Can Property Rights Beget Additional Property Rights?

Thank you Eugene for inviting me to guest blog about Chain Reaction: How Property Begets Property. There I argue that intellectual and other property rights can arise in reaction to each other. These reactive property rights may have little to do with the value of the resource in question or efficiency concerns.

The chain reaction evolution of property helps to explain the emergence of more restrictive intellectual and other property regimes. It does not, however, explain the transformation of all property regimes or serve as the exclusive explanation for the process through which all property rights evolve. The theory cautions that once property rights are created, they take on a life of their own and can have adverse consequences.

Over the next several days, my posts will explore examples of and reasons for reactive propertization. My final post will discuss some ramifications of the chain reaction evolution of property rights.

Let us consider one of the most perplexing phenomena of today's patent activity -- the so-called patent paradox. Patent activity has risen dramatically in the last two decades even though paradoxically the expected value of individual patents has diminished. Patent filings generally rose by about 40% between 1993 and 2003. In addition, patent intensity - the measure of patents obtained per research and development dollar - nearly doubled from the mid-1980's to the late 1990s. Meanwhile, empirical research indicates the low average expected value of the overwhelming majority of patents. Studies set the average value of patents at considerably below their average acquisition costs. A paper by Mark Lemley estimates that only 1.5% of patents are litigated, of which courts deem almost half invalid, and only a small additional number are licensed for royalty (as opposed to cross-licensed). A 2005 study by Judge Kimberly Moore shows that most patentees view their patents to hold so little value that they let them lapse before their term rather than pay the periodic maintenance fees.

Why do so many seek patents despite their apparent low expected individual value?

Scholars have offered several excellent theories. Clarisa Long suggests that patents serve a signaling function. They provide information about the invention or firm to, for example, potential investors. Some argue that patents act as lottery tickets. Individuals and corporations obtain patents hoping that one will turn into a winning ticket. Because they do not know in advance which of their patents will ultimately prove the winner, they patent everything. Richard Levin and others have suggested that patents provide a means to measure employee performance. University consideration of the number of patents awarded to individual professors in promotion and tenure decisions exemplifies such use. Meanwhile, Gideon Parchomovsky and Polk Wagner advance a patent portfolio theory. They argue that patents of little individual worth become valuable when bundled together.

Each of these theories helps explain the patent paradox. I believe, however, that something else is going on too. Patent activity itself begets additional patent activity. If we apply insights from those who study group behavior to the patent paradox puzzle, we see that people and corporations may be seeking patents because others have done so.

Group behavior theorists John Miller and Scott Page recently tackled the standing ovation problem. They summarize the problem as follows: A theater performance ends. The audience begins to applaud tentatively. A few audience members stand. "Does a standing ovation ensue or does the enthusiasm fizzle?" Using computational models, They found that the system often converged on the wrong equilibrium. Most people stood even though most did not like the performance. They also discovered that greater pressure to conform led to less efficient aggregation of information. In addition, they found that people sitting in the front had a large impact as almost everyone patterned their behavior off them.

The 1990's frenzy to obtain patent rights over genetic fragments illustrates this copycat behavior. In June of 1991, Dr. Craig Venter, on behalf of the National Institutes of Health (NIH), applied for patents on some 2,700 gene fragments of unknown function that he had sequenced using automated sequencing methods. NIH's attempt to patent and hence control a large quantity of genetic material whose function it had not identified was unprecedented. Academics and industry groups immediately and harshly denounced NIH's action, and uncertainty existed as to whether the PTO would even issue patents on such gene fragments.

Despite these criticisms, legal uncertainty and the enormous expense of preparing and filing patent applications, once word of NIH's applications got out, the patent lemmings began their march. Applications covering hundreds of thousands of genetic fragments began to pour into the PTO -- confronting the office with a 90-year backlog. As a leader in the scientific community, NIH served the societal function of a front row theater-goer standing to applaud. Other researchers and institutions followed its lead.

The increasingly widespread use of defensive patenting also evidences a chain reaction dynamic. Corporations and individuals obtain patents not because of the patents' potential positive value, such as their ability to generate license revenue or to provide a manufacturer with a competitive edge, but rather for maintenance in a patent arsenal. If threatened with a lawsuit, the corporation threatens to counter-sue with one of its warehoused patents. The suits go away, and each corporation returns to business as usual.

In this defensive patenting environment, people patent because others in their field are doing so. Commentators consistently liken the situation to an arms race, the quintessential example of a wasteful tit-for-tat, rather than to an enterprise designed to promote innovation by capturing the actual or the potential value of technological advances.

Have others in the blogsphere come across examples of copycat or reactive propertization?

Its Not Just About Money: Propertization of Genetic Material and a Tit-for-Tat.

Yesterday, my post explored how patents can beget additional patents as people and corporations, like lemmings, following the patenting activity of others. Today, I want to explore one of the best examples of reactive propertization -- the emergence of exclusive property rights over raw genetic material.

Until recently, nations and individuals treated genetic material -- the subcellular sequences that direct the structure and characteristics of all living things -- as open access property. Like information in the public domain, genetic resources were available in principle for the use of all. No one held an exclusive ownership interest in this material, and individuals and countries freely shared samples of seeds, soil and even animal specimens containing it.

In sharp contrast, today extensive ownership rights envelop genetic material. Individuals and corporations patent genetic sequences that they have isolated. Patients no longer share biological specimens that they contributed in the course of receiving medical treatment as readily as they once did. Meanwhile, national governments of developing countries, which house most of the world's genetic material in its natural state, increasingly assert sovereign ownership rights over biological samples containing this material.(I discuss this trend in a prior article: http://ssrn.com/abstract=658421.)

What accounts for this transformation? The canonical explanation offered by Harold Demsetz for the evolution of property regimes is that private property rights emerge when the economic value of a resource changes relative to the costs of controlling it such that it becomes cost-efficient to establish a property regime over the resource and to internalize costs or benefits previously experienced as externalities. Changes in relative value typically occur when some external shock, like the introduction of a new technology or the opening or closing of particular markets, alters the costs and benefits of the existing property regime.

Demsetz's thesis as well as traditional theories for the granting of intellectual property rights explains the actions of those who first sought to patent bioengineered goods and isolated genetic sequences as well as developed countries' grant to them of these first generation property rights. The biotechnology revolution offered economic reward to those who could isolate genetic sequences and create bioengineered innovations.

These theories do not, however, adequately explain nor even usually anticipate the second wave of propertization: the emergence of exclusive ownership rights over raw biological material. Granting property rights in naturally-occurring genetic material does not encourage innovation. This material already exists. While a desire to profit from biological samples plays some role in demands both by developing countries and by patients for a property interest in their raw biological samples, it leaves much unexplained.

Instead, I believe these second generation property rights arose in response to the first generation patent rights. A tit-for-tat dynamic, rather than a cost-benefit analysis designed to capture the actual or potential economic value of raw genetic material, animates the emergence of these responsive property rights. Patients and developing countries felt that if researchers and corporations obtain property rights by patenting cell lines and genetic sequences isolated from tissue samples, than they too should claim a property interest in the raw tissue samples from which those patents sprung.

As John Dawson observed three decades ago, "Uncompensated gains are pervasive and universal; our well-being and survival depend on them…" And so we share. Indeed, experiments show that people cooperate and forgo free riding much more often then economists predict. In fact, as Cass Sunstein notes, if most people cooperate and share "the social meaning of non-cooperation is greed."

However, if some stop sharing and cooperating, preferring instead to claim certain property or knowledge as exclusively their own, continuing to share under such circumstances transforms the good public citizen into a public patsy. Game theorists have shown that in a repeated game, players will cooperate in the first period but will defect in subsequent periods if the other player defected in the immediately preceding period. Absent such defection, they will continue to cooperate.

Underlying the creation of property rights over raw genetic and biological material lays a desire by those demanding such rights that others not exploit them. When individuals and corporations began to patent isolated and purified genetic sequences, cell lines and living organisms, those from whom the raw biological material came felt exploited. They no longer viewed the sharing of raw biological material as international collaboration but rather as "biocolonialism." As the president of Tanzania said, "[M]ost of us in developing countries find it difficult to accept the notion that biodiversity should [flow freely to industrial countries] while the flow of biological products from the industrial countries is patented, expensive and considered the private property of the firms that produce them. This asymmetry … is unjust." Developing countries created property rights over material that they had previously shared to prevent others from taking advantage of them.

A similar sentiment animates patient property claims to biological specimens. Patients willing donated biological specimens when they believed they were contributing to a greater social good. The obtainment of patent rights by researchers and institutions over cell lines and genetic sequences fractured this cooperative spirit. Contributors, like those who joined the effort to find the gene responsible for Canavan disease and then sued the researchers who patented the gene as well as John Moore who sued those who patented a cell line isolated from his spleen, felt taken advantage of.

Their fury and sense of violation do not stem from concern over lost potential economic opportunities but rather from being used. As John Moore exclaimed: "What the doctors had done was to claim that … my genetic essence was their invention and their property." The furious Canavan donors did not seek a share of future royalties. Rather, in their complaint, they sought to prevent the patent holders from restricting access to the Canavan gene and from limiting genetic screening tests.

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.

Globetrotting Propertization.

Today's global economy makes the chain reaction creation of property rights more pronounced because changes in property rights in one country, particularly when internationalized, can trigger unanticipated changes in the property regimes of another. The propertization of naturally-occurring genetic material that occurred in response to the patenting of bioengineered organisms and isolated and purified genetic sequences represents one example of globetrotting propertization. The growing international demand for the creation of new intellectual property rights to cover traditional knowledge represents another.

Most knowledge that we use is both traditional and free. It consists of human innovation and insight developed over millennia and passed down from generation to generation. We take the free availability of most information as a given. Yet, today many nations demand the development of new intellectual property regimes to cover "traditional knowledge." A flurry of international activity in multiple fora has materialized on this issue. Several nations have already enacted measures to protect traditional knowledge.

What has occurred to cause nations to demand the extension of intellectual property rights to tradition?

Anthropologist Michael Brown observes that "[i]n the late 1980's, ownership of knowledge and artistic creations traceable to the world's indigenous societies emerged, seemingly out of nowhere, as a major social issue."

Did something happen in the late 1980's that could have engendered such demands? Yes, the internationalization of intellectual property.

In the late 1980s, the United States began to impose trade sanctions against countries that accorded little or no protection to U.S. intellectual property goods. Moreover, in 1986 and 1987, the United States and the European Union linked intellectual property and trade in the negotiating mandate for the Uruguay Round of the GATT. The 1994 adoption of the TRIPs Agreement, which emerged from the Uruguay Round, required countries to put in place, as a condition of participating in the world trading system, copyright, patent, trademark and trade secret laws.

Beginning in the late 1980s, developing countries were thus forced to extend a host of intellectual property protection to a vast range of knowledge that had hitherto remained free in their countries. They responded to these first generation intellectual property rights by demanding in numerous international fora the development of second generation intellectual property rights which would propertize traditional knowledge generated in their countries that had previously remained open.

For example, developing countries strongly object to the TRIPs requirement that they extend patent protection to pharmaceutical goods. In turn, their demands for the extension of intellectual property protection to traditional knowledge often concern the protection of folk remedies. Similarly, developing countries have responded to the developed country insistence on intellectual property rights over plants by demanding the international recognition of "Farmers Rights" to address the historical and continued contribution of farmers to the development of crops.

In response to requirements that developing countries extend copyright protection to artistic works, these countries now demand that some kind of intellectual property right attach to traditional songs and dances that originated in their countries. They decry the copying of these traditional works or their incorporation into new works as "piracy."

The internationalization of intellectual property began a chain reaction of propertization that not only encompassed new technologies and creative works but also unexpectedly innovations and expressions existent for centuries.

Should the movement to extend intellectual property rights to traditional knowledge take root, I expect that in chain reaction fashion it will engender demands to protect not only knowledge from developing countries and from indigenous communities but also traditional Western knowledge. Each year when I teach about international developments to establish new intellectual property regimes to cover traditional knowledge, some students invariably assert that traditional Western knowledge should receive the same protection. One student recently elaborated on all the intellectual property rights that ought to attach to the hamburger.

(I note as an aside that there exists a tendency in the United States not to take overseas and international propertization developments that seriously. Who cares if Panama or Brazil restricts access to raw genetic material or puts in place an intellectual property system to cover traditional knowledge? These developments can, however, impact the U.S. intellectual property system. For example, an increasing number of both developed and developing countries believe that the TRIPs agreement should be amended to require that patent applications disclose the source country of any biological material used in the innovation. If the amendment is adopted, this disclosure requirement could apply to U.S. patent applications as well.)

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.