Copyfutures

IP Protection: A Thought Experiment

In order for IP to possess value, it needs to be made concrete in a physical medium.  I've categorized IP into two basic types, based partly on how the IP ultimately derives its value when it takes physical shape.  The two types are:

1. IP that has value, regardless of - w/ithin reason - how it takes physical expression.  If you purchase an mp3 tune, you can put it on your PC, laptop, iPod, car sterio, etc. and it will maintain it's utility for you (assuming you bought a song you liked).  This is what we've spent most of our class on; basically, anything that can be considered "content."  You can think of this like cash: stored value.  Trademarks belong here too.
2. IP that requires specific physical steps before deriving value.  Patents belong here.  You'll need, for example, to follow specific manufacturing steps in order to derive value from my newly patented cell phone design.  I know that you can simply resell the design - for a profit, possibly - but here we're talking about how the IP ultimately derives value; at some point someone will have to actullay make the damn thing in order to realize a gain. 

Most of our discussion has been focused on the first type.  Both are important, however, but I believe the second type will eventually stand out as the most impornt for us in the upcoming decades.  My thought experiment is of the second type:

Suppose I have recently discovered a method to cheaply manufacture Lipitor, a chelosterol lowering medication,and one of the best selling prescription drugs on the market today.  All the equipment and base compounds needed are readily available at any scientific supply shop.  The equipment will cost $100 initially and the base compounds will cost $10 the first month and very month thereafter.  Currently, Lipitor will cost you between $140 to $240 a bottle, even at a discount Canadian online pharmacy. I start with the same base chemicals, a different process, and end up with the identical active ingredient (which is patented, as well as their own process).  Also, the process is unbelievably simple!

Pleased with myself, I post detailed instructions on how to do duplicate this proess, along w/ links to sites where the necessary equipment can be found.  I only ask that they affix a sticker on their device that says, "Peter's Home Lipitor Kit!"  (Please ignore any other legal issues here, such as FDA regulations and the like; this experiment is meant only to to focus on IP issues.).  My kit is such a hit that virtully all Lipitor user switches over to "Peter's Home Lipitor Kit."  Lipitor brought in $2.36 billion for Pfizer, accounting for 19% of revenue in Q2 FY'04.  Due directly to my success, Q3 and Q4 of FY'04, saw Lipitor generate only $20 million in revenue.  Moreover, my success has inspired many amateur scientests to experiment on their own home drug making kits with other popular drugs.  So far, home manufacturing methods have been found for Viagra and Prozac, with similarly devastating losses.

Industry leaders focus all their efforts on combatting this new threat.  Some want to step up the effort and sue more sites that host directions while others, fearing that most P2P networks already have millions of copies available,  want to take a more aggressive tactic: lawsuits against individual manufacturers.  The best in Madison Ave. is enlisted to educate the public on how much home drug manufacturing hurts the industry.  Smart and well meaning Law Professors at top institutions write law review articles arguing that the solution is "Medical Socialism."  Scientific research institutions, private and public, protest that taxing things like beakers, flasks,  and pipettes - very common items for chemistry - unfairly burdens them.  The more conspiracy-minded suspect the HMO's are conducting the reserach behind the scenes and leaking the results.  All the while, middle-aged men with high chelostrol hold hands in solidarity, proclaiming, "Yu-shen-ko!  Yu-shen-ko!" "information wants to be free," and "Down w/ith big pharma and corporate greed!"  All are in agreement that "this is the future of medicine."

Most people would agree this type of home manufacturing, independent of safety concerns, should be illegal.  If not, at least you agree that not many of these Lipitor examples could happen in real life w/o big pharma going under and/or the FDA reducing testing standards to near nil.  I argue that this hypo is similar to illegal file sharing in the most important way: Someone is unfairly gaining without payment from the profit-driven efforts of another.  It doesn't matter that the good here is non-rivalrous - the "but for" reason the drug exists is the expectation of profit.  The average cost to take a drug to market is $800 million.  Seven out of ten don't recover their average cost.  If this Lipitor hypo hit the top 20 drugs on market, there would soon be nothing left to copy as R&D funding pipeline dries up.

The content industry and pharmaceutical companies are not identical, but in the hypo, I've removed the biggest difference; making your own Lipitor is only slightly harder than burning your own CD.  Here, all the same logic applies: I own all the equipment, I'm not dispossessing anyone of anything so there's no theft, it's non-rivalrous so no problem of wasting, plus, less people with high cholesterol.  But this ignores the tens of millions of dollars invested in human trials necessary for approval so that when someone (correctly) "pirates" an existing drug, they can take it knowing they won't simply drop dead.  They have essentially gained all the benefits of hundreds of millions of dollars invested in research and testing, as well as the institutional approval of the FDA for free. 

But maybe the big difference is that musicians will make music anyway, because they're artists and will derive personal utility while pharmaceutical companies lack something analogous.  While it's true that there will always be people who make music simply for personal utility, there will be, by definition, less musicians overall, and our access will likely be more limited.  For the most part, the CD's available at Tower Records and the songs available on iTunes primarily represent the effort of the record label.  This is because the majority of the value is derived from making potential buyers aware of the product and making it available for purchase.  Record labels must provide some value add, or bands wouldn't keep signing with them when they can start their own.  Three notable musicans: P. Diddy, Master P, and Jay-Z all started their own labels and have an average worth of about $300 million each.  Big pimpin' indeed.  But they are the exception, not the rule.  The ability to make music and the ability to make money from music are two different skills and the reward structure properly reflects this. 

Forget Sharing, Let's Sell Our MP3s

This is something that caught my eye the other day and I though may be of interest to some others. It is clear that the RIAA is going to pursue their lawsuits against online file sharers. Check out what some Slashdot readers had to say on the topic. And now it looks like the MPAA is going to do the same. But when I saw this, I hardly knew what to say besides...Are you kidding me? Take a look at this advertisement. I thought this was sort of funny. You don't see this type of thing too often.

Let's pretend, just for a second, that all of these MP3 files that are for sale come from legally bought cds or downloaded from a legal digital download service. As if the RIAA wouldn't be mad enough that this person were sharing them on the internet for free, this person is trying to sell them on a college campus for $25. When the recording industry figured out that it was to its benefit for people to purchase digital music files, I don't think that this is what it had in mind.

One of the interesting things about this advertisement is that the chances any legal action being taken against this entrepreneur are probably very small. Since this person is doing this the old fashion way, I guess out of the trunk of his or her car, chances are that it is not reaching enough people for the RIAA to ever find out (unless they read this blog) or even care.

But if the RIAA does want to go after this person, this person has made it very easy on them. Some courts have made it a little more difficult for the RIAA to identify the identities of online file sharers, forcing the record industry to file John Doe suits. But the work has already been done since this person has listed his or her phone number right on the advertisement (which I have blacked out for the purposes of this post).

Now, to be fair, it does appear from the flyer that most of the songs on this CD are lesser known artists who may or may not be signed to record labels. And this would be a good opportunity for some of these artists to reach new potential fans. Or maybe all of these tracks are in the public domain. Or maybe all of these artists have signed over the rights to these songs.

I guess the bottom line is that if sharing digital files is bad, then selling digital files is really bad. Remember those guys in Spain who thought that they could sell mp3s and make some money. They are $10.5 million poorer.

Due Process, I Don't Think So

Casey, on the www.maisonbisson.com blog summarized an interesting report on an experiment done by a Dutch civil rights organization called Bits of Freedom. The experiment was to investigate the notice and take down procedure of multiple Internet service providers in Europe. Under the European law, ISP’s can be held liable for customers websites that illegally use copyrighted work, unless they act fast enough to remove the information from public view.

Under the European E-Commerce directive internet hosting providers risk liability for apparently illegal content from their customers. Once they are notified, they should take immediate action to block or remove the content.

The European directive has different liabilities for three different categories of providers:

In case of mere conduit (access provisioning) and caching, providers are exempted from any liability. In the case of hosting, providers are only exempted if they have no actual knowledge of 'apparent' illegal content and, if so, act expeditiously to remove the content.

This is compared in the report to the Safe Harbor provision for providers in the DMCA §512 when confronted by notification of customers copyright infringement. As summarized in the report:

The legal safe harbour consists of 5 elements.
• a complaint must identify himself and the infringements exactly
• plaintiff and the customer must act 'in good faith', on penalty for perjury.
• the provider must block the material upon receipt of the complaint and inform the customer
• materials must be put-back in 10, maximum 14 business days after a counter notice
• identification data can only be obtained with a subpoena

Bits of Freedom points out that the European directive:

Compared with these Safe Harbour provisions, the European legislation leaves
plenty of room for doubt and misguided judgement[sic] by providers. There are no criteria to validate complaints and counter notices and there are no arrangements for the hand-over of customer data, besides general privacy principles that do allow voluntary hand-over. More-over there is no obligation in Europe to inform the customer and there are no legal guarantees to protect the freedom of speech.

Bits of Freedom questioned how much effort is put forth by the providers to protect free speech? How much investigation is done of the allegations before taking the content down? Do providers ask their customers to respond before the information was taken down?

Bits of Freedom decided to do an experiment to answer these questions. They started by posting a text from an 1871 famous Dutch author, whose work was well within the public domain, on 10 different ISP’s. Subsequently the organization signed up for free hotmail accounts and sent notices to the ISP’s “representing” the copyright holder warning the ISP that the content of the website they were hosting was infringing on their copyright, and that immediate action should be taken to remove the content from the webpage.

There were varied responses, but totaled to about a 70% take down rate. Out of the three companies that did not take down the content only one company showed evidence that they looked at the webpage and realized that the content was out of copyright. The seven companies that did take down the content did not give any evidence of researching the credibility of the complaint and did not give the customer much time to respond, the shortest period being three hours.

In the report, Bit of Freedom suggests that more effort should be made by the ISP’s to investigate these claims, train their staff about copyright law, and/or hire attorneys to deal with these issues. Bit of Freedom wants the ISP’s to fight harder for freedom of speech.

Although the fact is, the easiest and cheapest method for the ISP to save itself from being liable is to just remove the content. ISP’s cannot afford to hire a full time attorney to deal with copyright infringement claims, nor should they have to fund such an effort. This cost will just be passed onto the consumer, and this will hurt the ISP’s business. It seems that anyone can make this type of claim, and the ISP will have to spend hundreds of thousands of dollars investigating them. I think a better solution would be to have the ISP’s qualify certain agencies or law firms that complainants can pay to research the claim, or at least show a prima facie case of infringement before a letter is sent to the ISP.

It would be interesting to do a similar type of “Dutch” experiment here in the US on DMCA take down type letters. Although, a post by Donna Wentworth How Do C&Ds Affect Fair Use? pointed me to a similar type report by Tricia Beckles and Marjorie Heins of an investigation into the “effects” on fair use of the take down notices sent by The Chilling Effects organization. Which is a:

joint project of the Electronic Frontier Foundation and six law school clinical programs, serves as a resource for those who want to know what the law says about areas such as fan fiction, copyright and fair use, domain names, trademarks, anonymous speech, and defamation on the Internet. The Web site's depository contains almost 800 cease and desist letters, going back to 1997.

This is just a preliminary report of a small sample of the cease and desist letters sent by the Chilling Effects organization, but their findings show they can:

infer that cease and desist letters sometimes -- but not always -- have chilling effects on speech that might qualify as fair use. Critical factors in determining whether the recipient of such a letter will comply seem to include awareness that fair use provides a defense; support from the community; and a non-risk-averse temperament.

Contracting Away Your Fair Use Rights

A recent holding by a federal court held three programers had violated the DMCA and breached user end license agreements when they created the BnetD game server. This server allows users to play Blizzard video games online on servers that don't belong to Blizzard's Battle.net server.

The court followed the holding in Bowers v. Baystate Technology, which held that clickwrap contracts prohibiting reverse engineering are enforceable. This notion is of concern to many bloggers because it allows copyright holders to force users to give up thier rights to fair use if they want to use certain software.

For example, Seth Finkelstein posted on his blog,

Some of the parade of horrors: The Federal Circuit in Bowers stated that the First Circuit recognized the contractual waiver of affirmative defenses and statutory rights, therefore, the defendants could contractually waive their fair use right to reverse engineer. Id. The Court finds the reasoning in Bowers persuasive. The defendants in this case waived their "fair use" right to reverse engineer by agreeing to the licensing agreement. Parties may waive their statutory rights under law in a contract.

And in another post John Mitchell seems to be worried that this way of thinking has the potential to spill over into the realm of abridging other rights.

According to this logic, employers everywhere should have prospective employees sign a EULA (perhaps an "Employee Unprotected Labor Agreement") saying that the employee gives up any rights to the statutory provisions under federal and state labor laws, including anti-discrimination, workplace safety, and so on.

While I do not agree that courts would be willing to enforce contracts that are in such violation of public policy as Mr. Miller seems to be implying, I do agree with his basic point. It is that courts are failing to recognize fair use as a right that is important enough that they will stop copyright holders from forcing consumers to waive this right by making them sign a contract before they are allowed to use a certain product.

The greatest flaw in this holding is that it goes against the very purpose of fair use. Fair use allows for information to be transformed and used to create further benefits to society. Why would courts allow individual copyright holders to determine whether or not others should be allowed to use their copyrighted materials fairly within the bounds of the law? Any copyright holder whose material is used via the internet could make it so that anyone using their software, or reading their e-book, or reading their blog must first waive their right to fair use before doing so. Where would this get us? This could essentially be granting exclusive rights over intellectual property. This is the exact opposite of what copyright law and fair use are intended to do.

Freedom of Expression vs. Copyrights

As seen in many articles and blogs, the issues of copyright goes hand in hand with the issue of freedom of expression. Both promote creativity and prevent against suppression of information that may have significant value to others.
The courts in Pennsylvania struck down a new law requiring internet service providers to shut down websites with offensive material. In the article Court strikes down Pennsylvania porn law by Jim Hu discusses how the statute reached too many “legal” internet porn sites while only shutting down a few offenders that distributed child pornography.
The same reasoning is used to argue against shutting down all p2p networks. These networks are used for legitimate legal purposes along with illegal purposes. Eliminating the system would stifle the creative possibilities of the growing internet. Although these p2p networks may be promoting child pornography, it has been shown that this is such a small percentage of use that eliminating the network would suppress the freedom of expression more than it would affect the few offenders that distribute child porn over these networks. (See Pirates, sharks and moral crusaders: Social control in peer–to–peer networks by Jörgen S. Svensson and Frank Bannister).
Again, issues of piracy are involved with the Free Software movement by users of Linux. Linux allows users to use the software already developed, and allows users to add to the programs. There is a problem with people adding intellectual property already patented to others inside the newly developed software programs, and then making it available to the world. Although this is a problem, completely shutting down the Linux and Free software communities would drastically suppress the access to tools needed for creativity in developing new and useful technology.
Linux is a success story in showing that not all “intellectual property” should have a price tag attached to it. There needs to be a balance of free and paid for. When products are free, there is an advantage of wider distribution, which leads to a wider arena of name recognition and so on. This in turn helps promote new creative material. Which is why the goals of copyright and freedom of expression although similar in some respects, need their competing interests to be balanced in a progressive manner by future law makers.

Copyright: Free Speech or Property Right?

Professor L. Ray Patterson has recently commented on the relation of copyright law to the First Amendment.

Patterson believes that copyright law has its roots in the Constitution, specifically the First Amendment, and soon courts will begin viewing copyright as a freedom of speech issue rather than as a property rights issue.

Presently, copyright is viewed as an intellectual property rights issue. As such, copyright holders look to maximize financial profit from their copyrights by creating "marketing monopolies," charging each time a page is read, for example. Patterson feels that this behavior causes people to treat copyrights as economic rights rather than respecting their Constitutional history. He points out that we are guaranteed the freedom to speak, and therefore also have the freedom to be heard or to be read.

The current trend in copyright as IP rights makes copyrights strictly avenues of "economic censorship." In his own words, "only those who can pay can read, and if the price is high enough no one can read the 'free speech'."

The internet is becomming one of the, if not the most dominant mediums for copyright. Patterson feels, therefore, that courts need to begin re-evaluating their position on copyright ASAP. He proposes a solution: a publisher, for example, will be able to maintain a marketing monopoly when they sell a book, but after the sale, small portions of the book should be made available to the public for copying - both for-profit and not-for-profit. This way, the publisher will still be able to profit from the copyright (as the entire book is not made available to the public for copying), but he will not be able to control the speech after the sale.

Patterson's view is very optimistic, but it has yet to be realized in courts or by Congress.