Economic Foundations of Compulsory Liability Rules

Abstract

Compulsory liability rules can focus on achieving a public policy goal, such as access to medicines, but this book concentrates on liability rules that aim at enhancing the patent system’s functional efficiency, such as sustaining dynamic competition. Existing economic research on liability rules focuses on generally applicable statutory licenses, although under the TRIPS Agreement compulsory licenses are meant to be applied only case-specifically. This chapter analyses other economic concerns related to the application of compulsory liability rules, negative effects on incentives to innovate, challenges in patent evaluation, possible hold-out risks, error costs, legal uncertainty, and the instrument’s underuse. It concludes that compulsory liability rules can be designed in a manner that fosters dynamic efficiency while mitigating the unfavourable effects associated with the instrument. A compulsory liability rule may also have an indirect, balancing effect on the licensing negotiations between a patent holder and a follow-on innovator, even when it is not used in practice.