52 Pages Posted: 12 Dec 2009 Last revised: 6 Dec 2014
Intellectual property rights are controversial because on first glance they present a disjunction between the purposes they serve and the mechanisms they employ. New Institutional Economics (NIE) suggests that for reasons of transaction costs, broadly conceived, institutions are imperfect and their imperfections may nonetheless be cost-effective. This Article draws on the NIE to present a theory of the similarities and differences between IP and regular property, and sharpens some empirical questions relating to the advisability of property-style IP protection. IP is characterized by two types of indirectness that need not both be present in regular property. In first-order indirectness, the resource to be measured is difficult to meter, leading to the use of rough proxies. Variation in outcomes along dimensions of the resource – for example, animals supported by grazing land – show high variance, i.e. risk. Second-order indirectness involves uncertainty or ambiguity about the return from a resource, in terms of how to employ it or even to carve it up – for example choosing crops or deciding between agricultural and residential subdivision. The greater the uncertainty, the more attractive, in terms of maximizing option value, it is to delegate decisions over these dimensions of resource activity to those close to the resource. Both types of indirectness point to advantages that in theory a modular structure of rights can provide: difficulty in measuring dimensions (first-order) or identifying the relevant dimensions (second-order) suggests that a given activity be placed within a module and control over local remodularization be given to private actors. Because information is nonrival, the benefits of modularity must be traded off against the benefits of exclusion costs. In both patent licensing and remedies, an NIE approach to property that does not emphasize information costs has difficulty explaining patent rights as opposed to other internalization and coordination devices. The Article applies the information-cost theory to IP licensing and patent remedies. Licensing implements a governance strategy that enriches the interface between IP rights in limited ways. Injunctive remedies dovetail with a modular structure of exclusion rights, and the traditional equitable approach to injunctions provides for targeted safety valves for problems relating to lack of notice and reasonable reliance by potential infringers.
Keywords: intellectual property, property, information costs, new institutional economics, exclusion, governance, patent, licenses, injunctions
JEL Classification: D23, K11, O34
Suggested Citation: Suggested Citation
Smith, Henry E., Institutions and Indirectness in Intellectual Property. University of Pennsylvania Law Review, Vol. 157, No. 6, pp. 2083-2133, 2009; Harvard Public Law Working Paper No. 10-12. Available at SSRN: https://ssrn.com/abstract=1522342