Jonathan M. Barnett

The Fashion Lottery: Cooperative Innovation in Stochastic Markets

The fashion market is an anomaly: innovation is vigorous, but original producers are substantially unprotected against imitation. We account for this anomaly through a cooperative innovation model in which producers prefer an incomplete property regime that permits some imitation to alternative regimes that permit no imitation or all imitation, independent of budget constraints. A property regime that permits positive but limited levels of imitation operates as a collective insurance mechanism that alleviates the risk of recoupment failure in a market characterized by demand uncertainty, long lead times, skewed returns, and rapid product obsolescence. This model is compatible with producers’ selective enforcement of intellectual property protections, privately administered quasi‐copyright schemes, and institutional mechanisms that facilitate seasonal coordination of design outcomes. This model potentially generalizes to certain other markets in which innovation persists despite substantial imitation.

From Patent Thickets to Patent Networks: The Legal Infrastructure of the Digital Economy

Scholarly and popular commentary often assert that markets characterized by intensive patent issuance and enforcement suffer from “patent thickets” that suppress innovation. This assertion is difficult to reconcile with continuous robust levels of R&D investment, coupled with declining prices, in technology markets that have operated under intensive patent issuance and enforcement for several decades. Using network visualization software, I show that information and communication technology markets rely on patent pools and other cross-licensing structures to mitigate or avoid patent thickets and associated inefficiencies. Based on the composition, structure, terms and pricing of selected leading patent pools in the ICT market, I argue that those pools are best understood as mechanisms by which vertically integrated firms mitigate transactional frictions and reduce the cost of accessing technology inputs. Appropriately structured patent pools can yield cost savings for intermediate users, which may translate into reduced prices for end-users, but at the risk of undercompensating R&D suppliers.

The Illusion of the Commons

Intellectual property rests on a simple incentive rationale: without imitation barriers, innovators rationally decline to invest. But this blanket proposition is incompatible with markets where innovation proceeds without substantial recourse to intellectual property and imitation is widespread. This discrepancy sometimes drives the alternative view that intellectual property or other access barriers often or even usually are not prerequisites for intellectual production. But utopian understandings oversimplify the complex incentive structures and circumscribed conditions under which some markets can induce innovation without intellectual property or practical equivalents. A simple rational choice framework anticipates that sharing regimes - that is, innovation environments bereft of exclusionary barriers but governed by reputational norms - can sustain a viable habitat for innovation but inherently deteriorate as endowment heterogeneity, group size, asset values and capital intensities increase. Empirics substantially track theory: industries that sustain innovation without robust intellectual-property protections tend to be confined to low-stakes settings or make indirect recourse to other exclusionary instruments. Critically, however, it is also the case that voluntarily-formed sharing arrangements pervade even economically-intensive markets. Properly understood, these sharing arrangements do not substitute for property but provide a vital complementary mechanism that alleviates the transaction-cost burden of an exclusionary regime. Examination of three best cases for the view that intellectual production can proceed without intellectual property - premodern craft guilds, academic research and open source software - supports this intermediate position: sharing practices proliferate to facilitate the low-cost circulation of knowledge assets but are consistently embedded within a legal or technological infrastructure that implements some barrier to imitation.

Hollywood Deals: Soft Contracts for Hard Markets

Hollywood film studios, talent and other deal participants regularly commit to, and undertake production of, high-stakes film projects on the basis of unsigned “deal memos,” informal communications or draft agreements whose legal enforceability is uncertain. These “soft contracts” constitute a hybrid instrument that addresses a challenging transactional environment where neither formal contract nor reputation effects adequately protect parties against the holdup risk and project risk inherent to a film project. Parties negotiate the degree of contractual formality, which correlates with legal enforceability, as a proxy for allocating these risks at a transaction-cost savings relative to a fully formalized and specified instrument. Uncertainly enforceable contracts embed an implicit termination option that provides some protection against project risk while maintaining a threat of legal liability that provides some protection against holdup risk. Historical evidence suggests that soft contracts substitute for the vertically integrated structures that allocated these risks in the “studio system” era.

Copyright Without Creators

Abstract Copyright is typically justified by the rationale that profits induce authors and other artists to invest in cultural production. This rationale is vulnerable to the objection that some artists have intrinsic production incentives and do not require significant capital. Even accepting this objection, copyright is justified by an alternative rationale: it principally supports the profit-motivated intermediaries that bear the high costs and risks involved in evaluating, distributing and marketing content in mass-cultural markets. This “authorless” rationale is consistent with the intermediated structure of mass-cultural markets and accounts for long-standing features of copyright law that have conventionally been dismissed as unjustified transfers from consumers to media interests. The digital transformation of mass-cultural markets, in which content is abundant but quality is variable, challenges and clarifies the intermediary-based rationale for copyright. Even in digitized content markets, robust copyright enables intermediaries to select from the full range of transactional structures for most efficiently bearing the costs and risks of screening, packaging, distributing and marketing content. Weak or zero copyright skews the market’s selection of organizational forms by compelling the use of intermediation structures that bundle unprotected content with excludable complementary goods. Preliminary evidence from the popular music market suggests that the effective decline in copyright protection may have distorted the efficient selection of intermediation mechanisms.

Do Patents Matter? Empirical Evidence on the Incentive Thesis

A central goal of any economy is to achieve rapid and sustained growth. This cannot happen without continued innovation. This landmark Handbook brings together many of the world’s legal scholars to examine features of the legal infrastructure that affect both innovation and growth. Individual chapters explore different legal subject areas, in most cases offering recommendations for rule changes that could accelerate growth, primarily in the context of the US economy. The introductory chapter provides a framework for these discussions and explains why it is time for legal scholarship and research to move in that direction.

Has the Academy Led Patent Law Astray

Scholarly commentary widely asserts that technology markets suffer from a triplet of adverse effects arising from the strong patent regime associated with the establishment of the Court of Appeals for the Federal Circuit in 1982: “patent thickets” that burden innovation with transaction and litigation costs; “patent holdup” resulting in excessive payouts to opportunistic patent holders; and “royalty stacking” resulting in exorbitant patent licensing fees. Together these effects purportedly depress innovation and inflate prices for end-users. These repeated assertions are inconsistent with the continuing robust output, declining prices and rapid innovation observed in the most patent-intensive technology markets during the more than three decades that have elapsed since 1982. Recent empirical studies relating to each of these assertions have found little to no supporting evidence over a variety of markets and periods. Nonetheless courts, antitrust agencies and legislators have taken, or have proposed taking, actions consistent with these assertions. Most importantly, policymaking entities have sought to mitigate thickets, holdup and stacking effects by limiting injunctive relief for important segments of the patentee population and placing significant constraints on damages awards. Substituting monetary relief for injunctive relief — what I call the “depropertization” of the patent system — yields three potential efficiency losses. First, depropertization impedes efficient resource allocation by shifting the pricing of technology assets from the relatively informed marketplace to relatively uninformed judges and regulators. Second, depropertization distorts markets’ organizational choices by inducing entities to undertake innovation and commercialization through vertically integrated structures, rather than contractual relationships now clouded by the prospect of judicial re-negotiation. Third, depropertization may facilitate oligopsonistic efforts to depress royalties on patent-protected inputs, resulting in wealth transfers to downstream entities and discouraging innovation by upstream R&D suppliers. This possibility is consistent with the revealed preferences of downstream intermediate users in the smartphone market, who advocate limiting injunctive relief and damages awards for certain patent holders. These potential welfare losses, combined with the paucity of evidence for thicket, holdup and stacking effects, recommend against policy actions that have weakened patent protections in technology markets.

Patent Tigers: The New Geography of Global Innovation

It is widely argued that international extension of the patent system hinders innovation and growth in developing countries by restricting access to technological inputs. I re-examine the connection between patents, innovation and development by assessing the extent to which the U.S. patent regime supports R&D investment by firms in certain emerging market countries. Based on USPTO data covering all utility patents issued to U.S. and foreign inventors (a total of 6,122,217 patents issued to inventors resident in 188 countries and territories) during 1965-2015, and supplemented by additional data sources, I argue that the U.S. patent system has supported innovation in a cluster of foreign countries that have developed rapidly and dramatically since the 1980s. The increase in the proportion of foreign (and especially, East Asian) innovators in the USPTO patentee population is so large that it accounts for much of the significant increase in USPTO patent issuance that has commonly been attributed to policy changes by U.S. courts and the USPTO. Within this expanded foreign patentee population, three smaller and late-developing countries are now (together with Japan) the most intensive foreign users of the U.S. patent system on a per-capita and per-GDP basis: Israel, South Korea and Taiwan. Based on entity type, industry type and other salient characteristics of the leading “first-named” assignees of USPTO patents in Israel and Taiwan during 2000-2015, and supplemented by other evidence relating to these countries’ innovation capacities and performance, I argue that these countries rely on USPTO patents to extract value from their R&D investments by supplying product or process inputs to the global value chains that connect innovation sources with commercialization sources on the pathway to target consumption markets. While prior work has presented evidence that patents sometimes promote entry into technology markets by upstream R&D firms that lack downstream production and distribution capacities, this paper extends that rationale and presents evidence that patents can promote entry into technology markets by economies that are rich in intellectual and human capital but have small domestic markets in which to extract returns on that capital. For those countries, the patent system (or at least the U.S. patent system) is an aid, not a hindrance, to development.

Revisiting Labor Mobility in Innovation Markets

It is now widely asserted that legal regimes that enforce contractual and other limitations on labor mobility deter technological innovation. First, recent empirical studies purport to show relationships between bans on enforcing noncompete agreements, increased employee movement, and increased innovation. We find that these studies misconstrue legal differences across states and otherwise are flawed, incomplete, or limited in applicability. Second, scholars have largely adopted the view that California’s policy against noncompetes promoted Silicon Valley as the world’s leading technology center. By contrast, Massachusetts’ enforcement of noncompetes purportedly stunted innovation in the Route 128 region near Boston. We show that this account is incomplete. During the rise of Silicon Valley, California noncompete law did not as vigorously preclude noncompetes as today and firms could substantially mimic noncompetes through contractual and other instruments. Rather, fundamental technological and economic factors more persuasively account for the rise of Silicon Valley and the Boston area has remained a significant innovation center. There is little compelling ground for the view that barring noncompetes and other limitations on employee mobility promotes innovation.