Intellectual property High handed conduct low hanging fruit

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

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

Is IP like P? …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

Is IP like P?

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 in ideas the distinction of our extraordinary species, the building block of human progress Every piece of IP is a potential public good

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

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

Public 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 Private Goods 8

From potential to actual public good

Web 2. 0: an explosion of emergent public goods Web 2. 0 platforms are public goods: Google (1998) Wikipedia (2003) Blogs (early 2000 s) Facebook (2004) Twitter (2006) Government didn’t build any of them 10

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

IP: the basic economics 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 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.

First and second order tradeoffs 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 14

Evaluating IP Protection Very little change in benefit because of discounting applied to future cash flows of IP holders $ Total Social Benefit 0 10 20 30 40 50 Years of IP Protection 60 70 80 90 15

First and second order tradeoffs 1 st order trade-off $ Total Social Benefit Total Social Cost 2 nd order trade-off 0 10 20 30 40 50 60 Net Benefit 70 80 90 Years of IP Protection 16

The political economy of IP 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

Over-specified IP rights 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

Manufacturing for export 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

Is IP like P?

Enter AUSAFTA 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

What’s in big pharma’s interests 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 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?

The international politics For Australia to be forced to back down on Mf. E, 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 Mf. E provisions in light of the decision

Properly conceptualising legal risk 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

The result 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

The pathology of IP 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 economics of IP – the big ‘But’ 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

Patent thickets or anti-commons

Proportion of patent litigation = software

Private benefits and costs - Pharma

Private benefits and costs - Others

Transaction costs 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

‘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

First and second order tradeoffs 1 st order trade-off $ Total Social Benefit Total Social Cost 2 nd order trade-off 0 10 20 30 40 50 60 Net Benefit 70 80 90 Years of IP Protection 38

First and second order tradeoffs 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. Mf. E) Move towards focus on damages to exclusive rights, not monopoly

Over-specified copyright 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 < $2, 000 to make and >$200, 000 to obtain permissions for release Increasingly important on the internet – which requires low transactions costs

Under-specified automatic permissions Permissions require human involvement – for each one So they don’t ‘scale’ Pre-permissions required APIs are pre-permissions · · How to get onto i. Tunes, 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 preinternet pre-permission

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 webcrawler

Righting the IP Imbalance: 1 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: 2 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