PATENTS, PRIZES, AND PROPERTY.

• Author: Sichelman, Ted
• Position: Symposium: Intellectual Property and the New Private Law

TABLE OF CONTENTS I. INTRODUCTION 279 II. STATIC AND DYNAMIC INTERVENTIONS IN INTELLECTUAL PROPERTY 284 A. The Static-Dynamic Divide in the Patent-Prizes Debate 285 B. The Power of Property Rules in Patent Law 290 III. FROM REGULATION TO "PROPERTY" IN PATENT LAW 294 IV. CONCLUSION 297 I. INTRODUCTION

The standard conception of a patent is that of a property right that allows its holder to exclude potential competitors in order for the holder to price its patented goods above the competitive rate so as to generate above-market profits that ostensibly induce inventive activity. (1) On this view, society countenances the deadweight losses of exclusionary rights in return for the fruits of innovation. (2) In contrast to this view of patents is the traditional conception of prizes--namely, rewards provided by the State or a third party in return for a suitably completed invention. (3) Unlike patents, once the inventor is paid via a prize, the invention is placed into the public domain and, on the traditional view, is available for all to consume absent deadweight losses. (4) In simpler terms, patents sound in private law and the conceptions of tort, contract, and property. (5) Prizes sound in public law and the conceptions of regulation and state subsidy. (6)

Several scholars have recently cast considerable doubt on the starkness of this dichotomy between patents and prizes. (7) For example, in Beyond the Patents-Prizes Debate, Professors Daniel Hemel and Lisa Ouellette reconceive patents and prizes as complementary components of a larger selection of incentives for innovation, such as research grants and tax credits. (8) In so doing, they provide a variety of examples of how prizes could be structured so as to perform the major functions of patents. (9) For instance, noting the oft-stated view of economists that patents are inherently superior to prizes because they draw only on users of the patented invention, Hemel and Ouellette explain that government funding for a prize may derive from a sales tax imposed on consumers of a particular innovative product--mimicking the "user-pays" feature of a patent system. (10) Specifically, such a sales tax would raise the price on an otherwise non-patented product exactly to the level necessary to incentivize the innovator to produce the product. (11) If we assume the patent system is precisely calibrated--so that it awards neither too little nor too much to the innovator--then with a sales tax-driven prize, those consumers who could not purchase the product under the supracompetitive prices of the patent system are precisely the same consumers priced-out of the ostensibly "competitive" market under a prize system. (12)

In Intellectual Property versus Prizes: Reframing the Debate, (13) Professor Benjamin Roin further explores the insightful analysis of Hemel and Ouellette. (14) Specifically, he contends that the State may implement a host of measures alongside patents--such as subsidies, tax credits, and price controls--in order to effectively reduce the consumer deadweight losses imposed by patents. (15) At the same time, like Hemel and Ouellette, he recognizes that because prizes--at least those offered by the State--must be funded by the taxpayers, they too impose deadweight losses. (16) Moreover, when prizes are calculated based on sales figures of a completed invention, for a variety of complex reasons--particularly a seller's incentive to price below marginal cost so as to increase sales--further deadweight losses may result. (17)

For these and other reasons, Roin persuasively concludes that the seemingly stark differences between patents and prizes may sometimes evaporate in practice. (Hemel and Ouellette implicitly make a similar point.) I term this the "patent-prize fungibility thesis." (18) In this regard, as I explain below, the institutional choice between patents and prizes may ultimately be less one of deadweight losses than of minimizing transaction and error costs in implementation. (19) In particular, because patents' deadweight losses may be tempered by subsidies, credits, and other supplements, the main issue becomes whether a patent or prize system is better at generating incentives for--and reducing the costs of--creating, propagating, and commercializing technological inventions. (20)

According to Roin--and consistent with Hemel and Ouellette's "complements" view--governments implement patents and prizes alongside one another in order to promote innovation. (21) Nonetheless, Roin identifies a residual function of patents--their ability to exclude competitors via a property rule (i.e., injunctive relief) from making and selling the invention--as providing innovation benefits beyond those of prizes. (22) Specifically, Roin points to the use of patents by "big pharma" companies to renegotiate drug payment structures with governments that fully set drug prices--essentially providing prizes--as an example of how patents can play an important role even when they have no direct effect on pricing. (23) In Roin's view, because a big pharma company can wield a patent as a club to credibly threaten that neither it nor any third party will produce the drug, governments must sit at the bargaining table with the company and negotiate in good faith. (24) As such, Roin ultimately rejects the patent-prize fungibility thesis, but not on the usual ground that government and market-based mechanisms for "pricing" innovation diverge in accuracy. (25)

This Article contributes to the literature in two main respects. First, I extend Roin's analysis to suggest that the property-rule aspect of patents provides benefits beyond those stemming from mere negotiation with governments-as-payors to more broadly engender greater commercialization incentives than under a prize system. (26) Second, although property rules may distinguish patents from prizes in practice, I contend that the fungibility thesis nonetheless helps to legitimate an important theoretical claim about patents: like prizes, patents--despite often being effectuated via private law means--aim to achieve essentially regulatory, public-oriented goals. (27)

Part II critiques the patent-prize fungibility thesis on broader grounds than previous scholars. Although in static equilibrium patents and prizes may converge, I explain this is not so in dynamic equilibrium, even theoretically. (28) In particular, patents can impede downstream innovation, but unlike consumer deadweight losses, (29) governments typically cannot alleviate these dynamic deadweight losses without effectively eliminating property-rule enforcement of patent rights. (30) This inability, however, is not necessarily suboptimal, as it provides the patentholder greater control over its invention--and thus greater incentives to commercialize and perfect the invention--than in a pure prize system. (31) Relatedly, greater patentee control over third-party uses can reduce transaction costs in transforming an invention into a fully commercialized product. (32) Indeed, the reason governments allow inventors, particularly pharmaceutical firms, to retain their patents in the face of substantial price regulation may be more related to coordinating future innovation and commercialization than the ability of the patentholder to renegotiate payment. (33)

In Part III, I situate the patent-prize fungibility thesis within the larger sphere of the property-regulation debate in intellectual property. Drawing upon my contention in a recent article that patents are primarily designed to promote public, regulatory aims, (34) I test this claim in the context of the fungibility thesis. (35) Specifically, Hemel and Ouellette's, and Roin's insight that patents can be complemented by a host of government practices that effect a convergence of patents and prizes--and their related finding that prizes may impose deadweight losses much in the manner of patents--is further evidence that patents, along with other government interventions to spur innovation, should generally be treated as regulatory tools, rather than a pure species of traditional property. (36) Nonetheless, the private-law features of patents may often in practice best serve the social aims of promoting innovation. (37)

2. STATIC AND DYNAMIC INTERVENTIONS IN INTELLECTUAL PROPERTY

   Patents lead to two fairly distinct types of inefficiencies: static and dynamic. (38) Static inefficiencies generally result when a patent confers market power sufficient for a seller of patented goods or services to set prices higher than that it could in an otherwise competitive market. (39) Specifically, these supernormal prices prevent some consumers who would have purchased the good in a competitive market to be priced out, leading to consumer deadweight losses. (40) The tradeoff for this static inefficiency is that patents often induce innovation by preventing others from making, using, or selling the same or similar invention. (41)

   Dynamic inefficiencies occur when patentholders have the power to prevent or raise the costs of follow-on innovators and commercializers who would like to improve a patented invention or perfect it so as to transform it into a viable commercial product or service. (42) Unlike static inefficiencies, which occur within the equilibrium of the traditional producer-consumer supply-demand curve of microeconomics, dynamic inefficiencies result because of transaction costs in the evolution of an invention throughout the course of its innovation life cycle. (43) Dynamic inefficiencies affect not merely the inducement patents provide to the patentee to improve and commercialize its invention, but also the patentee's control over the nature and scope of any third-party activity regarding the invention. (44)

   Although Roin convincingly dispels the seemingly stark choice between patents and prizes in the context of static inefficiencies, he does not do so with respect to dynamic inefficiencies. (45)...