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[Sabrina Safrin (guest-blogging), March 7, 2007 at 6:36am] Trackbacks
Reactive Propertization and Fear of Exclusion.

My last two postings identified two reasons why property rights beget additional property rights. First, some may seek property rights because they are copying the actions of others, particularly the actions of influential members of their community. As an example, I pointed to the dramatic rise in patenting notwithstanding the low expected value of individual patents, commonly referred to as the patent paradox. Dennis Crouch suggested that we refer to this as the lemming theory for the patent paradox, and, upon reflection, I concur. (Thank you Dennis.)

Second, second generation property rights may emerge in response to first generation property rights because the first generation property rights fracture a cooperative norm. I pointed to the emergence of property rights over raw genetic material that arose in response to the patenting of genetic sequences and bioengineered goods as an example of this.

Some of yesterday's bloggers seemed to want a bit more information on this point. Basically, before the early 1990s, most nations treated genetic material as part of the "common heritage of mankind." (For example, 100 nations expressly referred to genetic material as part of the "common heritage of mankind" in an international agreement on plant genetic resources). The common heritage principle that prevailed for centuries accounts for the widespread distribution of foods far away from their place of origin. It also accounts for the semi-dwarf varieties of wheat and rice that formed the bedrock of the Green Revolution. U.S. breeders developed these varieties from seeds freely obtained from Japan and, in turn, freely shared their improved varieties throughout the world.

By the early 1990s, this had changed. As developed countries began to patent isolated genetic sequences and bioengineered organisms as well as to require that developing countries, as a condition of free trade relations, extend intellectual property protection to bioengineered goods, developing countries responded by asserting government rights over naturally-occurring genetic material. Why, these countries asked, should individuals and companies from gene-poor developed countries obtain genetic material free of charge from gene-rich developing countries when they then patent these genes and at times sell them back to the country where the genetic material originated? Consequently, in 1992, developing countries insisted on language in the Convention on Biological Diversity that expressly recognized sovereign rights over genetic material and pointedly rejected the common heritage of mankind principle. Since 1992, some 40 nations have or are in the process of adopting laws that greatly restrict access to genetic material within their borders.

Meanwhile, closer to home, patients began to assert property or related legal rights over biological samples that they had contributed in the course of receiving medical treatment.

Today, I offer a third reason for why the creation of property rights can beget additional property rights: fear of exclusion. When some begin to demand and receive new property rights, others naturally experience concern that they will no longer enjoy the ability to use the previously common resource. They respond by securing a property right for themselves in the good that is now the new object of propertization. In the alternative, they demand the creation of new property rights over some related good that they can exchange for access to the first object of propertization.

The fear of exclusion animates much of the frenetic patent activity underlying the patent paradox. Companies and institutions feel compelled to obtain patents over slight and even dubious innovations out of concern that if they do not have such patents, they will have no currency to trade for access to other patented and potentially equally slight innovations. As Internet Patent News Service editor Gregory Aharonian explains: "The big guys couldn't care less about the quality of their patents …. They just want as many as possible because they trade them like baseball cards. When you have a thousand patents and your competition has 1,500, you don't care what they are, you just swap them." Fear of exclusion also helps to explain why so many rushed to file patent applications over gene fragments. They feared that, unless they obtained such patents, those who did would exclude them from entire fields of innovation.

The demand by developing countries for property rights over raw biological material partly arose from their concern that patent holders would exclude them from enjoying the benefits of technology, particularly biotechnology. Developing countries sought governmental property rights over raw biological material partly to leverage such rights for access to patented technologies. The article of the Convention on Biological Diversity that acknowledges sovereign rights over genetic material is immediately followed by an article entitled "access to and transfer of technology." Together, the two articles envision a world where developing countries exchange access to unimproved genetic material within their borders for technological know-how.

Patients also often lay property or other legal claim to donated samples in order to secure access both to the patented gene and to diagnostic tests based on that gene. For example, in Greenberg v. Miami Children's Hospital, 264 F. Supp. 2d 1064 (S.D. Fl. 2003), patient groups, who had provided researchers with tissue samples to help them isolate the gene responsible for Canavan disease, sued the researchers for unjust enrichment in order to enjoin the researchers from enforcing the patent on the gene and preventing others from using the gene and diagnostic tests based on that gene.

Other patient donor groups, like the PXE consortium, have insisted on co-ownership of any issued patent again in order to ensure that the patented gene and derivative diagnostic tests remain available to those who suffer from the disease. They thus obtain an ownership interest to secure open access.

Dan Simon (mail) (www):
First, some may seek property rights...I pointed to the emergence of property rights...Meanwhile, closer to home, patients began to assert property or related legal rights....Today, I offer a third reason for why the creation of property rights can beget additional property rights....When some begin to demand and receive new property rights....They respond by securing a property right for themselves....they demand the creation of new property rights....The demand by developing countries for property rights....Developing countries sought governmental property rights....Patients also often lay property or other legal claim....

I tried to make this point in my comment on your first post, Sabrina, but it appears to have been ignored, so I'll make it again, in a more general form: by completely eliding the distinctions between people "seeking" property rights, "demanding" them, "receiving" them, and "asserting" them, you've managed to mischaracterize the entire story of the "patent paradox". As I explained before, it's not a case of "property rights begetting more property rights", but rather of a constantly-evolving, capricious, unpredictable and therefore risk-filled legal landscape forcing people and corporations to file otherwise worthless patents as insurance against the risk of being caught in a "patent trap".

Take the case of software patents that you discussed in your first post. People have been seeking property rights over software since software was first invented, for the obvious reason that such property rights often stood a good chance of making them lots of money. But the US Patent Office was originally steadfast in rejecting all such patent applications, on the grounds that "algorithms are mathematical objects, and therefore unpatentable".

Then, during the 1980s, some clever lawyers found a formulation which allowed them to get their software patent applications through the patent office (essentially, they patented "a device which runs this algorithm", rather than the algorithm itself). As a result, a gold rush of sorts began, with people patenting algorithms left, right and center using this new legal formulation.

Some of those patents were, in retrospect, for wonderful inventions that deserved intellectual property protection. Some were silly and useless. And some were essentially scams: cleverly worded patents that covered obvious, or even well-known and widely-used, software techniques, without revealing that they were doing so. Unfortunately, the patent office lacked the time, manpower and expertise to give this flood of patents the scrutiny it needed, and eventually got the reputation of letting just about anything through--spurring a renewed flood of scam patents. And after a few shocking court victories for patent scammers, things only got worse.

Faced with this perilous landscape, software companies reacted in the obvious way: by patenting anything and everything they could think of related to their products, in the hope of increasing their odds in any potential battle against a patent scammer. And of course, once they had this expensive portfolio of patents, they started looking for ways to leverage it--by extracting money from other software companies, thus increasing the incentive for those other companies to enlarge their own portfolios in response.

Notice two important facts about this story: (1) the vast majority of the patent applicants never had the slightest interest in "asserting property rights" in the normal sense of obtaining exclusive use over an invention. Rather, they sought either to extract money from independent, unknowing future (and often present) users of the invention, or to prevent such extraction attempts on themselves. (2) The uncertainty generated by the legal system's capricious treatment of intellectual property is a major culprit. If software companies, for instance, could be sure that (a) only genuinely novel inventions would be protected by intellectual property rights and (b) they could know what those inventions are, they wouldn't bother filing frivolous patent applications--they'd simply negotiate for the use rights they needed. Instead, they must spend enormous amounts of money on what amounts to partial insurance against the vagaries of the patent office and courts.

By ignoring the role of legal uncertainy, and instead treating both patent scamming and defensive patenting as serious assertions of property rights, I'm afraid you've constructed a grand theoretical framework that has precious little connection to the real world.
3.7.2007 11:01am
Kim Jong Il (www):
"By ignoring the role of legal uncertainy, and instead treating both patent scamming and defensive patenting as serious assertions of property rights, I'm afraid you've constructed a grand theoretical framework that has precious little connection to the real world."

Isn't that what academics do?
3.7.2007 12:05pm
Alan in CT (mail) (www):
One prime example of the fear of exclusion motivation is the cell phone industry. Cell phone standards are actually collections of various "inventions" that are patented by their individual contributors. As such, licensing and cross-licensing run rampant since, in order to utilize the accepted standard, a hardware or service provider must necessarily use patented content. This leads to cell phone companies patenting like crazy in an attempt to gain a stronger position for cross-licensing negotiations. This is also the basis for the lawsuits against Qualcomm and the lengthy proceedings relating thereto. (Qualcomm holds some of the early, necessary patents on cell phone communication.)

At first, the nature of the cell phone industry and standards took me by surprise. How can anyone own a portion of a standard? That would be like someone owning various HTML tags or XML commands. Yet, in the cell phone industry that's the norm. I don't necessarily agree with it, though as a patent agent I certainly don't argue with the amount of work it brings in.
3.7.2007 12:43pm
Michael Martin (mail):
The "fear of exclusion" effect seems not unexpected when a resource is going through a Demsetzian propertization. I'm guessing that during the enclosure movement, some built fences defensively to prevent the cattle that were newly excluded from a neighbor's land from being funneled on their own. The question is whether the cost of the system of property rights (including not only the administrative costs, but the costs of fraud and abuse) is justified by the additional benefit of having the system.

I'll tip my hand. With Abe Lincoln, I see the patent system as cost-justified. Unlike Abe Lincoln, I can tell you why (he thought it justified as a moral desert for the work of inventing): patents add liquidity to human capital. Before a patent system with publicly recorded specifications and claims came on line (not until 1836 in the U.S.), inventors could maximize the value of their human capital only by making some credible commitment of staying with a single employer for a long period of time. The most lucrative way to do this was to be an inventor-entrepreneur. The alternative was to have some asset-specific tie to production aside from inventing. These were the only alternatives available because trade secrets are not a sufficient means for protecting inventions -- they're too costly too enforce, and too easy to design around for the inventor who leaves for a competitor. By applying for and assigning patents to her employer, and inventor makes a credible commitment that that invention will remain the exclusive right of the employer, regardless of what happens to the inventor.

The market for human capital that patents have created is only now beginning to emerge. The recordation system in place since 1836 has been a sufficient stimulus for specialized innovation in subfields where engineers monitor every new issued patent. But search technology and the Internet are beginning to expose the full implications of the system.

The important thing is not to worry too much about the fraud and excess at the margins that is more visible than the everyday benefits because of the media. Regarding treaties in the 1990s, it was in the 1980s that Stanford professors Cohen and Boyer started the biotechnology patenting revolution in the United States. There was a fierce debate on campus at the time because their were cultural (and in some cases, like at Harvard) written norms against patenting therapeutic technology. Paul Berg, in particular, was very against the idea of patenting recombinant DNA. He lost. Genentech was founded along with the tech transfer business model and the rest is history. I am not sure, but I think if we asked Paul Berg today he would agree that the biotechnology industry, even with patents, has produced a net benefit for society.
3.7.2007 12:44pm
Ken Arromdee:
The important thing is not to worry too much about the fraud and excess at the margins that is more visible than the everyday benefits because of the media.

I think the entire field of software patents is a little wider than just a margin.
3.7.2007 1:06pm
Dan Simon (mail) (www):
At first, the nature of the cell phone industry and standards took me by surprise. How can anyone own a portion of a standard?

There are two main possibilities: (1) A patented invention may be so useful that virtually everyone in its related industry feels the the need to license it, making it a reasonable candidate for an industry standard; and (2) somebody may have managed to obtain a patent on a particular technique that's so obvious to those "practiced in the art" as to be a reasonable candidate for an industry standard. Needless to say, the latter case is the far more common one.

Again, the culprit here isn't some kind of self-perpetuating "propertization" dynamic in which "property rights beget property rights" through "fear of exclusion". It's entirely a product of the patent office's de facto policy of granting a patent to any distinguishable software technique, no matter how obvious or unimportant its variation from prior art (and of the court system's routine deference to the patent office's de facto policy).
3.7.2007 1:32pm
Michael Martin (mail):
Ken,

What software technology in particular do you think has been stunted by patents? There are bad patents out there, but they're being asserted against industry incumbents such as Microsoft, not new entrants. Software technology evolves so quickly that the technology may be obsolete before any patent ever issues. Many people talk about "bad patents" in software, but I don't hear of many software startups that are refused funding because of patent issues. There is almost always a way to work around.

But you're probably talking about patent trolls in software technology. Actually, there are patent trolls all over the place. Trolls are not always bad. Why should we be upset simply because they're living under a bridge they didn't build unless they scared the bridge builder away in order to live there? Usually, they didn't. Usually, they either came up with the ideas described in the patent on their own or paid fair value to the person who did at a bankruptcy auction or the like. Patent trolls are speculators in human capital. Patents make speculation in human capital possible. Selling a patent at a bankruptcy auction to a "patent troll" who will turn around and try to wring value out of it is a perfectly fair and just way to get _some_ return on a failed business investment.

That being said, I'd like to see the obviousness test tightened up -- or at least applied more consistently at the PTO. But the recent stats show that the PTO is issuing fewer patents, which is probably a good sign for quality. And the Supreme Court is almost certainly going to retrench to the Graham factors in KSR, which will tighten things up even further for patent applicants. The system has problems, but let's not discard it.
3.7.2007 1:34pm
Sabrina Safrin (mail):
Maybe I'm rosy-eyed, but Dan I do not think that what you are saying - namely, that extensive patenting arises in response to legal uncertainty and capriciousness - and what I am saying - namely, that we may be seeing a reactive snowballing effect - are entirely inconsistent.

The reason why I discuss both property rights that arise in response to new or expanded property rights (the cleanest case) as well as demands for property rights that arise in response to demands by others for new new property rights is that a reactive snowballing effect can occur during the uncertainty period. The stampede to the patent office for patents on gene fragments of unknown function before the office had even issued a single such patent exemplifies this.

This does not mean that every demand for new or expanded property rights generates a chain reaction of responsive propertization demands. The initial demandeurs have to have some stature in the community.

If a chain reaction does begin, it is often fueled by fear and copycat behavior, and can have a life of its own. The propertization chain reaction will often be defensive in nature, but defensive propertization is reactive. A is asserting or seeking to obtain a property right because B has asserted or seeks to obtain one.

This does lead to Michael's point about whether the propertization is good or bad. I do think that extensive defensive patenting is economically wasteful and has alot of intangible costs as well. Silly and dubious patents, which appear to spur additional ones of poor quality, are also costly both directly and indirectly.

This does not mean that the entire patent system is bad or that entire fields of technology necessarily should be left outside of it.

It does mean, however, that we need to be very careful before expanding the boundaries of the system. It also means that we need to be rigorous about enforcing the the system's existing boundaries (in the case of patents, that inventions be novel, nonobvious and useful and be disclosed) - otherwise we have a propertization creep that can snowball in unanticipated ways.

It also means that we should take care before expanding property rights to cases on the margin. In my opinion, the patenting of purified and isolated genetic sequences represents such a marginal case. I believe that we are worse off with a system that allows these patents than one that does not. Downstream biotechnological products are a different matter.

Line-drawing is always hard. However, I would prefer a system where in marginal cases we err on the side of open systems over enclosure. Patents may be like desert. Just because some is great does not mean that more is better.
3.7.2007 3:44pm
Michael Martin (mail):
Thanks for the reply, Sabrina. The interesting questions are always at the margin. I appreciate the clarification that the implications of your theory are not that patents and the patent system are bad in general, but rather that extending patentable subject matter to include purified and isolated genetic sequences is bad. There does seem to be "propertization creep" with respect to the eligible subject matter requirements (although ironically, it is traditionally the PTO that does the best job at putting the breaks on that creep).

It's hard to talk about whether the eligible subject matter requirements are efficient in the abstract, but here's a first cut. What's the harm in making "everything under the sun that is made by man" eligible for patenting?

Since we've got this analogy to chain reactions, I'd like to suggest another. Demsetzian propertization is more like a phase transition than a chain reaction. When water cools below its freezing point, free H20 molecules crystallize into orderly three-dimensional patterns because it's more energy efficient for any single one of these molecules to exist in the cooler environment as a crystal than it is to try and be free. It's not that it couldn't -- you could chip one off and it would, in effect be a gas. But why waste the energy? Once we're below 0 degrees C, it's easier to just leave things a crystal. Conversely, above 0 degrees C, even if an H20 molecule wants to form a crystal, it's not going to happen -- none of the other H20 molecules are going to join in.

Energy and water molcules are like money and patents: if cost-justified, the patent application gets filed; if not, it doesn't. The flaws of uncertainty and fraud are built into most patent applicants' calculation as to whether it is worth applying. The fact that some patent applications are cost-justified only by the existence of other patents is significant only if those other, pre-existing patents were not themselves cost-justified by external factors.

I think people started applying for patents on genetic material when (and because) a market emerged for products and therapeutic methods derived from such materials. We want those markets (at least sick people do), and method patents simply aren't as valuable as product patents. At some point, the reputational and altruistic benefits of simply publishing such research was outstripped by the expected downstream market value created by a discovered gene sequence. Trade secrets are no good as an alternative when so much of the value comes from downstream innovations. If Cohen and Boyer hadn't applied for patents on recombinant DNA, somebody else would have. (Actually, I think I remember that somebody else actually did try and failed in England after the university patent lawyer refused to apply because there was no market for recombinant DNA.)

I think the only class of subject matter that should be denied patent protection is the class of ideas whose value is maximized by being kept secret. But then there's no need to make a rule against patenting such subject matter because most inventors will recognize that to be the case and opt to keep a trade secret -- there won't be any wasteful chain reaction.
3.7.2007 6:46pm
Dan Simon (mail) (www):
defensive propertization is reactive. A is asserting or seeking to obtain a property right because B has asserted or seeks to obtain one.

I disagree. In seeking a defensive patent, "A is asserting or seeking to obtain a property right" because there may be some B out there that has already been granted one. In the days before the patent office began issuing patents on software, there simply was no such thing as defensive patenting, regardless of the number of entrepreneurial types (and there were actually quite a few) submitting doomed patent applications for software. And I furthermore claim that even given today's regime of patentable software, if software patents were generally clearly written, quickly issued and consistently and fairly interpreted--that is, if software companies were able to reliably evaluate their risk of patent infringement under any contingency--then they would never bother with purely defensive patents, no matter how many legitimate software patents were issued.

This does not mean that the entire patent system is bad or that entire fields of technology necessarily should be left outside of it. It does mean, however, that we need to be very careful before expanding the boundaries of the system. It also means that we need to be rigorous about enforcing the the system's existing boundaries (in the case of patents, that inventions be novel, nonobvious and useful and be disclosed) - otherwise we have a propertization creep that can snowball in unanticipated ways.

I agree completely. But again, the key problem is the erratic, capricious nature of the legal landscape. Note that "propertization creep" is only one symptom of this problem. Companies also engage in elaborate standards politics, for example, working to establish standards that are unencumbered by other companies' intellectual property claims--or even just to "smoke out" other companies' potential hidden intellectual property claims. (Of course, they can also push, as commenter Alan pointed out above, to have their own intellectual property established as a standard.)

As I mentioned previously, this kind of defensive behavior is hardly unique to property law, much less intellectual property law. Wherever vague, capricious law puts companies at risk, they will use whatever tools are available to insure themselves against that risk. It just so happens that one way to protect against the dangers created by fuzzy patent law is to apply for defensive patents, which apparently look to some people like "propertization creep".
3.7.2007 9:15pm
Toby:
By ignoring the role of legal uncertainy, and instead treating both patent scamming and defensive patenting as serious assertions of property rights, I'm afraid you've constructed a grand theoretical framework that has precious little connection to the real world

This is very big. This is the lawyers version of "Fun for the boys, but hard on the frogs." And, at the center, not the margin, this creates a huge *reduction* in innovation and competition.

That would be like someone owning various HTML tags or XML commands. Yet, in the cell phone industry that's the norm. I don't necessarily agree with it, though as a patent agent I certainly don't argue with the amount of work it brings in.

Actually, there are patent trolls all over the place. Trolls are not always bad. Why should we be upset simply because they're living under a bridge they didn't build unless they scared the bridge builder away in order to live there? Usually, they didn't. Usually, they either came up with the ideas described in the patent on their own or paid fair value to the person who did at a bankruptcy auction or the like.

This now consumes an ever larger portion of the work in a standards committee that I participate in. Corporations are known to deliberately pollute a standard so that, after adoption, they can come back and claim rights that they nevr hinted at when they were putting forward ideas in committee as to how to solve porblmes. As the chair of a standards committee, I can say that we lost months of work, and now require that employers sign of on employee participation in any standards work, even if it is in the employee's free time.


Wherever vague, capricious law puts companies at risk, they will use whatever tools are available to insure themselves against that risk.

This understates the harm to society.

There is a company that asserted that they hold the idea of putting a web server on a device. For simplicity, think of going to a web page and finding the temperature. This is clearly absurd because there was all sorts of prior art, but none that any had patented because of the absurdity of the claim.

Geeky grad students are always instrumenting things that seem silly. Some of you may have heard of SNMP (Simple Network Management) - the primary open protocol used to monitor networks. What is less well known is that the very first Network management point ever defined in SNMP was a sensor placed in a coke machine to report the temperature of the bottom can. The idea of displaying temperatures on the web was obvious to everyone except the patent examiner who handled this case.

The company that get that patent was well capitalized and began explosive growth through acquisition. One of the primary methods was to sue any sensor company smaller than it on this issue. After a year, and large expense, the target company would be offered a choice of going to court (always risky), large fees, or being acquired. Many companies have simply pulled usefull products off the market because they do not want to encounter this companies legal dobermans. As the bully grew in size, they could take on larger and larger targets...It also meant that there were fewer and fewer people able to contest this...

Locking up the technology in question may impede the modernization of the Power Grid, as NIST is less and less willing to include contaminated IP in standards. Some estimate that pulling off a modernization of the grid based upon e-commerce pronciples might save a third of the power generating capacity in the US today. The standards to pull this off may be delayed for years, and the competitive barriers to entry in this market keep many players on the sidelines. All because a foolish clerk made a patent ruling in an area he did not understand.

Trolls are not always bad. Why should we be upset simply because they're living under a bridge they didn't build unless they scared the bridge builder away in order to live there? Usually, they didn't. Usually, they either came up with the ideas described in the patent on their own or paid fair value to the person who did at a bankruptcy auction or the like.

And this sponsors innovation in our society how? As I started this comment on a BLOG for lawyers..."Fun for the boys, but hard on the frogs!"
3.8.2007 3:43pm
Michael Martin (mail):
Toby,

A private party has no incentive to build a bridge unless they can then charge a toll for crossing it. The idea is that trolls are like toll booths. Bridges, like ideas, are a "public good" in economic terms.
3.8.2007 5:03pm