Introduction

When two inventors compete using a shared environment, what are the rights of one inventor against the other? Percy Schmeiser, a Saskatchewan canola farmer, was recently condemned for patent infringement of Monsanto’s proprietary variety of herbicide-resistant (Roundup Ready – RR) canola. In a 5–4 decision, the Canadian Supreme Court upheld two lower court rulings of infringement holding that Schmeiser’s possession and subsequent replanting of the seed containing the patented gene amounted to infringement ( Monsanto Canada Inc. v Schmeiser , 2004), even if plants and seeds were statutorily barred from patent eligibility ( Harvard College v Canada , 2002) and if gene transfer could have occurred inadvertently through such means as pollen drift.

Although the Schmeiser decision was limited to ruling on patent enforcement under a particular set of circumstances, outside the courts it raises concerns over whether patent infringement from inadvertent use 1 could freeze competitor innovation. More specifically, does enforcing such patents not put farmers 2 at a disadvantage in creating their own (unpatented) varieties by requiring them to take additional precautions to prevent cross-pollination or other forms of inadvertent use?

Pollen drift and other forms of inadvertent use, such as mixing of seeds in handling facilities, are not in themselves new phenomena resulting from genetically modified organisms (GMOs) or patents. But patents have made such GMOs the object of an inventive step, thereby providing the patentee with exclusive rights that may be used to prevent those possessing a patented gene. Therefore, as it is often impossible to separate the patented gene from a plant not owned by the patentee, a farmer can lose legal rights and control over a plant he or she has cultivated. The threat of infringement and the extra precautions required by farmers to avoid infringement make introduction of competing varieties expensive; moreover, a collateral effect of such patents may be a reduction in the supply of seed varieties – a potential loss of social welfare.

Legal scholars treat infringement and pollen drift as separate issues of property and tort liability (Kershen, 2004). For example, pollen containing a patented gene drifting onto a neighbouring farmer’s field of organic crops can be seen as one farmer’s activity harming another’s. At the same time, the drifted gene found in the neighbour’s field may be viewed as unlicensed possession of the patentee’s property. Appreciating that nothing prevents a patentee from having to compensate a farmer for cleaning a ‘contaminated’ organic field, while at the same time requiring the farmer to give up seeds or plants containing such patented material (Grossman, 2002), these separate legal treatments of the phenomenon do little to help us understand how patent and tort law induce the creation of inventions that create conflicts of rights between farmers and patentees.

Economists, on the other hand, have understood that incentives provided by a patent system, combined with the fact that the private costs of invention use are less than its full social cost, cause such conflicts. If not remedied, the situation eventually leads to a misallocation of social resources, in which potentially harmful inventions continue to be produced, whereas the creation of other, perhaps

even innocuous, substitutes may be hampered.

Situations in which social costs of an activity, such as use of an invention, are greater than its private costs result in what economists refer to as negative externalities . A negative externality occurs, for example, when pollen drifting on the field of one party creates an added cost (e.g. cleaning, lost sales) for the affected party, as in the case of the organic farmer. Just as the case of a steel mill releasing pollution into the air prompts us to ask whether the steel mill should compensate affected residents for pollution or whether it is the residents who should pay the mill to reduce its effluent, we can also ask whether the organic farmer should in fact pay the patentee for not exploiting his patented technology.

To understand which party should be compensated or bear the costs, it is helpful to recognize that the problem of externalities occurs because of a separation of ownership. Take the example of a steel mill and laundry. If both were owned by a single owner, pollution would be reduced just to the point at which the value of the total benefits from both laundering and steel making was maximized. This occurs because the owner essentially ‘internalizes’ or bears the cost of pollution in the form of soot accumulation on the laundry hung out to dry. Similarly, if we consider that some patented inventions create similar types of externalities when they are used, we can surmise that abatement of negative externalities using instruments that work to internalize the costs of such externalities will be desirable. This internalization of externalities is of particular importance when the externality impacts on a competing inventor. Two points are relevant here:

1. In addition to the property rights to the invention, the patentee will be concerned about rights, permissions and other regulations that restrict its use. An ‘auxiliary’ set of rights to use (i.e. discharge stray genes into the environment) is required, and because it is tied to the patented invention, it makes the patent valuable. The bundle of legal relationships concerning property and liability is therefore the relevant unit of analysis.

2. The specification of the rights to use an invention can have profound effects on the incentives to develop particular types of inventions. For example, if residents possess a right to clean air, they may trade it away to a polluter. Conversely, if the polluter holds the right to pollute the air, he or she may trade it away to residents desiring reductions in pollution – an example that resonates with the Coase theorem (Coase, 1960).

However, there may be several reasons such as the inability to identify all right-holders, why fluid, costless transactions may be impossible. When patentees are unable to trade away (or purchase) such necessary rights, they will have fewer incentives to invent or to introduce improved versions of the invention that abate harmful externalities. Thus, the incentive to invent resides not only in the patent itself, but also in the legal and economic conditions under which the patent can be exploited.

This chapter develops a framework for understanding the relationship between social welfare, externalities resulting from the use of patented inventions and patent rights. To this end, we introduce the concept of a patent as an entitlement defined by a bundle of legal relationships. We use Hohfeld’s typology of claim rights , privileges , powers and immunities to illustrate how a bundle of legal relationships governing exchanges between licensees, competitors, patentees and other members of society affects social welfare by the supply of new inventions.

Moreover, the framework of patent entitlements enables us to understand the technological conditions that connect tort liability and property. Seed producers often license GMO varieties for single use and require the farmer to maintain buffer zones. This is done to secure a continual market for the seed and to prevent gene transfer through cross-pollination. These contractual restrictions have little or no legal bearing on the validity of the patent or the likelihood of infringement. A licence agreement can thus require a licensee to take measures to internalize the externalities. Controlling the use of an invention prevents its unlicensed replication and diffusion – conditions that apply directly to the case of living inventions. Certain technologies thus provide opportunities for self-regulation in that the patentee’s private interests can be aligned with the society’s welfare interest in limiting adverse externalities. In the case of technologies in which there is an absence of such complementarities, the state would have to create incentives for the patentee through other legal relationships, such as powers and immunities, in order to provide a mechanism of internalizing negative externalities.

The following section provides a primer on the relationship between patent infringement in plant biotechnology and its connection with social welfare as understood by economists. The concept of a patent entitlement (as opposed to a patent that is concerned primarily with restrictions on making, using or selling an invention) in terms of Hohfeldian relationships is then introduced. The conditions in which it may be socially efficient to allocate certain legal powers or rights to the patentee or the public are also discussed. The chapter ends with a summary and conclusion.