If you think this headline is hyperbole, read on. You tell me.

Erosion of the copyright first-sale doctrine: Omega watches

In my post Leveraging IP, I discussed a lawsuit from last year where Swiss watchmaker Omega used an arcane twist in copyright law to protect itself from competitive arbitrage. Omega sells its luxury watches at a higher cost in the US than in Paraguay. The difference in prices creates “a tempting arbitrage opportunity in importing Omega watches from Paraguay to the U.S. It is just such watches that Costco bought from a stateside importer, allowing the warehouse store to offer an Omega Seamaster for $1,299 when the brand preferred them sold in the U.S. for $1,999.”

Now Omega didn’t like this, but couldn’t argue that the watches were fakes. They were authentic. No fraud, no trademark infringement.

So Omega made a small globe logo, subject to copyright protection, and put it on the back of the watch. Then they sued Costco for copyright infringement. Now normally one would think this would be prohibited by the copyright law “First Sale Doctrine.” Under that doctrine, when the owner of a copyright sells a copy to a buyer, the buyer is free to resell that particular copy. The seller is said to have “exhausted” his rights in the copyright in the first sale. The buyer cannot make extra copies, but he can re-sell his copy. This is why used book sales do not infringe the author or publisher’s copyright.

However, in the Omega case, “[t]he appeals judges decided that, since the first sale of the Omega watches in question happened outside of the U.S., America’s first-sale doctrine doesn’t apply.” (For an update on that case, see Supreme Court lets ban on “gray market” imports stand.)

As I noted in that post, a WSJ article commented that this arcane ruling:

could have large implications. … Constrain the first-sale doctrine and you throw a wrench into the business of used-book stores, garage sales (including the electronic garage sale that is eBay), and any and every sort of secondhand shop. And yes, even public libraries might find themselves facing the challenge of figuring out which books on the stacks were first sold in the U.S., and which were first sold abroad.

The first-sale doctrine and resale of books

Another recent case gets a step closer to a rule that public libraries can’t lend out books purchased overseas, that used books originally purchased overseas can’t be re-sold on Amazon or eBay. The case, John Wiley & Sons Inc. v. Supap Kirtsaeng d/b/a Bluechristine99, discussed here and here, was decided on Monday by the Court of Appeals for the Second Circuit. In this case, a foreign grad student, Supap Kirtsaeng, re-sold in the US textbooks printed abroad.

To subsidize his education, Kirtsaeng’s family shipped him foreign editions of textbooks printed abroad by Wiley Asia, which he sold on eBay.com at a discount. The textbooks, mostly scientific, had soft covers, thinner paper and lower-quality printing than the more expensive U.S. editions.

Apparently Kirtsaeng made about $1 million re-selling these books. Now these books were not pirated. They were authorized copies. But the publisher did not like this price arbitrage cutting into their geographic price discrimination. They maintained that the books were “intended only for overseas markets.” So, they sued for copyright infringement. Of course, “Kirtsaeng argued that the first sale doctrine gave him the right to resell the textbooks,” but, naturally, in view of the copyright statute, and recent precedent, the Court of Appeals disagreed, holding, as did the court in the Omega watch case, “that the first sale doctrine does not apply to goods manufactured outside the United States.” Thus, the court “upheld a $600,000 jury verdict against Supap Kirtsaeng for his unauthorized re-sale of books.”

Wiley’s lawyer “said the company was ‘very pleased’ with the 2nd Circuit’s decision.” I bet it was! How presh!

The first-sale doctrine and library lending and resale of used foreign books

Now: as noted above: what about libraries, that own foreign-published books? What about sales of used books that were printed overseas? Is this now to be prohibited? It’s hard to see how this is not a real possibility.

Yet another case of how copyright causes censorship (see various examples, e.g. that of the judicial banning of a sequel to J.D. Salinger’s  Catcher in the Rye or a judge ordering buyers of a Harry Potter book not to read it, in The Patent, Copyright, Trademark, and Trade Secret Horror Files).

For more on the first-sale doctrine, see Do Libraries Need Permission To Lend Out Ebooks?; Supreme Court lets ban on “gray market” imports stand; Leveraging IP; Why Netflix Won.

Patent law’s exhaustion doctrine, drug reimportation, and free trade

By the way, a patent law has a rule similar to copyright law’s first-sale doctrine, the “exhaustion doctrine,” which I discuss in Leveraging IP, Patent Exhaustion, and Radical Patent Reform Is Not on the Way esp. n.5. Big pharma have also tried to stop price arbitrage from eroding their own geographical price differentials, as when drug is priced very high in the US (due to patents) but sold cheaper, say, in Canada (partly because of Canadian price controls). This gives rise to arbitrage opportunities, as in the Omega watch case–leading to drugs being imported into the US from Canada and sold at a cheaper price. Unlike in the Omega case and the recent text book copyright case, the patent exhaustion doctrine has not yet been watered down enough to allow the drug companies to claim the resale of the reimported drug infringes patents: the pills were sold legitimately in Canada, and so the patent is not infringed if they are re-sold in the US. However, the FDA still helps out Big Pharma by blocking the reimportation for various made-up reasons such as consumer safety, etc. The pharma companies have succeeded in blocking legislative attempts (e.g., H.R. 2427, in 2003) to force the FDA to allow such drug reimportation. And sadly, the support of patents even by some libertarians has led them to oppose reimportation–that is, to oppose free trade–e.g., Cato’s Doug Bandow, Richard Epstein, and Michael Kraus. (See Ideas Are Free: The Case Against Intellectual Property; Pilon on Patents; Drug Reimportation; Cato on Drug Reimportation; and Patents, Prescription Drugs, and Price Controls.

Libertarians and free marketeers must support property rights in purchased items, whether it be drugs, books, or ebooks; we must support the right to resell, or even reimport, one’s own property; and we must oppose patent and copyright.

Update: See Mike Masnick’s great analysis, Legally Bought Some Books Abroad? Sell Them In The US And You Could Owe $150k Per Book For Infringement.

[mises]

From Wikipedia:

The Tolkien Estate maintains the position that the geographical layout of Middle-earth or any other places in the imaginary universe created by J.R.R. Tolkien was the intellectual property of J.R.R. Tolkien and subsequently is that of his heirs. The Tolkien Estate has therefore restricted the publishing of maps to those authorized by the Estate and legally pursues anyone who publishes any maps, including self-made works, on the internet.

From Techdirt: Restaurant Owner Ordered To Pay BMI $30,450 For ‘Illegally Playing’ Four Unlicensed Songs. ‘Nuff said.

There is a good post on Gizmodo, by Brian Barrett, arguing that “The US Patent System Is Killing Innovation.” (H/t Paul Vahur)

However, it does contain some confused analysis and prescriptions for our current patent mess. Here is the comment I left there:

The patent system ought to be abolished. I say this as a practicing patent attorney, and a pro-property rights libertarian. Patents are not property rights. They are state-granted monopoly privileges designed to permit some companies to outlaw competition. This is mercantilism.

The author’s views are a bit confused. The problem with the patent system is not that it “kills innovation.” Like all state interventions in the market, the patent system (a) violates property rights; and (b) reduces overall societal wealth. The form this destruction takes is just a detail. Sure, it results in less innovation, but then so do all other state regulations and interventions, from war to income taxes income taxes (since it reduces overall wealth, leaving less capital available for R&D, etc.).

The author is also confused in proposing “A better answer is probably to write specific language into patent law to cover the unique properties of software.” Patel is right that software is nothing special; if you allow method patents, then some software-related techniques will be patentable. There is also nothing wrong with patent trolls; if the state grants patent rights, they will be used in a variety of ways. I discuss this in Patent Trolls and Empirical Thinking; Patent Law, State Courts, and Free Speech: The Case of Troll Tracker.

The suggestion for a loser-pays rule is also misguided: “As for litigation, Gurley recommends moving to a system—similar to what the UK and France already have in place—where the losing party pays. That would, ideally, head off countless baseless suits at the pass.” As I note in Is “Loser Pays” Libertarian?, such a rule would only enhance the power of large companies suing smaller parties and add additional cost to such defendants.

The only solution is to recognize the patent system was a huge mistake and is a derogation from property rights and the free market. There is no justification whatsoever for a system of state-granted anti-competitive monopoly privileges. The current examples we are seeing on a daily basis of patent lawsuits and conflict is not just “abuse”; it is a natural consequence of such an unjust, anti-market system. People talking about “reforming” or “fixing” the system instead of getting rid of it–people who say “don’t throw the baby out with the bathwater”–are part of the problem, as they are endorsing the basic validity of the corrupt system that will always lead to injustice, economic and scientific distortion, rent-seeking, lobbying, corruption, and economic waste.

I provide more extensive arguments for why the entire patent (and copyright) system should be abolished, in various articles collected at C4SIF. See also the various studies collected in  Yet Another Study Finds Patents Do Not Encourage Innovation.

All this said, there are some reforms short of abolition that we could make, including compulory licensing. I mention them in “Reducing the Cost of IP Law”. But let’s not pretend that ANY of the current reform proposals do anything significant at all — see “Radical Patent Reform Is Not on the Way“; and Prior User Rights and Patent Reform and Patent Reform is Here! O Joy!

In my most recent speech, I discuss a lot of the problems with IP law extensively: Intellectual Property and Economic Develoment.(I left some similar comments on Niley Patel’s very confused post about software patents and patent policy.)

–Stephan Kinsella, JD, Patent Attorney, believer in the free market, opponent of state granted monopolies

[the comment seems not be coming up on Gizmodo; if anyone knows how to post it there, feel free.]

As reported on Slashdot (h/t Peter Surda):

Anti-Piracy Lawyers Accuse Blind Man of Downloading Films

Posted by Soulskill on Tuesday August 16, @10:23PM
from the you-wouldn’t-download-a-seeing-eye-dog dept.

Masnick's Smartphone Lawsuit Diagram

So try to follow the bouncing ball of this gargantuan patent-caused waste of energy and resources.

First, Google’s Android smartphone platform is under attack from a number of competitors, all using patents against Android–including competitors Apple (iPhone), Microsoft (Windows phone), RIM (Blackberry), and Motorola, as well as Samsung.¹ (The diagram above right is an improved version, by Mike Masnick, of earlier, flawed diagrams depicting patent lawsuits in the smartphone space, shown in miniature below.)

Now the Samsung part is a mess: apparently Apple sued Samsung for patent infringement, as part of its attack on the Android platform. It seems Apple needs the state’s help to fight off competition. And then Samsung strikes back against Apple with its own patent infringement claims. And at the same time, another division of Samsung is one of Apple’s key suppliers of SSD drives, memory chips, and displays. Got it? Apple sues its key supplier, to stop Android competition; its key supplier sues it back; and yet the arrangement between Apple and the Samsung division supplying it with these components continues on. Wow.

Meanwhile, Apple is also at the receiving end of patent aggression, e.g. the lawsuits by Lodsys, the Intellectual Ventures-connected patent troll, who is suing Apple’s iOS developers, and the recent suit by HTC.

As for Microsoft, which is also attacking Android with patent threats and suits, it has also been on the receiving end of patent attacks, recently losing a $300 million patent judgment against i4i.²

Google, so far reluctant to go on the patent offensive, has been trying to acquire more patents to defend itself from the onslaught of suits by its competitors. If it has enough patents in its arsenal, then Apple and Microsoft might lay off suing Google, for fear of a counter-patent suit. Which is why Google’s $3 billion bid was not enough to acquire bankrupt Nortel’s 6000 patents: a “consortium” (hello, FTC!) of its competitors, including Apple, Microsoft, and RIM, obtained the Nortel patents for $4.5 billion.³ (RIM, apparently now seeking to use patents to hammer the Android competitor, of course was previously forced to pay $600M to NTP for patent infringement; and it has recently made a licensing deal with Intellectual Ventures for 30,000 IP assets–whether this is defensive, or for offensive purposes, I can no longer keep track.)

Source: New York Times

Back to the subject of this post. A recent entry into the patent club using the club of patents to hammer Google’s Android platform is Motorola.⁴ And yet today it’s reported that Google is buying Motorola Mobility for $12.5 Billion. Yet another enemy-friend deal. The WSJ says that the purpose of the acquisition is to “make Google more competitive in the mobile-computing market.” Yet, can it be doubted that a major reason for this huge purchase is to “give Google control of Motorola Mobility’s attractive patent portfolio after the Internet giant recently missed out on a bid for Nortel Networks Corp.’s portfolio”? This follows on the heels of Google’s purchase of 1,000 patents from IBM, and its possible acquisition of Interdigital patents.⁵ (Apple Apple has also sued Motorola for patent infringement.)

So let’s get this straight. Apple and Samsung are suing each other, while Apple relies on another division of Samsung for key parts. Apple and Microsoft–and apparently RIM–are using patents aggressively to stop competition, despite each having been hammered hard by others (including patent trolls) for patent infringement. Google, who seems to want patents for defensive purposes, lost out on the Nortel patent shield (acquired by its competitors Apple, RIM, Microsoft, etc.), but has paid billions of dollars now for patents from IBM and even from Motorola (recently its patent enemy), and may pay more for Interdigital’s patents–in a continuing escalation of the patent war in the smartphone segment of the market.

Which, of course, is just one part of the market. Similar battles are being fought all the time, on all different fronts. I wonder if this is what the Founders had in mind when they put that unfortunate patent clause in the US Constitution?

[mises]

1. Android in trouble; Samsung strikes back at Apple with ten patent infringement claims; Apple sues Samsung over Galaxy products; Microsoft Demands Samsung Pay $15 Royalties For Every Android Phone It Sells; Android Patent Trouble Worsens: Motorola Considers Collecting IP Royalties; see also other posts about the Android mess here. [↩]
2. Microsoft Demands Samsung Pay $15 Royalties For Every Android Phone It Sells; i4i recently won $300M from Microsoft. [↩]
3. Apple, Microsoft, Sony, RIM et al. won for $4.5B. [↩]
4. Android Patent Trouble Worsens: Motorola Considers Collecting IP Royalties [↩]
5. Google buying more patents to defend itself. [↩]

From Jeff Tucker, at the Mises Blog:

A number of stories online chronicle the fight between headquarters and the Dr. Pepper plant in Dublin, Texas, over whether this local plant can market its own drink made not with corn syrup but sugar. See this story, for example. But correspondent David Blackstone gets it right: this is really a story of the injustice of “intellectual property”; it is threatening the way of life of people in this small town (I’ve driven through many times). It is also an interesting and unusual case. Usually the issue with trademark is how a company can beat back impersonators. But what happens when the company itself becomes the impersonator and its franchises want to stick to the real thing?

One of the most beautiful treasures of Texas is being threatened. I’m talking about Dublin Dr Pepper, the national soda of Texas, made in tiny little Dublin, TX, a beautiful town of Texas heritage. Dublin’s main industry is its 120-year-old Dr Pepper bottling plant.

Thanks to government intervention, like a steep tariff on sugar, almost all soda in America is now sweetened with high fructose corn syrup instead of cane sugar. A side by side comparison shows that the taste is absolutely not the same. Corn syrup “burns”; sugar is “smooth.” Old-timers remember sodas tasting different in years gone by because the sodas were different. And devoted aficionados know how to get “the real thing”: you can purchase Mexican or Passover Coke to get cane sugar Coca-Cola; PepsiCo recently created “Mountain Dew Throwback” and “Pepsi Throwback,” and for years the Dr Pepper bottling plant of Dublin, TX has built a devoted following.

When all other bottlers were switching to high fructose corn syrup due to cost, the owners of the Dublin Dr Pepper plant stubbornly stuck by cane sugar. It meant they would make less money on each can or bottle sold, but they felt that the way forward was to not compromise quality. Unfortunately the century-old agreement for the Dublin plant limited their distribution to a small area of just a few counties, but for years retailers from outside of the territory would acquire the product and sell it to their customers. Even the Dr Pepper main company itself promoted Dublin Dr Pepper, as the original formula.

The town of Dublin throws a blowout party for Dublin Dr Pepper every year in June. For a week the town’s name is legally changed to “Dr Pepper, TX” and road signs are changed to read “Dr Pepper, Texas Population: 1024? This year the plant observed its 120th birthday at the party.

But shortly afterward, the main Dr Pepper corporation filed a lawsuit against Dublin Dr Pepper. They seek to use the courts to force the Dublin plant to: stop selling outside of their six county territory, accept corporate labeling and packaging for their product, and cease use of the name “Dublin Dr Pepper” (even though corporate Dr Pepper has been using and promoting this name for years!).

Of course, were it not for the ridiculous and immoral idea of “intellectual property,” the Dublin Dr Pepper bottling plant would have the right to make whatever they want, call it whatever they want, package it however they want, and sell it wherever they want.

My family adores Dublin Dr Pepper and are incensed to see its producers aggressed against. Just one more beautiful treasure whose existence is threatened by government intervention.

Y Combinator co-founder Paul Graham’s 2006 essay “Are Software Patents Evil?” opens with “if you’re against software patents, you’re against patents in general.”

Yep.

My Mises University 2011 lecture, Intellectual Property and Economic Development (July 27, 2011), is now available in video. Slides and audio available here.

Sent to me by Allen Lewis, CFA, a post from Financial Advisor magazine about a financial planning patent. Who says software patents or patent trolls are the main problem in the patent system, or that business method patents are dead?

Business method patents were approved in the 1998 case State Street Bank & Trust Co. v. Signature Financial Group Inc., which I wrote about in “A New Traffic Cop at Intersection of Patents and Financial Inventions” (Duane Morris website version), The Legal Intelligencer [Philadelphia], Thurs., Sept. 3, 1998. As I wrote then:

As a result of this decision, more innovations of economists, accountants, bankers and the like will be protectable by patent. Thus, the financial services and related industries will start to adopt some of the patent-related practices of the electronics industry and other technology-intensive industries.

For example, proposed new financial products and customer services will be reviewed for potential patentability, and will be the subject of patent applications. Financial services companies will be in the position of reviewing employment agreements with their creative employees to ensure that patent rights are properly vested in the company.

New developments will also be reviewed for possible infringement of existing patents. Patent licensing and infringement litigation will likely become commonplace.

Yep.

However, in 2010 the Supreme Court’s Bilski decision, while not explicitly overruling State Street and business method patents, Bilski rejected State Street‘s “useful-concrete-tangible test,” arguably causing many or mostbusiness method patents to be invalid. So, expect the defendants here to rely heavily on Bilski in arguing that the patents asserted against them are no longer valid.

Here’s an excerpt from the post:

Lawsuit Against UBS Has Far-Reaching Implications For Advisors

UBS Financial Services Inc. is being sued for two patent infringements in a case some experts say could affect the entire financial planning industry.

Wealthcare Capital Management, which serves individual investors, financial advisors and institutions, filed suit against UBS in U.S. District Court in the Southern District of New York for using what it contends are its own  proprietary processes for financial planning.

The two patented processes involved in the suit assess a client’s long-term financial goals and then use a capital-market modeling technique to determine how these goals can be achieved.

Wealthcare has offered in the past to license the company’s advisory system to UBS, but the Switzerland-based UBS has declined, says David B. Loeper, founder and chief investment officer of Wealthcare Capital Management. Loeper is chairman of Financeware Inc., the parent company for Wealthcare and its intellectual property rights arm, Wealthcare Capital Management LP LLC.

The suit seeks monetary damages and an injunction banning UBS from using the financial advising systems that are part of programs, including MoneyGuidePro.

Read more>>

From Jeff Tucker at Mises blog:

Great–and scary–alternate history from Mike Masnick at Techdirt:

What If Tim Berners-Lee Had Patented The Web?

from the it-would-be-quite-different dept

You may have seen the stories a week or so ago about how it was the 20th anniversary of Tim Berners-Lee putting up the first web page. While many, many people still confuse “the web” with “the internet,” Berners-Lee’s creation really did help take what was mostly a system used by a few nerds (myself include) and add the elements that made it possible to go mainstream in a big, big, big way. And while many folks are talking about just how amazingly far we’ve come in just 20 years, Marco Arment (the InstaPaper guy) reminds us that if Berners-Lee had sought and received a patent for the web, it would just now be coming out of patent coverage.

That sets up an interesting thought experiment. Where do you think the world would be today if the World Wide Web had been patented? Here are a few guesses:

• Rather than an open World Wide Web, most people would have remained on proprietary, walled gardens, like AOL, Compuserve, Prodigy and Delphi. While those might have eventually run afoul of the patents, since they were large companies or backed by large companies, those would have been the few willing to pay the licensing fee.
• The innovation level in terms of the web would have been drastically limited. Concepts like AJAX, real time info, etc. would not be present or would be in their infancy. The only companies “innovating” on these issues would be those few large players, and they wouldn’t even think of the value of such things.
• No Google. Search would be dismal, and limited to only the proprietary system you were on.
• Most people’s use of online services would be more about “consumption” than “communication.” There would still be chat rooms and such, but there wouldn’t be massive public communication developments like blogs and Twitter. There might be some social networking elements, but they would be very rudimentary within the walled garden.
• No iPhone. While some might see this as separate from the web, I disagree. I don’t think we’d see quite the same interest or rise in smartphones without the web. Would we see limited proprietary “AOL phones?” Possibly, but with a fragmented market and not as much value, I doubt there’s the necessary ecosystem to go as far as the iPhone.
• Open internet limited by lawsuit. There would still be an open internet, and things like gopher and Usenet would have grown and been able to do a little innovation. However, if gopher tried to expand to be more web like, we would have seen a legal fight that not only delayed innovation, but limited the arenas in which we innovated.

What else do people think might have happened? I’d also argue that Berners-Lee himself would hardly be a name that most people knew about. When you think about just how limiting a world this would have been compared to what we have today… and then begin to wonder about what “web-like” invention of today is now locked up under patents, it really makes you wonder just how much we’ve held back innovation in this arena.

Mike Masnick notes in If You Have To License The Software You Claim Infringes On Your Patent, How Is Your Patent Valid? that:

It’s certainly beginning to feel like we’re hitting something of an inflection point in getting people to realize just how incredibly broken the patent system is. There has been a flurry of mostly excellent news stories from a variety of sources picking up on this and detailing specific cases of a broken patent system. The This American Life episode certainly helped kick off a lot of attention, but it’s definitely been growing in other areas as well. The latest entrant into the field is an excellent article from Ben Popper over at The Observer’s BetaBeat site, which focuses on one specific smaller patent troll, a company called IQ Biometrix, and what it’s done over the years… which is basically nothing productive. However, it does have two hugely questionable patents: 7,289,647 for a “system and method for creating and displaying a composite facial image” and 6,731,302 for a “method and apparatus for creating facial images.”

The patent proponents do indeed seem to be on the ropes. This is acknowledged by one guy offering a pathetic, tepid defense of the patent system, in Everybody’s Angry About Patents, But They’re Actually A Good Thing, which asserts, groundlessly:

it’s easy to lose sight of what patents actually do: they force inventors to disclose information about an invention to the public. In exchange, they get a time-limited monopoly on that invention.

The end result is MORE innovation, not less. There’s no reason to throw the whole system out just because we don’t like the way some companies are using it today.

As I commented there,

See also the various studies collected here http://blog.mises.org/10217/yet-another-study-finds-patents-do-not-encourage-innovation Yet Another Study Finds Patents Do Not Encourage Innovation.