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Contents : 1600 INTELLECTUAL PROPERTY: GENERAL THEORIES Peter S. Menell Professor of Law and Co-Director Berkeley Center for Law and Technology University of California at Berkeley Copyright 1999 Peter S. Menell Abstract This chapter surveys and synthesizes the deepening and widening theoretical landscape of intellectual property. Not surprisingly the principal philosophical theory applied to the protection of utilitarian works - that is technological inventions - has been utilitarianism. Utilitarian theorists generally endorse the creation of intellectual property rights as an appropriate means to foster innovation. Non-utilitarian theorists emphasize creators' moral rights to control their work. Many of these scholars draw upon multiple philosophical strands in constructing their analyses. JEL classification: K11 Keywords: Copyrights Patents Utilitarianism 1. Introduction The theory of intellectual property has not until recently attracted much philosophical interest or been the subject of deep controversy. Utilitarian theorists generally endorsed the creation of intellectual property rights as an appropriate means to foster innovation subject to the caveat that such rights are limited in duration so as to balance the social welfare loss of monopoly exploitation. Non-utilitarian theorists emphasized creators' moral rights to control their work. With the increasing importance of intellectual property in society and the development of particular new technologies most notably digital technology and the decoding of genetic structure the theory of intellectual property has attracted heightened interest. Economists and policy analysts have greatly enriched our understanding of the complex relationship between intellectual property protection and innovation and diffusion of technological advances. Non-utilitarian theories of intellectual property have proliferated in recent years as philosophers and legal scholars have applied traditional and novel philosophical perspectives to the realm of intellectual property. This article surveys and synthesizes the deepening and widening theoretical landscape of intellectual property. While much of the 129 130 Intellectual Property: General Theories 1600 discussion transcends the law of any particular nation the statutory and doctrinal examples are drawn principally from the particularities of the Unites States intellectual property regimes. A. Utilitarian/Economic Theories of Intellectual Property Not surprisingly the principal philosophical theory applied to the protection of utilitarian works - that is technological inventions - has been utilitarianism (Merges et al. 1997 pp. 135-136 hereinafter cited as MMLJ Machlup 1958). The social value of utilitarian works lies principally if not exclusively in their ability to perform tasks (for example a better mousetrap) or satisfy desires more effectively or at lower costs. It is logical therefore that society would seek to protect such works within a governance regime that itself is based upon utilitarian precepts. Furthermore inventions - new processes machines manufactures or compositions of matter - unlike artistic or literary expression do not generally implicate personal interests of the creator. (For a discussion of the application of non-utilitarian theories to patent law see Oddi 1996 pp. 274-277 discussing reward-based and natural law theories Becker 1993 noting intuitive appeal of entitlementbased arguments.) The United States Constitution expressly conditions the grant of power to Congress to create patent and copyright laws upon a utilitarian foundation: to Promote the Progress of Science and useful Arts'. Economic theory a particular instantiation of utilitarianism has provided the principal framework for analyzing intellectual property. In addition the utilitarian perspective has relevance to other forms of intellectual property. Trade secret law often protects utilitarian works (MMLJ 1997 pp. 34-36 Scheppele 1988). Trademark law is principally concerned with ensuring that consumers are not misled in the marketplace and hence is particularly amenable to economic analysis (Economides 1988). Even copyright law which implicates a broader array of personal interests of the creator than patent law may benefit from the application of the utilitarian framework to the extent that society seeks the production and diffusion of literary and artistic works. Hadfield (1992) provides a thorough historical survey of economic theories of copyright see also Goldstein (1995 ch. 5) and Plant (1934b). The utilitarian framework has been particularly central to the development of copyright law in the United States. The Congressional Committee reporting on the 1909 Copyright Act stated: The enactment of copyright legislation by Congress under the terms of the Constitution is not based upon any natural right that the author has in his writings ... but upon the ground that the welfare of the public will be served ... by securing to authors for limited periods the exclusive rights to their 1600 Intellectual Property: General Theories 131 writings'. (H.R. Rep. No. 2222 60th Cong. 2nd Sess. 7 1909. See also Mazer v. Stein 347 U.S. 201 219 1954 MMLJ 1997 pp. 326-328). 2. Historical Background Utilitarian theories of intellectual property developed and evolved in a symbiotic relationship with the evolution of the modern state: from the formation and maturation of the mercantilist nation-states through the Industrial Revolution to the rise of the modern capitalist economy. Most early scholars focused upon what Merges (1995b) calls the Grand Question': whether state-created intellectual property rights should exist at all. More recently attention has shifted toward the design of intellectual property rules and institutions. Intellectual property rights emerged during the early mercantilist period as a means for nation-states to unify and increase their power and wealth through the development of manufactures and the establishment of foreign trading monopolies. The term patent derived from the Latin patere (to be open) refers to an open letter of privilege from the government to practice an art (MMLJ 1997 p. 122). The Venetian Senate enacted the first patent statute in 1474 providing the maker of any new and ingenious device ... reduced to perfection so that it can be used and operated' an exclusive license of 10 years to practice the invention. Other nations followed suit and the granting of limited monopolies for inventions and later to publishers and authors of literary works became the dominant means of promoting innovation and literature (Hadfield 1992 Merges 1995b MMLJ 1997). The philosophy of intellectual property developed in response to the use of monopoly power to spur innovation. Adam Smith (1776 pp. 277-278) while generally critical of monopoly power as detrimental to the operation of the invisible hand' nonetheless justified the need for limited monopolies to promote innovation and commerce requiring substantial up-front investments and risk. Jeremy Bentham (1839 p. 71) went beyond this justification for intellectual property rights providing a clear explication of the differential fixed costs borne by innovators and imitators: T hat which one man has invented all the world can imitate. Without the assistance of the laws the inventor would almost always be driven out of the market by his rival who finding himself without any expense in possession of a discovery which has cost the inventor much time and expense would be able to deprive him of all his deserved advantages by selling at a lower price. 132 Intellectual Property: General Theories 1600 John Stuart Mill (1862) concurred that patent monopolies were justified arguing that a temporary exclusive privilege' was preferable to general governmental awards on the ground that it avoided discretion' and ensured that the reward to the inventor was proportional to the usefulness' to consumers of the invention. Pigou (1924) elaborated the basic framework of modern welfare economics developing the concept of public goods as instances in which marginal private net product falls short of marginal net social product because incidental services are performed to third parties from whom it is technically difficult to exact payment'. This appropriability problem figured directly in Pigou's assessment of intellectual property: The patent laws aim in effect at bringing marginal private net product and marginal social net product more closely together. By offering the prospect of reward for certain types of invention they do not indeed appreciably stimulate inventive activity which is for the most part spontaneous but they do direct it into channels of general usefulness. (p. 151) Clark (1927) reinforced this justification noting that a system that did not give inventors control of their inventions would result in a rivalry in waiting for others rather than an effort to distance others in originating improvements. Building upon the growing understanding of oligopoly and the economics of imperfect competition (see for example Robinson 1933 Plant 1934a 1934b) offered a more skeptical view of intellectual property rights questioning whether such rights were in fact needed to stimulate inventive activity and investment in actual as opposed to idealized markets. Plant argued that much invention is spontaneous and hence forthcoming without the provision of patent protection. He contended further that firstmover advantages imperfections in markets and other factors provided inventors and publishers sufficient rewards to create and market their works even in the absence of intellectual property rights. Plant concluded that patent protection would lead to an overinvestment in research and development that could result in discoveries that fell within the patent domain wastefully diverting resources from more appropriate endeavors. Arrow (1962) provides the seminal modern diagnosis of markets for information. In addition to the appropriability problem described by Pigou Arrow recognized that the marginal cost of increasing the utilization of information is zero. A ny information obtained say a new method of production should from the welfare point of view be available free of charge (apart from the costs of 1600 Intellectual Property: General Theories 133 transmitting information). This insures optimal utilization of the information but of course provides no incentive for investment in research. In a free enterprise economy inventive activity is supported by using the invention to create property rights precisely to the extent that it is successful there is an underutilization of the information. (pp. 616-617) Reflecting the Chicago tradition of law and economics a number of scholars questioned whether the public goods' attribute of information is the most appropriate starting point for thinking about intellectual property. Demsetz (1969 1970) applying insights from the property rights literature (Coase 1960 Demsetz 1967) argued that strong property rights for intellectual creations should be provided with the market available to ensure efficient allocation of resources through Coasean bargaining. Hirshleifer (1971) undercut the public goods justification for intellectual property protection directly by pointing out that innovators may be able to appropriate substantial return from the private utilization of proprietary information without the need for property rights by speculating in markets on the basis of their discoveries prior to such discoveries becoming public knowledge. This mechanism creates strong incentives for the dissemination of such information following the speculative investing of the innovator. By the late 1960s economists increasingly turned their attention to the more narrowly focused question of how intellectual property rights should be designed to best promote innovation. In what is now considered the classic treatment Nordhaus (1969) showed formally how the optimal duration of patent protection balanced the incentives for innovation against the deadweight loss of monopoly exploitation. Among his findings were that the optimal patent life is longer the lower the price elasticity of demand for the underlying product the smaller the social benefit from the invention relative to the research and development cost and the more responsive the amount of invention to the research and development cost. See generally Scherer (1972) Scherer and Ross (1990 p. 625). 3. Current Research on the Economics of Innovation and Intellectual Property Protection By the early 1970s three distinct models of intellectual property had developed: (1) a market failure framework building upon traditional neoclassical analysis (2) a property rights framework reflecting the Chicago tradition and (3) a comparative institutional perspective premised upon a

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