Copyright as Trade Regulation

II. Toward a Theory of Unfair Competition in Copyright

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II. Toward a Theory of Unfair Competition in Copyright

The law of unfair competition has its roots in the belief that “[t]he freedom to … compete for the patronage of prospective customers is a fundamental premise of the free enterprise system.”126 Sometimes this competition causes harm in the form of “divert[ed] business,” but the law concerns itself with that harm only when competitors use “particular methods of competition determined be unfair.”127 Among those methods is the tort of “passing off” (also known as “palming off”), which occurs when “a producer misrepresents his own goods or services as someone else’s.”128 The usual way in which a producer commits this wrong is by marking his goods with a trademark that confuses consumers as to the origin of the marked goods.129 “The primary and proper function of a trademark is to identify the origin or ownership of the article to which it is affixed.”130 When a producer has established rights in such a mark,

others are debarred from applying the same mark to goods of the same description, because to do so would in effect represent their goods to be of his production and would tend to deprive him of the profit he might make through the sale of the goods which the purchaser intended to buy.131

Congress codified these principles in the Lanham Act of 1946.132 Like the bodies of law that preceded it, the Lanham Act concerns itself with “securing to the owner the good will of his business and protecting the public against spurious and falsely marked goods.”133 Thus, while the statute does exist to safeguard the investments of trademark owners by giving them exclusive rights, it also exists to serve the public interest. Indeed, “the public interest in preventing confusion around the marketplace is paramount …”134

Like the property right in copyrights, the “property” right in trademarks is limited.135 Under the Lanham Act, rights in trademarks flow from the use of those marks in interstate commerce to identify the source of the marked goods. This “trademark use” is the prerequisite to protection because consumers cannot form the mental link between a trademark and the goods it identifies—known as “secondary meaning”—unless those goods are released into the stream of commerce. In other words, consumers cannot make the association between “Coke” and a cola beverage unless and until that beverage is available for purchase. In the absence of such an association, another producer would be free to use the word “Coke” to identify its own products because that use would not engender any confusion. Thus, by conditioning the property right on the use of trademarks in commerce, trademark law encourages producers to distribute goods bearing those marks to the public. To borrow a term from copyright law, trademark law encourages “publication”136 by encouraging producers to make their wares “available to members of the public regardless of who they are or what they will do with [them].”137

Once a producer has established rights in a mark, he or she has the right to prevent others from marking their goods with symbols that are likely to confuse consumers as to the source of those goods. Courts determine whether such a “likelihood of confusion” exists by weighing several factors, including “the strength of [the mark], the degree of similarity between the two marks, the proximity of the products” in the marketplace, “the sophistication of the buyers,” and of course, the existence of any “actual confusion.”138 Thus, for the purposes of infringement law, two producers can adopt and use the same trademark, so long as they use the mark on different goods, in different markets, or in different places. And while courts ask whether the defendant acted in “good faith in adopting its own mark,”139 bad faith, standing alone, is not enough to support the imposition of liability. Instead, courts inquire into the existence of competitive harm: In making purchasing decisions, are consumers likely to be misled as to which product comes from which source, so as to deprive the trademark owner “of the profit he might make through the sale of the goods which the purchaser intended to buy”?140

Professor Patterson once observed that “[t]he law of copyright can be viewed most usefully as statutory unfair competition” because the law “function[s] … to protect the copyrighted work against predatory competitive practices.”141 Indeed, copyright law and the law of unfair competition (including trademark law) have a number of things in common. Both bodies of law provide producers with a limited property right as an inducement to invest in the production or use of intangibles that benefit the public. As we have seen, copyrights benefit the public by “promot[ing] the Progress of Science”142 in several important ways. And while Congress does not wish to encourage the proliferation of trademarks per se, trademarks benefit the public by enabling consumers to distinguish between goods sold by rival producers.

While these similarities are significant, there also are a number of differences between copyright law and trademark law. Among the most significant of these is the degree to which the creation and invasion of each property right depends on whether parties engage in what one might describe as “public acts.”143 Take the creation of rights first: Under copyright law, if a producer wishes to obtain rights, he or she must either create an “original work[ ] of authorship fixed in any tangible medium of expression”144 or negotiate a transfer of copyright from somebody who has created one.145 Both of these acts can be conducted entirely in private, and indeed they often are. Most of the time, the public has no idea that somebody, somewhere has created or purchased or licensed a copyrightable work. These “covert” events (for want of a better word) only impact the public when a copyright owner decides to publish his or her work, by which time the property right already exists. By contrast, under trademark law, a producer wishing to obtain rights in a mark must engage in the “bona fide use of [that] mark in the ordinary course of trade,”146 which trade ordinarily is “overt,” whether on the wholesale or retail level. When producers have tried to obtain rights in marks by engaging in private acts, courts have rejected those efforts as “bad faith attempt[s] to reserve a mark.”147

The two bodies of law also diverge when it comes to the invasion of rights: A person can infringe a copyright by engaging in an entirely private act, for section 106 provides copyright owners with “the exclusive right[ ] … to reproduce the copyrighted work in copies,” regardless of where that reproduction takes place.148 To be guilty of infringement under section 32(1) of the Lanham Act, however, a person must use a confusingly similar mark “in commerce … in connection with the sale, offering for sale, distribution, or advertising of … goods.”149 One body of law accords legal significance to private acts; the other, on the whole, does not. This difference seems odd when one considers that both bodies of law are designed to “protect the copyrighted work against predatory competitive practices.”150 Competition, by definition, occurs in the marketplace, which is a uniquely public (i.e., overt) institution.

Copyright law used to accord more significance to public acts than it does today.151 Until January 1, 1978, the effective date of the Copyright Act of 1976, creators obtained rights under the federal statute only when they engaged in the act of general “publication,” which happened when at least one member of the general public obtained at least one copy of the work without being restricted from further distributing it. In most cases, this meant that rights were created upon “publication in print.”152 In 1976, however, Congress revised the statute to provide for the creation of rights at the moment a work was “fixed in any tangible medium of expression,”153—whether that work was published or not. As I have noted elsewhere, this “fundamental”154 change meant an explosion in the number of copyrightable works, “fixed works being far more numerous, by definition, than published works.”155 But it also meant that for the first time, exclusive rights could be created in private, giving the public no way of knowing whether, and when, those rights were being created.

Further, if copyright law now punishes violations of property rights done in private, this was not always the case. Congress only added the word “copy” to the list of exclusive rights in the statute on July 8, 1870, when Congress extended the copyright to works of the fine arts.156 Before that date, copyright owners had enjoyed only the exclusive rights of “printing, reprinting, publishing and vending” copies of their works.157 Professor Patterson believed that Congress inserted the word “copy” intending it to apply only to works of the fine arts,158 which would mean that most copyright owners enjoy the exclusive right of reproduction only by accident. Regardless, given the bundle of rights that copyright owners now hold, the invasion of rights—like the creation of rights—has, in many cases, become a private act.

How might copyright law function if it concerned itself only with those invasions of the property right that threatened to cause competitive harm? It bears noting, first, that “competitive harm” does not mean harm of any kind. Under the antitrust laws, courts require injured parties to demonstrate that their injuries were caused by an anticompetitive practice “‘of the type the antitrust laws were intended to prevent,’”159 such as predatory pricing.160 Because “[t]he antitrust laws … were enacted for ‘the protection of competition not competitors,’ …. [i]t is inimical to the purposes of [those] laws to award damages for the type of injury” that flows merely from vigorous competition.161 The law of unfair competition imposes a similar requirement. According to the Restatement, “the freedom to compete necessarily contemplates the probability of harm to … other participants in the market,”162 as when, for example, a producer lowers prices, raises quality, or otherwise satisfies consumer desires better than its rivals do. The law exists to remedy only those “harm[s] resulting from particular methods of competition determined to be unfair,” including trademark infringement and other practices likely to have a negative impact on the public.163

Copyright law, too, holds that some harms are not cognizable because they flow from acts of fair competition. As the Supreme Court pointed out in Campbell v. Acuff-Rose Music, Inc.,164 the fact that a parody may suppress demand for the original does not make the use “unfair.” According to the Court, “the only harm” with which courts need concern themselves “is the harm of market substitution.”165 Echoing this language, a number of courts have suggested that substitutive works cause competitive harms, while complementary harms do not.166 As Judge Richard Posner observed in Ty, Inc. v. Publications Int’l, Inc.,167 “copying that is complementary to the copyrighted work (in the sense that nails are complements of hammers) is fair use, but copying that is a substitute for the copyrighted work (in the sense that nails are substitutes for pegs or screws) … is not fair use.”168 “If the price of nails fell,” he wrote, “the demand for hammers would rise …. The hammer manufacturer wants there to be an abundant supply of cheap nails.”169

The problem with this argument is that, unlike hammers and nails, copyrighted works can change in form and substance, giving them the ability to exist in several markets at the same time. As Judge Posner recognized, copyright owners want courts not only to enjoin those copies that substitute for their works, but also those copies that “substitute … for derivative works from the copyrighted work.”170 In other words, copyright owners want exclusivity not only in the existing markets for their works, but also in derivative markets they may (or may not) develop in future.171 In Ty, the owner of copyrights in Beanie Babies wanted to control not only the market in Beanie Babies themselves, but also the market in photographs of Beanie Babies, as well as the market in books about Beanie Babies. Judge Posner elided the derivative markets issue by holding (I think) that at least some of the books about Beanie Babies were not “derivative works”172—thus answering a slightly different question than the one he had asked. He also declined to address the question whether Ty was engaging in copyright misuse by using its copyrights to squelch criticism of the company.173

But if courts can (and do) elide these issues, somebody must consider them. By failing to define the “relevant markets” in copyrighted works, lawmakers are giving copyright owners the power to define the scope of their own property rights by enabling them to occupy those markets in which they wish to exercise exclusivity. The result is similar to what would happen if courts gave monopolists the power to define the relevant market in antitrust law: If the market were defined broadly enough, even Microsoft would have an insignificant share of it. Similarly, in copyright law, if the market for a copyrighted work were defined broadly enough, every unauthorized use of that work would give rise to infringement liability because every such use would be “competing”—whether in “original” or derivative markets. The result would be a copyright law that provided creators with plenty of inducement to create (in the form of exclusive rights) but that neglected the values of access to copyrighted works, open and populous markets in copyrighted works, and diversity of expression. In other words, the result would be the copyright law we have today.

How might lawmakers define (and confine) the relevant markets in copyrighted works? The answer is not to ask, as lawmakers have done, whether giving creators this or that exclusive right in this or that market would provide them with an enhanced inducement to create. As I have argued elsewhere, changes in the law have conditioned creators to expect an increasing reward for engaging in the act of creation—and creators have formed incentives accordingly.174 “Lawmakers hasten to safeguard those incentives by granting more rights. Those rights, in turn, create higher expectations among creators,” and the result is a cycle in which the property right grows increasingly broad.175 The only way to escape the cycle is for lawmakers to ask not what creators have come to expect in the way of rights, but what creators are entitled to expect given the nature of the public interest in copyright.176

The rights that creators are entitled to expect are likely to vary with the type of work at issue because the public interacts with different types of works in different ways. Consider the case of works that exist in a single copy, such as original paintings and sculpture: For many “collectors of fine art, there [is] no substitute for the original,” making the relevant market in those works so narrow that the benefits of copyright might not be worth the costs of granting protection.177 The opposite is true of works created for the purpose of existing in multiple copies, or what I have termed “printed works.”178 Books are a prime example of these: Most authors write books so that others might pay to read them. In order to accomplish this goal, authors make (or authorize) copies of those books and distribute those copies to the public. Copyright law enables authors and their publishers to turn a profit by prohibiting others from marketing the fruits of creative processes in which they did not invest. The expectation that such a profit is possible acts as an inducement to more creation, both by existing authors and future ones.

There are, of course, other reasons why people create. Some of those reasons might have nothing to do with money—as if, for example, authors were motivated to write books in the hopes of becoming famous, or in the hopes of using copyright law to keep others from criticizing or ridiculing their work. Other motivations might be more mercenary: Authors might write books hoping to make money by writing sequels, or by having their books made into movies. Authors might write books so they can demand a royalty whenever (a) their books are sold by used bookstores or loaned by libraries, (b) their books are shared among friends, (c) their books are read aloud on the radio, in concert halls, on street corners, (d) their books are displayed on television, in bookstores, on public streets. As strange as it may seem, some authors might even be motivated to write books so they can get paid when a computing company (like Google) decides to scan their books and make the resulting digital images searchable on the Internet.

But just how relevant is each of these motivations? As we have seen, some types of harms are not “competitive harms,” such as the harms that arise when copyrighted works are subjected to criticism or ridicule. Thus, even if some authors would not create without being granted the right to exclude these uses, copyright law does not (and should not) respond by providing an inducement here. Similarly, other authors might be motivated to create by the prospect of excluding uses that might not be part of the “relevant market” in books—which is another way of saying that satisfying those expectations of reward might not serve the public interest. Rights under copyright should be granted or withheld so as to benefit the public, and as we have seen, this benefit does not always “coincide[ ] ... with the claims of individuals.”179

If lawmakers wished to define the “relevant market” for printed works, they could not do so without deciding what creators of printed works are entitled to expect, but in pursuing this inquiry, one might reasonably begin by asking what most people actually expect to gain by creating. Even if this is an empirical question, one suspects that at least some of the answers are obvious: First, a significant percentage of people create in the hopes of releasing copies of their works (and to a lesser extent, derivatives of their works) to the public in return for money. Second, the only way for those creators to make money is by distributing those copies or derivatives to interested members of the public.180 Third, it would do those creators no good to print copies or create derivatives of their works without distributing them. The value contained in a warehouse of books, or posters, or movies depends almost entirely on what the public might pay for those things upon their release. In short, most people create primarily because copyright law provides them with the exclusive right of public distribution. It is no accident that Congress once conditioned the grant of statutory protection on the fact of publication; “intellectual conceptions benefit the public only when they are released.”181

Like every other right in property, the exclusive right of public distribution has its limits. Notwithstanding the fact that at least some people might create so as to earn a royalty every time a copy of their work changes hands, Congress has determined that creators are not entitled to expect those royalties, at least insofar as authorized copies are concerned. Almost exactly a century ago, Congress limited the public distribution right in section 41 of the Copyright Act of 1909, providing that copyright owners cannot “forbid, prevent, or restrict the transfer of any copy of a copyrighted work the possession of which has been lawfully obtained.”182 The first public distribution of a work in copies exhausts the distribution right as to those copies. This limitation, known as the “first sale doctrine,” appears in substantially the same form in section 109(a) of the Copyright Act of 1976.183 In adopting this limitation, Congress believed that the first sale doctrine would benefit society (e.g., by providing more in the way of access) than the doctrine would harm it (e.g., by providing less in the way of inducement). Accordingly, Congress defined the relevant market in printed works so as to encourage competitors to engage in the further distribution of “lawful[ ]” copies that already had reached the public.

If copyright law concerned itself only with those invasions of the property right that threatened to cause competitive harm in this market, the law would continue to provide copyright owners with the exclusive right to release copies (and perhaps, derivatives) of their works to the public. It would not, however, provide copyright owners with the exclusive rights of reproduction and adaptation because the acts of reproduction and adaptation are not anticompetitive, standing alone. Professor Patterson once described the right to copy as “a predicate right”;184 that is, one cannot distribute copies of a work to the public without making those copies in the first place. The same might be said of the right to make derivative works: One cannot distribute derivatives of a work to the public without making those derivatives in the first place. The act of public distribution requires a predicate act of reproduction or adaptation, but acts of reproduction and adaptation can (and indeed, do) happen without the results being distributed to the public.

This is not to say that acts of unauthorized copying might not deprive copyright owners of opportunities to charge for access to their works—as when, for example, friends send each other electronic copies of songs they purchased, hoping to share an experience.185 But these are relevant harms only in a world in which copyright owners are given the right to exclude every use, however beneficial to the public. Copyright law does not (and should not) exist to internalize every externality that impacts the public in a positive way. To quote Professor Mark Lemley, “part of the point of intellectual property law is to promote uncompensated positive externalities, by ensuring that ideas and works that might otherwise be kept secret are widely disseminated.”186 Indeed, as Professor Lemley has observed, giving copyright owners the right to capture the value of every use (i.e., to eliminate freeriding) would impose significant costs—not only on society, but also on creators themselves.187

Suppose that section 106 of the Copyright Act were amended to replace subsections (1) through (3)188 with a provision granting to copyright owners “the exclusive right[ ] … to distribute copies or derivatives of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.” Suppose further that section 109(a) were amended to provide that “the owner of a particular copy or derivative … made by authority of the copyright owner… is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or derivative…” In providing creators with the distribution right (but not the reproduction and adaptation rights), lawmakers would permit copyright owners to capture the values in some uses without forcing the public to sacrifice other interests that the law was meant to promote.

Creators would enjoy the exclusive right to release copies (and perhaps, derivatives) of their works to the public, but they could not control the later distribution of those copies and derivatives. Creators could not prevent others from copying or adapting their works, but they would have the right to exclude those (unauthorized) copies and derivatives from the marketplace; the first sale doctrine would exempt from liability only those acts of public distribution involving “cop[ies] or derivative[s] … made by authority of the copyright owner.” “Private” distribution, for its part, would continue to be perfectly legal, thus enabling members of the public to share copies and derivatives of copyrighted works within the “normal circle of … family and … social acquaintances.”189 Creators would continue to enjoy a significant amount of inducement; the public would enjoy a significant amount of access to copyrighted works; and the law would provide the public with a number of other significant benefits, to which I now turn.

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