Brookings: Topics - Intellectual Property

The 'First Sale Doctrine' and Its Impact on the Music Business

John Villasenor — Fri, 03 May 2013 11:16:00 -0400

On March 19, the Supreme Court issued its decision in Kirtsaeng v. John Wiley & Sons, a landmark copyright case examining the reach of the “first sale” doctrine. Under that doctrine, the owner of a copy of a work that was “lawfully made” in accordance with U.S. copyright law “is entitled, without the authority of the copyright owner, to sell or otherwise dispose” of it. For instance, if you purchase a lawfully produced music CD or movie DVD in the United States, you are free to later sell it at a garage sale, donate it to a library or loan it to a friend.

But what about goods made and sold overseas and then imported for resale? After all, there is another provision of copyright law that prohibits the importation into the United States, without the authority of the copyright owner, of copies of a work “acquired outside the United States.”

These two potentially contradictory features of copyright law were tested by Supap Kirtsaeng, who built a business around importing textbooks that had been lawfully made and sold overseas and then reselling them at a profit in the United States. After publisher John Wiley & Sons filed suit against Kirtsaeng in 2008, a federal district court found that his actions infringed Wiley’s copyrights, and the Second Circuit affirmed. However, the Supreme Court reversed these decisions on March 19, holding that the first sale doctrine “applies to copies of a copyrighted work lawfully made abroad.” The ruling will make it very difficult for sellers of physical goods like music CDs to price the same products differently in different markets.

So what will this mean for music sales? In an amicus brief filed in the case, the RIAA and Motion Picture Assn. of America warned against exactly the decision the Supreme Court has now made, stating it “would undermine the copyright protection on which artistic fields like the motion picture and music industries depend for their economic viability” and “have deleterious consequences for the U.S. economy as a whole.”

The Supreme Court’s Kirtsaeng decision undeniably weakens the power of copyright holders. But it’s a bit of a stretch to suggest that the entire U.S. economy might suffer significant harm as a result. In fact, the negative impact on music copyright holders will likely be far more modest than some people expect. Why? Because the first sale doctrine applies to sales. By contrast, music download and cloud-based access services can be delivered using licenses that allow copyright holders to retain a much higher level of control over use of the work.

Not all licenses, however, are equivalent. For example, ReDigi has built an online digital music marketplace based in part on its belief that the iTunes terms of sale, in contrast with the terms of use for Amazon’s online music store, provide for a transfer of title that allows iTunes customers to resell their songs. Whether that interpretation carries the day will depend on the outcome of an ongoing lawsuit filed against ReDigi by Capitol Records in a New York federal district court.

More generally, it is certainly possible -- and very common -- to design licenses in which customers do not become owners of a copy of a song. Under such licenses, music copyright holders can and routinely do impose restrictions on resale and geographic portability. Whether these sorts of restrictions are well matched to the ways in which people and information move in today’s world is a debate for another day. But as profoundly important as Kirtsaeng is for copyright in the broader sense, it may have little impact on a music ecosystem increasingly built around licensing-based approaches for distributing “purchased” content.

Authors

John Villasenor

Publication: Billboard

Image Source: © Siphiwe Sibeko / Reuters

Tech Transfer Policy: Bayh-Dole has Distributional Consequences

Walter D. Valdivia — Fri, 26 Apr 2013 08:59:00 -0400

Editor’s Note: This article first appeared in Innovation: America’s Journal of Technology Commercialization (April/May 2013; Volume 11, Number 2).

The sequester will have a negative effect on federal R&D of $9.6 billion, that is about a 7 percent cut with respect to the 2012 budget. These cuts will renew the urgency of figuring out how to maximize the social return on public R&D investments. That is a complex question because social returns are not only a function of the pace of innovation but also depend on how the benefits of innovation are distributed across society. Federal agencies that fund research as well as universities and national laboratories have an important role to play here. Not only can they rebalance their research portfolios but also they can improve technology transfer—the dynamic exchange of knowledge between research organizations and the private sector.

One important channel for technology transfer is patenting and the licensing of those patents to industry. These activities are primarily regulated by the Bayh-Dole Act of 1980. Think privatization of public assets where the assets are public patents—patents derived from federally funded research. The act introduced in this way the profit incentive to develop commercial products from public research. Under this act, the research contractor (generally a university or national laboratory) can take title to patents and to subsequently license those patents to private companies or other agents with the only proviso that the licensee takes reasonable efforts to practice the patent, that is, to develop it into a practical application.

The ostensible goal of Bayh-Dole was precisely to maximize the social benefit of federal R&D investments. We must then ask if this policy has delivered and if taxpayers are receiving a social return commensurate to their investment in research. The answer is inconclusive. There is some evidence that the translation of federally funded research into market products has increased but Bayh-Dole has also had unanticipated consequences—patenting has moved upstream to research tools creating what legal scholars Michael Heller and Rebecca Eisenberg have characterized as the tragedy of anticommons. In addition, it is not at all clear how widely the benefits of public patents have been distributed. Therefore, a fair assessment of Bayh-Dole must address at least two questions: Are the unanticipated consequences undercutting efficiency gains? And, are social returns from innovation concentrated or broadly distributed?

Regarding efficiency, a concern of the first order is that universities are patenting research tools. Scientific research is a collective effort that requires an active intellectual exchange at the outer boundaries of knowledge. Among the goods traded there are research tools, materials, and data. The patenting of reagents, cell lines, chemical compounds, raw datasets and other materials and the strict enforcement of those patents poses the risk of slowing down innovation at the headspring. A sensible answer to this problem would be to modify the statute to allow an exemption for non-profit research institutions. The exemption must at least apply to public patents. Universities and laboratories wanting to negotiate exclusive licenses on research tools would then be required to demonstrate that such an arrangement is in the interest of science and the public good. Complementing this solution, federal research contractors could benefit greatly from organizing a system-wide consortium for sharing research tools. This patent pool, chartered as a not-for-profit organization, would guarantee access to its patents (or at least patents on research tools) to all its members at fair licenses fees.

Beyond efficiency, there is an equity concern. That a public patent is developed into a product doesn’t directly imply maximum social benefit. If a new product is priced so high that only very few people can afford it, the social return will be minimal. Consider the effect of innovation in the pricing of drugs. If pharmaceutical companies are allowed to charge as high prices as they wish, only patients with prescription drug coverage in their health insurance will afford new medicine. If health insurance is universal, the effect will be deleterious for society because insurance prices will have to keep pace with drugs prices. A good indicator of the social return on public investment in biomedical research is therefore affordability. Amidst budget cuts and inflationary pressure on prescription drugs, policymakers are taking this issue seriously; for instance, Senator Ron Wyden (D-OR) has recently asked the NIH to “revisit the idea of striking a better balance between encouraging profit, innovation, accessibility and affordability.”

If public patents are a steady source of innovation in the biomedical sector, pricing excesses should be disallowed or at least regulated. Let’s be clear that companies that take a public patent and commit significant resources to its development are justly entitled to recoup their investments and even to retain a profit margin. But they did not incur in the full back-to-back investment—they did not invest in the expensive portfolio of blue-sky research out of which one program resulted in the patent they have come to license—it was the taxpayer that incurred in that high-risk investment. Put shortly, companies cannot assume a right to maximum profit when selling products based on public patents.

Federal agencies should be empowered, under Bayh-Dole, to promote competitive markets in high-tech sectors. One area where this can be done is defining better the conditions for exclusive licenses. While exclusive licenses are well justified in the case of start-up companies—they use these intangible assets to raise investment capital—the same rationale does not hold for large companies with high liquidity or easy access to credit. This kind of safeguard was part of the original intent of the act; Bayh-Dole originally limited to five years exclusive licenses for large companies. Another safeguard is the march-in rights provision. Federal agencies retain a royalty free license to all public patents and they can practice their licenses if the private sector shows no active effort to develop the patents or to satisfy public health and safety needs. Executive action should allow federal agencies to apply this provision to curb pricing excesses, for instance by linking need to affordability. The sole threat of intervention would curb pricing while still allowing companies to make some profit.

Congress and the federal government can help universities and national laboratories maximize the social returns of research by encouraging licensing practices that ease scientific collaboration and by curbing pricing excesses.

Authors

Walter D. Valdivia

Publication: Innovation

The United States Transitions to a 'First-Inventor-To-File' Patent System

John Villasenor — Mon, 11 Mar 2013 00:00:00 -0400

The United States has long had a “first-to-invent” patent system in which the date of invention could trump the date of filing a patent application in determining patent rights. However, that is set to change due to the America Invents Act (AIA), a sweeping patent reform bill signed into law by President Obama in September 2011.

For patent applications with an effective filing date of March 16, 2013 or later, the United States shifts to what is often – and only partially accurately – called a “first-inventor-to-file” or “first-to-file” system. The reality is more complex than those designations imply, as patent rights in the United States under the first-to-file system will depend on the interplay between the dates of filing and of any pre-filing disclosures of the invention.

As I explained in an article in Fast Company last year:

Consider, for example, the case of an employee at Company A, who conceives an invention in May, works diligently to reduce it to practice, and files the corresponding patent application in August. Suppose, further, that an employee at Company B independently conceives the same invention in June and files for a patent in July.

Who gets the patent? Under the pre-AIA first-to-invent rules, Company A can get the patent because its employee invented first. However, under the new first-to-file system, things will be more complicated.

If Company A does not make any public disclosures regarding the invention before the August filing, Company B can get the patent by virtue of its earlier filing date. This is exactly what would be expected given the term "first-to-file."

On the other hand, suppose that Company A describes the invention in detail (or in more formal terms, provides a disclosure) at a trade show, before a disclosure or a filing by the second company. In this case, Company A can get the patent even though it filed after Company B.

Pre-filing disclosures, however, have a very important downside that wasn’t changed by the AIA: They can eliminate the ability to obtain rights in the many international jurisdictions that do not recognize a “grace period” for disclosures made in advance of filing a patent application. What has changed is that under first-to-file silence can be more costly than before with respect to U.S. patent rights.

Under first-to-file, an inventor who does not take prompt action to protect his or her invention faces a higher risk that a later inventor will end up holding the associated U.S. patent rights. In part for this reason, the U.S. Patent and Trademark Office is likely to see increased numbers of provisional applications, which if done properly can be a cost-effective way to obtain an early priority date for a patent application.

Much ink has been spilled debating the merits of the move to a first-to-file system. It is often suggested, for example, that it will favor larger companies with more financial resources. However, as I explained in this Forbes article, that isn’t necessarily true. Larger companies may have more money, but they also have more people creating inventions. Smaller companies can be more agile in identifying which innovations are worth patenting, and then acting quickly to take steps to protect them.

While first-to-file has gotten significant attention, the AIA contains many other provisions [PDF] as well, most of which have already taken effect. Companies, universities, individual inventors, and other patent-seeking entities should update their procedures and training accordingly. A good patent attorney or patent agent can play a vital role in helping inventors navigate first-to-file and the other changes provided under the AIA.

Authors

John Villasenor

Publication: Forbes

Image Source: © Pichi Chuang / Reuters

Invention and the Mobile Economy

Tue, 05 Mar 2013 15:00:00 -0500

Event Information

March 5, 2013
3:00 PM - 4:30 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

In the 40 years since the creation of the cell phone, creative engineers have developed a range of new products that enable mobile activity. From cellular networks and microchips to batteries and antennas, invention has been a big part of mobile technology, resulting in an industry that has become a vibrant driver of economic development. The mobile industry contributes significantly to GDP growth and job creation around the globe. In many countries, mobile is among the fastest-growing business areas. With mobile devices spreading at a rapid pace, it is important to understand how progress has been made and how government and business can facilitate continued development.

On March 5, as part of the Mobile Economy Project, Governance Studies at Brookings hosted an event focusing on key inventors, how different countries encourage and protect invention, and barriers that need to be overcome in order to promote mobile invention. A panel of experts discussed the culture of invention that has propelled the mobile industry to the economic forefront.

Read Darrell West's related paper»

Event Materials

How Do Government Restrictions Harm International Online Trade and Commerce?

Tue, 26 Feb 2013 14:00:00 -0500

Event Information

February 26, 2013
2:00 PM - 3:30 PM EST

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Register for the Event
The trading of goods and services over the Internet is now routine in the global marketplace and a highly important facet of international commerce. The Internet’s capacity to move data across borders securely and efficiently is an important enabler of international trade. Despite the Internet’s significant contribution to international trade and the free flow of goods across borders, governments are employing a range of potentially damaging restrictions that reduce the ability of businesses to use the Internet as a venue for international commerce. Of these various restrictions, which are the most salient and harmful to online international commerce? How are these restrictions being used to prevent cybercrime or protect intellectual property, are they effective, and are there unintended consequences to these regulations?

On February 26, the Center for Technology Innovation at Brookings hosted a discussion on how governments can best enable online global commerce while also taking precautions to maintain security, national interests and intellectual property rights. A panel of experts discussed the increase in international trade and propose steps that governments should take to strengthen international trade rules and norms for the Internet.

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Full Event - How Do Government Restrictions Harm International Online Trade and Commerce?

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How Do Government Restrictions Harm International Online Trade and Commerce?

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Transcript (.pdf)

Event Materials

20130226_international_online_trade_transcript

The Satellite Question: Why SiriusXM Should Pay Higher Performance Royalties to Artists

John Villasenor — Fri, 22 Feb 2013 00:00:00 -0500

On Feb. 14, the Copyright Royalty Board issued a “final determination” setting SiriusXM’s statutory sound recording performance royalty rate for 2013 at 9% of “gross revenue.” This rate is too low by several percentage points, depriving artists and labels of tens of millions of dollars of royalty payments that will instead flow into SiriusXM’s coffers.

SiriusXM’s satellite radio service is subject to a standard called 801(b), which requires the CRB to balance the interests of copyright holders and the public when setting statutory royalty rates. In addition, 801(b) mandates calculating rates that “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.” During the CRB proceeding for the previous licensing period, which covered 2007-12, the CRB judges concluded that 13% of gross revenue was the “upper boundary for a zone of reasonableness.” But, in the interest of avoiding disruption to the satellite radio industry, artists were forced to accept much lower rates, ranging from 6% to 8%.

How has this artist-subsidized growth of satellite radio worked out? Pretty well. In recent years, SiriusXM has thrived, with revenue increasing from less than $2.5 billion in 2009 to more than $3.4 billion in 2012. Adjusted earnings before interest, taxes, depreciation and amortization grew from about $463 million in 2009 to more than $920 million in 2012. Speaking to a Forbes interviewer in early 2012, former SiriusXM CEO Mel Karmazin called the satellite broadcaster “a very profitable, successful company.”

“If we want a performer,” he added, “we can afford to pay more than anybody else can because we’re making more.”

Against this backdrop, it’s hard to argue that SiriusXM still needs a government-sanctioned discount from rates that the CRB deems appropriate. But that’s in essence the argument the company made in the CRB proceeding to set rates for 2013-17. In written testimony, Karmazin warned against an increase that could “take improper advantage of the company’s only recently improved economic circumstances” and “jeopardize the company’s ability to earn a fair return on long-term investments to which investors in our company are entitled.”

In a decision signed by two of the three judges, the CRB appears to have at least partially heeded that warning. While concluding that “the most appropriate rate” for satellite radio for 2013-17 is 11% of gross revenue, to “minimize any potential disruptive impact of the rate increase” the judges elected to “phase it in over the license period.” Thus, SiriusXM will pay a rate that starts at 9% in 2013 and rises in annual increments to 11% in 2017. “Gross revenue” has a complex definition, and can be significantly less than the total revenue reported in SiriusXM’s financial statements.

If 11% is indeed the appropriate rate, it’s hard to see why requiring a thriving company like SiriusXM to pay that amount for the entire 2013-17 period would have been particularly burdensome. In fact, under the 9% rate that will apply for 2013, there’s a good argument that artists will suffer more disruption from their unfairly low income than SiriusXM will avoid thanks to its discounted payment obligations.

There are also consequences for the broader music delivery ecosystem, since SiriusXM can use the money saved by paying artificially low satellite radio royalties to subsidize its expansion into market segments with higher royalty costs. And if the launch of its new MySXM Internet radio service thins the number of companies providing digital music services in the coming years, then everyone, not just artists, will pay the price for SiriusXM’s low royalty rates.

This item was originally published in Billboard.

Authors

John Villasenor

Publication: Billboard

Image Source: © Larry Downing / Reuters

Seven Copyright Principles for the Digital Era

John Villasenor — Tue, 05 Feb 2013 14:30:00 -0500

Since last year, I’ve had the privilege of serving as one of 18 members of the World Economic Forum’s Global Agenda Council on the Intellectual Property System. Recently, we’ve developed and published a set of digital copyright principles that we hope will provide a framework for addressing copyright in light of the many new technologies for creating, disseminating, and consuming content.

The original document as published through the World Economic Forum can be found here [PDF]; the principles it identifies are as follows:

1. Creators and producers of creative works should receive meaningful protection, recognition and compensation for their contributions to economic and cultural development.

2. Copyright law should reflect an appropriate balance between the rights of creators and copyright owners and the interests of consumers and other users of works.

3. Copyright law should be regularly reviewed and updated as appropriate to respond to new technologies and uses.

4. Copyright systems should enable rights to be meaningfully, practically, cost-effectively, and proportionally enforced.

5. A wide range of means should be available for creative works to reach the public, as enabled by Internet and other technologies—maximizing choice for both rights holders and users. It is desirable to have as much quality content as possible available in as many formats as possible.

6. Licensing should be streamlined in a content-appropriate manner and simplified to be as easy and efficient as possible, including for different types of content and across national boundaries.

7. The public should be educated about the purpose, scope and nature of copyright protections, including exceptions, and the reasons for proposed changes or government action.

Formulating specific copyright policy approaches can be complex, messy work. But the principles above can help guide that process, and can serve as a reminder that all of us share an interest in copyright systems that both incentivize creativity and provide balanced frameworks for accessing the resulting works.

Authors

John Villasenor

Image Source: © Jason Reed / Reuters

Will It Be Legal to Download 'Pirated' Music and Movies From Servers in Antigua?

John Villasenor — Mon, 04 Feb 2013 00:00:00 -0500

As a consequence of a long-running dispute over online gaming services, the Caribbean nation of Antigua and Barbuda (commonly known as Antigua) may soon begin providing online access to U.S.-copyrighted movies and music without compensating the owners of those copyrights.

Will it be lawful for consumers in the United States and elsewhere to avail themselves of this content? Not in most places. But, before getting to why, it’s helpful to provide some context.

Back in the 1990s, online sports books and casinos proliferated in Antigua thanks to the growing reach of the Internet and a favorable corporate tax environment. In response, American authorities began invoking statutes such as the Wire Act to prevent offshore gambling providers from accessing the American market. Antigua considered those actions to be in violation of U.S. obligations under the World Trade Organization’s GATS (General Agreement on Trade in Services) treaty, and initiated a WTO dispute settlement proceeding in 2003.

In a series of reports in 2004 and 2005, the WTO generally found in favor of Antigua, and in 2007, a WTO arbitrator pegged the resulting “impairment of benefits” to Antigua at $21 million annually. In principle, this could be remedied by allowing Antigua to suspend its own equivalently valued GATS obligations towards the United States. However, since this was not feasible given the enormous trade asymmetry between the two countries, the WTO allowed Antigua to request authorization to suspend its intellectual property obligations to the United States under a completely different WTO treaty (called TRIPS), up to an annual level of $21 million. Last week, the WTO formally granted Antigua an “authorization to retaliate.”

The island nation is apparently planning to waste no time in doing just that. Harold Lovell, Antigua’s minister of finance, the economy and public administration, wrote in USA Today on February 1 that his country has “reluctantly decided to suspend intellectual property rights protections for American firms and products.” And, in the international trade equivalent of “nice car; sure would be a shame if anything bad happened to it,” Mr. Lovell asked “why should, for example, the U.S. motion picture industry suffer just so the federal government can continue to protect the monopolies of the big American gambling interests?”

Exactly how Antigua plans to tighten the screws on the movie industry and other holders of U.S. copyrights remains to be seen, and it’s still possible that settlement talks will resolve the dispute before Antigua opens the downloading floodgates. But, suppose Antigua does in fact proceed to make U.S.-copyrighted movies and music available at nominal or even no cost to anyone in the world with an Internet connection. Will it be legal to download that content?

Almost certainly not, according to Ariel Lavinbuk, an attorney with the Washington, D.C. law firm of Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP. Mr. Lavinbuk explains that a person in the U.S. who downloads a song or movie from a server in Antigua without authorization from the copyright holder is reproducing that work in violation of U.S. copyright law. “When you download a song, a new, distinct copy is created,” Mr. Lavinbuk says. “And the creation of that copy on a computer in the U.S. without copyright-holder authorization is unlawful in this country, regardless of whether the website providing the content is now considered lawful in Antigua.”

And what about copies downloaded from Antigua to computers in non-U.S. countries? With the exception of Antigua itself, the TRIPS treaty’s intellectual-property obligations of WTO member countries are still in full force. And almost all countries have laws prohibiting unauthorized reproduction of copyrighted content. Thus, just as in the U.S., downloading a song from Antigua without the copyright holder’s consent would generally violate copyright rights.

None of this is likely to give much comfort to the big movie studios and record labels, which have usually (though certainly not always) aimed their enforcement efforts at those who facilitate distribution of pirated content as opposed to those who download it. And, there’s no small irony in seeing these companies scramble to play defense against the same sort of heavy-handed techniques they have been so willing to dole out when it served their interests.

But it’s also important to remember that the copyright system is intended, first and foremost, to protect and incentivize songwriters, recording artists, writers, sculptors, photographers, choreographers, artists, architects, playwrights, and others who create copyrightable works. Whatever one thinks of the biggest corporate copyright owners, it is hard to think of much reason to celebrate when any country, even one with fewer than 100,000 people, declares with WTO backing that it is suspending intellectual property rights protections within its borders for the creative output of millions of Americans.

Authors

John Villasenor

Publication: Forbes

Image Source: © Mike Segar / Reuters

Patenting and Innovation in Metropolitan America

Fri, 01 Feb 2013 00:00:00 -0500

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Patenting Prosperity: Invention and Economic Performance in the United States and its Metropolitan Areas

Jonathan Rothwell, José Lobo, Deborah Strumsky and Mark Muro — Fri, 01 Feb 2013 00:00:00 -0500

“Patenting Prosperity: Invention and Economic Performance in the United States and its Metropolitan Areas” is the first analysis of its kind to present patenting trends on a regional level from 1980 to 2012. The report ranks all of the nation’s roughly 360 metropolitan areas on patenting levels and growth, while noting the firms and organizations responsible. It also analyzes how patenting has affected productivity levels in each region, comparing patents—which embody novel inventions—to other sources of economic dynamism, such as educational attainment.

This report examines the importance of patents as a measure of invention to economic growth and explores why some areas are more inventive than others. Why should we expect there to be a relationship between patenting and urban economic development? As economist Paul Romer has written, the defining nature of ideas, in contrast to other economic goods, is that they are non-rival: their use by any one individual does not preclude others from using them. Although useful ideas can be freely transmitted and copied, the patent system guarantees, in principle, temporary protection from would-be competitors in the marketplace (i.e. excludability). Thus, one would expect regions to realize at least some of the value of invention, as has been shown for individual inventors and companies that patent. Yet there is no guarantee that patents generated in a specific location will generate wealth in that same location—a set of conditions (the presence of a skilled and diverse labor force, an “ecosystem” of businesses providing complementary goods and services, financing and marketing capabilities among them) have to be met for invention to be commercialized. Research has established that patents are correlated with economic growth across and within the same country over time. Yet, metropolitan areas play a uniquely important role in patenting, and the study of metropolitan areas within a single large country—the United States—allows one to isolate the role of patents from other potentially confounding factors like population size, industry concentration, and workforce characteristics.

An analysis of national and metropolitan area invention from 1980 to 2012, using a new comprehensive database of patents, reveals:

The rate of patenting in the United States has been increasing in recent decades and stands at historically high levels.
Most U.S. patents—63 percent—are developed by people living in just 20 metro areas, which are home to 34 percent of the U.S. population.
Inventions, embodied in patents, are a major driver of long-term regional economic performance, especially if the patents are of higher quality.
Research universities, a scientifically-educated workforce, and collaboration play an important role in driving metropolitan innovation.
Patents funded by the U.S. government tend to be of especially high quality, and federal small business R&D funding is associated with significantly higher metropolitan productivity growth.

Read the report »
View the interactive feature »

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Authors

Jonathan Rothwell
José Lobo
Deborah Strumsky
Mark Muro

Image Source: © Denis Balibouse / Reuters

Online Games And Crowdsourced Creativity: The Next Frontier In Intellectual Property

John Villasenor — Mon, 31 Dec 2012 00:00:00 -0500

If you ask a non-“gamer” to name a few places where some of the world’s most compelling contemporary architecture can be found, you’re likely to get answers like Beijing, Dubai, Shanghai, and Tokyo. But ask a gamer, and the answer may well be the name of a server that hosts his or her favorite massively multiplayer online game (MMOG).

There is a veritable architectural boom occurring in the online gaming world, with millions of people engaged, both individually and collectively, in creating an endless variety of virtual buildings. And architectural designs represent only one of the many forms of user-contributed intellectual property (IP) that are redefining how people interact in online games.

Who owns all of this IP? And how can those ownership rights be protected? Such questions are not merely academic. According to online games research firm SuperData, the global virtual goods market approached $15 billion in 2012 and is expected to exceed $20 billion in 2014. The virtual economy is thriving, and as in any thriving economy there are opportunities for enterprising people to identify new goods and services that have value to the community.

Intellectual property, which consists of copyright, patents, trademarks, and trade secrets, has always been an important aspect of games. Traditionally, however, it was the companies making the games that generally held the associated IP. Consider the classic 1970s-era table tennis video game “Pong”. The job of a Pong player was to adjust the vertical position an electronic paddle on one side of a television screen so that it would intercept a “ball” and send it back to a player the other side of the screen. There was skill involved when ball speeds got high, but the act of playing Pong did not produce any IP.

Modern descendents of Pong – including many of the offline games played on console platforms like the Sony PlayStation 3 and the Nintendo 3DS – are leaps and bounds more sophisticated. But much of the IP for these games still resides with the game manufacturers as opposed to the players.

By contrast, in multiplayer online gaming environments that allow players to create complex virtual worlds, opportunities for both game designers and players to generate IP abound. In fact, in many of these games the lines between designers and players are blurred. Consider Minecraft, which was developed by Stockholm-based Mojang. Millions of copies of Minecraft have been sold, including over 450,000 on Christmas Day, 2012 alone. Minecraft supports a multiplayer mode allowing players to set up and manage a server that can host dozens or even hundreds of simultaneous players in a single, persistent virtual world (for an example of a popular Minecraft server, see Meepcraft). A server owner can customize a virtual world with specific rules and economic models for player-to-player interaction. Players who spend time on the server, in turn, can design and construct their own buildings, and in many cases, use them in various types of commercial transactions.

Thus, in multiplayer Minecraft there are multiple levels at which intellectual property is being created and used: Mojang, the company that sells Minecraft, provides IP in the form of the underlying game itself. A Minecraft server owner adds IP by designing a specific type of virtual world, and the players within that virtual world then create their own IP as they develop its infrastructure and economy through their own in-game interactions. And in yet another layer of IP complexity, server owners often incorporate software provided by third-party developers, and in some cases also hire people to write code to add customized features to the server.

As Minecraft illustrates, in sophisticated multiplayer virtual environments there can be user-contributed IP pretty much everywhere you look. Copyright, for example, arises through the player-supplied software, architectural designs, and graphics that are employed to help run and populate the virtual world. Trademarks arise through the names and symbols used to identify a seller’s unique virtual goods. Trade secrets can be found in player-developed (non open source) add-on software and in economically valuable, non-publicly-observable methods used by players to enhance their gameplay.

Player innovations providing specific types of gaming experiences may also be patentable. An interesting precedent will be provided by the outcome of a pending Nintendo patent application regarding methods for MMOG players to collectively alter a virtual environment without directly interacting with each other. (In filings with the U.S. Patent and Trademark Office during 2012, Nintendo has substantially narrowed the claims with respect to those in the original 2010 application.) Nintendo, of course, is a game company, not an individual player. But that is not relevant from a patentability standpoint. If Nintendo can patent new methods relating to providing certain types of MMOG gameplay, then players should be able to do so as well.

In the coming years, many of the most interesting online games will be produced not by large teams of developers at big-name corporations, but instead by smaller, independent groups of developers who allow their customers to be partners in creating the IP that comes to define the in-game experience. And when, as will inevitably occur, player-generated IP acquires substantial real world monetary value, players should be able to access that value. This will require that game sellers adopt terms of use allowing players to retain an appropriate, commercially meaningful ownership interest in the IP they create. It will also raise complicated jurisdictional challenges due to the global nature of gaming. Where, for example, should a copyright or trademark claim involving in-game content created on a server in the U.S. by a player in Japan using software provided by a server owner in France be enforced? And, it will require sorting out copyright rights for intricate chains of derivative works.

And for those people who aren’t gamers, and who might wonder what all this has do to with the non-gaming world, there is this: Some of today’s massively multiplayer online games are at the very forefront of crowdsourcing creativity on a global scale. The lessons learned could help spur innovation in domains that go far beyond gaming.

Authors

John Villasenor

Publication: Forbes

Image Source: © Phil McCarten / Reuters

How Entrepreneurs Can Thrive Under the "First-Inventor-to-File" Patent System

John Villasenor — Tue, 11 Dec 2012 11:08:00 -0500

In September 2011, President Obama signed the America Invents Act (AIA) into law. Under one of the most important provisions of the AIA, the longstanding first-to-invent patent system will be replaced with what is often called a first-inventor-to-file system for patent applications with an effective filing date of March 16, 2013 or later. In the run-up to next March, there is likely to be significant attention in the press – and plenty of misinformation – regarding how first-inventor-to-file works and how it will impact entrepreneurs.

Here are six things that entrepreneurs can do to not only survive but thrive as they navigate this important transition in the American patent system.

Understand how first-inventor-to-file works: Contrary to what is implied in many articles about the AIA in the popular press, first-inventor-to-file doesn’t mean that the winner of a race to the patent office will be guaranteed to get the patent. Under the first-inventor-to-file system, rights to a U.S. patent will involve the interplay between the dates of filings with the U.S. Patent and Trademark Office (PTO) and the dates of any pre-filing public disclosures regarding the invention. In fact, a company that files a patent application after a competitor will sometimes be able to prevail in obtaining the corresponding U.S. patent if it publicly disclosed the invention before a disclosure or filing by the competitor (and if the company’s application is filed within one year of the disclosure.)

However, while pre-filing public disclosures can play an important role in impeding the ability of competitors to later patent the invention, those same disclosures can also foreclose the company’s own ability to obtain a patent in jurisdictions outside the United States. Entrepreneurs should educate themselves and their employees regarding these tradeoffs. This can ensure that patent filings, product releases, discussions with potential partners and customers, and presentations at trade shows are all conducted with a full awareness of their intellectual property implications.

Proactively formulate and then execute a patent strategy: Critics of first-inventor-to-file often argue that it will favor larger companies over entrepreneurs who may be unfamiliar with the patent system. But this logic confuses two issues that don’t need to be correlated: company size, and the ability to engage with the patent process.

Entrepreneurs owe it to themselves – and to the investors supporting them – to proactively formulate a strategy for protecting their company’s intellectual property. This will typically include putting in place mechanisms to identify and document inventions, and engaging the services of a good patent attorney or patent agent to help navigate the patent application process.

Understand when first-inventor-to-file applies, and prepare accordingly: The first-inventor-to-file rules will be used for applications with an effective filing date of March 16, 2013 or later. The key word here is “effective.” Under certain conditions, patent applications filed well after March 2013 will nonetheless be subject the first-to-invent rules. This creates some interesting strategic opportunities for businesses of all sizes. But startup companies are particularly well positioned to capture these opportunities by filing patent applications between now and next March that could confer significant strategic value in an acquisition.

Be agile: Large companies have more money, but they also have more people creating inventions, and often have complex organizational structures that can impede internal information flow. This can make it more challenging to execute a cohesive, cost-efficient patent strategy.

By contrast, in a small company the information flows among employees can be much more efficient, and an entrepreneur can get both the 30,000-foot view as well as the detailed view. He or she can quickly spot patentable innovations and then act to make sure they are protected. In some respects, the first-inventor-to-file system will favor companies that are more agile and better able to allocate resources to their most promising inventions – thus providing an important potential advantage to entrepreneurs.

Consider the use of provisional applications: Provisional applications, which were originally introduced in 1995 and left in place by the AIA, can be a cost-effective way of obtaining a priority date without incurring the full expenses of preparing and filing a non-provisional application. Provisionals can sometimes be submitted relatively quickly, and unlike public disclosures of an invention that hasn’t been the subject of a previous patent application, can leave options for future foreign filings open.

However, provisionals involve their own obligations and risks. Once a provisional application is filed, the corresponding non-provisional application needs to be filed within one year. If that doesn’t occur, the opportunity to patent the invention with the benefit of the provisional filing date is lost. And, a provisional that fails to include a sufficiently detailed written description and drawings will not be accorded the early filing date that was a key goal of the making the filing in the first place. In sum, provisionals can be valuable options for entrepreneurs in a first-inventor-to-file system, but must be used properly.

Don’t be penny wise, pound foolish: In a startup company where every dollar counts, the costs associated with executing a comprehensive patent strategy might seem like a deterrent. But there’s some good news in the AIA for entrepreneurs on that front: The AIA introduced a new micro-entity status that will give qualifying companies a 75% discount on most patent fees. Of course, companies will still need to pay a patent attorney or agent to prepare applications, but even those costs are often very modest when compared to the value of the resulting patents. The fee discount for micro-entities will be available when the PTO completes rulemaking to adjust its fees as provided by the AIA.

Authors

John Villasenor

Publication: Forbes

Image Source: Haag + Kropp GbR

Technology Transfer, the Public Interest and Re-Igniting Public Research Investments

Thu, 06 Dec 2012 10:30:00 -0500

Event Information

December 6, 2012
10:30 AM - 12:00 PM EST

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Technology transfer is the exchange of specialized knowledge between research organizations and firms within countries and, in an increasingly global economy, across borders. It encompasses transactions with intellectual property rights but also partnerships and programs of scientific exchange. The policies shaping the current technology transfer system in the United States are three decades old. While these policies have had some success aligning the needs of government, universities, and industry with the public interest, inadequacies in the system have made reform a necessity. The challenge is to make the technology transfer system a more effective instrument to translate research investments into sustained economic growth, better public health and national security.

On December 6, the Center for Technology Innovation at Brookings hosted a discussion examining ways to reform the U.S. technology transfer system, improve its effectiveness, and address its inadequacies. A panel of experts explored the government’s role in configuring the technology transfer system within the United States and toward other nations; how public policies can support new and competitive industries and facilitate knowledge transfer with U.S. trade partners; and how international standards of patent law can be reformed to address anti-competitive practices.

Audio

Technology Transfer, the Public Interest and Re-Igniting Public Research Investments

Transcript

Uncorrected Transcript (.pdf)

Event Materials

20121206_technology_transfer

Intellectual Property Awareness at Universities: Why Ignorance is not Bliss

John Villasenor — Tue, 27 Nov 2012 00:00:00 -0500

Recently, I conducted an informal survey of graduate engineering students at UCLA, where I teach, to assess intellectual property (IP) awareness. The results highlight the challenges of promoting and protecting IP in American universities and technology companies, and illustrate why universities need to increase their efforts to educate students on what IP is and why it matters.

First, the numbers: Of the approximately 60 graduate engineering students who completed the survey, 68% stated that they did not know enough to answer the question “what is a trade secret?” 21% stated that they did not know enough to answer the question “what is a patent?” The percentages of students unable to provide an answer to “what is copyright?” and “what is a trademark?” were 32% and 51% respectively.

It would be unfair to blame the students themselves for these statistics. After all, they follow programs of study designed largely by university faculty members. If we require these students to spend hundreds of hours learning the finer points of one particular discipline of engineering, yet decline to ask them to spend even one single hour learning the basics of IP, we shouldn’t be surprised when many of them can’t explain what a trade secret is.

This problem is even more pressing now that many cash-strapped universities are making IP a key focus of efforts to more effectively leverage their research output. By obtaining a greater number of patents and then licensing them to industry, universities hope to both boost revenues and speed the introduction of the results of their research into the market. In theory, this will benefit universities, companies, and the broader public. But the success of this endeavor relies on the ability of university researchers – who are very often graduate students – to recognize potentially patentable inventions and take the steps necessary to protect them by initiating and participating in the patent prosecution process. The survey results suggest that a key link in this chain may be broken.

At all of the University of California campuses (not just at UCLA), graduate students hired to perform research are required to sign a document [PDF] acknowledging their “obligation to promptly report and fully disclose the conception and/or reduction to practice of potentially patentable inventions to the University authorized licensing office.” Student researchers at many other universities sign similar forms. Having these signed patent forms on file keeps university attorneys happy. But if tens of thousands of students engaged in research projects in American universities lack even the most basic knowledge about IP, how reliably can they expected to “promptly report and fully disclose” their patentable inventions? And how carefully can they be expected to handle unpublished data, computer code, and research paper drafts that might represent the results of many years and many millions of dollars of effort by a large research team?

The problems caused by lack of IP awareness also reach well beyond universities, sometimes to devastating financial effect. Take trade secrets, which are a form of IP critical to almost all technology companies. An engineer who doesn’t understand trade secrets and the obligations that accompany them is far more likely to walk out the door with proprietary computer code on a USB stick when he or she moves to a new job. Ignorance, of course, is not an excuse for trade secret theft. However, it contributes to a theft rate that is drastically underreported and almost certainly at epidemic levels. When trade secrets walk out the door, everyone loses – the company that invested in their development, the engineer who took them and who stands exposed to substantial civil and/or criminal liability, and third party recipients who could become embroiled in misappropriation allegations.

Universities need to do a better job at preparing their graduates to be productive citizens of the innovation economy, and that includes giving more attention to IP education. In particular, graduate students in science, technology, engineering, and math (STEM) disciplines should receive instruction on the nature, purpose, and protection of IP. This doesn’t mean turning them into patent, copyright, trademark, and trade secret specialists. But it does mean ensuring that each of them receives at least a modest amount of training regarding their IP rights and obligations. One good way to start: All universities should require their STEM graduate students to participate in a short, interactive, web-based training session on “IP Basics” at the beginning of their first year of study. In addition, STEM faculty members should more proactively incorporate IP concepts in their mentoring of graduate student researchers.

Opponents of integrating formalized IP training into graduate STEM programs will likely argue that we can’t afford to introduce further complexity into curricula that are already packed with requirements. But, can we really afford not to increase IP awareness? Each year, American universities are sending thousands of newly minted M.S. and Ph.D. scientists and engineers into the workforce, many of whom have received little or no instruction regarding the nature of the IP system and their role in it. Given the importance of intellectual property in the national and global economy, there’s no excuse for not giving it more emphasis in our university graduate programs.

Authors

John Villasenor

Publication: Forbes

Image Source: © Denis Balibouse / Reuters

Are We All Copyright Infringers?

John Villasenor — Sun, 28 Oct 2012 00:00:00 -0400

I’ve never thought of myself as a copyright infringer. But now I’m not so sure. My possible “crime”: I recently purchased a book in London’s Heathrow Airport to read on a flight back to the United States. While reading it onboard, it occurred to me that someone else I know would find the book interesting. Under a strained – but unfortunately no longer unthinkable – interpretation of U.S. copyright law, bringing the book home with the awareness that I might well lend or give it to that person could be a violation of Section 602 of Title 17 of the United States Code.

Whether or not innocuous behaviors like passing along a book bought lawfully overseas to a relative, friend or coworker constitute copyright infringement depends on the outcome of Kirtsaeng v. John Wiley & Sons, Inc., a case scheduled to be heard by the Supreme Court this week (background here).

Historically, the first sale doctrine has provided strong rights to owners of legitimately purchased copyrighted works. Once you buy a book, music CD, or movie DVD in the United States, you are free to later sell it, lend it to a friend, or donate it to a library or charity without seeking permission from the copyright owner. As the Supreme Court wrote in a 1998 decision, the “whole point of the first sale doctrine is that once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.” However, in the 2011 ruling that set the stage for the Supreme Court argument in Kirtsaeng, the Second Circuit held that “the first sale doctrine does not apply to copies manufactured outside of the United States.”

If the Supreme Court arrives at the same conclusion, your ownership rights for copyrighted works you bought overseas and brought back to the United States will change – and not for the better. Why? Because the first sale doctrine affirmatively protects owners of lawfully purchased works by limiting the ability of a copyright holder to impede their downstream actions. In its absence, to comply with U.S. copyright law you would have to keep track, in perpetuity, of all foreign-sourced works in order to avoid inadvertently selling, lending, gifting, donating, or otherwise distributing them without permission from the copyright holder. You would be burdened with this task forever – or at least until the copyrights expire, which is often many decades in the future.

Of course, people can’t be expected to perform this kind of accounting on their personal possessions. Most things we own will part company with us sooner or later. In the long run, all of them will. Under the Second Circuit’s view of copyrighted items manufactured abroad, that parting, whenever it occurs, will often become an act of copyright infringement.

The implications of the Supreme Court’s Kirtsaeng decision could go far beyond imposing an obligation (which almost no one would follow) to track the provenance of personal items. Retailing giant Costco, for example, has filed an amicus brief [PDF] in the case citing the negative impact that upholding the Second Circuit’s ruling could have on its continued ability to offer low-cost goods to consumers. eBay is concerned [PDF] about the possible negative consequences to secondary markets. Goodwill Industries International’s amicus brief [PDF] raises the possibility of reduced donations. Some extremely well-known bookstores are worried [PDF] about a decision that could turn many of their routine transactions into violations.

Another less commonly articulated concern is the possible reciprocal impact on American individuals and American businesses abroad. If other countries were to adopt a view analogous to the Second Circuit’s, then Americans who travel overseas with copyrighted works legitimately purchased in the United States could find their ownership rights dramatically curtailed once they arrive on foreign soil. American businesses could be forced to drop the prices of their exported goods, because buyers would have increased exposure to claims from American copyright holders.

The potential for collateral damage from well intentioned – and, to be fair, in many ways very beneficial – copyright statutes is a consequence of the legislative dynamics at play when they were enacted. In drafting laws, there is a choice between 1) casting a wide net when defining unlawful behavior, and then assuming that the combination of generally reasonable enforcement and a rational court system will protect people who engage in harmless technical violations from being punished, or 2) casting a somewhat narrower net that leaves harmless, reasonable behavior clearly on the right side of the law.

Today’s copyright statutes often reflect the first approach, largely because they embody the concerns of well-organized industry groups of copyright holders, such as the music, movie, and publishing industries. It is completely reasonable for these industries to seek laws that will protect their valuable intellectual property and give them the tools they need to combat piracy and other abuses. But they have little incentive to oppose laws that are too expansive in scope. From their standpoint, it is desirable to have broadly worded statutes providing more flexibility to bring selective enforcement actions.

Copyright users, on the other hand, tend to be a much more diverse group. Use of copyright may be one of the only things in common among the American Library Association, the Association of Art Museum Directors, Costco, eBay, Goodwill, Google, and Powell’s Books – all of which have submitted amicus briefs urging the Supreme Court to reverse the Second Circuit’s ruling. As a result, the voices of copyright users have been more muted when Congress drafts and enacts copyright legislation. That may change in the future. Earlier this month a new coalition called the Owners’ Rights Initiative was launched to “protect ownership rights in the United States.”

Copyright and other forms of intellectual property are vital assets to people, companies, nations, and to the global economy. Creators of copyrighted works deserve to be protected both by law and through appropriate enforcement. But purchasers of copyrighted works have rights too, provided they acquire those works legitimately and use them in a manner respectful of the intellectual property they contain. Copyright approaches that don’t reflect this balance can hurt us all by reducing the ability to engage with our collective cultural heritage.

Last week, a company called Faulkner Literary Rights filed a copyright infringement claim against Sony Pictures Classics. The issue: One of the characters in the movie Midnight in Paris mentions Faulkner by name and voices a brief (and slightly modified from the original) quote from one of his novels. That, apparently, has set off the alarm bells among the guardians of Faulkner’s literary legacy.

I’m sure that Faulkner himself has written something appropriate to describing this situation. In fact, I even have a good quote in mind. But, I’m not going to write it here. After all, if I do, I might be sued for copyright infringement.

Authors

John Villasenor

Publication: Forbes

Can Copyrighted Works Purchased Abroad Be Resold In the United States?

John Villasenor — Sun, 21 Oct 2012 00:00:00 -0400

Next week, the Supreme Court is set to hear arguments in Kirtsaeng v. John Wiley & Sons, Inc., a case that will have fundamental consequences for the global flow of books, music, movies, and other copyrighted material.

Foreign students studying in the U.S. have long known that textbooks can often be purchased much less expensively in their home countries. Supap Kirtsaeng, who originally came to the United States from Thailand as a student in 1997, built a business around this arbitrage opportunity, asking family members in Thailand to legally purchase textbooks and ship them to the United States, where he then resold them for a profit on sites such as eBay. In September 2008, publisher John Wiley & Sons, Inc. filed a complaint in a New York federal district court asserting, among other things, that Kirtsaeng’s actions constituted copyright infringement. A jury agreed, imposing damages of $75,000 for each infringed work. Kirtsaeng appealed to the Second Circuit, which affirmed the district court’s decision, and then to the Supreme Court, which will hear oral arguments on October 29.

Common sense would hold that a person who legally acquires copyrighted material such as a book or music CD generally has the right to resell it at a later time. And indeed, under the “first sale” doctrine, a person in possession of a copy of a work that was “lawfully made under this title” [Title 17 of the U.S. Code, which contains U.S. copyright law] “is entitled, without the authority of the copyright owner, to sell or otherwise dispose of” it. For instance, if you legally purchase a book or music CD, the owners of the associated copyrights can’t prevent you from later selling it at a garage sale or donating it to a library.

Or can they? If the product was manufactured and purchased overseas, the answer isn’t clear. The uncertainty arises due to the interpretation of the phrase “lawfully made under this title” and to a separate statute that prohibits the importation into the United States, “without the authority of the owner of copyright,” of copies of a work “acquired outside the United States.” Thus, a person who legally purchases a copyrighted work abroad and wants to resell it domestically can be caught between two ambiguous and potentially contradictory provisions of copyright law. Does the first sale doctrine provide the right to resell the work? Or is that right foreclosed because exercising it would of necessity involve a prohibited importation?

Unsurprisingly, the jurisprudence on this issue is complex and sometimes contradictory. In the 1998 Quality King decision, the Supreme Court considered hair care products bearing copyrighted labels that had been manufactured in the U.S., sold abroad and subsequently re-imported and sold without authorization in the U.S. The “whole point of the first sale doctrine,” wrote the Court in Quality King, “is that once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.” But is that always true, or does it only hold when the item was manufactured in the United States?

In affirming the copyright infringement judgment against Kirtsaeng, the Second Circuit held in 2011 that “the first sale doctrine does not apply to copies manufactured outside of the United States.” Taken to its logical extreme, this interpretation could provide American companies that manufacture overseas with an extraordinary level of control over the secondary market for their products. The Third Circuit, by contrast, concluded [PDF] in a (pre-Quality King) 1988 ruling involving product label copyrights that “a first sale by the copyright owner extinguishes any later right to control importation of those copies.” Aspects of this tension in U.S. copyright law were also considered – though not fully resolved – by the Ninth Circuit in 1996 and 2008.

Kirtsaeng has attracted a large number of amicus briefs, with the American Library Association, Costco, eBay, Goodwill Industries International, Google, the National Association of Chain Drug Stores, and a group of leading American art museums backing Kirtsaeng. Costco, for example, writes [PDF] that the “first-sale doctrine plays an important role in Costco’s ability” to sell “genuine brand-name merchandise to its members at prices lower than its competitors,” and that Wiley’s position “that copies made abroad would have enjoyed significantly greater copyright protection than those made at home is inconceivable.” Goodwill argues [PDF] that the Second Circuit’s Kirtsaeng decision, if affirmed by the Supreme Court, could have “a catastrophic effect on the viability of the secondary market and, consequently, on Goodwill’s ability to provide needed community-based services.”

The American Bar Association, the American Intellectual Property Law Association (AIPLA), the Motion Picture Association of America (MPAA), and the Recording Industry Association of America (RIAA) have filed briefs supporting Wiley. The AIPLA argues [PDF] that Kirtsaeng infringed Wiley’s copyrights by the act of importing the textbooks, and that the first-sale defense regarding their subsequent sale is thus irrelevant. According to [PDF] the MPAA and RIAA, the motion picture and music industries “rely on the ability to divide rights across markets and to plan for and control the timing and manner of the release of their works in different markets around the world.”

One of the ironies of Kirtsaeng is that it involves shipping copyrighted works across an ocean in paper form, an approach more typical of the last century than the present one. While enormous amounts of copyrighted material still travels in shipping containers – think, for example, of the software included in consumer electronics products and automobiles – a growing fraction of written, audio, and audiovisual content is transported by fiber optic cable and stored in the cloud. The concepts of location and importation are thus more complex than in the past. And, with appropriate updating of copyright and licensing frameworks, cross-border flows of copyrighted material can be an opportunity for copyright owners, not a threat.

In the immediate term, however, the question is how to handle Kirtsaeng in the context of current American copyright law. Congress could not have anticipated all of the complexities of today’s copyright landscape when it enacted the Copyright Act of 1976. But it almost certainly wouldn’t have wanted the consequences that could arise if the Second Circuit’s Kirtsaeng decision is affirmed.

Authors

John Villasenor

Publication: Forbes

Pandora's Box: New Legislation Might Finally Fix the Messy Internet Radio Royalty System

John Villasenor — Mon, 24 Sep 2012 00:00:00 -0400

If you are like most of the millions of people who listen to Sirius XM satellite radio or Internet radio services like Pandora or Last.fm, you probably don’t give much thought to the underlying—and fundamentally flawed—framework that governs digital music broadcasting royalties. But you may want to perk your ears up, because under the Internet Radio Fairness Act of 2012, a bill introduced [PDF] in the House last week by Reps. Jason Chaffetz, R-Utah, and Jared Polis, D-Colo., and in the Senate by Sen. Ron Wyden, D-Ore., that system may finally get fixed. Or, under a competing bill expected from Rep. Jerrold Nadler, D-N.Y., it could get even worse. Depending on which bill succeeds, Internet radio may flourish or flounder.

To understand why the current system is so badly in need of repair, it’s helpful to start by taking a step back. Songs have two types of copyrights—one for musical compositions (for example, the words and music of “I Heard It Through the Grapevine,” written by Barrett Strong and Norman Whitfield) and the second for sound recordings (such as Marvin Gaye’s classic 1968 rendition). Owners of musical composition copyrights are typically songwriters and music publishers, while sound recording copyrights are usually held by recording artists and record labels.

Under current U.S. copyright law, whether and how much these copyright holders get paid by broadcasters for the use of their intellectual property depends on a dizzying mix of factors. For musical composition copyrights, the royalty system is generally reasonable and technology-neutral, with broadcasters typically paying in the range of 2 percent to 5 percent of their gross revenue to the holders of music composition copyrights.

However, for sound recording copyrights, the royalty rates vary dramatically depending on who is playing the tunes. For digital music broadcasts, the three judges on the Copyright Royalty Board (CRB) determine “statutory” royalty rates using two different standards: one called 801(b) that applies to older services like Sirius XM satellite radio, and one called “willing buyer/willing seller,” which is used for the newer field of Internet radio.

Under rates set by the CRB using the 801(b) standard, Sirius XM pays 8 percent of gross revenues for the use of sound recordings in 2012, up from 6 percent in 2008 and 7 percent in 2010. Sirius XM’s rates for 2013 and beyond have not yet been determined, but are likely to rise into mid-teen percentages in the coming years. Pandora, however, paid nearly 50 percent of its revenues in sound recording royalties during its 2012 fiscal year ending Jan. 31, 2012, and appears on track to exceed that percentage in FY2013. And that is after a 2009 agreement provided a substantial discount to CRB willing buyer/willing seller rates that risked driving Pandora and other webcasters out of business.

And if that’s not confusing enough, AM and FM stations pay zero sound recording performance royalties for their terrestrial over-the-air broadcasts under a decades-old exemption (though they do pay royalties for their Internet streams).

Today’s landscape for digital broadcast royalties was largely shaped by legislation enacted during the 1990s, when the music industry, traditional broadcasters, and Congress were struggling to come to grips with the growth of then-new communications technologies enabling the delivery of perfect digital copies of songs to consumers. But as so often happens when policy decisions are motivated more by fear of new technology than by recognition of the opportunities it creates, the resulting legislation ended up impeding growth rather than fostering it.

Under the Digital Millennium Copyright Act of 1998, noninteractive digital audio services were partitioned into two categories based on, among other things, a snapshot of the digital music broadcasting industry taken on July 31, 1998. Companies such as Sirius and XM (now Sirius XM), Muzak, and Music Choice that were providing satellite or subscription services by that key date were grandfathered in and given access to the 801(b) standard. Internet radio, on the other hand, falls under the willing buyer/willing seller standard.

Nearly 15 years later, there is wide agreement on the need to replace the two-tiered system with a single, uniform standard. But which standard should be chosen? The Internet Radio Fairness Act introduced last week by Chaffetz, Polis, and Wyden would use 801(b), while Rep. Nadler’s draft bill, called the Interim First Act [PDF], would adopt the willing buyer/willing seller standard. Additionally, Nadler’s draft bill would in effect do an end-run around the terrestrial broadcast exemption by tacking on increased fees for AM and FM stations’ online streams.

Good copyright policy requires a balancing act. As the Supreme Court explained in a 1975 ruling, the fundamental purpose of the copyright system is to provide an incentive “to stimulate artistic creativity for the general public good” and promote “broad public availability” of creative work.

Setting music royalty rates too low is unfair to recording artists, and lowers the incentive to create music. But if royalty rates are too high, as has occurred with Internet radio, companies providing broadcasting services will continually struggle to turn a profit, impeding market—and ultimately royalty—growth. Despite the innocuous-sounding name, willing buyer/willing seller requires identifying “market” rates in the absence of a true competitive market. Unsurprisingly, this has produced skewed results.

For these reasons and more, the Internet Radio Fairness Act of 2012, which would move to a uniform 801(b) standard, is the far better path forward. That said, the bill isn’t perfect. For example, it contains a provision intended to increase the expertise of the judges appointed to the CRB. But as anyone who actually studies their rulings will quickly conclude, the CRB judges have consistently produced careful, considered, and meticulously explained decisions. The flaw in the system isn’t with the competence of the CRB judges. It’s in the copyright royalty framework they are required to implement. Fixing it could allow a promising industry to flourish, generating jobs, providing more revenue opportunities for artists, and giving more choices to consumers. And that would be music to everyone’s ears.

This piece originally appeared on Slate >>

Authors

John Villasenor

Publication: Slate

Can a Company Trademark the Colors On Its Website?

John Villasenor — Sat, 15 Sep 2012 00:00:00 -0400

Earlier this month, a federal appeals court ruled [PDF] that the contrasting red soles on shoes from designer Christian Louboutin are sufficiently distinctive to warrant trademark protection. The ruling adds an important chapter to the history of color trademarks, and has broad implications that go well beyond the fashion industry. To what extent, for example, might colors on web sites be eligible for trademark protection?

A trademark is “a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others.” Examples of famous trademarks include the Nike swoosh symbol, the McDonald’s Golden Arches, and the phrase “Intel Inside.” In the landmark 1995 Qualitex ruling involving the color of dry cleaning equipment, the Supreme Court held that U.S. trademark law as established under the 1940s-era Lanham Act “permits the registration of a trademark that consists, purely and simply, of a color.” Color alone, wrote the Court, can at least sometimes “meet the basic legal requirements for use as a trademark. It can act as a symbol that distinguishes a firm’s goods and identifies their source, without serving any other significant function.”

Mr. Louboutin started coloring shoe outsoles in the early 1990s, choosing red because he considered it “engaging, flirtatious, memorable and the color of passion.” Over the subsequent years, the red soles became a widely recognized identifier of the Louboutin brand. “When it comes to women’s shoes made for style rather than walking,” Reuters wrote in 2007, “Christian Louboutin footwear with their distinctive red soles lead the pack, according to a survey of wealthy American consumers.”

In 2008, the U.S. Patent and Trademark Office granted Louboutin a trademark [PDF] for a “lacquered red sole on footwear,” and in 2011, when the company learned that Yves Saint Laurent was selling shoes with both a red sole and a monochrome red “upper,” it filed a trademark infringement claim in a New York federal district court. After the court refused to grant an injunction against Yves Saint Laurent, Louboutin appealed.

In a September 5 ruling that both Louboutin and Yves Saint Laurent described as a victory, the United States Court of Appeals for the Second Circuit held [PDF] that Louboutin’s lacquered red outsole is “a distinctive symbol that qualifies for trademark protection,” but only when contrasted with a different color used for the other visible portions of the shoe. In other words, Yves Saint Laurent’s monochrome red shoes walk free, and Louboutin’s trademark survives, though with a narrower scope.

What does this mean for the ability to trademark colors on web sites? Consider the thick, red, horizontal stripe at the top of CNN’s web site. A person seeing a computer from the other side of a room who might not be able to read the print on the screen would nonetheless be likely to recognize that it was displaying a page from the cnn.com domain. In the context of online news sites, CNN’s red stripe placed across the top of the screen plays an important role in brand identification.

But does it establish trademark rights? The answer turns, among other things, on whether the stripe’s color and placement are distinctive (most likely, yes), whether its use by competitors would create customer confusion (quite possibly), and whether it steers clear of being functional (maybe).

A product feature cannot serve as a trademark “if it is essential to the use or purpose of the article or if it affects the cost or quality of the article.” This functionality doctrine is intended to avoid granting trademarks that would give a single company control over a useful feature, and thus impede competition. Under some circumstances color can have an important functional role – for instance, if it is used to identify the type of medication contained in a gelatin capsule. Preventing a generic drug maker from choosing the same capsule color as the brand name manufacturer could create confusion for both pharmacists and patients.

More subtly and controversially, some courts – including the Second Circuit that issued the Louboutin ruling – have viewed product features that are “aesthetically functional” as ineligible for trademark protection. Even a feature that is not functional in the traditional sense can be aesthetically functional if allowing it to be trademarked “significantly undermines competitors’ ability to compete in the relevant market” [PDF].

It could be argued that CNN’s red stripe is not functional in either the traditional utilitarian sense or aesthetically. After all, a competing news site barred from using it could choose to use a green stripe, or no stripe at all. But there is also a case to be made in favor of functionality: Unlike the sole of a shoe, which has a function tied to its non-color attributes, color in a web site can help visitors navigate the site.

Another issue is the limited number of basic colors to choose from when designing a web site, and the limited number of basic shapes they can be used to fill. What would happen if there were no more colors left to trademark? In the 1995 Qualitex ruling, the Supreme Court considered and rejected depletion as an argument against granting trademark protection for colors. At some point, the Court reasoned, color choices become functional and thus ineligible for protection. And, the Court wrote, when “a color serves as a mark, normally alternative colors will likely be available for similar use by others.”

That may have been true for dry cleaning equipment manufacturers in 1995, and for makers of fiberglass insulation in 1985 and outboard motor companies in 1994. But is it well matched to an era when almost every company has a web site, and in some industries, such as online news, or, for that matter, high end shoes and jewelry, there can be dozens or hundreds of competing companies? In this context, the assumptions of the Qualitex Court regarding depletion may warrant reexamination.

Lynne Beresford, who served as Commissioner for Trademarks at the U.S. Patent and Trademark Office from 2005 to 2010, thinks that the use of color on web sites might, under some circumstances, be eligible for trademark protection. However, she notes, she has “not seen any successful trademark applications for color-only marks where the company hasn’t made a significant effort to alert the public about the trademark.” In other words, merely using a distinctive green border on a web site almost certainly wouldn’t be sufficient to obtain registration.

A closely related additional issue concerns copyright. William & Mary law professor Laura Heymann has written that the line between trademark and copyright is “considerably blurrier” than at the other intellectual property law interfaces. She also observes that the importance of overlapping rights – i.e., the possibility that a piece of creative content could have both copyright and trademark protection, is often underappreciated.

Web sites and other online content (such as virtual worlds) will test the overlap between trademark and copyright in new and complex ways. The design of a company’s web site, including the layout, colors, choice of fonts, and navigation among pages, is protected by copyright. The company’s name and logo on that website are protected by trademark. The extent to which the use of color on the site can also fall within the scope of trademark protection is an issue likely to end up before the courts in the coming years.

Authors

John Villasenor

Publication: Forbes

Digital Music Broadcast Royalties: The Case for a Level Playing Field

John Villasenor — Tue, 07 Aug 2012 12:15:00 -0400

Royalty rates play a crucial role in shaping the digital music broadcasting industry. If rates are too high, the ability of digital broadcasters to provide the public with access to music is impeded. If rates are too low, then recording artists do not receive a fair return on their endeavors. And if rates are inconsistent across different delivery mechanisms, then some business models are favored over others.

Today, the playing field in American digital music broadcasting is anything but level. For example, Internet radio companies can be compelled to pay over 60% of their revenue in sound recording performance royalties. By contrast, Sirius XM satellite radio currently pays only 8% of gross revenue. To make matters even more complicated, these rates are evolving over time in complex and sometimes unpredictable ways, making it nearly impossible for digital audio broadcasters to make reliable projections regarding their future content acquisition costs.

This new paper examines how the current patchwork of rates reflects a two-tiered system in American copyright law that partitions non-interactive digital audio services into two categories, each with its own standard for statutory performance royalty rate determinations. Services such as Internet radio that have the misfortune of being subject to the more onerous “willing buyer/willing seller” standard can face extremely high rates, while those such as Sirius XM satellite radio that are often associated with the more balanced standard known as “801(b)” enjoy much lower rates. Furthermore, access to the 801(b) standard is limited to certain services that were “preexisting” in 1998, the year that the Digital Millennium Copyright Act was enacted.

The current copyright royalty landscape creates significant inequities among current market participants. It also furnishes a strong disincentive to potential new market entrants and to the introduction of innovative new business models for delivering digital music. The good news is that these shortcomings can be addressed through simple, focused legislation to provide all non-interactive digital music broadcasters – not just a favored few – with access to statutory royalty rates determined according to the 801(b) standard. This would stimulate innovation and growth in a key segment of the broadcasting industry.

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Digital Music Broadcast Royalties: The Case for a Level Playing Field

Authors

John Villasenor

Image Source: Steve Marcus / Reuters

Why Artists Should Always Get Paid By Broadcasters Who Play Their Songs

John Villasenor — Mon, 02 Jul 2012 00:00:00 -0400

Why is it that Internet, satellite, and cable radio broadcasters pay performance royalties for the sound recordings they play, and American over-the-air “terrestrial” AM and FM broadcasters do not? The answer isn’t particularly satisfying for artists, record labels, and anyone who thinks the government shouldn’t be in the business of impeding new technologies.

For decades, terrestrial broadcasters have been exempt from paying a performance royalty to the owners of sound recordings, who are typically record labels and recording artists. By contrast, with the growth of digital transmissions in the 1990s and the accompanying concerns about the decline of music sales, Congress passed legislation imposing royalty obligations on the newer audio broadcast technologies. Under the resulting system, the rates today vary widely depending on how sound recordings are transmitted to listeners.

For example, some providers of audio-only channels available via cable or satellite television service currently pay performance royalties of 7.5% of gross revenue, Sirius XM satellite radio currently pays 8% of gross revenue, and Internet radio services, depending on their size, can be compelled to pay as much as 50% or more of revenue. To make matters even more confusing, these rates are evolving over time in complex and only sometimes predictable ways.

During the past several decades, proposals to end the terrestrial broadcasters’ performance royalty exemption have repeatedly been floated. The most recent significant legislative push to end the exemption came in 2009, when both the House and Senate Judiciary Committees passed versions of a bill called the Performance Rights Act. Neither bill received a vote by the full House or Senate.

There was talk of an industry-brokered compromise in 2010 that never came to fruition, in part due to opposition to a proposed term in the agreement that would have called for the “inclusion of radio chips on all mobile phones.” The Obama administration has also weighed in: In March 2011 the White House’s Office of the U.S. Intellectual Property Enforcement Coordinator released a white paper recommending “that Congress create a right of public performance for sound recordings transmitted by over-the-air broadcast stations.”

There’s a glimmer of hope that the inequities in the current system may once again be getting legislative attention. On June 6, the House Energy and Commerce Committee’s Subcommittee on Communications and Technology held a hearing on “The Future of Audio.” The subcommittee heard from a parade of witnesses, several of whom addressed the terrestrial broadcast performance royalty exemption. However, the Energy and Commerce Committee does not have oversight over the nation’s copyright laws, so until efforts are revived before the House and Senate Judiciary Committees, no change in the law can be expected.

A key argument against ending the exemption for terrestrial radio has been that radio play drives music sales. And indeed, the longstanding existence of “payola”, the (illegal when undisclosed) practice of providing payments to radio stations to play music by certain artists, is economic proof that the broadcasters’ view of the sales value of radio play has merit.

But if airtime on traditional AM and FM stations drives sales, so, too, can exposure through cable, satellite, and Internet radio. And, the argument can also be inverted: By playing artists who people want to hear, broadcasters of all stripes attract more listeners, and can therefore charge higher fees to their advertisers or subscribers. It’s a well-recognized symbiosis in which the benefits flow in both directions. Exposure drives sales, and good music attracts listeners.

However, this balance, and the entire music broadcast industry, can only exist thanks to a flow of intellectual property that only goes one way. Broadcasters use intellectual property owned by artists and record labels, and not the other way around. The fact that artists may receive some benefit from radio stations’ use of their intellectual property shouldn’t strip them of their right to be paid for its use.

So what should be done? To start, Congress should end the terrestrial performance royalty exemption. This would rectify a glaring inconsistency in American copyright law and would also bring American artists one important step closer to receiving overseas terrestrial broadcast royalties. As had been proposed in the 2009 Performance Rights Act, new legislation could require smaller terrestrial radio stations to make revenue-dependent, flat annual payments in the approximate range from $5,000 down to $500, which could hardly be described as onerous.

Rates for larger stations would likely end up in the hands of the Copyright Royalty Board, a prospect which would justifiably make the terrestrial broadcast industry nervous. CRB rates for other (non-terrestrial) broadcasts have sometimes been punitively high, forcing Congress to intervene on more than one occasion to pass legislation providing relief. Similar intervention might be necessary for terrestrial broadcast royalty rates as well if the exemption is ended.

In addition, and in some respects more importantly in the long run given the inevitable transition to digital, performance royalty rates should be harmonized across digital broadcast technologies. The current framework, which forces Internet radio providers to pay extremely high rates while charging somewhat more modest rates to satellite and cable music broadcasters is not only unfair, but also impedes innovation. “Given a more equitable royalty standard, I’d expect we would see an explosion of new technologies to connect artists and Internet radio listeners over the coming years,” says Pandora Founder Tim Westergren. “The one-to-one nature of Internet-delivered radio could allow thousands of artists to engage with their audiences in unprecedented ways that could really revolutionize the industry.”

Somewhat ironically, impetus for a partial solution may come from the terrestrial radio stations themselves, who are seeing small but growing numbers of listeners migrate to their online streams. A recently announced deal between radio broadcasting giant Clear Channel Communications and Nashville record label Big Machine provides a potential model. In return for reduced webcasting royalty rates, Clear Channel will, for the first time, pay royalties to sound recording copyright owners for its terrestrial broadcasts.

However, while the deal has been termed revolutionary, in at least one important sense a better description may be evolutionary: It reflects an approach available only to companies such as Clear Channel that have a foot in both the traditional broadcasting and webcasting worlds. By contrast, pureplay providers like Pandora don’t have the option of offering to start paying terrestrial broadcast performance royalties in exchange for reduced webcasting royalties. And even if other record labels ink similar deals with Clear Channel and other terrestrial broadcasters, that wouldn’t address the concerns of independent artists. The upshot is that a comprehensive solution will almost certainly require congressional action. A separate but related issue is ensuring that artists, who have often gotten the short end of the stick from record companies, get their fair share of royalties.

There’s also a larger context that goes well beyond the world of digital music and relates to disincentives to innovation. The government should not be stacking the deck against the newest, most compelling technologies. Saddling Internet radio with high royalty rates while giving terrestrial AM and FM stations a free pass impedes the growth of a promising new way to distribute content. And, it sends a message to would-be-entrepreneurs with ideas about how to revolutionize an industry that the playing field is far from level. In an increasingly competitive global technology environment, that’s a message we can’t afford to be sending.

Authors

John Villasenor

Publication: Forbes

Image Source: Reza Estakhrian