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Intellectual property and intellectual

Van Caenegem, William

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Law Faculty Publications Faculty of Law

March 2002 Intellectual Property and Intellectual Capital William van Caenegem Bond University, [email protected]

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William van his article focuses on the relationship between intellectual property Caenegem" and intellectual capital. The broader concept of 'intellectual capital' is a useful framework within which to analyse the relative merits and drawbacks of reliance on proprietary rights over . Strategic analysis of the costs, risks and benefits of various forms of proprietary protection is vital in the context of rapid in a ''. Maximising the value of the intellectual capital of the firm will require: a considered assessment of the strengths and weaknesses of each IP regime; combining reliance on the rules of intellectual property law with other strategies; and re-evaluating the utility, function and expectations of intellectual property protection in general. This article presents some tentative conclusions concerning strategies to protect the intellectual capital of the innovative firm. Its main themes are: (i) That intellectual property will not be effective in protecting many aspects of intellectual capital; (ii) That combining reliance on the rules of IP law with other strategies will maximise the firm's control over intellectual capital; (iii) That the real value of intellectual property rights may lie rather in their transactional utility than in restricting competition-by-imitation; (iv) That there may be advantages in investing in , rather than technological innovation and ideas; and (v) That a firm should primarily focus its intellectual capital strategies on maximising the value of the of its employees.

ntellectual Capital broader strategic issues in the use and deployment ht~oduction of IPR's. The concept 'intellectual capital' is no longer new. Information and knowledge. ntellectual capital is more than just intellectual Intellectual capital consists of knowledge or woperty. Intellectual capital consists of all the information4. Are there relevant differences between ntangible assets of the firm, whether or not they the two? It may be that knowledge is simply one Ire the subject of exclusive legal rights, and subcategory of information; however, I make a vhether or not they appear on the balance sheet1. qualitative distinction here, and view information as 'irguably most intellectual capital does not appear static, whereas knowledge is dynamic5. Knowledge IS intangible assets (eg as trade marks, , is information in action, information understood opyright etc.) on the balance sheet2. For instance, and put to use. The term knowledge implies a ;enera1 knowledge, skill and experience of connection between information and a constant mployees, organisational culture, organisational process of learning, and is thus associated with tructures, learning ability, and technological novelty, originality, innovation, and progression in zadership are components of the intellectual terms of what is known and understood6. apital of the firm that are not, or only marginally, Knowledge is the ability to acquire and deal with overed by intellectual property rights (IPR's), and information in an effective goal-oriented manner. o not normally figure on balance sheets3. Knowledge is more valuable to the firm than mere 'he concept 'intellectual capital' is not only a information. At the very least, a firm needs to lanagement tool, but also provides a useful optimise acquisition of information and knowledge -amework for legal analysis. It places intellectual to compete effectively. roperty in the context of the totality of the firm's Tacit and codified knowledge ltellectual assets, and focuses a lawyer's mind on For a firm, knowledge can be usefully characterised as either 'tacit', if it is contained in the minds of stage of economic development, following on from employee's; or 'explicit' if it is 'codified', ie agricultural and industrial stages. A knowledge expressed in some record from which it can be economy is characterised by a huge discrepancy retrieved. Although codified knowledge is valuable between the cost of inputs of labour, capital, energy because it can be inventoried and shared between and raw materials, and the value of industrial members of the firm, it usually requires outputlo. In other words, it supports productivity interpretation and understanding to be turned to growth despite static or declining inputs of account. Therefore, in an innovation driven manpower and other resources. economy, although knowledge can be externalized In terms of the firm, knowledge accounts for a large and recorded, it can rarely be efficiently traded and increasing proportion of the price differential separately from people. that it can command for its goods and services, and An analogous distinction can be made between the difference between the realisable value of assets structural and : human capital is the and stock value. A useful way of thinking about the employees; structural capital is what remains difference between a knowledge economy and an behind when all employees go home7. Structural industrial economy is to compare value and weight intellectual capital includes , precedents, of goods: over the duration of the 2oth century, the structures, manuals, training materials etc. value of goods for a constant weight has increased Structural capital is usually owned by the firm, exponentially. The additional value is the result of and is transferred by the firm, whereas human the knowledge contents of the goods; it is not the capital is most commonly transferred in the mind result of scarcity since the growth outstrips the of the individual employee, outside the control of expansion of overall inputs of goods and servicesll the firm. Evolution from an industrial to a knowledge Appropriation and transfer of tacit knowledge economy characteristically means a transition from The fact that a large proportion of useful physical to intellectual capital. knowledge is tacit knowledge, ie human capital, Knowledge markets has important implications in terms of the In a knowledge-based market economy knowledge intellectual capital strategy of the firm. Codified production is increasingly a market function: firms, knowledge is more susceptible to appropriation, as well as public institutions, invest considerable zontrol and structured acquisition or disposition resources in the production of new knowledge and 2y the firm; it is more easily converted into information12. The rate and direction of production ntellectual property, even though not all codified of knowledge is largely determined by the market tnowledge is potentially covered by IPR's. By rather than by external factors13. Knowledge :ontrast, as tacit knowledge is contained within accumulation is driven by profit motives rather than .he minds of employees, it is as mobile and as advancement of the public interest. As a mcontrollable as the employees themselves, and consequence there is also an intensification of argely outside the province of intellectual activity in expanding knowledge markets - the value xoperty laws. of exchange increases rapidly. Although much rhat part of human capital that is not subject to knowledge is at present still produced in a 'public :edification and to the constraints of intellectual domain' environment, ie not subject to proprietary )roperty law, is only 'of the firm' in a transitory control, the knowledge economy is characterised by ~ndrelative sense. Rules relating to acquisition an expansion of knowledge subject to appropriation ~ndcontrol of tacit knowledge are mostly within by way of intellectual property rights. he domain of labour law, which largely Appropriation of knowledge letermines the rights of employees in terms of As the expands, and private erminating , entering into new labour investment in knowledge assets grows, pressure on rrangements or setting up competing businesses. regulators to shift more knowledge from the public n other words, labour markets, not knowledge to the private domain rises. In terms of law, there varkets determines the mobility and transfer of results a trend towards extending the reach of acit knowledge. proprietary rights over knowledge. This trend is often criticised because the resulting contraction of he Knowledge Economy the public domain may have a negative impact on %aracteristics productivity, by driving up the cost of knowledge 'he 'knowledge economy' is a ubiquitous concept 11 and the transaction costs of knowledge acquisition. arely defined9. It is often proffered as the third Intellectual Property and Intellectual Capital

Recently, certain patents in the field of can be developed in-house, for instance by biotechnology and genetics, and the supposed investment in R&D. It may be acquired as such trend to allow business method patents have been externally (eg in the form of intellectual property), the focus of such criticism14. or by acquisition of other firms, or by imitation. It may also be acquired externally by hiring employees Increased proprietisation of knowledge drives up with the requisite knowledge; or it may be bought in the cost of learning. Privatisation of education (ie as training and consultancy services. moving educational resources from the public to the private sphere) combined with a tendency to There is little doubt that most efficient knowledge assert proprietary rights over knowledge acquisition occurs by way of learning, rather than in educational institution, have further cost and structured acquisition. In the knowledge economy, organisational implications for the innovative firms as producers or acquirers of knowledge must firmT5. be learnzng organisations; as suppliers of products Technological innovation in the knowledge and services they are teaching organisations. Both economy learning and teaching are constant functions of the firm in the knowledge economy. In terms of the law, Technology and technological innovation lie at the learning and teaching result predominantly in the heart of the knowledge economy. Certain growth of human rather than . Much technological trends reflect the transition from an of the process of learning and teaching is a form of industrial to a knowledge economy. First, information exchange that are not structured on the increased complexity: products consist of more individual components, reflecting more complex basis of any kind of legal rules. technological parameters. Secondly, products have Knowledge and intellectual property a higher knowledge content, ie are ultimately rights based on and developed from theoretical insight For the individual firm, survival in a knowledge and scientific experiment, rather than from economy requires efficient acquisition and practical experience16.Thirdly, families of management of knowledge and information. These technologies often have a common generic science are critical to the firm's competitiveness even in a base with multiple and varied applications that 'traditional' sector. Organisational innovation will develop over time within measurable be primarily aimed at devising more effective ways parameters17. Fourthly, technological products are of obtaining, controlling and managing more interdependent, ie various technologies inter- information18. A number of environmental operate in a complimentary fashion. Fifthly, determinants as well as organisational culture will technology has a much shorter influence the strategy of the redundancyIinnovation cycle and shorter product firm 19. life cycle. One of the firm's most important tools for the As a consequence, technological change becomes a management of knowledge is intellectual property matter of collaboration rather than individual law. But efficiently managing IPR's alone does not ~ffort:most inventions are made by collaboration equate to managing intellectual capital, which between individuals or organisations, rather than requires integrated strategies derived from an by single individuals or isolated entities. Increased understanding of technology, of the market :ethnological complexity inevitably results in conditions within which a firm operates, and of the ncreased organisational complexity, through a limitations of intellectual property law. It requires an xocess of organisational innovation that matches understanding of alternative, non-proprietary md enables technological change. In terms of law, strategies for controlling and extracting maximum he knowledge economy is typified, therefore, by value from intellectual capital as a whole: ie an :xpansion in the scope and complexity of both integrated and 'holistic' approach. ntellectual property rights and contractually Knowledge Networksz0 jefined collaborative organisational structures. Public and private sector networks lcquisition and dissemination of knowledge Technological progress no longer relies exclusively n conditions of greater technological complexity, on gradual improvement through learning by doing, ihorter innovation cycles, greater knowledge but on interpretation and exchange of complex :ontent etc. firms must develop a capacity both to scientific knowledge in the development of practical lcquire and to disseminate knowledge rapidly. A applications. Whereas scientific knowledge is stil! irm acquires knowledge in a number of ways. It produced In large measure in the public sector (universities and government research knowledge; and secondly, continuous access to establishments), private sector investment in knowledge that is constantly and rapidly evolving. science has grown over time; more recently, so has Thus a knowledge economy is marked by the search public sector interest in proprietary rights. for access to proprietary knowledge through the Previously the production of basic knowledge was creation of relationships which congeal into largely separated from the application of that networks of interdependency. knowledge, paralleling a relatively rigid separation At the same time, empirical evidence shows that between public and private sector R&D. Now the there is a trend towards diversification and two stages are increasingly integrated. decentralization of research and development Indeed, contemporary innovation policy focuses activity2I. This trend gives rise to new forms of 'loose almost exclusively on fostering efficient consolidation', although consolidation into single integration of the various stages of innovation, corporate units by way of acquisitions is still recognising that the traditional linear model of common. Start-ups, spin-offs, Cooperative Research innovation is flawed. As a result, the production Centres, joint ventures, dutsourcing, private-public of knowledge has become a more market-driven sector arrangements such as sponsorships and grants, activity, rather than one purely directed at etc proliferate in this market. Such trends reflect a education and the advancement of the public need for co-operation that goes beyond hands-off interest, which coincidentally impacts on markets. acquisition of technology, while respecting the . Much of the change has come about because of diverse and serendipitous pursuit that is R&D, and shifts in public and government attitudes to public the dynamic nature of knowledge. funding of research, and increasing emphasis on Discrepancy between products and intellectual the production of proprietary knowledge within property rights universities and public research establishments. When technological sophistication advances, Overall, science and Academe, and innovation increased complexity and versatility of products and commerce have become more closely results. There follows a discrepancy between integrated within various legal and organisational intellectual property rights and products. In other models. These arrangements are often complex words, rarely does a single intellectual property right and constantly mutating, requiring efficient cover a single product, and as a result a number of collaboration and knowledge sharing within intellectual property owners will have a stake in any broad 'knowledge networks'. given product22. IPR's, such as patents, play an Access to proprieta y knowledge inventories increasingly important role in structuring essential Given the wealth of available knowledge, the transactions between disparate knowledge speed and diversity of its production, and the proprietors in the production of complex products23. technological complexity and interdependence of Complex technologies with simple interfdces products, no single firm controls all knowledge The increased 'scientific content' and complexity of resources that it needs. Firms require access to products, and the ubiquity of mass-market each other's inventories of proprietary knowledge, technology result in a difficulty for the innovator: and to proprietary knowledge held by publicly how to make inherently complex products usable to funded institutions. Firms are interdependent as the average person without specialist knowledge or far as both tacit and codified knowledge are experience. The problem is solved by producing concerned. simple and uniform interfaces between man and As the perceived value of knowledge mounts, machine. This results in technological convergence: attempts to appropriate knowledge grow more one interface and a single learning process gives a determined. Almost inevitably more knowledge consumer access to a multiplicity of products from becomes subject to intellectual property law, and different suppliers. The problem is also solved by what rights already exist are exercised more binding customer to supplier by a process of constant aggressively. Thus, at the very least, firms will learning and support. require strategies which grant access to and use of The knowledge economy thus generates greater I number of other firms' intellectual property dependency and integration between customer and resources. supplier, as well as dependency between suppliers24. But arms-length acquisition of codified knowledge Communities of learning grow around technologies, s often of limited effectiveness. More productive both of producers and suppliers and of producers 13 s first, access to both codified and tacit and customers. Intellectual Property and Intellectual Capital

Network economic effects reliance on IPR's and elements that do not rely on Recent scholarship has attempted to draw proprietary rights. Secondly, the predominance of conclusions concerning intellectual property law tacit knowledge within intellectual capital as a from 'network economic^'^^. For our purposes, whole requires a firm to focus primarily on efficient the basic tenet of the latter is that as the number practices in hiring and retaining knowledge-rich of users of a technology increases, so does the employees. In this process intellectual property law value of the technology to each user26. At the plays only a minor role. And thirdly, the importance same time, according to static economic theory, of effective participation in knowledge networks the more units of the technology produced, the focuses attention on the transactional utility of lower production costs per unit are. As the cost to intellectual property rights, rather than there value the supplier of the technology decreases, the value in terms of interdicting imitation. to the consumer increases. Thus proprietary The limitations of IPR's already referred to above technologies that enjoy network effects tempt the are analysed further below first. Then some broad proprietor to raise the level of monopoly rents (ie strategic options that flow from the three points pricelunit), inflating profit levels because of lower here made are put forward. per-unit costs. As the installed base of a technology grows, so should its price, at least The Limitations of Intellectual Property Law where competitors can be denied because of IPR's. Generally It is indisputable that the importance of intellectual Networks also tend to be 'sticky', ie there is often property rises in a knowledge economy. Yet a considerable cost attached to a consumer intellectual property is only concerned with a extracting herself from a network based on a fraction of all knowledge, and is not even all that certain technology (eg learning, new investment, effective in controlling that fraction. Hence the uncertainties about compatibility, transfer of data, market for intellectual capital can not be equated of addresses et~.)~~.In other words, first movers with the market for intellectual property. create a valuable : dependency. Furthermore, in a networked and interdependent For the knowledge based firm network economic knowledge economy the primary function of effects and 'stickiness' mean that material first- intellectual property law changes. From interdiction, mover advantages will often result in pricing it becomes cooperation. In other words, the main strategies with initial low returns28.There is an focus shifts from IPR's as combative rights that obvious correlation between material first-mover exclude, prohibit or interdict access to knowledge, advantages and the structure of intellectual to IPR's as transactional tools. It is in this light that property law, because the grant of property rights in the following paragraphs I consider the is usually tied to the novelty or originality of the limitations of intellectual property rights and the product or work. This is at once the purpose and changing role of intellectual property law in the the curse of IPR's: additional rents for innovators knowledge economy. risk becoming excessive rents because they are compounded by structural first-mover advantages. Tacit knowledge and intellectual propevty law Compared to the intellectual capital of the firm as a What is important in this context is that there is a whole, the scope and extent of intellectual property :oncornitant risk of rival technologies being coverage is quite limited. I have already pointed out mtirely frozen out of the marketplace, irrespective that much intellectual capital consists of tacit ~f their substantive merits. To avoid this risk, knowledge that is retained in the minds of 5rms must be in a position to negotiate access on employees. Such knowledge is only marginally :ompetitive terms, either by collaborating on the affected by the rules of intellectual property law, ievelopment of standard-setting technology, or by because there is often little by way of IP law that an 3ositioning themselves to bargain effectively on employer can do to exercise effective control over :he basis of their own indispensable knowledge knowledge acquired on the job. The courts tend to nventory. favor the employee's freedom of employment over 'aterim conclusions: intellectual property & the employer's interests in controlling allegedly 'ntellectual capital in a knowledge economy proprietary knowledge29.In other words, knowledge rhree points result from the above. First, the diffusion in a knowledge economy is to a imited reach of intellectual property law in considerable extent regulated by labour markets and ,elation to intellectual capital as a whole, requires labour law. It is also a matter of contract law, ie the I firm to develop a strategy that incorporates both formation of new legal constructs that allow access to tacit knowledge on an ongoing, hands-on in the determination and enforcement of higher basis30. universal standards of legal protection for Limited scope and extent: patchy coverage intellectual property32. Nonetheless, at present the Intellectual property law also does not cover detailed regulation of intellectual property is still a general knowledge, learning, know-how or largely domestic matter, which creates difficulties for experience; only very specific and clearly identified the knowledge based firm which trades across knowledge falls within its embrace. Thus there are borders. no patents in discoveries or laws of science and Although there are global treaty systems relating to the like, but only in specific applications of such intellectual property law and to intellectual property knowledge. Copyright does not extend to the law and trade (TRIPSNTO), IPR's are in fact still ideas expressed in a work. Trade secrets In some trading blocks there is a slow move protection only extends to information specific towards multilateral forms of protection (eg the enough to be demonstrably not in the public European Convention), but in effect the domain. treaties leave governments quite free to regulate And rights run out over time. However, trade intellectual property law within flexible boundaries. marks and other forms of protection for goodwill Copyright, because it does not depend on do not run out unless the owner of the right lets registration, is the most universal form of this happen31. For that reason alone, such rights protection, by way of the Berne Convention - but over reputation have potentially greater future even then enforcement will be in accordance with value, a point to which I return to below. But even local rules in any other member country. Legal rules, a trade mark monopoly is subject to many and courts and officers enforcing those rules may be restrictions, limitations and exceptions: the less than sympathetic to foreign intellectual property owner's control over a mark is not absolute. In owners in some jurisdiction^^^. Relying on local law general terms, the specificity of IP rights means in a foreign jurisdiction may be ineffective, that certain competitiveIimitative practices fall expensive and risky. The registration systems, ie through the cracks between the different regimes. patents, designs and trade marks protection, are [ntellectual property protection will always remain local and restricted to a single jurisdi~tion~~. patchy, because the law aims to strike a balance Multiple applications are required, for multiple between effective incentive and the public interest jurisdictions, with uneven effects. Thus although the n free or low cost access to knowledge and knowledge economy is global, proprietary nformation. protection is uneven and not seamless. Local rights in a global economy The expense of intellectual property (nowledge as a tradeable commodity lends itself Which brings me to my next point: the expense of o the geographical expansion of trade, since cost effective intellectual property protection in a global ind complexity of distribution are minimal in economy. In a global economy it will be necessary to .elation to the value of knowledge. In a world invest similar amounts in a number of jurisdictions, vith relatively homogenous levels of education, with spiraling costs. That is even before any expense ,imilar legal systems, a common linguistic base, of enforcing the patent (ie going to court or just md common communication platforms hiring lawyers to advise) is taken into account36. [nowledge can be readily exchanged. Reduced Patents are certainly the most expensive form of .osts of travel, transport and communication ease intellectual property protection, but there are not he way for a global trade in knowledge and in insignificant costs attached to other regimes as well. :nowledge based goods and services. Students, The real expense is even greater if one takes into eachers and manpower in general become mobile, account the uncertainties and therefore risks onstituting the principle mode of knowledge inherent in the process of applying for, obtaining listribution. Knowledge about technology tends and enforcing intellectual property rights in any o be universally valued, whereas the value of jurisdiction. Intellectual property rules tend to lther knowledge (eg about cultural rites) tends to follow slowly upon new technological developments, le more location-specific. Technology tends to resulting in periods of adjustment and uncertainty ave universal appeal and thus value in any precisely in relation to the most valuable ational marketplace in which the requisite technologies. Application of the law is unpredictable xhnical and institutional conditions apply. even within an IPR owner's home jurisdiction, let 15 'hat the knowledge economy is global is reflected alone in foreign jurisdictions where competitors may Intellectual Property and Intellectual Capital

have competing vested interests in similar IPR's inventiveness). The strongest patents may well be (eg the problem of local goodwill in a foreign those that have been litigated and found valid on a trade mark). counterclaim for invalidity, but this is a small Proprietary rights and publicity category indeed. The most important form of intellectual property However, it is ~robabl~the case that in an age of in the context of innovation also has the high litigation costs, a weak patent is just as drawback of publicity. Patents grant is dependent effective a barrier to entry as a strong patent39. The on an enabling disclosure: obtaining the cost of proving the invalidity of an apparently weak monopoly requires divulging to competitors the patent may be prohibitive. For the patentee, the fact nature of your knowledge in detail. A dilemma that a granted patent is not necessarily valid means faces the firm: to choose secrecy without that there are hidden, uncertain and deferred costs monopoly or monopoly without secrecy37? attached to the process of patent grant and proof of Reliance on trade secrets law may have limited validity. Litigating on the basis of a patent also utility because of the ease of reverse-engineering risks destroying what apparent value a patent has if once the product is sold; trade secrets law does the result is a successful counterclaim for not normally prohibit reverse-engineering as invalidity40. Trade secrets law also has the drawback Interim conclusions: wow about innovation, not that although damages or a temporary restraint imitation may be available as a remedy for illegal So a tentative conclusion may be that in terms of disclosure, information irretrievably looses much stopping imitation, and on a wider front, protecting of its value once it is in the public domain. Legal the intellectual capital of a firm, intellectual remedies can hardly ever fully restore the property is only marginally efficient. In any case, I proprietor to his previous position, since he loses would suggest that a competitive firm should be the advantage of secrecy not only in relation to concerned by a competitor's innovation rather than the infringer but in relation to the world at large. imitation41! Effective innovation by other firms is On the other hand, although patent grant results likely to affect competitiveness far more in the long In a monopoly right, statutory publication may run. serve competitors in all sorts of ways. A patent Because IPR's are costly, uncertain and difficult to lags the research path the applicant has chosen; it enforce, of limited scope, easily subverted, and lags the nature of the technology and may suggest often function as a springboard rather than a uays of invention around; and it may mean that deterrent for the firm's competitors, a firm should mother person obtains an improvement patent focus primarily on how to limit the impact of a .elated to the invention, leaving a cross-licensing competitor's innovation, rather than of a &lemma. A patent may well present an important competitor's imitation. The lesson is simply; to use ethnological breakthrough, but it is frequently a hackneyed slogan: 'you've got to be in it to win mly the gradual improvements that occur itY.In other words, focus on IPR's as effective ubsequently that result in a marketable and bargaining tools to obtain relevant knowledge and ~rofitableproduct. Thus there will commonly be skills in the race to innovate. To put it differently, denty of time for a competitor to position itself to IPR's main value in a networked knowledge ibsorb the market impact of the new product, and economy lies in their utility as transactional tools. leny the patentee much of its potential ompetitive advantage. Competitors will not Intellectual Capital Strategies nfringe IPR's, they'll simply use them as a From the above various broad strategic imperatives tepping stone to overtake the patentee in the race emerge for the innovative firm intent on o innovate. maximising the value of its intellectual capital. To reiterate these: first, appropriate emphasis is Talidity of granted rights is limited required on the bargaining rather than barring uses ntellectual property rights that are granted on the of intellectual property rights, ie their transactional lasis of a process of examination are not utility. Secondly, a firm should develop a broad and ecessarily valid, eg a grant of a patent is no integrated strategy combining reliance on IPR's uarantee of validity. There are 'weak' and with other complementary strategies, and weighing ;trongl patents, ie patents whose validity is up the strengths and weaknesses of various regimes. oubtful and others that more clearly conform to Thirdly, a careful choice must be made between eatutory requirements (eg novelty and investment in the development of alternative intellectual assets; in particular, the advantages of there is an imitation lag that allows innovators to investment in the protection of goodwill over consolidate market position, the so-called first- investing in substantive will have to mover advantage. be considered. And lastly, an IC strategy will have Further more, in a knowledge economy, with its to be employee-focussed. These strategic pervasive networks and all-embracing standards, the imperatives are developed in more detail in the distributed base of a new technology and the following paragraphs. relationships built around the technology may pre- IPRS in a knowledge economy: transacational tools empt imitation and market entry by a competitor far Limitations of the traditional view of the policy more effectively than intellectual property law ever goals of IPR's would. As technology becomes more complex, Theory would have it that the granting of interdependency between innovator and customer intellectual property rights in new knowledge becomes an important factor that bars customer enhances innovation: intellectual property rights transition to a competing (cheaper) imitator. And are granted in response to market failure in the technological interdepen'den~~between competitors market for new knowledge. Sub-optimal levels of will tend to organise imitative conduct more than production of intangibles are said to occur legal rules will46. because intangibles can be used without being In any case, innovation rates (ie the rates of depleted; have public good characteristics, ie are substitution of new technology) have risen so subject to positive externalities which cannot be dramatically, that one comes to a stage where the captured by the creator; and the marginal cost of imitation cycle is longer than the life cycle of the use or reproduction of intangibles is minimal product, and imitation becomes a pointless activity. compared to the cost of initial creation. Simply That intellectual property has unknown effects on put, market failure results, because returns on the rate of innovation does not mean that it is not a investment in the production of knowledge and valuable tool of the knowledge economy. The point information cannot be captured in the absence of is that intellectual property law enables participation property rights. The first producer of knowledge in the knowledge economy, rather than exclusion will be trumped by the free rider who can use the from it. In a networked, hi-tech, high innovation knowledge while avoiding the cost of knowledge economy, a firm's intellectual property is as, or production and only suffering the marginal cost of more, useful as a bargaining than as a barring tool. imitation. Enforcement of intellectual property rights then Yet it is clear from what little empirical data are takes on the role of sign-posting appropriate rules of available, that many industries do not consider market behavior rather than effectively denying intellectual property (patents in particular) relevant imitation and copying. to the decision whether to innovate or not42. Bartering knowledge with IPR's Whether and to what extent intellectual property Intellectual property, which tends to require material law encourages firms to innovate is a very open form and some precision in identification, aids with question. The devil lies in the detail: the wrong inventorying of intellectual capital. This process kind or scope of intellectual property laws can even then also allows a firm to use a form of shorthand have a detrimental effect on innovation rates43. in advertising its intellectual capital base, without In today's context, it may be that market and having to fully catalog the information as such: for technology related factors have a far greater instance, the number of patents in a firm's portfolio influence on the rate of imitation44.For one thing, is an indicator of its level of intellectual capital. the marginal cost of imitation is often Demonstrable ownership of , design underestimated or misunderstood. Intellectual registrations, trade marks, circuit layout rights is property as codified knowledge is not necessarily advantageous in terms of valuing the firm, of readily deployable by a competitor, and the cost attracting finance, of retaliation when faced with ~f acquiring useful knowledge will thus often be infringement litigation, and of commercial higher than the cost of acquisition of codified negotiations relating to licensing47. ~ntellectualproperty. The imitator must engage in Intellectual property inventories also have 1 more or less costly learning process, and must considerable advantages to a firm because they develop or acquire the tacit knowledge and know enable participation of the firm in the networked low that are not revealed by the codified knowledge economy. Knowledge is more and inore 1 tnowledge or the ~roductitself45. In other words, Intellectual Property and Intellectual Capital

complex and it is increasingly impossible for a IPR's with other approaches in a holistic fashion. I single firm to 'own' all relevant knowledge that it address some examples of both below. needs to provide a complex technological product Perpetual innovation or service48.In such conditions, the strength of Probably the most effective strategy that does not IPR's will be as a bargaining tool rather than a rely on intellectual property rights, is perpetual barring tool (ie barring imitation by threatened innovation. In absolute terms, that is nothing new: litigation). simply put, it's staying ahead of the competition. But The resulting networked economy operates partly it is new in degree, in the sense that it requires the through knowledge barter: in other words, cross- primary focus of the firm to be the management of licensing of intellectual property rights. The key is knowledge for perpetunl innovation. As I said to focus on those advantages and to dismiss the above, because obtaining and enforcing IPR's is so illusions concerning IPR's as barring rights in any costly and slow, litigation or disputes often revolve but the rarest cases. This is not to deny that around yesterday's technology. Rapid rates of litigation against imitators sometimes has strategic technological change make that even truer today advantages. But an investment in building than it was in the past. Thus if a firm no longer knowledge inventories will be much more readily relies on a technology or product for profitability, justifiable that investing in litigation. there will be little gained from enforcing IPR's. But The effect of the growth in proprietaty knowledge the choice is not there unless a new technology or Various trends have resulted in a growth of product can be substituted for the old. It is this proprietary knowledge. First, more knowledge is process of constant intra-firm technological subject to appropriation because legislators and substitution that will liberate the firm from the need courts tend to expand rather than contract the to pursue costly and high-risk strategies of reliance categories of protection; secondly, firms (and other on and enforcement of rights in existing agents, such as universities) are increasingly technologies and products. However, the ~nterestedin obtaining proprietary rights; and effectiveness of a strategy of constant innovation :hirdly, as the economy goes global, firms tend to will depend on a number factors, not the least being >btain rights in a plurality of jurisdictions to a the installed base of the technology. yeater extent than before. The result of these Client inclusion in the innovation process +ends is that firms will find themselves at risk of I pointed out above that building proprietary )eing barred from access to vital information that knowledge networks is crucial in a knowledge n-eviously may have been in the public domain. economy. However, since successful innovation is The only way of maintaining access to vital often dependent on detailed improvements of an knowledge and technology is through developing initial product, tying in access to the knowledge proprietary networks of knowledge, ie networks resources of clients will also be of vital interest to an of exchange of proprietary knowledge. Such innovative firm. Clients are important source of networks function on the basis of confidentiality product knowledge, and the firm that maintains a and reciprocity, ie cross- licensing arrangements. two-way client relationship guarantees access to a This is all the more the case where there is vital future resource. Such relationships can be considerable pressure on patents law to move maintained by legal means (contractual provisions in towards rewarding investment in research rather licensing or supply agreements), but can also be than inventiveness in research, certainly in highly maintained at the informal level and at the level of scientific areas such as biote~hnology~~.Again, employee interaction. Mobility of employees building knowledge inventories will be the key to between innovator and client is most useful in this successful participation in proprietary knowledge respect. networks. IPR's as technological determinants IC strategies: integrating reliance on IPRS with other In terms of product choice and design strategy, designing products to maximise imitation lag is a approaches well known strategy. But it is not unreasonable to The high cost and other shortcomings of IPR's suggest that the nature and extent of available IPR's imply that for a firm concerned to limit the effects should be taken into consideration in the course of of competitive imitation, alternative strategies not the design process. How well does the design of a reliant on IPR's may be more efficient and more product protect the firm's intellectual capital, and cost-effective. Alternatively, a firm should consider are there changes in design that will make reliance integrated strategies that combine reliance on on IPR's as barring tools more effective? There are standard of originality is very low in Australia5'. of course technical and commercial limits to the Fairly minor changes to existing copyright works extent to which IPR's can shape the design of a may result in an original work or subject matter that product, but since the IC of the firm is such a core separately attracts copyright. Where the author of asset in a knowledge economy, it is reasonable to the changes is not the original author, the term of suggest that such considerations should have a copyright may be usefully extended51. And designs place. Some design elements may be purposely registration is available for 'new or original' designs, introduced to make detection and proof of but this usually requires only small changes in the imitation or infringement easier (the deliberate appearance of a product52. Thus IPR's can be spelling error example). In other cases it is a obtained and managed in a manner that will extend question of preferring design choices that make the effective life of legal protection of a basic imitation and reverse engineering harder and innovation in technology or design. detection easier at the same time. Being pro-active Imitation Because of the structural characteristics of the An innovator is inevitably also an imitator, and subsistence requirements of IPR's, failure to act early the cost of imitation tends to be lower than the can cost innovators dearly. Options may be cost of innovation (hence the existence of IPR's). irrevocably lost by the failure to observe There is of course a risk of legal liability inherent requirements for subsistence of IPR's, for instance, in imitation. But the scope of IPR's tends to be by revealing information before the filing of a patent quite narrow, so that the substance of innovative application. In other words, the structure of IPR's ideas can often be acquired without infringement, rewards the pro-active firm which has structures in making imitation a sound and cost-effective place for the early identification and processing of strategy. Imitation in effect amounts to another emerging IPR's. A relatively small initial investment form of acquisition of innovation. The may secure a valuable future position. imitationlinnovation decision is one that has to be Being pro-active can come at a cost, but savings at made with regard to the existence and the early stage are false savings: initial costs are low, effectiveness of IPR's. Much advantage may be and a firm can opt out (allowing an application or derived in terms of IPR's and strengthening a registration to lapse) but cannot opt in (because firm's bargaining position by a strategy of novelty will have been lost). Costs can also be imitation and innovation. The development of deferred for a considerable time without loss of improvements on a patented technology owned by privileges once the initial application is made. a third party may give rise to an improvement patent; or ideas contained in a copyright based Strategic considerations undoubtedly come into play product may be re-deployed to greater effect or in pro-active decisions concerning the protection of with greater graphic skill etc. rights, and these must be carefully evaluated. For instance, at what stage in the product development Staged release cycle does the firm apply for a relevant patent? A concomitant of perpetual innovation is staged Applying for a patent marks a transition from product release. Many modern technologies are secrecy to publicity (although this may vary between science-based and thus generic. They lend jurisdictions depending on whether the application themselves to a multitude of different is published or not), and is therefore a strategically applications, forms, improvements, adaptations important decision. The choice between reliance on and efficiency gains. Many factors determine the trade secrets law and on a patent, depends on many timing of market introduction, but there is usually different factors, not least the nature of the little to be gained by extending the delay between technology involved. But the fact that there may be invention and market entry. IPR's tend to apply to risks inherent in an early application does not mean ?volutionary changes as much as to revolutionary a firm should not be proactive; the essential breakthroughs. The standard of inventiveness for requirement is that, as a matter of course, active 2atents is actually quite low, and the merit of the consideration is given to IPR protection as early as ;ubject matter is irrelevant: a 20 year patent is possible in the product development cycle. ivailable for an improved ironing board just as nuch as for a revolutionary cancer-treating drug. Cumulating rights Improvement patents may extend the effective Cumulating IPR's is also an effective way of nonopoly over a technology. In copyright law, the enhancing the value of the intellectual capital of the 19 firm. Modern intellectual property law permits of Intellectual Property and Intellectual Capital

more overlapping between different forms of generate a wider scope of monopoly) and is protection. Examples are copyright and registered conditional on intended andlor actual use. designs (which can be cumulated in some Registration is also national, not international, jurisdictions but not in others - or not wholly); which can leave well-known marks vulnerable in designs registration and trade marks registration foreign markets. Trade mark registration is generally (because in most jurisdictions shape and also subject to good faith-use exceptions and other packaging of goods can now be registered as trade derogation's, and the validity of a trade mark is not marks); copyright and trade marks registration; guaranteed by registration. If a trade mark is not etc. Some concrete illustrations: reliance on trade well managed, it can be the victim of its own success dress and on registered trade mark protection; and become generic rather than distinctive of the ensuring a remedy against piracy of software by firm. Careless licensing practices can also result in inclusion of a trade mark in software, so that an trade marks becoming confusing or deceptive, or action can be brought in copyright and trade descriptive rather than distinctive of the trade mark marks law; and grant of a software patent which owner, with a consequent loss of monopoly. gives the option of both relying on copyright An alternative to reliance on registered trade mark protection and patents protection. rights is to have recourse to an action in passing off, A firm with more options will usually enjoy a misleadingand deceptive conduct, unfair wider scope of protection. Remedies may differ competition or the like, in relation to trade dress between regimes, and exceptions under one and other distinctive indicia of a firm's business or system may be inapplicable in another. As already products. The evidentiary burden in such actions is referred to above, registering multiple IPR's within greater, reputation and misrepresentation needing to a single regime may also be effective, eg a general be established in every case. Courts tend to be and improvement patents; product and process reluctant to enforce a monopoly in the appearance patents; registered trade marks in different signs; or design of a product through means of an action registered designs in slight modifications of the in passing off or sec 52 TPA in imitation cases same design; etc. Some intellectual property (registered designs being the more appropriate regimes specifically allow for the registration of a avenue for protection). number of similar or interdependent rights. Advantages of goodwill Investing in goodwill or in innovation? Despite the abovementioned limitations, the The goodwill vs innovation trade-off protection of goodwill has several great advantages There is a basic distinction in intellectual property over monopolisation of ideas. First, it is not law between rights in goodwill and rights in necessarily product specific, but can be - and innovations. A firm must optimise the choice frequently is - firm specific. The effective 'protection' between investment in innovation or in goodwill. of a product through designs, copyright, patents etc. [n making this choice, it must evaluate the might have to rely on a multitude of rights in structural differences between the protection of constituent parts, creating potential transaction and ;oodwill and of innovation (in the broad sense) in management costs. Firm-specific goodwill does not ntellectual property law. More precisely, it must suffer from this disparity: in other words, it is an tssess the advantages reliance on trade marks over-arching right, certainly if effectively managed. oegistration andlor passing off may have over This reduces transaction costs and increases the :xclusive copyright, design and patent rights. value of all products of the firm, ie firm-specific goodwill enhances the value of all other intellectual fhe goodwill of a firm resides in the signs that capital of the firm. :onsumers associate with it. Distinctive signs that Ire not confusing can be registered as trade marks A further advantage lies in the continuity of md thus 'owned'. Although trade mark goodwill: protection does not run out. As long as a ,egistration may obviate the need to prove trade mark is used and does not become descriptive, ,eputation and misrepresentation or deception in deceptive or confusing, registration can be I given case, it admittedly has its limitations. Only maintained. There is no cut-off date as there is in ertain signs can be registered, and they tend to be relation to other IPR's. The same effectively applies mly a small fraction of the total interface between to unregistered trade marks and other elements of irm and consumer. Furthermore, the monopoly is trade dress. The value of a trade mark therefore lnly in relation to a certain class of goods or potentially increases with the passage of time, with ervices (although well-known marks may increasing returns on investment in goodwill. A firm does not have to reinvest in a new image at given instance, image building as a market-leader in intervals, although it can choose to do so. innovation is a well-established strategy. And since Contrast this with the diminishing returns from reputation is as much about the quality of investment in patents, designs, copyrights etc., employees as about image-building, investment in which require a firm to invest in substitute people is an effective investment in goodwill. innovations to maintain its monopoly position. Strategies that attract and retain good employees Well-known merchandising characters are a good will enhance business reputation, and enhance the example of this: while the copyright in Mickey value of those indicia of goodwill and reputation Mouse runs out 50 years after the death of its which a firm will be able to trade off in the future. author, the Mickey Mouse trade mark can be Employee related strategies maintained forever. Thus strategies that convert or Tacit knowledge of employees leverage substance into goodwill have marked Tacit knowledge is carried in the heads of advantages. employees, and in that form the law ensures that it Goodwill protection is also less susceptible to remains quite mobile and rather outside the scope of subversion by new technologies than substantive legal control of the firm (see above). On the other rights. Copyright, for instance, has arguable failed hand, the law in most nations recognises that to protect the interests of authors, composers and employers own the intellectual property rights in producers in relation to sound recordings on the employees' (patented) inventions, although there are Internet. At the same time, returns to musicians some limitations to this rules3. In this light, it seems and producers from merchandising and other to be to the advantage of the firm to pursue two goodwill related activities have remained constant strategiess4: first, externalking tacit knowledge; and or grown, and are less affected by technological secondly, attracting and retaining inventive change. Arguably, an international trend in favour employees. of goodwill protection is, not surprisingly, Externalization of knowledge - subject as it is to developing; moves to dramatically increase inherent limitations, because of the dynamic quality protection for geographical indications are of knowledge - codifies tacit knowledge. It can then illustrative of this. be rendered subject to IPR's. This has all the general Investing in goodwill or in innovation? advantages referred to above, and also strengthens Therefore investment choices in relation to the the hand of the firm if a dispute concerning trade intellectual capital of the firm require careful secrets or confidential information with an employee consideration of the advantages of the protection ensues in the future. Externalising tacit knowledge of goodwill. Relative costs and potential for future also allows a firm to build a more comprehensive returns must be compared. It may be that the knowledge inventory. The firm only obtains a return exploitation of a successful patent, for instance, on investment in training if the employee is retained, under which a new entrant can establish itself in a or - to a degree at least - if the tacit knowledge of market, or create a barrier to entry by others, the employee is rendered explicit. should be seen as the springboard for the longer Externalisation of knowledge can be encouraged in term development of the goodwill of the firm. In various ways: by offering employee - incentives (eg other words, successful innovation should be seen in the form of co-ownership of patents); by way of as an opportunity to enhance the value of building in externalising procedures (eg maintaining goodwill, which, when the monopoly in a patent logbooks; computerisation of procedures); by runs out, can be maintained. Other products can making employees aware of the value and then be developed under the 'umbrella' of importance of IPR's, and of obligations in relation continuous rights over goodwill, which will in to confidentiality and notification. It may even turn enhance the value of future innovations, and enhance a firm's position to encourage and support so on. Thus innovation is leveraged for a future employees in establishing spin-offs and start-ups return in terms of the firm's goodwill or (subject to the firm having a stake). Strategies that reputation. encourage employees to externalise and be open The balance between investment in goodwill and about their inventions need not go to the length of her forms of IPR must depend on the promising full or partical employee ownership, but 5rcumstances of each firm and on its could take the form of a right to a royalty from :ethnological base. Investment in goodwill and commercial exploitation, or salary responses 21 nnovation are not mutually exclusive. For depending on the number of registered IPR's with Intellectual Property and Intellectual Capital

the employee's as named inventoP. revolves around the fact that it is not visible on the balance sheet, or alternatively, around attempts to render it visible on the balance Retaining employees: 'incentivisation' sheet. However, even though some aspects of intellectual capital are But maybe more important than externalisation by their nature impossible to measure, in fact they contribute geatly to the value of the firm as demonstrated by the valuation of strategies is effective management aimed at its stock. For instance, the discrepancy between stock valuation of retaining inventive employees. The strategy GM and Microsoft is much smaller than the discrepancy between examples given in the previous paragraph are at the values of its traditional net assets (land, buildings, equipment etc, but not IC; see Roos, above 1, at pl). least first steps in that process. They help the firm 3. In fact one of the difficulties with the concept of intellectual to identify the most valuable employees, and thus capital is that on present understanding, it is impossible to define to offer timely incentives and rewards related to adequately or to develop an accurate taxonomy of its elements. This results in the use of general terms that add little to our the production of IPR's. But intellectual capital is understanding; for instance, Klein refers to 'knowledge, experience, more than IPR's, and broader incentives of a more expertise and associated soft assets, rather than hard physical and traditional kind might be more appropriate or ', see Klein A, The strategic management of intellectual capital, Butterworth Heinemann (1999), at 1. effective. Nonetheless, there are advantages in 4. More or less complex definitions of these terms have been tying employee reward more explicitly to the offered. For instance, Boisot maGes a careful distinction between contribution to the intellectual capital of the firm. data, information and knowledge. Data are 'discernible differences between alternative states of a system'; information is 'data that Conclusion: Integration Between IP And Non-IP modifies the expectations or the conditional readiness of an observer'; and knowledge is 'the set of expectations that an Strategies observer holds with respect to an event': see Boisot, MH, The main point made in this paper is that Knowledge assets, Securing competitive advantage in the intellectual capital is a broader concept than Information Economy, OW (1998). Whether such precise definitions are helpful beyond the immediate aims of their author is IPR's. To enhance the value of intellectual capital, doubtful. the firm must use IPR's in combination with other 5. References to both the 'information economy' and the strategies, while being fully cognizant of the 'knowledge economy' are rife, often without clear distinction being made between the two, whether purposefully or by inadvertence. strengths and weaknesses of the various IP The Merriam-Webster Collegiate Dictionary (online) definition of regimes. The intellectual capital of the firm is its knowledge is 'the fact or condition of knowing something with main asset in a knowledge economy, increasingly familiarity gained through experience or association (2): acquaintance with or understanding of a science, art, or technique characterised by technological interdependency. b (1): the fact or condition of being aware of something (2) : the Given the nature of IPR's, it is more effective to range of one's information or understanding "answered to the best think of IPR's in terms of bargaining tools in such of my knowledge" c : the circumstance or condition of apprehending truth or fact through reasoning : COGNITION d : a market. Furthermore, there are other strategic the fact or condition of having information or of being learned "a decisions relating to intellectual property law that man of unusual knowledge"'. a firm must take with full recognition of the real 6. Hence the emphasis on learning in a knowledge economy, and the emphasis on the firm as a learning organisation. limitations and real promise inherent in the 7. See Roos, above 1. various areas of intellectual property law. Thus a 8. On the whole the law is unwilling to restrict the mobility of firm will have to focus on strategies to maximise employees, or to restrain them from using knowledge acquired in the course of employment for themselves or in the service of a the value of tacit knowledge, and also consider different employer. The law relating to employee mobility and the value of goodwill over innovation when control over IP is one of the most crucial areas of law in relation to investing to enhance the value of intellectual innovation and technological growth; as to the question of employee mobility and the law in a knowledge economy, see capital. Merges RP, 'The law and economics of employee inventions' (1999) Harvard J of Law & Tech, 13, 1; Bankman J & Gilson RJ, 'Why start-ups?' (1999) Stanford LR, 51, 189. 9. See Conceicao P et a1 (eds), Science, technology and innovation policy: opportunities and challenges for the knowledge economy, D". Associate Professor of Law, Bond University, Gold Coast, Quorum Books (2000); Neef D. "Rethinking Economics in the 2ueensland. Knowledge-based Economy.", in The Economic Impact of L. There are now many works that analyse intellectual capital Knowledge, Butterworth Heinemnann, Boston (1998). Neef D, The rom a management perspective: see for instance, Roos J, Roos knowledge economy, Butterworth Heinemann (1998); and Neef D, >, Edvinsson L & Draaonetti NC, Intellectual capital: A little knowledge is a dangerous thing: understanding our global iavigating in the ~ew~usinessLandscape NYUP(1998); knowledge economy, Heinemann (1998); or for a combination of {dvinsson L & Malone MS, Intellectual Capital, HarperBusiness both 'knowledge economy', and 'information economy', see Eliasson 1999); Sullivan PH, Profiting from Intellectual Capital: G, The knowledge based information economy, The Industrial 3xtracting value from innovation, John Wiley & Sons (1998). A Institute for Economic and Social Research, Stockholm (1989). The ~sefulrecent work, from the perspective of intellectual property term 'information economy' is just as common as 'knowledge aw and intellectual capital, is Imparato N (ed), Capital for our economy', but from the perspective of intellectual property law, the ime: the economic, legal and management challenges of former is a less interesting concept, since arguably IPR's are more ntellectual capital, Hoover Institution Press (1999). The notion concerned with knowledge than information. ~f intellectual capital is not new, but the degree of attention it 10. Added value is a loose descriptor: I mean that the market will las received is. sustain higher prices for intellectual capital-value added goods and :. Much of the recent thinking about intellectual capital services. 11. The same in fact applies to goodwill as well as to technical networks' more narrowlv to refer to the manner in which firms in knowledge. The weight of a generic coke drink can is the same the knowledge economy depend on networks for access to and as that of a Coca Cola can, but the value of the latter is greater distribution of knowledge assets. because of the intellectual capital in the form of goodwill that 21. See Merges R, 'Intellectual Property Rights and the New the Coca Cola trade mark represents. Institutional Economics' (2000) 53 Vand L Rev 1857. 12. In economic terms, it is not an exogenous variable; 22. See Merges R, 'Intellectual Property rights and the New knowledge is integral to market equations, not a factor of supply Institutional Economics (NIE)', above 21. NIE is, according to that is unaffected by market conditions. Merges, 'all about coordination between multiple economic units', 13. It is possible to associate the growth of the knowledge inter alia in terms of vertical integration, but principally in relation economy with the post-cold war period, with its shift from to inter-firm coordination public to private determinants of expenditure on new knowledge 23. This is sometimes advanced in support of broader scope production brought about by the reduction in military spending. patents. Variations in patent scope impact on the nature of the This constituted a shift away from government direction of the relationship between owners of disparate technological expenditure of innovation resources. components, or between 'pioneers' and 'improvers'. The grantee of 14. A 'business method' patent is in fact a misnomer: see a broad patent will profit either by licensing, or through joint Welcome Real-Time SA v Catuity Inc [2001] FCA 445 (17 May ventures, from the creation of further applications of the patented 2001). See for instance, Merges R, 'As many as six impossible technology. Firms other than the initial inventor may in fact have patents before breakfast' (1999) Berkeley Technology Law superior expertise in identifying and implementing further Journal 14, 577; but whether or not such patents are applications. The grant of patent rights thus serves to co-ordinate economically justified, and in spite of doubt about the validity of the R&D efforts of downstream inventors in an efficiency- business methods patents, industry has certainly embraced them enhancing manner. However, it may be that coordination of in the United States, as have legal practitioners: see eg Kang PH, research activity is in fact more efficient between owners of various Snyder K, 'A practitioner's approach to strategic enforcement related patents than between one owner of a broad patent and a and analysis of business method patents in the post-State Street number of innovators willing to develop the patented technology era', (2000) IDEA - The journal of Law and Technology 40, further. 267. 24. The customer's investment in training in a new product results 15. As the learning process of employees is one of, if not the in so-called 'customer groove-in', ie reluctance to switch between principal way of, acquiring knowledge assets. Previously such systems because of the loss of the investment in training in the old acquisition has been largely non-transactional, but in the future system and the cost of re-investing in training in a new system: see that will be less and less the case: training and continuing Roos, above 1, p 12. Note however that modern technology is education of employees will become a greater cost for firms as it flexible, ie subject to a continuous process of error correction. becomes less of a public sector function. 25. Or network externalities. See Lemley MA, McGowan D, 16. Ie more based on learning by structured study than learning 'Legal implications of Network Economic Effects' (1998) by doing. This also means that the pattern of technological California Law Review 86, 481. In the area of intellectual change is modified. Theorists now tend to identify a distinction property law, the phenomenon of network economic effects tends between paradigmatic shifts in technology and steady and to indicate the desirability of exceptions to intellectual property predictable changes in technology. According to Duysters, 'Over rights in the interest of comparability, eg in relation to reverse time a product or technology is likely to arise which stands out engineering of computer programs and reproduction of interface above all other products or technologies. These so-called 'basic components. designs' serve as sorts of 'technological guideposts' for further 26. Eg the value to A and B of software that allows their developments in technology. Once a basic design is established, computers to communicate over the Internet is limited; if every :ethnological progress tends to follow consistent paths or computer owner has the software installed the value is far greater. :rajectories. The cumulative character of technological progress 27. An excellent example of this is copyright law protection in icilitates a rapid expansion of the boundaries of the technology relation to computer programs in the absence of reverse engineering lntil the natural limits of the technology are approached and enablement provisions. :ethnological progress slows down. At that time decreasing 28. In an industry where market and technological uncertainty are .eturns from investment in research and development induce high, first mover firms have a great advantage in preempting new irms to redirect focus towards other technological paths.', see market opportunities: see Duysters G, The dynamics of hysters G, The Dynamics of Technical Innovation, Edward technological innovation, Edward Elgar (1996), at 214. New 3gar (1996), at 213. The development of 'basic designs', or entrants are likely to enjoy benefits over established firms because hat one might call generically new technologies, will come the investment in innovation does not have the same opportunity lbout more frequently the more scientific investigation occurs. cost: see Duysters, above 16, at 216. In other words, investment in ;ee also Flueckiger GF, Control, information and technological innovation as a way of reducing costs in an existing organisation is zhange, Kluwer (1995): scaling a technology leads to a path of in itself costly and subject to risk. xedictable technological change, citing Sahal who defines 29. Only information that can be classified as trade secrets (or ethnological evolution as 'a process of learning by scaling', confidential information sensu stricto) is subject to legal restraints. ~tp 17. Most often employees will fall foul of such restraints only if they !7. With more investment in science generic breakthroughs have taken information from an employer in some codified form, )ecome more common. such as papers or computer files. .8. Literature on the management of knowledge is common; see 30. Ln other words, firms can develop ties to tacit knowledge by g Momberg D, Ashton A, Strategy in the use of intellectual developing structures that allow access without appropriation, to property; a guide to managing business' most valuable asset, the most valuable of tacit knowledge assets. Ties to tacit knowledge 1986) Gerundive Press, Hong Kong. The Internet as an not only assist the firm to be profitable, they also affect the market xample: those firms that obtain and manage client information value of the firm: see eg Darby, Liu and Zucker, 'Stakes and stars: nost effectively will be the winners. the effect of intellectual human capital on the level and variability 9. See Boisot M, Knowledge assets OUP (1998): knowledge of high-tech firms' market value', NBER Working Paper Series No ssets substitute for physical assets as the process of learning 7201 (1999) (concerning the effect of ties with star scientists on lrogresses. share value). .O. The development of social networks in the 'informational 31. Trade marks registration requires use of the mark to remain ociety' and the role of information technology is now a valid, and a mark that is not, or no longer is distinctive, or that is ommon topic in sociology (see eg Castells M, The rise of the confusing or deceptive to the consumer, may also be removed from 23 Jetwork Society, Blackwell (1996)).I use the terms 'knowledge the register. Intellectual Property and Intellectual Capital

32. All members of WTO must (eventually) abide by the TRIPS 80%): see Drummond D, 'Ate the courts down under properly agreement. handling patent disputes?' (2000) IP Forum 42, 10. 33. In other words, although standards may be converging, 41. There is some indication from empirical data that this is what registration must be sought in each country, and the laws of each firms do; the average time in the US between application date and jurisdiction (with all their distinct approaches, despite common the resolution of a lawsuit is 12.3 years.. That tends to suggest-- that treaty obligations) will differ, as will the level of effectiveness of firms are protecting an established market position dependent on the enforcement mechanisms available. An exception may be the outdated technology,-. against- the introduction of an innovation new domain name rights on the internet. which will affect their market: see on this topic, Lemley M, 34. For instance, specific exceptions may exist in one 'Reconceivmg patents in the age of ' (2000) The jurisdiction and not another, or be different in scope; some Journal of Small and Emerging Business Law 137 at 141. See also subject-matter may be expressly excepted from protection in Barton JH, 'Reforming the Patent System', SCIENCE, Vol287, 17 some jurisdictions and not in others. March 2000, 1933. 35. Which means that protection may or may not be available: 42. In facr recent scholarship concerning the effect of patents on for instance, whereas business method patents can now probably innovation tends towards stressing that patents may be useful, not be patented in the US (see State Street Bank & Trust Co v so much as incentives to innovate, but as property rights that form Signature Financial Group Inc 149 F. 3d 1368 (Fed Cir 1998)), the basis for transactions in the networked economy, ie as a this is not the case in most other jurisdictions; see also the mechanism of exchange rather than prohibition: see eg Lemley MA, American Inventors Protection Act, November 29, 1999 'Reconceiving patents in the age of venture capital', (2000) The (Intellectual Property and Communication Omnibus Reform Act Journal of Small and Emerging Business Law 4, 137; Allison J, of 1999, Title IV - Inventor Protection), which effectively Lemley MA, 'Empirical evidence on the validity of litigated patents' recognises the patentability of business methods. (1998) AIPLA Q J 26, 185. In the US, the economist Fritz Machlup 36. A survey has estimated the median cost of litigating a patent concluded that it would be irresponsible to create a patent system if in the US at US$ 1.5 million: AIPLA, Report of Economic the US did not have one, but also irresponsible to abolish the one Survey: 1999, Table 22. See also Kingston W, 'Reducing the cost they had (see Staff of Senate Subcommittee on Patents, of resolving intellectual property disputes' (1995) European and Copyrights, 85th Congress, 'An economic review of the patent Journal of Law and Economics 2, 85 - 92. system: study No 15, at 80 (Comm Print 1958)). In Australia 37. The choice between secrecy and publicity is usually a choice Mandeville, Lamberton & Bishop came to exactly the same between patenting and relying on trade secrets law. The choice conclusion: see Mandeville, Lamberton 81 Bishop, The economic may not be absolute, but one of timing. The timing of the filing effects of the Australian Patent System (1982). See also Lamberton of a patent application is an important policy issue, as it is often D, Science, technology and the Australian economy, Tudor Press thought that the wider the scope of patents that the law permits, (1970). the earlieipatent applications will be filed. The earlier an 43. See for instance, Barton J, 'Reforming the Patent System', application is filed, the sooner competitors will desist from above 41; Barton J, 'Patents and antitrust: a rethinking in light of identical research paths. This will limit the cost of duplication of patent breadth and sequential innovation' (1997) Antitrust Law investment in research in a race to invent. On the other hand, Journal 65, 449; Merges P, 'As many as six impossible patents this may increase the monopoly cost on society because of the before breakfast: propert rights for business concepts and patent scope of the patent granted, and will result in the problem of so- system reform' (1999) Berkeley Technology Law Journal 14, 577. :ailed 'blocking patents', and unjustifiable limitations on Much of the focus is on the potential chilling effects of doubtful Improver inventions. See Grady MF, Alexander JI, 'Patent law patents, and on the potential for abuse of patent power, in md rent dissipation' (1992) 78 Virginia Law Review 193; particular by multiple patenc owners. Patents can be construed as Merges R, 'Rent control in the patent district: observations on barriers to market entry. In terns of copyright, the anti-competitive :he Grady-Alexander thesis' 78 (1992) Virginia Law Review potential of computer program protection ha5 been a long-standing 359; Kitch, EW 'The nature and function of the patent system' bone of contention. 1978)J of L & Eco 20, 165; Merges, R, Nelson R, 'On the 44. Some empirical research has shown that the impact of patents :omplex economics of patents scope' (1990) Columbia Law on the cost of imitation is minimal: see Mansfield, Schwartz, ieview 90, 839. As to blocking patents, see Scotchmer S, Wagner, 'Imitation costs and patents: an empirical study' (1981) Standing on the Shoulders of Giants: cumulative innovation and The Economics Journal 91,907-918. latent law (1991) 5 J Econ Persp 29; Green J, Scotchmer S, 'On 45. In fact there is considerable general ex-ante cost involved, in he division of profits in sequential innovation' 26 Rand J Econ advanced industries, in simply keeping up with developments in the !O (1995); Lemley MA, 'The economics of improvement in field, as well as the cost involved in acquiring market capabilities in ntellectual property law' (1997) Texas Law Review 75, 989. a new technology. 18. The fact alone that information incorporated in a machine 46. Competitor A, a licensee in relation to technology Z from s encrypted does not mean that the purchaser is subject to an competitor B is less likely to avoid payment of a fair royalty to ~bligationof confidence not to access that information by competitor B for technology Y and vice versa. everse engineering (eg disencryption): see eg Mars UK Ltd u 47. As to other advantages in relation to patents, see also Lemley "eknowledge Ltd (1999) Ch D (Jacob J) 11/6/99. MA 'Reconceiving..', above 42 at 142 - 144 9. On this issue see Ellis TS, 'Distortion of patent economics 48. Concerning the importance of the multiplicity of LPR's ly litigation costs', in CASRIP, Streamlining International embodied in a single product, Merges R, 'lntellectual Property ntellectual Property (Hill et a1 eds) (1999), arguing that because Rights and the New Institutional Economics', above 21. ~fhigh costs of litigation weak patents amount to as high a 49. In the US, for instance, there is arguably an increasing trend to arrier to entry as strong patents, thus distorting patent have regard to the effectiveness of a firm at marketing innovations conomics. rather than only the inherent merit of the invention, by accepting 0. A recent study shows that approximately 54% of all the relevance of secondary factors such as the commercial and tigated patents in the US between 1989 and 1996 were held licensing success of an invention in assessing inventiveness: this did, with little variation between different areas of invention, thesis is put forward in Merges P, 'Commercial success and patent lthough some areas of invention were rarely litigated to a final standards: economic perspectives on innovation' (1998) 76 onclusion: see Allison JR, Lemley AM, 'Empirical evidence on California Law Review 805. That evidence of the application of le validity of litigated patents' (1998) AIPLA Quarterly Journal routine but time-consuming methods of investigation should be 6, 185. A recent study of published Australian court decisions treated as relevant in determining inventiveness in patents law was sncerning validity of patents in the period 1990 - 2000 argued in some important UK decisions: see eg In re Genentech's jtablished a failure rate of 66% (and an overall failure rate in Patent [I9891 RPC 147; Chiron v Organon Teknika [I9931 12 :rms of obtaining a remedy against an alleged infringer of EIPR D-285; Amagen u Chugai Pharmaceutical, 927 F.2d 1200, 1991; and Biogen u Medeva, [I9951 RPC 68. 50. See eg Telstra Corporation Limited u Desktop Marketing Systems Pty Ltd [2001] FCA 612 (25 May 2001): white pages attract copyright protection. 51. See for instance the discussion in Interlego AG u Croner Trading Pty Ltd (1993) AIPC 90-956; (1992) 111 ALR 597; (1992) 25 IPR 65; (1992) 39 FCR 348. 52. See sec 17 Designs Act 1906 (Cth). 53. For instance, employees have more extensive rights to their inventions in Germany (see Employed Inventors' Law of 1976) and also in the UK, although in the latter the employee's rights are more restricted (share of windfall profits). See, with respect to the argument as to the most appropriate statutory rules concerning employee inventions, Merges R, 'The law and economics of employee inventions' (1999) Harvard Journal of Law and Technology 13, 1. 54. As to employee-related strategies in the knowledge based firm, see Harvard Business Review, On knowledge management (1998); Horibe F, Managing knowledge workers: new skills and attitudes to unlock the intellectual capital in your , Wiley (1999). 55. University employees are in a special position. Divergent rules and customs have applied to academics for many years, giving them greater rights to certain forms of IP. In terms of patented inventions, there may be good arguments, related to academic freedom and independence, to grant them ownership rights. On the other hand, this can in fact amount to an expensive burden to bear.