More Property Rules Than Property? the Right to Exclude in Patent and Copyright

• Publication year: 2019

More Property Rules than Property? The Right to Exclude in Patent and Copyright

BJ Ard

MORE PROPERTY RULES THAN PROPERTY? THE RIGHT TO EXCLUDE IN PATENT AND COPYRIGHT

BJ Ard^*

Abstract

Patent and copyright rely more consistently on property rules than property law itself. While IP law is intended to enhance intellectual production, the property-rule remedies of injunctive relief and punitive damages sometimes conflict with this goal. In particular, these remedies may dampen innovation by imposing unjustified costs on unwitting infringers and allowing opportunists to hold up projects that implicate several parties' rights. Both problems could be ameliorated by strategic deployment of liability rules, and the law of tangible property demonstrates how this strategy might work. While we might assume that the law protects tangible property with property rules, closer scrutiny shows that courts and lawmakers use liability rules to deal with unintentional trespasses and to circumvent holdout problems involving real property.

This analysis yields three payoffs. First, it develops the novel and counterintuitive argument that IP deploys property rules in many circumstances where property law would use liability rules. This arrangement is backwards because the greater notice failures, inexhaustibility, and importance of building on others' work inherent to intellectual production counsel in favor of liability rules. Second, it grounds the theoretical debate over the use of property rules versus liability rules in IP in real property doctrine, where courts and lawmakers have taken the pragmatic approach of structuring entitlements to facilitate economic progress. Finally, it identifies ways the choice of remedies could serve as a concrete policy lever to address issues in IP: (1) IP law could correct notice failures by creating a "reasonable search defense"?eliminating property-rule protection in cases of accidental infringement?to encourage users to search and owners to publicize their claims; (2) courts could defuse holdout strategies by denying property-rule protection to IP owners who refused

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to bargain in good faith; and (3) the state could pursue important policy objectives by employing?or threatening to employ?its authority to enact compulsory licenses.

Introduction.............................................................................................687

I. Property Rules Versus Liability Rules....................................693

A. The Case for Property Rules in IP............................................ 695
B. The Case for Liability Rules in IP ............................................ 697
C. Breaking the Impasse ............................................................... 699

II. Liability Rules for Tangible Property.....................................700

A. Negligent Trespass ................................................................... 700
B. Unintentional Encroachment.................................................... 701
C. Necessity ................................................................................... 703
D. Nuisance ................................................................................... 704
E. State-Authorized Takings .......................................................... 705

III. Property Rules in Patent.............................................................707

A. Injunctions Post-eBay .............................................................. 707
B. "Reasonable Royalty" Damages.............................................. 709

IV. Property Rules in Copyright......................................................712

A. Statutory Damages Are Mandatory.......................................... 712
B. Exceptions ................................................................................ 714

1. Fair Use.............................................................................. 714
2. Industry-Specific Exceptions .............................................. 716

V. The Case for Property Rules Is Stronger for Real Property than IP .............................................................................................718

A. Real Property's Pluralistic Normative Foundations ................ 718
B. Notice Failures ......................................................................... 720
C. Inexhaustibility ......................................................................... 722
D. Cumulative Intellectual Production .......................................... 724
E. Counterarguments .................................................................... 725

VI. Beyond Property Rhetoric..........................................................727

A. Balancing Rights to Promote Progress .................................... 728
B. Remedial Choices as Policy Levers .......................................... 730

1. Defusing Notice Failures via Reasonable Search Defense . 730
2. Defusing Holdups via Limited Compulsory Licensing ........732
3. Non-Market Rate Compulsory Licenses ..............................733

C. Barriers to Reform ..................................................................... 735

Conclusion.................................................................................................737

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Introduction

Patent and copyright law rely predominantly on property rules rather than liability rules.¹ While this may not seem surprising for areas of law designated as "intellectual property" (IP), it turns out that copyright and patent rely more consistently on property rules than property law itself. In designating strong rights to exclude as "property rules," Guido Calabresi and Douglas Melamed evoked the high level of protection the law provides over ownership of tangible things, especially real property.² The law of real property nonetheless draws on the weaker protection of liability rules in many situations. These departures from property-rule protection allow for remedial flexibility in cases where the injunctive relief and punitive damages authorized under a property rule would seem disproportionate to the defendant's culpability or create conditions for opportunism and market failure.

Neither patent nor copyright provides courts the same leeway in fashioning remedies. Yet issues of culpability and market failure create problems for the application of property rules in IP disputes just as they do for real property. Proponents of property-rule protection in patent and copyright might argue that these strong remedies are appropriate because they further the utilitarian goal of bolstering ex ante incentives for investment in intellectual production.³ This answer is unsatisfying, however, in circumstances where inflexible deployment of property rules does not bolster intellectual production but instead creates problems for the creation and distribution of new intellectual works.

Property rules may be counterproductive, for example, in situations of notice failure?circumstances where parties unwittingly infringe because the patent and copyright systems provide inadequate notice of IP owners' rights.⁴ Consider

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first how these problems arise with respect to patented inventions. Independent invention is not a defense against patent infringement.⁵ This means that an independent inventor commits patent infringement even if?through original research?she develops a product that inadvertently embodies someone else's patent. The defendant's factual ignorance of the patent provides no defense even if she can prove that she searched exhaustively for conflicting patents and found none.⁶ Indeed, the defendant remains liable for infringement even if the patent would be impossible to find at the time of the search. Inventors often face this risk in emerging technology markets due to the confidentiality of patent applications. Prior to 2001, the Patent and Trademark Office (PTO) held patent applications in confidence until they were granted; even now it holds patent applications in confidence for eighteen months after filing.⁷ This is no trivial concern. Research in Motion (RIM)?manufacturer of the Blackberry?was nearly put out of business by a patent whose application was still confidential at the time RIM began raising capital.⁸ The patentee ultimately pushed RIM to settle for $612.5 million to avert the risk of injunctive relief.⁹

Consider also the risk of unwitting infringement that consumers face in their everyday interactions with digital works. Routine activities such as browsing the Internet, forwarding emails, and running cloud software create "copies" for purposes of the Copyright Act.¹⁰ These acts of copying may or may not constitute infringement depending on a range of context-specific factors that are difficult even for legal experts to evaluate.¹¹ Similar problems are on the horizon

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in patent as new technologies like 3D printing make it possible for home users to share and replicate patented inventions.¹²

Using property rules to penalize inventors and users for acts they do not know are infringing does little to advance the property-rule goal of channeling these users into market transactions.¹³ Instead, they impose a set of additional costs?including search costs and the latent risk of injunctive relief or punitive damages?that take a toll on both inventive effort and the public's engagement with new works and inventions. Property rules may further weaken the market by encouraging opportunistic IP owners to obscure their rights in hopes of suing unwitting parties for infringement damages well above what they could have demanded in licensing royalties.¹⁴ This is the strategy that so-called patent trolls exploit when they amass a portfolio of patents and then lie in wait hoping to sue an unwitting infringer.¹⁵

The problems posed by overuse of property rules, moreover, are not limited to circumstances of notice failure. Property rules may also exacerbate the...