Defining the Patented Invention Entitlement

Hohfeldian legal relationships

As outlined earlier, effective abatement strategies internalize negative externalities, whereas exclusive rights to an invention create patentee incentives for investment in R&D. Although these two issues are the focal points of this chapter, we emphasize that a number of different kinds of legal relationships are also required to create incentives to make them possible. These legal relationships determine whether the rest of the society must assent to a right-holder’s choices, whether a party to a contract is obligated to do something or whether he or she may choose to do so. In this regard, we note that Wesely Hohfeld devised a typology describing what he saw as four categories of legal relationships between individuals (Hohfeld, 1913, 1917).

The main insight from Hohfeldian analysis and its relevance to the problem of externalities and patent policy is that it defines legal relationships, such as a claim to right to a property, in terms of the correlative duties it imposes on the rest of society. This approach is helpful in understanding the welfare consequences of a patent entitlement, because it allows us to understand to what extent the public (which includes developers of non-infringing substitutes) may be affected by externalities resulting from the use of a patented invention. Claim rights, privileges, powers and immunities – the four basic Hohfeldian legal relationships – can therefore inform us of welfare impacts in terms of the duties they impose on the rest of society. Following a brief introduction of these concepts, we explain in the following subsection how they relate to the abatement of negative externalities.

Claim right – A claim right is a legal relationship that most clearly defines property, of which one form is private ownership. In this regard, two basic reasons for specifying claim rights (i.e. defining private ownership) are to: (i) identify who owns resources (including factors of production such as an environment into which effluent may be discharged); and (ii) provide incentives for the owner of such resources to put them to their highest-valued social use (Demsetz, 2003, p. 285). In an economy of market exchanges, granting property rights eliminates the need for a social planner to allocate resources since the owner will be driven to engage them where they obtain their highest returns. In order to enable occurrence of this allocation process, owners must have the ability to exclude others from accessing their property.

These exclusive rights are understood in the Hohfeldian tradition as corresponding to a correlative duty for all non-owners to refrain from interfering with the owner’s desire to sell, lease or use their property. Applied to patents, a claim right to an invention implies that the rest of society has a duty to abstain from making, selling or using the invention without a licence.

Privilege – A privilege is a legal relationship in which the holder may choose to do something as opposed to being obliged to do it. A privilege is thus defined by the rest of society’s correlative ‘no-right’ to oblige the holder to act in a specific way. Because a patentee may refuse to grant a licence and non-licensees have no recourse against this decision, a patent provides the patentee with a privilege of

licensing an invention.

Commentators have often argued that removing such entitlements may improve social welfare because compulsory licensing reduces deadweight loss associated with patent monopolies (Ayres and Klemperer, 1999). However, a licensing privilege may also be valuable to the patentee if it offers him or her increased control of the marketing and distribution of the invention so as to limit unlicensed use, for example, by preventing farmers from replanting the seed they have grown from licensed germplasm.

This can be useful not only for reducing the incidence of unlicensed use of an invention but also for mitigating externalities. A licensing privilege (i.e. society’s no-right to demand a licence) enables Monsanto to select licensees and stipulate the conditions in which its technology is to be used in order to protect neighbouring fields against pollen drift.

Powers and immunities – Finally, powers and immunities refer to mutations to legal relationships concerning claim rights and privileges; the abilities to change a contract and escape liability for changes to a contract. The holder of such power has the expectation that changes to a contract will be accepted by parties to the contract as a liability. Powers are best appreciated in the scenario of incomplete contracts (Grossman and Hart, 1986). For situations in which specifying all of the contingencies may be costly or impossible, a contract may stipulate that one party retains ‘residual rights’ to determine the rights and obligations of both parties for contingencies that lie outside of the literal language of a contract. Giving meaning to the language of a contract – such as when courts construe the meaning of a patent claim in a Markman hearing 5 – is an example of a power. Building on this example, it may be argued that certain institutions of patent enforcement (e.g. the application of the doctrine of equivalents) that preserve judicial discretion are worthwhile powers for the public to retain against patentees, because they allow courts to reduce the effective scope of protection for improvidently granted patent claims (Kesan and Banik, 2000).

A power entitlement provides discretion, whereas immunity is the right to reject changes (i.e. refuse to be bound by them) to a legal relationship. Immunity is defined by the correlative disability of others to impose changes upon the entitlement-holder. Immunity is valuable for the same reason as power: it is a means of insulating oneself from adverse future contingencies. Although immunity may be advantageous for the party benefiting from such entitlements, it can be costly for the party granting it. For example, immunity from post-issuance challenges to a patent may enable improvidently issued patents to be enforced. We can thus understand that current institutions of patent law that deny the patentee immunity from post-issuance challenges are in the public interest, because it is a means of ensuring that inventions that were with the public domain (but unknown to the Patent Office) prior to the patentee’s application are never privatized.