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Abstract:
Current patent valuation methods have been described charitably as "inappropriate," "short-sighted," "inherently unreliable," and a "guestimate." This article provides a more rational and systematic tool than any found in the existing literature. We explain how patents are like stock options and demonstrate how the Black-Scholes equation for pricing real options can be applied to price patents. First, we explain the major difficulties inherent in applying the standard equation to patents and then proceed to demonstrate how it can be adapted to overcome those problems. In particular, the Denton Variation of Black-Scholes begins with fine distinctions in identifying the source of value, followed by a systematic analysis of factors, especially market forces, that influence variance and its sources over time. We show that the point-price paradigm relied upon by patent valuations to date has been flawed. Here, we leave the world of contemporary patent valuation behind. We claim that solving a single Black-Scholes equation is grossly inadequate for a risky, long-lived, infrequently traded item such as a patent. For a patent, the present value exists as a distribution curve with variously weighted probabilities, thus the apparent precision in picking a starting value by traditional patent valuation methods is illusory. The Denton Variation eliminates two historic shortcomings of the parent equation by providing a precise way to factor in transactions costs, and by quantifying the impact of the option cost on the profitability of the transaction. Moreover, the expression can accommodate a variety of patent profitability situations. For the purposes of illustration, we run through the equation to value a hypothetical patent. We also take the time to explain how insights provided by game theory help justify the choices that underlie the Denton adaptation of the Black-Scholes equation. In the patent licensing context, considerations of the effect of bargaining position are unavoidable, and we show how our assumptions are consistent game theoretical paradigms. In conclusion, we explore the implications of our refined approach to patent valuation. We examine, therefore, how patent valuation problems currently hinder efficient transfer of technology and how our enhanced version of the new Black-Scholes variant equation fits comfortably into the calculation of the reasonable royalty remedy applicable in cases of patent infringement when the patent owner cannot prove lost profits.

patents, Black-Scholes, game theory, valuation, pricing, variance, random walk, licensing, damages, royalties, options, Nash, mathematics

Abstract:
In 1982, the Federal Circuit Court of Appeals was established, and shortly thereafter, patent validity rates climbed dramatically. Not surprisingly, the rate of patenting also increased, tracking the rising validity rate. To the surprise of patent incentive theorists, however, research and development expenditures fell in relation to the patenting rate throughout the 1980's, prompting one prominent commentator to conclude, "the incentive story as classically told has some serious problems." In response, this essay describes critically important purposes served by patent law beyond providing incentives for inventors and innovators. In particular, patent ownership rules significantly reduce transaction costs compared to the available alternative system for protection: trade secrecy. Several ways that patent law lowers transaction costs have already been identified by commentators, but new scholarship in the area of corporate law finally makes possible the assertion that the transaction cost rationale is of primary importance. Theorists of the firm have long sought to explain the law of business organizations as providing legal structures in situations where contractual solutions are likely to be too costly. Similarly, the patent form can be characterized as a legal structure designed to reduce costs associated with the alternative regime of trade secrecy. Critical in this regard is recent groundbreaking work by corporate law scholars who have de-emphasized the role of limited shareholder liability and agency costs in the development of the corporate form. Instead, recent scholarship describes the corporation primarily as a superior response to: (i) The need to shield the assets of an enterprise from the creditors and heirs of those who invest in it ("affirmative asset partitioning"), and (ii) The need to monitor shirking and opportunistic behavior when the relative value of inputs and outputs of an enterprise are difficult to measure ("team production problems"). Important features of patent law, and the behavior of patentees, can be explained as responses to these same concerns.

patents, Hall, Ziedonis, Levin, Scherer, Kortmer, incentives, asset partitioning, team production, monitoring, opportunistic behavior, Long, Kitch, theory, transaction costs, information costs, corporation, theory of the firm, Alchian, economics

Abstract:
Economists and policymakers have recently defended the extension of copyright protection to assure the efficient exploitation of existing works. They assert that works in the public domain may be under-exploited due to the lack of property rights or over-exploited due to congestion externalities. This study compares the availability, number of editions, and prices of 166 public domain bestsellers published from 1913-1922 with 168 copyrighted bestsellers from 1923-1932. It also compares the 20 most durable public domain works from 1913-1922 with the 20 most durable protected works from 1923-1932. A significantly higher percentage of the public domain books are still in print, with significantly more editions available per book, and for the sub-set of especially durable works, the public domain works are significantly less expensive. Although the data show that rates of availability for both kinds of books are likely sensitive to reductions in the cost of duplication and distribution, the study concludes that protection of fiction beyond the period necessary to ensure its creation is not justified by concerns about under-exploitation. The possibility of congestion presented by the data is also considered.

copyright, public domain, congestion, externalities

Abstract:
Dozens of commentators have suggested that long term occupant communities (especially in underdeveloped countries) should be granted sui generis rights over plant genentic resources and their knowledge about plant genetic resources. These rights would protect existing germplasm and information maintained by indigenous peoples. Advocates of new rights demonize international pharmaceutical and agribusiness firms that exploit plant genetic resources and argue that new intellectual property rights are the solution to a serious problem. The essay urges advocates for long term occupant communities to abandon the rhetoric of principle and set sail with the bio-pirates. Both indigenous groups and multinational pharmaceutical and agribusines firms have a common enemy: loggers. The twin objectives of preserving biodiversity and indigenous cultures is best served by adopting a commercial or economic rhetoric. As a practical and theoretical matter, an intellectual property solution is unlikely to win widespread support.

bio-piracy, biopiracy, intellectual property, patent, biodiversity, bio-diversity, pharmaceutical, agribusiness, plant genetic resources, germplasm, indigenous, long term occupant

Abstract:
Induced by favorable trade concessions, developing countries seem to be willing to incur some of the costs of enacting and enforcing the new laws necessary to comply with the TRIPS Agreement. The United States and other industrialized nations insist compliance is a small sacrifice. They assert that enforcement of high intellectual property standards imposes only short-term costs and that long-term stimulus of local creativity and direct foreign investment offer the best incentive for developing countries to embrace the TRIPS Agreement. This paper de-mystifies the canonical work inevitably cited for the proposition that a developing country will stimulate foreign direct investment by increasing its intellectual property protection. It's difficult to overestimate the influence of Edwin Mansfield's 1994 paper for the International Finance Corporation, but close scrutiny reveals that its findings have been consistently misread. The developing world should be very skeptical of the Western claim that maximum enforcement of intellectual property laws will inevitably lead to economic prosperity. In the world of intellectual property law, one size does not fit all. Each country must consider it's own unique economic situation in crafting an intellectual property policy that complies with the TRIPS Agreement. The paper examines options available to policymakers most likely to be involved in the compliance process in developing countries. First it looks through the legislative lens and explores the numerous statutory options available to capture welfare benefits offered by intellectual property while reducing the cost to consumers and local industry of complying with the TRIPS Agreement. Next, proposes a role for the judiciary in realizing legislative initiatives. Then, it focuses on the welfare-enhancing ways that intellectual property owners and users can be permissibly regulated by an executive (or agency) function. Finally, it explores the critical diplomatic perspective, and borrowing from the work of Professors Reichman and Lange, suggests strategic initiatives that can enable a nation to "bargain around the TRIPS Agreement." Even if new intellectual property laws do not stimulate investment in - or technology transfer to - a developing country, public/private partnerships have the potential to leverage significant economic benefits. One advantage of examining the TRIPS Agreement from distinct legislative, judicial, executive (or agency), and diplomatic perspectives is what it can reveal about ineffective or non-existent governmental structures in the developing world. The approach taken here not only directly examines the substance of rational intellectual property policy, but also indirectly addresses the structure of effective lawmaking and enforcement.

Abstract:
Thirty years after the publication of James B. White's iconic THE LEGAL IMAGINATION, Law & Literature scholarship has gained no traction in the practice of law. This essay, prompted by a session of teaching Ariel Dorfman's DEATH AND THE MAIDEN to federal judges, explains why our scholarship has no impact, but fiction itself is very influential.

Law and Literature, Dorfman, Death and the Maiden, rhetoric, Fish, White, Weisberg, transitional justice

Abstract:
Patent law is under-theorized in the sense that the predominating incentive-based justifications cannot by themselves adequately explain empirical evidence on patenting gathered by research economists. This article provides an alternative justification for patent law based on private transaction costs savings offered by patent law in comparison to alternative options available to those who wish to exploit information assets. In particular, it identifies striking parallels to corporate law as described in recent scholarship and shows how patents act as affirmative asset partitions, ameliorate significant team production problems, and encourage technology transfer. Even if the patent system provides no significant incentives to invent, it can be explained and justified in terms of transaction costs savings alone.

patents, transaction costs, new institutional economics, team production, asset partition, technology transfer, incentives

Abstract:
Some economists assert that as valuable works transition from copyrighted status and fall into the public domain they will be underexploited and their value dissipated. Others insist instead that without an owner to control their use, valuable public domain works will be overexploited or otherwise debased. This study of the most valuable musical compositions from 1913-32 demonstrates that neither hypothesis is true as it applies to the exploitation of songs in movies from 1968-2007. When compositions fall into the public domain, they are more likely to be exploited in movies, suggesting no under-exploitation. And the rate of exploitation of these public domain songs is no greater than that of copyrighted songs, indicating no congestion externality. The absence of market failure is likely due to producer and consumer self-regulation.

Copyright, Musical Composition

Abstract:
Some economists assert that as valuable works transition from copyrighted status and fall into the public domain they will be underexploited and their value dissipated. Others insist instead that without an owner to control their use, valuable public domain works will be overexploited or otherwise debased. This study of the most valuable musical compositions from 1913-32 demonstrates that neither hypothesis is true as it applies to the exploitation of songs in movies from 1968-2007. When compositions fall into the public domain, they are more likely to be exploited in movies, suggesting no under-exploitation. And the rate of exploitation of these public domain songs is no greater than that of copyrighted songs, indicating no congestion externality. The absence of market failure is likely due to producer and consumer self-regulation.

copyright, music, cinema, public domain, empirical, exploitation, term, duration

Abstract:
Genetically modified pollen drifting onto the field of a neighboring farm may cause substantial harm. If the bystanding farmer is growing non-genetically modified crops, she may suffer a pecuniary loss due to genetic pollution. If the pollen is patented, the patentee may also claim harm stemming from the unauthorized distribution of its proprietary genetic material. Disputes arising from pollen drift present classic legal questions arising under the law of neighbors and classic economic questions broached most famously by Ronald Coase in his essay on The Problem of Social Cost. The application of the Coase Theorem and its most applicable corollary strongly suggest that: 1) balancing rules under nuisance law should be applied on a case-by-case basis to determine whether any particular genetic polluter should be liable for damages caused by pollen drift; and 2) most bystanding farmers should have viable defenses to patent infringement. Venerable legal principles applied to this new problem suggest the same two conclusions. Proving both propositions provides a textbook demonstration for the usefulness of economic analysis and solves a world-wide multi-billion dollar legal problem.

patents, GMO, pollen, agriculture, Coase, law and economics, nuisance

Abstract:
According to the conventional wisdom, the twentieth century was a disaster of monumental proportions for vegetable crop diversity. The conventional wisdom is wrong. Our study of 2004 commercial seed catalogs shows twice as many 1903 crop varieties surviving as previously reported in the iconic 1983 study on vegetable crop diversity. More important, we find that growers in 2004 had as many varieties to choose from (approximately 7100 varieties among 48 crops) as did their predecessors in 1903 (approximately 7262 varieties among the same 48 crops). In addition, we cast doubt on the number of distinct varieties actually available in 1903 by examining historical sources that expose the systematic practice of multiple naming. Finally, by looking more closely at the six biggest diversity winners of the twentieth century (tomatoes, peppers, lettuce, garden beans, squash, and garlic), we suggest that patent law is virtually irrelevant.

vegetable varieties, crop diversity, crop varieties, patents, RAFI, seeds, biodiversity, tomatoes, peppers, garden beans

Abstract:
This article considers current proposals for patent law reform in light of a simple theory about intellectual property law: In a world without transaction costs, the assignment of property rights is not necessary to stimulate the optimal production of creative goods. Because potential users of inventions could contract for their creation, a compelling justification for granting property rights in these intangibles is the reduction of real-world transaction and information costs that hinder, or make impossible, contract formation between users and creators. Proposals for patent law reform, therefore, should be evaluated by whether a change in legal rights, or in the regulatory process increases or lowers these costs.

patents, inventions, coase, transaction costs, ebay, reform

Abstract:
In a world of zero transaction costs, one should observe optimal invention and innovation. As long as a system of enforceable contracts were in place, firms with inventive capacity and firms requiring inventions would negotiate for the optimal production of new creations. With adequate information, an observer could accurately predict which transactions would occur between firms and which transactions would not, thereby permitting description of the conditions for optimal inventiveness. Patent remedies in a world with transactions costs can be calibrated so that real firms behave as ideal firms, providing incentives for real world transactions to mimic those in a world without transactions costs. The goal of remedies for patent infringement should therefore be to provide incentives for efficient transactions to occur, while minimizing the cost of transacting. This approach sets the framework for a comprehensive revision of current patent remedies and resolves current debates over the relevance of an infringer's knowledge, independent invention, and the proper scope of injunctive relief.

patent, remedies, hold up, troll, injunctions, damages, royalty, license, efficiency, economics, Coase, transactional costs

Abstract:
In 1988, Professor Heald found a lost manuscript of Steve Allen's groundbreaking television show, "A Meeting of the Minds." In that episode, published in 6 J. of Law & Rel. 279, Oliver Wendell Holmes, Mark Kelman, Blaise Pascal, and Richard Posner discussed the nature of law. While completing renovation of a house, possibly visited by Allen, Heald recently found another manuscript jammed on top of an old water tank. The present episode reveals a lively discussion of Columbine, the death penalty, and the nature of retribution between Lucius Annaeus Seneca (4 B.C.-65 A.D.), C.S. Lewis (1898-1963), Jerry Falwell, and Milner Ball.

law and literature, religion, capital punishment, seneca, milner ball, c.s. lewis, columbine, retribution

Abstract:
It would be hard to overestimate the influence of Edwin Mansfield's 1994 empirical study for the International Finance Corporation of American business executives' attitudes toward low levels of intellectual property protection in developing nations. His paper is ubiquitously cited for the proposition that if developing countries raise their level of intellectual property protection (especially patents), they will attract foreign investment and technology transfer. I take a skeptical new look at this canonical work and conclude that the developing world should be very suspicious of the persistent claim that Mansfield's landmark survey of corporate decision makers supports a maximalist implementation and enforcement strategy across all areas of intellectual property. It has been cited too frequently and read too seldom.

Mansfield, technology transfer, developing countries, patent, trade secrets

Abstract:
This essay takes three quick looks at American copyright law through the eyes of an observer from an undeveloped economy. Look One focuses on Eldred v. Ashcroft and recent legislative initiatives that give the appearance that American copyright law is completely dominated by corporate interests. Look Two emphasizes the huge holes in American copyright law that allow users and competitors to engage in massive copying, e.g. fair use principles, the Altai and Feist tests, contributory liability and exhaustion rules, and various other statutory exceptions to liability. Look Three points out that these exceptions keep American consumers quiescent by keeping the cost of copyright protection here relatively low. This allows the U.S. government to pursue a TRIPS+/Berne+ worldwide copyright strategy without a hint of domestic interference. The essay concludes by suggesting what developing countries can learn from the U.S. approach.

Copyright, Eldred, CTEA

Abstract:
The intellectual property system does not seem to drive the rate of innovation in the market for vegetable varieties. Drawing on a unique data set of all plant patents, plant variety protection certificates, and utility patents among 42 vegetable varieties, this short paper examines the relationship between intellectual property rights in vegetable crops and the diversity of commercially available varieties. Three findings are of particular interest: 1) Only 3.8% of varieties available in 2004 were ever subject to protection under patent law or the Plant Variety Protection Act; 2) More than 16% of all vegetable varieties that have ever been patented were commercially available in 2004; and 3) In 2004, approximately 4.5% of protected, or once protected, varieties consisted of inventions that were at least twenty years old. Although intellectual property rights appear to be an insignificant part of the crop diversity story, they exhibit much higher commercialization rates than expected (the conventional wisdom suggests a 5% rate), and they exhibit a slower rate of obsolescence than expected. Complete data on individual vegetable types are provided, and the sui generis nature of corn is also discussed.

vegetables, crops, patents, varieties, commercialization, intellectual property, plants, PVPA, Plant Variety Protection Act, innovation

Abstract:
This paper conducts the first comprehensive exploration of the Court's recent jurisprudence in the area of implied constraints on Congressional power, including such cases as Alden, Seminole Tribe, U.S. v. New York, Printz, and Plaut. We use this jurisprudence to ask whether the Intellectual Property Clause of the Constitution places any absolute limits on Congressional power. After conducting the extensive examination of history and constitutional structure mandated by the Court's cases, we conclude that the answer is "yes," and apply those limits to recent intellectual property legislation. We find several of the dozen laws we examine are suspect and conclude that two are surely unconstitutional: the Copyright Term Extension Act and the proposed database protection legislation.

Abstract:
Building on a broader earlier constitutional analysis, see Heald & Sherry, Implied Constraints on Congressional Power: Construing the Commerce Clause in Light of the Intellectual Property Clause (forthcoming Ill. L. Rev.), this paper argues that database protection legislation which does not recognize a right to extract information from a protected database is unconstitutional. Duplication may be prohibited and, of course, line-drawing between permissible extraction and prohibited duplication will be difficult, but the history and structure of the Intellectual Property Clause of the Constitution demonstrate that Congress may not establish property rights in facts. The proposed extraction/duplication dichotomy functions much like the well-established idea/expression dichotomy, another doctrine that history indicates has constitutional underpinnings.