PRIVATE LAW AND THE FUTURE OF PATENTS.

• Author: Liivak, Oskar
• Position: Symposium: Intellectual Property and the New Private Law

1. INTRODUCTION 33 II. PRIVATE LAW: DEFINING DUTIES THAT WE CAN AND DO OBEY 36 A. Can We Obey 37 B. Do We Obey 38 III. PATENT LAW IS NOT PRIVATE LAW 41 A. Subsidy Reward Theory 41 B. Inability to Understand Our Duties 42 C. No Reason to Feel Obligated to Obey Duties 45 D. Judges and an Internal View of the Patent System 47 IV. EX ANTE TRANSACTIONS: A PRIVATE LAW ALTERNATIVE 48 A. Ex Ante Technology Transfer 48 B. Private Law & Ex Ante Licensing of Inventions 50 V. CONCLUSION 52 I. INTRODUCTION

   It is hard to find a silver lining in the recent press clippings about the patent system. Descriptors such as "failure," "broken," and "crisis" abound. (1) One line of criticism led by economists James Bessen and Michael Meurer has focused on the overall cost of the patent system for patent holders--the one group that should surely benefit from the system. (2) They found that, even for that group, patents as a whole cost more to acquire, litigate, and defend against than the benefits they generate for the patent holders. (3) In theory, the system is envisaged as a kind of subsidy for inventors, yet in operation, the patent system as a whole is a losing proposition even for the intended recipients. (4) The costs are so high, Bessen and Meurer argue, because patent boundaries are imprecisely drawn--forcing patentees into expensive, drawn-out litigation. (5) Patents fail to function as traditional property. (6) These costs are a fatal drag on the system that, on average, burn through any of the revenues it generates. (7) Bessen and Meurer propose improving the precision of patent claims in the hope that this will reduce these costs. (8) Surely this will be an important incremental improvement. (9) But there remains a nagging worry. Will it be enough? I doubt it. Any legal institution that depends heavily upon litigation and its direct coercion is doomed to incur excessive administrative costs. (10) There is a more fundamental problem.

   Where alarm over excessive enforcement costs arises, as it currently does in patent law, (11) serious consideration and study should be given to private law. Private law shows that not all legal institutions have to bankrupt themselves with enforcement costs. (12) Property, tort, and contract law all entail intricate webs of interpersonal coordination and interaction that thrive and endure while needing only a relatively light judicial touch. (13) For the most part, these institutions are self-enforcing. The stakeholders participating in these institutions know their rights and their duties, and they largely abide by them. (14) Constituents abide not from fear of punishment; rather, they feel an obligation to abide because compliance in some sense is just the right thing to do. With that acceptance, the enforcement costs can be much lower. (15) unfortunately, patent law faces a serious obstacle blocking access to these efficiencies. Recent patent scholarship by Professor Ted Sichelman has highlighted that the dominant theory of patents isn't readily compatible with private law. (16) The dominant theory envisions patents as a subsidy for encouraging inventing by giving patentees a government reward funded by a tax on anyone who infringes the exclusive rights granted by the patent. The theoretical focus is not a private law-like purpose of preventing or compensating harms. Rather, the theoretical focus is a "public regulatory" aim of optimizing inventive activity. (17) Sichelman's work joins and expands on a long-running debate within patent law: should patents be considered, labeled, or understood as property? (18) Many believe that they should. (19) others disagree, seeing patents more as a form of government intervention that should be divorced from notions of property. (20) Sichelman argues that there is "nearly universal" agreement that the dominant subsidy view of patents is correct and that the theory is not structured as a private law institution. (21) He argues that this requires "purging" any residual private law elements from the patent system. (22) As argued below, I wholly agree that the dominant patent theory is incompatible with private law. Indeed one must yield. Yet our agreement on incompatibility does not compel the prescription to rid patents of private law. There is an alternative; agreement about the correctness of the dominant theory is not universal. We should instead jettison the dominant theory, and we should adopt a private-law compatible theory for patents. (23)

   There is an alternative theory that could fill this role. Scholars have been developing a transaction-based theory focusing on the commercialization and transfer of technology. (24) That theory has the potential to pave the way for a patent system that can become private law. The aim is not to ensure a reward or to induce people to invent. Rather, the system simply defines the behavioral expectations among participants in the innovation sphere. In particular, it defines the duties owed by technology producers and users to other producers and users. The purpose of the system is the efficient and coordinated transfer of technology. Importantly, that role is not limited to the courthouse or its shadow. This narrative is not just about imposing a tax on infringers. Instead, the theory defines expectations of beneficial innovative behavior out in the business world. Such a theory has many advantages. It could provide for a system that optimally allocates resources to innovative activity. (25) In addition, and critically for this Article, the theory has another great advantage over today's reward subsidy theory. It has the hallmarks of private law and as such it could provide the foundation for maturing the patent system into an accepted and stable institution where participants largely govern themselves.

   This argument proceeds in three sections. The first reviews some of the central features of private law that enable institutions like property and tort to operate without extensive, chronic judicial coercion. The next section proceeds to the dominant patent theory and shows that its incentive-centric framework is incompatible with private law. The final section points to the emerging transaction-based understanding of the patent system that focuses on ex ante transfer of technology and shows how it is built around fundamental features of private law.

2. PRIVATE LAW: DEFINING DUTIES THAT WE CAN AND DO OBEY

   Private law achieves its low system cost via widespread self-enforcement. (26) Institutions like property, contract and tort have significant efficiencies because, for the most part, people comply with the duties imposed by these legal regimes. (27) This high level of self-compliance is a hallmark of private law and central to its smooth functioning. (28) Two conditions are paramount to achieving this. Constituents must be able to understand their duties. (29) And, just as importantly, they must actually comply with their duties. (30) The first feature is a matter of deliberate, careful system design while the latter is ultimately an empirical observation of the system in operation. If we are interested in designing an efficient, smoothly operating legal system, then both conditions should be primary concerns.

   1. Can We Obey

      The first condition, whether people can comprehend their duties, has been a focus of work by Professor Henry Smith. (31) Smith argues that information costs play a significant role in defining the contours of legal institutions, especially property. More recently, Smith has been extending that line of research by focusing on the efficiencies of using modular system design. (32)

      Any real human institution entails a vast set of context-dependent interactions between actors. In theory, we might structure the rules of these institutions by giving each person a full list of their duties owed toward every other person that accounts for the myriad ways we might interact with others. (33) But we do not structure most legal institutions in this way because it would be "impossibly complex and costly" to provide such a listing. (34) There are too many choices and too many details to possibly be within our cognitive capacities. (35) Instead, Smith argues that we can achieve the impossible by intelligently developing rules that are much simpler to deploy but which largely reach the same results (even if indirectly) as those attained by the more complete case-by-case analysis. (36) Through this modular design, actors have a simpler set of rules that are within their cognitive capacities. (37) For example, property simplifies its content and thereby makes its rules comprehensible by centering them around the res, the thing of property, and by generally having rules that prevent others from interfering with the property owner's wishes as to the disposition of the res. (38)

   2. Do We Obey

      That we are capable of understanding and complying with rules is an important and necessary condition of self-enforcement, yet it is largely meaningless unless we actually obey. Private law institutions have an advantage here because these areas of law have managed to be imbued with an aura that their rules and duties ought to be obeyed by the general public.

      These areas of private law achieve compliance in part because their duties are infused with a type of morality. (39) And, buoyed by these general feelings that we have an obligation to obey them, such institutions will be cheaper to run compared to an institution where every interaction requires reliance on costly litigation. These obligations are not necessarily attached to any preexisting moral code, though such piggybacking can make rule comprehension easier. (40) Instead, successful private law institutions define their own codes. (41)

      These successful private law institutions have constituents who have adopted what Professor H. L. A. Hart described as the internal point of view of the institution and its rules. (42) In Hart's view, for someone who takes...