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Nearly all economists from across the political spectrum agree: free trade is good. Yet free trade agreements are not always the same thing as free trade. Whether we’re talking about the Trans-Pacific Partnership or the European Union’s Digital Single Market (DSM) initiative, the question is always whether the agreement in question is reducing barriers to trade, or actually enacting barriers to trade into law.

Read the full piece here. 

Earlier this week Senators Orrin Hatch and Ron Wyden and Representative Paul Ryan introduced bipartisan, bicameral legislation, the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (otherwise known as Trade Promotion Authority or “fast track” negotiating authority). The bill would enable the Administration to negotiate free trade agreements subject to appropriate Congressional review.

Nothing bridges partisan divides like free trade.

Top presidential economic advisors from both parties support TPA. And the legislation was greeted with enthusiastic support from the business community. Indeed, a letter supporting the bill was signed by 269 of the country’s largest and most significant companies, including Apple, General Electric, Intel, and Microsoft.

Among other things, the legislation includes language calling on trading partners to respect and protect intellectual property. That language in particular was (not surprisingly) widely cheered in a letter to Congress signed by a coalition of sixteen technology, content, manufacturing and pharmaceutical trade associations, representing industries accounting for (according to the letter) “approximately 35 percent of U.S. GDP, more than one quarter of U.S. jobs, and 60 percent of U.S. exports.”

Strong IP protections also enjoy bipartisan support in much of the broader policy community. Indeed, ICLE recently joined sixty-seven think tanks, scholars, advocacy groups and stakeholders on a letter to Congress expressing support for strong IP protections, including in free trade agreements.

Despite this overwhelming support for the bill, the Internet Association (a trade association representing 34 Internet companies including giants like Google and Amazon, but mostly smaller companies like coinbase and okcupid) expressed concern with the intellectual property language in TPA legislation, asserting that “[i]t fails to adopt a balanced approach, including the recognition that limitations and exceptions in copyright law are necessary to promote the success of Internet platforms both at home and abroad.”

But the proposed TPA bill does recognize “limitations and exceptions in copyright law,” as the Internet Association is presumably well aware. Among other things, the bill supports “ensuring accelerated and full implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights,” which specifically mentions exceptions and limitations on copyright, and it advocates “ensuring that the provisions of any trade agreement governing intellectual property rights that is entered into by the United States reflect a standard of protection similar to that found in United States law,” which also recognizes copyright exceptions and limitations.

What the bill doesn’t do — and wisely so — is advocate for the inclusion of mandatory fair use language in U.S. free trade agreements.

Fair use is an exception under U.S. copyright law to the normal rule that one must obtain permission from the copyright owner before exercising any of the exclusive rights in Section 106 of the Copyright Act.

Including such language in TPA would require U.S. negotiators to demand that trading partners enact U.S.-style fair use language. But as ICLE discussed in a recent White Paper, if broad, U.S.-style fair use exceptions are infused into trade agreements they could actually increase piracy and discourage artistic creation and innovation — particularly in nations without a strong legal tradition implementing such provisions.

All trade agreements entered into by the U.S. since 1994 include a mechanism for trading partners to enact copyright exceptions and limitations, including fair use, should they so choose. These copyright exceptions and limitations must conform to a global standard — the so-called “three-step test,” — established under the auspices of the 1994 Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, and with roots going back to the 1967 amendments to the 1886 Berne Convention.

According to that standard,

Members shall confine limitations or exceptions to exclusive rights to

1. certain special cases, which
2. do not conflict with a normal exploitation of the work and
3. do not unreasonably prejudice the legitimate interests of the right holder.

This three-step test provides a workable standard for balancing copyright protections with other public interests. Most important, it sets flexible (but by no means unlimited) boundaries, so, rather than squeezing every jurisdiction into the same box, it accommodates a wide range of exceptions and limitations to copyright protection, ranging from the U.S.’ fair use approach to the fair dealing exception in other common law countries to the various statutory exceptions adopted in civil law jurisdictions.

Fair use is an inherently common law concept, developed by case-by-case analysis and a system of binding precedent. In the U.S. it has been codified by statute, but only after two centuries of common law development. Even as codified, fair use takes the form of guidance to judicial decision-makers assessing whether any particular use of a copyrighted work merits the exception; it is not a prescriptive statement, and judicial interpretation continues to define and evolve the doctrine.

Most countries in the world, on the other hand, have civil law systems that spell out specific exceptions to copyright protection, that don’t rely on judicial precedent, and that are thus incompatible with the common law, fair use approach. The importance of this legal flexibility can’t be understated: Only four countries out of the 166 signatories to the Berne Convention have adopted fair use since 1967.

Additionally, from an economic perspective the rationale for fair use would seem to be receding, not expanding, further eroding the justification for its mandatory adoption via free trade agreements.

As digital distribution, the Internet and a host of other technological advances have reduced transaction costs, it’s easier and cheaper for users to license copyrighted content. As a result, the need to rely on fair use to facilitate some socially valuable uses of content that otherwise wouldn’t occur because of prohibitive costs of contracting is diminished. Indeed, it’s even possible that the existence of fair use exceptions may inhibit the development of these sorts of mechanisms for simple, low-cost agreements between owners and users of content – with consequences beyond the material that is subject to the exceptions. While, indeed, some socially valuable uses, like parody, may merit exceptions because of rights holders’ unwillingness, rather than inability, to license, U.S.-style fair use is in no way necessary to facilitate such exceptions. In short, the boundaries of copyright exceptions should be contracting, not expanding.

It’s also worth noting that simple marketplace observations seem to undermine assertions by Internet companies that they can’t thrive without fair use. Google Search, for example, has grown big enough to attract the (misguided) attention of EU antitrust regulators, despite no European country having enacted a U.S-style fair use law. Indeed, European regulators claim that the company has a 90% share of the market — without fair use.

Meanwhile, companies like Netflix contend that their ability to cache temporary copies of video content in order to improve streaming quality would be imperiled without fair use. But it’s impossible to see how Netflix is able to negotiate extensive, complex contracts with copyright holders to actually show their content, but yet is somehow unable to negotiate an additional clause or two in those contracts to ensure the quality of those performances without fair use.

Properly bounded exceptions and limitations are an important aspect of any copyright regime. But given the mix of legal regimes among current prospective trading partners, as well as other countries with whom the U.S. might at some stage develop new FTAs, it’s highly likely that the introduction of U.S.-style fair use rules would be misinterpreted and misapplied in certain jurisdictions and could result in excessively lax copyright protection, undermining incentives to create and innovate. Of course for the self-described consumer advocates pushing for fair use, this is surely the goal. Further, mandating the inclusion of fair use in trade agreements through TPA legislation would, in essence, force the U.S. to ignore the legal regimes of its trading partners and weaken the protection of copyright in trade agreements, again undermining the incentive to create and innovate.

There is no principled reason, in short, for TPA to mandate adoption of U.S-style fair use in free trade agreements. Congress should pass TPA legislation as introduced, and resist any rent-seeking attempts to include fair use language.

Filed under: contracts, copyright, intellectual property, international center for law & economics, international politics, international trade, technology Tagged: copyright, copyright law, fair use, fast track, free trade agreements, Intellectual property, Intellectual Property Rights, TPA, trade agreement, trade agreements

Summary

In the context of ongoing negotiations of the Trans Pacific Partnership (TPP) and deliberations over trade promotion authority (TPA), some organizations have been advocating for the inclusion of U.S.style fair use exceptions and limitations to copyright. This brief looks at the evidence for and against mandating the adoption of a U.S.-style fair use exception and, in particular, at the implications of requiring countries to adopt such an exception in free trade agreements. It begins with a brief exploration of the relationship between copyright, creativity and economic development. It then considers the economics of copyright and fair use, applying these to a networked global marketplace. The brief concludes with an assessment of current debates around fair use exceptions in free trade agreements and TPA.

Anyone familiar with the antitrust newstream realizes there is a tremendous amount of controversy about the Federal Trade Commission’s administrative litigation process. Unlike the Antitrust Division which fights its litigation battles in Federal Court, the FTC has a distinct home court advantage. FTC antitrust cases are typically litigated administratively with a trial conducted before an FTC administrative law judge, who issues an initial decision, followed with an appeal to the full Commission for a final decision. I have authored a couple of recent articles as have others that question the fairness of the FTC acting as both prosecutor and judge. These concerns have only been amplified since for the last 19 years the FTC has always found a violation of law. As one Congressman noted the FTC has “an unbeaten streak that Perry Mason would envy.”

Read the full piece here.

Over at the blog for the Center for the Protection of Intellectual Property, Richard Epstein has posted a lengthy essay that critiques the Obama Administration’s decision this past August 3 to veto the exclusion order issued by the International Trade Commission (ITC) in the Samsung v. Apple dispute filed there (ITC Investigation No. 794).  In his essay, The Dangerous Adventurism of the United States Trade Representative: Lifting the Ban against Apple Products Unnecessarily Opens a Can of Worms in Patent Law, Epstein rightly identifies how the 3-page letter issued to the ITC creates tremendous institutional and legal troubles in the name an unverified theory about “patent holdup” invoked in the name of an equally overgeneralized and vague belief in the “public interest.”

Here’s a taste:

The choice in question here thus boils down to whether the low rate of voluntary failure justifies the introduction of an expensive and error-filled judicial process that gives all parties the incentive to posture before a public agency that has more business than it can possibly handle. It is on this matter critical to remember that all standards issues are not the same as this particularly nasty, high-stake dispute between two behemoths whose vital interests make this a highly atypical standard-setting dispute. Yet at no point in the Trade Representative’s report is there any mention of how this mega-dispute might be an outlier. Indeed, without so much as a single reference to its own limited institutional role, the decision uses a short three-page document to set out a dogmatic position on issues on which there is, as I have argued elsewhere, good reason to be suspicious of the overwrought claims of the White House on a point that is, to say the least, fraught with political intrigue

Ironically, there was, moreover a way to write this opinion that could have narrowed the dispute and exposed for public deliberation a point that does require serious consideration. The thoughtful dissenting opinion of Commissioner Pinkert pointed the way. Commissioner Pinkert contended that the key factor weighing against granting Samsung an exclusion order is that Samsung in its FRAND negotiations demanded from Apple rights to use certain non standard-essential patents as part of the overall deal. In this view, the introduction of nonprice terms on nonstandard patterns represents an abuse of the FRAND standard. Assume for the moment that this contention is indeed correct, and the magnitude of the problem is cut a hundred or a thousand fold. This particular objection is easy to police and companies will know that they cannot introduce collateral matters into their negotiations over standards, at which point the massive and pointless overkill of the Trade Representative’s order is largely eliminated. No longer do we have to treat as gospel truth the highly dubious assertions about the behavior of key parties to standard-setting disputes.

But is Pinkert correct? On the one side, it is possible to invoke a monopoly leverage theory similar to that used in some tie-in cases to block this extension. But those theories are themselves tricky to apply, and the counter argument could well be that the addition of new terms expands the bargaining space and thus increases the likelihood of an agreement. To answer that question to my mind requires some close attention to the actual and customary dynamics of these negotiations, which could easily vary across different standards. I would want to reserve judgment on a question this complex, and I think that the Trade Representative would have done everyone a great service if he had addressed the hard question. But what we have instead is a grand political overgeneralization that reflects a simple-minded and erroneous view of current practices.

You can read the essay at CPIP’s blog here, or you can download a PDF of the white paper version here (please feel free to distribute digitally or in hardcopy).

 

Filed under: administrative, intellectual property, international trade, litigation, patent, politics Tagged: Apple, exclusion order, international trade commission, International Trade Commission, Obama Administration, patent holdup, policy, Policy Statement, public interest, Richard Epstein, Samsung, united states trade representative, veto

Excerpt

Interest in patent cases — particularly those involving standard-essential patents — at the U.S. International Trade Commission has increased lately, especially in light of recent attention from the White House and Congress. Critics have argued that the ITC is an inappropriate forum for adjudication of patent suits involving FRAND-encumbered SEPs (required by their owner to be offered to willing licensees on fair, reasonable and nondiscriminatory terms) because it has the authority to issue only import and sales bans — injunctions — and not monetary damages….

Continue reading on Law360

The claim that there is a “patent litigation explosion” is a myth, but there’s a related patent litigation myth that has proven cantankerously resilient in the patent policy debates — there’s an “explosion” of patent-owners racing to the International Trade Commission (ITC) who are obtaining exclusion orders against infringers.

Well, this argument has crashed and burned against the hard facts of the actual numbers, but even before patent filings at the ITC dropped, this argument was still problematic.

The reason is that it was an example of a great game that we all learn in college: fun with statistics!  It’s the old rhetorical saw: If actual numbers don’t make something look bad, then just reframe the point as an out-of-context statistical claim and now it sounds like a complete disaster that demands immediate action by everyone—by Congress, by courts, and, given that the season is almost upon us, by Santa Claus (who should punish these allegedly rent-seeking patent-owners with coal in their stockings).

You may think I jest, but it’s common fare for commentators and academics to paint the situation in the ITC entirely in terms of statistical increases by patent-owners.  To take but one representative example from a 2009 academic article:

The ITC has become a popular forum for enforcing patents, with the number of actions increasing by nearly 80% since 2003.

An 80% increase in patent filings in six years!  This is clearly a litigation hurricane of historic proportions!  We must do something about this before the ITC is flooded like New York City was by Hurricane Sandy!

Yet, when one looks behind the statistics at the actual numbers, it’s almost laughable that numerous law journal articles, newspaper articles, and blog postings are breathlessly reporting on this as if this is a pressing policy problem in both the patent system and the ITC.  Congress even spent more taxpayer dollars holding hearings this past summer on this allegedly pressing problem, and what a waste of time this was.

Here’s the actual numbers behind the statistics: From 2003 to 2009 (fiscal year), patent filings in the ITC increased from 19 to 29.  In the ten years from 2001 to 2011, patent case filings in the ITC went from 29 to 70.  (Note the drop between 2001 and 2003, a drop that has occurred again and to which we will return shortly.)

So, commentators and academics want Congress to change the law to make it harder for patent-owners to seek relief at the ITC because patent filings increased in ten years from 29 cases to 70 cases.  Alas, 70 total cases doesn’t sound too bad, especially when hundreds of thousands of lawsuits and other regulatory cases are filed annually.  So, the easy answer to this problem is to reframe rhetorically the total cases: the shift from 29 to 70 cases is an increase of 141%!  In ten years!  Yep, fun with statistics.

But even if one thinks for some strange reason that 70 cases is a huge number of filings at the ITC, this is still an out-of-context assertion that doesn’t mean anything.  As empirical economists and statisticians always ask: What’s the baseline?

One good baseline is to compare ITC filings to patent infringement cases filed in plain-old-vanilla federal court. How many patent infringement cases are filed each year in federal court?  In 2010, the total number of patent infringement lawsuits was 3,605 cases.  Yes, you read that number right: 3,605 cases.  (That’s the last year for which we have numbers.)  And before readers jump to the conclusion that 3,605 cases is an unmitigated patent litigation explosion, this would be incorrect as well — as I explained in a previous blog posting, patent litigation rates today are approximately the same or less than the patent litigation rates from 1790 to 1860.

In sum, we’re supposed to be filled with shock and awe by the 70 patent cases that were filed in the ITC in 2011, as compared to the 3,605 cases filed in federal court.  These 70 patents cases at the ITC, we’re told, demand immediate congressional action to impose a regime change on the ITC in limiting its jurisdiction over patents.  To put it bluntly, people are getting their patent policy knickers in a twist because 1.94% of total patent infringement cases are also being filed in the ITC.  Yep, fun with statistics.

And as Billy Mays would say: But wait, there’s more!  (That OxiClean was definitely worth it.  My sneakers were never so clean.)

Lest one still thinks that the number of patent filings in the ITC is a problem, the ITC released last month its fiscal-year 2012 report on patent filings — a report that got about as much attention as a report on dryer lint accumulations in fiscal-year 2012.  Given the ongoing uproar over patent filings in the ITC, one would expect that the ITC’s report would be have been trumpeted in news articles, blog postings, and by the commentators and academics who have been singing this tune for the past several years.

Nope, not a single peep about this report has been made in the more-than-30 days since its release.  Why the silence — the deafening silence — about the most recent data from the ITC on patent filings?

The reason is simple: the facts in the latest ITC fiscal-year report don’t fit the policy narrative.  The ITC reported that patent cases filed in the ITC dropped from a high of 70 cases in 2011 to a total of 48 cases in 2012 (fiscal year).  In the statistical terms loved so much by the critics of patent filings at the ITC, patent filings dropped by 31.4% between 2011 and 2012 (fiscal years).  Now that’s an interesting statistical number about which much could be said — or, as is the case, not said and ignored in the hope that it’ll just go away.

So, what happened to the loud, incessant complaints about skyrocketing patent filings in the ITC?  Well, to paraphrase the old man at the end of every Scooby Doo episode: And I would have gotten away with it, too, if it wasn’t for you meddling facts!

UPDATE: I made some minor copy-edit changes to the text after I posted it.

Filed under: intellectual property, international trade, litigation, patent

I thought I’d aim my opening post at the question that motivated my interest in this symposium:  is behavioral economics leading us to the end of free markets and the takeover of the regulatory state?

Consider how far we’ve come since the days of “caveat emptor,” when sellers had a legal right to fool and cheat buyers, and consumers were free to be fooled and cheated.

Read the full piece here.

Earlier this year, the US Supreme Court granted a writ of certiorari to Costco in the case of OMEGA SA v. Costco Wholesale Corp. (541 F. 3d 982 (2008)).  At issue is whether the ‘first sale doctrine’ of US copyright law (17 U.S.C. § 109(a)), which limits the copyright owner’s ability to restrict distribution of its product after first sale, applies to foreign-manufactured products whose first sale was outside the U.S. and whose importation to the U.S. was not authorized by the manufacturer. (I happened to run across a July 31 op-ed by Eric Felten at the WSJ lamenting the potential for the case to limit the ability of libraries to lend books, particularly books originally published and purchased overseas.) The case raises some interesting issues about the role and purpose of copyright protection, segregated market price discrimination in a global economy, and the role of the gray markets in arbitraging global price disparities.

Read the full piece here.