The Commercial Law of Intellectual Property.

• Author: Merges, Robert P.

1. INTRODUCTION

   Peter A. Alces(1) and Harold F. See(2) state in their highly useful book that

   As the relative proportion of traditional goods involved in commercial transactions declines and the relative proportion of intellectual property in such transactions increases, the important question is whether Commercial Code principles designed with contemporary commercial practices in mind and promulgated essentially uniformly across the entire nation provide the better rules to foster economic and technological growth, or whether, on the other hand, the common law rules of contract forged in the early days of the industrial revolution, from which the commercial law sprang and diverged, provide the better guidance. [pp. 346-47]

   Although they tip their hand a bit in framing the question -- they clearly favor the extension of UCC rules and principles to cover "contemporary commercial practices" -- Alces and See have no doubt hit on an important set of issues. They have identified a new ingredient increasingly spicing the meat-and-potatoes practice of the transaction-oriented business lawyer: intellectual property.

   At the simplest level, their volume contains a compendium of, and commentary on, a wide range of commercial bargains in which intellectual property plays a role. By its own terms, their book is a straightforward effort to collect these cases from the corners of the commercial law reports and to impose some order on them. To do this, the authors make clear, they must describe and define some concepts that are familiar to intellectual property lawyers but not to commercial lawyers, and vice versa. Thus, for the practitioner, the book represents an effort to bridge the gap between two heretofore isolated fields. Although it is a smidgeon better at bringing commercial law to the intellectual property specialist than the other way around, overall it is a highly competent exemplar of the legal bridgebuilder's art.

   Nevertheless, the bridge is an early model -- a prototype, almost. Although there is a crying need for a book that brings out and ties together the multifaceted legal issues arising from intellectual property transactions, this book falls somewhat short of the deluxe, Golden-Gate-spanning variety the subject seems to call for. Nevertheless, it establishes some solid footings on which future scholars might build a more elaborate structure.

   A. The Plan of Attack

   In Part II, I try to explain why intellectual property is cropping up in more and more commercial transactions. I emphasize the role that intellectual property plays in some newly emerging organziational arrangements in economic production -- in particular, the greater use of nonemployee consultants and contract-based "quasi firms" such as joint ventures. These increasingly common organizational forms, which appear regularly in the cases that Alces and See survey, have become more viable now that Congress and the courts have joined together to create stronger intellectual property rights.

   After this account of the origins of the growing intellectual property component in commercial transactions, I turn in Part III to some details of those transactions, as analyzed by Alces and See. I first briefly describe the UCC-based approach the authors have taken to their subject matter, and I argue that the authors have included too many commercial transactions with only a nominal intellectual property component. I also describe the high points of the book and stop, now and again, to record a doctrinal quibble. The substantive conclusion of this Part is that the authors would have better served their intended audience by dissecting more thoroughly a smaller number of cases that expose basic incompatibilities between policies central to the UCC and accepted intellectual property doctrine.

   In Part IV, I discuss why the book only partly bridges the existing gap in the intellectual property literature -- why, as I like to put it, we need a contract law of intellectual property, and not just a commercial law. Here I argue for an integrated approach to the entire body of rules and doctrines that Congress and the courts have created to police intellectual property transactions. In the course of this discussion, I attempt to show why legislatures, courts, and scholars must consider the policing doctrines traditionally thought of as "internal" to the federal intellectual property regimes -- especially the twin doctrines of copyright and patent "misuse," and such other issues as federal preemption of state law affecting intellectual property -- together with U.C.C. issues if they are to construct a coherent body of transactional rules. I present a lengthy discussion of the "shrinkwrap" or "tear open" software license to illustrate the need for such an integrated treatment.

   In Part V, I argue that the forces behind the growing commerce in intellectual property rights, which I review in Part II, will likely intensify, making it all the more necessary to complete what Alces and See have begun in this volume -- the process of constructing a truly integrated contract law governing intellectual property-based transactions. I close by noting that books like this do more than describe this trend; they add to it by disseminating transactional "know-how" that enables lawyers and others to build more complex transactions on the foundation of intellectual property rights.

2. INTELLECTUAL PROPERTY RIGHTS AND THE ORGANIZATION OF PRODUCTION

   Consider the quote from Alces and See in the introduction to this review. The authors observe that the relative importance of traditional goods involved in commercial transactions is declining while the relative proportion of intellectual property in such transactions is increasing. In this Part, I focus on what the authors see as the motivation for this development, and I discuss its implications and ramifications.

   Let me state at the outset that, in the spirit of the authors' undertaking, I will take as a given that they are correct in asserting a higher intellectual property content in the practice of commercial lawyers. Anecdotal evidence for this abounds; it is certainly also relevant that two experienced commercial lawyers have bothered to write a practitioner-oriented book on the subject. I will assume their market research was accurate. The interesting question is: What lies at the heart of this trend? Just why has intellectual property become the subject of an increasing volume of transactions?

   There are essentially three interrelated reasons for the growth in intellectual property commercial transactions. First, there is more intellectual property to include in transactions than there used to be, and it is worth more because it is more readily enforced by the courts. Congress, and to a lesser extent the state legislatures, are creating more intellectual property each year; where the United States leads in this area, other countries tend to follow.(3) Second, the growth in intellectual property has increased businesspeople's awareness of the intellectual property aspects of traditional transactions. Consequently, there is often now an intellectual property dimension to transactions that were conducted in the past without mention of these rights. Third, and most interesting to me, intellectual property rights make more feasible various organizational structures that firms and individuals are increasingly using to produce goods and services. Since these organizations are at least partially based on contracts, they provide a growing source of commercial transactions that necessarily include an intellectual property component.

   Intellectual property rights appear to enhance and, in some cases, to enable these contract-based organizations -- which run the gamut from consulting arrangements to "out-sourcing" agreements in which firms purchase components formerly manufactured by themselves. In general, intellectual property rights make such transactions less risky, and hence feasible in more instances, because they make it easier for the licensor -- often the supplier of a productive input -- to police the activities of the licensee. The strong policy favoring injunctions is one example of how licensors can use intellectual property rights to police licensee activities;(4) another example is courts' strict adherence to the field-of-use limitations that many licensing agreements contain.(5) In these and other ways, intellectual property rights give the input supplier greater control over the activities of the licensee, which makes the external production of inputs and the concomitant transfer by contract more feasible. To put it another way, intellectual property rights reduce the licensee's opportunistic possibilities(6) and thereby lower transaction costs.

   While it is important not to overstate the significance of intellectual property rights in the emergence of these new organizational forms, it is also important to point out some likely causal links, all of which turn on the potential for tighter contractual control, at lower cost, that comes with property rights. The most obvious illustration of how property rights confer tight control is the example alluded to above, the availability of quick injunctions in the event of breach. Since injunctions are much more easily obtained in intellectual property infringement cases than in run-of-the-mill commercial contract disputes,(7) the inclusion of intellectual property in a commercial arrangement gives the owner of that property right much more leverage with which to police licensee behavior. It follows that, at the margin at least, the availability of intellectual property will make a supplier more likely to rely on contract, as opposed to integration or some other transactional form. In this way property rights, including intellectual property rights, contribute to the growth of contract-based exchange.

   Note in this connection that it is difficult to argue that contract terms can...