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Perspectives from FSF Scholars
July 29, 2016
   
Liberty of Contract and the Free Market Foundations
of Intellectual Property
 
by
 
Randolph J. May * and Seth L. Cooper **
 
[Below is the Introduction and Summary to this latest FSF Perspectives. A PDF version of the complete Perspectives is here.]
 
Introduction and Summary
 
Intellectual property is a source of tremendous value in our digital age economy. A 2014 International IP Alliance report found that "core copyright industries in the U.S. generated over $1.1 trillion dollars of economic output in 2013, accounting for 6.71% of the entire economy" and "employed nearly 5.5 million workers in 2013." And according to a 2012 United States Patent and Trademark Office report, IP-intensive industries accounted for about $5.06 trillion in value added in 2010. The figures for IP's contributions to the overall economy and to jobs almost certainly are greater today.
 
The value of copyrights and patent rights is secured and maximized through market exchanges - both outright sales of exclusive rights and through licensing agreements. It is often the case that creative artists or inventors can maximize their economic returns by assigning their rights to more highly capitalized entrepreneurs or commercial enterprises that may be better situated to use, reproduce, or sell the creative works or inventions. Meanwhile, by all estimates patent licensing agreements generate well over a hundred billion dollars annually for American enterprises. And licensing of music, movies, and other copyrighted works through digital media technologies collectively generates billions of dollars each year.
 
In considering the astonishing economic value of intellectual property and its future potential in the digital age, we need to be mindful of the free market foundations of intellectual property rights in the United States. And in considering the importance of market exchanges and licensing agreements involving intellectual property as drivers of economic growth and innovation, we need to be mindful that liberty of contract is an indispensable component of the free market foundations of intellectual property rights.
 
Specifically, there is a close connection between American constitutionalism and the free market enterprise system. To be sure, the U.S. Constitution does not formally institute capitalism as the nation's economic system. However, the Constitution contains several provisions particularly favorable to free market enterprise. Just as significantly, legal and policy developments of the 19th and early 20th centuries built upon the Constitution's entrepreneurial, market-friendly foundation.
 
This paper considers intellectual property in the context of American constitutionalism and the emergence of free market capitalism and, more particularly, the role played by liberty of contract protected by the Constitution. It focuses on the interstate commercial marketplace and the U.S. copyright and patent systems as they developed during the 19th and early 20th centuries. Building on the Constitution's framework and the work of the First Congress, the developments of the first several decades that followed established intellectual property as a form of exchangeable capital in a competitive interstate commercial marketplace. Although often overlooked, the protections accorded to copyrights and patent rights proved particularly conducive to free market economics, and they performed an important role in advancing art and innovation in the United States during the first 150 years under the Constitution.
 
Undoubtedly, IP's status as exchangeable capital rests on the foundational understanding that copyrights and patent rights are unique forms of private property subject to the protections accorded liberty of contract in our Constitution. As we explained in our recent book, The Constitutional Foundations of Intellectual Property: A Natural Rights Perspective, at the time the Constitution was adopted, the prevailing consensus was that copyrights and patent rights were rooted in the natural rights of inventors and authors to the fruits of their labors.
 
The Intellectual Property Clause provides that "The Congress shall have Power To... promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." The IP Clause is consistent with the natural law premise that inventors and authors are justly deserving of exclusive rights, at least for limited periods of time, to the proceeds of their inventions and creative works. At the same time, the Clause recognized and enabled the vital public purpose of encouraging the creation of artistic works and the invention of useful technologies by securing copyrights and patent rights.
 
The Clause was unique in conferring on Congress a role in defining the parameters of a property right - a role otherwise left to the states. Subsequent to the Constitution's adoption, the First Congress exercised its power under the IP Clause by granting particular types of "writings" by "authors" exclusive rights protections. The Copyright Act of 1790 provided protections to maps, charts, and books. Likewise, the First Congress defined the types of "discoveries" for which "inventors" were to receive protections. The Patent Act of 1790 secured protections to "any person who has "invented or discovered any useful art, manufacture, engine, machine, or device, or any improvement therein not before known or used."
 
Over the next century, Congress would continue to enlarge and refine the categories of copyrightable and patentable subject matter. The Copyright Act of 1909, for example, expressly broadened the scope of copyrightable works. It secured copyright protections for "all the writings of an author," and established fourteen classifications of copyrightable works, including dramatic compositions, motion pictures, and sound recordings. Similarly, the Patent Act of 1870 expressly broadened the scope of protections to "any person who has invented or discovered any new and useful art, machine, manufacture, or composition of matter, or any new and useful improvement thereof, not known or used by others in this country." Congress later swapped the term "useful art" for "processes."
 
Importantly, the First Congress also set IP firmly on a free market footing by expressly authorizing copyright and patent right holders to transfer their exclusive rights or license the use of their writings and inventions. The Copyright Act of 1790 secured copyright protections for authors as well as "his or their executors, administrators or assigns." And the Patent Act of 1790 secured exclusive rights in inventions to "petitioning inventors as well as his, her or their heirs, administrators or assigns." Thus, from the time of the First Congress, liberty of contract has been indispensable to maximizing the enjoyment and value of IP rights. Copyright and patent legislation passed by later Congresses followed those precedents in authorizing the assignment through contractual arrangements of exclusive IP rights. Subsequent legislation also enhanced the value of copyrights and patent rights as freely exchangeable goods by establishing recording requirements for assignments.
 
Contractual liberty in selling or licensing IP was reflected in court decisions throughout the 19th and early 20th centuries. According to the Supreme Court in Bement v. National Harrow Company (1902), "the general rule is absolute freedom in the use or sale of rights under the patent laws of the United States." The same rule of liberty of contract is equally applicable regarding the sale of copyrights. The legal enforceability of contracts for the sale or licensing of IP rights is a critical aspect of contractual liberty. Depending on the circumstances, violations of contracts for sale or licensing agreements concerning IP rights may give rise to legal claims based on breach of contract grounds as well as copyright or patent infringement grounds.
 
It is easy to take for granted the accessibility of IP rights in the interstate commercial market. The value of IP was significantly enhanced by the uniformity supplied by federal copyright and patent laws, and by IP's ready accessibility in our nation's interstate commercial marketplace.

Uniform federal IP laws reduced administrative compliance burdens for authors and inventors seeking exclusive rights protections. Beginning in 1790, authors and inventors were relieved of the burden of securing IP protections on a state-by-state basis. And they could count on a uniform legal standard when seeking to enforce their rights in a court of law against infringers.
 
Another important consequence of the constitutional commitment to uniform federal laws for securing copyrights and patent rights was that it restrained states from directly regulating in those areas pursuant to states' general jurisdiction or "police powers." IP rights were thus a step removed from the generalized legal disputes of the late 19th and early 20th centuries regarding the rights of property owners, liberty of contract, the right to pursue a lawful calling, and the extent of state police powers to regulate economic activities that impact the exercise of those rights.
 
The Constitution's respect for copyrights and patent rights as legally secure forms of property rights that are freely exchangeable by virtue of liberty of contract in an interstate marketplace and unencumbered by local restrictions unlocked the economic potentialities of creative works and inventions. The Court's bolstering of a free commercial market between states coincided with the first two stages of industrialization in the American economy - often called America's First and Second Industrial Revolutions. The growth of copyrighted goods and patented inventions both partook of and propelled those legal and market developments. Courts enforced IP rights secured by federal law, enhancing their underlying market values. This, in turn, enhanced the opportunities of creators and inventors to earn a livelihood. Subsequently, further advances in useful information and technology were embodied in copyrighted works and patented inventions, providing still further capital investment opportunities for entrepreneurs and fledgling industries.
 
* Randolph J. May is President of the Free State Foundation, an independent free market-oriented think tank located in Rockville, Maryland.
 
** Seth L. Cooper is a Senior Fellow of the Free State Foundation.

Read the complete Perspectives here.

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The Constitutional Foundations of Intellectual Property - A Natural Rights Perspective, by Randolph J. May and Seth L. Cooper, is available from Amazon here at a deeply discounted price. This discounted price may not last for long.


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