Transcript Kieff-Presentation

The Importance of
Property Rights in Patents
F. Scott Kieff
Associate Professor
Washington University School of Law
Research Fellow
Hoover Institution
Visiting Professor
Stanford Law School
Presented at the
Southern California Law Associations Intellectual Property
Spring Seminar, June 8–10, 2007, Laguna Niguel, CA
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Why Is the U.S. So Rich?
GDP Per Capita 2005, US$
25,000
20,000
15,000
10,000
5,000
-
SOURCE WDI 2006
Property Rights in Intangibles!
How Do Property Rights Matter?
• Far more than homes and land
• Modern economic growth is about
innovation!
– Property rights in ideas
– Property rights in capital
• Not just about protecting the wealthy, it’s
about fighting poverty
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0%
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Again, Property Rights!
(Source World Bank Financial Structure Database)
Hong Kong
Switz
S. Africa
Stock Mkt
Private Bond Mkt
Bank Credit
Jordan
Belg
Australia
Japan
Portugal
Finland
Germany
Thailand
N. Zea
Trinidad & Tob
Egypt
Brazil
Papua N.G.
Hungary
Slovenia
Guyana
Malta
Bolivia
El Salv
Turkey
St. Vinc
Bulg
Sri Lanka
Tonga
China
Slovak R.
Samoa
Macedonia
Oman
Nicaragua
Qatar
Burundi
Guatemala
Zambia
Serb & Mont
Venez
Haiti
Nepal
Kyrgyz Rep
500%
Gabon
Swaziland
Uganda
S Leone
U.S. Financial System is Huge
700%
Financial System as % of GDP
600%
U.S.A
400%
300%
U.K.
Japan
FR
200%
100%
Property Rights Are Key to Finance
• Banking example
– Depositors vs. banks
– Banks vs. debtors
– Minority shareholders vs. insiders
– Banks vs. governments
• Compare Mexico
– No property rights
– No banking system
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U.S. Intellectual Property System
is Huge
• Intellectual Property-based companies make up
largest sector of the U.S. economy
• U.S. Intellectual Property is worth over $5 trillion
• U.S. Intellectual Property is almost half U.S. GDP
• Greater than the GDP of almost any other nation
in the world
(Source U.S. Patent Office Director Jon W. Dudas April 19, 2007)
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Why Have IP? Ever Forward!
Mark Twain’s Connecticut Yank went to Warwick Castle,
England. There he was magically transported back to the time
of King Arthur. He did well. He was made First Minister. He
was called Sir Boss. What was the first thing he did in power?
The very first official thing I did, in my administration –
and it was on the very first day of it, too – was to start a
patent office; for I knew that a country without a patent
office and good patent laws was just a crab, and
couldn’t travel anyway but sideways or backwards.
Lord Robin Jacob, Royal Courts of Justice, London, England, One Size
Fits All? in F. Scott Kieff, PERSPECTIVES ON PROPERTIES OF THE
HUMAN GENOME PROJECT 449 (2003).
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Why Have IP? Really?!
Is intellectual property good?
To call it “intellectual” is misleading. It takes one's eye off
the ball. “Intellectual” confers a respectability on a
monopoly which may well not be deserved. A squirrel is
a rat with good P.R.
*****
[H]owever justified the cry, “what we need here is
protection” may be for an anti AIDS campaign, it is not
self evident for a process of the creation of new or
escalated kinds of monopoly
Lord Robin Jacob, Royal Courts of Justice, London, England,
Industrial Property-Industry's Enemy, The Intellectual Property
Quarterly, Launch Issue, (Sweet & Maxwell), 1997, pp 3-15.
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Popular Theories of IP:
Reward & Balance
• Most see IP as rewards, try to balance incentives
and access
– Targeted incentives to specific individuals to
invent or create as a solution to problem of
positive externalities
– But then targeted responses to problems of
monopoly distortions, transaction costs, and
reduced downstream access
• Weaken rights through more discretion
• Enhanced antitrust regulation
• This is all wrong – incorrect history and policy
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Property Rights in IP Are Key to
Innovation and Competition
• Increase innovation
– Not just incentives to invent
– Get inventions put to use
– By facilitating coordination among complementary users of
the invention (investors, managers, marketers, laborers,
owners of other inventions, etc)
– The D part of R&D
• Help new companies compete
– Anti-monopoly weapons
– Vital slingshot for David against Goliath
• History: Giles Rich,’52 Act, don’t focus on inventing
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Good Coordination Hinges on
Property Not Rewards
• Beacon effect
– Publicly recorded ownership and credible threat of injunction serve as
beacon to draws folks together
– Allows even indirect interaction
– Rewards might give adequate incentive to the IP owner
• But they don’t give same incentives for all others to come to owner
• They give alternative incentives for these others to instead go to
agencies, courts and legislatures
• Bargain effect
– If breakdown avoids injunction, why would infringers try to get along?
– Rewards focus on price
• But deals often hinge on complex terms other than price
• Overlooks the need to hedge, diversify or insure (compare portfolio
players v. unique investments – especially early stage deals)
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Biotechnology Example
•Before 1980, U.S., Europe, & Japan all had NO
patents in biotech
•After 1980, only the U.S. has patents in biotech
–Large increase in number of new drugs & machines
actually commercialized
–Large pool of ~ 1,400 small & medium biotech
companies
(Source 2003 Hearing at House Energy & Commerce Committee, Health Subcommittee, Statement of Stanford Associate Dean Phyllis Gardner)
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U.S. Venture Capital is Huge
Venture Capital as % of GDP, 1999-2002
0.70
0.60
0.50
0.40
0.30
0.20
0.10
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(Source OECD Venture Capital Database)
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Venture Capital Feedback Loops
• Venture capital depends on property rights and freedom of contract in
– Corporate governance & finance (protection from teammates)
– Intellectual property (protection from competitors)
• Venture capital helps
– Financial system (more opportunities to invest)
– Innovation system (more sources of investment)
• Key is predictable enforcement
– To protect against expropriation
– By government and politically powerful
– Limited government
• Impact
– Economic growth and innovation (16.6% of GDP)
– Jobs (9% of private sector work force)
– Tax receipts (2005 sales at $2.1 trillion)
– Better ROI than government (2005 investment at $23 billion, 0.2% GDP)
(Source National Venture Capital Association 2007 Global Insight Study)
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What Are Some Current Threats?
• Finance
–
–
–
–
Sarbanes-Oxley mandatory disclosure component
Hedge fund regulation
Enforcement actions whenever sympathetic losers
Recent Supreme Court cases like Billing & Charter
• IP
–
–
–
–
Patent “reform”
Increased antitrust regulation and enforcement
Abrogating patents for world health and development
Recent Supreme Court cases like eBay & KSR
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SARBOX Example:
Unintended Consequences?
• Disclosure can be good
• But mandatory disclosure may be so onerous, that it:
– Keeps some small companies from “going public”
– Encourages others already public to be taken “private,” or
offshore
– Distracts management and the board from corporate
strategy
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Patent “Reform” Example:
Lofty Goals
• New patent bill introduced in Congress
–Core changes focus on what patent lawyers call the “prior art”
–Today a court adjudicates as a question of fact, based on
evidence like lab notebooks or printed theses
–Proposals would defer to government examiner’s discretion
about what the state of some art was on some date
• Compare recent KSR case on more discretion for obviousness
• Compare recent eBay case on more discretion for injunctions
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Patent “Reform” Example:
Unintended Consequences?
• Problems of discretion – flexibility’s Achilles’ heel
– Influenced by political pressure and lobbying
– Big guys win, which turns a law designed to help
competition into one that hurts competition
• Example: IBM & Kennedy/Johnson/Katzenbach
– Discretion to reject any software patent, and eventually all
– Absence of property rights lead to monopoly
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IBM & Open Source
• Open source is supposed to make everything free
• Property rights lead to coordinated development
• Avoiding property leads to uncoordinated
development
• Uncoordinated software increases demand for
consulting services
• More so than hardware and software, IBM now sells
mostly consulting services
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Example of Recent Government
Actions on IP & AT
• FTC & DOJ
– Joint hearings (throughout 2002)
– Interim report on pharmaceutical patents, FDA/PTO and
Hatch-Waxman Act (Jun. 2003)
– IP/AT Report vol. 1, FTC only (Oct. 2003)
– FTC & DOJ joint IP & AT report (Apr. 2007) (vol. 2?)
– Standard setting cases like Rambus
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Two Often Missed Keys to IP & AT
• Monopoly refers to markets, not to particular goods or services
• The efficiency problem of monopolies is tied to decreased output, so
price discrimination can be of great help, not harm
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Keiretsu Strategy for IP & AT
• Keiretsu strategy and bad type of coordination among big players
– What if every legal test turns on discretion?
– Ensures large numbers of low value IP assets
– Mitigates trust problem: improves communication
• Decisions to push and yield transmit preferences
• Discovery ensures fidelity
– Mitigates antitrust problem: (blessed by Federal Judges)
• Insulates from scrutiny generally
• Mitigates chance of treble damages and jail time even if
scrutinized
– Avoids slingshots from Davids
• Rambus example
– Upstream/downstream
– Not quite “bad” in several ways, so therefore “bad” (compare “basics
matter” thesis)
– In face of 3rd largest AT criminal fine ever (2005 Hynix & Infineon
combined DRAM price fixing cases with fines of $346 million)
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Patent Example:
Utility and Subject Matter Rules
• Utility
– Upstream inventions lack utility
– But nobody infringes a useless patent, and one person’s
upstream is another’s downstream
• Subject Matter
– Today’s technologies are not proper subject of patents
because they could not have been anticipated by the
founders – surely nobody thinks Jefferson anticipated the
internet?
– But those technologies that are anticipated are exactly
those that are not patentable
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Patent Example:
World Health & Development
• What’s wrong with the new initiatives?
– Over 95% of drugs on WHO’s essential medicines list are
off patent
– When patented drugs are given to those countries for free
they are heavily taxed or outright taken by corrupt local
governments – sometimes even resold on black markets
to U.S., Japan, Europe, etc.
– Millions of real people are dying from war, famine,
unsanitary conditions, lack of basic health care, etc
• Who is behind them? (India, Argentina, Brazil)
– Holders of biodiversity inputs (upstream of those patents)
– Having developed manufacturing organizations (for whom
the patents are upstream)
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At Bottom, the Details Matter:
Property Rights at Their Best
• Attributes
–
–
–
–
Predictable enforcement
Tradable
Can be bundled & divided
Users deal with private
individuals
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• Effects
– Easy for market actors to
use
– Stimulate competition,
innovation, economic
growth, and jobs
At Bottom, the Details Matter:
Property Rights at Their Worst
• Attributes
– Created or changed at
discretion of government
– Fixed owner
– Fixed contours
– Users deal with
government
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• Effects
– Easy for political actors
to use (regulators and
powerful political
constituents)
– Concentrate wealth and
power
Political Economy
of Government Discretion
• Stigler
– Concentrated benefits and diffuse costs
– Explain how we get so much of it
• Buchanan & Tullock
– Competition for it among citizens
– Causes waste (“rent dissipation”)
• De Soto, McChesney, Schleifer, Haber
– Competition among government actors to provide it
– Increases waste (“tollbooth” and “crony capitalism” theories)
• Friedman
– Even seemingly benign or unrelated government agencies
– Drawn in by “mission creep”
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Take Away
• These seemingly diverse areas of law
– Corporate, finance, IP, AT, WHO, trade
– Share basic themes in common
• Economic success is about property rights
• Property rights require limited government
• As Murray Weidenbaum often said to friends in
government:
– “Don’t just stand there…
– undo something!”
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Hoover Project on
Commercializing Innovation
– Core team: Stephen Haber, F. Scott Kieff, Troy Paredes
– Diverse fields in law and economics
• Intellectual property
• Corporate and securities
• Contracts
• Finance
• Industrial organization
– Sectors
• Public: government and academic
• Private
– Modes of action
• Basic research, academic articles and books, white papers
• ADR, expert consulting, testifying, amicus briefs, op-eds, media
• Collaborations – we enjoy working with you
• Contact [email protected]
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