Copyright and Free Trade; Patents and Censorship

by Stephan Kinsella on February 29, 2012

Critics of patent and copyright often argue that copyright causes censorship,¹ while patents inhibit free trade and competition.² For this reason, and because of the way the state can use copyright and the fight against piracy as an excuse to clamp down on information sharing and also the Internet itself, I’ve argued that copyright is worse than patent.³

But patent and copyright are not so easily compartmentalized. Patents also give rise to censorship (see, e.g, my post Cato/Reason/CEO brief opposing medical diagnostic process patents as violating freedom of speech [update: Patents Threaten To Silence A Little Girl, Literally.]), and copyright also restricts free trade and competition. Patent law’s effect on speech and expression, and copyright law’s effect on free trade, is not surprising–after all, the price signals of a free market are a type of communication. So interfering with expression has to hamper the market, and hampering the market has to affect price signals, i.e. communications. Censorship affects the efficiency of the market, and intervention in the market suppresses free expression and communication of useful information. (This is one reason patent and copyright ought to be considered similar type of laws, despite protestations by some critics that we have to treat each IP law separately. See my post “Intellectual Property” as an umbrella term and as propaganda: a reply to Richard Stallman.)

We and others have given a lot of attention lately to the danger copyright poses to freedom of expression and also the Internet itself, in the wake of the SOPA battle. (See posts on C4SIF and Techdirt for more information.) But in the wake of the temporary defeat of SOPA, the looming Trans-Pacific Partnership trade agreement (Death by Copyright-IP Fascist Police State Acronym) threatens to exacerbate copyright’s affect not only on free speech and the Internet but on free trade itself.

I noted before (Supreme Court lets ban on “gray market” imports stand; Leveraging IP) how copyright law can be used to stop resales of legitimately purchased products, like Omega watches, by slapping some copyrighted symbol on the product and manufacturing it outside the US to exploit a quirk of US copyright law–and how this could imperil libraries and sales of used books, if the book was made outside the US (Libraries: Prepare to burn foreign books, courtesy copyright law). As Mike Masnick explains in a recent Techdirt post (below), the TPP may make this even worse, by giving companies selling products the ability to ban secondary markets and resale of the goods they sell consumers–for example, an iPhone. In effect, TPP could allow Apple, for example, to prevent the “owner” of an iPhone from reselling it or even lending it to someone, on the grounds that it was includes copyrighted material (such as iOS) but was made overseas so that it is exempt from the First Sale doctrine (which normally would permit someone who buys a copyrighted item to resell it, lend it, etc.). One can just imagine ebay and garage sales and gazelle.com being viewed as illegal “piracy” because owners of objects are … reselling them without permission of the original manufacturer.

Scary stuff. Here’s Masnick’s excellent but chilling, post.

Update: For another example of how patent law, not just copyright law, serves to censor free speech: here we have a patent troll using patents to potentially shut down, or impose a heavy tax, on podcasting, and to violate the First Amendment rights of donors to anonymity and privacy. See UPDATE: EFF Fights Patent Troll Demand For Save Podcasting Campaign Donor Information.

See also Tom G. Palmer, “Intellectual Property: A Non-Posnerian Law and Economics Approach,” Hamline L. Rev. 12, no. 2 (Spring 1989; https://perma.cc/DH7K-ZCRV): 261–304, p. 264 (footnote omitted): “Monopoly privilege and censorship lie at the historical root of patent and copyright.”

How The US Trade Rep Is Trying To Wipe Out Used Goods Sales With Secretive TPP Agreement

from the trade-for-thee-but-not-for-me dept

For a while now, we’ve been covering the gradual legal assault on the First Sale doctrine and beyond. The First Sale doctrine, of course, is what lets you resell a legally purchased book without having to first obtain permission from the copyright holder. Of course, copyright holders generally hate the First Sale doctrine, because it often means that their products have to compete against “used” versions of their own products as well. Of course, this view is very shortsighted and economically ignorant. A healthy used or resale market has been shown to increase the amount people will pay for new items — because they recognize that there’s a secondary market and they can recoup some of what they paid for the original. Thus a healthy secondary market, contrary to what some believe, can often improve the health of the primary market.

But, there have been a few very questionable lawsuits that are chipping away at the first sale doctrine, starting with the infamous Omega case, in which the watchmaker exploited the phrase “made under this title” to argue that any goods made outside the US were not subject to first sale rights under copyright law, because they were not “made under this title.” That 9th Circuit ruling (which remains in place after the Supreme Court split down the middle — with Kagan abstaining due to her earlier involvement in the case) was one thing, in that there were some limitations. But then the 2nd Circuit went to loony town in suggesting that some books that were legally purchased in Asia could not be resold in the US without permission (i.e. an expensive license). While the district court who reviewed the Omega case on remand recently rejected Omega’s claim as copyright misuse, there is a lot of fear over this issue as the courts sort things out.

The risk of the Omega case goes even further, since it could wipe out the used goods market not just for “content,” but for physical goods as well. That’s because Omega didn’t just exploit the “under this title” part of the law, it exploited copyright law itself. Remember, it sells watches. What do watches have to do with copyright? Absolutely nothing. But Omega’s trick was to create a little design drawing, which it then got a registered copyright on… and then engraved that drawing in a tiny tiny spot on the back of the watch where almost no one will ever notice it. It serves absolutely no purpose… other than to make a physical object subject to the crazy excesses of copyright law. Thankfully the district court saw through that and recognized it was copyright misuse, but who knows what the higher courts (or other circuits) will say.

Of course, all this fighting in the courts over this might be moot if the Trans Pacific Partnership Agreement (TPP) is approved. We’ve been covering the incredibly secretive negotiations over that agreement, including last year’s leaked draft of the IP section. However, we didn’t quite realize the extent to which the US Trade Representative (USTR) and the big industry interests were seeking to use the TPP process to wipe out the used goods market.

In a fantastically detailed post, John Mitchell walks through how the USTR is seeking to effectively neuter any used goods sales by more or less locking in these rulings that makes it effectively against the law to resell copyrighted goods that were legally bought abroad back into the US without purchasing a new license to do so. He goes through (in much more detail than I did above) the history of first sale, as well as the two key cases above, but then digs into what the USTR is trying to do according to the leaked draft:

Here is where the aid of the U.S.T.R. in negotiating the Trans-Pacific Partnership Agreement (TPP) would come in, nullifying any potential adverse ruling by the Supreme Court while concurrently protecting against liability for copyright misuse. After all, if our own treaties require us to allow copyrights to be used to suppress price competition, it can hardly be a misuse of the copyright to do just that. The current draft would require the parties to codify the outcome from the 9th Circuit’s self-maligned interpretation. And, if the U.S.T.R. is successful, even if the Supreme Court were to reverse the Kirtsaeng holding, Congress would have an international obligation to amend Section 109(a) to apply only to copies either made in the U.S. or authorized by the U.S. copyright holder for sale here – authorized, no doubt, only at a minimum resale price rather than the true market price.

The current draft of the TPP has a provision that the major college textbook publishers could not have drafted any better themselves, as it mirrors the outcome advocated in their briefs. It would require treaty parties to codify the Ninth Circuit’s damaging ruling, thereby creating a huge loophole for U.S. copyright holders to take control all secondary markets for their works, as well as to control primary markets, by requiring all retailers to obtain a copyright owner’s “license to sell” in addition to outright ownership of noninfringing copies – if those copies are made abroad.

The fear, then, is that as companies recognize how this works, they can effectively ban almost any resale, just by having some of the product “made” outside the US. Mitchell highlights the case of the iPhone:

The iPhone, for example, comes pre-loaded with copyrighted computer programs, making it a noninfringing “copy” of many works, lawfully made in China (albeit by the U.S. copyright owner). Under the Ninth Circuit ruling, you may lend you iPhone to a friend without the copyright owner’s consent, because Apple sold it here (assuming Apple is the owner of all of the copyrights) in pre-installed works. Under the Second Circuit ruling, you cannot, simply because the copies were all made in China. Under the proposed TPP provision, the outcome might differ depending on whether there is a market for iPhones without the operating system (iOS) and related application software.

There is also a flip side to all of this which Mitchell only briefly touches on. Copyright holders might not want to be so excited about arguing that works made outside this country are not subject to US copyright law… because that could mean that all of these US copyright holders might not be able to make use of their copyrights abroad:

If a copy is not “lawfully made” under the U.S. Copyright Act solely because the Copyright Act does not apply abroad, then the other part of the exclusive right in Section 106(1) – to “authorize” the reproduction of the work into copies or phonorecords – would be limited to the exclusive right to authorize reproductions in the United States alone. In other words, anyone in the United States would be free to authorize reproductions abroad without infringing upon the U.S. copyright owner’s exclusive right to authorize reproductions.

Of course, I’m sure they would argue against that, or in a cognitively dissonant manner, seek to make use of the fact that various countries have agreed to recognize each others’ copyrights to argue that when abroad, those copyrights are automatically converted to the local copyrights within those countries (just don’t ask why first sale doesn’t then apply too…).

Either way, this is yet another reason to be quite worried about the USTR and TPP, and how seemingly “simple” changes to these rules and “international obligations” could have massive market-changing impact.

Update: for another example of how patents infringe free speech, see this ACLU criticism of gene patents:

What laws apply to human gene patents?

The ACLU and PUBPAT believe that gene patents violate both existing patent law and the Constitution.

Patent law has long held that products of nature and laws of nature are not patentable subject matter. The USPTO is failing to abide by this precedent when it grants patents on human genes. Human genes, even when removed from the body, are still products of nature, and their associations with diseases are laws of nature.

The First Amendment protects the freedom of thought, academic inquiry, and the exchange of knowledge and ideas. Gene patents implicate the First Amendment because the very thought that there is a relationship between specific genetic mutations and diseases has been patented and because scientific inquiry is limited.

The Patent Clause in Article 1, Section 8 of the U.S. Constitution gives Congress the power to award patents “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Human genes are not inventions, and awarding patents on them does not promote the progress of science. Instead, gene patents slow scientific advancement, because there is no way to invent around a gene – the gene is the basis for all subsequent research.