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Tuesday, March 6, 2012

Michael Carrier on Creation Without Restraint

Posted by Michael Carrier

In Creation without Restraint: Promoting Liberty and Rivalry in Innovation, Christina Bohannan and Herbert Hovenkamp marshal a simple but profound observation from antitrust law to cabin the excesses of intellectual property (IP). They inject the core of the antitrust injury requirement – that a plaintiff must show harm – into numerous corners of patent and copyright law. In doing so, they seek to return IP to its origins as a regime with doctrines more closely connected with creation incentives. This post focuses on copyrights, whose connections to innovation have not been as thoroughly appreciated as patents.

Antitrust injury

A central motivating insight of Creation without Restraint stems from the concept of antitrust injury. In Brunswick Corp. v. Pueblo Bowl-O-Mat, the plaintiff, a small bowling alley, challenged the defendant’s acquisition of a rival. The plaintiff complained that, absent such acquisition, the rival would have gone out of business and the plaintiff would have received more income.

The Supreme Court rejected this claim, explaining that “[p]laintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Relying on one of the most famous lines in antitrust law, from Brown Shoe Co. v. United States, the Court required the plaintiff to show harm to “competition, not competitors.” Brunswick’s injury requirement connected antitrust law to the purposes for which it was created.

IP law could benefit from a correction like the one antitrust law underwent in Brunswick. For unlike antitrust, which corrected (some say overcorrected) from the 1960s era in which courts upheld antitrust claims even where there was not harm to competition, much of IP law has veered away from its utilitarian foundation.

Copyright expansion

Such a migration is painfully obvious in copyright law. Stated most briefly, the copyright term, initially 14 years (with a potential 14-year renewal), now lasts for the life of the author plus 70 years. And the rights granted to copyright holders have expanded to embrace the right to prepare derivative works and, under the anticircumvention provisions of the Digital Millennium Copyright Act (DMCA), the right to block access to uncopyrightable parts of works.

Yet the challenge confronting those seeking to cabin IP law is that it is difficult to know exactly what scope and duration of rights are optimal. Creation without Restraint is valuable in its offer of a framework that could be used to limit IP law without wading into the morass of determining optimal rights. For while we might not know what shape of IP right is ideal, we can conclude that certain IP expansions are not justified.

Unforeseeable protection

One set of expansions that is not justified includes instances where protection does not encourage creation. And one of those areas involves markets that the author did not foresee. If a particular market is not anticipated by an author, then it is hard to see how it provides an incentive to create the work. The authors find one obvious example in the definition of derivative works, which is “a work based upon one or more preexisting works” and which provides the copyright holder with the exclusive right over “any . . . form in which a work may be recast, transformed, or adapted.” Such an expansive right could embrace works for which copyright holders “have no incentive or would not be a credible source of works critical of their own” (p. 152). An example the authors provide involves the television show Seinfeld, where a court ruled against a defendant who had published a trivia book based on the show even though the copyright holder “had decided not to exploit” the market (p. 197). Another example is a retroactive extension of the copyright term. In the Sonny Bono Copyright Term Extension Act, Congress added 20 years to the existing copyright term, which applied even to works that had already been created. The authors explain that such extensions “cannot provide any incentives to create existing seventy-year-old works” but “are simply a naked transfer of monopoly profits from consumers to the rights holder” (p. 55).

Statutory damages

A stark example of copyright holders’ recovery that is not justified by any conception of harm is provided by the statutory damages regime, which allows copyright owners to collect as much as $150,000 for each work infringed. Applied to technology manufacturers, potential liability quickly escalates to levels having nothing to do with any reasonable notion of harm.

Two examples are illustrative. Viacom sued YouTube and Google based on 160,000 unauthorized clips available on YouTube, which, at $150,000 per clip, could result in liability of $24 billion. Even more astonishing, copyright owners requested $75 trillion in damages from LimeWire, a figure higher than the ($62 trillion) GDP of the world.

Even in cases against individuals, statutory damages typically are not connected to any conception of harm. In 2009, a jury awarded $1.9 million (later reduced to $54,000 and currently on appeal) in statutory damages against an individual who had uploaded 24 copyrighted songs. A recording industry official admitted that “We haven’t stopped to calculate the amount of damages we’ve suffered due to downloading.”

And in the case involving MP3.com, a service enabling subscribers to build an online library that would allow them to listen to music from multiple locations, the defendant, facing potential statutory damages liability of $250 million, settled the case for $53 million. The service’s founder, Michael Robertson, explained that the copyright owners “could not prove they were harmed even $1” and that he “had ample evidence that they actually profited from [the] technology.”

Nascent innovation

While astronomical statutory damages typically do not provide an appropriate remedy for infringement, they do threaten a direct effect on innovation. Innovation also could be affected by antitrust law.

One of the fundamental characteristics of innovation is its unpredictability. We do not know which new technologies ultimately will be successful. In fact, inventors themselves do not typically know the ultimate uses to which their technologies will be put. Just to pick two examples, Alexander Graham Bell thought the telephone would be used primarily to broadcast the daily news, and Thomas Edison believed that the phonograph would be used “to record the wishes of old men on their death beds.” For that reason, antitrust plaintiffs challenging defendants’ actions that harm their fledgling technologies should not be required to show that the technology is commercialized to the level that it offers a viable market alternative. The D.C. Circuit explained in the Microsoft case that it could “infer causation when exclusionary conduct is aimed at producers of nascent competitive technologies” since it is difficult to “confidently reconstruct a product’s hypothetical technological development.”

The Federal Circuit’s decision in Princo v. ITC gave insufficient attention to such nascent innovation. The court found that Philips and Sony did not commit patent misuse by “grant[ing] licenses to standardized recordable CD technology” but “allegedly agree[ing] with each other not to license an unused patent that might have facilitated development of alternative technology.” The court concluded that the plaintiff’s technology was only a “theoretical solution” and that the agreement did not “result[] in some realistic foreclosure of competition” (p. 281). As the authors correctly note, however, the court “failed to appreciate the importance of protecting nascent innovation.” For even if the technology was not presently feasible, the agreement between Philips and Sony not to license it “prevented others from building on that technology to develop a viable or even superior digital technology” (p. 281).

FTC Section 5

Innovation also is affected by how different products work together. Bohannan and Hovenkamp address interconnection issues by wading simultaneously into two controversial streams. The first involves Section 5 of the Federal Trade Commission (FTC) Act. In allowing the FTC to target “unfair methods of competition,” Section 5 offers a tool that reaches beyond antitrust law. Exactly how far it reaches has been subject to vigorous debate, as revealed by, for example, the fractured (majority, Majoras dissent, Kovacic dissent) FTC decision involving the potential liability of N-Data for increased licensing fees in the standard-setting context.

The second contentious issue involves whether monopolists should be subject to antitrust liability for their refusal to license IP to rivals. U.S. courts have been much less receptive to such arguments than their European counterparts. Bohannan and Hovenkamp offer Section 5 as the navigator of the shoals between (1) antitrust litigation, with its potential treble damages and unpredictable jury awards, (2) U.S. refusal-to-license law, which provides blanket immunity for IP holders, and (3) Section 2 of the Sherman Act, which, after cases like Verizon v. Trinko, treats the existence of regulation as a reason to avoid the application of antitrust. The authors hold up Section 5 as a modest, cautious step that could address the important issues involving interconnection in network markets. Such issues arise in settings such as Microsoft’s refusal to share protocols that would have allowed rivals to connect with its work group servers, which provide services such as file and print sharing (the focus of the EU case).

Conclusion

The requirement that a plaintiff show harm appears in various areas of the law. The authors rely on antitrust law – in particular antitrust injury – to limit IP law. The authors also correctly focus on innovation as a key goal of antitrust law. Given the importance of innovation and questionable direction of much copyright law today, these ambitious endeavors are worth attention from courts and policymakers.

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