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Wednesday, January 19, 2011

Fuzzy Boundaries: The Potential Impact of Vague Secondary Liability Doctrines on Technology Innovation | Electronic Frontier Foundation

January 19th, 2011

Fuzzy Boundaries: The Potential Impact of Vague Secondary Liability Doctrines on Technology Innovation

Legal Analysis

Last year, Ninth Circuit Chief Judge Alex Kozinski and Josh Goldfoot from the DoJ's Criminal Division directly confronted some of EFF's concerns about overreaching theories of secondary copyright infringement. Playing on EFF founder John Perry Barlow's seminal essay, Judge Kozinski and Mr. Goldfoot titled their work "A Declaration of the Dependence of Cyberspace," and in it, they argue that current secondary liability doctrines can and should be used aggressively to tackle online infringement.

Former EFF intern and accomplished photographer Paul Szynol has responded with an interesting essay, which will be published today in Next Digital Decade, Essays on the Future of the Internet. In his response excerpted below, with which we generally agree (although we differ somewhat on the details) Paul cogently warns that today's vague, secondary liability rules may smother innovation from inventors big and small.

The book launch for Next Digital Decade will be streamed live from 9:45am to 2:30pm Pacific (12:45 to 5:30pm Eastern).

Broadly stated, the rationale at the heart of the secondary liability doctrine is this: an entity that knowingly helps to facilitate the commission of an illegal act (such as copyright infringement, for example) should be penalized for its contribution to the illegal activity.1 If a technology company induces its customers to use its product for infringing purposes, for instance, both the users and the company should be liable for such infringement—the users for direct infringement and the company for contributory infringement, which is a species of secondary liability.

The doctrine is appealing as a practical solution to widespread infringement because it targets the entities that enable illegal behavior—e.g., the Napsters and Groksters of the world—and thus eradicates the distribution mechanism that enables infringement in the first place. Judge Kozinski and Mr Goldfoot (I'll generally refer to them as "the authors" from here on), like the movie and music industries, certainly believe that the doctrine of secondary liability should be readily used as a handy and effective tool for weeding out copyright infringement. According to the authors, people "who provide powerful tools that can be used for good or evil have some responsibility to make sure that those tools are used responsibly." Put more bluntly, however, if you outlaw the tool, you needn't chase after the users, so in practice it's less a question of ethics and more a question of convenience and efficiency.

One of the principal problems with this approach, however, is the fact that the boundaries of secondary liability are not precisely set, and, short of extreme cases, it is not at all clear under what circumstances a product manufacturer will be liable for secondary infringement. Such wholesale endorsement for secondary liability doctrines should therefore give us some pause. For example, at what point does a software company that develops a peer-to-peer application utilized by end users to exchange copyrighted materials begin to "contribute" to the infringement and become secondarily liable? Does the company contribute simply by writing software that is merely capable of infringing uses?2 Or does the company contribute only if the software's primary use is, by design, infringing? Or, further yet, does the company contribute only if a substantial portion of the end-users utilize the technology for infringing purposes? If so, how much of the user base must engage in infringing activity for it to be a substantial portion?3 Or, as yet another option, does the company "contribute" only if it promotes infringing uses of its software? And, if that's the case, how much promotion is too much promotion? For example, is the advertising slogan "Rip. Mix. Burn." too much of an inducement to make infringing copies of music?4

These are fundamental, starting-point questions about the secondary liability doctrine, and one would expect that case law or legislation provides a clear answer to each. Yet the law is ambiguous (and the authors are altogether silent) on these points. Outside of extreme cases, no one knows with certainty—including lawyers, judges, company officers, engineers and academics—when secondary liability might attach to a product that facilitates the transmission of copyrighted materials. The legal system's failure to provide clear guidelines is the equivalent of posting a sign on a freeway that says "obey the speed limit" without giving an actual speed.

The effect is potentially detrimental to the entire technology sector. A clear rule is a predictable rule, and a predictable rule is one on which innovators can rely when developing a product. Without clear guidance from the legal system, tech companies are forced to engage in a "fingers crossed" product design process, and, subsequently, face a market that can be an explosive landmine of infringement liability. The potential economic damage to a company found guilty of secondary liability can be substantial, to say the least. Since statutory damages for copyright infringement range from $750 to $150,000 per infringement, a maker of a multi-use technology may confront liabilities on a scale that can threaten the viability of even the wealthiest corporations. The risk is further exacerbated by the recent trend of unpredictable and often very bloated damage awards granted to copyright plaintiffs. Such risk can dissuade even the most resolute investors from marketing their invention—and it can literally bankrupt the braver among them. The loss of a robust distribution tool harms the content sector, too, since a powerful method for distributing content to end users will not be brought to market.

Judge Kozinski and Mr Goldfoot are not concerned with the chilling effect that the legal system's ambiguity can have on technology innovation. In fact, they reject the proposition, and confidently point to the pharmaceutical and auto industries as counter-examples: Both industries have to comply with legal regulation yet manufacturers in both industries nevertheless innovate.

It's not a very persuasive comparison. First, the auto industry is hardly a hotbed of innovation. We might really like power windows and power steering, but, as advancements over prior art, these innovations are an order of magnitude smaller than the innovation we've seen on the Internet. Second, the players in the auto and pharmaceutical industries are frequently different from the players in the technology sector. It is rare, after all, if not unheard of, that a single person invents valuable medicine—the medical R&D process takes place in the laboratories of some of the wealthiest companies under the sun. In addition, medical innovation is subject to review and approval by government regulatory agencies, so by the time a medicine reaches the market, it has already been approved by the government. Innovation in information technology, in contrast, is often the result of the proverbial garage inventor who releases the technology entirely on its own. Think of eBay, Napster, Apple, Google and Microsoft, each of which had a modest start in someone's home or garage at the hands of one or two people (and many subsequently acquired similarly independent garage innovations). The distinction between a multinational company and a garage inventor is critical. First, there is no government imprimatur for multi-use technologies. Second, in contrast to wealthy companies that can afford sophisticated legal teams, garage inventors typically lack the economic resources necessary to pay for a comprehensive legal review of product design prior to the product's release. That inability increases the likelihood that the garage inventor will—unwittingly—design its product in a way that leads to legal liability, or the likelihood that, after releasing the product and receiving angry threats of litigation, the garage inventor will have to backtrack and redesign the product in order to avoid liability. These are very expensive measures. If the inventor can afford them, the inventor will have spent money that it would have saved had the law simply been clearer in the first place; if the inventor cannot afford them, the outcome is even worse: the start-up will simply fold, thus wasting its investment costs, while consumers will miss out on the product altogether.

That outcome is bad enough, but it's the third reason for the comparison's inadequacy that should give all of us some pause: because the legal landscape around copyright secondary liability is so unclear, even if the would-be inventor did have the resources to hire outside counsel, lack of clarity in the law means that, unless the product clearly crosses a line, lawyers—no matter how high their hourly rates—won't be able to confidently provide the inventor with a legal imprimatur. In other words, no matter how much a company tries, lack of clear standards means that its lawyers might "get it wrong," and the company may face infringement liability if it releases the product, or incur the costs of post-release redesign, or both. That is a very expensive proposition, and its corollary is clear: faced with potential liability exposure and potential redesign costs, each of which could figure in the millions or even billions of dollars,5 some would-be inventors and investors will, as rational economic actors, forego the whole enterprise—not because they analyzed the risk and found it potentially too costly, but because the law's ambiguity meant they simply couldn't properly analyze the risk in the first place. Notably, the foregoing outcome will apply to garage inventors and big companies alike. The garage inventor whose coffers won't be able to withstand the potential cost will retreat to the sound of a distant death knell; the big company will retreat because it knows that its deep pockets makes it an attractive target for a lawsuit and therefore may well decide that the potential litigation and licensing costs, even if not fatal, just aren't worth it. Again, consumers will miss out on a new product.

An ambiguous secondary liability doctrine also disadvantages American products in a global market: U.S. companies will have to worry about drowning in the unpredictable and poorly charted quicksand of secondary liability, while their international competitors will have clear legal rules in front to guide them. The domestic market suffers as well: By creating barriers to entry (high and unreliable due diligence costs as well as post-release redesign costs), the ambiguity favors entrenched entities over newcomers. Advocating secondary liability without removing the ambiguity also contradicts the authors' claim that the same set of laws should apply to offline and online worlds: The fuzzy secondary liability doctrine which they so strongly espouse in connection with technology wouldn't fly in the physical world. For example, should a car company be held liable for drivers who speed? After all, it would be easy enough to add a "speed limit compliance chip." Yet auto manufacturers are not forced to pay any portion of a speeding driver's ticket. Offline, in other words, bad actors—the users of technology—are punished for their own transgressions. Online, however, the law chases the manufacturers—and applies ad-hoc, ambiguous standards to their products. It would seem that the authors want Internet-specific laws after all.

None of this sounds like wise intellectual property policy. The legal system has a cconstitutional imperative to incentivize inventors, after all, and it achieves this objective in part by providing both content producers6 and innovators with a stable and predictable legal climate, such as the "bright line" rule devised by the Supreme Court in its 1984 Sony ruling.7 In its current state, the law threatens to punish rather than reward those who have the courage to release an innovative technology if that technology may be misused by its adopters and if that technology has yet to be contemplated and cleared by the judiciary or legislature. That is not an environment that encourages innovation. If the intent of the judiciary and the DoJ Department of Justice is indeed to mightily wield the secondary liability sword across the technology sector, the doctrine must be clearly defined, so that the rules of engagement are clearly stated and U.S. innovators can design their products with confidence—not in fear.

1. The specific theories of secondary liability have more nuanced elements, such as the requirements of materiality for contributory infringement and direct financial benefit for vicarious infringement. Since these elements are not critical to the essay’s main thesis, I’ve avoided spelling them out in detail.
2. An argument that the Supreme Court famously rejected in its 1984 "Betamax" decision. Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984)
3. See, for example, the Napster litigation. According to the District Court’s opinion, 87% of the content on Napster was copyrighted, and "virtually all Napster users" transferred copyrighted content. A & M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D.Ca. 2000). A decade later, a critical question remains essentially unanswered: how much lower would those percentages have to be for a manufacturer to be safe from secondary liability?
4. The standard introduced in is "clear expression", which is not much of a lodestar for someone seeking to gauge risk with any degree of precision. Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 914 (2005). One could persuasively argue that Apple’s very large, very prominent and very ubiquitous "Rip. Mix. Burn." billboards amounted to "clear expression."
5. It’s worth emphasizing that the billion dollar figure is not hyperbole —just ask SAPS, which , in late November of this year,recently lost its legal dispute with Oracle and was ordered to pay $1.3 billion in damages. See Sam Diaz, Jury: SAP Owes Oracle $1.3 Billion for Copyright Infringement, ZDNet, Nov. 23, 2010. The facts of that case are quite different from the examples given here, of course, but the award is a very conspicuous reminder that such astronomical damage awards are a startling reality of present day copyright litigation.
6. In Community for Creative Non-Violence v. Reid, the Supreme Court acknowledged "Congress’ paramount goal in revising the 1976 Act of enhancing predictability and certainty of copyright ownership." 490 U.S. 730, 749 (1989).
7. Sony v. Universal City Studios, supra note 2.