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2 Intellectual Property Institutions and the Panda's Thumb: Patents, Copyrights, and Trade Secrets in Economic Theory and History
Pages 19-62

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From page 19...
... The shortening of product life cycles, and the advance of techniques that make "reverse engineering" and outright copying of novel products easier, have made it more difficult for firms to reap the benefits of innovation simply by guarding new technologies as trade secrets while quickly moving along their production learning curves to seize a cost advantage over potential imitators. Also, many awkward ambiguities and widening areas of legal dispute have been created by the application to new technological developments of laws pertaining to patents, copyrights, and trade secrets, particularly in regard to biotechnology and to computer and information technologies.
From page 20...
... Rather, in keeping with the more pervasively utilitarian spirit of the times, the statutes, legal rulings, administrative regulations, and other institutional arrangements affecting patents, copyrights, and trade secrets are widely regarded as public policy instruments that should be designed to enhance economic welfare by stimulating technological progress. Even if the rhetoric of argument occasionally appeals to notions of justice and equity, modern economic analysis, and its characteristic preoccupation with questions of efficiency, now set the terms for policy discussions about the protection of intellectual property.
From page 21...
... , have left an enduring mark. So, it would be really quite remarkable if the evolution of legal institutions concerning patents, copyrights, and trade secrets had somehow resulted in a set of instruments optimally designed to serve either public policy purposes or the private economic interests of individuals and firms seeking such protections.
From page 22...
... . The modern "law" of intellectual property, however, consists of statutory and administrative laws pertaining to patents and copyrights, even though the common law roots of the law of trade secrets create a complicating exception.
From page 23...
... Second, intellectual property law is an intricate, highly specialized area of legal scholarship and one to which I make no pretensions of expertise. Third, the historical development in Western societies of the patent system, the statutory protection of copyright, and the body of law governing trade secrets is a subject area that, unfortunately, has remained all too separated from economic and legal analyses of contemporary intellectual property issues.
From page 24...
... Some considerable indulgence and forbearance on the part of the reader will therefore be required if my discussion oversimplifies complex matters of economic reasoning concerning intellectual property and the production and distribution of knowledge, points out only the most salient and early developments in the long history of these western European institutional arrangements, glosses over crucial distinctions and subtle points of modern law, and indulges in some provocative concluding comments on the current U.S.-led campaign for an international regime of uniformly strong intellectual property protection, as that appears from this economic historian's perspective. KNOWLEDGE, PUBLIC POLICY ECONOMICS, AND INTELLECTUAL PROPERTY The economist approaches the subject of protection of intellectual property rights, like many other issues, by trying to fit it into the generic formula for public policy decisions (see, e.g., Besen and Raskind, 1991:5~.
From page 25...
... Intellectual property institutions must be evaluated in terms of their implications for the social costs of producing new knowledge, as well as for the utilization of the existing stock of knowledge. Information, Public Goods, and Competitive Market Failures The argument most generally offered in support of public policy interventions to enforce patents, copyrights, and trade secrecy is that there is a "market failure." In the absence of governmental protection of private property rights, the argument goes, competitive markets would not give individuals and organizations sufficient incentives to induce the socially optimal amount of investment in public goods in the form of new scientific and technological knowledge.
From page 26...
... Recent discussions of the economics of R&D and technology transfers (see, e.g., Pavitt, 1987; Rosenberg, 1990; Arora, 1991) have recognized the importance of tacit components of technological knowledge and emphasized that the in
From page 27...
... What is held secret and what becomes publicly disclosed are determined not so much by the inherent nature of the information as by the expected costs and rewards associated with each course of action for the agents involved (see Dasgupta and David, 1990~. This much is obvious from considering the factors that enter into a firm's decision whether to file for a patent on a new process of manufacture or to protect it as a trade secret.
From page 28...
... Unlike scientific and technological knowledge, light signals just do not evolve and acquire new utility through cumulation and interaction. As discussed below, legal and other institutional arrangements may be imposing high costs on research-intensive firms, and society more generally, by restricting access to some elements in those streams of creative thought and thereby making it less likely that the elements will be rapidly rearranged and recombined in new and fruitful ways.
From page 29...
... The specific legal contrivances of the patent, copyright, and somewhat more problematically, the trade secret fall within the property rubric. The Intellectual Property System Patents convey the most potent rights in the intellectual property system, for the patentee may exclude everyone else from making, selling, or using the subject matter of a valid patent throughout its term.
From page 30...
... Copyright Act except for the right to injunctions against infringers exist independently of any formal registration, prior examination, or determination of the validity of the claim to originality. Thus, the scope of copyright protection ultimately must be defined through litigation.
From page 31...
... actions of others. Unlike patent and copyright law, trade secret law (even when given statutory structure)
From page 32...
... Each of the three allocative mechanisms has been found useful in some fields and at some periods in the development of modern industrial societies; but the weight of reliance has shifted among them over time, and none has been accepted as clearly superior to the others in all contexts in which useful knowledge has been sought. Even the brief economic analysis that follows readily exposes some serious drawbacks to, as well as the principal advantages of, each of the three arrangements.
From page 33...
... Priority is equally central to patent awards, although whether the touchstone is priority of invention or priority of registration and disclosure varies from one national system to another. Also, statutory copyright protections are traditionally accorded to the first author to disclose (by registration with the copyright-granting authority)
From page 34...
... Exclusive possession of technological knowledge by a profit-seeking agent will restrict the extent to which that knowledge is applied for the production of commodities that embody the innovation or can be fashioned more cheaply by processes based on it. The more secure the possession is, the less the patent monopolist or copyright holder has to worry that charging a high royalty rate will induce others to seek to avoid paying it by investing in reverse engineering, "inventing around," or closely imitating his or her creation.
From page 35...
... The greater the incentive is for firms to proceed with their R&D programs in complete secrecy, the more severe this source of inefficiency is likely to become. Here again, within the category of property devices for organizing the production of knowledge, patent and copyright protections possess comparative virtues (of intermediate-stage disclosure)
From page 36...
... This may be due, in part, to the fact that patents and copyrights sprang from statutory enactments, which often ignite political debate and public discussion, whereas the protection afforded to possessors of trade secrets by the courts is rooted in the common law. Optimizing Intellectual Property Protection: Issues of Length and Breadth More than 30 years ago, Fritz Machlup (1958:80)
From page 37...
... Hirschliefer and Riley (1979) , for example, evaluate the impact of increasing copyright protection by comparing the benefits from reducing losses due to underproduction of new works to the costs incurred in the form of losses due to underutilization of copyrighted material.
From page 38...
... provides a more dynamic analysis of the trade-offs involved in broadening the breadth of patent protection. As a proxy variable for patent breadth, he proposes the anticipated probability of infringement.
From page 39...
... , and excessively rapid spending on research. These forms of inefficiency are clearly related to the previously discussed problem of lack of interfirm coordination or socially optimal scheduling of R&D projects, which stems from the competitive conduct of research under conditions of secrecy and from "patent racing." As a solution to this problem, Kitch and Beck proposed to broaden the scope of patent protection to allow the rationalization of the entire development process for a given technological "prospect." Drawing an analogy to mineral resource development, Kitch and Beck have argued that by allowing the "competent" initial innovator to coordinate the subsequent development of "a technological prospect" through efficient bilateral monopoly contracts with other innovators, broader protection would eliminate duplicative effort, premature invention, and other forms of inefficiency in a competitive race for patent monopoly.
From page 40...
... The monopoly franchise envisaged by David and Olsen's analysis would be designed solely to optimize the rate of incremental improvements and the resulting diffusion of the technology into use, without regard for the possibility of inducing some future breakthrough that would introduce yet another new technology. The situation is one in which patent protection would be granted not for invention but for the introduction and adaptation of a basic invention that had already been developed elsewhere.
From page 41...
... More recently, Merges and Nelson (1990:5-6) persuasively formulated an analogous case, although in broad terms and without invoking results from any formally specified model, for restricting the breadth of patent protection.
From page 42...
... One implication that would seem to follow is that as basic scientific advances reduce the costs of successfully inventing around breakthrough patents in a particular technological area, the breadth of patent protection awarded the pioneers could be increased without diminishing the net incentives that would exist for derivative, second-generation R&D projects. Essentially the same considerations that arise from recognizing that new scientific and technological knowledge (and intellectual products more generally)
From page 43...
... By focusing selectively on specific features of the complex structure of intellectual property protections and pointing to their putatively favorable consequences for social efficiency in resource allocation, one can convey the misleading impression that the law in this area is susceptible to easy and rapid reshaping to enhance economic welfare. The evolution of the law in Western societies for protecting intellectual property does attest to a great adaptive capacity.
From page 44...
... Legal institutions preserve many aspects of outward continuity even when it has become apparent that the circumstances of many of the economic actors affected by the institution have changed and that a radical transformation has occurred in the inner rationale and motivation for its maintenance. Thus, although the history of intellectual property rights in the West is replete with instances of redefinition and reinterpretation in response to pressures to accommodate or advance the economic interests of those most affected by the laws, many of the structure's gross features continue to reflect the remote historical circumstances in which they originated.
From page 45...
... (As has been pointed out, however, modern economic analysis finds this aspect of the contemporary patent system difficult to rationalize.) Granting monopolies also made sense fiscally for sovereigns whose powers of taxation and borrowing were very circumscribed.
From page 46...
... Patent Office, and elsewhere, might well be seen as the makeshift results of a 200year struggle to use the granting of patent privileges to accomplish a purpose for which it was not originally designed (see Lubar, 1990~. Most historical accounts place the origins of systematic state protection of intellectual property firmly in Renaissance Italy, from where it spread first on the continent of Europe and eventually to England.
From page 47...
... Despite the rising interest in invention and the spread on the continent of Europe of the use of patent grants to encourage the development of new industrial practices as an instrument of mercantilist policy in France during the mid-sixteenth century, in England the first clear provision for "patents of invention" as distinct from technology transfer franchises sometimes referred to as "import patents" did not emerge until the seventeenth century and it did so then rather as an afterthought, in the course of a movement to free the economy and polity from the abuses of royal grants of monopoly privileges. With the advent of the Tudor dynasty (1485)
From page 48...
... , however, the previous policy of general encouragement of technology transfers was reinstituted. Between 1561 and 1571, many patents were issued by the Crown under this policy, starting with a grant to two foreigners to introduce the manufacture of hard white Spanish soap and one for the manufacture of saltpeter, an item previously imported from Antwerp (see Federico, 1929a:293297~.
From page 49...
... This statute's purpose was to establish literary property protection for a renewable 14-year term, but it included the following interesting rider (Bugbee, 1 967:931: The Inventors of useful machines shall have a like exclusive privilege of making or vending their machines for the like term of 14 years, under the same privileges and restrictions hereby granted to, and imposed on, the authors of books. What makes this provision rather intriguing today is that it so closely coupled patent protection with copyright protection, assigning the former as most appropriate to "machines" and the latter to "books," but otherwise barely distinguishing the treatment of the one from the other.
From page 50...
... The U.S. Senate complied with Washington's recommendation in his address of January 8, 1790, by appointing a committee charged with considering provisions for the granting of technology importation franchises, patents for invention, and copyright protection, all within a single act.
From page 51...
... or ~ ~~~ ~~ I' copy and the unit cost of subsequent copies. Copyright law, from the beginning, has been shaped more by the economics of publication than by the economics of authorship (see Patterson, 1968; Plant, 1974:Ch.4~.
From page 52...
... Similar arrangements had developed among leading German publishers and were exercised through a guild and the book fairs of Frankfurt and Leipzig (see Bugbee, 1967:48~. When the German book trade was interrupted during the Thirty Years' War, the Dutch quickly assumed leadership of the publishing industry in Europe.
From page 53...
... Nevertheless, authors in England had personal property rights in their unpublished manuscripts, as well as contractual protections under the common law. These protections extended to a recognized interest in the integrity of the form and content of the work for which publication permission had been given, which restrained printers from making arbitrary alterations in texts once they were published and from dispensing with the need to recompense the author.
From page 54...
... CONCLUDING OBSERVATIONS Historical studies reveal that although patents, copyrights, and legal protection of trade secrets have been recognizable institutions in Western societies for centuries, policies bearing on the protection accorded to intellectual property, and the juridical-institutional arrangements used to implement them, have been a mutable thing, adapted over time and across societies to the perceived needs and advantages of interested parties. The adaptations in each form of protection, moreover, have occurred within the historical context of other, related institutional arrangements affecting the costs and benefits of maintaining specific intellectual property rights.
From page 55...
... "prospect" argument that broad, strong patents encourage fundamental innovations and their orderly development, but it contests the premise in the latter that a monopolist can identify and efficiently contract for the performance of cumulative, elaborative research. Third, although it is arguable that weak patent protection regimes encourage exchanges of patent licenses among firms that are symmetrical in their technological capabilities, the opposite is more likely to be the case in regard to transfers of technical know-how from more to less capable organizations.
From page 56...
... Rather, they have been pragmatically altered over time in response to changing perceptions of the way the creation and dissemination of information and information products affect "national interests." They also have been tinkered with periodically to remedy unanticipated problems in the workings of institutional arrangements due to changes in the technologies employed to produce and distribute information products. Much of the late nineteenth century "reform" in national and international copyright law, for example, was provoked by developments in the technology of printing that underlay the cutthroat competition for mass markets (by the standards of the day)
From page 57...
... These constraints would remain even if there were widespread agreement as to the needs of the mo ment. The two foregoing observations imply, in my view, a third conclusion: Proposals now being advanced to establish a uniform international regime of intellectual property protection are not practical, even though careful economic analysis would indicate that there may be considerably more points of agreement between the interests of the technologically advanced and the economically developing countries than often has been supposed.
From page 58...
... Journal of the Patent Office Society 11:358-365. Folster, S
From page 59...
... Journal of the Patent Office Society 27(March)
From page 60...
... Journal of the Patent Office Society 26(November)
From page 61...
... World Intellectual Property Organization.


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