The Economics of Copyright Law and Problems With Its Implementation
Summary and Keywords
Without copyright law, authors would be unable to internalize the benefits of their writings. Copyright law reacts to this by providing authors with a period of exclusivity. The relevant legislation has a contract-like character; authors receive a period of exclusivity, and the public benefits by virtue of original writings that eventually pass into the public domain. Ideally each contract between the public and an author would be individually negotiated. Because U.S. copyright law is strictly utilitarian, authors would be “paid” the lowest amount possible to bring their works into existence. For example, popular authors may be able to internalize sufficient returns in just a few years. In other cases, a longer period of exclusivity is necessary. Huge transaction costs prohibit individual transactions and, at this writing, most works are protected for the life of the author plus 70 years.
As an economic matter, the actual implementation of copyright law is hard to rationalize. Works with even a modicum of creativity are copyrightable. This can result in a disincentive to be creative and invites expensive legal disputes about works that are socially irrelevant. In addition, works receive levels of protection that are independent of their value to the public. In some instances Congress with the approval of the Supreme Court has extended the copyright term for works already in existence. Retroactive extension of the copyright term cannot have an impact on works in existence. Oddly, copyright law views authors as profit maximizers but also limits the value of their works by allowing heirs to terminate assignments after a set period of time. Finally, the remedy for copyright infringement is the damages suffered by the author plus all profits made by the infringer that can be traced to the infringement. It is not clear that this remedy is consistent with the goals of copyright law.
Copyright law exists to incentivize the production of writings that would otherwise be public goods and, thus, characterized by non-rivalousness and non-excludability. It does this by granting authors exclusivity. This exclusivity is expressed in terms of length of time and breadth of protection. In the early 21st century protection for most works is the life of the author plus 70 years. Breadth is determined by whether protection is thick or thin. Works with only minor copyrightable content may receive only “thin” protection.
There is little doubt that copyright law in the United States is strictly utilitarian. According to the United States Supreme Court,
The limited scope of the copyright holder’s statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music and the other arts. The immediate effect of our copyright law is to secure a fair return for an “author’s” creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good.
(Twentieth Century Music Corp. v. Aiken, 1975)
Three economically relevant themes emerge from this. First, authors are the means to the end of benefiting the public. Second, with very minor exception, there are no what are called “moral rights.”1 Third, the relationship between the government, acting on behalf of the public, and the author is comparable to a contract. The author receives exclusivity in exchange for producing the work and allowing it eventually to pass into the public domain. This article expands on the contractual nature of this relationship and describes what an ideal outcome would look like. It compares that outcome with current legal rules applied to copyright. Several copyright doctrines are examined for their economic rationality.
The Copyright Contract
But for massive transaction costs, each time a work is produced, the author and the government would agree on an appropriate breadth and period of exclusivity. In this relationship, the government can be viewed as a buyer, on behalf of the public, and obviously possesses monopoly power. Authors, depending on the value of their works, may have some bargaining power but because there is great substitutability from work to work, the power is likely to be relatively slight. In fact, whatever power exists is likely the result of the identity of the artist as much as the quality of the work itself. For example, a simple drawing by Andy Warhol may be highly valued by the public not because of anything inherent in the work but because it was done by Andy Warhol. Even in these situations, the government maintains its superior bargaining power because there are no other equally effective means of guaranteeing the exclusivity that allows authors to fully internalize the benefits of their efforts. This leads to the question of what copyright would look like in a transaction cost–free world.
First, as already noted, each copyright would be individually negotiated. Second, three tests would be applied in each case: (1) no works would be protected unless the private costs of production and the social costs of protection are less than the value of the work to the public, (2) the payment by the government in terms of length and breadth of protection should be the lowest possible to bring the work into existence, (3) no works would be protected unless copyright protection is necessary for them to exist. Authors would receive, in effect, their costs plus a normal profit or, assuming some market power, the least amount necessary to bring the work into existence. Payment above this is a waste. It is comparable to spending more than necessary to produce any other public good. Specifically, the economic rents that are a result of author notoriety would be decreased or eliminated.
A couple of examples illustrate that different works would be protected at different levels. Take, for example, a child’s drawing completed in a first grade class. The social costs of protection are likely to be low as are the marginal private costs of protecting the work. Costs are low but so is the likely value to society. Although it cannot be known how these costs and benefits balance out, it is clear that the work would come into existence even without copyright protection. In effect, in this case, ideally copyright would not apply at all.
For another example, consider a novel by popular author John Grisham. Fans look forward to each new work. Given the popularity of his novels, his works almost certainly pass test one. As noted, Grisham’s work is protected for life plus 70 years. In theory, that is payment from the government to sit down at his word processor and create a new work. But is it really? If he were not an author, perhaps his next best opportunity would be to be employed by a law firm. His earning in the profession would be a fraction of his earnings a writer. Would John Grisham refuse to write if protection lasted only 50 years? What about 10 or 20 years? The sales of most bestsellers peak within a year or two. As long as Grisham is given enough time to internalize sufficient royalties to assure further production, any period of protection beyond that is an economic waste.
Finally, consider the composer of a symphony. The effort takes years. In the first few years of its existence the symphony is rarely performed and, when performed, it is to modest audiences. As time passes, the symphony is increasing appreciated and gives great pleasure to generations of classical music fans. Here the creation of the work may be possible only if given an extended period of protection. It is only because of life plus 70 that the composer can hope to recoup costs and earn a modest return.
The point is that in a transaction cost–free world, different works would be afforded different levels of protection. In terms of the contract analogy, the government (on behalf of the public) would pay different prices for different works. Those that would exist in the absence of copyright would, unlike with current law, receive no copyright protection. Works that the public is likely to value very highly would be “purchased” for the least amount necessary to bring the work into existence.
This “ideal” is attractive as an alternative to the standard of life plus 70 years, which at this writing applies to nearly all works regardless of importance. Note that this standard “payment” is untethered to the effect, imagination, importance, or usefulness of the work. Obviously, though, individual negotiations are impractical. Partly this is true because of the low standard for the granting of copyright; virtually any writing is eligible for copyright protection. This is because the principal requirements are originality and a modicum of creativity (Feist Publication Inc. v. Rural Telephone Service Co., 1991). Another problem is the difficulty of determining ex ante the importance or usefulness of a work. How much payment in breadth and duration is enough for a first-time author as opposed to a popular one? How can the government assess how a work that seems worthless today might viewed by future generations? Finally, the broad license granted to all authors does not mean all are compensated equally. The market actually determines how much is internalized and when. The life plus 70 term may seem irrational in some respects, but it can be viewed as similar to a lottery ticket. The unknown author who writes a novel that no one likes will actually receive very little. On the other hand, it could be a bestseller. In a sense, copyright provides a ticket that opens the door to the lottery of the market.
The fact that individual transactions are prohibitive does not mean the current approach could not be more efficient. For example, one of the greatest inefficiencies of copyright is the fact that its allocative effect may be outweighed by battles over distributive outcomes. In short, copyright encourages output but also gives rise to extended and expensive battles over the earnings associated with the works produced. Some of these costs could be avoided. The discussion about specific doctrines introduces questions to which further research might be addressed in the interest of streamlining and rationalizing copyright.
Specific Copyright Doctrines
Modicum of Creativity
Copyright protection is afforded to authors who create works with at least a modicum of creativity. The word author can be deceiving. In the context of copyright it means only that the person seeking protection is actually responsible for the existence of the work. It carries no loftier connotation. The modicum of creativity standard means that a work need not be especially imaginative. In fact, even a poor effort to copy something in the public domain is copyrightable. One classic case notes that a thunderclap causing the copyist’s pen to swerve could be enough to satisfy the creativity requirement (Alfred Bell & Co. v. Catalda Fine Arts, 1951).
Some of the least imaginative copyrightable works may exist independent of copyright. There are a number of examples. Children’s drawings, photographs, and school assignments are included in this group. In addition, it seems unlikely that many authors are motivated by the need to produce a work that includes a modicum of creativity but, having failed to do better, they still receive protection. Finally, the sales of many works are a function of short-term novelty rather than copyright. Examples are greeting cards (which are copyrightable) and fashion design (which typically is not). Cards, like fashion design, are constantly revised in minor ways. In a sense, they are sold under competitive conditions. The key to success is to differentiate the product line each year to encourage new sales. The market is characterized by slight variations that render cards excellent substitutes. It is likely that the market would be unaffected by eliminating copyright for these types of products.
A representative case illustrating the problem with the modicum standard is Sherry Manufacturing Co. v. Towel King of Florida, Inc. (1985), which resulted in two trips to the Eleventh Circuit Court of Appeals. The parties were manufacturers of silk-screened beach towels depicting an island with palm trees surrounded by water. The towel was first marketed in the 1960s and allowed to enter the public domain. In order to secure a new copyright, Sherry had an artist make minor changes to the original design. Later it discovered that Towel King was marketing a towel that appeared to be a copy. In the ensuing litigation Sherry won an award of $87,000 plus attorney’s fees. The Eleventh Circuit reversed, reasoning that the new towel lacked sufficient originality. The case returned to the same court two years later after the award of $54,000 in attorney’s fees to the defendant Towel King. The case was remanded again when the Eleventh Circuit was unable to determine the reasoning applied by the lower court. In effect, the low expectations created by the modicum standard set off a protracted and expensive period of litigation. More generally, the problem is that sometimes works that involve a modicum of creativity and, thus, have no positive allocative effects actually generate huge social costs.
The justification for the modicum standard is that courts should avoid making judgements as to the value of a work. The problem with this is that avoiding them is expensive and, in fact, courts are already making them. This is true with respect to three separate areas of analysis, two of which relate to fair use. Fair use is a defense to claims of infringement and allows limited use of copyrighted works without permission. The first step of the fair use test involves an examination of whether the otherwise infringing work is “transformative.” Being transformative is necessary but not sufficient to bring a work under the fair use exemption. In Campbell v. Acuff-Rose Music, Inc. (1994) the Supreme Court articulated a standard that clearly requires an assessment of value. Thus, the question was seen as “whether the new work merely ‘supercede[s] the objects’ of the original creation, . . . or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message; it asks, in other words, whether and to what extent the new work is ‘transformative.’” Similarly, in SunTrust Bank v. Houghton Mifflin Co. (2001), the court noted that the transformative use standard involved an assessment of “the value generated by the secondary use and the means by which such value is generated.”
Fair use analysis also involves a determination of the value of the work being copied. Thus, in Campbell v. Acuff-Rose Music, Inc., the Supreme Court noted that “[t]his factor calls for recognition that some works are closer to the core of intended copyright protection than others.” (Campbell v. Acuff-Rose Music, Inc., 1994, p. 579). The Court quoted Folsom v. Marsh (1841), in which Justice Story noted the inescapable truth that courts must “look to the . . . quantity and value of the materials used” (Folsom v. Marsh, 1841, p. 348). Although Justice Story in Folsom and the Court in Acuff-Rose applied their reasoning in the context of a fair use analysis, the analysis has important implications for the issue of copyrightability itself. A finding that a work is more available for fair use is one that lowers its value. Conversely, a finding that the work is close to the core value of copyright is one that raises its value by insulating it from others. In effect, those works that are more creative have more powerful copyright protection.
Finally, relatively recent legislation requires courts to make very clear choices based on merit. Under the Visual Artists Rights Act of 1990, artists may prevent the destruction of their works that are of “recognized stature.” Although the statute has been applied infrequently and judicial discussion is sparse, its existence suggests that slightly higher standards for creativity and authorship would hardly shock the system of copyright jurisprudence.
It is bedrock copyright law that facts, ideas, concepts, and principles cannot be copyrighted. In this regard it is important to distinguish the fact or idea from the expression of it. For example, a new method of bookkeeping is not copyrightable but the way in which it is described would be protected. A historian may do extensive research about the details of a civil war battle and write a book. None of the facts discovered would be copyrightable. The researcher discovered but did not create the facts. On the other hand, it would be an infringement for someone to verbatim copy the text. In fact, in one famous passage, Judge Easterbrook assessed the copyrightability of a book based on the unlikely idea that John Dillinger was not shot outside the movie theater in Chicago but had lived out his life in California. The “facts” were not copyrightable because the author had portrayed his story as nonfiction (Nash v. CBS, Inc., 1991).
Closely related to this doctrine is the idea of merger. There instances may not involve facts but a description. For example, a cereal maker might include instructions on each box on how to enter a sweepstakes. If there are few ways of expressing those directions, we say that there is merger between the idea and the expression and subsequent authors cannot be barred from using the same expression.
These doctrines have huge economic significance. The idea in both cases is the avoidance of granting the writer a monopoly that would enable him or her to exclude all others. For example, the civil war researcher, but for the doctrine, would be the only person permitted to express the facts he or she discovered. This would, in theory, greatly impede further research. On the other hand, it creates an imbalance, with respect to incentives, between those inclined to write based on perhaps important historical facts and ideas, on the one hand, and those who favor fictional works on the other.
Over the years, copyright duration has increased and changed form. Prior to 1978 authors were granted a 28-year term followed by another if the copyright was renewed after the first term. In 1978 for works completed before that date, the second of these two terms was extended to 47 years. Works completed in 1978 and after were assigned a unitary term of 50 years plus the life of the author. In 1998 duration was revised again with the second term of work completed before 1978 extended to 67 years. Works completed in 1978 and after were extended to life plus 70 years.
Ideally, the term would be long enough to maximize the net gains to the public of having a copyright system. As an economic matter, it is very hard to square the current duration and its implementation with achieving this goal. Several problems stand out. For example, the incentive for authors varies not with the importance of the work but with age and life expectancy. A 25-year-old author may expect 120 years of protection. A 70-year-old author can expect significantly less “incentive” to produce copyrightable works. Returning to the notion of a copyright contract, the government (on behalf of the public) does strike a different bargain with each author; it is, however, unrelated to the amount of benefit to the public of any particular work.
Aside from the economic irrationality of the length of duration, there is the question of why it has been consistently extended. The theory would have to be that in 1978 and again in 1998, authors either invested much more in their creative efforts than in prior times or that it takes longer to internalize the gains from those activities. Although creative people today may invest more, it seems likely that it takes less time to internalize the gains. A novelist in 1850 would likely wait years before his or her book could be fully disseminated. And before recorded music, the composer’s source of income would come from the sales of sheet music and live performances. Today, there is worldwide dissemination instantly.
Similarly, there is nothing magical about life plus 70 years. Given the discounted present value of the income 70 years in the future, it is not clear that adding to the copyright term increases the incentive to be creative in any meaningful way. In fact, the 1998 act adding 20 years to the copyright term is likely the result of heavy lobbying efforts by corporations that possessed valuable assets (Mickey Mouse) that would pass into the public domain if copyright were not extended.
Those assets would have passed into the public domain even with the extension of the copyright terms unless the extension was applied retroactively. This leads to one of the least economically rational decisions concerning copyright duration. The logic against retroactive extension is pretty obvious. Works already in existence in 1998 could not be affected by an extension. Whatever benefits were likely to accrue to the public were already guaranteed. In a sense they represented the opposite of sunk costs. They are sunk gains. The Supreme Court addressed the issue of retroactive extension in 2003 and held that retroactive extension was permissible. (Eldred v. Ashcroft, 2003). The Court reasoned that retroactive extension had been applied in the past. Consequently, authors working in the period when there were two terms of 26 years could have reasoned that the actual term was 26 + 26 + a possible extension. From the point of view of marginal analysis, the idea that a writer in 1950 would be more productive because there was a possibility that the copyright terms might be extended seems fanciful. Not only would that additional income, if any, have to be discounted to present value but it would have to be further discounted because it might never accrue.
One unusual characteristic of the copyright system is its dedication to paternalism. This is all the more perverse given the emphasis of the Court on the notion that extensions are applied retroactively because authors, before any extension, could be said to have been motivated by possible future extensions.
To understand how the paternalism works one has to recall that copyright extends beyond the author’s life and is part of the author’s estate when he or she dies. In the case of real property this is also true unless the owner sold it during his or her life. In other words, heirs are affected by prior transfers by the owner. This is only partly the case in the context of copyright. For works completed before 1978 that were assigned to another party, the heirs may terminate that assignment after 56 years and after 75 years. The “logic” appears to be that at the time of assignment, the author could not know that the copyright term would be extended for 19 years in 1978 and for 20 years in 1998. This “windfall” in terms of extended duration can be reclaimed by the author or his or her heirs if the author is deceased. For assignments made in 1978 or later, the right to terminate exists as of the 35th year after assignment and is available to the author as well as to his or her heirs if the author is deceased.
The rationale for the termination rights seems to be based on the idea that authors have less bargaining power than those who buy their rights. In addition, at the beginning of the copyright period, the value of the copyright is difficult to assess. Finally, it is possible that authors are regarded as irresponsible people who may not consider the welfare of their heirs. With very limited exception, termination right may not be waived. In short, someone seeking to license a work for the full period of duration may not simply pay to bind the author or heirs not to exercise these rights.
In the process of attempting to bar authors from, in effect, squandering their property in the form of the copyright, the legislation has the effect of lowering the value of the work. The author cannot successfully assign all of which he or she owns. For example, the last 39 years of a work completed prior to 1978 cannot be assigned in a way that is binding. Similarly only 35 years of a work assigned after 1977 can be confidently assigned. Thus, while the Supreme Court regards authors as so sensitive to duration that they are motivated by the possibility of future extensions, it also reduces the value of what the author is able to receive at the time of producing the work by limiting what can be successfully sold. To put it in terms of real property, it is comparable to ruling that the owner of a 1,000-acre farm may sell it all but the buyer knows that the heirs may reclaim a portion of what is sold by observing the proper procedures.
Since 35 years after 1978 occurred in 2013, litigation concerning termination rights is gaining momentum. Many well-known authors and their heirs have given notice that they are terminating previously assigned rights. A question that has arisen is whether parties may, during the time of the original assignment but after 1978 decide to terminate that original assignment and negotiate a new one. The new agreement cannot change the 35-year rule but it may have the effect of pushing it back.
Perhaps the most litigated issue in copyright concerns what is called fair use. A party who would otherwise be viewed as infringing the copyright of another may assert fair use as a defense. The court will weigh four factors to determine whether the fair use defense is available. The four factors are:
1. The purpose and character of the use.
Uses that involve criticism, comment, and news reporting are favored, but this is not the full list. Uses that are primarily commercial are slightly less likely to be regarded as fair use.
2. The nature of the copyrighted work.
Generally, more original works will be afforded greater protections than works that exhibit little creative spark.
3. The amount taken of the copyrighted work.
This is not based on an absolute determination but is relative. In fact, under the statute it is the amount and substantiality of the portion used in relation to the copyrighted work as a whole.
4. The impact of the use on the value of the copyrighted work.
This requires viewing the work as an asset and determining how much the fair use has decreased the value of the asset. Not all value-decreasing uses count against fair use. The analysis is more refined than that. Uses that lower the demand for the original because they are substitutes count against a finding of fair use. On the other hand, if the value is lowered because the use is in the form of criticism, that does not count against a finding of fair use. For example, a critical movie or book review that quotes from the original may very well be a fair use even though it substantially lowers the value of the original. Some have noted a circularity in the application of this fourth fair use step. The issue is: How can one determine whether the value will be decreased without first knowing that value which itself is determined by a fair use analysis.
It is important to note how broadly fair use may extend. Take a relatively simple case in which an artist purchased a number of Mattel’s Barbie dolls. He then arranged the dolls in various poses, often in groups, and took photographs of them. With respect to the first step in the fair use analysis, the court observed:
In some of [defendant] Forsythe’s photos, Barbie is about to be destroyed or harmed by domestic life in the form of kitchen appliances, yet continues displaying her well known smile, disturbingly oblivious to her predicament. As portrayed in some of Forsythe’s photographs, the appliances are substantial and overwhelming, while Barbie looks defenseless. In other photographs, Forsythe conveys a sexualized perspective of Barbie by showing the nude doll in sexually suggestive contexts. It is not difficult to see the commentary that Forsythe intended or the harm that he perceived in Barbie’s influence on gender roles and the position of women in society.
(Mattel v. Walking Mountain Productions, 2003)
It held this weighed in favor of fair use.
With respect to the second step in the fair use analysis, the court reasoned that, although Barbie was original, the second step was not as important as the others. Still it noted that this step weighed in Mattel’s favor.
The third step weighed in favor of fair use. The court noted that not all of the bodies of the Barbies were exhibited in the photographs. Moreover, where the entire Barbie was photographed, the artist was faced with a choice of actually severing the doll. This was viewed as practical in the case of some works—stories, books, etc.—but impractical in the case of a sculpture.
The final factor also weighed in favor of fair use. By making a parody of Barbie the demand could conceivably decrease, but the photos were not likely to be viewed as substitutes for Barbie dolls. Of course the value of the copyright asset is not merely in resale of the final product. A fair use may mean that the owner of the copyright is unable to license others who would have paid to license the original for the same use. Here the court noted that there was unlikely to be a market for works specifically designed to ridicule Barbie.
From a purely legal standpoint, the fair use defense in copyright helps reconcile copyright with First Amendment law. As an economic matter, the story is more complex. One obvious impact of fair use is that it dramatically lowers transactions costs for fair users. Rather than locate an author of a book or the producer of a movie in order to negotiate the right to comment and to use a portion of the work in that commentary, portions of the work can simply be taken. Fair users possess that right. On the other hand, there is nothing in copyright law that would keep authors from buying the right to make fair use of a work from those desiring to do so. The transaction costs to authors would likely greatly exceed those to fair users. The idea of contacting every potential fair user to buy their rights to fair use is a silly one. As an economic matter, the allocation of fair use rights lowers transaction costs to fair users to zero and raises them to infinite levels for authors.
Aside from the reduction of transaction costs, fair use obviously eliminates the need to pay for the license itself. In a sense, if one makes an analogy to real property, fair use is comparable to an easement. It may be tempting to ask why authors are required to subsidize the possible profitable enterprises of others. Subsidy is not the correct concept here because the right to complete exclusivity was never allocated to the author in the first instance.
It is better to analyze fair use from the point of view of the bargain struck between authors and the government (on behalf of the public). The relevant question then becomes whether this right is efficiently allocated—is it possessed by those who value it more? This is particularly important given that a market transaction is unlikely to correct a misallocation. Because the fair use right is allocated at the time the work begins its copyright term, the timing of the allocative inquiry should be at that point. The economic question is whether fair use is more valued by the copyright holder or the public. Although there is no way to know, it seems doubtful than many or any works do not come into existence because a subsequent author may make fair use of that work. If the potential for fair use plays no role in the initial decision to create original works, it is hard to see an economic justification for allocating the right to prevent fair use to authors. On the other hand, the availability of fair use is very likely to stimulate the work of those who wish to comment, ridicule, or make other uses of existing works.
If the contract analogy is carried through, an infringement is comparable to a breach of contract. This leads to the issue of the proper remedy for breach of the copyright contract. Specifically, should a property rule or a liability rule apply? Liability rules, like those applied in negligence cases, require the party causing the harm to compensate injured parties for damages in order to restore them to pre-damage conditions. Property rules, on the other hand, are those that require the permission of the party before his or her rights may be affected. This is typically the case when one party would like to acquire the property of another. Thus, one may damage the property of another through negligence and pay damages but one may not take the property without consent. Property rules give rise to transaction costs because an actual agreement must be reached.
The standard remedy in cases of copyright infringement is monetary but has the effect of a property rule. Specifically, infringers are liable for any damage caused by the infringement plus any profits resulting from the use of the protected work. This eliminates, in theory, the efficient infringement or one in which the author could be fully compensated for his or her loss and the infringer still allowed to benefit. By awarding the author both damages and the profits from the infringement, the potential infringer would be better off negotiating with the copyright owner because at least part of the profit resulting from an otherwise infringing use of the copyrighted work could be retained.
When assessing the remedy for infringement, the question is: why should copyright deviate from the standard contract remedy, which would be damages only? As a general matter, the preference for property rules stems from three basic concerns: autonomy, distributive matters, and distributive outcomes. The first is easy to understand; a property rule respects the autonomy of the copyright holder because a use may not be made, with many exceptions, without permission. Similarly, those with distributive concerns may feel that the infringer should not benefit from the work of the author.
The efficiency concern is the most complicated. From that perspective, exchanges (or takings) that leave both parties better off are preferable for obvious reasons. When an infringer is liable only for damages, as under a liability rule, it is impossible to know if the infringement has been efficient. The damage to the value of the copyrighted work is akin to a market value—it is more or less an average. Perhaps the author would have demanded more than this amount and market value leaves him or her feeling worse off.
In the context of efficiency concerns, it makes sense to think in terms of false positives and false negatives. A transaction that does not take place but which would have been beneficial to both parties is a false negative. When transaction costs are high, the possibility of false negatives increases. An “exchange” (or taking) that takes place and is not ultimately beneficial to both parties can be viewed as a false positive. Involuntary exchanges—like theft, contract breach, or infringement, even with payment, run the risk of being false positives. A transfer does occur but it leaves at least one party worse off. Thus, voluntary exchanges, like those under property rules, avoid the false positive problem but because of transactions costs may lead to false negatives.
It is not clear that any of these objections to liability rules apply to copyright. To understand why these objections lose their validity in the context of copyright, it is important to focus on what copyright law actually is intended to do. As already noted, the long and universally held view is that U.S. copyright law is utilitarian—it is an instrument the government implements to increase overall well-being. The means to this end is to grant exclusivity that bars the use by others to those who create expressive works. This exclusivity is the cost to the public of having the work available. It is comparable to a tax that is passed on to members of the public. In this context that tax should be no greater than the minimum needed to achieve the ends sought.
Now return to the three concerns about liability rules. Again, some may object to liability rules because they allow for taking the property of another without permission. The sense may be that liability rules do not respect individual autonomy. This is an appealing argument but must rest on a view that the author believes what is taken is his or hers in the first place. This notion is unrealistic in the context of a statute that has multiple exemptions, a fair use defense, and a battery of compulsory licenses. The point is that any expectation of someone holding a copyright that takings will occur only with permission would be unrealistic and uninformed. All authors assume the risks of nonconsensual transfers. Having agreed to the terms of the copyright contract, it is disingenuous to claim a lack of consent to involuntary uses.
What about distributive outcomes? When authors ask for and receive the profits made by infringers, they receive economic rents. These are payments in excess of the amount necessary to make the copyright holder whole and, thus, in excess of the amount necessary to produce the work. The right to bargain over these rents raises transaction costs and reduces the likelihood an exchange will take place. This may seem like a fair trade-off. Higher transaction costs mean fewer exchanges but an increased likelihood that the author will share in the profit from reuse. The problem is that whatever appeal this trade-off holds is based on a misconception of what the author has been granted. The Copyright Act does grant exclusivity but it does not grant monopoly or market power. The author attempting to leverage this right of exclusivity into a share of the profit asks for something that is not promised under the terms of the copyright contract. In fact, in other instances of government grants of exclusivity the owners are not entitled to assert monopoly or market power. There is no principled distinction between those instances and copyright. In copyright exclusiveness is granted to the extent the public benefits. The property right and the ability to extract profits made by others extends that grant beyond what is necessary for the public benefit. It seems counterintuitive to create property for the benefit of the public and then allow the owner of that property to earn monopoly profits from that property through the use of property rule protection. The liability rule already protects any reasonably expected profits.
The efficiency concern is that payment of damages may result in inefficient infringements—false positives—because it would be unknown whether the author would have voluntarily exchanged the use of the work for the damages caused to the work by its use by others. The only way for the liability rule to result in an inefficiency is if the author would not have sold for the fair market value of the projected losses associated with the infringement. In these instances the author would have to possess an attachment to the work that is excess of market value. There are two possible explanations for an attachment in excess of market value. First, an author, fully aware of the property rule, knows that he or she can use market power to hold out for more than the actual loss suffered. Second, the author may have some subjective vision about how the work should be used that would not be reflected in loss earnings.
Taking these in turn, if an author would not sell because he or she realizes the property rule allows him or her to hold on to the work for more than fair market value, it does not mean that the liability rule creates the inefficiency. The liability rule accounts for the value of any exclusivity the author could expect and the value of the exclusivity that resulted in creation of the work. In effect, the property rule grants monopoly power that allows the author to bargain for a better distributive outcome. Eliminating the monopoly power of the author is not a form of inefficiency. Moreover, whatever power is granted to the author is actually inconsistent with the central goal of copyright as an instrument of a utilitarian policy. In effect, the property rule allows the author to raise the price beyond that which he or she agreed to when entering into the “copyright contract.”
What about the possibility of subjective attachment or sentimental values? In the context of contract or tort law and liability rules, this a common objection. For example, in contract, whatever was bargained for was of greater value to the buyer than market value. In copyright, this would mean attributing some special importance to a work or wanting to control the use to which it might be put. This is not an unrealistic possibility. Any effort to protect that preference, though, is comparable to protecting moral rights, something that is rejected, with very limited exception, by the Copyright Act. Expecting or demanding payment in excess of damages suggests the author believes, incorrectly, that his or her personal preferences are to be taken into consideration when determining what uses may be made of the work. But this is not the case in copyright law, as attested to by instances in which permission for payment has been rejected and the work is used anyway, and the vast opportunities for objectionable uses made possible through the fair use defense.
In sum, the typical remedy available for infringement seems inconsistent with copyright policy.
For the interested reader there is a vast literature on copyright and specifically on the intersection of copyright law and economics. Roger Blair and Thomas Cotter have written extensively on the remedies associated with infringement with respect to intellectual property generally (Blair & Cotter, 1998). Very interesting and useful empirical work has been presented by Oberholzer-Gee and Strumpf (2009). For those interested in the distributive implications of copyright, work by Justin Hughes and Rober P. Merges is highly recommended (Hughes & Merges, 2017). For an expansive discussion of the factors influencing the 1998 act that extended the copyright term and created standards for copyright in the digital age, a key source is Jessica Litman’s book Digital Copyright (Litman, 2006).
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(1.) In the case of some visual works of art authors do have rights of attribution and rights that protect against alteration and destruction of their works.