Property as process: How innovation markets select innovation regimes

Yale Law Journal

Volumn 119, Issue 3, 2009, Pages 384-456

  Barnett, Jonathan M ^a  

^a UNIVERSITY OF SOUTHERN CALIFORNIA   (United States)

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EID: 77749261619     PISSN: 00440094     EISSN: None     Source Type: Journal    
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References (233)

1. FRITZ MACHLUP, SUBCOMM. ON PATENTS, TRADEMARKS, AND COPYRIGHTS OF THE S. COMM. ON THE JUDICIARY, 85TH CONG., AN ECONOMIC REVIEW OF THE PATENT SYSTEM 80 (Comm. Print 1958) [hereinafter ECONOMIC REVIEW]. Several years later, Fritz Machlup, the author of the subcommittee study, expressed a similar remark: "The absence of any empirical evidence for either the claim or its denial that the patent system is an effective promoter of inventive research. is most frustrating." FRITZ MACHLUP, THE PRODUCTION AND DISTRIBUTION OF KNOWLEDGE IN THE UNITED STATES 176 (1962).
2. See, e.g., WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF INTELLECTUAL PROPERTY LAW 10 (2003) (noting "the degree to which economic analysis of intellectual property remains inconclusive, if not indeterminate").
3. Frank H. Easterbrook, Who Decides the Extent of Rights in Intellectual Property?, in EXPANDING THE BOUNDARIES OF INTELLECTUAL PROPERTY: INNOVATION POLICY FOR THE KNOWLEDGE SOCIETY 405, 405-06. (Rochelle Cooper Dreyfuss, Diane Leenheer Zimmerman & Harry First eds., 2001) (stating that "we know so little about the effects of our current intellectual property regime on the production and use of traditional intellectual property that it is silly to suppose that we have the information essential to prescribe new regimes for new kinds of intellectual property" and that "[t]he best academic students of the subject disclaim knowledge" as to the optimal strength of intellectual property protection).
4. Adam B. Jaffe, The U.S. Patent System in Transition: Policy Innovation and the Innovation Process, 29 RES. POL'Y 531, 531 (2000) (stating that "robust conclusions regarding the empirical consequences for technological innovation of changes in patent policy are few").
5. Julia D. Mahoney, Lawrence Lessig's Dystopian Vision, 90 VA. L. REV. 2305, 2332-33 (2004) (book review) (noting that "it is impossible to state with complete confidence that any [intellectual property] regime strikes... the ideal balance" between incentives and access).
6. For references, see infra notes 59-60.
7. For more detailed discussion and supporting references, see infra note 103.
8. By "innovation market," I mean any market for the distribution of cultural, technological, or other ideational assets. For the most part, empirical support for my thesis is drawn from markets for technology that are covered by patent rights (as well as database markets that are subject to minimal forms of copyright protection and certain semiconductor products that are covered by sui generis forms of protection). However, my thesis is formulated generically and is logically applicable to cultural markets that are covered by copyright. For further discussion, see infra note 131.
9. This approach drives modern economically informed antitrust analysis. For a well-known account, see ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF 116-33 (The Free Press 1993) (1978). Note that this "alternative" approach is the standard approach in conventional microeconomic analysis, which generally seeks to demonstrate how competitive markets produce efficient outcomes, in contrast to most law and economics analyses, which generally seek to address whether particular legal rules or doctrines are efficient.
10. See Paul H. Rubin, Judge-Made Law, in 5 ENCYCLOPEDIA OF LAW AND ECONOMICS: THE ECONOMICS OF CRIME AND LITIGATION 543, 544-45 (Boudewijn Bouckaert & Gerrit De Geest eds., 2000).
11. This standard does not exhaustively account for the complex bundle of social gains and losses generated by any extension of intellectual property coverage. However, it is a reasonably close translation of various formulations of the idea that intellectual property coverage is "excessive" and supplies a workable standard by which to isolate the market's ability and incentives to implement propertization outcomes in conformity with the social interest (understood in this limited but meaningful manner). For a precise definition of "transaction cost losses," including subsequent innovation losses, see infra notes 52-53 and accompanying text. To avoid any broader efficiency implications, I endeavor throughout to describe "correct" propertization outcomes as "socially compatible," "socially preferred," "socially desirable," or "socially interested." For further discussion, see infra note 49.
12. For bibliographic references to this large literature, see infra notes 49-50.
13. The literature is vast. For a seminal source, see MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS (1965). For a standard current reference, see DENNIS C. MUELLER, PUBLIC CHOICE III (2003).
14. See infra Section II.C.
15. For an extensive historical review of these subject-matter expansions in the patent context, see Robert Greene Sterne & Lawrence B. Bugaisky, The Expansion of Statutory Subject Matter Under the 1952 Patent Act, 37 AKRON L. REV. 217 (2004). For further discussion of subject- matter expansion in the case of nontechnical business method patents, see infra notes 68-74 and accompanying text; in the case of software, see infra note 70; in the case of biotechnology, see infra note 56; and in the case of semiconductors, see infra notes 158-159 and accompanying text.
16. For similar thoughts, see Mark A. Lemley, Ignoring Patents, 2008 MICH. ST. L. REV. 19 (2008).
17. Robert P. Merges, The Uninvited Guest: Patents on Wall Street, ECON. REV., Fourth Quarter 2003, at 1, 6-7.
18. In particular, Figure 1 does not capture: (i) increases in the length of copyright and patent terms; (ii) increases (or decreases) in the ease of showing eligibility when applying for the relevant entitlement and infringement when bringing suit, especially relevant in the patent context; and (iii) increases (or decreases) in the typical range of damages awards and the availability of injunctive remedies. For a semiformalized attempt to measure propertization against a broader set of relevant factors, see R.E. Evenson & Jonathan D. Putnam, Institutional Change in Intellectual Property Rights, 69 AM. J. AGRIC. ECON. 403 (1987). For a qualitative discussion that describes multiple factors that can subject intellectual goods to a property rights regime.
19. see Michael A. Carrier, Cabining Intellectual Property Through a Property Paradigm, 54 DUKE L.J. 1, 18-25 (2004).
20. The horizontal axis is "normalized" so that "0" designates zero propertization and "1" designates complete propertization. Note that this Figure is simplified to the extent that: (i) lobbying activities are confined to the promulgation and application stages, which will be a simplification in some cases where the legislature, agencies, or courts contemplate modifications to previously promulgated entitlements; and (ii) the application of promulgated entitlements by the courts or relevant agencies may sometimes lower propertization levels or, alternatively, may be collapsed into the adoption and/or enforcement rubrics.
21. Some enforcement and administrative expenditures are made by government agencies (which in turn can be construed as a function of lobbying by entitlement holders). As a practical matter, however, (i) "out-of-pocket" administrative costs are negligible since the PTO is now fully "self-funded" and the Copyright Office is partially "self-funded" by filing and other fees; and (ii) government enforcement expenditures fall well short of private expenditures (and can therefore be safely omitted for analytical convenience). For a review of federal enforcement of criminal statutes against counterfeiting and other intellectual property crimes, see U.S. DEP'T OF JUSTICE, PROGRESS REPORT OF THE DEPARTMENT OF JUSTICE'S TASK FORCE ON INTELLECTUAL PROPERTY (2006), http://www.usdoj.gov/opa/ documents/ipreport61906.pdf.
22. See Robert P. Merges, Intellectual Property Rights and the New Institutional Economics, 53 VAND. L. REV. 1857, 1875 (2000) [hereinafter Merges, Intellectual Property Rights].
23. Robert P. Merges, One Hundred Years of Solicitude: Intellectual Property Law, 1900-2000, 88 CAL. L. REV. 2187, 2200-01 (2000). On the extensive involvement of industry representatives in the drafting and negotiation of copyright legislation, see Jessica D. Litman, Copyright, Compromise and Legislative History, 72 CORNELL L. REV. 857 (1987); and Jessica D. Litman, Copyright Legislation and Technological Change, 68 OR. L. REV. 275, 276-78 (1989).
24. See infra notes 19-24 and accompanying text.
25. The reverse is also possible: a weak level of formal intellectual property protection may effectively be enhanced through aggressive enforcement actions by entitlement holders. Several scholars have recently pursued variations of this scenario in the copyright context, arguing that aggressive threats of infringement litigation against cash-poor and/or risk- averse firms or individuals can lead to licensing practices that effectively extend the scope of the corresponding intellectual property entitlement and are sometimes subsequently entrenched through judicial decisions. See Thomas F. Cotter, Fair Use and Copyright Overenforcement, 93 IOWA L. Rev. 1271 (2008); James Gibson, Risk Aversion and Rights Accretion in Intellectual Property Law, 116 YALE L.J. 882 (2007); Jennifer E. Rothman, The Questionable Use of Custom in Intellectual Property, 93 VA. L. REV. 1899 (2007).
26. On adoption and enforcement costs, see Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Nw. U. L. REV. 1495, 1498-1502 (2001), which estimates $4.33 billion for annual patent prosecution costs and $2.1 billion for annual litigation costs. On enforcement costs, see Josh Lerner, Patenting in the Shadow of Competitors, 38 J.L. & ECON. 463, 470 (1995), which estimates that patent litigation begun in 1991 will generate total legal expenditures of approximately $1 billion.
27. See supra note 15.
28. U.S. COPYRIGHT OFFICE, ANNUAL REPORT OF THE REGISTER OF COPYRIGHTS: FISCAL YEAR ENDING SEPTEMBER 30, 2007 (2007) http://www.copyright.gov/reports/annual/2007/ ar2007.pdf; U.S. PATENT & TRADEMARK OFFICE, PERFORMANCE AND ACCOUNTABILITY REPORT FISCAL YEAR 2008, at 56 (2008) http://www.uspto.gov/web/offices/com/annual/ 2008/2008annualreport.pdf. For the PTO, immediately prior years show slightly lower figures: $1.507 billion in 2007, $1.384 billion in 2006, and $1.198 billion in 2005. U.S. PATENT & TRADEMARK OFFICE, supra, at 56.
29. Renewal fees are due at three and a half, seven and a half, and eleven and a half years after patent issuance. See 35 U.S.C. § 41(b) (2000).
30. See Lemley, supra note 19, at 1498-99 (estimating $10,000-$30,000 as the cost of a typical patent application, including legal fees, but excluding subsequent renewal fees); Jonathan S. Masur, Costly Screens and Valuation Asymmetries 20 (Univ. of Chicago Law & Economics, Olin Working Paper No. 393, 2008), http://www.ssrn.com/abstract=1105184 (estimating $22,000 as the cost to prosecute an average patent application, including attorneys' fees, but excluding subsequent renewal fees). Obtaining patent protection in other jurisdictions adds substantial additional costs, potentially exceeding $100,000 (depending on the number of jurisdictions). U.S. GEN. ACCOUNTING OFFICE, INTERNATIONAL TRADE: FEDERAL ACTION NEEDED TO HELP SMALL BUSINESSES ADDRESS FOREIGN PATENT CHALLENGES, GAO-02-789, at 10 (2002).
31. U.S. FED. TRADE COMM'N, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY 3 n.11 (2003) (citing AM. INTELLECTUAL PROPERTY LAW ASS'N, REPORT OF THE ECONOMIC SURVEY 2003, at 22 (2003)), http://www.ftc.gov/opa/2003/10/cpreport.shtm.
32. See James Bessen & Michael J. Meurer, Lessons for Patent Policy from Empirical Research on Patent Litigation, 9 LEWIS & CLARK L. REV. 1, 25 (2005).
33. To be precise, the final maintenance fee payment is due eleven and a half years after issuance of the patent. See 35 U.S.C. § 41(b) (2000). Fees are $4,110 or, in the case of a "small entity," $2,055. See U.S. PATENT & TRADEMARK OFFICE, FY 2009 FEE SCHEDULE (2009), http://www.uspto.gov/web/offices/ac/qs/ope/fee2009january01_2009may01.htm#partapp.
34. See Kimberly A. Moore, Worthless Patents, 20 BERKELEY TECH. L.J. 1521, 1526 (2005) (finding that 53.71% of U.S. patentees that issued patents in 1991 allowed the patents to expire for failure to pay maintenance fees sometime prior to twelve years after issuance).
35. P.J. FEDERICO, RENEWAL FEES AND OTHER PATENT FEES IN FOREIGN COUNTRIES, STUDY OF THE SUBCOMMITTEE ON PATENTS, TRADEMARKS, AND COPYRIGHTS OF THE COMMITTEE ON THE JUDICIARY, U.S. SENATE, 85th Cong., at 27, 29-30 (2d Sess. 1958) (showing, for the period 1930-1939, the following renewal rates for the following countries in the following years: Great Britain (year 16, 5%), Germany (year 18, 2.2%), Sweden (year 17, 4.6%), France (year 20, 2.9%) and the Netherlands (year 18, 2.2%)).
36. It appears that only a small percentage of all issued patents are licensed, and even fewer are litigated. See Lemley, supra note 19, at 1507 (estimating that only about five percent of issued patents are licensed for a royalty, not including cross-licenses). While not based on hard data, Lemley's conjecture is consistent with other data that imply an extremely skewed distribution of patent values. See F.M. Scherer & Dietmar Harhoff, Technology Policy for a World of Skew-Distributed Outcomes, 29 RES. POL'Y 559, 560 tbl.1 (2000).
37. All relative values are hypothetical for expository purposes but, as discussed in the text, based on reasonable assumptions given available data. Increasingly dark coloration indicates increasing propertization, and vice versa. Each region is understood to encompass all regions situated closer to the circle's center (that is: B + C + D is a subset of A, C + D is a subset of B, and D is a subset of C). The Figure is not drawn precisely to scale.
38. 35 U.S.C. §§ 171-173 (2006). The Act provides limited-duration patent protection for useful articles that are otherwise ineligible for protection under the copyright statute. On its limited usage, see William S. Thompson, U.S. Design Protection: Discussion of Status and Suggested Proposals, 24 AIPLA Q.J. 393, 394-95, 404-05 (1996).
39. 35 U.S.C. §§ 161-164. The Act provides sui generis protection on asexually reproducing plant varieties. On its limited usage, see Judith I. Stallman & A. Allan Schmid, Property Rights in Plants: Implications for Biotechnology Research and Extension, 69 AM. J. AGRIC. ECON. 432 (1987).
40. 7 U.S.C. §§ 2321-2582. The Act provides sui generis protection on sexually reproducing plant varieties. On its limited usage, see Mark D. Janis & Jay P. Kesan, U.S. Plant Variety Protection: Sound and Fury...?, 39 HOUS. L. REV. 727 (2002). Note that certain plant varieties can now be protected under the general patent statute, which has bolstered property rights protections in this market. See J.E.M. AG Supply, Inc. v. Pioneer Hi-Bred Int'l, Inc., 534 U.S. 124 (2001).
41. 17 U.S.C. §§ 901-914. On its limited usage, see infra note 160 and accompanying text.
42. 17 U.S.C. §§ 1301-1332. The Act provides sui generis protection on "moldings," or designs for recreational boat hulls. On its limited usage, see Bradley J. Olson, The Amendments to the Vessel Hull Design Protection Act of 1998: A New Tool for the Boating Industry, 38 J. MAR. L. & COM. 177 (2007).
43. For the leading source, see ELINOR OSTROM, GOVERNING THE COMMONS: THE EVOLUTION OF INSTITUTIONS FOR COLLECTIVE ACTION (1990).
44. Consistent with the prior Figure, increasingly dark coloration indicates increasing propertization, and vice versa.
45. See Jonathan M. Barnett, Sharing in the Shadow of Property: Rational Cooperation in Innovation Markets (Univ. of S. Cal. Law Sch., Law & Econ. Working Paper Series No. 87, 2008). Note that, in the companion piece, I describe both (i) a hypothetical "pure form" sharing regime that relies exclusively on reputation-driven social norms to sustain innovation incentives and (ii) a variety of actual "mixed-form" sharing regimes where a substantial portion of the innovation pool is unprotected by legal barriers but there exist collateral legal and extralegal imitation barriers that protect some other portion of the aggregate product and services bundle. The sharing regime described above corresponds to the latter variety, which has far broader application in economically intensive settings. As I show in the companion piece, the former has virtually none.
46. For contributions that apply a "semicommons" concept to the intellectual property context, see Brett H. Frischmann & Mark A. Lemley, Spillovers, 107 COLUM. L. REV. 257 (2007); and Robert A. Heverly, The Information Semicommons, 18 BERKELEY TECH. L.J. 1127 (2003). For explorations of mixed property regimes more generally, see Michael A. Heller, The Dynamic Analytics of Property Law, 2 THEORETICAL INQUIRIES IN L. 79 (2001); Carol H. Rose, The Several Futures of Property: Of Cyberspace and Folk Tales, Emission Trades and Ecosystems, 83 MINN. L. REV. 129 (1998); and Henry E. Smith, Semicommon Property Rights and Scattering in the Open Fields, 29 J. LEGAL STUD. 131 (2000).
47. State St. Bank & Trust Co. v. Signature Fin. Group Inc., 149 F.3d 1368 (Fed. Cir. 1998). For further analysis of the decision, see infra Section II.A.
48. Prior to the State Street decision in 1998, it had been commonly understood that patent protection was unavailable for financial instruments, following the historical bar on patenting abstract ideas and mathematical formulae, which case law had extended to bar business-method patents. See Hotel Sec. Checking Co. v. Lorraine Co., 160 F. 467, 469 (2d Cir. 1908).
49. See Peter Tufano, Financial Innovation, in HANDBOOK OF THE ECONOMICS OF FINANCE (George M. Constantinides et al. eds., 2007) (estimating that from 1980-2001, 1200 to 1800 new types of securities were released into the market); see also Peter Tufano, Financial Innovation and First-Mover Advantages, 25 J. FIN. ECON. 213, 215 (1989) (showing that fifty- eight financial innovations in corporate and mortgage-backed securities were used to raise 11.6% of the dollar volume of all U.S. public offerings during the period 1974-1987) [hereinafter Tufano, Financial Innovation and First-Mover Advantages].
50. Consistent with this view, empirical inquiry has shown that first-mover innovators accrue substantial returns even though successful financial products are subject to imitation. See Tufano, Financial Innovation and First-Mover Advantages, supra note 42, at 230-35. For further discussion of alternative appropriation instruments in the financial market, see Merges, supra note 12, at 4-5.
51. For detailed discussion of these alternative appropriation instruments, see Jonathan M. Barnett, Private Protection of Patentable Goods, 25 CARDOZO L. REV. 1251, 1257-69 (2004).
52. Consistent with the previous Figures, increasing coloration indicates increasing strength of barriers to imitation. Note that "brand name" is given a darker coloration because it is protected by trademark, a legal entitlement.
53. For the leading studies showing limited reliance on patent protection, see C.T. TAYLOR & Z.A. SILBERSTON, THE ECONOMIC IMPACT OF THE PATENT SYSTEM: A STUDY OF THE BRITISH EXPERIENCE (1973); Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, 1987 BROOKINGS PAPERS ON ECON. ACTIVITY 783; Edwin Mansfield, Patents and Innovation: An Empirical Study, 32 MGMT. SCI. 173 (1986); and Wesley M. Cohen, Richard R. Nelson & John P. Walsh, Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not) (Nat'l Bureau of Econ. Research, Working Paper No. 7552, 2000). For similar results in an earlier study, see FREDERIC M. SCHERER ET AL., PATENTS AND THE CORPORATION: A REPORT ON INDUSTRIAL TECHNOLOGY UNDER CHANGING PUBLIC POLICY (2d ed. 1959).
54. See supra Section I.A.
55. See Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. 347 (1967).
56. See YORAM BARZEL, ECONOMIC ANALYSIS OF PROPERTY RIGHTS (1989);
57. GARY D. LIBECAP, CONTRACTING FOR PROPERTY RIGHTS (1989);
58. Terry L. Anderson & P.J. Hill, The Evolution of Property Rights: A Study of the American West, 18 J.L. & ECON. 163 (1975). As noted previously, this is not intended to be a complete statement of the welfare effects of increased levels of intellectual property coverage; there may be social costs in addition to transaction cost losses that must be offset against innovation gains. In particular, this standard omits the deadweight losses that are usually associated with increased levels of intellectual property protection as a result of output constraints imposed by intellectual property holders who rationally implement supracompetitive pricing, which in turn blocks efficient sales to some users willing at least to pay a price equal to marginal cost. Even from a consumer-welfare perspective, however, it is not clear that taking into account deadweight losses would make any difference "on net" so long as we also take into account the deadweight losses attributable to reduced levels of intellectual property protection. That too results in a decline in output, which in turn implies blocked efficient sales to users who would have been willing to pay the supracompetitive price that would have been demanded by the hypothetical intellectual property rights holder. Multiple antitrust commentators have expressed the view that the social costs to consumers from supracompetitive pricing are far outweighed by the social costs to consumers from technological delay as a result of reduced innovation.
59. See, e.g., Phillip Areeda, Antitrust Law as Industrial Policy: Should Judges and Juries Make It?, in ANTITRUST, INNOVATION, AND COMPETITIVENESS 29, 31 (Thomas M. Jorde & David J. Teece eds., 1992) (noting the widespread view among economists that "innovation has been thought to contribute far more to our well-being than keeping prices closer to costs through competition");
60. Frank H. Easterbrook, Ignorance and Antitrust, in ANTITRUST, INNOVATION, AND COMPETITIVENESS, supra, at 119, 122 ("An antitrust policy that reduced prices by 5 percent today at the expense of reducing by 1 percent the annual rate at which innovation lowers the costs of production would be a calamity.");
61. Donald F. Turner, Basic Principles in Formulating Antitrust and Misuse Constraints on the Exploitation of Intellectual Property Rights, 53 ANTITRUST L.J. 485, 485 (1985) (noting that "in the long run, technological progress contributes far more to consumer welfare than does the elimination of allocative inefficiencies caused by noncompetitive pricing").
62. See, e.g., PROPERTY RIGHTS: COOPERATION, CONFLICT, AND LAW 5 (Terry L. Anderson & Fred S. McChesney eds., 2003). For leading contributions in the literature, see BARZEL, supra note 49; LIBECAP, supra note 49; DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE (1990); and ANDREW SCHOTTER, THE ECONOMIC THEORY OF SOCIAL INSTITUTIONS (1981).
63. On the sequential nature of most innovation processes, see WILLIAM J. BAUMOL, ENTREPRENEURSHIP, MANAGEMENT, AND THE STRUCTURE OF PAYOFFS 181-84 (1993). For the leading economic analysis of sequential innovation, see Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991).
64. This broad definition is standard usage in the property rights literature. Note, however, that I exclude: (i) costs related to appropriating the value of unprotected intellectual assets, which would be reduced by intellectual property protections; or (ii) amounts paid to access protected intellectual assets, which are transfer payments without any implications from a social efficiency perspective.
65. A clarification and a caveat. First, note that subsequent innovation losses must be restricted to subsequent innovation that still would have been generated under some weaker level of propertization (either due to the assumption of intrinsic motivations or access to equivalent technological inputs in the public domain). This is sometimes overlooked. Second, to reiterate earlier disclaimers, see supra notes 7 and 49, the tradeoff stated above does not completely describe the bundle of social costs and benefits generated by greater or lesser levels of propertization.
66. In a zero transaction costs world, the holder of any intellectual property entitlement would rationally bargain to mutually efficient transactions with any derivative follow-on inventors. I note that more complex economic analysis of the first-mover/second-mover scenario stipulates additional conditions for this efficiency result to hold with certainty, although these too can be at least partially satisfied by assuming prior agreements between first- mover and second-mover innovators (which would by definition take place in a zero transaction costs world). See Scotchmer, supra note 51.
67. The leading decision is Diamond v. Diehr, 450 U.S. 175 (1981), which recognized the eligibility of software for patent protection so long as the software is implemented by a process or apparatus that itself would be eligible for patent protection. This decision was expanded subsequently to progressively remove the "process or apparatus" limitation. See AT&T v. Excel Commc'ns, 172 F.3d 1352, 1356-60 (Fed. Cir. 1999) (following the decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), which rejected the claim that patentable software must have physical structure associated with it, so long as it otherwise produces a "useful, concrete and tangible result"); In re Alappat, 33 F.3d 1526, 1540-45 (Fed. Cir. 1994) (en banc) (holding that the "statutory process or apparatus" test is satisfied so long as the relevant claim is drafted to include a general purpose computer or standard hardware or memory element necessary for useful application of the relevant algorithm).
68. For the leading judicial decisions and agency actions, see Diamond v. Chakrabarty, 447 U.S. 303 (1980), which upheld a patent on genetically engineering microorganisms; 1118 O.G. 19 (1987), which stated that PTO "now considers non-naturally occurring non-human multicellular living organisms, including animals, to be patentable subject matter"; and Amgen, Inc. v. Chugai Pharmaceutical Co., 927 F.2d 1200 (Fed. Cir. 1991), which upheld a patent on purified and isolated DNA sequences encoding a red blood cell-stimulating protein.
69. See DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE 73, 110 (1990). Given this deficiency, the Demsetz thesis has been called a "naïve" theory of property rights formation.
70. See THRAINN EGGERTSSON, ECONOMIC BEHAVIOR AND INSTITUTIONS 250, 272-73 (1990).
71. See Stuart Banner, Transitions Between Property Regimes, 31 J. LEGAL STUD. S359 (2002);
72. Saul Levmore, Property's Uneasy Path and Expanding Future, 70 U. CHI. L. REV. 181 (2003);
73. Saul Levmore, Two Stories About the Evolution of Property Rights, 31 J. LEGAL STUD. S421 (2002). In the economics and political science literature, there exist several dedicated critiques of the Demsetzian and related efficiency driven theories of institutional formation from a distributive and/or strategic bargaining perspective.
74. See, e.g., DANIEL W. BROMLEY, ECONOMIC INTERESTS AND INSTITUTIONS: THE CONCEPTUAL FOUNDATIONS OF PUBLIC POLICY (1989);
75. JACK KNIGHT, INSTITUTIONS AND SOCIAL CONFLICT (1992);
76. ITAI SENED, THE POLITICAL INSTITUTION OF PRIVATE PROPERTY (1997).
77. For examples along these lines, see LAWRENCE LESSIG, FREE CULTURE: HOW BIG MEDIA USES TECHNOLOGY AND THE LAW TO LOCK DOWN CULTURE AND CONTROL CREATIVITY (2004);
78. LAWRENCE LESSIG, THE FUTURE OF IDEAS: THE FATE OF THE COMMONS IN A CONNECTED WORLD (2001);
79. James Boyle, The Second Enclosure Movement and the Construction of the Public Domain, LAW & CONTEMP. PROBS., Winter/Spring 2003, at 33. This is in an indicative, not complete, list of references. For reviews of this literature, see, for example, R. Polk Wagner, Information Wants To Be Free: Intellectual Property and the Mythologies of Control, 103 COLUM. L. REV. 995 (2003).
80. Other scholars have made similar observations. See, e.g., David E. Adelman & Kathryn L. DeAngelis, Patent Metrics: The Mismeasure of Innovation in the Biotech Patent Debate, 85 TEX. L. REV. 1677, 1679 (2007) (noting but also challenging "the widely held belief that the rapid growth in biotechnology patenting over the last decade is impeding innovation");
81. F. Scott Kieff & Troy A. Paredes, Engineering a Deal: Toward a Private Ordering Solution to the Anticommons Problem, 48 B.C. L. REV. 111, 112 (2007) (noting the recent "explosion" in the intellectual property literature on the anticommons problem, which asserts that the proliferation of patent rights can retard innovation).
82. For the leading expression of the anticommons thesis, see Michael A. Heller, The Tragedy of the Anticommons: Property in the Transition from Marx to Markets, 111 HARV. L. REV. 621 (1998), which states that excessively fragmented property rights can generate net social losses by impeding, rather than facilitating, innovation (or, in a broader real property context, other) investments; and Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698 (1998), which advances the same thesis with respect to gene patents. For some of the most sophisticated arguments and empirical evidence advanced in favor of various forms of the patent thicket thesis, see JAMES BESSEN & MICHAEL J. MEURER, PATENT FAILURE: HOW JUDGES, BUREAUCRATS, AND LAWYERS PUT INNOVATORS AT RISK (2008); ADAM B. JAFFE & JOSH LERNER, INNOVATION AND ITS DISCONTENTS: HOW OUR BROKEN PATENT SYSTEM IS ENDANGERING INNOVATION AND PROGRESS, AND WHAT TO DO ABOUT IT 4 (2004); and Carl Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting, in 1 INNOVATION POLICY AND THE ECONOMY 119 (Adam B. Jaffe, Josh Lerner & Scott Stern eds., 2000). This is a highly selective list of references; a much larger legal literature has applied the thicket and anticommons concepts in a variety of contexts.
83. For related views, see Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV. 1293, 1320-21 (1996), which argues that the conventional approach falsely imagines that private parties can do little about property entitlements incorrectly issued by the state and advances instead an approach that focuses on parties' ability to modify legal entitlements through social norms and cooperative institutions. For a similar statement in the property rights school more generally, see CARL J. DAHLMAN, THE OPEN FIELD SYSTEM AND BEYOND: A PROPERTY RIGHTS ANALYSIS OF AN ECONOMIC INSTITUTION 220 (1980), which states that the property rights approach recognizes that even the "losers in institutional change" can use bargaining power and/or form voluntary associations to adjust the effective property rights allocation.
84. See R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960).
85. This point recalls two important propositions found in the transaction costs literature on property rights. First, Demsetz observed in another publication that complete markets may sometimes be less preferred relative to incomplete markets to the extent that fully pricing all externalities in a complete market is an activity that diverts resources to policing market exchanges without necessarily generating commensurate social benefits in the form of allocative efficiencies. See Harold Demsetz, The Exchange and Enforcement of Property Rights, 7 J.L. & ECON. 11 (1964). Second, other commentators have shown that an increase in asset values may not always precipitate further expenditures on rights enforcement since an increase in asset values can attract greater third party investments in thievery, thereby increasing policing costs that may swap any gains from increased propertization.
86. See Douglas W. Allen, The Rhino's Horn: Incomplete Property Rights and the Optimal Value of an Asset, 31 J. LEGAL STUD. S339 (2002);
87. Barry C. Field, The Evolution of Property Rights, 42 KYKLOS 319, 328 (1989). In more general forms of the latter point, other commentators have observed that property rights over any given item may not be fully defined to the extent that doing so generates transaction costs without commensurate efficiency gains. See BARZEL, supra note 49, at 64-67.
88. For further discussion, see infra note 112 and accompanying text.
89. For further discussion, see infra notes 86-87 and accompanying text.
90. For the only dedicated statement of this view (to my knowledge), see Easterbrook, supra note 2, at 412.
91. Generally, I do not focus on market movements between a commons and a property regime, which is the more typical focus in the economic and legal literature on the evolution of property rights, both in the real-property and intellectual property contexts. This is both for reasons of brevity and because I am of the view that the commons is not especially relevant, for the simple reason that zero propertization usually does not offer a sustainable environment for innovation investment. I address this point in greater detail in a companion piece. See Barnett, supra note 38.
92. For the decision establishing the business methods limitation (that is, the ineligibility of non-technical methods of doing business for patent protection), see Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908).
93. See Josh Lerner, Where Does State Street Lead? A First Look at Finance Patents, 1971-2000 (Nat'l Bureau of Econ. Research, Working Paper No. 7918, 2000), at 8. For one such litigation, see Paine, Webber, Jackson & Curtis, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 564 F. Supp. 1358, 1368 (D. Del. 1983), which rejects a challenge to the validity of a patent held by Merrill Lynch claiming a Securities Brokerage-Cash Management System.
94. The erosion of the business methods limitation is largely a function of the expansion of protection for software applications. For the leading decisions that anticipated State Street, see Diamond v. Diehr, 450 U.S. 175, 187-88 (1981), which upheld a patent claim about a process for curing rubber even though it "employs a well-known mathematical equation" and stating generally that a claim directed to subject matter that is otherwise patentable does not become unpatentable "simply because it uses a mathematical formula, computer program, or digital computer"; and In re Alappat, 33 F.3d 1526, 1542-44 (Fed. Cir. 1994) (en banc), which, following Diehr, held that the statutory "process" or "machine" test for patentable subject matter is satisfied so long as the patent claim "as a whole" is directed to an apparatus to produce a "useful, concrete, and tangible result," even if the claimed machine accomplishes that result through a mathematical formula that would not be patentable subject matter by itself. In turn, these decisions were grounded in the Court's earlier decision, Diamond v. Charkrabarty, 447 U.S. 303 (1980), which generally counseled a broad interpretation of patentable subject matter under 35 U.S.C. § 101.
95. 149 F.3d 1368 (Fed. Cir. 1998).
96. Data Processing Sys. for Hub & Spoke Fin. Servs. Configuration, U.S. Patent No. 5,193,056 (filed Mar. 11, 1991) (issued Mar. 9, 1993).
97. Robert M. Hunt, Business Method Patents and U.S. Financial Services 3-4 (Fed. Res. Bank of Phila., Working Paper No. 08-10/R, 2009), available at http://www.philadelphiafed.org/ research-and-data/publications/working-papers/2008/wp8-10.pdf (last visited Oct. 14, 2009).
98. For extensive discussion of these alternative instruments, see Barnett, supra note 44, at 1257- 69.
99. This is the widely used pejorative term for holding companies that acquire patents solely for purposes of licensing the patent to operating companies in the relevant field or, failing an agreement to license, litigating the patent to extract a settlement or infringement damages. For further discussion, see infra notes 138-143 and accompanying text.
100. In a companion publication, I provide greater content to idiosyncratic preferences for defecting from a sharing regime, arguing that poorly endowed and richly endowed innovators (who, respectively, are rationally excluded from or rationally decline to participate in the collective innovation pool that sustains a sharing regime) are most likely to abandon an existing sharing regime. See Barnett, supra note 38.
101. The Figure shows the number of patents classified (either on an "original" or "cross- reference basis") under Class 705 of the U.S. Patent Classification system, which is commonly associated with business method patents (and therefore includes, but is not restricted to, financial method patents) and is called "Data Processing: Financial, Business Practice, Management, or Cost/Price Determination." Sources for the data shown are from Part A1, Table A1-2 of U.S. PATENT & TRADEMARK OFFICE, PATENT COUNTS BY CLASS BY YEAR (2008), http://www.uspto.gov/go/taf/cbcby.htm. Note that Class 705 is both underinclusive and overinclusive with respect to finance-related patents: (i) underinclusive since some financial method patents may be classified under other categories and, of greater relevance; (ii) overinclusive since some Class 705 patents may be business method patents but not financial method patents. Nonetheless, Class 705 is a useful proxy for showing general trends. For a similar approach, see Merges, supra note 12, at 4 tbl. For an approach that creates a financial method patent data set by inclusion of limited subclasses, see Lerner, supra note 69, at 904-05. For an introduction to the PTO classification system, see U.S. Patent & Trademark Office, Overview of the U.S. Patent Classification System (USPC), http://www.uspto.gov/web/offices/opc/documents/overview.pdf.
102. U.S. PATENT & TRADEMARK OFFICE, PERFORMANCE AND ACCOUNTABILITY REPORT: FISCAL YEAR 2007, at 16 (2007), http://www.uspto.gov/web/offices/com/annual/2007/ 2007annualreport.pdf. Corresponding values for 2004, 2005, and 2006 are, respectively, approximately twenty-eight months, twenty-nine months, and thirty-one months. Id.
103. AT&T Corp. v. Excel Commc'ns, Inc., 172 F.3d 1352 (Fed. Cir. 1999).
104. Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp. 2d 1228 (W.D. Wash. 1999). The patent at issue is Method and System for Placing a Purchase Order Via a Communications Network, U.S. Patent No. 5,960,411 (filed Sept. 12, 1997) (issued Sept. 28, 1999), which covers the technique of enabling consumers to make online purchases with a single click, using payment information entered previously by the user.
105. For information on patent application and award rates through 2000, see Lerner, supra note 69, at 907 fig.1. For information on litigation relating to finance patents issued through 2003, see Josh Lerner, The Litigation of Financial Innovations (Harvard Bus. Sch. Working Paper 09-027, 2008). For an example of a widely noted settlement, see Press Release, eSpeed and New York Mercantile Exchange Reach Settlement Agreement on Wagner Patent (Dec. 22, 2003), available at http://www.espeed.com/articles/article20031222.htm, which reported that eSpeed had settled a business method patent suit against New York Mercantile Exchange for $8 million.
106. The projected damages figure is based on a report issued by the Congressional Budget Office, which calculated the amounts that could be demanded in a takings action against the federal government by the "Data Treasury" patent holders in the event immunity were granted to the alleged infringers. See CONGRESSIONAL BUDGET OFFICE, COST ESTIMATE, S. 1145, PATENT REFORM ACT OF 2007, at 2-3, 5-6, 11 (2008), http://www.cbo.gov/ ftpdocs/89xx/doc8981/s1145.pdf. Note that some defendants have already settled. See Latest Data Treasury Settlements Add to Pressure on Defendants, Digital Transactions, Sept. 9, 2008, http://www.digitaltransactions.net/newsstory.cfm?newsid=1910 (noting settlements with Bank of New York and others, leaving forty-seven remaining defendants, including Bank of America and Citigroup).
107. Not coincidentally, the only exception to this statement is the business methods class of patents, which is subject to a prior user defense, under legislation enacted in 1999 as a result of financial industry pressure. For further discussion, see infra note 88 and accompanying text.
108. All patent applications filed on or after November 29, 2000 must be published within eighteen months of the date of filing, unless (i) the applicant requests that the PTO not publish the application and (ii) the applicant has not filed an application for the same invention in a foreign jurisdiction that also requires publication. See 35 U.S.C. § 122(b)(1)(A)-(B) (2000); American Inventors Protection Act of 1999, Pub. L. No. 106-113, § 4508, 113 Stat. 1501 (giving effective date).
109. This optimism characterizes an important minority of the intellectual property literature. See WILLIAM M. LANDES & RICHARD A. POSNER, THE POLITICAL ECONOMY OF INTELLECTUAL PROPERTY LAW 18 (2004) (noting that increases in intellectual property protection that adversely affect concentrated economic interests are likely to be resisted effectively); Merges, Intellectual Property Rights, supra note 16, at 1873-74 (arguing that wholesale capture of legislative decisions concerning the scope of intellectual property law is "not always present" given the capacity of opposing groups to undertake countervailing actions).
110. The free-rider problem in this context can be summarized as follows: without a credible agreement to enforce individual contributions (or without collateral benefits to induce individual contributions), each firm maximizes its individual payoff by declining to contribute and instead choosing to enjoy the gains generated as a result of other firms' contributions; thus, when no firm contributes, the public good is not funded and all firms are left worse off.
111. For the seminal source on the superior lobbying and coordination capacities of small- number and well-organized interest groups, see OLSON, supra note 9.
112. First Inventor Defense Act of 1999, 35 U.S.C. § 273 (2000).
113. For a similar observation, see Merges, supra note 12, at 6.
114. See U.S. PATENT & TRADEMARK OFFICE, A USPTO WHITE PAPER: AUTOMATED FINANCIAL OR MANAGEMENT DATA PROCESSING METHODS (2000), http://www.uspto.gov/web/menu/ busmethp.
115. See Bezos and O'Reilly Spearhead Call for Patent Reform, OReilly.com, March 9, 2000, http://oreilly.com/news/amazon_patents.html.
116. See Patent Reform Act of 2009, designated as S.515 (reported with amendments, Apr. 2, 2009) and H.R. 1260 (introduced Mar. 3, 2009). For earlier bills, see Patent Reform Act of 2007, designated as S. 1145 and H.R. 1908 (introduced Sept. 11, 2007). In 2008, financial services companies or representative organizations which were signatories to an open letter sent to members of Congress in support of the legislative reform package included: the Securities Industry and Financial Markets Association; Visa Inc.; and the Financial Services Roundtable (a financial services industry trade group). See Letter to The Honorable Harry Reid, Majority Leader, U.S. Senate, and The Honorable Mitch McConnell, Republican Leader, U.S. Senate, Jan. 22, 2008, http://www.sifma.org/regulatory/comment_letters/ 61653310.pdf.
117. See Jeffrey H. Birnbaum, Lawmakers Move To Grant Banks Immunity Against Patent Lawsuit, WASH. POST, Feb. 14, 2008, at A22. This provision was included in the Senate version of the 2007 proposed patent reform bill, see supra note 92, and has been included in an alternative version of the Senate's 2009 proposed patent reform bill, as introduced by Senator John Kyl (R-AZ). See Stephen Albainy-Jenei, Patent Reform 2009: Still Too Many Competing Interests, Patent Baristas, Mar. 24, 2009, http://www.patentbaristas.com/archives/2009/03/24/ patent-reform-2009-still-too-many-competing-interests.
118. See, e.g., Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008); In re Nuijten, 500 F.3d 1346, 1352-57 (Fed. Cir. 2007).
119. 545 F.3d 943 (Fed. Cir. 2008).
120. See Brief Amicus Curiae of Computer & Communications Industry Association in Support of Appellee Director of the U.S. Patent and Trademark Office and Urging Affirmance, In re Bilski, 545 F.3d 943 (No. 2007-1130); Brief for Financial Services Industry as Amici Curiae in Support of Affirmance, In re Bilski, 545 F.3d 943 (No. 2007-1130).
121. In re Bilski, 545 F.3d at 954-60. For the leading historical source of this test, see Gottschalk v. Benson, 409 U.S. 63 (1972), which was clarified (and narrowed) in Parker v. Flook, 437 U.S. 584 (1978). The Bilski court explicitly adopted (or readopted) the "machine-or- transformation test" in lieu of the "useful, concrete and tangible result" test that had been set forth by the Supreme Court in Diamond v. Diehr, 450 U.S. 175 (1981), and then implemented by the Federal Circuit in State Street Bank and Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).
122. In re Bilski, 545 F.3d at 963-64.
123. Bilski v. Doll, 129 S. Ct. 2735 (2009).
124. See Lerner, Litigation of Financial Innovations, supra note 81, at 11 (noting that, for the period 1976-2003, the leading patentees are mostly information technology companies that apparently patented innovations developed in the course of providing services to clients in the financial services industry). Some firms within the financial services industry do appear to have invested greater efforts in patenting financial method innovations than others. See Tamara Loomis, Express Route, IP LAW & BUS., Aug. 2005, at 32 (reporting that American Express adopted a more aggressive patenting strategy after having reached a settlement as a defendant in a financial-method patent infringement suit).
125. Josh Lerner, The Litigation of Financial Innovations, at 11-12 (finding that, for the period 1976-2005, patent holding companies are the most frequent plaintiffs in litigation over finance patents)
126. Josh Lerner, The Litigation of Financial Innovations at 15 ("Patents assigned to individuals are five times more likely to be litigated than those held by public corporations, and about 50% more likely to be so than those held by private firms, which include both smaller operating firms and patent holding companies.").
127. Josh Lerner, The Litigation of Financial Innovations at 11-12, 15 (finding that, in the sample of firms that were issued finance patents during 1976-2003, (i) firms with less than two hundred employees had initiated at least one lawsuit per finance patent; and (ii) firms with more than 200,000 employees had never initiated a lawsuit to enforce a finance patent). For examples of relevant litigations, see Press Release, eSpeed, Inc., eSpeed and New York Mercantile Exchange Reach Settlement Agreement on Wagner Patent (Dec. 22, 2003), http://www.espeed.com/articles/article20031222.htm (reporting that eSpeed had settled business method a patent suit against the New York Mercantile Exchange for $8 million). I note that eSpeed is an affiliate of Cantor Fitzgerald, a bond brokerage firm that does have an operational business.
128. See David E. Adelman, A Fallacy of the Commons in Biotech Patent Policy, 20 BERKELEY TECH. L.J. 985, 989-90 (2005) (observing that "anticommons" and related critiques of biotechnology patents are grounded in isolated anecdotes and have not been confirmed by empirical studies)
129. Timothy Caulfield et al., Evidence and Anecdotes: An Analysis of Human Gene Patenting Controversies, 24 NAT. BIOTECH. 1091, 1093 (2006) (same)
130. Stuart J.H. Graham & David C. Mowery, Software Patents: Good News or Bad News?, in INTELLECTUAL PROPERTY RIGHTS IN FRONTIER INDUSTRIES: SOFTWARE AND BIOTECHNOLOGY 45, 73 (Robert W. Hahn ed., 2005) (noting that "contentions that increased software patenting somehow "causes' declines in R & D investment remain unproven") (internal citation omitted)
131. F. Scott Kieff, On Coordinating Transactions in Intellectual Property: A Response to Smith's Delineating Entitlements in Information, 117 YALE L.J. POCKET PART 101 (2007), http://yalelawjournal.org/images/pdfs/593.pdf (noting the lack of supporting empirical evidence for the anticommons concept). A number of underlying studies have examined the biotechnology sector.
132. See David E. Adelman & Kathryn L. DeAngelis, Patent Metrics: The Mismeasure of Innovation in the Biotech Patent Debate, 85 TEX. L. REV. 1677, 1680 (2007) (finding "little evidence that the recent growth in biotechnology patenting is threatening innovation" based on dataset of 52,000 biotechnology patents from January 1990 through December 2004)
133. John P. Walsh, Ashish Arora & Wesley M. Cohen, Effects of Research Tool Patents and Licensing on Biomedical Innovation, in PATENTS IN THE KNOWLEDGE-BASED ECONOMY 285 (Wesley M. Cohen & Stephen A. Merrill eds., 2003) (finding that, in a sample of seventy interviews, patents on inputs to drug discovery generally have not halted research projects due to potentially conflicting patent claims held by other parties, although there is evidence of some delays in negotiating access to research tools or other valuable information or methodologies);
134. Fiona Murray & Scott Stern, Do Formal Intellectual Property Rights Hinder the Free Flow of Scientific Knowledge? An Empirical Test of the Anti-Commons Hypothesis (Nat'l Bureau of Econ. Research, Working Paper No. 11465, 2005) (hypothesizing that anticommons effects would predict a lower citation rate for papers that contained ideas that were subsequently patented and finding evidence of a modest effect)
135. For some studies in the software sector, see John R. Allison & Ronald J. Mann, The Disputed Quality of Software Patents, 85 WASH. U. L. REV. 297 (2007), which finds that software patents vary in quality and value and as a group appear to be of higher quality and value than the average patent, based on a dataset of 20,000 computer industry patents
136. Robert P. Merges, Software and Patent Scope: A Report from the Middle Innings, 85 TEX. L. REV. 1627, 1628 (2007), which finds that previously expressed concerns that patent protection would discourage software innovation have been contradicted by continuing robust industry performance
137. Robert P. Merges, Patents, Entry and Growth in the Software Industry (Univ. of Cal. Berkeley Sch. of Law Working Paper, 2007), which finds that patent effort by incumbent software firms correlates closely with indicators of market success and that entry rates in the software industry have not declined as patentability has increased.
138. Professor Robert Merges has provided some of the leading scholarship for both parts of this statement. See Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV. (documenting transactional solutions whereby private parties lower the costs of licensing and enforcing large pools of intellectual property rights)
139. Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990) (documenting cases where patent disputes apparently delayed development of early aircraft and radio technologies and describing some industrygenerated solutions).
140. Robert P. Merges, Institutions for Intellectual Property Transactions: The Case of Patent Pools, in EXPANDING THE BOUNDARIES OF INTELLECTUAL PROPERTY: INNOVATION POLICY FOR THE KNOWLEDGE SOCIETY
141. See Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV., at 1342-52.
142. For a comprehensive review of these knowledge-cooperative arrangements, see Nadine Roijakkers & John Hagedoorn, Inter-Firm R&D Partnering in Pharmaceutical Biotechnology Since 1975: Trends, Patterns, and Networks, 35 RES. POL'Y 431 (2006)
143. For data on strategic alliances and similar arrangements in biotechnology, see David B. Audretsch & Maryann P. Feldman, Small-Firm Strategic Research Partnerships: The Case of Biotechnology, 15 TECH. ANALYSIS & STRATEGIC MGMT. 273 (2003)
144. For additional discussion of cooperative arrangements in the biotechnology sector, see Jonathan M. Barnett, Cultivating the Genetic Commons: Imperfect Patent Protection and the Network Model of Innovation, 37 SAN DIEGO L. REV. 987, 1015-21 (2000)
145. Peter Lee, Contracting to Preserve Open Science: Consideration-Based Regulation, 58 EMORY L.J. 889, 915-16 (2009)
146. Robert P. Merges, A New Dynamism in the Public Domain, 71 U. CHI. L. REV. 183, 186-91 (2004).
147. For further discussion, see DAVID J. TEECE, MANAGING INTELLECTUAL CAPITAL: ORGANIZATIONAL, STRATEGIC, AND POLICY DIMENSIONS 194-98 (2000)
148. Anne Layne-Farrar & Josh Lerner, To Join or Not To Join: Examining Patent Pool Participation and Rent Sharing Rules (Nat'l Bureau of Econ. Research, Working Paper No. 15,061, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=945189. I note that some "MPEG" pools operate as simple cost-effective solutions to licensing large pools of patents, akin to the performance-rights licensing organizations in the content industries (for example, BMI and ASCAP), which does not alter the formal propertization outcome; however, others appear to permit access to standard technologies by competitors for purposes of facilitating product development, which does diverge materially from formally allocated entitlements. For detailed discussion, see Layne-Farrar & Lerner.
149. For discussions of a similar reversal in the classic sequence anticipated by Demsetz, see Robert P. Merges, A New Dynamism in the Public Domain, 71 U. CHI. L. REV., at 200-01, which argues that "property-preempting investments" in software, biotechnology, and cultural markets appear to reverse Demsetz's proposed correlation between an increase in property values and an increase in property rights, insofar as increases in the value of the relevant asset class apparently trigger voluntary abandonment of property rights. Note that, whereas Merges primarily attributes the voluntary abandonment of property rights for competitive advantage to an increase in the value of the underlying asset, id., I attribute this phenomenon entirely to an increase in the transaction costs of sustaining participation in the property regime relative to the innovation gains that could be accrued by abandoning the regime. That is consistent with the Demsetz thesis, which provides that property rights will increase as a function of increasing value, subject to the administration and enforcement costs of doing so. See supra notes 48-49 and accompanying text.
150. This is not the exclusive motivation for giving away knowledge assets that are, or could be, protected by patents or other entitlements. Most obviously, firms may forfeit patentable assets in order to preempt competitors from patenting those assets, for which "vanity journals" are used in order to establish a prior art record. Some scholars have argued that firms will prefer to "give away" private technology in order to induce follow-on innovation that increases the value of the original innovation. See Oren Bar-Gill & Gideon Parchomovsky, The Value of Giving Away Secrets, 89 VA. L. REV. 1857 (2003) (describing the increasing tendency among firms to publish, rather than patent, valuable private knowledge, which is attributed to a rational interest in credibly committing to share surplus with follow-on innovators). In the fashion context, I and co-authors have argued that luxury apparel firms prefer incomplete protections against third-party imitation-that is, to effectively "give away" a portion of any season's revenues on a winning product-in order to accrue "runner-up" awards in other seasons where the firm misjudges the winning style outcome.
151. See Jonathan M. Barnett, Gilles Grolleau & Sana El Harbi, The Fashion Lottery: Cooperative Innovation in Stochastic Markets, 39 J. LEGAL STUD. (forthcoming 2010).
152. This assumption has empirical grounding. Based on a dataset of U.S. public firms involved in 20,522 patent lawsuits during the period 1987-1999, Professors James Bessen and Michael Meurer have estimated that the hazard of being an alleged patent infringer has been slightly less than being a patent litigant (where hazard is calculated as the sample mean rate of litigation per firm divided by the sample mean deflated R&D expenditure).
153. See James Bessen & Michael J. Meurer, The Patent Litigation Explosion 17-18 (Boston Univ. Sch. of Law Working Paper Series, Law & Econ. Working Paper No. 05-18, 2005), http://ssrn.com/abstract=831685. Importantly, these data show that a public firm's risk of being an alleged patent infringer (measured relative to R&D spending) has risen sharply during the subject period (a seventy percent increase), id. at 18, which would in turn be consistent with the fact that (as I discuss shortly) these firms (in some industries) are the principal proponents behind proposed reforms to relax patent protections. Note that if hazard is measured alternatively as the rate of litigation per patent, then the hazard rate does not change significantly during the subject period in general and behaves differently in different industries. See id. at 33.
154. It should be noted that the "propertization bias" of individual inventors and small firms may have some countervailing efficiency benefits, to the extent that either (i) small firms are uniquely situated to generate certain types of innovations, or (ii) large firms have differential access to substitutes for intellectual property (in which case, reducing intellectual property protection necessarily protects incumbents against entry). For further discussion, see Jonathan M. Barnett, Is Intellectual Property Trivial?, 157 U. PA. L. REV. 1691, 1726-29, 1736-37 (2009)
155. Barnett, supra note 44, at 1285-98. That in turn raises the broader question (outside the immediate scope of this Article) of whether "second-best" considerations would sometimes recommend some level of "excessive" propertization in order to offset the inefficiencies resulting from the concentrated market conditions that otherwise facilitate private-market efforts to reduce the transaction cost losses attendant to an actively deployed property regime. Put differently: we may face an inherent choice between (i) a heavily propertized market with high transaction costs and associated losses but lower barriers for small-firm entry, and (ii) a lightly propertized market with low transaction costs and associated losses but higher barriers for small-firm entry.
156. See Investigation of Concentration of Economic Power: Hearings Before the Temporary National Economic Comm., 75th Cong. 257-58 (1938) (testimony of Edsel Ford, President, Ford Motor Co., and testimony of I. Joseph Farley, Patent Counsel, Ford Motor Co.) [hereinafter Ford Testimony].
157. Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV., at 890 (noting the current practice in the automotive industry of "relatively automatic cross licensing" of patents).
158. See John R. Allison et al., Valuable Patents, 92 GEO. L.J. 435, 446, 472 (2004) (finding that patents in automotive, semiconductor, and chemicals industries are litigated less frequently than in all other industries based on sample population of patents issued between June 1996 and May 1998).
159. See Richard C. Levin, The Semiconductor Industry, in GOVERNMENT AND TECHNICAL PROGRESS: A CROSS-INDUSTRY ANALYSIS 9, 76-77 (Richard R. Nelson ed., 1982).
160. See Scott Baker & Claudio Mezzetti, Disclosure as a Strategy in the Patent Race, 48 J.L. & ECON. 173 (2005).
161. See TEECE, supra note 108, app. A., § A.3.3; Bar-Gill & Parchomovsky, supra note 110, at 1857-58.
162. See Julien Pénin, Open Knowledge Disclosure: An Overview of the Evidence and Economic Motivations, 21 J. ECON. SURVS. 326, 329 (2007) (citing a survey by Science Watch). In 1991, industry researchers were responsible for one-sixth of the scientific and technical literature in chemistry and physics and one-fourth of the scientific and technical literature in engineering and technology.
163. See Paula E. Stephan, The Economics of Science, 34 J. ECON. LIT. 1199, 1210-11 (1996).
164. See Database and Collections of Information Misappropriations: Joint Hearing on H.R. 3261 Before the Subcomm. on Courts, the Internet, and Intellectual Property of the H. Comm. on the Judiciary and the Subcomm. on Commerce, Trade, and Consumer Protection of the H. Comm. on Energy and Commerce, 108th Cong. 50 (2003) (statement of Thomas J. Donohue, President and Chief Executive Officer, Chamber of Commerce).
165. See Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 CAL. L. REV. 1889, 1904-06 (2002) (reviewing rules and bylaws adopted by dozens of standard setting organizations, mostly in the computer networking and telecommunications industries, with respect to ownership and licensing of patents and other intellectual property rights contributed to those organizations).
166. For leading decisions, see Diamond v. Chakrabarty, 447 U.S. 303 (1980), which upheld a patent on a genetically engineered microorganism; and Amgen, Inc. v. Chugai Pharmaceutical Co., 927 F.2d 1200 (Fed. Cir. 1991), which upheld a patent on purified and isolated DNA sequence encoding a red blood cell-stimulating protein.
167. For information on the SNP Consortium, see About the International HapMap Project, http://snp.cshl.org/abouthapmap.html (last visited Sept. 5, 2009)
168. SNP Fact Sheet, http://www.ornl.gov/sci/techresources/Human_Genome/faq/snps.shtml#whoare (last visited Sept. 5, 2009)
169. For information on the Merck Gene Index, see Press Release, Merck & Co., First Installment of Merck Index Data Released to Public Databasevs (Feb. 10, 1995), http://www.bio.net/bionet/mm/bionews/1995-February/001794.html. For further description of these arrangements, see Lee, supra note 106, at 905, 915-16; and Merges, supra note 106, at 187-88.
170. See Ronald J. Mann, Commercializing Open Source Software: Do Property Rights Still Matter?, 20 HARV. J.L. & TECH. 1, 29 (2006).
171. See Steve Lohr, Guidelines Set on Software Property Rights, N.Y. TIMES, Dec. 19, 2005, at C6; IBM University Relations, http://www.ibm.com/university (last visited Sept. 5, 2009).
172. See Mann, supra note 124, at 20, 31 n.129. For extensive discussion, see Barnett, supra note 38, at 57-69. For further discussion of the Open Invention Network, see infra note 144 and accompanying text.
173. For more detailed information, see Coalition for Patent Fairness, http://www.patentfairness.org (last visited Sept. 5, 2009).
174. See supra note 92. The reforms are opposed by individual inventors and venture capitalist investors that commonly invest in small firms as well as, most adamantly, the pharmaceutical and biotechnology industries.
175. On standard accounts of the political economy of copyright and patent law, see supra note 59. On the political economy of trademark law, see Clarisa Long, The Political Economy of Trademark Dilution, in TRADEMARK LAW AND THEORY: A HANDBOOK OF CONTEMPORARY RESEARCH 132 (Graeme B. Dinwoodie & Mark D. Janis eds., 2008), which documents that large corporate interests supported legislative expansion of trademark law to cover dilution claims, but federal courts constrained the reach of those expansions and these court decisions were only partially reversed by legislative amendments.
176. There may be other reasons why, relative to other industries, entertainment firms are both more sensitive to the innovation gains and less sensitive to the transaction costs attendant to increased intellectual property rights. First, these firms generally operate in a capitalintensive "hits market," which implies especially high requirements for copyright protection given a large "appropriability gap" between creation costs (which must take into account the costs of creation across the large number of failed projects) and imitation costs, which can be close to negligible depending on the quality of then-existing reproduction technologies. Second, while these firms produce multi-component products akin to the information technology sector, firms can limit exposure to the transaction costs of a property rights system through (i) "work for hire" contracts (which preempt copyright infringement and "joint works" claims by freelance contributors); (ii) "errors and omissions" insurance against copyright infringement suits; and (iii) regular refusal to review unsolicited submissions (which protects against copyright infringement and common-law misappropriation claims). These are all standard practices at Hollywood studios. Interview with David Fierson, Senior Vice President, Alcon Entm't, in L.A., Cal. (Nov. 20, 2009). On studios' reluctance to review unsolicited manuscripts, see Igor Dubinsky, The Race to the Box Office Leads to Cinematic Déjà Vu: Modifying Copyright Law To Minimize Rent Dissipation and Copyright Redundancy at the Movies, 29 WHITTIER L. REV. 405, 411 (2007).
177. Note that the conventional view assumes that adversely affected populations in entertainment and other content markets lack any feasible means by which to influence propertization outcomes or otherwise reduce transaction cost burdens (which in turn would support the standard normative view that copyright persists at excessive levels in these markets). Some preliminary observations suggest a murkier picture. Consider: (i) users can influence propertization outcomes by mass infringement and through conventional lobbying by collective organizations such as library associations and higher education institutions; (ii) hardware manufacturers can influence propertization outcomes by selling devices that lower the costs of user infringement; and (iii) distribution intermediaries can influence propertization outcomes by taking greater or lesser precautions against user infringement. Moreover, individual creators exercise leverage in the movie and television industries through trade guilds, and collective clearance organizations have largely solved transaction cost obstacles in performance rights over recorded musical works through associations such as BMI and ASCAP. See Merges, supra note 61, at 1328-40. More recently, some individual creators have adjusted propertization outcomes to a limited extent through "Creative Commons" licenses that waive certain copyright protections. In short, there is a rich mix of constituencies and strategies that imply a complex balance of power, which, without further analysis, may not immediately support the standard inference of excessive propertization.
178. See Brian Bergstein, IBM Filing Seeks Patent for Patent-Licensing Process, HOUS. CHRON., Oct. 24, 2007, at 7.
179. See Brief of Amicus Curiae International Business Machines Corp. in Support of Neither Party, KSR Int'l Co. v. Teleflex, Inc., 550 U.S. 398 (2007) (No. 04-1350) (arguing against the Federal Circuit's standard for determining non-obviousness and in favor of a standard that would make it easier for PTO to reject combination patent applications); Brief of International Business Machines Corp. as Amicus Curiae in Support of Neither Party, Lab. Corp. of Am. Holdings v. Metabolite Labs, Inc., 548 U.S. 124 (2006) (No. 04-607) (arguing in favor of bolstering the "useful application" requirement that would probably bar purely nontechnical business-method patents); Brief of International Business Machines Corp. as Amicus Curiae in Support of Neither Party, eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (No. 05-130) (arguing against the Federal Circuit's automatic standards for permanent injunctions and in favor of traditional standards that permit greater use of equitable discretion); Brief of Amicus Curiae International Business Machines Corp. in Support of Neither Party, In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (No. 2007-1130) (urging the Federal Circuit to narrow standard of patentability under State Street so as to exclude abstract nontechnological methods).
180. These trade and lobbying groups include most notably the Business Software Alliance, the Software and Information Industry Association, the Computer and Communications Industry Assocation, and, as noted earlier, the Coalition for Patent Fairness. For further information, see Business Software Alliance, http://www.bsa.org (last visited Sept. 5, 2009); Coalition for Patent Fairness, http://www.patentfairness.org (last visited Sept. 5, 2009); Computer & Communications Industry Association, http://www.ccianet.org (last visited Sept. 5, 2009); and Software & Information Industry Assocation, http://www.siia.net (last visited Sept. 5, 2009).
181. See supra note 96 and infra notes 140-142. For other examples in the widely followed litigation of KSR International Co. v. Teleflex, Inc., 550 U.S. 398 (2007), see Brief for Amicus Curiae Computer & Communications Industry Ass'n in Support of Petitioner, Teleflex, 550 U.S. 398 (No. 04-1350), which urges the Court to adopt a standard that would make it easier for the defendant to contest the nonobviousness of a patent; Brief of the Business Software Alliance as Amicus Curiae in Support of Petitioner, Teleflex, 550 U.S. 398 (No. 04- 1350), which urges the same; and Brief of Intel Corp. and Micron Technology, Inc. as Amici Curiae in Support of Petitioner, Teleflex, 550 U.S. 398 (No. 04-1350), which urges the same.
182. See supra note 128. On the involvement of the information technology industry in the lobbying process, see Kim Hart, Patent Reform Bill Introduced in Congress Today, WASH. POST, Mar. 3, 2009, http://voices.washingtonpost.com/posttech/2009/03/patent_reform_bill_introduced.html.
183. See Ford Testimony, supra note 113, at 282.
184. This phenomenon is most vividly illustrated by the 2006 settlement concerning the Blackberry device, where Research In Motion Ltd. settled an infringement claim for $612.5 million in the face of a threatened injunction that would have shut down the Blackberry system. See Associated Press, Settlement Reached in Blackberry Patent Case, MSNBC, Mar. 3, 2006, http://www.msnbc.msn.com/id/11659304. Empirical results are complex as to the extent to which non-practicing patent holders actually drive patent litigation, which appears to vary considerably across technology and patent characteristics. See John R. Allison, Mark A. Lemley & Joshua Walker, Extreme Value or Trolls on Top? The Characteristics of the Most- Litigated Patents, 25 fig.2, 26 tbl.5A (Stanford Pub. Law Working Paper No. 1407796, 2009), http://ssrn.com/abstract=1407796. For policy-oriented commentary on the patent troll issue, see John M. Golden, "Patent Trolls" and Patent Remedies, 85 TEX. L. REV. 2111 (2007); and Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 TEX. L. REV. 1991 (2007). Note that I am not expressing any view as to whether the conventional portrayal of patent holding companies is an accurate characterization of these entities, at least in the typical case.
185. I am referring both to (i) the Supreme Court's decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), which held that a permanent injunction cannot automatically issue against a defendant following a finding of validity and infringement (rather, it is subject to a multifactor balancing test); and (ii) the lower court case law that has subsequently applied eBay such that direct competitors are almost always entitled to an injunction following a finding of validity and infringement whereas indirect competitors are almost always not so entitled. See Golden, supra note 138, at 2113-14. The Business Software Alliance filed a brief in the landmark Supreme Court case of eBay, Inc. v. MercExchange, L.L.C., successfully arguing against the Federal Circuit's "automatic" injunction standard in patent infringement cases. See Brief of Business Software Alliance et al. as Amici Curiae in Support of Petitioners, eBay, 547 U.S. 388 (No. 05-130).
186. See KSR Int'l Co. v. Teleflex, Inc., 550 U.S. 398 (2007) (instructing that the stringent teaching-suggestion-motivation test established by the Federal Circuit for showing obviousness was too rigid, and that courts should interpret evidence holistically to determine whether or not the subject matter of a patent was obvious, taking into account existing knowledge together with technological developments and market demand in the relevant field).
187. See In re Seagate Tech., L.L.C., 497 F.3d 1360 (Fed. Cir. 2007) (enhancing the standard by which patentholder must establish objective recklessness in order to show willful infringement, which triggers treble damages). The Business Software Alliance filed a brief urging the court to reverse the lower court's ruling that failure to seek opinion of counsel with respect to likelihood of infringement can support a finding of willful infringement. See Brief for the Business Software Alliance as Amicus Curiae Supporting Defendant-Appellant Qualcomm Inc. and Supporting the Petition for Rehearing En Banc 1-2, Broadcom Corp. v. Qualcomm, Inc., 543 F.3d 683 (Fed. Cir. 2008) (No. 2008-1199, -1271, -1272), available at http://www.appellate.net/briefs/BSA_Brief_final.pdf (last visited Sept. 5, 2009).
188. See Roger Parloff, A No-Fly Zone To Protect Linux from Patent Trolls, CNNMoney, Dec. 8, 2008, http://features.blogs.fortune.cnn.com/2008/12/08/a-no-fly-zone-to-protect-linux-from-patent-trolls. Members include IBM, Novell, NEC, Philips and Sony. Fifty companies have entered into reciprocity agreements with the Open Invention Network, including Oracle and Google. For further information, see Open Invention Network, http://www.openinventionnetwork.com (last visited Sept. 5, 2009). Nascent transactional solutions may also emerge from outside the affected population of patent holders. Most recently, the RPX Corporation, a for-profit firm, has acquired a portfolio of critical patents, which it promises not to litigate and licenses on a fixed fee basis to subscribing firms that wish to retire potentially harmful patents. See Complete Alignment of Interests Between RPX and Its Members, http://www.rpxcorp.com/svc_howitworks.html (last visited Sept. 5, 2009). Existing licensees include IBM, LG, Cisco, Philips, and Samsung. See Press Release, RPX Corporation, Eleven Technology Companies Join RPX in First Five Months (Mar. 31, 2009), http://www.rpxcorp.com/releases/current/pr_090331_customers.html. The company states that it owns over 270 patents with an "acquisition value" of $97.6 million. See RPX Corporate Fact Sheet, http://www.rpxcorp.com/facts.html (last visited Sept. 5, 2009).
189. Some intellectual property commentators take the view that strong intellectual property protections hurt both end users and small innovators. That is usually internally contradictory: the former are "net users" who rationally favor weak protections while the latter are usually "net producers" who rationally favor strong protections. Not coincidentally, the same mistaken identification of consumer and small producer interests led to persistent errors in antitrust commentary and jurisprudence over several decades. For extensive discussion of this point, see BORK, supra note 6.
190. See supra notes 31-35 and accompanying text.
191. Consistent with prior Figures, increasingly dark coloration indicates increasing propertization, and vice versa.
192. See Ben Depoorter, The Several Lives of Mickey Mouse: The Expanding Boundaries of Intellectual Property Law, 9 VA. J.L. & TECH. 1, 34-41, 47-59 (2004) (arguing that legal evolution in intellectual property regimes follows a multi-stage path consisting of a technological jump, which then prompts overprotection as sought by producers who claim underprotection under the now outdated existing regime, which in turn prompts corrective lobbying by adversely affected users who use "outlier" applications of the new regime to argue for limits on purportedly excessive protections)
193. Robert P. Merges, One Hundred Years of Solicitude: Intellectual Property Law, 1900-2000, 88 CAL. L. REV. 2187, 2190 (2000) (arguing that intellectual property evolution tends to follow a three-stage path consisting of disequilibrium induced by a technological development, case law adaptation, and legislative consolidation of an emerging consensus). For a variant of the "pendulum" view applied to industrial design protection, see J.H. Reichman, Design Protection in Domestic and Foreign Copyright Law: From the Berne Revision of 1948 to the Copyright Act of 1976, 1983 DUKE L.J. 1143, which argues that design protection follows a circular pattern where expanded copyright protection for industrial art elicits pressures in the general product market to contract copyright protection, which then elicits pressures to expand legal protections for industrial art.
194. As used herein (and following standard usage), "semiconductors market" refers to the market for integrated circuits (also known as a "chip" or "device"), which in turn generally fall into the three major categories of (i) memory components; (ii) logic devices; and (iii) integrated circuits (including microprocessors used in PCs) made of components that combine categories (i) and (ii). See Semiconductors and Related Devices, in 1 ENCYCLOPEDIA OF AMERICAN INDUSTRIES 1085, 1086 (Lynn M. Pearce ed., 4th ed. 2005). Broader definitions of the market would include semiconductor equipment and materials. For a detailed review of the market, see INTEGRATED CIRCUIT ENGINEERING CORPORATION, STATUS 1997: A REPORT ON THE INTEGRATED CIRCUIT INDUSTRY (Bill McClean ed., 1997).
195. See Global Semiconductor Alliance, Industry Data, http://www.gsaglobal.org/resources/ industrydata/facts.asp (last visited Sept. 5, 2009).
196. See JAFFE & LERNER, supra note 60, at 57. For similar observations, see DAVID P. ANGEL, RESTRUCTURING FOR INNOVATION: THE REMAKING OF THE U.S. SEMICONDUCTOR INDUSTRY 38-43 (1994); CHRISTOPHE LECUYER, MAKING SILICON VALLEY: INNOVATION AND THE GROWTH OF HIGH TECH, 1930-1970, at 253-94 (2006).
197. See Levin, Semiconductor Industry, supra note 116, at 82
198. Pamela Samuelson & Suzanne Scotchmer, The Law and Economics of Reverse Engineering, 111 YALE L.J. 1575, 1597 (2002).
199. See supra note 116 and accompanying text. It is commonly stated that the consent decrees were the "but for" reason for these "open licensing" practices. As Richard Levin shows in detail, this is arguably not the case given that these practices predated the decree and Bell Labs exceeded the decree's requirements thereafter. See Levin, supra note 116, at 76-78.
200. See ANGEL, supra note 151, at 38-39; TEECE, supra note 108, at 199-201. On historically below-market royalty rates
201. see Andrew Pollack, A Chip Maker's Profit on Patents, N.Y. TIMES, Oct. 16, 1990, at D1.
202. See Andy Grove, Churning Things Up, FORTUNE, Aug. 11, 2003, at 115. This policy was complemented by the fact that the military funded R&D contracts with private firms, who were then required to disseminate publicly some technical findings. See Levin, Semiconductor Industry, supra note 116, at 66-82.
203. Japanese (and later, Korean and Taiwanese) firms pushed U.S. firms' share of the worldwide semiconductor market from approximately 56.7% in 1982 to 42.6% in 1992 and 48.3% in 2005. See SEMICONDUCTOR INDUS. ASS'N, STATS: WORLD MARKET SALES & SHARES-1982-2005 (2006), http://www.sia-online.org/galleries/press_release_files/ shares.pdf.
204. At the time, U.S. manufacturers claimed that Japanese firms copied the circuitry layout of U.S.-developed chips, which was not subject to intellectual property protections. See Leon Radomsky, Sixteen Years After the Passage of the U.S. Semiconductor Chip Protection Act: Is International Protection Working?, 15 BERKELEY TECH. L.J. 1049, 1051-52 (2000). Some commentators attribute Japanese success principally to superior, lower-cost production methods, with little importance placed on imitation of existing technology. See ANGEL, supra note 151, at 191-92; ANDREW DICK, INDUSTRIAL POLICY & SEMICONDUCTORS: MISSING THE TARGET 54-55 (1995).
205. Semiconductor Chip Protection Act of 1984, tit. III, Pub. L. No. 98-620, 98 Stat. 3347 (codified at 17 U.S.C. §§ 901-914 (2006)).
206. 17 U.S.C. § 906(a). This exception permits reproduction of a protected mask work for purposes of "evaluating the concepts or techniques embodies in the mask work" and then incorporating the results of such analysis into a new mask work, which then in turn qualifies for protection assuming it meets the statutory originality requirement. Id.
207. For a description of reverse engineering practices at this time in the industry, see Levin, Semiconductor Industry, supra note 116, at 80-82. As a practical matter, the statute has become an underused "dead letter," largely due to certain technological advances that have frustrated third-party imitation that relies solely on reverse engineering the layout design. See Radomsky, supra note 157, at 1077-82. Others argue that it retains some residual function in facilitating licensing of "IP blocks" among "design only" firms in the industry.
208. See Jeffrey T. Macher, David C. Mowery & David A. Hodges, Reversal of Fortune? The Recovery of the U.S. Semiconductor Industry, 41 CAL. MGMT. REV. 107, 127 (1998).
209. See Lawrence M. Fisher, Patents: Aggressive Defender Branches Out, N.Y. TIMES, Jan. 25, 1992, at L38.
210. See Pollack, supra note 154 (noting that, as result of litigation, Texas Instruments was considered the "schoolyard bully of the electronics industry")
211. see also Peter C. Grindley & David J. Teece, Managing Intellectual Captial: Licensing and Cross-Licensing in Semiconductors and Electronics, in ESSAYS IN TECHNOLOGY MANAGEMENT AND POLICY 204, 213 (David J. Teece ed., 2003) (noting "outrage" in industry to TI's aggressive litigation strategy, in deviation from industry norms).
212. See Bronwyn H. Hall, Exploring the Patent Explosion, in ESSAYS IN HONOR OF EDWIN MANSFIELD: THE ECONOMICS OF R&D, INNOVATION, AND TECHNOLOGICAL CHANGE, 195, 201-02 (Albert N. Link & F.M. Scherer eds., 2005); Pollack, supra note 154, at D19.
213. See Macher et al., supra note 160, at 128; Rosemarie Ham Ziedonis & Bronwyn H. Hall, The Effects of Strengthening Patent Rights on Firms Engaged in Cumulative Innovation: Insights from the Semiconductor Industry, in 13 ENTREPRENEURIAL INPUTS AND OUTCOMES: NEW STUDIES OF ENTREPRENEURSHIP IN THE UNITED STATES 133, 144-45 (Gary D. Libecap ed., 2001).
214. Adjusted relative to R&D dollars, this rate (that is, the propensity to patent) doubled between 1982 and 1992. See Ziedonis & Hall, supra note 164, at 144-45.
215. See id. at 137, 159 (finding that firms that entered the semiconductor industry after 1982 patent more intensively than pre-1982 entrants, where 1982 is used as a "marker" for strengthened patent rights based on creation of Federal Circuit; in particular, finding that small firms are five times more likely to patent than all other firms in the sample, which excludes, however, some of the largest diversified semiconductor manufacturers); Adam B. Jaffe, The U.S. Patent System in Transition: Policy Innovation and the Innovation Process, 29 RES. POL'Y 531, 540 (2000) (stating that semiconductor patents held by small "design" firms are disproportionately the subject of patent litigation)
216. Rosemarie Ham Ziedonis, Patent Litigation in the U.S. Semiconductor Industry, in PATENTS IN THE KNOWLEDGE-BASED ECONOMY 181-82 (Wesley M. Cohen & Stephen A. Merrill eds., 2003) (finding that large vertically integrated semiconductor firms tend to cross-license patents while small design firms tend to adopt more litigious strategies).
217. See Ziedonis & Hall, supra note 164, at 142-43. "Fabless" firms now constitute roughly twenty percent of the worldwide semiconductor chip market. See Global Semiconductor Alliance, http://www.gsaglobal.org (last visited Sept. 5, 2009). For further discussion of the fabless sector and its reliance on patent rights
218. see Rajà Attia, Isabelle Davy & Roland Rizoulières, Innovative Labor and Intellectual Property Market in the Semiconductor Industry, in TECHNOLOGY AND MARKETS FOR KNOWLEDGE: KNOWLEDGE CREATION, DIFFUSION, AND EXCHANGE WITHIN A GROWING ECONOMY 137 (Bernard Guilhon ed., 2001).
219. See Attia et al., supra note 168, at 165-67.
220. See Bronwyn H. Hall & Rosemarie Ham Ziedonis, An Empirical Analysis of Patent Litigation in the Semiconductor Industry 14-16 (Jan. 2007) (unpublished manuscript, on file with author); see also Allison et al., supra note 115, at 446, 472 (noting that patents in the seminconductor industry are less likely to be litigated than those in other industries); Allison et al., supra note 138, at 25-27 (finding that semiconductor patents are a minor percentage of two datasets, which consisted of one dataset consisting of every patent that has been litigated eight times or more during 2000-2007 and one randomly selected control set of patents that had been litigated once during that same period).
221. See ANGEL, supra note 151, at 3, 85-86; Macher et al., supra note 160, at 120.
222. See TEECE, supra note 108, at app. A; John H. Barton, Antitrust Treatment of Oligopolies with Mutually Blocking Patent Portfolios, 69 ANTITRUST L. J. 851 (2001); Grindley & Teece, supra note 162
223. see also Bronwyn H. Hall & Rosemarie Ham Ziedonis, The Patent Paradox Revisited: An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995, 32 RAND J. ECON. 101, 125 (2001) (finding that large firms appear to expand patent portfolios largely for the defensive purpose of preventing holdup or infringement claims by rivals holding potentially overlapping patents); Moore, supra note 27, at 1544-45 (finding that semiconductor patents show high renewal rates based on all patents issued in 1991, but noting that based on other results, semiconductor patents are infrequently litigated relative to other industries, and concluding that these findings together suggest that semiconductor patents are primarily used as trading currency for cross-licensing purposes).
224. See Semiconductor Industry Association, Industry Fact Sheet, http://www.siaonline. org/cs/industry_resources/industry_fact_sheet (last visited Sept. 5, 2009).
225. See International Technology Roadmap for Semiconductors, http://www.itrs.net (last visited Sept. 5, 2009).
226. For further information, see ASHISH ARORA, ANDREA FOSFURI & ALFONSO GAMBARDELLA, MARKETS FOR TECHNOLOGY: THE ECONOMICS OF INNOVATION AND CORPORATE STRATEGY 257-58 (2001); and Attia et al., supra note 168, at 164-65.
227. For discussions of this organization, see LARRY D. BROWNING & JUDY C. SHETLER, SEMATECH: SAVING THE U.S. SEMICONDUCTOR INDUSTRY (2000)
228. Larry D. Browning, Janice M. Beyer & Judy C. Shetier, Building Cooperation in a Competitive Industry: SEMATECH and the Semiconductor Industry, 38 ACAD. MGMT. J. 113 (1995)
229. Rose Marie Ham, Greg Linden & Melissa M. Appleyard, The Evolving Role of Semiconductor Consortia in the United States and Japan, 41 CAL. MGMT. REV. 137 (1998).
230. See SEMATECH INC., 2007-A YEAR IN REVIEW 3 (2008), http://www.sematech.org/corporate/annual/annual07.pdf. Contributions from 1987-1996 consisted of $850 million in dues from members and a matching amount in federal funding. See Ham et al., supra note 176, at 149. Federal funding ceased in 1996. Id. Note that smaller firms generally do not participate in SEMATECH due to its capped fixed-fee schedule (one percent of annual revenues, subject to a minimum of one million dollars and a maximum of fifteen million dollars), which yields amounts that may be manageable in absolute terms for an industry leader but exorbitant for a small entrant. See Douglas A. Irwin & Peter J. Klenow, Sematech: Purpose and Performance, 93 NAT'L. ACAD. SCI. USA 12,739, 12,740 (1996).
231. See BROWNING & SHETLER, supra note 176, at 107-08; Ham et al., supra note 176, at 143-44. A General Accounting Office report notes that consortium members state that SEMATECH has successfully shifted the industry from a "competitive, arms-length relationship between semiconductor manufacturers and their suppliers toward a culture that establishes longterm relationships between semiconductor manufacturers and their suppliers." U.S. GEN. ACCOUNTING OFFICE, FEDERAL RESEARCH: SEMATECH'S TECHNOLOGICAL PROGRESS AND PROPOSED R&D PROGRAM 8 (1992), http://archive.gao.gov/d33t10/147343.pdf. Other observers are less sanguine concerning the performance of SEMATECH, arguing that it failed to achieve its objectives of improving industry profitability, generated few new innovations, and abandoned its cooperative research mission for "bail-out" investments in distressed equipment manufacturers. See DICK, supra note 157, at 65-70.
232. There is no single history of the complex and multiple litigations pursued by Rambus against most of the leading integrated chip manufacturers (and the various countersuits filed in response). For a summary overview, see Rambus-Wikipedia, http://en.wikipedia.org/wiki/Rambus (last visited Sept. 5, 2009). For all motions, filings, and orders in the various proceedings, see Rambus Litigation Update, http://investor.rambus.com/litigation.cfm?CategoryID=779 (last visited Sept. 5, 2009).
233. Note that, for presentation purposes, this Figure does not illustrate (i) "involuntary" knowledge spillovers to small-firm nonmembers from some cooperative ventures funded by large-firm members, and (ii) the use by some vertically integrated manufacturers of "foundries" for manufacturing capacity and "chipless" firms as sources of design components. For more detailed discussion of the latter phenomenon, see Attia et al., supra note 168, at 165-66.