From PLI S Course Handbook

From PLI’s Course Handbook Advanced Seminar on Copyright Law 2009 #19103

THE FUTURE OF COPYRIGHT

Bruce G. Joseph Wiley Rein LLP

Bruce G. Joseph

2 Biographical Information

Program Title: Seminar on Advanced Copyright Name: Bruce G. Joseph Position or Title: Partner Firm or Place of Business: Wiley Rein LLP Address: 1776 K Street NW Phone: 202.719.7258 Fax: 202.719.7049 E-Mail: [email protected] Primary Areas of Practice: Copyright, Internet and Computer law issues Law School: Harvard Law School Work History: Law Clerk to the Honorable James Hunter III, U.S. Court of Appeals, Third Circuit Membership in Associations, Committees, etc.: Former President of Washington Chapter and Trustee, Copyright Society of the USA; Member of Advisory Board of BNA’s Patent, Trademark and Copyright Journal

The Future of Copyright Bruce G. Joseph WILEY REIN LLP

What a title! Pretty grandiose. Let me peer into my crystal ball. No, wait. That’s a snow-globe.

Ah, now, I see lobbyists and rent-seekers of all stripes. I see processes that make fundamental change near impossible. I see ongoing confusion over digital technologies that were never contemplated when terms like “reproduction” and “public performance” were defined. I see renewed efforts to hold intermediaries and technology providers liable. I see innovation inhibited by the threat of massive statutory damages.

I see the continued perversion of the English language.

Copyrights are “property” just like your house and car.

Infringement becomes “piracy” and “theft.” Fair use, statutorily

“not infringement,” becomes a “defense” to what are otherwise

“exclusive rights” and is to be “construed narrowly.” I hear shouts of: “It’s mine! I bought it from the author! Don’t even think about using it without paying.” “Granularity” and “pay-per-use” become mantras.

What is that?? An execution? Poor Dmitri! They finally did it—all of these increases in monetary penalties and prison time 5 were not enough. In 2020, Congress enacted the death penalty for willful copyright infringement and circumvention.

Come to think of it, I see huge opportunities for copyright lawyers in the years to come.

I. BACKGROUND: ECONOMIC AND THEORETICAL UNDERPINNINGS OF COPYRIGHT LAW

A. COPYRIGHT AS INCENTIVE

1. The Constitution grants Congress the power to establish copyright law “To promote the Progress of Science” [read: “Knowledge”].

2. The Constitutional grant of power has its foundation in providing economic incentives to create for the benefit of the public. Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975) (“[T]he ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good.”); Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, at 429 n.10 (1984) (noting that copyright law “‘is not based upon any natural right that the author has,’” and describing the balance between stimulating the producer and “‘the evils of the temporary monopoly’” (quoting H.R. REP. NO. 2222, 60th Cong., 2d Sess. 7 (1909)).

B. CALIBRATING THE INCENTIVE

1. Key questions: How much incentive is the right amount? How much is too little? Is it possible for there to be too much incentive? Can there be too much of a good thing?

2. Consideration: Resource allocation – the goal is to draw the economically efficient levels of productive

6 resources to an activity (such as the creation of copyrighted works).

a). What is economically efficient? Drawing resources from other activities in an amount that maximizes overall social welfare.

b). Too little incentive, and there would be more societal benefit from the creation of more copyrighted works than from the deployment of the resources in other activities (teaching, lobbying, making baseball bats, building roads).

c). Too much incentive and there would be more societal benefit from the creation of fewer copyrighted works and the deployment of the excess resources in other beneficial activities (well, not lobbying).

d). So yes, it is possible for there to be too much incentive. Does anyone really need an entourage?

3. Consideration: Equitable distribution – how much compensation is “fair.”

a). One theory of fairness might be – “I created it, so if you want to use it in any way, you must pay.”

b). Another theory of fairness might be – “I paid for it, so I can make any use that I want, as long as I don’t cross some line that interferes with your ability to sell it to someone else.”

c). Another theory of fairness might be – the work exists and letting everyone have access does not preclude anyone else from having access, so let everyone have access.

7 4. Consumer surplus and producer surplus: The economic incentive system will necessarily be imperfect.

a). A price that draws the socially optimal level of resources will be lower than some are willing to pay, leading to a benefit to those consumers called “consumer surplus.”

b). On the other hand, the price will be higher than would be necessary to draw some of the producers into the market, leading to a benefit to those producers called “producer surplus.”

c). A competitive market (the paradigm that is often considered when speaking approvingly of “the market”) generally leads to maximization of consumer surplus.

d). Price discrimination. The more a producer can control prices charged to different buyers, the more the balance is tilted towards producer surplus instead of consumer surplus.

5. These and other issues are discussed in Part II of the monograph “Copyright in the Digital World: Basics, Law, and Policy,” by Bruce Joseph and Scott Bain, originally published in December, 2005 by the National Legal Center for the Public Interest, and reproduced here, following the outline.

8 II. CROSS-CURRENTS UNDERLYING THE EXISTING MISMATCH BETWEEN COPYRIGHT AND THE DIGITAL ENVIRONMENT

A. ARE COPYRIGHT RIGHTS PROPERLY DEFINED?

1. In the analog world, the rights granted to the copyright owner matched economically significant commercial activities.

a). Reproduction and distribution to the public were how books, magazines, sound recordings, and many other works were commercialized.

b). Public performance and transmission were principal ways that music, television programs, and motion pictures were commercialized.

2. In the digital world, the paradigm of matching rights with significant commercial activities breaks down.

a). Digital technologies operate by making copies of (and transmitting) billions of bits of information.

b). Personal computers are enormous copying machines with immense capacity.

c). Digital networks, including the Internet, operate by copying and transmitting undifferentiated bits of information.

d). Reproduction, distribution and performance by transmission are no longer primarily means of commercialization.

e). Every person browsing the Internet causes copies to be made in his or her computer.

f). Every digital performance requires buffering, which may be deemed to be copies. In other

9 words, every public performance may also be claimed to be a distribution to the public and the making of copies. See Part II.D, below.

3. Viewed another way, digital copying technology is responsible for the Internet, an advance that the Supreme Court has described as “a unique and wholly new medium of worldwide human communication,” and a “new marketplace of ideas” containing “vast democratic forums,” from which “any person with a phone line can become a town crier with a voice that resonates farther than it could from any soapbox.” Reno v. ACLU, 521 U.S. 844, 850, 868, 870, 885 (1997).

4. The net result is that the originally defined rights reach far more conduct than contemplated; far more conduct than should rationally fall under copyright owner control.

B. OTHER ATTRIBUTES OF COPYRIGHT LAW THAT ARE RELEVANT TO ITS EFFECT ON THE DIGITAL ENVIRONMENT.

1. All works that qualify for protection are automatically protected. In other words, anyone who writes an email or takes a picture with a cell phone camera is a copyright owner, with no regard to the quality or significance of the work.

2. No notice is required. Not only is protection broad, there is no requirement that the copyright owner alert others to his or her rights.

3. Direct infringement liability is strict liability. The infringer need not intend to infringe or even know he or she is infringing.

10 4. Secondary liability standards have been construed in various ways by different courts, at times very broadly.

5. The application of copyright law in the digital environment is full of uncertainty and gray areas. For example,

a). When does a public performance require reproduction and distribution rights?

b). Does a licensed performance require additional rights if it is made to someone using a device that makes home recordings that would be allowed under the Audio Home Recording Act?

c). Can a DVR facilitate the skipping of commercials?

d). Is a device that allows consumers to watch their home television channels when away from home (e.g., Slingbox) a device that promotes infringement?

6. Copyright sanctions can be severe. Thus, the penalty for making a wrong assessment of a gray area can put you out of business.

a). Statutory damages can reach $30,000 per infringed work for even non-willful infringement; $150,000 per infringed work for infringement a jury deems willful.

b). When a technology handles, or is capable of handling, many copyrighted works (think the Internet, private data storage, Internet or satellite radio), the potential liability can be massive.

C. ATTRIBUTES OF THE DIGITAL ENVIRONMENT THAT AFFECT COPYRIGHT INTERESTS

11 1. Digital copies of works are easily reproduced in high quality copies.

2. Digital networks permit private exchanges that are difficult to detect and to police.

3. As a result, copyright infringement has become simpler and more widespread.

4. These characteristics have led copyright owners to seek to hold network intermediaries (service providers) and technology providers responsible for infringement committed by users of their systems, networks or technologies. When these technologies are capable of handling many copyrighted works, as they typically are, the potential liability if a claim succeeds can be enormous.

D. EXAMPLE OF IMPROPERLY DEFINED RIGHTS: MUSICAL WORK PERFORMANCES AND DISTRIBUTIONS

1. Digital music offers an excellent example of the mismatch between existing definitions of rights and the digital environment.

2. Musical work copyright owners have divided the licensing of rights among different agents.

a). Performance rights may be licensed directly by the copyright owner (typically a music publisher), but are most commonly licensed by three performing rights organizations (“PROs”), ASCAP, BMI and SESAC. Rates for these collectives are set either in negotiations, or, in the case of ASCAP and BMI, by a “Rate Court” established by antitrust consent decrees. SESAC, which is not subject to an antitrust consent decree, has commonly offered licenses on a “take it or leave it” basis.

12 b). Mechanical (reproduction and distribution rights) may be licensed directly, but are most commonly licensed by an arm of National Music Publishers Association, the Harry Fox Agency. Mechanical license fees are set either in negotiation or in proceedings before the Copyright Royalty Judges under the section 115 statutory license.

3. The performing rights organizations have taken the position that downloads implicate the public performance right.

a). The PROs rely primarily on the “transmission” clause of the definition of “publicly” – “to transmit or otherwise communicate a performance or display of the work to a place [open to the public or where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered] or to the public . . . whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”

b). In April, 2008, the ASCAP Rate Court ruled that downloads were not performances, as they were not transmissions “of a performance,” but rather transmissions of copies. United States v. Am. Soc’y of Composers, Authors & Publishers, 485 F. Supp. 2d 438, 443 (S.D.N.Y. 2007).

c). This proceeding (involving AOL, Yahoo and Real Networks) was ultimately completed for non- download services, and is now on appeal to the Second Circuit.

13 4. Publishers simultaneously take the position that digital performances implicate the reproduction and distribution rights due to (i) server copies from which the performances are made, and (ii) buffers in receiving devices that are required to gather bits in order to generate the performed sounds. See, e.g., Comments of the National Music Publishers Ass’n, et. al, at 8, Copyright Office Docket RM 2000-7 (Aug. 28, 2008) available at http://www.copyright.gov/docs/ section115/comments-3/rm2000-7_nmpa_sga_ nsai_aimp.pdf.

a). The publishers have focused their arguments on interactive streaming, which they contend requires both a performance and mechanical license. Publishers have generally agreed that non-interactive streaming either does not require a mechanical license or that the appropriate fee for such a license is zero. Id. at 14.

b). Certain services and the record companies have acquiesced in this construction, generally out of fear of liability for server copies that do not qualify for the section 112 ephemeral recording exemption. See, e.g., Copyright Royalty Board, Final Rule, Mechanical and Digital Phonorecord Delivery Rate Determination, Docket No. 2006-3 CRB DPRA, 74 Fed. Reg. 4510, 4514 (Jan. 26, 2009) (discussing settlement of RIAA, DiMA and music publishers), amended 74 Fed. Reg. 6832 (Feb. 11, 2009).

c). The agreement among the publishers, record companies and certain services was submitted to the Copyright Royalty Judges in a partial settlement of a pending mechanical license fee litigation. The Judges adopted the settlement in their final rules, including a provision asserting that “interactive streams are incidental digital phonorecord deliveries”. See id.

14 d). The Copyright Office subsequently reviewed the CRB’s rules and found that the provision declaring interactive streams to be DPDs was contrary to law. Copyright Office, Review of Copyright Royalty Judges Determination, 74 Fed. Reg. 4537 (Jan. 26, 2009).

e). The Copyright Royalty Judges subsequently amended their decision to strike the sentence. Copyright Royalty Judges, Final Rule, Mechanical and Digital Phonorecord Delivery Rate Determination, 74 Fed. Reg. 6832 (Feb. 11, 2009).

5. In July, 2008, the Copyright Office published a notice of proposed rulemaking contemplating that buffers used in digital performances were cognizable copies that implicated the reproduction and distribution rights. Copyright Office, Library of Congress, Compulsory License for Making and Distributing Phonorecords, Including Digital Phonorecord Deliveries, Notice of Proposed Rulemaking, 73 Fed. Reg. 40,802 (July 16, 2008).

6. Shortly thereafter, the Second Circuit decided the Cartoon Network case, holding that fragmentary buffers used by a cable system in providing an in- network DVR function, were not cognizable reproductions. The Cartoon Network LP v. CSC Holdings, Inc., 536 F.3d 121, 127-30 (2d Cir. 2008)

7. In November, 2008, the Copyright Office issued an interim rule retreating from the proposition that digital performance buffers necessarily implicated the distribution right. Copyright Office, Library of Congress, Compulsory License for Making and Distributing Phonorecords, Including Digital Phonorecord Deliveries, Interim Rule, 73 Fed. Reg. 66,173 (November 7, 2008).

15 8. It simply makes no sense for a single economic activity – the performance of music by digital transmission – to require multiple licenses from multiple agents of the same copyright owners.

a). Such a regime would create enormously burdensome administrative costs, with no benefit. Worse, the requirement to distinguish to two rights will, if anything, lead to over-compensation for the same activity.

b). Determination of public performance royalties in Rate Court litigation is enormously expensive (costing each side millions of dollars). Determination of mechanical royalties in CRB litigation is enormously expensive (costing each side more millions of dollars).

c). Neither the Rate Court nor the CRB is well suited to differentiating the economic value of a performance from the economic value of reproductions that have, as their only function, effectuation of the performance.

d). Indeed, the CRB has been admonished by the Register for failure to separate the value of the section 114 sound recording performance right from the value of the section 112 ephemeral reproduction, following a full litigation on the record, in which no party submitted any evidence from which the Judges could decide how much value to attribute to the ephemeral reproductions. Copyright Office, Notice, Review of Copyright Royalty Judges’ Determination, 73 Fed. Reg. 9143 (Feb. 19, 2008).

9. Moreover, a requirement that each digital public performance implicates the reproduction and distribution rights cannot be harmonized with numerous provisions of the Copyright Act.

16 a). The Copyright Act consistently differentiates between the public performance right and other rights. These distinctions are deeply rooted in copyright law, and stem from underlying economic realities. b). For example, the Act often limits the public performance right in ways that other rights are not limited. Sections 106(6) and 114 limit the sound recording performance right but not reproduction and distribution. Sections 114 and 112 combine to establish a comprehensive statutory license structure for sound recording rights in non-interactive digital performances. However, the buffers needed to render such performances are not addressed in either section. c). Congress could not have put in place the complex structure of sections 112 and 114 and charged the Copyright Arbitration Royalty Panels and then the Copyright Royalty Judges with setting willing-buyer/willing-seller rates in a detailed, complex, on-the-record, trial-type litigation, if, after all that was done, sound recording copyright owners could still say “that is all very nice, but you still need to obtain licenses for the reproductions and distributions that necessarily result from those licensed digital performances, or, at least, you need to prevail on a fact-specific claim that those copies are fair use. And, by the way, there is no statutory license for that—you must deal with us individually.” d). Section 115, itself, establishes a clear rule for when a musical work is subject to statutory licensing: only those musical works for which a phonorecord “have been distributed to the public in the United States under the authority of the copyright owner” are subject to the statutory license. 17 U.S.C. § 115(a)(1); Copyright Law Revision, H.R. Rep. No. 94-1476, at 107-08

17 (Sep. 3, 1976) (the “1976 House Report”). The issue of what works were subject to the license was described as “the most controversial issue in the 1909 act” (at least with respect to the mechanical license). 1976 House Report at 107. Conversely, Congress decided that, before a musical work was recorded and distributed to the public, a record company could not record or distribute it under section 115. e). The unavoidable consequence of a rule that performance buffers are reproductions and “digital phonorecord deliveries” is that if a composer authorizes a digital public performance of a musical work that has never been recorded, that composer will also have authorized the creation and distribution of phonorecords of the work. Simply by appearing in the studio of a digital transmission service, and performing a new song, the songwriter will have yielded any rights to control first recording and distribution of the song. That is not what Congress intended or provided. f). Section 110 provides numerous exemptions from the public performance and display rights. These exemptions include, among others, an exemption for performances made by digital transmissions used in digital distance education, 17 U.S.C. § 110(2), and performances made in the course of a transmission specifically designed for and primarily directed to the blind or other handicapped persons, id. 110(8). Each of the underlying transmissions, when made digitally, requires buffering at the receiving device. If a digital performance buffer implicates the reproduction and distribution rights, the transmitting person would be engaging in causing the making of a reproduction and distribution, and the receiving person would be causing the making of a reproduction. Yet, nothing in the

18 section 110 exemptions applies to the reproduction or distribution rights. In other words, treating buffers as distributed copies could render null these carefully crafted exceptions.

g). Publication is defined as the “distribution of copies or phonorecords of a work to the public by sale or other transfer of ownership,” but the Act expressly provides that “a public performance or display of a work does not of itself constitute publication.” 17 U.S.C. § 101 (emphasis added). Construing every digitally transmitted public performance of a work as a distribution of the work to the public would appear to lead to the conclusion, contrary to the plain meaning of the definition, that every public performance by digital transmission would constitute publication.

E. EXAMPLE OF THE EFFECT OF EMPOWERED INDIVIDUAL CONDUCT: INTERMEDIARY LIABILITY

1. User demand has spurred content owners to make content available on the Internet, often for free. Others are also making content available, at times without the authorization of the copyright owner.

2. For content to travel from one computer to another, dozens of intermediate copies of at least parts of works may be made on computers in the transmission path.

3. The recipient’s computer generally makes temporary copies in its RAM and/or on its hard drive.

4. Users’ desire to “share” content, coupled with the ease of reproduction, means that substantial copying and distribution may be accomplished easily.

5. When infringement does occur, it is often conducted in private transactions, which makes enforcement difficult. 19 6. There is a tendency for copyright owners to try to enlist intermediaries as “copyright police” by holding the threat of legal action over those intermediaries.

7. In 1998, the DMCA established a set of “safe harbors” under which a service provider could not be liable for monetary relief and could only be subjected to user- specific injunctive relief.

a). The conduct addressed including acting as a conduit through which material flowed, server caching, acting as a location for third parties to store content, and acting as an information location tool or link to content.

b). These safe harbors are codified at 17 U.S.C. § 512.

c). The Act is clear that each action must be viewed on its own, and the different types of conduct can be combined, with each still subject to a safe harbor.

d). For content stored on a service provider’s system or network, the Act establishes a notice and take- down procedure that allows the copyright owner to obtain fast relief of potential infringement, without the need to involve the courts.

i. The take-down process has led to notices seeking take down of political and other non- infringing speech. See, D. McCullagh, McCain campaign protests YouTube’s DMCA policy, CNet News, Oct. 14, 2008, available at http://news.cnet.com/8301-13578_3-10066510- 38.html; J. Urban, L. Quilter, Summary Report, Efficient Process or “Chilling Effects”? Takedown Notices Under Section 512 of the Digital Millennium Copyright Act, available at http://mylaw.usc.edu/ documents/512Rep/

20 ii. One question is the extent to which a copyright owner must take account of fair use, before sending a take-down notice. One court recently held that fair use must be considered in good faith. Lenz v. Universal Music Corp., Order Denying Motion To Dismiss, Aug. 20, 2008, available at http://www.eff.org/files/ filenode/lenz_v_universal/lenzorder082008.pd f.

e). The Act contains numerous provisions that have not yet been construed by the courts.

8. Copyright owners and service providers have continued to skirmish over the scope of the safe harbor and over particular requirements.

9. One major area of contention is whether user- generated video sites, such as YouTube, are protected by section 512. Copyright owners have argued that the combination of storage with indexing functions, functions such as “most viewed,” and the generation of advertising revenue, disqualify the cites from protection and have sued UGC sites seeking damages approaching the GNP of many of the world’s nations. See, e.g., http://news.cnet.com/Viacom-sues-Google- over-YouTube-clips/2100-1030_3-6166668.html

10. Copyright owners also have pressed to require service providers to apply filters that seek out copyrighted material stored on or transiting a service provider’s system.

a). Section 512 suggests that such filtering or monitoring was rejected by Congress in 1998: “Nothing in this section shall be construed to condition the applicability of [the safe harbors] on (1) a service provider monitoring its service or affirmatively seeking facts indicating infringing activity. . . ..” 17 U.S.C. § 512(m).

21 b). Nevertheless, some service providers have voluntarily undertaken to filter stored content to reduce infringing conduct and to foster good relations with copyright owners, with whom they may wish to deal. See, e.g., Principles for User Generated Content, available at http://www.ugcprinciples.com/.

III. IMPEDIMENTS TO CHANGE

A. THE LEGISLATIVE PROCESS MAKES REFORM DIFFICULT.

1. Copyright is a creature of statutory law. See, e.g., Wheaton v. Peters, 33 U.S. (8 Pet.) 591, 659-68 (1834); White-Smith Music Publ’g Co. v. Appollo Co., 209 U.S. 1, 15 (1908). The rights exist entirely by statute and most changes in copyright law require statutory amendment.

2. It is much harder to block legislation than to pass it. Among other things, it effectively takes one committed Senator, who is able to employ a virtual filibuster by placing a “hold” on a bill. The bill can still pass, but it must follow procedures that make it very difficult.

3. Any reform that is perceived by any interest or group to adversely affect its interests will be vigorously opposed. In many cases, the interests have entrenched rights developed over decades that they are unwilling to compromise.

a). For example, although ASCAP, BMI and SESAC on the one hand, and the Harry Fox Agency, on the other, are both agents of the same copyright owners, they have their own interests in continuation of the bifurcated system of music rights.

22 4. Copyright owner interests tend to be most focused on copyright issues. User interests tend to have their focus on copyright issues diluted by other legislative priorities.

5. As a result, copyright rights tend to ratchet upwards.

B. EXISTING RIGHTS ARE DIFFICULT TO ELIMINATE

1. Once rights exist, they are very difficult to take away.

2. In addition to the political difficulties noted above, efforts to reduce rights may be met with arguments that taking away an existing right without compensation violates the Fifth Amendment.

C. INTERNATIONAL OBLIGATIONS

1. The United States is subject to a complex array of international obligations that require certain approaches to copyright law, including the Berne Convention, GATT TRIPS, and many bilateral trade agreements.

2. In many cases, the U.S. has pressed to include obligations in these agreements that mirror current law.

3. Any significant change risks violating these agreements.

4. Violations can lead to trade sanctions.

6. Wait, I think I said that already, twice.

23 IV. CRYSTAL BALL GAZING (NAVEL CONTEMPLATION?)

A. CHANGES THAT SHOULD OCCUR

1. Copyright rights should be rationalized and harmonized with the digital environment, so that infringement is based on economically significant acts, not technical violations that are vestiges of old technology.

a). Thus, for example, a performance by digital transmission is a single economic transaction. It should implicate a single copyright right with respect to any work, and only one transaction should be required to license that right.

b). Similarly, a digital download is a single economic transaction. It, too, should implicate a single copyright right with respect to any one work.

c). Internet browsing, which requires copies to be made in the browser’s computer, should not give rise to strict copyright liability.

2. Copyright terms are so long that they bear no relation to the creation of economic incentive. The present value of $100 that will be earned in 70 years is negligible ($3.29 using a 5% discount rate). Copyright terms should be based on rational economic incentives and should be shortened.

3. The long-term protection of works without any claim by the copyright owner or any requirement that the copyright owner identify him or herself and assert an interest in protection, has brought the public domain to a standstill and has made it difficult to build on a rich heritage of existing material. After a certain period of time, protection should depend on some form of rights assertion and identification of the relevant owner.

24 4. The statutory damage regime, as applied to providers of technology or technological services, creates risks of liability that are sufficient to deter investment and slow innovation.

a). Consider the threat of $30,000 times 100,000 works. Even if a defendant has a 90% probability of prevailing, and in gray areas of law, that is a very high probability, indeed, the expected value of liability is $300,000,000. [$30,000 x 100,000 x 0.10]

b). Would you invest in a new technology that allows individuals to have access to works that they have purchased when away from home or that allows individuals to make home recordings of digital radio broadcasts, even if you believed it was 80- 90% likely that those technologies were lawful?

c). Statutory damages should be reformed at least to limit their applicability to secondary liability for legitimate business activities.

B. CHANGES WORTH DISCUSSING

1. There have been calls for collective licensing of a single music right, called the “uni-license,” with no oversight of license fees. Hearing on Music Licensing Reform, Subcommittee on Courts, the Internet, and Intellectual Property, Committee on the Judiciary, United States House of Representatives, Statement of Marybeth Peters, The Register of Copyrights, 109th Congress, 1st Session, June 21, 2005.

2. There have been calls for a system of statutory licensing or collective licensing for activities such as peer-to-peer file sharing. See, e.g., http://www.eff.org/wp/better-way-forward-voluntary- collective-licensing-music-file-sharing.

25 3. While these are worth consideration, they should be approached with caution.

4. Collective licensing.

a). Collective licensing establishes a single seller, the collective, which has the ability to set prices, and with which all buyers, as a practical matter, must deal.

b). Collective licensing creates transactional efficiencies for buyers and owners. Each buyer need only go to one seller for all necessary rights.

c). At the same time, collective licensing typically creates enormous market power in the collective.

i. The collective is, essentially, a horizontal cartel that fixes prices. While buyers theoretically can seek out direct licenses from each copyright owner, this typically is impractical, and the owners have little incentive to undercut the collective’s prices. Inter-work competition disappears.

ii. As a result, collectives have attracted the attention of antitrust authorities. Both ASCAP and BMI were sued for antitrust violations and operate under consent decrees that include numerous protections for users, including judicial rate setting and a prohibition of refusal to deal.

iii. When the sound recording performance right was established, the Justice Department opposed allowing the formation of a collective licensing agent, absent rate regulation. Letter from Acting Assistant Attorney General Kent Markus to Hon. Patrick Leahy, June 20, 1995, reprinted in Cong. Rec. S11961-62.

26 d). Collective licensing without rate regulation is a prescription for market distortion and over- compensation.

e). For example, SESAC, the third PRO, is not subject to rate regulation, and typically charges a significant premium over its market share, compared with ASCAP and BMI. Why? In many cases a user must have a SESAC license to operate without fear of massive infringement liability (e.g., when the user cannot control the music in pre-produced programming or commercials, or cannot identify which collective controls various compositions), and SESAC will offer only a blanket license for its entire repertory, at a premium price.

5. Collective licensing with rate regulation and statutory licensing.

a). One approach to mitigate collectivized market power is to establish a rate regulation mechanism.

b). Rate regulation can take the form it has taken in the case of ASCAP and BMI – that is, a prohibition on collective refusal to deal and a “Rate Court” charged with setting reasonable fees on the request of either a user or the collective, if the parties are unable to negotiate a fee.

c). Alternatively, Congress can establish a “statutory license,” which acts as a prohibition on the refusal to deal, coupled with rate setting by the Copyright Royalty Judges.

d). Rate regulated collectives are substantially more likely to approximate competitive market pricing than an unregulated collective.

e). Rate regulation is, however, extraordinarily expensive for all parties, and is far from perfect.

27 f). Rate court and CRB cases cost each party millions of dollars. User interests rarely have the incentive to invest as much in the process as the collective, which often can apply the result to a wide array of users in different situations.

g). Rate regulation often yields results significantly above that which would prevail in a reasonably competitive market.

h). Recent decisions by the Copyright Royalty Judges, including the 2007 non-interactive webcasting decision, relied on an cream- skimming benchmark (subscription interactive services, as licensed by the four major record companies – itself far from a competitive market), and failed to adjust for admitted differences in promotional and substitutional effects between interactive and non-interactive services.

6. Employing technology to create competitive markets.

a). Another approach that may soon be practical, is to employ technology to create competitive markets featuring inter-work competition.

b). Licenses must be obtainable at the point where the decision to use a work is made. After that, the value of the use of the work, often becomes inextricably intertwined with the value of any derivative.

c). Technology must allow tracking and identification of works and licensors.

28 C. CHANGES TO AVOID

1. Further ratcheting up of sanctions

a). Over the past 10 years, copyright owners have repeatedly pressed for increases to the already stiff sanctions for infringement.

i. In 1999, maximum statutory damage amounts were increased by 50% and the Sentencing Commission was instructed to promulgated guidelines for sentencing under the prior No Electronic Theft Act.

ii. In 2004 Congress created an entirely new regime of prohibitions, including statutory damages and attorneys fees for trafficking in products with “counterfeit labels” (defined to include labels on unauthorized copies).

iii. In 2005, Congress increased criminal penalties for infringement, created a new violation for recording in a theater, and directed the Sentencing Commission to review guidelines for all intellectual property crimes, inter alia, “to ensure that the Federal sentencing guidelines and policy statements described in subsection (a) are sufficiently stringent to deter, and adequately reflect the nature of, intellectual property rights crimes.”

iv. In 2008, Congress toughened civil and criminal forfeiture and seizure provisions in copyright infringement cases.

b). While increases in sanctions may be an easy political sale (after all, the person is already a wrong-doer), the political process can lose sight of the extent to which stiff sanctions, coupled with evolving and uncertain law, coupled with strict liability for direct infringement and

29 potentially broad theories of secondary liability, and coupled with the unlimited array of copyrighted works and copyright owners, can deter socially beneficial conduct.

c). There has been little reliable evidence that increased sanctions were needed or have been effective in reducing the most harmful kinds of infringement.

2. A pay-per-use society

a). The digital environment has led to increased use of licensing as an alternative to the sale of a work.

b). Because many private uses require the making of “copies,” it has been possible for copyright owners to grant finely granulated rights to take specific actions (e.g., listen once, listen for three days).

c). Digital rights management technologies have further supported granular rights models. DRM can be used to back up licenses and to prevent unlicensed uses.

d). Granular licenses are often defended as offering the opportunity to experiment with new business models. If a consumer does not want to pay the price for a permanent copy, he or she can lease a view.

e). On the other hand, granular licenses are a form of price-discrimination. Those willing to pay the most, can obtain the most rights.

f). Price discrimination generally leads to the diminution of consumer surplus and the transfer of that surplus to producers.

30 g). If copyright production leads to generation of more producer surplus for any given level of investment, compared with other activities, this may lead to distorted resource allocation in favor of production of copyrighted works.

h). Such a result is paradoxical given the “public good” nature of copyrighted works. Unlike physical goods, copyrighted works can be enjoyed widely by all, without depriving others of their enjoyment (non-rivalrous consumption), and it is more difficult to keep copyrighted works confined to a limited set of permitted users than with physical goods (non-excludability).

i). All things equal, it seems likely that society would be better off if copyrighted works were more widely available and offered with less price- discrimination than tangible property.

D. LIKELY OUTCOMES

1. Given the impediments for change discussed above, do not expect radical change any time soon. Now that is going out on a limb.

2. More likely, there will be continued pressure from copyright interests for greater sanctions for infringement, imposition of more obligations on intermediaries, and granular, price-discriminating business models.

3. The music licensing system that exists today is broken. There may actually be enough of a consensus among stakeholders on this point that some form of reform could occur. Entrenched interests make it unlikely that the reform will take the form of rationalized rights.

4. Copyright lawyers will continue to be in high demand.

31 V. THE DIGITAL COPYRIGHT DILEMMA—IS THE BALANCE CORRECT? The public interest goal established by the Constitution for copyright law requires Congress to strike a careful balance between the competing interests of providing the desired incentive to create copyrightable works, on the one hand, and furthering the free flow of ideas and information and permitting the public to use and build upon creative works, on the other.1 The balance embodied in the 1976 Copyright Act, despite extensive tweaking, however, is still fundamentally based on the world that existed in 1976, at the dawn of personal computers and long before the Internet, most digital content and digital communications. Is that balance still valid today?

Moreover, the goal of providing an incentive begs a second critical question—how much of an incentive should be provided? In the words of one author, “What we want . . . is not merely an incentive but the right incentive.”2 On the one hand, an activity must generate sufficient return to direct appropriate amounts of talent, investment and other resources into the activity. On the other hand, providing too great a return can be as bad as or worse than providing too little return. Providing excessive returns to an activity can lead to inefficiency and allocation of too many resources to that activity, diverting those resources from other, more necessary activities and reducing society’s overall welfare.3

1 See Part I.A, supra. 2 DAVID D. FRIEDMAN, LAW’S ORDER 135 (2000), quoted in Mark A. Lemley, Property, Intellectual Property and Free Riding, 83 TEX. L. REV. 1031, 1059 (2005). 3 Glynn S. Lunney, Jr., Reexamining Copyright’s Incentives- Access Paradigm, 49 VAND. L. REV. 483, 488-92 , 576-577 (1996) (“[T]o create these additional works, we must strip the resources from other sectors of the economy. As a result, broadening copyright imposes a second critical cost [beyond the loss of access to existing or future works]: the lost value society would have associated with the alternative investments to which these resources would otherwise have been devoted.”). Lemley identifies four additional social costs imposed by over- compensation, including (i) static inefficiencies and deadweight 32 Are there attributes of the digital environment that suggest this has become the case with Congress’ grant of copyright rights?

These questions are exquisitely difficult. Full consideration would require extensive economic analysis beyond the scope of this monograph. However, there are characteristics of copyright law and the digital environment that suggest that the law as it exists today does not strike the proper balance. Consideration of these characteristics should inform the policy debate about today’s digital copyright issues.

A. IMPORTANT CHARACTERISTICS OF COPYRIGHT AND THE DIGITAL ENVIRONMENT There are several characteristics of copyright law and the digital environment that are relevant to calibration of the copyright balance and consideration of the policy issues that arise in that environment. It is worth highlighting them here. Copyright law provides automatic protection for just about everything that is communicated. Text, pictures, graphics, music, recorded sound, video and computer programs are all protected by copyright. Protection is automatic. There is no need for the copyright owner to identify protected subject matter or to register his or her claim with any governmental body. As a result, virtually everyone is a copyright owner, with ability to invoke the remedies of copyright law, without regard to the quality or desirability of the work.4 loss as a result of increasing prices above the competitive norm, resulting in under-use of works; (ii) interference with the ability of improvers to create improvements on the work; (iii) encouraging socially wasteful rent-seeking behavior (such as the readily observed petitioning of the government for even greater rights); and (iv) the imposition of added administrative costs, most notably the costs of additional enforcement. Lemley, supra note 69 at 1059-64. 4 Curiously, purveyors of pornography have been among the most litigious copyright owners. See, e.g., ALS Scan, Inc. v. Remarq Communities, Inc., 239 F.3d 619 (4th Cir. 2001); Perfect 10, Inc. v. Cybernet Ventures, Inc., 213 F. Supp. 2d 1146 (C.D. Cal. 2002); Compl., Perfect 10, Inc. v. Google, Inc., No. 04-9484 (C.D. Cal. 33 The law gives the copyright owner the right to control five broadly defined activities with respect to protected subject matter, including the making of copies.5 Although there are important exceptions to these rights and limitations on their exercise, courts and the Copyright Office often declare that the exceptions and limitations are to be construed narrowly on the ground that they are in derogation of the “exclusive rights” granted by Congress.

The law imposes strict liability for conduct that itself performs any of the controlled activities, without regard to knowledge or intent. Further, despite the lack of a clear statutory basis, the courts have created doctrines of secondary liability that have at times been applied broadly. Direct and secondary violations both are subject to potentially enormous monetary liability under the Act’s statutory damage provisions.

Unlike analog technology, digital technology operates by making copies. Computers make copies in their random access memory when content is loaded for use. Digital networks make copies or partial copies of content throughout the transmission process. Viewing a site on the World Wide Web requires a copy of the content of the site to be transmitted using technology that makes copies in routers, caches complete copies in service provider servers, makes a copy of the content in the recipient’s random access memory and typically makes a second automatic copy on the recipient’s hard drive to promote efficient recall.

Conversely, the digital environment permits efficient and hard to detect unauthorized reproduction and dissemination to large numbers of persons or even to the public at large. Infringing copies typically are high quality and such infringement is often hard to detect. Thus the digital environment has likely spawned an filed Nov. 19, 2004) (“Perfect 10 Compl.”); Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, No. C-04-0371, 2004 WL 1773349 (N.D. Cal. Aug. 5, 2004); Playboy Enters., Inc. v. Davidson, No. 97- 2787, 1999 WL 246739 (N.D. Ohio April 12, 1999); Playboy Enters., Inc. v. Webbworld, Inc., 991 F. Supp. 543 (N.D. Tex. 1997); Playboy Enters., Inc. v. Russ Hardenbaugh, Inc., 982 F. Supp. 503 (N.D. Ohio 1997). 5 See Part I.B.1, supra. 34 increase in infringing conduct.6 It has also spawned new business models allegedly built on the unauthorized exploitation of infringement.

B. ARE COPYRIGHT RIGHTS PROPERLY ANALOGIZED TO TANGIBLE PROPERTY RIGHTS? Major copyright owners and their supporting organizations in the public policy debates have analogized intellectual property to tangible property, and have urged that it should be treated as such when considering the appropriate level of protection.7 There are reasons to believe, however, that the 6 The major copyright owners believe that the increase in infringing activity has caused enormous economic harm to their industries. See, e.g., Recording Industry Association of America, What the RIAA is Doing About Piracy, available at http://www.riaa.com/issues/piracy/riaa.asp (last visited Sep. 22, 2005) (claiming that online infringement “costs the music industry more than 300 million dollars a year domestically”); Motion Picture Association of America, Anti-Piracy Introduction, available at http://www.mpaa.org/anti-piracy/index.htm (last visited Sep. 22, 2005) (claiming that “it is safe to assume that Internet losses cause untold additional damages [beyond $3 billion in annual non-Internet “piracy” losses] to the industry.”). While injury is likely, the extent of that injury is disputed. For example, some observers argue that most unauthorized uses are made by those who would not otherwise purchase the content, and that at least some unauthorized uses stimulate sales (e.g., previewing by unauthorized download). See, e.g., Felix Oberholzer & Koleman Strumpf, The Effect of File Sharing on Record Sales: An Empirical Analysis, available at http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf (last visited Sep. 23, 2005) (claiming that “[d]ownloads have an effect on sales which is statistically indistinguishable from zero.”). 7 See, e.g., Recording Industry Association of America, Old as the Barbary Coast, New as the Internet, available at http://www.riaa.com/issues/piracy/default.asp (last visited Nov. 6, 2005) (analogizing downloading to the taking of “gold (and platinum and diamonds)” by brandishing “cutlasses, cannons, or daggers”); Steven A. Hetcher, The Music Industry’s Failed 35 analogy to tangible property overstates the societal benefits of intellectual property protection, and should be approached with caution when considering how to calibrate the copyright balance.8

Tangible property differs from intellectual property in several important respects. Most fundamentally, a copyrighted work, unlike tangible property, may be used and enjoyed by many without depleting the work or depriving others of their own enjoyment. This characteristic, referred to in the literature as non- rivalrous consumption,9 suggests society is likely to obtain greater benefits, with little if any incremental cost, from broad use of the work. Tangible property, in contrast, is characterized by rivalrous consumption. If one person uses the property, others cannot use it at the same time. Moreover, use tends to deplete the value of the property. Thus, the net benefit to society from sharing tangible property is likely to be substantially less than the benefit from sharing intellectual property.

Second, because information is easily shared (and digital files are easily copied), it is difficult and costly to prevent others from using the work. Tangible property is far more easily “owned” and controlled. This characteristic, referred to in economic literature as “non-excludability,”10 suggests that society will spend more to impose comparable controls over intellectual property than tangible property.

Attempt to Influence File Sharing Norms, 7 VAND. J. ENT. L. & PRAC. 10, 20 (2004) (quoting statements equating copying to stealing); Frank H. Easterbrook, Intellectual Property Is Still Property, 13 HARV. J.L. & PUB. POL'Y 108, 118 (1990) (arguing that the law “should treat intellectual and physical property identically”). 8 At times, this argument has taken the form that property rights granted by Congress must be respected in order to ensure respect for the law. Assuming, for the sake of discussion, the validity of that argument in applying the law as it exists, it is irrelevant to consideration of what the law should be and how intellectual property rights should be defined to strike the appropriate balance of interests. 9 E.g., Lemley, supra note 69 at 1050-51. 10 E.g., Lemley, supra note 69 at 1049. 36 Goods characterized by both non-rivalrous consumption and non-excludability are referred to as “public goods.” The economics of public goods differ significantly from the economics of other types of goods.11 Indeed, subjecting copyrighted works to property rights comparable to those applicable to tangible property could cause society to lose in two ways—less benefit from sharing and the imposition of greater costs to prevent sharing. At minimum, this suggests that analyzing copyrights as tangible property will misstate the appropriate analysis and lead to a result that does not maximize social welfare.

C. SHOULD COPYRIGHT OWNERS BE PERMITTED TO EXERCISE GRANULAR CONTROL OVER PRIVATE USE? In the world of 1976, the rights granted under copyright law mirrored commercially important means of exploiting copyrighted works. Reproduction and distribution rights mirrored the publication and sale of books, records, magazines, photographs and many other types of expression. Public performance rights mirrored the broadcasting of musical works and audiovisual works, live concert performances of music and theatrical exhibition of motion pictures. A commercial entity interested in exploiting a copyrighted work typically needed to obtain a relatively well-understood and defined set of rights to engage in that exploitation.12 11 See, e.g., Lemley, supra note 69 at 1051, 1055 (“[R]ather than a tragedy [as in the case of real and tangible property], an information commons is a ‘comedy’ in which everyone benefits.”) (“Intellectual property, then, is not a response to allocative distortions resulting from scarcity, as real property law is. Rather, it is a conscious decision to create scarcity in a type of good in which it is ordinarily absent in order to artificially boost the economic returns to innovation.”); Wikipedia, http://en.wikipedia.org/wiki/Public_goods (last visited Nov. 7, 2005). 12 See also Lunney, supra note 70 at 501 (“Until the early part of the twentieth century, actual copying would constitute an infringing appropriation only if it amounted to an unfair use of the plaintiff’s work in that ‘so much is taken that the value of the 37 Conversely, private enjoyment of copyrighted works could be undertaken without implicating the rights of the copyright owner. An individual did not need the permission of the copyright owner to read a book, view a painting or photograph, listen to a record or the radio, or watch television or a home video.

The digital environment changes the calculus. Many private uses of copyrighted works in the digital environment arguably implicate rights that were not implicated in the analog world. Viewing video, listening to music or reading an article on a computer now requires the making of a copy. Viewing text and photographs by surfing the World Wide Web similarly causes multiple copies to be made.

Moreover, the application of technological protection measures enables copyright owners to further subdivide the usage rights provided to users.13 Thus, for example, a copy of a video may be acquired in a form that allows the user to watch it only a limited number of times or for a limited period of time. Copies of recorded music already are made available in a form usable for only the period of time that a subscription fee is paid.

Should the copyright owner be permitted to exercise such granular control of the use of a work? Copyright owners argue that granular control enables pricing that is more accurately related to the value of a use. This argument holds that, if a copyright owner is able to charge less for a copy that includes only the right to view a video once and more for a copy with unlimited viewing rights, consumers will be better off—the person that wants to watch only once will pay less than he or she would pay for a copy with unlimited rights in a world where granular control was not possible.

Such pricing is a form of price discrimination, in which the price difference between the two offerings exceeds the cost original is sensibly diminished, or the labors of the original author are substantially to an injurious extent appropriated by another.’”) (citations omitted). 13 See infra, Part III.B. 38 difference in making the offerings.14 Economists generally believe that the theoretical economic model of perfect price discrimination leads to the socially efficient allocation of scarce resources, just as the theoretical economic model of perfect competition.15 Others disagree, and argue that perfect price discrimination, like perfect competition, cannot exist, and that the price discrimination model will lead to different, and perhaps less desirable, types of works.16

But whatever its effect on efficient resource allocation, the net effect of price discrimination is that consumers spend more in the aggregate and producers earn more than in a competitive market.17 Consumer surplus is redistributed to producers and turned into producer surplus.18 Thus, it is not surprising that copyright owners strongly advocate economic and legal models that permit granular differential pricing.

Which way is society better off? Which way are consumers better off? Evaluation of those issues requires both theoretical and empirical economic analysis beyond the scope of

14 See, e.g., Michael J. Meurer, Copyright Law and Price Discrimination, 23 CARDOZO L. REV. 55, 58 (2001). 15 See, e.g., id. at 69 (“Perfect price discrimination . . . maximizes total surplus . . . . This is the same total surplus that would be achieved in a competitive market.”); William W. Fisher III, Property and Contract on the Internet, 73 CHICAGO-KENT L. REV. 1203, 1240 (arguing that partial price discrimination reduces social welfare losses). 16 See, e.g., Julie E. Cohen, Copyright and the Perfect Curve, 53 VAND. L. REV. 1799 (2000) (arguing that the price discrimination model will lead to qualitatively less desirable works); id. at 1812 (“[T]he contractual price discrimination model rests on a logical impossibility. As a result, it is unlikely to foster the sort of competition that its adherents claim is necessary for it to work.”). 17 See, e.g., id. at 1802-04; Meurer, supra note 81 at 91 (“Recall the seller always gains from price discrimination. Discrimination is voluntary. Thus, the seller would not discriminate unless it was profitable.”). 18 See, e.g., Meurer, supra note 81 at 69 (“[P]erfect price discrimination distributes the entire surplus to the seller, competition distributes the entire surplus to buyers.”). 39 this monograph. We may, however, draw some insights from the economic treatment of tangible property.

The discussion in Part II.B, supra, suggests that society will be better off if copyrighted works, as public goods, are subjected to less restrictive property rights than tangible property. In the world of tangible property, producers typically are not able to charge prices based on the extent of use. Consumers purchase a product and are free to use that product as much as they want without paying more. Although those that use a product more likely value it more, they pay no more. It therefore appears counter-intuitive to grant the ability to engage in granular price discrimination in copyright markets, when that ability typically is not present in markets for tangible property.

Moreover, permitting producers of certain types of products to capture consumer surplus, while producers of other types of products are precluded from price discrimination, could drive additional resources into production of the product that may be sold with granular, discriminatory pricing. That may distort resource allocation and lead to a reduction of society’s overall welfare.19

This discussion is not intended to be conclusive; it is intended only to stimulate discussion. It does suggest, however, that careful scrutiny should be applied to arguments that intellectual property should be treated just like tangible property and that society is best served by granular price differentiation for each use of copyrighted works.

19 See, e.g., Lunney, supra note 70 at 633 (“[G]ranting authors more extensive control over derivative uses, with a correspondingly greater ability to price discriminate, would lead the market to overproduce works of authorship and to underproduce non-work products.”). 40