1 of 29 The Importance of Property Rights in Patents F. Scott Kieff Associate Professor Washington University School of Law Research Fellow Hoover Institution Visiting Professor Stanford Law School Presented at the Southern California Law Associations Intellectual Property Spring Seminar, June 8–10, 2007, Laguna Niguel, CA

2 of 29 Why Is the U.S. So Rich? Property Rights in Intangibles!

3 of 29 How Do Property Rights Matter? Far more than homes and land Modern economic growth is about innovation! –Property rights in ideas –Property rights in capital Not just about protecting the wealthy, it’s about fighting poverty

4 of 29 U.S. Financial System is Huge (Source World Bank Financial Structure Database) Again, Property Rights!

5 of 29 Property Rights Are Key to Finance Banking example –Depositors vs. banks –Banks vs. debtors –Minority shareholders vs. insiders –Banks vs. governments Compare Mexico –No property rights –No banking system

6 of 29 U.S. Intellectual Property System is Huge Intellectual Property-based companies make up largest sector of the U.S. economy U.S. Intellectual Property is worth over $5 trillion U.S. Intellectual Property is almost half U.S. GDP Greater than the GDP of almost any other nation in the world (Source U.S. Patent Office Director Jon W. Dudas April 19, 2007)

7 of 29 Why Have IP? Ever Forward! Mark Twain’s Connecticut Yank went to Warwick Castle, England. There he was magically transported back to the time of King Arthur. He did well. He was made First Minister. He was called Sir Boss. What was the first thing he did in power? The very first official thing I did, in my administration – and it was on the very first day of it, too – was to start a patent office; for I knew that a country without a patent office and good patent laws was just a crab, and couldn’t travel anyway but sideways or backwards. Lord Robin Jacob, Royal Courts of Justice, London, England, One Size Fits All? in F. Scott Kieff, PERSPECTIVES ON PROPERTIES OF THE HUMAN GENOME PROJECT 449 (2003).

8 of 29 Why Have IP? Really?! To call it “intellectual” is misleading. It takes one's eye off the ball. “Intellectual” confers a respectability on a monopoly which may well not be deserved. A squirrel is a rat with good P.R. * * * * * [H]owever justified the cry, “what we need here is protection” may be for an anti AIDS campaign, it is not self evident for a process of the creation of new or escalated kinds of monopoly Lord Robin Jacob, Royal Courts of Justice, London, England, Industrial Property-Industry's Enemy, The Intellectual Property Quarterly, Launch Issue, (Sweet & Maxwell), 1997, pp Is intellectual property good?

9 of 29 Popular Theories of IP: Reward & Balance Most see IP as rewards, try to balance incentives and access –Targeted incentives to specific individuals to invent or create as a solution to problem of positive externalities –But then targeted responses to problems of monopoly distortions, transaction costs, and reduced downstream access Weaken rights through more discretion Enhanced antitrust regulation This is all wrong – incorrect history and policy

10 of 29 Property Rights in IP Are Key to Innovation and Competition Increase innovation –Not just incentives to invent –Get inventions put to use –By facilitating coordination among complementary users of the invention (investors, managers, marketers, laborers, owners of other inventions, etc) –The D part of R&D Help new companies compete –Anti-monopoly weapons –Vital slingshot for David against Goliath History: Giles Rich,’52 Act, don’t focus on inventing

11 of 29 Good Coordination Hinges on Property Not Rewards Beacon effect –Publicly recorded ownership and credible threat of injunction serve as beacon to draws folks together –Allows even indirect interaction –Rewards might give adequate incentive to the IP owner But they don’t give same incentives for all others to come to owner They give alternative incentives for these others to instead go to agencies, courts and legislatures Bargain effect –If breakdown avoids injunction, why would infringers try to get along? –Rewards focus on price But deals often hinge on complex terms other than price Overlooks the need to hedge, diversify or insure (compare portfolio players v. unique investments – especially early stage deals)

12 of 29 Biotechnology Example Before 1980, U.S., Europe, & Japan all had NO patents in biotech After 1980, only the U.S. has patents in biotech –Large increase in number of new drugs & machines actually commercialized –Large pool of ~ 1,400 small & medium biotech companies (Source 2003 Hearing at House Energy & Commerce Committee, Health Subcommittee, Statement of Stanford Associate Dean Phyllis Gardner)

13 of 29 U.S. Venture Capital is Huge (Source OECD Venture Capital Database)

14 of 29 Venture Capital Feedback Loops Venture capital depends on property rights and freedom of contract in –Corporate governance & finance (protection from teammates) –Intellectual property (protection from competitors) Venture capital helps –Financial system (more opportunities to invest) –Innovation system (more sources of investment) Key is predictable enforcement –To protect against expropriation –By government and politically powerful –Limited government Impact –Economic growth and innovation (16.6% of GDP) –Jobs (9% of private sector work force) –Tax receipts (2005 sales at $2.1 trillion) –Better ROI than government (2005 investment at $23 billion, 0.2% GDP) (Source National Venture Capital Association 2007 Global Insight Study)

15 of 29 What Are Some Current Threats? Finance –Sarbanes-Oxley mandatory disclosure component –Hedge fund regulation –Enforcement actions whenever sympathetic losers –Recent Supreme Court cases like Billing & Charter IP –Patent “reform” –Increased antitrust regulation and enforcement –Abrogating patents for world health and development –Recent Supreme Court cases like eBay & KSR

16 of 29 SARBOX Example: Unintended Consequences? Disclosure can be good But mandatory disclosure may be so onerous, that it: –Keeps some small companies from “going public” –Encourages others already public to be taken “private,” or offshore –Distracts management and the board from corporate strategy

17 of 29 Patent “Reform” Example: Lofty Goals New patent bill introduced in Congress –Core changes focus on what patent lawyers call the “prior art” –Today a court adjudicates as a question of fact, based on evidence like lab notebooks or printed theses –Proposals would defer to government examiner’s discretion about what the state of some art was on some date Compare recent KSR case on more discretion for obviousness Compare recent eBay case on more discretion for injunctions

18 of 29 Patent “Reform” Example: Unintended Consequences? Problems of discretion – flexibility’s Achilles’ heel –Influenced by political pressure and lobbying –Big guys win, which turns a law designed to help competition into one that hurts competition Example: IBM & Kennedy/Johnson/Katzenbach –Discretion to reject any software patent, and eventually all –Absence of property rights lead to monopoly

19 of 29 IBM & Open Source Open source is supposed to make everything free Property rights lead to coordinated development Avoiding property leads to uncoordinated development Uncoordinated software increases demand for consulting services More so than hardware and software, IBM now sells mostly consulting services

20 of 29 Example of Recent Government Actions on IP & AT FTC & DOJ –Joint hearings (throughout 2002) –Interim report on pharmaceutical patents, FDA/PTO and Hatch-Waxman Act (Jun. 2003) –IP/AT Report vol. 1, FTC only (Oct. 2003) –FTC & DOJ joint IP & AT report (Apr. 2007) (vol. 2?) –Standard setting cases like Rambus

21 of 29 Two Often Missed Keys to IP & AT The efficiency problem of monopolies is tied to decreased output, so price discrimination can be of great help, not harm Monopoly refers to markets, not to particular goods or services

22 of 29 Keiretsu Strategy for IP & AT Keiretsu strategy and bad type of coordination among big players –What if every legal test turns on discretion? –Ensures large numbers of low value IP assets –Mitigates trust problem: improves communication Decisions to push and yield transmit preferences Discovery ensures fidelity –Mitigates antitrust problem: (blessed by Federal Judges) Insulates from scrutiny generally Mitigates chance of treble damages and jail time even if scrutinized –Avoids slingshots from Davids Rambus example –Upstream/downstream –Not quite “bad” in several ways, so therefore “bad” (compare “basics matter” thesis) –In face of 3 rd largest AT criminal fine ever (2005 Hynix & Infineon combined DRAM price fixing cases with fines of $346 million)

23 of 29 Patent Example: Utility and Subject Matter Rules Utility –Upstream inventions lack utility –But nobody infringes a useless patent, and one person’s upstream is another’s downstream Subject Matter –Today’s technologies are not proper subject of patents because they could not have been anticipated by the founders – surely nobody thinks Jefferson anticipated the internet? –But those technologies that are anticipated are exactly those that are not patentable

24 of 29 Patent Example: World Health & Development What’s wrong with the new initiatives? –Over 95% of drugs on WHO’s essential medicines list are off patent –When patented drugs are given to those countries for free they are heavily taxed or outright taken by corrupt local governments – sometimes even resold on black markets to U.S., Japan, Europe, etc. –Millions of real people are dying from war, famine, unsanitary conditions, lack of basic health care, etc Who is behind them? (India, Argentina, Brazil) –Holders of biodiversity inputs (upstream of those patents) –Having developed manufacturing organizations (for whom the patents are upstream)

25 of 29 At Bottom, the Details Matter: Property Rights at Their Best Attributes –Predictable enforcement –Tradable –Can be bundled & divided –Users deal with private individuals Effects –Easy for market actors to use –Stimulate competition, innovation, economic growth, and jobs

26 of 29 At Bottom, the Details Matter: Property Rights at Their Worst Effects –Easy for political actors to use (regulators and powerful political constituents) –Concentrate wealth and power Attributes –Created or changed at discretion of government –Fixed owner –Fixed contours –Users deal with government

27 of 29 Political Economy of Government Discretion Stigler –Concentrated benefits and diffuse costs –Explain how we get so much of it Buchanan & Tullock –Competition for it among citizens –Causes waste (“rent dissipation”) De Soto, McChesney, Schleifer, Haber –Competition among government actors to provide it –Increases waste (“tollbooth” and “crony capitalism” theories) Friedman –Even seemingly benign or unrelated government agencies –Drawn in by “mission creep”

28 of 29 Take Away These seemingly diverse areas of law –Corporate, finance, IP, AT, WHO, trade –Share basic themes in common Economic success is about property rights Property rights require limited government As Murray Weidenbaum often said to friends in government: –“Don’t just stand there… –undo something!”

29 of 29 Hoover Project on Commercializing Innovation –Core team: Stephen Haber, F. Scott Kieff, Troy Paredes –Diverse fields in law and economics Intellectual property Corporate and securities Contracts Finance Industrial organization –Sectors Public: government and academic Private –Modes of action Basic research, academic articles and books, white papers ADR, expert consulting, testifying, amicus briefs, op-eds, media Collaborations – we enjoy working with you Contact (end)