Archives For property rights

What does it mean to “own” something? A simple question (with a complicated answer, of course) that, astonishingly, goes unasked in a recent article in the Pennsylvania Law Review entitled, What We Buy When We “Buy Now,” by Aaron Perzanowski and Chris Hoofnagle (hereafter “P&H”). But how can we reasonably answer the question they pose without first trying to understand the nature of property interests?

P&H set forth a simplistic thesis for their piece: when an e-commerce site uses the term “buy” to indicate the purchase of digital media (instead of the term “license”), it deceives consumers. This is so, the authors assert, because the common usage of the term “buy” indicates that there will be some conveyance of property that necessarily includes absolute rights such as alienability, descendibility, and excludability, and digital content doesn’t generally come with these attributes. The authors seek to establish this deception through a poorly constructed survey regarding consumers’ understanding of the parameters of their property interests in digitally acquired copies. (The survey’s considerable limitations is a topic for another day….)

The issue is more than merely academic: NTIA and the USPTO have just announced that they will hold a public meeting

to discuss how best to communicate to consumers regarding license terms and restrictions in connection with online transactions involving copyrighted works… [as a precursor to] the creation of a multistakeholder process to establish best practices to improve consumers’ understanding of license terms and restrictions in connection with online transactions involving creative works.

Whatever the results of that process, it should not begin, or end, with P&H’s problematic approach.

Getting to their conclusion that platforms are engaged in deceptive practices requires two leaps of faith: First, that property interests are absolute and that any restraint on the use of “property” is inconsistent with the notion of ownership; and second, that consumers’ stated expectations (even assuming that they were measured correctly) alone determine the appropriate contours of legal (and economic) property interests. Both leaps are meritless.

Property and ownership are not absolute concepts

P&H are in such a rush to condemn downstream restrictions on the alienability of digital copies that they fail to recognize that “property” and “ownership” are not absolute terms, and are capable of being properly understood only contextually. Our very notions of what objects may be capable of ownership change over time, along with the scope of authority over owned objects. For P&H, the fact that there are restrictions on the use of an object means that it is not properly “owned.” But that overlooks our everyday understanding of the nature of property.

Ownership is far more complex than P&H allow, and ownership limited by certain constraints is still ownership. As Armen Alchian and Harold Demsetz note in The Property Right Paradigm (1973):

In common speech, we frequently speak of someone owning this land, that house, or these bonds. This conversational style undoubtedly is economical from the viewpoint of quick communication, but it masks the variety and complexity of the ownership relationship. What is owned are rights to use resources, including one’s body and mind, and these rights are always circumscribed, often by the prohibition of certain actions. To “own land” usually means to have the right to till (or not to till) the soil, to mine the soil, to offer those rights for sale, etc., but not to have the right to throw soil at a passerby, to use it to change the course of a stream, or to force someone to buy it. What are owned are socially recognized rights of action. (Emphasis added).

Literally, everything we own comes with a range of limitations on our use rights. Literally. Everything. So starting from a position that limitations on use mean something is not, in fact, owned, is absurd.

Moreover, in defining what we buy when we buy digital goods by reference to analog goods, P&H are comparing apples and oranges, without acknowledging that both apples and oranges are bought.

There has been a fair amount of discussion about the nature of digital content transactions (including by the USPTO and NTIA), and whether they are analogous to traditional sales of objects or more properly characterized as licenses. But this is largely a distinction without a difference, and the nature of the transaction is unnecessary in understanding that P&H’s assertion of deception is unwarranted.

Quite simply, we are accustomed to buying licenses as well as products. Whenever we buy a ticket — e.g., an airline ticket or a ticket to the movies — we are buying the right to use something or gain some temporary privilege. These transactions are governed by the terms of the license. But we certainly buy tickets, no? Alchian and Demsetz again:

The domain of demarcated uses of a resource can be partitioned among several people. More than one party can claim some ownership interest in the same resource. One party may own the right to till the land, while another, perhaps the state, may own an easement to traverse or otherwise use the land for specific purposes. It is not the resource itself which is owned; it is a bundle, or a portion, of rights to use a resource that is owned. In its original meaning, property referred solely to a right, title, or interest, and resources could not be identified as property any more than they could be identified as right, title, or interest. (Emphasis added).

P&H essentially assert that restrictions on the use of property are so inconsistent with the notion of property that it would be deceptive to describe the acquisition transaction as a purchase. But such a claim completely overlooks the fact that there are restrictions on any use of property in general, and on ownership of copies of copyright-protected materials in particular.

Take analog copies of copyright-protected works. While the lawful owner of a copy is able to lend that copy to a friend, sell it, or even use it as a hammer or paperweight, he or she can not offer it for rental (for certain kinds of works), cannot reproduce it, may not publicly perform or broadcast it, and may not use it to bludgeon a neighbor. In short, there are all kinds of restrictions on the use of said object — yet P&H have little problem with defining the relationship of person to object as “ownership.”

Consumers’ understanding of all the terms of exchange is a poor metric for determining the nature of property interests

P&H make much of the assertion that most users don’t “know” the precise terms that govern the allocation of rights in digital copies; this is the source of the “deception” they assert. But there is a cost to marking out the precise terms of use with perfect specificity (no contract specifies every eventuality), a cost to knowing the terms perfectly, and a cost to caring about them.

When we buy digital goods, we probably care a great deal about a few terms. For a digital music file, for example, we care first and foremost about whether it will play on our device(s). Other terms are of diminishing importance. Users certainly care whether they can play a song when offline, for example, but whether their children will be able to play it after they die? Not so much. That eventuality may, in fact, be specified in the license, but the nature of this particular ownership relationship includes a degree of rational ignorance on the users’ part: The typical consumer simply doesn’t care. In other words, she is, in Nobel-winning economist Herbert Simon’s term, “boundedly rational.” That isn’t deception; it’s a feature of life without which we would be overwhelmed by “information overload” and unable to operate. We have every incentive and ability to know the terms we care most about, and to ignore the ones about which we care little.

Relatedly, P&H also fail to understand the relationship between price and ownership. A digital song that is purchased from Amazon for $.99 comes with a set of potentially valuable attributes. For example:

  • It may be purchased on its own, without the other contents of an album;
  • It never degrades in quality, and it’s extremely difficult to misplace;
  • It may be purchased from one’s living room and be instantaneously available;
  • It can be easily copied or transferred onto multiple devices; and
  • It can be stored in Amazon’s cloud without taking up any of the consumer’s physical memory resources.

In many ways that matter to consumers, digital copies are superior to analog or physical ones. And yet, compared to physical media, on a per-song basis (assuming one could even purchase a physical copy of a single song without purchasing an entire album), $.99 may represent a considerable discount. Moreover, in 1982 when CDs were first released, they cost an average of $15. In 2017 dollars, that would be $38. Yet today most digital album downloads can be found for $10 or less.

Of course, songs purchased on CD or vinyl offer other benefits that a digital copy can’t provide. But the main thing — the ability to listen to the music — is approximately equal, and yet the digital copy offers greater convenience at (often) lower price. It is impossible to conclude that a consumer is duped by such a purchase, even if it doesn’t come with the ability to resell the song.

In fact, given the price-to-value ratio, it is perhaps reasonable to think that consumers know full well (or at least suspect) that there might be some corresponding limitations on use — the inability to resell, for example — that would explain the discount. For some people, those limitations might matter, and those people, presumably, figure out whether such limitations are present before buying a digital album or song For everyone else, however, the ability to buy a digital song for $.99 — including all of the benefits of digital ownership, but minus the ability to resell — is a good deal, just as it is worth it to a home buyer to purchase a house, regardless of whether it is subject to various easements.

Consumers are, in fact, familiar with “buying” property with all sorts of restrictions

The inability to resell digital goods looms inordinately large for P&H: According to them, by virtue of the fact that digital copies may not be resold, “ownership” is no longer an appropriate characterization of the relationship between the consumer and her digital copy. P&H believe that digital copies of works are sufficiently similar to analog versions, that traditional doctrines of exhaustion (which would permit a lawful owner of a copy of a work to dispose of that copy as he or she deems appropriate) should apply equally to digital copies, and thus that the inability to alienate the copy as the consumer wants means that there is no ownership interest per se.

But, as discussed above, even ownership of a physical copy doesn’t convey to the purchaser the right to make or allow any use of that copy. So why should we treat the ability to alienate a copy as the determining factor in whether it is appropriate to refer to the acquisition as a purchase? P&H arrive at this conclusion only through the illogical assertion that

Consumers operate in the marketplace based on their prior experience. We suggest that consumers’ “default” behavior is based on the experiences of buying physical media, and the assumptions from that context have carried over into the digital domain.

P&H want us to believe that consumers can’t distinguish between the physical and virtual worlds, and that their ability to use media doesn’t differentiate between these realms. But consumers do understand (to the extent that they care) that they are buying a different product, with different attributes. Does anyone try to play a vinyl record on his or her phone? There are perceived advantages and disadvantages to different kinds of media purchases. The ability to resell is only one of these — and for many (most?) consumers not likely the most important.

And, furthermore, the notion that consumers better understood their rights — and the limitations on ownership — in the physical world and that they carried these well-informed expectations into the digital realm is fantasy. Are we to believe that the consumers of yore understood that when they bought a physical record they could sell it, but not rent it out? That if they played that record in a public place they would need to pay performance royalties to the songwriter and publisher? Not likely.

Simply put, there is a wide variety of goods and services that we clearly buy, but that have all kinds of attributes that do not fit P&H’s crabbed definition of ownership. For example:

  • We buy tickets to events and membership in clubs (which, depending upon club rules, may not be alienated, and which always lapse for non-payment).
  • We buy houses notwithstanding the fact that in most cases all we own is the right to inhabit the premises for as long as we pay the bank (which actually retains more of the incidents of “ownership”).
  • In fact, we buy real property encumbered by a series of restrictive covenants: Depending upon where we live, we may not be able to build above a certain height, we may not paint the house certain colors, we may not be able to leave certain objects in the driveway, and we may not be able to resell without approval of a board.

We may or may not know (or care) about all of the restrictions on our use of such property. But surely we may accurately say that we bought the property and that we “own” it, nonetheless.

The reality is that we are comfortable with the notion of buying any number of limited property interests — including the purchasing of a license — regardless of the contours of the purchase agreement. The fact that some ownership interests may properly be understood as licenses rather than as some form of exclusive and permanent dominion doesn’t suggest that a consumer is not involved in a transaction properly characterized as a sale, or that a consumer is somehow deceived when the transaction is characterized as a sale — and P&H are surely aware of this.

Conclusion: The real issue for P&H is “digital first sale,” not deception

At root, P&H are not truly concerned about consumer deception; they are concerned about what they view as unreasonable constraints on the “rights” of consumers imposed by copyright law in the digital realm. Resale looms so large in their analysis not because consumers care about it (or are deceived about it), but because the real object of their enmity is the lack of a “digital first sale doctrine” that exactly mirrors the law regarding physical goods.

But Congress has already determined that there are sufficient distinctions between ownership of digital copies and ownership of analog ones to justify treating them differently, notwithstanding ownership of the particular copy. And for good reason: Trade in “used” digital copies is not a secondary market. Such copies are identical to those traded in the primary market and would compete directly with “pristine” digital copies. It makes perfect sense to treat ownership differently in these cases — and still to say that both digital and analog copies are “bought” and “owned.”

P&H’s deep-seated opposition to current law colors and infects their analysis — and, arguably, their failure to be upfront about it is the real deception. When one starts an analysis with an already-identified conclusion, the path from hypothesis to result is unlikely to withstand scrutiny, and that is certainly the case here.

[First posted to the CPIP Blog on June 17, 2014]

Last Thursday, Elon Musk, the founder and CEO of Tesla Motors, issued an announcement on the company’s blog with a catchy title: “All Our Patent Are Belong to You.” Commentary in social media and on blogs, as well as in traditional newspapers, jumped to the conclusion that Tesla is abandoning its patents and making them “freely” available to the public for whomever wants to use them. As with all things involving patented innovation these days, the reality of Tesla’s new patent policy does not match the PR spin or the buzz on the Internet.

The reality is that Tesla is not disclaiming its patent rights, despite Musk’s title to his announcement or his invocation in his announcement of the tread-worn cliché today that patents impede innovation. In fact, Tesla’s new policy is an example of Musk exercising patent rights, not abandoning them.

If you’re not puzzled by Tesla’s announcement, you should be. This is because patents are a type of property right that secures the exclusive rights to make, use, or sell an invention for a limited period of time. These rights do not come cheap — inventions cost time, effort, and money to create and companies like Tesla then exploit these property rights in spending even more time, effort and money in converting inventions into viable commercial products and services sold in the marketplace. Thus, if Tesla’s intention is to make its ideas available for public use, why, one may wonder, did it bother to expend the tremendous resources in acquiring the patents in the first place?

The key to understanding this important question lies in a single phrase in Musk’s announcement that almost everyone has failed to notice: “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” (emphasis added)

What does “in good faith” mean in this context? Fortunately, one intrepid reporter at the L.A. Times asked this question, and the answer from Musk makes clear that this new policy is not an abandonment of patent rights in favor of some fuzzy notion of the public domain, but rather it’s an exercise of his company’s patent rights: “Tesla will allow other manufacturers to use its patents in “good faith” – essentially barring those users from filing patent-infringement lawsuits against [Tesla] or trying to produce knockoffs of Tesla’s cars.” In the legalese known to patent lawyers and inventors the world over, this is not an abandonment of Tesla’s patents, this is what is known as a cross license.

In plain English, here’s the deal that Tesla is offering to manufacturers and users of its electrical car technology: in exchange for using Tesla’s patents, the users of Tesla’s patents cannot file patent infringement lawsuits against Tesla if Tesla uses their other patents. In other words, this is a classic deal made between businesses all of the time — you can use my property and I can use your property, and we cannot sue each other. It’s a similar deal to that made between two neighbors who agree to permit each other to cross each other’s backyard. In the context of patented innovation, this agreement is more complicated, but it is in principle the same thing: if automobile manufacturer X decides to use Tesla’s patents, and Tesla begins infringing X’s patents on other technology, then X has agreed through its prior use of Tesla’s patents that it cannot sue Tesla. Thus, each party has licensed the other to make, use and sell their respective patented technologies; in patent law parlance, it’s a “cross license.”

The only thing unique about this cross licensing offer is that Tesla publicly announced it as an open offer for anyone willing to accept it. This is not a patent “free for all,” and it certainly is not tantamount to Tesla “taking down the patent wall.” These are catchy sound bites, but they in fact obfuscate the clear business-minded nature of this commercial decision.

For anyone perhaps still doubting what is happening here, the same L.A Times story further confirms that Tesla is not abandoning the patent system. As stated to the reporter: “Tesla will continue to seek patents for its new technology to prevent others from poaching its advancements.” So much for the much ballyhooed pronouncements last week of how Tesla’s new patent (licensing) policy “reminds us of the urgent need for patent reform”! Musk clearly believes that the patent system is working just great for the new technological innovation his engineers are creating at Tesla right now.

For those working in the innovation industries, Tesla’s decision to cross license its old patents makes sense. Tesla Motors has already extracted much of the value from these old patents: Musk was able to secure venture capital funding for his startup company and he was able to secure for Tesla a dominant position in the electrical car market through his exclusive use of this patented innovation. (Venture capitalists consistently rely on patents in making investment decisions, and for anyone who doubts this need to watch only a few episodes of Shark Tank.) Now that everyone associates radical, cutting-edge innovation with Tesla, Musk can shift in his strategic use of his company’s assets, including his intellectual property rights, such as relying more heavily on the goodwill associated with the Tesla trademark. This is clear, for instance, from the statement to the LA Times that companies or individuals agreeing to the “good faith” terms of Tesla’s license agree not to make “knockoffs of Tesla’s cars.”

There are other equally important commercial reasons for Tesla adopting its new cross-licensing policy, but the point has been made. Tesla’s new cross-licensing policy for its old patents is not Musk embracing “the open source philosophy” (as he asserts in his announcement). This may make good PR given the overheated rhetoric today about the so-called “broken patent system,” but it’s time people recognize the difference between PR and a reasonable business decision that reflects a company that has used (old) patents to acquire a dominant market position and is now changing its business model given these successful developments.

At a minimum, people should recognize that Tesla is not declaring that it will not bring patent infringement lawsuits, but only that it will not sue people with whom it has licensed its patented innovation. This is not, contrary to one law professor’s statement, a company “refrain[ing] from exercising their patent rights to the fullest extent of the law.” In licensing its patented technology, Tesla is in fact exercising its patent rights to the fullest extent of the law, and that is exactly what the patent system promotes in the myriad business models and innovative

Google Book Project

Paul H. Rubin —  24 March 2011

Google’s efforts to make out of print books available online has run into a major stumbling block. Judge Chin ordered that books can only be digitized by Google if the author opts in; the agreement which he through out called for opt out.  This is an shame and a highly inefficient result.  As reported, the intricacies of copyright law and the unavailability of many rights holders means that opt in is not feasible in many cases.  As a result, thousands of books will not be digitized at all.  Instead of transferring rights to authors (which was apparently Judge Chin’s intent) he has simply destroyed valuable property rights.  This case was argued as an issue of the distribution of rights, but it is really about the creation of  rights — or, as it turns out, their non-creation.