Patent Law's Externality Asymmetry

Abstract

Technologies such as social media, autonomous vehicles, and “big data” analytics generate enormous benefits for society, but they also create substantial harms. Many of these effects take the form of externalities—external benefits and harms that a decisionmaker (such as an inventor) imposes on third parties without charge or compensation. Considering negative externalities, for example, social media networks spread misinformation throughout the electorate, autonomous vehicles threaten the jobs of millions of professional drivers, and predictive policing based on big data can lead to unreasonable searches and seizures. Externalities can cause inefficient resource allocation, and the classic remedy is to “internalize” externalities by ensuring that decisionmakers consider the external benefits and costs of their actions. Patents, which confer exclusive rights on new inventions, enable inventors to internalize a share of the positive externalities from technology, thus shoring up incentives to invent. However, inventions also produce harms, and how patents treat negative externalities from new technologies has been largely overlooked. This Article is the first to extensively examine this issue. It argues that while patents internalize positive externalities associated with innovation, they do surprisingly little to internalize negative externalities. This Article refers to this underappreciated dynamic as patent law’s externality asymmetry.

Patent law’s externality asymmetry is particularly striking when comparing patents to physical property rights. Foundational economic theory holds that property rights (including patents) emerge to internalize externalities. However, physical property rights internalize negative externalities in several ways that are inapplicable to patents. Patents do not internalize negative externalities associated with the tragedy of the commons, and they encourage rapid exploitation of technologies rather than their judicious use. Due to high transaction costs, patents do not facilitate efficiency-maximizing negotiations between patentees and individuals harmed by their inventions. Finally, patents create no duties for inventors to mitigate harms from their patented technologies. Patents, in other words, allow inventors to capture a meaningful share of the upside of their inventions while largely insulating them from the downside. Turning to normative considerations, this Article argues that patent law’s externality asymmetry is highly problematic because it undermines efficiency, distributive equity, and fairness. It proposes modest reforms to patent law and greater integration of patent and nonpatent regulatory mechanisms to internalize negative externalities from technological innovations.

Keywords: patent law, intellectual property, externalities, spillovers, law and economics, Demsetz, Facebook, filter bubble, autonomous vehicles, AI, automation, predictive policing, property rights in land, tragedy of the commons, transaction costs, nuisance, efficiency

JEL Classification: D61, D62, D63, O31, O32, O34, P14, Q24