Tuesday, March 6, 2012

Shubha Ghosh on Creation Without Restraint

Posted by Shubha Ghosh

Professors Christina Bohannan and Herbert Hovenkamp combine their strengths in intellectual property and antitrust in their new book Creativity without Restraint to propose a new approach to intellectual property law that limits the scope of intellectual property rights. They ask a simple question, echoing My Fair Lady: Why can’t IP be more like antitrust? The book is a valiant effort, but the answer ultimately is that there is good reason for IP to not be more like antitrust. The two fields are complementary, and creating symmetry between the two removes the forces that make the two areas of law work together to promote innovation and competition.

The book’s thesis is as follows. IP law needs a principle of harm in order to limit spurious claims by IP owners, particularly owners of patents or copyrights, against creators and innovators. The authors bases this harm principle on the doctrine of antitrust harm, articulated by the Supreme Court in its 1977 Brunswick v Pueblo Bowl-a-Mart decision. The harm principle would require the patent or copyright owner to show harm to innovation much like the Brunswick decision requires antitrust plaintiffs to show harm to competition. The authors provide many examples of how this principle might work in practice. Here, I want to address two points that follow from the book’s thesis. The first is a challenge to IP theory; the second, to IP practice.

Beyond Public Goods Theory

Public goods theory, derived from neoclassical economics, provides the primary justification for intellectual property rights. All intellectual property subject matter involves information, and in its pure state, information is non-excludable and non-rival. These limitations mean that information cannot be excluded from parties absent some technological or legal limitation. Similarly, information cannot be exhausted. It can be used by an infinite number of people without it being diminished. Markets driven by price signals cannot perform in either producing or distributing public goods in an efficient manner. Intellectual property rights cure this market failure in part by creating exclusionary rights that allow creators and inventors to market information goods through traditional commodities. While exclusionary rights may work to solve the public goods production problem, they are not good at the distribution problem. By turning public goods into private goods, intellectual property rights curtail the public value of information. Within this framework, intellectual property law scholars and policy makers attempt to calibrate the scope of intellectual property rights to facilitate both the public value and the incentives to produce. Doctrines related to infringement, fair use, the allocation of rights, and other limitations serve as the levers for this calibration.

Professors Bohannan and Hovenkamp turn this traditional theory on its head. Starting from the premise that competition is the engine for innovation, the authors ask what set of rights facilitate the competition necessary to promote entry of new creators and new ideas in order to promote innovation. The concept of public goods plays only a small role in their theory. In fact, there are only a handful of references to public goods in the entire book. Intellectual property rights can aid in the production of creative works, but they also serve as a restraint. The restraint is on the competitive process through which creativity and innovation occurs. Through explorations of traditional doctrines like fair use and misuse, the authors demonstrate how intellectual property can promote dynamic competitive innovation.

Professors Bohannan and Hovenkamp provide a useful and fruitful avenue for discussion. Even within traditional public goods theory, the question remains on how markets defined through intellectual property rights would function and serve goals of efficiency and equity, goals captured through the loaded term “welfare maximization.” These questions surface most prominently in intellectual property’s relationship to antitrust law. The authors broach this question by an appeal to fundamentals. They ask, what is competition and how does intellectual property law nurture it. This inquiry opens up possibilities for research on the dynamics of technological markets, the motivations and drive for creativity and invention, and the role of tournaments that arise in many institutions, such as universities, in promoting innovation. Many scholars have already written on these and related issues. Professor Bohannan and Hovenkamp provide a potentially cohesive framework for these lines of research.

My big caveat is about the implications for policy. Within public goods theory, the policy challenge is to balance incentives for creation with the needs of many constituencies to use works protected by intellectual property law. The challenge is a bold and perhaps impossible one to meet. By moving beyond public goods theory to competition theory, Professors Bohannan and Hovenkamp arguably offer more heat than light. Framing the issue in terms of competition does not strike a more appropriate balance between incentives and use. Instead, the proposed frame introduces only more questions about what type of competition is appropriate and how best to structure it. I am not optimistic that we will necessary get better policy results from the shift. Nonetheless, understanding the contexts in which intellectual property operates is important, and the authors invite that move in their approach. That is certainly a welcome change.

What’s the Harm?

Professors Bohannan and Hovenkamp have one response to my question about how a focus on competition in intellectual property law can shape policy. They propose to model the implementation of intellectual property law on antitrust law. That proposal has some promise, but raises other questions.

As the authors point out, antitrust law has developed a theory of antitrust harm that provides a basis for assessing antitrust claims. In its 1977 Brunswick decision, the Supreme Court held that antitrust law protects competition, not competitors, meaning that antitrust law aims to cure injury to the competitive process. What counts as an injury, of course, rests on how the competitive process should ideally work. For example, even stalwart critics of antitrust law would agree that price fixing by competitors is illegal. This agreement stems from a recognition that firms should compete on price terms to ensure that consumers are obtaining a product or service at the lowest price possible. How about price restrictions imposed by a manufacturer on a retailer? What is the model of competition that guides the answer to that question. Disagreement over the answer is reflected in the debate over the legality of minimum resale price maintenance which the Supreme Court held to no longer be per se illegal in its 2007 Leegin decision (with Justice Breyer dissenting). Although the meaning of injury to competition is a source of controversy in antitrust law and policy, its appeal has served to guide the debate and development of the law. Hence, the proposal to use competition to shed light in intellectual property law seems sensible.

One application would be to trademark law. Under current doctrine, trademark law is based on either a likelihood of confusion or a likelihood of dilution. As many have pointed out, such likelihood is readily found creating a boon to trademark owners even when the existence of any actual harm to owners is doubtful. Perhaps requiring a showing of actual harm to the branding process would cure these concerns with the current standard. Trademark law provides one example of where the professors’ proposal would add benefit.

Surprisingly, the authors do not discuss trademark law. Their focus is on patent and copyright, with some discussion of trade secret, perhaps because these are more traditional areas of intellectual property. How to frame competitive injuries in the area of patent and copyright laws is a challenging question. Part of the problem is the lack of a consistent model of competition that applies well in these areas as the model of price competition applies in so many areas of antitrust law. In copyright law, fair use analysis might benefit from an application of competition principles, supporting transformative works as the entry of a new product or service in the marketplace. Similarly, the repair doctrine in patent law might also benefit from an inquiry into competitive harm. Perhaps even the nonobviousness analysis might be understood in competitive terms as patentability hinging on the introduction of an inventive product or service that provides competitive benefits. Professors Bohannan and Hovenkamp have introduced a trove of possible analytic approaches and nuances to patent and copyright.

The problem is that the antitrust analogy provides a mismatch to intellectual property. Patent and copyright resolves competitive problems in the creative and inventive processes. They both address the problems of the first to create or invent, albeit in quite different ways. As a result, a requirement on competitive injury does not necessarily loosen the restraint of strong intellectual property rights on creativity as Professors Bohannan and Hovenkamp suggest. Good intellectual property attorneys can reframe an infringement claim into a claim for competitive injury by emphasizing the loss of incentives from the defendant’s conduct. At best, the proposal shifts how we talk about infringement rather than supporting the substantive reforms promised.

The mismatch between antitrust and intellectual property is demonstrated by the words used to describe markets created by intellectual property rights. One often hears such markets described as a monopoly, which is incorrect in many instances because design-arounds permit ready substitutes. The term oligopoly, a market with a few mid-sized to large firms, is equally inaccurate if the market description does not take account of product differentiation adequately. Antitrust law contains two approaches to market definition. One is based on the Structure-Conduct-Performance (SCP) approach, which focuses on markers like the shape of cost curves, the extent of demand, and ease of firm entry to determine concentration in markets. The other is the Chicago Approach, which uses the assumption of rational behavior to explain firm behavior in competitive settings. Under the Chicago Approach, even seemingly concentrated markets might have a competitive dynamic that militates against application of antitrust law.

Neither approach is fully applicable to patent and copyright. Creative and inventive activities do not arguably take place in organized markets. They are diffuse, not necessarily operating in response to price or demand signals. People produce because they want to produce. The SCP approach does not apply to such unstructured environments lacking meaningful cost or demand structures. The Chicago Approach also is inapplicable. Putting aside criticisms of the rational actor model, which have been rehearsed and are well understood, the real problem with the Chicago Approach as applied to patent and copyright is that creation does not occur in a transactional setting. So the transaction cost approach that is the hallmark of the current version of the Chicago School seems off target in identifying competitive injury.

Admittedly, patent and copyright do occur in organized and structured markets informed with transactions. The publishing, software, and pharmaceutical industries are just three prominent examples. So borrowing from antitrust law to gauge the competitive dynamics arising from intellectual property might be relevant in those contexts. But much creative activity will be missed by focusing on those contexts. How, for example, to approach YouTube or blogging or social networks within the antitrust terms proposed by Professors Bohannan and Hovenkamp? Their approach might favor organized markets over unstructured settings and thereby support the IP interests of large companies rather than individual creators, such as users and contributors to YouTube or independent software developers.

What is needed is a better understanding of competition in creative settings. How does competition, for example, operate when there are no price signals? Much of the competition that is covered by patent and copyright can be described as the non-price variety. Once we understand issues like non-price competition, we might make more progress in designing intellectual property policy than simply borrowing from antitrust law. Creation Without Restraint invites that needed inquiry.

Summary

Professors Bohannan and Hovenkamp have written a provocative and thought-provoking book. For those who feel that current intellectual property debate (perhaps legal theory debate, more broadly) seems to be occurring in a closed room, this book provides a door out with a thin sliver of light peering through the cracks. What is on the other side of the door, however, is still to be seen.

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