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Intellectual property: High handed conduct, low hanging fruit

A presentation to the Australian Digital Alliance Policy ForumNational Library of Australia , Canberra, 4th March, 2011

Nicholas Gruen, CEO, Lateral Economics

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Outline

Is IP like P?Public goods and the internetThe economics and politics of IP

– First and second order policy tradeoffs

Manufacturing for export (High handed conduct)The easiest tradeoffs (Low hanging fruit)Righting the IP Imbalance

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…as much as two thousand years ago the power of steam was not only observed, but an ingenious toy was actually made and put in motion by it, at Alexandria…. What appears strange is, that neither the inventor of the toy, nor anyone else, for so long a time afterwards, should perceive that steam would move useful machinery as well as a toy

Is IP like P?

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Is IP like P?

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Differences between P and IP: Problems of IP

Indeterminacy of boundariesIndeterminacy of threshold tests like obviousnessMultiplicity – and increasing impossibility of search - Sheer number of

patents and complexity of contemporary science, or copyrights on code

Regulatory/judicial creep – whereby new things come within purview of IP law – like software and business methods patents

Non-rivalryNon-rivalry in ideas the distinction of our extraordinary species, the building

block of human progressEvery piece of IP is a potential public good

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Public goods – goods that no-one will supply if the government doesn’t

Public goods Public goods . . . present seriousproblems in human organisation.

Vincent and Elenor Ostrom - 1977

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The Wealthof Nations (1776)

• Private Goods

The Theory ofMoral Sentiments (1759)

• The social preconditionsof markets(Public Goods)

Language

Some crucial public goods are not government built. They’re emergent

Adam Smith

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Public Goods

Private Goods

[The public good of] Justice . . . is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society . . . must in a moment crumble into atoms.

Adam Smith

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From potential to actual public good

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Web 2.0: an explosion of emergent public goods

Web 2.0 platforms are public goods:

Google (1998)Wikipedia (2003)Blogs (early 2000s)Facebook (2004)Twitter (2006)

Government didn’t build any of them

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The economics of abundance: a new birth of ‘free’dom

Public goods . . . present seriousproblems in human organisation.

Vincent and Elenor Ostrom - 1977

The freedom of ideas is the liberation of our speciesPublic goods as a problemPublic goods as an opportunity

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There’s never a case for IP (including more IP) Unless it generates more benefits than costs

Its costs are on consumers of IP (in form of higher prices and/or lack of access)

It’s benefits – its only benefits – are that such imposts may induce more IP

IP: the basic economics

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In an uncertain world – who’s side should we be on? Consumer or producer?

The losses from under-investment exceed the losses from overpricing PC’s argument about infrastructure access pricing

Because IP is dynamic – because IP leads to more IP, we should err on the side of producers.

But there’s a problem . . . a big problem

IP: the basic economics

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To muck up a first order trade-off is a misfortune, to muck up a second order trade-off looks like carelessness

Costs and benefits - same order of magnitude

Costs and benefits – different order of magnitude

First and second order tradeoffs

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Evaluating IP ProtectionVery little change in benefit because of discounting applied to future cash flows of IP holders

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2nd order trade-off

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First and second order tradeoffs1st order trade-off

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IP is promoted by IP owners, IP agencies and IP exporters

Sometimes without plausible economic rationale Retrospective IP increases

Mickey mouse Patent terms

Yet they can’t bring into existence IP that already exists

The political economy of IP

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For patents monopoly rights to sell into a territory is the core (first order) right

Other rights to Import Manufacture

The second order subsidiary rights may once have helped administer the preeminent right

Unnecessary today and . . .As the world becomes more complex and globalised, costs

mount

Over-specified IP rights

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Patents expire later in Australia than in other major markets

Because Australia offers patent extensions of up to 5 years Patent owners apply for marketing approval later here

Exports are in breach of patent until its expiryIt’s not viable to manufacture generics for export

Manufacturing for export

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Is IP like P?

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Though patent extensions are TRIPS plus . . .Art 17.9.8(b) of AUSAFTA requires patent extensionsThe exporter (Hospira) suggested several ways through

the impasse

Enter AUSAFTA

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Big pharma opposed these optionsYet there was little direct or indirect benefit to it

Hospira will make the drug and market it in generic markets It will simply do so from outside Australia Favoured locations have no patent extensions – like

Canada, India, New Zealand and Israel Is it really in Big Pharma’s interests to prevent countries

that agreed to stronger IP protection from losing generics production to countries with weaker protection?

What’s in big pharma’s interests

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For Australia to be forced to back down on MfE, would require 1. A firm or firms to object to our allowing it2. That being translated into a country objecting3. It would have to be the US under AUSAFTA as TRIPS does not

seriously constrain Australia 4. The US would have to consider this a good ‘test case’

Yet it’s a notoriously bad test case in almost every way A victory confers negligible commercial benefit on anyone And high costs on Australia, with lower IP countries benefitting

5. Then the US would have to win the case and force Australia to change course

6. Then Australia gets a chance to craft new MfE provisions in light of the decision

The international politics

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Were our AUSAFTA obligations regarded as raising ‘legal risk’? Like a firm might bear in risking some legal liability

But Australia bore no substantial risk other than the risk – a slim one – of being forced to reverse course having permitted manufacturing for export

On the other hand, Hospira was seeking to take the substantial commercial risk of investing in a stranded Australian asset

Properly conceptualising legal risk

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Government consideration of the issues from late 2008 to July 2009

“The issue has been given very careful . . . Consideration by relevant departments and agencies, including matters of economic impact, the system of intellectual property protection and Australia’s international trade obligations.”

Independent opinion of the Solicitor General soughtGovernment supported status quo, as it did in 2004

The result

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Initial over-specification of rights Uncompromising politics of retaining rightsExpansion of rightsEndless reviews to micro-manage IP for

evolving technologyOver-compliance with international obligations Fatalism about reform

The pathology of IP

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The biggest problem of IP is not hurting consumers who will ultimately benefit if IP protection generates more IP

IP can obstruct the creation of more IP Proprietary IP Open IP

The economics of IP – the big ‘But’

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Patent thickets or anti-commons

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Proportion of patent litigation = software

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Private benefits and costs - Pharma

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Private benefits and costs - Others

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Invisible in many economists’ modelsIP favouring large incumbent firmsSmall firms often harassed and unable to bear risk of

IP litigation – something that large firms know

Transaction costs

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‘We considered patenting; we prepared a patent and it was nearly filed. Then I had an interaction with a big, multinational electronics company. I approached a guy at a conference and said, “We’ve got this patent coming up, would you be interested in sponsoring it over the years?” It’s quite expensive to keep a patent alive for 20 years. The guy told me, “We are looking at graphene, and it might have a future in the long term. If after ten years we find it’s really as good as it promises, we will put a hundred patent lawyers on it to write a hundred patents a day, and you will spend the rest of your life, and the gross domestic product of your little island, suing us.”

Andre Geim, 2010 Nobel prize in physics for graphene

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2nd order trade-off

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First and second order tradeoffs1st order trade-off

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The diagram illustrates second order tradeoffs quantitatively

But it also exists qualitatively Orphan copyright More liberal fair use exemptions Education, research, archiving, indexing, preserving and

non-commercial permissions The scope of IP rights . . . (eg. MfE) Move towards focus on damages to exclusive rights, not

monopoly

First and second order tradeoffs

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Copyright prevents reproduction of expression Even where it won’t conceivably damage owner Chains of permissions sound innocuous

Lessig’s example of a film that cost < $2,000 to make and >$200,000 to obtain permissions for release

Increasingly important on the internet – which requires low transactions costs

Over-specified copyright

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Permissions require human involvement – for each oneSo they don’t ‘scale’Pre-permissions requiredAPIs are pre-permissions

How to get onto iTunes, Android app market etc How to interface with Twitter, Facebook

Creative commons is an API for copyrightThe NLA’s statutory collection rights are a pre-internet pre-

permission

Under-specified automatic permissions

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Copyright in the internet ageWe’ve gone backwards on pre-permissionsThe NLA does not have the rights to access and

provide access to Australian internet contentPANDORA requires permissions from each domain

owner – 16 million web-pages archived in PANDORA over

2009– 700 .au web-pages in two months by a web-crawler

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Reduce IP where the private economic gains are second order

Move IP away from absolute monopoly towards some right of commercial exploitation – subject to damages, not exemplary penalties

IP bodies should promote stronger economies, not stronger IP

Promoting transparency – a la PC – here and offshoreFocusing on the cumulative use of IP

Righting the IP Imbalance: 1

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Represent our national interest as an IP importerThe US (perhaps with Switzerland) is a minority of

one as an IP exporterCo-ordinated international negotiation for IP

improvements – a la Cairns Group on trade More robust approach to diplomacyPrinciple based diplomacy More robust domestic behaviour within international

arrangements. There is no ‘legal risk’ to Australia

Righting the IP Imbalance: 2