Sunday, November 2, 2008

The Intellectual Property War: A Turn of The Tide?

      Captain Copyright, From a ludicrous and short-lived pro-copyright campaign by the Canadian version of the RIAA - Yes this is real
Two developments in the US legal system last week may indicate a turn of the tide in the Intellectual Property (IP) wars.  The first was a significant Federal Court ruling limits what can be patented and invalidates thousands of questionable existing patents.  The second was a novel and very persuasive constitutional challenge to the Recording Industry Association of America (RIAA) lawsuit campaign against individual file sharers.  As they play out, these two events should mark a significant change in the legal landscape for IP world-wide.

When it comes to IP law, the US leads the world.  This is due to several factors.  First, the US is by far the biggest exporter of IP.  Second, the technology that has changed the nature of IP mostly origionated in the US.  Until recently, US internet traffic has been greater than the rest of the world combined.  Third, Americans tend to settle things through litigation rather than legislation.  So there is always lots of action on the IP front.  Lastly, IP is one of the fault lines in the macro development of the post-national world.  Briefly, the nation state is becoming obsolete due to globalization.   The nation state will not disapear, but it is evolving.  There are two competing models to replace it: the EU regional state approach, and the American corporate state approach.   IP is a key point of conflict because it represents the tension between corporate and public ownership.  Companies want to extend their control over products past the point where consumers make the purchase.  Consumers want the opposite (which is ok) and whatever they can get for free via digital distribution (less ok).  The ideal world for content creators is when the consumer pays every time they access a particular peice of content.  They want content to stay live and open-ended (licensed like software) rather than dead and purchased like a book.  The stakes are immense in terms of revenue.  But technology so far has trumped the political and legal weapons of content owners.

There are three types of intellectual property under US law, and each is rife with litigation.  Trademarks are commercial property and give a company a monopoly on the use of a term in a particular business.  I can't start a computer company called Apple.  But I can start a tire company called Apple.  Apple has trademarked the term for use in the computer business.  This is a sensible law that protects both companies and consumers from fraud by third parties.  Unfortunately, trademark is now widely used by companies trying to surpress use of names outside their industry, or by people saying things about the company that they don't like.  For example, Monster Cables routinely sues anyone that starts any business in the US with "monster" in the name.  The test for a trademark infringement is the "idiot in a hurry".  Would an idiot in a hurry think your company A is really company B with a similar name?  Or would an idiot in a hurry think your effort that mentions company B is actually sanctioned by company B?  If so, you are probably infringing.  But real trademark infringements are rare, usually restricted to counterfeiters deliberately trying to fool consumers.

Patents are the second type of IP protected by US law.  Patents are a time-limited monopoly on the design of devices.  Patents are specific and require detailed description.  You can't patent an idea.  The law has traditionally required devices to be 1) novel, and 2) non-obvious before they can be patented.  Patents are granted by a government agency, the Patent Office.  One must apply for a patent, providing all the relevant paperwork and support material.  A patent examiner goes through the application and either grants or denies the patent.  The process is supposed to be difficult because a patent amounts to a government enforced monopoly.  Monopolies are good for monopolists, but bad for the public.  That's why monopolies like the gas company are heavily regulated.  The rationale for patents is that a limited-time monopoly is necessary to encourage the resources needed to invent new technology.  Most countries have a very similar regime to the US.

Unfortunately, several things happened to distort US patents.  The first was creation of a special court to deal with patent cases.  This should have been a good thing, but it didn't work out that way.  Some questionable rulings were made, and because the patent court had limited oversight by the rest of the judicial branch, it was difficult to challenge these.  Second, one of these rulings was that patents could be granted out not only for devices, but for methods.  This ruling allowed patents on software, algorithms, genes and other intangibles.  Lastly, the US patent office was underfunded and unable to deal with the flood of patent applications created by the methods ruling.  Examiners lacked the expertise to deal with software and the time to look for prior art.  So they just granted most applications and let the courts sort out which ones were correct.  The result was chaos.  It is now widely accepted that the US patent system has broken to the detriment of economic performance.  There are so many dubious patents that it is becoming difficult to bring new products to market.  It has happened before with the US aircraft industry.  It took WW2 to clear the logjam.

Techdirt summarizes last week's Federal Appeals court ruling on the original case that legitimized business concept patents:
The summary is that the court has said that there's a two-pronged test to determine whether a software of business method process patent is valid: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. In other words, pure software or business method patents that are neither tied to a specific machine nor change something into a different state are not patentable.
Emphasis in original. This is an extremely important ruling.  Battles are currently raging in several countries, and the EU over software patents.  This ruling will take the wind out of the sails proponents.  A significant argument they were making was that local companies would be at a disadvantage if they could not patent things that were patentable in the US.  In addition, this should be the end of patent trolls.  Companies that buy up patents and sue everyone  making something even theoretically similar.  Patent law is remote from consumers, being something litigated between companies.  However, the number of dubious patents and the aggressiveness of patent holders in the courts has had an enormous impact on product development in the US. This chilling effect has not only retarded development in high-tech.  It has had a very dramatic impact in medical, pharmaceutical and biotechnology industries.

The last type of IP covered by US law is the most familiar.  Copyright is the limited ability for a content creator to control their creation.  It protects the expression of an idea.  A story about teenage wizards cannot be copyrighted.  A story about a teenage wizard named Harry Potter who attends a school called Hogwarts can.  When someone in the US downloads a song or a movie from the Internet, they are infringing copyright.  Note that copyright infringement and theft are not the same thing, despite their frequent conflation.  Theft deprives the owner of an object, copyright infringement does not.  Infringement denies the owner a sale, assuming that the infringer would have purchased the item had they been unable to acquire it illegally.  

Obviously, the Internet and digital file-formats have dramatically changed content distribution.    Remember when a copy of a copy of a videotape was lousy?  That was analogue, every digital copy is exactly the same as the original.  The Internet gives people the means to distribute these perfect copies between themselves.  The problem for content owners like music companies is that their business model is based on scarcity.  If you wanted a song, you had to buy a copy from the record company.  They were the only ones who had original high-quality content.  Now, everything is different.  Rather than adapt to the new situation, the US content industries tried to impose the existing business model on the new world.  They successfully lobbied for new IP laws and have used the power granted by these laws to prosecute individuals for infringement.  The RIAA has sued over 30,000 individuals in the US.  Most settle out of court for some thousands of dollars rather than incur the legal fees required to fight.  However, the legal basis for the RIAA's actions is questionable, as are the methods they use to acquire information on individuals they want to sue.  In cases that have gone to trial, the RIAA has lost all but one, and that ruling was subsequently put aside by the judge who declared a mistrial.   Many in the US legal community are unhappy with the way the RIAA has used the legal system as a bludgeon and look forward to a reckoning.

Apart from the legal problems, the RIAA's approach has been suicidal from a business point of view.  Not only have they had zero impact on the number of files being shared, but have covered themselves in negative publicity.  That negative publicity on its own has reduced their revenues and created enemies throughout the technology industry.  Two years ago, the RIAA switched tactics and began to sue Universities who failed to stop file sharing on their internal networks.  This was a promising avenue because students are big file sharers and Universities are unlikely to risk huge fines to protect them.  Unfortunately for the RIAA, they are as inept at law as they are at business.  Some Universities successfully fought back based on privacy concerns and the questionable tactics of the RIAA at collecting evidence.

Notable among high-profile schools, Harvard has never been sued.  This has occasioned comment.  The tech press speculated that the RIAA was afraid of their potential counter-attack.  They were right to be.  Harvard law professor Charles Nesson got tired of waiting and has intervened in an unrelated RIAA action against an individual, Joel Tannenbaum.  Nesson has made a novel and devastating constitutional challenge to the entire RIAA legal strategy.  The law gives the RIAA a statutory penalty much greater than the market price of the infringed music.  They can collect as much as $150,000 for a song that sells for $0.99 at the iTunes store.  Typically, they settle out of court for between $500 and $1500 per song.  The counter-argument Nesson advances is that the legislation enabling these suits is unconstitutional.  It amounts to a criminal law being run by a private entity for its own profit.
Imagine a statute which, in the name of deterrence, provides for a $750 fine for each mile-per-hour that a driver exceeds the speed limit, with the fine escalating to $150,000 per mile over the limit if the driver knew he or she was speeding. Imagine that the fines are not publicized, and most drivers do not know they exist. Imagine that enforcement of the fines is put in the hands of a private, self-interested police force, that has no political accountability, that can pursue any defendant it chooses at its own whim, that can accept or reject payoffs in exchange for not prosecuting the tickets, and that pockets for itself all payoffs and fines. Imagine that a significant percentage of these fines were never contested, regardless of whether they had merit, because the individuals being fined have limited financial resources and little idea of whether they can prevail in front of an objective judicial body.  
Yikes.  If you have any interest, its worth reading the whole thing.  Nesson goes on to eloquently demand compensation for Tannenbaum and others targeted by the RIAA based on their abuse of the courts.  That could amount to a half a billion dollars.  Not something the RIAA's money losing members would care to contemplate.  If successful, the argument would also derail the Motion Picture Association of America (MPAA) legal strategy.  The MPAA has been far more judicious in their use of the courts, but their aims have been similar.  Both met the Internet revolution with a counter-revolution via the Congress and the Courts.  This may be at an end.

Together, these two legal developments promise to revolutionize the landscape for IP law in the US.  Many fundamental legal issues remain to be settled, but we can hope that the tide is turning.