IPSC session 1

Intellectual Property Scholars Conference at DePaul

(Standard disclaimer: my notes may be wrong or strangely targeted. Corrections are welcome.)

IP Theory

Peter S. Menell, University of California at Berkeley School of Law & Michael Meurer, Boston University School of Law, Notice Externalities and Development of Intangible Resources

Problem to be solved: appropriate return on R&D investment. Creates second market failure: notice externality. When someone acquires IP, they impose costs on others, as true of any resource, but intangibles tend to be particularly costly from a notice standpoint. Like landmines. Example: NTP v. RIM, leading to $612 million settlement while patents are still under review (many of which were rejected on reexamination). NTP is now suing everyone. This is failure of notice: if NTP had been identified earlier on, RIM would have known who its neighbors were and could have negotiated/found the boundaries. System of real property is designed so that you find the boundaries and negotiate/preclear up front. Notice exists to help us plan.

PTO is probabalistic, not simply a land registry. Costly, subjective, dependent on disclosure. Patent applicants have bad incentives to not provide notice. They earn nothing when better disclosure and clearer claim language help an innovator avoid their rights. Exception: in pharma industry. NPE problem is distinct from real property.

Using the notice externality framework gives us a bigger policy toolbox. Why an 18-month secrecy period for patent filing? Seems easy from perspective of real property—but patent lawyers worry about giving up trade secrets if they don’t get the patent: but who should bear the risk of that, the public or the hopeful patentee?

Logic of externality: internalize the cost, and there are many ways to do that to discourage overclaiming. Think about other resources with social costs: property taxes pay for roads, schools, other costs of occupying land. Maybe cap damages based on declared value of patent, with maintenance fees based on patent value.

Music rights example: people have an incentive to identify rights in music, though it’s very complex in terms of ownership. YT has huge complex database for tracking music composition rights. Then we have linedrawing: what is included in your right?

Mark Lemley: wonders about the lottery ticket problem: I don’t know whether this will be valuable or not. Is that bad investment? If it isn’t, how do you deal with uncertain valuation?

Menell: It’s designed to attract capital: go to a VC and say it’s valuable. Or we could change valuation over time, with reissues. People who came in when your valuation was low would be subject to different constraints than those who came in when your valuation was high. Different ways of incentivizing people to reveal value. We do this all the time in our portfolios: we allocate value/risk.

Eric Johnson: Don’t we do it the opposite way now? If you think you have a billion dollar company, you need to do millions of research at the patent office. If you have a tiny company, not so much.

Menell: we should be equal-handed. All of the social cost is borne by non-patentees building successful businesses.

Q: real property has adverse possession, quiet title, etc. Should we have these?

A: we should have aggressive laches defenses. Also zoning: if you have issue regarding a border, you can typically get someone to resolve that issue on a quick timeframe. (Comment: That’s not actually zoning.) Externality thinking can help clarify the issues.

Salil K. Mehra, Temple University, Taylorism, Human Relations and User Dynamism

Walled gardens as metaphor/epithet. Negative connotations of control, but he wants to take as a given that there’s a tendency towards monopoly (whether or not it meets the antitrust definition). And user-generated content provides value. Do we need intervention to require user freedom? Not going to see it from antitrust law.

Taylorism: principles of scientific management, hierarchical view of breaking up what people do into small units. Plus protocols/platforms/communities/networks. Think about our models of platforms. Traditional telecom model: user is a potted plant subject to network effects; value added comes from investment not from users. That’s the argument against open access. With operating systems, user is one half of two-sided market, with producers on the other side and OS in the middle. New model of users is content creators/innovators, which brings us to ideas of exit, voice, loyalty, and neglect.

Linux, iPhone apps, Wikipedia, Facebook each depend on users not being too far exploited. Users rely on platform—contract model? Will the market solve opportunism? If people can’t switch easily, opportunism is tempting.

CDDB/Gracenote: original promise was that it would “remain 100% free to software developers and consumers.” Later, exclusionary license terms were imposed after the fact. Wikipedia took some flak because non-notable things are moved over to Wikia, which is for profit but has board overlap. Nascent Facebook-phobia: if norms of privacy can be shifted, what people contribute will be used differently. (I’d add: attempts to monetize fan sites.)

Why is exit etc. relevant? Think of relationships through human responses to them. What people do when they feel dissatisfied: they can leave, voice dissatisfaction, neglect/stop investing. People are quality-sensitive. As product turns into community, quality sensitivity increases, and if quality deteriorates, sensitive members use exit or voice. If they exit, they tend to take quality with them, leading to further deterioration. This is different from price sensitivity. User dynamism/community makes this different from standard network effects.

Enforce commitments based on both contract and reliance interests? FTC already does this with online privacy. Maybe disclosure. Promote opportunity for user-investor democracy in platforms.

Robert Merges: how do you find members of the user community who can speak for the group? The investors have the board (comment: hah), but who’s the focal point for users?

Mehra: People can elect representatives/form problem-solving units as on Wikipedia. In the same way that the FTC tries to shape privacy norms, there may be a role for generating an off-the-rack form.

Q: governance/picking a representative is resource intensive. Bond issuance: have trustees who represent the recipients; might be a model.

Kathy Strandberg: In the employment situation, the answer is unions, but that isn’t working so well right now. Laws about unions are intended to foster the ability to create collective representatives. How do we think about the relationship between platform opportunism and user myopia? Sometimes the platform changes the rules, but contracts say “we’ll do whatever we want.” It’s not easy to say they broke a promise.

Mehra: a sort of natural arbitrage. Maybe that’s something we’d like to see platforms compete over. But FB is lawyered up to take advantage of myopia.

Bill McGeveran: Disclosure means that the rational response is to not promise anything, create no enforceable expectations.

Mehra: If it’s valuable to have user content creation, that will be something of a check on the dynamic. But myopia could overwhelm that.

Me: I’m thinking of persistent kerfuffles over terms of service where the service says “we own all your content” and the users freak out and we end up with terms that say what they have to (we have the rights to use all your content to run our service, and if you delete your account we will eventually delete most of our backups), and then the cycle repeats with the next new service. Disclosure doesn’t work; the FTC has given up on it making substantive improvements to privacy (though it does enforce broken promises).

Chris Newman: being able to export all your data is one possible solution.

Mehra: that’s basically taking the wall out.

Newman: the first mover doesn’t want to do that: see Facebook.

Brett Frischmann, Benjamin N. Cardozo School of Law, The Shortcomings of Pursuing Optimality

The opportunity to leverage nonrivalry is important even if you reject the economic approach to IP. Strategic behavior by consumers prevents measuring costs/benefits (of public goods and others), as do measurement problems making it impossible to measure demand to achieve perfect price discrimination, which also make it impossible to determine optimal demand for public goods. The idea of optimality is not just a red herring, it’s not an ideal worth striving for in a second-best world.

A substantial amount of investment in public goods occurs well before marginal return becomes relevant. The complexity of the systems involved/variety of equilibria mean that it’s better to focus on inframarginal investments rather than seek to optimize at the margins. Policies tailored to the margin can have significant effects on inframarginal activity as well as on the distribution of benefits between producers and users, which may be more important than the marginal effects.

Implications: copyright/patent should focus on average cost recovery in competitive markets, rather than temporary monopoly/artificial scarcity for the purpose of collecting rents. Exclusion is important but ought to be quite limited in scope. Also, understand that distribution often has efficiency consequences: consumers are often productive users, even if their use doesn’t generate a marketable good. Finally, IP should focus on reducing the cost as opposed to capturing/appropriating the benefit. Cost recovery is one side of the equation; optimality focuses us on appropriating as much of the benefit as possible. But if you lower the cost of being a public goods producer, that will change the shape of what gets done.

Q: but isn’t the margin the best or the highest quality?

A: There are some public goods that are continuous so you can keep drawing resources in and investing more, but focusing on that margin is not necessarily what we want the system to do. There’s a difference between looking at a single public good and saying “there should be more of it!” and evaluating the system as a whole.

Lemley: Doesn’t your and my work on spillovers/etc. suggest that we should be overinvesting in public goods, because equalizing costs and benefits is a fool’s errand—if anything, public goods are more useful than the market anticipates?

A: Rejecting optimality is not to say that we under/overinvest, it’s to say that the marginal approach is the wrong way to look at it. We may want to overinvest relative to what the marginal approach would tell us.

Robert P. Merges, University of California at Berkeley School of Law, Justifying Intellectual Property

Merges presented a chapter from a book, with necessary abridgements. The chapter did not do much to convince me, but as he pointed out the project is a whole book.

The book is about ¾ defending IP and ¼ justifying in the sense that we justify margins—cleaning it up. He draws on Locke, Kant, and Rawls but suggests that you don’t have to share his normative foundations to agree with him. Midlevel principles justifying IP: efficiency, nonremoval, proportionality and dignity: these are components of shared public reason, an idea taken from Rawls—we can agree on them despite varying normative commitments.

Utilitarianism was the god that failed: difficult to make a solid case for IP on utilitarian grounds. Does not mean he abandons efficiency as an important principle for determining means to the chosen ends.

Defends Locke as working possibly better for IP than for real property; Nozick’s critique of finding the boundaries of the mixed labor can be addressed by Locke’s ideas about annexation. Kant’s writing on property also works well for IP. For Kant everything starts with freedom/autonomy—his ideas about individual ownership and its relationship to individual development have a Hegelian feel; questions about whether IP is pre-state or post-state. Rawls: are our social practices defensible as part of an idealistically fair society? Merges defends IP along two different lines: stronger case for IP for people in the original position behind the veil, though Rawls himself is not that keen on private property. IP can also be defended using the difference principle: it helps the poorest members of society enough to justify the redistribution in the direction of creatives. (I’d really like to read Lawrence Liang’s reaction to that.)

IP rights are individual rights. Modern setting: most creative professionals work in teams. One chapter is dedicated to translating the defense of IP into the modern context. Makes a limited defense of relaxing patent rights in the case of lifesaving drugs according to the Lockean charity proviso, though with attention to avoiding killing the goose that lays the golden drugs/intergenerational equity.

Chris Newman: How does IP satisfy the difference principle if you can’t prove it’s efficient?

A: difference involves redistribution. We might do that to honor their work, to help them realize their life goals; that’s different from saying it’s efficient.

Justin Hughes: Amartya Sen’s take on Rawls/justice through capacity building?

A: talks about it a little. Relates to whether or not you should take into account personal preferences/life goals or whether Rawls is at heart a utilitarian.

Me: what is nonremoval? Also whether he agrees with Kant that only creating text, not visual art, justifies rights/is related to personhood.

A: nonremoval is the public domain. He thinks Kant’s work on printing addressed a specific problem, and his writing on property generally applies to all IP.