Private Value Determinations and the Potential Effect on the Future of Research and Development

Chapman Law Review Volume 18 | Issue 3 Article 4 2015 Private Value Determinations and the Potential Effect on the Future of Research and Development Amy L. Landers Follow this and additional works at: http://digitalcommons.chapman.edu/chapman-law-review Recommended Citation Amy L. Landers, Private Value Determinations and the Potential Effect on the Future of Research and Development, 18 Chap. L. Rev. 647 (2015). Available at: http://digitalcommons.chapman.edu/chapman-law-review/vol18/iss3/4 This Article is brought to you for free and open access by the Fowler School of Law at Chapman University Digital Commons. It has been accepted for inclusion in Chapman Law Review by an authorized administrator of Chapman University Digital Commons. For more information, please contact . Do Not Delete 6/6/2015 11:02 AM Private Value Determinations and the Potential Effect on the Future of Research and Development Amy L. Landers* INTRODUCTION Although the promise of an emerging patent market is thought to provide future benefits to invention, innovation, and the public, this Article examines the possibility that the aggregate influence of this activity could instead destabilize patent values in a manner that mirrors the “bubble” phenomenon that occurred in certain markets in the past. To the extent that this occurs, this would have negative consequences for the future of investment in research, development, and innovation.1 Although a patent market has been said to be in the emerging stages, none exists at this time.2 The attributes of a well-functioning market are not present, including accepted methods for determining price, a system to connect buyers/licensees with sellers/licensors, liquidity, and minimal transaction costs. If such a market becomes established, it might lead to rational private ordering for intellectual property asset trades. In theory, such a market might facilitate information sharing, collaboration, commercialization, and invention. Yet there are reasons to consider that a socially desirable market might not materialize as anticipated. * Professor of Law, Drexel University Thomas R. Kline School of Law. 1 Based on the current state of available information, it is not possible to fully evaluate whether there is an overall distortion for patent licensing. At present, there is only interstitial pricing information available. Patent assertion entities do not disclose specifics, license agreements are largely confidential, and there are few comparators. Indeed, it appears that some entities go to great lengths to shield the confidentiality of the terms of these agreements. See Patrick Anderson, Micron Retains Interest in Round Rock Patent Monetization Proceeds, GAMETIME IP (May 9, 2012), http://gametimeip.com/2012/ 05/09/micron-retains-interest-in-round-rock-patent-monetization-proceeds. 2 See Mark A. Lemley & Nathan Myhrvold, How to Make a Patent Market, 36 HOFSTRA L. REV. 257 (2007); see also Lucia Karina Alvarado, The Patent Transactions Market – Established and Emerging Business Models 7 (2010) (Master’s thesis, Chalmers University of Technology) (on file with Department of Technology Management and Economics, Chalmers University of Technology). 647 Do Not Delete 648 6/6/2015 11:02 AM Chapman Law Review [Vol. 18:3 As Hyman Minsky has theorized, some markets become subject to a form of instability that leads to incoherence.3 This might occur even in the absence of any mismanagement, fraud, or wrongful conduct. Damaging volatility can occur due to frictions, which can include that which exists between the private wealth-maximizing interests of individuals on one hand, and the public interest on the other. Further, the impact of such incoherence can create second-order effects that reach outside the core activity in which this incoherence occurs. This can take any of numerous forms, up to and including impacts that harm employment, invention, investment, and innovation. First, this Article draws on the existing literature to establish a working definition of bubbles, both economic and non-economic. Second, these principles are applied to the case of Bitcoin to illustrate how these theories might be applied to an asset that lacks widely accepted, objective price anchors. Third, this work considers how these principles might be applied to an emerging market for patents. I. THE IRRATIONAL EXUBERANCE OF BUBBLES A. Economic Bubbles: A Brief Primer The field of neoclassic economics assumes that agents are rational and markets are efficient. Under this theory, well-informed arbitragers correct mispricing when it occurs.4 In this theoretical world, the individual pursuit of self-interest is said to best serve the public interest by maximizing welfare.5 Under economic theory, the price of an asset has a rational connection to future cash flows, subject to reasonable variations.6 The behavior that is responsible for bubbles is at odds with these assumptions. Episodes that range from the Dutch tulip mania in the 1630s up to the recent bursting of the subprime mortgage market shed doubt on the idea that the rationality assumption can be applied to all markets. To explain this behavior, economists have turned to psychology, sociology, and political 3 See HYMAN P. MINSKY, STABILIZING AN UNSTABLE ECONOMY 11 (2008). 4 See Dilip Abreu & Markus K. Brunnermeier, Bubbles and Crashes, 71 ECONOMETRICA 173 (2003). 5 See Joseph E. Stiglitz, The Invisible Hand and Modern Welfare Economics 1 (Nat’l Bureau of Econ. Research, Working Paper No. 3641, 1991). The field of economics’ limited sphere of influence on the operation of the law has been explored by others. See, e.g., Richard A. Posner, Utilitarianism, Economics, and Legal Theory, 8 J. LEGAL STUD. 103−40 (1979). 6 See Jeremy J. Siegel, What Is an Asset Price Bubble? An Operational Definition, 9 EUR. FIN. MGMT. 11, 12 (2003); see also PETER M. GARBER, FAMOUS FIRST BUBBLES: THE FUNDAMENTALS OF EARLY MANIAS 4 (2000). Do Not Delete 2015] 6/6/2015 11:02 AM Private Value Determinations 649 science to formulate a literature that examines the bubble phenomenon. The richest source of this literature focuses on the pricing bubble, which is defined as “an upward price movement over an extended [range] . . . that then implodes.”7 An alternative definition holds that bubble pricing is “a sharp rise in [the] price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers—generally speculators interested in profits from trading in the asset rather than its use or earning capacity.”8 The key points of commonality underlying these descriptions is that a bubble occurs when the price of the asset is higher than justified by its intrinsic value when referenced against its underlying fundamentals. For a typical commodity, fundamental price drivers might include supply scarcity, increased demand, changes in consumer income levels, overall (...truncated)