The standard antitrust paradigm, even in the current era where price (or, reciprocally, quantity) is the principal focus, takes for granted that property rights are well defined and enforced. While that assumption may be warranted in the typical case, it does not apply across the board. And when it does not, the antitrust model has proven difficult to apply, sometimes leading to perverse results.

The tension between antitrust and property is well understood in the context of intellectual property. Legal protections afforded by patents, copyrights, and trademarks recognize that creation and enforcement of intellectual property entail a separate cost--the item must not only be produced but first created--that does not apply to the standard widget already in existence. If so, prices above marginal production costs must be charged as an incentive to compensate for the fixed costs of creating the good in the first place. The higher prices necessarily result in lower quantities sold, compared to a price covering just production costs, as in the standard economic model of competition.

This distinction between the static model, with well-defined property rights, and a more dynamic model that takes into account the need to create assets first would seem self-evident. But traditionally it has not been self-evident to antitrust enforcers. In the field of intellectual property, for example, "the history of the Department of Justice enforcement has been one of almost unbroken hostility towards patents."

Although the property-antitrust dichotomy arises most frequently in areas of intellectual property such as patents, it is perhaps best illustrated in the context of more traditional property rights. Take the standard economic example, the fishery. Typically, fish are found in "open access," owned by no one until they are actually caught. Because access to a lake, stream, or ocean is open, over-fishing is a well-recognized problem. The equally well-recognized solution to this so-called "tragedy of the commons" is some form of ownership, either communal or completely private. With private ownership, over-fishing ends.

But in an antitrust world where low prices and high quantities are the goal, establishment of property rights is an objectionable solution. Property rights mean the exclusion of some fishers and ending the exploitation of an open-access resource. As quantities taken diminish, prices naturally rise, a result striking at the core values of modern antitrust. To antitrusters, the result is particularly objectionable when, as is often the case, the solution to over-exploitation of resources available in open access requires a collective agreement among competing fishermen to reduce their catch. Then, it is a "contract, combination, or conspiracy" employed "in restraint of trade," with restricted quantities and higher prices. In the static antitrust world, Sherman Act liability would follow.

And so it has when private agreements have attempted to solve the tragedy of the commons. The Gulf Coast Shrimpers & Oystermans Association (GCSOA) was a private organization that regulated shrimp harvests along the Mississippi coast of the Gulf of Mexico. Its members agreed also to sell only to certain packers, who would pay GCSOA packers a minimum price. The Justice Department ended the GCSOA's private definition of property rights in a criminal action brought under section 1 of the Sherman Act.

And so, an attempt to define private property, thus avoiding the economic waste created by open access, resulted in a criminal conviction.

Just as it has been hostile to private creation of property--intellectual or marine--so has antitrust enforcement been hostile to private enforcement of property rights. To cite some of the better known cases, the government has attacked manufacturers' collective attempts to safeguard their contract rights against fraud, to protect their original fabric designs from being copied by pirates, or to prevent reverse engineering of machinery protected by a web of patents and unpatented trade secrets.

Analyses that would reconcile property (including intellectual property) law with antitrust, though voluminous, thus far have not succeeded in resolving the essential puzzles. Although complex reasons are often offered for the incompatibility of the two systems, simple ones suffice. Both intellectual property and antitrust law (as they are considered today) supposedly seek to maximize social welfare, net of costs. But one system (antitrust) maximizes welfare in a short-run static sense. The other (property) is based on the claim that short-run losses from higher prices are necessary for the long-run existence of the good, and so benefits will ultimately exceed costs. Thus, comparison of welfare benefits net of costs under the two models must by definition be an empirical exercise, comparing streams of benefits and costs over time, appropriately discounted for the time-value of money and for the risks of attaining the supposed net benefits. What is best in any particular situation require empirical data that cannot be expected to emerge, at least not in the context of antitrust litigation.

Judge Easterbrook has proposed two basic tests for determining whether an antitrust case makes sense:

Is there market power?
Are consumers harmed?

But in situations where property rights are poorly defined or enforced these tests are not helpful. The imposition of property rights in settings in which none exist will increase prices and "hurt" consumers in the short run.

The foregoing is not a criticism of Judge Easterbrook's filters. They have exerted an important influence in antitrust thinking since their appearance some 20 years ago, and deservedly so. The point, rather, is that they are effective in the standard antitrust paradigm in which property rights are already well defined and enforced. When antitrust cases arise outside that paradigm, standard antitrust thinking risks diminishing social welfare by applying the tools of maintaining competition when the standard assumptions do not apply.

Two years ago most downloaders did not know that their activities were illegal. Few uploaders felt guilty about making large numbers of songs available for free on the Internet. It was viewed as akin to lending your CDs out to your friends, except that the "friends" here were both anonymous and large in number. "Art should be free," right?

Since the United States lawsuits, there has been a subtle shift of opinion. Many people, especially those beyond their teenage years, are now proud of not being downloaders. They brandish their Apple iPods with pride. The cultural climate has shifted to the point where people, even if they download, are embarrassed to admit as such. Only in the under-twenty crowd is illegal downloading still a badge of honor. And many of these children now face (admittedly imperfect) regulation from their parents.

The music industry knows that the long run will bring a network of free music. It knows that free music may have illegal status, a "grey" status, white status (recorded from the radio), or perhaps be pirate (from abroad) but not illegal in the actionable sense. But there will be two networks, a pay network and a free network.

The pay network stands a good chance of competing against the free network. Perhaps the pay network can offer better sound quality, tie-ins (concert tickets, T-shirts, etc.), upgrades and maintenance service, better information such as album liner notes, song selection services, easier interface, and other benefits. The future course of technology is difficult to predict. Nonetheless it is easy to see why a pay network will have a greater ability to finance these goodies than will a free network.

The music companies - present and future suppliers of the pay network - do not wish to face a ten year period where everyone is used to getting music for free. They do not want an entire generation to grow up thinking of music as a free commodity. They do not want hackers and illegal downloaders to become established as folk heroes.

"Anyone interested in the intersection of antitrust and regulation (whether telecommunications, IP, or environmental) should read Herbert Hovenkamp's article "Antitrust and the Regulatory Enterprise," published at 2004 Columbia Business Law Review 335 (2004). Professor Hovenkamp addresses several issues I would like to touch on through my posts here and is directly on point to Monday's post on Trinko.

"First of all, Professor Hovenkamp makes the often ignored point that intellectual property is a form of regulation:

"'[W]hile extreme free marketers might rail at the excesses of regulation or antitrust, they tend to accept the system of intellectual property ("IP") rights as if it were handed from a mountaintop. In fact, however, the existing IP system is a very elaborate effort to correct a market failure, in this case free riding that occurs when innovations are too freely copied, and the corresponding decrease in the incentive to innovate. Anyone who does not believe that the IP laws are a form of regulation has not read the Patent, Lanham, or Copyright Acts and the maze of technical rules promulgated under them. To be sure, IP laws create property rights. But so do state created exclusive franchises and filed tariffs. In fact, the detailed regulatory regimes that we call the IP laws are filled with very rough guesses about the optimal scope of protection-- ranging from the duration of patents and copyrights to the scope of patent claims and fair use of copyrighted material.' "

The slow shift in MP3's role is part of an ongoing change in the digital-music industry, with the focus moving slowly away from the anarchic file-swapping networks and toward money-making stores and services such as Apple's iTunes Music Store.

My guess is yes, for 7 reasons, ranging from the more to less legal:

1. These is a stated legal conflict on the Sony standard as between the 7th and 9th Circuits;
2. The 7th and 9th Circuits disagree (albeit in partially in dicta) on the relevance of willful blindness to secondary liability;
3. The Court has these matters in hand: it has granted cert. in many similar cases historically (Sony, 1980s, White-Smith (the Piano Roll case) 1909, Teleprompter and Fortnightly (Cable / Broadcast, 1960s & 1970s);
4. The Court has a vague sense that some far-out stuff is going on in the field of 'Computer Law' that maybe it should check out;
5. Law clerks use P2P technology to plan basketball games;
6. JJs. Stevens and Breyer deeply dig this stuff;

And most importantly,

7. The Court loves to be the center of attention, and this would make it so.

The reaction has been swift and predictable (almost as if one could anticipate this was going to happen...hmmmm). SBC announced immediate expedition of its investment plans from a five-year time horizon to a two- to three-year horizon. BellSouth announced plans to increase its homes-passed plans by 40%.

All this through the simple declaration that if you buy something (like a fiber optic cable), you own it, and get to derive the economic benefits from it. Property rights...all the cool regulators are embracing them, even if it is under implicit threat from the D.C. Circuit.

Fourth, commercial games have an informal, rigorous, intense verification and validation procedure thanks to the hundreds of dedicated enthusiasts who provide a constant critical, check of designer assumptions, implementation, data, and results. Professional simulations have relatively few testers, and shorter, less intense VV&A by people who do not share the amateur's dedication.

In an effort to gain credibility as vendors that can accommodate open-source systems, suppliers must contribute something of value -- something that is not seen as self-serving, says Dan Kusnetzky, program vice-president of system software for IDC.

[T]hat does not mean they are turning into altruistic organizations with no concern for the bottom line.

They will "cherry pick what aids and abets them, doesn't detract from their revenue, and hurts their competitors," Dana Gardner, senior analyst for application infrastructure and software programs for the Yankee Group, told NewsFactor. "So far, though, their donations have been rather spotty and insignificant."

In terms of competitive advantage, "we will see vendors continue to push open-source business models on competitors whose profits depend on commercial-software businesses," says Gartner's [David] Smith.

"Nowadays, most of the core open source software developers are full-time employed professionals and contributing to public software projects is part of their job description." (Tr. 7)

During the past three years, 38,000 changes have been made in the kernel by 1,000 contributors, with half of the changes coming from a core group of 20 people. (Tr. 8) Linux has less than 100 developers who are significant contributors. (Tr. 73)

For many of the "most successful open source projects," there is not much intellectual property value involved. They represent decades old technologies, and participating companies are simply consolidating around a particular implementation so they "can concentrate their innovation, their resources, and their investment at a higher level of the software stack." (Tr. 49)

Security problems in the Linux kernel are fixed "in a flash." But generally speaking, studies indicate that resolution rates for open source and proprietary software are about the same. (Tr. 63)

The IT industry uses open source as a way of "pulling resources towards a software commons," and "the GPL is the glue there which prevents it from fragmenting" in the same fashion as the old Unix. (Tr. 66)

The risk of someone putting a malicious piece of code into the Linux kernel are almost non-existent. Nothing goes in that is not understood by Morton or one of the inner circle. (Tr. 70)

The Transition to Digital Television
Open Source Software
Expensing Stock Options
P2P Networks

[I]in the context of illicit P2P file sharing, the person targeted by the subpoena is, by definition, someone who has opened up portions of his hard drive to the entire world of the Internet, allowing in everyone without restriction. But he then wants to assert that the copyright owner has no right to notice what everyone else in the world is invited not just to notice but to act upon -- namely, the available of copyrighted music.

. . . . The idea that one can put up the equivalent of a sign outside one's house saying, "hot goods for sale here (undercover cops not invited)," and make it stick is not persuasive.

Policymakers should resist the call of the free culture movement to give favorable treatment to free culture products under the assumption they are somehow economically or morally superior. Let free culture proponents try to compete. But in the meantime, it would be foolish to weaken or undermine the property-rights model of innovation -- the model that continues delivering incredible benefits to society.

I think it's been a fantastic thing that a very large part, dramatically larger than before, of the world's population gets to participate in capitalistic opportunity; that is, as their societies are better off, more people go to college, they get to do more of the interesting work and contribute to the world economy.

And it's a little scary to me to see people thinking of this as a zero-sum game. It's not like war where you have one winner and one loser. Is it bad for the United States that China would be rich? Take as an extreme that India and China were as rich as the United States is. Now, on a relative basis in terms of political power and percentage of economic wealth, on a relative basis the U.S. would be worse off, but in any other value frame we'd be way better off just in terms of the living conditions in those countries, their ability to come up with better products, to come up with better services; that's a good thing.

And so we're starting to see we're at the start of a process where the whole world is getting into this virtuous cycle of the higher income, better living standards, all of those things. [Emphasis added.]

And so it's a little scary to me to see some people in the U.S. saying, no, we need to put up walls and make sure that, Oh, they're getting good jobs; no, no, no, there's a finite number of those, let's hold that back.

Clearly Berkeley UNIX, the BSD distribution was a fantastic thing. It let a lot of computer science students understand operating systems, tinker around. It was an element that allowed Sun to get going and build its products, that had been a huge contribution.

So a lot of software will have the source code available. There will be these different licensing models and I think this is one thing where researchers, universities, people have to think carefully. We tend to favor the distribution license that was used for BSD, which is a very non-coercive open license that allows you to modify it and make your modifications available, or you can actually modify it and create a version that you build a company around, hire people, pay taxes and there's this virtuous cycle that there's lots of free software that often comes out of the universities, sometimes that just generates more free software, sometimes it generates companies and jobs that then pay taxes and that money goes back to the university to keep this ecosystem going, and that ecosystem that the U.S. has is the envy of the world. [Emphasis added.]

The GPL in our view should be used, which is the license that says you can't enhance it and create a commercial product. Our view is that it should be used very narrowly, and we think people should think twice. So if you have government funded research, it's ironic that then if it goes into that GPL you can't create a company that creates jobs that pays taxes. And so most of the countries outside the U.S. have stayed away from that because they want to get the ecosystem that we have.

So over time in software we'll have free software and commercial software and the equilibrium between them will always shift as people see the support, the indemnification, the certain types of innovation. There is some innovation in terms of taking risk, like building the system that will do machine translation. That will be done because of the scale of the problem and the nature, it will be done, it will come from research but it will be done in the commercial world and then eventually there may be free versions of that.

So it really is an interplay that's working very well. It keeps us on our toes and except for a little bit of overuse of the restrictive license sometimes, I think the direction it's going in is quote [sic] good.

Markham Erickson, NetCoalition;
David Green, MPAA;
Gigi Sohn, Public Knowledge;
TBA, Music Industry rep
Adam Thierer (moderator), Cato Institute

Copyright law has many complexities, including the issue of contributory liability for copyright infringement. The newly proposed Induce Act would hold peer-to-peer (P2P) providers and portable media device manufacturers liable for copyright infringement if they are found to have induced, aided or abetted copyright violations by others. What impact would the Induce Act have on the Internet and consumer electronics market? What role should contributory liability play in the future of copyright law? How much responsibility do middlemen bear for policing their networks for "piracy"? And should technology manufacturers be held liable for acts of infringement committed with their devices? These issues will be discussed by a diverse panel of copyright experts.

The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of those profits for the non-farm business economy. We conclude that only a minuscle fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers. (emphasis added)

The smallness of this figure is astounding. If it is anywhere close to being an accurate estimate, the implication is that "society" pays a paltry $2.20 for every $100 worth of welfare it enjoys from innovating activities.

(1) The cyberleft vision that the Internet can and should be a peaceable kingdom of untrammeled end-to-end connectivity where everyone interacts with everyone is an impossible, and indeed a destructive, pipedream. The world, and the Internet, are full of wolves that must be neutralized, and the capacity to wall them out is a very good thing. Companies like AOL can add huge value by building walls and serving as gatekeepers.

(2) This protective function is best performed by private companies, not governments. People have different needs and tastes for protection, so they need walls of different heights and strengths, and gatekeepers with varying instructions. AOL is putting its packages together, and others can do the same. People can choose them or not, so spare me any moaning about how AOL is contradicting the end-to-end principle, or diminishing the Internet experience. It is, in fact, enhancing it.

Last week, I met with a leader in California politics to discuss our concerns about the state economy (and everything from education to broadband access). I spent a bunch of time talking to him and his staff about the California Performance Review, and the danger in confusing open source, and open standards. And the cynical movement by some companies to conflate those two concepts, to promote their business and lock in consumers with hidden switching costs. . . . .

Now, a few weeks ago, the CEO of one of the more popular open source companies called and asked me to support their stance on the invalidation of software patents. . . . .

And so I asked - "I'm not sure why you're asking my support to invalidate what Sun's stockholders have invested tens of billions of dollars to create, when you'd cringe if I told you to give away your largest asset, your copyright and brand." His answer, "You just don't understand." He was right, I didn't and don't. And we're going to agree to disagree. He and I, and I with a vocal minority of folks on the 'net who feel software should have no patent protection (leaving copyright and trademark untouched). I do not support that view, any more than I believe any other field of endeavor should be subjected to such a double standard. From drug discovery to academic work, the protection of IP is part and parcel of what incents inventors to invent, and investors to invest.

Inducement of infringement occurs whenever someone "actively induces
infringement of a patent." 35 U.S.C. S 271(b). On its face, 271(b) is much
broader than 271(c) and certainly does not speakof any intent requirement to
prove active inducement. However, in view ofthe very definition of "active
inducement" in pre-1952 case law and the factthat 271(b) was intended as
merely a codification of pre-1952 law, theFederal Circuit has stated that
they are of the opinion that proof of actual intent to cause the acts which
constitute the infringement is a necessary prerequisite to finding active
inducement. See Water Technologies v. Calco,Ltd., 850 F.2d 660, 668, 7
USPQ2d 1097, 1103 (Fed.Cir.1988)(intent is necessary and that it may be shown
by circumstantial evidence).

"The time for this scenario is sometime before 1978. Suppose I am an airline agent for a flight due to leave. It has ninety-nine seats, but we have sold one hundred tickets, so someone must be bumped. I must decide who, and I am charged with making a decision that is just and fair. Clearly this will not be easy. I must interview all one hundred passengers to determine their individual reasons for traveling and decide whose need is least worthy. Some of the passengers may lie to me, so I need to investigate suspicious stories. Perhaps each deserves a chance to investigate all the stories of all the others and to introduce evidence of lying, or to bring in witnesses as to the urgency of his or her journey. We will have hearings! They can hire lawyers! This could take a while, but who can object to delays in the name of Justice? And I am not going anywhere.

"Real-life airlines are interested in quick departures more than perfect Justice, so their approach to bumping was more direct. As the agent, I would pick someone and say 'Sorry.' Randomness might seem fair, but there were other considerations. The prosperous-looking woman with the expensive briefcase might complain to the airline president and cost me my job. She was not in the draw for the black ball. The tough-looking gent picking his teeth with a bowie knife might impose other kinds of costs on me personally, so let's not bump him. Airline agents were instructed in the art of choosing victims. Elderly people were regarded as less likely to make trouble, so they were a preferred category. The one certainty was that the chosen sacrifice would be angry. In an effort to avoid inflicting this pain on passengers and on themselves, the airlines tried to underbook, allowing an ample safety margin for no-shows. Often the planes took off with empty seats that could have been filled. This cost the airlines money and raised ticket prices.

"The system changed in 1978 through an act of creative government. The Civil Aeronautics Board, acting at the prodding of economist Julian Simon, required airlines to institute a 'voluntary bumping' system. This meant that they were required to offer to pay bumpees. If the airline sells too many seats it offers money to anyone who will give up her seat on the next flight out. If not enough takers appear, the offer is raised until a sufficient number of passengers volunteer. The underlying structure of the deal is that the airline gives each ticketed passenger a property right in his seat, and if it overbooks, it buys this right back at a price satisfactory to the passenger.

"The results please everyone. Almost 700,000 passengers profited from a buy-back payment in 1993. By definition, they are happy because they wanted the money more than they wanted the seat on that flight. They were also spared the ignominy of having their fate decided by the whim of airline passenger agents without knowledge of individual needs. All the people not bumped are happy, or would be if they knew of their escape. The airlines are able to increase overbooking, which raises their load factors. This makes their stockholders happy indeed. Fares have gone down, to the joy of the traveling public. Ticket agents do not get grief from bumpees, which improves their lives. Particularly vulnerable people have ceased to be special targets for bumping. No one has claimed damage from the system. The net result is that the new system of making an airline seat into property is an improvement on the old system of random bumping in every possible dimension -- Justice, Economic Efficiency, Political Freedom, and Personal Autonomy -- and it all results from creating a property right. Who, given the choice, would substitute a system where a passenger agent, however capable and earnest, is charged with finding 'Justice'?"

James V. DeLong, Property Matters: How Property Rights Are Under Assault -- And Why You Should Care (Free Press, 1997), pp. 49-50.

Current law requires that anyone who distributes recording or audiovisual works to conspicuously disclose the "true name and address" of the actual manufacturer. This made it easier for consumers and law enforcement to distinguish between legitimate material and pirated material. Legitimate material manufactured by legitimate distributors would include the true name and address and pirated material would not.