Ariel Katz

The Potential Demise of Another Natural Monopoly: Rethinking the Collective Administration of Performing Rights

In most countries the right to publicly perform music is not administered individually by the copyright holders but rather collectively by Performing Rights Organizations (PROs). The common explanation behind the proliferation of collective administration is that some aspects of copyright administrations are natural monopolies. It is often argued that individual administration is impracticable or at least non-economical. Collective administration is therefore promoted as the most efficient method for licensing, monitoring and enforcing those rights. In addition, since the market is a natural monopoly, regulation, rather than an attempt to foster competition, is thought to be the optimal regulatory response.This is a first in a series of two articles that critically analyzes this natural monopoly argument. In this article I argue that the case for PROs is not as straightforward as it is assumed to be. I show that many of the underlying cost efficiencies that are attributed to PROs are usually simply assumed, and in many cases could be equally achieved under less restrictive arrangements. The next article will show that technological changes that can facilitate the online licensing of music undermine the natural monopoly framework even further. This is a pre-copy-editing, author-produced PDF of an article accepted for publication in the Journal of Competition Law and Economics following peer review.

Making Sense of Nonsense: Intellectual Property, Antitrust, and Market Power

The concepts of ‘monopoly power’ or ‘market power’ are often used in explaining the economic rationale for intellectual property (IP) rights. However, there is wide consensus among antitrust scholars and antitrust agencies that no such presumption should exist. The explanations to the undesirability of such a presumption of market power are varied. Some explanations are semantic, e.g., that IP rights do not confer market power ‘in the antitrust sense’, or that the use of the term ‘monopoly’ in the IP literature is different than its use in antitrust; other explanations focus on empirical observations that most IP rights do not have any commercial value, and therefore a fortiori lack any market power, while other explanations pertain to the undesirability of a presumption of market power as a matter of legal policy, and especially to the concern that a presumption of market power will lead to oversized antitrust law when applied to the exercise of IP rights. The purpose of this paper is to clarify the relationship between IP rights and market power and their implication for antitrust and IP policy. I argue that the concept of ‘market power’ as used in economics and in the IP literature is the same concept as used in antitrust, and further that it could be expected that the sample of IP rights that tend to be involved in litigation would include those that do confer substantial market power upon their owners. Yet this should not necessarily lead to oversized antitrust law, since antitrust inquiry is (or at least should be) only interested in the extent to which a challenged practice increases or maintains market power. Therefore for most antitrust inquiries an IP holder’s existing market power is irrelevant. A separate question is whether a presumption of market power should exist or not, yet an answer to this question depends on the specific conduct that is under review and the underlying substantive and procedural rules governing such inquiry; the merit of a presumption, therefore, is context specific. Accordingly I show when and where a presumption of market power may or may not make sense.

The Orphans, The Market, and the Copyright Dogma: A Modest Solution to a Grand Problem

This article proposes a modest common law solution to the orphan works problem: works that are still under copyright but whose owners cannot be easily located. Most discussions on the orphan works problem focus on the demand side: on users’ inability to locate owners. However, looking also at the supply side reveals that the problem of orphan works arises not only because users find it prohibitively costly to locate owners, but also because under a strict permission-first rule copyright owners, who do not internalize the full social cost of forgone uses, face suboptimal incentives to maintain themselves locatable. However, in many cases copyright owners are usually the least-cost avoiders of the orphan works problem, and like in many other areas of law, should be encouraged to take steps to reduce the extent of the problem. Building on this insight, the article shows how considering the locatability of the owner of an infringed work at the remedy stage and tweaking the appropriate remedy will encourage owners to remain locatable, and why this solution is preferable to other proposed solutions. The article also discusses the tendency to treat the requirement to seek permission before using as a dogma, and why this dogmatic view of copyright impedes simple and efficient solutions and leads to adoption of grand solutions that are ineffective at best and harmful at worst.

Beyond Refusal to Deal: A Cross-Atlantic View of Copyright, Competition and Innovation Policies

Conventional wisdom holds that the European Union has opted to apply its competition law to the exercise of intellectual property rights to a much greater extent than has the United States. We argue that, at least in the context of copyright protection, this conventional wisdom is false. While European antitrust regulation of refusal to license ones intellectual property does seem much more robust and activist than U.S. antitrust regulation of similar conduct, focusing solely on one narrow aspect of antitrust doctrine — the treatment of a unilateral refusal to deal — tells less than half the story. Once various doctrines of copyright law are taken into account, the substantive difference between the European and American approaches not only narrows, but in some key respects is reversed. While European jurisdictions have relatively expansive copyright protection which may require antitrust intervention to check anti-competitive uses of copyrighted works, American copyright law provides stronger internal limits on copyright protection, which thereby lessens the need for resort to antitrust law as an external check on anti-competitive uses of copyrighted works. Furthermore, when the broader impact that antitrust law might have on the exercise of IPRs in the United States is considered (not only in substance, but also in antitrust process), it becomes apparent that in key respects, when innovative-competition is at stake, U.S. law grants overall weaker copyright protection than that available in Europe. We also explain why the two jurisdictions have adopted distinct approaches to resolving similar problems and evaluate those approaches.

Copyright and Competition Policy

This Chapter discusses the tensions between copyright law and competition and some of the ways through which copyright law itself works to advance competition policy goals. It shows how competition policy goals and anti-monopoly measures shaped the design of copyright since the Statute of Anne, and the notion of limited exclusive rights operating within a competitive market system is crucial to copyright law’s design. The Chapter offers a three-dimensional framework, consisting of considering incentive sufficiency, relative capacity to innovate, and transaction costs, to explain some key elements of copyright law: the limited term of copyright, limitations on subject matter, fair use, and the first-sale doctrine. It shows how these limitations on copyright can ensure that the copyright may not result in excessive static losses resulting from unconstrained market power, and how they can minimize dynamic losses by ensuring that copyright is not used to hinder future innovation.

What Antitrust Law Can (and Cannot) Teach About the First Sale Doctrine

The first-sale doctrine, which limits the exclusive rights that survive the initial authorized sale of an item protected by such rights, has never been fully explored and articulated. Recently, insights borrowed from modern antitrust law and economics are invoked to provide a seemingly robust theoretical foundation for undermining exhaustion rules or narrowing their scope and thereby strengthen IP owners’ control over downstream distribution and use of the goods they produce. It has been suggested that just as antitrust law has recognized the efficiency of post-sale restraints and relaxed its hostility towards them, so should IP law permit their imposition and provide remedies for their breach. This Article shows that, with the exception of certain instances, this trend is misguided and should be resisted, not because the insights from modern antitrust are irrelevant, but because insights from modern antitrust do not support a case against the first sale doctrine. The main benefits of post-sale restrictions involve situations of imperfect vertical integration between co-producing or collaborating firms, and occur during the production and distribution phases or shortly thereafter. In such situations, contracting around the first sale doctrine should be permitted. Beyond such limited circumstances, however, the first sale doctrine promotes important social and economic goals: it promotes efficient use of goods embodying IP, guarantees their preservation, and facilitates user-innovation. When a closer look is taken at what modern antitrust law can offer, it can be seen that it confirms the validity and supports the continued vitality of the first sale doctrine.

Copyright Collectives: Good Solution But for Which Problem?

Collective administration of copyright has been touted as a solution to many of the ills of the copyright system and to many of the legal challenges brought about by the encounter between copyrights and the digital realm. It has been viewed as the magic bullet that bridges the unfortunate trade-off between incentive and access; a mechanism that allows both rewarding creators and unfettered access to works. While not at all a new phenomenon - music performing rights have been administered collectively in many countries for most of the 20th century - collective administration has recently proliferated across many other areas of copyright, often with enthusiasm. This paper offers a less enthusiastic account. It examines several types of collective administration and argues that with rare exceptions, the various justifications for collective administration are too weak to justify departure from the competitive paradigm that underlies market economies. It suggests that in most cases collusion and rent-seeking mainly drive the formation of copyright collectives, and suspects that only rarely such rent-seeking may be justified as a matter of policy, either as a way to improve the incentives to create socially valuable works or on distributional grounds.

The Economic Rationale of Exhaustion: Distribution and Post-Sale Restraints

Despite over a hundred years of adjudication, courts have never been able to draw the exact contours of the first sale doctrine or fully articulate its rationale. In recent years, insights borrowed from modern antitrust law and economics have been applied to suggest that just as that just as antitrust law has recognized the efficiency of post-sale restraints and relaxed its hostility toward them, so should IP law permit their imposition and provide remedies for their breach. This Chapter challenges this position. It shows that the main benefits of post-sale restraints involve situations of imperfect vertical integration between coproducing or collaborating firms, which occur during the production and distribution phases or shortly thereafter. In such situations, contracting out of the first sale doctrine should be permitted. Beyond such limited circumstances, however, the first sale doctrine promotes important social and economic goals: it promotes efficient use of goods embodying IP, guarantees their preservation, and facilitates user innovation, while minimizing transaction costs that otherwise might impede those goals. Therefore, rather then undermining it, the economics of post-sale restraints confirm the validity of the first sale doctrine and support its continued vitality.

Commentary: Is Collective Administration of Copyrights Justified by the Economic Literature?

On March 2007 Canadas Competition Bureau hosted a symposium on the interface between competition and intellectual property. This short comment responds to a paper presented by Professor Jacques Robert in which he argued that the economic literature on bundling of information goods provides a novel justification for the collective administration of copyrights and made a few other recommendations relating to collective administration of copyright. This comment critically examines this bundling argument as well as other recommendations made by Robert.

Digital Exhaustion: North American Observations

Rumor has it that the first-sale doctrine is dying. According to the rumor, the doctrine, forged in the era of the physical copy, will lose its prominence in the brave new world where works in digital formats are no longer distributed and enjoyed as particular identifiable objects but exist merely as data flows. Some (e.g., librarians, consumer advocates) mourn the loss of their beloved doctrine with trepidation, while others (e.g., publishers) rejoice at its anticipated demise. Both camps assume that the doctrine is confined to the transfer of tangible copies and that it limits only copyright owners’ distribution right, not any other exclusive rights.The death prognosis further relies on the proliferation of contractual and licensing conditions that purport to prohibit one buyer from transferring what he or she purchased to another, even if the transfer was otherwise technically possible and legally permissible.This chapter argues that the rumor of the doctrine’s death is premature. The death prognosis regards the first-sale doctrine merely as a statutory exception, and one that limits only the copyright owner’s distribution right, but not other rights. The doctrine, thus, protects defendants who can show that their acts fall within the bounds of the statutory exception, but any mismatch would be fatal.The chapter offers a different understanding of the first-sale doctrine. As a “first sale” doctrine it may limit the distribution right, but its statutory presence merely affirms a broader principle of exhaustion — one of several copyright law principles that limit the copyright owners’ powers, and a species of a larger genus of rules that restrict the exercise of private power more generally. Since the doctrine isn’t a creature of statute, its codification does not limit courts in applying the broader principle of exhaustion that it reflects. The death prognosis rests on the first and narrow view, which also implies that only legislative reform can expand exhaustion beyond that limited statutory scope. Under the second view, however, the first-sale doctrine may not only be alive but might well be kicking.The chapter shows that the second view is both plausible and sound.