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1 Intellectual property: High handed conduct, low hanging fruit A presentation to the Australian Digital Alliance Policy Forum National Library of Australia,

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Presentation on theme: "1 Intellectual property: High handed conduct, low hanging fruit A presentation to the Australian Digital Alliance Policy Forum National Library of Australia,"— Presentation transcript:

1 1 Intellectual property: High handed conduct, low hanging fruit A presentation to the Australian Digital Alliance Policy Forum National Library of Australia, Canberra, 4 th March, 2011 Nicholas Gruen, CEO, Lateral Economics

2 2 Outline Is IP like P? Public goods and the internet The economics and politics of IP –First and second order policy tradeoffs Manufacturing for export (High handed conduct) The easiest tradeoffs (Low hanging fruit) Righting the IP Imbalance

3 3 …as much as two thousand years ago the power of steam was not only observed, but an ingenious toy was actually made and put in motion by it, at Alexandria…. What appears strange is, that neither the inventor of the toy, nor anyone else, for so long a time afterwards, should perceive that steam would move useful machinery as well as a toy Abraham Lincoln 1858 Is IP like P?

4 4 Problems are  Obviousness  Vagueness and uncertainty about breadth  Multiplicity – and increasing impossibility of search - Sheer number of patents and complexity of contemporary science  Non-rivalry

5 5 Differences between P and IP: Problems of IP Indeterminacy of boundaries Indeterminacy of threshold tests like obviousness Multiplicity – and increasing impossibility of search - Sheer number of patents and complexity of contemporary science, or copyrights on code Regulatory/judicial creep – whereby new things come within purview of IP law – like software and business methods patents Non-rivalry Non-rivalry in ideas the distinction of our extraordinary species, the building block of human progress Every piece of IP is a potential public good

6 6 Public goods – goods that no-one will supply if the government doesn’t Public goods Public goods... present serious problems in human organisation. Vincent and Elenor Ostrom - 1977

7 7 The Wealth of Nations (1776) Private Goods The Theory of Moral Sentiments (1759) The social preconditions of markets (Public Goods) Language Some crucial public goods are not government built. They’re emergent Adam Smith

8 8 Public Goods Private Goods [The public good of] Justice... is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society... must in a moment crumble into atoms. Adam Smith

9 9 From potential to actual public good

10 10 Web 2.0: an explosion of emergent public goods Web 2.0 platforms are public goods: Google (1998) Wikipedia (2003) Blogs (early 2000s) Facebook (2004) Twitter (2006) Government didn’t build any of them

11 11 The economics of abundance: a new birth of ‘free’dom Public goods... present serious problems in human organisation. Vincent and Elenor Ostrom - 1977 The freedom of ideas is the liberation of our species Public goods as a problem Public goods as an opportunity

12 12 There’s never a case for IP (including more IP)  Unless it generates more benefits than costs Its costs are on consumers of IP (in form of higher prices and/or lack of access) It’s benefits – its only benefits – are that such imposts may induce more IP IP: the basic economics

13 13 In an uncertain world – who’s side should we be on?  Consumer or producer? The losses from under-investment exceed the losses from overpricing  PC’s argument about infrastructure access pricing Because IP is dynamic – because IP leads to more IP, we should err on the side of producers. But there’s a problem... a big problem IP: the basic economics

14 14 To muck up a first order trade-off is a misfortune, to muck up a second order trade-off looks like carelessness Costs and benefits - same order of magnitude Costs and benefits – different order of magnitude First and second order tradeoffs

15 15 Evaluating IP Protection Very little change in benefit because of discounting applied to future cash flows of IP holders

16 16 2 nd order trade-off 16 First and second order tradeoffs 1st order trade-off

17 17 IP is promoted by IP owners, IP agencies and IP exporters Sometimes without plausible economic rationale  Retrospective IP increases  Mickey mouse  Patent terms  Yet they can’t bring into existence IP that already exists The political economy of IP

18 18 For patents monopoly rights to sell into a territory is the core (first order) right Other rights to  Import  Manufacture The second order subsidiary rights may once have helped administer the preeminent right Unnecessary today and... As the world becomes more complex and globalised, costs mount Over-specified IP rights

19 19 Patents expire later in Australia than in other major markets Because  Australia offers patent extensions of up to 5 years  Patent owners apply for marketing approval later here Exports are in breach of patent until its expiry It’s not viable to manufacture generics for export Manufacturing for export

20 20 Is IP like P?

21 21

22 22 Though patent extensions are TRIPS plus... Art 17.9.8(b) of AUSAFTA requires patent extensions The exporter (Hospira) suggested several ways through the impasse Enter AUSAFTA

23 23

24 24 Big pharma opposed these options Yet there was little direct or indirect benefit to it  Hospira will make the drug and market it in generic markets  It will simply do so from outside Australia  Favoured locations have no patent extensions – like Canada, India, New Zealand and Israel  Is it really in Big Pharma’s interests to prevent countries that agreed to stronger IP protection from losing generics production to countries with weaker protection? What’s in big pharma’s interests

25 25 Even within the initial patent period, TRIPS allows “limited exceptions” to IP rights providing they do not  “unreasonably conflict with the normal exploitation of the patent... or the interests of the patent owner” Canada-Patents for Pharmaceuticals WTO case: 1.Springboarding (the breach of the patent simply to prepare for generic production) is legitimate, but not 2.‘Stockpiling’ of product pending the expiry of the patent. Manufacturing for export is probably more like 1 than 2 Even if this were wrong, TRIPS imposes no disciplines within patent extension periods. The legal position: TRIPS

26 26 AUSAFTA has similar provisions to TRIPS on “limited exceptions” (Art. 17.9.3) which, it could be argued, permit manufacturing for export even within patent period.  But this hasn’t been tested and may be wrong Art 17.9.8(b) requires each party to provide patent extensions But it doesn’t specify the scope of the patent extension nor its length “So is Australia completely constrained? I strongly doubt it” Kim Weatherall The legal position: AUSAFTA

27 27 For Australia to be forced to back down on MfE, would require 1.A firm or firms to object to our allowing it 2.That being translated into a country objecting 3.It would have to be the US under AUSAFTA as TRIPS does not seriously constrain Australia 4.The US would have to consider this a good ‘test case’  Yet it’s a notoriously bad test case in almost every way  A victory confers negligible commercial benefit on anyone  And high costs on Australia, with lower IP countries benefitting 5.Then the US would have to win the case and force Australia to change course 6.Then Australia gets a chance to craft new MfE provisions in light of the decision The international politics

28 28 Were our AUSAFTA obligations regarded as raising ‘legal risk’?  Like a firm might bear in risking some legal liability But Australia bore no substantial risk other than the risk – a slim one – of being forced to reverse course having permitted manufacturing for export On the other hand, Hospira was seeking to take the substantial commercial risk of investing in a stranded Australian asset Properly conceptualising legal risk

29 29 Government consideration of the issues from late 2008 to July 2009 “The issue has been given very careful... Consideration by relevant departments and agencies, including matters of economic impact, the system of intellectual property protection and Australia’s international trade obligations.” Independent opinion of the Solicitor General sought Government supported status quo, as it did in 2004 The result

30 30 Initial over-specification of rights Uncompromising politics of retaining rights Expansion of rights Endless reviews to micro-manage IP for evolving technology Over-compliance with international obligations Fatalism about reform The pathology of IP

31 31 The biggest problem of IP is not hurting consumers  who will ultimately benefit if IP protection generates more IP IP can obstruct the creation of more IP  Proprietary IP  Open IP The economics of IP – the big ‘But’

32 32 Patent thickets or anti-commons

33 33 Proportion of patent litigation = software

34 34 Private benefits and costs - Pharma

35 35 Private benefits and costs - Others http://press.princeton.edu/titles/8634.html

36 36 Invisible in many economists’ models IP favouring large incumbent firms Small firms often harassed and unable to bear risk of IP litigation – something that large firms know Transaction costs

37 37 ‘We considered patenting; we prepared a patent and it was nearly filed. Then I had an interaction with a big, multinational electronics company. I approached a guy at a conference and said, “We’ve got this patent coming up, would you be interested in sponsoring it over the years?” It’s quite expensive to keep a patent alive for 20 years. The guy told me, “We are looking at graphene, and it might have a future in the long term. If after ten years we find it’s really as good as it promises, we will put a hundred patent lawyers on it to write a hundred patents a day, and you will spend the rest of your life, and the gross domestic product of your little island, suing us.” Andre Geim, 2010 Nobel prize in physics for graphene

38 38 2 nd order trade-off 38 First and second order tradeoffs 1st order trade-off

39 39 The diagram illustrates second order tradeoffs quantitatively But it also exists qualitatively  Orphan copyright  More liberal fair use exemptions  Education, research, archiving, indexing, preserving and non-commercial permissions  The scope of IP rights... (eg. MfE)  Move towards focus on damages to exclusive rights, not monopoly First and second order tradeoffs

40 40 Copyright prevents reproduction of expression  Even where it won’t conceivably damage owner  Chains of permissions sound innocuous  Lessig’s example of a film that cost $200,000 to obtain permissions for release  Increasingly important on the internet – which requires low transactions costs Over-specified copyright

41 41 Permissions require human involvement – for each one So they don’t ‘scale’ Pre-permissions required APIs are pre-permissions  How to get onto iTunes, Android app market etc  How to interface with Twitter, Facebook Creative commons is an API for copyright The NLA’s statutory collection rights are a pre-internet pre- permission Under-specified automatic permissions

42 42 Copyright in the internet age We’ve gone backwards on pre-permissions The NLA does not have the rights to access and provide access to Australian internet content PANDORA requires permissions from each domain owner –16 million web-pages archived in PANDORA over 2009 –700.au web-pages in two months by a web-crawler

43 43 Reduce IP where the private economic gains are second order Move IP away from absolute monopoly towards some right of commercial exploitation – subject to damages, not exemplary penalties IP bodies should promote stronger economies, not stronger IP Promoting transparency – a la PC – here and offshore Focusing on the cumulative use of IP Righting the IP Imbalance: 1

44 44 Represent our national interest as an IP importer The US (perhaps with Switzerland) is a minority of one as an IP exporter Co-ordinated international negotiation for IP improvements – a la Cairns Group on trade More robust approach to diplomacy Principle based diplomacy More robust domestic behaviour within international arrangements. There is no ‘legal risk’ to Australia Righting the IP Imbalance: 2


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