p2pnet.net News Feature:- Courts and scholars have increasingly assumed that intellectual property is a form of property, and used this to condemn the use of intellectual property by others as ‘free riding’, writes Stanford Law School professor Mark Lemley in an abstract to his paper, Property, Intellectual Property, and Free Riding, continuing:

"In a functioning market, we neither need nor particularly want to let producers capture the full social value of their output. Nor do we give even real property owners such a right, except where it is necessary to solve the “tragedy of the commons” problem.

"We are using the rhetoric of free riding to give intellectual property owners something that no other property owner gets.

"From this core insight, I proceed to explain why free riding is desirable in intellectual property cases except in limited circumstances where curbing it is necessary to encourage creativity. I explain why economic theory demonstrates that too much protection is just as bad as not enough protection, and therefore why intellectual property law must search for balance, not free riders. Finally, I consider whether we would be better served by another metaphor than the misused notion of intellectual property as a form of tangible property."

Lemley gave p2pnet permission to reproduce a draft of his paper in full under this version of the Creative Commons license.

Now read on >>>>>>>>>>>>>

Property, Intellectual Property, and Free Riding
By Mark A. Lemley

Intellectual property protection in the United States has always been about creating incentives to invent. Thomas Jefferson was of the view that "inventions cannot, in nature, be a subject of property"; for him, the question was whether the benefit of encouraging innovation was "worth to the public the embarrassment of an exclusive patent."3 On this long-standing view, free competition is the norm. Intellectual property rights are an exception to that norm, and they are granted only when - and only to the extent that - they are necessary to encourage invention. The result has historically been intellectual property rights that are limited in time, limited in scope, and granted only to authors and inventors who met certain minimum requirements. On this view, the proper goal of intellectual property law is to give as little protection as possible consistent with encouraging innovation.

This fundamental principle is under sustained attack. Congress, the courts and commentators increasingly treat intellectual property not as a limited exception to the principle of market competition, but as a good in and of itself. If some intellectual property is good because it encourages innovation, they reason, more is better. The thinking is that creators will not have sufficient incentive to invent unless they are legally entitled to capture the full social value of their inventions. On this view, absolute protection may not be achievable, but it is the goal of the system.

The absolute protection or full-value view draws significant intellectual support from the idea that intellectual property is simply a species of real property rather than as a unique form of legal protection designed to deal with public goods problems. Protectionists rely on the economic theory of real property, with its focus on the creation of strong rights in order to prevent congestion and overuse and to internalize externalities. They rely on the law of real property, with its strong right of exclusion. And they rely on the rhetoric of real property, with its condemnation of "free riding" by those who imitate or compete with intellectual property owners. The result is a legal regime for intellectual property that increasingly looks like the law of real property, or more properly an idealized construct of that law, one in which courts seek out and punish virtually any use of an intellectual property right by another.

In this article, I suggest that the effort to permit inventors to capture the full social value of their invention - and the rhetoric of free riding in intellectual property more generally - are fundamentally misguided. In no other area of the economy do we permit the full internalization of social benefits. Competitive markets work not because producers capture the full social value of their output - they don’t, except at the margin - but because they permit producers to make enough money to cover their costs, including a reasonable return on fixed-cost investment. Even real property doesn’t give property owners the right to control social value. Various uses of property create uncompensated positive externalities, and we don’t see that as a problem or a reason people won’t efficiently invest in their property. Analogously, I argue that full internalization of positive externalities is not a proper goal of tangible property rights except in unusual circumstances, for several reasons: because there is no need to fully internalize benefits in intellectual property, because efforts to capture positive externalities may actually reduce them, leaving everyone worse off, and because the effort to capture such externalities invites rent-seeking.

The goal of eliminating free riding, then, is ill-suited to the unique characteristics of intellectual property. Efforts to permit intellectual property owners to fully internalize the benefits of their creativity will inevitably get the balance wrong. Because this goal seems to derive in the minds of many from their conception of property rights, I suggest that treating intellectual property as "just like" real property is a mistake as a practical matter. We are better off with the traditional utilitarian explanation for intellectual property, because it at least attempts to strike an appropriate balance between control by inventors and creators and the baseline norm of competition. If we must fall back on a physical-world analogy for intellectual property protection - and I see no reason why we should - treating intellectual property as a form of government subsidy is more likely to get people to understand the tradeoffs involved than treating it as real property.4

In Part I, I outline the growth of the real property theory of intellectual property, and explain how that theory has influenced courts to focus on free riding and the complete internalization of externalities. In Part II, I explain why attempting to fully internalize the benefits of inventions is not appropriate and indeed is counterproductive. Finally, in Part III I discuss the alternatives to the free riding.

I. The Free Riding Model of Intellectual Property5

Talking about patents, copyrights, and trademarks as just another species of property is very much in vogue. The rhetoric and economic theory of real property are increasingly dominating the discourse and conclusions of the very different world of intellectual property. The shift begins with simple rhetoric - talking about intellectual property rights as aspects of a broader system of property. But its implications go far beyond that. The temptation to move from rhetoric to rationale seems almost irresistible. Courts and commentators adopt - explicitly or implicitly - the economic logic of real property in the context of intellectual property cases. They then make a subconscious move, one that the economic theory of property doesn’t justify: they jump from the idea that intellectual property is property to the idea that the IP owner is entitled to capture the full social value of her right. This leads them to an almost obsessive preoccupation with identifying and rooting out that great evil of the modern economic world - free riding.

The idea of propertization begins with a fundamental shift in the terminology of intellectual property law. Indeed, the term "intellectual property" itself may be a driver in this shift. Patent and copyright law have been around in the United States since its origin, but only recently has the term "intellectual property" come into vogue.6 A quick, unscientific search for the term "intellectual property" in federal court opinions by decade shows an almost exponential growth in the use of the term:

If the goal of creating property rights is to equate private and social costs and benefits by having the property owner internalize the social costs and benefits, those who "free ride" - obtain a benefit from someone else’s investment - are undermining the goals of the property system. The professed fear is that property owners won’t invest sufficient resources in their property if others can free ride on that investment.33 To be efficient, logic would seem to suggest, we must eliminate free riding.34

If one concludes that this logic applies to intellectual property as well, as some (but by no means all) law and economics scholars apparently have,35 the implications are obvious. The way to get private parties to invest efficiently in innovation is not only to give them exclusive ownership rights in what they produce, but to define those rights in such a way that they permit the intellectual property owner to capture the full social benefit of the invention.36 In theory, this will encourage them to invest efficiently in identifying, developing, and commercializing new inventions and managing the inventions they have already made.37 If the social value of innovation exceeds the private value, as apparently it does (or at least did in the early 1980s),38 that simply means we don’t have strong enough property rights, and too many people are free riding on the investments of innovators.39 Further, if one postulates that transactions involving intellectual property are costless, society as a whole should benefit, since the owners of intellectual property rights will license those rights to others whenever it is economically efficient to do so.

And so it has gone. By virtually any measure, intellectual property rights have expanded dramatically in the last three decades. Terms of protection are longer,40 the number of things that are copyrightable has increased, it is easier to qualify for copyright protection,41 copyright owners have broader rights to control uses of their works,42 and penalties are harsher.43 In addition, Congress has created entirely new rights.44 These changes are directly tied to the reconceptualization of patents, copyrights and trademarks as a form of property. Even some of the most careful scholars of intellectual property economics have suggested that copyrights should be perpetual, relying on the economic theory of property: "All valuable resources, including copyrightable works, should be owned, in order to create incentives for their efficient exploitation and to avoid overuse."45 Trademark law, which was once limited to protecting against consumer confusion, has increasingly taken on the character of a property right, with the result that trademark "owners" now have the power to prevent various kinds of uses of their marks, regardless whether consumers will be confused or search costs increased.46 Courts and commentators increasingly speak of trade secrets as property rights, not simply rights to prevent tortious acts that breach standards of business ethics.47 And notwithstanding Supreme Court statements distinguishing the two,48 they regularly refer to copyrights as property.49

Courts applying the property theory of intellectual property are seeking out and eliminating uses of a right they perceive to be free riding. Some treat copying as free riding.50 They justify property-like protection for trademarks on the basis that it will avoid free riding.51 They debate the proper role of patent law’s doctrine of equivalents in terms of whether it permits free riding.52 They permit the imposition of a private intellectual property-like restriction that would otherwise violate the antitrust laws on the grounds that the restriction is necessary to prevent free riding on data created by the restrictor.53 The database protection bill pending in Congress at this writing expressly conditions liability on loss occasioned by "the ability of other parties to free ride on the efforts of the plaintiff."54 Courts have defined the elements of the quasi-intellectual property tort of misappropriation by reference to whether the defendant is free riding on the plaintiff’s information.55 Even the courts that reject intellectual property claims do so because they cannot find evidence of free riding.56

The focus on free riding leads to an assumption on the part of courts that all enrichment derived from use of an intellectual property right is necessarily unjust. We can see several examples in modern intellectual property law. Some examples involve the extension of IP rights to cover uses that don’t cause harm directly to the intellectual property interest of the IP owner. Some courts see any use of a trademark by a competitor or third party is problematic, for example, not because it deprives the trademark owner of sales, confuses consumers, or increases search costs, but because it reflects "trading on the goodwill" of the trademark owner and therefore appropriates value that properly belongs to the trademark owner.57 Others create new intellectual property rights (or quasi-intellectual property rights) to permit their "owners" to capture new uses of their public data online, their web servers, and even their golf handicap system.58 The strong presumptive entitlement to injunctive relief in intellectual property is also consistent with the free riding rule, and indeed may encourage people to think of the intellectual property owner’s right as absolute: An intellectual property owner gets to stop a use of "their" property whether or not they are harmed by the use.59 The rationale here isn’t generally that the intellectual property owner has been harmed, but that the defendant has benefited, and that benefit involves taking something that doesn’t belong to them.

A second application of the free riding idea involves the remedies for intellectual property infringement. Copyright law provides that the defendant must disgorge any profits attributable to its act of infringement.60 It also provides for statutory damages so great that they generally overwhelm both the losses to the copyright owner and the benefits to the infringer,61 for payment of attorney’s fees,62 and in many cases treats copyright infringement as a felony.63 Trademark and trade secret law also require disgorgement of profits in at least some circumstances,64 and permit punitive damages and attorneys fees for willful acts of infringement.65 Misappropriation of trade secrets and trademark infringement are also criminal offenses.66 Patent law emphasizes deterrence least among the intellectual property regimes.67 It does not require disgorgement of profits or criminal liability, though it does provide for attorneys fees and treble damages for willful infringement.68 And injunctive relief will prevent defendant’s uses, preventing free riding even in patent cases.

Disgorgement is the most clearly connected to free riding. Anyone who benefits from the use of the intellectual property right must forfeit the benefit to the intellectual property owner. Deterrence, like extensions of the scope of the intellectual property right, helps intellectual property owners internalize the positive externalities of their invention by preventing unauthorized uses and therefore encouraging licensing. But if the baseline assumption of the law is that the intellectual property owner is entitled to capture the full social value of the invention, it is that baseline that will drive any licensing transactions.

One caveat before I continue. The rhetoric and theory of property are certainly not the only things driving courts, Congress, and commentators to expand the scope of intellectual property protection. There is a strong public choice component to the expansion too, particularly in Congress and particularly with respect to copyright law.69 But the role of property theory is an important one, both because it provides intellectual heft to justify the expansion and because it offers courts an attractive label - "free rider" - that they can use both to identify undesirable conduct and to justify its suppression.

II. In Defense of Free Riding

A. No Property Owner Is Entitled to Capture the Full Social Value of Their Property

The assumption that intellectual property owners should be entitled to capture the full social surplus of their invention runs counter to our economic intuitions in every other segment of the economy. We do not permit producers to capture the full social value of their output. Nor do we permit the owners even of real property to internalize the full positive externalities associated with their property.

Let’s begin with producers. In a market economy, we care only that producers make enough return to cover their costs, including a reasonable profit.70 So long as that cost is covered, the fact that consumers value the good for more than the price, or that others also benefit from the goods produced, is not considered a problem. Indeed, it is an endemic part of the market economy. The very concept of "consumer surplus" in economics presupposes uncompensated positive externalities in the market for production.71 I may be willing to pay $100 for a copy of "Hamlet,"72 but I don’t have to - producers will compete to sell it to me for far less. Thus, in Figure 1 everything above the line is a social benefit from the producer’s sale that is not captured by that producer. That discrepancy isn’t a problem, because so long as the price stays above marginal cost producers will still make the good. The externality comes not with respect to the marginal consumer, but the higher-value consumer.

Indeed, if we were concerned with fully internalizing positive externalities in the marketplace, the ideal world would be one in which monopolists engaging in price discrimination were not just desirable but mandatory. We would favor monopoly pricing and cartels over competitive markets, because monopoly increases the returns to producers, bringing them closer to capturing the full social value of their goods, reducing the "free riding" in which all consumers engage every day. Centuries ago, property theorists took precisely this approach, seeing competition as a nuisance courts should enjoin.73 We don’t draw any such conclusion today, of course. Quite the contrary - antitrust law is devoted to preserving consumer surplus by favoring competition over monopoly,74 and economists treat property as welfare-enhancing precisely because it facilitates the development of markets.

Tangible property law too implicitly rejects the idea that owners are entitled to capture all positive externalities. If I plant beautiful flowers in my front lawn, I don’t capture the full benefit of those flowers - passers-by can enjoy them too.75 But property law doesn’t give me a right to track them down and charge them for the privilege76 - though owners of property once tried unsuccessfully to obtain such a right.77 Nor do I have the right to collect from my neighbors the value they get if I replace an unattractive shade of paint with a nicer one, or a right to collect from society at large the environmental benefits I confer by planting trees. The same is true in commercial settings. The fact that my popular store is located next to your obscure one may drive traffic to your store - indeed, the ubiquitous shopping mall is founded on this very idea - but I have no right to capture that value.

The very idea that the law should find a way to internalize these positive externalities seems faintly preposterous. Positive externalities are everywhere. We couldn’t internalize them all even if we wanted to.78 Areeda and Hovenkamp offer numerous examples of uncompensated positive externalities. They conclude that "free riding on the positive externalities created by others is everywhere, and society does little to eliminate it."79 And as noted above, there is no reason we should particularly want to do so. If "free riding" means merely obtaining a benefit from another’s investment, the law does not, cannot, and should not prohibit it. If the marginal social cost of benefiting from a use is zero, prohibiting that use imposes unnecessary social costs.

We do sometimes try to internalize negative externalities in the real property context in order to avoid the tragedy of the commons. The central idea behind the tragedy of the commons is that joint or public ownership of a piece of property is inefficient, because non-owners who use the property have no incentive to take care of it and will therefore overuse it.80 Thus, common land shared by cattle owners is overgrazed, because in the private calculus of each cattle owner their benefit from grazing (which inures entirely to them) exceeds their benefit from holding off (which is spread among all the users of the common). The property rights argument is that dividing the common into private property solves this problem, by making each property owner liable for the consequences of her own actions. We therefore internalize externalities in this case in There is also one circumstance in which the internalization of positive externalities may be important in tangible property law: where the efficient use of a piece of property requires a substantial fixed investment that may produce benefits that are nonexcludable.81 This is part of the classic definition of a public good.82 It is not true of all property or all types of investments, but only a subset. For these cases, unlike the normal market case, efficiency requires that we permit producers to recover not only marginal cost but to amortize their fixed cost as well. Real property has two ways of accommodating the need for such fixed-cost investments. First, consistent with the classic economics of public goods, the government may provide the resource. This is generally how we provide infrastructural goods such as roads, bridges, and airports. Alternatively, we may grant a private party the right to control the resource and internalize some of the benefits in the hope that the lure of those benefits will be sufficient to induce them to incur the fixed expense. Private toll roads are built on this model, for instance: in exchange for building the road the government grants the builder a right to exclude others from what is ordinarily a public resource. Finally, in a functioning market private parties may organize to produce such a result. The owners of land may invest in improving it - building a shopping mall, for example - on the expectation that they will be able to reap some of the social benefit of the mall by charging rent to tenants who will share in the positive benefits of proximity to other stores.

Importantly, even in these infrastructure cases, private investment in real property is not dependent on the property owner fully internalizing positive externalities. The owners of toll roads don’t capture the full social benefit of their road to users. And builders of malls may benefit neighboring property owners whose real estate values improve. But we don’t need them to fully internalize positive externalities in order to invest - just to capture enough of the benefits of their investment to make it worthwhile. The remaining social surplus from their investment will be dissipated - by the market if the resource trades in a competitive economy, or by government price regulation if it doesn’t (as in the case of toll roads).

In short, society in general doesn’t prohibit free riding. Internalization of positive externalities is not necessary at all unless efficient use of the property requires a significant investment that cannot be recouped another way. And even then, economic theory properly requires not the complete internalization of positive externalities but only the capture of returns sufficient to recoup the investment. Only where there is a tragedy of the commons do we insist on complete or relatively complete internalization of externalities.

B. Lessons for Intellectual Property

There is no tragedy of the commons in intellectual property. The idea of a tragedy of the information commons is fundamentally flawed because it misunderstands the nature of information. A tragedy of the commons occurs when a finite natural resource is depleted by overuse. Information cannot be depleted, however. Information is a "public good," which means both that its consumption is nonrivalrous - my use of an idea does not impose any direct cost on you - and that it is not something from which others can easily be excluded.83 Precisely because its consumption is nonrivalrous, information does not present any risk of the tragedy of the commons. It simply cannot be "used up."84 Indeed, copying information actually multiplies the available resources, not only by making a new physical copy but by spreading the idea and therefore permitting others to use and enjoy it.85 The result is that rather than a tragedy, an information commons is a "comedy" in which everyone benefits.86 The notion that information will be depleted by overuse simply ignores basic economics.87

The lessons of the previous section suggest that we should not therefore be particularly worried about free riding in information goods. It is not that free riding won’t occur with information goods; to the contrary, it is ubiquitous. Everyone can use E=mc2, the words of Shakespeare, or the idea of the tragedy of the commons without compensating their creators. Rather, because the use of those ideas or words does no harm to their creator, they are not the sort of uses with which property theory tells us we should be concerned.88 As we have seen, there is no general reason to worry about uncompensated positive externalities. Indeed, part of the point of intellectual property law is to promote uncompensated positive externalities, by ensuring that ideas and works that might otherwise be kept secret are widely disseminated.89

Courts that subscribe to the rhetoric of property and free riding miss this point. In Register.com v. Verio,90 for example, the court held that the defendant violated the law by accessing Internet WHOIS data on plaintiff’s Web site, even though WHOIS data is by the design of the Internet free for anyone to use. The court analogized the defendant to someone who had taken an apple from a tree on plaintiff’s property.91 In fact, however, because information rather than tangible goods were at stake, and so the plaintiff was not in fact deprived of anything,92 a better analogy might be a defendant who had admired from the street a tree on plaintiff’s property. Taking an apple seems like a bad thing because we assume that consumption is rivalrous and the taking deprives the owner of something. Change the analogy to "taking" a look, and the equities seem rather different.93 We prohibit "taking a look" only where it causes harm, for example by invading the privacy of another. Treating information like real property leads us to think of a use of that information as free riding, and therefore as something that ought to be prohibited, when in fact it shouldn’t.

This doesn’t mean that intellectual property law is a bad idea. Rather, the basic economic justification for intellectual property law comes from what was only an occasional problem with tangible property — the risk that creators will not make enough money in a market economy to cover their costs. The production of any good involves fixed cost investments that must be made before production, and variable or marginal costs that are incurred each time a new unit is produced. For most tangible goods, a price high enough to cover the marginal cost of making another good, plus a reasonable profit, is sufficient to generate a return on fixed capital investments. Information is different from ordinary goods because the marginal cost of reproducing it is so low.94 While the fixed cost associated with producing a particular piece of information will vary from industry to industry - writing this article involved very few fixed costs, while making the Lord of the Rings films required the outlay of hundreds of millions of dollars - in either event the ratio of fixed to marginal costs is much higher than for other types of goods. That ratio is increasing as the Internet makes the distribution of additional copies of many types of information virtually costless.95 Figure 2 demonstrates the problem by comparing average fixed and average variable costs in a typical industry and in an information industry. In a typical industry, the average variable cost is represented by line 1. Because variable costs increase, over the range of production average total costs will too (lines 2 and 3). The producer minimizes its average total costs by generating just enough to reach the low point of the curve. By contrast, in an information industry, the average variable cost is zero or close to it, and the average total cost curve therefore declines over the entire range of market demand (line 4). The producer of such an information good minimizes its average total costs by selling throughout the full range of market demand.

In a private market economy, individuals will not generally invest in invention or creation unless the expected return from doing so exceeds the cost of doing so — that is, unless they can reasonably expect to make a profit from the endeavor.96 To profit from a new idea or a work of authorship, the creator must be able either to sell it to others for a price, or to put it to some use which provides her with a comparative advantage in a market.97

Selling information requires disclosing it to others. Once the information has been disclosed outside a small group, however, it is extremely difficult to control. Information has the characteristics of a "public good" — it may be "consumed" by many people without depletion, and it is difficult to identify those who will not pay and prevent them from using the information.98 If we assume that it is nearly costless to distribute information to others, it will prove virtually impossible to charge enough for information to recoup any but the most modest fixed-cost investments. If the author of a book charges more than the cost of distribution, hoping to recover some of her expenditures in writing the work, competitors will quickly jump in to offer the book at a lower price. Competition will drive the price of the book towards its marginal cost — in this case the cost of producing and distributing one additional copy. In this competitive market, the author will be unable to recoup the fixed cost of writing the book. More to the point, if this holds generally true authors may be expected to leave the profession in droves, since they cannot make any money at it. The result, according to economic theory, is an underproduction of books and other works of invention and creation with similar public goods characteristics.99

Intellectual property, then, is not a response to allocative distortions resulting from scarcity, as real property law is. Rather, it is a conscious decision to create scarcity in a type of good in which it is ordinarily absent in order to artificially boost the economic returns to innovation.100 If property law is the creation of barriers to entry, as Demsetz suggests, the question is whether those barriers are properly scaled to the problem.101 But solving the "problem" of intellectual property does not require complete internalization of externalities.

Christopher Yoo has argued that intellectual property rights should be modeled as examples of monopolistic competition, and that granting strong property rights to control works will have minimal effects on competition because it will merely encourage more creators to enter, bringing differentiated products closer and closer together and reducing price.102 In effect, Yoo’s monopolistic competition model encourages rent seeking by deliberately over-rewarding creators on the theory that doing so will encourage new creators to enter seeking a similar rent. This model is useful, but it is important to recognize its limits. First, Hotelling’s original model did not deal with intellectual property rights,103 and so his assumption of entry in response to competition did not account for legal limits on how close to existing companies new entrants can come. For Hotelling, the more attractive a product monopoly, the more companies will enter and crowd around it, dissipating the economic rents. With intellectual property, that mechanism won’t work. The broader the scope of an intellectual property right, the less room there is for new innovators to develop and market new products, because the law itself restricts that competition. Further, increasing the strength of intellectual property rights has diminishing returns in terms of encouraging marginal inventions, and increasing costs to consumers. It may also lead to inefficient near-homogeneity among products.104 Thus, Yoo’s model does not suggest there is no tradeoff between encouraging invention and static consumer welfare.

There is one exception to this general rule. Scholars occasionally suggest that use of information created by another might create negative externalities in unusual circumstances. Generally this is where the audience has come to rely on a consistent impression of a work, and the new use detracts from that consistent impression.105 Examples might include songs or art works that cast Barbie in a light that Mattel - and perhaps young girls - find unfavorable.106 While such negative externalities are possible, they seem unlikely to significantly affect the analysis above or to serve as a justification for complete internalization of externalities via intellectual property rights in general, for a variety of reasons I have explained elsewhere.107

How do the implications of my approach differ from the free riding argument I rejected in the previous section? The critical difference is that intellectual property law is justified only in ensuring that creators are able to charge a sufficiently high price to ensure a profit sufficient to recoup their fixed and marginal expenses. Sufficient incentive, as Larry Lessig reminds us, is something less than perfect control.108 Economic theory offers no justification for awarding creators anything beyond what is necessary to recover their average total costs. The question is whether, as Landes and Posner put it, "making intellectual property excludable creates value."109 Intellectual property rights are justifiable only to the extent that that excludability does in fact create value. Broader formulations - such as an outright prohibition on free riding - are too broad because they don’t distinguish between uses that interfere with necessary incentives to create and uses that do not.110 They seek to transfer wealth from the user to themselves, but there is no economic reason to support such a transfer.

One other way in which this economic analysis differs from the property analysis is that incentives cannot justify intellectual property rights in trademarks or the right of publicity.111 The economic support for those laws must be found elsewhere, in efforts to reduce consumer search costs, avoid confusion, or protect privacy,112 or perhaps in a rare case by negative externalities from the use of intellectual property described above. As Stephen Carter has observed, the search costs rationale explains the classic contours of these doctrines, but cannot justify the rather dramatic expansion of both doctrines under the property rubric.113

C.What’s Wrong With Overcompensating Creators?

The argument so far shows that there is no economic justification for granting inventors and creators the right to control positive externalities flowing from their creations, except to the extent necessary to enable them to cover their average fixed costs. But, the reader might object, while you have shown there is no need to grant such control, you haven’t shown there is anything wrong with giving creators greater control over positive externalities. Wouldn’t it be easier just to treat intellectual property rights as absolute?

There are a number of costs to granting overbroad intellectual property rights. Because most of these arguments are well known in the literature, I will detail them only briefly here. These costs fall into four categories. First, intellectual property rights distort markets away from the competitive norm, and therefore create static inefficiencies in the form of deadweight losses. Second, intellectual property rights interfere with the ability of other creators to work, and therefore create dynamic inefficiencies. Third, the prospect of intellectual property rights encourages rent-seeking behavior that is socially wasteful. Finally, overinvestment in research and development is itself distortionary. The ultimate result of these costs is that, as David Friedman puts it, "what we want is not merely an incentive but the right incentive."114

Not every intellectual property right will impose these costs, of course. Most rights don’t confer any significant power over price. Indeed, most patents are never enforced or licensed.115 But they are not the important ones. The intellectual property rights that spur creativity do so precisely because they give their owner a return in excess of marginal cost. And in doing so, they risk the costs I discuss in this section. They are also the ones on which a defendant is most likely to "free ride" - there seems less likelihood that anyone will copy an unsuccessful invention or parody an out-of-print book.

The first form of cost is the classic deadweight loss associated with deviations from the competitive norm. Intellectual property rights are designed to give creators incentives to create by giving them a reward greater than they would obtain in a competitive market. By definition, therefore, the intellectual property system permits owners to raise price above marginal cost, creating deadweight losses by raising the price to consumers. If it doesn’t do that, it isn’t working. This doesn’t mean that all intellectual property rights are monopolies in the antitrust sense, of course.116 Indeed, few are. But it does mean that consumers who are willing to pay more than it costs to make a copy of a work will be denied access to that work.117 The result is a static economic inefficiency that may be great or trivial, depending on the intellectual property right in question, but which must be balanced against the benefits we get from expanding intellectual property rights. This inefficiency is well established in the literature on intellectual property economics.118

A second cost to strong intellectual property protection is dynamic. Inventions are not created in a vacuum.119 They build on existing technology and ideas. But those ideas themselves were once new. Giving inventors or creators control over all the positive externalities associated with their inventions means giving them control over improvements and new uses that might be made of their works. But doing so may retard improvements in a variety of ways. Central control by original inventors may simply give less incentive to improve on first-generation technology than competition for the rights to improvements. While there is substantial debate about how best to promote innovation - through the control of monopoly or the spur of competition120 - there is substantial evidence that at least in some industries competition is a stronger spur to innovation.121 One argument is that "possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress."122 Further, giving an original inventor control over the search for subsequent improvements leaves improvers vulnerable to bargaining breakdown, strategic behavior, or valuation error.123 A final problem is that the greater the right of the initial creator to capture all of the benefits conferred by the invention, the less supracompetitive profit will be available for those who come up with new uses of the invention. If the initial property right is perfectly airtight, new users capture none of the benefit of their improvement. Indeed, they could actually incur a loss if the patentee can demand the full social value of its invention, including improvements and new uses, while the improver is unable in turn to capture consumer surplus perfectly from its consumers.124

This situation could occur either with an improver who competes with the patent owner or with one who opens up a new market. If there is a chain of markets, each with its own positive externalities, the initial owner may demand a fee for licensing which is less than the aggregate social value across all markets, but greater than the private value users can capture. This is particularly likely if the downstream uses involve tangible rather than intellectual property, since as we’ve seen there is no legal right to control the social surplus associated with non-intellectual property. In this case, market failure will cause us to forego efficient new uses. Alternatively, the improver might want to sell a product in competition with the patentee that increases social surplus but reduces producer surplus. For example, suppose that the patentee has produced an invention, and that a potential improver wants to adapt the invention to compete in the same market. The social value of the use of the improved invention is $100, but the improver will only capture $60 of that value; the rest is consumer surplus. These competitive sales will displace sales by the patentee with a total social value of $80 and a private value of $65. The patentee will demand at least $65 to permit the use, more than the improver can pay.

The problem is a more general one, as Brett Frischmann notes: "economic analysis of many infrastructure resources fails to fully account for how the resources are used as inputs to create social benefits and thus fails to fully account for the social demand for the resources."125 In short, granting perfect control privileges initial inventors at the expense of improvers, and may therefore actually reduce the size of positive externalities from invention by discouraging the improvements and new uses which generate those externalities.

A third cost to intellectual property protection is strategic. The grant by the government of exclusive rights over inventions, like the grant of any government largess, inevitably attracts attention by those who would like to get their share of benefits from the government. In the intellectual property context, this "rent-seeking" behavior takes two different forms. First, the fact that patents in particular are granted to the first to invent may lead to races to invent. Some have worried that this racing will lead to wasteful duplication of research effort.126 I’m not particularly concerned about such duplication, in part because a race tends to accelerate innovation, leading to social welfare benefits,127 in part because it leads to the development of alternative means of solving the same problem, a process which generates its own positive externalities,128 and in part because duplication of effort may drive duplicators to find different uses for the same invention. But John Duffy has shown that even those who view patent races as a negative must oppose setting intellectual property protection equal to the full social surplus from the invention,129 a point which supports the one I make here.

Second, and more problematic, the very process of government granting rights over creations encourages creators to petition Congress to give them still more rights. This sort of legislative rent-seeking has proven to be a real problem in intellectual property, particularly in the copyright field, where Congress of late seems willing to give copyright owners whatever they ask for, at least as long as there is no large vested interest making demands on the other side.130 This rent-seeking is a cost of government-granted intellectual property rights. Indeed, economic theory suggests that private parties will spend up to the total value of the benefit seeking to capture it.131

A final problem is more structural. Even if we believe that investment in innovation is linear, not binary, and that increasing the returns to intellectual property rights will encourage greater investment throughout the range of demand,132 encouraging this additional investment is probably a bad idea beyond a certain point. As I noted above, the rest of the economy does not operate on the assumption that investors will reap the full social benefit of their investment. Rather, producers generally expect only to cover their marginal costs plus a reasonable return on capital investment. If we create a different rule for intellectual property, one that permits the internalization of social benefits not available with other kinds of property, we will encourage too much investment in innovation relative to other forms of production. This distorts the general economic equilibrium.133

None of this is intended to suggest that intellectual property is a bad idea. Far from it. Rather, the point is that we cannot and should not seek to internalize all positive externalities and prevent "free riding" on intellectual property. Granting intellectual property rights imposes a complex set of economic costs, and it can be justified only to the extent those rights are necessary to provide incentives to create. The economics of intellectual property simply do not justify the elimination of free riding.

D.How Can We Strike the Right Balance?

While it is possible to dispute the magnitude of the costs discussed in the previous section, it seems incontrovertible that they are greater than zero. Similarly, it also seems at least highly probable that intellectual property increases innovation and creation relative to a world without intellectual property rights, though it is hard to say by how much. Economic theory tells us that we must balance those rights if we are to achieve efficiency,134 granting intellectual property rights only to the extent necessary to enable creators to cover their average fixed costs. Anything more does harm and no good.

Economic theory does not, however, give us a very clear answer to the question "how much control is optimal?" The evidence is so ambiguous that Fritz Machlup once famously told Congress that he could not in good conscience recommend either that a patent system be created if one did not exist or that it be eliminated if it already did exist.135 In fact, George Priest went so far in 1986 as to say that economists could tell lawyers virtually nothing about the appropriate scope of intellectual property rights.136 The proliferation of economic literature on intellectual property over the last two decades has improved our understanding of the economics of innovation and intellectual property considerably, but it has not given us a magic bullet or told us where to draw the line between protection and the public domain. Instead, it has taught us that there is no one right answer. The optimal scope, strength and duration of intellectual property protection depend on the type of creation at issue, on the nature of innovation in the particular industry in question, on the particular kind of invention (and inventor) at issue, and on the market context.137 They may also depend on the sort of information that is at issue.138 The problem is further complicated by the fact that we must take into account other means intellectual property owners have of enforcing rights, including government funding, contract and technological protection.139 Given this, it is hard - and perhaps even impossible - to ever calibrate intellectual property law perfectly.

The difficulty of drawing the right economic line naturally leads commentators to look for another way out. David McGowan points out the difficulties that utilitarian analysis of intellectual property law faces.140 He also observes quite correctly that because of the difficulty of doing a proper utilitarian analysis, many people end up falling back on their assumptions or on first principles, and simply couching those arguments in utilitarian terms. He also quite rightly suggests that to the extent people are doing so, they should do so openly.141 McGowan seems dubious that we can ever get utilitarian balancing right, and therefore he himself relies on first principles - in his case, the Lockean notion that having put labor into something, one should own it.142 Others would fall back on an equally venerable first principle - that competition is the background norm, and granting intellectual property rights are departures from the public domain background that must be justified.143 Indeed, Benjamin Kaplan elevated this principle to the form of a "natural right" as well:

[I]f may has any ‘natural’ rights, not the least must be a right to imitate his fellows, and thus to reap where he has not sown. Education, after all, proceeds from a kind of mimicry, and ‘progress,’ if it is not entirely an illusion, depends on generous indulgence of copying.144

On this view, the fact that we can’t be sure whether intellectual property rights are necessary or what their proper scope should be means not (as McGowan suggests) that we should presume an entitlement to a property right but that we should deny such an entitlement altogether.

McGowan is surely correct to criticize those who couch in economic terms arguments that really reflect only underlying assumptions rather than economic reasoning.145 But I think turning to first principles - and therefore shying away from the difficult questions - is a mistake. First, doing so doesn’t tell us what to do. The fact that people can draw diametrically opposed conclusions by shifting to different non-utilitarian first principles suggests that we need some way to choose among those principles. If we have given up utilitarian economic analysis, it is not at all clear how we will make that choice, except perhaps by relying on the very preconceived notions and biases against which McGowan warns. Second, and more important, the economic analysis in this section suggests that falling back either on a property rights model or on the public domain will get the balance between intellectual property rights and the competitive market wrong. We may not know exactly how to calibrate the right level of intellectual property protection, but we can be reasonably certain that neither "no protection" nor "absolute control over externalities" is the right answer. Hard as it is to get the balance right, we will never do it if we simply stop trying.

We can take some minimum guidance from the likelihood that the relationship between intellectual property protection and innovation is not monotonic. For the reasons I identified in the previous section, adding more and more intellectual property protection not only has diminishing marginal benefits, but at some point has a net negative impact on innovation, because the strengthening of existing rights stifles more new innovation building on those rights than further expansion encourages. Thus, the relationship between the two resembles and inverted "U."

At a bare minimum, increases in intellectual property protection that restrict more innovation than they encourage cannot be economically justified.146 An obvious example is the retroactive extension of copyright term in the Sonny Bono Copyright Term Extension Act,147 which provided no new incentive to authors and complicated efforts to make use of a large number of existing works.148

In the search for the proper economic balance, the rhetoric of free riding seems unlikely to offer any substantial aid and quite likely to lead us astray. The concept of free riding focuses on the economic effects on the alleged free rider - whether the accused infringer obtained a benefit from the use of the invention, and if so whether it paid for that benefit. But that is not where we should be focusing our attention in calibrating intellectual property. The proper focus is on the intellectual property owner, not the accused infringer. The question is whether an extension of intellectual property rights is necessary to permit intellectual property owners to cover their average fixed costs. If so, it is probably a good idea.149 If not, it is not necessary, and the likelihood that it will impose costs on competition or future innovation should incline us to oppose it.150 Whether an accused infringer obtained a benefit without paying for it bears only indirectly on that question. "Free riding" encompasses both conduct that simply captures consumer surplus or other uncompensated positive externalities and conduct that reduces the return to the intellectual property owner to such an extent that it cannot cover its costs. Only the latter is of concern, and free riding as a concept will not help us to distinguish the two.

III.Beyond the Property-Free Riding Paradigm

If we are wrong to think of intellectual property rights in terms of free riding, how then are we to think of them? What is the right analogy for intellectual property law? Several possibilities come to mind.

First, it might be possible to rehabilitate the property analogy by disconnecting the concept of property from the arguments against externalities and free riding.151 As noted above, the economic arguments for property don’t justify the full internalization of social surplus as a general matter; only in the limited circumstances of the tragedy of the commons. The leap from property right to "despotic dominion" is not a universal one. As Carol Rose notes, despotic dominion is a caricature of property rights rather than an accurate description of them.152 There is a strong body of literature discussing the limits of real property rights and the circumstances in which we either grant restrictive rights to land or hold it open altogether.153 Some of the literature describing the nuances of property has made it to intellectual property or the Internet, where a number of thoughtful scholars applying the property framework have acknowledged the limitations of real property law and looked at how the particular characteristics of intellectual property should affect the construction of the right.154 It is possible, therefore, to talk of intellectual property as a species of property more generally without applying the inapt economic lessons from different types of property with rather different characteristics.155 Indeed, since as we have seen the tragedy of the commons doesn’t apply in the intellectual property context, economists who are thinking correctly about the issue will not seek to fully internalize the social benefits of intellectual property merely because we call it a form of property.

Clearly these treatments are a step in the right direction. But these nuanced analyses of the variety of possible property rules are the exception, not the rule, in the wave of property-based IP theory and court decisions. Far more common is an assumption that intellectual property is just like real property.156 With that erroneous157 assumption has come a second doctrinal leap: a focus on the elimination of externalities, and with them free riders. My worry is that the rhetoric of property has a clear meaning in the minds of courts, lawyers and commentators as "things that are owned by persons,"158 and that fixed meaning will make all too tempting to fall into the trap of treating intellectual property as an absolute right to exclude.159 Further, it is all too common to assume that because something is property, only private and not public rights are implicated.160 Given the fundamental differences in the economics of real property and intellectual property, the use of the property label may simply be too likely to mislead in practice. And if we have to keep emphasizing how IP isn’t like other forms of property, it’s not clear how much the label really buys us.161

A second alternative is to treat intellectual property as a tort.162 Unlike property systems, which focus their attention on legally enforceable rights to exclude, tort systems are intended to compensate injured parties. In one sense, treating intellectual property as a form of tort law is consistent with the economic lessons of the previous sections. A focus on harm to the intellectual property owner, rather than on the benefit conferred on the infringer, is consistent with optimal intellectual property policy. Indeed, in another era we treated intellectual property as a species of business tort, lodging trademarks and trade secrets in the Restatement of Torts and including chapters on copyright and patent in tort casebooks.163 But the analogy to tort law is far from perfect. Tort law tends to focus on defendant’s conduct, assigning blame where the defendant could have acted differently, rather than focusing on the incentives given to plaintiffs. Further, while basic tort principles design the law around compensating plaintiffs for injury, a significant branch of tort law is built around the concept of unjust enrichment.164 The idea behind unjust enrichment is to recapture - or at least to deny to the tortfeasor - positive externalities or spillovers. As noted above, that focus is inappropriate in an intellectual property case. My fear, therefore, is that drawing too close an analogy to the tort system will encourage the courts to focus attention on how the defendant was enriched, not on the need for compensating intellectual property owners. This would be a move in precisely the wrong direction.

Perhaps the closest legal analogy to intellectual property is a government-created subsidy. Tom Bell analogizes copyright to the welfare system.165 The point of intellectual property law is to depart from the norm of a competitive marketplace in order for the government to provide a benefit to a private party.166 This is also the point of the welfare system. The government is not doing so out of largess in either case. Rather, it is acting in order to benefit the public more generally, supporting innovation that might otherwise never occur because the market would undervalue creativity. A similar argument can be made for welfare and other forms of government subsidy, for example for education - that they are intervening to help particular people or activities in a way that the market would not in order to produce collateral social benefits.167 Thinking of intellectual property as government welfare policy has substantial benefits, because it makes it clear that the grant of this government benefit, like any other, no matter how well intentioned, comes with costs and should be implemented only if necessary.168

Nonetheless, the analogy has problems. The public has to pay directly for the social benefits of welfare in taxes. By contrast, the subsidies in intellectual property law are mediated through the market - only those who want to buy creative works or inventions are affected, though as a practical matter you would find it difficult to survive in modern society without using a copyrighted or patented product. The fundamental differences between intellectual property rights and other forms of government subsidy have to do with how the recipients of that subsidy are selected and the size of the subsidy determined. While with most government subsidies the government makes both choices, in the case of intellectual property the government leaves those decisions to the very market it is attempting to influence. Because many criticisms of government subsidies focus on size and allocation, they may not apply to intellectual property.169

A related formulation is intellectual property as government regulation.170 Intellectual property is obviously government regulation in the classic neutral sense of that term - government intervention in the free market to alter the outcome it would otherwise produce because of a perceived market failure. Intellectual property is a form of government subsidy, designed to influence supply in the market away from the competitive norm just as support from the National Endowment of the Arts, the National Institutes of Health, or crop supports to farmers are. Recognizing this fact may be useful because it helps us to understand the comparison between this form of subsidy and other sorts of rewards, an area on which there is a burgeoning literature.171 Further, copyright in particular (and to a lesser extent patent) have become increasingly regulatory in structure, with statutes setting out detailed rules, regulations and prices for specific uses in specific industries.172

Nonetheless, there are some problems with the subsidy and regulation analogies. I am concerned that drawing the analogy to welfare may have a problem similar to the problem with the property story: it brings with it too much baggage. Welfare is not popular, even among liberals, and much legislative effort has been devoted to reducing, reforming, or eliminating it.173 These efforts may be misguided, but even so welfare has a stigma.174 To talk about intellectual property in terms of welfare may incline people subconsciously to oppose it, just as talking about property and free riding inclines people to strengthen it. There may also be unconscious bias against government programs characterized as regulations. Regulation is out of vogue, and those who talk about intellectual property as regulation usually do so in order to denigrate it.175

None of these analogies is even close to perfect. My fear is that a focus on analogies will mislead more than it enlightens. If there are sufficient dissimilarities between intellectual property and other areas of law, drawing analogies becomes problematic, not only because of the caveats that are required ("intellectual property is like any other tort, except in the following ways . . ."), but because those caveats have a way of getting lost over time. This may be what has happened with efforts to talk about intellectual property as a form of property: over time, it is too easy to rely on the shorthand reference to property and come to believe that intellectual property really is like other kinds of property.

In the final analysis, I don’t know that we need an analogy at all.176 We have a well-developed body of intellectual property law, and a large and developing body of economic scholarship devoted specifically to intellectual property. The needs and characteristics of intellectual property are unique, and so are the laws that establish intellectual property rights. As the Supreme Court of Canada recognized 25 years ago,

copyright law is neither tort law nor property law in classification, but is statutory law. It neither cuts across existing rights in property or conduct nor falls in between rights and obligations heretofore existing in the common law. Copyright legislation simply creates rights and obligations upon the terms and in the circumstances set out in the statute.177

Intellectual property has come of age; it no longer needs to turn to some broader area of legal theory to seek legitimacy. The economics of intellectual property law should focus on the economic characteristics of intellectual property rights, not on inapposite economic analysis borrowed from the very different case of land.

1 (c) 2004 Mark A. Lemley.

2 William H. Neukom Professor of Law, Stanford Law School; Director, Stanford Program in Law, Science and Technology; of counsel, Keker & Van Nest LLP, San Francisco, California.

Thanks to Yochai Benkler, Anupam Chander, Julie Cohen, Dick Craswell, Tino Cuellar, Brett Frischmann, Rose Hagan, Mark Kelman, Glynn Lunney, Mike Meurer, David McGowan, Alan Morrison, Mitch Polinsky, Arti Rai, Stewart Sterk, Jeff Strnad, Eugene Volokh, Spencer Waller, and participants at a workshop at Stanford Law School for comments and discussions that have fundamentally changed (and hopefully improved) the paper.

3 VI Writings of Thomas Jefferson 180-81 (H.A. Washington ed.), quoted in Graham v. John Deere Co., 383 U.S. 1 (1966). There are other, nonutilitarian theories of intellectual property, primarily based on Locke and the natural law tradition, though it is worth noting that Locke himself spent plenty of time on utilitarian rather than desert-based justifications for property. See, e.g., Richard Epstein, The Utilitarian Foundations of Natural Law, 12 Harv. J. L. & Pub. Pol’y 713, 733-34 (1989); Seana Valentine Shiffrin, Lockean Arguments for Private Intellectual Property, in New Essays in the Legal and Political Theory of Property 152 (Stephen Munzer ed. 2001).

4 Tom Bell is the first to draw this analogy, likening copyright specifically to a particular form of government subsidy: welfare. Tom W. Bell, Author’s Welfare: Copyright as a Statutory Mechanism for Redistributing Rights, 69 Brooklyn L. Rev. 229 (2003).

5 Two paragraphs of this section of the article are adapted from my earlier work Romantic Authorship and the Rhetoric of Property, 75 Tex. L. Rev. 893 (1997), which sought to describe the emergence of the property view of intellectual property.

6 The modern use of the term intellectual property as a common descriptor of the field probably traces to the foundation of the World Intellectual Property Organization (WIPO) by the United Nations. See Convention Establishing the World Intellectual Property Organization art. 2(viii) (Stockholm, July 14 1967 to January 13 1968). Since that time, numerous groups such as the American Patent Law Association and the ABA Section on Patent, Trademark, and Copyright Law have changed their names (to the American Intellectual Property Law Association and the ABA Section on Intellectual Property Law, respectively).

There were uses of the term in the literature well before this time, especially on the Continent. See, e.g., A. Nion, Droit civils des auteurs, artistes et inventeurs (1846) (referring to "propriete intellectuelle"); Davoll v. Brown, 7 F. Cas. 197, 199 (C.C.D.Mass. 1845) (calling intellectual property "the labors of the mind," and concluding that they were "as much a man’s own . . . as what he cultivates, or the flocks he rears"). Copyright was sometimes referred to as literary property, and patents as industrial property. These uses do not seem to have reflected a unified property-based approach to the separate doctrines of patent, trademark, and copyright, however.

7 Westlaw search in FEDCOURTS database conducted April 2, 2004. One shouldn’t make too much of the methodology - growth in the number of cases and the growth of organizations and companies with "intellectual property" in their name may explain part of these differences. Still, the differences are fairly dramatic.

8 See Bell, supra note __, at 273 ("Rhetoric matters.").

9 To be sure, one can find earlier references to the property analogy. See Mark Rose, Authors and Owners: The Invention of Copyright 90 (1993). Adam Mossoff has even gone so far as to argue that it was endemic in the early years of the field, Adam Mossoff, Rethinking the Development of Patents: An Intellectual History, 1550-1800, 52 Hastings L.J. 1255 (2001), though his argument puts him at odds with most historical learning on the subject, and with what at least some contemporaries said they were doing.

10 Kenneth W. Dam, Some Economic Considerations in the Intellectual Property Protection of Software, 24 J. Legal Stud. 321, 332 & n.44 (1995); Frank H. Easterbrook, Intellectual Property is Still Property, 13 Harv. J.L. & Pub. Pol’y 108 (1990); I. Trotter Hardy, Property in Cyberspace, 1996 U. Chi. L.F. 217; Edmund Kitch, Patents: Monopolies or Property Rights?, 8 Res. L. & Econ. 31 (1986); Edmund Kitch, The Nature and Function of the Patent System, 20 J.L. & Econ. 265 (1977); Edmund W. Kitch, Elementary and Persistent Errors in the Economic Analysis of Intellectual Property, 53 Vand. L. Rev. 1727 (2000); Symposium, Does It Matter Whether Intellectual Property is Property?, 68 Chi.-Kent L. Rev. __ (1993); David McGowan, Copyright Nonconsequentialism, 69 Mo. L. Rev. 1 (2004); everything by Kieff. Cf. Wendy J. Gordon, An Inquiry Into the Merits of Copyright: The Challenges of Consistency, Consent, and Encouragement Theory, 41 Stan. L. Rev. 1343 (1989) (discussing similarities between copyright law and common-law property). In other cases, property theorists don’t focus on intellectual property, but use intellectual property examples as part of a broader theory of property. [cite Merrill & Smith].

Of the property scholars, Richard Epstein’s work is perhaps the most thoughtful. He believes that the characteristics of intellectual property largely but not entirely parallel real property, and he focuses on the distinctions to justify limits on intellectual property law. See Richard A. Epstein, Liberty versus Property? Cracks in the Foundations of Copyright Law (working paper 2004). But Epstein still begins with the baseline assumption - adopted implicitly from the real property model - that someone ought to own an invention.

Other scholars have lamented the rise of property rhetoric and its effects, while acknowledging its growing significance in the debate. See, e.g., Rochelle Cooper Dreyfuss, We Are Symbols and Inhabit Symbols, So Should We Be Paying Rent? Deconstructing the Lanham Act and Rights of Publicity, 20 Colum./VLA J.L. & Arts 123 (1996) (speaking of the "privatization" of words and symbols); Shuhba Ghosh, Deprivatizing Copyright, 54 Case W. Res. L. Rev. 387, 389 (2004); Lemley, Romantic Authorship, supra note __, at 895-903; Kenneth Port, The Illegitimacy of Trademark Incontestability, 26 Ind. L. Rev. 519 (1993); Samuelson, supra note __, at 397; Robert P. Merges, Property Rights Theory and the Commons: The Case of Scientific Research, 13 Soc. Phil. & Pol. 145, 146-47 (1996) (discussing "creeping propertization" in the pure sciences); Arti Rai, Northwestern (same); Neil W. Netanel, Copyright and a Democratic Civil Society, 106 Yale L.J. 283, 314-21 (1996) (tracing the connection to the preeminence of the Chicago School of economic analysis); Pamela Samuelson, Information as Property: Do Ruckelshaus and Carpenter Signal a Changing Direction in Intellectual Property Law?, 38 Cath. U.L. Rev. 365 (1989). Cf. Dan Hunter, Cyberspace as a Place and the Tragedy of the Digital Anticommons, 91 Calif. L. Rev. 439 (2003) (noting the effects of analogizing the Internet to real property); Mark A. Lemley, Place and Cyberspace, 91 Calif. L. Rev. 521 (2003) (same).

One measure of the extent to which the parallel has filtered through the legal academy is that first-year property casebooks now include significant discussions of intellectual property. See, e.g., John Dwyer & Peter S. Menell, Property (Foundation 2000).

11 See United States Department of Justice and Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property §2.2 (1995) (treating intellectual property just like physical property, and interpreting that to mean that it is entitled to no special immunity from antitrust law); Hon. Giles S. Rich, Are Letters Patent Grants of Monopoly?, 15 W. New Eng. L. Rev. 239 (1993) (arguing that intellectual property is just like physical property, and as a result doesn’t confer monopoly power, so antitrust scrutiny is inappropriate).

12 Easterbrook, supra note __, at 109, 112, 118.

13 See, e.g., San Francisco Arts & Athletics, Inc. v. United States Olympic Committee, 483 U.S. 522 (1987) ("when a word acquires value as the result of organization and the expenditure of labor, skill, and money by an entity, that entity constitutionally may obtain a limited property right in the word. . . . The USOC’s right to prohibit the use of the word Olympic in the promotion of athletic events is at the core of its legitimate property right."); Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) (trade secrets laws confer a property right which cannot be "taken" by government disclosure of the secret unless the government pays just compensation). For an analysis of several cases suggesting that the Court may be moving towards a view of information as property, see Samuelson, supra note __, at 375-95.

14 Samuelson, supra note __, at 398.

15 2 William Blackstone, Commentaries *2.

16 Julie E. Cohen, Overcoming Property: Does Copyright Trump Privacy?, 2002 U. Ill. J. L. & Tech. Pol’y 375, 379 (2002).

17 See Blackstone, supra ("There is nothing which so generally strikes the imagination, and engages the affections of mankind, as the right of property"); F. Gregory Lastowka & Dan Hunter, The Laws of the Virtual Worlds, 92 Calif. L. Rev. 1, 36 (2004) (noting that even small children exhibit possessiveness over chattels); Richard Pipes, Property and Freedom 65-86 (1999) (animals and all human societies show the possessiveness instinct).

18 Garrett Hardin, The Tragedy of the Commons, 162 Sci. 1243, 1244 (1968).

19 See 3 Friedrich A. von Hayek, Law, Legislation and Liberty 43 (1976) (referring to externalities as "neighborhood effects" that land owners will not take into account).

20 Harold Demsetz, Toward a Theory of Property Rights, 57 Am. Econ. Rev. Papers & Proc. 347, 348 (1967) ("A primary function of property rights is that of guiding incentives to achieve a greater internalization of externalities.").

21 Id. at 349.

22 Id. at 350 ("property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization"). Accord Gideon Parchomovsky & Peter Siegelman, Selling Mayberry: Communities and Individuals in Law and Economics, 92 Cal. L. Rev. 75, 79-80 (2004).

23 Demsetz, supra note __, at 350-53.

24 See, e.g., Henry E. Smith, Exclusion and Property Rules in the Law of Nuisance, 90 Va. L. Rev. 965, 965 (2004); Daniel C. Esty, Environmental Protection in the Information Age, 79 N.Y.U. L. Rev. 115, 150 (2004).

25 See City of Renton v. Playtime Theatres, 475 U.S. 41 (1986) (justifying prohibition of nude dancing based on secondary neighborhood effects).

26 Thus, in Voyeur Dorm, LLC v. City of Tampa, 265 F.3d 1232 (11th Cir. 2001), the court refused to permit a local zoning ordinance prohibiting nude dancing to shut down a live sex show broadcast over the Internet from a house in Tampa. The court found that no externalities were imposed on neighbors because the entertainment was not physically provided at the site but sent to remote users.

27 See Ronald S. Coase, The Problem of Social Cost , 3 J. Law & Econ. 1 (1960).

28 Id. Coase himself never really believed this; he set up the zero transactions costs model to make a point. But the idea has taken on a life of its own, and is generally attributed to him.

29 Demsetz, supra note __, at 356 ("But the owner of private rights to one parcel does not himself own the rights to the parcel of another private sector. Since he cannot exclude others from their private rights to land, he has no direct incentive (in the absence of negotiations) to economize in the use of his land in a way that takes into account the effects he produces on the land rights of others. If he constructs a dam on his land, he has no direct incentive to take into account the lower water levels produced on his neighbor’s land.").

30 Id. at 356-57.

31 Demsetz, supra note __ at __.

32 Westlaw search in FEDCOURTS database conducted April 27, 2004. The same disclaimers apply - this doesn’t purport to be a scientific study.

33 This argument is commonly found in antitrust law as a justification for intrabrand vertical restraints. See, e.g., Bus. Elec. v. Sharp Elec., 485 U.S. 717 (1988); Richard Posner, Economic Analysis of Law 295-96 (4th ed. 1992).

34 My focus in this article is on economic arguments against free riding. I acknowledge that there are arguments against "unjust" enrichment of another based on theories of desert in intellectual property. See, e.g., Lawrence C. Becker, Deserving to Own Intellectual Property, 68 Chi.-Kent L. Rev. 609 (1993); Wendy J. Gordon, A Property Right in Self-Expression: Equality and Individualism in the Natural Law of Intellectual Property, 102 Yale L.J. 1533 (1993); Wendy J. Gordon, On Owning Information: Intellectual Property and the Restitutionary Impulse, 78 Va. L. Rev. 149 (1992). Evaluation of those claims must await another day and likely another scholar, though it is worth noting that theories of desert don’t do especially well at explaining what the courts actually do in intellectual property, see Becker, supra, at 609, and that there are also noneconomic arguments against intellectual property protection. See, e.g., Wendy J. Gordon, Render Copyright unto Caesar: On Taking Incentives Seriously, 71 U. Chi. L. Rev. 75 (2004) (arguing that some creativity may be spurred by the idea of "giving back" to a society that has given a gift, and that propertization may reduce creation of this sort).

35 The clearest example is Kitch, supra note __, at 270-71, 275, who suggests a "prospect" rationale for intellectual property that is expressly based on the mining claims system used for certain types of real property once in the public domain. See also Dam, supra note __, at __; F. Scott Kieff, Property Rights and Property Rules for Commercializing Inventions, 85 Minn. L. Rev. 697 (2001). Demsetz devoted less than a paragraph to intellectual property. He wrote:

Consider the problems of copyright and patents. If a new idea is freely appropriable by all, if there exist communal rights to new ideas, incentives for developing such ideas will be lacking. The benefits derivable from these ideas will not be concentrated on their originators. If we extend some degree of private rights to the originators, these ideas will come forth at a more rapid pace. But the existence of the private rights does not mean that their effects on the property of others will be directly taken into account. A new idea makes an old one obsolete and another old one more valuable. These effects will not be directly taken into account, but they can be called to the attention of the originator of the new idea through market negotiations. All problems of externalities are closely analogous to those which arise in the land ownership example. The relevant variables are identical.

Demsetz, supra note __, at 359.

On the other hand, William Landes & Richard Posner explicitly reject such an approach in favor of the classic incentive-balancing approach discussed below. See William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 37 (2003); William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. Legal Stud. 325, 326 (1989). And no less an economic authority than Friedrich Hayek warned against equating real property and intellectual property: "a slavish application [to intellectual property] of the concept of property as it has been developed for material things has done a great deal to foster the growth of monopoly. . . . [D]rastic reforms may be required if competition is to be made to work." Friedrich A Hayek, Individualism and Economic Order 114 (1948).

36 Indeed, Brett Frischmann notes that "at times, nonrivalry [the public goods characteristic of intellectual property] seems inextricably linked to nonexcludability and the associated risk of free riding." Frischmann, supra note __, at 19.

37 On the growth of the management theory of intellectual property and its problems, see Mark A. Lemley, Ex Ante Versus Ex Post Justifications for Intellectual Property, 71 U. Chi. L. Rev. 129 (2004).

38 See Morton I. Kamien & Nancy L. Schwartz, Market Structure and Innovation (1982); Edwin Mansfield et al., Social and Private Rates of Return From Industrial Innovations, 91 Q. J. Econ. (1977). For more recent data, see Charles I Jones & John C. Williams, Measuring the Social Return to R&D, 113 Q. J. Econ. 1119 (1998).

39 Joseph Farrell & Carl Shapiro, Intellectual Property, Competition, and Information Technology [draft at 18] (working paper 2004).

40 The length of the copyright term was extended 11 times between 1963 and 1998, and now stands at the life of the author plus 70 years. 17 U.S.C. §302. Congress also changed the patent term from 17 years from issue to 20 years from filing, 35 U.S.C. §154(a), a change prior work has found adds patent term for the majority of patentees. Mark A. Lemley, An Empirical Study of the Twenty-Year Patent Term, 22 AIPLA Q.J. 369 (1994).

41 See Ghosh, Deprivatizing, supra note __, at 390 (noting the various types of works copyright has expanded to cover).

42 See generally Jessica Litman, Copyright Legislation and Technological Change, 68 Or. L. Rev. 275 (1989).

43 17 U.S.C. §505, 506.

44 See, e.g., Semiconductor Chip Protection Act, 17 U.S.C. § 901 et seq.; Digital Millennium Copyright Act, 17 U.S.C. § 1201 et seq.; Vessel Hull Design Protection Act, 17 U.S.C. § 1301 et seq.; 17 U.S.C. § 1101 et seq. (creating anti-bootlegging right); Federal Trademark Dilution Act, 15 U.S.C. § 1125(c); Anticybersquatting Consumer Protection Act, 15 U.S.C. § 1125(d).

45 William M. Landes & Richard A. Posner, Indefinitely Renewable Copyright, 70 U. Chi. L. Rev. 471, 475 (2003).

46 See Mark A. Lemley, The Modern Lanham Act and the Death of Common Sense, 108 Yale L.J. 1687 (1999) (discussing ways in which trademark law has expanded).

47 The United States Supreme Court treated trade secrets as property rights subject to a takings claim in Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001-04 (1984). Commentators have argued that the Uniform Trade Secrets Act, in force in 42 states, adopts a view of trade secrets as property. See, e.g., Lynn C. Tyler, Trade Secrets in Indiana: Property vs. Relationship, 31 Ind. L. Rev. 339, 339 (1998).

48 Dowling v. United States, 473 U.S. 207, 216-17 (1985) ("The copyright owner . . . holds no ordinary chattel . . . for the copyright holder’s dominion is subjected to precisely defined limits. It follows that interference with copyright does not easily equate with theft, conversion or fraud.").

49 See, e.g., Feltner v. Columbia Pictures Television, 523 U.S. 340 (1998) ("Actions for damages for infringement of common-law copyright, like actions seeking damages for invasions of other property rights, were tried in courts of law . . .").

50 "Free-riding . . . may be a pejorative description of copying, but it is still copying." Jane C. Ginsburg, Copyright, Common Law, and Sui Generis Protection of Databases in the United States and Abroad, 66 U. Cin. L.Rev. 151, 162 (1997). In Lowry’s Reports v. Legg Mason, 271 F. Supp. 2d 737 (D. Md. 2003), the court relied on this equation to find that a state law targeting free riding was preempted as equivalent to copyright.

51 Adidas-Salomon AG v. Fitnessworld Trading Ltd., [2003] 1 C.M.L.R. __, Case C-408/01, ¶¶37-40.

52 Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 234 F.3d 538, 627 (Fed. Cir. 2000) (en banc) (Linn, J., dissenting), rev’d, 535 U.S. 722 (2002).

53 Morris Comms. Corp. v. PGA Tour Inc., 364 F.3d 1288 (11th Cir. 2004).

54 H.R. 3261 (108th Cong., 2d Sess.) §3(a)(3) (2004).

55 Nat’l Basketball Ass’n v. Motorola, Inc., 105 F.3d 841, 843 (2nd Cir. 1997) (holding that "transmission of real-time NBA game scores" via Motorola’s pagers "did not constitute a misappropriation" of the NBA’s property). The Motorola court defined the "hot-news" International News Service claims as including the following elements: (i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendant’s use of the information constitutes free-riding on the plaintiff’s efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened. Id. at 845.

56 See, e.g., Ty, Inc. v. Perryman, 306 F.3d 509, 512 (7th Cir. 2002).

57 1-800 Contacts, Inc. v. WhenU.com, 2003 WL 22999270 (S.D.N.Y. Dec. 22, 2003); see also Playboy Enters., Inc. v. Netscape Communications Corp., 354 F.3d 1020 (9th Cir. 2004). Cf. Nissan Motor Corp. v. Nissan Computer Co., 2004 WL 1753289 (9th Cir. Aug. 6, 2004) (finding trademark infringement where the defendant capitalized on the goodwill of the plaintiff’s mark for commercial benefit, even absent any plausible theory of confusion); I.P. Lund Trading ApS v. Kohler Co., 163 F.3d 27, 50 (1st Cir. 1998) (defining trademark dilution in terms of "an appropriation of or free riding on" the investment of a trademark owner). Eric Goldman identifies Brookfield Communications, Inc. v. West Coast Ent. Corp., 174 F.3d 1036 (9th Cir. 1999) and Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808 (7th Cir. 2002) as using the concept of "goodwill misappropriation" to replace the traditional test for likelihood of confusion. Eric Goldman, Deregulating Relevancy in Internet Trademark Law [draft at 46] (working paper 2004). Similarly, Vincent Chiapetta has refered to "mark free riding" and proposed that the law should "internaliz[e] the returns on the seller’s ‘goodwill.’" Vincent Chiapetta, Trademarks: More Than Meets the Eye, 2003 U. Ill. J. L, Tech. & Pol’y 35, 51. For an argument that this approach is inconsistent with the goals of trademark law property understood, see Stacey L. Dogan & Mark A. Lemley, Trademarks, Search Costs, and the Internet, 43 Hous. L. Rev. __ (forthcoming 2004).

58 cites - trespass to chattels cases, Morris Comms. Corp. v. PGA Tour Inc., 364 F.3d 1288 (11th Cir. 2004).

59 To be sure, there are other reasons one might prefer a property entitlement over a liability rule in the Calabresi-Melamed framework. [cite Calabresi-Melamed]. For example, because valuation of intellectual property is difficult, we may trust parties more than courts to determine the right license price. Indeed, this is the primary justification scholars have offered for injunctive relief in intellectual property cases. [cite Merges, Epstein]. I don’t challenge that justification here. I merely point out that a right to injunctive relief strengthens the assumption that any use of the IP right by the defendant is problematic.

60 17 U.S.C. § __.

61 17 U.S.C. § __.

62 Id. § __.

63 Id. § __.

64 cites. In trademark cases disgorgement is limited to circumstances of intentional rather than good faith infringement.

65 cites

66 cites

67 For a good general discussion of the economics of intellectual property damages, see Blair & Cotter on remedies.

68 35 U.S.C. § __.

69 See Litman, supra note __; Jessica D. Litman, Copyright, Compromise, and Legislative History, 72 Cornell L. Rev. 857 (1987); Mark A. Lemley, The Constitutionalization of Technology Law, 15 Berkeley Tech. L.J. 529, 532 (2000) ("it is far too easy for Congress to fall into a pattern of responding to private demands, rather than thinking proactively about what should be done. To a disturbing extent, Congress in recent years seems to have abdicated its role in setting intellectual property policy to the private interests who appear before it."). On the role of interest group pressure in driving propertization more generally, see Saul Levmore, Two Stories About the Evolution of Property Rights, 32 J. Legal Stud. S421 (2002). Cf. Peter S. Menell, Envisioning Copyright Law’s Digital Future, 46 N.Y.L. Sch. L. Rev. 63 (2003) (suggesting that Congress is increasingly delegating the setting of digital copyright rules to the parties with concentrated interests in those rules)

70 Id. at 412; Friedman, supra note __, at 115 ("You will make something only if its value . . . is at least as great as the cost of making it.").

71 Samuelson, supra note __, at 413 ("there is always a sort of gap between total utility and total market dollar value. This gap is in the nature of a surplus, which we consumers get because we ‘receive more than we pay for.’").

72 The book, not the film. No rational consumer would be willing to pay $100 for a "Hamlet" film. Unless it has Mel Gibson in it, of course.

73 See, e.g., Morton J. Horowitz, The Transformation of American Law, 1780-1860 at 115 (1977) (attributing to Blackstone the view that competition between mills, bakeries, and river ferries could be enjoined on property principles). For a good discussion of the history of one such case in the United States, the Charles River Bridge case, see Raymond Shih Ray Ku, Copyright, the Constitution and Progress [draft at 18-19, 29] (working paper 2004) (noting that in that case "the investors argued that the opportunity to transport people across the river was no different than ownership of land. Only the current landowner could exploit that land," and similarly only the first to build a bridge across a river should be permitted to transport people across).

74 See Robert W. Bork, The Antitrust Paradox: A Policy At War With Itself (1978) (describing consumer welfare as the only proper goal of antitrust law). Richard Posner, by contrast, argues that total welfare is the right measure for antitrust. Richard A. Posner, Antitrust Law: An Economic Perspective (2d ed. 2001). Posner’s approach seems right, but his total surplus measure is still consistent with the idea that consumer surplus is a good and not an evil to be rooted out.

75 See VIII Philip Areeda & Herbert Hovenkamp, Antitrust Law ¶1613b, at 153.

76 See Entick v. Carrinigton, 95 Eng. Rep. 807 (K.B. 1765) ("the eye cannot by the laws of England be guilty of a trespass."); Boyd v. United States, 116 U.S. 616, 628 (1886) (adopting English view).

Admittedly, one reason this might be so in the example I have chosen is that the transactions costs of finding potential passers-by and setting a price with them ex ante would be quite high. See id. (making this point). But the law doesn’t even give me a liability rule right to collect "damages" from passers-by I can identify, as it does in much of tort law. See A. Mitchell Polinsky, An Introduction to Law and Economics 51-52 (2d ed. 1989); Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1088 (1972). Nor does it vest such a right in me in cases where the beneficiaries are few, clearly identifiable, and possible to deal with - think of the next-door neighbors who can see into my back yard, for instance. Cf. Demsetz, supra note __, at 353-54 (noting that the creation of property rights reduces the cost of bargaining over externalities).

If the positive externalities associated with a particular use of property are sufficiently strong, property owners may invest in efforts to internalize those externalities - for example by fencing off a garden and charging admission. While the investment in building such a private garden will likely be of social value, the investment in building the wall generally will not be. And so it is with intellectual property - trade secrets law, for example, seeks to discourage the construction of inefficient "walls" that unnecessarily restrict access to information. See, e.g., Edmund W. Kitch, The Law and Economics of Rights in Valuable Information, 9 J. Legal Stud. 683 (1980).

77 See Lawrence Lessig, Free Culture 33-34 (2004) (discussing the free riding arguments offered by property owners in the Nineteenth Century that they were entitled to prevent photographs of their property).

78 See Wendy Gordon, On Owning Information: Intellectual Property and the Restitutionary Impulse, 78 Va. L. Rev. 149, 167 (1992) ("A culture could not exist if all free riding were prohibited within it.").

79 Areeda & Hovenkamp, supra note __, at 153.

80 See, e.g., Carol Rose, Property and Persuasion 106 (1994).

81 The exception to this involves infra