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The answer in a word is no. Saying "theft is theft" is exactly the error that the Jefferson Warning is supposed to guard against. We should not a.s.sume that intellectual property and material property are the same in all regards. The goal of creating the limited monopoly called an intellectual property right is to provide the minimum necessary incentive to encourage the desired level of innovation. Anything extra is deadweight loss. When someone takes your car, they have the car and you do not. When, because of some new technology, someone is able to get access to the MP3 file of your new song, they have the file and so do you. You did not lose the song. What you may have lost is the opportunity to sell the song to that person or to the people with whom they "share" the file. We should not be indifferent to this kind of loss; it is a serious concern. But the fact that a new technology brings economic benefits as well as economic harm to the creation, distribution, and sale of intellectual property products means that we should pause before increasing the level of rights, changing the architecture of our communications networks, creating new crimes, and so on.

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Remember, many of the things that the content industries were concerned about on the Internet were already illegal, already subject to suit and prosecution. The question is not whether the Internet should be an intellectual property-free zone; it should not be, is not, and never was. The question is whether, when the content industries come asking for additional or new rights, for new penalties, for the criminalization of certain types of technology, we should take into account the gains that the Internet has brought them, as well as the costs, before we accede to their requests. The answer, of course, is that we should. Sadly, we did not. This does not mean that all of the content industries' attempts to strengthen the law are wrong and unnecessary. It means that we do not know whether they are or not.

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There is a fairly solid tradition in intellectual property policy of what I call "20/20 downside" vision. All of the threats posed by any new technology--the player piano, the jukebox, the photocopier, the VCR, the Internet--are seen with extraordinary clarity. The opportunities, however, particularly those which involve changing a business model or restructuring a market, are dismissed as phantoms. The downside dominates the field, the upside is invisible. The story of video recorders is the best-known example. When video recorders--another technology promising cheaper copying--first appeared, the reaction of movie studios was one of horror. Their business plans relied upon showing movies in theaters and then licensing them to television stations. VCRs and Betamaxes fit nowhere in this plan; they were seen merely as copyright violation devices. Hollywood tried to have them taxed to pay for the losses that would be caused.

Their a.s.sumption? Cheaper copying demands stronger rights.

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Having lost that battle, the movie studios tried to have the manufacturers of the recording devices found liable for contributory copyright infringement; liable, in other words, for a.s.sisting the copyright violations that could be carried out by the owners of Sony Betamaxes. This, of course, was exactly the same legal claim that would be made in the Napster case. In the Sony case, however, the movie companies lost. The Supreme Court said that recording of TV programs to "time-shift" them to a more convenient hour was a fair use.17 The movie studios' claims were rejected.

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Freed from the threat of liability, the price of video recorders continued to fall. They flooded consumers' houses at a speed unparalleled until the arrival of the World Wide Web. All these boxes sitting by TVs now cried out for content, content that was provided by an emerging video rental market. Until the triumph of DVDs, the videoca.s.sette rental market made up more than 50 percent of the movie industry's revenues.18 Were losses caused by video recorders? To be sure. Some people who might have gone to see a movie in a theater because the TV schedule was inconvenient could instead record the show and watch it later.

Videos could even be shared with friends and families--tattered copies of Disney movies recorded from some cable show could be pa.s.sed on to siblings whose kids have reached the appropriate age. VCRs were also used for copying that was clearly illicit--large-scale duplication and sale of movies by someone other than the rights holder. A cheaper copying technology definitely caused losses. But it also provided substantial gains, gains that far outweighed the losses. Ironically, had the movie companies "won" in the Sony case, they might now be worse off.

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The Sony story provides us with some useful lessons--first, this 20/20 downside vision is a poor guide to copyright policy. Under its sway, some companies will invariably equate greater control with profit and cheaper copying with loss. They will conclude, sometimes rightly, that their very existence is threatened, and, sometimes wrongly, that the threat is to innovation and culture itself rather than to their particular way of delivering it.

They will turn to the legislature and the courts for guarantees that they can go on doing business in the old familiar ways.

Normally, the marketplace is supposed to provide correctives to this kind of myopia. Upstart companies, not bound by the habits of the last generation, are supposed to move nimbly to harvest the benefits from the new technology and to outcompete the lumbering dinosaurs. In certain situations, though, compet.i.tion will not work: 35

* if the dinosaurs are a cartel strong enough to squelch compet.i.tion; * if they have enlisted the state to make the threatening technology illegal, describing it as a predatory encroachment on the "rights" of the old guard rather than aggressive compet.i.tion; * if ingrained prejudices are simply so strong that the potential business benefits take years to become apparent; or * if the market has "locked in" on a dominant standard--a technology or an operating system, say--to which new market entrants do not have legal access.

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In those situations, markets cannot be counted on to self- correct. Unfortunately, and this is a key point, intellectual property policy frequently deals with controversies in which all of these conditions hold true.

37

Let me repeat this point, because it is one of the most important ones in this book. To a political scientist or market a.n.a.lyst, the conditions I have just described sound like a rarely seen perfect storm of legislative and market dysfunction.

To an intellectual property scholar, they sound like business as usual.

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In the case of the VCR wars, none of these factors obtained. The state refused to step in to aid the movie companies by criminalizing the new technology. There were equally powerful companies on the other side of the issue (the consumer electronics companies selling VCRs) who saw this new market as a natural extension of a familiar existing market--audio recorders.

There was no dominant proprietary technological standard controlled by the threatened industry that could be used to shut down any threats to their business model. The market was allowed to develop and evolve without premature legal intervention or proprietary technological lockout. Thus we know in this case that the movie companies were wrong, that their claims of impending doom from cheap copies were completely mistaken. The public and, ironically, the industry itself benefited as a result. But the Sony case is the exception rather than the rule.

That is why it is so important. If compet.i.tion and change can be forbidden, we will get relatively few cases that disprove the logic that cheaper copying must always mean stronger rights. The "natural experiments" will never be allowed to happen. They will be squelched by those who see only threat in the technologies that allow cheaper copies and who can persuade legislators or judges to see the world their way. The story line I describe here, the Internet Threat, will become the conventional wisdom.

In the process, it will make it much less likely that we will have the evidence needed to refute it.

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The Holes Matter as Much as the Cheese 40

The Sony case is important in another way. The Supreme Court's decision turned on the judgment that it was a "fair use" under U.S. copyright law for consumers to record television programs for time-shifting purposes. Since fair use comes up numerous times in this book, it is worth pausing for a moment to explain what it is.

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The content industries like to portray fair use as a narrow and grudging defense against an otherwise valid case for copyright infringement--as if the claim were, "Yes, I trespa.s.sed on your land, which was wrong, I admit. But I was starving and looking for food. Please give me a break." This is simply inaccurate.

True, fair use is a.s.serted as "an affirmative defense"; that is the way it is brought up in a copyright case. But in U.S. law, fair uses are stated quite clearly to be limitations on the exclusive rights of the copyright holder--uses that were never within the copyright holder's power to prohibit. The defense is not "I trespa.s.sed on your land, but I was starving." It is "I did not trespa.s.s on your land. I walked on the public road that runs through it, a road you never owned in the first place."

When society hands out the right to the copyright holder, it carves out certain areas of use and refuses to hand over control of them. Again, remember the Jefferson Warning. This is not a presumptively absolute property right. It is a conditional grant of a limited and temporary monopoly. One cannot start from the presumption that the rights holder has absolute rights over all possible uses and therefore that any time a citizen makes use of the work in any way, the rights holder is ent.i.tled to get paid or to claim "piracy" if he does not get paid. Under the sway of the story line I called the Internet Threat, legislators have lost sight of this point.

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So what is "fair use"? When I am asked this question by nonlawyers, I offer to show them the actual provision in the copyright act. They recoil, clearly imagining they are about to be shown something the size and complexity of the tax code. Here is the statutory fair use provision in its entirety: 43

Sec. 107. - Limitations on exclusive rights: Fair use

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Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for cla.s.sroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include--

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(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

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The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

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"But this seems quite sensible," people often say, as though they had expected both Byzantine complexity and manifest irrationality. (Perhaps they have had some experience with legal matters after all.) The ones who think about it a little longer realize that these factors cannot be mechanically applied. Look at factor 3, for example. Someone who is making a parody frequently needs to take large chunks of the parodied work. That is the nature of a parody, after all. They might then sell the parody, thus also getting into trouble with factor 1. And what about factor 4? Someone might quote big chunks of my book in a devastating review that ruined any chance the book had of selling well. Come to think of it, even a parody might have a negative effect on the "potential market" for the parodied work.

But surely those uses would still be "fair"? (In both instances, the Supreme Court agrees that they are fair uses.) 48

In coming up with these hypothetical problem cases, the copyright novice is probably closer to having a good understanding of the purpose of fair use than many people who have studied it for years. In fact, the novice's questions shed light on all of the exceptions, limitations, and defenses to proprietary rights--the holes in the cheese of intellectual property. The scholar's urge is to find one theory that explains all the possible applications of the fair use doctrine, to arrange all of the cases like targets and shoot a single arrow through all of them. Perhaps fair use is designed to reduce the difficulty of clearing rights when it would be uneconomical or impossibly complex to do so: to reduce the paperwork, ha.s.sle, delay, ignorance, and aggravation that economists refer to under the sanguine name of "transaction costs."19 (Though the idea that fair use is about transaction costs hardly explains some of the types of fair use we care most about--the rights to parody, to criticize, to reverse engineer.) Or perhaps fair use allows the rights of a transformative author to be trumped only by a second transformative author, who is building on the first--the parodist, reviewer, collage artist, or what have you.20 (Then again, photocopying for cla.s.sroom use does not sound very "transformative.") Could fair use be dictated by the Const.i.tution or by international free speech guarantees? In this view, fair use provides a safety valve that allows copyright to coexist with the First Amendment, property rights over speech to coexist with freedom of expression.21 After all, it is not entirely obvious how it could be const.i.tutional to forbid me, in the name of a federal law, from translating Mein Kampf in order to warn of the dangers of fascism or parodying some piece of art to subversive effect.

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Each of these ideas about fair use has much to recommend it, as do the many other grand theories that have been offered to explain the puzzle. And therein lies the problem.

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Intellectual property is a brilliant social invention which presents us with great benefits but also with a mult.i.tude of dangers: 51

1. the danger that the monopoly is unnecessary to produce the innovation, or that it is broader or lasts for longer than is necessary to encourage future production;

2. that overly broad rights will chill speech, criticism, or scientific progress;

3. that it will restrict access in ways that discourage "follow- on" innovation;

4. that it will lead to industry concentration in a way that hurts consumers or citizens while being less subject to ant.i.trust regulation precisely because the monopoly or oligopoly rests on intellectual property rights;

5. that it will establish strong "network effects" which cause the market to tip over to some inefficient technology; and

6. that it will give the rights holder control over some technology outside the range of the monopoly but closely linked to it.

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The list of dangers goes on and on, and so does the list of exceptions, limitations, and restraints designed to prevent them. We restrict the length of intellectual property rights.

(At least, we used to. The framers thought it so important to do so that they put the need to have a limited term in the Const.i.tution itself; nevertheless both Congress and the Supreme Court seem to have given up on that one.) We restrict the scope of intellectual property rights, so that they cannot cover raw facts or general ideas, only the range of innovation and expression in between. (At least, we used to. Developments in database protection, gene patents, and business method patents are clearly eroding those walls.) As with fair use, we impose limitations on the rights when we hand them out in the first place. The exclusive right conferred by copyright does not include the right to prevent criticism, parody, cla.s.sroom copying, decompilation of computer programs, and so on. (Though as the next chapter shows, a number of recent legal changes mean that the practical ability to exercise fair use rights is seriously threatened.) 53

These limitations on intellectual property do not fit a single theory, unless that theory is "avoiding the multiple and evolving dangers of intellectual property itself." Even a single limitation such as fair use clearly responds to many different concerns about the dangers of intellectual property rights.

Indeed it will evolve to fit new circ.u.mstances. When computer programs were first clearly covered by copyright law, software engineers wondered if this would cripple the industry. Why?

Anyone who wishes to compete with a dominant program needs to "decompile" it in order to make their program "interoperable,"

or simply better. For example, a new word processing program, no matter how good, would be dead on arrival unless it could read all the files people had created with the old, dominant word processing software. But to do this, the engineers at the upstart company would have to take apart their compet.i.tor's program. In the process they would have to create temporary copies of the old program, even though the final product--the hot new software--would be completely different from the old. Would this be a violation of copyright law?

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In a series of remarkable and far-seeing cases involving such issues, the courts said no.22 "Decompilation" was fair use. The law of fair use had evolved in the context of expressive, nonfunctional, stand-alone works such as books, poems, songs.

Now it was being applied to a functional product whose economics depended strongly on "network effects"--many types of programs are useful only if they are widely used. Without interoperability, we could never take our existing doc.u.ments or spreadsheets or datasets and move to a new program, even if it was better. One program would not be able to read the files created by another. It would be as if language itself had been copyrighted. To have said that the incidental copies created in the process of decompiling software were actually infringements of copyright would have turned the law on its head because of a technological accident (you needed temporarily to "copy" the programs in order to understand how they worked and make yours work with them) and a legal accident (copyright was now being used to regulate functional articles of commerce: "machines"