Intellectual Property: Economic and Legal Dimensions of Rights and Remedies

Intellectual Property: Economic and Legal Dimensions of Rights and Remedies

by Roger D. Blair, Thomas F. Cotter

Addresses several aspects of the law and economics of intellectual property rights.See more details below


Addresses several aspects of the law and economics of intellectual property rights.

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'… the authors, both of whom have impeccable credentials and have created a work of undoubted scholarship.' European Intellectual Property Review

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Cambridge University Press
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Intellectual Property
Cambridge University Press
0521833167 - Intellectual Property - Economic and Legal Dimensions of Rights and Remedies - by Roger D. Blair and Thomas F. Cotter



Until fairly recently, the law of intellectual property - a term that encompasses patents, trade secrets, copyrights, and trademarks, among other things - was something of a backwater. Of interest mostly to specialists within these fields, it garnered little attention from the broader legal community. Most economists manifested a similar indifference to these issues. Only a few gave serious consideration to the design of patent rights and even fewer paid much attention to trademarks or copyrights. Indeed, some law-and-economics scholars doubted that economics had much to say about any of these bodies of law.1 Roughly within the last ten years, due in large part to the expanding role of high technology in our everyday lives, all of that has changed. The law of intellectual property - particularly patents and copyrights, but also trademarks and trade secrets and other related fields - has become a topic of major interest to lawyers, judges, and law professors. Many high-profile cases are making their way through the courts; new legislation is being introduced in many countries and international treaties are attempting to properly balance the incentives for investment against the need for access to the products of that investment, such as essential medicines. Economists have also taken up the challenge of modeling the consequences of high and low levels of protection and, to some extent, of testing these models against the empirical evidence. It is now common for leading law reviews and economics journals to publish articles on these issues - to say nothing of the popular press, with its endless fascination for such items as the attempt to patent the human genome, the ongoing controversy over the digital distribution of sound recordings and other copyrighted works, and cases that push the envelope of trademark protection for remote source signifiers such as product design and color.

However, even within the burgeoning literature on the law and economics of intellectual property rights (IPRs), there is still relatively little discussion of the appropriate remedies for the infringement of patents, copyrights, trademarks, and trade secrets. There is, to be sure, a fairly widespread consensus that an injunction - an order to cease infringing - is the appropriate remedy in most cases in which the plaintiff proves that the defendant has trespassed the plaintiff's rights. But there is relatively little discussion of the law of damages, and this gap is curious. Even in a system that routinely grants injunctive relief, damages are a necessary remedy for the time period running from the beginning of the infringement to the entry of the injunction. And this may be quite a long time, depending on how difficult it is to detect infringement; the ease with which litigants may obtain preliminary injunctive relief; and the substantial time it takes for a case to go through the legal system. A system that awards very substantial damages in effect strengthens the owner's IPR, whereas a system that awards minimal or no damages, or that imposes insuperable difficulties to the proof of damages, necessarily weakens those rights. More generally, the remedies that are available for infringement in some respects drive the entire IPR system. Without effective remedies for the enforcement of these rights, the rights are worthless; on the other hand, if remedies and other enforcement mechanisms are too generous, they may cause the cost of protection to be raised to a point that outweighs the potential benefits. Inattention to remedies, in other words, can undermine the whole system, no matter how much careful thought and analysis have gone into devising the rules of substantive law.


This is the first book-length treatment of which we are aware of the law and economics of remedies and other closely-related issues in intellectual property (IP) law.2 We begin in Chapter 2 with an overview of the law of patents, trade secrets, copyright, and trademarks, and of the economic rationales for (and critiques of) the principal features of these bodies of law. As this discussion will show, all of the various bodies of IP law ideally strike a balance between incentives (to create, to publish, to invest in product quality), on the one hand, and public access to the work product that results from these incentives on the other. Just where that ideal balance lies remains a matter of disagreement. Scholars are divided on the issue of how strong IPRs should be, particularly in the digital environment and with respect to new technologies. But our goal in this book is not to resolve these issues. Instead, we will assume that the policymaker has chosen a particular scope and duration for the IPR at issue, and that this choice reflects some reasoned consideration about the proper balance of social benefits and costs. We then offer some insights as to the advantages and disadvantages of different possible rules for the private enforcement of these rights in court. As we will see, some of these enforcement rules may function better than others at preserving the incentive structure embedded in the substantive law; others may be less costly to apply, but may not function as effectively at preserving that structure.

More specifically, we want to be able to answer the following sorts of questions. First, with respect to remedies, as we noted earlier, IP law evidences a marked preference for injunctive relief. Rules relating to damages and other forms of monetary relief are nevertheless also a necessary supplement, if only for those cases in which injunctive relief cannot be obtained immediately (or at all). But what sort of monetary relief should courts provide in order to preserve the incentive structure upon which the system is premised while at the same time avoiding the overdeterrence of lawful conduct? Is a lost profits or lost royalty remedy sufficient or should courts in some cases award relief in the amount of the defendant's gain instead of in the amount of the plaintiff's loss? How can one measure the amount of the plaintiff's loss (or defendant's gain) that was attributable to the act of infringement and not to other factors? If neither form of monetary relief can be calculated with confidence, should courts opt for some form of fixed or presumed damages, as in defamation cases? Is there a role for punitive or other supercompensatory relief? We address questions of this nature in Chapters 3 and 4, and then return to some measurement problems in Chapter 8.

A second set of issues with respect to enforcement relates to the proof of infringing conduct. Even if the defendant's invention, work of authorship, or trademark falls within the scope of the plaintiff's rights, should the defendant's liability be conditioned upon proof of a particular mental state (such as intent or negligence)? Or should liability in these cases be strict? U.S. IP law is often referred to as a body of strict liability law, but as we will show what we really have is a sui generis system in which the defendant's ability and effort to discover the plaintiff's entitlement ex ante has some bearing on the relief to which the plaintiff is entitled. Although the rules vary from one body of law to another, the remedies afforded for the infringement of IPRs are often conditioned upon proof of some sort of knowledge or notice or other mental state on the part of the defendant. This insight is trivially true with respect to injunctive relief. No court will enter a preliminary or permanent injunction, prospectively enjoining the defendant from infringing, unless and until the defendant has been served and has had an opportunity to be heard. But it is also, less obviously, often true with respect to damages remedies as well. Patent law, for example, conditions awards of damages upon proof of at least constructive notice (most of the time, at any rate) and copyright conditions all relief upon proof of copying (albeit sometimes unconscious copying is sufficient). Along the way, we discuss the merits and demerits of different possible liability regimes, including a "pure" strict liability regime, a negligence regime, and an intent-based regime.

A third set of issues relates to the identity of the proper parties to an infringement suit. U.S. patent law, for example, extends liability all the way down the chain of distribution by rendering manufacturers, sellers, and users jointly and severally liable, subject to the first-sale doctrine. Copyright and trademark law traditionally have limited liability to a greater extent, although some recent developments tend to move these bodies of law in the direction of the patent model. Is there any logic to the way in which these bodies of law have decided who should be responsible for the act of infringement and who should not? Similarly, is there any logic to the various ways in which IP law allocates the right to sue for infringement? Here, patent law is the most restrictive in allocating the right to sue; it essentially restricts suits to patent owners and their exclusive licensees who must join the owner as a party. Copyright law is the least restrictive and permits suits by any "beneficial owner" of a copyright interest, including owners and exclusive licensees of individual copyright rights falling short of the entire "bundle of sticks." The trademark rules are less easy to describe in a sentence or two but might be viewed as falling somewhere in between the rigorous patent and less rigorous copyright rules. Are there good reasons for these differences? Should the rules be modified? As we shall see, the answers to these questions depend in part upon the various ways in which rights may be licensed and in part on the likelihood of a right being invalidated in court, which varies from one body of law to another.

We anticipate two possible critiques of our analytical framework. One critique is that our analysis, which takes the existing scope and duration of IPRs as a given, cannot improve social welfare because the existing scope and duration of IPRs are suboptimal. To cite just a few problems, the duration of copyright is probably much longer than it needs to be under the incentive model; the optimal breadth of patents and copyrights is uncertain; and the one-size-fits-all nature of much of patent and copyright law may be unfortunate as well, because equal terms are conferred on both high- and low-value products. To the extent that the current system is suboptimal, our suggested rules for preserving the incentive structure embedded in that system will only exacerbate the problems or not go far enough toward correcting market failures. A second critique is that, even if our task is worthwhile, it is impossible, because matters of enforcement and procedure cannot be sharply contrasted with matters of substance. This is perhaps most evident in connection with our discussion of liability standards: if a particular mental state is required (or not) for an act to be deemed infringing, then the scope of the IPR owner's rights is narrower (or broader) than if the rule were otherwise. But the point can be made in connection with the other chapters as well. A rule that awards the patent owner her lost profit confers a broader scope than does one that awards only a fraction of that lost profit, because in the latter instance some acts of infringement may be profitable to the infringer, and therefore will occur even though illegal; in effect, patent scope has been diminished under the latter rule for good or ill.

We recognize the force of these critiques, but nevertheless adhere to our basic framework for two reasons. First, while our analysis assumes the optimality of a given system of IPRs, it does not depend upon any particular system being optimal. In other words, even if the copyright term was shorter, the patent term was longer, and the scope of both bodies of law was more precisely calibrated with the maximization of social benefits, one would still need to confront the issues we discuss in this book. Moreover, one would - we think - still reach the same basic conclusions. Therefore, our analysis is, to borrow a metaphor from computer technology, platform-independent. As long as IP law is viewed as embodying certain incentives designed to maximize social welfare, one will need to craft enforcement rules so as not to undermine those incentives. Our analysis suggests a variety of ways of doing this, even if the current mix of incentives can itself be improved upon.3

Our second response is jurisprudential. The current system may be suboptimal and by various maneuvers one could manipulate the rules relating to enforcement to better align costs and benefits. For example, if one thinks that the patent system in its current state confers too many costs and too few benefits, one might try to remedy the situation in part by making it extremely difficult for patent owners to recover their lost profits from infringers. By tightening up judge-made rules relating to proximate cause and the like, judges could achieve precisely this end. While this step may not go very far toward improving the system, it would encourage some acts of infringement that, under this hypothesis, would be socially beneficial. As a general matter, however, we think that this sort of approach would be a bad way of attempting to correct a flawed system. For one thing, the perceived merits or demerits of the present system are likely to vary substantially from one observer to another. Any suggestion that courts should manipulate the rules of enforcement and procedure to attain desired substantive goals ultimately will be futile, if courts themselves are divided on the issue of whether IPRs are already too strong or too weak. More fundamentally, however, this view threatens to undermine the rule of law by substituting judges' idiosyncratic views of the merits of (say) the patent system for the view expressed by Congress in enacting the Patent Act. To be sure, we are not so naive as to believe that the only thing judges do is to follow the rules laid down or that Congress in enacting the Patent Act and its many amendments has been motivated exclusively by concern for the public interest. Judges are policymakers and Congress often responds more to interest-group pressure than to considerations of the public good (to say nothing of the difficulty of ascribing a motive to a collective body, such as Congress, at all). But there is an institutional concern in operation here. Warts and all, legislative bodies are probably the best place for the fundamental decisions about the scope and duration of IPRs to be debated and resolved (barring some constitutional constraint upon legislative power, as may occur when IPRs come up against principles such as freedom of speech). We believe that, as a general matter, courts ought to operate as if the intellectual property laws embody the proper balance when deciding how to best calculate damages or craft standing and joinder rules, or the like, and leave it to other branches of government to decide whether the underlying assumption is true or false. That is the premise, at least, upon which this book is based.


The Law and Economics of IPRs

In this chapter, we provide an overview of basic patent, trade secret, copyright, and trademark law, and a general sense of the ways in which courts enforce these rights. Our principal focus will be on U.S. law, although from time to time we will examine other countries' laws and how they sometimes differ from U.S. law. With respect to each of these four bodies of law, we first provide a brief description of the legal rights at issue, and then follow with a discussion of the standard economic justifications for, and challenges to, these rights. Finally, we review the debate over whether intellectual property rights (IPRs) are better protected by property or liability rules.


Inventions and other industrial know-how sometimes may be subject to ownership under patent or trade secret law.1 Because the same invention may not be protected by both patent and trade secret law, and because patents usually confer a more robust form of protection, an inventor will usually choose patent over trade secret protection when either is available. In this section, we examine the scope of these bodies of law and their suggested economic underpinnings.


To qualify for patent protection, an invention must fall within the scope of patentable subject matter (a machine, process, manufacture, or composition of matter) and must meet the three statutory criteria of novelty, utility, and nonobviousness.2 In the United States, the novelty requirement is normally satisfied as long as the patent applicant was the first to invent the claimed invention. For example, suppose that you file an application for a U.S. patent on a composition of matter comprising four elements: (A) water, (B) sugar, (C) electrolytes, and (D) glycerol in a concentration of approximately 0.5% to 5.0%. If, prior to the date on which you are deemed to have invented this composition, someone else already had invented and publicly disclosed in the United States a composition comprising these four elements, your invention would lack novelty.3 The utility condition requires only that the invention work and that it serve some minimal human need. Although utility is a minimal criterion, it does manage to weed out a few purported inventions, including those that cannot work (such as perpetual motion machines) and those that do not have a sufficiently specific known use; a possible example of the latter are intermediate research tools such as expressed sequence tags used in biotechnological research.4 The nonobviousness requirement denies patentability if the differences between the claimed invention and the relevant prior art are such that the claimed invention would have been "obvious at the time the invention was made to a person having ordinary skill in the art to which the subject matter pertains."5 Nonobviousness is often the most difficult of the three conditions to satisfy. It is also the most difficult to describe or quantify, though in a rough sense it means that an invention is not patentable if it is an insubstantial improvement over the existing state of the art. In comparison with our previous example, a piece of prior art comprising (α) water, (β) sugar, (γ) electrolytes, and (δ) glycerol in a concentration of approximately 6.0% to 8.0% would not anticipate your invention - element D and element δ are not identical. Given the proximity of the range of glycerol concentrations, however, the prior art might render your invention obvious, unless (for example) the prior art "teaches away" (i.e., would lead the ordinary researcher to a different solution to the problem) from a lower glycerol concentration or the use of a lower concentration has unexpected properties.

Patent laws also impose upon the patent applicant a variety of disclosure requirements. Under U.S. law, the specification portion of the patent must include a written description of the invention "in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains . . . to make and use the same,"6 and also must disclose the inventor's own "best mode" or preferred embodiment of the invention as of the time the application is filed.7 It must "conclude with one or more claims particularly pointing out and distinctly claiming the subject matter that the applicant regards as his invention."8 Other countries' laws have similar, though not necessarily identical, requirements.

Once the patent is granted, the U.S. patentee may exclude others from, among other things, making, using, or selling the invention in the United States for a term ending twenty years from the date on which the application was filed.9 If the patent owner suspects that someone is making, using, or selling without her permission, she can file suit for patent infringement. Infringement itself comes in two forms. First, the patent owner may claim that the defendant has literally infringed, by making, using, or selling an invention that contains all of the elements of the patented invention. In our previously mentioned hypothetical, where we used the letters A, B, C, and D to denote the elements of a patented invention, the defendant would literally infringe if he made, used, or sold a composition containing those same four elements (alone, or in combination with another element or elements). Alternatively, the patent owner may assert that the defendant's product (sometimes called the accused device) infringes under the doctrine of equivalents, which is substantially though not literally the equivalent of the patented invention. In our hypothetical, an accused device comprising elements A, B, C, and E would not literally infringe but might infringe by equivalents if the substitution of element E for element D is an insubstantial or trivial variation over the patented invention. Not surprisingly, applying the doctrine of equivalents can be quite complicated. Interpreted too broadly, the doctrine could have a chilling effect on follow-up inventors; interpreted too narrowly, it could render patents virtually worthless to the extent that almost any knowledgeable researcher could avoid literal infringement by making some minor modification to the patented invention.10

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