Category: Intellectual Property

The Limits of Law & Econ in IP: The Case of Digital Music

Once again, the folks at Truth on the Market have celebrated the recording industry’s efforts to assure perfect control over copyrighted content via Digital Rights Management. Free marketeers like Tyler Cowen are beginning to question DRM as a tax on consumers, and even one of the big four record companies is considering abandoning it. Untroubled by such doubts, Josh Wright and Geoff Manne push for ever more latitude for the dominant platform (iTunes) and dominant content providers (the big four recording companies).

Their posts provide classic examples of what Reza Dibadj has called the key shortcomings of conventional law & economics (L&E) reasoning. As Dibadj summarizes,

[T]hree of the most basic assumptions to the popular L&E enterprise–that people are rational, that ability to pay determines value, and that the common law is efficient–while couched in the metaphors of science, remain unsubstantiated.

Let’s take a look at how each of these assumptions drives the TOTM approach to digital music markets.

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Close the Education Gap with Advertising?

What if a technology company like Microsoft supplied a school with computers students could use for free? Self-interested, maybe, but certainly there could be a convergence of interests there. Well, what if the company then required that the computers not run any alternative software? A little less nice, but in a country where income, education, and opportunity are closely intertwined, poor schools would have to think seriously about turning down such an offer. Well, what if the company then implemented a technology that required students to watch enough advertising to justify the use of computers and repossessed the computers if students didn’t watch enough ads? I’m not dismissing this model as, on net, bad for students — I’d want to see some data on that. But I find the mixture of commercial interest and education more than a little disturbing.

(FYI, I first read about the Microsoft patent on Slashdot.)

Norse Wisdom on Digital Music

communism.jpgEven if antitrust in the U.S. slowly fades into a subfield of legal history, international pressure can lead to fairer business practices. Consider Norway’s recent pressure on Apple to open up its iTunes/iPod music platform to rival players: “Norway’s consumer regulator declared the lack of interoperability illegal, and gave Apple until Oct. 1 to change it or face legal action and possible fines.”

When emissions standards were introduced in the 1970’s, it’s said that Toyota hired a thousand engineers, and Ford hired a thousand lawyers. We can see where each company is now. Apple’s response to the Norwegian directive appears to show that, after Fordishly fighting France tooth and nail on interoperability, they are finally interested in a constructive approach. Consider these extraordinary words on Apple’s website:

[A final] alternative is to abolish DRMs entirely. Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music.

Why would the big four music companies agree to let Apple and others distribute their music without using DRM systems to protect it? The simplest answer is because DRMs haven’t worked, and may never work, to halt music piracy. Though the big four music companies require that all their music sold online be protected with DRMs, these same music companies continue to sell billions of CDs a year which contain completely unprotected music. That’s right! No DRM system was ever developed for the CD, so all the music distributed on CDs can be easily uploaded to the Internet, then (illegally) downloaded and played on any computer or player.

Precisely. Rather than trying to sweep the sand from the shore, and massively annoying everyone in the process, why not follow this plan? True interoperability would likely lead to a boom in the sale of both digital music players and music. For way too long, the industry has focused on minimizing losses, rather than maximizing gains.

Fortunately, the scorched earth litigation strategy against infringers is getting less viable as a few defendants fight back. In Capitol Record v. Debbie Foster, the defendant successfully introduced a “‘prove it was me using the computer’ defense.” The strategy may gain traction: “Although the judge in Elektra v. Santangelo declined to dismiss the labels’ infringement claims against Patti Santangelo, he doubted that ‘an Internet-illiterate parent who does not know Kazaa from a kazoo’ could be found liable for file sharing done in her house without her knowledge or consent.” Foster actually won attorney’s fees against the RIAA–throwing a wrench into the works of an infringement litigation machine.



Just a quick note to say that I’m happy to be serving you fresh legal blog entries. No lard or preservatives will be used. And if there’s anything I can do to improve your dining experience, just let me know.

I thought I’d start with a tasty Second Life dish that is making the rounds. For those who don’t know, Second Life is a virtual world in which millions of people do virtual work, go to virtual dance parties, build and sell virtual things, and, well, spend a lot of their real lives in front a computer doing all that.

I’ve never played Second Life and don’t really want to. Nor am I really interested in the legal considerations that normally get Second Life into the news (questions like: “What is virtual property?” and “Can I be taxed on my virtual income?”) Indeed, I think the best thing about Second Life is that it inspired the clever parody site, Get a First Life.

So why am I going on about it?

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Real Estate Appraisals and Copyrighting Facts

As reported by the Washington Post, an interesting intellectual property dispute is brewing in the real estate appraisal business. On one side are traditional real estate appraisers, who charge several hundred dollars for an appraisal that typically involves an onsite inspection. On the other side are online appraisal services that, relying on their databases and some algorithms, offer lenders an instantaneous appraisal at a small fraction of the cost.

The traditional appraisers are upset because the online services may be extracting information from their appraisals and using that information to improve their databases (and thus the accuracy of their online appraisals). Taken to its logical extreme, as online appraisers get better databases by capturing data from the traditional appraisers’ inspections, traditional appraisers will destroy their own industry.

Not surprisingly, the traditional appraisers are looking for ways to preserve their market niche, and intellectual property doctrines can be great tools to hinder marketplace competition. So the WaPo article mentions that the traditional appraisers are considering their copyrights in their appraisals. After all, traditional appraisers put in their sweat of the brow, so shouldn’t they be rewarded? (The article provides some good quotes reflecting this paradigm).

We know how this argument goes. Copyright doesn’t protect the labor invested to generate facts. Appraisers probably can copyright the report in its entirety, and they may even be able to copyright their specific price estimate (see, e.g., CDN v. Kapes), but there should be no way for appraisers or anyone else to obtain copyright protection for a home’s basic specifications (e.g., square footage, age, number of rooms). As a result, copyright law does not provide appraisers with any effective way to restrict online databases from extracting facts from their reports. Thus, if traditional appraisers are looking for a tool to restrict competition from online factual databases, copyright law may not be very helpful.

Even if copyright law isn’t availing, traditional appraisers have other tools at their disposal, including:

* providing services that online database providers can’t, such as the increased accuracy associated with the onsite inspections.

* restricting access to the appraisals. Right now, it appears that the biggest online database service gets some data by providing an online tool for appraisers to submit their reports to lenders—thus, allowing them to extract facts from appraisals that cross the network. Traditional appraisers could try to discourage lenders from using this delivery service, thereby making it harder or impossible for the online service to see the appraisals. Alternatively, if they keep using this delivery service, traditional appraisers could negotiate a contract that limits the service’s ability to extract facts. (The contract is probably some standardized click-through agreement, but it’s negotiable in theory).

* if traditional appraisers really think they are losing money, they could just increase their fees to lenders to cover the lost value (good luck!).

But despite these options, the long-term prognosis may not be very good. A good appraisal always will need an onsite inspection, but just about every other aspect of the appraisal business can be replicated or eliminated through online mechanisms. Thus, it could be that the Internet is disintermediating the appraisal industry, and no amount of rear-guard intellectual property saber-rattling will change that fact.

Dream Makers, Dream Breakers

stars.jpgI recently saw Dreamgirls, a well-marketed movie that’s largely about Barry Gordy-style marketing of music from the 50s to the 80s. Although there’s a lot to viscerally enjoy in the film, I kept analyzing the action from a lawyerly angle. Compulsory licenses, payola laws, restrictive entertainment industry contracts–all play pivotal roles in the movie. Each becomes a tool in the hands of a mogul and his enemies, as they struggle for fans and creative control.

Later in the weekend, I heard an interview with hip-hop impresario Ryan Leslie, who aims to be a 21st century starmaker. After scoring a perfect 1600 on the SAT, Leslie went to Harvard at 15, and is now precociously producing videos with Hollywood icons. Leslie’s career promises to be a lot less destructive than that of prior industry powerbrokers (for some spoiler-revealing reasons I’ll disclose after the jump). But what few fully realize is how important the law is to such a development.

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A Guest Blogger’s “Meta” Post About Guest Blogging

Thanks to Dan and the rest of the Concurring Opinions team for hosting me this month. Incredible as it may seem (given the number of law geeks involved and our sophistication about the applicable law), we enter into this guest-blogging arrangement without any contract of any sort. Thus, any legal consequences of my guest-blogging are governed by default rules…whatever those are.

Fortunately, with respect to liability to third parties, the default rules are generally favorable. 47 USC 230 absolutely immunizes my blog hosts from most types of liability for what I say or do. If I defame someone, I’ll be on the hook, but my peers won’t be. After the California Supreme Court’s opinion in Barrett v. Rosenthal, I think it’s also 100% clear that I’m generally not liable for the posts of my peers. (Pursuant to the reasoning of that case, I could claim to be a “user” of the Concurring Opinions interactive computer service). Even though Dan doesn’t like 47 USC 230 as much as I do, we all benefit from it in this case.

But 47 USC 230 doesn’t cover all types of third party liability—most critically, it leaves open the risk of copyright liability. For example, if I post an infringing photo to the site, not only would I be liable, but my blog hosts could face contributory or vicarious liability. A statutory safe harbor, 17 USC 512, putatively provides some relief, but (1) that safe harbor isn’t nearly as robust as 47 USC 230, and (2) more importantly, 512 has a number of prerequisite formalities, including the requirement that the website register with the Copyright Office, which Concurring Opinions has not done. (You can confirm that here).

As a result, default copyright doctrines apply to any infringing posts I make. Of most concern is vicarious copyright infringement, which would hold the Concurring Opinions folks liable for my infringing posts if they had the right and ability to supervise my infringing activities and a direct financial interest in those activities. (Because it’s a vicarious doctrine, scienter is irrelevant). Even though Concurring Opinions doesn’t generate any revenues (as far as I know!), the Napster court found that Napster had a direct financial interest in infringing P2P file sharing even though Napster didn’t generate a dime of revenues. Instead, the court said that the infringing materials acted as a “draw” to induce people to use Napster. So the principal issue in any vicarious copyright infringement claim would be whether my blog hosts had the right and ability to supervise my infringing activities. Many defendants do not find this a comforting standard…

(Note this analysis could work in reverse as well, where I could be liable for any infringements committed by my peers. As a guest-blogger, I feel a little better that I lack the requisite right and ability to supervise the infringing activities of my peers…but this may be a self-serving statement!)

If you’re interested in a more extensive analysis of liability for guest-blogging, see here.

While the liability situation could be disconcerting, I think the dynamics of being a guest blogger may alleviate some concerns. I am finding guest-blogging a little inhibiting because I don’t want to violate the norms of my blog hosts, which makes me even more cautious than normal. In this respect, guest-blogging feels a little like visiting a friend’s home. The friend may say “mi casa su casa,” but I’ll still carefully wipe the dirt off my shoes and try not to use the guest towels in the vanity bathroom. Similarly, I’ll blog politely here and save my reckless blogging for my own blogs.

What Would Europe Do?

Muni Wifi Router.jpgI went to a few trying panels at the annual law prof conference, but overall I felt presentations in my fields were great. (Perhaps it’s just like Congress–people hate the institution but love their own representative). My two favorite panels were on the internet & telecommunications, and on health insurance. But I felt the latter was ultimately more satisfying than the former, largely because many of the health scholars were deeply aware of comparative health policy, but the internet/telephony panel focused very tightly on U.S. policies.

That’s not to say the internet/telephony panel was at all bad–many big names in the field were there, they directly argued with one another, and a high-level senate staffer injected some political realism into what could have become a speculative discussion. Perhaps the most compelling arguments for the status quo (as opposed to “net neutrality intervention“) were offered by Christopher Yoo, who put forward a quasi-Gilderian vision of Darwinian competition unleashing quantum advances in communication services. For example, Yoo said it would be foolish for the FCC to protect Google from “gouging” by broadband networks, since the danger of such discrimination might just drive Google to massively invest in a satellite network to provide a third alternative to the the telephone/cable duopoly. Some would say it’s that duopoly that’s largely responsible for the US’s pathetic ranking of 21st in the world (right behind Estonia) in broadband penetration.

That makes a lot of sense as far as it goes, and reminds me generally of Schumpeterian visions of innovation–let monopolies rack up rents so they’ll either use profits to innovate or provoke someone else to swipe their customers. But another, gentler vision animates some European policy on the matter, where most customers get much lower prices for much faster services than Americans do.

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Fisking Posner on Inequality

In a recent post on the B-P blog, Richard Posner addresses soaring inequality. In the U.S., “since 1980 the percentage of total personal income going to the top 1 percent of earners has risen from 8 percent to 16 percent.” He concedes a few bad effects from this situation, but ultimately concludes that, aside from upping the estate tax, nothing should be done. My favorite part of the post involves Posner’s speculation that “[m]assive philanthropy directed abroad can interfere with a coherent foreign policy;” fortunately, the administration is already on the case.

It’s astonishing how assiduously Posner ignores the work of Robert H. Frank. In 20 years of rigorous articles and books, Frank has documented over and over the ways that growing inequality harms society. Some of us in the legal profession have applied his theories; Cass Sunstein on cost-benefit analysis, Richard McAdams in Relative Preferences, and my own work on luxury health care and the rise of low-volume, high-margin business models in IP.

But in this post, and even in longer treatments of the subject, Posner ignores the leading American theorist on the consequences of economic inequality. Frank takes his libertarian critics seriously, but somehow falls under the Posner’s radar. (Even in articles published in Westlaw, where a search for [au(posner) and (“robert frank” or “robert h. frank”)] got no hits evidencing engagement with Frank’s work on inequality.)

In what follows, I try to “fisk” Posner’s account of the effects of inequality.

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Chained Melodies

chainbest.jpgThe record industry is reportedly steamed that iPod users only buy, on average, 22 songs per device via iTunes. How could it possibly be that people aren’t rushing to fill up their iTunes library? Who wouldn’t entrust their music to a fragile digital demimonde so shackled by DRM that its best physical analogue would be CD’s chained to a bike rack? (The Zune makes the extraordinary concession of permitting one to “squirt” songs wirelessly for–get this–three days or three plays.)

After a couple of songs of mine disappeared during a computer switch, I swore the whole iTunes-purchase thing off. I get CD’s now, buying far less than I would if I could just get durable copies of songs I like. DRM is designed to minimize piracy, not to maximize sales, a “cut off your nose to spite your face” strategy long ago skewered by McKinsey & Co.

But what I find even more strange about the whole situation is the rigidity of pricing. Forget about the obvious equity issues–the almost spiteful flouting of the the principle of nonrivalry in consumption involved in denying content to those with no chance of paying. The industry and its partners appear to be shunning even profit-improving discounts. As Chris Sprigman noted in The 99 Cent Question, 5 J. Telecom. & High Tech. L. 87:

In 2003, the Rhapsody download service . . . [briefly] offered tracks at 99¢, 79¢, and 49¢. The prices do not appear to have been differentiated according to quality. . . . Rhapsody sold three times as many of the 49¢ tracks as the 99¢ tracks. Given that the marginal cost of selling each track is virtually zero, the 49¢ price yielded greater revenue. . . . Had Rhapsody sorted the tracks by quality (measured by demand at the previous uniform 99¢ price), it could have enjoyed additional sales for the lower-quality tracks (sales that would be profitable if the price Rhapsody pays to the major record labels for licenses to particular tracks were also varied to track demand), and maintained its margins for the higher-quality ones. But for some reason the music industry hasn’t absorbed this lesson.

Indeed. The difficult thing for everybody to realize is that there may well be no “right price” for digital music. Rather, the most efficient solution would have to involve a broadbased tax on either (or both) devices and ISPs. (As The Register puts it, “Free legal downloads for $6 a month. DRM free. [Terry Fisher] explains how.”) Verizon gets it. The RIAA gets it when it comes to compositions and lyrics. Why can’t they get it when it comes to recordings?

Photo Credit: Darwin Bell/Flickr.