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Librarians’ Contradictory Letter Reveals an Alarming Ignorance of the Copyright System

U.S. Capitol buidlingOn December 14th, a group of librarians sent a letter to Congress explaining why they believe the Copyright Office should remain under the control of the Library of Congress. Written by University of Virginia Library’s Brandon Butler, the letter is a self-contradicting and uninformed response to recent recommendations on reform of the Copyright Office offered by leading members of the House Judiciary Committee. While the lawmakers’ report proposes overdue, sensible reforms to the framework of a department in need of modernization, the librarians’ letter favors a one-sided approach to reform and reveals a gross misunderstanding of how copyright law and the Copyright Office ensure public access to creative works.

The Letter Embraces the Very Conflict It Claims to Reject

The letter begins by criticizing another recent letter to Congress from former Registers of Copyright Ralph Oman and Marybeth Peters in which they question the recent firing of Register of Copyright Maria Pallante and discuss the urgent need for an independent Copyright Office. Butler takes issue with the former Registers’ suggestion that the Library of Congress and the Copyright Office have different priorities and distinguishable missions, insisting that if any tensions exist, they are a result of bias at the Copyright Office. Alleging that the former Registers and the Copyright Office are “on the side of authors and media companies,” Butler proclaims that libraries “in all their richness and complexity” truly serve the interest of all. It’s a nice-sounding theory, but unfortunately it’s completely inaccurate and soon contradicted by a palpable disregard for the rights of authors and creators.

Claiming that librarians and the Library of Congress don’t subscribe to the theory of an adverse dichotomy between authors and the public, the letter then reinforces this theory by suggesting the scales should be tipped in favor of the public. In one paragraph, Butler endorses the “important balance between the short-term, private interests of authors and intermediaries, and the long-term interests of the public.” Curiously, just after he lauds this “important balance,” it is abruptly discarded as a reflection of “a narrow conception” and “inimical” priorities that cause an unproductive tension between the Office and the Library of Congress. Soon after describing libraries as the “fulcrum” upon which the balance of copyright and the public interest rests, the letter declares that “[we] reject this false dichotomy between copyright and the public interest.”

Regardless of this hollow denunciation, it’s clear that Butler believes there is a conflict between the interests of authors and the interests of the public, as he preaches to it throughout the letter. After paying lip service to rising above tensions between copyright and the public interest, Butler distinctly pushes for a system that values libraries over creators and the rights in their works. Describing the “crucial parts” of the copyright system embraced by libraries and librarians, the letter lists “fair use, first sale, interlibrary loan,” and claims that “without them libraries as we know them in this country could not exist.” One might argue that more crucial to the existence of libraries are the creative works that line their stacks, but this reality doesn’t seem worth mentioning. In fact, Butler asserts that copyright law has a “fundamentally public-serving character,” contrary to the letter’s earlier emphasis on serving copyright owners, authors, and the public equally. After praising the balance, then rejecting it, the letter unequivocally elevates the importance of the access libraries provide over the contributions and rights of creators.

The Letter Fails to Take into Account a Complex Creative Economy Based on Property Rights

James Madison observed in Federalist No. 43 that “the public good fully coincides . . . with the claims of individuals.” The Founders of our country recognized that creative economies are built upon the property rights of authors and artists, and as CPIP’s recent policy brief on creative markets explains, they “had the foresight to recognize that the public ultimately benefits when this protection is secured by law.” Promoting the public interest by recognizing the importance of individual interests was a theory drawn from Adam Smith and his seminal The Wealth of Nations. In it, Smith explained that concerted efforts to benefit the public are often less effective—and less helpful to society—than uncoordinated individual efforts to pursue private interests, and that society benefits the most when individuals are empowered to create valuable goods and services by pursuing their own interests.

Embodying these principles, copyright empowers authors and creators to pursue their own private interests by granting them exclusive property rights in their works. These same property rights support creative industries and provide significant benefits by playing a key role in facilitating the myriad transactions that contribute to a vibrant creative economy grounded in free market principles. Among other things, these property rights enable the division of labor, encourage product differentiation and competition, and spur investments in the development and distribution of creative works. Copyright not only incentivizes the creation of works, but also the commercialization of these works through further development, marketing, and distribution.

Copyright’s intricate ecosystems are based on incentives that ensure the continued creation and distribution of original works of authorship, yet the librarians’ letter doesn’t seem to appreciate their significance or how they function. Butler dedicates much of the letter to emphasizing the importance of public access to copyrighted works, but access is only the final step in a complex system of investment, commercialization, and distribution of creative works. The librarians claim to “understand that copyright is a complex ecosystem,” but nothing in the letter validates this assertion. The only part of the creative economy they deem worth discussing is the end result of access, with all other imperative stages either not realized or ignored.

The Librarians Are Oblivious to a Broken System

Ending with a plea to Congress not to interfere with the current “relationship” between the Library of Congress and the Copyright Office, the letter claims the Library is in the best position to lead a desperately needed modernization initiative at the Office. It’s a bold claim, given that the Library stood by as the Office’s infrastructure became embarrassingly outdated and underfunded over the past twenty years. Before her untimely ouster, Register Pallante provided Congress with a perspective on copyright review that included a detailed list of deficiencies within the Office in need of improvement. Specifically, Pallante cited the diminishing number of fulltime employees and inadequate budget that have made it all but impossible to support growth and development at the Copyright Office:

The Copyright Office budget is consistently in the neighborhood of $50 million, of which $30 million is derived from fees paid by customers for registration and other services. The Library’s overall budget for 2015 is approximately $630 million, inclusive of the Copyright Office. Without taking anything away from the important duties or funding deficiencies in the rest of the Library, the Copyright Office’s resources are inadequate to support the digital economy it serves.

Pallante’s report goes on to discuss the serious information technology (IT) problems facing the Office, and to question the Library’s plan to address IT concerns by exerting more control over the Office’s departments and decisionmaking. The former Register was wise to question a plan that would give more control to an organization that has consistently failed to value or support the Copyright Office and its mission.

Further demonstrating just how out of touch they are with the realities of the current copyright law landscape, an affiliated group of librarians recently professed their faith in the Digital Millennium Copyright Act (DMCA) safe harbor system that is undoubtedly failing creators, copyright owners, and the public. In comments submitted to the Copyright Office as part of its study on the effectiveness of Section 512 of the DMCA, the Library Copyright Alliance (LCA) makes the absurd claim that the “safe harbors are working exactly as the stakeholders and Congress intended.” But, just before this assertion, the comments accuse copyright owners of abusing the DMCA’s notice and takedown process, and suggest amendments to the DMCA are necessary “to curtail this abuse.” Not only are the LCA’s comments utterly contradictory, they ignore substantial evidence and testimony from dozens of interested parties that the DMCA needs to be reformed and updated.

As CPIP highlighted in a recent examination of the state of the DMCA, the notice and takedown system has been largely ineffective in managing the ever-increasing amount of piracy, and courts continue to diminish service providers’ responsibility to cooperate with copyright owners to detect and deter infringement. The constant game of whack-a-mole with websites offering infringing content continues, and platforms such as YouTube are teeming with unauthorized works. Artist, creators and copyright owners have loudly voiced their frustration with the current system and called for reforms that better respect their rights. In the face of such obvious evidence of a broken system, to claim the DMCA is working exactly as intended speaks volumes of the librarians’ inability to recognize the reality of the situation.

It’s Time for Change at the Copyright Office

The House Judiciary Committee’s proposal on copyright reform is a response to years of listening “to the views and concerns of stakeholders from all sides of the copyright debate,” and it identifies modernization efforts that address the concerns of these interested parties. Since 2013, the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet has conducted 20 copyright review hearings on the current state of copyright law which included testimony from 100 witnesses. In addition to the hearings, Committee Chairman Bob Goodlatte and Ranking Member John Conyers brought a copyright listening tour to Nashville, Silicon Valley, and Los Angeles where a wide range of creators, innovators, technology professionals, and users of copyrighted works had the opportunity to tell the Committee directly what changes they believe are needed to ensure U.S. copyright law evolves with the digital age.

The resulting policy proposals reflect a broad acknowledgment by those who participated  in the review that the Copyright Office must be updated to keep up with the digital culture it serves. Two of the most important steps in this modernization effort identified by the Committee include requiring the Office to maintain an updated digital database and granting the Office autonomy with respect to the Library of Congress. If Brandon Butler and the signatories of his letter had their way, the Copyright Office would remain under control of an organization that has proven it is unable to help propel the Office into the 21st century. It’s not particularly surprising that librarians would want the Library of Congress to retain control over the Copyright Office, but an overwhelming majority of creators, copyright law experts, and lawmakers recognize that the Office needs to move forward, rather than remain trapped in the past.

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Members of Congress Express Concerns About Abuses of PTO’s Inter Partes Review System

U.S. Capitol and Supreme Court buildingsTwo years ago, CPIP published an issue paper warning about the tremendous potential for abuse inherent in the America Invents Act’s newly-created administrative review programs. It now appears that several members of Congress are concerned as well. On December 5, 2016, a bipartisan group of New York representatives sent a letter to Michelle Lee, Director of the United States Patent and Trademark Office (USPTO), raising their concerns about abuse of the inter partes review (IPR) system by financial speculators.

The IPR system permits anyone to challenge the validity of an issued U.S. patent in front of administrative patent judges at the USPTO. Unfortunately, as we predicted in our 2014 issue paper, the system has shown itself to be susceptible to several kinds of abuse, including rent-seeking, evasion of estoppel and time bars, seriatim attempts at invalidation, and retaliation.

The New York representatives draw attention to abuse that occurs when the IPR system is used merely to influence the stock price of a targeted company. The basic strategy used by the hedge funds and financial speculators is simple: (1) take a short position on a patent-dependent company so that profit comes if the stock loses value, (2) file an IPR against that company’s patents so that the stock loses value, (3) realize the profit from the short position. The letter notes:

“As you are aware, hedge funds and other financial speculators continue to use IPR proceedings for their enrichment, while also burdening the owners of valuable patents. With more than 50 such petitions having been filed, typically as part of a secret stock-shorting scheme or in an attempt to extort substantial payments from patent owners, these proceedings raise great concern. A particularly troubling aspect of this strategy is repeated instances of filing petitions challenging the same patent claims on grounds substantially identical to those previously denied institution in prior-filed petitions. In essence, this “try-again” practice affords hedge funds multiple bites at the apple, in which the PTO’s reasons for denying an IPR petition are used as a how-to guide to filing another petition. We are also concerned this practice inspires collusion by parties who would otherwise be time-barred from bringing their own IPR because the PTO has been permitting such parties to join these hedge funds in their IPR. Furthermore, it is our understanding that the statute appears to foreclose that option. Allowing these open-ended challenges perpetuates such disputes rather than resolving them. They also undermine the investment-backed expectations of patent owners in “quiet title” in their intellectual property, depreciates the market value of their businesses, and harms their ability to advance their research and development programs.”

In order to address the problem, the representatives urge the USPTO to start using the tools provided in Sections 314(a), 316(a), and 325(d) to prevent abuses of the system. In particular, the USPTO should prevent IPR proceedings from being instituted when they are an abuse of process or when the arguments are similar to those previously raised against the patent.

The letter was signed by Nydia Velázquez (NY-12), Chris Collins (NY-27), Louise Slaughter (NY-25), Peter King (NY-2), Eliot Engel (NY-16), Elise Stefanik (NY-21), Yvette Clarke (NY-9), Paul Tonko (NY-20), Kathleen Rice (NY-4) and Steve Israel (NY-3).

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New Paper Exposes Flaws in Smallest Salable Patent-Practicing Unit Rule

the word "inspiration" typed on a typewriterCPIP Research Scholar Jonathan Putnam and co-author Tim Williams’ paper “The Smallest Salable Patent-Practicing Unit (SSPPU): Theory and Evidence,” shows how poorly patent law measures the value of litigated patents. Using theory and empirical evidence, they show that the economic contribution of patented technology is better measured by the output, such as the commercial product, rather than the smallest input, or component, that embodies the invention. Unfortunately, the theoretically and empirically supported conclusions they reach stand in stark contrast to the state of the law as it currently exists.

The paper begins by surveying how the courts have arrived at the current method for determining patent damages, called the smallest salable patent-practicing unit (SSPPU) rule. In a nutshell, patent damages are often assessed as a “reasonable royalty” paid by the infringer for his use of the patented technology. This is calculated by determining a rate (e.g. 3%) and multiplying it by a base (either the product or some portion of it that has an identifiable price). As the name suggests, the SSPPU rule requires that the base be the smallest salable patent-practicing unit rather than the final product as actually commercialized.

Putnam and Williams trace this rule to an idiosyncratic and quixotic case where there was a need to guard against a patent owner’s overreaching because of particular litigation behavior and unusual procedural issues. However, what was initially an ad hoc solution developed in a lower court for unique circumstances was later generalized to become the default rule in many patent cases.

Proceeding next to mathematically rigorous economic theory, Putnam and Williams show why the generalization of the SSPPU rule conflicts with basic economic theory. Because different components of a product interact to generate the product’s value, they conclude that properly determining the value added by an invention on a component requires looking at the incremental value added to the final product. In other words, the SSPPU rule fails to account for how the invention may improve the product of the whole beyond just the smallest component.

As a prosaic example, Putnam and Williams use smartphone battery life. The battery is a clearly identifiable component to which the SSPPU rule could apply for a patent improving battery life. But the value of the invention is not just in the battery, but also in how the invention affects the design and tradeoffs in the rest of the phone. The improved battery life may permit a larger screen or result in other changes in smartphone design. Attributing the value of the improved battery life only to the price of the battery will not capture the effect of the invention on all the other components that go into the final product. Using the value of the smartphone—i.e. the final product—is the only royalty base that captures all of the interacting effects that determine the value of the battery improvement invention.

Of course, all of this theoretical modeling would be for naught if real world actors behaved differently. After surveying previous studies and publicly available license terms in the telecommunications sector, Putnam and Williams were able to confirm for the vast majority of cases that the royalty base was not a component or combination of components. Furthermore, they were not able to identify a single instance where a mere component, salable or not, was used as the royalty base. This confirms in practice what they showed in theory, that the final product is the economically proper method for measuring royalties.

The paper addresses one final flaw with the SSPPU rule. As the SSPPU rule has become entrenched in court opinions, there have been efforts to expand its use to entire patent portfolios rather than individual patents. Putnam and Williams use a sample patent portfolio to show that this would be misguided for an additional reason: the smallest salable unit would not be “patent practicing” in relation to the entire portfolio.
Despite demonstrating that using the final product rather than the SSPPU would be the economically pure way to determine the royalty base, Putnam and Williams propose a more nuanced solution. Courts should use economic theory to scrutinize the royalty bases proposed in litigation. For example, it would be useful to permit the patent owner to show the normal practice in the industry or which product in the supply chain captures the incremental value of the patented technology. As their paper shows, this will typically be the final product.

Importantly, the proposed reform is not the unfaltering use of the final product’s price as the royalty base. If the royalty rate approaches zero because the royalty base is too large, using a smaller base may be helpful. In other words, if the final product is too distant in the supply chain from the invention, it may be hard to properly align the rate with the base. This was one of the exigent circumstances that led to the SSPPU rule in the first place, where the patent was on a system related to how computer CPUs make calculations, but the patent owner claimed damages on entire servers and workstations. Rather than make the error at the other extreme, Putnam and Williams’ recommendations simply allow the parties to make arguments and develop evidence that is consistent with basic economics, rather than apply inappropriately rigid judge made rules.