Tag: copyright

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Copyright History of Intellectual Property Innovation Inventors Trade Secrets Trademarks Uncategorized

Strong IP Protection Provides Inventors and Creators the Economic Freedom to Create

Here’s a brief excerpt of a post by Terrica Carrington that was published on IPWatchdog.

CPIP went against the grain with this conference, and showed us, bit by bit, what our world might look like today without intellectual property rights. Music wouldn’t sound the same. Movies wouldn’t look the same. You wouldn’t be reading this on your smartphone or have access to the cutting-edge biopharma and healthcare products that you rely on. And some of our greatest artists and inventors might be so busy trying to make ends meet that they would never create the amazing artistic works and inventions that we all enjoy. In short, CPIP explored how intellectual property rights work together as a platform that enables us to innovate, share, and collaborate across industries to develop incredible new products and services at an astounding rate.

To read the rest of this post, please visit IPWatchdog.

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Copyright Injunctions Internet Remedies Trademarks Uncategorized

CloudFlare Enjoined From Aiding Infringers: Internet Unbroken

Just how far does a court’s power to enjoin reach into cyberspace? It’s clear enough that those directly posting or hosting infringing content are subject to an injunction. But what about a company such as CloudFlare that provides content delivery network and domain name server services? Does an injunction under Rule 65 against anyone acting in “active concert or participation” with an online infringer apply to an internet infrastructure company such as CloudFlare? CloudFlare recently argued that its service is “passive” and untouchable, but a district court vehemently—and rightly—disagreed.

The controversy started with the shutdown of the Grooveshark music streaming service pursuant to a settlement agreement with the major record label plaintiffs this past April. Back in September of 2014, Grooveshark and its two founders were found directly and indirectly liable for copyright infringement. After the district court held that their infringement was “willful,” thus subjecting them to potential statutory damages exceeding $736 million for the 4,907 works-in-suit, they consented to paying $50 million in damages and shutting down the grooveshark.com site rather than risk it with a jury.

But the demise of Grooveshark was short-lived, and just days after publicly apologizing for failing “to secure licenses from right holders,” two copycat sites popped up at different top-level domains: grooveshark.io and grooveshark.pw. The record label plaintiffs filed a new complaint and obtained ex parte relief, including a temporary restraining order (TRO), against the new sites. Upon receipt of the TRO, Namecheap, the registrar for both sites, disabled the .io and .pw domain names. When another copycat site was established at grooveshark.vc, the domain name was quickly disabled by Dynadot, the registrar, after it received the TRO.

Undeterred, the defendants publicly taunted the plaintiffs and registered yet another copycat site at grooveshark.li. Rather than continuing this global game of domain name Whac-A-Mole, the plaintiffs served the TRO on CloudFlare, the service utilized by the defendants for each of the infringing domains. And this is where things got interesting. Rather than swiftly complying with the TRO, as the domain name registrars had done, CloudFlare lawyered up and contended that it was beyond the court’s reach.

In its briefing to the court, CloudFlare argued that it played merely a passive role for its customers—including the defendants and their copycat site—by resolving their domain names and making their websites faster and more secure. CloudFlare disavowed the ability to control any content on the copycat site, and it denied that it was in active concert or participation with the defendants:

Active concert requires action, and CloudFlare has taken none. Participation means assisting a defendant in evading an injunction. CloudFlare has not so assisted defendants and, in fact, has no ability to stop the alleged infringement. Even if CloudFlare—and every company in the world that provides similar services—took proactive steps to identify and block the Defendants, the website would remain up and running at its current domain name.

CloudFlare did not deny that the defendants utilized its services; it instead argued that the TRO would not remove the infringing site from the internet. Thus, CloudFlare’s position hinged on its own passivity and on the futility of enjoining it from providing services to the defendants.

A moment’s reflection reveals the superficiality of this position. The fact that CloudFlare had no control over the content of the copycat site was not dispositive. The question was whether CloudFlare aided the defendants, and there was no doubt that it did. It was not only the defendants’ authoritative domain name server, it also optimized and secured their copycat site. That the defendants could have used other services did not erase the fact that they were using CloudFlare’s services. And once CloudFlare was served with the TRO and made aware of the copycat site, its continued provision of services to the defendants constituted active concert or participation.

CloudFlare’s policy arguments were similarly unpersuasive. It suggested that the TRO “would transform a dispute between specific parties into a mandate to third parties to enforce” the plaintiffs’ rights “against the world in perpetuity.” Of course, that is not what happened here. The question was not who else in the world the TRO reached; the question was whether the TRO reached CloudFlare because it aided the defendants.

CloudFlare further argued that it could not be enjoined because “Congress explicitly considered and rejected granting such authority to the courts with respect to Internet infrastructure providers and other intermediaries for the purpose of making a website disappear from the Internet.” To enjoin it, CloudFlare proposed, would be to pretend that the Stop Online Piracy Act (SOPA) “had in fact become law.” This argument, however, completely ignored the fact that courts have long been empowered to enjoin those in active concert or participation with infringers.

In reply, the record label plaintiffs rebuffed CloudFlare’s claim that it was not aiding the defendants: “CloudFlare’s steadfast refusal to discontinue providing its services to Defendants – who even CloudFlare acknowledges are openly in contempt of this Court’s TRO – is nothing short of breathtaking.” They pointed to how CloudFlare continued to aid the defendants, even after being on notice of the TRO: “[T]he failure of an Internet service provider to stop connecting users to an enjoined website, once on notice of the injunction, readily can constitute aiding and abetting for purposes of Rule 65.”

In the real world, CloudFlare markets the benefits of its services to its customers. It touts its content delivery network as delivering “the fastest page load times and best performance” through its “34 data centers around the world.” It boasts having “web content optimization features that take performance to the next level.” It offers robust “security protection” and “visitor analytics” to its customers. And its authoritative domain name server proudly serves “43 billion DNS queries per day.” But when it came to the defendants’ copycat site, it claimed to be a “passive conduit” that in no way helped them accomplish their illicit goals. This disingenuousness is, to borrow the plaintiffs’ term, “breathtaking.”

District Judge Alison J. Nathan (S.D.N.Y.) made short work in rejecting CloudFlare’s shallow denials. She noted that there was no factual question that CloudFlare operated the defendants’ authoritative domain name server and optimized the performance and security of their copycat site. The question was whether these acts were passive such that CloudFlare was not in “active concert or participation” with the defendants. Judge Nathan held that the services CloudFlare provided to the defendants were anything but passive:

CloudFlare’s authoritative domain name server translates grooveshark.li as entered in a search browser into the correct IP address associated with that site, thus allowing the user to connect to the site. Connecting internet users to grooveshark.li in this manner benefits Defendants and quite fundamentally assists them in violating the injunction because, without it, users would not be able to connect to Defendants’ site unless they knew the specific IP address for the site. Beyond the authoritative domain name server, CloudFlare also provides additional services that it describes as improving the performance of the grooveshark.li site.

Furthermore, Judge Nathan dismissed CloudFlare’s argument that it was not helping the defendants since they could simply use other services: “[J]ust because another third party could aid and abet the Defendants in violating the injunction does not mean that CloudFlare is not doing so.” And to CloudFlare’s concern that the TRO was overly broad, Judge Nathan reasoned that the issue before her was CloudFlare’s own actions, not those of other, possibly more attenuated, third parties: “[T]he Court is addressing the facts before it, which involve a service that is directly engaged in facilitating access to Defendants’ sites with knowledge of the specific infringing names of those sites.”

This TRO wasn’t about the “world at large,” and it wasn’t about turning the companies that provide internet infrastructure into the “trademark and copyright police.” It was about CloudFlare knowingly helping the enjoined defendants to continue violating the plaintiffs’ intellectual property rights. Thankfully, Judge Nathan was able to see past CloudFlare’s empty and hyperbolic position. Protecting intellectual property in the digital age is difficult enough, but it’s even more challenging when services such as CloudFlare shirk their responsibilities. In the end, reason trumped rhetoric, and, best of all, the internet remains unbroken. In fact, it’s now even better than before.

Further reading: Leo Lichtman, Copyright Alliance, Bringing Accountability to the Internet: Web Services Aiding and Abetting Rogue Sites Must Comply With Injunctions

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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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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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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.

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.