The bundle of legal relationships and its importance to abatement

As argued from the outset, a patent is valuable to the patentee given that there are complementary rights to use the invention. An invention can be regulated if it creates negative externalities. Such auxiliary claim rights may therefore be essential but, perhaps paradoxically, they also play a crucial role in the abatement of negative externalities. If claim rights to an environment free of pollen are given to farmers, abatement will be provided by the patentee or licensees through the use of a buffer zone around the patented crop. Patentees or licensees could also pay farmers compensation to remove their claim right. If the opposite allocation of rights occurs, i.e. the right to release patented GMO pollen is given to the patentee (or licensee), abatement will be supplied through one of two means: (i) farmers could pay patentees to supply abatement either by providing a buffer zone or limiting the area in which the patented plants are grown; and (ii) farmers could supply abatement on their farms by maintaining a buffer zone on their property at their own cost. Although this does nothing to reduce the likelihood of pollen drift, it can none the less be considered as abatement because it reduces the incidence of harmful externalities on the adjacent fields belonging to the right-holder.

Assuming such transactions between farmers and patentees are costless, Coase’s theorem suggests that the level of abatement should be independent of the initial assignment of such claim rights. However, in practice we can see that there will be a breakdown in exchanges: patentees unable to contract with all farmers for such permissions would avoid investing in R&D altogether to create the invention in the first place (Bebchuck, 2001). A liability rule for genetic pollution would resolve this issue by granting the patentee the right to release such material, provided he or she compensates the affected parties for the harm done. However, it brings with it the requirement that the value of the damage be assessed by a third party (Calabresi and Melamed, 1972), and this ‘take now, pay later’ approach may provide insufficient incentives to the patentee to reduce such externalities.

One way to address this situation is to consider how other legal relationships of the entitlement bundle, i.e. claim rights to the invention itself, might be modified. Removing the claim right to the invention in cases of inadvertent use would absolve the affected farmer of infringement (a duty to avoid using the invention through inadvertent means), provided of course he did not knowingly replant or reproduce the seeds. However, maintaining the privilege of licensing (i.e. enabling the patentee to choose whom to license and under what conditions) will provide the patentee with some means to reduce such inadvertent use by enabling him or her to demand that licensees maintain buffer zones and/or deliver all harvested seed. Furthermore, in order to increase the incentives for the patentee to reduce such externalities, liability for farmer losses due to crop contamination (cleaning of fields and replacement of crops) could be imposed upon the patentee. Finally, while in this scenario the claim right to the invention is rendered unenforceable, the patentee retains rights to recover, or to destroy, plants or seeds containing a patented gene.

Even though the above example describes a situation in which the level of abatement is unspecified, it should be clear that the larger the licence fee (hence, potential loss for the patentee), the greater will be the incentives for abatement or precautionary measures. The level of abatement will depend on the relative costs and benefits. If the effect of pollen drift is low (a small reduction on the competing farmers abilities to develop their own varieties) in relation to the benefits of inventions (increases in yield), patentees will take some measures to reduce such externalities, but only up to the point where the net marginal benefits approach zero. The underlying assumption here is that the social costs of pollen drift are properly accounted for in terms of the patentees’ liability to affected parties.

Moreover, it is important to understand that in the scenarios of abatement described earlier, powers and immunities are two legal relationships that play a fundamental role. This is because abatement of externalities only occurs if claim rights, such as the right to pollute, are specified. The state (i.e. the public) retains the power to define or respecify such property rights. Taking into account social preference and transaction costs associated with different entitlement allocations, lawmakers will allocate entitlements to one of the parties and this, in turn, influences the level of abatement that will be supplied. More importantly, the powers to redefine claim rights and privileges provide the state with an important means of adapting to unknown externalities in the future, which may be brought about by new technologies. For example, farmed salmon carries the risk of being released and destroying populations of wild salmon (National Academy of Science, 2002; Pew Initiative on Food and Biotechnology, 2003). If such fish were not protected by patents, additional regulations may have to be imposed on users of the technologies. However, as we have seen in the case of GMO plants, patents may offer some leverage in providing incentives to patentees to ensure that such technology is used responsibly, as a result of licensing restrictions, serving the dual purpose of preventing unlicensed and unregulated use of the invention. In this case, the threat to the patentee would be that such patents on a fish would be rendered unenforceable unless the invention is used in a closed environment (but that subsequent attempts to reproduce stray fish would, none the less, constitute infringement).

Finally, it is important to reiterate that the benefits of abatement through a reduction in the enforceability of patents must be weighed against the disincentives created by uncertainty of the externality. If the incidence of the externality results in significantly high likelihood of unenforceablity (because wilful infringement is too difficult to distinguish from inadvertent use), it may chill innovation.

Conclusion

Agricultural and other open-environment biotechnology inventions are different from other kinds of inventions because their potential to impose unforeseen externalities could directly impact on other competing inventors. Such externalities can have a direct effect on social welfare in terms of the nuisance they create for affected parties and, more importantly, an indirect effect on social welfare if they reduce incentives for competitive innovation. With a reduced supply of new inventions, there are fewer technology options to choose from and presumably fewer opportunities for future innovation.

With these concerns, the question of how externalities result from a distribution of rights has been examined. These are not rights concerning property, but rather rights to make others bear the costs of externalities. In particular, for the case of patented inventions that produce negative externalities, we argued, using Coase’s reasoning, that the same level of abatement would occur regardless of whether rights to pollen-free air were allocated to farmers or patentees. The reason is, of course, that farmers and patentees could trade away the rights granted to them in relation to their valuations for them. However, such outcomes rarely occur, since a single patentee is rarely able to conclude such agreements with all right-holders. A failure of this kind leads to some socially undesirable level of externalities or, in the very least, few incentives to develop inventions that reduce such occurrences.

The proposed solution to this dilemma is to connect rights to impose externalities with property rights to the patented invention. Rendering a claim right to an invention unenforceable if it imposes adverse costs to a competitive inventor (or anyone else as a result of inadvertent use) provides a disincentive for patentees to let such outcomes occur. While this may be insufficient to motivate changes in the supply of new inventions, liability for damages caused to the affected party (e.g. cleaning costs and replacement of contaminated crops) should work towards achieving higher levels of abatement. Even so, we wish to reiterate that abatement on its own is not necessarily socially desirable. If, for example, social benefits from increases in crop yield are considerably larger than benefits of biodiversity, it makes little sense to maintain biodiversity at very high social costs – unless it is believed to be an essential input to future R&D.

Deconstructing the linkage of externalities and property rights into Hohfeldian legal relationships also enables us to understand that some technologies lend themselves more easily to internalizing negative externalities than others. A patent that provides a privilege to the patentee of imposing restrictions

on the use of the invention (as part of the licensing agreement) can also be helpful in abating negative externalities because measures taken to preserve the exclusive rights to the invention, such as giving up rights to replant seeds, can also decrease externalities. Thus, for biotechnology inventions where propagation is a concern, regulations governing use and defining property rights should be co-aligned.

These findings also highlight the importance for the state to define rights concerning the use of such technologies. Exercising legal powers to create such rights induces inventors to exploit the state’s private information and idiosyncratic technical knowledge, which might otherwise remain underutilized for fear of not being able to appropriate the rewards from their use. In this sense, a specification of rights, which now remain in the public domain may help to resolve a conflict between two kinds of inventors. Perhaps paradoxically, agricultural biotechnology is one area in which increased fence-building within the public domain can have the unforeseen consequence of improving social welfare.

Acknowledgements

Marc Banik thanks the University of Illinois at Urbana-Champaign College of Law and the Programme  d’aide financière à la recherche et à la création (PAFARC) of the Université du Québec à Montréal for supporting this research. Drew Kershen and participants at the Seeds of Change Conference in  Urbana, Illinois, also provided helpful suggestions and comments in the course of preparing this manuscript.      

Notes  

1 By ‘inadvertent use’ we mean unintended use through natural phenomena such as pollen drift or other forms of contamination through, for example, mixing of seeds in handling and conditioning facilities. Knowingly replanting a seed or a plant produced from inadvertent use (as in the case of Schmeiser) is regarded as infringement.

2 In this chapter we refer to farmers as individuals who can create new varieties but who do not necessarily patent them. Licensees or ‘growers’ are users of the patented varieties, who do not save seeds for replanting or develop their own varieties through hybridization. We recognize that some individuals may be classified both as farmers and licensees, depending on their choice of seeds for a number of different crops.

3 It is worth mentioning here that plants and other higher life forms (i.e. multicellular organisms) are ineligible for patent protection in Canada ( Harvard College v Canada ( Commissioner of Patents )) but not in other jurisdictions such as the USA and the EU.
4 This is evident by the shape of the indifference curve. A convex shape indicates that small amounts of both biodiversity and yield improvements are preferable to exclusively one or the other. Moreover, the slope of the indifference curve at the point of tangency with the PPF, indicates that both biodiversity and yield improvements are almost equally desirable. These indifference curves indicate that any level set to the north-east of the initial SWF would be strictly preferred. Thus, V (SWF 1 ) > V (SWF 2 ), where V is a monotonic increasing function.

5 Following Markman v Westview Instruments, Inc ., 52 F.3d 967 (Federal Circuit 1995), the interpretation of patent claims has been held by the Federal Circuit and affirmed by the Supreme Court as a matter exclusively for judges and not juries. Thus, a pre-trial ‘Markman hearing’ often occurs in which the trial judge hears evidence in order to construe the legal meaning of the patent claims. Since a party may then file for a summary judgment on patent validity or infringement, Markman hearings can eliminate the need to litigate the case in court.