Section III: Entrepreneurial Ventures and The Marketplace

Part 7: Intellectual : Patents, Trademarks, and Copyrights

by Russell S. Sobel

Introduction: This part of the course discusses rights.

Rights, Rights, and Intellectual Property Rights

The phrase intellectual property (IP) refers to the bundle of legal rights that arise from the creative genius of the human mind. But before we can understand those rights we must work our way down from a higher level concept. Intellectual property rights are a subset of private property rights, which in turn are a subset of rights in general. Thus, we start our exploration with the general concept of ‘rights’.

Understanding ‘Rights’: Government Granted Rights vs. Natural Rights

For the majority of human history, the rights individuals had were those granted to them by their governments, through kings or other rulers. These rights were distributed quite inequitably, and often arbitrarily. During the Age of Enlightenment (17th and 18th centuries), scholars such as English philosopher , helped to challenge the idea that rights were granted by governments, and instead argued that humans were simply born with rights instilled from nature (or God) and simply had these rights as the result of being alive. This is known as the idea of ‘natural rights’. Also, notably, John Locke even helped to write South Carolina’s first constitution.

Nowhere is this concept more familiar to most than in America’s founding documents, such as the U.S. Declaration of Independence, which reads: “We hold these truths to be self evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed…”

The idea expressed is one in which humans have rights that endowed to them by their Creator. One interesting difference in these contrasting views of rights is the question of: “is it possible for a government to violate a person’s rights?” For example, suppose in Cuba or North Korea someone is jailed or killed for speaking badly about the current dictatorial ruler of the country. Did the government violate that person’s rights? Under the government-grants-rights view, government can’t violate a person’s rights because that person never had those rights (in this case the right to free speech) to begin with. Under the natural-rights view, one can conclude that the government has violated a right the person innately had.

Perhaps most importantly, the ideas that follow from this concept of natural rights are that: (1) government’s main job is to protect and enforce the natural rights of individuals, and (2) that government powers should be constrained, for example by a constitution, to prevent government from violating the natural rights of its own citizens. Again, these are concepts embodied in the U.S. Declaration of Independence, that from above continues: “…That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

So if each of us is born with rights to our life and our labor, then we also own the fruits of our labor, including the things we create. This natural-rights view is at the heart of most Western-style legal systems in countries such as the United States and England, and lays the foundation for the constrained- government perspective present as well.

Negative and Positive Rights

It is also important to understand that in the way legal rights are enforced, only those that can be considered ‘negative rights’ are real rights that can be enforced. The contrasting idea is one of ‘positive rights’, which are not real legal rights. The difference is the obligations the rights impose on others. Negative rights only impose ‘refrain from’ obligations. For example, my right to life doesn’t mean you have to do anything… you don’t have to feed me, clothe me, care for me, give me money… rather it simply means you have to refrain from killing me. My right to my car is similar, you just have to refrain from stealing it.

In contrast a ‘positive right’ would be a right that imposed positive obligations requiring another individual devote effort or resources. Suppose, for example, we passed a tomorrow saying everyone has a right to ‘health care’, a right to ‘a nice house’, and a right to ‘a fun vacation’. Now suppose we see someone who is homeless, didn’t have fun on vacation, or who is in need of health car but didn’t get it. Who should have provided it? Who do we sue in court on their behalf? And doesn’t the concept of someone having, by force, to provide something for another person against their will violate that person’s right to their own labor?

In the case of a negative right, like the property right to my car, or my right to life, if someone violates that right we can (ideally) identify that person and hold them accountable. While an interested reader can delve deeper into these concepts by reading philosophy, this cursory introduction should be sufficient for us to understand that intellectual property rights, like other legal rights in the Western tradition are of a negative ‘refrain from’ type only.

As one quick example that should help to clarify, let us consider the ‘right to free speech’. If a John owns a radio station and he lets only the Democrat Party candidate Bill on the air, and refuses to let the Republican Party candidate Bob on his station, has he violated Bob’s right to free speech? The answer is no. Bob’s right to free speech does not mean someone has to provide anything for him. It only means people need to refrain from taking his ability to speak away if he is speaking somewhere he has a right to speak. For example, if Bob was on his own radio station, or a station that invited him (or in is front yard) speaking, nobody can forcefully shut him down, we have to refrain from doing that.

You can see this more clearly by considering the wording of the actual U.S. Constitution, Bill of Rights, Amendment I: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.” It simply states that Congress shall pass no law infringing upon these rights, not that one citizen needs to do anything for another.

Private Property Rights are a ‘Bundle’ of Legal Rights

Now let us turn to one specific type of right, the . As we discussed in an earlier lesson, well defined and enforced private property rights are the cornerstone of a market economy—they are the defining characteristic of ‘capitalism’ versus ‘socialism’. Recall socialism in its pure form does not allow for private , at least for productive resources, instead everything is owned collectively.

Like all rights, private property rights really represent a ‘bundle of legal rights’—meaning there are many different dimensions to or aspects of the right. Among these are the right to buy and sell (i.e., property is tradable), the right to the income flows produced, the right to lease it, and the right to exclusive use. The exclusive use right means that if you own something it is yours to use exclusively as you see fit. Nobody else can use it without your permission, even if they need it.

Importantly, property rights must be well-defined and protected to work. A system where property rights are unclear, or not protected simply won’t work well. It will have an outcome similar to when there are no property rights. What does it mean for something to not be privately owned? There are two alternatives, it may be unowned or owned in common. Consider the oceans, the moon, or even the air. Who owns these? Well, either everyone or no one. Either is a fine answer, and the same would be true for highways or national parks.

What we know is that when things are privately owned, it creates four strong incentives. The first is to give proper care. Items that are privately owned tend to be better cared for than those that are used or owned collectively. Second, privately owned items are also better conserved for the future because when current consumption is delayed, the owner receives the future reward. On commonly owned (or unowned) property these two incentives are not as strong, leading to what is know as ‘The Common Pool Problem’ or ‘The Tragedy of the ’. Overfishing of the oceans, polluted rivers, and trash piled up on the side of a highway are all examples of this phenomenon. So is a pizza or a bottle of liquor brought to a party for everyone to share. It sure does get consumed quickly. Its like if two people both can drill into a common underground pool of oil, they both have an incentive to pump as quickly as possible as any left behind simply gets taken by the other person.

Third, private property owners have an incentive to use their property in ways others value and also bear the opportunity cost of ignoring the wishes of others. When you go to sell your property what you get for it is what other people are willing to pay. If you do things to the property you control to make it more attractive to others you receive the reward. You can put purple countertops in your home, or cut the roof off your car with a chainsaw, or even burn a piece of art you own, but you have an incentive not to because you suffer the loss in value personally as an opportunity cost of forgone income. You have an incentive if you own an idea, for example, to use it in ways that create income for you, which means in ways others are willing to pay for—ways they value.

Fourth, and lastly, private property rights give the owner an incentive to mitigate the harm their property does to the property of others, because they can be held accountable for the damages. If you have a dog that bites someone else, you will have to pay for their medical care and potentially damages on top of that. This gives you an incentive to leash or muzzle your dog.

Types of Intellectual Property: Patents, Trademarks, Copyrights

We are now ready to turn to intellectual property (IP) which refers to the bundle of legal rights that arise from the creative genius of the human mind. Thomas L. Peterson, on howstuffworks.com defines the concept well by saying: “like real and rights protect one's ownership interest in tangible objects, such as land and automobiles, IP rights protect one's ownership interest in intangible objects, such as the idea behind an invention, the music score for a Broadway play and the name or logo used to brand a product.” There are three main types of IP rights, patents, trademarks, and copyrights.

A patent protects the intellectual property rights associated with the design of a product or process. Patents are issued by the United States Patent and Trademark Office and are enforceable only within the United States. In other words, having a U.S. patent does not protect you from someone in another country copying your idea unless you also have a patent in that country.

A patent owner has the ‘exclusive right’ to stop others from making, using, selling or offering for sale the product, or process of making the product, that is described by the patent claims. Your ability to use your patent can be blocked if one of the parts of the item you patent is covered by an earlier patent to someone else. Peterson gives the example of a person patenting a ‘rocking chair’ but someone else already having an earlier patent on the rockers used on the chair. You can still patent the idea, but you cannot produce the chair unless you get permission from the owner of the rocker patent. Patents can be licensed, so you could pay a licensing fee to the holder of the rocker patent in exchange for permission to sell the chair. Patents normally last 20 years from the date the patent application is filed. This gives the patent holder a temporary monopoly on the ability to produce the item.

A trademark addresses the need for product identification, or branding, among consumers of the product. A trademark is defined by Peterson as "any word, name, symbol, or device, or any combination, used, or intended to be used, in commerce to identify and distinguish the goods of one manufacturer or seller from goods manufactured or sold by others, and to indicate the source of the goods. In short, a trademark is a brand name." Trademarks are also issued by the United States Patent and Trademark Office. The term is 10 years, with 10-year renewal terms and the owner must submit proof the trademark is still in use for renewal. Note that you can trademark more than just a name or symbol, for example many beverage makers have trademarks covering the shape of their bottle, for example. Service marks (for a service), collective marks (for a group or organization), and certification marks (to certify quality, accuracy), are closely related.

A copyright protects the expression of an idea through drawings, pictures and words. It can be registered, but this is not required. All that you need to establish a patent is to put the usual “©” mark on the item with your name. Photographers, for example, often post pictures online with “© Cary McDonald” embedded in the image to protect their rights to usage of the photo, and authors can put this on things they right. Unlike a patent which protects the idea itself, copyright protects only the expression of the idea through a drawing or words. To be eligible for copyright protection a work must be original to the author, but it may contain non-original elements. Song lyrics that sample a prior song, for example, can be copyrighted. The period for a copyright depends on when created, but generally terminates 70 years after the death of the author (or longer for corporate works). There is an interesting story you can look at if you want on how the length has been changed in recent times, under what is know as the ‘Micky Mouse Protection Act’ or the ‘Sonny Bono Act’.

Is Intellectual Property the Same as Other ? Should it be Protected?

Interestingly, there is a debate as to whether intellectual property should be protected like other tangible property. While intellectual property is a product of one’s labor efforts, it has important differences. As Peter S. Menell puts it in his 2007 article "Intellectual Property and the Property Rights Movement" in the Cato Institute's Regulation, “Unlike tangible goods, knowledge and creative works are public goods in the sense that their use is nonrivalrous. One agent’s use does not limit another agent’s use. Indeed, in its natural state, knowledge is also ‘nonexcludable.’ That is, even if someone claims to own the knowledge, it is difficult to exclude others from using it.”

The point is this, if I own the property right to a car, and you take the car, I no longer can use the car. That means the use of the car is rivalrous in consumption. We are rivals for its use. In contrast, if I come up with an idea, say how to tie shoes differently, and you start tying your shoes that way also, it doesn’t take away my ability to also use the idea. There is no reduction in my ability to use my idea. There is a reduction, perhaps in my ability to earn income from my idea if you can copy it. But some argue that giving me an intellectual property right that allows me to get a monopoly flow of income from the idea isn’t right to begin with.

In addition, by creating a temporary monopoly, intellectual property rights such as patents lead to higher prices, reduced output and availability, and also may reduce the ability to use the idea to come up with additional innovations.

The counter argument—that is the ‘traditional’ argument in favor of patents and intellectual property protection simply flows from our lessons regarding Israel Kirzner’s ideas of discovery. Profits incentivize discovery. The fact that the potential monopoly profits are awaiting the creation of a good idea, according to that logic, leads the innovation to come more quickly. We have more innovations and faster rates of discovery because of the higher monopoly associated with the enforcement of intellectual property rights.

Software Patents

Worthwhile of a specific mention are the changes to the regarding software patents. At the beginning of the computer and Internet era, you were able to patent things that were simply a technological implementation of an old idea. For example, you might be able to get a patent on a way to implement the game of poker using software. Amazon famously patented ‘one click ordering’ and was able to enforce it in a way that made Barnes and Noble add an additional step for purchasing as well as made Apple have to pay for the right to use one click ordering on iTunes and app store purchases. Due to the proliferation of these patents, and the rise of what are known as ‘patent trolls’—patent- licensing firms that buy a lot of small patents then go around suing everyone for violating them, there was an important Supreme Court decision in 2014 that changed the scope of what can be patented. No longer can a patent be awarded for simply using a computer to implement a patent-ineligible abstract idea. Case law continues to evolve on the margins of this new decision. The court decision does seem to have accomplished its goal, as one of the most famous ‘patent troll’ firms, Shipping & Transit LLC (formerly known as Arrivalstar), filed for bankruptcy in 2018 after a decade of litigation on more than 500 patent suits involving computerized notifications regarding delivery.

Conclusion

Intellectual property protection is one of the main ways to protect an idea from simply being copied by competition. Without this protection a firm may start up and its idea copied and implemented by other firms. Without this protection it can be hard to secure investors. Like other rights, and property rights, intellectual property rights give the holder a negative right to exclusive use, and represent a bundle of legal rights that create strong positive incentives for the owner to use the property in ways others value.