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AN EVOLUTIONARY VIEW OF INTELLECTUAL PROPERTY LAW

Published in the Oakland County and Detroit Legal News October 2004 -

By Dr. John Sase & Associates

(Part One of Six)

“Imagination is more important than knowledge”

--Albert Einstein

This is the first of a multi-part series in which we will explore intellectual property law on a historical, theoretical, and applied basis. This law, which includes patents and copyrights, has made cultural and industrial progress more robust and successful. In fact, it forms the bedrock of modern capitalism. In the absence of intellectual property rights, further economic development would be problematical. As the World Intellectual Property Organization (WIPO) states, “Intellectual property is a ‘power tool’ for economic development and wealth creation that is not yet being used to optimal effect in all countries, particularly in the developing world.” (Intellectual Property, A Power Tool for Economic Growth, WIPO, 2003)

However, it should be noted that intellectual piracy has played, and continues to play, an interesting role in the evolution of industrial and cultural development, particularly in areas of underdeveloped economies. One example of this is the United States in the century after its birth, which proves that great things may sometimes come from rebellion.

Ben Franklin Meets Napster

According to the Encyclopedia Britannica, the true beginning of the Industrial Revolution was Gutenberg’s invention of the printing press in 1456. With the invention of the moveable type press, copies became cheaper and cheaper once a work was fixed in type. The costs of acquiring a work from a creator and typesetting it were spread over a larger and larger print run. Thus, a new age was born--the mass production of standardized commodities.

When William Caxton introduced the printing press to England by in 1476, the Crown (under Queen Anne) instituted a copyright law. This wasn’t done with consideration of individual rights of creators in mind, but rather for matters of censorship. This is a crucial distinction: the rights over the printed matter were given to the printer and not to the creator because, as the Encyclopedia Britannica states, “It quickly became apparent to the Tudor monarchs of England (as well as those on the European continent) that it was much easier and more effective to control a limited number of presses than a large number of subversive or heretical creators. After all, a hand-written manuscript could only be read by a relative few; typeset copies, on the other hand, could be read by and corrupt many.” For example, Guttenberg’s Bible was used by followers of Luther and others to reduce the power of the Catholic Church by making it possible for “every man to be his own priest.”

The copyright law of 1476 was a licensing law requiring printers to inscribe their name, their location, and the titles of the works that they wanted to print on a register. If approved for publication, the Crown granted a “copye” to the printer. The rights flowing from this copye constituted “copyright” and were held by the printer proprietor, not the creator. Even today, the rights of published works, including music, often are bought by the publishing or recording company. The term “royalty” originates from this; it is a form of payment based on consignment in lieu of up-front purchase.

Philip Allingham of Lakewood University in Canada wrote that the first American “pirate” was probably Benjamin Franklin (1706-90). Allingham stated that, among other things, Franklin was a printer who re-published the works of British authors in the eighteenth century without seeking their permission or offering remuneration. (Ontario University Scholars Programme Project, www.victorianweb.org/authors/dickens/pva/pva74.html.) Before the advent of the “global economy,” protectionism was rife and extreme. Until 1896, when America finally joined the International Copyright Union, foreign authors were pillaged and plundered in the U.S. and American authors routinely were pirated abroad. From a theoretical standpoint, if we consider cyberspace to be a vast and newly discovered territory--a foreign continent almost, one unregulated and barely charted--then the piratical deeds of Napster and other file-sharing entities are evolving in a parallel manner to the early stages of the Industrial Revolution.

In the early stages of evolution, an entity will test its environment to find its limits. In an economic context, piracy, like underground economies in general, represents a primitive form of capital accumulation in a situation where it is denied access to more formal or legally acceptable methods. In Iraq, where real employment is probably something like 40%, a grisly cottage industry has developed in which videotapes of beheadings reportedly sell for 75 cents per copy. In Afghanistan, where “Democracy” has taken root, 75% of the world’s heroin supply continues to exist in the wide-strewn poppy fields. The point is that in underdeveloped economies—or, in the case of the Internet, underdeveloped industries--evolution appears as a process of “natural selection” whereby mutations occur and either succeed by themselves, fail, or lead to more successful variations. In many places, and in various contexts, evolution may be the only law.

Copyrights and Many Wrongs

It was very profitable for printers not to have an international copyright agreement. However, it was a tragedy for writers. As Allingham mentions, Mark Twain was hurt badly when Tom Sawyer was published in Toronto before an American edition was released. Charles Dickens was especially plagued. His early novels Oliver Twist and The Pickwick Papers were published and sold in America by the thousands; he never got a dime. At a dinner in Boston in 1842 at the beginning of a long reading tour through the States, Dickens drew much criticism for daring to complain about the American piracy. Dickens asserted that “had American publishers paid Sir Walter Scott appropriate royalties for his pirated works here, he would not have faced bankruptcy in the middle of his career and would not have died broken in body and mind by years of financial difficulties.”

While the American printers made lucre by publishing foreign works for which they did not have to pay royalties, such piracy did allow them to grow. Furthermore, English publishers also prospered by pirating American works. It was the authors who suffered. This led Mark Twain to complain that American writers (and, hence, American Literature) were not being published and growing due to this imbalance of power. It should be noted here that Walt Whitman, perhaps the greatest American poet, was a self-published author. We will never know what literature might have flowered in both countries had the economic power of intellectual property rights been enforced rationally and on an international basis.

In England, a precedent (and a good test case) was established domestically in copyright law when Dickens first got an injunction against publisher Peter Parley. Parley had published a book titled A Christmas Ghost Story a mere two weeks after the release of Dickens’ A Christmas Carol. Dickens sued Parley, and his injunction halted publication of A Christmas Ghost Story. Allingham said that Dickens’ victory was Pyrrhic, when he beat the piratical firm, it declared bankruptcy, “leaving Dickens to pay his court costs of 700 pounds, against a profit of only 230 pounds on the sale of six thousand copies by the end of 1843.” Allingham added, “Images of the debtors’ prison swam before his eyes.” This also may be a lesson to those advocates of the British system of lawsuits wherein the loser always pays for unsuccessful cases.

In the struggle to get America finally to join the International Copyright Union, Dickens made a telling comment during a visit to Harford, Connecticut. He stated that a native American literature would flourish only when American publishers were compelled by law to pay all writers their due, rather than being able to publish works of any foreign author for free--a bad custom that only serves to discourage literary production by American citizens. Mark Twain agreed, and was seminal in pushing for this agreement. So was biographer James Parton, who wrote a famous article in the Atlantic Monthly (October, 1867) noting that Harriet Beecher Stowe, the American author of Uncle Tom’s Cabin, had lost $200,000 that was rightfully hers from the success of the book in Europe, and that Henry Wadsworth Longfellow also would have gained an additional $250,000 from sales of his works in England.

The laudable efforts of these people have fueled the discovery and success of the Ernest Hemingways and Tom Clancys of modern times. Therefore, we would argue that the evolution of the United States from a relatively underdeveloped economy with limited market-power to its present productive capacity co-evolved with its adaptation of international intellectual property law and responsibility. “Intellectual property is a term increasingly in use today, but still little understood. To many people, it remains an obscure legal concept of little relevance to everyday life.” (WIPO)

(Part Two)

“There is the striking, symptomatic disparity between the growth-curves of technological achievement on the one hand and of the ethical behavior on the other; or, to put it differently, between the powers of the intellect when applied to mastering the environment, and its impotence when applied to the conduct of human affairs.” -- Arthur Koestler from The Heel of Achilles

“It Was a Dark and Stormy Night….”

In part one of this multi-part series on the evolution of intellectual property law, we took a brief look at the early ramifications of copyright law in its historical context. Among other things, we concluded that the lack of an international treaty governing copyright law had the deleterious effect of inhibiting the flowering of an American Literature. Since domestic printers were not forced to pay royalties to foreign authors, it was in the self-interest of the printers to publish British authors such as Sir Walter Scott and Charles Dickens, who were already famous, and to neglect Walt Whitman, Edgar Allen Poe, and the other American writers who might have been published. In that respect alone, the adoption of an international copyright treaty helped to remedy an enormous and consequential market failure.

We also have noted that such intellectual piracy had residual and gradual public welfare benefits. This piracy represented a form of primitive capital formation with the eventual growth of American publishing houses. (For example, Ben Franklin was a pirate printer. The pirating of foreign works also helped to develop a public appetite and domestic market for later ventures, which, of course, would start to feature American writers.)

In this installment, we continue our discussion with further considerations. We also will include a historical overview that will feature a discussion of patents. There always has been a philosophical argument about intellectual property law and the validity of its extensions and implications. However, what is not questionable is the existence of tremendous economic value of the investment in intellectual property. In a recent document, the World Intellectual Property Organization (WIPO) stated, “In 1982, some 62% of corporate assets in the U.S. were physical assets but, by 2000, that figure had shrunk to a mere 30%”--the rest of their value being in the form of intellectual property. Furthermore, the WIPO estimates that from 5% to 7% of world trade, with profits valued at $300 billion, is lost due to product counterfeiting and intellectual piracy, with an estimated loss of 200,000 jobs world wide.

As with nearly all official economic analysis, these highly partisan calculations presented by the WIPO neglect the economic impact that this piracy has on the underground economy; i.e. the many jobs that have been created in China and other previously underdeveloped nations by the production of counterfeit watches, blue jeans, DVDs, books, and software that violate patent and copyright laws. Also, there have been American engineers, draftsmen, and graphic artists who have developed their skills in order to create a professional portfolio by using this software illegally. There have been so many obvious violations that IBM and other software producers have had to install special features in software and hardware to ensure obligatory valid licensing. Recently, the Detroit-based software company Compuware won a ruling by a federal magistrate against IBM in an ongoing piracy dispute. This ruling requires IBM to pay Compuware’s legal costs. According to a report in the Detroit News (“IBM Must Pay Compuware,” 9 October 2004), IBM is in a losing battle over a piracy lawsuit, a fact that makes for some irony. This event adds a chaotic dimension to the WIPO calculations. These calculations do not account for the thousands of jobs that are created in the legal profession over intellectual property disputes and related business-litigation cases. This fact always has made the idea of tort reform somewhat of a red herring, as is the image of intellectual property pirates being some sort of Oriental dervish with ten watches on each arm.

Some Rumination on Innovations

The origin of patents for invention remains obscure, as no one country can claim to have been the first in the field with a patent system. However, Britain does have claim to the longest continuous patent tradition in the world. Its origins can be traced back to the 15^th century, when the Crown started to make specific grants of privilege to manufacturers and traders. Such grants were signified by “Letters Patent,” open letters marked with the King’s Great Seal. The earliest known English patent for an invention was granted by Henry VI to Flemish-born John of Utynam in 1449. This patent gave Utynam a twenty-year monopoly for a method of making the stained glass required for the windows of Eton College , a method not previously known in England .

In the U.S. , it was James Madison who made sure that intellectual property rights were incorporated in the U.S. Constitution. In his Federalist Papers, Madison insisted that this article remains a matter of national jurisdiction and would not be given over to the states. Thus, Article 1, Section 8 of the Constitution reads, “Congress shall have the power... 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.”

The inclusion of this article reflected great foresight. Like much of the Constitution, the article was based on the assertion by English philosopher John Locke that mankind has an inherent “natural right” to private property. This assertion was such an affront to the absolutism of monarchy that Locke admitted authorship of his Treatises on Government on his deathbed, while in exile in Holland . On 19 April 1790, President George Washington signed the bill which laid the foundations of the modern American patent system. The U.S. patent system was unique. For the first time in history, the intrinsic right of an inventor to profit from his invention was recognized by law. Previously, privileges granted to an inventor were dependent upon the prerogative of a monarch or upon a special act of legislature.

The granting of such privileges in America was rare at that time. Secretary of State Thomas Jefferson--himself an inventor--examined and approved the patents. As a result, very few inventions were created. In exchange for granting monopoly power to an inventor to license or to sell a patent for twenty years, the applicant was required to make the invention public through detailed drawings and explanations of its utility. This requirement satisfied Locke’s ideal benefits of private property in that there was protection of the natural right of an individual for his property or creation as well as a reward for the fruits of his labor. In addition, there was a promotion of the general well-being of society. This latter component was reinforced by the availability of public access to information in the patent offices. Over time, this component enabled the public to make improvements or duplications of an invention.

The legal requirements for obtaining a patent are that the invention must be: (a) Novel, meaning that it must not be known or used by others in this country, patented, or described in a printed publication here or abroad, or in public use or on sale in this country for more than one year prior to the application for patent. (b) Non-obvious, meaning that it must not be obvious to a person having ordinary skill in the pertinent art as it existed when the invention was made. (c) Useful, meaning that it must have current, significant, beneficial use as process, machine, manufacture, composition of matter, or improvements to one of these.

According to the Patent Office, the word “process” is defined by law as a process, act, or method, and primarily includes industrial or technical processes. Hopefully, the term “machine” used in the statute needs no explanation. The term “manufacture” refers to articles that are made and includes all manufactured articles. The term “composition of matter” relates to chemical compositions and may include mixtures of ingredients as well as new chemical compounds. These classes of subject matter taken together include practically everything that is made as well as the processes for making the products. Certain kinds of software and Internet-related processes merit granting of patents.

As with copyright, violations of patent are treated as civil matters rather than criminal theft. The idea is that ordinary theft of physical property may deprive the owner of actual use of the property and thus does physical harm. Prohibition of such crime is enforced by the state. However, theft of intellectual property does not deprive the owner of the actual use of the property. Therefore, it must be enforced by the owner via a civil lawsuit. The patent office recommends strongly that patent seekers use a patent attorney, one licensed to practice before the patent office. Due to the fact that all patents are disclosed publicly so that others may learn from the ideas and build on them, many inventors opt not to seek patent rights and to keep their ideas secret.

Despite the efforts of the WIPO to tout intellectual property protection as practically an unvarnished public good, it is notable that sometimes it may be used for less altruistic motives.

One example of this is the delay of the introduction of DVD recorders in the U.S. The motive? Though the machines already were available in other countries for a few years, introduction to the U.S. market was delayed to protect the complementary rights of DVD producers (many of which were owned by the same parent companies that owned the recorder manufacturers) as well as to preserve the declining market for their VHS recorders. The use of intellectual property rights has been a method sometimes used by record companies, movie studios, and manufacturers to hold back or suppress innovation and, thus, competition from new products. This conduct has become known as planned product obsolescence.

“Wealth creation in the global village is shifting from a resource to a knowledge base. The economy is increasingly dependent on brain power and our ability to create, to sell, to explain, and to solve problems. In the future, wealth will come more and more out of our heads; less and less will it come out of the ground. And the goods and services of our brainpower will be marketed in an increasingly competitive global village.”

As has been said often in many contexts and places, our civilization is in transition from the Industrial Age to the Information Age. As one might expect during epochal upheavals, there is much chaos, not to mention certain casualties, as old institutions struggle to adapt. There is both chaos and entropy as 21^st Century permutations of energy-information transformations occur in relation to legal, political, and economic structures that may or may not be flexible enough to accommodate evolution without causing widespread disruption. The case of Napster, along with other Internet file-sharing cases, is but one example of market failure that can occur due to the structural incoherence of new “life forms” that are introduced into the socio-political environment. There are so many others that we can but glimpse at the anomalies as if this were a National Geographic special.

As much as the computer and its various aspects of networking, especially the Worldwide Web, have been transforming and uprooting old patterns and structures, we may be getting only a small taste of epoch-shattering change as compared to the potential that nano-technology, a new science based on miniaturization, promises. Dr. Bart Kisko, a professor at the University of Southern California , wrote a book called Heaven in a Chip (Random House, 2000) that is a visionary tour of nano-tech. It may raise the hair on the back of your neck.

Nano-technology is based on microchips the size of molecules. One chip is claimed to measure 100 atoms across. According to Kisko, futuristic scientists are less than a hair’s-breadth away from being able to program molecules to alter shape. Kisko claims that it may soon be possible for scientists, like the alchemists of old, to convert one form of matter into any other form due to the electro-magnetic properties of molecules. Turn mere sand into petroleum? Create “smart” or self-correcting robots that could clean up toxic wastes, wage war, or perform medical operations from inside of a human body? In a recent radio interview, Kisko stated that such possibilities may not only be feasible, they soon may be inevitable. However, he also said that one of the major hang-ups is a “patent logjam from a patent office that is overworked and under-funded.” Kisko states that it takes an average of two years to get a patent processed and approved. The disclosure process that accompanies this patent filing, which would make recent developments in the field proceed apace, is being delayed by secrecy and counter-productive patent disputes. He adds, “While Einstein may have worked in a patent office, the people we have now are more like Dennis the Menace.”

For better or for worse, scientific advancement almost always has struggled against conservative forces representing societal inertia. The scientists who finished the Manhattan Project (the development of the atom bomb) are said to have lamented their feat after viewing test results. Galileo, who is said to be the father of modern science for wedding mathematics to empirical research, was forced by the Inquisition--at the threat of death--to recant his view that the earth revolves around the sun. The Detroit Free Press reprinted a New York Times article (“Report: Scientists Kept Out of Jobs over Politics,” 6 September 2004) that cites a report by the Union of Concerned Scientists in which the scientific community complains that nominees to scientific advisory panels were asked questions about their voting preferences in the last election and their stances on various philosophical issues. The report continues, “Secretary Tommy Thompson’s office (the Department of Health and Human Services) rejected nineteen of twenty-six candidates that didn’t support certain of the President’s policies.” So much for scientific objectivity.

However, the Bush administration is on the right course internationally in respect to intellectual property rights, according to H.H. Chartrand (“Intellectual Property in the Global Village,” Cultural Economics [10 September 2004], www.culturaleconomics.atfreeweb.com). In the recent round of World Trade Organization negotiations over the General Agreement on Tariffs and Trade (GATT), intellectual property rights were insisted upon in formal international trade talks. With respect to business software, Chartrand comments that the Washington-based Software Publishers Association estimates that software piracy had cost firms in the United States and elsewhere more than $8 billion in 1994. The greatest offenders were China (98% of business software in that country was pirated), Russia (95%), and Thailand (92%).

In fact, we can look forward to President Bush cracking down even harder in his second term. In its article “U.S. Prepared to Crack Down on Intellectual-Property Piracy” (4 October 2004), the Wall Street Journal reported that the administration has announced a coordinated crackdown called STOP (Strategy Targeting Organized Piracy) because pirated products and trademarks amount to about 7% of global trade. The Wall Street Journal stated, “ U.S. officials say the problem has begun to hit--besides movies and compact discs--even small U.S. manufacturers and goes beyond designer purses and movies to include sales of substandard tools and parts under the stamp of well known U.S. brands.”

Microsoft Corporation, which already has paid over $3.5 billion to settle anti-trust lawsuits, recently found itself in a new battle. Microsoft faces new, potentially damaging allegations about its business conduct in a patent theft and monopolization case that is pending in the U.S. District Court in Baltimore . In a recent filing, a small Silicon Valley software company called Burst.com, Inc.—whose early investors included the Irish rock band U2--alleges that Microsoft routinely destroyed much of its internal e-mail, despite the many federal investigations and private suits that it has faced in recent years, when Microsoft often has been under court orders to preserve such communications.

Burst.com charges that Microsoft used its digital-media technology in Windows, solving a technical problem that was slowing the acceptance of Internet video. Burst.com also claims that Microsoft tried to patent the technology after a technical briefing from Burst.com. They claimed that Microsoft altered Windows so that Burst.com’s product would not work. Microsoft denies the charges. For more information on this case, see www.burst.com/new/newsevents/pressrelease001.htm.

While America sometimes is derided as being a litigious society due to the frequency of lawsuits, the response should be that this derision occurs because the U.S. is a creative and dynamic society. In addition, our court system usually provides a more immediate way to cope institutionally with change than the laborious ponderings, primpings, and musings of the various legislative bodies. That being said, it is a positive sign that the National Institute of Health (NIH) is leaning on the scientific publishing industry and prodding it to make many of its peer-review studies available to the public (Wall Street Journal, “Biomedical Publishers Plan More Free Articles, 8 December 2004). In this regard, there has been much criticism of the medical industry, in that scientific advancement is delayed by the pace of bio-medical corporations and university research departments to publish information about their findings, information that could lead to breakthroughs by other research groups, if speedily disseminated.

In the desire for proprietary conquest of various diseases, the bio-medical corporations and universities are only too happy to take taxpayers’ money via NIH grants to do the research. However, at the hint of any research breakthrough, these institutions rush to the patent office to ensure their private rights of intellectual property. If Professor Kisko is correct that it takes up to two years for the disclosure aspect of the patent process, research will continue to crawl. Consequently, lives will continue to be at risk. Since scientific journals, which publish such research for peer review, are expensive and not readily accessible, the NIH (as a party to this esteemed learning), could claim an intellectual-property right upon said journals as a social good. The WSJ article reported, “NIH Director Elias Zerhouni said that scientists with NIH funding should make their work available on a free NIH web site after a six-month delay.”

Between the ideal good of the Intellectual-Property clause in the U.S. Constitution as seen by Madison, Jefferson, and Franklin and the actual business practices that occur today, there exists much disparity. In the course of evolution, there are always winners and losers. For society as a whole, the way to survival is the same as it is for a single entity faced with complexity: adaptation.

“Human minds have a unique cosmic function not identifiable with any other phenomena--the capability to act as local Universe information-harvesters and local Universe problem-solvers in support of the integrity of an eternally regenerative Universe.”

--Buckminster Fuller, in Critical Path (St. Martin’s Pr., 1981)

On 3 January 2005, Ed Karamanian of Bloomfield Hills wrote the following letter, titled “Broken Promises,” to the editor of the Detroit Free Press.

Karamanian stated, “As a person with 40 years of work experience starting at Fisher Body then Delphi and finally at GM working on the start-up of their Shanghai plant, it saddens me to see the pain and suffering happening to workers and businessmen in Michigan and the United States.

Unfortunately, I was misled trying to convince U.S. suppliers to relocate in China by GM and Chinese officials. The big fear suppliers had was patent protection, trademark protection, proprietary information protection because of China’s bad past record. I was told that China was seeking entry into the World Trade Organization and one of its requirements was to honor these principles. Now that China is a member, all promises are null and void. To do business in China is to spill your guts with technology. What was your proprietary information is now theirs.

What nation will now ask for China’s removal from the World Trade Organization because of these violations? None.

Right now in China there is a strong demand for autos, but once the major manufacturers crank up and excess supply results, the export of autos to the U.S. will begin. Who will challenge the Chinese promise not to do so? As more and more workers lose their jobs in the U.S., the only vehicle they will be able to afford will be a Chinese-built $14,000 compact. Then how will GM, Ford, and Chrysler compete?

The answer is not free trade but fair free trade.”

The China Bull in the Workshop

The answer to one of Mr. Karamanian’s questions came just three days after his letter was published: major media outlets announced that the “Cherry,” a Chinese-built compact, will now be introduced into the U.S. market.

Other questions are more difficult to answer because the international trade system is a complex system; that is, no single aspect of a complex system can be isolated out of context of the system as a whole. The system includes politics, demographics, stock-market imperatives, the transportability of capital, and the transportability of information, or what sometimes is called “information contagion.”

For instance, entry into the World Trade Organization (WTO) sometimes is used as a carrot to get a nation to cooperate on other matters. In China’s case, it was to make it agree to end egregious human-rights violations; to cease exporting nuclear and missile technology via Iran and North Korea; and to “try” to curb its internal production of cheap products with U.S. trademarks, like auto parts that fail dangerously in certain conditions and piracy of video and music products that it exported, and continues to export, to other nations.

Obviously, China has a way to go in complying totally. However, no country is perfect. The U.S. often tangles with the WTO, as it has with its recent, and some would say egregious, farm subsidies--to the tune of $350 billion under the Bush administration. The U.S. also has a rampant problem with music and video piracy domestically. (We will address this topic in our next installment.) It took the U.S. government over a hundred years before it began to cooperate with international copyright law, as we documented in part one of this series. Lest anyone forget, China is little more than 50 years old as a nation!

In textbooks on Economics, it would be said that China is practicing a strategic trade policy known as the “infant industry argument.” Here, a developing nation may subsidize its infant industry in various ways. Even as Early-American publishers, including Ben Franklin, developed their industry, markets, and capital by pirating foreign authors, so do the Chinese subsidize their industries by neglecting to recognize fully or to enforce international patent, trademark, and copyright laws domestically. If multi-national companies still wish to locate their production facilities or their investments in China, it may be wise to license agreements with arms-length patent and copyright holders who are often individual inventors with little clout on the international level. This could be done not only as a financial investment but also as a way for these companies to avoid compliance. Such a development surely opens a future market niche for American law firms on that scale: a further evolution of intellectual property litigation will be imminent.

“I Got a Hellhound on my Trail” (old Blues song by Robert Johnson)

An evolution in intellectual property practice is indeed on the horizon. Timothy Aeppel reported in the Wall Street Journal (“Patent Dispute Embroils Host of Industries,” 21 October 2004) about the Chicago-based company Solaia Technology LLC. Aeppel called Solaia “one of dozens of enterprises created in the last decade solely to buy patents and collect licensing fees from any company that, in their view, infringes on their protected idea.” Aeppel states that while the number of U.S. patents issued annually has more than tripled over the past two decades, the patents also are the source of a growing litigation that is emerging as a sub-industry. (There were 2,814 patent infringement lawsuits filed in federal court last year, and a vast number of cases that were settled before they ever were filed.)

In the Solaia case, the patent applies to a system that includes several elements. The software and equipment allows a central computer to communicate with a number of machines that are spread out on a factory floor. According to Aeppel, Solaia formed three years ago specifically to acquire the disputed patent from a French company called Schneider Electric. The dispute already has ensnared more that forty of the country’s largest industrial names, including Rockwell Automation, Clorox Co., U.S. Steel, Eli Lilly and Co., and even Tootsie Roll Industries (though the latter has been dropped).

An unusual aspect of this suit is that Solaia evidently bought only a share of the patent or formed some type of partnership with Schneider. The latter, a competitor of Rockwell, has leveraged the suit by having its salesmen warn customers not to buy Rockwell products because of the threat of patent litigation.

A local company has found deep traction exploring this niche. St. Clair Intellectual Property Consultants Inc., a firm with six staff members housed above an office-supply shop on Kercheval, has won $34.7 million against Canon Inc. and unspecified damages against Sony Corp. St. Clair was awarded this money for the rights to a digital camera invented by three local inventors that was copied by the high rollers. As reported in the Detroit Free Press (“Patent Lawsuits Give Firm Clout,” 25 October 2004), “What started out as a dinner party novelty has turned into a lucrative patent for a small group of Grosse Pointe lawyers--but not without years of high-stakes litigation with some of the world’s largest camera and photography companies.”

As is often the case, inventors patent a product but lack the capital or wherewithal to develop it. However, the specifications and designs are available publicly at the patent office for any shark to discover on the Internet. This is one reason that in Canada, the patent office recommends that any applicant go through an attorney before registering a patent. This sounds like solid advice for U.S. inventors as well.

Hopefully, some of the developments mentioned above, such as the partnering of firms that specialize in intellectual property law, will help attorneys to gain the expertise, the clout, and the capital to tame the beast in the East while keeping the other eye on domestic serpents.

“Henry Ford, it is said, commissioned a survey of the car scrap-yards of America to find out if there were parts of the Model T Ford which never failed. His inspectors came back with reports of almost every kind of failure: axles, brakes, pistons—all were liable to go wrong. But they drew attention to one notable exception; the kingpins of the scrapped cars invariably had years of life left in them. With ruthless logic, Ford concluded that the kingpins on the Ford Model T were too good for their job and ordered that in the future they should be made to an inferior specification.”

--Nicholas Humphrey, Consciousness Regained: Chapters in the Development of Mind (reprint, Oxford University Press, 1984)

One of the common justifications used by consumers of pirated electronic entertainment is that they are fed up with purchasing expensive CDs that have merely one or two decent songs per album. They feel that the bulk of these CDs consist of little more than “filler.” During the Napster controversy, even the conservative Wall Street Journal lent qualified editorial sympathy to illicit file-sharing on the basis of an outdated and short-sighted business model being used by the music industry. The Internet has provided the means that is causing long-simmering consumer frustration to boil over.

Likewise, the television networks and film studios have faced episodic onslaughts of electronic piracy since the advent of the VCR. Consumers have been able to tape television programs—omitting commercials—on their VCRs and to scam digital movie copies off of the Internet, thus avoiding travel, long lines, and the risk of investing time and money on a film that may be a dud. A charitable view would allow that such piracy represents consumer discretion—a way of investing one’s time and money wisely—while the copyright holders and studios see this merely as cheap opportunism at best and criminal activity at worst.

Of course, this is not merely a case of crime and punishment. Complexity is involved: the governments of the world have maintained a hands-off policy (as much as possible) in respect to the evolution of electronic technology. These governments acknowledge that the tensions and economic disruptions involved in this evolution--which has a social cost, to be sure--is more than offset by the economic potentials and provable gains that novelty always has provided to society as a whole! It is important to qualify our amazement with this novelty and its pace of development and to realize that the economic dislocations could have deleterious consequences in ways yet unforeseen.

A crucial and potentially landmark case will hit the mainstream this year. The U.S. Supreme Court will be hearing the case of Metro Goldwyn Mayer Studios, Inc., Atlantic Recording Corporation, et al vs. Grokster, Ltd. and Streamcast, Inc. (No. 03-55894, D.C. No. CV-01-08541-SVW). As summarized in the article “Web Piracy Case Hits High Court” (Detroit Free Press, 27 January 2005), this high-profile case is expected to determine whether or not Internet file-sharing services are responsible for the illegal swapping of songs and movies by customers, a multibillion dollar legal question that may shape the future of technological innovation significantly. Generally, the Recording Industry Association of America (RIAA) and Motion Picture Association of America (MPAA) have been forced to go after individual users of the file-swapping services, a costly and time-consuming process akin to sticking a finger in a hole of the dike that has new holes popping out continuously. This case will decide if these plaintiffs can go after the file-servers, an action that would prove more efficient and economical. At issue is a legal standard set by the Supreme Court in 1984. In this case, the Court ruled that the creators of the Sony Betamax VCR format could not be held liable for acts of copyright infringement so long as a device is capable of substantial legitimate uses. This ruling sought to strike a balance between the competing rights of copyright holders of content and innovators of technology. Courts that have held third parties liable for copyright infringement operate under two long-standing common-law doctrines, contributory infringement and vicarious liability.

One of the most concise and complete discussions of this problem was provided by Douglas Lichtman and William Landes in their article “Indirect Liability for Copyright Infringement: An Economic Perspective,” (Harvard Journal of Law & Technology, spring 2003.) As Lichtman and Landes point out, the issue of indirect liability was addressed by Congress in 1998 when it passed the Digital Millennium Copyright Act. One provision immunizes a broad class of Internet access providers, telecommunication companies, and Internet search engines from indirect liability, so long as these entities satisfy certain specific requirements designed to safeguard the interests of copyright holders.

Lichtman and Landes state, “Before this legislation came into effect, the liability associated with many of these entities was in doubt. Was an Internet service provider vulnerable to a claim of vicarious liability given that it charges its users for Internet access and has ultimate control over what is, and what is not, available online? Was an online auction site like eBay liable since the site profits every time a seller sells an infringing item? The Digital Millennium Copyright Act answered these questions by establishing a safe harbor: if these Internet entities follow the requirements laid out by the stature--requirements that typically require the entity to act when a specific instance of infringement is either readily apparent or called to the entity’s attention by a copyright owner—they are immune from charges of vicarious liability and contributory infringement.”

In the case coming before the Supreme Court this summer, the RIAA and MPAA are going after Grokster and Streamcast because they operate services that are used principally for infringement. It is this infringement, not legitimate activity—as required by the Sony-Betamax decision—that earns them the revenue, as claimed by the plaintiffs.

On the other side of the equation, we have Michael Petricone, vice president of Technology Policy for the Consumer Electronics Association, stating that “Betamax and the principles that Betamax represents… gave the technology industry the license to go out and innovate without having to ask the content industry’s permission first.” Also, as Alan Davidson, associate director of the Center for Democracy and Technology, notes in the Free Press article, “The Internet has flourished to a large extent because of the freedom to innovate.”

Petricone said that the Betamax ruling led to a surge of new products, from the DVD to the TiVo digital video recorder to the iPod portable music player. As this illustrates, the government is in a balancing act between protecting the rights of producers and artists while allowing innovation to proceed unhindered.

In the long term, it may be very useful to consider an idea mentioned in the article by Lichtman and Landes, the concept of “efficient approach.” For instance, the authors state, “Neil Netanel argues in a current working paper that Congress should declare certain types of unlicensed online file swapping legal and then, in exchange, require firms that profit from file swapping activity to build a modest copyright levy into the price of their various goods and services.” Presumably, this would suggest that we tax Internet servers and, possibly, producers of computers, blank CD and DVD media, disc burners, and other related items. The proceeds could be delivered to ASCAP, BMI, the RIAA, the MPAA and other content-producer representatives who then could distribute the proceeds among copyright holders. This proposal has a parallel to the long-standing practice of the BBC in Britain in which purchasers of television sets pay a high value-added tax up front. This tax goes directly to the BBC, who then provides high-quality, commercial-free programming.

This idea begs a question: not if, but when will there be an appropriate tax on the Internet as a whole and, in particular, an effective sales tax on the plethora of online purchases? With declining state tax revenues, caused in part by the increasing amount of non-taxed (or at least non-collected tax) purchases of all sorts of consumer goods, to the extent that even Wal-Mart is entering the online purchasing parade, there has to be a point when these market transactions will be effectively taxed. After all, if teacher shortages and school closings result from continued declines in state revenue, eventually we may have an Internet complete with music, video, and consumer products but with no literature or even blogs because no one will be able to read and write! Perhaps this helps to explain why we have had little clamor in the literary community over copyright infringement.

Indeed, there are social costs to go along with the benefits of technological innovation. There always will be. However, when the invisible hand of the marketplace meets the invisible hand of gravity—as it someday must—it will be reality’s turn to dance with novelty, and that too is an integral part of evolution.

“While in prison, the Spaniard Cervantes invented the first novel when he wrote the great Don Quixote. Outside perhaps of Shakespeare, Don Quixote is almost certainly the best thing written by anybody, at any time and at any place. Nobody had ever seen anything like this--a novel--and it sold immensely, spreading over the countryside like a wild fire. Coming out of prison a few years later, Cervantes was cheated by his publisher and never received a coin.”

--Howard Bloom, author and critic, writing in the Wall Street Journal

Buckminster Fuller, inventor of the geodesic dome (and countless other wonders) and an industrial consultant to the Roosevelt Administration during WWII, also was a great theorist, an author, and the coiner of the term “synergy.” In his autobiographical collection of thoughts, theories, and perceptions, Critical Path, (St. Martin=s Press, 1981), Fuller had much to say about intellectual property rights. He writes, “While a U.S.A. patent can be obtained for less than $200, a patent that the great corporations’ patent attorneys see no way of circumventing requires expensively expert professional services. Added to this is the cost of world-around major nations’ patent coverage (which foreign patents must be applied for and obtained because every country can now air-deliver their inventions into any other country within less than a week.... This world-around patent coverage cost about $50,000 in 1975 (it was $30,000 in 1950) for obtaining each world-protected, probably court-sustainable, infringement-defying patent.”

In respect to his inventions, Fuller states, “In every instance I sought the services of those lawyers most widely acknowledged to be the champion patent attorneys of that moment in the specific category of my type of inventions…. From time to time during the half-century since I first obtained a patent, the patent attorneys of more than 100 of the world’s most powerful corporations have called upon my patent attorneys to obtain a license under one or more of my patents.” Fuller goes on to say that his attorney was told by a visiting corporate attorney that his corporate client asked him to find a way of circumventing Fuller’s patent. However, Fuller’s attorney had written the claims so well that the visiting attorney was forced to advise his client to procure a license under Fuller’s patent. By doing so, this would allow the corporation to manufacture Fuller’s invention without exposure to what the author calls “almost certainly devastating infringement expense.”

This statement discloses two truths. The first is that many multi-national corporations, which now make the major portion of their profits out of “know-how,” deliberately steal know-how wealth whenever possible. The second is that if Bucky Fuller had not taken out patents, we probably would never have heard of him. In addition, we would not have learned that an independently operating individual, starting penniless, had succeeded in creating the wealth of inventions and theories that Fuller has.

Shadow Economies

It is one of those open secrets that there are hidden social-political powers calling the shots behind many--if not most--governments of the world. These are referred to colloquially as “shadow governments.” However, there also are shadow economies in which rules are broken, are unenforceable, or are consciously ignored for political or economic expediency. A good example is the case of Afghanistan, which has its own open secret: it is responsible for about 70% of the world’s heroin. Presently, the country is occupied by American troops that represent a nation having the world’s largest prison population; 25% of all convicted criminals in the world sit in prison in the U.S.A., the majority of them for drug-related crimes. Any avid connoisseur of conspiracy theory could have fun with this. However, for the sake of argument, let us assume that the U.S. government has very good reasons for policies that tolerate this situation.

In the realm of intellectual property, there also are glaring discrepancies around the world between generally accepted accounting practices and various and sundry shadow economies.

As reported by Peter Wonacott and Sarah McBride (“To Catch Film Pirate, U.S., China Follow Spy Flick to Shanghai,” Wall Street Journal, 7 March 2005), the Hollywood film companies lose “an estimated $3.5 billion dollars in global losses a year” due to piracy. The article mentions that, in most cases, DVDs are copied from video camcorders having good recording quality (prosumer high-definition models now go for less than $3,000.00.) The pirates copy off the screen in movie theatres, though there are instances where people in the theatre audience can be seen standing up, or their voices or coughs are picked up. Months before the studios release their own legit DVDs, hundreds of thousands of pirated DVDs are sold on the street for approximately $2.00.

In an article by Kate Kelly, Ethan Smith, and Peter Wonacott (“Movie, Music Giants Try Fighting Pirates on Price,” Wall Street Journal, 7 March 2005”), they cite the International Federation of the Phonographic Industry to state that, in China, it is estimated that 90% of all CDs sold are pirated CDs. In Mexico, the piracy rate (for CDs) is about 60%, and in two dozen countries, primarily in Latin America and Asia, at least half of all CDs sold are pirated.

In the first article cited, an official of the Motion Picture Association of America (MPAA) decried the efforts of the Chinese government, which busted a U.S. citizen who had moved to Shanghai. The entrepreneur, Randolph Hobson Guthrie III, set up a three-man operation that produced tens of thousands of illicit DVDs and advertised them over the Internet. While scanning eBay, an attorney working for MGM Studios found ads touting low-cost DVDs in bulk. With MPAA assistance, he set up a sting operation and busted Guthrie for possession of massive amounts of these DVDs. The rueful MPAA executive said, “Chinese officials would love to be able to say their country is not responsible--it is a U.S. citizen.” The MPAA maintains that China is making a show-trial out of this case to disguise the fact that, at this point, their government generally makes little effort to enforce Intellectual Property rights.

Freedom at Any Price?

Observing the overall pattern of international transgressions, it could be noted that there seems to be relatively little piracy in the Middle East, at least on a scale massive enough to draw international interest. We know that they at least have VCRs in that region because video copies of terrorist beheadings sell on the street for $5.00 in Baghdad. However, we can reasonably assume that no mechanical copyrights were violated, if indeed copyright claims were even registered. One could suggest that the piracy rate is low in parts of the Middle East because these regions have remained economically stagnant due to their authoritarian proclivities. Commerce of any kind is inhibited by ruinous licensing fees (“baksheesh”) and onerous bureaucratic barriers to entry. Perhaps we should consider that these regions, where shadow economies exist, reflect a dynamic and typify a primitive accumulation of capital that presages hopeful development. Point of fact: in places like China, where at any given time there may be 200 million unemployed and many times that number underemployed, a shadow economy provides a de facto safety net, allowing stability to a system in struggle. This also appears to be the situation in Afghanistan, which not only experienced two decades of civil war, but five years of punishing drought as well. Freedom is a dangerous enterprise that comes with peril and strife and is paid for in many ways--and almost always in blood.

In respect to stability and safety nets, there were a number of studies conducted in the 1970s by the International Labor Organization (ILO), an agency of the United Nations. Their periodical, World Development, has published a series of articles relating to shadow economies, which they refer to as Informal Sectors. In these articles, many scholars discuss the viability of these shadow sector developments (also referred to Underground Economies) and have gone as far as to encourage some countries to nurture them for stop-gap purposes of primitive accumulation and survival. Indeed, at the time that these studies were conducted, “informal economies” were all that existed in many nations. (For further information, see “An Exploration into the Nature of Informal-Formal Sector Relationships,” World Development, Vol.6, Nos. 9/10, 1978, Pergamon Press, Great Britain.)

The violation of pirated product by consumers is based upon the economics of the value of the products in question relative to the consumers’ money income. It also is based on the value of their time. Consumers anywhere have the incentive to buy pirated goods—or to pirate the goods themselves—when the price of the legit product far exceeds the cost of obtaining a pirated copy. For example, if a consumer is weighing the cost of purchasing a music CD against the cost of an hour or so spent downloading and burning one, a $15.00 price tag for a legit, manufactured, high-quality CD may seem excessive to someone who earns only minimum wage. However, to a consumer who earns $25.00 per hour, the convenience of spending $15.00 instead of using up an hour of his or her time may appear to be more cost-effective.

The examples given above outline the enforcement—or lack of—intellectual property laws in the global market. Violations of intellectual property rights throughout the world cannot be ended soon or easily, especially with standard practices. The holders of intellectual property rights, who generally tend to be established in first-world countries, need to find ways of ameliorating the widespread violations in countries that have a much lower standard of living than their own.

“[M]usicians and songwriters have to adjust to the fact that the 20^th century will likely be a ‘golden age’ in terms of the earning potential of their kind; we are as likely to protect that construct as manufacturers of analog recording tape are likely to protect theirs. The business of writing and recording music is going to pay less and support fewer people. There will still be music, and some of it will be great, and those great people will still get paid a lot, but they are for sure going to make less than they would have before anyone knew what an ‘mp3’ was.” --Andy Snitzer, in a letter to the Wall Street Journal (7 April 2005) titled “The Day the Music Residuals Died.”

We think that Mr. Snitzer is wrong. His letter was a response to a column by Daniel Henninger in the Wall Street Journal concerning the upcoming Supreme Court ruling about Internet piracy (“Can Justice Scalia Solve the Riddles of the Internet;” WSJ, 1 April 2005). This article is as terse and well-written as it is naive and under-informed. It has been said that Conservative thought, which has been rather dominant in the past decade and a half, is divided into two schools. The first is the “realist” camp, which is considered somewhat nativist, protectionist, and adverse to radical change; it is perhaps best represented by Pat Buchanon. The second school is the Neo-Conservative, which is considered more radical, idealistic, and-- especially by Mr. Buchanon--utopian.

Like Daniel Henninger, the WSJ Neo-Cons have an idealist’s view of the Internet (as they do of “free markets”). The Neo-Cons contend that evolution can occur only when unimpeded by government control or influence. Thus, they create the false dichotomy of government versus marketplace. That finally crashes into the wall of cyber-reality when confronted with the problems of intellectual property law, spammers, hackers, and identity thieves, to name but a few.

People who deny reality—of which idealists may be the biggest culprits--rarely do well in math. The particular equation considered here is that, in its phases of evolution, our Capitalist system includes novelty, innovation, and private property, with a particular emphasis in America on individual rights of private property.

“Taxes Are the Price We Pay for Civilization”--Oliver Wendell Holmes

As stated above, Henninger writes well and tersely. He asks, “How is it that millions of Americans who wouldn’t cross the street against a red light will sleep like lambs after downloading onto their computers a Library of Alexandria’s worth of music or movies--for free.” Then Henninger laments, “It may seem quaintly old school to suggest that people should stop downloading culture without paying simply because it’s the right thing to do. But that may be the best option available.” Then Henninger reveals his real fear: “For starters, if ‘the people’ don’t solve this problem themselves, Congress will, and you won=t like the solution--unless you enjoy the tax code.”

The writing is on the wall. Already we have anecdotal reports that a few Silicon Valley companies are working on software that, presumably, state governments will be able to use to calculate sales tax owed for products sold over the Internet. As stated earlier in this series, with companies as large as Wal-Mart going into E sales, the loss of sales tax to the states makes ignoring this “evolution” potentially catastrophic. As a point of fact, modern evolutionists account for the principle of the interconnectedness of economic entities and use the term “co-evolution” to describe the principle that nothing evolves in nature without affecting surrounding entities.

Government and Markets Co-evolve

Of all the research we have done for this series of articles, the most succinct, encompassing, and relevant paper that we have found on this subject comes from the Harvard Journal of Law & Technology (Douglas Lichtman and William Landes, “Indirect Liability for Copyright Infringement: An Economic Perspective,” spring 2003). A footnote states that one Neil Weinstock Netanel wrote a paper, “Impose a Noncommercial Use Levy to Allow Free Peer-to-Peer File-Swapping and Remixing,” that he wants to submit to Congress. Netanel suggests that Congress could levy an excise tax on digital copying equipment, from burners to discs to whatever comes down the road in the future. The resulting proceeds of this levy could be distributed to copyright holders via the performing rights societies that manage the collection of royalties for their member artists. These societies include such organizations as the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music Inc. (BMI).

The Harvard Journal article provides several useful illustrations of this copyright problem, such as the flea-market dilemma. This involves a California case in which the impresario of a flea market profited by selling booths to proprietors--some of whom sold pirated CDs and movies. The case was decided based upon the U.S. Supreme Court ruling in the case of Sony v. Universal City Studios, 1984. In this landmark case, the Court decided that the introduction of VCR recorders could proceed legally since they had legitimate use-value, besides their obvious illicit possibilities. The decision in the California case also was based upon the Digital Millennium Copyright Act passed by Congress in 1988. The California court decided that, since the flea-market owner had the ability to police the activity of booth proprietors selling pirated materials, this impresario was guilty of indirect liability and contributory negligence and, therefore, was liable for damages.

In the latest music piracy case before the U.S. Supreme Court, MGM, et al, v. Grokster, the Court will be deciding whether or not this file-sharing service is liable, if indeed it is adjudged that the proprietor could have monitored the illegal file-sharing of its subscribers. However, even before this case is decided, it may be rendered moot by still another development in the evolution of piracy. As reported in the press posting at www.riaa.org/news (“RIAA Targets New Piracy Epidemic on Special High-Speed Campus Network,” 12 April 2005), the Recording Industry Association of America (RIAA) and Motion Picture Association of America (MPAA) are pursuing 405 students at 18 universities (limited to 25 per university, including Michigan State) for illegally distributing more than 1.5 million total files. The miscreants are users of a new ultra high-speed service called Internet2, which is out of Ann Arbor. However, unlike the owners of Grokster or Napster, which existed only for piratical downloading, the proprietors of this service are not even liable indirectly. Clearly, this is because their technology is completely decentralized. Evidently, its very nature makes tracking of users virtually impossible.

It always was efficient economically to sue proprietors of a centralized service for indirect liability. In addition, it is generally considered untenable, on a cost-benefit ratio, to go after individual users--not to mention the burden it places on already jammed court dockets. This latest evolutionary development merely reinforces the idea that the only sensible thing is for the government to recognize that illicit downloading represents market failure on a mass scale. Therefore, the only way to reconcile the principle of private property with the principles of innovation and novelty--all of them pivotal in an economic sense--is to for the government finally to devise a sensible approach to the Internet. Tax the damn thing and give the artists their money!

As a practical matter, this should be part of well-considered and deliberated legislation that also will allow the states to collect their sales tax for all E commerce. If this is not done, what will be the alternative--hire 10,000 more judges and build 1,000 more courthouses to handle massive liability cases? If taxes be the price of civilization, then let’s get real... and get our roads fixed in the meantime.

We hope that you have enjoyed our series on intellectual property. Hopefully, the attention that we have paid to this subject underscores its importance. We also hope that some of the issues that we have pointed out, such as problems with enforcement of intellectual property in cyberspace and the social politics of intellectual property rights in developing economies and their effect on world trade, are particularly relevant. We plan to revisit the subject of intellectual property as new developments occur.