[Sabrina Safrin (guest-blogging), March 5, 2007 at 6:56am] Trackbacks
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?