Copyright Arbitrage
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University of Colorado Law School Colorado Law Scholarly Commons Articles Colorado Law Faculty Scholarship 2019 Copyright Arbitrage Kristelia A. Garcia University of Colorado Law School Follow this and additional works at: https://scholar.law.colorado.edu/articles Part of the Administrative Law Commons, Antitrust and Trade Regulation Commons, Courts Commons, Law and Economics Commons, and the Legislation Commons Citation Information Kristelia A. Garcia, Copyright Arbitrage, 107 CALIF. L. REV. 199 (2019), available at https://scholar.law.colorado.edu/articles/1214. Copyright Statement Copyright protected. Use of materials from this collection beyond the exceptions provided for in the Fair Use and Educational Use clauses of the U.S. Copyright Law may violate federal law. Permission to publish or reproduce is required. This Article is brought to you for free and open access by the Colorado Law Faculty Scholarship at Colorado Law Scholarly Commons. It has been accepted for inclusion in Articles by an authorized administrator of Colorado Law Scholarly Commons. For more information, please contact [email protected]. Copyright Arbitrage Kristelia A. García* Regulatory arbitrage—defined as the manipulation of regulatory treatment for the purpose of reducing regulatory costs or increasing statutory earnings—is often seen in heavily regulated industries. An increase in the regulatory nature of copyright, coupled with rapid technological advances and evolving consumer preferences, have led to an unprecedented proliferation of regulatory arbitrage in the area of copyright law. This Article offers a new scholarly account of the phenomenon herein referred to as “copyright arbitrage.” In some cases, copyright arbitrage may work to expose and/or correct for an extant gap or inefficiency in the regulatory regime. In other cases, copyright arbitrage may contravene one or another of copyright’s foundational goals of incentivizing the creation of, and ensuring access to, copyrightable works. In either case, the existence of copyright arbitrage provides strong support for the classification (and clarification) of copyright as a complex regulatory regime in need of a strong regulatory apparatus. DOI: https://doi.org/10.15779/Z38DR2P868 Copyright © 2019 California Law Review, Inc. California Law Review, Inc. (CLR) is a California nonprofit corporation. CLR and the authors are solely responsible for the content of their publications. * Associate Professor at the University of Colorado Law School and Director of the Content Initiative at the Silicon Flatirons Center for Law, Technology and Entrepreneurship. For their generous and helpful comments, the author thanks Michael Abramowicz, Eric Alston, Ian Ayres, Robert Brauneis, Ben Depoorter, Eric Gerding, Jim Gibson, Mark Lemley, Yvette Liebesman, Jessica Litman, Barak Orbach, Gideon Parchomovsky, Blake Reid, Matthew Sag, Andrew Schwartz, Sloan Speck, Harry Surden, Rebecca Tushnet, Phil Weiser, and the participants of the St. Louis University School of Law Faculty Workshop, Yale Law School’s ISP Speaker Series, and the University of Pennsylvania’s Third Annual Copyright Roundtable. For their generous support, the author thanks the Honorable Nancy F. Atlas IP Inn of Court and the Institute for Intellectual Property & Information Law (IPIL). A special thanks to Rachael Smith, and to Jane Thompson and the Colorado Law Library team for their excellent research assistance, and to Daniel Yablon, Martha Reiser, and the editors at the California Law Review without whom this Article would be far less readable. Accolades and compliments, and criticism couched as such, are welcome at [email protected]. 199 200 CALIFORNIA LAW REVIEW [Vol. 107:199 This Article discusses several options available for identifying and curbing problematic copyright arbitrage. First, courts can take a purposive, substantive approach to interpretations of the Copyright Act. Second, Congress can empower a regulatory agency with rulemaking and enforcement authority. Finally, antitrust law can help to curb the anticompetitive effects of copyright arbitrage resulting from legislative capture. Introduction ............................................................................................. 201 I. Regulatory Arbitrage ........................................................................... 206 A. The Theory of Regulatory Arbitrage ................................... 206 B. Conditions Promoting Regulatory Arbitrage ....................... 209 1. Regulatory-Regime Inconsistency ................................. 209 2. Economic Substance Inconsistency ............................... 210 3. Time Inconsistency ........................................................ 210 C. Constraints on Regulatory Arbitrage ................................... 211 1. Legal Constraints ........................................................... 211 2. Transaction Costs .......................................................... 212 3. Reputational Concerns ................................................... 213 II. Copyright Arbitrage ........................................................................... 214 A. The Impetus for Contemporary Copyright Arbitrage .......... 214 B. Examples of Copyright Arbitrage ........................................ 216 1. Section 114 Arbitrage: Pandora’s Terrestrial Radio Station ............................................................................ 217 2. Section 115 Arbitrage: Mass “Address Unknown” Notices of Intent .......................................................................... 219 3. Section 109(a) Arbitrage ................................................ 224 a. ReDigi’s Second-Hand Digital Music Marketplace 224 b. “Buy Now” Buttons for Licenses ........................... 227 4. Section 110(11) Arbitrage: VidAngel’s Filtered Streaming Service ........................................................................... 227 5. Section 106(4) Arbitrage ............................................... 229 a. Aereo’s “Private” Broadcasts ................................. 229 b. Downloads, Samples & Public Performances ........ 231 6. Section 512 Arbitrage .................................................... 233 a. YouTube’s Alleged “Value Gap” ........................... 233 b. Improper Takedown Notices .................................. 237 III. Implications ...................................................................................... 238 A. Incentives & Inefficiency .................................................... 240 B. Anticompetitive Effects ....................................................... 243 C. Distributive Justice .............................................................. 247 D. Consumer Expectations ....................................................... 248 E. Correction, Information-Forcing & Signaling ..................... 249 IV. Mitigation ......................................................................................... 250 2019] COPYRIGHT ARBITRAGE 201 A. Legislative Response ........................................................... 250 1. Subject Matter Expertise ................................................ 251 2. Timeliness ...................................................................... 252 3. Capture ........................................................................... 253 B. Judicial Response ................................................................. 254 C. Administrative Response: A Proposal ................................. 257 1. Copyright as a Regulatory Regime ................................ 257 2. Call for a Regulatory Apparatus .................................... 258 3. Application .................................................................... 260 D. Antitrust ............................................................................... 264 Conclusion .............................................................................................. 265 INTRODUCTION Babyface, Bon Jovi, Cher, Chicago, Katy Perry, and Lady Gaga—this may sound like a Grammy lineup, but it actually constitutes only a fraction of the 186 recording artists who signed a June 2016 petition asking Congress to fix the law that they claim allows YouTube to shirk proper payment for the music it uses.1 Meanwhile, a slew of artists ranging from Frankie Valli & the Four Seasons to Guns N’ Roses, have filed “staggering”2 lawsuits—explicitly rejecting a settlement offer of $43.45 million—against Spotify alleging that it failed to pay statutory royalties under Section 115 of the Copyright Act of 1976 (Copyright Act).3 In both scenarios, the platforms in question are in technical compliance with the letter of the law, while simultaneously reducing, or altogether denying, royalties paid to copyright owners. At fault for this convoluted state of affairs is regulatory arbitrage, or the reduction of regulatory costs via manipulation of regulatory treatment. All regulatory regimes are vulnerable to manipulation; it arises in diverse areas of 1. Tim Ingham, Revealed: The 186 Artists Fighting the Youtube-Shielding DMCA, MUSIC BUS. WORLDWIDE (June 21, 2016), https://www.musicbusinessworldwide.com/revealed-the-186- artists-protesting-against-youtube-shielding-dmca-laws [https://perma.cc/TTL6-XUQU]. 2. Eriq Gardner, Spotify Hit with Two Lawsuits Claiming “Staggering” Copyright Infringement, HOLLYWOOD REP. (July 18, 2017), https://www.hollywoodreporter.com/thr-esq/spotify- hit-two-lawsuits-claiming-staggering-copyright-infringement-1021771