Guy Rub: Copyright or Contract?

Using software often means you have to sign a contract as a condition for using the software. This "end user license agreement," called a EULA, will lay out the terms under which the software can be used. For example, the EULA you sign to play a video game might say: "The player of this video game cannot cheat while playing the game."  What if you breach the EULA by playing the game using a commercially available cheating "bot"?  Is this copyright infringement? Or is this just a breach of contract?  This may seem obscure, but the question matters a lot.  For one thing, in this example, if the video game publisher has a copyright claim against the cheater, not just a contract claim, this could mean very large statutory damages versus no damages at all.

This is just one of many scenarios in which copyright owners use contracts to control the conditions of use, and whose breach may, or may not, give rise to copyright infringement. In his new article, Against Copyright Customization, Guy Rub addresses this thorny question—copyright or contract?—along with many closely related questions. For example: when is a software user a mere licensee versus an owner?  (Spoiler alert:  almost always!)  The article is forthcoming in Iowa Law Review and a draft can be downloaded on SSRN.

I interviewed Guy about the article. Here is a transcription.

Lucy Xiaolu Wang on the Medicines Patent Pool

Patent pools are agreements by multiple patent owners to license related patents for a fixed price. The net welfare effect of patent pools is theoretically ambiguous: they can reduce numerous transaction costs, but they also can impose anti-competitive costs (due to collusive price-fixing) and costs to future innovation (due to terms requiring pool members to license future technologies back to the pool). In prior posts, I've described work by Ryan Lampe and Petra Moser suggesting that the first U.S. patent pool—on sewing machine technologies—deterred innovation, and work by Rob Merges and Mike Mattioli suggesting that the savings from two high tech pools are enormous, and that those concerned with pools thus have a high burden to show that the costs outweigh these benefits. More recently, Mattioli has reviewed the complex empirical literature on patent pools.

Economics Ph.D. student Lucy Xiaolu Wang has a very interesting new paper to add to this literature, which I believe is the first empirical study of a biomedical patent pool: Global Drug Diffusion and Innovation with a Patent Pool: The Case of HIV Drug Cocktails. Wang examines the Medicines Patent Pool (MPP), a UN-backed nonprofit that bundles patents for HIV drugs and other medicines and licenses these patents for generic sales in developing countries, with rates that are typically no more than 5% of revenues. For many diseases, including HIV/AIDS, the standard treatment requires daily consumption of multiple compounds owned by different firms with numerous patents. Such situations can benefit from a patent pool for the diffusion of drugs and the creation of single-pill once-daily drug cocktails. She uses a difference-in-differences method to study the effect of the MPP on both static and dynamic welfare and finds enormous social benefits.

On static welfare, she concludes that the MPP increases generic drug purchases in developing countries. She uses "the arguably exogenous variation in the timing of when a drug is included in the pool"—which "is not determined by demand side factors such as HIV prevalence and death rates"—to conclude that adding a drug to the MPP for a given country "increases generic drug share by about seven percentage points in that country." She reports that the results are stronger in countries where drugs are patented (with patent thickets) and are robust to alternative specifications or definitions of counterfactual groups.

On dynamic welfare, Wang concludes that the MPP increases follow-on innovation. "Once a compound enters the pool, new clinical trials increase for drugs that include the compound and more firms participate in these trials," resulting in more new drug product approvals, particularly generic versions of single-pill drug cocktails. And this increase in R&D comes from both pool insiders and outsiders. She finds that outsiders primarily increase innovation for new and better uses of existing compounds, and insiders reallocate resources for pre-market trials and new compound development.

Under these estimations, the net social benefit is substantial. Wang uses a simple structural model and estimates that the MPP for licensing HIV drug patents increased consumer surplus by $700–1400 million and producer surplus by up to $181 million over the first seven years of its establishment, greatly exceeding the pool's $33 million total operating cost over the same period. Of course, estimating counterfactuals from natural experiments is always fraught with challenges. But as an initial effort to understand the net benefits and costs of the MPP, this seems like an important contribution that is worth the attention of legal scholars working in the patent pool area.

It's Hard Out There for a Commons

I just finished reading a fascinating draft article about the Eco-Patent Commons, a commons where about 13 companies put in a little fewer than 100 patents that could be used by any third party. A commons differs from cross-licensing or other pools in a couple of important ways. First, the owner must still maintain the patent (OK, that's common to licensing, but different from the public domain). Second, anyone, not just members of the commons, can use the patents (which is common to the public domain, but different from licensing).

The hope for the commons was that it would aid in diffusion of green patents, but it was not to be. The draft by Jorge Contreras (Utah Law), Bronwyn Hall (Berkeley Econ), and Christian Helmers (Santa Clara Econ) is called Green Technology Diffusion: A Post-Mortem Analysis of the Eco-Patent Commons. A draft is on SSRN. Here is the abstract:

We revisit the effect of the “Eco-Patent Commons” (EcoPC) on the diffusion of patented environmentally friendly technologies following its discontinuation in 2016, using both participant survey and data analytic evidence. Established in January 2008 by several large multinational companies, the not-for-profit initiative provided royalty-free access to 248 patents covering 94 “green” inventions. Hall and Helmers (2013) suggested that the patents pledged to the commons had the potential to encourage the diffusion of valuable environmentally friendly technologies. Our updated results now show that the commons did not increase the diffusion of pledged inventions, and that the EcoPC suffered from several structural and organizational issues. Our findings have implications for the effectiveness of patent commons in enabling the diffusion of patented technologies more broadly.

The findings were pretty bleak. In short, the patents were cited less than a set of matching patents, and many of them were allowed to lapse (which implies lack of value). Their survey-type data also showed a lack of importance/diffusion.

What I really love about this paper, though, is that there's an interpretation for everybody in it. For the "we need strong rights" group, this failure is evidence of the tragedy of the commons. If nobody has the right to fully profit on the inventions, then nobody will do so, and the commons will go fallow.

But for the "we don't need strong rights" group, this failure is evidence that the supposedly important patents were weak, and that it was better to essentially make these public domain than to have after the fact lawsuits.

For the "patents are useless" group, this failure shows that nobody reads patents anyway, and so they fail in their essential purpose: providing information as a quid pro quo for exclusivity.

And for the middle ground folks, you have the conclusions in the study. Maybe some commons can work, but you have to be careful about how you set them up, and this one had procedural and substantive failings that doomed the patents to go unused.

I don't know the answer, but I think cases studies like this are helpful for better understanding how patents do and do not disseminate information, as well as learning how to better structure patent pools.

Equitable Servitudes and Post-Sale Restrictions

I have continued to find the issue of post-sale restrictions vexing. On the one hand, I think that there are sound economic reasons for them. On the other hand, I really don't like them, especially when they limit what should otherwise be reasonable and free activities.

The Supreme Court's recent cases in this area have made it more difficult to enforce such restrictions, but they have done so in a way that leaves open the possibility that some restrictions might apply while also not giving much guidance about when.

A recent article takes this on. Tim Scott (King & Spalding) has published The Availability of Post-Sale Contractual Restrictions in the Wake of Impression Products, Inc. v. Lexmark, 581 U.S. 1523 (2017) in Les Nouvelle. It is available on SSRN as well, and the abstract is below. I write about this article in part because the abstract is uninspiring when compared to the high quality analysis in the article. Don't be fooled.

In Impression Products, Inc. v. Lexmark International Inc., 581 U.S. ___, 137 S. Ct. 1523 (2017), the United States Supreme Court reaffirmed the patent exhaustion rule; i.e., patent rights are exhausted upon the first sale of the patented item such that the patentee has no rights to impose any post-sale conditions or limitations on the use of the product, at least under the patent laws. Id. at 1529. In doing so, the Court left open the question of whether such conditions or limitations could be imposed as a matter of contract law. Thus, the “restrictions in Lexmark’s contracts with its customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.” Id. at 1531 (emphasis added). In summarizing its decision in Quanta Computer, Inc. v. LG Electronics, Inc., 533 U.S. 617 (2008) ruling that the sale of computer components exhausted the plaintiffs patent rights in those components, the Court noted that it reached that conclusion “without so much as mentioning the lawfulness of the contract.” Lexmark, 137 S. Ct. at 1533. And it later summarized its holding by stating that “whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law.” Id. (emphasis added).

This is my kind of article: it's short, it gets right to business, and it is thorough despite its brevity. The article introduces the cases, discusses contract v. property rights, discusses equitable servitudes, surveys the literature on equitable servitudes on personal property (including pros and cons), proposes alternatives to equitable servitudes (and points to critiques), and then discusses how the alternatives might have applied to Lexmark's activities in Impression Products.

Not bad for eight journal pages. This is recommended reading for anyone who wants a quick background on the state of post-sale restrictions.

Examining the Role of Patents in Firm Financing

Just this morning, an interesting new literature review came to my mailbox via SSRN. In Is There a Role for Patents in the Financing of New Innovative Firms?, Bronwyn Hall (Berkeley economics) provides an extremely thorough, extremely helpful literature review on the subject. It's on SSRN, and the abstract is here:

It is argued by many that one of the benefits of the patent system is that it creates a property right to invention that enables firms to obtain financing for the development of that invention. In this paper, I review the reasons why ownership of knowledge assets might be useful in attracting finance and then survey the empirical evidence on patent ownership and its impact on the ability of firms to obtain further financing at different stages of their development, both starting up and after becoming established. Studies that attempt to separately identify the role of patent rights and the underlying quality of the associated innovation(s) will be emphasized, although these are rather rare.

This paper caught my eye for a few reasons.

Patents and Vertical Integration: A Revised Theory of the Firm

I'm a big fan of Peter Lee's work, and I'm a big fan of theory of the firm work. Imagine my joy upon seeing Prof. Lee's new article, forthcoming in Stanford Law Review, called: Innovation and the Firm: A New Synthesis. This article is a really thoughtful, really thorough re-examination of patents and the firm. The abstract is here:

Recent scholarship highlights the prevalence of vertical disintegration in high-technology industries, wherein specialized entities along a value chain transfer knowledge-intensive assets between them. Patents play a critical role in this process by lowering the cost of technology transactions between upstream and downstream parties, thus promoting vertical disintegration. This Article, however, challenges this prevailing narrative by arguing that vertical integration pervades patent-intensive fields. In biopharmaceuticals, agricultural biotechnology, information technology, and even university-industry technology transfer, firms are increasingly absorbing upstream and downstream technology providers rather than simply licensing their patents.

 This Article explains this counterintuitive development by retheorizing the relationship between innovation and the firm. Synthesizing previously disconnected lines of theory, it first argues that the challenge of aggregating tacit technical knowledge — which patents do not disclose — leads high-tech companies to vertically integrate rather than simply rely on licenses to transfer technology. Relatedly, the desire to obtain not just discrete technological assets but also innovative capacity, in the form of talented engineers and scientists, also motivates vertical integration. Due to the socially embedded nature of tacit knowledge and innovative capacity, firms frequently absorb entire pre-existing organizations and grant them significant autonomy, an underappreciated phenomenon this Article describes as “semi-integration.” Finally, strategic imperatives to achieve rapid scale and scope also lead firms to integrate with other entities rather than simply license their patents. The result, contrary to theory, is a resurgence of vertical integration in patent-intensive fields. The Article concludes by evaluating the costs and benefits of vertically integrated innovative industries, suggesting private and public mechanisms for improving integration and tempering its excesses.

The abstract does a pretty complete job of explaining the thesis and arguments here, so I'll make a few comments after the jump.

More Impressions About Patent Exhaustion

Daniel Hemel and Lisa Larrimore Ouellette
Cross-posted at Whatever Source Derived

As we explained last week, the full impact of the Supreme Court’s decision in Impression Products v. Lexmark will depend on whether courts are willing to view creative patent transactions as licenses (which do not exhaust the patentee’s rights) rather than sales (which, after Impression, now do). While it is too early to answer that question, we can already anticipate answers to two related questions regarding Impression’s impact: (1) What does the decision mean for pharmaceutical prices in the United States and abroad?; and (2) How will Impression affect information costs in markets for patented products? With respect to the first question, we expect that Impression will put upward pressure on pharmaceutical prices in developing countries—and downward pressure on prices in the United States—notwithstanding the fact that the importation of drugs from abroad will remain illegal under most circumstances. As for the second question, we are skeptical that Impression will have a substantial effect on information costs in markets for patented products, notwithstanding some of the enthusiastic commentary in the technology press immediately after the decision.

Below, we explain both of these conclusions in more detail.

Licensing in the Shadow of Impression Products

Daniel Hemel and Lisa Larrimore Ouellette
Cross-posted at Whatever Source Derived

Judging by the media coverage, the Supreme Court’s decision today in Impression Products, Inc. v. Lexmark Inc. will have dramatic implications for producers and consumers of patented products around the world. The decision places “sharp limits on how much control patent holders have over how their products are used after they are sold,” says the New York Times’s Adam Liptak. The ruling is a “sure-to-be-landmark decision,” reports Ronald Mann at SCOTUSblog. It “takes away an important tool used by companies to control the marketplace,” according to Bloomberg.

Well, maybe. But the Court’s opinion, authored by Chief Justice Roberts, also opens the door for creative contract lawyers to draft licensing agreements that severely restrict resale of patented products. The full impact of the Supreme Court’s decision won’t be known for years, but much will depend on how courts view the newfangled licensing agreements that are almost certain to follow in the wake of Impression Products.

To see why, let’s start with a hypothetical: Suppose your firm, Company A, holds a U.S. patent covering a certain widget. You manufacture one such widget and sell it to B on the condition that B not resell the widget to anyone else. In violation of that condition, B resells the widget to C, who then uses the widget. Can you sue B and/or C for patent infringement?

Prior to today, the answer under Federal Circuit precedent was yes: A could sue both B and C. Today’s decision changes that. The Court holds that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose.” This is true even if A’s sale to B occurs outside the United States. Thus, Company A now cannot sue B or C for patent infringement, though it still might be able to sue B for breach of contract.

But now reconsider the above scenario with the following modification: Company A—instead of selling the widget to B—licenses the widget to B with the proviso that B can do whatever she wants with the widget except resell it. If B violates the terms of the license and resells the widget to C, who then uses it, can Company A sue B and/or C for patent infringement?

The Long Awaited FTC Study on Patent Assertion and Nuisance Litigation

After months of speculation that the FTC's long awaited FTC study on patent assertion entities was going to issue any day now, the study has finally issued. The press release is here, and the full PDF is here.There is a lot to learn from this study - the FTC had subpoena power to obtain data unavailable to mere mortals like the scholars who study this area. I thought that the study was generally balanced and well researched. A scan of the footnotes alone will make a great literature review for anyone new to this area (even if it is missing a couple of my articles...).

Some of the highlights of the study come right out of the press release:

The report found two types of PAEs that use distinctly different business models. One type, referred to in the report as Portfolio PAEs, were strongly capitalized and purchased patents outright. They negotiated broad licenses, covering large patent portfolios, frequently worth more than $1 million. The second, more common, type, referred to in the report as Litigation PAEs, frequently relied on revenue sharing agreements to acquire patents. They overwhelmingly filed infringement lawsuits before securing licenses, which covered a small number of patents and were generally less valuable.

The report found that, among the PAEs in the study, Litigation PAEs accounted for 96 percent of all patent infringement lawsuits, but generated only about 20 percent of all reported PAE revenues. The report also found that 93 percent of the patent licensing agreements held by Litigation PAEs resulted from litigation, while for Portfolio PAEs that figure was 29 percent.

The separation of portfolio versus litigation business models was an important one - something I discuss in Patent Portfolios as Securities and Lemley & Melamed discuss in Missing the Forest for the Trolls.

The study also debunks the notion of widespread demand letter abuse, but does show that PAEs tend to sue first and demand later. It shows about $4B in revenues for all study respondents over a 6 year period, 80% of which came from portfolio companies (and mostly not after litigation). The study is unclear what this $4B represents if extended to all PAEs, but provides some statistics that might aid in a ball park calculation for the whole market.

There's more -- a lot more -- to this report, which runs 150 pages before the appendices. The study concludes with some reasonable and mostly uncontroversial ways the system can be made better, such as limiting expensive discovery at the early stages of a case. That said, I do take issue with one point of the study - relating to nuisance litigation. More on this after the jump.

Evaluating Patent Markets

I've been interested in patent markets for some time. In addition to several articles studying NPE litigation, I've written two articles discussing secondary markets explicitly: Patent Portfolios as Securities and Licensing Acquired Patents.

Thus, I was very interested in Michael Burstein's (Cardozo) draft article on the subject, called Patent Markets: A Framework for Evaluation, which is now on SSRN and forthcoming in the Arizona State L.J.

What I like about the approach of this article is that it takes a step back from the question of whether certain types of parties create a market, and asks instead, is having a market at all a good thing?

Here is the abstract:

Patents have become financial assets, in both practice and theory. A nascent market for patents routinely produces headline-grabbing transactions in patent portfolios, and patent assertion entities frequently defend themselves as sources of liquidity essential for a patent market to function. Much of the discourse surrounding these developments assumes that a robust, liquid market for patents would improve the operation of the patent system. In this Essay, I challenge that assumption and systematically assess the cases for and against patent markets. I do so by taking seriously both the underlying innovation promotion goal of the patent system and the lessons of financial economics, and asking what might be the effects of a market for patents that looked roughly like other familiar markets for stocks, real estate, or secondhand goods.

I conclude that, like much in patent law, the effects of robust patent markets are likely to vary with specific technological and business contexts. When there is a close fit between patents and useful technologies, a patent market can support a market for technology that aids in connecting inventors with developers and sources of capital for commercialization. But when that fit breaks down, market pricing could favor litigation over commercialization. Similarly, a liquid patent market might help to allocate the risks of innovation and of patent infringement to the parties best able to bear it, but a kind of moral hazard familiar to the market for subprime mortgages could lead not to more innovation but to more patents, thereby increasing the overall risk in the system. This analysis suggests that we are having the wrong conversation about patent markets. Rather than assuming their utility and asking how to improve them, we should be undertaking empirical research to determine the circumstances in which they will or will not work and exercising caution in invoking the logic of markets in policy debates about the contours of the patent system.

Like other markets, they are good when they are good, and bad when they are bad. Burstein adds a lot of nuance throughout the article, focusing on arguments why markets may be good or not, but without making too many assumptions about any particular technology or patent owner type.

One thing I would add to the article is the importance of timing. Markets early might be better than markets later, even in the same technological contexts. The article would probably put this into the "business context" category, but I think the importance of diffusion, cumulative innovation, and path dependency merit a separate consideration.

In all events, I think the essay adds to the literature and may produce some testable hypotheses as well.

Supreme Court Affirms Brulotte, but Opens the Door to Creative Licensing

Just a short note that the court has affirmed Brulotte v. Thys in Kimble v. Marvel Entertainment. The question was a simple one: can a patent owner charge a royalty for sales after the patent expires? Brulotte said no. But the economic rationale for that has been whittled away, just as much has been in antitrust. But the court today said...no. Stare decisis governs, and the reasons for overturning are just not great enough.

An interesting aspect of this dispute is that many folks with whom I often disagree on patent policy were in favor of lifting the post-expiration ban, while I never thought it was that big a deal because you can always creatively license around it.

The good news is that the Court has affirmed my latter assumption. The most important quote in the whole case (at least on my very quick reading) may be (citations omitted):

And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights. Under Brulotte, royalties may run until the latest-running patent covered in the parties’ agreement expires. Too, post-expiration royalties are allowable so long as tied to a non-patent right—even when closely related to a patent. That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone). Finally and most broadly, Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention.

The trade secret example is especially important. As I note in my article Patent Challenges and Royalty Inflation, there is uncertainty about how much one must drop the license fee for trade secrets. For example, I cite one case where a fifty percent drop when the patent expires was still anticompetitive under Brulotte.

But not all patents come with trade secrets. The question is whether an optional know-how license will be sufficient. If I wanted to try for post-expiration royalties, I'd give it a shot but not count on it.

Why are many IP contracts contingent?

At the recent American Law and Economics Association (ALEA) meeting at Columbia, I provided some comments on Intellectual Property Contracts: Theory and Evidence from Screenplay Sales by Milton Harris, Abraham Ravid, Ronald Sverdlove, and Suman Basuroy. The paper works with a fascinating dataset: 1269 contracts for screenplay sales between 1997 and 2003, which are either for a fixed price (averaging $958,000) or contingent on production—but not success—of the script (with average initial payments of $458,000 and average total compensation of $914,000).

Why are many of these contracts contingent when the buyers are typically better at bearing risk? And why are contingent contracts more likely for less experienced sellers? One typical explanation is moral hazard, but apparently that is not an issue in screenplay sales: studios use other writers to edit scripts prior to production, so no further effort from the seller is required once the script is sold. Instead, this paper develops a model in which the seller's competence is not directly observable by either party, and the seller is more optimistic about her competence than the buyer. And as sellers become more experienced, more information is available, which narrows the difference of opinion between the buyer and seller.

I had two general sets of questions about the paper:

Yelderman on Coordination-Focused Patent Policy

If the main benefit of patents is their role in coordination—facilitating transactions in information and thereby increasing collaboration—would we want patent law to look any different? This is the question tackled by Steve Yelderman (Notre Dame Law School) in his working paper Coordination-Focused Patent Policy, which I recently had the pleasure to read.

As Yelderman notes, there is currently much debate among patent scholars on what the best utilitarian justification for the patent system is (as well as whether utilitarianism is even the right foundation). Historically, patents have been seen primarily as ways to incentivize innovators with monetary rewards, though there is disagreement over whether the reward is for ex ante or ex post behavior. But commentators have increasingly argued that the patent system also (or primarily) plays a key role in coordinating communities of innovators; see, e.g., work by Paul Heald, Scott Kieff, Oskar Liivak, Clarisa Long, Rob Merges, and Jason Rantanen. Different scholars emphasize different coordinating functions, but Yelderman notes a unifying theme in this line of work: "reducing costs and risks so that otherwise privately desirable transactions can occur."

In Coordination-Focused Patent Policy, Yelderman does not take sides in this debate over the role of coordination in justifying the patent system. Rather, he is interested in what coordination-focused policy would even look like—a question that is important even if coordination is merely a subsidiary benefit of patents—and he concludes that it would look rather different from a rewards-focused system.

Nguyen on IP as Collateral and the Fed. Cir.'s Overreach into Commercial Law

Xuan-Thao Nguyen (Indiana McKinney) has posted two just-published articles on the role of IP in secured transactions. The first is Financing Innovation: Legal Development of Intellectual Property as Security in Financing, 1845-2014, which describes the development of the use of IP in chattel mortgages, including recent Federal Circuit decisions on whether a secured party of IP collateral becomes the owner after default. She argues that despite new financing mechanisms, small businesses have been struggling to access financing for innovation, and that more attention to this issue is necessary to help the United States maintain its innovative edge. (As Daniel Hemel and I point out in Beyond the Patents-Prizes Debate, one of the main downsides of ex post rewards like patents and prizes over ex ante rewards like grants and R&D tax credits is that ex post rewards require innovators to obtain financing to cover early R&D costs.) In her conclusion, Nguyen notes that "China has embraced a competitive strategy to increase innovation by providing financing based on the intellectual property assets of the business," though she notes that the details of Chinese IP financing is beyond the scope of her current project.

Nguyen's second new article is In the Name of Patent Stewardship: The Federal Circuit's Overreach into Commercial Law, which has harsh words for the Federal Circuit's recent cases on secured transactions and other commercial law issues affecting IP. Here is the abstract:

While the U.S. Court of Appeals for the Federal Circuit has admirably commandeered its stewardship of patent law—Congress bestowed the Federal Circuit with exclusive jurisdiction over patent appeals since 1982—the court has unabashedly extended its reach, unwelcomed, into commercial law. Camouflaged in the name of patent stewardship, the Federal Circuit’s foray into commercial law has yielded unexpected and unjustifiable results. This Article argues that, paradoxically, to maintain its stewardship of patent law, the Federal Circuit should not invoke patent law to rationalize its decisions concerning commercial law, which have dramatically altered established commercial law. This encroachment into commercial law, which is within the provenance of state law, destabilizes federalism causing uncertainty in state law. The Federal Circuit must refrain from encroaching into commercial law as it has no authority to inject itself into state law making.

I haven't delved into these cases in any depth, but I'd be curious to hear the thoughts of other commercial law scholars on these issues.

When should universities patent?

I spoke today about university patenting to the Yale Student Science Diplomats, a group of science graduate students who are interested in science policy issues. It was great to have a chance to engage with scientists about why we allow universities to file patents on federally funded research (which they are permitted to do under the Bayh-Dole Act), and what those justifications tell us about when public-minded universities should be filing patents. As I discuss in my YLJ Comment, patents are not needed to motivate university researchers to innovate or to disclose their inventions—university researchers were innovating and publishing their results long before Bayh-Dole, primarily out of a desire for prestige (and the resulting tenure and prizes). The most compelling justification for Bayh-Dole patents is commercialization theory, the idea that exclusive patent rights are necessary to bring inventions to market. This theory is more convincing for inventions like pharmaceuticals with high regulatory barriers and low imitation costs, but it does not make sense when the exclusive patent right is unnecessary for commercialization—something that is very difficult to determine.

Mulligan: Numerus Clausus for IP

Should the number of ways to transfer intellectual property rights be limited? Real property may only be held in certain standardized forms (fee simple, lease, etc.), a principle first termed "numerus clausus" ("the number is closed") by Merrill & Smith in a 2000 Yale Law Journal article. "The justifications for the numerus clausus principle in real property law are even stronger in the intellectual property context," argues Christina Mulligan (Yale Law School Information Society Project) in her forthcoming article, A Numerus Clausus Principle for Intellectual Property.

Buccafusco & Sprigman: Valuing IP

Are there problems with the way IP is priced? Professors Christopher Buccafusco (Chicago-Kent) and Christopher Sprigman (Virginia) provide a novel experimental insight on this question in Valuing Intellectual Property: An Experiment, which was published in the November 2010 issue of the Cornell Law Review. I have been thinking recently about the prices that are set for intellectual property because of Amy Kapczynski's project on theorizing the costs of these prices, which she presented at Yale Law School today (and which I'll blog about in more detail once a draft of her paper is posted). But while Kapczynski provides the first thorough critique of price itself (challenging the premise that IP should be priced whenever transaction costs are low), Valuing Intellectual Property contributes to the second-order critiques that emphasize the particularly high transaction costs in the IP context.

Buccafusco and Sprigman conducted a clever experiment to study how people set prices for creative works by creating a market for 10 poems in a $50 poetry contest. They found that the "authors" who wrote the poems and the "owners" who were told they owned one of the poems were only willing to sell their poem (and the corresponding chance of winning the contest) for over $20, while "bidders" would only pay around $10 to buy a poem. This effect was the same whether the participants could see all 10 poems or not. And even when the "contest" became a random lottery (so that each poem had a 1 in 10 chance of winning), authors and owners would only sell for over $15, while bidders would only pay around $5 (the actual expected value).

This experiment is the first demonstration of the endowment effect (where people value something they own more than an equivalent thing they don't) for non-rival, created goods. Even though the authors were reminded that they would get to keep their poems (which would be emailed to them), they still priced the poems' values as contest entries more highly than the bidders. The implication for IP is that the deadweight loss caused by copyrights and patents may be even larger than previously expected. Although the endowment effect is well established in behavioral law and economics, these inefficiencies are particularly troubling in IP, where the marginal cost of information is zero. Buccafusco and Sprigman argue that their results suggest market failures in licensing IP, which supports the use of liability rules over property rules and a more expansive fair use doctrine. More broadly, their results demonstrate another problem with using price as a signal of value for information goods.