Changes in Intellectual Bioproperty Markets

Changes in intellectual property market strength

IP market strength in agricultural biotechnology has grown over the past several decades. The main technological source of this growth has been enhanced communication, surveillance and computation technology. With significantly reduced telecommunication costs and widespread Internet use, an IP owner's monitoring and detection costs are much lower than those in earlier years. Since the early

1980s, a series of changes have been made in the US patent system to strengthen patent protection and broaden the definition of patentability, both in what subject matter may be patented and who can be awarded patent rights.

The strengthening of patent protection is reflected in three ways: (i) more liberal interpretations of the monopoly power that patents afford; (ii) a wider experience base at the PTO; and (iii) the establishment of the Court of Appeals for the Federal Circuit (CAFC). With regard to the first way, litigation to enforce patent rights was, until the 1970s, often scrutinized by the Justice Department, and both patent awards and licensing agreements often were ruled anticompetitive. In several decisions since 1980, the Supreme Court has explicitly recognized that monopoly power is precisely the mechanism through which patent protection provides innovation incentives, so that the enforcement of patent protection and the extraction of its monopoly rents should not generally be judged against antitrust law (Jaffe, 1999). With regard to the second way, the US patent office appears, before the 1980s, to have had a difficult time defining a biotechnology patent clearly and reliably. Consequent uncertainty over patent validity was exemplified in the patent litigation rate, which was six times higher in biotechnology than in other technical fields (Lanjouw and Lerner, 1997). Subsequent experience at the PTO ought to have enhanced the efficiency of the patent examination and re-examination processes, although some suspect that the resources available to the PTO have not kept pace with the significant upsurge in patent applications and that patent officers are increasingly overworked.

Finally, the CAFC, established in 1982, hears patent appeals from all district courts. This specialized federal appeals court was designed to provide greater expertise and uniformity in interpreting patent law and to enhance efficiency in case management (Besen and Raskind, 1991). Consistent with its 'pro-patent' judicial philosophy, the CAFC has considerably strengthened patent owner protections. Between 1982 and 1990, for example, 90% of district court decisions regarding patent validity were upheld by the appeals court, compared to 62% before the CAFC's creation (Jaffe, 1999). The expectation that a patent owner will beat off a challenge to his or her ownership claims, therefore, has risen. As awareness of such a structural shift spreads, others are more likely to be dissuaded from infringement attempts, and those who may have infringed already are more likely to settle out of court. The CAFC's expansion of preliminary injunctive relief, preventing a defendant from using the IP during trial, has made infringement attempts even more costly. In sum, the patent-owner-friendly appeals court has reduced IP owner enforcement costs by increasing the probability of court relief from infringement and, in the anticipation of that, discouraging attempts to infringe. These changes have likely been to the comparative advantage of small firms, which, with relatively few financial resources, are less able than larger firms to endure lengthy litigation. In fact, it may be broadly hypothesized that declining IP enforcement costs benefit small firms over large ones and consequently reduce the scale economies of biotechnical innovation.

Court decisions such as Diamond v Chakrabarty, establishing patentability on living organisms, have applied not only to products of immediate economic use but also to upstream innovations that contributed only to further research. Concurrent with the expansion in what could be patented, significant changes took place in who could be awarded a patent right. Throughout most of the 20 th century, there was no uniform patent policy for publicly funded research. Each federal agency followed its own practices, ranging from a blanket agreement granting universities full patent rights, to waivers of the agency's right to particular research results, to no waiver at all. As technological competitiveness became increasingly important in the late 1970s, policies were instituted to strengthen IPR for publicly financed discoveries. According to an Association of University Technology Managers (AUTM) licensing survey, fewer than 250 patents had been issued annually to universities before 1980. From 1985 to 2000, annual university patent awards rose from 550 to 3272, while the share of university patents rose from 0.5% to 2.2%. The increase was especially sharp in biological fields. For example, Buccola and Xia (2004) show that universities were awarded 34% of the agricultural biotechnology patents granted in the USA in 1999, up from 21% in 1995.

Biotechnology IP owners' property enforcement costs have then fallen significantly on account of both technical change and the government's reaction to that change. In the last 25 years, what had essentially been a biological common has been dramatically transformed into extensive, albeit fragmented, private property markets. The privatization has provided scientists, as potential IP owners, with greater research incentives and, as potential IP buyers, with greater research costs.

Changes in intellectual property market structure

The structure of biological IP markets also greatly influences market performance. The two principal aspects of IP market structure - the distribution of protect-able knowledge among patents and the distribution of patents among owners -have changed in countervailing ways: patents have fragmented and firms have consolidated.

Fragmentation of the patent stock is revealed by a close examination of the number and quality of awarded patents. As is widely documented, biotechnology patent numbers have risen dramatically during the last two decades (Hall et al., 2001). However, using the citations in later patents to earlier ones as a quality indicator, Buccola and Xia (2004) show that the average quality or revealed scope of agricultural biotechnology patents has been declining, despite a rise in the total value of all biotechnology patents. This quality deterioration may be: (i) technologically driven, i.e. the average innovation has become increasingly derivative, shifting downstream on the R&D continuum; (ii) strategically driven, i.e. patent owners are learning that they can enhance their property protection by inflating the number of patents in which their discoveries are embodied; or (iii) policy driven, i.e. the patent office and courts are either insisting on a more strictly defined patent scope or more easily granting narrower sets of claims.

Regardless of the causes, the picture we have of patent quality deterioration amidst rising total IP value is one in which biotechnical innovation is congested by an ever-increasing number of individual and partly overlapping property rights. Operating in that landscape, the IP user must keep track of, and negotiate for the use of, an increasing number of patented technologies. Contract compliance costs also rise. However, patent narrowing may have a beneficial side for users. As a patent's average scope declines, substitutability among patents likely grows, inhibiting individual owners' market power and hence reducing user licence fees. To the extent patent narrowing is indeed an owner strategy for property right protection, it may have the unintended result, in large, of undermining the licence revenues, which these patents will command.

At the same time the biological knowledge stock has become fragmented, the industry itself has extensively consolidated. Attracted by the rich technological opportunities of recombinant DNA, large chemical companies, such as Monsanto and DuPont, invested heavily in the life sciences. These giants then vertically integrated into major seed businesses, including Pioneer Hi-Bred, Asgrow, DeKalb, and Delta and PineLand. By the late 1990s, they had also acquired many of the startup and medium-sized firms that had led biotechnology research in the 1980s. Graff et al. (2003) argue that these mergers are partly explained by an effort to exploit the complementarities among germplasm, gene, and genetic transformation patents, especially in face of the high transaction costs of arm's-length IP licensing. Vertical integration of chemical, seed, and life science companies substantially concentrated the farm-input sector in general, and the ownership of agricultural IP in particular. Vertical integration reduces users' compliance costs because users can negotiate with fewer owner-firms. But it boosts IP licence fees because concentrated IP ownership is a source of market power.

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