Skip to Content

Paper Abstracts

The Disintegration of Intellectual Property

Richard A. Epstein (Biography)

The title of this paper plays off Thomas Grey's well known article, The Disintegration of Property, which argued in part that the constant consensual fragmentation and recombination of property rights revealed some inner incoherence of private property institutions. I take the opposite position and treat this supposed disintegration as evidence of the robust nature of private property rights, not only for land but for all forms of intellectual property. I use this framework to critique modern IPR cases that impose limits on the terms of private licenses, and the efforts, some of which were embodied in the (almost certainly) defunct Patent Reform Act of 2007, to limit the use of injunctions, damages, and attorney’s fees, including at least one effort to shield an important class of admitted infringements of patents from all forms of liability. One broad issue that patent reform initiatives raise concerns the question of whether the per se rules for physical takings carry over to the patent area, which in turn raises the larger philosophical question of the transference of legal principles from the physical to the intellectual realm.

Back to Top

What's Wrong With Royalties in High Technology Industries?

Damien Geradin (Biography)

Over the past few years, there has been an unprecedented degree of interest among competition authorities, scholars, Standard-Setting Organizations (hereafter, SSOs) and trade associations with respect to the level of royalties that are charged by holders of intellectual property rights (IPRs).  For instance, in the past two years, the US Department of Justice (DoJ) granted business letter clearance to two SSOs - VITA and IEEE - to implement new IPR policies designed to control the IPR costs.  In April 2007, the DoJ and the Federal Trade Commission (FTC) jointly released a report on "Antitrust Enforcement and Intellectual Property Rights".  But the interest is not limited to the United States. The European Commission is currently investigating the compatibility of certain licensing regimes and conduct within SSOs against EC competition law.  Reflecting the debate at the policy level, scholars have produced a large body of legal and economic literature on IPR and standardization issues, including patent hold-up (where the patent holder exploits ill-gotten market power in "excessive" licensing fees) and royalty stacking (where multiple patents must be licensed and thus the royalty rates stack up to "excessive" amounts). 

Against this background, this paper addresses the issue of whether something has gone wrong with royalties in high technology industries. This paper seeks to answer this question first by looking at a number of concrete scenarios where firms holding IPRs seek to obtain a return on their patent portfolios by licensing them. As will be seen, the behaviour of these firms essentially depends on whether they are vertically-integrated  or non vertically-integrated. Vertically-integrated firms engage in research and development activities, patenting at least some of their inventions, and also manufacturing products based on their own innovations and the innovations produced by others. Non vertically-integrated firms, in contrast specialize in one or the other layers of production. Pure upstream firms conduct research and development activities and patent their innovations, but they do not engage in manufacturing. Downstream firms specialize in manufacturing, but do not engage in R&D.

Download Paper

Back to Top

Federalism, Substantive Preemption, and Limits on Antitrust

Bruce H. Kobayashi (Biography) and Joshua D. Wright (Biography)

In Credit Suisse v. Billing, the Court held that the securities law implicitly precludes the application of the antitrust laws to the conduct alleged in that case.  In that case, the court considered several factors, including the availability and competence of other laws to regulated unwanted behavior, and the potential that application of the antitrust laws would result in "unusually serious mistakes".  This paper examines whether similar considerations suggest restraint when applying the antitrust laws to conduct that is normally regulated by state laws and other federal laws.  In particular, we examine the use of the antitrust laws to regulate the problem of patent hold up of members of standard setting organizations.  While some have suggested that this conduct illustrates a gap in the current enforcement of the antitrust laws, our analysis finds that such conduct would be better evaluated under the federal patent laws, and under state contract laws.

Download Paper

Back to Top

Patent Holdup and Oligopsonistic Collusion in Standard Setting Organizations

J. Gregory Sidak (Biography)

Current controversies over patent policy place standard setting organizations (SSOs) on a collision course with antitrust law. Recent theoretical research, particularly by Professors Mark Lemley and Carl Shapiro, asserts that, in an SSO, patent owners can “hold up” patent users in the sense of demanding high royalties for a patented input after the SSO has adopted the patented technology as an industry standard and manufacturers within the SSO have incurred sunk costs to design end products that incorporate that standard. Consistent with these new theoretical arguments, actual SSOs have recently sought no-action letters from the Antitrust Division for a variety of amendments to SSO rules that would require or request, at the time a standard is under consideration, the ex ante disclosure by the patent owner of the maximum royalty that the patent owner would charge under the regime of fair, reasonable, and nondiscriminatory (FRAND) licensing. This price information—which is characterized as the “cost” of the patented input—would, under at least one recent SSO rule modification, be a permissible topic for potential users of the patent to discuss when deciding whether to select it in lieu of some alternative standard. This exchange of information among horizontal competitors would occur ostensibly because the cost of the patented technology had been characterized as simply one more technical attribute of the standard to be set, albeit an important technical attribute. The Antitrust Division and the Federal Trade Commission have jointly stated that such discussion, by prospective buyers who are competitors in the downstream market, of the price of a patented invention that might become part of an industry standard should be subject to antitrust scrutiny under the rule of reason rather than the rule of per se illegality. The rationale that the antitrust agencies offer for applying rule of reason to such conduct is that such horizontal collaboration might avert patent holdup. The Antitrust Modernization Commission (AMC) has similarly endorsed the view that rule of reason analysis is appropriate for ex ante discussion of royalty terms by competing buyers of patented technology. This rule of reason approach, however, is problematic because it conflicts with both the body of economic research on bidder collusion and with the antitrust jurisprudence on information exchange and facilitation of collusion. Put differently, because of their concern over the possibility of patent holdup, the U.S. antitrust agencies and the AMC are facilitating oligopsonistic collusion by encouraging the ex ante exchange of information among competitors concerning the price to be paid for a patented input as an implicit condition of those competitors’ endorsement of that particular patented technology for adoption in the industry standard. However, neither the proponents of these SSO policies nor the antitrust agencies and the AMC have offered any theoretical or empirical foundation for their implicit assumption that the social cost of patent holdup exceeds the social cost of oligopsonistic collusion. It is more plausible (though still uncertain) that the related theoretical concern of preventing “royalty stacking” would justify rule of reason treatment of ex ante exchange of purchase price information among SSO members who buy a patented input that is incorporated in a standard. However, neither the antitrust agencies nor the AMC have identified royalty stacking (as opposed to patent holdup per se) as a possible justification for coordinated action among competing buyers in an SSO—and, in any event, the existence and severity of royalty stacking are still conjectures rather than empirically substantiated facts. Consequently, any efficiency defense that would be claimed in American antitrust law by SSO members accused of oligopsonistic collusion could encounter a court’s considerable skepticism under the rule of reason. If a court did conclude that the royalty stacking conjecture is sufficiently certain to provide a compelling business justification for restraining trade in patented inputs to the SSO’s standard, the remaining antitrust question would be whether there are alternative means to avert royalty stacking that do not facilitate oligopsonistic collusion. At least five promising alternatives exist. Given the analytical and factual uncertainty over whether patent holdup is a serious problem, and given the divergence of desired interpretations of antitrust law concerning SSO self-help responses to possible patent holdup, it is foreseeable that antitrust litigation on questions of first impression will arise and affect a wide range of high-technology industries that rely on SSOs. However, there is no indication that scholars and policy makers have considered the possibility that oligopsonistic collusion in SSOs is a larger problem than patent holdup.

Download Paper

Back to Top

Removing Property from Intellectual Property and (Intended?) Pernicious Impacts on Innovation and Competition

F. Scott Kieff (Biography)

Property rule treatment of intellectual property (IP) is said to cause “excessive” transaction costs, thickets, anticommons, hold-ups, hold-outs, and trolls, unduly taxing and retarding innovation, competition, and economic growth. The popular response has been to offer a shift towards some limited use of weaker liability rule treatment, usually portrayed as “just enough” to facilitate transactions in those special cases where the bargaining problems are at their worst and where escape hatches are most needed. This paper shows how over just the past few years, the patent system has been hugely re-shaped from a system having several major, and helpful, liability-rule-pressure-release-valves, into a system that is almost devoid of significant property rule characteristics. The paper then explores some harmful effects of this shift, focusing on the ways liability rule treatment can seriously impede the beneficial deal-making mechanisms that facilitate innovation and competition. The basic intuition behind this bad effect of liability rules is that they seriously frustrate the ability for a start-up or other market-challenging patentee to attract and hold the constructive attention of a potential contracting party (especially one that is a larger more established player) while preserving the option to terminate the negotiations in favor of striking a deal with a different party.

Download Paper

Back to Top

Commercializing Property Rights in Inventions: Lessons for Modern Patent Theory From Classic Patent Doctrine

Adam Mossoff (Biography)

Innovation is central to the American patent system, but current economic theories of patent law cannot account for the role it plays in shaping patent doctrine. It is my thesis that the patent system promotes innovation by creating a default presumption that secures maximum liberty to a patentee in using its invention. Accordingly, patentees may engage in a broad array of exclusive licensing practices that reflect the fundamental use and alienation rights long secured to them as central patent entitlements under the normative policy of securing to patentees the fruits of their inventive labors. This is a novel insight today, because most patent theories focus only on issues of patent scope, duration and enforcement. In fact, when George Priest famously declared that economics says nothing about patent law, he said this only in the context of defining a patent’s scope and duration.

The resulting economic analyses of patent law—advancing the reward theory—have responded to Priest only these doctrinal terms, i.e., scope, duration and enforcement. This makes sense for the reward theory, since commercialization is essentially irrelevant to the patent system according to this theory. In sum, the monopoly profits secured by patentees are simply the necessary evil in promoting inventive activity and receiving disclosure of these inventions through the patent systems qui pro quo.

Unfortunately, the prospect and commercialization theories have fared little better in explaining the central function of commercialization as a core analytical baseline in patent law, i.e., the array of exclusive licensing practices long secured to patentees and the wide latitude given to patentees under the patent exhaustion doctrine. Ed Kitch used only scope and enforcement doctrines, e.g., early granting of patents and liberal claim construction, as the only examples in his famous prospect theory. More important, the recent commercialization theory basically addresses the issue of commercialization by ejecting it from patent law, concluding that such issues are best addressed by contract, corporate law, antitrust and other self-standing commercialization doctrines.

My paper would explain why expansive licensure rights were secured to patentees as a fundamental design principle of the patent system. As scholars and jurists are wont to say: the one thing we know about innovation is that we know nothing about it. It is entirely unpredictable ex ante. We know not what new inventions will be created tomorrow, and, even more important, what new business models will be created in order to profit by these new inventions. Thus, inventors require substantial liberty in the free use and alienation of their property rights. This paper will explain how these rights were first defined as core entitlements in patent law using an analytical baseline that viewed them as securing to patentees their property rights of use and alienation.

Download Paper

Back to Top

The Modularity of Patent Law

Henry E. Smith (Biography)

This paper extends recent work on modularity in organization theory to explain how delineation strategies from property serve to manage information costs in intellectual property. For information cost reasons, it makes sense in property law to deal with a wide range of problems using an exclusion strategy in which decisionmaking over discrete things is delegated to owners whose authority is protected by relatively simple on/off signals – like boundary crossings in the case of real property. By defining a right to exclude from a thing, many potential uses by the owner and various contractual partners can be protected without separate delineation. Only when use conflicts become large and private ordering is likely to fail do we need to move to a system of governance rules, whether by contract, tort law, or regulation. But the basic presumption is property law is the right to exclude, which serves to economize on information costs.

In effect, the exclusion strategy allows the system of uses of resources to manage complexity with modularity, with much information hidden in property modules. As organizational theorists have increasingly emphasized, modularity helps to manage complexity in team production. By specifying interface conditions, a wide range of activities can occur in one module, making the system easier to use, more robust, and more flexible. These theorists have borrowed from software theory especially in seeking to explain organizational structures in industries, like computer hardware and software, whose products exhibit a high level of modularity.

One benefit from examining intellectual property rights through the lens of the organizational literature on modularity is that the organizations that private parties devise for themselves may serve as suggestive analogies for off-the-rack intellectual property law. In particular, the mixture of proprietary and open source elements in software have their analogs in both organizational law and property. In particular, what I have called a semicommons, a property system in which private and common elements coexist and potentially interact with each other seems to have some relevance both to intellectual property law and to joint ventures. Intellectual property, like property and organizational law, can be seen as a second-best solution of a complex coordination problem of attributing outputs to inputs.

Download Paper

Back to Top

Favoring Dynamic over Static Competition: Implications for Antitrust Analysis and Policy

David J. Teece (Biography)

This paper asks how competition policy should be shaped if it were to favor Schumpeterian (dynamic) competition over neoclassical (static) competition. Schumpeterian competition is the kind of competition that is engendered by product and process innovation. Such competition not only brings price competition—it tends to overturn the existing order. A framework that favors dynamic over static competition would put less weight on market share and concentration in the assessment of market power, and more weight on assessing potential competition and enterprise level capabilities. By embedding recent developments in evolutionary economics and the behavioral theory of the firm into antitrust analysis, a more robust framework for antitrust economics can be developed. Such a framework is likely to soften remaining tensions between antitrust and intellectual property. It is also likely to lead to less confidence in the standards tools of antitrust economics when the business environment is associated with rapid technological change.

Download Paper

Back to Top

Rewarding Innovation Efficiently: The Case for Exclusive Rights

Vincenzo Denicolò (Biography) and Luigi Alberto Franzoni (Biography)

What rights should be assigned to a party that has discovered a new idea or a new technology? Should the first innovator be able to exclude potential rivals or should property rights mitigated so as to allow for some degree of imitation and competition?

In this paper, we address some basic issues pertaining to the optimal nature of the exclusion rights of successful innovators with respect to parties that might arrive at the discovery at a later time. We develop a test for the patentability of innovations able to capture the trade-off between the goals of fostering innovation and promoting its diffusion.

We argue that fully exclusive rights represent the efficient way of rewarding innovation when competition in the product market is weak, the innovation is "big", and research entails little spill overs. Our results are used to get insights on policy issues relating to proper scope of the patentability requirements, the independent inventor defense, open vs closed industry standards, and the patent breadth.

Download Paper

Back to Top

Does the Market Care About Changes In Patent Law?

Scott Baker (Biography), John Conley (Biography), and Arvind Malhotra (Biography)

In recent years the Supreme Court has issued several major patent law decisions, and the Federal Circuit does so even more often. These decisions are awaited with much anticipation by patent lawyers and studied by scholars. The rulings are dissected and discussed; predictions are made about the impact of the ruling on the practice of patent law and the advancement of innovation. In this paper, we ask whether these rulings matter in one specific sense: whether the decisions are associated with changes in the share prices of those firms most interested in the litigation. We define the "most interested" firms as those that were parties to the litigation or filed an amicus brief. For 75 major patent cases, we collected share price data and ran an event study, asking whether the markets cared whether the parties and amici won or lost.

Download Paper

Back to Top

Patent Notice and Cumulative Innovation

Michael Meurer (Biography)

This paper surveys the mechanism design approach to patent design (best illustrated by the work of Suzanne Scotchmer) and comments on whether the key results are robust to inclusion of fuzzy patent boundaries in the models, and what sort of future research is needed to incorporate a serious treatment of patent notice failure into models of patent design.

Download Paper

Back to Top