By Robert S. Schwartz and Mike Godwin

Also available in PDF and Word DOC formats.

By Robert S. Schwartz and Mike Godwin¹

Also available in PDF and Word DOC formats.

Most commentators on the future of the 1984 Betamax² holding — that secondary liability may be avoided if a staple product has a potential "substantial" (or, "commercially significant") noninfringing use — have predicted that no matter what the Supreme Court holds in the pending Grokster case, Congress is likely to take this subject up (or at least be asked to do so) once the Court rules. Hence, it is useful to look at some of the expert policy prescriptions that have been offered thus far, and would likely be offered to the Congress no matter what the Court decides.

Two sets of prescriptions from groups of prominent professors are examined herein - the "Menell" brief, submitted by copyright law authorities,³ and the "Arrow" brief, submitted by prominent law-and-economics professors.⁴ Despite the authors' impeccable credentials, each work proceeds from flawed premises and ends in proposed solutions that would prove either unworkable or disastrous in practice. This reflects the challenging nature of the issue: In late September, 2004, Senators Hatch and Leahy convened an intense round of negotiations among experienced practitioners representing private sector interests, supported by consultation with technologists, on the same subject matter. They also failed to arrive at a generally acceptable solution.⁵

The "Menell" prescription is based on two premises that do not withstand examination. The first premise is that that entirely separate analytical doctrines, "patent" and "copyright," can be managed without regard to each other in the context of modern digital products, and that innovative products should be viewed entirely through "copyright" doctrine for purposes of secondary liability. The second premise is that the Congress, since the Betamax decision, has in fact been moving toward a "copyright" regime so as to change the context of, and necessity for, the Supreme Court's earlier formulation, which was heavily influenced by "patent" doctrine.

The "Arrow" brief apparently shares the first premise, plus others - (1) that economic analysis offers only the policy choices of imposing all obligations on technology providers or doing nothing; (2) that a general rule of economic policy can and should be based only on the example of "peer-to-peer" technologies; and (3) even within such a narrow analytical framework, there actually exists a generally accepted definition of what a "P2P" technology is and will be, today and tomorrow.

A legislative regime based on either analytical framework would upset the post-Betamax foundation for innovation, and would undermine Congress's post-Betamax, non-copyright, parallel regime aimed at avoiding both copyright litigation and judicial choosing of technological winners and losers. The post-Betamax regime of license, legislation and regulation, though far from perfect, has for the most part succeeded. Any legislation aimed at implementing these experts' constructs would be flawed, incomplete, and at odds with the direction in which the private sector, the Congress, and regulatory agencies have been proceeding since 1992.

Menell et al. Paint A Copyright Regime That The Congress Has Not Enacted And The Courts Have Not Imposed

Menell et al. state two main premises at the outset:

1. "Whereas patent law seeks to promote technological innovation and evolved a staple article of commerce doctrine primarily out of concern for unduly expanding patent scope, copyright law seeks to promote cultural and social progress, manifesting a more cautious stance toward technological dissemination, particularly where a technology threatens widespread piracy of expressive works."
2. "Furthermore, amendments to the Copyright Act since the Sony decision demonstrate that Congress does not believe that dual-use technology - i.e., technology that is capable of both infringing and substantial non-infringing uses - should be treated as inviolate under copyright law. Rather, Congress has shown that it sees a need to balance the efficacy of the copyright system for promoting creative expression against social interests in technological innovation and consumer autonomy."

Neither bears scrutiny.

Artificial Delineation of 'Patent' and 'Copyright' Objectives For Policy Purposes

The language quoted above seems to assume that the products subject to each exist in separate universes and separate marketplaces and are sold to separate consumers. This artifice allows the authors to dismiss, airily, the Supreme Court's insight that expanded secondary copyright remedies would necessarily impinge on the rights of technology innovators. In the actual marketplace, the objectives of copyright and patent law "must need coalesce."⁵

Menell et al. sidestep this juncture through another artifice: an assumption that the Betamax itself had primarily noninfringing uses under any and all possible constructions of the facts - even those of the dissent.⁷ This ignores the contemporary opinion of four Supreme Court Justices, who disagreed that even time shifting, alone should be considered a fair use:

It is thus apparent from the record and from the findings of the District Court that time-shifting does have a substantial adverse effect upon the "potential market for" the Studios' copyrighted works. Accordingly, even under the formulation of the fair use doctrine advanced by Sony, time-shifting cannot be deemed a fair use. *** There is no indication that the fair use doctrine has any application for purely personal consumption on the scale involved in this case, and the Court's application of it here deprives fair use of the major cohesive force that has guided evolution of the doctrine in the past.⁸

In fact, after observing that the patent and copyright laws "have not developed in a parallel fashion," Justice Blackmun recognized that "many of the concerns underlying the 'staple article of commerce' doctrine are present in copyright law as well." He went on to say, "I therefore conclude that if a significant portion of the product's use is noninfringing, the manufacturers and sellers cannot be held contributorily liable for the product's infringing uses." (464 U.S. at 492, emphasis in original). He would have remanded the case, then, primarily because he believed it was important to resolve the factual issue that Menell et al. now argue played no role in the decision (464 U.S. at 492 - 493, note omitted):

The proportion of VTR recording that is infringing is ultimately a question of fact, and the District Court specifically declined to make findings on the 'percentage of legal versus illegal home-use recording.' 480 F.Supp., at 468. In light of my view of the law, resolution of this factual question is essential. I therefore would remand the case for further consideration of this by the District Court.

Thus, Menell et al. dismiss and discount the novelty and severity of the issue that both the majority and the dissent acknowledged that they faced in Betamax. This dismissal allows them similarly to dismiss the fact that the Supreme Court in 1984 was facing a serious collision of the patented "technology" world and the copyrighted "culture" world - a dilemma as significant as any occurring today, one that contributed to the Court's unusual request for the case to be re-argued. It is plainly insufficient, then, to dismiss the Court's failure to adopt their own view of the 1976 Copyright Act merely as "surprising."

The indictment of the Betamax doctrine starts with the observation:

[I]n patent law, technological innovation is the end to which the system is directed. Patent claims determine the limits of the patent reward and the law seeks to ensure that patentees do not control more than they invented and rightfully claim. *** By contrast, in copyright law, technology serves as a means to the end of promoting creation and dissemination of works of authorship - art, music, literature, film, and other expressive works. Technology provides the platforms for instantiation, reproduction, and distribution on which creative expression flourishes and commerce occurs.

The utility of this distinction breaks down with the very first example cited by Justice Stevens in the Betamax opinion, as the Court grappled with the collision of technology and copyright regimes, at 430-431:

From its beginning, the law of copyright has developed in response to significant changes in technology. Indeed, it was the invention of a new form of copying equipment — the printing press — that gave rise to the original need for copyright protection. Repeatedly, as new developments have occurred in this country, it has been the Congress that has fashioned the new rules that new technology made necessary. Thus, long before the enactment of the Copyright Act of 1909, 35 Stat. 1075, it was settled that the protection given to copyrights is wholly statutory. Wheaton v. Peters, 8 Pet. 591, 661-662 (1834). The remedies for infringement "are only those prescribed by Congress." Thompson v. Hubbard, 131 U.S. 123, 151 (1889).⁹

The discussions quoted above show that both the majority and dissenting opinions thoroughly considered the patent / copyright interface, and though differing in important respects, neither was willing to consider these to be unrelated regimes for purposes of secondary liability. It is the Menell suggestion that is truly novel and out of step with jurisprudence.

The Menell brief, like Justice Blackmun's dissent, traces the evolution of the staple article of commerce doctrine back to patent misuse cases in which patentees sought to control the use of staple articles that were touched on by their inventions. It then attacks the 1984 patent / copyright analogy - accepted in principle by both the majority and the dissent — with the observation that "[w]hen the sale of a 'staple article of commerce' contributes to infringement of patented technology by third parties, the effects are limited to a single patent or perhaps a cluster of no more than a handful of patents." It ignores, however, the necessary corollary: The universe of potential monopolists who might acquire domain over staple products is limited to the same small group of particular patent claims that expire within two decades, whereas the list of potential copyright claimants for statutory damages and injunctive relief against a staple article is nearly infinite in both number and duration.¹⁰ This potential is amplified if one agrees with Justice Blackmun (at 462) that "there can be no question that under the Act the making of even a single unauthorized copy is prohibited."

A massive threat, therefore, both to innovation and to accustomed consumer practices, inheres in the policy prescription with which Menell et al. (p. 13) (and the Arrow et al., p. 6) would replace the Staple Article of Commerce Doctrine, particularly if this is accomplished via legislation, which would put any ameliorating doctrine beyond the reach of courts:

Thus, when a court enjoins a factory that spews noxious chemicals under nuisance or statutory environmental law, it would be misleading to characterize such a result as giving pollution victims "exclusive rights" over the factory's technology. A more apt characterization would be that society does not believe that the activity should be permitted in its current form. Such a perspective would not necessarily mean that the factory should be shut down permanently. But it might mean that it would have to install filters to limit the adverse effects on neighbors.

The Arrow et al. example (liability of delivery vans) is even more egregious (emphasis supplied):

If accidents are unavoidable, the delivery price will rise and the frequency of deliveries will fall, which is exactly what should happen given this unavoidable harm. Note that the purpose of liability here is not to encourage specific precautions such as more careful screening of delivery drivers, but instead to influence how often the harmful activity in question takes place.

The suggestion in each case is that the suppression of entire categories of "dual use" technologies is a worthy goal — but the fact that such suppression could be triggered by a complaint from virtually any person, anywhere, is not discussed. Nor is any metric suggested whereby - to take the Arrow et al. example - it can be determined that suppressing deliveries would run afoul of the Betamax majority's concern about "block[ing] the wheels of commerce." Nor does either prescription address how the prospect of copyright's massive statutory damages, even for a single infringement, could so chill commerce that no "deliveries" would occur at all.

Purported Congressional Copyright Regime Since Betamax

The justification for the new proposed policy — that Congressional enactments after the Betamax decision established a regime of "copyright" rather than "patent" doctrine that punishes products despite substantial noninfringing uses — is simply at odds with reality.

The Audio Home Recording Act Was Not A Copyright Enforcement Measure; It Was Aimed At Avoiding Rather Than Enabling Litigation

The Menell brief proves too much when it notes (p. 17) that —

Unregulated digital recording devices clearly have non-infringing uses - such as making second generation copies of public domain works or authorized works - yet Congress saw the balancing of copyright, consumer, and technological innovation interests as the appropriate solution.

If the Audio Home Recording Act (AHRA) had in fact been an elaboration of copyright liability, Congress would not have engaged in such a "rough justice" balancing - which also included, in Section 1008, a complete exemption from copyright suit for the manufacture and distribution of any analog recorder or recording medium, even though no technical restrictions or levies were put on such devices or media by the AHRA.¹¹

The AHRA also, in §§1002(a)(3) and 1002 (b), outlined a role for the Secretary of Commerce in, respectively, certifying versions of the Serial Copy Management System, and in verifying compliance with technical standards. In addition, the AHRA provides in § 1009 for non-copyright civil remedies and not for any criminal remedies, and in § 1010 provides for arbitration of disputes with respect to conformance of products or the basis for royalty payments.

Clearly, the AHRA was proposed, introduced, and passed not to set new rules for copyright litigation, but as part of a private sector compromise presented to the Congress in order to avoid such litigation. The report of the Senate Judiciary Committee makes this clear:

The prospect of any compromise seemed unlikely on July 9, 1990, when songwriters and music publishers filed a lawsuit against Sony Corporation claiming that unauthorized home taping on DAT recorders would displace record sales, costing the plaintiffs the royalties to which they were entitled under United States copyright law. The plaintiffs sought a ban on the import on Sony DAT recorders and blank cassettes on the grounds of contributory copyright infringement.

However, in June 1991, a historic compromise was reached by all of the parties to the audio home taping dispute. The suit against Sony was subsequently dropped. The compromise was incorporated into a legislative proposal and introduced in the Senate and the House.

On August 1, 1991, S. 1623, the Audio Home Recording Act was introduced by Senator DeConcini. *** S. 1623 is a direct response to the needs of the music industry, the consumer electronics industry, and consumers. The bill incorporates the SCMS system, and a royalty provision on digital audio recorders and media, thus ensuring the consumers' right to record both analog and digital audio material for their private use.¹²

Clearly, the AHRA was an early step - to be followed by others - away from defining home recording issues in terms of potential copyright litigation, and toward administered "parallel" regimes that explicitly do not purport to establish new rules for determining the outcome of copyright litigation.

The Digital Millennium Copyright Act Is Not A Part Of The Copyright Act And Is A Step Even Further Away From Settling Disputes Over New Technology Via Copyright Litigation

The Menell brief's citation to various parts of the Digital Millennium Copyright Act (DMCA) as a step in congressional revision of the Betamax standard runs even further afield. The authors seem to suggest (p. 18) that because Congress, in legislating, "did not consider staple articles of commerce to be sacrosanct," the "substantial noninfringing use" doctrine has been and should be abandoned for purposes of copyright law, as well. Again, the authors seize on only part of the picture to make their point. Other parts of the picture thoroughly contradict it:

• Sections 1201(a) and (b) are aimed at strengthening a regime of licensed technological measures and self-help, as an alternative to copyright litigation.¹³ Both the House Commerce Committee and the House Judiciary Committee made it clear that these provisions were not aimed at construing or limiting the Betamax formulation.¹⁴
• Section 1201(c)(3) explicitly provides that, with one exception, product manufacturers and distributors are not under any obligation to comply with technical regimes to which they have not previously agreed. Indeed, if interpreted as part of a Copyright Act regime, this provision would be conclusive proof against the notion of the sort of "design filtering" regime advocated as a policy prescription in the Menell and Arrow briefs.¹⁵
• Section 1201(k), the exception to 1201(c)(3), sets up a regime, for particular products, that balances a technological mandate against "Encoding Rules" that prevent copyright owners from applying encoding to block the recording of certain copyrighted content.

The Conference Report on Section 1201(k) (emphasis supplied) explains this tradeoff (which does not provide for any "royalty" payment whatsoever):

Fifth, the provisions of paragraph (2) are intended to operate to allow copyright owners to use these technologies to prevent the making of a viewable copy of a pay-per-view, near video on demand, or video on demand transmission or prerecorded tape or disc containing one or more motion pictures or other audiovisual works, at the same time as consumers are afforded their customary ability to make analog copies of programming offered through other channels or services. Copyright owners may utilize these technologies to prevent the making of a ''second generation'' copy where the original transmission was through a pay television service (such as HBO, Showtime, or the like). The basic and extended basic tiers of programming services, whether provided through cable or other wireline, satellite, or future over the air terrestrial systems, may not be encoded with these technologies at all. The inclusion of paragraph (2)(D) is not intended to be read to authorize the making of a copy by consumers or others in relation to pay-per-view, near video on demand or video-on-demand transmissions or prerecorded media.¹⁶

If, then, the AHRA and the DMCA were to constitute congressional enactments that amended the Betamax Substantial Noninfringing Use doctrine, they would also have to be read as congressional declarations that copyright owners have no right to prevent or claim liability for first generation copies of higher tier cable subscription programming, and no right to prevent or complain about copying of basic cable or broadcast programming. Clearly, the entertainment industry, in its subsequent litigation, has not read these statutes in this fashion.¹⁷

Arrow et al. Would Apply A Partial Model To Artificial, Undefined, And Static Facts

Arrow et al. suggest parameters for a legislative or quasi-legislative approach to issues of indirect liability. By combining elements of a broad theoretical approach with a sharply and arbitrarily limited application of that approach, they actually demonstrate why a common law, litigation-oriented solution could not possibly be fair or efficient.

The Theoretical Construct Is Artificially Limited

Characteristically of their argument, Arrow et al. argue for an efficient market based on "clearly defined property rights" but on the next page note that copyright law, like other species of intellectual property, invests in authors (only) "certain exclusive rights" rather than the sort of ownership that pertains to real or personal property. That the right given to copyright owners is a defined and limited right to exclude (that does not include personal use) ought to be a fundamental consideration for any economic analysis of copyright. The authors, as eminent economists, later recognize that this fact imposes severe limitations and qualifications on their own argument. The result is a formulation that really compels the conclusions that (1) there are inherent problems with any "solution" that is developed via an elaboration only on the Copyright Act or on principles of common law, and (2) the authors have only scratched the surface as to the number of factors that would have to be considered.

Arrow et al. start with a number of theoretical examples purportedly serving as a model - liability in a master-servant relationship; liability of bartenders toward drunks; liability of landlords toward tenants; liability of manufacturers toward third party accident victims. They then suggest (p. 4, fn. omitted) a common construct for deciding whether third party liability may be appropriate:

Thus, if the employees and drunk drivers from the examples above were easy to identify, inexpensive to sue, and they had assets sufficient to pay for whatever harm they might cause, there would be no need to introduce an additional layer of legal liability. Wrongful conduct would be adequately addressed by imposing criminal penalties or assessing monetary damages on the direct actors alone. Similarly, in instances where the relevant direct actors are expensive to prosecute but penalties can be raised such that the low likelihood of prosecution can be offset by high penalties for the few cases actually brought, again direct deterrence will work and indirect liability is therefore unnecessary and likely unwise.

The first two sentences, alone, reflect abstract controversies that have raged among economists for decades, and still do. (The next sentence acknowledges the inefficiency and impracticality of trying to address copyright law considerations in the limited context of litigation among a few private parties.) The core issue was formulated by Prof. Coase in his groundbreaking The Problem of Social Cost:

The world must have factories, smelters, oil refineries, noisy machinery and blasting, even at the expense of some inconvenience to those in the vicinity and the plaintiff may be required to accept some not unreasonable discomfort for the general good. *** What has to be decided is whether the gain from preventing the harm is greater than the loss which would be suffered elsewhere as a result of stopping the action which produces the harm. In a world in which there are costs of rearranging the rights established by the legal system, the courts, in cases relating to nuisance, are, in effect making a decision on the economic problem and determining how resources are to be employed.¹⁸

Judge Calabresi elaborated a decade later, in his classic The Costs of Accidents:

[T]he loss bearer who can enter into transactions most cheaply must be chosen with all the cost elements involved in entering into transactions in mind, and these include not only the most obvious transaction costs, but also costs of risk, information, and even coercion where it is the cheapest device available.¹⁹

The Number of Economic Alternatives Offered By the Copyright Act Is Artificially Limited By The Limited Number of Parties Before The Court

Economic theory, as exemplified by the quotations above, suggests that consideration should always be given to an alternative that Arrow et al. do not discuss, but which is regularly considered in legislative contexts: that parties, before seeking any judicial relief, may have an obligation to invest in and devise their own technological or contractual solutions.²⁰ In the copyright context, the one solution not mentioned at all by Arrow et al., even as a theoretical possibility, but that is made particularly relevant by the DMCA and the web of licensing arrangements of the last decade,²¹ is for the law to recognize an obligation by the copyright proprietor to protect its own rights via a system of technological and contractual "rules" and technologies in aid of them, enhanced by legal penalties on those who take affirmative steps to interfere with their effective operation.²² In light of the additional factors discussed below, this omission is especially glaring.

The Necessary Parties Could Not Possibly All Be Before A Single Court

In the copyright litigation scenario, the range of plaintiffs in terms of content, media, format, and technology is extremely broad, but the range of defendants is extraordinarily narrow. In the Betamax case, missing²³ from the picture were the actual users, and their opportunity for them to defend the legality of their own conduct. Missing from cases brought under a legislative regime as posited by Menell and Arrow would be the providers of hardware devices, software devices, and services who would be swept up in their broad rules of resource allocation, but who are ignored entirely in the modeling that they propose. These include:

• Makers and sellers of personal video recorders, which acquire content on an authorized basis, via electronic program guides and services that maintain continuous relationships with consumers.
• Architects and makers of home networking devices and interfaces, that facilitate the sharing of content within the home after it has been recorded.
• Those who write and provide the software that controls and facilitates these devices, architectures, and functions, and would be subject to any advance requirement that they "filter" the operation of these of products according to some notion of projected uses, and the later evaluation of those uses by courts.

The Technological Framework Is Artificially Narrow

Given the broad scope of their premises and assumptions - economic as well as technological - one would think Arrow et al. would have discussed, or at least considered, a number of present and projected technology frameworks, before suggesting a rule of general application. They do the opposite: while proposing a general rule, they discuss (p. 9) only the instance of "peer-to-peer," and this without any consideration of economic efficiency alternatives:

If firms that produce peer-to-peer technology know that they are completely immune from liability as long as their technology makes possible some qualifying amount of non-infringing use, they will have no incentive to attempt to discourage infringing uses even if the costs of doing so are very low.

Absent from these economists' formulation is:

• Any discussion about the feasibility of allocating obligations, such as self-help technical measures, to content owners and distributors instead;
• Any discussion about the sort of legislative "balancing" of obligation that they note in their ensuing discussion of the DMCA; and
• Any discussion about whether their formulation for "peer-to-peer" technologies makes any sense in any other market or technological context.

Perhaps recognizing the pitfalls of having jumped straight from delivery van accidents to complex software, Arrow et al. then back away (p. 11, fn. 11) from their prescription, even in the limited case of "peer-to-peer" technologies:

We take no position with respect to the question of whether reasonable modifications are possible for the technology at issue here. Our concern is that the lower courts deemed this question irrelevant. Were the case remanded, the lower courts would have an opportunity to review evidence along these lines, for example to see whether good faith efforts were undertaken.

Essentially, then, the prescription is for individual trial judges, with only a fraction of the concerned parties and interests before them, and few of the consensus-building tools available to the Congress, to establish a quasi-legislative tribunal, balancing only some interests if any, every time any of the world's billions of copyright proprietors finds a technology to be objectionable and purportedly harmful. This makes any real economic analysis impossible for a court. As Professor Coase observes (p. 22), the right to participate in the marketplace is also a property right that must be considered in any economic (as well as legal) analysis:

If factors of production are thought of as rights, it becomes easier to understand that the right to do something which has a harmful effect (such as the creation of smoke, noise, smells, etc.) is also a factor of production.

The Technological Framework Is Artificially Static, And Imprecise

In addition to being too broad in scope and too narrow in execution, this "filtering" formula is also static, in a dynamic age. Even in the Sony case, the shapes and uses of VCRs were changing, and the vast market for prerecorded content was emerging — in 1983 the Justices were mulling over usage evidence gathered in the mid-1970s. In the digital, Internet era, the velocity of change has only increased. Arrow et al. offer no framework or prescription for how to anticipate or track these changes in their common law regime of judicial legislation.

Neither Arrow nor Menell offers any definition, static or dynamic, of what, for policy purposes, a "peer-to-peer" technology is. This is no trivial omission. In September and October, 2004, representatives of major concerned interests were asked by Senators Hatch and Leahy to work in good faith on legislation as a consensus alternative to their own formulation in S. 2560, and to the formulations put forward by the Copyright Office. After almost a week of intensive negotiation, backed by the technological resources of their respective industries, the negotiators failed to arrive at a consensus definition of a "peer-to-peer" technology. This suggests that any attempts by courts to do so will offer more uncertainty than guidance to markets, entrepreneurs, retailers, and consumers.

A Better Legislative Approach

In the legislative debates just referred to, the Home Recording Rights Coalition and Public Knowledge were among seventeen coalitions, public interest groups, trade associations, and corporations to endorse a different approach - one that would have codified the Betamax doctrine legislatively, but would have addressed egregious conduct and specific intent aimed at mass, indiscriminate redistribution of copyrighted works via conscious, recurring, and deliberate acts. A draft of this approach is available at www.hrrc.org.

* * *

Whatever the Supreme Court decides in the Grokster case, the Congress will quickly be presented with formulations for imposing, or avoiding, liability on technologies and technologists. The policy formulations discussed above are inadequate to the task of providing guidance to the Congress. The task is difficult, complex, and requires caution. Better approaches are available than the ones suggested by these authorities.