Reinventing copyright and patent.

Author:Bell, Abraham

Intellectual property systems all over the world are modeled on a one-size-fits-all principle. However important or unimportant, inventions and original works receive the same scope of protection, for the same period of time, backed by the same variety of legal remedies. Essentially, all intellectual property is equal under the law. This equality comes at a heavy price, however. The equality principle gives all creators access to the same remedies, even when those remedies create perverse litigation incentives. Moreover, society overpays for innovation through more monopoly losses than are strictly necessary to incentivize production.

In this Article, we propose a solution for these problems in the form of a self-tailored system of intellectual property rights. This self-tailored system would allow inventors and creators to select the optimal type and scope of protection for their intellectual property. Working from the bottom up, our self-tailored system would give each innovator a basic package of intellectual property rights and enforcement powers and then allow her to add more rights and legal remedies in exchange for a fee.

Our self-tailored system would reduce wasteful litigation while encouraging wider dissemination and more extensive use of inventions and expressive works. In addition, our proposal would lower the social cost of granting monopoly protection to intellectual goods while maintaining an adequate level of economic incentives to create. Accordingly, our self-tailored system would constitute a marked improvement over the extant one-size-fits-all design of intellectual property rights.

Unlike other proposals for reform, which often seek to improve access to expressive works and inventions through compulsory licenses and other coercive policies, our model is purely voluntary. It respects authors' and inventors' autonomy and uses market mechanisms--specifically, pricing--to recalibrate our intellectual property system in a way that improves societal well-being.

Table of Contents INTRODUCTION I. THE ONE-SIZE-FITS-ALL DESIGN OF THE INTELLECTUAL PROPERTY SYSTEM A. Uniformity and Its Costs 1. Anticompetitive Effects 2. Dispute-Resolution Costs B. Arguments in Favor of Uniformity 1. Administrative Costs 2. Considerations of Political Economy 3. Information Costs II. A SELF-TAILORED SYSTEM OF INTELLECTUAL PROPERTY PROTECTION A. An Overview of Patent and Copyright B. The Mechanics of Self-Tailored Rights C. Tailoring Patent and Copyright D. Optimizing Packages E. Pricing Packages III. IMPLICATIONS OF SELF-TAILORED INTELLECTUAL PROPERTY RIGHTS A. Incentives of the Self-Tailored System B. Litigation, "Trolling," and the Self-Tailored System C. Other Benefits of the Self-Tailored System IV. POTENTIAL OBJECTIONS A. Administrative Costs B. Private Ordering C. Tailoring Rights by Industry D. Owners' Inability to Value Their Rights CONCLUSION INTRODUCTION

Intellectual property systems all over the world are modeled on a one-size-fits-all principle. Under current patent law, for instance, an invention that meets the patentability criteria is entitled to protection of the law for a specified period. (1) Big inventions or small inventions, valuable inventions or worthless inventions--all receive the same scope of protection, and the same variety of legal remedies, for the same period of time. Essentially, all inventions are equal under the law.

While one size fits all is easy to administer, it generates two kinds of problems for the patent system. First, the equality principle gives all creators access to the same remedies, even when those remedies create perverse incentives. Scholarly literature has focused on the phenomenon of "patent trolls"--patent holders who have no interest in marketing or manufacturing their inventions but simply wait for apparent breaches of the patent in order to sue. (2) While scholars have characterized trolling as a problem of underproductive patents, (3) we view it as a problem of incentives. Patents that are enforced by trolls could potentially be valuable to society, but the one-size-fits-all system's excessive litigation rewards incentivize trolls to hoard their patents for opportunistic litigation rather than license them for productive use. Specifically, by providing uniformly large remedies even for very small inventions, the judicial system allows patent trolls to reap more profit through infringement suits than through selling their inventions on the market. This is not intrinsically problematic, but the judicial system is not cost free. Society subsidizes judges, courtrooms, and enforcement measures while litigating parties bear only some of the costs themselves. (4) In the case of patent trolls, these societal subsidies encourage parties to conduct their transactions in the courtroom when the optimal forum is actually private market transactions. In many other cases, partly because the costs of litigation are asymmetric and must be paid in part even by prevailing parties, the threat of these litigation costs can force parties into inefficient transactions. (5)

At the same time, the market does not always succeed in allocating rights efficiently. Owners of intellectual property rights and users--that is, potential consumers of those rights--are not always aware of one another, leading users to infringe and owners to fail to exploit markets optimally. The one-size-fits-all system greatly exacerbates these problems. For some creations, the uniform statutory remedies are too generous. These uniform remedies therefore encourage inefficient use of the legal system in instances where voluntary bargaining would have been superior; in other cases, the remedies deter nonconsensual use that would be optimal.

Second, the one-size-fits-all system exacerbates the monopoly problem created by patents. Patent law grants legal protection in order to incentivize creation. (6) Whatever the patent, the law offers a monopoly consisting of a specified set of rights over the invention for a fixed period of time. The monopoly gives the inventor the opportunity to profit handsomely, but it also subjects society to all the costs of monopoly pricing. As documented in the economic literature, these costs include excessively high prices and artificially low production. (7) Rewarding inventors with monopoly rights thus necessarily comes at a price. Society receives desirable innovation. But society also pays the price of monopolistic inefficiencies. Because the same monopolistic protection is accorded to all inventions irrespective of their value, society often pays too high a price for innovation. Many inventors would have produced their innovative products and processes even if the reward were lower. The one-size-fits-all regime thus means that sometimes society overpays for innovation by absorbing more monopoly losses than are strictly necessary to incentivize production.

In this Article, we propose an alternative design for our patent system. Specifically, we argue that society would be better served by abolishing the extant one-size-fits-all approach to patent protection and adopting in its stead a self-tailored system. In our vision, inventors would be offered a menu of options with varying degrees of protection terms, scopes, and remedies. They would then be allowed to tailor the protection to best fit their needs. Importantly, the various options would be subject to differential pricing to reflect the cost society stands to incur from the choice of the inventor.

An example can provide a helpful illustration of how our alternative regime would work. Basics Inc. is a medical-device company that produces simple applications whose expected commercial life is four years. Basics Inc. has no use for a patent-protection term of twenty years. Moreover, Basics Inc. has very little marketing capacity and would have a much easier time if potential users were able to search out Basics Inc., rather than Basics Inc. expending efforts to identify potential users. Under our proposed regime, Basics Inc. would be allowed to purchase a protection term of four years. Furthermore, Basics Inc. would have the option voluntarily to give up the possibility of injunctive relief and instead to confine itself to monetary damages if its patent were infringed. In exchange, Basics Inc. would pay a relatively low price for the protection it would receive.

Nano Tech Industries, by contrast, is in the business of developing complex medical instruments that require considerable expenditures on R&D and whose commercial life is much longer. Accordingly, Nano Tech would likely choose a protection design that closely resembles the current patent regime. Under our system, its wish would be granted. But at a higher price.

A self-tailored patent system would yield several important advantages. First, and most importantly, it would cause patentees to take into account the cost they impose on society through perverse litigation incentives and monopolization. While society should welcome innovation, we need not pay an excessive price to get it. Under our proposal, inventors would be entrusted with the task of deciding the degree of protection they wish to receive but would be asked to pay for their preference. Voluntary relinquishment of protection, either in terms of time or scope, would result in social net gain by reducing the deadweight loss associated with patent protection. While this effect may be small per patent, in the aggregate society would benefit from the same level of innovation at a lower social cost.

Second, our self-tailored system would enhance societal welfare by increasing beneficial use of existing patents. Excessive protection of patents, together with inefficient use of the judicial system, increases the costs of transactions between patent holders and users, decreases efficient nonconsensual use of granted patents, and increases the number of inefficient nonuses resulting from strategic holdups by...

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