The Functions of an Intellectual Property System, and the Case Against It

4. It transfers wealth across borders. A country that consumes more protected knowledge than it produces pays out more in royalties than it receives. In 1994 that described almost every developing country, and it is the reason the TRIPS negotiation was as hard as it was. This is worked in [The Uruguay Round 1986 to 1994, and Its Socio Legal Implications].

The four answers the system gives

The system does not ignore the objections. It answers each with a limitation.

Against deadweight loss: a limited term. The right expires and the loss stops.

Against the anticommons: compulsory licences and exceptions. TRIPS Article 30 permits limited exceptions and Article 31 permits use without authorisation. Section 84 of the Indian Patents Act is one answer and section 91 for dependent patents is another.

Against the unproven incentive: variable protection. Different terms and different tests for different subject matter, and exclusions for what does not need the incentive.

Against the wealth transfer: transitional periods and technology transfer obligations. TRIPS Articles 65, 66 and 67, worked in [TRIPS Articles 65 and 66: Transitional Arrangements].

A worked example

A company patents a gene sequence used as a diagnostic marker for a hereditary disease.

The incentive function is real. Finding the marker took years and money, and without a patent a competitor could offer the test immediately.

The disclosure function is real. The sequence and its association with the disease are published in the specification, and the world's researchers can read them.

The anticommons objection is also real. Any researcher who wants to develop a better test, or a test for several markers at once, now needs a licence, and if twenty markers are held by twelve companies the multi marker test may never be made.

The deadweight loss is real and measurable. The test costs very little to run and is priced far above that, so patients who would benefit go without.

Indian law answers by excluding. Section 3(j) of the Patents Act excludes plants and animals in whole or in part, and section 3(c) excludes the discovery of any living thing or non living substance occurring in nature, so a naturally occurring sequence is not patentable in India at all. That is a national policy choice inside TRIPS Article 27, and whether it is the right one is exactly the argument this chapter exists to let a student have.

What it does NOT mean

Criticising the system is not arguing for abolition. Almost nobody argues for that. The argument is about scope, term and exceptions.

"Deadweight loss" is not the same as "high prices". A high price that transfers money from buyer to seller is a transfer, not a loss. The loss is the transactions that never happen.

The objections are not anti Western or anti trade. Every one of them appears in the economic literature of the countries with the strongest systems.

Quick revision

• Four functions: incentive to create; disclosure (patents only); orderly transfer of technology (TRIPS Article 7 names it); reduction of search costs (marks only).
• Four objections: deadweight loss, because price above near zero marginal cost excludes willing buyers; anticommons, because cumulative innovation needs many licences; the incentive effect is unproven outside industries where copying is trivial and development costly; and it transfers wealth from knowledge importing to knowledge exporting countries.
• Four answers: limited term; compulsory licences and exceptions (TRIPS Articles 30 and 31); variable protection by subject matter; transitional periods and technology transfer (TRIPS Articles 65, 66, 67).
• India's answer to gene patents is exclusion: sections 3(c) and 3(j) of the Patents Act.
• Criticism is about scope, term and exceptions, not about abolition.

Test yourself

1. What functions does an intellectual property system perform? Four. The incentive function: by allowing a creator to charge a price above the cost of copying, the right lets the creator recover the cost of creating, which the market would otherwise not permit because the subject matter is a public good. The disclosure function, which belongs to patents alone: a patent is granted only in exchange for a specification sufficient to enable a person skilled in the art to perform the invention, and that specification is published, so the alternative strategy of trade secrecy, which protects the holder but teaches nobody, is displaced. The transfer function: knowledge that cannot be owned cannot be sold, so a firm with knowledge and no manufacturing capacity and a firm with capacity and no knowledge can strike a bargain only if the knowledge is defined by claims, capable of valuation and capable of assignment or licence, which is why Article 7 of TRIPS names the transfer and dissemination of technology among the objectives of the system. And the search cost function, which belongs to trade marks alone: a mark identifies trade origin, so a buyer need not inspect each product and a producer can profit from maintaining quality.

2. State the principal criticisms of intellectual property and the answers the system gives. Four criticisms. Deadweight loss: because an additional copy costs almost nothing to make, any price above almost nothing excludes buyers who value the product more than the cost of supplying them, and those transactions simply do not occur, so the loss is not transferred to the right holder but destroyed. The anticommons: cumulative innovation requires the use of earlier work, and where many rights cover one product the cost of assembling licences can prevent the product being made at all, a problem acute in biotechnology and telecommunications. The unproven incentive: the claim that protection increases creation is empirical, and the evidence supports it strongly where copying is trivial and development expensive, as in pharmaceuticals, but weakly elsewhere, where lead time and complexity already provide protection. And the international wealth transfer: a country that consumes more protected knowledge than it produces pays more in royalties than it receives, which described almost every developing country in 1994. The system answers each with a limitation: the term is limited so the deadweight loss ends; exceptions and compulsory licensing under TRIPS Articles 30 and 31 answer the anticommons; protection is varied by subject matter, with different terms, tests and exclusions; and transitional periods and technology transfer obligations under TRIPS Articles 65, 66 and 67 answer the transfer of wealth.

3. Why is the gene patent example a good test of the whole argument? Because every function and every objection is present in one fact pattern and they point in opposite directions. The incentive function is genuinely engaged, since identifying the association between a sequence and a disease takes years and money and a competitor could offer the resulting test at once. The disclosure function is engaged, since the specification publishes the sequence and the association for the world's researchers to read. But the anticommons objection is equally engaged, because a researcher wishing to develop a better test, or a panel testing twenty markers at once, must now obtain licences from every holder, and where the markers are dispersed among many owners the improved test may never be made at all. And the deadweight loss is measurable rather than theoretical, since the marginal cost of running a diagnostic test is small and the price is set far above it, so patients who would benefit go without. Indian law resolves the conflict by exclusion rather than by balancing: section 3(c) of the Patents Act excludes the mere discovery of a living thing or non living substance occurring in nature, and section 3(j) excludes plants and animals in whole or in part, so a naturally occurring sequence is not patentable in India. That is a policy choice made inside the space Article 27 of TRIPS leaves open, and whether it is the right choice is precisely the argument the question invites.