15

Daily politics cares little for the limitations imposed by const.i.tutions or for the structural principle the Court describes--that we should leave facts free for others to build upon. Since 1991, a few database companies have lobbied the Congress strenuously and continuously to create a special database right over facts. Interestingly, apart from academics, scientists, and civil libertarians, many database companies, and even those well-known property haters, the U.S. Chamber of Commerce, oppose the creation of such a right. They believe that database providers can adequately protect themselves with contracts or technical means such as pa.s.swords, can rely on providing tied services, and so on. Moreover, they argue that strong database protection may make it harder to generate databases in the first place; the facts you need may be locked up. We need to focus on the inputs as well as the outputs of the process--a point I have tried to make throughout this book. The pressure to create a new right continues, however, aided by cries that the United States must "harmonize" with Europe, where, you will remember, compilations of facts are strongly protected by intellectual property rights, even if their arrangement is unoriginal.

16

So here we have our natural experiment. One major economy rejects such protection and resists pressure to create a new right. A different major economic region, at a comparable level of development, inst.i.tutes the right with the explicit claim that it will help to produce new databases and make that segment of the economy more compet.i.tive. Presumably government economists in the United States and the European Union have been hard at work ever since, seeing if the right actually worked?

Well, not exactly.

17

Despite the fact that the European Commission has a legal obligation to review the Database Directive for its effects on compet.i.tion, it was more than three years late issuing its report. At first, during the review process, no attention was paid to the actual evidence of whether the Directive helps or hurts the European Union, or whether the database industry in the United States has collapsed or flourished. That is a shame, because the evidence was there and it was fairly shocking. Yet finally, at the end of the process, the Commission did turn to the evidence, as I will recount, and came to a remarkable conclusion--which was promptly stifled for political reasons. But we are getting ahead of ourselves.

18

How do we frame the empirical inquiry? Intellectual property rights allow the creation of state-backed monopolies, and "the general tendency of monopolies," as Macaulay pointed out, is "to make articles scarce, to make them dear, and to make them bad."

Monopolies are an evil, but they must sometimes be accepted when they are necessary to the production of some good, some particular social goal. In this case, the "evil" is obviously going to be an increase in the price of databases and the legal ability to exclude compet.i.tors from their use--that, after all, is the point of granting the new right. This right of exclusion may then have dynamic effects, hampering the ability of subsequent innovators to build on what went before. The "good"

is that we are supposed to get lots of new databases, databases that we would not have had but for the existence of the database right.

19

If the database right were working, we would expect positive answers to three crucial questions. First, has the European database industry's rate of growth increased since 1996, while the U.S. database industry has languished? (The drop-off in the U.S. database industry ought to be particularly severe after 1991 if the proponents of database protection are correct; they argued the Feist case was a change in current law and a great surprise to the industry.) 20

Second, are the princ.i.p.al beneficiaries of the database right in Europe producing databases they would not have produced otherwise? Obviously, if a society is handing over a database right for a database that would have been created anyway, it is overpaying--needlessly increasing prices for consumers and burdens for compet.i.tors. This goes to the design of the right--has it been crafted too broadly, so that it is not being targeted to those areas where it is needed to encourage innovation?

21

Third, and this one is harder to judge, is the new right promoting innovation and compet.i.tion rather than stifling it?

For example, if the existence of the right allowed a one-time surge of newcomers to the market who then use their rights to discourage new entrants, or if we promoted some increase in databases but made scientific aggregation of large amounts of data harder overall, then the database right might actually be stifling the innovation it is designed to foment.

22

Those are the three questions that any review of the Database Directive must answer. But we have preliminary answers to those three questions and they are either strongly negative or extremely doubtful.

23

Are database rights necessary for a thriving database industry?

The answer appears to be no. In the United States, the database industry has grown more than twenty-five-fold since 1979 and--contrary to those who paint the Feist case as a revolution--for that entire period, in most of the United States, it was clear that unoriginal databases were not covered by copyright. The figures are even more interesting in the legal database market. The two major proponents of database protection in the United States are Reed Elsevier, the owner of Lexis, and Thomson Publishing, the owner of Westlaw. Fascinatingly, both companies made their key acquisitions in the U.S. legal database market after the Feist decision, at which point no one could have thought unoriginal databases were copyrightable. This seems to be some evidence that they believed they could make money even without a database right. How? In the old-fashioned way: competing on features, accuracy, tied services, making users pay for entry to the database, and so on.

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If those companies believed there were profits to be made, they were right. Jason Gelman, a former Duke student, pointed out in a recent paper that Thomson's legal regulatory division had a profit margin of over 26 percent for the first quarter of 2004.

Reed Elsevier's 2003 profit margin for LexisNexis was 22.8 percent. Both profit margins were significantly higher than the company average and both were earned primarily in the $6 billion U.S. legal database market, a market which is thriving without strong intellectual property protection over databases. (First rule of thumb for regulators: when someone with a profit margin over 20 percent asks you for additional monopoly protection, pause before agreeing.) 25

What about Europe? There is some good news for the proponents of database protection. As Hugenholtz, Maurer, and Onsrud point out in a nice article in Science magazine, there was a sharp, one- time spike in the number of companies entering the European database market immediately following the implementation of the Directive in member states.2 Yet their work, and "Across Two Worlds,"3 a fascinating study by Maurer, suggests that the rate of entry then fell back to levels similar to those before the directive. Maurer's a.n.a.lysis shows that the attrition rate was also very high in some European markets in the period following the pa.s.sage of the directive--even with the new right, many companies dropped out.

26

At the end of the day, the British database industry--the strongest performer in Europe--added about two hundred databases in the three years immediately after the implementation of the directive. In France, there was little net change in the number of databases and the number of providers fell sharply. In Germany, the industry added nearly three hundred databases immediately following the directive--a remarkable surge--about two hundred of which rapidly disappeared. During the same period, the U.S. industry added about nine hundred databases. Bottom line? Europe's industry did get a one-time boost and some of those firms have stayed in the market; that is a benefit, though a costly one. But database growth rates have gone back to predirective levels, while the anticompet.i.tive costs of database protection are now a permanent fixture of the European landscape. The United States, by contrast, gets a nice steady growth rate in databases without paying the monopoly cost.

(Second rule of thumb for regulators: Do no harm! Do not create rights without strong evidence that the incentive effect is worth the anticompet.i.tive cost.) 27

Now the second question. Is the Database Directive encouraging the production of databases we would not have gotten otherwise?

Here the evidence is clear and disturbing. Again, Hugenholtz et al. point out that the majority of cases brought under the directive have been about databases that would have been created anyway--telephone numbers, television schedules, concert times. A review of more recent cases reveals the same pattern. These databases are inevitably generated by the operation of the business in question and cannot be independently compiled by a compet.i.tor. The database right simply serves to limit compet.i.tion in the provision of the information. Recently, the European Court of Justice implicitly underscored this point in a series of cases concerning football scores, horse racing results, and so on. Rejecting a protectionist and one-sided opinion from its Advocate General, the court ruled that the mere running of a business which generates data does not count as "substantial investment" sufficient to trigger the database right. It would be nice to think that this is the beginning of some skepticism about the reach of the directive. Yet the court provides little discussion of the economic reasons behind its interpretation; the a.n.a.lysis is merely semantic and definitional, a sharp contrast to its compet.i.tion decisions.

28

So what kinds of creations are being generated by this bold new right? The answer is somewhere between bathos and pathos. Here are some of the wonderful "databases" that people found it worthwhile litigating over: a Web site consisting of a collection of 259 hyperlinks to "parenting resources," a collection of poems, an a.s.sortment of advertis.e.m.e.nts, headings referring to local news, and charts of popular music. The sad list goes on and on. The European Commission might ask itself whether these are really the kind of "databases" that we need a legal monopoly to encourage and that we want to tie up judicial resources protecting. The point that many more such factual resources can be found online in the United States without any legalized database protection also seems worthy of note. At the very least, the evidence indicates that the right is drawn much too broadly and triggered too easily in ways that produce litigation but little social benefit.

29

Now, in one sense, these lawsuits over trivial collections of hyperlinks and headlines might be seen as irrelevant. They may indicate we are handing out rights unnecessarily--did we really need a legal monopoly, and court involvement, to get someone to compile hyperlinks on a Web page? But it is hard to see social harm. As with the patents over "sealed crustless" peanut b.u.t.ter sandwiches or "methods of swinging on a swing," we may shake our heads at the stupidity of the system, but if the problems consist only of trivial creations, at least we are not likely to grieve because some vital piece of information was locked up.

But we should not be so quick to declare such examples irrelevant. They tend to show that the system for drawing the boundaries of the right is broken--and that is of general concern, even if the issue at hand is not.

30

Finally, is the database right encouraging scientific innovation or hurting it? Here the evidence is merely suggestive.

Scientists have claimed that the European database right, together with the perverse failure of European governments to take advantage of the limited scientific research exceptions allowed by the directive, have made it much harder to aggregate data, to replicate studies, and to judge published articles. In fact, academic scientific bodies have been among the strongest critics of database protection. But negative evidence, by its nature, is hard to produce; "show me the science that did not get done!" Certainly, both U.S. science and commerce have benefited extraordinarily from the openness of U.S. data policy.

I will deal with this issue in the next part of this chapter.

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If the United States does not give intellectual property protection to raw data, to facts, how is it that the database industry has managed to thrive here and to do better than in Europe, which has extremely strong protection? The economists described in Chapter 1 would surely tell us that this is a potential "public goods" problem. If it is hard to exclude others from the resource--it is cheap and easy to copy--and if the use of the resource is not "rival"--if I don't use up your facts by consulting them--then we ought to see the kind of dystopia economists predict. What would that consist of? First it might result in underproduction. Databases with a social value higher than their cost of creation would not get made because the creator could not get an adequate return on investment. In some cases it might even lead to the reverse--overproduction, where each party creates the database for itself. We get a social overinvestment to produce the resource because there is no legal right to exclude others from it. If you gave the first creator an intellectual property right over the data, they could sell to subsequent users at a price lower than their own cost to create the database. Everyone would win. But the United States did not give the intellectual property right and yet its database industry is flourishing. There are lots of commercial database providers and many different kinds of databases. How can this be? Is the economic model wrong?

32

The answer to that is no, the model is not wrong. It is, however, incomplete and all too often applied in sweeping ways without acknowledging that its basic a.s.sumptions may not hold in a particular case. That sounds vague. Let me give a concrete example. Westlaw is one of the two leading legal database providers and, as I mentioned before, one of the key proponents of creating intellectual property rights over unoriginal databases. (There is considerable question whether such a law would be const.i.tutional in the United States, but I will pa.s.s over that argument for the moment.) Westlaw's "problem" is that much of the material that it provides to its subscribers is not covered by copyright. Under Section 105 of the U.S. Copyright Act, works of the federal government cannot be copyrighted. They pa.s.s immediately into the public domain. Thus all the federal court decisions, from district courts all the way up to the Supreme Court, all the federal statutes, the infinite complexity of the Federal Register, all this is free from copyright. This might seem logical for government-created work, for which the taxpayer has already paid, but as I will explain in the next section of the chapter, not every country adopts such a policy.

33

West, another Thomson subsidiary that owns Westlaw, publishes the standard case reporter series. When lawyers or judges refer to a particular opinion, or quote a pa.s.sage within an opinion, they will almost always use the page number of the West edition.

After all, if no one else can find the cases or statutes or paragraphs of an opinion that you are referring to, legal argument is all but impossible. (This might seem like a great idea to you. I beg to differ.) As electronic versions of legal materials became more prevalent, West began getting more compet.i.tion. Its compet.i.tors did two things that West found unforgivable. First, they frequently copied the text of the cases from West's electronic services, or CD-ROMs, rather than retyping them themselves. Since the cases were works of the federal government, this was perfectly legal provided the compet.i.tors did not include West's own material, such as summaries of the cases written by its employees or its key number system for finding related issues. Second, the compet.i.tors would include, within their electronic editions, the page numbers to West's editions. Since lawyers need to cite the precise words or arguments they are referring to, providing the raw opinion alone would have been all but useless. Because West's page numbers were one of the standard ways to cite case opinions, compet.i.tors would indicate where the page breaks on the printed page would have been, just as West did in its own databases.

34

West's reaction to all of this was exactly like Apple's reaction in the story I told in Chapter 5 about the iPod or like Rural's reaction to the copying of its phone directory. This was theft!

They were freeloading on West's hard work! West had mixed its sweat with these cites, and so should be able to exclude other people from them! Since it could not claim copyright over the cases, West claimed copyright over the order in which they were arranged, saying that when its compet.i.tors provided its page numbers for citation purposes, they were infringing that copyright.

35

In the end, West lost its legal battles to claim copyright over the arrangement of the collections of cases and the sequence in which they were presented. The Court held that, as with the phone directory, the order in which the cases were arranged lacked the minimum originality required to sustain a copyright claim.4 At this stage, according to the standard public goods story, West's business should have collapsed. Unable to exclude compet.i.tors from much of the raw material of its databases, West would be undercut by compet.i.tors. More importantly, from the point of view of intellectual property policy, its fate would deter potential investors in other databases--databases that we would lose without even knowing they could have been possible.

Except that is not the way it turned out. West has continued to thrive. Indeed, its profits have been quite remarkable. How can this be?

36

The West story shows us three ways in which we can leap too quickly from the abstract claim that some information goods are public goods--nonexcludable and nonrival--to the claim that this particular information good has those attributes. The reality is much more complex. Type www.westlaw.com into your Internet browser. That will take you to the home page of West's excellent legal research service. Now, I have a pa.s.sword to that site. You probably do not. Without a pa.s.sword, you cannot get access to West's site at all. To the average consumer, the pa.s.sword acts as a physical or technical barrier, making the good "excludable"--that is, making it possible to exclude someone from it without invoking intellectual property rights. But what about compet.i.tors? They could buy access and use that access to download vast quant.i.ties of the material that is unprotected by copyright. Or could they? Again, West can erect a variety of barriers, ranging from technical limits on how much can be downloaded to contractual restrictions on what those who purchase its service can do ("No copying every federal case,"

for example).

37

Let's say the compet.i.tor somehow manages to get around all this.

Let's say it somehow avoids copying the material that West does have a copyright over--such as the headnotes and case synopses.

The compet.i.tor launches their competing site at lower prices amidst much fanfare. Do I immediately and faithlessly desert West for a lower-priced compet.i.tor? Not at all. First of all, there are lots of useful things in the West database that are covered by copyright--law review articles and certain treatises, for example. The compet.i.tor frequently cannot copy those without coming to the same sort of agreements that West has with the copyright holders. For much legal research, that secondary material is as important as the cases. If West has both, and the compet.i.tor only one, I will stick with West. Second, West's service is very well designed. (It is only their copyright policies I dislike, not the product.) If a judge cites a law review article in a case, West will helpfully provide a hyperlink to the precise section of the article she is referring to. I can click on it and in a second see what the substance of the argument is. The reverse is true if a law review article cites a statute or a case. Cases have "flags" on them indicating whether they have been overruled or cited approvingly in subsequent decisions. In other words, faced with the compet.i.tive pressure of those who would commoditize their service and provide it at lower cost, West has done what any smart company would: added features and competed by offering a superior service. Often it has done so by "tying" its uncopyrightable data structures to its huge library of copyrighted legal material.

38

The company that challenged Westlaw in court was called Hyperlaw. It won triumphantly. The courts declared that federal cases and the page numbers in the West volumes were in the public domain. That decision came in 1998 and Westlaw has lobbied hard since then to reverse it by statute, to create some version of the Database Directive in the United States. To date, they have failed. The victor, Hyperlaw, has since gone out of business. Westlaw has not.

39

This little story contains a larger truth. It is true that innovation and information goods will, in general, tend to be less excludable and less rival than a ham sandwich, say. But, in practice, some of them will be linked or connected in their social setting to other phenomena that are highly excludable.

The software can easily be copied--but access to the help lines can be restricted with ease. Audiences cannot easily be excluded from viewing television broadcasts, but advertisers can easily be excluded from placing their advertis.e.m.e.nts in those programs.

The noncopyrightable court decisions are of most use when embedded within a technical system that gives easy access to other material--some of it copyrighted and all of it protected by technical measures and contractual restrictions. The music file can be downloaded; the band's T-shirt or the experience of the live concert cannot. Does this mean that we never need an intellectual property right? Not at all. But it does indicate that we need to be careful when someone claims that "without a new intellectual property right I am doomed."

40

One final story may drive home the point. When they read Feist v. Rural, law students often a.s.sume that the only reason Feist offered to license the white pages listings from Rural is because they (mistakenly) thought they were copyrighted. This is unlikely. Most good copyright lawyers would have told you at the time of the Feist case that the "sweat of the brow" decisions that gave copyright protection based on hard work were not good law. Most courts of appeals had said so. True, there was some legal uncertainty, and that is often worth paying to avoid. But switch the question around and suppose it is the day after the Supreme Court decides the Feist case, and Feist is heading off into another market to try to make a new regional phone directory. Do they now just take the numbers without paying for them, or do they still try to negotiate a license? The latter is overwhelmingly likely. Why? Well, for one thing, they would get a computer-readable version of the names and would not have to retype or optically scan them. More importantly, the contract could include a right to immediate updates and new listings.

41

The day after the Feist decision, the only thing that had changed in the telephone directory market was that telephone companies knew for sure, rather than merely as a probability, that if they refused to license, their compet.i.tors could laboriously copy their old listings without penalty. The nuclear option was no longer available. Maybe the price demanded would be a little lower. But there would still be lots of good reasons for Feist to buy the information, even though it was uncopyrighted. You do not always need an intellectual property right to make a deal. Of course, that is not the whole story.

Perhaps the incentives provided by other methods are insufficient. But in the U.S. database industry they do not seem to have been. Quite the contrary. The studies we have on the European and the American rules on database rights indicate that the American approach simply works better.

42