J. Gillan, S. Denton, E. Guardado Econ 495
U.S. Supreme Court (2005)
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J. Gillan, S. Denton, E. Guardado Econ 495
The case before the Court, MGM et al. v. FastTrack et al. (2005) , concerns the defendant, from here on referred to as our client’s, distribution of free software that allows computer users to share electronic files directly through peer-to-peer networks, enabling users to infringe copyrighted works, including those of the plaintiff and party, in violation of the Copyright Act. The software our client distributed can be used to transfer any type of digital file, but the defendant alleges that our client distributed the software with both knowledge and intention of profiting off of the unauthorized sharing of copyrighted material, seeking damages and an injunction. Court discovery revealed that our client did knowingly and intentionally aim to satisfy a demand for copyright infringement and that our client generated income by selling advertising space and streaming advertisements to users. We do not dispute the legitimacy of the plaintiff’s allegations as they were verified by court discovery to be true. However, in recognizing the dual capabilities of the software distributed by our client, we believe the court’s finding does not confirm in our client liability to the plaintiff on the order of damages nor grant the copyright holders the right to an injunction based on the precedence set forth by previous court rulings and the Kaldor-Hicks economic efficiency achieved by the software’s facilitation of the transfer of intellectual property.
With regards to damages, we find no verifiable damages incurred by the plaintiff as a direct result of our client’s actions nor any plausible valuation processes by which any damages could be determined.
Awarding damages to the plaintiff the Court suggests that our client benefited from some loss or injury experienced by the plaintiff, but there is no such detriment, such as lost revenue or sales, stated in the facts of the case. The software distributed by our client is free and allows users do not pay for the transfer of information and media. Assuming a user obtained copyrighted material via our client’s software, the only cost to a user transferring information is the potential copyright infringement fees that he or she could be charged for violating the Copyright Act. Since the probability of being caught in a system in which billions of transfers are made monthly and decentralized networks inhibit the ability to target specific transfers is presumably small, it is safe to assume the expected cost to a user for a single transfer to be miniscule. One cannot reasonably conclude
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J. Gillan, S. Denton, E. Guardado Econ 495 that the users committing copyright infringement would have purchased the copyright material they obtained in the first place as the system provides no valuation mechanism with which to evaluate the costs the users considered. For example, if a user copied software “for personal use and not for resale and could not have afforded to buy the software; then the copyright owner does not lose even a single sale as a result,” 1 and no damages in form of forgone sales have occurred.
Furthermore, the degree of infringement specific to the plaintiff that was committed using our client’s software is speculative and difficult to precisely determine. Awarding damages to the plaintiff would be rewarding them for sales they would not necessarily have made for users who perceived cost of a transfer to be below the market price for the copyrighted material. The informational costs associated with evaluating these damages would be a formidable if not impossible task to perform accurately, involving individual cost-benefit analysis specific to each user’s value associated with being caught. A decision to award damages to the plaintiff would set a dangerous precedent that would promote rent-seeking behavior by other copyright holders seeking similar hypothetical damages caused by the transfer of their copyrighted material over peer-to-peer filesharing networks. This is a problem because copyrights “protect an infinitude of sentences, musical phrases…, and other minutiae of expression” 2
and “it is not necessary to register in order to be covered by copyright.”
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Thus, there would be an incentive for copyright holders to claim damages they would not have necessarily sought by suing peer-to-peer networks for ambiguous, undeterminable damages. Such a decision poses an indeterminate amount of potential litigation costs to society for rectifying these damages to any person who believed or can remotely verify that their intellectual property was infringed upon, not to mention implicating other providers of mediums to transfer information such as internet providers.
With regards to an injunction, we claim the distribution of our client’s software promotes greater economic efficiency in two regards: first, it increases the static efficiency of intellectual property, increasing the social benefit derived thereof; and second, the software does not necessarily hinder the dynamic efficiency of intellectual property as it is not detrimental to the ultimate function of copyright law, to protect future incentives.
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J. Gillan, S. Denton, E. Guardado Econ 495
Static analysis abides by the “unrealistic but often fruitful assumption that adjustments occur instantaneously, 4 allowing us to disregard the copyright infringement facilitated by our client’s software as there is no reason to consider the future implications of infringement. From this perspective, our client’s software drastically increases the static efficiency of intellectual property as millions of consumers are allowed access to information, deemed a “public good” by economists, 5
at no cost, increasing the social benefit. This reduction in cost of copying to zero eliminates the allocative costs of copyright laws that grant copyright holders the right to charge a positive price for the public good and as a result prohibit consumers whose opportunity cost is below the price from enjoying the public good, assuming they cannot price discriminate.
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Moreover, it allows consumers access to information and media that may not have been available to them through the existing avenues of distribution, such as the news, the recording industry, the movie industry, etc. For example, some producers of copyrighted musical works, “especially if the producers are new and trying to establish a reputation, may want their works distributed as rapidly and as far as possible even at the sacrifice of royalties.”
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Our client’s software allows these artists a free digital medium by which to transfer their media to others, relieving them of the capital barriers to production associated with producing physical copies of their media and promoting competition. It acts a complement to producers of intellectual property, allowing them audiences they may have never before accessed.
The most legitimate criticism of our client is how free peer-to-peer sharing software affects the dynamic efficiency of intellectual property. This requires a more complicated analysis of the future implications of our client’s actions on incentives to produce intellectual property in the future. The argument against our client states that providing free unmonitored file-sharing contributes to copyright infringement which in turn diminishes future incentive to produce intellectual property. Awarding copyrights to producers of expression and ideas grants them time-limited rights so that they may be compensated for their contribution to the public good of information.
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J. Gillan, S. Denton, E. Guardado Econ 495
We do not dispute the necessity to protect these incentives, but the legal definitions of copyright and patent law have not proven static, but rather malleable and subject to change in the face of technological innovation. This can be observed by the rulings in previous intellectual property infringement cases where the definition has changed over the years. Patents and copyrights were first outlined in the Constitution Art. I,
Section 8, Cl. 8, to “promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” However, the definition of patents were first subject to legal scrutiny in Lowell v. Lewis, 8568 Circuit Court, D. Mass. 1018 (1817) where the
Circuit Court of Massachusetts claimed that the word “useful” in the Constitution merely connoted the contradistinction to mischievous or immoral, stating that items that did not necessarily harm society would naturally “sink into contempt and disregard.” 8
The problem with exercising this interpretation of protecting intellectual property is that it creates a perverse incentive for rent-seeking behavior and when analogously applied to copyrights a similar behavior can be observed as there is a profitable nature to some copyright material.
Nearly one hundred fifty years later, in light of the technological developments in modern chemistry, a patent was denied a scientist who developed a novel process for producing a specific compound in Brenner,
Commissioner of Patents v. Manson, 383 U.S. 519 (1966). The court ruled on the grounds that “a new chemical process was not inherently ‘useful’ by virtue of its being a contribution to scientific researchers, but that proof of practical utility of the compound produced by the process was an essential element in establishing … its patentability.” This contradicts the previous definition as the court found granting patents is not the same as “granting a hunting license.”
The most relevant and recent case the Court has seen regarding copyright infringement was in Sony
Corporation v. Universal City Studios, 464 U.S. (1984). Here the Court ruled that the Copyright Act “does not expressly render anyone liable for infringement committed by another.” Sony was found not responsible for the copyright infringement by the owners of its equipment on the grounds that the equipment is generally
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J. Gillan, S. Denton, E. Guardado Econ 495 capable of copying an entire range of material both uncopyrighted and copyrighted. Taking this notion of a dynamic copyright definition into account we do not believe our client’s software is anything more than another case that provides a social benefit through a technological medium the court has not previously seen. While infringement has occurred, it would be less costly to society to place responsibility in the hands of copyright holders to adapt to this new medium rather than provide distributors with special private benefit and deprive society of this instrument of greater information transfer.
Fundamentally, the case before the Court is a cost benefit analysis of our client’s product. The software distributed by our client facilitates the transmission of information and media that is currently underprovided and overpriced by the distribution avenues of the existing market. It is a technological medium for which there is no direct precedence previously set forth by the Court, but the definitions of copyright infringement and its stringency on contributors to infringement in the past have been subject to change and are by no means static.
Artists and other producers of intellectual property will continue to produce intellectual property as the utility they derive from doing so outweighs the opportunity cost of working in a sector where they could not produce such intellectual property. It is not safe to assume that artists or producers will be discouraged from future production simply because the recorded format of their intellectual property can be freely distributed. One can just as easily argue that capital barriers to distribution impede artists in just as significant of a manner. Thus, it is on these grounds that we believe the social benefit provided on the order of static efficiency of intellectual property by our client’s product outweighs any potential decrease in dynamic efficiency of intellectual property, thereby exonerating our client of any liability sought by the plaintiff.
1 Posner, Richard A. Economic Analysis of Law , 7 th ed., (New York, NY: Aspen Publishers, 2007), 41.
2 Posner, Richard A. Economic Analysis of Law , 7 th ed., (New York, NY: Aspen Publishers, 2007), 41.
3 Friedman, David. Law's Order . (Princeton, NJ: Princeton University Press, 2000), 131
4 Posner, Richard A. Economic Analysis of Law , 7 th ed., (New York, NY: Aspen Publishers, 2007), 31.
5 Posner, Richard A. Economic Analysis of Law , 7 th ed., (New York, NY: Aspen Publishers, 2007), 41.
6 Posner, Richard A. Economic Analysis of Law , 7 th ed., (New York, NY: Aspen Publishers, 2007), 42.
7 Posner, Richard A. Economic Analysis of Law , 7 th ed., (New York, NY: Aspen Publishers, 2007), 43.
8 Lowell v. Lewis 8568 Circuit Court, D. Mass. 1018 (1817)
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