Forced pooling as a solution to the tragedy of the anticommmons in patent law

The anticommons and its tragedy

An anticommons occurs when multiple owners each have a right to exclude others from a scarce resource and no one has an effective privilege of use. The “tragedy of the anticommons”, coined by Michael Heller, is when the right to exclude is exercised by some of the right holders, with the result that the resource becomes under-utilized. Heller has discussed this occurrence in post soviet regimes [4] and in biomedical research with Rebecca S. Eisenberg [5]. In the particular case of patents the under-utilization is the suppression of innovation due to the cost of using upstream resources. This problem becomes magnified because the rights holders have monopolies on the resource - the innovator cannot find an alternate supply of the resources they need.

Heller and Eisenberg establish three main hurdles that must be overcome to prevent tragedy in the Biomedical anticommons, which can be extended to patents in general. These are the high transaction costs of bundling rights, conflicting goals of rights holders and rights holders overvaluing of their piece of the resource.

While some view this situation as one with a free market solution [6], others think that this is a pitfall in the current system and thus an area ripe for government intervention [7]. Proposed solutions range from supplanting the right to exclude with liability rules [1] to giving free compulsory licenses for experimental use [8].

Government seizure as a solution to the tragedy

Government seizure is not a new idea. Seizure has been a useful way for government to overcome high transactions costs, hold-outs or parties unwilling to release their rights at any cost in the building of roads and other public works for centuries. The use of seizure is specifically allowed for the public good with fair compensation in the fifth amendment of the US constitution, and a recent supreme court case has held that seized property can go into private hands as long as its use is for the public good [9].

The standard argument for granting patent holders the right to exclude is that it is an incentive to innovate. Thus, the argument goes, removing that right will chill innovation as patents will become less valuable because of the taking of rights. Our solution tries to walk the line between ensuring incentives for innovation and decreasing the hurdles and tolls that an innovator needs to take advantage of the protected ideas in downstream research.

Seizure through a forced pooling scheme

Patent pools have been a used to stop under-utilization if patents in the past. Upon entering World War I the US government brokered the creation of a patent pool to encourage aviation, which was stagnating due to disagreements between the Wright company and their competitors [2]. In the realm of copyright, collectives for authors and musicians exist to lessen the transaction costs of licensing [3].

Our concept of forced pooling is simple: when an anticommons in a particular resource or group of resources is found to be deterring innovation the government can step in and seize the right to exclude from the patent holders, and place these patents into a patent pool. This effectively overcomes the three problems of transaction costs, conflicting goals and overvaluing of patents: the actors have no right as to how their property is used in the pool. Note that we do not discuss here who decides what 'deterring innovation' means - it is an important question beyond the scope of this paper.

The question then becomes what constitutes 'fair compensation'. We propose a mandatory licensing scheme to reward the patent holder. When an entity wishes to use the pool they must devote some capped percentage of the gross income to the members of the pool whose patents were used. This scheme is detailed in figure 1. Thus, we retain some semblance of market in that the 'better' patents get used more and thus produce more income, ensuring that the patent holders will receive some form of fair compensation based on the worth of the use of their research.

Benefits of the forced pooling scheme

The forced pooling scheme is not very different from the liability scheme proposed by Bar-Gill and Parchomovsky [1]. In both schemes the right to exclude is taken and replaced with some monetary compensation. The major differences, and benefits of our forced pooling scheme, are the lower transaction costs, greater predictability of damages and the greater incentive for the industry to consolidate their rights independent of government interference.

Lower transaction costs and greater predictability

The liability scheme relies on courts to set the price of the patent to the infringer ex post. Presumably, the threat of lawsuit would then lead to negotiations about how valuable the patent was to the new invention. However, this could open the infringer to crippling litigation. Imagine a the manufacturer of a dvd player, which uses thousands of patents. Under the liability scheme, the manufacturer would need to anticipate hundreds of negotiations and lawsuits to bring their product to market, an unpredictable task and a deterrent to innovation.

The forced pooling scheme, on the other hand, has a known capped percentage of gross income to go back to the pool, so the liability is predictable, and there is no need to go to the courts or bargain with different rights holders.

Incentive for rights consolidation independent of government interference

The liability scheme offers no incentive for the rights holders to break the anticommons. If bargaining breaks down, they may simply sue - there is no reason to consolidate their rights into a system favorable to innovation.

The threat of the forced pooling scheme may encourage private bargaining to break the anticommons. Faced will a loss of rights, the actors may turn to the bargaining table. Thus, a benefit of the proposed system may be the incentives it creates, not the benefits of its utilization.

References

[1] A Marketplace for Ideas?, Oren Bar-Gill and Gideon Parchomovsky, 84 Texas Law Review 395, 2005.

[2] Property Rights, Progress, and the Aircraft Patent Agreement George Bittlingmayer Journal of Law and Economics, 31; 227-248, 1988.

[3] An Economic Analysis of Copyright Collectives, S. Besen, S. Kirkby and S. Salop, Virginia Law Review, 78; 383-441, 1992.

[4] The Tragedy of the Anticommons: Property in the Transiton from Marx to Markets, Michael A. Heller, 111 Harv. L. Rev. 621, 1998.

[5] Can Patents Deter Innovation? The Anticommons in Biomedical Research, Michael A. Heller and Rebecca S. Eisenberg, Science 1 May 1998: Vol. 280. no. 5364, pp. 698 - 701.

[6] Engineering a Deal: Toward a Private Ordering Solution to the Anticommons Problem, F. Scott Kieff and Troy A. Paredes, Stanford Law and Economics Olin Working Paper No. 330 (November 2006). Available at SSRN: http://ssrn.com/abstract=948468 .

[7] Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, Suzanne Scotchmer, The Journal of Economic Perspectives, Vol. 5, No. 1. (Winter, 1991), pp. 29-41.

[8] What Does the Public Get? Experimental Use and the Patent Bargain, Katherine J. Strandburg, Wisconsin Law Review 2004: 81.

[9] Kelo v. City of New London, 545 U.S. 469 (2005).