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An Introduction to IP Law and Economics

Stephen M. MaurerGoldman School of Public Policy

IT and Public Policy – Sept. 30, 2004

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Software

Hardware

Two Frontiers

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Software

Hardware

Two Frontiers

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Work Both Sides of the ProblemOpen SourceData WarehousingComputer Security

Incentives are Powerful!Hortatory Solutions & Laws

Two Frontiers

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Legal TraditionLocal (Nuts-and-Bolts) OptimizationIs-Ism

Economics TraditionGlobal (Big Picture) OptimizationPrecision

Two Sets of Tools

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The Second Copy is Cheap!Jargon: “Non-Rival”

I Care What You Buy.

Two Themes

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Intellectual Property (“IP”) Other R&D InstitutionsApplications . . .

Database Policy(Private-Public Partnerships)(Academic Entrepreneurs)

MP = 0

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LegalA Right To Exclude

Some HistoryLate Medieval OriginsStatute of Monopolies (1524)Patent & Trademark OfficeFashions in IP Law

Many TypesPatents, Copyright, SCPA, etc.

Many ProposalsDatabases

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Subject Matter?No.Defendant

Wins

Yes.

Liability (Infringement)

No.DefendantWins

Yes.

Defenses & Exemptions

No.DefendantWins

Yes.

ReliefNo.Defendant

WinsPlaintiff Wins

Yes!

Legal

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Legal

Subject Matter?No.

Yes.

Subject Matter

Patents: * Products, Compounds, Machines, Processes . . .** Life, Business Methods, Software?* Novelty

Copyright:* Expression, Not Ideas* Writings, Plays, Movies, Digital Audio . . .** Software?* Creativity

Other Statutes - The Public Domain

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LegalLiability

(Infringement)

No.

Yes.

Liability

Basic ConceptsBreadthDuration

PatentsDoctrine of Equivalents20 Years

Copyright Non-Literal SimilarityLife + 70 Years

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Legal

Defenses & Exemptions

No.

Yes.

Defenses & Exemptions

PatentsReduction to Practice, Misuse, First Sale Rule, Research, Duty of Candor, Estoppel & Laches.

CopyrightIndependent Invention, First Sale, Fair Use, Misuse (?), Estoppel & Laches

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Legal

ReliefNo.

Yes.

Relief

Patents & CopyrightDamagesPreliminary InjunctionsPermanent InjunctionsExemplary & Statutory Damages

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Trade Secrets

A Different Philosophy . . .

Subject Matter

Commercially Valuable Secrets

LiabilitySecrecy, Improper Means, Duration

Relief Damages, “Headstart” Injunctions

Legal

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A Choice of Methods Dominant Solution!!!

What Are We Trying to Accomplish?

What Are the Benefits/Drawbacks?

Economics

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What Are We Trying to Accomplish?1. “Nobody Can Be Made Better Off Without Making Someone Else Worse

Off.”

2. Maximize Net Social Value (v-c) > 0

3. Old Economy Prescription:P = MC

Economics

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What Are We Trying to Accomplish?

1. Ex Post Efficiency – “Deadweight Loss”2. Ex Ante Efficiency – “Innovation”3. Eliciting Privately Held Information4. Agency Problems – Sponsors5. Agency Problems – Researchers

Economics

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Economics

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Demand

“Markets are Efficient”Price

Quantity

Economics

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“Monopoly”

π

Economics

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S

“Monopoly”

π

Economics

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Public Goods: Non-Rival (MC = 0)

Excludable

Why P = MC Won’t Work

What IP Does

“Intellectual Property” Economics

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Is IP a Monopoly?P > MCDoing WithoutEx Ante vs. Ex Post

Mitigating Deadweight LossDigital Rights Management

“Intellectual Property” Economics

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Limits of IPCopyright History

Is IP Necessary?DatabasesSource CodeMusic

Too Much IP?Databases, DMCA, Software Patents. . .

Economics

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Economics

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Incentive = Π·V

πEconomics

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What Incentive is Optimal?

Innovation vs. DWLIntergenerational Issues

RacesDuplicationWasteHigh Risk Research

Economics

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Cumulative InnovationDo We Need A Strong Commons?The Licensing ArgumentSoftware Patents

Economics

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Economics

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Information About (v-c) is Dispersed.

Two Types of InformationTechnical Feasibility – JavaValue to Consumers – The Internet

Limits on Information Sharing

Economics

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Economics

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Economics

What If Researchers . . .

* Lie About (V – C)?* Go to the Beach?

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Economics

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Economics

What If The Sponsor Doesn’t Pay?

* Patent Litigation?

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Evidence

Are Patents Important?

PathologiesPatent ThicketsThe AnticommonsTrolls

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History

Examples PrizesContract ResearchGrantsBuy-Outs

HybridsCRADAsBayh-Dole

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Prizes

1. Ex Post Efficiency No Deadweight Loss!!

2. Ex Ante Efficiency – “Innovation”You Must Know “v”!!

3. Eliciting Privately Held InformationDirected Prizes (DARPA, X-Prize) Blue Sky Prizes (Google)

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4. Agency Problems – SponsorsTypes of PrizesCommitment Strategies

5. Agency Problems – Researchers

Prizes

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Contracts1. Ex Post Efficiency

No Deadweight Loss!!

2. Ex Ante Efficiency – “Innovation”You Must Know “(v-c)”!!Packet SwitchingCompetitive bidding & second-price auctions.

3. Eliciting Privately Held Information

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4. Agency Problems – Sponsors

5. Agency Problems – Researchers

Contracts

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Grants1. Ex Post Efficiency No Deadweight Loss!!

2. Ex Ante Efficiency – “Innovation”You Know “c” Before, “v” Afterward!!

3. Eliciting Privately Held Information

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4. Agency Problems – Sponsors

5. Agency Problems – ResearchersAn Imperfect Solution . . .

Grants

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DatabasesHistory

U.S.Feist & CongressEurope (1996)

U.S. Politics

IP as a Hidden TaxUsers vs. Sellers

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DatabasesPolicy

The Paradox: Why Do We Have a Database Industry at All?

The Issue: DWL vs. More innovation

The Evidence:

Who’s Been Injured?What New Databases Would We Get?The European Experiment

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0.5

1

1.5

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2.5

3

3.5

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4.5

5

1994 1996 1998 2000

France

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2

4

6

8

10

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1994 1996 1998 2000

U.K.

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5

10

15

20

25

1994 1996 1998 2000

Germany

0

1

2

3

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5

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1994 1996 1998 2000

US

Databases

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Advice to Congress

OptionsProperty RulesLiability Rules

MisappropriationThe INS Case

Current Law

Prove It!

Databases