Category: Copyright

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Biotech Commercialization Conferences Copyright Innovation Intellectual Property Theory Inventors Uncategorized

The Common Economic Case for Patents and Copyrights

This is the second in a series of posts summarizing CPIP’s 2014 Fall Conference, “Common Ground: How Intellectual Property Unites Creators and Innovators.” The Conference was held at George Mason University School of Law on October 9-10, 2014.  Videos of the conference panels and keynote will be available soon.

The opening panel of CPIP’s 2014 Fall Conference examined the common economic case for patents and copyrights. Unfortunately, IP policy discussions often include a false narrative that intellectual property produces monopolies that harm innovation and economic growth.  The panelists, Troy Dow (Disney), Professor Stan Leibowitz (University of Texas at Dallas), Jon Santamauro (Abbvie), and Professor Jay Kesan (University of Illinois College of Law), highlighted how this narrative, in fact, ignores the essential role that intellectual property serves in enabling the creation, development, and commercialization of both inventions and creative works.

Kesan explained how patents provide economic benefits from both an ex-ante and ex-post perspective. Ex-ante, a strong patent system provides incentives to create, invest in R&D, and finance further innovation. While there are other ex-ante motivations to invent (such as a first mover advantage, the ability to secure trade secrets, and reputational advantages), Kesan argued that innovation is best facilitated ex-ante by a combination of all of these incentives plus the incentives created by patents. The ideal system incorporates a heterogeneous mix of these incentives to invent—in the absence of patents the level of disclosure decreases and innovation slows down.

Patents also provide numerous ex-post benefits. Patents facilitate coordination with producers and perform important signaling functions. They additionally allow for important private ordering by giving inventors increased control over who uses their invention and under what circumstances. In many industries, this is essential to collaboration, interoperability of products, and the aggregation of complementary benefits.

Jon Santamauro discussed the role of patents in the pharmaceutical industry. The exclusive property rights created by patents encourage R&D and serve as a crucial catalyst for new discoveries and businesses.  Patent protection is particularly important in the pharmaceutical industry due to the high-risk, lengthy, and costly process necessary to develop new, safe, and effective drugs.

Pharmaceutical companies developing new drugs screen thousands of potential compounds over 6-7 years of testing to gain FDA approval, at an average cost of about $1.2 billion per drug. The reasons for the high R&D costs?  Out of 10,000 initial molecules tested, only 6 go to clinical trials, and of these, only 1 is approved by the FDA for use in the healthcare market.  Of the 1 out of 10,000 drugs that make it to market, only 2 out of every 10 medicines produce enough revenues to recoup the initial high costs of R&D and also provide revenue to invest in more R&D. In short, pharmaceutical and biotech firms face very high risk—high R&D expenditures and very few market successes.  Strong IP protection helps offset this risk and encourages further investment and research.

Leibowitz explained that one of the primary criticisms of copyright—that it grants a monopoly, and that monopolies are intrinsically bad for society—is utterly thoughtless. A property right is, by definition, a monopoly of sorts. This criticism is an indictment of property rights on the whole, including real property rights.  This is even more inapt to copyright, as copyright does not restrict entry and does not provide an economic monopoly.

Leibowitz also addressed the common argument that IP isn’t necessary because inventors and creators would continue inventing and creating even if they didn’t get to own the fruits of their productive labors.  While some innovative and creative activity would undoubtedly continue, many innovators and creators do not simply create for creations sake. They need salaries (like everyone else), and strong IP rights allow them to capture the value of what they produce.

Finally, Troy Dow highlighted the benefits of strong copyright protection in the movie industry. Bringing a film to market involves substantial risks that many people do not appreciate.  He explained that studios perform the same market function as venture capitalists: they invest in  films at the birth of the original idea and then provide financing all the way through the final showing in movie theaters. This financing comes from banks, other investors, or other studios in order to spread the risk. Dow analogized a new film project to a new startup company, as each new film has its equivalent of a CEO (producer), COO (director), and thousands of employees and independent contractors.  And just as with startup companies, everyone must be paid before the film makes a single cent in revenue.

A single film can cost over $200 million to produce. While a particularly big hit can gross over $350 million after long-term distribution (including on-demand and DVD sales), only 4 out of every 10 movies recoup their investment at the box office. Copyright thus serves the vital function of making it possible for studios to make substantial, upfront investments with the hope of a return on this investment and a sufficient profit to reinvest in further film projects.

Disney’s IP is enormously valuable and is the dominant driver of their business. Even though only $6 billion of Disney’s $45 billion in revenues last year came directly from movie revenue, the movies, including the stories they tell, are at the heart of the Disney experience.  The movies form the basis for other products, media networks, theme parks, and licensing. A strong copyright regime allows studios like Disney to keep producing both creative works and the myriad other products and experiences that so many of us enjoy.

Together, the four panelists illustrated that the economic foundations of IP are equally applicable to the creative industries as they are to the innovation industries.  By securing for inventors and creators the value of their productive labors, IP provides the economic bedrock of our creative and innovative economy.

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Commercialization Conferences Copyright Copyright Licensing Copyright Theory Economic Study High Tech Industry History of Intellectual Property Injunctions Innovation Intellectual Property Theory Internet Inventors Law and Economics Patent Law Patent Licensing Patent Litigation Patent Theory Remedies Software Patent Uncategorized

Intellectual Property Unites Creators and Innovators

This is the first in a series of posts summarizing CPIP’s 2014 Fall Conference, “Common Ground: How Intellectual Property Unites Creators and Innovators.” The Conference was held at George Mason University School of Law on October 9-10, 2014. Videos of the conference panels and remarks, as well as panel summaries, will be available soon.

Introduction by Professors Adam Mossoff and Mark Schultz

Common Ground: How Intellectual Property Unites Creators and Innovators

The creative industries and innovation industries have much in common, but too often this is overlooked. Both industries engage in brilliant intellectual work to bring new products and services into the world, both take great risks to commercialize this work, and both depend on intellectual property – copyrights (for the creative industries) and patents (for the innovation industries). Unfortunately, most accounts of these two industries emphasize their differences and frequently portray them in conflict.

This conference will explore the common ground shared by these two dynamic industries, focusing on the similar values secured by their patents and copyrights and thus their common policy goals and commercial developments.

It should be unsurprising that these two industries share much in common. The work of inventors and artists is much the same. We see hints of this in their respective aspirations. Engineers, for example, often talk of seeking “elegant” or “beautiful” solutions to the technological problems they face. Artists also strive to innovate technically in how they create their works, as demonstrated with much panache in the recent documentary, Tim’s Vermeer. Many creators apply their prodigious talents to both art and invention.

One may think of a Steve Jobs today as exemplifying this truth, but history is replete with examples. Leonardo da Vinci also comes to mind, the quintessential Renaissance Man. In the 19th century, Samuel Morse invented the telegraph, but he was also a successful artist and in fact he developed the telegraph while working as a well-known Professor of Art at New York University.

In modern America, Walt Disney has defined much of our culture not just with his artistic creations, but also with his innovative technological creations in movies, theme parks and products. More recently, filmmakers George Lucas and James Cameron have cast large shadows in popular culture, but their contributions to filmmaking technology may prove even more enduring and pervasive.

These and many other examples are unsurprising when one considers that art and technology both result from the same source: productive intellectual labor.

As the work of artists and inventors is at heart the same, so is the moral and economic case for securing property rights to them. Artists and inventors deserve to own the fruits of their productive labors. In protecting these labors, intellectual property rights secure to them their liberty and their careers. These rights thus fuel the vast economic activity that drives the innovation economy – bringing to market the products and services that ensure full and flourishing lives for them and for the rest of us as well.

Too often, though, the creative and innovation industries are portrayed as being at odds. One popular narrative today – in both scholarly and popular accounts – is that technology disrupts the creative industries, forcing copyright owners to adapt. This is a myopic account of their relationship that ultimately creates a false picture. In truth, creativity and innovation – secured by copyrights and patents – constantly spur each other to greater heights.

The true story of creativity and innovation is more properly viewed as a virtuous circle.

Recording and broadcast technology, for instance, gave musicians and other performers their first worldwide audiences, whose demand for ever-more entertainment and information spurred further improvement and expansion of technology. The invention of the electric guitar, spurred by a series of patented improvements, enabled blues and rock ‘n’ roll, which in turn pushed further developments in music and recording technology.

The Internet certainly created much disruption, but it also has been a fountainhead of creativity. To take just one example, streaming of original, creative content enables television viewers to enjoy storytelling as never before, bringing about what some are now calling a Second Golden Age of Television.

Our technological devices, such as smartphones and iPads, would not be so well loved and so ubiquitous without the games, music, and video content they deliver to hundreds of millions of people the world over.

The common ground and shared aspirations of creators and innovators is clear, but rarely appreciated in the din of today’s policy debates.

Thus, our Annual Conference this year considers afresh the common goals, challenges and needs of the creative and innovation industries. Many distinguished speakers with extensive knowledge and experience in both fields will address how intellectual property rights represent the bedrock of this common ground. We hope that you will enjoy what promises to be enlightening discussion.

**Panel summaries coming soon**

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Copyright Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Law and Economics Patent Law Patent Litigation Patent Theory Statistics Uncategorized

Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong

By Mark Schultz & Adam Mossoff

A handful of increasingly noisy critics of intellectual property (IP) have emerged within free market organizations. Both the emergence and vehemence of this group has surprised most observers, since free market advocates generally support property rights. It’s true that there has long been a strain of IP skepticism among some libertarian intellectuals. However, the surprised observer would be correct to think that the latest critique is something new. In our experience, most free market advocates see the benefit and importance of protecting the property rights of all who perform productive labor – whether the results are tangible or intangible.

How do the claims of this emerging critique stand up? We have had occasion to examine the arguments of free market IP skeptics before. (For example, see here, here, here.) So far, we have largely found their claims wanting.

We have yet another occasion to examine their arguments, and once again we are underwhelmed and disappointed. We recently posted an essay at AEI’s Tech Policy Daily prompted by an odd report recently released by the Mercatus Center, a free-market think tank. The Mercatus report attacks recent research that supposedly asserts, in the words of the authors of the Mercatus report, that “the existence of intellectual property in an industry creates the jobs in that industry.” They contend that this research “provide[s] no theoretical or empirical evidence to support” its claims of the importance of intellectual property to the U.S. economy.

Our AEI essay responds to these claims by explaining how these IP skeptics both mischaracterize the studies that they are attacking and fail to acknowledge the actual historical and economic evidence on the connections between IP, innovation, and economic prosperity. We recommend that anyone who may be confused by the assertions of any IP skeptics waving the banner of property rights and the free market read our essay at AEI, as well as our previous essays in which we have called out similarly odd statements from Mercatus about IP rights.

The Mercatus report, though, exemplifies many of the concerns we raise about these IP skeptics, and so it deserves to be considered at greater length.

For instance, something we touched on briefly in our AEI essay is the fact that the authors of this Mercatus report offer no empirical evidence of their own within their lengthy critique of several empirical studies, and at best they invoke thin theoretical support for their contentions.

This is odd if only because they are critiquing several empirical studies that develop careful, balanced and rigorous models for testing one of the biggest economic questions in innovation policy: What is the relationship between intellectual property and jobs and economic growth?

Apparently, the authors of the Mercatus report presume that the burden of proof is entirely on the proponents of IP, and that a bit of hand waving using abstract economic concepts and generalized theory is enough to defeat arguments supported by empirical data and plausible methodology.

This move raises a foundational question that frames all debates about IP rights today: On whom should the burden rest? On those who claim that IP has beneficial economic effects? Or on those who claim otherwise, such as the authors of the Mercatus report?

The burden of proof here is an important issue. Too often, recent debates about IP rights have started from an assumption that the entire burden of proof rests on those investigating or defending IP rights. Quite often, IP skeptics appear to believe that their criticism of IP rights needs little empirical or theoretical validation, beyond talismanic invocations of “monopoly” and anachronistic assertions that the Framers of the US Constitution were utilitarians.

As we detail in our AEI essay, though, the problem with arguments like those made in the Mercatus report is that they contradict history and empirics. For the evidence that supports this claim, including citations to the many studies that are ignored by the IP skeptics at Mercatus and elsewhere, check out the essay.

Despite these historical and economic facts, one may still believe that the US would enjoy even greater prosperity without IP. But IP skeptics who believe in this counterfactual world face a challenge. As a preliminary matter, they ought to acknowledge that they are the ones swimming against the tide of history and prevailing belief. More important, the burden of proof is on them – the IP skeptics – to explain why the U.S. has long prospered under an IP system they find so odious and destructive of property rights and economic progress, while countries that largely eschew IP have languished. This obligation is especially heavy for one who seeks to undermine empirical work such as the USPTO Report and other studies.

In sum, you can’t beat something with nothing. For IP skeptics to contest this evidence, they should offer more than polemical and theoretical broadsides. They ought to stop making faux originalist arguments that misstate basic legal facts about property and IP, and instead offer their own empirical evidence. The Mercatus report, however, is content to confine its empirics to critiques of others’ methodology – including claims their targets did not make.

For example, in addition to the several strawman attacks identified in our AEI essay, the Mercatus report constructs another strawman in its discussion of studies of copyright piracy done by Stephen Siwek for the Institute for Policy Innovation (IPI). Mercatus inaccurately and unfairly implies that Siwek’s studies on the impact of piracy in film and music assumed that every copy pirated was a sale lost – this is known as “the substitution rate problem.” In fact, Siwek’s methodology tackled that exact problem.

IPI and Siwek never seem to get credit for this, but Siwek was careful to avoid the one-to-one substitution rate estimate that Mercatus and others foist on him and then critique as empirically unsound. If one actually reads his report, it is clear that Siwek assumes that bootleg physical copies resulted in a 65.7% substitution rate, while illegal downloads resulted in a 20% substitution rate. Siwek’s methodology anticipates and renders moot the critique that Mercatus makes anyway.

After mischaracterizing these studies and their claims, the Mercatus report goes further in attacking them as supporting advocacy on behalf of IP rights. Yes, the empirical results have been used by think tanks, trade associations and others to support advocacy on behalf of IP rights. But does that advocacy make the questions asked and resulting research invalid? IP skeptics would have trumpeted results showing that IP-intensive industries had a minimal economic impact, just as Mercatus policy analysts have done with alleged empirical claims about IP in other contexts. In fact, IP skeptics at free-market institutions repeatedly invoke studies in policy advocacy that allegedly show harm from patent litigation, despite these studies suffering from far worse problems than anything alleged in their critiques of the USPTO and other studies.

Finally, we noted in our AEI essay how it was odd to hear a well-known libertarian think tank like Mercatus advocate for more government-funded programs, such as direct grants or prizes, as viable alternatives to individual property rights secured to inventors and creators. There is even more economic work being done beyond the empirical studies we cited in our AEI essay on the critical role that property rights in innovation serve in a flourishing free market, as well as work on the economic benefits of IP rights over other governmental programs like prizes.

Today, we are in the midst of a full-blown moral panic about the alleged evils of IP. It’s alarming that libertarians – the very people who should be defending all property rights – have jumped on this populist bandwagon. Imagine if free market advocates at the turn of the Twentieth Century had asserted that there was no evidence that property rights had contributed to the Industrial Revolution. Imagine them joining in common cause with the populist Progressives to suppress the enforcement of private rights and the enjoyment of economic liberty. It’s a bizarre image, but we are seeing its modern-day equivalent, as these libertarians join the chorus of voices arguing against property and private ordering in markets for innovation and creativity.

It’s also disconcerting that Mercatus appears to abandon its exceptionally high standards for scholarly work-product when it comes to IP rights. Its economic analyses and policy briefs on such subjects as telecommunications regulation, financial and healthcare markets, and the regulatory state have rightly made Mercatus a respected free-market institution. It’s unfortunate that it has lent this justly earned prestige and legitimacy to stale and derivative arguments against property and private ordering in the innovation and creative industries. It’s time to embrace the sound evidence and back off the rhetoric.

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Copyright Uncategorized

Supreme Court Says Aereo has to Play by the Rules

Today in American Broadcasting Companies, Inc. v. Aereo, Inc. the Court held that Aereo’s television service, which re-transmits over-the-air TV signals to subscribers does indeed transmit performances to the public within the meaning of the Copyright Act.

Aereo tried to engineer its system around the law by using individual micro-antennas assigned to each subscriber. An appellate judge below described this system as a “Rube Goldberg-like contrivance.” Aereo’s system was a case of legal engineering rather than technical innovation, as it was hard to see any purpose for its design beyond exploiting perceived loopholes in the law.

The Court today chose to look to the clear result and commercial purpose of Aereo’s system, rather than the superficial appearances created by Aereo’s technical design. In doing so, it returns to Congress’s intent under the 1976 Copyright Act to define the rights of copyright owners in a technologically neutral way.

Contrary to critics, it is important to note that this decision does not make Aereo or its technology, illegal. Instead, it simply confirms that copyright owners and broadcasters continue to have the right to decide how their property is used and sold by commercial resellers. In other words. Aereo must play by the rules just like everybody else does — cable systems, Netflix, and broadcasters themselves. Among other things, they need to pay in the first place for what they are re-selling to consumers.

Despite what some are saying, this decision is a boon, not a threat, to innovation. Studios and TV networks are investing hundreds of millions of dollars into new business models and are licensing their creative works to dozens of new entrants. They can now continue to make these innovative investments with greater certainty that they wont be undermined by overly-technical interpretations of their rights.

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Commercialization Copyright Copyright Licensing Copyright Theory High Tech Industry Internet Legislation Uncategorized

Taking a Whack at the DMCA: The Problem of Continuous Re-Posting

By Steven Tjoe

On Thursday March 13, the House Judiciary Committee held a hearing on the Digital Millennium Copyright Act’s (DMCA) notice and takedown system.  Among the witnesses testifying at the hearing was CPIP Fellow Professor Sean O’Connor (Washington University School of Law), who offered his insights on Section 512 from his unique position as a law professor, former musician, and counsel to web businesses.  Professor O’Connor observed that while the notice and takedown system may have operated effectively in the late 90s, today it no longer works for any of its intended beneficiaries.

Professor O’Connor traced the shared problems faced by websites and creators today to an unfortunate and unintended consequence of Section 512: the incentive for web businesses not to monitor content.  According to Professor O’Connor, this incentive has emboldened bad actors and fostered a culture of copyright contempt.  Under current law, web businesses (including the small, start-up web businesses Professor O’Connor counsels) are generally given an odd piece of advice by their attorneys: “don’t monitor the content on your site.”  The rationale is that there are serious potential downsides to monitoring content, but no upsides.  Monitoring content can expose web businesses to knowledge or awareness of infringement, and they risk losing their safe harbor under Section 512.  The end result is that web businesses don’t monitor (or even look), and as they turn a blind eye, bad actors are emboldened to upload and continuously re-post stolen works regardless of how many times they are taken down.

Professor O’Connor proposed two solutions to return some sanity to the process and encourage all parties involved to “do the right thing.”  His proposals target the most egregious cases: continuous re-posting of wholesale copies of creators’ works (not mash-ups, parodies, or excerpts, but infringing copies of the entire work).  Targeting these egregious cases makes sense given that the continuous re-posting of blatantly (really, inarguably) infringing wholesale copies accounts for the vast majority of takedown notices.

First, Professor O’Connor proposed a “notice and stay-down” system.  In such a system, once a business receives a takedown notice for a given work, it would monitor for re-posted copies of the same work (which it has already been notified is infringing) and take them down without having to receive additional notices for that work.  Ideally, web businesses should adopt voluntary best practices to monitor and immediately remove re-posted works.  Absent a voluntary adoption, Professor O’Connor believes that Congress should consider amending the DMCA to add an affirmative duty to monitor and remove re-posted infringing works.

This solution reflects the technological advances that have become a reality since the DMCA was passed in 1998.  Automated systems like the YouTube Content ID System (YouTube is owned by Google) can now effectively identify copyrighted works.  Adapting such technologies to identify works that have already been taken down under Section 512 and adding those works to a filter catalog would be one way to automate a notice and stay-down system to deter repeat offenders.  This would not only alleviate the cost (on both sides) of repeated takedowns for the same re-posted works, but would also systematically curb instances of blatant, wholesale copyright infringement.

Second, Professor O’Connor proposed revisiting and strengthening the DMCA’s red flag provisions by codifying a stronger version of the “willful blindness” doctrine that courts have narrowly interpreted.  Some courts have failed to find willful blindness even in cases involving very high volumes of infringing activity on a website.  In his written testimony, Professor O’Connor notes that “[t]he ‘don’t monitor’ advice and glamorization of a piracy culture means that many websites are in fact turning a blind eye to extensive infringement on their sites.”  By defining willful blindness to discourage today’s common “do not look” policy, we could combat the culture of copyright contempt that emboldens bad actors and repeat infringers.

Testimony by some of the other witnesses at the hearing corroborated the significant problems with the current notice and takedown system.  Paul F. Doda, Global Litigation Counsel for Elsevier (a premier publishing company), noted that despite rigorously issuing takedown notices, Elsevier encounters a growing number of copyright infringements each year.  The same literary works that are taken down are repeatedly re-uploaded on the same sites hundreds of times after being taken down.

From a more general standpoint, the sheer volume of takedown notices each year is staggering.  Katherine Oyama, Senior Copyright Policy Counsel at Google, testified that Google received 230 million takedown notices in 2013 alone (acting on 99% of those).  As instances of infringement continue to increase, the expense of locating, identifying, and then sending (or acting on) separate takedown notices for each infringing file has become increasingly significant and prohibitive, especially for creative up-starts and smaller web businesses.

From an artist’s standpoint, Maria Schneider (three-time GRAMMY-winning composer, conductor, and producer of jazz and classical music) testified to the real-world harm artists suffer despite the current “solutions” offered by Section 512.  Ms. Schneider described her experience with the notice and takedown system as an “endless whack-a-mole game” where, immediately after being taken down, her work reappears on the same sites she sent takedown notices to, offering her no relief from constant infringement.  She observed that independent artists are “hemorrhaging red ink” on their intellectual property.  Worse yet, policing the constant re-posting of stolen copies of their work is incredibly time-consuming and defers the ability of independent artists to focus on artistic endeavors, an effect Ms. Schneider fears will prove disastrous to young, aspiring artists and the future of the industry.

Simply put, it is time to update the notice and takedown system to reflect the realities of our digital age.

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Copyright Copyright Licensing High Tech Industry Internet Legislation Uncategorized

Improving the DMCA's Notice and Takedown System

In conjunction with today’s House Judiciary Committee hearing on the DMCA, CPIP Senior Scholar Prof. Mark Schultz published a critique of the notice and takedown system this morning on AEI’s TechPolicyDaily Blog.

In his critique, Prof. Schultz discusses CPIP’s policy brief by Prof. Bruce Boyden, which details the failures of the DMCA – despite the massive number of takedown notices sent, not a single day goes by when the infringing content is not readily available online. Prof. Schultz also highlights the written testimony of CPIP Fellow Prof. Sean O’Connor, a witness at today’s hearing, who proposes two simple, focused solutions – “notice and stay-down and codified “willful blindness” – to improve the notice and take-down process for all parties involved.

Categories
Copyright Copyright Theory History of Intellectual Property Intellectual Property Theory Law and Economics Patent Law Patent Theory Uncategorized

IP as a Source of Personal and Economic Freedom

CPIP’s Mark Schultz authored an excellent essay today in TechPolicyDaily.com advocating intellectual property as a source of personal and economic freedom.  The essay, “A Free Market Perspective on Intellectual Property Rights,” describes parallels between physical property and intellectual property and dispels several denigrating myths about intellectual property’s role in a free market.  It’s a quick read, and well-worth checking out.

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Copyright Internet Uncategorized

The Failure of the DMCA Notice and Takedown System

using a laptopToday, CPIP released an important new policy brief, The Failure of the DMCA Notice and Takedown System: A Twentieth Century Solution to a Twenty-First Century Problem, by Professor Bruce Boyden of Marquette University Law School.  Professor Boyden argues that the DMCA notice and takedown system is outdated and not up to the task of reducing the availability of infringing copies of creative works.  A tool that was originally designed as an emergency stopgap measure, to be used in isolated instances, is now expected to manage infringement on a persistent, ubiquitous, and gargantuan scale. Copyright owners currently send takedown notices at an annualized rate of over 78 million infringing files, and yet every day these same files are still available on the most heavily trafficked websites.  In short, the notice and takedown system is long overdue for an update that actually works to prevent today’s wide-scale infringement.

The full document is available here, and we’ve also included the text (and replaced end notes with hyperlinks) below.

The Failure of the DMCA Notice and Takedown System: A Twentieth Century Solution to a Twenty-First Century Problem

 Bruce Boyden

Section 512 of the Digital Millennium Copyright Act will be turning 15 years old soon, and it’s showing its age. Its design belongs to a different era. Like a 15-year-old automobile, it no longer runs as well as it used to. It can’t keep up with the newer, faster vehicles on the road. Its users are beginning to look for alternative forms of transportation. Pieces of it have been wearing down over time, and ultimately something is going to break that outweighs the cost of replacement.

That time may be now: the notice-and-takedown provision of Section 512 is straining under the weight of a blizzard of notices, as copyright owners struggle to abate the availability of infringing copies of their most highly valued works. The tool is no longer up to the task. Mainstream copyright owners now send takedown notices for more than 6.5 million infringing files, on over 30,000 sites, each month. Printing out the list of sites for which Google receives takedown requests in just one week runs to 393 pages. And that just counts the notices sent to Google; duplicates of many of those notices are sent to the site hosts and to other search engines. For example, over a six-month period ending in August, the member companies of the Motion Picture Association of America sent takedown notices for 11,996,291 files to search engines, but sent even more notices—for 13,238,860 files—directly to site operators. (See chart below.)

That amount of effort might be worth the trouble if the flurry of paperwork made more than a dent in the availability of infringing files. Despite all the notice, there is precious little “takedown” to show for it. Unless a site employs some sort of content filtering technology, the same content typically re-appears within hours after it is removed. As a result, this is a system that makes no one happy. Copyright owners are unhappy with the amount of expense and effort the system requires for such paltry results. Online services are unhappy with the burden of having to process and respond to all of those notices. Users are unhappy with inconsistent enforcement and occasional, inevitable mistakes.

The problem is that notice-and-takedown has been pressed into service in a role for which it was never intended. Section 512 was originally designed as an emergency stopgap measure, to be used in isolated instances to remove infringing files from the Internet just long enough to allow a copyright owner to get into court. That design reflected the concerns of its time. In 1998, the dawn of widespread public use of the Internet, there was considerable anxiety about how the law would react to the growing problem of online infringement. Online services worried that they might be held directly liable as publishers for infringing copies of works uploaded by users, despite lacking any knowledge of those copies. Section 512 addressed these concerns by giving service providers a safe harbor to protect them from liability for unknowingly hosting or linking to infringing material.

Since Section 512 was a legislative compromise, Congress sought to address the concerns of copyright owners too – at least the ones they had in the late ‘90s. The problem the creative industries confronted in 1998 was one of content escapes—of copyrighted work moving off of physical formats and onto the Internet. Once there, the speed and accessibility of Internet transmission meant that even a single individual could create a website—or in the 1990s, perhaps a file transfer protocol (FTP) site—and distribute such copyrighted work worldwide. That approach suited the times. Since residential transmission speeds were slow, there was a chance that if copyrighted owners acted quickly enough they could prevent uploaded works from reaching a large audience. Even preparing court papers would take a few days, however; to get immediate results, they would need the assistance of the ISPs hosting the infringing site to help them take it down, at least temporarily.

And that’s why the notice-and-takedown system was added. The goal of notice-and-takedown was to get “service providers and copyright owners to cooperate to detect and deal with” infringing sites before the content was distributed too widely (S. Rep. No. 105-190 at 20 (1998)). It was a more immediate, but temporary, substitute for going into court and getting a temporary restraining order. Indeed, it lasts approximately the same amount of time as a TRO, ten business days.

The DMCA’s statutory language confirms the original, extraordinary nature of takedown requests. The notices themselves are cumbersome to draft, with six required pieces of information in a signed writing. Then, after the online service removes or disables access to the material, there is a complicated game of tennis, as the service provider must first forward the takedown notice to the user, who then may reply with a counternotice asking that the material be restored, which in turn must be forwarded back to the content owner. At that point, the copyright owner has “not less than 10, nor more than 14, business days” to stop the copyrighted work from being replaced by filing a lawsuit. (17 U.S.C. § 512(g)(2)(C)).

The notion that content might leak onto the Internet unless somehow stopped now seems almost quaint. Modern infringement is persistent, ubiquitous, and gargantuan in scale. It is a problem that needs to be policed, not prevented, if our current copyright system is to continue to function. Takedown notices, with their detailed requirements and elaborate back-and-forth, are a poor way to achieve the routine policing of sites that receive thousands of new files every hour.

Indeed, the situation has only gotten worse. The DMCA’s unsuitability as a tool to manage chronic, persistent, and pervasive infringement is particularly apparent after recent decisions from the Second Circuit and Ninth Circuit that construed the duty of website owners very narrowly under Section 512. (See Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012); UMG Recordings, Inc. v. Shelter Capital Partners LLC, 106 U.S.P.Q.2d 1253 (9th Cir. 2013). In those decisions, the courts largely rejected any arguments that Section 512 requires site owners to do anything more than remove the specific file identified in a takedown notice, even if a flood of takedown notices arrives all identifying the same copyrighted work, and even if the site owner has tools in place to automatically identify copyrighted work by pattern-matching. (Viacom Int’l, 676 F.3d at 30-31, 41).

The result is that Section 512 takedowns have become largely ineffective for most works. Even for the largest media companies with the most resources at their disposal, attempting to purge a site of even a fraction of the highest-value content is like trying to bail out an oil tanker with a thimble. In their effort to make their most highly sought-after works just slightly harder to find, copyright owners are currently sending notices at an annualized rate of over 78 million infringing files. The expense of locating, identifying, and then sending a notice for that many files is so significant that even large companies must limit their efforts to only their most recent releases. And even then, despite intensive efforts targeted at the most popular files, takedown notices achieve not a single day when the content is not available on the most heavily trafficked sites.

That burden is falling on businesses of all sizes in every creative industry. Of the roughly 6.5 million files Google receives notices for each month from mainstream U.S. copyright owners, approximately 2.1 million are the subject of notices sent by the RIAA, and another 2 million are in notices sent by the MPAA member companies. But more than one-third of the notices received by Google are the results of efforts undertaken by other industries, such as publishing, video games, and software creators, and by smaller record labels and film and television producers.

The enormous investment of effort required under the notice-and-takedown system is a waste of everyone’s resources. Worse, it may create perverse incentives. The impossibility of keeping up with new uploads means that an online service can create a site aimed at and dedicated to hosting infringing copyrighted works, comply with every takedown notice, and still benefit from the safe harbor, as long as its intent remains hidden. If the site has enough users, any popular content removed will be supplanted by new copies almost immediately.

As a result of the increasing futility of takedown notices, some copyright owners and online services have begun seeking ways to avoid the notice-and-takedown system altogether. For example, several large user-generated content sites have adopted technological tools that allow copyright owners to identify their content and specify what should happen when it appears on the service provider’s system, such as blocking or ad placement. Access providers have joined with copyright owners in creating the Copyright Alert System, which is an attempt to police copyright infringement by issuing the equivalent of an escalating series of speeding tickets. These private agreements and coordination efforts (what economists call “private ordering”) may be moves in the right direction, but they also indicate the increasing frustration that copyright owners and online services have with the Sisyphean nature of takedown notices. It’s long past time for a retooling of the notice and takedown regime.

Section 512 Notices Sent by MPAA Companies (Based on information provided by the MPAA)

Chart. March 2013: Infringing URLs (Total): 5,136,431. URLs sent to sites: 2,369,308. Links sent to search engines: 2,767,123. Counter-Notices Received (Total): 2. April 2013: Infringing URLs (Total): 4,839,709. URLs sent to sites: March 2013. Links sent to search engines: 2,857,496. Counter-Notices Received (Total): 2. May 2013: Infringing URLs (Total): 3,468,182. URLs sent to sites: 2,161,816. Links sent to search engines: 1,306,366. Counter-Notices Received (Total): 0. June 2013: Infringing URLs (Total): 3,378,371. URLs sent to sites: 1,888,692. Links sent to search engines: 1,489,679. Counter-Notices Received (Total): 0. July 2013. Infringing URLs (Total): 4,005,669. URLs sent to sites: 2,347,647. Links sent to search engines: 1,658,022. Counter-Notices Received (Total): 1. August 2013: Infringing URLs (Total): 4,406,789. URLs sent to sites: 2,489,184. Links sent to search engines: 1,917,605. Counter-Notices Received (Total): 3. Grand Totals. Infringing URLs (Total): 25,235,151. URLs sent to sites (Grand Total): 13,238,860. Links sent to search engines (Grand Total): 11,996,291. Counter-Noticed Grand Total: 8.

 

Categories
Copyright Uncategorized

Mercatus’s Unhelpful Business Advice to the Creative Industries

Washington, D.C. is full of smart people with great ideas about how other people should run their lives and businesses. The more innocent of first hand knowledge and practice they are, the more generous and enthusiastic they seem to be with their advice.

While free market advocates are particularly fond of criticizing progressives for this sort of “helpfulness,” it is, in truth, a bi-partisan, pan-philosophical affliction.

For example, I have a friend who runs a business managing parking garages for various organizations and corporations in D.C. In one of those only-in-Washington moments, an executive at one of his accounts, a free market policy analyst, summoned him to a meeting to explain to him how to better run the parking garage.

The scholar proceeded to cite and explain various economic models that counseled changes in my friend’s business practices. As I listened to my friend’s story sympathetically, I thought of how I would respond. In truth, I’m cut from the same cloth as this scholar, so I probably would have cited Mises and Hayek back at him, and talked about the importance of distributed, first hand knowledge. We could have had a fine Washington think tank conversation – perhaps we could have perfected it by citing “data” supplied by rival trade associations.

My friend’s answer was simpler. After listening patiently, he asked the scholar a few questions: “Do you know how many cars came into this garage between 7 and 10am yesterday? Do you know how many spaces are in this garage? Do you know how many spaces are in the neighborhood?” “No,” replied the scholar. Of course, my friend knew the answers, and knowledge like that, combined with 20 years of successful experience explained why he ran his business the way he did.

The conversation pretty much ended there, with the free market advocate and the actual market actor staring at each other across the gulf between theory and experience.

I was reminded of this story when I heard about the error-plagued launch of the Mercatus Center’s new piracydata.org project. The free-market organization launched a website that proposes to answer the question: “Do people turn to piracy when the movies they want to watch are not available legally?”

To answer this question, the website takes a weekly top ten list of most-pirated movies from the TorrentFreak website, and then compares it to a list from CanIStream.It, which purports to provide information as to whether movies are available for rental or purchase via stream.

Initially, Mercatus claimed that only 1 of those top ten most-pirated movies was available for rental and 4 were available for purchase. It later issued a correction (buried at the bottom of this Washington Post piece), noting that, actually, 4 were available for rental and 6 for purchase. (In truth, Mercauts only concedes that 3 were available for rental, since the authors offer a qualification with respect to one of the movies).

What to make of all this? Well, putting aside the embarrassing errors (but the authors don’t seem all that embarrassed), first there’s the way Mercatus framed the research question: Do people “turn” to piracy because the movies they want are unavailable legally? Ah, yes, that familiar “turn” of phrase, as in being forced to “turn to a life of crime” by circumstances beyond one’s control.

It sounds to me like Mercatus is blaming the wrong victim here, which is what Jeffery Eisenach said in TechPolicyDaily. We skeptics weren’t the only ones who saw things that way. Many who praised the website saw it the same way. For example, TorrentFreak’s coverage said “Is Hollywood partly to blame for the high piracy rates of some movies? A newly launched website suggests that this may be the case, as it shows that the most pirated movies are not available to stream, buy or rent legally.” The CCIA’s blog similarly headlined its coverage: “Piracydata.Org Confirms Yet Again That Hollywood Should Evolve Business Models To Deter Piracy.”

Look, we all get it, skeptics and fans alike: There are certain questions you ask because you want to make a particular point by answering them. Is it really a surprise that the newest movies are the subject of the most piracy, and, may not be available quite yet, as their owners continue to exploit other markets? It would be more of a surprise to find “The Maltese Falcon,” “Casablanca,” or even “The Little Mermaid” among the most pirated movies. And yet, Mercatus chose to ask the question and gather the data. It seems disingenuous to claim that the authors were just curious and had no point to make about piracy.

Jerry Brito of the Mercatus Center explains that this point of view is wrong. Piracy is bad. Brito says he is not blaming the victim.

In both my post announcing the site and the Washington Post article Eisenach links to, as well as other articles about the site, I make it clear that there is no excuse for piracy. Piracy is illegal and wrong and copyright holders should be able to exercise their exclusive rights as they see fit during the term of copyright. I don’t know how much more explicit I can be.

Okay, sorry. So Jerry Brito is not blaming the victim. Except, of course, when he is blaming the victim on Twitter:

Brito

Brito also links piracy to Hollywood’s release windows – the implication seems to be that Hollywood should change its business model. Just as with my friend’s parking garage, the free market analyst wants to tell the market actor how to run his business.

But once again, I allegedly am doing the Mercatus project an injustice. I’m not the first to contend that Brito and his colleagues are, well, Washington know-it-alls, and Brito wants to make clear that he is not a meddler:

In my post announcing the site I wrote that “their business model is their prerogative, and it’s none of my business to tell them how to operate,” and that’s something I repeated in other articles where I was quoted. So to be clear, I don’t think movie studios have any obligation to do anything. And I certainly don’t think that shortening their release windows would “eliminate piracy,” as [one commentator] said.

So, Brito is not telling Hollywood how to run its business. I got a different impression from his friend and frequent collaborator Tim Lee, who quoted Brito in the Washington Post as follows:

Hollywood, [Brito] says, could “change its business model to take their own voluntary measures to deal with piracy,” by making movies more readily available through legal online channels. If it chooses not to do that, he believes, they have no business complaining that tech companies aren’t doing enough to combat the problem.

Putting snark aside, perhaps the authors should simply dispense with the pretext. All too often, we see arguments such as this that say ‘I think copyright is important and abhor piracy, BUT . . . ‘ And, after the “but” comes outrage at most any attempt by creators to enforce their rights and protect their investment. Or, as in this case, advice that excuses piracy and counsels surrender to piracy as the only practical way forward. Perhaps it would be less hypocritical for such commentators to admit that they are members of the Copyleft. While I think that it’s a terribly misguided and unfortunate position, it is all too respectable in libertarian circles these days. See the debate in which I participated earlier this year in Cato Unbound.

In any event, however, how about a little more modesty and a little more respect for copyright owners? In truth, the “content” industry leaders I’ve met are, as I’ve told them, way smarter than the Internet says they are. They are certainly smarter about their business than any policy analysts or other Washingtonians I’ve met.

The movie industry knows these numbers very well and knows about the challenges imposed by its release windows. They know their business better than their critics. All sorts of internal, business, and practical constraints may keep them from fixing their problems overnight, but it’s not a lack of will or insight that’s doing it. If you love the free market, then perhaps it’s time to respect the people with the best information about their property and the greatest motivation to engage in mutually beneficial voluntary exchanges.

Or you can just contribute to the mountain of lame excuses for piracy that have piled up over the last decade.

Categories
Commercialization Copyright Copyright Licensing Legislation Supreme Court Uncategorized

Summary of Kirtsaeng v. John Wiley & Sons by Professor Chris Newman

Kirtsaeng v. John Wiley & Sons, U.S. Supreme Court, decided March 19, 2013

Chris Newman
Assistant Professor of Law
George Mason University School of Law

This is best described as a decision in which the Court felt compelled to choose between two readings of the Copyright Act, either of which led to unpalatable results.   One reading would eviscerate the exclusive importation right that Congress had sought to grant copyright owners.  The other would insert a huge loophole into the first-sale doctrine, which denies a copyright owner the right to control how people dispose of copies of protected works once they lawfully acquire ownership of them.   The argument was largely couched in the language of statutory interpretation, but at the end of the day the question was which horrible did more of the Justices fear more.  

The majority, in an opinion by Justice Breyer, chose to sacrifice the importation right.  This means that U.S. copyright owners may not rely on copyright law to aid them in segmenting the world market into domestic and foreign exclusive distribution zones.   Which is nice—at least in the short run—for U.S. consumers who want to buy cheap gray market imports.  It may turn out to be less nice in the long run for petitioner Kirtsaeng’s fellow citizens in Thailand, to whom U.S. textbook publishers may no longer be willing to sell books at prices that support arbitrage.  As Justice Kagan frankly acknowledged in concurrence, this is a suboptimal result that might have been avoided had the court taken a different route in an earlier case.  

The three dissenters would have opted to preserve the importation right, and in terms of straightforward textual interpretation, this commenter thinks Justice Ginsburg got the better of the argument.   What cost her the day was her inability to read the statute in a way that definitively closed the potential loophole in first sale doctrine, so as to dispel the spectre of permitting copyright owners to move all their manufacturing overseas and thereby gain the right to control all downstream distribution and display of copies even after they had been legally sold.   To be sure, this would indeed be an undesirable result, and Justice Ginsburg certainly did not believe it to be a correct or desirable application of copyright law.  But the only way she could avoid it while preserving the importation right was to argue that first sale doctrine is not really governed by the language in which it was codified in the statute.  Her solution makes sense as a matter of policy, but there was no way for the Court to adopt and make it stick in the context of this case, which would have left the spectre seemingly at large and triumphant.