Digital Copyright Intro to IP – Prof. Merges

Agenda Review coevolution of Digital technology and copyright law – Legislation vs. litigation Grokster case study Kelly and Amazon: fair use and digital distribution

Functional specifications: Typically involves the making of intermediate copies karate karate Reverse Engineering

Note: Accolade’s games competed with the disassembled work, yet still fair use Accolade disassembled Sega’s game cartridges to discover an initialization code necessary to make games execute on the Sega Genesis game console. Sega v. Accolade Ninth Circuit held the disassembly a fair use because necessary to understand functional requirements for Genesis compatibility Reverse Engineering

Dual nature of software: IPNTA 5 th p. 658 Relates to “nature of the work” element under section 107 Text or expression But also utilitarian article A “writing that performs work, that executes on its own”

IPNTA 5 th at 660 “[T]he use of a clean room would not have avoided the need for disassembly because disassembly was necessary in order to discover the functional specifications for a Genesis-compatible game.”

IPNTA 5 th at 662 “We conclude that where disassembly is the only way to gain access to the ideas and functional elements embodied in a copyrighted computer program and where there is a legitimate reason for seeking such access, disassembly is a fair use of the copyrighted work, as a matter of law.”

Atari v. Nintendo Atari disassembled “lock-out” code in the Nintendo game console using source code obtained from the Copyright Office deposit under false pretenses Fed. Cir. held disassembly a fair use where necessary to understand the work’s ideas, processes, and methods of operation Atari’s unclean hands precluded finding of fair use Reverse Engineering

Digital Milliennium Copyright Act (1998) When is disassembly “strictly necessary” (Atari) or “the only way” to gain access to ideas (Sega)? Prohibits circumvention of technological measures that control access to a work and the manufacturing, importation, and offering of any device or service that is primarily designed for the purpose of circumventing such measures. Exception for reverse engineering for the “sole purpose of identifying and analyzing those elements of the program that are necessary to achieve interoperability of an independently created computer program...” Reverse Engineering Remaining Questions

Interoperability and Standards Common criticism: patents interfere with interoperability and standards in the software industry

IP Rights and Interoperability Key Point: IP rights NOT inherently inconsistent with interoperability Many standards and protocols that are covered by various IP rights are widely licensed and therefore de facto “open”

KEY POINT IP Rights ≠ Closed systems

Why have IP rights on an open system? To maintain quality control, prevent unauthorized versions To enable selective licensing – Keep open the option to selectively exclude

What about the problem of “monopoly via standard ownership”? Not a very common problem: usually, standard owner wants to encourage use of the standard – Often, standard interface technologies are given away for free: e.g., Adobe Acrobat – Microsoft: the exception – antitrust law can deal with this problem

Matsushita VHS; Adobe Acrobat; Sun Java Internet protocol; Open Source software Apple II, Apple MacIntosh, Microsoft Windows; Sony Betamax Cisco acquisition strategy; Disney succession plan Product Strategy IP Strategy Open Closed Proprietary Non- proprietary Examples

Core Freely license this component Aggressively protect and limit access to this component

Core IP Rights are OPTIONS; you can assert them or waive them, as strategy dictates Waive more rights – expand open component Assert more rights; reduce open comp- onent

Why voluntary dealmaking? For products that exhibit “network effects,” the market often requires it –No special legal rules required to get Matsushita to license VHS technology –No special rules required to get Sony and Philips to license CD and DVD technology

“History may not repeat itself, but it rhymes.” - p. 94

Real Estate Analogy Private parcels Public Street

Elena G. Irwin, The Effects of Open Spaces on Residential Property Values, 78 Land Economics 465 (2002) -Proximity to public space increases residential land values

Operating System Example Linux Private Firm Applications: IBM, RedHat, HP, Sun, etc.

Appropriate Divergence Network Leverage: tiny property right leveraging huge market –Video game/fair use cases When property rights completely block massive economic opportunity –“Charles River Bridge” scenario

Markets often protect consumers better than regulation Competition for platform ownership will lead to openness; more effective (often) than regulation

Coevolution of digital tech and copyright law Digital Audio Tape legislation, 1995 A model accommodation of IP and new technology?

“Media Taxes” Surcharge on technology and media Distribute pool of proceeds to artists/creators in some way NB: Applies only to Digital Audio Tape and mini-disc technology (obsolete)

Terry Fisher – “Promises to Keep”

Music compulsory license Lessig proposes an internet-wide compulsory license for downloading of music Separate compensation from control

Larry Lessig and Terry Fisher Compulsory license, paid for via a tax on all content Is there a better way? I think so …

This form of property is a wrong turn, I would argue Merges, “Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,” 84 CLR 1293 (1996)

Alternative Proposal Collective Rights Organizations, such as ASCAP and BMI, will form if © is defined and enforced The pressure to reach a collective bargain is too great Case study: Apple iTunes/iPod

He Pushed a Reluctant Industry Toward Digital Music When the iTunes store opened, the music industry’s revenue from digital sales was negligible, but by last year it had grown to $4.6 billion around the world, representing 29 percent of all revenue from recorded music. This week at Apple’s unveiling of the iPhone 4S, it noted that the store has sold 16 billion songs in its eight and a half years operation. – NYTimes Oct. 11, 2011

This is why I am a “transaction cost optimist” in IP Field Merges, Justifying Intellectual Property (2011) “There is a solution.”

Rightholders can continue to receive rights, while consumers and users can gain access to the works they want to use, if resources are directed to creating efficient transactional mechanisms that allow IP rights to flow through commercial channels as smoothly, or almost as smoothly, as do the works covered by those rights. Recognize that, in a world with numerous IP rights, the market for creative works necessitates also a (separate, but related) market for the rights covering those works. Encourage market making in this secondary market! – p. 290

Compulsory license vs. private negotiations Current law: “Interactive services” must negotiate directly with © owners; non- interactive services have compulsory license Webcasting: Case Study

Sec Exclusive Rights in Copyrighted Works (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

(a) The exclusive rights of the owner of copyright in a sound recording are limited to the rights specified by clauses (1), (2), (3) and (6) of section 106, and do not include any right of performance under section 106(4).

Section 114: 3 main categories “Exempt” transmissions: digital broadcasts by established broadcasters Non-exempt transmissions: compulsory license for non-interactive subscription services Interactive services (not really broadcasting): requires license from sound recording copyright owner

Why this treatment? Interactive services provide more control, operator can include or exclude songs at will Maybe encourages specialized services – country only, jazz only, etc. Noninteractive: more like traditional radio broadcasts; ASCAP and BMI already in place

Arista Records, L.L.C. v. Launch Media, Inc., 578 F.3d 148 (2d Cir. 2009), the Second Circuit held that LAUNCHcast, a service that creates customized radio stations based on user rankings and other input, was not interactive.

Sec. 114 (d) Limitations on Exclusive Right. — Notwithstanding the provisions of section 106(6) — (1) Exempt transmissions and retransmissions. — The performance of a sound recording publicly by means of a digital audio transmission, other than as a part of an interactive service, is not an infringement of section 106(6) if the performance is part of —

Sec. 114 (cont’d) (A) a nonsubscription broadcast transmission; (B) a retransmission of a nonsubscription broadcast transmission: Provided, That, [the retransmission is basically by analog broadcast repeater, and not over the internet]

[114(d)](2) Statutory Licensing of Certain Transmissions. — The performance of a sound recording publicly by means of a subscription digital audio transmission not exempt under paragraph (1), an eligible nonsubscription transmission, or a transmission not exempt under paragraph (1) that is made by a preexisting satellite digital audio radio service shall be subject to statutory licensing, in accordance with subsection (f) if — (A)(i) the transmission is not part of an interactive service;

(3) Licenses for transmissions by interactive services. — … (C) Notwithstanding the grant of an exclusive or nonexclusive license of the right of public performance under section 106(6), an interactive service may not publicly perform a sound recording unless a license has been granted for the public performance of any copyrighted musical work contained in the sound recording: Provided, That such license to publicly perform the copyrighted musical work may be granted either by a performing rights society representing the copyright owner or by the copyright owner.

Technology and © Enforcement Rio digital MP3 recorder/player Replay TV recording device These and other examples show delicate interplay of (1) business models, (2) technologies, (3) Congress and (4) Courts