Property Rules, Liability Rules and Patent Market Failure

Relying on the economic theory of real property, commentators argue that patent law is better suited to a property rule regime than a liability rule system. The underlying assumption is that ex ante incentives for innovation are best promoted by enabling patent holders to negotiate licenses against the backdrop of an injunction. By contrast, judicially determined damage remedies systematically undervalue innovation. However, recent judicial developments have started to deny injunctions in patent infringement cases in favour of awarding damages, making it appear that patent law will now be increasingly governed by liability rules. This article reflects on this trend by considering the case of patent market failure. It argues that many of the preconditions that work against liability rules similarly affect property rules and private bargaining. Patent market failure is caused by difficulties in valuing (and pricing) innovation, establishing the boundaries of patents and resolving the externalities involved in patent licensing. Patent market failure strengthens the case for liability rules that provide follow-up innovators access to patents, while eliminating the detrimental effect of the anticommons.