IP and Private Ordering

Posted by Social Science Research Network

IP and Private Ordering

Reto Hilty (University of Zurich)

Abstract:     Just as legal practice has increasingly begun to appreciate the need to safeguard access interests of third parties and the public in intellectual property rights, a new challenge has arisen: the possibility of privately ordering the use of IP, thereby supplanting the current legislative regimes and overriding limitations that have been imposed on the scope of exclusivity. Right holders can restrain users in two ways: contractually or by use of technical protection measures (TPMs) – or by a combination of both. While the former way has long been subject to academic discussion, the latter has only recently become a concern, not only, but above all, in the digital environment, and is significantly more problematic.

Private ordering may apply on three graduated levels of exclusivity, namely factual, legal, and contractual exclusivity. Factual exclusivity is based on particular circumstances, either rooted in the fact that the subject matter is not generally available, and particularly not disclosed to competitors, or in technological means, such as encryption and access controls. Whereas contracting is the unavoidable consequence of disseminating knowledge to third parties (e.g. revealing trade secrets), the artificial creation of unavailability by “locking away” a subject matter that in principle is or was accessible for third parties seems more problematic.

Legal exclusivity has its root in specific legal protection imposed through IP legislation. On this level right holders may be motivated to resort to private ordering either because protection, although existing in the law, may not be enforceable in practice, or because they are of the opinion that the granted protection, although adequately enforceable, is insufficient. The latter case is of concern because the right holder will then upset and circumvent a balance intended by and inherent to the underlying legislation.

The third level of exclusivity is based on contracts between cooperating market participants that have an impact on third parties or the general public. Examples include non-attack clauses or cross-licensing of IP rights. This level and its many variations are the concern of antitrust law. As with the first level, licensing in the first instance may be evaluated positively, depending on the terms and conditions that apply.

Tools for intervention in contractual private ordering are available in principle: In many jurisdictions, statutory restrictions to private autonomy aiming at the protection of systemically weaker parties exist with regard to the first and second level. IP legislation itself obviously comes into play on the second level. Antitrust law can apply on the first and the second level under the guise of control over unilateral conduct, on the third level under the guise of control over bilateral conduct. The current framework, however, does not offer effective means for limiting private ordering based on TPMs. Thus, especially in this respect, new regulatory approaches are required. These can, as far as the second level is concerned, be based on consumer protection law or on IP legislation itself, through the development of existing legal approaches, and, with respect to all three levels, can be based on unfair competition law.

However, since both methods of private ordering take place in highly complex and dynamic market conditions, traditional state regulation threatens to be far too inflexible and, inter alia due to lacking information often held unsystematically by different market players, ultimately incapable of intervening appropriately. Instead, this environment may provide the breeding ground for self-regulation amongst the concerned parties. For such forms of self-regulation to evolve, however, certain conditions must be met, especially an understanding of a majority of the actors that they will all benefit more from coordinated actions than from solo efforts.

Useful insights can be drawn from the currently ongoing, highly interesting learning process in the relatively narrow field of standard-essential patents, where everyone is better off with the standard because of interoperability. Further areas in which self-regulation already plays a role or might become relevant in the future are patent pools or collective rights management (CRM) in copyright law. Beyond these fields, the legislative focus in addressing the problem of private ordering might best be directed toward efforts to frame appropriate regulatory guidelines for self-regulation by market participants. These would define certain benchmarks, but leave it to the actors to operate within that framework.

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