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Intellectual Property Introduction (Part 2): Economic Theory

Intellectual Property Introduction (Part 2): Economic Theory

There is a correlation between the increasing need for a country to protect innovation and its transition towards industrialisation. Intellectual Property Law (IP) is an integral part of international and domestic business. Lawyers with an interest in the commercial sector must, therefore, have an understanding of IP and its place within the economic market.

Economic theory suggests that IP protection acts as a balance against pure free market competition..

The first article in this series outlined the basic concepts involved in the study of IP at undergraduate level. The following comments on the foundations of intellectual property law with reference to the economic and philosophical justifications surrounding this often paradoxical area of legal theory. This will be of interest to those students planning on studying Intellectual Property Law as well as those seeking to learn more about the law and its effect upon economics and the regulation of the commercial sector.

The historical basis of IP is linked the development of industry. There is a correlation between the increasing need for a country to protect innovation and its transition towards industrialisation. In fact some have argued that countries providing for stronger IP protection posses higher levels of industry as a result. This is far from proven, however, and many commentators have argued for a restriction on the scope and strength of IP rights. Despite such debate, it is generally accepted that these rights fulfil a useful economic function.

Economic theory suggests that IP protection acts as a balance against pure free market competition. This prevents an under-allocation of resources at the innovation stage of development. The concern is that without the benefit of a competitive advantage, research and creativity would be less financially viable due to the ‘freerider’ problem. This is the concern that investors would be unable to recuperate research costs where third parties could enter the market with a copied product. Therefore, the economic justification seeks to protect investment into research and innovation, and, thereby, economic growth and prosperity, by balancing the benefit of increased creativity with the disadvantages of decreased competition at the production level.

The concern is that without the benefit of a competitive advantage, research and creativity would be less financially viable due to the ‘freerider’ problem.

On this basis, it has been argued that there is greater development within an impure or non-exclusively, competitive market system. Without the competitive advantage given to creators there would be less investment and less disclosure of information regarding creative developments. In order for this system to have a beneficial result for society it is necessary for protection to be granted to the party most likely to economically maximise profits resulting from invention. There is, therefore, a reoccurring theme of ‘use it or lose it’ within IP law. However, there are differing opinions as to who specifically should obtain protection given the justifications above.

The debate is highlighted by differing philosophical approaches to intellectual property. On one hand, there is Labour Theory arguing for rights to be granted to the creator. On the other is the Utilitarian Theory, which is often associated with arguments emphasising the need to protect producers and investors. Labour Theory is based on the following two principles advocated by John Locke:

  • Everyone has a property right in the labour of his own body and brain.
  • The application of human labour to an unowned object gives you a property right in it.

An example of this is the French ‘Droit d’auteur’ system which seeks to protect the expression of personality…

This ties into the idea of granting personal and not merely property rights in the results of creation. These principles have been mirrored in the thoughts of Roussea who defined a creation as a reflection of the creator.

Such concepts are more rigidly applied outside the UK and usually within the realms of copyright. An example of this is the French ‘Droit d’auteur’ system, which seeks to protect the expression of personality associated with the act of creation. The reason this is associated with copyright specifically is due to the traditionally artistic nature of copyrightable products, such as art, music, literature, etc. Whilst copyright has more recently expanded to encompass more scientific products, such as computer programmes, it still maintains significant differences from patent law due to Lockean principles. The best example of this in the UK is the provision of moral rights. However, in general the UK holds far less rigidly to Labour Theory, preferring to take a more practical, if less romantic, approach to the idea of invention.

The UK, therefore, adopts a more Utilitarian approach in that it seeks to protect and maintain the continuous investment into research rather than the creative act of innovation in itself. In this jurisdiction rights can be more easily assigned from the creator to their employers for example. This means that many employment contracts are written to confer rights to the employer for creations made by employees during the course of their work. This is more in line with commercial and economic thinking and lessens the effect of limiting competition by making intellectual property a commodity in its own right.

IP has become a significant component within the economic market, acting not only as a balance upon competition, but also as a product with enormous commercial value. Some have come to argue, therefore, that the concept of free competition is no longer the presumption but the exception. Many commentators have suggested that the time has come to restrict the scope and strength of IP protection. In some cases the use of IP has had an overly restrictive effect upon competition. This has been seen with regards to certain technological companies with large market shares who have been ordered to make some of their software open source in order to redress the competitive balance.

The UK adopts a more Utilitarian approach, it seeks to protect and maintain the continuous investment into research…

Despite the challenges faced, and differing approaches used by IP law, many are in agreement that it is a matter of fine tuning the system already in place rather than implementing a radical shift in the law. Those who criticise the current laws are often confronted with the difficulty of coming up with a fundamentally better system. However, with the advent of new development mechanisms and structures, along with the increase of collaborative work and open source systems, it can be argued that IP law will be hard pressed to keep up with business practice. Current protection works within the scope of the justifications above because there is an expectation of it being granted. If that becomes the exception due to a change in standard business practice, the law will have to move quickly to adapt in order to maintain an economic justification. Whilst this is, however, a distant and hypothetical situation, it is correct to say that business practice will continue to have a greater impact on the development of IP law than IP law will have on the development of business practice.

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