Archives For intellectual property

Public comments on the proposed revision to the joint U.S. Federal Trade Commission (FTC) – U.S. Department of Justice (DOJ) Antitrust-IP Licensing Guidelines have, not surprisingly, focused primarily on fine points of antitrust analysis carried out by those two federal agencies (see, for example, the thoughtful recommendations by the Global Antitrust Institute, here).  In a September 23 submission to the FTC and the DOJ, however, U.S. International Trade Commissioner F. Scott Kieff focused on a broader theme – that patent-antitrust assessments should keep in mind the indirect effects on commercialization that stem from IP (and, in particular, patents).  Kieff argues that antitrust enforcers have employed a public law “rules-based” approach that balances the “incentive to innovate” created when patents prevent copying against the goals of competition.  In contrast, Kieff characterizes the commercialization approach as rooted in the property rights nature of patents and the use of private contracting to bring together complementary assets and facilitate coordination.  As Kieff explains (in italics, footnote citations deleted):

A commercialization approach to IP views IP more in the tradition of private law, rather than public law. It does so by placing greater emphasis on viewing IP as property rights, which in turn is accomplished by greater reliance on interactions among private parties over or around those property rights, including via contracts. Centered on the relationships among private parties, this approach to IP emphasizes a different target and a different mechanism by which IP can operate. Rather than target particular individuals who are likely to respond to IP as incentives to create or invent in particular, this approach targets a broad, diverse set of market actors in general; and it does so indirectly. This broad set of indirectly targeted actors encompasses the creator or inventor of the underlying IP asset as well as all those complementary users of a creation or an invention who can help bring it to market, such as investors (including venture capitalists), entrepreneurs, managers, marketers, developers, laborers, and owners of other key assets, tangible and intangible, including other creations or inventions. Another key difference in this approach to IP lies in the mechanism by which these private actors interact over and around IP assets. This approach sees IP rights as tools for facilitating coordination among these diverse private actors, in furtherance of their own private interests in commercializing the creation or invention.

This commercialization approach sees property rights in IP serving a role akin to beacons in the dark, drawing to themselves all of those potential complementary users of the IP-protected-asset to interact with the IP owner and each other. This helps them each explore through the bargaining process the possibility of striking contracts with each other.

Several payoffs can flow from using this commercialization approach. Focusing on such a beacon-and-bargain effect can relieve the governmental side of the IP system of the need to amass the detailed information required to reasonably tailor a direct targeted incentive, such as each actor’s relative interests and contributions, needs, skills, or the like. Not only is amassing all of that information hard for the government to do, but large, established market actors may be better able than smaller market entrants to wield the political influence needed to get the government to act, increasing risk of concerns about political economy, public choice, and fairness. Instead, when governmental bodies closely adhere to a commercialization approach, each private party can bring its own expertise and other assets to the negotiating table while knowing—without necessarily having to reveal to other parties or the government—enough about its own level of interest and capability when it decides whether to strike a deal or not.            

Such successful coordination may help bring new business models, products, and services to market, thereby decreasing anticompetitive concentration of market power. It also can allow IP owners and their contracting parties to appropriate the returns to any of the rival inputs they invested towards developing and commercializing creations or inventions—labor, lab space, capital, and the like. At the same time, the government can avoid having to then go back to evaluate and trace the actual relative contributions that each participant brought to a creation’s or an invention’s successful commercialization—including, again, the cost of obtaining and using that information and the associated risks of political influence—by enforcing the terms of the contracts these parties strike with each other to allocate any value resulting from the creation’s or invention’s commercialization. In addition, significant economic theory and empirical evidence suggests this can all happen while the quality-adjusted prices paid by many end users actually decline and public access is high. In keeping with this commercialization approach, patents can be important antimonopoly devices, helping a smaller “David” come to market and compete against a larger “Goliath.”

A commercialization approach thereby mitigates many of the challenges raised by the tension that is a focus of the other intellectual approaches to IP, as well as by the responses these other approaches have offered to that tension, including some – but not all – types of AT regulation and enforcement. Many of the alternatives to IP that are often suggested by other approaches to IP, such as rewards, tax credits, or detailed rate regulation of royalties by AT enforcers can face significant challenges in facilitating the private sector coordination benefits envisioned by the commercialization approach to IP. While such approaches often are motivated by concerns about rising prices paid by consumers and direct benefits paid to creators and inventors, they may not account for the important cases in which IP rights are associated with declines in quality-adjusted prices paid by consumers and other forms of commercial benefits accrued to the entire IP production team as well as to consumers and third parties, which are emphasized in a commercialization approach. In addition, a commercialization approach can embrace many of the practical checks on the market power of an IP right that are often suggested by other approaches to IP, such as AT review, government takings, and compulsory licensing. At the same time this approach can show the importance of maintaining self-limiting principles within each such check to maintain commercialization benefits and mitigate concerns about dynamic efficiency, public choice, fairness, and the like.

To be sure, a focus on commercialization does not ignore creators or inventors or creations or inventions themselves. For example, a system successful in commercializing inventions can have the collateral benefit of providing positive incentives to those who do invent through the possibility of sharing in the many rewards associated with successful commercialization. Nor does a focus on commercialization guarantee that IP rights cause more help than harm. Significant theoretical and empirical questions remain open about benefits and costs of each approach to IP. And significant room to operate can remain for AT enforcers pursuing their important public mission, including at the IP-AT interface.

Commissioner Kieff’s evaluation is in harmony with other recent scholarly work, including Professor Dan Spulber’s explanation that the actual nature of long-term private contracting arrangements among patent licensors and licensees avoids alleged competitive “imperfections,” such as harmful “patent hold-ups,” “patent thickets,” and “royalty stacking” (see my discussion here).  More generally, Commissioner Kieff’s latest pronouncement is part of a broader and growing theoretical and empirical literature that demonstrates close associations between strong patent systems and economic growth and innovation (see, for example, here).

There is a major lesson here for U.S. (and foreign) antitrust enforcement agencies.  As I have previously pointed out (see, for example, here), in recent years, antitrust enforcers here and abroad have taken positions that tend to weaken patent rights.  Those positions typically are justified by the existence of “patent policy deficiencies” such as those that Professor Spulber’s paper debunks, as well as an alleged epidemic of low quality “probabilistic patents” (see, for example, here) – justifications that ignore the substantial economic benefits patents confer on society through contracting and commercialization.  It is high time for antitrust to accommodate the insights drawn from this new learning.  Specifically, government enforcers should change their approach and begin incorporating private law/contracting/commercialization considerations into patent-antitrust analysis, in order to advance the core goals of antitrust – the promotion of consumer welfare and efficiency.  Better yet, if the FTC and DOJ truly want to maximize the net welfare benefits of antitrust, they should undertake a more general “policy reboot” and adopt a “decision-theoretic” error cost approach to enforcement policy, rooted in cost-benefit analysis (see here) and consistent with the general thrust of Roberts Court antitrust jurisprudence (see here).

The FCC’s blind, headlong drive to “unlock” the set-top box market is disconnected from both legal and market realities. Legally speaking, and as we’ve noted on this blog many times over the past few months (see here, here and here), the set-top box proposal is nothing short of an assault on contracts, property rights, and the basic freedom of consumers to shape their own video experience.

Although much of the impulse driving the Chairman to tilt at set-top box windmills involves a distrust that MVPDs could ever do anything procompetitive, Comcast’s recent decision (actually, long in the making) to include an app from Netflix — their alleged arch-rival — on the X1 platform highlights the FCC’s poor grasp of market realities as well. And it hardly seems that Comcast was dragged kicking and screaming to this point, as many of the features it includes have been long under development and include important customer-centered enhancements:

We built this experience on the core foundational elements of the X1 platform, taking advantage of key technical advances like universal search, natural language processing, IP stream processing and a cloud-based infrastructure.  We have expanded X1’s voice control to make watching Netflix content as simple as saying, “Continue watching Daredevil.”

Yet, on the topic of consumer video choice, Chairman Wheeler lives in two separate worlds. On the one hand, he recognizes that:

There’s never been a better time to watch television in America. We have more options than ever, and, with so much competition for eyeballs, studios and artists keep raising the bar for quality content.

But, on the other hand, he asserts that when it comes to set-top boxes, there is no such choice, and consumers have suffered accordingly.

Of course, this ignores the obvious fact that nearly all pay-TV content is already available from a large number of outlets, and that competition between devices and services that deliver this content is plentiful.

In fact, ten years ago — before Apple TV, Roku, Xfinity X1 and Hulu (among too many others to list) — Gigi Sohn, Chairman Wheeler’s chief legal counsel, argued before the House Energy and Commerce Committee that:

We are living in a digital gold age and consumers… are the beneficiaries.  Consumers have numerous choices for buying digital content and for buying devices on which to play that content. (emphasis added)

And, even on the FCC’s own terms, the multichannel video market is presumptively competitive nationwide with

direct broadcast satellite (DBS) providers’ market share of multi-channel video programming distributors (MVPDs) subscribers [rising] to 33.8%. “Telco” MVPDs increased their market share to 13% and their nationwide footprint grew by 5%. Broadband service providers such as Google Fiber also expanded their footprints. Meanwhile, cable operators’ market share fell to 52.8% of MVPD subscribers.

Online video distributor (OVD) services continue to grow in popularity with consumers. Netflix now has 47 million or more subscribers in the U.S., Amazon Prime has close to 60 million, and Hulu has close to 12 million. By contrast, cable MVPD subscriptions dropped to 53.7 million households in 2014.

The extent of competition has expanded dramatically over the years, and Comcast’s inclusion of Netflix in its ecosystem is only the latest indication of this market evolution.

And to further underscore the outdated notion of focusing on “boxes,” AT&T just announced that it would be offering a fully apps-based version of its Direct TV service. And what was one of the main drivers of AT&T being able to go in this direction? It was because the company realized the good economic sense of ditching boxes altogether:

The company will be able to give consumers a break [on price] because of the low cost of delivering the service. AT&T won’t have to send trucks to install cables or set-top boxes; customers just need to download an app. 

And lest you think that Comcast’s move was merely a cynical response meant to undermine the Commissioner (although, it is quite enjoyable on that score), the truth is that Comcast has no choice but to offer services like this on its platform — and it’s been making moves like this for quite some time (see here and here). Everyone knows, MVPDs included, that apps distributed on a range of video platforms are the future. If Comcast didn’t get on board the apps train, it would have been left behind at the station.

And there is other precedent for expecting just this convergence of video offerings on a platform. For instance, Amazon’s Fire TV gives consumers the Amazon video suite — available through the Prime Video subscription — but they also give you access to apps like Netflix, Hulu. (Of course Amazon is a so-called edge provider, so when it makes the exact same sort of moves that Comcast is now making, its easy for those who insist on old market definitions to miss the parallels.)

The point is, where Amazon and Comcast are going to make their money is in driving overall usage of their platform because, inevitably, no single service is going to have every piece of content a given user wants. Long term viability in the video market is necessarily going to be about offering consumers more choice, not less. And, in this world, the box that happens to be delivering the content is basically irrelevant; it’s the competition between platform providers that matters.

The Global Antitrust Institute (GAI) at George Mason University’s Antonin Scalia Law School released today a set of comments on the joint U.S. Department of Justice (DOJ) – Federal Trade Commission (FTC) August 12 Proposed Update to their 1995 Antitrust Guidelines for the Licensing of Intellectual Property (Proposed Update).  As has been the case with previous GAI filings (see here, for example), today’s GAI Comments are thoughtful and on the mark.

For those of you who are pressed for time, the latest GAI comments make these major recommendations (summary in italics):

Standard Essential Patents (SEPs):  The GAI Comments commended the DOJ and the FTC for preserving the principle that the antitrust framework is sufficient to address potential competition issues involving all IPRs—including both SEPs and non-SEPs.  In doing so, the DOJ and the FTC correctly rejected the invitation to adopt a special brand of antitrust analysis for SEPs in which effects-based analysis was replaced with unique presumptions and burdens of proof. 

o   The GAI Comments noted that, as FTC Chairman Edith Ramirez has explained, “the same key enforcement principles [found in the 1995 IP Guidelines] also guide our analysis when standard essential patents are involved.”

o   This is true because SEP holders, like other IP holders, do not necessarily possess market power in the antitrust sense, and conduct by SEP holders, including breach of a voluntary assurance to license its SEP on fair, reasonable, and nondiscriminatory (FRAND) terms, does not necessarily result in harm to the competitive process or to consumers. 

o   Again, as Chairwoman Ramirez has stated, “it is important to recognize that a contractual dispute over royalty terms, whether the rate or the base used, does not in itself raise antitrust concerns.”

Refusals to License:  The GAI Comments expressed concern that the statements regarding refusals to license in Sections 2.1 and 3 of the Proposed Update seem to depart from the general enforcement approach set forth in the 2007 DOJ-FTC IP Report in which those two agencies stated that “[a]ntitrust liability for mere unilateral, unconditional refusals to license patents will not play a meaningful part in the interface between patent rights and antitrust protections.”  The GAI recommended that the DOJ and the FTC incorporate this approach into the final version of their updated IP Guidelines.

“Unreasonable Conduct”:  The GAI Comments recommended that Section 2.2 of the Proposed Update be revised to replace the phrase “unreasonable conduct” with a clear statement that the agencies will only condemn licensing restraints when anticompetitive effects outweigh procompetitive benefits.

R&D Markets:  The GAI Comments urged the DOJ and the FTC to reconsider the inclusion (or, at the very least, substantially limit the use) of research and development (R&D) markets because: (1) the process of innovation is often highly speculative and decentralized, making it impossible to identify all market participants to be; (2) the optimal relationship between R&D and innovation is unknown; (3) the market structure most conducive to innovation is unknown; (4) the capacity to innovate is hard to monopolize given that the components of modern R&D—research scientists, engineers, software developers, laboratories, computer centers, etc.—are continuously available on the market; and (5) anticompetitive conduct can be challenged under the actual potential competition theory or at a later time.

While the GAI Comments are entirely on point, even if their recommendations are all adopted, much more needs to be done.  The Proposed Update, while relatively sound, should be viewed in the larger context of the Obama Administration’s unfortunate use of antitrust policy to weaken patent rights (see my article here, for example).  In addition to strengthening the revised Guidelines, as suggested by the GAI, the DOJ and the FTC should work with other component agencies of the next Administration – including the Patent Office and the White House – to signal enhanced respect for IP rights in general.  In short, a general turnaround in IP policy is called for, in order to spur American innovation, which has been all too lacking in recent years.

As Commissioner Wheeler moves forward with his revised set-top box proposal, and on the eve of tomorrow’s senate FCC oversight hearing, we would do well to reflect on some insightful testimony regarding another of the Commission’s rulemakings from ten years ago:

We are living in a digital gold age and consumers… are the beneficiaries. Consumers have numerous choices for buying digital content and for buying devices on which to play that content. They have never had so much flexibility and so much opportunity.  

* * *

As the content industry has ramped up on-line delivery of content, it has been testing a variety of protection measures that provide both security for the industry and flexibility for consumers.

So to answer the question, can content protection and technological innovation coexist?  It is a resounding yes. Look at the robust market for on-line content distribution facilitated by the technologies and networks consumers love.

* * *

[T]he Federal Communications Commission should not become the Federal Computer Commission or the Federal Copyright Commission, and the marketplace, not the Government, is the best arbiter of what technologies succeed or fail.

That’s not the self-interested testimony of a studio or cable executive — that was Gigi Sohn, current counsel to Chairman Wheeler, speaking on behalf of Public Knowledge in 2006 before the House Energy and Commerce Committee against the FCC’s “broadcast flag” rules. Those rules, supported by a broad spectrum of rightsholders, required consumer electronics devices to respect programming conditions preventing the unauthorized transmission over the internet of digital broadcast television content.

Ms. Sohn and Public Knowledge won that fight in court, convincing the DC Circuit that Congress hadn’t given the FCC authority to impose the rules in the first place, and she successfully urged Congress not to give the FCC the authority to reinstate them.

Yet today, she and the Chairman seem to have forgotten her crucial insights from ten years ago. If the marketplace for video content was sufficiently innovative and competitive then, how can it possibly not be so now, with audiences having orders of magnitude more choices, both online and off? And if the FCC lacked authority to adopt copyright-related rules then, how does the FCC suddenly have that authority now, in the absence of any intervening congressional action?

With Section 106 of the Copyright Act, Congress granted copyright holders the exclusive rights to engage in or license the reproduction, distribution, and public performance of their works. The courts are the “backstop,” not the FCC (as Chairman Wheeler would have it), and section 629 of the Communications Act doesn’t say otherwise. All section 629 does is direct the FCC to promote a competitive market for devices to access pay-TV services from pay-TV providers. As we noted last week, it very simply doesn’t allow the FCC to interfere with the license arrangements that fill those devices, and, short of explicit congressional direction, the Commission is simply not empowered to interfere with the framework set forth in the Copyright Act.

Chairman Wheeler’s latest proposal has improved on his initial plan by, for example, moving toward an applications-based approach and away from the mandatory disaggregation of content. But it would still arrogate to the FCC the authority to stand up a licensing body for the distribution of content over pay-TV applications; set rules on the terms such licenses must, may, and may not include; and even allow the FCC itself to create terms or the entire license. Such rules would necessarily implicate the extent to which rightsholders are able to control the distribution of their content.

The specifics of the regulations may be different from 2006, but the point is the same: What the FCC could not do in 2006, it cannot do today.

Imagine if you will… that a federal regulatory agency were to decide that the iPhone ecosystem was too constraining and too expensive; that consumers — who had otherwise voted for iPhones with their dollars — were being harmed by the fact that the platform was not “open” enough.

Such an agency might resolve (on the basis of a very generous reading of a statute), to force Apple to make its iOS software available to any hardware platform that wished to have it, in the process making all of the apps and user data accessible to the consumer via these new third parties, on terms set by the agency… for free.

Difficult as it may be to picture this ever happening, it is exactly the sort of Twilight Zone scenario that FCC Chairman Tom Wheeler is currently proposing with his new set-top box proposal.

Based on the limited information we have so far (a fact sheet and an op-ed), Chairman Wheeler’s new proposal does claw back some of the worst excesses of his initial draft (which we critiqued in our comments and reply comments to that proposal).

But it also appears to reinforce others — most notably the plan’s disregard for the right of content creators to control the distribution of their content. Wheeler continues to dismiss the complex business models, relationships, and licensing terms that have evolved over years of competition and innovation. Instead, he offers  a one-size-fits-all “solution” to a “problem” that market participants are already falling over themselves to provide.

Plus ça change…

To begin with, Chairman Wheeler’s new proposal is based on the same faulty premise: that consumers pay too much for set-top boxes, and that the FCC is somehow both prescient enough and Congressionally ordained to “fix” this problem. As we wrote in our initial comments, however,

[a]lthough the Commission asserts that set-top boxes are too expensive, the history of overall MVPD prices tells a remarkably different story. Since 1994, per-channel cable prices including set-top box fees have fallen by 2 percent, while overall consumer prices have increased by 54 percent. After adjusting for inflation, this represents an impressive overall price decrease.

And the fact is that no one buys set-top boxes in isolation; rather, the price consumers pay for cable service includes the ability to access that service. Whether the set-top box fee is broken out on subscribers’ bills or not, the total price consumers pay is unlikely to change as a result of the Commission’s intervention.

As we have previously noted, the MVPD set-top box market is an aftermarket; no one buys set-top boxes without first (or simultaneously) buying MVPD service. And as economist Ben Klein (among others) has shown, direct competition in the aftermarket need not be plentiful for the market to nevertheless be competitive:

Whether consumers are fully informed or uninformed, consumers will pay a competitive package price as long as sufficient competition exists among sellers in the [primary] market.

Engineering the set-top box aftermarket to bring more direct competition to bear may redistribute profits, but it’s unlikely to change what consumers pay.

Stripped of its questionable claims regarding consumer prices and placed in the proper context — in which consumers enjoy more ways to access more video content than ever before — Wheeler’s initial proposal ultimately rested on its promise to “pave the way for a competitive marketplace for alternate navigation devices, and… end the need for multiple remote controls.” Weak sauce, indeed.

He now adds a new promise: that “integrated search” will be seamlessly available for consumers across the new platforms. But just as universal remotes and channel-specific apps on platforms like Apple TV have already made his “multiple remotes” promise a hollow one, so, too, have competitive pressures already begun to deliver integrated search.

Meanwhile, such marginal benefits come with a host of substantial costs, as others have pointed out. Do we really need the FCC to grant itself more powers and create a substantial and coercive new regulatory regime to mandate what the market is already poised to provide?

From ignoring copyright to obliterating copyright

Chairman Wheeler’s first proposal engendered fervent criticism for the impossible position in which it placed MVPDs — of having to disregard, even outright violate, their contractual obligations to content creators.

Commendably, the new proposal acknowledges that contractual relationships between MVPDs and content providers should remain “intact.” Thus, the proposal purports to enable programmers and MVPDs to maintain “their channel position, advertising and contracts… in place.” MVPDs will retain “end-to-end” control of the display of content through their apps, and all contractually guaranteed content protection mechanisms will remain, because the “pay-TV’s software will manage the full suite of linear and on-demand programming licensed by the pay-TV provider.”

But, improved as it is, the new proposal continues to operate in an imagined world where the incredibly intricate and complex process by which content is created and distributed can be reduced to the simplest of terms, dictated by a regulator and applied uniformly across all content and all providers.

According to the fact sheet, the new proposal would “[p]rotect[] copyrights and… [h]onor[] the sanctity of contracts” through a “standard license”:

The proposed final rules require the development of a standard license governing the process for placing an app on a device or platform. A standard license will give device manufacturers the certainty required to bring innovative products to market… The license will not affect the underlying contracts between programmers and pay-TV providers. The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.

But programming is distributed under a diverse range of contract terms. The only way a single, “standard license” could possibly honor these contracts is by forcing content providers to license all of their content under identical terms.

Leaving aside for a moment the fact that the FCC has no authority whatever to do this, for such a scheme to work, the agency would necessarily have to strip content holders of their right to govern the terms on which their content is accessed. After all, if MVPDs are legally bound to redistribute content on fixed terms, they have no room to permit content creators to freely exercise their rights to specify terms like windowing, online distribution restrictions, geographic restrictions, and the like.

In other words, the proposal simply cannot deliver on its promise that “[t]he license will not affect the underlying contracts between programmers and pay-TV providers.”

But fear not: According to the Fact Sheet, “[p]rogrammers will have a seat at the table to ensure that content remains protected.” Such largesse! One would be forgiven for assuming that the programmers’ (single?) seat will surrounded by those of other participants — regulatory advocates, technology companies, and others — whose sole objective will be to minimize content companies’ ability to restrict the terms on which their content is accessed.

And we cannot ignore the ominous final portion of the Fact Sheet’s “Standard License” description: “The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.” Such an arrogation of ultimate authority by the FCC doesn’t bode well for that programmer’s “seat at the table” amounting to much.

Unfortunately, we can only imagine the contours of the final proposal that will describe the many ways by which distribution licenses can “harm the marketplace for competitive devices.” But an educated guess would venture that there will be precious little room for content creators and MVPDs to replicate a large swath of the contract terms they currently employ. “Any content owner can have its content painted any color that it wants, so long as it is black.”

At least we can take solace in the fact that the FCC has no authority to do what Wheeler wants it to do

And, of course, this all presumes that the FCC will be able to plausibly muster the legal authority in the Communications Act to create what amounts to a de facto compulsory licensing scheme.

A single license imposed upon all MVPDs, along with the necessary restrictions this will place upon content creators, does just as much as an overt compulsory license to undermine content owners’ statutory property rights. For every license agreement that would be different than the standard agreement, the proposed standard license would amount to a compulsory imposition of terms that the rights holders and MVPDs would not otherwise have agreed to. And if this sounds tedious and confusing, just wait until the Commission starts designing its multistakeholder Standard Licensing Oversight Process (“SLOP”)….

Unfortunately for Chairman Wheeler (but fortunately for the rest of us), the FCC has neither the legal authority, nor the requisite expertise, to enact such a regime.

Last month, the Copyright Office was clear on this score in its letter to Congress commenting on the Chairman’s original proposal:  

[I]t is important to remember that only Congress, through the exercise of its power under the Copyright Clause, and not the FCC or any other agency, has the constitutional authority to create exceptions and limitations in copyright law. While Congress has enacted compulsory licensing schemes, they have done so in response to demonstrated market failures, and in a carefully circumscribed manner.

Assuming that Section 629 of the Communications Act — the provision that otherwise empowers the Commission to promote a competitive set-top box market — fails to empower the FCC to rewrite copyright law (which is assuredly the case), the Commission will be on shaky ground for the inevitable torrent of lawsuits that will follow the revised proposal.

In fact, this new proposal feels more like an emergency pivot by a panicked Chairman than an actual, well-grounded legal recommendation. While the new proposal improves upon the original, it retains at its core the same ill-informed, ill-advised and illegal assertion of authority that plagued its predecessor.

The Antitrust Division of the U.S. Department of Justice (DOJ) ignored sound law and economics principles in its August 4 decision announcing a new interpretation of seventy-five year-old music licensing consent decrees it had entered into separately with the two major American “performing rights organizations” (PROs)  —  the American Society of Composers, Authors, and Publishers (see ASCAP) and Broadcast Music, Inc. (see BMI).  It also acted in a matter at odds with international practice.  DOJ should promptly rescind its new interpretation and restore the welfare-enhancing licensing flexibility that ASCAP and BMI previously enjoyed.   If DOJ fails to do this, the court overseeing the decrees or Congress should be prepared to act.

Background

ASCAP and BMI contract with music copyright holders to act as intermediaries that provide “blanket” licenses to music users (e.g., television and radio stations, bars, and internet music distributors) for use of their full copyrighted musical repertoires, without the need for song-specific licensing negotiations.  This greatly reduces the transactions costs of arranging for the playing of musical works, benefiting music users, the listening public, and copyright owners (all of whom are assured of at least some compensation for their endeavors).  ASCAP and BMI are big businesses, with each PRO holding licenses to over ten million works and accounting for roughly 45 percent of the domestic music licensing market (ninety percent combined).  Because both ASCAP and BMI pool copyrighted songs that could otherwise compete with each other, and both grant users a single-price “blanket license” conveying the rights to play their full set of copyrighted works, the two organizations could be seen as restricting competition among copyrighted works and fixing the prices of copyrighted substitutes – raising serious questions under section 1 of the Sherman Antitrust Act, which condemns contracts that unreasonably restrain trade.  This led the DOJ to bring antitrust suits against ASCAP and BMI over eighty years ago, which were settled by separate judicially-filed consent decrees in 1941.  The decrees imposed a variety of limitations on the two PROs’ licensing practices, aimed at preventing ASCAP and BMI from exercising anticompetitive market power (such as the setting of excessive licensing rates).  The decrees were amended twice over the years, most recently in 2001, to take account of changing market conditions.  The U.S. Supreme Court noted the constraining effect of the decrees in BMI v. CBS (1979), in ruling that the BMI and ASCAP blanket licenses did not constitute per se illegal price fixing.  The Court held, rather, that the licenses should be evaluated on a case-by-case basis under the antitrust “rule of reason,” since the licenses inherently generated great efficiency benefits (“the immediate use of covered compositions, without the delay of prior individual negotiations”) that had to be weighed against potential anticompetitive harms.

The August 4, 2016 DOJ Consent Decree Interpretation

Fast forward to 2014, when DOJ undertook a new review of the ASCAP and BMI decrees, and requested the submission of public comments to aid it in its deliberations.  This review came to an official conclusion two year laters, on August 4, 2016, when DOJ decided not to amend the decrees – but announced a decree interpretation that limits ASCAP’s and BMI’s flexibility.  Specifically, DOJ stated that the decrees needed to be “more consistently applied.”  By this, the DOJ meant that BMI and ASCAP should only grant blanket licenses that cover all of the rights to 100 percent of the works in the PROs’ respective catalogs, not licenses that cover only partial interests in those works.  DOJ stated:

Only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses that distinguish ASCAP’s and BMI’s activities from other agreements among competitors that present serious issues under the antitrust laws.

The New DOJ Interpretation is bad as a Matter of Policy

DOJ’s August 4 interpretation rejects industry practice.  Under it, ASCAP and BMI will only be able to offer a license covering all of the copyright interests in a musical competition, even if the license covers a joint work.  For example, consider a band of five composer-musicians, each of whom has a fractional interest in the copyright covering the band’s new album which is a joint work.  Previously, each musician was able to offer a partial interest in the joint work to a performance rights organization, reflecting the relative shares of the total copyright interest covering the work. The organization could offer a partial license, and a user could aggregate different partial licenses in order to cover the whole joint work.

Now, however, under DOJ’s new interpretation, BMI and ASCAP will be prevented from offering partial licenses to that work to users. This may deny the band’s individual members the opportunity to deal profitably with BMI and ASCAP, thereby undermining their ability to receive fair compensation.  As the two PROs have noted, this approach “will cause unnecessary chaos in the marketplace and place unfair financial burdens and creative constraints on songwriters and composers.”  According to ASCAP President Paul Williams, “It is as if the DOJ saw songwriters struggling to stay afloat in a sea of outdated regulations and decided to hand us an anchor, in the form of 100 percent licensing, instead of a life preserver.”  Furthermore, the president and CEO of BMI, Mike O’Neill, stated:  “We believe the DOJ’s interpretation benefits no one – not BMI or ASCAP, not the music publishers, and not the music users – but we are most sensitive to the impact this could have on you, our songwriters and composers.”  These views are bolstered by a January 2016 U.S. Copyright Office report, which concluded that “an interpretation of the consent decrees that would require 100-percent licensing or removal of a work from the ASCAP or BMI repertoire would appear to be fraught with legal and logistical problems, and might well result in a sharp decrease in repertoire available through these [performance rights organizations’] blanket licenses.”  Regrettably, during the decree review period, DOJ ignored the expert opinion of the Copyright Office, as well as the public record comments of numerous publishers and artists (see here, for example) indicating that a 100 percent licensing requirement would depress returns to copyright owners and undermine the creative music industry.

Most fundamentally, DOJ’s new interpretation of the BMI and ASCAP consent decrees involves an abridgment of economic freedom.  It further limits the flexibility of copyright music holders and music users to contract with intermediaries to promote the efficient distribution of music performance rights, in a manner that benefits the listening public while allowing creative artists sufficient compensation for their efforts.  DOJ made no compelling showing that a new consent decree constraint is needed to promote competition (100 percent licensing only).  Far from promoting competition, DOJ’s new interpretation undermines it.  In short, DOJ micromanagement of copyright licensing by consent decree reinterpretation is a costly new regulatory initiative that reflects a lack of appreciation for intellectual property rights, which incentivize innovation.  In short, DOJ’s latest interpretation of the ASCAP and BMI decrees is terrible policy.

The New DOJ Interpretation is bad as a Matter of Law

DOJ’s new interpretation not only is bad policy, it is inconsistent with sound textual construction of the decrees themselves.  As counsel for BMI explained in an August 4 federal court filing (in the Southern District of New York, which oversees the decrees), the BMI decree (and therefore the analogous ASCAP decree as well) does not expressly require 100 percent licensing and does not unambiguously prohibit fractional licensing.  Accordingly, since a consent decree is an injunction, and any activity not expressly required or prohibited thereunder is permitted, fractional shares licensing should be authorized.  DOJ’s new interpretation ignores this principle.  It also is at odds with a report of the U.S. Copyright Office that concluded the BMI consent decree “must be understood to include partial interests in musical works.”  Furthermore, the new interpretation is belied by the fact that the PRO licensing market has developed and functioned efficiently for decades by pricing, colleting, and distributing fees for royalties on a fractional basis.  Courts view such evidence of trade practice and custom as relevant in determining the meaning of a consent decree.

 

The New DOJ Interpretation Runs Counter to International Norms

Finally, according to Gadi Oron, Director General of the International Confederation of Societies of Authors and Composers (CISAC), a Paris-based organization that regroups 239 rights societies from 123 countries, including ASCAP, BMI, and SESAC, adoption of the new interpretation would depart from international norms in the music licensing industry and have disruptive international effects:

It is clear that the DoJ’s decisions have been made without taking the interests of creators, neither American nor international, into account. It is also clear that they were made with total disregard for the international framework, where fractional licensing is practiced, even if it’s less of a factor because many countries only have one performance rights organization representing songwriters in their territory. International copyright laws grant songwriters exclusive rights, giving them the power to decide who will license their rights in each territory and it is these rights that underpin the landscape in which authors’ societies operate. The international system of collective management of rights, which is based on reciprocal representation agreements and founded on the freedom of choice of the rights holder, would be negatively affected by such level of government intervention, at a time when it needs support more than ever.

Conclusion

In sum, DOJ should take account of these concerns and retract its new interpretation of the ASCAP and BMI consent decrees, restoring the status quo ante.  If it fails to do so, a federal court should be prepared to act, and, if necessary, Congress should seriously consider appropriate corrective legislation.

It’s not quite so simple to spur innovation. Just ask the EU as it resorts to levying punitive retroactive taxes on productive American companies in order to ostensibly level the playing field (among other things) for struggling European startups. Thus it’s truly confusing when groups go on a wholesale offensive against patent rights — one of the cornerstones of American law that has contributed a great deal toward our unparalleled success as an innovative economy.

Take EFF, for instance. The advocacy organization has recently been peddling sample state legislation it calls the “Reclaim Invention Act,” which it claims is targeted at reining in so-called “patent trolls.” Leaving aside potential ulterior motives (like making it impossible to get software patents at all), I am left wondering what EFF actually hopes to achieve.

“Troll” is a scary sounding word, but what exactly is wrapped up in EFF’s definition? According to EFF’s proposed legislation, a “patent assertion entity” (the polite term for “patent troll”) is any entity that primarily derives its income through the licensing of patents – as opposed to actually producing the invention for public consumption. But this is just wrong. As Zorina Khan has noted, the basic premise upon which patent law was constructed in the U.S. was never predicated upon whether an invention would actually be produced:

The primary concern was access to the new information, and the ability of other inventors to benefit from the discovery either through licensing, inventing around the idea, or at expiration of the patent grant. The emphasis was certainly not on the production of goods; in fact, anyone who had previously commercialized an invention lost the right of exclusion vested in patents. The decision about how or whether the patent should be exploited remained completely within the discretion of the patentee, in the same way that the owner of physical property is allowed to determine its use or nonuse.

Patents are property. As with other forms of property, patent holders are free to transfer them to whomever they wish, and are free to license them as they see fit. The mere act of exercising property rights simply cannot be the basis for punitive treatment by the state. And, like it or not, licensing inventions or selling the property rights to an invention is very often how inventors are compensated for their work. Whether one likes the Patent Act in particular or not is irrelevant; as long as we have patents, these are fundamental economic and legal facts.

Further, the view implicit in EFF’s legislative proposal completely ignores the fact that the people or companies that may excel at inventing things (the province of scientists, for example) may not be so skilled at commercializing things (the province of entrepreneurs). Moreover, inventions can be enormously expensive to commercialize. In such cases, it could very well be the most economically efficient result to allow some third party with the requisite expertise or the means to build it, to purchase and manage the rights to the patent, and to allow them to arrange for production of the invention through licensing agreements. Intermediaries are nothing new in society, and, despite popular epithets about “middlemen,” they actually provide a necessary function with respect to mobilizing capital and enabling production.

Granted, some companies will exhibit actual “troll” behavior, but the question is not whether some actors are bad, but whether the whole system overall optimizes innovation and otherwise contributes to greater social welfare. Licensing patents in itself is a benign practice, so long as the companies that manage the patents are not abusive. And, of course, among the entities that engage in patent licensing, one would assume that universities would be the most unobjectionable of all parties.

Thus, it’s extremely disappointing that EFF would choose to single out universities as aiders and abettors of “trolls” — and in so doing recommend punitive treatment. And what EFF recommends is shockingly draconian. It doesn’t suggest that there should be heightened review in IPR proceedings, or that there should be fee shifting or other case-by-case sanctions doled out for unwise partnership decisions. No, according to the model legislation, universities would be outright cut off from government financial aid or other state funding, and any technology transfers would be void, unless they:

determine whether a patent is the most effective way to bring a new invention to a broad user base before filing for a patent that covers that invention[;] … prioritize technology transfer that develops its inventions and scales their potential user base[;] … endeavor to nurture startups that will create new jobs, products, and services[;] … endeavor to assign and license patents only to entities that require such licenses for active commercialization efforts or further research and development[;] … foster agreements and relationships that include the sharing of know-how and practical experience to maximize the value of the assignment or license of the corresponding patents; and … prioritize the public interest in all patent transactions.

Never mind the fact that recent cases like Alice Corp., Octane Fitness, and Highmark — as well as the new inter partes review process — seem to be putting effective downward pressure on frivolous suits (as well as, potentially, non-frivolous suits, for that matter); apparently EFF thinks that putting the screws to universities is what’s needed to finally overcome the (disputed) problems of excessive patent litigation.

Perhaps reflecting that even EFF itself knows that its model legislation is more of a publicity stunt than a serious proposal, most of what it recommends is either so ill-defined as to be useless (e.g., “prioritize public interest in all patent transactions?” What does that even mean?) or is completely mixed up.

For instance, the entire point of a university technology transfer office is that educational institutions and university researchers are not themselves in a position to adequately commercialize inventions. Questions of how large a user base a given invention can reach, or how best to scale products, grow markets, or create jobs are best left to entrepreneurs and business people. The very reason a technology transfer office would license or sell its patents to a third party is to discover these efficiencies.

And if a university engages in a transfer that, upon closer scrutiny, runs afoul of this rather fuzzy bit of legislation, any such transfers will be deemed void. Which means that universities will either have to expend enormous resources to find willing partners, or will spend millions on lawsuits and contract restitution damages. Enacting these feel-good  mandates into state law is at best useless, and most likely a tool for crusading plaintiff’s attorneys to use to harass universities.

Universities: Don’t you dare commercialize that invention!

As I noted above, it’s really surprising that groups like EFF are going after universities, as their educational mission and general devotion to improving social welfare should make them the darlings of social justice crusaders. However, as public institutions with budgets and tax statuses dependent on political will, universities are both unable to route around organizational challenges (like losing student aid or preferred tax status) and are probably unwilling to engage in wholesale PR defensive warfare for fear of offending a necessary political constituency. Thus, universities are very juicy targets — particularly when they engage in “dirty” commercial activities of any sort, no matter how attenuated.

And lest you think that universities wouldn’t actually be harassed (other than in the abstract by the likes of EFF) over patents, it turns out that it’s happening even now, even without EFF’s proposed law.

For the last five years Princeton University has been locked in a lawsuit with some residents of Princeton, New Jersey who have embarked upon a transparently self-interested play to divert university funds to their own pockets. Their weapon of choice? A challenge to Princeton’s tax-exempt status based on the fact that the school licenses and sells its patented inventions.

The plaintiffs’ core argument in Fields v. Princeton is that the University should be  a taxpaying entity because it occasionally generates patent licensing revenues from a small fraction of the research that its faculty conducts in University buildings.

The Princeton case is problematic for a variety of reasons, one of which deserves special attention because it runs squarely up against a laudable federal law that is intended to promote research, development, and patent commercialization.

In the early 1980s Congress passed the Bayh-Dole Act, which made it possible for universities to retain ownership over discoveries made in campus labs. The aim of the law was to encourage essential basic research that had historically been underdeveloped. Previously, the rights to any such federally-funded discoveries automatically became the property of the federal government, which, not surprisingly, put a damper on universities’ incentives to innovate.

When universities collaborate with industry — a major aim of Bayh-Dole — innovation is encouraged, breakthroughs occur, and society as a whole is better off. About a quarter of the top drugs approved since 1981 came from university research, as did many life-changing products we now take for granted, like Google, web browsers, email, cochlear implants and major components of cell phones. Since the passage of the Act, a boom in commercialized patents has yielded billions of dollars of economic activity.

Under the Act innovators are also rewarded: Qualifying institutions like Princeton are required to share royalties with the researchers who make these crucial discoveries. The University has no choice in the matter; to refuse to share the revenues would constitute a violation of the terms of federal research funding. But the Fields suit ignores this reality an,d in much the same way as EFF’s proposed legislation, will force a stark choice upon Princeton University: engage with industry, increase social utility and face lawsuits, or keep your head down and your inventions to yourself.

A Hobson’s Choice

Thus, things like the Fields suit and EFF’s proposed legislation are worse than costly distractions for universities; they are major disincentives to the commercialization of university inventions. This may not be the intended consequence of these actions, but it is an entirely predictable one.

Faced with legislation that punishes them for being insufficiently entrepreneurial and suits that attack them for bothering to commercialize at all, universities will have to make a hobson’s choice: commercialize the small fraction of research that might yield licensing revenues and potentially face massive legal liability, or simply decide to forego commercialization (and much basic research) altogether.

The risk here, obviously, is that research institutions will choose the latter in order to guard against the significant organizational costs that could result from a change in their tax status or a thicket of lawsuits that emerge from voided technology transfers (let alone the risk of losing student aid money).

But this is not what we want as a society. We want the optimal level of invention, innovation, and commercialization. What anti-patent extremists and short-sighted state governments may obtain for us instead, however, is a status quo much like Europe where the legal and regulatory systems perpetually keep innovation on a low simmer.

Copyright law, ever a sore point in some quarters, has found a new field of battle in the FCC’s recent set-top box proposal. At the request of members of Congress, the Copyright Office recently wrote a rather thorough letter outlining its view of the FCC’s proposal on rightsholders.

In sum, the CR’s letter was an even-handed look at the proposal which concluded:

As a threshold matter, it seems critical that any revised proposal respect the authority of creators to manage the exploitation of their copyrighted works through private licensing arrangements, because regulatory actions that undermine such arrangements would be inconsistent with the rights granted under the Copyright Act.

This fairly uncontroversial statement of basic legal principle was met with cries of alarm. And Stanford’s CIS had a post from Affiliated Scholar Annemarie Bridy that managed to trot out breathless comparisons to inapposite legal theories while simultaneously misconstruing the “fair use” doctrine (as well as how Copyright law works in the video market, for that matter).

Look out! Lochner is coming!

In its letter the Copyright Office warned the FCC that its proposed rules have the potential to disrupt the web of contracts that underlie cable programming, and by extension, risk infringing the rights of copyright holders to commercially exploit their property. This analysis actually tracks what Geoff Manne and I wrote in both our initial comment and our reply comment to the set-top box proposal.

Yet Professor Bridy seems to believe that, notwithstanding the guarantees of both the Constitution and Section 106 of the Copyright Act, the FCC should have the power to abrogate licensing contracts between rightsholders and third parties.  She believes that

[t]he Office’s view is essentially that the Copyright Act gives right holders not only the limited range of rights enumerated in Section 106 (i.e., reproduction, preparation of derivative works, distribution, public display, and public performance), but also a much broader and more amorphous right to “manage the commercial exploitation” of copyrighted works in whatever ways they see fit and can accomplish in the marketplace, without any regulatory interference from the government.

What in the world does this even mean? A necessary logical corollary of the Section 106 rights includes the right to exploit works commercially as rightsholders see fit. Otherwise, what could it possibly mean to have the right to control the reproduction or distribution of a work? The truth is that Section 106 sets out a general set of rights that inhere in rightsholders with respect to their protected works, and that commercial exploitation is merely a subset of this total bundle of rights.

The ability to contract with other parties over these rights is also a necessary corollary of the property rights recognized in Section 106. After all, the right to exclude implies by necessity the right to include. Which is exactly what a licensing arrangement is.

But wait, there’s more — she actually managed to pull out the Lochner bogeyman to validate her argument!

The Office’s absolutist logic concerning freedom of contract in the copyright licensing domain is reminiscent of the Supreme Court’s now-infamous reasoning in Lochner v. New York, a 1905 case that invalidated a state law limiting maximum working hours for bakers on the ground that it violated employer-employee freedom of contract. The Court in Lochner deprived the government of the ability to provide basic protections for workers in a labor environment that subjected them to unhealthful and unsafe conditions. As Julie Cohen describes it, “‘Lochner’ has become an epithet used to characterize an outmoded, over-narrow way of thinking about state and federal economic regulation; it goes without saying that hardly anybody takes the doctrine it represents seriously.”

This is quite a leap of logic, as there is precious little in common between the letter from the Copyright Office and the Lochner opinion aside from the fact that both contain the word “contracts” in their pages.  Perhaps the most critical problem with Professor Bridy’s analogy is the fact that Lochner was about a legislature interacting with the common law system of contract, whereas the FCC is a body subordinate to Congress, and IP is both constitutionally and statutorily guaranteed. A sovereign may be entitled to interfere with the operation of common law, but an administrative agency does not have the same sort of legal status as a legislature when redefining general legal rights.

The key argument that Professor Bridy offered in support of her belief that the FCC should be free to abrogate contracts at will is that “[r]egulatory limits on private bargains may come in the form of antitrust laws or telecommunications laws or, as here, telecommunications regulations that further antitrust ends.”  However, this completely misunderstand U.S. constitutional doctrine.

In particular, as Geoff Manne and I discussed in our set-top box comments to the FCC, using one constitutional clause to end-run another constitutional clause is generally a no-no:

Regardless of whether or how well the rules effect the purpose of Sec. 629, copyright violations cannot be justified by recourse to the Communications Act. Provisions of the Communications Act — enacted under Congress’s Commerce Clause power — cannot be used to create an end run around limitations imposed by the Copyright Act under the Constitution’s Copyright Clause. “Congress cannot evade the limits of one clause of the Constitution by resort to another,” and thus neither can an agency acting within the scope of power delegated to it by Congress. Establishing a regulatory scheme under the Communications Act whereby compliance by regulated parties forces them to violate content creators’ copyrights is plainly unconstitutional.

Congress is of course free to establish the implementation of the Copyright Act as it sees fit. However, unless Congress itself acts to change that implementation, the FCC — or any other party — is not at liberty to interfere with rightsholders’ constitutionally guaranteed rights.

You Have to Break the Law Before You Raise a Defense

Another bone of contention upon which Professor Bridy gnaws is a concern that licensing contracts will abrogate an alleged right to “fair use” by making the defense harder to muster:  

One of the more troubling aspects of the Copyright Office’s letter is the length to which it goes to assert that right holders must be free in their licensing agreements with MVPDs to bargain away the public’s fair use rights… Of course, the right of consumers to time-shift video programming for personal use has been enshrined in law since Sony v. Universal in 1984. There’s no uncertainty about that particular fair use question—none at all.

The major problem with this reasoning (notwithstanding the somewhat misleading drafting of Section 107) is that “fair use” is not an affirmative right, it is an affirmative defense. Despite claims that “fair use” is a right, the Supreme Court has noted on at least two separate occasions (1, 2) that Section 107 was “structured… [as]… an affirmative defense requiring a case-by-case analysis.”

Moreover, important as the Sony case is, it does not not establish that “[t]here’s no uncertainty about [time-shifting as a] fair use question—none at all.” What it actually establishes is that, given the facts of that case, time-shifting was a fair use. Not for nothing the Sony Court notes at the outset of its opinion that

An explanation of our rejection of respondents’ unprecedented attempt to impose copyright liability upon the distributors of copying equipment requires a quite detailed recitation of the findings of the District Court.

But more generally, the Sony doctrine stands for the proposition that:

“The limited scope of the copyright holder’s statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts. The immediate effect of our copyright law is to secure a fair return for an ‘author’s’ creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good. ‘The sole interest of the United States and the primary object in conferring the monopoly,’ this Court has said, ‘lie in the general benefits derived by the public from the labors of authors.’ Fox Film Corp. v. Doyal, 286 U. S. 123, 286 U. S. 127. See Kendall v. Winsor, 21 How. 322, 62 U. S. 327-328; Grant v. Raymond, 6 Pet. 218, 31 U. S. 241-242. When technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of this basic purpose.” Twentieth Century Music Corp. v. Aiken, 422 U. S. 151, 422 U. S. 156 (1975) (footnotes omitted).

In other words, courts must balance competing interests to maximize “the general benefits derived by the public,” subject to technological change and other criteria that might shift that balance in any particular case.  

Thus, even as an affirmative defense, nothing is guaranteed. The court will have to walk through a balancing test, and only after that point, and if the accused party’s behavior has not tipped the scales against herself, will the court find the use a “fair use.”  

As I noted before,

Not surprisingly, other courts are inclined to follow 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 Lenz case was an interesting one because, despite the above noted Supreme Court precedent treating “fair use” as a defense, it is one of the very few cases that has held “fair use” to be an affirmative right (in that case, the court decided that Section 1201 of the DMCA required consideration of “fair use” as a part of filling out a take-down notice). And in doing so, it too tried to rely on Sony to restructure the nature of “fair use.” But as I have previously written, “[i]t 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.”

Further, even the Eleventh Circuit, which the Ninth relied upon in Lenz, later clarified its position that the above-noted Supreme Court precedent definitely binds lower courts, and that “fair use” is in fact an affirmative defense.

Thus, to say that rightsholders’ licensing contracts somehow impinge a “right” of fair use completely puts the cart before the horse. Remember, as an affirmative defense, “fair use” is an excuse for otherwise infringing behavior, and rightsholders are well within their constitutional and statutory rights to avoid potential infringing uses.

Think about it this way. When you commit a crime you can raise a defense: for instance, an insanity defense. But just because you might be excused for committing a crime if a court finds you were not operating with full faculties, this does not entitle every insane person to go out and commit that crime. The insanity defense can be raised only after a crime is committed, and at that point it will be examined by a judge and jury to determine if applying the defense furthers the overall criminal law scheme.

“Fair use” works in exactly the same manner. And even though Sony described how time- and space-shifting were potentially permissible, it did so only by determining on those facts that the balancing test came out to allow it. So, maybe a particular time-shifting use would be “fair use.” But maybe not. More likely, in this case, even the allegedly well-established “fair use” of time-shifting in the context of today’s digital media, on-demand programing, Netflix and the like may not meet that burden.

And what this means is that a rightsholder does not have an ex ante obligation to consider whether a particular contractual clause might in some fashion or other give rise to a “fair use” defense.

The contrary point of view makes no sense. Because “fair use” is a defense, forcing parties to build “fair use” considerations into their contractual negotiations essentially requires them to build in an allowance for infringement — and one that a court might or might not ever find appropriate in light of the requisite balancing of interests. That just can’t be right.

Instead, I think this article is just a piece of the larger IP-skeptic movement. I suspect that when “fair use” was in its initial stages of development, it was intended as a fairly gentle softening on the limits of intellectual property — something like the “public necessity” doctrine in common law with respect to real property and trespass. However, that is just not how “fair use” advocates see it today. As Geoff Manne has noted, the idea of “permissionless innovation” has wrongly come to mean “no contracts required (or permitted)”:  

[Permissionless innovation] is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright…, which otherwise requires those pernicious licenses (i.e., permission) from others.

But this position is nonsense — intangible property is still property. And at root, property is just a set of legal relations between persons that defines their rights and obligations with respect to some “thing.” It doesn’t matter if you can hold that thing in your hand or not. As property, IP can be subject to transfer and control through voluntarily created contracts.

Even if “fair use” were some sort of as-yet unknown fundamental right, it would still be subject to limitations upon it by other rights and obligations. To claim that “fair use” should somehow trump the right of a property holder to dispose of the property as she wishes is completely at odds with our legal system.

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About a month ago, I was asked by some friends about the shift from the first-to-invent patent system to a first-to-file patent system in the America Invents Act of 2011 (AIA). I was involved briefly in the policy debates in the spring of 2011 leading up to the enactment of the AIA, and so this query prompted me to share a short essay I wrote in May 2011 on this issue. In this essay, I summarized my historical scholarship I had published up to that point in law journals on the legal definition and protection of patents in the Founding Era and in the early American Republic. I concluded that a shift to a first-to-file patent system contradicted both the constitutional text and the early judicial interpretations of the patent statutes that secured patent rights to first inventors.

This legal issue will likely reach the courts one day. A constitutional challenge a couple years ago was rightly dismissed as not being justiciable, but there may yet be an appropriate case in which an inventor is denied a patent given that he or she lost the race to file first in the Patent Office. So, after sharing my essay with my friends, I thought it valuable to post it again on the Internet, because the website on which it was first published (www.noonHR1249.com) slipped into digital oblivion long ago.

I was asked to write this essay in May 2011 by the U.S. Business & Industry Council (USBIC)[1] The USBIC requested my scholarly analysis of the first-to-file provision of the AIA, which was being debated as H.R. 1249 on Capitol Hill at the time, because I had been publishing articles in law journals on the legal definition and protection of patents as property rights in the Founding Era and in the early American Republic (see here and here for two examples). In my essay, I identified the relevant text in the Constitution, which authorizes Congress to secure an exclusive right to “Inventors” in their “Discoveries” (Article 1, Section 8, Clause 8). Based on my academic research, I summarized in my essay the historical Supreme Court and lower federal court decisions, which secured patents to inventors according to the same policy justifications used in common-law cases to justify property rights to first possessors of land. Thus, I concluded that the first-to-file provision in the American Invents Act was unconstitutional, based on well-recognized arguments concerning textual analysis of the Constitution and inferences from original public meaning as reflected in the historical judicial record.

There’s more to my essay, though, than just the substantive legal argument. It also provides an insight into the nature of the legal academic debates going back many years, because at the time Professor Mark Lemley of Stanford Law School compared me to an “Obama-birther” and he called this constitutional and legal argument “fringe science.” Given concerns expressed last year in an open letter co-authored by Professor Lemley and others about inappropriate rhetoric used by academics, among other issues (see here for a news report on this letter), it bears noting for the record that this is a concern that goes back many years.

Here’s the basic story: My essay was published by the USBIC in May 2011 and I was invited to speak in congressional staffer briefings and in other venues in Capitol Hill against the AIA on this issue. At this time, I was the only legal academic writing and speaking on Capitol Hill on this issue in the AIA. In late May, the 21st Century Coalition for Patent Reform, which supported enactment of the AIA, distributed on Capitol Hill a response that it had solicited from Professor Lemley. I no longer possess this response statement that was sent out via email by the 21st Century Coalition, but I do have the response I was asked to write on June 1, 2011 in which I explicitly refer to Professor Lemley’s argument against the first-to-invent position. In response to a law professors’ letter to Congress defending the first-to-file provision in the AIA that was circulated on an IP professors listserv (IPProfs), I sent out on IPProfs on June 11 a draft letter to Congress, calling for signatures from other law professors in support of my argument first presented in my essay (the final version is here). The next day, on June 12, Professor Lemley wrote on Facebook that my constitutional and legal argument made me the same as an “Obama-birther.”[2] Although he didn’t refer directly to me, it was clear that it was directed at me given that this posting by Lemley followed the day after my email to all IP professors asking them to join my letter to Congress, and I also was the only law professor actively writing on this issue and speaking on it on Capitol Hill up until then.

The following year, in a New York Times article on the court challenge to the first-to-file provision, Professor Lemley further characterized this constitutional argument as “the legal equivalent of fringe science.”

Before the spring of 2011, my writings on legal doctrine and policy were published only in law journals, and I had never participated in a policy debate over patent legislation. In my academic articles before this time, I had critiqued Professor Lemley’s incorrect historical claims about whether U.S. patents were considered monopolies or property rights, and they reflected a purely academic tone that one should expect in a law journal article (see here). Before spring 2011, I had never addressed Professor Lemley, nor had he addressed me, about the AIA, other legislation or court cases.

Professor Lemley’s “Obama-birther” attack on me was surprising, and when I replied in the comments to his Facebook post solely on the substantive merits of the issue of policy versus law, Professor Lemley defended his accusation against me. (This is evidenced in the screen shot.)[2] At the time, I was still a relatively junior academic, and this was an object lesson about what a senior academic at a top-five-ranked law school considers acceptable in addressing a much-more junior academic with whom he disagrees. This remark in 2011 was not an outlier either, as Professor Lemley has used similar rhetoric in the ensuing years in addressing academics with whom he disagrees; for instance, a couple years ago, Professor Lemley publicly referred to an academic conference that I and other patent scholars participated in as a “Tea Party convention.”

Of course, legal and constitutional disputes consist of opposing arguments. In court cases and legislative debates, there are colorable legal and policy arguments on both sides of a dispute. Few issues are so irrational that they are not even cognizable as having a supporting argument, such as astrology and conspiracy theories like the birthers or 9-11 truthers. So, I will simply let my essay speak for itself as to whether it makes me the same as an “Obama-birther” and if my argument represents “fringe science.”

More important, if or when a good case arises in which an inventor can rightly claim an identifiable and specific harm as a result of the statutory change created by the AIA, I hope my essay will be of some value.

[1] Full disclosure: The U.S. Business & Industry Council paid me for my time in writing the essay, which I disclosed in the essay itself. Unfortunately, as recently reported by IAM Magazine, other legal academics are not always so forthcoming about their financial and legal connections to companies when publicly commenting on court cases or advocating for enactment of legislation.

[2] This is a link to a screen shot I took last year only because the Facebook post by Professor Lemley recently disappeared after I only quoted the language from it about a month ago when I shared on Facebook my essay with my friends and colleagues.

UPDATE on June 7: I added some more supporting links and some additional information after this was initially published on June 6, 2016.