University of Chicago Law School University of Chicago Law School
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Journal Articles Faculty Scholarship
2011
Licensing of Intellectual Property Licensing of Intellectual Property
Omri Ben-Shahar
Richard A. Epstein
Jonathan Masur
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Omri Ben-Shahar, Richard A. Epstein & Jonathan Masur, "Licensing of Intellectual Property," 78 University
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The
University
of
Chicago
Law
Review
Volume
78
Winter
2011
Number
1
@
2011
by
The
University
of
Chicago
The
Licensing
of
Intellectual
Property
Until
not
too
long
ago,
commercial
property
trading
was
accom-
plished
primarily
through
either
sale
or
lease,
usually of
tangible
as-
sets.
If
you
wanted
more
rights
in
an
asset,
you
bought
it.
Otherwise,
you leased
it.
But
with
the
rise
of
digital
media
as
an
important
class
of
assets,
and,
more
fundamentally,
with
the
growing
share
of infor-
mation
products
in
the
economy,
the
mechanics
of
trade
have
changed.
Information
is
neither
sold
nor
leased;
it
is
now
licensed un-
der
terms
whose
richness
matches
the
complexity
of
the
new
bundle
of
rights.
You
can
still
buy
a
book,
or
a
music
CD,
or
even
a
patent.
But
increasingly
common
is
the
acquisition
of only
a
subset
of
intellec-
tual
rights-a
license
to enjoy
digital
content,
to
use
a
technology,
or
to brand
a
good.
From
the
standard
end
user
license
agreement
at-
tached
to
all
consumer
software, to
the
assemblage
of
negotiated
li-
censes
underlying
every
new technological
product,
the
license
trans-
action
has
taken
over
intellectual
property
(IP)
commerce.
On
June
19
and
20,
2010,
the
John
M.
Olin
Center
for
Law
and
Economics
at
The
University
of
Chicago
and
The
University
of
Chicago
Law
Review
hosted
a
conference,
The
Licensing
of
Intellectual
Proper-
ty.
The
title
for
our
conference
was
not
chosen
by
accident.
The
law
of
intellectual
property
has
three
distinct
components:
registration
of
vari-
ous
forms
of
intellectual
property,
protection
of
that
property
against
infringement,
and disposition
of
intellectual
property
in
a
variety
of
business,
professional,
and consumer
markets.
The
first
component
involves
the
acquisition
of
IP
rights
in
an
invention,
a
literary
work, or
a
trademark,
which
includes
trade
names.
In
these
areas,
the differences
among
the
various
branches
IP
are
evident,
for
examination
of
patents
is
a
far
more
complex
affair
than
the
registration
of
either
copyrights
or
trademarks.
These
differences
in
IP
types
persist
in
the
second compo-
nent,
which
involves
litigation
over
infringement
of
the protected
IP
1
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The
University
of
Chicago
Law
Review
rights,
as
supplemented
by
the
backstop
doctrines
of
contributory
in-
fringement
and
inducement
of
infringement.
Yet
the third
topic,
rights
of
disposition,
is
characterized
by
sub-
stantial
similarities
across
classes
of
intellectual
property.
In
many
cases, owners,
users,
and
consumers
of
patented
technologies,
copy-
righted
works,
and
trademarks
are
faced
with
similar issues
when de-
ciding
whether
to
license
IP
rights
or to
opt
for
an
alternative
such
as
sale
or
infringement.
Here,
the
legal
rules
differentiating
licensing
from
other
types
of
transactions
can
be
highly
significant.
For
exam-
ple,
IP
rights
are
often
sold
in
order
to facilitate
their
assertion
in
in-
fringement proceedings
by
parties
with
greater
litigation
expertise
and
resources.
IP
sales
also
allow
for
the
creation
of
complementary
IP
pools,
which
increase the
overall
value
of
the
patents
to
buyers
and
sellers
alike.
In
licensing
cases,
by
contrast, the
end
in
view
is
rarely
litigation.
Licensing's typical
use
is
to
facilitate
either
the
develop-
ment
of
new
products or
their
commercialization to
end
users
in
a
variety
of
consumer
and
commercial
markets.
In
some
cases,
the
line
between
license
and
sale
matters
given
the
general
view
that
it
is
easi-
er
to
attach
conditions
on use
to
licenses
than
it
is
to attach
them
to
sale.
For
example,
under
many circumstances
only
the
latter
is
subject
to
the
first-sale
or
exhaustion
rules
that
operate
for
both
copyrights
and
patents.
In
many licensing
transactions,
moreover,
the
licensee
pays
some
fee
based
on
the
intensity
of
its
use
of
the
licensed
product.
In
general,
this
approach
is
used
when
pervasive
market
uncertainties
make
it
difficult
to
attach
a
lump
sum
value
to
an
IP
right,
especially
when
its
future
value
could easily
depend
on
cooperation
between
licensor and
licensee.
This
uncertainty
makes
the topic
of
licensing
far
more
diffi-
cult to
organize
because of
the
need
to
develop
a
comprehensive
the-
ory
that
can
explain
this
wide
variety
of
licensing
transactions.
Some
licenses
are
exclusive
to
one
licensee,
while
others
are
nonexclusive;
some
licenses
are
among
merchants
and
professionals,
while
others
are
with
consumers;
some
licenses
are
offered
on
a
take-it-or-leave-it
basis,
while
others
are complex
negotiated
agreements; most
licenses
are
voluntary,
but
some
licenses
are compulsory;
some
licenses
are
freestanding
arrangements,
but
often
parties
use cross-licensing
or
pooling
agreements;
some
licenses are
part
of
standard-setting
ar-
rangements,
but
most
are
not;
some licenses use
open-source
ar-
rangements,
but
others
remain
strictly
proprietary.
Regardless
of their
individual
pedigrees,
all
licenses are
vulnera-
ble to
the
usual
attacks
that
can
be
leveled
against
all
types
of
con-
tracts.
Thus
they
can
be
attacked
on
the
grounds
that
their
mode
of
creation
leaves
it
uncertain
whether
an
agreement
has
been
formed,
and,
if
it
has,
on
what
terms.
Likewise,
licenses
can
be
attacked
for
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The
Licensing
of
Intellectual
Property
fraud
in
the
inducement,
or
even
for
insufficient disclosure
of
relevant
information,
and
for
creating
collusive
arrangements
under
the
antitrust
laws.
And
they
can
be
attacked
on
grounds
that
are
specific
to license
or
user
type,
as
with clickwrap
contracts and
consumer
transactions.
Positioned
at
the
interface
between contract
law
and
IP
law,
licenses
are
also
vulnerable
to
a
wide
variety
of
collateral
attacks.
One
such
common
claim
is
that
the
ostensible
license
must
be
recharacterized
as
a
sale,
which
would
make
it
subject
to
the
limitations
of
the
first-sale
rule.
At
this
point,
the
parties
and
courts
face
the
same
challenges
in
deciding
whether
a
given
transaction
is
a
sale
or
lease
for
tax
or tort
liability
purposes.
What
the parties
say
always
matters,
but
it
is
never
conclusive.
The
articles
in
this
Issue
address
the numerous
legal
and
market
structures
that
can
facilitate
or
impede
licensing
activity across
all
types of
intellectual
property.
The
diversity
of
issues
brings
with
it
a
diversity
of
views.
Often these
articles
take
opposing
views
on
such
key
questions
as
the
required
disclosures
in
consumer
transactions,
the
desirability
of
allowing
parties
to
vary
via
contractual arrange-
ments
the
bundle
of
rights
that
licensing
agreements
leave
with
the
owner and
transfer to
the
licensee,
or
the
relationship
between
prop-
erty-based
and
contractual
remedies.
But
the
articles
are
unified
in
their
treatment
of
IP
licensing
as
an
area
of
law
embodying
specific
concerns and
warranting
particular
attention.
The
flavors
of
the
collected
contributions
in
this
Issue
can
be
cap-
tured
through
a
common
metaphor.
Consider
the
copy
(hard
or
digi-
tal)
of
the
Symposium
Issue
you
are
presently
reading.
Someone
else
owns
the
copyright
to
it,
but
through
a
chain of
transactions
-mostly
if
not
solely
licenses-you
are
now
enjoying
this
content.
Your
rights
in
the
copy
are
limited
by
these
licenses,
but
do
you
know
the
exact
scope
of
such
limitations?
Two articles
in
this
Issue
debate
whether
better
precontractual
disclosure
of
license
terms
would
help
end
users.
Robert
Hillman
and
Maureen
O'Rourke,
the
Reporters
of
the
Amer-
ican
Law
Institute's
recent
Principles
of
the
Law
of
Software
Con-
tracts,
advocate
more
disclosure,
whereas
Florencia
Marotta-Wurgler
presents
empirical
evidence
that
such
disclosure
would
be
pointless.
What
if
some
readers
of
this
Issue
accessed
it
without
a
license?
Rebecca
Eisenberg
argues
that
rightholders
sometimes
turn
a
blind
eye
to unlicensed
uses
(even
of patents),
especially
those
made
for
limited
research
purposes,
which
might
in
the
long
run
improve
the
value
of
their
creations.
It
is
also
possible
that
some
readers
had
to
pay
more
than
others
for the
license.
Indeed,
the
practice
of licens-
ing
makes
it
quite
easy
to
tailor
different
prices
and
terms
to
differ-
ent
users. Guy
Rub's
article
critiques
Judge
Frank
Easterbrook's
well-known
decision
in
ProCD,
Inc
v
Zeidenberg,
which
enabled
and
2011]
3
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The
University
of
Chicago Law
Review
rationalized
such
tailoring.
He
argues
that
the
resulting
price
discrim-
ination
may
be
less
efficient
than
is
commonly
thought
because
it
may
result
in
less,
rather
than more,
readership.
In contrast,
David
McGowan
argues
that
allowing
authors
strong
licensing
control
over
downstream
modifications
of
their
work
may
in
the
long
run
encour-
age
creativity
by
increasing
both
the
number
and quality
of
artistic
works
protected
by
these licensing
terms.
What
if
the
unlicensed use
of
the
content
of
this
Issue
is
commit-
ted
by
a
user
who
is
either
hard
to
detect
or
judgment
proof?
Jona-
than
Masur
explores
how
the
presence
of
liable
third
parties
(here,
perhaps,
the
university
that
negotiated
a
group
license
or
the
publish-
er
who
distributes
unlicensed
derivative
work)
incentivizes
search
for
infringement.
He
shows
that
sometimes
licenses
can
be
written to
in-
duce
socially
inefficient
levels
of
search.
Or
what
if
the
copyright
holders
refuse to
license
this
Law
Re-
view Issue
to
high-value
users
who
cannot
afford to
pay
for the
li-
cense?
IP
laws
recognize
some
grounds
for
"compulsory
licensing,"
and
in
some places
compulsory
licenses are
available
at regulated
prices
below
marginal
cost.
Richard Epstein
and
F.
Scott
Kieff
attack
such practices
and
show
that
they
go
beyond the
settled
injunctive
and
remedial
rules.
Your
license
allows
you some
uses
of
the
articles
in
this
Issue,
but
not
others.
What
remedies
would
the
copyright
holder
have
if
you
commit
unlicensed
uses?
Some
unlicensed
uses
(for
example,
distrib-
uting
free
photocopies
to
an
entire
class)
might
give
rise
only
to
breach
of
contract
remedies,
while
other
unlicensed
uses
(for exam-
ple,
modifying
the
content
of
the
articles
or
selling
them
online)
might
give
rise
to
IP
remedies.
Omri
Ben-Shahar's
article
addresses
the rela-
tionship
between
remedies
for breach
of
contract and infringement
of
IP
rights,
demonstrating
the boundary
issues
and
analyzing
how
they
can
be
manipulated
by
IP
owners
to
increase overall
compensation
beyond
what
the
law
intended
to
accord
them.
While
quite
uncommon
in
the context
of
law
review
content,
oth-
er
copyrights
and
patents
are
sometimes
sold
in
a
secondary
market.
Anne
Kelley,
associate
general
counsel
at
Microsoft,
explains
how
such
sales
create
value.
Buyers
are
not
always
the
better
users of
the
rights,
but
are
instead
better
suited
to
litigate
the
infringement
suits,
or
more generally
have
superior
abilities to overcome
information
obstacles
and
friction
in
utilizing
the
rights.
Many
authors
of
law
review
articles
are
known
to
value
their
cre-
ations
more
than
other
users
of
the
content
do.
Is
this
a
version
of
an
endowment
effect,
extended
to
the
IP
context,
whereby
people
attach
more
value
to
property
they
own
than
do
potential
buyers? Christo-
pher
Buccafusco
and
Christopher
Sprigman
provide
experimental
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The
Licensing
of
Intellectual
Property
evidence
of
what
they label
a
"creativity
effect":
owners
of
IP
who
originally
created
a
work
attach
a
higher
value
to
it
than
owners
who
acquire
the
work
by
purchase
only.
Many
authors
of
academic
work
distribute
it
through
open-
source
licenses.
Mark
Lemley
and Ziv Shafir
ask
more
generally
who
uses
open-source
software
licenses.
They
present
survey
data
that
ex-
plore
the
differences
between
academic
users
and private
firms and
find
that
the
former
are somewhat
more
likely
to
adopt
the
open-
source
format
than the
latter.
A
well-known
pricing
strategy,
also
prevalent
in
the
licensing
ar-
ea,
is
"razors
and
blades"
pricing,
whereby
a
producer
sells
one
prod-
uct
(the
razor)
at
a
loss
in
order
to
command
profits
from
the
sale
of
a
second
product
(the
blades).
For
instance,
the
owner
of a
law
review
database
might
charge
a
small
fee
for
general
access
to
its
content,
with
additional
fees
for each
article
that
the
user
reads
or
copies.
Randal
Picker
explains
the
flaws
in
the
conventional
account
from
both
a
his-
torical
and
analytical
perspective.
Because
it
is
impossible
to
lock
in
customers
with
free
razors
without
patent
or
technological
protection,
the
razor
company
can
charge
high
prices
for
its
razors only
during
its
period
of
patent
protection.
He
argues
that
Gillette,
the
supposed
in-
ventor
of
the
strategy,
did
not
actually
play
razors
and
blades-or
at
least
not
when
it would
have
been most
advantageous
to
do
so.
We
think
that
the
rich
diversity
of
topics
and
approaches
makes
this
Issue
of
the
Law
Review
a
timely
contribution
to
the
rapidly
evolving
field
of
intellectual
property
licensing
that
sheds
light
on
a
wide
range of
business
and
litigation
practices.
We are
proud
to
com-
mend
to
your
attention
this
licensed
copy
of
the
Law
Review's
Licens-
ing
of
Intellectual
Property
Symposium.
Richard
A.
Epstein
Omri
Ben-Shahar
Jonathan
S.
Masur
2011]
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