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Patents and Property: The Evidence
I’ve been really impressed with the job that Regulation, Cato’s quarterly journal of regulatory policy, has been doing covering patent policy of late. A year ago, I highlighted a fantastic exchange between legendary libertarian legal scholar (and Cato adjunct scholar) Richard Epstein and Berkeley law professor Peter Menell over the legal and philosophical status of the patent system. Epstein, drawing a close parallel between traditional property rights and patent rights, argued that courts should give patent holders the same kind of strong enforcement powers—including the power to obtain injunctions against infringers—that are available to the holders of traditional property rights. Menell, for his part, emphasized the differences between patents and traditional property rights, and argued that in light of the patent system’s various deficiencies, it’s a good idea to give trial judges wide discretion about whether to award injunctions or monetary damages in infringement cases.
In the latest issue of Regulation, two of my favorite patent scholars, James Bessen and Michael J. Meurer, contribute something that’s all too rare in patent debates: empirical evidence. They argue that at root, Epstein and Menell’s dispute isn’t so much a philosophical disagreement as an empirical one: do patents, in fact, operate in the same beneficial fashion as traditional property rights? That is, do they enhance legal certainty and increase incentives for innovation, or do they confuse and discourage potential innovators? This is a question that can’t be settled in the abstract; it must be answered by looking at the performance of real patent systems and seeing what effects they have in real industries.
Bessen and Meurer’s answer to the question “do patents promote innovation?” is “it depends.” In particular, there appears to be wide variation in the efficacy of the patent system across nations, industries, and time periods. Historically, the patent system appears to have worked somewhat better in the United States than the UK, although its performance in the 19th century was mixed in both cases. Today, the patent system appears to work well for the pharmaceutical and chemical industries and poorly for most other industries. In most non-chemical industries, the costs of litigation are so astronomical as to completely swamp the patent system’s benefits. That is, the threat of litigation due to inadvertent infringement discourages research and development more than the patent system’s rewards to inventors encourages it. If Bessen and Meurer’s data are right, then the public would be better off if those industries did not have access to the patent system at all.
Bessen and Meurer stop there in their Regulation piece, but in their book, they argue that the fundamental problem is that outside of the chemical industries, the patent system does a poor job of defining the boundaries of patent rights. That is, in industries like software, it’s difficult to determine which patents cover any given product or technology. It’s analogous to a physical property regime in which there were numerous, overlapping claims for any given piece of land, and no clear procedure for sorting out the true owner. Such a “property” system would not have any of the beneficial features that libertarians correctly attribute to well-designed property regimes.
Friedman prize winner Hernando de Soto made a name for himself by advocating reforms to third-world property systems to make them work more like Western property systems. I think we should regard patent reformers like Bessen, Meurer, and Menell as doing something similar: seeking to reform the patent system to bring something like the predictability found in traditional property systems. De Soto understood that until that can be achieved, it’s crucial that the old “property” system not be strictly enforced, because the laws on the books are so far out of sync with the facts on the ground. It’s not fair to a Guatamalan squatter to raze the home he’s lived in for a decade because some bureaucrat decides the land rightfully belongs to someone else. By the same token, it would be unfair to an innovator like Vonage to force it to shut down the Internet telephony network it has constructed because it accidentally violated one of Verizon’s overly-broad patents. Before insisting that people respect patents, we need to make sure that the patent system is respectable.
Patents, Injunctions, and Uncertainty
There’s some fantastic back and forth between Chicago law professor Richard Epstein (a Cato adjunct scholar) and Berkeley law professor Peter Menell about the similarities and differences between physical property and what’s often called intellectual property—patents and copyrights. The exchange is a response to Menell’s previous contribution to Regulation.
I think Menell has the better of the argument. They both devote a considerable amount of ink to the eBay v. MercExchange, which centered around the question of when it’s appropriate to grant injunctions for patent infringement. Epstein has generally advocated a rule that grants injunctions more freely, arguing that this creates more certainty for the patent holder. Menell, in contrast, has argued that damages are often more appropriate.
The reason this matters is that if an injunction is granted, it can often drive the losing party into bankruptcy. In 2006, for example, Research in Motion, makers of the popular BlackBerry mobile device, was forced to pay $612 million to a company called NTP that had no employees, no products, and patents that were subsequently ruled invalid by the patent office. By rights, NTP shouldn’t have gotten a dime (because there was ample prior art for its “inventions”) but because RIM would have been forced to shut down its BlackBerry network before it had exhausted its appeals, NTP was able to extort hundreds of millions of dollars from the firm.
Interestingly, Epstein alludes to the biggest flaw in his argument, but doesn’t stop to ponder its implications. He writes:
This set of institutional arrangements [from real property] does not carry over perfectly to patent cases where the fact of infringement is harder to determine outside the piracy context, owing to the lack of clear boundaries that surround any patent.
This is a gross understatement. The boundaries of many patents—especially those relating to software, which is what the MercExchange case was focused on—are so fuzzy that it’s basically impossible for even the most experienced patent lawyer to predict accurately which of the hundreds of thousands of software patents in existence might be related to a given software product. Microsoft, for example, has darkly hinted that the Linux operating system had infringed several hundred software of its patents, but the company has refused to say which patents they are and the Linux develop community hasn’t been able to figure it out.
I share Epstein’s goal to create “a system of secure property rights that allows people to transact at low cost and high reliability,” but I think he fails to appreciate how completely our current patent system fails that test. In many cases, an inventor wishing to identify the patents his new invention might infringe has no low-cost or high-reliability means of doing so. This introduces uncertainty and litigation that greatly reduces the potential rewards for inventive activity. Strengthening these vague patents even further by making injunctions even easier to obtain will only make the problem worse, because the disincentives created by the patent system will be magnified.
It’s also worth noting the important contrast between patents and physical property: if a court fails to grant you an injunction against someone who’s using your land, you are thereby deprived of the opportunity to use the land yourself. In contrast, if the court fails to grant an injunction against a patent infringer, you have lost nothing other than potential licensing revenues. This means that unlike with physical property, there’s no compelling reason to impose the potentially devastating remedy of an injunction any earlier than absolutely necessary.
Are Copyrights and Patents Property Rights?
The latest issue of Regulation magazine has a fantastic article by Peter Menell discussing the divisions in libertarian theory on copyright and patent issues. One one side is what Menel dubs the Property Rights Movement, of which Richard Epstein is a leading theoretician. They see intellectual property and more traditional property rights as fundamentally similar, and apply libertarian insights about the importance of strong property rights in tangible goods to debates over patent and copyright law. For theorists like Epstein, the need to reward the fruits of labor lie at the heart of the libertarian case for property rights, and as a consequence the argument for strong intellectual property rights is identical to the argument for tangible property rights.
The other camp sees copyright and patent law as fundamentally different from tangible property rights. It includes F.A. Hayek, many “cyberlibertarians,” and Menell himself. For this camp, the fundamental argument for property rights is not about rewarding creativity so much as managing scarcity. We need strong property rights in tangible property so people can make plans about the use of scarce resources. Since inventions and creative works are non-rivalrous once created, the argument goes, property-like restrictions on their use are at best a necessary evil.
As I’ve written before, my sympathies are with the latter camp. One difference that’s particularly important—and which Menell mentions only in passing—is the issue of clear boundaries. It’s almost always easy to determine who owns which parcel of land and where the boundary lies. In contrast, both copyright and patent law suffer from vexing line-drawing issues. For example, the legal principles governing what constitutes fair use of copyrighted materials is notoriously vague. The result is endless litigation that can hamper technological progress. Patent law can be even worse. Microsoft, for example, has vaguely hinted that the Linux operating system has infringed several hundred of its patents, but no one has been able to figure out which of Microsoft’s 6000 patents they might be referring to. It’s hard to imagine a company complaining that its competitor is trespassing on its land but refusing to give any specifics.
Ultimately, I think that lumping copyright and patent law together with traditional property law obscures more than it illuminates. There may very well be good arguments for expansive interpretations of copyright and patent law, but they’re likely to be rather different from the arguments for robust property rights in tangible goods. It makes more sense to debate those arguments on their own terms rather than confusing the issue by lumping together legal regimes that have relatively little in common.
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