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Political Philosophy, Competition, and Competition Law: The Road to and from Neoliberalism, Part 2

Lazar Radic —  3 February 2022

This post is the second in a three-part series. The first installment can be found here and the third can be found here.

In just over a century since its dawn, liberalism had reshaped much of the world along the lines of individualism, free markets, private property, contract, trade, and competition. A modest laissez-faire political philosophy that had begun to germinate in the minds of French Physiocrats in the early 18th century had, scarcely 150 years later, inspired the constitution of the world’s nascent leading power, the United States. But it wasn’t all plain sailing, as liberalism’s expansion eventually galvanized strong social, political, cultural, economic and even spiritual opposition, which coalesced around two main ideologies: socialism and fascism.

In this post, I explore the collectivist backlash against liberalism, its deeper meaning from the perspective of political philosophy, and the main features of its two main antagonists—especially as they relate to competition and competition regulation. Ultimately, the purpose is to show that, in trying to respond to the collectivist threat, successive iterations of neoliberalism integrated some of collectivism’s key postulates in an attempt to create a synthesis between opposing philosophical currents. Yet this “mostly” liberal synthesis, which serves as the philosophical basis of many competition systems today, is afflicted with the same collectivist flaws that the synthesis purported to overthrow (as I will elaborate in subsequent posts).

The Collectivist Backlash

By the early 20th century, two deeply illiberal movements bent on exposing and demolishing the fallacies and contradictions of liberalism had succeeded in capturing the imagination and support of the masses. These collectivist ideologies were Marxian socialism/communism on the left and fascism/Nazism on the right. Although ultimately distinct, they both rejected the basic postulates of classical liberalism. 

Socially, both agreed that liberalism uprooted traditional ways of life and dissolved the bonds of solidarity that had hitherto governed social relationships. This is the view expressed, e.g., in Karl Polanyi’s influential book The Great Transformation, in which the Christian socialist Polanyi contends that “disembedded” liberal markets would inevitably come to be governed again by the principles of solidarity and reciprocity (under socialism/communism). Similarly, although not technically a work on political economy or philosophy, Knut Hamsun’s 1917 novel Growth of the Soil perfectly captures the right’s rejection of liberal progress, materialism, industrialization, and the idealization of traditional bucolic life. The Norwegian Hamsun, winner of the 1920 Nobel Prize in Literature, later became an enthusiastic supporter of the Third Reich. 

Politically and culturally, Marxist historical materialism posited that liberal democracy (individual freedoms, periodic elections, etc.) and liberal culture (literature, art, cinema) served the interests of the economically dominant class: the bourgeoisie, i.e., the owners of the means of production. Fascists and Nazis likewise deplored liberal democracy as a sign of decadence and weakness and viewed liberal culture as an oxymoron: a hotbed of degeneracy built on the dilution of national and racial identities. 

Economically, the more theoretically robust leftist critiques rallied around Marx’ scientific socialism, which held that capitalism—the economic system that served as the embodiment of a liberal social order built on private property, contract, and competition—was exploitative and doomed to consume itself. From the right, it was argued that liberalism enabled individual interest to override what was good for the collective—an unpardonable sin in the eyes of an ideology built around robust nodes of collectivist identity, such as nation, race, and history.

A Recurrent Civilizational Struggle

The rise of socialism and fascism marked the beginning of a civilizational shift that many have referred to as the lowest ebb of liberalism. By the 1930s, totalitarian regimes utterly incompatible with a liberal worldview were in place in several European countries, such as Italy, Russia, Germany, Portugal, Spain, and Romania. As Austrian economist Ludwig Von Mises lamented, liberals and liberal ideas—at least, in the classical sense—had been driven to the fringes of society and academia, subject of scorn and ridicule. Even the liberally oriented, like economist John Maynard Keynes, were declaring the “end of laissez-faire.” 

At its most basic level, I believe that the conflict can be understood, from a philosophical perspective, as an iteration of the recurrent struggle between individualism and collectivism.

For instance, the German sociologist Ferdinand Tonnies has described the perennial tension between two elementary ways of conceiving the social order: Gesellschaft and Gemeinschaft. Gesellschaft refers to societies made up of individuals held together by formal bonds, such as contracts, whereas Gemeinschaft refers to communities held together by organic bonds, such as kinship, which function together as parts of an integrated whole. American law professor David Gerber explains that, from the Gemeinschaft perspective, competition was seen as an enemy:

Gemeinschaft required co-operation and the accommodation of individual interests to the commonwealth, but competition, in contrast, demanded that individuals be concerned first and foremost with their own self-interest. From this communitarian perspective, competition looked suspiciously like exploitation. The combined effect of competition and of political and economic inequality was that the strong would get stronger, the weak would get weaker, and the strong would use their strength to take from the weak.

Tonnies himself thought that dominant liberal notions of Gesellschaft would inevitably give way to greater integration of a socialist Gemeinschaft. This was somewhat reminiscent of Polanyi’s distinction between embedded and disembedded markets; Karl Popper’s “open” and “closed” societies; and possibly, albeit somewhat more remotely, David Hume’s distinction between “concord” and “union.” While we should be wary of reductivism, a common theme underlying these works (at least two of which are not liberal) is the conflict between opposing views of society: one that posits the subordination of the individual to some larger community or group versus another that anoints the individual’s well-being as the ultimate measure of the value of social arrangements. That basic tension, in turn, reverberates across social and economic questions, including as they relate to markets, competition, and the functions of the state.

 Competition Under Marxism

Karl Marx argued that the course of history was determined by material relations among the social classes under any given system of production (historical materialism and dialectical materialism, respectively). Under that view, communism was not a desirable “state of affairs,” but the inevitable consequence of social forces as they then existed. As Marx and Friedrich Engels wrote in The Communist Manifesto:

Communism is for us not a state of affairs which is to be established, an ideal to which reality [will] have to adjust itself. We call communism the real movement which abolishes the present state of things. The conditions of this movement result from the premises now in existence.

Thus, following the ineluctable laws of history, which Marx claimed to have discovered, capitalism would inevitably come to be replaced by socialism and, subsequently, communism. Under socialism, the means of production would be controlled not by individuals interacting in a free market, but by the political process under the aegis of the state, with the corollary that planning would come to substitute for competition as the economy’s steering mechanism. This would then give way to communism: a stateless utopia in which everything would be owned by the community and where there would be no class divisions. This would come about as a result of the interplay of several factors inherent to capitalism, such as the exploitation of the working class and the impossibility of sustained competition.

Per Marx, under capitalism, owners of the means of production (i.e., the capitalists or the bourgeoisie) appropriate the surplus value (i.e., the difference between the sale price of a product and the cost to produce it) generated by workers. Thus, the lower the wages and the longer the working hours of the worker, the greater the profit accrued to the capitalist. This was not an unfortunate byproduct that could be reformed, Marx posited, but a central feature of the system that was solvable only through revolution. Moreover, the laws, culture, media, politics, faith, and other institutions that might ordinarily open alternative avenues to nonviolent resolution of class tensions (the “super-structure”) were themselves byproducts of the underlying material relations of production (“structure” or “base”), and thus served to justify and uphold them.

The Marxian position further held that competition—the lodestar and governing principle of the capitalist economy—was, like the system itself, unsustainable. It would inevitably end up cannibalizing itself. But the claim is a bit more subtle than critics of communism often assume. As Leon Trotsky wrote in the 1939 pamphlet Marxism in our time:

Relations between capitalists, who exploit the workers, are defined by competition, which for long endures as the mainspring of capitalist progress.

Two notions expressed seamlessly in Trotsky’s statement need to be understood about the Marxian perception of competition. The first is that, since capitalism is exploitative of workers and competition among capitalists is the engine of capitalism, competition is itself effectively a mechanism of exploitation. Capitalists compete through the cheapening of commodities and the subsequent reinvestment of the surplus appropriated from labor into the expansion of productivity. The most exploitative capitalist, therefore, generally has the advantage (this hinges, of course, largely on the validity of the labor theory of value).

At the same time, however, Marxists (including Marx himself) recognized the economic and technological progress brought about through capitalism and competition. This is what Trotsky means when he refers to competition as the “mainspring of capitalist progress” and, by extension, the “historical justification of the capitalist.” The implication is that, if competition were to cease, the entire capitalist edifice and the political philosophy undergirding it (liberalism) would crumble, as well.

Whereas liberalism and competition were intertwined, liberalism and monopoly could not coexist. Instead, monopolists demanded—and, due to their political clout, were able to obtain—an increasingly powerful central state capable of imposing protective tariffs and other measures for their benefit and protection. Trotsky again:

The elimination of competition by monopoly marks the beginning of the disintegration of capitalist society. Competition was the creative mainspring of capitalism and the historical justification of the capitalist. By the same token the elimination of competition marks the transformation of stockholders into social parasites. Competition had to have certain liberties, a liberal atmosphere, a regime of democracy, of commercial cosmopolitanism. Monopoly needs as authoritative government as possible, tariff walls, “its own” sources of raw materials and arenas of marketing (colonies). The last word in the disintegration of monopolistic capital is fascism.

Marxian theory posited that this outcome was destined to happen for two reasons. First, because:

The battle of competition is fought by cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labor, and this again on the scale of production. Therefore, the larger capital beats the smaller.

In other words, competition stimulated the progressive development of productivity, which depended on the scale of production, which depended, in turn, on firm size. Ultimately, therefore, competition ended up producing a handful of large companies that would subjugate competitors and cannibalize competition. Thus, the more wealth that capitalism generated—and Marx had no doubts that capitalism was a wealth-generating machine—the more it sowed the seeds of its own destruction. Hence:

While stimulating the progressive development of technique, competition gradually consumes, not only the intermediary layers but itself as well. Over the corpses and the semi-corpses of small and middling capitalists, emerges an ever-decreasing number of ever more powerful capitalist overlords. Thus, out of “honest”, “democratic”, “progressive” competition grows irrevocably “harmful”, “parasitic”, “reactionary” monopoly.

The second reason Marxists believed the downfall of capitalism was inevitable is that the capitalists squeezed out of the market by the competitive process would become proletarians, which would create a glut of labor (“a growing reserve army of the unemployed”), which would in turn depress wages. This process of proletarianization, combined with the “revolutionary combination by association” of workers in factories would raise class consciousness and ultimately lead to the toppling of capitalism and the ushering in of socialism.

Thus, there is a clear nexus in Marxian theory between the end of competition and the end of capitalism (and therefore liberalism), whereby monopoly is deduced from the inherent tendencies of capitalism, and the end of capitalism, in turn, is deduced from the ineluctable advent of monopoly. What follows (i.e., socialism and communism) are collectivist systems that purport to be run according to the principles of solidarity and cooperation (“from each according to his abilities, to each according to his needs”), where there is therefore no place (and no need) for competition. Instead, the Marxian Gemeinschaft would organize the economy around rationalistic lines, substituting cut-throat competition for centralized command by the state (later, the community) that would rein in hitherto uncontrollable economic forces in a heroic victory over the chaos and unpredictability of capitalism. This would, of course, also bring about the end of liberalism, with individualism, private property, and other liberal freedoms jettisoned as mouthpieces of bourgeoisie class interests. Chairman Mao Zedong put it succinctly:

We must affirm anew the discipline of the Party, namely:

1. The individual is subordinate to the organization;

2. The minority is subordinate to the majority.

Competition Under Fascism/Nazism

Formidable as it was, the Marxian attack on liberalism was just one side of the coin. Decades after the articulation of Marxian theory in the mid-19th century, fascism—founded by former socialist Benito Mussolini in 1915—emerged as a militant alternative to both liberalism and socialism/communism.

In essence, fascism was, like communism, unapologetically collectivist. But whereas socialists considered class to be the relevant building block of society, fascists viewed the individual as part of a greater national, racial, and historical entity embodied in the state and its leadership. As Mussolini wrote in his 1932 pamphlet The Doctrine of Fascism:

Anti-individualistic, the Fascist conception of life stresses the importance of the State and accepts the individual only in so far as his interests coincide with those of the State, which stands for the conscience of the universal, will of man as a historic entity. It is opposed to classical liberalism […] liberalism denied the State in the name of the individual; Fascism reasserts.

Accordingly, fascism leads to an amalgamation of state and individual that is not just a politico-economic arrangement where the latter formally submits to the former, but a conception of life. This worldview is, of course, diametrically opposed to core liberal principles, such as personal freedom, individualism, and the minimal state. And surely enough, fascists saw these liberal values as signs of civilizational decadence (as expressed most notably by Oswald Spengler in The Decline of the West—a book that greatly inspired Nazi ideology). Instead, they posited that the only freedom worthy of the name existed within the state; that peace and cosmopolitanism were illusory; and that man was man only by virtue of his membership and contribution to nation and race.

But fascism was also opposed to Marxian socialism. At its most basic, the schism between the two worldviews can be understood in terms of the fascist rejection of materialism, which was a centerpiece of Marxian thought. Fascists denied the equivalence of material well-being and happiness, instead viewing man as fulfilled by hardship, war, and by playing his part in the grand tapestry of history, whose real protagonists were nation-states. While admitting the importance of economic life—e.g., of efficiency and technological innovation—fascists denied that material relations unequivocally determined the course of history, insisting instead on the preponderance of spiritual and heroic acts (i.e., acts with no economic motive) as drivers of social change. “Sanctity and heroism,” Mussolini wrote, are at the root of the fascist belief system, not material self-interest.  

This belief system also extended to economic matters, including competition. The Third Reich respected private property rights to some degree—among other reasons, because Adolf Hitler believed it would encourage creative competition and innovation. The Nazis’ overarching principle, however, was that all economic activity and all private property ultimately be subordinated to the “common good,” as interpreted by the state. In the words of Hitler:

I want everyone to keep what he has earned subject to the principle that the good of the community takes priority over that of the individual. But the State should retain control; every owner should feel himself to be an agent of the State. […] The Third Reich will always retain the right to control property owners.

The solution was a totalitarian system of government control that maintained private enterprise and profit incentives as spurs to efficient management, but narrowly circumscribed the traditional freedom of entrepreneurs. Economic historians Christoph Buchheim and Jonas Scherner have characterized the Nazis’ economic system as a “state-directed private ownership economy,” a partnership in which the state was the principal and the business was the agent. Economic activity would be judged according to the criteria of “strategic necessity and social utility,” encompassing an array of social, political, practical, and ideological goals. Some have referred to this as the “primacy of politics over economics” approach.

For instance, in supervising cross-border acquisitions (today’s mergers), the state “sought to suppress purely economic motives and to substitute some rough notion of ‘racial political’ priority when supervising industrial acquisitions or controlling existing German subsidiaries.” The Reich selectively applied the 1933 Act for the Formation of Compulsory Cartels in regulating cartels that had been formed under the Weimar Republic with the Cartel Act of 1923. But the legislation also appears to have been applied to protect small and medium-sized enterprises, an important source of the party’s political support, from ruinous competition. This is reminiscent of German industrialist and Nazi supporter Gustav Krupp’s “Third Form”: 

Between “free” economy and state capitalism there is a third form: the economy that is free from obligations, but has a sense of inner duty to the state. 

In short, competition and individual achievement had to be balanced with cooperation, mediated by the self-appointed guardians of the “general interest.” In contrast with Marxian socialism/communism, the long-term goal of the Nazi regime was not to abolish competition, but to harness it to serve the aims of the regime. As Franz Böhm—cofounder, with Walter Eucken, of the Freiburg School and its theory of “ordoliberalism”—wrote in his advice to the Nazi government:

The state regulatory framework gives the Reich economic leadership the power to make administrative commands applying either the indirect or the direct steering competence according to need, functionality, and political intent. The leadership may go as far as it wishes in this regard, for example, by suspending competition-based economic steering and returning to it when appropriate. 

Conclusion

After a century of expansion, opposition to classical liberalism started to coalesce around two nodes: Marxism on the left, and fascism/Nazism on the right. What ensued was a civilizational crisis of material, social, and spiritual proportions that, at its most basic level, can be understood as an iteration of the perennial struggle between individualism and collectivism. On the one hand, liberals like J.S. Mill had argued forcefully that “the only freedom which deserves the name, is that of pursuing our own good in our own way.” In stark contrast, Mussolini wrote that “fascism stands for liberty, and for the only liberty worth having, the liberty of the state and of the individual within the state.” The former position is rooted in a humanist view that enshrines the individual at the center of the social order; the latter in a communitarian ideal that sees him as subordinate to forces that supersede him.

As I have explained in the previous post, the philosophical undercurrents of both positions are ancient. A more immediate precursor of the collectivist standpoint, however, can be found in German idealism and particularly in Georg Wilhelm Friedrich Hegel. In The Philosophy of Right, he wrote:

A single person, I need hardly say, is something subordinate, and as such he must dedicate himself to the ethical whole. Hence, if the state claims life, the individual must surrender it. All the worth which the human being possesses […] he possesses only through the state.

This broader clash is reflected, directly and indirectly, in notions of competition and competition regulation. Classical liberals sought to liberate competition from regulatory fetters. Marxism “predicted” its downfall and envisioned a social order without it. Fascism/Nazism sought to wrest it from the hands of greedy self-interest and mold it to serve the many and the fluctuating objectives of the state and its vision of the common good. 

In the next post, I will discuss how this has influenced the neoliberal philosophy that is still at the heart of many competition systems today. I will argue that two strands of neoliberalism emerged, which each attempted to resolve the challenge of collectivism in distinct ways. 

One strand, associated with a continental understanding of liberalism and epitomized by the Freiburg School, sought to strike a “mostly liberal” compromise between liberalism and collectivism—a “Third Way” between opposites. In doing so, however, it may have indulged in some of the same collectivist vices that it initially sought to avoid— such as vast government discretion and the imposition of myriad “higher” goals on society. 

The other strand, represented by Anglo-American liberalism of the sort espoused by Friedrich Hayek and Milton Friedman, was less conciliatory. It attempted to reform, rather than reinvent, liberalism. Their prescriptions involved creating a strong legal framework conducive to economic efficiency against a background of limited government discretion, freedom, and the rule of law.

In Antitrust & Competition, Cartels, Constitutional Law, International, Monopolization, Truth on the Market , , , , , , ,
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The Problem of Data Property Rights

Dirk Auer —  23 March 2021

Policy discussions about the use of personal data often have “less is more” as a background assumption; that data is overconsumed relative to some hypothetical optimal baseline. This overriding skepticism has been the backdrop for sweeping new privacy regulations, such as the California Consumer Privacy Act (CCPA) and the EU’s General Data Protection Regulation (GDPR).

More recently, as part of the broad pushback against data collection by online firms, some have begun to call for creating property rights in consumers’ personal data or for data to be treated as labor. Prominent backers of the idea include New York City mayoral candidate Andrew Yang and computer scientist Jaron Lanier.

The discussion has escaped the halls of academia and made its way into popular media. During a recent discussion with Tesla founder Elon Musk, comedian and podcast host Joe Rogan argued that Facebook is “one gigantic information-gathering business that’s decided to take all of the data that people didn’t know was valuable and sell it and make f***ing billions of dollars.” Musk appeared to agree.

The animosity exhibited toward data collection might come as a surprise to anyone who has taken Econ 101. Goods ideally end up with those who value them most. A firm finding profitable ways to repurpose unwanted scraps is just the efficient reallocation of resources. This applies as much to personal data as to literal trash.

Unfortunately, in the policy sphere, few are willing to recognize the inherent trade-off between the value of privacy, on the one hand, and the value of various goods and services that rely on consumer data, on the other. Ideally, policymakers would look to markets to find the right balance, which they often can. When the transfer of data is hardwired into an underlying transaction, parties have ample room to bargain.

But this is not always possible. In some cases, transaction costs will prevent parties from bargaining over the use of data. The question is whether such situations are so widespread as to justify the creation of data property rights, with all of the allocative inefficiencies they entail. Critics wrongly assume the solution is both to create data property rights and to allocate them to consumers. But there is no evidence to suggest that, at the margin, heightened user privacy necessarily outweighs the social benefits that new data-reliant goods and services would generate. Recent experience in the worlds of personalized medicine and the fight against COVID-19 help to illustrate this point.

Data Property Rights and Personalized Medicine

The world is on the cusp of a revolution in personalized medicine. Advances such as the improved identification of biomarkers, CRISPR genome editing, and machine learning, could usher a new wave of treatments to markedly improve health outcomes.

Personalized medicine uses information about a person’s own genes or proteins to prevent, diagnose, or treat disease. Genetic-testing companies like 23andMe or Family Tree DNA, with the large troves of genetic information they collect, could play a significant role in helping the scientific community to further medical progress in this area.

However, despite the obvious potential of personalized medicine, many of its real-world applications are still very much hypothetical. While governments could act in any number of ways to accelerate the movement’s progress, recent policy debates have instead focused more on whether to create a system of property rights covering personal genetic data.

Some raise concerns that it is pharmaceutical companies, not consumers, who will reap the monetary benefits of the personalized medicine revolution, and that advances are achieved at the expense of consumers’ and patients’ privacy. They contend that data property rights would ensure that patients earn their “fair” share of personalized medicine’s future profits.

But it’s worth examining the other side of the coin. There are few things people value more than their health. U.S. governmental agencies place the value of a single life at somewhere between $1 million and $10 million. The commonly used quality-adjusted life year metric offers valuations that range from $50,000 to upward of $300,000 per incremental year of life.

It therefore follows that the trivial sums users of genetic-testing kits might derive from a system of data property rights would likely be dwarfed by the value they would enjoy from improved medical treatments. A strong case can be made that policymakers should prioritize advancing the emergence of new treatments, rather than attempting to ensure that consumers share in the profits generated by those potential advances.

These debates drew increased attention last year, when 23andMe signed a strategic agreement with the pharmaceutical company Almirall to license the rights related to an antibody Almirall had developed. Critics pointed out that 23andMe’s customers, whose data had presumably been used to discover the potential treatment, received no monetary benefits from the deal. Journalist Laura Spinney wrote in The Guardian newspaper:

23andMe, for example, asks its customers to waive all claims to a share of the profits arising from such research. But given those profits could be substantial—as evidenced by the interest of big pharma—shouldn’t the company be paying us for our data, rather than charging us to be tested?

In the deal’s wake, some argued that personal health data should be covered by property rights. A cardiologist quoted in Fortune magazine opined: “I strongly believe that everyone should own their medical data—and they have a right to that.” But this strong belief, however widely shared, ignores important lessons that law and economics has to teach about property rights and the role of contractual freedom.

Why Do We Have Property Rights?

Among the many important features of property rights is that they create “excludability,” the ability of economic agents to prevent third parties from using a given item. In the words of law professor Richard Epstein:

[P]roperty is not an individual conception, but is at root a social conception. The social conception is fairly and accurately portrayed, not by what it is I can do with the thing in question, but by who it is that I am entitled to exclude by virtue of my right. Possession becomes exclusive possession against the rest of the world…

Excludability helps to facilitate the trade of goods, offers incentives to create those goods in the first place, and promotes specialization throughout the economy. In short, property rights create a system of exclusion that supports creating and maintaining valuable goods, services, and ideas.

But property rights are not without drawbacks. Physical or intellectual property can lead to a suboptimal allocation of resources, namely market power (though this effect is often outweighed by increased ex ante incentives to create and innovate). Similarly, property rights can give rise to thickets that significantly increase the cost of amassing complementary pieces of property. Often cited are the historic (but contested) examples of tolling on the Rhine River or the airplane patent thicket of the early 20th century. Finally, strong property rights might also lead to holdout behavior, which can be addressed through top-down tools, like eminent domain, or private mechanisms, like contingent contracts.

In short, though property rights—whether they cover physical or information goods—can offer vast benefits, there are cases where they might be counterproductive. This is probably why, throughout history, property laws have evolved to achieve a reasonable balance between incentives to create goods and to ensure their efficient allocation and use.

Personal Health Data: What Are We Trying to Incentivize?

There are at least three critical questions we should ask about proposals to create property rights over personal health data.

  1. What goods or behaviors would these rights incentivize or disincentivize that are currently over- or undersupplied by the market?
  2. Are goods over- or undersupplied because of insufficient excludability?
  3. Could these rights undermine the efficient use of personal health data?

Much of the current debate centers on data obtained from direct-to-consumer genetic-testing kits. In this context, almost by definition, firms only obtain consumers’ genetic data with their consent. In western democracies, the rights to bodily integrity and to privacy generally make it illegal to administer genetic tests against a consumer or patient’s will. This makes genetic information naturally excludable, so consumers already benefit from what is effectively a property right.

When consumers decide to use a genetic-testing kit, the terms set by the testing firm generally stipulate how their personal data will be used. 23andMe has a detailed policy to this effect, as does Family Tree DNA. In the case of 23andMe, consumers can decide whether their personal information can be used for the purpose of scientific research:

You have the choice to participate in 23andMe Research by providing your consent. … 23andMe Research may study a specific group or population, identify potential areas or targets for therapeutics development, conduct or support the development of drugs, diagnostics or devices to diagnose, predict or treat medical or other health conditions, work with public, private and/or nonprofit entities on genetic research initiatives, or otherwise create, commercialize, and apply this new knowledge to improve health care.

Because this transfer of personal information is hardwired into the provision of genetic-testing services, there is space for contractual bargaining over the allocation of this information. The right to use personal health data will go toward the party that values it most, especially if information asymmetries are weeded out by existing regulations or business practices.

Regardless of data property rights, consumers have a choice: they can purchase genetic-testing services and agree to the provider’s data policy, or they can forgo the services. The service provider cannot obtain the data without entering into an agreement with the consumer. While competition between providers will affect parties’ bargaining positions, and thus the price and terms on which these services are provided, data property rights likely will not.

So, why do consumers transfer control over their genetic data? The main reason is that genetic information is inaccessible and worthless without the addition of genetic-testing services. Consumers must pass through the bottleneck of genetic testing for their genetic data to be revealed and transformed into usable information. It therefore makes sense to transfer the information to the service provider, who is in a much stronger position to draw insights from it. From the consumer’s perspective, the data is not even truly “transferred,” as the consumer had no access to it before the genetic-testing service revealed it. The value of this genetic information is then netted out in the price consumers pay for testing kits.

If personal health data were undersupplied by consumers and patients, testing firms could sweeten the deal and offer them more in return for their data. U.S. copyright law covers original compilations of data, while EU law gives 15 years of exclusive protection to the creators of original databases. Legal protections for trade secrets could also play some role. Thus, firms have some incentives to amass valuable health datasets.

But some critics argue that health data is, in fact, oversupplied. Generally, such arguments assert that agents do not account for the negative privacy externalities suffered by third-parties, such as adverse-selection problems in insurance markets. For example, Jay Pil Choi, Doh Shin Jeon, and Byung Cheol Kim argue:

Genetic tests are another example of privacy concerns due to informational externalities. Researchers have found that some subjects’ genetic information can be used to make predictions of others’ genetic disposition among the same racial or ethnic category.  … Because of practical concerns about privacy and/or invidious discrimination based on genetic information, the U.S. federal government has prohibited insurance companies and employers from any misuse of information from genetic tests under the Genetic Information Nondiscrimination Act (GINA).

But if these externalities exist (most of the examples cited by scholars are hypothetical), they are likely dwarfed by the tremendous benefits that could flow from the use of personal health data. Put differently, the assertion that “excessive” data collection may create privacy harms should be weighed against the possibility that the same collection may also lead to socially valuable goods and services that produce positive externalities.

In any case, data property rights would do little to limit these potential negative externalities. Consumers and patients are already free to agree to terms that allow or prevent their data from being resold to insurers. It is not clear how data property rights would alter the picture.

Proponents of data property rights often claim they should be associated with some form of collective bargaining. The idea is that consumers might otherwise fail to receive their “fair share” of genetic-testing firms’ revenue. But what critics portray as asymmetric bargaining power might simply be the market signaling that genetic-testing services are in high demand, with room for competitors to enter the market. Shifting rents from genetic-testing services to consumers would undermine this valuable price signal and, ultimately, diminish the quality of the services.

Perhaps more importantly, to the extent that they limit the supply of genetic information—for example, because firms are forced to pay higher prices for data and thus acquire less of it—data property rights might hinder the emergence of new treatments. If genetic data is a key input to develop personalized medicines, adopting policies that, in effect, ration the supply of that data is likely misguided.

Even if policymakers do not directly put their thumb on the scale, data property rights could still harm pharmaceutical innovation. If existing privacy regulations are any guide—notably, the previously mentioned GDPR and CCPA, as well as the federal Health Insurance Portability and Accountability Act (HIPAA)—such rights might increase red tape for pharmaceutical innovators. Privacy regulations routinely limit firms’ ability to put collected data to new and previously unforeseen uses. They also limit parties’ contractual freedom when it comes to gathering consumers’ consent.

At the margin, data property rights would make it more costly for firms to amass socially valuable datasets. This would effectively move the personalized medicine space further away from a world of permissionless innovation, thus slowing down medical progress.

In short, there is little reason to believe health-care data is misallocated. Proposals to reallocate rights to such data based on idiosyncratic distributional preferences threaten to stifle innovation in the name of privacy harms that remain mostly hypothetical.

Data Property Rights and COVID-19

The trade-off between users’ privacy and the efficient use of data also has important implications for the fight against COVID-19. Since the beginning of the pandemic, several promising initiatives have been thwarted by privacy regulations and concerns about the use of personal data. This has potentially prevented policymakers, firms, and consumers from putting information to its optimal social use. High-profile issues have included:

Each of these cases may involve genuine privacy risks. But to the extent that they do, those risks must be balanced against the potential benefits to society. If privacy concerns prevent us from deploying contact tracing or green passes at scale, we should question whether the privacy benefits are worth the cost. The same is true for rules that prohibit amassing more data than is strictly necessary, as is required by data-minimization obligations included in regulations such as the GDPR.

If our initial question was instead whether the benefits of a given data-collection scheme outweighed its potential costs to privacy, incentives could be set such that competition between firms would reduce the amount of data collected—at least, where minimized data collection is, indeed, valuable to users. Yet these considerations are almost completely absent in the COVID-19-related privacy debates, as they are in the broader privacy debate. Against this backdrop, the case for personal data property rights is dubious.

Conclusion

The key question is whether policymakers should make it easier or harder for firms and public bodies to amass large sets of personal data. This requires asking whether personal data is currently under- or over-provided, and whether the additional excludability that would be created by data property rights would offset their detrimental effect on innovation.

Swaths of personal data currently lie untapped. With the proper incentive mechanisms in place, this idle data could be mobilized to develop personalized medicines and to fight the COVID-19 outbreak, among many other valuable uses. By making such data more onerous to acquire, property rights in personal data might stifle the assembly of novel datasets that could be used to build innovative products and services.

On the other hand, when dealing with diffuse and complementary data sources, transaction costs become a real issue and the initial allocation of rights can matter a great deal. In such cases, unlike the genetic-testing kits example, it is not certain that users will be able to bargain with firms, especially where their personal information is exchanged by third parties.

If optimal reallocation is unlikely, should property rights go to the person covered by the data or to the collectors (potentially subject to user opt-outs)? Proponents of data property rights assume the first option is superior. But if the goal is to produce groundbreaking new goods and services, granting rights to data collectors might be a superior solution. Ultimately, this is an empirical question.

As Richard Epstein puts it, the goal is to “minimize the sum of errors that arise from expropriation and undercompensation, where the two are inversely related.” Rather than approach the problem with the preconceived notion that initial rights should go to users, policymakers should ensure that data flows to those economic agents who can best extract information and knowledge from it.

As things stand, there is little to suggest that the trade-offs favor creating data property rights. This is not an argument for requisitioning personal information or preventing parties from transferring data as they see fit, but simply for letting markets function, unfettered by misguided public policies.

In Apple, Copyright, COVID-19, Data Privacy & Security, European Union, Facebook, Google, Health Care, Health Insurance, Intellectual Property, International, Law & Economics, Patent, Pharmaceuticals, Platforms, Regulation, Truth on the Market , , , , , , , , , , , , , , , , , ,
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COVID-19, Ghost Flights, and Emerging Property Rights in Airport Slots

Brent Skorup —  25 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Brent Skorup, (Senior Research Fellow, Mercatus Center, George Mason University).]

One of the most visible economic effects of the COVID-19 spread is the decrease in airline customers. Alec Stapp alerted me to the recent outrage over “ghost flights,” where airlines fly nearly empty planes to maintain their “slots.” 

The airline industry is unfortunately in economic freefall as governments prohibit and travelers pull back on air travel. When the health and industry crises pass, lawmakers will have an opportunity to evaluate the mistakes of the past when it comes to airport congestion and airspace design.

This issue of ghost flights pops up occasionally and offers a lesson in the problems with government rationing of public resources. In this case, the public resource are airport slots: designated times, say, 15 or 30 minutes, a plane may takeoff or land at an airport. (Last week US and EU regulators temporarily waived the use-it-or-lose it rule for slots to mitigate the embarrassing cost and environmental damage caused by forcing airlines to fly empty planes.)

The slots at major hubs at peak times of day are extremely scarce–there’s only so many hours in a day. Today, slot assignment are administratively rationed in a way that favors large, incumbent airlines. As the Wall Street Journal summarized last year,

For decades, airlines have largely divided runway access between themselves at twice-yearly meetings run by the IATA (an airline trade group).

Airport slots are property. They’re valuable. They can be defined, partitioned, leased, put up as collateral, and, in the US, they can be sold and transferred within or between airports.

You just can’t call slots property. Many lawmakers, regulators, and airline representatives refuse to acknowledge the obvious. Stating that slots are valuable public property would make clear the anticompetitive waste that the 40-year slot assignment experiment generates. 

Like many government programs, the slot rationing began in the US as a temporary program decades ago as a response to congestion at New York airports. Slots are currently used to ration access at LGA, JFK, and DCA. And while they don’t use formal slot rationing, the FAA also rations access at four other busy airports: ORD, Newark, LAX, and SFO.

Fortunately, cracks are starting to form. In 2008, at the tailend of the Bush administration, the FAA proposed to auction some slots in New York City’s three airports. The plan was delayed by litigation from incumbent airlines and an adverse finding from the GAO. With a change in administration, the Obama FAA rescinded the plan in 2009.

Before the Obama FAA recission, the mask slipped a bit in the GAO’s criticism of the slot auction plan: 

FAA’s argument that slots are property proves too much—it suggests that the agency has been improperly giving away potentially millions of dollars of federal property, for no compensation, since it created the slot system in 1968.

Gulp.

Though the GAO helped scuttle the plan, the damage has been done. The idea has now entered public policy discourse: giving away valuable public property is precisely what’s going on. 

The implicit was made explicit in 2011 when, despite spiking the Bush FAA plan, the Obama FAA auctioned two dozen high-value slots. (The reversal and lack of controversy is puzzling to me.) Delta and US Airways wanted to swap some 160 slots at New York and DC airports. As a condition of the mega-swap, the Obama FAA required they divest 24 slots at those popular airports, which the agency auctioned to new entrants. Seven low-fare airlines bid in the auction and Jetblue and WestJet won the divested slots, paying about $90 million combined. 

The older fictions are rapidly eroding. There is an active secondary market in slots in some nations and when prices are released it becomes clear that the legacy rationing amounts to public property setasides to insiders. In 2016 it leaked, for instance, that an airline paid £58 million for a pair of take-off and landing slots at Heathrow. Other slot sales are in the tens of millions of dollars.

The 2011 FAA auctions and the loosening of rules globally around slot sales signal that the competition benefits from slot markets are too obvious to ignore. Competition from new entry drives down airfare and increases the number of flights.

For instance, a few months ago researchers used a booking app to scour 50 trillion flight itineraries to see new entrants’ effect on airline ticket prices between 2017 and 2019. As the Wall Street Journal reported, the entry of a low-fare carrier reduced ticket prices by 17% on average. The bigger effect was on output–new entry led to a 30% YoY increase in flights.

It’s becoming harder to justify the legacy view, which allow incumbent airlines to dominate the slot allocations via international conferences and national regulations that require “grandfather” slot usage. In a separate article last year, the Wall Street Journal reported that airlines are reluctantly ceding more power to airports in the assignment of slots. This is another signal in the long-running tug-of-war between airports and airlines. Airports generally want to open slots for new competitors–incumbent airlines do not.

The reason for the change of heart? The Journal says,

Airlines and airports reached the deal in part because of concerns governments should start to sell slots.

Gulp. Ghost flights are a government failure but a rational response to governments withholding the benefits of property from airlines. The slot rationing system encourages flying uneconomical flights, smaller planes, and excess carbon emissions. The COVID-19 crisis allowed the public a glimpse at the dysfunctional system. It won’t be easy, but aviation regulators worldwide need to assess slots policy and airspace access before the administrative rationing system spreads to the emerging urban air mobility and drone delivery markets.

In Corporate & Securities Law, COVID-19, The Law, Economics, and Policy of the COVID-19 Pandemic, Truth on the Market , , , , , , , ,
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Understanding ownership and property in the Digital Age

Geoffrey Manne & Neil Turkewitz —  22 March 2017

What does it mean to “own” something? A simple question (with a complicated answer, of course) that, astonishingly, goes unasked in a recent article in the Pennsylvania Law Review entitled, What We Buy When We “Buy Now,” by Aaron Perzanowski and Chris Hoofnagle (hereafter “P&H”). But how can we reasonably answer the question they pose without first trying to understand the nature of property interests?

P&H set forth a simplistic thesis for their piece: when an e-commerce site uses the term “buy” to indicate the purchase of digital media (instead of the term “license”), it deceives consumers. This is so, the authors assert, because the common usage of the term “buy” indicates that there will be some conveyance of property that necessarily includes absolute rights such as alienability, descendibility, and excludability, and digital content doesn’t generally come with these attributes. The authors seek to establish this deception through a poorly constructed survey regarding consumers’ understanding of the parameters of their property interests in digitally acquired copies. (The survey’s considerable limitations is a topic for another day….)

The issue is more than merely academic: NTIA and the USPTO have just announced that they will hold a public meeting

to discuss how best to communicate to consumers regarding license terms and restrictions in connection with online transactions involving copyrighted works… [as a precursor to] the creation of a multistakeholder process to establish best practices to improve consumers’ understanding of license terms and restrictions in connection with online transactions involving creative works.

Whatever the results of that process, it should not begin, or end, with P&H’s problematic approach.

Getting to their conclusion that platforms are engaged in deceptive practices requires two leaps of faith: First, that property interests are absolute and that any restraint on the use of “property” is inconsistent with the notion of ownership; and second, that consumers’ stated expectations (even assuming that they were measured correctly) alone determine the appropriate contours of legal (and economic) property interests. Both leaps are meritless.

Property and ownership are not absolute concepts

P&H are in such a rush to condemn downstream restrictions on the alienability of digital copies that they fail to recognize that “property” and “ownership” are not absolute terms, and are capable of being properly understood only contextually. Our very notions of what objects may be capable of ownership change over time, along with the scope of authority over owned objects. For P&H, the fact that there are restrictions on the use of an object means that it is not properly “owned.” But that overlooks our everyday understanding of the nature of property.

Ownership is far more complex than P&H allow, and ownership limited by certain constraints is still ownership. As Armen Alchian and Harold Demsetz note in The Property Right Paradigm (1973):

In common speech, we frequently speak of someone owning this land, that house, or these bonds. This conversational style undoubtedly is economical from the viewpoint of quick communication, but it masks the variety and complexity of the ownership relationship. What is owned are rights to use resources, including one’s body and mind, and these rights are always circumscribed, often by the prohibition of certain actions. To “own land” usually means to have the right to till (or not to till) the soil, to mine the soil, to offer those rights for sale, etc., but not to have the right to throw soil at a passerby, to use it to change the course of a stream, or to force someone to buy it. What are owned are socially recognized rights of action. (Emphasis added).

Literally, everything we own comes with a range of limitations on our use rights. Literally. Everything. So starting from a position that limitations on use mean something is not, in fact, owned, is absurd.

Moreover, in defining what we buy when we buy digital goods by reference to analog goods, P&H are comparing apples and oranges, without acknowledging that both apples and oranges are bought.

There has been a fair amount of discussion about the nature of digital content transactions (including by the USPTO and NTIA), and whether they are analogous to traditional sales of objects or more properly characterized as licenses. But this is largely a distinction without a difference, and the nature of the transaction is unnecessary in understanding that P&H’s assertion of deception is unwarranted.

Quite simply, we are accustomed to buying licenses as well as products. Whenever we buy a ticket — e.g., an airline ticket or a ticket to the movies — we are buying the right to use something or gain some temporary privilege. These transactions are governed by the terms of the license. But we certainly buy tickets, no? Alchian and Demsetz again:

The domain of demarcated uses of a resource can be partitioned among several people. More than one party can claim some ownership interest in the same resource. One party may own the right to till the land, while another, perhaps the state, may own an easement to traverse or otherwise use the land for specific purposes. It is not the resource itself which is owned; it is a bundle, or a portion, of rights to use a resource that is owned. In its original meaning, property referred solely to a right, title, or interest, and resources could not be identified as property any more than they could be identified as right, title, or interest. (Emphasis added).

P&H essentially assert that restrictions on the use of property are so inconsistent with the notion of property that it would be deceptive to describe the acquisition transaction as a purchase. But such a claim completely overlooks the fact that there are restrictions on any use of property in general, and on ownership of copies of copyright-protected materials in particular.

Take analog copies of copyright-protected works. While the lawful owner of a copy is able to lend that copy to a friend, sell it, or even use it as a hammer or paperweight, he or she can not offer it for rental (for certain kinds of works), cannot reproduce it, may not publicly perform or broadcast it, and may not use it to bludgeon a neighbor. In short, there are all kinds of restrictions on the use of said object — yet P&H have little problem with defining the relationship of person to object as “ownership.”

Consumers’ understanding of all the terms of exchange is a poor metric for determining the nature of property interests

P&H make much of the assertion that most users don’t “know” the precise terms that govern the allocation of rights in digital copies; this is the source of the “deception” they assert. But there is a cost to marking out the precise terms of use with perfect specificity (no contract specifies every eventuality), a cost to knowing the terms perfectly, and a cost to caring about them.

When we buy digital goods, we probably care a great deal about a few terms. For a digital music file, for example, we care first and foremost about whether it will play on our device(s). Other terms are of diminishing importance. Users certainly care whether they can play a song when offline, for example, but whether their children will be able to play it after they die? Not so much. That eventuality may, in fact, be specified in the license, but the nature of this particular ownership relationship includes a degree of rational ignorance on the users’ part: The typical consumer simply doesn’t care. In other words, she is, in Nobel-winning economist Herbert Simon’s term, “boundedly rational.” That isn’t deception; it’s a feature of life without which we would be overwhelmed by “information overload” and unable to operate. We have every incentive and ability to know the terms we care most about, and to ignore the ones about which we care little.

Relatedly, P&H also fail to understand the relationship between price and ownership. A digital song that is purchased from Amazon for $.99 comes with a set of potentially valuable attributes. For example:

  • It may be purchased on its own, without the other contents of an album;
  • It never degrades in quality, and it’s extremely difficult to misplace;
  • It may be purchased from one’s living room and be instantaneously available;
  • It can be easily copied or transferred onto multiple devices; and
  • It can be stored in Amazon’s cloud without taking up any of the consumer’s physical memory resources.

In many ways that matter to consumers, digital copies are superior to analog or physical ones. And yet, compared to physical media, on a per-song basis (assuming one could even purchase a physical copy of a single song without purchasing an entire album), $.99 may represent a considerable discount. Moreover, in 1982 when CDs were first released, they cost an average of $15. In 2017 dollars, that would be $38. Yet today most digital album downloads can be found for $10 or less.

Of course, songs purchased on CD or vinyl offer other benefits that a digital copy can’t provide. But the main thing — the ability to listen to the music — is approximately equal, and yet the digital copy offers greater convenience at (often) lower price. It is impossible to conclude that a consumer is duped by such a purchase, even if it doesn’t come with the ability to resell the song.

In fact, given the price-to-value ratio, it is perhaps reasonable to think that consumers know full well (or at least suspect) that there might be some corresponding limitations on use — the inability to resell, for example — that would explain the discount. For some people, those limitations might matter, and those people, presumably, figure out whether such limitations are present before buying a digital album or song For everyone else, however, the ability to buy a digital song for $.99 — including all of the benefits of digital ownership, but minus the ability to resell — is a good deal, just as it is worth it to a home buyer to purchase a house, regardless of whether it is subject to various easements.

Consumers are, in fact, familiar with “buying” property with all sorts of restrictions

The inability to resell digital goods looms inordinately large for P&H: According to them, by virtue of the fact that digital copies may not be resold, “ownership” is no longer an appropriate characterization of the relationship between the consumer and her digital copy. P&H believe that digital copies of works are sufficiently similar to analog versions, that traditional doctrines of exhaustion (which would permit a lawful owner of a copy of a work to dispose of that copy as he or she deems appropriate) should apply equally to digital copies, and thus that the inability to alienate the copy as the consumer wants means that there is no ownership interest per se.

But, as discussed above, even ownership of a physical copy doesn’t convey to the purchaser the right to make or allow any use of that copy. So why should we treat the ability to alienate a copy as the determining factor in whether it is appropriate to refer to the acquisition as a purchase? P&H arrive at this conclusion only through the illogical assertion that

Consumers operate in the marketplace based on their prior experience. We suggest that consumers’ “default” behavior is based on the experiences of buying physical media, and the assumptions from that context have carried over into the digital domain.

P&H want us to believe that consumers can’t distinguish between the physical and virtual worlds, and that their ability to use media doesn’t differentiate between these realms. But consumers do understand (to the extent that they care) that they are buying a different product, with different attributes. Does anyone try to play a vinyl record on his or her phone? There are perceived advantages and disadvantages to different kinds of media purchases. The ability to resell is only one of these — and for many (most?) consumers not likely the most important.

And, furthermore, the notion that consumers better understood their rights — and the limitations on ownership — in the physical world and that they carried these well-informed expectations into the digital realm is fantasy. Are we to believe that the consumers of yore understood that when they bought a physical record they could sell it, but not rent it out? That if they played that record in a public place they would need to pay performance royalties to the songwriter and publisher? Not likely.

Simply put, there is a wide variety of goods and services that we clearly buy, but that have all kinds of attributes that do not fit P&H’s crabbed definition of ownership. For example:

  • We buy tickets to events and membership in clubs (which, depending upon club rules, may not be alienated, and which always lapse for non-payment).
  • We buy houses notwithstanding the fact that in most cases all we own is the right to inhabit the premises for as long as we pay the bank (which actually retains more of the incidents of “ownership”).
  • In fact, we buy real property encumbered by a series of restrictive covenants: Depending upon where we live, we may not be able to build above a certain height, we may not paint the house certain colors, we may not be able to leave certain objects in the driveway, and we may not be able to resell without approval of a board.

We may or may not know (or care) about all of the restrictions on our use of such property. But surely we may accurately say that we bought the property and that we “own” it, nonetheless.

The reality is that we are comfortable with the notion of buying any number of limited property interests — including the purchasing of a license — regardless of the contours of the purchase agreement. The fact that some ownership interests may properly be understood as licenses rather than as some form of exclusive and permanent dominion doesn’t suggest that a consumer is not involved in a transaction properly characterized as a sale, or that a consumer is somehow deceived when the transaction is characterized as a sale — and P&H are surely aware of this.

Conclusion: The real issue for P&H is “digital first sale,” not deception

At root, P&H are not truly concerned about consumer deception; they are concerned about what they view as unreasonable constraints on the “rights” of consumers imposed by copyright law in the digital realm. Resale looms so large in their analysis not because consumers care about it (or are deceived about it), but because the real object of their enmity is the lack of a “digital first sale doctrine” that exactly mirrors the law regarding physical goods.

But Congress has already determined that there are sufficient distinctions between ownership of digital copies and ownership of analog ones to justify treating them differently, notwithstanding ownership of the particular copy. And for good reason: Trade in “used” digital copies is not a secondary market. Such copies are identical to those traded in the primary market and would compete directly with “pristine” digital copies. It makes perfect sense to treat ownership differently in these cases — and still to say that both digital and analog copies are “bought” and “owned.”

P&H’s deep-seated opposition to current law colors and infects their analysis — and, arguably, their failure to be upfront about it is the real deception. When one starts an analysis with an already-identified conclusion, the path from hypothesis to result is unlikely to withstand scrutiny, and that is certainly the case here.

In Amazon, Apple, Copyright, Intellectual Property, Law & Economics, Platforms , , , , , , , , , , , , , , , , , , , ,
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Teslas’s New Patent Policy: Long Live the Patent System!

Adam Mossoff —  13 August 2014

[First posted to the CPIP Blog on June 17, 2014]

Last Thursday, Elon Musk, the founder and CEO of Tesla Motors, issued an announcement on the company’s blog with a catchy title: “All Our Patent Are Belong to You.” Commentary in social media and on blogs, as well as in traditional newspapers, jumped to the conclusion that Tesla is abandoning its patents and making them “freely” available to the public for whomever wants to use them. As with all things involving patented innovation these days, the reality of Tesla’s new patent policy does not match the PR spin or the buzz on the Internet.

The reality is that Tesla is not disclaiming its patent rights, despite Musk’s title to his announcement or his invocation in his announcement of the tread-worn cliché today that patents impede innovation. In fact, Tesla’s new policy is an example of Musk exercising patent rights, not abandoning them.

If you’re not puzzled by Tesla’s announcement, you should be. This is because patents are a type of property right that secures the exclusive rights to make, use, or sell an invention for a limited period of time. These rights do not come cheap — inventions cost time, effort, and money to create and companies like Tesla then exploit these property rights in spending even more time, effort and money in converting inventions into viable commercial products and services sold in the marketplace. Thus, if Tesla’s intention is to make its ideas available for public use, why, one may wonder, did it bother to expend the tremendous resources in acquiring the patents in the first place?

The key to understanding this important question lies in a single phrase in Musk’s announcement that almost everyone has failed to notice: “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” (emphasis added)

What does “in good faith” mean in this context? Fortunately, one intrepid reporter at the L.A. Times asked this question, and the answer from Musk makes clear that this new policy is not an abandonment of patent rights in favor of some fuzzy notion of the public domain, but rather it’s an exercise of his company’s patent rights: “Tesla will allow other manufacturers to use its patents in “good faith” – essentially barring those users from filing patent-infringement lawsuits against [Tesla] or trying to produce knockoffs of Tesla’s cars.” In the legalese known to patent lawyers and inventors the world over, this is not an abandonment of Tesla’s patents, this is what is known as a cross license.

In plain English, here’s the deal that Tesla is offering to manufacturers and users of its electrical car technology: in exchange for using Tesla’s patents, the users of Tesla’s patents cannot file patent infringement lawsuits against Tesla if Tesla uses their other patents. In other words, this is a classic deal made between businesses all of the time — you can use my property and I can use your property, and we cannot sue each other. It’s a similar deal to that made between two neighbors who agree to permit each other to cross each other’s backyard. In the context of patented innovation, this agreement is more complicated, but it is in principle the same thing: if automobile manufacturer X decides to use Tesla’s patents, and Tesla begins infringing X’s patents on other technology, then X has agreed through its prior use of Tesla’s patents that it cannot sue Tesla. Thus, each party has licensed the other to make, use and sell their respective patented technologies; in patent law parlance, it’s a “cross license.”

The only thing unique about this cross licensing offer is that Tesla publicly announced it as an open offer for anyone willing to accept it. This is not a patent “free for all,” and it certainly is not tantamount to Tesla “taking down the patent wall.” These are catchy sound bites, but they in fact obfuscate the clear business-minded nature of this commercial decision.

For anyone perhaps still doubting what is happening here, the same L.A Times story further confirms that Tesla is not abandoning the patent system. As stated to the reporter: “Tesla will continue to seek patents for its new technology to prevent others from poaching its advancements.” So much for the much ballyhooed pronouncements last week of how Tesla’s new patent (licensing) policy “reminds us of the urgent need for patent reform”! Musk clearly believes that the patent system is working just great for the new technological innovation his engineers are creating at Tesla right now.

For those working in the innovation industries, Tesla’s decision to cross license its old patents makes sense. Tesla Motors has already extracted much of the value from these old patents: Musk was able to secure venture capital funding for his startup company and he was able to secure for Tesla a dominant position in the electrical car market through his exclusive use of this patented innovation. (Venture capitalists consistently rely on patents in making investment decisions, and for anyone who doubts this need to watch only a few episodes of Shark Tank.) Now that everyone associates radical, cutting-edge innovation with Tesla, Musk can shift in his strategic use of his company’s assets, including his intellectual property rights, such as relying more heavily on the goodwill associated with the Tesla trademark. This is clear, for instance, from the statement to the LA Times that companies or individuals agreeing to the “good faith” terms of Tesla’s license agree not to make “knockoffs of Tesla’s cars.”

There are other equally important commercial reasons for Tesla adopting its new cross-licensing policy, but the point has been made. Tesla’s new cross-licensing policy for its old patents is not Musk embracing “the open source philosophy” (as he asserts in his announcement). This may make good PR given the overheated rhetoric today about the so-called “broken patent system,” but it’s time people recognize the difference between PR and a reasonable business decision that reflects a company that has used (old) patents to acquire a dominant market position and is now changing its business model given these successful developments.

At a minimum, people should recognize that Tesla is not declaring that it will not bring patent infringement lawsuits, but only that it will not sue people with whom it has licensed its patented innovation. This is not, contrary to one law professor’s statement, a company “refrain[ing] from exercising their patent rights to the fullest extent of the law.” In licensing its patented technology, Tesla is in fact exercising its patent rights to the fullest extent of the law, and that is exactly what the patent system promotes in the myriad business models and innovative

In Intellectual Property, Patent, Regulation , , , , , , , , , , , ,
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Google Book Project

Paul H. Rubin —  24 March 2011

Google’s efforts to make out of print books available online has run into a major stumbling block. Judge Chin ordered that books can only be digitized by Google if the author opts in; the agreement which he through out called for opt out.  This is an shame and a highly inefficient result.  As reported, the intricacies of copyright law and the unavailability of many rights holders means that opt in is not feasible in many cases.  As a result, thousands of books will not be digitized at all.  Instead of transferring rights to authors (which was apparently Judge Chin’s intent) he has simply destroyed valuable property rights.  This case was argued as an issue of the distribution of rights, but it is really about the creation of  rights — or, as it turns out, their non-creation.

In Copyright, Google, Intellectual Property, Platforms ,
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