Lemley, Mark“Property, Intellectual Property and Free Riding” 2005
83 Texas Law Review 1031

Main Points:

  • Free competition is the norm; IPRs are an exception to that norm which are grant only when – and only to the extent that – they are necessary to encourage invention (p1031)
  • The proper goal of IP law is to give as little protection as possible consistent with encouraging innovation (p1031)
  • However, this principle is under “sustained attack” by the thinking that creators will not have sufficient incentive to invent unless they are legally entitled to capture the full social value of their inventions (p1031)
  • People making this argument rely of the rhetoric of real property, with its condemnation of “free riding” (p1032)
  • But the leap from property right to “despotic dominion” is not a universal one. “As Carol Rose notes, despotic dominion is a caricature of property rights rather than an accurate description of them.” (p1069)
  • In no other area of the economy do we permit the full internalisation of social benefits (p1032; 1046)
  • “Tanglible property law also implicitly rejects the idea that owners are entitled to capture all positive externalities. If I plan beautiful flowers in my front law, I don't capture the full benefit of those flowers – passers-by can enjoy them too. But property law doesn't give me a right to track them down and charge them for the privilege” (p1048, citing Areeda and Hovenkamp as the source of the example (note 74)).
  • “In a market economy, we care only that producers make enough return to cover their costs, including a reasonable profit. So long as that cost is covered, the fact that consumers value the good for more than the price, or that others also benefit from the goods produced, is not considered a problem.” (p1046)
  • Free riding on the positive externalities created by others is everywhere in society, and society does little to eliminate it (p1049)
  • “If “free riding” means merely obtaining a benefit from another's investment, the law does not, cannot, and should not prohibit it. If the marginal social cost of benefiting from a use is zero, prohibiting that use imposes unnecessary social costs.” (p1049)
  • It is only where there is a tragedy of the commons that we insist on relatively complete internalisation of externalities. There is no tragedy of the commons in IP. A tragedy of the commons occurs where a finite resource is depleted by overuse. Information cannot be depleted (p1050)
  • Part of the point of IP law is to promote uncompensated positive externalities, by ensuring that ideas and works that might otherwise be kept secret are widely disseminated (p1052)
  • Granting perfect control privileges initial investors at the expense of improvers and may therefore actually reduce the size of positive externalities from inventions by discouraging the improvements and new uses which generate those externalities (p1062)
  • At a bare minimum, increases in IP protection that restrict more innovation than they encourage cannot be economically justified. E.g. the retroactive extension of term under the Sonny Bono Act provided no new incentives to authors and complicated efforts to make use of a large number of existing works (p1068)

Longer quotes:

“[I]ntellectual property law is justified only in ensuring that creators are able to charge a sufficiently high price to ensure a profit sufficient to recoup their fixed and marginal expenses. Sufficient incentive, as Larry Lessig reminds us, is something less than perfect control. Economic theory offers no justification for awarding creators anything beyond what is necessary to recover their average total costs. The question is whether, as Landes and Posner put it, “making intellectual property excludable creates value.” Intellectual property rights are justifiable only to the extent that that excludability does in fact create value. Broader formulations — such as an outright prohibition on free riding — are too broad because they don’t distinguish between uses that interfere with necessary incentives to create and uses that do not.” (p1057)

“There are a number of costs to granting overbroad intellectual property rights. Because most of these arguments are well known in the literature, I will detail them only briefly here. These costs fall into five categories. First, intellectual property rights distort markets away from the competitive norm, and therefore create static inefficiencies in the form of deadweight losses. Second, intellectual property rights interfere with the ability of other creators to work, and therefore create dynamic inefficiencies. Third, the prospect of intellectual property rights encourages rent-seeking behavior that is socially wasteful. Fourth, enforcement of intellectual property rights imposes administrative costs. Finally, overinvestment in research and development is itself distortionary.” (pp1058-1059)

“Second, and more problematic, the very process of government granting rights over creations encourages creators to petition Congress to give them still more rights. This sort of legislative rent-seeking has proven to be a real problem in intellectual property, particularly in the copyright field, where Congress of late seems willing to give copyright owners whatever they ask for, at least as long as there is no large vested interest making demands on the other side.” (p1063) “Indeed, economic theory suggests that private parties will spend up to the total value of the benefit seeking to capture it” (p1064).

“In the search for the proper economic balance, the rhetoric of free riding seems unlikely to offer any substantial aid and quite likely to lead us astray. The concept of free riding focuses on the economic effects on the alleged free rider — whether the accused infringer obtained a benefit from the use of the invention, and if so whether it paid for that benefit. But that is not where we should be focusing our attention in calibrating intellectual property. The proper focus is on the intellectual property owner, not the accused infringer. The question is whether an extension of intellectual property rights is necessary to permit intellectual property owners to cover their average fixed costs. If so, it is probably a good idea. If not, it is not necessary, and the likelihood that it will impose costs on competition or future innovation should incline us to oppose it. Whether an accused infringer obtained a benefit without paying for it bears only indirectly on that question.” (p1068)

Analogies:

What is the appropriate analogy for IP law? Lemley considers the advantages of and problems with comparing IP to or treating IP as:

  • property law (generally, entire article; see also pp1069-1071)
  • a tort (p1072)
  • a government-created subsidy (pp1072-3)
  • government regulation (pp1073-4)

Conclusion: “In the final analysis, I don’t know that we need an analogy at all. We have a well-developed body of intellectual property law, and a large and developing body of economic scholarship devoted specifically to intellectual property. The needs and characteristics of intellectual property are unique, and so are the laws that establish intellectual property rights.” (p1075)

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