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The Ninth Circuit made waves recently with its decision in Lenz v. Universal Music Corp., in which it decided that a plaintiff in a copyright infringement case must first take potential fair use considerations into account before filing a takedown notice under the DMCA. Lenz, represented by the EFF, claimed that Universal had not formed a good faith belief that an infringement had occurred as required by § 512(c)(3)(A)(v). Consequently, Lenz sought damages under § 512(f), alleging that Universal made material misrepresentations in issuing a takedown notice without first considering a fair use defense.

In reaching its holding, the Ninth Circuit decided that fair use should not be considered an affirmative defense–which is to say that it is not properly considered after an allegation, but must be considered when determining whether a prima facie claim exists. It starts from the text of the Copyright Act itself. According to 17 U.S.C. § 107

Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work … is not an infringement of copyright.

In support of its contention, the Ninth Circuit goes on to cite a case in the Eleventh Circuit as well as legislative material suggesting that Congress intended that fair use no longer be considered as an affirmative defense. Thus, in the Ninth Circuit’s view, such fair use at best qualifies as a sort of quasi-defense, and most likely constitutes an element of an infringement claim. After all, if fair use is literally non-infringing, then establishing infringement requires ruling out fair use, as well.

Or so says the Ninth Circuit. But it takes little more than a Google search — let alone the legal research one should expect of federal judges and their clerks — to realize that the court is woefully, and utterly, incorrect.

Is Fair Use an Affirmative Defense ?

The Supreme Court has been perfectly clear that fair use is in fact an affirmative defense. In Campbell v. Acuff-Rose, the Supreme Court had occasion to consider the nature of fair use under § 107 in the context of determining whether 2 Live Crew’s parody of Roy Orbison’s “Pretty Woman” was a permissible use. In considering the fourth fair use factor, “the effect of the use upon the potential market for or value of the copyrighted work,” the Court held that “[s]ince fair use is an affirmative defense, its proponent would have difficulty carrying the burden of demonstrating fair use without favorable evidence about relevant markets.”

Further, in reaching this opinion the Court relied on its earlier precedent in Harper & Row, where, in discussing the “purpose of the use” prong of § 107, the Court said that “[t]he drafters [of § 107] resisted pressures from special interest groups to create presumptive categories of fair use, but structured the provision as an affirmative defense requiring a case-by-case analysis.”  Not surprisingly, other courts are inclined to follow the the Supreme Court. Thus the Eleventh Circuit, the Southern District of New York, and the Central District of California (here and here), to name but a few, all explicitly refer to fair use as an affirmative defense. Oh, and the Ninth Circuit did too, at least until Lenz.

The Ninth Circuit Dissembles

As part of its appeal, Universal relied on the settled notion that fair use is an affirmative defense in building its case. Perhaps because this understanding of fair use is so well established, Universal failed to cite extensively why this was so. And so (apparently unable to perform its own legal research), the Ninth Circuit dismissed § 107 as an affirmative defense out of hand, claiming that

Universal’s sole textual argument is that fair use is not “authorized by the law” because it is an affirmative defense that excuses otherwise infringing conduct … Supreme Court precedent squarely supports the conclusion that fair use does not fall into the latter camp: “[A]nyone who . . . makes a fair use of the work is not an infringer of the copyright with respect to such use.” Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 433 (1984).”

It bears noting that the Court in Sony Corp. did not discuss whether or not fair use is an affirmative defense, whereas Acuff Rose (decided 10 years after Sony Corp.) and Harper & Row decisions do.

To shore up its argument, the Ninth Circuit then goes on to cite the Eleventh Circuit for the notion that the 1976 Act fundamentally changed the nature of fair use, moving it away from its affirmative defense roots. Quoting Bateman v. Mnemonics, Inc., the court claims that

Although the traditional approach is to view “fair use” as an affirmative defense, . . . it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.

But wait — didn’t I list the Eleventh Circuit as one of the (many) courts that have held fair use to be an affirmative defense? Why yes I did. It turns out that, as Devlin Hartline pointed out last week, the Ninth Circuit actually ripped the Eleventh Circuit text completely out of context. The full Bateman quote (from a footnote, it should be noted) is as follows:

Fair use traditionally has been treated as an affirmative defense to a charge of copyright infringement …. In viewing fair use as an excused infringement, the court must, in addressing this mixed question of law and fact, determine whether the use made of the original components of a copyrighted work is “fair” under 17 U.S.C. § 107 … Although the traditional approach is to view “fair use” as an affirmative defense, this writer, speaking only for himself, is of the opinion that it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.” (internal citations omitted, but emphasis added)

Better yet, in a subsequent opinion the Eleventh Circuit further clarified the position that the view of fair use as an affirmative defense is binding Supreme Court precedent, notwithstanding any judge’s personal preferences to the contrary.

But that’s not the worst of it. Not only did the court shamelessly misquote the Eleventh Circuit in stretching to find a justification for its prefered position, the court actually ignored its own precedent to the contrary. In Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., the Ninth Circuit held that

Since fair use is an affirmative defense, [the Defendant-Appellants] must bring forward favorable evidence about relevant markets. Given their failure to submit evidence on this point … we conclude that “it is impossible to deal with [fair use] except by recognizing that a silent record on an important factor bearing on fair use disentitle[s] the proponent of the defense[.]

Further, even if the Lenz court is correct that § 107 “unambiguously contemplates fair use as a use authorized by the law” — despite Supreme Court precedent — the authority the Ninth Circuit attempts to rely upon would still require defendants to raise a fair use defense after a prima facie claim was made, as “the burden of proving fair use is always on the putative infringer.”  

It Also Violates a Common Sense Reading of the DMCA

As with all other affirmative defenses, a plaintiff must first make out a prima facie case before the defense can be raised. So how do we make sense of the language in § 107 that determines fair use to not be infringement? In essence, it appears to be a case of inartful drafting.  Particularly in light of the stated aims of the DMCA — a law that was enacted after the Supreme Court established that fair use was an affirmative defense — the nature of fair use as an affirmative defense that can only be properly raised by an accused infringer is as close to black letter law as it gets.

The DMCA was enacted to strike a balance between the interests of rightsholders in protecting their property, and the interests of society in having an efficient mechanism for distributing content. Currently, rightsholders send out tens of millions of takedown notices every year to deal with the flood of piracy and other infringing uses. If rightsholders were required to consider fair use in advance of each of these, the system would be utterly unworkable — for instance, in Google’s search engine alone, over 54 million removal requests were made in just the month of August 2015 owing to potential copyright violations. While the evisceration of the DMCA is, of course, exactly what the plaintiffs (or more accurately, EFF, which represented the plaintiffs) in Lenz wanted, it’s not remotely what the hard-wrought compromise of the statute contemplates.

And the reason it would be unworkable is not just because of the volume of the complaints, but because fair use is such an amorphous concept that ultimately requires adjudication.

Not only are there four factors to consider in a fair use analysis, but there are no bright line rules to guide the application of the factors. The open ended nature of the defense essentially leaves it up to a defendant to explain just why his situation should not constitute infringement. Until a judge or a jury says otherwise, how is one to know whether a particular course of conduct qualifies for a fair use defense?

The Lenz court even acknowledges as much when it says

If, however, a copyright holder forms a subjective good faith belief the allegedly infringing material does not constitute fair use, we are in no position to dispute the copyright holder’s belief even if we would have reached the opposite conclusion. (emphasis added)

Thus, it is the slightest of fig leaves that is necessary to satisfy the Lenz court’s new requirement that fair use be considered before issuing a takedown notice.

What’s more, this statement from the court also demonstrates the near worthlessness of reading a prima facie fair use requirement into the takedown requirements. Short of a litigant explicitly disclaiming any efforts to consider fair use, the standard could be met with a bare assertion. It does, of course, remain an open question whether the computer algorithms the rightsholders employ in scanning for infringing content are actually capable of making fair use determinations — but perhaps throwing a monkey wrench — any monkey wrench — into the rightsholders’ automated notice-and-takedown systems was all the court was really after. I think we can at least be sure that that was EFF’s aim, anyway, as they apparently think that § 512 tends to be a tool of censorship in the hands of rightsholders.

The structure of the takedown and put-back provisions of the DMCA also cut against the Lenz court’s view. The put-back requirements of Section 512(g) suggest that affirmative defenses and other justifications for accused infringement would be brought up after a takedown notice was submitted. What would be the purpose of put-back response, if not to offer the accused infringers justifications and defenses to an allegation of infringement? Along with excuses such as having a license, or a work’s copyright being expired, an alleged infringer can bring up the fair use grounds under which he believed he was entitled to use the work in question.

In short, to require a rightsholder to analyze fair use in advance of a takedown request effectively requires her to read the mind of an infringer and figure out what excuse that party plans to raise as part of her defense. This surely can’t have been what Congress intended with the takedown provisions of the DMCA — enacted as they were years after the Supreme Court had created the widely recognized rule that fair use is an affirmative defense.

Well, widely recognized, that is, except in the Ninth Circuit. This month, anyway.

Update: I received some feedback on this piece which pointed out an assumption I was making with respect to the Ninth Circuit’s opinion, and which deserves a clarifying note. Essentially, the Lenz court splits the concept of affirmative defenses into two categories: (1) an affirmative defense that is merely a label owing to the procedural posture of a case and (2) an affirmative defense, as it is traditionally understood and that always puts the burden of production on a defendant.  By characterizing affirmative defenses in this way, the Lenz court gets to have its cake and eat it too:  when an actual proceeding is filed, a defendant will procedurally have the burden of production on the issue, but since fair use is at most a quasi-affirmative defense, the court felt it was fair to shift that same burden onto rightsholders when issuing a takedown letter.  So technically the court says that fair use is an affirmative defense (as a labeling matter), but it does not practically treat is as such for the purposes of takedown notices.

Recently, the en banc Federal Circuit decided in Suprema, Inc. v. ITC that the International Trade Commission could properly prevent the importation of articles that infringe under an indirect liability theory. The core of the dispute in Suprema was whether § 337 of the Tariff Act’s prohibition against “importing articles that . . . infringe a valid and enforceable United States patent” could be used to prevent the importation of articles that at the moment of importation were not (yet) directly infringing. In essence, is the ITC limited to acting only when there is a direct infringement, or can it also prohibit articles involved in an indirect infringement scheme — in this case under an inducement theory?

TOTM’s own Alden Abbott posted his view of the decision, and there are a couple of points we’d like to respond to, both embodied in this quote:

[The ITC’s Suprema decision] would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference … Furthermore, the en banc majority’s willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of [Limelight v.] Akamai.

In truth, we are of two minds (four minds?) regarding this view. We’re deeply sympathetic with arguments that the Supreme Court has become — and should become — increasingly skeptical of blind Chevron deference. Recently, we filed a brief on the 2015 Open Internet Order that, in large part, argued that the FCC does not deserve Chevron deference under King v. Burwell, UARG v. EPA and Michigan v. EPA (among other important cases) along a very similar line of reasoning. However, much as we’d like to generally scale back Chevron deference, in this case we happen to think that the Federal Circuit got it right.

Put simply, “infringe” as used in § 337 plainly includes indirect infringement. Section 271 of the Patent Act makes it clear that indirect infringers are guilty of “infringement.” The legislative history of the section, as well as Supreme Court case law, makes it very clear that § 271 was a codification of both direct and indirect liability.

In taxonomic terms, § 271 codifies “infringement” as a top-level category, with “direct infringement” and “indirect infringement” as two distinct subcategories of infringement. The law further subdivides “indirect infringement” into sub-subcategories, “inducement” and “contributory infringement.” But all of these are “infringement.”

For instance, § 271(b) says that “[w]hoever actively induces infringement of a patent shall be liable as an infringer” (emphasis added). Thus, in terms of § 271, to induce infringement is to commit infringement within the meaning of the patent laws. And in § 337, assuming it follows § 271 (which seems appropriate given Congress’ stated purpose to “make it a more effective remedy for the protection of United States intellectual property rights” (emphasis added)), it must follow that when one imports “articles… that infringe” she can be liable for either (or both) § 271(a) direct infringement or § 271(b) inducement.

Frankly, we think this should end the analysis: There is no Chevron question here because the Tariff Act isn’t ambiguous.

But although it seems clear on the face of § 337 that “infringe” must include indirect infringement, at the very least § 337 is ambiguous and cannot clearly mean only “direct infringement.” Moreover, the history of patent law as well as the structure of the ITC’s powers both cut in favor of the ITC enforcing the Tariff Act against indirect infringers. The ITC’s interpretation of any ambiguity in the term “articles… that infringe” is surely reasonable.

The Ambiguity and History of § 337 Allows for Inducement Liability

Assuming for argument’s sake that § 337’s lack of specificity leaves room for debate as to what “infringe” means, there is nothing that militates definitively against indirect liability being included in § 337. The majority handles any ambiguity of this sort well:

[T]he shorthand phrase “articles that infringe” does not unambiguously exclude inducement of post-importation infringement… By using the word “infringe,” § 337 refers to 35 U.S.C. § 271, the statutory provision defining patent infringement. The word “infringe” does not narrow § 337’s scope to any particular subsections of § 271. As reflected in § 271 and the case law from before and after 1952, “infringement” is a term that encompasses both direct and indirect infringement, including infringement by importation that induces direct infringement of a method claim… Section 337 refers not just to infringement, but to “articles that infringe.” That phrase does not narrow the provision to exclude inducement of post-importation infringement. Rather, the phrase introduces textual uncertainty.

Further, the court notes that it has consistently held that inducement is a valid theory of liability on which to base § 337 cases.

And lest you think that this interpretation would give some new, expansive powers to the ITC (perhaps meriting something like a Brown & Williamson exception to Chevron deference), the ITC is still bound by all the defenses and limitations on indirect liability under § 271. Saying it has authority to police indirect infringement doesn’t give it carte blanche, nor any more power than US district courts currently have in adjudicating indirect infringement. In this case, the court went nowhere near the limits of Chevron in giving deference to the ITC’s decision that “articles… that infringe” emcompasses the well-established (and statutorily defined) law of indirect infringement.

Inducement Liability Isn’t Precluded by Limelight

Nor does the Supreme Court’s Limelight v. Akamai decision present any problem. Limelight is often quoted for the proposition that there can be no inducement liability without direct infringement. And it does stand for that, as do many other cases; that point is not really in any doubt. But what Alden and others (including the dissenters in Suprema) have cited it for is the proposition that inducement liability cannot attach unless all of the elements of inducement have already been practiced at the time of importation. Limelight does not support that contention, however.

Inducement liability contemplates direct infringement, but the direct infringement need not have been practiced by the same entity liable for inducement, nor at the same time as inducement (see, e.g., Standard Oil. v. Nippon). Instead, the direct infringement may come at a later time — and there is no dispute in Suprema regarding whether there was direct infringement (there was, as Suprema notes: “the Commission found that record evidence demonstrated that Mentalix had already directly infringed claim 19 within the United States prior to the initiation of the investigation.”).

Limelight, on the other hand, is about what constitutes the direct infringement element in an inducement case. The sole issue in Limelight was whether this “direct infringement element” required that all of the steps of a method patent be carried out by a single entity or entities acting in concert. In Limelight’s network there was a division of labor, so to speak, between the company and its customers, such that each carried out some of the steps of the method patent at issue. In effect, plaintiffs argued that Limelight should be liable for inducement because it practised some of the steps of the patented method, with the requisite intent that others would carry out the rest of the steps necessary for direct infringement. But neither Limelight nor its customers separately carried out all of the steps necessary for direct infringement.

The Court held (actually, it simply reiterated established law) that the method patent could never be violated unless a single party (or parties acting in concert) carried out all of the steps of the method necessary for direct infringement. Thus it also held that Limelight could not be liable for inducement because, on the facts of that case, none of its customers could ever be liable for the necessary, underlying direct infringement. Again — what was really at issue in Limelight were the requirements to establish the direct infringement necessary to prove inducement.

On remand, the Federal Circuit reinforced the point that Limelight was really about direct infringement and, by extension, who must be involved in the direct infringement element of an inducement claim. According to the court:

We conclude that the facts Akamai presented at trial constitute substantial evidence from which a jury could find that Limelight directed or controlled its customers’ performance of each remaining method step. As such, substantial evidence supports the jury’s verdict that all steps of the claimed methods were performed by or attributable to Limelight. Therefore, Limelight is liable for direct infringement.

The holding of Limelight is simply inapposite to the facts of Suprema. The crux of Suprema is whether the appropriate mens rea existed to support a claim of inducement — not whether the requisite direct infringement occurred or not.

The Structure of § 337 Supports The ITC’s Ability to Block Inducement

Further, as the majority in Suprema notes, the very idea of inducement liability necessarily contemplates that there will be a temporal separation between the event that gives rise to indirect liability and the future direct infringement (required to prove inducement). As the Suprema court briefly noted “Section 337(a)(1)(B)’s ‘sale . . . after importation’ language confirms that the Commission is permitted to focus on post-importation activity to identify the completion of infringement.”

In particular, each of the enforcement powers in § 337(a) contains a clause that, in addition to a prohibition against, e.g., infringing articles at the time of importation, also prohibits “the sale within the United States after importation by the owner, importer, or consignee, of articles[.]” Thus, Congress explicitly contemplated that the ITC would have the power to act upon articles at various points in time, not limiting it to a power effective only at the moment of importation.

Although the particular power to reach into the domestic market has to do with preventing the importer or its agent from making sales, this doesn’t undermine the larger point here: the ITC’s power to prevent infringing articles extends over a range of time. Given that “articles that … infringe” is at the very least ambiguous, and, as per the Federal Circuit (and our own position), this ambiguity allows for indirect infringement, it isn’t a stretch to infer that that Congress intended the ITC to have authority under § 337 to ban the import of articles that induce infringement that occurs only after the time of importation..

To interpret § 337 otherwise would be to render it absurd and to create a giant loophole that would enable infringers to easily circumvent the ITC’s enforcement powers.

A Dissent from the Dissent

The dissent also takes a curious approach to § 271 by mixing inducement and contributory infringement, and generally making a confusing mess of the two. For instance, Judge Dyk says

At the time of importation, the scanners neither directly infringe nor induce infringement… Instead, these staple articles may or may not ultimately be used to infringe… depending upon whether and how they are combined with domestically developed software after importation into the United States (emphasis added).

Whether or not the goods were “staples articles” (and thus potentially capable of substantial noninfringing uses) has nothing to do with whether or not there was inducement. Section 271 makes a very clear delineation between inducement in § 271(b) and contributory infringement in § 271(c). While a staple article of commerce capable of substantial noninfringing uses will not serve as the basis for a contributory infringement claim, it is irrelevant whether or not goods are such “staples” for purposes of establishing inducement.

The boundaries of inducement liability, by contrast, are focused on the intent of the actors: If there is an intent to induce, whether or not there is a substantial noninfringing use, there can be a violation of § 271. Contributory infringement and inducement receive treatment in separate paragraphs of § 271 and are separate doctrines comprising separate elements. This separation is so evident on the face of the law as well as in its history that the Supreme Court read the doctrine into copyright in Grokster — where, despite a potentially large number of non-infringing uses, the intent to induce infringement was sufficient to find liability.

Parting Thoughts on Chevron

We have some final thoughts on the Chevron question, because this is rightly a sore point in administrative law. In this case we think that the analysis should have ended at step one. Although the Federal Circuit began with an assumption of ambiguity, it was being generous to the appellants. Did Congress speak with clear intent? We think so. Section 271 very clearly includes direct infringement as well as indirect infringement within its definition of what constitutes infringement of a patent. When § 337 references “articles … that infringe” it seems fairly obvious that Congress intended the ITC to be able to enforce the prohibitions in § 271 in the context of imported goods.

But even if we advance to step two of the Chevron analysis, the ITC’s construction of § 337 is plainly permissible — and far from expansive. By asserting its authority here the ITC is simply policing the importation of infringing goods (which it clearly has the power to do), and doing so in the case of goods that indirectly infringe (a concept that has been part of US law for a very long time). If “infringe” as used in the Tariff Act is ambiguous, the ITC’s interpretation of it to include both indirect as well as direct infringement seems self-evidently reasonable.

Under the dissent’s (and Alden’s) interpretation of § 337, all that would be required to evade the ITC would be to import only the basic components of an article such that at the moment of importation there was no infringement. Once reassembled within the United States, the ITC’s power to prevent the sale of infringing goods would be nullified. Section 337 would thus be read to simply write out the entire “indirect infringement” subdivision of § 271 — an inference that seems like a much bigger stretch than that “infringement” under § 337 means all infringement under § 271. Congress was more than capable of referring only to “direct infringement” in § 337 if that’s what it intended.

Much as we would like to see Chevron limited, not every agency case is the place to fight this battle. If we are to have agencies, and we are to have a Chevron doctrine, there will be instances of valid deference to agency interpretations — regardless of how broadly or narrowly Chevron is interpreted. The ITC wasn’t making a power grab in Suprema, nor was its reading of the statute unexpected, inconsistent with its past practice, or expansive.

In short, Suprema doesn’t break any new statutory interpretation ground, nor present a novel question of “deep economic or political significance” akin to the question at issue in King v. Burwell. Like it or not, there will be no roots of an anti-Chevron-deference revolution growing out of Suprema.

On August 10, in Suprema, Inc. v. ITC, the en banc Federal Circuit granted Chevron deference to a U.S. International Trade Commission (“ITC”) statutory interpretation in holding that goods that do not directly infringe a U.S. patent at the time they are imported nevertheless may be excluded from entry by the ITC if they are used, after importation, to directly infringe by the importer at the inducement of the goods’ seller.  Although this decision is good news for believers in strong U.S. patent enforcement against infringing imports, it is problematic as a matter of jurisprudence.  It may face stormy waters if it eventually is subject to U.S. Supreme Court review.  The gist of the case is as follows.

In May 2010, Cross Match Technologies, Inc. (“Cross Match”) filed a complaint with the ITC, alleging infringement of four patents it owned that involved certain fingerprint scanning devices.  The ITC found the scanners were manufactured abroad by a Korean company, Suprema, Inc. (“Suprema”).  An American company, Mentalix, Inc., bought the scanners and imported them into the United States.  Mentalix subsequently combined the scanners with Mentalix software, and used and sold the scanners in the U.S.  The ITC determined that Mentalix directly infringed a Cross Match patent claim by integrating its software with the Suprema scanners.  The ITC also found that Suprema was liable for inducing patent infringement by Mentalix, in that it “willfully blinded” itself to and “actively encouraged” Mentalix’s infringing U.S. activities.  (Furthermore, Suprema “aided and abetted” Mentalix’s infringement by assisting Mentalix in getting Mentalix software to work with the scanners.)  Consequently, the ITC imposed an exclusion order covering the importation of scanners used in the infringement, applying Section 337 of the Tariff Act of 1930 (“Section 337”), which declares unlawful “importing articles that . . . infringe a valid and enforceable United States patent.”  On appeal, a three-judge Federal Circuit panel disagreed and found no Section 337 violation, reasoning that there are no “articles that infringe” at the time of importation when direct infringement does not occur until after importation.  The Federal Circuit granted a rehearing en banc and a six-judge majority vacated the panel decision, with four judges dissenting.

The en banc majority opinion, authored by Judge Jimmie V. Reyna, applied Chevron deference to the ITC’s determination.  (The administrative law principle known as “Chevron deference,” enunciated in 1984 by the U.S. Supreme Court in Chevron U.S.A. Inc. v. NRDC, gives judicial deference to an agency’s construction of federal statutory language if (1) the statutory language is ambiguous and (2) the agency’s interpretation is based on a “permissible” construction of the language.  An agency’s interpretation need not be the “best” or “most likely” statutory construction, it need only be “not unreasonable.”)  The opinion found first that because Section 337 refers to “articles that infringe,” not just to infringement (the subject of the Patent Act), textual uncertainty is introduced.  In other words, applying Chevron Step One, “Congress has not directly answered whether goods qualify as ‘articles that infringe’ when the [ITC] has found that an importer used such goods, after importation, to directly infringe at the inducement of the goods’ seller.”  Applying Chevron Step Two, Judge Reyna deemed reasonable the ITC’s determination that induced infringement was covered by Section 337:  “Induced infringement is one kind of infringement, and when it is accomplished by supplying an article, the article supplied can be an ‘article that infringes’ if the other requirements of inducement are met.”  Furthermore, “[t]he legislative history consistently evidence[d] Congressional intent to vest the ITC with broad enforcement authority to remedy unfair trade acts.”  Accordingly, Judge Reyna held that deference to the ITC’s interpretation of Section 337 was warranted.

A four-judge dissent, authored by Judge Kathleen M. O’Malley, found no ambiguity in the term “articles that infringe,” and stressed that “there is no actual harm to a patentee until an infringing use, and that harm only occurs after importation for method claims such as the ones at issue in this appeal. This is especially true for staple goods like Suprema’s scanners, where a broad assertion of the Commission’s power could prevent noninfringing goods from entering the country on the basis of what a customer may do with that item once it enters U.S. territory. Such considerations are the purview of the district courts, and fall outside the limited statutory jurisdiction of the [ITC].”  Notably, Judge O’Malley also relied heavily on the Supreme Court’s 2014 decision in Limelight Networks v. Akamai Technologies, when the Court held that inducement liability may arise if and only if there is direct patent infringement.  As Judge O’Malley explained, “[b]y permitting indirect infringement liability at the point of importation when there has been no direct infringement, the [Federal Circuit en banc] majority crafts patent policy where it believes there is a loophole ripe for abuse.”  But “[a]s the Supreme Court recently reminded us” in Limelight, “ ‘[t]he courts should not create liability for inducement of non-infringing conduct where Congress has elected not to extend that concept.’ ”

The dissent has the better case.  The fact is, the scanners did not infringe when they were imported, only when they were bundled subsequently with another company’s software in connection with their being marketed in the United States.  Finding ambiguity in the term “articles that infringe” involves an exercise in statutory construction that appears strained to the point of unreasonableness.  It would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference (see, for example, the Court’s very recent summary rejection of such deference in Michigan v. EPA).  Furthermore, the en banc majority’s willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of Akamai.  Finally, Federal Circuit decisions have fared poorly before the Supreme Court in recent years, and Judge O’Malley’s thoughtful application of Akamais teachings makes the en banc majority’s opinion a particularly ripe target for Supreme Court reversal, should certiorari be granted. 

As Judge O’Malley pointed out, if U.S. patentees are being seriously harmed by induced infringement after the point of importation, a simple statutory tweak to Section 337 should deal with the problem.  Supporters of strong patent protection would be well advised to have such an amendment “in their back pocket” and ready to go should the Supreme Court elect to review the Suprema decision.

Patent reform legislation is under serious consideration by the Senate and House of Representatives, a mere four years after the America Invents Act of 2011 (AIA) brought about a major overhaul of United States patent law. A primary goal of current legislative efforts is the reining in of “patent trolls” (also called “patent assertion entities”), that is, firms that purchase others’ patents for the sole purpose of threatening third parties with costly lawsuits if they fail to pay high patent license fees. A related concern is that many patents acquired by trolls are “poor quality,” and that parties approached by trolls too often are induced to “pay up” without regard to the underlying merits of the matter.
In a Heritage Foundation paper released today (see, John Malcolm and I briefly review developments since the AIA’s enactment, comment on the patent troll issue, and provide our perspective on certain categories of patent law changes now being contemplated.
Addressing recent developments, we note that the Supreme Court of the United States has issued a number of major decisions over the past decade (five in its 2013–2014 term alone) that are aimed at tightening the qualifications for obtaining patents and enhancing incentives to bring legitimate challenges to questionable patents. Although there is no single judicial silver bullet, there is good reason to believe that, taken as a whole, these decisions will significantly enhance efforts to improve patent quality and to weed out bad patents and frivolous lawsuits.
With respect to patent trolls, we explain that there can be good patent assertion entities that seek licensing agreements and file claims to enforce legitimate patents and bad patent assertion entities that purchase broad and vague patents and make absurd demands to extort license payments or settlements. The proper way to address patent trolls, therefore, is by using the same means and methods that would likely work against ambulance chasers or other bad actors who exist in other areas of the law, such as medical malpractice, securities fraud, and product liability—individuals who gin up or grossly exaggerate alleged injuries and then make unreasonable demands to extort settlements up to and including filing frivolous lawsuits.
We emphasize that Congress should exercise caution in addressing patent litigation reforms. Despite its imperfections, the U.S. patent law system unquestionably has been associated with spectacular innovation in a wide variety of fields, ranging from smartphones to pharmaceuticals. Thus, in deciding what statutory fixes are appropriate to rein in patent litigation abuses, Congress should seek to minimize the risk that changes in the law will have the unintended consequence of weakening patent rights, thereby undermining American innovation.
We then turn to assess proposals dealing with heightened patent pleading requirements; greater patent transparency; case management and discovery limits; stays of suits against customers; the award of attorneys’ fees and costs to the prevailing party; joinder of third parties; reining in abusive demand letters; post-grant administrative patent review reforms; and minor miscellaneous reforms. We conclude that many of these reforms appear to have significant merit and could prove useful in reducing the costs of the patent litigation system. Nevertheless, there is a serious concern that certain reform proposals would make it more difficult for holders of legitimate patents to vindicate their rights. In addition, as is the case with all new legislation, there is the risk that novel legislative language might have unintended consequences, including the effects of future court decisions construing the newly-adopted language.
Accordingly, before deciding to take action, we believe that Congress should weigh the particular merits of individual reform proposals carefully and meticulously, taking into account their possible harmful effects as well as their intended benefits. Precipitous, unreflective action on legislation is unwarranted, and caution should be the byword, especially since the effects of 2011 legislative changes and recent Supreme Court decisions have not yet been fully absorbed. Taking time is key to avoiding the serious and costly errors that too often are the fruit of omnibus legislative efforts.
In sum, careful, sober, detailed assessment is warranted to ensure that further large-scale changes in U.S. patent law advance the goal of improving the U.S. patent system as a whole, with due attention to the rights of inventors and the socially beneficial innovations that they generate.

Today, in Kimble v. Marvel Entertainment, a case involving the technology underlying the Spider-Man Web-Blaster, the Supreme Court invoked stare decisis to uphold an old precedent based on bad economics. In so doing, the Court spun a tangled web of formalism that trapped economic common sense within it, forgetting that, as Spider-Man was warned in 1962, “with great power there must also come – great responsibility.”

In 1990, Stephen Kimble obtained a patent on a toy that allows children (and young-at-heart adults) to role-play as “a spider person” by shooting webs—really, pressurized foam string—“from the palm of [the] hand.” Marvel Entertainment made and sold a “Web-Blaster” toy based on Kimble’s invention, without remunerating him. Kimble sued Marvel for patent infringement in 1997, and the parties settled, with Marvel agreeing to buy Kimble’s patent for a lump sum (roughly a half-million dollars) plus a 3% royalty on future sales, with no end date set for the payment of royalties.

Marvel subsequently sought a declaratory judgment in federal district court confirming that it could stop paying Kimble royalties after the patent’s expiration date. The district court granted relief, the Ninth Circuit Court of Appeals affirmed, and the Supreme Court affirmed the Ninth Circuit. In an opinion by Justice Kagan, joined by Justices Scalia, Kennedy, Ginsburg, Breyer, and Sotomayor, the Court held that a patentee cannot continue to receive royalties for sales made after his patent expires. Invoking stare decisis, the Court reaffirmed Brulotte v. Thys (1964), which held that a patent licensing agreement that provided for the payment of royalties accruing after the patent’s expiration was illegal per se, because it extended the patent monopoly beyond its statutory time period. The Kimble Court stressed that stare decisis is “the preferred course,” and noted that though the Brulotte rule may prevent some parties from entering into deals they desire, parties can often find ways to achieve similar outcomes.

Justice Alito, joined by Chief Justice Roberts and Justice Thomas, dissented, arguing that Brulotte is a “baseless and damaging precedent” that interferes with the ability of parties to negotiate licensing agreements that reflect the true value of a patent. More specifically:

“There are . . . good reasons why parties sometimes prefer post-expiration royalties over upfront fees, and why such arrangements have pro-competitive effects. Patent holders and licensees are often unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation. In those circumstances, deferred royalty agreements are economically efficient. They encourage innovators, like universities, hospitals, and other institutions, to invest in research that might not yield marketable products until decades down the line. . . . And they allow producers to hedge their bets and develop more products by spreading licensing fees over longer periods. . . . By prohibiting these arrangements, Brulotte erects an obstacle to efficient patent use. In patent law and other areas, we have abandoned per se rules with similarly disruptive effects. . . . [T]he need to avoid Brulotte is an economic inefficiency in itself. . . . And the suggested alternatives do not provide the same benefits as post-expiration royalty agreements. . . . The sort of agreements that Brulotte prohibits would allow licensees to spread their costs, while also allowing patent holders to capitalize on slow-developing inventions.”

Furthermore, the Supreme Court was willing to overturn a nearly century-old antitrust precedent that absolutely barred resale price maintenance in the Leegin case, despite the fact that the precedent was extremely well know (much better known than the Brulotte rule) and had prompted a vast array of contractual workarounds. Given the seemingly greater weight of the Leegin precedent, why was stare decisis set aside in Leegin, but not in Kimble? The Kimble majority’s argument that stare decisis should weigh more heavily in patent than in antitrust because, unlike the antitrust laws, “the patent laws do not turn over exceptional law-shaping authority to the courts”, is unconvincing. As the dissent explains:

“[T]his distinction is unwarranted. We have been more willing to reexamine antitrust precedents because they have attributes of common-law decisions. I see no reason why the same approach should not apply where the precedent at issue, while purporting to apply a statute, is actually based on policy concerns. Indeed, we should be even more willing to reconsider such a precedent because the role implicitly assigned to the federal courts under the Sherman [Antitrust] Act has no parallel in Patent Act cases.”

Stare decisis undoubtedly promotes predictability and the rule of law and, relatedly, institutional stability and efficiency – considerations that go to the costs of administering the legal system and of formulating private conduct in light of prior judicial precedents. The cost-based efficiency considerations underlying applying stare decisis to any particular rule, must, however, be weighed against the net economic benefits associated with abandonment of that rule. The dissent in Kimble did this, but the majority opinion regrettably did not.

In sum, let us hope that in the future the Court keeps in mind its prior advice, cited in Justice Alito’s dissent, that “stare decisis is not an ‘inexorable command’,” and that “[r]evisiting precedent is particularly appropriate where . . . a departure would not upset expectations, the precedent consists of a judge-made rule . . . , and experience has pointed up the precedent’s shortcomings.”

If you haven’t been following the ongoing developments emerging from the demise of Grooveshark, the story has only gotten more interesting. As the RIAA and major record labels have struggled to shut down infringing content on Grooveshark’s site (and now its copycats), groups like EFF would have us believe that the entire Internet was at stake — even in the face of a fairly marginal victory by the recording industry. In the most recent episode, the issuance of a TRO against CloudFlare — a CDN service provider for the copycat versions of Grooveshark — has sparked much controversy. Ironically for CloudFlare, however, its efforts to evade compliance with the TRO may well have opened it up to far more significant infringement liability.

In response to Grooveshark’s shutdown in April, copycat sites began springing up. Initially, the record labels played a game of whac-a-mole as the copycats hopped from server to server within the United States. Ultimately the copycats settled on, using a host and registrar outside of the country, as well as anonymized services that made direct action against the actual parties next to impossible. Instead of continuing the futile chase, the plaintiffs decided to address the problem more strategically.

High volume web sites like Grooveshark frequently depend upon third party providers to optimize their media streaming and related needs. In this case, the copycats relied upon the services of CloudFlare to provide DNS hosting and a content delivery network (“CDN”). Failing to thwart Grooveshark through direct action alone, the plaintiffs sought and were granted a TRO against certain third-parties, eventually served on CloudFlare, hoping to staunch the flow of infringing content by temporarily enjoining the ancillary activities that enabled the pirates to continue operations.

CloudFlare refused to comply with the TRO, claiming the TRO didn’t apply to it (for reasons discussed below). The court disagreed, however, and found that CloudFlare was, in fact, bound by the TRO.

Unsurprisingly the copyright scolds came out strongly against the TRO and its application to CloudFlare, claiming that

Copyright holders should not be allowed to blanket infrastructure companies with blocking requests, co-opting them into becoming private trademark and copyright police.

Devlin Hartline wrote an excellent analysis of the court’s decision that the TRO was properly applied to CloudFlare, concluding that it was neither improper nor problematic. In sum, as Hartline discusses, the court found that CloudFlare was indeed engaged in “active concert and participation” and was, therefore, properly subject to a TRO under FRCP 65 that would prevent it from further enabling the copycats to run their service.

Hartline’s analysis is spot-on, but we think it important to clarify and amplify his analysis in a way that, we believe, actually provides insight into a much larger problem for CloudFlare.

As Hartline states,

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.

Importantly, the issuance of the TRO turned in part on whether the plaintiffs were likely to succeed on the merits — which is to say that the copycats could in fact be liable for copyright infringement. Further, the initial TRO became a preliminary injunction before the final TRO hearing because the copycats failed to show up to defend themselves. Thus, CloudFlare was potentially exposing itself to a claim of contributory infringement, possibly from the time it was notified of the infringing activity by the RIAA. This is so because a claim of contributory liability would require that CloudFlare “knowingly” contributed to the infringement. Here there was actual knowledge upon issuance of the TRO (if not before).

However, had CloudFlare gone along with the proceedings and complied with the court’s order in good faith, § 512 of the Digital Millennium Copyright Act (DMCA) would have provided a safe harbor. Nevertheless, following from CloudFlare’s actual behavior, the company does now have a lot more to fear than a mere TRO.

Although we don’t have the full technical details of how CloudFlare’s service operates, we can make some fair assumptions. Most importantly, in order to optimize the content it serves, a CDN would necessarily have to store that content at some point as part of an optimizing cache scheme. Under the terms of the DMCA, an online service provider (OSP) that engages in caching of online content will be immune from liability, subject to certain conditions. The most important condition relevant here is that, in order to qualify for the safe harbor, the OSP must “expeditiously [] remove, or disable access to, the material that is claimed to be infringing upon notification of claimed infringement[.]”

Here, not only had CloudFlare been informed by the plaintiffs that it was storing infringing content, but a district court had gone so far as to grant a TRO against CloudFlare’s serving of said content. It certainly seems plausible to view CloudFlare as acting outside the scope of the DMCA safe harbor once it refused to disable access to the infringing content after the plaintiffs contacted it, but certainly once the TRO was deemed to apply to it.

To underscore this point, CloudFlare’s arguments during the TRO proceedings essentially admitted to knowledge that infringing material was flowing through its CDN. CloudFlare focused its defense on the fact that it was not an active participant in the infringing activity, but was merely a passive network through which the copycats’ content was flowing. Moreover, CloudFlare argued that

Even if [it]—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.

But while this argument may make some logical sense from the perspective of a party resisting an injunction, it amounts to a very big admission in terms of a possible infringement case — particularly given CloudFlare’s obstinance in refusing to help the plaintiffs shut down the infringing sites.

As noted above, CloudFlare had an affirmative duty to to at least suspend access to infringing material once it was aware of the infringement (and, of course, even more so once it received the TRO). Instead, CloudFlare relied upon its “impossibility” argument against complying with the TRO based on the claim that enjoining CloudFlare would be futile in thwarting the infringement of others. CloudFlare does appear to have since complied with the TRO (which is now a preliminary injunction), but the compliance does not change a very crucial fact: knowledge of the infringement on CloudFlare’s part existed before the preliminary injunction took effect, while CloudFlare resisted the initial TRO as well as RIAA’s efforts to secure compliance.

Phrased another way, CloudFlare became an infringer by virtue of having cached copyrighted content and been given notice of that content. However, in its view, merely removing CloudFlare’s storage of that copyrighted content would have done nothing to prevent other networks from also storing the copyrighted content, and therefore it should not be enjoined from its infringing behavior. This essentially amounts to an admission of knowledge of infringing content being stored in its network.

It would be hard to believe that CloudFlare’s counsel failed to advise it to consider the contributory infringement issues that could arise from its conduct prior to and during the TRO proceedings. Thus CloudFlare’s position is somewhat perplexing, particularly once the case became a TRO proceeding. CloudFlare could perhaps have made technical arguments against the TRO in an attempt to demonstrate to its customers that it didn’t automatically shut down services at the behest of the RIAA. It could have done this in good faith, and without the full-throated “impossibility” argument that could very plausibly draw them into infringement litigation. But whatever CloudFlare thought it was gaining in taking a “moral” stance on behalf of OSPs everywhere with its “impossibility” argument, it may well have ended up costing itself much more.

In my article published today in The Daily Signal, I delve into the difficulties of curbing Internet-related copyright infringement.  The key points are summarized below.

U.S. industries that rely on copyright protection (such as motion pictures, music, television, visual arts, and software) are threatened by the unauthorized Internet downloading of copyrighted writings, designs, artwork, music and films. U.S. policymakers must decide how best to protect the creators of copyrighted works without harming growth and innovation in Internet services or vital protections for free speech.

The Internet allows consumers to alter and immediately transmit perfect digital copies of copyrighted works around the world and has generated services designed to provide these tools. Those tools include, for example, peer-to-peer file-sharing services and mobile apps designed to foster infringement. Many websites that provide pirated content—including, for example, online video-streaming sites—are located outside the United States. Such piracy costs the U.S. economy billions of dollars in losses per year—including reduced income for creators and other participants in copyright-intensive industries.

Curtailing online infringement will require a combination of litigation, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders and business innovations that lessen incentives to infringe.

Yesterday my essay on this topic was published as part of a Heritage Foundation Special Report on Saving Internet Freedom.  The essay reviews threats to copyrighted works posed by the Internet and describes public and private essays to deal with Internet-related copyright infringement.  The essay concludes as follows:

“A variety of approaches—many of which are private, voluntary initiatives requiring no new laws or regulations—have been deployed to combat online copyright infringement, and new ones are being developed. While these efforts have not eliminated infringement, which remains a substantial problem, they are having some success.

There is no “silver bullet.” Curtailing online infringement will require a combination of litigation tools, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders, and business innovations that lessen incentives to infringe.”

Earlier this week Senators Orrin Hatch and Ron Wyden and Representative Paul Ryan introduced bipartisan, bicameral legislation, the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (otherwise known as Trade Promotion Authority or “fast track” negotiating authority). The bill would enable the Administration to negotiate free trade agreements subject to appropriate Congressional review.

Nothing bridges partisan divides like free trade.

Top presidential economic advisors from both parties support TPA. And the legislation was greeted with enthusiastic support from the business community. Indeed, a letter supporting the bill was signed by 269 of the country’s largest and most significant companies, including Apple, General Electric, Intel, and Microsoft.

Among other things, the legislation includes language calling on trading partners to respect and protect intellectual property. That language in particular was (not surprisingly) widely cheered in a letter to Congress signed by a coalition of sixteen technology, content, manufacturing and pharmaceutical trade associations, representing industries accounting for (according to the letter) “approximately 35 percent of U.S. GDP, more than one quarter of U.S. jobs, and 60 percent of U.S. exports.”

Strong IP protections also enjoy bipartisan support in much of the broader policy community. Indeed, ICLE recently joined sixty-seven think tanks, scholars, advocacy groups and stakeholders on a letter to Congress expressing support for strong IP protections, including in free trade agreements.

Despite this overwhelming support for the bill, the Internet Association (a trade association representing 34 Internet companies including giants like Google and Amazon, but mostly smaller companies like coinbase and okcupid) expressed concern with the intellectual property language in TPA legislation, asserting that “[i]t fails to adopt a balanced approach, including the recognition that limitations and exceptions in copyright law are necessary to promote the success of Internet platforms both at home and abroad.”

But the proposed TPA bill does recognize “limitations and exceptions in copyright law,” as the Internet Association is presumably well aware. Among other things, the bill supports “ensuring accelerated and full implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights,” which specifically mentions exceptions and limitations on copyright, and it advocates “ensuring that the provisions of any trade agreement governing intellectual property rights that is entered into by the United States reflect a standard of protection similar to that found in United States law,” which also recognizes copyright exceptions and limitations.

What the bill doesn’t do — and wisely so — is advocate for the inclusion of mandatory fair use language in U.S. free trade agreements.

Fair use is an exception under U.S. copyright law to the normal rule that one must obtain permission from the copyright owner before exercising any of the exclusive rights in Section 106 of the Copyright Act.

Including such language in TPA would require U.S. negotiators to demand that trading partners enact U.S.-style fair use language. But as ICLE discussed in a recent White Paper, if broad, U.S.-style fair use exceptions are infused into trade agreements they could actually increase piracy and discourage artistic creation and innovation — particularly in nations without a strong legal tradition implementing such provisions.

All trade agreements entered into by the U.S. since 1994 include a mechanism for trading partners to enact copyright exceptions and limitations, including fair use, should they so choose. These copyright exceptions and limitations must conform to a global standard — the so-called “three-step test,” — established under the auspices of the 1994 Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, and with roots going back to the 1967 amendments to the 1886 Berne Convention.

According to that standard,

Members shall confine limitations or exceptions to exclusive rights to

  1. certain special cases, which
  2. do not conflict with a normal exploitation of the work and
  3. do not unreasonably prejudice the legitimate interests of the right holder.

This three-step test provides a workable standard for balancing copyright protections with other public interests. Most important, it sets flexible (but by no means unlimited) boundaries, so, rather than squeezing every jurisdiction into the same box, it accommodates a wide range of exceptions and limitations to copyright protection, ranging from the U.S.’ fair use approach to the fair dealing exception in other common law countries to the various statutory exceptions adopted in civil law jurisdictions.

Fair use is an inherently common law concept, developed by case-by-case analysis and a system of binding precedent. In the U.S. it has been codified by statute, but only after two centuries of common law development. Even as codified, fair use takes the form of guidance to judicial decision-makers assessing whether any particular use of a copyrighted work merits the exception; it is not a prescriptive statement, and judicial interpretation continues to define and evolve the doctrine.

Most countries in the world, on the other hand, have civil law systems that spell out specific exceptions to copyright protection, that don’t rely on judicial precedent, and that are thus incompatible with the common law, fair use approach. The importance of this legal flexibility can’t be understated: Only four countries out of the 166 signatories to the Berne Convention have adopted fair use since 1967.

Additionally, from an economic perspective the rationale for fair use would seem to be receding, not expanding, further eroding the justification for its mandatory adoption via free trade agreements.

As digital distribution, the Internet and a host of other technological advances have reduced transaction costs, it’s easier and cheaper for users to license copyrighted content. As a result, the need to rely on fair use to facilitate some socially valuable uses of content that otherwise wouldn’t occur because of prohibitive costs of contracting is diminished. Indeed, it’s even possible that the existence of fair use exceptions may inhibit the development of these sorts of mechanisms for simple, low-cost agreements between owners and users of content – with consequences beyond the material that is subject to the exceptions. While, indeed, some socially valuable uses, like parody, may merit exceptions because of rights holders’ unwillingness, rather than inability, to license, U.S.-style fair use is in no way necessary to facilitate such exceptions. In short, the boundaries of copyright exceptions should be contracting, not expanding.

It’s also worth noting that simple marketplace observations seem to undermine assertions by Internet companies that they can’t thrive without fair use. Google Search, for example, has grown big enough to attract the (misguided) attention of EU antitrust regulators, despite no European country having enacted a U.S-style fair use law. Indeed, European regulators claim that the company has a 90% share of the market — without fair use.

Meanwhile, companies like Netflix contend that their ability to cache temporary copies of video content in order to improve streaming quality would be imperiled without fair use. But it’s impossible to see how Netflix is able to negotiate extensive, complex contracts with copyright holders to actually show their content, but yet is somehow unable to negotiate an additional clause or two in those contracts to ensure the quality of those performances without fair use.

Properly bounded exceptions and limitations are an important aspect of any copyright regime. But given the mix of legal regimes among current prospective trading partners, as well as other countries with whom the U.S. might at some stage develop new FTAs, it’s highly likely that the introduction of U.S.-style fair use rules would be misinterpreted and misapplied in certain jurisdictions and could result in excessively lax copyright protection, undermining incentives to create and innovate. Of course for the self-described consumer advocates pushing for fair use, this is surely the goal. Further, mandating the inclusion of fair use in trade agreements through TPA legislation would, in essence, force the U.S. to ignore the legal regimes of its trading partners and weaken the protection of copyright in trade agreements, again undermining the incentive to create and innovate.

There is no principled reason, in short, for TPA to mandate adoption of U.S-style fair use in free trade agreements. Congress should pass TPA legislation as introduced, and resist any rent-seeking attempts to include fair use language.

As I explained in a recent Heritage Foundation Legal Memorandum, the Institute of Electrical and Electronics Engineers’ (IEEE) New Patent Policy (NPP) threatens to devalue patents that cover standards; discourage involvement by innovative companies in IEEE standard setting; and undermine support for strong patents, which are critical to economic growth and innovation.  The Legal Memorandum focused on how the NPP undermines patentees’ rights and reduces returns to patents that “read on” standards (“standard essential patents” or “SEPs”).  It did not, however, address the merits of the Justice Department Antitrust Division’s (DOJ) February 2 Business Review Letter (BRL), which found no antitrust problems with the NPP.

Unfortunately, the BRL does little more than opine on patent policy questions, such as the risk of patent “hold-up” that the NPP allegedly is designed to counteract.  The BRL is virtually bereft of antitrust analysis.  It states in conclusory fashion that the NPP is on the whole procompetitive, without coming to grips with the serious risks of monopsony and collusion, and reduced investment in standards-related innovation, inherent in the behavior that it analyzes.  (FTC Commissioner Wright and prominent economic consultant Greg Sidak expressed similar concerns about the BRL in a March 12 program on standard setting and patents hosted by the Heritage Foundation.)

Let’s examine the BRL in a bit more detail, drawing from a recent scholarly commentary by Stuart Chemtob.  The BRL eschews analyzing the risk that by sharply constraining expected returns to SEPs, the NPP’s requirements may disincentivize technology contributions to standards, harming innovation.  The BRL focuses on how the NPP may reduce patentee “hold-up” by effectively banning injunctions and highlighting three factors that limit royalties – basing royalties on the value of the smallest saleable unit, the value contributed to that unit in light of all the SEPs practiced the unit, and existing licenses covering the unit that were not obtained under threat of injunction.  The BRL essentially ignores, however, the very real problem of licensee “hold-out” by technology implementers who may gain artificial bargaining leverage over patentees.  Thus there is no weighing of the NPP’s anticompetitive risks against its purported procompetitive benefits.  This is particularly unfortunate, given the absence of hard evidence of hold-up.  (Very recently, the Federal Circuit in Ericsson v. D-Link denied jury instructions citing the possibility of hold-up, given D-Link’s failure to provide any evidence of hold-up.)   Also, by forbidding injunctive actions prior to first level appellate review, the NPP effectively precludes SEP holders from seeking exclusion orders against imports that infringe their patents, under Section 337 of the Tariff Act.  This eliminates a core statutory protection that helps shield American patentees from foreign anticompetitive harm, further debasing SEPs.  Furthermore, the BRL fails to assess the possible competitive harm firms may face if they fail to accede to the IEEE’s NPP.

Finally, and most disturbingly, the BRL totally ignores the overall thrust of the NPP – which is to encourage potential licensees to insist on anticompetitive terms that reduce returns to SEP holders below the competitive level.  Such terms, if jointly agreed to by potential licensees, could well be deemed a monopsony buyers’ cartel (with the potential licensees buying license rights), subject to summary antitrust condemnation in line with such precedents as Mandeville Island Farms and Todd v. Exxon.

In sum, the BRL is an embarrassingly one-sided document that would merit a failing grade as an antitrust exam essay.  DOJ would be wise to withdraw the letter or, at the very least, rewrite it from scratch, explaining that the NPP raises serious antitrust questions that merit close examination.  If it fails to do so, one can only conclude that DOJ has decided that it is suitable to use business review letters as vehicles for unsupported statements of patent policy preferences, rather than as serious, meticulously crafted memoranda of guidance on difficult antitrust questions.