IP TRANSACTIONS ON THE THEORY PRACTICE OF COMMERCIALIZING INNOVATION



IP TRANSACTIONS ON THE THEORY PRACTICE OF COMMERCIALIZING INNOVATION



Description:
This Article explores how some particular arrangements of formal law and informal practice may help reach across the ‘valley of death’ between early stage technologies and their downstream commercial deployment.


F. Scott Kieff

ABSTRACT

All too often within organizations and communities, innovations are not generated or put to use as rapidly or as broadly as they could be. Chief targets for blame include the problems of transaction costs, agency costs, lack of coordination, and improper incentives. Borrowing from the rich literature in the field generally known as new institutional economics, which has studied these types of problems more broadly, this Article elucidates how some practical tools might be expected to mitigate such problems. Particular arrangements of formal law and informal practice may help reach across the “valley of death” between early stage technologies and their downstream commercial deployment. Depending on the circumstances of a given situation, different practices and different aspects of the legal regimes of intellectual property, antitrust, business

~ Associate Professor of Law, Washington University in St. Louis. The Author gratefully acknowledges financial support for this work from the 2003-04 and 2004-05 W. Glenn Campbell and Rita Ricardo-Campbell National Fellowships and Robert Eckles Swain National Fellowships at Stanford University’s Hoover Institution, and from the law firm of Baker Botts. The Author also gratefully acknowledges intellectual contributions from participants in the Second Annual Baker Botts Lecture at the University of Houston Law Center on February 17, 2005, and appreciates helpful insights and comments provided by Steve Haber, Craig Joyce, John Norris, Troy Paredes, and Greg Vetter. Correspondence may be sent to fskieff.91@alum.mit.edu. JEL Classifications: A12, B15, B25, D23, D29, D61, K11, K20, K29, K39, O31, O33, O34.

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associations, bankruptcy, property, and contract may prove most helpful. Elucidating at least as many questions for further empirical research as answers in the form of practical tips for structuring transactions, this Article focuses on the particular mechanisms by which the problems and proposed solutions might actually operate.

TABLE OF CONTENTS

I. INTRODUCTION 728

II. OVERVIEW OF THE NIE APPROACH 729

III. OVERVIEW OF NIE LESSONS FOR IP THEORY 732

IV. SOME IMPLICATIONS FROM NIE FOR IP PRACTICE

AND EMPIRICAL RESEARCH 743

A. Start-ups 743

B. Innovating Within Hierarchies 748

C. Deploying Research Tool Innovations 751

D. Bankruptcy 756

V. CONCLUSION 758

I. INTRODUCTION

Lawyers and other professionals may be seen as some of the giant transaction costs, or potential wastes, of modern society.1 Yet, in other respects, to the extent the underlying transactions themselves are good for society and to the extent lawyers facilitate those transactions, a positive view of lawyers is appropriate, championing their role as “transaction cost engineers.”2

1. See, e.g., Ronald J. Gilson, Seeking Competitive Bids Versus Pure Passivity in Tender Offer Defense, 35 STAN. L. REV. 51, 62-63 (1982) (noting that there are “two important elements of transaction costs in the acquisition setting: information costs necessary to identify the opportunity

2. See, e.g., Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 YALE L.J. 239, 255 (1984) (describing lawyers as “transaction cost engineers”)

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Recognizing that a lawyer’s real impact depends on the circumstances of a given situation, this Article focuses on the mechanisms by which particular types of transactions relating to intellectual property can be structured to best facilitate innovation and commercialization and explores both particular practice tips as well as topics ripe for empirical research .3 Touching on aspects of various legal institutions including intellectual property (IP), antitrust, business associations, bankruptcy, property, and contract, the Article proceeds as follows. Part II provides an overview of New Institutional Economics (NIE), the field of economics that studies the ways institutions impact economic performance in general. Part III provides a brief discussion of a role suggested by NIE for IP institutions in general and patent law in particular. Part IV explores some representative examples of transactions relating to IP for which insights from NIE can suggest both specific practice tools as well as topics for further empirical research. The Article considers particular transactional issues relating to one example from what may be seen as each phase of the commercialization business life cycle: start-ups, innovating within a hierarchy, deploying research tool innovations, and bankruptcy. Part V concludes.

II. OVERVIEW OF THE NIE APPROACH

NIE emphasizes the use of comparative institutional analyses to look at the different characteristics of institutions and what impact they have on individuals and organizations over time.4 The comparative institutional analysis approach of NIE

engineer)

3. The view offered here is rather optimistic about the role lawyers can play, although it is admittedly written from the perspective of one who is at least doubly biased on that point, as one who teaches lawyers and practiced law for several years.

4. The NIE approach treats as “institutions” the set of human imposed constraints-such as formal laws and rules and informal norms-and their enforcement characteristics. See Douglass C. North, Economic Performance Through Time, Nobel

Lecture at Washington University (Dec. 9, 1993), in ECONOMIC SCIENCES 1991-1995, at

112-13 (Torsten Persson ed., 1997), available at http://www.nobel.se/economics/ laureates/1993/north-lecture.html (providing an overview of the field that is accessible to

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teaches us to ask not only what we want, but also which mix of formal and informal institutions will work better in achieving our set of goals.5

A core lesson of NIE is that even when there is consensus about what the goals of a particular institution should be, the particular choices that are made about the details of the institutional framework will have different and important implications for a number of problems operating on a number of levels. On the individual level, these problems include, inter alia, those of incentives, rent dissipation, information costs, and behavioralism. On the interpersonal level, these problems include, inter alia, those of transaction costs, agency costs, coordination, and private ordering. On the institutional level, these problems include, inter alia, enforceability of laws and norms, market failures, the differences between dynamic and static efficiency or between ex ante and ex post considerations, monopoly effects, government failures, and public choice, as well as public goods problems and the tragedies of the commons and anticommons.6

Because different institutional choices will have diverse implications-positive and negative -for these varied problems, NIE teaches why it makes sense as a conceptual matter to pay attention to means as well as ends. Engaging in a comparative institutional analysis makes conceptual sense because the perfect institution, like the perfect anything, is simply not achievable, and every real institution will have some problems. Accordingly, institutional choices should not be about a singular search for perfection but rather about which sets of problems and benefits

a general audience)

ANALYSIS 3-5 (2001) (applying game theory to comparative institutional analysis and NIE to develop a deeper understanding of economic institutions)

RUDOLF RICHTER, INSTITUTIONS AND ECONOMIC THEORY: THE CONTRIBUTION OF THE NEW

INSTITUTIONAL ECONOMICS 6-7 (1997) (reviewing the concept of the institution and generally defining it to mean “a set of formal and informal rules, including their enforcement arrangements”).

5. See FURUBOTN & RICHTER, supra note 4, at 7, 18-19 (discussing the importance of both formal and informal institutions).

6. While these problems are grouped for presentation purposes here by the level at which they are most evident, and with the recognition that in some respect these groupings are inevitably imperfect, most of these problems can be seen to operate on more than one level. For a short and accessible overview of these various problems in the context of NIE, see Oliver E. Williamson, The Institutions of Governance, 88 AM. ECON. REV. 75 (1998) and Oliver E. Williamson, The New Institutional Economics: Taking Stock, Looking Ahead, 38 J. ECON. LITERATURE 595 (2000) (addressing the different levels of “social analysis”). See also FURUBOTN & RICHTER, supra note 4, at 2-7, 122 (noting the “role of individual decision makers” and expounding on the various problems encountered at both the individual and institutional level).

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are best suited to tolerances and needs. Put differently, it is better to compare the particular costs and benefits of actually available options than merely to identify problems with one option and seek to perfect it. This is a theory of the “secondbest.”7 The search for perfection is what Demsetz calls the “nirvana” fallacy,8 and as Voltaire noted, it is through such searches that “the perfect is the enemy of the good.”9 This is not to say that institutions, existing or otherwise, should not be studied critically or that everything should be left alone because such complacency ignores the countervailing sage warning by John Dewey that “‘the better is too often the enemy of the still better.'”10

Moreover, institutions are essentially endogenous in that we can change them if we want.11 Therefore, a comparative institutional analysis makes great sense as a practical matter as well.12

The comparative institutional analysis of NIE teaches a great deal about many institutions, including the institution of property in general and IP in particular. The section that follows

7. See