Newsflash: Kookaburra damages award case sounds like bad economics

By Assoc. Profs. Beth Webster and Paul Jensen

Yesterday’s decision of Larrikin Music Publishing Pty Ltd v EMI Songs Australia Pty Ltd (No. 2) – [2010] FCA 698 to grant damages to Larrikin Music heralds a new chapter in bad economics.  To understand why, consider the economic rationale for the existence of IP rights.  As a matter of economic principle, IP rights only exist to stimulate investment in creation of new technology, music or books.  IP rights achieve this by protecting against imitation, thereby enabling their owner to sell their works for a higher price than would otherwise be the case.  So, decisions to award damages for breach of IP rights should depend solely on the loss of profit sustained by the IP owner.

In February’s judgment, (click here for a summary) Justice Jacobson ruled that Men at Work’s song ‘Down Under’ had indeed infringed Larrikin’s copyright in the tune ‘Kookaburra Sits in the Old Gum Tree’.  Yesterday’s ruling dealt with the issue of the damages that this infringement caused.  Using our simple economic framework, it is obvious that damages should only be paid if it can be shown that Larrikin suffered an economic loss as a result of the infringement.  The relevant question is the following: if ‘Down Under’ had not been recorded and sold, would Larrikin’s profits from ‘Kookaburra’ be higher?  The answer is clearly “no”.

So, what did Justice Jacobson rule with regard to damages?  Well, he awarded Larrikin damages equal to 5% of profits since 2002.  Given the success of the song, this will probably amount to several hundred thousand dollars.  Justice Jacobson makes it clear in his judgment that these are not damages for copyright infringement.  So far, so good.  Instead, they are damages payable under s82 of the Trade Practices Act 1974 as a result of misrepresentations made by the composers (and recording companies) of ‘Down Under’ to musical royalty collection agencies APRA and AMCOS.

Say that again?  You mean the damages are due because the composers of ‘Down Under’ falsely filled out their APRA form when identifying who wrote the song (and therefore who was entitled to the royalty revenue stream)?  In other words, they failed to recognise the contribution of the composer of ‘Kookaburra’.  But that’s absurd.  The sales of ‘Kookaburra’ were not affected in any way shape or form by the success of ‘Down Under’.  Quite simply, Larrikin should not be due any damages at all.

However, upon a finding of infringement, the parties agreed that damages be determined by taking a percentage of Men at Work’s royalties.  The parties agreed that the percentage be based on the hypothetical bargain that would have been struck between a willing licensor and a willing licensee of the copyright in Kookaburra.  The judge stated that “this approach is in accordance with the principles commonly applied in assessing damages for the infringement of the rights of the owner of an item of intellectual property.”

Once again, this approach illustrates how IP law and IP practitioners operate under a veil of ignorance with regard to the economic rationale of IP rights.  The problem is quite simple: the law typically assumes that IP rights are based in ‘natural rights’.  Viewed through this lens, Larrikin is entitled to capture some of the value created by ‘Down Under’ because it relied on a tune owned by Larrikin.  But this is clearly flawed logic: the only reason copyright exists is to provide sufficient incentive for artists to create new works.

We don’t use ‘natural rights’ logic to determine the rewards for doctors who save lives, civil engineers who bring us clean drinking water, or teachers who teach our children to read and write, so why should we use this rule for the creators of music?  Hopefully, the outrage over this decision will force a major re-think about the way in which we view IP infringement cases.

Beth Webster and Paul Jensen, IPRIA, University of Melbourne

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6 Responses to Newsflash: Kookaburra damages award case sounds like bad economics

  1. Anna says:

    Beth and Paul
    Many thanks for a succinct and excellent summary of the problems with copyright judgements such as these. Unfortunately not enough of the public take note or register with their MPs how disfunctional IP policy and practice has become.

  2. Kevin Ashby says:

    The only reason copyright exists is to encourage artists to create new works? Yes, indeed, provided that they know they will be able to reap the rewards down the line.

    The law needs a mechanism to compensate the owners of the Kookaburra copyright according to what they ought to have earned by licensing Men at Work to use some of their material. Men at Work profited, but their margin should have been a bit lower.

    The point is not that the owners of Kookaburr a lost, the point is that they did not win what they ought to have.

    • Dear Kevin

      Thanks for your comments – we really appreciate the feedback.

      In principle, we agree with your statement that “The only reason copyright exists is to create new works? Indeed, provided they know that they will be able to reap the rewards down the line.” But only up to a point. The basic problem is that there is a fundamental inter-temporal issue to consider in the incentive argument. That is, a dollar of income in 100 years time is worth less than 1 cent today if we discount using an annual real rate of interest of 5%. This is a conservative rate of discount because it assumes there is complete certainty that in 100 years time a particular work will still be sold. If we included doubt about whether sales will still exist in 100 years time, you could be talking about a 1000th of a cent. In essence, this means that the effect of royalties on the incentive to create and invest in creative works drops off rather quickly after about the 20 year mark.

      In addition, the impost on consumers – in terms of freedom to operate for other artists and higher prices – of copyright protected works in 20 years is not discounted and is as large as it is today. When year 20 comes around these costs are not discounted to the people that bear them. Hence we can say that royalties beyond a certain point – say about 20 years – have little effect on motivating artists and their backers, but impose large costs on society.

      Your statement that “…they [Larrikin] did not win what they ought to have” raises another major concern: how much reward is too much? Our conjecture is that rewards shouldn’t be unlimited. Rather, they should be limited to provide just enough incentive to create, ceteris paribus. That is, copyright should be judged by whether or not it brings forth the optimal quantity and quality of new songs, new films and new books etc. In such a framework, it is entirely possible that we are producing too many new titles – that is too many of societies resources are going to these artistic endeavours and too few to other things like education, health and the environment. We should not automatically assume that the arts need more encouragement. Nor should we assume, that if it does need more encouragement, that strengthening copyright is the best policy. There are other ways to encourage and promote artistic works – such as artistic stipends, tax concessions, subsidised studios etc that may be more appropriate. Copyright has hidden costs that do not always make them desirable. Unfortunately, we do not know of any study that has tried to estimate whether we are producing more or less than the optimal level of new titles, but our guess is that we are producing more than we did 20 or 200 years ago.

      Beth and Paul
      http://www.ipria.net/people/director.html
      http://melbourneinstitute.com/people/pjensen/home.html

  3. Neil Foster says:

    Dear Beth and Paul;
    Doctors, engineers and teachers are paid a salary because their work is ongoing. We don’t often pay creative individuals money to hang around until they get an idea. When they do come up with something original, it doesn’t seem unreasonable that they get rewarded for it. The IP system we have arranges that reward by granting them property rights in the thing they have created. If someone has a property right they should be able to pass that right onto their heirs to enjoy (as long as the right lasts), and the right should be able to be bought and sold. That is what property rights are like.
    The upshot is that I respectfully disagree with this comment. Men at Work took something that was subject to a property right and used it without providing compensation. It doesn’t seem wrong to me that they should be required to account for some of the profit they made by using it. (I know that the form of the order was not an “account of profits” for copyright infringement, but it was something in effect quite similar.)
    To argue that no-one should be able to enforce an IP right unless they can show they suffered an economic loss from its infringement seems to me to confuse one possible justification of the IP system, with the actual way the system works. Our IP system does not simply have one justification- it exists for a number of reasons, and recognising the right that people should have to be compensated for their creations is a legitimate role, just as providing economic incentives is another legitimate role.
    “IP rights only exist to stimulate investment in creation of new technology, music or books” is just not a true statement about how IP functions in the legal system, or indeed in popular thought.
    Regards
    Neil

  4. Beth Webster says:

    Dear Neil

    Thanks for your comments.

    Our concern is not with that artists get remunerated for their efforts – they clearly should – but about the appropriate reward for their effort. But if we want a fair reward system, we should think about the problem from a clean slate. Why do we give one group of people access to temporary monopoly rights and not others? Research scientists often get a wage and also have access to monopoly rights if they invent something – depending on the agreement with their employer. Their employers can claim monopoly rights even if they are funded by general taxation. Should then giving teachers, engineers and doctors a wage necessarily exclude them from the monopoly rights over their products too? What if they are self-employed? What about a person who saves another’s life outside their employment, – should they receive a monopoly right? Should artists who receive government stipends not be allowed to claim copyright? We are not so sure the copyright system delivers a reward system that is necessarily fair. The analogy we drew with doctors, engineers, and teachers was meant to tease out the flawed logic associated with the “natural rights” argument associated with IP. The whole of civilisation is built upon an accumulation of ideas and creations. If people had an automatic right to take a percentage of the stream of future benefits from their produce then (a) we would impose huge costs on (future) society – as we would still be paying royalties to the heirs of Isaac Newton, da Vinci, Aristotle and so on, and, (b) the claims on national income would most likely exceed total national income. Hence, we can deduce that the royalty-on-future-benefits model is likely to run into difficulties if universally applied. To say one should reward a person for their effort does not mean that they should have a right to exclude others from the use of what ever they produce.

    Copyright has many flaws as a reward system: it gives zeros rewards to the vast majority of people and enormous rewards to a few. If we wanted to design a fair system for rewarding artists, it would be hard to defend the copyright system (one might prefer a mixed system of grants, free training, stipends, subsidised rooms etc). If believe this very skewed distribution of rewards, why not use it for research scientists too? That is just pay them according to how many inventions they have sucessfully commercialised.

    Which is why the copyright system is NOT advocated as a system of fair rewards but rather as a system to motivate people to create and invest in the costs of creation and transmission.

    Essentially, society has to consider: what is the best business model for generating and transmitting ideas? Given this we need to ask what is the optimal incentive system? Certainly not one that allows for perpetual royalties because income streams in the distant future are discounted and have limited impact on present day incentives (see our response to Kevin above). Certainly not one that provides rewards over and above what we need to give artists an incentive (these are called ‘rents’). Certainly not one that has a significant negative effect on consumers’ ability to enjoy the fruits of the creation as this would be self-defeating – remember the aim of the whole exercise is to maximise consumer satisfaction. And certainly not one that clogs up the whole system for follow-on artists who have to spend time and resources doing freedom-to-operate checks.

    kind regards
    Beth

  5. [...] At first instance, Jacobson J held that the 1979 and the 1981 recordings of ‘Down Under’ (‘the recordings’) infringed copyright in ‘Kookaburra’. However, Larrikin also claimed that EMI had authorised acts of infringement in relation to the reproduction of ‘Down Under’ in other works, including two Qantas advertisements in which ‘Down Under’ was featured. The trial judge held that the Qantas advertisements did not involve the infringement of copyright in ‘Kookaburra’. An order relating to damages was made on 6 July 2010 and discussed in Fortnightly Review. [...]

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