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.

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.

In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far‐reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-­standard and misguided definitions of economic terms of art such as “ex ante” and “hold-­up,” while urging new inefficient rules for calculating damages for patent infringement. Stripped of the technicalities, the FTC Proposal would so reduce the costs of infringement by downstream users that the rate of infringement would unduly increase, as potential infringers find it in their interest to abandon the voluntary market in favor of a more attractive system of judicial pricing. As the number of nonmarket transactions increases, the courts will play an ever larger role in deciding the terms on which the patents of one party may be used by another party. The adverse effects of this new trend will do more than reduce the incentives for innovation; it will upset the current set of well-­‐functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. Such a trend would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote.

Focusing in particular on SSOs, the trio homes in on the potential incentive problem created by the FTC’s proposal:

The central problem with the FTC’s approach is that it would interfere seriously with the helpful incentives all parties in the IP marketplace presently have to contract with each other. The FTC’s approach ignores the powerful incentives that it creates in putative licenses to spurn the voluntary market in order to obtain a strategic advantage over the licensor. In any voluntary market, the low rates that go to initial licensees reflect the uncertainty of the value of the patented technology at the time the license is issued. Once that technology has proven its worth, there is no sound reason to allow any potential licensee who instead held out from the originally offered deal to get bargain rates down the road. Allowing such an option would make the holdout better off than the contracting party. Such holdouts would not need to take licenses for technologies with low value, while resting assured they would still get technologies with high value at below market rates. The FTC seems to overlook that a well-­‐functioning patent damage system should do more than merely calibrate damages after the fact. An efficient approach to damages is one that also reduces the number of infringements overall by making sure that the infringer cannot improve his economic position by his own wrong.

The FTC Proposal rests on the misguided conviction that the law should not allow a licensor to “demand and obtain royalty payments based on the infringer’s switching costs” once the manufacturer has “sunk costs into using the technology;” and it labels any such payments as the result of “hold-­up.”

As Epstein, et al. discuss, current private ordering (reciprocal dealing, repeat play, RAND terms, etc.) works perfectly well to address real hold-up problems, and the FTC seems to be both defining the problem oddly and, thus, creating a problem that doesn’t really exist.

Although not discussed directly, the paper owes a great deal to the great Ben Klein and especially his paper, Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships (to say nothing of Klein, Crawford & Alchian, of course).  Likewise, although not discussed in the paper, Josh and Bruce Kobayashi’s excellent paper, Federalism, Substantive Preemption and Limits on Antitrust: An Application to Patent Holdup is an essential precursor to this paper, addressing the comparative merits of antitrust  and contract-based evaluation of claimed patent holdups in SSOs.

Highly-recommended and an important addition to the ever-interesting antitrust/IP discussion.

Public lawmakers lack incentives to engage in a socially optimal amount of legal innovation. Private lawmaking is a potential solution to this problem. However, private lawmaking faces a dilemma: In order to be effective privately produced laws need to be publicly enacted, but under current law enactment eliminates the intellectual property rights that are essential to motivate private lawmakers. Because of this dilemma, much private lawmaking is done as a byproduct of other activities. The mixed incentives entailed in this “byproduct” approach make it a second-best response to the problems of public lawmaking. Potential solutions involve finding a better balance between public access and private rights.

The paper treats the creation of law as a form of intellectual property.  The central problem the paper identifies is the weakness of intellectual property protection of law.  This forces private lawmaking into the second-best world of “byproduct” lawmaking, where private lawmaking is essentially a form of lobbying.  This particularly includes the practicing bar’s significant role in lawmaking, and uniform laws.  The paper draws illustrations of byproduct laws from the development of the limited liability company, including the “L3C” spinoff.  We conclude with suggestions of how to fix intellectual property law to bring private lawmaking closer to a first-best world.

This paper is a natural outgrowth of several strands of my work alone and with others, including on LLCs and uncorporations, jurisdictional competition, lawyers as lawmakers, uniform laws, the “information revolution’s” effect on the law industry, and law teaching.

I just looked at the site to check on the publication date and I was delighted to see the advance reviews of the book.  They are pretty incredible, and we’re honored to have such impressive scholars, among the very top in our field and among our most significant influences, saying such nice things about the book:

After a century of exponential growth in innovation, we have reached an era of serious doubts about the sustainability of the trend. Manne and Wright have put together a first-rate collection of essays addressing two of the important policy levers – competition law and patent law – that society can pull to stimulate or retard technological progress. Anyone interested in the future of innovation should read it.

Daniel A. Crane, University of Michigan

Here, in one volume, is a collection of papers by outstanding scholars who offer readers insightful new discussions of a wide variety of patent policy problems and puzzles. If you seek fresh, bright thoughts on these matters, this is your source.

Harold Demsetz, University of California, Los Angeles

This volume is an essential compendium of the best current thinking on a range of intersecting subjects – antitrust and patent law, dynamic versus static competition analysis, incentives for innovation, and the importance of humility in the formulation of policies concerning these subjects, about which all but first principles are uncertain and disputed. The essays originate in two conferences organized by the editors, who attracted the leading scholars in their respective fields to make contributions; the result is that rara avis, a contributed volume more valuable even than the sum of its considerable parts.

Douglas H. Ginsburg, Judge, US Court of Appeals, Washington, DC

Competition Policy and Patent Law under Uncertainty is a splendid collection of essays edited by two top scholars of competition policy and intellectual property. The contributions come from many of the world’s leading experts in patent law, competition policy, and industrial economics. This anthology takes on a broad range of topics in a comprehensive and even-handed way, including the political economy of patents, the patent process, and patent law as a system of property rights. It also includes excellent essays on post-issuance patent practices, the types of practices that might be deemed anticompetitive, the appropriate role of antitrust law, and even network effects and some legal history. This volume is a must-read for every serious scholar of patent and antitrust law. I cannot think of another book that offers this broad and rich a view of its subject.

Herbert Hovenkamp, University of Iowa

With these contributors:

Robert Cooter, Richard A. Epstein, Stan J. Liebowitz, Stephen E. Margolis, Daniel F. Spulber, Marco Iansiti, Greg Richards, David Teece, Joshua D. Wright, Keith N. Hylton, Haizhen Lee, Vincenzo Denicolò, Luigi Alberto Franzoni, Mark Lemley, Douglas G. Lichtman, Michael Meurer, Adam Mossoff, Henry Smith, F. Scott Kieff, Anne Layne-Farrar, Gerard Llobet, Jorge Padilla, Damien Geradin and Bruce H. Kobayashi

I would have said the book was self-recommending.  But I’ll take these recommendations any day.

Gans notes, as I did, that Microsoft is not engaged in wholesale copying of Google’s search results, even though doing so would be technologically feasible.  But Gans goes on to draw a normative conclusion:

Let’s start with “imitation,” “copying” and its stronger variants of “plagiarism” and “cheating.” Had Bing wanted to do this and directly map Google’s search results onto its own, it could have done it. It could have set up programs to enter terms in Google and skimmed off the results and then used them directly. And I think we can all agree that that is wrong. Why? Two reasons. First, if Google has invested to produce those results, if others can just hang off them and copy it, Google’s may not earn the return on its efforts it should do. Second, if Bing were doing this and representing itself as a different kind of search, then that misrepresentation would be misleading. Thus, imitation reduces Google’s reward for innovation while adding no value in terms of diversity.

His first reason why this would be wrong is . . . silly.  I mean, I don’t want to get into a moral debate, but since when is it wrong to engage in activity that “may” hamper another firm’s ability to earn the return on its effort that it “should” (whatever “should” means here)?  I always thought that was called “competition” and we encouraged it.  As I noted the other day, competition via imitation is an important part of Schumpeterian capitalism.  To claim that reducing another company’s profits via imitation is wrong, but doing so via innovation is good and noble, is to hang one’s hat on a distinction that does not really exist.

The second argument, that doing so would amount to misrepresentation, is possible, but I’m sure if Microsoft were actually just copying Google’s results their representations would look different than they do now and the problem would probably not exist, so this claim is speculative, at best.

Now, regardless, I doubt it would be profitable for Microsoft to copy Google wholesale, and this is basically just a red herring (as Gans understands–he goes on to discuss the more “innocuous” imitation at issue).  While I think Gans’ claims that it would be “wrong” are just hand waiving, I am confident it would be “wrong” from the point of view of Microsoft’s bottom line–or else they would already be doing it.  In this context, that would seem to be the only standard that matters, unless there were a legal basis for the claim.

On this score, Gans points us to Shane Greenstein (Kellogg).  Greenstein writes:

Let’s start with a weak standard, the law. Legally speaking, imitation is allowed so long as a firm does not violate laws governing patents, copyright, or trade secrets. Patents obviously do not apply to this situation, and neither does copyright  because Google does not get a copyright on a search result. It also does not appear as if Googles trade secrets were violated. So, generally speaking, it does not appear as if any law has been broken.

This is all well and good, but Greenstein goes on to engage in his own casual moralizing, and his comments are worth reproducing (imitating?) at some length:

The norms of rivalry

There is nothing wrong with one retailer walking through a rival’s shop and getting ideas for what to do. There is really nothing wrong with a designer of a piece of electronic equipment buying a rival’s product and studying it in order to get new ideas for a  better design. 

In the modern Internet, however, there is no longer any privacy for users. Providers want to know as much as they can, and generally the rich suppliers can learn quite a lot about user conduct and preferences.

That means that rivals can learn a great deal about how users conduct their business, even when they are at a rival’s site. It is as if one retailer had a camera in a rival’s store, or one designer could learn the names of the buyer’s of their rival’s products, and interview them right away.

In the offline world, such intimate familiarity with a rival’s users and their transactions would be uncomfortable. It would seem like an intrusion on the transaction between user and supplier. Why is it permissible in the online world? Why is there any confusion about this being an intrusion in the online world? Why isn’t Microsoft’s behavior seen — cut and dry — as an intrusion?

In other words, the transaction between supplier and user is between supplier and user, and nobody else should be able to observe it without permission of both supplier and user. The user alone does not have the right or ability to invite another party to observe all aspects of the transaction.

That is what bothers me about Bing’s behavior. There is nothing wrong with them observing users, but they are doing more than just that. They are observing their rival’s transaction with users. And learning from it. In other contexts that would not be allowed without explicit permission of both parties — both user and supplier.

Moreover, one party does not like it in this case, as they claim the transaction with users as something they have a right to govern and keep to themselves. There is some merit in that claim.

In most contexts it seems like the supplier’s wishes should be respected. Why not online? (emphasis mine)

Where on Earth do these moral standards come from?  In what way is it not “allowed” (whatever that means here) for a firm to observe and learn from a rival’s transactions with users?  I can see why the rival would prefer it to be otherwise, of course, but so what?  They would also prefer to eradicate their meddlesome rival entirely, if possible (hence Microsoft’s considerable engagement with antitrust authorities concerning Google’s business), but we hardly elevate such desires to the realm of the moral.

What I find most troublesome is the controlling, regulatory mindset implicit in these analyses.  Here’s Gans again:

Outright imitation of this type should be prohibited but what do we call some more innocuous types? Just look at how the look and feel of the iPhone has been adopted by some mobile software developers just as the consumer success of graphic based interfaces did in an earlier time. This certainly reduces Apple’s reward for its innovations but the hit on diversity is murkier because while some features are common, competitors have tried to differentiate themselves. So this is not imitation but it is something more common, leveraging without compensation and how you feel about it depends on just how much reward you think pioneers should receive.

It is usually politicians and not economists (other than politico-economists like Krugman) who think they have a handle on–and an obligation to do something about–things like “how much reward . . .pioneers should receive.”  I would have thought the obvious answer to the question would be either “the optimal amount, but good luck knowing what that is or expecting to find it in the real world,” or else, for the Second Best, “whatever the market gives them.”  The implication that there is some moral standard appreciable by human mortals, or even human economists, is a recipe for disaster.

The day has at last arrived.  The article is now called “Law’s Information Revolution,” co-authored by Bruce Kobayashi, and on SSRN.  Here’s the abstract.

Lawyers traditionally have conveyed legal expertise in the form of advice tailored to the needs of individual clients. This business model is reinforced by licensing and ethical rules designed to ensure the lawyer’s competence and loyalty to the client’s interests. The traditional professional model is being challenged by the sale of legal information to impersonal product and capital markets. This article provides a theoretical intellectual property framework for the regulatory decisions that must be made as the two models collide. We show that traditional professional regulation inhibits full development of the new business model by limiting intellectual property protection for legal information. This regulation assumes consumers will continue to get legal information in one-to-one relationships with lawyers where they have little ability to evaluate the advice they are receiving. However, a fully developed legal information market could provide some of the protection consumers now receive from licensing and ethical rules without the current model’s costs of restricting the supply and raising the costs of legal services. We apply our analysis to some actual and potential markets in legal information.

Read it while it’s hot.