2.2 The Study of Intellectual Property
2.2.1 Basis of Intellectual Property Systems
Intellectual Property Rights are the application of property rights to intangible property. The innovator (or owner) is entitled to property rights over the fruits of their intellectual labours. Locke (1690) provides a theoretical justification for property rights applying the concept of labour theory of acquisition.11,12 Locke
11 Becker (1976) labels Locke’s theory as “labor theory of acquisition” in his paper; however, other authors refer to Locke’s theory as labour-‐deserve theory (as in Borghi (2007)), or merely labour theory.
argues that individuals have ownership of their own labour and, when that labour is applied to remove something out of its natural state, the result is also his property. “Whatsoever he removes out of the state that nature hath provided and left in it, he hath mixed his labour with, and joined it to something that is his own, and thereby makes it his property… He by his labour does, as it were, enclose it from the common.”
Locke’s reasoning provides the foundation for current patent regimes, which parallel his labour theory of acquisition. In order to qualify for patent protection, the invention must surpass the state of the “prior art.” This prior art is merely the state of knowledge preceding the start of the innovative efforts and is akin to Locke’s state of nature. Intellectual Property Rights are the appropriation of the result of an individuals’ mental labour applied to the current state of knowledge;
Locke’s property rights are an appropriation of the result of an individual’s physical labour applied to the current state of nature.
Adam Smith (1776) argues for property rights as a means to avoid the tragedy of the commons.13 Smith encourages a laissez-‐faire approach to economic trade policies with the exception of intellectual property rights. The emphasis on property rights lends itself most naturally to Smith’s capitalistic structure;
however, IPRs are not excluded from the philosophical arguments of other economics regimes, such as communism and socialism. IP systems exist
internationally and operate on a global level. From a de facto perspective, given that IP protection regimes are open to foreign applicants, the presence of IP rights in any regime means that no modern economic system can exclude IP rights. Thus, IP is found in capitalist, communist and socialist economic regimes.
12 Texts and notes selected by Borghi, “Rationales for Patent Protection”, Bocconi Intellectual Property Transatlantic Summer Academy, June 25, 2007, include the relevant passages in Locke, Fichte and MacLeod.
13 The tragedy of the commons is the scenario in which a public good is over-‐used because the individual receives all the benefits of additional use but only incurs a portion of the costs. The typical example is that of the common grazing area in which each farmer has an incentive to graze more sheep in the area. However, each additional sheep degrades the grazing area and this ultimately ends up with over-‐grazing. Division of the public good into individual property rights is a proposed solution to the tragedy. Nicholson (1998).
Having established the property rights justification for intellectual property rights, the contract between society and the owner of the intellectual property rights must be examined. Fichte (1791) notes the conflicts which IP systems address – rewarding innovation while increasing social surplus:
It is not fair that the man who invested his money and years of hard work and effort should find himself robbed of the fruits of his labour as soon as he goes public with the results of his extensive work, results of which are of such a nature that anyone who sees them can appropriate them.14
Here Fichte notes the fairness aspects of rewarding innovation and the ease with which reverse engineering can be accomplished. This argument emphasizes how society should reward innovators and encourage further innovation.
Fichte also addresses the competing argument, which is concerned with
increased social surplus. From this perspective, and incorporating the utilitarian argument of the greatest good for the greatest number of people,15 Fichte (1791) recounts a parable in which an IP infringer of a medicine defends himself by arguing:
The only true measure of the excellence of our actions is their utility … I sell the nostrum [infringed medicine] much more cheaply that the plaintiff; the lowliest man can thus afford to procure it, unlike at the high price
demanded by the monopolist. What a service to humanity! Could I but paint a vivid picture for Your Majesty of the groans of the suffering, the rattling throats of the dying, who have been saved by the physic they bought from me!16
In this case, the counter-‐argument to rewarding innovators with monopolistic rights is that the innovation, medicine in this case, would provide more total utility; i.e. increased social surplus, if it were not under the monopoly restriction.
Fichte recognizes that the IP systems must be considered from the points of view
14 Fichte (1791), p. 8.
15 While Locke and Smith support individual property rights, followers of utilitarian philosophies can present arguments against them. As noted in Rosen (2003), John Stewart Mill evaluates policies based on whether they result in the greatest good for the greatest number of people.
This greatest happiness principle can be applied to reject property rights in that they may not maximize utility. For example, the farmer who grows oats would, under labour-‐deserve theory, own these oats and have rights to them. However, were the oats not the private property of the farmer, and instead available to hungry people, overall happiness could be increased. That is, the disutility the farmer suffers from losing the oats would be more than compensated for by the utility the oats provide to the hungry people. In this case, the utilitarian philosopher would argue against property rights, as they do not maximize overall utility.
16 Fichte (1791), p. 10.
of both the innovator and society. Thus, IP protection systems provide a policy tool to maintain the delicate balance of the individual’s property rights and the utilitarian perspective of social surplus.
Under the patent system, the individual reveals the innovation and is granted protection from appropriation, in the form of a temporary monopoly, which then results in higher prices and lower quantities of the good. In return, society benefits from the innovation and receives the innovative knowledge in exchange for paying higher prices. The underlying concept is that a static inefficiency (inefficiency at a point in time, in this case the temporary monopoly) is tolerated in order to achieve the dynamic efficiency (efficiency over time, in this case continued innovation.) As Macleod (2005) describes it, one aims not to kill the (innovative) goose that laid the golden egg (of new IP.)
The philosophical justification for Trade Secret protection is more problematic than that of patents and copyrights. From the Lockean perspective, trade secrecy is compatible with labour theory of acquisition. Bone (1998), however, notes that while the Lockean labour-‐deserve theory does allow for some rights over the fruits of labour, it says nothing about the need for secrecy.17
Furthermore, from the utilitarian perspective, trade secrecy does not necessarily have the social surplus aspects required. As Hettinger (1989) notes, trade
secrecy does not encourage the free flow of information and can limit the labour mobility of employees.18 These difficulties in using the traditional justifications for IP in justifying trade secrets highlight some of the doubts raised by the law discipline with respect to trade secrets as a form of IP (as discussed in Lemley, 2008.)
17 Bone (1998) notes that the Lockean argument cannot “explain two of the most basic features of trade secret law: its requirement of secrecy, and its concern with the way information is
appropriated”, p. 284.
18 The labour mobility of employees can be hindered by “non-‐compete” or “non-‐disclosure”
clauses in employment contracts that limit employee’s ability to work for other employers. This also falls under the “inevitable disclosure” doctrine, which argues that, in the course of
employment, a former employee will inevitably disclose confidential information even if they are contractually prevented from doing so.
However, from a practical perspective, these arguments are partially addressed by the relatively low level of protection afforded to trade secrecy in comparison with other intellectual property, as noted by Friedman et al (1991) and Lemley (2008.) In addition, like patents, trade secrecy offers incentives to innovate and develop ideas. In response to Hettinger’s arguments, Paine (1991) argues that trade secrecy is justified on the basis that individuals should have the right to control initial disclosure of their ideas, respect for confidential relationships and that patents, by offering incentives to disclose, implicitly recognize the right of innovators not to disclose.
The combination of labour and utilitarian theories provides the main
justifications for Intellectual Property protection. These arguments are typically applied to the justification of patents, but similar arguments are made in favour of trade secrecy.
Trade Secrets and Privacy
Further justification for trade secrecy can be found in the legal discussion surrounding privacy law. While privacy law focuses on privacy as it pertains to individuals, the extension of privacy to commercial activities provides further arguments in favour of trade secrecy. Posner (1983) addresses the relationship between privacy, which he defines as “the withholding or concealment of
information,”19 and secrecy, which is included in the broader definition of privacy. Posner argues that secrecy allows the innovator to choose when to disclose information. He notes that, when extended to commercial activities,
“The purpose of a property right, or of according legal protection secrecy as a surrogate for an explicit property right, is to creative an incentive to invest in the creation of information.”20 Posner argues that privacy, and therefore secrecy, is sound in an economic sense in the commercial context because it reduces socially wasteful efforts to protect information (e.g. constant monitoring of former employees to insure secrets are not revealed.)
19 Posner (1983) p. 231
20 Posner (1983) p. 245
Posner (1983) also notes that the term ‘privacy’ is not often evoked in discussion of commercial activities:
“The polemical character of the privacy debate is further illustrated by the arbitrary contraction of the term to exclude business privacy, despite the strong economic case for such privacy. Not only is the word privacy rarely used with reference to the private information of corporations or universities, but privacy interests are rarely thought implicated when information is concealed, even if by an individual, in the context of commercial activities.”21