Week 7: Antitrust and Week 7: Antitrust and Intellectual PropertyIntellectual Property

BA 107BA 107

ReviewReview

► Justifications for Government Justifications for Government InterventionIntervention Market FailuresMarket Failures

►Public GoodsPublic Goods►ExternalitiesExternalities►Natural MonopoliesNatural Monopolies►Information AsymmetryInformation Asymmetry►Imperfect CompetitionImperfect Competition

Regulatory CaptureRegulatory Capture

Intellectual PropertyIntellectual Property

The KaZaa CaseThe KaZaa Case

Background FactsBackground Facts

►What is KaZaa?What is KaZaa? Kazaa.com, Kazaa Media Desktop and Kazaa Kazaa.com, Kazaa Media Desktop and Kazaa

Plus are products of Sharman Networks. SharPlus are products of Sharman Networks. Sharman Networks is a proactive, virtual, global teman Networks is a proactive, virtual, global technology and publishing company, focused ochnology and publishing company, focused on delivering peer-to-peer software. – Kazaa wn delivering peer-to-peer software. – Kazaa websiteebsite

What is (are) the nonmarket issueWhat is (are) the nonmarket issue(s)?(s)?

►What is the controversy?What is the controversy? ““Theft” vs. “Harmless appropriation”Theft” vs. “Harmless appropriation”

►What is the primary nonmarket issue?What is the primary nonmarket issue? Market FailureMarket Failure

►Who are the stakeholders?Who are the stakeholders?►What are their interests?What are their interests?►““Slippery Slope” argumentSlippery Slope” argument

Discussion QuestionsDiscussion Questions

►1. What is the economic rationale for 1. What is the economic rationale for the existence of intellectual property?the existence of intellectual property?

Discussion QuestionsDiscussion Questions

► 2. The Recording Industry Association of Americ2. The Recording Industry Association of America has argued that users of Napster, KaZaa, Morpa has argued that users of Napster, KaZaa, Morpheus and other free digital music exchanges are heus and other free digital music exchanges are “stealing” the intellectual property of record c“stealing” the intellectual property of record companies and artistsompanies and artists What arguments can be made to support their positioWhat arguments can be made to support their positio

n?n? How would you build a case against the RIAA viewpoiHow would you build a case against the RIAA viewpoi

nt? (Why should file-sharing services remain legal?)nt? (Why should file-sharing services remain legal?)

Discussion QuestionDiscussion Question

►3. To what extent is the music industry 3. To what extent is the music industry representative of other digital content representative of other digital content industries, and how is this likely to industries, and how is this likely to affect “solutions” to the intellectual affect “solutions” to the intellectual property questions raised by file-property questions raised by file-sharing services?sharing services?

Discussion QuestionDiscussion Question

►What is likely to happen to the What is likely to happen to the development of the Internet and development of the Internet and Internet-based industries if the music Internet-based industries if the music industry is successful in shutting down industry is successful in shutting down all file-sharing services?all file-sharing services?

Intellectual PropertyIntellectual Property

► RationaleRationale EconomicEconomic Natural RightNatural Right

► Legal BasisLegal Basis ConstitutionConstitution

►Article 1, Section 8, Clause 8. The Congress shall have Article 1, Section 8, Clause 8. The Congress shall have power … to promote the progress of … useful arts, by power … to promote the progress of … useful arts, by securing for limited times to … investors the exclusive securing for limited times to … investors the exclusive right to their … discoveriesright to their … discoveries

Patent Act, USC (35 U.S.C.)Patent Act, USC (35 U.S.C.) Copyright Act (Copyright Act (17 U.S.C. §§ 101 – 81017 U.S.C. §§ 101 – 810) ) (Trademarks)(Trademarks) (Unfair competition)(Unfair competition)

Copyright Act 17 USC Copyright Act 17 USC

► Federal legislation enacted by Congress Federal legislation enacted by Congress pursuant to the Constitution to protect the pursuant to the Constitution to protect the writing of authorswriting of authors

► Technological advances led to expanding Technological advances led to expanding scope of “writings”scope of “writings” Now include: architectural design, software, the Now include: architectural design, software, the

graphic arts, motion pictures, and sound recordingsgraphic arts, motion pictures, and sound recordings

► A copyright gives the owner the exclusive A copyright gives the owner the exclusive right to reproduce, distribute, perform, right to reproduce, distribute, perform, display, or license his work display, or license his work

Copyright Act 17 USCCopyright Act 17 USC

► To be covered by copyright a work must be origiTo be covered by copyright a work must be original (no need to be novel; nal (no need to be novel; Bleistein v. Donaldson Bleistein v. Donaldson Lithographing Co.Lithographing Co. (1903); (1903); Time Inc. v. bernard GTime Inc. v. bernard Geis Associationeis Association (1968); ”work of one man’s alo (1968); ”work of one man’s alone”; ne”; Matthew Bender & Co. v. West Publishing CMatthew Bender & Co. v. West Publishing Co.o. (1998); “sweat of the brow,” “minimal crea (1998); “sweat of the brow,” “minimal creativity”) and in a concrete "medium of expressiotivity”) and in a concrete "medium of expression." (cf. choreography, typefaces)n." (cf. choreography, typefaces)

► Under current law, works are covered whether oUnder current law, works are covered whether or not a copyright notice is attached and whether r not a copyright notice is attached and whether or not the work is registered. or not the work is registered.

KaZaa case: copyright infringemenKaZaa case: copyright infringement and liabilityt and liability

►Technical Background on P-2-P technologTechnical Background on P-2-P technologyy Three methods of indexing available files on dThree methods of indexing available files on d

isparate PCs serving as “server-client”isparate PCs serving as “server-client” (1) Centralized Indexing (Napster)(1) Centralized Indexing (Napster) (2) Decentralized Indexing (StreamCast, Gnut(2) Decentralized Indexing (StreamCast, Gnut

ella)ella) (3) Supernode Indexing (KaZaa) (3) Supernode Indexing (KaZaa)

KaZaa CaseKaZaa Case► Legal ReasoningLegal Reasoning

Contributory or Vicarious Infringement (Contributory or Vicarious Infringement (Sony Corp. v. Universal StudiosSony Corp. v. Universal Studios 464 U.S. 417 (1984); 464 U.S. 417 (1984); Ellison v. RobertsonEllison v. Robertson, 357 F.3d 1072, 1076 (9th Cir. 2, 357 F.3d 1072, 1076 (9th Cir. 2004))004))

Contributory Infringement (knowledge & material contribution)Contributory Infringement (knowledge & material contribution)► Knowledge of InfringementKnowledge of Infringement

If D can show substantial or commercially non-significant non-infringing uses, knIf D can show substantial or commercially non-significant non-infringing uses, knowledge or infringement cannot be imputed to D. Burden of proof then rests on Powledge or infringement cannot be imputed to D. Burden of proof then rests on P

Grokster I, 259 F.Supp.2d at 1035, trial court found (capability of) substantial non-Grokster I, 259 F.Supp.2d at 1035, trial court found (capability of) substantial non-infringing use. “Wilco,” “Project Gutenberg”infringing use. “Wilco,” “Project Gutenberg”

P failed to carry burden of proof; so Sony Corp appliedP failed to carry burden of proof; so Sony Corp applied P failed to show D “had specific knowledge of infringement at a time at a time thP failed to show D “had specific knowledge of infringement at a time at a time th

ey contribute[d] to the infringement and fail[ed] to act upon that information.”ey contribute[d] to the infringement and fail[ed] to act upon that information.” P’s notices of infringement irrelevant because they arrive when D can do nothinP’s notices of infringement irrelevant because they arrive when D can do nothin

g to stop the alleged infringementg to stop the alleged infringement Because of software design, D had no control over indexing, so there can be no coBecause of software design, D had no control over indexing, so there can be no co

ntributory infringementntributory infringement

KaZaa CaseKaZaa Case►Legal Reasoning (Contributory InfringemeLegal Reasoning (Contributory Infringeme

nt)nt)►Knowledge of Infringement (from prior slide)Knowledge of Infringement (from prior slide)►Material ContributionMaterial Contribution

Napster I: Indexing resided on D’s computer. Swap meNapster I: Indexing resided on D’s computer. Swap meets have been held to materially contribute to infringemeets have been held to materially contribute to infringement of copyrighted materials (Fonovisa v. Cherry Auction Int of copyrighted materials (Fonovisa v. Cherry Auction Inc., 76 F.3d 259, 261, 264 (9th Cir. 1996)nc., 76 F.3d 259, 261, 264 (9th Cir. 1996)

KaZaa does provide the site and facilitiesKaZaa does provide the site and facilities

KaZaa CaseKaZaa Case►Vicarious InfringementVicarious Infringement

Direct Infringement by a primary partyDirect Infringement by a primary party Direct financial benefit to the defendantDirect financial benefit to the defendant Right and ability to supervise the infringersRight and ability to supervise the infringers

►KaZaa does not have ability to block access of any KaZaa does not have ability to block access of any individual userindividual user

Patent Act 35 USCPatent Act 35 USC

► Federal legislation enacted pursuant to Federal legislation enacted pursuant to Article I of US ConstitutionArticle I of US Constitution

► Patents grant an inventor the right to Patents grant an inventor the right to exclude others from producing or using the exclude others from producing or using the inventor's discovery or invention for a inventor's discovery or invention for a limited period of time. limited period of time.

► In order to be patented an invention must In order to be patented an invention must be novel, useful, and not of an obvious be novel, useful, and not of an obvious nature. nature. SeeSee §§ 101 - 103 of Title 35§§ 101 - 103 of Title 35. .

► Changing technology has led to expansion Changing technology has led to expansion of definition of “human made product” – of definition of “human made product” – e.g., genetically modified mice; plants.e.g., genetically modified mice; plants.

Patentable InventionsPatentable Inventions

► ““Novelty”Novelty” Foreign, domestic anticipationForeign, domestic anticipation

► UsefulnessUsefulness No particular quantum of benefit required (Anderson No particular quantum of benefit required (Anderson

v. Natta (1973)v. Natta (1973) Specific utility (open-ended patents may lead to “mSpecific utility (open-ended patents may lead to “m

onopoly of knowledge” Brenner v. Manson (1996))onopoly of knowledge” Brenner v. Manson (1996))► NonobviousNonobvious

Just because it was never actually invented does not Just because it was never actually invented does not mean it was not hypothetically inconceivable. Sakraimean it was not hypothetically inconceivable. Sakraida v. Ag Pro, Inc. (1976)da v. Ag Pro, Inc. (1976)

Antitrust LawAntitrust Law

►Rationale:Rationale: Correct market failure of monopoliesCorrect market failure of monopolies

►Federal legislation enacted pursuant to Federal legislation enacted pursuant to the Commerce Clause of the U.S. the Commerce Clause of the U.S. ConstitutionConstitution

Sherman Act (1890)Sherman Act (1890)► Section 1. Trusts, etc., in restraint of trade illegal; penaltySection 1. Trusts, etc., in restraint of trade illegal; penalty► Every contract, combination in the form of trust or otherwise, or conspiracy,Every contract, combination in the form of trust or otherwise, or conspiracy,

in restraint of trade or commerce among the several States, or with foreign in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal sor engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punishall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other pershed by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both saion, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.d punishments, in the discretion of the court.

► Section 2. Monopolizing trade a felony; penaltySection 2. Monopolizing trade a felony; penalty► Every person who shall monopolize, or attempt to monopolize, or combine Every person who shall monopolize, or attempt to monopolize, or combine

or conspire with any other person or persons, to monopolize any part of thor conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shae trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punishell be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, d by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said pu$350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.nishments, in the discretion of the court.

Court InterpretationCourt Interpretation

► Per Se Rule (bright line tests)Per Se Rule (bright line tests) Act is illegal whether or not there was any harmAct is illegal whether or not there was any harm Price-fixing; geographic market divisionPrice-fixing; geographic market division Established in Established in Northern Pacific Railroad Co. v. Northern Pacific Railroad Co. v.

U.S.,U.S., 356 U.S. 1 (1958) 356 U.S. 1 (1958) Rigid, modern courts tend not to favorRigid, modern courts tend not to favor

► Rule of ReasonRule of Reason To engage in illegal monopolization, D must To engage in illegal monopolization, D must

possess power in a relevant market and must possess power in a relevant market and must have used improperly exclusionary acts to gain have used improperly exclusionary acts to gain or protect that poweror protect that power

Rule of Reason AnalysisRule of Reason Analysis►Monopoly powerMonopoly power

Product market (Cellophane Case)Product market (Cellophane Case) Geographic market Geographic market

► ““Bad Act”Bad Act” Monopoly power alone is not illegal. There must Monopoly power alone is not illegal. There must

be some bad actbe some bad act But distinguishing monopolizing intent from But distinguishing monopolizing intent from

permissible business activity of a firm with permissible business activity of a firm with massive market power is not easymassive market power is not easy

Two questions: (1) is the conduct in question Two questions: (1) is the conduct in question truly exclusionary? (2) If so, does that justify an truly exclusionary? (2) If so, does that justify an inference of illegal purpose and intent?inference of illegal purpose and intent?

Courts have been all over the mapCourts have been all over the map

Other Antitrust StatutesOther Antitrust Statutes

► Clayton Act of 1914 (15 USCA 12-27)Clayton Act of 1914 (15 USCA 12-27) Attempted to remedy lack of guidance of Sherman Act by declarAttempted to remedy lack of guidance of Sherman Act by declar

ing four business practices illegal – tying and exclusive dealing cing four business practices illegal – tying and exclusive dealing contracts; price discrimination; corporate mergers; interlocking dontracts; price discrimination; corporate mergers; interlocking directorates (but only if effect would substantially lesson competiirectorates (but only if effect would substantially lesson competition).tion).

► Federal Trade Commission Act (1914) (15 USCA 45)Federal Trade Commission Act (1914) (15 USCA 45) Prohibition against “unfair methods of competition in or affectiProhibition against “unfair methods of competition in or affecti

ng commerce, and unfair or deceptive acts or practices in or affeng commerce, and unfair or deceptive acts or practices in or affecting commerce”cting commerce”

► Hart-Scott-Rodino Antitrust Improvements Act of 1976Hart-Scott-Rodino Antitrust Improvements Act of 1976

Enforcement AgenciesEnforcement Agencies

► Department of JusticeDepartment of Justice Has authority to enforce the Sherman and Clayton AcHas authority to enforce the Sherman and Clayton Ac

tsts All suits are brought in federal courtsAll suits are brought in federal courts Has sole authority to enforce criminal provisions of thHas sole authority to enforce criminal provisions of th

e federal antitrust lawse federal antitrust laws Almost all criminal suits arise from Section 1 of the ShAlmost all criminal suits arise from Section 1 of the Sh

erman Acterman Act► Federal Trade CommissionFederal Trade Commission

Shares responsibility with the Justice Department for Shares responsibility with the Justice Department for civil enforcement of the Clayton Actcivil enforcement of the Clayton Act

Has exclusive authority to enforce Section 5 of the FTHas exclusive authority to enforce Section 5 of the FTC Act (prohibition of unfair methods of competition)C Act (prohibition of unfair methods of competition)