REFORMING HOW INFORMATION IS TRANSFORMED:

INTELLECTUAL PROPERTY AS NATURAL MONOPOLY

Ari Allen
Georgetown University Law Center

I.

Introductory Remarks
The Congress shall have Power To promote the
Progress of Science and useful Arts, by securing for limited
Times to Authors and Inventors the exclusive Right to their
respective Writings and Discoveries.1
In the depths of Article I of the United States Constitution, the Founders of our

nation hid a fundamental principle of governance: promote the Progress. Without very
much instruction or specificity, the Constitution instructs all future legislators to promote
progress. Of course, its scope is limited to the entire library of human knowledge,
industry and creativity. And of course, it does give some instruction: intellectual property
can be granted protection for any time spanning less than perpetuity.
Indeed, this seemingly innocent clause prompts a very large question, with very
little direction. And so, like most contentious debates, two sides of the same coin have
emerged rather independently: intellectual property and antitrust law. Emphasis on
intellectual property often leads to conclusions that reflect Joseph Schumpeters view that
market concentration increases innovation, while emphasis on antitrust law reflects
Kenneth Arrows desire for competition as a driving force of innovation.2
Yet both of these views are accurate, depending on the circumstances at hand. In
this paper I will most broadly attempt to reconcile these views and show that market
concentration and intellectual property rights are often necessary to spur revolutionary
innovations in fragile emerging markets, while antitrust law must be used as a tool to
reignite competition in markets that are matured and potentially stagnant. In recent years,
it has become more obvious that these two approaches are converging and find each other
1

U.S. Const. art. I, 8, cl. 8.

Michael Carrier, Two Puzzles Resolved: Of The Schumpeter-Arrow Stalemate and
Pharmaceutical Innovation Markets, 93 Iowa L. Rev. 396 (Feb., 2008).

quite complementary. Soon enough perhaps, they will find themselves more properly
integrated under a larger subheading that seems to be implicitly intertwined with
promoting progress: innovation. Exploring the means and ends of this essential
integration is the aim of this paper.
The rest of Part I will be dedicated to preparing the reader for the theoretical
analysis that follows. Specifically, I will make brief remarks explaining the following
fundamental intuitions: (a) progress is best understood through the lens of innovation; (b)
innovation is the product of the transformation of information the essential input of
every product, service and market; and (c) information is protected as intellectual
property, but is more properly classified as a form of natural monopoly.
In Part II, I will argue that: (a) similarly to the grant of legal monopoly status to
natural monopolies, the grant of intellectual property rights are vital to maintaining exante incentives to innovate and establish new markets; (b) similarly to mandates of equal
access imposed upon legal monopolies, compulsory licensing regimes should be
instituted when such intellectual property falls under the essential facilities doctrine; and
(c) compulsory licensing and antitrust mechanisms are just as legitimate a form of
government intervention as the initial grant of intellectual property rights.
In Part III, we will explore the theoretical framework through the following
practical examples: (a) a case study on the Google Books settlement; and (b) price
discrimination in the pharmaceutical industry.
In Part IV, I will conclude by briefly recapping the argument, tying it together
into a brief synthesis, and recommending future areas of possible theoretical and practical
development.

a. Progress as Innovation
Defining progress may be the most fundamental debate pondered by political
theorists and legal jurists. It is, most literally, the direction of the future, and we all have
different views of what that future should look like. However, all of these views share
one overarching theme: progress always involves change. Nobody proclaims that the
world is perfect (although some may be resigned to the fact that it can never be better).
Progress then, is defined by change, although we may disagree about what type of change
is appropriate. However, we also know that change never happens without the
introduction of something new innovation. As such, every angle from which progress
is approached involves a propensity toward innovation. Even social progress involves
innovation: the creations of new social norms and perceptions. Martin Luther King Jr.s
I Have A Dream speech something one may define as a cultural artifact, is also a type
of social innovation. It is also intellectual property.3 Indeed, innovation is the mechanism
underlying all types of progress, and it is promoted and protected through intellectual
property rights and antitrust law.
There are other common understandings of progress as well, especially within the
economic domain. Firstly, there is progress in terms of efficiency improving the ratio of
beneficial output (in terms of quantity, or quality) to input costs. Increases in efficiency
lead to greater revenues and lower costs, increasing profits while lowering prices.
Consequently, both businesses and consumers benefit as does society as a whole.
On the other hand, there is progress in terms of equity. Increases in efficiency can
lead to increases in equity (by making products more affordable), but equity can also be
3

David Firestone, King Estate and CBS Settle Suit Over Rights To Famous Speech, N.Y.
Times (July 14, 2000).
3

encouraged independently of price mechanisms. Greater accessibility or interoperability

may enhance equity by allowing more consumers to reach a product. For example,
former FCC chairman, William Kenner has described one innovation, the Internet, as
the great equalizer.4
Yet increases in efficiency and equity can both be reduced to innovative
improvements.5 Increases in efficiency and equity are both changes that result from
innovations that range from establishing new growth strategies that capture economiesof-scale to the introduction of entirely new product lines. Indeed, innovation may be the
term of convenience we seek in defining progress whether it is increases in efficiency,
equity or novelty. Thus, the breadth of progress is not fully captured by greater freedom,
equality, wealth or justice yet innovation can lead to all of the above. E pluribus unum.
From a policy standpoint, promoting progress is about protecting market
participants just enough so that they will actually participate, while also putting pressure
on them to continue to innovate and provide greater access preventing complacency,
stagnation and bottlenecking. As such, progress is maintained by promoting active
participation in the innovative process the creative introduction of new intellectual
property into the stream of commerce and consciousness. This process represents the
transformation of information.
b. Innovation as Transformation of Information
The fundamental unit of innovation is information. Essential to every tangible
product or service is the intangible thought or idea that lies behind it. In this sense, while
4

William Kennard, The Great Equalizer, Remarks at Supercom 2000 International

Dinner (June 5, 2000).
5
In fact, innovation is often termed dynamic efficiency, as contrasted against static
efficiency.
4

it is only beginning to receive the attention it deserves, information has always been an
essential input to progress. Indeed, it is now commonly accepted that knowledge is
power.
It is this fundamental distinction that separates real from intellectual property.
Intangible and disembodied intellectual property is the genetic code of tangible and
embodied real property. As such, the transformation of this information is the impetus
behind the innovation of every good. However, transformation requires investment
labor, capital and time. Consequently, transformation does not occur on its own. How,
then, does this transformation occur? How is innovation promoted?
c. Intellectual Property as Natural Monopoly of Information
Investment in innovation will only occur if the proper ex-ante incentives are in
place namely, adequate returns on the initial investment. No innovators will risk and
invest capital, effort or time in an endeavor that will cost them more than they stand to
benefit. As a result, intellectual property rights were created to protect investment
incentives and consequently, to promote innovation.
Since its inception however, intellectual property has struggled with the tension
between its legal excludability and its intrinsic nonrivalrous quality. A modern adage of
unknown origin reflects that information wants to be free.6 Yet, information is also
only born, or transformed, through its granted excludability. From an economic
standpoint, intellectual property often involves high fixed costs and extremely low
marginal costs. More simply stated, creating or transforming information often involves
intense research and development upfront, but is relatively inexpensive to duplicate or
6

The source is of unknown origin, though it is often attributed to a hacker at 1984

computer conference.
5

copy after this initial effort is expended. Information is born in chains, but wants to be
free.
Indeed, many have proclaimed that intellectual property is in fact, better described
as a type of monopoly, because a single entity is granted rights of exclusion over a
nonrivalrous resource. Furthermore, ownership of a disembodied idea allows
monopolization over the entire market of goods that embody that idea. As a result,
monopolistic prices are charged because marginal costs being near zero, are easily
surpassed by supracompetitive prices. Adam Smith recognized this problem at the very
outset of capitalist thought:
[T]he author of a new book has an exclusive privilege of publishing and
selling his books [for a limited time] Some indeed contend that the book
is an [e]ntire new production of the authors and therefore ought in justice
to belong to him and his heirs for ever, and that no on should be allowed
to print or sell it but those to whom has given leave But it is evident that
printing is no more than a speedy way of writing. Now suppose that a man
had wrote a book and had lent it to another who took a copy of it, and that
he afterwards sold this copy to a third would there be here any reason to
think the writer was injured. I can see none, and the same must hold
equally with regard to printing. The only benefit one would have by
writing a book would be that he would have the first of the market and
may be thereby a considerable gainer. The law has however granted him
an exclusive privilege for [a limited time], as an encouragement to the
labours of learned men But there are few so harmless. All monopolies
in particular are extremely detrimental.7
Harvard Professor Lloyd Weinreb remarked more succinctly, the most that can
be said confidently about copyright or patent is that it confers a monopoly.8 Smith,
however, makes a crucial observation about this necessary evil, and views it as an
encouragement to the labours of learned men. In these words, Smith is alluding to the
7

Adam Smith, Lectures on Jurisprudence, 83 (R.L. Meek, D.D. Raphael & P.G. Stein
eds., Oxford Univ. Press 1978) (1896).
8
Lloyd L. Weinreb, Copyright for Functional Expression, 111 Harv. L. Rev. 1149, 1205
(1998).
6

notion that supracompetitive prices are necessary to recoup the fixed costs that are not
accounted for in marginal costs.
However, Smith also points out that printing is no more than a speedy way of
writing. Thus, after the fixed costs are recouped, and returns on investment satisfied, we
must not forget that authors do not handwrite every copy of the information on the page,
but rather, provided their contribution only initially, by transforming the information that
would later be copied. As such, the innovator may be compensated beyond the intensity
of his efforts. Indeed, the author may be rewarded for Guttenbergs efforts in inventing
the printing press, and many others efforts in establishing the Internet. While of course,
Guttenberg would be an extreme example; it is illustrative of the fact that innovators are
often rewarded with profits from related competitive markets in which labor was not
applied.
Understanding the contribution of the printing press to every future author also
illustrates the underlying unity between intellectual property and natural monopoly
namely, high fixed costs with extremely low marginal costs. These marginal costs are
heavily depressed by innovations such as the printing press, and thus, enhance the
nonrivalrous nature of the intellectual property. If it can be easily copied and transferred,
then it is more clearly a nonrivalrous good. In other words, as the marginal cost
approaches zero, the good approaches being perfectly nonrivalrous.
The combination of high fixed costs and low marginal costs can be unified under
the single phrase, declining average costs. This phenomenon defines the nature of
natural monopoly a firm that can provide supply at continually increasing economies of
scale. The natural monopoly phenomenon has been observed in many industries,

including: common carriers, transportation, electric utilities and telecommunications.

Interestingly, every revolution whether in transportation, energy or
telecommunications has been accompanied by this natural monopoly phenomenon. The
revolution provides for a sudden decrease in marginal costs, and thus, declining average
costs. Thus, it becomes more efficient for a single firm to supply the entire market. In the
age of the information revolution, information is becoming increasingly subject to the
same phenomenon. From the printing press to the Internet, it seems that information truly
does want to be free and it is increasingly becoming so.
However, the law has not yet fully taken account of this transformation in the way
information is transformed. Natural monopolies are providers of excludable and
nonrivalrous goods namely, club goods. Due to their low marginal costs, club goods are
often supplied by selling access to the good, rather than the good itself. Since
nonrivalrous goods can be easily duplicated, access is enough to provide a consumer with
an opportunity to tap into the multiplicative resource. As a result, a television viewer
doesnt pay for the amount of hours he watches television, but rather for access to the
broadcast television network. As an aside, it may be worthwhile to note that in natural
monopoly industries where marginal costs are still relatively substantial (but still
markedly less than fixed costs), a consumer may still need to pay a marginal price. The
point however, is that access is a precondition to being a consumer in the market itself.
As such, access retains its primacy in all club goods. Consequently, and as we will
explore later, unilateral exclusionary conduct (forbidding access) is particularly harmful
in these types of markets.

Yet in this age of information, it is becoming increasingly true that disembodied

information is easily duplicable. Moreover, certain types of informationespecially
copyrights (e.g., books, music and film)are also becoming easily duplicable in its
embodied form.9 Records have become MP3s, and books have become e-books. As a
result, these embodiments are becoming increasingly centralized through emerging
centralized service providers (such as Google Books, iTunes and Hulu). Indeed,
intellectual property is becoming increasingly subjected to the phenomena of declining
average costs, and in many cases, represents a natural monopoly over every embodiment
of a disembodied idea. The idea need only be created once any additional investments
would be duplicative and socially inefficient. As such, intellectual property owners may
increasingly find themselves as the owner of a club, regulated by admission, rather than
the owner of an invention, physically produced for consumption.
II.

Theoretical Framework
a. Intellectual Property and Legal Monopolies
Pioneers are unlikely to explore new frontiers if they are not adequately equipped

with protections that guarantee returns on successful investments. Intellectual property

rights confer these protections by granting the pioneer a legal monopoly over the usage of
their innovation. This protection ensures that pioneers will profit from their innovations,
and not be too quickly driven to marginal cost pricing that prevents the recouping of
fixed costs. Thus, similarly to natural monopolies, the economies of scale inherent in

The difference between embodied copyrights, which have become increasingly subject
to declining average costs, and disembodied patents, which sometimes require high
marginal costs to provide for embodiment, will be discussed later in Part III.
9

intellectual property require initial legal protections that allow the emerging innovation to
reach the critical point at which these scales can be realized.
In short, the granting of intellectual property rights is tantamount to the granting
of natural monopoly status an example of necessary government intervention in order
to promote the Progress. However, before we become too comfortable with these
protections, we must remember that intellectual property rights are not a moral right,
but a legal tool that encourages economic utility.
Two illustrative examples come to mind. First, consider a competitor who has
expended as much (and possibly more) effort and investment on the same innovation, but
has lost the race to the finish line. This competitor is excessively damaged by the sudden
excludability of these rights. On the verge of a great breakthrough, another innovator may
be the victim of the antiquated rule of capture that defines early property laws, and lose
his entire investment in the matter.10 Similarly, and secondly, future innovators not even
born yet are afforded no opportunity to independently discover the same innovation
rather, future generations are forever indebted to past innovators, and are subject to their
monopolistic will. Even an independent effort to recreate the same innovation, in an
attempt to avoid dealing with the monopolist, is forbidden by the legal right of exclusion.
Yet both of these examples are illustrative of the absurdity of intellectual property
rights in the face of its nature as a nonrivalrous resource. An innovator who is granted
exclusive intellectual property rights becomes the owner of a disembodied idea, but also

10

Similarly to early determinations on hunting cases, ideas can be considered ferae

naturae in that they are wild and up for capture. See Pierson v. Post, 3 Cai. R. 175
(N.Y. 1805). This reasoning was also later applied to cases of oil. See e.g., Prohosky v.
Prudential Ins. Co. of Am., 584 F. Supp. 1337 (N.D. Ind. 1984).
10

inherits a monopoly over all embodied iterations of that idea preventing anybody from
utilizing (or independently formulating) a specific thought.
b. Essential Facilities and Compulsory Licensing
If the granting of private monopoly over ideas sounds a bit absurd, then the
recommended remedy will come as a welcome addition to this framework. In industries
characterized as natural monopolies, grants of legal monopoly status often come with a
symmetrical and complementary mandate to provide equal access at competitive prices.
An example of this is in the public utility industry, in which a public utility is granted a
legal monopoly over the provision of electricity in a specified geographical region, but is
also mandated to equally serve all consumers within that region.
In short, a protected market must at some point be opened up and allowed access
both for consumer welfare and for its own growth and efficiency. The newfound
accessibility of the good allows it to be both utilized, and innovated upon. In the case of
intellectual property, permitting improvements of the idea allows for the further
transformation of the information at stake evolutionary, rather than revolutionary
innovation.
While it may not be desirable to impose a similar mandate on all grants of
intellectual property rights, it may be necessary in certain circumstances. Proper
identification of intellectual property that should receive such a mandate can be achieved
through the analogous antitrust analysis that is applied in identifying natural monopolies:
the essential facilities doctrine. Such essential facilities can be made accessible through
compulsory licensing regimes that ensure continued revenues for the innovator.
Yet, the right of exclusion is fundamental within the bundle of rights proscribed to

11

property. Indeed, under the Colgate doctrine, a firm is free to unilaterally refuse to deal.
However, the Supreme Court has noted that such a right is not absolute; it exists only if
there are legitimate competitive reasons for the refusal.11 Thus, the essential facilities
doctrine developed as the applicable antitrust limitation on this unilateral exclusionary
conduct.!In brief, the essential facilities doctrine renders a unilateral refusal to deal
subject to potential liability as a monopolization violation of Section 2 of the Sherman
Act.12!
For example, in 1983, the Seventh Circuit Court of Appeals required a monopolist
provider of telecommunications services to provide access to its local service network to
competitors in long-distance services.13 Many other examples are prevalent within the
history of antitrust litigation, and promise to continue to stir up contentious debates.14 A
subset of these debates should most certainly apply to questions of the extreme
dominance provided by intellectual property rights. Whether specific information, or
intellectual property, should be openly accessible is a question of whether the information
satisfies the four factors of essential facility analysis: (1) control of the essential facility
by a monopolist; (2) a competitors inability to practically or reasonably duplicate the
essential facility; (3) the denial of the use of the facility to a competitor; and (4) the
feasibility of providing the facility to competitors.15 Former Chairman of the FTC,

11

See Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 483 n.32
(1992).
12
Robert Pitofsky, The Essential Facilities Doctrine Under United States Antitrust Law,
Submission to European Commission In Support of National Data Corporation, 3 (2001).
13
Id., at 4 (citing MCI Communications v. American Tel. & Tel. Co., 707 F.2d 1081,
1132-33 (7th Cir. 1983)).
14
See also, Associate Press v. United States, 326 U.S. 1 (1945); Otter Tail Power Co. v.
United States, 410 U.S. 366, 377-79 (1973).
15
Pitofsky, supra note 12, at 6 (citing MCI Communications, 708 F.2d at 1132-33).
12

Robert Pitofsky, notes that [t]his test for antitrust liability has been adopted by virtually
every court to consider an essential facilities claim.16
However, prior to analyzing the claim under these four factors, it must first be
established that the facility is truly essential to competition i.e., constitutes an input
without which a firm cannot compete with the monopolist.17 In the case of intellectual
property, this is a common occasion. The benefit provided by accessing Ayn Rands
Atlas Shrugged cannot necessarily be matched by some other substitute. In this sense,
creative pieces are often unique enough to form a market of their own, without adequate
substitutes although this point is surely up for a debate beyond the scope of this paper.
Specifically, however, the Antitrust Guidelines of the Federal Trade Commission and
Department of Justice refuse to presume that intellectual property rights confer
monopolization.18 However, this lack of presumption is no reason to avoid the frequency
of its occurrence.
Consequently, intellectual property often satisfies the first two conditions rather
easily. An intellectual property right essentially confers control of the essential facility
by a monopolist, and competitors are generally excluded from practically or reasonably
duplicat[ing] the essential facility. Moreover, from a societal standpoint, the efforts to
duplicate the essential facility, or invent around it, would be considered a wasted
overinvestment in something already provided for.

16

Id.
Id.
18
U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for
the Licensing of Intellectual Property, 2.2 (The Agencies will not presume that a
patent, copyright, or trade secret necessarily confers market power upon its owner.)
17

13

The third and fourth conditions however, provide the pivot point at which the
analysis turns. First, if the intellectual property owner is not exhibiting anticompetitive
conduct in relation to the relevant information (i.e., refusing to deal or gouging prices),
then, tautologically, access is being provided at a competitive rate. Second, if it is
unfeasible to provide access to competitors, then of course, such access should not be
mandated. However, in cases of intellectual property, it is generally extremely feasible to
share the facility (especially in its disembodied form) due to the low marginal costs and
nonrivalry implicit in the good. Consequently, it seems that the essential facilities
doctrine may apply broadly to intellectual property and information, which has already
been identified as an essential input to innovation.
Relevantly, Pitofsky notes that [t]he doctrine seeks to prevent the firm with
monopoly control over an essential asset from unlawfully excluding actual or potential
rivals, or from extending its monopoly over that asset to the final stage of production.19
Hence, in the case of information, the doctrine prevents intellectual property owners from
utilizing their control over an essential input (the information) in order to monopolize the
final stage of production namely, the embodiment of the disembodied idea, and more
importantly, the innovation market as a whole.20 In 1992, the Supreme Court observed
this dynamic: The Court has held many times that power gained through some natural or
legal advantage such as patent, copyright or business acumen can give rise to liability if

19

Pitofsky, supra note 12, at 10.

See Pitofsky, supra note 12, at 12 (United States courts are sensitive to concerns that
limiting intellectual property protections may dampen incentive for innovation. However,
the courts have recognized that permitting antitrust liability in proper circumstances
appropriately promotes competition, and, ultimately, innovation as well.).

20

14

a seller exploits his dominant position in one market to expand his empire into the
next.21
However, the feasibility element of the essential facilities test may come into
consideration when fixed costs are not adequately recouped. In these cases, the
innovation must be protected from renewed creative gales of destruction,22 so that
mandated access does not inhibit the defendants ability to serve it customers
adequately.23
From this analysis, it seems clear that intellectual property and natural monopoly
share the essential facilities doctrine as a potentially procompetitive legal framework.
Indeed, United States courts have applied the essential facilities doctrine [to intellectual
property] just as they have when the undisputed natural monopolies involved utilities,
transportation facilities or other physical assets.24
c. Government Intervention as Cause and Remedy
One important theme emerges from the prior analysis: compulsory licensing
regimes and natural monopoly regulations are not some sort of an interventionist crusade.
Rather, government intervention occurs at many stages within the lifecycle of intellectual
property, including the very grant of those property rights. Jeremy Bentham wrote:
Before laws were made there was no property; take away laws, and property ceases.25
This notion cannot be more clearly revealed than through this analysis of intellectual

21

See Eastman Kodak Co., 504 U.S. at 479

Joseph A. Schumpeter, Capitalism, Socialism and Democracy, 87 (Harper Perennial
1976) (1942).
23
Hecht v. Pro-Football, Inc., 570 F.2d 982, 992-93 (D.C. Cir. 1977).
24
Pitofsky, supra note 12, at 11.
25
Jeremy Bentham, Principles of Civil Code, Pt. 1, Ch. 8.
22

15

property. Before the law, nobody could own an idea, and this notion should be quite
obvious from the very absurdity that it arises.26
With an attempt to silence free market ideologues that cling to conservative
principles, such as those set forth in the Colgate doctrine, I now move on to remedy the
situation at hand. No remedies are possible, or even debatable, until the possibility of
remedy is viewed as a legitimate form of government intervention. Fortunately, the
fundamental principle underlying remedies to intellectual (or natural) monopoly is also
the foundation of the modern era: increased access and inclusivity the fruit of
innovation in the age of information.
Rebutting criticism is simple when one notes that even when compulsory licenses
are imposed, some property rights remain attached to the owner of the intellectual
property. In other words, the property is not taken away without compensation. Rather,
compulsory licensing remedies ensure that such mandates continue to compensate the
innovator. The process by which these licenses are priced and administrated is beyond the
scope of this paper. However, the proper execution of this process is essential to the
remedys success.
III.

Practical Applications
a. Case Study: Copyright Law and the Google Books Settlement
The recent Google Book settlement is a fruitful example to examine under this

framework. Two fundamental features of the settlement are relevant to our analysis: first,
the orphan works problem; and second, Googles potential monopolization of the digital

26

See e.g., Reiko Aoki and John Small, Compulsory Licensing of Technology and the
Essential Facilities Doctrine, Department of Economics, University of Auckland, 6
(Sept. 2002).
16

book market. The orphan works problem is a legal dilemma arising out of the Copyright
Act of 1976.27 The Act ended the requirement that copyrighted materials be registered
with the U.S. Copyright Office. As a result, thousands of works would be published
without any central record of copyright ownership. Thus, contacting copyright-holders
for potential licensing has become near impossible. In a sense, the Act granted a mass of
legal monopolies without any way of regulating these monopolies (orphan works). As a
result, current efforts to consolidate the mass of human knowledge into megalibraries,
such as Google Books Search, have become especially difficult.
Yet it has never been clearer that these libraries are the wave of future innovation.
In the age of information, these libraries have begun to emerge everywhere (e.g., iTunes,
Wikipedia, Hulu, and many others). Centralization has become a form of innovation.
However, there seems to be no library more important than the entire wealth of human
knowledge all books, accessible to anyone, from a single location.
This effort becomes impossible without viewing intellectual property properly
as a form of natural monopoly. Recognizing this fact allows us to mandate access to an
innovation after it has been granted its initial protections, so long as the intellectual
property is considered an essential facility. In the age of information, knowledge has
become power, and access to that knowledge has become essential.
Applying an essential facility analysis in this instance is rather simple. First, as
discussed earlier, a legal monopoly has been conferred upon the intellectual property
owner books tend to be unique enough to create a market of their own (although again,
this is a contentious point of debate). Second, new authors are legally precluded from

27

Copyright Act of 1976, Pub. L. No. 94-553 (1976).

17

attempting to duplicate the work. Third, the feasibility factor is easily proven as satisfied:
Google has already digitized a large mass of these books. Finally, the last factor
whether there is a refusal to dealis particularly interesting in this scenario. While the
owners of orphan works are not explicitly refusing to deal with Google, they are
implicitly refusing to deal by making their whereabouts unknown. While the refusal to
deal has not typically been approached from this perspective, it could be pivotal in
resolving the orphan works problem.28
The Google Books Settlement seems to recognize the shakiness of the refusal to
deal factor by providing a compulsory licensing regime in which all books are
licensable, by default, so long as the author does not opt out of the settlement. This
scheme of providing licenses by default solves a large coordination problem that is a
legal barrier to centralization namely, identifying authors of unregistered orphan works.
It also resolves the equally difficult problem of negotiating individual licenses with each
owner of millions of scattered pieces of intellectual property. However, it simultaneously
maintains the authors right to refuse to deal, so long as there is a legitimate business
reason to do so (which would be assumed to be rare in this scenario).
However, the original Google Books Settlement, as proposed in October 2008,
was flawed in that it would have potentially created a new monopoly that of Google
Books itself.29 This is a flaw, because unlike most natural monopolies, Google Books
requires no protections to encourage its creation in fact, for the most part it has already

28

It is important to note that Google can easily be considered a retail competitor, seeking
to sell books amongst a wide collection. On the other hand, the author may be viewed as
a wholesaler of the essential input the book.
29
See Proposed Settlement, Authors Guild v. Google Inc., No. 05 CV 8136
(S.D.N.Y. filed Oct. 28, 2008).
18

been created. The question to be posed is whether or not the digitization of books requires
a grant of legal monopoly in order for it to be economically feasible. Considering the fact
that Google has already undertaken much of this endeavor, and other competitors such as
Amazon and Yahoo are equally eager to do so, it does not seem that the emergence of a
centralized book market requires a grant of legal monopoly. Indeed, these databases are
classic public goods, and neither Google nor the Registry will need exclusive rights over
them as an incentive.30
The new settlement, released in November 2009 recognized this flaw. It seems
that the new settlements has emerged with new language that has begun to remove
Googles exclusivity from the agreement.31 In other words, the compulsory licensing
regime would remain, but anybody, not only Google, could become a licensee (though
interpretations of the settlement remain highly contentious). It is hopeful that a final
settlement will emerge that allows Google to digitize books, but also frees orphan works
to the general public. This result would provide for an equality of access that promotes
competition sustaining both dynamic efficiency (or innovation) and static efficiency
(competitive pricing and output).32
b. Extremity Stress Test: Patent Law and Essential Pharmaceuticals

30

James Grimmelmann, How To Fix The Google Book Search Settlement, Journal of
Internet Law, 10(1): 2, (April, 2009).
31
See Amended Settlement, Authors Guild v. Google Inc., No. 05 CV 8136
(S.D.N.Y. filed Nov. 19, 2009).
32
This would also help avoid the current predicament within the music industry
regarding Performance Rights Organizations. These organizations act as an exclusive
central registry, through which works can be licensed. Many scholars have criticized this
as a collective monopoly. See Ariel Katz, The Potential Demise of Another Natural
Monopoly: Rethinking the Collective Administration of Performing Rights, Journal of
Competition Law and Economics, 1(3) (2005).
19

While patents, in contrast to copyrights, often face higher marginal costs for the
embodiment of intellectual property, the intellectual property itself remains easily
duplicable. Additionally, the fixed costs, such as research and development, are usually
even higher for patents than for copyrights. As a result, the declining average cost
phenomenon remains in tact.
One area of intense patent debate often surfaces in the pharmaceutical industry.
Intellectual property in this area often represents an intermediate good or input of
production. Additionally, the final good often represents an essential drug that could
provide massive social benefits if access is promoted. As one scholar has noted:
The biopharmaceutical industry is characterized by the
cumulative innovation paradigm, wherein the discovery of a gene
sequence is only the first step It is feared that patents over
upstream gene sequences may block further downstream research
and consequently adversely impact drug discovery.33
However, similarly to our earlier examples, if access is mandated without
providing for sufficient returns on investment, these important initial innovations will not
occur in the first place. As a result, it is of the utmost importance that compulsory
licensing regimes in this area are particularly sensitive to the ex-ante incentives it creates.
Yet pharmaceuticals are equally demanded across the globe. An HIV vaccine
created in the U.S. may have an even higher demand in Africa. Unfortunately however,
the socioeconomic level of most Africans is significantly lower than an American, and
so, access can be difficult for a majority of the demand-side of the market.
This problem can be solved through a compulsory licensing regime that permits
price discrimination. In fact, such a regime, if executed correctly, could have a positive
33

Shamnad Basheer, Block Me Not: Are Patented Genes Essential Facilities?, Berkeley
Electronic Press, 1 (2005).
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impact both on society (more affordable drugs) and on the drug company (increased
revenues through sales previously unattainable due to nondiscriminatory pricing).
However, getting to this positive resolution still requires the analysis explored in previous
sections.
First, as we have already discussed, the grant of intellectual property rights is
necessary to encourage innovation in the first place. The rights must be granted so that
the innovator can be properly compensated both by initial supracompetitive sales, and
eventual compulsory license revenues.
Second, these pharmaceuticals (or their intermediate methods and inputs) are
often classifiable under the essential facilities doctrine. As in most cases of intellectual
property, the equivalent of a legal monopoly has been granted over the facility. The
ability of competitors to practically or reasonably duplicate the facility is blocked by the
excludability granted with this legal monopoly.34 Additionally, since information is often
easily transferrable in the age of information, it seems unlikely that providing the facility
to competitors would be considered unfeasible.
Lastly, the only element on which the analysis hinges is whether or not the
innovator is denying use of the facility to a competitor which often occurs within the
ultracompetitive pharmaceutical industry. However, in the rare case that a benevolent
pharmaceutical company decides to share its innovations with competitors, an essential
facility test may fail (being unnecessary).

34

Even if an adequate substitute or invent-around technology could be designed, such a

duplicative investment is inefficient and a waste of capital making it unreasonable to
duplicate the relevant capacities of the facility.
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In 2001, the WHO released a report recommending that such facilities be subject
to differential pricing (or price discrimination). Specifically, they call for a more
coherent global framework for differential pricing [to] . . . facilitate the mobilization of
the funds necessary to ensure that differential pricing actually contributes to meeting the
needs of the poor for access to essential drugs. Another report notes that, [p]rice
discrimination in this context almost certainly raises total consumer welfare.35 However,
most importantly: If low-price users cover at least their marginal costs and make some
contribution to R&D costs, prices paid by other users can be lower than they would have
been in the absence of price discrimination.36 In other words, as long as the price being
charged to a specific socioeconomic group is above marginal cost, that additional revenue
will help recover fixed R&D costs. Consequently, the pharmaceutical company will be
able to capture revenues previously unattainable. In short, since marginal costs are low,
any additional sales (and especially licenses) are bound to increase profits for the
innovator.
It is important to note that I have framed this discussion primarily around the
pharmaceutical producer and the end consumer. In reality, compulsory licenses
would likely take place between the producer and a foreign competitor that seeks to
produce the pharmaceutical locally. This dynamic is simplified in the previous discussion
because the intermediary does not change the end result: higher profits for the innovator
and greater access for consumers.
IV.

Concluding Thoughts

35

Patricia Danzon, Making Sense of Drug Prices, Regulation Magazine, Cato Institute,
23(1): 62 (July 11, 2000).
36
Id.
22

Antitrust deals with the implicit paradox that competition is, by nature,
anticompetitive and thus, something that needs to be continually restored. Like a
chicken-and-egg, innovation protection and promotion must be carefully balanced. A
chicken must protect its eggs, but once the egg is hatched, its development and growth
must be encouraged, and it must be permitted the opportunity to live a life of further
innovations and transformations. Eventually the revolution is complete, and new one
begins a new egg is hatched.
Intellectual property rights maintain ex-ante incentives to innovate, and have long
been properly justified under economic reasoning. Antitrust on the other hand, restores
competition when competition becomes anticompetitive when the gales of creative
destruction preclude future creative gales. In this way, intellectual property and antitrust
law are necessary complements. This is becoming increasingly true in the age of
information. Information has finally taken its stand in the spotlight as the backbone of
progress, and the essential input to innovation. Consequently, we must come to terms
with the fact that intellectual property is, and will continually become, an essential
facility an essential input for competition.
However, while intellectual property is commonly accepted as a normal form of
government intervention, antitrust actions are often seen as an exception to the norm.
This perception is absurd. No innovator is discouraged from innovating for fear of
becoming a monopoly subjected to antitrust action. If anything, this result would be
desired because it signifies the innovators success and profitability. Moreover, the
antitrust actions recommended in this papercompulsory licensing regimesrepresents
a continued source of revenue for the innovator.

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It is true that it is difficult to set prices in compulsory licensing regimes.

However, such difficulty should not preclude us from reaching for the optimality that
would come with its success. As such, we must overturn the stilted perception that
antitrust is a less legitimate form of government intervention than the assigning of
intellectual property rights. Indeed, market power associated with an essential facility
arises because of the absence of a specific legal action (declaration) to remove it, whereas
market power associated with intellectual property arises because of the presence of a
specific legal protection.37 Recognizing this factthat the freedom of the market
actually arises out of government interventionmay be the necessary paradigm shift in
order to reform the way we view the transformation of information. As a result, it is
hoped that we can finally, with full force, aim to maximize innovation and promote the
Progress.

37

Aoki, supra note 26, at 5.

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