On economic analysis of IP law: an interview with professor Tom Cotter

This Kat just returned from vacationing in beautiful Minnesota where he enjoyed open water swimming, fried cheese curds and … a conversation on the law & economics of IP with Professor Tom Cotter. Cotter's recent books include Comparative Patent Remedies (2013) and Patent Wars: How Patents Impact our Daily Lives (2018). He runs the Comparative Patent Remedies blog and has authored dozens of articles on, particularly, the economic analysis of patent remedies.

Professor Cotter kindly agreed to be interviewed for this blog so what follows is his take on the potential uses of economic analysis for IP law!

Professor Cotter

Q: How is economic analysis of law different from other legal methodologies? 

A: Lawyers traditionally engage in doctrinal analysis, i.e. reading legal texts such as statutes or precedents and interpreting them. That is, and will remain, an important part of lawyers' work. But these legal texts are also often indeterminate: by themselves, they do not always offer a conclusive answer to a legal question.

Economic analysis of law provides an additional perspective when faced with the question of how such an indeterminacy can sensibly be solved. It seeks to quantify potential outcomes and, thereby, helps thinking clearly about the problem at hand. Often times, economic analysis will restate legal penalties and sanctions as the price people pay to engage in certain behaviour. These penalties and sanctions, and the legal rules from which they emanate, become tools to stimulate desirable behaviour and quantifying them may allow us to more accurately predict their effects.

Thus, economic analysis of law essentially asks what the consequences will be of one answer to the question versus the other, which allows lawyers and legal scholars to make a policy argument in support of their preferred interpretation, or to support proposals on how the law needs to adapt.

Competition law offers a good example. Decisions of competition courts or authorities often rely strongly on economic analysis to show anti- or, as the case may be, pro-competitive effects of certain behaviours. More often than not, economic analysis reveals a certain trade-off: for instance, vertical restraints might raise prices but simultaneously increase quality control. Whether such price-fixing is anti-competitive in the given case, however, remains a matter of judgment by the court or authority. In that sense, economic analysis rarely dictates a specific outcome.

Q: We've all heard of the approach to law & economics pioneered by the Chicago School, which presumes market participants are rational actors. Has the methodology evolved following discoveries by behavioural economists that challenge this presumption?

A: The Chicago School made important contributions to our understanding of many legal problems and expanded our way of thinking about these problems. But it is correct to say that actors do not always act rationally. Economists should, and increasingly do, take into account our individual psychological quirks.

Empirical studies have therefore moved us forward. A famous example of modern scholarship that has moved beyond the classic Chicago law & economics paradigm is the work of Cass Sunstein and Richard Thaler on nudging. Sunstein and Thaler set out to formulate rules for various everyday situations based on their likely effect, which is in line with the approach a law & economics scholar would take. But they assumed that the efficacy of the rules depends not on rational decisions made by the addressees of the rules, but rather on different psychological preferences they have.

Economic analysis can make arguments more persuasive (Meme credit: Super Funny Awesome Memes)

Q: Can you describe some of the benefits economic analysis of law has specifically in the field of IP?

A: With the possible exception of copyright, all IP rights are utilitarian in nature: they seek to bring about certain effects. Thus, patents exist to stimulate innovation, trade marks exist to avoid consumer confusion, and so on. When rules in these fields of law are indeterminate, these stated goals should guide the answers. That makes the inquiry necessarily consequential, inviting economic analysis to assess the expected outcomes.

This is the approach I take in my work on IP remedies. For instance, in a forthcoming paper, I suggest that courts should maximize the social benefits of the patent system by abandoning the rule that patent infringement should always result in an injunction. There is a strong theoretical case to be made that injunctions can result in overcompensation of patentees, imposing unnecessary costs on implementers and society. That sits uneasily with the utilitarian basis of the patent system, so an ideal patent system would avoid granting injunctions in such cases. I rely on economic models and assumptions to make some cautious recommendations on how such a system might try to identify those cases.

Q: Is economic analysis of law merely an academic exercise, or is it also useful in practice?

A: It can certainly be a valuable tool for practitioners. If a statute is clear and unambiguous, you are probably out of luck trying to argue in a different direction. But if not, attorneys need arguments to persuade courts of their clients' positions. And showing what real-world consequences might be expected to arise from a particular decision can be a very compelling argument.

It is perhaps true that such consequentialist reasoning is more often found in common law courts. But there is plenty of opportunity to rely on it in civil law systems as well: France, for instance, has a very detailed civil code and yet it also needs interpretation. French courts providing that interpretation are probably just as likely to take into account the real-world consequences of their decision as their common law counterparts. Tradition will dictate if and how those considerations feature in the court's decision, but I think courts all over the world share a desire to come to a decision that works in practice, especially in IP cases.

Q: Can you provide an example?

A: Sure. Certain jurisdictions, such as the US and France, have a system whereby lost profits cannot be claimed if a non-infringing alternative was available to the infringer. At first glance, that rule might seem odd: after all, damages calculations are normally about what an infringer actually did, rather than what they could have done. Indeed, UK courts have long rejected this rule, considering non-infringing alternatives irrelevant [see United Horseshoe & Nail Co. (Ltd.) v. Stewart & Co, [1888] UKHL 447].

However, from an economic standpoint the rule makes sense: IP rights and, in particular, patents are about enrichment of the state of the art by the patentee. If a non-infringing alternative is available, the invention apparently did not represent a tremendous improvement to the state of the art. Consequently, it would be unreasonable to award a patentee lost profits in these cases, because that would imply a greater contribution to the state of the art than was actually provided. After all, discarding non-infringing alternatives when calculating lost profits assumes only the patented invention was available to use and thereby incorrectly attributes all hypothetical sales to that invention.

Interestingly, Canadian courts used to follow the British approach but, in its recent decision in Merck & Co. v. Apotex, Inc [here], the Federal Court of Appeal embraced the US/French approach. The decision relies on economic arguments to justify this change [see esp. paragraphs 60-72]. This shows that such arguments can be persuasive if an opportunity to change current doctrine presents itself. I would imagine that an English lawyer trying to get United Horseshoe overturned might want to rely on the same economic reasoning to add substance to their argument.