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[Sabrina Safrin (guest-blogging), March 9, 2007 at 11:38am] Trackbacks
Ramifications of Chain Reaction Propertization.

Many thanks both to Eugene and to all who have shared their insights over the last several days. I conclude today by discussing two ramifications of the chain reaction evolution of property rights: 1) less efficient property regimes and 2) the importance of first movers.

First, if, property rights can arise in reaction to each other, as I obviously believe they do, we will see less efficient property regimes than those anticipated by Demsetz and other traditional theories for the evolution of property rights.

For example, the property regimes over raw genetic material created by developing countries are extremely costly to create, to administer and to enforce. In addition, complying with these regimes entails substantial expense. Impressive revenue streams have not offset these high costs. In fact, rather than generating much revenue for their countries, the laws that restrict access to genetic material have caused scientists and corporations to cease or minimize their bioprospecting activity.

Moreover, researchers no longer share genetic and biological material as freely with each other. Concern over the growing unwillingness by scientists to share tangible research material prompted the NIH in 1999 to issue guidelines to encourage sharing. The restrictive trend, however, continues.

Patent rights in the genetics area also appear to be spiraling to an inefficient and unhappy outcome. By mid-2000, the U.S. PTO had issued over 6,000 patents on full-length genes isolated from living organisms and had under consideration over 20,000 gene-related patent applications.

In a frenzy, researchers and companies rush to patent genes and parts of genes that they have isolated before someone else does. All of this frenetic genetic patenting activity is, or at a minimum, risks creating an anticommons in genetic material that deters innovation. An anticommons can occur when multiple individuals or entities have rights of exclusion to a given resource.

As patentees acquire thousands of patents on genetic sequences for specific genes and fragments of genes, moving forward with any particular gene therapy requires securing the consent of these multiple patent holders. Obtaining such consent, in turn, involves high transaction costs to locate and bargain with the holders of all of these gene patents. Moreover, any one patent holder can thwart a project entirely by refusing to license its individual genetic component unless it receives a bribe. Not all agree that a genetic anticommons of any significance exists. Most scholarship, however, suggests that the patent system in the genetics area has overreached.

The over-enclosure of genetic material is costly. The anticommons and other problems engendered by both the sovereign-based and the patent-based ownership systems lead to the under-utilization of potentially helpful genetic material.

More broadly, the patent paradox and overall patent activity in the United States seems to indicate that the U.S. patent system has settled on a sub-optimum level of property rights. Between 1983 and 2002, the number of patents issued in the United States roughly tripled, growing from 62,000 to 177,000 per year. This would constitute good news, if it signaled that we had become a nation of Thomas Edisons. Yet, according to Adam Jaffe and Mark Lerner, international comparisons show that U.S. inventions with confirmed worldwide significance grew at a rate less than half that of domestic U.S. patent grants in the 1990s.

This extensive patent activity comes at a high price. People currently spend approximately $4.3 billion annually to obtain patents and several billion more to enforce them. According to one study, in 1991 U.S. companies spent over $1 billion enforcing or defending patent lawsuits, while expending only approximately $300 million on research and development.

In addition to these direct monetary costs, extensive patent rights improperly granted to trivial innovations can also impede scientific collaboration and can deter researchers from pursuing a field. These intangible costs are exacerbated by the drag that extensive patent rights place on international scientific collaboration and international comity. Jaffe and Lerner conclude that the intangible costs of the present U.S. system with its high level of low quality patents greatly exceed even litigation costs.

Property scholars note that property rights are sticky. Once societies create them, they find them difficult to dislodge, and inefficient and imprudent property regimes do not readily self-correct.

Property rights over genetic material exhibit this stickiness. For example, rather then curtailing their control over raw genetic material in light of the dearth of bioprospecting activity, nations like Brazil have tightened their grip over genetic material even further by refusing to grant a patent unless the applicant has complied with their access-restricting regimes. Although some contrary examples do exist, the expansion of intellectual property rights that has occurred in the last two decades largely exhibits similar tenacity.

In addition to predicting less efficient property regimes, the chain reaction theory indicates that those who first demand property rights play a critical and underestimated role in the evolution of property rights. These propertization pioneers can trigger a chain reaction of demands for similar or different yet related property rights. The role that NIH played in triggering the stampede to patent genetic fragments beautifully illustrates the importance of first movers.

Decision-makers, therefore, must exercise extreme caution before bowing to the demands of these first movers. Accommodating their propertization requests can create a propertization chain reaction. At present, government agencies, legislators and courts usually appear unaware that their actions can set off a process with widespread and potentially undesirable implications. The chain reaction theory cautions decision-makers to think carefully before expanding property rights, particularly in borderline cases, and to build in restrictions on these rights more thoughtfully.

At a minimum, decision-makers should exercise particular care before expanding property rights in situations where people have identified potential spillover effects. For example, scholars, news services and organizations like the U.S. National Academies of Sciences raised concerns that proposed new intellectual property rights over databases risked dramatically curtailing access to data itself. Congress has so far refrained from creating property rights for databases and thereby has avoided initiating a chain reaction that would have likely led to the propertization of data.

Michael Martin (mail):
Sabrina presents a strong case for the argument that there is an anticommons in biotech patenting. But there is a reason why things may not turn out as bad as its seems like they will right now: the transactions costs of identifying IP rights and contracting around them is plummeting even faster than the costs of the new system are going up -- a pareto improvement, so the point about developing countries losing out for now is well-taken. On the other hand, the U.S. trade deficit with China and India would probably probaly balance if IP rights were enforceable there.

I also distrust some of the empirics cited, such as the $300 million spent on R&D in 1991. Does this number take into account the oil industry? Exxon probably spends close to that much on R&D in a year by itself now. Does the number take into account funding agreements with Universities? Since the Bayh-Dole Act was passed, R&D divisions have disappeared because Universities have a comparative advantage (because of sunk costs) over large corporations in basic research and early-stage development.

At the end of the day, I think it's misleading to focus too much on what is claimed in a patent. What matters is the research and development activities for which the patent provides incentive. If we like those activities, then we want patents, even if it looks and feels a little strange to be claiming something that grows inside of us.

Also, before the U.S. cuts back at IP rights, it needs to consider what China, India, and the EU are doing with the same rights before it does. A misstep now could only accelerate the shifting economic balance of power and lead to more outflow of human capital from the United States.

If IP rights do add liquidity to human capital, and the transactions costs are law, then the world will be freer with more IP rights. Historically, the U.S. has been a champion of property rights and freedom of contract. Why not also take the lead in this new frontier of biotechnological development?
3.9.2007 1:16pm
M. Simon (mail) (www):
I'm an entrepreneurial kind of guy.

I have a number of ideas for products that have excellent prospects.

However, the rule these days is "no patent, no money".

I'm not talking big money to get started; under $100,000 to get most of my products to market.
3.9.2007 4:29pm