The Debilitating Effect of Exclusive Rights: Patents and Productive Inefficiency

Are we underestimating the costs of patent protection? Scholars have long recognized that patent law is a double-edged sword. While patents promote innovation, they also limit the number of people who can benefit from new inventions. In the past, policy makers striving to balance the costs and benefits of patents have analyzed patent law through the lens of traditional, neoclassical economics. This Article argues that this approach is fundamentally flawed because traditional economics rely on an inaccurate oversimplification: that individuals and firms always maximize profits. In actuality, so-called “productive inefficiencies” often prevent profit maximization. For example, cognitive biases, bounded rationality, habituation, and opportunism all contribute to productive inefficiencies that harm individuals, firms, and ultimately society. Moreover, a variety of theoretical analyses and empirical studies demonstrate that robust competition reduces productive inefficiencies. Consequently, patents that substantially limit competition exacerbate productive inefficiencies and an important effect of patent law therefore has been systematically overlooked. This Article begins to fill this void and demonstrates that consideration of productive inefficiencies sheds new light on numerous unresolved and contentious debates in patent law. INTRODUCTION 2046 I. NEOCLASSICAL ECONOMICS AND PATENT LAW 2052 A. Neoclassical Economics 2052 B. Traditional Intellectual Property Scholarship 2055 II. PRODUCTIVE INEFFICIENCY 2059 A. Sources of Productive Inefficiency 2059 B. Effects of Productive Inefficiency 2065 * Associate Professor, University of Baltimore School of Law. For their insightful comments, I thank Jonas Anderson, Michael Burstein, Jorge Contreras, Gregory Dolin, Brett Frischmann, Oliver Goodenough, Paul Gugliuzza, David Jaros, Megan LaBelle, Bob Lande, Jiarui Liu, Gregory Mandel, Lucas Osborn, Kristen Osenga, Roger Schechter, Christopher Seaman, Harry Surden, David Taylor, John Whealan, and Joshua Wright. I also thank for their feedback the participants at the 2013 Intellectual Property Law Scholars Conference, the 2013 Mid-Atlantic Patent Works in Progress Conference, the 2013 Intellectual Property Scholars’ Roundtable, and the 2014 Midwinter Patent Law Experts Conference. This Article was produced with the support of a University of Baltimore Summer Research Fellowship. I also thank my wife Julie and my twin daughters Cassie and Lydie for their support as I worked on this project. All errors are mine. 1 Hubbard: The Debilitating Effect of Exclusive Rights: Patents and Producti Published by UF Law Scholarship Repository, 2015 2046 FLORIDA LAW REVIEW [Vol. 66 C. Reducing Productive Inefficiency 2066 1. Competition 2066 2. Limits on Managerial Supervision 2071 III. PRODUCTIVE INEFFICIENCY AND PATENTS 2073 A. General Concerns 2073 B. Quantifying Productive Inefficiency from Patents 2077 1. The Complex Effects of Patent Protection 2077 2. The Schumpeter–Arrow Debate 2078 C. Promoting Commercialization 2081 1. The Commercialization Problem 2081 2. Existing Proposals 2084 3. Incorporating Productive Inefficiency Analysis 2087 D. Patent Scope 2089 E. Irrational Ignorance at the Patent Office 2094 CONCLUSION 2097 “The best of all monopoly profits is a quiet life.” Nobel Laureate J.R. Hicks (1935)