The Bad Seed?

As students of 450 know, not all nonstandard contracts are designed to establish or maintain market power. That, indeed, is one of the central messages of Oliver Williamson’s work:

Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised ex ante

This is useful to keep in mind as we watch the antitrust suit against seed-giant Monsanto that is unfolding in America’s heartland. The case speaks to managerial v. entrepreneurial capitalism, contracting for innovation, and the role of a non-standard contract.

Monsanto has been quite generous with its intellectual property, licensing it out to both competitors and seed manufacturers alike since it first entered the biotech seed market with a huge investment in the 1990s. The seed industry is heavily dependent on the innovations that expensive research & development yields. High-tech advances in improving the resilience, yield and herbicide resistance of mainstay crops have generated significant results along with a set of widely-licensed gene patents that are used in most soybean and corn crops grown in the U.S. today. That Monsanto, one of the most significant contributors to this research, has placed conditions on the use of its intellectual property or charges for access to its property is neither extraordinary nor problematic: Licensing agreements are complicated affairs, running into the dozens of pages, and they always preserve a range of protections for the patent holder.

So, why are these restrictions in place?

The restrictions aren’t there because Monsanto unilaterally insists on them or foists them, unwanted, on their licensees. Rather, each is a negotiated term and is there because the licensee wanted it there when the contract was negotiated. The logic is simple: For each additional bit of access to Monsanto’s property, licensees are charged a price. If they really want the access, they negotiate their license accordingly and pay for the right; if not, the contract may include terms specifically limiting the scope of use—and the negotiated price will reflect the restriction.

Here’s the full story.

On the heels of yesterday’s class, a more pithy discussion of contracting for information would be difficult to find. Look for this case on the final.