Limiting patentees' market power without reducing innovation incentives: the perverse benefits of uncertainty nd non-injunctive remedies

Michigan Law Review

Volumn 97, Issue 4, 1997, Pages 985-1032

  Ayres, Ian ^a   Klemperer, Paul ^a  

^a NONE

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EID: 0042361801     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: 10.2307/1290378     Document Type: Article

References (175)

1. See, e.g., Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 699 (1998) ("Long delays between the filing and issuance of biotechnology patents aggravate the problem of concurrent fragments. During this period of pendency, there is substantial uncertainty as to the scope of patent rights that will ultimately issue."). However, uncertainty has already been shown to be desirable in some special cases. First, Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); and Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991), have shown that uncertainty about whether follow- on innovation would infringe a patent might be desirable. See infra note 73. Second, uncertainty about which of two competing innovators' patent-claims on innovation will be valid is equivalent to each innovation receiving a small prize in expectation, which might attract more innovators to enter an R&D contest. See Richard Gilbert & Paul Klemperer, An Equilibrium Theory of Rationing, RAND J. ECON. (forthcoming 1999). Third, uncertainty about which claim is valid (which is economically equivalent to joint ownership of the rights to produce) can result in more efficient bargaining over the rights. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement To Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Peter Cramton et al., Dissolving a Partnership Efficiently, 55 ECONOMETRICA 615 (1987).
2. See, e.g., Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 699 (1998) ("Long delays between the filing and issuance of biotechnology patents aggravate the problem of concurrent fragments. During this period of pendency, there is substantial uncertainty as to the scope of patent rights that will ultimately issue."). However, uncertainty has already been shown to be desirable in some special cases. First, Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); and Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991), have shown that uncertainty about whether follow- on innovation would infringe a patent might be desirable. See infra note 73. Second, uncertainty about which of two competing innovators' patent-claims on innovation will be valid is equivalent to each innovation receiving a small prize in expectation, which might attract more innovators to enter an R&D contest. See Richard Gilbert & Paul Klemperer, An Equilibrium Theory of Rationing, RAND J. ECON. (forthcoming 1999). Third, uncertainty about which claim is valid (which is economically equivalent to joint ownership of the rights to produce) can result in more efficient bargaining over the rights. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement To Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Peter Cramton et al., Dissolving a Partnership Efficiently, 55 ECONOMETRICA 615 (1987).
3. See, e.g., Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 699 (1998) ("Long delays between the filing and issuance of biotechnology patents aggravate the problem of concurrent fragments. During this period of pendency, there is substantial uncertainty as to the scope of patent rights that will ultimately issue."). However, uncertainty has already been shown to be desirable in some special cases. First, Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); and Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991), have shown that uncertainty about whether follow- on innovation would infringe a patent might be desirable. See infra note 73. Second, uncertainty about which of two competing innovators' patent-claims on innovation will be valid is equivalent to each innovation receiving a small prize in expectation, which might attract more innovators to enter an R&D contest. See Richard Gilbert & Paul Klemperer, An Equilibrium Theory of Rationing, RAND J. ECON. (forthcoming 1999). Third, uncertainty about which claim is valid (which is economically equivalent to joint ownership of the rights to produce) can result in more efficient bargaining over the rights. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement To Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Peter Cramton et al., Dissolving a Partnership Efficiently, 55 ECONOMETRICA 615 (1987).
4. See, e.g., Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 699 (1998) ("Long delays between the filing and issuance of biotechnology patents aggravate the problem of concurrent fragments. During this period of pendency, there is substantial uncertainty as to the scope of patent rights that will ultimately issue."). However, uncertainty has already been shown to be desirable in some special cases. First, Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); and Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991), have shown that uncertainty about whether follow-on innovation would infringe a patent might be desirable. See infra note 73. Second, uncertainty about which of two competing innovators' patent-claims on innovation will be valid is equivalent to each innovation receiving a small prize in expectation, which might attract more innovators to enter an R&D contest. See Richard Gilbert & Paul Klemperer, An Equilibrium Theory of Rationing, RAND J. ECON. (forthcoming 1999). Third, uncertainty about which claim is valid (which is economically equivalent to joint ownership of the rights to produce) can result in more efficient bargaining over the rights. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement To Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Peter Cramton et al., Dissolving a Partnership Efficiently, 55 ECONOMETRICA 615 (1987).
5. See, e.g., Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 699 (1998) ("Long delays between the filing and issuance of biotechnology patents aggravate the problem of concurrent fragments. During this period of pendency, there is substantial uncertainty as to the scope of patent rights that will ultimately issue."). However, uncertainty has already been shown to be desirable in some special cases. First, Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); and Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991), have shown that uncertainty about whether follow- on innovation would infringe a patent might be desirable. See infra note 73. Second, uncertainty about which of two competing innovators' patent-claims on innovation will be valid is equivalent to each innovation receiving a small prize in expectation, which might attract more innovators to enter an R&D contest. See Richard Gilbert & Paul Klemperer, An Equilibrium Theory of Rationing, RAND J. ECON. (forthcoming 1999). Third, uncertainty about which claim is valid (which is economically equivalent to joint ownership of the rights to produce) can result in more efficient bargaining over the rights. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement To Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Peter Cramton et al., Dissolving a Partnership Efficiently, 55 ECONOMETRICA 615 (1987).
6. See, e.g., Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 699 (1998) ("Long delays between the filing and issuance of biotechnology patents aggravate the problem of concurrent fragments. During this period of pendency, there is substantial uncertainty as to the scope of patent rights that will ultimately issue."). However, uncertainty has already been shown to be desirable in some special cases. First, Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); and Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991), have shown that uncertainty about whether follow- on innovation would infringe a patent might be desirable. See infra note 73. Second, uncertainty about which of two competing innovators' patent-claims on innovation will be valid is equivalent to each innovation receiving a small prize in expectation, which might attract more innovators to enter an R&D contest. See Richard Gilbert & Paul Klemperer, An Equilibrium Theory of Rationing, RAND J. ECON. (forthcoming 1999). Third, uncertainty about which claim is valid (which is economically equivalent to joint ownership of the rights to produce) can result in more efficient bargaining over the rights. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement To Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Peter Cramton et al., Dissolving a Partnership Efficiently, 55 ECONOMETRICA 615 (1987).
7. See, e.g., Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 699 (1998) ("Long delays between the filing and issuance of biotechnology patents aggravate the problem of concurrent fragments. During this period of pendency, there is substantial uncertainty as to the scope of patent rights that will ultimately issue."). However, uncertainty has already been shown to be desirable in some special cases. First, Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995); Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); and Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991), have shown that uncertainty about whether follow- on innovation would infringe a patent might be desirable. See infra note 73. Second, uncertainty about which of two competing innovators' patent-claims on innovation will be valid is equivalent to each innovation receiving a small prize in expectation, which might attract more innovators to enter an R&D contest. See Richard Gilbert & Paul Klemperer, An Equilibrium Theory of Rationing, RAND J. ECON. (forthcoming 1999). Third, uncertainty about which claim is valid (which is economically equivalent to joint ownership of the rights to produce) can result in more efficient bargaining over the rights. See Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement To Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995); Peter Cramton et al., Dissolving a Partnership Efficiently, 55 ECONOMETRICA 615 (1987).
8. Economists have understood that reducing the price of patented products with compulsory licensing and increasing the patent length (to maintain the patentee's expected profit) can increase welfare. See, e.g., Richard Gilbert & Carl Shapiro, Optimal Patent Length and Breadth, 21 RAND J. ECON. 106 (1990); Paul Klemperer, How Broad Should the Scope of Patent Protection Be? 21 RAND J. ECON. 113 (1990): Pankaj Tandon, Optimal Patents with Compulsory Licensing, 90 J. POL. ECON. 470 (1982). The core insight of this Article is that delay and uncertainty can have the same beneficial effects on limiting the patentee's exploitation of market power.
9. Economists have understood that reducing the price of patented products with compulsory licensing and increasing the patent length (to maintain the patentee's expected profit) can increase welfare. See, e.g., Richard Gilbert & Carl Shapiro, Optimal Patent Length and Breadth, 21 RAND J. ECON. 106 (1990); Paul Klemperer, How Broad Should the Scope of Patent Protection Be? 21 RAND J. ECON. 113 (1990): Pankaj Tandon, Optimal Patents with Compulsory Licensing, 90 J. POL. ECON. 470 (1982). The core insight of this Article is that delay and uncertainty can have the same beneficial effects on limiting the patentee's exploitation of market power.
10. Economists have understood that reducing the price of patented products with compulsory licensing and increasing the patent length (to maintain the patentee's expected profit) can increase welfare. See, e.g., Richard Gilbert & Carl Shapiro, Optimal Patent Length and Breadth, 21 RAND J. ECON. 106 (1990); Paul Klemperer, How Broad Should the Scope of Patent Protection Be? 21 RAND J. ECON. 113 (1990): Pankaj Tandon, Optimal Patents with Compulsory Licensing, 90 J. POL. ECON. 470 (1982). The core insight of this Article is that delay and uncertainty can have the same beneficial effects on limiting the patentee's exploitation of market power.
11. The terms "Type I" and "Type II" are inspired by classical hypothesis testing. As traditionally defined, the possibility that a true null hypothesis will be rejected is referred to as a "Type I" error, while the possibility that a false null hypothesis will not be rejected is referred to as a "Typre II" error. See James E. Krier, Risk and Design, 19 J. LEG. STUD. 781, 784 (1990); infra note 85. We are implicitly defining the null hypothesis to be that a patent is valid, but we have no strong view on which type of error should be denned as Type I or II.
12. See infra section III.A.
13. For leading analyses of these issues, see WILLIAM D. NORDHAUS, INVENTION, GROWTH, AND WELFARE (1969); F.M. Scherer, Nordhaus' Theory of Optimal Patent Life: A Geometric Reinterpretation, 62 AM. ECON. REV. 422 (1972); and Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990).
14. For leading analyses of these issues, see WILLIAM D. NORDHAUS, INVENTION, GROWTH, AND WELFARE (1969); F.M. Scherer, Nordhaus' Theory of Optimal Patent Life: A Geometric Reinterpretation, 62 AM. ECON. REV. 422 (1972); and Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990).
15. For leading analyses of these issues, see WILLIAM D. NORDHAUS, INVENTION, GROWTH, AND WELFARE (1969); F.M. Scherer, Nordhaus' Theory of Optimal Patent Life: A Geometric Reinterpretation, 62 AM. ECON. REV. 422 (1972); and Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990).
16. The "envelope theorem" also exploits this aspect of the maxima (or minima) of functions. See George A. Akerlof & Janet L. Yellen, Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria? 75 AM. ECON. REV. 708 (1985); Ian Ayres, Pushing the Envelope: Antitrust Implications of the Envelope Theorem, 17 MISS. C. L. REV. 21 (1996).
17. The "envelope theorem" also exploits this aspect of the maxima (or minima) of functions. See George A. Akerlof & Janet L. Yellen, Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria? 75 AM. ECON. REV. 708 (1985); Ian Ayres, Pushing the Envelope: Antitrust Implications of the Envelope Theorem, 17 MISS. C. L. REV. 21 (1996).
18. See infra Table 1.
19. But cf. infra text accompanying notes 36-37 (describing pathological example in which elasticity of innovation with respect to expected profit was extremely high).
20. This will only be true if the patentee is risk-neutral and if preemptive innovation does not independently limit the patentee's ability to profit from the original innovation in later years. If patentees are risk-averse, patent duration will need to be lengthened more to maintain a constant incentive to innovate. The latter possibility of preemptive innovation is discussed below with regard to choosing the appropriate discount rate. See infra text accompanying notes 49-50.
21. See Frank P. Ramsey, A Contribution to the Theory of Taxation, 37 ECON. J. 47 (1927). For a review of the subsequent literature, see William J. Baumol, Ramsey Pricing, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 49, 49-51 (John Eatwell et al. eds., 1987). See also Robert Cooter, Optimal Tax Schedules and Rates: Mirrlees and Ramsey, 68 AM. ECON. REV. 756 (1978): Stephen Law, Inter-Temporal Tie-ins: A Case for Tying Intellectual Property (Univ. of New Brunswick Working Paper 98-06, 1998); Frank Mathewson & Ralph Winter, Tying as a Response to Demand Uncertainty, 28 RAND J. ECON. 566 (1997) (arguing that a monopolist might also use tying to implement Ramsey pricing across products - instead of charging a monopoly price for the product it has a monopoly on and a competitive price for a related product).
22. See Frank P. Ramsey, A Contribution to the Theory of Taxation, 37 ECON. J. 47 (1927). For a review of the subsequent literature, see William J. Baumol, Ramsey Pricing, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 49, 49-51 (John Eatwell et al. eds., 1987). See also Robert Cooter, Optimal Tax Schedules and Rates: Mirrlees and Ramsey, 68 AM. ECON. REV. 756 (1978): Stephen Law, Inter-Temporal Tie-ins: A Case for Tying Intellectual Property (Univ. of New Brunswick Working Paper 98-06, 1998); Frank Mathewson & Ralph Winter, Tying as a Response to Demand Uncertainty, 28 RAND J. ECON. 566 (1997) (arguing that a monopolist might also use tying to implement Ramsey pricing across products - instead of charging a monopoly price for the product it has a monopoly on and a competitive price for a related product).
23. See Frank P. Ramsey, A Contribution to the Theory of Taxation, 37 ECON. J. 47 (1927). For a review of the subsequent literature, see William J. Baumol, Ramsey Pricing, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 49, 49-51 (John Eatwell et al. eds., 1987). See also Robert Cooter, Optimal Tax Schedules and Rates: Mirrlees and Ramsey, 68 AM. ECON. REV. 756 (1978): Stephen Law, Inter-Temporal Tie-ins: A Case for Tying Intellectual Property (Univ. of New Brunswick Working Paper 98-06, 1998); Frank Mathewson & Ralph Winter, Tying as a Response to Demand Uncertainty, 28 RAND J. ECON. 566 (1997) (arguing that a monopolist might also use tying to implement Ramsey pricing across products - instead of charging a monopoly price for the product it has a monopoly on and a competitive price for a related product).
24. See Frank P. Ramsey, A Contribution to the Theory of Taxation, 37 ECON. J. 47 (1927). For a review of the subsequent literature, see William J. Baumol, Ramsey Pricing, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 49, 49-51 (John Eatwell et al. eds., 1987). See also Robert Cooter, Optimal Tax Schedules and Rates: Mirrlees and Ramsey, 68 AM. ECON. REV. 756 (1978): Stephen Law, Inter-Temporal Tie-ins: A Case for Tying Intellectual Property (Univ. of New Brunswick Working Paper 98-06, 1998); Frank Mathewson & Ralph Winter, Tying as a Response to Demand Uncertainty, 28 RAND J. ECON. 566 (1997) (arguing that a monopolist might also use tying to implement Ramsey pricing across products - instead of charging a monopoly price for the product it has a monopoly on and a competitive price for a related product).
25. See Frank P. Ramsey, A Contribution to the Theory of Taxation, 37 ECON. J. 47 (1927). For a review of the subsequent literature, see William J. Baumol, Ramsey Pricing, in 4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 49, 49-51 (John Eatwell et al. eds., 1987). See also Robert Cooter, Optimal Tax Schedules and Rates: Mirrlees and Ramsey, 68 AM. ECON. REV. 756 (1978): Stephen Law, Inter-Temporal Tie-ins: A Case for Tying Intellectual Property (Univ. of New Brunswick Working Paper 98-06, 1998); Frank Mathewson & Ralph Winter, Tying as a Response to Demand Uncertainty, 28 RAND J. ECON. 566 (1997) (arguing that a monopolist might also use tying to implement Ramsey pricing across products - instead of charging a monopoly price for the product it has a monopoly on and a competitive price for a related product).
26. This can be seen as an application of the stationarity intuition in another setting. The first increment of taxation has a second-order effect on social welfare but a first-order effect on tax revenue.
27. If the demand becomes more elastic over time, then raising most of the revenues in the first years may be efficient. But later years should still be "taxed." For example, if the demand curve is linear and the x-intercept decreases while the y-intercept remains constant then Ramsey pricing would imply constant taxes over time. In other cases, if the demand curve s elasticity increases over time, policy makers will want lower but still positive amounts of "taxation" in the later, more elastic periods. In the probabilistic patents model, lower taxation in later years could be accomplished by awarding lower expected damages for infringement in later years. For the remainder of this Article, we restrict our attention to constant tax rates (i.e., constant expected damage rates) during the life of the patent.
28. Most standard demand curves - including all concave, linear, and not overly convex demand curves - satisfy this condition. See Klemperer, supra note 2, at 122. Linear demand curves become more elastic as price increases - even though the slope of the demand curve remains constant - because proportionate increases in price cause increasingly large proportionate reductions in demand. Monopolists will always increase price until they reach an elastic portion of the demand curve, and such a portion always exists for sufficiently high prices on demand curves that are linear.
29. The condition that demand becomes more elastic as price increases is stronger than necessary. It relates to the second implication of Ramsey taxation, that it is preferable to tax inelastically- rather than elastically-demanded goods. If demand is much more inelastic at higher prices, it might be preferable to tax a small number of periods at high prices rather than a larger number of periods at lower prices.
30. See Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97 HARV. L. REV. 1813 (1984).
31. Id. at 1829 n.4, 1831. Kaplow's approach is applied to the copyright issue of "fair use" in William W. Fisher III, Reconstructing the Fair Use Doctrine, 101 HARV. L. REV. 1659 (1988).
32. Indeed, at the stationary point - the profit-maximizing price - the ratio by definition is zero.
33. For convenience, the interim production by nonpatent holders is referred to as "infringement" - even though under a probabilistic regime, there is some probability that the "infringer" will not need to pay damages.
34. In terms of Figure 1, infringement might not only drive the price to P′, but the patentee would be supplying only a portion of Q′.
35. Thus our model only admits the possibility of Type I uncertainty (the possibility that valid patents will be unenforced) excluding the possibility of Type II uncertainty (the possibility that invalid patents might be enforced). We will later discuss the extent to which uncertainty in the real world gives rise to each of these two distinct possibilities. See infra Part III. For now, suffice it to say that we could imagine a regime that keeps the amount of Type II uncertainty constant but which increases Type I uncertainty. For example, one could imagine a regime in which a court or an agency immediately adjudicated the validity of the patent but then waited 20 years before flipping a coin to decide whether any damages would be paid for intervening infringement.
36. In either instance, the result of the coin flip should not affect future behavior, because the validity of the patent is only determined after the patent has expired.
37. If the product costs $10 per unit to produce, the demand schedule could simply be rescaled to produce the same results.
38. Stiff damages or strong injunctive protection of a patent entitlement would constitute what Calabresi and Melamed have called a "property rule." See Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1092 (1972). Recently, Robert Merges has written several pieces exploring the implications of property and liability rules in intellectual property. See, e.g., Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV. 1293 (1996); Robert P. Merges, Of Property Rules, Coase, and Intellectual Property, 94 COLUM. L. REV. 2655 (1994) [hereinafter Merges, Of Property Rules].
39. Stiff damages or strong injunctive protection of a patent entitlement would constitute what Calabresi and Melamed have called a "property rule." See Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1092 (1972). Recently, Robert Merges has written several pieces exploring the implications of property and liability rules in intellectual property. See, e.g., Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV. 1293 (1996); Robert P. Merges, Of Property Rules, Coase, and Intellectual Property, 94 COLUM. L. REV. 2655 (1994) [hereinafter Merges, Of Property Rules].
40. Stiff damages or strong injunctive protection of a patent entitlement would constitute what Calabresi and Melamed have called a "property rule." See Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1092 (1972). Recently, Robert Merges has written several pieces exploring the implications of property and liability rules in intellectual property. See, e.g., Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV. 1293 (1996); Robert P. Merges, Of Property Rules, Coase, and Intellectual Property, 94 COLUM. L. REV. 2655 (1994) [hereinafter Merges, Of Property Rules].
41. It is straightforward to allow patents to last for multiple periods (and to discount future profits) - or to define a period as lasting for 20 years.
42. We further assume that infringing producers (possibly with the aid of bonds) will be able to pay these damages, that is, they will not be able to their liability through bankruptcy, etc. Instead of being liable pro-rata, one might imagine that infringers would only be held liable for the marginal impact of their infringement on the patentee's damages. Judge Frank Easterbrrok has rejected this standard: [T]here is the question whether [the defendant] is entitled to "credit," as it were, for the price erosion caused by the other infringers' sales. . . . [T]he answer is no. . . . A judge would be not let the infringers play a game of whipsaw, in which each argued that it should pay less of the damages than its share of the sales, because the price would have been depressed anyway even had it never infringed. That approach would lead to a less than compensatory award. Indeed it might lead to no damages at all, even though by hypothesis the patent holder and his licensee have been injured. In re Mahurkar Doule Lumen Hemodialysis Catheter Patent Litig., 831 F. Supp. 1354, 1392 (N.D. Ill. 1993).
43. In Cournot models of oligopolistic competition, each competitor chooses a quantity to produce that maximizes its profits, given an equilibrium expectation about the output of other producers. w is assumed to be common knowledge. The order of play is: (1) the patent is awarded; (2) the patentee and competitive fringe simultaneously choose output levels; and (3) the court flips a coin and announces damages if the patent is to be "enforced." The possibility of risk-averse patentees is discussed supra note 9.
44. e), a profit maximizing patentee will produce: [formula presented] Solving these two equations yields the expressions for the patentee's and entrants' output shown in the text.
45. In this model, the fact that the market price (in dollars) equals the patentee's output (in units) is an artifact of the particular linear demand function and not a general result.
46. This reduction in the deadweight-loss triangle is represented in Figure 1. At the monopoly price the deadweight loss equals the area of the triangle comprising Areas B + C + D, but the reduction in price reduces the deadweight loss triangle to Area D.
47. As shown in Table 1, profits fall $400 from $2.500 to $2.100.
48. The competitive fringe earns profits of $1,200 ($30 per unit on 40 units) but 75% of the time must pay damages of $1.600 - so that competition induces entry to the point that entrants expect to earn zero profits. On net, the entrants' 25% chance of earning $1,200 compensates for the 75% chance of losing $400.
49. Delay would not be necessary to induce limited infringement if (1) damages were not set to compensate the patentee for lost monopoly profits, and (2) prospective damages were possible instead of an injunction. Under such circumstances, the partially compensating damages would be equivalent to a compulsory license. See infra text accompanying notes 115-27. Even though delayed judgement is needed to induce interim infringement, the law may not need to mandate delayed decision. As long as the patentee has the option of postponing judgement, the patent holder has a strong incentive to delay the court's decision. See infra text accompanying notes 66-67.
50. Table 1 shows the social cost of $1.023.20 to be 81.86% of the monopoly social cost ($1,250).
51. Table 1 shows profits of $2.477.30 to be 99.09% of monopoly profits ($2.500).
52. As George Akerlof and Janet Yellen have noted with regard to the stationarity prerequisite for the envelope theorem: "[F]or the [envelope] theorem to have practical relevance, it must be true for finite values of w, corresponding to economically noticeable shocks, and not just for infinitesimal w . . . ." Akerlof & Yellen, supra note 6, at 711.
53. See Tandon, supra note 2, at 474. The elasticity of social surplus with regard to R&D has been estimated to be approximately 0.10. See id. A mild reduction in profit would occasion a mild reduction in R&D and a correspondingly small reduction in value added from patents.
54. Obviously, such a lengthening analysis only has practical usefulness to the extent that statutory inertia can be overcome to actually increase the current patent duration. See Kaplow, supra note 15, at 1841.
55. To be more precise, in a probabilistic regime, lengthening the patent's duration is only lengthening the patent's potential validity, because after the patent expires a court may hold (with probability 1 - w) that the patent was not valid.
56. Recall that we have assumed that patentees are risk-neutral. See supra note 9.
57. The values for this column are calculated as follows: Generalizing from the example provided in the text, the optimal probabilistic regime requires multiplying the patent length by the inverse percentage of monopoly profit produced each period by the probabilistic regime. The overall percentage effect on social welfare will thus be the periodic effect on social cost ("% S.C.") multiplied by the percentage increase in the length of the patent (1/"% Profit"), which equals the right-hand column.
58. Kaplow, supra note 15, at 1829.
59. This calculation is based on $413.20 increased deadweight loss divided by $82.60 increased patentee profit.
60. For w = 90%, a compensating increase in patent duration increases the social cost by approximately $28 (= (S837/.9669) - $837). The social cost per dollar of profit is calculated by dividing the $28 increased deadweight loss by the $82.60 increased patentee profit.
61. For other examples of adjusting the patent length to keep the patentee's expected profits constant, see Gilbert & Shapiro, supra note 2; Klemperer, supra note 2, at 114; and Manfredi La Manna et al., The Case for Permissive Patents, 33 EUR. ECON. REV. 1427, 1435-37 (1989).
62. In essence, the consumers would be exchanging their entitlement to end the patent's validity (for a few years) for the patentee's entitlement to price at the monopoly level. This example suggests that a monopsonist consumer might have a strong incentive to enter into a contract with a longer duration than the patent is valid for in exchange for a lower price per period. The fact that buyers with market power engage in a particular activity can provide strong information for policy makers seeking to promote the welfare of more diffuse consumer groups. See Ian Ayres & John Braithwaite, Partial-Industry Regulation: A Monopsony Standard for Consumer Protection, 80 CAL. L. REV. 13 (1992).
63. See Klemperer, supra note 2, at 120-24. This is always true at sufficiently competitive prices, because (by stationarity) small increases in price affect patentee profits much more than they affect social welfare. But it is also true at all prices if the elasticity of demand is nondecreasing, since a firm selling at a higher elasticity earns lower profits relative to the consumer surplus dissipated.
64. As a formal matter, policymakers would want to continue to reduce price (and lengthen the patent's duration) as long as: [formula presented] where SC and Π are the expected periodic social cost and patentee profit, respectively. For the linear model set out above, this relevant derivative is always positive, indicating that compensated reductions in price all the way down to the competitive level are cost justified. This derivative will be positive for all levels of w for all demand curves that are not too convex.
65. M) for 20 years equal to the present value of receiving constricted profits (Π(w)) for L years: [formula presented] which can be solved for L in terms of w and the other structural parameters in the model: [formula presented] The present value of social cost is simply the social cost from Table 1 discounted for L years.
66. See, e.g., Ian Ayres, How Cartels Punish: A Structural Theory of Self-Enforcing Collusion, 87 COLUM. L. REV. 295, 315 (1987).
67. This lower limit on enforcement levels is calculated by determining what fall in periodic profitability could not be compensated for by making the patent duration perpetual. Of course, a "perpetual probabilistic" patent as a limiting case would be impossible to implement because the court's decision whether to award damages for "interim" infringement would only come at the end of time. But a similar perpetual effect might be implemented with our "partial damages" regime, discussed infra section IV.B. Perpetual patents would violate the Constitution which gives Congress the power to reward exclusive rights for only a "limited" duration. See U.S. CONST. art. I, § 9, cl. 8.
68. See James Kim, Drug-company backlash, USA TODAY, Nov. 4, 1992, at B1; conversation with Pfizer representative Roberta Lombardini (Nov. 3, 1995).
69. Conversation with Pfizer representative, Roberta Lombardini (Nov. 3, 1995).
70. Each of these assumptions is literally false. The periodic demand curves for patented products do not remain constant. And usually after a pharmaceutical patent expires, the patentee - when faced with generic competition - raises its price in order to focus on the relatively price insensitive segment of demand. See, e.g., Ernst R. Berndt et al., Pharmaceutical Innovations and Market Dynamics: Tracking Effects on Price Indexes for Antidepressant Drugs, in BROOKINGS PAPERS ON ECONOMIC ACTIVITY: MICROECONOMICS 133, 151-52 (Martin Neil Baily et al. eds., 1996); cf. Zvi Griliches & Iain Cockburn. Generics and New Goods in Pharmaceutical Price Indexes, 84 AM. ECON. REV. 1213, 1215 (1994) (stating that "the incumbent usually does not respond to entry by reducing its price").
71. Each of these assumptions is literally false. The periodic demand curves for patented products do not remain constant. And usually after a pharmaceutical patent expires, the patentee - when faced with generic competition - raises its price in order to focus on the relatively price insensitive segment of demand. See, e.g., Ernst R. Berndt et al., Pharmaceutical Innovations and Market Dynamics: Tracking Effects on Price Indexes for Antidepressant Drugs, in BROOKINGS PAPERS ON ECONOMIC ACTIVITY: MICROECONOMICS 133, 151-52 (Martin Neil Baily et al. eds., 1996); cf. Zvi Griliches & Iain Cockburn. Generics and New Goods in Pharmaceutical Price Indexes, 84 AM. ECON. REV. 1213, 1215 (1994) (stating that "the incumbent usually does not respond to entry by reducing its price").
72. There is evidence, however, that the returns to the patentee under the current system may capture much less than the social value of the patent. See, e.g., Timothy F. Bresnahan, Measuring the Spillovers from Technical Advance: Mainframe Computers in Financial Services, 76 AM. ECON. REV. 742, 753 (1986); Michael Kremer, Patent Buyouts: A Mechanism for Encouraging Innovation, 113 Q.J. ECON. 1137, 1141 (1998); Edwin Mansfield et al., Social and Private Rates of Return from Industrial Innovations, 91 Q.J. ECON. 221, 234 (1977).
73. There is evidence, however, that the returns to the patentee under the current system may capture much less than the social value of the patent. See, e.g., Timothy F. Bresnahan, Measuring the Spillovers from Technical Advance: Mainframe Computers in Financial Services, 76 AM. ECON. REV. 742, 753 (1986); Michael Kremer, Patent Buyouts: A Mechanism for Encouraging Innovation, 113 Q.J. ECON. 1137, 1141 (1998); Edwin Mansfield et al., Social and Private Rates of Return from Industrial Innovations, 91 Q.J. ECON. 221, 234 (1977).
74. There is evidence, however, that the returns to the patentee under the current system may capture much less than the social value of the patent. See, e.g., Timothy F. Bresnahan, Measuring the Spillovers from Technical Advance: Mainframe Computers in Financial Services, 76 AM. ECON. REV. 742, 753 (1986); Michael Kremer, Patent Buyouts: A Mechanism for Encouraging Innovation, 113 Q.J. ECON. 1137, 1141 (1998); Edwin Mansfield et al., Social and Private Rates of Return from Industrial Innovations, 91 Q.J. ECON. 221, 234 (1977).
75. Compulsory license regimes have been notoriously vague about the standards used to set "reasonable" royalties. See F.M. SCHERER, THE ECONOMIC EFFECTS OF COMPULSORY PATENT LICENSING 44 (Center for the Study of Fin. Indus., N.Y. Univ. Monograph Series in Fin. and Econs. No. 1977-2. 1997). Most often, however, the license fees are set to yield a reasonalbe profit above cost - instead of offerig some percentage of what monopoly profit would be. Section IV.B will show that the benefits of probebilistic patents could also be obtained from a regime that provided patentees with certain enforcement but only awarded a percentage of the current make-whole damages.
76. The total patent duration necessary is the standard patent duration (20 years) times the reciprocal of the periodical percentage of monopoly profit, see, e.g., supra Table 1, which will generally turn on the particular shape of the demand and cost curves. See supra note 40.
77. M.
78. Note, however, that demand and cost curves can be constructed such that this simple formula overcompensates the patentee to the extent that total social cost is increased.
79. In a simple model, imagine that the government knew that the probability that a patent would become obsolete in a particular year was δ (which as discussed above can be interpreted as taking into account both the time value of money and the probability of obsolescence). To compensate for the reduction in certainty, the government would want to set the patent length so that the present value of the probabilistic patent was equal to the present value of the nonprobabilistic 20-year patent. Instead of setting the patent length equal to the simple reciprocal of w, in a world with discounting it is necessary to set the approximate patent length equal to: [formula presented] See supra note 48. As in supra note 57, it can be shown that this approximation produces slightly higher expected payoffs than does the monopoly regime.
80. See Mark Schankerman, How Valuable is Patent Protection? Estimates by Technology Field, 29 RAND J. ECON. 77 (1998); see also Ariel Pakes, Patents as Options: Some Estimates of the Value of Holding European Patent Stocks, 54 ECONOMETRICA 755 (1986); Ariel Pakes & Mark Schankerman, The Rate of Obsolescence of Patents, Research Gestation Lags and the Private Rate of Return to Research Resources, in R&D, PATENTS AND PRODUCTIVITY 73 (Zvi Griliches ed., 1984).
81. See Mark Schankerman, How Valuable is Patent Protection? Estimates by Technology Field, 29 RAND J. ECON. 77 (1998); see also Ariel Pakes, Patents as Options: Some Estimates of the Value of Holding European Patent Stocks, 54 ECONOMETRICA 755 (1986); Ariel Pakes & Mark Schankerman, The Rate of Obsolescence of Patents, Research Gestation Lags and the Private Rate of Return to Research Resources, in R&D, PATENTS AND PRODUCTIVITY 73 (Zvi Griliches ed., 1984).
82. See Mark Schankerman, How Valuable is Patent Protection? Estimates by Technology Field, 29 RAND J. ECON. 77 (1998); see also Ariel Pakes, Patents as Options: Some Estimates of the Value of Holding European Patent Stocks, 54 ECONOMETRICA 755 (1986); Ariel Pakes & Mark Schankerman, The Rate of Obsolescence of Patents, Research Gestation Lags and the Private Rate of Return to Research Resources, in R&D, PATENTS AND PRODUCTIVITY 73 (Zvi Griliches ed., 1984).
83. Schankerman, supra note 60, at 84.
84. This equation can be derived by re-solving the equation in note 59 in terms of w.
85. Schankerman estimates: "The top 1% of patents account for 12% and 14% of the total value of patent rights in pharmaceuticals and chemicals, respectively, and 21% and 24% for mechanical and electronics patents (excluding Japan)." Schankerman, supra note 60, at 94.
86. For example, if a patentee believes that a patent will not become marketable until more than 20 years in the future, she might pick a low w (say 50%) that creates more deadweignt loss than society would experience under the current regime.
87. For example, with regard to the Hatch-Waxman amendments, pharmaceutical patentees might be allowed to trade off extended patent duration for weaker preliminary injunction rights. See infra text accompanying notes 93-96.
88. However, if patent damages are not expected to make the patentee whole the naten tee may prefer to have an immediate decision. See infra note 116.
89. A particularly notorious example of protracted litigation concerns an interference proceeding that was declared in 1958 and resolved by the District Court only in 1980. See Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839, 901-02 & n.292 (1990).
90. For example, if the patentee is risk-averse, it would be necessary to have a longer compensating extension in duration to compensate for the risk that the patent would not be enforced. And while our model assumed that competition among potential infringers caused all the profits from infringement to on average be paid to the patentee by way of damages for infringement, one can construct models in which infringers earn profits in equilibrium (even after accounting for expected damages). Having infringers syphon off part of the industry's profits would also require larger compensating increases in duration. If either the risk-aversion or the infringer-profit effects were sufficiently pronounced, a probabilistics regime would not enhance welfare.
91. See F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND PERFORMANCE 454 (2d ed. 1980) (estimating total annual patent system administration and litigation costs to be roughly $300 million in 1978); Josh Lerner, Patenting in the Shadow of Competitors, 38 J.L. & ECON. 463, 470 (1995) ("[T]he patent litigation within USPTO and the federal courts begun in 1991 will lead to total legal expenditures (in 1991 dollars) of about $1 billion, a substantial amount relative to the $3.7 billion spent by U.S. firms on basic research in 1991."); Leslie Scism, Insurance Helps Little Guy Sue Patent Infringer, WALL ST. J., NOV. 25, 1996, at B1 (observing that patent litigation can "cost hundreds of thousands of dollars").
92. See F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND PERFORMANCE 454 (2d ed. 1980) (estimating total annual patent system administration and litigation costs to be roughly $300 million in 1978); Josh Lerner, Patenting in the Shadow of Competitors, 38 J.L. & ECON. 463, 470 (1995) ("[T]he patent litigation within USPTO and the federal courts begun in 1991 will lead to total legal expenditures (in 1991 dollars) of about $1 billion, a substantial amount relative to the $3.7 billion spent by U.S. firms on basic research in 1991."); Leslie Scism, Insurance Helps Little Guy Sue Patent Infringer, WALL ST. J., NOV. 25, 1996, at B1 (observing that patent litigation can "cost hundreds of thousands of dollars").
93. See F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND PERFORMANCE 454 (2d ed. 1980) (estimating total annual patent system administration and litigation costs to be roughly $300 million in 1978); Josh Lerner, Patenting in the Shadow of Competitors, 38 J.L. & ECON. 463, 470 (1995) ("[T]he patent litigation within USPTO and the federal courts begun in 1991 will lead to total legal expenditures (in 1991 dollars) of about $1 billion, a substantial amount relative to the $3.7 billion spent by U.S. firms on basic research in 1991."); Leslie Scism, Insurance Helps Little Guy Sue Patent Infringer, WALL ST. J., NOV. 25, 1996, at B1 (observing that patent litigation can "cost hundreds of thousands of dollars").
94. We will return to the question of whether the law can induced the right type of uncertainty, infra Part III.
95. See Scotchmer, supra note 1.
96. See infra text accompanying note 106 (discussing how broadening the doctrine of reverse equivalence may facilitate follow-on innovation).
97. Indeed, Professors Green and Scotchmer have shown that creating uncertainty about follow-on innovation may increase the expected returns of the initial patentee. See Green & Scotchmer, supra note 1. When it is certain that follow-on innovation will infringe, the follow-on innovators may credibly threaten not to invest in innovation (foreseeing that they will have to pay a large licensing fee). But Green and Scotchmer show that uncertainty about whether a subsequent innovation will be infringing may mitigate this threat oo noninnovation and may thereby actually increase the original patentee's expected profits. See id. at 27; see also Scotchmer, supra note 1; Chang, supra note 1.
98. This is an example of the general proposition that with fixed costs (or if entrants have higher marginal costs), entry restrictions may be socially beneficial. See Jeremy I. Bulow et al., Multimarket Oligopoly: Strategic Substitutes and Complements, 93 J. POL. ECON. 488, 504-05 (1985); N. Gregory Mankiw & Michael D. Whinston, Free Entry and Social Inefficiency, 17 RAND J. ECON. 48 (1986).
99. This is an example of the general proposition that with fixed costs (or if entrants have higher marginal costs), entry restrictions may be socially beneficial. See Jeremy I. Bulow et al., Multimarket Oligopoly: Strategic Substitutes and Complements, 93 J. POL. ECON. 488, 504-05 (1985); N. Gregory Mankiw & Michael D. Whinston, Free Entry and Social Inefficiency, 17 RAND J. ECON. 48 (1986).
100. That is, the socially optimal number of firms is four, assuming the foregoing Cournot model as set out in equations (1) and (2). Obviously, an all-powerful and all-knowing regulator could do better than permit Cournot competition.
101. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
102. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
103. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with
104. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
105. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
106. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
107. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
108. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
109. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
110. See, e.g., SCHERER, supra note 69; Alan Beggs & Paul Klemperer, Multi-period Competition with Switching Costs, 60 ECONOMETRICA 651 (1992); Darius W. Gaskins, Jr., Dynamic Limit Pricing: Optimal Pricing under Threat of Entry, 3 J. ECON. THEORY 306 (1971); Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 AM. ECON. REV. 424 (1985); Paul Klemperer, Competition When Consumers Have Switching Costs, 62 REV. ECON. STUD. 515 (1995); Paul Klemperer, The Competitiveness of Markets with Switching Costs, 18 RAND J. ECON. 138 (1987); Paul Klemperer, Entry Deterrence in Markets with Consumer Switching Costs, 97 ECON. J. 99 (Supp. 1987); Paul Klemperer, Markets with Consumer Switching Costs, 102 Q.J. ECON. 375 (1987); Paul Klemperer, Price Wars Caused by Switching Costs, 56 REV. ECON. STUD. 405 (1989); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information, 50 ECONOMETRICA 443 (1982); A. Michael Spence, The Learning Curve and Competition, 12 BELL J. ECON. 49 (1981).
111. A caveat is that infringing entry may be quite inefficient in the presence of learning curves and perhaps also if there are network externalities or consumer switching costs, because entry is likely to raise production costs or consumers' costs. See articles cited supra note 76; Paul Klemperer, Welfare Effects of Entry into Markets with Switching Costs, 37 J. INDUS. ECON. 159 (1988). But these are just special cases of the issue discussed supra in section II.C: from the social perspective these effects reduce the benefits of infringement and the costs of extending the patent life.
112. Patentees have at times been successful in claiming infringement damages for their own lost sales of noninfringing products, but no court to date has awarded damages because infringement transferred sales from the patentee to other noninfringing products. See infra section IV.B (discussing frontiers of patent damage litigation).
113. The stationarity intuition does not fail if the patentee must compete with a competitive fringe of noninfringing products. For example, if the patentee of a differentiated (and perhaps slightly better) mouse trap must vie in the marketplace against a competitive market of noninfringing traps, the patentee is likely to face a very elastic demand curve. The profit-maximizing price for this downward sloping, but relatively flat demand curve, is likely to be a much smaller percentage markup over the patentee's cost, but the logic of our main model still applies.
114. This will usually be the case in quantity competition, as our model assumes (and is the case for the demand and cost conditions in our simple model). More generally, the patentee will not be harmed by a little infringement when competition is between strategic substitutes in the terminology of Bulow, Geanakoplos, and Klemperer. See Jeremy I. Bulow et al., Holding Idle Capacity to Deter Entry, 95 ECON. J. 178 (1985); Bulow et al., supra note 74. In a price-competition model, however, strategic complements would be more likely. In that case, limited infringement might cause both the patentee and the noninfringing producers to lower their prices (and even perhaps increase their output) - so the patentee would be more likely to be significantly harmed by a small infringement. On the question of whether quantity competition or price competition is the more natural assumption, see Paul Klemperer & Margaret Meyer, Price Competition vs. Quantity Competition: The Role of Uncertainty, 17 RAND J. ECON. 618 (1986); Paul D. Klemperer & Margaret A. Meyer, Supply Function Equilibria in Oligopoly Under Uncertainty, 57 ECONOMETRICA 1243 (1989); and the articles cited therein.
115. This will usually be the case in quantity competition, as our model assumes (and is the case for the demand and cost conditions in our simple model). More generally, the patentee will not be harmed by a little infringement when competition is between strategic substitutes in the terminology of Bulow, Geanakoplos, and Klemperer. See Jeremy I. Bulow et al., Holding Idle Capacity to Deter Entry, 95 ECON. J. 178 (1985); Bulow et al., supra note 74. In a price-competition model, however, strategic complements would be more likely. In that case, limited infringement might cause both the patentee and the noninfringing producers to lower their prices (and even perhaps increase their output) - so the patentee would be more likely to be significantly harmed by a small infringement. On the question of whether quantity competition or price competition is the more natural assumption, see Paul Klemperer & Margaret Meyer, Price Competition vs. Quantity Competition: The Role of Uncertainty, 17 RAND J. ECON. 618 (1986); Paul D. Klemperer & Margaret A. Meyer, Supply Function Equilibria in Oligopoly Under Uncertainty, 57 ECONOMETRICA 1243 (1989); and the articles cited therein.
116. This will usually be the case in quantity competition, as our model assumes (and is the case for the demand and cost conditions in our simple model). More generally, the patentee will not be harmed by a little infringement when competition is between strategic substitutes in the terminology of Bulow, Geanakoplos, and Klemperer. See Jeremy I. Bulow et al., Holding Idle Capacity to Deter Entry, 95 ECON. J. 178 (1985); Bulow et al., supra note 74. In a price-competition model, however, strategic complements would be more likely. In that case, limited infringement might cause both the patentee and the noninfringing producers to lower their prices (and even perhaps increase their output) - so the patentee would be more likely to be significantly harmed by a small infringement. On the question of whether quantity competition or price competition is the more natural assumption, see Paul Klemperer & Margaret Meyer, Price Competition vs. Quantity Competition: The Role of Uncertainty, 17 RAND J. ECON. 618 (1986); Paul D. Klemperer & Margaret A. Meyer, Supply Function Equilibria in Oligopoly Under Uncertainty, 57 ECONOMETRICA 1243 (1989); and the articles cited therein.
117. SCHERER, supra note 69, at 450 (citing Henry Steele, Monopoly and Competition in the Ethical Drugs Market, 5 J.L. & ECON. 131 (1962); Henry Steele, Patent Restrictions and Price Competition in the Ethical Drugs Industry, 12 J. INDUS. ECON. 198 (1964)).
118. SCHERER, supra note 69, at 450 (citing Henry Steele, Monopoly and Competition in the Ethical Drugs Market, 5 J.L. & ECON. 131 (1962); Henry Steele, Patent Restrictions and Price Competition in the Ethical Drugs Industry, 12 J. INDUS. ECON. 198 (1964)).
119. The patentee's markup can often be estimated by looking at the price generic producers are willing to charge once the patent expires. See Richard E. Caves et al., Patent Expiration, Entry and Competition in the U.S. Pharmaceutical Industry, in BROOKINGS PAPERS ON ECONOMIC ACTIVITY: MICROECONOMICS 1, 36 (Martin Neil Baily & Clifford Winston eds., 1991) (finding that first generic entrant tends to charge 58.8% of patented price: with three generic entrants the generic price falls to 49.6% and with ten generic entrants the percentage falls to 29.4%); Battling the High Cost of Drugs, HARV. HEALTH LETTER (Harv. Med. Sch., Dept. of Continuing Educ.), July 1993, at 9 (noting that in Canada, generic manufacturers may copy patented drugs if they pay a royalty to the patent holder; the entry of the first generic competitor prompts an average price drop of 25-30%, and as others enter the price may drop up to 90%). There are, of course, other extreme examples. See, e.g., Moneyweek, (CNN television broadcast, May 21, 1994) (reporting that prices on Naprosyn (by Syntex) fell 80% just 24 hours after the patent expired).
120. The patentee's markup can often be estimated by looking at the price generic producers are willing to charge once the patent expires. See Richard E. Caves et al., Patent Expiration, Entry and Competition in the U.S. Pharmaceutical Industry, in BROOKINGS PAPERS ON ECONOMIC ACTIVITY: MICROECONOMICS 1, 36 (Martin Neil Baily & Clifford Winston eds., 1991) (finding that first generic entrant tends to charge 58.8% of patented price: with three generic entrants the generic price falls to 49.6% and with ten generic entrants the percentage falls to 29.4%); Battling the High Cost of Drugs, HARV. HEALTH LETTER (Harv. Med. Sch., Dept. of Continuing Educ.), July 1993, at 9 (noting that in Canada, generic manufacturers may copy patented drugs if they pay a royalty to the patent holder; the entry of the first generic competitor prompts an average price drop of 25-30%, and as others enter the price may drop up to 90%). There are, of course, other extreme examples. See, e.g., Moneyweek, (CNN television broadcast, May 21, 1994) (reporting that prices on Naprosyn (by Syntex) fell 80% just 24 hours after the patent expired).
121. Also, as large corporations with multiple R&D projects and low-cost access to financial markets, pharmaceutical enterprises should be systematically less risk averse than smaller, single project inventors. Accordingly, risk aversion in the pharmaceutical context is less likely to contraindicate intentional uncertainty. See supra note 9 (discussing risk aversion).
122. This is especially true if courts enforce a patent that is not novel (whose idea is already embodied in the prior art). We note, however, that an optimal patent system might want to provide some lesser rewards for inventions that do not rise to the level of strict patentability. Type II uncertainty might have the benefit of generating lower rewards for innovations that were, say, only quasi-novel.
123. General discussions of structuring legal rules to achieve the appropriate balance of Type I and Type II error can be found in Krier, supra note 3; A. Mitchell Polmsky & Steven Snavell, Legal Error, Litigation, and the Incentive to Obey the Law, 5 J.L. ECON. & ORG. 99 (1989); and Raaj Kumar Sah & Joseph E. Stiglitz, The Architecture of Economic Systems: Hierarchies and Polyarchies, 76 AM. ECON. REV. 716 (1986).
124. General discussions of structuring legal rules to achieve the appropriate balance of Type I and Type II error can be found in Krier, supra note 3; A. Mitchell Polmsky & Steven Snavell, Legal Error, Litigation, and the Incentive to Obey the Law, 5 J.L. ECON. & ORG. 99 (1989); and Raaj Kumar Sah & Joseph E. Stiglitz, The Architecture of Economic Systems: Hierarchies and Polyarchies, 76 AM. ECON. REV. 716 (1986).
125. See Robert P. Merges, Commercial Success and Patent Standards: Economic Perspectives on Innovation, 76 CAL. L. REV. 803, 821 (1988);
126. William A. Morrison, Note, The Impact of the Creation of the Court of Appeals for the Federal Circuit on the Availability of Preliminary Injunctive Relief Against Patent Infringement, 23 IND. L. REV. 169, 196 (1990) (finding post-Federal Circuit success rate for preliminary injunctions of 52%, which author found to be a statistically significant increase from the 36% rate from the preceding 29 years). Epic Metals Corp. v. H.H. Robertson Co., 870 F.2d 1574 (Fed. Cir. 1989), is representative of this sea change.
127. Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152, 1158 n.5 (6th Cir. 1978) (quoting 35 U.S.C. § 261).
128. Polaroid Corp. v. Eastman Kodak Co., 228 U.S.P.Q. 305, 344 (D. Mass 1985) (emphasis added) (quoting Smith Intl., Inc. v. Hughes Tool Co., 718 F.2d 1573, 1581 (Fed. Cir. 1983)). But see Atari Corp. v. Sega of Am., 869 F. Supp. 783 (N.D. Cal. 1994) (denying preliminary injunction in part because 1200 permanent jobs would be lost).
129. H.H. Robertson, Co. v. United Steel Deck, Inc., 820 F.2d 384, 391 (Fed. Or. 1987) (internal quotation marks omitted).
130. Smith Intl., Inc., 718 F.2d at 1577-78.
131. 845 F. Supp. 1576 (S.D. Ga. 1993).
132. 845 F. Supp. at 1583 (emphasis added).
133. Pub. L. No. 98-417, 98 Stat. 1585 (codified as amended in scattered sections of 21 U.S.C. and 35 U.S.C.).
134. See 21 U.S.C. § 355(j)(2)(A)(vii), (5)(B)(iii) (1994). This 30-month stay may be shortened by the court if the patent owner does not act reasonably or if the court finds the patent-in-suit is not infringed or is invalid. See 21 U.S.C. § 355(j)(5)(B)(iii).
135. See 35 U.S.C. § 271(e)(1) (1994); see also Brian D. Coggio & Francis D. Cerrito, The Application of the Patent Laws to the Drug Approval Process (Andrews Pharmaceutical New York), Aug. 1997, at 12,421.
136. It should be emphasized, however, that other aspects of the Act were designed to increase the effective duration of pharmaceutical patents. See 35 U.S.C. § 156 (compensating patentees for the patent life that erodes during FDA review by adding to the patent term an amount of time roughly commensurate with the review period).
137. See, e.g., Rochelle Cooper Dreyfuss, The Federal Circuit: A Case Study in Specialized Courts, 64 N.Y.U. L. REV. 1, 6-25 (1989).
138. See, e.g., Markman v. Westview Instruments, Inc., 517 U.S. 370, 384-91 (1996) (holding that the interpretation of patent claim terms is the exclusive province of the court). Markman may also increase the use of interlocutory appeals to the Federal Circuit and thus - contrary to the themes of this Article - may speed the judicial award of preliminary and permanent injunctive relief.
139. See Merges, supra note 86, at 822-23; Morrison, supra note 86, at 187-88 (concluding that availability of preliminary injunctive relief against patent infringement has increased since the creation of the Federal Circuit).
140. See Merges, supra note 86, at 822 ("Between 1982 and 1985, the court invalidated only forty-four percent of the patents it adjudicated on appeal from trial courts, a marked contrast to the old invalidation rate of approximately sixty-six percent." (footnote omitted)); cf. Lawrence Baum, The Federal Courts and Patent Validity: An Analysis of the Record, 56 J. PAT. OFF. SOCY. 758, 760 (1974) (showing high rates of patent invalidation in courts before the creation of the Federal Circuit).
141. See Ian Ayres, Preliminary Thoughts on Optimal Tailoring of Contractual Rules, 3 S. CAL. INTERDISC. L.J. 1, 15-17 (1993); Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557, 559-60, 565-66 (1992).
142. See Ian Ayres, Preliminary Thoughts on Optimal Tailoring of Contractual Rules, 3 S. CAL. INTERDISC. L.J. 1, 15-17 (1993); Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557, 559-60, 565-66 (1992).
143. To be valid a patent needs to be "nonobvious," a requirement that currently forces courts to consider (1) the scope and content of the prior art; (2) the level of ordinary skill in the art; (3) the differences between the claimed invention and the prior art; and (4) the secondary or objective evidence of nonobviousness. See Graham v. John Deere Co., 383 U.S. 1, 17-18 (1966); Michael J. Meurer, The Nonobviousness Standard and the Optimal Probability of Patent Validity (July 1995) (unpublished manuscript, on file with author). Having a patent's nonobviousness turn on the degree of ultimate commercial success may also induce ex ante uncertainty. See Merges, supra note 86, at 824-26.
144. Merges, supra note 86, at 842.
145. See Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 34-36 (1997); Alpex Computer Corp. v. Nintendo Co., 102 F.3d 1214, 1222 (Fed. Cir. 1996), cert. denied, 117 S. Ct. 2480 (1997); Valmont Indus., Inc. v. Reinke Mfg. Co., 983 F.2d 1039, 1041-44 (Fed. Cir. 1993).
146. Westinghouse v. Boyden Power Brake Co., 170 U.S. 537, 568 (1898).
147. Whether an expanded doctrine of equivalence actually leads to overinclusive enforcement turns on one's view about whether the preexisting (non-expanded) regime was over or underinclusive. However, even if the preexisting regime were underinclusive - so that Type I uncertainty is likely to be larger than Type II uncertainty -expanding the doctrine of equivalence is likely to have the deleterious uncertainty effect of decreasing Type I and increasing Type II uncertainty.
148. Unsuccessful applicants, however, do have limited rights of appeal. See 35 U.S.C. §§ 134, 141 (1994).
149. Imagine, for example, that the PTO has a 5% chance of committing both Type I and Type II error in reviewing applications - meaning that there is a 5% chance that valid applications would be denied and a 5% chance that invalid applications would issue. Under our current system there would still be some uncertainty whether the PTO's Type II error would be corrected (i.e., subsequent litigation might deny enforcement to the improvidently granted patents). Subsequent litigation might also create some Type I uncertainty - in that some correctly issued patents might be unenforced. But by giving deference to the PTO's initial decision, our current system reduces an important source of Type I uncertainty. Reducing the PTO's grounds for rejecting patent applications at the margin would reduce Type I error while increasing Type I uncertainty - both on the additional patents that would be issued, and on the patents that would in any case have been issued but for which the issuance of a patent is now a weaker signal of validity. In the extreme case, the patent office would simply become a registry that time-stamped patent claims to create a record for subsequent adjudication of validity. The United States' "first to invent" standard may create both Type I and Tvpe II uncertainty as compared to the "first to file" rule used by most other nations. While the Tvpe I uncertainty would be valuable chiefly because it creates a limited class of infringes, the Type II uncertainty may be deleterious. But see supra note 84 (discussing possible benefits of Type II uncertainty). While "first to invent" disputes are currently resolved relatively quickly by PTO interference proceedings, our model suggests that it might be better to have delayed decisionmaking by (possibly less-specialized) courts so that we could sustain the benefits of limited infringement for a longer period.
150. See supra Introduction A and Section I.B. The parties could reduce distortion even more if the buyer paid a lump sum fee rather than a per-unit fee. However, sellers with patent market power may prefer royalties in order, for example, to implement second-degree price discrimination.
151. 379 U.S. 29 (1964).
152. See Meehan v. PPG Indus., 802 F.2d 881, 886 (7th Cir. 1986) (holding that when royalty payments extend unchanged beyond the life of a patent, the agreement is per se unlawful); Boggild v. Kenner Prods., 776 F.2d 1315, 1320-21 (6th Cir. 1985) (holding agreement per se unlawful when pre- and postexpiration royalties are the same).
153. See supra text accompanying notes 15-17 (discussing Kaplow).
154. See Gilbert & Shapiro, supra note 2, at 109 (discussing this possibility); Klemperer, supra note 2, at 121-23 (discussing in a more general model when this is desirable).
155. Klemperer analyzes the situations in which it is more desirable for society to reward a patentee through a broader scope of coverage rather than by a longer duration. See Klemperer, supra note 2, at 121-23. If consumers would have relatively similar valuations for the patented product when no close substitutes were available, but would have relatively dissimilar willingness to pay for the patented product if low-price close substitutes were available, then it is relatively more desirable to give the patentee control over the close substitutes: that is, the patent should be broadened so that the close substitutes would infringe. If the opposite is true - for example, if potential consumers have varying levels of need for a product (because they would use it with different frequencies) but have similar strengths of preferences between an easy-to-learn product and harder-to-learn copies - then a longer-lived but more narrowly construed patent covering just the "ideal" easy-to-learn product is socially preferred.
156. The potential utility of compulsory licensing is discussed in Merges, Of Property Rules, supra note 23; Ralph Oman, The Compulsory License Redux: Will It Survive in a Changing Marketplace? 5 CARDOZO ARTS & ENT. L.J. 37 (1986); and J.H. Reichman, Legal Hybrids Between the Patent and Copyright Paradigms, 94 COLUM. L. REV. 2432 (1994).
157. The potential utility of compulsory licensing is discussed in Merges, Of Property Rules, supra note 23; Ralph Oman, The Compulsory License Redux: Will It Survive in a Changing Marketplace? 5 CARDOZO ARTS & ENT. L.J. 37 (1986); and J.H. Reichman, Legal Hybrids Between the Patent and Copyright Paradigms, 94 COLUM. L. REV. 2432 (1994).
158. M In the linear demand example, [equation presented] so delaying judgment will only be the patentee's preferred strategy if: [equation presented]
159. See F.M. SCHERER, THE ECONOMIC EFFECTS OF COMPULSORY LICENSING 43 (1977).
160. If desired, there could also be a final settling up based on ex post information. Of course, courts could demand that infringers post interim bonds to make sure they have the wherewithal to ultimately pay the ex post award.
161. Trademark and copyright infringers are required to pay the greater of (1) what the rights holder lost from infringement, or (2) what the infringer gained. See 17 U.S.C. § 504(b) (1994) (copyright); 15 U.S.C. § 1117(a) (1994) (trademark). In our simple model, infringers in equilibrium disgorge all of their expected profits to the patentee. But in richer models, (for example, if infringers had lower costs than the patentee) not all profits from infringement would be disgorged.
162. 35 U.S.C. § 284 (1994).
163. 575 F.2d 1152 (6th Cir. 1978).
164. 575 F.2d at 1156-57 (quoting Goodyear Tire and Rubber Co. v. Overman Cushion Tire Co., 95 F.2d 978, 984 (6th Cir. 1937) (internal quotation marks and citations omitted)).
165. See ROBERT P. MERGES ET AL., INTELLECTUAL PROPERTY IN THE NEW TECHNOLOGY AGE 306 (1997) (notes on the Frontiers of Lost Profit Damages).
166. Patentees at times convince courts that they have lost profits not only because they sold fewer items, but also because infringement erodes the market price and therefore the profits on the items they continue to sell. See, e.g., Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056 (Fed. Cir. 1983). We generally favor awarding additional damages for price erosion so as ultimately to limit the amount of infringement, and we would even favor a price erosion adjustment to the calculation of reasonable royalty. But the details of calculating the rate at which the erosion damages accrue must be sufficiently conservative so as not to deter all infringement. Judge Frank Easterbrook, sitting by designation as a district court judge, has laid out the most sophisticated analysis of how to go about calculating price erosion damages. See In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 831 F. Supp. 1354, 1385-93 (N.D. Ill. 1993).
167. The Panduit test requires the absence of noninfringing substitutes. Some courts, however, have calculated lost profit damages where at least one seller in a market is a noninfringing competitor by assuming that the patentee's market share relative to the noninfringer would have remained the same in the absence of infringement. See State Indus. v. Mor-Flo Indus., 883 F.2d 1573, 1579 (Fed. Cir. 1989).
168. Patentees - under the "entire market value rule" - have recently been claiming damages for lost profits on unpatented components that they claim would have been made but for infringement of a related patented product. See TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 900-01 (Fed. Cir. 1986).
169. Patentees have at times gained additional damages by arguing that infringement during the term of the patent gave the infringer a head start on postexpiration sales. See TP Orthodontics, Inc. v. Professional Positioners, Inc., 17 U.S.P.Q.2d 1497, 1504-06 (E.D. Wis. 1990).
170. The current regime gives coinventors just this right in one situation: coinventors, as tenants-in-common, each own an undivided one-half interest in the patent. See Drake v. Hall, 220 F. 905, 906 (7th Cir. 1915). Thus, they each have a right to practice the invention and to exclude anyone except their fellow inventor from practicing the same.
171. For richer models of auctions, see THE ECONOMIC THEORY OF AUCTIONS (Paul Klemperer ed., 1999), and Paul Klemperer, Auction Theory: A Guide to the Literature, 13 J. ECON. SURV. (forthcoming May 1999). For example, the problems discussed in Paul Klemperer, Auction with Almost Common Values: The 'Wallet Game' and Its Applications, 42 EUR. ECON. REV. 757 (1998) may be important.
172. For richer models of auctions, see THE ECONOMIC THEORY OF AUCTIONS (Paul Klemperer ed., 1999), and Paul Klemperer, Auction Theory: A Guide to the Literature, 13 J. ECON. SURV. (forthcoming May 1999). For example, the problems discussed in Paul Klemperer, Auction with Almost Common Values: The 'Wallet Game' and Its Applications, 42 EUR. ECON. REV. 757 (1998) may be important.
173. This oligopoly auction idea is similar to the "permissive" patent proposal of La Manna et al., supra note 44, in that both would allow multiple producers for each innovation. But the purpose of permissive patents would be to reward nonplagiarist copiers for their attempts at innovation, while the purpose of the oligopoly auction is merely to restrict the exploitation of patentee power when that exploitation is not cost effective. Michael Kremer, supra note 54, 1146-48, suggests that the government should auction the monopoly right to the patent, but with some predetermined probability cancel the result of the auction ex post and offer to pay the patent holder the final price determined by the auction "times some constant markup which would reflect the typical ratio of social to private value," Kremer, supra note 54, at 1146, in return for allowing free production of the innovation by all. Of course, this approach would require substantial government funds.
174. Kaplow, supra note 15, at 1821.
175. While this Article has focused on patent law, the stationarity and Ramsey intuitions might also usefully inform copyright law (and possibly even trademark law).