Scott Kieff, Coordination, Property and Intellectual Property: an Unconventional Approach to Anticompetitive Effects and Downstream Access

• Publication year: 2006

COORDINATION, PROPERTY, AND INTELLECTUAL PROPERTY: AN UNCONVENTIONAL APPROACH TO

ANTICOMPETITIVE EFFECTS AND DOWNSTREAM ACCESS

F. Scott Kieff^*

INTRODUCTION ................................................................................................330

I. NIE, COORDINATION, AND PROPERTY RIGHTS ....................................338

A. Coordination as an Emerging Theory of Property Rights............341

1. Conventional Focus on Externalities .....................................341

2. New Focus on Coordination...................................................345

B. Contrasting Property with Other Tools for Facilitating

Coordination ................................................................................354

1. Norm Communities like Open Source Projects ......................355

2. Firms ......................................................................................359

3. Government ............................................................................363

4. Overview of Coordinating Options ........................................370

C. Mitigating the Problems of Property Rights.................................370

1. Rent Dissipation .....................................................................370

2. Transaction Costs...................................................................374

3. Behavioralism.........................................................................381

4. Monopoly Effects ....................................................................385 a. Dynamic Versus Static Efficiency ....................................386 b. The Nature of the Inefficiency Associated with

Monopolies ......................................................................389

5. Anticommons, Patent Thickets, and Patent Trolls..................391

6. Overview of Responses to Property's Problems.....................398

II. NIE AND THEORIES OF IP .....................................................................398

A. Conventional IP Theories.............................................................399

1. Conventional Majority View on Rewards...............................399

2. Conventional Minority View on Rent Dissipation ..................405

3. Conventional Views on Anticommons, Anticompetitive

Effects, and Public Choice .....................................................406

B. Commercialization Theory, Coordination, and Social Costs .......414

1. Correcting Conventional Takes on Commercialization .........415

2. Commercialization's Overlooked Solutions ...........................419

3. Example: Introducing a Case Against Copyright...................429

CONCLUSION....................................................................................................435

APPENDIX ........................................................................................................437

ABSTRACT

Countless high profile cases like the recent patent litigation threatening to shut down the BlackBerry service have long drawn sharp criticism. In response, most of the intellectual property (IP) literature argues for the use of weaker, or liability rule, enforcement as a tool for solving the problems of anticompetitive effects and downstream access while still providing sufficient rewards to IP creators. This Article takes an unconventional approach under which rewards do not matter much, but coordination does matter a great deal. This Article emphasizes both a good and a bad type of coordination.

This Article explains how stronger, or property rule, enforcement can facilitate the good type of coordination that increases competition and access, such as coordination among entrepreneurs, inventors, and venture capitalists to facilitate commercialization of new ideas. Under this view, coordination is offered as an alternative to other goals that have been suggested, including internalizing externalities, mitigating rent dissipation, and providing direct incentives. Property is offered as an alternative to other institutions or organizations that also can facilitate this coordination goal, including government, firms, and norm communities such as open source projects. This Article adds to the author's earlier commercialization theory (which pointed out the importance of the commercialization effect) by explaining how coordination is the mechanism that allows for commercialization to be achieved. The approach is consistent with the recent literature on the theory of property rights, generally, in that coordination is seen as the mechanism by which property rights help internalize externalities and mitigate rent dissipation. It also is consistent with the literature on the theory of the firm in that property rights can be seen as offering a unique set of costs and benefits when compared to other institutional and organizational options such as firms, open markets, and norm communities.

This Article further explains how, paradoxically, the reforms urged by IP critics can end up facilitating the different, bad type of coordination that decreases competition and access. This bad effect is the coordination among large, established businesses to keep out competitors.

Debates within both academic and policy circles would be improved by giving serious attention to these two different coordination effects. The failure within these circles to take seriously these effects helps explain why so many of the reform proposals offered by others should be expected to exacerbate the two key persistent problems of anticompetitive effect and reduced downstream access.

This Article follows the general approach of the field called New Institutional Economics ("NIE"), which explores problems triggered by different institutions of laws and norms. Because no institution is perfect, the NIE approach suggests that our choices among institutions must be informed by our views of the solutions we most want and the problems we can best mitigate or bear.

This Article provides some brief comparisons of salient elements of the main positive law IP regimes-patent, trademark, and copyright-to provide some concrete examples. Taking seriously the warning that more is not always better when it comes to entitlements, including IP rights, this Article explains how the copyright regime has many of the features that should be expected to lead to decreased access and increased anticompetitive effect. It explores the historical accident that may explain why these problems afflict the copyright regime more than they do the patent regime-an effort at the drafting stage of the patent regime to strive for coherence rather than compromise. Understanding that the patent regime is not immune from these same effects, this Article further explains how similar problems may be caused by patent reform efforts that are focused on compromise-such as the reforms to better balance the interests of branded and generic drugs.

INTRODUCTION

Despite numerous reforms over the past century,¹important problems continue to plague the IP systems of today, generating numerous proposals for further reform tomorrow. Recent high profile cases like the patent litigation threatening to shut down the BlackBerry service²have drawn sharp criticism in the business community³as prime examples of the pernicious impact of protecting intellectual property (IP) rights with strong property rules, backed up by injunctions, as opposed to using weaker liability rules, which would only give rise to a right to payment.⁴Various forms of liability treatment have been offered. For example, Ian Ayres and Paul Klemperer advocate a patent litigation system characterized by uncertainty and delay, which they show could serve as a form of compulsory license, or liability rule.⁵Others simply advocate various exemptions to infringement, such as treating certain uses as fair use.⁶

Underlying these critiques of IP is a view that property rights either restrict access or cause anticompetitive effects. The arguments raised today are quite similar to those raised throughout most of the past century, and as usual, the reform efforts target all three branches of the federal government⎯legislative, executive, and judicial.⁷This Article explains why addressing the concerns of competition and access via conventional approaches⁸is likely to exacerbate those problems by tapping into property's bad coordination effects. These bad effects can be mitigated by adopting an unconventionally strong property-rule approach informed by property's good coordination effects.

This Article offers a comparative institutional analysis using the set of analytical tools from the field generally called New Institutional Economics ("NIE"), which is often associated with the work on institutions, transaction costs, agency costs, and the theory of the firm.⁹This systems-based approach¹⁰ is broader than prior works at the interface between NIE and IP, and it is particularly timely given the recent surge in interest in particular aspects of that interface.¹¹

This Article does not purport to present new social science. Rather, it is focused on law and how discussion of law can be informed by the literature in the social sciences of economics and political science. While others focus on particular aspects of that social science literature, this Article endeavors to knit together a wider range of that social science literature to elucidate the ongoing debates in public policy and legal circles that purport to hinge on aspects of that scientific literature. This Article is not designed to prove any net effect, but rather to explain how and why certain positive and negative effects may be expected to operate within the particular setting of IP. This Article also contributes to the social science literature relating to NIE by explaining how it can be applied to and informed by the field of IP.

The tools NIE uses to conduct comparative institutional analyses have played a central role in the scholarly debate within property theory...