Foreseeability And Copyright Incentives


Dec 3, 2012 (4 years and 4 months ago)



Sixth Edition

The following are the web notes for the sixth edition of
Law and Economics

by Robert D.
Cooter and Thomas S. Ulen. Our intent in these notes is to extend the material in the text by d
scribing some additional issues, articles, cases, and books. Because the fields of law, economics,
and law and economics are not standing still

because, that is, scholars are adding interesting
new material all the time, we may supplement, alter, and ad
d to these notes from time to time.

Each note begins with a copy of the material from the text about the content of the web note
and the page on which that web note can be found. We will from time to time insert new mater
al, update some of the entries,

and add some additional material. You should be able to dow
load pdf versions of each chapter’s web notes and of the entire set of web notes for all 13 cha

We have found that the very best students and their instructors from all over the world pa
close attention to these web notes. They often have good ideas about how to add to the entries
already here and suggestions about articles, cases, books, and topics that would be instructive to
add. We would be grateful for any comments or suggestions
about any of the notes.

Chapter 5

Web Note

(p. 116)

We discuss the burgeoning law
economics literature on trade secrets on our website.

Trade secret rights are based on common law tort and the rights and obligations established
under contract
law. Trade secrets are generally defined and governed by state common law, and
state regulation of trade secrets is not preempted by any federal law.

The fundamental right of a trade secret owner is the right to restrict access to, and use and

of a trade secret. This is also essentially an obligation, since maintenance of secrecy or
confidentiality is a prerequisite to trade secret protection. The
Restatement of Torts

defines Trade
Secret as follows

“[a] trade secret may consist of any formula
, pattern, device or compilation of info
mation which is used in one’s business, and which gives him an opportunity to obtain an
advantage over competitors who do not know or use it. It may be a formula for a chem
cal compound, a process of manufacturing,
treating or preserving materials, a pattern for
a machine or other device, or a list of customers.”

Furthermore, the restatement requires that a substantial element of secrecy will exist, so that,
except by the use of improper means, there would be
difficulty in acquiring the information.


Kewanee Oil Co. v. Bicron Corp
., 416, 470, 475 (1974).


American Law Institute, Restatement of Torts §757, comment b (1939). Restatement (Second) of Torts (1979)
declined to address trade secrets, however, the definition supplied by the first Restatement of Torts retains vitality.

Web Notes

Sixth Edition

Cooter & Ulen


In an economic sense, an important issue in evaluating the potential of a firm is its compet
tive position in respect to other firm at the same market. One way a firm can protect its position
in the market is by dev
eloping brand
equity and manufacturing tools that other competitors could
not duplicate.

Trade secrecy is quite different from other forms of intellectual property protection. First,
trade secrecy provides stronger protection than patents. The span of trad
e secret protection is i
definite and is not limited to a set term as other forms of protection. While the registration of a
patent is a must, the trade secret cannot be discovered and hence cannot be registered. Second, In
contrast to other forms of intel
lectual property protection, trade secrets are only protected against
misappropriation. Thus, when the trade secret is discovered by a competitor independently or
through the disassembly of a product that contains the trade secret in order to discover how
works, the trade secret owner does not have a ground to sue. Finally, while the other forms of
intellectual property protection are governed by federal law, trade secrets are protected by state

Firms may choose to employ trade secrecy because i
t is more cost effective than patent pr
tection (e.g., there is no disclosure of information to rivals), and because the expected duration of
trade secret protection may exceed the fixed length of a patent grant.

Sometimes a firm will choose not to patent
an intermediate discovery, lest the information
disclosed allow its rival to make the ultimate innovation. The less established a firm is the more
likely is for it to employ trade secrecy because the costs of patenting are too large.

This Web Note will dea
l, through the following articles, with the different aspects of the law
and the economics of trade secrets.

David D. Friedman, William M.

Landes, and Richard A. Posner

Some Economics of Trade S
cret Law

Econ. Persp

72 (1991).

In this
Article, the authors sketch an approach to the economics of trade secret law that co
nects it more closely both to other areas of intellectual property and to broader issues in the ec
nomic theory of the common law.

A trade secret is an item of information
, commonly a customer list, business plan, or man
facturing process that has commercial value and that the firm possessing the information wants
to conceal from its competitors in order to prevent them from duplicating it. A trade secret is not
property in

the sense it bears in the law of real and personal property or in areas of intellectual
property law (
for example
, copyright), because it is not something that the possessor has the e
clusive right to use or enjoy. If through accident the secret leaks out
, or if a competitor unmasks
it by reverse engineering, the law gives no remedy. The law does give a remedy if the secret is
lost through a breach of contract, (
for example
, by a former employee who had promised not to
disclose what he learned on the job),

however, the violation is not of a property right to the secret
but of a common law right defined without regard to trade secrets or to information in general.
Hence there is in a sense no law of trade secrets and violations of a trade secret are treated


Josh Lerner,
on to the Economics of Trade Secrets
, Harvard Business School,
available at


Further discussion on the Law and Economics of Trade Secrets can

be found in, Edmund W. Kitch,
The Law and
Economics of Rights in Valuable Information
, 9
J. of Legal Stud.
, 683
723 (1980); Steven N.S. Cheung,
Rights in Trade Secrets
, 20
Econ. Inquiry
, 40
53 (1982); Andrea Fosfuri & Thomas Ronde,
Tech Clus
Technology Spillovers, and Trade Secret Laws
, Discussion Papers Centre for Industrial Economics, Institute of Ec
nomics, University of Copenhagen, available at:

Web Notes

Sixth Edition

Cooter & Ulen


other legal means, for example, breach of contract, or other conventional common law princ

The common law of trade secrets raises three principal questions: (i) why the law does not
protect trade secrets as such, or, why it does not protect agai
nst the loss of trade secrets by acc
dent or by reverse engineering; (ii) why anyone would choose not to patent his trade secret; and
(iii) why the law permits the election. The conclusion that emerges from the authors’ attempt to
answer these questions is

that the common law approach to trade secrets appears to make good
(or even subtle) economic sense.

Regarding the second and third questions, the authors hold that Judges and lawyers’ view
that because trade secret law provides less protection to the inve
ntor than patent law does, no r
tional person with a patentable invention would fail to seek a patent and therefore trade secret
law must protect a class of lesser inventions, is incorrect. The authors then demonstrate their
view by considering three cases
. In the first, the inventor has a patentable invention that he b
lieves will take as long or almost as long as the term of a patent for anyone else to invent, but the
invention has only modest economic value. In the second case, the inventor again has a p
ble invention, but in this case one that he believes will take much longer than the term of a patent
for anyone else to invent. In the third case the investor has a non
patentable invention but b
lieves that reinventing it would take so long that he
can obtain a substantial return by keeping the
invention secret.

In the first case, the inventor’s decision may seem an obvious one, since the patent will yield
greater protection; however, it will probably do so at greater cost, which may not pay if as a
sumed the invention is not of great value. Obtaining patent protection involves significant fixed
costs of preparing the patent application; in contrast, protecting a trade secret avoids these costs,
but adds other expenditures to protect the secret from b
eing disclosed. The latter cost should be
roughly proportional to the value of the secret to prospective appropriators, and hence should be
low when the secret is of modest value. In that situation, trade secret protection may well be
cheaper than patent p
rotection, and the difference may exceed the benefits of a broader and lon
er lasting protection, embodied in a patent protection. Furthermore, the cost of obtaining a patent
must be incurred in every case, whereas the cost of establishing trade secret pro
tection is i
curred only if the secret turns out to be valuable enough to incite someone to try to steal it.

In the second case, the inventor’s choice is between patenting the invention and gaining
stronger protection and protecting it with a trade secret.

The investor will choose protecting the
invention by a trade secret if he thinks that doing so will give him a greater return. The law of
trade secrets assists him in this demonstration by increasing the chance that if someone does d
plicate the invention
, he will do so by inventing rather than by stealing it.

The third case is analytically similar to the second. The case assumes that the government
thinks the invention obvious (i.e. that someone else will come up with it shortly), and therefore
that grant
ing the inventor a patent would over
reward him and hence the invention is non
patentable. The inventor offers to demonstrate the contrary, by keeping the invention secret. If he
is wrong and someone else invents the same thing the next year, this proves t
he government
right; so it is as if the inventor had been denied a patent and the patent laws were exclusive. But
if the inventor is right and there is no duplication, then he gets the approximate reward he would
have gotten if the invention were patentabl
e, for he has shown that the government was mista
en. This third case merely reflects the fact that patent law cannot be tailored finely enough to
cover every case. To summarize, trade secret law supplements the patent system. Inventors
choose trade secret

protection when they believe that patent protection is too costly relative to
Web Notes

Sixth Edition

Cooter & Ulen


the value of their invention, or that it will give them a reward substantially less than the benefit
of their invention, either because the invention is not patentable or becaus
e the length of patent
protection is insufficient.

The authors’ analysis of trade secret law is congruent with the basic economic explanation
for patent protection

that it provides a means of internalizing the benefits of innovation. But it
may appear to

clash with the complementary explanation which views a patent primarily as a
device for establishing property rights over regions of partially unexplored inventions.

This discussion in this article raises the broader question whether trade secrets should
treated as property and comprehensively protected. The current structure of trade secret law may
be the best compromise among the competing economic considerations. No stronger conclusion
is possible. Yet, the analysis in this article does suggest that
the law of trade secrets may have
surprising efficiency properties that would reward further research in this neglected but i
portant field of common law.

Stanley M. Besen & Leo J. Raskind,

An Introduction to the Law and Economics of Intellectual

Econ. Persp


In this article the authors discuss the law and economics of different intellectual properties.
For the purpose of this Web Note, we will deal only with the part of the article on trade secrets.

The authors describe the trade s
ecret law as a law that covers specific business information
transmitted by persons, firms, and markets. A trade secret has been described as any formula,
pattern, device or compilation of information which is used in one’s business, and which gives
him an

opportunity to obtain an advantage over competitors who do not know or use it. Add
tionally, the Uniform Trade Secret Act

defines a trade secret as “information including a form
la, pattern, compilation, program, device, method technique, or process, tha
t: (i) derives ind
pendent economic value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain value from its disclosure
or use, and (ii) is the subject of efforts tha
t are reasonable under the circumstances to maintain its

The authors discuss the three respects in which trade secret law is different from patent law.
First, trade secret law is a state law, therefore

except for the uniformity prevailing in th
e 16
states that have enacted the Uniform Trade Secret Act

the scope of protection varies among the
states. According to the authors, a few states rest trade secret protection on a property theory,
while the majority of states invoke doctrines of tort, c
ontracts, constructive trust, or unjust e
richment as a basis of trade secret protection. In addition, 25 states have made it a crime to steal
a trade secret. The Second aspect of difference between trade secret law and patent law is that
trade secret law
is outside the disclosure framework of patent and copyright laws.

While protection is granted to a patent and copyright owner in return for the disclosure of the
subject matter to the public, trade secrets are not disclosed. Trade secrets are protected aga
discovery by “improper means,” but not against discovery of the trade secret by independent
means or by reverse engineering. The authors argue that the incentive to create trade secrets,
such as customer lists or chemical formulae, and to incur costs
of protecting them, is derived
from their value. A third difference presented in the article between trade secret law and patent
law is the subject matter and duration of protection. The authors present the difference in the
ject matter, as: “while prot
ection is granted only for subject matter that represents some cre


Uniform Trade
Secrets Act, drafted by the National Conference of Commissioners on Uniform State Laws.

Web Notes

Sixth Edition

Cooter & Ulen


tive efforts under the copyright and patent regimes, trade secret protection rests solely on the
commercial value of the matter to the claimant. Thus, trade secret law includes a wider subj

Regarding the duration of trade secret protection, the authors argue that it is limited only in
the case of independent discovery or by improper disclosure. The potential for perpetual prote
tion offered by the trade secret provides an incenti
ve to avoid the disclosure requirements of the
patent regime. Furthermore, there is also a potential in trade secret protection if the subject ma
ter of an expired patent were to be given further protection as a trade secret.

Injunctive relief and damages
are the remedies offered in the case of using “improper means”
of discovery by a competitor, or a breached of the confidential condition under which a trade s
cret was disclosed, by an employee. According to the Uniform Trade Secret Act, it is illegal both

to use “improper means” to discover the trade secret and to misappropriate improperly disco
ered material. Under Section 1(1
2) of the Uniform Trade Secret Act, “improper means” include
“theft, bribery, misrepresentation, breach or inducement of a breach
of duty to maintain secrecy,
or espionage through electronic or other means” while misappropriation is defined (in part) as
“acquisition of a trade secret of another by a person who knows or has reason to know that the
trade secret was acquired by improper

means.” Thus, the authors argue that the focus of trade
secret law is “fair dealing” between competitors and between employer and employee with r
gard to the uses of specific business information.

Furthermore, the authors argue that “since trade secret
law is enmeshed both with the co
petitive process and the internal decisions of the firm, economic analysis of the properties and
consequences of trade secret protection would illuminate important public policy interests. Ec
nomic analysis might also illum
inate the judicial task of applying trade secret protection.” In the
authors’ view, judges presently are too concerned with “dirty trick” aspects of competition.

The authors believe that “optimal administration of the trade secret laws requires more e
is on the private and social costs and benefits of trade secret protection, and on economic
efficiency, and correspondingly less concern with norms of fair commercial conduct.”

J. Zabojnik,

A Theory of Trade Secrets in Firms

Int’l Econ. Rev.
, 831 (

The article provides a theoretical model of trade secrets in hierarchical firms. The author uses
an assumption that each manager has access to trade secrets pertaining to his own hierarchical
level as well as to all lower levels. The article offers
some implications of this assumption for
optimal degree of trade secrets accumulation and protection as well as for the wage structure in
firms. The suggested model, developed by the author, implies that managers may have an ince
tive to overpay their subo
rdinates and protect their firms’ trade secrets too much.

Many times when a firm wants to learn about the trade secrets if its competitor, the firm can
hire a former officer of the competitor who has the knowledge. An employee who has the
knowledge of the
trade secret is usually a target for irresistible offers from the firm’s compet

Trade secret may include knowledge of the firm’s suppliers, prices, conditions of delivery,
etc., as well as the organizational capital of the firm (i.e., the organizatio
nal improvement the
firm performs in each hierarchical level). Additionally, trade secret may include the firm’s ince
tive system for management, the firm’s strategy for gaining a new market, or the firm’s R&D

Although the law is attempting to provi
de adequate protection for trade secrets, sometimes
the only way to protect a trade secret is to restrict a former employee from working for a compe
Web Notes

Sixth Edition

Cooter & Ulen


itor. Although this restriction of a former employee was used in the past as a protection for the
trade sec
ret (under the ‘‘inevitable disclosure’’ doctrine), in some states (e.g., California), state
court judges tend to object such measures because they restrict employee mobility. Furthermore,
some states statues also address the issue of restricting employee
mobility. For example, the Ca
ifornia Business & Professions Code provides a protection for the employee from such r
strictions, by stating that “every contract by which anyone is restrained from engaging in a la
ful profession, trade, or business of any k
ind is to that extent void.” Hence, although the law pr
vides some protection, it is not able to fully prevent loss of valuable trade secrets.

In order for a firm to prevent a leak of a trade secret to its competitors, it must pay high
enough wages to all
managers who have access to the trade secret, in order to convince them not
to defect to the competitors. Another thing the firm might consider is to restrict the knowledge
each employee has regarding the trade secret.

The article provides a theory of trad
e secrets in hierarchical firms and builds a model that
yields a number of theoretical and empirical implications, such as the predictions that both cap
tal rationing and managerial turnover should be observed more frequently at lower or middle
levels or that turnover in R&D
intensive firms should involve more senior managers.
The model presented in the article yields interesting results regarding the incentives of managers
to choose the optimal (from the firm’s point of view) level of trade secr
ets accumulation and pr
tection. “In the absence of contingent contracts, managers will almost never accumulate the level
of trade secrets that the firm considers as optimal. Some (or all) managers will accumulate too
much and some (or all) too little. Man
agers have a tendency to protect their firms’ trade secrets
too much and overpay their subordinates. This increase the subordinates’ own value to compet
tion and drives their wages up.”

, due to the restrictions preventing firms from contraction
with their employees to
prevent the future employment of the employee at the firm’s competitors, and as a result of the
inability of the law to fully protect trade secrets; firms face a situation where their trade secrets
are at stake. One of the ways to p
rotect the trade secrets under these circumstances is to make
sure that every employee obtains only an “optimal” amount of knowledge regarding the trade
secret. Additionally, firms can increase the salaries of their employees in order to create an i
e for the employees to stay with the firm and not to defect to the competitors.

T. Ronde,

Trade Secrets and Information Sharing

J. Econ.

Mgmt. Strategy
, 391

The main idea of the article is described by the author, as follows: “If trade

secrets are wea
ly protected by law, firms risk losing their valuable information when employees are hired by
competitors. It may therefore be optimal to limit the number of employees who share the trade
secrets even if it reduces the firm’s productive ef
ficiency. The benefits of limited information
sharing are greatest if the efficiency cost is low and the competition in the market is neither very
tough nor very weak. It is shown that it is more profitable to reduce the information sharing by
giving the e
mployees different information than by giving some employees more information
than others.”

The importance of secrecy for firms is due to their wish to protect their valuable information.
Sometimes firms use trade secret in order to provide protection to t
heir valuable information.
There are some types of information that, although have significant economic value to the firm,
cannot be patented (e.g., customer lists, market data, and efficient work procedures and routines).
In those cases, secrecy is the on
ly way to protect the valuable information.

Web Notes

Sixth Edition

Cooter & Ulen


Although the best way to keep a secret is not to tell it to anybody, this is not possible with
trade secrets. Usually, the firm has to disclose, to at least few employees, the trade secrets in o
der for them to u
se it in their day
day work. Furthermore, in order to obtain the current input
or advice from the firm’s suppliers or consultants, the firm has to allow them also to learn the
secret information.

In principle, the law of trade secrets prohibits anyone w
ho has the secret information to r
veal it to outsiders. However, firms are facing an obstacle of proving that a trade secret exists,
when alleging a misappropriation of a trade secret. Proving the existence of a trade secret is often
difficult, because th
e information constituting a trade secret is unknown to the public. The firm’s
position is particularly weak in cases concerning employees defecting to competitors. Because
courts are concerned about employees’ freedom to seek new job opportunities, they a
re reluctant
to prevent an employee from working for a competitor by granting injunctive relief or enforcing
a very restrictive noncompete covenant.

As a result, a basic rule regarding trade secret protection is to restrict the amount of
knowledge each emp
loyee accumulates. The firm might find it efficient to provide all the e
ployees with all the information about the functioning of the firm. However, when the employees
share the firm’s valuable information they are a target for competitors who will try to

them to defect.

The author provides the following model (regarding the protection of the trade secret through
the restriction on the information the firm will share with each employee): a firm hires two e
ployees and has to decide how to organize t
he production. The firm can choose to let the e
ployees work together on all the tasks in production (in that case, the employees share the info
mation about the full production process), or can choose to divide the tasks between the emplo
ees (the employe
es then work separately and are given only the information necessary to perform
their particular tasks). The more efficient way is to let the employees work together. However,
the employees receive lower outside offers if they work separately, as they shar
e fewer of the
firm’s trade secrets and that makes it cheaper to protect the firm’s valuable information.

The model shows that if the efficiency cost is the same, it is a less profitable to protect the
trade secret by providing some employees more informat
ion than others instead of giving the
employees different information, as is done when they are assigned separate tasks.

This article shows how firms might optimally limit the employees’ access to trade secrets in
order to reduce the outside offers that th
ey receive. The idea of giving some employees more i
formation than others can be interpreted as a theory of hierarchies. The employees who are i
formed about the firm’s trade secrets are then in the upper tier of the hierarchy, and the uni
formed employee
s are in the lower tier. The employees in the upper tier take the decisions and
instruct the employees in the lower tier. The model can therefore explain why hierarchies may
exist even if they reduce the internal efficiency of the firm. This provides an in
teresting contrast
to most existing theories that explain why hierarchies increase the efficiency of the firm.

Web Note

(p. 119)

See our website for more on recent developments in patent laws in the United States and
other nations, including
speculation on the causes of the tremendous upsurge in the nu
ber of patents in the 1990s and early 2000s.

Web Notes

Sixth Edition

Cooter & Ulen


There has been a great deal of
recent scholarship about different aspects of patent law

too much to summarize in a relatively short note. B
ut t
he following articles
give a flavor of
some of this literature, focusing on
developments in the
laws in the United States
and in China and Japan.

We also recommend that you look for the academic literature on the
Orphan Drug Act, which
is one of the few attempts to tailor patent law to the needs of a partic
lar industry (the pharmaceutical industry) in which innovation is particularly important.

The second part of this web note deals with the incredible upsurge in the number of patents

issued in the 1990s and early 2000s.

James C. Pistorino,
Recent Developments in Patent Law
, 6 Tex. Intell. Prop. L.J. 355 (1998).

Jones v. Cooper Industries Inc.

Contracts assigning or licensing patents are construed according to the usual and established
principles of contract law in the forum state, and the fact that the object of the contract is a patent
should present no special considerations.

This decision s
uggests that the patentee's interest in ensuring payment of royalties or posse
sion of the patent could be protected by licensing the patent rather than assigning it. The effect of
a license transferring substantially all the attributes of title, but attem
pting to retain title to ensure
payment of royalties, is uncertain at best.

In this case, the reversionary interest clause should have been enforceable because there was
no improper subdivision or condition to the practice of the monopoly rights. The reve
interest clause only placed a condition on retention of ownership of the monopoly rights. While
clearly flawed, this decision serves as an important reminder that the interaction of patent law
and judicial interpretation of state contract law can
surprise even the most careful practitioner.

Ethicon Inc. v. United States Surgical Corp.

In this case, the court reaffirmed the rule that a joint inventor/owner of a patent has the power
to unilaterally license the patent without accounting to the othe
r inventor/owner. However, the
court clarified the relationship between joint inventorship claims and sole inventorship claims
contained in the same patent

The decision illustrates the need for firm agreements whenever
there is even the prospect of a join
t invention and the important effects of a joint inventorship

While the interaction between joint inventorship and joint ownership continues to present di
ficult questions in the litigation context, a firm lesson from this court decision is the im
of memorializing in contract the terms of a joint inventorship whenever the possibility of joint
inventorship exists. As a practical matter, once conception of the invention is complete, it may
prove impossible to secure an agreement that allows f
or effective licensing and management of
the patent rights. The case illustrates the devastating impact that the failure to secure agreement
from a joint inventor can have.

Gentry Gallery Inc. v. Berkline Corp.

In this case, the perils of listing the
objects of an invention were made clear when the court
used a stated object of the invention to determine that the claims were invalid for failing to co
ply with the written description requirement. This decision illustrates the importance of careful
deration of each aspect of the specification of a patent application, including the practice of
listing the so
called "objects of the invention."

Web Notes

Sixth Edition

Cooter & Ulen


In order to comply with the requirement of a written description, the patent specification
must convey to thos
e skilled in the art that the applicant invented the subject matter later
claimed. All the claimed limitations of the invention must be described in order to comply with
the written description requirement. Applying this standard, the court found that clai
ms directed
to sofas having recliner controls other than on the console were invalid. The court looked to the
specification for any description of recliner controls on some place other than the console and
found none.

However, the court also considered the

statement that an object of the invention was to pr
vide a console that accommodates the controls for both the recliners. In the court's view, this
statement indicated that housing the controls was the very purpose of the console. Thus, recliner
located on any place other than the console did not accord with the object or purpose of
the invention. The court read the stated object of the invention as further evidence that the wri
ten description requirement was not satisfied as to claims directed t
o sofas incorporating controls
not located on the console.

The court's consideration of the "purpose" of the invention and its limiting effect in this case
should cause practitioners to further avoid the already suspect practice of listing "objects of the

invention" in the specification. While there is no statutory or regulatory requirement that the
specification include "objects of the invention," a listing of the "objects of the invention" has
been common practice in the past. In recent years, however, t
hat practice has been largely di
continued because of concerns that defendants would seize upon this language either as a written
description defense or for claim construction purposes.

In re Zurko

The issue in this case is the standard of review to appl
y to Patent and Trademark Office
(PTO) fact findings. The long
standing practice of the Federal Circuit and its predecessor court
has been to apply the same standard of review used for district court fact findings

namely, the
clearly erroneous standard.
The Zurko case could have an important effect on patent prosecution
by making challenges to PTO findings even more difficult.

Hien Nguyen,
Recent Developments in Patent Law
, 224 Texas Intellectual Property Law
Journal [Vol. 6:2].

Pfaff v. Wells E
lectronics Inc.

In this case, t
he court considered all of the

circumstances surrounding

sale or offers to sell

, including the stage of development

of the invention, the nature of the invention, and the
manner in which the invention was

sold. A

ommercially satisfactory stage of development for
the invention was not a


The court had no difficulty in holding that neither a redu
tion to practice nor a

physical embodiment of the invention is a prerequisite to the application of
the on

bar. Instead, the court emphasized that the only step not fully performed at the time

of sale was the invention’s customized tooling for production, but this step was routine

in light of
the nature of the invention. Because the invention was substantiall

complete at the time of the
sale such that there was reason to expect that it would work

for its intended purpose upon co
pletion, the court found that the invention was on

sale within the meaning of
the law.

Evans Cooling Systems Inc. v. General Motors


This case also involves an interpretation of the on
sale bar.
The issue was whether the d
fendant m

the plaintiff. The
held that t
here is not a single word
Web Notes

Sixth Edition

Cooter & Ulen


in the statute which would tend to put an inventor, whose

sclosures have been pirated, in any
different position from one who has permitted the

use of his process. He is master of the situation
and by prompt

action can protect himself fully and render the defense of

prior public use impo

According to the c
ourt, when there is a specific and definite offer for sale of a

tested device embodying every element of a later patented invention before

the critical date, as
evidenced by a completed contract for a sale that is clearly for

commercial purpos
es, the analysis
ends. There is no basis in the language of the

statute on which to carve an exception to the bar
for those instances in

which a third party misappropriates the invention and later places the i
vention on sale

or causes an innocent third pa
rty to place the invention on sale. Thus, activities of

third parties trigger the statutory bar even if those activities are

instigated by the one who alle
edly misappropriated the invention.

Todd E. Garabedian, Recent Developments in Intellectual Proper
ty Law: Avoiding Traps in the
Pursuit of University Research,

Research Management Review, Volume 14, Number 1 (2004).

U.S. patent laws have undergone many changes in recent years, both through Congress and
the courts.

law makes no distinctions b
etween academic research

and research done
for commercialization and profit. Therefore, those involved in research administration

at not
profit organizations, colleges, or universities must not assume that they will be


or that certa
in provisions of the patent laws do or do not apply to them. Such assumptions can

have a severe impact on the ability to license the technologies developed at these institutions.

In 1980 Congress passed the Bayh
Dole Act, which for the first time
permitted universities
and small

businesses to own inventions made with federal funding and to become directly i
volved in the

commercialization process of those inventions. The

purpose of the new law was to
have the public benefit

from the fruits of feder
ally funded research through the transfer of new
technology from academia to the

marketplace. After more than 20 years, it is readily apparent
that university technology transfer has

helped to create new businesses and industries, and open
new markets.

ortly after passage of Bayh
Dole, colleges and universities began to develop and strengt
en their

capabilities to effectively engage in the patenting and licensing of inventions. Although

technology transfer offices today perform a wide variety
of highly specialized fun
tions related to the

patenting and licensing of inventions, most utilize outside patent counsel to
develop and maintain patents

that protect their intellectual property. Since enactment of Bayh
Dole, and with the assistance of out

patent counsel, technology transfer offices at most co
leges and universities have become quite

sophisticated in playing the “patent game.”

The patent laws have undergone many changes and interpretations in recent years that add to

the already complex

tasks of the technology transfer office, its staff, and those involved in r

administration. This article summarizes several of the more important judicial decisions
and issues

relating to intellectual property rights and what implications they have

on university
research policies and

procedures. While in no way a comprehensive study, the following analysis
can serve as a starting point

for those involved in university research administration to enact or
change conventional procedures in

view of the
changing law.

New Railhead Mfg., LLC v. Vermeer Mfg. Co.:

ourt held that New Railhead’s patent was in public use more than a year before patent

filing and therefore invalid. Although one issue in this case centers

around “public use,” this case

instructive for its discussion of the requirements of a provisional patent application.

This case
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illustrates that a provisional application must fully disclose the invention claimed in any

quent utility application in accordance with the written desc
ription requirement of the patent

including a full description of how to make and use the invention, and the best way to pra
tice the

invention. To not do so can result in denial of any priority filing claim, or, as in

this case,
invalidity of an iss
ued patent.

University of West Virginia v. VanVoorhies:

ourt held that a former graduate student

must assign his patent rights to the University.
ourt determined that one patent application must be

assigned because an agreement execu
ed by the
graduate student covering an earlier patent required him

to assign subsequent patent

applications. A second patent application must be assigned because the

University’s patent pol
cy statement requires assignment of all inventions made by graduate students

This case illu
trates the importance of assignments and a comprehensive university patent policy.

With respect
to assignments, in most cases it is desirable that the assignment broadly include language

ring to all types of continuing applications
(both foreign and domestic), such as divisional

cations, continuation applications, renewal applications, reissue applications, and, as here,


Madey v. Duke University:

niversities can no
infringe valid patents, claim the act
ivities are

protected under “exper
mental use,” and suffer no consequences.

The court held that
regardless of whether a particular
institution or entity is engaged in an endeavor for

commercial gain, so long as the act is in fu
therance of the alleged infr
inger’s legitimate business

and is not solely for amusement, to satisfy
idle curiosity, or for strictly philosophical inquiry, the

act does not qualify for the very narrow
and strictly limited experimental use defense. Moreover,

the profit or non
profit st
atus of the user
is not determinative.

Previous case law had suggested the experimental use exception may e
empt university researchers from

patent infringement if the research had no commercial applic
tion. However, the
ourt has now held

that the real te
st is whether the research furthers legitimate
business objectives of the alleged infringer.

Integra Life Sciences v. Merck KgaA et al.:

ound that

early stage discovery research activities were not “solely for uses re
sonably related to the dev

and submission of information under a Federal law” and thus
not protected by the safe harbor

of the Patent law


addition, holders of research tool patents
may now assert their patents against potential infringers, even if

the infringing use is
related to
drug development activities that may be used at some indeterminate time in

the future for the d
velopment of data for regulatory approval.

William N. Hulsey III, Anthony E. Peterman, and Steven Sprinkle, Recent Developments in P
tent Law, 4 Te
x. Intell. Prop. L.J. 99 (1995)

This article provides an analysis of significant developments in patent law in the United

In the area of patent prosecution, the Court of Appeals for the Federal Circuit and the
U.S. Patent and Trademark Office (PTO
) worked to solidify the law relating to patentable inve
tions. With both judicial decisions and new guidelines, the Federal Circuit and the PTO made
major advances in clarifying patentable subject matter, especially in the computer software and
ogy areas. Not only did the Federal Circuit work to remove uncertainty as to patent
ble subject matter, it also strove to resolve questions in the areas of best mode and inequitable
conduct. In dealing with the inequitable conduct question, the divided Fed
eral Circuit panel hig
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lighted the tension that exists between the attorney's duty of disclosure to the Patent Office, on
the one hand, and the duty of maintaining the attorney
client privilege, on the other.

In the area of patent infringement litigation,
the Federal Circuit attempted to eliminate unce
tainty by issuing en banc decisions addressing claim interpretation, doctrine of equivalents, and
damages. Eliminating questions for jury review, thereby eliminating uncertainty, was apparently
on the agenda
of the Federal Circuit. However, the U.S. Supreme Court reintroduced uncertainty
on the issue of the right to a jury trial concerning validity by vacating the Federal Circuit panel

Recently, a milestone occurred in the harmonization of the U.S. pa
tent laws with internatio
al intellectual property rights treaties and statutes, as the end of the General Agreement on Trade
and Tariffs (GATT) interim period drew to a close and the permanent GATT Trade Related A
pects of Intellectual Property Rights (TR
IPS) provisions of U.S. patent law came into effect.
With numerous bills pending in Congress and a new report from a Presidential task force on i
tellectual property addressing the National Information Infrastructure, it is likely that additional
nt developments can be expected in the future.

John R. Alliso

and Lianlian Lin, The Evolution of Chinese Attitudes Toward Property Rights in
Invention and Discovery, 2 Patent Law of the People’s Republic of China (1992), reprinted in 2
China L. for Foreign Bus.

Modern China is as complex and imposing as ancient Chi
na was

mysterious. With well over
one billion people, ample natural resources, a tradition of

creative and inventive genius during

and mid
dynastic periods, and an emerging

based economy possessing the potential
to become one of the world’s lar

economic engines in the twenty
first century, the long
tortuous, but recently rapid

evolution of China’s attitudes toward property rights in invention and

commands attention. Encouraging technological research, development, and comme
tion through effective government policies is a

necessary, albeit insufficient, condition for
the advancement of China’s developing

economy. Thus, the new Chinese patent system and its
practical implementation provide

an illuminating partial portrait of at
titudinal change.

Although knowledgeable observers have had their differences about whether the

role of patents
in encouraging technological advancement and commercialization

outweighs their arguably ant
competitive exclusionary effects, today’s consensus
is that

the benefits of an appropriately ta
lored patent system more than counterbalance its

costs. The point is essentially moot except in
debates over how to fine
tune patent

systems to seek a more nearly optimal balance of competing
public interests. Fr
om the

perspective of a developing country such as China, it is an inescapable
fact that all

developed nations have correspondingly well
developed patent systems, and that the

increasing interdependence of virtually all economies means that China must act

to be a
true participant in the global economy.

Chinese attitudes toward invention and discovery, one can see

that a culture deeply
embedded with traditions completely antithetical to the patenting of

inventions and to the gran
ing of prop
erty rights in other forms of intellectual products

has recently moved toward recogn
tion of the necessity of a modern patent system.

Perhaps the most

important aspect of the current movement toward true recognition and e
forcement of

patent rights is its
emphasis on long
term goals, such as the construction of the

ucational, legal, and administrative infrastructures demanded for patent law to possess

and substance. Moreover, Western nations should be sensitive to Chinese

cultural and social
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ntions, and seek creative solutions to patent controversies rather

than force solutions on the
Chinese that do not fit China’s cultural context. An effective

system for protecting patents and
other intellectual property rights can exist in a


context other than that of liberal
democratic societies, albeit in a somewhat

different form. Assuming that China continues on its
current course, and with the proper

cooperation from the West, China can successfully complete
its transition to a patent


system of technological advancement and corresponding ec
nomic growth.

Latest Developments of Patent System in Mainland China, by Ms. Wen Xikai, Deputy Director
General, Legal Affairs Department, State Intellectual Property Office of the People's Republic of
China, available at:


The first Chinese Patent Law was published in 1984 and formally entered into enforcement
on April 1, 1985.

The purpose of its formulation is to adapt to the government policy of promo
ing economy and opening

This law has
absorbed the advantages of various patent systems
while taken into consideration of Chinese practices.

It follows the basic rules of Paris Conve
tion and creates a sound basis for establishing and promoting the development of Chinese patent

In 1992
, TRIPS agreement has reached its framework and been signed in draft.

In order to
enhance our protection level and be harmonized with TRIPS, China made important revision to
its Patent Law.

The revised patent law entered into force on January 1, 1993.

s revision has
greatly enhanced the protection level and as a developing country China provides the complete
protection in the leading roll.

Patentee has the right of importation and there is strict limitation on
granting compulsory license.

The granted pa
tent should have novelty, creativity, industrial a
plicability and the term of protection is 20 years.

The terms of protection for utility model and
design are 10 years from the date of filing.

Patent description should make full disclosure to the
gy solution and the burden of proof is on the defendant if an infringe case of process p
tent is filed against him.

In November 2001, China has formally acceded to WTO. At the same time, it also raised
new requirements for the development of domestic econ
omy market and the harmonization of
Chinese law system to the international standard.

For the purpose of further harmonizing with
basic rules of WTO and implementing the promises of Chinese government, Chinese Patent Law
made its second revision.

It increa
ses the intellectual property awareness especially patent pr
tection awareness and creates a sound social environment for the generation and promotion of

In the aspect of effective enforcement, this revision has further strengthened the jud
l and administrative channel for dealing with patent disputes.

Besides that, it prescribes even
stricter sanctions on patent infringement, counterfeiting or passing

Activities infringing p
tent and composing of crimes will be subject to criminal sanct

This helps to improve the j
dicial and administrative enforcement from various aspects and enhances the protection level.

Since the second revision of Chinese Patent Law, Chinese patent system has made great pr

According to the latest statisti
cs of SIPO, within the first 9 months of the year 2003, the
patent office has received totally 219,002 patent applications, which is 45% increase comparing
with the same period of the previous year.

It is estimated that the total patent applications in 200
will reach 300,000.

Since April 1, 1985, China spent 14 years and 9 months to reach its first one
million cases while the second million only cost a little bit more than 4 years.

In 2002, the appl
cations for patent invention was over 80,000, among which

over 40,000 are foreign applications
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and 22,590 were via PCT.

We can expect that in the near future, the examination capacity of the
office will be greatly enhanced and the quality will also keep improving.

By the year 2010, the
annual examination and gra
nting capacity of the office for 3 kinds of patents will be over 50,000,
among them the capacity for invention patent will be over 20,000.

The substantive examination
period for invention patent will shrink into 18 months while 6 months for utility model a
nd d

Toshiko Takenaka,

Patent Law and Policy Symposium: Re
Engineering Patent Law: The Cha
lenge of New Technologies: Part III: International and Comparative Law Issues: Patent I
fringement Damages in Japan and the United States: Will Increased Pat
ent Infringement Damage
Awards Revive the Japanese Economy?
, 2 Wash. U. J.L. & Pol'y 309 (2000)

Since the Japanese economy plunged into its current, deep recession, the Japanese gover
ment has been looking for measures to revive its economy. Reviewing Unit
ed States legislation
in the 1980s and early 1990s, Japan's Ministry of International Trade and Industry (MITI) and its
agency, the Japanese Patent Office (JPO), were convinced that the pro
patent policy and other
legislation that encouraged technology tra
nsfer were the primary reasons for the United States'
recovery from its recession. To follow the United States example, the government organized the
Commission on Intellectual Property Rights in the Twenty
First Century. In its report, published
in April 1
997, the Commission emphasized the need to strengthen intellectual property rights in
order to promote the development of breakthrough technologies.

Since then, MITI and the JPO have changed their intellectual property policies in order to
make them more

IP owner
friendly. Japanese patent law traditionally gave more weight to public
interests, particularly competitors' rights to design around existing patents, than to patent owners'
interests. The Commission on Intellectual Property Right proposed to shif
t this traditional ba
ance between the two competing interests toward more protection of patent owners' interests, and
wants patent law to give more incentives for developing pioneer inventions rather than i
provements and manufacturing technologies. This
new policy is not only in response to crit
cisms by United States patent owners, but if also reflects the needs of domestic industries facing
competition from Asia.

To increase incentives for innovation, the JPO emphasizes the need to give quick and str
patent protection. To meet this need, the JPO reconsidered the time period allowed to request
examination and opposition or invalidation proceedings, and revised the patent statute to shorten
the time required for examining applications. With respect t
o the policy of giving strong patent
protection, the JPO organized a committee to review claim interpretation and encouraged debates
among patent professionals on the appropriateness of the scope of protection given by Japanese
courts. Responding to concer
ns expressed by patent professionals, recent decisions by lower
courts have broadly interpreted claims and adopted the doctrine of equivalents. The Japanese S
preme Court recently endorsed these lower court decisions.

After finishing its review of the pat
granting procedure and the liability phase of the p
tent enforcement procedure, the JPO entered the final stage of its review of the Japanese patent
system in light of its new pro
patent policy. This final stage was a review of patentees' remedies
patent infringement and culminated, in late 1998, with a revision of the patent law provisions
relating to calculation of damages, and in 1999, with a revision of the patent enforcement pr
ceeding. This legislation is intended to increase damages awarded b
y Japanese courts, which
have been criticized by United States patent owners for their much smaller damage awards than
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those awarded by United States courts. The JPO's attempt to increase damages was successful
because courts reacted very quickly and start
ed to award larger damages more frequently. Ho
ever, whether such increased damages attain the goal of providing incentive for research and i
novation is questionable.

The JPO's call for changes in Japanese patent infringement damages was successful in tri
gering debate in the patent community and in drawing the courts' attention to the new direction
in patent policy. The revision of the patent statute signifies the new direction that the Japanese
courts are very likely to follow and create an overcompensat
ion scheme to deter future infring
ment. To maintain the traditional role of damages under the Japanese tort system and to prevent
overcompensation, Japanese courts will need measures to reduce the infringer's burden to esta
lish the amount that would not
have sold even without infringement. However, such measur
ment will not be readily developed and may take some time, as they will be developed in the o
derly course of case
case determinations.

Increased damages resulting from the overcompensation schem
e may chill the competition
from unpatented products or discourage the actual exploitation of patented inventions. At the
same time, if the expectation of the JPO and MITI is correct, the increased damage awards will
contribute to the recovery of the Japan
ese economy. In any event, both the JPO and MITI have
taken all possible measures in the field of technology and industry policy, there is nothing we
can do at this moment other than to leave the result to chance.

following articles offer some
ation on the causes of the tremendous upsurge in the
number of patents in the 1990s

and early 2000s.

The total number of patents in 1989 was 102,712 while in the year 2000 the number was
182,223, and increase of 77.4%. (Source: United States Patent and T
rademark Office, Perfo
mance and Accountability Report: Fiscal Year 2001). This increase has many explanations and
some of them are brought here.

Mark A. Lemley,
Reconceiving Patents in the Age of Venture Capital
, 4 J. Small & Emerging
Bus. L. 137

Patents are a growth industry. The U.S. Patent and Trademark Office (PTO) issued more than
150,000 patents in 1998, about twice as many as were issued in 1986. The rate of increase shows
no sign of slowing, and it is a radical break from the kind of gradua
l increase that had preceded

What this means if you multiply it out is that more than two million patents are now in force
in the United States. If you do a little math and you know how much it actually costs to get a p
tent through the entire syste
m, it's pretty easy to see that in the United States alone, the prosec
tion costs

what we're paying patent prosecutors and the PTO

exceed $5 billion a year, to say
nothing of the costs in the rest of the world, the costs of litigation, or any of the co
sts of licen

There are a number of reasons to question the classic incentive story. It may be that as we
move away from the model of patents that existed in 1790

that is, of the individual innovator
working in the garage

toward large corporate ent
ities, the link between innovation and patent
reward might be broken. Individuals who work for large corporations no longer see the particular
incentive or reward coming out of their particular innovation. The reward goes to a corporation
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and is a somewhat

more diffuse incentive. Corporations get revenues from patents, but the rev
nues don't necessarily go to the departments or the individuals who engage in innovation, and
therefore the incentive effect is less.

Another objection to patents notes that big
company's patent, but small companies innovate.
This is something that's true in some industries but not others. In particular, in the software i
dustry, a number of people have argued that the companies that get patents are not the ones at the
forefront o
f technological innovation. Rather, the people at the forefront of technological innov
tion are the ones working in garages who doesn't know any patent lawyers and therefore doesn't
patent anything.

We've also seen the development of what I call "licensing

shops," that is, significant corp
rate entities with little or no business purpose other than to accumulate and license patents. These
companies are not engaged in the business of building products. They might be engaged in the
business of thinking of ide
as, but what they mostly seem to "produce" are patents and patent l

Sheldon Krimsky, The Profit of Scientific Discovery and its Normative Implications, 75 Chi.
Kent. L. Rev. 15 (1999)

Several pieces of legislation were enacted in 1980 to creat
e more cooperation between indu
tries and universities. The Stevenson
Wydler Technology Transfer Act of 1980 encouraged i
teraction and cooperation among government laboratories, universities, big industries and small
businesses. In the same year, Congress

passed the Bayh
Dole Patent and Trademark Laws
Amendment, which gave intellectual property rights to research findings to institutions that had
received federal grants. Discoveries and inventions from public funds could be patented and l
censed, initially

to small businesses, with exclusive rights of royalties given to the grantee. The
Economic Recovery Tax Act of 1981 gave companies a twenty
five percent tax credit for sixty
five percent of their direct funding to universities for basic research. In 1983,

by executive order,
President Reagan extended the Bayh
Dole Act to all industry. To close the circle of research
partnerships among industry, universities and government, Congress passed the Federal Tec
nology Transfer Act of 1986, which expanded science
industry collaboration to laboratories run
by the federal government. Governmental standards for keeping an arm's length from industry
were being turned on their head.

The new federal initiatives on technology transfer and academic
government co
laborations were responsible for a marked rise in university patents. In 1980, American univers
ty patents represented one percent of all U.S. origin patents. By 1990, the figure rose to 2.4%.
Within that decade, the number of applications for patents on N
supported inventions i
creased by nearly 300%.

David Hricik,
Remedies of the Infringer: The Use by the Infringer of Implied and Common Law
Federal Rights, State Law Claims, and Contract to Shift Liability for Infringement of Patents,
Copyrights, an
d Trademarks

28 Tex. Tech L. Rev. 1027 (1997)

The 1980s saw the law turn full force in favor of federal intellectual property rights, partic
larly patent rights, which had been long
ignored by Congress and disfavored by the courts. In a
remarkable about
ace, the scope of subject matter protectable under patent law dramatically e
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panded in the 1980s, and the available defenses were narrowed. As a result, the number of appl
cations for patents and trademarks are at all
time highs, and damage awards are at r
ecord levels.

Not surprisingly, this has led accused infringers to seek a reduction in their own liability by
spreading it, in whole or in part, to third parties through the use of actions for contribution and
indemnity against those parties who caused the


Specifically, in the early 1980s, several important judicial decisions broadened the subject
matter protectable under federal law, particularly under the patent laws. Similarly, Congress has
afforded broader protection to intellectual prope
rty. For example, in 1984 Congress broadened
the patent laws by making it unlawful to ship the unassembled parts of a patented invention to a
foreign country for final assembly. The patent laws were again expanded in 1988 to protect pr
cess patent rights b
y making the sale or use of a product made by a patented process an i
fringement of the process patent. Prior to 1988, a process patent holder only had the right to e
clude others from practicing the process in the United States.

The increased scope of

intellectual property rights and the greater judicial protection afforded
to them probably explains the exponential increase in the number of patent and trademark appl
cations. The number of applications for plant patents increased from 147 in 1981 to 414

in 1991.
Patent applications increased dramatically during the 1980s and are now at record levels. Lik
wise, trademark applications nearly doubled between 1986 and1992. The ever
increasing scope
of intellectual property rights, the increased protection th
e courts give those rights, and the i
creasing amounts of damages underscore the need for parties to seek a reduction in the scope of
their own direct infringement liability, by looking for contribution or indemnity from those who
contributed to or induced

the infringement
by contract when practical, and by third
party action
or cross
claim when necessary in litigation.

Web Note

(p. 1

See our website for additional law
economics literature on patent issues.

This Webnote discusses the
treatment of the vexing issue of pharmaceutical prices and the
Orphan Drug Act. The issue of patent protection raises a debate between developing countries
and patients who cannot afford the prices of drugs and, as a result, suffer from the spread of di
se, and pharmaceuticals corporations that bear high costs in researching and developing drugs
and wish to have a return on their investment. This debate is the subject of international agre
ments and numerous literatures. The followings are excerpts and di
scussion of some of the liter
ture on patent issues.

Peng Jiang, Fighting the Aids Epidemic: China's Options Under the WTO

TRIPS Agreement,
Alb. L.J. Sci. & Tech. 223

The number of Chinese people infected with AIDS is estimated as one million. According to
experts, China could have 10 million people infected with HIV by 2010. Chinese patients are in a
desperate situation because the "AIDS cocktail"

the triple drug the
rapy credited for dramatica
ly reducing AIDS
related death rates in developed countries that now use the cocktail as a stan
ard treatment

still costs more than $ 10,000 a year in China, which is far beyond the budget of
virtually all AIDS patients in Chi

On November 10, 2001, after fifteen years of difficult negotiations, China won formal a
proval to join the World Trade Organization ("WTO"). In return for a host of membership ben
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fits, China will abide by the various WTO agreements, including the Agr
eement on Trade
Related Aspects of Intellectual Property Rights ("TRIPS"). Under the TRIPS Agreement, China
is required to provide strict patent protection to pharmaceuticals.

China's increasing AIDS infection rate and its entry into the WTO seem to pose
a dilemma
for the country. On one hand, there will be an increasing demand for affordable AIDS medicines
among its growing AIDS population in the near future. On the other hand, it will have to comply
with the TRIPS Agreement and protect patents of AIDS me
dicines, most of which are held by
pharmaceutical companies in developed countries. The high prices of these patented drugs are a
major reason for their inaccessibility in developing countries.

The author explores China's options under the TRIPS Agreement

in its effort to obtain a
fordable medication for its growing AIDS population. He holds that while the Chinese gover
ment's commitment to international trade agreements is commendable, when human lives are at
stake, the protection of intellectual property

should not take precedence. The granting of compu
sory licenses is legally permissible under the TRIPS Agreement, morally supported by the inte
national public opinions, and practically effective in bringing down exorbitant pharmaceutical

t Weissman,
A Long, Strange TRIPS: The Pharmaceutical Industry

to Harmonize
Global Intellectual Property Rules, and the Remaining WTO Le
gal Alternatives Available to
Third World Countries
, 17 U. Pa. J. Int'l Econ. L. 1069 (1996)

One of the great iron
ies of the recent drive to global free trade is the inclusion of intellectual
property on the free trade bandwagon. By definition, protecting intellectual property is about r
stricting trade in certain goods. The pharmaceutical industry in the United State
s has played a
critical role in placing intellectual property protection on the free trade agenda.

Yet, intellectual property protection has become a central part of the free trade agenda, as
well as the major global trade agreements. This Article consider
s how this state of affairs came
about, and what it means for the Third World. Its crucial concern is the range of pharmaceutical
patent policy options that remain open to Third World nations.

The primary concerns of a rational drug policy for Third World
nations should be dissemina
ing useful drugs as widely and cheaply as possible and encouraging research and development of
products to address local illnesses. Within the realm of patent policy, the best means to achieve
the goal of providing drugs widely
and cheaply is to promote generic production. The author b
lieves that "compulsory licensing is the most feasible means to promote generics. Compulsory
licensing is a decentralized, anti
bureaucratic means to ensure the rapid development of generics
once t
he system is legislated into place or otherwise adopted."

The development of the domestic industry as an outgrowth of a compulsory licensing system
may aid in the creation of an indigenous research capacity and in promoting research on local
illnesses. Hi
storical experience shows, however, that developing a domestic industry will not a
complish these goals by itself. To achieve these ends, Third World nations should look to the e
ample of the biomedical infrastructure in the U.S., which is crucially depend
ent on government
funding. Collective action problems and other factors affecting corporate incentive, structure,
and organization preclude private industry by itself from accomplishing what government fun
ing can (e.g. development of an indigenous capacit
y in basic and early
phase applied research
which creates break
through advances and spins off into commercial applications.) With very
few exceptions, however, Third World nations do not have available funds easily diverted into
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biomedical research progra
ms in national universities or laboratories. There are, however, at
least two attractive options to generate these monies: (i) a percentage of royalty payments to p
tent licensors could go to a national biomedical fund; and (ii) a national tax could be pla
ced on
all drug sales, or on all non
essential drug sales, with the resulting revenue also directed to the
national biomedical fund.

The key to implementing reforms of this sort is conceptualizing and promoting them as legi
imate and valid policy choices.
Once they have crossed the threshold of legitimacy in practical,
political, economic, legal, and metaphoric terms, they can be considered on their merits.

Judy Rein,
International Governance through Trade Agreements: Patent Protection for Essential
, 21 NW
. J. Int'l L. & Bus. 379 (2001).

This article examines the current conflicts surrounding the implementation of patent prote
tion for pharmaceuticals. Medical research has yielded significant improvements in treating di
eases that only recently

were incurable. This is most stunning in the area of AIDS treatments.
Simultaneously, an explosion in the infection rate in poor countries has made AIDS a largely d
veloping world disease. As a result, the high

drugs is largely unavailab
le about
90% of the infected population.

The devastation of the AIDS pandemic and the management of a public health solution pr
sent a challenge to global governance. A critical source of conflict arose from the tension b
tween forces favoring preservation

of commercial interest in patent rights and the compelling
need for poorer countries to get access to safe medicines at an affordable price. A combination of
the market, state regulation of patent monopolies, and intergovernmental trade regimes manages
stributional outcomes. However, this governance structure poorly responds to this particular
instance of market failure.

The signing of the NAFTA Agreement and the TRIPS Agreement represented a significant
departure from traditional multilateral trade dip
lomacy. From its creation in 1947, the General
Agreement on Tariffs and Trade (GATT) operated through a process of negotiating tariff redu
tions on goods. In the 1990s, this gradual reduction of tariff barriers to the free flow of commod
ties was supplemen
ted with the establishment of enforceable global standards governing intelle
tual property.

The inclusion of intellectual property rights as a critical aspect of trade negotiations flowed
logically from the explosive growth of value generated by intellect
ual property in industries such
as software and biotechnology. Strong intellectual property protections in an otherwise unreg
lated market are rationalized as necessary interventions to encourage innovation by guaranteeing
sufficient return on investment i
n the development of intellectual property. Rights holders are
then able to enjoy monopoly rents on their inventions, a policy which must be balanced with o
posing social goals of promoting competition and affordability of consumer goods. By establis
ing p
rotection of rights for investors in innovation, the global trade regime governs the complex
balance of interests between intellectual property owners, second
comers in the market, and co

Managing this balance is particularly tricky in the case of
pharmaceuticals. Unlike most other
consumer goods, access to essential medicines is a basic human need, and an important aspect of
many national health policies. One of the types of access is the financial access which is greatly
affected by the ability of

pharmaceutical companies to exercise monopoly control of pricing
through exclusive patent rights. Where comparative advantage depends on monopoly of intelle
tual property, developing countries are at a distinct disadvantage. Through active lobbying, i
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Cooter & Ulen


national pharmaceutical companies succeeded in obtaining a high level of pharmaceutical p
tent protections in the trade agreements. Increasingly, poor countries affected by the AIDS pa
demic and international health organizations actively have sought to pr
eserve state regulatory
powers within the confines of the TRIPS Agreement. However, these efforts have been met with
considerable resistance, particularly from the United States, which has engaged in aggressive
unilateral action to extend patent protection

beyond the international agreements.

Resolutions to the affordability issue are only part of a larger public health challenge to the
infectious disease crisis in the developing world, or even the cancer and heart disease complaints
of developed world. Ho
wever, the mechanisms for intellectual property protection established
through the trade agreements are ill
suited to overcome this dilemma. Not only do they operate
in an incongruous context, they also are not reflective of the actual nature of the transn
interests affected by policy outcomes.

Carolina Dolmo,
Examining Global Access to Essential Pharmaceuticals in the Face of
Patent Protection Rights: The South African Example
, 7 Bu
ff. Hum. Rts. L. Rev. 137(2001)

The divide between world inco
me and access to life saving medicines is great. Many poor
countries try to implement policies to help their citizens acquire affordable medicines in order to
close the economic gap. The AIDS pandemic creates an enormous demand for essential drugs.
The mag
nitude of the AIDS crisis in South Africa coupled by the difficulty of obtaining afford
ble and essential drugs, forced the government in 1997 to enact Section 15(c) of the South Afr
can Medicines and Medical Devices Regulatory Act (SAMMDRA) that intended
to address this
critical public health crisis. Section 15 (c) authorize parallel imports and compulsory licensing
with the objective of allowing easier access to affordable drugs.

Countries practice parallel importing when they globally seek lower priced
medicines and
permit the drugs' import, rather than restrict purchases at higher priced versions of the same
drugs from local distributors. Parallel imports are an effective means for poor and developing
countries to achieve lower priced drugs. In addition
, parallel imports benefit many European
Community countries, where the government is the chief payer for health care services, inclu
ing pharmaceuticals.

Compulsory licensing allows regular licensure grants to a third party that will manufacture a
drug s
till under patent. The third
party licensee is able to use the patented product or process. In
return, the patentee has a right to adequate royalty payments, at a rate set by the host legislature.

Forty major drug companies sued as a response to South Afr
ica's initiative, in an attempt to
protect pharmaceutical patent rights and corporate profits, and the United States waged an a
gressive campaign to reverse the South African law. During the fierce, two
year campaign
against the Act, members of the global
public health community and consumer interest groups
joined forces to protest the pharmaceutical industry's efforts. As a result of the sustained pre
sure, the United States eventually withdrew the suit. For its part, South Africa agreed to abide by
the GA
TT and the TRIPS provisions in implementing subsequent drug initiatives.

However, the apparent change in the U.S. posture toward the Act did not eliminate the ong
ing broader dilemma of balancing public health concerns and pharmaceutical patent rights. Thi
article explores how that dilemma was manifest within the South African context. It examines
how changes in political posture should further manifest into concrete policies. It posits that the
United States Trade Commission must adopt less restrictive tr
ade standards to other countries

Web Notes

Sixth Edition

Cooter & Ulen


Since the policy shift of the United States, South Africa has been reevaluating its own public
health strategy in a seemingly quixotic manner. However, it at least seems it is free to do so
without outside pressu
re. Moreover, South Africa has also sought to deliver Diflucan; an AIDS
related treatment, free of charge to AIDS patients. Given that South Africa prevailed in preser
ing its compulsory licensing and parallel imports, the same case could be made with othe
r cou
tries in desiring access to cheaper drugs.

The author believes that "parallel imports and compulsory licenses in the developing world
do not affect companies' revenues significantly. However, public health benefits are enormous.
For the protection of

fundamental human rights, the U.S. should reconsider its global trade poli
es of essential pharmaceuticals and implement strategies that place public health concerns "pa
amount" to intellectual property issues."

Keith E. Maskus,
Intellectual Property Rig
hts and Economic Development
, 32 Case W. Res. J.
Int'l L. 471 (2000).

This article provides an analytical overview of how economic development may be promoted
or hindered by an effective system of intellectual property rights. Intellectual property right
s can
play a positive role in encouraging new business development, rationalization of inefficient i
dustry, and inducing technology acquisition and creation. They may harm development prospects
by raising the costs of imitation and permitting monopolistic

behavior by the owners of the
rights. The evidence provided in this article supports the view that product innovation is sensitive
to intellectual property rights in developing countries.

As the global protection regime strengthens due to implementation
of the TRIPS Agreement
numerous questions arise about impacts on prospects for economic growth. For many reasons, it
is impossible to claim confidently that the new regime will raise growth and improve economic
development processes. First, many other vari
ables affect growth in ways that could dominate
the impacts of intellectual property rights. Such elements include macroeconomic stability, ma
ket openness, policies for improving the economy's technological infrastructure, and the acquis
tion of human cap
ital. Second, economic theory points out that intellectual property rights could
have many effects on growth, some positive and some negative. Further, the significance of these
effects would be dependent on circumstances in each country. However, in a bro
ad setting of a
propriate complementary policies and transparent regulation, intellectual property rights could
play an important and positive role in promoting economic growth. Indeed, the system of inte
lectual property rights itself may be structured in

particular ways to favor dynamic competition
within a system of rights and obligations.

Economic theory demonstrates that intellectual property rights could play either a positive or
negative role in fostering growth and development. Intellectual property

rights could be effective
and market
based mechanisms for overcoming problems that exist in markets for information
creation and dissemination. However, their existence could pose problems in terms of their p
tential for costs and anticompetitive abuse.

he author argues that modern intellectual property rights systems are not sufficient by the
selves to encourage effective technology transition. Intellectual property right must form part of
a coherent and broad set of complementary policies that maximize
the potential for intellectual