In this edition #23

March 17, 2011

Kimberlee Weatherall provides ‘A few thoughts on iiNet FFC decision’, the recent Federal Court decision dismissing AFACT’s case against iiNet for authorising copyright infringement of BitTorrent using subscribers.

Similarly, in ‘Weapons in the Piracy Wars: COICA and Domain Name Seizures’, Jake Goldenfein looks at examples of more extreme co-opting of ISPs against online infringement, with new prospective US legislation potentially establishing a piracy based internet blacklist.

Finally, in ‘Patent fees as a tax on so-called ‘monopoly rents’: a response’ David Brennan responds to Shaun Larcom’s article in our last edition concerning the role of fees in patent systems, arguing that higher taxing of patentees though fees may undermine incentives provided by the patent system.

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A few thoughts on iiNet FFC decision

March 17, 2011

On 24 February the iiNet decision generated significant buzz in the media, academy and anyone with an interest in cyber-regulation or copyright. Kimberlee Weatherall first posted the article below on her blog LawFont, and we are reposting it here to provide our audience with her expert exposition. As mentioned in Kimberlee’s article, Fortnightly Review author David Brennan also wrote a piece for The Age, and hopefully the conversation between these analyses will generate some excellent discussion and commentary within our community of readers and authors.

A few thoughts on iiNet FFC decision

By Kimberlee Weatherall

By now, all the copyright nerds in the world know the headlines: the Full Federal Court has handed down its decision in the iiNet case; that the appeal was dismissed in a 2:1 decision (Emmett and Nicholas JJ; Jagot J dissenting). Most people also will know that the reasoning is very, very different from the Trial Judge’s decision, and certainly contemplates, in a way that the Trial Judge didn’t, that in different factual circumstances an ISP could be liable for authorising infringement by its BitTorrenting users. The various major law firms have issued their summaries, I refer you there for an overview. Assoc Prof David Brennan from Melbourne Uni has expressed his succinct, and compelling view.

The decision is really long: it half looks like all three judges wrote as if theirs was to be the main decision (with others concurring or dissenting more briefly). A close reading reveals why. Although it is fair to say that the majority judges reach broadly the same conclusion on broadly similar grounds (namely, that the AFACT notices did not contain enough information to require action on the part of iiNet), they conceptualise the facts quite differently, and demonstrate important differences of approach. My early thoughts are below the fold. This one’s for people generally familiar with the case and Australian copyright law though – beginners need to start, at least, with the law firm case notes.

Conceptualising the facts

Emmett J’s judgment reads like a borderline one to me: it’s almost like he came within a hair trigger of finding authorisation. He emphasises iiNet’s ‘contumelious disregard’ for the rights of the copyright owners, suggests that iiNet ‘tacitly approved’ of the infringements, and highlights the facts that appear to have come quite close to constituting authorisation. Ultimately, Emmett J is not satisfied that sufficient information was provided by AFACT to trigger authorisation. Emmett J also seems concerned that iiNet ought not be required to bear the whole cost of any system.

Nicholas J seems to view iiNet’s behaviour as far less egregious: it is Nicholas J, for example, who emphasises that iiNet’s apparent ‘indifference’ could not simply be characterised as wrongful, based as it apparently was on a belief that iiNet was not legally obliged to act. One has the sense, however, that insofar as Nicholas J was concerned that iiNet not be held liable for taking a position on the law that was not entirely judicially unsupported, his Honour would be less sympathetic in a future case, where an ISP would no longer be able to take that attitude in light of the decisions in iiNet. It is Nicholas J who seems most concerned with the possibility that ISPs will be incentivized to suspend or terminate users all too readily to avoid future litigation.

Jagot J, the dissenting judge, roundly condemns iiNet’s attitude. Her Honour emphasises iiNet’s refusals to cooperate, in effect holding iiNet responsible for any results of its failure to cooperate – including the fact that it had insufficient information to be, perhaps, fully confident that infringement was occurring. ‘Be it on iiNet’s head’, as Jagot J would have it.

Authorisation: Reaffirming the existing case law

The three judges affirm a more traditional conception of authorisation in copyright than that we saw in the Trial Judgment. They confirm that Moorhouse’s phrase, stating that to authorise is to ‘sanction, countenance or approve’ infringement is to be read disjunctively – one is sufficient. The Judges also reject the apparent attempt by the Trial Judge to revive the Justice Jacob reasoning in Moorhouse from the first instance decision: rejecting the idea that there needed to be some ‘sense of official approval or favour’ in order to show authorisation.

On the meaning of authorisation, Emmett J’s judgment is the most wide-ranging, in that it adopts, perhaps affirms, much of the language from cases like Cooper in a series of phrases drawn from earlier cases. I really wish judges would not repeat a series of phrases about the law in this decontextualised way. It seems practically designed to give comfort to the prospective plaintiff in an authorisation case: you can always find a phrase that suits.

On the meaning of authorisation, I recommend the judgment of Justice Nicholas, which is I think, the easier judgment to read and understand, having ‘synthesised’ the precedent more.

‘Means of Infringement’
The three judges – implicitly or explicitly – reject Justice Cowdroy’s threshold test. Under Justice Cowdroy’s approach at trial, iiNet did not provide the ‘means of infringement, in the relevant sense used in Moorhouse, in that it did not extend an invitation to the iiNet users to use its facilities to do acts comprised in the copyright of the Copyright Owners’ and consequently did not authorise infringement. In other words, this question of whether the party provided the ‘means of infringement’ operates as a threshold test, without which authorisation will not be found.

Justice Emmett almost seems determined to politely pass over this approach by the Trial Judge like a polite host ignoring the uncouth table manners of an ill-assorted guest. Emmett J notes the reasoning of the Trial Judge, using the mild epithet of ‘unconventional’ to describe the structure of the reasons. But once Emmett J has described the primary judge’s approach, this phrase never appears again in the judgment. Both Justice Nicholas and Justice Jagot more explicitly reject the Trial Judge’s approach: Jagot J more fulsomely.

The crux of the case: knowledge
Both Emmett J and Nicholas J were dissatisfied with the information provided in AFACT’s notices: this finding lies at the heart of their rejection of AFACT’s case on authorisation. More or less, the notices provided by AFACT gave rise to ‘reason to suspect’ infringements on the part of iiNet’s users, but not knowledge of specific acts of infringement sufficient to warrant iiNet acting to suspend or terminate internet accounts.

Emmett J thought that AFACT’s notices would have to have included:

  1. Information in writing of particulars of specific primary acts of infringement of copyright of the Copyright Owners, by use of particular IP Addresses of iiNet customers; and
  2. Unequivocal and cogent evidence of the alleged primary acts of infringement by use of the iiNet service in question; at least information as to the way in which the material supporting the allegations was derived, that was adequate to enable iiNet to verify the accuracy of the allegations.

Justice Jagot takes a very different view here: stating that the AFACT notices ‘contained prima facie credible evidence of widespread and repeated infringements of the appellant’s copyright by iiNet customers and users’, rising above the level of ‘mere unsubstantiated or unreliable allegations’. What is more, if iiNet did not have sufficient information to judge the accuracy of the notices, that was iiNet’s own fault: having refused to engage with AFACT, it could not then plead its own ignorance.

Did iiNet have the ‘power to prevent’ the infringements?
All three judges consider that iiNet had the technical and contractual power to terminate or suspend its services to subscribers on the basis of copyright infringement; this was relevant, albeit not determinative (cf the Trial Judge who seemed to say that a power to suspend or terminate could not be reasonable and so wasn’t really relevant). On this question, again I think Justice Nicholas’ judgment is the more interesting one: his Honour talks about the difference between ‘direct’ powers to prevent infringement (ie, to stop that particular act) and indirect powers (like taking away internet access so they can’t do anything, let alone infringe, online).

The judges also talk about another statutory factor, the ‘relationship with the infringer’, but it’s not that interesting. I never really know what to make of this factor anyway. There was a contractual relationship – so? Really, most of the action is in the next of the statutory factors in authorisation: whether iiNet took reasonable steps to prevent the infringement.

Reasonable steps

All three judges accept that sending warnings to users ought to be considered a reasonable step. None of the judges was wiling to accept that people when notified of copyright infringement would simply ignore the notice: not all would be aware that such activities infringe copyright; not all would be aware they can be detected.

Worryingly for many, I suspect, is the fact that all three judges also contemplate that suspension or termination of internet service is also a reasonable step. In this respect, a really important consideration that the various judges point to is the Safe Harbours: specifically, the provision that requires parties wanting to take advantage of the Safe Harbours to have, and reasonably implement, a policy for the termination of the accounts of repeat infringers in appropriate circumstances. This is evidence, to the judges, that termination is contemplated as a reasonable step.

iiNet’s protestations concerning the expense, difficulty, and complication of having a system for sending warnings and following up with suspension or termination fell on deaf ears of two judges. Justice Emmett, of the three judges, seems the most ready to count this as an issue, noting the ‘difficult judgments’ involved, the number of notices received, the many, many issues of design choice in such a system (see paragraphs 206-207). Perhaps for this reason, Justice Emmett is the most explicit in practically setting out his own version of a graduated response system. The key paragraph here is paragraph 210. It’s kind of too long to quote here, but go have a look. In summary, it says that ‘before it would be reasonable for iiNet to take steps to suspend or terminate a customer’s account’, AFACT would need to send notices providing ‘unequivocal and cogent evidence’, and undertake to reimburse iiNet for its reasonable costs. But most extraordinary is the way that the Judges say that AFACT’s notices should set out a series of specific steps that it requests. According to the Judge, AFACT should request the following steps:

  1. iiNet should inform its customer of the particulars of the allegations of primary infringement involving the use of that customer’s iiNet account
  2. iiNet should invite the customer to indicate whether the service has been used for acts of infringement as alleged;
  3. iiNet should request the customer either to refute the allegations or to give appropriate assurances that there will be no repetition of the acts of infringement;
  4. iiNet should warn the customer that, if no satisfactory response is received within a reasonable time, perhaps 7 days, the iiNet service will be suspended until such time as a reasonable response is received;
  5. iiNet should warn the customer that if there are continued acts of infringement by use of the service, the service will be terminated;
  6. iiNet should terminate the service in the event of further infringements.

OK, strictly, Justice Emmett is not saying that iiNet would have to follow this procedure: it’s what AFACT should request. But the suggestion is strong that this is what Emmett J thinks a reasonable set of steps looks like.

Um, judicial legislation anyone?

It’s kind of extraordinary that his Honour would set out a system in such detail. These weren’t, after all, the facts before the court. It’s also kind of extraordinary that this is his version of reasonable steps, when this set of conditions doesn’t look anything like what has been legislated in other countries, like France, the UK, South Korea, or New Zealand. Justice Emmett’s ‘reasonable steps’, if that is what these are (and as I said, it’s not entirely clear) have none of the procedural protections found in other places – and specifically contemplate termination of Internet service – something the UK wouldn’t even do without a further order from Parliament and which requires independent decision-makers in France, South Korea, and New Zealand. So, like, wow.

Justice Nicholas, on the other hand, is only prepared to say that ‘an ISP should be given considerable latitude when working out the detail of such a system. It is always possible to argue that a system for the issue of warnings and termination could be tougher than it is. But it would be difficult to criticise an ISP on that account if it acted in good faith to devise and implement a system that involved taking such steps against subscribers who the ISP was satisfied had used (or permitted others to use) its facilities for the purpose of committing flagrant acts of copyright infringement’ (at para 750).

Other interesting stuff

There’s so much more, but this post is already too long. Look out for:

  1. The various judges’ views on whether iiNet ‘encouraged’ infringement, and Justice Nicholas’ discussion of iiNet’s alleged ‘indifference’;
  2. The discussion of the Safe Harbours (no judge thought iiNet could use it);
  3. The judges’ struggles to give s 112E some meaning;
  4. The issue of who bears the cost. Emmett J is explicit: AFACT should offer to reimburse. Justice Jagot thinks that this could have been part of a conversation that should have occurred. I didn’t really see much from Nicholas J on this question (but the judgment is long, maybe I’ve missed something).

Oh, and here’s something interesting. You will look in vain for references to much overseas case law or any of the mound of academic writing on the issues involved. If anything, this suggests to me the continuing isolation of the Australian law of authorisation from the law in other jurisdictions. Too close an examination of overseas case law might reveal the differences too starkly? Of course, it would also have made the judgment even longer than it already is. I suppose we should be grateful for small mercies.

Where to from here?

Interesting question. We’ll have to see if there’s going to be an appeal to the High Court (or rather, application for special leave). Failing that, it’s back to the negotiations. Questions of cost (who bears it) are unresolved. It’s not clear to me whether there is enough guidance here to lead to a ready deal, despite Emmett J’s attempts to write a Code of Conduct for the industry. Termination of service is something I can’t imagine the internet industry is all that keen on, but AFACT’s hand to demand more than the mere passing on of warnings may have been strengthened by the frequent references to the reasonableness of termination as a response. So, much to think about. I suppose I should be pleased…

Kimberlee Weatherall is a senior lecturer at the University of Queensland

This article was cross-posted here at LawFont

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Weapons in the Piracy Wars: COICA and Domain Name Seizures

March 17, 2011

By Jake Goldenfein

You may have encountered this image if you recently tried to stream a sporting event online. Domain name seizures in the US occur under civil forfeiture and seizure provisions in the Crimes and Criminal Procedure title of the United States Code. Being territorially restricted, those provisions allow the US Immigration and Customs Enforcement agency (ICE) to distrain websites with a .com, .net or .org suffix.

Recent seizures of websites linking streamed sporting events (conveniently 10 days before the Super Bowl) were the directive of phase 3 of ICE’s Operation ‘In Our Sites,’ which began in June 2010. The mandate of ‘In Our Sites’ goes beyond sporting events however, and has targeted websites connected to counterfeit goods, child pornography and first-run movies. Although the process and propriety of those seizures have been questioned, presently working its way through the US political system is the Combating Online Infringement and Counterfeits Act (COICA) that will provide an expedited process to block domains and extend ICE’s reach to content hosted outside the US.

COICA (S. 3804) would authorise the Attorney General to obtain injunctions in rem against websites ‘dedicated to infringing activities.’ Sites are defined as dedicated to infringing activities if ‘primarily designed’, have ‘no demonstrable commercially significant purpose or use other than,’ or are ‘marketed by its operator,’ as offering copyright infringing goods.

Effectively, COICA creates an internet blacklist with ‘offending’ websites added by Court order. Originally there was a second blacklist controlled by the Attorney General without judicial oversight, however that was jettisoned in the bill’s latest iteration. By obtaining a Federal Court injunction, the Attorney General orders U.S. domain name registrars to stop resolving blacklisted domains, leading users instead to an error message.

For infringing domains outside of the U.S, the bill demands internet service providers block offending foreign addresses. This does not prevent access outside of U.S territory, but rather is aimed at preventing the importation into the US (censoring) of goods and services offered by websites deemed ‘dedicated’ to infringing activities.

Introduced by Democratic Senator Patrick Leahy in September, the bill received unanimous approval by the Senate Judiciary Committee in November 2010 under Leahy’s chair. Not surprisingly three of Leahy’s top five campaign contributors are large media organisations. Yet substantial opposition from various groups including Internet Engineers, Human Rights Groups, the Net Coalition, some Senators, and law professors has been successful in preventing the bill passing a full vote on the Senate floor, leading to another Judiciary Committee hearing on 16 February, which led to discussion of substantial modification, and likely a follow-up hearing.

Arguments against the bill include:

  • Blacklisting of websites by Justice Department officials without sufficient judicial oversight offends due process and threatens legitimate political speech.
  • Definitions within the bill, including ‘facilitating infringement’ and ‘dedicated to infringing activities’ are very broad.
  • Blacklisting for copyright infringement purposes may undermine U.S. secondary liability law as well as existing copyright exceptions, limitations and defences.
  • The censorship process causes entire domains to vanish, not just infringing pages or files.
  • The bill creates precedent for internet censorship, and congress should consider the effect for countries less protective of citizens’ rights of free expression.
  • The extraterritorial reach of the court prevents a full and fair trial with all interested parties present.
  • The bill may affect legitimate digital services such as cyberlockers if the Department of Justice decides that piracy is ‘central’ to their businesses.
  • Blacklisting may apply to sites that discuss and advocate for P2P technology or piracy because they sometimes link tools and information intended for file sharing, despite the otherwise political nature of their speech.
  • Censorship may undermine the stability of the internet by encouraging the use of circumvention measures and rerouting internet traffic away from the U.S.

But perhaps the most compelling arguments are found in the joint letter from 49 legal academics in the U.S. Citing jurisprudence, they contend ‘the bill amounts to a constitutional abridgment of freedom of speech because it directs courts to impose “prior restraints” on speech, which are the most serious and least tolerable infringement of First Amendment rights.’ They argue such cases ‘require a court, before the material is completely removed from circulation to make a final determination that material is unlawful after an adversary hearing.’

Contrary to that requirement, the professors claim ‘the Act permits the issuance of speech-suppressing injunctions without any meaningful opportunity for any party to contest the Attorney General’s allegations of unlawful content’ because of inadequate notice provisions and the capacity to enter injunctions ex parte. Requiring the shut down of entire domains rather than blocking specific content is described in the letter as ‘burning down the house to roast the pig.’

More profound however, is the academics’ claim that the bill’s ‘egregious Constitutional infirmities… will not survive judicial scrutiny’ suggesting its significance ‘is entirely symbolic.’ This would be the first time the US would require internet service providers to block speech because of its content. Enjoining ISPs to police users’ activities is an issue of growing judicial significance, not simply in circumstances like the iiNet case in Australia, but also for a range of future measures, including filtering, censorship and levying, that may require ISP cooperation.

Content industries have sought this law for years, and view the new capabilities as a magic bullet for copyright enforcement, with the MPAA and RIAA extensively lobbying for its passage. Lauding the legislation, the bill’s proponents emphasize the derisory economic consequences affected by infringing rogue sites. Previous MPAA interim boss Bob Pisano defended the bill, claiming targeted sites ‘exist for one purpose only – to make a profit using the internet to distribute the stolen and counterfeited goods and ideas of others,’ and that the ‘economic impact of these activities – millions of lost jobs and dollars – is profound.’ Pisano argues the First Amendment was not intended as a shield for those who steal, irrespective of the means. ‘Theft is theft, whether it occurs in a dark alley or in the ether, and to attempt to distinguish the two is to undermine the most basic tenets of our criminal laws.’

Clearly rhetoric laden, such speech reverts back to the questionable conflation of tangible and intellectual goods, and co-opts morality for its justification without acknowledging the concomitant censorship issues. However, other Hollywood groups have claimed that concerns of unlawful censorship are an ‘absurd misrepresentation of civic rights’.

For organisations like MPAA and RIAA who maintain a controversial program of prosecuting online copyright infringement, the new law would amount to another weapon in the arsenal of content protection. But beyond copyright, the bill highlights emerging issues in digital censorship and jurisdiction by entrenching in U.S law filtering of international content that offends local laws – a dangerous precedent that may expand to other types of speech. Passage of this bill would mark a substantial shift in lawmakers’ willingness to regulate cyberspace and a fortiori against the principle of the Single Global Internet.

Jake Goldenfein is a PhD candidate at the Melbourne Law School

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Patent fees as a tax on so-called ‘monopoly rents’: a response

March 17, 2011

By Assoc. Prof. David Brennan

In his post Shaun Larcom explains the findings of Gaetan de Rassenfosse and Bruno van Pottelsberghe. Their research shows that great variation exists between territories as to patent fees, but that variation does not appear to cause a commensurate impact on patenting activities as between territories. This reveals that demand for patent applications and patent renewals is inelastic (i.e. unresponsive to price change) and the authors observe that this did not mean that patent fees were an ineffective policy tool, but that ‘a change in fees must be sufficiently large to have observable effects’. The question is put by Larcom: what is a socially optimal fee structure? Larcom argues that patent fees could have a taxation role, targeted at ‘the monopoly rents that accrue to patent holders’. For the reasons stated here it is argued that this should only be done if a conscious policy decision has been made to reduce the incentive effects of the patent system.

Deciding whether to have a property system of patents for inventions entails social choices.

The primary social choice is whether or not to institute patent property. Over time it has been largely accepted that temporally limited property rights for inventions confers net social benefit by providing measured incentives to accelerate the rate of technological progress, and to provide those incentives in such a way that they are conditional on full disclosure. The rationale is economic. The promise of being able to appropriate value from market demand for the patented technology per se is intended to have stimulating effects upon conduct likely to yield more technological progress – such as investment in R & D. After the patent term expires, the disclosed technology is absent any property rights.

Another social choice is how to conduct a merit assessment of that which is patentable. It has been long agreed that patents for existing or obvious technology is unjustifiable. Such grants do not stimulate worthwhile progress and restrain existing trade. It is largely accepted that best practice involves assessing the merit of inventions the subject of a patent application, and the written application itself, prior to grant. Such assessments are complex. The exercise involves integrating technologies that are at the edge of human understanding with a body of difficult law. Employing sufficient quality human capital to administer a patent system is expensive. How is a nation’s patent office to be properly funded?

The current IP Australia fee structure to acceptance for a standard patent is between about $1000 and $2000 depending upon the circumstances of the particular application. (For example the acceptance fee of a patent application with more than 20 claims entails $100 for each claim in excess of 20.) The current IP Australia fee scale for standard patent renewal is

5th anniversary $250

6th anniversary $250

7th anniversary $250

8th anniversary $250

9th anniversary $250

10th anniversary $450

11th anniversary $450

12th anniversary $450

13th anniversary $450

14th anniversary $450

15th anniversary $1,020

16th anniversary $1,020

17th anniversary $1,020

18th anniversary $1,020

19th anniversary $1,020

If term extended, $2000 for each anniversary during the period of extension

What should underpin the setting of such fees? In my view it should simply be to fund the patent system by a user-pays principle.

Because a patent office is expensive, it needs to be funded. While inventors can use the patent system, they do not need to. For example sheer secrecy and/or merely first-to-market advantage provide alternative means to confer comparative advantage upon inventors. If an entity relies on patent incentives and avails itself of the patent system, it is apt that the entity pays for the system. Patentees derive a clear private benefit from the system. But the total fee take should not be more than that required to properly fund the patent office.

What is the extent of such use in any given case? Given that the direct users of the patent system are mostly patentees, the extent of any use must be measured by degree of reliance on the patent system. The logic underpinning the current fee structure reflects this thinking. Most obviously, the more patents applied for and renewed, the greater will be the fees payable by a user. But extent of use can be differentiated, and usage pricing accordingly discriminated as between individual usages. For example X and Y might each apply for and be granted a respective patent. X has invented an improved device for which there is no market demand; X might maintain the patent for short time and then surrender it. Y has invented an improved pharmaceutical which is heavily demanded; Y might obtain a term extension of the patent. X and Y are each required to pay quite different total fees to IP Australia in relation to their patents. This is because while each has used the patent system in relation to their respective patents, the extent of patent system use of X and Y is very different. On user-pays principles, Y should make a bigger contribution to the running of the patent office because the extent of its reliance on the system is higher than X.

There may be very good arguments for revising overall fee levels to ensure that a country’s patent office is properly resourced and employing sufficient numbers of talented people. However it seems that the basic features of total fees being no more than that amount necessary to fund such a system, and fee pricing set on the basis of a user-pay principles, are sound. In contrast Larcom’s idea is that patent fees should also be a tool to tax (so-called) ‘monopoly rents’ accruing to patentees. This seems less desirable unless an informed policy decision has been made to reduce the incentive effects of the patent system.

Underlying Larcom’s approach is the philosophical view that ‘optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders’. A person owning a patent is not a monopolist any more than is a person owning a block of land – indeed the land owner has stronger property rights than a patentee. Once the basic social choice is made to have a patent system, its justification is the incentive effects of the promise of patent property. Property, while central to the operation of many markets, is a concept defined in law. The defining attribute of property is the owner’s entitlement to exclude the world from carrying out certain activities, and to secure the assistance of the law in carrying out a decision to exclude. Exclusive rights therefore require most third parties desirous of lawfully exploiting the patent resource to bargain with the owner. In that licensing bargain, the owner is able to appropriate to itself some of the value accruing from a third party licensee’s exploitation. Value will be appropriated by the patent resource owner which is vastly in excess of the marginal cost to it – typically zero – of providing of the patent resource. This is an inherent feature of patent incentives in the first place. The promise of appropriating some third-party value from the licensing of an owned patent resource with a zero marginal cost of provision is the very incentive which justifies the patent system.

Therefore if (as Larcom says) ‘optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders’, and if that is to be done (as Larcom suggests) by changing the law so as to tax through patent office fees that appropriated value, such taxation must reduce the incentive effects of the system.

It is far from clear that current patent incentives are excessive and require such a change. Whether or not existing incentives are excessive such as to create ‘monopoly rents’ and misallocations of resources is highly contestable. Is there evidence, for example, of over-investment in R & D caused by such excessive incentives? This uncertainty is especially so given that the promise of the patent system enables a prospective patentee to invest in different avenues, knowing that one commercially successful patented technology can offset expenditures in avenues that prove unsuccessful. It is equally unclear that there are strong policy justifications that patentees’ revenues should be subjected to higher taxes than others engaged in industry – whether those industries are intellectual property dependant or not. While the patent system should be self-funding through fees set under sensible user-pay principles, taxing patentees more highly than others in industry should not be considered unless an informed policy decision has been made to reduce current patent incentives.

David Brennan is an Associate Professor at the Melbourne Law School

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In this edition # 22…

March 4, 2011

In “Too Many Academics? The Experience of Privacy Law Reform”, Professor Megan Richardson outlines some of the recent proposals for privacy law reform, and frames the lack of progress and uniformity as a result of the individualistic nature of academic work.

Shaun Larcom reviews “The role of fees in Patent Systems: Theory and Evidence by Gaétan de Rassenfosse and Bruno van Pottelsberghe de la Potterie”, a new paper analysing the historical level of patent fees and their consequences for innovation, as well as their use as a policy tool.

Finally, in “Collective Management of Copyright: Issues Emerging from the Google Books Program”, Jake Goldenfein reports on the recent Columbia Law School symposium on collective management of copyright in New York, and provides a brief history of the Google Books project.

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Too Many Academics? The Experience of Privacy Law Reform

March 4, 2011

By Professor Megan Richardson

Are there too many academics involved in law reform? There are obvious benefits to academic input (speaking for law academics generally). We have expertise, excellent critical facilities and an enthusiasm for law reform. I do not know a single law academic who does not want to make things better in their chosen field. We often dwell on the need for improvements in the law in our articles, chapters and books. But we can also be opinionated and individualistic. And since our academic reputation is built around personal influence rather than achieving group success we find it hard to give in when it comes to a disputed position of principle.

Take privacy law reform for instance. When the Australian Law Reform Commission compiled a group of academics, of which I was one, to define ‘privacy’ for purposes of its law reform project in 2006, we spent a day in a room arguing about the meaning of privacy and since we could not agree on any coherent and constructive concept for law reform purposes defaulted to the most anodyne definition we could all agree on. Since then, each of the Australian, New South Wales and Victorian Law Reform Commissions has reported on privacy. Each had much support and involvement from academics. And each has come up with a different set of proposals for a privacy cause of action.

Although it is widely agreed that it would be best to have a single set of privacy standards that apply uniformly through all of the Australian states and territories, our law reform bodies are unable apparently to come to a common position on what those standards should be. The Australian Law Reform Commission in its 2008 report For Your Information only wants invasions of privacy that would be highly offensive to the reasonable person of ordinary sensibilities to be the subject of a statutory cause of action.

This is in addition to a general requirement that the claimant has a reasonable expectation of privacy. The New South Wales Commission in its 2009 Invasion of Privacy report would dispense with the highly offensive threshold and rest its standard for a statutory cause of action on violation of a reasonable expectation of privacy.

The Victorian Commission in its 2010 Report on Surveillance in Public Places would reinstate a high offensiveness threshold and also specify two privacy causes of action as (1) public disclosure of private information and (2) intrusion on seclusion (the latter read broadly here to encompass covert personally intrusive conduct such as upskirt filming in public places). In addition, it would add a specific defence of public interest. By contrast, the Australian and New South Wales Commissions take the view that the public interest in the defendant’s actions can be adequately accommodated in the general standards.

All these recommendations are interesting to have on the table but the practical question is will they produce useful legal change? Or will we end up in the position where for lack of agreement on what should be done nothing is done?

It is already very clear that there will be opposition from parts of the media to any proposals for privacy law reform, with some quite persuasive arguments being mounted – for instance, that we have got along fine without legislative privacy protection in the past; that the common law provides or will provide sufficient protection where needed including through the equitable action for breach of confidence which has been recognised by courts as giving considerable protection against the misuse of private information; that Australian media are generally self-restrained; and that there are large segments of the population who don’t care much for privacy anyway.

Each of these arguments can be countered: for instance, that the common law’s protection of privacy while good suffers from some uncertainty and lack of transparency; that although the media may be generally self-restrained there have been cases involving media defendants and anyway controlling the media is not the only concern; that although individual preferences for privacy may vary individuals may still legitimately desire a degree of individual control on matters essentially going to personal identity. But until there is a clear consensus on the shape of privacy law reform, I suspect that for Australian legislators it will be all too easy to stick with the devil we know.

For my part, although I was a member of the New South Wales advisory group and involved in its proposals, I like the way the Victorian proposals provide for an explicit balancing between privacy and free speech since I think media and other defendants should have the opportunity to justify their actions as in the public interest.

If supporting a particular claim of privacy is clearly against the public interest (and I am talking about the public interest in John Stuart Mill’s sense of genuine public benefit or avoidance of harm and not simply the satisfaction of public curiosity), why should our laws and legal institutions support it?

On the other hand, I do not support the Australian and Victorian recommendation for a threshold of high offensiveness to the reasonable person. I fear this would be an excuse for some defendants to seek to dismiss genuinely felt claims of privacy as trivial – so avoiding the need to defend their actions as serving the public interest under the public interest defence.

In short, I prefer the New South Wales proposal for reasonable expectation of privacy as the threshold but followed up with a public interest defence to a prima facie privacy invasion. Moreover, I also prefer a generic privacy cause of action to more specifically delineated ones that may not capture every instance of privacy invasion as experienced down the line. ‘Seclusion’, for instance, is a potentially limiting concept no matter how broadly some may seek to construe it. And I cannot understand why overt surveillance should be treated more leniently than covert surveillance. I could go on … But, by now, in true academic fashion I am drifting down the path of fashioning yet another set of proposals for privacy law reform.

Perhaps if Australia was a less populous, less diverse and less argumentative society we would solve the problem of multiple opinions from multiple academics by having only a handful of academics who can basically agree involved in law reform functions in a given area. That’s what happens in New Zealand. For instance, when the New Zealand Law Commission undertook the task of reporting on privacy law reform it established its own ‘academic reference committee’. Yet this did not prevent it coming up with a single set of proposals (to let the common law continue to develop its own privacy tort/s, as already indicated by the courts) in its 2010 report on Invasion of Privacy. But Australia is not New Zealand and it seems we cannot avoid having continuing discussion and debate on issues to do with privacy law reform, especially when academics are involved.

Megan Richardson is a Professor of Law at The University of Melbourne.

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Review Article: The role of fees in Patent Systems: Theory and Evidence by Gaétan de Rassenfosse and Bruno van Pottelsberghe de la Potterie

March 4, 2011

By Shaun Larcom

In many countries, including the United States, patent filings have soared, and there are severe backlogs.  Also, there are questions being raised over the quality of incoming patent applications.  Within this context Gaétan de Rassenfosse and Bruno van Pottelsberghe look at patent fees and how they can be used as a policy tool in a recent working paper published by the Centre for Economic Policy Research.  Their work looks at how the magnitude of fees has changed over the last couple of centuries in the United States, how fees vary considerably between jurisdictions, how fee changes affect the number of applications, and finally what an ‘optimal’ fee might look like.  The authors note that patent fees are generally applicant friendly and priced with administrative cost recovery or international harmonisation in mind.

We learn that the first U.S. Patent Act of 1790 set fees of around $5 per application, which was intentionally low, to simply cover the cost of issue.  However, three years later the fee was increased to $30 to make it comparable to European systems, and presumably well above administrative cost recovery.  After this, while fees in the United States increased in nominal terms, they stayed much the same once adjusted for general price inflation until the 1960s at around $600.  In this decade they increased significantly and since then have broadly stayed the same, once adjusted for general price inflation and now stand at around $2500.

The authors argue, however, that this presents a misleading picture.  They consider that a better measure of the relative price of fees is one that is adjusted for increases in wealth, or increased potential earnings from patents.  When the fee is deflated using GDP per capita, which accounts for increases in total income, rather than just price increases, patent fees in the United States are at an all time low and are approximately one tenth of 1800 level (see chart below).  As we have become much wealthier, fees as a proportion of total income that can be expected from an average patent is the lowest it has ever been.

Evolution of United States application fees adjusted for income: 1790-2005

Source: de Rassenfosse and Bruno van Pottelsberghe 2010, p6.

The second thing we learn from their work is that fees vary considerably across nations.  To take the two extremes, total patent fees are more than five times more expensive in Japan than in Switzerland.  However, the authors look deeper at cross-country comparisons.  They point out that these costs need to be weighted for market size, as patent protection in a large economy can be more cost effective than in a small economy even though fees might be higher.  For instance, even though Finland has similar fees to the United States the Finish market is more expensive to protect in relative terms as its market is many times smaller than the United States.  Once they account for market fee costs to market size, a very different picture emerges.  China and Japan, two of the countries with the highest nominal fees are among the cheapest on per capita basis, and the Nordic countries are among the most expensive.  They also find that the European market is up to 13 times more expensive to cover compared to the United States even after accounting for the cost savings brought about by London Agreement, which reduced the translation requirements for patent validation procedures in key European countries.

The authors also look into how fees may affect the number of patent applications. Surveying various studies, including their own, that look at the effect of fee increases or decreases on patent applications.  While the results vary, changes in fees seem to have a small effect on patent applications, which is not surprising as the fee is likely to be a small component in overall application costs.  In their own work, which uses data for 26 years from the European Patent Office, Japanese Patent Office, and United States Patent and Trademark Office they estimates a long-term elasticity fluctuating around -0.30.  These results suggest that a 10 per cent increase in fees should lead to a 3 per cent fall in patent applications over time. The authors point out that because an increase in fees lowers demand by a smaller relative amount than the increase in revenue, higher fees would actually increase the patent office’s income.

Given that patent offices could easily increase their revenues by charging higher fees suggests that governments are IP friendly and see the benefits generated by the monopoly power of a patent as greater than the costs it imposes on consumers.  Alternatively, they may not have thought of using patent fees as a policy tool.  The authors argue that issues associated with the applicant’s behaviour and welfare issues are rarely considered.  After surveying the literature, they also find that work by economists has focused on the optimal length and breadth of patents, and studies on the optimal fee policy are scarce.

It is well understood that patents have the potential to generate high levels of R & D in new technologies that may benefit not only the holder but society as a whole.  However, we also know that these benefits are not without cost, as patents also explicitly generate monopoly power which can see high prices and other detrimental effects that results in some consumers unable to buy or use the new technology.  With this in mind, the authors survey the relevant economic literature.  Gans et al (2004) suggests the socially optimal level fee structure is initially low, but that renewal fees are as high as possible such that the inventor would be willing to undertake the inventive activity in the first place.  Others, such as Baudry and Dumont (2009) suggest initially low patent fees but a sharp increase in a final fee around year 14.  Such fee structures are aimed at inducing the necessary investment while minimising the social costs of a patent.  That is, high renewal fees may have the ability to avoid excessively long patents from a social perspective.

From an economic point of view the optimal innovation policy would aim to ensure that new technologies are developed but that costs associated with monopoly power are minimised.  We know how to achieve this, at least in theory.  Optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders.  In economics, the term rent has a specific meaning, and can be defined as the difference between the price someone is willing to receive to conduct an activity versus what they actually receive.  For instance, a mining company would be willing to invest in a new mine at a certain ore price, if this price doubles, the increase in profit brought about by the price rise is rent.  The economic argument goes that even if all this rent is taxed, the mining company would still invest in the new mine and make profits, but that the risk adjusted profits would be no greater than if the capital was employed elsewhere.  While estimating economic rent is not easy, it is possible.  The Australian government has been calculating and taxing economic rent generated by offshore petroleum producers for decades.

The work by de Rassenfosse and van Pottelsberghe puts patent fees into a historical, international and economic perspective.  We learn that patent fees as a proportion of potential income generated is at an all time low.  From their survey of the literature we also find that patent fees have the potential to be an important policy tool for innovation policy, but that up until recently this has been ignored.  Indeed, fees could be used as a tool to tax economic rents generated by patents, or to reduce the life of a patent, while still encouraging investment in R & D.

Gaétan de Rassenfosse and Bruno van Pottelsberghe de la Potterie, The Role of Fees in Patent Systems: Theory and Evidence, June 2010, Centre for Economic Policy Research Discussion Paper Series No. 7879.

Shaun Larcom is a PhD candidate in law at the University College London’s Centre for Law and Economics

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Collective Management of Copyright: Issues Emerging from the Google Books Program

March 4, 2011

By Jake Goldenfein

February 18th 2011 marks one year since the Amended Google Books Settlement (AGBS) fairness hearing, with Judge Denny Chin yet to issue a ruling. Though the Google Book Search program cannot be implemented without Judge Chin’s approval, both academy and industry are prodigiously analysing its potential ramifications. Establishing a collective management organisation (CMO) called the Book Rights Registry is one of the AGBS’s more provocative features. Very simply, the Book Rights Registry would collect and distribute revenues from the Google Books program to the rightsholders of digitised texts. As the specific issues generated by the AGBS fall to redoubled investigation, so do their corollaries for the institution of copyright. Accordingly, on January 28th 2011, the Kernochan Centre at Columbia University Law School in New York held its annual symposium on CMOs and their role in new licensing regimes. By way of introduction, June Besek, Director of the Kernochan Centre, noted the AGBS was one of the two fundamental reasons why CMOs are receiving more attention (the other being that collective management is a lesser institution in the US than the rest of the world), making the symposium extremely timely.

Google’s inclusion of collective management in the AGBS has reinvigorated the analysis of CMOs, as collective management may play a part in the AGBS’ controversial rights clearing process. To briefly summarise – Google began digitising the collections of major US university libraries, making available snippets of text for search engine enquiries. The US Authors Guild and Association of American Publishers brought a class action lawsuit against Google, claiming copyright infringement on behalf of rightsholders of the texts scanned and digitised. Google originally asserted a fair use defence based on the limited quantity of text displayed as search results, however the parties eventually settled, authorising Google to engage in activities more expansive than those inducing the original action. Google would be permitted to make available full, digitised texts on private and institutional bases, with revenues distributed to rightsholders through the Book Rights Registry. Controversially, the settlement used the ‘opt-out’ mechanism of class-action procedure to subvert the traditional requirement of permission from rightsholders. This clever piece of litigation strategy may enable Google to digitise and commercialise (actions within the rights reserved by copyright) the legacy of western publishing without undergoing the otherwise impossible task of clearing rights. Remarkably, this inversion of the default copyright position for a massive canon of information is achieved through private (settlement) action rather than legislative reform.

Many are familiar with the function of CMOs, such as APRIA in Australia, who license music performance rights from its repertory to users of all kinds. For example, if you operate a bar, you pay a fee to APRIA to lawfully play music to the public. The CMO determines the fee, then distributes revenues to rightsholders based on its usage data. While APRIA has its equivalent in the US, CMOs in other categories of rights are far less prolific. Perhaps this paucity is linked to the poisonous connotations of the term ‘collective’ amidst an American environment of strict economic rationality. Indeed the keynote speaker at the conference, Daniel Gervais, argued a purely economic approach to collective rights management makes those agencies’ role less compelling. He argued, in Europe comparatively, collective management is considered a preferred system rather than a necessary evil.

Gervais highlighted some central features of collective management including the lack of excludability. Any user may access any work within the CMO repertoire provided they pay the licensing fee. This reduces transaction costs, and highlights how, while industry actors often have a program of saying ‘no’, CMOs generally say ‘yes’. In this sense, CMOs may facilitate movement away from the permission culture that accentuates the conflicts of copyright in the internet age.

Schott Hemphill, an anti-trust and IP professor at Columbia Law School, discussed the competition issues regarding collective management – generally, and in reference to the AGBS. He highlighted the fundamental concern emanating from the horizontal relationship amongst rightsholders that enables setting higher licensing prices than if rightsholders were acting individually. The original Google Books settlement entitled the CMO to establish a profit maximising price. Of course, this smacks of cartelisation. However, the amended agreement clarified that the pricing algorithm enables individuals to price their works severally. Orphan works issues also emerge in an anti-trust analysis of the AGBS, with the US Justice Department contending that later entrants to the ‘ebook’ market will struggle to replicate access to orphan texts as those rightsholders (by definition) cannot opt-in. Naturally, within the massive envelope of materials digitised by Google, many rightsholders are not identified or located. By requiring absent authors to ‘opt-out’, the settlement grants Google a de facto monopoly over those works. However, Hemphill remarked Google’s substantial risks in commencing digitisation would increase access to orphan works from effectively zero, thereby obviating anti-trust liability because the cost of the product is not increased. Apart from contending the anti-trust complaint is not made out, Hemphill also declared problematic the inclusion of competition issues in Judge Chin’s fairness determination as Chin’s mandate considers legitimacy for settlement class-members only, not the public at large.

As a CMO, the Book Rights Registry utilises extended collective licensing (ECL) machinery. ECL operates by extending the relationship between rightsholders and CMOs, by virtue of law, to all individuals within that class of rightsholder. Consequently, as pointed out by Alain Strowel from the Facultés Universitaires Saint-Louis in Brussels, this model has vast utility in licensing mass digitisation projects (and orphan works). Extended collective licences are already legislatively prescribed in Europe for cable television transmissions and other communications, while Nordic ECL law has omnibus provisions facilitating application to all categories of rights (including those necessary for the Norwegian National Digital Library). Uniquely to the AGBS, the legal extension to ‘outsiders’ is by virtue of private law, not legislation, and the benefits flow to only one user – Google.

Berkeley Law School professor Pamela Samuelson objected to the AGBS for precisely those reasons, stating her preference that other parties also have access to the mass digitisation. She argued for legislation establishing a CMO with extended collective licensing of orphan works and out of print books only (although she cites preference for the limited liability model of the proposed US orphan works legislation). Rather than vesting this resource in a private company like Google, Samuelson endorses creating a national Digital Public Library along the lines of the Europeana project.

Finally, the last speaker at the Symposium, Séverine Dusollier from the University of Namur succinctly highlighted the spectrum of licensing options from individual management of rights to compulsory licensing, and canvassed the various legislative proposals including levies on internet use and devices, and commandeering ISPs as collection agencies, licensors and enforcers.

The collective licensing options discussed at the conference have been subject to varying amounts of analysis and implementation. Clearly, the importance of developing adequate and appropriate licensing regimes is not escaping academics or policy makers, and the quantity and complexity of those options is only expanding. However, convincing established content industries continues to suffer for their preference of Digital Rights Management technologies over licensing innovation. For that reason, many eagerly await Judge Chin’s determination. Those opposed to the AGBS often cite Google’s ‘end-run’ around copyright law and the danger in privatising of such a phenomenal resource. However, considering US Congress’ inability to even pass necessary orphan works legislation, it is questionable whether the US Government has the political, let alone technical means to bring such a valuable public asset into fruition. In addition, recent US copyright reform focuses predominantly on term extension and fiercer enforcement, leading some to prefer Google’s vision of copyright to that of the US Government. No doubt whether or not the AGBS is approved, the concept will remain a substantial influence on the progress of digital licensing in times to come.

Video of the symposium is available on the Kernochan Centre’s website here.

Jake Goldenfein is a PhD candidate in Law at the University of Melbourne

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