Property as process: how innovation markets select innovation regimes.

Author:Barnett, Jonathan M.

ARTICLE CONTENTS INTRODUCTION I. INTELLECTUAL PROPERTY AS REGIME SELECTION A. Effective Propertization B. Graduated Propertization C. Propertization Theses (or Demsetz Meets Marx Meets Coase) II. ERRORS AND CORRECTIONS ON THE REGIME PATH A. Falling into the Property Trap B. Escaping the Property Trap 1. Direct Truncation 2. Indirect Truncation C. Why "Too Much" Property Often Does Not Last III. REGIME SELECTION IN PRACTICE A. Regime Template B. Case Study: Regime Selection in the Semiconductor Industry 1. Property at Bay (c. 1956-1982) 2. Property Unleashed (c. 1982-1988) 3. Property Constrained (c. 1988-present) 4. End Result: Regime Bifurcation CONCLUSION INTRODUCTION

If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it. (1) In 1958, in the midst of public debate over the patent system, economist Fritz Machlup delivered the above "non-opinion" to a Senate subcommittee, disclaiming any definitive knowledge concerning whether or not the patent system is a socially desirable institution. Just over fifty years later, a similar public debate over the intellectual property system proceeds in the Supreme Court, which has taken a renewed interest in patent jurisprudence; Congress, which has been deliberating substantial reforms to the patent statutes; and other policymaking, judicial, and scholarly venues. While we certainly have a considerably improved theoretical and empirical understanding on localized points of interest, it is probably uncontroversial among most economically informed observers that Machlup's qualified statement still characterizes our current understanding of the net social value of the intellectual property system as a general matter. (2) Despite this indeterminacy, contemporary legal and scholarly commentary widely asserts that intellectual property coverage has expanded excessively, especially in recently propertized markets that lie at the heart of a knowledge-based economy: business and financial methods, software, semiconductors, and biotechnology. (3) This often-dramatic commentary--which I refer to globally as the "too much property" thesis--warns that a formerly unfettered exchange of ideas has been stifled by a thicket of intellectual property that on the whole impedes, rather than facilitates, technological progress or artistic creativity. But empirics have yet to track rhetoric: the too much property thesis has yet to be supported or denied by definitive evidence (4) and, more generally, stands in uncomfortable contrast with the continuing innovative vigor of the markets where intellectual property thickets are usually claimed to be most intense.

In this Article, I take this empirical uncertainty as an analytical given. I start from the agnostic assumption that we do not have sufficiently reliable information or sufficiently sensitive tools to ascertain whether there is excessive intellectual property protection in any innovation markets at any given time. Contrary to the normative mode of most intellectual property scholarship, I therefore maintain strict neutrality throughout as to the socially desirable level of effective property rights coverage--what I call the "propertization outcome"--in any field of technological or cultural innovation. Explicit and consistent recognition of our limited knowledge opens the door to an alternative line of inquiry. In place of the "substance" question as to whether or not any given propertization outcome is excessive, I ask a "process" question: can the market assess if any propertization outcome is excessive and then undertake actions to move toward a socially preferable alternative outcome? Even if we cannot reliably assess whether or not intellectual property coverage in any given market is excessive, it may be possible to arrive at a reasonable approximation of this unknown datum indirectly by assessing whether the conditions under which coverage is effectively determined are likely to yield and tolerate excessive propertization levels. This approximates standard methodology in antitrust law, where regulators, courts, and scholars indirectly assess claims of anticompetitive conduct by assessing whether conditions exist that would tolerate and preserve inefficient pricing, rather than assessing whether existing pricing is inefficient. (6) So too intellectual property scholars may be able to indirectly assess claims of overpropertization by assessing whether conditions exist that would tolerate and preserve overpropertization outcomes, rather than assessing whether existing propertization outcomes are excessive.

To put this process-based approach into operation, I adopt three foundational assumptions. First, I assume that more or less propertization always involves a tradeoff between innovation gains (which require "more IP") and transaction cost losses, including all related social losses in the form of frustrated subsequent innovation (which require "less IP"). (7) This implies a simple social cost-benefit test for any propertization outcome: it must yield innovation gains in excess of transaction cost losses. Otherwise, it is excessive consistent with the various formulations of the too much property thesis. Second, in lieu of the top-down approach inherent to legal scholarship where formal actions by the state determine the extant level of intellectual property coverage, I adopt the bottom-up approach of the new institutional economics literature, (8) where private-market investments are the primary factor in eliciting formal issuance of property entitlements. These investments then determine the effective strength of any issued entitlements through adoption and enforcement actions as well as a wide range of transactional arrangements for exchanging and distributing those entitlements. This methodological turn critically reframes entitlement strength as a moving variable linked to dollar investments by entitlement holders: that is, the strength of any intellectual property entitlement is a continuous function of its formal content plus the expenditures made to fund the costly actions required to implement it. Third, I suppose that these market expenditures then select propertization outcomes that can be situated along a graduated path of innovation regimes, which is bounded by the conventional alternatives of property and commons but comprises in its intermediate region a rich variety of limited-access property regimes--what I refer to globally as "sharing regimes"--where some, but not all, relevant innovation assets are eligible for property rights protection.

This analytical framework supports this Article's primary exercise: to identify the conditions under which privately interested innovator populations likely will, and will not, have the incentives and capacities to undertake lobbying, adoption, enforcement, and other actions that select socially interested points along the regime path, each of which implements some tradeoff between innovation gains and transaction cost losses. Put slightly differently: is the market likely to make a mistake as it selects among innovation regimes and, if so, can we anticipate the direction of any such mistake? To formulate a meaningful response, I focus on stylized movements between two broadly defined regions on the regime path: (i) a property regime where innovation assets are substantially protected by property rights and (ii) a sharing regime where innovation assets are substantially unprotected by property rights. This theoretical exercise yields a property trap scenario where the market is inherently likely to get it wrong. The underlying mechanism is straightforward: as a result of negative externalities generated by innovators who exit a sharing regime for a newly introduced property regime, an innovation market is prone to move "too quickly" in abandoning the low transaction cost structure of a sharing regime, resulting in a net social loss consistent with the too much property thesis. Faced with increasing litigation risk from potential infringement claims and increasing input costs from a declining innovation pool, each innovator rationally defects to the property regime even if it would elect otherwise if sufficient coordination could be achieved to control outward migration. This property trap thesis supplies an economic rationale for the widely expressed intuition that there seems to be too much intellectual property. But there is a key difference: the property trap thesis identifies the predicate conditions under which the market is likely to tolerate an excessive propertization outcome and does not directly take any view as to whether propertization levels in any particular market are excessive. Where those conditions are not satisfied, there is a substantially reduced likelihood that excessive intellectual property coverage would be tolerated by the relevant market, in which case, at some reasonable level of certainty, we can indirectly take the view that existing propertization outcomes are either not excessive or, if excessive, are likely to be cured by market action within some reasonable period of time.

Building in part on established lessons from the public choice literature on the rationally self-interested processes that drive policy outcomes, (9) 1 argue that markets are likely to resist and correct overpropertization--that is, the property trap is likely to be broken--where two conditions are substantially satisfied. First, it must be the case that adversely affected innovators are neither clearly net users nor clearly net producers of the relevant pool of intellectual goods, which is likely to be true in any market that relies on cumulative innovation--that is, a sequence of related first-mover and n-mover...

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