Week 7: Antitrust and
Intellectual Property
BA 107
Review
► Justifications
for Government Intervention
 Market Failures
►Public
Goods
►Externalities
►Natural Monopolies
►Information Asymmetry
►Imperfect Competition
 Regulatory Capture
Intellectual Property
The KaZaa Case
Background Facts
► What
is KaZaa?
 Kazaa.com, Kazaa Media Desktop and Kazaa
Plus are products of Sharman Networks.
Sharman Networks is a proactive, virtual, global
technology and publishing company, focused on
delivering peer-to-peer software. – Kazaa
website
What is (are) the nonmarket issue(s)?
► What
is the controversy?
 “Theft” vs. “Harmless appropriation”
► What
is the primary nonmarket issue?
 Market Failure
► Who
are the stakeholders?
► What are their interests?
► “Slippery Slope” argument
Discussion Questions
► 1.
What is the economic rationale for the
existence of intellectual property?
Discussion Questions
► 2.
The Recording Industry Association of America
has argued that users of Napster, KaZaa,
Morpheus and other free digital music exchanges
are “stealing” the intellectual property of record
companies and artists
 What arguments can be made to support their position?
 How would you build a case against the RIAA viewpoint?
(Why should file-sharing services remain legal?)
Discussion Question
► 3.
To what extent is the music industry
representative of other digital content
industries, and how is this likely to affect
“solutions” to the intellectual property
questions raised by file-sharing services?
Discussion Question
► What
is likely to happen to the development
of the Internet and Internet-based
industries if the music industry is successful
in shutting down all file-sharing services?
Intellectual Property
► Rationale
 Economic
 Natural Right
► Legal
Basis
 Constitution
► Article
1, Section 8, Clause 8. The Congress shall have
power … to promote the progress of … useful arts, by securing
for limited times to … investors the exclusive right to their …
discoveries




Patent Act, USC (35 U.S.C.)
Copyright Act (17 U.S.C. §§ 101 – 810)
(Trademarks)
(Unfair competition)
Copyright Act 17 USC
► Federal
legislation enacted by Congress pursuant
to the Constitution to protect the writing of
authors
► Technological advances led to expanding scope of
“writings”
 Now include: architectural design, software, the graphic
arts, motion pictures, and sound recordings
►A
copyright gives the owner the exclusive right to
reproduce, distribute, perform, display, or license
his work
Copyright Act 17 USC
► To
be covered by copyright a work must be
original (no need to be novel; Bleistein v.
Donaldson Lithographing Co. (1903); Time Inc. v.
bernard Geis Association (1968); ”work of one
man’s alone”; Matthew Bender & Co. v. West
Publishing Co. (1998); “sweat of the brow,”
“minimal creativity”) and in a concrete "medium of
expression." (cf. choreography, typefaces)
► Under current law, works are covered whether or
not a copyright notice is attached and whether or
not the work is registered.
KaZaa case: copyright infringement
and liability
► Technical
Background on P-2-P technology
 Three methods of indexing available files on
disparate PCs serving as “server-client”
 (1) Centralized Indexing (Napster)
 (2) Decentralized Indexing (StreamCast,
Gnutella)
 (3) Supernode Indexing (KaZaa)
KaZaa Case
►
Legal Reasoning
 Contributory or Vicarious Infringement (Sony Corp. v. Universal Studios
464 U.S. 417 (1984); Ellison v. Robertson, 357 F.3d 1072, 1076 (9th Cir.
2004))
 Contributory Infringement (knowledge & material contribution)
►
Knowledge of Infringement
 If D can show substantial or commercially non-significant non-infringing uses,
knowledge or infringement cannot be imputed to D. Burden of proof then rests on P
 Grokster I, 259 F.Supp.2d at 1035, trial court found (capability of) substantial noninfringing use. “Wilco,” “Project Gutenberg”
 P failed to carry burden of proof; so Sony Corp applied
 P failed to show D “had specific knowledge of infringement at a time at a time they
contribute[d] to the infringement and fail[ed] to act upon that information.”
 P’s notices of infringement irrelevant because they arrive when D can do nothing to
stop the alleged infringement
 Because of software design, D had no control over indexing, so there can be no
contributory infringement
KaZaa Case
► Legal
Reasoning (Contributory Infringement)
►Knowledge
of Infringement (from prior slide)
►Material Contribution
 Napster I: Indexing resided on D’s computer. Swap meets
have been held to materially contribute to infringement of
copyrighted materials (Fonovisa v. Cherry Auction Inc., 76
F.3d 259, 261, 264 (9th Cir. 1996)
 KaZaa does provide the site and facilities
KaZaa Case
► Vicarious
Infringement
 Direct Infringement by a primary party
 Direct financial benefit to the defendant
 Right and ability to supervise the infringers
►KaZaa
does not have ability to block access of any
individual user
Patent Act 35 USC
► Federal
legislation enacted pursuant to Article I of
US Constitution
► Patents grant an inventor the right to exclude
others from producing or using the inventor's
discovery or invention for a limited period of time.
► In order to be patented an invention must be
novel, useful, and not of an obvious nature. See §§
101 - 103 of Title 35.
► Changing technology has led to expansion of
definition of “human made product” – e.g.,
genetically modified mice; plants.
Patentable Inventions
► “Novelty”
 Foreign, domestic anticipation
► Usefulness
 No particular quantum of benefit required (Anderson v.
Natta (1973)
 Specific utility (open-ended patents may lead to
“monopoly of knowledge” Brenner v. Manson (1996))
► Nonobvious
 Just because it was never actually invented does not
mean it was not hypothetically inconceivable. Sakraida v.
Ag Pro, Inc. (1976)
Antitrust Law
► Rationale:
 Correct market failure of monopolies
► Federal
legislation enacted pursuant to the
Commerce Clause of the U.S. Constitution
Sherman Act (1890)
Section 1. Trusts, etc., in restraint of trade illegal; penalty
► Every contract, combination in the form of trust or otherwise, or conspiracy, in
restraint of trade or commerce among the several States, or with foreign
nations, is declared to be illegal. Every person who shall make any contract or
engage in any combination or conspiracy hereby declared to be illegal shall be
deemed guilty of a felony, and, on conviction thereof, shall be punished by fine
not exceeding $10,000,000 if a corporation, or, if any other person, $350,000,
or by imprisonment not exceeding three years, or by both said punishments, in
the discretion of the court.
► Section 2. Monopolizing trade a felony; penalty
► Every person who shall monopolize, or attempt to monopolize, or combine or
conspire with any other person or persons, to monopolize any part of the trade
or commerce among the several States, or with foreign nations, shall be
deemed guilty of a felony, and, on conviction thereof, shall be punished by fine
not exceeding $10,000,000 if a corporation, or, if any other person, $350,000,
or by imprisonment not exceeding three years, or by both said punishments, in
the discretion of the court.
►
Court Interpretation
► Per
Se Rule (bright line tests)
 Act is illegal whether or not there was any harm
 Price-fixing; geographic market division
 Established in Northern Pacific Railroad Co. v. U.S., 356
U.S. 1 (1958)
 Rigid, modern courts tend not to favor
► Rule
of Reason
 To engage in illegal monopolization, D must possess
power in a relevant market and must have used
improperly exclusionary acts to gain or protect that
power
Rule of Reason Analysis
► Monopoly
power
 Product market (Cellophane Case)
 Geographic market
► “Bad
Act”
 Monopoly power alone is not illegal. There must be
some bad act
 But distinguishing monopolizing intent from permissible
business activity of a firm with massive market power is
not easy
 Two questions: (1) is the conduct in question truly
exclusionary? (2) If so, does that justify an inference of
illegal purpose and intent?
 Courts have been all over the map
Other Antitrust Statutes
►
Clayton Act of 1914 (15 USCA 12-27)
 Attempted to remedy lack of guidance of Sherman Act by declaring
four business practices illegal – tying and exclusive dealing
contracts; price discrimination; corporate mergers; interlocking
directorates (but only if effect would substantially lesson
competition).
►
Federal Trade Commission Act (1914) (15 USCA 45)
 Prohibition against “unfair methods of competition in or affecting
commerce, and unfair or deceptive acts or practices in or affecting
commerce”
►
Hart-Scott-Rodino Antitrust Improvements Act of 1976
Enforcement Agencies
► Department
of Justice
 Has authority to enforce the Sherman and Clayton Acts
 All suits are brought in federal courts
 Has sole authority to enforce criminal provisions of the
federal antitrust laws
 Almost all criminal suits arise from Section 1 of the
Sherman Act
► Federal
Trade Commission
 Shares responsibility with the Justice Department for
civil enforcement of the Clayton Act
 Has exclusive authority to enforce Section 5 of the FTC
Act (prohibition of unfair methods of competition)