Haynes, 2013). The cultural significance of Nollywood is equally notable. Africa has a deeply ingrained storytelling tradition, but has long lacked a mass media vehicle to harness its creative energies. For the first time, African stories told by Africans can be shared by audiences across the continent (McCall, 2002). That Nigerian films regularly outsell Hollywood imports made with far higher budgets and more sophisticated production values testifies to the hunger of African consumers for a genuinely popular medium of expression (Schultz, 2012). African diasporal communities overseas have proven equally avid consumers for whom watching Nollywood film provides a cultural connection to Africa (Miller, 2016). Nollywood films are made by a decentralized network of producers who operate at extremely low cost using rudimentary equipment. A budget of $50,000 and production calendar of four weeks from script to final release are not uncommon. Over 90 percent of revenues come from sales of physical media routed through four central market hubs and then resold across Nigeria and beyond. Films are sold for roughly $2, and sales average anywhere from 50,000 to 200,000 authorized copies per film, with the occasional blockbuster surpassing one million copies (Miller, 2016).  7   While VCR technologies were widely available in Nigeria by the mid-late 1980s, the cost of such technologies plummeted in the 1990s, and, in particular, massive quantities of blank tapes became available at cut-rate prices as dealers in developed markets shifted to more advanced technologies (Miller, 2016).  8   Nigerian video film production is as diverse as the country itself. Each of Nigeria’s main ethnic groups produces films in their local language. However, Nollywood has come to signify the Englishlanguage films produced in Southern Nigeria, which enjoy the widest distribution (Miller, 2016).  9   A widely cited 2009 UNESCO report ranked Nollywood second only to Bollywood; however, this claim hinges on a statistical anomaly: Nollywood’s count is based on video film production, whereas other countries count only films released for theatrical distribution and omit direct-to-video films (Bud, 2014). 10   The industry also generates indirect benefits such as road construction by film crews in rural villages (McCall, 2004).

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588  Research handbook on the economics of IP law volume 1 Funding and distribution of Nollywood films is dominated by shadowy guilds of ‘marketers’ who operate through informal networks that originally served to smuggle pirated copies of foreign movies. As a result, although it has grown into a billion dollar, global industry, Nollywood still operates almost entirely through informal mechanisms. Cash predominates over credit. Trust relationships replace contracts. Copyright formalities are ignored. Instead, Nollywood guilds enforce order through informal disciplinary measures, and actively discourage recourse to formal legal institutions. Accurate records of sales and revenues are impossible to obtain. Nor it is easy to establish who holds the rights to a given title; fraudulent sales agents abound (Miller, 2016). While Nollywood’s reliance on erstwhile pirate networks gave it far greater reach than conventional distribution channels could have achieved, piracy today is the industry’s Achilles heel (Paulson, 2012). Unauthorized copies of Nollywood films usually appear within a couple weeks and cannibalize sales. Anywhere from 60–80 percent of revenues may be diverted in this fashion. Pirate sales likely account for an even greater percentage of international revenues (Miller, 2016). Unauthorized distributions of Nollywood films occur even in developed country markets that have functioning copyright regimes (Pager, 2012a). Because filmmakers reap only a fraction of the total revenue that their movies generate, the industry suffers from chronic underinvestment. Lack of copyright protection also introduces perverse incentives. Filmmakers are forced to mass-produce films at a breakneck schedule to stay ahead of the pirates. Slap-dash productions featuring formulaic plots, wooden acting, and crude production values are the predictable result (Pager, 2012a). In recent years, a group of successful filmmakers has sought to launch a ‘New Nollywood’ comprising more ambitious, higher budget films, with glossier production values, splashy marketing, and international financing (Pratt, 2015; Miller, 2016). The opening of highend multiplex cinemas in Nigeria’s largest cities has allowed New Nollywood films to tap theatrical exhibition revenues. These films also travel the international film festival circuit and are increasingly shown on airline flights, satellite TV, Netflix, and even at London cinemas. An online service, iROKOtv, backed by Western private equity funds, offers an extensive film catalog to subscribers in over a dozen countries (Miller, 2016). The reality remains, however, that these alternative revenue sources do not suffice to cover the costs of production. New Nollywood, like old Nollywood, remains dependent on revenues from sales of physical media which the marketers control. Attempts to establish alternative distribution channels in Nigeria have thus far failed. As a result, New Nollywood remains a largely marginal presence, and Nigerian film production remains centered on the high volume, direct-to-video model, whose financing and distribution remains firmly under the control of the marketers’ guilds (Miller, 2016). Some have argued internet distribution offers a means to bypass the marketers’ stranglehold over the industry (Pratt, 2015). However, although internet penetration rates in Nigeria have risen in recent years, low bandwidth speeds and high data costs limit the domestic potential for video distribution; the online video market remains primarily comprised of diasporal communities (Miller, 2016). The attitude of Nigeria’s government has been ambivalent. Initially ashamed and embarrassed by the industry’s vulgarity, Nigeria’s leaders gradually came to take pride in Nollywood’s accomplishment and also eyed the industry as a juicy tax source. However,

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Copyright and emerging creative industries  589 government initiatives to formalize the distribution sector and curtail piracy have largely failed (Bud, 2014, 2016; Lobato, 2012). By contrast, Nigeria’s music industry has made a more successful transition to digital distribution platforms, taking advantage of the lower bandwidth requirements for music. Piracy has devastated sales of physical media, but mobile music offers a promising replacement. Working through telecommunications companies facilitates online ­payment—an otherwise difficult hurdle in a country where credit cards are rare, albeit at the cost of 70 percent of revenues. Licensing of ring-back tones alone comprises a $150+ million market (Sanchez, 2014).11 Nigeria’s revitalized collecting society, Coson, has also stepped up enforcement and licensing of music performance rights, and the extension of YouTube’s Partner Program to Nigeria has unlocked additional revenues from digital streaming. However, despite this rebound in revenues from music recordings, concerts and endorsement deals remain the largest source of income for musicians (Rutschman, 2015). Nigeria’s music industry has grown to become Africa’s largest and—in contrast to Nollywood—has attracted investment interest and distribution deals from Western music industry multinationals (Ingham, 2016). Hip-hop icon, Jay Z, has also reportedly explored investment opportunities in Nigeria (Abulude, 2015). Meanwhile, i-Tunes’ debut of a Nigerian version of its online store has been matched by a pair of Western-backed local music platforms, Freeme Digital and iRoking, launched in recent years (Rutschman, 2015). D. India On its face, India’s film industry presents a very different context than Nollywood. India has had a long, successful history producing celluloid films, and the industry remains focused on theatrical exhibition, with video sales largely an afterthought. India’s annual production of over a thousand films makes it the world’s most prolific industry, and over three billion box office admissions each year give it a claim to the world’s largest audience (Banerjee, 2016). Movies are central to public life in India. Indian films are also avidly consumed not only across South Asia and among its diasporal communities, but also by native populations in much of Asia and Africa, for whom the films’ wholesome family values supply an attractive alternative to Hollywood (Rajadhyaksha, 2008; Liang and Sundaram, 2011). Bollywood’s global reach may long predate Nollywood’s, and its theatrical orientation contrasts with Nollywood’s direct-to-video model, but on closer inspection, the two industries have much in common as decentralized, low cost, high volume producers. Bollywood properly refers only to the Hindi-speaking film industry based in Mumbai, whose films circulate primarily in North India, just as Nollywood usually refers to English-language films from Southern Nigeria. Both represent the global face of their country’s ethnically and regionally fragmented film industries.12

11   Ring-back tones are personalized music clips played to an incoming caller in lieu of a ringing sound. 12   Hindi films only command 40 percent of the domestic market, and several of India’s regional film industries are commercially significant, global exporters as well (Pager, 2011).

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590  Research handbook on the economics of IP law volume 1 The parallels between the two become even stronger if one compares Nollywood’s current position to Bollywood three decades ago. In the 1980s, Bollywood was a largely informal industry revolving around loosely organized, highly decentralized studios that churned out an endless stream of musical melodramas. Fueled by ‘dubious money’ supplied by gangsters and tax dodging money-launderers, the industry was characterized by shambolic management and murky accounting (Athique, 2008; Moullier, 2007). Little heed was paid to copyright norms. Story lines were widely recycled, often taken from successful films produced elsewhere. Sheltered from foreign competition by protectionist barriers and restricted in its ability to export, the industry relied on a captive domestic audience to consume its often formulaic output (Pager, 2011). Things began to change, however, with the spread of VCR technologies in the 1980s, which suddenly exposed Indian film producers to competition from widely available pirated videotapes. Concerned over mounting losses to piracy, the industry mobilized to place copyright enforcement on the policy agenda. India’s national government had been long indifferent to Bollywood, except to exploit it as a tax cow. IP law was also generally suspect, seen as an imperialist imposition and viewed through a patent-centric prism (Banerjee, 2016). Local governments have proved more amenable to industry concerns, however, especially in the South. Police conduct sweeping anti-piracy raids to accompany big releases of local films. The effective result is akin to the guild-created window in Nollywood: a short period to recoup investment at the box office. Some state governments have also pressed anti-gangster legislation into service against commercial pirates (Liang and Sundaram, 2011; Scaria, 2014).13 Despite initial skepticism toward IP rights, the national government eventually responded to industry lobbying by passing more stringent laws, modernizing the Copyright Act in 1994 and 1999, and stepping up enforcement. A crackdown on cable piracy, in particular, bore fruit, and television became an important revenue source (Telang and Waldfogel, 2014). The recent shift to digital distribution has made further inroads against piracy, by allowing nationwide release of blockbuster movies, thus avoiding problematic delays in rural distribution of popular movies that created openings for pirated distribution as the default provider.14 Other developments around the turn of the millennium further enhanced the commercial prospects of the film industry. The government’s 2001 decision to grant formal industry status to the film industry enabled it for the first time to turn to conventional sources of finance. ‘Corporatization’ became the watchword of the day, as industry leaders worked to attract investors by putting their operations on a more professional footing and taking strides toward horizontal and vertical integration (Moullier, 2007; Ganti, 2012). The development of modern shopping malls, encouraged by tax incentives, also led to investment in high-end, multiplex theaters that catered to urban professionals. By 13   State enforcement initiatives are often organized along starkly parochial lines, targeting only piracy of local films, while otherwise ignoring trade in illicit media (Liang and Sundaram, 2011). 14   Digital distribution also has allowed single-use copies to be sent to individual theaters, enabling watermarking to trace the source of pirated copies and thereby break up camcording rackets (Liang and Sundaram, 2011).

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Copyright and emerging creative industries  591 providing a superior theatrical experience, the multiplexes could charge much higher admission fees, yielding far greater revenues (Pager, 2011). Relaxation of trade restrictions also allowed the industry to develop profitable export markets tapping affluent Indian diasporal communities. The combination of these two more sophisticated audiences led Indian filmmakers to produce more ambitious, high budget productions that ventured beyond the usual formulas (Pager, 2011). These developments have spurred a renaissance in Indian filmmaking.15 The industry has grown to $2.8 billion annual revenues, with double-digit growth in recent years forecast to continue (Deloitte, 2016). Online piracy rates are rising as broadband speed and penetration increases (Liang and Sundaram, 2011). However, the industry’s main revenue source—theatrical exhibition—remains relatively insulated due to the distinctive nature of India’s movie-going culture based on active audience participation (Hammer, 2014). As a result, pirated wares are not a direct substitute for the theatrical experience.16 The Indian music industry has had a less illustrious past. Recorded music in India has long been viewed primarily as an adjunct to film production (Booth, 2015). Most popular films feature extended musical segments and rely on catchy new music to help market the movie. Moreover, 70 percent of album sales are based on Indian movie soundtracks, and Indian film music constitutes its own distinctive genre of popular music that dominates industry production (Liang and Sundaram, 2011). Toward the end of the twentieth century, the music industry had begun to exploit new playback media by lowering prices and expanding its distribution (Athique, 2008). Sales duly exploded and rapid growth ensued. As profits rose, newcomers joined the industry and pioneered new markets. Producers diversified into neglected genres besides film music, and began to record music in languages other than Hindi. For a little more than a golden decade, the industry began to view recorded music as an independent revenue source, worthy of investment in its own right (Booth, 2015; Liang and Sundaram, 2011). The advent of digital piracy abruptly reversed these trends. As pirates and producers of unauthorized ‘version’ recordings increasingly diverted revenues, the industry retrenched sharply. Language and genre diversity suffered, as production of recorded music largely reverted to its prior diminished status as a loss-leading investment designed to sell film tickets (Booth, 2015). E. China Whereas the Indian and Nigerian content industries largely comprise private actors functioning autonomously from the government, China’s modern content industries operate in a very different context. Although China has undertaken a remarkable program of privatization and liberalization in recent decades, the state retains considerable control 15   Indian filmmakers did not, however, break entirely with the formulas of the past. Rather, the industry bifurcated between more ambitious ‘crossover’ films that catered to wealthy urban and expatriate audiences and a reinvigoration of the old-style musical melodramas that had long thrilled rural masses, now filmed with ever-more elaborate production values and exotic locales. 16   Because the overseas market is less theatrically based, it is more directly affected by piracy (Scaria, 2014).

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592  Research handbook on the economics of IP law volume 1 over the media. Key distribution channels remain state monopolies, and state censorship continues to impose restraints on expressive content. On its face, the Chinese government remains committed to fostering a ‘quality culture’ that will instill the correct moral values in its citizenry. At the same time, the need to cater to popular demand and fend off the competitive pressure from foreign media has led to a progressive liberalization of censorship standards (Priest, 2015a). As state subsidies were gradually withdrawn in the 1990s, China’s culture industries have had to manage the transition from churning out state propaganda to courting audiences with crowd-pleasing fare. Private investment has flown into a host of new enterprises, and the content industries have enjoyed considerable success in recent years (Montgomery and Priest, 2016). The film industry has benefited from extensive construction of state-ofthe-art cinemas in urban centers that have made going to the movies a fashionable leisure activity for China’s newly affluent professionals, commanding box office ticket prices as high as $26 (Priest, 2015a). The Chinese box office is now the second largest in the world, and Chinese domestic films have claimed an ample share of the proceeds, in recent years rivaling the take of Hollywood’s blockbusters. As explained below, the music industry has had a tougher road, but even it has perked up recently (Song, 2016). Censorship aside, however, the biggest challenge that China’s content industries face remains extraordinarily high rates of domestic piracy. Chinese consumers have long relied on informal distribution mechanisms to access popular media that may not have been available through legitimate channels. With almost ubiquitous access to pirated wares on the internet, they have grown accustomed to obtaining all manner of creative media instantly, free of charge. A ‘culture of unauthorized reuse’ pervades even commercial enterprises, with amusement parks, media firms, and even state television making liberal use of unlicensed creative content (Montgomery and Priest, 2016; Liu, 2015). China’s content industries have therefore struggled to devise business models that allow them to appropriate revenue in a climate of pervasive piracy. Unsurprisingly, performance models—theatrical exhibition for films; concerts for music—have provided the main source of income as these delivery models are subject to physical exclusion (admission controls) and offer a marketable experience that is distinguishable from pirated copies consumed at home. While profitable, these models are subject to capacity constraints, as Section IV-C(1) will elaborate. The digital content market has faced even graver challenges. The market for recorded music all-but imploded in the first decade of the millennium, with sales and investment in new music plummeting by as much as 90 percent (Liu, 2015). Until recently, the only way that ‘Chinese musicians and music companies [could] actually make money from music sales [came from] two narrow markets: ringback tones sales [for mobile phones] and overseas sales’ (Liu, 2015). Until recently, copyright law played little or no role in China’s content industries. However, this has begun to shift. China has made considerable improvement in its copyright infrastructure in recent decades. Much of its efforts were undertaken in response to treaty obligations and external pressure. Public enforcement campaigns against piracy have often served as a form of kabuki theater performed for foreign consumption, with showy, albeit ultimately ineffective raids to seize and destroy illicit material (Montgomery and Priest, 2016).

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Copyright and emerging creative industries  593 Private enforcement of copyright law, however, tells a different story. China has become the most IP-litigious society in the world, and almost 98 percent of the plaintiffs have been Chinese. Chinese rightsholders have thus expressed an enthusiastic vote of confidence in the benefits of IP law (Priest, 2014). Chinese policy-makers have also come to recognize that copyright law has a role to play in building the strong creative content industries that they see as underpinning China’s soft power (Priest, 2015a). As a result, copyright law has increasingly become seen as a matter of domestic concern, rather than an unwanted foreign imposition—the long-heralded ‘crossover point’ for IP development (Yu, 2007). Furthermore, in what some commentators have hailed as a ‘watershed moment for China’s cultural and creative industries,’ the last few years have witnessed a major transformation in China’s digital content landscape (Montgomery and Priest, 2016). China’s leading online music and video streaming platforms have begun to purge their sites of pirated works.17 Having long attracted traffic by hosting a vast sea of unlicensed content of variable quality, the websites have shifted strategies and are now focusing on negotiating exclusive licenses for professionally produced content, as well as investing in production in-house. Having purchased exclusive rights to such valuable content, Chinese firms are also increasingly turning to litigation to enforce them, with all of the leading sites vigorously prosecuting claims and counterclaims against one another (Montgomery and Priest, 2016). Copyright’s role throughout these case studies remains, at best, ambiguous. To resolve this ambiguity, we should first clarify as a theoretical matter the economic function that copyright is expected to perform and to highlight its advantages and disadvantages as compared to alternative models.

III.  STATE SUPPORT FOR CREATIVE INDUSTRIES Creative markets are risky; entry often requires high capital investments that are subject to uncertain returns. Because cultural mass media represent public goods likely to be produced at suboptimal levels through market mechanisms, the conventional wisdom deems that public subsidies are merited. Yet, questions remain: How should government support artistic production? What kind? Who decides? Who pays? Who bears the risks? In part, the answer to these questions is determined by our choice of subsidy mechanism. A. Copyright Copyright law gives authors exclusive rights in their expressively creative works. These rights function to confer an implicit subsidy through decentralized, market-based exchanges. Because the benefits of copyright are tied to commercialization, authors and publishers bear the costs and risks of creative investment in advance of any market returns.

17   Several factors likely account for this turn to licensing. Government edicts, pressure from advertisers, litigation by rightsholders, and even the prospect of stock market flotations in Western bourses have all been cited as possible explanations; Priest credits advertisers as playing the decisive role (Priest, 2015b).

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594  Research handbook on the economics of IP law volume 1 1.  Production incentives Most copyright scholars justify copyright protection based on some variation of the incentive-access theory (Bracha and Syed, 2014a). This theory begins by observing that many creative works are expensive to make, but cheap to copy. Because copyists do not bear the initial costs of creativity, they could drive the price of the work down to the marginal cost of producing copies. If so, the original creator would be unable to recoup her initial investment in creating the work. Given such prospect, the theory holds that creators would have inadequate incentive to produce the works in the first place.18 By providing creators a legal entitlement to prevent a range of market-impairing copying, copyright restores the incentives to invest in creative production to a socially optimal level.19 Copyright law protection is not cost-free. Its most immediate costs inhere in the higher prices that copyright exclusivity facilitates, thereby enabling creators to recoup their up-front investments. Such costs are primarily borne by end users who must pay prices set above marginal cost. Copyright thus famously functions as ‘a tax on readers for the purpose of giving a bounty to writers’ (Macaulay, [1841] 1915). The costs of copyright are a particular concern to developing countries. The ‘copyright tax’ may deter purchases of copyright works, leading to reduced access to information goods that inhibits educational and scientific progress (Kapczynski, 2008) and impede cultural literacy (Liang, 2009). There are also distributional justice concerns (Chon, 2006). Developing countries are invariably net importers of copyrighted material. Copyright benefits tend to flow disproportionately to a handful of global superstars, who are often foreigners. The siphoning of royalty payments offshore can trigger balance of payment concerns (Pager, 2012a). Furthermore, copyright exclusivity is more than just a tax; it confers exclusionary rights that creators can use to further restrict access, even where consumers are willing to pay the price. High piracy rates and fear of reimportation often make rightsholders reluctant to authorize distribution in developing countries. Copyright exclusivity can also deter secondary creators from engaging in creative expression that builds upon the copyrighted original, resulting in chilled speech and reduced rates of secondary innovation.20 Copyright’s costs can be mitigated through carefully tailored limitations and exceptions. However, even in the best scenario, some degree of restricted access remains inevitable (Bracha and Syed, 2014a). Moreover, because developing countries often fail to make effective use of the policy levers available to them, in practice, the results may fall even further from the ideal (Kaminski, 2014). 18   Recently, copyright skeptics have challenged the utility of copyright incentives, citing evidence that creativity is intrinsically motivated. These arguments are explored in Section III-C. It is also worth noting that copyright also serves to protect more subjective interests of creators, including the desire for attribution and control over the work’s integrity. Although the extent to which such ‘moral rights’ are operationalized separately within copyright law varies, protection of such authorial interests could further encourage creative investment (Hansmann and Santilli, 1997). 19   Note that copyright incentives govern the level of creative investment, which is a different metric than the actual number of works created. As will be argued in Section V, increased copyright protection may actually result in a smaller number of high value works being produced, as compared to the high volume, low investment equilibrium that prevails in the absence of copyright. 20   Some argue that these dynamic costs have grown particularly intolerable in the digital age as new forms of follow-on creativity have proliferated. See Section V-A(5).

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Copyright and emerging creative industries  595 2.  Allocative efficiency By encouraging authors and publishers to monetize demand for creative works through commercialization, copyright engenders a set of market feedbacks that, in turn, influence future investments. In this way, copyright markets respond to popular demand and allocate creative investments toward socially desirable production through decentralized exchanges.21 Some have sought to extend copyright’s allocation function broadly into derivative markets to monetize all productive uses to which creative works are put, thereby allowing the market to properly internalize the full spectrum of societal demand (Goldstein, 2003). Such a broad vision of copyright, however, conflicts with countervailing values that favor access to information and breathing space for transformative uses (Netanel, 1996). 3.  Private ordering By allowing authors to transfer their copyrights to publishers and distributors, the copyright system has facilitated the growth of sophisticated ‘culture industries.’ Such intermediaries greatly increase the efficiency of cultural markets by exploiting economies of scale to develop specialized editorial, production, distribution, marketing, and enforcement capabilities. Intermediaries also furnish an important source of venture capital to front the costs of commercialization. Investment across a portfolio of works functions as a crucial form of risk management whereby a few commercial ‘hits’ subsidize many ‘misses’ (Anderson, 2006).22 Accordingly, some scholars have explained copyright incentives as directed toward publishers, not authors (Barnett, 2013; Cohen, 2011), with a goal of inducing commercialization rather than creativity per se.23 More broadly, copyright law helps to sustain concentrated creative infrastructures with the capabilities to support a wide range of creative projects. Such ‘creative clusters’ could doubtless function in the absence of copyright, relying on contracts and other private law norms. However, in reducing the risks associated with capital-intensive creative investments, copyright law has encouraged their development. Copyright’s risk-reduction functions go beyond its protection against copying. Copyright law provides a set of building blocks around which to structure transactions. Its statutorily defined cluster of rights and obligations reduces uncertainty (Pager, 2012a). The divisibility of copyright’s propertarian ‘bundle of sticks’ further facilitates private ordering. Indeed, pre-sales of foreign distribution rights allocated by national territory provide a crucial source of financing for independent film production (Dale, 1997). Copyright law also provides default ownership and evidentiary rules that further enhance predictability and facilitate creative collaborations (Sawicki and Casey, 2013; Lichtman,

21   In theory, the global reciprocity provided by international copyright treaties further reinforces the decentralized nature of copyright markets, allowing them to aggregate niche demand from around the world. As we will see, however, some question the extent to which copyright markets cater to the global long-tail. See infra Section V. 22   Individual creators may lack the means to bear such up-front costs or face potentially ruinous losses should their creative investments fail. By allowing copyright entitlements to be transferred from authors to commercial intermediaries, copyright law facilitates risk-shifting. 23   Other commentators dismiss such intermediaries as obsolete ‘gatekeepers’ that the digital age is destined to bypass. See infra Section III-C.

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596  Research handbook on the economics of IP law volume 1 2003).24 Finally, by providing a robust set of remedies that transcends contractual privity, copyright law provides an added measure of security against defection. 4. Autonomy A key feature of copyright markets is their ability to operate in relative autonomy from state control. Such autonomy reflects both the decentralized nature of copyright’s marketdriven incentives and the privately ordered infrastructure that copyright helps to sustain. Several facets of the copyright system reinforce its decentralized nature. Copyright accrues automatically upon fixation, with no formalities required and a minimal originality threshold. This lack of formalities reduces entry barriers to authors and insulates the copyright system from the meddling hand of the state. To further minimize the potential for the state to preempt market allocations, copyright law has built-in firewalls against state interference. In particular, an ethos of non-discrimination pervades copyright doctrine, discouraging subjective judgments as to the merits of copyrighted works (Walker and Depoorter, 2015).25 By facilitating cultural discourse through decentralized market institutions that operate largely outside state control, copyright serves a political, as well as economic, function. Indeed, Neil Netanel (1996) has argued that a system for funding autonomous cultural production constitutes an essential prerequisite of liberal democracy. Subsequent work by Netanel (1998) has underscored the particular importance of copyright law in sustaining independent media in emerging democracies. Robert Merges has similarly emphasized the role that copyright plays in sustaining a class of creative professionals who work under conditions of relative creative autonomy that enable them to refine and perfect their craft (Merges, 2011; Pager, 2015). 5.  Prior commitments and path dependencies Finally, regardless of any theoretical advantage that copyright law affords a priori, copyright protection is mandated by international treaty. While countries have discretion as to the extent to which they enforce such norms, deviations from compliance may come at a geopolitical cost. Conversely, there are benefits to operating within the copyright system that derive from preexisting understandings and institutional arrangements. Creative industries are governed globally by a complex system of private ordering arrangements premised on formalized understandings of copyright law. Accordingly, to the extent that individual countries establish a functioning copyright system that is compatible with these preexisting arrangements, they enable national rightsholders to plug into this global system and thereby to derive a host of network benefits. Advantages range from reciprocal benefit-sharing between collective rights organizations to standardized chain of title protocols for international distribution. As explored further below, the structural imperative exerted by such preexisting institutions and practices exert a powerful pull toward copyright formalization.26 24   In jurisdictions such as Nigeria where such formalities are lacking, uncertainties as to ownership can have a deleterious effect on licensing (Miller, 2016). 25   Of course, markets impose their own biases on cultural production. Such concerns are explored further in Section V. 26   See infra Section IV-F.

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Copyright and emerging creative industries  597 6.  Summing up The preceding frameworks for theorizing copyright to some degree overlap and are complementary. For present purposes, therefore, we need not commit to any particular normative theory. Rather, our understanding of copyright’s various aims and functions provides a basis to compare copyright against competing paradigms to sustain creative production. B.  State Patronage and Other Subsidy Mechanisms Copyright is hardly the only mechanism to support creative production. Governments can subsidize artistic production through a variety of means both direct and indirect. 1.  Direct patronage Historically, the most prevalent means of support for the arts was aristocratic patronage: Wealthy patrons bestowed funding or employment upon creators. Such direct patronage mechanisms persist. However, governments have largely supplanted aristocrats as the primary sponsor of direct patronage mechanisms.27 The Nigerian government’s announcement of a $200 million ‘Special Entertainment Fund’ to underwrite the production of Nollywood films represents a recent iteration in this tradition (Abulude, 2016). State patronage represents a very different model than copyright law. Where copyright confers its benefits indirectly through exclusive rights, patronage funding is conferred directly. Instead of relying on decentralized market mechanisms to determine demand for the finished work, patronage is typically allocated up front through competitive selection processes that operate in top-down fashion. Finally, instead of ‘tax[ing] readers’ directly, patronage regimes typically draw their funding from other sources, including general tax revenues. In some ways, patronage models are undoubtedly more appealing than copyright: They avoid the access restrictions engendered by exclusive rights, thereby facilitating dissemination and enabling secondary creators to build on existing expression without fear of infringement.28 Awarding grants directly to creators may allow them to bypass industry gatekeepers (or at least to negotiate more favorable terms). By committing to funding in advance of production, patronage regimes afford creators greater license to experiment and take risks without the need to worry about recouping their investment in the market. Indeed, the ability of patronage systems to correct for market biases in the copyright system—awarding funding based on artistic merit rather than commercial appeal—may be one of its most salient advantages. In theory, patronage systems also allow for greater precision, directing funding toward cultural works responsive to social needs and avoiding the overinclusiveness of the copyright regime, which protects works that may not need external incentives. 27   Private funding from corporations and foundations also accounts for a significant source of support for the arts. However, our focus here is on public subsidies. 28   It is worth noting that, in practice, patronage awards do not normally preclude copyright exclusivity. Several commentators have proposed that state subsidies be leveraged to curtail copyright, however (Lee, 2012; Baker 2003), and the National Institute of Health has recently taken a small step in this direction (Contreras, 2013).

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598  Research handbook on the economics of IP law volume 1 Patronage regimes suffer from several drawbacks, however, that hamper their effectiveness. Substituting government bureaucracies for market-driven mechanisms is almost always a recipe for inefficiency, not least because markets are better at uncovering the private information necessary to match supply to demand (Demsetz, 1969). The comparative advantage of copyright markets over top-down processes may be particularly salient in the context of creative works whose value is notoriously difficult to appraise at the time of creation.29 There is a long history of cultural innovation being rejected by contemporary experts only to win acceptance by subsequent generations (Pager, 2012b; Cowen, 2006). The relatively long duration of copyright terms allows innovative works to benefit from such esthetic revisionism. Patronage schemes are also vulnerable to other distortions and abuses. First, although both copyright and patronage confer subsidies to creators, the nature of the subsidy is far more visible in the patronage context, and it comes directly out of the state treasury. This makes patronage funding vulnerable to budget cuts prompted either by fiscal austerity or artistic philistinism.30 Second, patronage’s theoretical advantages in encouraging dissemination are often not realized in practice. Patronage schemes tend to focus on underwriting the creation of new works without necessarily ensuring that such works reach actual audiences; creators whose costs have been covered in advance may also be less incentivized to commercialize their work (Pager, 2011).31 Third, instead of spurring artistic breakthroughs, committing funding up front can encourage self-indulgent auteurs to produce esoteric works of questionable social value. It is notable, for example, that increased state subsidization of the French and Italian film industries resulted in films that not only underperformed at the box office, but also garnered a diminished share of prestigious film festival prizes compared to prior decades (Pager, 2011).32 Furthermore, selecting works based on artistic merit rather than commercial appeal pushes cultural production toward esthetic standards dictates by the cultural elites who populate selection committees. In the development context, such elitist tendencies have sometimes meant favoring foreign audiences over domestic ones. For example, in the early post-colonial period, African governments funded celluloid films ‘as prestigious cultural trophies to impress European elites.’ Such ‘embassy films’ were rarely seen by African audiences (Pager, 2012b).33 Chinese filmmakers in the 1980s followed a similar pattern,

29   This comparative advantage becomes greater still where patronage funding is committed in advance of production. In such cases, review committees must assess the comparative merits of competing works without seeing them in a fully realized form. It is, of course, possible to allocate funding ex post, evaluating completed works through a competitive prize system. However, in practice, competitive prizes do not account for a significant share of cultural funding. 30   Drastic cuts in Nigerian media funding in the economic crisis years of the early 1990s offers an example of the former (Miller, 2016). Newt Gingrich’s savaging of public arts funding in the United States offers an example of the latter (Cowen, 2006). Developing economies may be particularly prone to such fiscal upheavals. 31   By contrast, the market-centric structure of copyright exclusivity inherently encourages commercial dissemination. 32   This reduced haul of festival prizes is particularly striking because such prestigious prizes epitomized the cultural currency that patronage funding was intended to generate. 33   In later years, European cultural funds supported African cinema even more directly, and Europeans played an active role in the production process. Unsurprisingly, the films became even

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Copyright and emerging creative industries  599 producing films designed to win prizes at foreign film festivals, but largely unintelligible to Chinese audiences (Priest, 2015a). Where patronage regimes rely on expert committees drawn from the cultural establishment, biases toward elite culture may be especially pronounced. At the same time, a preference for works that conform to establishment canons means that such regimes may reject truly revolutionary work (Cowen, 2006).34 Delegation to committees can also introduce further selection biases due to agency constraints; problems can include ideological biases, private rent-seeking, or outright corruption (Pager, 2011). Such problems are likely to be particularly grievous in developing countries with weak rule of law norms and quasi-tribal loyalties based on ethnicity (Nigeria), caste (India), or personal connections (China). While political oversight can curb such problems to some extent, political pressure can also lead to excessive conservatism in making awards. The firestorm over National Endowment for the Arts funding in the US in the late 1990s illustrates the potential for populist demagoguery to curtail artistic innovation. Accountability to democratic watchdogs led funders to gravitate toward sterile ‘safe bets’ that could escape censure by the self-appointed watchdogs of public morality (Cowen, 2006).35 Even more seriously, governments can use patronage funding to advance their own agendas, rewarding favored speakers and viewpoints. Culture is a powerful tool to influence hearts and minds and mold public opinion. As such, patronage regimes can easily become instruments of censorship, propaganda, or authoritarian control (Pager, 2011).36 Indeed, the patron’s influence can be felt even without the need to take overt steps to impose an agenda. Artists relying on state funding are likely to self-censor or engage in sycophantic projects to curry favor with those holding the purse strings. Such concerns are especially stark in developing countries where authoritarian rulers have few scruples about wielding power through propaganda. China’s Communist party has a long history of funding cultural agitprop. While China’s decades-long liberalization process has led artistic production to be dictated largely by markets rather than party apparatchiks, in recent years, the government has increased pressure on creative artists to toe the line ideologically and encouraged a revival in works exalting the Communist regime and its current leader (Economist, 2016; 2014). Such political preferences also express themselves on a more general level. For example, the Chinese government disfavors musical genres such as jazz and rock that are deemed ideologically suspect (Liu, 2015). While China represents an extreme case, its instrumental view of the arts is hardly unique. The idea that popular culture should serve as an agent of moral perfection that instills wholesome virtues in audiences through positive examples is widely held in

more oriented toward European sensibilities, purveying an esthetic fetishization of the exotic (Pager, 2011). 34   Where funds are committed in advance of production, the difficulty in predicting the merits of a proposal can further reinforce a bias toward established artists who have a proven track record. 35   Democratic regimes face popular outcries whenever state-subsidized creativity is deemed blasphemous, offensive, or immoral. Cutting-edge works are more likely to provoke extreme reactions. Because they speak in a language unintelligible to conventional esthetic codes, their meanings may be misunderstood. Cf. Bleistein v. Donaldson, (1903). 36   The old saw ‘He who pays the piper, calls the tune’ has a ring of truth here.

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600  Research handbook on the economics of IP law volume 1 developing countries (Netanel, 1998).37 Even in countries with established commercial content industries such as Nigeria and India, government officials continue to evince a belief that artists have a ‘pedagogical mission’ to present a ‘positive’ vision of society (Rajadhyaksha, 2008; Miller, 2016). Of course, all countries enforce community decency standards. However, there is a difference between policing such outer bounds and affirmatively encouraging ‘correct’ or ‘moral’ values through competitive allocations of funding. Patronage regimes offer a natural vehicle for such positive censorship, and it is all too easy for subjective standards to be manipulated to stifle viewpoints threatening to the ruling establishment.38 In contrast to the decentralized market for expression supported under a copyright model, a patronage regime may therefore lead to less vibrant modes of cultural expression covering a narrower range of viewpoints and styles. Moreover, where patronage regimes dominate funding of cultural production, alternative funding sources can be crowded out (Pager, 2011; Cowen, 2006). Allowing state domination of cultural production thus raises serious democratic concerns (Netanel, 1996). Conversely, market forces expressed through the popular demand of paying audiences can themselves function as a counter to state control. Priest (2015a) argues that in the Chinese context, commercial imperatives have, over time, served to soften censorial impulses. Similarly, Nollywood’s contribution to public discourse in Africa has been significant. In contrast to the tight control over state-funded media hitherto exercised by Nigeria and other African states, Nigeria video films have enjoyed an unprecedented license to poke fun at cultural taboos and establishment foibles in the guise of popular entertainment (Pager, 2012b). While both the Nigerian and Indian film industries remain formally subject to pre-release censorship, the commercial appeal of their offerings has helped to insulate them from aggressive enforcement of decency standards (Miller, 2016; Bose, 2006). 2.  Collective licensing, rewards and indirect subsidies Copyright and direct state patronage are hardly the only means by which governments subsidize cultural production. While space does not permit a comprehensive survey, it is worth noting a few common alternatives. First, hybrid models exist that combine elements of both copyright and patronage, typically seeking to harness the market-based incentives that the copyright system supplies, while reducing the costs of exclusivity. For example, compulsory licenses, collective rights management, and market-based reward regimes all reduce access barriers by effectively shifting from a property to a liability rule whereby copyright holders lose veto rights, but still get paid compensation (Fisher, 2004). The downside of these hybrid models is that they compromise the market mechanisms used to value works individually. In the absence of price signals, alternative mechanisms must be devised that rely on indirect proxies such as statistical sampling or administrative processes. Moreover, the efforts required to render such alternative mechanisms into 37   By contrast, the Western liberal ideal of the artist as iconoclast who challenges the status quo remains suspect. 38   Even established democracies are not immune to the temptation to engage in such ideological meddling, as shown by recent scandals in South Korea and Canada (Sang-hun, 2017; Pager, 2011).

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Copyright and emerging creative industries  601 ­ lausible substitutes for market transactions can introduce further complexities whose p design, operation, and validation require administrative resources and careful oversight. Hybrid regimes thus forgo some of the virtues of decentralized copyright markets and come to more closely resemble top-down patronage models. Indeed, the very complexity of such regimes may result in reduced transparency even compared to traditional patronage, making them vulnerable to favoritism, fraud, and other abuses such as antitrust concerns. Indeed, the track record of existing collective rights organizations in many developing countries hardly inspires confidence (Schlatter, 2005; Schultz and van Gelder, 2008). Second, governments can employ mechanisms to support cultural production indirectly. Tax incentives offer one such approach. For example, using tax credits to induce private investment in creative content allows public subsidies to harness private information (Hemel and Ouellette, 2013). While such an approach can be effective, it requires careful policing to ensure that the investments are actually aimed at the desired target activities, and that the tax credits are not misused.39 Investments in training or infrastructure that facilitate the production of commercial content can similarly yield powerful payoffs where well-targeted, or result in white elephant boondoggles where misplaced (Pager, 2012c). As with the hybrid models, to be executed effectively, these strategies thus require competent administration, a commodity that is in short supply in much of the developing world. Ideally, governments would manipulate these different policy levers in a targeted fashion to achieve optimal outcomes. In practice, government is not nearly nimble enough to manage this feat. The best compromise may therefore be a belt-and-suspenders approach that blends several overlapping support mechanisms in the hopes that different actors will self-select into the options that work best for them. C.  Commons-Based Creativity Models The notion that subsidies are needed to avoid suboptimal investment in creative production has come under attack in recent decades. Commentators have questioned this logic in light of the bottomless upwelling of creative expression on the internet (Moglen, 1999). Perhaps we can just sit back and reap the digital manna from commons-based production. There are two versions of this ‘comedy of the commons.’ The first focuses on non-commercial creativity; the second emphasizes alternative business models premised on ‘open’ distribution. A third, related argument emphasizes the impracticality of enforcing copyright in the digital age. 1.  Non-commercial creativity In questioning the need for copyright incentives in today’s digitally empowered, postscarcity world, critics point to empirical research by psychologists suggesting that creators are primarily driven by intrinsic motivations (Lemley, 2015). While such intrinsic motivations are not new, skeptics argue that digital technologies have dramatically lowered the costs of creating and distributing new works, thereby removing the resource constraints that previously held creators back (Benkler, 2004). As such, the extrinsic incentives

39   Developing countries often have weak tax bases and erratic collection, which reduces the value of tax write-offs.

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602  Research handbook on the economics of IP law volume 1 supplied by copyright or other subsidies have become either irrelevant or downright counterproductive (Zimmerman, 2011). It is clear that digital technologies have unleashed many new forms of creativity. The proliferation of creative works by non-commercial amateur creators generates no end of gaudy statistics (e.g. over 400 hours of video uploaded to YouTube every minute; Von Lohmann, 2016) that testify to the cornucopia that digital networks have unleashed. Amateur work can be genuinely creative and worthy of admiration. Moreover, the inclusion of voices from underrepresented communities and viewpoints must be applauded on democratic grounds. At the same time, the level of authorship invested in any given work is typically low. Amateurs generally restrict themselves to short-form content involving modest production values, often piggybacking on preexisting works through mash-ups and remixes. The result is an ocean of ‘lol cats’ and dancing babies, but very little that can rival commercially produced content in scope, sophistication, or production values (Pager, 2015). Indeed, despite the ready availability of abundant free content, consumers continue to signal the premium they place on commercial content by patronizing it in the marketplace and paying substantial fees for the privilege. The limited scope of amateur creativity reflects some enduring realities of content production that the sheer volume of production sometimes obscures. Creating anything of more than passing interest to people outside one’s immediate family requires talent and skills that remain in short supply. Moreover, undertaking creative projects of ambition and scope still requires investment of time and resources that exceed the enthusiasm of most hobbyists.40 Beyond a certain level of investment, intrinsic motivations no longer suffice, and creators need a viable prospect of recouping their investment to proceed (Pager, 2015). Such exigencies are felt especially strongly in developing countries where discretionary incomes are much lower than the United States and many struggle to meet basic social needs. Cyberspace may be borderless and frictionless, but in the real world authors need to eat. Money buys practical necessities such as equipment, plus the luxury of time and artistic freedom, enabling higher quality output (Liu, 2015). Time spent struggling for survival means less time to refine and perfect one’s craft (Merges, 2011). If creativity is obliged to pay its way, however, the question remains how. 2.  Alternative business models The need for extrinsic revenue sources to buttress intrinsic motivations does not necessarily mean government subsidies are required. In many circumstances, market mechanisms can underwrite investments in creativity. In an influential early article, then-professor (now

40   Peer production can sustain more ambitious commons-based production by integrating the collective contributions of decentralized collaborators. However, only a narrow subset of creative projects fit the template required for such collaborative models to function effectively. You need a modular project that can be farmed out to individual contributors and a means by such granular output can then be efficiently reviewed, assembled, and integrated into a coherent whole (Benkler, 2002). Peer production works well for software and Wikipedia, but not for many other types of high value authorship; assembling music, film, or novels by committee, for example, is a recipe for disaster.

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Copyright and emerging creative industries  603 Supreme Court Justice) Stephen Breyer (1970) cited the historical example of nineteenthcentury publishing practices whereby US publishers relied on lead-time to recoup their investment, beating copyists to the market by securing exclusive advance-sheets from British authors whose works were denied copyright protection in the United States. Such arrangements eventually ripened into an informal cartel system based on ‘trade courtesy’ between leading publishing houses that led to de facto exclusivity. Lead-time is harder to preserve in the digital age, and cartels are illegal. However, another alternative mechanism that Breyer describes—advance purchase contracts—are not only widely used to fund indie films, but also form a mainstay of crowdfunding campaigns. There are many more possibilities. Commons enthusiasts have catalogued a wide array of alternative business models based on reputational economies, sales of ancillary products and services, or advertising/sponsorship that could facilitate creative production under an ‘open’ distribution model (Anderson, 2009; Lemley, 2015).41 They argue that copyright’s ‘closed’ model of proprietary production should give way to more diverse, democratic, and communal modes of creativity that digital technologies facilitate. Removing copyright’s access barriers could encourage more creative remixing of culture and avoid the costs of exclusivity. Critics also argue that copyright’s benefits are monopolized by a handful of moguls and superstars, but largely irrelevant to everyone else (Zimmerman, 2011). Creative production under a commons model is seen as potentially more egalitarian. However, such assumptions are difficult to test in countries where copyright norms remain entrenched.42 The proliferation of vibrant creative industries across the developing world that seemingly thrive in the absence of copyright protection have accordingly been hailed as harbingers of a post-copyright future (Anderson, 2009; Montgomery, 2010). Because such emerging content industries effectively function in a de facto copyright commons, they serve as a laboratory in which the viability of alternative business models can be tested and evaluated (Rizk, 2014). Yet, as Section IV reveals, the record is far from an unvarnished endorsement. 3.  Copyright futility Even if a copyright business model premised on controlling and monetizing individual copies were normatively desirable, skeptics further argue that enforcing copyright exclusivity has become infeasible in a world where digital technologies make unauthorized 41   Some have questioned the extent to which the revenues such alternative models generate are sufficiently robust to replace copyright (e.g. Lowery, 2012). Others question whether such putatively ‘post-copyright’ alternatives could really function in the absence of copyright (Priest, 2016; Liu, 2015). 42   Commons-based production in the developed world is shaped by default norms of copyright in several ways. First, when copyright is the default from which ‘open’ production must opt out, comparisons between the kinds of creativity that emerges under open versus closed models are tainted by selection bias. Second, copyright remains active as a background norm that shapes market conditions and behavior. Third, copyright may actively hinder access to creative materials that commons-based producers need. Finally, open source licenses often leverage copyright exclusivity themselves as an enforcement strategy. The ‘open businesses’ that flourish under these conditions are therefore a poor predictor of the outcome that would ensue in a truly ‘postcopyright’ world.

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604  Research handbook on the economics of IP law volume 1 copying and distribution virtually costless (Lemley, 2015). Stepped-up enforcement, however draconian, will not put the copying genie back in the bottle, and propping up outdated business models just delays the inevitable. Rather than investing further resources in such a futile quest, skeptics argue that we should embrace post-copyright paradigms and focus on making them economically viable (Anderson, 2009). Such claims again hold special resonance in the developing world context where the pervasive presence of piracy and its seeming invulnerability to copyright enforcement appears to validate such claims (Karaganis, 2011). Doubts about copyright’s viability in the developing world, in part, reflect disillusionment over overly optimistic promises that strong IP protection would serve as a ‘power tool’ for development in the aftermath of the 1995 TRIPS Agreement (Pager, 2012a).43 Yet, the skepticism prompted by such oversold claims may have veered equally far off course in the opposite direction.44 The challenges in developing a functional copyright regime do not necessarily make the quest futile. Moreover, evidence from developed markets shows that a combination of effective enforcement campaigns and proactive distribution strategies can make a meaningful dent in piracy (Danaher, et al., 2017). The question remains whether making such a sustained effort is merited. What specifically would be gained by investing resources to this end? Would creative development be advanced? As the following part explores, the answer is more complicated than either copyright proponents or skeptics acknowledge.

IV. COPYRIGHT AND CREATIVE DEVELOPMENT: REVIEWING THE RECORD A strong body of empirical evidence makes clear that piracy hurts content industry revenues in developed country markets (Danaher, et al., 2017). Digital technologies have certainly facilitated piracy; yet, digital technologies have also lowered production and distribution costs, reducing the revenue necessary to sustain content production. In his contribution to Volume II of this series, Joel Waldfogel presents evidence suggesting that the net effect on commercial content creation has been positive.45 While backed by an impressive array of data, Waldfogel’s conclusions are hardly beyond question.46 Yet,

43   For example, the World Bank embarked on a much publicized initiative to develop the rich musical heritage in West Africa into a digitally empowered music industry. Proponents hailed this plan as a visionary attempt to build ‘Nashville’ in Africa (Finger and Schuler, 2004). The idea that a dollop of copyright capacity-building would prove magically transformative proved misguided, however. Building a viable content industry required more than just passing laws and setting up websites. 44   Many developing countries have come to view copyright law as a Trojan horse designed to advance the interests of multinational corporations at the expense of indigenous creators (Pager, 2012a). After all, IP rights were the ‘quid’ exchanged for the promised ‘quo’ of market access for textiles and agricultural exports. This ‘bargain narrative’ thus posited IP as an inherently losing proposition (Yu, 2006). 45   This is not to speak of the massive proliferation of amateur content creation whose limitations were addressed above. 46   For example, Stan Liebowitz suggests that a ‘generational cohort’ effect may account for

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Copyright and emerging creative industries  605 even if they are accepted on face value, the most they show is that the relative decline in copyright enforcement experienced thus far in the developed country jurisdictions from which his data is drawn has not yet had an injurious effect. Such findings are thus in no way predictive of the outcomes in a world in which copyright law has ceased to function entirely.47 For a closer approximation, we can look to developing country jurisdictions in which copyright norms are substantially weaker. A.  Thriving or Surviving? The claim that emerging content industries are thriving in the absence of copyright deserves scrutiny. Eric Priest (2014) uses the metaphor of ‘extremophiles’ to describe the hardy creative industry life-forms that survive in the exigent conditions of a copyright desert. It does not follow, however, that the absence of copyright facilitates their survival any more than camels flourish because they are denied water. Weak copyright norms may encourage the pioneering of new markets, but such conditions arguably hinder creative development later on. 1.  Pirate innovators Nollywood’s origin story presents an archetypal example of piracy’s generative potential. The extensive transnational distribution networks that pirate operators had cultivated were instrumental in popularizing Nigeria’s nascent video film industry (Santos, 2013). Nigerian marketers were skilled at evading censors and customs officials alike, ensuring a steady supply of Nollywood videos reached audiences across Africa. India’s content industries have similarly benefited from the pioneering of new markets by pirate entrepreneurs. Liang and Sundaram (2011) chronicle the successful development of a new mass market for low cost audio cassettes filled with unauthorized recordings of popular film music.48 The pioneer in this nascent market, T-Series, also ‘expanded the music-consuming public by focusing on genres and languages that had been ignored by the dominant Indian record labels.’ Adrian Athique (2008) tells a similar story of new export markets for Indian film developed by selling pirated video cassettes to South Asian emigres through a decentralized network of Indian grocery stores.49 By doing so, such informal distribution cultivated a new generation of Indian film devotees. Chinese search

Waldfogel’s finding that music quality has been harmed by filesharing. The idea is that people ­generally favor the music they grew up with; thus, the larger the generational cohort, the more popular the music. Millennials, the generation that has come of age in the filesharing era, have recently passed Baby Boomers as the single largest tranche of the US population. Thus, ‘their music’ would be expected to measure favorably in surveys (Liebowitz, 2016). 47   Indeed, as discussed below, Waldfogel co-authored a separate case study of the effects of piracy on Bollywood, and came up with a diametrically opposite result: showing clear harm to both the number and quality films being produced (Telang and Waldfogel, 2014). 48   Many of T-series’ recordings were technically not pirated, as they exploited a loophole in Indian copyright law that allowed the release of new versions of existing songs (Liang and Sundaram, 2011). 49   As with Nollywood, the informal, decentralized nature of such distribution networks served to evade formal barriers to media exports, of particular value in Pakistan where Indian films had long been banned (Athique, 2008).

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606  Research handbook on the economics of IP law volume 1 engines and content hosting sites similarly lured online traffic with a limitless supply of pirated media (Priest, 2015a). Initially, the producers of the creative works in question received little benefit from such entrepreneurial efforts. In most cases, however, the leading players in these new distribution networks eventually legitimized their operations by entering into licensing arrangements with producers—or became producers themselves—in part, to assure a more regular supply of new works and to preclude competition from upstarts (Miller, 2016; Athique, 2008; Priest, 2016). Such entrenched incumbents would often be challenged in turn by a new generation of pirates exploiting newer technology to once again disrupt existing distribution (Athique, 2008). 2.  Depressed revenues The absence of effective copyright enforcement in these markets, however, means that piracy never really disappears. Such unauthorized distribution not only diverts revenue from content producers, it also exerts a downward pressure on pricing both in the (legal) market and on the licensing fees that can be extracted from intermediaries. The effects of such diminished revenues are perhaps most visible in Nollywood. Despite the massive global audience that its films enjoy, the industry has struggled to effectively monetize its customer base. While Nollywood films remain profitable, the industry operates on a breakneck schedule, perpetually starved of funds. Filmmakers are forced to pursue a churn strategy that rushes new videos to market weekly to beat the pirates (Barrot, 2009). Pricing of discs is kept close to marginal cost, in a further effort to deter piracy (Miller, 2016). Such high volume, low margin production restricts the creative ambition that can be invested in developing any single project. Moreover, without enforceable copyrights in their work, filmmakers cannot offer collateral to obtain financing. Instead, they must either surrender control to marketers or tap informal short-term lenders at punitive interest rates—reinforcing the ‘rush to market’ mentality that fosters slap-dash productions (Pager, 2012b). And while the industry has expanded the reach of authorized distribution channels both domestically and abroad, the specter of rampant piracy drives down the prices such licensing arrangements garner (Miller, 2016). The ‘New Nollywood’ filmmakers whose higher quality productions compete for screening in domestic cinemas and global festivals offer a glimpse of the industry’s broader creative and commercial ambitions. Yet, it is far from clear that the industry’s existing revenue base can support such lavish productions. Without a more effective means to monetize consumption, Nollywood remains a shadow of its potential. Filmmakers in China and India are doing better, thanks in part to robust and expanding revenues from theatrical distribution. Such reliance on theatrical revenues has its downsides, however. Bollywood remains far more dependent on theatrical exhibition: reaping over 70 percent of its total revenue from box office sales (Singh, 2013). By comparison, Hollywood’s theatrical take represents less than 20 percent of total revenue (Young, et al., 2010). Relying so heavily on this single income stream makes Bollywood vulnerable to shifts in consumption patterns. Showing this threat is more than theoretical, Telang and Waldfogel (2014) document the effects in the late 1980s and early 1990s of the diffusion of home video technologies (the VCR) and independent cable television operators. These emerging channels provided

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Copyright and emerging creative industries  607 conduits for pirate distribution that allowed consumers to watch home movies for free, including films currently in the cinema.50 Such illicit competition led Bollywood’s per movie revenues to decline by as much as 50 percent during the period 1985–2000.51 Reduced revenues in turn led to fewer movies being produced. In notable contrast to Waldfogel’s findings in the US context (see Volume II), Telang and Waldfogel (2014) also analyze IMDb ratings data and conclude that the quality of Indian films produced in this period also declined. While piracy remains rampant in China, China’s audiovisual producers have enjoyed comparatively healthy growth in recent years due to expanding markets for both theatrical distribution and online streaming platforms. However, the turnaround in online revenue is a recent phenomenon, and some question its sustainability (Priest, 2016). Moreover, the ready availability of pirate media elsewhere continues to inhibit consumer willingness to pay for creative content, restricting the revenue available to fund new productions. The situation in the music industry broadly parallels that of audiovisuals. The dystopian effects of piracy are perhaps most visible in China. Priest describes the massive drop in revenues experienced in China from roughly 2003 onward as online distribution of pirated music rapidly displaced legitimate sales. At a time when Chinese spending on entertainment and leisure was steadily rising, revenue from recorded music dropped by more than half (Priest, 2014). The revenue drop-off was not for lack of consumer demand. Accessing music remained one of the most popular activities on the internet. However, Chinese consumers became accustomed to not paying for something that was abundantly available for free, and alternative revenue sources could not make up the shortfall. Liu’s (2015) survey evidence shows that declining revenues led to reduced investment in music. Arguably as a result, the Chinese music market became increasingly dominated by imported music from neighboring countries (Liu, 2010). Industry revenues have rebounded in the past few years as online intermediaries have entered into licensing deals and largely weaned themselves off pirated content. However, China’s music industry remains comparatively undeveloped for a country of its size and affluence (Liu, 2015, 2010).52 Digital piracy has had similarly harmful effects on the Indian music industry, decimating legitimate sales channels and causing industry-wide retrenchment (Booth, 2015).

50   Geographically sequenced theatrical releases meant that rural audiences particularly proved receptive to such pirate distribution. Because the high cost of celluloid limited the number of film copies that could circulate at a time, Indian theatrical exhibition followed a staggered release schedule with new films shown first in big cities, then regional towns, only reaching village theaters at the end of the sequence. Film copies were often worn out by this time leading to an impaired viewing experience, and many rural residents were, in any case, impatient to wait (Liang and Sundaram, 2011). 51   A separate study of the effects of ‘camcording’ on film revenues in seven developing countries reached similar conclusions, showing that the availability of pirated movies online significantly reduced box office earning (Koch, et al., 2011). 52   Music industry revenues are also paltry compared to other Chinese content industries such as books and films, a result which both Liu (2015) and Priest (2014) attribute to music’s greater exposure to piracy. For example, the market for digital music in China is comparable to the total domestic box office take. However, whereas the film industry receives roughly 40 percent of box office sales, almost none of the money generated from digital music actually goes to the music industry (Priest, 2014).

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608  Research handbook on the economics of IP law volume 1 Toward the end of the twentieth century, the music industry had begun to expand beyond its historic role as an adjunct to the film industry and to diversify into other genres. However, the advent of digital piracy meant that music reverted to its focus on selling movie soundtracks (Booth, 2015). As in China, music industry revenues remain significantly lower than film (Liang and Sundaram, 2011).53 The story in Nigeria is somewhat less dismal. Digital piracy certainly caused revenues to plummet, leading labels to close and investment to fall (Santos, 2013). However, the growing popularity of Nigerian music across Africa has helped to cushion the losses and open up alternative revenue sources. In recent years, the industry has grown steadily and attracted outside investment (Rhodes, 2014). 3.  Copyright’s positive role In each of these countries, a revival of industry fortune may be partly attributable to copyright. This turnaround is most dramatic in the Chinese online market for streamed content, where the leading websites have executed a remarkable turnaround from havens of piracy to platforms populated almost entirely by licensed content. While several factors appear to have contributed to this industry shift, all of them reflect direct or indirect pressure to comply with copyright law (Priest, 2014). As the leading streaming platforms purged their sites of pirated content and embraced licensing norms, they have competed for exclusive rights to prime content. Per episode costs of leading popular dramas have risen from $1,500 in 2009 to as much as $290,000 by 2011 (Montgomery and Priest, 2016). Soaring licensing fees have in turn spurred investment in better quality films and television shows and provided much needed revenue for indie films that are denied access to theatrical distribution (Montgomery and Priest, 2016). The revival of India’s film industry after 2000 also partly reflects stepped-up copyright enforcement. Telang and Waldfogel (2014) describe how more effective enforcement measures after 2000 curbed the threat from pirate cable channels. Other factors also contributed to the industry’s improving outlook, including the growth of multiplex theaters, television licensing, and overseas revenues. While these factors are not directly tied to copyright enforcement, it should be noted that all of these revenue streams depend, to some degree, on copyright exclusivity to function effectively. Most people do not watch a movie more than once, and it is hard to get customers to pay for something that is available for free, underscoring the importance of suppressing unauthorized distribution. A positive role for copyright is harder to trace in Nigeria. Government initiatives to combat piracy and formalize distribution have achieved meager results. However, a few bright spots are apparent. COSON, a music rights management organization, has launched a vigorous campaign to license public performances and filed a series of lawsuits against holdouts, yielding tangible payoffs to musicians (Akpotaire, 2016). IROKOtv continues to expand its catalogue of Nollywood movies, and airline in-flight entertainment systems have contributed additional licensing revenues (Miller, 2016). Overall, copyright norms remain shaky, however, and benefits slim.

53

  By comparison, music industry revenues in the US are comparable in size to that of film.

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Copyright and emerging creative industries  609 B.  Pursuing ‘Copyright’ by Other Means Just because creative industries can operate in developing countries where copyright norms are weak or non-existent does not prove the viability of open business models. In the cases examined here, it is notable the extent to which industries’ revenues depend on exclusionary strategies. Such strategies restrict access to copyrighted works in ways that sharply diverge from the unconstrained flows of ‘free’ content that commons enthusiasts contemplate. Most obviously, the theatrical film exhibition model that has been the mainstay of Chinese and Indian film industry revenues relies on physical exclusion: Patrons must purchase tickets to enter the cinema.54 Here, physical control over access substitutes for copyright exclusivity. Sale of concert tickets for musical performances also relies on physical access control. However, there is a difference: Music concerts are less threatened by open distribution of copyrighted media. Indeed, many musicians promote their concerts by releasing free music recordings (Santos, 2013).55 By contrast, cinema revenues are much more vulnerable to cannibalization by distribution of recorded media.56 As a result, strict access controls across the entire theatrical distribution chain are essential to preserve content exclusivity. Most Nollywood films do not enjoy theatrical release, and the bulk of their earnings come from distribution of physical media, which are even more vulnerable to piracy. In the absence of viable copyright protection, Nollywood producers have again developed workarounds based on a combination of lead-time and physical exclusion. The marketers’ guilds control the principal urban markets in which film copies circulate by employing brawny enforcers to prevent pirates from setting up rival stalls; here, physical muscle substitutes for legal writ.57 The marketers’ guild has also developed informal distribution norms that further extend exclusivity based on mutual interest (Miller, 2016). Such informal norms recall the ‘trade courtesies’ that Breyer (1970) touted as regulating the nineteenth-century trans-Atlantic book trade in the absence of copyright. 54   As noted above, theatrical exhibition models also depend on backdrop norms of copyright law to function effectively—i.e. to prevent camcording and subsequent distribution or exhibition of pirated versions of the films. However, physical exclusion backed by real property law provides the first line of defense. 55   The music business is better suited to a commons-based business model because studio production costs are significantly lower than film, and live concert performances offer experiential value whose spontaneity and emotional resonance cannot be readily duplicated by recordings (Pager, 2012a). 56   The social experience of going out to the movies makes home viewing an imperfect substitute; some customers will still pay for the experience. The vocal participation of Indian cinema audiences, in particular, makes the theatrical experience a distinctive communal event (Hammer, 2014). For its part, Hollywood has turned to technology to replicate a similar premium on the theatrical experience through a combination of lavish production values and special effects that showcase best on giant screens, with 3-D images and high quality sound. Yet, the investment levels required to achieve production qualities sufficient to make the theatrical experience significantly more appealing than home viewing keep rising and may be out of reach of most developing countries. 57   These practices are not unique to Nollywood. Spike Lee apparently fell back on such ‘muscular enforcement’ tactics to combat piracy of his films in New York City (Lobato, 2012).

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610  Research handbook on the economics of IP law volume 1 In the case of digital music sales in China, technologically enabled access controls do copyright’s work. Priest (2014) notes that 90 percent of recorded music revenues in 2010 derived from an extremely narrow source: cell-phone ring-back tones. Ring-back tones are essentially music that a caller hears while awaiting an answer on the other end. Mobile phone users pay a small monthly fee to the phone company to select personalized music. Ring-back tones are extremely popular in China; they generate US $4 billion in annual revenue—an amount comparable to the entire gross revenues for recorded music in the United States (Priest, 2014). Because the tones are stored on the centralized architecture of the phone company rather than individual users’ phones, they are insulated from piracy (Liu, 2015).58 As such, they offer a rare context in which Chinese consumers are willing to pay for recorded music. In theory, such technological precautionary measures (TPM) could be used more widely to prevent unauthorized copying. However, TPM uptake in the developing world has been slow.59 Such replication of copyright exclusivity by other means hardly seems like proof of copyright’s irrelevance. It is not as if the content industries profiled here are blind to the potential offered by non-exclusionary revenue models. Sponsorship deals, merchandise, product placement, social media engagement, and the like are widely employed and furnish a welcome source of ancillary revenues. However, it is no accident that these industries rely on exclusionary models for the lion’s share of their revenues; the revenue potential from alternatives sources is too limited. Some might suggest, however, that use of these exclusionary alternatives is still preferable to copyright. As examples of ‘order without law’ (Ellickson, 1991) or ‘IP without IP’ (Raustiala and Sprigman, this volume), these regimes arguably embody the virtues of private ordering, providing bespoke solutions that serve the needs of particular communities and contexts. Could it be that these ‘non-legal regulatory tools . . . enable more granular, and potentially more effective, management of creative incentives’? (Perzanowski and Darling, 2017). Such commons-based management systems potentially minimize much of the dead-weight losses of the copyright system, in that access controls tend to be limited and short-lived in practice. Despite their revenue limitations, such ‘synthetic copyright’ models (Liebowitz, 2017) therefore merit further exploration. Yet, closer examination reveals that copyright’s alternatives—both exclusionary and non-exclusionary—come with substantial drawbacks of their own. C.  The Hidden Drawbacks of Copyright Alternatives 1.  Lack of scalability Copyright law, at least in theory, functions as a seamless, global system. International agreements such as Berne and TRIPS ensure a minimum standard of protection across national boundaries. By contrast, the alternative revenue models described above often rely on local arrangements that do not readily scale to broader horizons.   Ring-back tones are also popular in Nigeria, accounting for an estimated $150 million market.   Content industries appear to have prioritized other issues, perhaps out of recognition that pirated content is already so widely available that it makes no sense to penalize purchasers of legitimate copies by encumbering them with digital rights management or other such controls (Scaria, 2013). 58

59

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Copyright and emerging creative industries  611 Such limitations are most apparent in the Nigerian context, where the marketing guilds’ control is highly localized: confined to specific urban street markets in a handful of cities. Although the guilds’ internal self-regulation has helped to extend this zone of exclusivity, such informal norms are themselves limited in scope; they function best in close-knit communities where trust is based on personal relationships or kinship and monitoring against defections is feasible.60 Indeed, Barnett argues more generally that commons-based regulation of information goods is inherently limited in scale (Barnett, 2010). The Chinese ring-back-tone architecture, while national in scope, is subject to its own scale limitations. First, it only applies to music—and only specific types of music at that. Second, it only works for music consumed in this one very narrow context. Third, the market could eventually become saturated, if Chinese consumers tire of continually updating their tone files with newer offerings. Finally, while cinema exhibition is certainly scaleable in theory; there are practical limitations in this regard. China still lacks sufficient screens to meet domestic demand for movies (although it is building more), and state distributors further limit the number of films authorized for theatrical distribution (Priest, 2014). Movie theaters in developing countries are typically concentrated in urban areas, whereas potential audiences can be widely dispersed across the countryside (Pager, 2012a); diasporic audiences can be similarly scattered. High crime rates make evening cinema-going unsafe in some areas. Indeed, most cinemas closed in Nigeria in the 1980s for this reason. Moreover, in many Muslim regions, including Northern Nigeria, women are denied access to public cinemas due to prohibitions against gender mixing (Pager, 2012a). These limitations apply to music concerts as well. In China, in particular, there is a shortage of suitable venues. The Communist party’s distrust of public gatherings outside their control further limits the number of concerts and festivals that can be staged, as well as the types of musical acts that are allowed to perform (Montgomery, 2010; Liu, 2015). Moreover, whereas multiple copies of a movie can be screened simultaneously, concert performers can do at most one show per night (and even that quickly becomes too much; Schultz, 2009). By contrast, copies of recorded media can reach dispersed audiences wherever they are located. Such decentralized distribution affords the convenience of on-demand consumption in the home and can easily be scaled to meet global demand. Yet, monetizing such consumption is difficult without copyright. 2.  Abuse of power Another drawback of alternatives to copyright is their vulnerability to power asymmetries and abuses. Copyright law, in principle, is administered in an evenhanded fashion subject to principles of fairness, due process, and non-discrimination (see, e.g. TRIPS, Arts. 3, 4, 41–2). Under the TRIPS Agreement, compliance with such rule of law safeguards is enforceable through binding dispute resolution at the World Trade Organization backed

60   Jennifer Davis makes a similar point about the trade courtesy regime governing nineteenthcentury trans-Atlantic book publishing whose membership was bounded by class and ethnicity (2014). Similar kinship ties also characterize (and delimit) Bollywood’s film families (Liang and Sundaram, 2011).

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612  Research handbook on the economics of IP law volume 1 by trade sanctions. This is not to say that deviations never occur in practice. In many countries, for example, enforcement practices tend to favor the products of local industries over imports (Karaganis, 2011). In South India, such favoritism is amplified by the close ties between local film industries and provincial political parties.61 However, informal, norm-based, alternative regimes are often marred by lack of transparency and discriminatory treatment. This is certainly the case with the Nigerian marketers’ guilds (Miller, 2016). When informal norms are combined with private deployment of violence, the potential for abuse becomes all the more grievous: Nigerian ‘big men’ in the guild have a tendency to flout rules with impunity (Paulson, 2012).62 A different sort of power asymmetries governs the Chinese ring-back-tone market. This market is controlled by mobile phone companies, and in China two firms dominate. Because the Chinese music industry lacks other viable sources of income (due to piracy), it is obliged to license music to this duopoly on starkly unequal terms: The Chinese mobile operators keep over 97 percent of the proceeds, with less than 3 percent split between the record labels and musicians (Priest, 2014). Stanley Liebowitz (2017) documents how the trans-Atlantic trade courtesy regime operated by nineteenth-century publishers was similarly marred by exploitative behavior. American authors (whose works were subject to copyright) received much less generous terms compared to British authors (whose works were not). Moreover, the publisher’s regime treated the latter as permanently bound to whichever publisher first published his or her work, accentuating the potential for monopsonistic abuse. Different, but equally objectionable, proprietary attitudes toward artists are displayed by corporate sponsors today. In China and Nigeria, such funders often seek to exert creative control or impose other conditions that inhibit artistic autonomy (Liu, 2015; Pager, 2012b). In this regard, private patronage proves no less objectionable than its public analogue (Netanel, 1996). Of course, power asymmetries between authors and intermediaries exist in the copyright system as well. Different jurisdictions provide doctrinal safeguards against the resulting inequities to varying degrees (Pager, 2015). Moreover, copyright’s market structure helps to enable successful authors to work under conditions of creative autonomy (Merges, 2011).

61   The starkly provincial bent of enforcement practices in South India reflects the intimate connection between film and politics: Politicians fund movies that burnish the leading stars’ heroic image, and the stars, in turn, campaign for the politicians (and often become politicians later in their own right). As a result, vendors of pirated discs who dare to sell pirated versions of local films face punishing police crackdowns. Such highly selective enforcement remains locally bounded: Tamil police protect the Tamil film industry; Kannada police protect Kannada films, etc. (Liang and Sundaram, 2011). Accordingly, despite their formal use of police power and ostensible basis in copyright law, such practices are not that different from Nigeria’s marketers’ guild, and suffer from some of the same limitations: vulnerability to abuse, distorting effects in production signals, and potentially inequitable distribution of benefits. 62   While not directly related to copyright, it should also be noted that Bollywood’s flirtation with mafia financing in the 1980s led to similarly extralegal uses of force to exert control over film production; the sometimes fatal consequences for industry participants represent a particularly sinister form of dead-weight losses (Athique, 2008).

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Copyright and emerging creative industries  613 3.  Distorting effects of alternative revenue sources A further critique of alternative business models and other copyright substitutes is that they tend to monetize only a limited segment of total consumption as their revenue source. Because producers only internalize benefits from one part of the market, they receive distorted signals as to societal demand. This in turn can channel future production in suboptimal directions. For example, Chinese musicians and record labels who rely on ring-back tones for the bulk of their income have an incentive to create new music that is suitable for use in the ring-tone market and to ignore competing sources of audience demand that they are unable to monetize. This means composing short, catchy melodies suitable for the low quality acoustics of the ring-back context at the expense of more sophisticated works with higher production values. Jiarui Liu (2015) describes how Chinese music companies are doing exactly that. The Indian music industry has similarly reverted to its traditional subsidiary role as a supplier of Bollywood film music, forsaking the linguistic and genre diversity that had emerged when music could be sold directly to consumers as a standalone good (Booth, 2015). This distorted incentive critique can be applied more broadly to other commons-based alternative business markets.63 For example, Nagla Rizk (2014) describes the ability of Egyptian singers to earn a living performing at weddings and other social gatherings. One suspects that such singers will develop a repertoire of sentimental ballads rather than, say, protest songs or devotional hymns in order to cater to the narrow niche of Egyptian music demand that happens to be monetizable.64 Indeed, Rizk suggests that Arab authorities deliberately favor pop stars over more socially conscious ‘underground music’ as a ‘means to distract the masses’ (2014). Katherine Strandburg (2013) predicts similar distortions will occur in US content markets funded through online behavioral advertising, invoking an analogous theory of price signal mismatches. Advertising supported creative markets are already subject to a host of undesirable biases, from the undue influence of sponsors (Baker, 1997) to the prevalence of click-bait (Gardiner, 2015) and the distorting effects of two-sided markets (Reidel, 2011).65 More generally, any reliance on ancillary revenues to subsidize the production of creative content is vulnerable to distortions where the proxy market represents an imperfect substitute for the social value of the primary good.66 For ­example, the ability to sell happy meals figurines only imperfectly captures the value of a film qua film. When merchandising potential and product placements provides 63   As noted, Chinese and African filmmakers under state patronage regimes were similarly incentivized to produce films that catered to European film festivals at the expense of domestic audiences. One can speculate as to the extent to which such distortions occur in other markets. For example, do South Indian filmmakers overinvest in heroic star-vehicles in order that their political funders can reap the electoral benefits? 64   Capacity constraints on performance models impose further selection biases, favoring mass market over niche content. Such biases are particularly grievous in China as elaborated further in Section V, infra. 65   This is not to mention the privacy concerns that invasive online advertising implicates (Kapczynski, 2012). 66   One can also raise questions of fairness: Why should consumers in one market subsidize products consumed in a different market. And what happens if demand for the proxy market disappears?

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614  Research handbook on the economics of IP law volume 1 the primary value proposition underlying movies, the quality of the film itself becomes secondary.67 Such distorted signals can be contrasted with the allocative efficiency that a properly functioning copyright system ensures. Copyright’s broad bundle of rights allows ­producers to internalize benefits across the full range of demand for a given creative work, thereby capturing market signals that orient future production accordingly (Goldstein, 2003).68 The result is a mix of creative works that serves a broad range of societal tastes and interests.69 D.  Distribution of Benefits Furthermore, the claim that copyright only benefits a narrow few must be evaluated against the alternatives. Much of the skewed distribution of benefits arguably flows from superstar economics and other inherent biases of media markets that have very little to do with copyright (Shur-Ofry, 2012). The same skews can result under alternative business models based on sponsorship, concert performances, and sale of merchandise (Liu, 2015). Alternative business models also favor particular types of creators with particular traits that may have little to do with the quality of their work. For example, sponsorship models place a premium on attractive, charismatic pitchmen (Liu, 2015).70 Similarly, a concert performance model works best for established bands whose fan base is concentrated in major urban areas. Performers with a fan base dispersed across a wide geographic area may struggle to fill venues. Touring on the road also imposes hardships that not everyone can readily endure (e.g. single parents). Some artists’ talents and certain musical genres simply lend themselves to studio projects better than live concerts (Schultz, 2009). Such groups could be systematically disadvantaged were concert revenues the only source of remuneration. At minimum, such biases call into question claims that commons regimes yield a fairer distribution of benefits than copyright. Copyright models may exacerbate distributional skews to the extent that they generate higher levels of revenue overall, making skews seem more extreme. However, it is important to keep in mind that a portion of the revenues that superstars and Big Media conglomerates generate trickles down to subsidiary personnel (session musicians,

67   The Pixar movie Up provides a real-life example of such dystopian incentives: although the film was hailed as a critical success and made a profit at the box office, Disney stock still fell due to the movie’s lack of merchandisable characters. 68   We can debate how far along the chain of derivative revenue streams we want to allow authors to internalize benefits. This point is explored further in the discussion of cultural diversity, infra Section V. The primary point, however, is that copyright does a better job of capturing a broad spectrum of market signals than many alternatives. 69   Of course, intellectual property markets are not without their own distortions. As Amy Kapczynski points out, only consumers who have the ability to pay get counted (2012). Moreover, pricing of media goods in some developing markets can be disproportionately oriented toward the wealthy (Karaganis, 2011)—although query whether this trend would persist if piracy were better controlled, allowing for more effective price discrimination strategies. 70   Physical attractiveness and charisma provide advantages in the copyright system as well. However, the effect of this benefit is likely to be particularly emphasized under a sponsorship model.

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Copyright and emerging creative industries  615 composers, camera-men, editors, and the like). In this way, copyright helps to subsidize up-and-coming artists, many of whom hone their skills through such industry day jobs while they await their turn in the limelight (Hazucha, 2014).71 E.  Context-Specific Copyright What about the claim that eliminating piracy is futile—akin to King Canute’s struggle to hold back the tide? Should creators in the digital age just learn to live with it? There’s undeniably some truth to this claim. Digital technologies reduce the marginal costs of reproduction and distribution to almost zero, whereas production costs remain high, allowing pirates an opportunity for profitable arbitrage. However, copyright enforcement does not have to be an all-or-nothing proposition. Reducing or delaying piracy by even a small amount can make huge differences to an industry’s bottom line, as the Indian and Chinese cases demonstrate. Furthermore, even if piracy remains rampant at the retail distribution level, this does not obviate the benefits of copyright entirely. Although our usual image of ‘piracy’ conjures up shadowy figures in trench coats peddling misbegotten wares, content industries face a range of potential appropriators which include competitors, intermediaries, broadcasters, cable networks, airlines, hotels, and other established enterprises. Enforcing copyrights against such entities may be more feasible than preventing retail piracy as high profile enterprises can hardly hide in the shadows. As noted, India has made tremendous headway toward enforcing copyright norms in this regard: bringing pirate cable operators into the fold; ensuring that public performances are licensed; and clearing rights for film inputs. Nigeria has made recent progress in this regard as well; the main holdup is a lack of reliable proof of ownership. China too has moved toward a licensure model on many fronts, although state broadcasters and other government entities remain largely untouchable. Such incremental gains belie claims of copyright’s inevitable doom. Enforceable copyrights can also promote greater trust and collaboration internally within content industries. Small creators who furnish inputs for content production such as songs or scripts are particularly vulnerable to predatory corporations in the absence of copyright (Hughes, 1999). Lack of copyright protection also introduces perverse incentives in the way that creative industries operate. For example, fear of script piracy has even led some Nollywood directors to withhold scripts from their actors; instead, actors are only given their lines for individual scenes as they are shot (Pager, 2012a).72 However, recent developments, including a favorable Nigerian high court ruling on script piracy as well as the Nigerian Copyright Commission’s online platform for electronic registration, offer Nigerian creators the prospect of greater protection against such internal misappropriation (Opara, 2017; Nigerian Copyright Commission, 2017). 71   Copyright arguably exacerbates distributional inequalities in another respect: by helping well-capitalized media firms to fund marketing campaigns that accentuate the advantage of blockbuster culture over indie alternatives. See infra Section V-A. 72   Admittedly, trade secret law can counter this threat to some degree. But copyright’s reach is broader, allowing remedies against third parties who exploit the purloined property, even without showing culpability or knowledge of the misappropriation.

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616  Research handbook on the economics of IP law volume 1 As these accounts demonstrate, copyright norms operate according to a variable geometry whose contours remain highly contextualized. Even if it is true that digital piracy can never be eradicated, achieving more modest enforcement and licensing goals can still yield palpable benefits to creators’ bottom lines in the form of increased revenues and reduced uncertainty. F.  The Formalization Imperative Furthermore, the value of adhering to copyright norms grows as industries develop over time and move—or are nudged—toward more formal modes of operations. Expanded commercial ambitions bring with them the pressure to conform to established structures of the global copyright. For example, a filmmaker that seeks a bank loan for an upcoming production will usually be required to offer the copyright as collateral. Completing such transaction will require the filmmaker to demonstrate a host of formal copyright instruments that collectively document ownership of the work to establish the chain of title. Similarly, if the filmmaker seeks an international distributor or a film festival exhibitor, they will likely have to document clearance of all the film’s copyrightable inputs—music, screenplay, background art, and so on (Miller, 2016). It may not take too many iterations of this exercise before such formalities become routinized as a business practice. Potential sponsors of the work can also apply pressure toward formalization. Advertisers of international brands do not want to be associated with illegal practice, as Nollywood filmmakers discovered when their penchant for using unauthorized music tripped them up (Pager, 2012a). Similarly, pressure from foreign advertisers is said by Priest to have played an instrumental role in persuading Chinese web video sites to embrace licensure norms (Priest, 2014). Even without such overt pressure to embrace copyright, other structural forces exert their own pull, tugging emerging content industries toward global copyright norms. For example, participating in the reciprocal arrangements that govern international collecting societies brings with it the prospect of royalty payments from wealthy diasporal populations, but requires investment in formal record-keeping and local monitoring/ enforcement. Similarly, engaging in joint productions with Western content industries can expose local partners to global copyright ‘best practices’ and bring with it the concomitant expertise required for compliance.73 Such structural forces can push creative content industries toward embracing copyright formalization even in the absence of credible enforcement threats. Indeed, exposure to global copyright norms can potentially exert a ripple effect that shifts industry behavior merely by making such norms a focal point of attention (McAdams, 2000).

73   Such collaborations are especially common in the music industry where world music is a growing market niche and Western stars such as Paul Simon and Ry Cooder have made a habit of collaborating with artists across the developing world. Joint ventures in film are also becoming more common. India has produced a steady diet of crossover films combining Indian talent with Western funding, direction, and distribution: e.g. Monsoon Wedding, Slumdog Millionaire, Best Exotic Marigold Hotel, and so on. A forthcoming Chinese film by Zhang Yimou is to be made in English starring Matt Damon (McClendon, 2016). New Nollywood has also begun to move in this direction, drawing backing and distribution from Nigerian expatriates (Miller, 2016).

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Copyright and emerging creative industries  617 A shift toward embracing copyright norms over time can also arise for competitive reasons. As noted, there is a tendency for content distributors exploiting new technologies or business models to build their platform and attract users on the back of authorized content. However, once they have achieved critical mass, the now-established incumbents then seek to entrench their position through exclusive content licensing deals that give them a leg up over competitors. China’s internet video industry, and, more recently, its music streaming services have followed this path, and indeed are now busy suing each other for copyright infringement (Priest, 2016).74 A similar pattern emerged in the Indian music industry (Athique, 2008). Piracy certainly has not gone away, but at least some powerful incumbents have taken a stake in upholding the copyright system.75 Even consumers can sometimes play an informal role in policing copyright norms, filling a void left by ineffectual state institutions. For example, Chinese and Indian fan groups monitor distribution of works by their favored artists and can mobilize to exert sanctions against unauthorized distributors (Hammer, 2014). Over time, such collective mobilizations could conceivably pave the way for a transition toward an emerging norm of copyright compliance. G.  Taking Stock This chapter has offered a nuanced account of the interaction between copyright law and development, and the extent to which commons-based models offer a viable alternative. The case studies examined show that copyright law is not a sine qua non for creative development. Yet, they also suggest that the ability of creative industries to grow beyond a certain level in its absence is limited and that there are structural imperatives that push toward copyright formalization. Copyright protection benefits creative industries by allowing them to diversify their revenue streams and pursue a variety of possible business models. Importantly, copyright law does not prevent rightsholders from releasing works under open licenses or pursuing commons-based business models, if they choose. It merely gives them the option not to (Barnett, 2013).76 Copyright is not cost-free. Consumers have to put up with reduced access and higher costs, thus some amount of consumer surplus is forfeited (Karaganis, 2011).77 Yet, if

74   Google arguably has played a similar game with YouTube and GoogleBooks (pre-settlement collapse); although its licenses are non-exclusive, it arguably enjoys market power via network effects that allow it to achieve more favorable terms than an upstart competitor. 75   This pattern can be cyclical as it progresses through iterative evolutions toward new technology and new platforms. Thus, the shift toward formalization is not necessarily continuous (Lobato, 2012). However, as industries develop, the long-term trend seems be toward embrace of copyright norms. The biggest hold-out remains Nigeria, but even here the emergence of new licensing platforms backed by Western investment, such as Iroko in audiovisuals and Feeme in music, offers hope that formalization may yet arrive as an industry norm. 76   Some might argue that widespread instantiation of copyright business models crowd out space for innovative ‘open’ alternatives. By preventing such alternatives from licensing a critical mass of content, the incumbent content industries keep them from getting off the ground, or deter investors by threatening infringement suits. 77   Unauthorized distribution can sometimes also add value to the consumption experience, e.g. where fans of a foreign television show distribute it for a domestic audience with high quality

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618  Research handbook on the economics of IP law volume 1 they get higher quality productions to enjoy as a result, arguably the ledger looks more even.78 What about claims of blocked innovation and censorship? While commentators in the developed world obsess over user generated content by non-commercial artists, such issues hardly register in the developing world context. Content industries in the Global South are waging an existential struggle against commercial enterprises whose unauthorized distribution of verbatim copies directly supplants legitimate sales in their primary market.79 Such industrial scale piracy has nothing to do with internet mash-ups, parodies, and the like. Enforcement actions against such secondary creators is the last priority of rightsholders, and appropriately tailored exceptions can easily be made to accommodate them, if need be.80 Arguably, the biggest difference between copyright models and alternatives may be the extent to which content industries develop into highly concentrated, integrated structures and acquire more capital-intensive capabilities. This begs the questions posed at the start of this chapter: What kind of cultural development do we want? Do we have to choose between blockbusters and viral web videos? Arguably, what matters most is having a diversity of offerings. Is copyright compatible with cultural diversity? These issues are addressed in the next part.

V.  COPYRIGHT AND CULTURAL DIVERSITY Thus far, this chapter has discussed the development of creative content industries largely in terms of the economic revenue they generate. Cultural development, however, is arguably about more than cranking out cultural widgets, however profitable. As Big Media conglomerates have grown more concentrated and powerful, concern has mounted over cultural diversity. Copyright and media theorists argue that access to a diverse supply of cultural media is essential from a variety of normative standpoints, including democratic discourse (Netanel, 1996; Baker, 2002), human flourishing (Fisher, 1988; Sunder, 2012), personal autonomy (Benkler, 2001), and multiculturalism (Shur-Ofry, 2012; Burri, 2012). However, the manner in which diversity is defined varies greatly by context. In the United subtitles added through crowd-sourced translations, often within days or even hours of the original broadcast. 78   Concerns over access to knowledge (e.g. scientific publishing and educational materials) present a more serious worry (Chon, 2007). The Berne Annex has provisions to help developing countries overcome such hurdles, but there are still real costs to be borne here. Such costs, however, are largely extrinsic to the ‘cultural development’ focus of this chapter. Concerns over access to cultural resources are more relevant as media literacy arguably provides a foundation for creative innovation. Appropriate tailoring of exceptions and limitations, and public funding for libraries offer partial solutions. Further exploration, however, lies outside the present scope. 79   Peer-to-peer filesharing can be non-commercial, but the leading platforms are almost always supported by for-profit entities that earn money from advertising. 80   A rare case of a parody remix in China that provoked claims of copyright infringement offers an instructive example: When Hu Ge’s video remix parodying a blockbuster film by acclaimed director Chen Kaige went viral online, attracting Chen’s ire, China’s netizens mobilized in support of the remix, forcing Chen to back off from his threatened litigation (Gong and Yang, 2010). More generally, Chinese courts have shown themselves willing, in principle, to construe Chinese copyright law flexibly to accommodate fair use interests (Song, 2011).

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Copyright and emerging creative industries  619 States, for example, diversity can be discussed in terms of media ownership, racial/ethnic representation, or political viewpoint (Napoli, 2012). Internationally, diversity is often measured in terms of language or national origin (Burri, 2012). Some discuss diversity in terms of ‘shelf space’ in cultural markets; others focus on production process, contrasting artisanal with ‘industrialized’ creativity; still others are preoccupied with tracking actual consumption patterns (Napoli, 2012; Arsenault and Castells, 2008). By lowering the threshold costs of creating and distributing content, digital technologies have democratized cultural expression. As such, one might expect that they have proven to be an unmitigated boon for cultural diversity. The explosion of Nigerian filmmaking in the early 1990s offers perhaps the best example of this. Not only did Nollywood grow from almost nothing to become a major global industry within a decade, but each of Nigeria’s major ethnic groups has its own regional film industry that produces movies in a different language (Miller, 2016). Nollywood movies are diverse in other ways as well: by genre, subject matter, viewpoint, and also the backgrounds of those who make them: multi-ethnic casts and crews are common, and a significant number of Nollywood directors are female (McCall, 2002). However, one could also argue that by hewing rigidly to genre conventions, Nigerian movies are themselves commodity products, mass-produced according to the logic of global capitalism (Lobato, 2012). Critics contrast such formulaic, commercial output with the artistic masterpieces of Africa’s celluloid film tradition (Pager, 2012b). Nollywood movies also freely borrow from Hollywood tropes, techniques, and sometimes specific plots, while Hausa films, made in Northern Nigeria, have drawn heavily from the Bollywood film tradition, further undermining their authenticity in the eyes of detractors (Larkin, 2004). Moreover, the widespread circulation of Nollywood videos and music across Africa and beyond has sometimes come at the expense of local media, prompting charges of cultural imperialism (Krings and Okome, 2013). These contrasting viewpoints point to the deep ambiguities lurking within the concept of cultural diversity. For present purposes, we need not commit to any single definition of diversity and can consider the concept from multiple standpoints. The salient question to explore, however, is what role do copyright and other cultural funding models play in shaping diversity? Subsection A examines evidence from and debates surrounding developed markets. Subsection B recontextualizes these debates in the developing world context. Subsection C then briefly considers copyright’s transnational effects on diversity in the global market. A.  Diversity Effects in Developed Markets Copyright provides an incentive to invest in cultural production. More copyright means more investment, albeit subject to diminishing returns. Note that this does not mean that strengthening copyright will lead to more creative works being produced and thus more diversity. It may have the opposite effect: Producers may choose to invest bigger sums in a smaller number of works or focus on a narrow range of genres (Nadel, 2004). Therefore, the effect of copyright on diversity a priori is ambiguous. As noted, copyright law is largely agnostic as to output. It leaves it to the market to determine the appropriate allocation of investment and discourages subjective judgments about cultural value within copyright doctrine. The connection between copyright and cultural diversity has been explored by commentators, however, along several dimensions,

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620  Research handbook on the economics of IP law volume 1 including: (1) the threat from commoditized culture; (2) structural biases; (3) anticompetitive abuses; (4) effects of digitization; and (5) restrictions on downstream creativity. These dimensions are explored below in turn.81 1.  Commodity culture Ever since the Frankfurter School, commentators have reviled commercial ‘culture industries’ for producing a bland ‘commodity culture’ the same way that McDonalds makes hamburgers—mass-produced to appeal to the lowest common denominator of taste. Such cultural junk food allegedly manipulates its viewers into over-consumption at the expense of more authentic, wholesome fare (Skladany, 2008). Modern-day heirs to this tradition view copyright as a tool for entrenching the dominance of transnational corporate media (e.g. MacMillan, 2014; Story, 2003). Their critiques are echoed by cyberlibertarian scholars who view copyright law as ‘resistance’ to be routed around by the digital networked currents of authentic folk culture (Moglen, 1999; Benkler, 2006). Yet, yearnings for some imagined folkloric past or cyber-utopian future do not alter the reality that the production of cultural goods remains, in many cases, a resource-intensive enterprise requiring extrinsic funding. Such funding can come either from the government or from the market. The tradeoffs between copyright and state patronage explored in Section III pointed to characteristic biases that each regime displays in incentivizing particular forms of cultural production: State patronage tends to be oriented toward commercially marginal niches, for example, funding avant-garde works or subsidizing minority expression. By contrast, copyright directs investment toward commercially viable forms of expression. Setting aside Marxist distaste for commodification on principle, what exactly is wrong with commercial culture? After all, to succeed, such works require the validation of paying audiences. What is wrong with giving consumers what they want? (Baker, 1997). The cultural junk food metaphor referenced above offers some indication of possible responses. Critical media scholars have identified a long list of societal ills that commercial mass culture allegedly exacerbates, including harmful stereotypes, valorization of celebrity, hyper-sexuality, consumerist materialism, stultifying passivity, and the need for instant gratification. To the extent that copyright law subsidizes such addictive and unhealthy consumption, it arguably produces a public bad rather than good (Skladany, 2008). More generally, critics such as Edwin Baker (2002) and Amy Kapczynski (2012) note that cultural media are associated with a wide range of social externalities not captured by market pricing. Included among them are normative values associated with culture  diversity. Baker also emphasizes that audiences’ preferences are not endogamous: What people want is partly shaped by the menu of options with which 81   Given the obvious connection between diversity and product differentiation, the emerging literature on copyright and product differentiation (Bracha and Syed, 2014b; Abramowicz, 2011; Yoo, 2004) deserves mention here. Such scholarship recognizes that the sheer number of works produced matters less in terms of satisfying societal demand than the spacing of such works across the demand spectrum and seeks to apply such insights to optimize copyright doctrine. Further theoretical work is arguably required, however, to develop this literature before its normative payoffs can be usefully connected to the broader discourse on copyright and diversity.

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Copyright and emerging creative industries  621 they are presented.82 Accordingly, copyright markets respond to consumption patterns that may be a poor proxy for social welfare. 2.  Market structure A related diversity critique emphasizes not so much the commercial nature of copyright markets as the particular structure such markets assume. In theory, copyright markets respond to decentralized demand signals from the consuming public to satisfy a wide range of tastes, both mainstream and niche. Yet, markets for mass media characterized by high production costs and low distribution costs have a tendency to tip toward winnertake-all outcomes because bestselling works deliver outsized returns. The winning strategy is therefore to invest in lavishly produced, heavily promoted works of blockbuster culture that maximize market returns by crowding out competition from more diverse works (Nadel, 2004).83 The resultant ‘tyranny of the market’ (Waldfogel, 2007) means that the profit maximizing solution is not necessarily the best outcome in terms of satisfying consumer preferences. Many commentators link such market failures to copyright law. Mark Nadel (2004) argues that copyright increases the winner-take-all biases of media markets by generating inflated profits that Big Content uses to fund its marketing juggernaut. Guy Pessach (2003) attributes such harms to the expansive derivative works right that copyright provides, leading to overinvestment in blockbuster works that drive merchandise sales and other ancillary revenues. Neil Netanel (2000) describes how copyright facilitates price discrimination and bundling strategies that can be best implemented on a large scale, further tipping copyright markets toward concentration. However, Pager (2011) notes that revenues from blockbuster works often cross-­subsidize more experimental forms of creativity. Moreover, Michal Shur-Ofry (2012) argues that copyright is, at most, a marginal player in this story. She sees the scale economies of superstar economics as driving outcomes and suggests there is not much we can do about network-induced solidarity preferences that are an integral part of being human. ShurOfry (2014) further argues that media markets are far too complex a system to fine-tune through copyright doctrine. It should be also noted that relying on alternative revenue models such as sponsorship or merchandising can push just as strongly toward winner-take-all outcomes (Liu, 2015).84 More generally, Guy Pessach (2016) describes informational capitalism under the commons model as dominated by winner-take-all platforms online that perpetuate forms of cultural commoditization that are just as troubling as the criticisms laid at copyright’s door.

82   Baker describes a feedback loop between the media goods that consumers encounter in the marketplace and the molding of consumer preferences that determine future consumption choices (1997, 2002). 83   Large media conglomerates can also exploit economies of scale and scope through growth and industrial integration, not to mention market power (addressed in subsection A(3) infra). Moreover, as noted in subsection A(3) infra, large content firms can more easily negotiate copyright permissions to use cultural media as inputs. 84   As noted below in subsection A(4), Elberse (2013) views media blockbusterization, in part, as a strategy that responds to weakening of copyright exclusivity, relying instead on branding power to generate ancillary revenues.

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622  Research handbook on the economics of IP law volume 1 3.  Anticompetitive abuse Commentators have also expressed concerns over the market power that large content conglomerates wield. Detractors allege that Big Content abuses its clout, disadvantaging smaller players through a variety of anticompetitive practices, including product tying (e.g. block booking; Burri, 2012) and preferential dealing (Netanel, 2000; Nadel, 2004). Copyright plays a role in this story as well. In so far as copyright encourages media concentration, it exacerbates the potential for harm. Big Content leverages its exclusive rights over large catalogues of valuable content to negotiate more favorable terms in the marketplace than smaller competitors can obtain (Garcia, 2014). Such firms can also more easily obtain permission to reuse commercial content owned by others through implicit cross-licensing deals (Pager, 2015). Yet, it is far from clear the extent to which copyright itself is inherently culpable in this narrative, as opposed to, for example, regulatory failures in antitrust and communications law. Moreover, some commentators have also argued that too little copyright can have equally pernicious effects on cultural diversity. Guy Pessach (2013, 2016) suggests that copyright plays an important structural role in mediating between authors and intermediaries. In conditions of weak copyright enforcement, he worries about dominant content hosting platforms, such as YouTube, abusing their market power at authors’ expense in ways that harm diversity. Justin Hughes (1999) likewise argues that copyright promotes diversity in part by protecting small creators from abuses of corporate power. Netanel (1996) and Merges’ (2011) points about the autonomy enhancing function of copyright are apropos here as well.85 4.  Effects of digitization A further facet of this debate concerns the effects of digitization on creative content markets. Chris Anderson (2006) captured a lot of attention with his ‘longtail economics’ theory holding that the advent of digital media and, in particular, the vastly expanded scope for distribution in cyberspace would lead to a decisive shift in both supply and consumption away from the mass market. The supply of online content has unquestionably grown by orders of magnitude (Lemley, 2015). While scholarly attention has focused on amateur creators, a new breed of commercial creators have braved the new world of digital disintermediation (Pager, 2015) to contribute to output diversity as well. Less clear is the extent to which consumption patterns have shifted. Some suggest that digital markets can advance diversity by supplying more personalized media offerings through automated recommendation engines and innovative data mining techniques (Smith and Telang, 2016). Yet, Anita Elberse’s book, Blockbusters (2013), shows that the Big Content producers have moved the other way: focusing ever-more myopically on promoting and hyping a narrow range of mass market offerings. In a way, these narratives are complementary: The massive proliferation of free amateur and indie content has made it necessary for the big players to launch their marquee content with a supersized splash that cuts through the noise and grabs public attention. The real loser may be content in the mid-market.

85   See Section III-A(4), above. Netanel (2000) also argues that a degree of concentrated power is necessary to give the media the clout to stand up to the government and other power centers.

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Copyright and emerging creative industries  623 The big studios have downsized their art-house divisions, and a similar trend can be seen in the music industry. Where is copyright in this story? It is arguably felt by its absence: By facilitating both commercial piracy and peer-to-peer filesharing, digital media have clearly hurt creative industry revenues (Danaher, et al., 2017). This may exert a negative effect on diversity. Elberse (2013) draws a connection between piracy and blockbusterization, suggesting that ‘tentpole’ strategies, in part, respond to loss of control over content distribution. Big Content can still make money from sponsorship, merchandise, tie-ins, and all the other brand-driven benefits that flow from a blockbuster franchise. By contrast, smaller competitors are less able to tap such ancillary revenues. Large distributors can also better cope with the challenges of digital enforcement compared to upstart creators (Pager, 2015). Some, however, argue piracy-induced revenue hits have weakened Big Content’s hegemony, creating openings for upstart rivals (Burri, 2012; Waldfogel, vol. II this Handbook).86 5.  Restrictions on downstream creativity Another place where copyright is seen as having a negative impact on diversity concerns its effect on downstream creativity and, in particular, on derivative art forms such as remixes, mash-ups, and fan fiction that are popular with amateurs. The digital age makes it easier for rightsholders to target forms of amateur creativity that previously flew beneath the radar (Litman, 2006). Moreover, the proliferation of user generated content online means there is a lot more to target. Fans of such grass roots creativity hail its liberating potential. Proponents of remix culture cite its potential to affirm minority identities, challenge orthodoxies, and air alternative perspectives (Sunder, 2012; Lessig, 2008). Much scholarly ink has been spilled exploring the threat to such follow-on creativity posed by expansive interpretations of copyright and the need to carve out a safe zone to protect it (e.g. Menell, 2016). Responding to these views, some cast doubt on the extent to which copyright actually exerts such chilling effects in practice (Joo, 2011; LaPolt, et al., 2015). Others contest the diversity value that such derivative expression brings. For example, Joo (2011) argues that remixes just reinforce the hegemony of the dominant media. And Fishman (2015) argues that by constraining copying and thereby forcing authors to ‘create around’ copyrighted roadblocks, copyright law actually promotes diversity, forcing us to be more original. Such disputes highlight the inherent subjectivity of cultural diversity as a normative goal. B.  Recontextualizing to the Development Context: Evidence from Case Studies The preceding diversity debate has largely played out among scholars in the developed world, based on conditions which may not necessarily extrapolate to developing countries. To the extent such discourse focuses on the US context, it may be particularly misleading given the United States’ unique position as a global hegemon of popular culture.

86   Economists have also attempted to measure the effects of piracy on diversity more directly. For example, Hammond (2014) suggests that piracy hurts sales of indie artists more than mainstream artists.

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624  Research handbook on the economics of IP law volume 1 Accordingly, insights from the developing world context may offer a useful corrective to the existing debate. It should be noted, however, that the case studies in this chapter— Nigeria, India, and China—focus on large countries whose creative markets may not be representative of the developing world as a whole. Nigeria and India, in particular, are global exporters of popular culture and occupy a role as regional hegemons comparable to the United States, albeit on a smaller scale. That said, it is worth noting that the content industries in India and Nollywood are far more decentralized than their US counterparts. Their domestic markets are fragmented along regional/linguistic/ethnic lines.87 Moreover, there are many more producers in the market, and they release far more movies than Hollywood. One might be tempted to attribute such decentralization to the weaker copyright norms that prevail in these countries. On closer inspection, however, the picture becomes more ambiguous. At first glance, China perhaps best illustrates Nadel’s (2004) argument about copyright reducing diversity through winner-take-all markets. The copyright enforcement climate has generally been improving in recent years. At the same time, there has been a trend toward consolidation in China’s creative industries and an increasing focus on blockbuster/superstar models (Frater, 2015; Liu, 2015). Yet, it is premature to say that copyright either caused consolidation or impaired diversity. Indeed, in the music realm, the emphasis on superstars is arguably better explained as a response to the lack of copyright enforcement that has forced a reliance on alternative business models (Liu, 2015; Priest, 2014).88 Moreover, China’s content industries are undergoing rapid transition in the wake of market liberalization (Montgomery and Priest, 2016). Many of China’s big companies are looking for opportunities to diversify into the fast-growing entertainment market and have consciously emulated Hollywood’s blockbuster model (Sun, 2016; Frater, 2015). And China’s government has increasingly looked to its culture industries as a source of global ‘soft power’ (Montgomery, 2010). All of these factors contribute to the ongoing industry restructuring, irrespective of copyright, underscoring Shur-Ofry’s (2012) point that creative markets are responsive to many extraneous factors that can swamp the diversity effects of copyright. As for copyright’s supposed anticompetitive effects, it is true that Chinese intermediaries are busy purchasing exclusive rights to popular content, leveraging copyright as the means to build market share and shut out rivals. Recent mergers between such firms do raise concerns over anticompetitive injuries (Priest, 2014; Economist, 2017). Independent artists have been unfairly exploited due to their lack of negotiating clout (Economist, 2017). Yet, such anticompetitive abuses arguably pale compared to the extortionate licensing terms imposed by China’s mobile phone duopoly for ring-back tones. As noted, the exploitation there results from copyright failures rather than its excesses. 87   By contrast, China’s population is 90 percent Han, and use of Mandarin language almost ubiquitous. China does have ethnic minorities, with whom it has politically fraught relationships. Yet, such minority media as exists tends to be state subsidized (and controlled), rather than marketdriven (Na Yi, 2016). 88   Capacity constraints on film exhibition and music concerts further constrain content diversity. With limited slots to allocate, distributors and promoters naturally favor content with mass market appeal over more experimental fare.

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Copyright and emerging creative industries  625 At the other extreme, Nollywood seemingly illustrates the inverse implications of Nadel’s argument. In the absence of enforceable copyrights, filmmakers make minimal investments in any one single project but rather have adopted a ‘spawn’ instead of ‘nurture’ strategy that releases a steady flood of creative progeny into the market in the hope of evading pirate predation through sheer numbers. Yet, while the resultant output is diverse in many respects, the diversity of content is notably shallow: Nollywood movies recycle familiar elements within well-defined genres based on established formulas. Without the resources to invest in product differentiation strategies, a standardized product offers the best way to secure customer patronage (Lobato, 2012). In other words, the absence of copyright has encouraged commoditized culture. Bollywood experienced a similar phenomenon in the early 1980s. As new technologies enabled pirates to divert revenues, Bollywood’s creative ambitions stagnated. Its staple output of masala (‘mix’) films had become largely fungible reworkings of the same stale formula: the romantic musical melodrama (Pager, 2011).89 It is notable, however, that copyright failures did not lead to an increase in production in the way that Nollywood’s example might predict. Rather, Telang and Waldfogel (2014) found that increased piracy led to lower production by Bollywood. Conversely, when copyright enforcement improved after 2000, Indian film production increased, and larger budgets allowed filmmakers to tackle more ambitious creative projects that enhanced the overall diversity of movies on offer. Bollywood continues to turn out masala films targeting consumption by rural masses, while simultaneously producing more sophisticated offerings catering to urban elites and expatriates. Moreover, India’s regional film industries catering to linguistic minorities have largely maintained their market share despite the higher budget Hindi films on offer (Pager, 2011). India’s example suggests that the causal relationships between copyright, industry concentration, and cultural diversity are more complex than critics have allowed. One might, for example, postulate a sweet spot at which the optimal level of copyright maximizes diversity.90 An alternative explanation would focus on path dependencies that prevent industries from easily restructuring and switching strategies as they move from one equilibrium level to another. Indeed, some of the decentralization in Nigeria and India today reflects the informal basis on which their film industries operated in decades past, denied the benefits of government recognition and access to financial markets. Bollywood has made considerable progress toward ‘corporatization’ and professionalization since obtaining official industry status in 2001 (Pager, 2011). However, the industry remains remarkably ­decentralized.

89   Floyd Whaley’s (2012) account of the Filipino film industry also traces a causal trajectory between increased piracy and less distinctive films. Booth (2015) similarly attributes retrenchment in the Indian music industry and a resulting reduction in diversity to the advent of digital piracy. 90   One explanation in the film context may be that both big-budget blockbuster films made under a strong copyright regime (because they involve bet-the-company investments) and lowbudget, high volume straight-to-video production models favored in a weak copyright climate (due to lack of a marketing budget) permit little scope for risk-taking innovation. In both cases, the incentive is to play it safe and work within existing genres/formulas to deliver a product that appeals predictably to proven sources of demand. By contrast, a moderately effective copyright system could allow space for diversity and experimentation.

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626  Research handbook on the economics of IP law volume 1 Moreover, significant investment continues to be driven by ulterior motives including money laundering and political influence (Rajadhyaksha, 2014), which acts as a centrifugal force impeding industry concentration. Meanwhile Nollywood’s marketers remain stubbornly resistant to change (Bud, 2014, 2016); the hegemonic grip exercised by its guilds provides a further cautionary tale as to the anticompetitive outcomes that can result in copyright’s absence. Finally, one clear difference between emerging and developed markets is that copyright lawsuits against follow-on creators are much more rare in the former. As noted, enforcement priorities lie elsewhere. India represents a partial exception in that music versioning and remixes have commercial significance there and have attracted some enforcement efforts (Greene, 2013). However, India’s version of a cover tune license has been interpreted broadly, and amendments to the Copyright Act in 2012 provided additional protection. As such, concerns over copyright’s chilling effects remain more theoretical than actual in the development context. C.  Global Diversity 1.  Overview of diversity concerns Cultural diversity concerns transcend the boundaries of individual national states, and the advent of globalization and global communications has only increased them. In general, a bigger global market should support a greater diversity of products. Yet, the scale economies of media goods tend to tip toward domination by big-market producers (Wildman and Siwek, 1988). For the better part of a century, the United States has had the largest home market, and most countries have been on the receiving end of American popular culture hegemony. UNESCO’s 2005 Convention on the Protection and Promotion of the Diversity of Cultural Expressions attracted almost the entire world as signatories (with the notable, albeit predictable exception of the United States). Yet, while countries pay lip service to the Convention’s ideal of cultural diversity as a global public good, they are mostly concerned about preserving their own domestic content industries. Many employ overtly protectionist policies, propping up domestic content industries through subsidies and restricting foreign competition (Pager, 2011). China, for example, strictly limits imports of foreign movies (Priest, 2014).91 In fact, the threat of US domination is arguably less dire for developing countries than it is for developed ones due to greater differences in cultural and social contexts. Such differences create a translational barrier that makes it harder for American cultural exports to dominate in Lagos than in London (Schultz, 2012). This ‘cultural discount’ applied to imported works creates a corresponding advantage for locally produced content that is steeped in the everyday realities of domestic audiences. Moreover, now that digital technologies have leveled the playing field, local content industries can finally exploit this built-in advantage and satisfy such hitherto unmet demand (Pager, 2012c).

91   India used to do the same until the 1990s (Pager, 2011). Nigeria, for its part, heavily subsidized domestic television production in the 1980s, which indirectly benefited Nollywood (Pager, 2012c).

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Copyright and emerging creative industries  627 Market size still matters to a degree. Regional superpowers Nollywood and Bollywood exert their own cultural hegemony over their neighbors. Hong Kong and South Korea played a similar role in East Asia (Pager, 2011), a mantle that China looks poised to inherit. Such ‘cultural colonization’ can also extend to diasporic populations: Bollywood increasingly targets affluent South Asian migrant communities who can be tapped for higher-priced ticket sales; in recent years, it has produced a bumper crop of films centered on the expatriate experience (the so-called ‘Manhattan-in-Mumbai’ genre; Pager, 2011). Nollywood too has begun to follow this trend (Santos, 2013). But who is colonizing whom? Even the US is now arguably a prisoner of its own hegemony. Because Hollywood increasingly relies on the global box office, it makes films whose appeal travels as widely as possible. The result has been a shift away from dialogue-intensive romantic comedies, which American audiences appreciate but which are hard to translate, in favor of violent action films built around lavish special effects and easily recognizable cultural icons such as comic book characters (Pager, 2011). 2.  The role of copyright Once again, a key question is where does copyright figure in the global diversity equation? Delegates negotiating the UNESCO Convention could not agree on an answer. As a result, copyright was omitted from the final text, save for a brief mention in the preamble (Hazucha, 2014). Some see global copyright law as a threat. By creating a seamless web of globally reciprocal protection, the Berne Convention and TRIPS Agreement have effectively expanded the market for global content. The globalization of copyright law thus increases the stakes of winner-takes-all contests. On this view, enforcing copyrights only serves to enrich Western multinational conglomerates and entrench their hegemony (Story, 2003). Yet, allowing piracy of foreign media arguably makes matters worse for local artists. Piracy effectively acts as a zero-price subsidy to purchase foreign media thereby undercutting the demand for locally produced content (Pager, 2012a).92 Fickle audiences spoiled for choice by a massive repertoire of pirated content drawn from the world’s best films and television no longer need to bother with sampling local unknowns. Moreover, local tastes may become warped by exposure to esthetic norms forged in alien contexts (Montgomery and Priest, 2016). Furthermore, the worldwide protection afforded by global copyright law serves as much opportunity as threat. The relationship between Nigerian and Indian content industries and their diasporic communities in the West illustrates this potential. More effective copyright norms could encourage expatriates to invest in content industries back home and also ensure that such industries internalize the benefits from overseas markets currently served by pirate distribution. Growing interest among Western audiences in sampling ‘exotic’ cultures represents a further market for content industries to develop (Pager, 2012a).

92   Complaints along these lines by US authors were instrumental in persuading Congress to extend copyright to foreign works (Pager, 2012a). For the same reason, countries such as France that are seriously concerned about cultural diversity are often strong proponents of copyright enforcement (Hazucha, 2014).

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628  Research handbook on the economics of IP law volume 1 To realize such a multipolar future of global content flows will require investments in capacity-building. As noted, the copyright system functions through a complex set of institutions and practices from collecting societies to clearance protocols that often require specialized expertise to navigate (Pager, 2015). Emerging content industries often struggle to realize the benefits copyright affords due to lack of information and capabilities (Pager, 2012a). Reducing such obstacles would arguably yield a more diverse copyright system. 3.  Cross-cultural remakes, parallel imports and versioning Copyright affects cultural diversity in other ways. Diversity concerns are also implicated by forms of copying that fall short of verbatim piracy. For example, Bollywood has a penchant for remakes of successful American films—everything from borrowing general plot ideas to more extensive copying that goes scene by scene, replicating dialogue verbatim and even camera angles (Desai, 2005). Such reworkings are common in other emerging film industries as well.93 Producers like such remakes because borrowing market-tested stories reduces risk. However, local writers and audiences arguably lose out on opportunities to have wholly indigenous stories appear on the silver screen. That such remakes are rarely licensed raises the issue of infringement (Desai, 2005). Where do we set the line between permissible borrowing of ideas and potentially unlawful copying of expression? How much license should we give for transformative ‘cultural translations’ of copyrighted originals? Some of this just recaps the debate, supra, regarding constraints on downstream creativity. However, the trans-cultural dimension of the copying implicates broader questions regarding diversity. Taking global cultural forms and indigenizing them through local settings and idioms can be seen as a mixed blessing. It assimilates dominant foreign media and messages, which could be viewed as a threat to diversity. Yet, such hybrid forms also serve to recontextualize aspects of global modernity and reconcile them with local meanings and traditions in ways that could be viewed as positive (Pager, 2012b). After all, culture does not exist in a pure form, frozen in time and immutable to outside influence; rather—especially in a global, digital age—it must react to and engage with changes around it to survive. Trans-cultural remakes arguably contribute to this adaptive process. Such trans-cultural adaptations therefore do more than merely dissipate rents from the original. That said, the extent to which copyright doctrine should encourage this practice remains unclear. Such ‘glocalization’ practices—adapting global commodity culture to local contexts— are connected to copyright doctrine in another way. The Kirtsaeng decision (Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013)) construed US copyright law as governed by an international exhaustion rule.94 Such a ruling makes it harder for US content ­producers to price discriminate by offering lower priced copies for sale in developing markets.

93   Nigerian filmmakers have reworked foreign story lines from a variety of sources, although the degree of copying is typically less extensive (Santos, 2013). Meanwhile, filmmakers in other African countries have freely adapted Nollywood film plots to local contexts (Krings and Okome, 2013). Chinese copying, by contrast, seems to focus more on cloning American TV shows (Generalpaperpress, 2012), although charges of copycat films are not unknown (Lu, et. al, 2015). 94   Rules on international exhaustion (the global version of first sale doctrine) were left unharmonized under TRIPS Article 6. Many developed countries apply a rule of national or regional exhaustion, which segments the global market and precludes parallel imports. By contrast, coun-

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Copyright and emerging creative industries  629 Technological controls offer a partial solution. However, these can be circumvented. A more effective solution is to create distinct versions of a work, tailored to the language and customs of each market, thereby restoring the potential for differential pricing without concerns over parallel importation. Kirtsaeng will thus encourage greater uptake of versioning strategies. Whether such an outcome is normatively desirable remains a difficult question. That reasonable minds can disagree on the answer only underscores the ambiguities that surround discourse on cultural diversity and transnational culture flows.

VI. CONCLUSION This chapter has explored the relationship between copyright and cultural development. It shows copyright is neither a magical elixir of growth, nor an outdated paradigm of dubious value. Rather, copyright law provides a pragmatic tool to encourage investments in particular kinds of cultural production oriented toward market demand. Having examined case studies based on the Nigerian, Indian, and Chinese music and film industries, several conclusions emerge. First, we can see that copyright offers important advantages over alternative models such as state patronage or commons-based production. In particular, the choice between ‘closed’ copyright and an ‘open’ commons may offer a false dichotomy. The case studies reveal that creative industries employ alternative exclusionary strategies in the absence of copyright. Such pursuit of ‘copyright by other means’ has negative ramifications that arguably outweigh the downsides of formal copyright. At the very least, such drawbacks must be reckoned with in any comparative assessment. Furthermore, the benefits of copyright law can be realized even without committing to a full-scale war on piracy. Moreover, the logic and external benefits of copyright formalization exert their own gradual pull over time. Finally, while the relationship between copyright and cultural diversity is complex and ambiguous, there is reason to think that copyright markets are not intrinsically hostile to diversity and that other factors play a larger role in driving outcomes. Further research is needed both to clarify the underlying dynamics at play and to unpack the values encoded under the rubric of diversity.

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632  Research handbook on the economics of IP law volume 1 Hemel, Daniel, and Lisa Larrimore Ouellette. 2013. ‘Beyond the Patents-Prizes Debate,’ 92 Texas Law Review 303–82. Hughes, Justin. 1999. ‘“Recoding” Intellectual Property and Overlooked Audience Interests,’ 77 Texas Law Review 923–1010. Ingham, Tim. 2016. ‘Sony Music Open Nigeria Office as It Expands across Africa’ (September 23), accessed 4 April 2019 at http://www.musicbusinessworldwide.com/sony-music-opens-nigeria-office-as-it-expands-acrossafr​ica/. Jedlowski, Alessandro. 2010. ‘Beyond the Video Boom: New Tendencies in the Nigerian Video Industry,’ ORBI, accessed 4 April 2019 at https://orbi.uliege.be/handle/2268/177492. Jedlowski, Alessandro. 2012. ‘Small Screen Cinema: Informality and Remediation in Nollywood,’ 13 Television & New Media 431–46. Joo, Thomas W. 2011. ‘Remix Without Romance,’ 44 Connecticut Law Review 415–79. Kaminski, Margot E. 2014. ‘The Capture of International Intellectual Property Law through the U.S. Trade Regime,’ 87 Southern California Law Review 977–1052. Kapczynski, Amy. 2008. ‘The Access to Knowledge Mobilization and the New Politics of Intellectual Property,’ 117 Yale Law Journal 804–85. Kapczynski, Amy. 2012. ‘The Cost of Price: Why and How to Get Beyond Intellectual Property Internalism,’ 59 UCLA Law Review 970–1026. Karaganis, Joe, ed. 2011. Media Piracy in Emerging Economies. New York, NY: Social Science Research Council. Koch, Jason, Mike D. Smith, and Rahul Telang. 2011. ‘Camcording and Film Piracy in Asia-Pacific Economic Cooperation Economies,’ International Intellectual Property Institute, Washington, Carnegie Mellon University, Study, accessed 14 April 2019, at https://iipi.org/wp-content/. . ./Camcording-and-Film-Piracy-inAPEC-Economies.pdf. Krings, Matthias, and Onookome Okome. 2013. ‘Nollywood and Its Diaspora: An Introduction,’ in Matthias Krings and Onookome Okome, eds., Global Nollywood. Bloomington: Indiana University Press. LaPolt, Dina, Jay Rosenthal, and John Meller. 2015. ‘A Response to Professor Menell: A Remix Compulsory License is Not Justified,’ 38 Columbia Journal of Law & the Arts 365–74. Larkin, Brian. 2004. ‘Itineraries of Indian Cinema: African Videos, Bollywood, and Global Media,’ in Ella Shohat and Robert Stam, eds., Multiculturalisms, Postcoloniality, and Transnational Media. New Brunswick, NJ: Rutgers University Press. Lee, Edward. 2012. ‘Copyright, Death, and Taxes,’ 47 Wake Forest Law Review 1–43. Lemley, Mark. 2015. ‘IP in a World Without Scarcity,’ 90 NYU Law Review 460–515. Lessig, Lawrence. 2008. Remix: Making Art and Commerce Thrive in the Hybrid Economy. New York, NY: The Penguin Press. Liang, Lawrence. 2009. ‘Piracy, Creativity and Infrastructure: Rethinking Access to Culture,’ Alternative Law Forum, accessed 4 April 2019 at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1436229. Liang, Lawrence, and Ravi Sundaram. 2011. ‘Chapter 8: India,’ in Joe Karaganis, ed., Media Piracy in Emerging Economies. New York: Social Science Research Council. Lichtman, Douglas. 2003. ‘Copyright as a Rule of Evidence,’ 52 Duke Law Journal 683–743. Liebowitz, Stan. 2016. Email correspondence with author, September 18. Liebowitz, Stan. 2016. ‘Paradise Lost or Fantasy Island? Voluntary Payments by American Publishers to Authors Not Protected by Copyright,’ 59 Journal of Law & Economics 549–567. Litman, Jessica. 2006. Digital Copyright. Amherst, NY: Prometheus Books. Liu, Jiarui. 2010. ‘The Tough Reality of Copyright Piracy: A Case Study of the Music Industry in China,’ 27 Cardozo Arts & Entertainment Law Journal 621–61. Liu, Jiarui. 2015. ‘Copyright for Blockheads: An Empirical Study of Market Incentive and Intrinsic Motivation,’ 38 Columbia Journal of Law & Arts 467–548. Lobato, Ramon. 2010. ‘Creative Industries and Informal Economies: Lessons from Nollywood,’ 13 International Journal of Cultural Studies 337–54. Lobato, Ramon. 2012. Shadow Economies of Cinema: Mapping Informal Film Distribution. UK: British Film Institute. Lowery, David. 2012. ‘Meet the New Boss: Even Worse than the Old Boss,’ The Trichordist (April 15), accessed 4 April 2019 at https://thetrichordist.com/2012/04/15/meet-the-new-boss-worse-than-the-old-boss-full-post/. Lu, Shenand Anna Hsieh, 2015. ‘Copycat Movie? Filmmaker Denies Knocking off Pixar’s “Cars,”’ CNN (July 7), accessed 4 April 2019 at http://www.cnn.com/2015/07/07/china/china-movie-disney-cars/. Macaulay, Thomas Babington. [1841] 1915. ‘The First Speech on Copyright, February 5, 1841,’ in James Fleming Hosic, ed., Macaulay’s Speeches on Copyright and Lincoln’s Address at Cooper Institute. New York, NY: Henry Holt and Company. Macmillan, Fiona. 2014. ‘Cultural Diversity, Copyright, and International Trade,’ in V.A. Ginsburgh and David Throsby, eds., Handbook of the Economics of Art and Culture. New York, NY: Elsevier. McAdams, Richard H. 2000. ‘A Focal Point Theory of Expressive Law,’ 86 Virginia Law Review 1649–729.

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Copyright and emerging creative industries  633 McCall, John C. 2002. ‘Madness, Money, and Movies: Watching a Nigerian Popular Video with the Guidance of a Native Doctor,’ 49 Africa Today 79–94. McCall, John C. 2004. ‘Nollywood Confidential: The Unlikely Rise of Nigerian Video Film,’ 13 Transition 98–109. McClendon, Lamarco. 2016. ‘“The Great Wall” Director Addresses “Racist” Matt Damon Casting Controversy,’ Variety (August 4), accessed 4 April 2019 at https://variety.com/2016/film/news/the-great-wall-director-res​ ponds-matt-damon-casting-controversy-1201830581/. Menell, Peter S. 2016. ‘Adapting Copyright for the Mashup Generation,’ 164 University of Pennsylvania Law Review 441. Merges, Robert. 2011. Justifying Intellectual Property. Cambridge, MA: Harvard University Press. Miller, Jade L. 2016. Nollywood Central. London: BFI Palgrave. Moglen, Eben. 1999. ‘Anarchism Triumphant,’ First Monday (August 2), accessed 4 April 2019 at https:// firstmonday.org/ojs/index.php/fm/article/view/684/594. Montgomery, Lucy. 2010. China’s Creative Industries: Copyright, Social Network Markets and the Business of Culture in a Digital Age. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing Limited. Montgomery, Lucy, and Brian Fitzgerald. 2006. ‘Copyright and the Creative Industries in China,’ 9 International Journal of Cultural Studies 407–18. Montgomery, Lucy, and Eric Priest. 2016. ‘Copyright and China’s Digital Cultural Industries,’ in Michael Keane, ed., Handbook of Cultural and Creative Industries in China. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Morarjee, Rachel. 2015. ‘China’s Music Dream Is Out of Tune with Reality,’ Reuters Breakingviews (December 4), accessed 4 April 2019 at http://blogs.reuters.com/breakingviews/2015/12/04/chinas-music-dream-is-out-of-tune​ -with-reality/. Moullier, Bertrand. 2007. ‘Whither Bollywood? IP Rights, Innovation, and Economic Growth in India’s Film  Industries,’ Creative and Innovative Economy Center, George Washington University Law School, Study. Nadel, Mark S. 2004. ‘How Current Copyright Law Discourages Creative Output: The Overlooked Impact of Marketing,’ 19 Berkeley Technology Law Journal 785–856. Napoli, Philip M. 2012. ‘Diminished, Enduring, and Emergent Diversity Policy Concerns in an Evolving Media Environment,’ in Sean A. Pager and Adam Candeub, eds., Transnational Culture in a Digital Age. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Netanel, Neil Weinstock. 1996. ‘Copyright and a Democratic Civil Society,’ 106 Yale Law Journal 283–387. Netanel, Neil Weinstock. 1998. ‘Asserting Copyright’s Democratic Principles in the Global Arena,’ 51 Vanderbilt Law Review 217–329. Netanel, Neil Weinstock. 2000. ‘Market Hierarchy and Copyright in Our System of Free Expression,’ 53 Vanderbilt Law Review 1897–932. Nigerian Copyright Commission. 2017. ‘About NceRS,’ Nigerian Copyright Commission (August 17), accessed 4 April 2019 at http://www.eregistration.copyright.gov.ng/ncc/about. Opara, Jackie. 2017. ‘Court Ruling on IP Struggle between Movie Producers Shows Level of Copyright Awareness in Nigeria,’ IP Watch.org (April 24), accessed 4 April 2019 at https://www.ip-watch.org/2017/04/24/ court-ruling-ip-struggle-movie-producers-shows-level-copyright-awareness-nigeria/. Pager, Sean. 2006. ‘TRIPS: A Link Too Far? A Proposal for Procedural Constraints on the Use of Cross-Issue Linkages to Advance Regulatory Harmonization in the WTO,’ 10 Marquette Intellectual Property Law Review 215–537. Pager, Sean. 2011. ‘Beyond Culture vs. Commerce: Decentralizing Cultural Protection to Promote Diversity Through Trade,’ 31 Northwestern Journal of International Law and Business 63–135. Pager, Sean. 2012a. ‘Accentuating the Positive: Building Capacity for Creative Industries into the Development Agenda for Global Intellectual Property Law,’ 28 American University International Law Review 223–94. Pager, Sean. 2012b. ‘Folklore 2.0: Preservation Through Innovation,’ 2012 Utah Law Review 1835–95. Pager, Sean. 2012c. ‘Digital Content Production in Nigeria and Brazil: A Case for Cultural Optimism?,’ in Sean A. Pager and Adam Candeub, eds., Transnational Culture in the Internet Age. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Pager, Sean. 2015. ‘Making Copyright Work for Creative Upstarts,’ 22 George Mason Law Review 1021–55. Paulson, Cole. 2012. ‘Marketers and Pirates, Businessmen and Villains: The Blurred Lines of Nollywood Distribution Networks,’ 7 St Antony’s International Review 51–68. Perzanowski, Aaron, and Kate Darling. 2017. ‘Introduction,’ in Aaron Perzanowski and Kate Darling, eds., Creativity without Law: Challenging the Assumptions of Intellectual Property. New York, NY: New York University Press. Pessach, Guy. 2003. ‘Copyright Law as a Silencing Restriction on Noninfringing Materials: Unveiling the Scope of Copyright’s Diversity Externalities,’ 76 Southern California Law Review 1067–104.

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634  Research handbook on the economics of IP law volume 1 Pessach, Guy. 2013. ‘Deconstructing Disintermediation: A Skeptical Copyright Perspective,’ 31 Cardozo Arts and Entertainment Law Journal 833–73. Pessach, Guy. 2016. ‘Beyond IP: The Cost of Free – Informational Capitalism in a Post IP Era,’ 54 Osgoode Hall Law Journal 225–51. Pratt, Lande N. 2015. ‘Good for “New Hollywood”: The Impact of New Online Distribution and Licensing Strategies,’ 3 International Journal of Cultural and Creative Industries 70–84. Priest, Eric. 2014. ‘Copyright Extremophiles: Do Creative Industries Thrive or Just Survive in China’s HighPiracy Environment?,’ 27 Harvard Journal of Law & Technology 467–541. Priest, Eric. 2015a. ‘Copyright and Free Expression in China’s Film Industry,’ 26 Fordham Intellectual Property, Media and Entertainment Law Journal 1–69. Priest, Eric. 2015b. ‘Acupressure: The Emerging Role of Market Ordering in Global Copyright Enforcement,’ 68 SMU Law Review 169–242. 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Sang-hun, Choe. 2017. ‘South Korea’s Blacklist of Artists Adds to Outrage over a Scandal,’ New York Times, January 13. Santos, Ana. 2013. ‘Nurturing Creative Industries in the Developing World: The Case of the Alternative Systems of Music Productions and Distribution,’ 21 Michigan State International Law Review 601–779. Sawicki, Andres, and Anthony J. Casey. 2013. ‘Copyright in Teams,’ 80 University of Chicago Law Review 1683–741. Scaria, Arul George. 2013. ‘Online Piracy of Indian Movies: Is the Film Industry Firing at the Wrong Target?,’ 21 Michigan State International Law Review 647–63. Scaria, Arul George. 2014. Piracy in the Indian Film Industry. Delhi: Cambridge University Press. Schiller, Dan. 1999. Digital Capitalism: Networking the Global Market System. Cambridge, MA: The MIT Press. 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Copyright and emerging creative industries  635 Smith, Michael, and Rahul Telang. 2016. Streaming, Sharing, Stealing: Big Data and the Future of Entertainment. Cambridge, MA: The MIT Press. Song, Mengxing. 2016. ‘China Shifts Toward Paid-Service Model for Audio Services,’ China Daily, COM.CN (April 20), accessed 5 April 2019 at http://www.chinadaily.com.cn/cndy/2016-04/20/content_24686138.htm. Song, Seagull Haiyan. 2011. ‘Reevaluating Fair Use in China: A Comparative Copyright Analysis of Chinese Fair Use Legislation, the US Fair Use Doctrine, and the European Fair Dealing Model,’ 51 IDEA 453–89. Story, Alan. 2003. ‘Burn Berne: Why the Leading International Copyright Convention Must be Repealed,’ 40 Houston Law Review 763–801. Stout, Kristie Lu. 2016. ‘Blockbuster Battle: Is China’s Movie Industry the New Hollywood?,’ CNN (June 23), accessed 4 April 2019 at http://www.cnn.com/2016/06/23/asia/china-entertainment-movie-industry/. Strandburg, Katherine J. 2013. ‘Free Fall: The Online Market’s Consumer Preference Disconnect,’ 2013 University of Chicago Legal Forum 95–172. Sun, Rebecca. 2016. ‘Can China Make a Movie the Whole World Will Love?,’ The Hollywood Reporter (November 2), accessed 4 April 2019 at http://www.hollywoodreporter.com/news/can-china-make-a-movie-world-will-love​ -943345. Sunder, Madhavi. 2012. From Goods to a Good Life: Intellectual Property and Global Justice. New Haven: Yale University Press. Telang, Rahul, and Joel Waldfogel. 2014. ‘Piracy and New Product Creation: A Bollywood Story,’ Carnegie Mellon University, Working Paper (August 6), accessed 4 April 2019 at https://papers.ssrn.com/sol3/papers. cfm?abstract_id=2478755. Thussu, Daya Kishan. 2008. ‘The Globalization of “Bollywood”: The Hype and Hope,’ in Anandam P. Kavoori and Aswin Punathambekar, eds., Global Bollywood. New York: New York University Press. UNCTAD (United Nations Conference on Trade and Development and United Nations Development Programme). 2010. Creative Economy Report 2010, Creative Economy: A Feasible Development Option. UNCTAD (December 14). von Lohmann, Fred. 2016. ‘Google on What is Driving Creativity and Innovation in the Digital Economy,’ WIPO Magazine, April. Voon, Tania. 2007. Cultural Products and the World Trade Organization (Cambridge Studies in International and Comparative Law Series). Cambridge: Cambridge University Press. Waldfogel, Joel. 2007. The Tyranny of the Market: Why You Can’t Always Get What You Want. Cambridge, MA: Harvard University Press. Waldfogel, Joel. 2019. ‘Copyright and Technological Change in Music, Movies, and Books,’ in Peter S. Menell and David L. Schwartz, eds., Research Handbook on the Economics of Intellectual Property, vol. I. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Walker, Robert Kirk, and Ben Depoorter. 2015. ‘Unavoidable Aesthetic Judgments in Copyright Law: A Community of Practice Standard,’ 109 Northwestern University Law Review 343–81. Whaley, Floyd. 2012. ‘New Ambitions in Philippine Film Business,’ The New York Times (May 7), accessed 4 April 2019 at http://www.nytimes.com/2012/05/08/business/global/new-ambitions-in-philippine-film-business. html?_r=0. Wildman, Steven S., and Stephen E. Siwek. 1988. International Trade in Films and Television Programs (American Enterprise Institute Trade in Services Series). Pensacola, FL: Ballinger Publishing Company. Yi, Na. 2016. ‘Ethnic Cultural Injuries and the “One Place, One Product” Strategy,’ in Michael Keane, ed., Handbook of Cultural and Creative Industries in China. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Yoo, Christopher S. 2004. ‘Copyright and Product Differentiation,’ 79 New York University Law Review 212–80. Young, S. Mark, James J. Gong, and Wim A. Van der Stede 2010. ‘The Business of Making Money with Movies,’ February 2010 Strategic Finance, 35–40, accessed 17 April 2019 at https://sfmagazine.com/wp-content/ uploads/sfarchive/2010/02/The-Business-of-Making-Money-with-Movies.pdf. Yu, Peter K. 2006. ‘TRIPs and Its Discontents,’ Marquette Intellectual Property Law Review 369‒410. Yu, Peter K. 2007. ‘Intellectual Property, Economic Development, and the China Puzzle,’ in Daniel J. Gervais, ed., Intellectual Property, Trade and Development: Strategies to Optimize Economic Development in a TRIPSPlus Era. New York: Oxford University Press. Yu, Peter K. 2009. ‘The Global Intellectual Property Order and Its Undetermined Future,’ 1 The WIPO Journal 1–15. Zimmerman, Diane. 2011. ‘Copyright Incentives: Did We just Imagine That?,’ 12 Theoretical Inquiries in Law 29–58.

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23.  Intellectual property and economic development: a guide for scholarly and policy research Shubha Ghosh* 95

Contents I. Introduction II. Models and Frames for Understanding Economic Development III. Intellectual Property: Law and Institutions IV. Mapping the Contours of What We Know About Law and Economic Development A. Macroeconomic Studies B. Microeconomic Studies V. Directions for Future Research References

I. INTRODUCTION State creation of intellectual property rights (IPRs) can be motivated by many goals. Under the US Constitution, the primary goal is promotion of progress in the development of knowledge and applied fields, referred to as Science and the Useful Arts. Under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), the ostensible goal is to promote technology transfer and innovation. Historically, different jurisdictions have adopted intellectual property laws to pursue goals of industrial development and domestic wealth creation (see, e.g., Sybaris, Florence, Venice, England). Conceptually, IPRs promote economic development through incentivizing the invention of technologies and creation of works that can spur knowledge creation. These new technologies and works in turn contribute to production of new industries that increase the growth of economic metrics such as national income (Cooter and Schäfer, 2012; Deaton, 2013; Neal and Williamson, 2014). Although the connection between economic development and patent law in the United States has become tenuous as a matter of doctrine and policy starting in the nineteenth century, the debate over how patents promote industries continues among scholars and has implications for global intellectual property law (Hovenkamp, 2016). This chapter presents research methodologies and questions for the study of economic development and IPRs. A separate chapter deals with the relationship between IPRs and *  Crandall Melvin Professor of Law and Director, Syracuse Intellectual Property Law Institute (SIPLI) and IP & Tech Commercialization Curricular Law Program, Syracuse University College of Law.

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A guide for scholarly and policy research  637 cultural development. By economic development, we mean broadly metrics of material success such as national income, industry profitability, and measures of well-being, such as literacy, life expectancy, and physical well-being. Cultural development, by contrast, refers to contributions to symbolic and social meanings, in the form of artifacts such as film, literature, music, and other forms of communication. Cultural and economic development are interrelated (Mokyr, 2017). Studies of both economic development and cultural development focus on the national level. So economic development refers to the material well-being of people within specific geographic boundaries, determined by history and a shared sense of culture. Cultural development refers to the growth of a national identity as defined through the particular artifacts defined earlier in this paragraph. Whether there is a meaningful notion of global economic and cultural development we leave for later discussion. The tension between national and global economic development will be touched upon later in this chapter. Such a tension has implications for transnational legal institutions as well as for disputes within specific nations. Economic development, at an initial glance, has a linear relationship with IPRs. The cadre of IPRs—copyrights, patents, trademarks, trade secrets, and related areas—creates a legal and social environment for creation, invention, and the distribution of new works and technologies. This environment can work at the micro level of incentives and at the macro level of defining institutions that support innovation. As innovation occurs, new industries emerge and economic growth follows. Economic growth in turn spurs economic development. While the linear model connecting IPRs to economic development through invention, creation, and economic growth provides a starting point for analysis, it also can be misleading. Whether IPRs actually incentivize invention is a contentious question. More likely, IPRs direct the commercialization of invention rather than spark creation. Furthermore, economic growth is the result of variables other than technological change, such as social institutions that promote human capabilities and effective governance. Finally, IPRs may be the result of economic growth as interest groups seek to use the law to either extend intellectual property protection to other regions or to expand the scope of existing rights. The linear model serves as a frame for assessing complex economic, legal, and social relationships synchronically and diachronically. Basberg (1987) and Griliches (1990) both speak to the use of patent statistics to gauge the impact of patents on growth and other economic variables. Adding to the debate is determining how to measure economic growth. National income measures often disguise distributional disparities and social metrics, such as literacy, health, political participation, and cultural progress (Fields, 2001; Nussbaum and Sen, 1993). Even if the linear model is accurate, questions would still arise as to how IPRs affect different dimensions of development, quantitative and qualitative. This chapter will untangle these complex issues by considering the question of the role of law in economic development, broadly, and the specific question of IPRs. These two questions are addressed first in terms of theory and second in terms of examples, drawn from the extensive literature. Together, these two parts of the inquiry will aid in framing a rich policy and research agenda for assessing and reforming IPRs in its promotion of economic development.

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II. MODELS AND FRAMES FOR UNDERSTANDING ECONOMIC DEVELOPMENT Classical theories of economic development typically ignore law. The theoretical overview by Joan Robinson (1979) illustrates how economic development was more firmly grounded in economic investments of capital and labor rather than in legal regimes of rights and duties. Neoclassical theories of economic growth, starting with the work of Robert Solow (1956, 1988), reduce the growth rate of national income to the population growth rate, the growth rate of capital, and rate of technological change, referred to as the Solow residual (Spiegler, 2015, pp. 28–31). The rate of technological change was viewed as exogenous and outside the control of economic policy. Population growth rate was also considered exogenous as well, determined by sociological factors such as marriage, fertility, and mortality. As Schmookler points out, however, the problem with neoclassical theories of economic growth is that they ‘may leave scientific and technological progress unexplained’ (1972, p. 84). Refinements of the model incorporate factors that can affect technological change and population growth such as human capital as measured by literacy, life expectancy, and measures of health and well-being. These refinements potentially identify policy tools to reach certain goals for economic growth and development. The qualification in the word ‘potentially’ reflects certain limitations implicit in the models of the role of policy intervention in altering predicted growth rates. One specific limitation within the neoclassical models of economic growth is the prediction of a long run convergence across countries in the rate of economic growth. This prediction stems from an assumption that countries will converge in the underlying growth rate of the population and technological change. These two factors are assumed to converge globally as improvements in technology spread across countries resulting in improvements of literacy, reductions in fertility and mortality, and diffusion of knowledge. However, impediments to global diffusion, and the predicted convergence, such as failures of family planning programs, difficulties in realizing improvements in mortality due to failures in health care delivery, and household and family dynamics that impede improvements in education across generations can result in gross disparities both across countries and within countries in the levels of economic growth and development. Professor Jeffrey Sachs (Sachs and Warner, 1997) refers to these disparities as the result of poverty traps that require government intervention in the creation of educational, family planning, and health care infrastructure to put developing countries back on track to reach the economic heights achieved by developed countries. Despite variations in neoclassical growth models that identify poverty traps and tendencies to global disparities, the underlying prediction is one of global convergence. Government intervention, largely targeting variables that influence population growth, would be a necessity to attain the predicted global convergence. However, little attention is placed within these models on technological change. This variable is viewed largely as exogenous, the product of social forces that may be largely outside the control of adjusting economic variables such as prices and incomes. At the same time, the neoclassical model assumes that technology will diffuse, resulting in improvements in technological change across countries. Needless to say, the rate of technological change does vary across countries. Invention varies both in quantity and quality between the developing and

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A guide for scholarly and policy research  639 developed worlds. While the assumption of free trade, namely the unimpeded movement of products and factors of production, such as capital and labor across borders, may lead to technological diffusion, free trade is neither a reality nor a norm. Furthermore, even if goods and factors did move freely across borders, there may be reasons for owners of technology to protect their know-how from moving across borders. Neoclassical growth theorists measure cross-national disparities in technology through the Solow residual. A statistical concept, the residual measures changes in economic growth that cannot be explained quantitatively by growth rates of capital and labor. Measures of the residual demonstrate disparities across countries in their respective growth rates and serve to counter theoretical predictions of global convergence. The challenging questions are how to account for differences in the Solow residual and how policy can affect differences in the rate of technological change. One possible explanation is offered by the New Growth Theory, which emerged in the late 1980s and early 1990s. The New Growth Theory, attributed to Paul Romer (1994) and to Robert Barro (Barro and Sala-i-Martin, 2003), examines technological change as an endogenous variable, the product itself of economic choices. Technological change produces increasing returns to scale with past change having a magnifying feedback effect on growth. Technological change creates externalities, or spillovers, within an economy, and government policy can shape how these spillovers can be managed to influence economic growth. In contrast with the neoclassical theory of growth, which focused on government policy to improve rates of population growth, policy interventions under the New Growth Theory are oriented to the ‘supply side’ of the economy, namely firms and industries that generate new technologies and improvements to methods of producing and diffusing new products and services. Government policy through taxes and subsidies can stimulate the supply side to promote improvements in the rate of technological change. Furthermore, government programs to develop infrastructure, such as roads and bridges, can help realize returns to scale and spillovers for the benefit of potentially innovating firms. While the New Growth Theory does not explain the Solow residual, it does aid in unpacking it by shedding some light into the black box of technological change. The models are needless to say abstract but do address several simplifying features of the neoclassical growth model. Foremost, while the neoclassical model assumed that the underlying production function does not change, the New Growth Theory recognized that variables can change the shape of the function relating inputs such as capital and labor to outputs such as goods and services. This shift in assumptions raises questions about how the production function can change and how such changes can explain ongoing disparities across countries. While the production function is an abstraction, conceptually it captures the range of social institutions and practices that determine how an economy functions, grows, and develops. Consequently, what the neoclassical theory took as a black box, whose contours can be gauged through the Solow residual, the New Growth Theory takes as something to be explained and possibly altered through a range of government policies, beyond those that affect population growth. Although not expressly focused on legal institutions, the New Growth Theory offers a potential avenue for law to influence economic growth. As legal institutions can serve to control externalities, law arguably would be relevant to the direction and level of economic growth. The Legal Origins literature makes the case, for example, that common law systems are more amenable to economic growth than civil law systems. While the evidence

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640  Research handbook on the economics of IP law volume 1 for this claim is contested, the argument shows that law might have some influence on economic variables, contrary to traditional theories of economic growth. However, the contested empirical literature demonstrates the complex dynamics that belie that simple linear model with which this chapter began. On the one hand, opening the black box of technological change creates new possibilities for understanding growth and development but also geometrically expands the set of potential policy tools for shaping the trajectory of changing technology. Perhaps the initial light allowed into the black box is simply blinding. More realistically, the light reveals a vast array of possibilities that may be paralyzing for policy makers and governmental actors. Several examples illustrate the cavernous layers within the black box of technological change. The New Growth Theory harkens back to the work of Nelson and Winter (1983) on economic theories of technological change that adopt an evolutionary and transaction costs approach to peer inside the black box of the firm. The work of Nelson and Winter in turn parallels transaction cost economics going back to Ronald Coase’s theories of the firm and social costs (1937, 1960), to Oliver Williamson’s transaction cost approach to contracts and corporate governance (2013), and to work in legal sociology by Stewart McCauley (1963) and Ian MacNeil (1978, 1980). Through McCauley’s work on relational contracting, we can further go back to the work of legal historian Willard Hurst (1956) on the role of law in creating the conditions for freedom and business development. What these seemingly disparate strands have in common is the development of contextualized understanding of how a firm operates and how business practices foster growth and development. Law plays varied roles in these scholarly examinations from creating conditions for freedom to providing the background against which social and economic relations take shape. Currently, these various strands arguably coalesce in the work of New Law and Development scholars which draws on these extensive socio-legal and economic insights to understand the relationship between law and development. The New Law and Development literature, spearheaded by Trubek and Santos (2006), promotes the claim that legal institutions, combined with social institutions, are needed to direct economic development. This literature offers an alternative to purely investment based policies for stimulating development and to dogmatic rule of law policies as providing the sole institutional prerequisite for economic growth. According to Trubek and Santos, fashioning law to promote development is a contextual inquiry, dependent on the particular historical, cultural, and social background within which development policy will operate. The New Law and Development, the product of the scholarly and policy activities of legal and sociological scholars, presents the multifaceted connections between law and development. Unlike the New Growth Theory that presents important refinements to a theoretical model of growth, the New Law and Development literature focuses on country specific case studies that demonstrate how actual governments and actual firms function to promote technological change through contracting, finance, collaborative research and development, and partnerships between industry and government. While the New Growth Theory raises questions, the New Law and Development literature proposes to find specific answers that demonstrate what types of government policies and business practices help to promote development. There is a family resemblance and close intellectual ties between the New Law and Development scholarship and the work of Professor Charles Sabel, a legal sociologist, on the theory and mechanics of innovation (2005). Through independent scholarship and

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A guide for scholarly and policy research  641 intellectual collaborations with Professors Ronald Gilson and Robert Scott, Sabel demonstrates how contracting practices can promote innovation (Gilson et al., 2013). While the work of Gilson, Scott, and Sabel does not directly address questions of intellectual property policy, their work is crucial to understanding the business practices that support innovation and are instrumental in further unpacking the black box of technological change. As a result there are potentially synergies and connections between Charles Sabel’s scholarship and the New Law and Development literature. Three distinct but overlapping lines of scholarship present models and frames for delineating the relationship between economic development and legal institutions. Neoclassical growth theory posits economic development as the product of technological change, largely unknowable and purely exogenous, and population change, more malleable through social and economic policy. Light is cast on the black box of technological change through the New Growth Theory that emphasizes externalities, spillovers, and variations in the relationship between economic inputs and outputs, cast abstractly as a production function. This framework provides a role of government policy and law to shape the supply side of an economy beyond, and perhaps instead of, shifts in sociological behavior affecting population growth. Finally, the New Law and Development breaks open the black box of technology by exposing light to its nooks and crannies through detailed contextualized studies of actual policies and practices. These methodologies provide useful frames, but also leave many questions. Foremost for the purposes of this chapter is the role of intellectual property as a set of institutions grounded in law for economic development. None of the three approaches directly address this question, but each can provide a background for engaging the policy debates over intellectual property institutions. Debates over intellectual property law and economic development center on how contextualized IPRs should be in order to reach goals of development. The 2002 Commission on Intellectual Property Rights study, for example, reflects such a contextualized approach in the broader context of the World Trade Organization and TRIPS. The study identifies the various avenues through which IPRs can affect economic development. It also highlights the complex set of objectives captured by the word development, such as access to health care, education, and income growth. Although not couched within the three theoretical frameworks presented in this section, assessments of the 2002 Report and other contributions to the policy debates over intellectual property and economic development can best occur against the theoretical landscape of this section. Such assessments are the subject of the next section, which addresses the debates over the design of intellectual property as a set of legal institutions for the promotion of economic development.

III.  INTELLECTUAL PROPERTY: LAW AND INSTITUTIONS Neoclassical growth theory, the New Growth Theory, and the New Law and Development scholarship frame the discussion of how IPRs shape economic development. While neoclassical growth theory would turn a policy maker’s attention to population growth and technological change as determinants of growth and development, the New Growth Theory emphasizes returns to scale and spillovers that stimulate technological change. The New Law and Development approach, by contrast, would frame questions of

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642  Research handbook on the economics of IP law volume 1 development contextually and the role of policy makers in shaping laws and institutions to reach national economic goals. The 2002 Commission Report on intellectual property and development reflects each of these perspectives to different degrees. Technology transfer serves to increase the capital stock and the technological transformation of economies in developing countries, according to one aspect of the Report. Consistent with the neoclassical growth theory, capital expansion and the adoption of new technologies promotes economic growth through investments in a country’s production function. In addition, technology transfer can promote spillovers as indicated by the varying effects of intellectual property protection. Weaker IPRs tend to spark economic growth and development for low income countries, and intellectual property protection becomes stronger as national income increases. This finding is consistent with the predictions of knowledge spillovers in the New Growth Theory as the spillover effects may be greater for countries in the early stages of development. Finally, the 2002 Report extols a country specific and contextualized perspective that takes into consideration history, natural resources, and political institutions in the tailoring of IPRs to the goals of a specific country. This last view is consistent with the new development economics. While the 2002 Report, and other scholarship discussed here, may not have consciously drawn on these three theoretical approaches, the theories can aid in gauging and understanding the policy reports and scholarly analyses. The big problem for policy analysis is navigating between abstract models that might shed general insights on intellectual property and development and disparate case studies that may point to successes and failures of policies without the benefit of generalizable lessons across countries. Drawing on a rich sociological literature, Trebilcock and Prado (2014, p. 42) state the problem as follows: The scholarly community has reached a relatively broad consensus around the idea that institutions matter for development, but we still do not know how to reform dysfunctional institutions. Even if certain ends of development were thought to be universal (which is contestable), the different starting points or initial conditions of the large universe of developing countries may suggest that there will be very few universally effective blueprints with respect to substantive economic and social policies and the processes and institutions appropriate for implementing, administering, and fostering such policies.

Although universal blueprints may not exist, scholarly study of development and IPRs across countries drawing on econometric methods, historical analyses, studies grounded in political science and sociology, and integrative case studies can shed some light on whether and how IPRs affect economic development. Examples of such successful approaches are collected in the edited volume by Aoki et al. (2012), which examines institutions and economic development from a comparative economics perspective. That institutions matter is a foundational idea for this chapter, pointing towards contextualized analyses that built upon more abstract models. But as with any framework that attempts to identify explanatory variables, the difficult question is identifying which institutions matter. At a general level, law matters for development, but that generalization invites identification of which legal institutions are critical. The rest of this section will focus on this question in light of the scholarly literature and lay the foundation for the discussion of more detailed scholarly work in the remaining two sections. The three theories of development start with the nation-state as the unit of analysis.

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A guide for scholarly and policy research  643 Decision making is aggregated at the national level, and growth is determined by aggregate levels of capital, labor, and technological change. The frameworks, except for the studies within the New Law and Development school, abstract from particular industries or markets. Even if one accepts this gross level of description, the question still exists whether the nation is the appropriate unit of analysis. Regional, or subnational, development has been the focus of attention as some explore ways to replicate the success of Silicon Valley (Casper, 2007). But the implicit assumption of the nation-state as the appropriate unit of analysis is striking given the international treaty environment, whether the multilateral harmonization of intellectual property laws through TRIPS or the bilateral negotiations for the establishment of rule of law institutions, such as courts and democratically elected legislatures. Mandel (2014) has commented on the nation-state focus of innovation in the debate over TRIPS implementation. He develops an interest group analysis of nationstates as a means of predicting what type of intellectual property regime a country would prefer based on its pattern of exports and imports. While it is not completely clear how these predictions would be implemented in policy, Mandel does highlight the nation-state emphasis of most analyses of innovation. The literature on global public goods (see Maskus and Reichman, 2005) provides a framework for conceptualizing innovation in global as opposed to solely national terms. Practical inventions that are the subject matter of patent law and the expressive works protected by copyright are viewed as public goods that benefit all individuals. However, these benefits are not limited to individuals within a nation-state. Scientific inventions, entertainment products, information goods—all travel worldwide beyond the points of their creation. Analyses of intellectual property policy need to consider the concept of global public goods, which may be one way of formulating the global commons of knowledge that all individuals, regardless of nationality, share. What the policy implications of global public goods are is a complex question. Global public goods are a form of transnational spillover, suggesting parallels with the New Growth Theory that attempts to explain technological change and innovation through regional spillovers and industry formation. This parallel suggests that the policy implications from the New Growth Theory, such as government investment in infrastructure and the creation of legal protections for property and contract rights would have implications for intellectual property policy making. International agreements are ways to internalize the spillovers from global public goods and to institutionalize through state by state negotiation legal infrastructure for the creation and dissemination of technology. Such interactions between states serve to facilitate technology transfer across countries as participants in the international regime innovate. Multilateral organizations such as the World Trade Organization and supporting treaties such as the TRIPS Agreement can be seen as a global government that aids in the provision of global public goods, much like national and local governments provide public goods for their citizens. The global government serves to provide harmonized rules for the provision of technology by nation-states and the diffusion of technology through trade. Political and legal rules define the terms of governance for members of the organization. These rules serve to structure the global marketplace for technology, goods, and services. A problem with the global public goods model is the diversity of benefits provided by the wide range of technologies that are traded in the contemporary world. While citizens of all countries benefit from innovations in medicine, lower income countries

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644  Research handbook on the economics of IP law volume 1 need ­support for preventing basic, life threatening diseases such as cholera, diarrhea, and malaria. Similarly, nutritional needs vary across countries as do needs for basic transportation and communication infrastructure. These differences in needs shape differing meanings of innovation. In developed countries, innovation flows through new consumer goods and forms of entertainment and processing of digital information. In developing countries, innovation may appear more early stage in the form of basic health care, nutritional, and infrastructure needs. These differences belie the conception of a homogeneous, undifferentiated set of global public goods. Intellectual property institutions more effectively serve to provide a wide of range of heterogeneous global public goods. The failure to account for these differences is illustrated, for example, by Mansfield (1994) and its criticism by Heald (2003). Mansfield prepared his report on the need for strong IPRs in developing countries for the International Finance Corporation. His argument for strong rights to promote technology transfer has served as strong rhetoric for an expansionist view of TRIPS and for the promotion of Western style IPRs in developing countries. Heald’s criticism of the article reveals many veiled assumptions in the Mansfield survey of multinational businesses, especially the failure to distinguish between different types of intellectual property. Specifically, Heald points out that the multinational businesses surveyed were interested not so much in technology transfer as in opening up new markets for their products. Strong IPRs prevented the development of local industries that would copy, improve, and compete with the importing companies. The Doha Declaration from developing countries advocates for a development agenda under the TRIPS Agreement to promote intellectual property institutions that meet the development needs of low income countries. The World Intellectual Property Organization has, from its inception, focused on the needs of developing countries. With the Doha Declaration, the TRIPS Agreement has been refocused on the needs of developing countries, contra reports by scholars such as Mansfield. The 2002 Commission Report reflects many of these goals. First, the Report adopts an industry specific, or perhaps a technology specific, approach to IPRs with separate emphasis on health care, educational, and agricultural needs in developing countries. Second, the Report adopts a more analytical approach to intellectual property, questioning the linear model connecting IPRs, growth, and economic development. Third, this analytical approach takes into consideration both the economics and politics of intellectual property institutions and the needs of particular developing countries and regions in designing IPRs. Finally, the Report frames IPRs in terms of the path of development with the strength of intellectual property evolving with advances in income and economic well-being. With the 2002 Report, the global public goods model has evolved into a richer analytical framework for understanding the heterogeneous benefits and technologies. Putting the various strands of scholarship together, we start with the highly analytically abstract model of neoclassical growth theory which reduces economic growth to changes in population and technological change. Starting from this useful, but decontextualized, model, we move towards approaches that add more degrees of context and analytical rigor. The New Growth Theory attempts to unpack the black box of technological change, and the New Law and Development literature focuses on contextualized case studies. The strands of the theoretical literature map onto the continuing debate over intellectual property institutions and economic development. Where we are now appears to be a

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A guide for scholarly and policy research  645 need to recognize technological change and global public goods in heterogeneous terms taking account of a range of interests and institutional contexts in developing countries. Against this background, I turn in the second half of this chapter to empirical studies of IPRs and economic development, looking first at macroeconomic studies and then at microeconomic studies. The chapter closes with questions to guide future researchers.

IV. MAPPING THE CONTOURS OF WHAT WE KNOW ABOUT LAW AND ECONOMIC DEVELOPMENT This section presents an analytical overview of important empirical studies of the relationship between law and economic development. While the second volume of this handbook turns our attention to empirical methods in scholarship, the purpose of this section is to assess results, rather than methods. On occasion, I will point to methodological issues to highlight the substantive theoretical concerns about the various pathways and variables that connect law and economic development. The scholarly empirical literature divides into macroeconomic and microeconomic studies. These broad categories capture respectively the high level economic variables that aggregate market and social behavior, such as trade patterns and national income, and the low-level variables on the ground, that describe behavior within a firm or a household. Empirical scholarship is limited often by available data, which is often gathered through aggregate government statistics or lower level surveys of individuals, whether managers in a company, farmers, or consumers. However, theoretical considerations guide the statistical analyses of available data sources. In surveying the literature, I glean broader lessons for the theoretical discussion presented in Section III. These lessons in turn inform policy options for shaping development policy nationally and globally. What the literature suggests is that the case for the macroeconomic effects of intellectual property law on promoting trade and foreign direct investment is at best a mixed one. Stronger IPRs do not necessarily invite more foreign investment. Creating an environment hospitable to foreign investment is not solely a matter of intellectual property law, but also one of institutional arrangements that create an environment for markets. At the same time, the creation of market- and investment-friendly environments comes at a cost for issues of distribution, cultural change, and social stratification. Micro-level studies, particularly the work of Banerjee and Duflo (2011), call our attention to these broader institutional concerns by examining incentives and the structure of social organization. Consequently, I conclude, future research should explore more completely how law and institutions shape each other and their influence on the course of economic development. The remainder of this chapter adds substance and details to these arguments. A.  Macroeconomic Studies Maskus and Fink (2005) summarize the empirical literature on the relationship between trade and IPRs, between foreign direct investment and IPRs, and between licensing technology and IPRs. The scholarship they cite and include in their edited volume reminds us of the ambiguous predictions of the theoretical analyses of economic growth and ­intellectual property. Predictions depend on specific analytical models and the a­ ssumptions

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646  Research handbook on the economics of IP law volume 1 built into these models about technologies, preferences, and population growth rates. In addition, the empirical research highlights the importance of contextual variables such as the presence of social institutions and the stage of development on the effect of stronger intellectual property protections. Countries can vary on the development scale with mid-level developing countries (such as India or China) offering a different environment for the causal pathways from intellectual property than low-level developing countries, such as several countries in sub-Saharan Africa or South America. Further research can potentially identify these contextual and institutional variables. Researchers have identified a strongly positive statistical relationship between trade flows to developing countries and the strength of the country’s IPRs, as measured by standard scales of legal protection. This positive relationship holds true for traded products that are relatively easy to copy, such as information or entertainment based works or goods whose consumption status value derives from trademarks. However, studies find that stronger patent protection does not necessarily lead to greater trade flows. The explanation is that patented goods are inherently difficult to copy and so added patent protection has a minor, and perhaps insignificant effect, on trade flows to developing countries. Empirical studies also demonstrate differential effects between middle income and low income developing countries. Heightened intellectual property protection affects trade flows to middle income countries more than flows to low income developing countries. This difference reflects the role of institutional factors in driving trade. Weaker infrastructure and less advanced consumer markets in low income developing countries make them less desirable as a recipient of trade flows. Empirical support for the effect of strong IPRs on foreign direct investment is much weaker than the effect on trade flows. Foreign direct investment includes the creation of new business enterprises, the purchase of existing enterprises, and investment in physical capital, such as infrastructure, machines, and buildings within developing countries. A complicating factor is measuring these various dimensions of foreign direct investment as business enterprises, nation-states, and governmental bodies do not collect data on these diverse range of investments. Focusing on foreign direct investment by United States companies, for which there is relatively stronger data, scholars have not found a strong relationship between IPRs and investment. The weak statistical relationship reflects in part the importance of institutional variables such as infrastructure, education and training of the workforce, and cultural and political environment, all of which shape the perceived risk of investing in developing countries. Stronger IPRs do not alleviate the risks associated with foreign direct investment. Furthermore, stronger IPRs are not necessarily associated with other dimensions of legal reform, such as more effective enforcement of contract, or stable and predictable political systems. One would predict a positive correlation between stronger IPRs and transborder licensing to developing countries. Although companies in developed countries do not tend to expand foreign direct investment to a developing country that expands its intellectual property protections, there is evidence of increased licensing activity as measured by greater flows of licensing revenues to developed countries from developing countries. Empirical studies show some increase in licenses to companies in developing countries that strengthen their intellectual property laws. But it is not clear from measures of licensing revenue whether resulting increases in revenue are from higher royalty rates and other payments or a higher volume of licensing transactions. Stronger intellectual

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A guide for scholarly and policy research  647 property protections may allow intellectual property owners to obtain more rents from their licensing activities rather than stimulate more licenses to companies in developing countries. How these changes in licensing activities translate into technology transfer is not well understood. Synthesizing the diverse studies summarized by Maskus and Fink (2005), stronger IPRs lead to more imports of readily copied information and trademarked products into a developing country but may not lead to increased technology transfer whether in the form of foreign direct investment or technology licenses. Future research would need to untangle these various effects on international transactions with an eye on the broader question of whether stronger worldwide IPR regimes do support technology transfer from developed to developing countries. It may be the case that intellectual property law promotes new markets in developing countries for certain products from the developed world. Complexities of the relationship between intellectual property law and trade arise with respect to parallel imports, or the reimportation of intellectual property protected products from developing countries to developed countries. Whether electronics, books, music CDs, movie DVDs, pharmaceuticals, or cosmetics, parallel importation rests on a country’s choice of exhaustion rules. If the initial sale of a product exhausts global or regional rights in patents, copyrights, or trademarks embodied in the product, then parallel trade between countries is likely to result. Whether exhaustion and the resulting parallel importation are socially desirable is not clear as a matter of theory. The effects on social welfare depend on the benefits of global price discrimination and the value of free trade. Maskus and Fink (2005) summarize empirical studies that show differential effects of parallel trade by industry and product type. This result is not surprising in light of the ambiguities in the theoretical predictions. Whether price discrimination is beneficial depends on relative sensitivities of demand to changes in price and income and on the market structure of industries that meet the demand. Consequently, depending on the industry, price discrimination might serve either to allow companies to extract excessive profits from consumers or to provide a product to a market that otherwise would not be served because of high prices. Empirical studies show that the benefits of exhaustion can vary depending on whether rights are exhausted in all countries or only among a few countries that are connected regionally (such as the European Union). There seems to be some support for regional based exhaustion rules. However, there is no empirical work on the benefits of worldwide exhaustion. The lack of such work stems from the failure of countries to adopt an effective rule of global exhaustion, until quite recently. Studies of parallel importation point to the need for better understanding of the role of market structure on development. Although the economics literature on intellectual property rests on the debate between Schumpeterian theories of monopolies and Arrovian theories of competition in promoting innovation, details of specific industries matter for shaping policies to guide development. Large scale technological change may require some degree of market concentration. But innovation can also occur through start-ups and small companies in certain industries. Design of intellectual property laws needs to take account of these differences across industries and markets. In addition, intellectual property law design often must occur in tandem with the implementation of competition

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648  Research handbook on the economics of IP law volume 1 laws. Both sets of law establish an interrelated environment for the promotion of innovation, economic growth, and development. Policy advocates and analysts draw on the empirical work on the relationship among IPRs, development, and trade in many ways. Stiglitz and Charlton (2005) advise that a strong patent system can limit economic development by impeding technology transfer. They recommend the implementation of compulsory licensing schemes as a limitation on patent rights in situations of global health emergencies as well as in situations where patent owners refuse to deal. Compulsory licensing, they argue, can effectively move innovative technologies into the hands of companies and thereby promote competition. Yamane (2015) draws on Japanese success in promoting economic development to examine that country’s regulation of intellectual property licensing schemes. This study identifies what the author calls a ‘fairness’ approach to competition law based limitations on intellectual property licensing. This approach emphasized access to technologies, economic development, and competitive dynamics. Yamane recommends the Japanese post-war model as one for currently developing countries to emulate. Trade policy oriented towards development rests not only on national lawmaking and implementation but also on cross border trade and multilateral agreements. Farley (2014) and Yu (2015) document the proliferation of bilateral trade and investment agreements and their role in promoting, even coercing, strong intellectual property laws in developing countries. The authors separately caution against the conditioning of trade agreements on the implementation of intellectual property laws that go beyond the requirements of the TRIPS Agreement. Instead, their articles remind us of the need for contextualized lawmaking in order to meet the development needs of individual nation-states. Appeal to context echoes the recommendations of the 2002 Report of the Commission on Intellectual Property Rights which concluded that the effects of trade and investment on development depended on the particular economic progress and history of a country. Greater benefits from trade and strong IPRs may accrue to high-level developing countries with advanced technological capacities. Mid-level or low-level developing countries may experience little or no benefit from trade and IPRs especially if stronger rights are used for creating new consumer markets for companies in developed countries rather than transferring technology and know-how to developing countries. How can policy makers in developing and developed countries shape intellectual property and trade policy in order to promote development? The answer rests in part on identifying the relevant contextual variables that shape the effectiveness of policy as implemented through intellectual property and trade laws. Helpman and Krugman (1985) provide a helpful conceptual toolkit for formulating strategic trade policy. Their analytical structure rests on appreciating the role of market structure in capturing the benefits from cross border trade. Some benefits accrue in greater consumption opportunities in developing countries. Some also accrue to the development of new companies and industries that can compete in newly created markets. The authors show how targeted policy can help promote new industries as they enter these new markets opened by trade. Country specific studies provide helpful guidance in identifying potentially relevant context for the success or failure of development policy. The World Bank’s collected volume on poor people’s knowledge (2004) brings together case studies on efforts to promote local industry and trade through intellectual property in South Asia, Latin America, and the Caribbean. The various papers focus on efforts to create markets for

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A guide for scholarly and policy research  649 traditional knowledge and for cultural products designed to encourage tourism and businesses among indigenous communities. Millaleo and Cadenas (2015) offer a model of country specific studies in their account of developments in intellectual property law in Chile. Their analysis not only reveals the political economy of legal reform but also connects changes in intellectual property to the needs and interests of constituencies in Chile. As many intellectual property reforms in Chile were responses to demands from free trade agreements, the case of Chile demonstrates how efficacious trade led reforms can be. Specifically, the authors conclude that countering the move for strengthening IPRs has been the worsening of income inequality arising from poorer access to medicines and from limits on sharing cultures on the Internet. These tensions poise the country for continuing debates on legal reform and development goals. Perullo and Eisenberg (2015) add to the richness of country specific studies in their examination of copyright and the music industry in Tanzania and Kenya. Their comparative article shows how the implementation of copyright in the two east African countries facilitated the development of the music industry at the national and local levels with varying results. In Kenya, the music industry developed along lines that paralleled the industry in developed countries with extensive licensing between creators and music publishers that have tended to be concentrated and corporatized. By contrast, the national government has taken more of a role in promoting artists and music in Tanzania, following what the authors call a socialist model. What the study of music and copyright in Tanzania and Kenya teaches is the range of context and forms in which cultural industries can flourish within intellectual property systems. Considerations of context not only should shape development policy and intellectual property reform but also can influence conceptions of economic development. The 2002 Commission Report discussed at many points in this chapter concludes that the connections between foreign direct investment and intellectual property law may depend upon the stage of development for a particular country. The authors of the Report also point to how intellectual property law can affect education, food and agriculture, and public health. Each of these variables influences growth and economic development. Schultz (1981) provides a valuable theoretical and empirical framework supporting the connection between growth and measures of population quality, such as healthiness and education. Aptly titled ‘Investing in People,’ Schultz’s lectures on human health and education build on traditional economic growth theory which looks solely at rates of population growth. But Professor Schultz looks beyond the quantity of people in a given economy to include other contextual factors. What the 2002 Commission Report does is show how intellectual property law can affect measures of population quality through transfers of new technology to benefit society through improvements in health and education. This section has offered an analytical summary of scholarship on the path from intellectual property reform to development at the macro level. Starting with research on foreign direct investment and trade, the analysis moved to a recognition of contextual variables that can affect the macroeconomic links between legal reform and development. Ending with a discussion of studies that provide substance on the relevant contextual variables, this section ends with a question. What institutional and behavioral mechanisms affect innovation and technology transfer? This question is the focus of the research discussed in the next section.

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650  Research handbook on the economics of IP law volume 1 B.  Microeconomic Studies What studies of macroeconomic relationships between intellectual property law and economic variables, such as trade and investment, teach is the importance of context and institutions. Discovering the relevant context and institutions requires an analytical approach that starts from examining behavior from the bottom up, starting from the behavior of individuals within firms and households in developing countries. A bottom up approach would provide insights into how invention and creativity occur, how technology is transferred and implemented across and within firms, and how returns from innovation, growth, and development are distributed. Banerjee and Duflo (2011) is a provocative example of a bottom up approach to law and development. Economists at MIT, Professors Banerjee and Duflo are prominent for their work on randomized control trials to examine through experimental techniques the effect of various development policies on households and businesses in developing countries. Their work is grounded in microeconomic theory enriched by sociological and cultural studies as a response to contentious debates at the macroeconomic level on the efficacy of United States foreign aid and development assistance policies. On the one hand, the authors are critical of scholars like Jeffrey Sachs who point to the inexorability of poverty traps and the need for government assistance to bring individuals out from poverty. Professors Banerjee and Duflo express skepticism that poverty traps are inevitable although they acknowledge the existence of situations where extremely low income individuals are unable to move up the economic level. Similarly, the authors are skeptical of scholars who claim that foreign aid and development assistance are inexorably harmful in dampening private incentives. As a counter to these two extreme positions on foreign aid, Professors Banerjee and Duflo analyze the behavior of poor people, identifying the psychological, social, and economic constraints that shape their choices about financial investment, adoption of technology, and consumption. Their methodology is rooted in part in behavioral economics, which examines how human reasoning and choice operates in practice, revealing psychological processes ignored by pure rational choice theory with its emphasis on comparing benefits and costs. In addition, institutional context and the lack of institutions, such as banks and courts, also shape actual decision making in developing countries. Behavioral limitations and institutional gaps help to explain why poverty traps may occur and technology may fail to transfer for the stimulus of growth and development. Through their empirical studies, the two development economists identify a role for conditioned aid and grants to better pursue innovation and development goals to address psychological and institutional constraints on investment behavior. Although Professors Banerjee and Duflo do not directly address legal reform, their identified impediments to investment and entrepreneurial decision making point to institutional reform guiding law and policy. For example, their research uncovers the problem of financing loans to poor individuals who want to form their own small business that arises from difficulties in monitoring high risk loans. The authors make the case for microcredit to fund small scale projects that can generate sufficient returns to help attain profitability of business enterprises. In addition, institutional constraints limit the ability to create start-ups and new technologies in developing economies. What they discover is that the very poor are often faced with investment opportunities that have high marginal

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A guide for scholarly and policy research  651 returns but relatively low total returns. This disparity stems from the lack of markets and institutions that make initial investments incrementally profitable but not sizable in aggregate terms. Consequently, investment in infrastructure and large scale enterprises, like factories, may have important effects on stimulating private investment in small, individually owned and managed businesses. These investments would include a shift from traditional to more modern technologies. The case of a Chinese businesswoman discussed by Banerjee and Duflo illustrates the role of institutional and behavioral constraints on technology transfer and business development. The businesswoman opened a garment shop in her home with a single sewing machine. Her initial investment in the sewing machine had very large marginal returns, but the business soon reached capacity in meeting the local demand. This example illustrates investments that have huge marginal return but low total returns. As Banerjee and Duflo point out, this disparity between marginal and total returns describes many business investments in developing countries. A consequence is while there are incentives to invest in new enterprises and technologies, the investment often does not aid in sufficient generation of income to allow expansion of a business. The entrepreneur in the case study, however, enjoyed a windfall in receiving an export order that allowed her to expand into a factory. This opportunity allowed the entrepreneur to achieve scale and make high marginal return investments that yield high total returns as well. This example illustrates how development policy should focus on overcoming institutional and behavioral impediments. Legal reform, such as adoption of intellectual property laws, is not sufficient in promoting growth and development. A further implication is that expansion in trade and foreign direct investment may not be fruitful without addressing institutional and behavioral limitations. Banerjee and Duflo (2011) offer an innovative methodological approach to the microeconomics of development economics. Their attention to psychology and institutions potentially supports a range of legal reforms which future research should explore. Equally importantly, the theoretical and empirical scholarship they present complements contemporaneous scholarly work demonstrating the role of institutions in the ­relationship between law and economic development. One illustration of institutional and behavioral understandings of development policy and intellectual property is Nussbaum and Sen’s work on capabilities and economics (1993). Capabilities expand the relevant measures of economic growth beyond income, prices, and other traditional economic metrics. While these traditional metrics capture aggregate well-being as quantified in market measures, capabilities capture improvements in the standard of living as critical, but ignored development goals. Measures of capabilities would include improvements in literacy, access to education, professional training, health and welfare, and psychological well-being. Material metrics, such as income or wealth, fail to acknowledge ‘the quality of life,’ the title of Nussbaum and Sen’s volume. There is a superficial similarity between capabilities and Schultz’s notion of population quality, discussed in the previous section. The key difference is that Schultz views measures of population quality, such as health and education, as inputs to obtain improvements in income and wealth rather than as independent indicators of economic development. The studies in Nussbaum and Sen’s 1993 volume make the case for how to gauge the quality of life and identify aspects of the standard of living that can serve as the basis for assessing

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652  Research handbook on the economics of IP law volume 1 development. Health and education are desirable independent of their contributions to material measures of economic progress. Conceptually, income and wealth perhaps serve as inputs for the realization of improved health and education, the outputs from economic growth and development. Chon (2006, 2007) provides the valuable connections among development, capabilities, and intellectual property. Her works lay the foundation for a bottom up approach to intellectual property that has as its starting point the activities and needs of people. Development, according to her conception, arises from education (which is the focus of her research) rather than from macro variables of trade and investment. However, access to education depends on intellectual property laws adopted by a particular nation. As Chon shows, copyright laws on access to education materials vary widely across countries demonstrating different commitments to using intellectual property laws to improve educational opportunities. Although she does not directly establish whether variations in intellectual property laws promote stronger educational outcomes, she does show that countries have managed to use copyright laws as strategic tools for promoting development through access to education. Detailed studies of institutions and behavior involving intellectual property can better inform how to structure legal reform and policy. Lerner and Schankerman (2010) examine the propagation of open source and proprietary software in developing countries. Scaria (2014) provides an excellent example of this line of research. Using survey techniques, Scaria identifies the extent of and reasons for copyright piracy of film in India. His work examines both the demand side of piracy among Indian households and the supply side responses by film copyright owners. The empirical findings are framed within a theoretical model of crime that identifies both the negative and positive incentives for engaging in illegal activity like piracy. With this methodology, Scaria is able to identify how piracy correlates with income, education status, and the price for various works. In addition, he measures the use of peer to peer and other file sharing networks for purposes of piracy as well as legally recognized uses of copying. While there are limits to survey methods, even ones as broad and comprehensive as Scaria’s, this study is unique in providing rich institutional details about copyright and usage in a developing country. Cimoli et al. (2014) collect a diverse set of case studies on the role of intellectual property in development. The studies in this collection complement the theoretical approach of Banerjee and Duflo to illuminating the institutional and behavioral dimensions of economic development. For example, the case study on the Green Revolution demonstrates how technology transfer can occur parallel to intellectual property regimes through government-industry collaboration. The case studies focus on the role of technology diffusion in development and the limits placed on diffusion by intellectual property laws at critical linkages from law to institutions to behavior by firms and consumers in the adoption of new technologies. Micro-level studies of economic development can potentially suffer from being too diffuse and ungeneralizable. The methodology of Banerjee and Duflo addresses this concern with an emphasis on experimental design combined with attention to institutional and behavioral details. Future research can complement their approach with more careful and varied case studies about specific industries in specific countries at specific points in time. The resulting findings can be valuable in identifying contextual variables for the success and failure of economic development within differing regimes of intellectual property.

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A guide for scholarly and policy research  653

V.  DIRECTIONS FOR FUTURE RESEARCH Discussions of intellectual property are often fueled by rhetoric about promoting progress, incentivizing creativity, and sparking innovation. There should be no surprise that similar rhetoric informs the relationship between intellectual property law and economic development. This chapter has tried to temper the rhetoric with a synthesis of scholarly work that examines the determinants of economic growth and development, the relationship between law and the economy, and the role of intellectual property law in fostering development. Synthesis is necessarily a broadly interdisciplinary one, reaching across law, economics, social theory, cultural theory, and political theory. While such a multifaceted discussion may seem diffuse, the synthesis attempts to identify common themes that are relevant to policy and scholarly research. Synthesis can promote greater analysis as a cure to the rhetoric. The volume divides the topic of development into economic development and cultural development, with economic development centering on state efforts to promote improvements in material well-being and cultural development, on state efforts to promote aspects of national culture. As one recognizes that context matters for the relationship between law and economic development, culture—whether language, history, religion—is an important context for economic development. Therefore, the division may be artificial and is largely adopted for purposes of exposition. Future scholars can fruitfully draw the connections between these two interrelated strands. Future scholars can also provide more specific context for understanding how intellectual property and development interact in their complex, nonlinear relationship. The topics identified in this chapter are rich with ideas for engagement. Whether better understanding the intricacies of trade and agreements, or identifying experiments for understanding technology adoption, finance, and business entrepreneurship at the micro level, scholarship has much to build on here. In this way, rhetoric can give way to light and to more thoughtful and effective policy debate at the national, regional, and global levels.

REFERENCES Aoki, Masahiko, Timur Kuran, and Gérard Roland, eds. 2012. Institutions and Comparative Economic Development. New York, New York: Palgrave Macmillan. Banerjee, Abhijit V., and Esther Duflo. 2011. Poor Economics: Rethinking Poverty and Ways to End It. New York, NY: Random House. Barro, R.J., and Xavier Sala-i-Martin. 2003. Economic Growth. Cambridge, MA: The MIT Press. Basberg, Bjørn L. 1987. ‘Patents and the Measurement of Technological Change: A Survey of the Literature,’ 16 Research Policy 131–41. Casper, Steven. 2007. Creating Silicon Valley in Europe: Public Policy Towards New Technology Industries. Oxford: Oxford University Press. Chon, Margaret. 2006. ‘Intellectual Property and the Development Divide,’ 27 Cardozo Law Review 2821–911. Chon, Margaret. 2007. ‘Intellectual Property “From Below”: Copyright and Capability for Education,’ 40 University of California Davis Law Review 803–47. Cimoli, Mario, Giovanni Dosi, Keith E. Maskus, Ruth L. Okediji, Jerome H. Recihman, and Joseph E. Stiglitz. 2014. Intellectual Property Rights: Legal and Economic Challenges for Development. Oxford: Oxford University Press. Coase, Ronald H. 1937. ‘The Nature of the Firm,’ 4 Economica 386–405. Coase, Ronald H. 1960. ‘The Problem of Social Cost,’ 3 Journal of Law and Economics 1–44.

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654  Research handbook on the economics of IP law volume 1 Commission on Intellectual Property Rights. 2002. Integrating Intellectual Property Rights and Development Policy. London: Commission on Intellectual Property Rights. Cooter, Robert D., and Hans-Bernd Schäfer. 2012. Solomon’s Knot: How Law Can End the Poverty of Nations. Princeton, NJ: Princeton University Press. Deaton, Angus. 2013. The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton, NJ: Princeton University Press. Farley, Christine Haight. 2014. ‘TRIPS-Plus Trade and Investment Agreements: Why More May Be Less for Economic Development,’ 35 University of Pennsylvania Journal of International Law 1061–72. Fields, Gary. 2001. Distribution and Development: A New Look at the Developing World. Cambridge, MA.: The MIT Press. Ghosh, Shubha. 2012. ‘Propriedade intelectual no novo projeto de direito e desenvolviemento comentarios e exemplos da India,’ in Mario G. Schapiro and David M. Trubek, eds., Direito e Desenvolvimento: Um Diálogo Entre Os Brics. Sao Paulo, Brazil: Editora Saraiva. Gilson, Ronald J., Charles F. Sabel, and Robert E. Scott. 2013. ‘Contract and Innovation: The Limited Role of Generalist Courts in the Evolution of Novel Contractual Forms,’ 88 New York University Law Review 170–215. Griliches, Zvi. 1990. ‘Patent Statistics as Economic Indicators: A Survey,’ 28 Journal of Economic Literature 1661–707. Heald, Paul M. 2003. ‘Misreading a Canonical Work: An Analysis of Mansfield’s 1994 Study,’ 10 Journal of Intellectual Property Law 309–19. Helpman, Elhanan, and Paul Krugman. 1985. Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy. Cambridge: The MIT Press. Hovenkamp, Herbert. 2016. ‘The Emergence of Classical American Patent Law,’ 58 Arizona Law Review 263–306. Hurst, Willard. 1956. Law and Conditions of Freedom in the Nineteenth Century United States. Madison, WI: University of Wisconsin Press. Lerner, Josh, and Mark Schankerman. 2010. The Commingled Code: Open Source and Economic Development. Cambridge, MA: The MIT Press. McCauley, Stewart. 1963. ‘Non-Contractual Relations in Business: A Preliminary Study,’ 28 American Sociological Review 55–67. MacNeil, Ian. 1978. ‘Contracts: Adjustments of Long-Term Economic Relations under Classical, Neoclassical, and Relational Contract Law,’ 72 Northwestern University Law Review 854–902. MacNeil, Ian. 1980. The New Social Contract. New Haven, Conn.: Yale University Press. Mandel, Gregory N. 2014. ‘Leveraging the International Economy of Intellectual Property,’ 75 Ohio State Law Journal 733–78. Mansfield, Edwin. 1994. ‘Intellectual Property Protection, Foreign Direct Investment, and Technology Transfer.’ International Finance Corporation Discussion Paper No. 19. Maskus, Keith E., and Carsten Fink, eds. 2005. Intellectual Property and Development: Lessons from Recent Research. Washington, DC: The World Bank. Maskus, Keith E., and Jerome H. Reichman, eds. 2005. International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime. Cambridge: Cambridge University Press. Millaleo, Salvador, and Hugo Cadenas. 2015. ‘Intellectual Property in Chile: Problems and Conflicts in a Developing Society,’ in Matthew David and Debora Halbert, eds., The Sage Handbook of Intellectual Property. Los Angeles, CA: Sage. Mokyr, Joel. 2017. A Culture of Growth: The Origins of the Modern Economy. Princeton, NJ: Princeton University Press. Neal, Larry, and Jeffrey G. Williamson. 2014. The Cambridge History of Capitalism Volume I: The Rise of Capitalism—From Ancient Origins to 1848. Cambridge: Cambridge University Press. Neal, Larry, and Jeffrey G. Williamson. 2014. The Cambridge History of Capitalism Volume II: The Spread of Capitalism—From 1848 to the Present. Cambridge: Cambridge University Press. Perullo, Alex, and Andrew J. Eisenberg. 2015. ‘Musical Property Rights Regimes in Tanzania and Kenya after TRIPS,’ in Matthew David and Debora Halbert, eds., The Sage Handbook of Intellectual Property. Los Angeles, CA: Sage. Robinson, Joan. 1979. Aspects of Development and Underdevelopment. Cambridge: Cambridge University Press. Romer, P.M. 1994. ‘The Origins of Endogenous Growth,’ 8 The Journal of Economic Perspectives 3–22. Sabel, Charles F. 2005. ‘Bootstrapping Development: Rethinking the Role of Public Intervention in Promoting Growth,’ Paper presented at the Protestant Ethic and Spirit of Capitalism Conference, Cornell University, Ithaca, New York, October 8–10, 2004, accessed August 2, 2015, at http://www2.law.columbia.edu/sabel/papers/ bootstrapping%20deve%20send5.pdf. Sachs, Jeffrey D., and Andrew M. Warner. 1997. ‘Fundamental Sources of Long-Term Growth,’ 87 The American Economic Review 184–8. Scaria, Arul George. 2014. Piracy in the Indian Film Industry: Copyright and Cultural Consonance. Cambridge: Cambridge University Press.

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A guide for scholarly and policy research  655 Schmookler, Jacob. 1972. Patents, Invention, and Economic Change: Data and Selected Essays. Cambridge, MA: Harvard University Press. Schultz, Theodore W. 1981. Investing in People: The Economics of Population Quality. Berkeley, CA: University of California Press. Solow, Robert M. 1956. ‘A Contribution to the Theory of Economic Growth,’ 70 Quarterly Journal of Economics 65–94. Solow, Robert M. 1988. Growth Theory: An Exposition. Oxford: Oxford University Press. Spiegler, Peter. 2015. Behind the Model: A Constructive Critique of Economic Modeling. Cambridge: Cambridge University Press. Stiglitz, Joseph E., and Andrew Charlton. 2005. Fair Trade for All: How Trade Can Promote Development. Oxford: Oxford University Press. Trebilcock, Michael J., and Mariana Moto Prado. 2014. Advanced Introduction to Law and Development. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Trubek, David M., and Alvaro Santos. 2006. The New Law and Economic Development: A Critical Appraisal. Cambridge: Cambridge University Press. Williamson, Oliver. 2013. The Transaction Cost Economics Project: The Theory and Practice of the Governance of Contractual Relations. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. World Bank. 2004. Poor People’s Knowledge: Promoting Intellectual Property in Developing Countries. Cambridge: Cambridge University Press. Yamane, Hiroko. 2015. ‘Competition Analyses of Licensing Agreements: Considerations for Developing Countries under TRIPS.’ Geneva: ICTSD Discussion Paper. Yu, Peter. 2015. ‘Déjà Vu in the International Intellectual Property Regime,’ in Matthew David and Debora Halbert, eds., The Sage Handbook of Intellectual Property. Los Angeles, CA: Sage.

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24.  Economic development and intellectual property rights: key analytical results from economics Keith E. Maskus*

Contents I. Introduction II. Endogenous Intellectual Property Regimes A. Basic Tradeoffs B. Global Tradeoffs III. Intellectual Property, Innovation, and Technology Diffusion A. IPRs and Innovation B. IPRs and Technology Diffusion IV. Patents and Access to Medicines V. Concluding Remarks References

I. INTRODUCTION Economic development is the result of numerous interrelated processes, including the adoption and development of new technologies, the organization of markets to facilitate production and consumption, and the establishment of facilitating institutions (Cimoli et al., 2014). For countries behind the technological frontier, development is a process of ‘catching up,’ featuring a combination of imitation, learning, knowledge absorption, and ultimately innovation. Many and varied elements affect the pace and direction of this evolution, including the governance of intellectual property rights (IPRs). Intellectual property laws, and their implementation and enforcement, aim to strike a balance among numerous objectives and constraints that affect the complex processes undergirding economic and social development. These laws determine the scope and strength of IPRs, which in turn may influence the pace and direction of economic activity. In their most direct conception, patents are thought to encourage innovation and deepen technological markets, while raising the costs of potential rivals in imitating new technologies. Trademarks are supposed to sort out information problems in markets where consumers might be confused about the provenance of goods and services, even as they potentially diminish employment in counterfeiting firms. Copyrights are presumed to secure market returns to successful content creators, but may diminish access to cultural and scientific knowledge. *  Arts and Sciences Professor of Distinction in the Economics Department at the University of Colorado, Boulder. Email: [email protected].

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Key analytical results from economics  657 These basic views dominate received economic analysis of IPRs to a considerable degree, as will be evident from the review in this chapter. By focusing on specific incentive impacts of patents or copyrights, economists, at least in theoretical models, are able to isolate their potential effects on development and growth and to identify how those effects may vary with economic and technological conditions.1 This approach has unearthed a range of important insights that should be accounted for in any assessment of intellectual property law and regulation. At the same time, however, IPRs reside in a far broader and more complex economic and social ecosystem than economists can hope to capture with tractable theoretical models or econometric analysis. Thus, for example, development economists point to the roles patents may play in the full ‘national innovation system,’ involving infrastructure, investment taxes, R&D subsidies, factor markets, competition rules, educational attainment, and even trade policy, not to mention accidents of history and geography (Odagiri et al., 2010). How such factors interact over time and at different levels of economic development is a frightfully complex issue, making it difficult to say much with confidence about the true significance of IPRs in the development context. Beyond this general complexity lie the many details of policies and effects that, while extremely important, render straightforward statements about IPRs and economic development all but meaningless.2 To begin, even the best economists make the mistake of failing to distinguish among the types of IPRs, which may have quite different impacts on development prospects. Patents and plant variety rights operate differently from copyrights, which in turn are distinct from trademarks and geographical indications. Moreover, these devices feature complex regulatory components that influence their true protective scope, such as compulsory licenses of patents, copyright limitations and exceptions, and parallel trade. Next, economic sectors vary widely in their interrelationships with IPRs of various types, with pharmaceuticals, chemicals, and biotechnological inventions most dependent on patents and literature, music, software, and digital entertainment goods closely associated with copyrights. Finally, IPRs are national policy constructs and as such their structure and scope are, to some extent, dependent on economic and social conditions in each country. In turn, there is two-way causation between economic activity and the IPRs regime. Such complications should be kept in mind when contemplating the development aspects of intellectual property protection. Perhaps the greatest challenge in organizing a review chapter is simply deciding which elements to cover among the vast array of development problems that may be affected by IPRs. There are many economic processes that have been related to patents, including innovation, technology diffusion, trade, competition, monopoly power, and price-setting. Analysts may be concerned about sectoral issues involving medicines, green technologies, agricultural inputs, software, and e-commerce. They have broader concerns, such as how 1   As will become evident later, satisfactory empirical identification of such effects is far more elusive. 2   Regrettably, such statements are common where observers have a strong economic or political interest, whether for or against IPRs. Thus, for example, some see IPRs as an unalloyed ‘power tool for development’ (Idris, 2002). Others paint IPRs as largely a mechanism for blocking development of poor countries through sustaining monopolistic rents of existing firms (Stiglitz and Charlton, 2005).

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658  Research handbook on the economics of IP law volume 1 the productivity of IPRs depends on other policies, their implications for access to scientific and technological information, and barriers they may raise to cultural development. A judicious treatment is therefore called for to avoid being too shallow in the treatment of too many subjects. Here I focus on three key questions that have been studied closely by economists and about which most may be said with some confidence. First, I overview the political economy of decisions made by countries at different development levels to adopt stronger IPRs and characterize international trade rules in that context. Second, I critically discuss findings on the roles of IPRs in innovation, technical change, and technology transfer across borders. Third, I describe major results about how patents may be affecting pricing decisions and product availability of medicines in developing economies.

II.  ENDOGENOUS INTELLECTUAL PROPERTY REGIMES The vast majority of economic theorizing in this area treats IPRs as exogenous, or determined independently outside the economic and social environment. This approach is useful for analysing how policy changes might influence the behavior of specific firms and industries or alter the well-being of households. It is reasonable to suppose that any individual firm or consumer simply takes such policy changes as given by legislators or trade negotiators seeking to achieve a broad set of outcomes. A.  Basic Tradeoffs The difficulty, of course, is that IPRs, like taxes and tariffs, are the endogenous outcomes of a policymaking process that depends on a large variety of competing interests, both domestic and foreign. Moreover, these interests change over time because the dynamics of economic growth fundamentally alter underlying circumstances. Focusing for the moment solely on domestic factors, a government devoted to maximizing national welfare would take account of at least the following considerations.3 First is consumer welfare, which consists of static consumer surplus from having access to existing goods and dynamic benefits from having access to more and newer goods from future innovation. Second is the profits (more accurately, producer rents) of domestic firms, made up of both imitators and innovators or creative content providers. Third would be any spillover benefits or costs of IPRs, such as reduced infection rates from faster access to newer medicines or diminished learning of new technologies through higher-cost imitation or reverse engineering. From this description two basic and interrelated tradeoffs emerge in policymaking (Maskus, 2000). One is the purely static distribution of welfare between consumers, 3   The government might also care about tax revenues, employment, and other objectives. Alternatively, a government may be self-interested, with legislators seeking to maximize the chances of staying in office or garnering lobbying contributions, calling for a model of political economy along the lines of a tariff-setting model. See, for example, Grossman and Helpman (1994). The self-interested approach has not yet been studied in a rigorous empirical model of patent policy formation.

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Key analytical results from economics  659 including input users, and producers of existing goods and technologies. Another is the dynamic tension between current access gains and the benefits from future innovation, incentivized by IPRs. This simple logic underlies the primary political-economy view about economic development and intellectual property. Countries with limited innovation capacity are likely to favor short-term access benefits through weak or absent IPRs. As firms and industries acquire greater capacities to invent new goods, which could be the result of numerous economic and policy factors, interests arise endogenously in strengthening patents and other rights (Chen and Puttitanun, 2005; Ginarte and Park, 1997; Park, 2008a). A variant of this story is that endogenous protection may be U-shaped in economic development, which was demonstrated in an early study (Maskus and Penubarti, 1995).4 Countries at the lowest income levels may favor the ability of moderately strong IPRs to bring more products to their markets from abroad, while having little domestic production capacity that would oppose such a regime. As nations gain more imitative capacity at middle-income levels, however, local firms gain the ability to imitate products, which is facilitated by weaker patents. Beyond some level of real per-capita incomes the emerging innovation interests dominate and the strength of IPRs rises along with development. It is consistent with economic history that IPRs are expanded in scope as economies grow richer and more technologically capable (Odagiri et al., 2010). For example, development of the US pharmaceutical industry was boosted by the vacating of German-owned patents in World War I, with the rights to produce such goods given to domestic firms as compulsory licenses (Moser and Voena, 2012). Switzerland’s chemical industry grew from imitating foreign formulations in the absence of domestic patents (Maskus, 2012). These countries now have highly protective patent regimes. Through the late 1980s Japan’s patent system favored widespread technology diffusion through the use of utility models and narrow claims, but that country also now strongly protects novel inventions (Ordover, 1991; Maskus and McDaniel, 1999). South Korea has experienced a similar transition of technology development and IPRs, while the rapid solidification of patent protection in China since 2000 surely reflects the emergence of such high-technology industries as electronics, solar power, and biotechnology. Two important qualifications to this dynamic must be mentioned. First, because countries vary in their industrial composition even relatively poor nations may have endogenous preferences for strong components of IPRs, while richer countries may limit them. India, for example, has long protected copyrights due to the importance of its domestic film and publishing sectors. More recently, many developing countries have entertained legislation to protect geographical indications as a potential boost to their agricultural sectors (Maskus, 2012). In contrast, Canada has deployed compulsory licenses in pharmaceuticals and limited the scope of digital copyrights in order to favor consumer access. These stories suggest that attempts to identify the evolution of ‘appropriate’ intellectual property regimes as countries develop inevitably are subject to numerous exceptions (World Bank, 2002; Kim et al., 2012).

4   Caution should be exercised in interpreting this U-shaped outcome, however, for to some degree, it may reflect simply the legacy of imported colonial laws.

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660  Research handbook on the economics of IP law volume 1 B.  Global Tradeoffs A second and more fundamental qualification is that countries may not be fully free to select their desired IPR regimes, even where governments are welfare maximizers, in a world of open trade and investment. The primary reason is that a developing country’s domestic protection may be inadequate for the interests of international corporations seeking to export or invest there.5 These companies can press directly for upgraded standards or encourage indirect strengthening via international trade agreements. Thus, for example, the unprecedented expansion and partial convergence of patent rights since 1995 is largely the result of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) at the World Trade Organization and even stronger demands in subsequent preferential trade agreements (Maskus, 2012). It follows that negotiated intellectual property rules, in themselves, likely exceed the individually welfare-optimizing levels within poorer countries. These considerations were spelled out carefully in landmark theoretical contributions (Grossman and Lai, 2004; Scotchmer, 2004). In determining their own policies (so-called ‘Nash non-cooperative patent regimes’), governments will take into account the welfare gains from access to goods and the profits of domestic firms, including imitators. They will not consider the profits earned in their markets by foreign firms. There are two critical implications. First, countries with large markets and strong capacities to invent goods with commercial potential will choose considerably stronger protection than will those with small markets and limited inventiveness. Second, these individual policies, by failing to offer incentives to foreign innovators, suffer from a global coordination problem: patent and copyright systems are inadequate to produce the globally optimal level of innovation and growth is diminished as a result. It follows that international agreements to internalize this spillover through more integrated standards can expand global welfare. This logic offers the key principled justification for a tendency to harmonize international IPRs within TRIPS or increase them further via preferential trade agreements (PTAs). In the latter approach, agreement partners are pressured by industrialized countries, primarily the United States and the European Union, to adopt certain ‘TRIPS-Plus’ standards, which go beyond the requirements of TRIPS. Typically included among these demands are stronger patent rights and data-secrecy protection in pharmaceuticals and chemicals, enhanced protection from online digital piracy, elevated rights for geographical indications, and strong enforcement mechanisms (Maskus, 2012). Indeed, policymaking in TRIPS and its aftermath have been affected, for measured patent rights in the era after the agreement became higher than their prior Nash levels.6 Note, however, that the TRIPS and TRIPS-Plus patent standards themselves may not be globally optimal, despite their partial convergence, if they settle at weighted-average levels higher than needed to 5   Again, a politically driven system could generate excessive protection even on a national basis if industries seeking strong exclusive rights have more lobbying influence, a situation that arguably has characterized the United States in recent years and underlies domestic debates about copyright limitations and patent scope. 6   The issue of measurement will be discussed below. On the departure of TRIPS rules from Nash standards, see the estimates in Lai et al. (2008).

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Key analytical results from economics  661 correct the international externalities. Moreover, because these agreements generated rules that may exceed currently useful levels for developing countries they may diminish welfare there unless their costs are offset by other benefits. These questions remain largely unanswered in the economics literature.7

III. INTELLECTUAL PROPERTY, INNOVATION, AND TECHNOLOGY DIFFUSION In granting and protecting the exclusive rights embodied in various forms of IPRs, governments attempt to manage these static, dynamic, and international tradeoffs. The fundamental social bargain in patents, for example, is to offer temporary rights to exclude others from using or copying protected technologies and goods in return for disclosure of the patented information. The ability to exclude addresses the dynamic innovation problem by creating a limited monopoly in ideas, permitting originator firms to earn enough profits to pay for R&D costs or to finance the costs of marketing their technologies. Copyrights address the similar problem of promoting creative expression. Whether IPRs actually achieve these goals, and under what circumstances, is a hugely complex question, even among developed economies. In this section, I review primary evidence and draw some important lessons.8 A.  IPRs and Innovation As suggested above, a primary justification for IPRs is their presumed ability to incentivize invention, innovation, creativity, and knowledge diffusion. These concepts are not easily measured or even explained, especially in poor countries. For example, economists know very little about the drivers of artistic creativity and inventive activity in informal sectors in developing countries. Even within developed economies, the primary measures of innovation used by economists are indirect and focused on invention and diffusion, whether input-based (R&D expenditures) or output-based (patents and technology spillovers). These variables, while imperfect, permit a historical and statistical record linking patents or patent laws to innovation.9

7   No particular answers could be definitive given the complexity of the subject and attendant empirical uncertainties. For example, many have argued that the World Trade Organization (WTO) agreements failed to generate sufficient market access and technology transfer to developing countries to offset the costs of stronger IPRs (Maskus, 2012). However, if one takes account of the likely positive impacts of globalized patent rights on foreign direct investment, even high-level harmonization generates global increases in technology diffusion (Lai and Yan, 2013). 8   A full review in this chapter is impossible, given space constraints. See Maskus (2012), Park (2008b), and Cimoli et al. (2014). Readers may wish to begin with a review of the broader roles of innovation in economic development, such as Fagerberg et al. (2010). 9   Copyrights are difficult to assess in this context because they need not be registered to have legal weight. Analysts sometimes measure their importance by the shares of employment or output in such ‘copyright industries’ as music, publishing, software, and digital entertainment (Pouris and Inglesi-Lotz, 2011; European Commission, 2013). This approach says relatively little about the causal effects of copyrights, however.

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662  Research handbook on the economics of IP law volume 1 As an initial matter, note that patents are, in principle, neither necessary nor sufficient to induce the optimal degree of innovation. As long argued by innovation scholars, the primary motivation for investments in new goods is the anticipation of making future profits. This observation has been the foundation of innovation theory by economists from Schumpeter (1942) to Romer (1990) and beyond. The ability to appropriate profits from these inventions may come from many factors other than IPRs, including secrecy, market lead times, the high costs of imitation, and barriers to competition, though the relative importance of such factors, including patents, varies sharply across industries (Cohen et al., 2000). This explains why the historical anecdotal record may be used to support any view of the necessity of patents. For example, James Watt’s fundamental improvement of the steam engine was patented and defended rigorously. The role of patents in this case is alternately described in the literature as critical for the invention itself and unnecessary, in that the patent was procured after the invention was stabilized, and a socially wasteful means of blocking entry ex post by others.10 Anecdotes prove little so we must consider evidence from econometric studies. In this context, innovation historians have fruitfully analysed detailed data from the past. For example, Chen (2008) studied how 614 major inventions and innovations from 1750–1950 were related to the existence of patent laws in 14 Western European countries and the United States. These countries introduced their initial patent laws at different times in this period. Chen found a positive and highly significant impact of the existence of a patent law on the number of domestic inventions over this long period, often with a long lag, suggesting that a legal patent regime ultimately supports domestic inventive activity. However, this evidence must be treated cautiously for a number of reasons. Most importantly, he did not include in the analysis many confounding variables that surely influence national inventiveness, nor did he satisfactorily account for reverse causality between inventions and adoption of patent laws. In a landmark study, Lerner (2002) compiled information on 177 legal patent reforms in 51 countries over the period 1852–1998. He focused on substantive reforms, such as implementation of patent laws and extensions of patent duration. He estimated how these policy reforms led to changes in home patent applications by domestic residents and foreign applications in the reforming nations, using data normalized by contemporaneous trends in the propensity to patent. The study window ranged from five years before to five years after each reform and the regressions included a number of controls. Lerner’s results were striking. The volume of both domestic and foreign applications rose after patents were strengthened. However, after normalization only foreign applications increased significantly, while domestic applications actually fell. Thus, in most cases national patent reforms induced far more inward applications than domestic inventions, at least in the short run. Applications by domestic firms were, in fact, crowded out, perhaps by increased competition from abroad. Additional work found evidence of diminishing returns to increasing patent protection over time, meaning that countries with weaker initial regimes saw more patenting post-reforms, and that domestic innovation gains were concentrated in larger and higher-income economies.

10   The pro-patent history is exemplified by Rosen (2010), while the anti-patent argument is made by Boldrin and Levine (2008).

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Key analytical results from economics  663 Lerner’s findings are sobering for policymakers expecting that new and stronger patent laws in the developing world will induce considerably more domestic innovation. This outcome may pertain in large countries with initially weaker patents and rapidly rising incomes, such as China and Brazil. In much of the developing world, however, the impact over several years is likely to be greater growth in incoming patent registrations by foreign firms seeking to protect the new products and technologies they export or transfer. Put into context, this situation is not surprising. Many of the reforms Lerner analysed were adopted in response to foreign pressure, rather than domestic commercial interests. In another important study, Moser (2005) looked at whether patent laws alter the sectoral distribution of inventive activity, rather than overall innovation.11 She compiled data on nearly 15,000 inventions exhibited at either the 1851 world’s fair in London or the 1876 world’s fair in Philadelphia. Her hypothesis was that inventions in countries without patent laws should be concentrated in industries with other means of appropriation, such as secrecy and lead time, while those from nations with patent laws should be more broadly distributed. This proposition was confirmed: inventions from countries without patents were more likely to be in textiles, food processing, and instruments (with low patent intensities), while those from countries with patent laws were more evenly distributed, though significantly higher in machinery. Notably, after the Netherlands abolished its patent law in 1869, the share of Dutch innovations in food processing rose sharply. Moreover, the cross-industry distribution of inventions was significantly different between countries with short patent durations versus long patent durations. Thus, it seems that both the existence and strength of patents can profoundly affect the type of goods invented. In turn, legal patent reforms could help determine the evolution of industrial specialization over time. This historical record is informative but we also wish to study how IPRs influence innovation currently, particularly across countries at different levels of economic development. Econometric analysis of this question is rather recent, mainly because there were no consistent and international measures of patent protection over time until the famous Ginarte-Park (GP) index appeared (Ginarte and Park, 1997). This index, now extended to 2010 across a comprehensive set of countries, amounts to an adding up of the presence or absence of particular legal provisions in five components of patent laws, generating an index running from zero to five. Its use has been criticized for a number of reasons, including its inability to measure the extent of legal enforcement. This index has increased sharply among developing and emerging economies since 1995, with a considerable degree of harmonization with the most protective countries (Maskus, 2012). The earliest studies of innovation using such measures suffered considerably from an inability to control for missing variables and endogeneity. However, enough well executed studies have been published recently to support certain conclusions, which primarily suggest that the evidence is far from clear. An important question is whether the effects of patent reforms on innovation activities are different between rich and poor nations. In this context, Schneider (2005) analysed a sample of 19 developed and 28 developing countries, taking innovation as the number of patent applications residents of each nation registered in the United States from 1970 to   For further information on the historical evidence, see Moser (2013).

11

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664  Research handbook on the economics of IP law volume 1 1990. The explanatory variables included the GP index and several national variables that should affect technological change. In the basic regressions, Schneider found a positive and significant elasticity of 0.6 between patent applications and patent rights. However, when the sample was divided this positive impact remained only for developed countries, with a highly elastic coefficient of around 2.0. In developing countries, the effect was negative, though significant in only some specifications. We should interpret these findings cautiously, given some econometric problems with the approach, including the failure to deal with causality. However, they suggest that patent laws have limited or even negative impacts on contemporaneous patentable innovation in developing countries. It would be useful to revisit this question to analyse whether there is a longer-lagged effect that may be positive in emerging economies. A more sophisticated approach was used by Chen and Puttitanun (2005). They used data for 61 developing countries over 1975–2000 and accounted for the simultaneity between IPRs and innovation. The authors found that the GP index had no effect on US patent applications by residents of lower-income countries but the impact was positive and significant for middle-income and emerging economies. Thus, there is an important threshold effect, in that increases in the scope of patent rights seem to induce more innovation only above relatively high levels of gross domestic product (GDP) per capita. Similar conclusions were drawn by Allred and Park (2007a). While suggestive, the results of aggregate cross-country regressions are of questionable reliability for several reasons. More recently scholars have incorporated firm-level data sets, which increase sample sizes and permit greater focus on strategic aspects of the IPR-innovation relationship. For example, Allred and Park (2007b) related firm-level real R&D expenditures for 2,446 multinational enterprises in ten industries to their headquarter-nation’s GP index in 1990, 1995, and 2000, controlling for firm size, GDP, and time and industry fixed effects. They found a strongly positive impact of patent rights on R&D in the developed countries but no effect in developing countries. This evidence indicates that elevated patent laws stimulate R&D in nations where there are both high incomes and significant technological capabilities. However, there is little evidence of such impacts in low-income countries. A highly notable study is by Branstetter et al. (2006), which analysed the responses of affiliates of US multinational enterprises to major reforms in patent laws in 16 countries, 14 of which were developing or emerging, between 1982 and 1999. The authors performed an event analysis, considering changes in aggregate resident and non-resident patent filings in a six-year window surrounding the dates of reforms. In their econometric model the patent reforms had no impact on domestic applications. However, the results indicated that reforms had a positive impact on foreign patent applications, both in the short and long run, raising non-resident filings in the average nation by at least 52 percent. Thus, these authors reinforced the basic wisdom that international firms are more responsive to increases in patent rights in developing countries than are domestic firms. A last important work is by Qian (2007), who analysed 26 countries that, between 1978 and 2002, implemented laws establishing patent protection for pharmaceutical products and how those policies affected innovation in that industry. Her primary innovation measure was the log of citation-weighted drug-patent applications registered in the United States after legal changes, comparing matched country pairs that differed in whether they adopted reforms. Various national and industry control variables were included in the

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Key analytical results from economics  665 regressions. Qian found that there were no significant direct impacts of legal changes on US drug-patent applications, even up to ten years later. However, there were important interactions, in that patent reforms in countries with higher educational attainment, per-capita income, and greater measured market freedom significantly increased such applications. Thus, Qian’s results offer more evidence that the innovation-inducing impact of IPRs depends on other factors. Low-income economies with limited educational attainment and technical skills are unlikely to see much impact. This review points out that there are no clear and unidirectional relationships between patent rights and subsequent innovation, however measured.12 Much depends on other factors that vary across countries and industries and over time. A few general conclusions are worth drawing, however. First, the initial effect of legal revisions in developing countries is to attract more applications from abroad as multinational firms seek to exploit and protect their technologies. Second, even in middle-income countries it takes time for any domestic responsiveness to emerge.13 IPRs reforms have little, if any, impacts on innovation in poor countries, perhaps because of weak business and investment environments and poor governance institutions, including an inability to enforce such laws. An important qualification is that virtually all of the available evidence refers to strengthening patent laws, which may simply be irrelevant for innovation in the poorest countries. But innovation and creativity are hardly absent in those countries, even if they reside largely in informal sectors. It would be of great interest to study closely whether, in the post-TRIPS era, new copyright systems have encouraged creative activity in concert with greater access to the internet, or whether small producers are registering more domestic and international trademarks as they expand their marketing reach. B.  IPRs and Technology Diffusion For most developing economies, incoming international technologies are the primary source of new information, productivity gains, and economic growth (Keller, 2004). International technology diffusion is therefore a major determinant of global technical change and increasing such flows is a critical part of economic development policy. It is equally vital to adapt technologies to local conditions and learn how to use and improve them. Countries seeking access to foreign technologies therefore build into their innovation systems the entire policy complex involving skill accumulation, investment, competition, R&D support, and IPRs. In order to summarize a complex set of relationships, it is useful to distinguish between market-mediated technology transfer and informal means of diffusion into the broader

12   Available measures are themselves deeply flawed. For example, definitions and coverage of R&D can vary considerably across countries. Patent applications may not reflect underlying innovation so much as a need for firms to engage in defensive patenting in industries with overlapping claims and cumulative innovation. Moreover, some countries, notably China, see patent applications in themselves as socially desirable and governments may absorb the application costs, resulting in excessively high filings. 13   There are exceptions, as technology-oriented firms in South Korea, China, and India quickly expanded their R&D spending and turned to patenting in the wake of domestic reforms (Maskus, 2012).

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666  Research handbook on the economics of IP law volume 1 economy. One major market-based channel is trade in high-technology goods and services. Imported capital goods and technological inputs can directly improve productivity by being placed into production processes. A second is foreign direct investment (FDI) through multinational enterprises (MNEs), which tend to transfer to their subsidiaries newer and more productive technological information (Markusen, 2002). Yet a third is technology licensing, which typically involves the transfer of production or distribution rights, protected by some combination of IPRs, and the associated technical information and know-how. In this context patents, trade secrets, copyrights, and trademarks serve as direct means of information transfer. Licensing of IPRs is overwhelmingly performed via voluntary contracts. However, governments may on occasion issue a compulsory license. Also important is the cross-border movement of engineers and technicians who transfer knowledge. Evidence from patent citations suggests that there is substantial diffusion through this channel (Hovhannisyan and Keller, 2015). There are also important non-market means of technology diffusion. The first is imitation, involving efforts to learn the technological or design secrets of an incoming technology, whether by product inspection, reverse engineering, or another task. Imitators pay no compensation to the technology owner, making this an attractive form of learning. However, imitation can be costly and divert investment from local innovation, so its full impacts on development are not straightforward. A related form of non-market diffusion is for technical and managerial personnel to take technical information to a rival firm, which can be particularly significant in industries and locations where cross-fertilization of knowledge is important. Firms also access technology through reading patent applications, which, in principle, offer enough information that a skilled person should be able to use them to invent competing products that do not infringe the original claims. Patents therefore provide both a direct vehicle of technology transfer, through FDI and licensing, and an indirect form through inspection and experimentation. It is evident that one important factor determining how readily technologies may be diffused through these various channels is the scope of multiple IPRs. On the one hand, patents, trademarks, and enforceable contracts for licensed trade secrets can do much to reduce the information costs and uncertainty of market-based technology transfer (Yang and Maskus, 2001; Hoekman et al., 2005). On the other hand, if patents have extensive scope, say through broad claims and a ban on experimental use, they can greatly increase the costs of imitation. Similarly, rigorous trade-secrets protection against labor mobility and patent applications that fail to disclose useful technical information do not support much local diffusion. And, as always, the full effects depend on numerous conditioning factors. In this context, it is important again to consider the recent and most credible empirical evidence. Regarding patents as a source of technical change, Eaton and Kortum (1996) discovered in an elegant structural approach that the bulk of productivity growth in smaller and less technologically advanced Organisation for Economic Co-operation and Development (OECD) countries came from having foreign inventors patent in their economies, resulting in related technology spillovers. This result likely would hold in small developing nations, which overwhelmingly remain net importers of technology, so long as they build the needed technical capacity to adopt and improve such technologies. Indeed, there is direct evidence of this possibility from East Asian developing economies (Hu and Jaffe, 2003). Citations listed in patents awarded to Korean and Taiwanese inventors

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Key analytical results from economics  667 by the United States Patent and Trademark Office suggested that innovators in both countries discerned and mastered considerable information from recent Japanese and US inventions. Further, there are increasing citations across patents in East Asia, indicating an expanding regionalization of knowledge flows (Hu, 2009). The major channels of technology transfer include trade, investment, and licensing contracts, raising the question of how these flows to developing economies are affected by IPRs. This question supports an extensive literature that, while pointing to some ambiguities, generally finds a positive relationship among emerging and middle-income countries. For example, in the first study of the trade impacts of TRIPS reforms, Ivus (2010) analysed the growth of high-technology exports from 24 OECD countries to 55 developing countries. Taking the 18 countries with relatively larger policy reforms post-TRIPS as the treatment group, she found that high-technology exports to those nations grew significantly faster than low-technology exports after 1994. Her estimates suggested that the rise in the GP index in this period increased the value of OECD exports of patent-sensitive goods to those countries by 8.6 percent. A more recent study finds strong evidence that such reforms also raise the exports of high-technology goods from middle-income economies (Maskus and Yang, 2018). Regarding FDI, available evidence also points to positive impacts of patent rights in developing countries. For example, increases in the GP index were a significantly positive determinant of the FDI location decisions of US multinational firms between 1995 and 2000 (Nunnenkamp and Spatz, 2004). Similarly, the extent and enforcement of patents in Eastern European and former Soviet Union economies positively affected the decisions of European multinational firms to locate production facilities in those countries (Smarzynska Javorcik, 2004). Similar evidence was found in Chinese provinces (Du et al., 2008). Intellectual property protection could affect multiple activities of multinational firms. One prominent study analysed the impacts on licensing of US parents with affiliates after patent-law changes in 16 developing economies (Branstetter et al., 2006). The authors found that royalty payments to parents rose by 34 percent on average, mostly reflecting an increased volume of technology sold rather than higher royalty charges. There was also a significant increase in R&D investments at local subsidiaries. Both of these effects, which were much stronger for companies in high-technology industries, implied a substantial shift to reforming economies in the use and development of new technologies. In a later study the authors related various measures of affiliate activity in hightechnology US multinational companies to patent reforms (Branstetter et al., 2011). There were significantly positive increases after patent reforms in affiliate sales, net plant and equipment, and employee compensation. Further, they found that value added in local competing firms rose significantly, especially in technology-intensive sectors. The preferred estimates indicated that there was an average increase of 20 percent in the local industries of reforming economies. There was also strong evidence that firms in these countries expanded the range (‘extensive margin’) of their exports to the United States after patent rights were broadened. These results run counter to concerns that stronger IPRs would shut down domestic enterprises. Rather, these policies seem to encourage growth in the most competitive local firms. Again, these findings related to reforms in larger and middle-income economies and there remains no evidence about whether they would apply in smaller and poorer developing countries.

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668  Research handbook on the economics of IP law volume 1 To summarize, the best available evidence supports the claim that patent reforms have positive effects on inward technology transfer through market-based channels. They attract foreign patents, though there is little evidence of a domestic innovation gain for some years. They raise imports of high-technology goods and may also stimulate export growth. Stronger IPRs expand the local activities of multinational firms, while increasing licensing to both affiliated and unaffiliated parties. They particularly stimulate these responses among high-technology firms. While these are important benefits, the conclusions come with major qualifications. First, to date, these impacts were found only in larger and middle-income countries. There is little evidence of such effects in the poorest and smallest developing economies, where patents are not of much relevance for technology transfer or industrial development. Moreover, these positive impacts are subject to important threshold effects in the levels of income and education. Second, the fact that international activities expand does not necessarily imply a stimulus to domestic production. Local firms may have to change product lines or close down if they cannot adapt to the new competitive environment post-reforms, a possibility about which we have little systematic evidence. A final major qualification is that the evidence reviewed above offers insights only on issues where extensive data exist, which overwhelmingly means such market transactions as exports, investment, and patenting. Adopting stronger IPRs to support such direct and indirect technology markets is surely going to raise such activity, at least in countries that can absorb new information. The subsequent spillovers into local productivity growth can be substantial (Keller, 2010). These potential gains reflect just one side of a complex process, however. Stronger IPRs also may diminish prospects for imitation and learning from non-market channels, removing a central channel for poorer countries to move up the critical lower rungs of the technology ladder. Indeed, it is difficult to find historical evidence of a now-developed economy that did not take considerable advantage of weak technology protection in the early and middle stages of its development.14 Unfortunately, systematic data do not exist for studying this fundamental claim because the counterfactual scenarios cannot readily be measured without extensive industrial surveys applied consistently over time in a selection of poor countries, combined with analysis of exogenous events affecting imitation prospects. We are left far short of a balanced depiction of the full roles of IPRs and economic development. This is the primary shortcoming in economic analysis of intellectual property reforms, international technology flows, and innovation, one that needs to be addressed. In place of that lacuna, however, the literature does offer some important indirect observations about IPRs and technology diffusion. Specifically, since the seminal work of Zvi Griliches (1957), agricultural economists have studied how rapidly new crop varieties are diffused and adopted across countries, based on numerous economic and technical factors. Regarding intellectual property, two thought-provoking studies considered the global diffusion of different major crops from 1960–2000 (Goeschl and Swanson,

14   Examples of those which did are many, including the United States, Switzerland, Japan, South Korea, and China, albeit with different characteristics in each case. For a good historical overview of such experiences, see the chapters in Odagiri et al. (2010).

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Key analytical results from economics  669 2000; Swanson and Goeschl, 2014). An essential difference between crops is that corn and maize hybrids had automatic ‘use restriction technologies’ because they produced sterile seeds and could not be replanted, while others did not have this feature. Here, the ‘natural experiment’ was that such hybrids were fully protected by a technological form of restriction on diffusion, while others may have been protected by weaker legal regimes of plant breeders’ rights or patents, which varied across countries. They found that the strong protection form produced higher levels of technological growth in those industries among primarily developed economies, but materially impeded the diffusion of innovations to developing countries. Thus, to the extent that corn hybridization can proxy for strongly exclusive rights, this result suggests that enhanced IPRs may indeed slow the progress of lower-income economies in approaching the technological frontier.

IV.  PATENTS AND ACCESS TO MEDICINES While studying the interplay between patents and innovation is important, it is hardly the only relevant development issue regarding IPRs. More specific issues arise in considering specific economic and cultural sectors. Full chapters could be devoted to the development aspects of IPRs in agriculture, biogenetic resources, environmental technologies, health, education, information technology, and software and digital goods. Indeed, all are the subject of extensive qualitative analyses, often by interested observers.15 Again, however, systematic evidence from which to draw analytical lessons is largely missing. One key exception is pharmaceuticals, where issues of patents, market power, pricing, and access to medicines loom large. The primary concern in developing economies as they have implemented stronger patent rules is the potential for sharply increased prices, diminished generic competition, and reduced availability of new drugs. Experience in the United States and other developed economies shows that generic products entering at the end of a patent take major shares of the market and drive prices down toward marginal costs (Frank and Salkever, 1997; Reiffen and Ward, 2005). There is also the possibility that originator firms suffer large market-share losses upon entry but the prices of their drugs actually rise due to brand loyalty built under patent protection. As developing countries register and enforce new drug patents the time of such entry likely will be delayed, perhaps considerably. Generic companies may close down, consolidate or be taken over, generating even less competition and potentially longer waits before new medicines are imitated. Thus, new patent regimes seem likely to raise significant challenges for both health and competition authorities in developing economies. Recent economic analysis has shed light on a few fundamental issues.16 First, consider three detailed studies of potential impacts of new patents on drug prices in India, a 15   A partial list of comprehensive books would include Maskus and Reichman (2005), Melendez-Ortiz and Roffe (2009), and Gervais (2007). 16   There are other critical issues, such as the need for additional public funding to meet global needs for R&D in neglected diseases, the scope for advanced market commitments in new drugs, and the effectiveness of exhaustion-based policy regimes to encourage price differentiation across markets at different income levels. There is little in the way of serious empirical analysis of these matters and I leave them aside to conserve space in this chapter. See Maskus (2012) for a discussion.

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670  Research handbook on the economics of IP law volume 1 country with very low prices prior to its new patent law in 2005, extensive data, and a deep generic industry. A study of data before 2005 suggested there was potential for considerable price increases (Chaudhuri et al., 2006). The authors developed a structural econometric model of the Indian market for quinolones, a family of broad-spectrum antibiotics, such as ciprofloxacin. Using monthly data on prices and sales by firm from January 1999 through December 2000, they estimated a demand system permitting drug substitution across competing products. Using the estimated elasticities, they simulated the impacts of patent protection by removing domestic competition in some or all of these drugs. Thus, eliminating just domestic ciprofloxacin would increase prices of three foreign competing drugs by up to 315 percent and also increase prices of related domestic molecules by more than 100 percent. Removing domestic competition in all four quinolones would raise foreign prices by a factor of between four and six. The associated Indian welfare losses were predicted to be $156 million to $400 million per year. However, the rise in profits to foreign pharmaceutical companies was estimated at just $53 million, suggesting that the large static welfare loss would not be offset by comparable dynamic incentives for innovation. A more comprehensive analysis used data in India for 155 drugs in five therapeutic groups, including many products with a foreign presence (Dutta, 2011). Using data from 2001–03, the author estimated a structural model of the market, accounting for a number of important demand and cost features. The model was simulated to compute the potential price effects of providing patents in the 40 goods that had a foreign presence in India and did not face price controls. On average those drug prices would go up by 18 percent, though the effects ranged from 3.5 to 80 percent. However, in another simulation where some patents were accompanied by the elimination of price controls, the price increases were considerably larger. Overall, the author computed a consumer welfare loss of around $380 million per year, with perhaps 8.5 million patients choosing not to buy the drugs. Thus, simulation analyses based on pre-patent prices predicted notable price hikes in India. However, a more recent study considered impacts on actual prices after the 2005 patent law and found far smaller impacts (Duggan et al., 2016). The authors developed a database of 6,000 products in approximately 1,000 molecules, around 1/3 of which were afforded patents by late 2011. They found a modest impact of patents, with prices going up an average of 3 percent. Much of this increase came in newer molecules, which received stronger protection in the law. This small price effect, however, likely was related to competition: Indian law permitted existing firms that competed in newly patented drugs to continue to produce under license. For those molecules with just one producer, prices rose an average of 20 percent. The results point strongly toward the importance of other policies, specifically price regulation and compulsory licensing where possible, to limit the price impacts of patents. This logic is reinforced in the only study to date of the drug-price effects of TRIPSrelated pharmaceutical patent laws across many countries (Kyle and Qian, 2014). The sample covered 60 nations, about 2/3 of which were developing or transition economies, permitting the authors to exploit changes in the implementation timing of such laws among the latter group. They found that patented drugs have higher average prices than those not patented, as expected. However, the price premiums associated with drugs patented after TRIPS compliance in the middle-income countries were modest and perhaps

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Key analytical results from economics  671 negative in the poor nations. The authors attributed this outcome to the possible impacts of price controls and other regulations, though they did not test this claim. Another issue that has attracted attention is the impact of patent availability on the willingness of pharmaceutical companies to launch their new products in different markets. Two recent studies are particularly noteworthy and both point to the same basic conclusion. The first studied the timing of launches of 642 new drugs in 76 countries over 1983–2002, thus covering a period before most TRIPS changes were made (Cockburn et al., 2016). Controlling for a variety of endogeneity concerns, the authors found that launches were accelerated in countries with longer and broader patents and in countries with health policy institutions and demographic factors that favored profitability. Launches were delayed by price regulations. The second study, undertaken in the TRIPS era, found that the absence of patents significantly reduced the likelihood of a new drug entering a market, while patent availability encouraged faster launches (Kyle and Qian, 2014). A third critical issue for development purposes is whether the adoption in developing countries of pharmaceutical patents and minimum protection standards, as set out in TRIPS, is likely to incentivize more R&D into the particular medical needs of poor nations. The new regime’s potential for such impact was a key promise of TRIPS advocates and deserves serious scrutiny. It may be that implementation is too new, and the potential impacts on R&D too delayed by time lags, to reach any conclusions at this point. However, two observations may be made. First, there is one preliminary study of how patent-law changes affected R&D investments from 1990 to 2003 (Kyle and McGahan, 2012). The fact that TRIPS compliance occurred at different times and across countries with different relative disease burdens allowed the authors to study how global diseasespecific R&D investments (measured as clinical trials) were affected, distinguishing global diseases from ‘neglected diseases’ of greatest interest in poor regions. The authors found no indications of an increase in clinical trials in neglected diseases after TRIPS, although there were significant increases in investments in global maladies with a large presence in high-income countries. Second, early analysis suggests that major Indian pharmaceutical companies sharply increased R&D and product development in the period surrounding the 2005 patent law (Arora et al., 2008). That country is now among the largest global suppliers of lower-cost drugs and a number of global pharmaceutical companies have established R&D facilities in India. Thus, the industry is growing and consolidating, perhaps as a result of patenting opportunities. However, the investments to date do not seem to have focused on developing new drugs for neglected diseases. To summarize, the evidence on patents and pricing power in developing nations is scarce but the emerging evidence points to mixed messages. On the one hand, newly protected patents in countries with limited competition may support markedly higher prices, though this impact can be effectively countered with well-designed price regulations and licensing regimes. On the other, countries with weak patent scope and extensive price controls suffer lengthy delays before new products arrive in their markets. Thus, policy institutions matter a great deal for access to medicines and health authorities have deep tradeoffs to consider in the wake of TRIPS. Finally, there is little evidence to date that the globalized patent regime is raising incentives for private R&D into the diseases of poor countries. A solution for this last issue, therefore, remains in the purview of public authorities and foundations.

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672  Research handbook on the economics of IP law volume 1

V.  CONCLUDING REMARKS It is difficult to characterize the roles IPRs may play in the economic development process, given the great complexity of the issue and the variability of potential impacts across sectors and time. Broadly speaking, the selection of intellectual property regimes is endogenous. We would expect lower-income economies with limited technological capabilities to adopt weaker systems with broad limitations and exceptions. As countries get richer and move into more advanced manufacturing and service sectors interests emerge in deeper protection. Two immediate implications are that international attempts to harmonize IPRs at TRIPS levels or even higher TRIPS-Plus standards may be suboptimal for many participants. A first-order issue for economists going forward is to investigate whether emerging impacts are harming or helping development prospects, and under what circumstances. Despite this limited knowledge, economic analysis has made progress in understanding some important development issues and their relationship to IPRs, especially patent laws. In brief, and again noting that circumstances are highly variable across countries, the following conclusions may be drawn. First, stronger global patents do seem to stimulate marginally more R&D investments, but such effects are concentrated in the developed and higher-income emerging economies. There is no evidence that measurable innovation is growing in lower-income countries, nor is there any suggestion that the new regime has increased private R&D incentives in important products for those markets. Second, there are strong indications that enhanced IPRs encourage more and higherquality technology diffusion through market-based channels, including trade, FDI, and licensing. The associated spillover gains in domestic productivity should offer a welcome long-term boost to recipient economies. Again, however, this impact is prevalent only in larger and middle-income countries that have a sound basis of intermediate technological skills and education, which are important for absorbing and improving these technologies. Technology transfer to lower-income economies in the TRIPS era has not expanded significantly, raising numerous questions about the reasons for this lack of responsiveness. Moreover, there remains no systematic evidence about how IPRs may be limiting the scope for learning and diffusion through non-market means, including reverse engineering and imitation. This is another first-order area for additional research. Finally, there are many important questions that could not be covered here and about which we have inadequate information. For example, how are creativity and innovation sustained in poor economies with large informal sectors, and is there any real role for IPRs in that context? If product counterfeiting and unauthorized copying of digital products limit development of new products and services in developing economies, how effective are trademarks and copyrights in addressing such problems, and at what social cost? Does the need to invest public resources in administering and enforcing a TRIPS-compliant IPRs regime divert enough scarce talent to retard growth prospects? Most importantly, what are the key thresholds, in terms of education, science, infrastructure, and factor markets, that developing countries need to achieve before patents and other IPRs help improve the dynamic efficiency of developing countries? There is a large research agenda remaining.

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Key analytical results from economics  673

REFERENCES Allred, Brent B., and Walter G. Park. 2007a. ‘The Influence of Patent Protection on Firm Innovation Investment in Manufacturing Industries,’ 13 Journal of International Management 91–109. Allred, Brent B., and Walter G. Park. 2007b. ‘Patent Rights and Innovative Activity: Evidence from National and Firm-Level Data,’ 38 Journal of International Business Studies 878–900. Arora, Ashish, Lee Branstetter, and Chirantan Chatterjee. 2008. ‘Strong Medicine: The Impact of Patent Reform on the Indian Pharmaceutical Industry,’ Working Paper, Carnegie-Mellon University, presented at National Bureau of Economic Research Workshop on Location Decisions of Multinational Pharmaceutical Enterprises, Savannah, Georgia. Boldrin, Michaele, and David K. Levine. 2008. Against Intellectual Monopoly. Cambridge: Cambridge University Press. Branstetter, Lee, Ray Fisman, and C. Fritz Foley. 2006. ‘Do Stronger Intellectual Property Rights Increase International Technology Transfer? Empirical Evidence from US Firm-Level Patent Data,’ 121 Quarterly Journal of Economics 321–49. Branstetter, Lee, Ray Fisman, C. Fritz Foley, and Kamal Saggi. 2011. ‘Does Intellectual Property Rights Reform Spur Industrial Development?,’ 83 Journal of International Economics 27–36. Chaudhuri, Shubham, Pinelopi Goldberg, and Panle Jia. 2006. ‘Estimating the Effects of Global Protection of Pharmaceuticals: A Case Study of Quinolones in India,’ 96 American Economic Review 1477–513. Chen, Qiang. 2008. ‘The Effect of Patent Laws on Invention Rates: Evidence from Cross-Country Panels,’ 36 Journal of Comparative Economics 694–704. Chen, Yongmin, and Thitima Puttitanun. 2005. ‘Intellectual Property Rights and Innovation in Developing Countries,’ 78 Journal of Development Economics 474–93. Cimoli, Mario, Giovanni Dosi, Keith E. Maskus, Jerome H. Reichman, and Joseph E. Stiglitz. 2014. ‘Innovation, Technical Change, and Patents in the Development Process,’ in Mario Cimoli, Giovanni Dosi, Keith E. Maskus, Ruth L. Okediji, Jerome H. Reichman, and Joseph E. Stiglitz, eds., Intellectual Property Rights: Legal and Economic Challenges for Development. Oxford: Oxford University Press. Cockburn, Iain M., Jean O. Lanjouw, and Mark Schankerman. 2016. ‘Patents and the Global Diffusion of New Drugs,’ 106 American Economic Review 136–64. Cohen, Wesley M., Richard R. Nelson, and John P. Walsh. 2000. ‘Protecting their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not),’ Cambridge, MA: National Bureau of Economic Research Working Paper 7552. European Commission. 2016. Intellectual Property Rights Intensive Industries Contribution to Economic Performance and Employment in the European Union. Brussels: Office for Harmonization in the Internal Market, accessed at 9 April 2019, http://www.europeantrademark.it/Files/intellectual_propery_rights_intensive_industries_study_ epo_ohim.pdf. Du, Julian, Yi Lu, and Zhigong Tao. 2008. ‘Economic Institutions and FDI Location Choice: Evidence from US Multinationals in China,’ 36 Journal of Comparative Economics 412–29. Duggan, Mark, Craig Garthwaite, and Aparajita Goyal. 2016. ‘The Market Impacts of Pharmaceutical Product Patents in Developing Countries: Evidence from India,’ 106 American Economic Review 99–135. Dutta, Antara. 2011. ‘From Free Entry to Patent Protection: Welfare Implications for the Indian Pharmaceutical Industry,’ 93 Review of Economics and Statistics 160–78. Eaton, Jonathan, and Samuel Kortum. 1996. ‘Trade in Ideas: Patenting and Productivity in the OECD,’ 40 Journal of International Economics 251–78. Fagerberg, Jan, Martin Srholec, and Bart Verspagen. 2010. ‘Innovation and Economic Development,’ in Bronwyn H. Hall and Nathan Rosenberg, eds., Handbook of the Economics of Innovation: Volume 1. Amsterdam, Netherlands: Elsevier-North Holland Publishing Co. Frank, Richard G., and David S. Salkever. 1997. ‘Generic Entry and the Pricing of Pharmaceuticals,’ 6 Journal of Economics and Management Strategy 75–90. Gervais, Daniel J., ed. 2007. Intellectual Property, Trade and Development: Strategies to Optimize Economic Development in a TRIPS-Plus Era. Oxford: Oxford University Press. Ginarte, Juan Carlos, and Walter G. Park. 1997. ‘Determinants of Patent Rights: A Cross-National Study,’ 26 Research Policy 283–301. Goeschl, Timo, and Timothy Swanson. 2000. ‘Genetic Use Restriction Technologies and the Diffusion of Yield Gains to Developing Countries,’ 12 Journal of International Development 1159–78. Griliches, Zvi. 1957. ‘Hybrid Corn: An Exploration in the Economics of Technical Change,’ 25 Econometrica 501–22. Grossman, Gene M., and Elhanan Helpman. 1994. ‘Protection for Sale,’ 84 The American Economic Review 33–850. Grossman, Gene M., and Edwin L.-C. Lai. 2004. ‘International Protection of Intellectual Property,’ 94 American Economic Review 1635–53.

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674  Research handbook on the economics of IP law volume 1 Hoekman, Bernard, Keith E. Maskus, and Kamal Saggi. 2005. ‘Transfer of Technology to Developing Countries: Unilateral and Multilateral Policy Options,’ 33 World Development 1587–602. Hovhannisyan, Nune, and Wolfgang Keller. 2015. ‘International Business Travel: An Engine of Economic Growth?,’ 20 Journal of Economic Growth 75–104. Hu, Albert G. 2009. ‘The Regionalization of Knowledge Flows in East Asia: Evidence from Patent Citations Data,’ 37 World Development 1465–77. Hu, Albert G., and Adam B. Jaffe. 2003. ‘Patent Citations and International Knowledge Flow: The Cases of Korea and Taiwan,’ 21 International Journal of Industrial Organization 849–80. Idris, Kamal. 2002. Intellectual Property: A Power Tool for Economic Growth. Geneva, Switzerland: World Intellectual Property Organization. Ivus, Olena. 2010. ‘Do Stronger Patent Rights Raise High-Tech Exports to the Developing World?,’ 81 Journal of International Economics 38–47. Keller, Wolfgang. 2004. ‘International Technology Diffusion,’ 42 Journal of Economic Literature 752–82. Keller, Wolfgang. 2010. ‘International Trade, Foreign Direct Investment, and Technology Spillovers,’ in Bronwyn H. Hall and Nathan Rosenberg, eds., Handbook of the Economics of Innovation: Volume 1. Amsterdam, Holland: Elsevier-North Holland. Kim, Yee Kyoung, Keun Lee, and Walter G. Park. 2012. ‘Appropriate Intellectual Property Protection and Economic Growth in Countries at Different Levels of Development,’ 41 Research Policy 350–75. Kyle, Margaret K., and Anita M. McGahan. 2012. ‘Investments in Pharmaceuticals Before and After TRIPS,’ 94 Review of Economics and Statistics 1157–72. Kyle, Margaret K., and Yi Qian. 2014. ‘Intellectual Property Rights and Access to Innovation: Evidence from TRIPS,’ Cambridge, MA: National Bureau of Economic Research, Working Paper 20799. Lai, Edwin L.-C., and Isabel K.M. Yan. 2013. ‘Would Global Patent Protection Be Too Weak Without International Coordination?,’ 89 Journal of International Economics 42–54. Lai, Edwin L.-C., Samuel Wong, and Isabel K. Yan. 2008. ‘International Protection of Intellectual Property: An Empirical Investigation,’ Hong Kong University of Science and Technology, manuscript. Lerner, Josh. 2002. ‘Patent Protection and Innovation Over 150 Years,’ Cambridge MA: National Bureau of Economic Research, Working Paper 8977. Markusen, James R. 2002. Multinational Firms and the Theory of International Trade. Cambridge, MA: MIT Press. Maskus, Keith E. 2000. Intellectual Property Rights in the Global Economy. Washington DC: Peterson Institute for International Economics. Maskus, Keith E. 2012. Private Rights and Public Problems: The Global Economics of Intellectual Property in the 21st Century. Washington DC: Peterson Institute for International Economics. Maskus, Keith E., and Christine McDaniel. 1999. ‘Impacts of the Japanese Patent System on Productivity Growth,’ 11 Japan and the World Economy 557–74. Maskus, Keith E., and Mohan Penubarti. 1995. ‘How Trade-Related Are Intellectual Property Rights?,’ 39 Journal of International Economics 227–48. Maskus, Keith E., and Jerome H. Reichman, eds. 2005. International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime. Cambridge: Cambridge University Press. Maskus, Keith E., and Lei Yang. 2018. ‘Patent Rights, Access to Technologies, and the Structure of Exports,’ 51 Canadian Journal of Economics 483–509. Melendez-Ortiz, Ricardo, and Pedro Roffe, eds. 2009. Intellectual Property and Sustainable Development Agendas in a Changing World. Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Moser, Petra. 2005. ‘How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World’s Fairs,’ 94 American Economic Review 1214–36. Moser, Petra. 2013. ‘Patents and Innovation: Evidence from Economic History,’ 27 Journal of Economic Perspectives 23–44. Moser, Petra, and Alessandra Voena. 2012. ‘Compulsory Licensing: Evidence from the Trading with the Enemy Act,’ 102 American Economic Review 396–427. Nunnenkamp, P., and J. Spatz. 2004. ‘Intellectual Property Rights and Foreign Direct Investment: A Disaggregated Analysis,’ 140 Review of the World Economy 393–414. Odagiri, Hiroyuki, Akira Goto, Asushi Sunami, and Richard R. Nelson, eds. 2010. Intellectual Property Rights, Development, and Catch-Up. Oxford: Oxford University Press. Ordover, Janusz A. 1991. ‘A Patent System for Both Diffusion and Exclusion,’ 5 Journal of Economic Perspectives 43–60. Park, Walter G. 2008a. ‘International Patent Protection: 1960–2005,’ 37 Research Policy 761–6. Park, Walter G. 2008b. ‘Intellectual Property Rights and International Innovation,’ in Maskus, Keith E., ed., Intellectual Property, Growth and Trade: Frontiers of Economics and Globalization. Amsterdam, Netherlands: Elsevier North-Holland. Pouris, A., and R. Inglesi-Lotz. 2011. The Economic Contribution of Copyright-Based Industries in South Africa.

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Key analytical results from economics  675 Geneva, Switzerland: World Intellectual Property Organization, accessed at 9 April 2019, http://www.thedti. gov.za/industrial_development/docs/Economic_Contribution.pdf. Qian, Yi. 2007. ‘Do National Patent Laws Stimulate Domestic Innovation in a Global Patenting Environment? A Cross-Country Analysis of Pharmaceutical Protection, 1978–2002,’ 89 Review of Economics and Statistics 436–53. Reiffen, David, and Michael R. Ward. 2005. ‘Generic Drug Industry Dynamics,’ 87 The Review of Economics and Statistics 37–49. Romer, Paul M. 1990. ‘Endogenous Technological Change,’ 98 Journal of Political Economy S71–102. Rosen, William A. 2010. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York, NY: Random House. Schneider, Patricia Hingo. 2005. ‘International Trade, Economic Growth and Intellectual Property Rights: A Panel-Data Study of Developed and Developing Countries,’ 78 Journal of Development Economics 529–47. Schumpeter, Joseph A. 1942. Capitalism, Socialism and Democracy. New York, NY: Harper and Brothers. Scotchmer, Suzanne. 2004. ‘The Political Economy of Intellectual Property Treaties,’ 20 Journal of Law, Economics and Organization 415–37. Smarzynska Javorcik, Beata. 2004. ‘The Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: Evidence from Transition Economies,’ 48 European Economic Review 39–62. Stiglitz, Joseph E., and Andrew Charlton. 2005. Fair Trade for All: How Trade Can Promote Development. Oxford: Oxford University Press. Swanson, Timothy, and Timo Goeschl. 2014. ‘The Distributive Impact of Intellectual Property Regimes: A Report from the “Natural Experiment” of the Green Revolution,’ in Mario Cimoli, Giovanni Dosi, Keith E. Maskus, Ruth L. Okediji, Jerome H. Reichman, and Joseph E. Stiglitz, eds., Intellectual Property Rights: Legal and Economic Challenges for Development. Oxford: Oxford University Press. World Bank. 2002. Global Economic Prospects and the Developing Countries. Washington DC: World Bank. Yang, Guifang, and Keith E. Maskus. 2001. ‘Intellectual Property Rights, Licensing, and Innovation in an Endogenous Product Cycle Model,’ 53 Journal of International Economics 169–87.

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Index Abramowicz, M. 51, 121, 272, 273, 293, 332, 350–75, 379, 384, 620 Abramson, B. 382, 393 abstraction levels 177, 178, 388, 558, 559, 560, 561, 573 Abulude, S. 589, 597 Adams, W. 382 Adler, A. 100, 102, 104, 106 Adler, J. 355, 372 advance purchase contracts 603 adverse possession doctrine 18, 22, 431, 446–7 aggressive patent assertions 38–9 Aghion, P. 232 Aitken, H. 195 Akerlof, G. 126 Akpotaire, U. 608 Alfano, M. 88 Allison, J. 41, 123, 216, 387, 390, 393, 417, 418 allocative efficiency 288, 290, 385–6, 595, 614 Allred, B. 664 Alschuler, A. 86 Altman, R. 569 Amabile, T. 394, 563 Ames, J. 447 Anand, B. 335 Anderson, C. 595, 603, 604, 622 Anderson, J. 233, 443, 475, 476, 481, 483 Anderson, T. 54, 413 anti-competitive effects 35, 37, 234, 236–41, 245–53, 255, 622 see also competition anticommons, transaction costs, and patent aggregators 27–46, 242 anticompetitive effects 35, 37 bundling of rights 28 clinical genetic tests 34 copyright ownership fragmentation 29 double marginalization problem 29, 35 downstream product development, impact on 33–5, 38–9 fragmented ownership of intellectual property (IP) rights 28 future research 31 information asymmetries 28 litigation costs 36 patent aggregators, rise of 35–7 patent portfolios and enhanced bargaining position 35–6

patent proliferation issues 34 patent trolls 36, 37 patented genes in genetic tests 30–32, 38 and privatization 27 survey results and form of questions 31 tragedy of the anticommons 27, 28–9 upstream research impact 30–33 see also commons anticommons, transaction costs, and patent aggregators, risk mitigation changes 37–42 aggressive patent assertions 38–9 ambiguous language use and future innovation risk 41 claim interpretation issues 40–41 doctrine of equivalents restrictions 41 Federal Circuit invalidation of broad university patents 39 information costs 40–41, 42 injunctions, limits on 39–40 and patent aggregation 42 patent challenges, lowering costs of 41–2 publicly available information about patent ownership, legal changes suggestion 41 upstream rights and assertions, limits on 38–9 utility requirement for patentability 38 Anton, J. 135, 428 Aoki, M. 642 application program interface (API) protection 160, 162–3, 167, 172, 175–6, 179–80, 189–91, 218–19 appropriability issues network effects 166, 167, 173, 188, 211, 218, 220 open innovation and ex ante licensing 338–9, 341 product differentiation 270, 271 uniformity cost reduction 379, 381, 391, 392, 394, 395–7 Arai, K. 232 Archibald, G. 264, 266, 269 Areeda, P. 210, 237, 241, 243, 246, 251, 252, 253 Arewa, O. 587 Armond, M. 133 Armstrong, M. 287 Arora, A. 122, 333, 334, 338, 671 Arora, S. 52

677

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678  Research handbook on the economics of IP law volume 1 Arrow, K. 6, 120, 232, 331, 332, 334–5, 378, 385, 427–8, 553 Arsenault, A. 619 Article III trial courts 481, 483, 486 Aschauer, D. 552 Athique, A. 583, 590, 591, 605–6, 617 Aufderheide, P. 29, 529–30, 533 Ayres, I. 130, 134, 388, 446 Bagley, M. 395 Bain, J. 275 Baker, E. 282, 292, 585, 597, 613, 618, 620, 621 Baker, J. 210, 292, 395 Bakker, G. 356 Bakos, Y. 134, 300, 301 Baldwin, C. 52, 332, 336, 339, 340, 341, 342 Balganesh, S. 102, 291, 409, 412, 508–25 Ball, G. 483 Band, J. 186 Banerjee, Abhijit 650, 651, 652 Banerjee, Arpan 589 Banks, J. 113 Bar-Gill, O. 125, 292, 334, 335 Barak, B. 52 Barnes, D. 274, 275 Barnett, J. 28, 29, 35, 37, 56, 61, 66, 166, 212, 313, 334, 335, 385, 396, 411, 448, 563, 566, 595, 611, 617 Barro, R. 639 Barron, A. 565 Barros, B. 7 Barrot, P. 606 Basberg, B. 637 Baseman, K. 164 Battacharyya, S. 324 Baumol, W. 269 Baxter, W. 293 Beath, J. 266, 270 Bebchuk, L. 411 Beckles, T. 529–30 Beebe, B. 103, 110, 418 Beggan, J. 89 Bell, A. 17, 391 Bell, T. 287, 291, 414 Belleflamme, P. 232 Benesch, C. 110 Benjamin, S. 480, 483 Benkler, Y. 66, 185, 292, 313, 330, 333, 338, 340, 341, 342, 551–2, 553, 554, 557, 560, 561, 562, 563, 567, 618, 620 Berkowitz, M. 390 Berners-Lee, T. 185 Bernheim, B. 412 Bernstein, L. 313, 528–9, 542 Berry, S. 273

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Beschorner, P. 272 Besen, S. 134, 164, 272, 290, 296, 301, 498 Bessen, J. 4, 10, 16, 35, 36, 38, 40, 49, 59, 137, 139–40, 212, 335, 384, 396, 416, 417, 439, 446, 447, 448 best practice statements, custom role 532–3, 543–4, 545 Bhaskar, V. 269, 385 Biagioli, M. 314 Bibb, M. 19 bilateral (ex ante) license 333–6 Bishop, R. 266 Bitzer, J. 395 Bjornstad, D. 29 Blackstone, W. 527, 528, 543 Blair, R. 132, 135 blocking rights, innovation, cumulative innovation 141–2, 148 Bogers, M. 337 Bohannan, C. 205, 206, 232, 234, 235, 237, 249, 250, 252, 255, 256 Boldrin, M. 234, 379, 417, 662 Bonanno, G. 269 Bone, R. 411, 418 Bontis, N. 570 Booth, G. 591, 607, 608, 613, 625 Borenstein, S. 269, 270 Bork, R. 299 Bose, D. 600 Bouchard, R. 395 Boudreau, K. 337 Bourdieu, P. 552 Bowman, W. 237, 238, 292, 296 Boyle, J. 5, 19, 84, 102, 291, 292, 553, 560, 567, 569, 586 Bracha, O. 263, 273, 378, 382, 384–5, 411, 594, 620 Braithwaite, J. 384 Brander, J. 269 Branscomb, L. 552 Branstetter, L. 664, 667 Bratton, W. 523 Brauneis, R. 457 Brennan, T. 356, 373 Bresnahan, T. 199 Breyer, S. 5, 83, 398–9, 603, 609 Bridy, A. 409, 415 Briggs, J. 213 Broache, A. 439 Bronsteen, J. 103, 105, 106, 107, 108, 109, 114 Brown, D. 88 Brown, E. 89 Brown, R. 274 Browne, J. 543 Brudner, A. 510

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Index  679 Bruni, L. 110 Brunt, L. 353–4 Brynjolfsson, E. 300 Buccafusco, C. 81, 98–118, 203, 313, 316 Buchanan, J. 28, 273 Bud, A. 587, 589, 626 Budish, E. 81 bundling, and price discrimination 285–6, 297–300 Burk, D. 57, 108, 124, 141, 235, 334, 335, 381, 383, 384, 385, 386, 387, 391, 393, 394, 426–7, 474, 478–9, 481, 483–4 Burrell, R. 353, 371 Burri, M. 618, 619, 622, 623 Burstein, M. 330–49, 355, 378, 385, 428, 463, 464, 484, 566 business method patents 143, 197–8, 201, 384, 392, 394–5 Butler, H. 298 Byrne, D. 325 Cadenas, H. 649 Cai, M. 146 Calabresi, G. 6, 134 Calandrillo, S. 359, 366, 367–8, 369, 370–71 Campbell-Kelly, M. 188 Canada, collective society definition 490 Carbone, J. 30 Cardozo, B. 510 Carlton, D. 299 Carniaux, M. 42 Carrier, M. 4, 5, 35, 51, 216, 384, 414 Carroll, J. 415 Carroll, M. 372–3, 377–406, 453 Carter, S. 527 Carver, B. 162, 184 Casey, A. 595 Cass, R. 100 Castells, M. 619 Caulfield, T. 32 Ceruzzi, P. 183 Chafee, Z. 61 Chamberlin, E. 263–4, 265, 266, 267, 274–5, 277 Chander, A. 4, 6 Chandler, A. 336 Chang, H. 137, 141 Chang, X. 232 Chang, Y. 54 channeling doctrines 122, 136, 150 Chari, V. 361 Charlton, A. 648, 657 Chaudhuri, S. 670 Che, Y.-K. 121 Chen, Q. 662

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Chen, Yeh-ning 134 Chen, Yongmin 659, 664 Chesbrough, H. 330, 336, 337, 338 Chiang, T.-J. 16, 19, 61, 439 Chien, C. 35, 83, 124, 339, 345–6, 416, 417, 436, 481 Chile, intellectual property law 649 China, creative development see under creative development and copyright, emerging industries in Global South Chisum, D. 173, 177, 183 Cho, M. 30, 34 Choi, J. 300 Chomsky, N. 88 Chon, M. 594, 618, 652 Chu, C. 477 Cimoli, M. 652, 661 Clancy, M. 357, 362 Clapes, A. 217 Clark, K. 52, 332 clearance culture, custom role 529–30, 532, 539, 540–41, 542 Coase, R. 14, 49, 250, 334, 361, 370, 385 Cockburn, I. 671 Cohen, J. 4, 57, 113, 291, 385, 387, 394, 414, 553, 557, 560, 563, 567, 595 Cohen, W. 31, 36, 332, 382, 389, 662 collaborative innovation, open innovation and ex ante licensing 333–45 collective licensing 458–9, 600–601 collective management 489–507 complementary works and substitutive works, difference between 500–501 consumers and product variety versus monetary incentive 499 and copyright 495, 499, 501, 503–5 delegation of authority to license 491–2 distribution to represented parties 493–4 economic analysis 494–503 efficiency measurement 495, 502–3 game theory model 496–7 individual works’ valuation 498–501 membership numbers and administrative costs 498–9 online notice-and-take-down system 504 and pricing 495, 501 proportional distribution issues 499–500 repertory price setting 492, 495–8 technology and online uses 503–5 transaction costs reduction 495, 501 user identification and licensing 492–3 willingness-to-pay model 497–8 collective-rights organizations 57, 58, 66 Collins, K. 50 Comanor, W. 274–5

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680  Research handbook on the economics of IP law volume 1 commercialization effects 51–2, 58, 59, 60, 61, 125, 128, 331–2, 336, 337–8, 368–9 common law 508–25 and copyright 513–14, 516, 520–21 and custom role 527–8, 536, 543 evolutionary approach 512–14 fair use doctrine 513–14, 516, 520 and federalism 521–3 freestanding 517, 518–20 future research 523, 524 interstitial 517–18, 519, 520–21 as judge-made law 514–16 as method of lawmaking 511–14, 518 and misappropriation doctrine 519 patent law’s doctrine of equivalents 521 precedent and stare decisis use 511–12 as state law 521–3 as substantive law 517–21 and technological development 513 trade secret law 519, 520 utility-maximization 515–16 commons 556–7, 561–2, 601–4 Creative Commons 149, 343, 460, 533 open source 148, 149–50, 162–3, 171, 185, 216, 460 semi-commons regime 56, 66, 559–60, 571–3 see also anticommons, transaction costs, and patent aggregators competition 231–61 anti-competitive effects 35, 37, 234, 236–41, 245–53, 255, 622 antitrust policy and IP policy, relationship between 235–40 and consumer welfare 235, 236 copying 233, 234, 243 copyright misuse 255 development cost factors 242–3 digital content duplication 243 doctrine of equivalents and patent law 238 economic growth 232, 242–3 and exclusionary practices 237, 239, 241–2, 245, 250, 251–3, 256 exclusivity rights 244, 245–6, 252, 254 exhaustion (first sale) doctrine 238, 246, 254 functionality protection limitations 256–7 industry structure and market position 233 and innovation 129, 233–4, 237 interbrand and intrabrand restraints 245–6 and market power 233, 235–6, 241–3, 244 network effects see network effects, competition policy non-patent IPRs 243 non-practicing patent holders 234 nonobvious subject matter and patent law 234, 236–7

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nonprice restrictions 245 patent aggregation and market power 242 patent misuse doctrine 238, 247, 255–6 patent pools 248–51 pay-for-delay settlements 239 political economy of intellectual property law 231–5 price-fixing 236, 238–9, 241, 243–4 producer involvement 235 product differentiation 242, 263–9, 272–4 standards-essential patents and FRAND licensing 242 tying arrangement 246–8, 250–51 vertical restraints 244–8 complementary products 159–60, 162, 164, 168, 183, 194, 269, 285–6, 297–300, 368, 500–501 compulsory licensing 57, 59, 60, 135, 148, 170, 253, 455 Conner, K. 134, 301 Connor, J. 239 consequentialism see under philosophical foundations of IP law consumers, effects on 107–12, 159–60, 161, 167, 235, 236, 266–8, 269, 271, 369–70, 499 context-specific copyright 615–16 Conti, A. 137 contract law 295–6, 519, 528, 542 Contreras, J. 38, 66, 148, 162, 165, 166, 195, 199, 242, 339, 428, 597 Cook, P. 396 Cook, V. 88 Coombe, R. 586 Cooter, R. 15, 135, 511 copying competition 233, 234, 243 and custom role 534, 536 innovation, cumulative innovation 138, 144, 146 innovation, stand-alone innovation 129, 133, 134 negative space of IP 310–11, 314–15, 317–18, 320, 321–2, 324–5 network effects 176, 178, 179, 183, 189–90, 193–4 and notice and disclosure 428–9, 437, 447, 461 and price discrimination 291, 298–9 and uniformity cost reduction 388, 391, 393, 396 copyleft licensing model 184–5, 343 copyright anticommons, transaction costs, and patent aggregators 29

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Index  681 and collective management 495, 499, 501, 503–5 and common law 513–14, 516, 520–21 and competition 255 context-specific 615–16 and creative development see creative development and copyright creativity not protected by see negative space of IP and cumulative innovation 144, 145, 148 and custom role 531–2, 534–5, 536–7, 545 enforcement costs see enforcement costs, copyright law enforcement and fair use doctrine 60, 144, 146–7, 187, 456, 458, 459, 531–2, 534–5, 536, 545 first-sale (exhaustion) doctrine 63–4, 207, 238, 246, 254, 294 governance see governance of intellectual property, patent versus copyright and innovation, stand-alone innovation 122, 123, 133–4 intellectual property as property 10–11, 13, 18–19, 21–2 notice and disclosure see notice and disclosure, copyright tracing and ownership price discrimination see price discrimination, copyright product differentiation 272–4 and uniformity cost reduction 387–8, 390–91, 394, 397 welfare promotion 109–12, 115 work-for-hire doctrine 536–7 Cornelli, F. 382 Cornes, R. 554 Correa, C. 384 Corts, K. 287 costs see enforcement costs; information costs; transactions costs; uniformity cost reduction Cotropia, C. 40, 381, 382, 387, 417, 418, 447 Cotter, T. 132, 135, 252, 448 cover licensing 455 Cowen, T. 598, 600 Creative Commons 149, 343, 460, 533 see also commons creative development and copyright 582–635 context-specific copyright 615–16 copyright alternatives, hidden drawbacks 596, 610–14 distribution of benefits 614–15 exclusivity rights 593, 594, 597, 603–4, 608–10 formalization imperative 616–17

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future research 629 lead-time advantage 603, 609 creative development and copyright, cultural diversity 618–29 and alternative revenue models 621–2 anticompetitive abuse 622 commodity culture 620–21 developed markets, effects on 619–23 developing world 623–6 digitization effects 619, 622–3 global diversity 626–9 market structure 621, 627 winner-take-all biases of media markets 621 creative development and copyright, emerging industries in Global South 584–93 China and film industry 591–3, 598–600, 606, 609, 611, 616, 617, 627 China and film industry, and piracy 592, 605–6, 607, 608, 615, 618 China and music industry 593, 610, 611, 613, 617, 624 digital technology effects 585–6, 588, 589, 590, 592, 605–10, 611, 613, 615, 617 home-grown media and cultural progress 584–5 India and film industry 589–91, 599, 600, 606, 609, 624, 625–6, 627, 628, 652, 659 India and film industry, and piracy 590, 604, 607–8, 615 India and music industry 591, 607–8, 613, 617, 626 Nigeria and film industry 586–90, 596, 597, 598, 599, 600, 609, 611, 619, 624, 625–6, 627, 628 Nigeria and film industry, and piracy 605–6, 608, 615 Nigeria and music industry 589, 608 and TRIPS Agreement 586 creative development and copyright, state support 593–604 advance purchase contracts 603 allocative efficiency 595, 614 alternative business models 602–3 collective licensing 600–601 commons-based creativity models 601–4 direct patronage 597–600 exclusivity issues 603–4 non-commercial creativity 601–2 prior commitments and path dependencies 596 private ordering and intermediaries 595–6 production incentives 594 risk-reduction functions 595–6 creative expression and functionality, distinction between 217–18

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682  Research handbook on the economics of IP law volume 1 creativity as benefit, welfare promotion 112–14 creativity, cumulative 429, 440, 457–60 creativity not protected by copyright see negative space of IP (creativity not protected by copyright) Crouch, D. 233 Csikszentmihalyi, M. 112 Cugno, F. 132 cultural diversity, and creative development see creative development and copyright, cultural diversity cultural environment as infrastructure, infrastructure theory 560–62, 567, 570 cumulative innovation see innovation, cumulative custom role 526–50 best practice statements 532–3, 543–4, 545 certainty of custom 543–4 classroom (educational) guidelines 531–2, 535–6, 540, 545, 547 clearance culture 529–30, 532, 539, 540–41, 542 and common law 527–8, 536, 543 contract law 528, 542 and copying 534, 536 and copyright 531–2, 533, 534–5, 536–7, 545 customary pricing 534–5 formal law role 533–7 future research 547 implications of adoption of a role 545–6 in-house guidelines 532 incentive-rationale theory 538 industry practices 529–33, 538–41 IP-adjacent norms 530–31 labor-reward analysis 538 lock-in effect 539, 542–3 market effects 534–5 and parties’ expectations 541–3 and private sector 540–41, 546 reliance issues 537–43 representativeness 545 special interest groups involvement 539–40 and tort law 528, 541 trademark protection 538–9, 547 Dagan, H. 4 Dale, M. 595 Dam, K. 295 damages 134, 135, 149, 448, 457 see also injunctions Dana, J. 299 Danaher, B. 604, 623 Darling, K. 313, 320, 411, 546, 610 Darwall, S. 73 Das, P. 312

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Dasgupta, P. 390 D’Aspremont, C. 268 Daughety, A. 410 David, P. 29, 137, 552 Davy, B. 444 De Beer, J. 336, 339 De Castor, I. 408 De Jong, J. 314 De Laat, E. 121 De Larena, L. 395 De Mot, J. 409 deadweight loss prize and reward alternatives 355, 357, 358, 364, 367, 369–70, 372 stand-alone innovation 101, 120, 123, 126, 130–31, 142 Deaton, A. 108 DeBrock, L. 383, 390 decentralization effects 338, 341, 380, 381 DeMartino, G. 560 Demsetz, H. 4, 54, 57, 102, 287, 288, 385, 413, 448, 565 Deneckere, R. 289, 292 Denicola, R. 453 Denicolò, V. 65, 121, 140, 141, 271, 390 Denton, F. 389 deontology see under philosophical foundations of IP law Depoorter, B. 4, 29, 281–308, 388, 407–23, 430, 456, 458, 500–501, 585, 596 depropertization 448, 460–62 Derclaye, E. 104, 107 derivative works 59–60, 113–14, 115, 141, 144, 162, 163, 184, 343, 563, 564, 566, 571–2 Desai, D. 418 Desai, R. 628 design patents 123, 203–5, 218–19, 462–5 Determann, L. 185 deterrence principle, network effects 171, 220–21 Deuze, M. 113 DeVany, A. 382 developing countries 360, 494, 623–6, 646, 665–9 see also individual countries Devlin, A. 112, 427 DiCola, P. 29, 34, 569 Ding, W. 357–8 Dinwoodie, G. 40, 381, 418 direct patronage, creative development and state support 597–600 disclosure requirements 144–5, 331, 334, 335–6 and notice see notice and disclosure district courts 40, 434, 444, 456, 474, 475, 476, 481

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Index  683 Dixit, A. 266, 292 doctrine of equivalents 41, 129, 142–3, 238, 447, 521 Doll, S. 569 Donaldson, M. 457 Dore, M. 390 Drahos, P. 384 Drassinower, A. 7, 8 Dreyfuss, R. 40, 123, 146, 216, 236, 324, 345, 418, 476, 482, 484, 569 Du, J. 667 Du Mont, J. 203, 204 Duffy, J. 51, 135, 236, 254, 359, 361, 362, 363–4, 367, 369, 370, 371, 381, 389, 390, 479, 480, 482, 484, 565, 566 Duflo, E. 650, 651, 652 Duggan, M. 670 Dukeminier, J. 2 Dutta, A. 670 Dwyer, J. 431 Dybvig, P. 164 Dyson, J. 122 Easterbrook, F. 3 Eaton, B. 265, 268, 269, 270 Eaton, J. 666 economic analysis, collective management 494–503 economic characteristics, infrastructure theory see infrastructure theory, economic characteristics economic development 636–55 and competition 232, 242–3 cross border trade and multilateral agreements 648 education access 652 endogenous regimes 658–61 foreign direct investment 646–7, 666, 667 future research 647, 652, 653, 668, 672 global diffusion and convergence issues 638–9 global public goods 643–4 global tradeoffs 660–61 innovation and patents 661–5 institutional and behavioral understandings 650–51, 652 legal policy 641–5, 652 mapping 645–52 nation-state as unit of analysis 643 neoclassical growth model 638–9, 641, 644 network effects 159, 161–2, 163 parallel imports 647–8 and patents 666–7, 669–71 population quality measures 649, 651–2 preferential trade agreements 660–61

DEPOORTER_V1_9781848445369_t.indd 683

price discrimination 647 technological advancement 659 technological change 639–40, 641, 642, 643, 644, 665–9 technology transfers 642, 643, 647, 648, 650–51 threshold effect 664 trade flows to developing countries and strength of IPR 646 and TRIPS 643, 644, 660–61, 667, 670–71 welfare distribution between consumers 658–9, 660 Edlin, A. 239, 240, 385 education 494, 531–2, 535–6, 540, 545, 547, 652 Ehrlich, I. 409 Eicher, T. 76 Eisenberg, A. 649 Eisenberg, M. 510 Eisenberg, R. 27–46, 66, 126, 143, 145–6, 341, 372, 387, 389, 395, 408, 417, 438, 485 Elazari Bar-On, A. 207 Elberse, A. 621, 622 Elhauge, E. 166, 248, 286, 299 Elkin-Koren, N. 63, 410 Ellickson, R. 14, 50, 55, 312–13, 314, 413, 528, 540, 610 Ellis, R. 50 emerging industries in Global South see creative development and copyright, emerging industries in Global South enforcement costs 407–23 adjustment of intellectual property rights 413–14 copyright and small creators, effects on 412, 413 distributive effects 412–13 doctrinal developments, effects of 409 future research 419 and legal protection costs 408–9 negative effects 410–11 opportunistic enforcement practices 411 patent law enforcement 408, 416–18 patent law, repeat players and large firms, effects on 412–13 patent trolls 416–18 private enforcement as public good 411 technological advances, effects of 409–10, 414, 415–16 trademark law enforcement 418 enforcement costs, copyright law enforcement 414–16 innovation spillovers 414 small claims courts 416 social norm complications 414–15 statutory damages 415–16

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684  Research handbook on the economics of IP law volume 1 Englmaier, F. 286 Epstein, L. 485 Epstein, R. 3, 7, 8, 11, 28, 29, 34, 35, 65, 146, 234, 528, 540–41 essential facilities doctrine 210 Ethiraj, S. 54 EU, Directive on Collective Management 490–91, 495 Evans, D. 188 Ewing, T. 35, 36, 417, 418 exclusionary practices 5–6 and competition 237, 239, 241–2, 245, 250, 251–3, 256 governance of intellectual property 50–53, 57, 59–61, 63–4, 65–6 infrastructure theory 562–6, 570 network effects 199, 201, 202, 209, 211 uniformity cost reduction 382, 383–4, 387, 397 exclusivity rights and competition 244, 245–6, 252, 254 creative development and copyright 593, 594, 597, 603–4, 608–10 infrastructure theory 564, 567, 573 innovation, cumulative innovation 140, 143, 144, 146, 148 network effects 183, 195, 210, 211 open innovation and ex ante licensing 331, 334, 335–6, 338, 344–5 price discrimination 285, 295, 297, 299–300 uniformity cost reduction 383, 391–4, 397 welfare promotion 100–101, 102, 103 exhaustion (first-sale) doctrine 63–4, 133, 207, 238, 246, 254, 294–5 expert valuation specialty 58–60 Fagerberg, J. 661 Fagundes, D. 313, 316, 531, 546 fair use doctrine common law 513–14, 516, 520 and copyright 60, 144, 146–7, 187, 456, 458, 459, 531–2, 534–5, 536, 545 patents 573 Faller, G. 569 Falvey, R. 233 Farber, D. 385 Farley, C. 648 Farrell, J. 163, 164, 168, 483, 530 Fauchart, E. 82, 313, 316, 530, 546, 547 Faulhaber, G. 273 federalism and common law 521–3 fee shifting proposal, and notice and disclosure 458 Feenstra, R. 269 Feit, I. 146

DEPOORTER_V1_9781848445369_t.indd 684

Feldman, A. 73, 81 Feldman, R. 35, 36, 61, 206, 417, 418 Feldman, Y. 415 Fellmeth, A. 207 Fennell, L. 6, 14, 15, 28, 29, 388 Field, B. 413 Fields, G. 637 Fierstein, R. 242 film industry, emerging industries see under creative development and copyright, emerging industries in Global South Finger, J. 604 Fink, C. 645–6, 647 first mover advantage 234, 317–19, 338–9 first-sale (exhaustion) doctrine 63–4, 133, 207, 238, 246, 254, 294 Fischbaum, M. 361, 363 Fish, R. 438 Fisher, F. 247 Fisher, W. 104, 290–91, 341, 356–7, 359, 360, 365, 378, 381, 532, 553, 566, 600, 618 Fishman, J. 144, 623 Fisk, C. 313 fixed ‘pot’ suggestion, prize and reward alternatives 358, 359, 367 fluid property 55–7 follow-on innovation 102, 108, 114, 137, 140–41, 144–5, 147–8, 149, 398 Foot, P. 103, 104 Foray, D. 552 foreign direct investment 646–7, 666, 667 Fraley, J. 7 franchisors, and competition 248 FRAND licensing and competition 242, 253 and cumulative innovation 149–50 network effects 162, 166, 171, 199, 201–2, 203, 206, 208–10, 214, 215–16, 220 notice and disclosure 428, 448 see also licensing Frank, J. 515 Frank, Richard 669 Frank, Robert 396 Frater, P. 624 free software movement (General Public License) 184–5, 188, 200–201, 343 free-riding issues 169, 173, 295, 359, 563, 564, 565, 566 Freeman, A. 275 French, S. 12, 447 Frey, B. 103, 110, 394 Freyfogle, E. 56 Friedman, D. 57, 126, 291, 520 Friedman, M. 266 Friedman, O. 7, 89

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Index  685 Frischmann, B. 56, 61, 66, 104, 340, 343, 378, 380, 381, 385, 397, 551–80 Fromer, J. 10, 49, 74, 336, 427, 483 Fu, W. 586 functionality doctrine 193, 194–5, 204, 217–18 future research anticommons, transaction costs, and patent aggregators 31 common law 523, 524 creative development and copyright 629 custom role 547 economic development 647, 652, 653, 668, 672 enforcement costs 419 negative space of IP (creativity not protected by copyright) 313, 326–7 network effects 221 patent institutions and legal actors 485–6 philosophical foundations of IP law 94 price discrimination 302 product differentiation 276–7 welfare promotion 111, 115 Gabriella, J. 295 Gadde, S. 480 Galanter, M. 412 Galasso, A. 28, 137 Gale, I. 121 Galetovic, A. 166 Gallagher, W. 418 Galle, B. 356 Gallini, N. 122, 129, 131, 158, 271, 293, 295, 334, 390 Gallo, A. 379, 387 game theory model, collective management 496–7 Gana, R. 586 Gandal, N. 159, 181, 195 Gans, J. 335, 338 Ganti, T. 590 Garcia, K. 622 Gardiner, B. 613 Gardner, E. 456, 457 Garon, J. 313 Gates, B. 173 Gault, F. 314 Geistfeld, M. 411 gene sequence patents 143, 477–8, 479 General Public Licence (free software movement) 184–5, 188, 200–201, 343 genericide doctrine 147, 170, 194, 418, 555 Geradin, D. 166 Gervais, D. 29, 66, 415, 489–507, 669 Ghafele, R. 338 Ghosh, A. 552

DEPOORTER_V1_9781848445369_t.indd 685

Ghosh, R. 341 Ghosh, S. 4, 5, 6, 295, 389, 564, 636–55 Giblin, R. 415 Gibson, J. 10, 381, 382, 412, 456, 535, 539 Gilbert, D. 109 Gilbert, R. 35, 130, 162, 212, 213, 214, 233, 248, 271, 390 Gilson, R. 333, 335, 641 Ginarte, C. 232, 659, 663 Ginsburg, J. 10, 414, 455, 504 Gladwell, M. 87 Glovsky, S. 41 Godin, B. 568–9 Goeschl, T. 668–9 Goettler, R. 273 Gogswell, L. 440 Gold, E. 30 Goldberg, M. 294 Golden, J. 58, 59, 166, 395, 479, 484 Goldstein, A. 201 Goldstein, P. 122, 191–2, 287, 290, 595, 614 Gordon, W. 57, 147, 288, 291, 456, 562 Gould, D. 232 Gould, J. 410 governance of intellectual property 47–70 collective-rights organizations 57, 58, 66 commercialization effects 51–2, 58, 59, 60, 61 exclusion strategies 50–53, 57, 59–61, 63–4, 65–6 fluid property 55–7 governance through equity 64–5 group institutions 65–6 hybrid regimes 55–6 in rem and in personam rights, distinction between 61–2 information costs 57, 61, 62 infrastructure theory 559 and law of nuisance 53, 54, 56–7 licensing 61–4 licensing, compulsory 57, 59, 60 modularity of property law 52–4 opportunism 64, 65 patent trolls 64–5 property as platform 48–55 semicommons 56, 66 thing-definition 48–55 trademark law definition of rights 50 governance of intellectual property, patent versus copyright 58–61 activities as uses 58 derivative works 59–60 expert valuation specialty 58–60 fair use doctrine 60 form of property 58

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686  Research handbook on the economics of IP law volume 1 individual uses 59 licensing 60 governmental purchases and tax credits 372–3 Grad, B. 212 Grady, M. 409 Graham, S. 81, 135, 202 Grasmick, H. 415 Green, D. 415 Green, J. 32, 41, 124, 125, 137, 140, 141, 567 Greenberg, B. 394 Greene, K. 418 Greene, P. 626 Grennan, M. 293 Griffin, J. 105 Griliches, Z. 637, 668 Grill, B. 299 Grinvald, L. 408, 418 Grossman, G. 232, 658, 660 group institutions, and governance of intellectual property 65–6 Gruben, W. 232 Grushcow, J. 124 Grynberg, M. 418 Guell, R. 361, 363 Gupta, K. 166 Haber, E. 411, 412 Haddock, D. 54 Haemmerli, A. 78 Hagelin, T. 397 Hagiu, A. 35 Hall, B. 211, 382, 408, 413, 478 Hammond, R. 623 Handke, C. 495, 498 Hansen, D. 16, 19, 33 Hansen, R. 298 Hansmann, H. 594 Hanson, R. 372 Hanssen, F. 300 Hardin, G. 4, 27 Harding, S. 19 Hardy, T. 290, 414 Hargreaves, I. 449 Harhoff, D. 340 Harsanyi, J. 73 Hart, H. 474 Hashmi, A. 232 Haskell, J. 409, 411 Hastie, R. 110 Hauser, M. 87 Hausman, J. 293 Hay, D. 269 Haynes, J. 587 Hazard, G. 411 Hazucha, B. 615, 627

DEPOORTER_V1_9781848445369_t.indd 686

Heald, P. 51, 81, 334, 389, 644 Hegde, D. 82 Heins, M. 529–30 Heller, M. 27–8, 29, 30, 38, 66, 143, 341, 371, 417, 431, 438 Helpman, E. 232, 552, 648, 658 Hemel, D. 103, 295, 369–70, 371, 373, 378, 566, 601 Hemphill, C. 82, 111, 313, 418 Henkel, J. 339 Henry, M. 477 Herder, M. 31 Herrell, J. 207 Hess, C. 553, 557 Heverly, R. 56, 559, 571 Hicks, D. 126 Hicks, J. 121 Higgins, R. 295 Hill, P. 54, 413 Hilsenteger, J. 443 Hoekman, B. 666 Hofmann, J. 29 Hogendorn, C. 552, 565 Holbrook, T. 8, 9, 49, 483 Hollander, A. 499 Hollis, A. 293, 295, 358 Holmes, O. 85–6, 110, 510, 512 Holmes, T. 232, 287 Hoofnagle, C. 291 Hopenhayn, H. 361 Hotelling, H. 263, 267, 268, 271 Hovenkamp, E. 242, 247, 252 Hovenkamp, H. 206, 211, 231–61, 287, 300, 447 Howe, J. 337 Howitt, P. 232 Howse, D. 353 Hrdy, C. 369, 373 Hsee, C. 110 Hu, A. 666, 667 Huang, K. 31, 32 Hubbard, T. 356, 358, 369, 381 Hudson, T. 462 Hughes, J. 3, 18, 19, 22, 101, 147, 287, 410, 462, 622 Hunt, R. 137, 142, 323 Hunter, D. 29 Hurst, W. 640 Hurt, R. 411 hybrid regimes, and governance of intellectual property 55–6 Hylton, K. 100, 299 Hynes, R. 254 imitator’s entry to proprietary market, and innovation 131, 132, 138

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Index  687 independent invention, and innovation 131–3 India creative development see under creative development and copyright, emerging industries in Global South patents and drug prices 669–70, 671 individual preference satisfaction, welfare promotion 102–4, 108–9, 110, 111, 114 individual works’ valuation, collective management 498–501 industry practices, and custom role 529–33, 538–41 information ambiguous language use and future innovation risk 41 asymmetries 28, 379–80, 392, 427–8 costs 14–17, 40–41, 42, 57, 61, 62 sharing challenges, and open innovation 331–3, 335 see also knowledge; language infrastructure theory 551–80 abstraction levels 558, 559, 560, 561, 573 commons management 556–7, 561–2 cultural environment as infrastructure 560–62, 567, 570 derivative works 563, 564, 566, 571–2 exclusionary practices 562–6, 570 exclusivity rights 564, 567, 573 first- and second-generation inventors, relationship between 567 genericness 555 governance rules 559 in-system behavior 553 input-output relationships 567–8 intellectual-cultural resources 557–73 lead-time advantage 563, 566 linear model 568–9 and market power 554–6, 565–6 misappropriation risks 570 nonrival resources 554, 564–6, 567, 570 patent fair use doctrine 573 private demand and social demand, difference between 555–6 resources characteristics 553–4 semi-commons regime 559–60, 571–3 sharable nature of resources 554 social returns versus private returns 553–4 spillover effects 561, 568, 569, 572 transaction costs 564, 570 infrastructure theory, economic characteristics 562–71 demand-measurement problems 565 free riding issues 563, 564, 565, 566 patent law 564 self-help mechanisms 563

DEPOORTER_V1_9781848445369_t.indd 687

supply-side problems 562–6 user innovation 563 Inglesi-Lotz, R. 661 injunctions 39–40, 134, 135, 201–2, 448 see also damages innovation ambiguous language use and future innovation risk 41 and competition 129, 233–4, 237 and economic development 661–5 investment and network effects 160 and prior art 32, 36, 122, 124–5, 143, 149, 196–7, 198 and prize and reward alternatives 355, 365–7 spillovers 414 and welfare promotion 100–101, 102, 103, 104–5, 109, 114 innovation, cumulative 137–50, 361 blocking rights 141–2, 148 ‘business method’ patent 143 channeling doctrines 150 compulsory licensing 145, 146, 148 copying 138, 144, 146 copyright law 144, 145, 148 copyright law, fair use doctrine 144, 146–7 Creative Commons 149 damages for past infringement 149 derivative works 141, 144 disclosure requirements 144–5 enhanced damages in patent law 149 evolving doctrines regarding subject matter 143–4 exclusive rights 140, 143, 144, 146, 148 and follow-on innovation 137, 140–41, 144–5, 147–8, 149 FRAND licensing 149–50 ‘inventive application’ eligibility threshold 143, 144 licensing failures 141 licensing and transaction costs 140, 143, 147 licensing virtues 138–9 lost royalty and damages for past infringement 149 network effects and technology sharing 148, 150 patent life and renewal rates 139–40 prior art and threshold for protection 143, 149 profit shares 141 prospect patents 142 protection duration 139–40 public interest exemptions 148 remedies 149–50 reverse engineering 147 and rights of others 145–50

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688  Research handbook on the economics of IP law volume 1 and technical change 121 threshold requirements and breadth 140–45 and trade secrets 147 and university research 145–6, 147 innovation, stand-alone 122–36 breadth of intellectual property protection 128–31 channeling doctrines 122, 136 commercialization effects 125, 128 compulsory licensing 135 copying 129, 133, 134 copyright protection 122, 123, 129 deadweight loss 101, 120, 123, 126, 130–31, 142 design patent protection 123 doctrine of equivalents 129 duration of protection 126–8 exhaustion (first-sale) doctrine 133 expressive creativity protection 122 imitator’s entry to proprietary market 131, 132, 138 independent invention, rights arising from 131–3 injunctions and damages 134, 135 licensing 122, 130, 131, 132, 135 patent law nonobviousness standard 124–6 patent law novelty requirement and first-toinvent system 124, 136 and price discrimination 134 prior user right 131, 132, 133, 136, 447 and prior works 122 profitability of intellectual property right 127–8 remedies 134–6 rights of others 131–4 substantial similarity test 129 and technical change 121 threshold for protection 123–6 trade secret law 123, 126, 132, 135–6 unpatented inventions and independent inventors 132–3 input-output relationships, infrastructure theory 567–8 institutions and economic development 641–5, 650–51, 652 patent see patent institutions and legal actors insurance pools and license on transfer (LOT) commitments 200 intellectual property as property 2–26 copyright and changed circumstances concept 21–2 copyright as instrument of constraint 13 copyright notice and registration 10–11

DEPOORTER_V1_9781848445369_t.indd 688

copyright and time limitations 18–19 first possession theory 11 information costs 14–17 non-possessory property 12–14, 17, 19–21 orphan works and time limitations 18–19 patent disclosure requirements 9–10 possession rationale 7–8, 9–10 public domain works 11 recording and renewal requirements 20–21 standardization of property rights 15 time dimension 17–22 trademarks as rivalrous resources 11–12 intellectual property as property, tangible objects distinction 4–7 distribution of physical resources 6–7 exclusionary practices 5–6 land titles and information mechanisms 16–17 law of adverse possession 18 scarcity and rivalry 5, 11–12 interbrand and intrabrand restraints, and competition 245–6 interstitial common law 517–18, 519, 520–21 ‘inventive application’ eligibility threshold 143, 144 Jackendoff, R. 88 Jaffe, A. 219, 411, 484, 666 James, S. 415 Janis, M. 203, 204, 379, 476 Japan, prize and reward alternatives to IP, history of 354 Jasanoff, S. 287 Jaszi, P. 29, 529–30, 532, 533 Jegan, R. 394 Jesien, K. 312 Johnson, W. 134 Jones, C. 552 Joo, T. 623 Joyce, C. 388 Judd, K. 269 judge selection, randomization suggestion 483 judicial tailoring, and uniformity cost reduction 391, 393 Justman, M. 552 Kagan, S. 84 Kahn, A. 552 Kahneman, D. 103, 105, 108, 109 Kaldor, N. 264, 265, 267, 269 Kalil, T. 356, 367, 373 Kaminski, M. 594 Kamm, F. 87 Kanngiesser, P. 90 Kant, I. 78, 79, 86, 90

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Index  689 Kapczynski, A. 6, 102, 105, 313, 364, 365, 372, 594, 613, 614, 620 Kaplow, L. 73, 130, 134, 293, 296, 385, 386, 409, 411 Karaganis, J. 604, 617 Karjala, D. 170, 381 Kastenmeier, R. 392 Katoh, M. 186 Katsoulacos, Y. 266, 270 Katz, A. 411 Katz, M. 161, 164, 168, 269, 288, 292 Katz, R. 463 Keller, J. 552 Keller, W. 665, 668 Kelly, C. 353, 371 Kelman, M. 386 Kennedy, D. 386 Kenney, R. 300 Kenya, intellectual property law 649 Kesan, J. 379, 387, 389, 483 Khan, B. 363 Khanna, D. 19 Khanna, T. 335 Khoury, A. 233 Kieff, F. 51, 125, 146, 332, 335, 368–9, 389, 395, 397, 564 Kiesling, L. 54 Kim, Y. 76, 659 King, G. 310 Kirby, S. 134, 272, 296, 301 Kitch, E. 58, 125, 126, 135, 142, 291, 334, 368, 380, 414, 564 Klein, B. 292, 298, 300 Klemperer, P. 129, 134, 164, 271 Klerman, D. 475, 481 Kline, D. 219 Kline, S. 469 Knight, F. 381 knowledge commons, and open innovation 343–5 dissemination function, and notice and disclosure 426–7 see also information Knudsen, C. 569 Kobayashi, B. 300 Koch, J. 607 Koenigsberg, F. 504 Koenker, R. 266, 270 Komesar, N. 566 Korman, B. 504 Korngold, G. 13 Kornhauser, L. 313, 511 Kortum, S. 666 Kotowitz, Y. 390 Kozinski, A. 455

DEPOORTER_V1_9781848445369_t.indd 689

Krackhardt, D. 560 Krazit, T. 439 Kremer, M. 359, 362–3, 364, 367, 371, 373, 379 Kretschmer, M. 495 Krings, M. 619, 628 Krugman, P. 648 Ku, R. 411 Kuhlik, B. 28, 29, 34, 35 Kumar, S. 481 Kwall, R. 86, 101 Kyle, M. 670–71 La Manna, M. 132 Laakmann, A. 393 Lai, E. 660, 661 Lakhani, K. 337–8, 340 Lancaster, K. 267, 565, 570 Landes, W. 5, 10, 11, 19, 100, 126, 128, 132, 138, 147, 173, 216, 275, 288, 295, 390, 395, 409, 410, 411, 414, 496, 528, 564, 572 Lane, W. 269 Langlois, R. 52, 170 language, ambiguous language use and future innovation risk 41 see also information Lanjouw, J. 139, 408, 413 Lansing, P. 295 LaPolt, D. 623 Larkin, B. 619 Lastowka, G. 313 Laursen, K. 339 Lawson, J. 543 Laycock, D. 64 Le, N. 566 lead-time advantage 396, 563, 566, 603, 609 Leahy, J. 395 Lederman, L. 415 Lee, B. 49 Lee, E. 113, 597 Lee, J.-A. 29 Lee, P. 336, 480, 485, 560, 573 Lee, T. 121, 128 Lee, W. 65, 202, 440 Leeson, P. 286 Lefstin, J. 144, 477 Lei, Z. 31 Leibovitz, J. 132 Lemley, M. 3–5, 9, 35–7, 39, 41, 53, 58, 61, 66, 85, 88, 100, 108, 123–4, 135, 141, 143–4, 149, 162–3, 165–6, 199, 201, 203, 206, 216, 235, 272–3, 275, 288, 311, 327, 331, 381, 383–97passim, 412, 414, 416–18, 436, 439–40, 447, 474–84 passim, 530, 540, 552, 553–7, 571, 573, 603–4, 622

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690  Research handbook on the economics of IP law volume 1 Lemus, J. 240 Lenman, J. 81 Lerner, J. 185, 219, 249, 313, 342, 343, 395, 411, 413, 484, 652, 662–3 Leslie, C. 369 Leslie, P. 290, 299, 300 Lessig, L. 18, 378, 397, 553, 562, 567, 623 Leval, P. 57, 529 Levin, R. 382, 389, 395, 563 Levine, D. 234, 379, 417 Levine, M. 287, 662 Levinsohn, J. 269 Levinthal, D. 54, 332 Levmore, S. 373 Lewinsohn-Zamir, D. 104 Liang, L. 589, 590, 591, 594, 605, 607, 608 Libecap, G. 57, 413, 431, 438 licensing collective 458–9, 600–601 and collective management 491–3, 495 compulsory 57, 59, 60, 135, 148, 170, 253, 455 cover licensing 455 and cumulative innovation 140–41 FRAND see FRAND licensing governance of intellectual property 57, 60, 61–4 innovation, cumulative 138–9 innovation, stand-alone 122, 130, 131, 132, 135 network effects 183–6, 199–201, 210–11, 213 and open innovation see open innovation and ex ante licensing refusal 210–11, 252–3 and transaction costs, innovation, cumulative innovation 140, 143, 147 voluntary 458–60 Lichtman, D. 29, 125, 132–3, 298, 357, 379, 409, 414, 418, 595–6 Liebeler, L. 295 Lieberman, M. 396 Liebowitz, S. 133, 161, 300, 496, 604–5, 610 Liivak, O. 3, 4, 52, 566 Lim, D. 255 Lipner, S. 295 Lipsey, R. 265, 268, 270, 565, 570 Litman, J. 10, 59, 311, 384, 411, 553, 562, 567, 572, 623 Litwak, M. 300 Liu, Jiarui 592, 599, 603, 607, 610, 611, 613, 614, 621, 624 Liu, Joseph 10, 22, 147, 393 Llewellyn, K. 510, 515 Lobato, R. 589, 609, 617, 619, 625

DEPOORTER_V1_9781848445369_t.indd 690

Lobel, O. 570 lock-in effect, custom role 539, 542–3 Loeb, D. 88 Lohr, S. 397 Long, C. 10, 16, 59, 120, 335, 381, 383–4, 385, 389, 391, 412, 428, 478, 527 Loren, L. 16, 19, 29, 56, 559, 571 Loshin, J. 313 Loury, G. 121, 128 Love, J. 356, 358, 369, 381, 382, 390 Lowery, D. 603 Lu, S. 628 Lueck, D. 7, 413, 431, 438 Lunney, G. 4, 272, 275, 290, 291, 292, 296–7, 300, 380, 381, 382, 385, 389, 392, 495, 499, 564, 565 Luo, H. 82 Lyons, D. 77, 78 McAdams, R. 616 McAfee, R. 289, 292 Macaulay, S. 313 Macaulay, T. 378, 594 McCahery, J. 523 McCall, J. 587, 619 McCauley, S. 640 McClure, D. 275 McDaniel, C. 659 McDonnell, B. 334, 385 McDonough, J. 36 Macedo, C. 124 McFetridge, D. 390 Macfie, R. 354, 355 McGahan, A. 671 McGeveran, W. 418, 532 McGowan, D. 76, 83–4, 163, 165, 185, 396–7 Machlup, F. 83, 120, 379 McJohn, S. 438 Mackaay, E. 504 McKenna, M. 272, 273, 275, 453, 562, 566 MacKie-Mason, J. 293 McKusick, M. 184 McLeod, K. 29, 34, 569 McManis, C. 31, 32 McManus, J. 54 Macmillan, F. 620 MacNeil, I. 640 Madison, M. 48, 343, 344, 531, 546, 558, 560, 561, 564, 568, 571 Magliocca, G 313 Mahoney, J. 20 Mahoney, P. 511 Mak, J. 137 Malamud, C. 192 Malueg, D. 293

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Index  691 mandatory registration, notice and disclosure, copyright tracing and ownership 449, 452, 461 Mandel, G. 643 Maness, R. 211 Mankiw, N. 270 Manly, L. 542 Mansfield, E. 139, 382, 385, 396, 563, 644 Manta, I. 107, 287, 290 mapping economic development 645–52 negative space of IP 313–24 notice and disclosure, patents 445–6 Margolis, S. 133, 161, 300 market power and competition 233, 235–6, 241–3, 244 and creative development, cultural diversity 621, 627 custom role 534–5 and infrastructure theory 554–6, 565–6 negative space of IP 322–4 and network effects 161–5, 212, 214–16 prize and reward alternatives 362–3, 364, 366–7 and product differentiation 269–70, 272–3 Markoff, J. 212 Markusen, J. 666 Marshall, R. 496 Maskin, E. 137, 139–40, 289 Maskus, K. 76, 411, 643, 645–6, 647, 656–75 Massarsky, B. 493 Masur, J. 98–118, 477, 478, 484 Matal, J. 481 Mattioli, M. 195, 448 Matutes, C. 271 Maurer, S. 32, 111, 121, 131, 132, 272 Max, D. 530 Mazzeo, M. 417 Mazzone, J. 453 Meagher, K. 552 Medina, B. 84 Meeker, H. 162, 185, 188, 200 Meese, A. 299 Melamed, D. 6, 35, 36, 37, 65, 134, 201, 202, 417, 418 Melendez-Ortiz, R. 669 Melichar, F. 499 Mencken, J. 312 Menell, P. 4, 5, 6, 10, 16, 42, 49, 59, 75, 102, 119–230, 232, 233, 234, 236, 251, 330, 331, 378, 395, 409, 411, 416, 424–71, 476, 623 Mensch, E. 275

DEPOORTER_V1_9781848445369_t.indd 691

Merges, R. 4, 35, 52, 65, 66, 72–97, 101, 125, 126, 135, 137, 141, 142–3, 146, 148, 185, 206, 212, 216, 233, 234, 291, 324, 331, 334, 335, 383, 384, 387, 398, 418, 448, 458, 460, 483, 530, 553, 567, 596, 622 Merrill, T. 7, 15, 17, 49, 51, 52, 57, 63, 431, 446 Merz, J. 30, 34 Meurer, M. 4, 10, 16, 36, 38, 40, 49, 59, 199, 281–308, 384, 385, 395, 396, 416, 417, 430, 438, 439, 442, 445, 446, 447, 448, 451 Miceli, T. 411 Mikhail, J. 86, 88–9, 90 Milgrom, P. 418 Mill, J. 364 Millaleo, S. 649 Miller, Jade 586, 587, 588, 596, 598, 600, 606, 608, 609, 616, 619 Miller, Joseph 65, 66, 443 Miller, S. 418 Miller, Z. 569 Mireles, M. 395 Mnookin, R. 313 Mock, D. 195 Moglen, E. 601, 620 Mojibi, A. 233 Mokyr, J. 121, 637 monopoly power 171, 263–6, 291, 295, 354–5 Monroe, B. 464 Montgomery, D. 396 Montgomery, L. 592, 593, 603, 611 Moore, K. 135, 389, 439, 446, 475, 477, 478, 481, 482 Morris, C. 528 Mortimer, J. 287, 290 Moschini, G. 357, 362 Moser, J. 456 Moser, P. 232, 354, 659, 663 Moskowitz, N. 219 Mossinghoff, G. 124 Mossoff, A. 3, 53, 234 Moullier, B. 590 Mowery, D. 31, 395 Mueller, C. 78 Mueller, D. 78 Mueller, J. 39, 146, 206 Murray, F. 29, 31, 32, 314, 355 Musgrave, R. and P. 554, 555 music industry compulsory license for cover versions 148 emerging industries see under creative development and copyright, emerging industries in Global South negative space of IP 321, 325–6

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692  Research handbook on the economics of IP law volume 1 Nachbar, T. 5 Nadel, M. 619, 621, 622, 624 Nadler, J. 415 Nalebuff, B. 248, 286, 299, 300 Nanda, V. 324 Napoli, P. 619 Nard, C. 474, 477, 479, 480, 482, 484 Neary, K. 7, 89 negative space of IP (creativity not protected by copyright) 309–29 comedians 314–15, 325 computer databases and first-mover advantage 317–18 copying 310–11, 314–15, 317–18, 320, 321–2, 324–5 fashion industry 311–12, 321–2, 327 financial service industry 322–4 first-mover advantage 317–19 food industry 316–17, 320 future research 313, 326–7 industrial design 326–7 legal consequences, unintended 324–6 mapping 313–24 market power unrelated to IP 322–4 music business 321, 325–6 philosophical foundations of IP law 82 positive space comparison 311 products versus performances 319–21 publishing trade 315–16 social norms, role of 314–17 Nelson, R. 120, 121, 122, 137, 141, 146, 233, 331, 383, 387, 398, 553, 567 neoclassical economic growth model 638–9, 641, 644 Netanel, N. 134, 135, 287, 290, 585, 595, 596, 600, 618, 621, 622 network effects 157–230 application program interface (API) protection 218–19 appropriability problem 166, 167, 173, 188, 211, 218, 220 business method patents 197–8, 201 complementary products 159–60, 162, 164, 168, 183, 194 compulsory licensing of patents 170 and consumer demand 159–60, 161, 167 copying 176, 178, 179, 183, 189–90, 193–4 demand-side effects 167–8 derivative works 162, 163, 184 deterrence principle 171, 220–21 economic and social value 159, 161–2, 163 exclusionary practices 199, 201, 202, 209, 211 exclusivity rights 183, 195, 210, 211

DEPOORTER_V1_9781848445369_t.indd 692

FRAND licensing 162, 166, 171, 199, 201–2, 203, 206, 208–10, 214, 215–16, 220 free-rider problem 169, 173 functionality and creative expression, distinction between 217–18 future research 221 and market power 161–5, 212, 214–16 monopoly power issues 171 network externality dilemma 168–9 open innovation and ex ante licensing 333, 338, 339, 340 open source software 162–3, 171, 216 parsimony principle 168–9, 217–19 patent bargaining model 166 proportionality principle 169–70, 219–20 protectionist entrepreneurs 216 real and virtual networks 161–2 remedies against abusive and anticompetitive behavior 171 royalty stacking 166 standard setting organizations (SSOs) 162, 166, 171 standard-essential patents (SEPs) 166, 171, 199, 201, 202–3 standardization 163, 164–5, 167–8 and technological advances 159–60, 169–70, 171, 218 and technology sharing 148, 150 trade secret protection in software industry 172–3 uniformity cost reduction 396–7 network effects, competition policy 167–71, 205–16 ‘essential facilities’ doctrine 210 exhaustion (first-sale) doctrine 207 licensing guidelines 213 patent misuse doctrines 205–7 patent thickets 211–12 private antitrust liability 210–12 public enforcement 212–16 refusals to license 210–11 ‘rule of reason’ approach to patent licensing 213–14 standard setting processes, ambush of 208 network effects, copyright protection in software industry 173–92, 218 abstraction-filtration-comparison test 177, 178 application program interface (API) protection 160, 162–3, 167, 172, 175–6, 179–80, 189–91 command systems for computer software 180–82 copyleft licensing model 184–5, 343 fair use doctrine 187

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Index  693 free software movement (General Public License) 184–5, 188, 343 idea/expression doctrine 173–4, 175, 177 mobile platform development 189 open software movement (permissive licenses) 185 piracy protection 173, 175 public domain dedication 185–6 reverse engineering permissibility 182–3, 186, 188 software copyright jurisprudence 188–91 software licensing 183–6 standards and codes 191–2 start-up phase, adoptions over revenues strategy 188–9 trade secrets 182–3 unprotectability of functional and network features 176–82 network effects, patent protection for softwarerelated technologies 195–205, 219–20 claim indefiniteness doctrine 199 design patents 203–5, 218–19 dot-com bubble burst effects 197, 201, 220 FRAND licensing 199, 201–2, 203, 206 free software movement (General Public License) 200–201 injunctive relief as remedy 201–2 insurance pools and license on transfer (LOT) commitments 200 licensing 199–201 machine-or-transformation test 197 non-practicing entities 200 nonobviousness requirement 198 patent holdup prevention and precommitment strategy 200 patentability requirements 196–8 and prior art 196–7, 198 remedies 201–3, 204–5 royalty rates 202 standard setting organizations (SSO) 199, 201–3, 206 standard-essential patents (SEPs) 166, 171, 199, 201, 202–3 start-up businesses and patent portfolios 197 subject matter eligibility 196–8 network effects, trademark protection 192–5 and confusing product names 194 functionality doctrine 193, 194–5, 204 genericide doctrine 194 platform sponsors and complementary product manufacturers 194 and standard setting organizations (SSOs) 194 and unfair competition 194 Neven, D. 269

DEPOORTER_V1_9781848445369_t.indd 693

New Zealand, Phonographic Performances (NZ) Ltd v. Radioworks Limited 507 Newell, R. 121 Newiak, M. 76 Newman, C. 49, 61, 455 Newman, J. 237 Newson, M. 88 Nicholas, A. 354 Nicol, D. 30, 33, 34 Nielsen, J. 30, 33, 34 Nigeria, creative development see under creative development and copyright, emerging industries in Global South Nimmer, D. 453 ‘nine no nos’ of patenting 213, 237 Nock, J. 480 non-commercial creativity 601–2 non-possessory property 12–14, 17, 19–21 non-practicing entities (NPEs) (patent trolls) 36, 37, 64–5, 83, 200, 416–18, 417–18 nondisclosure agreements (NDAs) 428, 440, 465 nonobviousness requirement 124–6, 198, 234, 236–7, 366, 476, 478–9, 480 nonrivalness 57, 432, 554, 564–6, 567, 570 Nordhaus, W. 126–7, 158, 271, 390 North, D. 560 notice and disclosure 424–71 and copying 428–9, 437, 447, 461 design patents 462–5 FRAND licensing 428 freedom to operate function 428–9 informational asymmetries 427–8 intangible resources, costs of describing and disclosing 432, 436–8 knowledge dissemination function 426–7 nondisclosure agreements (NDAs) 428, 440, 465 nonrivalrous nature of intangibles 432 notice costs 430–33 notice externalities 438–9 notice functions 426–9 orphan works and copyright 439 patent protection 426–7, 434, 436, 438–9 patent thickets 438 remedies 440 signaling function 427–8 standard setting organizations (SSOs) 428 trade secrets 427, 440, 465 trademarks 435, 465 see also disclosure requirements notice and disclosure, copyright tracing and ownership 428–9, 434–8, 449–62 collective licenses 458–9 compulsory licensing 455

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694  Research handbook on the economics of IP law volume 1 cover licensing 455 Creative Commons 460 cumulative creativity 429, 440, 457–60 depropertization 460–62 digital registration proposal 451, 461 fair use doctrine 456, 458, 459 fee shifting proposal 458 liability standards 456–7 mandatory registration 449, 452, 461 open source projects 460 orphan works 449 preclearance of works 453, 458 preregistration system 461 reforms 454–8 remedies 456–8 standardized unique identification number systems 451–2 statutory damages 457 technology advances 449–52, 455, 459 trade secrets 461 unpublished works, protection of 461–2 voluntary licensing 458–60 notice and disclosure, patents 441–8 adverse possession doctrine 18, 22, 431, 446–7 application and maintenance fees 446 claim clarity and standardized claiming system, call for 442–3 claim construction and judicial evaluation 443–4 depropertization 448 disclosure timing 442 doctrine of equivalents 447 FRAND licensing 448 independent invention defense 447 injunctive relief and damages awards 448 mapping and search tools 445–6 notice failure and harm reduction 447 ownership transparency 443 remedies 447–8 novelty requirement 124, 136 Novos, I. 134, 301 nuisance law 53, 54, 56–7 Nunnenkamp, P. 667 Nussbaum, M. 104, 637, 651–2 Ochoa, O. 567 Ochoa, T. 235 O’Connor, S. 99 Odagiri, H. 657, 659, 668 Oddi, A. 125 O’Donoghue, T. 121, 137, 138, 139, 141, 142, 271, 389 Okome, O. 619, 628

DEPOORTER_V1_9781848445369_t.indd 694

Oliar, D. 4, 8, 10, 82, 99, 313, 314, 315, 394, 530–31, 547 Olson, D. 287, 290 Olson, K. 90 Olson, T. 384 O’Neil, O. 86 Opara, J. 615 Opderbeck, D. 560 open innovation and ex ante licensing 330–49 appropriability over free revealing 338–9, 341 bilateral (ex ante) license 333–6 collaborative innovation 333–45 collective action problems 344 commercialization effects 331–2, 336, 337–8 ‘coupled’ open innovation 337–8 Creative Commons 343 and decentralization 338, 341 derivative works 343 exclusivity rights 331, 334, 335–6, 338, 344–5 first mover advantage 338–9 General Public Licence (free software movement) 184–5, 188, 200–201, 343 information sharing challenges 331–3, 335 inside-out and outside-in implementation 337, 338 knowledge commons 343–5 network effects 333, 338, 339, 340 patent thickets, effects of 341 peer production 341–3 and reward theory of intellectual property 331–2 ‘sticky’ information 332–3, 335, 342 supply chains 334–5 technology transfer 331–3, 334–5, 338, 342 transaction costs 332–3, 334–5, 342 underproduction problem 330–31, 343–4 user innovation 339–41, 344–5 open source 148, 149–50, 162–3, 171, 185, 216, 460 see also commons opportunism 64, 65, 411 Ordover, J. 134 O’Rourke, M. 146, 291, 393, 573 orphan works 18–19, 439, 449 Osenga, K. 395 Ostrom, E. 47, 56, 57, 65–6, 250, 343–4, 528, 531, 553, 557, 560 Oswald, A. 108 Ottoz, E. 132 Ouellette, L. 103, 295, 336, 369–70, 371, 373, 378, 427, 566, 601 overcompensation issues, prize and reward alternatives 360–61

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Index  695 Pager, S. 582–635 Pakes, A. 139 Pallante, M. 21 parallel imports 647–8 Parchomovsky, G. 5, 17, 36, 37, 125, 211, 334, 335, 389, 390, 391, 397, 412, 432, 446 Parente, M. 29 Parisi, F. 28, 29, 74, 291, 500–501 Park, W. 232, 659, 663, 664 parsimony principle, network effects 168–9, 217–19 Partnoy, F. 389 patent institutions and legal actors 473–88 accuracy evaluation 483–4 administrative review 484 Article III trial courts 481, 483, 486 claim construction 476–7, 482, 483 Congressional involvement 474, 480–81, 484 district courts 40, 434, 444, 456, 474, 475, 476, 481 en banc decision making 473, 479, 481, 484 Federal Circuit 474, 475–9, 480, 481, 482–4 future research 485–6 gene sequence patents 143, 477–8, 479 ideology role 485 judge selection randomization suggestion 483 legal devolution 474–5, 483 non-obviousness determination 476, 478–9, 480 patent application increase 478 patent clustering 481 patent denial reversals 478 prior case law effects 485 pro-patent bias 477, 484 specialized trial court suggestion 482–3 Supreme Court 39, 465, 474–5, 476, 477, 479–80, 483, 484–5 teaching, suggesting, and motivation (TSM) approach 479–80 USPTO 474–5, 477–8, 480, 481, 483, 484 USPTO Patent Trial and Appeal Board (PTAB) 474, 481, 484, 485–6 validity presumption for issued patents 476 venue restriction suggestion 483 patent pools 248–51 patent thickets 211–12, 341, 371, 438 patent trolls (non-practicing entities (NPEs)) 36, 37, 64–5, 83, 200, 416–18, 417–18 patents and patent law aggregators and anticommons see anticommons, transaction costs, and patent aggregators bargaining model, network effects 166

DEPOORTER_V1_9781848445369_t.indd 695

‘business method’ patent, innovation, cumulative innovation 143 design patents 123, 203–5, 218–19, 462–5 disclosure requirements, intellectual property as property 9–10 doctrine of equivalents 41, 129, 238, 447, 521 and economic development 661–5, 666–7, 669–71 and enforcement costs 408, 416–18 fair use doctrine 573 and infrastructure theory 564 innovation and incentive-to-invent theory 81–2 innovation, stand-alone innovation 124, 124–6, 132–3 life and renewal rates, innovation, cumulative innovation 139–40 misuse doctrine 238, 247, 255–6 network effects 200, 205–7 ‘nine no nos’ 213, 237 nonobviousness requirement 124–6, 198, 234, 236–7, 366, 476, 478–9, 480 notice and disclosure see notice and disclosure, patents novelty requirement 124, 136 and price discrimination 292–3 product differentiation 271–2 prospect patents 142 ‘rule of reason’ approach to patent licensing 213–14 scope-of-the-patent test 238–40 standard-essential patents (SEPs) 166, 171, 199, 201, 202–3, 208–10, 214, 215–16, 242 uniformity cost reduction 381, 386–8, 389, 390 university patents 39, 145–6, 147 versus copyright governance see governance of intellectual property, patent versus copyright welfare promotion 107–9, 112 Patry, W. 235, 384, 390, 391 Patterson, M. 208 Paulson, C. 588 pay-for-delay settlements, competition and intellectual property 239 peer production, and open innovation 341–3 Peñalver, E. 3, 4 Penner, J. 49, 61 Penrose, E. 120 Penubarti, M. 659 Perel, M. 410 Perry, M. 266, 270

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696  Research handbook on the economics of IP law volume 1 ‘person having ordinary skill in the art’ (PHOSITA) 387, 393 Perullo, A. 649 Perzanowski, A. 14, 17, 82, 207, 291, 313, 315, 411, 546, 610 Pessach, G. 621, 622 Peterman, B. 295 Petherbridge, L. 479, 482 Phelps, M. 219 Philips, L. 295 Phillips, D. 183, 185, 186 philosophical foundations of IP law 72–97 consequentialism 73–84 consequentialism, macro theory 75–6, 77–9, 83–4 consequentialism, morally reprehensible objection 79–80 consequentialism, and personal preferences 78–9 consequentialism, productivity and innovation investment relationship 75–6 deontology 74, 79, 84–90 deontology and consequentialism, reconciling 91–3 deontology, consistent moral judgments across cultures 87–8 deontology, moral duties 84–6 deontology, moral judgment studies 86–90 deontology, and universal intellectual property instinct 90 efficiency principle 92, 93 future research 94 ‘negative space’ industries (absence of IP) 82 non-practicing entities (patent trolls) and small businesses 83 patents, innovation and incentive-to-invent theory 81–2 patents and small businesses 83 proportionality principle 92 utilitarianism 73–84 welfare economics 73–4, 99–101 Pigou, A. 283 Piller, F. 337 Pink, D. 563 Pinker, S. 88 piracy protection 173, 175, 291 Pitofsky, R. 206, 215 Plant, A. 398–9, 411 Png, I. 134 Pogge, T. 358 Polanvyi, M. 354, 355, 379 Polanyi, M. 333 Polinsky, A. 134, 135 political economy 231–5, 384 Pollack, M. 312

DEPOORTER_V1_9781848445369_t.indd 696

population quality measures, economic development 649, 651–2 Port, K. 408, 418 Posner, R. 5, 10, 11, 19, 74, 84–6, 88, 90, 100, 102, 104, 106, 109, 115, 126, 128, 132, 138, 147, 173, 216, 275, 288, 293, 295, 299, 313, 386, 390, 395, 407, 409–11, 496, 510–12, 515–16, 518, 528, 539, 541, 572 Pound, R. 510 Pouris, A. 661 Powdthavee, N. 108 Powell, W. 333 Prado, M. 642 Pratt, L. 588 preferential trade agreements 660–61 Prescott, E. 269 Pressman, D. 438 Price, W. 121 price discrimination 281–308 allocative efficiency 288, 290 complementary products 297–300 and copying 291, 298–9 digital technologies 286–7 distributional effects 289 economic development 647 exclusivity rights 285, 295, 297, 299–300 exhaustion principle 294 future research 302 geographic 293–5 monopoly power 291, 295 patent exhaustion doctrine 294–5 patents and social welfare 292–3 product differentiation 284 profitability 285, 286–7 second and third degree, differences between 285, 288 social welfare issues 287–93 stand-alone innovation 134 tie-in metering benefits 299 trademark free-riding 295 trademarks, identical 295 tying, merchandising, and bundling 285–6, 297–300 uniformity cost reduction 385 and willingness to pay 282–3 price discrimination, copyright and cumulative creation 291 and delivery date differentiation 284 ‘first sale’ doctrine 294 and free access loss 292 and incentives for creative activity 290–91, 292 and piracy 291 restrictions on type of use 296 sharing 301–2

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Index  697 and social welfare 290–92 and transaction costs reduction 291 and unauthorized use 297 price-fixing 236, 238–9, 241, 243–4 pricing and collective management 495, 501 real option pricing, tailoring through 388–91 Priest, E. 583, 592, 593, 599, 600, 603, 605, 606, 607, 608, 610, 611, 616, 617, 624, 626 Priest, G. 411, 511 prior art 32, 36, 122, 124–5, 143, 149, 196–7, 198 prior user right, innovation, stand-alone 131, 132, 133, 136, 447 private antitrust liability, network effects, competition policy 210–12 private demand and social demand, difference between 555–6 private enforcement as public good 411 private interest, prize and reward alternatives 355, 367, 371 private ordering 385–6, 595–6 private sector, and custom role 540–41, 546 prize and reward alternatives 350–75 administrative design issues 356–60, 362 cash versus other incentives 356–7 commercialization, effects on 368–9 complementary invention 368 consumers, effects on 369–70 cumulative invention 361 deadweight loss 355, 357, 358, 364, 367, 369–70, 372 developing countries 360 fixed ‘pot’ suggestion 358, 359, 367 free-riding incentives 359 governmental purchases and tax credits 372–3 innovation, effects on 355, 365–7 international coordination 359–60 market mechanisms 362–3, 364, 366–7 monopolization concerns 354–5 overcompensation issues 360–61 patent nonobviousness 366 and patent thickets 371 private interest 355, 367, 371 redundant innovation, effects on 367–8 social value 360–61, 365, 366, 367 timing of payment 356 traditional property systems comparison 364–73 transaction costs 370–71 and TRIPS Agreement 360 uniformity cost reduction 379, 380, 381

DEPOORTER_V1_9781848445369_t.indd 697

valuation of contributions 360–64 valuation mechanism 351–2, 360–64 variable versus fixed payments 357–8 pro-patent bias 477, 484 producer-side effects, welfare promotion 112–15 product differentiation 262–80 access and incentives, relationship between 269 appropriability problems 270, 271 and competition 242, 263–9, 272–4 complementary products 269, 285–6 consumer preferences 266–8, 269, 271 copyright 272–4 future research 276–7 and market power assessment 269–70, 272–3 monopolistic competition 263–6 patents 271–2 price discrimination 284 spatial competition 266–9, 272–4 trademarks 274–5 trademarks, free imitation 274 uniformity cost reduction 397 profitability 127–8, 141, 285, 286–7 Profitt, B. 218 proportionality principle 92, 169–70, 219–20, 499–500 prospect patents 142 protectionist entrepreneurs, and network effects 216 Pruitt, S. 212 public enforcement, network effects, competition policy 212–16 public fund investment in innovation, risks in 379–80 publicly available information about patent ownership 41 Puttitanun, T. 659, 664 Qian, Y. 664–5, 670–71 Radin, M. 6, 386 Rafiquzzaman, M. 390 Rai, A. 38, 107, 293, 395, 473–88 Rajadhyaksha, A. 589, 600, 626 Rajec, S. 384 Ramsey, L. 418 Rantanen, J. 41, 233, 480 Raskind, L. 290 Ratner, J. 210 Rato, M. 166 Raustiala, K. 82, 111, 234, 309–29, 330, 394, 530, 546, 610 Rawls, J. 84–5, 86, 90, 93 Raymond, E. 336

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698  Research handbook on the economics of IP law volume 1 redundant innovation, and prize and reward alternatives 367–8 Reese, A. 19, 416 refusal to license 210–11, 252–3 Reichman, J. 341, 411, 643, 669 Reidel, I. 613 Reidenberg, J. 83 Reiffen, D. 669 Reilly, G. 475, 481 Reinganum, J. 121, 128, 410 remedies innovation, cumulative innovation 149–50 innovation, stand-alone innovation 134–6 network effects 171 notice and disclosure 440, 447–8, 456–8 Remington, M. 392 repertory price setting, collective management 492, 495–8 reverse engineering, cumulative innovation 147 reward alternatives see prize and reward alternatives reward theory, and open innovation 331–2 rewards distribution issues, uniformity cost reduction 382–3 Rhodes, D. 608 Rice, J. 148, 200, 448 Rich, G. 51, 443 Ridgway, W. 418 Ridley, D. 356 Rierson, S. 418 Riley, J. 289 Risch, M. 36, 417, 418, 438 risk mitigation changes, anticommons see anticommons, transaction costs, and patent aggregators, risk mitigation changes risk-reduction functions, creative development and copyright 595–6 risk-spreading justification and costs of failure, uniformity cost reduction 380 Rivette, K. 219 Rizk, N. 603, 613 Roberts, J. 418 Roberts, P. 212 Roberts, R. 298 Robinson, G. 17, 61 Robinson, J. 263, 288, 638 Robinson, K. 448 Robinson, W. 396 Rochelandet, F. 502–3 Roffe, P. 669 Roin, B. 300, 360, 362, 365, 368, 369, 372, 379

DEPOORTER_V1_9781848445369_t.indd 698

Romer, P. 232, 552, 567, 639, 662 Rooklidge, W. 476 Rose, C. 5, 6, 7, 10, 11, 12, 13, 14, 20, 47, 56, 66, 386, 528, 542, 552–3 Rose-Ackerman, S. 411 Rosen, S. 396 Rosen, W. 662 Rosenberg, D. 410, 411 Rosenberg, N. 137, 569 Rosenblatt, E. 82, 310, 394 Rosenbluth, G. 269 Rothman, J. 16, 412, 526–50 Rowe, E. 395 Rowley, C. 73 Royall, S. 208 royalties 149, 166, 202 Rubin, P. 295, 511, 512–13, 518 Rubinfeld, D. 211 ‘rule of reason’ approach to patent licensing 213–14 Rumelt, R. 134, 301 Russell, A. 165 Rutschman, A. 589 Ruttan, V. 121 Sabel, C. 640–41 Sachs, J. 638, 650 Sacks, A. 474 Saeb, S. 109 Sag, M. 409, 411, 416 Salinger, M. 299 Salkever, D. 669 Saloner, G. 163, 164, 168 Salop, S. 268, 269, 270, 272–3, 418 Salter, A. 339 Sammi, P. 147, 178 Sampat, B. 108, 389 Samuelson, P. 10, 29, 147, 170, 173, 183, 266, 273, 274, 388, 395, 415, 416, 438, 553, 554, 562, 564, 565 Sanchez-Roig, R. 312 Sander, M. 42 Sandler, T. 554 Santilli, M. 594 Santore, R. 248 Santos, A. 605, 608, 609, 627, 628, 640 Sarnoff, J. 238, 384, 387, 566 Saulo, E. 381 Saunders, K. 211 Saunders, M. 40 Sawicki, A. 595 Sawyer, M. 459 Saxenian, A. 333 Scanlon, T. 86 Scaria, A. 590, 591, 610, 652

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Index  699 Schallnau, J. 408 Schankerman, M. 135, 137, 139, 149, 382, 408, 413, 652 Schatz, T. 569 Schauer, F. 386, 515 Scheffler, S. 73, 78–9 Scheffman, D. 418 Scheibehenne, B. 110 Scherer, F. 199, 271, 274, 366, 379, 382, 390 Schiller, D. 586 Schlag, P. 386 Schlatter, S. 601 Schlosser, S. 418 Schmalensee, R. 269, 275, 288 Schmidt, G. 552, 567 Schmitz, J. 232 Schmookler, J. 638 Schneider, P. 663–4 Schuchman, R. 411 Schuler, P. 604 Schultz, J. 14, 17, 148, 200, 207, 220, 291, 341, 343, 395 Schultz, M. 313, 314, 316, 583, 586, 587, 601, 611, 614, 626 Schultz, T. 649, 651 Schulz, N. 28 Schumpeter, J. 232, 331–2, 662 Schwartz, B. 110 Schwartz, D. 35, 40, 418, 434, 481, 482–3 Schwartz, H. 65 Schwartz, M. 289, 293 Schwartz, W. 411 scope-of-the-patent test 238–40 Scotchmer, S. 32, 41, 75, 102, 119–56, 158, 173, 183, 192, 232, 234, 236, 251, 272, 288, 293, 330, 331, 378, 384, 390, 395, 429, 553, 557, 562, 567, 660 Scott, J. and T. 232 Seaman, C. 233 Seijo, B. 82 semi-commons regime 56, 66, 559–60, 571–3 see also commons Sen, A. 103, 104, 561, 637, 651–2 Serrano, R. 73 Sevcenko, C. 29 Seymore, S. 427 Shachar, R. 273 Shankerman, M. 28 Shankland, S. 212 Shannon, J. 191 Shapiro, C. 28, 35, 37, 39, 58, 130, 135, 159, 161, 164, 166, 168, 172, 188, 201, 212, 213, 233, 249, 271, 282, 341, 385, 390, 396, 408, 417, 438, 448, 530

DEPOORTER_V1_9781848445369_t.indd 699

Shapley, L. 496–7 Shavell, S. 73, 121, 134, 135, 358, 361, 367, 379, 380, 394, 395, 410, 411 Shaver, L. 380 Shaw, A. 89, 90 Sheldon, J. 438 Shrestha, S. 417 Shur-Ofry, M. 614, 618, 621 Shy, O. 134, 301 Sichelman, T. 52, 58, 60–61, 125, 238, 332, 369, 411, 434 Sidak, J. 58, 136, 166, 292 Siebrasse, N. 448 Siegel, J. 353 Siegelman, P. 5, 397, 412 Silberston, A. 137 Silbey, J. 113 Simcoe, T. 164, 339 Simon, D. 453 Simon, H. 52 Singer, J. 4 Singh, J. 606 Siwek, S. 586, 626 Skladany, M. 585, 620 small claims courts 416 Smart, J. 73 Smarzynska Javorcik, B. 667 Smith, H. 2, 5, 6, 7, 8, 15, 16, 17, 47–70, 383, 431, 436, 540, 559, 571 Smith, J. 413 Smith, K. 415 Smith, M. 622 Snow, A. 495, 499 Sobel, G. 211 Sobel, R. 286 social costs of intellectual property rights 383, 384–5 social demand and private demand, difference between 555–6 social norms enforcement costs, copyright law enforcement 414–15 negative space of IP 314–17 social returns versus private returns, infrastructure theory 553–4 social value network effects 159, 161–2, 163 prize and reward alternatives 360–61, 365, 366, 367 social welfare see welfare promotion software industry 143, 145, 147 network effects and copyright protection see network effects, copyright protection in software industry

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700  Research handbook on the economics of IP law volume 1 network effects and patent protection see network effects, patent protection for software-related technologies trade secret protection 172–3 Soini, S. 30, 34 Sokoloff, K. 363 Solow, R. 75, 232, 638, 639 Solum, L. 99, 515 Song, M. 592, 618 spatial competition, product differentiation 266–9, 272–4 Spatt, C. 164 Spatz, J. 667 special interest groups involvement, custom role 539–40 specialized trial court suggestion 482–3 Spector, H. 85 Spence, M. 266 Spiegler, P. 638 Spier, K. 299 spillover effects, infrastructure theory 561, 568, 569, 572 Spoo, R. 313, 315–16 Sprigman, C. 10, 82, 111, 234, 309–29, 330, 394, 449, 452, 530–31, 546, 547, 610 Spulber, D. 269, 365 Stake, J. 7 Stanca, L. 110 stand-alone innovation see innovation, stand-alone standard-essential patents (SEPs) 166, 171, 199, 201, 202–3, 208–10, 214, 215–16, 242 standard-setting organizations (SSOs) 94, 148, 149–50, 162, 166, 171, 199, 201–3, 206, 208, 428 standardization, network effects 163, 164–5, 167–8 standardized unique identification number systems 451–2 standards and codes, network effects 164, 167–8, 191–2 state support, and creative development see creative development and copyright, state support Stefanadis, C. 300 Stein, A. 412 Steinmueller, W. 553 Sterk, S. 5, 17, 300, 447, 456 Stern, J. 4, 8, 10 Stern, S. 29, 31, 335, 338 Stewart, S. 29 ‘sticky’ information, and open innovation 332–3, 335, 342 Stigler, G. 266, 282, 284

DEPOORTER_V1_9781848445369_t.indd 700

Stiglitz, J. 266, 292, 360, 379, 390, 648, 657 Stole, L. 269, 289 Story, A. 585, 620 Strandburg, K. 146, 314, 333, 339, 340, 345, 393, 395, 573, 613 Strang, L. 62 Straus, J. 30 Stutzer, A. 103 substantial similarity test, copyright 129 substitutive works 500–501 see also complementary products Suk, J. 82, 111, 313 Sukhatme, N. 112 Sullivan, L. 293 Sumner, L. 102, 104 Sundaram, S. 589, 590, 591, 605, 607, 608 Sunder, M. 585, 618, 623 Sunstein, C. 93, 386 Supreme Court 39, 465, 474–5, 476, 477, 479–80, 483, 484–5 see also individual cases Swanson, T. 668–9 Sweeney, M. 20 Syed, T. 102, 104, 263, 273, 356–7, 359, 360, 364, 365, 372, 378, 381, 382, 384–5, 411, 594, 620 Sykes, A. 293 Takeyama, L. 301, 396 Tandon, P. 130, 271 Tangri, R. 149, 440 Tanzania, intellectual property law 649 Tassey, G. 552 Taylor, C. 137 Taylor, D. 58 teaching, suggesting, and motivation (TSM) approach 479–80 technological advancement and change and common law 513 economic development 639–40, 641, 642, 643, 644, 659, 665–9 and enforcement costs 409–10, 414, 415–16 and innovation 121 and network effects 159–60, 169–70, 171, 218 notice and disclosure, copyright tracing and ownership 449–52, 455, 459 technology and collective management 503–5 computer databases and first-mover advantage 317–18 creative development and cultural diversity 619, 622–3 digital registration proposal 451, 461

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Index  701 digital technology effects, emerging industries in Global South 585–6, 588, 589, 590, 592, 605–10, 611, 613, 615, 617 and price discrimination 286–7 software industry see software industry and welfare promotion 107–9 technology transfer economic development 642, 643, 647, 648, 650–51 innovation, cumulative innovation 148, 150 open innovation and ex ante licensing 331–2, 331–3, 334–5, 338, 342 Teece, D. 338 Tehranian, J. 291, 301, 412 Telang, R. 590, 606, 607, 608, 622, 625 Teubal, M. 552 thing-definition, governance of intellectual property 48–55 Thisse, J. 134, 287, 301 Thomas, J. 123, 478, 482 Thompson, E. 528 Thomson, J. 87 Thorpe, J. 495 threshold effect, economic development 664 threshold requirements innovation, cumulative 140–45 innovation, stand-alone 123–6 Tiebout, C. 273, 521 Tiller, E. 387, 393 Tirole, J. 185, 249, 288, 289, 295, 313, 342, 343, 366, 395, 412 To, T. 269, 385 Tomlinson, B. 233 Torrance, A. 233, 343 tort law, and custom role 528, 541 Towse, R. 495, 498 trade secrets common law 519, 520 innovation, cumulative 147 innovation, stand-alone 123, 126, 132, 135–6 network effects 172–3, 182–3 notice and disclosure 427, 440, 461, 465 see also misappropriation doctrine trademarks and custom role 538–9, 547 enforcement costs 418 and governance of intellectual property 50 network effects see network effects, trademark protection notice and disclosure 435, 465 and price discrimination 295 tragedy of the anticommons 27, 28–9

DEPOORTER_V1_9781848445369_t.indd 701

transaction costs and anticommons see anticommons, transaction costs, and patent aggregators and collective management 495, 501 infrastructure theory 564, 570 innovation, cumulative 140, 143, 147 open innovation and ex ante licensing 332–3, 334–5, 342 and price discrimination 291 prize and reward alternatives 370–71 uniformity cost reduction 385–6 Trebilcock, M. 642 Treiger-Bar-Am, K. 78 Trubek, D. 640 Tuckman, H. 395 Tufano, P. 323 Tugend, A. 159 Tullock, G. 411 Tur-Sinai, O. 102, 104, 105 Turner, J. 477 Tushnet, R. 313, 531, 546 tying arrangements 246–8, 250–51, 285–6, 297–300 Tyler, T. 415 Uhlir, P. 341 underproduction problem, and open innovation 330–31, 343–4 uniformity cost reduction 377–406 administrative benefits of uniform rights in patent system 383–4 allocative efficiency 385–6 alternative appropriability mechanisms 395–7 alternative incentives to create or innovate and distribute 394–5 business method patents 384, 392, 394–5 and copying 388, 391, 393, 396 and copyright 387–8, 390–91, 394, 397 decentralization argument 380, 381 demand side and positive spillovers 397 direct subsidies 395–6 exclusionary practices 382, 383–4, 387, 397 exclusive rights, tailoring 383, 391–4, 397 follow-on innovation 398 information-asymmetry 379–80, 392 judicial tailoring 393 lead-time advantage 396 market efficiency limits 380 network effects 396–7 one-size-fits-all argument 383–5 patent law and real option pricing 389, 390 patentable subject matter definition 386–8

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702  Research handbook on the economics of IP law volume 1 patents to facilitate financing of drug discovery 381 ‘person having ordinary skill in the art’ (PHOSITA) 387, 393 price discrimination 385 private ordering, tailoring through 385–6 prize or reward strategy 379, 380, 381 product differentiation strategies 397 public fund investment in innovation, risks in 379–80 real option pricing, tailoring through 388–91 rewards distribution issues 382–3 risk-spreading justification and costs of failure 380 social costs of intellectual property rights 383, 384–5 standards instead of rules 386–8 transaction costs and allocative efficiency 385–6 uniformity presumption of IP 379–81 willingness-to-pay and ability-to-pay, gap between 380–81 university patents 39, 145–6, 147 unpatented inventions and independent inventors 132–3 unpublished works, protection of 461–2 unreasonable infringement claims 251–2 Urban, J. 16, 19, 148, 200, 220, 341, 343 US America Invents Act (AIA) 41–2, 124, 125, 475, 481, 484 Bayh-Dole Act 38, 336, 392, 395 Clayton Act 210, 234, 235, 236, 245, 246, 252, 253, 255 Copyright Act 145, 148–9, 174–5, 183, 186–8, 192, 235, 245, 320, 390, 392, 394, 415, 455–6, 459–60, 490, 520, 531, 590 Digital Millennium Copyright Act (DMCA) 160, 186–8 Hatch-Waxman Act 239, 392, 447 International Trade Commission 202, 209, 481 Lanham Act 192, 193, 195 Music Modernization Act (MMA) 435, 451, 455, 459, 460–61 National Commission on New Technological Uses of Copyrighted Works (CONTU) Final Report 174–5, 176, 190 National Endowment for the Arts 599 Patent Act 125, 143–4, 196–8, 202, 204–6, 210, 236, 240–41, 244–7, 251–3, 255, 294, 392–3, 395, 427, 520 Patent and Trademark Office (USPTO) 241, 251, 386, 389, 393, 409, 426, 434–5, 439, 443, 445, 474–5, 477–8, 480–81, 483–6, 509

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Sherman Act 210, 235, 245, 246, 251, 252 US, cases 1-800-CONTACTS v. WhenU.Com 256 321 Studios v. Metro-Goldwyn-Mayer Studios 187 Adams v. Burke 207, 238, 254 Akzo v. Int’l Trade Comm. 296 In re Alappat 219 Alice Corp. v. CLS Bank International 143, 198, 220 Allied Orthopedic Appliances v. Tyco Health Care Grp. 237 American Geophysical Union v. Texaco 492, 535 American Society for Testing and Materials v. Public.Resource.Org 192 Amini Innovation Corp. v. Anthony Cal. 204, 463 Apple Computer v. Formula Int’l 176, 194 Apple Computer v. Franklin Computer Corp. 176, 178, 217 Apple Computer v. Microsoft Corp. 179–80, 217 In re Apple iPod iTunes Antitrust Litig. 237, 246 Apple v. Motorola 150, 242 Apple v. Samsung Elecs. Co. 150, 202, 204, 464 Application of Bergel 198 Ariad Pharmaceuticals v. Eli Lilly 8, 39, 426 Aronson v. Quick Point Pencil Co. 100 Asahi Glass Co. v. Pentech Pharm. 243 Aspen Skiing Co. v. Aspen Highlands Skiing Corp. 210 Assessment Tech. of Wisconsin. v. Wiredata 207, 255 Ass’n for Molecular Pathology v. Myriad Genetics 39, 143 AT&T Corp. v. Excel Commc’ns 387 Athletic Alternatives v. Prince Mfg. 49–50 Avia Group International v. L.A. Gear California 462 Baker v. Selden 173, 174, 191, 256, 462 Barclays Capital v. Theflyonthewall.com 519 Basic Books v. Kinko’s Graphics 536, 540 Bateman v. Mnemonics 179 Bement & Sons v. Nat’l Harrow Co. 236 Berkey Photo v. Eastman Kodak Co. 246 Bernhardt v. Collezione Europa USA 387 Berry Sterling Corp. v. Pescor Plastics 204 Best Lock Corp. v. Ilco Unican Corp. 203, 204, 257 Bikram’s Yoga College of India v. Evolation Yoga 256

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Index  703 Bill Graham Archives v. Dorling Kindersley 456 In re Bilski 197 Bilski v. Kappos 197, 220 Blaustein v. Burton 428 Bleistein v. Donaldson Lithographic Co. 110, 585, 599 Bloomer v. McQuewan 235, 238, 294 Bobbs-Merrill Co. v. Straus 254 Bonito Boats v. Thunder Craft Boats 183, 462, 522 Bowers v. Baystate Techs. 186 Bowman v. Monsanto 14, 254 Braun Med. v. Abbott Labs. 244 Brear v. Fagan 20 Bridgeport Music v. Dimension Films 530 Bright Tunes Music Corp. v. Harrisongs Music 429 Broadcast Music v. Columbia Broadcast 300 Brooke Group Ltd. v. Brown and Williamson Tobacco Corp. 235 Brulotte v. Thys Co. 255, 297 Bryant v. Mattel 454 Building Officials & Code Admin. v. Code Technology 192 California Computer Prod. v. IBM Corp. 247 Cambridge Univ. Press v. Patton 535 Campbell v. Acuff-Rose Music 456, 516 Capitol Records v. Thomas-Rasset 415 Carbice Corp. v. American Patents Development Corp. 205, 238, 247 Cariou v. Prince 516 Chamberlain Group v. Skylink Techs. 188 Chevron v. Natural Resources Defense Council 484, 486 Chicago Board of Trade v. United States 235 Chrysler Motors Corp. v Auto Body Panels of Ohio 256–7 Cincinnati Car Co. v. New York Rapid Transit Corp. 202 Clorox Co. v. Sterling Winthrop 237 Code Revision Comm’n for General Assembly of Georgia v. Public.Resource.Org 192 In re Comiskey 197 Computer Assocs. Int’l v. Altai 177–8, 179–80, 188, 217, 388, 537 Continental Paper Bag Co. v. E. Paper Bag Co. 236, 252 Continental TV v. GTE Sylvania 245 Continental Wall Paper Co. v. Louis Voight and Sons Co. 255 Cornell Univ. v. Hewlett-Packard Co. 202 Cortese v. United States 21 Costco Wholesale Corp. v. Omega 14 Coupe v. Royer 238

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Creative Labs v. Cyrix Corp. 194 Crocs v. Int’l Trade Comm’n 204 CSIRO v. Cisco Sys. 150, 203 Cuno Engineering Corp. v. Automatic Devices Corp. 124 Cybor Corp. v. FAS Technologies 477 Data General Corp. v. Grumman Systems Support Corp. 211 Dawson Chem. Co. v. Rohm & Haas Co. 60 Dell Computer Corp. 215 Dellar v. Samuel Goldwyn 529 In re Dembiczak 198 Dennison Manufacturing v. Panduit 476 Desny v. Wilder 428 Diamond v. Chakrabarty 387 Diamond v. Diehr 197, 219 Dickinson v. Zurko 480 Dippin’ Dots v. Mosey 237 Dolbear v. Am. Bell Tel. Co. 144, 195 DSC Communications Corp. v. DGI Technologies 207 Duke University v. Madey 30 Dun & Bradstreet Software Servs. v. Grace Consulting 537 Eastman Kodak Co. v. Image Technical Services 210, 300 eBay v. MercExchange 39–40, 60, 64–5, 150, 201–2, 220, 237–8, 448, 456, 480 Egyptian Goddess v. Swisa 203–4, 462 Eldred v. Ashcroft 235, 390 Elliott v. Google 194 Eng’g Dynamics v. Structural Software 179 Ericsson v. D-Link Sys. 150, 202, 203 Erie R.R. Co. v. Tompkins 521 Exxon Research and Engineering Co. v. United States 40 Faus v. City of Los Angeles 446 Feltner v. Columbia Pictures Television 457 Festo Corp. v. Shoketsu Kinzoku Kabushiki Co. 447 Folsom v. Marsh 516 Forasté v. Brown Univ. 536 F.T.C. v. Actavis 238–40, 485 F.T.C. v. Borden’s Real Lemon 275 F.T.C. v. Phoebe Putney Health Sys. 246 Gates Rubber Co. v. Bando Chem. Indus. 179 Gen. Talking Pictures Corp. v. W. Elec. Co. 244 Gentry Gallery v. Berkline Corp. 439 Geophysical Union v. Texaco 534 Georgia-Pacific Corp. v. U.S. Plywood Corp. 202 Golden Bridge Tech. v. Motorola 242 Gorham Co. v. White 462 Gottschalk v. Benson 196, 197, 219

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704  Research handbook on the economics of IP law volume 1 In re GPAC 387 Graham v. John Deere Co. 361 Graver Tank & Mfg. Co. v. Linde Air Products Co. 129, 447 Halo Electronics v. Pulse Electronics 202, 440 Harbor Software v. Applied Sys. 453 Harper & Row, Publishers v. Nation Enters 388, 534–5, 536, 537 Harper House v. Thomas Nelson 180 Hays v. Sony Corp. of Am. 536 Henley v. DeVore 456 Henry v. A.B. Dick Co. 236 Herbert Rosenthal Jewelry Corp. v. Kalpakian 180 Hewlett-Packard Co. v. Nu-Kote Intern. 194 Highmark v. Allcare Health Mgmt. Sys. 480 IBM Corp. v. United States 298 Illinois Tool Works v. Indep. Ink 241, 247, 286 Image Tech. Servs. v. Eastman Kodak Co. 211, 253 Impression Products v. Lexmark International 14, 63, 207, 248, 254, 294–5 In re Independent Service Organizations Antitrust Litigation 211 In re Innovatio IP Ventures LLC Patent Litig. 150, 203 In re Intel Corp. 215 Intel v. Advanced Micro Devices 194 Intellectual Ventures I v. Capital One Financial Corp. 252 Intergraph Corp. v. Intel Corp. 211 International News Service v. Associated Press 511 International Salt Co. v. United States 241, 297 Inwood Labs. v. Ives Labs. 193–4, 204 ISO Antitrust Litigation 253 Jacobsen v. Katzer 185, 533 Jefferson Parish Hosp. Dist. No. 2 v. Hyde 286, 300 Jim Henson Prods. v. John T. Brady & Assocs. 537 Johnson & Johnston Assocs. v. R.E. Serv. Co. 238 Jungersen v. Ostby & Barton Co. 236 K-Mart Corp. v. Cartier 295 Kellogg Co. v. National Biscuit Co. 193 Kewanee Oil Co. v. Bicron Corp. 9, 100 Kimble v. Marvel Entm’t Co. 255, 485 King-Seely Thermos Co. v. Aladdin Indus. 170 Kirtsaeng v. John Wiley & Sons 14, 245, 254, 294, 628–9 KSR Int’l Co. v. Teleflex 198, 220, 479–80

DEPOORTER_V1_9781848445369_t.indd 704

L.A. Gear v. Thom McAn Shoe Co. 203, 204, 462 Lasercomb America v. Reynolds 206, 255 LaserDynamics v. Quanta Computer 202 Lee v. Dayton-Hudson Corp. 203 Leegin Creative Leather Prod. v. PSKS 245 Lenz v. Universal Music Corp. 459 Lexmark Int’l v. Static Control Components 188 Lotus Dev. Corp. v. Borland 181–2, 188, 217 Lotus Dev. Corp. v. Paperback Software 180 Lotus v. Borland 176, 218 L.P. v. Penguin Books USA 191 Lucent Techs v. Gateway 202 Madey v. Duke University 30, 145 MAI Systems v. Peak Computer 298–9 Markman v. Westview Instruments 434, 443–4, 476–7 Mattel v. MGA Entertainment 454 Mattel v. Walking Mountain Prods. 191 May v. Morganelli-Heumann & Assocs. 537 Mayo Collaborative Services v. Prometheus Laboratories 39, 143, 198, 220 Mazer v. Stein 462 MDY Indus. v. Blizzard Entm’t 188 MedImmune v. Genentech 434 Microsoft Corp. v. Lindows.com 194 Microsoft Corp. v. Motorola 150, 203, 209–10, 253 Microsoft v. i4i Ltd 42 Mitchell Bros Film Group v. Cinema Adult Theater 319–20 MiTek Holdings v. ARCE Engineering Co. 182 Mitel v. Iqtel 179 Morton Salt Co. v. G.S. Suppiger Co. 205, 256, 298 In re Morton-Norwich Prods. 204 Motion Picture Patents Co. v. Universal Film Mfg. Co. 205, 206, 236, 255–6, 298 In re Motorola Mobility 214 Murphy Door Bed Co. v. Interior Sleep Systems 170 Nautilus v. Biosig Instruments 40, 199, 220 NBA v. Motorola 523 In re Negotiated Data Solutions LLC (N-Data) 214 Nero AG v. MPEG LA 251 New Era Publ’ns Int’l v. Carol Publ’g Grp. 536 New York v. Microsoft Corp. 215 Newton v. Diamond 388 Nichols v. Universal Pictures Corp. 177 Nobelpharma v. Implant Innovations 251 In re NTP 439

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Index  705 In re Nuijten 197 Octane Fitness v. ICON Health & Fitness 251, 440 OddzOn Products v. Just Toys 203, 463 Oil States Energy Services v. Greene’s Energy Grp. 481 Omega v. Costco Wholesale Corp. 14, 255 Oracle v. Google 150, 174, 182, 189–91, 218–19, 221 O’Reilly v. Morse 143, 387 Otter Tail Power Co. v. United States 210 Pandora Media v. Am. Soc’y of Composers, Authors, and Publishers 459 Parker v. Flook 197–8, 219 PHG Techs. v. St. John Cos. 204 Pierson v. Post 7 Pittsburgh State Univ. v. Kansas Bd. of Regents 536 Plains Cotton Coop. Ass’n v. Goodpasture Computer Serv. 177 Practice Mgmt. Info. Corp. v. American Med. Assoc. 192, 207 Princeton Graphics Operating v. NEC Home Electronics 194 Princeton Univ. Press v. Mich. Document Servs. 534, 535 Princo Corp. v. Int’l Trade Comm’n 249, 252 ProCD v. Zeidenberg 61–2, 290, 295 Qualcomm v. Broadcom Corp. 208, 242 Quality King Distributors v. L’anza Research Int’l 294 Quanta Computer v. LG Electronics 14, 63–4, 254 Queen City Pizza v. Domino’s Pizza 248 Raab v. Casper 446 Rambus v. Infineon Technologies 208 Regents of the University of California v. Eli Lilly 39 Richardson v. Stanley Works 203, 463 Ringgold v. Black Entm’t Television 534 Roche Prods. v. Bolar Pharm. Co. 145 Rodi Yachts v. Nat’l Marine 541 Rosco v. Mirror Lite Co. 204 Rosemont Enters. v. Random House 536, 542 Rosetta Stone v. Google 256 Roy Exp. Co. Establishment of Vaduz v. CBS 535, 544 Samsung Elecs. v. Apple 205 Sanitary Refrigerator Co. v. Winters 129 SCM Corp. v. Xerox Corp. 211–12, 242 Sega Enterprises Ltd. v. Accolade 179, 183, 187, 188, 190, 191, 194–5, 217, 298 Seiko Epson Corp. v. Nu-Kote Int’l 204 Shapiro, Bernstein & Co. v. P.F. Collier & Son Co. 536

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Sheldon v. Metro-Goldwyn Pictures Corp. 429 Siegel v. Chicken Delight 241, 248 Smith v. Dravo 428 Soc’y of Holy Transfiguration Monastery v. Gregory 535 Sony BMG Music Entm’t v. Tenenbaum 416 Sony Computer Entertainment v. Connectix Corp. 179, 190, 191 Sony Corp. v. Universal Studios 100, 301 Stac Elec. v. Microsoft Corp. 219 Standard Oil Co. of Calif. v. United States 246 Standard Sanitary Mfg. Co. v. United States 236 State ex. rel. Thornton v. Hay 528 State Street Bank v. Signature Financial Group 197, 219, 323, 387, 478 Storage Technology Corp. v. Custom Hardware Eng’g & Consulting 188 Sun Microsystems v. Microsoft Corp. 194, 212, 220–21 Synercom Technology v. University Computing Co. 177 TC Heartland LLC v. Kraft Food Brands 483 Teleflex v. KSR Intern. Co. 198 Teva Pharmaceuticals USA v. Sandoz 40, 249, 480, 481 The T.J. Hooper 528 TrafFix Devices v. Marketing Displays 256, 462 Trebro Mfr. v. Firefly Equip. 237, 252 Tulk v. Moxhay 447 Twentieth Century Fox Film v. Marvel Enters 537 Tyco Healthcare Group v. Mutual Pharma. Co. 251 Uniloc USA v. Microsoft Corp. 202 United States v. Aluminum Co. of Am. 235 United States v. Am. Can Co. 246 United States v. AT&T 253 United States v. Carroll Towing Co. 514 United States v. Dentsply Int’l 245 United States v. E.I. du Pont de Nemours 235 United States v. General Electric Co. 238 United States v. Line Material Co. 238 United States v. Loew’s 241 United States v. Microsoft Corp. 215, 242, 246 United States v. Singer Mfg. Co. 240 United States v. Univis Lens Co. 254 Universal City Studios v. Corley 187 University of Rochester v. G.D. Searle 39 U.S. Gypsum Co. v. National Gypsum Co. 256 U.S. Steel Corp. v. Fortner Enterprises 286 USM Corp. v. SPS Tech. 255

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706  Research handbook on the economics of IP law volume 1 Vault Corp. v. Quaid Software 186 Veeck v. S. Bldg. Code Congress Int’l 192 Viacom Int’l v. YouTube 457 VirnetX v. Cisco Sys. 202 Wal-Mart Stores v. Samara Bros. 326 Walker Process Equip. v. Food Mach. and Chem. Corp. 237, 251–2 Walker v. Time Life Films 388 Warner-Jenkinson v. Hilton Davis Chemical 41, 129, 447 Weinstein v. Univ. of Illinois 536 Whelan Associates v. Jaslow Dental Laboratory 176–7, 178, 217 White-Smith Music Publishing Company v. Apollo Company 12–13, 19 Whitmill v. Warner Bros. Entertainment 315 Whittemore v. Cutter 145 Williamson v. Citrix Online 199 Witmark & Sons v. Berger Amusement Co. 206 Witmark & Sons v. Jensen 206 W.L. Gore & Assocs. v. Garlock 132 user identification, collective management 492–3 user innovation 339–41, 344–5, 563 utilitarianism 73–84 Vacca, R. 475–6, 479, 484 Vaidhyanathan, S. 4, 567 valuation mechanism, prize and reward alternatives 351–2, 360–64 Van Gelder, A. 583, 601 Van Gompel, S. 16, 449 Van Hiel, A. 415 Van Houweling, M. 2–26, 48, 49, 61, 62, 63–4, 207, 425, 447, 452, 459, 460 Van Overwalle, G. 393 Van Ypersele, T. 121, 358, 361, 367, 379, 380, 394, 395 Vanneste, S. 29, 415 Varian, H. 133, 159, 161, 172, 188, 282, 288, 301, 385, 396 Verrier, R. 82 Vertinsky, L. 484 Vetter, G. 66, 571 Vickers, J. 287 Viscusi, W. 288, 290 Vishnubhakat, S. 389 Visscher, M. 269 Vives, X. 287 Voena, A. 659 voluntary licensing 458–60 Von Hippel, E. 82, 113, 122, 313, 314, 316, 330, 332, 333, 336, 339–40, 341, 342, 345, 530, 546, 547, 563

DEPOORTER_V1_9781848445369_t.indd 706

Voon, T. 585 Wagner, R. 36, 37, 211, 387, 389, 390, 393, 397, 432, 446, 479, 482 Waldfogel, J. 273, 321, 411, 412, 590, 604–5, 606, 607, 608, 621, 623, 625 Waldman, M. 134, 299, 301, 418 Walker, R. 388, 410, 585, 596 Walls, W. 382 Walsh, J. 30, 31, 33–4, 143, 146 Walton, G. 137 Ward, M. 669 Ware, J. 444 Wasserman, M. 477, 478, 484 Waterson, M. 271, 390 Watt, R. 495, 499 Weber, S. 184, 343, 460 Wegner, H. 457 Weil, M. 476 Weinberg, H. 275 Weinreb, L. 312, 529, 540 Weiser, P. 396 welfare promotion 98–118 consequentialism and IP law 99–101 consumer-side effects 107–12 copyright law 109–12, 115 and derivative works 113–14, 115 and economic development 658–9, 660 exclusivity and innovation costs 100–101, 102, 103 and follow-on innovation 102, 108, 114 future research 111, 115 happiness (subjective well-being) 105–7, 108–9 individual preference satisfaction 102–4, 108–9, 110, 111, 114 innovation promotion and funding 103, 104–5, 109, 114 patent law 107–9, 112 and price discrimination 287–93 producer-side effects 112–15 science and useful arts promotion 101–2 technologies and well-being gains 107–9 virtue ethics 104–5 welfare economics 73–4 Wenzel, M. 415 West, J. 162, 337, 338, 340 Wheatland, T. 415, 416 Wheeler, G. 438 Whinston, M. 270, 299, 412 Wilde, L. 121, 128 Wildman, S. 586, 626 Wiley, J. 292, 298 Williams, B. 73 Williams, H. 31–2, 108, 359

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Index  707 Williams, P. and R. 411 Williamson, O. 165–6, 334, 640 Willig, R. 134 willingness-to-pay model 282–3, 380–81, 497–8 Wilson, B. 213, 237 Wilson, T. 275 Winn, A. 29 winner-take-all biases of media markets 621 Winokur, J. 20 Winter, R. 334 Winter, S. 121, 122, 333, 640 Wolfstetter, E. 357–8 Wooders, M. 268, 269 work-for-hire doctrine 536–7 Wright, B. 121, 354–5, 357, 358, 368, 369 Wright, D. 390 Wright, J. 293, 299 WTO TRIPS Agreement 360, 586, 643, 644, 660–61, 667, 670–71

DEPOORTER_V1_9781848445369_t.indd 707

Wu, T. 291, 301, 381, 393, 398, 412 Wyatt, J. 300 Wyman, K. 57 Yablon, D. 432, 462, 464, 465 Yagi, B. 31, 32 Yamane, H. 656 Yan, I. 661 Yang, G. 666, 667 Yao, D. 135, 428 Yelderman, S. 346 Yen, A. 8 Yoffie, D. 35 Yoo, C. 262–80, 384, 385, 620 Yoon, Y. 28 Yu, P. 56, 411, 492, 571, 584, 593, 604, 648 Zamir, E. 84 Ziedonis, A. 31, 34, 36, 166, 382, 408, 413 Zimmerman, D. 84, 603

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RESEARCH HANDBOOK ON THE ECONOMICS OF INTELLECTUAL PROPERTY LAW

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RESEARCH HANDBOOKS IN LAW AND ECONOMICS Series Editors: Richard A. Posner, Judge, United States Court of Appeals for the Seventh Circuit and Senior Lecturer, University of Chicago Law School, USA and Francesco Parisi, Oppenheimer Wolff and Donnelly Professor of Law, University of Minnesota, USA and Professor of Economics, University of Bologna, Italy Edited by highly distinguished scholars, the landmark reference works in this series offer advanced treatments of specific topics that reflect the state-of-the-art of research in law and economics, while also expanding the law and economics debate. Each volume’s accessible yet sophisticated contributions from top international researchers make it an indispensable resource for students and scholars alike.   Titles in this series include: Research Handbook on the Economics of Property Law Edited by Kenneth Ayotte and Henry E. Smith Research Handbook on the Economics of Family Law Edited by Lloyd R. Cohen and Joshua D. Wright Research Handbook on the Economics of Antitrust Law Edited by Einer R. Elhauge Research Handbook on the Economics of Corporate Law Edited by Brett McDonnell and Claire A. Hill Research Handbook on the Economics of European Union Law Edited by Thomas Eger and Hans-Bernd Schäfer Research Handbook on the Economics of Criminal Law Edited by Alon Harel and Keith N. Hylton Research Handbook on the Economics of Labor and Employment Law Edited by Michael L. Wachter and Cynthia L. Estlund Research Handbook on Austrian Law and Economics Edited by Todd J. Zywicki and Peter J. Boettke Research Handbook on Behavioral Law and Economics Edited by Joshua C. Teitelbaum and Kathryn Zeiler Research Handbook on the Economics of Intellectual Property Law Volume 1: Theory Edited by Ben Depoorter and Peter S. Menell Research Handbook on the Economics of Intellectual Property Law Volume 2: Analytical Methods Edited by Peter S. Menell and David L. Schwartz

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Research Handbook on the Economics of Intellectual Property Law Volume 2: Analytical Methods

Edited by

Peter S. Menell University of California, Berkeley School of Law, USA

David L. Schwartz Northwestern University, School of Law, USA

RESEARCH HANDBOOKS IN LAW AND ECONOMICS

Cheltenham, UK • Northampton, MA, USA

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© The Editors and Contributors Severally 2019 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2019945636 This book is available electronically in the Law subject collection DOI 10.4337/9781789903997

ISBN 978 1 84844 536 9 (2 volume set) ISBN 978 1 78990 399 7 (eBook) Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

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Contents List of contributorsviii PART I  EMPIRICAL METHODS   1 Data sources on patents, copyrights, trademarks, and other intellectual property2 David L. Schwartz and Ted Sichelman PART II  EMPIRICAL STUDIES RELATING TO PATENTS Section A  Metrics   2 Patent citation data in social science research: overview and best practices Adam B. Jaffe and Gaétan de Rassenfosse

20

  3 Patent value John R. Allison

47

Section B  Patent Institutions and Litigation   4 Empirical scholarship on the prosecution process at the USPTO Michael D. Frakes and Melissa F. Wasserman

77

  5 The USPTO’s Patent Trial and Appeal Board Arti K. Rai and Saurabh Vishnubhakat

92

  6 The Federal Circuit as an institution Ryan Vacca

104

  7 Empirical studies of claim construction J. Jonas Anderson and Peter S. Menell

159

  8 Empirical studies of the International Trade Commission Colleen V. Chien and David L. Schwartz

175

  9 Technical standards, standards-setting organizations, and intellectual property: a survey of the literature (with an emphasis on empirical approaches)185 Jorge L. Contreras 10 Empirical studies of patent pools Michael Mattioli

236

v

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vi  Research handbook on the economics of IP law volume 2 11 Empirical analyses related to university patenting Arvids A. Ziedonis

256

PART III  PATENT LAW DOCTRINES 12 Empirical studies in patentability Ronald Mann and Christopher Cotropia

281

13 Patent duration Brian J. Love

310

14 Infringement Lee Petherbridge and Jason Rantanen

326

15 Presumption of validity Christopher B. Seaman

350

16 Inequitable conduct and patent misuse Lee Petherbridge and Jason Rantanen

367

17 Remedies Thomas F. Cotter and John M. Golden

390

PART IV  TECHNOLOGY-SPECIFIC STUDIES 18 Patent rights and innovation: evidence from the semiconductor industry Rosemarie H. Ziedonis and Alberto Galasso

423

19 Patent trolls Jay P. Kesan

445

20 Patents and innovation in economic history Petra Moser

462

21 The political economy of intellectual property reforms Jay P. Kesan and Andres A. Gallo

482

PART V  EMPIRICAL STUDIES RELATING TO COPYRIGHT 22 Empirical studies of copyright litigation Matthew Sag

511

23 Empirical studies of copyright registration Dotan Oliar

533

24 Copyright and technological change in music, movies, and books Joel Waldfogel

547

25 Music copyright Peter DiCola

564

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Contents  vii 26 Experiments in intellectual property Christopher Buccafusco and Christopher Jon Sprigman

579

27 The effect of copyright law on access to works Paul J. Heald

605

PART VI  EMPIRICAL STUDIES OF TRADEMARK LAW 28 Empirical studies of trademark law Barton Beebe

617

PART VII  EMPIRICAL METHODS IN TRADE SECRET RESEARCH 29 Empirical methods in trade secret research Michael Risch

638

PART VIII  KNOWLEDGE COMMONS 30 Knowledge commons Michael J. Madison, Katherine J. Strandburg and Brett M. Frischmann

656

Index677

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Contributors John R. Allison, The Mary John and Ralph Spence Centennial Professor, McCombs Graduate School of Business, University of Texas at Austin, USA J. Jonas Anderson, Professor of Law, American University, Washington College of Law, USA Barton Beebe, John M. Desmarais Professor of Intellectual Property Law, New York University School of Law, USA Christopher Buccafusco, Professor of Law and Director of the Intellectual Property and Information Law Program, Cardozo School of Law, Yeshiva University, New York, USA Colleen V. Chien, Professor of Law, Santa Clara University Law School, California, USA Jorge L. Contreras, Professor, University of Utah S.J. Quinney College of Law, USA Christopher Cotropia, Professor of Law, University of Richmond School of Law, USA Thomas F. Cotter, Briggs and Morgan Professor of Law, University of Minnesota Law School, USA Gaétan de Rassenfosse, Assistant Professor, Brandeis University (USA) and Queensland University of Technology (Australia) Peter DiCola, Professor of Law and Searle Research Fellow, Northwestern University Pritzker School of Law, USA Michael D. Frakes, Professor of Law and Economics, Duke University, USA Brett M. Frischmann, Charles Widger Endowed University Professor in Law, Business and Economics, Charles Widger School of Law, Villanova University, Philadelphia, USA Alberto Galasso, Associate Professor, University of Toronto, Canada
and Research Associate, National Bureau for Economic Research, USA Andres A. Gallo, Professor, Coggin College of Business, University of North Florida, USA John M. Golden, Loomer Family Professor in Law, University of Texas at Austin, USA Paul J. Heald, Richard W. and Marie L. Corman Professor of Law, University of Illinois College of Law, USA Adam B. Jaffe, Research Professor, Brandeis University (USA) and Adjunct Professor, Queensland University of Technology (Australia) Jay P. Kesan, Professor of Law and Workman Research Scholar at the University of Illinois at Urbana-Champaign, USA viii

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Contributors  ix Brian J. Love, Associate Professor and Co-Director of the High Tech Law Institute, Santa Clara University School of Law, USA Michael J. Madison, Professor of Law and Faculty Director, Innovation Practice Institute, University of Pittsburgh School of Law, USA Ronald Mann, Albert E. Cinelli Enterprise Professor of Law, Columbia Law School, USA Michael Mattioli, Professor of Law, Indiana University Maurer School of Law, Indiana University, USA Peter S. Menell, Koret Professor of Law and Director, Berkeley Center for Law & Technology, Berkeley School of Law, University of California, USA Petra Moser, Associate Professor of Economics, NYU Stern School of Business, USA and Research Associate, National Bureau of Economic Research, Cambridge, Massachusetts, USA Dotan Oliar, Professor of Law, University of Virginia School of Law, USA Lee Petherbridge, Professor of Law, Vachon Research Fellow, Loyola Law School, Loyola Marymount University, USA Arti K. Rai, Elvin R. Latty Professor of Law, Duke Law School; Faculty Director, Duke Law Center for Innovation Policy; Duke Innovation and Entrepreneurship Initiative Research Fellow, USA Jason Rantanen, Professor, Ferguson-Carlson Fellow in Law, and Director of the Innovation, Business, and Law Program, University of Iowa Law School, USA Michael Risch, Professor of Law, Villanova University School of Law, USA Matthew Sag, Professor,  Loyola University Chicago School of Law and  Associate Director for Intellectual Property, Institute for Consumer Antitrust Studies, USA David L. Schwartz, Stanford Clinton Sr. and Zylpha Kilbride Clinton Research Professor of Law, Northwestern University School of Law, USA Christopher B. Seaman, Associate Professor of Law, Washington and Lee University School of Law, USA Ted Sichelman, Professor of Law, University of San Diego Law School, USA Christopher Jon Sprigman, Professor, New York University School of Law and Co-Director, Engelberg Center on Innovation Law and Policy, USA Katherine J. Strandburg, Alfred B. Engelberg Professor of Law, New York University School of Law, USA Ryan Vacca, Professor of Law, University of New Hampshire School of Law, USA Saurabh Vishnubhakat, Associate Professor of Law, Texas A&M University School of Law, USA

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x  Research handbook on the economics of IP law volume 2 Joel Waldfogel, Professor, Frederick R. Kappel Chair in Applied Economics, University of Minnesota, USA Melissa F. Wasserman, Charles Tilford McCormick Professor of Law, The University of Texas at Austin, USA Arvids A. Ziedonis, Professor of Strategy and Innovation, Faculty of Economics and Business, KU Leuven, Belgium Rosemarie H. Ziedonis, Associate Professor, Strategy and Innovation, Questrom School of Business, Boston University, and Research Associate, National Bureau for Economic Research, USA

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PART I EMPIRICAL METHODS

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1.  Data sources on patents, copyrights, trademarks and other intellectual property David L. Schwartz* and Ted Sichelman**

Contents I. Patents II. Trademarks III. Copyrights IV. Trade Secrets and Other Intellectual Property V. Licensing Data VI. IP Litigation VII. Conclusion References In this chapter, we provide a roadmap of the sources of data on the various forms of intellectual property (IP) protection. We first explain what data is available about patents, copyrights, trademarks, and other types of IP, and where to find it. Then we identify and analyze data sources specifically relating to IP licensing and litigation, growing areas of research by scholars and lawyers.

I. PATENTS There are numerous sources that permit advanced searching and free downloading of individual patents. U.S. patents and published patent applications are freely searchable and downloadable from the United States Patent and Trademark Office (USPTO) website.1 **  Stanford Clinton Sr. and Zylpha Kilbride Clinton Research Professor of Law, Northwestern University School of Law. **  Professor of Law, University of San Diego Law School. We thank Colleen Chien, Amit Elazari, Paul Heald, Jason Rantanen, Michael Risch, Josh Sarnoff, Jeremy Sheff, Ryan Whalen, and Heidi Williams for their helpful comments on previous drafts of this chapter. 1   U.S. patents can be searched at United States Patent and Trademark Office. 2017. ‘USPTO Patent Full-Text and Image Database’, http://patft.uspto.gov/netahtml/PTO/search-adv.htm. According to the website, the database includes all U.S. patents issued since 1976, whereas patents from 1790 through 1975 are searchable by Issue Date, Patent Number, and Current Classification (US, IPC, or CPC) categories. Full text images of U.S. patents back to 1790 are available at United States Patent and Trademark Office. 2017. ‘US Patent Full-Page Images’, http://patft.uspto.gov/ netahtml/PTO/patimg.htm, although the results are not searchable. U.S. published patent applications can be searched at United States Patent and Trademark Office. 2017. ‘Patent Application Full Text and Image Database’, http://appft.uspto.gov/netahtml/PTO/search-adv.html. The USPTO began publishing certain patent applications in 2001.

2

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Data sources on intellectual property  3 There are other free websites that permit searching of U.S. patents.2 These websites appear to obtain their data from the USPTO. Bibliographic information about individual U.S. patents is also downloadable for free from the USPTO.3 Bibliographic information includes, for instance, inventor names, assignee of patent at issuance, U.S. and International patent classification, filing date, issue date, claims of priority, etc. The USPTO also provides basic aggregate statistics about U.S. patent grants, filings, and other patent-related information.4 The availability of bulk downloadable data will be discussed shortly. International patent information is also available from a number of sources. European Patent Office (EPO) patents are searchable at the EPO’s eSpaceNet website.5 The EPO also operates PatStat,6 which permits users to generate bibliographic information on all EPO patents, for a fee (de Rassenfosse et al., 2014). The World Intellectual Property Organization (WIPO) hosts a free website, PatentScope, that permits searching of WIPO patents.7 Google patents permits searching of some international patents, in addition to U.S. patents.8 The Organization for Economic Co-operation and Development (OECD) also provides basic statistical information on international patents.9 In addition to governmental sources, various commercial databases permit searching of U.S. and international patents. For instance, LexisNexis, Westlaw, and BloombergLaw10 permit searching of U.S. patents. Thomson Innovation,11 which is owned by Westlaw, permits more extensive searching and analysis of patents. For example, Thomson Innovation maintains data on patent families and allows for examiner-provided citations to be distinguished from applicant-provided citations (starting for patents and applications published in 2001). While these databases all contain the underlying patents, the commercial databases permit easier downloading of demographic characteristics of patents after a desired query.

 2   Numerous websites permit free downloading and searching of patents, including, for instance, 2017. Free Patents Online, freepatentesonline.com and Google Patents, https://patents. google.com/.  3   The data, beginning in 2002 and through the present, is downloadable at ReedTech. 2017. ‘USPTO Data Sets’, http://patents.reedtech.com/pgog.php. Some scholars report finding it timeconsuming and generally difficult to parse the bibliographic information into a useful format.  4   United States Patent and Trademark Office. 2017. ‘Statistics’, www.uspto.gov/learning-and-re​ sources/statistics.  5   EPO patents can be searched at European Patent Office. 2017. ‘Espacenet Patent search’, http://worldwide.espacenet.com.  6   European Patent Office. 2017. ‘Patstat’, www.epo.org/searching/subscription/raw/product-1​ 4-24.html.  7   World Intellectual Property Organization. 2017. ‘Patentscope’, https://patentscope.wipo.int/ search/en/search.jsf.  8   The Help page for Google patents indicates that it obtains patent information from the USPTO, the EPO, and WIPO. Google. 2017. ‘About Google Patents’, https://support.google.com/ faqs/answer/2539193.  9   OECD. 2017. ‘Intellectual property (IP) statistics and analysis’, www.oecd.org/science/inno/ oecdpatentdatabases.htm. The OECD website indicates that the data is mainly derived from the EPO’s PatStat dataset. 10   Bloomberg Law. 2017. www.bloomberglaw.com/patent_search. 11   Clarivate Analytics. 2017. ‘Derwent Innovation’, http://info.thomsoninnovation.com/.

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4  Research handbook on the economics of IP law volume 2 Patent citation information is available through the National Bureau of Economic Research (NBER).12 The NBER website contains several free data files. These files contain various demographic information about each U.S. patent issued from 1976 until 2006, including assignee, filing date, issue date, and International classification. They also include the number of times that the patent was cited in patent prosecution by another patent. Unfortunately, the NBER citation field does not distinguish between citations provided by a patent applicant and those supplied by the patent examiner.13 An update to the NBER patent citation data file to include more recent patents is expected to be released shortly. The NBER patent citation data includes all citations to U.S. patents, including citations by the same inventor. Such self-citations can be removed by using the disambiguated inventor dataset. Lee Fleming and others have updated and refined the NBER patent dataset, and made their data available to the public.14 Recently, the USPTO, through an agreement with ReedTech, has released bulk patent data in a granular format, which is specifically geared for researchers.15 Using the NBER classifications, the USPTO constructed the USPTO Historical Patent Data Files, four research datasets containing time series and micro-level data by NBER sub-category on applications, grants, and in-force patents spanning two centuries of innovation.16 The USPTO also has datasets including the gender of inventors, the full text of claims, foreign priority, the number of figure sheets, and other information.17 We understand that all of the relevant data from grants and published applications—e.g., citations—can be parsed directly from the full-text XML files available via bulk downloads from Google. Information about patent prosecution is also available for download. Through the Patent Application Information Retrieval (PAIR) system, one can view the prosecution history of a U.S. issued patent or published patent application.18 For a majority of patents issued and applications published in the last five to ten years, PDF images of the actual 12   National Bureau of Economic Research. ‘Patent Data Project’, https://sites.google.com/site/ patentdataproject/Home. The seminal article introducing and explaining the dataset is Hall et al. (2001). 13   Beginning with patents issued around 2002, examiner citations were marked with an asterisk on the face of the patent. Citations cited by the applicant in an information disclosure statement do not have an asterisk. For patents issued before 2002, there is no way to identify examiner citations from the face of the patent. 14  https://dataverse.harvard.edu/dataset.xhtml?persistentId=hdl:1902.1/15705. 15   The USPTO’s home page for its electronic bulk data (patent and trademark) is available at United States Patent and Trademark Office. 2017. ‘Bulk Data Products’, www.uspto.gov/learningand-resources/electronic-bulk-data-products. ReedTech has released additional data to the public, available at ReedTech. 2017. ‘Public PAIR Patent Access Download’, http://patents.reedtech.com/ Public-PAIR.php. 16   United States Patent and Trademark Office. 2017. ‘Historical Patent Data Files’, http://www. uspto.gov/learning-and-resources/electronic-data-products/historical-patent-data-files. For a discussion of the USPTO’s historical patent data files, see Marco et al. (2015). 17  http://www.patentsview.org/download/. 18   Members of the public can use Public PAIR, which requires entry of a Recaptcha code. United States Patent and Trademark Office. 2017. ‘Patent Application Information Retrieval’, http://portal.uspto.gov/external/portal/pair. Public PAIR has publicly available information on patents and published applications. Private PAIR, which is only available to registered patent attorneys or agents, does not require a Recaptcha and further provides access to non-public information on applications that the attorney or agent is authorized to view. United States

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Data sources on intellectual property  5 prosecution documents (i.e., office actions, restriction requirements, originally filed applications, amendments, etc.) can be accessed. For older patents and applications, only the table of contents of the prosecution history is available. The full prosecution history for these older patents is only available in hardcopy format from the USPTO. Through cooperation with the USPTO, Google has made available certain PAIR data.19 We believe that Google’s patent PAIR data is generally complete for applications published in the last several years, although it may not be comprehensive historically. The USPTO has released parsed datasets of patent examination data,20 including a separate research dataset on office actions.21 Patent Advisor22 is a Reed Technology/Lexis product that has a database of millions of prosecution histories and provides information about patents and patent prosecution. Researchers should note that applications which have not been published or issued as patents, whether because they are premature (less than 18 months from filing) or because the applicant requested non-publication, are missing from the PAIR data. PatentBox also permits searching of patent file wrappers.23 Patent Ninja provides detailed statistical information relating to specific patent examiners, including information relating to examiner interviews at the USPTO.24 Google has also assembled additional patent data, which it makes available for free download. The additional patent data includes text from patent assignments (1980– current),25 patent maintenance fee filings and abandonments (1981–current),26 patent classification,27 and Image File Wrapper petition decisions.28 The patent assignment data only includes assignments and other documents recorded with the USPTO.29 Because recording is voluntary (although encouraged), the assignment database represents an incomplete subset of all assignments. The remaining dataset should be more complete, although we have not independently verified as much. Although the USPTO has released substantial amounts of data on patent prosecution, data about the agency itself is less available. The Freedom of Information Act (FOIA)

Patent and Trademark Office. 2017. ‘Portal Applications’, https://ppair.uspto.gov/authenticate/ AuthenticateUserLocalEPF.html. 19   Google. 2012. ‘USPTO Bulk Downloads: PAIR Data, www.google.com/googlebooks/usptopatents-pair.html. 20   Graham, Marco and Miller (2017). The dataset is available for download at www.uspto.gov/ learning-and-resources/electronic-data-products/patent-examination-research-dataset-public-pair. 21   Lu, Myers and Beliveau (2017). The dataset is available for download at www.uspto.gov/ learning-and-resources/electronic-data-products/office-action-research-dataset-patents. 22  http://kr.lexisnexisip.com/products-services/intellectual-property-solutions/lexisnexis-patent​ advisor. 23   The Patent Box. 2017, www.thepatentbox.com/. 24  https://examiner.ninja/. 25   Google. 2012. ‘USPTO Bulk Downloads: Patent Assignment Text’, www.google.com/google​ books/uspto-patents-assignments.html. 26   Google. 2012. ‘USPTO Bulk Downloads: Patent Maintenance Fees’, www.google.com/google​ books/uspto-patents-maintenance-fees.html. 27   Google. 2012. ‘USPTO Bulk Downloads: Patent Classification Information’, www.google. com/googlebooks/uspto-patents-class.html. 28   Google. 2012. ‘USPTO Bulk Downloads: Patent Petition Decisions’, www.google.com/google​ books/uspto-patents-petitions.html. 29   Various companies, such as Innography, offer seemingly similar information for a fee.

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6  Research handbook on the economics of IP law volume 2 permits members of the public to request information from federal agencies. These include the USPTO (via the Department of Commerce), the Copyright Office, and the Food and Drug Administration. For example, Michael Frakes and Melissa Wasserman obtained patent processing information (Frakes and Wasserman, 2013, p. 92), as well as a full examiner roster from the USPTO (Frakes and Wasserman, 2017, p. 553).30 While there is no specific form to use in making a FOIA request, the government provides specific contact information to use for each agency.31 The FOIA request itself must reasonably describe the records sought. The agency is required to promptly respond to the request and provide responsive documents or indicate a reason for denial of the request. The government may charge educational requestors for the costs of duplication of the records, and may charge commercial users search charges as well. Public Citizen publishes an informative guide on the FOIA process.32 The courts, however, are not subject to FOIA requests.

II. TRADEMARKS Relative to patents, there are fewer sources of data on trademarks. Free online searches of trademarks can be conducted at the USPTO website through the Trademark Electronic Search System (TESS).33 TESS permits searching on text and images of registered marks, and marks in pending and abandoned applications. Many other countries also have government-run websites that permit trademark searching.34 Trademarks can also be searched on Lexis, Westlaw, BloombergLaw and other fee-based places. One new feebased service, TrademarkNow, provides searching across many international trademark offices and uses sophisticated artificial intelligence and natural language processing techniques to find marks similar to those being searched.35 The USPTO, through the Office of the Chief Economist, has released bulk trademark data.36 The USPTO trademark data set is updated annually, and contains detailed information on 8.6 million trademark applications filed with or registrations issued by the   Other information, such as examiner wages, are also likely subject to a FOIA request.   United States Department of Justice. 2011. ‘FOIA.Gov: Make a Request’, www.foia.gov/ report-makerequest.html. 32   Public Citizen. 2017. ‘How to File a FOIA Request: A Guide’, http://citizen.org/Page.aspx?pid=​ 458. 33   TESS can be accessed at United States Patent and Trademark Office. ‘Trademark Electronic Search System (TESS)’, http://tess2.uspto.gov/. 34   For instance, the U.K. operates Gov.UK. ‘Search for a trade mark’, www.gov.uk/search-fortrademark, and the Canadian Intellectual Property Office operates Government of Canada. 2017. ‘Canadian Trademarks Database’, www.cipo.ic.gc.ca/app/opic-cipo/trdmrks/srch/bscSrch.do. See also World Intellectual Property Organization. 2017. ‘Global Brand Database’, www.wipo.int/ branddb/en/. WIPO also provides statistical reports. See World Intellectual Property Organization. ‘Intellectual Property Statistics’, www.wipo.int/ipstats/en/. Japanese trademark records are available in digital format from the National Center for Industrial Property Information and Training, www.inpit.go.jp/info/standard/download/standard_dl/sgml5.3.html. 35   TrademarkNow, www.trademarknow.com/. 36   United States Patent and Trademark Office. 2017. ‘Trademark Case Files Dataset’, www.uspto. gov/learning-and-resources/electronic-data-products/trademark-case-files-dataset-0. 30 31

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Data sources on intellectual property  7 USPTO, beginning in 1870. It is derived from the USPTO main database for administering trademarks and includes data on mark characteristics and designs, prosecution events, ownership, classification, renewal history, foreign priority, and international registration. International bulk data is more difficult to locate. Additionally, the United Kingdom government has released bulk trademark data.37 The USPTO has also released a bulk dataset of trademark assignments.38 This dataset comprises documents that parties have filed relating to trademark assignments, securities interests, releases of security interests, and other related documents. The USPTO dataset includes information from 1952, and is updated annually. It should be noted that, as for patents, recording trademark assignments and security interests with the USPTO is not mandatory. Therefore, the dataset is only a subset of all trademark assignments and security interests. Google has also assembled various large databases of trademark information from the USPTO, which are available for free download.39 The Google data was updated through 2015 and the file format is eXtensible Markup Language (XML), which may permit easier manipulation than the bulk USPTO data. One series of data files consists of the images of trademark word mark, serial number, registration number, filing date, registration date, goods and services, classification number(s), status code(s), design search code(s) and pseudo mark(s) from April 7, 1884 to present. Another series of data files includes the text of trademark applications for the same time period. Google also provides trademark assignment data (1980–present), as well as Trademark Trial and Appeal Board decisions (1955–present). Finally, Google provides a dataset with images of all applications (not just those that mature into registrations) from a recent period, 2010 until present.

III. COPYRIGHTS Unlike patents and trademarks, copyrights are not substantively examined by the government. Copyrights are registered by the U.S. Copyright Office, provided all the paperwork is properly completed and the required fee is remitted. Currently there is no requirement that a creator of an expressive work register her copyright. Rights accrue even without registration, and there is no central repository of copyrighted but unregistered works. Thus, any investigation of current copyrights that relies upon registrations will be limited by selection concerns. Registration provides certain benefits, including permitting the owner to initiate a lawsuit and potentially authorizing special ‘statutory’ damages. Before 1989, and especially before the passage of the 1976 Copyright Act, registration played a more important role. 37   Gov.UK. ‘Transparency data IPO: Trade mark data release’, www.gov.uk/government/pub​ lications/ipo-trade-mark-data-release. 38   United States Patent and Trademark Office. 2017. ‘Trademark Assignment Dataset’, www. uspto.gov/ip/officechiefecon/tm_assignments.jsp. For a discussion of the dataset, see Graham et al. (2015). 39   The Google bulk download of USPTO trademark data can be found at Google. 2012. ‘USPTO Bulk Downloads: Trademarks’, www.google.com/googlebooks/uspto-trademarks.html.

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8  Research handbook on the economics of IP law volume 2 Registrations and renewal information for works registered before 1978 are maintained in physical copy in the Copyright Public Records Reading Room. The U.S. Copyright Office is presently engaged in a Digitization and Public Access project, with the goal of providing electronic access to the pre-1978 registrations.40 Although the pre-1978 registrations and other documents are not available through the Copyright Office, there are other limited sources for the information. For instance, some early information on books, dramatic compositions, and other works is maintained by the University of Pennsylvania Libraries.41 For works registered in 1978 or later, the Copyright Office maintains the Copyright Catalog,42 an electronic searchable database. The Copyright Catalog permits searching by author, title, keyword, and registration number, and several other fields.43 Many creative works are licensed through The American Society of Composers, Authors and Publishers (ASCAP). In the U.S., ASCAP does not share much information about its collection of copyrighted works. Analogous EU collecting societies often publish more data.44 Martin Kretschmer and Ruth Towse maintain a wiki of empirical studies relating to copyrights.45 Information about specific creative works is available. For example, Nielsen has data on music and book sales, among other things. Nielsen information is expensive to obtain and we do not believe that it provides free data to academics. Additional information about music can be found on Discogs46 and Musicbrainz.47 The Internet Movie Database has information on movies.48 Bowker49 has more information on books, as does Amazon.

IV. TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY By definition, information protected by trade secret laws must be secret. It cannot be generally known or readily ascertainable. Consequently, any public database of trade secret information would destroy the trade secret status of the information. Thus, we are aware of no public directory. Information about trade secrets, when available, is typically found in judicial decisions relating to claims of misappropriation of trade secrets. These cases, some of which are filed in state courts, can be found on Westlaw, Lexis, BloombergLaw,

  U.S. Copyright Office. ‘Digitization Project’, http://copyright.gov/digitization/index.html.   The Online Books Page: Copyright Registration and Renewal Records, http://onlinebooks. library.upenn.edu/cce/. 42   U.S. Copyright Office. ‘Copyright Catalog’, http://cocatalog.loc.gov/cgi-bin/Pwebrecon.cgi. 43   Robert Brauneis and Dotan Oliar have assembled the post-1978 copyright registration data and plan to make it available to researchers in bulk format in the near future. 44   For a list of some of these societies, see Wikipedia. 2017. ‘List of copyright collection societies’, http://en.wikipedia.org/wiki/List_of_copyright_collection_societies. Martin Kretschmer and Ruth Towse have been very successful mining data from those sources. 45  www.copyrightevidence.org/evidence-wiki/index.php/Copyright_Evidence. 46   Discogs. 2017, www.discogs.com/. 47   MusicBrainz, https://musicbrainz.org/. 48   IMDb. 2017, www.imdb.com/. 49   Bowker, www.bowker.com/. 40 41

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Data sources on intellectual property  9 and other online litigation databases. As far as we know, other types of IP-like rights, such as rights of publicity, performance rights, unfair competition, and so forth, are also only catalogued in reported decisions.

V.  LICENSING DATA IP licensing data is generally limited to those licenses that are disclosed to the Securities and Exchange Commission (SEC) by public companies as material transactions under the securities laws. These licenses are available on the EDGAR database for no charge,50 as well as Lexis and Westlaw, which allow more sophisticated searching than on the SEC’s website. Unfortunately, the set of publicly disclosed licenses is much smaller than the total universe of licenses. Some private companies have collected the licenses in EDGAR, plus have added other licenses available from other sources, and have made them available for a fee. These companies include RoyaltySource,51 ktMine,52 RoyaltyStat,53 and Valuation Resources.54 Royalty Range provides a collection of European licenses.55 The Association of University Technology Managers provides information on university licenses.56 Moreover, there is scant publicly available information about letters that demand the recipient to take a license. Chillingeffects has a limited database of patent demand letters, as provided by some demand letter recipients.57

VI.  IP LITIGATION For federal cases, the Administrative Office of the Courts (AO) provides access to electronic dockets and related documents on its Public Access to Court Electronic Records (PACER) system.58 Importantly, PACER only carries those dockets and related documents that have been electronically logged. We have found that starting in 1999, PACER carries 95 percent or more of all cases, and nearly 100 percent of cases since the mid-2000s. However, because many courts did not convert to electronic case filing until the mid-2000s or later, case documents—other than orders—are widely available only for cases filed in the mid-2000s or later (and vary by jurisdiction before then). Perhaps more problematic than PACER’s limited selection of cases and documents are its limitations in searching 50   U.S. Securities and Exchange Commission. ‘EDGAR: Company Filings’, www.sec.gov/edgar/ searchedgar/companysearch.html. 51   RoyaltySource, www.royaltysource.com/. 52   Ktmine. ‘License Agreement Database’, www.ktmine.com/ip-data/license-agreements/. 53   RoyaltyStat. 2017, www.royaltystat.com/. 54   Valuation Resources. ‘Royalty Rates and License Fees’, http://valuationresources.com/Econo​ micData/Royalty.htm. 55   Royalty Range, www.royaltyrange.com/. 56   The Association of University Technology Managers. ‘AUTM Licensing Activity Surveys’, www.autm.net/resources-surveys/research-reports-databases/licensing-surveys/. 57  https://trollingeffects.org/letters. 58   Public Access to Court Electronic Records (PACER), www.pacer.gov/.

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10  Research handbook on the economics of IP law volume 2 for cases. The ‘Case Locator’ allows search by court, case number, subject matter (e.g., patent, copyright, trademark, and party name) across all courts.59 However, there is no means by which to search docket entry text, much less the text of documents filed with the court. Moreover, PACER charges $0.10 per page of information, which can often add up quickly, especially when users are downloading multiple documents. For these reasons, several commercial and non-commercial services provide alternative access to the PACER data. For instance, the RECAP project (PACER spelled backwards) provides free access to select PACER dockets and documents.60 PACERPro61 and DocketAlarm62 provide front-end user interfaces to PACER that allow searching across cases and dockets by many different fields, including free-text and Boolean-style searches. Both services generally provide documents already in their databases at no additional charge and access to any PACER document for an additional, small fee. In a recent development, the USPTO has released bulk raw data from patent litigation, including the cases, attorneys, and docket entry descriptions.63 Other services have assembled large amounts of PACER data and resell it on a subscription basis (sometimes with additional fees for downloading documents not on file). Lexis Courtlink,64 Westlaw CourtExpress,65 and Bloomberg Law Dockets66 each offer docket-related services with sophisticated searching across cases and related dockets, as well as some information located in court documents (e.g., patent numbers in CourtLink). Bloomberg Law Dockets will retrieve many documents from PACER without charge for academic accounts. Other services which are IP specific—including DocketNavigator,67 Lex Machina, MaxVal IP,68 and RPX69—provide advanced searching across different types of IP cases (generally since 2000). These services also offer daily email updates of newly filed cases. Many of these services also provide information about pending Patent Trial and Appeal Board (PTAB)70 and International Trade Commission (ITC) actions.71

59   PACER, https://pcl.uscourts.gov/search. For discussion of the accuracy of PACER’s nature of suit field, see Sag (2013) and Kesan and Ball (2006, p. 260, n. 177). 60   Free Law Project. 2017. ‘RECAP Project — Turning PACER Around’, www.recapthelaw. org/. 61   PacerPro. 2017, www.pacerpro.com/. 62   Docket Alarm. 2017, www.docketalarm.com/. 63   United States Patent and Trademark Office. 2017. ‘Patent Litigation Docket Reports Data’, www.uspto.gov/learning-and-resources/electronic-data-products/patent-litigation-docketreports-data/. Patent numbers and case types for cases filed from 2003 to 2016 will also be available in this dataset. 64  www.lexisnexis.com/en-us/products/courtlink-for-corporate-or-professionals.page. 65   Thomson Reuters Westlaw. 2017. ‘Dockets’, https://courtexpress.westlaw.com. A scaleddown version of CourtExpress is available in Westlaw itself via its Westlaw Dockets service. 66  www.bloomberglaw.com/page/law_school#advanced-search/dockets. 67   Docket Navigator. 2015, http://home.docketnavigator.com/. 68   Litigation Databank. 2017, http://litigation.maxval-ip.com/. 69   RPX Insight. 2017, https://search.rpxcorp.com/users/sign_in. 70   PTAB data is also available for no charge at https://ptabdataui.uspto.gov/#/documents. 71   ITC data is also available for no charge at United States International Trade Commission. 2017. ‘Electronic Document Information System (EDIS)’, https://edis.usitc.gov/edis3-external/app. The ITC also provides summary statistics about its investigations at United States International Trade Commission, https://usitc.gov.

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Data sources on intellectual property  11 Some of the services, such as Westlaw, Lexis, and Bloomberg, also make available docket and related information in select state court cases. A major limitation of all of these services is that there is no means to download data in bulk for academic analysis, such as empirical study with STATA, Excel, or other statistical packages. Docket Navigator provides some downloading capabilities in Excel format on a free basis for academics. The University of Michigan’s ICPSR service provides limited federal case information and related coding from the AO for no charge.72 However, ICPSR recently changed its policy and now requires institutional review board (IRB) approval for its litigation data, and makes data usage subject to confidentiality restrictions. The Federal Judicial Center (FJC) recently began providing the same information for free without restriction.73 Moreover, the reliability of some of the AO data has been questioned.74 A private consulting group of patent law professors and economists, Academic Expert Group (AEG), has assembled a large collection of PACER data and related documents on IP litigation cases, which it makes available for bulk download to academics for research purposes for a small fee.75 Unlike the ICPSR data, no IRB approval is needed, though the AEG generally requires that the data be kept confidential other than for peer review purposes. Direct access to PACER and its documents provides a much larger universe of documents than the sets of opinions available on Westlaw, Lexis, and Bloomberg. However, one of the authors has conducted an informal study of summary judgment patent orders available on PACER and has found that at least since 2010, it appears Westlaw carries nearly all of the orders that appear on PACER in electronic format. A related issue is the so-called ‘Rule 36’ orders from the Federal Circuit, which are mere summary affirmances with no further information.76 In order to know which issues were appealed in these cases, it is necessary to review the briefs. Although Westlaw has these briefs from 2004 onward, they do not consistently appear prior to that date. Because the Federal Circuit did not add electronic case filing until a few years ago, it is necessary to consult at the Federal Circuit the paper versions of missing briefs filed prior to 2004. Another problematic coverage issue in these databases is the set of reported litigated patent numbers. Researchers have relied on Derwent’s ‘LitAlert’ service (available in Westlaw and Lexis) to provide reported litigated patents.77 This data is derived from reports sent by district courts to the USPTO of pending litigation. Unfortunately, in separate work we are undertaking to assemble litigated patent numbers, we have found that many districts do not regularly report to the USPTO. Thus, the Derwent data substantially underreports litigated patents. As noted earlier, some services provide searching by patent number against data derived from PACER (e.g., Courtlink and RPX), but these  www.icpsr.umich.edu/icpsrweb/ICPSR/series/72.   For lawsuits filed after 1988, the data is available at www.fjc.gov/research/idb/interactive/ IDB-civil-since-1988. 74   See, for example, Beebe (2006, pp. 1652–54) and Hadfield (2004). 75   Please contact the authors of this chapter for further information about AEG’s data. 76   For a discussion of Rule 36 affirmances see Schwartz (2008). The Federal Circuit adopted Rule 36 in 1989. See Dunner et al. (1995). Even before 1989, there were typically a few Federal Circuit summary affirmances each year, which also require consulting the briefs to ascertain the appealed issues. 77   Clarivate Analytics, Westlaw, http://ip-science.thomsonreuters.com/support/patents/dwpiref/ hosts/westlaw/. 72 73

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12  Research handbook on the economics of IP law volume 2 data are not available for bulk download. We plan to complete our litigated patent number database and make it available for research purposes in the near future. Another area of interest is data about non-practicing entities (NPEs), pejoratively termed ‘patent trolls’. The two main sources of data for researchers has been data from Patent Freedom78 and RPX.79 Unfortunately, these companies have not allowed general release of their bulk data for independent verification by other researchers, and subsequent work by one of the authors along with other researchers has shown that both entities tend to be fairly aggressive in labeling entities as NPEs.80 This alternative coding of NPEs (for 2010 and 2012) classifies litigants as one of operating companies, individual inventors, failed operating companies/failed startups, universities, patent holding companies, patent aggregators, technology development companies, and IP subsidiaries of operating companies. The full data set is available for full download at the NPE Data website.81 The Stanford NPE Litigation Dataset, led by Shawn Miller, classifies a random sample of patent plaintiffs since 2000.82 Other data about business entities can be acquired from Compustat,83 Hoovers,84 VentureXpert,85 Wharton Research Data Services,86 and Dun & Bradstreet.87 There are some sources that have coded the underlying data in order to provide more information and, sometimes, statistics about IP litigation. As mentioned earlier, the AO data available at the ICPSR service provides additional, hand-coded information, about IP cases (though, again, some have questioned its reliability). Another site of interest is PatStats, run by Paul Janicke and the University of Houston School of Law,88 which provides statistics about patent law issues at the district court and Federal Circuit levels for cases since 2000. Other entities provide reports with statistics, such as the Federal Circuit,89 the FJC,90 the Government Accounting Office,91 PricewaterhouseCoopers,92 RPX,93 Lex Machina,94   Patent Freedom, www.patentfreedom.com/.   RPX. 2017, www.rpxcorp.com/. 80   Some of RPX’s data is now searchable at its portal, but is not available for download in bulk. See RPX Insight. 2017, https://search.rpxcorp.com/users/sign_in. 81  www.npedata.com. 82   https://law.stanford.edu/projects/stanford-npe-litigation-dataset/. For a description of the dataset, see Miller (2017). 83   For academics, Compustat is available on the Wharton Research Data Services Wharton Research Data Services. 2017, https://wrds-web.wharton.upenn.edu/wrds/index.cfm. 84   D&B Hoovers. 2017, http://hoovers.com. 85   VentureXpert is a Thomas Reuters product. 86   Wharton Research Data Services. 2017, https://wrds-web.wharton.upenn.edu/wrds/. 87   Dun & Bradstreet. 2017, www.dnb.com/. 88   Patstats.org, www.patstats.org/. 89   United States Court of Appeals for the Federal Circuit, www.cafc.uscourts.gov/the-court/ statistics. 90   United States Courts, www.uscourts.gov/Statistics/JudicialBusiness/2013.aspx. 91   U.S. Government Accountability Office. 2013. ‘Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality’, www.gao.gov/products/ GAO-13-465. 92   PWC. 2017. ‘2017 Patent Litigation Study’, www.pwc.com/us/en/forensic-services/publications/ patent-litigation-study.jhtml. 93   RPX. 2017. ‘Reports’, www.rpxcorp.com/reports/. 94   Lex Machina. 2015, https://lexmachina.com/category/reports/. 78 79

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Data sources on intellectual property  13 Docket Navigator,95 and LegalMetric.96 A very useful report is the American Intellectual Property Law Association survey, which estimates fees and expenses for a variety of IP activities, from prosecution to licensing and litigation.97 The underlying cases, especially cases decided by the various courts of appeals, can be obtained from numerous sources, most notably Westlaw, Lexis, and BloombergLaw. There are several indexed and coded data sets of reported decisions of IP cases that are publicly available. For instance, William Mitchell Law School provides a trademark litigation search engine,98 and the University of Georgia provides a patent litigation datafile.99 These data sets are useful and required substantial effort on the part of those who assembled the datasets. Researchers should be aware that since these datasets were compiled from reported cases from Westlaw, Lexis, United States Patents Quarterly (USPQ), or BloombergLaw, they constitute only a subset of all litigated cases. USPQ, in particular, may be particularly unrepresentative of the population of litigated cases (Rantanen, 2016). USPQ has apparently reported all or substantially all of the historic appellate decisions relating to patents, except for summary affirmances. However, its coverage of district court decisions is less complete, with some districts and judges largely absent. Also, like all judicial decisions relating to litigation, judgments on the merits (i.e., bench trials and grants of summary judgment) are more likely to be enshrined in a reported decision than other rulings (i.e., denials of summary judgments). Jury verdicts are also missing from reported decisions, because they are decided by the jury without a decision by the judge, unless there is a separate judicial ruling concerning judgment as a matter of law. Depending upon the research question presented, these selection issues may be paramount. Westlaw and Lexis appear to presently be comprehensive. However, we believe that even as recently as 2009, both Westlaw and Lexis were missing a non-trivial number of unpublished opinions. In the 1999–2000 timeframe, they were missing many more unpublished opinions. Furthermore, while Westlaw and Lexis both have the complete set of ‘published’ opinions (those available in F. Supp, F. Supp.2d., F.2d, F.3d, etc.), at least before 2010, they had somewhat different collections of unpublished opinions. Because the completeness of these databases has increased over time, researchers should exercise caution when using them to study time trends. Data on specific aspects of IP litigation is available on an ad hoc basis. There are too many of these individual datasets to list them exhaustively here. To provide a small sample for illustrative purposes, an enormous series of datasets relating to technology standards, patent pools (including membership and licensees) and industry consortia is available at the Searle Center of Northwestern Law School.100 Rudi Bekkers, Christian Catalani,

 95   Docket Navigator. 2015. ‘Year in Review’, www.docketnavigator.com/document/special/Doc​ ket%20Navigator%20Year%20in%20Review%202015.pdf.  96   Legal Metric. 2016, www.legalmetric.com/.  97   American Intellectual Property Law Association. 2017, www.aipla.org/learningcenter/library/ books/econsurvey/Pages/default.aspx.  98  http://app.mitchellhamline.edu/trademark.   99   The UGA Patent Litigation Datafile, http://people.terry.uga.edu/jlturner/patentlitigationdata/. 100   Northwestern Pritzker School of Law. ‘Data on Technology Standards, Industry Consortia, and Innovation’, www.law.northwestern.edu/research-faculty/searlecenter/innovationeconomics/da​ ta/technologystandards/.

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14  Research handbook on the economics of IP law volume 2 Arianna Martinelli, Timothy Simcoe, and Cesare Righi maintain the Disclosed Standard Essential Patents Database.101 Recent data on fee shifting in patent infringement lawsuits has been released.102 Professor Barton Beebe has released data on likelihood of confusion cases in federal trademark litigation, fair use decisions in copyright law, and trademark dilution cases.103 Our discussion so far has centered on U.S. IP litigation. Data on international IP litigation is much more difficult to access, especially for American researchers. For example, DARTS-IP makes available information on international IP litigation for a fee.104

VII. CONCLUSION A substantial amount of data is available for patents, copyrights, and trademarks, domestically and internationally, as well as domestic IP litigation. Unfortunately, much of this data is not accessible for bulk download for research purposes, sometimes making it time-consuming or costly to acquire. Less data is available for international IP litigation and licensing, and little to no data—other than reported decisions—is available for trade secrets and other IP rights. These limitations have made it difficult for researchers to perform comprehensive empirical studies. We hope that this chapter has illuminated some of the pockets of data available to researchers, and these pockets will expand over time so as to provide a wide array of comprehensive data to answer fundamental questions in the field of IP.

REFERENCES American Intellectual Property Law Association. 2017, www.aipla.org/learningcenter/library/books/econsurvey/ Pages/default.aspx. Beebe, Barton. 2006. ‘An Empirical Study of the Multifactor Tests for Trademark Infringement’, 94 California Law Review 1581–654. Bloomberg Law. 2017. www.bloomberglaw.com/patent_search. Bowker, www.bowker.com/. Clarivate Analytics, Westlaw, http://ip-science.thomsonreuters.com/support/patents/dwpiref/hosts/westlaw/. Clarivate Analytics. 2017. ‘Derwent Innovation’, http://info.thomsoninnovation.com/. Crouch, Dennis. 2015. ‘Data: Counting Fee Shifting Cases’, https://patentlyo.com/patent/2015/05/countingshifting-cases.html. D&B Hoovers. 2017, http://hoovers.com. darts-ip, www.darts-ip.com/world/. de Rassenfosse, Gaétan, Dernis, Hélène and Boedt, Geert. 2014. ‘An Introduction to the Patstat Database with Example Queries’, 47 Australian Economic Review 395–408.

 http://ssopatents.org/   For data from 2015 see Crouch (2015). Older data is also available from Research on Innovation, www.researchoninnovation.org/data.html. 103   www.bartonbeebe.com/. The site includes the data used in ‘An Empirical Study of U.S. Copyright Fair Use Opinions, 1978–2005’, 156 Penn. L. Rev. 549 (2008); ‘The Continuing Debacle of U.S. Antidilution Law: Evidence from One Year of Trademark Dilution Revision Act Case Law’, 24 Santa Clara Comp. & High Tech. L.J. 449 (2008); ‘An Empirical Study of the Multifactor Tests for Trademark Infringement’, 95 Cal. L. Rev. 1581 (2006). 104   darts-ip, www.darts-ip.com/world/. 101 102

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Data sources on intellectual property  15 Discogs. 2017, www.discogs.com/. Docket Alarm. 2017, www.docketalarm.com/. Docket Navigator. 2015, http://home.docketnavigator.com/. Docket Navigator. 2015. ‘Year in Review’, http://home.docketnavigator.com/year-review/. Dun & Bradstreet. 2017, www.dnb.com/. Dunner, Donald R., Jakes, J. Michael and Karceski, Jeffrey D. 1995. ‘A Statistical Look at the Federal Circuit’s Patent Decisions: 1982–1994’, 5 Federal Circuit Bar Journal 151–80. European Patent Office. 2017. ‘Espacenet Patent search’, http://worldwide.espacenet.com/. European Patent Office. 2017. ‘Patstat’, www.epo.org/searching/subscription/raw/product-14-24.html. European Policy for Intellectual Property, www.epip.eu/datacentre.php. Frakes, Michael D. and Wasserman, Melissa F. 2013. ‘Does Agency Funding Affect Decisionmaking?: An Empirical Assessment of the PTO’s Granting Patterns’, 66 Vanderbilt Law Review 67–125. Frakes, Michael D. and Wasserman, Melissa F. 2017. ‘Is the Time Allocated to Review Patent Applications Inducing Examiners to Grant Invalid Patents? Evidence from Microlevel Application Data’, 99(3) The Review of Economics and Statistics 550–63. Free Law Project. 2017. ‘RECAP Project—Turning PACER Around’, www.recapthelaw.org/. Free Patents Online, freepatentesonline.com. Google Patents, https://patents.google.com/. Google. 2012. ‘USPTO Bulk Downloads: PAIR Data, https://www.google.com/googlebooks/uspto-patentspair.html. Google. 2012. ‘USPTO Bulk Downloads: Patent Assignment Text’, https://www.google.com/googlebooks/ uspto-patents-assignments.html. Google. 2012. ‘USPTO Bulk Downloads: Patent Classification Information’, https://www.google.com/google​ books/uspto-patents-class.html. Google. 2012. ‘USPTO Bulk Downloads: Patent Maintenance Fees’, https://www.google.com/googlebooks/ uspto-patents-maintenance-fees.html. Google. 2012. ‘USPTO Bulk Downloads: Patent Petition Decisions’. https://www.google.com/googlebooks/ uspto-patents-petitions.html. Google. 2012. ‘USPTO Bulk Downloads: Trademarks’, https://www.google.com/googlebooks/uspto-tradema​ rks.html. Google. 2017. ‘About Google Patents’, https://support.google.com/faqs/answer/2539193. Gov.UK. ‘Search for a trade mark’, www.gov.uk/search-for-trademark. Gov.UK. ‘Transparency data IPO: Trade mark data release’, www.gov.uk/government/publications/ipo-trade-ma​ rk-data-release. Government of Canada. 2017. ‘Canadian Trademarks Database’, www.cipo.ic.gc.ca/app/opic-cipo/trdmrks/ srch/bscSrch.do. Graham, Stuart J.H., Marco, Alan C. and Miller, Richard. 2015. ‘The USPTO Patent Examination Research Dataset: A Window on the Process of Patent Examination’, https://ssrn.com/abstract=2702637. Graham, Stuart J.H., Marco, Alan C. and Myers, Amanda F. 2015. ‘Monetizing Marks: Insights from the USPTO Trademark Assignment Dataset’, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2430962. Hadfield, Gillian. 2004. ‘Where Have All the Trials Gone? Settlements, Nontrial Adjudications and Statistical  Artifacts in the Changing Disposition of Federal Civil Cases’, 1 Journal of Empirical Legal Studies 705–34. Hall, Bronwyn H., Jaffe, Adam B. and Trajtenberg, Manuel.  2001. ‘The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools’. National Bureau of Economic Research, Centre for Economic Policy Research Discussion Paper Series, No. 3094. http://app.wmitchell.edu/trademark. http://patentadvisor.com/. http://rosencrantz.berkeley.edu/batchsql/downloads. www.bartonbeebe.com/. www.bna.com/bloomberglaw-dockets/. www.npedata.com. www.patentcore.com/. https://courtlink.lexisnexis.com. https://ptabtrials.uspto.gov/. www.chillingeffects.org. www.icpsr.umich.edu/icpsrweb/landing.jsp. IMDb. 2017, www.imdb.com/. Kesan, Jay P., and Ball, Gwendolyn G. 2006. ‘How Are Patent Cases Resolved—An Empirical Examination of the Adjudication and Settlement of Patent Disputes’, 84 Washington University Law Review 237–312. Ktmine. ‘License Agreement Database’, www.ktmine.com/ip-data/license-agreements/.

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16  Research handbook on the economics of IP law volume 2 Legal Metric. 2016, www.legalmetric.com/. Lex Machina. 2015, https://lexmachina.com/category/reports/. Lu, Qiang, Myers, Amanda F. and Beliveau, Scott. 2017. ‘The USPTO Patent Prosecution Resaerch Data: Unlocking Office Action Traits,’ USPTO Economic Working Paper No. 2017-10, https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=3024621. Litigation Databank. 2017, http://litigation.maxval-ip.com/. Marco, Alan C., Carley, Michael, Jackson, Steven and Myers, Amanda F. 2015. ‘The USPTO Historical Patent Data Files: Two Centuries of Innovation’, USPTO Economic Working Paper, No. 2015-1, www.uspto.gov/ sites/default/files/documents/USPTO_economic_WP_2015-01_v2.pdf. Miller, Shawn P. et al., 2017. ‘Introduction to the Stanford NPE Litigation Dataset’, https://law.stanford.edu/ publications/introduction-to-the-stanford-npe-litigation-dataset/. MusicBrainz, https://musicbrainz.org/. National Bureau of Economic Research. ‘Patent Data Project’, https://sites.google.com/site/patentdataproject/ Home. Northwestern Pritzker School of Law. ‘Data on Technology Standards, Industry Consortia, and Innovation’, www.law.northwestern.edu/research-faculty/searlecenter/innovationeconomics/data/technologystandards/. OECD. 2017. ‘Intellectual property (IP) statistics and analysis’, www.oecd.org/science/inno/oecdpatentdatabases. htm. Pacer, https://pcl.uscourts.gov/search. PacerPro. 2017, www.pacerpro.com/. Patent Freedom, www.patentfreedom.com/. Patstats.org, www.patstats.org/. Public Access to Court Electronic Records (PACER), www.pacer.gov/. Public Citizen. 2017. ‘How to File a FOIA Request: A Guide’, http://citizen.org/Page.aspx?pid=458. PwC. 2017. ‘2017 Patent Litigation Study’, www.pwc.com/us/en/forensic-services/publications/patent-litigationstudy.jhtml. Rantanen, Jason. 2016. ‘Empirical Analysis of Judicial Opinions: Methodology, Metrics, and the Federal Circuit’, 49 Connecticut Law Review 227–91. ReedTech. 2017. ‘Public PAIR Patent Access Download’, http://patents.reedtech.com/Public-PAIR.php. ReedTech. 2017. ‘USPTO Data Sets’, http://patents.reedtech.com/pgog.php. Research on Innovation, www.researchoninnovation.org/data.html. Royalty Range, www.royaltyrange.com/. RoyaltySource, www.royaltysource.com/. RoyaltyStat. 2017, www.royaltystat.com/. RPX Insight. 2017, https://search.rpxcorp.com/users/sign_in. RPX Insight. 2017, https://search.rpxcorp.com/users/sign_in. RPX. 2017, www.rpxcorp.com/. RPX. 2017. ‘Reports’, www.rpxcorp.com/reports/. Sag, Matthew. 2013. Empirical Studies of Copyright Litigation: Nature of Suit Coding. Loyola University Chicago School of Law Research Paper, No. 2013-017, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2330256. Schwartz, David L. 2008. ‘Practice Makes Perfect? An Empirical Study of Claim Construction Reversal Rates in Patent Cases’, 107 Michigan Law Review 223–84. The Association of University Technology Managers. ‘AUTM Licensing Activity Surveys’, www.autm.net/resou​ rces-surveys/research-reports-databases/licensing-surveys/. The Online Books Page: Copyright Registration and Renewal Records, http://onlinebooks.library.upenn.edu/ cce/. The Patent Box. 2017, www.thepatentbox.com/. The UGA Patent Litigation Datafile, http://people.terry.uga.edu/jlturner/patentlitigationdata/. Thomson Reuters Westlaw. 2017. ‘Dockets’, https://courtexpress.westlaw.com. TrademarkNow, www.trademarknow.com/. U.S. Copyright Office. ‘Copyright Catalog’, http://cocatalog.loc.gov/cgi-bin/Pwebrecon.cgi. U.S. Copyright Office. ‘Digitization Project’, http://copyright.gov/digitization/index.html. U.S. Government Accountability Office. 2013. ‘Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality’, www.gao.gov/products/GAO-13-465. U.S. Securities and Exchange Commission. ‘EDGAR: Company Filings’, www.sec.gov/edgar/searchedgar/ companysearch.html. United States Court of Appeals for the Federal Circuit, www.cafc.uscourts.gov/the-court/statistics.html. United States Courts, www.uscourts.gov/Statistics/JudicialBusiness/2013.aspx. United States Department of Justice. 2011. ‘FOIA.Gov: Make a Request’, www.foia.gov/report-makerequest. html. United States International Trade Commission, https://usitc.gov.

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Data sources on intellectual property  17 United States International Trade Commission. 2017. ‘Electronic Document Information System (EDIS)’, https://edis.usitc.gov/edis3-external/app. United States Patent and Trademark Office. ‘Trademark Electronic Search System (TESS)’, http://tess2.uspto. gov/. United States Patent and Trademark Office. 2017. ‘Bulk Data Products’, www.uspto.gov/learning-and-resources/ electronic-bulk-data-products. United States Patent and Trademark Office. 2017. ‘Historical Patent Data Files’, http://www.uspto.gov/learningand​-resources/electronic-data-products/historical-patent-data-files. United States Patent and Trademark Office. 2017. ‘Patent Application Full Text and Image Database’, http://appft. uspto.gov/netahtml/PTO/search-adv.html. United States Patent and Trademark Office. 2017. ‘Patent Application Information Retrieval’, http://portal.uspto. gov/external/portal/pair. United States Patent and Trademark Office. 2017. ‘Patent Litigation Docket Reports Data’, www.uspto.gov/ learning-and-resources/electronic-data-products/patent-litigation-docket-reports-data/. United States Patent and Trademark Office. 2017. ‘Portal Applications’, https://ppair.uspto.gov/authenticate/ AuthenticateUserLocalEPF.html. United States Patent and Trademark Office. 2017. ‘Statistics’, www.uspto.gov/learning-and-resources/statistics. United States Patent and Trademark Office. 2017. ‘Trademark Assignment Dataset’, www.uspto.gov/ip/officechie​ fecon/tm_assignments.jsp. United States Patent and Trademark Office. 2017. ‘Trademark Case Files Dataset’, www.uspto.gov/learning-and-re​ sources/electronic-data-products/trademark-case-files-dataset-0. United States Patent and Trademark Office. 2017. ‘US Patent Full-Page Images’, http://patft.uspto.gov/netahtml/ PTO/patimg.htm. United States Patent and Trademark Office. 2017. ‘USPTO Patent Full-Text and Image Database’, http://patft. uspto.gov/netahtml/PTO/search-adv.htm. Valuation Resources. ‘Royalty Rates and License Fees’, http://valuationresources.com/EconomicData/Royalty. htm. Wharton Research Data Services. 2017, https://wrds-web.wharton.upenn.edu/wrds/. Wharton Research Data Services. 2017, https://wrds-web.wharton.upenn.edu/wrds/index.cfm. Wikipedia. 2017. ‘List of copyright collection societies’, http://en.wikipedia.org/wiki/List_of_copyright_collec​ tion_societies. World Intellectual Property Organization. ‘Intellectual Property Statistics’, www.wipo.int/ipstats/en/. World Intellectual Property Organization. 2017. ‘Global Brand Database’, www.wipo.int/branddb/en/. World Intellectual Property Organization. 2017. ‘Patentscope’, https://patentscope.wipo.int/search/en/search. jsf.

Legislative materials Freedom of Information Act, 5 U.S.C. § 552. 1976 Copyright Act, Pub. L. No. 94-553, 90 Stat. 2541.

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PART II EMPIRICAL STUDIES RELATING TO PATENTS

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Section A Metrics

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2.  Patent citation data in social science research: overview and best practices* 105

Adam B. Jaffe * and Gaétan de Rassenfosse‡** †

Contents I. Introduction II. Citations as an Indicator of Invention Attributes A. Forward Citations and Technological Impact B. Backward Citations and Reliance on Previous Technology C. Technological Distance and Diversity D. Linkage to Science E. Economic Value III. Citations as an Indicator of Knowledge Flows A. Geographic Dimension of Knowledge Flows B. Temporal Dimension of Knowledge Flows C. Validation Studies IV. Citations as Links in Knowledge or Innovation Networks A. Mapping Patents, Individuals, Institutions, and Regions B. Mapping of Technological Trajectories V. Pitfalls and Best Practices in Use of Citation-Based Indicators A. Office Effects B. Time and Technology Field Effects C. Examiner Effects D. Strategic Effects VI. Conclusion References Appendix Knowledge flows […] are invisible; they leave no paper trail by which they may be measured and tracked, and there is nothing to prevent the theorist from assuming anything about them that she likes. Paul Krugman (1991)

*  We thank David Schwartz for suggesting this project. We received helpful comments from Bronwyn Hall, Dietmar Harhoff, Sadao Nagaoka, and Beth Webster, as well as participants at the 2015 Workshop on the Economics of Intellectual Property in Northwestern University. Jan Kozak provided valuable research assistance. The authors are solely responsible for all opinions or errors. † *  Motu Economic and Public Policy Research, Level 1, 97 Cuba St, Wellington 6011 New Zealand; Queensland University of Technology: Te Pūnaha Matatini Centre of Research Excellence. ‡ **  Brandeis University, 415 South St, Waltham MA 02453 USA; Queensland University of Technology.

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Patent citation data in social science research  21

I. INTRODUCTION Eugene Garfield is one of the pioneers of the study of citation data. In his 1955 article, Garfield proposes to build a citation index for scientific articles in order to make it possible for “the conscientious scholar to be aware of criticisms of earlier papers.” He further explains, “even if there were no other use for a citation index than that of minimizing the citation of poor data, the index would be well worth the effort required to compile it” (p. 108). It turns out that citation indices have been used in a variety of ways and for a variety of purposes. Two of the most notable uses are to assess the attributes of the idea embedded in a scientific article and to track its diffusion through time, space and technology domains. In fact, Garfield (1955) foresaw these two uses as he described the citation index as an “association-of-ideas index” (p. 108) and explained that the citation index may “help the historian to measure the influence of the article—that is, its ‘impact factor’” (p. 111). While the analogy with the broader field of bibliometrics may seem obvious, patent citations differ from scientific citations in substantial ways. Citations in patents are the results of a highly mediated process that involves multiple parties: the inventor, the patent attorney, and the patent examiner (Meyer, 2000). These parties have different incentives for citing publications and may do so at different times and in different sections of the patent document (Cotropia, Lemley, and Sampat, 2013). Much of the empirical research relies on US citations, but there are important differences across jurisdictions in citation rules and practice.1 This creates interesting opportunities for research on non-US data, but also suggests a degree of caution in thinking about the global implications of results based solely on US data. The widespread use of patent citations in social science research can be traced to the availability of patent statistics in digitally readable form in the late 1970s.2 Zvi Griliches (1979), in his important manifesto for research on R&D and productivity growth, suggested that the frequency with which patents from different industries cite each other could be used as a measure of the technological proximity of industries. An early strand of research on patent citations was the work of Francis Narin and his associates at CHI Research, Inc. (Carpenter, Narin, and Woolf, 1981; Carpenter and Narin, 1983; Narin and Noma, 1985; Narin, Noma, and Perry, 1987). An influential early demonstration of the potential utility of patent citation data in economic research was the PhD research of Griliches’ student Manuel Trajtenberg (Trajtenberg, 1990a, 1990b). The use of patent citation data has grown dramatically over the last two decades, as illustrated in Appendix A. What makes citations potentially useful is that they convey information about the cumulative nature of the research process, as well as information about the consequences.

1   The present survey also discusses evidence on citations at the European Patent Office whenever available. 2   The earliest reference that we found is Clark (1976). It presents statistics on the obsolescence of US Patent and Trademark Office patents using citation data. Garfield (1966) discusses the use of patent citation searches to say something about the significance of a patent, but it does not present any systematic analyses or statistics. Kuznets (1962) did not specifically discuss citations, but did emphasize that patent documents are a rich and deep source of information on the inventive process, and urged that this richness be exploited in addition to researchers’ simply counting patents.

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22  Research handbook on the economics of IP law volume 2 While some inventors and research organizations pursue patents for motives of prestige or internal tracking of research success, most patent applications are made with the goal of securing commercial advantage, or at least preserving options for pursuit of commercial advantage. Another virtue of patent data for social science research is that patents reside in a non-market-based technological classification system, allowing one to place patents, inventors and organizations in technology space in a way that is not derived from sales or other economic data that one may be trying to relate to invention.3 Furthermore, the classification scheme is hierarchical so that technology categories can be very fine or relatively broad as desired. This feature, and others, has been combined with patent citation data to provide powerful indicators. This chapter provides an overview of the major uses of such data and the issues that arise in such research. Other authors have previously discussed the use of patent statistics in social science research (e.g., Griliches, 1990; Lerner and Seru, 2015), and Gay and Le Bas (2005) provide a brief overview of the use of patent citations to measure invention value and knowledge flows. However, we are not aware of a broad survey on the use of patent citation data.4 In order to identify the papers to include in this survey, we started from a limited number of references that we were aware of and complemented those using a keyword-based search on Google Scholar. We then expanded this core of references by looking at cited and citing references. Ultimately, we kept the most influential articles, either in terms of the number of citations received or in terms of relevance of the findings. The majority of papers are published in economics, management, and information science journals. Conceptually, we classify research using patent citations into two broad groups. One research line uses a variety of citation-based statistics to characterize the inventions, in terms of the magnitude and nature of their impact, as well as the nature and magnitude of the departure that they represent relative to the existing pool of knowledge. This work is discussed in the next section. The other research line focuses on the citations themselves, using them as proxies for knowledge linkages across inventors in order to explore the nature of knowledge flows and the factors that affect those flows. This research is discussed first with regard to relatively simple metrics of knowledge flow in Section III, and then with respect to attempts to map interactions in a more complex network framework in Section IV. We then provide some brief comments on practical difficulties and pitfalls in using citations data in Section V. Section VI concludes with opportunities for future research.

II. CITATIONS AS AN INDICATOR OF INVENTION ATTRIBUTES There is no agreed-upon model of inventions and the inventive process, which leads to some ambiguity in how citation metrics are interpreted. Nonetheless it is possible to 3   Jacob Schmookler pointed out that in a patent subclass “Dispensing of semi-solid materials,” he found a patent for a manure spreader and another for a toothpaste tube (Schmookler, 1966). 4   Jaffe and Trajtenberg (2002) reprint 12 of the key papers on patent citations by them and their co-authors.

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Patent citation data in social science research  23 identify two broad aspects of the process that underlie citation-based inferences. First, we can think of all possible technologies as mapping onto a high-dimensional technology space, such that a given invention can be located in that space, and a patent represents the right to exclude others from marketing products that impinge upon a specified region (or regions) of that space. Second, the invention process is cumulative, that is, inventions build on those that came before and, in turn, facilitate those that come after. In this “geometric” interpretation, the patent claims delineate the metes and bounds of the region of technology space over which exclusivity is being granted, while the citations indicate previously marked off areas that are in some sense built upon by or connected to the invention being granted. Thus the citations that appear in a patent (its “backward” citations) inform us about the technological antecedents of the patented invention. A patent that contains many citations corresponds to an invention with many antecedents; a patent whose citations are to technologically diverse previous patents has diverse antecedents; a patent whose citations are to old patents corresponds to an invention with old antecedents, and so forth. Conversely, the citations received by a patent from subsequent patents (“forward” citations) inform us about the technological descendants of the patented invention. A patent that is never cited was a technological dead end. A patent with many or technologically diverse forward citations corresponds to an invention that was followed by many or technological diverse descendants. Note that the discussion so far is entirely definitional. We have said nothing about the possibility of causal connections between these different attributes of inventions, or between any of these attributes and the private or social value of the invention. Ultimately, we are interested in whether, for example, patents with relatively few technological antecedents are more or less likely to spawn multiple lines of research, or whether patents that generate many or diverse technological descendants correspond to inventions that generate large social benefits. It is in large part to be able to say something about these questions that citation metrics have been developed. In a very broad sense, citation analysis is predicated on an expectation that the extent and nature of an invention’s antecedents tell us something about the novelty or “radicalness” of the invention, and the extent and nature of its descendants tell us something about both its technological impact and its economic value. But different authors propose or use different characterizations of citation information to elucidate these ideas. In practice, writers are not always clear on the underlying concept that a given metric is intended to measure, and given metrics are used in different contexts as proxies or indicators for different concepts. In some cases, researchers postulate a relationship between a given citation metric and an underlying concept, and then test hypotheses about the concept taking that relationship as a given. In other cases, researchers attempt explicitly to validate the extent to which a given metric reflects a particular underlying conceptual attribute of inventions. We will consider these different approaches below in the context of specific papers, but for expositional purposes it is useful to consider five broad categories of approaches: 1. counts of forward citations as an indicator of subsequent technological impact; 2. counts of backward citations as an indicator of the extent of reliance on previous technology;

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24  Research handbook on the economics of IP law volume 2 3. characterization of both backward and forward citations in terms of technological diversity and technological distance; 4. examination of references to non-patent literature as an indicator of science linkage; and 5. use of citations as an indicator for private and social value. We consider each category in turn. A.  Forward Citations and Technological Impact Using the number of forward citations as a measure of technological impact of a patented invention can be motivated by direct analogy to the larger and pre-existing bibliometric literature starting with Garfield (1955). Nonetheless, Trajtenberg, Henderson and Jaffe (1997) undertook to demonstrate the validity of this (and other) metrics by comparing the citation rate to university patents and corporate patents, based on a maintained assumption that university patents are more “basic” and hence have, on average, greater technological impact. To incorporate the cumulative nature of invention into the metric, they proposed that the importance of an invention be characterized by the number of forward citations received, plus a fractional weight multiplied by the number of citations received by those citing patents. That is, important patents are those that are cited a lot and are cited by patents that are themselves relatively highly cited.5 The authors showed that importance by this definition is indeed higher for university patents than for corporate patents, using a sample of patents assigned to US corporations, matched by patent class and grant date to patents assigned to US universities. In addition, they discuss qualitatively the highest-importance patents in their sample, and argue that the citing patents can be seen as technological descendants, and these highly “important” patents are indeed subjectively very important in their respective fields. More recently, taking advantage of improvements in computing power, scholars have taken into account the whole stream of citations. For example, Lukach and Lukach (2007) have proposed computing importance by the PageRank score of patents. This method is directly inspired from Google’s “random surfer” model and takes into account the fact that different citations weigh differently depending on the importance of the citing documents (Brin and Page, 1998). However, the authors are not able to validate their ranking using external measures such that the conditions under which the PageRank method is more appropriate than a straightforward citation count are unclear. This approach is a natural extension of earlier work and begins to move this line of analysis towards the “innovation network” formulation discussed later in the text. Albert, Avery, Narin, and McAllister (1991) provide a validation study of the use of forward citations as an indicator of impact. They reported a strong correlation between 5   The authors report “forward importance” as the number of citations received plus .5 times the number of citations received by the citing patents, and undertook sensitivity analysis varying this weight between .25 and .75. Extending this throughout the citation tree involves a geometrically declining weight—for example, if patent E cites patent D which cites patent C which cites patent B which cites patent A, we might consider patent B to contribute 1 to the importance of A, patent C .5, patent D .25 and patent E .125.

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Patent citation data in social science research  25 the citation intensities of 77 Kodak silver halide patents and expert evaluations of technical impact and importance of the patents. Narin (1995) showed that patents that have attained the legal status of pioneering patents in the United States, as well as other prominent patents appearing in such patent office publications as “Hall of Fame” patents, are very highly cited. Czarnitzki, Hussinger and Schneider (2011) relate a group of “wacky” patents to control groups and test the extent to which commonly used metrics are able to identify wacky patents from patents in the control group. Wacky patents are selected by an employee of the World Intellectual Property Organization “for their futile nature, as they do not involve a high-inventive step or only marginally satisfy the ‘non obviousness’ criterion” (p. 131). They find that the number of forward citations is a good predictor of importance. However, other measures such as originality and generality (discussed below) were higher for wacky patents. Another interesting confirmation of patent citations as indicative of technological impact is Benson and Magee (2015). They identify 28 “technological domains” (e.g., “Solar Photovoltaics” or “Genome Sequencing”) in which it is possible to identify a specific metric of the technological state of the domain (e.g., watts/$ for Solar Photovoltaics). They take the exponential rate of improvement of these metrics across domains and across time as the dependent variable in regressions on various citation metrics of patents in the technology domain. They find that forward citations are positively related, and the average age of backward citations negatively related, to the rate of improvement of the technology over the subsequent ten-year period. B.  Backward Citations and Reliance on Previous Technology While it seems clear that important inventions generate more forward citations, the opposite may hold for backward citations. That is, more trivial inventions are more extensively rooted in what has come before, while more basic inventions are less incremental in nature and thus have fewer identifiable antecedents (Trajtenberg, Henderson, and Jaffe, 1997). Another way to think of this is that a patent will, to some extent, tend to cite other patents all the way back along the inventive trajectory upon which it lies. Patents that are near the beginning of a trajectory are in this sense more basic, and may be expected to make fewer backward citations because they have less historical background. Empirical evidence is rather inconclusive. Trajtenberg, Henderson, and Jaffe (1997) find that university patents (presumably more important than the average patent) do make fewer citations and cite patents that are themselves less highly cited. However, von Wartburg, Teichert, and Rost (2005) provide a different view. They correlate a measure of backward citations with expert ratings on the technological value added (in the form of technical scoring tables) of 107 patents related to four strokes internal combustion engines. Their backward citations measure counts first and second-generation citations received. They obtain a statistically significant correlation coefficient of 0.38, implying that patents with higher technological value added build on more references. Liu, Hseuh, Lawrence, Meliksetian, Perlich, and Veen (2011) propose a more in-depth analysis of backward references and patent value. They correlate the number of backward references with the probability that a patent will stand up in court and find a statistically strong positive association. Overall, it is unclear whether the number of backward citations captures patent importance.

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26  Research handbook on the economics of IP law volume 2 C.  Technological Distance and Diversity As noted above, one of the basic virtues of patent data is that they provide a non-marketbased technological classification system for inventions. Looking at the way in which citations span the technology space defined by the classification scheme is a natural way to characterize the technological complexion of both an invention’s roots and its impacts. Broadly speaking, there are two major aspects to be considered, whether looking forward or backward. One is pure distance: how technologically different are the patents connected by a citation link—for example, does a drug patent cite other patents for compounds in the same chemical class, or patents on other chemicals, or mechanical or electronic patents? The other is breadth or diversity: independent of whether that drug patent generally cites other patents that are close to or far from itself, are they all bunched together in technology space, or are they dispersed far from each other? Trajtenberg, Henderson, and Jaffe (1997) implement a measure of technological distance using a three-level representation of the US Patent and Trademark Office (USPTO) patent classification system. The lowest level used is the three-digit original patent class (e.g., Electric Lamp and Discharge Devices); the next level is the set of two-digit c­ ategories (e.g., Electrical Lighting); the highest level is six very broad fields (e.g., Electrical and Electronic). The authors axiomatically set two patents in the same patent class at distance 0; two that are in different classes but the same category at distance .33; two that are in different categories but the same broad field as distance .66; and two that are not even in the same field as distance 1. They then calculate the average distance over both forward and backward ­citations for each patent in the university and corporate samples. As expected, they found that the forward citations received by university patents came, on average, from farther away in technology space, although the difference was small and not always statistically significant. For backward citations, there was no consistent pattern—that is, university patents did not systematically cite earlier patents that were, on average, technologically more distant by this metric. To measure technological dispersion or diversity, Trajtenberg, Henderson, and Jaffe (1997) proposed 1 minus the Herfindahl-Hirschman Index of concentration of the citations across patent classes—that is, 1 minus the sum of squared shares of citations in each class. This metric is equal to zero if all citations are in the same class, and it approaches unity as the citations are spread thinly across all classes. The authors dubbed this metric of diversity “generality” when applied to forward citations, and “originality” when applied to backward citations.6, 7 They conjectured that both measures should be larger 6   For a small number of citations, it is clear that this measure is heavily influenced by the number of citations—for example, a patent receiving only two citations cannot possibly have generality greater than .5. Whether or not this is a problem is largely a matter of interpretation; in some sense it is meaningful to say that a patent receiving only two citations cannot have a very diverse impact. A different interpretation is that every invention has a latent or unobserved generality that is randomly realized in the citations it happens to receive. Under this formulation, the distribution of citations across patent classes is multinomial, and the observed generality or originality is a biased estimator of the true parameter. Bronwyn Hall has derived a formula to correct for this bias (Hall, Jaffe and Trajtenberg, 2001); it produces a significant correction for patents with just a few citations. 7   Ziedonis (2004) has built on this idea to construct a measure of the fragmentation of ownership rights to a firm’s complementary patents. Backward citations are stratified by assignee instead of technology class.

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Patent citation data in social science research  27 for more basic inventions, and therefore expected to be larger for university patents than for corporate patents. This hypothesis was borne out in the data for generality measure, but not for originality. A concept related to generality is that of “General Purpose Technology” (GPT). GPTs are conceived as technologies that subsequently connect to many different application or development technologies to allow multiple lines of technology innovation and diffusion. Frequently mentioned examples are the electric motor in the late 19th and early 20th centuries, and digital information technology in the late 20th century. Hall and Trajtenberg (2006) use data from a selected sample of 780 most highly cited patents that were granted by the USPTO in the years 1967–99 to construct generality, number of citations, and patent class growth, for both cited and citing patents, intended to identify GPTs in their early stages. The paper finds that highly cited patents differ in almost all respects from the population of all patents (they take longer to be issued; have twice as many claims; are more likely to have a US origin; are more likely to be assigned to a US corporation; are more likely to have multiple assignees; have on average higher citation lags; have a higher generality; and are in patent classes that are growing faster than average). The paper concludes that the identified measures, although promising, give contradictory messages when taken separately and that it is not obvious how to combine those measures to choose a sample of GPT patents.8 The fundamental difficulty is that we don’t have measures of how general-purpose a technology is other than broad conceptions of GPT technologies. Thus, while it seems plausible that general-purposeness would be reflected in citation patterns, it is hard to pin such patterns down or test their validity.9 Youtie, Iacopetta, and Graham (2008) found that nanotechnology patents from 1990–93 were more general than computer patents and much more general than drug patents, and interpreted this result as evidence that nanotechnology is an emerging GPT. Moser and Nicholas (2004), however, found that electricity patents from the 1920s were less general and less highly cited than chemical and mechanical patents from the same period, suggesting that the relationship between the characteristics that make a technology a GPT and other characteristics of inventions is complex. Another concept related to technological distance and diversity is that of a “radical” or “breakthrough” invention. Ahuja and Lampert (2001) propose that radical inventions are simply the top 1 percent of patents ranked on citations received in a given year. Dahlin and Behrens (2005) adopt a more sophisticated approach. They conceive a “radical” invention within a given technology domain (tennis rackets, in their application) to be one that recombines previous technology elements in a new and different way, but which is then imitated and so spawns subsequent patents that combine technology elements in a manner

8   Hall and Trajtenberg (2006) explain that the generality measures suffer from the fact that they treat citations from patents in patent classes different from the cited patents in the same way, although some patent classes are very different and some are closely related. They suggest that the future research could construct a weighted generality measure, with weights inversely related to the overall probability that one class cites another class. To the best of our knowledge, no one has implemented such an approach. 9   Hall and Trajtenberg (2006) also show that a disproportionate share of the patents in the extreme upper tail of the distribution for generality and total forward citations in the period 1967–99 are IT patents, suggesting that these metrics may be indicative of a GPT.

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28  Research handbook on the economics of IP law volume 2 substantially similar to the radical invention. They construct a measure of the “overlap” in the respective sets of patents cited by two different patents, and show that the radical inventions (oversized and wide-body rackets, in their application) had little overlap with previous or contemporary patents, but significant overlap with patents that came after. D.  Linkage to Science As discussed, patents contain references to non-patent documents, the overwhelming majority of which are scientific papers. On this basis, the number of non-patent backward citations made by a patent, or the fraction of backward citations that these non-patent citations represent, has been explored as a metric of the closeness of linkage between an invention and scientific research.10 Collins and Wyatt (1988) looked at citations to scientific papers from 366 genetics patents granted from 1980 to 1985 in order to trace linkages from basic research to genetics technology. The United States had the highest number of papers cited in patents, followed by the United Kingdom, Japan, Germany, and France. These figures were compared to the total output of genetics papers for those countries, showing some differences, which were interpreted as indicating that the United Kingdom produced more papers that were useful in developing patented technology than Germany, France or Japan. The number of citations from patents received per paper was highest for the United Kingdom, followed by the United States and Germany. Callaert, Van Looy, Verbeek, Debackere, and Thijs (2006) characterize non-patent references in a sample of patents at the USPTO and the European Patent Office (EPO) from 1991–2001. Non-patent references are found in 34 percent of USPTO patents and 38 percent of EPO patents, comprising about 17 percent of all references (patent and non-patent combined). For both the USPTO and EPO, more than half of non-patent references are journal references. Of the remaining non-patent references, many can be considered scientific in the broader sense (as they consist of conference proceedings, books, databases or other non-journal scientific publications), or technology related. The paper reports that at the USPTO at least, 42 percent of non-journal non-patent references can be considered scientific in broader sense, and 40 percent relate to technological information. For the EPO sample, these figures are 77 percent and 20 percent, respectively. Tijssen (2002) provides a note of caution on the use of non-patent references. He found no relationship between the number of non-patent references and the inventor-reported dependence on science in a small (< 100) sample of Dutch patents from 1998–99. Li, Chambers, Ding, Zhang, and Meng (2014) qualify this finding. They argue that non-selfcitations to scientific papers are a noisy measure of science linkage, but that applicant self-citations to scientific papers are indeed informative of science linkage. Roach and Cohen (2013) matched patent citations to survey reports from R&D lab managers in the United States, with particular focus on the extent to which patent citations capture knowledge flows to commercial R&D from publicly funded research. They find that

10   Lemley and Sampat (2012, footnote 12) find that the vast majority of references to nonpatent prior art at the USPTO come from applicants, not examiners, potentially making these a relevant measure of science dependence.

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Patent citation data in social science research  29 patent citations reflect codified knowledge. However, citations miss the reliance on private and contract-based science, as well as basic research. (The discussion in the section on citations as a measure of knowledge flows considers further whether non-patent references are an indicator of science dependence.) E.  Economic Value As noted above, the (public or private) economic value of an invention is a distinct concept from its technological impact. Citations are, first and foremost, an indicator of technological impact. But it turns out that forward citation intensity is, in fact, correlated with economic value. There are, however, several different concepts of economic value. First, we can in principle think of the (gross) social value of an invention—that is, the total producers’ and consumers’ surplus associated with its use. In some cases this gross social value may be much greater than the net value, for which we would subtract off the lost rents that may be suffered by previous technologies made wholly or partially obsolete. The gross social value is greater than the private value—that is, the value to the owner of a patented invention; the net social value may be either greater or less than the private value, depending on the magnitude of the “rent stealing” effect. For any of these concepts, we can distinguish the value of the invention and the value of the patented invention, which differ by the value of the legal protection afforded by the patent grant. In practice, these different value concepts may or may not be distinguishable, and proxies for value are often used whose mapping onto these different value concepts may be ambiguous. An early strand of research on citations and economic value was the work of Francis Narin and his associates seeking to develop indicators based on patent data of companies’ competitiveness or technological strength. Carpenter, Narin, and Woolf (1981) showed that inventions identified in the Industrial Research Institute IR100 Awards are much more highly cited than a random sample of matched patents. Narin, Noma, and Perry (1987) found that the average citation frequency of a company’s patent portfolio was associated with increases in firms’ profits and sales among publicly traded pharmaceutical companies. Trajtenberg (1990b) calculated the social welfare gains associated with successive generations of computed tomography scanners by estimating hedonic demand functions for the attributes. He then showed that the number of citation-weighted patents associated with each generation was statistically predictive of the magnitude of welfare gains, while the raw or unweighted count of patents was not correlated with surplus (sample of about 500 patents). This suggests that the gross social value of these inventions is associated with the citation intensity of the associated patents. Interestingly, the unweighted patent counts were correlated with the level of R&D expenditure. He interpreted these findings as suggesting that the number of patents is associated with the magnitude of research effort, but not indicative of research success. Counting citation-weighted patents then combines the scale of effort with a measure of such success and yields a measure of effective research output. Moser, Ohmstedt, and Rhode (2014) identified specific improvements in hybrid corn and gathered data on the magnitude of the yield improvement they allowed. They interpret this as measuring the “inventive step” associated with the patent; but as the measurement is in the use domain rather than strictly in the technology domain, it

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30  Research handbook on the economics of IP law volume 2 seems more closely related to social value than to inventive step, per se. They found that there is indeed a strong correlation between yield improvements and citation intensities. Interestingly, they find that there are a small number of early patents that are routinely cited in almost all patents in the field. Excluding these citations enhances the correlation between yield and citation frequency. Hall, Jaffe, and Trajtenberg (2005) consider the relationship between citation intensity and the private value of patents by relating citation-weighted patents to the market value of the firm. They confirm that citation weighting greatly improves the information content of patent counts in terms of predicting market value. In addition, they find that citations from future patents assigned to the same firm as the original patentee have a larger associated market value than citations from others.11 They also find that a disproportionate share of the value associated with patents is associated with a very small number of highly cited patents. Finally, they find that forward citations are associated with increases in market value at the time a patent is initially granted, suggesting that to a significant extent market participants can anticipate the eventual value of inventions at this early stage, and those expectations are (on average) then confirmed by subsequent citations. Lanjouw and Schankerman (2001) provide indirect evidence of the relationship between citations and value, by assuming that patents that are litigated are, on average, more valuable than those that are not, and comparing the citation patterns of litigated patents with a control sample of non-litigated patents. They find that the probability of litigation rises with the number of claims and the number of forward citations per claim, while declining with the number of backward citations per claim. Allison, Lemley, Moore, and Trunkey (2003) undertake a similar approach. Consistent with expectations, they find that litigated patents are more highly cited. Interestingly, they find that litigated patents also have more backward citations. Harhoff, Scherer, and Vopel (2003) obtained estimates from patent holders of the private value of 772 patents with a 1977 German priority date, and that were maintained to full term. They then examined how that reported value correlated with publicly observable indicia of patent value, including patent citations (and also the number of four-digit International Patent Classification (IPC) codes and family size). They found that both the number of forward citations and the number of backward references to the patent literature are significantly correlated with patent value (see also Harhoff, Narin, Scherer, and Vopel 1999). Interestingly, they also found that the number of citations made to nonpatent literature was predictive of value, particularly in drug and chemical patents. They noted that the predictive value of backward citations (both patent and non-patent) is quite useful, as this information is available at time of patent grant, while forward citations must be awaited.12 It is unclear theoretically why backward citations are predictive of value. For non-patent references, it is plausible that in some fields inventions linked to science are less 11   Since Trajtenberg (1990b) showed that total citations are correlated with social returns, the finding that self-citations have a stronger effect on market value than other citations suggests that self-citation is associated with the extent of appropriation of the social returns by the original patenting firm. 12   Similarly, international family size is a measure predictive of value that is knowable soon after patent application.

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Patent citation data in social science research  31 incremental and hence more valuable. For backward patent citations, it may reflect some tendency for bigger, more complex patents to make more backward citations and also be more valuable on average. In addition, the positive correlation between the number of backward citations and value may simply arise from the fact that applicants have stronger incentives to search for prior art for more important patents (Sampat, 2010). Gambardella, Harhoff, and Verspagen (2008) undertook a similar survey of inventors listed in patent applications at the EPO. They found that the number of forward citations is by far the best predictor of reported value, but that the fraction of the variance in reported value explained by any or all of the metrics was relatively low, consistent with a view of citation-weighted patents as an indicator of value, but one with substantial noise. Nicholas (2008) looked at patents granted to US corporations between 1910 and 1939, and identified the citations to those historical patents from the period 1976–99. He found that about 15 percent of the patents from the 1910s received at least one citation from the recent patents, rising to almost 30 percent for those from the 1930s. He then went on to show that citation-weighted patents constructed in this way are correlated with firm market value. Thus, patents that are still cited after 40 to 60 years are more valuable than those that are not. What we cannot know from this exercise (since early citations have not been captured) is the extent to which valuable patents are simply more highly cited at all lag durations, or whether there is greater persistence in the sense that the rate of obsolescence is lower. Bessen (2008) related the value of patents, as indicated by both renewal information and firm financial data, to a number of patent characteristics, including forward citations received. He estimated that each additional citation is associated, on average, with an increase in value of about 1 percent. Nonetheless, the relationship is very noisy, so that even among very highly cited patents, a significant fraction appears to be of little value; 37 percent of the patents in the top decile in citation intensity from 1991 were not renewed. Recent work by Abrams, Akcigit, and Popadak (2015) also suggests an overall positive correlation between forward citations and patent value, but with an inverted-U-shaped relationship in which value falls at high citation rates. This finding is provocative, but it is unclear how robust it is, given the highly selected nature of the sample and the fact that the value of individual patents was estimated as the value of patent portfolios divided by the number of patents in the portfolio. The next section moves away from work focused on citations as indicators of invention characteristics, and discusses the use of citation data to capture geographic and temporal dimensions of the innovation process.

III.  CITATIONS AS AN INDICATOR OF KNOWLEDGE FLOWS A.  Geographic Dimension of Knowledge Flows Jaffe, Henderson, and Trajtenberg (1993) took on the challenge identified by Krugman (1991) on the invisibility of knowledge flows. They suggested that patent citations could be used as a kind of “paper trail” that could allow knowledge flows to be measured and tracked. They took a sample of patents from universities, large firms and other firms, and identified all of their citations. They then found, for every citing patent, a corresponding

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32  Research handbook on the economics of IP law volume 2 “control” patent, issued at the same time and in the same primary US patent class as the citing patent, and compared the frequency with which citing patents were geographically proximate to the cited patents with the frequency with which the control patents were proximate. Looking at metropolitan statistical areas, states and countries, and eliminating citations that were “self-citations” from the same firm, they showed that citations were indeed more likely to be proximate. For example, at the level of metropolitan areas, 7–9 percent of citations (depending on the nature of the cited patents) were from the same area, while only 1–4 percent of the control patents were, and the differences were highly significant statistically. Thompson and Fox-Kean (2005) criticize the Jaffe, Henderson and Trajtenberg methodology. They argue that selecting control patents based on the primary patent class of the citing patents is too rudimentary to capture the heterogeneity of technology. Patents in the same main patent class may be in different subclasses with inherently different technologies, and patents are assigned to multiple classes, again introducing heterogeneity not captured by the main patent classification. In response, Henderson, Jaffe, and Trajtenberg (2005) agree that it is possible that finer technological controls might be appropriate, but they point out that slicing things too finely minimizes the possibility for identifying knowledge flows across subclasses. Ultimately, the question comes down to the robustness of the localization effect under different identifying assumptions. A number of other authors have similarly used citation data to measure knowledge flows. Almeida and Kogut (1997) compare the patent citations of small and large semiconductor firms, and find that the citations made by small firms are more geographically localized. Hicks, Breitzman, Olivastro, and Hamilton (2001) show that US companies’ citations to university patents exhibit geographic localization, particularly to patents of nearby public universities. Almeida and Kogut (1999) examine citation patterns among semiconductor firms in the United States, including data on both the firms and the inventors. They show that a significant fraction of the geographic localization of the citations can be traced to specific engineers who move among firms, but are more likely to move to another nearby firm than to one that is farther away. Sonn and Storper (2008) show that, despite improvements in communications technologies, geographical localization has been increasing over time. Thompson (2006) compares the extent of localization in citations listed by the inventor to those added by the examiner. He finds localization at both the metropolitan area and state levels in both the examiner and inventor citations. Inventor citations are found to be about 20 percent more likely to match the country of origin of the citing patent than are examiner citations. In a similar vein, Alcácer and Gittelman (2006) estimate the probability that a citation is generated by an examiner or an inventor, conditional on a set of variables that are frequently employed in the knowledge spillover literature. They find that examiner citations introduce bias for some variables only (e.g., self-citations). They find no evidence that the degree of geographic proximity between citing and cited patents differs for inventor and examiner citations. A subtler pitfall in the use of citations to track knowledge flows relates to the intervention of law firms in the drafting of the patent document. Wagner, Hoisl, and Thoma (2014) show that patents by firms which rely on external agents are more likely to cite documents that are part of the law firm’s knowledge repository. They take this result as evidence that law firms help overcome localization. However, a blunter interpretation is

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Patent citation data in social science research  33 that external agents include citations that the firms were not aware of, further increasing the noise in patent citation data. Maurseth and Verspagen (2002) used data on citations among European patents to construct a region-by-region citations frequency matrix. They then looked at numerous variables to explain these frequencies. Geographical distance has a negative and substantial impact on knowledge flows. Controlling for distance, knowledge flows are greater between regions located within one country than between regions located in separate countries. The country effect remains even if regions share the same language, though sharing a language increases the amount of knowledge flows between two regions by up to 28 percent. The study also suggests that knowledge flows are industry specific, and regions’ technological specialization is an important determinant of their technological interaction. B.  Temporal Dimension of Knowledge Flows Caballero and Jaffe (1993) and Jaffe and Trajtenberg (1999) developed a structured model of knowledge diffusion across space and time. They postulate that two competing forces dominate the citation process. Over time, knowledge gradually diffuses, so that the number of people potentially citing a given patent increases exponentially with time. But the relevance or usefulness of a bit of knowledge becomes obsolete, leading to a countervailing exponential depreciation in the likelihood of citations. The parameters of these two exponential functions can be estimated econometrically. If allowed to vary across different technologies, different kinds of research organizations, and different geographic locations, they then capture the rates of diffusion in different areas across organizations and across space. Jaffe and Trajtenberg show, for example, that the geographic localization of citations diminishes as time passes, and also that obsolescence (as captured by declining citation rates) is more rapid in electronic technologies than in chemical and mechanical technologies. Bacchiocchi and Montobbio (2009) used this double-exponential function to look at knowledge flows from universities and public research organizations compared to flows from corporate patents in six countries: France, Germany, Italy, Japan, the United Kingdom, and the United States. They found that technology embodied in patents from universities and public research organizations diffuses more rapidly than that of firms. The diffusion rates are relatively homogenous across technological fields, but vary across countries: rapid in the United States and Germany, less so in France and Japan. Mehta, Rysman, and Simcoe (2010) have criticized this diffusion model on the ground that the age of a citation is computed as the citation year minus the application year, leading to an identification problem. Because citations received by a patent are rare before it is issued, the authors propose to use the lag between application year and grant year as a source of exogenous variation. They find that the citation peak occurs earlier than suggested by the double-exponential function. However, their method does not alter differences in the mean citation ages across industries. They conclude that the double-exponential function provides a good approximation to the non-parametric age distribution.

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34  Research handbook on the economics of IP law volume 2 C.  Validation Studies Jaffe, Trajtenberg, and Fogarty (2000) report a survey of inventors to test the extent to which citations in those inventors’ patents correspond to the inventors’ perceptions of how their inventions depended on earlier knowledge, and how the rate of citation relates to inventors’ own perceptions of impact or importance. They find that citations are a valid but noisy indicator of knowledge flows: the likelihood of reported knowledge impact is significantly higher (both quantitatively and statistically) when a citation link exists, but a significant fraction of citations (perhaps as high as one-half) do not correspond to any reported knowledge link. Duguet and MacGarvie (2005) tested the validity of patent citations as a measure of knowledge flows using data from French firms on their patents and citations, combined with survey responses regarding sources of knowledge. The total number of backward citations was correlated with survey answers about R&D and innovation, but this correlation was weakened by controlling for the number of patents held by the citing firm. Backward citation rates of French firms can reflect their R&D activities (if the technology is obtained from firms located in the EU), or purchases of equipment goods (if the source is located outside the EU). In general, it can be understood that backward citations are correlated with learning through R&D collaboration, licensing of foreign technology, mergers and acquisitions and equipment purchases. In their analysis, Roach and Cohen (2013, discussed above) found evidence of both “errors of omission” (reported knowledge flows with no corresponding citations) and “errors of commission” (observed citations with no corresponding reported knowledge flows). They conclude that despite these sources of measurement error, patent citations are likely to reflect meaningful aspects of knowledge flows from public research. Interestingly, they found that references in patents to non-patent publications (primarily scientific literature) are a better indicator of knowledge flow than are citations in commercial patents to the patents of universities and other public labs (cf. Tijssen, 2002). The next section discusses a third category of citation data research, in which the focus shifts to using citation links to understand and characterize networks.

IV. CITATIONS AS LINKS IN KNOWLEDGE OR INNOVATION NETWORKS A natural way of representing citation data is in the form of a network. Researchers have used concepts from network theory to grasp the way the innovation system is structured and the way knowledge is formed. A first group of studies seeks to map key components of the innovation system (patents, individuals, institutions and regions). A second group of studies uses the network of citations to map technological trajectories. We review these two applications in turn. A.  Mapping Patents, Individuals, Institutions, and Regions Huang, Chiang, and Chen (2003) rely on patent citation data to map Taiwan’s electronic industry. The researchers identify USPTO patents belonging to 58 relevant Taiwanese

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Patent citation data in social science research  35 companies as well as the citations made by these patents. They identify the strength of the relationship between companies by looking at the strength of bibliographic coupling. Bibliographic coupling is a method proposed by Kessler (1963) that involves identifying related documents through common cited references. The researchers then applied cluster analysis to the data produced to identify major sectors of the Taiwanese electronic industry. Although bibliographic coupling provides rich insights on the relatedness of patent documents, more recent studies make better use of network analysis theory and tools. Chen and Hicks (2004) study the citation “degree” distribution of 16 million citations made to the 3 million USPTO patents granted in the period from 1963 to 1999. The degree of a “node” (patent) is simply the number of “connections” (citations) received by the node. They estimate that the distribution follows a power law with an exponent of 2.89, which is very similar to the parameter obtained for scientific papers by Dorogovtsev and Mendes (2002).13 The fact that the degree distribution of the patent citation network follows a power-law is indicative of so-called scale-free networks, which can be seen as networks characterized by large hubs through which knowledge flows. Li, Chen, Huang, and Roco (2007) use a patent citation network to study the knowledge transfer process between entities. In particular, they study the efficiency with which knowledge transfers within the network compared to a random network. Their measure of efficiency is the average path length between any pair of patents in the network. They focus on USPTO nanotechnology patents in the period from 1976 to 2004. They find that knowledge transfer across assignees in the citation network is more efficient than knowledge transfer that would occur in a random network. Knowledge flow across (assignee) countries is as efficient as a random network. However, knowledge flow across technology fields is less efficient than knowledge flow that would occur in a random network. In other words, technological distance is a greater barrier to knowledge flows than geographic distance. Hung and Wang (2010) examine the characteristics of the citation network formed by radio-frequency identification (RFID) patents. They find that the network can be characterized as a “small-world” network—that is, a network in which most nodes can be reached from every other by a small number of steps. They also find that the network has a power-law connectivity distribution and exhibits preferential connectivity behavior. That is, a few key patents have a very large number of connections and the majority of patents have few connections. The authors conclude that only a limited number of patents play a key role in diffusing RFID technology. This approach provides a more system-based way of thinking about knowledge flows than simply counting citations: key patents not only are highly cited patents, but also connect and integrate different technological trajectories.14 More detailed analyses of technological trajectories using citation network are described in the next section.

13   Cf. Huang, Huang, Chang, Chen, and Lin (2014), who provide evidence that the distribution of patent citations is more concentrated than the distribution of citations in scientific articles. 14   Hu, Rousseau, and Chen (2012) provide another study on the importance of patents using their positions in the citation network. Other applications include Liu and Shih (2011), who use the network formed by patents to improve patent classification.

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36  Research handbook on the economics of IP law volume 2 B.  Mapping of Technological Trajectories Scholars have recently used citation networks to identify technological trajectories that led to the advent of major technological breakthroughs. The main trajectory, or search path, is the sequence of links and nodes that is central to the development of a technology. It represents the main flow of ideas in the development of a technology. The method was pioneered by Hummon and Doreian (1989) on a citation network of scientific papers describing the development of DNA theory. This approach shifts the focus from the nodes of the network (looking at individual patents) to the connections that these nodes form. It allows the identification of key patents through their structural connectivity in the network. Technologically important patents should belong to the main paths of the citation network and/or locate at particularly critical junctions within those paths. Mina, Ramlogan, Tampubolon, and Metcalfe (2007), Verspagen (2007), and Fontana, Nuvolari, and Verspagen (2009) applied the method to patent citation networks. Mina et al. (2007) use it to understand how medical knowledge emerges, grows and evolves. They argue that the approach provides a dynamic view of innovation that recognizes the long-term, path-dependent and complex nature of technology. Their case study is based on treatment for coronary artery disease and covers 5136 USPTO patent documents granted between 1976 and 2003. The authors seek to identify the main path and “islands” of the network. Islands are small clusters of inventions whose internal connectedness is relatively superior to the strength of their outward connections within the global network. The authors argue that islands allow accounting for the variety of complementary and competing areas of technical expertise that contributed to the advancement of the technology. They report that the results form a consistent map of the major scientific and technological trajectories in the domain. Fontana, Nuvolari, and Verspagen (2009) study the structural connectivity of the citation network formed by patents related to local area networks (LAN) technology. Innovation in such a systemic technology has three main features. First, innovation is distributed: it takes place at the level of individual components, but these components all have to work together. Second, innovations in systems tend to be incremental and to occur around well-established technical designs. Third, innovations also tend to occur continuously. The authors argue that the classical approach of assessing the importance of patents by counting the number of citations they have received may have drawbacks in such systemic technologies. It may fail to identify concepts and principles that could act as “focusing devices” for a sequence of inventive activities. By contrast, a structural analysis of the citation network would allow the identification of inventions that have played a major role in the evolution of LAN technology. They find that the main path they have identified displays a coherent economic and engineering logic, consistent with qualitative accounts of the evolution of the Ethernet standard. One of the most interesting insights of the paper comes from the analysis of companies owning patents that lie on the main path. No company is “dominant” in the sense of claiming ownership of the majority of patents on the main path, which the authors take as evidence that no company is strategically placed along the main path of knowledge flow. Verspagen (2007) performs a similar analysis for citations among fuel cell patents. He finds that there are dominant companies: a small number of organizations hold patents belonging to the main path. Study of the ownership structure of technologies on the

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Patent citation data in social science research  37 main path provides a novel way of characterizing technology dominance. It is a promising avenue for research in industrial economics and strategic management.

V. PITFALLS AND BEST PRACTICES IN USE OF CITATIONBASED INDICATORS We take the opportunity of this review to discuss potential pitfalls associated with patent data. We focus on four key challenges. A.  Office Effects Institutional differences across jurisdictions induce differences in citation practices across offices. We briefly summarize two main differences in citation practices between the EPO/ Japan Patent Office (JPO) and the USPTO for illustrative purposes. More generally, researchers should get a clear understanding of citation practices in the office of interest before using citation-based indicators.15 A first difference is the “duty of candor” in US patent law. Failure to report known relevant prior art may lead to subsequent revocation of the patent (inequitable conduct doctrine). There is no duty of candor in European patent law, and applicants do not have to submit a list of prior art. It follows that search reports at the EPO usually contain many fewer references than USPTO search reports. In fact, according to EPO philosophy, “a good search report contains all the technically relevant information within a minimum number of citations” (Michel and Bettels, 2001, p. 189). In addition, since applicants at the EPO do not bear the same responsibility to disclose prior art as applicants at the USPTO, the citations come mostly from the examiner. This does not undermine their interpretation as indicators of impact or value; for example, Harhoff, Scherer, and Vopel (2003, discussed above) find EPO citations to be predictive of value. It does suggest that EPO citations might be less indicative of knowledge flows, although we are not aware of any empirical analysis of this question comparable to the survey work of Jaffe, Trajtenberg, and Fogarty (2000). In Japan, the patent law was revised in 2002 and imposed on applicants the obligation to disclose prior art. Although non-compliance with the disclosure requirement bears less severe consequences than in the United States, the reform led to a substantial increase in prior art disclosure by applicants. Takahiro, Nagaoka, and Naito (2015) find that about 8 percent of citations came from applicants in the years following the reform, compared to around 4 to 5 percent before the reform. A second important difference with the USPTO is that EPO patent examiners classify documents cited in particular citation categories (Schmoch, 1993). A document that shows essential features of the invention or questions the inventive step of these features if taken alone is marked with the letter “X”. A document that questions the inventive step if combined with another document is marked with the letter “Y” (hence “Y” citations never occur singly). The letter “A” marks a document that shows the general state of the

15   For example, researchers interested in EPO citations should read the “Guidelines for Examination in the European Patent Office” available on the EPO website.

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38  Research handbook on the economics of IP law volume 2 art. According to Schmoch (1993, p. 195), a patent document can be highly cited because it comprises “a good description of the prior art from a didactic point of view.” The classification provides opportunities for finer analyses. One may want to exclude class “A” citations for assessing the inventive step of patents, but class “A” citations are relevant for measuring technological proximity of patents. Additional classification codes exist; see Webb, Dernis, Harhoff, and Hoisl (2005) for a discussion. Examiners at the JPO also classify citations into categories. In particular, they flag whether citations are used as grounds for rejection, similar to “X” and “Y” citations at the EPO, or whether they are used for assessing the application but do not serve as a basis for rejection, similar to “A” citations at the EPO (Goto and Motohashi, 2007). The classification into categories opens the door to original uses of citation data. For example, von Graevenitz, Wagner, and Harhoff (2011) identify patent thickets at the EPO using X and Y citations. Their measure identifies constellations in which three firms each own patents that block patent applications of the other two firms (so-called triples). The authors show that density of triples in complex technology areas has risen steadily since the early 1980s, whereas the density of triples has been constant in discrete technology areas. Guellec, Martinez, and Zuniga (2012) use “X” and “Y” citations together with administrative information on the patent examination process (withdrawal and grant events) to identify defensive patents—that is, patent applications used to pre-empt others from getting their patents granted. Palangkaraya, Webster, and Jensen (2011) posit that patents with a higher inventive step will generate more “X” and “Y” citations, and use this information to proxy for the probability of grant ex-ante. Beyond institutional differences in the use of citations, researchers have also illustrated the presence of home bias in citation practices. Bacchiocchi and Montobbio (2010) analyze the geographic distribution of cited documents for a set of 657 151 equivalent patents filed at the EPO and the USPTO. In theory, distributions should be similar, since they refer to the same invention. They find that the frequency of US-cited patents at the USPTO exceeds 65 percent, while the frequency at the EPO is less than 40 percent. That examiners have a tendency to cite local documents does not come as a surprise.16 However, it illustrates an important limitation of the use of citations for assessing cross-border knowledge flows. B.  Time and Technology Field Effects The number of citations received by a patent increases as time passes such that there are strong cohort effects. This issue can be dealt with in a straightforward manner by counting citations received in a fixed time interval (e.g., citations received up to five years after grant). A more serious concern is the increase over time of citations made per patent. Hall, Jaffe, and Trajtenberg (2001) report that the average patent issued in 1999 made over twice as many citations as the average patent issued in 1975 (10.7 versus 4.7 citations). Although this issue does not affect the comparison of patents within a cohort, citation inflation

16   For example, there is a substantial cost to including non-English references at the USPTO. When using a foreign language reference in a rejection, examiners should provide a translation of the entire document.

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Patent citation data in social science research  39 makes it challenging to compare patents across cohorts. Analogously, citation practices and the intensity of activity vary by technology fields, so that what constitutes a high citation rate in one field may be modest or small for another field.17 The authors discuss two econometric techniques to deal with citation inflation and varying intensities by field: scaling citation counts by “dividing them by the average citation count for a group of patents to which the patent of interest belongs”; and identifying the multiple biases on citation rates via econometric estimation. Marco (2007) provides a recent illustration of the latter technique. He argues that by estimating a hazard rate based only on factors that are correlated to citation inflation rather than value, residuals can be used to measure latent patent value. For example, the ratio of observed citations to predicted citations may represent a proxy of patent value. Such an approach is an important step forward, although it is difficult to identify factors that are truly exogenous to value. A broader question, which has received little coverage in the literature, relates to differences in patenting and citation practices across technology fields. We know that the propensity to patent differs across fields (Cohen, Nelson, and Walsh, 2000), and that the relevance of patent data as innovation indicator therefore also varies across fields (e.g., Danguy, de Rassenfosse, and van Pottelsberghe, 2014). However, to the best of our knowledge, no study has investigated in a systematic manner how differences across fields affect the relevance of patent citation data. C.  Examiner Effects Cockburn, Koru, and Stern (2002) show that there is substantial examiner heterogeneity—for example, in terms of variations in tenure at the USPTO and in the average approval time per issued patent. Such heterogeneity translates into variations in outcomes of the examination process—such as in the volume and pattern of citations made.18 Lemley and Sampat (2012) demonstrate the presence of an examiner effect, in the sense that more experienced examiners cite less prior art. Alcácer and Gittelman (2009) paint a picture of examiner-added citations across key strata of patent data. They report that the proportion of citations added by examiners is higher for patents: by foreign applicants to the USPTO; by applicants with a large patent portfolio; and by applicants in electronics, communications, and computer-related fields. Criscuolo and Verspagen (2008) perform a similar analysis for EPO patent data. They show that the share of inventor citations declined from about 14 percent in 1985 to 9 percent in 2000. In addition, there is substantial variation across fields. More than 20 percent of citations in organic chemistry patents were added by the inventor, while for information technology patents this share is 4 percent.19

17   Technology fields are tracked using the patent office classification systems. Historically, the United States has maintained its own classification (USPC), while other offices use the IPC. The USPTO has recently introduced a Cooperative Patent Classification based on the IPC, and is phasing out the USPC. 18   Alcácer and Gittelman (2006) estimate that examiners insert two-thirds of citations on the average patent, and 40 percent of all patents have all citations added by examiners. 19   There are few country-specific studies. See Azagra-Caro, Mattsson, and Perruchas (2011) for Spanish evidence.

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40  Research handbook on the economics of IP law volume 2 Examiner intervention may bias the information content of citations. It may undermine the use of citations as a measure of knowledge flow, since the inventors may not have even been aware of the patents cited by examiners at the time of invention. However, examiner citations may be taken as a valid reflection of technological and economic value. In this spirit, Hegde and Sampat (2009) show that examiner citations have a much stronger relationship with renewal probability (a measure of private value) than the number of applicant citations. D.  Strategic Effects Variations in the number of examiner-added citations may also come from differences in applicants’ incentives to search for or disclose prior art. Recent research suggests that citing prior art (or not) is a strategic decision. Atal and Bar (2010) study firms’ incentives to search for unknown prior art. Although applicants at the USPTO have a duty to disclose what they know, they have no duty to search for prior art and may be better off by remaining ignorant. The authors show theoretically that firms search more when R&D investment (a proxy for innovation quality) and patenting costs are higher. Sampat (2010) provides empirical data on when applicants search for prior art. He shows that applicants contribute more prior art for their more important inventions. He also shows that applicants are more likely to search for prior art in fields where individual patents are important for appropriating returns from R&D (chemicals and drugs) and less likely to do so in industries where firms tend to accumulate patent portfolios for other strategic reasons (computers and communications, electronics and electrical, and mechanical). Lampe (2012) focuses on applicants’ decision to disclose known prior art. He identifies “voluntary withholding” of citations to prior art material by looking only at citations that were present on prior patents issued to the same firm. He estimates that applicants withhold between 21–33 percent of relevant citations. The rate is higher for firms applying for computer and electronic patents (25–42 percent) and lower for firms applying for drug and chemical patents (8–22 percent). More generally, Lampe finds that the likelihood of citation is positively correlated with proxies of patent value (number of claims and forward citations) and negatively correlated with the size of applicant patent portfolios.

VI. CONCLUSION The use of patent citation data in social science research has exploded in the last two decades. As just one indication, the frequency of appearance of the term “patent citation” in scientific documents listed in Google Scholar increased tenfold between 2000 and 2014 (Appendix A). As is often the case, this increase reflects increases in both supply and demand. On the supply side, the digitization of the patent office records, combined with the increased power of computers to analyze them, makes analyses possible today that simply could not have been undertaken 25 years ago. The number of scientific documents referencing the National Bureau of Economic Research patent citation data file is likewise continuously increasing (Appendix A). On the demand side, intangible assets are increasingly seen as a source—some would argue the dominant source—of economic returns. By definition, intangible assets are hard to track and measure, and so researchers

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Patent citation data in social science research  41 interested in diverse questions about knowledge accumulation and diffusion, innovation, firm strategy and regional economic growth seek measures that convey information about the sources and consequences of these assets. Neither of these trends is likely to reverse, so interest in measures of this kind is likely to continue to grow. Recent developments in computational linguistics may allow for construction of measures that are conceptually related to citations, but use all of the information contained in the patent text rather than relying solely on the links between patents that are explicitly identified via citation. It is now possible, for example, to identify connections between a patent and its antecedents by measuring the frequency with which important words are used in both patents, to measure novelty by identifying patents that use a certain technical term or combination of words in a particular phrase for the first time, and to measure impact by counting the number of subsequent patents that use such a phrase (e.g., Packalen and Bhattacharya, 2015). Younge and Khun (2015) use more advanced techniques to develop a text-based pairwise similarity comparison of any and every two patents at the USPTO. These new approaches have not yet been subjected to the kind of validation that has demonstrated the economic significance of citations, but because they utilize more information, they offer the promise of a valuable broadening and deepening of the research possibilities. A more mundane, but equally important task is to further validate citation indicators. This applies to both established and novel indicators, at both the USPTO and other offices. For example, it is unclear whether the count of backward citations proxies for patent importance. Even the link between forward citations and economic value, one of the most established and used indicators, is not well understood. In a similar vein, little research exists on technology field differences on the relevance of patent citation data. The need for validation studies will grow more pressing as new indicators are being developed and more patent offices make their data available. Similarly, legislative changes affect citation practices in non-trivial ways, and conclusions drawn using data from one time period are not necessarily valid in another time period. This calls for a continuous assessment of the validity of citation indicators. Another exciting area of research is the further application of network theory and analysis tools to the patent citation network. For example, the identification of key technologies and actors on the main knowledge path promises to greatly improve our understanding of industry dynamics and the knowledge creation process. A limitation of current research in the area is the insularity of two communities of scholars. Studies by scholars using advanced network analysis tools offer little practical implications, whereas studies by scholars looking at real-world implications use quite basic network analysis tools. A promising way forward is to better integrate the technical and the practical aspects of network analysis. Finally, researchers realize that the patent citation generation process is complex, but more work needs to be done to understand it. The complexity of the patent citation generation process is a blessing and a curse. Whereas it may distort the reality in an undesirable fashion, it may also provide a window into the incentives faced by inventors, patent attorneys and examiners and serve as a source of econometric identification. The example of examiner-added citations is a case in point. Whereas citations made by examiners arguably weaken the measurement of knowledge flows, they also strengthen the measurement of patent value.

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42  Research handbook on the economics of IP law volume 2

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Patent citation data in social science research  43 Dahlin, Kristina, and Dean Behrens. 2005. “When is an invention really radical?: Defining and measuring technological radicalness”, 34:5 Research Policy 717–737. Danguy, Jérôme, Gaétan de Rassenfosse, and Bruno van Pottelsberghe de la Potterie. 2013. “On the origins of the worldwide surge in patenting: an industry perspective on the R&D patent relationship”, 23:2 Industrial and Corporate Change 535–572. Dorogovtsev, S., and J. Mendes. 2002. “Evolution of networks”, 51:4 Advances in Physics 1079–1187. Duguet, Emmanuel, and Megan MacGarvie. 2005. “How well do patent citations measure flows of technology? Evidence from French innovation surveys”, 14:5 Economics of Innovation and New Technology 375–393. Fontana, Roberto, Alessandro Nuvolari, and Bart Verspagen. 2009. “Mapping technological trajectories as patent citation networks. An application to data communication standards”, 18:4 Economics of Innovation and New Technology 311–336. 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APPENDIX Figure 2.1A plots the yearly number of scientific articles listed in Google Scholar that contain the term “patent citation” (solid line), and the number of articles citing the NBER patent citation data file described in Hall, Jaffe, and Trajtenberg (2001) (dashed line). One can reasonable assume that the latter group of articles forms a subset of the former group.

1000

Containing “patent citation”

900

Citing HJT

Number of Articles

800 700 600 500 400 300 200 100 0

1980

1985

1990

1995

2000

2005

2010

Publication Year Note:  HJT refers to Hall, Jaffe, and Trajtenberg (2001).

Figure 2.1A  Number of scientific articles listed in Google Scholar

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3.  Patent value

John R. Allison* 20

Contents I. Introduction II. Social Value and Private Value III. How Does Patent “Quality” Fit into the Equation? IV. The Focus on Private Value V. Private Value and Patent Portfolios VI. Identifying Private Patent Value A. Is There a Litigation-Value Link? B. Possible Indicators of Private Patent Value   1. Prior art references   2. Patent claims   3. Citations received (“forward citations”)   4. Payment of maintenance or renewal fees   5. Number of countries in which patent protection is obtained (“patent family” size)   6. Number of patent classifications   7. Claim breadth and words, words, words   8. Patent examination characteristics  9. Licensing 10. Transfers of ownership 11. Litigation outcomes VII.  Directly Measuring Private Value References

I. INTRODUCTION What is a patent worth? Can we actually estimate the value of particular patents, or is merely identifying which patents may have value the best we can do? Indeed, can we even do that? Given that receiving a patent from the U.S. Patent and Trademark Office (USPTO) requires a meaningful investment, why don’t all patents have at least some value? Is value best identified or estimated by examining standalone patents, groups of them, or both? Can characteristics of patents themselves be employed usefully in identifying patents that have value? That is, do we know one when we see it? And if so, which characteristics?

*  The Mary John and Ralph Spence Centennial Professor, McCombs Graduate School of Business, University of Texas at Austin.

47

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48  Research handbook on the economics of IP law volume 2 Is there a link between the fact of patent litigation and patent value? And is there any association between litigation outcomes and patent value? Can information outside the patent document be useful in identifying patents of value? More fundamentally, what do we mean in the first place when we refer to patent value? Are there different types of value? And, value to whom: the owner of the patent or patents in question or the public at large? Drawing from research in both law and economics performed by many scholars during the past 25 years, this chapter addresses questions such as these.

II.  SOCIAL VALUE AND PRIVATE VALUE A patent may have “social value,” that is, value to society as a whole in the sense of positively affecting the well-being of some meaningful portion of the population.1 It may have “private value,” or economic value to its owner. Any patent that places into the public repository of knowledge an invention that is truly novel and nonobvious, and that fully describes the invention such that a skilled person in the field can make and use it, should necessarily have some social value, even if the invention is not ultimately commercialized. Much of the normative public discourse on patents is couched in terms of “patent quality” rather than patent value. Because the concept of “patent quality” essentially refers to conformity with patentability requirements, it correlates to some degree with both social and private value, although factors other than or in addition to quality will affect both types of value. It seems very likely that a patentee will care more about patent quality when he or she perceives private economic value. Psychologist and Nobel laureate Daniel Kahneman (2011), among others, has observed that inventors as a class, like entrepreneurs, tend to be quite optimistic, thus leading to the fact that large numbers of patents have no value to anyone. Their optimism is not excessive or unwarranted in every case, however, so the value perceptions of patent applicants should correlate at some level with actual private value. Moreover, there is probably a self-fulfilling prophecy at work in at least some cases, given that perceptions of future value can lead to substantial investment in obtaining and enforcing stronger patents. Although the private and social value of patents should correlate positively with one another at varying levels, and both should be associated with patent quality, the story cannot end there. A valid patent covering a pioneering invention should, it would seem, bring more value to the public than one covering a barely nonobvious incremental improvement on what others had already done. If the claims of such a patent are drafted broadly enough to take advantage of the invention’s pioneering status, private value to the owner should be comparably high as well. Some questions about social value will border on the metaphysical, such as whether, other things being equal, a valid patent on a device or method in the medical field that helps save or improve lives has inherently more social value than an equally valid patent on a manufacturing process or machine that improves the efficiency with which semiconductor chips can be fabricated. On the other hand, what if the money saved on

1   There is no practical means of knowing whether any invention with or without a patent constitutes a Pareto improvement.

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Patent value  49 chip fabrication is invested in the successful development of software or a new integrated circuit design that aids in the invention of a genetic engineering technique which helps stave off the onslaught of Alzheimer’s disease? Empirical work by legal academics and economists on patent value cannot be neatly separated into studies of social value or private economic value. Although both concepts are notoriously difficult to pin down, social value appears to be the more challenging of the two to identify or measure. A 2012 study (Barry and Delcamp) attempts to disentangle social and private value, and is discussed at length here because it serves to highlight some of both the strengths and weaknesses found in much of the research on patent value. Many other studies in the field suffer from the same or similar problems as this one. The authors seek to distinguish private and social patent value in the context of comparing so-called “discrete” and “complex” technologies. A discrete technology is one in which a marketable product is protected by a single patent or a small number of them. Pharmaceutical drugs are the clearest example. Pharmaceuticals, which are created using the technologies of either traditional chemistry or biotechnology, are also the field in which patents are generally agreed to be the most economically valuable to their owners. Complex technologies, on the other hand, are represented by marketable products protected by a large number of patents, sometimes forming so-called “patent thickets.” Carl Shapiro (2001) has aptly defined a patent thicket as “a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology.” A modern smart phone is the archetypical manifestation of a patent thicket because the typical multifunctional phone incorporates a very large number of individual software and hardware technologies, many of which are individually protected by patents.2 There are thus many more risks that a competitor will infringe on at least one of these patents when seeking to commercialize its own technology products. To distinguish between discrete and complex technologies, the authors employ categories of patents that are determined by USPTO classifications. Although economists have relied extensively on the patent classification system to define technology categories, neither USPTO classifications nor the closely related International Patent Classifications (IPCs) actually define technology areas at all. The USPTO classes begin at a level too broad to be useful for academic researchers (e.g., “television”), followed by subclasses that focus on detailed functions and often operate at too low a level of abstraction to be of use for research purposes. At a high level, “music,” “fire extinguishers,” “animal husbandry,” “brakes,” “dentistry,” and the like are not technology categories. At a low level, “music—stringed—picking devices,” “fire extinguishers—chemical pressure ­generating—automatic,” “animal husbandry—milkers—methods of milking—milking station arrangements—with traveling platforms,” “brakes—vehicle—hub or disc—motor vehicles,” “dentistry—orthodontics—bracket—having means to secure arch wire—­ separable securing means—ligature wire” are likewise not technology areas. The USPTO classification system and the IPCs were designed to assist patent e­ xaminers and other searchers in finding relevant prior art patents, and not to provide a tool for

2   Some of the firmware code’s original expression in a smartphone is also rendered proprietary by copyright.

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50  Research handbook on the economics of IP law volume 2 defining technology categories for research purposes. They can be somewhat useful for some kinds of broad distinctions such as that between pharmaceuticals (an industry, not a technology) and computer hardware (also an industry, or part of an industry, and not a technology); but even then one will develop data sets with large data comparability problems. In addition to being fundamentally unsuited for identifying technology fields for research, the system is replete with errors, and its classes are often confoundingly entangled in loops. The placement of patents into patent classifications by the USPTO and other examining agencies does reveal distinctions among the many possible subjects of inventive activity, but it reveals nothing approaching the kind of coherent, sciencebased typology needed by social science research.3 The use by some researchers of the number of different patent classifications into which a patent was placed as an independent variable in efforts to assess patent value is discussed later. The Barry and Delcamp study properly uses renewal data revealing payment of patent maintenance fees to the USPTO at post-issuance years four, eight, and 12 as a proxy for private patent value.4 If one were to choose a single factor to suggest private patent value,

3   The only currently known way to place patents within technology classifications in a way that avoids large Type I and Type II errors and that is not dependent on the error-prone patent classification system is to (1) develop concise definitions of technologies through experience over time, and (2) carefully study the claims and written descriptions of patents to place them within these definitions. This method, which has been employed by the author of this chapter numerous times in published studies, has its own problems, including the fact that it is remarkably time consuming and cannot feasibly be used for more than several thousand patents on any single project. This approach also is not replicable unless another researcher is willing to devote a very large amount of time to the approach. Attempts by this author working with others to automate the method with software have not proved successful.   If one wishes to create a data set of more than several thousand patents for a research study, the patent classification system is the only available means. It is strongly recommended that, if the patent classification system is so employed, one or more additional filters also be employed to diminish the rate of Type I and Type II errors, such as including patents issued to only a specified set of owners that normally only patent in particular technology categories. Such an approach is likely to diminish substantially the number of Type 1 errors, but Type II errors will remain abundant, necessitating care in not overclaiming for the results of the study. An example of this approach is found in Graham and Mowery (2003). There, the authors initially identified a group of prepackaged software firms, and then identified the patent classifications for patents owned by those companies before collecting a larger set of patents from those classifications. This approach is undeniably better than using only the classifications, and produces a data set with few nonsoftware patents and thus with relatively few Type I errors. But Type II errors may still abound with such an approach unless the researchers carefully draw boundaries for the inferences they draw.   The author of this chapter has studied both USPTO classifications and IPCs that purportedly hold only data processing patents, and has discovered relatively large numbers of patents that do not actually cover the manipulation of data. The Graham and Mowery approach represents a useful methodology for developing a data set of patents in a particular field if one wishes to subject the field to some type of patent-value analysis as long as any claims for the resulting findings are carefully limited to what was actually studied, in this case only patents on this type of software and not to software patents as a whole, and as long as Type II errors are expressly acknowledged along with an analysis of how such errors might affect the results. The majority of software patents have been issued to large hardware manufacturers rather than to pure software firms (Allison and Mann, 2007). 4   The patent offices in a number of other nations require that renewal fees be paid annually.

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Patent value  51 this is probably the most direct, given that it represents a decision by an owner to invest in keeping its patent in force rather than allowing it to lapse. It is not without shortcomings, however, as will be discussed below. The study supplements its identification of patents having private value with a dummy variable for any patent that had been cited in a lawsuit found in the Lex Machina intellectual property litigation database.5 There is indeed something different about most patents that have been asserted in litigation when they are compared with patents that have not been—a topic that is also discussed in more detail later in this chapter. The authors then use various indicators as a group to identify social value: citations received (what some call “forward citations”), references to prior art patents (what some call “backward citations,” which do not include references to prior publications other than patents), number of claims, the size of so-called “patent families” (a misnomer for the number of countries in which a patent owner has obtained patent protection on the same invention), and what economics researchers have called “generality” and “complexity” indices. The generality index purports to measure the degree of dispersion across the technology areas of the prior art patents that patents cite as references, and the complexity index putatively measures the degree of technology distribution across the patents that cite the patent in question (“citations received,” or “forward citations”). The generality and complexity metrics are based on the patent classification system, however, and thus have limited value in identifying technology fields for research needs (Cohen and Merrill, 2003; Allison and Mann, 2007). As discussed in more detail below, some of the patent value indicators the authors chose—including citations received, prior art patent references, number of claims, and the number of countries in which patents have been acquired on the same invention—have been employed by a number of other scholars in both law and economics to signal value. We will see that these and a few other metrics do signal something about the relative importance of certain patents, but it is incorrect to associate them with social value. To the extent that these variables suggest value, it is private economic value, just as payment of maintenance fees clearly does. It is not social value. The number of claims in a patent, for instance, bears no relation whatever to the value that a patent or a set of them has to society as a whole.

III. HOW DOES PATENT “QUALITY” FIT INTO THE EQUATION? Most scholarship on patent value has not attempted to distinguish between social and private value, but has instead simply focused on unspecified “value,” or in a number of instances on what researchers have referred to as “patent quality.” Quality is not the same thing as value, but at a conceptual level the two are clearly interrelated, quality arguably being a subset of value. On the other hand, it is definitely possible for a patent or set of patents to possess quality without having much private or social value. This statement

5   See https://lexmachina.com/. The authors of the study refer to the Stanford IP litigation database, the name of the entity before Stanford spun it off as a private for-profit entity.

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52  Research handbook on the economics of IP law volume 2 assumes that quality refers to the likelihood that a patent will be held valid if challenged in USPTO administrative proceedings or infringement litigation, which seems to be a reasonable definition of the term quality. A patent’s claims might undoubtedly cover an invention that is novel and nonobvious, and the patent’s written description and drawings (its “specification”) might clearly provide adequate enablement and written description support for these claims, but the patent may still have little or no economic value if, for example, (1) the claims are too narrowly drawn (i.e., the language of the claims is very specific) to encompass what others are making, using, or selling; (2) the claims can easily be circumvented by others who produce noninfringing alternatives; (3) the claims cover an invention that is obsolete even while the patent remains in force; or (4) the claims cover an invention for which there is no market demand in the first place.6 That said, however, on average, a patent showing a high likelihood of validity is also likely to be more valuable to its owner, and possibly to society, than one possessing deficiencies probably leading to invalidity. Perhaps one can say that quality in many cases is a necessary but insufficient condition for value.7

IV.  THE FOCUS ON PRIVATE VALUE The “value” that has been the subject of most studies is clearly private value, the economic value that a patented invention has to its owner. It is unsurprising that most research on patent value has either explicitly or implicitly focused on the private variety because even though the notion of private value is a slippery one, any kind of social value assessment is far more so. Moreover, most scholarship has not attempted to measure the actual monetary value of particular patents. Instead, what many view as the “black art” of quantitative valuation of specific patents or groups of them has largely been left to the privacy of licensing, sale (assignment) and other negotiations. Work by Schankerman (1998) did attempt to quantitatively estimate the average value of patents in France across different technology fields by using data on patent renewal rates.8 The paper offers a good theoretical defini6   Saying “undoubtedly” and “clearly” in connection with patent validity on any grounds is an overreach, because there is always some degree of uncertainty attending the likely validity of a patent until it has been judicially determined to be “not invalid.” Even then, the validity of the patent in question can be challenged on other grounds if the owner sues a different defendant for infringement. 7   One cannot dismiss the possibility, though, that a standalone patent that has a low probability of being found valid in litigation, and thus is of low “quality,” can nevertheless have some form of value to its owner, as when the patent is part of a larger portfolio that its owner can use as a bargaining chip in litigation, or even that a troll might use successfully to extract a so-called “nuisance settlement” for some amount less than the accused infringer’s estimated litigation costs. The latter phenomenon is, of course, largely a product of the exceptionally high cost of modern patent litigation. 8   Patent “renewal” fees in Europe are payable each year beginning with the third year from the original filing of the patent application, Article 86(1) European Patent Convention, www.epo.org/lawpractice/legal-texts/html/epc/2013/e/ar86.html; whereas patent “maintenance” fees in the U.S. are due in the fourth, eighth, and twelfth year after patent issuance, www.uspto.gov/learning-and-resources/ fees-and-payment/uspto-fee-schedule#Patent%20Maintenance%20Fee.

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Patent value  53 tion of the value of the patent right itself as “the incremental returns generated by holding a patent on the invention, above and beyond the return that could be earned by using a second-best means.” Because it is impossible to identify, let alone measure, the value that a particular invention would have if not protected by patents but instead shielded from competition as a trade secret or protected solely by private contracts such as licenses, work on private patent value in legal scholarship has not attempted to identify the value of only the patent right itself, but has instead sought to recognize patents with value from the combination of the underlying invention and the patent right.9 In the technology management literature, Ernst, Legler and Lichtenthaler (2010) sought to theoretically approximate the incremental value of the patent right beyond any value inherent in the invention itself by employing a Monte Carlo simulation.10 Although the authors suggest possible empirical studies to follow up on their analysis, one is hard pressed to envision a workable empirical test of the difference between the value of patent protection and the value of alternative protection for the invention such as the use of trade secret law and contractual provisions.

V.  PRIVATE VALUE AND PATENT PORTFOLIOS Before turning in detail to an examination of factors that have been employed to identify patented inventions suspected of possessing private economic value, an aside on patent portfolios is warranted. Most research in law and economics has busied itself with the task of identifying the fact of value for standalone patents or broad groups of them rather than attempting the far more difficult job of suggesting which patents may have value primarily or solely because of their incremental contribution to a coherent private portfolio of patents or to a “thicket” of patents that covers some complex device such as a smartphone. Parchomovsky and Wagner (2005) expounded a theory patent of portfolio value in significant part to help explain the so-called “patent paradox.” The paradox—observed from a large survey by Levin, Klevorick, Nelson, and Winter (1987)—is that, although R&D executives at businesses of all sizes in all industries except pharmaceuticals view secrecy and “first-mover advantages” (i.e., lead time) as much more effective for appropriating returns on R&D investments than patents, corporations nevertheless continued patenting  9   Also, Schankerman’s study determined technology sectors by the use of patent classifications. Using this flawed method for defining technologies is perhaps the best one can do when studying more than a few thousand patents, but any results based on the use of these classifications must be viewed very cautiously. 10   The authors summarize their study and conclusions as follows:

We rely on Monte Carlo simulations with data from a case study in a large chemical firm to estimate patent value according to our model. In the simulation analyses, we compare an R&D project with patent protection and the same project without patent protection. The difference of the values of the two projects is the surplus in profit that may be expected from having a patent covering the project. This surplus is regarded as the value that is directly attributable to the patent. The results of the simulation analyses indicate that the development costs and expected net cash flows of a patent-protected project are higher than of an unpatented project. The higher net cash flows outgrow the increased development costs, and patent value is positive. However, this value is smaller than the overall project value of the patent-protected R&D project.

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54  Research handbook on the economics of IP law volume 2 relentlessly and at accelerating rates. A later large survey of R&D executives by Cohen, Nelson, and Walsh (2000) led to the undeniably correct conclusion that a large portion of patents, especially those issued to large companies, were not acquired for the purpose of protecting particular technology products, but instead were obtained for defensive purposes (Goldenberg and Linton, 2012).11 Regarding portfolio value, the statement by Parchomovsky and Wagner (2005) that “We find that for patents, the whole is greater than the sum of its parts: the true value of patents lies not in their individual worth, but in their aggregation into a collection of related patents – a patent portfolio,” is clearly true for many patents, especially for those owned by large companies that are far more likely than individuals, small companies, or universities to obtain large numbers of patents on related technologies for any of several purposes. As noted by Wesley Cohen and his colleagues (2000), and as generally known by many patent practitioners, large companies develop extensive patent portfolios for defensive purposes so that they might better defend against infringement claims by competitors in a take-off on the existential “mutually assured destruction” model of nuclear armament. They likewise build portfolios to create more freedom of movement for their R&D investments, to keep rivals at a technological distance, and sometimes to build thickets of patents that enable complex pieces of hardware. Individual patents or small sets of them that sometimes originate with the same original application are typically more valuable to small entities of different types (Allison, Lemley, Moore, and Trunkey, 2004). Although single patents are more likely to have value to small entities,12 patent portfolios are often important even to small entities for some of the same reasons that they are important to large ones, except that they are likely to have smaller collections of patents presenting fewer opportunities for cross-licensing to short-circuit litigation.13 However, patents issued to individuals and small entities are more likely than those granted to large entities to be involved in infringement litigation, in part because the large portfolios of the latter provide them with more to trade (Lanjouw and Schankerman, 2003). The value of patent portfolios of any size to any size or type of entity must naturally vary across technology and industry sectors, as well as across firms and within firms. Relative to single patents, relatively large portfolios should be more valuable in the software technology field and in the information technology industry more generally than in technologies such as chemistry and biotechnology and industries such as pharmaceuticals, because technical 11   An unrelated use of the term “patent paradox” has been to describe the asserted phenomenon of stronger patent laws with longer durations allowing greater profit to the inventor, but at the same time discouraging related innovation as the protection for the underlying technology becomes broader and the duration is longer (Goldenberg and Linton, 2012). 12   The USPTO defines a small corporation as one with fewer than 500 employees. A company operating a non-labor intensive business may, of course, have very substantial assets and sales while still being classed as a small entity for discounted USPTO fee payment purposes. The USPTO also includes individuals and universities within its definition of a small entity. Universities do not, of course, engage in manufacturing and thus do not have a need to crosslicense, although the manufacturers to which they grant licenses (typically exclusive licenses) usually are manufacturers and may have the same need to use a patent portfolio defensively as any other practicing entity. 13   Universities, of course, rarely engage in cross-licensing because they do not manufacture.

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Patent value  55 advances tend to be smaller and more incremental in the former than in the latter. The previous statement also is a partial reflection of the distinction between discrete and complex technologies, to use the words of some researchers. Also, research has observed that litigated patents as a group were issued to a larger portion of small entities than were unlitigated patents (Allison, Lemley, Moore, and Trunkey, 2004). Satisfactory methods for measuring, or indeed even identifying, the special value that patent portfolios can have because the value of the whole is greater than the sum of its parts, or the value that any particular patent might contribute to a portfolio that is beyond any value that such patent might have on its own, have not been developed. Scholars have identified large groups of patents that seem to have more value than other large groups of patents, as with research on litigated versus unlitigated patents (Allison, Lemley, Moore, and Trunkey, 2004), but the sets of litigated and unlitigated patents identified have not consisted of any particular owner’s coherent portfolio. Reitzig (2003) did examine the characteristics of a single company’s portfolio of patents, his study focusing on 127 German or European patents and applications having filing dates between 1979 and 1999, all but a few having German priority. The patents and applications were owned by a single “large” semiconductor firm. In a 1999 survey conducted by the author, a technology unit within the firm identified the patents and applications as being held solely as “bargaining chips” for cross-licensing negotiation purposes. None of the issued patents had been asserted in litigation. Each patent or application was evaluated by four separate teams of experts from within this unit of the patent-owning firm, each team consisting of between one and four engineers and one marketing expert.14 Using an ordinal scale for each patent or application, these teams assessed several characteristics such as novelty, technical advance, quality of technical information disclosure, patent age, and difficulty that would be encountered by competitors in attempting to “invent around.” The teams then evaluated, again on an ordinal scale, the present value of each patent or application as a function of how interested the owning firm would be in buying the patent were it owned by the firm’s strongest competitor either at the time of application filing or at the time of the interview by the study’s author. The author found correlations between patent characteristics and value estimates at a medium level on a one-to-seven scale, the greatest positive correlation being that between the age of patents and their value estimates. The latter finding revealed that, in this set of semiconductor patents owned by a single large firm, greater age was correlated with greater value to the firm, with the caveat that the average age of patents in the data set was only about five years. The primary value of this study appears to be its confirmation of several predictors of value that seem quite intuitive. The paper’s finding regarding patent age is less intuitive, and probably would not continue to hold true as the patents in question became even older because of the increasing probability of obsolescence or the development by rivals of noninfringing alternatives. The study is also notable as an unusual and well-conceived attempt to assess the value of a single firm’s coherent patent portfolio, although, as the author candidly admits, the generalizability of the findings is uncertain.

14   If a team was unable to reach consensus on how to evaluate a patent, the opinion of the most senior engineer in the group was used.

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56  Research handbook on the economics of IP law volume 2

VI.  IDENTIFYING PRIVATE PATENT VALUE A.  Is There a Litigation-Value Link? Relatively early research in economics and law associated litigation propensity with private patent value, under the view that the extremely high costs of patent enforcement would generally lead patent owners to sue for infringement only in the case of patents they deem to be important (Lanjouw and Schankerman, 1999). “Importance” is surely associated in some way with private value, although this value is likely to take various forms. It may be value associated with protecting technology embodied in a marketable product, creating obstacles for competitors that may sue the patent owner for infringement of the competitors’ patents, establishing a reputation for actively enforcing patents to ward off other firms from getting too close to an owner’s protected technological territory, or even the ability of a patent assertion entity (a subtype of “non-practicing entity” (NPE)) to extract rents by means of settlements for less than the defendant’s projected litigation costs. Whereas the first three versions of value to patent owners are either wealth creating or at least not purely redistributive, the latter is like to be mostly redistributive in many cases, especially in those instances in which the patent assertion entity plays no role in providing remuneration to the original inventors of the patented technology. Several patent characteristics, including the number of references to patent and nonpatent (“printed publications”) prior art, number of claims, number of related patents issued from the same original application,15 and number of countries in which a patent is obtained on the same invention in different countries (sometimes referred to by the misnomer “patent family”) all require significant investment by patent applicants. Research shows that these characteristics not only are associated with litigation propensity and independent measures of patent value, but also tend to be correlated with one another. The correlation among some of these characteristics suggests a perception among certain patent applicants that their invention will have value to them, leading to greater investment in an attempt to obtain and enforce stronger patents (Allison and Tiller, 2003).16 There clearly is something about patents asserted in infringement litigation that sets them apart from patents that are not. Research by several scholars has found litigated patents to have different characteristics than unlitigated ones; or perhaps it is more accurate to say that litigated patents on average have characteristics that are greatly amplified in comparison with contemporaneously issued or filed unlitigated ones.17 For example, 15   The number of patents issued to a firm on closely related technologies, which in the U.S. will often spring from the same original patent application, is a metric that is better described as a “patent family.” 16   The authors found a strong correlation between number of claims and number of prior art references. 17   The authors found that, compared with unlitigated patents, contemporaneously issued litigated ones have significantly more patent and nonpatent prior art references, have more claims (and notably, more independent claims), are cited more often by later patents, are characterized by more technology areas per patent, and spent more time in prosecution. Allison and Sager (2007) refuted criticisms by another researcher of the statistical methods used in Allison, Lemley, Moore, and Trunkey (2004). Allison, Tiller, and Zyontz (2012) likewise found litigated patents to have more independent claims and citations received than unlitigated ones.

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Patent value  57 Allison, Lemley, Moore, and Trunkey (2004) discovered that, when compared with contemporaneously issued unlitigated patents, litigated patents have significantly more prior patent and nonpatent prior art references, claims (including, more importantly, a larger number of independent claims),18 and more technology areas per patent. Litigated patents also were found to be cited more by later patents. Moreover, patents that are asserted in litigation multiple times possess characteristics that are even more amplified than those of patents that are the subject of litigation only once (Allison, Lemley, and Walker, 2009). Comparing patents that were litigated eight or more times during an eight-year period between the beginning of 2000 and the end of 2007 with those having been litigated only once during the same period, the authors found that when compared with once-litigated patents, the “most-litigated” ones cited significantly more patent and nonpatent prior art, received significantly more citations from later patents—“forward citations” (and notably, significantly more self-citations), had more technology areas per patent, had more pre-litigation ownership changes, and were younger (Allison, Lemley, and Walker, 2011).19 The fact that litigated patents, including those litigated many times, tend to be relatively young may also suggest private value because the younger the patent, the fewer the number of noninfringing alternatives there are likely to be, and the lower the probability of invention obsolescence is likely to be (Allison, Lemley, Moore, and Trunkey, 2004; Allison, Tiller, and Zyontz, 2012).20 B.  Possible Indicators of Private Patent Value Researchers have identified several patent characteristics as suggesting patent quality and value, several of them having a clear association with litigation. Several research efforts have identified what might be termed a “litigation link”—an association between the fact of litigation of patents and quality or value. 1.  Prior art references One proxy for patent quality and value that scholars have identified is the number of prior art references together with, to the extent practicable, some assessment of the types and informational content of those references and their sources. Prior art is objective evidence of what has been done previously in the relevant technology field. The most important types of prior art that can be gleaned from patents themselves are references to prior U.S. and foreign patents and to prior printed publications of various types (often called 18   The difference in the number of total claims between litigated and unlitigated patents is driven by the difference in the number of independent claims, not dependent ones. 19   Like Allison, Lemley, Moore, and Trunnkey (2004), Allison, Lemley, and Walker (2009) did not employ patent classifications to identify technology fields, but rather used manually created and coded technology categories based on much trial and error in multiple studies. In a follow-up study, the authors also found that the owners of the most-litigated patents overwhelmingly lost their patent lawsuits, which is likely an artifact of technology area (most were software patents, especially those in the software communications field) and type of owner (the owners of the most-litigated patents were predominantly patent aggregators, or “trolls”) (Allison, Lemley, and Walker, 2011). 20   Allison, Tiller, and Zyontz (2012) found that both software business method patents and patents in a randomly selected set of contemporaneously issue patents from the general population had an average age of 4.5 years when litigation was instituted.

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58  Research handbook on the economics of IP law volume 2 “nonpatent prior art”). It is intuitively appealing to view the quantity and, to the extent we can measure it, the quality of prior art cited in patents as indicators of patent quality. Both should correlate with (1) the seriousness of the patent applicant’s effort to identify previous inventions and distinguish the new invention from prior ones, and (2) the rigor and thoroughness of the USPTO’s examination. Furthermore, the most common basis for judicial invalidation of patents in the U.S. is prior art that had not been considered by the USPTO (Allison and Lemley, 1998). This is not to say that the number and quality of references are perfect indicators of patent quality. For example, the fear of being charged with inequitable conduct leads some applicants to load up their applications with virtually any prior art reference they have come across, regardless of relevance.21 However, patentees’ ex ante perceptions about value should have some reliability, because patentees at the time of filing and prosecution have a considerable amount of value-relevant information about the market in which they will deploy the claimed invention. In a large data set of patents, it is reasonable to think that patents disclosing more prior art references reflect a level of effort on the part of the applicant and examiner that is higher on average than the effort involved in patents that disclose fewer references. For the applicant, greater effort also means greater investment. Moreover, other indicia revealing greater value perceptions and investment in the patenting enterprise, such as the number of claims and subsequent self-citations, correlate strongly with the number of prior art references (Allison and Tiller, 2003; Allison, Tiller, and Zyontz, 2012).22 Given the imperfection of inferences drawn from prior art, additional information about patent value is needed to buttress those inferences. For example, suppose, as seems likely, that patent owners care more about quality when they expect their patents to be valuable. Research by Harhoff, Scherer, and Vopel (2003) found a significant association between the number of references to prior patents and success in German opposition proceedings. Such success should be a reasonable indicator of private value.23 Regarding the informational value of prior art references, the best one can do with references to prior patents is to count them and identify the countries in which those patents were issued. In a few instances, their country of origin could possibly provide information about informational quality, but an effort to make such distinctions would be quite speculative. Assessing the probable informational quality of references to nonpatent prior art—printed publications—is more feasible, however, and may aid in a rough assessment of patent quality and perhaps value. Allison and Tiller’s (2004) comparison of Internet business method patents with patents from the general population, and later,

21   Under so-called “Rule 56,” USPTO rules require that a patent applicant disclose any relevant, material prior art of which he or she is aware, which is sometimes referred to as the “duty of candor.” 37 CFR § 1.56 (1977). 22   Allison and Tiller (2003) found a strong correlation between number of claims and number of prior art references, as did Allison, Tiller, and Zyontz (2012). 23   Any inferences drawn from prior art references are complicated, however, by the fact that not all prior art is cited by applicants. Examiners also add citations, and the USPTO began identifying examiner-added references on the fact of patents in 2001. A 2008 working paper found that, between 2001 and 2003, 40 percent of all applications included prior art cited by the examiner. Alcácer, Gittelman, and Sampat (2008).

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Patent value  59 Allison and Hunter’s (2006) comparison of business method patents in USPTO main class 705 with those in secondary class 705, examined the source of every nonpatent prior art reference, classified them into categories based on their estimated degree of objectivity and reliability, and then compared these classifications between data sets.24 The two studies employed the same set of nonpatent prior art categories, except that the later study separated academic and trade publications, as shown below: (1) Academic Publications: This category represents publications of a type for which there is an independent intermediating influence such as one or more editors or referees to increase the probability of accuracy, reliability, and objectivity, and which are targeted primarily at an academic, scholarly audience. Academic books, book chapters, journal articles, and academic proceedings papers, which have been independently screened for accuracy and objectivity, are the primary components of this category. Academic publications are likely to be the most objective and reliable nonpatent prior art references because of the rigorous peer-review process to which such publications are typically subjected. (2) Trade Publications: This category includes trade books and chapters, trade journal articles, and similar items. Trade publications are targeted primarily at a practitioner audience rather than an academic one and report on developments in a field rather than create new knowledge in that field as academic works are more likely to do. Like academic publications, trade publications are a type of nonpatent prior art for which there is an independent intermediating influence such as one or more editors or referees to increase the probability of accuracy and objectivity. Although these publications are quite unlikely to be subject to the same degree of rigorous peer review as academic publications, they nevertheless constitute prior art of relatively high quality and are a good reflection of the state of the art at the time of publication. (3) University Publications: This category includes publications from universities or consortia of universities, such as those from university research labs, departments (such as computer science, electrical engineering, information systems, business, etc.), individual faculty, and graduate student theses/dissertations. Because these types of publications are developed in an environment of objective academic inquiry, they typically will be prior art of good quality although this quality is probably quite variable. (4) Software: This category includes software programs and software documentation. These are separated from other company- or industry-sponsored publications because of their functional nature and obvious need for a high degree of accuracy and objectivity compared with less functionally motivated company-sponsored prior art. Software and software documentation therefore represent prior art of comparatively high quality. (5) Patent-Related: This category includes published patent applications and patent office search reports, such as PCT (Patent Cooperation Treaty) and EPO (European Patent Office) search reports. Such publications are likely to be of highly variable quality as prior art. Published patent applications are of uncertain quality as prior art because they have not yet been examined or otherwise tested. Published search reports are likely to be more objective and reliable than published applications because of the involvement of independent search authorities. (6) Government Documents: This category includes documents published by U.S. and foreign governments and by international government organizations such as the World Intellectual

24   Allison and Tiller (2003) provided statistical comparisons between several categories of nonpatent prior art categories in a population of software business method patents and a random sample of contemporaneously issued patents from the general population. Allison and Hunter (2006) provided statistical comparisons of several categories of nonpatent prior art in patents that had been assigned to USPTO main class 705 and in secondary class 705 as part of an effort to empirically evaluate the effect of the USPTO’s 2000 “second pair of eyes review” on the quality and value of software business method patents.

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60  Research handbook on the economics of IP law volume 2 Property Organization (WIPO), as well as websites sponsored by such entities. The category does not include U.S. and foreign patent-related documents such as published patent applications and search reports, which are treated separately because of their special nature. The quality of government documents as prior art is likely to be extremely variable. (7) Company/Industry Publications: This category includes press releases, websites, advertisements, technical disclosure bulletins, and various other publications that were produced by individual companies or industry groups and published with no independent intermediating influence to increase the probability of accuracy and objectivity. It does not include software and software documentation, however, because these are sufficiently distinct from and inherently more reliable than other types of publications from companies or industry groups. After removing software and software documentation from the category, companyand industry-sponsored publications overall cannot be treated as high quality prior art. (8) Popular Press: This category includes not only newspapers, magazines, and other publications of general interest, but also news publications aimed at general business and legal audiences. The relative quality of such publications varies greatly, but overall is relatively low. (9) Other: Includes sundry items such as individual webpages, but most references placed in this category are those in which insufficient information was provided for determining what the item really was, even after we conducted a web search of key names and terms in the incomplete reference. One example is a reference to a partial title of an item, followed by “found on the web on x date.”25

2.  Patent claims Like the number of prior art references, the number of claims in a patent relates intuitively to private economic value. Following the detailed written description of the invention in a patent, claims ideally identify the invention with linguistic precision and define the patent owner’s property interest with similar precision.26 Having a patent attorney draft more claims necessarily costs more money. Moreover, increasing the number of claims in a patent can sometimes increase the universe of potential infringers and the likelihood that the patent will be held to extend to competing products by providing the drafter with more opportunities to use a variety of different language formats in claiming an invention. Although researchers in economics had identified the total number of claims as a predictor of litigation and value (Lanjouw and Schankerman, 1997), later empirical scholarship in law (Allison, Lemley, Moore, and Trunkey, 2004; Allison and Sager, 2007) found that the significant association between the number of claims and litigation propensity is entirely driven by the number of independent claims, not dependent ones.27 Litigated patents have significantly more total and independent claims than unlitigated

  Id. at 741–744.   Anyone with substantial experience in studying the text of patent claims, and the interpretation of them by federal courts, knows that the ideal cannot be realized. 27   Patent claims are either independent or dependent. As the term implies, an independent claim stands by itself. An independent claim is usually relatively broad in its coverage by employing more general language, which increases the universe of potential infringers. More general language also translates into a higher probability of being invalidated for any of several reasons, including claim indefiniteness and overlap with prior art. After each independent claim a patent usually contains one or a series of dependent claims, each normally adding more specificity to a functional element from the independent claim. Increased specificity narrows the technological reach and decreases the number of potential infringers, but causes the dependent claim to be less vulnerable to an invalidity finding. Thus, if an independent claim is invalidated in infringement litigation, 25 26

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Patent value  61 ones (Allison, Lemley, Moore, and Trunkey, 2004). Moreover, Moore found that, in a logistic regression model, the number of claims was a significant predictor of continued payment of maintenance fees by owners (Moore, 2005).28 Payment of maintenance fees as a value indicator is discussed below. A further observation on independent claims is perhaps warranted. It is common to find multiple independent claims in a patent in recognition of the fact that human language is highly imperfect, even more so when it is used in an attempt to distinguish the functional details of an invention from all other similar inventions. Patent drafters often write multiple independent claims that cover the same invention, using different verbal formats to increase the odds that a later product that is substantively identical or similar to the disclosed invention will not “slip through the cracks.” The value of having different independent claims on the same invention is aptly, albeit anecdotally, illustrated by NTP, Inc. v. Research In Motion, Ltd. (2005), in which NTP successfully sued Research In Motion, the maker of the BlackBerry personal communication device, for infringement of several NTP patents. The United States Court of Appeals for the Federal Circuit concluded that the BlackBerry functioned in a way that did not violate the independent “method” (i.e., process) claim of the NTP patent, but did infringe the NTP patent’s “system” independent claim. 3.  Citations received (“forward citations”) Another intuitive and empirically validated indicator of patent value is the number of times that later patents cite a particular patent as prior art (“citations received” or “forward citations”). It is reasonable to expect a correlation between the number of citations received and the relevance of the patent to continuing developments in the applicable technological field.29 The number of citations received similarly relates to the likelihood that the patent disclosed a fundamental development in the particular technology field, thus giving the patent owner a valuable “head start.” Moreover, later citations to a patent by the owner of the earlier patent (“self-citations”) suggest that the patent owner is building a group of patents on closely related technological advancements, which suggests a greater likelihood there may still be a finding of infringement if the defendant is making, using, or selling a product that falls within the more specific confines of a dependent claim. 28   The number of claims also has been found to be significantly correlated with the number of prior art references (Allison and Tiller, 2004). 29   One cannot simply use the raw number of citations received, however. As patents age, the opportunity they have to be cited as prior art in other patents increases, although not in a linear fashion. Thus, to properly use forward citations as a research metric, the absolute number of citations received must be adjusted, or “standardized” to account for the different ages of patents in a data set. A commonly used method of adjustment, suggested by Hall, Jaffe, and Trajtenberg (2002), involves placing each patent in the data set into a cohort of other patents in the data set that were issued during the same year. Thus, each cohort is one year, although cohorts of more than one year could be used if necessary to solve a small numbers problem even though this would decrease precision. The number of forward citations received by each patent is divided by the average number of forward citations received by other patents in the same cohort. This gives the adjusted number of forward citations for that patent in the data set. The process is repeated for every other patent in the same cohort and then repeated for each patent in the other year cohorts. To obtain the adjusted number of forward citations for an entire data set, the quantity of adjusted number of forward citations received by all patents in the set is then averaged.

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62  Research handbook on the economics of IP law volume 2 of commercial exploitation of the patent. Hence, it is no surprise that empirical studies have found significant positive correlations between the number of forward citations and firm market value, and between the former and likelihood of litigation. Lanjouw and Schankerman (1999) identified citations received as a patent value indicator, and a study by Hall, Jaffe, and Trajtenberg (2005) concluded that each additional forward citation was associated with a 3 percent increase in firm market value. The same Hall, et al. study found that “self-citations” were even more strongly associated with firm market value than citations by others.30 In addition, Harhoff, Scherer, and Vopel (2003) found that the number of citations received was a predictor of successful outcomes in German patent opposition proceedings. Moser, Ohmstedt, and Rhodes (2015) discovered a correlation between citations received and improvements in yields on patented hybrid corn, the association being robust for alternative measures for improvements in the crop. Other research shows that litigated patents received significantly more citations than unlitigated patents (Allison, Lemley, Moore, and Trunkey, 2004), and that both external citations received and the self-citations subset were significantly greater in patents that had been litigated multiple times than in those litigated only once (Allison, Lemley, and Walker, 2009). Although some researchers have used a patent value metric calculated by dividing the number of forward citations by the total number of claims, there appears to be no empirical or logical basis for doing so (Lanjouw and Schankerman, 2003). Regarding both patent citations made and those received, as well as the litigation-value link, recent but yet unpublished work by Torrance and West using eigenvector centrality and hierarchical graphical approaches shows that litigated patents have vastly larger and more complex networks of citations made and citations received than patents that have not been litigated (Torrance and West, 2016). 4.  Payment of maintenance or renewal fees Intuitively, the willingness of patent owners to keep their patents alive by paying “maintenance fees” (called “renewal fees” in Europe) should be an indicator of perceived economic value. As shown by Kimberly Moore (2005), the failure of the owners of most U.S. patents to pay the relatively modest maintenance fees necessary to keep their patents

30   Allison, Lemley, and Walker (2009) made the point that use of a relatively accurate decision model for identifying self-citations is preferable to simply counting later citations having the same assignee as other researchers had done. Because there are often multiple inventors on a patent, and because ownership of a patent can change after issuance, there can be difficulty in identifying a particular forward citation as a self-citation. Thus, Allison, Lemley, and Walker (2009) used the following decision rule for identifying self-citations: A forward citation is a self-citation if either (1) the owners of the main patent and the forward citation are the same, or (2) the owners are different, the inventors in the main patent and the forward citation are the same, and there are no co-inventors (i.e., no other inventors). To apply this decision rule, they had to examine the front pages of each of the 3419 patents that constituted forward citations to patents in their two data sets. Other researchers have not examined individual forward citations and thus used a blunter test to identify self-citations: a forward citation in which the assignee (owner) of the patent is the same in the cited and citing patents. See, e.g., Hall, Jaffe, and Trajtenberg (2002).   Like all citations received, self-citations must be adjusted to account for the varying ages of patents in a data set.

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Patent value  63 in force suggests that more than half of all patents are not worth even a few thousand dollars a few years after they are issued. The intuition that payment of maintenance fees relates to private patent value is buttressed by empirical research identifying strong positive correlations between the indicators of value discussed above and maintenance fee payments. Specifically, Moore concluded that patents with more claims and forward citations are more likely to be maintained. The payment of maintenance fees as a factor by itself could be somewhat limited as a value indicator, however, if evidence were to show that, as is likely, corporate owners with very large portfolios renew patents en masse in particular fields of activity where they need to defend against competitive encroachments and against infringement claims by competitors rather than giving careful consideration to the maintenance decision for individual patents or small groups of them. The great majority of all U.S. patents are owned by large companies as part of large portfolios. Undoubtedly, though, patents that have been continued in force by fee payments should be more valuable than those that have not. 5.  Number of countries in which patent protection is obtained (“patent family” size) Another indicator of value used in the existing literature is the number of countries in which the owner has obtained patent protection on the same invention (often referred to as a “patent family”).31 This makes sense because of the large expense of patenting in multiple countries, and because patent protection is limited to the nation in which the patent is granted, the number of different countries in which patents are obtained on the same invention should correlate with the perception, and sometimes the reality, of wider geographic markets for the patented technology. Putnam (1997) and Lanjouw, Pakes, and Putnam (1998) made relatively early uses of what they referred to as the “size of the patent family” as a value indicator. Lanjouw and Schankerman (1999) developed a patent quality index that relied on the number of claims, prior art references, forward citations, and the number of countries in which the patentee sought protection for the invention, finding, inter alia, that the size of a patent family is significantly associated with the likelihood of litigation. And Harhoff, Scherer, and Vopel (2003) found a significant association between the number of countries in which patent protection was acquired and successful outcomes in German opposition proceedings. 6.  Number of patent classifications A few researchers have sought to use the number of different USPTO or IPC classifications into which patents have been placed by the examining agency as a measure of technological breadth and, consequently, of private patent value. A relatively early and ingenious attempt to do so by Lerner (1994) examined patents issued to young biotechnology firms in the Boston area and found that the number of four-digit IPCs per patent was significantly associated with these firms’ success in obtaining financing. Lerner equated 31   Instead of identifying the number of countries in which a patent has been obtained on the same invention, a better use of the term patent family is to denote the number of patents on closely related technologies. In the U.S., which allows patents to issue from continuation applications, multiple patents can issue from continuing applications of various types that all relate back to the same original application.

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64  Research handbook on the economics of IP law volume 2 the number of patent classifications per patent as a proxy for patent “scope” or “breadth.” Using a sample of 535 financing rounds at 173 privately held venture-backed biotechnology firms, Lerner found that one standard deviation increase in the average number of four-digit IPCs was associated with a 21 percent increase in the firm’s value. Broad patents, Lerner stated, are more valuable when substitutes in the same product class are plentiful, a finding consistent with theoretical suggestions.32 However, later research has not been able to generalize on Lerner’s findings in different contexts.33 Guellec and Van Potterie (2000; 2002) found no association between the number of patent classifications per patent and the success of patent applications in achieving issued patents. They found that issued patents actually were characterized by a smaller average number of four-digit IPCs than abandoned or rejected applications, which were presumably less valuable than issued patents. In addition, using outcomes in German patent opposition proceedings as a measure of private patent value, Harhoff, Scherer, and Vopel (2003) found no statistical association between the number of four-digit IPCs and positive outcomes. Likewise, Allison, Lemley, Moore, and Trunkey (2004) could find no positive association between litigation likelihood and the number of USPTO or IPC classes. Other things being equal, broader patents should indeed be more valuable, but the number of different patent classifications is not a measure of patent breadth. The number of different actual technology areas is, however, a significant predictor of litigation. If, as many believe, the fact of litigation is associated with private patent value, the number of actual technology areas per patent, when properly measured by studying the patents themselves, should be a value indicator. 7.  Claim breadth and words, words, words Assuming validity, a broader patent is inherently more valuable than a narrower one because patent breadth should translate into a larger universe of potential infringers. The problem, of course, is that broader patents are more likely to be invalid than narrower ones because they are more likely to overlap with prior art and fail the novelty or nonobviousness requirements, suffer from fatal indefiniteness, or be noncompliant with the enablement and separate written description disclosure requirements. The fact that broader patents are more likely to be invalidated than narrower ones causes the relationship between breadth and value to be murky, given the substantial uncertainty associated with any prospect of invalidity before a court has definitively ruled. Consequently, broader patents may or may not be more valuable relative to those that reach less far technologically. The relationship between breadth and value will, generally speaking, be idiosyncratic to a particular patent, or to a group of closely related patents. Putting aside the increased invalidity risk posed by broad patent claims, it is necessary to understand what is really meant by patent breadth. And when we say patent breadth, we necessarily mean claim breadth. Such breadth is not attributable to the number of total claims, as many have supposed. Patent breadth may sometimes be increased by the 32   As previously noted, the number of patent classifications per patent likely reveals something, despite the fact that neither the USPTO nor the IPC classifications truly identify technology fields. 33   Lerner and others appear to believe that the classifications into which U.S. patents are placed are the result of very careful decisions by patent examiners. Those having more familiarity with the process, however, know this to be untrue.

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Patent value  65 number of independent claims, but not necessarily so, and maybe not even usually so. Breadth certainly is not the number of classifications into which examining authorities have placed a patent or a set of patents. Patent breadth is increased, however, by the relative generality of the language within claims, particularly within independent claims. This seems to be always the case, or at the least subject to only unusual exceptions. Language generality within independent claims is thus the true measure of patent breadth. Exactly when a word or phrase in a patent claim is relatively more general or specific, however, is yet another question having what is likely to be a highly idiosyncratic answer. Developing a consistently applicable metric for language generality has proved difficult, precision almost certainly being unattainable. Some observers have regarded the average word count per independent claim as a coarse estimator of breadth. In 2016, Oracle Corp. proposed to the USPTO that a close additional review by an examiner and supervisory examiner be given to patents with any allowed independent claims of fewer than 300 characters, or about four lines of text, because according to the company the USPTO has almost never allowed independent claims this short. Oracle observed that its study of patents granted to itself and a number of other large software and computer hardware firms revealed that 1 percent or fewer of these firms’ issued patents included such a short independent claim. Malackowski and Barney (2008) observed, for example: “While claim breadth cannot be precisely measured mechanically or statistically, counting the average number of words per independent claim in an issued patent can serve as rough proxy if taken from a sufficiently large, statistically relevant sample.” If no pretense of precision is adopted, this is probably true. There is strong intuitive merit to the idea of an inverse relationship between the word count of a patent claim and the breadth of its technological reach, although testing the proposition will be fraught with uncertainty in light of the fact that claim breadth is an inherently imprecise concept to begin with. And the immediately following explanation by these authors carries things too far: “That is because each word in a claim introduces a further legal limitation upon its scope.” As an absolute statement, this is simply not true. A single word may or may not represent an additional restriction on the technical reach of a patent claim. A 2016 study found that the number of words in patent claims bears an inverse relationship to the number of citations received by Japanese patents (Okada, Naito, and Nagaoka, 2016). That is, the shorter the claim measured by the number of words, the more adjusted forward citations were received by Japanese patents in the data set. Evidence discussed elsewhere in this chapter regarding such “citations received” as a demonstrated value indicator lends additional credence to the idea that shorter independent claims tend to be more valuable, again assuming validity. 8.  Patent examination characteristics Marco and Miller (2017) tested for associations between certain characteristics of the USPTO patent examination process and litigation propensity. They separated their chosen independent variables into logical groups identified as (1) application characteristics, (2) examination characteristics, (3) patent characteristics, and (4) post-grant characteristics. They also used a small set of patent value indicators, including the number of countries in which patent protection had been achieved for the same invention (what some economists term “size of the patent family”), the number of citations patents received in later patents

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66  Research handbook on the economics of IP law volume 2 citing them as prior art (referred to by some economists as “forward citations”), the continued payment of maintenance fees by patent owners to prevent patent expiration, and whether patents are “standard-essential patents” (disclosed by a patent owner to a “standard-setting organization”), in a technology field. These are well-chosen value indicators. Among other findings, the authors found significant positive associations between the likelihood of patent litigation and patent value indicators, and between patent litigation and certain examination characteristics, namely: (1) the applicant going through the appeals process for rejected applications within the USPTO; (2) the application being examined by a relatively more senior examiner who has signature authority, in contrast with a relatively more junior examiner without signature authority; (3) the number of interviews between the applicant’s legal representative and the examiner; and (4) the length of patent prosecution. Variables (1), (3), and (4), along with a few other independent variables associated with the examination process, most likely reflect the ability and willingness of a patent applicant to invest more resources in the patenting effort, probably because of a perception by the applicant of relatively greater importance or value. And (4) is also most likely driven by the applicant having filed and pursued a greater number of ancestor applications leading up to the application resulting directly in the patent in question, as has been shown in previous research. A major weakness of this study, however, is that data on patent litigation was obtained from RPX, which is emphatically not an unbiased data source and the use of which by researchers is difficult to understand. RPX is a private firm that, among other services, assists patent infringement defendants with prior art that may assist in challenging the validity of plaintiffs’ patents, provides patent infringement insurance, acquires patents itself for licensing and litigation purposes (it is a patent troll), and collects data on patent infringement litigation as part of the market intelligence service it supplies to clients. There is no way to assess the methodological soundness of RPX-provided data or the qualifications of those collecting the data. Thus, a researcher might justifiably decide not to rely on conclusions drawn from such data. 9. Licensing A few studies have focused on licensing in relation to patent value. A cogent argument can be made that the mere existence of a licensing agreement suggests that the patent or patents forming the subject of the agreement are, on average, more valuable than unlicensed patents. It may be the case that a distinction is warranted between patent licenses resulting from litigation and those reached without the filing of litigation. If the distinction is made, however, a simple dichotomy between licenses achieved completely apart from litigation and licenses entered into at some point after a patent infringement lawsuit has been filed is unlikely to reveal much about the value of the subject patents. Given that some infringement cases are instituted solely for the purpose of pressuring the defendant to take a license, sometimes for a fee below the defendant’s expected litigation costs, the stage of litigation at which licensing occurs will be an undeniable factor in any use of licensing as a value indicator. A study by Ruckman and McCarthy (2016) examined patent licensing in the bio­ pharmaceutical industry, finding that indicators of patent value have less to say about whether patents get licensed than do the characteristics of the patent owners themselves. The prestige of the patent owning company and its experience with licensing activity

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Patent value  67 were found to be associated with the fact of licensing to a much greater degree than any particular characteristics of the patents themselves.34 There is some intuitive sense to these findings, although the many unique traits of the pharmaceutical industry itself militate against generalizing the findings without replication of this kind of study in other industries and technologies. Using a large proprietary data set of licensing transactions by so-called NPEs, Abrams, Akcigit, and Popadak (2014) found an inverted U-shaped relationship between per-patent licensing revenues and forward citations (citations received), with fewer citations at the high end of the value metric than in the middle. Although the confidential nature of the data’s source and collection methodology hampers an objective assessment of the study’s reliability, there is no reason to believe that these authors would use a seriously flawed data set. Licensing revenue clearly represents a direct measure of value for the kinds of owners and the kinds of patents in this data set. It appears to be a fair guess that the patent owners represented in these data are firms that own patents solely or at least primarily for the purpose of licensing them or, failing that, suing on them. Without knowing more about the data set, including which firms and which patents are included, as well as how and why they were selected, one cannot be sure about whether the patent owners represented in this data are all or mostly those that most observers would characterize as “trolls,” or “patent assertion entities.” These concerns aside, the study clearly complicates what previously had been the almost universal view of scholars that forward citations are an indicator of patent value. At a minimum, the study reveals that the relationship is not linearly simple (and not even monotonic, as the authors observe). Finally, one must remember that, among those patents that possess any economic value, that value can take a variety of forms other than generation of licensing revenue. The Abrams, Akcigit, and Popadak study does, however, add meaningfully to the patent value literature. 10.  Transfers of ownership It also stands to reason that patents which have attracted post-issuance buyers could be more valuable that those the ownership of which has remained the same since issuance. Referring back to the litigation-value link, Chien (2011) found that patents ending up in infringement litigation experienced significantly more ownership transfers through assignment after the initial patent grant than those that had not been litigated. And Allison, Lemley, and Walker (2009) revealed that patents which had been litigated multiple times during an eight-year time period were more likely to have been the subject of post-issuance, pre-litigation assignments than patents litigated only once during the same timeframe. On the other hand, Moore (2007) found that pre-litigation ownership transfers had no significant effect on patent owner win rates in litigation. 11.  Litigation outcomes A final possible variable that may signal some information about patent quality or value is the outcome of litigation in which infringement of a patent has been averred. Associating

34   It bears observing that there may be some reverse causation at work because the mere fact of a license could signal to others that the subject patents have value regardless of whether they would in the absence of the patent owning firm’s characteristics.

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68  Research handbook on the economics of IP law volume 2 any type of variable with litigation outcomes is, however, exceedingly difficult, as seen in Lanjouw and Schankerman (2003). Working from a data set of U.S. patent litigation during 1978–99, they found that neither technology areas (improperly identified by patent classifications), citations to prior patents (divided by number of total claims), citations received (“forward citations,” also divided by the number of claims for some reason), number of patents held by each litigating owner, nor the status of a patent owner as an “unlisted” (primarily individuals and small companies) or “listed” (primarily large companies) entity had any significant effect on settlement rate or on patent owner win rate at trial.35 Regardless of whether such findings reflect reality, one cannot depend on this study as authority for these propositions. The authors acknowledged that their data on litigation, which was acquired from commercial provider Derwent and the Federal Judicial Center, was incomplete because of underreporting by federal district judges to the USPTO. Federal judges began reporting patent cases to the USPTO in greater numbers after the end of this study, although judges’ omissions of some cases doubtless continue. Regardless, the authors report only trial outcomes or settlement. Judges probably are more likely to report trial outcomes than the many other possible results in litigation, so judicial underreporting may not be a serious problem for this study. Using only trial decisions is a major problem, however. Outcomes in litigation are complex, and even more so in patent infringement litigation where multiple patents are often asserted in the same lawsuit, the same patent can be litigated in more than one case, and judicial decisions are typically at the level of claims within the patent rather than at the level of the entire patent. The authors did not appear to be cognizant of the critical role that summary judgment plays in patent litigation, especially on infringement where summary judgments of noninfringement are the most common of the many possible outcomes. Also, many determinative, or at least crucial, decisions are made on pre- and post-verdict motions for judgment as a matter of law, and on appeal. Moreover, many nuances are attendant to each of these substantive decisions. Most patent lawsuits are resolved on summary judgment and do not go to trial, and patent owners and accused infringers face very different odds of successful outcomes in summary judgment compared with trial. Patent owners lose a large percentage of cases on summary judgment of noninfringement, but in the much smaller percentage of cases that get to trial, patent owners win on both infringement and validity over 50 percent of the time (Allison, Lemley, and Schwartz, 2014). There also is no indication in the paper that cases such as those alleging false marking, design, or plant patents were excluded, as should be done when a researcher is only interested in utility patents. Also, the authors excluded from their data cases in which “the suit was dismissed without a request from one of the parties,” but it is not at all apparent what this means. Trial judges rarely dismiss cases or take any other action sua sponte, and no further explanation was given. Finally, one cannot depend on case outcomes reported by a busy judge who is completely uninterested in possible future uses in social science research of the data points he or she creates. Outcomes reported by a commercial vendor likewise cannot be taken

35   Other researchers in economics management have been known to divide prior art references and citations received by the total number of claims, which is a rather mystifying exercise.

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Patent value  69 at face value because of the immense time needed to get the outcomes right. As noted, outcomes in patent cases are complex, rarely being a simple win or loss for either party, and accurately recording them is difficult even for one with extensive legal training and intimate familiarity with patent litigation. The authors of the study acknowledged that many patent infringement suits assert multiple patents, and for the purposed of collecting data from the patents themselves they stated that they chose only the “main patent.” There is no such thing in patent litigation when multiple patents are alleged to have been infringed. Of the several patents commonly asserted in the complaint, some of them frequently drop out of the case very early for unstated reasons. Some of them will drop out during claim construction or immediately after the court’s claim construction order, and some will remain. Summary judgment motions on validity and infringement by both parties normally follow, and each of the grounds asserted by the accused infringer for invalidity often will be the subject of separate decisions on summary judgment. And patent owners do not simply sue for infringement “of the patent,” but instead sue for infringement of particularly identified claims within a particular patent. An early-stage decision on any of these can be a meaningful win or loss for either party. With respect to the recording of settlements, in many instances cases are settled by the parties without there being a docket entry so stating. A docket entry revealing a consent judgment surely means a settlement. Voluntary dismissals are often the result of settlements, but not necessarily so, and more research into the court documents may be needed to determine with greater confidence whether the case was settled (Allison, Tiller, and Zyontz).36 Stipulated judgments are often representative of settlements, but may be the result of an earlier decision by one party to drop the suit if a subsequent decision by the court causes its odds of winning to be dramatically reduced, as with a stipulation by  the patent owner that a decision of noninfringement on a particular patent claim should later be rendered if the court adopts a specific interpretation of claim language. Docket sheets are complicated and often very lengthy, sometimes with well over 500 entries to be deciphered, and court documents themselves often must be consulted to make a relatively reliable outcome coding decision. In Allison, Lemley, and Schwartz (2014), the authors who coded outcomes were law professors with extensive patent litigation experience. They coded many specific litigation outcomes in a data set of 945 cases filed in federal district courts in 2008 and 2009 that were the subject of a decision on the merits by the end of 2013.37 The data was acquired from Lex Machina and from manual coding of the patents that were the subject of the litigation.38 From the cases provided by Lex Machina, the authors excluded lawsuits that

36   Even then, to be accurate one may have to refer to, or even create a separate category for, “probable settlements.” Allison, Tiller, and Zyontz (2012) used categories for “clear” and “likely” settlements, and tested first with only clear settlements and then with the combined categories. 37   Lemley and Schwartz were the outcome coders. A test of intercoder reliability revealed over 95 percent agreement between the coders. 38   Recently, the underlying documents, including motions and opinions, from district court litigation became more readily available. Electronic filing requirements mean that the online filing tool, Public Access to Court Electronic Records (PACER), has a nearly complete collection of litigation documents from patent cases. Some scholars have taken advantage of PACER data to analyze district court decisions. But the raw data provided by the Administrative Office of the

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70  Research handbook on the economics of IP law volume 2 did not include a complaint either for infringement of a utility patent or for a declaratory judgment of noninfringement or invalidity of a utility patent. Thus, they excluded inventorship and licensing disputes, patent law malpractice actions, and allegations of design or plant patent infringement. Any empirical study of patent litigation that looks at specific outcomes faces an inevitable problem. To obtain reliable data on outcomes requires very careful manual coding from docket sheets and the reading of complaints, motions, and judicial rulings. The inherently time-consuming nature of the work limits the size of the data set when the total number of cases is divided into specific decisions on various infringement and validity issues on summary judgment, trial, and appeal. In this study, the numbers of observations were sufficient for statistical analysis of a number of measured outcomes, but not for others. The way in which the study was performed gave the authors confidence that a high degree of reliability was achieved. However, results from any empirical study of patent litigation, or indeed any form of litigation, will always be subject to the limitations of several types of selection effects, which these authors discuss at length. The most important findings of this study relating to patent quality and value were as follows. (1) The number of patents asserted by the owner in the same lawsuit significantly increased the patent owner’s odds of achieving a “definitive win,” or a win on all validity and infringement issues, on each patent (not just a better chance of winning on at least one patent in the case). This finding may lend support to the idea that patents can sometimes have more value as part of a portfolio, and that cumulative innovation matters. On the other hand, it may simply be the case that the assertion of multiple patents in the same lawsuit imposes a greater defense burden on the accused infringer. (2) Neither the number of adjusted forward citations nor the number of prior art references (patent and nonpatent) has any significant correlation with overall win rates, validity, or infringement outcomes. Citations seem to tell us nothing about whether patents are valid or whether they are infringed. The latter set of findings is both surprising and sobering, given the large amount of time and effort that have been devoted to the use of these variables as patent value indicators. Such negative findings are tempered, however, by the fact that litigation outcomes are clearly affected by a number of undiscoverable or unmeasurable variables, as shown by the low pseudo R2 for each logistic regression model in the study (each outcome was a binary dependent variable and various patent and litigation characteristics were independent variables). As the authors observe, who the attorneys, jurors, and judges are matters, and other unidentified explanatory variables are doubtless at work as well. United States Courts is notoriously error-prone, and it does a poor job of classifying outcomes. Therefore, the authors of the study used Lex Machina.   Lex Machina provides convenient access to cleaned and verified PACER data for district court patent litigation, which permitted us to evaluate all patent lawsuits. Lex Machina data offers three primary benefits. First, it includes all lawsuits, even those without a decision available on Westlaw or Lexis, so as not to overcount appellate decisions. Second, Lex Machina has cleaned and evaluated the PACER data, eliminating many of the errors in the raw data. Finally, Lex Machina has indexed the cases to identify all summary judgment rulings, trial events, and appeals. LEX MACHINA, www.lexmachina.com. This being said, one nevertheless cannot rely on Lex Machina’s reported outcomes, so the authors manually studied all docket sheets and relevant court documents, which were available on Lex Machina. The authors of the study did not depend on the outcomes reported by Lex Machina, however.

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Patent value  71 Somewhat in alignment with the previous study, another in 2012 by a law professor and an experienced in-house patent law practitioner found that patent validity decisions were not significantly associated with most of the patent demographics that had previously been found to predict the fact of litigation (Mann and Underweiser, 2012). Although the study reveals an admirable degree of ingenuity and effort—the authors even accomplishing a detailed investigation of the prosecution histories for a sizable sample of the patents that were the subject of litigation in their data set—it is attended by several flaws either that are necessarily encountered in studying litigation empirically or that were avoidable. The most avoidable flaw is that the study examined only validity decisions on appeal by the U.S. Court of Appeals for the Federal Circuit. The majority of the work in patent litigation takes place at the district court level, and many important district court decisions are not appealed. Moreover, unappealed district court decisions are subject to different selection effects than those decided on appeal, and it is even possible that district courts and the main patent appeals court may have somewhat different decision-making tendencies. Allison, Lemley, and Schwartz (2014) found that district courts as a group were significantly more likely to uphold the validity of patents than the Federal Circuit, although the difference in selection effects at the trial and appeal levels means that one should view this result with caution. A second shortcoming that could have been avoided is that judicial rulings of infringement were not included, and for several reasons such decisions can be as important as validity determinations. Many patent lawsuits are killed early in the process—for instance, by the grant of summary judgment of noninfringement in favor of the defendant—­ without any ruling on validity (Allison, Lemley, and Schwartz, 2014). These criticisms may simply reveal the inevitable tradeoffs of any research effort such as this. The authors delved into such great detail that adding infringement decisions may have made the effort infeasible. The same might be said of including unappealed district court decisions, which are substantially more numerous than appeals court decisions, but leaving out trial court decisions has a serious negative impact on the value of the study. Any study of litigation outcomes without infringement decisions and without unappealed district court decisions is simply incomplete, however, no matter how difficult it would be to include them. The authors essentially found that the fact of litigation and the outcomes in litigation appear to be two very different phenomena in a value assessment. The authors found, for example, that the number of total claims has no statistical association with judicial rulings of patent validity (Mann and Underweiser, 2012).39 Even more surprising is the result that the number of countries in which patent protection was obtained on the same ­invention—the so-called “patent family”—was significantly but negatively associated with patent validity in a comparison of patents ruled to be valid and invalid. The authors also discovered a significant inverse relationship between the number of related patents issued from ancestor applications in the same chain of continuations (a more descriptive use of the term “patent family”), which others had related significantly to the fact of litigation (Allison, Lemley, Moore, and Trunkey, 2004). Notably, especially given that patent

39   Mann and Underweiser (2012) did not measure independent claims by themselves, which are the cause of an association between claims and litigation. Singling out independent claims requires a small program that will count total claims.

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72  Research handbook on the economics of IP law volume 2 classifications do not identify or define technology categories, the authors discovered a significant positive relationship between the number of patent classes per patent and findings of validity, each additional class increasing the likelihood of validity by 9 percent. Thus, the number of USPTO classifications or IPCs to which patents are assigned does seem to signify something. It may be a proxy for some other kind of complexity that itself is associated with patent validity. The authors themselves even admit that the assignment of patents to multiple classifications could simply reflect classifications that are poorly organized. And one cannot escape the fact that the USPTO classification system is both convoluted and error-prone. The authors also employed textual analysis software to construct a metric for denoting the degree of alignment between a patent’s written description and its claims, which if successful would show an association with a patent’s compliance with the enablement and written description requirements of 35 U.S.C. § 112 (Allison and Ouellette, 2016).40 The measure, after ignoring articles and other common words, counted the number of unique words in the written description that also appeared in the claims. The frequency of these words was not measured, as this would cause longer written descriptions and sets of claims to bias the results. The degree of alignment was treated as signifying likely compliance with patent law’s disclosure requirements. Multiple regression revealed a positive correlation between the “distance” between the written description and the claims, as measured by a smaller number of unique words in the written description also being found in the claims, but only at a 90 percent confidence level (p WTA:Att). The results suggest that subjects’ valuation of attribution is indeed strongly endogenous on the default rule. In the Default Attribution condition, subjects’ initial WTA:Att for credited use of their photos averaged $40.17, while they demanded $54.94 for uncredited use of their photos (WTA:NoAtt). This difference is statistically significant. Subjects given an opportunity to “sell” their attribution right demanded almost $15 on average to do so. This is a strong confirmation of the previous experiments reported in the paper. In the No Default Attribution condition, subjects also altered their willingness to accept. Their initial WTA:NoAtt for uncredited use averaged $42.36, yet they were willing to accept only $38.75 in order to receive credit (WTA:Att). Again, the difference is statistically significant. Subjects who were given an opportunity to “buy” attribution were willing to give up $3.61 to obtain it. Comparing the two conditions, it is clear that subjects’ valuation of attribution is highly endogenous on the legal rule. When the subjects were initially endowed with a right to attribution, they valued it four times higher than they did when they were not so endowed and had to purchase it. The Sprigman et al. findings suggest that an endowment effect attaches to the right of attribution when it is structured as a default right which creators must contemplate trading away. Legal rights that are structured as defaults are in a sense “owned,” just like any other form of property, and the owners of those default legal rights will tend to be resistant to parting with them. The authors predict that the magnitude of the endowment effects attaching to attribution rights will be higher for creators than for others, and that the law will minimize transaction costs by assigning rights to parties with lower endowment biases. C.  Sequential Innovation Innovation is not a one-shot activity. In all fields of creativity, new efforts build on old ones. But the nature of sequential innovation is affected by existing IP regimes. IP rights

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Experiments in intellectual property  593 shape the manner and timing of innovation by affecting the decisions that downstream creators make about how and when to build off of existing ideas. Most importantly, IP rights affect downstream creators’ judgments of whether to borrow from existing creations by licensing IP rights or to invent around those rights to develop different, non-infringing solutions (Bechtold, Buccafusco, and Sprigman 2016). A number of experiments have focused on whether an IP regime or an “open source” or “IP-free” regime does a better job of promoting innovation over time. We review some of those studies here. Torrance and Tomlinson (2009) were the first to study sequential innovation using experiments. They created a simulation of an innovation environment involving a noncreative search task, in which subjects were given options to “patent,” make, license, and “open source” their creations. Subjects who patented their creations could also enforce their patents against other players who infringed them. The simulation was played in rounds that allowed for cumulative innovation and development of existing solutions. Subjects played the game in groups of five in trials that lasted 30 minutes. Three different conditions were used: Pure Patent, Patent/Open Source, and Pure Commons. In the middle condition, subjects could choose whether to patent their creations or not. In the last condition, all creations were open for others to develop further. The researchers find that subjects in the Pure Commons condition produced significantly more innovations and generated significantly more value than did those in the conditions where patenting was allowed. Julia Brüeggemann and co-authors (Brüeggemann, Crosetto, Meub, and Bizer, 2016) have also studied experimentally the effects of IP rights on sequential innovation. Like Torrance and Tomlinson (2009), they ask whether the existence of IP rights enhances or impedes innovation and overall welfare. To do so, they employ a creativity task based on the board game Scrabble. Subjects playing in groups of four can choose on every turn whether to create a new root word using the letters available to them or to extend existing words into longer (and more valuable) words. Subjects (n = 214) were randomly assigned to one of two conditions: noIP or IP.4 In the noIP condition, subjects could freely build upon any words that had been created. In the IP condition, once a subject created a word, she could insist on a license fee from 0–100 percent of the value of new words built upon hers. Others who extended her word would have to pay the fee, which was visible to all players. Although one might have predicted that the possibility of higher returns from licensing fees in the IP condition would have produced greater innovation, the researchers instead find that innovation and welfare are impeded in the IP condition relative to the noIP condition. In the IP condition, subjects produced less valuable words than in the noIP condition. The prospect of having to pay licensing fees in the IP condition discouraged people from borrowing others’ words. Instead, they either focused on creating more lowvalue root words or building on the root words that they had produced. Thus, under the conditions studied in the experiment, the introduction of IP rights harms innovation and social welfare shifting creator behavior away from the most valuable kinds of creativity. These findings are consistent with those of Torrance and Tomlinson (2009).

4   The researchers also ran separate conditions in which the subjects could communicate with each other via messaging. Due to space limitations, we will not discuss these here.

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594  Research handbook on the economics of IP law volume 2 In a recent experiment, Boudreau and Lakhani (2013) set up a tournament on the TopCoder computer programming platform that involved solving a complicated algorithmic task over the course of two weeks. Subjects played for cash prizes (up to $500) and reputational enhancement within the TopCoder community. Subjects were randomly assigned into different conditions based on varying disclosure regimes. The three disclosure conditions were: ●

Intermediate Disclosure: Subjects could submit solutions to the contest, and, when they did, the solutions and their scores were immediately available for other subjects in the same condition to view and copy. ● No Disclosure: Subjects’ solutions to the contest were not disclosed to other subjects until the end of the two-week contest. ● Mixed: During the first week of the contest, submissions were concealed from other subjects, but, during the last week of the contest, they were open and free to copy. For the Intermediate and Mixed conditions, subjects were asked to provide attribution to other subjects whose code they copied. The Intermediate condition allowed free-riding by others which could diminish incentives to participate. The data supported this hypothesis: fewer people submitted answers in the Intermediate condition than in the No Disclosure condition, and the average number of submissions and the number of self-reported hours worked were also lower by significant margins. The Mixed condition generally produced data that were between the other two conditions. Despite the lower participation rates, scores in the Intermediate condition were better than those in the other conditions because subjects could borrow from high-performing solutions. More importantly, the data also disclosed differences in  how  subjects solved the problem. Subjects in the Intermediate condition tried fewer technical approaches and seemed to experiment less than did those in the No Disclosure condition. Once significant improvements were disclosed, other subjects in the Intermediate condition tended to borrow the successful code, leading to path dependence. In the No Disclosure condition, by contrast, subjects tried a greater variety of approaches to solving the problem. Boudreau and Lakhani’s approach is valuable for a number of reasons. It involves actual creators in an incentivized environment. It measures trade-offs between participation losses from free-riding against more rapid improvement in solution quality. And it offers researchers competing visions of innovation success in terms of the value of different solutions to a problem. Although there have been a number of studies contrasting IP versus no-IP regimes for sequential innovation, few researchers have focused on the nature of sequential innovation as such. Bechtold, Buccafusco, and Sprigman (2016) have studied how creators think about cumulative innovation. In particular, they studied how creators decide whether to borrow from existing ideas and pay a license fee or whether to innovate around those ideas. In theory, creators’ decisions should be based on their assessments of the relative costs and benefits of these two options. The researchers study creators’ responses to two factors that should influence this cost-benefit calculus: how costly the license is and how easy it is to innovate around the existing IP. Comparing the costs and benefits of innovating versus borrowing is complex, however, and the authors hypothesized that creators may

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Experiments in intellectual property  595 use “innovation heuristics”—mental shortcuts about innovation decisions—to determine what to do. The experiments employ two separate creativity tasks. In one, subjects play a version of a knapsack task that requires them to select items to add to a wagon in order to maximize the wagon’s value without exceeding its weight limit. They are told that another subject has begun playing the game, and that if they innovate around the other subject’s solution, they can obtain more bonus points. The second task involves a Scrabble game in which subjects must create a list of six words using a series of letters provided. Again, another person has submitted a word list, and subjects gain more points by innovating around the other subject’s list (defined as using two or fewer of her words). In both tasks, although choosing to innovate results in a bonus, it also constricts the subject’s options. Because innovating can be a good or a bad decision, subjects need to weigh the costs and benefits of their choices. In the first set of experiments, the researchers test whether subjects are sensitive to the cost of borrowing the other subject’s solution. Subjects were randomly assigned to conditions that differed in terms of the value of the bonus offered for innovating. In some conditions, the bonus should have been too small to induce rational subjects into restricting their options to play the games. In other conditions, the bonus should have been far greater than is necessary to induce innovation. Despite these differences, subjects tended to innovate at almost identical rates (about 70 percent) in each condition in both the wagon and the Scrabble games. This led to welfare losses in both the low and high bonus conditions, because many subjects chose to innovate when they should have borrowed (and vice versa). The researchers find that although subjects are insensitive to objective changes in the innovation environment, their decisions are largely driven by their own subjective assessments of how easy it is to innovate. In the second set of experiments, Bechtold, Buccafusco, and Sprigman (2016) test whether subjects are sensitive to how easy it is to innovate around the existing solutions. The better the given solution, the more likely it is that people should borrow rather than innovate. In separate studies using each of the creativity tasks, subjects were randomly assigned to conditions in which the strength of the given solution was 60 percent, 80 percent, or 100 percent of the best solution. They were offered a single innovation bonus that remained constant. In the wagon version of this study, unlike in the first set of studies, subjects demonstrated some sensitivity to how good the given solution was. Subjects were more likely to borrow rather than innovate as the solution strength increased (80.8 percent, 69.3 percent, and 60.2 percent, respectively). This was particularly surprising because they were not told how strong the given solution was. Yet the truly striking results appeared in the Scrabble version of the study. Between the 60 percent condition and the 80 percent, subjects chose to innovate less in the latter (46.8 percent vs. 40.9 percent), as standard theory would predict given the smaller innovation space. But subjects in the 100 percent condition innovated at a substantially higher rate (85.7 percent) than did those in the other conditions, even though innovating was an overwhelming bad option. The authors suggest that subjects in the 100 percent condition were influenced by an “innovation heuristic.” Instead of comparing the ease of finding an innovating solution with the value of that solution relative to the value of borrowing, subjects simply asked themselves how easy it was to generate a list of non-borrowing words. Here, the given solution in the 100 percent condition had very challenging words,

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596  Research handbook on the economics of IP law volume 2 so subjects found it easy to create a non-borrowing list of words. They ignored, however, the low value associated with those words. Rather than assessing the full problem, subjects seem to have focused only on a portion of it. The results of these studies suggest that creators’ responses to sequential innovation decisions are not necessarily as rational as IP law predicts. Creators are often insensitive to key aspects of the innovation environment, and their decisions may be motivated more by internal preferences for innovating versus borrowing than by objective factors. Moreover, features of the innovation environment may affect the success of creators’ decisions depending on whether heuristics do a good job of proxying for the best decision. Finally, it is worth pointing out that there is also some overlap between these data and those of Brüeggemann et al. (2016) suggesting that creators tend to avoid borrowing from others and paying licensing fees even when doing so is economically rational. IP incentives are not the only ones that might matter for innovation. Some scholars have suggested that innovation prizes might do a better job of stimulating innovation than IP rewards. A working paper by Julia Brüeggemann and Lukas Meub (2017) attempts to measure how the availability of prizes affects creators’ innovation behavior. They use the same Scrabble-style game as in Brüeggemann et al. (2016), in which competing players create words and build off root words to create new ones. Those who create root words can insist upon royalties for subsequent words that build on their roots. This gives creators an IP right in the words that they create. Groups of four players interact over 25 rounds (total n = 144). Groups play in one of three different conditions: (1) Control (players are paid according to points scored from words and royalties); (2) Bonus (scored like Control, but the player with the highest value reward receives an additional payment); and (3) Ranking (where the top player is paid twice as much as the other three players). The first condition is modeled on a standard IP regime of rights licensing. The latter two conditions are intended to simulate innovation prizes in addition to IP rights. The researchers measure a variety of different dependent variables. The average royalty rate per condition is taken to represent the degree of cooperativeness that players show. They also study how much building and sequential innovation occur, as well as the overall innovativeness of each group. Their findings indicate that royalty rates are significantly higher in the prize conditions than in the Control condition, indicating that subjects are less cooperative and more competitive when there is an additional bonus available. There was no difference in royalty rates between the two prize conditions. Despite the higher royalty rates in the prize conditions, however, there were no differences in degree of borrowing between the three conditions. In each condition, subjects built on existing words about two-thirds of the time, meaning that in the prize conditions, borrowing subjects were willing to pay more to compete. Moreover, the results showed no significant differences in total innovation activity between groups in different conditions. Groups produced approximately the same scores regardless of whether prizes were available. The decreased cooperativeness without increased innovation suggests that prizes combined with IP rights might not lead to welfare improvements. Although the subjects were more competitive, this led to less sharing and, thus, greater restrictions on sequential innovation between the parties. The researchers suggest that a better system might be one in which creators are forced to choose between prizes and IP rights.

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Experiments in intellectual property  597 D.  Experimental and Survey Studies of IP Norms and Moral Beliefs Over the last decade, scholars have argued that a complete understanding of the economics of IP requires an appreciation of the roles that social norms and morals play in creative communities and public discourse (Raustiala and Sprigman, 2018; Buccafusco and Fagundes, 2015). Increasingly, scholars have turned to experimental and survey evidence to study how social norms operate and moral beliefs are formed. A number of recent studies have shown that people’s intuitions about creativity, ownership, and copying are formed during infancy. For example, children apply the same principles of ownership to ideas that they apply to physical property. A study by Shaw, Li, and Olson (2012) showed that six-year-old children believe that ideas such as songs, jokes, and solutions to math problems can be owned. These children also seem to apply ownership principles about first possession, denial of permission, and non-transfer of ownership through theft to creative ideas. It seems likely that children map their intuitions about physical property (which develop earlier) onto intellectual property as they begin to learn that ideas can be valuable. Thus, by the time we enter grade school (at least in the U.S.), we already understand that ideas can be subject to individual ownership and propertization. By a very early age, children seem to understand relationships between creating ideas, ownership, and value. Studies show that very young children will assign ownership of objects to people who invested creative effort in them rather than to the initial possessor of the underlying materials, and that they will do this for themselves and for third parties (Kanngiesser, Gjersoe, and Hood, 2010; Kanngiesser and Hood, 2014). Importantly, young children also distinguish between creativity and labor, and they place more value on the former. In a series of studies, researchers found that four- and six-year-old children prefer pictures that depict their ideas over ones on which they have labored (Li, Shaw, and Olson, 2013). And six-year-olds generally assigned ownership of a picture to the person who contributed the ideas about the picture rather than to the person who contributed the labor. Even very young children understand that ideas can be created, that creativity is especially valuable, and that creativity can lead to ownership relationships with the objects that embody the creativity. Moreover, young children also believe that taking others’ ideas or objects embodying those ideas is wrong. Two- and three-year-old children will object when someone attempts to take objects which they have created (although they do not yet object on behalf of third parties). In a different study, three-year-old children protested when someone threatened to destroy an object that a third party had created (Vaish, Missana, and Tomasello, 2011). In addition, by the time they are six or so, children also object to others who take ideas (Olson and Shaw, 2011). In one study, children were shown videos of people who drew unique pictures and people who copied others’ pictures. The children were then asked to rate how good or bad each person was. They rated the copier significantly worse than they did the creative drawer. These children typically mentioned copying or something similar as the reason why they rated the plagiarist poorly. Interestingly, however, the copier was rated as less bad than someone who stole a piece of physical property. Gregory Mandel (2014) has conducted experimental and survey research on adults’ perceptions of various aspects of IP doctrine. Mandel surveyed 1719 Americans on their views about four separate IP issues using vignettes about creations and inventions. For

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598  Research handbook on the economics of IP law volume 2 each issue, subjects read a vignette about either copyrightable authorship or patentable invention. In the first scenario, subjects were willing to award monetary damages for both copyright and patent infringement, but they were more willing to do so for the latter. The second scenario featured new but not particularly creative efforts by an author or inventor. Respondents were generally willing to give both creators IP rights, even though only the copyright author would have received them under current U.S. doctrine. The third scenario tested whether independent creators of new works or inventions deserve IP rights. Again, a majority of respondents believed they do, consistent with copyright law but inconsistent with patent law. In the final scenario, subjects in both the copyright and patent conditions were about equally split on whether joint creators deserved IP rights. Finally, Mandel surveyed participants on the appropriate basis for granting IP rights, and found substantial support for a natural rights approach to IP law that contradicts the common view among scholars that IP rights are consequentialist in nature. While Mandel focused on the concurrence between people’s beliefs and formal IP doctrine, other scholars have studied the emergence and enforcement of informal social norms that govern certain creative communities. Bauer, Franke, and Teurtscher (2015) analyze the norms against copying in an online community of t-shirt designers, Threadless.com. Using content analysis and survey research, they describe seven norms that govern the community. These norms include prohibitions on copying and requirements of permission and attribution. They also include affirmative duties on members to police others’ behavior and report violations to the community. Bauer, Franke, and Teurtscher (2015) also replicate their survey data with a live intervention into the Threadless community. They posted copied designs and measured whether they were detected, shared, and negatively remarked on. Most copied designs were detected, and the response was consistent with the norms discovered in the survey data. Ultimately, the authors conclude that this community’s norms emerge and are enforced because members believe that doing so is morally correct. E.  Judging IP Infringement Closely related to the issue of moral norms about IP is the question of people’s judgments of IP infringement. In the past several years, scholars have begun to focus on how people decide whether one work infringes the rights of another work and how people determine damages for IP infringement. For example, Jamie Lund (2011) has examined how people apply the “lay listener test” in music composition copyright cases. According to the test, jurors should compare only the original aspects of the plaintiff’s composition to the compositional elements of the defendant’s work. This means that jurors should consider only the two compositions’ melody, rhythm, and harmony and ignore aspects of the ways in which the works were performed, such as their style, tempo, or instrumentation. Lund’s experiment had lay subjects compare two songs to determine whether the allegedly infringing song was substantially similar to the plaintiff’s song. In one condition, subjects heard the two songs played with similar style, tempo, and instrumentation. In the second condition, however, the allegedly infringing song was performed in a strikingly different style (e.g., calypso). Subjects in the first condition were substantially more likely to find the two songs to be compositionally similar (mean = 4.36 on a scale of 1–5)

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Experiments in intellectual property  599 than were subjects in the second condition (mean = 2.23). These results held for another version of the study that included a more formal jury instruction. Lund also ran the study with a second pair of songs with the same differences between conditions, but the results were not as strong. For this pair, subjects were less influenced by performance and more sensitive to jury instructions about what to compare. Nonetheless, this study casts considerable doubt on the ability of lay jurors to make reliably and valid determinations about copyright infringement in music composition cases. Shyamkrishna Balganesh, Irina Manta, and Tess Wilkinson-Ryan (2014) have also studied how people apply copyright law’s substantial similarity doctrine. As in Lund’s (2011) study, Balganesh et al. were interested in the extent to which extraneous information might influence subjects’ assessments of similarity. Here they studied whether knowledge that the defendant copied from the plaintiff and information about the plaintiff’s level of effort inappropriately affected similarity determinations. In their first study, subjects recruited from Amazon Mechanical Turk (AMT) were shown a series of six pairs of works and asked to assess their similarity on a scale of 1–7. In one condition, subjects were told that one of the works copied from the other work, while in the other condition, subjects were told that the works were created entirely independently of one another. This difference should be irrelevant, but the authors found a significant difference in the aggregate similarity judgments for works in the “copied” condition compared to those in the “not copied” condition. Thus, when people know that a work was copied from another work, they tend to consider them to be more similar to each other. In a second set of studies reported in the paper, Balganesh et al. (2014) used a similar method to determine whether information about the creator’s level of effort and the economic impact of infringement affected similarity judgments. In one comparison, subjects were told either that the work took about two months to create or that it took about ten minutes to create.5 In another comparison, subjects were told either that the second work significantly impacted the market share of the first or that it had no effect on its market share. Here, the experimenters found a significant difference only for the first comparison but not for the second. In the labor comparison, the extraneous information affected subjects’ judgments, with those in the high-labor condition judging the works to be significantly more similar than those in the low-labor condition. But there was no difference in similarity judgments between the groups who were given different information about market effects. The authors suggest that the effects in the studies might arise from either attentional biases (where subjects divert their attention toward similarities when they know of copying) or due to motivated reasoning. They argue that the latter is more likely in their labor study, where subjects who believe that copying another’s creative labor is bad try to find greater similarities between the two works in order to punish the wrongdoer. Interestingly, though, subjects would also likely have thought that causing substantial market harm is bad, but the differences in market harm did not seem to lead to higher levels of similarity judgments. Experimental studies of patent infringement issues also exist. For example, Mandel

5   The experimenters also included a set of conditions that contrasted high vs. low economic harm caused by the infringement, but these results showed no difference between conditions.

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600  Research handbook on the economics of IP law volume 2 (2006) has examined the role of hindsight bias in non-obviousness judgments, and David Schwartz and Christopher Seaman (2013) have measured the effects of standards of proof on patent invalidity determinations. Because these studies are discussed elsewhere in this volume (see Cotropia and Mann, 2018, and Seaman, 2018, respectively) we will not repeat those discussions here.

IV. METHODOLOGICAL ISSUES AND FUTURE DEVELOPMENTS Although experimental research increases investigators’ ability to control environments and study causality, these features come at a cost. Laboratory settings differ from realworld creative environments in many ways that might affect the validity of experimental findings. In this section, we discuss a variety of issues in experimental IP research that impact validity. We also discuss opportunities for future research that could address these concerns. Inventing a new pharmaceutical or producing a movie takes years of intellectual effort. The creativity that researchers can study in the laboratory, however, may involve minutes or even seconds. Moreover, some IP experiments do not even involve tasks that require creativity or innovation. Instead, the tasks simply require algorithmic search. It is difficult to know to what extent these differences affect studies’ findings. Research suggests that tasks involving creativity are different from those involving pure effort or search (Amabile, 1979). Compared to effort or search tasks, creativity tasks may generate more intrinsic motivation, which may be differentially affected by incentives and scoring. In addition, people tend to value things that they created more than things that they own, which may affect important aspects of IP markets that researchers want to study (Buccafusco and Sprigman, 2011). For these reasons, researchers should attempt to use tasks that involve creativity, and not simply algorithmic tasks, whenever possible. Of course, not all creativity tasks are the same, and different research questions might be better studied with some tasks rather than others. The creativity involved in copyrighted works is often open-ended, so it is best studied with divergent creativity tasks. Patented innovations might be more similar to convergent creativity tasks, where there is one answer or only a few appropriate answers. A related issue of validity arises with the populations recruited to study IP issues. Traditionally, many social scientists have relied upon available students to serve as experimental subjects. This can cause problems, however, where students differ from the population of interest in systematic ways. Recently, many researchers, including some studying IP, have used subjects recruited from AMT. AMT subjects are often more demographically diverse than undergraduate student populations, but they still are not representative of the U.S. population. AMT can be used with previously arranged panels of subjects to more closely match populations of interest (e.g., Buccafusco, Heald, and Bu, 2016). This will be particularly valuable when studying questions of liability or other issues that juries face. Researchers should also explore opportunities to study real-world creativity experimentally. Doing so can minimize validity concerns arising from creativity tasks and subject pools. Academic researchers may have access to students at their universities who are

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Experiments in intellectual property  601 engaged in creative writing, design, architecture, and engineering projects. Admittedly, the classroom environment is different from the environments in which creativity is exercised outside the educational setting, just as creativity in the lab is different from creativity in real life. But diversifying the settings in which creativity is studied experimentally will, at very least, help us understand whether and when findings are driven, in whole or in part, by the experimental setting. There are also possibilities for studying creativity experimentally in natural settings, including in online communities such as Kickstarter and TopCoder. Using subjects drawn from these communities could improve the ecological validity of experimental research, although conducting experiments in natural settings raises the related possibility that behavior in the natural setting may be altered when subjects understand they are being studied. The validity of experiments can also be affected by the use of incentive-compatible elicitation methods. Researchers often worry that subjects who have no financial motivation to respond truthfully may not do so. Fortunately, almost all of the creativity studies discussed above use monetary incentives to encourage subjects to respond appropriately. The same is not necessarily true of all survey research, which can bias results in unpredictable ways. Survey researchers should consider options for encouraging subjects to respond truthfully. Another, and important, validity issue involves the focus on individual rather than group decision making in IP experiments. Almost all of the experiments described above involve individual actors, as creators, mock jurors, or survey participants. Many situations that interest IP researchers, however, involve group decision making. This is a limitation not simply of IP experiments but of most behavioral research. It is difficult to predict how the different contexts might affect behavior. Would a group of creators tend to act more rationally than the average of its members or would an extreme member further bias the group (Sunstein and Hastie, 2008)? In fact, both of these outcomes are likely in certain circumstances. Subsequent IP experiments should address the effects of creating in teams, how agents shape creators’ behavior, and how jury’s decisions may differ from those of individual jurors. Too many publications in this field report only a single experiment or survey and make no attempt to replicate results with additional tests. In the social sciences, multiple experiments are usually included within the same paper to assess the replicability and robustness of results. Running multiple studies also allows researchers to understand how changes in context or procedure may affect their results. For example, do results found using a convergent creativity test remain the same for a divergent creativity test? Given the early state of the literature, with few existing studies and methods to draw upon, ­researchers should attempt to provide multiple tests of their research questions whenever possible. Finally, one of the principal challenges of experimental work involves the difficulty of matching experimental variables with real-world phenomena. This can be particularly difficult when the phenomenon being studied is creativity or innovation. These concepts do not have well-settled meanings either in the social science or in the legal literature. Nonetheless, experimentalists should attempt to clarify the conceptual account of creativity or innovation that they are using. For example, consider a hypothetical study with two conditions. The data show that condition 1 produces better innovations in terms of absolute quality versus condition 2.

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602  Research handbook on the economics of IP law volume 2 But, the data also show that condition 2 produces more innovations than condition 1. Determining which treatment is more conducive to innovation is a difficult question and one that relies on more fundamental normative questions about the kinds of innovation that IP law is supposed to promote. What counts as valuable for creative production could include a variety of different goals, including absolute creativity, speed of creativity, and distribution of creativity. As yet, however, researchers have done an insufficient job of clarifying the aspects of creative or innovative production that they are studying. We would like to see future studies report a variety of creativity measures. This would allow for a fuller normative assessment of the data. Alternatively, if researchers focus on only one aspect of creative performance, they should justify that decision.

V. CONCLUSION Experiments have begun to provide valuable information about some of the foundational questions in IP law, and we expect that the experimental IP law and economics scholarship will continue to expand. Experiments afford IP scholars with an opportunity to investigate questions for which no data exists, or for which access to data held in private hands is restricted. Like all empirical scholarship, experiments raise issues of methodology, including the overarching question regarding the extent to which an experiment, which is necessarily highly stylized, can produce findings that are suitable to use in the assessment of IP policies. While it is rare, and perhaps impossible, for one experiment to definitively address a policy question, we believe that over time a variety of experimental approaches to a particular question—supplemented, if possible, by observational quantitative studies and qualitative or ethnographic studies—can add substantially to our ability to assess the effectiveness of IP policies.

REFERENCES Amabile, Teresa M. 1979. “Effects of External Evaluation on Artistic Creativity”, 37 Journal of Personality and Social Psychology 221–33. Ariely, Dan, Gneezy, Uri, Loewenstein, George, and Mazar, Nina. 2009. “Large Stakes and Big Mistakes”, 76 The Review of Economic Studies 451–69. Arlen, Jennifer H. and Talley, Eric L. 2008. “Introduction”, in Jennifer H. Arlen and Eric L. Talley, eds., Experimental Law and Economics. Cheltenham: Edward Elgar. Balganesh, Shyamkrishna, Manta, Irina D., and Wilkinson-Ryan, Tess. 2014. “Judging Similarity”, 100 Iowa Law Review 267–90. Barton, Beebe. 2018. “Empirical Studies of Trademark Law”, in Peter S. Menell and David L. Schwartz, eds., Research Handbook on the Economics of Intellectual Property Law, Vol. II. Cheltenham: Edward Elgar Publishing. Bauer, Julia, Franke, Nikolaus, and Teurtscher, Philipp. 2015. “The Seven IP Commandments of a Crowdsourcing Community: How Norms-Based IP Systems Overcome Imitation Problems”, 2015:1 Academy of Management Proceedings. Bechtold, Stefan, Buccafusco, Christopher, and Sprigman, Christopher Jon. 2016. “Innovation Heuristics: Experiments on Sequential Creativity in Intellectual Property”, 91 Indiana Law Journal 1251–307. Benkler, Yochai. 2002. “Coase’s Penguin, or Linux and the Nature of the Firm”, 112 Yale Law Journal 369–446. Boudreau, Kevin J. and Lakhani, Karim R. 2013. “How Disclosure Policies Impact Search in Open Innovation”, Harvard Business School Technology and Operations Management Working Paper Series, No. 14-002.

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Experiments in intellectual property  603 Brüeggemann, Julia and Meub, Lukas. 2017. “Experimental Evidence on the Effects of Innovation Contests”, 39 Information Economics and Policy 72–83. Brüeggemann, Julia, Crosetto, Paolo, Meub, Lukas, and Bizer, Kilian. 2016. “Intellectual Property Rights Hinder Sequential Innovation. Experimental Evidence”, 45 Research Policy 2054–68. Buccafusco, Christopher and Fagundes, David. 2015. “The Moral Psychology of Copyright Infringement”, 100 Minnesota Law Review 2433–507. Buccafusco, Christopher and Sprigman, Christopher Jon. 2010. “Valuing Intellectual Property: An Experiment”, 91 Cornell Law Review 1–45. Buccafusco, Christopher and Sprigman, Christopher Jon. 2011. “The Creativity Effect”, 78 University of Chicago Law Review 31–51. Buccafusco, Christopher, Burns, Zachary C., Fromer, Jeanne C., and Sprigman, Christopher Jon. 2014.  “Experimental Test of Intellectual Property Laws’ Creativity Thresholds”, 92 Texas Law Review 1921–79. Buccafusco, Christopher, Heald, Paul J., and Bu, Wen. 2016. “Testing Tarnishment in Trademark and Copyright Law: The Effect of Pornographic Versions of Protected Marks and Works”, 94 Washington University Law Review 341–422. Cohen, Julie E. 2011. “Copyright as Property in the Post-Industrial Economy: A Research Agenda”, 2011 Wisconsin Law Review 141–65. Conti, Regina, Amabile, Teresa M., and Pollak, Sara. 1995. “The Positive Impact of Creative Activity: Effects of Creative Task Engagement and Motivational Focus on College Students’ Learning”, 21 Personality and Social Psychology Bulletin 1107–16. Cotropia, Christopher and Mann, Ronald. 2018. “Empirical Studies in Patentability”, in Peter S. Menell and David L. Schwartz, eds., Research Handbook on the Economics of Intellectual Property Law, Vol. II. Cheltenham: Edward Elgar Publishing. Deci, Edward L. 1971. “Effects of Externally Mediated Rewards on Intrinsic Motivation”, 18 Journal of Personality and Social Psychology 105–15. Deci, Edward L. 1972. “Intrinsic Motivation, Extrinsic Reinforcement, and Inequity”, 22 Journal of Personality and Social Psychology 113–20. Eckartz, Katharina, Kirchkamp, Oliver, and Schunk, Daniel. 2012. “How Do Incentives Affect Creativity?”, CESifo Working Paper Series, No. 4049, http://papers.ssrn.com/sol3/abstract_id=2198760. Eisenberger, Robert, Armel, Stephen, and Pretz, Jean. 1998. “Can the Promise of Reward Increase Creativity?”, 74 Journal of Personality and Social Psychology 704–14. Engel, Christoph and Kurschilgen, Michael. 2011. “Fairness Ex Ante and Ex Post—An Experimental Test of the German ‘Bestseller Paragraph’”, 8 Journal of Empirical Legal Studies 682–708. Fromer, Jeanne C. 2012. “Expressive Incentives in Intellectual Property”, 98 Virginia Law Review 1745–824. Giorcelli, Michela and Moser, Petra. 2015. “Copyright and Creativity, Evidence from Italian Operas”, available at http://ssrn.com/abstract=2505776. Glover, John and Gary, A.L. 1976. “Procedures To Increase Some Aspects of Creativity”, 9 Journal of Applied Behavior Analysis 79–84. Hennessey, Beth  A. 1989. “The Effect of Extrinsic Constraints on Children’s Creativity While Using a Computer”, 2 Creativity Research Journal 151–68. Johnson, Eric E. 2012. “Intellectual Property and the Incentive Fallacy”, 39 Florida State University Law Review 623–79. Johnson, Eric J. and Goldstein, Daniel. 2003. “Do Defaults Save Lives?”, 302 Science 1338–39. Kanngiesser, Patricia and Hood, Bruce M. 2014. “Young Children’s Understanding of Ownership Rights for Newly Made Objects”, 29 Cognitive Development 30–40. Kanngiesser, Patricia, Gjersoe, Nathalia, and Hood, Bruce M. 2010. “The Effect of Creative Labor on PropertyOwnership Transfer by Preschool Children and Adults”, 21 Psychological Science 1236–41. Korobkin, Russell. 1997. “The Status Quo Bias and Contract Default Rules”, 83 Cornell Law Review 608–87. Li, Vivian, Shaw, Alex, and Olson, Kristina R. 2013. “Ideas Versus Labor: What do Children Value in Artistic Creation”, 127 Cognition 38–45. Lund, Jamie. 2011. “An Empirical Examination of the Lay Listener Test in Music Composition Copyright Infringement”, 11 Virginia Sports and Entertainment Law Journal 137–77. Mandel, Gregory N. 2006. “Patently Non-Obvious: Empirical Demonstration that the Hindsight Bias Renders Patent Decisions Irrational”, 67 Ohio State Law Journal 1391–463. Mandel, Gregory N. 2011. “To Promote the Creative Process: Intellectual Property Law and the Psychology of Creativity”, 86 Notre Dame Law Review 1999–2026. Mandel, Gregory N. 2014. “The Public Perception of Intellectual Property”, 66 Florida Law Review 261–312. McGraw, Kenneth O. 1978. “The Detrimental Effects of Reward on Performance: A Literature Review and a Prediction Model”, in Mark R. Lepper and David Greene, eds., The Hidden Costs of Reward: New Perspectives on the Psychology of Human Motivation. Hillsdale, N.J.: L. Erlbaum Associates.

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604  Research handbook on the economics of IP law volume 2 Moser, Petra. 2005. “How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World Fairs”, 95 American Economic Review 1214–36. Olson, Kristina R. and Shaw, Alex. 2011. “‘No Fair, Copycat!’: What Children’s Response to Plagiarism Tells Us about Their Understanding of Ideas”, 14 Developmental Science 431–39. Raustiala, Kal and Sprigman, Christopher. 2012. The Knockoff Economy. Oxford: Oxford University Press. Raustiala, Kal and Sprigman, Christopher Jon. 2018. “When Are IP Rights Necessary? Evidence from Innovation in IP’s Negative Space”, in Peter S. Menell and Ben Depoorter, eds., Research Handbook on the Economics of Intellectual Property Law, Vol. I. Cheltenham: Edward Elgar Publishing. Schwartz, David L. and Seaman, Christopher B. 2013. “Standards of Proof in Civil Litigation: An Experiment from Patent Law”, 26 Harvard Journal of Law & Technology 429–79. Seaman, Christopher B. 2018. “Empirical Studies Relating to Patents – Presumption of Validity”, in Peter S. Menell and David L. Schwartz, eds., Research Handbook on the Economics of Intellectual Property Law, Vol. II. Cheltenham: Edward Elgar Publishing. Shaw, Alex, Li, Vivian, and Olson, Kristina R. 2012. “Children Apply Principles of Physical Ownership to Ideas”, 36 Cognitive Science 1383–403. Sprigman, Christopher Jon, Buccafusco, Christopher, and Burns, Zachary. 2013. “What’s a Name Worth?: Experimental Tests of the Value of Attribution in Intellectual Property”, 93 Boston University Law Review 1389–435. Sunstein, Cass R. and Hastie, Reid. 2008. “Four Failures of Deliberating Groups”, University of Chicago Law & Economics, Olin Working Paper Series, No. 401, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1121400. Torrance, Andrew W. and Tomlinson, Bill. 2009. “Patents and the Regress of Useful Arts”, 10 Columbia Science and Technology Law Review 130–68. Tushnet, Rebecca. 2009. “Economies of Desire: Fair Use and Marketplace Assumptions”, 51 William and Mary Law Review 513–46. Vaish, Amrisha, Missana, Manuela, and Tomasello, Michael. 2011. “Three-year-old Children Intervene in Third-party Moral Transgressions”, 29 British Journal of Developmental Psychology 124–30. Zimmerman, Diane Leenheer. 2011. “Copyrights as Incentives: Did We Just Imagine That?”, 12 Theoretical Inquiries in Law 29–58.

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27.  The effect of copyright law on access to works Paul J. Heald* 6

Contents I. Introduction II. Role of (Efficient) Access in Copyright Theory III. Evidence of Inefficient Levels of Access A. Barriers to Access to the Work Itself B. Price Effects C. Effects on Follow-on Creation IV. International Treaty Responses, Legislation, and Self-help A. International Responses to Textbook Access Problems B. National Legislation C. Self-help by Authors V. Conclusion References

I. INTRODUCTION Landes and Posner describe an economic model of copyright law that focuses on the trade-off between the benefits of increasing incentives to create and the costs that legal protection imposes on follow-on creation (Landes and Posner, 2003). Indeed, protecting creative works is designed to stimulate new creations, and granting exclusive rights surely raises the cost to those wishing to build upon, transform, or adapt a rights holder’s work. Yet Landes and Posner are relatively unconcerned about the potential monopoly costs of copyright protection. After all, copyright does not protect ideas, so patent-like monopolies should be difficult to establish, and the existence of a vast number of books, music, and movies suggests a degree of fungibility that should make monopoly pricing difficult to maintain (Liebowitz, 2009). They, and other economic theorists, worry little that copyright protection might cause the two main problems commonly associated with monopoly: diminished supply and higher prices (Liebowitz and Margolis, 2005). In a world without transaction costs and full information, they are probably right (Heald, 2008). Empirical evidence, however, suggests that present markets for creative goods are not particularly efficient and that serious barriers stand between copyrighted works and those who would efficiently consume them. This chapter describes how copyright creates inefficient barriers to access, contrary to the public benefit rationale animating copyright *  Richard W. and Marie L. Corman Professor of Law, University of Illinois College of Law.

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606  Research handbook on the economics of IP law volume 2 law in the first place. It then discusses three distinct access issues: access to the work itself; price effects; and availability for follow-on creation. The chapter concludes by briefly describing various legislative and self-help responses to these problems of access.

II.  ROLE OF (EFFICIENT) ACCESS IN COPYRIGHT THEORY Although one can imagine numerous ways to fund the creation of new works without granting exclusive rights to authors—including crowdfunding, levies, restitution, and advertising/service-based models (Suzor, 2013)—since at least the Statute of Anne, the baseline stimulus has been provided by rewarding the author of a new publication (now merely a new fixation) with an enforceable property right. Nowadays, in most jurisdictions, that property right gives authors the exclusive right to reproduce, distribute, perform, display, and create derivative works (17 U.S.C. § 106). In the absence of transaction or information costs, such rights would be unnecessary: authors and those desiring works of authorship would contract for the efficient number of creative goods to be consumed or to be used in follow-on creation (Heald, 2008). Imagine all potential authors with perfect knowledge of all potential users (who also have full information about all potential authors) transacting costlessly with each other and engaging in optimal price discrimination. In the purest realm of theory, no conflict between creative incentives and barriers to access should emerge. In reality, contracts to create works of authorship arise despite very real transaction costs, and a myriad of new works are created, but usually only a fraction of potential users finance their creation. Leslie, for example, might be hired by Big Bank to write an accounting program to manage its assets. Leslie is content with the compensation package, and Big Bank is happy with its new program. But what about Little Dry Cleaners (LDC), a firm that doesn’t compete with Big Bank, which would benefit from that software program? Denying use of the program to LDC creates a deadweight loss, but this inefficiency is the result if Big Bank is given exclusive control over the program. The granting of exclusive rights in a world with significant transaction costs frames the traditional incentives/access debate: “Copyright, under this view, is a necessary evil, a finely tuned balance between providing incentives to create and encouraging dissemination of, and access to, copyright works” (Suzor, 2013, p. 303) (Lunney, 1996). Providing the efficient level of access to works in light of the costs of transacting over the initial creation and eventual dissemination of those works is the primary work of copyright doctrine. A recent Supreme Court case demonstrates the difficulty of striking the right balance. In Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013), the Court held that under the first-sale doctrine (17 U.S.C. § 109) a student from Thailand living in the U.S. could buy cheap Wiley textbooks in Thailand, import them into the United States, and sell them at much lower prices than authorized Wiley distributors. The holding, of course, promises to increase access to Wiley textbooks in the United States. After all, competition should result in a drop in price and the books should become more affordable. Access in Thailand, however, may be diminished if Wiley responds by raising its prices there to discourage arbitrage and export. Of course, if the Thai market cannot bear the new higher price, Wiley may cease selling there altogether. In fact, the inability to engage in productive price discrimination may decrease Wiley’s incentive to publish in

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The effect of copyright law on access to works  607 the first place. Whether Kirtsaeng will prove to be efficient or not is an empirical question, but it is not hard to see how the first-sale doctrine and the distribution right involve direct trade-offs between access and incentives to create and disseminate. Any change in copyright doctrine affects the complex ecosystem of creative and distributive activity. Mostly courts and legislatures operate in the absence of significant information about real-world market conditions. The next two sections of this chapter discuss empirical studies that suggest copyright currently erects inefficient barriers to access and then discusses several legislative and self-help responses to those barriers.

III.  EVIDENCE OF INEFFICIENT LEVELS OF ACCESS Barriers to access to a work may come in several different forms. First, the work itself may no longer be available for purchase on the open market (e.g., an out-of-print book). Second, the work might be available, yet priced so that some transactions are deterred. Finally, the work might be available to be consumed, but not available as a source for follow-on creation due to high license costs or other significant transaction costs (e.g., the cost of locating the owner). A.  Barriers to Access to the Work Itself One of the first studies suggesting that copyright law as currently constructed establishes inefficient barriers to access was conducted by Tim Brooks for the Library of Congress (2005). He gathered a database of thousands of popular recordings from the 1890s to the1960s and studied which recordings had been converted from analog formats, such as vinyl or wax, to digital formats, such as CDs or .mp3 downloads. Given the digital revolution and the decline of the long-playing record, conversion to digital format is necessary to provide meaningful access to most consumers of older music. He found that copyright owners had made only 14 percent of the popular recordings available in digital format, while non-owners (many in Europe taking advantage of a shorter copyright term for sound recordings) had made 22 percent of the same set of recordings available (Brooks, 2005, p. 7). A comparison of the two digitization rates indicated a demand for the music that the copyright owners were not satisfying. The U.S. copyrights subsisting in the old recordings were likely standing in the way of other non-owners more willing and able to exploit the digital market.1 Such inefficiencies also likely plague the market for books. David and Rubin (2008, p. 46) studied changes in copyright term duration and found that “by 2027, changes in copyright laws over the last half-century will have prevented over 3.5 million books that would otherwise have entered the public domain from doing so.” Although many of these books may be unwanted by consumers, many retain significant value. A recent random sample of 800 books reviewed in the New York Times from 1930–2010 showed that well under 20 percent of the sample were presently available in e-book form (Heald, 2014b).

1   Recent research, however, suggests that since the advent of iTunes, copyright owners have done a better job of digitizing their back catalogs (Heald, 2014b).

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608  Research handbook on the economics of IP law volume 2 Books that are both valuable and out of print pose evidence of a significant access problem. In fact, Smith, Telang and Zhang (2012) studied out-of-print books and estimated that the out-of-print books, were they to be made available in e-book format, would be worth $740 million to the publishers ($460 million in profits) (2012, p. 3). They estimate unrealized consumer surplus to be $860 million. Various transaction costs, including outdated business models, likely explain why so much value is left on the table (Heald, 2014b). Further evidence of distortions in the book market has been found by taking a random sample of over 2000 new hardcover or paperback editions for sale on Amazon.com and ordering the books by decade of their initial publication (Heald, 2014b). The dramatic increase in the availability of books in books published before 1923 correlates perfectly with the U.S. copyright duration rule that declares all such books to be in the public domain. Works published after 1923 are still potentially protected by copyright and therefore unavailable to competing publishers and consumers. Even more striking than the pre-1923 bump is the steep decline in availability of books initially published from 1930–90. Copyrighted status and accessibility in new book format correlate very strongly. Even after making two adjustments to the data reported above, the influence of copyright status on accessibility remains dramatic. First, because the random sample was collected by querying Amazon.com with randomly generated International Standard Book Numbers (ISBNs), the results in Figure 27.1 show the distribution of editions of books, not book titles. Since public domain titles have more publishers and more editions (Heald, 2008), they are more likely to be retrieved in a random ISBN search. Adjusting for this phenomenon reduces the relative percentage of public domain titles in the sample by two-thirds. Another adjustment, however, increases the relative percentage of pre-1923 titles in Figure 27.2 because one must account for the number of books published in each decade. For example, an estimated 18 times more books were published in the 1980s than the 1880s (Heald, 2014b). Using changes in the number of copyright registrations over time (or WorldCat library shelf data), one can estimate the number of books published per decade and account for changes in publication rates. Figure 27.2 shows the amplified 350

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Figure 27.2  Percentage of book titles for sale on Amazon by decade of initial publication effect of copyright status on the number of titles of new books currently available on Amazon.com making all adjustments. Both figures show that copyright status has quite a dramatic effect on access, but the data is from the supply side, showing what Amazon.com has for sale. Smith et al. (2012), discussed above, find significant demand for the books missing from the last three-quarters of the twentieth century and find an unrealized consumer surplus of about $860 million. Further evidence of actual demand and a true access problem can be seen by comparing used books for sale on Abebooks.com and new books for sale on Amazon. Used book sellers offer a significant number of books for sale from decades relatively unserviced by Amazon.com (Heald, 2014b). Because of the first-sale doctrine, used booksellers are unconstrained by copyright law in making decisions about which books to purchase and sell, whereas Amazon can only sell new editions of post-1923 books with the authorization of the copyright owner. Figure 27.3 suggests that sellers unconstrained by copyright offer more books from the last three-quarters of the twentieth century. The decision to offer those books suggest a consumer demand (after all, why would a bookstore buy and stock a book if there were no demand for it?), a demand indicated by the “x” that is currently unmet by Amazon. Figure 27.3 also suggests which publishers would be willing to meet that demand—the same publishers that generate the dramatic jump in published titles for the pre-1923 books that have fallen into the public domain. Even more barriers to access can be seen by studying only the most popular books from earlier eras. A 2006 comparison of 165 public domain titles that were bestsellers from 1913–22 with 167 copyrighted titles that were bestsellers from 1923–32 showed that 98 percent of the public domain titles were still in print, while only 78 percent of the copyrighted titles were in print (Heald, 2008). Updating the study in the e-book era shows an even greater discrepancy. By 2014, 94 percent of the public domain bestsellers from 1913–22 were available as e-books, while only 27 percent of the copyrighted bestsellers from 1923–32 were available in e-book format (Heald, 2014b). Finally, a study of which bestselling books have been made available as audiobooks tells a similar story of reduced access correlated with copyright status. Of public domain bestsellers from 1913–22, 33 percent had been made available in audiobook form by 2012; only 17 percent of the

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Figure 27.3 Distribution by decade of initial publication of new Amazon books and used Abe books copyrighted bestsellers from 1923–32 were accessible as audiobooks (Buccafusco and Heald, 2013). In a more recent study, Biasi and Moser (2018) found that a Second World War era presidential order that effectively cast a large number of German scholarly works into the public domain increased access to those works as measured by citation intensity and library holdings. In conducting a welfare analysis of the 1998 US copyright term extension, Reimers (2018) found that the extension significantly limited the availability of books. B.  Price Effects In addition to barriers to availability raised by out-of-print status, studies have shown a correlation between copyright status and price, at least with the most valuable of books of a particular era (Heald, 2008). Although price increases do not render products absolutely unavailable, for consumers with finite resources, price affects their relative access to goods. Figure 27.4 compares the average low price for the 20 most popular books of each era: 1913–22 (public domain books) and 1923–32 (copyrighted books). Prices were compared in three sources: all publishers listed in Books In Print; major publishers only in Books In Print; and the lowest price on Amazon.com. The price discrepancy found in the above comparison is replicated when one compares the average price per page of a random sample of public domain and copyrighted books for sale in the Penguin Classics paperback collection. The average price per page of 48 copyrighted Penguin Classics was 4.7 cents, while the average price per page of 48 public domain Penguin Classics was only 3 cents (Heald, 2008). A similar price-per-minute study of audiobooks based on public domain works and on copyrighted works reveals a similar

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Figure 27.4  Prices of the 20 most popular books from 1912 to 1922 and from 1923 to 1932 difference. Audiobook CDs based on copyrighted works cost on average 31 percent more than audiobook CDs based on public domain works, while audiobook .mp3s based on copyrighted works cost 28 percent more (Buccafusco and Heald, 2013). Research taking much larger samples of books, as opposed to the sub-set of popular books, shows no price effect associated with legal status (Heald, 2008; Liebowitz, 2009). In more recent studies, Li et al (2018) found a 50 per cent price increase in books associated with a 1814 UK copyright term extension; and Giblin et al (2019) found price differences in international e-lending book markets to be correlated with the copyright status of the titles studied. C.  Effects on Follow-on Creation Many works have value not only in themselves, but in their potential to serve as the basis for derivative, follow-on creation. Some commentators have asserted that such works need owners to maintain adequate incentives for subsequent innovation. So far, the small body of empirical evidence on the issue indicates that ownership may hinder the production of derivative works and reduce access to follow-on creation. Most audiobooks are derivative of original written works. A recent study compared the percentage of 165 public domain works originally published between 1913–22 which are currently available in digital audio versions with the percentage of 167 copyrighted works published from 1923–32 which have audiobook versions. Of the public domain works, 33 percent of the titles were accessible in audiobook form in 2012, while only 16 percent of the copyrighted titles had been made into audiobooks (Buccafusco and Heald, 2013). Similarly, a study of the use of public domain images on Wikipedia revealed that 87 percent of images found on 300 randomly generated Wikipedia pages contained public domain photos (Heald, 2015). Public domain status seems to enhance the likelihood of

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612  Research handbook on the economics of IP law volume 2 new uses on the website, as evidenced by a counterintuitive finding from the study of bestselling authors pages on Wikipedia. Over 80 percent of authors born before 1880 had images on their Wikipedia pages, while only about 50 percent of authors born after 1900 had images on their pages (Heald, 2015). Since all photos published prior to 1923 are in the public domain, a natural conclusion is that the copyright status of later photos stands in the way of their reuse in the Wikipedia format.

IV.  INTERNATIONAL TREATY RESPONSES, LEGISLATION, AND SELF-HELP Policymakers’ consideration of inefficient barriers to access can be seen in various initiatives to mandate access where transaction costs are high or where copyright owners seem unwilling to license at reasonable prices. A.  International Responses to Textbook Access Problems Access barriers caused by copyright take on a human rights dimension when the protected works are textbooks and other educational materials sought to be used in developing countries (Schonwetter, de Beer, Kawooya, and Prabhala, 2009–10). In a recent article, Margaret Chon (2007, p. 827) describes the “severe access problems with respect to basic educational materials protected by copyright.” The same inefficiencies in the book market described in section II seem especially acute in the market for textbooks, especially the market for translations and material for the blind. The Berne Convention, the major international copyright treaty, recognizes this by including a lengthy appendix that makes possible the use of compulsory licenses for textbook translations under certain circumstances. Unfortunately, according to Chon (2007, p. 828) its provisions are so complex and unwieldy that the exception it creates is virtually unusable. Instead, countries have acted unilaterally to enact a combination of copying exceptions and compulsory licenses at the state level. Chon lists 19 governments that have enacted such provisions. A more promising international treaty has been drafted by the World Intellectual Property Organization (WIPO): the Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired, or Otherwise Print Disabled (Crook, 2013). A WIPO press release announcing the treaty describes a “book famine” affecting visually impaired people around the world. Some 90 countries have signed the treaty, which permits compulsory licensing of the conversion of print materials to formats accessible to the visually impaired and allows for the cross-border transfer of reformatted materials. The treaty entered into force on September 30, 2016. The need for international initiatives on behalf of the visually impaired, and on behalf of educational institutions in developing countries, demonstrates the severity of the transactions cost problems that plague some markets for creative goods. Translators are willing to pay for the right to translate textbooks into local languages, and a large market for audio materials for the blind surely exists; yet voluntary transactions that would satisfy consumer demand often go unexecuted, leaving compulsory licensing as a necessary way to resolve barriers to access.

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The effect of copyright law on access to works  613 B.  National Legislation When high transaction costs create barriers at the local level, governments have acted to limit the effects of copyright law. One significant example involves orphan works legislation in the EU designed to increase access to millions of copyrighted works (primarily photographs) whose owners cannot be found (Favale, Homberg, Kretschmer, Mendis, and Secchi, 2013). Orphan works legislation typically exempts users of works from copyright infringement liability when they have engaged in a reasonable search for the owner of the work. Here the problem is market failure caused by the lack of legal rules mandating the identification of copyright owners of published works. The potential user of a photograph contained in an old magazine or newspaper frequently has no clue who to contact to obtain a proper license. Search costs rapidly become so high that the only feasible solution to the access problem is legislation that introduces effective functions as a compulsory license. Users may appropriate the material without permission and must pay a reasonable royalty if the owner ever appears. In the United States, the notice-and-takedown regime established in the Digital Millennium Copyright Act (DMCA) has solved, perhaps unintentionally, a significant transaction cost problem and lowered barriers to accessing musical and audiovisual works (Heald, 2014a). YouTube, for example, has become a market where those possessing copies of music and video clips can illegally post those copies to consumers. Under the DMCA, YouTube must act expeditiously to take down infringing materials upon request by a copyright owner, but very frequently the owner leaves the copy up and chooses to monetize the content via YouTube’s advertising program. YouTube is immunized from liability as long as it responds quickly to copyright owners. This immunity has created access to a wide variety of older musical and audiovisual works which had not been publicly available for decades (Heald, 2014a). No compulsory license is mandated; owners maintain complete control. However, the notice-and-takedown regime allows those with copies to efficiently communicate (via detection programs) with copyright owners in the provision of works to consumers, reducing previously high transaction costs. Many other examples could be offered, including the compulsory licensing of music and the fair use exception in American copyright law. In theory, voluntary transactions provide the best measure of access, but in a world with significant transaction costs, rules modifying strong property rights may be necessary to achieve efficient levels of access for consumers. C.  Self-help by Authors Barriers to access present problems not only for consumers, but also for authors who want their works to be more widely disseminated. To increase access, authors will frequently voluntarily abandon some of their rights under copyright law. The Creative Commons license is a frequently used device which allows an author to grant free access to her work access based upon a commitment by the user to provide proper attribution or to refrain from commercial exploitation of the work (Loren, 2007). Recent scholarship documents the massive use of the Creative Commons licenses to provide images for Wikipedia pages (Heald, 2015). The Open Source movement among computer programmers provides another good

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614  Research handbook on the economics of IP law volume 2 example of authors willing to share their works without compensation (Lessig, 2006). Access to important and widely used programs such as the Linux operating system or the Mozilla web browser is provided to consumers free of charge. Another example is provided by academic authors who make their work freely available in open access journals (Mueller-Langer and Watt, 2010). One of the most important journals, the Social Science Research Network, reports that it has over 500 000 full-text papers available for free download. Many more examples could be offered.

V. CONCLUSION Empirical research leaves little doubt that copyright law creates significant barriers to accessibility. Of course, access must be limited to some degree to incentivize the initial creation of the work (Ginsburg, 2000), but the studies suggest that the current duration of access limitations is almost certainly too long. Fewer than 50 of the 2226 editions in the Amazon study were originally published in the 1950s, while three times that many were initially published in the 1850s, a decade when far fewer books overall were published (Heald, 2014b). We can confidently predict that the same publishers exploiting the public domain books from the 1850s would be happy to bring back into print the missing books from the 1950s. They see a demand for old books that they are willing to satisfy, but the cost of transacting with copyright owners is too high. Why don’t the copyright owners satisfy the demand themselves? Almost certainly their business models require a greater predicted yearly sale per book that one would expect from titles more than 60 years old (Heald, 2014b). In a world where negotiation is costly, information is imperfect, business models are outdated, and competition is less than fulsome, copyright law will often stand as a barrier to efficient levels of access to creative works. Recent studies demonstrate how copyright can make works disappear, and more research needs to be done to pinpoint why willing owners and willing buyers are so often unable to engage in mutually beneficial voluntary transactions. It is no surprise, therefore, when courts, international organizations, local governments, and private parties craft solutions to access problems as they see them emerge. As long as the property paradigm dominates copyright law, the complex ecosystem of creation and regulation will need constant adjustment and therefore constant input from economists and lawyers.

REFERENCES Biasi, Barbara and Moser, Petra. 2018. “Effect of Copyrights on Science”, available at https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=2542879. Brooks, Tim. 2005. Survey of Reissues of U.S. Recordings. Washington, D.C.: Library of Congress, www.clir. org/pubs/reports/pub133. Buccafusco, Christopher and Heald, Paul. 2013. “Do Bad Things Happen When Works Fall into the Public Domain?: Empirical Tests of Copyright Term Extension”, 28 Berkeley Technology Law Journal 1–43. Chon, Margaret. 2007. “Intellectual Property ‘From Below’: Copyright and Capability for Education”, 40 U.C. Davis Law Review 803–54. Crook, John R. 2013. “U.S. Supports New Treaty to Facilitate Visually Impaired Persons’ Access to Book”, 107 American Journal of International Law 933–34.

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The effect of copyright law on access to works  615 David, Paul and Rubin, Jared. 2008. “Restricting Access to Books on the Internet: Some Unanticipated Effects of U.S. Copyright Legislation”, 5 Review of Economic Research on Copyright Issues 23–53. Erickson, Christopher, Heald, Paul J., and Kretschmer, Martin. 2015. “The Valuation of Unprotected Works: A Case Study of Public Domain Images on Wikipedia”, 28 Harvard Journal of Law & Technology 1–31. Favale, Marcella, Homberg, Fabian, Kretschmer, Martin, Mendis, Dinusha, and Secchi, Davide. 2013. Copyright and the Regulation of Foreign Works: A Comparative Review of Seven Jurisdictions and a Rights Clearance Simulation. London: Intellectual Property Office. Giblin, Rebecca, et al. 2019. “What can 100,000 Books Tell us about the International Public Library E-lending Landscape”, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3354215. Ginsburg, Jane. 2000. “From Having Copies to Experiencing Works: The Development of an Access Right in U.S. Copyright Law”, in Hugh Hansen, ed., U.S. Intellectual Property: Law and Policy. London: Sweet & Maxwell. Heald, Paul J. 2008. “Property Rights and the Efficient Exploitation of Copyrighted Works: An Empirical Analysis of Public Domain and Copyrighted Fiction Bestsellers”, 93 Minnesota Law Review 1031–63. Heald, Paul J. 2014a. “How Secondary Liability Rules Create a Market for Music on YouTube”, 82 University of Missouri-Kansas City Law Review 313–26. Heald, Paul J. 2014b. “How Copyright Keeps Works Disappeared”, 11 Journal of Empirical Legal Studies 829–66. Heald, Paul J. 2015. “The Valuation of Unprotected Works: A Case Study of Public Domain Images on Wikipedia”, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2560572. Landes, William and Posner, Richard. 2003. The Economic Structure of Intellectual Property Law. Boston, MA: Belknap Press. Lessig, Laurence. 2006. Code: And Other Laws of Cyberspace 2.0. New York, NY: Basic Books. Li, Xing, MacGarvie, Meghan, and Moser, Petra. 2018. “Dead Poets’ Property: How Does Copyright Influence Price”, 49 Rand J. of Econ. 181. Liebowitz, Stan J. 2009. “The Myth of Copyright Inefficiency”, 32 Journal of Regulation 28–34. Liebowitz, Stan and Margolis, Stephen. 2005. “17 Famous Economists Weigh in on Copyright: The Role of Theory, Empirics, and Network Effects”, 18 Harvard Journal of Law & Technology 435–57. Loren, Lydia Pallas. 2007. “Building a Reliable Semi-Commons of Creative Works: Enforcement of Creative Commons License and the Limited Abandonment of Copyright”, 14 George Mason Law Review 271–328. Lunney, Glynn. 1996. “Reexamining Copyright’s Incentives-Access Paradigm”, 49 Vanderbilt Law Review 483–656. Mueller-Langer, Frank and Watt, Richard. 2010. “Copyright and Open Access for Copyrighted Works”, 7 Review of Economic Research on Copyright Issues 45–65. Reimers, Imke. 2018. “Copyright and Generic Entry in Book Publishing”, available at https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=2938072. Schonwetter, Tobias, de Beer, Jeremy, Kawooya, Dick, and Prabhala, Achal. 2009–2010. “Copyright and Education: Lessons from African Copyright and Access to Knowledge”, 10 African Journal of Information and Communication 37–52. Smith, Michael, Telang, Rahul, and Zhang, Yi. 2012. “Analysis of the Potential Market for Out-of-Print eBooks”, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2141422. Suzor, Nicholas. 2013. “Access, Progress, and Fairness: Rethinking Exclusivity in Copyright”, 15 Vanderbilt Journal of Entertainment and Technology Law 297–342.

Cases Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013)

Legislative Materials The Digital Millennium Copyright Act of 1998, Pub. L. No. 105-304, 112 Stat. 2860 (1998) (codified in scattered sections of 5, 17, 28, and 35 U.S.C). 17 U.S.C. § 106 17 U.S.C. § 109

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PART VI EMPIRICAL STUDIES OF TRADEMARK LAW

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28.  Empirical studies of trademark law Barton Beebe* 2

Contents I. Introduction II. Studies of Trademark Registration III. Trademark Distinctiveness IV. The Likelihood of Confusion Test A. Courts’ Use of the Multifactor Test B. The Likelihood of Confusion and Sponsorship Confusion C. The Likelihood of Confusion in Context D. The Role of Survey Evidence V. The Likelihood of Dilution Test A. Anti-dilution Law in the Courts B. Dilution Over Time C. Experimental and Survey Evidence of Dilution VI. Conclusion References

I. INTRODUCTION In one of the earliest efforts at bringing empirical methods to bear on trademark law, Judge Jerome Frank of the Second Circuit Court of Appeals questioned “some adolescent girls and their mothers and sisters, persons I have chosen at random,” about the facts of the case then before him in 1948. In the case, both the plaintiff and the defendant used the mark “Seventeen” for their respective products (Triangle Publ’ns, 167 F.2d 969 (1948)). Judge Frank reported: “I have been told uniformly by my questionees that no one could reasonably believe that any relation existed between plaintiff’s magazine and defendants’ girdles.” In the half-century that has passed since Judge Frank’s survey, we have undoubtedly come a long way in the sophistication and breadth of the empirical methods we employ in the adjudication of trademark disputes and in the study of trademark law. Indeed, the past two decades have seen an especially significant expansion in the empirical study of the workings of trademark law, ranging from the straightforward “case-counting” and systematic content analysis of reported court opinions to highly creative and innovative studies employing such varying resources as internet search

*  John M. Desmarais Professor of Intellectual Property Law at the New York University School of Law.

617

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618  Research handbook on the economics of IP law volume 2 engines, historic phonebooks, surveys of trademark lawyers, and massive datasets covering trademark registrations in the U.S. and Europe. This chapter attempts a brief review of the present state of the empirical study of trademark law.1 Section II covers studies of trademark registration. Section III considers studies of the concept of trademark distinctiveness. Section IV turns to empirical studies of the likelihood of confusion cause of action, while Section V covers empirical studies of trademark dilution.

II.  STUDIES OF TRADEMARK REGISTRATION In 2013, the Office of the Chief Economist of the U.S. Patent and Trademark Office (USPTO) released the USPTO Trademark Case Files Dataset (TCFD) (Graham, Hancock, Marco, and Myers, 2013), which the USPTO has since updated annually. The TCFD represents an extraordinary resource. As of 2015, it contains detailed information on all 7.6 million trademark applications filed at the USPTO from 1982–2015, including filing basis, prosecution history, ownership, assignment, goods and services classifications (the so-called “Nice classes” after the Nice Classification of Goods and Services), and the characteristics of the applied-for marks themselves. The dataset also contains partial information on a significant proportion of applications filed from 1870–1981. Graham, Hancock, Marco, and Myers (2013) provide an extensive overview of the data (then current through 2012) with a particular focus on trends over time. They show the substantial increase in the annual number of trademark applications filed at the USPTO from approximately 62 000 in 1982 to over 300 000 in 2011 (and the number has since increased to almost 370 000 in 2015). With Beebe (2011), they attribute the significant spike in trademark applications during 1999–2000 to the dot-com boom.2 The authors further observe that with the introduction in November, 1989 of the intent-to-use filing basis, intent-to-use applications have come to make up a majority of trademark applications filed at the USPTO, though use-based applications still constitute a majority of the applications that advance to registration, owing in part to the significantly higher rates of abandonment before registration of intent-to-use applications. In a forthcoming study, Beebe and Fromer (2018) analyze the TCFD to show severe levels of trademark depletion and congestion on the USPTO’s Principal Register. They define trademark depletion as the process by which an increasing proportion of potential trademarks are precluded from registration by already registered trademarks in one or more classes of goods or services. Trademark congestion is the process by which, for any particular trademark that has already been claimed, that mark is claimed by an increasing number of different trademark owners. Beebe and Fromer (2018) analyze the TCFD data in light of the most frequently used words and syllables in American English, the most

1   For a review of empirical studies of the economic role and function of trademarks, see Schautschick and Greenhalgh (2015). 2   Gerhardt and McClanahan (2013) also note that this spike followed the USPTO’s introduction of electronic filing for trademark applications in October, 1998.

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Empirical studies of trademark law  619 frequently occurring surnames in the U.S., and all possible one-syllable words in English given spelling and pronunciation constraints. These data show that rates of word mark depletion and congestion have been increasing over the past three decades and have reached chronic levels, particularly in various important economic sectors. The data also show that trademark applicants are increasingly resorting to second-best marks that are more complex, as measured by character, syllable, and word count, and that take the form of neologisms rather than standard English words or frequently occurring surnames. One significant limitation of the TCFD is that it does not present data on the grounds for refusal of the trademark applications that the USPTO refused to approve for publication. To make up for this shortfall, Beebe and Fromer systematically downloaded from the USPTO website the full text of all trademark Office actions issued by the USPTO from 2003—the year when the USPTO began to post online its Office actions—through 2016. They report clear increases over this period in the proportion of applications receiving refusals on the ground that the applied-for mark is confusingly similar to an already registered mark, particularly in such economic sectors as apparel fashion and hightechnology goods. In light of these findings, Beebe and Fromer assert that the “ecology of the trademark system is breaking down, with mounting barriers to entry, increasing consumer search costs, and an eroding public domain.” Sheff (2014) has also used the TCFD to analyze the impact of federal anti-dilution protection on registration practice at the USPTO. This work is considered below in the discussion of empirical studies of trademark dilution law. Before the USPTO released the TCFD in 2013, Google agreed in 2010 to host on its servers the USPTO’s raw and somewhat haphazardly organized xml data that eventually formed the basis of the TCFD. Two early projects on trademark registration relied on this xml data. ‘Is the Trademark Office a Rubber Stamp?’ (Beebe, 2011) revealed overall and class-specific trademark application publication and registration rates over time at the USPTO (rates that the USPTO still does not publicly announce). The article established that the overall publication rates for both use-based and intent-to-use applications filed from 1989–2007 were the same, at .76, and that these rates varied little annually except for applications filed during the 1999–2000 period, when the publication rates declined to as low as .70 for use-based applications filed in 2000 and .68 for intent-to-use applications filed in that year. As for registration rates, the article noted the substantial difference between the annual registration rates for use-based applications, which closely tracked the annual publication rates for such applications, and the annual registration rates for intent-to-use applications, which averaged .37 from the inauguration of the intent-to-use basis in November, 1989 through 2007, and which were thus drastically lower than the annual publication rates for such applications. As noted above, this difference is largely due to many intent-to-use applicants’ failure to file statements of use after their applications had been published. Though the article is largely descriptive, it asks why trademark publication rates at the USPTO remain significantly higher than 50 percent. It proposes one possible explanation: that—particularly for use-based applications—if an applicant is in doubt as to whether its application will succeed, it may settle for protection of its mark as an unregistered mark rather than risk rejection by the USPTO. Combined with the cost and effort required for registration, the result is that some trademark owners which do not perceive a significantly better than even chance of success in registration may decide against applying.

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620  Research handbook on the economics of IP law volume 2 Gerhardt and McClanahan (2013) also used the USPTO’s raw xml data as the basis of their article ‘Do Trademark Lawyers Matter?’, which analyzed the degree to which the involvement and quality of legal representation—rather than proceeding pro se—affected trademark applicant success rates at the USPTO. They focused on the 5.5 million trademark applications filed at the USPTO from 1984–2012. They chose a start date of 1984 because the data contained incomplete information on the presence of legal counsel for applications filed before this year. Their analysis of registration rates (rather than publication rates) covered only the period from 1984–2010 because applications typically take12–24 months to proceed through examination and potential opposition to registration or refusal. (This two-year buffer for the study of registration rates is standard practice in the literature.) They defined pro se applications as applications for which the “attorney-name” field in the data was left blank. As Gerhardt and McClanahan readily admit, this definition of pro se applicants is problematic. Among the most frequent such “pro se” filers in their data were large corporations such as Twentieth Century Fox Film (New Corp.) and Avon Products, which no doubt had access to sophisticated in-house legal counsel but filed their applications through paralegals or other administrators who left the attorney field blank. Nevertheless, the authors mitigate this problem to a great degree by taking into account the frequency with which certain attorneys and pro se filers filed trademark applications at the USPTO. Overall, they show that during the period studied, attorney-filed applications had a significantly higher publication rate (82 percent) than pro se applications (60 percent), particularly when applications met with an Office action from the USPTO (72 percent vs. 45 percent). Registration rates were also significantly different, with attorney-filed applications enjoying a 60 percent registration rate, far above the 42 percent registration rate for pro se applicants. Further emphasizing the importance of attorney involvement, Gerhardt and McClanahan (2013) identified 27 940 applicants that filed at least one pro se application and one attorney-filed application. For such applicants, publication and registration rates were significantly higher for applications filed by an attorney. Finally, the authors present compelling and detailed evidence that for both pro se and attorney-filed applications, increased experience levels of the filers correlated very strongly with increased publication and registration rates. Working from an original dataset rather than the TCFD, Carpenter and Garner (2015) studied trademark applications that received an Office action refusing registration on the grounds that the applied-for trademark was “scandalous” or “immoral” under Section 2(a) of the Lanham Act, 15 U.S.C. § 1052(a). To do so, they developed a dataset consisting of 232 trademark applications filed from 2001–11 that received a Section 2(a) refusal by searching on the USPTO’s Trademark Electronic Search System for trademarks containing words likely to trigger such a refusal. Of these 232 applications, only two ultimately overcame the Section 2(a) refusal. Carpenter and Garner reported that 73 percent of the applications they studied resulted in refusals where the examiner did not discuss the context in which the mark was used, notwithstanding well-established doctrine requiring examiners to do so. Examiners used dictionary definitions as the only source of support for their refusals in 70 percent of the applications studied. Unsurprisingly, 97 percent of the applications studied were filed by individuals or small businesses, and 80 percent of the applicants abandoned their applications upon receiving a Section 2(a) refusal. Separate from their dataset of 232 applications, the authors additionally focused on five potentially scandalous terms appearing in applications from 2000–10 to show significant inconsisten-

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Empirical studies of trademark law  621 cies in USPTO review of these terms. Finally, they note that 53 percent of the applied-for marks were still in use in some fashion, regardless of whether they were ultimately refused registration, which suggests that “the morality bar is not effective at keeping immoral trademarks out of the marketplace” (Carpenter and Garner, 2015). Turning to studies of trademark registration in the European context, Von Graevenitz, Greenhaigh, Helmers, and Schautschick (2012) provided a descriptive and econometric analysis of the phenomenon of “trademark cluttering,” which they defined as occurring when trademark registers contain “such a large number of unused or overly broad trademarks . . . that the cost of creating and registering new marks substantially increase for other applicants.” Because European trademark law does not impose as stringent a use requirement on registrants as U.S. law does, and because cancellations for non-use are in practice very rare in the European system, trademark cluttering has emerged as a serious problem in Europe in recent years.3 Using trademark registration data from the Oxford Firm Level Intellectual Property database (Helmers, 2011) and financial data from Bureau van Dijk’s Financial Analysis Made Easy, they developed a dataset consisting of 201 021 UK or European Community trademark registrations from 27 161 firms registered in the UK over the period 2000–07. They showed that over the period studied, firms tended to file more widely across more Nice classes, with medium-sized and large firms doing so to a greater extent than smaller firms. They used a linear regression model to show that growth in firms’ trademark registration activity is largely independent of asset growth. Interestingly, they also identified in the data a “feedback mechanism” through which firms respond to increases in their competitors’ trademark registration activity by increasing their own registration efforts—a process that the authors suggest may lead to increased cluttering. The authors additionally used data from the Office for Harmonization of the Internal Market (OHIM, now called the European Union Intellectual Property Office (EUIPO)) covering trademark applications at the office over the period 1996–2010. These data show, among other things, that after the UK Intellectual Property Office (UKIPO) ceased in 2007 to examine trademark applications for relative grounds for refusal (which considers whether the applied-for mark is confusingly similar to an already registered mark), UK firms’ applications at the UKIPO faced an increased probability of being opposed relative to applications by firms from other countries; meanwhile, UK firms’ applications at OHIM enjoyed a reduced probability of being opposed relative to applications by firms from other countries. The authors speculated that this may show UK firms’ efforts before the 2007 policy change to use OHIM applications to circumvent UKIPO’s relative grounds examination. Finally, the authors presented compelling evidence of simultaneous application activity in which firms apply for multiple different marks for one product even though they expect ultimately to use only one of the registered marks. This is particularly problematic in the pharmaceutical sector, where firms submit to public health regulators multiple invented names per drug in anticipation of the rejection of many of these proposed names out of a heightened concern for consumer confusion

3   In their highly influential review of European trademark law, Kur and Knaak (2011) cite a survey conducted by the Institut für Demoskopie Allenbach suggesting that European trademark lawyers believe cluttering to be a problem.

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622  Research handbook on the economics of IP law volume 2 or misinterpretation of drug names. The result is a “surplus” of registered marks in the pharmaceutical sector in Europe that are unused and merely clutter the register. Von Graevenitz (2013) extended his study of European firms’ strategic trademark registration behavior in the face of public health regulators’ invented pharmaceutical name review. He took advantage of the enlargement of the European Union (EU) in 2004, when ten new countries joined the EU, to estimate the proportion of surplus trademarks registered as Community trademarks. Each new accession country brought with it its own ability to veto invented drug names, which increased significantly the likelihood of rejection. Von Graevenitz modelled firm behavior to hypothesize that firms would increase after the 2004 EU enlargement the number of names they submitted to invented name review and for trademark registration. Using a dataset covering 597 450 trademark applications at OHIM from 1997–2009, he employed a difference-in-differences approach and a nearest neighbor matching approach to compare trademark application conduct by pharmaceutical firms before and after the 2004 enlargement. He concluded that invented name review caused pharmaceutical firms to increase their trademark application filings from 10–15 percent per year, with the cost of developing and registering surplus invented names ranging from $21 million to $49 million per year. Von Graevenitz proposed that these costs could be minimized by reforms to the use requirement in European trademark law. More generally, he suggested that his findings may challenge the conventional view that trademark registers are not susceptible to depletion.

III.  TRADEMARK DISTINCTIVENESS In order to qualify for protection, a trademark must be “distinctive” of source. Distinctiveness is arguably the central requirement of trademark protection and among the most important concepts in trademark law. It is conventionally held that trademarks may be inherently distinctive of source or they may acquire source distinctiveness through use in commerce, advertising, or other means of informing consumers that the trademark is a source designation. As set forth most authoritatively (at least in the U.S.) in the Second Circuit opinion in Abercrombie & Fitch v. Hunting World, 537 F.2d 4 (1976), trademarks qualify as inherently distinctive of source when, due to their nature, consumers immediately perceive them as source indicators. In the case of word marks, words typically qualify as inherently distinctive if they are “fanciful” or coined (e.g., ACCENTURE for consulting services), “arbitrary” in the sense that they bear no semantic relation to the product (APPLE for high-technology goods), or merely “suggestive” of the product’s characteristics (IVORY for soap). Words that are descriptive of the product or its merits (AMERICAN for airline services) are traditionally understood to lack inherent distinctiveness. Their users must show that such descriptive marks have acquired distinctiveness over time in order to qualify for trademark protection. Generic terms (e.g., “Lite Beer” for low-calorie beer) are incapable of source distinctiveness. Together, this framework forms the “Abercrombie spectrum”, consisting of fanciful, arbitrary, and suggestive marks that are inherently distinctive, descriptive marks that must show acquired distinctiveness to gain protection, and generic marks that do not qualify for protection. Through a series of clever experiments (which they described especially clearly and in great detail), Lee, DeRosia, and Christensen (2009) mounted a compelling challenge

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Empirical studies of trademark law  623 to the Abercrombie spectrum and in particular its understanding of how consumers perceive descriptive marks. Specifically, the authors showed that contextual indicators of meaning on product packaging such as the size, stylization, framing, and positioning of a word mark can instill the word mark with source distinctiveness even when the word is otherwise descriptive of the product—or even when the word is generic with respect to the product. In essence, while the conventional view has held that descriptive marks can only acquire secondary meaning over time through use and advertising, the authors showed that descriptive marks are capable of acquiring secondary meaning “ab initio through non-lexical cues” on product packaging. Such cues evoke the consumer’s “perceptual schema for product packages” and guide the consumer to the conclusion that the descriptive mark is being used as a brand name. Lee, DeRosia, and Christensen (2009) conducted three studies. In the first, 210 individuals answered an online questionnaire about various images of product packaging for packaged cookies. This packaging featured one of various hypothetical trademarks from each of the five Abercrombie categories (fanciful, arbitrary, suggestive, descriptive, and generic). The packaging otherwise remained constant in appearance. The trademark appeared prominently on the package in a context in which product brand names conventionally appear. The test respondents ultimately perceived the descriptive marks to be just as source distinctive as the suggestive marks—and indeed over one-quarter of the respondents perceived the generic mark to be source indicating. The second study significantly expanded on the first. In total, 930 individuals answered an online questionnaire about images of product packaging for four different categories of goods that carried 31 different hypothetical marks from the various Abercrombie categories. The authors found that “all of the descriptive marks were statistically equivalent to the suggestive marks in terms of source indication.” In their third study, the authors varied the number of contextual indicators on the product packaging that suggested that the word mark was being used as a brand name. The results strongly suggest that the contextual indicators are what instilled the descriptive marks in the previous studies with source distinctiveness. Based on their findings, Lee, DeRosia, and Christensen (2009) urged that the descriptiveness bar to protection be removed in situations where the “placement, prominence, and style” of the mark will prompt consumers to recognize that it is being used as a source indicator. The authors recognized that “competitive need” offers an alternative justification for the denial of protection to descriptive marks that have not developed secondary meaning over time. But they urged a reformulation of this justification so that only “competitively essential” words would be denied protection. Though the study provides an important and much-needed corrective to the orthodoxy of the Abercrombie spectrum, one limitation of the study is that its findings arguably do not apply to situations in which a mark is used independently of product packaging—for example, when the mark is used in aural communications, in product reviews, or in other media coverage of the mark. In a different and highly creative approach to the study of the workings of trademark distinctiveness, Ouellette (2014) showed that Google search engine results can be used to estimate the strength of trademarks that are the subject of litigation (and, as discussed in the next section, Google results can also greatly aid in the assessment of the likelihood of confusion). Indeed, she argued that “Google does a better job than courts in evaluating the factual issue of consumer perceptions of trademarks.” Ouellette tracked federal

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624  Research handbook on the economics of IP law volume 2 court opinions over a one-year period from December 2011 through November 2012 that addressed trademark distinctiveness or the likelihood of consumer confusion. After filtering out opinions involving disputes between related companies, licensing disputes, and trade dress cases, she ended up with a dataset consisting of 88 cases. Within two weeks of the issuance of each opinion, Ouellette conducted Google searches, set to the location of the case venue (and in a later rerunning of the protocol, more broadly to the United States), for the relevant trademarks in the case, searching both for the trademarks alone as well as for the trademarks in combination with various keywords describing the field of use specified by the owner of the asserted mark. To assess the distinctiveness of the asserted mark, she analyzed the first page of organic, non-paid search results for that mark (and for the mark and keywords referring to its field of use) and counted the number of hits (out of a total of ten) that referred to the source identified by the asserted mark. Ouellette established a scheme by which the number of hits indicated that the mark was either unprotectable (0–2 hits), weak (3–5), medium (4–8), strong (8–10), or famous (10), and found that this scheme correlated with the court’s assessment of the strength of the asserted mark in 64 (or 73 percent) of the 88 cases she studied. Ouellette closely analyzed the cases in which Google and the courts disagreed and argued that, at least on the issue of distinctiveness, the assessment yielded by a Google search rather than the court’s assessment was correct in each instance.

IV.  THE LIKELIHOOD OF CONFUSION TEST The central question in trademark infringement analysis is whether the defendant’s trademark as used on the defendant’s goods is sufficiently similar to the plaintiff’s trademark as used on the plaintiff’s goods that consumers will be confused as to the true source of the defendant’s goods. In most trademark systems around the world, judges assess this likelihood of consumer confusion as to source by recourse to a set of factors. This test typically considers such factors as the similarity of the plaintiff’s and defendant’s marks; the strength of the plaintiff’s mark; the proximity of the parties’ goods, sales, and marketing channels; the defendant’s intent in adopting its mark; the sophistication of the relevant consumers; and any anecdotal or survey evidence of confusion among consumers. A.  Courts’ Use of the Multifactor Test To determine which factors drive the multifactor test for the likelihood of consumer confusion in U.S. federal courts, Beebe engaged in the systematic content analysis of all reported federal district courts opinions over the period 2000–04 that made substantial use of a multifactor test to assess the likelihood of consumer confusion (Beebe, 2006). Working from an original dataset of 331 opinions, Beebe further sought to show the degree to which judges engage in “coherence-based reasoning” (Simon, 2004) and “fast and frugal” heuristics (Gigerenzer and Goldstein, 1996) when using multifactor tests. Relying primarily on correlation and logistic regression analysis, the study found that five core factors drive the overall outcome of the multifactor test. The plaintiff must win the similarity factor to win the overall test, and in every opinion in which the plaintiff also wins the intent factor, it wins the overall test. The proximity of the goods and marketing

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Empirical studies of trademark law  625 channels, evidence of actual confusion, and the strength of the plaintiff’s mark also play important roles in driving the outcome of the test. The study further showed that when judges find a likelihood of confusion, they tend to find that all the factors in the multifactor test support that result, while the factors do not tend to “stampede” in this way in opinions in which no likelihood of confusion is found. Relatedly, a finding that the defendant acted with a bad-faith intent to infringe tends to trigger stampeding of the factors all to support a likelihood of confusion. With respect to the Abercrombie spectrum of trademark distinctiveness, the study showed that judges make far less use of this spectrum than is generally thought, and that the inherent distinctiveness analysis appears to exert little influence over the court’s overall assessment of the strength of the mark, which is guided instead by the court’s assessment of the actual marketplace strength (or weakness) of the mark. Finally, the study made the controversial finding, discussed further below, that survey evidence is rarely presented in likelihood of confusion disputes and that when it is presented, judges rarely credit it. Blum, Fox, Hayes, and Xu (2010) renewed the systematic content analysis of federal court opinions employing the multifactor test for the likelihood of consumer confusion by focusing on a 15-year period from 1994–2008 and on federal court opinions from one district, the Southern District of New York. Working from an original dataset of 206 opinions, they sought to determine whether the findings in Beebe’s 2006 study would hold across time. Their findings were largely consistent with Beebe’s with respect to win rates, the relative importance of the various factors, and courts’ treatment of the Abercrombie spectrum and inherent distinctiveness. However, though Beebe had found that Second Circuit district courts were somewhat less prone to stampeding the factors than other districts, the authors found no evidence at all that S.D.N.Y. courts stampeded the factors when finding a likelihood of confusion or, more specifically, when finding that the defendant acted with a bad-faith intent to infringe. As for historical trends, the authors grouped the opinions into three-year baskets and reported a declining proportion over time of opinions that found a likelihood of confusion. The authors also considered whether an additional factor—whether the parties’ goods were directly competing—could help predict the overall outcome of the test. They concluded that the competing goods factor (which they admitted is closely similar to the proximity of the goods factor) did no better than any other factors in predicting the outcome of the multifactor test. In her study of Google search results discussed above, Ouellette (2014) analyzed the first page of search results to assess not only the distinctiveness of the asserted mark, but also the likelihood of confusion of the parties’ marks. Addressing in detail many of the cases in her dataset and their Google search results, she noted the many cases in which the search results either supported a finding of a likelihood of confusion (e.g., because the search results for the defendant’s mark contained hits referring to the plaintiff) or did not support a likelihood of confusion (e.g., because the search results for the defendant’s mark contained no hits referring to the plaintiff). Overall, Ouellette identified 16 cases in which the Google search results and the court disagreed on the issue of likelihood of confusion. In only three of these, she argued, was the court correct rather than Google; and in each of these three cases, the defendant was making a permissible concurrent use of a mark in a limited geographical area—a special factual situation that Google search results are not equipped to account for. Ouellette suggested that Google search results, like traditional survey evidence, may serve as probative evidence in trademark litigation;

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626  Research handbook on the economics of IP law volume 2 but she was quick to emphasize that, like survey evidence, Google’s search results must always be subject to careful assessment by the fact finder. B.  The Likelihood of Confusion and Sponsorship Confusion Trademark law will generally find infringement when the defendant uses a trademark in such a way that consumers believe that even though the plaintiff did not produce the defendant’s goods, the plaintiff has somehow sponsored, authorized, or endorsed them. So-called “sponsorship confusion” is controversial in trademark commentary. Lemley and McKenna (2010) in particular have advocated that trademark law adopt the principle that sponsorship confusion is actionable only when it is material to consumers’ decision to purchase. In light of the controversy surrounding sponsorship confusion, Kugler (2017) conducted an Internet consumer confusion survey to determine how often sponsorship confusion is material to consumers and in what ways it is material. He exposed consumers to various online advertisements patterned after Amazon listings for merchandising products for professional sports teams, well-known automobile brands, a well-known university, various city and governmental institutions (e.g., the New York Police Department), parody products, and a motion picture whose title was the subject of a claim of sponsorship confusion. Kugler adapted the standard Ever-Ready consumer confusion survey format (Union Carbide v. Ever-Ready, 531 F.2d 366 (1976)) to include additional questions testing for materiality. Specifically, he asked survey respondents: (1) who they thought was responsible for the quality of the product; (2) whether they would have a better, worse, or unchanged opinion about the sponsor of the product if they had an adverse experience with the product; (3) assuming that the product was not produced by the entity to which the product referred, whether they would be more or less interested in purchasing the product; and (4) whether they would be willing to pay more for the product if it was or was not made with the permission or authorization of the entity to which the product referred. Kugler analyzed the responses of 1049 consumers, various subsets of whom were exposed to various subsets of the merchandising products at issue. Overall, he interpreted the data as showing that “across a wide range of products and domains, sponsorship confusion is rarely material to more than half of potential consumers.” On this basis, he concluded that adopting a materiality requirement would allow a variety of unauthorized third-party merchandising uses of well-known trademarks that the law currently prohibits. However, Kugler emphasized that the data show that in the context of professional sports brands in particular, sponsorship confusion is typically material to consumers, and so the adoption of a materiality requirement would not significantly affect merchandising practices in that context. Interestingly, he also asked respondents whether they thought it should be possible to make the advertised product without the permission of the entity referred to by the product. The data show that for most products tested, most respondents believed that permission should be obtained. C.  The Likelihood of Confusion in Context In two large-scale empirical studies, David Franklyn and David Hyman (2013, 2014) focused on the likelihood of confusion in the context of keyword advertising. They

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Empirical studies of trademark law  627 designed and oversaw the administration of three surveys, two of which were conducted in 2010 and one in 2012, and each of which had about 1000 respondents. The surveys asked a wide array of questions designed to determine how consumers use search engines when searching for branded goods and how consumers perceive advertisements in the form of paid links that appear together with organic links on the results pages of leading search engines. The survey results indicate a surprisingly high degree of consumer uncertainty and confusion about search page architecture and the labelling of paid links, with a majority of respondents indicating that they pay no attention to where links are located on the search results page or whether the links appear in a shaded box (which is one way that search engines have tried to distinguish paid links). Franklyn and Hyman (2013) conclude that most consumers ignore labels identifying paid links, and thus that such labels fail to communicate whether content appearing on results pages is paid or unpaid. Nevertheless, the authors find in their survey results little evidence that consumer ignorance with respect to paid links actually results in forms of consumer confusion that are traditionally actionable under trademark law. While consumers may not understand why paid links appear or understand the difference between paid and unpaid links, only a small minority of consumers (15 percent, in the authors’ estimate) tend to incorrectly assume that paid links purchased by third parties are actually sponsored, endorsed, or somehow affiliated with the owners of the trademarks to which such paid links are keyed. Interestingly, however, the authors report that about half of those surveyed (excluding those who were unsure or without an opinion) believed that it was unfair or inappropriate for one firm to purchase the trademark of a competitor for use as a keyword triggering a paid link. In a second study, which they conducted mainly in 2010, Hyman and Franklyn (2014) studied which entities were purchasing trademarks as keywords for purposes of keyword advertising. To do so, they systematically studied the search results generated when 2462 prominent trademarks were entered into three leading search engines. Among other data they collected, they classified the “first five paid and unpaid links” for each mark entered in each search engine according to whether the link referred to the trademark owner, a competitor, or various other entities. They found that firms purchased the trademarks of their competitors as keywords in only 6 percent of the paid links they studied. Instead, trademarks owners themselves account for a high proportion of keyword purchasing activity, apparently to ensure that their links appear at the top of the search results and perhaps to prevent their competitors from benefiting from paid links keyed to their trademarks. The authors also found a high degree of variation over time in the purchase of paid links and the domain names to which those links referred. Overall, they conclude that, notwithstanding legal attention paid to the phenomenon in the form of a spate of litigation and commentary in recent years, the risk of widespread abuse of keyword advertising is quite low. DeRosia, Lee, and Christensen (2011) developed experimental evidence showing that in certain contexts, more sophisticated consumers may actually be more likely to experience confusion as to source than less sophisticated consumers. This runs counter to the i­ntuition—and to the black-letter principle in trademark law—that the level of a consumer’s sophistication is inversely related to that consumer’s likelihood of confusion. The authors hypothesized, in essence, that if a competitor of a senior mark extends its brand into a new product category, then consumers of that senior mark are more likely

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628  Research handbook on the economics of IP law volume 2 to be confused by a junior mark in the new product category that is identical or similar to the senior mark. The authors further hypothesized that more sophisticated consumers are more likely to be confused. Due to their heightened sophistication, such consumers more readily update their mental schemas upon exposure to the competitor’s brand extension and are more prone to assume, upon exposure to the junior mark, that the senior mark has also engaged in the extension of its brand. In order to explore these hypotheses, the authors conducted an experiment which exposed participants to a series of advertisements, some of which announced the extension of certain automobile brands into laptop computers, and tested the participants for their “enduring involvement” in the product category of automobiles and their “need for cognition” —that is, “an individual’s enduring tendency to engage in and enjoy effortful cognitive endeavors.” The experimental results confirmed the authors’ hypotheses. D.  The Role of Survey Evidence Trademark law scholars have devoted a great deal of attention to the role of survey evidence in the likelihood of confusion analysis, and for good reason. Ford (2012; 2013) tracked the use of survey evidence in reported cases of federal trademark litigation from 1946–2012 and found a significant increase in the use of such evidence in connection with some question of fact in trademark disputes, with it appearing very rarely in the reported case law in the mid-twentieth century (e.g., in only about six reported opinions per year for the period 1961–75) and now appearing relatively more frequently (in about 45 reported opinions per year over the period 2006–12). However, Beebe’s 2006 empirical study of the multifactor test suggested that despite conventional wisdom to the contrary (and the insistent claims of survey experts), survey evidence of the likelihood of consumer confusion is not commonly presented in trademark litigation; and more importantly, that when it is presented, courts rarely give it any weight, particularly if the evidence runs contrary to the court’s ultimate finding on the issue of the likelihood of confusion. Of the 331 opinions Beebe studied, only 20 percent discussed survey evidence and only 10 percent credited that evidence (Beebe, 2006). Other quantitative studies have found that survey evidence is more frequently presented than Beebe’s 2006 study suggested. As part of a larger study of the consumer in trademark law, Austin (2004) evaluated ten years of trademark infringement case law from May 1993 through May 2003 to find that survey evidence “is before the court around 57.4 percent of the time,” but that courts gave weight to that evidence in only 35.2 percent of the cases studied. Austin characterizes his findings as showing a “low use of survey data in trademark cases.” Also contrary to Beebe’s findings, Sarel and Marmorstein (2009) studied trademark infringement cases from 2001–06 and found that survey evidence was considered in 34.1 percent of these cases. To develop their dataset, the authors included only opinions (1) “in which the infringement plaintiff possessed an undisputed, valid trademark,” (2) which resulted in a dispositive judgment on the likelihood of confusion, and (3) which conveyed “sufficient information about the basic issues of the case and evidence presented.” Furthermore, the authors excluded cases that “were dismissed on technicalities or that focused primarily on other legal issues” outside of the likelihood of consumer confusion. The dataset thus consisted of 126 cases. The authors then coded the cases for a variety

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Empirical studies of trademark law  629 of characteristics, including whether, in the authors’ view, the parties’ marks were “more similar” or “less similar.” The authors found overall no statistically significant difference in plaintiff win rates between cases in which the plaintiffs presented “actual confusion or survey evidence” and those in which plaintiffs presented no such evidence. However, and quite interestingly, the authors do show that in the cases in which the parties’ marks were coded as “less similar,” plaintiffs enjoyed a substantially higher win rate (85.7 percent) when they presented survey evidence on the issue of the likelihood of consumer confusion and that evidence was admitted than when they did not present survey evidence (27.3 percent) or they did and the evidence was not admitted (0 percent). (The authors do not specify how many cases in their dataset were coded as less similar, so the strength of this finding is not clear). Bird and Steckel (2012) expanded on Beebe’s initial dataset of 311 opinions from 2000–04 to study the treatment of survey evidence in 533 reported federal district court opinions from 2000–06 that made substantial use of a multifactor test for the likelihood of consumer confusion. After coding the additional two years of opinions according to Beebe’s protocol, the authors found that only 16.6 percent of the opinions they studied addressed survey evidence and thus that “survey evidence is used infrequently” in trademark litigation. However, in opinions in which survey evidence was considered, it did sometimes appear to influence the outcome of the confusion analysis. The authors used regression analysis to conclude that “[a] credited plaintiff survey increases the probability of a likelihood of confusion finding, a non-credited plaintiff survey decreases it, and any defendant survey increases the probability of a no likelihood of confusing finding.” Furthermore, the authors suggested that surveys may play significant roles that would not be apparent from published opinions, specifically in providing guidance to plaintiffs considering filing suit or in giving plaintiffs leverage in settlement negotiations. Diamond and Franklyn (2014) significantly advanced the empirical study of survey evidence in trademark litigation by looking outside of reported published opinions to ask trademark litigators what their experience had been with survey evidence. In 2013, the authors sent invitations to participate in a survey about “consumer perception surveys” to all members of the International Trademark Association. Of the 465 respondents, 335 described themselves as practicing attorneys (of whom two were excluded from the tabulation of results because they also described themselves as survey consultants). More than half of the remaining 333 practicing attorneys indicated that they had commissioned at least one survey, and of the 145 attorneys from the U.S. who indicated that they had practiced for at least eight years, 96 (or 61 percent) reported that they had commissioned at least one survey. Indeed, for these 96 attorneys, the average number of surveys each had commissioned so far in his or her career was 11.8 surveys. Diamond and Franklyn present further statistics strongly suggesting that only a small proportion of these surveys were actually presented at trial and that in the experience of the attorneys surveyed, consumer perception surveys can play a very significant role in the lead-up to trial and in settlement negotiations. Outside of the U.S., Huang, Weatherall, and Webster (2012) conducted an empirical study of the use of survey evidence in Australian federal and state trademark and passing off litigation. They collected 353 trademark and passing off cases from the LexisNexis database for the period from 1990 through April 1, 2010. Finding only 33 cases that discussed survey evidence, they identified an overall downward trend in the use of survey

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630  Research handbook on the economics of IP law volume 2 evidence over that time. In a careful probit regression analysis incorporating a variety of case-specific factors, the authors concluded that they could not reject the null hypothesis that survey evidence had no effect on case outcomes for the cases studied. However, they muster a variety of findings to show that surveys had at best a “limited impact” on outcomes.

V.  THE LIKELIHOOD OF DILUTION TEST Dilution describes the process by which certain kinds of non-confusing uses of a trademark by third parties can diminish that mark’s distinctiveness of source or distinctiveness from other marks. For example, if a small corner bodega calls itself “Apple Market,” it is not at all likely that consumers will believe the bodega is somehow affiliated with the maker of iPhones. Thus, the bodega’s use does not create a likelihood of consumer confusion as to source and no cause of action will succeed on that ground. However, if many shops of many different kinds begin to use the term “Apple” in their names, though consumers may continue to realize that there is no connection between such shops and the high-technology firm, the distinctiveness of the high-technology firm’s mark may be impaired. Upon hearing “Apple” in a commercial context, consumers may have to think for a moment to determine to which firm the term is referring, and this increases consumer search costs (or so goes the orthodox story in trademark law). Furthermore, as more and more firms use the word “Apple,” the distinctiveness of the mark from other marks diminishes. It becomes a commonplace commercial designation for a wide variety of firms. Its advertising power therefore declines. A.  Anti-dilution Law in the Courts Anti-dilution protection has remained a highly controversial area in trademark law. In an ambitious study, Long (2006) was the first empirically to confirm the conventional wisdom that courts are hostile to the anti-dilution cause of action. Long developed a dataset of 344 cases that considered a federal anti-dilution cause of action drawn from all reported federal opinions on Westlaw from the January 16, 1996 effective date of the Federal Trademark Dilution Act of 1995 (FTDA), which established anti-dilution protection at the federal level, through July 16, 2005. Her data show a substantial and steady decline over time in the success rate of dilution claims, with approximately 54 percent of such claims granted in 1996 but only 12 percent granted in the first half of 2005. This decline is greater than the decline in win rates over the same period for non-dilution trademark claims. The author also used data from the Administrative Office of the United States Courts and the Public Access to Court Electronic Records (PACER) database to study cases not reported in Westlaw. She focused on the ten federal districts with the greatest number of trademark complaints and studied, for the period January 16, 1996 through 1999, every dilution-related complaint that was available. For the period 2000 through July 16, 2005, she took a random sample. This resulted in a dataset of 732 dilution filings. Long found similar declines in dilution win rates in the unreported case law. She theorizes overall that “[a]lthough judges are not justifying their actions in efficiency terms, over time they are generally denying enforcement in cases where enjoining unauthorized use of

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Empirical studies of trademark law  631 the trademark would reduce social welfare.” Though dilution claims appear to have been largely unsuccessful in the federal courts over the period she studied, Long nevertheless recognizes that dilution could be a “powerful bargaining chip” in cease-and-desist stage or settlement negotiations. In a much smaller-scale study, Beebe (2008) conducted a systematic content analysis of all reported federal court opinions that analyzed an issue in anti-dilution law during the one-year period following the October 6, 2006 effective date of the new Trademark Dilution Revision Act (TDRA), which replaced the FTDA. Using Westlaw and Lexis, Beebe developed a dataset of 85 opinions. Perhaps unsurprisingly, the data showed that many courts were unaware of the new law and thus improperly applied the old FTDA, or that even if they were aware of the new law, they continued to apply precedent based on the FTDA. Some courts apparently unknowingly applied bits and pieces of both the old law and the new. The main finding of the study was that the anti-dilution cause of action is largely redundant of the infringement cause action. Of the 64 opinions studied that analyzed both a confusion and a dilution cause of action, 89 percent reached the same outcome under both. No opinion found no confusion but then went on to find dilution. In only one opinion did the dilution analysis appear to drive the outcome of the case. In ongoing work, Beebe (2017) updates these results for the ten-year period following the effective date of the TDRA. The data show that the dilution cause of action remains essentially redundant of the confusion cause of action and plays no significant role in driving the outcomes of federal trademark infringement case law. As mentioned above, Sheff (2014) undertook a comprehensive study of the effect—or more precisely, the lack of effect—of federal anti-dilution law on registration practice at the USPTO. Sheff conducted three different empirical analyses. First, he developed and hand-coded a dataset of all 453 Trademark Trial and Appeal Board (TTAB) dispositions of dilution claims from the January 16, 1996 effective date of the FTDA through June 30, 2014. He found only three TTAB cases over that 18-year period in which anti-dilution claims made any difference to the outcome of a TTAB adjudication; and in one of these, Sheff argues, a likelihood of confusion claim could have been used to reach the same outcome, but having found dilution, the TTAB declined to consider the confusion claim. The other two cases were free speech cases with highly controversial findings of dilution. Second, Sheff used the TCFD discussed above to study trends in the application or registration rates of identical marks by different parties in different product categories. He found no significant change in such rates that would suggest that anyone had changed their behavior in response to the advent of federal anti-dilution law. Third, Sheff studied third-party applications to register famous marks. To do so, he developed a list of 86 clearly famous brands and studied all third-party applications for such trademarks (or close approximations of such trademarks) filed on or after January 1, 1981. He found that such applications are “extremely uncommon” and that, in any case, there was no change in the annual rate of filing of such applications that might suggest some effect of the advent of federal anti-dilution law. The author’s overall conclusion is compelling: “dilution appears to have been largely (though perhaps not entirely) a failure at the PTO.” The primary effect of anti-dilution rights “appears to be imposing increased costs on those who have business with the trademark system, with little if any apparent benefit to justify those costs.”

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632  Research handbook on the economics of IP law volume 2 B.  Dilution Over Time A long-standing challenge in anti-dilution law has been to show an example of a single famous trademark that has actually suffered from dilution. Many famous marks have eventually collapsed into generic terms, but it is far more difficult to identify a famous mark that has maintained its distinctiveness of source, but nevertheless seen that distinctiveness significantly diluted over time by third-party non-confusing uses of the mark. Two important articles by Brauneis and Heald (2011a; 2011b) have taken up the considerable challenge of studying trademark dilution over time. In the first (2011a), the authors developed a list of 131 historically famous brand names based in part on the list published in the early twentieth century by Hotchkiss and Franken (1923) and updated in the late century by Golder (1997). They then examined business names used in the white pages telephone directories of Chicago, Philadelphia, and Manhattan in the years 1940, 1960, 1980, 1990, 2000, and 2010. Among the authors’ most interesting general findings is that from 1960–2010, unauthorized third-party uses of famous marks declined by 54 percent across the three cities. The authors closely considered many economic, cultural, and legal factors that may have contributed to this decline. They suggested that the introduction of anti-dilution protection and increased anti-confusion protection partially explains the decline. In the second article, Brauneis and Heald (2011b) moved beyond white pages telephone directories to study the appearance of third-party uses of famous brands names in a wide variety of sources. Specifically, they examined: (1) state corporate name and LLC databases over various periods of time from six states (three that established anti-dilution protection long before the 1996 advent of federal anti-dilution protection and three that offered no state-level anti-dilution protection before 1996); (2) advertisements appearing from 1925–2010 in the New York Times, Washington Post, and Wall Street Journal; (3) all reported dilution litigation in the federal courts from 1946 apparently through 2010; and (4) Westlaw’s state trademark registration database and the Principal Register of federal trademark registrations at the USPTO. At the same time that they greatly expanded their corpus of sources where unauthorized third-party uses might appear, they narrowed the number of historically famous brand names on which they focused from 131 to 33. The authors presented a host of interesting findings with respect to certain brand names in certain states. Among their main overall findings was that third parties commonly make unauthorized uses of famous marks as trade names, but rarely do so for products. The authors further showed significant declines over time in such unauthorized third-party uses; and as they did in their first article (2011a), the authors suggested that the emergence of anti-dilution protection at the state and federal levels likely contributed to these declines. C.  Experimental and Survey Evidence of Dilution Another considerable challenge in anti-dilution law has been to design an experiment or survey method that would show dilution. Morrin and Jacoby (2000) developed a series of experiments that remains the leading effort in this regard. They began by hypothesizing that consumers exposed to diluting stimuli are more likely to commit brand recognition errors and to exhibit slower brand recognition times than consumers unexposed to such

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Empirical studies of trademark law  633 stimuli. To test this hypothesis, the authors exposed 64 study participants to six print advertisements in random order. For some of the participants, some of these advertisements conveyed diluting information—that is, the advertisements associated a famous brand with a product or service with which the brand was not traditionally associated. The study participants than completed a computer task in which they were exposed to a brand name (or a product category/attribute) on the computer display followed by a product category/attribute (or a brand name). The participants were instructed to indicate as quickly as possible by pressing a key for yes or no whether the two words “represented a match.” The authors found that response accuracy with respect to certain brand names was significantly lower for participants exposed to stimuli diluting of those brands. The authors further found that response times were significantly higher with respect to certain brands for participants exposed to stimuli diluting of those brands. However, the authors found no significant change in response times for the particular brand (Hyatt for hotel services) with which the study participants were most familiar. Morrin and Jacoby (2000) then conducted a second study designed to test participants’ product category recall for various brands after exposure to diluting stimuli, some of which exposed certain participants to diluting uses in related product categories, while others exposed other participants to diluting uses in unrelated product categories. The authors found that participants’ category recall with respect to certain brands declined after exposure to stimuli diluting of those brands, with more pronounced declines in recall following exposure to diluting uses from unrelated product categories than from related product categories. Importantly, however, Morrin and Jacoby found that brands of especially high fame showed no declines in category recall. They conclude: “It appears that very strong brands are immune to dilution because their memory connections are so strong that it is difficult for consumers to alter them or create new ones with the same brand.” Morrin, Lee, and Allenby (2006) developed a hierarchical Bayes associative network model for consumers’ memory of a brand and tested how exposure to diluting stimuli may impact that associative network. They also sought to determine how contextual factors, and in particular, the presence of consumer confusion, may affect brand recall. The authors exposed 212 participants to a booklet containing various real-world brand logos below which appeared their product categories. Some participants were given booklets that contained real-world logos of companies that used very similar trademarks (e.g., Bass for shoes and Bass for ale). After a distracter task, the participants were provided with a list of certain brands of interest and given one minute to record which product categories came to mind for each brand name. The participants were also asked to assess on a nine-point scale various contextual factors, such as their level of familiarity with the various brands included in the booklet and their level of confusion as to source with respect to the various brands. The authors analyzed, among other things, brand exclusive recall ( i.e., the proportion of consumers who, when presented with one of the brand names used by two different companies, recalled only the product category of the company that first used the brand name). The authors conclude that “a single exposure to diluting brand stimuli is found to have a damaging effect on brands, reducing brand exclusive recall by about a third, on average.” Once again, however, the authors show that highly famous brand names were not significantly impacted by the diluting stimuli used in the experiment. They explain:

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634  Research handbook on the economics of IP law volume 2 The legal implication of this result is that if the level of fame required by the courts for application of the FTDA is held extremely high, then few of the brands to which it applies may ever be able to demonstrate harm, at least from single instances of trademark dilution.

The study is also of great interest because its results suggest that consumers’ level of confusion with respect to two very similar brands may impact the degree to which the junior user’s use dilutes the senior user’s brand. In a wide-ranging and remarkably ambitious collection of five experiments, Pullig, Simmons, and Netemeyer (2006) used three different measurement methodologies— response latency, aided recall, and simulated choice—to study how junior brands affect identical or very similar senior brands when the brands are in related or unrelated product categories and are perceived to possess similar or dissimilar attributes. The results of the experiments suggested that junior brands will not dilute identical or very similar senior brands when the brands are in the same product category and possess similar attributes. However, if a junior brand possesses dissimilar attributes and is used in a product category similar to that of an identical or very similar senior brand, the junior brand’s use will dilute the attribute associations of the senior brand. Furthermore, if a junior brand possesses dissimilar attributes and is used in a dissimilar product category, its use will dilute both the category and attribute associations of the senior brand. Finally, with respect to simulated choice, the authors showed that when a junior brand is dissimilar to a senior brand along the dimensions of brand attributes and product category, this can suppress in certain conditions consumers’ consideration and choice of the senior brand. Notwithstanding many experimental attempts to show trademark dilution, many trademark scholars remain unconvinced that these experiments have succeeded in demonstrating that dilution represents a real problem in the marketplace. Tushnet (2008) presented the most prominent of these critiques. She questioned, among other things, whether the slight decreases in response times recorded in the experiments actually translate into any significant harm to famous brands. She further questioned whether lab experiments can adequately recreate the full context of the purchasing experience and decision, particularly in light of the fact that the consumption context may altogether dispel any significant impairment of a famous mark’s attribute or product category associations conventionally labelled “dilution.” Beebe, Germano, Sprigman, and Steckel (2017) conducted a series of experiments to test whether the protocols used by Morrin and Jacoby (2000) and Pullig, Simmons, and Netemyer (2006), which involved response latency, properly measured dilution. Beebe, German, Sprigman, and Steckel found, in essence, that respondents exposed to any diluting stimuli slowed their response times to questions involving nearly any brand, even if the brand was not the target of the diluting stimuli. They proposed that unfamiliar diluting stimuli, such as an advertisement for Mercedes toothpaste, cause respondents to experience surprise and to adopt a stance of guardedness toward subsequent test questions, thus increasing response times. On this basis, they contended that previous response time studies used the wrong control, in that they exposed a treatment group to diluting stimuli and the control group to no diluting stimuli. The authors showed that when the control group is exposed to diluting stimuli that targeted brands other than those that were the focus of the treatment, there is no significant difference in response times between the

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Empirical studies of trademark law  635 treatment and control groups. They concluded that current response time methods of testing for dilution are unable to show any evidence of dilution.

VI. CONCLUSION In just two decades, the empirical study of trademark law has rapidly developed into a sophisticated and wide-ranging area of inquiry. The USPTO’s recent release and ongoing updating of the TCFD represents an especially significant achievement that will undoubtedly continue to inspire scholarly work in the area. It is hoped that other leading intellectual property offices, particularly the EUIPO, will also publicly release their data for scholarly examination. Further empirical work also remains to be done in a number of areas relating to trademark litigation, including how courts adjudicate defenses to infringement and what remedies courts provide for infringement.

REFERENCES Austin, Graeme W. 2004. “Trademarks and the Burdened Imagination”, 69 Brooklyn Law Review 827–922. Beebe, Barton. 2006. “An Empirical Study of the Multifactor Tests for Trademark Infringement”, 95 California Law Review 1581–654. Beebe, Barton. 2008. “The Continuing Debacle of U.S. Antidilution Law: Evidence from the First Year of Trademark Dilution Revision Act Case Law”, 24 Santa Clara Computer & High Technology Law Review 449–67. Beebe, Barton. 2012. “Is the Trademark Office a Rubber Stamp?”, 48 Houston Law Review 751–77. Beebe, Barton. 2018. “The Continuing Redundancy of U.S. Trademark Antidilution Law: Evidence from Ten Years of Trademark Dilution Revision Act Case Law”, Working Paper. Beebe, Barton, and Jeanne Fromer. 2018. “Are We Running Out of Trademarks?: An Empirical Study of Trademark Depletion and Congestion”, forthcoming Harvard Law Review. Beebe, Barton, and Roy Germano, Christopher Jon Sprigman, and Joel Steckel, “Testing for Trademark Dilution in Court and the Lab”, Working Paper. Bird, Robert C., and Joel H. Steckel. 2012. “The Role of Consumer Surveys in Trademark Infringement: Empirical Evidence from the Federal Courts”, 14 University of Pennsylvania Journal of Business Law 1013–53. Blum, Kevin, Ariel Fox, Christina J. Hayes, and James (Hanjun) Xu. 2010. “Consistency of Confusion? A Fifteen-Year Revisiting of Barton Beebe’s Empirical Analysis of Multifactor Tests for Trademark Infringement”, Stanford Technology Law Review 3–45. Carpenter, Megan M., and Mary Garner. 2015. “NSFW: An Empirical Study of Scandalous Trademarks”, 33 Cardozo Arts & Entertainment Law Journal 321–65. DeRosia, Eric D., Thomas R. Lee, and Glenn L. Christensen. 2011. “Sophisticated but Confused: The Impact of Brand Extension and Motivation on Source Confusion”, 28 Psychology & Marketing 457–78. Diamond, Shari Seidman, and David J. Franklyn. 2014. “Trademark Surveys: An Undulating Path”, 92 Texas Law Review 2029–73. Ford, Gerald L. 2012. “Survey Percentages in Lanham Act Matters”, in Shari Seidman Diamond and Jerre B. Swan, eds., Trademark and Deceptive Advertising Surveys: Law, Science, and Design. American Bar Association. Ford, Gerald L. 2013. “Survey Evidence”, McCarthy Law Symposium, February 29, 2013. Franklyn, David J., and David A. Hyman. 2013. “Trademarks as Search Engine Keywords: Much Ado About Something?”, 26 Harvard Journal of Law & Technology 481–543. Gerhardt, Rebecca, and Jon P. McClanahan. 2013. “Do Trademark Lawyers Matter?”, 16 Stanford Technology Law Review 101–41. Gigerenzer, Gerd, and Daniel G. Goldstein. 1996. “Reasoning the Fast and Frugal Way: Models of Bounded Rationality”, 103 Psychological Review 650–69. Golder, Peter N. 2000. “Historical Method in Marketing Research with New Evidence on Long-Term Market Share Stability”, 37 Journal of Marketing Research 156–72. Graham, Stuart, Galen Hancock, Alan Marco, and Amanda Fila Myers. 2013. “The USPTO Trademark Case Files Dataset: Descriptions Lessons, and Insights”, U.S. Patent and Trademark Office.

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636  Research handbook on the economics of IP law volume 2 Helmers, Christian, Mark Rogers, and Philipp Schautschick. 2011. “Intellectual Property at the Firm-Level in the UK: The Oxford Firm-Level Intellectual Property Database”, Oxford University Department of Economics Discussion Paper No. 546. Hotchkiss, George Burton, and Richard B. Franken. 1923. The Leadership of Advertised Brands: A Study of 100 Representative Commodities Showing the Names and Brands that are Most Familiar to the Public. Garden City, NY: Doubleday, Page & Company. Huang, Vicki, Kimberlee Weatherall, and Elizabeth Webster. 2012. “The Use of Survey Evidence in Australian Trade Mark and Passing Off Cases”, in Andrew T. Kenyon, Megan Richardson, and Wee Loon Ng-Loy, eds., The Law of Reputation and Brands in the Asia Pacific. Cambridge University Press. Hyman, David A., and David J. Franklyn. 2014. “Trademarks as Search-Engine Keywords: Who, What, When?”, 92 Texas Law Review 2117–50. Kugler, Matthew. 2017. “The Materiality of Sponsorship Confusion”, 50 U.C. Davis Law Review 1911. Kur, Annette, and Roland Knaak. 2011. “Study on the Overall Functioning of the European Trade Mark System”, Max Planck Institute for Intellectual Property and Competition Law. Lee, Thomas R., Eric D. DeRosia, and Glenn L. Christensen. 2009. “An Empirical and Consumer Psychology Analysis of Trademark Distinctiveness”, 41 Arizona State Law Journal 1033–109. Lemley, Mark A., and Mark McKenna. 2010. “Irrelevant Confusion”, 62 Stanford Law Review 413–54. Long, Clarissa. 2006. “Dilution”, 106 Columbia Law Review 1029–78. Morrin, Maureen, and Jacob Jacoby. 2000. “Trademark Dilution: Empirical Measures for an Elusive Concept”, 19 Journal of Public Policy & Marketing 265–76. Morrin, Maureen, Jonathan Lee, and Greg M. Allenby. 2006. “Determinants of Trademark Dilution”, 33 Journal of Consumer Research 248–57. Ouellette, Lisa Larrimore. 2014. “The Google Shortcut to Trademark Law”, 102 California Law Review 351–407. Pullig, Chris, Carolyn J. Simmons, and Richard G. Netemeyer. 2006. “Brand Dilution: When Do New Brands Hurt Existing Brands?”, 70 Journal of Marketing 52–66. Sarel, Dan, and Howard Marmorstein. 2009. “The Effect of Consumer Surveys and Actual Confusion Evidence in Trademark Litigation: An Empirical Assessment”, 99 Trademark Reporter 1416–36. Schautschick, Philipp, and Christine Greenhalgh. 2015. “Empirical Studies of Trade Marks—The Existing Economic Literature”, 25 Economics of Innovation and New Technology 358–90. Sheff, Jeremy N. 2014. “Dilution at the Patent and Trademark Office”, 21 Michigan Telecommunications & Technology Law Review 79–140. Simon, Dan. 2004. “A Third View of the Black Box: Cognitive Coherence in Legal Decision Making”, 71 University of Chicago Law Review 511–86. Tushnet, Rebecca. 2008. “Gone in Sixty Milliseconds: Trademark Law and Cognitive Science”, 86 Texas Law Review 507–68. United States Patent and Trademark Office. 2015. “Trademark Case Files Dataset”, available at www.uspto.gov/ learning-and-resources/electronic-data-products/trademark-case-files-dataset-0. von Graevenitz, Georg. 2013. “Trade Mark Cluttering: Evidence from EU Enlargement”, 65 Oxford Economic Papers 721–45. von Graevenitz, Georg, Christine Greenhalgh, Christian Helmers, and Philipp Schautschick. 2012. “Trademark Cluttering: An Exploratory Report”, U.K. Intellectual Property Office.

Cases Abercrombie & Fitch Co. v. Hunting World, Inc. (1976), 537 F.2d 4. Triangle Publ’ns, Inc. v. Rohrlich (1948), 167 F.2d 969. Union Carbide v. Ever-Ready (1976), 531 F.2d 366.

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PART VII EMPIRICAL METHODS IN TRADE SECRET RESEARCH

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29.  Empirical methods in trade secret research Michael Risch* 4

Contents I. Introduction II. About Trade Secrets III. Justification-Based Research A. Incentives 1. Data sources and methods 2. Differential laws 3. Experimental and survey methods B. Differential Research and Development Expenditure Incentives C. Efficiency/Cost of Protection Incentives IV. Litigation Behavior-Based Research A. Data Sources 1. Case dockets 2. Demands and settlements 3. Surveys B. What Can Litigation Studies Measure? V. Conclusion References

I. INTRODUCTION This chapter details some analytical methods in trade secrets research, and provides example studies that illustrate these methods. In general, there are two primary strands of research in trade secrets. The first strand relates to the justification of trade secrets. Why do we have trade secrets? Do they improve or impede innovation? What are the secondary effects, such as reduced worker mobility? What investments and costs are there? These studies attempt to answer the challenge of finding empirical evidence to support welfare justifications for trade secret law (Bone, 2013). The second strand relates to measurement and analysis of litigation behavior. Even in the age of online dockets, this remains difficult because trade secrets are a state law matter

*  © 2019 Michael Risch, Professor of Law, Villanova University School of Law. The author thanks Peter Menell, Sharon Sandeen, David Schwartz, and participants in the Empirical Methods in IP Research workshop for valuable comments on a prior draft. Valuable research assistance was provided by Amanda Garger, Christie Larochelle, and Jessica Watkins.

638

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Empirical methods in trade secret research  639 and many cases are heard in state court. State trial court opinions are rarely reported, and their dockets are in disparate systems that vary in accessibility county by county and state by state. Even federal cases do not have a “trade secret” type code to easily identify such cases in the system. Of course, there is some overlap between these two strands. For example, litigation behavioral studies finding that most cases involve former employees (which they do) will have a bearing on how trade secret law’s justifications should be approached with respect to employees. However, the reality is that we know very little about trade secrets, despite the best efforts of a handful of scholars conducting research in this area. We know, for example, that most reported trade secret decisions involve former employees rather than unknown misappropriators. We also know that most surveys report trade secrets as more prevalent and valuable than any other type of intellectual property. But we don’t know that much beyond broad surveys and cases that reach a final ruling. Trade secrets are, by definition, secret. Further, enforcement mechanisms do not lend themselves to easy measurement. This chapter will discuss some of the hurdles associated with empirical trade secret research and point to areas where diligent scholars might make headway. This chapter will walk through several of these studies, discuss some current and potential future data sources, and discuss methods of improving research in trade secret law.

II.  ABOUT TRADE SECRETS Trade secrets originated in the common law as the economy shifted away from master/ apprentice relationships to master/servant relationships during the industrial revolution (Fisk, 2009). With a shift from arts to industry, secrets were no longer kept secure through promises made by apprentices, family members, and guilds. Instead, a new set of rules gradually appeared to govern how workers and others could use information learned. Though trade secret cases first appeared in the early 1800s in England, and a few cases appeared in the U.S., the Supreme Court of Massachusetts appears to be the first court in the United States to describe a complete view of trade secrets (Risch, 2007). Interestingly, despite its roots in employment, this case was about the sale of a business: If [a person] invents or discovers, and keeps secret, a process of manufacture, whether a proper subject for a patent or not, he has not indeed an exclusive right to it as against the public, or against those who in good faith acquire knowledge of it; but he has a property in it, which a court of chancery will protect against one who in violation of contract and breach of confidence undertakes to apply it to his own use, or to disclose it to third persons (Peabody v. Norfolk, 98 Mass. 452 (1868)).

By 1907, trade secrets were well established in the law, and the California Supreme Court declared “[t]hat equity will always protect against the unwarranted disclosure of trade secrets and confidential communications and the like is, of course, settled beyond peradventure” (Empire Steam Laundry v. Lozier, 165 Cal. 95 (1907)). Throughout its history, trade secret law was governed by the common law. However, in 1979 the National Conference of Commissioners on Uniform State Laws recommended

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640  Research handbook on the economics of IP law volume 2 the Uniform Trade Secrets Act (UTSA) (1979).1 The statute set forth a broader and slightly more protective version of trade secret law than was present in the Restatement. As of 2015, 48 states (and the District of Columbia) had enacted some version of the UTSA.2 According to the law, trade secrets are some sort of information that has value because it is not generally known. The UTSA defines a trade secret as follows: “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:  (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and  (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy (UTSA § 1(4), 1979).

For the two remaining states that have not implemented the UTSA, and for most judicial opinions that pre-date the UTSA,3 the definition of a trade secret is set forth in Restatement (Second) of Torts § 757, comment b:4 “Definition of trade secret”. A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.  “Secrecy”. The subject matter of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret.

The Restatement definition of a trade secret is different from that of the UTSA, but is similar. Key differences are: (1) the exception for “single use” information (which can be a trade secret under the UTSA); (2) the requirement of continuous use in business (which is not required under the UTSA); and (3) less emphasis on efforts to maintain secrecy than under the UTSA. Misappropriation of a trade secret involves improper means used to acquire or use a trade secret (UTSA § 1(2), 1979).5 Trade secret law outlaws three different acts: (1) acquisition of a trade secret—merely obtaining the information; (2) disclosure of the trade secret—merely telling the information to another; and (3) use of the trade secret—using the information to one’s advantage. Three categories of defendants may be liable for misappropriation: (1) the knowing acquirer of information is liable—this person obtains the information by improper means; (2) the knowing discloser of information is liable—this person discloses the information that has been improperly acquired, or perhaps properly acquired but for which there is a duty of   UTSA Prefatory Note. In 1985 certain amendments were proposed as well.   States still using the Restatement are Massachusetts and New York. Texas was the latest to adopt, in 2013. 3   The source of trade secret law will be discussed in detail below. 4   The American Law Institute has since withdrawn this section from the Second Restatement of Torts in favor of its inclusion in the newer Third Restatement of Unfair Competition. However, no state appears to have used the Third Restatement of Unfair Competition on a consistent basis. 5   The Restatement of Torts is very similar to the UTSA. 1 2

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Empirical methods in trade secret research  641 secrecy; and (3) the negligent acquirer/discloser of information is liable—this person obtains the information with reason to know that the information was improperly obtained.6 The discussion above uses the term “improper” extensively; under the UTSA, “‘improper means’ includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means” (UTSA § 1(1), 1979).7 Further, “improper means” includes acts that are actionable in and of themselves—trespass, breach of contract, conversion (of physical property), and, under modern laws, the misuse of computer networks.

III.  JUSTIFICATION-BASED RESEARCH Among others, there are four different justifications for trade secrets: (1) providing incentives to innovate, invent, research, or otherwise undertake positive creation; (2) reduction in an arms war of costs of protection/costs of discovery; (3) Lockean and other natural rights theories; and (4) populist and other non-economic/non-rights theories. Analytical methods are not impossible for the last two categories. One could, for example, survey trade secret owners about why they keep information secret (Feldman, 2003; Hannah, 2007). But such a method would be measuring why people believe we should have trade secrets, not why we should actually have them. Thus, the non-utilitarian bases are combined with discussion of other survey and experimental methods in this chapter. Incentives and cost reduction are the leading testable theories. A. Incentives The incentives theory essentially asserts that trade secret laws are justified because they cause owners to invest more in the information kept secret. In this sense, trade secret methods are little different than patent law incentive methods. Of course, this does not mean that such research is simple; patent research has, to date, provided ambiguous evidence on the incentive effect of patents. But trade secret research may actually be more difficult than patent incentive research, because one must be careful to distinguish those incentives caused by the default state of the world (the ability to keep a secret) from those incentives caused by the law (remedies for improper invasion of the secret) (Risch, 2010a). Even if there were no trade secret law, disclosure would not be legally mandated. Rather, people would still keep secrets, and would invest so long as they could do so. The goal of research, then, should be to identify the marginal protection added by the law. Of course, where the default rule might be mandated disclosure (e.g., voting machine software or environmental impact) (Levine, 2011), the existence of trade secret law that thwarts access to putatively public records (e.g., secrecy exceptions to Freedom of Information Act requests) may lead to much greater marginal incentives to innovate.

6   Included in this category are those who learn that the information was obtained or disclosed by mistake but have not yet relied on the information at the time the mistake is discovered. 7   The Restatement of Torts is similarly broad and vague. Restatement § 757 cmt f.

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642  Research handbook on the economics of IP law volume 2 1.  Data sources and methods Data sources for incentive measurement may be difficult to find, and may explain the relative dearth of quality research. Data sources include census data on different types of IP ownership (U.S. Census Office, 2015), American Intellectual Property Law Association (AIPLA) survey data on trade secret value (AIPLA Economic Survey, 2014), Kaufmann Firm Survey data (Kaufman Foundation, 2013), novel survey data, and general research and development (R&D) data used in other incentive studies. One difficulty in the data is that trade secrets are not easily measured, and so proxies must be used. The selection of a good proxy is key to a quality study. The following examples show some of the proxies used in such studies. 2.  Differential laws One study methodology is to examine differences in trade secret laws between different regions and then examine how companies behave in those regions, preferably holding other measures constant. The benefit of this sort of study is that it is the value of the law, not secrecy, that is measured, because changes in the law are the only differences. Ideally, one region would have no trade secret law at all, so that the comparison could measure the differences between having no law and some law. However, one challenge with such studies is that—in order to show a causal link—core properties of these regions must be randomly distributed. For example, comparing R&D expenditures between the United States and Luxembourg will yield biased results, because wealth is not distributed randomly. However, changes in expenditures year to year might be randomly distributed, so that a differences-in-differences analysis is appropriate. Barnett and Sichelman (2016) review many of the considerations at issue in using this approach, including a critique of many of the papers discussed in this section. More difficult is the assumption that companies are randomly distributed. On the one hand, the existence of multinational companies may support this view. On the other hand, company type may be highly selective based on regional resources, other intellectual property laws, governmental stability, and so forth, such that one could not expect companies to make the same decisions even if the trade secret laws were the same. Png (2015) was the first to perform studies like this for trade secrets, ranking different states on eight different variables to a normalized scale of 0–1. His exemplar figure is reproduced in Figure 29.1. Png solves randomization problems by using interaction variables to test heterogeneous groups: company size, company technology, and different time periods. He finds that stronger trade secret protection is associated with more R&D spending for larger companies, for high-tech companies, and for complex-product companies. Stronger trade secret protection had much less effect for smaller or discrete-product companies. Png suggests that these results could show that spillovers are substitutes with internal development for large companies, and that increases in trade secret protection that limit spillovers might simply lead to higher return on R&D spending. Lippoldt and Schultz have since expanded this type of survey in two extensive studies for the Organisation for Economic Co-operation and Development (2014). These studies measure several countries on a five-point scale based on 38 factors that affect the strength of trade secrets, including obtaining protection, defining misappropriation, remedies, and enforcement. Rather than studying changes in trade secret laws over time, their primary

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Empirical methods in trade secret research  643 1. California

2. New York

3. New Jersey

0.6

Commol law UTSA

0.4 0.2 0 4. Massachusetts

5. Pennsylvania

6. Ohio

0.6 0.4 0.2 0 1980

1985

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Figure 29.1  Ranking of state trade secret laws (Png, 2015) variation is between countries. They suggest that the study be updated in the future to measure changes over time in each country. The detailed classifications can be used as an input to future studies of cross-country protection. Lippoldt and Schultz provide an example of how to do this in their second study, which compares a variety of economic indicators between countries with different laws (Lippoldt and Schultz, 2014). They used country fixed effects to solve the randomization problem, adding country-specific variables for market openness and regulation, patent system, market size, income level, and human capital development. Unsurprisingly, they find that gross domestic product correlates highly with other economic measures. But they also find (among other things) that R&D is higher in countries with increased trade secret protection, that a larger percentage of the labor force works in R&D jobs as combined trade secret/patent protection increases, and that there is a strong and highly significant relationship between strength of trade secret laws and foreign development investment. Finally, they are able to test these variables against subcomponents, such as definition of trade secrets and ease of enforcement, and find varying results based on component of protection. Differential laws need not be calculated as a full scale, however. Instead, smaller, simpler legal shocks can be used to identify differential effects before and after law changes. These types of studies are natural experiments. For example, Fleming, Marx, and Strumsky (2009) take advantage of a 1985 Michigan law that allowed non-compete agreements for the first time after they had been barred for almost a century.8 They

8   More important, the law appeared to change by accident, meaning that courts had not started enforcing non-competes on their own, and there was no deliberative process. The authors refer to

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644  Research handbook on the economics of IP law volume 2 used differences-in-differences analysis to test whether the sudden enforcement of noncompete agreements decreased worker mobility as compared to other states that made no such change. The answer was yes, especially for employees with firm specific knowledge. This result makes sense theoretically, but the law change allowed for empirical analysis. 3.  Experimental and survey methods Another method of testing the value of trade secret law is to conduct surveys or perform experiments. Surveys involve asking a representative sample a variety of questions and using responses to make determinations about the respondents’ views. Questions might involve behaviors, valuations, choices, or preferences, among other things. Experimental methods include two randomized groups. The first, the control group, is observed under status quo conditions. The second, the treatment group, is observed under varying “treatment” conditions, such as differential legal regimes, different rules, or different tasks to perform. The experiments may be conducted via question and answer (using survey forms) or through direct observation. Some examples of the survey methodology designed to elucidate trade secrets’ role in R&D are the well-known Yale, Carnegie Mellon, and Berkeley surveys on how businesses appropriate their intangible assets (Levin et al., 1987; Cohen et al., 2000; Graham and Sichelman, 2010). Each of these found that companies reported trade secrets being as important as, if not more important than, patents. A more specialized example is Blumenthal, et al. (1986), which surveyed 1200 biotechnology professors and found that those more reliant on industry funds were more likely to rely on trade secrets. Surveys need not be limited to just valuations. One study, for example, models how personality traits and business contexts will affect ethical views of trade secret misappropriation (Delerue and Hamid, 2015). In a similar vein, a more complex survey methodology that incorporates experimental methods was undertaken by Feldman (2003, 2006, 2009), who surveyed high-tech employees in Silicon Valley about their understanding and use of trade secrets. The study covered multiple areas: the expressive purpose of law, how normative acceptance of the law will affect compliance, and how the source and type of information used will affect the likelihood of sharing. The surveys included a bit of experimental methodology: the takers were offered random (but different) scenarios about how the information was created and to be used. For example, one study found that the tangibility of the information had more of an effect on attitudes toward secrecy than did the authorship of information (Feldman, 2006). A different article found that trade secret law’s expressive impact is based more on morality than on its ability to impose social or career costs (Feldman, 2009). An example of a pure experimental methodology is a study by Amir and Lobel (2013), who tested whether post-employment restrictions (in their case, non-competes, but this could be extended to trade secret usage) affected completion, performance quality, and enjoyment of tasks. The authors assigned a series of money-making tasks to experiment participants under three conditions: freedom of movement, partial non-compete, and non-compete. They simulated the non-competition conditions by promising future tasks,

this as the legislature “catching up” with the law on the ground; instead, the Michigan change was entirely new.

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Empirical methods in trade secret research  645 but that current work might not be usable in the future task, or that future payments would be lower. They found that participants under the non-competition conditions were more likely to drop out before even finishing the first task. Among those that finished, the authors found that those in the “effort” group exhibited more errors if they were subject to the non-competition constraint. On the other hand, the authors found that those in the “creative” group had similar error rates across post-employment constraints. These results have interesting consequences for creative work generally, but also for motivation relating to the generation of secret information. Survey and experimental methods such as these can be valuable because of the randomized process. This is especially true in trade secret law, where the actual trade secrets are not published and are therefore unobservable to outsiders. Thus, the usual benefits of randomized trials are present: with a sufficient population size, individual differences are washed out in favor of the law of large numbers, and findings that subsets or even an entire population behave in a particular way can be quite robust. There are trade-offs, however. Experiments are not without peril, especially in trade secrets. Common experimental problems are no different here. For example, individuals who are willing to participate might not be reflective of individuals in the population of interest. Thus, as with any randomized study, the best studies will be conducted on members of the target population, ideally with demographics in proportion to the population as a whole. But more important, there are two additional problems relating to intellectual property generally and trade secrets specifically. First, it is even more difficult to arrange experiment conditions to match the real world. Participants dealing with experimental information may not behave the same way when it is not relevant to an actual company product or livelihood. Amir and Lobel (2013), for example, attempt to mirror actual noncompete conditions, but their constraints are not truly like a non-competition agreement. Second, and related, the work and rewards offered are difficult to match against the real world. This is true of all experiments, of course, but confidential information may be of a different kind when it is not real, or really confidential. A robust trade secret experiment should focus on some way to make the secrecy of the information meaningful to whatever party would like it to be kept secret. Trade secret surveys, too, suffer from the same drawbacks as any other surveys because they ask participants for their stated preferences. Stated preferences may often differ from how respondents actually behave, or their revealed preferences. One counter is to ask questions designed to correlate stated and preferred preferences. Surveys that can identify preferences through concrete questions (e.g., “How much did you spend?”) rather than opinion questions (e.g., “How much is it worth?”) may yield better results, assuming people tell the truth. Similarly, comparison questions (e.g., ranking the value of secrets versus patents) will likely yield better results than seeking fixed and untethered answers. Revealed preference concerns are particularly acute in trade secrecy, where admitting to not keeping someone else’s information secret might be tantamount to a tort or crime. Feldman attempts to solve this problem with a quasi-experimental survey, and his results seem to imply that many respondents did not care too much about trade secrets. There are methods to minimize the risk of misreporting, such as randomizing which respondents answer particular questions (but not keeping track of which ones are supposed to answer). In all events, the reports of the results should consider whether the actors are behaving

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646  Research handbook on the economics of IP law volume 2 differently than they say. Further, as with all surveys, demographic comparisons between those who respond and those who do not respond are helpful. B.  Differential Research and Development Expenditure Incentives Another justification for trade secrets that might be studied is differential expenditure in R&D. This type of study examines innovation spending, either by IP regime or by jurisdiction. By isolating expenditures related to trade secret law, such studies might show the value (or lack thereof) of the law. For example, Png (2014) and Lippoldt and Schultz (2015), discussed above, report on differential expenditures, both finding nuanced results based on industry type and company size (for Png) and the particular differential legal issue (for Lippoldt and Schultz). Similarly, Klasa, et al. (2015) perform a differences-­indifferences analysis that examines when states enhanced trade secret protection by adopting the inevitable disclosure doctrine. They find that companies in states with the stronger protection were more likely to change their capital structure after the change, especially in those industries most susceptible to losing employees with company information. Census data reports show differential valuation of different intellectual property, broken down by type of firm. Trade secrets dominate in every category. Further work could be done with this data to determine whether the law, rather than secrecy in general, drives the differences. The AIPLA performs an annual survey of practitioners in both companies and law firms. That survey includes data about values of IP assets (including trade secrets) and the cost to litigate different claims. The AIPLA data could be used in a couple of ways. First, it could be used longitudinally, to track changes over time. Second, it might be used to compare value and enforcement in IP regimes. Another legal change worth exploiting further is the American Inventors Protection Act, which for the first time in U.S. history mandated that patent applications would be published unless the applicant opted out. Prior to that time, failed applications remained secret. One would expect applicants to continue to rely on secrecy, but natural experiment evidence quite clearly shows that applicants didn’t care much about the secrecy of their inventions in the event that patents did not issue (Graham and Hegde, 2015). Indeed, they found that the most cited patents were the least likely to be kept secret beforehand. Further studies might consider this change to study the types of patents that are published (versus technology patents that issue but were not published), or to otherwise glean information about technology and secrecy. Finally, data sources might be combined to seek answers to otherwise opaque questions. For example, Graham (2004) combines data from the Carnegie Mellon Survey with patenting and continuation data to develop and estimate a model of the trade-off between secrecy and patenting. C.  Efficiency/Cost of Protection Incentives A third theoretical justification of trade secret law is that it prompts less spending on protection because the trade secret remedy is available; without such a remedy, companies would spend too much protecting their secrets (Friedman et al., 1991; Lemley, 2008; Lichtman, 2005; Risch, 2007). Indeed, without a remedy companies might spend too

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Empirical methods in trade secret research  647 much discovering secrets as well. Thus, we might tolerate more misappropriation because misappropriation plus damages are still less costly than protection above all else. However, there are few empirical studies that support this theory (Bone, 2013). Thus, this is an area ripe for further study: does the law cause changes in protection of information? To date, however, it does not appear that any studies have methodically tackled this question beyond anecdote. A study into this aspect of trade secrets would be helpful. Though difficult, it would not be impossible. There are several ways one might consider the question. First, one might take the differential legal regime data from Lippoldt and Schultz (2015) or Png (2014) and compare expenditures on protection (and on misappropriation). Alternatively, one might consider such efforts in industries where trade secrets are run of the mill versus industries where there is no apparent remedy, even with trade secret law. For example, it is no surprise that spending on protecting Department of Defense secrets exceeds that which might be efficient under a remedial trade secret regime. Of course, the devil is in the details. Finding data on expenditures might be difficult, especially because some of the costs associated with lack of protection are not easily visible. For example, in a jurisdiction with weaker trade secrets, companies might engage in more nepotism or fragment information within the company. Fisk (2009), for example, describes how information was transferred before trade secret law: within families, to apprentices, and within guilds. Risch (2007) anecdotally describes differences in security measures taken by one company in the U.S. and in China. Finding and measuring increased information protection costs such as these might be difficult. One attempt to do so is a study by Bilir (2014), who examined company location based on strength of patent laws. While ostensibly a patent analysis, the study has much to say about trade secrecy, because the choice of location due to weak patents is based on a perceived inability to enforce trade secret misappropriation laws as well.9 The study finds that manufacturing is less sensitive to patent strength when development cycles are short and imitation before launch is less likely. An extension of Bilir’s method could be to combine expenditure data with surveys in different countries or industries. Such surveys might reveal different patterns of protection associated with the inability to rely on a trade secret remedy. Experiments might also be useful. Participants could be asked to organize information in a variety of ways, but with varying degrees of findability; participants could then make choices based on the perceived chance that information will be discovered by others. Participant behavior might be applied to trade secret owners generally. In any event, this is an area where research should go forward.

IV.  LITIGATION BEHAVIOR-BASED RESEARCH In addition to innovation type studies, empirical trade secret studies might focus on litigation behavior. Of course, there is an attenuated relationship between litigation and

9   In this sense, the article is also quite relevant to the role of trade secret laws (not just secrecy) in innovation incentives.

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648  Research handbook on the economics of IP law volume 2 innovation. The number and types of lawsuits brought may affect R&D. Thus, any study that can link the litigation results discussed in this section with innovation results of the prior section would serve both purposes. This section focuses primarily on litigation as an end in itself. A.  Data Sources 1.  Case dockets Trade secret litigation data sources are more difficult to quarry than in other IP litigation. Unlike copyrights and patents, trade secret cases can be brought in state or federal court. Indeed, with diversity removal, some cases may begin in state court and move to federal court. Thus, while federal dockets and documents are available via PACER and services that mirror PACER (e.g., RECAP or Bloomberg Law), filings are also available at the individual courthouses. The dual system complicates matters in a variety of ways. First, state court dockets are often not available or searchable electronically. And when they are available, they are not standardized even within a given state, let alone between states. Some of the state court documents underlying those dockets may also be available electronically, but each county in each state typically maintains its own system. These systems can be quite disparate from county to county and state to state. However, state court documents are usually available by a visit to the clerk’s office for each court. Archives visits might be necessary for old, closed cases. Second, even in federal courts, where case dockets are standardized on PACER, there is no case code for trade secret cases on the Civil Cover Sheet, making it difficult to track the number of cases in which trade secrets are asserted. However, because PACER data is now available in many formats, federal trade secret data is more available, such as through analytics firms or docket work searches. Given these difficulties, most studies use published opinions to study trade secret litigation, especially at the state level. These opinions may be the easiest (and certainly the most available) set of data on trade secret cases. But use of this data is not without problems. First, there is an obvious selection effect. Parties must first select into litigation, which may mean that only certain types of values of trade secrets are represented. The importance of this effect is ambiguous. On the one hand, it means that the types of and values of secrets studied in litigation may not be representative of the types and values of secrets that exist generally. But if the goal is to study litigation, then the fact that only certain secrets are litigated is helpful information. Second, opinions only show cases where the parties did not settle before an opinion. Depending on one’s view of the types of cases that settle (e.g., Priest-Klein), this might mean that the most valuable, most uncertain, most asymmetric, or most [fill-in-the-blank] types of cases wound up leading to an opinion. This selection effect is more problematic than the simple litigation-choice effect, because even if one is studying litigation, the opinions may not reflect all of the underlying cases. Third, whether a case is in state or federal court is a selection, as only certain types of diverse domicile or federal question (e.g., patent or copyright) cases wind up in federal court. This means that cases in different venues may have different characteristics for reasons unrelated to the underlying secret.

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Empirical methods in trade secret research  649 Fourth, the source of opinions differs between state and federal courts. Most state courts do not publish or otherwise readily make available trial court opinions, even ones that grant summary judgment. Thus, most published state cases are appellate opinions. Federal district court opinions, however, are much more available. This means that the types of opinions available will differ between state and federal courts. Because trial court opinions can be overturned,10 studies of outcomes at the trial court level may not reflect the “true” status of the law, which may be unobservable in state courts at all. The alternative, using case filings from a docket list, is no panacea, however. As noted above, they are difficult to find. Additionally, a simple case filing provides little detail about the underlying dispute, such as the type of trade secret, the relationship between the parties, and the manner of misappropriation. Furthermore, without examining case documents, it may be difficult to determine whether cases are misidentified. There is an opportunity to add greatly to the litigation study literature by doing the heavy lifting of identifying every trade secret case (or some random selection of them) and examining all filed documents closely. This would be no easy task. Many case filings are made under seal because of the secret nature of the subject matter, making it difficult to find detailed information in court files. Further, it would take a lot of work not only to identify, but also to find case information across jurisdictions—especially in state courts, where filed documents cannot be retrieved online. This might limit archival searching to one or a few state courts, but that would raise its own selection effects. In other words, a full litigation search would be high effort, high reward for the parties to undertake. But no one has done so yet. Thus, it may be that judicial opinions are the best data source available with any sort of expediency. Researchers using such data should use best practices to improve study outcomes. Such practices include either quality randomization of selection or a population study. They also include ensuring that the limitations of reported results be considered and reported. As noted above, not every study will be limited by the same shortcomings; the limitations depend on what the investigator is studying. 2.  Demands and settlements Another potential data source might include pre-litigation demand letters and pre- and post-litigation settlements. To date, no central source has emerged with this data. It is unclear whether anyone has collected a private set of this data, either. Collecting information about demands and settlements might require contacting various litigants, or—more broadly—contacting every company in an industry sector. The goal would be to obtain anonymized data from a statistically valid cross-section. This is easier said than done; those who donate information tend to have more interest. Nonetheless, this data would be useful for study, especially if characteristics of the company and litigation were obtained as well. 3. Surveys One way to find out about demands and settlements is to ask companies about their experiences. This chapter introduced surveys, especially those coupled with experimental methods,

10   Obviously, appellate court opinions can be overturned as well, but this is much less likely as a practical matter.

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650  Research handbook on the economics of IP law volume 2 as a way to learn about the value of trade secrets in innovation. The surveys contemplated here are much more straightforward, seeking specific information about experiences with litigation. These types of surveys are less likely to have experimental components. Thus, a well-designed survey might ask companies about their experiences with demands and settlements. Conducting a survey is easier said than done, however. First, the proper group must be targeted. Surveys of a few self-selected interested parties may be helpful to understanding the thoughts of those parties, but will have little scientific value outside that group. Even if that group is typical, without some way to prove it, any results would be suspect. Thus, lists of companies from Dun & Bradstreet or similar business indexes would better provide broad-based coverage. Even then, however, a broad list might oversample from low-trade-secret industries. But focus on high-tradesecret industries might not provide an adequate picture of trade secret claims across all industries. After all, how do you know which industry is high-trade-secret until you ask? In all events, solicitations for survey takers should be targeted at the person with the best information and framed as neutrally as possible to avoid selection bias in the responses. Even after a target group is identified, response rates might vary between 10 percent and 30 percent, depending on the length, type (phone or written), and depth (discomfort) associated with the survey instrument. Best practices in any survey include comparing the demographics of the responding parties with the demographics of the solicited parties to ensure that the respondents did not fall within a non-random distribution. If the respondents did fall within a non-random distribution, care must be used to determine why. Was there selection bias toward one type of answer? Did non-response indicate lack of trade secret activity, such that responses can be inferred? Were certain industries harder to reach (e.g., are software firms more likely to respond to email than construction firms)? Finally, trade secret surveys are no different from any other survey. The usual concerns apply. The instrument should be carefully tailored to answer the question under study, and results reporting to only those questions that can be answered by the survey instrument. It is tempting to generalize survey responses to a broader question not directly asked by the survey. However, it is also appropriate to do so only if the question is truly generalizable. The goal is to write questions that are narrow enough to be answered easily and quickly (so as to avoid respondent fatigue), but that might touch on broader issues. This is, quite frankly, easier said than done. A narrow question may not necessarily lead to answers beyond that very question. Unfortunately, surveys that are so long that they ask every question the researcher has are surveys that may wind up with low response rates (and small/biased sample sizes) because the respondents don’t have the time or inclination to complete the survey. B.  What Can Litigation Studies Measure? Whether through docket, decision, or survey, litigation studies can measure a variety of things. At its deceptively simplest, a study might simply measure the amount of litigation. As noted above, however, such a study would likely be difficult, at least with respect to trial court level filings. A litigation study might also look at other case characteristics. For this type of study, Almeling, et al. (2009, 2010) set the bar. These two studies, one of state decisions and one of federal decisions, tally a remarkable array of data points: plaintiff characteristics,

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Empirical methods in trade secret research  651 defendant characteristics, trade secret types, outcomes, type of law applied, and type of precedent applied. While these studies are thorough, they are far from exhaustive. They end in 2009, and they sample in ways that leave other cases open for study. On the other hand, any new study considering the same topic should take care to build on their data rather than simply repeat it. Litigation studies might also look beyond tallies and consider the issues within the cases. Almeling, for example, considers whether specific aspects of trade secret law were litigated and recorded outcomes. Searle (2012) considers the types of defendants and secrets at issue in Economic Espionage Act cases. Risch (2010b, 2013) performs a citation study to examine whether common law or UTSA principles were considered by the court in a variety of legal issues. Rowe (2016) performs comprehensive analysis on damages awards in trade secret cases, and examines other issues in those case. But litigation studies are not limited to these types of counting or citation analyses. Litigation data might be combined with external data to test any number of hypotheses about trade secret law, just as others have done with patent law. For example, do trade secret cases affect R&D spending or share price of defendant parties (or in the aggregate)? Is there any correlation between a company’s trade secret litigation and patent litigation? When laws change the strength of either patents or non-secret information, what happens to trade secret litigation? Further, more empirical research needs to be done to examine the different types of trade secret claims. Trade secret claims originally arose in the context of confidential relationships and involved the alleged wrongful disclosure or use of information that was shared in the context of that confidential relationship. The concept of trade secret misappropriation through acquisition by improper means developed much later and has not been the subject of much independent analysis or study. While there are cases that have examined the breadth and meaning of “improper means,” the different nature of the wrongs and the actual and potential harms caused thereby have not been illuminated. Among other questions that need to be answered are the extent to which actual damages have been granted in cases where there was a finding of wrongful misappropriation but no subsequent disclosure or use of the trade secrets and, where applicable, the measure of damages that was used. The possibilities are limited only by researcher creativity and available data. For example, Sag (2009) has modeled trade secret litigation on judicial temperament at the Supreme Court. The limited number of cases limited ability to test any hypotheses, but that methodology could be extended to other courts where there are more trade secrets. Finally, litigation might be used as a way to estimate the value of trade secrets themselves. Because trade secrets are by their very definition unknown, it is difficult to learn what they might be and how they might be valued. But litigation might provide some clues, at least as to the litigated secrets. Some articles have attempted to leverage this information to measure the value of trade secrets (Lerner, 2006; Reid et al., 2015; Searle and Reid, 2012).

V. CONCLUSION Trade secrets are a traditionally understudied area of law. There are a variety of methods that can be used to test various hypothesis about the cause and effects of the law. This

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652  Research handbook on the economics of IP law volume 2 chapter discussed some of those methods, sources of data for those methods, and examples of their application.

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Levine, David S. 2011. “The People’s Trade Secrets?”, 18 Michigan Telecommunications and Technology Law Review 61–116. Lippoldt, Douglas, and Mark F. Schultz. 2014. Uncovering Trade Secrets—An Empirical Assessment of Economic Implications of Protection for Undisclosed Data. OECD Trade Policy Papers No. 167, available at http://dx.doi.org/10.1787/5jxzl5w3j3s6-en. Lobel, Orly. 2015. “The New Cognitive Property: Human Capital, Knowledge Creation, and the Reach of Intellectual Property”, 93 Texas Law Review 789–851. Marx, Matt, et al. 2009. “Mobility, Skills, and the Michigan Non-Compete Experiment”, 55 Management Science 875–89. Motivans, Mark. 2004. “Intellectual Property Theft, 2002”, U.S. Department of Justice, Federal Justice Statistics Program. Ottoz, Elisabetta, and Franco Cugno. 2011. “Choosing the Scope of Trade Secret Law When Secrets Complement Patents”, 31 International Review of Law and Economics 219–27. Png, I.P.L. 2015. “Law and Innovation: Evidence from State Trade Secrets Laws”, Review of Economics and Statistics 1–13. Png, Ivan, and Sampsa Samila. 2013. “Trade Secrets Law and Engineer/Scientist Mobility: Evidence from ‘Inevitable Disclosure’”, Working Paper. Reid, Gavin C., et al. 2015. “What’s It Worth to Keep a Secret?”, 13 Duke Law & Technology Review 116–61. Riley, P. Andrew, and Jonathan R. K. Stroud. 2013. “A Survey of Trade Secret Investigations at the International Trade Commission: A Model for Future Litigants”, 15 Columbia Science and Technology Law Review 41–89. Risch, Michael. 2007. “Why Do We Have Trade Secrets?”, 11 Marquette Intellectual Property Law Review 1. Risch, Michael. 2010a. “Trade Secret Law and Information Development Incentives”, in R. C. Dreyfuss and K. J. Strandburg, eds., The Law and Theory of Trade Secrecy: A Handbook of Contemporary Research. Rochester, NY: Edward Elgar Publishing. Risch, Michael. 2010b. “A Failure of Uniform Laws”, 159 University of Pennsylvania Law Review Online 1–20. Risch, Michael. 2014. “An Empirical Look at Trade Secret Law’s Shift from Common to Statutory Law”, in S. Balganesh, ed., Intellectual Property and the Common Law. Cambridge University Press. Rowe, Elizabeth A. 2016. “Unpacking Trade Secret Damages”, https://papers.ssrn.com/sol3/papers.cfm?abstract_ id​=2842325. Ruiz, Diego Hernan Gonzalez. 2012. “Developing and Protecting Intellectual Property in Virtual Projects: Trade Secret Protection in Telecommunications”, Norwegian University of Science and Technology. Sag, Matthew, et al. 2009. “Ideology and Exceptionalism in Intellectual Property: An Empirical Study”, 97 California Law Review 801–56. Schwartz, Andrew A. 2013. “The Corporate Preference for Trade Secret”, 74 Ohio State Law Journal 623–68. Schultz, Mark F., and Douglas Lippoldt. 2014. Approaches to Protection of Undisclosed Information (Trade Secrets): Background Paper. OECD Trade Policy Paper No. 162, available at http://dx.doi.org/10.1787/5jz9z43w0jnw-en. Searle, Nicola C. 2012. “The Criminalization of the Theft of Trade Secrets: An Analysis of the Economic Espionage Act”, 2 IP Theory 33–51.

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654  Research handbook on the economics of IP law volume 2 Searle, Nicola C., and Gavin C. Reid. 2012. Firm Size and Trade Secret Intensity: Evidence from the Economic Espionage Act. SIRE Discussion Paper. Sichelman, Ted M., and Stuart Graham. 2010. “Patenting by Entrepreneurs: An Empirical Study”, 17 Michigan Telecommunications and Technology Law Review 111–80. U.S. Census Office. 2015. “Business R&D and Innovation Survey (BRDIS) Main Page”, www.census.gov/ manufacturing/brdis/. Whitmore, Peter J. 1989. “A Statistical Analysis of Noncompetition Clauses in Employment Contracts”, 15 Journal of Corporate Law 483–534. Younge, Kenneth A., and Matt Marx. 2016. “The Value of Employee Retention: Evidence From a Natural Experiment”, 25 Journal of Economic & Management Strategy 652–77.

Cases Empire Steam Laundry v. Lozier (1907), 165 Cal. 95. Peabody v. Norfolk (1868), 98 Mass. 452.

Legislative Materials Uniform Trade Secrets Act (USTA) § 1(1), 1979. USTA § 1(2), 1979. UTSA § 1(4), 1979.

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PART VIII KNOWLEDGE COMMONS

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30.  Knowledge commons

Michael J. Madison*, Katherine J. Strandburg** and Brett M. Frischmann*** 11

Contents I. Introduction II. Theoretical Background A. The Public Domain B. Commons-based Peer Production C. Semi-commons D. Infrastructure E. IP without IP (Sometimes Referred to as “IP’s Negative Space”) F. Open Innovation G. User Innovation H. New Commons III. Introducing Knowledge Commons: The Empirical Challenge IV. The Knowledge Commons Research Framework V. Provisional Results of Knowledge Commons Research A. Research Counsels an Expansive View of the Problems to be Solved by Governance Institutions B. Relationships Among Governance Systems are Critical C. Shared Infrastructure May Play a Key Role D. Informal Governance Institutions, and Especially Trusted Leadership and Shared Normative Framing, Contributes a Great Deal E. Commons Governance Often Evolves Over Time, and Commons May Play an Especially Important Role in the Early Stages of Some Industries F. Knowledge Commons Governance Does Not Necessarily Depend on One Strong Type or Source of Individual Motivations for Cooperation VI. Lessons for Knowledge Commons Researchers A. Applying the Framework to Some Institutions that are Not Core Examples of “Knowledge Commons” B. Taking a Broad Approach to Identifying Relevant Resources and Participants

***  Professor of Law and Faculty Director, Innovation Practice Institute, University of Pittsburgh School of Law. ***  Alfred B. Engelberg Professor of Law, New York University School of Law. ***  Charles Widger Endowed University Professor in Law, Business and Economics, Charles Widger School of Law, Villanova University.

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Knowledge commons  657 C. Accounting More Explicitly for Evolution of Knowledge Commons Governance Over Time D. Beginning with Goals and Objectives and Identifying Action Arenas E. Identifying Social Dilemmas F. Identifying Shared Infrastructure G. Identifying Both Non-rivalrous and Rivalrous Resources H. Identifying Dilemmas and Action Arenas Associated with Boundary Management VII. Questions to be Answered A. Systematization of Cases B. Empirical Methods C. Alignment with Other Literature D. Alignment with Practice E. Evaluation and Normative Implications F. Design Principles VIII. Conclusion References

I. INTRODUCTION “Knowledge commons” refers to an institutional approach (commons) to governing the production, use, management, and/or preservation of a particular type of resource (knowledge). “Commons” refers to a form of community management or governance. It applies to a resource, and it involves a group or community of people who share access to and/or use of the resource. “The basic characteristic that distinguishes commons from noncommons is institutionalized sharing of resources among members of a community” (Madison, Frischmann, and Strandburg, 2010, p. 841). Commons does not denote the resource, the community, a place, or a thing. “Commons” is the institutional arrangement of these elements and their coordination via combinations of law and other formal rules; social norms, customs, and informal discipline; and technological and other material constraints. Community or collective self-governance of the resource, by individuals who collaborate or coordinate among themselves effectively, is a key feature of commons as an institution, but self-governance may be and often is linked to other formal and informal governance mechanisms. More detail is supplied below. For the purposes of this chapter, “knowledge” refers to a broad set of intellectual and cultural resources. There are important differences between various resources captured by such a broad definition. For example, knowledge, information, and data may be different from each other in meaningful ways. But an inclusive term is necessary in order to permit knowledge commons researchers to capture and study a broad and inclusive range of commons institutions and to highlight the importance of examining knowledge commons governance as part of dynamic, ecological contexts (see Benkler, 2013 and Cohen, 2006 on the importance of understanding the cultural environments in which knowledge resources are produced and used). Prior attempts to use “cultural environment” were cumbersome (for further explanation, see Frischmann, Madison, and Strandburg, 2014;

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658  Research handbook on the economics of IP law volume 2 Frischmann, 2013a; and Bertacchini, Bravo, Marrelli, and Santagata, 2012). For similar reasons related to inclusiveness, potentially narrower definitions of knowledge goods are avoided; in addressing resources, this chapter does not limit its discussion to precise distinctions among private goods, public goods, club goods, and/or toll goods. The resource set includes information, science, knowledge, creative works, data, and other related resources. “Knowledge commons” thus refers to the institutionalized community governance of the sharing and, in some cases, creation of a wide range of intellectual and cultural resources. This chapter provides an overview of efforts to develop and apply a research framework to investigate knowledge commons on a systematic basis, across a diverse range of contemporary and historical cases and across cases that are both supported by modern information technologies and those that pre-date or that operate independently of those technologies.

II.  THEORETICAL BACKGROUND The problem of providing empirical justifications for intellectual property (IP) law regimes (patent and copyright in particular) has vexed modern researchers for at least 50 years (Machlup, 1958). IP goods such as patentable inventions and copyrighted works are conventionally modeled as public goods, which are neither excludable nor depletable, in contrast to private goods, which are both. That pattern leads to the framing of the following social dilemma: it is typically assumed by researchers that likely overconsumption of IP goods by uncoordinated, self-interested consumers and users in some “common” domain will lead to diminishment of the incentive to invest in their production, because the inventors and creators of those goods will be discouraged by their inability to recover necessary investments in and returns on innovation. In short, free riders among consumers will produce an IP version of what Hardin referred to as a tragedy of the commons (Landes and Posner, 2003; Hardin, 1968). Such a tragedy may be solved, if at all, by the creation and assignment of marketable property rights to individual owners of specific resources within what was formerly held “in common,” or by production and governance of the resource by a single, central authority, such as the state. The theoretical assumptions behind the conventional tragedy of the commons model have long been belied by the fact that knowledge-generating and innovation-generating institutions based on successful coordination and collaboration among knowledge producers and users have existed for decades—even centuries, often despite the absence of IP rights owned by individual creators or inventors. Perhaps the best example of this phenomenon is the modern research university, whose historical antecedents can be traced back roughly 1000 years (Madison, Frischmann, and Strandburg, 2009). Universities have long served as knowledge-generating and knowledge-sustaining institutions despite faculty researchers often exercising few conventional market-based IP interests. Openly accessible knowledge resources do not necessarily pose the dilemmas of “tragic” outcomes; social dilemmas involving knowledge need not be solved by the delineation of private rights exchanged in markets, or left to strong coordination by the state. Contemporary technological developments grounded in patterns of Internet exchange, such as open source computer programs and Wikipedia, have renewed interest in and have prompted relatively recent re-examinations of the conventional tragedy of the commons

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Knowledge commons  659 model along several different dimensions. Each of these highlights a different respect in which the so-called “tragic commons” may not develop around a shared resource and in which community self-governance has the potential to develop as an institution to the point that sustained innovation is the probable result, rather than an overconsumed and/ or underproduced resource. Some of these also highlight certain respects in which the term “commons” may give rise to ambiguity, at least in theoretical terms. A.  The Public Domain Free and unhindered user access to certain knowledge and information resources, particularly basic ideas and facts (truths) about the world, is treated as a critical element of IP and information law and policy by scholars including Boyle (2003, 2008), Lessig (2001), Litman (1990), and Lange (1981). These authors stress the cumulative character of knowledge and information production and the proposition that new knowledge is not possible without elements of free access to existing knowledge as “building blocks” (Boyle, 2008, p. 41) of new works and inventions. In this framework, the term “commons” denotes common or shared resources that are used by many users (and perhaps, potentially, by all of them) without fees and also without legal or contractual restrictions. Governance of public domain resources by self-organized communities or collectives is not necessarily inconsistent with their public or common status, but scholars stress their open nature over the institutional frameworks by which new creations or innovations emerge from them. The licensing entity known as “Creative Commons” is grounded on this view, where “Creative Commons” licenses of different forms are designed to enable users of copyrighted works intentionally to facilitate later uses of their works, either by specifying “open” licensing terms or by dedicating their works to the public domain. B.  Commons-based Peer Production Beginning with the emergence of large-scale implementation of open source computer programs and the initial stabilization of the Internet encyclopedia Wikipedia, Benkler (2006, 2013) theorizes that sustainable innovation processes could emerge and exist without support from formal IP regimes, or with limited support. Drawing in part on Boyle’s conception of the commons as a domain of information accessible to any and all, Benkler identifies certain cases where independent actors produce sustainable innovations by operating in coordination but without a traditional market, hierarchy, or firm (thus, “peers”). Benkler’s examples focus mostly on Internet-enabled innovations such as open source computer programs, but his concept extends explicitly to certain “peer” produced innovations beyond the technology arena. Among them is the practice of “casual carpooling” in the San Francisco area and “slugging” in the Washington, DC area, in which commuting drivers offer spare seats in their cars to anonymous volunteer riders, forming carpools that can operate legally in carpool-only lanes on highways and bridges (Benkler, 2004). C. Semi-commons Looking to classic or traditional models of property law theory modeled on rights in land, Smith (2000) posits the existence of a model of property rights that exists in between full

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660  Research handbook on the economics of IP law volume 2 rights of exclusion and full openness. Looking primarily to medieval English practice, he identifies land-holding patterns that operated on what he refers to as a successful semicommons model, in which common and private uses of property co-exist. By this he means that open fields at times are subject to collective or communal governance regarding their use (for grazing), but are interspersed with scattered strips of land, subject to rights of exclusion, for grain growing. Heverly (2003) and Smith (2005) extend the model toward certain domains of information rights, notably telecommunications law and policy (see also Weiser and Hatfield, 2005). The implications of the model are debated. Bertacchini, De Mot, and Depoorter (2009) theorize that semicommons creates opportunities for strategic behavior and the fragmentation of property claims, introducing costs that outweigh the possible benefits of the regime. David (2003) argues that some combination of open and closed access to a property resource is overwhelmingly likely to be more socially efficient than completely one or the other. D. Infrastructure Scholars have asked whether certain types or classes of innovation are more or less susceptible to tragedies of the commons, as a matter of theory. Frischmann (2013b) argues that creating and allocating marketable property rights to individual rights owners is unlikely to lead to the production of sustainable innovation with respect to the class of infrastructure resources. The reason is that the anticipated social welfare benefits associated with the use of infrastructure are likely to accrue to actors other than those which invest in infrastructure; infrastructure users are likely to be heterogeneous and distributed across space and time; and the character of their demand for the resources is likely to be highly variable (see also Frischmann and Lemley, 2007). The resource is likely to be a shared input into a diverse range of outputs. In that event, the market is unlikely to aggregate this social demand in a way that may be concentrated productively in marketable innovation goods. Rose (1986) foreshadowed Frischmann in part by highlighting the presence of forms of shared or common rights of access to and ownership of property in ancient Roman law, particularly with respect to transportation resources, such as roads. She refers to her description as a “comedy of the commons.” E.  IP without IP (Sometimes Referred to as “IP’s Negative Space”) In recent years IP and innovation scholars have produced a number of case studies of specific communities that operate successfully as producers of innovative and creative works, but without relying formally on IP interests. These are domains where IP might regulate production, but for one reason or another, it does not. The cases are collected loosely under the heading “Intellectual Production [IP, for this purpose] Without Intellectual Property [IP]” (Perzanowski and Darling, 2017). These researchers ask: what motivates the production of new works or inventions (i.e., how is the tragedy of the commons overcome), if formal IP law is not supplying the relevant incentive? This collection of “IP without IP” cases does not rely on a standard research framework or on a stated concept of commons or “the commons,” but it does investigate and build on the insight that community or collective self-governance can provide a powerful mechanism for creative production. In some instances, work produced by members of these communities is not

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Knowledge commons  661 eligible for IP protection (Raustiala and Sprigman, 2006 (discussing the fashion industry in the United States)); in some instances, it is eligible for such protection but members of the group choose to rely on social norms that operate as substitutes for formal IP interests (Perzanowski, 2013 (discussing tattoo artists)). In some instances members of the group opt out of any system that resembles IP norms or formal interests and substitute their own community-based governance system (Fagundes, 2012) (discussing roller derby competitors). Related work explores the motivations of creative and inventive individuals and their partners, supporters, and collaborators, at times in individual context (Silbey, 2014); at times in institutional context (Murray, Piper, and Robertson, 2014; De Beer, Armstrong, Oguamanam, and Schonwetter, 2014). F.  Open Innovation Management scholars have identified a class of research and development and innovation practices that are collected under the heading “open innovation” (Chesbrough, 2003). In “open innovation” systems, traditional or conventional hierarchical firms manage their research and development functions in part by organizing confederations of independent or semi-independent researcher/contributors, whose work is often shared with each other and facilitated and coordinated via technology platforms developed and maintained by the principal firm. “Open innovation” therefore describes less a single model of innovation by coordination of third-parties and more a family of similar management practices. The research problems are typically drawn from relatively early challenges in the development of a product, service, or technology and are typically susceptible to being broken up or distributed to multiple researchers at once. Their respective contributions may be treated as competitive with each other, or as complementary. The researchers may be more or less independent from each other as well as from the principal firm, in terms of contractual relationships, in terms of geographic location, and in terms of knowledge and awareness of the others’ work. The problems being solved may be given to the researchers in the context of a tight management relationship that appears more or less analogous to the organization of a traditional firm, or may be much more loosely specified. G.  User Innovation A different group of management scholars has identified a class of innovation practices that focus on the type of innovator rather than on the organizational design of the innovation institution. In these cases, clustered under the heading “user innovation” (von Hippel, 2005), groups of users or consumers of a product or technology experiment or innovate with their own copies or instances of the thing in order to adapt it to their own needs, goals, or other circumstances. Researchers have identified a typical pattern, by which purely local innovations of this sort are communicated and shared among users: often a lead user or entrepreneurial user advances a shared version of the innovated good and in the end a new, improved device is marketed. While the process of user innovation is far from seamless or even frequent, it is observed across a broad range of markets and technologies, both in contemporary practice and through history. Successful user innovation exists as a documented practice in certain innovation communities (Bogers, Afuah, and Bastian, 2010).

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662  Research handbook on the economics of IP law volume 2 H.  New Commons Ostrom, who pioneered investigation of commons governance with respect to shared natural resources, together with certain colleagues, briefly considered extending Ostrom’s research program into the domain of knowledge, taken as a resource in itself (Hess and Ostrom, 2003, 2007). Hess offers extended consideration of the possibilities of Ostrom’s work in information and knowledge domains (Hess, 2008). This expansion of Ostrom’s program has been referred to as the “New Commons,” though in some cases, notably those involving cities and urban planning, “New Commons” cases do not necessarily address knowledge or information-sharing institutions. Domain-specific application of Ostrom’s work to empirically investigate those domains has focused particularly on open source computer programs (Schweik, 2005, 2007; Schweik and English, 2007, 2012; Schweik and Kitsing, 2010; Tenenberg, 2008) and on scientific research (Hess and Ostrom, 2006; Reichman and Uhlir, 2003). Less conventional applications include the production of legislation and other law (Daniels and Hudson, 2015).

III. INTRODUCING KNOWLEDGE COMMONS: THE EMPIRICAL CHALLENGE Each of the intellectual domains described briefly in the last section shares an interest in three interlinked themes: (1) the production of innovative and creative things via collective action, (2) structures for sharing information and knowledge resources, and (3) governance processes that depend significantly on openness (open access to resources and/or open participation by creators and innovators) or at least on a relative disinterest in the conventional exercise of formal IP rights provided by the classic public policy drivers of innovation and creativity—patent and copyright law. Some of these areas (the public domain, commons-based peer production) are described in the literature via theory (even formal models), supported by anecdote and illustration. Some—particularly open innovation, user innovation, and (to some extent) IP without IP—have developed inventories of case studies of qualitative empirical research. To date, they have lacked a shared, comprehensive intellectual framework for identifying and understanding both the historical cases and their modern counterparts. The fragmentation of these fields, both across disciplines (e.g., law and management) and within them (e.g., copyright and patent), has placed certain limits on their effectiveness from an empirical standpoint. There has been little comprehensive effort to identify the virtues and drawbacks of collective action in the knowledge production context from an empirical standpoint, and there has been no comprehensive intellectual framework for doing so. The knowledge commons research framework was developed and applied initially as an effort to provide precisely that framework, and to guide that effort. Following the political economist Elinor Ostrom, researchers focusing on natural resources, such as forests, pastures, and irrigation systems, have collected extensive evidence of commons governance used by a wide variety of communities to manage many different types of resources, referred to collectively in this body of work as “common pool resources” (CPRs). Common pool resources are distinguished by the twin propositions

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Knowledge commons  663 that the resource is depletable or rival, and that it is difficult if not impossible to exclude users from consuming the resource. In CPR contexts and elsewhere, establishing and sustaining governance confronts various obstacles to sharing and cooperation. Some of those obstacles derive from the nature of the resources and others derive from other factors, such as the nature of the community or external influences. Ostrom was awarded the Nobel Prize in Economic Sciences in 2009 for her pioneering research demonstrating that self-governed communities can and often do overcome obstacles through purpose-built or constructed commons as well as emergent commons. Her co-Nobelist, Oliver Williamson, is also celebrated for his work on economic institutions, confirming that the recognition of Ostrom is noteworthy not only for her advocacy of commons governance as such, but also for her contributions to the field of comparative institutional analysis. The knowledge commons research framework draws on Ostrom’s comparative institutionalism as well as on her research on natural resource commons. The empirical challenge is to construct and apply a technique that captures appropriately the range of potentially knowledge commons cases, respecting the tradition of open and inclusive inquiry that Ostrom established, but also distinguishing Ostrom’s work when appropriate. Knowledge and information resources typically do not exhibit the characteristics of CPRs, for example. Some examples illustrate the variety of institutional arrangements and resources that are governed via knowledge commons. Most obvious may be research commons, given the importance of sharing and collaboration norms within scientific research communities (Merton, 1973). Reichman and Uhlir (2003) examined scientific data commons, pressures on the “sharing ethos” within various scientific communities, and institutional means for reconstructing commons. Cook-Deegan and Dedeurwaerdere (2006) examined research commons in the life sciences and mapped out some of the relationships between the structure and function of the resource commons and the relevant community. The National Research Council of the National Academies sponsored an international conference in 2009 that explored microbial research commons. Participants examined how upstream microbial research inputs—microbial data, literature, and research materials— can be managed as commons (Reichman, Uhlir, and Dedeurwaerdere, 2016). Sharing the products of genomics research has been a fruitful area of knowledge commons research (Contreras, 2010, 2011; Contreras and Reichman, 2015). Madison et al. (2010) discuss the following, less obvious examples, some of which are discussed in the research literature mentioned above: IP pools, in which owners of patents in a technological domain license their patents to a common “pool” from which producers of complex products can obtain all of the permissions needed to make and sell goods that use the patents (Shapiro, 2000; Merges, 1996); open source computer programs and projects, which offer users of open source programs the ability to create and share modifications to the programs (Schweik and English, 2012); Wikipedia, which offers users of this Internet encyclopedia the power to add to and edit its contents (Hoffman and Mehra, 2009); wire services for journalism, which allow individual member media outlets the opportunity to publish work produced by other members; and “jamband” fan communities, which record, share, and comment on musical performances of their favorite groups, with the permission of the artists themselves (Schultz, 2006). Madison et al. mention additional examples, including medieval guilds and the Request for Comments series that defines the technical protocols of the Internet.

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IV. THE KNOWLEDGE COMMONS RESEARCH FRAMEWORK To date, knowledge commons research has focused almost entirely on qualitative inquiry and thick description of knowledge commons cases. Reichman, Uhlir, and Dedeurwaerdere (2016) dive deeply into the laws, regulations, and practices governing the scientific communities that they collect under the heading ‘microbial research commons.’ Strandburg, Frischmann, and Madison (2017) collect qualitative case studies of commons governance in medical and public health research. Borgman (2015) synthesizes a large number of small qualitative studies of data-based research projects under a commons rubric. Data suitable for rigorous quantitative research is difficult to come by. Institutions and informal groups that manage knowledge as a shared resource may be difficult to sample, and large-scale quantitative data may be unavailable otherwise. In exceptional but important cases of open source software development communities whose collaborations are collected in a small number of umbrella websites, quantitative research has been blended with qualitative methods (Schweik and English, 2012). It is anticipated that the results of qualitative case study research may be used as the basis for future statistical analysis. In addition, the study of commons via experimental methods has begun (Janssen, Lee, and Waring, 2014). The primary challenge of qualitative case studies has been how to approach that process in a systematic way. Any research framework should permit research and data collection to proceed under a common set of assumptions and questions, even if specific research methods and disciplinary foundations may vary from researcher to researcher or field to field. The framework is usable by researchers in social sciences and in the humanities, as well as by legal scholars. The framework is neither theory nor model; it does not, in itself, provide a taxonomy of governance institutions. (For related work categorizing such institutions that build on collective or communal self-governance, see Dusollier, 2010; Van Overwalle, 2009.) Strong theorizing and modeling may follow the research, but only light and tentative theorizing, if any, should precede it. The knowledge commons framework as described below is borrowed from Frischmann, Madison, and Strandburg (2014). The framework builds on the Institutional Analysis and Development (IAD) framework pioneered by Ostrom and her colleagues (Ostrom, 2005), but it adds some important modifications. The IAD framework has been used principally to structure analysis of solutions to collective action problems in natural resource contexts (so-called action arenas, or action situations, in which commons participants resolve social dilemmas by applying formal and informal “rules-in-use”), such as forests, fisheries, and irrigation systems. Lobster fisheries and self-governance by local communities of lobstermen in Maine and elsewhere are often cited as accessible cases of commons governance of a natural resource. Acheson (1988) offers a readable introduction to the topic. Acheson’s work is book-ended by more recent investigation of commons governance of fisheries, including lobster grounds, by Wilson, Acheson, and Johnson (2013). The online Digital Library of the Commons (https://dlc.dlib.indiana.edu), a project of the Vincent and Elinor Ostrom Workshop in Political Theory and Policy Analysis at Indiana University, maintains a robust repository of scholarship on commons. Representative commons case studies available in that resource include hundreds of case studies and comparative analysis of successful and unsuccessful forest management governance in communities around the world (e.g., Gibson, Dodds, and Turner, 2007; Gibson and Becker, 2000).

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Knowledge commons  665 Empirical research has largely confirmed Ostrom’s initial hypothesis that successful commons governance involves attention to a handful of “design principles” (Ostrom, 1990, p. 90), focused on clarity of the attributes of the resource, identity and membership of the relevant community, and the community’s adoption and application of proportionate disciplinary rules on resource consumption. IAD analysis is premised largely on choice-processing, goal-oriented behavior by self-interested individuals. It looks to explain sustainable collective action that produces measurable, productive results. The insight from applying the IAD framework to a large number of governance institutions and resources is that commons solutions can be as stable and robust as market-oriented solutions to classic “tragedy of the commons” overconsumption dilemmas involving depletable natural resources. Shared governance of these common pool resources by community members can lead to sustainable fisheries and forests and to regular supplies of usable water. The knowledge commons framework differs from the IAD framework in certain key respects. It does not assume the agency of choice-selecting, self-interested individuals, as the IAD framework tends to do. It accepts the role of historical contingency and of both inward-directed (selfish) and outward-directed (selfless, pro-social, or otheroriented) agents in the evolution of collective or commons institutions. At the front end of the analysis, it requires understanding the contingency of the underlying resources themselves. Natural resource commons largely take the existence of their resources for granted: fish, trees, water, and the like. Knowledge commons identify resource design and creation as variables to be described and analyzed. As intellectual resources (i.e., as forms of knowledge and information), patents, copyrights, and underlying inventions, creations, and data are shaped by a variety of institutional forces rather than by nature. Critically, the knowledge commons framework does not assume that the relevant resources are rival and depletable; these are not, typically, common pool resources. The knowledge commons framework generally assumes precisely the contrary: that intangible information and knowledge resources are non-rival, non-depletable public goods. The social dilemma to be solved by a governance institution is not primarily a classic “tragic commons” overconsumption problem. Instead, it is more likely (in part) an underproduction problem and (in part) a coordination problem. In applying the framework to any particular case, care must be given to describing the authentic character of the social dilemmas present. Against that background, the knowledge commons framework proposes to undertake comparative institutional analysis by evaluating cases of commons resources via a series of questions, or clusters of questions, to be applied in each instance. The following summary is documented in summary form at The Workshop on Governing Knowledge Commons (2014), for ease of reference. The case study investigation begins with a general description of the history and character of the problem that is being addressed by governance in the specific case or context. This may be an explanation that is internal to the governed institution(s) (problems and explanations may emerge from stories told by participants, either today or historically, or both), or an explanation that is external to the governed institution (e.g., the public goods account of the rise of IP law). One should ask whether the relevant resource or case is characterized from the outset by patent rights or other proprietary rights, as in the case of a patent pool, or by a legal regime of formal or informal openness, as in the case of public domain data or ­information

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666  Research handbook on the economics of IP law volume 2 collected in a government archive. A particular regime might involve sharing data and information, or sharing rights in information, or sharing both. The character of the commons solution might involve coordinating holders of different IP interests or holders of different public domain knowledge resources, for example. In many respects, this cluster of queries parallels that investigation of the biophysical attributes of the natural resource that is the first part of examining a common pool resource in the natural environment. Answering that question sets a baseline against which a commons governance regime has been constructed. Within that regime, one next asks definitional questions. What is the relevant resource and subsidiary resource units, taking into account both intangible and tangible resources and their individual or social character? What are the relationships among these resources, the baseline, and any relevant legal regime (e.g., what a scientist considers to be an invention, what patent law considers to be an invention, and the boundaries of the patent itself are three related but distinct things)? What are the boundaries and constitution (membership) of the community or communities that manage access to and use of those resources? How is membership acquired (this may be informal, formal, or a blend of the two), and how is membership governed? What is good behavior within the group, what is bad behavior, who polices that boundary, and how? Next are questions concerning explicit and implicit goals and objectives of commons governance, if any such goals and objectives exist (it is possible that commons governance regimes emerge from historical contingency rather than via planning). Is there a particular resource development or management dilemma that commons governance is intended to address, and what commons strategies are used to address that dilemma? How “open” are the knowledge and information resources and the community of participants that create, use, and manage them? The details of the relevant aspects of “openness” should be specified, along with their contributions to the effectiveness of commons. Some commons and commons resources have precise and fixed definitions of both resources and community membership. Either resources or membership or both may be more fluid, with boundaries defined by flexible standards rather than by rules. A large and critical cluster of questions concerns the dynamics of commons governance, or what Ostrom refers to as the “rules-in-use” of commons: the interactions of commons participants and resources. Included in this cluster of questions are: (1) details of stories of the origins, histories, and operations of commons; (2) formal and informal (norm-based) rules and practices regarding distribution and coordination of commons resources among participants, including rules for appropriation and replenishment of commons resources; (3) the institutional setting(s), including the character of the regime’s possibly being “nested” in larger-scale institutions and being dependent on other, adjacent institutions; (4) relevant legal regimes, including but not limited to IP law; (5) the structure of interactions between commons resources and participants and institutions adjacent to and outside the regime; and (6) dispute resolution and other disciplinary mechanisms by which commons rules, norms, and participants are policed. In principle, at this point it becomes possible to identify and assess outcomes. In Ostrom’s IAD framework, outcomes are typically assessed in terms of the resources themselves. Has a fishery been managed in a way that sustains fish stocks over time? Do commons participants, such as the members of a fishing community, earn returns in the commons context that match or exceed returns from participation in an alternative governance context? In knowledge commons, resource-based outcome measures may be

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Knowledge commons  667 difficult to identify and assess. Sustaining the resources and their uses, individually or in combination, may be the point. Or, sustaining the community itself via its relationship to particular resources, may be the point. In a patent pool, pooled resources may constitute components of larger, complex products that could not be produced but for the pooling arrangement that reduces transactions costs among participants. Outcomes take different forms. It may be the case that patterns of participant interaction constitute relevant outcomes as well as relevant inputs. Agency, in a manner of speaking, may be less important than identity; the group and its participants, in a particular institutional setting, may be ends as well as means. Levels and types of interaction and combination matter. Participant interaction in the context of a shared resource pool or group may give rise to (or preserve, or modify) an industrial field or a technical discipline. In that specific case, such spillovers may be treated as relevant outcomes. Having identified relevant outcomes, it becomes possible to look back at the problems that defined commons governance in the first place. Has the regime solved those problems, and if not, then what gaps remain? How do the outcomes produced by commons governance differ from outcomes that might have been available if alternative governance had been employed? Has commons governance created costs or risks that should give policy makers and/or institution designers pause? Costs of administration might be needlessly high; costs of participation might be high. A collection of industrial firms that pool related patents in order to produce complex products may engage in anti-competitive, collusive behavior. Commons governance may facilitate innovation; it may also facilitate stagnation.

V. PROVISIONAL RESULTS OF KNOWLEDGE COMMONS RESEARCH Knowledge commons case studies conducted so far—primarily, though not exclusively, those collected in Frischmann, Madison, and Strandburg (2014) —suggest a number of promising but provisional research results with respect to the eventual goal of producing a more or less comprehensive understanding of the mechanisms for effective or successful and less effective or unsuccessful knowledge commons. Those include the following. A. Research Counsels an Expansive View of the Problems to be Solved by Governance Institutions Knowledge commons may confront diverse obstacles or social dilemmas, many of which are not well described or reducible to a tragedy of the commons, to a free rider dilemma, or to some other generic collective action problem. Close analysis of relevant obstacles tends to suggest multiple social dilemmas that create demand for governance institutions. Strandburg, Frischmann, and Cui (2014), in a case study of a medical research consortium housed in the Rare Diseases Clinical Research Network, describe multiple dilemmas addressed by governance of a shared knowledge resource. In that case, the resource consisted of the research results of medical research on diseases that affect small patient populations. The results of that case suggest the importance of casting a wide net in general. Relevant social dilemmas may include: (1) in the case of scientific

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668  Research handbook on the economics of IP law volume 2 research, dilemmas attributable to the nature of the research and/or the research problem; researchers and their subjects may be few in number and/or widely distributed; other research inputs such as funding and time may be scarce or, in the case of large datasets, unmanageable via traditional analysis conducted by human beings; (2) dilemmas attributable to the need to coordinate knowledge sharing among multiple constituencies and stakeholders that collaborate with respect to creation and management of the resource; again with respect to scientific research, interests to be accounted for include researchers, their subjects, funders, commercial partners, and the public; (3) dilemmas arising from the need to manage rivalrous or depletable resources that are necessary inputs into production and use of the shared knowledge resources; these may include funding, time, and labor; (4) dilemmas arising from (or mitigated by) the broader systems within which a knowledge commons institution is nested; for example, knowledge production in the modern research university is situated in the broader context of knowledge production to serve the interests of society at large; commons approaches and reliance on formal IP systems offer different modes of governance that may complement each other or that may conflict. B.  Relationships Among Governance Systems are Critical Researchers should be alert to potentially complex relationships between knowledge commons and the systems within which they operate and/or are nested. The knowledge commons framework suggests a focus on the background legal rights associated with commons resources. Those legal rights may influence the shape of commons governance and/or interact with other framework inquiries in diverse ways. In some cases, the background contexts (i.e., the presence or absence of formal IP rights) seem to act as external constraints on commons governance much as the biophysical characteristics of the resource do in the natural resource context. In others, background contexts shape participants’ goals and objectives, participants’ roles, and action arenas in diverse and dynamic ways. For example, knowledge commons and market-based institutions (or institutions for knowledge production based on different hierarchies or histories, such as government, or the military) may operate as complements, as stages in the evolution of a product or technology, or in opposition to each other. C.  Shared Infrastructure May Play a Key Role Shared infrastructure appears to be often central to the success of knowledge commons institutions. In some cases, technical or technological infrastructures (e.g., technology platforms, databases, and bibliographies) may substitute for formal rule-based governance and discipline, easing, though perhaps also obfuscating, decision-making processes. Organizational infrastructures, such as shared coordination mechanisms (e.g., task forces, steering committees, technical standards and the like), may lower the costs of participation, collaboration, and research among commons participants. Ownership and/ or control of infrastructure or platforms that support knowledge commons may have a significant impact on knowledge commons governance. The state itself may supply important infrastructural resources for knowledge commons, consisting of funding processes, regulatory processes, or coordination institutions.

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Knowledge commons  669 D. Informal Governance Institutions, and Especially Trusted Leadership and Shared Normative Framing, Contributes a Great Deal Informal or “social” governance, especially involving trusted leaders or decision makers, complements and at times may substitute for formal or public disciplinary institutions in many knowledge commons cases. Reliance on informal governance may grow out of relationships or norms predating the emergence of commons governance, such as norms among scientific researchers, or norms of university-based researchers and teachers, and it may evolve further, toward greater formality. A close relationship may exist between informal governance mechanisms and the need to tailor governance to the needs of small and/or local commons communities. E. Commons Governance Often Evolves Over Time, and Commons May Play an Especially Important Role in the Early Stages of Some Industries Commons governance may evolve as the number of participants grows or as innovation affects the nature of the shared knowledge or the balance between competition and cooperation within the group. The pattern of evolution may not necessarily follow a path from more informal to more formal governance mechanisms. Smaller or larger-scale feedback loops between smaller-scale governance institutions and larger-scale systems may be implicated. F. Knowledge Commons Governance Does Not Necessarily Depend on One Strong Type or Source of Individual Motivations for Cooperation Knowledge commons entail cooperation in the building, sharing, and preservation of knowledge resources, but the reasons individuals cooperated in particular knowledge commons may vary. Different individuals cooperate for different reasons, and sometimes a single individual has multiple motivations for cooperating, partly intrinsic and partly extrinsic, or social. Participants may have both competitive and cooperative motives, and the balance between the two may vary between individuals or change over time, depending in part on participants’ overlapping roles as creators, maintainers, and/or users of shared knowledge resources. This variety of motives seems to be partially responsible for the variety of social dilemmas that arise in governing knowledge commons.

VI. LESSONS FOR KNOWLEDGE COMMONS RESEARCHERS The knowledge commons research framework is intended to be an evolving research tool, susceptible to being improved with use over time. The knowledge commons cases collected in Frischmann, Madison, and Strandburg (2014), together with the cases referred to above as early cases identified as knowledge commons, suggest that the framework may be refined, or its application improved, or both, via considering the following perspectives. The items on this list are necessarily preliminary, given the relative youth of this field of research.

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670  Research handbook on the economics of IP law volume 2 A. Applying the Framework to Some Institutions that are Not Core Examples of “Knowledge Commons” Researchers may cast a wide net in defining proper subjects for study. Because the framework is primarily methodological rather than normative, it has proved useful to date in guiding study of a broad range of cases, some that were closer to what many researchers would identify as “core” or “typical” institutionalized knowledge sharing regimes (e.g., scientific research consortia) and others that may seem, at first glance, to be unusual subjects for a study of knowledge commons (e.g., the legislative process). B.  Taking a Broad Approach to Identifying Relevant Resources and Participants The framework helps researchers to avoid tunnel vision in identifying relevant resources and participants merely by prompting researchers to ask explicitly “What are the resources?” “Who are the participants?” Research to date includes case studies that report on a broader range of resources and participants than one might associate with a typical (or stereotypical) “knowledge commons.” C. Accounting More Explicitly for Evolution of Knowledge Commons Governance Over Time It is to be expected that knowledge commons should change over time as resources, communities of participants, and relevant formal and informal rules evolve through the decisions and actions of actors in the various action arenas. Research to date suggests a broader question about how the character and stability of some knowledge commons may be affected by changing interactions with the background environment or changes in the knowledge resources themselves. Not only do resources, actors, and rules evolve; the institutions of governance may change as well. D.  Beginning with Goals and Objectives and Identifying Action Arenas The basic summary of the knowledge commons research framework does not fully anticipate the potential complexity in defining action arenas for knowledge commons. In the natural resource context, the primary operational action arena for a commons regime generally is the use of a specified natural resource by a community defined by geographic proximity. (Other action arenas operate at a rule-making or governance level.) Because knowledge resources are intangible and often are created by a self-selected group of commons participants, knowledge commons often form around particular goals and objectives rather than around pre-existing resources tied to particular communities or particular geographies. When that is the case, there may be several primary action arenas at the operational level, and the most important action arenas may not be immediately evident at the outset of research. To analyze a knowledge commons regime, it may be most sound analytically to begin with goals and objectives, rather than resources, then to identify action arenas related to those goals and objectives, and then to identify resources, participants, rules, and so forth associated with each action arena. In practice, use of the framework is likely to be an iterative process, in which collecting

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Knowledge commons  671 data about particular knowledge resources may lead to the identification of additional goals and objectives, which may lead to the identification of additional participants or additional shared resources and so on. E.  Identifying Social Dilemmas Knowledge commons governance responds to a wide variety of social dilemmas in addition to the traditional free rider problem. To analyze an action arena, it is helpful to identify the social dilemmas faced by participants. To understand the social dilemmas faced by a group of commons participants, it is also useful to study their motivations, especially since a theme that frequently appears in the case studies documented so far is diversity of participant motivation. F.  Identifying Shared Infrastructure Future case studies may focus specifically on identifying infrastructural resources created or used by the commons institution. In some cases, such as open source software, it will be important to include infrastructural constraints in the analysis of an action arena’s “rules-in-use” in order to get a complete picture of commons governance. G.  Identifying Both Non-rivalrous and Rivalrous Resources Although the study of knowledge commons focuses on the sharing of intangible, nonrivalrous resources, it is important to identify any rivalrous resources that are important to a particular action arena. Social dilemmas for knowledge commons governance can and do arise from competition or conflict over the allocation of scarce or non-rivalrous resources. H. Identifying Dilemmas and Action Arenas Associated with Boundary Management Knowledge commons may have different types and degrees of “openness.” In particular, because knowledge resources are non-rivalrous, knowledge commons are likely to have to deal with multiple constituencies, including as users, creators, managers, curators, and subjects of the knowledge resources. These different constituencies may make different and sometimes conflicting demands on commons resources. It is important when identifying goals and objectives and action arenas to be aware of the possibility that important action arenas may be devoted to managing overlaps among these interests and boundary conflicts among different participants.

VII.  QUESTIONS TO BE ANSWERED The field of knowledge commons studies is still in its infancy, both substantively and methodologically. Knowledge commons is in the process of moving from a place of relative obscurity and marginalization in the context of studies of IP and innovation generally, to a place where its approach to comparative institutional analysis—what

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672  Research handbook on the economics of IP law volume 2 modes of governance support innovation and creativity, and in different ways—appears to be gaining adherents among researchers. Still, numerous questions about knowledge commons remain to be explored. Among them are the following. A.  Systematization of Cases As more cases of knowledge commons are studied and documented, the task of synthesizing the data generated will become more important and more pressing. B.  Empirical Methods Investigation of knowledge commons need not be limited to qualitative case study research. Experimental methods, examining the strengths and limits of self-governed collaboration and cooperation among groups in knowledge and information settings, may prove useful. C.  Alignment with Other Literature The related fields of research identified earlier in this chapter may offer important lessons for knowledge commons researchers; some of the cases developed in those fields may be adapted as data for the broad systematization of the field. How that task might be accomplished remains to be developed. D.  Alignment with Practice The case study approach that knowledge commons research has taken so far offers both opportunities to examine contemporary commons institutions and the challenge of adapting the research to the needs and goals of contemporary practitioners of knowledge commons governance (Bollier and Helfrich, 2012). E.  Evaluation and Normative Implications Knowledge commons research is presented today primarily in descriptive terms; the questions concern the mechanics of successful and unsuccessful knowledge commons institutions. More precise guidelines and measures for understanding success are missing, at present, whether from a social welfare standpoint or from an expressive or social meaning standpoint. The fact that knowledge commons offers prospects for sustained governance of an innovation domain, despite the presence of formal IP rights or despite their absence, offers an implied normative claim regarding the value and purpose of knowledge commons. That normative claim has not yet been developed in detail. F.  Design Principles Ostrom’s work on commons governance is celebrated in part because she reduced her investigation of commons to a series of so-called “design principles” for well-functioning,

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Knowledge commons  673 long-enduring commons regimes (Ostrom, 1990, p. 90). Differences between knowledge and information resources and the natural resources commons that Ostrom focused on suggest that those design principles should not be carried over uncritically into the knowledge and information domain. Is a comparable set of design principles feasible? If so, what would those principles look like? The answers will have to await further research.

VIII. CONCLUSION There are many different knowledge commons. Yet we know very little about them. How do such commons work? Where do they come from, what contributes to their durability and effectiveness, and what undermines them? When are commons governance institutions preferred for managing the production and use of knowledge and information resources? When are market mechanisms preferred? When is state or other centrally coordinated governance superior? This chapter provides an overview of the present state of research into these questions, and a look forward at the research possibilities that the field offers. In the past decade, scholars in various disciplines have become interested in studying these types of commons, and some have begun case studies. However, their research often is focused narrowly on the specific case or an isolated area, such as academic publishing or open source software, and fails to investigate the broader institutional questions and to appreciate the need for systematic analysis. As a result, they tend to consider only a limited number of descriptive variables, which makes integration and learning from a body of case studies quite difficult. Building on Ostrom (1990), Ostrom (2005), and Hess and Ostrom (2007), Frischmann, Madison, and Strandburg developed a framework for the systematic study and comparative analysis of knowledge commons (Madison et al., 2010; Frischmann et al., 2014). The underlying nature and structure of the inquiry as well as the focus on complexity, context, communities, and institutions, unite this knowledge commons project with Ostrom’s legacy. Nonetheless, Ostrom’s Institutional Analysis and Development framework for researching commons has been adapted and extended to account for significant differences between natural resource commons and knowledge commons. Most obviously, the resources are different, and as a result, the obstacles that must be overcome for institutionalized sharing to work are different. Thus, for example, the governance structures for knowledge commons manage existing resources as well as production and integration of new resources. Another interesting complication is the complex role of legal institutions in delineating intellectual resources, for example, by defining what constitutes the expression in software that might be governed by open source software licenses. Notably, this complication raises resource boundary and corresponding resource management issues that may be less salient for natural resource commons. These and other differences call for a series of inquiries specifically tailored to knowledge commons. This chapter provides a summary of the research framework that applies those inquiries on a systematic basis, as well as a brief review of related research areas. It summarizes the findings of case study research on knowledge commons to date, and points researchers toward an updated set of research questions on both large and small scales. Details on the knowledge commons research framework can be found at Workshop on Governing Knowledge Commons (2014).

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Index Aboagye, A. 317 Abramowicz, M. 317 Abrams, D. 31, 67, 293, 318 abusive behavior solutions, patent trolls 456–9 access to works, and copyright law see copyright law and access to works Acheson, J. 664 acquisition and timing effects, standardessential patents (SEPs) 197–8 Adams, C. 341 Adams, D. 400, 401 Adams, J. 276 Adelman, M. 245, 426 age distribution of authors, copyright registration studies 541, 542–3, 544–5 aggregate licenses, music distributors 575 aggregate number of disclosures, standardssetting organizations (SSOs) 192 aggregate royalty caps suggestion, standardssetting organizations (SSOs) 219 Agrawal, A. 265, 266 Aguiar, L. 551, 555, 556, 562 Ahuja, G. 27 Aitken, M. 318 Albert, M. 24–5, 195 Alcácer, J. 32, 39, 58, 79 Allen, R. 466, 467, 475 Allison, J. 30, 47–75, 118–19, 138–9, 140, 285–9, 291–2, 307–8, 329, 332, 335, 336, 339–42, 347, 357–8, 359, 449, 496 Almeida, P. 32 Almeling, D. 650–51 Alsup, W. 357, 358 alternative dispute resolution, standardssetting organizations (SSOs) 221–2 Amabile, T. 582, 600 Ambwani, S. 99–100, 292, 363 amici curiae briefs 146–7 Anand, B. 434 Anderson, J. 93, 154, 155, 159–74 anti-commons concerns, university patenting 269–72 see also commons Anton, J. 464 appellate review standard, claim construction studies 162, 163, 164, 165–6, 170, 331, 405–6 Apple, R. 257, 261

application numbers, copyright registration studies 537–40, 542 Ariely, D. 583, 585 Arlen, J. 580 Armstrong, A. 190, 202, 214 Arora, A. 274, 428, 468 Ashtor, J. 414 Atal, V. 40 Atkinson, S. 93, 108, 109 attorneys’ fees 396, 403, 404, 410–11, 503, 519–20, 534, 535, 536 attribution valuation, and experiments in intellectual property 590–92, 594 Auerbach, J. 466, 467 Austin, G. 628 Australia damages awards 405 injunctions 396, 399 trademarks and survey evidence 629–30 Auyang, H. 167 Ayres, I. 355, 393 Azagra-Caro, J. 39 Azoulay, P. 262, 264–5 Bacchiocchi, E. 33, 38 backward citations and technological antecedents 23, 25, 30–31, 34 Baker, B. 505 Baker, M. 538 Balganesh, S. 599 Ball, G. 93, 121, 131, 152–3, 169, 338, 346, 357, 400, 449 Banik, M. 357 Bar, T. 40, 188, 189 Barnes, J. 117, 118, 140–41, 512, 519 Barnett, J. 224, 642 Barney, J. 65 Baron, J. 187, 188, 189, 190, 192, 193, 198, 199, 204, 206, 207, 208, 212, 213, 217, 220, 241 Barry, C. 407, 408–9, 411 Barry, J. 49, 50–51 Bartlett, J. 201, 214 Baten, J. 472 Baudry, M. 320, 321 Bauer, J. 598 Baum, L. 496 Baumol, W. 199, 213 Bechtold, S. 593, 594–6

677

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678  Research handbook on the economics of IP law volume 2 Becker, D. 664 Beckerman-Rodau, A. 400, 401 Beebe, B. 11, 500, 501, 512, 524–5, 527, 528, 617–36 Behrens, D. 27–8 Bekkers, R. 189, 191, 192–3, 194, 195, 196, 197, 198, 203, 205, 206, 207, 210, 211, 212, 219, 220, 221, 222 Bender, G. 165 Benjamin, S. 496 Benkler, Y. 583, 657, 659 Bennett, A. 271 Benson, C. 25 Berger, F. 197 Berliner, B. 411 Berne Convention 535, 537, 539, 612 Bertacchini, E. 657, 660 Besen, S. 189 Bessen, J. 31, 317, 320, 321, 335, 393, 411, 455, 463 Bettels, B. 37 Bhaskarabhatla, A. 427, 428, 429 Bhattacharya, J. 41 Biasi, B. 477, 610 Biddle, B. 188, 190, 203, 206, 220 Bilir, L. 317, 647 biomedical research growth, university patenting 259–60, 261, 262, 263 biotechnology research, university patenting 264–5 Bird, R. 629 black-letter principle, trademark law studies 627–8 Blind, K. 187, 189, 191, 192, 193–4, 195, 196, 197, 199, 200, 204, 205, 206, 207, 212, 214, 218, 219, 220 Block, M. 222 Blount, J. 455 Blount, S. 311 Blum, K. 625 Blumenthal, D. 644 Bock, J. 143, 144–5, 358, 360–61 Bogart, D. 554 Bogers, M. 661 Bohannan, C. 246, 384, 385 Bolin, S. 188 Bollier, D. 672 Bone, R. 647 books access barriers 607–11 technological change and copyright see copyright and technological change in music, movies, and books Borgman, C. 664 Boudreau, K. 594

DEPOORTER_V2_9781848445369_t.indd 678

bounded-ranges approach, patent infringement 333 Bourguet, F. 412 Boyle, J. 659 brand recognition errors, trademark law studies 632–3 Brauneis, R. 8, 533, 534, 541–2, 544–5, 632 Breau, D. 361 Bremer, E. 223 Breznitz, D. 441 Brin, S. 24 Brook, B. 361 Brooks, T. 607 Brown, B. 374–5, 377, 381 Brüeggemann, J. 593, 596 Buccafusco, C. 415, 566, 579–604, 610, 611 Budish, E. 318 bundling of patent rights that are substitutes, patent pools 245–6 Burk, D. 130, 134, 317, 319 Burt, S. 447 Büthe, T. 188 Byrd, O. 408, 409 Caballero, R. 33 Calabresi, G. 392, 393 Callaert, J. 28 Camesasca, P. 200, 217 Canada damages awards 405 permanent injunctions 396 Cargill, C. 188 Carley, M. 81 Carlson, S. 240, 245, 251 Carlton, D. 216 Carpenter, Mark 21, 29 Carpenter, Megan 620 Carroll, M. 317 Casey, S. 94 Caves, R. 559 Caviggioli, F. 189, 193 cease-and-desist orders 176, 179, 396, 400, 498, 631 Charnas, D. 570 Chatlynne, E. 350–51, 357, 358–9 Chen, C. 35 Cheng, J. 503 Chesbrough, H. 661 Chiang, T.-J. 368 Chiao, B. 208, 220 Chien, C. 67, 175–84, 199, 200, 217, 314, 319, 396, 400, 410, 414, 446, 451, 454, 455, 458, 493 China damages awards 405, 413

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Index  679 US, International Trade Commission studies 180 Choi, J. 250 Choi, K. 189, 220 Chon, M. 224, 612 Chu, C. 165 citations categories and document classification, European Patent Office (EPO) 37–8 data see patent citation data in social science research forward see forward citations Claessen, R. 399, 403 claim construction studies 159–74 appellate review standard 162, 163, 164, 165–6, 170, 331, 405–6 claim clarity issues 171 claim differentiation doctrine 161 courts’ specialized doctrines 161 dictionaries, use of 161, 163, 166, 168, 169 dissenting opinions 165, 167 district judge responsibility 162 evidence requirements 161, 163 future research 171–2 generic terms, use of 171 high technology areas and reversals 166–7 judge-level effects 167–9 judicial behavior, learning and collegial effects 169–70 judicial review standard issues 163–4 judicial variation 165 jurisprudence and patent policy development effects 170–71 and jury trials 161–2 peripheral claims format 160–61 predictability issues 163, 168 proceduralist versus holistic methodology 168 reversal rate studies 164–7, 169–70 specialization issues 161, 166, 168 unpredictability 162–3 Clark, C. 21 Clermont, K. 359 Cockburn, I. 39, 82–3, 90 coding 11, 12, 69–70, 307, 330, 513–14, 516, 527 Cohen, J. 583, 657 Cohen, M. 413 Cohen, W. 28–9, 34, 39, 51, 54, 429, 469, 644 Collins, P. 28 Colyvas, J. 266, 275 commercial databases 3, 6, 8, 9, 10–11, 12 commercialization concerns, university patenting 262–3, 266, 272–4 common law 110, 111, 113, 396–7, 398, 639–40

DEPOORTER_V2_9781848445369_t.indd 679

commons anti-commons concerns, university patenting 269–72 common pool resources (CPR), knowledge commons 662–3, 665, 666 knowledge see knowledge commons see also Creative Commons; open standards; patent pools competition inequitable conduct and patent misuse 384–5 patent pools 238, 241–9 semiconductor industry 426, 428–9, 430, 439 compulsory licensing 393, 397, 407, 414–15, 463, 472, 477, 565, 612, 613 computer programmers and Open Source movement 613–14 confusion test see trademark law studies, likelihood of confusion test Conley, J. 493 Conti, R. 582 Contreras, J. 185–235, 237, 238, 243, 663 Cook-Deegan, R. 663 cooperation factors knowledge commons 663, 669, 672 patent pools 237–8, 249 copying 345–6, 528, 529 copyright as alternative, economic history and patent policies 476–7, 478 data sources 7–8 music see music copyright political economy of intellectual property reforms 501–4 substantial similarity 599 technical standards and standards-setting organizations (SSOs) 223–4 copyright law and access to works 605–15 compulsory licenses 612, 613 computer programmers and Open Source movement 613–14 follow-on innovation 606, 607 international treaty responses 612–14 musical works and notice-and-takedown regime 613 national legislation 613 orphan works legislation and photographs 613 price effects 610–11 self-help by authors and Creative Commons licenses 613–14 transaction costs 606–7, 608, 613 copyright law and access to works, access barriers and inefficiency evidence 607–12 audiobooks as follow-on creation 611 books 607–11

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680  Research handbook on the economics of IP law volume 2 digitization of music 549–50, 559–61, 607 first-sale doctrine 606, 607, 609 follow-on creation, effects on 611–12 public domain bestsellers 609–10 public domain images 611–12 copyright litigation studies 511–32 appellate decisions, effects of 513 future research 518, 530–31 ideology effects 512 judicial behavior 512–13 open data 530 selection bias 530–31 copyright litigation studies, docket studies 513–18 damages awards 516 intensity variation 515 internet file-sharing 516–17, 518, 530 litigation trends and geographic coverage 518 low intellectual property industries and works in litigation cases 515–16 suit coding 513–14, 516, 527 willful infringement 516 copyright litigation studies, doctrinal studies 519–29 attorneys’ fee awards 519–20 distribution issues 523 event studies 519–20 injunctive relief 519–20 publication decisions 521–3 publication relevance 522–3 substantial similarity studies 520–21 copyright litigation studies, doctrinal studies, fair use doctrine 512, 522, 523, 524–9, 531 copying 528, 529 court decision differences 524 and creativity shift 528 predictability issues 527–9 reasonableness test 528–9 transformative use 525–8 value of copyrighted work 527 copyright registration studies 533–46 age distribution of authors 541, 542–3, 544–5 application numbers 537–40, 542 attorneys’ fees 534, 535, 536 co-authorship 540 creativity effect 538, 543–4 data accuracy issues 539–41 data and law 535–6 future research 545 gender of authors 542–3 geographic areas 541 group registrations 544 and infringement lawsuits 535–6

DEPOORTER_V2_9781848445369_t.indd 680

noisy registration data 536–9, 543–4 pre-registration 536, 540 and presumption of validity 535 publication status 540 racial and ethnic distribution of authors 542–3 registration cost benefits 543 registration fees 536–7, 543 registration prior to publication 535, 536 renewal rates 535, 536, 537 statutory amendments, effects of 537 times of registration 540–41 unregistered works 543 US Copyright Office data, use of 541–3 validity measurement issues 543 copyright and technological change in music, movies, and books 547–63 book self-publishing 555, 560, 561 cost reduction 552–4, 559–60 creative output 554–61 demand curves for products 548–50 digitization effects 549–50, 559–61, 607 e-books 555, 607–8, 609 file sharing and music revenue 551–2 movies quality and appeal assessment 555, 558–9, 560, 561 music quality and appeal assessment 555, 556, 557–8, 560, 561 new book titles 554–5 piracy effects 548–60 reviews, access to 553–4 streaming services 553, 573, 575, 576 see also music copyright Cornelli, F. 320 cost factors copyright registration costs 536–7, 543 copyright and technological change in music, movies, and books 552–4, 559–60 experiments in intellectual property 600 information costs, patent remedies 393 presumption of validity 356–7 see also fees; transaction costs Cote, F. 116 Cotropia, C. 21, 79, 80, 108, 110, 111, 112–13, 145–6, 166–7, 180, 281–309, 345, 346, 396, 446–56passim, 512, 514–16, 518, 530, 600 Cotter, T. 195, 200, 213, 214, 215, 217, 368, 374, 384, 385, 390–421 Cottrell, F. 257 covered business method (CBM) review 95, 96–7, 98, 99 Cowhey, P. 189 Cox, A. 413 Cramer, J. 317

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Index  681 Creative Commons licensing, knowledge commons 659 political economy of intellectual property reforms 504 self-help by authors and Creative Commons licenses, copyright law and access to works 613–14 see also commons creative output, copyright and technological change in music, movies, and books 554–61 creativity effect, copyright registration studies 538, 543–4 creativity shift, and copyright fair use doctrine 528 Criscuolo, P. 39 Croson, R. 358 cross-border issues, patent remedies 397 cross-licensing 54, 55, 238, 241–2, 247, 251, 426, 428, 435, 439–41 Crouch, D. 14, 292–3, 311, 312, 314 cumulative innovation 23, 436–7, 593, 594–5 cumulativeness role, inequitable conduct and patent misuse 370 Cunningham, B. 538 Czarnitzki, D. 25 Dahlin, K. 27–8 Daily, J. 493, 494 damages copyright litigation studies, docket studies 516 patent remedies see patent remedies, damages Danguy, J. 39, 320 Daniel, B. 357 Daniels, B. 662 Dann, C. 331 Darling, K. 660 Dasgupta, P. 258 data access to works, and copyright law see copyright law and access to works copyright registration studies 535–6, 539–41 innovation data, economic history and patent policies 465–6 reliability issues, patent infringement 329 selection bias concerns 299–300, 328–9, 369, 530–31 social science research see patent citation data in social science research sources 2–17 David, P. 258, 269, 276, 464, 607, 660 Davis, R. 100 De Beer, J. 661

DEPOORTER_V2_9781848445369_t.indd 681

De Carvalho, N. 223 De Rassenfosse, G. 20–46, 315, 319 Dearborn, R. 331 Dechenaux, E. 274 Deci, E. 582 Dedeurwaerdere, T. 663 DeLacey, B. 189, 208 Delcamp, H. 49, 50–51, 188 Delerue, H. 644 demand curves for products, copyright and technological change in music, movies, and books 548–50 demand letters 452, 454–5, 499, 649 DeMeyer, C. 211 DeNardis, L. 191 Deng, Y. 320, 321 Depoorter, B. 512, 516 DeRosia, E. 627–8 deterrence factor, patent remedies, damages 393, 404–5 Devlin, A. 354–5, 357 Diamond, S. 629 DiCola, P. 564–78 dictionaries, use of, claim construction studies 161, 163, 166, 168, 169 see also language use Diehl, M. 181 Diessel, B. 400, 401 differential laws, trade secret studies 642–4, 646, 647 differential treatment 371, 472, 477, 588, 600 differentiation, claim differentiation doctrine 161 digitization effects copyright and technological change in music, movies, and books 549–50, 559–61, 607 digital sampling, music copyright 566, 574–5 see also technology dilution test, trademark law see trademark law studies, likelihood of dilution test DiMasi, J. 318, 355 disclosure policies inequitable conduct and patent misuse 374 patentability studies 289–90, 307–8 technical standards, standards-setting organizations (SSO) and patents 192, 205, 206, 207–8, 209, 211–12 dissenting opinions 111–12, 122, 134, 146, 149, 165, 167 distinctiveness requirement, trademark law studies 622–4, 625, 630 district courts 71, 98–9, 101, 115, 151–3, 162, 180–81, 295–6, 394–5 see also US, Federal Circuit as institution

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682  Research handbook on the economics of IP law volume 2 docket studies 9–10, 11, 69–70, 180, 181–2, 638–9 copyright litigation see copyright litigation studies, docket studies doctrinal standards, inequitable conduct and patent misuse 369–72 doctrinal studies, copyright litigation see copyright litigation studies, doctrinal studies doctrine of equivalents patent infringement see patent infringement, doctrine of equivalents US, Federal Circuit as institution 113, 127–9, 141 document classification, European Patent Office (EPO) 37–8 Dolak, L. 369, 375 Doreian, P. 36 Dorogovtsev, S. 35 double-marginalization risk, patent pools 237 Downing, K. 394 Dreyfuss, R. 106, 107, 108, 110, 112–13, 114, 115, 129, 130, 131–2, 133, 135, 148, 149, 150, 151, 152, 154, 275, 330 Duffy, J. 108, 110, 111, 113, 114, 129, 130, 133, 137, 147, 148, 150, 153–4, 316, 321, 368 Duguet, E. 34 Dumont, B. 320, 321, 412, 414 Dunner, D. 11, 106, 107, 337, 338, 357, 371, 381, 382, 383 duration of patents see patent duration Dusollier, S. 664 Dutton, I. 469, 470 e-books, copyright and technological change in music, movies, and books 555, 607–8, 609 Eckartz, K. 583 economic history and patent policies 462–81 compulsory licensing encouraging innovation 463, 472, 477 copyrights as alternatives 476–7, 478 differential treatment 472, 477 follow-on innovation 475, 477 future research 471, 475, 477–8 industry differences 473 innovation data sources 465–6 innovation without patent laws 468–70 innovations outside patent system 467–8 intellectual property rights for living organisms, innovation effects 473–4 intellectual property rights as source of economic development 464–5 knowledge sharing 475 litigation risks 470

DEPOORTER_V2_9781848445369_t.indd 682

patent laws changing direction and geography of innovation 474–6 patent laws and low fees 464–5, 469–70 patent pools discouraging innovation 470–71 science and immigration policies 478 secrecy versus patents 473, 475 technical change effects 471, 472, 473, 475 world fairs 466–9, 473, 474 economic value patent citation data in social science research 29–31, 40, 41 patent value 48, 49, 51, 52, 53, 60, 62–3, 67, 73 university patenting 272–4 efficiency issues access barriers see copyright law and access to works, access barriers and inefficiency evidence and cost factors, trade secret studies, incentives theory 646–7 efficient access role, copyright law and access to works 606–7 inequitable conduct and patent misuse 374–5 patent citation data in social science research 35 patent trolls 451, 452, 454, 455, 456 semiconductor industry 430, 434, 438 technical standards, standards-setting organizations (SSO) and intellectual property 200, 203, 218 US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board 94, 99 Egyedi, T. 188, 189, 198, 224 Eisenberg, R. 238, 246, 269, 271, 275, 314, 318, 431, 433 Eisenberg, T. 359 Eisenberger, R. 582 Elhauge, E. 213, 496 Ellis, D. 400 Eltzroth, C. 189, 203, 212 end-users file-sharing software litigation 516–17, 518 protection 498 Engel, C. 585–6 English, R. 662, 663, 664 Epstein, R. 200, 217, 438 Ernst, E. 186, 188, 189, 190, 191, 199 Ernst, H. 53 essentiality and disclosure, technical standards, standards-setting organizations (SSO) and patent policy disputes 211–12 ethnographic approach, patent pools 239 EU judicial behavior, assignment and reasoning 512–13

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Index  683 orphan works legislation 613 patent assertion entities 204 permanent injunctions and cross-border issues 397 Samsung 217, 221 technical standards, standards-setting organizations (SSO) and intellectual property 188 trademark law studies 621–2 European Court of Justice, Huawei 217 European Patent Office (EPO) 3, 28, 31 citation categories and document classification 37–8 examiner effects 39–40, 80, 85, 89 home bias issues 38 patent thickets 38 prior art disclosure 37, 199 event studies, copyright litigation 519–20 examiner effects, European Patent Office (EPO) 39–40, 80, 85, 89 exclusion orders patent remedies 395–6, 400 US, International Trade Commission studies 177, 178–9, 181 exclusionary rights, and semiconductor industry, patent hold-up 431, 433 experiments in intellectual property 579–604 attribution valuation 590–92, 594 causal effects, study of 580–81 copyright law and substantial similarity 599 cost factors 600 cumulative innovation 593, 594–5 differential treatment 588, 600 future research 602 group decision making 601 infringements, people’s judgment of 598–600 multiple studies, importance of 601 patents and non-obviousness judgments 599–600 researcher control 580–81 social norms and moral beliefs 597–8 trade secret studies 643–6, 649–50 trademark law studies 632–5 validity issues 600, 601 valuation, endowment effects 587–90 experiments in intellectual property, creativity and incentives 581–6, 600 buyers versus sellers 586 copyright incentives and fairness 585–6 magnitude and structure of incentives 582–3 over-justification studies 582 real-world creativity experiments 600–602 structure of incentives 583–5 experiments in intellectual property, sequential innovation 592–6

DEPOORTER_V2_9781848445369_t.indd 683

and availability of prizes 596 and free-riding 594 and licensing fees 593 expressive function 355, 644 Fagundes, D. 597 fair use doctrine, copyright litigation see copyright litigation studies, doctrinal studies, fair use doctrine Falck, A. von 399 Farrell, J. 94, 188, 189, 199, 213, 430, 438 Favale, M. 511, 512–13, 613 Federal Circuit see US, Federal Circuit as institution Federico, P. 314, 319, 330, 331, 351, 355 fees attorneys’ fees, and patent remedies 403, 410–11 copyright registration fees 536–7 economic history and patent policies 464–5, 469–70 fee structure effects, US, Patent and Trademark Office (USPTO) 87–8 fee-shifting provision 497–8 licensing fees and sequential innovation 593 maintenance fees 62–3, 314–15 renewal fees, and patent duration 319–20 see also cost factors Fehder, D. 270 Feldman, Y. 641, 644, 645 Féliers, A. 411–12 Field, T. 137, 142 file-sharing internet 516–17, 518, 530 and music revenue 551–2 films, technological change and copyright see copyright and technological change in music, movies, and books first-sale doctrine, books 606, 607, 609 first-to-file system, patentability studies 293 Fisch, A. 328 Fischer, C. 224–5 Fish, R. 161 Fisher, D. 452 Fisk, C. 639, 647 Flamm, K. 238, 246, 247–8 Flanz, S. 410–11 follow-on innovation 424, 425–6, 431, 436–7, 475, 477, 606, 607, 611–12 Fontana, R. 36 Ford, G. 628 Ford, R. 334, 355, 357 Ford, W. 512, 513

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684  Research handbook on the economics of IP law volume 2 Forman, D. 499 forum shopping, US, Federal Circuit as institution 106, 107, 108–10 forward citations patent remedies 414 patent value, private value identification 51, 57, 61–2, 63, 65, 66, 67, 68, 70, 73 patentability studies 284–5, 286–7, 288 patents and standards, SEPs (standardessential patents) 194–5 and technological descendants 23, 24–5, 26, 29, 30, 31 Fox-Kean, M. 32 Frakes, M. 6, 77–91, 320, 356, 493, 494 France damages awards 405, 412 injunctions 398 FRAND licensing disputes see technical standards, standardssetting organizations (SSO) and intellectual property, patent policy disputes, FRAND licensing disputes technical standards 206–7 FRAND royalties patent remedies, damages 406–7 technical standards 201–2, 203, 221–2 see also royalties Franklyn, D. 626–7, 629 free-riding 594, 658, 671 Freilich, J. 336, 337 Friedman, D. 646 Frischmann, B. 656–76 Froats, T. 143–4 Froman, M. 179, 180 Fromer, J. 93, 109–10, 581, 590, 618–19 Frontz, M. 97 Froomkin, A. 189 Frye, B. 268 function-way-result test, patent infringement, doctrine of equivalents 342 future innovation issues, patent duration 316–17 future litigation effects, presumption of validity 355 future research claim construction studies 171–2 copyright litigation studies 518, 530–31 copyright registration studies 545 economic history and patent policies 471, 475, 477–8 experiments in intellectual property 602 inequitable conduct and patent misuse 370, 375, 383–4, 387 knowledge commons 669–73 music copyright 575–6

DEPOORTER_V2_9781848445369_t.indd 684

patent citation data in social science research 41 patent duration 321 patent infringement 336, 337, 345, 346–7 patent pools 252 patent remedies 416 patentability studies 308 presumption of validity 361–3 semiconductor industry 441 trade secret studies 643, 647, 649, 651 trademark law studies 635 university patenting 275–6 US, Federal Circuit as institution 137, 144, 155 US, International Trade Commission studies 181–2 US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board 100–101 US, Patent and Trademark Office (USPTO), prosecution process 90 Gadde, S. 298–9 Galasso, A. 423–44 Galetovic, A. 200, 202 Gallini, N. 426 Gallo, A. 482–509 Gamalielsson, J. 189 Gambardella, A. 31 Gandal, N. 188, 189 Ganglmair, B. 219 Gans, J. 320 Garfield, E. 21, 24 Garland, E. 572 Garner, M. 620 Gary, A. 582 Gay, C. 22 Geiger, R. 260 gender of authors, copyright registration studies 542–3 general purpose technology (GPT) concept 27 generic terms, use of claim construction studies 171 and trademark law 622–3, 632 see also language use generic versions of new drugs, and patent duration 312–13, 318 geographic factors copyright litigation studies 518 copyright registration studies 541 economic history and patent policies 475–6 Geradin, D. 200, 201–2, 213, 214 Gergen, M. 395 Gerhardt, R. 512, 521, 522–3, 618, 619 Germany damages awards 405, 412

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Index  685 injunctions 397, 398, 399, 403 patents and US Trading with the Enemy Act (TWEA) 472 Ghosh, R. 191 Giblin, R. 611 Gibson, C. 664 Gibson, J. 512, 514–16, 518, 530 Gigerenzer, G. 624 Gilbert, R. 200, 213, 216, 316 Ginsburg, J. 614 Giorcelli, M. 476, 478, 581 Gittelman, M. 32, 39 Giudici, E. 455 Giummo, J. 317, 320, 321 Glover, J. 582 Golden, J. 111, 113, 114, 150, 222, 390–421, 496 Goldenberg, D. 54 Golder, P. 642 Goldman, D. 318 Goldman, R. 375 Goldstein, D. 591, 624 Google search engine 3, 5, 7, 24, 40, 46, 623–4, 625–6 Goter, P. 246 Goto, A. 38 Goulet, P. 181 government agency involvement, music copyright 565–6 government delays and extension of patent rights 311–14 government funding effects, university patenting 276 Grabowski, H. 272, 318 Graham, S. 50, 424, 429–30, 618, 644, 646 grant-back licensing, and patent pools 238–9, 246–7, 248–9 grant-rate-calculation studies, US, Patent and Trademark Office (USPTO) 81–2, 86 Gray, J. 415 Green, J. 316 Greenbaum, E. 220 Greenhalgh, C. 618 Greenstein, S. 189 Griliches, Z. 21, 22, 436, 465, 478 Grindley, P. 424, 425, 426, 427, 429, 439 group registrations, copyright registration studies 544 Grumbles, E. 400 Gruner, R. 110, 120, 121, 125 Guellec, D. 38, 64 Gugliuzza, P. 107, 137–8, 150, 151, 152, 154–5, 363 Gulfo, J. 452

DEPOORTER_V2_9781848445369_t.indd 685

Gupta, K. 189, 196, 200, 202, 394, 399, 401, 454 Haber, L. 473 Haber, S. 449, 454, 455 Hadfield, G. 11 Hagiu, A. 452–3 Hahn, R. 180, 181 Hall, B. 27, 30, 38, 61, 62, 267, 273, 428–9, 432, 435 Hannah, D. 641 Haracoglou, I. 414 Hardin, G. 658 Harhoff, D. 30, 37, 58, 62, 63, 64, 195, 273, 440–41 Hashimoto, K. 223 Hatfield, D. 660 Hayes, C. 211, 222 Heald, P. 564, 567, 605–15, 632 Hegde, D. 40, 88, 427, 428, 429, 646 Helfrich, S. 672 Heller, M. 238, 239, 246, 269, 275, 431, 433 Helmers, C. 411, 621 Hemphill, C. 318 Henderson, R. 32, 258, 262–4, 265, 266 Hennessey, B. 582 Henry, M. 116–17, 125–6, 330, 331, 332, 333, 338 Herfindahl-Hirschman Index of concentration 26–7 Herman, M. 218, 219, 220 Hess, C. 662, 673 Heverly, R. 660 Hicks, D. 35 Hill, R. 116 Hilsenteger, J. 168, 171 Hilty, R. 407 Hoffman, D. 663 Holbrook, D. 425 hold-up practices patents and standards, SEPs (standardessential patents) 199–200, 201, 218, 220 semi-conductor industry see semiconductor industry, patent hold-up university patenting 267–9, 268–9, 274 home bias issues, European Patent Office (EPO) 38 Hood, B. 597 Hounshell, D. 465 Housley, R. 189 Hovenkamp, E. 237, 238 Hovenkamp, H. 197, 237, 238, 384, 385, 386 Howard, B. 409 Howell, K. 456 Hsu, D. 273, 430

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686  Research handbook on the economics of IP law volume 2 Hu, J. 413, 416 Hu, X. 35 Huang, M.-H. 34–5 Huang, V. 629–30 Hudson, B. 662 Hummon, N. 36 Hung, S.-W. 35 Hunt, R. 197 Hunter, S. 59–60 Hutchins, M. 318 Hyman, D. 626–7 Iancu, A. 458 Iden, D. 246 ideology effects, copyright litigation studies 512 incentives theory, trade secrets see trade secret studies, incentives theory individual inventors and patent trolls 449, 450, 454 and patentability studies 293 Industrial Research Institute IR100 Awards 29 industries influencing congressional politics 483–8, 489–91, 493–5 industry institutions, music copyright 568–70 industry-specific basis, call for, and patent duration 317–19 inequitable conduct and patent misuse 367–89 alleged material misconduct 373–4, 375 antitrust law 384–5 cumulativeness role 370 decline in challenges 387 differential treatment 371 doctrinal components, missing 369–70 doctrinal standards, different 370–72 efficiency issues 374–5 Federal Circuit 382–3, 387 future research 370, 375, 383–4, 387 historic equitable doctrine of unclean hands 368 intent to deceive 372–3 judicial attention to substantive issues of patent law 376–7 lower tribunal versus appealed inequitable conduct 371–2 as plague on patent system 375–6, 378–9 pleadings claims 368, 376, 378–80, 381 and royalties 385 selection bias issues 369 sufficient disclosure, lack of 374 time-extension misuse rule 386–7 tying arrangements 384, 386 vexatious litigation 386 written opinions 376–8

DEPOORTER_V2_9781848445369_t.indd 686

infrastructure, and knowledge commons 660, 668, 671 injunctions copyright litigation studies 519–20 patent remedies see patent remedies, injunctions preliminary see preliminary injunctions technical standards, FRAND licensing disputes 216–17 innovation compulsory licensing encouraging 472 cumulative 23, 436–7, 593, 594–5 data sources 465–6 follow-on 424, 425–6, 431, 436–7, 475, 477, 606, 607, 611–12 intellectual property rights for living organisms 473–4 outside patent system 467–8 and patent duration 316–17 patent laws changing direction and geography of innovation 474–6 and patent pools 238–9, 244–9 and patent trolls 455 sequential innovation see experiments in intellectual property, sequential innovation user innovation, knowledge commons 661 without patent laws 468–70 insubstantial differences test, doctrine of equivalents 342 insurance, patent insurance coverage, and patent trolls 458–9 Intellectual Property Exchange International (IPXI) trading exchange 203 intent to deceive, inequitable conduct and patent misuse 368, 369, 370, 372–3 intent-to-use applications, trademark law studies 618, 619 International Patent Classification (IPC) codes 30, 49–50, 63–4, 72 International Trade Commission see US, International Trade Commission studies invention attributes indicator 22–31 inventive step measurement, patent citation data in social science research 29–30, 37–8, 283 Isackson, R. 394 Italy injunctions 398 Venetian law and intellectual property rights 464 Iversen, E. 189, 200, 205 Jacoby, J. 632–3, 634 Jaffe, A. 20–46, 89, 276, 319, 426, 465

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Index  687 Jang, E. 189, 220 Janicke, P. 12, 394 Janis, M. 93, 94, 315, 355, 357, 358, 496 Janssen, M. 664 Japan citation categories and document classification 38 damages awards 412–13, 416 examiner effects 89 injunctions 397, 398 prior art disclosure 37 Jeffri, J. 573 Jeruss, S. 446 Jiam, H. 410 Jillavenkatesa, A. 205 Johnson, C. 299–300 Johnson, E. 317, 583, 591 joinder rules 101, 446, 456 Jones, D. 411 Joshi, A. 247–8 judiciary authored opinions of judges 140 backgrounds and characteristics 138–43 behavior, claim construction studies 169–70 behavior, copyright litigation studies 512–13 dependence and differences, patent infringement, doctrine of equivalents 343–5 dependence, and reversal rates 118–19 discretion 134 experience 118–19, 120–21, 152–3 expertise shortcomings 93 outcomes and implementation, patentability studies 291–308 review standard issues, claim construction studies 163–4 role, and trademarks 500–501 rulings of patent infringement shortcomings 68–9, 71 substantive issues of patent misuse 376–7 time of appointment or prior patent experience 118–19 variation, claim construction studies and reversal rates 165 visiting judges, proposal for use of 132 see also US, Federal Circuit as institution jury trials, and claim construction studies 161–2 just-in-time-patenting 197 justification-based research, trade secret studies 641–7 Kahl, L. 205 Kahneman, D. 48 Kamien, M. 316

DEPOORTER_V2_9781848445369_t.indd 687

Kang, B. 197 Kanngiesser, P. 597 Kapczynski, A. 318 Kaplow, L. 93, 392, 393 Kappos, D. 505 Karachalios, K. 208 Katz, M. 186 Kenney, M. 265, 267, 275 Kesan, J. 93, 94, 121, 131, 152–3, 169, 190, 191, 211, 222, 336, 338, 346, 356, 357, 394, 399, 400, 401, 445–61, 482–509 Kessler, D. 164 Kessler, M. 35 Kevles, D. 258 keyword advertising, and likelihood of confusion test 626–7 Khan, B. 464, 465, 467, 469, 470, 478 Khanna, T. 434 Khoury, A. 317 Khun, J. 41 Kieff, F. 200, 355 Kitsing, M. 662 Klasa, S. 646 Klein, B. 164, 359, 430, 520 Klemperer, P. 316, 355 Klerman, D. 93 Klimczak, R. 363 Knaak, R. 621 Knopper, S. 570 knowledge commons 656–76 boundary conflicts 671 common pool resources (CPR) 662–3, 667 commons governance 666, 669, 670 cooperation factors 663, 669, 672 Creative Commons licensing 659 free riders 658 future research 669–73 informal governance benefits 669 infrastructure 660, 668, 671 Institutional Analysis and Development (IAD) framework 664–5 IP’s negative space 660–61 natural resource commons 662–3, 664, 665 New Commons 662 open innovation 661 open source computer programs 658–9 peer production 659 problem solving 667–8 public domain 659 research framework 664–7 research outcomes assessment 666–7 semi-commons 659–60 social dilemmas 658, 664, 665, 667–8, 668, 669, 671 tragedy of the commons 658–9, 665

30/07/2019 15:56

688  Research handbook on the economics of IP law volume 2 user innovation 661 see also commons knowledge flows indicator, patent citation data in social science research 31–4, 35 knowledge sharing, economic history and patent policies 475 knowledge transfer process, patent citation data, network links and mapping 35 Kobayashi, B. 164 Koenig, G. 330, 331 Kogan, L. 273 Kogut, B. 32 Köllner, M. 399 Korobkin, R. 591 Krasilovsky, M. 568 Krause, T. 167 Krechmer, K. 190 Kretschmer, M. 8 Krogstad, J. 449 Kroker, E. 466 Krugman, P. 20, 31 Ku, R. 537, 538–9 Kugler, M. 626 Kuhn, J. 209 Kühn, K. 221, 222 Kühnen, T. 399, 403 Kumar, S. 205, 495 Kur, A. 621 Kurschilgen, M. 585–6 Kuznets, S. 21 Kyle, M. 318 La Belle, M. 447 Laird, L. 446, 456 Lakhani, K. 594 Lakwete, A. 470 Lamoreaux, N. 465, 467, 469 Lampe, R. 40, 248, 250, 466, 470, 471 Lampert, C. 27 Landes, D. 467 Landes, W. 496, 512, 536–7, 538, 539, 544, 605, 658 Lange, D. 659 Langlois, R. 189 language use changes in application review process, US, Patent and Trademark Office (USPTO) 83 dictionaries, use of, claim construction studies 161, 163, 166, 168, 169 generic terms see generic terms, use of patent remedies and do not infringe language 402 patent value, private value identification 65, 72

DEPOORTER_V2_9781848445369_t.indd 688

technical standards and patent policy disputes 210 Lanjouw, J. 30, 54, 56, 60, 62, 63, 68, 283–4, 314, 320, 398, 400, 433 Larouche, P. 217, 221 layered patents 290–91 Layne-Farrar, A. 195, 198, 200, 201, 202, 207, 210, 213, 214, 216, 217, 219, 240, 241 Le Bas, C. 22 Lea, G. 189 Leavens, T. 568–9 Lebrecht, N. 569–70 Lee, P. 93, 148 Lee, S. 472 Lee, T. 622 Lefstin, J. 122–3, 125, 129, 131, 167 Lehman, B. 504 Lehr, W. 189 Lei, Z. 80, 81, 270, 271, 275 Leiponen, A. 188, 189 Lemley, M. 28, 39, 58, 69, 81–2, 84–6, 93, 118–19, 130, 134, 138–40, 170–71, 179–81, 186, 196, 199, 201–2, 205–7, 213, 217–19, 221, 224, 237, 268, 291–2, 310–11, 317, 319, 329, 332, 339–42, 345–6, 354–8, 363, 392, 394, 396, 400, 407, 409, 433, 438, 449, 496, 534, 626, 646, 660 Lerner, J. 22, 64, 89, 208, 219, 237, 238, 240, 241, 248, 319, 398, 400, 426, 433, 438, 471, 651 Leroux, I. 412 Leslie, C. 356, 357 Lessig, L. 614, 659 Levin, R. 53, 274, 317, 424, 425, 429, 432, 469, 644 Levine, D. 641 Li, R. 28 Li, V. 597 Li, X. 35, 476, 611 liability rules, versus property rules, patent remedies 392–4 Liang, M. 411 licensing compulsory 393, 397, 407, 414–15, 463, 472, 477, 565, 612, 613 cross-licensing 54, 55, 238, 241–2, 247, 251, 426, 428, 435, 439–41 data 9 fees, and experiments in intellectual property, sequential innovation 593 grant-back, and patent pools 238–9, 246–7, 248–9 music copyright 574–5

30/07/2019 15:56

Index  689 negotiations, semiconductor industry, patent hold-up 432–3 open, semiconductor industry 425–6 patent value, private value identification 66–7 royalty-free 219–21 rules, patent pools 248 technical standards, standards-setting organizations (SSO) 205, 206, 207–8, 209, 218–21 Lichtman, D. 82, 83, 199, 213, 342, 354, 355, 356, 358, 646 Liddicoat, J. 415 Liebowitz, S. 605, 611 Lim, D. 385–6, 387 Lindsay, M. 208 Linton, J. 54 Liotard, I. 189 Lippman, K. 512, 520–21, 522, 529 Lippoldt, D. 642–3, 646, 647 litigation copyright studies see copyright litigation studies frequency assessment, technical standards and SEPs (standard-essential patents) 195–6 impact, patent pools 249–50 layered patent system 290–91 litigation-value link and patent characteristics 56–7, 62, 66 patent trolls 447, 452–3, 454, 455 probability, patent citation data in social science research 30 risks, economic history and patent policies 470 semiconductor industry, patent hold-up 434–7 trade secrets see trade secret studies, litigation behavior-based research Litman, J. 501–2, 503, 659 Liu, D.-R. 35 Liu, J. 512, 519–20 Liu, K.-C. 407 Liu, Y. 25 living organisms, IP rights, and innovation effects 473–4 lobbying 483–8, 489–91, 493–5, 501 localization effects, patent citation data in social science research 32–3 Loeber, C. 458 Long, C. 319, 430, 493, 494, 495 lost substitutes and patent pools 243, 248 Lourie, A. 133, 134 Love, B. 99–100, 266–7, 292, 310–25, 363, 413, 416, 451, 458

DEPOORTER_V2_9781848445369_t.indd 689

Lowe, R. 274 Lu, Q. 5 Lukach, R. and M. 24 Lund, J. 566, 580, 598–9 Lundell, B. 189, 190, 224 Lundqvist, B. 188, 203, 211, 222 Lunney, G. 128, 129, 294–5, 296, 299–300, 606 Lynch, J. 375 Lyon, T. 224–5 McCain, K. 271 McCarthy, I. 66–7 McClanahan, J. 618, 620 McClelland, S. 401 McDaniel, C. 180 McDonagh, L. 411 McEldowney, S. 295–6 MacGarvie, M. 34, 267, 273, 476, 478 McGowan, D. 224 McGraw, K. 582 Macher, J. 432 Machlup, F. 658 Mack, K. 376–7, 378, 381 McKenna, M. 626 McKusick, V. 258, 259 MacLeod, C. 469, 475 McLeod, K. 574 McManis, C. 205, 223, 224 Madison, M. 656–76 Magee, C. 25 Magliocca, G. 320 maintenance fees 62–3, 314–15 Malackowski, J. 65 Malin, S. 401 Mallinson, K. 196–7, 202, 214 Mammen, C. 371, 372, 375, 377–8, 380, 382, 383 Mandel, G. 305–7, 583, 597–8, 599–600 Mandel, O. 399 Mann, R. 51, 71, 83, 281–309, 600 manufacturing industries, political economy of IP reforms 484, 489, 491 Manzo, E. 400–401 Maples, J. 409 mapping, and network links see patent citation data in social science research, network links and mapping Marco, A. 4, 39, 65–6, 332 Margolis, S. 605 Marino, F. 458 market effects, technical standards and SEPs (standard-essential patents) 194, 199–202 market inefficiencies, and patent trolls 454

30/07/2019 15:56

690  Research handbook on the economics of IP law volume 2 Markey, H. 108, 138, 139, 143, 144 Markoff, J. 423 Marmorstein, H. 628–9 Marshall, E. 271 Martin, D. 211 Maskin, P. 463 mass media coverage, patent trolls 447 Masur, J. 214, 415 Matich, N. 540, 543 Matsunaka, M. 412–13 Mattioli, M. 236–55 Mattli, W. 188 Maurer, N. 449, 454, 455 Maurseth, P. 33 Mayer, C. 139 Mazumdar, A. 164 Mazzeo, M. 414 media and entertainment industries, political economy of IP 484, 489 Mehra, S. 663 Mehta, A. 33 Melamed, D. 392, 393, 449 Mendelson, N. 223 Mendes, J. 35 Menell, P. 159–74, 317 Merges, R. 94, 209, 237, 238, 240, 243–4, 248, 250, 251–2, 393, 424, 426, 427, 663 Merrill, S. 51 Merton, R. 258, 663 Meub, L. 596 Meurer, M. 160, 317, 335, 393, 411, 455 Meyer, M. 21 Miao, C. 413 Michel, J. 37 Michel, P. 114, 115, 118, 119, 127–8, 135, 138, 143, 161 Michel, S. 217 Miller, J. 217 Miller, R. 65–6 Miller, Scott 168 Miller, Shawn 12, 166, 170, 171 Mina, A. 36 Mojibi, A. 382 Monteverde, K. 431 Montobbio, F. 33, 38 Moore, G. 317 Moore, K. 61, 62, 63, 93, 109–10, 121, 159, 164–5, 166, 169, 170, 311, 320, 333, 334–5, 337, 338, 359, 409–10 Morgan, S. 317 Morrisett, J. 357 Morrin, M. 632–4 Moser, P. 27, 29–30, 62, 247, 248, 250, 462–81, 581, 610 Mossinghoff, G. 338

DEPOORTER_V2_9781848445369_t.indd 690

Mossoff, A. 238, 241, 249, 445, 448, 450 Motohashi, K. 38 Motsenbocker, M. 94 movies, technological change and copyright see copyright and technological change in music, movies, and books Mowery, D. 50, 257, 259, 261–2, 263–4, 265, 272–3, 275, 424, 432, 468 Mueller, J. 396 Mueller-Langer, F. 614 Mullally, K. 115, 116 Mullane, A. 397, 399, 400 multifactor test, trademark law studies, likelihood of confusion test 624–6, 628 multiple patents 68, 69, 70 Murphy, C. 189 Murray, F. 269–70 Murray, L. 661 music copyright 564–78 classical music 570 compulsory licenses 565 contract clauses 568 Copyright Code 565, 566 data sources 567 digital sampling 566, 574–5 future research 575–6 government agency involvement 565–6 historical sources 569–70 and human perception of sound 566 industry institutions 568–70 infringement cases 566 licensing 574–5 music business guides 568–9 musical works and sound recordings, distinction between 565 musician numbers 571–2 musicians’ financial outcomes 568, 570–73 musicians’ financial outcomes, government surveys 571–2 musicians’ financial outcomes, musician surveys 573 notice-and-takedown regime 613 online sources 569 performing rights 576 statutory provisions 566, 576 study methodologies 567 as tailored legal regime 565–6 and technological change see copyright and technological change in music, movies, and books termination rights 576 trademark and branding issues 569 see also copyright and technological change in music, movies, and books Mutti, J. 180

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Index  691 Nakamura, N. 413 Nard, C. 108, 110, 111, 113, 114, 116, 129, 130, 133, 135–7, 150 Narin, F. 21, 29 Neff, G. 94 Neil, S. 189 Nelson, R. 261, 269 Nerkar, A. 247–8 Netanel, N. 512, 524–6, 527, 528 Netherlands injunctions 397, 398 patent protection history 474–5 network links and mapping see patent citation data in social science research, network links and mapping Newman, D. 221 Newman, P. 107, 133, 138–9 Nguyen, T. 458 Nicholas, T. 27, 31 Nickerson, J. 188, 189 Nicol, D. 415 Nimmer, D. 523, 524 Nocera, J. 449, 454 Nock, J. 298–9 noisy copyright registration data 536–9, 543–4 Nolan-Stevaux, K. 374, 376, 380–81 Noma, E. 21 non-discrimination and FRAND licensing disputes 215–16 non-obviousness decisions see patentability studies, non-obviousness decisions non-practicing entities (NPEs) see patent trolls Nordhaus, W. 316 North, D. 464 notice-and-takedown, musical works 613 novelty-specific studies, and patentability studies 292–3 Nuvolari, A. 466, 467, 475 Oberholzer-Gee, F. 476 Odasso, C. 73 Oddi, A. 318 O’Donoghue, T. 316 Oesterle, M. 501 Ohana, G. 218 Ohmstedt, A. 470 Okada, Y. 64 Oliar, D. 8, 533–46 Olson, K. 597 O’Malley, K. 115, 116, 133, 164 Opderbeck, D. 409, 413–14 open standards open data, copyright litigation studies 530 open licensing, semiconductor industry 425–6

DEPOORTER_V2_9781848445369_t.indd 691

open science norms and institutions, and university patenting 258 Open Source movement and computer programmers 613–14 technical standards 190–91 see also commons opportunistic behavior, technical standards and SEPs (standard-essential patents) 197, 198, 200 Orozco, D. 493 orphan works legislation, EU 613 Osborn, L. 130, 131, 134 Osenga, K. 450 Ostrom, E. 239, 662, 663, 664–5, 666–7, 672–3 Ouellette, L. 72, 307–8, 623–4, 625–6 over-granting of patents, US, Patent and Trademark Office (USPTO) 81, 85, 86, 87–9 Owen-Smith, J. 264 Packalen, M. 41 Page, L. 24 Page, W. 572 PageRank score of patents 24 Pakes, A. 320 Palangkaraya, A. 38 Paley, M. 317 Pallante, M. 534 Palmer, A. 259 panel dependency, US, Federal Circuit and reversal rates 114, 118, 123–4, 127 Parchomovsky, G. 53, 54 Parisi, P. 576 Park, W. 315 Parker, C. 454, 455 Parks, K. 569 Partnoy, F. 316, 321 Passman, D. 568 patent ambush, technical standards and patent policy disputes 207, 209–10 patent bar, US, Federal Circuit 115, 368, 496 patent citation data in social science research 4, 20–46 backward citations and technological antecedents 23, 25, 30–31, 34 citation categories and document classification 37–8 citation weighting and private value of patents 30 computational linguistics developments 41 control patents 31–2 cumulative innovation 23 economic value 29–31, 40, 41 efficiency issues 35 examiner effects 39–40

30/07/2019 15:56

692  Research handbook on the economics of IP law volume 2 forward citations and technological descendants 23, 24–5, 26, 29, 30, 31 future research 41 general purpose technology (GPT) concept 27 Herfindahl-Hirschman Index of concentration 26–7 highest-importance patents 24, 25, 27 home bias issues 38 intervention of law firms in drafting of patent document, effects of 32–3 invention attributes indicator 22–31 inventive step measurement 29–30, 37–8, 283 knowledge flows indicator 31–4, 35 litigation probability 30 localization effects 32–3 office effects and institutional differences 37–8 PageRank score of patents 24 patent thickets 38 potential pitfalls 37–40 prior art disclosure 37, 40 radical/breakthrough invention 27–8 region-by-region citations frequency matrix 33 scientific research link and non-patent references 28–9, 30–31 social value 23, 29, 30 technological distance and diversity 26–8 time and technology field effects 37–8 USPTO patent classification system 26 patent citation data in social science research, network links and mapping 34–7, 41 bibliographic coupling 35 degree distribution 35 knowledge transfer process between entities 35 radio-frequency identification (RFID) patents 35 technological trajectories 36–7 patent classification numbers 63–4, 70, 71–2 patent duration 310–25 future innovation issues 316–17 future research 321 generic versions of new drugs 312–13 government delays and extension of patent rights 311–14 industry-specific basis, call for 317–19 issue to filing date-based calculation 311 maintenance fees 314–15 patent renewal, theoretical and empirical studies 319–20 patent term, theoretical and empirical studies 316–19 petty patent regimes 314–15

DEPOORTER_V2_9781848445369_t.indd 692

pharmaceuticals 313–14, 317–18 renewal fees 314, 315, 319–20 software patents 317 ‘submarine’ patenting 311 and TRIPS Agreement 314–15, 318–19 welfare-reducing effects and patent duration limitation 316 patent hold-up, semiconductor industry see semiconductor industry, patent hold-up patent infringement 326–49 appellate treatment 337–8 bounded-ranges approach 333 and coding 330 copying 345–6 data selection bias concerns 328–9 Federal Circuit creation effect 330 future research 336, 337, 345, 346–7 indirect liability 328 patent trolls 336–7 post-Federal Circuit era 332–4, 338 pre-Federal Circuit era 330–32, 338 procedural posture and jury/judge differences 334–5, 336 special plaintiffs 336–7 subject matter effect 335–6 ‘true’ rate of infringement 332–3 patent infringement, doctrine of equivalents 334, 338–45 claim construction 327, 343, 344, 346 content developments 340–43 function-way-result test 342 insubstantial differences test 342 judicial dependence and differences 343–5 judicial hostility to 343 and legal limitations 342–3 and outcomes 339–40 summary judgment of non-infringement 341–2 patent invalidation impact 357–8, 437 patent misuse see inequitable conduct and patent misuse patent policies and economic history see economic history and patent policies patent policy disputes, and technical standards see technical standards, standards-setting organizations (SSO) and intellectual property, patent policy disputes patent pools 236–55 bundling of patent rights that are substitutes 245–6 competition studies 238, 241–9 complementary technologies 238 contract-based 241 cooperation factors 237–8, 249 cross-licensing 238, 241–2, 247, 251

30/07/2019 15:56

Index  693 documentation scarcity 239 double-marginalization risk 237 ethnographic approach 239 future research 252 governance rules and participation rates 241 and grant-back licensing 238–9, 246–7, 248–9 historical record 239–41 and innovation 238–9, 244–9 institutional structures adopted by 241 licensing rules and pool composition 248 lost substitutes concern 243, 248 membership agreements 240–41 patent litigation impact 249–50 regulation effects 244 royalty distributions 252 Singer Combination cross-licensing 241–2 standards-based 241 and technological standards 203, 243–4, 245 transaction cost impact 236–7, 250–51 validity challenge effects and dispute resolution 250 as valuation forums 251–2 see also commons patent prosecution information, data sources 4–5, 11–12 patent remedies 390–421 cease-and-desist orders 176, 179, 396, 400, 498, 631 compulsory licensing of patent rights in public interest 393, 395, 396, 397, 398, 407, 414–15 criminal penalties 415 cross-border issues 397 do not infringe language, use of 402 exclusion orders 395–6, 400 forward citations 414 future research 416 information costs 393 patent trolls 394 property rules versus liability rules 392–4 sanctions for contempt 392–3 technologies and holdout behavior 393–4 third-party challenges 415 patent remedies, damages 403–15 attorneys’ fees 403, 410–11 calculation issues 405–7 deterrence factor 393, 404–5 enhanced 409–10 FRAND royalties 406–7 lost profits 393, 403, 404, 406, 408–9, 412 median awards 407–9 potential predictors 413–14 pre-judgment interest 403

DEPOORTER_V2_9781848445369_t.indd 693

restitutionary relief 403, 404 royalties 403–4, 405, 406–7, 410 supra-compensatory awards 404–5 willfulness element 409–11 patent remedies, injunctions 391–403 district courts 394–5 injunctive relief 395, 398, 399–401 non-standard forms of injunctions 402 permanent 394–401 preliminary injunctions 397–8, 399–400, 402–3 staying effect of injunction 398 and technology fields 401, 402–3 violation and enforcement 403 patent thickets 38, 49, 53 Patent and Trademark Office see US, Patent and Trademark Office (USPTO) patent transfers, technical standards and SEPs (standard-essential patents) 194 Patent Trial and Appeal Board see US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board patent trolls (non-practicing entities (NPEs)) 320, 445–61 abusive behavior solutions 456–9 benefits 453–4 business model 447, 448 congressional legislation, proposed 457–8 data sources 12 definition 447–8 disadvantages 454–5 efficiency issues 451, 452, 454, 455, 456 enforcement strategy and demand letters 454–5, 499, 649 failed operating/start-up company 450–51, 458 Federal Rules of Civil Procedure Form 18, elimination of 456–7 fraudulent misrepresentation 452 increase factors 448 individual inventors 449, 450, 454 infringement threats 455 innovation restrictions and costs 455 inventor protection 454 joinder rules 101, 446, 456 large patent aggregators 450 litigation costs 447, 452–3, 454, 455 market inefficiencies, creation of 454 mass media coverage 447 operating company 451 patent holding company 451 patent infringement 336–7 patent insurance coverage 458–9 patent remedies 394 pleadings claims 455, 456–7

30/07/2019 15:56

694  Research handbook on the economics of IP law volume 2 political economy of intellectual property reforms 498, 499–500 renewal fees and patent duration 320 reverse trolling 452 technical standards and SEPs (standardessential patents) 196, 204 and technological advancement 448, 451 and technology exchange 453–4 and universities 449 US, International Trade Commission studies 180 US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board impact 99–100 patent value 47–75 cross-licensing 54, 55 discrete and complex technologies, distinguishing between 49–50, 55 docket studies 69–70 economic value 48, 49, 51, 52, 53, 60, 62–3, 67, 73 and patent quality 48, 51–2, 58 patent thickets 38, 49, 53 private value 48–51, 52–3 private value and patent paradox 53–4 private value and patent portfolios 53–5, 54–5, 63, 70 renewal fees 51, 52, 62–3 social value 48–51 patent value, private value identification 56–73 claim breadth effect 64–5 direct measurement 73 examiner effect 65 forward citations 51, 57, 61–2, 63, 65, 66, 67, 68, 70, 73 independent patent claims 60–61, 65 language use 65, 72 licensing 66–7 patent claims number 60–61 patent classification numbers 63–4, 70, 71–2 patent examination characteristics 65–6 patent family size in multiple countries 63, 71 prior art references 57–60 prior art references, nonpatent prior art 57–8 self-citations 4, 32, 57, 58, 61–2 transfers of ownership 67 patent value, private value identification, litigation outcomes 67–73 coding of outcomes 69–70 district courts 71 judicial shortcomings 68–9, 71 litigation-value link and patent characteristics 56–7, 62, 66

DEPOORTER_V2_9781848445369_t.indd 694

manual coding and reliable outcomes 70 multiple patents 68, 69, 70 and number of total claims 71 and patent demographics 71 recording of settlements 69 summary judgments 68 patentability studies 281–309 coding 307 disclosure requirements 307–8 first-to-file system 293 forward citations 284–5, 286–7, 288 future research 308 and individual inventors 293 judicial outcomes and implementation 291–308 litigation and layered patent system 290–91 novelty-specific studies 292–3 patent quality and research productivity 283–4 patentability requirements 282–3 prior art claims 292–3 repeat patent litigation 288–9 software patents and disputed quality 286–7 validity and information disclosure statements 289–90 validity of litigated patents 291–2 validity and quality of issued patents, quantifying 283–91 value of patents 285–6, 288–9 value of patents, extreme value 287–8 patentability studies, non-obviousness decisions 293–307, 600 after KSR v. Teleflex 298–302, 304–5 district court opinions 295–6 Federal Circuit decisions 296–305 hindsight bias 305–7 prior to KSR v. Teleflex 294–8, 302–4 reason to combine test 302 selection bias issues 299–300 standard applied by courts 302–5 teaching, suggestion, motivation (TSM) test 302–5, 306–7 and technological complexity 296, 301–2 and validity 294–5 patents data sources 2–6, 11–12, 13, 14–15 European Patent Office see European Patent Office (EPO) International Patent Classification (IPC) codes 30, 49–50, 63–4, 72 and non-obviousness judgments, experiments in intellectual property 599–600 political economy of intellectual property reforms 488–500

30/07/2019 15:56

Index  695 pro-patent bias see pro-patent bias smallest saleable patent practicing unit (SSPPU), technical standards and FRAND licensing disputes 215 standard-essential patents (SEPs) see technical standards, standards-setting organizations (SSO) and intellectual property, patents and standards, SEPs (standard-essential patents) and technical standards see technical standards, standards-setting organizations (SSO) and intellectual property, patents and standards university see university patenting US, Patent and Trademark Office (USPTO) see US, Patent and Trademark Office (USPTO) value and use, semiconductor industry 429–30 Pedraza-Fariña, L. 114, 116, 132, 138, 147, 148, 150–51, 152, 154 peer production, knowledge commons 659 peer review effectiveness trade publications 59, 270 US, Federal Circuit as institution, structure and staffing 144 Pegoraro, R. 454 Pekarek-Krohn, D. 496 Penrose, E. 468 Pentheroudakis, C. 187, 207, 213, 217 people’s judgments of infringements, experiments in intellectual property 598–600 Pérez-Peña, R. 449 peripheral claims format, claim construction studies 160–61 Perzanowski, A. 660, 661 Petherbridge, L. 110, 111, 113, 116, 118, 120, 123–4, 125, 127, 129, 136, 137, 141, 145, 167–8, 169, 297–8, 299, 303, 326–49, 367–89 Petit, N. 215 Pettigrew, L. 111, 113, 129, 131, 133–4, 136 petty patent regimes, patent duration 314–15 Pham, M. 447 pharmaceutical industries and patent duration 313–14, 317–18 political economy of IP reforms 484, 486, 489, 491, 492 Phillips, J. 317 piracy effects, copyright in music, movies, and books 548–60 Plager, S. 111, 113, 129, 131, 133–4, 136, 137, 139, 142

DEPOORTER_V2_9781848445369_t.indd 695

pleadings claims inequitable conduct and patent misuse 368, 376, 378–80, 381 patent trolls 455, 456–7 Png, I. 642, 646 Pogue, M. 447, 454 Pohlmann, T. 187, 188, 192, 193–4, 195, 196, 197, 199, 204, 206, 212, 241 political economy of intellectual property reforms 482–509 communications industries 484, 489, 491 congressional legislation, influences on 497–8 copyright 501–4 copyright, content providers, power of 502–3, 504 Creative Commons 504 Federal Circuit, external influences 496 Federal Circuit, historical development 495–6 fee-shifting provision 497–8 industries influencing congressional politics 483–8, 489–91, 493–5 lobbying effects 483–8, 489–91, 493–5, 501 manufacturing industries 484, 489, 491 media and entertainment industries 484, 489 patent reform bills, effects of 486 patent trolls 498, 499–500 patents 488–500 patents, stakeholders 488–93 pharmaceutical industries 484, 486, 489, 491, 492 pro-patent bias 493–4, 495, 496 protections for end users 498 and public access 501–2, 503–4 software and internet companies 483–4, 486, 489, 491–3 Supreme Court role 498–500 trade secrets 504–6 trademarks and role of judiciary 500–501 US Patent and Trademark Office (USPTO), influences on 493–5 Popp, D. 284–5 Posner, R. 496, 536–7, 538, 539, 544, 605, 658 post-grant review, US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board 94–7, 172, 452, 456 Powell, W. 264 pre-judgment interest, patent remedies, damages 403 predictability issues claim construction studies 163, 168 copyright litigation studies, fair use doctrine 527–9

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696  Research handbook on the economics of IP law volume 2 US, Federal Circuit see US, Federal Circuit as institution, certainty and predictability preliminary injunctions patent remedies 397–8, 399–400, 402–3 semiconductor industry 427, 432, 433 see also injunctions presumption of validity 350–66 constraints on USPTO’s examinations 356, 359, 360, 362–3 and copyright registration studies 535 cost factors 356–7 ‘expressive’ function 355 future litigation effects 355 future research 361–3 as information-poor process 356 justification theories 354–5 patent litigation invalidity rates 357–8 patent rights, promotion of stable 355 patent subject-matter eligibility 363 preponderance of evidence standard 354 prior art evidence 353–4, 361–3 rebuttable presumption 355 standard of proof 352–4, 357, 358–61 standard of proof, experimental studies 360–61 standard of proof, observational studies 358–9 summary judgment 359 see also validity issues price effects, copyright law and access to works 610–11 pricing of SEP licenses, technical standards and FRAND licensing disputes 213–14 Priest, G. 164, 359, 520 prior art disclosure challenges and judicial appointments 119 and duty of candor, US, Patent and Trademark Office (USPTO) 78–80, 85 European Patent Office (EPO) 37, 199 evidence, and presumption of validity 353–4, 361–3 Japan Patent Office (JPO) 37 patent citation data in social science research 37, 40 patent value, private value identification 57–60 patentability studies 292–3 technical standards and SEPs (standardessential patents) 194–5, 199 private ordering, technical standards see technical standards, standards-setting organizations (SSO) and intellectual property, private ordering and patent policies

DEPOORTER_V2_9781848445369_t.indd 696

private value identification see patent value, private value identification privateering, and technical standards 222 pro-patent bias political economy of intellectual property reforms 493–4, 495, 496 semiconductor industry 425–9 US, Patent and Trademark Office (USPTO) 85–9 product category recall test, trademark law 633–4 profits, lost profits, patent remedies, damages 393, 403, 404, 406, 408–9, 412 property rules versus liability rules, patent remedies 392–4 protectionism claims, US, International Trade Commission studies 176, 178, 179, 182 public access, and political economy of IP reforms 501–2, 503–4 public domain, copyright law and access to works 609–12 public interest patent remedies and compulsory licensing of patent rights 393, 395, 396, 397, 398, 407, 414–15 and university patenting 258, 259 and US, International Trade Commission studies 178, 179, 181 public participation, US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board 95, 96–7 publication decisions, copyright litigation studies, doctrinal studies 521–3 in scientific journals, and university patenting 265 status, copyright registration studies 540 Pullig, C. 634 Putnam, J. 63, 215 quality issues copyright and technological change in music, movies, and books 555, 557–61 and formalist approach, Federal Circuit see US, Federal Circuit as institution, quality and formalist approach patent quality and research productivity, patentability studies 283–4 and patent value 48, 51–2, 58 technical standards and SEPs (standardessential patents) 195 university patenting 263–4, 265 US, Patent and Trademark Office (USPTO), prosecution process 84

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Index  697 validity and quality of issued patents, quantifying 283–91 quantifying standards, technical standards 191–3 Quillen, C. 81, 496 Quinn, G. 317, 450, 452 racial and ethnic distribution of authors, copyright registration studies 542–3 radical/breakthrough invention, patent citation data 27–8 radio-frequency identification (RFID) patents, patent citation data 35 Rafilson, A. 401 Rai, A. 84, 92–103, 129, 130, 134, 150, 151, 152, 154, 205, 249, 261, 267–9, 275, 496 Ran, R. 180 Rantanen, J. 13, 118, 120, 300–302, 304, 326–49, 367–89, 455 Rato, M. 200 Raustiala, K. 581, 597, 660 reasonableness of royalty rates, and technical standards 202, 206–7 reasonableness test, copyright litigation studies, and fair use doctrine 528–9 Reese, R. 512, 519, 524, 528–9 Régibeau, P. 187, 188, 203, 211, 212, 214, 215, 218, 219, 221, 222 registration, copyright see copyright registration studies Reichman, J. 662, 663, 664 Reid, G. 651 Reilly, G. 93 Reimers, I. 476, 553, 554, 561, 610 Rein, L. 494 Reitzig, M. 55 remedies, patent see patent remedies Renaud, M. 411 renewal fees patent duration 314, 315, 319–20 patent value 51, 52, 62–3 renewal rates, copyright registration studies 535, 536, 537 Rens, A. 191 repeat patent litigation 288–9 restitutionary relief, patent remedies, damages 403, 404 reversal rates claim construction studies 164–7, 169–70 Federal Circuit see US, Federal Circuit as institution, certainty and predictability, reversal rates reverse hold-up, technical standards 200 reverse trolling 452 Rhode, P. 470, 474

DEPOORTER_V2_9781848445369_t.indd 697

Rice, K. 448 Rich, G. 139, 141, 161 Richards, J. 315 Richtel, M. 317 Riley, P. 181 Risch, M. 290–91, 329, 336, 347, 400, 449, 458, 638–54 Roach, M. 28–9, 34 Robb, H. 474 Rogers, E. 512, 520–21, 522, 529 Roin, B. 317, 318, 319 Rooksby, J. 275–6 Rose, C. 660 Rosenberg, N. 261, 465, 468 Rowe, E. 651 royalties distributions, patent pools 252 inequitable conduct and patent misuse 385, 386–7 patent remedies, damages 403–4, 405, 406–7, 410 and technical standards 196, 200–202, 203, 207, 214–15, 218–22 Rubin, J. 607 Ruckman, K. 66–7 Russell, A. 186, 189, 190 Russia, damages awards 405 Ryan, C. 268 Rysman, M. 189, 195, 220 Sag, M. 511–32, 533, 565, 570, 651 Sager, T. 56, 60 Saloner, G. 188 Sampat, B. 28, 31, 39, 40, 79, 81, 82, 84, 85, 86, 273, 318 Samuelson, P. 223, 317, 426, 524, 528 sanctions for contempt, patent remedies 392–3 Sanjek, R. and D. 569 Sarel, D. 628–9 Schacht, W. 312 Schankerman, M. 30, 52–3, 54, 56, 60, 62, 63, 68, 283–4, 314, 320, 427, 433, 434, 436, 437 Schautschick, P. 618 Scherer, F. 273, 316, 414–15, 425, 534 Schiff, E. 475 Schmoch, U. 37–8 Schmookler, J. 22, 465, 534 scholarship use, US, Federal Circuit 135–7 Schonwetter, T. 612 Schultz, M. 642–3, 646, 647, 663 Schwartz, A. 506 Schwartz, D. 2–17, 69, 120, 121, 122, 124, 125, 136, 137, 145, 165, 166, 169, 170, 175–84, 340, 342, 350–51, 358, 359, 360, 361, 449, 450

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698  Research handbook on the economics of IP law volume 2 Schwartz, N. 316 Schweik, C. 662, 663, 664 Scotchmer, S. 316, 320, 426, 463, 477 Seaman, C. 181, 350–66, 400, 401, 407, 409, 410, 600 Searle, N. 651 selection bias issues 118, 272, 299–300, 328–9, 369, 530–31 Self, L. 451 self-citations 4, 32, 57, 58, 61–2 self-help by authors and Creative Commons licenses 613–14 self-publishing, books and copyright 555, 560, 561 semi-commons, knowledge commons 659–60 semiconductor industry 423–44 competitive dynamics 426 competitor advantage 430 cross-licensing 426, 428, 435 efficiency issues 430, 434, 438 and Federal Circuit 426–7, 428, 436–7 follow-on innovation 425–6, 436–7 future research 441 Moore’s Law 423 open licensing 425–6 patents as bargaining chips 428 preliminary injunctive relief 427, 432, 433 pro-patent shift 425–9 specialization issues 424, 425, 428–9, 431, 435 technology protection against competitors 428–9 value and use of patents, survey evidence 429–30 semiconductor industry, patent hold-up 430–41 capital intensities effects 440 clean room operations 431–2 competition concerns 439 cross-licensing 439–41 cumulative innovation protection 436–7 and exclusionary rights 431, 433 and licensing negotiations 432–3 minimizing 430–31 patent invalidation impact 437 patent litigation 434–7 and standard setting 438–9 transaction costs 431, 433–4 vertical chain issues 431 Sepetys, K. 413 sequential innovation see experiments in intellectual property, sequential innovation Serrano, C. 431 Seru, A. 22 Seymore, S. 356 Shah, R. 190, 191

DEPOORTER_V2_9781848445369_t.indd 698

Shampine, A. 216 Shane, S. 273–4, 276 Shapiro, C. 49, 186, 187, 189, 199, 201, 202, 203, 213, 217, 219, 221, 237, 238, 246, 247, 249, 316, 356, 409, 433, 438, 439, 471, 663 Shavell, S. 93, 392, 393 Shaw, A. 597 Sheff, J. 619, 631 Sheffner, D. 223 Sheldon, J. 161 Shemel, S. 568 Shen, D. 456 Sherry, E. 215, 220 Shih, M.-J. 35 Shrestha, S. 336 Shurmer, M. 188, 189 Sichelman, T. 2–17, 109–10, 117, 121, 122, 123, 124, 125, 126, 127, 165, 238, 329, 338, 404, 642, 644 Sidak, J. 195, 200, 202, 208, 213, 214, 215, 217 Siebert, R. 439 Siebrasse, N. 195, 199, 200, 213, 214, 215, 404, 407 Simcoe, T. 188, 189, 192, 195, 196, 220, 431, 433, 438 Simon, B. 238 Simon, D. 624 Singer, H. 180, 181 Singer Combination cross-licensing, patent pools 241–2 Skitol, R. 218, 219 smallest saleable patent practicing unit (SSPPU) of a product, technical standards 215 Smith, H. 393, 659, 660 Smith, M. 608, 609 Smits, J. 189 Snyder, M. 196 social dilemmas, knowledge commons 658, 664, 665, 667–8, 669, 671 social science research, patent citation data see patent citation data in social science research social value knowledge commons 660 patent citation data 23, 29, 30 patent value 48–51 welfare-reducing effects and patent duration limitation 316 software code, and technical standards 224 software and internet companies, political economy of IP reforms 483–4, 486, 489, 491–3 software patents and disputed quality 286–7

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Index  699 and hold-up concerns, university patenting 267–9 patent duration 317 Sokoloff, K. 464, 465, 467, 469 Somaya, D. 180, 276, 435–6 Sonn, J. 32 specialization issues claim construction studies 161, 166, 168 semiconductor industry 424, 425, 428–9, 431, 435 US, Federal Circuit as institution 106, 107, 131–2, 138, 152–3 Spellman, P. 568 sponsorship confusion, trademark law studies 626 Sprigman, C. 396, 398, 566, 579–604, 660 Spulber, D. 188, 190, 199, 200, 204, 206, 207, 220 standard of proof, presumption of validity 352–4, 357, 358–61 standard-essential patents (SEPs) see technical standards, standards-setting organizations (SSO) and intellectual property, patents and standards, SEPs (standard-essential patents) standard-setting, and semiconductor industry, patent hold-up 438–9 standards, use of, US, Federal Circuit as institution, reversal rates 119–20, 124–5, 127–8 standards-setting organizations (SSO), and technical standards see technical standards, standards-setting organizations (SSO) and intellectual property start-ups failed, and patent trolls 450–51, 458 and university patenting 266, 270, 273, 274 Stasik, E. 202, 214 stated preferences issues, trade secret studies 645–6 Steckel, J. 629 Steenbock, H. 257, 258 Steinfield, C. 189 Sterk, S. 392, 393 Stern, R. 317 Stern, S. 269–71 Sternburg, A. 447 Stiernberg, C. 121, 124, 141–2, 169 Stokes, D. 269, 276 Stoll, R. 453, 454 Stoll, T. 209 Storper, M. 32 Strandburg, K. 237, 239, 656–76 Strauss, P. 223 streaming services 553, 573, 575, 576

DEPOORTER_V2_9781848445369_t.indd 699

Streitz, W. 271 Strumpf, K. 476 ‘submarine’ patenting, patent duration 311 substantial similarity studies copyright law and experiments in intellectual property 599 copyright litigation studies 520–21 substitutes, lost substitutes and patent pools 243, 248 suit coding, copyright litigation studies, docket studies 513–14 Sukhatme, N. 317, 320 Sumida, M. 355 supply chain, technical standards, and FRAND licensing disputes 215–16 Supreme Court 78, 93–4, 108, 111, 113–14, 116, 120, 129, 134–5, 148–54, 245–6, 341, 498–500 see also individual cases; US, Federal Circuit as institution survey evidence role 628–30, 632–5, 644–6, 649–50 Suzor, N. 606 Swanson, D. 199, 213 Swanson, R. 380, 381 Switzerland, injunctions 397, 398 Tabarrock, A. 317 Taiwan, damages awards 405 Takahiro, M. 37 Talley, E. 393, 580 Tapia, C. 208, 218, 219 Taylor, D. 133, 134–5, 147, 149, 356, 446 teaching, suggestion, motivation (TSM) test 119, 302–5, 306–7 technical standards, standards-setting organizations (SSO) 185–235 aggregate royalty caps suggestion 219 alternative dispute resolution and FRAND royalty rates 221–2 copyright 223–4 copyright, software code in standards 224 efficiency issues 200, 203, 218 ex ante licensing and royalty disclosure 218–19 open standards 190–91 reasonableness of royalty rates 202, 206–7 royalty-free licensing 219–21 royalty-free licensing suggestion, sleeping dog phenomenon 221 trademarks and certification marks 224–5 transfer of commitments and privateering 222 voluntary standard-setting ecosystem 187–8, 189

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700  Research handbook on the economics of IP law volume 2 technical standards, standards-setting organizations (SSO), patent policy disputes 209–17 aggregate royalty system suggestion 212 disclosure disputes 209–12 essentiality and disclosure 211–12 intentional non-disclosure and patent ambush 207, 209–10 language use issues 210 over-disclosure issues 211–12 self-reporting issues 211 technical standards, standards-setting organizations (SSO), patent policy disputes, FRAND licensing disputes 212–17 and comparable license agreements 214 injunctions 216–17 non-discrimination and supply chain issue 215–16 pricing of SEP licenses 213–14 royalty base and apportionment 214–15 royalty rates 213–14, 218 smallest saleable patent practicing unit (SSPPU) of a product 215 technical standards, standards-setting organizations (SSO), patents and standards, SEPs (standard-essential patents) 191–205 acquisition and timing effects 197–8 aggregate number of disclosures 192 firm performance effects 196–7 and forward citations 194–5 FRAND royalties 201–2, 203 geographic distribution 192 hold-up practices 199–200, 201, 218, 220 holder distribution 192, 193 Intellectual Property Exchange International (IPXI) trading exchange 203 just-in-time-patenting 197 litigation frequency assessment 195–6 market effects 194, 199–202 non-ICT standards 204–5 non-practicing entities (NPEs) 196, 204 opportunistic behavior 197, 198, 200 patent assertion entities 204 patent pools 203 and patent quality 195 patent status 193–4 patent transfers 194 and prior art 194–5, 199 quantifying standards 191–3 reverse hold-up 200 royalty stacking effects 200–202 royalty-free licensing commitments 196, 203, 207

DEPOORTER_V2_9781848445369_t.indd 700

and standardization activity 198, 201, 202 value of 193–7 technical standards, standards-setting organizations (SSO), private ordering and patent policies 205–9 cataloging 205–6 disclosure policies 205, 206, 207–8, 209 and firm membership decisions 208–9 FRAND licensing terms 206–7 licensing policies 205, 206, 207–8, 209 policy evolution 207–8 technology impact claim construction studies 166–7 and copyright see copyright and technological change in music, movies, and books digitization effects see digitization effects economic history and patent policies 471, 472, 473, 475 patent citation data in social science research 23, 24–5, 26–8, 30–31, 34, 36–7, 41 patent pools 203, 243–4, 245 patent remedies 393–4, 401, 402–3 patent trolls 448, 451, 453–4 patent value 49–50, 55 patentability studies, non-obviousness decisions 296, 301–2 semiconductor industry 428–9 and software see software headings technological classifications, US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board 97–8 technology transfer, and university patenting 259, 262–3, 266, 267, 268–9, 270–72 Teece, D. 215, 216, 220, 274, 424, 425, 426, 427, 429, 432, 439 Tenenberg, J. 662 Thayer, P. 95 Theron, D. 432 third-party involvement patent remedies 415 requestors, US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board 95 trademark applications and uses 626, 631, 632 Thomas, J. 94, 115, 119, 120, 128–9, 130, 312, 314 Thomas, R. 464 Thompson, N. 272 Thompson, P. 32 Thomson, K. 571 Thomson, R. 475 Thumm, N. 197 Thursby, J. and M. 263, 265

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Index  701 Tijssen, R. 28, 34 Tiller, E. 56, 58, 59, 61, 496 Tilton, J. 425–6 time constraints and technology field effects, patent citation data in social science research 37–8 time-extension misuse rule 386–7 US, Patent and Trademark Office (USPTO) 79, 80–81, 84, 86, 95–6 timing effects copyright registration 540–41 technical standards and SEPs (standardessential patents) 197–8 Tirole, J. 208, 219, 237, 238, 438, 471 Tomlinson, B. 593 Toole, A. 276 Torrance, A. 62, 205, 593 Touve, D. 575 Towse, R. 8 Toyama, N. 412 trade secret studies 638–54 and common law 639–40 data sources 8–9 defendant categories 640–41 expressive function 644 failed patents 646 future research 643, 647, 649, 651 history 639–41 justification-based research 641–7 political economy of intellectual property reforms 504–6 and US, Federal Circuit 115 trade secret studies, incentives theory 641–6 country classifications 642–3 data sources 642 differential expenditure in R&D 646 differential laws 642–4 efficiency and cost factors 646–7 experimental and survey methods 644–6 and morality 644 natural experiments 643–4 post-employment restrictions 644–5 and R&D spending 642, 643, 651 real world experiments 645 stated preferences issues 645–6 trade secret studies, litigation behavior-based research 647–51 case dockets 648–9 data sources 648–50 demands and settlements 649 experimental methods and surveys 649–50 measurement results 650–51 trademark law studies 617–36

DEPOORTER_V2_9781848445369_t.indd 701

and certification marks, technical standards, standards-setting organizations (SSO) 224–5 data sources 6–7, 11, 13 distinctiveness requirement 622–4, 625, 630 EU context and trademark cluttering 621–2 future research 635 and generic terms 622–3, 632 intent-to-use applications 618, 619 legal representation involvement and quality 620 music copyright and branding issues 569 publication rates 619 registration refusals 620–21 and role of judiciary 500–501 second-best marks 619 third-party applications and uses 626, 631, 632 trademark depletion and congestion 618–19 trademark registration 618–22 use-based applications 618, 619 USPTO Trademark Case Files Dataset (TCFD) 618–19 trademark law studies, likelihood of confusion test 624–30, 628–9, 633–4 bad-faith intent to infringe 625 consumer’s sophistication and black-letter principle 627–8 Google search engine results 625–6 keyword advertising 626–7 multifactor test 624–6, 628 sponsorship confusion 626 survey evidence role 628–30 trademark law studies, likelihood of dilution test 630–35 brand recognition errors 632–3 cause of action 631 dilution claims and success rates 630–31 dilution over time 632 experimental and survey evidence 632–5 junior brands versus senior brands 634 product category recall test 633–4 and registration practice 631 unfamiliar diluting stimuli 634–5 tragedy of the commons, knowledge commons 658–9, 665 Trajtenberg, M. 21, 22, 24, 25, 26, 27, 29, 30, 195 Tran, J. 363 Tran, S. 494 transaction costs copyright law and access to works 606–7, 608, 613 patent pools 236–7, 250–51

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702  Research handbook on the economics of IP law volume 2 semiconductor industry, patent hold-up 431, 433–4 see also cost factors transfers of ownership, and patent value 67 transformative use, copyright litigation studies, fair use doctrine 525–8 Trimble, M. 402 Tsai, J. 207 Tsilas, N. 210 Tu, S. 83 Turley, J. 431, 432 Turner, J. 116–17, 125–6, 330, 332, 333, 338 Tushnet, R. 583, 634 tying arrangements, inequitable conduct and patent misuse 384, 386 Uhlir, P. 662, 663 UK bulk trademark data release 7 damages awards 405, 412 patenting rates history 469–70 permanent injunctions 396 royalty rates 213 Statute of Monopolies 464 Unwired Planet 213 Virgin Atlantic 396 Underweiser, M. 71, 289–90 uniformity issues, US, Federal Circuit 107–14 university patenting 256–79 American Association for the Advancement of Science (AAAS) 257–8 anti-commons concerns 269–72 biomedical research growth 259–60, 261, 262, 263 biotechnology research 264–5 commercialization concerns 262–3, 266, 272–4 consultants to industry, working with 266 Department of Defense (DOD) financed research 260 economic value 272–4 federal policies 260, 261–7 future research 275–6 government funding effects 276 growth 1925–80 260–61 history of US policies 257–60 hold-up practices 268–9, 274 infringement litigation 275–6 medical patents, opposition to 258, 259 and open science norms and institutions 258 ownership of patents and publicly funded research 258–9 and patent trolls 449 patenting by faculty 267 and public interest 258, 259

DEPOORTER_V2_9781848445369_t.indd 702

and publication in scientific journals 265 quality issues 263–4, 265 research exemption 275 research results access by researchers 270–72 software patenting and hold-up concerns 267–9 and start-ups 266, 270, 273, 274 and technology transfer 259, 262–3, 266, 267, 268–9, 270–72 underlying research, effect on 266–7 unregistered works, copyright registration studies 543 Updegrove, A. 188, 190–91, 203, 205, 206, 207, 210, 211, 218, 220, 222, 224 US Administrative Office of the Courts (AO) 9–10 Administrative Procedures Act 177 America Invents Act (AIA) 84, 94, 95–7, 356, 456, 494–5 American Association for the Advancement of Science (AAAS) 257–8 American Inventors Protection Act 646 American Society of Composers, Authors and Publishers (ASCAP) 8 Bayh–Dole Act 94, 261–7, 268, 275 Berne Convention Implementation Act 539 Biologics Price Competition and Innovation Act 313 Copyright Office 7–8 Copyright Office data, use of 541–3 Copyright Term Extension Act 537–8 Defend Trade Secrets Act 505 Digital Future Coalition (DFC) 504 Digital Millennium Copyright Act (DMCA) 502–4, 613 Federal Judicial Center (FJC) 11 Federal Rules of Civil Procedure Form 18, elimination of, and patent trolls 456–7 Freedom of Information Act (FOIA) 5–6 Innovation Act 457, 497–8 Intellectual Property Law Association survey 13 National Bureau of Economic Research (NBER) 4 National Cooperative Research Act 426 Omnibus Trade and Competitiveness Act 177–8 Patent Abuse Reduction Act 497 Patent Act 72, 79, 130, 131, 134, 160–61, 292, 351, 352, 353, 355, 396–7, 470 Patent Application Information Retrieval (PAIR) system 4–5 Patent Litigation Integrity Act 498 Patents Quarterly (USPQ) 13

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Index  703 Securities and Exchange Commission (SEC) 9 Tariff Act 175, 177 Trading with the Enemy Act (TWEA) 472 Uniform Trade Secrets Act (UTSA) 640 University of Michigan’s ICPSR service 11, 12 US, cases AbbVie Deutschland v. Janssen Biotech 361, 362 Abercrombie & Fitch v. Hunting World 622, 623, 625 ActiveVideo 407 Addington v. Texas 355 Agawam Woolen Co. v. Jordan 351 Alice Corp. Ltd. v. CLS Bank Int’l 151, 172, 269, 363, 458, 500 Allied Tube 189 Am. Hoist & Derrick Co. v. Sowa & Sons 352, 353, 355 Amgen v. Hoechst Marion Roussel 163 Apple 213, 217, 222, 395, 397, 406 Ass’n for Molecular Pathology v. Myriad Genetics 172, 500 AT&T Corp. v. Excel Communications 130 Atlas Powder Co. v. Ireco Chemicals 427 Aventis Pharma Deutschland v. Lupin Ltd. 358 Bard Peripheral 405 BASCOM Global Internet Servs. v. AT&T Mobility 363 Bell Atlantic Corp. v. Twombly 456, 457 In re Bilski 120 Bilski v. Kappos 116, 130, 172, 269 Blonder-Tongue Labs. v. Univ. of Ill. Foundation 94 Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems 134, 149 Bosch 204 Brenner v. Manson 482 Bridgeport Music v. Dimension Films 566 Brooks Furniture Manufacturing v. Dutailier International 403, 411 Brulotte v. Thys Co. 385, 386 Burlington Industries v. Dayco Corp. 375 Butler Mfg. Co. v. Enterprise Cleaning Co. 352 Callaway Golf Co. v. Acushnet Co. 360 Campbell v. Acuff-Rose Music 524, 526, 528, 529 Cantrell v. Wallick 352 Cardinal Chemical v. Morton Int’l 332–3 Carpet Seaming Tape Licensing Corp. v. Best Seam 243

DEPOORTER_V2_9781848445369_t.indd 703

Carson Mfg. Co. v. Carsonite Int’l Corp. 352 Catalina Lighting v. Lamps Plus 346 In re Certain Wireless Standard Compliant Electronic Devices 178 Chevron v. Nat. Res. Def. Council 96 Chicago Rawhide Mfg. Co. v. Crane Packing Co. 353 Christianson v. Colt Industries Operating Corp. 108 Coffin v. Ogden 351 Commil USA v. Cisco Systems 358 Connell v. Sears, Roebuck & Co. 353 Cooper v. Lee 363 Cornell Univ. v. Hewlett-Packard Co. 215 Cuozzo Speed Technologies v. Lee 96 In re Cuozzo Speed Techs. 172 CyberSource Corp. v. Retail Decisions 363 Cybor Corp. v. FAS Technologies 120, 121, 123, 162, 163–4, 165, 170 Dell 209, 210 Diamond v. Chakrabarty 262 Diamond v. Diehr 267 Dickstein v. Seventy Corp. 352 eBay Inc. v. MercExchange 116, 149, 153–4, 176, 179, 394, 395, 396, 397, 398, 399, 400, 401, 410, 439, 447, 519 E.I. DuPont 398 Empire Steam Laundry v. Lozier 639 Eolas Technologies v. Microsoft Corp. 268 Ericsson 199, 200, 202, 213, 214, 215, 216, 439 Exergen Corp. v. Brooklands 363 Exergen Corp. v. Wal-Mart Stores 379–80, 381–2 Festo Corp. v. Shoketsu Kinzoku Kogyu Kabushiki 116, 129, 134, 341 Fogerty v. Fantasy 519 General Motors 403 Georgia-Pacific 213, 406, 407 Gillette Safety Razor Co. v. Cliff Weil Cigar Co. 352 Global-Tech Appliances v. SEB 149 Gottschalk v. Benson 130 Gould v. Control Laser Corp. 95 Graham v. John Deere Co. 119 Grain Processing 403, 406 Graver Tank & Mfg. Co. v. Linde Air Prod. Co. 128, 345 Greenwood v. Hattori Seiko Co. 353 H. Schindler & Co. v. C. Saladino & Sons 352 Halo Electronics v. Pulse Electronics 346, 405, 499 Harper & Row Publrs. v. Nation Enterprises 524 Hartford-Empire 246

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704  Research handbook on the economics of IP law volume 2 Hatsumei Kyokai 406 Holmes Group v. Vornado Air Circulation Systems 108 Honeywell 407 Hydrolevel 189 i4i Limited Partnership v. Microsoft Corp. 354, 406 In re Indep. Serv. Org. Antitrust Litigation CSU v. Xerox Corp. 130 Innovatio 201, 204, 212, 213, 214 Integra Lifesciences I Ltd. v. Merck KGaA 134 Jacuzzi Bros. v. Berkeley Pump Co. 352 J.E.M. Ag Supply v. Pioneer Hi-Bred International 149, 482 Johnson & Johnson Associates v. R.E. Service Co. 128 Kahn v. Gen. Motors Corp. 353 Kappos v. Hyatt 149 Kimberly-Clark Corp. v. Johnson & Johnson 375 Kimble v. Marvel Entertainment 385, 387 Kirtsaeng v. John Wiley & Sons 606–7 Knorr-Bremse Systeme Fuer Nutzfahrzeuge v. Dana Corp. 405, 410 KSR v. Teleflex 116, 119, 293–4, 353, 354 Kyocera 180 Larson Mfg. Co. of South Dakota 370 Lenz v. Universal 503 Levy v. Gadsby 162 LG Electronics v. Bizcom Electronics 134 Lighting Ballast Control v. Philips Elecs. N. Am. Corp. 163, 170 Limelight Networks v. Akamai Technologies 328 Line Materials 246 Lucent 404 Madey v. Duke University 130, 275 Magnivision v. Bonneau Co. 355 Markman v. Westview Instruments 120, 121, 159, 161–2, 165, 166, 167, 170, 340, 341 Mayo Collaborative Servs. v. Prometheus Labs 172, 269, 500 Medegen MMS v. ICU Med. 163 MercExchange 395 Merck & Co. v. Teva Pharm. 164 Merck KGaA v. Integra Lifesciences I 149 Microsoft Corp. v. i4i Ltd. P’ship 96, 149, 350, 353–4, 360, 361–2, 363 Microsoft v. Motorola 199, 201, 203, 213, 214, 216 Morton Salt Co. v. G.S. Suppiger Co. 384, 387 Moseley v. V Secret Catalogue 501

DEPOORTER_V2_9781848445369_t.indd 704

Motorola and Google 217, 221 Munising Paper Co. v. Am. Sulphite Pulp Co. 352 N-Data 204, 222 Nat’l Harrow Company 242, 243 Nautilus 151, 161, 171, 172 Newton v. Diamond 565 Nickson 404 Nortel 222 NTP v. Research In Motion 61 Octane Fitness v. Icon Health & Fitness 403, 410–11 OIP Techs. v. Amazon.com 363 OpenTV v. Apple 363 Paice 393, 395, 407 Panduit Corp. 406 Patlex Corp. v. Mossinghoff 94 Peabody v. Norfolk 639 Pfaff v. Wells Electronics 119, 134, 149 Phillips v. AWH Corp. 121, 123, 125, 130, 163, 165, 167, 168 Polaroid Corp. v. Polarad Electronics 512 Potthoff v. Hanson & Van Winkle Co. 352 Practice Management 223 Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co. 368 Qualcomm 209, 210 Quanta Computer v. LG Elec. 149, 215 Radio Corporation of America v. Radio Engineering Labs 352 Rains v. Niaqua 352 Rambus 197, 209, 210, 438 RCA v. Radio Engineering Labs 352, 354 Realtek 214 Rembrandt v. Samsung 196 Retractable Techs. v. Becton, Dickinson & Co. 163, 170, 398 Richardson 395 Rite-Hite Corp. 395 Robert Bosch 395, 397 Samsung 21, 217, 404 Santosky v. Kramer 355 Schering Corp. v. Geneva Pharms. 130 In re Seagate Tech. 404–5, 409–10, 499 Smith International v. Hughes Tool Co. 427 Sony Corp. of America v. Universal City Studios 502, 524 South Corp. v. United States 131 Spansion v. International Trade Comm’n 179 Stambler v. Diebold 209 Standard Havens 398 Standard Oil Co. v. United States 242–3, 246, 249 Standard Sanitary Manufacturing v. United States 242, 243

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Index  705 State Street v. Signature Fin. Group 119–20, 130, 267 In re Swanson 362 Symbol Technologies v. Lemelson Medical, Education and Research Foundation 311 TC Heartland v. Kraft Foods Group Brands 458, 499–500 Tenneco Chems. v. William T. Burnett & Co. 352, 353 Teva Pharmaceuticals USA v. Sandoz 123, 170, 171–2 Texas Digital Systems v. Telegenix 162–3, 168 Therasense v. Becton Dickinson & Co. 368, 373, 379–80, 381–2 Tianrui Group Co. v. ITC 178 Trading Techs. Int’l v. eSpeed 163 Trans-World Mfg. Corp. v. Al Nyman & Sons 353 Transocean Offshore Deepwater Drilling v. Maersk Contractors USA 327 Trebro 397 Triangle Publ’ns 617 Ultra-Tex Surfaces v. Hill Bros. Chem. Co. 353 Ultramercial 363 Underwater Devices 405 Uniloc 406 Union Carbide v. Ever-Ready 626 Unocal 204, 209 Unwired Planet 204 Veeck 223 Virnetx 406 VirtualAgility v. Salesforce.com 97 VMG Salsoul v. Ciccone 566 Wang v. Mitsubishi 209, 438 Warner-Jenkinson Co. v. Hilton Davis Chemical Co. 341 Watts v. XL Sys. 171 Williams v. Bridgeport Music 566 Williamson v. Citrix Online 171, 172 Windsurfing Int’l v. AMF 387 In re Winslow 119 US, Federal Circuit as institution 104–58 advisory panels to assist percolation 114 Court of Customers and Patent Appeals (CCPA) 107, 108, 119 creation of 105–7, 330, 495–6 dissenting opinions 111–12, 122, 134, 146, 149 district courts 71, 98–9, 101, 115, 151–3, 162, 180–81, 295–6, 394–5 diversity and percolation, lack of 110–14 doctrine of equivalents 113 entrenchment issues 110, 111, 114

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Federal Court Improvements Act 107 forum shopping 106, 107, 108–10 future research 137, 144, 155 goals 106–7 Hruska Commission 106, 109 inequitable conduct and patent misuse 382–3 non-obviousness decisions 296–305 patent infringements pre- and post-Federal Circuit era, patent infringement 330–34, 338 proportion of en banc cases to written decisions 112–13, 114 regional circuits’ treatment disparities 106, 111 and semiconductor industry 426–7, 428, 436–7 specialization issues 106, 107, 131–2, 138, 152–3 Supreme Court 78, 93–4, 108, 111, 113–14, 116, 120, 129, 134–5, 148–54, 245–6, 341, 498–500 Supreme Court and Federal Circuit working together suggestion 113–14 uniformity issues 107–14 see also judiciary; US, cases US, Federal Circuit as institution, certainty and predictability 114–29, 143, 151 certainty, pressure for and undermining 115–16 district courts as source of pressure 115 patent bar 115, 368, 496 Supreme Court rule 116, 120, 129 trade secrecy and uncertainty 115 USPTO as source of pressure 115–16 US, Federal Circuit as institution, certainty and predictability, reversal rates 116–29 Board of Patent Appeals and Interferences (BPAI) 117–18 claim construction 120–25 doctrine of equivalents 127–9 and frequency of dissents 122–3 and infringement certainty 125–9 and judicial dependence 118–19 judicial patent experience 118–19, 120–21 panel dependency 114, 118, 123–4, 127 prior art challenges and judicial appointments 119 teaching, suggestion or motivation (TSM) test 119 validity assessment 116–20 validity assessment, vague rules or use of standards 119–20, 124–5, 127–8 written description and enablement 117 US, Federal Circuit as institution, quality and formalist approach 129–37, 149

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706  Research handbook on the economics of IP law volume 2 Court of Customers and Patent Appeals (CCPA) input effect 131 elimination of policy levers 130 failing to read precedent in context 130–31 judicial discretion 134 judiciary, visiting judges, proposal for use of 132 negative aspects 132–3 policy arguments use in decision-making 133–5 scholarship use 135–7 scholarship use, cost factors 137 scholarship use, evidence for 136–7 typecasting and tunnel vision issues 132 USPTO input effect 131 US, Federal Circuit as institution, relations with other institutions 147–55 Congress 154–5 district courts 151–3 district courts, and judicial experience 152–3 district courts, as specialized patent trial courts 152, 153 Solicitor General 153–4 Supreme Court 148–50, 152, 153 USPTO 150–51, 494–5 USPTO, Patent Trial and Appeal Board (PTAB) 151 US, Federal Circuit as institution, structure and staffing 137–47 advisory panels 147 amici curiae briefs 146–7 authored opinions of judges 140 case distribution effects 143–4 case distribution effects, precedential cases 144 claim construction decisions 141–2 and curse of expertise 144–5 and doctrine of equivalents 141 en banc review 145–7 internal dynamics 144–5 judicial backgrounds and characteristics 138–43 knowing-doing gap 145 peer review effectiveness 144 turnover of judges 143 voting patterns of individual judges 139 US, International Trade Commission studies 175–84 characteristics 175–6 dispute coordination issues 176 district court comparison 180–81 docket studies 180, 181–2 exclusion orders 177, 178–9, 181 future research 181–2 investigations involving Chinese entities 180

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monetary awards, lack of 179 and patent remedies 395–6 patent trolls 180 Presidential Review period 179 protectionism claims 176, 178, 179, 182 and public interest 178, 179, 181 Section 337, existing research 179–81 Section 337, filing and adjudication trends 179–80 Section 337, legal doctrines application 181 Section 337 authority 176–8 Section 337 procedure and patent infringements 178–9 US, Patent and Trademark Office (USPTO) 2–3, 4, 5–7, 11, 28, 34–5 constraints on USPTO’s examinations, presumption of validity 356, 359, 360, 362–3 examiner effects 39, 65 home bias issues 38 patent classification system 26, 49–51, 58, 63–4, 65–6, 72 patent quality and infringement litigation 52 and political economy of IP reforms 493–5 prior art disclosure and duty of candor 37, 40, 58 Trademark Case Files Dataset (TCFD), trademark law studies 618–19 US, Federal Circuit as institution, relations with other institutions 115–16, 131, 150–51, 494–5 US, Patent and Trademark Office (USPTO), Patent Trial and Appeal Board 79, 92–103, 151, 172 administrative opposition under America Invents Act (AIA) 95–7 administrative review, reasons for 93–4 and asymmetric incentives of plaintiffs and defendants 93–4 automatic stays of co-pending declaratory judgment litigation 96 claim construction studies 172 covered business method (CBM) review 95, 96–7, 98, 99 descriptive statistics 97–8, 100 district court litigation intersection 98–9, 101 efficiency issues 94, 99 ex parte reexamination 94–5, 96 functioning assessment 97–101 future research 100–101 inter partes reexamination and public participation 95, 96–7 IPR review 95–7, 98, 99 judicial expertise shortcomings 93 Orange Book patents 101

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Index  707 patent trolls, impact on 99–100 patent-examination characteristics and IPR, relationship between 100, 101 post-grant review 94–7, 172, 452, 456 serial petitioning 101 summary affirmances 100–101 supplemental examination 95 technological classifications 97–8 third-party requestors 95 time constraints 95–6 US, Patent and Trademark Office (USPTO), prosecution process 77–91 continuation application 81, 88 deviation from mission, evidence of 84–9 examination practice effectiveness 78 examination process 78–82 examination time constraints 79, 80–81, 84, 86 examiner tenure and experience effects 83, 84, 85 examiner’s year of hiring, effects of 83–4, 86 fee structure effects 87–8 future research 90 grant-rate-calculation studies 81–2, 86 language changes in application review process 83 meritorious from non-meritorious applications, distinguishing between 80, 81 originated patent families in multiple countries 89 over-granting of patents 81, 85, 86, 87–9 patent office outcomes and examiner heterogeneity 82–4 patent quality importance 84 prior art and duty of candor 78–80, 85 pro-patent bias issues 85–9 user innovation, knowledge commons 661 Vacca, R. 104–58 Vaish, A. 597 Valdivia, W. 273 Valek, M. 317 validity issues copyright registration studies 543 patent pools 250 patentability studies 283–91, 294–5 presumption see presumption of validity US, Federal Circuit and reversal rates 116–20 valuation forums, and patent pools 251–2 patent value see patent value patent value and patentability studies 285–6, 288–9

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patent value, semiconductor industry 429–30 technical standards and SEPs (standardessential patents) 193–7 Van Overwalle, G. 664 Van Potterie, B. 64, 315, 319 Varian, H. 186, 187, 203 Vaughan, F. 237, 238, 240, 241, 244–5, 250 Vernon, J. 272, 318 Véron, P. 399, 412 Verspagen, B. 33, 36, 39 Vetter, G. 224 vexatious litigation, inequitable conduct and patent misuse 386 Vishnubhakat, S. 84, 92–103 Voena, A. 465, 472 Vogel, H. 547, 559 voluntary standard-setting ecosystem, and technical standards 187–8, 189 Von Graevenitz, G. 30, 439, 621–2 Von Hippel, E. 426, 661 Von Wartburg, I. 25 Wagner, R. 53, 54, 116, 123–4, 125, 141, 167–8, 169, 293, 297–8, 299, 303, 317, 330, 343, 344, 382 Wagner, S. 32 Waldfogel, J. 476, 547–63, 564, 567 Walsh, J. 270–71, 272, 275 Wang, A.-P. 35 Wasserman, M. 6, 77–91, 320, 356, 375, 493, 494, 495 Watt, R. 614 Watzinger, M. 425 Webb, C. 38 Weber, P. 399 Webster, O. 81 Weiner, C. 258, 260 Weinstein, R. 406 Weise, E. 423 Weiser, P. 392, 394, 660 Wells, M. 458 Wen, W. 189, 197 Weschler, C. 275 West, J. 62, 189, 190, 192–3, 219, 220 White, C. 316 Wicken, V. 400, 401 willfulness element and copying 345 copyright litigation studies 516 patent remedies, damages 404–5, 409–11 Williams, A. 499, 500 Williams, T. 215 Williamson, O. 431, 663 Wilson, P. 177

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708  Research handbook on the economics of IP law volume 2 Witt, S. 570 Wong-Ervin, K. 201, 213 Wood, D. 111 Wood, N. 405 work-by-work licenses, music copyright 574–5 world fairs, and economic history 466–9, 473, 474 World Intellectual Property Organization (WIPO) 3 Marrakesh Treaty 612 World Trade Organization (WTO) TRIPS Agreement, and patent duration 314–15, 318–19 Wright, B. 80, 81 Wright, F. 189 Wright, J. 207 Wyatt, S. 28

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Yamaguchi, K. 416 Yao, D. 464 Yates, J. 189 Yeung, B. 180 Yoffie, D. 452–3 Yoon, J. 458 Younge, K. 41 Youtie, J. 27 Yuan, Z. 413 Zarfas, L. 311 Zidel, A. 165 Ziedonis, A. 256–79 Ziedonis, R. 26, 238, 423–44 Zimmerman, D. 583 Zingales, N. 217 Zucker, L. 265 Zur Muehlen, M. 188, 189

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