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Interested observers on all sides of the contentious debate over Aereo have focused a great deal on the implications for cloud computing if the Supreme Court rules against Aereo. The Court hears oral argument next week, and the cloud computing issue is sure to make an appearance.

Several parties that filed amicus briefs in the case weighed in on the issue. The Center for Democracy & Technology, for example, filed abrief arguing that a ruling against Aereo would hinder the development of cloud computing. Thirty-six Intellectual Property and Copyright Law Professors also filed a brief arguing this point. On the other hand, the United States—represented by the Solicitor General—devoted a section of its amicus brief in support of copyright owners’ argument that the Court could rule against Aereo without undermining cloud computing.

Our organizations, the International Center for Law and Economics and the Competitive Enterprise Institute, filed an amicus brief in the case in support of the Petitioners (as did many other policy groups, academics, and trade associations). In our brief we applied the consumer welfare framework to the question whether allowing Aereo’s business practice would increase the societal benefits that copyright law seeks to advance. We argued that holding Aereo liable for copyright infringement was well within the letter and spirit of the Copyright Act of 1976. In particular, we argued that Aereo’s model is less a disruptive innovation than a technical work-around taking advantage of the Second Circuit’s overbroad reading of the law in the Cablevision case.

Although our brief didn’t directly address cloud computing writ large, we did articulate a crucial distinction between Aereo and other cloud computing providers. Under our reasoning, the Court could rule against Aereo—as it should—without destroying cloud computing—as it should not.

Background

By way of background, at the center of the legal debate is what it means to “perform [a] copyrighted work publicly.” Aereo argues that because only one individual subscriber is “capable of receiving” each transmission its service delivers, its performances are private, not public. The Copyright Act gives copyright owners the exclusive right to publicly perform their works, but not the right to perform them privately. Therefore, Aereo contends, its service doesn’t infringe upon copyright owners’ exclusive rights.

We disagree. As our brief explains, Aereo’s argument ignores Congress’ decision in the Copyright Act of 1976 to expressly define the transmission of a television broadcast “by means of any device or process” to the public as a public performance, “whether the members of the public capable of receiving the performance … receive it in the same place or in separate places and at the same time or at different times.” Aereo has built an elaborate system for distributing live high-def broadcast television content to subscribers for a monthly fee—without obtaining permission from, or paying royalties to, the copyright owners in the audiovisual works aired by broadcasters.

Although the Copyright Act’s text is less than artful, Congress plainly wrote it so as to encompass businesses that sell consumers access to live television broadcasts, whether using traditional means—such as coaxial cable lines—or some high-tech system that lawmakers couldn’t foresee in 1976.

What does this case mean for cloud computing? To answer this question, it’s worth dividing the discussion into two parts: one addressing cloud providers that don’t sell their users licenses to copyrighted works, and the other addressing cloud providers that do. Dropbox and Mozy fit in the first category; Amazon and iTunes fit in the second.

A Ruling Against Aereo Won’t Destroy Cloud Computing Services like Dropbox

According to the 36 Intellectual Property and Copyright Law Professors, a loss for Aereo would be bad news for cloud storage providers such as Dropbox:

If any service making multiple transmissions of the same underlying copyrighted audiovisual work is publicly performing that work, then the distinction between video-on-demand services and online storage services would vanish, and all such services would henceforth face infringement liability. Thus, if two Dropbox users independently streamed “We, the Juries,” then under Petitioners’ theory, those two transmissions would be aggregated together, making them collectively “to the public.” Under Petitioners’ theory of this case—direct infringement by public performance—that would be game, set, and match against Dropbox.

This sounds like bad news for the cloud. Fortunately, however, Dropbox has little to fear from an Aereo defeat, even if the professors are right to worry about an overbroad public performance right (more on this below). The Digital Millenium Copyright Act (DMCA) grants online service providers—including cloud hosting services such as Dropbox—a safe harbor from copyright infringement liability for unwittingly storing infringing files uploaded by their users. In exchange for this immunity, service providers must comply with the DMCA’snotice and takedown system and adopt a policy to terminate repeat-infringing users, among other duties.

Although 17 U.S.C. § 512(c) refers only to infringement “by reason of … storage” directed by a user, courts have consistently interpreted this language to “encompass[] the access-facilitating processes that automatically occur when a user uploads” a file to a cloud hosting service. Whether YouTube streams an infringing video once or 1,000,000 times, therefore, it retains its DMCA immunity so long as it complies with the safe harbor’s requirements. So even if Aereo loses, and every DropBox user who streams “We, the Juries” is receiving a public performance, DropBox will still be safe from copyright infringement liability in the same way as YouTube, Vimeo, DailyMotion, and countless other services are safe today.

An Aereo Defeat Won’t Kill Cloud Computing Services like Amazon and Google

As for cloud computing providers that provide copyrighted content, the legal analysis is admittedly trickier. These providers, such as Google and Amazon, contract with copyright holders to sell their users licenses to copyrighted works. Some providers offer a subscription to streaming content, for which the provider has typically secured public performance licenses from the copyright owners. Cloud providers also sell digital copies of copyrighted works—that is, non-transferable lifetime licenses—for which the provider has generally obtained reproduction and distribution licenses, but not public performance rights.

But, as copyright law guru Devlin Hartline argues, determining if a performance is public or private turns on whether the cloud provider’s “volitional conduct [is] sufficient such that it directly causes the transmission.” When a user streams her own licensed content from a cloud service, it remains a private performance because the cloud service took no willful steps to facilitate the playback of copyrighted material. (The same is true for Dropbox-like services, as well.) Aereo, conversely, “crosse[s] the line from being a passive conduit to being an active participant because it supplies the very content that is available using its service.”

Neither Google’s nor Amazon’s business models much resemble Aereo’s, which entails transmitting content for which the company has secured no copyright licenses—either for itself or for its users. And to the extent that these services do supply the content being transmitted (as Spotify or Google Play All Access do, for example), they secure the appropriate public performance right to do so. Indeed, critics who have focused on cloud computing fail to appreciate how the Copyright Act distinguishes between infringing technologies such as Aereo and lawful uses of the cloud to store, share, and transmit copyrighted works.

For instance, as CDT notes:

[S]everal companies (including Google and Amazon) have launched personal music locker services, allowing individuals to upload their personal music collections “to the cloud” and enabling them to transmit that music back to their own computers, phones, and tablets when, where, and how they find most convenient.

And other critics of broadcasters’ legal position have made similar arguments, claiming that the Court cannot reach a holding that simultaneously bars Aereo while allowing cloud storage:

[I]f Aereo is publicly performing when you store a unique copy of the nightly news online and watch it later, then why aren’t cloud services publicly performing if they host your (lawful) unique mp3 of the latest hit single and stream it to you later?… The problem with this rationale is that it applies with equal force to cloud storage like Dropbox, SkyDrive, iCloud, and Google Drive. If multiple people store their own, unique, lawfully acquired copy of the latest hit single in the cloud, and then play it to themselves over the Internet, that too sounds like the broadcasters’ version of a public performance. The anti-Aereo rationale doesn’t distinguish between Aereo and the cloud.

The Ability to Contract is Key

These arguments miss the important concept of privity. A copyright holder who does not wish to license the exclusive rights in her content cannot be forced to do so (unless the content is subject to a compulsory license). If a copyright holder prefers its users not upload their licensed videos to the cloud and later stream them for personal use, the owner can include such a prohibition in its licenses. This may affect users’ willingness to pay for such encumbered content—but this is private ordering in action, with copyright holders and licensees bargaining over control over copyrighted works, a core purpose of the Copyright Act.

When a copyright holder wishes to license content to a cloud provider or user, the parties can bargain over whether users may stream their content from the cloud. These deals can evolve over time in response to new technology and changing consumer demand. This happens all the time—as in therecent deal between Dish and Disney over the Hopper DVR, wherein Dish agreed that Hopper would automatically excise the commercials accompanying ABC content only after three days elapse after each show airs.

But Aereo forecloses the possibility of such negotiation, making all over-the-air content available online to subscribers absent any agreement with the underlying copyright owners of such programs. Aereo is thus distinct from other cloud services that supply content to their users, as the latter have permission to license their content.

Of course, broadcasters make their programming freely available over the airwaves, without any express agreement with viewers. But this doesn’t mean broadcasters lose their legal right to restrict how third parties distribute and monetize their content. While consumers can record and watch such broadcasts at their leisure, they can’t record programs and then sell the rights to the content, for example, simply replicating the broadcast. The fact that copyright holders have entered into licenses to “cloud-ify” content with dedicated over-the-top apps and Hulu clearly suggests that the over-the-air “license” is limited. And because Aereo refuses to deal with the broadcasters, there’s no possibility of a negotiated agreement between Aereo and the content owners, either. The unique combination of broadcast content and an unlicensed distributor differentiates the situation in Aereo from typical cloud computing.

If broadcasters can’t rely on copyright law to protect them from companies like Aereo that simply repackage over-the-air content, they may well shift all of their content to cable subscriptions instead of giving a free option to consumers. That’s bad news for folks who access free television—regardless of the efficiency of traditional broadcasting, or lack thereof.

The Cablevision Decision Doesn’t Require a Holding for Aereo

Commentators argue that overruling the Second Circuit in Aereo necessarily entails overruling the Second Circuit’s Cablevision holding—and with it that ruling’s fair use protections for DVRs and other cloud computing functionality. We disagree, however. Rather, regardless of whether Cablevision was correctly decided, its application to Aereo is improper.

In Cablevision, the individual cable subscribers to whom Cablevision transmitted copies of plaintiff Cartoon Network’s television programming were already paying for lawful access to it. Cartoon Network voluntarily agreed to license its copyrighted works to Cablevision and, in turn, to each Cablevision subscriber whose cable package included the Cartoon Network channel.

The dispute in Cablevision thus involved a copyright holder and a licensee with a preexisting contractual relationship; the parties simply disagreed on the terms by which Cablevision was permitted to transmit Cartoon Network’s content. But even after the decision, Cartoon Network remained (and remains) free to terminate or renegotiate its licensing agreement with Cablevision.

Again, this dynamic of voluntary exchange mitigates Cablevision’s impact on the market for television programming, as copyright holders and cable companies settle on a new equilibrium. But unlike the cable company in Cablevision, Aereo has neither sought nor received permission from any holders of copyrights in broadcast television programming before retransmitting their works to paying subscribers.

Even if it is correct that Aereo itself isn’t engaging in public performance of copyrighted work, it remains the case that its subscribers haven’t obtained the right to use Aereo’s services, either. But one party or the other must obtain this right or else establish that it’s a fair use.

Fair Use Won’t Save Aereo

The only way legitimately to rule in Aereo’s favor would be to decide that Aereo’s retransmission of broadcast content is a fair use. But as Cablevision’s own amicus brief in Aereo (supporting Aereo) argues, fair use rights don’t cover Aereo’s non-transformative retransmission of broadcast content. Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content:

Aereo is functionally identical to a cable system. It captures over-the-air broadcast signals and retransmits them for subscribers to watch. Aereo thus is not meaningfully different from services that have long been required to pay royalties. That fact sharply distinguishes Aereo from cloud technologies like remote-storage services and remote DVRs.

* * *

Aereo is not in the business of transmitting recorded content from individual hard-drive copies to subscribers. Rather, it is in the business of retransmitting broadcast television to subscribers.

* * *

Aereo…is not relying on its separate hard-drive copies merely to justify the lawfulness of its pause, rewind, and record functions. It is relying on those copies to justify the entire television retransmission service. It is doing so even in the many cases where subscribers are not even using the pause, rewind, or record functions but are merely watching television live.

It may be that the DVR-like functions that Aereo provides are protected, but that doesn’t mean that it can retransmit copyrighted content without a license. If, like cable companies, it obtained such a license, it might be able to justify its other functionality (and negotiate license terms with broadcasters to reflect the value to each of such functionality). But that is a fundamentally different case. Similarly, if users were able to purchase licenses to broadcast content, Aereo’s additional functionality might also be protected (with the license terms between users and broadcasters reflecting the value to each). But, again, that is a fundamentally different case. Cloud computing services don’t create these problems, and thus need not be implicated by a proper reading of the Copyright Act and a ruling against Aereo.

Conclusion

One of the main purposes of copyright law is to secure for content creators the right to market their work. To allow services like Aereo undermines that ability and the incentives to create content in the first place. But, as we have shown, there is no reason to think a ruling against Aereo will destroy cloud computing.

Over at the Center for the Protection of Intellectual Property (CPIP), Mark Schultz has an important blog posting on the Mercatus Center‘s recent launch of its new copyright piracy website, piracydata.org.  The launch of this website has caused a bit of a tempest in a teapot with a positive report on it in the Washington Post and with a report in the Columbia Journalism Review pointing out problems in its data and errors in its claims.  (It is a bit ironic that a libertarian organization is having trouble with the launch of a website at the same time that there is similar reporting on troubles of the launch of another website on the opposite side of the political spectrum, Obamacare.)

Professor Schultz, who is a Senior Scholar at CPIP and a law professor at Southern Illinois University, makes many important points in his blog posting (too many to recount here).  One of his more important identifications is that the piracydata.org website reflects an unfortunate tendency among libertarian IP skeptics, who seem to fall victim to an error that they often identify in leftist critiques of the free market, at least on non-IP issues.  That is, some libertarian IP skeptics seem all to quick to deduce conclusions about actual, real-world business models from solely theoretical knowledge about what they think these business models should be in some “ideal” world.

Professor Schultz also identifies that, despite protestations to the contrary, Jerry Brito has explicitly framed his website as a “blame the victim” defense of copyright piracy — stating explicitly on Twitter that “Hollywood should blame itself for its piracy problems.” Consistent with such statements, of course, conventional wisdom has quickly gelled around the piracydata.org website that it is in fact a condemnation of the creative industries’ business models.  (Professor Schultz backs up this point with many references and links, including a screen grab of Jerry’s tweet.)

Professor Schultz ultimately concludes his important essay as follows:

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

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

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

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

This is a compelling call to arms  for some libertarians doing policy work in the creative industries to take more seriously in practice their theoretical commitments to private ordering and free enterprise.

As the blogging king (Instapundit) is wont to say: Read the whole thing.

[Cross posted at the Center for the Protection of Intellectual Property blog.]

Today’s public policy debates frame copyright policy solely in terms of a “trade off” between the benefits of incentivizing new works and the social deadweight losses imposed by the access restrictions imposed by these (temporary) “monopolies.” I recently posted to SSRN a new research paper, called How Copyright Drives Innovation in Scholarly Publishing, explaining that this is a fundamental mistake that has distorted the policy debates about scholarly publishing.

This policy mistake is important because it has lead commentators and decision-makers to dismiss as irrelevant to copyright policy the investments by scholarly publishers of $100s of millions in creating innovative distribution mechanisms in our new digital world. These substantial sunk costs are in addition to the $100s of millions expended annually by publishers in creating, publishing and maintaining reliable, high-quality, standardized articles distributed each year in a wide-ranging variety of academic disciplines and fields of research. The articles now number in the millions themselves; in 2009, for instance, over 2,000 publishers issued almost 1.5 million articles just in the scientific, technical and medical fields, exclusive of the humanities and social sciences.

The mistaken incentive-to-invent conventional wisdom in copyright policy is further compounded by widespread misinformation today about the allegedly “zero cost” of digital publication. As a result, many people are simply unaware of the substantial investments in infrastructure, skilled labor and other resources required to create, publish and maintain scholarly articles on the Internet and in other digital platforms.

This is not merely a so-called “academic debate” about copyright policy and publishing.

The policy distortion caused by the narrow, reductionist incentive-to-create conventional wisdom, when combined with the misinformation about the economics of digital business models, has been spurring calls for “open access” mandates for scholarly research, such as at the National Institute of Health and in recently proposed legislation (FASTR Act) and in other proposed regulations. This policy distortion even influenced Justice Breyer’s opinion in the recent decision in Kirtsaeng v. John Wiley & Sons (U.S. Supreme Court, March 19, 2013), as he blithely dismissed commercial incentivizes as being irrelevant to fundamental copyright policy. These legal initiatives and the Kirtsaeng decision are motivated in various ways by the incentive-to-create conventional wisdom, by the misunderstanding of the economics of scholarly publishing, and by anti-copyright rhetoric on both the left and right, all of which has become more pervasive in recent years.

But, as I explain in my paper, courts and commentators have long recognized that incentivizing authors to produce new works is not the sole justification for copyright—copyright also incentivizes intermediaries like scholarly publishers to invest in and create innovative legal and market mechanisms for publishing and distributing articles that report on scholarly research. These two policies—the incentive to create and the incentive to commercialize—are interrelated, as both are necessary in justifying how copyright law secures the dynamic innovation that makes possible the “progress of science.” In short, if the law does not secure the fruits of labors of publishers who create legal and market mechanisms for disseminating works, then authors’ labors will go unrewarded as well.

As Justice Sandra Day O’Connor famously observed in the 1984 decision in Harper & Row v. Nation Enterprises: “In our haste to disseminate news, it should not be forgotten the Framers intended copyright itself to be the engine of free expression. By establishing a marketable right to the use of one’s expression, copyright supplies the economic incentive to create and disseminate ideas.” Thus, in Harper & Row, the Supreme Court reached the uncontroversial conclusion that copyright secures the fruits of productive labors “where an author and publisher have invested extensive resources in creating an original work.” (emphases added)

This concern with commercial incentives in copyright law is not just theory; in fact, it is most salient in scholarly publishing because researchers are not motivated by the pecuniary benefits offered to authors in conventional publishing contexts. As a result of the policy distortion caused by the incentive-to-create conventional wisdom, some academics and scholars now view scholarly publishing by commercial firms who own the copyrights in the articles as “a form of censorship.” Yet, as courts have observed: “It is not surprising that [scholarly] authors favor liberal photocopying . . . . But the authors have not risked their capital to achieve dissemination. The publishers have.” As economics professor Mark McCabe observed (somewhat sardonically) in a research paper released last year for the National Academy of Sciences: he and his fellow academic “economists knew the value of their journals, but not their prices.”

The widespread ignorance among the public, academics and commentators about the economics of scholarly publishing in the Internet age is quite profound relative to the actual numbers.  Based on interviews with six different scholarly publishers—Reed Elsevier, Wiley, SAGE, the New England Journal of Medicine, the American Chemical Society, and the American Institute of Physics—my research paper details for the first time ever in a publication and at great length the necessary transaction costs incurred by any successful publishing enterprise in the Internet age.  To take but one small example from my research paper: Reed Elsevier began developing its online publishing platform in 1995, a scant two years after the advent of the World Wide Web, and its sunk costs in creating this first publishing platform and then digitally archiving its previously published content was over $75 million. Other scholarly publishers report similarly high costs in both absolute and relative terms.

Given the widespread misunderstandings of the economics of Internet-based business models, it bears noting that such high costs are not unique to scholarly publishers.  Microsoft reportedly spent $10 billion developing Windows Vista before it sold a single copy, of which it ultimately did not sell many at all. Google regularly invests $100s of millions, such as $890 million in the first quarter of 2011, in upgrading its data centers.  It is somewhat surprising that such things still have to be pointed out a scant decade after the bursting of the dot.com bubble, a bubble precipitated by exactly the same mistaken view that businesses have somehow been “liberated” from the economic realities of cost by the Internet.

Just as with the extensive infrastructure and staffing costs, the actual costs incurred by publishers in operating the peer review system for their scholarly journals are also widely misunderstood.  Individual publishers now receive hundreds of thousands—the large scholarly publisher, Reed Elsevier, receives more than one million—manuscripts per year. Reed Elsevier’s annual budget for operating its peer review system is over $100 million, which reflects the full scope of staffing, infrastructure, and other transaction costs inherent in operating a quality-control system that rejects 65% of the submitted manuscripts. Reed Elsevier’s budget for its peer review system is consistent with industry-wide studies that have reported that the peer review system costs approximately $2.9 billion annually in operation costs (translating into dollars the British £1.9 billion pounds reported in the study). For those articles accepted for publication, there are additional, extensive production costs, and then there are extensive post-publication costs in updating hypertext links of citations, cyber security of the websites, and related digital issues.

In sum, many people mistakenly believe that scholarly publishers are no longer necessary because the Internet has made moot all such intermediaries of traditional brick-and-mortar economies—a viewpoint reinforced by the equally mistaken incentive-to-create conventional wisdom in the copyright policy debates today. But intermediaries like scholarly publishers face the exact same incentive problems that is universally recognized for authors by the incentive-to-create conventional wisdom: no will make the necessary investments to create a work or to distribute if the fruits of their labors are not secured to them. This basic economic fact—dynamic development of innovative distribution mechanisms require substantial investment in both people and resources—is what makes commercialization an essential feature of both copyright policy and law (and of all intellectual property doctrines).

It is for this reason that copyright law has long promoted and secured the value that academics and scholars have come to depend on in their journal articles—reliable, high-quality, standardized, networked, and accessible research that meets the differing expectations of readers in a variety of fields of scholarly research. This is the value created by the scholarly publishers. Scholarly publishers thus serve an essential function in copyright law by making the investments in and creating the innovative distribution mechanisms that fulfill the constitutional goal of copyright to advance the “progress of science.”

DISCLOSURE: The paper summarized in this blog posting was supported separately by a Leonardo Da Vinci Fellowship and by the Association of American Publishers (AAP). The author thanks Mark Schultz for very helpful comments on earlier drafts, and the AAP for providing invaluable introductions to the five scholarly publishers who shared their publishing data with him.

NOTE: Some small copy-edits were made to this blog posting.

 

Over at Cato Unbound, there has been a discussion this past month on copyright and copyright reform.  In his recent contribution to this discussion, Mark Schultz posted an excellent essay today, Where are the Creators? Consider Creators in Copyright Reform, that calls out the cramped, reductionist view of copyright policy that leads some libertarians and conservatives to castigate this property right as “regulation” or as “monopoly.”  Here’s a small taste from his essay:

I am genuinely puzzled when copyright discussions treat creative works if they are a pre-existing resource that the government arbitrarily allocates. They are not. They aren’t an imaginary regulatory entitlement, such as pollution credits. They aren’t leases or mineral rights on public land handed out to political cronies. Creative works are, instead, the productive intellectual labor of private parties. Real people make this stuff.

At this point in the discussion, a common rhetorical move is to reject what some scholars describe as the romantic myth of authorship. Copyright skeptics point out that authors build on the work of others and that many creative works are the work of corporations, not individuals. This argument was provoked by many decades—a couple centuries, really—of rhetoric that put the individual author on a pedestal. Even if one concedes that authors have, perhaps, been idealized, taking them for granted goes too far.

The absence of creators from the critique of copyright is one of many reasons I doubt the political (and moral) appeal of much of the case for copyright reform we have heard from a few libertarians and conservatives. At the risk of dredging up tiresome memories from the recent presidential election, the argument over “you didn’t build that” was very familiar to me as a scholar of copyright. In both instances, there is a divide between those who value (or, even, romanticize) individual achievement and those who emphasize how much that achievement depends on a social context.

This follows Mark’s earlier and equally excellent essay, Copyright Reform through Private Ordering, in which he identifies how defining and securing copyright as a property right is consistent with and advances the private-ordering regimes embraced by advocates of the free market.  Again, here’s a small taste:

Like other forms of property, copyright thus represents an invitation to a transaction and an opportunity to bargain. This opportunity for parties to transact and bargain is one of the key differences between property and regulation. A regulator has a duty to enforce the law—and if a regulator chooses not to enforce, then a court may order him to do so. Copyright owners need not enforce their rights, of course. Moreover, it is perfectly legitimate to offer a property owner money to forgo their right to enforce their copyrights; such commercial transactions are really the whole point of copyright. Make the same offer to a regulator, and you go to jail.

Read these essays in their entirety—both of them are here and here—as Mark is doing a great job in what is very brief and limited blogging space in providing both the important data and the principled arguments for how copyright is fundamentally consistent with and advances the aspirations of the free market and limited government.  This follows on his earlier, excellent blog posting at the Copyright Alliance that touched on similar themes, Copyright, Economic Freedom, and the RSC Policy Brief.

DISCLOSURE: Mark and I are both on the Academic Advisory Board of the Copyright Alliance.

In Part One, I addressed the argument by some libertarians that so-called “traditional property rights in land” are based in inductive, ground-up “common law court decisions,” but that intellectual property (IP) rights are top-down, artificial statutory entitlements.  Thus, for instance, libertarian law professor, Tom Bell, has written in the University of Illinois Journal of Law, Technology & Policy: “With regard to our tangible rights to person and property, they’re customary and based in common law. Where do the copyrights and patents come from? From the legislative process.” 2006 Univ.Ill. J. L. Tech. & Pol’y 92, 110 (sorry, no link). 

I like Tom, but, as I detailed in Part One, he’s just wrong in his contrast here between the “customary” “common law” court decisions creating property versus the  “legislative process” creating IP rights. This is myth masquerading as history. As all first-year property students learn each year, the foundation of Anglo-American property law is based in a statute, and many property rights in land were created by statutes enacted by Parliament or early American state legislatures.  In fact, the first statute — the Statute Quai Empotores of 1290 — was enacted by Parliament to overrule feudal “custom” enforced by the “common law” decisions at that time, creating by statutory fiat the basic foundational rule of the Anglo-American property right that property rights are alieanable.

As an aside, Geoff Manne asked an excellent question in the comments to Part One: Who cares? My response is that in part it’s important to call out the use of a descriptive historical claim to bootstrap a normative argument. The question is not who cares, but rather the question is why does Tom, Jerry Brito and other libertarians care so much about creating this historical myth, and repeatedly asserting it in their writings and in their presentations? The reason is because this triggers a normative context for many libertarians steeped in Hayek’s theories about the virtues of disaggregated decision-making given dispersed or localized knowledge, as contrasted with the vices of centralized, top-down planning. Thus, by expressly contrasting as an alleged historical fact that property arises from “customary” “common law” court decisions versus the top-down “legislative processes” creating IP, this provides normative traction against IP rights without having to do the heavy lifting of actually proving this as a normative conclusion. Such is the rhetorical value of historical myths generally — they provide normative framings in the guise of a neutral, objective statement of historical fact — and this is why they are a common feature of policy debates, especially in patent law.

What’s even more interesting is that this is not just a historical myth about the source of property rights in land, which were created by both statutes and court decisions, but it’s also an historical myth about IP rights, which are also created by both statutes and court decisions. The institutional and doctrinal interplay between Parliament’s statutes and the application and extension of these statutes by English courts in creating and enforcing property rights in land was repeated in the creation and extension of the modern Anglo-American IP system.  Who would have thunk?

Although there are lots of historical nuances to the actual legal developments, a blog posting is ideal to point out the general institutional and systemic development that occurred with IP rights. It’s often remarked, for instance, that the birth of Anglo-American patent law is in Parliament’s Statute of Monopolies (1624).  Although it’s true (at least in a generalized sense), the actual development of modern patent law — the legal regime that secures a property right in a novel and useful invention — occurred entirely at the hands of the English common law courts in the eighteenth century, who (re)interpreted this statute and extended it far beyond its original text.  (I have extensively detailed this historical development here.)  Albeit with some differences, a similar institutional pattern occurred with Parliament enacting the first modern copyright statute in 1709, the Statute of Anne, which was then interpreted, applied and extended by the English common law courts.

This institutional and doctrinal pattern repeated in America. From the very first enactment of copyright and patent statutes by the states under the Articles of Confederation, and then by Congress enacting the first federal patent and copyright statutes in 1790, courts then interpreted, applied and extended these statutes in common law fashion.  In fact, it is a cliché in patent law that many patent doctrines today were created, not by Congress, but by two judges – Justice Joseph Story and Judge Learned Hand.  Famous patent law historian, Frank Prager, writes that it is “often said that Story was one of the architects of American patent law.”  There’s an entire book published of Judge Learned Hand’s decisions in patent law. That’s how important these two judges have been in creating patent law doctrines.

So, the pattern has been that Congress passes broadly framed statutes, and the federal courts then create doctrines within these statutory frameworks.  In patent law, for instance, courts created the exhaustion doctrine, secondary liability, the experimental use defense, the infringement doctrine of equivalents, and many others.  Beyond this “common law” creation of patent doctrines, courts have further created and defined the actual requirements set forth in the patent statutes for utility, written description, enablement, etc., creating legal phrases and tests that one would search in vain for in the text of the actual patent statutes. Interestingly, Congress sometimes has subsequently codified these judicially created doctrines and sometimes it has left them alone.  Sometimes, Congress even repeals the judicially created tests, as it did in expressly abrogating the judicially created “flash of genius” test in § 103 of the 1952 Patent Act.  All of this goes to show that, just as it’s wrong to say that property rights in land are based solely in custom and common law court decision, it’s equally wrong to say that IP rights are based solely in legislation.

Admittedly, the modern copyright statutes are far more specific and complex than the patent statutes, at least before Congress passed the American Invents Act of 2011 (AIA).  In comparison to the pre-AIA patent statutes, the copyright statutes appear to be excessively complicated with industry and work-specific regimes, such as licensing for cable (§ 111), licensing for satellite transmissions (§ 119), exemptions from liability for libraries (§ 108), and licensing of “phonorecords” (§ 109), among others.  These and other provisions have been cobbled together by repeated amendments and other statutory enactments over the past century or so.  This stands in stark contrast to the invention- and industry-neutral provisions that comprised much of the pre-AIA patent statutes.

So, this is a valid point of differentiation between patents and copyrights, at least as these respective IP rights have developed in the twentieth century.  And there’s certainly a valid argument that complexity in the copyright statutes arising from such attempts to legislate for very specific works and industries increases uncertainties, which in turn unnecessarily increases administration and other transaction costs in the operation of the legal system.

Yet, it bears emphasizing again that, before there arose heavy emphasis on legislation in copyright law, many primary copyright doctrines were in fact first created by courts.  This includes, for instance, fair use and exhaustion doctrines, which were later codified by Congress. Moreover, some very important copyright doctrines remain entirely in the domain of the courts, such as secondary liability. 

The judicially created doctrine of secondary liability in copyright is perhaps the most ironic, if only because it is the use of this doctrine on the Internet against P2P services, like Napster, Aimster, Grokster, and BitTorrent operators, that sends many libertarian IP skeptics and copyleft advocates into paroxysms of outrage about how rent-seeking owners of statutory entitlements are “forcing” companies out of business, shutting down technology and violating the right to liberty on the Internet. But secondary liability is a “customary” “common law” doctrine that developed out of similarly traditional “customary” doctrines in tort law, as further extended by courts to patent and copyright!

As with the historical myth about the origins of property rights in land, the actual facts about the source and nature of IP rights belies the claims by some libertarians that IP rights are congressional “welfare grants” or congressional subsidies for crony corporations. IP rights have developed in the same way as property rights in land with both legislatures and courts creating, repealing, and extending doctrines in an important institutional and doctrinal evolution of these property rights securing technological innovation and creative works.

As I said in Part One, I enjoy a good policy argument about the value of securing property rights in patented innovation or copyrighted works.  I often discuss on panels and in debates how IP rights make possible the private-ordering mechanisms necessary to convert inventions and creative works into real-world innovation and creative products sold to consumers in the marketplace. Economically speaking, as Henry Manne pointed out in a comment to Part One, defining a property right in an asset is what makes possible value-maximizing transactions, and, I would add, morally speaking, it is what secures to the creator of that asset the right to the fruits of his or her productive labors. Thus, I would be happy to debate Tom Bell, Jerry Brito or any other similarly-minded libertarian on these issues in innovation policy, but before we can do so, we must first agree to abandon historical myths and base our normative arguments on actual facts.

The Case for Copyright

Adam Mossoff —  20 November 2012

Mark Schultz, law professor and specialist in copyright law, has written an excellent response to the Republican Study Committee policy brief on copyright law that has been making the rounds on the Internet the past several days.  Although the RSC promptly retracted the policy brief, the blogosphere has erupted in commentary on what appeared to be a radical shift in IP policy by one of the explicitly free market caucuses of GOP members.

Mark’s response is a tour-de-force, if only because in a very brief blog posting, he reveals that much of the RSC policy brief is, at best, based on assumptions about copyright that really require a lot more analytical heavy lifting than anything attempted by its author, or, at worst, simply a highly tendentious reading of copyright law and policy.

Here’s just a small taste of some of Mark’s response:

Some also see copyright as a morally suspect interference with economic freedom because they reject the contention that copyright is property. They instead vilify copyright as an odious monopoly or a government-granted privilege or subsidy.

The monopoly accusation is an elementary and persistent error in the economic analysis of intellectual property, as Edmund Kitch once explained in an article with that very title. Edmund W. Kitch, Elementary and Persistent Errors In The Economic Analysis Of Intellectual Property, 53 Vand. L. Rev. 1727 (2000). Dozens of scholarly articles, hundreds of court cases, and thousands of economics classes have repeated the claim that intellectual property grants a monopoly. As Kitch points out, the persistence of the claim does not lessen the error.

Ownership of a property right alone does not accord the owner a monopoly. The hallmark of a monopoly is market power. Owning something that is unique—whether it is a song, a story, or a house—does not give one that kind of power. Even a beautiful house in a nice location cannot command monopoly prices. The same is true of copyrighted works.

There’s more, including a great discussion about whether copyright really is justified, either morally or constitutionally, as only a social utility enhancing monopoly grant, something near and dear to my own scholarly work in the related field of patent law.  Mark concludes his response with a brilliant exposition on how, contrary to the RSC policy brief author’s claim that copyright violates laissez faire capitalism, copyright in fact makes it possible for private ordering to develop and to take root in a flourishing free market.

As Instapundit likes to say: Read the whole thing!

DISCLOSURE: Mark’s response is posted on the blog for the Copyright Alliance, and Mark and I are both members of the Academic Advisory Board of the Copyright Alliance.

My GMU colleague Adam Mossoff has been on and around the blogs this week — or at least, other people have been writing about him and particularly about his new paper  The Trespass Fallacy in Patent Law.  For example, here are a few reactions at Prawfsblawg and Patently-O.  I’ve been trying to get Professor Mossoff on the blog for some time now to talk about his own research and intellectual property issues more generally, and so I’m thrilled that he will be hanging out here for a bit.  Here’s his bio:

Professor Adam Mossoff teaches and writes in the areas of property and intellectual property law.  His research focuses on the intersection between intellectual property law and property theory, with a special emphasis on natural rights philosophy and its role in the intellectual history of patent law.  He has published numerous articles on topics in patent law, property law, legal history and legal philosophy in the University of Pennsylvania Law ReviewCornell Law Review, and Social Philosophy & Policy, among other journals.  He teaches a range of courses, including patent law, property, trade secrets, cyberlaw, jurisprudence, property theory, and estates and trusts.

Professor Mossoff graduated with honors from the University of Chicago Law School, where he was a research assistant to Richard A. Epstein and held the Bradley Governance Fellowship.  Following law school, he was a John M. Olin Fellow in Law and Visiting Lecturer at Northwestern University School of Law, and he clerked for the Honorable Jacques L. Wiener, Jr. of the U.S. Court of Appeals for the Fifth Circuit. He holds an M.A. in philosophy, specializing in legal and political philosophy, from Columbia University and a B.A. with High Distinction and High Honors in philosophy from the University of Michigan.

While I suspect Adam will take some of his blogging time to write about his new and important essay, no doubt he will have many interesting things to blog about in the intellectual property world.  TOTM is excited to have him with us.

The AALS Section on Antitrust and Economic Regulation call for papers features a topic near and dear to my heart this year: Google and Antitrust.   Here is the announcement:

Call for Papers Announcement

AALS Section on Antitrust and Economic Regulation

Google and Antitrust

 

2013 AALS Annual Meeting

January 4-7, 2013

New Orleans, Louisiana

The AALS Section on Antitrust and Economic Regulation will hold a program on Google and Antitrust during the AALS 2013 Annual Meeting in New Orleans. The program will explore the Federal Trade Commission’s potential antitrust case against Google and the Google Book Search settlement. The program will feature a roundtable panel involving leading scholars who have addressed these issues: Dan Crane (Michigan), Marina Lao (Seton Hall), Frank Pasquale (Seton Hall), and Pam Samuelson (Berkeley). We are looking to add one additional panelist through this Call for Papers.

Submission procedure:

Anyone interested in participating is encouraged to submit a draft paper (preferred, and roughly in the range of 20-40 pages) or proposal by e-mail to Michael A. Carrier, at mcarrier@camlaw.rutgers.edu by September 4, 2012.

Eligibility:

Full-time faculty members of AALS member law schools are eligible to submit papers. Faculty at fee-paid law schools; foreign, visiting and adjunct faculty members; graduate students; fellows; and non-law school faculty are not eligible to submit. Papers may already be accepted for publication, as long as the paper will not be published before the AALS meeting.

Registration fee and expenses:

Call-for-Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

How will papers be reviewed?

Papers will be reviewed and selected by members of the Executive Committee of the AALS Section on Antirust and Economic Regulation: Darren Bush (Houston), Michael Carrier (Rutgers-Camden), Daniel Crane (Michigan), Hillary Greene (Connecticut), Scott Hemphill (Columbia), and D. Daniel Sokol (Florida).

Will the program be published in a journal?

Yes, as a symposium in the Harvard Journal of Law & Technology Digest.

Deadline date for submission:

September 4, 2012. Decisions will be announced by September 28, 2012.

Program date and time:

Saturday, January 5, 2013, 10:30am – 12:15pm.

Contact for submission and inquires:

Michael A. Carrier

Chair, AALS Section on Antitrust and Economic Regulation

Rutgers Law School – Camden
217 North Fifth Street
Camden, NJ 08102
(856) 225-6380
mcarrier@camlaw.rutgers.edu

Stan Liebowitz (UT-Dallas) offers a characteristically thoughtful and provocative op-ed in the WSJ today commenting on SOPA and the Protect IP Act.  Here’s an excerpt:

You may have noticed last Wednesday’s blackout of Wikipedia or Google’s strange blindfolded-logo screen. These were attempts to kill the Protect IP Act and the Stop Online Piracy Act, proposed legislation intended to hinder piracy and counterfeiting. The laws now before Congress may not be perfect, and they can still be amended. But to do nothing and stay with the status quo is to keep our creative industries at risk by failing to enforce their property rights.

Critics of these proposed laws claim that they are unnecessary and will lead to frivolous claims, reduce innovation and stifle free speech. Those are gross exaggerations. The same critics have been making these claims about every previous attempt to rein in piracy, including the Digital Millennium Copyright Act that was called a draconian antipiracy measure at the time of its passage in 1998. As we all know, the DMCA did not kill the Internet, or even do any noticeable damage to freedom—or to pirates.

Scads of Internet pundits and bloggers have vehemently argued that piracy is really a sales-promoting activity—because it gives people a free sample that might lead to a purchase—or that any piracy problems have been due to a failure of industry to embrace the Internet. Yet these claims are little more than wishful thinking. Some reflect a hostility to commercial activities—think Occupy Wall Street, or self-interest. Others make “freedom” claims on behalf of sites that profit by helping individuals find pirate sites, makers of complementary hardware, or companies that benefit from Internet usage and collect revenues whether the material being accessed was legally obtained or not.

In my examination of peer-reviewed studies, the great majority have results that conform to common sense: Piracy harms copyright owners. I was also somewhat surprised to discover that the typical finding of such academic studies was that the entire enormous decline that has occurred is due to piracy.

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Do check out the whole thing.

 

 

The fight over SOPA is about the ownership of intellectual property.  Rights to intellectual property have two effects.  The benefits of intellectual property are the incentives for creation.  The costs are that after some work is created any price above marginal cost (which is often zero for digital property) will discourage valuable use.

Every piece of intellectual property than now exists was created with the incentives that were in place when it was created.  No change in intellectual property rights can have any effect on existing works.  Therefore, any change in property rights should be entirely prospective.  That is, any change in property rights should effect only works copyrighted after the passage of the legislation.

Of course, there are huge rents associated with the ownership of existing rights, and fights over these rents will  continue.  But we should recognize that these fights are over rents — payments which have no incentive effects.  If our goal is efficiency, we should stop wasting resources on these fights and start from now.