The Endogeneity of Intellectual Property Protection

Several strands of literature - including economic history, empirical analysis of patent policies, trade theory and patent case law - concur that the principles of rent seeking and capture apply in patent policy just as in any other area of policy. The essence of our argument is that those who invent have incentives for the strong protection of inventions, while those who benefit from copying or whose existing products might be displaced by new inventions have incentives for the weak protection of inventions. Established producers may find themselves with conflicting preferences, facing a trade-off in which their new inventions make their own existing products obsolete. The question of preferences for IPPs is particularly interesting and problematic in two policy contexts: (i) that of extending IPPs into new technological subject matters, which previously were not subject to protection (such as software or living organisms); and (ii) that of extending IPPs into new markets and jurisdictions, where IP law was not previously instituted or enforced (such as low-income countries or, as argued, Europe).

History has shown the tendency of countries - including the USA and Western European countries - to have maintained lax IP regimes so long as they have remained net importers of intellectual goods and assets. However, upon becoming net intellectual producers, their internal policy equilibria have shifted and they have strengthened their IP regimes. Khan and Sokoloff (1998) and Hesse (2002) illustrate this with the example of relatively weak US copyright policies maintained in the 19 th century. US publishers imported (i.e. pirated) books, music and other European cultural works. However, according to Hesse, as the number of domestic US authors increased, they banded together as a political interest group to advocate for authors' rights. But they were not able until the 1880s and 1890s to drive through changes to strengthen US copyright law and practice against an organized opposition from the US publishing houses that thrived under the mode of copying foreign works, justifying it as a service in the public interest.

Questions of the endogeneity of IP policy arise repeatedly in cross-country empirical analyses. Ginarte and Park (199 7) find that, across 110 countries between 1960 and 1990, the strength of countries' patent rights can be strongly explained by lagged measures of R&D spending. In particular, they find that the institution of patent rights seems to depend upon the R&D sector having exceeded a critical mass in terms of R&D/gross domestic product (GDP) ratio. Both Lerner (2000) and Moser (2001) use historical data to explore the impact of patent policy on innovation, but, given such a formulation, both digress into discussions and attempts to control the caveat that instead patent policies might be explained by levels of innovation. Variables largely correlated with innovative capacity, including the historical 'path dependence' of domestic institutions, the size of country, its stage of economic development (as technological leader versus technological follower), as well as the interaction between patents and other technology policy tools, are all found to influence IP policy. In fact, in a later publication of his results, Lerner (2002) reverses the direction of causality, instead of modelling patent policy changes as the endogenous variable.

Such historical and empirical observations on the endogeneity of IP policy concur with theoretically derived results. Helpman's (1993) two-country model of innovation and trade under IPP demonstrates that a tighter IP regime moves terms of trade against the technological follower and reallocates market share to the technological leader. In a model by Scotchmer (2001, 2002), IP regulators of a country with lower innovative capacity (in a given subject matter) have incentive to not grant IPRs (in that subject matter). They suffer deadweight loss on all inventions, foreign and domestic, transfer monopoly profits to foreign firms on (the many) foreign inventions and gain producer monopoly profits on only (the few) domestic inventions.

The recent case history of biotechnology patent law is perhaps the most direct and relevant evidence revealing the drivers of biotech IP policy. In the USA, the patenting of biological subject matter has hinged upon a series of cases put forth by domestic champions for the extension of protections to cover newly emerging technologies (Kevles, 1994, 1998). Just as domestic authors drove US policy reform of copyright in the 1880s and 1890s, domestic inventors and their university or corporate assignees drove US patent policy changes in the 1980s and 1990s by submitting patent applications, advocating new legal interpretations, and ultimately advancing the patentability of living organisms and compositions of matter. The key US cases for patent protection were won by the following inventors, their legal representatives and their institutional backers:

• Ananda Chakrabarty and Leo MaLossi of General Electric (for living compositions of matter; microorganisms);

• Standish Allen of the University of Washington and Vern Hayes of Coast Oyster (for multicellular organisms);

• Kenneth Hibberd of Molecular Genetics Research (for plants);

• Philip Leder of Harvard University and attorneys for Harvard and DuPont (for animals).

Looking at the recent legislative and legal trends in patent scope over genes and GMOs in Europe, the clearest contrast is the relative lack of European domestic champions. The standards set by the 19 73 EPC specifically disallowed utility claims over broad biological subject matters including plant and animal varieties, essentially biological processes, and most claims over genes. Interestingly, these standards were adopted in the same year that the breakthroughs in genetic engineering were made by the scientists Stanley Cohen and Herbert Boyer, of Stanford Unversity and the University of California, San Francisco, respectively, resulting in the most important biotechnology patents ever granted in the USA.

In fact, it appears that most of the legal tests brought before patent-granting authorities and the courts in Europe have been advanced by universities or firms from the USA, including Genentec, Harvard, Chiron, Biogen and ICOS. Only two major cases and one piece of legislation for the expansion of protections beyond the 1973 EPC standards have been advanced by domestic European biotechnology interests. In 1995, Plant Genetic Systems (PGS), a Belgian biotechnology start-up that pioneered Bt insect resistance in maize, was denied patent claims on a transgenic plant variety in a challenge at the EPO.1 Some protections were advanced by the 1998 European Directive on Legal Protection of Biotechnology Inventions, largely as a result of the political efforts of the European pharmaceutical sector (Thaker, 2002). This was followed by a second legal test on the patenting of transgenic organisms. In a 1999 case, Novartis of Switzerland succeeded in winning greater patent protection for its transgenic plants; however, the claims were limited to processes and general genetic characteristics, and did not extend to cover specific organisms (Nuffield Council on Bioethics, 2002).2

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