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Commercialization Copyright Copyright Licensing Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Internet Law and Economics Uncategorized

Copyright’s Republic: Promoting an Independent and Professional Class of Creators and Creative Businesses

By Mark Schultz and Devlin Hartline

The following essay is the first in a series of CPIP essays celebrating the 225th anniversary of the Copyright Act by recognizing the rich purposes, benefits, and contributions of copyright. This series of essays will be published together in a forthcoming collection entitled “Copyright’s Republic: Copyright for the Last and the Next 225 Years.”

The current academic and policy discussion of copyright focuses on balancing the gross economic benefits and harms of copyright. A more complete understanding of copyright can account for both the needs and rights of individuals and the public good. Copyright is important because it helps creators make an independent living and allows them to pursue and perfect their craft. In short, it enables a professional class of creators.

The creative industries benefit from this independence too. They must find a market, but they are not beholden to anybody but their customers and shareholders in choosing what creative works to promote. This enables a richly diverse cultural landscape, with movie studios, television channels, record labels, radio stations, and publishers specializing in vastly different types of material.

To understand the importance of a professional class of creators, it’s helpful to understand the paradoxical role of money in creativity. While some are quick to say, “It’s not about the money,” in some essential ways, it really is about the money. Certainly, for some creators, the proposition is straightforward. As the eighteenth-century poet Samuel Johnson famously and cynically proclaimed: “No man but a blockhead ever wrote, except for money.” For countless others, however, creative endeavors hardly bring riches. And even commercial creators frequently leave money on the table rather than do something they find distasteful. Nevertheless, money is important.

This seeming paradox can be resolved by considering the role of money overall in creative work. We can take creators at their word: There are many nonmonetary factors that influence and incentivize creativity, such as love, independence, curiosity, and passion. In fact, thinking about the money can hurt the creative process. But while creators may not “do it for the money,” the money is what makes it possible for them to spend their time honing skills and creating high-quality works. The money endows a professional class of creators and the various creative industries and channel partners that support them. This vibrant ecosystem – empowered by copyright – generates a rich diversity of cultural works.

Creative individuals, like every other human being, need to eat, and, like most of us, they need to work to eat. The real question is, what kind of work are they able to do? Some notable creators have worked in their spare time, but many of the greats thrive most when they can merge their avocation with their vocation. They get better at creating when their work is creation.

There is, of course, more than one way to fund professional creation – patronage, tenured university teaching, and commercial markets founded on copyright are notable ways to do it. One of the virtues of a commercial property rights system is that it fosters creative independence.

The independence afforded by a commercial system based on property rights is highlighted by contrasting it with the greater constraints under other systems. Before the first modern copyright statute passed nearly three centuries ago, many creators depended heavily on the patronage system. Wealthy patrons funded creative efforts by either commissioning works directly or employing creators to staff positions where they were given time to develop new works. To be sure, many great works were produced under this system – the musical compositions of Johann Sebastian Bach and Joseph Haydn stand testimony to this fact.

However, the economic benefits of patronage often came at the expense of the personal autonomy and integrity of these creators. As the old adage goes, “he who pays the piper calls the tune.” Sometimes these constraints were quite direct. When Johann Sebastian Bach attempted to leave the service of one of his patrons to go work for another, the former patron refused to accept his resignation and briefly had him arrested.

More important, patrons had tremendous say in the work of composers. They could decide what and when the composers wrote. They might not appreciate the value of the works created for them. For example, Bach’s Brandenburg Concertos are now recognized as works of genius. Unfortunately, the noble to whom they were dedicated, Christian Ludwig, the Margrave of Brandenburg, was apparently indifferent. The score sat on his shelf, unperformed and unappreciated, for decades. The concertos were not published until nearly 150 years later, after being rediscovered in an archive.

For these reasons, many composers dreamed of financial independence. For example, the composer Joseph Haydn once celebrated leaving behind the patronage of the Esterhazys, which was rather secure and relatively undemanding. Haydn moved to London, where he became the eighteenth-century equivalent of a successful rock star – in demand for his services and making lots of money. London had a private market – not yet so much supported by copyright and publishing as by private commissions and paid performances. In any event, Haydn prospered. In fact, at one point he wrote letters urging his friend Mozart to join him in London as soon as possible, unabashedly rhapsodizing over the money to be made there.

Still, he was now on his own, earning his own pay rather than being kept by a patron. For Haydn, artistic independence trumped economic security:

How sweet this bit of freedom really is! I had a kind Prince, but sometimes I was forced to be dependent on base souls. I often sighed for release, and now I have it in some measure. I appreciate the good sides of all this, too, though my mind is burdened with far more work. The realization that I am no bondservant makes ample amend for all my toils.

Haydn, Letter to Maria Anna von Genzinger, September 17, 1791

The modern copyright system, beginning with the English Statute of Anne in the early eighteenth century, freed creators from the restrictive patronage system. Like patronage, copyright offered creators the financial support they needed so that they could devote themselves to their craft. Unlike patronage, however, it gave them much-needed personal autonomy and artistic independence.

Beethoven, a young contemporary and student of Haydn working at the end of the patronage era, was able to support himself. His facility at performing his own difficult work helped him make a living. But he also used and supported copyright. He would often publish his works first in England to ensure that they received copyright there. He also lobbied the German states for a copyright law.

For Beethoven, too, money was important for the artistic independence it provided:

I do not aim at being a musical usurer, as you think, who composes only in order to get rich, by no means, but I love a life of independence and cannot achieve this without a little fortune, and then the honorarium must, like everything else that he undertakes, bring some honor to the artist.

Ludwig van Beethoven, Letter to publisher, August 21, 1810

The era of patronage was long ago, but human nature has not changed in the decades and centuries since. Creators still face the dilemma of trying to support themselves while maintaining independence. Every economic arrangement imposes some constraints, but some impose more than others.

A good example of how modern copyright enables individual creators to enjoy independence while supporting themselves is provided by the career of photographer Michael Stern. Stern is a hard-working creative entrepreneur – one 30-minute video he made required 103,937 photographs and 900 hours to produce. Stern doesn’t depend on subsidies or grants; rather, he values the independence he gets from being self-employed. He explains:

“The real benefit of being a self-employed photographer,” he says, “is that I can move through life on my terms and do what I want in the way I want to do it. That freedom drives me.” But, it’s not for everybody, he warns. “Nobody loves you like your mother, and even sometimes not even her. So ya gotta do it for yourself. If you don’t, you won’t have the drive needed to reach your goals.”

Instead of creating works that conform to the limited demands of their patrons, creators supply their works to the marketplace, where the demands of consumers are far more diverse. This proves beneficial to creators and society alike. Creators from all walks of life and with all sorts of interests can find the market that will support them, and this fosters a rich cultural landscape encompassing multiple political and social views.

Copyright fulfills its constitutional purpose of promoting progress by incentivizing creators through the grant of marketable rights to their works, but these rights do more than simply lure creators with the hope of economic benefits. Just as crucially, these rights endow creators with substantial personal autonomy while respecting their individuality and dignity. This fosters a creative environment conducive to the creation of high-quality works with enduring social value.

Copyright is a market-based system that supports a professional class of creators who rely on the value of their rights in order to make a living. These marketable rights have also given rise to entire creative industries that lend critical support to professional creators, and through the division of labor these industries enable professional creators to accomplish great feats that would be impossible if they worked alone.

The numbers testify to copyright’s success in helping to create a professional class of creators in the United States. As a recent report on the creative industries enabled by copyright found, there are 2.9 million people employed by over 700,000 businesses in the United States involved in the creation or distribution of the arts. They accounted for 3.9 percent of all businesses and 1.9 percent of all employees.

This creative ecosystem enables professional creators to produce the sorts of high-quality works that society values most. The popularity of these works in the marketplace makes them commercially valuable, and this in turn compensates professional creators and the creative industries that support them for creating the works that society finds so valuable.

This virtuous circle benefits creators and the public alike – just as the Framers had envisioned it. Copyright is not only doing its job, it is doing it well. The number of works available in the market is incredible – certainly more than anyone could ever possibly consume. And the diversity of voices able to connect with audiences in the marketplace makes our cultural lives all the more fulfilling.

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Commercialization Copyright Copyright Licensing Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Internet Law and Economics Uncategorized

Copyright’s Republic: Copyright for the Last and the Next 225 Years

By Mark Schultz and Devlin Hartline

This past Sunday marked the 225th anniversary of the first U.S. Copyright Act. As we move well into the twenty-first century, a claim that copyright no longer “works” in the “digital age” has become commonplace – so commonplace, in fact, that it’s arguably the dominant cliché in modern copyright discussions. Like many clichés, it contains a tiny grain of truth wrapped in a huge ball of glib, unhelpful, and even harmful generalizations.

Before one can understand what the future of copyright and the creative industries could and should look like, one should first appreciate what the first 225 years of copyright has given to the United States. Copyright laid the foundation for, and continues to support, the largest, most enduring, and most influential commercial culture in human history. That commercial culture is uniquely democratic, progressive, and accessible to both creators and audiences.

Could the Copyright Act profitably be revised? In theory, perhaps, and thus there is a grain of truth in the clichés about modernizing copyright. The 1976 Copyright Act and many of its subsequent amendments are overburdened with detailed regulatory provisions contingent on outdated assumptions about technology and business. They also sometimes embody political compromises that reflect circumstances that have long since passed. However, we should pause before hastening to replace yesterday’s contingencies with those of today. And we should also pause – indefinitely – before overturning the entire enterprise on the grandiose assumption that the Internet has changed everything.

Before we can understand what the future of the creative industries could and should look like, we need to appreciate what we have achieved and how we achieved it. The American creative industries are everything the Founding generation that drafted the 1790 Copyright Act could have dreamed – and so much more. Through its press, news media, and publishing industries, the U.S. has perpetuated the spirit of the Enlightenment’s Republic of Letters, with lively, reasoned, and sustained public discussions and debates about values, science, and politics.

The U.S. has produced a creative industry that enlightens and edifies while also diverting and distracting billions of people with its cultural products. This vast commercial creative marketplace allows professional writers, artists, musicians, actors, filmmakers, game designers, and others to make a living doing something that fulfills them and their audience. The U.S. has achieved much based on the twin foundations of free expression and copyright, securing the right to express oneself freely while securing the fruits of the labors of those who craft expressions.

The past thus has much to teach the future, while inevitably yielding to change and progress. Copyright should continue to secure the many values it supports, while being flexible enough to support innovation in creativity and business models.

On this occasion of the 225th anniversary of the first U.S. Copyright Act, the Center for the Protection of Intellectual Property (CPIP) is recognizing the essential contribution of copyright and commercial culture to the United States. To that end, CPIP will be publishing a series of essays highlighting the fact that, contrary to the facile narratives about copyright that dominate modern discussions, copyright isn’t simply a law designed to incentivize the creation of more creative stuff. It has much richer purposes and benefits. Copyright:

  • Supports a professional class of creators.
  • Enables a commercial culture that contributes to human flourishing.
  • Serves as a platform for innovation in both the arts and sciences.
  • Promotes a free republic.

U.S. copyright law has achieved these lofty goals for the last 225 years, and it will continue to do so—but only if we let it and help it do so. In many important ways, U.S. culture and politics has been so shaped by the commercial culture created by copyright that it rightly can be called Copyright’s Republic.

Part I: Copyright Promotes an Independent and Professional Class of Creators and Creative Businesses

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Copyright Internet Inventors Legislation Patent Law Uncategorized

CPIP Supports Guidelines for the Protection of Fundamental IP Rights

U.S. Capitol buildingFebruary 2, 2015

The Center for the Protection of Intellectual Property (CPIP) is proud to join today’s open letter to Congress providing a set of guidelines for considering laws and regulations governing intellectual property.

The letter outlines some of the fundamental economic and moral considerations that underscore the benefits of strong intellectual property rights. Framed by the following guidelines, the letter also highlights the need to respect and protect our intellectual property rights.

  • Intellectual Property Rights Are Grounded in the Constitution
  • Intellectual Property Rights Are a Fundamental Property Right Deserving the Same Respect as Physical Property
  • Intellectual Property Rights Promote Free Speech and Expression
  • Intellectual Property Rights Are Vital to Economic Competitiveness
  • Intellectual Property Rights Must Be Protected Internationally Through Effective IP Provisions in Trade Agreements
  • Intellectual Property Rights Are Integral to Consumer Protection and National Security
  • Intellectual Property Rights Must Be Respected and Protected on the Internet
  • Voluntary Initiatives to Address Intellectual Property Theft Are Positive

The letter, signed by 67 scholars, think tanks, advocacy groups, and other experts, concludes by noting that the “Founding Fathers understood that by protecting the proprietary rights of artists, authors, entrepreneurs, innovators, and inventors, they were promoting the greater public welfare. The continued protection of these fundamental rights is essential to American innovation and competitiveness.”

Read the letter in its entirety here

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Antitrust Commercialization DOJ FTC High Tech Industry Injunctions Innovation Intellectual Property Theory International Law Patent Law Patent Licensing Patent Theory Reasonable Royalty Remedies Software Patent Uncategorized

Curbing the Abuses of China’s Anti-Monopoly Law: An Indictment and Reform Agenda

The following is taken from a CPIP policy brief by Professor Richard A. Epstein.  A PDF of the full policy brief is available here.

Curbing the Abuses of China’s Anti-Monopoly Law:
An Indictment and Reform Agenda

Executive Summary

There are increasing complaints in both the European Union and the United States about a systematic bias in China’s enforcement of its Anti-Monopoly Law (AML).  In an extensive report on China’s abuse of its antitrust laws in advancing its own domestic economic policies, for instance, the U.S. Chamber of Commerce noted among many examples a recent action against Microsoft in which Chinese antitrust authorities used a “speculative possibility of licensor hold-up” following Microsoft’s acquisition of Nokia to justify a decree under the AML to “cap license fees for domestic licensees of mobile handset-related software.”

Although the biases in the enforcement of the AML against foreign companies are rooted in systemic problems in China’s political and legal institutions, the abuses are particularly evident in the patent space.  FTC Commissioner Joshua Wright has recognized the “growing concern about some antitrust regimes around the world using antitrust laws to further nationalistic goals at the expense of [intellectual property rights] holders, among others.” He specifically mentioned China as one such antitrust regime that may be finding encouragement or at least rationalization in recent FTC and DOJ actions that presume that “special rules for IP are desirable . . . and that business arrangements involving IP rights may be safely presumed to be anticompetitive without rigorous economic analysis and proof of competitive harm.”

This same theme has been recently echoed by FTC Commissioner Maureen Ohlhausen, who explained that recent American decisions on standard essential patents (SEP), such as the FTC’s use of its merger review power to enforce settlement agreements on SEPs against Bosch and Google, have “created potentially confusing precedent for foreign enforcers.”  This concern was brought home to her when she witnessed Chinese officials invoke these recent FTC actions against Bosch and Google to justify their per se claim under the AML that “an ‘unreasonable’ refusal to grant a license for a standard essential patent to a competitor should constitute monopolization under the essential facilities doctrine.”

Such broad propositions pave the way for Chinese officials to favor domestic, state-run companies who incorporate foreign patented innovation in their own domestic products and services.  These unfettered notions of “unreasonable” conduct become weapons that let Chinese officials force down prices of foreign goods to promote their own nationalist economic policies. Unfortunately, as Commissioner Ohlhausen observed just this past September, recent U.S. antitrust enforcement actions are giving Chinese officials grist for their industrial policy mill.

It is critical that American legal authorities do not give aid and comfort to China’s discriminatory treatment of foreign companies under the AML by the way in which American regulators either speak about or take action on SEPs or other issues relating to patented innovation in this country.  The antitrust laws should not be applied so as to single out patents or any other intellectual property rights for special treatment; all property deployed in the marketplace should be treated equally under the competition laws.

The unfortunate situation in China is one example of a dangerous set of practices which could spread to other countries, motivated either by imitating what China has done or retaliating against its abuses.  The risk is that the disease can spread all too easily.  Until reforms are implemented in both the substance of the AML and the enforcement practices of the Chinese authorities, American policymakers and enforcement authorities should do everything they can to avoid aiding this misuse of antitrust as a domestic economic policy cudgel.

Curbing the Abuses of China’s Anti-Monopoly Law:
An Indictment and Reform Agenda

Richard A. Epstein

I. Introduction

There is a loud chorus of complaints from both the European Union and the United States about a systematic bias in China’s enforcement of its Anti-Monopoly Law (AML).  This bias is evident in a wide range of economic sectors and companies. The Economist reports that China has imposed extra-heavy antitrust penalties on foreign automobile manufacturers, such as Daimler, including a record $200 million penalty on a group of ten Japanese car-parts firms, and the New York Times reports that China has imposed another $109 million penalty on six companies selling infant milk formula.  China has also initiated antitrust enforcement actions against American high-tech companies, such as Microsoft and Qualcomm, and there is an ongoing Chinese probe of Qualcomm (a firm for which I have consulted unrelated issues), which is said to be done with an effort to force a reduction in the prices that it charges for its advanced wireless technology, which China needs to implement a new 4G system for mobile phones.  Similarly, in a wide-ranging report on China’s abuse of the AML to advance domestic industrial policy, the U.S. Chamber of Commerce noted many examples, including a recent action against Microsoft in which Chinese antitrust authorities used its acquisition of Nokia as a basis for a completely “speculative possibility of licensor hold-up” to justify a decree to “cap license fees for domestic licensees of mobile handset-related software.” It is no wonder that many commentators are repeatedly stressing the distinctive foreign focus of China’s recent antitrust activities.

Chinese public officials insist that their stepped-up enforcement of the AML  is even-handed.  “Everyone is equal before the law,” asserted Li Pumin, the head of the National Development and Reform Commission, which takes the lead in investigating foreign firms.  But others in China disagree.  More market-oriented Chinese writers have lamented how China’s commitment to market processes has reversed course since the adoption of the AML law, as China is now using this law as an industrial policy cudgel in promoting its own domestic firms at the expense of foreign ones. Its recent behavior, which provoked expressions of concern from American antitrust officials at both the Federal Trade Commission and the Department of Justice, suggests that this is indeed the case.

II. The Chinese Anti-Monopoly Law

The current situation is an unwelcome reversal of the initial optimism that surrounded the adoption of the AML in 2008, and so a quick overview of the AML’s provisions is necessary.  Hailed at the time as “a tremendous leap forward for China,” the law adopts, at least in the abstract, many of the standard categories of antitrust analysis found in the United States and in the European Union.  In Article 3, it contains the standard prohibitions against horizontal arrangements that raise prices, reduce output, or divide territories, subject to an exemption under Article 15 for agreements that improve technical standards or upgrade consumer products.  The AML also bans “abuse of dominant market positions by business operators,” which under Article 17 includes setting prices in “selling commodities at unfairly high prices or buying commodities at unfairly low prices;” or in selling goods at below costs, refusals to deal, and tie-in arrangements, all “without any justifiable cause.”[i]

In many ways what is most notable about the AML is the extent to which it imitates the major features, both good and bad, of the more developed competition law applied in the United States and the European Union.  But by the same token, it is quite clear that the Chinese law is embedded in a different set of institutional arrangements.  Two elements stand out.

First, the AML reflects the unique Chinese approach to “market socialism” that was first implemented by Deng Xiaoping’s reform policies in the late 1970s as “socialism with Chinese characteristics.”  Article 4 of the AML thus attempts to square the circle: “The State constitutes and carries out competition rules which accord with the socialist market economy, perfects macro-control, and advances a unified, open, competitive and orderly market system.”

Second, the socialist legacy reflected in Article 4 has resulted in an extensive system of state-owned industries in China, and Article 7 of the AML provides special controls, exemptions and protections for this sector of the Chinese economy:

Industries controlled by the State-owned economy and concerning the lifeline of national economy and national security or the industries implementing exclusive operation and sales according to law, the state protects the lawful business operations conducted by the business operators therein. The state also lawfully regulates and controls their business operations and the prices of their commodities and services so as to safeguard the interests of consumers and promote technical progresses.

The scope of Article 7 offers instructive clues toward understanding the current situation.  Its text refers to entire “industries,” not just individual firms, that are given special treatment under the AML. It still speaks in terms of constraining the ability of “industries” to engage in any abusive practices, which at least in principle serve as the basis for competition-focused anti-monopoly law.

Unfortunately, the odds of it remaining focused in this constructive way are necessarily reduced because of its dual operation with respect to both state-owned enterprises (SOEs) and foreign corporations.  The SOEs have a built-in preferential position that can manifest itself in two ways.  Either they can get gentle slaps on the wrist for offenses that prompt far harsher sanctions against private companies, especially foreign companies who are either suppliers or competitors with SOEs, or the SOEs could prod Chinese anti-monopoly enforcement authorities to take action against their foreign competitors.  The AML can all too easily function as a new form of protectionism by virtue of its differential application to foreign firms vis-à-vis SOEs doing business in China.

The difficulties here are increased, moreover, by the structural decision to parcel out enforcement of the AML to several agencies. The National Development and Reform Commission has the lead with respect to enforcement over monopoly agreements.  The State Administration of Industry and Commerce deals with abuses of dominant position.  The division of enforcement authority between these agencies makes it much harder to impose uniform standards on the overall operation of the system. This split in enforcement authority increases the risks of differential enforcement and, more worrisome, the misuse or discriminatory use of the AML.

Therefore, it is evident that no evaluation of the operation of the Chinese anti-monopoly system can be made solely on the basis of the statutory terms in the AML itself.  So much depends on the oft-concealed enforcement practices of the relevant public authorities, who are given very broad powers of inspection and investigation under AML Article 39, which empowers the AML enforcers to run investigations “by getting into the business premises of business operators under investigation or by getting into any other relevant place,” or by forcing them to respond to interrogatories “to explain the relevant conditions” to the public authorities.” Chinese officials also have the power to examine or duplicate all business papers and to seize and retain relevant evidence, and to examine bank records and accounts.  The only procedural protection contained in Article 39, if it can be called that, is that a “written report shall be submitted to the chief person(s)-in-charge of the anti-monopoly authority” before the investigation is approved.  What kind of report and how it is to be reviewed are not stated, even though these substantive and procedural issues are subjects of volumes of statutory, regulatory and decisional law on administrative procedure in the United States and Europe.  Even more significant, there is no mention anywhere in the AML of any probable cause or warrant requirement that must be demonstrated before any independent judicial body.

III. Rule of Law

At the root of the many complaints about the Chinese approach to competition law is the constant concern that its antitrust enforcement practices are inconsistent with the rule of law.  Its legal system invites arbitrary and differential enforcement of anti-monopoly standards.  In dealing with these rule of law issues, it is incumbent to note that they address a critical mix of concerns about both substantive standards and administrative enforcement.

As a general rule of thumb, the more precise the particular rules of conduct that receive government enforcement, the better the prospects to avoid both rule of law violations and the general perception of such government violations.  In this regard, it is worth noting that the ordinary rules of property, contract and tort score very well under this general standard.  As I have argued in my book Design For Liberty:  Private Property, Public Administration and the Rule of Law, these common law rules have several key structural features that facilitate rule of law values.

First, the basic norm with respect to private property is that all other persons need only follow the basic norm “keep off” to comply with the system.  The simplicity of this command means that anyone can follow it regardless of the size of the polity in which this rule operates.  The same command works as well in China with 1.4 billion people as it does in New Zealand with a population just under 4.5 million people.

Second, the content of this simple rule is easily known and understood, so that no one need give special notice of what it requires to the many people who are bound by it.  It is no small deal to have a rule that is not promulgated by statute, which is thereafter interpreted by dense pages of administrative text to which the public has only imperfect knowledge, and which both small and large businesses are able to interpret and apply only with the aid of professional intermediaries such as trade associations and law firms.

Third, the simple rule in question works as well in poor countries as in rich ones, so that there is no awkward transition in rules with increasing development over time.  At this point, the property rules are complemented by the contract rules that allow people within broad limits to decide their own agreements for the provision of goods and services, so that in most cases the key function of the state is to enforce the agreement as designed, not to improve upon its terms with flights of legislative or judicial fancy.

The Chinese AML does not, and cannot, exhibit anything like the requisite level of overall clarity.  In order to determine whether a horizontal arrangement violates the antitrust law, for example, it is necessary to have some sense as to the scope of the market, and the nature of the agreement, to see whether it is or is not in restraint of trade.  It is also necessary to gather evidence about practices that can span both continents and years.  The AML’s standards for dealing with abusive practices are even looser; for example, there is no clear metric by which to determine whether prices are unfairly high or unfairly low. Another nagging question is what it means under the AML for goods to be sold at below cost, because it is completely unclear if the metric is average or marginal cost.  No matter which is chosen, the difficulties of estimation further the scope for abuse of administrative discretion.

This nagging uncertainty about the basic operating rules prompted the late Ronald H. Coase to quip to me long ago in a conversation only partly in jest: “If prices move up in any market, it is surely the result of monopolization. If they remain constant, it is surely the result of market stabilization arrangements.  If they go down, it is surely the result of predation” (quoting from memory).  Coase’s quip ruefully reflects the modus operandi of the Chinese AML.  Since any and all price movements could be associated with some violation of the AML, it follows that in principle no party, and no group of firms, is immune from investigation and criminal prosecution, regardless of how it conducts its own business.  And owing to the vastness of the multinational businesses who are targeted, these investigations can exert a large influence on the behavior of firms and on their key employees who bear the brunt of those investigations, where they are subject to the possibility of criminal sanctions in addition to emotional wear and tear.

IV. The Patent Dimension

The dangers of this system are apparent and easily understood. With respect to accusations of secret horizontal arrangements and price gouging arrangements, the risk comes in the form of extensive and exhaustive investigations that are intended to stifle and not promote competition in the marketplace.  In dealing with these issues, it is critical that our American legal authorities do not give aid and comfort to China’s aggressive regulation of foreign businesses enterprise by the way in which American regulators address similar issues in this country.  We live today in an intensely global environment, and any actions in the United States that overstate the role of the antitrust laws can easily be used as reasons to expand antitrust application overseas.

The point applies to all areas of law, but has especial importance in connection with patents, given that technology that is available in one country is instantly available in all. After the Supreme Court handed down eBay v. MercExchange in 2006, injunctive relief is no longer presumptively available for patent infringement in the United States.  As Professor Scott Kieff, now of the International Trade Commission, and I have written, eBay eased the way for Thailand to impose its regime of compulsory licensing for pharmaceutical patents, at far below market rates.

Evidently, decisions like eBay do not go unnoticed by foreign nations, where they set up a climate in which the weak enforcement of patent rights becomes par for the course.  That same development happens most emphatically in the crossover area between patent and antitrust law.  In general, the proper application of the antitrust law does not single out patents for special treatment of the antitrust laws.  A clear articulation of this principle was recently made by FTC Commissioner Joshua D. Wright in his 2014 Milton Handler Lecture:  “Does the FTC Have a New IP Agenda,”  which stressed the importance of the “parity principle” that states a central tenet in the Department of Justice/Federal Trade Commission 1995 Antitrust Guidelines for the Licensing of Intellectual Property:  “Agencies apply the same general antitrust principles to conduct involving intellectual property that they apply to conduct involving any other form of tangible or intangible property.”

The parity principle is critical to successful antitrust enforcement because it places an important fetter on the arbitrary use of government power, which increases greatly if any government, China included, could use a wide catalogue of novel arguments to justify some deviation from the general rule.  Indeed, this parity principle is an extension of what I have termed elsewhere as the “carry over” principle, which means that intellectual property rights in general should be based on the rules that are applicable to other forms of property, subject only to deviations required by the distinctive features of property rights in information, which chiefly relates to their finite duration to allow for the widespread dissemination of information. But once that key adjustment is made, the standard rules for property used elsewhere, including the rules for injunctive relief, should continue to apply.

Yet as Commissioner Wright mentioned, recent FTC and DOJ actions presume that “special rules for IP are desirable . . . and that business arrangements involving IP rights may be safely presumed to be anticompetitive without rigorous economic analysis and proof of competitive harm.” Commissioner Wright has also recognized the “growing concern about some antitrust regimes around the world using antitrust laws to further nationalistic goals at the expense of [intellectual property rights] holders, among others.” He specifically mentioned China as one such antitrust regime that may be finding encouragement or at least rationalization in these recent actions against IP owners by American antitrust agencies.

This same theme has been recently echoed by FTC Commissioner Maureen Ohlhausen, who noted how foreign nations invoke “‘competition fig leaves’ to address other domestic issues or concerns.” More specifically, Commissioner Ohlhausen explained how this tendency has manifested itself in the debate over standard essential patents (SEPS), that is those patents that are incorporated in setting key technical standards that allow for the interoperability of various technical devices.  She also noted how recent American decisions on SEPs have “created potentially confusing precedent for foreign enforcers.”  That concern was brought home when Chinese officials invoked recent FTC enforcement actions against Bosch and Google SEPs to justify a per se claim under the AML that “an ‘unreasonable’ refusal to grant a license for a standard essential patent to a competitor should constitute monopolization under the essential facilities doctrine.” Such broad propositions pave the way for Chinese officials to favor domestic, state-run companies who incorporate foreign patented innovation in their own domestic products and services.  These unfettered notions of “unreasonable” conduct become weapons that let Chinese officials force down prices of foreign goods to promote their own nationalist economic policies. Unfortunately, as Commissioner Ohlhausen observed just this past September, recent U.S. antitrust enforcement actions are giving Chinese officials grist for their industrial policy mill, by insisting that their heavy-handed antitrust action against foreign patent owners “has support in U.S. precedent,” such as the Google and Bosh settlements.

V. Enforcement Abuses

The suppression of patent licensing rates charged to domestic Chinese firms is just one example of how the AML enforcers have a built-in invitation to run massively intrusive and expensive investigations into any firms. These investigations are unhampered by any clear legal definition of relevance and are undertaken without regard to the high costs incurred by firms seeking to comply with the officials’ edicts, both administrative and reputational.  In some cases, the charge falls within the yawning gap in the AML concerning limits on its enforcement practices.  For example, the European Union Chamber of Commerce has found  that China engages in administrative intimidation, which is intended to short-circuit formal hearings, and forces parties charged to appear before tribunal hearings without the assistance of counsel and without involving their own governments or chambers of commerce in the process.

It is of course impossible for any academic sitting in the United States to make any estimation of the actual level of abuse in any one individual case. But the simple point here is that the Chinese authorities are already low on credibility because of the way in which they conduct themselves in so many other areas.  It takes no great imagination to connect the dots between China’s anti-monopoly investigations of foreign companies doing business in China proper with the Chinese government’s hostile response to the Hong Kong protests against the high-handed way in which Chinese authorities are stifling homegrown democratic activities by insisting on government vetting of all candidates for public office to weed out those who might oppose China’s national agenda.   And it takes no great leap in imagination to realize that the same aggressive attitude that China now takes on territorial issues with Vietnam and Japan can spill over to these investigations. It is also well known that China blocks (censors) service supplied by the mainstays of the internet and social media, including Google, Facebook, Wikipedia, and Twitter, which would provide ample opportunity for information about government (and private) abuses to be widely spread.

It also looks as though the lack of any formal protections in the AML investigative process opens up the entire system to these forms of abuse.  The lack of any reliable reporting on these matters is consistent with wide-scale abuse because of this simple stylized threat: “Be silent and take your punishment and we shall reduce the penalties.  Speak about the matter in public and the penalties will increase.”  These threats are all too credible within a tightly run collectivist society.  The legal system may give little or no relief, and even if the courts were somehow attuned to the civil liberties and procedural issues, the lack of any clear standards for what counts as either a violation or an appropriate penalty reduces the chances that judicial intervention could be used to slow down an official juggernaut.

VI. Reforms

China needs to do more than make bland and predictable protestations that the AML applies on even terms for all players.  The question is how?  At the most basic level, one way to get rid of this problem is to spin off all SOEs into private hands, preferably by bona fide auctions, so that there is less risk of political influence displacing the rule of law.  That path is of course hampered by China’s explicit commitment to socialist principles in the AML and everywhere else.

There is, however, no reason why that has to create an insuperable barrier.  Socialist principles are also inconsistent with private ownership of the means of production, and with the belief that open competition in the marketplace will assure the highest level of social output for any given set of resources. In a sense, the 2007 adoption of the AML itself should be regarded as an implicit rejection of the principles of the socialist economy found in Article 4, because it assumes private companies and a functioning free market.  It should take only a little imagination to push the cycle one step further by privatizing key government industries with auctions or other schemes of devolution, and the Chinese government has already proven resourceful in finding ways to explain how such free market reforms are consistent with its preexisting socialist system.

Even if this approach is not undertaken, it should still be possible to make reforms internal to the AML itself that are not likely to reduce its economic benefits but could do much to control its adverse effects. Within the American system, a strong distinction is taken between the horizontal arrangements that are governed under Section 1 of the 1890 Sherman Act and the variety of vertical arrangements that are covered under the monopolization provisions of Section 2.  The argument in favor of this distinction turns on the anticipated rate of social return from the enforcement of these two provisions.

With the Section 1 prohibition on contracts in restraint of trade, the nature of the societal loss is generally easy to figure out.  The horizontal arrangements that restrict output, raise prices or divide territories do not result only in the transfer of wealth from consumers to producers, but also a reduction in overall social wealth by removing those transactions that could take place for mutual benefit at the competitive price, but which will be foreclosed when the cartel raises its price to the monopoly level. As noted earlier, the Chinese AML tracks that approach, at least on paper.  The enforcement questions here are not easy, but since there is a clear sense of what the wrong is, it should be possible to obtain evidence from examining evidence of cooperation, including from disgruntled employees of the given firms.  And the matter can be helped along immeasurably by rules that waive treble damages to the first cartel member that reports the cartel practices.  These rules apply with great force in the current American enforcement efforts, much of which has been directed toward international cartels.

The dynamics under Section 2 of the Sherman Act are quite different.  In these instances, it is hard to develop a simple explanation as to why various kinds of vertical arrangements are harmful to consumer welfare.  In many cases, the practices that are undertaken by the dominant firm are also undertaken by their smaller rivals that have no element of market power.  The clear implication of this simple point is that the practices that are routinely attacked as restrictive are also practices that have efficiency benefits.  Any effort to ban or punish these factors could both stifle useful innovations and distort the competitive balance between firms of different size.

The situation gets even worse when the only charge leveled under the AML is that prices are “unfairly high” or “unfairly low,” which is just asking for trouble.  At one level the impetus behind this claim is that certain products are sold at higher (or lower) prices in China than in the United States or the European Union. But these simple price comparisons miss so many of the relevant marketplace complications.  Higher prices could stem from higher costs in distribution or in compliance with local laws.  Lower prices could result from the simple fact that the fixed costs of producing these goods are allocated to the home market where demand is higher, such that the foreign sales at a lower price improve the welfare of both the firm (which gets a chance to expand markets and recover an additional fraction of its fixed costs) and its Chinese customers, who get the benefit of low prices that forces local firms to reduce their costs.  It follows therefore that the Chinese antitrust system could do well to narrow the class of offenses that are said to be practiced by dominant firms, avoiding confusing and unclear terms such as “unfair” prices.

Once a sharper definition of monopolization activities is adopted, it reduces the pressure on the enforcement system to engage in overbroad and unfettered investigations or prosecutions, and thus the risks of massive abuse.  Nonetheless, it is a grim fact of life that the investigation of cartel-like behavior is always intrusive, precisely because these arrangements are always carried out in secret, which requires extensive government efforts to ferret them out.  But in this regard, it is imperative that China reform its antitrust system for the benefit of both its own citizens and foreign companies investing in China. It should adopt procedural protections that impose some definitive and clear checks on how investigators can behave in ways that avoid both massive human rights violations on the one hand and routine investigative abuses on the other.

At this point, it is necessary to add into Chinese law the same kinds of safeguards that are commonplace in most countries with respect to other forms of criminal investigation, whether crimes of violence or drug offenses, or simple cases of fraud and nondisclosure in financial circles and elsewhere.  The point here is that the most dangerous sentence in the English language—“trust me I am from the government”—translates perfectly into Chinese.  It is not enough that the abuse stops.  It is absolutely imperative that the appearance of abuse ceases as well.  Those reforms are not beyond the power of the Chinese legal system to implement, but it will take a long overdue switch from the inquisitorial types of system that socialist countries have found all too congenial in the political and economic sphere.

In urging these major antitrust reforms, it is imperative to put the Chinese position into global perspective. The Chinese government is not the only government that uses its anti-monopoly laws as a cudgel to achieve other political or economic objectives.  It has lots of company worldwide.  There are, more specifically, other illustrations of abuse in the United States and the European Union.  The American system is overly exuberant in its discovery processes, especially with respect to international operations under the 1995 guidelines of the United States Department of Justice and the Federal Trade Commission. It offers shameless protection to American export cartels under the Webb-Pomerene Act, passed in 1918 at the end of World War I, when the need for free trade could hardly have been greater. The European Union thrives on broad definitions of “abuse of dominant position” under Article 102 of its 2009 Treaty on the Functioning of the European Union.  The enforcement in many other nations, such as India, with its endless protectionist practices, is also in need of major reform.

In dealing with all these multi-national issues, the fundamental insight is that free trade across international borders offers the best hope for the amelioration of the human condition, especially in developing or underdeveloped countries.  It is widely understood that tariffs and other restrictions impede the flow of goods across international borders, which is why the World Trade Organization maintains global free trade as its primary objective.  The general attack on explicit entry restrictions by foreign firms and goods has borne much fruit in recent years, although there is still work to be done.  But it is precisely because tariffs and other barriers to entry are public and thus verifiable that it is (relatively) easy to control their abuse.

The success of the WTO in controlling these practices does not put to rest the protectionist impulses that have generated too many obstacles to free trade.  The differential enforcement of the anti-monopoly laws poses major dangers in this regard, for the same laws that protect against anticompetitive practices are all too often used to achieve the very abuse that they are intended to guard against.  Commissioner Ohlhausen bluntly puts the point: “Critics claim that China is using its antitrust law to promote industrial policy.” The unfortunate situation in China is but one example of that dangerous set of practices, which unchecked could spread to other countries, motivated either by imitating what China has done or retaliating against its abuses.  The risk is that the disease can spread all too easily.  Other nations can protest against these practices. But ultimately it is for China itself to throw aside the shackles that disadvantage foreign firms and the Chinese people alike.

 

Endnotes:

[i] The AML also contains a prohibition against mergers that lead to “concentration of business operators that eliminates or restricts competition or might be eliminating or restricting competition,” but this is not addressed in this brief essay.  These prohibitions cover only a few large transactions, none of which involve ordinary commercial practices that are the subject of the anti-monopoly and abuse of practice provisions at issue in the current applications of the AML.

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Cohen et al. “Patent Trolls” Study Uses Incomplete Data, Performs Flawed Empirical Tests, and Makes Unsupportable Findings

PDF summary available here

I.   Introduction

A recent draft study about patent licensing companies entitled “Patent Trolls: Evidence from Targeted Firms” is making the rounds on Capitol Hill and receiving press coverage. This attention is unfortunate, because the study is deeply flawed and its conclusions cannot and should not be relied upon. If the draft paper is ever published in a peer reviewed journal, it will certainly need to be greatly revised first, with its most notable results likely changing or disappearing.  In sum, the study should receive no credit in policy debates.

The study, by Lauren Cohen, Umit G. Gurun, and Scott Duke Kominers, finds that non-practicing entities (NPEs) are “opportunistic” because they target defendants that (1) are cash-rich (particularly compared to practicing entity patentees), (2) operate in industries that “have nothing to do with the patent” in suit, (3) are staffed by small legal teams, and (4) are busy with numerous non-IP cases. Additionally, the authors conclude that defendants that lose in patent litigation with NPEs on average have marked declines in subsequent R&D expenditures, on the order of $200 million per year. On this basis, the authors suggest “the marginal policy response should be to more carefully limit the power of NPEs.” One of the authors has been circulating this unpublished study to congressional staffers to make the case that NPEs have a large negative effect on US innovation.

II.   Critique of the Study

Professor Ted Sichelman, University of San Diego School of Law, and an expert in empirical studies of patent litigation, critiques the most recent, publicly available version of the Cohen et al. study in detail in his response paper, “Are Patent Trolls ‘Opportunistic?”.[1] He finds that the study’s dataset is incomplete and unrepresentative, its theoretical model is flawed, and its empirical models are unsound. Professor Sichelman concludes that neither their findings nor policy prescriptions are justified. Major weaknesses in the study are as follows:

  • The study’s public firm defendant dataset in current version of paper is incomplete and unrepresentative
  • The study relies on proprietary, unverified coding from PatentFreedom that groups together numerous NPE types (including individuals, R&D shops, and IP holding companies of operating companies), but in making its policy recommendations, the study assumes all NPEs are patent aggregators
  • The study’s finding that NPEs sue cash-rich defendants may simply be driven by the fact that NPEs tend to target software, Internet, and finance-related companies for reasons unrelated to cash holdings, but these companies simply happen to have larger cash-holdings than the average publicly traded company
  • When comparing NPE behavior to that of operating companies, the study improperly includes operating company suits in which the patentees primarily seek injunctions, which are not cash-driven suits
    • Our belief is that NPEs and operating companies alike that primarily seek royalties are likely to seek defendants with enough cash to pay likely damage awards and—like a seller of goods ensuring that a buyer has sufficient cash to pay for those goods—there is nothing “opportunistic” in this behavior
  • NPEs asserting patented technology that is different from the primary industry of the accused infringer are typically not going “after profits unrelated to the patents”
    • For instance, the use of patented computer hardware, software, or technical equipment may occur in any industry and provide a competitive advantage relative to others using non-patented technology
  • The study’s datasets and variables to determine the size of law firm and the number of pending cases are incomplete and flawed
  • The authors’ finding that R&D of accused infringers is differentially affected by a “loss” is based on a very small dataset of “wins” (n=35)

In sum, there is no support for the study’s policy recommendation “to more carefully limit the power of NPEs.” In this regard, we reiterate our view that any plaintiff targeting defendants with enough cash to satisfy a damages judgment is simply ordinary litigation behavior. According to Professor Sichelman, there is “massive risk aversion by many small NPEs” and “large uncertainty in [patent] cases” that may cause any patentee primarily seeking money damages to assert its patents against defendants who can pay their bills.

Finally, in making their policy proposals to restrict NPEs, Cohen et al. rely on the discredited study of Bessen and Meurer (2014) to argue that NPEs do not channel a large percentage of funds received back to inventors. As Schwartz and Kesan (2014) have shown, Bessen and Meurer’s study is inapplicable to most NPEs, because only 12 publicly traded aggregators were examined, and even for those 12 aggregators, Schwartz and Kesan persuasively argue that Bessen and Meurer’s findings are wrong. Indeed, there is ample evidence that many patent aggregators return 50% of net recoveries in litigation or licensing (i.e., after paying for attorneys’ fees and related costs) and that many NPEs are individuals, R&D shops, and other entities that effectively keep 100% of the net returns from recoveries.

As such, the Cohen et al. (2014) study should receive no credit in congressional policy debates. Indeed, another leading academic at a recent conference expressed surprise and dismay that this early-stage study was being circulated by its authors throughout Congress.

Notes:

[1] The authors presented new material in response to Sichelman’s critique at a recent conference, but as far as we know, they have not made any of it available to the general public. As such, we focus on Sichelman’s critique of the most recent, publicly available version of the study.

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IP Promotes Progress by Securing the Individual Liberty of Inventors and Creators

This is the third 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 second panel of CPIP’s 2014 Fall Conference analyzed the common moral case for copyrights and patents. The panel was moderated by Professor Chris Newman (George Mason University School of Law). Two of the panelists, Professor Mark Schultz (CPIP, and Southern Illinois University School of Law) and Professor Eric Claeys (George Mason University School of Law) explained the theoretical and normative principles underlying the moral case for intellectual property. The other two panelists, Dr. Ken Anderson (Thermaquatica) and David Lowery (musician, producer, and lecturer at the University of Georgia), then showed how those principles play out in practice.

Professor Schultz noted that the moral case for intellectual property is often overshadowed by (or outright ignored in favor of) the economic case. But in addition to being economically valuable, intellectual property serves important moral functions by enabling artists and inventors to live free and flourishing lives. Intellectual property fosters economic independence, enables the creation of a private sector, and supports political freedom. Patents and copyrights give an important set of choices to creators and inventors, enabling them not only to survive, but also to thrive. As such, intellectual property is a moral right that facilitates individual liberty. While the economic justifications for copyrights and patents remain important, it is equally important not to lose sight of their strong moral underpinnings.

Professor Claeys discussed the moral case for injunctive relief against IP infringement. Starting from a traditional property law perspective, he explained that remedies (such as injunctive relief) are essential in reinforcing and vindicating property rights. Just as with traditional property, copyrights and patents confer exclusive control to their owners to secure to them the value of their productive labors. By protecting copyright and patent owners’ discretion over the deployment of their property, injunctions protect their moral rights in the fruits of their labors. Claeys further noted that this labor-based understanding of intellectual property could inform the balance of equities discussed in eBay v. MercExchange, filing significant gaps in the Supreme Court’s reasoning and likely leading to a different conclusion regarding licensing companies’ ability to obtain injunctions.

Anderson and Lowery addressed the role of IP in their respective fields. Dr. Anderson discussed how patents were crucial to his ability to obtain investors for his green tech company. He invented a new, environmentally-friendly technology to convert “coal, biomass and other organic solids into low molecular weight products.” Being able to protect the value of his work through patent protection (he filed multiple rounds of patents all over the world) has been essential to his company’s success and his ability to commercialize his invention.

Lowery discussed how the lack of copyright enforcement in the digital era has affected the music industry, leading to an environment where internet platforms thrive, but the artists and creators who fuel the value of those platforms struggle mightily to make ends meet. In many ways, musicians are worse off now than they were in the 1950s (an era that s well-known for the exploitation of musicians). Nonetheless, he expressed hope that the third decade of the Internet could embrace legal and technological innovations that make it a better place for artists.

In sum, the panelists illustrated the fundamental moral importance of intellectual property, which applies equally to inventors’ patent rights as it does to artists’ copyrights. Intellectual property isn’t just about economic incentives. IP also promotes progress by securing the individual liberty of inventors and creators.

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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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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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Patent Policy Debates Characterized by "Intolerably High Ratio of Theory to Evidence"

In an interview with Law360 last week, FTC Commissioner Joshua Wright spoke about the FTC’s upcoming study on PAEs and the state of today’s patent policy debates. The interview is well-worth reading in it’s entirety, and we’ve also highlighted a couple key quotes below.

“One of the most fascinating things about the the policy debates in and around patents and by extension the intersection of patent law and antitrust law, is that most of the debate is chock full of theory and supposition but completely devoid of empirical evidence…It is very difficult to move forward sensibly in debates with those characteristics”

“Wright said that without evidence of ‘pervasive market failure’ in the standard setting space, the FTC and the U.S. Department of Justice should avoid the temptation to serve as ‘management consultant’ to standard setting groups and their members.”

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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.