Private Law and IP: Licensing I

Session 3: Licensing I
Moderator: Yonathan Arbel
Jonathan M. Barnett, “Why is Everyone Afraid of IP
Licensing?”: Conventional view—be wary of encroachment on public domain from
licensing transactions.  Medley of
limitations lay minefield for construction of transactions w/minimum legal
risk.  Preemption, misuse, naked
licensing/assignments in gross in TM; first sale, exhaustions. Legal
scholarship thinks these limits are good and courts should be more vigorous
about enforcing them. IP markets haven’t agreed, nor have lower courts until
recently—attenuated or abolished by courts. 
1976 Copyright Act abolished the doctrine of indivisibility. 1988:
Congress amended Patent Act to say that some misuse claims needed a showing of
market power.  Exhaustion/first sale
commonly detoured around by recharacterizing sale as a license.  Antitrust has treated non-price-vertical restraints
under rule of reason, including IP licenses; now includes price
restraints.  Freely divisible and
tradable: a core element of every robust content and tech market.  Lawyers have mostly figured out ways to
detour around these limits.
 
But out of 6 license-related decisions since 2006, 1 was
split, Monsanto favored patentee, but
4 decisions strengthened these limits, even specifically rejecting suggestion
to reconcile IP law with antitrust’s rule of reason.  Thesis: both recent decisions and dominant legal
scholarship misappreciate/underappreciate critical role played by licensing in
content and tech markets and that function is predominantly efficient. Licensing
is critical as an enabler of commercial transactions that would otherwise be
infeasible, given risks of expropriation from unrelated third parties.  IP scholarship in general focuses on
incentives to upstream innovator, but real world markets only generate value by
embedding that innovation in a product or service for the end user, and that
requires a multitude of costly commercialization steps that require expertise,
almost always carried out by actors who care only about delivering value to
shareholders, not the things that matter to artists and scientists.
 
Three main categories of efficiency gains through licensing.
Thesis of the paper: secure IP rights + secure licensing deliver these sources
of value.  Efficient supply chains;
efficient risk diversification; efficient fractionalization.  Most important: supply chains.  Traditional story of using license to
encroach on public domain always assumes that the licensor has market power,
dictating prices and nonprice terms to market, but that’s the exceptional case,
not the typical case. Most patents and © don’t have value.  Even a powerful standard-holder is often
subject to competition that exists or could be introduced; the history of IT
markets shows that dominant standard-holder often gives away at zero or below
market royalties in order to grow the market/sell related services.  Antitrust would require market power to even
begin thinking about liability.  Can’t
presume market power in a patent claim; IP should do the same.
 
Next step: revisit these limitations and ask the added value
of an IP-law specific limit on this practice given that antitrust law already
regulates it?
 
Licensing transactions can be evaluated: (1) is it one-way
or reciprocal exchange of knowledge? (2) Is it horizontal or vertical?  Anticompetitive risks are higher in
horizontal.  Any tech/content market, to
extract value from innovation, has to go through different levels of the supply
chain.  Classic decision: make or
buy.  You will choose the cheaper
one.  But when you choose buy, you have
expropriation risks identified by Arrow’s information paradox. License + IP
right is modularization, but must be combined with contract that allows you,
not necessarily to expand the grant you got, but to fine-tune the relationship
in customized way to regulate info flow between third parties who otherwise
lack reliable instrument to do that. Combination of secure IP + secure
licensing is good because it maximizes the total universe of transactions
because a priori we have no idea what the efficient supply structure is in any
given market.  Licensor has that info and
will adjust that structure as long as it’s subject to competition (or even not;
it will do so to pocket more gains for itself).
 
Semiconductor industry: 25 years ago they’d always make;
25-30% of manufacturers today are fabless. 
How did they enter?  Didn’t get $1
billion to set up new fab, but stayed in design market and monetized by
licensing—dependent on the licensing structure, not encroaching on the public
domain. Licensing obliterates an entry barrier.
 
Risk diversification: tech markets & content markets
have extreme skew problems. Most movies are losers; hits cover the losers.  How can you spread that risk? Create a
portfolio, whether internal (studio system) or external.  Biotech market now looks like Hollywood: risk
spread by external portfolio; innovators shoulder the risk and contract w/large
incumbents who have scale to carry out the rest of the supply chain.
 
Fractionalization: Combine divisibility with full
alienability: you can slice and dice among multiple users; field of use
restrictions; time delay.  Lower entry
barriers into industry by allowing IP owner to sell off among universe of
licensees who can fund distribution costs up front (movies).  Field of use restrictions/windows: this is
just price discrimination, whose effects are ambiguous in theory but are
efficient here, eliminating deadweight loss.
 
Commentator: Brett Frischmann: There’s some description
here; factual claims may be in need of empirical support.  How are you defining innovation?  Hard to evaluate assertions; also doesn’t
think that traditional scholarship ignores claims about the benefits of
licensing.  Us/them, black/white framing
may not be helpful in discourse, even as to private law/public law.
 
What’s the theory?  Is
it refutable?  Can it be evaluated/tested
and does it have boundaries?  Is it a
normative claim?  Yes—suggests that we should
adopt a new view supportive of IP licensing. But most scholars understand that
IP enables licensing in various segments of the supply chain. As a result of
framing, the if/then statements in the paper collapse.  If we understood the facts, then we won’t
necessarily adopt this new view of licensing: I need more proof.  Different baselines might give different
answers. IP isn’t fundamentally about transactional efficiency or market-based
metrics of efficiency—that’s important, but other things are important too.
Even understanding the facts Barnett offers, judges might disagree w/the
baseline.
 
Even w/the same baseline, we might disagree—not clear that
these examples generalize.  Hollywood,
big pharma—but does that reach a wide variety of other industries, markets, and
nonmarkets that shape/rely on IP?  Not
clear that examples prove the point about efficiency—do we believe that
Hollywood and big pharma are efficient structures w/which to produce movies.
Laughed when I read “the market evidently prefers hub & spoke.”  Did you interview the market?  The idea that the market speaks about what it
prefers as if it’s not shaped by the law is confusing to him.
 
No discussion of spillovers: how can you talk about supply
chains w/o spillovers?  Even w/efficiency—depends
on free flow of spillovers; there’s lots of empirical/theoretical work on
this.  IP is a little bit about
internalizing externalities, but also about promoting participation in
activities. Some of the limits on licensing freedom might be welfare-enhancing
and even efficient if they promote spillovers.
 
Barnett: I think the literature does focus on the expansion
of the monopoly by licensors—SCt decisions do that—I want to shift the focus.  Distributive effects: price discrimination;
semiconductors—when you don’t allow free licensing choice you limit transaction
structures, forcing them to take place in house which can raise capital
costs/favor incumbents.  On the market’s
preference: we’re agnostic about market structures, and as long as there’s free
entry, whatever structures we observe are efficient, so I don’t need to
interview Sony or “the market.”
 
Arbel: Market power (lack thereof) is key to your analysis.
Circularity: if you allow that, won’t market power increase/the empirical world
may change.  Comparative
institutionalism: compare other jurisdictions, where there are different
licensing rules; could show inefficiencies in those industries perhaps.  Do you see a problem of the anticommons,
fragmentation? 
 
RT: In Barnett’s model, what are TMs for? What do they incentivize the creation of, because the model of
efficiency offered in the paper depends on incentive structures and not on
consumer understanding? More generally, why class patent, TM, and © together
here with antitrust law (and notable that most papers here don’t cover TM,
which suggests some uncertainty about the overlap between private and public
law here—larger question for the group, is TM already private law so we aren’t
worrying about it here (I have thoughts about why that shouldn’t be true)?),
and what about trade secret, misappropriation, or advertising law? Relatedly: Different
kinds of wrongs to consumers and competitors exist—antitrust law doesn’t
recognize most false advertising as actionable, or most product liability (I
think), but that doesn’t mean those torts shouldn’t exist.
 
John Golden: You argue we shouldn’t do more than antitrust,
but do antitrust scholars disagree? Herbert Hovenkamp wants to shift the
problems of regulation from antitrust to IP b/c he thinks antitrust isn’t
designed well to deal with the problems of IP.
 
Van Houweling: paper sets up troubling mismatch b/t
critiques of licensing and benefits of licensing.  That’s a problem if there’s a complete
overlap. But we aren’t skeptical of all these
licensing practices; the skepticism isn’t that thoroughgoing, but covers
overreaching rather than all licensing. Would be more convincing with some
examples of beneficial licenses that the critics undermine.
 
Barnett: Mismatch is worth addressing, yes.  Division of labor b/t antitrust and IP—do they
have the same normative objectives, maybe we shouldn’t have overlap, but
otherwise it might be ok. Major antitrust case of the last 3 decades is Microsoft,
all about IP.  Market power is always
important b/c you’re taking terms from the market rather than dictating terms.
 
Greg R. Vetter, “Opportunistic FOSS Development Pathways”: Modular,
in H. Smith’s sense, not technical sense. 
Software licenses deploy permissions against a set of rights—©, trade
secret, patent, but mostly ©.  Whatever
license you have targets some type of opportunism. License might work with or
against the rights basis.  FOSS/GPL works
against the rights of © in that it uses © to enable copying and to defeat trade
secrecy in the source code.  One person’s
opportunism is another person’s business model. Some modes of opportunism are
illegal. Licenses operate as quasi public instruments.
 
Forking is allowed; GPL is hard to get out of—locks usable
value of software to the license b/c there are so many contributors and it
would be hard to get them all to agree to a different licensing scheme.  Property as a shortcut over many contracts
that would otherwise have to take place. 
Small startup can shift to permissive license, but hard to shift back;
could start a permissive fork.
 
Commentator: Christina Mulligan: Are incompatible licenses a
problem of property at all?  Potentially
separate issue—could be a problem of modularity or a problem of anticommons.
The worry is that public licenses create a bad interface b/t pieces of property
blocking us from bringing 2 pieces of software together.  The public license didn’t cause the problem;
companies can license a work under a public license such as the GPL, and then
if there’s some other reason they might want another deal, can license it to
specific people in a proprietary/specific way. 
Conceivably, you could imagine a license that tried to be an exclusive
GPL/public license, but she doesn’t think any license purports to do this.  Would create the same problem as the fee
tail, where no combination of people could make a separate deal; our
commitments make us not want have attempts to control property like that
work.  The software: can conceptualize it
as the software as it currently exists and as its possible derivatives, but she
thinks that’s wrong.  The property right
can include the work and the right to make derivative works, but not the
derivative works that don’t yet exist. 
Breeding racehorses: you want to blend them together—we wouldn’t about
whether it’s A or B; we can see it’s a third thing and the owners can agree
about how to share rights in the new thing. 
Pre-commiting to waiving your right to exclude in a certain
circumstances doesn’t redraw the boundaries of property; it’s not a problem of
defining the property interest correctly b/c you can always make side deals to
license, which means that the fundamental problem is one of the anticommons.
 
Vetter: one point to remember is that GPL uses © to defeat
trade secrecy—this makes me think there’s more instability here than there
otherwise might be.
 
Smith: One way of reconciling this idea of anticommons v.
modularity: maybe here your identification of the difficulty of modularity
arises not up front but after the fact. 
You have an intersection b/t the running covenants problem w/confusion
(you have grain, I have grain, they intermingle) or conceivably accession (if
you don’t have a deal and there’s a new calf, it belongs to the owner of the
mother)—the reason we don’t worry about that in property is that even ex post
we can modularize really easily—to the mother; divide pro rata; punish the
person who caused the problem. Not as difficult as intertwined software with
conflicting licenses.  There is an
anticommons aspect but it’s a lack of modularity, b/c even after the fact we
can’t draw lines about contributions very easily.
 
Michael Abramowicz: Biggest concern justifying viral license
was risk of proprietary fork that would add so much it would be hard to avoid;
GPL is attempt to deal with that risk.
 
Vetter: thought that forking was usually a result of
disagreement, not a purposeful deviation.

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