Intellectual property law and policy

Intellectual Property Law and Policy VOLUME 10 Edited by

Professor Hugh C Hansen Professor of Law and Director, Fordham University School of Law, International Intellectual Property Law and Policy Institute

OXFORD AND PORTLAND, OREGON 2008

Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA Tel: +1 503 287 3093 or toll-free: (1) 800 944 6190 Fax: +1 503 280 8832 E-mail: [email protected] Website: http://www.isbs.com © In the compilation, Fordham University School of Law 2008 and in the individual parts the Contributors severally. The Editor and Contributors have asserted their right under the Copyright, Designs and Patents Act 1988, to be identified as the authors of this work. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission of Hart Publishing, or as expressly permitted by law or under the terms agreed with the appropriate reprographic rights organisation. Enquiries concerning reproduction which may not be covered by the above should be addressed to Hart Publishing at the address below. Hart Publishing, 16C Worcester Place, Oxford, OX1 2JW Telephone: +44 (0)1865 517530 Fax: +44 (0)1865 510710 E-mail: [email protected] Website: http://www.hartpub.co.uk British Library Cataloguing in Publication Data Data Available ISBN: 978-1-84113-827-5 Typeset by Forewords, Oxford Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall

Foreword This volume is an edited version of the formal presentations and colloquies from the Fordham University School of Law Fifteenth Annual Conference on Intellectual Property Law and Policy held at Fordham April 12th and 13th, 2007. With this volume we have resumed the practice of our first nine years of publishing the conference proceedings. We expect to publish the proceedings from the tenth through the fourteenth conferences to make the printed record complete. In light of the eminence of conference participants, the importance of the subject matter, and astonishing candor of the exchanges, we hope and expect that the ideas and analyses presented in this volume will make a valuable contribution to worldwide discussions of intellectual property law and policy. The entire series provides an exceptional record of the development of this vital area; pinpointing the issues, ideas, and personalities behind new legal and policy initiatives. For both practitioners and scholars, we have strived to make the conference and these volumes an accessible, comprehensive, and unbiased forum for the best thinking and analysis in this important and often contentious area. Hugh C. Hansen Editor

ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS

Acknowledgements Many people and organizations have helped make the Conference and this volume possible. First and foremost are our conference sponsors. The support of over thirty organizations, listed at the beginning of this volume, has been crucial to the conference’s success and continued existence. We have benefited as much from their active interest in, and profound knowledge of intellectual property law, as from their generosity. In this regard, we wish to thank in particular Brad Smith, Microsoft Senior Vice President and General Counsel, for his personal and professional support, as well as the Microsoft Corporation itself, which has provided particularly generous support for the conference and for the publication of this volume. We are also grateful to the many representatives of our sponsors, as well as friends of the conference, who participated in the numerous group teleconferences and individual telephone calls that helped us determine which topics would be of most interest and relevance as we put together the program. Of course, any conference is only as good as its faculty. Our distinguished speakers were from the private sector, government and academia; from across town and across the globe, in fact numbering 139 from 19 countries. They are truly the crème de la crème. They came together in a lively, collegial spirit to offer presentations, discussion and commentary of the highest caliber. Also, as will be apparent to even the most casual reader of this volume, those attending the conference asked some of the most incisive questions, and made some of the most telling observations. I have often said that we could switch the speakers and the audience without any diminution in the quality of the proceedings. William M. Treanor, Dean of the Fordham University School of Law, has from the very start of his eight-year tenure given the conference and intellectual property law at Fordham his full support, for which we are very grateful. Darin Neely, International Director of our Office of Academic Programs, was instrumental in every step of the long arduous task from August through April of organizing this conference which, with its three concurrent sessions, is equivalent to a five-day conference. Also, Darin, David Quiles and the staff of the Academic Programs office worked tirelessly for the weeks immediately before the conference and nonstop for the two days of the conference to efficiently manage the herculean tasks involved in administering the conference. In this regard, members of Fordham’s Intellectual Property, Media and Entertainment Law Journal provided indispensable support throughout the two days of the conference, as well as assistance with various manuscripts co-published here and in the Journal. Sandra Sherman, Assistant Director of our new Fordham Intellectual Property Law Institute, oversaw every aspect of producing this volume, from helping to negotiate our new relationship with Hart Publishing to editing individual sessions. Her meticulous attention to detail and exceptional organizational focus kept this immense project on course. Sharon Hammer, President of Verbatim Transeedings, Inc., managed the recording, transcribing and assembling of this volume’s material. Her ability to track down a missing presentation or a stray but crucial submission is extraordinary, and often saved the day when we had nowhere else to turn. The accuracy and attention to detail of Verbatim’s transcription and manuscript services are second to none. Research assistants

viii A CK N OWL E D GE M E N T S Anthony Rizzo and Jason Lunardi, both second-year Fordham Law students, provided expert review of the manuscript including very valuable bluebooking. They were able to locate even the most obscure citations and correct the array of errors that always creep into the citations of every manuscript. Finally, we are very pleased with our association with our new publishing partner, Hart Publishing of Oxford, England. Richard Hart and his colleagues have done a wonderful job in putting this volume together. In particular, Richard, Mel Hamill, Rachel Turner, and Tom Adams have been very professional, agreeable, patient and supportive in a way that I do not think any other publisher could be, or even would want to be. Hart Publishing is in a class by itself. H.C.H.

List of Sponsors Berwin Leighton Paisner Clarke, Modet & Co. Cleary, Gottlieb, Steen & Hamilton LLP Covington & Burling LLP Cooper & Dunham LLP Darby & Darby P.C. Entertainment Software Association Frommer Lawrence & Haug LLP FTI Consulting Gómez-Acebo & Pombo, Abogados, S.L. Jones Day Kenyon & Kenyon LLP Ladas & Parry LLP McDermott, Will & Emery LLP Microsoft Corporation Milbank, Tweed, Hadley & McCloy LLP Morgan & Finnegan, LLP Morgan, Lewis & Bockius LLP Nokia Corporation Qualcomm Incorporated Ropes & Gray LLP Smith, Strong & Schlesinger LLP Thomson CompuMark Time Warner Inc. Vossius & Partner Weil, Gotshal & Manges LLP White & Case LLP Winston & Strawn LLP

CONTENTS CONTENTS

Contents Foreword

v

Acknowledgements

vii

List of Sponsors

ix

Welcoming Remarks

xxi

SESSION I: PLENARY SESSION The Next Ten Years in Intellectual Property Law: What Should Happen? What Will Happen? Part A: The Next Ten Years in WIPO and WTO Overview Michael S. Keplinger, The Next Ten Years in WIPO Hannu Wager, The Next Ten years in WTO Panel Discussion Prof. Hugh C. Hansen, Moderator Mihály Ficsor, Bruce A. Lehman, James Love, Eric H. Smith, Fred von Lohmann

1 2 3 5 9

Part B: The Next Ten Years in Trademarks Prof. Graeme Dinwoodie Panel Discussion Prof. Hugh C. Hansen, Moderator Prof. Graeme Dinwoodie, Prof. Jane Ginsburg, Prof. Sir Hugh Laddie, Prof. Marshall Leaffer, David Llewelyn, Paul Maier, Erik Nooteboom

17 18 20

Part C: The Next Ten Years in Copyright Panel Discussion Prof. Hugh C. Hansen, Moderator Prof. Jane Ginsburg, Prof. P. Bernt Hugenholtz, Fred von Lohmann, Tilman Lueder, Prof. John G. Palfrey Jr., Shira Perlmutter, Marybeth Peters, Thomas C. Rubin

29 30

Part D: The Next Ten Years in Patents Lord Hoffmann Panel Discussion Prof. Hugh C. Hansen, Moderator Lord Hoffmann, Charles Eloshway, Hon. Roger Hughes, Rt. Hon. Lord Justice Jacob, Ron Marchant, Hon. Pauline Newman, Erik Nooteboom, Prof. Tetsuya Obuchi, Hon. Randall Rader

37 38 40

Part E: The Next Ten Years of IP Law in the U.S. Supreme Court Panel Discussion Prof. Hugh C. Hansen, Moderator Dimitrios Drivas, Prof. Graeme Dinwoodie, Lord Hoffmann, Prof. Jay Thomas, Hon. Pauline Newman, Harold C. Wegner, Prof. Timothy Wu

49 49

xii CONTE NTS Part F: The Next Ten Years of IP Law in the European Court of Justice William Robinson, Overview of ECJ Cases Panel Discussion Prof. Hugh C. Hansen, Moderator Prof. Graeme Dinwoodie, Lord Hoffmann, Prof. Sir Hugh Laddie, Hon. Klaus Grabinski, Prof. Alain Strowel, Rt. Hon. Lord Justice Jacob

59 60 61

SESSION II: COPYRIGHT Unauthorized Use of Works on the Web: What Can Be Done? What Should Be Done? Part A: Legality of Unauthorized Use Prof. John G. Palfrey Jr. Donald B. Verrilli Jr. Alexander Macgillivray Panel Discussion Morton David Goldberg, Moderator Sandra Astairs, Michael A. Einhorn, Prof. Brian Fitzgerald, Thomas C. Rubin

67 68 71 73 76

Part B: Non-Copyright Legal Solutions Sandra Astairs Michael Schlesinger Panel Discussion: Morton David Goldberg, Moderator Michael A. Einhorn, Prof. Brian Fitzgerald, Alexander Macgillivray, John G. Palfrey Jr., Thomas C. Rubin, Donald B. Verrilli Jr.

85 86 88 90

Part C: Copyright Issues in Online Music Zoltán Bácsi Panel Discussion Prof. Silke Von Lewinski, Moderator Zoltán Bácsi, Tilman Lueder Jacqueline Charlesworth Elliot Peters Howard P. Knopf, Online Music 2007 Panel Discussion Eric J. Schwartz, Moderator David O. Carson, David Jones, Elliot Peters

97 99 101

105 108 110 131

SESSION III: PATENT Part A: Non-Obviousness and Inventive Step: A Comparative View John Richards Panel Discussion Norman Zivin, Moderator Hon. Klaus Grabinski, Rt. Hon. Lord Justice Jacob, Eiji Katayama, Steven J. Lee, Hon. Randall R. Rader Herbert F. Schwartz

139 140 143

CONTE NTS

Part B: Extraterritoriality and Related Principles: To What Extent Have and Should National Courts Apply their Domestic Patent Laws and Policies to Activities in Other Countries? Prof. John R. Thomas, Voda v. Cordis Hon. Roger Hughes, Jurisdiction of the State: Respecting the Incorporeal Dr. Johann Pitz, Extraterritoriality of German Patents Nicholas Groombridge Panel Discussion John Richards, Moderator Hon. Klaus Grabinski, Rt. Hon. Lord Justice Jacob, David Perkins Part C: Patentable Subject Matter: The Road Ahead for Software and Business Method Patents Bart Eppenauer David J. Kappos Ron Marchant Panel Discussion Prof. Martin J. Adelman, Moderator Dr. Anne Fitzgerald, Prof. John R. Thomas Robert Hart, Patentable Subject Matter: The Road Ahead for Software and Business Method Inventions in Europe and the U.K.

xiii

151 152 163 176 179 181

189 190 193 195 198

206

SESSION IV: ANTITRUST/COMPETITION LAW & INTELLECTUAL PROPERTY Part A: Standard Setting and Competition Issues Nicholas Banasevic John Temple Lang, Licensing, Antitrust and Innovation Under European Competition Law Roy Hoffinger Discussion/Q&A Geoff Oliver, The Rambus Case Panel Discussion Andreas P. Reindl, Moderator Victoria A. Espinel, David J. Kappos, Rondal Moore Michael Einhorn, Competition Policy and the European Commission: CDMA Standards and Qualcomm

215 216 219 224 229 235 237

240

Part B: Refusals to License Daryl Lim, Beyond Microsoft: Rethinking the Future of Refusals to License Panel Discussion: Prof. Hugh C. Hansen, Moderator Heinz Goddar, Prof. Valentine Korah, Susan Manning, John Temple Lang John Temple Lang, European Competition Law and Refusals to Licence Intellectual Property Rights

247 248 271

Part C: Intellectual Property and Competition Policy on Parallel Trade Thomas Heide, Overview of Parallel Trade Christopher Stothers

297 297 299

282

xiv CONTE NTS James B. Kobak Jr. & Ramsey Chamie, An Update On the Law, Politics and the Re-Importation of Pharmaceuticals in the United States Panel Discussion Thomas Heide, Moderator Thomas Cheng, Prof. Valentine Korah, Susan Manning, John Temple Lang

304 312

SESSION V: PATENT Part A: Japanese IP Developments Tsuyoshi Isozumi, Mutual Utilization & Enhanced Work Sharing: Patent Prosecution Highway and New-Route Proposal Hon. Koichi Tanaka, Speedy and High-Quality Disposition IP High Court Eiji Katayama, Japanese Patent Recent Developments: View from Industry and Attorney Prof. Tetsuya Obuchi, Japanese Patent and Copyright Law Developments Panel Discussion John Richards, Moderator Souichiro Kozuka, Harold C. Wegner Part B: EU Legislative and Related Developments Harrie Temmink Hon. Klaus Grabinski Panel Discussion David Perkins, Moderator Erik Nooteboom, Prof. Alain Strowel Part C: Courthouse Relationships: The Federal Circuit and the Supreme Court, The Court of Appeal and the House of Lords, Member State Courts and the Court of Justice Prof Martin J. Adelman, Introduction Lord Hoffmann Prof. John Duffy Panel Discussion Prof. Martin J. Adelman, Moderator Hon. Klaus Grabinski, Prof. Sir Hugh Laddie, Hon. Pauline Newman, Hon. Randall R. Rader, Harold C. Wegner

321 322 324 327 329 333

337 338 343 346

353 353 355 357 360

SESSION VI: HUMAN RIGHTS & INTELLECTUAL PROPERTY Prof. Martin J. Adelman, Introduction Prof. F. Willem Grosheide, The Human Rights Paradox Orit Fischman Afori, Copyright and Human Rights: External Balance for Internal Benefit Prof. Geertrui Von Overwalle, Human Rights’ Limitations in Patent Law Prof. Laurence R. Helfer, Human Rights and Intellectual Property Hannu Wager

369 370 372 375 379 382

CONTE NTS

Panel Discussion Prof. Martin J. Adelman, Moderator Hannu Wager, Prof. Peter K. Yu Orit Fischman Afori, Human Rights and Copyright: The Introduction of Natural Law Considerations into American Copyright Law Laurence R. Helfer, The New Innovation Frontier? Intellectual Property and the European Court of Human Rights

xv 384

390 430

SESSION VII: TRADEMARK Part A: Trademark Law Developments in the European Union William Robinson, Trademark Developments Gail E. Evans, Recent Developments in the Protection of Trade Names in the European Union Prof. Spyros Maniatis, Opel: What Will it Mean for the Future? Panel Discussion Claus Köhler, Moderator Prof. Annette Kur, Prof. Sit Hugh Laddie, David Llewelyn, Paul Maier Appendix: William Robinson et al., Tables: Community Trade Mark Jurisprudence of the European Community Courts, 1 January 2006 to 31 March 2007

473 474 478 502 511

521

Part B: Third-Party Uses of Trademarks: Search Engines and Key Words John Richardson, Introduction Prof. Graeme Dinwoodie Dr. Peter Ruess Panel Discussion John Richardson, Moderator Jeffrey Butler, Prof. Susy Frankel, Paul W. Garrity, Prof. Marshall Leaffer, Ilanah Simon

541 541 542 546 549

Part C: Dilution: A Review of Recent Developments Prof. Coenraad Visser, Introduction Prof. Barton Beebe, Trademark Dilution Revision Act Kenneth A. Plevan Ilanah Simon David Llewelyn Panel Discussion Prof. Coenraad Visser, Moderator Prof. Veronica Barresi, Andrew Bridges, Susan Progoff

559 559 560 563 566 570 571

Part D: Functionality and Protection of Product Configuration Marks Paul Maier Jonathan Moskin Panel Discussion Paul W. Garrity, Moderator Prof. Graeme Dinwoodie, Prof. Kenneth L. Port, Susan Progoff, Prof. Susan Scafidi

577 577 585 587

xvi CONTE NTS

SESSION VIII: COPYRIGHT Part A: Canada, Australia and New Zealand Prof. Brian Fitzgerald, Introduction Prof. Robert Burrell Howard P. Knopf, Recent Copyright Activity and Inactivity in Canada Prof. Susy Frankel Panel Discussion Prof. Brian Fitzgerald, Moderator Prof. Christoph Antons, Prof. Anne Fitzgerald, Prof. Daniel J. Gervais, Hon. Roger Hughes Part B: The Recasting of Copyright and Related Rights in the European Union — What Should the EU Do? What Will the EU Do? Prof. P. Bernt Hugenholtz, IViR Report Barbara Norcross-Amilhat Panel Discussion Prof. Lionel Bently, Moderator Mihály Ficsor, Thomas Heide, Andreas P. Reindl, Prof. Silke von Lewinski

591 591 592 595 612 613

621 621 627 631

Part C: WIPO Broadcasting Treaty and the Politics of Intellectual Property Michael S. Keplinger James Love Julie Samnadda Panel Discussion David O. Carson, Moderator Ann Chaitovitz, Shira Perlmutter, Tom Rivers

637 638 640 642 644

Part D: Exclusive Rights v. Global Remuneration Ted Shapiro Panel Discussion Mihály Ficsor, Moderator Prof. Daniel J. Gervais, Fred von Lohmann, Shira Perlmutter

651 652 659

Part E: Developments in the Copyright Office and Congress Marybeth Peters David O. Carson

663 664 667

SESSION IX: PATENT Part A: A View From the Trenches Charles Fish, Introduction Brian W. Nolan, The Real-World Effect of eBay, Inc. v. MercExchange, L.L.C. Basil Imburgia Hon. Jed S. Rakoff Panel Discussion Charles Fish, Moderator Hon. Klaus Grabinski, Brian Murphy, Hon. Koichi Tanaka, Tony Yeo

673 673 675 683 685 688

CONTE NTS

Part B: MedImmune: What Is a Case or Controversy Without Reasonable Apprehension? Implications for Licensors, Licensees and the Rest of Us John R. Lane, Introduction Steven J. Lee, MedImmune: What is a Case or Controversy Without Reasonable Apprehension? Implications for Licensors, Licensees and the Rest of Us Harold C. Wegner & Lynn E. Eccleeston, MedImmune: The Federal Circuit Fills in the Blanks Panel Discussion John R. Lane, Moderator Charles Fish, Herbert F. Schwartz Part C: Patent Law Reform John R. Lane Bruce A. Lehman Panel Discussion John R. Lane, Moderator Charles Fish, Steven J. Lee, Herbert F. Schwartz, John A. Squires Bruce A. Lehman, Bracing for the Impact of Patent Reform: Prospects for Legislation in the 110th Congress

xvii

697 697 699 709 726

731 731 734 737

748

SESSION X: COPYRIGHT Part A: Intellectual Property Law and Design Jack B. Hicks Alain Coblence, The Design Piracy Prohibition Act Harrie Temmink Paul Maier, Design Law: An Update on Decisions in the OHIM Panel Discussion Prof. Susan Scafidi, Moderator Prof. Kenneth L. Port, Mark Traphagen

759 760 773 777 780 794

Part B: The Three-Step Test: Is It Out of Step? Hoachen Sun, Overcoming the Achilles’ Heel of Copyright Law: The Case for the Creative Destruction of the Three-Step Test Panel Discussion Prof. Hugh C. Hansen, Moderator Prof. Jane Ginsburg, Prof. P. Bernt Hugenholtz, Prof. Annette Kur, Ted Shapiro, Prof. Coenraad Visser, Prof. Mary W.S. Wong

799

Part C: Copyright Law in the 21st Century: Some Empirical and Theoretical Considerations Concerning Fair Use, Tolerated Use, Indeterminate Protection, and Compulsory Licensing Prof. Barton Beebe Empirical Study of U.S. Copyright Fair Use Opinions 1978–2005 Discussion of Beebe Presentation Prof. Tim Wu, Tolerated Use Discussion of Wu Presentation Michael Einhorn, Alternatives to Fair Use Discussion of Einhorn Presentation

800 856

863 864 868 871 873 875 878

xviii CONTE NTS Michael S. Shapiro, Copyright’s Winter of Discontent? Some Thoughts on the International Public Policy Process Discussion of Shapiro Presentation Prof. Souoichirou Kozuka, Copyright Law and the Digital Agenda in Japan: Some Thoughts About Change Discussion of Kozuka Presentation Panel Discussion Prof. Hugh C. Hansen, Moderator Prof. Lionel Bently, Prof. Jane Ginsburg, Stanley Pierre-Louis Michael E. Einhorn, Alternatives to Fair Use: Can Kozinski Replace Posner?

880 887 889 894 894

899

SESSION XI: TRADEMARK From Communication to Thing: When Were Trademarks First Conceptualized and Treated as Property. Does it Matter? Prof. Lionel Bently, From Communication to Thing: Historical Aspects of the Conceptualisation of Trade Marks as Property Panel Discussion Prof. Marshall Leaffer, Moderator Andrew P. Bridges, Prof. Justin Hughes

915 916 941

SESSION XII: TRADE Part A: Thailand and Compulsory Licenses Prof. Susy Frankel, Introduction James Love Jeffrey P. Kushan Richard Kjeldgaard Panel Discussion Prof. Susy Frankel, Moderator Prof. Sir Hugh Laddie Part B: Trade Policy in Intellectual Property: Policy, Priorities, and Emerging Issues Victoria A. Espinel Questions & Answers

947 947 949 951 953 955

963 963 968

Part C: India, IP Developments and TRIPs Prof. Shamnad Basheer Victoria A. Espinel Panel Discussion Prof. Sir Hugh Laddie, Moderator James Love, Mustafa Safiyuddin, Eric H. Smith, Howard Zucker

971 972 976 978

Part D: TRIPs and China: Should a Case be Brought? — Will it be Brought? Justin Hughes, Introduction Victoria A. Espinel Eric H. Smith, The Case for TRIPs Violations

983 983 984 988

CONTE NTS

Prof. Peter Yu, Intellectual Property, Economic Development, and the China Puzzle Panel Discussion Prof. Justin Hughes, Moderator Mark Traphagen, Prof. Sir Hugh Laddie, Prof. Qian Wang

xix

990 1024

Appendix: The Next Ten Years in EU Copyright: Making Markets Work Dr. Tilman Lueder

1031

Index

1065

WELCOMING WELCOMING REMARKS REMARKS

FORDHAM UNIVERSITY SCHOOL OF LAW FIFTEENTH ANNUAL CONFERENCE INTERNATIONAL INTELLECTUAL PROPERTY LAW & POLICY New York, April 12–13, 2007 WELCOMING REMARKS PROF. HUGH C. HANSEN DEAN WILLIAM TREANOR

Fordham University School of Law

PROF. HANSEN: Good morning. Welcome to the Fifteenth Annual Fordham Conference. It is my great pleasure and honor to introduce the Dean of Fordham Law School, William Treanor, for welcoming remarks. DEAN TREANOR: Thanks very much, Hugh. Welcome. This is an incredibly exciting event for us at Fordham Law School. Today we have, for the fifteenth year, our International Intellectual Property Law & Policy Conference. As our alumni and students know, really pretty much every day we have a conference of some kind that meets here. But this is really a high point for us in the year. What it does is bring together really two of the great focuses of our Law School. Fordham Law School is one of the leading schools — certainly in the United States, I think in the world — in the areas of intellectual property and information law. Professor Hansen really is a pioneer in the field of intellectual property in the United States, and now we have Professor Sonya Katyal, Professor Mark Patterson, Professor Andy Sims, and Professor Joel Reidenberg. Joining us next year we have Professor Jeannie Fromer, who is a former U.S. Supreme Court Clerk, who also has a Masters in Computer Science from MIT. We also have two exciting visitors coming, Brett Frischmann and Kathy Strandburg. Fordham Law School has a profound commitment to intellectual property and realizes how much it is at the core of legal practice today. It is also profoundly committed to international law and has one of the preeminent international law programs in the United States. This Conference brings the two together. It started in 1993. Professor Hansen had the idea of bringing the leading figures in European intellectual property law and the leading U.S. figures together in one conference. Over fifteen years, it has expanded to what it is today. I think we have roughly 350 people here. We have people from six continents, which I think is basically all you can reasonably expect. It is a level of discussion that is really unparalleled. Professor Hansen’s motto for the conference is: Learn something; engage in the debate; have fun. That is what this Conference is about. It is about a top-level discussion, but it is done in a way that is fun and fascinating and that focuses on the debate.

xxii WE LCOMING R E MA R KS We started yesterday with a program in conjunction with the Intellectual Property Academy of Singapore, which we began in 2004, on Asian intellectual property law. It was a fabulous beginning. Now we have the program today and tomorrow. I want to thank all the sponsors who make this possible. As a dean, I am very grateful for sponsors. I want to thank them for their financial support. I want to thank all of you for coming here and bringing so much excitement to this. I want to thank Helen Herman in our Office of Academic Programs for doing such a great job in putting this together, and particularly Darin Neely, who is really a genius of logistics. And finally, before I turn things over to Professor Hansen, I want to acknowledge him again. He really is a visionary. In 1993 he thought this was what we had to do. He really reached. At a time in which intellectual property in the United States in the academy was really in its infancy, he realized both its importance and the importance of its international dimension. I think all of us who know him prize his pithy aphorisms and his sense of humor. In an increasingly soundbite-driven culture, as we have in the United States, if ever there is an IP talk show, I know who will be the host. In addition to his great wit and his vision, he has the most extraordinary intelligence and vision about intellectual property. All of us are very grateful to Professor Hansen for what he has done. It is my pleasure now to turn things over to Professor Hansen. PROF. HANSEN: Thank you very much, Bill. Wow, thanks. That was a great introduction. I have never had an introduction like that.

SESSION I: PLENARY SESSION PART A: THE NEXT TEN YEARS IN WIPO AND WTO

SESSION I: PLENARY SESSION

The Next Ten Years in Intellectual Property Law: What Should Happen? What Will Happen?

Part A: The Next Ten Years in WIPO and WTO

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law

Speakers MICHAEL S. KEPLINGER

HANNU WAGER

Deputy Director General World Intellectual Property Organization (Geneva)

Counsellor Intellectual Property Division World Trade Organization (Geneva)

Panelists MIHÁLY FICSOR

JAMES LOVE

President, Hungarian Copyright Council; Former Assistant Director General WIPO (Budapest)

Director, Knowledge Ecology International (Washington, D.C.)

BRUCE A. LEHMAN

ERIC H. SMITH

Akin, Bump Strauss Hauer & Feld LLP (Washington, D.C.)

Smith, Strong & Schlesinger LLP (Washington, D.C.)

FRED VON LOHMANN

Senior Intellectual Property Counsel, Electronic Frontier Foundation (San Francisco)

2 S E S S I O N I : P L E N A R Y SE S S I O N Overview The last ten years have seen major changes in intellectual property (IP) developments at both the national and international levels. Creators, inventors, and content providers are facing difficult times on two fronts. One is the never-ending growth of technological developments that make unauthorized copying even easier. The second is more vocal opposition to intellectual property protection. Developing nations, consumers, library associations, open source advocates, nongovernmental organizations (NGOs), Internet service providers (ISPs), digital manufacturers, and others have advocated less protection for IP. This opposition has resulted in new multilateral treaties and legislation that extends IP protection being stalled or killed. The low-protection advocates, however, have been only partially successful. Courts globally continue to provide strong IP protection, and legislatures have resisted calls to cut back existing protection. This might change since a number of government-sponsored studies have weighed in to varying degrees on the side lessening IP protection. Such studies included the Gowers Review in the United Kingdom,1 the Final Report of the U.K. Commission on IP rights (CIPR),2 and the European Commission’s reports on Databases and the Copyright Acquis.3 And, of course, it now has become almost de rigueur for academics throughout the world to question previously long-held assumptions about the scope of IP protection. This Plenary Session will address what these developments mean over the next ten years. Some of the issues to be discussed are: 앫 What is causing these calls for decreased protection? Are they driven by economic self-interest and/or ideological views that, perhaps unstated, are for redistribution of wealth and against market-driven economies and capitalism in general? Or are calls for less protection the reaction to a digital world that produces new roles for all market players, the democratization of creativity, and/or the growth of non-proprietary networks and mass creative collaboration? 앫 Are both sides in the IP debate too ideologically rigid to produce a workable compromise? 앫 Will multinational organizations become irrelevant or more important? 앫 Are treaties and EU and national legislation possible in this fractured environment? If so, what approaches toward IP will they take? Will “soft law” replace enacted law? 앫 Will courts, by default or design, play the central role in the intellectual property debate? If so, can courts globally produce a consistent, or at least somewhat harmonized, approach to the protection of IP? 1 U.K. Treasury, Gowers Review of Intellectual Property (December 2006), available at http://www.hmtreasury.gov.uk/media/6/E/pbr06_gowers_report_755.pdf. 2 U.K. Commission on Intellectual Property Rights [CIPR], Integrating Intellectual Property Rights and Development Policy (September 2002), available at http:// www.iprcommission.org/graphic/documents/ final_report.htm. 3 European Commission, First Evaluation of Directive 96/9/EC on the Legal Protection of Databases (Dec. 12, 2005) (Final Report), 2004 O.J. (L 195) 16, available at http://ec.europa.eu/internal_market/copyright/ documents/documents_en.htm#reports; European Commission, Report from the Commission on the Coordination of Certain Rules Concerning Copyright and Related Rights Related to Copyright Applicable to Satellite Broadcasting and Cable Transmission (July 26, 2002), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:52002DC0430:EN:NOT; European Commission, Report from the Commission to the Council, the European Parliament and the Economic and Social Committee on the Implementation and Effects of Directive 91/250/EEC on the Legal Protection of Computer Programs (Oct. 14, 2000); European Commission, Consultation on the Review of EU Legislation on Copyright and Related Rights (Working Document), available at http://eur-lex.europa.eu/internal_market/copyright/review/ consultation_en.htm.

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앫 What will copyright, patent, and trademark laws look like in ten years time? 앫 Will technology make all of the above irrelevant? The speakers and panelists in this Session will address these issues as well as some of their own. The session will consist almost entirely of discussion, with a major portion of time allocated for audience participation. * * * I think this morning’s program is very exciting. Normally, in this session review what happened in the last year. Our focus today is to look prospectively at the next ten years. Without further ado, we have two speakers addressing respectively the World Trade Organization (“WTO”) and the World Intellectual Property Organization (“WIPO”) in the future. The first speaker is Michael Keplinger. Mike a new Deputy Director of WIPO. His specialty is copyright. He has a long history in copyright in the U.S. Patent and Trademark Office (PTO). We are very, very pleased to have Mike here. MR. KEPLINGER: When I was asked to talk about the next ten years in WIPO, I thought this was quite a challenge. As Hugh said, my specialty is copyright. My new position is that of the Deputy Director General in charge of the Copyright Sector. I began by casting around the Organization to talk to the other Deputy Directors to see what their perceptions were about their respective areas. I wound up with a ten-minute talk with six pages of notes, which would let me talk for two hours about what the next ten years in WIPO are likely to bring. Let me just try to hit some of the highlights. In the next ten years, it is going to be incumbent on WIPO to work hard to maintain its leadership position in the area of intellectual property. In the area of intellectual property, we are experiencing some new trends. Some describe the “democratization” of intellectual property. It is no longer a “boutique” area but it is now one that touches almost every area of society. Certainly within the UN system, intellectual property comes up in the programs of most specialized agencies. We work in a more contested, a more multi-stakeholder environment, and one in which a wide variety of organizations are struggling hard to make their positions known. So what are we working to do at WIPO? We want to work to continue to maintain the balance of the intellectual property system. We need to look at the balance between private rights and the public good, between right holders’ needs for protection and users’ expectation for access. We need to make access to the IP system more equitable for individual creators and for those developing new business models, and for those in developed and developing countries alike. This applies across the board to all areas of intellectual property — not just patents, but to trademarks and to copyrights — and here I highlight some of the work we are doing at WIPO with regard to the Patent Cooperation Treaty (PCT)4 system. We need in WIPO to strengthen our technical capabilities in order to be able to focus discussions on the important areas. The IP system is changing. There is more emphasis these days on the management of IP, commercialization of IP, securitization, financing, and the use of IP as collateral. Today, IP is of incredible importance, and represents up to 80 percent of the value of the PROF. HANSEN:

4 World Intellectual Property Organization Patent Cooperation Treaty, Apr. 1, 2002, available at http://www.wipo.int/pct/en/texts/articles/atoc.htm.

4 S E S S I O N I : P L E N A R Y SE S S I O N top 500 Standard & Poor’s (S&P) companies, whose wealth is represented by their intangible investment in intellectual property. Technological changes are also impacting the way in which IP thinking is developing. New business models emerge constantly. Recent developments, such as Apple’s decision to release music without technological protection measures (TPMs) in certain areas, will change the way we think about the distribution of works in the future. We have at WIPO seen increasing pressure from developing countries to look at issues of concern to them. There has been pressure in WIPO to look at the Development Agenda;5 that is, what WIPO is doing to foster development among its developing country Members. This has been a very useful discussion in many ways for WIPO, because it has helped us focus our thinking, to explain and clarify how much WIPO actually does to foster development, and to also focus on the important role of intellectual property as a tool for economic development. We are doing some very important work in the area of development. In the field of copyright, we have been working with countries to establish economic models to determine the contribution of the copyright industries to national economies. The results have been surprising. The copyright industries are some of the most significant industries in many countries. I have seen a change in the perception of some of those countries where these studies have been done as to the way they approach copyright issues in WIPO. When they discover that copyright contributes some 6–8 percent of their gross domestic product (GDP) and somewhere around 8 percent of national employment, their attitude really changes. They begin to see that intellectual property offers something tangible for them. I think this is an area where WIPO’s work is going to intensify in the future. I think we will try to expand this work to examine other areas of intellectual property, and also to link this with a study that we are working on regarding the impact of piracy on national economies. WIPO has other projects. We are trying to increase our efforts towards a new treaty to protect the interests of broadcasting organizations.6 The General Assembly of WIPO in September 2006 directed the Standing Committee on Copyright and Related Rights to develop a new approach to the treaty that had been under discussion for some nine years on the protection of broadcasting organizations and to pursue a signal-based approach in looking at this treaty. We have interpreted this to mean focusing on protection of the broadcast signal and reducing emphasis on the protection of post-fixation rights. We have already had one special meeting of the Standing Committee, and in June we will have another. A new proposal has been posted for comments7 on the WIPO Web site prepared by the Chairman of the Standing Committee that focuses on this signal-based approach. The Chairman will revise this draft and release it as a basis for discussion. It is a draft that no one is completely happy with, which perhaps means it is a good approach because there is a little bit of pain in it for everyone.8 In the area of patents, we are focusing on our role as a service provider by working to increase the efficiency of our filings and our processing of works under the Patent Cooperation Treaty, and are devoting significant resources to that. Just to briefly mention other WIPO developments. We are working progressively in the 5

See http://www.cptech.org/ip/wipo/da.html. For latest developments and related documents regarding the Proposed WIPO Treaty on the Protection of Broadcasting Organizations, see http://www.cptech.org/ip/wipo/bt/ latest_docs.html. 7 See http://www.wipo.int/edocs/mdocs/copyright/en/sccr_9/sccr_9_3_rev.pdf. 8 See infra Session VIII, Part C, WIPO Broadcasting Treaty and the Politics of Intellectual Property. 6

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area of traditional knowledge and genetic resources. In trademarks, we are working on a new Trademark Treaty. WIPO’s Arbitration and Mediation Center has been very successful in resolving disputes, particularly in the area of domain name dispute resolution. We are also working strongly in the field of enforcement. WIPO recently conducted a very successful conference on enforcement, a World Congress, in cooperation with the World Customs Organization and the INTERPOL, to look at the practical effects and what we can do to combat piracy in the future. I have mentioned just some of the things that WIPO is and will be doing in the short time I’ve had. Thank you very much for your attention. PROF. HANSEN: Thank, you, Mike. Now, Hannu Wager. MR. WAGER: Thank you. Given the nature of the WTO as a member-led organization, what the next ten years will have in store for it very much depends on what issues the WTO Member governments choose to bring into its policy and rule-making processes and before the dispute settlement system. One thing is of course clear — namely, that it is not for the Secretariat to decide. Therefore, what I will say are very much only my own personal reflections on the matter. It should be borne in mind that at the WTO IP matters are handled as part of a broader trade framework. How IP matters will be treated will depend in substantial part on what happens in the WTO as a whole. It has been the experience of the WTO and GATT9 that significant changes to trade rules can only be accomplished in the context of a comprehensive round that allow trade-offs across areas of interest to different participants in negotiations. As regards the present Doha Round, there are some IP issues on the table.10 However, unlike during the Uruguay Round, they are not at the core of the Round. Perhaps it could be added that neither are they at the core of IP policy in general. Judging from past practice, WTO Members are unlikely to launch and complete new negotiating round after Doha within the next ten years. As you know, the Doha Round was launched in 2001. The negotiations have not moved forward as had been hoped. Given the failure to reach sufficient progress, the Round was suspended last July in order to allow Members time to reflect on the situation. Since February, the negotiations have resumed in full mode in all negotiating groups. Members are also working bilaterally and there is engagement and support at the highest political level. Three issues are at the forefront of the discussions at this moment: agricultural subsidies, agricultural tariffs, and industrial tariffs. However, a breakthrough in these key areas is still awaited. The main TRIPs11 issues being discussed in this context are those related to geographical indications (GIs) and a so-called “disclosure proposal” (a proposal on the disclosure of origin of biological resources and/or associated traditional knowledge12), although 9 General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, T.I.A.S. 1700, 55 U.N.T.S. 194; General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations 17 (1999), 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994). 10 Information and documents are available at http://www.wipo.int/activities/en/. 11 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement

6 S E S S I O N I : P L E N A R Y SE S S I O N there are different views on whether GI extension and the disclosure proposal form part of the agreed negotiating package for the Round. The introduction to this plenary session refers to a number of important questions concerning the balance in IP systems. I believe that these questions are likely to continue to be key issues in domestic and international policy discussions over the next ten years, including in the WTO. In the past few years, such questions have arisen in the WTO, particularly in the context of TRIPs and health. The work done in this area is likely to form part of the underlying consideration of future matters. The question posed in the Conference program that is most specific to the WTO is whether multilateral organizations will become irrelevant or more important. I don’t think that, due to the ongoing debate, the WTO is likely to become less important. However, it should be noted that much of the debate concerns matters such as the term of protection for copyright, the patentability of computer software and business methods, and more generally quality and scope of patents and the availability and strength of injunctive relief. In general, these types of questions are often matters that are not regulated in detail in TRIPs or go beyond its minimum requirements. Hence, this debate has taken place at the national level, and sometimes at the bilateral or regional level, and I would guess that this will continue to be the situation. Consequently, I would not expect the WTO to be the first port of call for such matters. But, in a sense, the ongoing debate at the national level, and sometimes at the bilateral or regional level, has underlined the fact that the TRIPs Agreement does contain important elements of balance and flexibility, allowing both developed and developing countries to seek their own responses to these evolving questions. Going back to the IP matters on the Doha agenda, it would appear that any significant progress on matters addressed by the disclosure proposal would be unlikely in the near future in the absence of major progress with the Round. And even with a successful conclusion of the Round, it is difficult to predict at this point what the outcome might be in this area. As regards discussions on any sui generis protection of traditional knowledge or folklore, although both of them have been standing items on the TRIPs Council’s agenda, Member governments have preferred, at least until now, to discuss them in the WIPO Intergovernmental Committee. The issues of traditional knowledge and folklore do not fit well into the bigger picture outlined in the Conference program, in the sense that in these areas a number of developing countries are in fact calling for new, additional forms of protection rather than less protection. Another area of debate in regard to the evolution of the balance in the TRIPs Agreement concerns the issue of so-called “GI extension,” the proposals for extending the higher level of protection, which presently only has to be given to GIs for wines and spirits, to other product areas. Also this issue does not fit well into the broader outline of the Conference program, since there is a mixed group of both developing and developed countries calling for more protection in this area, not less. on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/ trips_e/trips_e.htm. 12 WIPO/GRTKF/IC/5/10, World Intellectual Property Organization, Intergovernmental Committee on Intellectual Property and Genetic Resources, Traditional Knowledge and Folklore, Draft Technical Study on Disclosure Requirements Related to Genetic Resources and Traditional Knowledge (May 2, 2003), available at http://www.wipo.int/edocs/mdocs/tk/en/wipo_grtkf_ic_5/wipo_grtkf _ic_5_10.doc.

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As regards the negotiations on the establishment of a registry for GIs for wines and spirits, which is a part of the single undertaking of the Doha Round, the objective is not to readjust the balance under the Agreement, but rather to facilitate the protection of GIs. As I mentioned earlier, questions about a proper balance have been debated in the WTO particularly in relation to TRIPs and public health. The issue raised around the year 2000 was whether the flexibility in the TRIPs Agreement was sufficient to ensure that it was supportive of public health, especially in permitting affordable access to existing medicines in poor countries, while also promoting research and development into new ones. The work resulted in the 2001 Doha Declaration on the TRIPs Agreement and Public Health,13 which provides a number of important clarifications of some of the healthrelated flexibilities contained in the Agreement, and the so-called “Paragraph 6” system designed to make it easier for poorer countries to obtain cheaper generic versions of patented medicines. This system was put in place in 2003 in the form of a set of waivers, and in 2005 it was agreed to incorporate it into the TRIPs Agreement in the form of an amendment. The amendment will enter into force once two-thirds of the WTO Members have accepted it. So far, it has been accepted by seven Members — El Salvador, India, Korea, Norway, the Philippines, Switzerland, and the United States. In the meantime, the waivers remain in force. These three legal instruments have demonstrated the WTO’s ability to react to important developments, including humanitarian causes. In the coming years, the focus in the TRIPs Council will be on implementation of these instruments, including the ratification process of the Amendment. Any post-Doha work program would be likely to cover any unfinished business from the Doha Round. What other issues might come up in future discussions? 앫 Recently, there has been increasing attention to counterfeiting and piracy. Some Members have indicated in the TRIPs Council that they remain concerned about the increasing level of counterfeiting and piracy and have requested the TRIPs Council to discuss this matter. However, some other Members are not convinced that it would be appropriate for the Council to take up this matter at this stage, and argue that the Agreement leaves it to Members to determine the appropriate method of implementing enforcement measures. At this point it is not clear whether there will be work on enforcement in the TRIPs Council. 앫 Competition policy was one of the so-called “Singapore issues” that were initially examined in the context of the Doha Round. However, in 2004 it was decided to initiate negotiations only in one of these areas, namely trade facilitation. Presently, there appears to be increased interest in the interface between IP and competition law, and some recent cases have highlighted the international dimension of the issue. While competition policy has been on the back burner during the Round, it cannot be excluded that in the course of the next ten years some Members would wish to bring the international dimension of this question back to the WTO. 앫 As regards the least-developed countries (LDCs), their general transition period under TRIPs was recently extended until July 2013. Helping LDCs to implement and 13 Doha WTO Ministerial Declaration on the TRIPs Agreement and Public Health, WT/MIN(01)/Dec/2, adopted Nov. 14, 2001, available at http://www.wto.org/English/ thewto_e/minist_e/min01_e/mindecl_trips_e. htm.

8 S E S S I O N I : P L E N A R Y SE S S I O N use the IP system for their development will be an important area of work for the WTO. 앫 Also, discussions on transfer of technology will be continued, in particular in relation to LDCs. 앫 Currently the WTO has 150 members. The accession of countries, such as China, and most recently Saudi Arabia and Vietnam, have led to important developments concerning the IP regimes of these countries. Currently, there are some thirty countries in the process of accession. The negotiations with, for example, Russia and Ukraine are well advanced. IP matters are an important element in the accession negotiations of these countries. Let me close by saying a few words about dispute settlement. One of the questions posed in the Conference program is whether courts, by default or design, will play the central role in the IP debate. The number of TRIPs disputes has been relatively low. In particular, we have not seen so far any large-scale recourse to dispute settlement against developing countries. In general, I would not expect the dispute settlement system to play a major role in settling some of the key evolving policy issues that I mentioned earlier, given that they are issues that are either not regulated in detail under TRIPs or go beyond the minimum requirements under it. However, there may be issues about the interpretation and implementation of the current TRIPs provisions that Members may wish to bring to the WTO. As you know, one such case was just filed by the United States two days ago.14 PROF. HANSEN: Before our discussion the panel. I’ve mentioned Mike Kepplinger already. I should say a little more about Hannu Wager. He is a Counsellor in the Intellectual Property Division of WTO. That is actually a small shop. They also have some power as do the civil service in many governments. Panel decisions are heavily influenced by their assistance. So if you have complaints about any of the IP decisions, you can go straight to Hannu. Mihály Ficsor, who used to be the number two person for many years at the WIPO, the power behind the throne, is a world figure, now an IP and also the President of the Hungarian Copyright Council. Bruce Lehman is another world figure, head of the U.S. Patent and Trademark Office (PTO) for many years. He was a moving force certainly in the WIPO Copyright Treaties15 and is now in private practice with Akin, Gump in Washington, D.C. Jamie Love is Director of Knowledge Ecology International, which is a new name. Jamie, of course, is an international figure as well. 14 On Apr. 10, 2007, the U.S. Trade Representative requested consultations with China at the WTO over protection of IP rights and barriers to trade in copyrighted items. For information on subsequent developments, see Press Release, Office of the U.S. Trade Representative, United States Requests WTO Panel in Case Challenging Deficiencies in China’s Intellectual Property Rights Laws (Aug. 13, 2007), available at http://www.ustr.gov/Document_Library/Press_Releases/2007/August/United_States_Requests_WTO_Panel_ in_ Case_Challenging_Deficiencies_ in_Chinas_Intellectual_Property_Rights_Laws.html. See also WTO Dispute DS362, filed by the United States Apr. 10, 2007: China — Measures Affecting the Protection and Enforcement of IP Rights, available at http://www.wto.org/ english/tratop_e/dispu_e/cases_e/ds362_e.htm; WTO Dispute DS363, filed by the United States Apr. 10, 2007: China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, http://www.wto.org/ english/tratop_e/ dispu_e/cases_e/ds363_e.htm. See also infra Session XII, Part D, TRIPs and China. 15 World Intellectual Property Organization: Copyright Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 65 (1997) [hereinafter WCT], and World Intellectual Property Organization Performances and Phonograms Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 76 (1997) [hereinafter WPPT], available at http://www.wipo.org.

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Eric Smith has been in the forefront of bilateral and multilateral IP matters for many years. He almost created the international IP field from within the private sector. He is partner in a new firm of Smith, Strong & Schlesinger. Finally, Fred von Lohmann, Senior Intellectual Property Counsel, Electronic Frontier Foundation. Fred is also an international figure and a national figure as well. Everyone knows him in this area. PROF. HANSEN: Opening up the discussion, Mihály, why don’t you start off the discussion. Having been within the WIPO for many years and the second in power, what does the future of the WIPO look like to you? MR. FICSOR: It is difficult to speak about the future. There is only one thing about which we can be sure — namely, that ten years from now, in 2017, the Fordham Conference will take place on April 20 and 21. I have checked this, and this will be definitely so, because these dates will be the Thursday and Friday after Easter in that year. As far as WIPO and WTO are concerned, my answer to the question whether these multilateral organizations will survive is definitely “yes.” They will, they should, they must. In the globalizing world this is indispensable. For the time being, the atmosphere is not very good for new treaty-making activities. I wish all the best to Michael Keplinger, who in a way is also my successor. I think the chances for the Broadcasting Treaty are quite good; certainly much better than, let us say, the chance for Arnold Schwarzenegger being elected Miss France next year. But then, even if we succeed with the Broadcasting Treaty, I think WIPO should start a new “guided development” period, which was the case during the 1970s and the 1980s, and with a certain success. This meant the working out of guiding principles, recommendations, and model laws, instead of new binding norms. For example, there was a breakthrough for the copyright protection of computer programs, on the basis of Michael Keplinger’s excellent study, at a WIPO meeting in Geneva in 1985. It was confirmed later by the TRIPs Agreement and the WCT. As regards WTO, I wish — of course, not only I, but everybody wishes — that the Doha Round ends somehow with a reasonable compromise. But, then again, I think there will be not too many new norms, and attention should be paid rather to the appropriate interpretation of the TRIPs Agreement, including Part III on enforcement, which has been a little bit neglected until now. I hope that the dispute settlement bodies will be used more frequently, that their decisions, their findings, will be granted fuller respect, and that, through this, one of the basic principles of law that the WTO dispute settlement system is supposed to serve — pacta sunt servanda16 — will better prevail in the international IP relations. We badly need this. Thank you. PROF. HANSEN: Jamie, do you have any thoughts? MR. LOVE: I am not sure if I share the optimism about our prospects for the Broadcasting Treaty. But I think the general point that WIPO has to rethink its mission is an important one, because the international multilateral system has come through a period where the idea of raising norms for intellectual property seemed like the most urgent and important thing — the TRIPs initiative and all the efforts on patent harmonization and things like that. I think that today we are in the middle of a debate — not the first time, but it is really happening now — about the relationship between strong exclusive rights regimes and 16

Pacta sunt servanda is a basic principle of international law and civil law (“pacts must be respected”).

10 S E S S I O N I : P L E N A R Y SE S S I O N innovation. We are having that debate in the United States in the patent area, with the eBay decision17 and discussions about patents and standards. We are having a serious discussion about access and the relationship between prices of products and access, and prices and enforcement as a practical matter too. People want to have all this enforcement. There are huge differences in incomes. They are not very realistic about the prices that actually get buy-in on the enforcement front. There is also, I think, a lot of new thinking about the idea of trade-related aspects of public goods. WIPO itself has got this proposal for a treaty on access to knowledge that they will be debating at the June meeting at the Development Agenda18 discussions. There are quite a few countries that have supported the idea of something like this and, to my knowledge, none that have actually opposed it. There is a discussion in the World Health Organization (WHO) about the Medical Research and Development Treaty.19 Some of the ideas of this are that not all the ideas about innovation are about strengthening a monopoly. Sometimes it is about sharing the cost of providing public goods or providing the infrastructure and environment for that. So where does WIPO fit into this? Where does WTO fit into this? I think there has been a lot of movement at WIPO in the delegates. I think the decision in the WIPO Development Agenda in February surprised everybody — it surprised me and I think it surprised all the participants — because it was a stronger agreement than anybody anticipated and it had more universal support. It was not just wrung out of the North from the South, but it was a genuine meeting of minds between the North and South on issues about norm setting for WIPO, about the role of the public domain, the control of anticompetitive practices, and things like that. So I think that actually there are more possibilities that it becomes less and less of a North/ South fight and more of a mature, and I think intellectually interesting, discussion about how to manage IP. I think that the new phase should be, not just bringing IP to the ignorant savages of the world, but it should be more how do you do something really difficult, which is manage an IP system. I think that is the challenge for WIPO. I think there has been progress. PROF. HANSEN: There seem to be some forum shopping among competing multinational organizations. You mentioned WHO as one. Do you think that the debate will be diffused among a number of organizations, other independent organizations in the United Nations, as well as the WIPO, or do you think that effectively it is going to be in WIPO where things are going to happen? MR. LOVE: I think the most interesting debates are at WIPO today. I think part of the reason for that is that the U.S. government has more or less dismantled the capacity of the WHO to deal with intellectual property organizations. There has been a reduction in the number of people in the agency that know anything about the topic, and there has been an intimidation of the people who work for the agency to deal with these kinds of issues. I think that the same is true with United Nations on Trade and Development (UNCTAD) and the United Nations Development Program (UNDP). I think, particularly led by the American government, there has been an effort to reduce the role of those agencies in intellectual property disputes. PROF. HANSEN: Has the United States ever done anything right in your view? 17

eBay Inc v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006). See http://www.cptech.org/ip/wipo/da.html. 19 World Health Organization, Medical Research and Development Treaty (MRDT) (currently under discussion at the WHO Intergovernmental Working Group (IGWG) on Public Health, Innovation and Intellectual Property); see http://www.cptech.org/workingdrafts/rndtreaty.html. 18

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MR. LOVE: I think the United States did a very good job in the Broadcasting Treaty discussions in the last twelve months, and I think they did a really good job on the Development Agenda. They really exceeded everybody’s expectations. They have also done, I think, a very good job in the WHO discussions about new business models for financing R&D. So I think that the second Bush Administration has surprised everybody in the WHO discussions. They changed their position from being opposed to things, like discussions of R&D treaties or price systems or different ways of stimulating R&D in medicine, to the point where now they are supporting these conversations going forward. I think it is complicated. It is a big federal government, and there are different parts of the bureaucracy, but there have been some pretty positive things that have come out of this Administration. I think the Office of the U.S. Trade Representative so far has not gone too far in the Thailand case,20 which I think is good. PROF. HANSEN: Which we will be discussing later. Anyone else have a thought on WIPO now? We’ll go to WTO later. Bruce? MR. LEHMAN: I’m glad you clarified that. My view is that the future of WIPO in the next ten years is very cloudy. I certainly do not think WIPO will go out of existence; the treaties will not be dismantled. But certainly, unless there is very substantial change in the nature of U.S. leadership in diplomacy in general, not just simply with regard to intellectual property, I think that you are going to see in any significant norm-making activity at WIPO the kind of gridlock that we have seen on the Broadcasting Treaty, which is a very minor treaty.21 I cannot imagine that we will have any significant new international norm-making unless there is a very radical and substantial change in Washington. If we do have a change in Washington — and you are already seeing that on Capitol Hill, where we have had a change, and where we are seeing a distinct tilt against intellectual property rights I would say — I think you are going to see a big emphasis on environmental concerns and labor concerns, which are also going to be felt in the WTO. That is important, because I think intellectual property rights are less likely to be a high priority of future U.S. administrations, and that has big implications for WIPO, frankly. I would have to say, as a person who was a leading intellectual property diplomat in the 1990s, that the results of our efforts — and I have not changed my views one bit on the justice and importance of the things we did — but the results have been, frankly, quite disappointing. We are now bringing the case against China,22 but we are twelve years or so into the new TRIPs regime, and I do not think we have much to show for it when you look at the piracy rates around the world and so on and so forth. PROF. HANSEN: Fred? MR. VON LOHMANN: I agree with a lot of things that have been said. Looking ten years ahead to 2017, I think one interesting development that will be felt at WIPO is the growth of new constituencies that feel that they have an interest there. Obviously, the Development Agenda has played an important role, but I think increasingly you will find that innovation industries are interested as well. The innovation industries have shared interests both in the developed and developing world. I think that to the extent new innovators feel that the existing IP system is a hindrance or something that slows their ability to 20

See infra Session XII, Part A, Thailand and Compulsory Licenses. See infra Session VIII, Part C, WIPO Broadcasting Treaty and the Politics of Intellectual Property. 22 See supra note 13; see also infra Session XII, Part D, TRIPs and China: Should a Case Be Brought? Will It Be Brought? 21

12 S E S S I O N I : P L E N A R Y SE S S I O N bring new products to market, to grow new digital business, to grow new digital technologies, you may see those industries going to the U.S. Congress, for example, to say that the norms that are being pressed at WIPO need to be informed by issues of innovation and competition. So I think you may see some connection between the agendas of the developing world and the innovation industries. The controversies surrounding the WIPO Broadcasting Treaty have been a good example of that, where innovators in Europe and in the United States realized that they had a certain common bond with countries in the developing world. PROF. HANSEN: I think we saw what effect industries that transmitted or used copyright works can have when they, AT&T for instance, descended upon Geneva at the last minute at the WIPO diplomatic conference in 1996 on what some now call the Internet treaties. They had a dramatic effect on the level of copyright protection in the final treaties. . As Bruce and everyone has acknowledged, those treaties even as limited as they were, could not be adopted today. Now even more industries are mobilized against strong protection. So will the future hold any hope for new treaties? Or will there be a continuing stalemate leaving any new developments to “soft law” and judicial case law? Fred? MR. VON LOHMANN: That is the big question. I think it is too soon to make that prediction. It will depend on what happens in the domestic context in individual countries, which will have an echo at WIPO. PROF. HANSEN: Eric, you had your hand up. MR. SMITH: Yes. I want to echo what was said about WIPO. I do not think there are going to be any significant new norms in the next ten years. If I could limit my remarks to the copyright side, the norms are already there. Among the Berne Convention,23 TRIPs Agreement, and the Internet Treaties, the basic structure is there. I do not see in the next ten years any significant diminution in the levels of protection. If anything, I think you will see some small shifts at the margin of protection in many countries around the world, in part as a result of WIPO’s ongoing hoped-for guided development, plus all of these studies that Mike mentioned about the importance of copyright protection to domestic economies. But remember that things that are very controversial today, like technological protection measures, have already been implemented in 100 countries around the world. Terms of protection, very controversial; you already have ninety countries with terms of protection greater than fifty years, which is the international standard in TRIPs. I do not see any significant diminution there. PROF. HANSEN: That all came from free trade agreements (FTAs), right, bilateral agreements? MR. SMITH: No. I think the FTAs are part of the implementation process of the existing norms around the world. I think, even in the WTO context, where you have two cases24 that have looked at the three-step test,25 which is a key to the exceptions to protec23 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, as last revised, Paris, July 24, 1971, 828 U.N.T.S. 221. 24 The “three-step test” applied to patents: Case No. WT/DS114. Decided Aug. 18, 2000. A Dispute Settlement Body (DSB) interpreted the “three-step test” under TRIPs Art. 30. The case was brought before a WTO Panel by a complaint by the European Commission against Canada. The EC argued that there was lack of protection of patents in Canada in the area of pharmaceuticals, and that the Canadian legislation was not compatible with the obligations under TRIPs in that it did not provide for the full protection of patented pharmaceutical inventions for the entire duration of the term of protection as provided by TRIPs. See http://www.murdoch.edu.au/elaw/ issues/v10n4/meyer104_text.html. 25 See infra Session X, Part B, The Three-Step Test: Is It Out of Step? — Overcoming the Achilles’ Heel of Copyright Law: The Case for the Creative Destruction of the Three-Step Test.

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tion, you have some pretty sophisticated reasoning. I think any attempt to significantly undermine that could very well be brought up again in the WTO. I see more dispute settlement in the WTO, more emphasis on the enforcement side. That may be a little bit optimistic, but I just want to throw that out, because I think, in contrast to what has been said here — PROF. HANSEN: You said “what has been said here.” Are you ever going to mention anyone’s name? MR. SMITH: I think Jamie and Fred have taken the view — and maybe they are talking on the patent side — but certainly on the copyright side, a lot of the sturm und drang around all of these issues is just that, it’s sturm und drang. Country policymakers are seeing that they need to protect these important economic assets, and they will continue to do so. If there is any change, it is going to be at the margins. PROF. HANSEN: It’s interesting, because really when this all started out after TRIPs, it was the people in favor of IP who were more on the offensive and wanted to use the WTO to amend TRIPs and the WIPO to amend Berne to require higher protection. Now those in favor of strong IP protection seem to be more on the defensive. Are we going to see things happening around world that limit IP? Perhaps WTO most important role will to provide panels will be used defensively to stop retrenchment of IP in countries, such as by applying the three-step test.. MR. SMITH: I don’t feel on the defensive at all. I think globally we are moving forward, implementing the treaties, all the issues. China just joined the WIPO Treaties; they have access controls, they protect against trafficking in devices. There are always little areas of debate in my area, but I think ultimately, if you look at the FTAs, you look at the thrust of everything that is going on, there is progress. Enforcement is a different matter. I think, there are some real problems there. But even there, I think — and I totally disagree with Bruce on this — I don’t see any diminution in the U.S. government’s efforts, certainly in the copyright area. I think they are going to move hard and fast to keep and protect and nurture copyright industries in the United States and work with other countries to protect their own industries. PROF. HANSEN: Let me get Hannu in this now. Do you basically see WTO as sitting on the sidelines? Letting others fight it out either in the WIPO, bilaterally or individual countries’ legislatures? Will the WTO just be the referee who steps in at the end when there a dispute settlement procedure is instituted? That would still be an important role. MR. WAGER: It is a bit speculative to think about what is going to happen in the next ten

The so-called “three-step test,” a general exception concerning reproduction rights of authors, was introduced in the Berne Convention during revision at the Stockholm Conference in 1967. Revised Art. 9.2 requires that three distinct and cumulative conditions must be complied with before an exception relating to author’s reproduction rights can be justified: (1) the reproduction must be for a specific purpose: it is only allowed “in certain special cases”; (2) the reproduction must “not conflict with a normal exploitation of the work”; (3) the reproduction should “not unreasonably prejudice the legitimate interests of the author.” This “three-step test” is also contained in TRIPs Art. 30. Comparing the “three-step test” as provided in TRIPs Art. 30 to the same test under Berne Art. 9.2 and TRIPs Art. 13, the first condition of TRIPs Art. 30 is that exceptions provided under national law must be “limited exceptions,” which differs from Berne Art. 9.2 and TRIPs Art. 13, which cover only “special cases.” The second step, exceptions may “not unreasonably conflict with a normal exploitation of the patent,” does not differ in substance from Berne Art. 9.2 in TRIPs Art. 30. The third step under TRIPs Art. 30 is similar to the third condition in Berne Art. 9.2 and TRIPs Art. 13. The WCT extends the application of the “three-step test” to all economic rights provided in the Berne Convention. Art. 16(1) of the WPPT provides that Contracting States may introduce “the same kinds of limitations and exceptions with regard to the protection of performers and producers of phonograms as they provide for, in their national legislation, in connection with the protection of copyright in literary and artistic works.”

14 S E S S I O N I : P L E N A R Y SE S S I O N years. As I said at the outset, it very much depends on what governments themselves decide to bring to the WTO. There is plenty of potential work in the interpretation and implementation of the current rules. If countries wish to bring issues to the dispute settlement process, then they will be dealt with. What I said about the policy work was that we have certain issues on the Doha agenda, and what happens with them depends to a very large extent on what happens with the Doha Round as a whole. But I do not really see any new negotiating round being started and completed within the next ten years, so I would not expect major changes in the rules. On the other hand, we have the example of TRIPs and health, where a specific problem was identified and then there was a consensus to address it. So it remains to be seen if any issues of this type will be brought to the WTO. PROF. HANSEN: Okay. Assuming, we get no new treaties or amendments of TRIPs. And people realize that WTO panels and courts will have more influence and look to the policies embedded in those decisions. Do you see the WTO panels being influenced by approaches advocated by Jamie or Fred portrayed as promoting innovation? Do you see these views seeping into panel decisions, or are they immune from pretty much what is going on around them? Since you are writing them, we might as well ask you. MR. WAGER: It is not exactly like that. I often hear from scholars that the role of the WTO dispute settlement system is either to maximize the “wiggle room” or to fill in the gaps in the TRIPs Agreement. But, in fact, the Appellate Body applies the Vienna Convention on the Law of Treaties26 in interpreting the TRIPs Agreement. That is, you take the terms of a treaty and interpret them in accordance with their ordinary meaning in their context and in the light of the object and purpose of the treaty. So I would say that the current debate does not influence the way panels and the Appellate Body interpret the TRIPs Agreement. PROF. HANSEN: That’s your story and you’re sticking to it. Good. I think Jamie wants to say something. MR. LOVE: Yes. In terms of the WTO, I think the interpretation of Article 27 of TRIPs, the provision that has to do with patents, and whether you can discriminate by field of technology, is going to be an area where there is going to be a lot of discussion, because officially there is not supposed to be discrimination. There are a lot of differences in the way national patent laws treat patents in different fields of technology, and I think there is going to be more and more of that. So I think a potential issue is, to what extent do people try to resolve those issues through TRIPs disputes about what Article 27 means as it relates to software, as it relates to different treatment of compulsory licensing in different fields and things like that, and exceptions. And then, in the area of copyright, I think digital rights management (DRM) is really in play right now in terms of what the long-run outcome of DRM will be. I don’t think it is as well received as Eric would suggest. It is true that it is on the books everywhere, but if you go on the Internet and you go to YouTube and different things, you certainly see a lot of unauthorized sharing of information. Empirically, there seem to be a lot more people doing that now than ever before. I think the fact that France now has someone who is going to be deliberately regulating very deep aspects of DRM in the music field is just the first of the measures you are going to see of governments trying to regulate. PROF. HANSEN: Mike wanted to say something. 26 Vienna Convention on the Law of Treaties 1969, Vienna, May 23, 1969, effective Jan. 27, 1980. 1155 U.N.T.S. 331, available at http://untreaty.un.org/ ilc/texts/instruments/ english/conventions/1_1_1969.pdf.

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MR. KEPLINGER: Thanks. I’ll be brief, Hugh. Since WIPO has been spoken of a great deal, I think I need to say a few words. As Hannu said, WIPO is guided by the will of its Member States and we will do what our Member States direct. In that regard, I would like to mention one further thing concerning enforcement. In January 2007, WIPO hosted a Global Congress on IP Enforcement.27 We expected to receive some 600 participants. We had 1,200. Not one negative voice was raised in the Congress questioning the importance of enforcing intellectual property rights. And this was true across the spectrum of developed and developing countries. I think that is an area where we are seeing a greater consensus and recognition that enforcement is a problem and that IP infringement is something that hurts national economies. It also is becoming of increasing concern that fakes are finding their way into the stream of legitimate commerce. Fake drugs have been found in the distribution system here in the United States, let alone in countries that do not regulate their drug distribution system as well as the United States does. So it poses a real problem, and is attracting more attention. It is an area that I believe will be of great importance in the next ten years. Contrary to Bruce’s view, I think that — and here I’m not now speaking as a WIPO official, but as a senior U.S. official at WIPO — the diplomatic leadership of the United States has been absolutely crucial in reaching some of the goals we have achieved, and I think it will continue to be. This Administration has been a real force for the good in the development of intellectual property policy. PROF. HANSEN: Thank you. Thank you very much to the panel.

27 WIPO Third Global Congress on Combating Counterfeiting and Piracy, Geneva, Jan. 30–31, 2007. Post-Congress Press Release available at http://www.ccapcongress.net/archives/Geneva/Files/Keplinger_wipo.pdf. Suggestions extending from the Congress are available at http://www.wipo.int/enforcement/en/global_congress/ suggestions.html.

SESSION PLENARY PART B: THE NEXTI:TEN YEARSSESSION IN TRADEMARKS

SESSION I: PLENARY SESSION

The Next Ten Years in Intellectual Property Law: What Should Happen? What Will Happen?

Part B: The Next Ten Years in Trademarks

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law

Panelists PROF. GRAEME DINWOODIE

PROF. MARSHALL LEAFFER

Chicago-Kent College of Law

University of Indiana School of Law (Bloomington, IN)

PROF. JANE GINSBURG

DAVID LLEWELYN

Columbia Law School (New York)

IP Academy, Singapore; White & Case LLP (London)

PROF. SIR HUGH LADDIE

PAUL MAIER

Rouse & Co. International; University College London

President, Boards of Appeal, Office of Harmonization for the Internal Market (Alicante)

ERIK NOOTEBOOM

Head of Unit, Industrial Property Unit, DG Internal Market, European Commission (Brussels) PROF. HANSEN: Now we will focus on “The Next Ten Years in Trademarks,” looking at it from the U.S./European/Asian level. Let me introduce this panel. They are all very well known in the IP world. Graeme Dinwoodie from at Chicago-Kent College of Law and Queen Mary, London University; Jane Ginsburg from Columbia Law School; Sir Hugh Laddie, now at Rouse & Co. International and University College of London; Marshall Leaffer from the University of Indiana School of Law; David Llewelyn from White & Case, IP Academy, Kings College London; Paul Maier, President, Boards of Appeal, Office of Harmonization for the

18 S E S S I O N I : P L E N A R Y SE S S I O N Internal Market (OHIM); and Erik Nooteboom, Head of the Industrial Property Unit at DG Internal Market of the European Commission, who has been there for many years and is doing a great job, who has been actually been involved on the Trade Mark Directive1 and Regulation2 from an early stage. Graeme Dinwoodie will give us some talking points for the panel to address, and then we will move into the panel discussion. PROF. DINWOODIE: Thanks, Hugh. The narrative for the morning session has asked us to look forward, and Hugh has asked me to briefly frame the questions for the panel and identify challenges that might arise in the next ten years of trademark law. If you look at the different studies that are referenced in the program narrative, you may find there is actually very little reference in any of those studies to trademark law, which may make you think that all is quiet and stable on the trademark front. But trademark law has always got to adapt and deal with changes in commerce, and that is going to inevitably raise new questions over the next ten years. I want to start by putting on the table two sets of questions that reflect two changes in commerce, one of which is perhaps very obvious and the other a little more speculative. The obvious one first. Producers are increasingly looking to sell goods internationally, and thus to extend their brands and their trademark protection internationally. So the general question is: Is there room for further modification of the territorial nature of trademark law to reflect less nationally defined markets; or will trademark law resist the global nature of commerce? To make that question a bit more concrete, by what legal or policy devices will any such modification occur? Let me raise at least three possibilities. First, the adoption of substantive international norms. The adoption of the Uniform Domain-Name Dispute Resolution Policy (UDRP)3 effectively pursued this approach, developing an international cybersquatting norm without regard to territorial limits. But U.S. courts have in the recent past not been consistently hospitable even to existing international exceptions to territoriality. For example, the Federal Circuit in In re Rath4 says that it wasn’t all that concerned with whether U.S. law complied with Article 6 of the Paris Convention;5 and ten days ago the Second Circuit held that there was not a well-known marks rule in U.S. federal law, despite international provision on the subject.6 So, is there work to be done with international substantive norms that create exceptions to territoriality? A second way to modify the territorial model is in the acquisition of registered rights. We have the Community Trade Mark (CTM) and we have the Madrid Protocol.7 Are there improvements that can be made to make those systems more attractive to producers 1 First Council Directive 89/104 (EC), Dec. 21, 1988, 1989 O.J. (L 40) 1 (to approximate the laws of the Member States in relation to trademarks), available at http://eur-lex.europa.eu/LexUriServ/site/en/consleg/ 1989/L/01989L010419911223en.pdf. 2 Council Regulation (EC) 40/94, Dec. 20, 1993, 1994 O.J. (L 11) 1 (on Community Trademark), amended by Council Regulation (EC) 422/2004, Feb. 19, 2004, 2004 O.J. (L 070) 1, available at http://oami.europa.eu/ en/mark/aspects/reg.htm. 3 ICANN Uniform DomainName Dispute Resolution Policy, available at http://www. icann.org/udrp. 4 In re Rath, 402 F.3d 1207 (Fed. Cir. 2005). 5 Paris Convention for the Protection of Industrial Property, July 14, 1967, 21 U.S.T. 1583, 828 U.N.T.S. 305, available at http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo 020.html. 6 ITC, Ltd. & ITC Hotels, Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007), available at http://www.kenyon. com/files/tbl_s10News/FileUpload44/10074/Opinion%20(US%20Court%20of%20Appeals%20for%20The% 20Second%20Circuit).pdf. 7 Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, June 27, 1989, WIPO Doc. MM/DC/27 Rev. (1989), available at http://www. wipo.int/madrid/en.

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selling internationally? My sense is the large U.S. mark owners are not presently making as much use of Madrid as we might have expected. A third way of ameliorating the costs and challenges of territoriality would be to make enforcement less burdensome. This was, of course, one of the other achievements of the UDRP. We technically already have CTM courts, but will the proposed change in cross-border patent litigation offer any models for similar developments in trademark law, or are such innovations simply not needed for trademark law? A second change in commerce — and this time I’m being much more speculative — is that many innovators are seeking to generate profits not by asserting rights in the primary content that they generate and distribute, but by offering content free and instead building business models around the provision of complementary or affiliated goods and services. In this climate, the ability of competitors to reference the mark affixed to primary products, and thus compete in the complementary and service markets, will depend, on the one hand, upon whether the scope of trademark rights will extend to preclude even very loose senses of affiliation that consumers might develop between the different goods; and, on the other hand, whether trademark law will directly and expressly privilege certain referential uses that enable competition in the complementary markets. Question: Does current trademark law adequately preserve the ability for competitors to make such referential uses, whether through Article 6 in the EU Trademark Directive or through fair use in the United States? If not, should it in order to keep those kind of markets competitive? Trademark law has not seen much clamor for the mandatory limits on rights that is now the rage in copyright law. Maybe this is the place where we might see some of that in trademark law. Hugh also asked us to address the political climate. On this point, I want to suggest that representatives of user groups are becoming much more visible in commenting on the development of trademark law. Will the political battles that we have seen in copyright over the last decade, and to some extent in patents, define the next decade of trademark lawmaking? If that is the case, what exactly is the political economy of trademark law? Just as some large technology companies have fought against content providers in copyright battles over the last few years, so too there are big players on both sides of trademark issues. Google may like to protect its own trademark, but its advertising business model may depend to some extent upon the capacity to make certain unauthorized uses of the marks of others. The recent Dilution Act,8 just passed in October in the United States, contains a somewhat odd provision — that I think is actually completely unnecessary, which is why I think it is odd — that is inserted to expressly limit the liability of intermediaries, which I think reflects some of the complex interests that are now at play in trademark law. And then, how does that political economy then transfer to the international level? Since TRIPs,9 we in the trademark side have had the Trademark Law Treaty10 and the 8 Trademark Dilution Revision Act of 2006 (TDRA), Pub. L. 109-312, 120 Stat. 1730, 15 U.S.C. § 1051 (Oct. 6, 2006), available at www.informationtechnologylaw.com/mate rials/tmda.pdf. 9 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_e.htm. 10 World Intellectual Property Organization Trademark Law Treaty, adopted at Geneva Oct. 27, 1994, available at http://www.wipo.int/treaties/en/ip/tlt/trtdocs_wo027.html.

20 S E S S I O N I : P L E N A R Y SE S S I O N Singapore Revised Trademark Law Treaty.11 But both of these were procedural treaties about formalities. Is there any prospect for substantive trademark treaties, and is there any need for substantive trademark treaties; or is trademark law sufficiently harmonized already? To the extent that harmonization of substantive norms is desirable but hard to achieve because of a harder political climate, might “soft law” be an option? The UDRP and the non-binding recommendations that came out of the Standing Committee on Trademarks in the late 1990s12 may turn out to have been the greatest, if a little quieter, achievement of substantive harmonization during the last decade. Indeed, it is kind of ironic when you read the Second Circuit decision from ten days ago,13 saying that it is not really relevant what the Paris Convention or the TRIPs Agreement say on the subject of well-known marks, that they then reference and send a reference to the New York State Court of Appeals to define the meaning of “fame” under New York state law, saying, “Why don’t you take a look at the Joint Recommendation on Well-known Marks?”14 So is soft law the way to go actually to achieve harmonization? On the subject of devices that seem to fly under the radar, is there a trademark bilateral agenda? Do we need really to be ensuring that Korea protects scent marks, as we do in the recent bilateral agreement?15 Finally, can trademark harmonization be achieved through the courts? I have already mentioned the strange inconsistency in the U.S. courts’ attitude to treaties. Of course, the greater role for ensuring harmonization really is the European Union, where the European Court of Justice (ECJ) has that as one of its explicit duties. But is the ECJ getting so involved in the details of trademark law under the rubric of harmonization that we are simply getting a mass of very unhelpful doctrinal detail? Is there not an argument that the core trademark norms need to play out in national courts for a while before we get intervention from a supervisory court trying to harmonize? PROF. HANSEN: That was an excellent introduction. One issue Graeme raised concerned harmonization and some of the problems in achieving it. What is the need for harmonization? Of course, in Europe that is a form of harmonization in the Directive and the Regulation. As Graeme mentioned one of the roles of the European Court of Justice is to achieve harmonization in construction of directives and regulations. He indicated he thought the ECJ might be falling short on this. But even if they were doing a perfect job, would the Member State courts follow it or interpret the ECJ decisions through the prism of their own trademark culture? Would there remain disparity between the ECJ and the EU Court of First Instance, and the Community trademark office–OHIM’s Boards of Appeal, and OHIM’s examinging division? To what degree is harmonization working now in the EU? Anyone from Europe want to address that? Sir Hugh? 11 World Intellectual Property Organization Singapore Treaty on the Law of Trademarks, adopted at Geneva Mar. 27, 2007, available at http://www.wipo.int/treaties/en/ ip/singapore/singapore_treaty.html. 12 World Intellectual Property Organization Standing Committee on the Law of Trade-marks, Joint Recommendations, available at http://www.wipo.int/trademarks/en/sct.html. 13 ITC, Ltd. & ITC Hotels, Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007), available at http://www. kenyon.com/files/tbl_s10News/FileUpload44/10074/Opinion%20(US%20Court%20of%20Appeals%20for%20 The%20Second%20Circuit).pdf. 14 World Intellectual Property Organization Joint Recommendation Concerning Provisions on the Protection of Well-Known Marks, adopted September 1999, available at http:// www.wipo.int/about-ip/en/development_ iplaw/pub833.htm. 15 U.S.-Korea Free Trade Agreement, Apr. 1, 2007, available at http://www.bilaterals. org/article.php3?id_ article=7757.

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PROF. LADDIE: Well, after a fashion, yes, there is harmonization. My view is, of course, that harmonization makes sense, because if you have a uniform system of IP law, whether it is trademark, copyright, or anything else, amongst different states, you don’t have artificial barriers to the flow of goods and services between countries, and so obviously having the same system in different countries makes sense. That is what we have aimed for in Europe. After a fashion we have achieved harmonization through the ECJ, in particular on very contentious areas, like how similar marks have to be before one could be said to infringe another. There have been really profound differences, for example, between the common law approach and the civil law approach, particularly reflected in differences expressed by the judges in The Netherlands and the United Kingdom. That has been harmonized by court decision, or at least that is what we are told. The trouble with harmonization through the courts is the courts have to be competent. There are differing views as to whether or not the ECJ is competent to do the job that it has been given under our Trademark Directive and Regulation. Personally, I think it is incompetent. I feel sorry for it, insofar as one can feel sorry for a court. I feel sorry for it because most national trademark systems have grown up over a long period, and so there is an accumulated body of understanding. PROF. HANSEN: Hugh, let me just say we do have a session on the Court of Justice at which you can address your ECJ concerns.16 PROF. LADDIE: Fine. It’s a good idea, but I’m not sure it is being done. PROF. HANSEN: Okay. Let me ask this question. You are a trademark owner. Your trademark is being infringed in the United States as well as all over Europe. Just as a practical matter, which forum would you choose that would be most hospitable to you winning the case? MR. LLEWELYN: How much money do you have? PROF. HANSEN: All right. Do it first as if money doesn’t count. PROF. LADDIE: Well, if you want to get the correct decision, you of course go to the High Court in London. If you want it this decade, then you go to certain courts. If you don’t, you go to Greece. If you want a quick decision, which may be right, may be wrong, you go to Holland. I mean it depends. It is a very, very complicated question. PROF. HANSEN: No, it is not complicated. PROF. LADDIE: It is. PROF. HANSEN: If you are a trademark owner, you don’t go to the United Kingdom; you have a relatively low-protection view of trademarks. You go to The Netherlands; it has an expansive view. That’s the short answer. PROF. LADDIE: You are quite wrong, Hugh. Let me give you an example of the great thing about going to the United Kingdom. If you get an injunction in the United Kingdom and then somebody breaches it, you can cart them off to jail. That’s pretty good. PROF. HANSEN: You have to win to get the injunction. PROF. LADDIE: I know, Hugh, you have a rather off view of what happens in the U.K. courts. If you’ve got a good enough case, it is a very good court to be in. But David is right. I know you’re a purist, Hugh, and that you think that all rights owners are good and all alleged infringers are really pirates and bad. But there are occasionally people who have rights that are not very strong. If you have rights that are not 16

See infra Session I, Part F, Next Ten Years in IP Law at the European Court of Justice.

22 S E S S I O N I : P L E N A R Y SE S S I O N very strong, the last place you want to go to litigate is where they will look at your rights carefully. So you choose a country where either you will not get to a trial for ten years, or where you will get to a trial but it is like Russian roulette as to whether or not you win. So you choose: If you have lousy rights, go to a slow, unpredictable court; if you have good rights, go to a fast, predictable court. It is quite simple. It’s pure economics. What outcome do you want, and you choose your court accordingly. The fact that Europe allows this is a disgrace, but there we are. We live in a disgraceful environment. PROF. HANSEN: Anyone else want to comment? Erik? MR. NOOTEBOOM: Well, I do agree with some of the things Hugh [Laddie] said. I also think that everybody is happy about the situation in Europe, except Hugh [Laddie] maybe. We have not received any complaints, as far as I’m aware of, about the functioning of the litigation process in Europe with regard to trademarks. That was basically what I intended to say at the very start of my intervention. I do not see any major new developments coming up to deal with trademarks in Europe because everything seems to be pretty well under control. Moreover, as you know, Hugh [Hansen], with regard to new legislation in Europe, the tendency nowadays in Europe is not to legislate, rather to withdraw legislation that appears to be unhelpful. So also in that respect it is a better regulation program in Europe. There is very little to be expected, I think, from the legislature, unless there are really burning problems popping up in the internal market that need to be urgently tackled. But in the field of trademarks, contrary to patents, I don’t think there is any major political issue coming up in the next ten years. So we will rather focus, I think, on three issues in the field of trademarks: The costs of acquiring trademarks and enforcing trademarks; the efficiency of the trademark system; and the quality of the trademarks granted. I have some comments on each of these three issues. On costs, as many of you know, in Europe we have considerably reduced costs for applicants recently by a very significant fee reduction, in the order of 30 percent. And we haven’t yet reached the bottom. It has appeared that the management by OHIM of the European Trademark system has been very efficient and highly appreciated by business. That will allow us probably to deliver Community Trademarks at a much lower price in the future than we are doing already today. We are about to launch yet another exercise in Europe to further lower prices. Now, this may sound good for businesses and for IP departments around the globe if they seek protection in Europe, but it also raises, of course, an issue about how cheap can we offer trademarks to business and is there not a bottom line which we should not cross in order to make acquisition of trademarks too cheap for just anybody. On efficiency, we witness ever more use of software, of computers, to examine trademarks. They assist examiners to a large extent. It has been suggested to me recently that maybe in the next ten years, let’s say in 2015, the whole trademark process might be automated, not only examination, but even also maybe opposition. For sure, these computers and software tools may to a large extent come into the trademark examination process and litigation. The last point is very important, about quality. Some concerns have been expressed recently about the quality of the trademark system. Because the process is so simple to handle, because in many EU Member States there is no opposition procedure available under the national trademark system (contrary to the Community Trademark system in Alicante), the question has been raised whether we should not have a closer look at

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quality, for example by allowing competitors to come in at an early stage to prevent the Registration of frivolously applied trademarks. On the litigation, as I said, I think everybody is happy for the time being with the litigation system on trademarks, which would certainly not be the case if we were talking about patents. We have a patent session later on and I will comment on patents in that session.17 But on trademark litigation I don’t see any major changes coming either in Europe. So we will have to do it with the system as we have it. Note, however, that Paul Maier and his Boards of Appeal at Alicante will create very important jurisprudence in Europe on trademark law, I think. PROF. HANSEN: Paul Maier, you are Head of the Boards of Appeal. You are making decisions about trademark law constantly in appeals from the examining division. What do you look to? Are you looking to Member State law? Obviously, you’re looking at the ECJ and CFI. Or are you really just in charge — basically, you’re the man; they’re not the experts, you’re the experts? I know it is hard for you to say these things. But I think there is a tendency of people who do it day-in and day-out to think the rest are dilettantes. They maybe will say something about it, but we are really the core. With all that, Paul, just a “yes” or “no” answer to that question. [Laughter] MR. MAIER: Usually questions that are asked with the request to be answered by “yes” or “no” require very long replies! I will try to be short. Last year, the Boards of Appeal of OHIM made 1,657 decisions on trademark registration, opposition or cancellation cases as well as designs. These decisions have ended up in 142 appeals to the CFI. In other words, the Boards of Appeal of OHIM are a major filter for trademark and design registration in the EU system. The Boards of Appeal, even if they are a part of the OHIM (from an administrative and organizational point of view), decide independently. The President of OHIM cannot give instructions to the Boards or their individual members and the Boards are not bound by decisions of the President (e.g., the Boards are not obliged to apply the examination guidelines). What do we look at and what are the “precedents” or the “jurisprudence” that we follow? Well, we look at our own decisions or “jurisprudence.” In their ten-year history, the Boards have taken more than 8,000 decisions. We also look, of course, at the CFI and the ECJ. Their decisions are binding on us. It is true to say, however, that the CFI case law is not always easy to reconcile with earlier decisions. It is true that there is a general perception that we have a problem of coherence in trademark decisions in Europe. There is no doubt about that. This applies to all decision-making bodies, and I think even judges of the CFI recognize that and would acknowledge that if you asked them. Is this “coherence” or “perceived coherence” problem due to the fact that a number of the judges are not really trademark law specialists? Yes, there is no doubt about that. However, I think that Supreme Court judges do not have to be trademark law specialists. Their role is too broad for that. Furthermore, I think that the work is going in the right direction even if occasionally there are contradictory judgments. Remember that ten years ago we did not really have European trademark law. The progress achieved in this relatively short time is not bad. So there are some contradictory decisions, there is no doubt about that. However, if you ask the lawyers, they say, on the one hand, “You need more coherence in the system”; but on the other hand, they also say, “But you need a real second chance when you go to the CFI.” This means that they are really happy to see decisions being overturned there as well, even if this may mean less global coherence! 17

See infra Session I, Part D, The Next Ten Years in Patents.

24 S E S S I O N I : P L E N A R Y SE S S I O N The answer to this coherence question is not an easy one. However, the statistical reality is that 80 percent of the OHIM Boards of Appeal decisions are confirmed in Luxembourg. That shows that the so-called incoherence is not that blatant, frankly. I mean you know where you go when you file a Community Trademark application in terms of absolute grounds, and to a large extent this applies to opposition cases too. This can be demonstrated by the fact that the Boards of Appeal confirm more than 80 percent of First Instance decisions taken by the examiners in the office refusing a trademark on absolute grounds. And in inter partes proceedings more than 62 percent are confirmed. So the system as such works, but I am ready to admit that a lot of progress still needs to be made. What I want to say here on the Boards of Appeal is that we also need to be more efficient. I want to come back on what Erik said before, because we feel part of this as well as a part of the OHIM. We need to be faster in the decisions we make, and we have actually quite substantially reduced the time before the Boards already (less than five months to take a decision once the file is ready). We need to require less means to do the same sort of work too. In the Office actually we have multiplied by two the volume of work that we did over the years with the same number of people. I think that was not to the detriment of quality. Quite to the contrary. I think you simply cannot be good if you don’t work enough to start with. The second thing is that in the huge volume of decisions that we take and that push things forward, we still need to improve on quality. I think the level that we have reached in the Office, the level of professionalism, is good. But I am ready to listen to people who say this is not true at all. You will always find wrong decisions. In more than 1,600 decisions some have to be wrong decisions. But we hope to get it more harmonized and are actually working on it. One of the answers is in the use of the Grand Board. It is composed of nine persons (the Chairperson and five Members of the Boards). We make decisions that bind the Ordinary Boards of OHIM. We have taken three decisions until now. This may seem a small number, but not so many subjects actually qualify for this procedure. PROF. HANSEN: Let me just say one thing that ties into the United States. I think the difference between the United Kingdom and The Netherlands — and especially Hugh, and David for that matter — is the United Kingdom has a view of trademarks as just an indication of source. In the United States, in The Netherlands, and in other places, they are also very concerned about protection of goodwill, however it is used, even if there is not confusion. Depending on how you go at it, you are going to have two different results. The Arsenal case I think is a very good example: Hugh Laddie with one view,18 the ECJ with another,19 and then, actually surprisingly, the U.K. Court of Appeal,20 which seems to be moving in that direction. Bringing that to the United States, since we are also discussing the United States. Unlike copyright and patents, where it is difficult to get anything substantive, it seems 18

Arsenal Football League plc v. Matthew Reed, [2001] R.P.C. 922 (Laddie J.) (finding no infringement). Case 206/01, Arsenal Football Club plc v. Matthew Reed, 2002 O.J. (C 333) 22 (suggesting that only use that jeopardizes the essential function of a trademark is an infringing use. Reference made in a preliminary ruling by the High Court of Justice (England & Wales), Chancery Division, by order of that court, May 4, 2001). 20 Arsenal Football League plc v. Matthew Reed, [2003] EWCA (Civ) 696 (May 21, 2003); [2003] E.T.M.R. 73 (CA) (on remand from ECJ) (reversing Laddie J. and finding infringement), available at http://www.hmcourtsservice.gov.uk/judgmentsfiles/j1751/ arsenal_v_reed.htm. 19

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that trademark legislation on a substantive level, with very strong protection — although now some amelioration of that —seems to be able to move through Congress when nothing else is going through. For example, the TDRA revisions.21 Why do you think there is a difference in trademarks from copyright and patents, or do you think there is? Anyone, one of the U.S. panelists? PROF. LEAFFER: I think that there is more of a consensus on trademarks than the kinds of politically charged issues that arise in copyright. In trademark law, you have nothing analogous to the kinds of battles that have taken place in copyright, such as the Digital Millennium Copyright Act (DMCA),22 term extension, and file sharing. These copyright issues become front-page stories in newspaper because they are perceived as affecting a large number of people. I also think that also the participants in the political process, at least for trademark issues, are skewed in favor of the big trade-mark owners who have the ear of Congress. In the trademark context, you have no analogue to the vigorous activity of user groups and content owners who are locked in mortal combat in the political arena, even though in the end content owners have been effective in protecting their interests. PROF. HANSEN: Sounds right. Jane? PROF. GINSBURG: I would like to get back to some of Graeme’s points, if you will permit me to depart from your question. I identify three issues in recent U.S. developments that may continue to percolate for the next ten years: one of them is domestic and relates to your question about legislation; the second is international; the third is comparative. The first one is the TDRA, which incorporates — indeed, codifies — copyright-like fair use in trademark law. As a result, the legacy of the TDRA may not be strengthened protection against non-confusing use of trademarks, but rather protection for the persons or entities making the kinds of referential uses that Graeme is referring to. The consecration of a copyrightesque fair use doctrine in trademark law is an important development and something that is likely to grow in importance in the next ten years. The international development, which Graeme also referred to, is the incoherence in the federal courts about famous marks. Graeme referred to the Second Circuit’s unfortunate decision in the Bukhara Grill case.23 The Second Circuit is not the only court to think that the Paris Convention doesn’t actually apply in the United States. It is just a rather gross iteration of that claim. The suggestion that we can fulfill our obligation to protect famous marks by referring the matter to the state courts strikes me as highly undesirable. If the state courts all adopt World Intellectual Property Organization (WIPO) norms or other “soft law,” that’s great. But to remit the interpretation of terms used in international intellectual property treaties and trade agreements to the fifty separate states makes very little sense. Some of the famous marks problem might be overcome by reference to a different development in the federal courts, the Fourth Circuit’s decision in the Monte Carlo Casino case,24 in which the Fourth Circuit came up with a somewhat inventive and very extensive 21

See TDRA, supra note 8. Digital Millennium Copyright Act of 1998, Pub. L. No. 105-314 (codified at 17 U.S.C. § 512, Oct. 28, 1998) (DMCA), available at http://www.copyright.gov/title17. 23 ITC, Ltd. & ITC Hotels, Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007), available at http://www. kenyon. com/files/tbl_s10News/FileUpload44/10074/Opinion%20(US%20Court%20of%20Appeals%20for%20The%20 Second%20Circuit).pdf. 24 International Bancorp, LLC v. Société des Bains de Mer et du Cercle des Etrangers à Monaco, 329 F.3d 359 (4th Cir. 2003). 22

26 S E S S I O N I : P L E N A R Y SE S S I O N notion of what it means to “use” a trademark in “commerce.” The famous marks doctrine would have protected a famous foreign mark that is not used in the United States. But if we don’t have the famous foreign marks doctrine, maybe we can decide that all those well-known marks have actually been “used” in United States commerce anyway (at least if U.S. citizens purchased goods or services under those marks abroad), and protect the marks that way. Finally, on the comparative law development, the disparity between the treatment in the United States and in Europe of such entrepreneurial advances as the Google AdSense program, which in effect is not a classic trademark-infringing use but may be a kind of free riding off of trademark goodwill — I disagree with you, Hugh, about protecting against free riding. I think our courts so far have been, outside of dilution, pretty scrupulous about not protecting against free riding. PROF. HANSEN: Oh, you can’t be serious about that, Jane. PROF. GINSBURG: Yes, I am serious. Most of those ad cases have not favored the plaintiff trademark owners. Admittedly not unanimous, but I think that it is at least half, if not more.25 By contrast, if you look at what has been happening in France with the very same sorts of controversies over Google AdSense and similar sorts of referential uses of trademarks for advertising and commercial purposes, there the French courts are holding either that the uses are trademark infringement, or at least that the ad placements are unfair competition (under a notion of unfair competition far broader than anything we have in the United States).26 This divergent approach is setting up a conflict on the global commercial scale because, even if Google complies and doesn’t engage in those sorts of practices on Google.fr, it will continue to do it on Google.com, which is of course accessible in every country that might have a more restrictive notion of what is permissible competition. Then I think we are going to have an interesting clash. PROF. HANSEN: Let me respond to your saying that courts in the U.S. don’t protect goodwill as such. We obviously protect goodwill when there is no confusion. Initial interest confusion, secondary confusion, subliminal confusion — all these are doctrinal devices to protect goodwill when there is no confusion. Moreover, we have courts, especially in the promotional products or, what they call in England, badge of allegiance cases, find likelihood of confusion where there is none. They do this purely to protect goodwill in trademarks that others borrow, use or take without payment or authorization when the purpose is to benefit from the goodwill of the trademark owner. 25 Compare 1-800 Contacts, Inc. v. WhenU.com, 414 F.3d 400 (2d Cir. 2005); U-Haul Int’l, Inc. v. WhenU.com, Inc., 279 F. Supp.2d 723, 727 (E.D. Va. 2003); Wells Fargo & Co. v. WhenU.com, Inc., 293 F. Supp.2d 734, 762 (E.D. Mich. 2003) (all finding no actionable trademark use by defendant Internet service provider or its advertising customers), with 800-JR Cigar, Inc. v. GoTo.Com, Inc., 437 F. Supp. 2d 273 (D.N.J. 2006); Playboy Enters., Inc. v. Netscape Commc’ns Corp., 354 F.3d 1020, 1024 (9th Cir. 2004); GEICO v. Google, 330 F. Supp. 2d 700 (E.D. Va. 2004) (finding actionable use when Google linked trademark to advertisements for competitors); see also J.G. Wentworth, S.S.C. Ltd. P’ship v. Settlement Funding, LLC, 2007 U.S. Dist. LEXIS 288 (E.D. Pa. 2007) (finding no actionable use,and granting motion to dismiss). 26 See, e.g., Tribunal de grande instance [T.G.I.] [ordinary court of original jurisdiction] Paris, October 11, 2006, Citadines/Google, Inc & Google France, available at http://www.legalis.net/jurisprudence-decision. php3?id_article=1765 (unfair competition); Tribunal de grande instance [T.G.I.] (3e ch.) Paris, July 12, 2006, Gifam et autres/Google France, available at http://www.legalis.net/jurisprudence-decision.php3?id_article=1712 (unfair competition); Cour d’appel [CA] (4e ch.) Paris , June 28, 2006, Google France/Louis Vuitton Malletier, available at http://www.legalis.net/jurisprudence-decision.php3?id_article =1661 (trademark infringement); Cour d’appel [CA] (12e ch.) Versailles, March 23, 2006 Google/Cnrrh, available at http://www.legalis.net/jurisprudence-decision.php3?id_article =1613 (trademark infringement).

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I agree with you that there is a difference in the digital setting. As for interest–initial confusion, some courts have not found it I think because there are no transaction costs in switching to the right website after realizing the true source. As for the ad use cases, I think it is too early to make broad statements. The Second Circuit has gone one way. I am not sure how much that will be followed. But in the non-digital agenda the United States protects goodwill without confusion in many contexts. The badge of allegiance cases are a prime example of finding likelihood of confusion where there isn’t any. If someone buys a tee shirt with Yankees on it, they are doing so because they want to be associated with the goodwill of the team. If you want to see source or maker of the shirt, everyone knows that you look at the tag on the neck inside the shirt. If you want to actually see the source, you’ll look for the tag. Nine out of ten courts in the United States find likelihood of confusion when it is clear from the tag or otherwise that the shirt is not authorized by the trademark owner.27 That’s also the result in the English Arsenal case. Even the English are moving to protect goodwill when there isn’t confusion. The analysis is as simple as that in misappropriation cases. A team, for instance, has built up tremendous amount of goodwill in its product or organization. A tee shirt with the Yankees on it is sold for $20.00. The shirt would cost around $3.00. Should someone who had nothing to do with building up the goodwill be able to sell $17.00 of the Yankees’ goodwill or should it only be the Yankees? Misappropriation is not a favored doctrine, especially among academics. Courts avoid the problem by finding likelihood of confusion. In the digital arena, I think you are right, they are rethinking that, but only on the fringes. The Yankees case would go the same way analogue or digital. I am not surprised that France ruled the way it did in the Google case. They are high protection and probably technophobic and anti-Google to boot. I would like Graeme to address some of the issues on the substance, and then we will go to other panelists. PROF. DINWOODIE: First of all, Jane is right and you are wrong on that last point. I think there certainly was a period where I think your view would be correct, but I think if you look at the last couple of years, there has been a retrenchment on a bunch of issues, both in the definition of what confusion is actionable and in the trademark use cases in the Second Circuit. You even see it in traditional confusion cases. KP Permanent28 is not a digital case; it’s about quasi-permanent make-up. That is a case where the court actually goes so far as to say “we can even live with some confusion and we are not willing to protect the goodwill.” So I do think Jane is right. PROF. HANSEN: Are you talking about the Supreme Court? PROF. DINWOODIE: Yes, the Supreme Court. PROF. HANSEN: I think the Court did not make any strong statement and punted in that case. Moreover, there was no freeriding by the defendant. In any case, lower courts don’t traditionally follow the Supreme Court in trademark cases. PROF. DINWOODIE: They are. The Ninth Circuit. They largely are. The only comment I want to quickly make was actually to ask a question of Sir Hugh. When you were going through the forum-shopping options and you said it’s a disgrace, do you think it is a disgrace because there is such choice in terms of forum shopping, and therefore there are procedural reforms in terms of jurisdiction that are needed; or is it the differential treatment by national courts of common norms that actually is the problem? 27

See Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003). KP Permanent Make-Up, Inc. v. Lastingimpression I, Inc., No. 04-409, 543 U.S. 111 (2004), vacated and remanded, 328 F.3d 1061 (Slip op.), available at http://www.law.cornell.edu/supct/html/03-409.ZS.html. 28

28 S E S S I O N I : P L E N A R Y SE S S I O N PROF. LADDIE: Oh no, it’s procedural. I happen to believe that it is not flattering of the European system that you can have very, very slow and unpredictable litigation in one country over the same dispute where you get a fast and predictable outcome in another. It is more procedural. But I must tell you, listening particularly to Jane and to you, it seems to me that there is really quite an important point that comes out of the title for this session. Most of you were not here yesterday for a wonderful talk given by Eiji Katayama on patent trolls.29 There was some suggestion that patent trolls are a problem in jurisdictions where there are more and more patents over more and more areas, more pro-patent courts, greater awards of damages, and so on and so forth. You end up with vast numbers of rights that can be used to hinder competition. I have a concern about trademarks. It may be that the United States is retrenching, but still in Europe we are in a phase of widening the number of trademarks that can be obtained. I heard Erik’s talk about reducing the cost of getting trademarks in Europe. You are going to get more and more and more trademarks with wider and wider protection. What you are allowed to do in comparative advertising gets narrower and narrower. The worry is that we are going to have a proliferation of rights that will hinder business. I think that’s a bad thing. PROF. HANSEN: Marshall, are you raising your hand? PROF. LEAFFER: I would like to elaborate on a critical issue concerning the development of a more harmonized trademark system, one that has a centralized international trademark registration system by the use of international and regional agreements, such as Madrid and the Community Trademark, as well as technological developments, such as electronic filing. Certainly, legal and technological mechanisms made life render the multinational filing of trademark applications less costly. But there is a downside to these obvious efficiencies, the major one of which is the ever-increasing burden in clearing rights for new trademarks. The uncomfortable fact is that good trademarks for products are scarce resources. As anyone who has tried to find an appropriate trademark for a given product will tell you, the process gets harder all the time. One reason for this is that trademark rights have constantly expanded in recent times. With the widening of those rights, you create tension on the system that can only be alleviated by allowing a wider ambit of third-party use of trademarks. Unless you do that, the efficiencies that allow larger and faster filings will be offset by the ever-greater costs of finding good trademarks and clearing trademark rights. I am somewhat pessimistic about a solution because there seems to be no movement to curtail expansion of trademark rights by developing doctrines to allow more third-party use. In fact, the opposite has occurred. Thus, trademark practitioners must be forewarned: Those of you who wish to make an international launch will have your work cut out for them. PROF. HANSEN: I see people still raising their hands, and that shows the great interest in these issues. But unfortunately, our time is up. Thank you very much for a great panel.

29 Eiji Katayama, Partner, Abe, Ikubo & Katayama, Japan, Patent Trolls – Have Patents Will Sue: Using Patent Litigation as a Strategic Tool, Presentation Before Fourth Annual Asian IP Law and Policy Day: The Future of IP in Asia — Bridging the East-West Divide, Fordham Univ. School of Law (Apr. 11, 2007).

SESSION I: TEN PLENARY SESSION PART C: THE NEXT YEARS IN COPYRIGHT

SESSION I: PLENARY SESSION

The Next Ten Years in Intellectual Property Law: What Should Happen? What Will Happen?

Part C: The Next Ten Years in Copyright

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law

Panelists PROF. JANE GINSBURG

Columbia Law School (New York)

Prof. John G. Palfrey Jr. Executive Director The Berkman Center for Internet and Society, Harvard Law School (Cambridge, MA)

PROF. P. BERNT HUGENHOLTZ

SHIRA PERLMUTTER

Director, Institute for Information Law, University of Amsterdam

Executive Vice President, Global Legal Policy, IFPI (London)

FRED VON LOHMANN

MARYBETH PETERS

Senior Intellectual Property Counsel, Electronic Frontier Foundation (San Francisco)

Register of Copyrights, U.S. Copyright Office (Washington)

TILMAN LUEDER

THOMAS C. RUBIN

Head of Unit, Copyright and Knowledge-based Economy, DG Internal Market (Brussels)

Associate General Counsel, Copyright, Trademark and Trade Secrets, Microsoft Corp. (Redmond, WA)

30 S E S S I O N I : P L E N A R Y SE S S I O N PROF. HANSEN: We are now going to discuss the next ten years in copyright. Let me briefly introduce the panelists. We all know Jane Ginsburg from Columbia. Bernt Hugenholtz is a tremendous leader in the European Union in intellectual property, especially copyright. Fred von Lohmann you saw in the first panel. Tilman Lueder is the head of copyright for the European Commission. John Palfrey is a Professor at Harvard and the Executive Director of The Berkman Center for Internet and Society. Shira Perlmutter, who previously was at the Copyright Office and Time Warner, is now Executive Vice President of Global Legal Policy at IFPI in London. Marybeth Peters, as we all know, is the Register of Copyrights. Tom Rubin is Associate General Counsel for Copyright, Trademark, and Trade Secrets at Microsoft. In terms of giving us some talking points for discussion, we are going to start with Jane Ginsburg. PROF. GINSBURG: Good morning. My assignment is to produce talking points for the next ten years of copyright — what should it be, what will it be? I am going to invert those, what will it be, what should it be? I brought my crystal ball here (formerly a vase) so we can look into its empty future and figure out where we are going to go from here. I have identified three possible futures. I am sure there are many more, but it will give me an opportunity to group things into gross overstatements. The first two address what will the future be, and the third addresses what should the future be. One possible view of the future is that copyright in the next ten years will be increasingly consumer-oriented, so that we will see the maximization of consumer interests, both politically and translated into either legislation or court decisions, or simply just de facto pressures by virtue of consumers availing themselves of technologies which may resist effective policing. As a result of that, we may be drifting towards a future in which compulsory licenses or, since compulsory licenses are limited by international treaties, “voluntary” global licenses will predominate. Since I believe in moral rights, I have to credit Tilman Lueder with that particular vision, and I think he may say a little more about that. So that is one view of the future. Another view of the future is its equally extreme opposite, which is that in fact we will see a tremendous amount of corporate concentration and dominance, with the effective, as opposed to ineffective, wielding of technologies in a way that will give greater control, rather than lesser control, over works. Now, I just want to take a small parenthesis from the overstatement to make a, I think, slightly more reasonable statement about digital rights management (DRM) and the future. In the apocalyptic view, we will have digital lock-up. In the non-apocalyptic view, and one which may be slightly more representative, I think one can imagine that some kinds of DRM, particularly the type that everybody loves to hate, like the self-destructing DRM on Sony CDs and DRM on pre-retention downloads, may well be in the way of extinction. On the other hand, copy protection, whether you call it DRM or something else, when we are talking about digital delivery of works in various forms of streaming, I think will be very much present, and probably proliferating, in the future. The final vision, what the copyright world should look like in the next ten years, is one in which copyrights are owned and exploited by authors and performers, by creators, rather than by corporate entities, or for that matter by consumers. One can hope that in the future much of this digital technology will be distributed not only among corporate entities, but among authors who will be able to use it effectively, and while intermediaries will not disappear, we may come to see different types of intermediaries who will be less grasping of authors’ copyrights in the future. That’s the Utopian vision.

PART C: THE NEXT TEN YEARS IN COPYRIGHT 31 To articulate these visions, I have unilaterally, and without prior consultation, grouped our speakers into the following categories: first, the Olympian view of our distinguished representatives from government, Tilman Lueder from the European Union and Marybeth Peters from the Copyright Office; then the representatives of the consumer maximalists, here in the guise of Fred von Lohmann and John Palfrey; the representatives of the corporate technological world, Shira Perlmutter for IFPI, Tom Rubin for Microsoft; and finally, in the most Olympian role of all, Bernt Hugenholtz, who I think is sui generis. They are, of course, absolutely free to resist, reject, discredit, and spit upon these characterizations PROF. HANSEN: Thank you. That’s interesting. Jane certainly took the bull by the horns and the panelists are all now in their little boxes there. You will be allowed out after the panel, apparently. Let me just ask you. The first question is: Do you agree with Jane’s characterization of what the choices are for the future? Marybeth? MS. PETERS: I think those are the three top categories. I was not looking at it this way, but I have been reprogrammed. I am okay with it for this session. PROF. HANSEN: If you weren’t reprogrammed, would you agree with that? MS. PETERS: I’m not sure. PROF. HANSEN: Let me just ask if there is someone who does agree with it and then we’ll move from there. MR. LUEDER: I agree with the first version. PROF. HANSEN: What about the first version? MR. LUEDER: I agree with the first prediction because it’s my own, and I have to show a minimum of consistency, as opposed to ten minutes ago. So yes, I agree with what I said ten minutes ago to Jane. The first prediction is that ten years from now copyright will be a part of social policy. It will be artists’ and performing artists’ and authors’ social security schemes that will prevail. I think that we will move away from dealing with copyright as a property right, as an intellectual property right, or as any form of property. It will be social policy and not intellectual property in the future. PROF. HANSEN: That is driven, in part, by the people who run the collecting societies, which have a pot of money to distribute to whomever they want, but are not necessarily actually getting it to creators whose works had been performed or copied in any organized, systematic fashion. MS. PETERS: That is the dark side. I am on the light side. That’s my nightmare scenario, and so I am not going to go there. I think in the United States in the next ten years there will be a fight, and it probably is exclusive rights versus compulsory licenses and schemes of equitable remuneration. I think that, from my perspective, the fight should be about exclusive rights and authors. I am more like the Utopian, with Jane. As I have tried to get rid of compulsory licenses in the United States, what basically came and hit me over the head was when the songwriters said, “But without them we wouldn’t get any money.” Then I realized that authors in this country really were not empowered and they really did not exploit their rights themselves. They went through other means and they signed contracts that later they regretted. I would hope that in the next ten years that one of the things that we could do in the online environment is reinvigorate authorship. Basically, I think it is going to take a commitment to teach authors about their rights and to come up with schemes that allow them to be in the driver’s seat.

32 S E S S I O N I : P L E N A R Y SE S S I O N There will always be corporations that have a function, and a very large function. There will always be consumer expectations. But I would leave with the fact that if we do not have creative energy in this country, if we do not have creators and they are not incentivized, and if they do not feel part of the system, I think that we lose substantially. I do not want that to happen in the next ten years. So I certainly am going to do everything I can to make sure we do not have my nightmare vision come into play here. PROF. HANSEN: Fred. MR. VON LOHMANN: I think I am far more optimistic than Register Peters regarding this future. I agree that we need to reinvigorate the author sector. What I see, though, empirically is that new technologies, like MySpace and YouTube, are doing far more to bring the benefits of authorship to more people than ever before than the old copyright system has or is accomplishing. So I think there is great hope there. It is in that area that we are going to see the flowering of new modes of remuneration, new business models. We will not have just one model. We will not have a world where song-writers have to depend on a unitary compulsory license. Instead, we will have many different kinds of business models that small authors will pursue. You are already seeing that happen thanks to new technologies — not thanks to DRM, not thanks to the kinds of exclusive rights that have been passed in the last ten years. But I think the upside here extends beyond just the citizen creators. I think that ten years from now, certainly in the music space, we will have a collective licensing solution, not a compulsory license solution. I agree with Register Peters that compulsories have a number of very serious downsides. But in the United States you see collectives, like BMI and ASCAP and SESAC, that have developed competitively on a nonexclusive basis and have been able to harness revenue from distributed, otherwise-very-difficult-to-enforce user communities, including bars, restaurants, performance halls — you name it. It is no accident that, at a time when the record labels have seen their revenues decline, BMI and ASCAP have enjoyed record revenues every single year since the Napster phenomenon began. I think the record labels will recognize that and will organize collectives. You will have a situation where you will pay a fee, perhaps through your ISP, perhaps through a software vendor, perhaps through other methods you choose. In that environment, I think ten years from now we will be struggling with very different questions: How do we have collectives that are transparent, that are competitive, that are responsive to the authors that they represent, rather than collectives that are opaque and not accountable? Fortunately, I think in the United States we have a pretty good set of examples in our performing rights organizations (PROs), a set of examples that may not be perfect, but are much better than the sorts of entities that Europe has traditionally had. Of course, Europe has some encouraging new initiatives in this area as well. I think that ten years from now there will be a lot of attention there. However, I do not think DRM is going away — not because DRM is going to be used to empower the kinds of business models and anti-piracy goals that we were promised, but because it will be increasingly used by technology companies and by major incumbent entertainment industries to control innovation. You will have to sign a license in order to access the content. That license will dictate how your technology can work and what features it can offer. Those terms will be set by a cartel that is empowered to do that, thanks to the combination of legal protection of technological protection measures (TPMs) and relatively lax anticompetitive norms, especially in the United States. I hope that Europe does not fall into that trap. I am hopeful that Europe’s rather more

PART C: THE NEXT TEN YEARS IN COPYRIGHT 33 vigorous antitrust enforcement will contain those anti-competitive and anti-innovation implications of DRM. But I do think those will be the two issues that will be foremost ten years from now: How do we get a good collective licensing system that fairly pays authors; and how do we prevent DRM from being used in anticompetitive ways? PROF. HANSEN: A couple of things. One is, in terms of antitrust systems, it is the U.S. antitrust system that brought ASCAP into line to be transparent.1 The European competition system has done very little with the collecting societies, for political and other reasons. So I do not think it is as simplistic as their having a better system than the United States. In this area I think they have a weaker system. MR. VON LOHMANN: Antitrust enforcement has changed since the days of the ASCAP antitrust litigation. PROF. HANSEN: But not in a way that would affect that result. One other thing is that your vision helps those who remix and do other things like that, or perhaps write and perform their own works. But someone like a country music composer relies very much, not just on performance rights and BMI, but also on record sales and other things. So under your vision maybe a certain group will be well off, but the other group is pretty much ignored. MR. VON LOHMANN: No. I am not proposing that we have collec-tives only for performance rights. I think historically that is where we have been. But I think the future envisions a world where you have collectives that administer the full range of range of rights — reproduction, performance — because, frankly, I think we can all see ten years from now compact disks and unit sales of product will not be the dominant segment of the music industry. People will be downloading. Hard-drive manufacturers will tell you that ten years from now you should be able to hold all the world’s recorded music — all of it — in the palm of your hand in a device that will probably cost less than $200 or $300. PROF. HANSEN: Okay, Fred, thanks. Shira, let me call on you to respond. MS. PERLMUTTER: Where I definitely agree with Fred is in his vision that we are just at the outset of a phenomenal explosion and flourishing of diverse models and exciting creativity. I think there is no question about it. Where I differ from him is in the idea that that might require rethinking existing copyright and the idea of exclusive rights enabled by DRM. I think the answer is you need to have freedom of choice and the ability to put out every possible option anyone can think of to disseminate content to consumers, to let people create new content and then disseminate it. That will include things like YouTube. That will include models that do not involve the use of DRM. That will also include some models that build on DRM protection used in flexible ways that are acceptable to the public. We are at the infancy of this explosion of change and development. What we are seeing is a huge amount of experimentation. But we have a copyright system in place that in its basic framework has served creators very well for a very long time and is continuing to enable this vast variety of new creativity. There will be those who choose to use it in different ways, who choose to manage their rights collectively, because that will make sense for them. There will be a role for DRM because many business models will depend on the use of DRM. DRM has been used as a code word generally, including this morning, to mean 1

See Broadcast Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1 (1979).

34 S E S S I O N I : P L E N A R Y SE S S I O N some sort of restrictive lock-up, but in essence digital rights management just means technologies that are used to implement terms and conditions for use and may also be used to allow for royalty payments to be made appropriately. So it is a very broad term, and in its broadest sense it is an enabler of different business models, including streaming models as well as all kinds of subscription services and many things that no one has thought of yet. It is true that everyone is exploring different revenue streams. It is important that individual creators be empowered, and all of this technology holds tremendous promise for that. But we should not be rushing to make major changes in a system that has been very effective as a seed bed for change and creativity, and instead focusing on how to get past the glitches in this period of experimentation and work toward finding solutions that consumers will be happy with and that will reward creators. I think it is a bit of a red herring to focus too much on what it is that corporations do, in the sense that corporations should be there to provide what value they can provide in this new world. I believe there will be value that can be provided in terms of selection, marketing, promotion, dissemination. There are many things that corporations can do. Their value will consist of continuing to do that. But again, we will see a tremendous variety and diversity. PROF. HANSEN: Thank you, Shira. Tom? MR. RUBIN: I agree with a lot of what Shira said. I frankly agree with a fair amount of what Fred and others have said. I think what I disagree with more than anything is just at the very beginning, respectfully, Jane, pigeon-holing people into these categories, because I think that we are going to see, and we are seeing, a very heterogeneous world right now, where authors are being empowered as never before, where original content is being created, and where content providers are able to control their content in a way that actually provides tremendous benefits to consumers. I think that is the world that we are in and that world is going to accelerate. In order to think about where we are going to go, I think you have to look at where we are and where we have been and why we are here. There has been, obviously, a tremendous pressure on the system, in part because of widespread digital piracy that has led to all kinds of reactions, some good, some not good. But I think we are really at a point where the promise of technology is allowing us to realize these new business models that are making available high-quality content at very affordable prices from legitimate sources, and those are going to ultimately be something that consumers are going to want. They are going to be a great alternative to the piracy that we have seen. That being said, there is a very important role that technology is playing, and is going to play in the future, to create new business models that are not just the result of what large companies want to do. The ability of technology to identify works and automate rights management, including rights freedoms, is actually an area that has received a lot of investment lately, and there are a lot of technologies that are on the market or will soon be on the market that will empower everyone from individual creators to companies to decide how their content should be seen and redistributed on the Internet. PROF. HANSEN: Tom, let me move on so we get to everybody here. Bernt, do you have any thoughts on this? PROF. HUGENHOLTZ: Sure. Some of them already have been expressed. I believe the democratization of authorship, as it is sometimes called, will actually lead to a reappraisal of copyright, or actually of authors’ rights, which I would really like. That is Utopian, but possibly realistic at the same time.

PART C: THE NEXT TEN YEARS IN COPYRIGHT 35 Look at the enormous success of Creative Commons, and the main license applied by the hundreds of millions of users of Creative Commons licenses. The main license type reflects that, no modification and attribution. These are moral rights reconstructed through private ordering. So I think authors’ rights are up. Consumers’ rights are also up. That may be worrying for some in the copyright industries, but I believe it is not a bad thing to have consumers given some protection against oppressive end-user terms in boilerplate language. Certain freedoms to copy I think are also a good thing. In fact, that does in the end increase confidence in the copyright industries. PROF. HANSEN: Is that like thieves breaking in and stealing things having increased confidence in the property? PROF. HUGENHOLTZ: Yes, sure. It’s exactly the same. PROF. HANSEN: So they have confidence that the property protection becauuse people are fooled into thinking it will be protected? PROF. HUGENTHOLTZ: I think it is more like people buying a car and expecting a certain speed to be attained, not just have the car stuck in first gear. But anyway, we will see it either in copyright or outside. I think there may be a difference here between the European and U.S. approaches. In the United States, you see an attempt to fit the consumers’ interests into the copyright framework. I think that is understandable in light of the constitutional mandate here. In Europe, you see it more develop outside copyright. In fact, you see a string of cases in France and other countries where consumer unions have quite successfully demanded certain basic functionalities in information products and services. That is not particularly bad. I think it is actually a good thing. Third point: There is also one type of rights that will definitely be on the decline in the next ten years, at least — and that is wishful thinking, I must admit — intermediaries’ rights, or possibly neighboring rights if you look at it through the European lens. I think the political climate is increasingly hostile to demands for increased protection of investment, as opposed to true creation. As the costs of production and distribution decline thanks to the Internet, so does the economic justification for such rights. So what we shall not see, I hope, is an extension of the term of sound recordings. I do not think we will see a WIPO Broadcasting Treaty either, at least not a treaty that will amount of anything. Is that really bad? I don’t think so. I actually think intermediaries can do a lot of good business, as has been said before, without foolproof protection. I think EMI dropping DRM is actually a very good example of that. There can be more confidence in a world without perfect IP. PROF. HANSEN: Good. Thanks. John? MR. PALFREY: Thank you, Hugh. I should start with a confession, which is I am really bad at predictions. I remember teaching the Napster case2 in 2001, which was recorded, unfortunately for me. I made a prediction that said the recording industry will never be dumb enough to sue its consumers directly; they will just sue the intermediaries. Of course, the next year I was teaching the same class, and I had a co-teacher who went back and looked at that recording and called me on it. I said, “Ha, ha, ha, yes, I was wrong,” because, obviously, we know how history went. I said, “But the European 2

A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D. Cal. 2000).

36 S E S S I O N I : P L E N A R Y SE S S I O N recording industry won’t be so dumb as to sue.” So take this with a grain of salt, that I am probably wrong. I am most focused for the next ten years on the generation of young people who are learning to use technology in a really different way right now, good and bad. Kids now are born digital in a way that we have learned to be digital. I think that brings with it social norms that are really quite different. I think that the area of focus for the law and for law reform is going to be dealing with what is a global generation of digital natives and how they interact with information. I think one of the primary trends is the blurring of lines across these different types of media. Talking now about music, as most of this panel has, I think music and movies and text and gaming and second lifing, whatever you want to call it, all sort of get blurred, which is one sort of difficulty/ opportunity. The second one is, of course, it is so easy to do over international lines. I think that the stovepiping of rights is going to come under pressure in that zone. I think that the challenge from a legal reform perspective is to say: How do we continue to ensure that authorship is rewarded, but also rethink what authorship means? I respectfully disagree with the Register of Copyright about what that sense of the author is and how that is going to play out moving forward. But I certainly agree with some of the suggestions for how to handle it. I think that some of the suggestions for collective licensing, not compulsory licensing, of the sort that my colleague Terry Fisher has proposed,3 in an entertainment co-op type mode, is a very strong suggestion. I think focusing on how derivative works get thought about, and particularly across international lines, is a very important area. I think that building on top of the Creative Commons system ways of private ordering to convey rights very simply by consumers, one to the next without transaction cost, is super important. I think coming all around that is really one thing that Jane Ginsburg has focused on importantly for a long time, which is: How do you think about moral rights in this context when it really is a different environment and people are interacting with rights in such a different way in a digital age? I am concerned. PROF. HANSEN: Moral rights are dead, aren’t they, John? You can be frank. They kill all the nuanced compromises that might be made in the digital environment between copyright owners and users to make these wonderful knew social and technical advances work?. MR. PALFREY: I think there is a better expert on this in Jane Ginsburg. PROF. HANSEN: Unfortunately, we are out of time for this session. Jane, thanks for setting up the discussion. That was great. And thank you very much to the panel.

3

William W. Fisher III, Promises to Keep: Technology, Law, and the Future of Entertainment (2004).

SESSION I: PLENARY SESSION PART D: THE NEXT TEN YEARS IN PATENTS

SESSION I: PLENARY SESSION

The Next Ten Years in Intellectual Property Law: What Should Happen? What Will Happen?

Part D: The Next Ten Years in Patents

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law

Panelists LORD HOFFMANN

RON MARCHANT

Law Lord, House of Lords, Parliament (London)

Former CEO, UK Patent Office (London)

CHARLES ELOSHWAY

HON. PAULINE NEWMAN

Attorney-Advisor, Office of International Relations, U.S. Patent & Trademark Office (Alexandria, VA)

Judge, U.S. Court of Appeals, Federal Circuit

HON. ROGER HUGHES

ERIK NOOTEBOOM

Judge, Federal Court of Canada (Ottawa)

Head of Unit, Industrial Property Unit, DG Internal Market, European Commission (Brussels)

RT. HON. LORD JUSTICE JACOB

PROF. TETSUYA OBUCHI

Court of Appeal, Royal Courts of Justice (London)

Faculty and School of Law, University of Tokyo

HON. RANDALL R. RADER

Judge, U.S. Court of Appeals, Federal Circuit

38 S E S S I O N I : P L E N A R Y SE S S I O N PROF. HANSEN: Now we will move on to “The Next Ten Years in Patents.” Let me briefly introduce our very distinguished panel. Lord Hoffmann is considered by many, if not all, as the leading Law Lord in the U.K. Of course, the House of Lords in Parliament is considered the supreme court on all civil cases in the United Kingdom and in criminal cases in England and Wales. Charles Eloshway is Attorney-Advisor for the Office of International Relations at the U.S. Patent and Trademark Office. Judge Roger Hughes, prior to becoming a Federal Court judge in Canada, was a patent and IP practitioner. The Rt. Hon. Lord Justice Jacob is on the Court of Appeal (England and Wales) at the Royal Courts of Justice in London. Ron Marchant is the former CEO of the U.K. Patent Office. Judge Pauline Newman is one of the stars of the Federal Circuit. Erik Nooteboom is Head of the Industrial Property Unit at the European Commission. Professor Tetsuya Obuchi is a former judge and a very well-respected professor at the University of Tokyo. He is a tremendous leading light in the Japanese intellectual property scene. Finally, Judge Randall Rader, is well known by all, teaches patent law and,of course,is on the Court of Appeals for the Federal Circuit. We are very lucky to have Lord Hoffmann start us off with some thoughts on the future of patent protection. LORD HOFFMAN: I have a rather distant view of patents. It is like one of these comets that swoons into my sight about once every two years or so. So, therefore, it may be very different from those on the panel who come across it more frequently. My impression is that over the next ten years or so there isn’t going to be a great deal of movement on what one might call the substantive law of patents. Roughly speaking, I think it has settled down in a way which is pretty well okay. I know that there are, for example, pressures from the pharmaceutical industry over the twenty-year term. They say that, what with having to develop the product and having to go through all the clinical trials and so forth, they aren’t left with enough to make them money. Whether they get enough political sympathy for that I really don’t know. It is a pragmatic issue on which I am not in a position to express a view. As to the requirements, the validity of patents, I know that there is a certain amount of disquiet in the United States about the level of inventive step, which is the present requirement. To some extent, that may be a resources matter for examination within the Patent Office, rather than any difference in principle. It may be that it needs to be ratcheted up a bit, but again I leave that for others to discuss. On the question of the scope of patents, there are certain differences at the moment between the United States and Europe in the way we approach these questions. There are even possibly differences within Europe. But again, I had the impression that when we are talking about the scope of patents, the interpretation of what the patent covers, when it comes down to it, these are intuitive matters of impression on the part of the tribunal that is deciding the matter, and they then think of the reasons for them afterwards. So whether you have a doctrine of simply trying to find out what the patent means, or whether you have a doctrine of equivalents, such as they have in the United States, which I think is their problem, that is something which I think is ex post facto, after the initial judgment on whether there is actual infringement. So leaving the substantive part aside, clearly there is an enormous problem of resources for patent examination. It seems to be obvious that there is going to have to be among the various patent offices — the European Patent Office (EPO), the Japanese Patent Office (JPO), and the Patent Office of the United States (PTO) — greater cooperation in being able more efficiently to employ the resources that they do have for examination. Again, that is something I leave people like Ron Marchant to tell you about.

PA R T D : T H E NE X T TE N Y E A R S I N PA T E N T S

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The real problem that I foresee for Europe is the question of jurisdiction. That is really a serious matter, because everybody agrees that something has to be done. Nobody can agree on what it is that has to be done. The reason why something has to be done is because, while it is very nice to have the EPO in Munich, where you can take your application and have a patent issued for whichever number of the Convention states you nominate, and it is the same patent in each of them; then, when you actually come to enforce it, you have to bring separate proceedings in each country, and you may get different results. That is on the face of it a ridiculous situation. Well, what can be done about it? Originally, the idea was — and it seemed perfectly fine in theory — that we would have a Community Patent. That proposal, as far as I can see, has run into the sand. The latest Communication that we have had from the Commission makes virtually no mention of it. It is not really on the table. It is not on the table because we cannot get agreement among the Member States on two matters. One is how many translations there ought to be into the various European languages (I think we are now up to about twenty-three). Secondly, we cannot get agreement on what tribunals ought to be able to deal with the validity and infringement of European patents. The notion that you could have a domestic court in, say, Romania or some Member State revoking an important patent for the entire European Community is simply not acceptable to industry. So it fails on that ground as well. There is a lot of talk about political will and so forth, but from the point of view of a small country that does not have a lot of patent business, on this language question I rather sympathize with them. If you are the government of, say, Bulgaria, do you want a headline in the Bulgarian Sunday news papers saying “here you have this Bulgarian who has been held liable for an enormous sum of damages brought by a court which consists of a British, a Dutch, and a German judge for infringement of a patent that he could not possibly have read because it was published only in French, German, and English?” It doesn’t make good headlines. For that reason, I rather sympathize with their not going along with it. The same applies to the idea of having a specialized patent court. Now, having got to that position, and seeing that the prospect of a European Community Patent is pretty well dead, the Member States of the European Patent Convention had the idea of what is called the European Patent Litigation Agreement (EPLA). Forget about having a Community Patent, but at least let’s have a Convention court to which you can go and receive decisions that will be binding on all those members who belong to it. That made some progress. A Draft Convention was produced.1 In fact, some patent judges got together and produced a framework set of rules as to how that court might operate.2 That is running into two difficulties. One is there is a European feeling, emanating from the European Parliament and the Commission, that it is contrary to the rules for the Member States of the European Patent Convention, which are not exactly the same as the European Union — at any rate, don’t fall into the mechanism of the European Union — that it is wrong for them to set up any kind of international jurisdiction on their own. 1 European Patent Organisation, Working Party on Litigation, Draft Agreement on the Establishment of a European Patent Litigation System (EPLA) (2004), available at http:// www.european-patent-office.org/epo/ epla/pdf/agreement_draft.pdf. 2 In November 2006, an informal panel of judges from several European countries met in San Servolo, Italy, and adopted rules of procedures for the EPLA court. They signed a Resolution, the so-called “Second Venice Resolution.” See IPEG, European Patent Judges Agree on Rules and Procedures for New EU Patent Court (Nov. 7, 2006), available at http://ipgeek.blogspot.com/2006/11/european-patent-judges-agree-on-rules.html.

40 S E S S I O N I : P L E N A R Y SE S S I O N They have gotten a legal opinion of amazing pedantry that says this is the case; it simply cannot be done.3 The other objection is that some of the Members even of the European Patent Convention do not like it. They have reasons of their own. Although we seem to be getting along quite nicely with the Germans and the Dutch, the French, as I understand it, are unhappy about the arrangement and they want to pull out of it. The latest view of the Commission, which was published only within the last fortnight or so,4 is that we should compromise by getting an equivalent set up within the Community organization and have an appeal to the Court of First Instance, and then set up under that, roughly speaking, the kind of setup which the European Patent Litigation Agreement was trying to do, but within the general embrace of the European Union. That will require agreement from everybody to go along with that. The Commission says, “As long as there is the political will, then we can do it.” Well, that’s a big “if.” For the reasons I have already given, I do not really see that coming along. The Commission reminds me of the generals in the First World War who said, “If only we just have one more push, start a battle on the Somme, then we will win and we’ll get through.” I think what we need, if I can just stick to the military metaphor for the moment, is what the President of the United States would call “a coalition of the willing.” What we want is that those countries that want it should go ahead and do it. Now, if one looks at the Commission document’s statistics, 90 percent of the patent litigation in Europe takes place in the United Kingdom, Germany, The Netherlands, and France (I am not sure that France makes up an enormous number of that 90 percent). If we could get a single patent court for, let’s say — leave out the French — Germany, The Netherlands, and the United Kingdom, which I would have thought was perfectly feasible, wouldn’t that be an enormous advance? But we are told, “No, this is not communautaire, and therefore not allowed.” Well, we have a proverb, “The best is the enemy of the good.” I feel that is what is holding us back now. That is the point I want to throw open for discussion. PROF. HANSEN: Thank you very much. There is certainly a lot of food for thought there. Let’s go through some of the points. One that I want to start out with is patent quality. Let’s just talk about that. We have both the U.S. Patent and Trademark Office and the U.K. Patent Office represented. Just quickly, does low patent quality exist; and (2) is it harming competition and innovation? MR. MARCHANT: I’ll come in first. I think it does exist, but it is not as widespread as people often think. There are confusing thoughts about what is low patent quality. Some people say low quality is related to the scope or the nature of patentability, particularly as applied to the United States. Many people say it is the flood of vague business method and software patents that is damaging competition. Others say that in fact it is the quality of the stuff coming across all of the technology — insufficiently searched inadequate examiner expertise. And certainly on the latter you do get instances where we all could have done better. But I think it is fair to say that certainly nationally offices are taking big steps to look at regimes of ensuring and improving patent quality. 3 Interim Legal Opinion SJ-0844/06 D(2006)6511, Interim Legal Opinion (Feb. 1, 2007), available at http:// www.ipeg.com/_UPLOAD%20BLOG/Interim%20Legal%20Opinions%20Legal%20Service%20EP%20Feb% 201%202007.pdf. 4 Communication from the Commission to the European Parliament and the Council, Enhancing the patent system in Europe, COM (2007) 165 final (Brussels, Apr. 3, 2007), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2007:0165:FIN: EN:PDF.

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With the Patent Cooperation Treaty (PCT)5 quality initiative two years ago or thereabouts, and the current European initiative to set up a quality regime in Europe, we are taking active steps to mange and ensure quality. Discussions between the EPO, the PTO, and the JPO in relation to work sharing, which comes back to resources, which I’ll come to later, has an implication for quality. So all of these activities are working roughly in the right direction. There are difficult points at leading-edge technologies, where people who go into government service in patent offices probably cannot stay at the leading edge in terms of their expertise. That is why the Gowers Review,6 amongst other things, said there needs to be a greater scope for third-party intervention, modifying the U.K. Section 21 observations, also following the PTO initiative of the Community Patent Review, which is an unfortunate phrase to use in the European context. The United Kingdom will be implementing a pilot program on this in the light of the Gowers Review’s recommendation. So it is an issue. I think there is evidence that poor patents will hinder innovation, but it is not as widespread as people say. PROF. HANSEN: Thank you. Did you want to say anything about anything? MR. ELOSHWAY: From the PTO perspective, as Ron mentioned, quality is often in the eyes of the beholder. Sometimes the debate gets clouded in terms of issues, not so much regarding quality, but things like subject matter eligibility. In other words, the debate gets shifted from “was the patent issued properly?” to “should the patent have been issued at all in view of the subject matter involved?” That is, again, a debate that needs to be argued on different grounds. In terms of some of the other issues that the PTO is confronting, I think, as Ron mentioned, all offices believe that we can do a better job in terms of search and examination. Some of the main problems that the offices are facing are: The ever-expanding volume of prior art that has to be searched, making sure that the search tools that the examiners have available to them keep up with the volume of material to be searched; and then, particularly for the PTO, we have a very acute problem in terms of staffing. As most of you know, we have significantly increased the examining corps over the past couple of years. We are hiring at a pace of about 1,000 examiners a year. That raises all sorts of questions, not the least of which is proper training and quality review for the thousands and thousands of additional pieces of work that are going out the door. To confront some of these issues, the PTO is looking at a number of different approaches. One is we have instituted multiple layers of quality review. Second, we are looking at ways to increase the quality of output by increasing the quality of input. Many of you have seen some proposed rules from the PTO on claims and continuations, among other things. These are just some of the ideas that have been circulating. Third, as Ron touched upon, is the idea of expanded work sharing, the idea that an office can capitalize and exploit work done by another office on a corresponding application. I think we’ll talk about that in a bit more detail later. I will leave it at that. 5 WIPO Patent Cooperation Treaty, Done at Washington on June 19, 1970, amended Sept. 28, 1979, modified Feb. 3, 1984 and Oct. 3, 2001 (effective Apr. 1, 2002), available at http://www.wipo.int/pct/en/texts/articles/atoc.htm. 6 U.K. Treasury, Gowers Review of Intellectual Property (December 2006), available at http://www. hm-treasury.gov.uk/media/6/E/pbr06_gowers_report_755.pdf [hereinafter Gowers Review].

42 S E S S I O N I : P L E N A R Y SE S S I O N PROF. HANSEN: One of the issues you raised was subject matter, which gets merged sometimes with the quality. Perhaps the most controversial issue here is business method patents. Some are against, Others say they might be okay if there had been accessible prior art for examiners to make reasoned judgments on patentability. Others think matters are fine as they are. But compared to new subject matters decisions in the past, these are much more controversial. For instance, the early 1980s Supreme Court decisions in Diamond v. Diehr7 for software and Diamond v. Chakrabarty8 for biotechnology, in effect, created new patentable subject matter. There was generally favorable reaction and had impact not only in the United States but in the JPO and in the EPO. Business method patents have not had the same reaction in the U.S. and certainly not abroad. What do you think the future is for business method patents, especially if the Supreme Court gets to a case? For our panelists from Japan and from Europe, do you think there is any chance of business method patents having any resonance over there? Do you want to first address that, Charles? MR. ELOSHWAY: Yes. In terms of the PTO, we are in a reactive position, where whatever Congress and the courts determine are the boundaries of subject matter eligibility, we have to examine on that basis. Certainly, business methods have created a number of difficult issues for the PTO to address, not the least of which is: What exactly is the landscape for subject matter eligibility; what are the outer boundaries between an abstract idea and something that falls within subject matter eligibility? Then again, in terms of quality in examining, the problem that we have been battling over the last several years is how to get the best prior art in front of the examiner. Now, that presents issues in terms of work sharing, because the United States is practically the only jurisdiction that is granting patents on business methods, so it is very hard to capitalize on non-existent work from another office. But I do not see that business method patents are going to go away any time soon. I think that the Office has done a commendable job in terms of improving the tools and access to the appropriate prior art. PROF. HANSEN: Anyone else from a different jurisdiction have a view on that? LORD JUSTICE JACOB: As many of you know, Albert Einstein was a Patent Office examiner for a time. I have always wondered what happened as he looked at the files — “obvious,” “obvious.” PROF. HANSEN: Have you ever used that before, Robin? I’m just curious. LORD JUSTICE JACOB: No. I made it up on the way up from Virginia. PROF. HANSEN: That’s good. I like that. LORD JUSTICE JACOB: It is fairly evident that today’s Patent Office examiners are not Einsteins. PROF. HANSEN: Well, few of us are actually. LORD JUSTICE JACOB: The problem sometimes described as low quality is, I think, not going to go away. It is going to get bigger. The level of patenting around the world is getting bigger. The Chinese are now going to go in for it in a big way. One of the interesting questions for the next ten years is: What is the reaction to that going to be? There will be a lot of “duffy” patents out there. I think the answer is going to be that the courts are going to respond by saying: “Well, these patents are no good.” I think you will find various responses in various ways. In the 7 8

450 U.S. 175 (1981). 447 U.S. 303 (1980).

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United States, the presumption of validity will weaken. In a number of places people will start saying, “We need courts with greater expertise. We cannot leave this, in effect, to the old German system, where you could rely pretty well on the patent office and just use the courts for enforcement.” You are now going to have to have the courts looking much more at validity. So I think one of the developments over the next ten–fifteen years is going to be dealing with the inescapable fact that quite a lot of patents are not very good. I will not respond yet to Lord Hoffmann’s “little European problem.” This problem I think will be a worldwide problem. You can see it sometimes in the courts. For example, the Australians are struggling like mad with obviousness, and making a fine old mess of it, if I may say so, deciding to follow the Americans, when the Americans might be changing directions. You see it in the recent Supreme Court case, KSR, re-looking at the standard of obviousness.9 All of which I think is expressing a concern that the pendulum of protection, which seems to be a very regular thing going one way and the other, has now swung so far and is going to swing back a bit. PROF. HANSEN: Roger? JUDGE HUGHES: Hugh, can I take a run at a couple of the points you have made? It’s not the quality, it’s the quantity. From Canada’s point of view, 95 percent or so of the patents issued are issued to foreigners — Fortress America, Fortress Europe, Fortress Asia. So anybody with an innovative spark has got to face 95 percent of patents owned by somebody else and cannot really get into the business. So what do they do? They take a run at it, they go underneath it, they go around it, or they do something. But the real problem is to try and figure out how, in effect, to limit the number of patents that are issued for trivial stuff — I think people have used words like “patent thicket” and things like that. The ones that end up in court, as Sir Robin said, are sort of the marginal ones, the trivial ones, and so on, and those are the ones we have to deal with. You are going to find reactions. We find reactions already in our drug industry, people fighting patents on yet another form of a drug and so on. And you will find the courts are now reacting to that when people bring patents that are marginal. PROF. HANSEN: So basically it’s Fortress Canada protecting its businesses from outside competitive forces. JUDGE HUGHES: Yes. PROF. HANSEN: Okay. Professor Obuchi, what do you think? PROF. OBUCHI: According to current Japanese patent law,10 even a computer program as such can be patentable subject matter, and a so-called business method can be 9 KSR Int’l v. Teleflex, Inc., 127 S. Ct. 1727 (2007). [Note: After the conclusion on the Conference, the Supreme Court decision was handed down Apr. 30, 2007 (holding that Graham v. John Deere Co., 383 U.S. 1 (1966), controls obviousness; that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws”; and warning that a rigid application of the teaching/ suggestion/motivation (TSM) test as a litmus test for obviousness is inconsistent with the Graham framework, but stopped short of rejecting the TSM test outright. Simply put, the TSM shortcut for an obviousness analysis is no longer available. The Court’s decision focuses the obviousness spotlight back onto the framework that has controlled the issue for more than forty years, forcing everyone who has grown comfortable with the TSM litmus test shortcut (including the Federal Circuit, the PTO, and the patent bar) to return to full Graham analyses when assessing the obvious-ness of patent claims. The Court’s opinion also touches on several other issues, including the roles of “hindsight bias” and common sense in an obviousness inquiry, a question about the rationale for affording a presumption of validity to the patent-in-suit, which avoided a Graham analysis during prosecution, and a rejection of the rigid rule that “obvious to try” is per se insufficient to show obviousness. Decision available at http://w w w.supremecourtus. gov/opinions/06pdf/04-1350.pdf.] 10 Patent Act of Japan, Law No. 121 of Apr. 13, 1959, as amended. WIPO English version available at http://www.wipo.int/clea/docs_new/pdf/en/jp/jp006en.pdf.

44 S E S S I O N I : P L E N A R Y SE S S I O N patentable as a “computer program related invention,” while a so-called pure business method without using computer programs and so forth cannot be patentable because it is not a computer program-related invention. I am very much interested in the question of whether more patent protection for programs in places such as the United States and Japan, or less patent protection in places like Europe, will really better serve the promotion of innovation for programs. PROF. HANSEN: Let me ask both of you. You have a case before you. To what extent do you look at law outside of your jurisdiction — U.S. EU, EPO — at all in deciding your cases? JUDGE HUGHES: The United Kingdom yes, the United States yes, the EPO no. PROF. HANSEN: Professor Obuchi? PROF. OBUCHI: We are always very much interested in the law all over the world, especially the U.S. and European law. LORD HOFFMANN: If the Canadians look at the United Kingdom but not at the EPO, they are getting the EPO second-hand, because we pay a lot of attention to the EPO. JUDGE HUGHES: Well, I’ve kept my Eighth Edition of Copinger,11 because all the rest of the editions after that go Belgian or something. PROF. HANSEN: One thing on harmonization of litigation that Lord Hoffmann raised is that it is crazy to have to be suing in all the different places. What about the “coalition of the willing,” of harmonizing? We do have trilateral harmonization talks between Japan, the European Union and the EPO, and the United States on issues, because it is impossible to get effective harmonization through the multinational organizations. What about on that level, or a “coalition of the willing” on the litigation level? Erik? MR. NOOTEBOOM: I thought you were hinting at a “coalition of the willing” within Europe to create a uniform patent jurisdiction. It was not explicitly mentioned in our recent Communication on how to restructure the patent landscape in Europe, but it is clearly in our mind, given that we all know very well that the chance that Europe will move forwards on a unanimous basis is quite small. As you know, the current text of the European Treaty provides the possibility to work on reinforced cooperation, and that is basically cooperation between the willing. The problem that we will be facing is what the subject of that “coalition of the willing” should be. Evidently, under reinforced cooperation, one will have to define the subject of that project. Since we have very opposed views within Europe, even within the group of highly patent-minded countries, it is at this time very difficult to predict what the direction would be that this coalition would take. We have the German views, which clearly plead for an EPLA construction, a court that would work under the aegis of the European Patent Office basically. And there is the French coalition, so to say, which very much insists upon a Community jurisdiction. The main purpose of our paper is to launch this debate, to filter out all these different positions, and to see whether there is common ground to make progress. As always, we at the Commission try to develop good compromises that can, if necessary, be interpreted by anybody as he likes, but mostly at the end of it we come to a conclusion. Now, if you ask me what is going to happen in the next ten years, I think we will probably be discussing this issue for the next ten years. Whether we will achieve results remains to be seen. Whether that is dramatic, I don’t know. I think there is a much bigger threat to the patent system as a whole, which is very close 11

W.W. Copinger & F.E. Skone James, Law of Copyright (8th ed. 1948).

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to us and which has not yet been tackled, and that is the perception of the patent system by the politicians in Europe and by the public, plus the immense workload, the hundreds of thousands of patent applications that are pending all around the globe — in Washington, in Tokyo, in Beijing, and also in Munich — which all are a threat to those who want to innovate further on existing inventions. That is what we need to tackle. That is, I really think, a very, very important issue. On that issue, the next ten years will be crucial for the patent system. It may very well implode under the existing weight of all these hundreds of thousands of patents that are pending, patent applications that can very often not even be understood by examiners because they are so complex and so lengthy and so cumbersome to read through that they hardly have any clue whether they are patentable subject matter or not. We need to work on that. In that respect, the coalition also refers, I think, to global collaboration between the Japanese, the U.S., and the European patent offices in order to do away with duplication of examination work and search work. We should work very hard to come up with a united approach to patenting on a global scale. Last but not least, we should not forget about the Chinese and the Koreans, who in the meantime have to cope with many more patent applications than our own European Patent Office. They will be big players — they are already big players — and they should also be brought on-board in this coalition. PROF. HANSEN: Polly, do you have something to say? JUDGE NEWMAN: I always have something to say. I’ll be glad to comment. I was thinking as I was listening to these comments that what we need to have in mind is something that everyone in this room takes for granted and most everyone else doesn’t really stop and think about. The criticism, for instance, of the quality of patents is not so much the quality of the examination; it is the kinds of patents that are being granted — for instance, the big joke in the press of a peanut butter sandwich.12 What needs to be understood by all of us, and particularly by the lawmakers and by the judges, is the role of incremental change in the advancement of science and technology. As compared with even twenty years ago when the Federal Circuit was formed, today economists tell us that over half of the domestic and international product of the world is based on advances of technology, many of it on new technologies but also advances in existing technologies, as compared with 10 or 15 percent twenty years ago. This is a dramatic difference. This is certainly a contribution to the overload of the Patent Office, and certainly a contribution to all of the concerns that we are wrestling with here. It raises the fundamental question: What in fact is the kind of technological advance that the patent system can protect? We all know that almost every invention proceeds in small incremental steps, each one building on what has come before, until ultimately there is a breakthrough to commercial use and public benefit. So many of the advances of biotechnology, nanotechnology, and the information and knowledge industries have been developed in very small steps, such steps that might be excluded from today’s view of subject matter that is appropriate for a patentable invention. We need to understand what that means for the economy, for the advance of science and technology. This is what worries me about the popular noise about a broken patent system. Perhaps we have not modernized the law as rapidly as needed to adjust to changes in technology, 12 In December 1999, two independent inventors, Len Kretchman and David Geske, were granted U.S. Patent 6,004,596, “Sealed Crustless Sandwich,” for an improved peanut butter sandwich that would have a long shelf life. 13 eBay Inc v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006).

46 S E S S I O N I : P L E N A R Y SE S S I O N although a great strength of the law, particularly the common law, is that it moves pedantically, slowly, methodically, not in a rush. What I want to encourage us to do, as in the panel’s comments, is to think about what these changes mean and what in fact it means to the society and the economy. PROF. HANSEN: Thank you. Randy? JUDGE RADER: I think we are missing three of the major directions of the next ten years. One big direction will be a panel here at the Fordham Conference in 2017 that will entirely consist of international trade commission administrative judges. That will be a growing area of litigation. You get a sure injunction post-eBay,13 and it will be available for any international corporation with a U.S. patent. Regardless of whether they are from Japan or the United States, they can get an exclusive grasp of the entire U.S. market. The second big panel that will be here at the Fordham Conference that is not here today will be an entire panel of Chinese and Indian officials, both of them recognizing that their competition with each other, which is going to control the international marketplace of the next decade, is probably going to be decided by intellectual property. I have been to both countries three times in the last six months. They each want a Federal Circuit. They need institutions to improve their ability to beat the other in the intellectual property game. The third panel that you will have here in 2017 will be an entire panel of FDA lawyers telling you that the interface between drug policy and patent policy needs rewriting; there needs to be a revision and reexamination of the Hatch-Waxman Act;14 and that that interface is the key. Meantime, we Federal Circuit judges will be here saying, “With all the policy shifts, we are just trying to maintain some continuity.” PROF. HANSEN: Very good. Let me turn to our Canadian and Japanese panelists again. Looking at non-obviousness and an inventive step, our Supreme Court is going to be dealing with it15 and everyone is interested in it. Looking from afar, how would you characterize your law? What is it, and is it closer to the United States or the European Union on this issue? PROF. OBUCHI: I should say that our basic point is almost the same as in terms of inventive step. But I think that on this issue application on each concrete case is important. Such applications could be different in the States or in Europe or in Japan. Actually, in Japan some argue that the Japanese inventive step generally is too strict, the U.S. non-obviousness is too lenient, and the European inventive step stands in-between. That is a rather common perception among some Japanese patent lawyers. I am not quite sure whether this general statement is right or not, but it is really difficult to generalize the issue of inventive step because the issue is very fact-specific and may vary according to each technological area, even each case. Application is very, very important. PROF. HANSEN: That’s good. Roger? JUDGE HUGHES: I tend to agree with Lord Hoffmann that obviousness or inventiveness is really a matter of individual impression to the trial judge. While we do have a set of rules that are not different from the U.S. or the U.K. set of rules, it really boils down to 14 Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585 (codified as amended at 21 U.S.C. § 355 and 35 U.S.C. §§ 156, 271, 282 (1984)) (also known as the Hatch-Waxman Bill for Patent Restoration). 15 For a discussion of the KSR International decision, see supra note 9.

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the judge sitting on the original panel. Courts of appeal can take a second look at it and the House of Lords can take a third look at it, but this sort of gut instinct that you have sitting as a trial judge is what seems to drive the day. PROF. HANSEN: So what does that mean actually, that everything is a crap shoot? JUDGE HUGHES: No. You do it on a principled basis. I mean you just don’t sit down there and do it. PROF. HANSEN: A principled crap shoot. And, of course, then when you throw in juries, it just really goes all amok, doesn’t it? JUDGE HUGHES: We have no juries. PROF. HANSEN: I know. The United States does, though. MR. ELOSHWAY: I wanted to jump in here on one point. This gets back to the discussion that we were having earlier about substantive harmonization and this question of inventive step. It is true that across the major jurisdictions the notion of what constitutes an inventive step is pretty similar. The methodology may be somewhat different, though. In the studies that we have done, the results that we have seen have indicated that there is not a great degree of difference even in the methodology. However, one objective difference as far as inventive step is applied in different jurisdictions, and one that I think ought to be taken, which policymakers in these respective jurisdictions ought to take a closer look at, is this question about the use of inventive step and secret prior art. Secret prior art refers to the earlier filed conflicting applications published later. In the United States that’s called “Section 102(e) prior art.” In most of the rest of the world, those conflicting applications are used for novelty only. Now, it seems to us that if a problem or a policy concern that is being expressed is patent thickets, the lack of an inventive step approach for secret prior art necessarily would create patent thickets. Yet, in our harmonization discussions nobody has seemed willing to seriously investigate that question. We have just been told, “Oh well, it’s not a problem in our jurisdiction because people just cross-license and things like that.” Well, they do that in the United States too, but I think that the concern is more widespread and needs to be more broadly addressed. PROF. HANSEN: Thank you very much. We have one minute. I want to ask the panelists to pick one of three answers. In the next ten years is the patent system going to improve, remain the same, or get worse? JUDGE RADER: Improve. PROF. OBUCHI: Slightly improve. MR. NOOTEBOOM: Improve. JUDGE NEWMAN: Slightly improve. MR. MARCHANT: Stagnate. LORD JUSTICE JACOB: I think it will look much the same. JUDGE HUGHES: I’m going to say get worse because the United States is going to feel the hot breath of China and India and they are going to start finding patents obvious. MR. ELOSHWAY: Maybe that’s an improvement. I would say improve. LORD HOFFMANN: No change. PROF. HANSEN: Thank you very much. A great panel.

SESSION PLENARY SESSION PART E: THE NEXT TEN YEARSI:OF IP LAW IN THE U.S. SUPREME COURT

SESSION I: PLENARY SESSION

The Next Ten Years in Intellectual Property Law: What Should Happen? What Will Happen?

Part E: The Next Ten Years of IP Law in the U.S. Supreme Court

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law

Panelists DIMITRIOS DRIVAS

PROF. JAY THOMAS

White & Case LLP (New York)

Georgetown University Law Center (Washington)

PROF. GRAEME DINWOODIE

HON. PAULINE NEWMAN

Chicago-Kent College of Law (Chicago)

Judge, U.S. Court of Appeals, Federal Circuit (Washington)

LORD HOFFMANN

HAROLD C. WEGNER

Law Lord, House of Lords Parliament (London)

Foley & Lardner LLP (Washington)

PROF. TIMOTHY WU

Columbia University (New York) PROF. HANSEN: We will now look at intellectual property law in the U.S. Supreme Court. Let me introduce our panel. You all know Graeme Dinwoodie, an important and productive professor from Chicago-Kent College of Law. Tim Wu, from Columbia Law School, previously clerked for Justice Breyer. Dimitrios Drivas is at White & Case. I heard him give a review of Supreme Court cases in David Llewelyn’s IP Academy conference in Singapore, which was a fantastic talk. Lord Hoffmann of the House of Lords and Judge Pauline Newman of the Federal Circuit return from the previous session. Jay Thomas, a patent professor at Georgetown, is a real star in the firmament. Hal Wegner, now at Foley

50 S E S S I O N I : P L E N A R Y SE S S I O N & Lardner, previously at George Washington University, has an incredibly useful blog that keeps people informed. Hal usually doesn’t have strong opinions, but he might today. One overriding issue, which we will address at the end: Does it really matter what the Supreme Court says? In reality, does anyone follow it? What do we foresee that Supreme Court jurisprudence will bring us on copyrights, patents, and trademarks in the next ten years? We will then discuss the institutional issues, the extent of the impact of Supreme Court decisions, then anything else anyone wants to discuss. Let’s look at copyright first. Tim, do you want to tell us what you see in your crystal ball? PROF. WU: I looked at how often the Supreme Court takes these cases. Over the last fifteen years, it has taken about eight cases, which suggests about one every two years. So we should be due for a couple. I will give you my guess as to what might be the most likely kinds of cases running through the system that might get up to the Court. The Supreme Court, in my experience — and that is limited to clerking there for a year and reading hundreds of cert. petitions — has formal criteria for why it takes cases. There are 10,000 cases. Obviously, it chooses about eighty to a hundred, so it is not going to take every case. It tends to take cases where it feels that there has been some disturbance in the force. In an area like copyright, which is not a bread-and-butter Supreme Court case, it takes a case because it thinks (a) there is something strange going on here, and (b) it thinks it might be a fun, or even a sexy, case to get involved in, in some way or another, that it might be exciting. That’s my guess as to why the Supreme Court wants to get involved in a particular case. Now, that is based on the old Rehnquist Court, and maybe this Court is different. But you can only extrapolate from what you know. Based on those criteria, I would guess the leading candidate, if we look at the current cases, if it makes it through appeal, would be Google Book Search,1 a case of which everyone in this room is no doubt aware. It seems to have all these elements that make the Supreme Court interested in a case. The Supreme Court has become more interested in technology. Some of the Justices have computers now, or actually most of them. A few of them have that email or something that they can coordinate with basketball games. So there is now the idea that maybe this whole computer revolution thing might be important. Obviously, in Grokster2 they were excited about that. Google Book Search has these kinds of classic elements: authors and publishers, the virtual library, the start-up company. It has the narrative elements that excite the Supreme Court, in my experience. So I would put that near the top. Other likely cases: Some kind of Section 512 case, if they survive appeal and non-settlement. We have one ongoing litigation case, Viacom v. YouTube,3 but that is not the only ongoing Section 512 case. The Supreme Court has not looked at that part of the Digital Millennium Copyright Act (DMCA)4 yet, so I imagine there is some interest in trying to leave its own stamp on what Section 512 means. Another case, which may seem a little less likely to some people in the audience, is I can imagine the Supreme Court might eventually get involved in the Bridgeport sampling cases.5 I say that because in my experience one way in which a court is more likely to be 1 See Author’s Guild v. Google Inc., No. 05-CV-8136 (S.D.N.Y. Nov. 30, 2005); McGraw-Hill Cos. v. Google Inc., No. 05-CV-8881 (S.D.N.Y. Nov. 8, 2005). 2 MGM Studios v. Grokster, Ltd., 545 U.S. 913 (2005). 3 Viacom Int’l, Inc. v. YouTube, Inc., Case No. 07-CV-2103 (S.D.N.Y. Mar. 13, 2005). 4 Digital Millennium Copyright Act (DMCA) of 1998, Pub. L. No. 105-314 (codified at 17 U.S.C. § 512 (1998)), available at http://www.copyright.gov/title17. 5 Bridgeport Music, Inc. v. Dimension Films, 383 F.3d 390 (6th Cir. 2004).

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noticed by the Supreme Court is when it says, “We are going to do something different than the rest of the law.” In Bridgeport they basically say that “the de minimis rule for sampling is going to be different here than it is in the rest of, not only copyright law, but even the rest of law at large.” As we have seen in a lot of cases, the Supreme Court is interested when a court says, “We think this law or this statute is going to work different than the rest of common law.” That is something that piques their interest. They may have something to say about that. I will end here with less likely things but possible things. I think it is possible that the Supreme Court will take some kind of preemption case. If you look carefully, there is a lot of strange state law floating around that is vaguely copyright-related, often written for a single author or for one work. If you get pushed into it, there is a lot of funny state law that is around, and maybe related to telecom or whatever. The Supreme Court likes preemption cases, because it is all about the federal courts and state courts. They love that stuff. Then, finally, there is a remote chance that a DMCA Section 1201 case having to do with protection of digital rights management (DRM) would get up to the Court, although I think, after garage doors and print cartridges, those questions seem to have fizzled and they do not seem as exciting. That’s all I am going to say. PROF. HANSEN: Their age group is such that they are not very digitally adept. To what extent in a digital copyright case would they rely more on a clerk? PROF. WU: That is a good question. I think they rely a little bit on the clerks to tell them the facts, but they definitely have their opinions, even when it is a digital case. The way a clerk might make a difference is if the clerk knows a lot, he will maybe convince the Court that the facts are different than the way the parties are seeing them, or something like that. They have had enough Internet cases. Justice Stevens, who was around and active before radio, is the man who wrote ACLU v. Reno.6 Particularly he, and also Breyer, felt quite comfortable. Souter, of course, wrote Grokster.7 So once they’ve done one, I think they feel they are competent to do more. PROF. HANSEN: Now that you’ve mentioned some individuals, how would you assess the Justices in terms of — I know this is very broad, but this is all we have time for — pro IP, neutral, or anti IP? I know that’s not a sophisticated analysis. PROF. WU: I think there are a couple people who are anti. I will just use the terms you used. On the vaguely anti-IP front, you would have most clearly Breyer and Stevens, occasionally joined by Scalia. Neutral, I would guess Thomas. Kennedy is an unknown element because he loves the First Amendment and he loves big First Amendment cases, and some of these fair use cases tend to have a First Amendment aspect, and you can talk about pamphleteering and the early republic. So you don’t know where he is going to end up. I don’t know anything about Roberts, although I know he likes P.G. Wodehouse, so he might have a taste for the absurdity of the fair use doctrine. PROF. HANSEN: Very interesting. Thank you. Let’s move to trademarks. Graeme? PROF. DINWOODIE: I think that the most revealing thing to do in looking at the Rehnquist Court in trademarks is to look at the cases they took and the issues that were 6 7

Reno v. ACLU, 521 U.S. 844, 117 S. Ct. 2329, 138 L. Ed. 2d 874 (1997). MGM Studios v. Grokster, Ltd., 545 U.S. 913 (2005).

52 S E S S I O N I : P L E N A R Y SE S S I O N raised, and then compare the way those cases were decided. In a lot of cases, constitutional or quasi-constitutional issues were raised, to be sure, in part, because many of them were trade dress cases, with which the Court has been fascinated for a while. But you also had Dastar.8 In every single one, they ducked the constitutional issue. The Court did not want, in my view, to be making large pronouncements about where it wanted trademark law to go. It was essentially resolving circuit splits in almost every single case. They came out with a relatively narrow statutory interpretation, a pretty minimalist approach to the way of resolving trademark cases. In fact, the main values that informed the Rehnquist Court, and I assume will still inform the Roberts Court because the changes I don’t think are that significant — in fact, Roberts argued TrafFix9 successfully — were prudential values. They were values such as certainty, which you see stressed in almost every single case; values ensuring that defendants are able to get rid of cases that are nuisance cases with summary judgment where the standards are clear enough. These are pretty small. I don’t mean they are unimportant, but there is not grand vision for what they want to do with trademark law. But the signal, to the extent there is a signal that the lower courts have taken, is that the Court is skeptical of overprotection. This is particularly true on trade dress, but I think you can see it more generally. You see it even in what I think was the tortured statutory interpretation in Victoria’s Secret.10 The signals that they were sending, and have been consistently sending, are likely to continue for a while: a caution against overextension of trademark law, but not based upon some real grand vision of what trademark should be doing; more based upon pretty small lower-order set of values, such as certainty, certainty for competitors in particular. PROF. HANSEN: Excellent. Thank you Who wants to start off on the next ten years in patents? Hal? MR. WEGNER: I would like to echo what Tim Wu said. First, I would like to touch on which is pro business and which is pro patent. First of all, Breyer and Stevens are very anti-patent, however you slice it. I had a debate with Rob Merges in Dennis Crough’s blog a while ago and he was pointing out how pro business the current Court is. I said, “Well, that might be anti patent in the classic sense, because if you don’t need an injunction, maybe you don’t want strong patents.” I think that is a matter that is open for discussion. I have three points. First, patents have become very important in the economy, and they are perceived as important in the economy. I think if you turn the clock back to 1982 and ask if patents were as important then as they are now, I do not think the Supreme Court would have tolerated the creation of a Federal Circuit for patents; they would have wanted to have it all for themselves. That is just my offhand remark. They are going to take patent cases from time to time. They get very visible press. I have no connection to the Vonage case,11 but this whole field of technology might get shut down. It is in the newspapers every day.

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Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003). TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001). 10 Moseley v. Secret Catalogue, Inc., 537 U.S. 418 (2003). 11 Verizon Servs. Corp. et al. v. Vonage Holdings Corp. et al., No. 06-CV-0682 (E.D. Va. June 12, 2006); Verizon Servs. Corp. et al. v. Vonage Holdings Corp. et al., No. 07-1240 (Fed. Cir. Apr. 25, 2007), available at http://www.ll.georgetown.edu/Federal/ 9

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KSR,12 the problem of bad patents. The previous panel talked about bad patents. It is not a question of how many hours examiners spend. If you have a few hundred thousand patents that go through the Patent Office every year, you are going to get a handful of really bad stinkers, things that should be weeded out. Until the United States gets a good, solid, post-grant administrative revocation system to weed out the KSRs of the world, the Federal Circuit and the Patent Office are both going to be blamed for having a bad standard of patentability, which has nothing to do with why these patents are out there. We need to have that. I am not optimistic we will get that. PROF. HANSEN: What is the Supreme Court going to do in KSR? MR. WEGNER: They are going to reverse. PROF. HANSEN: And do what? MR. WEGNER: I don’t know. They are troubled by it. There will be at least two opinions. PROF. HANSEN: They just want to slap around the Federal Circuit a little bit. MR. WEGNER: No, I don’t think they want to do that. They are going to probably say that motivation is one of the factors to consider. PROF. HANSEN: It’s hard to tell. MR. WEGNER: That’s what’s fun. For people who enjoy chaos and making new predictions, this is the Hal Wegner Full Employment Act of 2007. Another area — I don’t see in the near future — is that we get a Federal Circuit of the future that has a diversity of judges, Last week, Don Dunner defended the Federal Circuit — he didn’t have to — at the twenty-fifth anniversary celebration of the court. He said, “The judges are all extraordinarily qualified.” Well, that’s a non sequitur. Sure they are qualified, but there is no diversity at that court. There are only two trial judges, both from the Court of Claims, and there has never been a single federal district court judge elevated to the Federal Circuit. There is virtually no patent litigation experience there. You are going to get wildcard rulings that go here, there, and everywhere. And above all, the biggest problem right now at the Federal Circuit is its failure to resolve its balkanized precedents through en banc review. PROF. HANSEN: Hold on, Hal. Let’s not focus too much Federal Circuit. There is going to be a whole session on Federal Circuit.13 Let’s stick to the Supreme Court. MR. WEGNER: That is where the Supreme Court is going to be going, wiping the behinds of the Federal Circuit for failure to clean up their act. PROF. HANSEN: Jay, what do you think?

12 KSR Int’l v. Teleflex, Inc. et al., 550 U.S. ____, 127 S. Ct. 1727 (2007). [Note: After the conclusion of the Conference, the Supreme Court decision was handed down Apr. 30, 2007 (holding that Graham v. John Deere Co., 383 U.S. 1 (1966), controls obviousness; that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws”; and warning that a rigid application of the teaching/suggestion/motivation (TSM) test as a litmus test for obviousness is inconsistent with the Graham framework, but stopped short of rejecting the TSM test outright. Simply put, the TSM shortcut for an obviousness analysis is no longer available. The Court’s decision focuses the obviousness spotlight back onto the framework that has controlled the issue for more than forty years, forcing everyone who has grown comfortable with the shortcut TSM test (including the Federal Circuit, the PTO, and the patent bar) to return to full Graham analyses when assessing the obviousness of patent claims. Importantly, the Court’s opinion touches on several other issues, including the roles of “hindsight bias” and common sense in an obviousness inquiry, a question about the rationale for affording a presumption of validity to the patent-in-suit, which avoided a Graham analysis during prosecution, and a rejection of the rigid rule that “obvious to try” is per se insufficient to show obviousness. Decision available at http:// www.supremecourtus. gov/opinions/06pdf/04-1350.pdf. 13 See, infra this issue, Session V, Part C, Courthouse Relationships: The Federal Circuit and the Supreme Court; the Court of Appeal and the House of Lords; and Member State courts and the Court of Justice.

54 S E S S I O N I : P L E N A R Y SE S S I O N PROF. THOMAS: Following Hal is always a challenge, but I will try to match his eloquence of expression. There is no doubt about it that if you are having a panel on intellectual property in the Supreme Court, plainly patents is where the action is, Hugh. Thanks for saving the best for last. There is no question the Supreme Court is taking more patent cases. From 1950–1982, the Court took about one case per term. With the advent of the Federal Circuit — again, that is our court of second instance, which has mostly exclusive jurisdiction over patent cases — they took five patent cases from 1983–1994, with only one actually involving a core patent law issue. From 1995–2005, there were twelve patent cases in eleven terms, with seven of those involving core patent law issues. Now we are seeing two, three, four patent cases per term, with two or three of those involving core patent law issues. I think that trend will continue. I think the era of a patent specialist or a patent lawyer arguing cases before the Supreme Court is over. We have seen that already, and I think it is basically done. So we will see general Supreme Court specialists arguing before the Supreme Court. The sense is that arguing before the Federal Circuit and the Supreme Court are two different tribunals, and you need different skills and different kinds of briefs. One upshot of that is if you read a transcript of the argument and you consider yourself steeped in patent law, it is best not to eat or drink during that experience because you may be choking or spitting things out, during that period of time. PROF. HANSEN: I agree. So you think this is not a good trend, I’m sensing, Jay? PROF. THOMAS: I think it will change the voice of progressive patent policy and the ability of the Supreme Court to act in that capacity. Two other quick trends. The Solicitor General is playing a powerful role. The United States runs a big law firm, called the Department of Justice, and one of the entities in that law firm is the Solicitor General. That person argues before the Supreme Court. The Supreme Court will often ask the opinion of the Solicitor General about whether a case should be heard. In patent cases, it seems that the opinion of the Solicitor General is given great weight. So one thing that private industry is trying to do is recruit the Solicitor General, essentially to act like a fourteenth circuit, an alternative voice of patent law that can be compared to the Federal Circuit rulings. The last point, quickly, is we have a Chief Justice who likes unanimous opinions. So I think reading Supreme Court opinions for the United States is going to be more like reading European Court of Justice opinions. They will be unanimous, opaque, and ultimately unsatisfactory. PROF. HANSEN: Yes, I think there is a trend. It is true in copyright and trademarks too. If you read the oral argument transcripts, it’s the blind leading the blind. But it is a basic policy approach rather than any sophisticated, innovative policy that you get out of that trend, I think. Judge Newman? JUDGE NEWMAN: I hadn’t thought that I would be here disagreeing with three of the people whom I admire so much, who have been stalwarts in our business. Let’s look at a bit of the reality of what has been happening in the Supreme Court. The Supreme Court just took another case from our court, a tax case. The Supreme Court has taken as many tax cases from the Federal Circuit as patent cases. There has been in the last year or two a spike — I call it a spike — in the absolute number of patent

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cases that have been taken by the Court from the Federal Circuit, following several years where no cases were taken. In contrast, last year and the year before, the Court took more Native American appeals from our court than they did patent cases, or in fact than they did tax cases. Now, what are we to make of that? Is there something dramatic happening in the American Indian community that has the attention of the Court? Cases come before the courts in the fullness of the evolution of the issues. I mentioned in the prior panel that about half of the nation’s economy involves intellectual property of various sorts. That is very new. The Supreme Court Justices are, despite most of them being younger than I, still not unaware of what is happening in the world and what is happening with the development of national and international economies. At the same time, a few of the issues which have been before the Federal Circuit have been percolating up and down, still in our court, but with majority and dissenting opinions airing and exposing some of the most difficult questions in our field that have come to the courts. We had one a year or two ago, where a panel of our court thought that the Supreme Court’s holding about the presumption of monopoly was binding upon us and was probably wrong. The Supreme Court took that at the urging of our court to liberate the courts and the public from their own precedent going back over the years. So it is interesting to see what happens. The Court is, it seems to me, affected by the amount of attention, by how much they are told of the implications of a particular decision. The Court may have been reading in the press — and I won’t get into who is behind all of this press exposure — that there is something wrong with the patent system, that patents in certain fields shouldn’t exist. As someone said earlier, there are statutes, there is precedent; if changes are to be made, they need to be made either by the Supreme Court — they cannot be made by us; we are bound by Supreme Court decisions — or by the legislature. It is notorious that our Congress has not reached consensus, any more than the business communities have reached consensus, in many of the areas that we have been talking about. So I for one, and I think my entire court, very much welcome the attention that patents and other areas of intellectual property have been getting from the Supreme Court. We don’t see it as an attempt to straighten us out, correct us, slap us down, or anything else. These are issues that are extremely important to the nation and that benefit very much from the attention that a case gets when it reaches the Supreme Court — the amicus briefs, the vested interests, the powerful public exposure. It is what this field of law at this stage in time in the evolution of science and technology needs. PROF. HANSEN: Polly, how many Supreme Court decisions in patents have you agreed with? JUDGE NEWMAN: Well, of course, there have been those that have adopted my dissent. That’s most of them. PROF. HANSEN: That is probably all of them really, isn’t it, frankly? JUDGE NEWMAN: I agree with all of them. I agree with the MedImmune decision,14 for instance, although the implications are going to be extremely difficult. I have always felt it should be easier to challenge patents, that patents should not be treated differently than any other commercial asset. I don’t know of any that I disagree with. I don’t know what is going to happen in KSR.15 It is extremely difficult. I know how 14 Medimmune, Inc. v. Genentech, Inc., 427 F.3d 958 (2005), vacated and remanded, 127 S. Ct. 764 (Jan. 9, 2007), available at http://www.supremecourtus.gov/opinions/06pdf/ 15 See KSR, supra note 12.

56 S E S S I O N I : P L E N A R Y SE S S I O N hard my court wrestled to try and find objective standards for obviousness. I hope the Supreme Court can do better. PROF. HANSEN: Thanks. Dimitrios, do you want to hold forth here a little bit? MR. DRIVAS: Yes, thank you. I think in the last twenty years we have seen a strengthening of the patent system in the United States, and uniformity, and a lot of that has to do with the Federal Circuit. At the same time, we have seen a transformation of the industries that really are important to our economy — financial services, information, biotechnology, and the like. With that change, I think there is a reaction, first in the business community, then in the public at large, and the Supreme Court takes note of that. There is some measure to bring things back to some middle point that pleases everyone. I think that is what has happened in the last two terms. We have seen seven cases, one appeal dismissed, LabCorp.16 We are awaiting two more important decisions. What I expect after KSR and Microsoft v. AT&T 17 is that the Supreme Court will probably step back and see what happens, see how everything falls back into place, especially with the decision on obviousness out of KSR. Maybe they will look to see if that solves the business method problems they seem to be having. If you look at the dissent in the dismissal of LabCorp and Justice Kennedy’s concurrence in eBay,18 you will see there are a lot of troubling aspects to the business method expansion on the Supreme Court. Now, even the greatest advocates of business method patents will say that there are some business method patents that just should not be issued; we just don’t understand why they are there. But they are also very important to our new economy because they protect some sort of innovation that needs patent-type protection. What that balance is I don’t know. So that is where I expect that the Supreme Court may have an interest. But otherwise I think things will somewhat slacken. PROF. HANSEN: Lord Hoffmann, do you have any comments from afar, from across the pond as we say? LORD HOFFMANN: I was listening with fascination to this discussion of the Supreme Court, mostly about what kinds of cases is it likely to take, what its agenda is, what are the views of the individual Justices, and so forth. The European Court of Justice you cannot sensibly ask any of those questions. It has a great deal in common with the Delphic Sybil. For one thing, the Delphic Sybil had no control over her docket, so she had to answer the question if you sent it. The rule in Europe is that if we have any question that is in the slightest bit of doubt and that involves a question of European law, like the Trademark Regulation, we have to bundle it up and send the question to Luxembourg. No further dispute about the matter. PROF. HANSEN: How many have you sent to Luxembourg? LORD HOFFMANN: Oh, quite a few personally. I sent one about a week ago about arbitration. PROF. HANSEN: In IP how many have you sent? LORD HOFFMAN: Two on trademarks. Then, like the Delphic Sybil, it takes a long time to get an answer. 16 Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc. et al., 548 U.S. ___; 126 S. Ct. 2921, slip op. (June 22, 2006) (Breyer, Souter, and Stevens, J. dissenting), available at http://www.supremecourtus.gov/opinions/ 05pdf/04-607.pdf. 17 Microsoft Corp. v. AT&T Corp., 550 U.S. ____ (2007) [Note: Subsequent to the Conference, the case was decided Apr. 30, 2007, available at http://www.supremecourtus.] 18 eBay Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006).

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PROF. HANSEN: We are doing a whole half-hour on the European Court of Justice later in this session.19 My thesis on the Supreme Court is that, to the extent that people actually listen to or follow it, stare decisis is dead, if it ever existed. It is really what respect they have for that institution, and also whether the institution actually polices its decisions. The Supreme Court has not policed its IP decisions up until recently. By that I mean if something goes wrong, if they say one thing and all the lower courts say something else, they do not grant cert. and correct it. Constitutional law they would do in a second. But they haven’t done that for IP law. They are starting to police their patent decisions. A judge on a circuit court, other than the Federal Circuit, would realize that only one IP case out of a million gets granted cert. by the Supreme Court. Even then it would only be for an issue they haven’t addressed before. So, I am pretty free to do whatever I want and not have to worry about being reviewed, let alone reversed, by the Supreme Court. So if I want to reach what I consider the right decision in the case, if the Supreme Court precedent leads in that direction, then fine, if not, then I go my own way discretely. For example, the 1964 decisions in Sears20 and Comco21, two companion cases concerning trademarks and unfair competition, were never followed by lower courts, or for that matter, by the Supreme Court thereafter. So, in terms of the future, to what extent does it matter as a practitioner, on the ground, what the Supreme Court says in an IP case? MR. WEGNER: I think the big impact is there are so few Supreme Court decisions — like let’s take KSR.22 It will be a reversal and it won’t be understood at the lowest levels, at the Patent Office, at the examiner level. But it will be taken as a message, “We are not being tough enough.” It will have a reaction that way. I do not think it will have much impact at the trial level, but it will have a huge impact at the Patent Office level. It will take them a dozen years to figure out what is said. PROF. HANSEN: Tim, I can see you are upset over this. PROF. WU: No. I am not upset about that. I was going to say I don’t see that trend you are talking about as much in copyright. It seems to me the trend — and I’m not a patent person — is strongest in patent and trademark, where courts, like the Federal Circuit, who take more ownership over patent, are slowly, quietly moving away from Supreme Court precedent, in software for example. I just don’t see it in copyright, but maybe you see things that I don’t see. PROF. HANSEN: Which particular case are you thinking of ? PROF. WU: Let’s say Feist.23 PROF. HANSEN: Feist is an example where the Court at least in one case directly on point was not followed. Feist was in 1991. At the same time, the Fourth Circuit was hearing an appeal in the Payphone case.24 They specifically delayed their decision until Feist was decided because both were sweat of the brow cases. By the way , Lewis Powell, retired Supreme Court Justice, was on the panel. After Feist came down and the Fourth Circuit decided Payphone. It was a per curiam, unpublished decision, that was not to be cited. It then became a sweat-of-the-brow case in selection and arrangement clothing. One one page for each state the plaintiff listed all the requirements to operate a payphone. There was no selection as everything was included. There was no arrangement other than 19 20 21 22 23 24

See, supra this issue, Session I, Part F, The Next Ten Years of IP Law in the European Court of Justice. Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225 (1964). Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234 (1964). See KSR, supra note 12. Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., Inc., 111 S. Ct. 1282 (1991). U.S. Payphone, Inc. v. Executives Unlimited of Durham, Inc., 18 U.S.P.Q. 2d 2049 (4th Cir. 1991).

58 S E S S I O N I : P L E N A R Y SE S S I O N a simple listing on the page, no particular or even minimally creative arrangement. The 4th Circuit nevertheless found copyrightable selection and arrangement. It emphasized the amount of effort even when discussing selection and arrangement. In one conclusory sentence it said that the evidence suggested an original selection and arrangement without detailing in any way why that was so. And they only said that the evidence “suggested” an original selection and arrangement. Of course, the civil law standard is proof by a preponderance of the evidence not that the evidence suggests something. In short, despite Feist the Fourth Circuit protected sweat of the brow. And Lewis Powell was on the panel! Part of the problem is that Feist was a sweat of the brow case where there was neither sweat of the brow nor free riding. Compiling of white pages phone directories used to require sweat of the brow but now the computer does all the work when the person signs up. Moreover, the defendant offered to pay for the listings and, in fact, paid other phone companies for their listings. So it was an easy case for the Supreme Court on the facts. Where you have cases with tremendous effort and free riding, it is much more difficult and I think courts have and will find a way to find a violation. The misappropriation underpinnings of the sweat of the brow doctrine I think still controls. Keep in mind that in Feist, Justice O’Connor said twice you could look to state unfair competition law to protect sweat of the brow. What effect Feist did have was to remove the more extreme versions of sweat of the brow doctrine such as not being able to take any facts from a compilation. But this is because courts agreed with that part of it. PROF. WU: I don’t think people will be asking for a database protection law — which obviously they haven’t been asking for too strongly lately — if people thought Feist had no impact or they could get what they wanted anyways. I think the Copyright Office will not give you the registration and the pure set of facts that you might have wanted. My sense is that the trend you are talking about feels a lot stronger in the patent context, and maybe in trademarks. And software is the one I think about. MR. DRIVAS: I wouldn’t say that. I mean take the MedImmune decision,25 which on a declaratory judgment criticized the Federal Circuit’s “reasonable apprehension” test in a footnote.26 I did not read that as overturning. I did not see any other proposed test in the MedImmune opinion. But the Federal Circuit now in Sandoz27 has totally thrown it out. So somebody took notice of a footnote. PROF. THOMAS: I had the same comment in mind. I agree. I believe the Federal Circuit has responded to Supreme Court rulings. But I also agree with Hal that we have to be realistic about whether a Supreme Court non-obviousness standard will actually have any effect on patent grants. The Patent Office examining corps is a very transient population, 1,000–1,200 people hired every year, and increasingly working out of home offices. PROF. HANSEN: First of all, I am not saying the Federal Circuit, or other circuits, never reaches the same result as the Supreme Court. I am saying these courts when they reaches the same results do so probably because they agree with the Supreme Court, rather than because it is precedent. And more recently, the Federal Circuit might also be following the Supreme Court as a way of laying low to get the Supreme Court off its back. Unfortunately, we actually are out of time. I want to thank our panel for a great session. 25 Medimmune, Inc. v. Genentech, Inc., 427 F.3d 958 (2005), vacated and remanded, 127 S. Ct. 764 (Jan. 9, 2007), available at http://www.supremecourtus.gov/opinions/06pdf/ 26 Id. n.11. 27 Savient Pharms. v. Sandoz, No. 07-1081 (Fed. Cir. Dec. 28, 2006).

I: PLENARY PART F: THESESSION NEXT TEN YEARS OFSESSION IP LAW IN THE ECJ

SESSION I: PLENARY SESSION

The Next Ten Years in Intellectual Property Law: What Should Happen? What Will Happen?

Part F: The Next Ten Years of IP Law in the European Court of Justice

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law

Panelists PROF. GRAEME DINWOODIE

WILLIAM ROBINSON

Chicago-Kent College of Law (Chicago)

Freshfields Bruckhaus Deringer (London)

LORD HOFFMANN

HON. KLAUS GRABINSKI

Law Lord, House of Lords, Parliament (London)

Presiding Judge, District Court (Düsseldorf)

PROF. SIR HUGH LADDIE

PROF. ALAIN STROWEL

Rouse & Co. International; University College London

Covington & Burling LLP St. Louis University (Brussels)

RT. HON. LORD JUSTICE JACOB

Court of Appeal, Royal Courts of Justice (London) PROF. HANSEN: Now we are going to look at the future of IP law in the European Court of Justice (ECJ). Let me introduce the panel. We have William Robinson from Freshfields Bruckhaus Deringer in London; Graeme Dinwoodie who seems to be on every panel of this conference, and I am glad of it; The Honorable Klaus Grabinski, Presiding Judge at the District Court of Düsseldorf; Lord Hoffmann; Lord Justice Robin Jacob; Professor Sir Hugh Laddie; Alain Strowel, a practitioner at Covington & Burling and a professor at St. Louis University in Brussels. We will start off with William Robinson, who worked for the UK Judge on the ECJ, Judge Edward, who was one of the best judges on the Court. William spent four years at

60 S E S S I O N I : P L E N A R Y SE S S I O N the Court. We are lucky to have someone who has seen it all from the inside. William will give us some talking points for the ECJ discussion. MR. ROBINSON: Top-line points. I think the Court of Justice has and will continue to struggle with IP and its role within the EC legal system in the next ten years. I don’t think it should come as much of a surprise that the ECJ is trying to forge, whether with legislation or without legislation, a more harmonized EC IP system. That is part of its mission. That is what it is asked to do by the EC Treaty.1 At the same time, it should not come as any surprise that that has created tensions throughout the system, particularly with national courts. Now, given that it is in its infancy, let me look back over the last ten years and try to find some pointers for the next ten years. I am going to give you the top four points and then see how far I can get into the detail. 앫 Point 1: Making European Community legislation work is going to be a major task in the next ten years, in particular in respect of the Enforcement Directive.2 앫 Point 2: Resolving the tension between the ECJ and national courts in the IP arena. There has to be some sort of way of working this out. 앫 Point 3: I believe there are a whole series of institutional issues that will arise for the ECJ in the next ten years. I will go into those in a little more detail. 앫 Point 4: The fourth area where I see enormous developments over the next ten years is in respect of the IP/antitrust overlap. It seems to me that that is an area that is bound to develop for a number of reasons. Let me take these in order. As to making Community legislation work, the ECJ has not been blessed with the legislation it has to interpret. It has been passed a series of hospital passes by the Community legislators, which has pitted it against various national interests over the last ten years. One only has to look at the phrase “likelihood of confusion,” including “likelihood of association,” in the Trade Mark Directive,3 to see that the Court was bound to run into problems. To my mind, the Enforcement Directive is going to create similar types of problems. I think it is a fantastic attempt by the Community legislature to try to harmonize enforcement. There have been a number of references this morning about the importance of enforcement. The problem is that national judges, if they are wedded to national IP substance, will be even more wedded to their national procedures. Whereas you have substantive forum shopping, on the one hand, you are now going to have claims that the IP Enforcement Directive provides a counterpoint to national procedure. Whereas a claimant might choose a “slow” jurisdiction because they particularly want to make use of the procedures in that country, the defendant will argue some sort of direct effect or interpretation of the 1 Treaty Establishing the European Economic Community, Mar. 25, 1957, 198 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-II) [hereinafter EC Treaty], amended by Single European Act, 1987 O.J. (L 169) 1, [1987] 2 C.M.L.R. 741, in Treaties Establishing the European Communities (EC Off’l Pub. Off. 1987). 2 Directive 2004/48/EC of the European Parliament and of the Council of 29 Apr. 2004 on the enforcement of intellectual property rights, 2004 O.J. (L 195) 32–36, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/ l_157/l_15720040430en00450086.pdf. 3 First Council Directive 89/104 (EEC) of 21 Dec. 1988 to approximate the laws of the Member States in relation to trademarks, 1989 O.J. (L 40) 1, available at http://eur-lex.europa.eu/LexUriServ/site/en/consleg/1989/L/ 01989L0104-19911223-en.pdf.

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Enforcement Directive to try and speed things up. And that extends to injunctions, to evidence, and to costs of the proceeding. This is an area fertile for debate between national courts and the ECJ. That brings me on to my second point: What can be done about the difficult relationship between national courts and the ECJ? Having worked within the ECJ, I believe it is fair to say that the IP area has been particularly problematic in terms of this relationship. Other areas of Community law have not been so heavily imbued with conflict between national courts and the Community Court, or at least “creative tension” at its highest. To my mind, there is going to have to be some sort of redefinition of these roles. There has already been reference earlier to the Article 234 process, national courts making references, and the instances within which they should be making references. Secondly, Advocate General Sharpston in her recent opinion in Boehringer,4 yet another repackaging case, has talked about the need for national courts to get on and apply high-level principles, and not to allow clever national lawyers to force more questions into the ECJ, thereby essentially turning a generalist court into a minutiae-dealing IP court. So there is a real need to work out that relationship. Where does the ECJ see itself ? Is it just going to set the high-level principles, or does it want to be a proper, fully-fledged IP court? My third concern, institutional issues. The ECJ has suffered with its internal inconsistency in IP cases. This has been both within the ECJ’s own case law and between the various chambers of the Court of First Instance (CFI). The ECJ is going to have to find a way of trying to get the answer right the first time, rather than going round and round the issues until it gets to a decision that it is in fact comfortable with. Linked to that is whether or not the proposal for a specialist IP tribunal should be taken forward. The CFI put forward that suggestion back in 1998, on the back of an estimation of between 200 and 400 IP cases coming from Alicante every year. That has not happened. They are at about 140 cases a year. But it still makes up 25 percent of the CFI’s caseload. Is there a reason, on the back of that and on the back of the consistency issues, to look at the development of a third level of jurisdiction — that is to say, an IP tribunal? Turning very, very quickly to the Community and European Patent jurisdiction that was mentioned earlier, there may be a concurrence of wills, but is it possible legally? If it is within the Community framework, is the ECJ going to take a robust position, as it did in respect of the European Convention on Human Rights accession proposal? Lastly, in antitrust there is a whole series of unresolved issues. National courts are playing a greater role in antitrust enforcement in the European Union. They are required to do so under the modernization rules. There is a Community Green Paper to try and improve the role of national courts in enforcement through damages actions.5 PROF. HANSEN: Thank you very much, William. Whatever you have to say further we can do in the discussion. I know that sounds brutal. That was fantastic. You have given us more food for thought than maybe we can even chew on in this. 4 Case C-348/04, Boehringer Ingelheim and Others v. Swingard; Boehringer Ingelheim and Others v. Dowelhurst, E.C.J. (Opinion of Advocate General Sharpston, Apr. 6, 2006), available at http://curia.europa.eu/jurisp/ cgi-bin/form.pl?lang=EN&Submit=Rechercher$docrequire=alldocs&numaff=C-348/04&datefs=&datefe=&no musuel=&domaine=& mots=&resmax=100. 5 European Commission, Green Paper on Damages Actions for Breach of EC Treaty Antitrust Rules, COM(2005) 672 (Final) (Dec. 19, 2005), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:52005DC0672:EN:NOT.

62 S E S S I O N I : P L E N A R Y SE S S I O N The first thing I will ask you is: What about enlargement? Doesn’t that make the ECJ almost unworkable? MR. ROBINSON: No, I don’t think it does make it unworkable. The ECJ has reorganized itself into chambers in a way that it can still manage its caseload, it can still manage the language issue, and it can still manage the consistency issues. PROF. HANSEN: By the way, enlargement has gone to twenty-seven members of the European Union and they each have a judge on the Court. That is a massive number of people. They have no legal or judicial background. And they have to speak French. Isn’t that a nightmare. MR. ROBINSON: The language issue is difficult. French is the internal working language. The ECJ still essentially works in an hourglass system: everything comes in the twentythree languages, gets channeled through French, and then comes out in twenty-three languages. It is about as efficient in the middle as it can be. It is now moving towards English and French in the middle part. But the language issue is not an overriding issue for the Court. There isn’t the issue of cross-translation that you get in the political institutions. So that is one point. The second point is you would hope that with more personnel they could create more specialist chambers. I am sure there will be a strong drive for an IP specialist chamber. Now, that partly goes back to the power of the President of the Court in deciding which judge should be the Judge Rapporteur for a particular case. The Judge Rapporteur is the lead judge on the case, and it is that choice that will often focus the direction of the case. PROF. HANSEN: Of course, the Court did that informally, because it chose both Judge Gulman for a great number of IP cases (he didn’t start with IP expertise, but he developed it) and Francis Jacobs as the Advocate General. They worked as a team, creating a fairly consistent body of law. Do you agree with that? MR. ROBINSON: I agree with that. LORD JUSTICE JACOB: I don’t. I agree they worked together and I agree they produced a body of law. I just don’t agree with the word “consistent.” PROF. HANSEN: Well, actually you just disagree with the results, don’t you, Robin? LORD JUSTICE JACOB: No, I don’t. I think it is inconsistent. PROF. HANSEN: Okay, then you disagree. We can discuss that. I think the European Bar Association just filed a letter with the Court in which they say that they are arguing before five-judge panels and two or three of them are sleeping through the entire argument. I just spoke with someone who argued before the Court of Justice and said that two of the judges slept through the entire argument. I’m not sure why that should happen. PROF. LADDIE: They don’t do any damage that way. PROF. HANSEN: By the way, these were judges from the new Members. Actually it doesn’t matter, because the oral arguments don’t count anyway, do they? Isn’t that true? MR. ROBINSON: A smaller role. PROF. HANSEN: I like that. MR. ROBINSON: The book-dropping tradition in the middle of oral pleadings isn’t limited to the ECJ. PROF. HANSEN: William raised a number of interesting issues. Anyone want to speak to any of those? Hugh? PROF. LADDIE: I would like to say something. There has been talk about the tension between the ECJ and national courts. I know that there certainly was some tension between the ECJ and me when I was a national judge. I think one of the things that is not really properly appreciated is the really difficult job

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the ECJ has. In most judicial systems — but there is an exception here in the States — the supreme court consists of judges who have risen through the ranks and are the best and most experienced judges in the system, so they really know their stuff. What happened in Europe, of course, because of its political structure, is that each country appointed somebody to the ECJ. Lots of them were not judges at all. They were then presented with an extraordinary job of trying to make a cohesive legal system from zero. Poor dears. It would have been difficult even if they had all been judges. So it is not surprising that there are some problems created by this. That is why I think actually one of the most encouraging things about the ECJ is the creation of the CFI and its expansion and the possibility of creating specialist tribunals. That way you will end up, perhaps belatedly, getting some courts who understand what they are talking about. I feel very sorry for the ECJ particularly in the field of trademarks. Trademarks is a horrendously difficult area of IP law. It is made all the worse in Europe by having legislation that is internally inconsistent. Resolving those inconsistencies is the sort of job that needs the best and most competent IP-savvy court, and the ECJ does not fit that description. They are not good enough for the job. PROF. HANSEN: So would you say you are neutral in this issue, Hugh? PROF. LADDIE: Yes, sure. PROF. HANSEN: Judge Grabinski? JUDGE GRABINSKI: I would like to add this is not only true with trademark law. At the moment, trademark law is in the domain of Community law; therefore, the ECJ has competence to decide on these matters. At the moment, this is not the case with regard to patent law. Patent law is still national law or law under the European Patent Convention,6 and therefore not Community law. But just imagine for a second that patent law would be also in the domain of Community law. At the moment, as long as it is national law, we have in Germany on all three levels — on the level of the district court, on the level of the court of appeal, on the level of the supreme court — judges that practiced patent law for a long time, who are experienced, who know what they are doing, at least most of them. If the ECJ would have competence to decide on these matters, there is none of all the twenty-five judges who has any experience at dealing with patent law. Just imagine that this would be the last instance, the court that would finally decide, for example, how to interpret the scope of protection, what is equivalence, what is obviousness, and so on. Probably it will come down that they have a certain référendaire, who will be perhaps a specialist in patent law, and he will then decide and determine how to, for example, define equivalence. I think this perspective is not very promising. Therefore, I am quite content in this respect with the situation as it is right now. LORD JUSTICE JACOB: I agree with every word of that. The Community Patent, if it includes proposals for these judges to be deciding patent cases, will die because industry will simply say no. Their record in trademarks — and I agree they had a terrible piece of legislation to start with — is that they have had at least seventy trademark cases in the last ten or eleven years go to the ECJ, and trademark law is now more uncertain than it was when they started. If they got hold of patents, there is no reason to suppose that exactly the same thing would not happen. For that reason, I remain utterly opposed to the ECJ being involved in 6 Convention on the Grant of European Patents, signed at the Munich Diplomatic Conference for the Setting up of a European System for the Grant of Patents on Oct. 5, 1973, 13 I.L.M. 270 (1974), 1160 U.N.T.S. 231.

64 S E S S I O N I : P L E N A R Y SE S S I O N patent law. I see no useful purpose in it being involved in patent law. The European Patent Litigation Agreement (EPLA) proposal,7 where you borrow national judges and create a supernational patent court, is the way forward. As far as I can see, it is perfectly lawful, providing it is gone about in the right way. By way of an advance notice, the next edition of European Intellectual Property Review (EIPR) will contain an article mainly written by Tony Arnull, with a few additions by me, saying exactly why it will be lawful and that the European Parliament’s little provisional opinion that came out saying EPLA is not lawful can be bypassed readily.8 PROF. HANSEN: I think there has been inconsistency on trademark matters in the ECJ. Just to clarify, when Francis Jacobs and Claus Gulmann were both on a case, I don’t think there was inconsistency. You may disagree with it, but I think the decisions were consistent. LORD JUSTICE JACOB: The man who thinks that BABY-DRY and DOUBLEMINT 9 are consistent one with the other has got very special vision. They were guilty on both of them. PROF. HANSEN: I don’t think those cases were consistent. But Claus Gulmann was not the judge rapporteur on either case. And my point was that when he was the judge rapporteur and Francis Jacobs was the Advocate General, the case law was consistent. In any case, Baby-Dry and Doublemint were more the exception than the rule. Finally, I think the furor over the Baby-Dry case was ridiculous and hysterical. Professor Strowel. PROF. STROWEL: I don’t think that the ECJ will be one day a fully-fledged IP court, because it does not have the possibility to rule on many substantive IP issues, except in the trademark field. Many core IP issues, such as subject matter and conditions of protection and infringement in the fields of copyright or patent, largely remain outside the ECJ’s competence. Last year, eight out of the ten cases for referrals to the ECJ concerned trademark. This focus on trademark will continue. We might expect some fine-tuning of the trademark case law and some inconsistencies will probably disappear. It is quite surprising that we do not have that much case law in the copyright field. So far, although there is a very substantial legislative body, with seven copyright directives, we mainly have decisions on the exhaustion issue. That is not much. Sometimes the ECJ is too prudent, and that limits the impact of its decisions. The ECJ was very prudent on the interpretation of the communication to the public right, for instance. But that changed recently. The kind of U-turn from the decision in EGEDA v. HOASA10 to SGAE v. Rafael Hoteles11 is a very interesting development. In the SGAE v. Rafael Hoteles case, decided last December, the Court decided what “communication to the public” means, while it had previously considered it as a matter for national law. I think the ECJ will remain a court on “IP versus other bodies of law.” On the interface with other bodies of law, the ECJ will bring something substantial. For instance, the relationship between IP and competition will be a hot issue this year.

7 European Patent Organisation, Working Party on Litigation, Draft European Patent Litigation Agreement (EPLA), Draft Agreement on the Establishment of a European Patent Litigation System (2004), available at http://www.european-patent-office.org/epo/epla/pdf/agreement_draft.pdf. 8 Anthony Arnull & Robin Jacob, European Patent Litigation: Out of the Impasse?, 2007 Eur. Intell. Prop. Rev. 209 (2007), EIPR 2007, 29(6), 209-214. 9 Case C-383/99 P, Procter & Gamble v. OHIM (Baby-Dry), [2001] E.R.R. I-6251; Case T-193/99 Wrigley v. OHIM (DOUBLEMINT), [2001] E.C.R. II-417. 10 Case C-293/98, EGEDA v. HOASA, [2000] E.C.R. I-629. 11 Case C-306/05, SGAE v. Rafael Hoteles SL, E.C.J. (Third Chamber) (Dec. 7, 2006), 2006 O.J. (C 331) 3.

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The CFI decision in the Microsoft case will be issued before the Fall.12 There are other forthcoming decisions in the pharmaceutical field, on the relation between IP and patents, and those decisions will have an important impact. There are other areas of the law that will be considered by the ECJ. The interface between, for instance, copyright and privacy, or data protection, is as well in the pipeline of the ECJ, with the Promusicae case.13 So the ECJ case law is quite important, but not as much for ruling on the standard IP issues as for delineating the relation between IP and other bodies of the law. PROF. HANSEN: Lord Hoffmann. LORD HOFFMANN: I agree entirely with what Klaus Grabinski said about the horrors of the thought of the ECJ dealing with patent cases for the whole of Europe. I think there is an institutional problem, and that is the reference under Article 234 of the Treaty, the way in which cases get to the ECJ, which is that if there is doubt you have to refer it to the ECJ, and they then deal with it and they give an answer to the question. It would be much more acceptable if the ECJ were a supreme court for Europe, in which, if they wanted to give leave to appeal because they thought we were getting out of line with the Germans or the Italians or something like that, they could. The cases would come up through the system. National courts would deal with questions of European law. At the moment, we do not deal with any European law because we send it off to the ECJ to deal with. They, in turn, never refer to what the national courts say. So there is no European jurisprudence being built up in the national courts, where there is a certain amount of judicial expertise that you might think the ECJ could avail itself of. Therefore, it is the institutional change that I think is necessary. I would also take away their law clerks so that you could actually see what they were like when they wrote their opinions. You would then have a system under which occasionally we could even bear the possibility of the ECJ being a supreme court for patent matters because then they wouldn’t have to deal with them all the time. They could decide whether they were going to intervene or not. They could be like the House of Lords during the Napoleonic Wars, who in the song did nothing in particular and did it very well indeed. PROF. HANSEN: Graeme has not spoken yet. PROF. DINWOODIE : I am actually intrigued by Advocate General Sharpston’s comments about the minutiae that she sees at the national court level. One of the intriguing things, at least in trademark cases, is that the Court is feeling the need to intrude upon a lot of issues that I think properly should be treated as fact issues. This is perhaps because it has a harmonization impulse, and, of course, when you make them fact issues, it is quite natural in some instances for one national court to reach a different factual conclusion from another. I think, in fact, one of the lessons the ECJ probably has to learn is to live with is fact issues. We do not have a uniform European trademark law. Notwithstanding the Regulation and notwithstanding the Directive that harmonizes national law, you have discrete national markets with discrete national rights. I think the ECJ has to learn to live with the 12 Case T-201/04, EC Commission v. Microsoft [2004]; all case documents available at http://curia.eu.int/ jurisp/cgi-bin/form.pl?lang=EN&Submit=Rechercher$docrequire=all docs&numaff; decision available at http://ec.europa.eu/comm/competition/antitrust/cases/decisions/37792/en.pdf. 13 Case C-275/06, Productores de Música de España Promusicae v. Telefónica de España SAU, E.C.J. (Opinion of Advocate General Kokott, July 18, 2007), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:62006C0275:EN:NOT.

66 S E S S I O N I : P L E N A R Y SE S S I O N fact that certain issues are fact issues and a lot of the national courts make determinations on those, and not feel the need to try to turn them into rules into law, but instead allow them to make a sort of European override of the national court determination. PROF. HANSEN: I see we have two seconds. Thank you to the panel for a lively and frank discussion. And thank you, William, for that great introduction.

SESSION II: PART A: LEGALITY OFCOPYRIGHT UNAUTHORIZED USE

SESSION II: COPYRIGHT

Unauthorized Use of Works on the Web: What Can Be Done? What Should Be Done?

Part A: Legality of Unauthorized Use

Moderator MORTON DAVID GOLDBERG

Cowan, Liebowitz & Latman, P.C. (New York) Speakers ALEXANDER MACGILLIVRAY

PROF. JOHN G. PALFREY JR.

Senior Product and Intellectual Property Counsel Google, Inc. (Mountain View, CA)

Executive Director, The Berkman Center for Internet and Society, Harvard Law School (Cambridge, MA)

DONALD B. VERRILLI JR.

Jenner & Block LLP (Washington, D.C.) Panelists SANDRA ASTAIRS

PROF. BRIAN FITZGERALD

Assistant General Counsel Time Warner, Inc. (New York)

Queensland University of Technology (Brisbane)

MICHAEL A. EINHORN

THOMAS C. RUBIN

Ph.D., Senior Consultant; Advisor, CONSOR Intellectual Asset Management (New York)

Associate General Counsel, Copyright, Trademark and Trade Secrets Microsoft Corp. (Redmond, WA)

MICHAEL SCHLESINGER

Smith, Strong & Schlesinger LLP (Washington, D.C.)

68 SESSION II: COPYRIGHT MR. GOLDBERG: Good afternoon. If you are looking for the panel on “Unauthorized Use of Works on the Web: What Can be Done? What Should be Done?” you are in the right place. The first segment will be “Legality of Unauthorized Use.” Let me first introduce everybody. I am Mort Goldberg of Cowan, Liebowitz & Latman in New York. I am your moderator. As I have had occasion to say in the past, the moderator is like the body at the Irish wake: you are needed for the thing to take place but you are not supposed to say very much. I do not plan to say to say very much. My primary job is to enforce brevity on both those on the dais and those in the audience. As Henry VIII said to each of his wives, “I won’t keep you long.” Let me now introduce you to the dais. They are, from left to right: John Palfrey, Professor at Harvard Law School and Executive Director of The Berkman Center; Don Verrilli, a partner at Jenner & Block in Washington; Alexander Macgillivray, Senior Product and Intellectual Property Counsel at Google. We then have the panelists who will participate in a panel discussion at the end of each segment of the presentation: Michael Einhorn, Senior Consultant, Advisor to CONSOR Intellectual Asset Management; Professor Brian Fitzgerald, Queensland University of Technology in Brisbane; Tom Rubin, Associate General Counsel, Copyright, Trademark and Trade Secrets, Microsoft. The speakers who are in the segment that will follow this are Sandra Aistars, who is Assistant General Counsel at Time Warner, and Michael Schlesinger, of Smith, Strong & Schlesinger in Washington. We will now start with John Palfrey talking about legality of unauthorized use. MR. PALFREY: Thank you so much, Mr. Goldberg. That was an impressive quick introduction. I will try to cede some time back also, given the quality of the panel. This is obviously a huge topic. In the context of an intellectual property conference that has many people in the audience who are also panelists, I thought I would just tee up what I think are the key issues and then Mr. Verrilli and Alex Macgillivray no doubt will take it on, and probably spar a little bit at that point. The title of this session is Unauthorized Use of Works on the Web and what could or should be done about it. It seems to me that the first thing is to take issue, of course, as you do in law school, with the topic. There is a whole lot that is in unauthorized use of works that is just fine and, in fact, that we want to encourage. In the last panel about copyright in the future, there was a lot of discussion about the value of democratization of creativity and so forth. I think we should bear in mind that many, many uses of works that are not copyrighted are great. There are uses of copyrighted works that, in fact, are unauthorized but also are great. Those are the classic limitations like fair use and implied license, things that the Technology, Education, and Copyright Harmonization Act (TEACH)1 protects in the United States. Just as an opening salvo, I would say it is critical, with any legal reform or any business reform, to note that we do not want to chill those kinds of unauthorized uses of works that are lawful — a “do no harm” starting point. Then I would say there are three categories from there in terms of issues that we might take up here. One is the set of probably not-all-that-controversial changes or approaches that might get us to a better place, as well as another set of approaches that are relatively

1 Technology, Education, and Copyright Harmonization Act of 2001 (TEACH), Pub. L. No. 107-273, 116 Stat. §§ 1758, 1912 (amending §§ 110(2) and 112 of the Copyright Act), available at http://www.copyright.gov/legislation/pl107-273.html.

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controversial. I will end with one that I think probably is the most controversial, to tee up the speakers to follow. In terms of the least controversial, I think one key thing that ought to happen and that we all — sort of the collective “all of us” — agree we should to have is better education of individuals. I think we have gotten to a place where the Internet overall is, in some quarters and by some people, thought of as an unlawful place where you can do anything; you can break the law and not be held accountable for it. The effort that we all make toward making the Internet just as accountable as the real space is important. I think we give lip service to this as a global community and then nobody really does anything about it. More responsibility should fall to schools or to parents to think about copyright education as a relevant part of what a young person learns today, not only because they might become a defendant if a case is brought, but also because, as you think about the democratization of creativity, young people are also the rights holders at the point at which they create something that is meaningful. So I would point to education as something that may be simply lip service and overlooked, but is actually super-important. Related to that, of course, in the accountability zone, people who are direct infringers and who clearly infringe copyright ought to be held liable for it. Efforts to enforce the existing laws make a lot of sense. This seems uncontroversial, but important. A second issue is the conversation around improving licensing schemes. I think one of the undisputed successes — or at least, I hope, undisputed successes — of the copyright space has been Creative Commons and the extent to which 150 million people deciding to license their works in specific ways to other people have taken some of the uncertainty out of the equation. There is a chance to build on top of this — perhaps a commercial set of licenses on top of the Creative Commons zone, or perhaps just the continued addition of this licensing scheme. Related to the licensing scheme are new business models. I understand that Sandra Astairs, our colleague from Time Warner, and others will be discussing this later in the panel. There is a ton of innovation that can be done by the private sector that would reduce the amount of unauthorized use of copyrighted materials that is going on. The third approach that I would say is in the “not that controversial” zone is to work towards developing further best practices, in terms of how people can reuse works, helping to define where the line falls between authorized and unauthorized. Peter Jaszi and Pat Aufderheide have done great work on this in the context of filmmaking.2 I think the articulation of what is a best practice for the creative reuse of materials by different sectors could be an extremely helpful approach to preventing more unauthorized works from occurring. So I would put those three forward as not controversial. Moving on to the more controversial proposals, the first is related to the conversations we had this morning about new licensing regimes. One is the notion of a collective form of licensing based on a subscription model that is voluntary — I know Tilman Lueder talked about this. There have been some concerns expressed about that resulting in a collecting society model in which this potentially competitive set of compulsory licensing is done on a non-compulsory basis, as in what Terry Fisher has proposed in his book,

2 See Pat Aufderheide & Peter Jasza, The Good, the Bad, and the Confusing: User-Generated Video Creators on Copyright, (Center for Social Media, Apr. 3, 2007), available at http://www.centerforsocialmedia.org/files/pdf/ good_bad_confusing.pdf.

70 SESSION II: COPYRIGHT Promises To Keep,3 in the last chapter, the entertainment cooperative and so forth. There is a lot in that zone that might be helpful. A second proposal that might be more controversial and might be helpful is further articulation of the exceptions and limitations, making clear what the rights are, the unarticulated rights, which are on the other side of the equation and which could well give greater clarity, and therefore reduce the incidence of the unauthorized uses. This is something that the non-governmental organization (NGO) community is very much in favor of in the international context The third one that I would say is in this category of somewhat controversial is technological protection measures (TPMs). Much of this will be discussed in the next panel.4 But it does intersect with the legal regime. Clearly, the way in which digital rights management (DRM) is put in place is clearly relevant. This has a lot to do with the legal background, in our context in the United States in Section 1201 of the Digital Millennium Copyright Act (DMCA),5 as well as its analogues elsewhere. But the most controversial, and the key one I think, that we will talk about here is the nature of secondary liability in copyright on the Internet. There are two classes of issues, obviously tightly related: One, relatively settled, the class of cases of Napster 6 and Grokster,7 which Mr. Verrilli and others have been instrumental in clarifying; but more recently, and more on the table, the interpretation of secondary liability on the Internet in the context of DMCA Section 512 — the YouTube-Viacom case8 being but one of many examples, DailyMotion in France,9 and so forth. The question is: How much liability do we place on the intermediaries that are providing the service? A lot hinges on the definition of these services. But where a third party does an unauthorized use of a copyrighted work online, I think this is where most of the action falls. I think the big question in the United States is: How will we interpret the DMCA, which was passed, roughly speaking, ten years ago? What did the Congress mean? How will it apply on a going-forward basis? There are lots of ways to look at this. One of the things that I would urge us to think about is: What will be the effect on further innovation after this interpretation? What are the effects of requiring the intermediaries to have some amount of liability if they are following what they perceive to be the letter of the law? I take this to be the position of most of the intermediaries who seek Section 512 protection, which is to say: “If every time we get a cease-and-desist letter, we in fact take it down, and we are honest about the process by which we do this, and if someone is a repeat infringer we kick them off the service, and we follow various rules — even if there are things that remain on the server, we get the safe harbor altogether.” On the other side, there is a complaint about this, which basically says, “You ought to know that there are lots of other ones up there and you have some further affirmative 3

William W. Fisher III, Promises to Keep: Technology, Law, and the Future of Entertainment (2004). See, infra this issue, Session II, Part B, Unauthorized Use of Works on the Web: What Can Be Done? What Should be Done? Non-Copyright Legal Solutions; Session II, Part C, Copyright Issues in Online Music. 5 Digital Millennium Copyright Act of 1998, 1998), Pub. L. 105-314, codified at 17 U.S.C. § 512 (Oct. 28, 1998) (DMCA), available at www.copyright.gov/title17. 6 A&M Records, Inc. v. Napster, Inc., 114 F. Supp.2d 896 (N.D. Cal. 2000). 7 MGM Studios v. Grokster, Ltd., 545 U.S. 913 (2005). 8 Viacom Int’l, Inc. et al. v. YouTube, Inc. et al., Case 1:2007cv02103 (S.D.N.Y. filed Mar. 13, 2007). 9 Christian C, Nord-Ouest Production c/ SA DailyMotion, SA UGC Images, Tribunal de Grande Instance de Paris, 3ème chambre, 2ème section, 13 July 2007, available at http:// www.juriscom.net/documents/tgiparis 20070713.pdf; see also http://www.juriscom.net/actu/ visu.php?ID=949. 4

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obligation.” Variants of the argument say, “If you are making some money from it somehow in the service, there should be a parallel to the vicarious infringement standard.” DMCA tracks this to some extent. A great deal hinges on this. Clearly, the extent to which you can provide services of the sort that are being challenged now hangs in the balance. But I think also we should think about what kinds of services have been able to go forward. GeoCities is the classic example, with ads and so forth, which clearly has infringing material, and where they have survived on the basis of the safe harbor. But what about things like email? What about things like the Amazon model? What are other models? If we restrict the meaning that, at least in the GeoCities model, one has ascribed, what will the effect on innovation be? So as we try to solve the copyright issue, we need to think about what the concerns are at a broader society level that also be implicated. MR. GOLDBERG: Thank you very much. I neglected to mention that, although I gave you the IDs for the various people in the dais, their impressive credentials are in the binders that you have. I urge you to look at them. Our next speaker will be Don Verrilli. MR. VERRILLI: Thank you, Mort. John made this all sound so calm and reasonable. I live in the part of the space that he described as more controversial, so probably it will seem less calm and reasonable ten minutes from now than it does now. I should say at the outset — because I don’t think the biographical materials make this clear, and I think it is only fair that you know this to evaluate my comments — I am representing Viacom in the current litigation against Google and YouTube,10 and did work on the Grokster case in the Supreme Court,11 and I have done other work for content companies. In the interest of full disclosure, that is where I am coming from on this. Obviously, as John said, there are lots of types of unauthorized use, including lots of different types of unauthorized use of copyrighted works. The unauthorized use that, as a practical matter, is problematic for content owners is not the creative or transformative unauthorized use. It is, from the perspective of the content owner, the unauthorized acquisition of digital copies and the unauthorized distribution of digital copies of copyrighted works and, more recently, the unauthorized acquisition of access to performances of copyrighted works through businesses like YouTube. As this breaks out, there have been efforts in the academic community, which I quite applaud actually for their honesty, to try to defend those types of unauthorized use as being beyond the reach of the copyright laws. I vigorously disagree with them, but I think they confront the problem honestly — in a way, frankly, that I think a lot of the litigation posturing hasn’t so far. You have that form of unauthorized use. And then you have business models that are designed to, and effectively do, generate very significant profits by exploiting the ability of digital technology to make those forms of unauthorized personal use available and occurring on a massive scale. There really are, when you think about it, three ways to defend that regime. They are all going to be implicated, I think, in the YouTube/Google litigation: 10 11

Viacom Int’l, Inc. et al. v. YouTube, Inc. et al., Case 1:2007cv02103 (S.D.N.Y. filed Mar. 13, 2007). MGM Studios v. Grokster, Ltd., 545 U.S. 913 (2005).

72 SESSION II: COPYRIGHT 앫 One is to follow the lead of the academic work and say the underlying use ought to be deemed to be beyond the reach of copyright. 앫 The second, as John mentioned, is to think about this in terms of the liability of the businesses and the business models, and to then defend on the ground that whatever the users of this technology are or are not responsible for, we, as the people running the businesses with this technology, should not be on the hook. 앫 The third is the other point that John made about the DMCA and whether the safe-harbor provisions of the DMCA allow people who run these kinds of businesses to say, “Yes, it might be infringement, and yes, we might otherwise be responsible for it, but so long as we abide by the terms of this statutory safe harbor, we are off the hook for any damages liability.” All three of those issues, I think, are going to be fought through in the litigation between Google and YouTube on the one hand, and Viacom on the other. I think, in the time I have, I would like to focus on the third one, because it is an important question. John identified it correctly as a controversial question. I think it is one that merits some attention. Some of what we have seen so far — I am certainly not trying to put any words in Alex’s mouth — from Prof. Lessig on the op-ed page in The New York Times12 and in some of the other rhetoric we have seen coming out as a result of the lawsuit13 has been the notion that there was a compromise cut in the DMCA in 1998, where content owners got certain protections (i.e., in particular, anti-circumvention protections) and, on the other hand, Internet service providers got very broad safe harbors, and that the point of this litigation was to try to recut that deal. I want to talk about the statutory basis for that argument in a minute, but before I do I would like to see if we could step back and think about that. If that is right, if the DMCA really does provide that kind of safe harbor, conditioned only upon a business responding promptly and effectively to a valid takedown notice, then you have a situation in which a company like YouTube — not YouTube, but a company like YouTube — could have on its Web site a banner across the top that says, “We are endeavoring to assemble a complete set of The O.C. episodes for this year. Please upload them to this site.” Then the next line could say, “And we really think you will enjoy this year’s O.C. Please view all of the uploaded episodes.” You could surround all that with advertising and generate revenue from the advertising. Someone could then sue you for copyright infringement. Your defense would be: “Well, as soon as the person who owns the copyright in The O.C. tells me to take it down, I will take it down. Until then, no damages liability.” It doesn’t seem possible that Congress actually could have intended to enact a statute like that in 1998. Yet that is the statute, according to what we have heard so far, that our friends on the other side are suggesting Congress did enact. When you actually go and look at the statute, I think it is not a surprise to see that the statute itself and the safe-harbor provisions themselves in Section 512 of the DMCA embody a balance within the provisions between the interest of the copyright owner, on the one hand, and the interest of the Internet service provider, on the other. It is not the case, for example, that the sole means by which a company would lose the benefit of the 12 Lawrence Lessig, Make Way for Copyright Chaos, N.Y. Times, Mar. 18, 2007, available at http://www. nytimes.com/2007/03/18/opinion/18lessig.html?ex=1331870400 &en=a376e7886d4bcf62&ei=5088&partner= rssnyt. 13 Viacom Int’l, Inc. et al. v. YouTube, Inc. et al., Case 1:2007cv02103 (S.D.N.Y. filed Mar. 13, 2007).

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damages safe harbor is by failing to respond to a valid takedown notice. There is an entirely separate subsection of the provision which says that if you have knowledge of infringing works on your service, or there are facts and circumstances from which that knowledge should be readily apparent, or that knowledge can be fairly imputed to you, you have an obligation to remove or disable access to the infringing works to sustain your entitlement to the safe harbor. That is completely apart from whether you get a takedown notice. So it seems obvious from that provision in the statute that Congress did more than just say, “You guys are fine unless you don’t respond to takedown notices.” There is another subsection in the same provision that says: if you achieve a direct financial benefit as a result of the infringing works and you have the right and ability to control their presence, you lose the benefit of the safe harbor. So, once again, Congress seemed quite concerned with the notion that there would be business models that would exploit the presence of infringing works and do nothing about them. It seems to me quite clear that Congress said that in that circumstance safe harbor does not apply. There is an even more basic point, I think, which is that, the way the statute is written, Internet service providers don’t get safe harbors. There are four specifically defined safe harbors for specific functions that an Internet service provider can provide: (1) routing and transmission; (2) caching; (3) linking; and (4) storage. It is only when you are sued for infringement by reason of one of those functions that you can claim entitlement to the safe harbor under the statute. None of these terms are very well defined in the courts. Google is going to have a view of how they ought to be defined. We have a view of how they ought to be defined. But one thing that I hope is clear from what I am saying so far is that the notion that there was a deal cut in 1998 that said, “You guys get anti-circumvention and you guys get an expansive safe harbor that keeps you protected under any circumstances, so long as you comply with takedown notices,” is just not what the statute says. As I tried to suggest earlier, it cannot really be what the statute was intended to say, because it would then become a shield for the most flagrant kinds of intentional infringing activities. When you get to a situation where you have a business and the business is about providing content to consumers — when it is a consumer media business — it seems to me the right answer here is going to have to be that you have certain responsibilities. Just to go back to John’s point, when you are running a consumer media business and you are making money from providing access to content, the responsibility ought to lie with you; that it ought to be your cost of doing business to prevent the infringement; that it ought not be that the cost of preventing the infringement, which can be a massive cost, gets shifted to the copyright owner. MR. GOLDBERG: Thank you, Don. Now we will hear from Alex Macgillivray, who I’m sure agrees with everything Mr. Verrilli has just said. MR. MACGILLIVRAY: It is always easy to agree with someone who is talking about hypotheticals, as opposed to the person that he actually sued. First and foremost, I want to get to something that happened this morning that I thought was quite a good thing and a relatively optimistic thing to me as a copyright lawyer. We had Marybeth Peters up here with Fred von Lohmann, and they were agreeing about something.14 The thing that they were agreeing about was the potential in the next ten years to really have a space where authors are empowered and where we could take 14

See infra Session I, Part C, The Next Ten Years in Copyright.

74 SESSION II: COPYRIGHT creativity and the ability of authors to actually get their material out there to the next level, and authors having the power to get their material out there, to get it seen by lots and lots and lots of people, to have the media companies be involved when it’s a good idea for the media companies to be involved, and yet to have a space for the creation of lots of different types of content and to make content creation be a part of everyday life. I want to show some videos. One of the reasons I want to show the videos is to talk specifically to Mr. Verrilli’s point about knowledge. I think, jumping into that third point — not the first, whether some things are just beyond the law; or the second, whether there is any liability there to begin with — the question is: If there is some liability there to begin with, does the DMCA provide what certainly everybody in the tech world thinks it provides, which is a safe harbor for the fact that some of your users may use your tools to in fact infringe, to put stuff up there that nobody really wants up there but that is infringing? Does that safe harbor actually apply the way we think it does, the way it has led to a bunch of different innovations in this space, and the way it lets us have somebody who is an author or a creator upload their material, without having to worry about Viacom turning around and saying, “Hey, the fact that you provided this ability for people to upload material means that you are now subject to a $1 billion lawsuit?” I am going to show a few videos. What I would like to do is, with your permission, play a little game about whether the particular videos are unauthorized use or not. Imagine that these videos are complete and that they are appearing on YouTube. My question for you is whether that appearance would be unauthorized. Here is the first one. [A video was shown.] Now I will switch to another one. Again, imagine that we have the whole thing there. [A video was shown.] Finally, this is the Clinton Fox News interview. Again, imagine that we have the whole thing there. [A video was shown.] I have shown you three videos. I just want a show of hands as to whether the first video was authorized or unauthorized. If you think it was unauthorized, please put up your hand. Absolutely nobody believes the first one was unauthorized, not even anybody on the panel. PARTICIPANT: Why don’t you ask if people thought it was authorized? MR. MACGILLIVRAY: That’s what I was asking, whether it is authorized or not. PARTICIPANT: There is another alternative, which is that you can’t tell. MR. MACGILLIVRAY: That’s a great point. I love this audience. I really enjoy coming to Fordham because I can just stop talking and let the audience get to the punch line for me. So let’s jump right to that. The question is, can you tell? Who can tell? The first was a video by Brooker. She knows whether it was authorized or not. But we the audience, we Google, do not know. The second video was the “Stop the Falsiness” video. This is a video in the Viacom lawsuit. I am not sure if Mr. Verrilli is representing them for this as well. The argument by MoveOn is that it is fair use. Mr. Verrilli said that fair use and transformative are not something they are trying to catch. But again, there is a question that maybe, even if you are the copyright holder, you don’t know. The third one was the Fox clip, which looks like a pretty professionally produced clip. It turns out that that one, in fact, was something that Fox uploaded, not under some sort of separate content deal with Google, but just that there was a user, who was Fox, who uploaded it. So there is an authorized use. The question of what you know is really central to this case, as Mr. Verrilli said. One of the things that I think these three videos, and also the response of this extremely intelli-

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gence audience, show is that there was a reason why Congress made the decision that the copyright holders themselves would be responsible for telling you what is theirs, what is infringing, and what they would like taken down. I want to shift gears a little bit and talk about YouTube specifically, and not just these general notions. I think a lot of people maybe don’t understand why we created YouTube or don’t understand what we do in terms of notice and takedown or what we are doing in terms of working with copyright holders. PARTICIPANT: Didn’t you buy it, Alex? MR. MACGILLIVRAY: Yes, we did buy it. Sorry. We are like the Borg: When we assimilate, we talk of “we.” When YouTube was created, what they were trying to do was to have a place to be able to host and pass around videos to friends. The videos that they were thinking of were like Steve Chen’s first video, a video of his cat playing. He wanted a way to share that with people. Email apparently was too much of a problem; it was too difficult for the people he was trying to share videos with. The question was: How would you create such a service? They did a whole bunch of things. One of the things that you can easily point to is the ten-minute limit. There were things you would do if you were trying to create a service that was good for sharing short, homemade clips, and less good for sharing things like television shows. They also did some things early on that you wouldn’t necessarily do if you were, as Mr. Verrilli has accused, trying to go out there and make a business based on copyright infringement. First of all, the DMCA process that they instituted is among the best and the fastest of any company that I know of. We get DMCA notices. We are very quick to take them down. We have built up an automated process — not required by the DMCA — that allows copyright holders to send us DMCA notices in a more efficient manner. There is a whole industry now that has built up around monitoring copyright holder content, again with the copyright holder being able to tell which is authorized and which is not authorized, and then telling the technology industry, the different companies, what content is the copyright owner’s and what is not. We also developed a hashing technology. When a user uploads a video and then it is taken down by the copyright holder and then the exact same video is uploaded by another user, we have this technology that we have been able to develop that matches that exact same video. We are now doing research and working with a bunch of different companies to try to come up with better ways to help the content industry search for their videos and to mark them as theirs and to take them down. This is all within the context of a tool, this original DMCA tool, that was part of YouTube from the beginning and was very much part of the way they were thinking about their part of the Web. Of course it is knowledge. Part of what is interesting in these debates is the actual allegations of knowledge are. One of the issues that was in the Viacom complaint, and one of the questions really, is whether merely making private videos available to people in private would be enough to not only qualify you as having induced copyright infringement, but also to make you lose your protection under the safe harbor. That is one of the issues that is in the complaint. Another interesting one would be whether paying $1.65 billion is enough, in and of itself. But getting back to the private videos question, if that is the case, then it seems like every single email provider would be guilty. The email providers do not make the contents of your email readily searchable by the content industry to make sure that there are no

76 SESSION II: COPYRIGHT copyrighted videos in those emails. They host them. They put them in repositories. They show them to people. They certainly distribute them. We, in fact, do also have an email product. I should be clear. But you don’t have the idea, in the way this was characterized by Mr. Verrilli, that you are trying to build your business on copyright infringement. There are two things I want to say about that. First of all, that is not the standard under the DMCA. It is not that this is a law that has never been brought into court before. There are plenty of companies — eBay,15 Amazon,16 Google,17 CCBill in a recent case18 — that have been shown to have been doing the things required under the DMCA. It is not a brand-new wild frontier where we can just theorize about it. There is precedent, and we are comfortable with that precedent. Second, even if there was some sort of test, as Mr. Verrilli explains, where you were trying to build your business on copyright infringement, he would not be able to meet that test either, because that is not what we are trying to do. What we are trying to do is make a place where people can upload content that they have created and share it with the world for free. It is true that when you let people do things sometimes they do the wrong thing. But that doesn’t mean that you should shut down the system entirely. MR. GOLDBERG: On the logistics of what we are about, we will now have a discussion with regard to the first topic, “Legality of Unauthorized Use.” After the discussion, we will have the presentations on “Non-Copyright Legal Solutions” by Sandra Aistars and Michael Schlesinger, and then we will have discussion of that subject matter after those presentations. Let me first ask our panelists, Michael Einhorn, Brian Fitzgerald, and Tom Rubin, if you have any comments on what you have heard so far. I am asking for very brief comments, please. MR. EINHORN: I would focus on the relationship between monitoring costs and uses of copyrighted works. I would make a distinction here between the costs of detecting personal reproductions on a computer drive, which in and of themselves are often very difficult to determine, and the costs related to public performances, which are easily monitored for digital applications. With present technology, we can observe whenever works are being performed on a digital network, or even if they have been uploaded to a netork. The question is: Can we then design a license that makes it possible to use online works at a reasonable cost? And the answer is clearly yes. This is because the performance rights for online works, as well as the associated reproduction rights for uploads to a network, entails monitoring costs that are considerably below those of reproductions made for personal uses. MR. GOLDBERG: Let me see if Tom Rubin and Brian Fitzgerald have any comments at this point. No comment at this point is not a waiver. Go ahead. PROF. FITZGERALD: In preparing for this panel my thoughts focused on three questions — which John has covered in large part : (1) What is the role for new licensing models, such as Creative Commons? (2) How do we draw the boundary between authorized and non- authorized — and how will this continue to change? What do we do with highly transformative derivatives? Is fair use the exception, the benchmark, or the starting point? 15

eBay Inc v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006). Corbis Corp. v. Amazon.com, Inc., 2004 WL 3092244 (W.D. Wash. 2004). 17 Parker v. Google, Inc., 422 F. Supp.2d 492 (E.D. Pa. 2006). 18 Perfect 10 Inc. v. CCBill. L.L.C., 481 F.3d 751 (9th Cir. 2007 Mar. 29, 2007), available at http://www.scribd. com/doc/267076/Perfect-10-v-CCBill-488-F3d-1102-9th-Cir-2007. 16

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(3) To what extent should the technology makers, Web site hosts, or intermediaries take responsibility? In the context of today’s discussion, may I add this very short comment? There has been some discussion around transformative use, and I think that is an issue that key people seem to be agreeing upon. It is an area that we need to consider more closely. In different jurisdictions, transformative use is still a significant legal issue in terms of copyright infringement. In the United States, you might have a more developed doctrine on transformative use than we do in other jurisdictions. The other point I would make is that the value of the social networking, the social value in what has been going on in this unauthorized space, is something that we need to assess more fully, and how we balance that with copyright enforcement is a critical issue in this debate. MR. GOLDBERG: Tom? MR. RUBIN: This is following up on some of the discussion earlier this morning. I think that what we are going to see is a world that is very heterogeneous, where there will be video uploaded sites, like YouTube, that have truly homegrown material or truly fair use content, which could indeed include the Stephen Colbert clip that we saw here. But the issue really is whether the user video sites should be homes for the showing of infringing content. There are means — and I didn’t hear this discussed so far in the panel — that content owners have and that they are pursuing to try to identify, for the sake of the technology company that is running the site, content that is infringing. I am talking about fingerprinting and the filtering that could accompany it. There are lots of ways that technology companies and content companies are working together now to ensure that the user sites are truly havens for users and other noninfringing material, and that commercial sites, which have much higher quality commercial content than even YouTube has, is the right place to have commercial content. I think that is the world where consumers and society benefit the most. MR. GOLDBERG: Thanks, Tom. I’m sure that there are no questions whatsoever in the audience. MR. MACGILLIVRAY: May I respond to Tom for one second? MR. GOLDBERG: I was being facetious. Go ahead. MR. MACGILLIVRAY: The only thing I would say is I completely agree with Tom. It is one of the things that we are doing in lots of deals with major content industry players. BBC, CBS, and others are using our service to get their professionally generated content out there. The only thing I would disagree with Tom on is that those need to be a totally separate service. I’m sure he didn’t mean that. MR. RUBIN: I didn’t mean that. MR. VERRILLI: Tom, let me follow up on that. I think it casts in a different light some of what we heard earlier from Alex. YouTube will filter for you now if you sign a licensing agreement with them. They have the technology. They will do it now. They will say, “Sure, we’ll filter, just sign the deal. If you don’t sign the deal, we won’t filter.” MR. MACGILLIVRAY: That’s just not true, though. MR. VERRILLI: So it is just not a matter of being in this world in which there is nothing that they can do. That is just not the reality that we face in this case. MR. MACGILLIVRAY: That’s just not true. What we are doing is working with a lot of people to try to figure out whether there are new search technologies that we can apply here, including fingerprinting, which Tom brought up. But we have never restricted our DMCA or any of our takedown tools to a deal or having some sort of partnership. We

78 SESSION II: COPYRIGHT will continue to not make those restrictions. I understand why that is a rhetorically interesting thing to say, but it is just not accurate. MR. GOLDBERG: Comments, questions? No comments? No questions? What you have heard is crystal clear and nothing has to be clarified and you agree with everything that you have heard? My God, this is a first! If there are no comments or questions from the audience, I’m sure, with a modest bit of encouragement, the people on the dais could force themselves to produce a few more comments. John? MR. PALFREY: Sure. One thing that seems interesting is: How do you think about the financial benefit issue? Does much hinge on whether or not you are making money generally on the service, versus making money individually on a clip that has been uploaded in some fashion? And how, if at all — not to get too much into statutory interpretation — does that relate to the vicarious liability standard? MR. VERRILLI: Obviously we are going to have a different view about that. One of the statutory safe harbor exits is if you achieve a direct financial benefit and have the right and ability to control the use. The notion of direct financial benefit, although Alex may feel it is very well-defined in the DMCA law, I think is something that the court in this case is going to have to decide, without a whole lot of precedent under the DMCA to guide it. But it does seem to me a matter of common sense that when you run an advertising-driven business, as YouTube is, that the ability to attract more users to your site drives up your advertising revenue. To the extent that the availability of copyrighted content is a driver of that traffic, it brings more people to your site than you would have at your site without the copyrighted material being so freely available, then I think it ought to be pretty clear that that is the kind of financial benefit that Congress is talking about, because it is not a matter of indifference. If the copyrighted material isn’t there, the traffic is not going to be as high and the financial benefit is not going to be as great. That is our take on that issue. MR. GOLDBERG: Michael? MR. EINHORN: By that standard, would you make any distinction between YouTube being a social networking site and Google being a search engine? MR. VERRILLI: I think in either situation, where the copyrighted material is making a significant difference in the level of traffic, that is a direct financial benefit. MR. EINHORN: By that standard, would search engines be liable for acts of infringement committed by Web sites or visitors ? MR. VERRILLI: It is very hard to think that it would make a significant difference. That is also only one part of the equation. MR. EINHORN: I understand. Should search engines be treated the same as social networking sites? MR. VERRILLI: You cannot answer that with respect to this question alone. There is a whole set of issues, things you have to answer to make that decision. You just cannot answer that in the abstract. But with respect to direct financial benefit, it seems to me more traffic equals more revenue; and if copyrighted material drives more traffic, it increases revenue. MR. MACGILLIVRAY: It is interesting that actually there is some legislative history talking about this point. I think that is the test that Mr. Verrilli just explained: if you are getting more revenue, in part, because there is some infringement there. That test is something that is discussed in the legislative history in an example that they use of something that would be not a financial benefit directly attributable. You will notice that they

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actually in the statute use different words than the words generally used in the vicarious liability test, the test that Don would like to adopt. The comment that they make is that if a particular Web site (they were thinking about Web hosts here) is hosting and charging for that hosting, then even the charging for the hosting of an infringing file — clearly, when you are hosting that file you are making some money from it — would not meet the DMCA’s test of financial benefit directly attributable. The reason is there are a whole bunch of hosting companies out there that were actually hosting material, a lot of it noninfringing, some of it infringing, and Congress meant to protect those companies. MR. GOLDBERG: Let me ask Sandra Aistars and Michael Schlesinger if they have any comments on what we are discussing now. MS. AISTARS: I am happy to comment generally on the discussion. I think there are a couple of points that were particularly interesting to me and relate somewhat to what I was planning to speak about in the next panel. I agree with the first point that John made, which was that he thinks it would be interesting to have a Creative Commons license expanded to commercial uses or adopted to cover commercial uses. I think it is an interesting thing to explore. It relates very closely to some of the issues that we have been discussing here, and also to some of the technology issues. Alex showed us a number of clips and asked can you tell which of these are infringing and which of these are not infringing. Of course, many of us sitting in the audience couldn’t immediately tell. But there are technologies that you can employ as an aid to tell whether they are infringing or not infringing. There are fingerprinting technologies so that you can identify a piece of content that has been uploaded to a Web site. If you combine that with some form of authorization, some sort of rules associated with how that content is authorized to be distributed by the content owner, I think you get a very interesting proposition. It is no longer a binary decision of take down or leave up, but it is a much more creative and engaging process, and one that I think is beneficial to consumers and beneficial to the companies involved on both sides. MR. SCHLESINGER: I would just add that it is clear that Google is in a process of riskmanagement in its approach to content. We are seeing the problems of an opt-out approach to copyright. The questions are myriad. Many of them are going to be answered in the lawsuit. One of the questions is: Why ten minutes? Why not five minutes? Why not one minute? If it’s Martin Luther King’s “I Have a Dream” speech, why not twenty seconds? Where is the nut of the copyright protection and why is it up to Google to decide how long or how short is acceptable to allow people to upload? I think that is one of the big issues. MR. GOLDBERG: I have seen some raised eyebrows in the audience at various times in the last half-hour. Hearing no comment, other than the rude interruption that I made and Dick Rudick followed up on during Alex Macgillivray’s presentation — MR. MACGILLIVRAY: That wasn’t rude at all. That was helpful. MR. GOLDBERG: In any event, are there any comments or questions? Fred. QUESTION [Fred von Lohmann, Electronic Frontier Foundation, San Francisco]: I have a question. It seems to me that there is a middle ground. Despite your valiant efforts to bicker, I actually think you have a lot more in common here than perhaps everyone is ready to admit. I hear, on the one hand, that there is no interest in attacking the kinds of new creative fair uses that these technologies allow, that the goal here is not to kill remix culture; the

80 SESSION II: COPYRIGHT goal here is to prevent the kind of piracy that undermines existing business arrangements. Okay, that’s very reassuring. On the other side, I hear Google and others, Tom as well, say, “We can do additional things. The tools are improving. We can create search tools that will allow rights holders to more accurately find and take things down faster.” Now, there is a big fight about whether that is required by the statute or not required by the statute, but it seems to me if there is this common ground, whether it is required by the statute or not, there are some private ordering opportunities here for Google and Microsoft and other players to roll out tools that go beyond what Section 512 requires. Presumably, some money may have to change hands in the course of finding the middle ground, as well. But I just do not see a fundamental difference here. I see content owners want to be able to take things down accurately, quickly, and make sure they do not go back up. The technology companies are saying, “We probably can get there and we want to get there.” On the other hand, I hear content owners saying, “And we don’t want to stop the creative stuff.” So is it just a matter of time until this is solved? MR. EINHORN: The devil is in the details here, and the details are the transaction costs of doing everything that you suggest could be done by users and content owners. It is not enough to say that the use is being used for commercial purposes. We know that in Campbell v. Acuff-Rose19 you did have a fair use for something that was used for commercial purposes. The next thing to do is to consider other factors besides the commercial purposes. I still make a crucial distinction between YouTube and Google. YouTube is allowing users to put works up on their server and then has immediate control and responsibility over the material. This is different from the Google search engine, which does not control the Web site that may infringe or to which infringers may link. Both Google and YouTube are, of course, commercial enterprises To find the devil in the details you must here focus on where the transaction takes place and who can monitor the system at lowest cost. Now, it seems very clear to me that you can make YouTube responsible for cleaning up material on its servers. But we have a different problem when we talk about finding stuff on the third-party Web site that the Google search engine links to QUESTIONER [Fred von Lohmann]: Alex is right. I don’t see any rational way you can claim that the service provider should know in advance every copyrighted work. So there needs to be an identification obligation. MR. EINHORN: Apparently, concerning a search engine. MR. GOLDBERG: We will come back to this. John Palfrey had a comment or a question. MR. PALFREY: I just wanted to not lose the issue that Brian Fitzgerald brought up, which I thought was intriguing, about transformative use. I didn’t mean to take it out of order, but it seems you left something out. MR. FITZGERALD: It was simply to echo what Fred has been talking about. To me one of the things we are going to do in ten years’ time is look back upon this great debate we are having and say, “Why did it take so long to get this solved?” On another front, one of the big problems we have in my jurisdiction is over transformative use. A fair amount of the content that is up on the Internet is transformative. 19 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994), available at http:// supct.law.cornell.edu/ supct/html/92-1292.ZS.html.

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So why can’t we clarify its legality with some certainty? It seems to me, as Fred highlights, that there is not a hell of a lot of distance to go on that one. I suppose the other thing that I would like to say, though, is that this compact around the DMCA, which we have a version of in Australia, which has been expanded under the Australia-U.S. Free Trade Agreement,20 is very much about the dynamic technology that is the Internet. We just can’t lose sight of that fact either. It is incredibly important to have an Internet that actually works in a very dynamic fashion. I think if we lose sight of the compact that we’ve got in the DMCA being related to that concept, then we might as well forget the dynamic nature of the Internet. MR. GOLDBERG: The lady over there has a comment. QUESTION [Maren Christensen, Universal Studios, Universal City]: We are obviously interested in this debate, although we are not a plaintiff in it, so I don’t have first-hand knowledge of it. I have tried to keep up on this in the press. Alex, I believe the press is reporting that you are treating differently the content owners who will enter into licenses with you from the content owners who will not when it comes to how you deal with the infringing content. But I understood you here to say that is not correct. I just wanted to be sure I understood what you were saying. There is no difference in the way you treat content owners who enter into licenses and those who do not? MR. MACGILLIVRAY: Our current technological solution that we have in terms of the DMCA is the notice and takedown process. The people who are partners versus the people who are not partners are not treated any differently. We are working, as Tom suggested, on experimenting with other ways of doing content identification. We are at the very beginning stages there. We are starting with some people with whom we have relationships. That is not something that is fully baked. We do not even know actually whether it will work. Nobody has done it in a large-scale way yet. But we are trying to make progress there, and we are trying to make progress because, as Fred says, it requires the content holders to help us with the identification. We are trying to make progress with some content holders that we already have relationships with and who already trust us. MR. GOLDBERG: Tom Rubin wanted to comment. MR. RUBIN: Just very briefly, I do want to make clear where there is a difference right now between Google’s approach and Microsoft’s, although, as Alex said, there is some common ground there. Microsoft has committed for our user-uploaded sites to institute filtering. That is something that we have committed to. We have also committed that when we do that it will be applied equally to people with whom we have commercial agreements and people with whom we do not have commercial agreements. There is an obligation on the content provider, of course, to use the database that is used as the match. That is a tool that is intended to be, and will be, open to all content owners. MR. GOLDBERG: Don, do you have a quick comment? MR. VERRILLI: Yes. Despite the denunciation of my position before on this issue, I think, in response to the question, Alex said that they are implementing technologies with their partners that they do not implement with people who are not their partners. MR. MACGILLIVRAY: No, that is not true. You probably do the same thing, right? You 20 See Australia-United States Free Trade Agreement (Jan. 1, 2005), art. 17, available at http://www.dfat. gov.au/trade/negotiations/us.html.

82 SESSION II: COPYRIGHT do tests with people that you know, and then after you get out of the testing phase you do other things. MR. GOLDBERG: We’ll go to Dick Rudick, who has a very brief question or comment. QUESTION [Richard Rudick, John Wiley & Sons, New York]: My comment follows on Fred’s version of a brave new world. You do need an identification mechanism, and you need it no matter where the responsibility lies, if we are going to have an efficient world. But you need a second thing besides an identification process, which you need regardless of where the responsibility lies. That is, you need something that facilitates efficient licensing. I know that is the topic of the next panel. Sandra alluded to it. There is the Automated Content Access Protocol (ACAP), which is an effort to develop an efficient way of processing licenses. That is the second thing you need to make this brave new world work. It is the kind of thing we should work on, and there is opportunity for collaboration. MR. GOLDBERG: Thank you. Andrew Bridges is next and then we will go to Bruce Lehman. QUESTION [Andrew Bridges, Winston & Strawn, San Francisco]: First of all, I should disclose that I represent Google in Perfect 10 v. Google 21 and MasterCard in Perfect 10 v. Visa and MasterCard.22 I would like to ask Mr. Verrilli about Perfect 10 v. CCBill,23 which was mentioned by Mr. Macgillivray. Recently, the Ninth Circuit held in a DMCA case that just because a Web site says it has stolen materials or just because it has passwords does not mean that the service provider definitely has knowledge, because it may be, as the Ninth Circuit pointed out, a salacious claim or a hoax and the like. The Ninth Circuit said the burden is not on the service provider but is on the complainant to police these types of sites. In your view, was the Ninth Circuit’s decision in Perfect 10 v. CCBill wrong? MR. VERRILLI: Well, the Ninth Circuit said a lot of things. QUESTIONER [Mr. Bridges]: On that point. MR. VERRILLI: I will get to that point in a second. One thing it said, though, was that the DMCA did actually adopt the common law test of vicarious liability. But on that point, it seems to me that this is another situation where the devil is in the details. You are talking about the situation in CCBill and comparing it to the situation we have here. I understand the strategy of going atomistic on the videos and looking at these three particular ones, but to draw from that the conclusion that there is a lack of knowledge is a little bit like being “shocked, shocked” that there is gambling going on in Rick’s Place. I just think that there is a practical, commonsense way in which you have to understand the term “knowledge.” When you have a situation like this, it is very hard in a practical, commonsense way to say there is knowledge. MR. GOLDBERG: One more question. QUESTIONER [Andrew Bridges]: Could I ask one very quick follow-up, please? Don, you mentioned an atomistic approach. The other approach is a constructive knowledge 21 Perfect 10 v. Google, Inc. et al., Case No. CV 04-9484 AHM (SHx) (C.D. Cal. 2007) (finding no infringement). District court ruling of May 16, 2007 available at http://www.cacd.uscourts.gov/CACD/Recent PubOp.nsf/0/3fdcaed8913a22018825711c005055a5/$FILE/ CV04-9484AHM.pdf. 22 Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, First Data Corp., Cardservice Int’l, Inc., Humboldt Opinion Bank, Mastercard Int’l, Inc., No. 05-15170, D.C. No. 05-00371-JW (9th Cir. July 3, 2007), available at http://www.ca9. uscourts.gov/ca9/newopinions.nsf/ EF5B069 AA425BC38825730D00579E8C/$file/0515170.pdf?openelement. 23 Perfect 10, Inc. v. CCBill L.L.C., 481 F.3d 751 (9th Cir. Mar. 29, 2007), available at http://www.scribd.com/ doc/267076/Perfect-10-v-CCBill-488-F3d-1102-9th-Cir-2007.

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approach based on statistics. Was Betamax 24 wrong, and should it be overturned on that point? MR. GOLDBERG: Thank you, Andrew. Bruce? QUESTION [Bruce Lehman, Akin, Gump, Strauss Hauer & Feld, Washington, D.C.]: There has been a lot of discussion about notice and takedown. Of course, that implies that once notice is given the work will not be used at all. But it seems to me, just off the top of my head, that is not always in everyone’s best interest. The thing that has puzzled me about this from the beginning is these uses. We saw examples that were not whole works. In fact, there are serious questions about whether some of these uses might even be fair uses. So isn’t this made to order for collective licensing? I think Duck Rudick was suggesting that. Sandra Aistars would probably be able to answer that. Have you had discussions about collective licensing mechanisms? MR. EINHORN: Regarding fair use, let me suggest that the criteria for fair use should be independent of whether the medium is analog or digital. MR. GOLDBERG: The court holds time is up.

24

Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984).

SESSION II: COPYRIGHT PART B: NON-COPYRIGHT LEGAL SOLUTIONS

SESSION II: COPYRIGHT

Unauthorized Use of Works on the Web: What Can Be Done? What Should Be Done?

Part B: Non-Copyright Legal Solutions

Moderator MORTON DAVID GOLDBERG

Cowan, Liebowitz & Latman, P.C. (New York)

Speakers SANDRA AISTARS

MICHAEL SCHLESINGER

Assistant General Counsel Time Warner, Inc. (New York)

Smith, Strong & Schlesinger (Washington, D.C.)

Panelists MICHAEL A. EINHORN

JOHN G. PALFREY JR.

Ph.D., Senior Consultant; Advisor, CONSOR

Executive Director, The Berkman Center for Internet and Society, Harvard Law School (Cambridge, MA)

PROF. BRIAN FITZGERALD

THOMAS C. RUBIN

Queensland University of Technology (Brisbane)

Associate General Counsel, Copyright, Trademark and Trade Secrets, Microsoft Corp. (Redmond, WA)

ALEXANDER MACGILLIVRAY

DONALD B. VERRILLI JR.

Senior Product & Intellectual Property Counsel, Google, Inc. (Mountain View, CA)

Jenner & Block LLP (Washington, D.C.)

86 SESSION II: COPYRIGHT MR. GOLDBERG: Now we will move into the next part of this session. In the previous panel we talked about unauthorized use and some solutions. We will now turn to noncopyright solutions, to be defined by the speakers. MS. AISTARS: I have foreshadowed what I am planning to speak about today by my comments in the previous panel. The title of our session is “Non-Copyright Solutions to the Unauthorized Use of Works on the Web.” I think that it was left to us to define for ourselves what is meant by that. Since this heading is broad enough to accommodate a variety of topics, what I have chosen to talk about is how, other than through copyright infringement lawsuits, content owners are dealing with unauthorized uses of content on the Internet. While I think it is true that we certainly do not stand idly by while others build commercial businesses on the backs of our copyrighted works, it is also true that we authorize, by way of license arrangements — or might be willing to authorize, subject to license arrangements — a far wider range of uses of our works than people commonly expect. At Time Warner, we take a multifaceted approach towards digital distribution and towards combating piracy and copyright infringement of our works on the Web. That consists of, I would say, three principal approaches.

앫 One is education and public awareness. John referred to educating users as something that is rather noncontroversial and something all of us should do. I agree; it is certainly something all of us should do, and something that each of us, whether in the academic community, or in copyright-driven businesses, should take seriously. Why is it important? I believe that most consumers do not intend to be copyright infringers. As new technologies emerge and expand a user’s technical ability to access and make use of works, it is partially our responsibility to put those uses in the proper context. While we embrace new technologies, we also need to combat the conditioning that sometimes occurs and that leads users to believe that any sort of use that one might be able to make of a work by using technology that is available in the marketplace is legal or fair or should be authorized. The only way we can do that is by educating consumers as to what the copyright law allows and does not allow. And, by the way, as services for exploiting and distributing user-generated content are becoming more and more popular, these education initiatives should include educating users about their rights as creators of works. 앫 Technology, which is the second approach we employ to deal with unauthorized uses of our works on the Internet, plays a part in that. The goal when we employ technologies to help distribute works digitally is not to lock up content, but rather to authorize the greatest and widest variety of uses of content that we can imagine, and to use Digital Rights Management (DRM) and other related distribution technologies to establish guideposts for consumers that allow them to understand the differences between the various options that they are being offered for a particular piece of content. My view on DRM systems is that they need not be perfect or impenetrable to work and to be useful. If part of the goal is to establish guideposts for consumers who want to use content legitimately, then what we first need to do is to ensure that the sorts of systems that we are implementing, the sorts of uses that we are authorizing, are ones that consumers are interested in taking advantage of. There is a lot of discussion in the media, and among critics of DRM systems, about the “cat and mouse” game that those deploying DRM solutions sometimes play with hackers. One way of limiting the damage a hacker can do to a DRM system is by seeking to meet

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legitimate consumer interests in deploying systems in the first place. Although it is probably true that every technology is hackable, and that those which are deployed by big companies are particularly attractive targets to hackers because of the mischief hackers can create and the publicity they can generate in hacking them, I think consumers conduct a cost/benefit analysis when they are determining whether or not to use a particular hack that might be available on the Internet. Even though a technology might have been compromised in some way, it still carries some value, to the degree that a consumer finds that it is not worth the added expense or added trouble to employ that hack in order to get access to the work in totally unprotected form. That argues for more transparent and more flexible protection measures being developed. I think those are being developed and are being deployed. I think some DRM systems will succeed better than others. Those are likely to be ones that are deployed with a broad amount of discussion among industries, so that there is a greater understanding of the types of technologies that are likely to be offered in the future by our colleagues in other Industries, and the technological landscape in which the DRM or other distribution technology will have to operate. 앫 I think all of these approaches are important, but equally important is to offer compelling and legal content offerings to consumers. This is the third prong of our approach towards battling infringement on the Internet. We at Time Warner have been, I think, at the forefront of offering some very interesting and compelling offerings to consumers. Everyone is familiar with Video on Demand (VOD) and Subscription Video on Demand (SVOD). That has been an enormously popular digital distribution method for consumers, whether it is delivered via cable or via the Internet. Roughly half a million buys of Warner Home Video content alone on services like CinemaNow and Movielink illustrate that consumers are not always interested in a permanent copy of a show or movie, and that they are willing to pay a different price to watch it once and not retain a copy for future watching. Those sorts of demarcations on DRM systems are valuable and useful to have. But we are not stopping with these sorts of basic offerings. We are exploring various other options and various other means of distributing content, including bundling e-copies of content with DVDs when they are sold as physical goods, at some incremental cost. We are doing a variety of electronic sell-through deals. Many of those deals allow for additional copies to be made of the content so that it can be moved to portable devices or moved to other devices in your home, so that you can take the content with you or view it in different rooms, at your convenience. We have done a variety of deals with technology providers, like BitTorrent and with mobile technology providers, which I think is important on a variety of levels. One, I think it illustrates that we, as well as our colleagues across the industry, recognize that technology is an opportunity for us and that a variety of technology platforms may serve our interests in distributing content. Even those technologies that in the past were associated primarily with infringing content. Warner Brothers was, I believe, the first company to partner with BitTorrent in developing the now-legal BitTorrent service, which offers both VOD and download models to consumers employing peer-to-peer technology on a day-and-date basis with the DVD release of the content. The offering that we are presenting allows the consumer to make a permanent copy plus three backups. It allows you to burn a disk that can be played on the PC to which you

88 SESSION II: COPYRIGHT downloaded it. You can stream the content around your house to watch it on other devices in your home. The pricing on certain of the offerings is as low as $0.99. A comparable deal is one that we did in Europe with In2Movies, which was a joint venture with Arvato Mobile, that also employs peer-to-peer technology to distribute the content. The model that we are using there allows the consumer to download, to own the content, and to obtain four additional copies for their PCs and for portable devices that they use. Again, it is available day-and-date with the DVD release. These are all models that we are exploring, and they are all models that rely heavily on the availability of DRM systems —first, to give us sufficient comfort to release content in digital form into the marketplace; and second, to distinguish for consumers the differences between the offerings that are made to them. I was going to close with a quick discussion on user-uploaded content sites and how we are viewing those, but I think that is something that was well handled already by the earlier panel, so I will cede the last minute and thirty-five seconds of my time back to Mort. MR. GOLDBERG: Michael Schlesinger. MR. SCHLESINGER: I have come to view copyright as an economic and social pie that can grow. It does not seem to me that it is a zero-sum game. That is why I think the economic studies that have been done over the years, both in the United States and in many other countries, and the ones now being conducted by the World Intellectual Property Organization (WIPO), are replete with data showing that strong copyright protection results in increased contributions from creative industries to national GDP, job creation, tax revenue growth, foreign sales and exports — all the positive commercial benefits. That is why legitimate right-holders are often in the best position to bring to market more culturally diverse materials and expand protection and promotion of great literary, artistic, cinema, and music software from around the world. We are also seeing that the copyright pie can shrink or become tainted. The starkest way to look at this is what I do every day. Those who espouse illegal uses of copyright I try to fight. We call it piracy. They view it, in many countries, as a legitimate business model. Again, it is risk management for them: The profits are far higher than any risk of ever getting caught. Of course, here I speak not of people in this room, but the commercial actors and markets around the world. They simply find the profits from unauthorized use of copyright so desirable, and such profits so outweigh the risks of getting caught, that it is an easy business decision. Ethics never really enters into it. But there are other ways that the pie can shrink. We heard this morning a discussion about democratization of creativity. I am the first to say that I love Google and I love to use Google for search. I love to see collaborative efforts that are authorized. But the question is: Can those who democratize collaborative works make a living at it, or do they work nine to five and then “communitize” or democratize after work? Does the communitization or democratization of creativity have the potential to shrink the pie? I do not have answers today; I am just asking the questions. I have seen all the economic studies on copyright. I just am noting it. Does the pie become tainted by unauthorized uses of copyright — for example, unauthorized adaptations? Mash-up culture is great, if everybody agrees and no one is hurt. What happens when not everyone agrees or when there are modifications made to content that can distort or mutilate it? I was very glad to hear John mention education in the schools in the previous panel. I think that is one of the most important things that our generation of teachers and

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lawyers need to do. WIPO will hold an Intellectual Property Day event on April 26, in which young high-schoolers will participate. One of the high schools that is featured, which I work with on a yearly basis, just completed a Concerto for Guitar and Orchestra that was performed by the Northern Virginia Community College Orchestra. I spend as much pro bono time as I can on copyright awareness. I believe that it is an extremely important part of what we are talking about here today. I think Thomas Rubin is also right, that the surround is more heterogeneous and that it is possible that all of these can coexist, that you can have a pie that both grows in terms of content owners and also is richer in terms of the number of people who are engaging in creativity. The heterogeneous surround requires heterogeneous approaches or solutions. Fred has mentioned some approaches; others at this table have mentioned others. There is even a place for litigation to deal with it when we cannot figure it all out, such as an opt-out approach to copyright, rather than an approach to copyright that views the rights as default rules, where the right-holder has the ability to decide whether to authorize or prohibit uses of copyright. I think that is at the crux of what this litigation is about. I applaud Fred’s attempt in his comments to try to bring the gap closer together. I think, in fact, that may be the case. On the other hand, I do think that there are fundamental issues involved in the litigation. I would like to point to a couple of examples of copyright and non-copyright approaches that seem to be working — or not working, in some cases. First, with copyright, I want to talk a little about the encouraging recognition that I see in the international decisions dealing with secondary liability. Commercial actors that generally exhibit more or less respect for copyright and who take steps to foster, or fail to take steps to prevent, infringement are being held accountable in these cases, whether or not they are infringers themselves. The clarification of secondary liability in the United States, in Australia, in Korea, in Japan, and in Taiwan demonstrates this trend. I think Australia KaZaA is a very good example of a reasonable approach to the issue. Of course, it led to litigation.1 If the Australia KaZaA folks had decided to engage in the kind of filtering that was available at the time, perhaps it would not have led to the end result, which is that the court said: “You, commercial actor, have the technology in front of you to help consumers do the right thing. Now do it. If you do not, we, the government, with an interest to protect authors and right-holders, not just those who have the capacity or wherewithal to step forward, will stop you.” I think the point in that parenthetical is very important. There are right-holders who are not in this room, and who do not have the capacity to come forward to a Google or to another service, but deserve to be protected just as much as the larger right-holders. Then there are non-copyright approaches to the issue of unauthorized use. I will just speak to the physical realm, which is the realm that I deal with most of the time. I suppose, just as a rhetorical question, I would pose this: Are there approaches in the online space that are similar? I deal with CD, DVD, and CD-ROM piracy on an everyday basis. I think the example is instructive, since, as in the online environment, it involves relatively finite legitimate demand — in this case, for disks — around the world, but rapidly increasing production capacity, and indeed massive overproduction. In order to protect those that have applied a roadmap to respectability, those plants that license and that produce legal disks, and do a great and important service, in fact, to 1 Universal Music Aust. Pty, Ltd. v. Sharman License Holdings, Ltd., [2005] F.C.A. 1242 (KaZaA), available at http://www.austlii.edu.au/au/cases/cth/federal_ct/2005/1242.html.

90 SESSION II: COPYRIGHT right-holders all over the world — not just right-holders that request that their rights be upheld, but all the time, as a default — mechanisms such as source identification and things similar to what we would view as a Rights Management Information (RMI) or a DRM approach have been introduced. Source identification is not a copyright concept, in a sense, because it is a relatively basic forensic tool. Like a DRM, it provides information: Where was the disk produced? Can it be matched to a legitimate license? What are the terms of the license? There are also cruder forms of identification, such as microscopic examination of evidence on disks. The point is that Source Identification Code (SID Code) works remarkably well at identifying plants producing unauthorized copies of copyrighted material. In addition, there are now measures in place to prohibit wrongful tampering with the SID Code. Again, all of these things in the physical realm look very similar to some of the DRMs. When I was asked to talk about non-copyright systems, I wanted to speak with you about something I know that possibly is applicable in the online environment. I think the optical disk area is one way to look at it. There are other forms of non-copyright approaches to protecting copyright, such as authenticity of labeling, the authenticity of holograms used by legitimate right-holders. There are also some other systems, like government-mandated holograms or stickers, which simply do not work quite as well. So as we work through these processes in the online environment, maybe it is instructive to take a look at the physical environment and see how some of these systems and approaches have worked. MR. GOLDBERG: Thank you, Michael. Before we go to the experts in our audience, what about the experts on the dais? Any comments, questions? Do you agree with everything you have heard? PROF. FITZGERALD: I would like to make a short comment. There is a certain theory by Joseph Schumpeter, who was an economist who wrote in the 1940s, which suggests our economies grow by being challenged by new ways of doing things.2 The whole theme of this panel to some extent — unauthorized use in the form of seamless access, someone sitting in front of a screen and with the click of a button being able to access content and reutilize it — is one of those challenges for our economy and asks us to consider how such a new way of disseminating knowledge and culture will be integrated into our business and legal frameworks. One of the critical things from a legal perspective is that we need to put in place appropriate and workable licensing models from the very commercial end to the very open end. One of the great challenges for us is to see how we can accommodate this new technology. In the next ten years we will no doubt see a completely different business and legal environment. And Schumpeter may well be right, that the innovation that we are being challenged with now will be the new business model of the future. A lot of the things that have been mentioned by Time Warner are things that five years ago we would have thought, “Why aren’t big businesses doing these things? Everyone one else wants them to do it.” Now they have actually started moving on a lot of those things. I just wonder what the next five years will show us in that space? MR. GOLDBERG: Sandra? MS. AISTARS: I would comment that one of the core reasons for us being able to do the 2 See, e.g., Joseph A. Schumpeter, The Creative Response in Economic History, Journal of Economic History 7 (1947); Joseph A. Schumpeter, Business Cycles: A theoretical, historical and statistical analysis of the capitalist process (McGraw-Hill Book Company) (1939).

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things that we are doing in the digital environment is the Digital Millennium Copyright Act (DMCA),3 as much criticized as it is by participants in this forum sometimes, and the support that it gives to DRM. I think people like to point to the DMCA and point to DRM technologies and say, “Look, it’s going to be a horrible world where all content is locked up,” and “The DMCA hasn’t served us well,” and “We haven’t rolled out the promised new opportunities.” I think that is not the case. Time Warner is not alone in this. Look at our colleagues in the movie industry. Look at our colleagues in the recording industry. Everyone is experimenting with new business models. MR. PALFREY: Just to be clear, Sandra, are you referring to Section 1201 in that context? MS. AISTARS: Yes, I’m talking about Section 1201. MR. GOLDBERG: Michael Einhorn? MR. EINHORN: The only thing I would add on this point is that law does not have to solve all the problems at the immediate moment. Markets have a way of working things out. For example, if we consider since 1914 how much infrastructure has developed to protect the performing right, we are tempted to ask: What made it possible for all that to happen? The law only did one thing to facilitate all this: it simply recognized the right of public performance. After that, everything was handled by private institutions — ASCAP, BMI, SESAC — as well as some licensing organizations formed by the users, such as the Radio Music Licensing Committee and the Television Music Licensing Committee. All this infrastructure arose because the law says “a performance rights exist,” end of story. The same thing here in connection with business models and collecting societies. A lot of work has to be done. A lot of it has to form, congeal, work things out. The important thing for Congress is to define the laws very clearly and establish the standards that can be used. MR. GOLDBERG: Is there a comment or a question from the audience?? QUESTION [Ed Lee, Moritz College of Law, Columbus, OH]: I wanted to push back a little bit on this. There seems to be a sentiment, especially in terms of the education, that in the online video space there is an easily definable category of infringing unauthorized uses of what we might call time-shifted clips. I do not think that category is actually that easy to determine. So, for instance, the CEO of CBS is on record basically saying that CBS wants to promote the mash-up culture and being able to use clips of CBS shows.4 CBS is in a partnership with YouTube and putting clips of CBS shows online. So that is one case where it is not clear that even the copyright holder has a problem with what people are doing on YouTube. The other case is involves Viacom’s “Comedy Central” shows.5 Stephen Colbert made several jokes about having his shows on YouTube. The producer of “The Daily Show” made a joke about it as well, and he specifically stated in an interview that they wanted to have a compromise where some of their shows would be okay to be put on YouTube. So I don’t know if the category of time-shifted shows or clips of shows is actually that easily condemnable. MR. GOLDBERG: Let’s see if we have some comments here. John? 3 Digital Millennium Copyright Act (DMCA) of 1998, Pub. L. No. 105-314, (codified at 17 U.S.C. § 512 (1998)), available at http://www.copyright.gov/title17. 4 See Leslie Moonves, Chief Executive Officer, CBS, Keynote Address Before Con-sumer Electronics Show (Jan. 9, 2007), available at http://www.cbscorporation.com/media/ pdf/CBS_CES_Moonves_speech_FINAL.pdf. 5 Viacom Int’l, Inc. v. YouTube, Inc., 2007 WL 775611 (S.D.N.Y. filed Mar. 13, 2007).

92 SESSION II: COPYRIGHT MR. PALFREY: Just to be clear, the point of raising the education issue was not that we can teach everybody to be really good copyright lawyers who all can analyze Section 107 perfectly. That’s not the point. There is clearly going to be a zone in which it is going to be tricky to know. I totally credit Les Moonves and others for what they are doing in that respect. What I was thinking about is a really simple idea. School kids, these digital natives, are all the time creating new stuff. Put them in the curriculum in that position of a creator. They will see the rights coming in, the shoulders of giants they are standing on, and then they will also be in the position of a rights holder and realize somebody else might reuse this at some point. I think introducing the tension and the basic facts could get us a long, long way, but not to perfection, in terms of understanding. To Alex’s point, the knowledge thing is going to be really tricky. MR. GOLDBERG: Alex? MR. MACGILLIVRAY: One thing that I would add is something that is somewhat underplayed in the DMCA. That is the flexibility that it gives content holders to figure out whether they want to have something up at a particular time, or a particular day, or from day to day. I think it really builds on that example. We have had lots of occasions where we have had a DMCA notice over something and then found out that the same company that sent us the DMCA notice was actually the user that posted it, that the DMCA notice was a mistake, that they didn’t mean to take down their own video that they had uploaded themselves. There are just as many examples of companies that believe, at least for the time being, that having this stuff up is a good idea. Again, one of the nice things about the DMCA is it gives the content holder that ability to give it a try for a little while, see what the results are; and if they don’t like it, they can always send a DMCA notice and get it removed quickly. MR. GOLDBERG: Don? MR. VERRILLI: I have two points in response. First, that is not the flexibility in the DMCA. That is just what any right-holder has, which is the option to enforce or not to enforce your rights. I don’t really think that has anything to do with the DMCA itself. It is just your option to decide what is in your interests as a right-holder. Second, going back to Professor Lee’s point — and what I think is troubling and does not really confront the issue — yes, you are right, there is some risk of the category being over-determined. But it seems to me that then you have to confront the issue that what that means is that, because of that fact, you are going to allow all of the other non-over-determined illustrations to go on and all of that infringement to occur. It is really not hard when you see the latest episode of a particular television show chopped up into three pieces on there in sequence. The fact that there may be some difficulty at the margin seems to me not to be a good enough answer to the question about “What about all that stuff that’s not at the margin?” MR. GOLDBERG: Sandra? MS. AISTARS: I think Don has pretty much made the points that I would have made. MR. GOLDBERG: Bruce Lehman? QUESTION [Bruce Lehman, Akin, Gump, Strauss Hauer & Feld, Washington, D.C.]: Is now the time for me to ask my question to Alex and Sandra? I think they represent the two sides of this issue. We hear all about DRM, and certainly I understand that, but certainly in the YouTube situation, the examples that we saw in the earlier panel, we are basically dealing with amateur video makers who want to assemble various kinds of

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content, some that they make, some that may be in the public domain, and some that may be under copyright. We certainly have seen the very effective use of collective licensing in other areas of copyright. Indeed, in the music business now, with regard to the new performing rights for sound recordings, we see the development of sound exchange and so on and so forth. Let me ask you, Alex, if that is something that you have looked into. Would you be willing to tolerate some kind of collective license, where maybe you would pay some kind of blanket fee that would be distributed among content owners according to the basis of use? MR. MACGILLIVRAY: We are not even waiting for the collective rights society to magically emerge. We are out there every day doing deals with content holders to get their content up and to have them also be able to authorize and get payment for the material that they believe is theirs but is uploaded by users. It is something that we are doing every day. We keep getting new partnerships there, and we have a whole fleet of lawyers that do that. QUESTIONER [Mr. Lehman]: Obviously, that is content owner by content owner. You still have holdouts. You still have a problem then, because you still have infringing material. Is there any discussion of a collecting society on either side or not, or is this something you are not interested in? MR. MACGILLIVRAY: Bruce, let me just segue to push it to the content owners. I think that the idea of forcing content owners into a deal is not something that we are typically concerned with. If the content owners want to do collective licensing, great. If the content owners want to do one-off deals, we’ve got the resources to help them with that. If they want to not have any of their content available on YouTube, that’s okay too. We really leave up to the content holder and what they want to do. MS. AISTARS: From the content owners’ side, we have been focusing on direct deals with companies, rather than on a collective licensing approach. The thing that is important to understand when we are thinking about user-uploaded content sites — and Fred alluded to this — is the fact that maybe there is a middle ground, maybe we can work things out; we’ve got technology that we can rely on. If you are talking about administering any sort of a licensing approach, there is a kind of two-step process. The first is identifying what is out there and whose it is so that you can deal directly with that person, or deal directly with the agent that they have authorized, whether it is a collective licensing agency or otherwise, to handle the approach to the content. The second part of the puzzle that is necessary is some effective form of actually having that license, or having information about the content attached to the content, such that the decision can be made on a technology basis and not by either the user-uploaded content side or the content owner employing huge staffs of people to sit and review clips that are appearing on a site on a daily/hourly/minute-by-minute basis. What that seems to require, at least from my perspective, is that, as a baseline, sites that are doing user-uploaded content employ some form of technology at the front end to be able to identify what is going up. Is it my video of my cat, or is it my favorite clip of something from “Adult Swim?” Once that technology is employed, then you can determine: Okay, if it is the “Adult Swim” content, does Turner authorize that content to stay up so long as whatever advertising that is associated with it is no removed? MR. GOLDBERG: We have another question. Fred? QUESTION [Fred von Lohmann, Electronic Frontier Foundation, San Francisco]: I want to add a little more context to Bruce’s point and sound another note of optimism. I

94 SESSION II: COPYRIGHT think we have the beginnings of a collective approach, de facto, already. You see the music industry licenses that were struck with YouTube, where Universal and EMI both essentially said, “When things go up that are ours, we will have the option to either send the takedown or participate in ad revenue that may be yielded.” Now, I know as a legal matter that is not a direct license to end-users, but as a practical matter it essentially sends the message to end-users that you can use their music in any way you like and, at least in many circumstances, they will happily accept payment. I think there is hope that some of these new original licensing approaches may yield what will operate very much like a blanket license. I think for many rights-holders the payment would be sufficient. Now, Sandra raised this issue, so I have to ask her: When you suggest front-end filtering, you say, “Sure, my ‘Adult Swim’ clip maybe shouldn’t go up.” But what if that “Adult Swim” clip is embedded in a parody, a satire, a mash-up, a who knows what? Are you suggesting that the kind of front-end filtering you are talking about would do more than simply block verbatim copies? MS. AISTARS: I am not suggesting one way or the other what the outcome should be once you’ve identified that it is ”Adult Swim” content. I think that is up to each individual. QUESTIONER [Mr. von Lohmann]: That it is that content or that it merely contains that content? MS. AISTARS: I think it is actually the same question ultimately, because the only way you are going to get to the question as to whether it is an authorized or an unauthorized use, whether it is something that is arguably a fair use, is to first identify what piece of content we are looking at. Also, do I need to look at it as Turner, for instance, with “Adult Swim?” Do I need to even review that clip to determine whether I am licensing it or not licensing it? I don’t want to throw cold water on this coming together of thinking on the topic here, but I think there is a very important question that we have been brushing under the table: Whose obligation is it to take the initial step to do the screening? Alex and Don discussed it. Alex was saying, “We don’t treat anybody who is not our partner differently in terms of the takedown tools we offer them, and the ‘claim your content’ tools.” I’m sure that is right, but that is not really what the debate is about. The debate is about whether something needs to happen on the front end, at Google or at YouTube, or whether the obligation is being shifted somehow to the content owner to monitor the site and to take things down. MR. GOLDBERG: John Palfrey has a comment or question, after which we will go to Dick Rudick. MR. PALFREY: Actually it turns out to be on roughly the same topic. I would be curious what those who are in the content-owning industry think about the collateral damage of the takedown process. I am troubled by this. I am not sure how to feel about it exactly, and Fred has done more work on it than I have. When Viacom sent 100,000 notices to Alex and YouTube saying “these things need to be taken down,” as I understand it, Google took them all down. I was told that in that mix at least sixty were found to be non-infringing. One of them was a close friend of mine in a ribs joint near here. It was really boring. It was thirty seconds of a couple of guys talking about OPML, some obscure technology. I don’t know why, but it got caught up in this. There certainly were many others of that sort. There is currently a back-and-forth with the NFL about a clip that Wendy Seltzer, who

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is a Fellow at our Center has put up, which has been up and down a few times, which she is using in her teaching as an example of a fair use case, for instance. So there are things that are sort of the collateral damage getting caught up in the cease-and-desist process. I wonder how we think about that. MR. GOLDBERG: Don? MR. VERRILLI: I’ll address that. You know, sixty out of 160,000 is pretty good. Remember that we are doing this approach because this is what YouTube told us we had to do to protect our copyrights. The whole point here is that YouTube says to us and the other copyright owners: “It is staying up there until you send a takedown notice.” When you are talking about the volumes of works that we are talking about hundreds and hundreds of thousands of them, you are talking about a very daunting endeavor. My sense of it is somewhat more optimistic in terms of the collateral damage. It really was a pretty small percentage of the overall activity, and it was, as I hope events will demonstrate going forward, something that Viacom had no intention of inflicting, and has tried to act responsibly once it has learned about it to try to get that material back up. MR. GOLDBERG: Thanks, Don. Dick Rudick? QUESTION [Richard Rudick, John Wiley & Sons, New York]: As the Director of the Copyright Clearing Center, I am very pleased at all the excitement and interest in collective licensing, which I think has to be part of the brave new world. I would like to take it to another place because it is as important for the efficient operation of search engines as it is for the efficient operation of operations like YouTube. I want to tie it in with something Marybeth Peters said this earlier morning. She talked about focusing on authors and on what I’ll call small producers (could be small publishers). It is not enough that Time Warner and Google can get together. For copyright to work in the interests of readers and society and the creative community, you have to have efficient mechanisms that work not only for large corporations, for their content, but for small providers, not all of whom are individuals — small companies, producers of documentaries. So I think we do need this universe of content collecting societies. I think, out of fairness to Google, if we want them to pay — and we have disagreements about what they should pay for and how it should all work — and if we want them to respect our vision as content owners of copyright, we need to provide efficient mechanisms and we need to cover the content of the small producers. MR. GOLDBERG: Very good. One last question or comment. We are running out of time. QUESTION [David Brennan, University of Melbourne]: I was just wondering how YouTube places obscene material on its site and whether that process is entirely complaint-reactive? MR. GOLDBERG: Who wants to respond to that? Alex? MR. MACGILLIVRAY: Very quickly, we do it in a similar way to the DMCA, where our users actually tell us when something is pornographic, as opposed to in copyright, where you cannot tell whether it is unauthorized or not on the face of it. If there happens to be naked genitalia, that is something that we mark as pornographic. But it is after the fact. Just be glad I didn’t say “ass.” MR. GOLDBERG: On that note, I want to thank very much the experts on our dais. Thank you very much.

SESSION II: COPYRIGHT PART C: COPYRIGHT ISSUES IN ONLINE MUSIC

SESSION II: COPYRIGHT

Part C: Copyright Issues in Online Music

Moderators ERIC J. SCHWARTZ

Mitchell Silberberg & Knupp, LLP (Washington, D.C.) PROF. SILKE VON LEWINSKI

Max Planck Institute for Intellectual Property (Munich)

Speakers ZOLTÁN BÁCSI

HOWARD P. KNOPF

Legal Advisor, European Parliament (Budapest)

Macera & Jarzyna LLP (Ottawa)

JACQUELINE CHARLESWORTH

TILMAN LUEDER

General Counsel, National Music Publishers Association (Washington, D.C.)

DG Internal Market, European Commission (Brussels)

ELLIOT PETERS

Vice President, Senior Counsel & Head of Digital Legal Affairs, Warner Music Group (New York)

Panelists DAVID O. CARSON

DAVID JONES

Associate Register for Policy & International Affairs, United States Copyright Office (Washington, D.C.)

Principal Program Manager Microsoft Corporation (Alexandria, VA)

98 SESSION II: COPYRIGHT MR. SCHWARTZ: We will continue the copyright issues, focusing now on digital music issues. Good afternoon. My name is Eric Schwartz, from the law firm of Mitchell Silberberg & Knupp. I will provide a brief introduction and an overview of the U.S. digital music copyright issues. First, let me briefly describe the setup of this panel. Silke von Lewinski from the Max Planck Institute, my co-moderator, will begin with an introduction of the European Union digital music issues. Then we will have Tilman Lueder, who needs no introduction, and Zoltán Bácsi from the European Parliament, speak on digital music and collective administrative issues in the European Union. We will then do a quick stage change and have three speakers speaking on the United States: Jacqueline Charlesworth from the Music Publishers Association; Elliot Peters from Warner Music Group; David Carson from the U.S. Patent and Copyright Office; and David Jones from Microsoft. Then, last and certainly not least, Howard Knopf will speak on Canadian issues. Todd Larson, who was going to represent Digital Media Association (DiMA) and the webcasters, was taken ill and is unable to be here this afternoon. Let me now turn the program over to Silke. PROF. VON LEWINSKI: Thank you very much. Good afternoon, everybody. One year ago we talked about the European Commission’s recommendation on online music licensing.1 Tilman Lüder presented the recommendation, and we had some panelists with controversial views about its possible consequences — since it is a non-binding instrument, one cannot easily know what the outcome will be. At the time, as has become usual at Fordham, we held our crystal balls in our hands and tried to predict what would happen. The only thing we were really sure of was that we would come back here one year later and know more. This year we know a little bit more, indeed — at least about what happened as a consequence of the recommendation. The recommendation aims at promoting competition between collecting societies as regards online music licensing in favor of the right owners, who are now enabled to choose one or several European collecting societies for online music licensing instead of having to address all of each country individually. I am very glad Tilman is here to tell us about the outcome of the recommendation to date from the European Commission’s point of view. MR. LUEDER: [Remarks here and throughout the following discussion deleted at request of Mr. Lueder. Please see related paper by Mr. Lueder in the Appendix at p 1031.] PROF. VON LEWINSKI: You know that, apart from the European Commission, we have other institutions in the European Union that dislike this instrument for many reasons, namely, the Member States, the Council, and the European Parliament. I am glad that we are able to have on this panel a representative of the European Parliament, Dr. Zoltán Bácsi, who is Legal Advisor to Mme. Lévai, the Member of Parliament who was responsible for a report on the recommendation of the Commission that was adopted by the Plenary of the European Parliament just in time for the Fordham Conference, namely on March 13th.2 1 Commission Recommendation of 18 May 2005 on Collective Cross-Border Management of Copyright and Related Rights for Legitimate Online Music Services (2005/737/EC), available at http://ec.europa.eu/internal_ market/copyright/management/ 2 European Parliament, Legal Affairs Committee, Report on the Commission Recom-mendation of 18 October 2005 on Collective Cross-Border Management of Copyright and Related Rights for Legitimate Online Music Services (2005/737/EC) (2006/2008(INI)), DOC A6-0053/2007 (Mar. 5, 2007), adopted at first reading, Mar. 13, 2007, available at http://www.europarl.europa.eu/sides/getDoc.do?Type=REPORT&Reference=A62007-0053&language=EN.

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This report takes a quite different approach. It focuses on issues that would probably not at all be issues in the United States, such as the consequences of the recommendation on cultural diversity and on the individual author, the importance of the cultural and social role of collecting societies, the importance of the work of smaller collecting societies, right owners, and of local repertoire, the solidarity function of these societies; and the unwanted effect of the recommendation, namely, to strengthen mainly the most profitable right owners. Even if the report is not legally binding, it has a political weight that should not be underestimated, all the more because the report was adopted by unanimity. After all, the European Parliament represents the voice of the people, so to speak, with this report. With this short introduction, I pass on the floor to Dr. Bácsi. DR. BÁCSI: Thank you very much. It is a great privilege to be here and to describe, I can say now, the position of the European Parliament. It was adopted by unanimous vote, not only in the plenary session, but in the Committee on Cultural Affairs and Committee on Legal Affairs as well. So there is strong support. I do not believe that the European Commission has the one and only solution, and not even the European Parliament, but we should avoid the threat of the wrong answer. I will talk about the resolution of the European Parliament and say a few words about the importance of the copyright sector in the European Union, not only its huge representation in the EU GDP, but the importance of making sure that the copyright and neighboring rights in this growing digital domain are managed properly to benefit all involved, not only for a few. You know the present license scheme, so I can skip it. You know the current system of music rights licensing, the flow of rights from the right-holders to the collecting rights managers, and the commercial users as well. It is typically European. You have the acquisition of local repertoire, on a basically national basis, and then, under step two, the acquisition of worldwide repertoire. It is a network of representation agreements, so-called reciprocal agreements. There are two main models in the new licensing sector. Actually, the difference is that the Commission advocates in its recommendations Model D with the so-called Option 3, while the Parliament has indicated a preference for Model E, not Option 2. It is a modified compromise between Option 2 and Option 3.3 I would like to stress just one aspect of the recommendation. The recommendation carries no force of law. It is a so-called “soft law.” It does not need the consent of the European Parliament or the Council. Nevertheless, this recommendation is having a very tangible impact in the market, equivalent to that of binding legislation. Theoretically, it is non-binding legislation; however, in practice it acts like binding legislation, but without the consent of the Parliament and the Council, the so-called “legislative triangle” of the European Union. As was mentioned, there are three options under the Commission’s recommendation. My first problem with the recommendation is with its impact assessment. I think it is a wrong simplification of this very important and very complex area of the copyright 3 The EC Study on a Community Initiative on the Cross-Border Collective Man-agement of Copyright, released in July 2005, proposed three options for the improvement of the current situation: (1) do nothing; (2) suggest ways in which cross-border cooperation between national collective rights managers in the 25 Member States can be improved; (3) give right-holders the additional choice of authorizing a collective rights manager for the online use of their musical works across the entire EU. European Commission, Commission Staff Working Document (2005): Study on a Community Initiative on the Cross-border Collective Management of Copyright (July 2005), available at http://europa.eu.int/comm/ internal_market/copyright/management/management_ en.htm.

100 SESSION II: COPYRIGHT sector. Ladies and gentlemen, you are the best experts of the copyright sector, so you know it is not easy to simplify this area and this very fast-developing domain. So I think it is a wrong simplification of this area. We do not support forcing one business model on the market. We would like to see that all the stakeholders are able to determine the best solutions in the different areas, find the best solutions for the different sectors of the digital online copyright area. I think that these are two conflicting concepts. Basically, we have to say that the European Parliament does not support Option 2. With the controlled and moderated competition, it is supported among societies, on the basis of the rights administration service, not underlying right royalties, and because it avoids a downward spiral of the royalties. The EMI Music Publishing approach could illustrate this. For example, EMI Publishing has rights from all existing European CRMs. I think it may be the first bad sign that these myths are not only myths but real dangers. Just a few words on the “soft law” approach. The European Union is unhappy with the “soft law” approach. By failing the Parliament and the Council, we think the Commission has bypassed the democratic process. Yet the recommendation is impacting the market as if it were binding law. Theoretically, as I mentioned, it is a non-binding act, but in practice it has the effect of binding law. The European Parliament’s report sent a strong signal to the Commission that it is unacceptable to ignore the legislative triangle on highly relevant issues such as this and calls for a framework directive, which is a legislative act, instead of the “soft law” approach. Some words on cultural diversity, which I do not think is only a myth. You know that it is a very important question in Europe. The motto of the European Union is “Unity in Diversity.” The European Parliament believes that the introduction of competition among collecting societies in the Internet and digital age is necessary and is compatible with the cultural diversity, but not in the rather rude manner proposed by the Commission. Our objective was to find a good balance. I think we found a good compromise between Option 2 and Option 3. This compromise aims to provide guarantees to rightholders and one-stop shops for the users of music, as well as to promote cultural diversity through introduction of controlled competition. The main elements of the European Parliament’s proposal: 앫 Prefers the reciprocal system of the collecting society in Europe. 앫 Encourages introduction of competition among collecting societies for the right-holders in a controlled manner — this is very important — and not the “big bang” approach of the Commission. 앫 Guarantees that individual right-holders can continue to join the collecting society of their choice. 앫 Promotes availability of the world repertoire — this is important — for all collecting societies, large and small. 앫 Argues for solidarity — this is important — and equal treatment between authors and publishers affiliated with collecting societies, important European issues. 앫 Prevents exclusive agreements between major publishers and a few large collecting societies, thereby creating an oligopoly situation in Europe. (I do not think this is only a myth.)

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앫 Introduces competition on the quality and efficiency of services provided, but prevents forcing down the level of the royalties. 앫 More important, the one-stop shop for users seeking to obtain a pan-European license. 앫 Calls for a directive reflecting these objectives to demonstrate the European Parliament’s support for strong cultural diversity in Europe. I think all these elements are important. PROF. VON LEWINSKI: Thank you very much. I believe that the last-mentioned element is probably the most important one, which directly leads me to a question for Tilman Lueder. The actual proposal by the European Parliament is that the European Commission should propose a legislative act — instead of a non-binding unilateral measure, such as the recommendation — in the form of a framework directive, setting some common standards on the operation of collecting societies in the European Union, in order to enable them to work under common conditions and, accordingly, to allow for preconditions of fair competition. This is the ball thrown from the Parliament to the Commission, which is the only body with the right to initiate directives and other legislative measures, followed later by the participation of the European Parliament and the Member States. MR. BACSI: Actually, I cannot answer your question about the legislative act. Is it possible that the European Commission will prepare or launch a directive with the participation of the stakeholders, and the European Parliament counsel as well? I think that was one of the main elements of the question. Mr. McGreevey has chosen, instead of launching a legislative act, the same old “wait and see.” But I am afraid it is time to have a legislative act in this important area, not only a “soft law” approach. Just some remarks on diversity. I do not think diversity is equal to inefficiency. I think European diversity is an important value. Different national values could add additional value to the common European values. I am afraid I cannot agree with this definition of diversity, that it is the main reason for inefficiency. On the other hand, competition is very important. But the subject of this competition is not simply Hoovers or freezers or some simple things. It is subjective — for example, “the art of Europe.” I think some regulation in the case of this intellectual property is necessary. So I do not agree to competition without any regulation. Those are the main points. PROF. VON LEWINSKI: Thank you very much. Very good points, indeed. Julie? QUESTION [Julie Samnadda, European Commission Legal Service, Brussels]: Can I comment briefly on the concept of controlled competition? There is nothing in EC competition law and there is nothing in the EC Treaty4 that would prevent collecting societies from applying the full force of competition law to collecting societies. There is no argument to date that has been successfully made that would say that collecting societies have some sort of special-interest undertaking within the meaning of the Treaty. The 2005 recommendation was based largely on one of the Four Freedoms of the EC Treaty, which was the provision of services. It was an attempt to enforce decisions that were taken several years ago in the area of competition law that had to do with 4 Treaty on European Union, Feb. 7, 1992, 1992 O.J. (C 224) 1, [1992] 1 C.M.L.R. 719, 31 I.L.M. 247, amending Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-II) [hereinafter EEC Treaty], as amended by Single European Act, 1987 O.J. (L 169) 1, [1987] 2 C.M.L.R. 741.

102 SESSION II: COPYRIGHT rights-holders being able to choose their service provider. I refer to the GEMA decisions of the late-1970s/early-1980s,5 where rights-holders wanted to leave their collecting society in relation to the administration of certain rights. You may have read in the press recently about one or two high-profile competition cases that have to do with iTunes and CISAC.6 Whilst I can only refer to what has been said in the press about these cases, both cases have underlying them market integration and the way rights managers in the European Union administer rights. As you will see from those cases as they play out over the next few years, what is at stake is the crossborder provision of services between rights-holders in the entire chain. The idea that there could be controlled competition in this area is something that has no legal basis. PROF. VON LEWINSKI: So we are back to competition law. Maybe someone else wants to focus on a different issue? The recommendation touches upon so many different issues. QUESTION [Sarah Faulder, MCPS-PRS Alliance Ltd., London]: MCPS-PRS Alliance in the United Kingdom is one of the co-venturers of GEMA in the CELAS Project. I am just curious, Mr. Bácsi, as to how you believe that the value of music, of copyright, can be maintained in a situation where you are encouraging societies to compete against each other for users. That seems to be one of the things that comes through from the report. I know you say in the report that the value should be maintained, and yet there are other contradictory statements that it seems to me make that impossible to achieve. MR. BACSI: That is why I mentioned that some regulation is necessary, because we have to avoid the situation you have mentioned, a cost spiral in the royalties. So we have some proposals in our report, for example, to use different and fixed tariffs in each country that is the location of the download, which can prevent the competition for the users and for the cost spiral of the royalties. So I think a model of some regulation, some mixture of the so-called Option 2 and Option 3, could prevent these dangers and could save the limits of the royalties, and the value of the music as well. PROF. VON LEWINSKI: I call upon the public. I know that some of you here are insiders. QUESTION [Cees Van Rij, Buma/Stemra, The Netherlands]: I made a comment last year in the same context. I would like to reiterate part of that comment. The reality is that for the small and medium-sized societies in Europe — and I am not here to defend the system overall; I know there are flaws in the system — the reality is that five of the major publishers have written letters to all of the European societies withdrawing their repertoire for online exploitation. Fact. This is not a myth, this is a fact. Now, what does that mean? That means that between 70 and 80 percent of the repertoire currently available to those societies will not be available to those societies for online licensing. That is a fact. The reality is that then the cost base for those societies does not diminish by the same proportion, clearly, so the right-holders that remain with those societies will have to bear a larger burden of the costs of operating the society. In addition, you split up the repertoire no longer according to territorial boundaries; 5 See Joined Cases 55/80 & 57/80, Musik-Vertrieb Membran GmbH and K-tel Int’l v. GEMA (Gesellschaft für musikalische Aufführungs — und mechanische Vervielfälti-gungs-rechte), [1981] E.C.R. 147, 2 C.M.L.R. 44. 6 See, e.g., European Commission, Press Release, Commission sends Statement of Objections to the International Confederation of Societies of Authors and Composers (CISAC) and its EEA members, Memo/06/63 (Feb. 7, 2006), available at http:// europa.eu/rapid/pressReleasesAction.do?reference=MEMO/06/63&format= HTML&aged =0&language=EN&guiLanguage=en; Press Release, European Commission, Competition: European Commission confirms sending a Statement of Objections against alleged territorial restrictions in on-line music sales to major record companies and Apple, Memo/07/126 (Apr. 3, 2007), available at http://www. europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/126&format=HTML&aged=1&language= EN&guiLanguage=en.

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you split up the repertoire according to who owns the repertoire and which society has the exclusive mandate. Now, isn’t there something about exclusivity in competition law? That is just in brackets. By splitting up the repertoire in that way, you create a system that is similar to the system that you say you dislike, which is having to obtain licenses from a variety of sources in order to create the world repertoire. Now, those societies — which, by the way, according to a 2004 study, contribute many times more to the preservation of musical diversity than the European Commission spends on its entire culture budget — need the Anglo-American repertoire. There is no myth about this. This is reality. Those societies need the Anglo-American repertoire in order to make ends meet for the right-holders of the Anglo-American repertoire as well as for their local right-holders. If you take away 60, 70, 80 percent of their repertoire, that part of what we call cultural diversity will not survive. Now, what does the Parliament mean by “controlled competition?” Probably what it means is, as DG Competition said it would accept in the CISAC case,7 that we can apply the rates in the country of destination. Thereby you do not get a race to the bottom with respect to tariffs, but you allow societies to compete with each other with respect to their own margins, their own commissions. That will create the drive towards efficiency for these smaller and medium-sized societies. I am not sitting here today saying that in ten years’ time we will still be left with twenty-four or twenty-five musical societies for authors’ rights in Europe. But what we have always argued is that the basis of competition law is that you should start out with a much-coined phrase, a level playing field. You should allow each of these societies to come to the starting line and enter into competition with each other on a level playing field. Then there will be some small societies that will survive. I would even venture to say that there will be some big societies that will not survive because, funnily enough, some of those big societies take bigger margins than some of the small societies. Some of the smaller societies are actually more efficient than some of the big societies. That is another reality, not a myth. We are not here to discuss myths. We are here to talk about the facts of life. These are the facts that we are currently dealing with in the European environment. PROF. VON LEWINSKI: Thank you very much for this very useful comment from practice, from real life. I believe that the concept of cultural diversity, which may be somewhat nebulous for some of you, certainly has now become clearer to everybody. PROF. VON LEWINSKI: Do you have something to add, Zoltán? MR. BACSI: Yes, just two comments. Unfortunately, as you can see the controlled competition, I can see the possibility of preventing the “one-stop shop” for a worldwide repertoire in the model of the recommendation of the Commission. On the other hand, I would like to hear something about the proposed legislative act, which was proposed by a huge majority of the European Parliament. PROF. VON LEWINSKI: Thank you very much. I guess the controversy will go on. It is not yet finished. A big round of applause for both of the speakers! I now pass it on to you, Eric. MR. SCHWARTZ: Thank you. Let me now invite Jacqueline, Elliot, Howard, David Carson, and David Jones from Microsoft to the podium. 7

See id.

104 SESSION II: COPYRIGHT While we are resetting the panel, I would just say that, having had a similar panel last year on EU issues and being only an observer, I had a great sense of déja vu on the sharpness of the issues that remain unresolved on territoriality, cultural diversity, and collecting rights societies. Let me provide a three-minute overview of music licensing issues in the United States. There are really four fundamental, overarching issues – all very different from those in the European Union. There are also some issues that equally pertain to rights-holders in the European Union. 앫 The first issue entails a deciphering of rights — what has become known as “rights clarity.” The fact is that music licensing and online music services are currently in operation without an understanding of when in a particular instance only the reproduction right and/or the public performance right is/are implicated. For example, currently at issue in the ASCAP Rate Court is the matter of whether or not downloaded music services are public performances. Absent private contracts, or so-called “all in” agreements, it is difficult to know in any instance whether users and licensees need to pay for reproductions, public performances, or both. And yet these systems are operating. 앫 Deciphering rights leads to the second issue: namely, the application and distinctions between types of musical services. The vernacular of digital music uses terms such as permanent copying, downloading, subscription streaming services, non-subscription services, and hybrids of this terminology, like conditional downloads. These activities may or may not correspond directly to the rights that need to be licensed in each instance, such as the reproduction, distribution, and/or public performance rights. 앫 The various payment options are overarching issue number three. These include: questions about whether or not payments should be a percentage of the service or fees collected or made on a per-unit basis; whether or not and when there should be collective management; and the development of new business models. It was interesting listening this morning to the predictions of what will happen in the next ten years. I think if you had backed up the clock three years ago and said to this audience that one of the fastest-growing markets in the music industry would be poorquality, $4.00-each, partial copies of a song — we know them as ringtones — everyone would have laughed. And yet, ringtones have gone from zero three years ago to, I believe, $2 billion a year in the United States last year, and something like zero to $6 billion worldwide in that same period, according to a recent article in Billboard.8 앫 The fourth issue is public policy. Who is going to resolve issues one, two, and three — the Copyright Office; the Copyright Royalty Board, the new entity; the courts; or Congress? That is, who will resolve the questions of deciphering rights, and, where necessary, altering or reforming rights, especially as they pertain to the mechanical license and other reproductions of music? If you have not seen Marybeth Peters’ testimony before Congress that she delivered in March, I urge you to take a look at it. It is on the Copyright Office Web site.9 8 See Billboard PostPlay, Ringtone Popularity Soaring (June 17, 2005), http://billboard.blogs.com/billboard postplay/2005/06/ringtone_popula.html. 9 Reforming Section 115 of the Copyright Act for the Digital Age: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the H. Comm. on the Judiciary, 110th Cong. 1st Sess. (2007) (statement of Marybeth Peters, The Register of Copyrights), available at http://www.copyright.gov/docs/regstat032207-1.html; see also Music Licensing Reform: Subcommittee on Courts, the Internet, and Intellectual Property, 109th Cong., 1st Sess. (2005), (statement of Marybeth Peters, The Register of Copyrights), available at http://www.copyright.gov/ docs/regstat062105.html.

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앫 Last, and certainly not least, is the matter of enforcement of rights, which, alas, we have no time today to discuss. Let me now turn to our two speakers: first Jacqueline talking from the music publishers’ point of view; then Elliot talking from the label point of view. MS. CHARLESWORTH: Good afternoon. I represent the National Music Publishers’ Association (NMPA). Given the time limitations, I decided to discuss the top five issues facing music publishers in the online world. The first issue is our rates. We have never had a rate-setting proceeding to set any rates in the online world. Eric mentioned that we recently began a new system for determining rights, the Copyright Royalty Board (CRB). We have a rate-setting proceeding, which commenced in February 2006, to determine rates for physical uses and the full spectrum of digital uses, full downloads and uses by subscription services. I think it is fair to say that there is a fairly large spread between where the music publishers are in terms of what our proposed rates are and where DiMA, on the other hand, and the labels, on the third hand, think their rates should be. A major issue that will be litigated in that proceeding is whether we will move, as the labels want, to a percentage-based rate structure. This makes publishers very nervous, at least in the physical world, because we do not, obviously, control the pricing decisions of the labels. So that is something that will be debated and that will play out during the course of this proceeding. Another very significant issue is the subscription service rates. There is a statutory rate for full digital downloads, which is currently the same as the physical rate, which is 9.1 cents. So publishers are paid for an Apple-style download. But for services like Napster, Rhapsody, and so forth, publishers have never been paid because no rate has been set. This is a problem that dates back to the launch of those services in 2001. At that time, publishers entered into an agreement, first with the record labels, and then with individual services. It is a use-now/pay-later agreement. In exchange for recognizing the publisher’s right to collect a mechanical fee for limited downloads and on-demand streams, under Section 115 of the Copyright Act, we agreed to grant a license. At the time, I think we thought we were operating on a horizon where rates would be set within two years. Now we are looking at late 2008 as the probable date before the CRB will issue its decision. So those services will have operated seven years without a rate, which is a long time. I will now move on to licensing reform. There are many in the room who have an interest in this. Eric mentioned Marybeth’s congressional testimony. I think the NMPA, music publishers, and songwriters fully agree that it is time to fix Section 115 and improve the licensing system for digital uses. It is how you do it where I think there is some difference of opinion. We believe that a collective or a blanket-style licensing system would be a good idea. Unfortunately, the DiMA representative is not here. I think there is a lot of sympathy and understanding on the part of the music publishers that it would be nice to file a piece of paper and have access to all repertoire. With that in mind, last year DiMA and NMPA took the lead in framing proposed legislation, which became known as the Section 115 Reform Act, (SIRA),10 which, 10 H.R. 5533, 109th Cong., Section 115 Reform Act of 2006 (SIRA), available at http://thomas.loc.gov/ cgi-bin/bdquery/z?d109:H.R.5553; see also U.S. Copyright Office Statement, available at http://www.copyright. gov/docs/regstat051606.html.

106 SESSION II: COPYRIGHT frankly, got pretty far in Congress. Insofar as the publishers and DiMA were concerned, there were large areas of agreement. It would have set up a general designated agent and, potentially, other designated agents to take blanket-license requests and issue licenses. As the legislative process moved on, various issues arose. There were governance issues, in terms of who would oversee the general agent. There were issues raised by the labels concerning how to continue to effectuate controlled composition clauses. The satellite radio services, which have devices on the market that are reproducing works, got into the mix. It was a typical sort of “Christmas tree” experience: we started out with what was already a somewhat complicated idea and it got heavier and heavier. Although it passed the House Subcommittee, it did not get through the full Committee. I think everyone learned a lot from that experience. I think there were large pieces of that that were breakthrough and would have helped solve many problems. I think we are somewhat back at the drawing board in terms of thinking about how to move forward with that. But there is a commitment to try to solve that problem. It is a very important problem to solve. Eric mentioned licensing clarity. In my outline, that is mechanical versus performance. The issues relating to services — say, streaming services, where copies are being made at the server level and then along the way, and they are being transmitted to users — are issues which have been long debated, really back to the late 1990s and early 2000s, when we entered into the agreement with the Recording Industry Association of America (RIAA). We believe that in passing the amendments to Section 115 in the 1990s, based on the actual text of the statute and the legislative history, on-demand streaming or interaction streaming is an activity that should be covered under Section 115.11 It is very clear that there are reproductions needed to stream works, including, as I mentioned, a server copy. That issue has been litigated. It is clear that you need a license for a server copy. It makes sense, in our view and, I think, in the view of DiMA — if I can speak for them — to include the server copy and all the incidental copies that are used in streaming in a license and to make sure that the users have everything they need to operate such a service. Similarly, with limited downloads and full download services, server copies are an issue. This was one of the issues that was addressed and resolved in the SIRA legislation. We hope that we can achieve a similar or the same result through a judicial process, or perhaps somehow solve the problem in the context of the CRB proceeding. So that is an issue that is out there. Eric mentioned the ASCAP proceeding regarding performance rights. In the United States, of course, we have separate institutions and separate ways that mechanical rights are licensed versus performance rights. DiMA has sought summary judgment on the issue of whether there is a performance in a download. The performance rights societies (PROs), as well as NMPA, have taken the position in an amicus brief in the ASCAP case that that right needs to be recognized.12 11 17 U.S.C. § 115(a)(1). Mirroring the statutory language, the provision’s legislative history states that the Section 115 license is “available to anyone as soon as ‘phonorecords of a nondramatic musical work have been distributed to the public in the United States under the authority of the copyright owner.’” See H.R. REP. NO. 94-1476 (1976). 12 See Press Release, DiMA, Digital Media Association Asks Court to Deny Music Publisher Double-Dip on Music, Movie and Television Downloads (Feb. 28, 2007), available at http://www.digmedia.org/content/ release.cfm?content=pr&id=7216; Amicus Brief in United States v. American Soc’y of Composers, Authors and Publishers (ASCAP), In the Matter of the Application of AOL, LLC, Yahoo! Inc., and RealNetworks, Inc. for the Determination of Reasonable License Fees, Civil Action No. 41-1395 (WCC) (S.D.N.Y. filed Feb. 28, 2007), available at http://www.digmedia.org/docs/DiMA%20AMICUS%20BRIEF% 2002-28-2007.pdf.

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I think there is a separate question of what the value is, but I believe that that is another decision. It will take a while, but probably within the next year we will at least have some federal case law on that issue. I think there is a lot of anxiety right now about how this is all going to play out. I wasn’t asked to predict the future, but three or four years from now we will probably have a much better sense and a much better system for dealing with these issues in law, and there will be much more clarity. Very quickly, we also have an issue regarding ringtones. There was a recent administrative ruling before the Copyright Office, where the publishers took the position that ringtones should be out of the compulsory license.13 We believe they are derivative works. We think that it is inappropriate to add more uses under the compulsory license. It is an unlevel playing field when we are under a compulsory license. Unfortunately, the Copyright Office disagreed with our view. That issue is on appeal. Just to give you an idea of the economics there, under the current rates, ringtone use would come under the compulsory 9.1 cents. But under the voluntary licenses that were negotiated prior to this decision, the publisher was getting 10 percent or more of, say, a $2.50 ringtone. That amounts to twenty-five cents. So this is a very big economic issue for publishers, given the numbers. Also there is a matter of principle. I will close by saying my fifth issue was enforcement, which was dealt with earlier. I will turn it back over to Eric. MR. SCHWARTZ: Thank you. Elliot, the floor is yours. MR. PETERS: I will respond to that. First of all, I think we always end up on these panels together where I am pitted as the label representative. But I work at Warner Music Group, which today has the second-largest music publisher catalogue in the world. MS. CHARLESWORTH: Feel free to agree with me. MR. PETERS: And I do, on a number of things. Let me comment quickly. You covered a lot of ground, some of which I was going to cover, so I thank you for that. On subscription, there should be a rate. One will come out of the rate-setting proceeding. I agree, it is long overdue. Copyright holders should be paid for uses of their works. In terms of SIRA and licensing reform, I think it would have accomplished a lot of good things. There were a lot of other constituents, like the Electronic Frontier Foundation (EFF). There was a lot of administrative complexity. I am not sure that everybody has abandoned hope. Clearly reform is necessary, and clearly we need to get subscription services launched, with clarity, so that they can be licensed for all uses, including streams. I found your comment on the performance versus download interesting, especially your comment about value. I understand there is subtext in the complaint. But I do think that will be one of the interesting ultimate determinations, not necessarily decided by the court. On Section 115 and whether ringtones are in or out, from the label perspective, clearly we do not feel that there is a fundamental change in the nature of a work just by truncating it. The Register of Copyrights agreed. And 9.1 cents versus the marketplace deals is the rate for the next year or so, but it isn’t the rate forever. The CRB will decide, and 13 See Docket No. RF 2006-1, In the Matter of Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, U.S. Copyright Office, Memorandum Opinion (Oct. 16, 2006), available at http://www.copyright.gov/ docs/ringtone-decision.pdf; Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, Order Granting in Part the Request for Referral of a Novel Question of Law, Docket No. 2006-3 CRB DPRA (Aug. 18, 2006).

108 SESSION II: COPYRIGHT they will take into account a number of factors, including the marketplace dynamics. So I wouldn’t cast it in such a negative way. The Register of Copyrights has spoken. But again, I wear two hats. MS. CHARLESWORTH: That she has. So either way you will win and either way you will lose on that issue. MR. PETERS: Exactly, which is nice. My name is Elliot Peters. I am head of Digital Legal Affairs at Warner Music Group. We are a music-based content company. We are working hard to innovate, using new technologies, to create new, rich musical experiences so fans can get closer to the music they like and the artists they love. Our goal is to make music a ubiquitous experience, so it can be experienced in the car, in the home, through home entertainment networks, gaming consoles, PCs, through the television, including Internet Protocol for Television (IPTV); interactive TV through fixed lines; on the go through cell phones; PDAs; MP3 players — through all kinds of transmission protocols, whether it’s Internet-based or extensions of the Internet, WiFi, WiMAX, digital broadcast. We really want music to be consumed everywhere. The record today, I think, enabled by new technology, is different than the record of years gone by. In years gone by, you put the record on a player, it played, you leaned back, you flipped through liner notes, and that was your musical experience. Today you can lean forward. You can be online. You can be in a virtual world. You can be in a Second Life type of environment. Your avatar self can be trolling around meeting people. You can set background music. You can invite people to go dance with you. You can personalize your cell phone. When my phone rings, I hear Dani California, and I know that I am identifying myself with the Red Hot Chili Peppers. When my wife calls me, I set the ringback tone so that she hears You’re Beautiful, James Blunt, and she gets a nice little welcome there. So we are looking to put music into every aspect of everybody’s life. But the legal landscape today poses some challenges. I will just speak quickly to a couple of those. One is the legal ambiguity. We already talked a little about the ASCAP proceeding before the Southern District of New York.14 Does the distribution of a download also implicate the performance right? ASCAP would argue that of course it does, because there is language in the statute that says that a work publicly performed includes the transmission of a performance, whether or not it is received. They would say: “Of course there is a transmission and the performance is the recorded performance. Artists went into the studio and recorded the song; that is the performance. So the conditions are met.” They feel that the language is clear and unambiguous. Opponents of their position would say, “Hang on a minute. You have to look at the definition of ‘perform.’ ‘Perform’ is to play or render. That’s very clear.” They would go further and say, “Look at the audiovisual definition. It has a further qualifier, the further qualifier being that it has to be capable of being heard.” I think there is some legislative history and reason that that same clause is not applied to the audio portion, which I, sadly, do not have time to get into. But I think opponents would also say that the “capable of being received” really is better understood in the context of terrestrial radio: Z100 in New York transmits its broadcast. If Elliot Peters does not have his radio turned on, that does not mean that it is not a public performance. 14

See id.

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So reasonable minds do differ on this issue. It will be resolved soon. We will hopefully have more clarity on that issue. By the way, the record of the case is fascinating. The amicus briefs are very well done. I invite folks to take a look at them. It is good reading and a good history lesson. The second thing I will note is that there are certain business models that seem to be beset with controversy. Let me just give you one example. At Warner Music we looked at the YouTube business model. We have licensed YouTube. We did our homework. We worked hard with YouTube to make sure that our business model respected intellectual property rights and returned value to creators of works. At Warner Music we are keen on innovating, rather than litigating, while at all times defending the rights of our authors, the artists, and defending our copyrights. So there is ambiguity, sometimes uncertainty, as to the rules of the game. I do think five years ago everything was rather murky, Jacqueline. Things are a little bit better today. People do not need to tread as cautiously. It is a somewhat more market-friendly environment today, from an understanding-of-rights perspective. It still needs to get better. Where we still need to improve is, now that we understand the rules of the game better, and as we continue to understand the rules of the game better, we need more efficient licensing mechanisms. The great promise of the digital space is the long tail, the fact that I go to Best Buy and find 10,000 records there that they are willing to stock on their shelves. As records begin to sell less well — Led Zeppelin IV will be there forever; The Beatles’ White Album will always be in Best Buy — it will not make sense for them to stock certain albums at some point. However, it will not make sense for a record company to manufacture and distribute certain albums in the physical space. In the digital space, you can have a virtual store in the sky with millions and millions of products. You know what? Records that sell only one or two a week, over millions and millions of units, really are an exciting opportunity for copyright holders and the digital stores. But the promise of the long tail is somewhat frustrated by our arcane licensing system for musical works that are licensable under Section 115. I do think we do need some kind of blanket licensing regime, akin to what we do under Section 114 for sound recordings, for Internet radio, or akin to — I am afraid to say it — the European system that is undergoing some change now. We do need one-stop shopping that will enable new products to come to the marketplace with greater efficiency and at lower cost. In sum, we need to keep our foot on the accelerator to ensure that there is legal clarity and that we can clear the rights so that we can put products out on the market. At Warner Music Group, we believe in music —that is why I am here — and we believe in the digital opportunity. MR. SCHWARTZ: Let’s now hear from our last speaker, Howard Knopf, who will talk about Canadian digital music issues. After his presentation, we have David Carson and David Jones interject their questions and comments on the EU, Canadian, and U.S. issues. Howard, the floor is yours. ***

110 SESSION II: COPYRIGHT ONLINE MUSIC 2007 Howard P. Knopf15 INTRODUCTION This paper will outline the situation in Canada regarding “online” music in this author’s view, along with some observations on the overall international scene. In the spirit of disclosure, I should point out that I have at various times acted for and against parts of the music industry. Lately, I have fought on behalf of various clients against private copying levies and against the attempts by the major record companies to sue alleged P2P downloaders and file sharers in Canada. I also wrote an amicus brief for KaZaA in the Grokster litigation in the U.S. Supreme Court. However, the view presented in this paper or in my presentation are strictly my own.16 I. THE OVERALL CANADIAN SITUATION A. THE COLLECTIVES

The major traditional collectives representing composers, authors, and publishers who have an interest in online music are: (1) SOCAN — for composers, authors and publishers. This is the counterpart of ASCAP + BMI + SESAC. There used to be two such collectives in Canada, but they were allowed to merge in 1990. (2) CMRRA — The Canadian Musical Reproduction Rights Agency is the counterpart of Harry Fox in the United States. (3) SODRAC is roughly the French Canadian counterpart to CMRRA. (4) CMRRA/SODRAC have combined for certain purposes as CMRRA/SODRAC Inc., or CSI. Canada now has neighboring rights; therefore, performers and producers want to be paid for everything online. Enter the NRCC (Neighboring Rights Collective of Canada). B. THE PRIVATE COPYING LEVIES

Canada has a private copying levy, which has generated probably close to $200 million since 1999. The figures for 2006 have not yet been publicly reported. This is collected by the Canadian Private Copying Collectives,17 which is a collective of music industry collectives. I mention this levy scheme because it is the elephant in the room of Canadian copyright in many respects and has a profound impact on copyright issues affecting the music industry in Canada. The levy scheme has effectively legalized P2P downloading.18 This is because Part VIII of the Canadian Copyright Act provides a quid pro quo: In exchange for the levy scheme, private copying is legal — and the Copyright Board has indicated that it doesn’t matter where the copy comes from, or whether the CPCC has chosen to ask for a levy on the 15 Counsel, Macera & Jarzyna, LLP, Ottawa, Canada; howard.knopf@macerajarzyna. com; www.excess copyright.blogspot.com. 16 Some of this material previously appeared in my blog, http://www.excesscopyright.blogspot.com. 17 See http://www.cpcc.ca. 18 See my discussion on the BMG v. Doe trial level and appeal decisions, wherein the Federal Court of Appeal stopped short of reversing in substance the much-commented-upon findings of the trial judge, available at http://www.macerajarzyna.com/pages/publications/ BMG%20Case%20-%20E-Commerce.pdf.

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particular medium which is being used to make the copy. So, in other words, copies made onto CDs are clearly legal because there is a levy on CDs. Copies made onto PC hard drives are very likely legal because the CPCC could probably ask for and receive a levy on PC hard drives.19 They have refrained from doing so for blatantly obvious practical and political reasons. The interesting gray area concerns things like iPods — which the Federal Court of Appeal has clearly ruled cannot be levied because they are devices and not “media” and are, therefore, outside of the scope of the levy legislation. However, the Court has gone further and suggested in obiter dicta that making copies on iPods may be infringing because an iPod does not fall within the definition of “blank audio recording medium.”20 In any event, the levy scheme is very controversial even within the music industry. It, along with Canada’s privacy legislation, has made it more difficult for CRIA to proceed in mass RIAA-type litigation. I say difficult, but not impossible. If CRIA were to put forward sufficient and reliable evidence that is not blatant hearsay (in contrast to the evidence that they used in the unsuccessful attempt), it might well succeed, at least against file sharers.21 But CRIA has chosen not to press forward and has used its partly self-inflicted loss in Canada as a means of attempting to convince law makers that it needs much tougher DMCA-type legislation in Canada. Only time will tell if this strategy will succeed. So — for the moment — there are no lawsuits against individuals underway in Canada for P2P activity and no tactics such a deposition of a ten-year-old child with a disabled mother living off medical benefits who was seven years old when the alleged infringement took place.22 And no lawsuits against twelve-year-old girls living in subsidized housing.23 The next major round in the levy controversy will be CPCC’s recent attempt to impose a $75 levy — or “tax” as it is commonly called — on iPods, Zunes, and other MP3 players. The Federal Court of Appeal clearly ruled in 2004 that this was not possible,24 and leave to appeal was denied by the Supreme Court of Canada in 2005. However, the CPCC is back attempting to do exactly the same thing in 2007. This would appear to be a clear instance of res judicata. In anticipating this point, the CPCC announced at the time of publication of the proposed tariff to have an opinion to the contrary from its law firm, but has not seen fit to publish it. The next levy round will also include an attempt by CPCC to impose a $10 levy on flash memory cards, which by its own figures are only used, at most, about 20–25 percent for the reproduction of music — and I suspect that the actual figure is only a fraction of this fraction. And much of that music has already been paid for at least once already, especially if the card is in a cell phone or an MP3 player. Finally, the private copying levies are a major complicating factor in copyright reform in Canada. The potential that Canadian WIPO treaty ratification will result in a doubling of the cost of the levies and outflows of hundreds of millions of dollars due to the 19

See http://cb-cda.gc.ca/decisions/c12122003-b.pdf, at 20–21. Canadian Private Copying Collective v. Canadian Storage Media Alliance et al., (2004) [2005] 2 F.C. 654, (2004) 36 C.P.R. (4th) 289 ¶ 147. 21 The BMG v. John Doe litigation in the Federal Court and Federal Court of Appeal is analyzed from various points of view in (2005–06) 6 I.E.C.L.C., available at http://www. macerajarzyna.com/pages/publications/BMG%20Case%20-%20E-Commerce.pdf. 22 Atlantic v. Andersen (Oregon), available at http://recordingindustryvspeople.blog spot.com/search?q= kylee+Andersen. 23 See http://news.com.com/RIAA+settles+with+12-year-old+girl/2100-1027_3-5073717.html. 24 Canadian Private Copying Collective v. Canadian Storage Media Alliance et al., (2004) [2005] 2 F.C. 654, (2004) 36 C.P.R. (4th) 289, ¶ 164. 20

112 SESSION II: COPYRIGHT national treatment requirement of the WPPT is an acknowledged issue and a major complication in the revision process. Everything would be much simpler if the levies were repealed — which Canada’s New Government pledged to do in its March 19, 2005 Policy Declaration,25 before the election in which it gained power — at least the power of a minority government. The Policy Declaration also promised to “to continue to allow an individual to make copies of sound recordings of musical works for that person’s personal and individual use.” II. CURRENT AND PENDING ONLINE TARIFFS IN CANADA A. SOCAN TARIFF 22 — PHASE I

In 1995, SOCAN started out on what it calls Tariff 22, which was an application to the Copyright Board to get paid for the use of music on the Internet. The Board early on wisely bifurcated the hearing into legal and quantum issues. Some, but by no means all, of the legal issues were finally determined by the Supreme Court of Canada in 2004.26 That decision held that ISPs as such are off the hook in their capacity as passive carriers of content and can rely on a particular exception in the legislation for the caching activity as a necessary aspect of providing the means of communication by telecommunication. In fairness to SOCAN, it appears that the issue of liability for caching arose from the bench in the Federal Court of Appeal — but, however, if it arose, it became the focus of a very complex appeal and resulting decision from the Supreme Court of Canada. In what may prove to be the most complex legacy of the initial round of Copyright Board hearings, and the resulting litigation, the Supreme Court of Canada held that liability could arise to SOCAN in Canada for activity abroad, thereby injecting an element of extraterritoriality into Canadian copyright law: [60] . . . A real and substantial connection to Canada is sufficient to support the application of our Copyright Act to international Internet transmissions in a way that will accord with international comity and be consistent with the objectives of order and fairness. [61] In terms of the Internet, relevant connecting factors would include the situs of the content provider, the host server, the intermediaries and the end user. The weight to be given to any particular factor will vary with the circumstances and the nature of the dispute.27 However, even after all of this, we still do not know definitively what the problematic phrase “communication to the public by telecommunication” means in Canada in terms of various architectures and modes of “online” delivery. B. RINGTONES DECISION OF AUGUST 18, 2006

The “communication by telecommunication” issue could be, and perhaps should have been, addressed squarely, but was not even substantively dealt with in the Copyright Board’s decision on August 18, 2006 on ring-tones.28 The reason it was not addressed was that the objectors to the tariff inexplicably conceded that the delivery of ring tones to members of the public involved a “communication by telecommunication.”29 They did not concede that it was to the public. 25 26 27 28 29

See http://www.conservative.ca/media/20050319-POLICY%20DECLARATION. pdf. SOCAN v. CAIP, 2004 S.C.C. 45. Id., ¶¶ 60, 61. See http://cb-cda.gc.ca/decisions/m20060818-b.pdf. Id. at 4.

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Now, on judicial review, the objectors have changed counsel and raised this argument for the first time. Again, in the spirit of disclosure, I had raised this argument at an earlier stage of the hearing, but my client, then known as MOVISO, the largest supplier of ringtones at the time, withdrew from the hearing, as have other large entities since then on other files at the Copyright Board. However, that is another story. It will be interesting to see how the Federal Court of Appeal deals with this new issue that is now being raised for the first time at the judicial review stage. Further, re ringtones, back on August 22, 2006 I wrote on my blog: 1. It’s not obvious that any or all of the various methods of delivering ringtones to customers involve a “communication to the public by telecommunication.” The remaining objectors conceded that there was a “communication by telecommunication” of a musical work — but disputed whether it was “to the public,” which is indeed an arguable point. The objectors’ strategy was to argue that the communication was not “to the public”— and, alternatively, if there was liability, the “communication” aspect is purely incidental to the reproduction right and should thus be valued accordingly. 2. But, actually, it’s not clear that the provision of ringtones to customers in the various ways that this is normally done even involves “communication” or “telecommunication” at all. There are many ways of moving music around on the Internet — and it is arguably erroneous to lump them all together as “communication” or “telecommunication” or both. For example, the transmission of a digital file that must be stored and may later be performed as a musical composition is arguably not the same thing at all for copyright purposes as real time on demand streaming that cannot be stored for later retrieval and amounts, in effect, to on demand radio or webcasting. 3. The problem with this decision lies in the result that effectively conflates and perhaps even confuses the communication right with the reproduction right. This goes back to the Board’s 1999 decision in SOCAN’s Tariff 22. Whether or not this should have been challenged following the 1999 Tariff 22 decision, or whether it should have been raised in this instance is a matter upon which reasonable minds may disagree. But the result, unless reversed, will likely compound the imposition of multiple layers of payment to multiple claimants for multiple rights involving the same activity and transaction. The concept of “double payment” will likely become “triple” or more. 4. Thus, ringtone users will eventually be making payments potentially for the communication right, the performance right, and the reproduction right to potentially three categories of claimants who sometimes wear multiple hats — composers/authors and their publishers, record producers and performers. The same will hold true for online music — i.e. iTunes. 5. In fact the Board itself even seems to hint in para. 12 of its decision that SOCAN could file a tariff for the “performance in public” of a ring-tone, which would compound the multi layering problem to a new level, i.e. SOCAN has not filed a tariff for the performance that may occur when a ringtone is played in a public setting. (Emphasis added) 6. The Board does more than hint in paragraph 7. It virtually lays down the red carpet for the recording industry to come and claim their share of the pie in respect of master tones (i.e., recorded performances). 7. Is this what Parliament intended? One would hope not. This would be the antithesis of efficiency and even the music industry has mixed feelings about it — witness the opposition even of CRIA to SOCAN in this hearing and to the music publishers in the CSI hearing on online music starting on September 6, 2006. 8. Even the Copyright Board cannot make the Internet cash pie expand forever, and the

114 SESSION II: COPYRIGHT current and future internecine battles in the music industry are mostly about how large the pie can grow and how it will divided before the growth boom finally gets corrected. 9. Note that composers and authors have always been paid for ringtones obtained though Canadian wireless providers or any other “authorized” sources, and access is tightly controlled in Canada. The essence of the transaction involves a reproduction, which has already been taken into account in the “behind the scenes” licensing. The question is how many more times and to how many more parties is the Copyright Board going to allow payments to be made? SOCAN doesn’t control reproduction rights here. But it represents the same composers, authors and publishers who do. If the Copyright Board is correctly interpreting the law, is Parliament going to stand by and let this multiple payment game continue? 10. This would not surprise me. The policy of Canadian Heritage is to support collectives in a variety of ways, including subsidies and legislation that creates new rights and the possibility of new tariffs and ever increasing revenues. Many of these officials probably see the prospect of multiple payments to multiple collectives for the same transaction as a good thing. Collectives do indeed serve an essential function — if not encouraged to excess. But the danger of the Canadian Heritage approach is that it appears to exemplify the old fallacy that that, if copyright is good, more of it must be even better. Lest we forget, we are dealing with the collective exercise of monopoly rights. 11. It was exactly this type of multiple payment problem arising from then-new technology (“talking pictures”) that led Parliament back in the 1930’s to put the brakes on SOCAN’s predecessor by establishing the predecessor of the Copyright Board. 12. The result of this decision is another blow to the concept of technological neutrality, as some would define it. Why should the efficient transfer of a file over the Internet trigger copyright liability for “communication” by “telecommunication” when the provision of the same file by much less efficient physical means (e.g. sending a CD by snail mail) does not? Quite apart from the spectre of multiple payments and layering, this amounts to a tax on efficiency. It could also spread to other businesses, even beyond the music business. If the Board is right, then it would presumably follow that e-books involve the “communication” of literary works. But I shouldn’t give Access Copyright ideas. ... 15. On the communication point, it strikes me that the Board hung its hat mainly on one word — the word “might” — from an obiter dicta passage in the Supreme Court of Canada’s decision in CCH v. LSUC. In that passage, Chief Justice McLachlin said that: “I agree with these conclusions. The fax transmission of a single copy to a single individual is not a communication to the public. This said, a series of repeated fax transmissions of the same work to numerous different recipients might constitute communication to the public in infringement of copyright. However, there was no evidence of this type of transmission having occurred in this case”(emphasis added). 16. The Supreme Court was not concerned in that case with the niceties of the various architectural permutations of how things happen on the internet, and the Copyright Board appears not to have delved too deeply even in this instance into how ringtones find their way from a composers’ pen to the intrusive and usually distorted cacophony that we too often hear during quiet meditative moments at the opera or in funeral parlours. 17. Moreover, a fax “transmission” — note that the Chief Justice does not necessarily equate the word “transmission” with the word “communication” — results immediately in something that is directly readable by the recipient. The transmission of a ringtone file does not immediately result in the conveying of any information — much less music — to any

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person. It must get properly loaded into the handset, paid for, selected, and is later activated only when the cell phone “rings.” 18. Nor, with respect, should the Copyright Board put too much reliance on paragraph 42 of the SOCAN v. CAIP decision in which Justice Binnie agreed with the Board that “a telecommunication occurs when the music is transmitted from the host server to the end user.” There is a potentially big difference between “the music” being “transmitted” and a file being copied that only later can be heard as music when it is played on a device. This may sound picky and even akin to sophistry — but that’s the nature of history of copyright law, which has always focussed on legal and technological niceties. 19. It appears that the objectors may have indirectly broached the “communication” point indirectly by arguing that the Board was really seeking to impose a “making available” right — which is required by the 1996 WIPO WCT treaty. But, as everyone knows, Canada has notably NOT YET ratified this treaty. And even if Canada does, the scope of the “making available” right is very uncertain and Canada would be wise to implement it in the most narrow and careful possible fashion. Ironically, the cursory 1998 analysis by Johanne Daniel and Lesley Ellen Harris, upon which the government relied for so long, concluded, without any stated reasoning, that Canada already complied with the WIPO WCT treaty in respect of the required “communication right” that included “a making available” right for composers and authors. The debate about whether Canada does or does not already have a “making available” right evidently is far from over. Some will see this decision as effectively confirming that we do, even if the Board says that we don’t. 20. The rate calculation issue will be even harder to review — the Federal Court of Appeal is very reluctant to interfere with the fact finding/ evidentiary aspect of any tribunal’s work. Much of the evidence was treated as confidential — which may be just fine for the parties, including interests not present, although this leaves the public very much in the dark. Consider the expurgated final conclusion, which will cause considerable frustration to anyone trying to understand what the Board was trying to say here: J. Ability to Pay[127] The Canadian ringtone market has grown very quickly in recent years. Mr. Sone estimated the revenues generated by ringtone retail sales in 2004 to be over $15 million, and predicted that revenues might reach $30 million in 2006. In addition, the costs associated with the production and sale of ringtones seem to be quite low. Those figures, which were not challenged by the objectors, are indications of a financially sound industry. Moreover, the rate we have set is low enough not to lead to XXXXXXXXXXXXXXXXXXX in the ringtone market. In other words, larger than the XXXXXXXXXXXXXXXXXXXXX amount of the royalties that will actually be paid. There should therefore be no consequence on market prices.30 21. This is a highly unusual way to conclude a decision of this importance that will set the stage for much to come in the future. Look at the actual decision — it at least indicates the amount of space of the expurgated portions. 22. Interestingly, the rate arrived at by the Board after 14 months of consideration ends up being effectively the average of the rate proposed by SOCAN (10%) and the rate proposed by the objectors (1.5%). The exact arithmetic average would have been 5.75%. The Board ends up with 6%, although they have an admittedly more complex way of getting to that conclusion. 23. It is difficult to guess whether there will be judicial review. We’ll know by September 18, 2006. Depending on how one reads between the lines, so to speak, of the final paragraph, 30

Footnote omitted. XXX = expurgated by the Board.

116 SESSION II: COPYRIGHT the 6% solution may not cause immediate serious pain to any of the remaining objectors. The Board seems confident that “There should therefore be no consequence on market prices” —for reasons that must remain confidential. We shall see. That’s a lot for the Board to assume, especially when the impact of the inevitable future multiple layer ringtone tariffs becomes apparent. 24. The public interest factor in this case may not be as obvious as in some other Board decisions. If kids want to spend lots of money on ringtones and buy new ones every week in order to be “cool,” that is their decision — and it may annoy their beleaguered parents who will foot the bill. Clearly, this is discretionary spending. The real public interest lies in the legal and rate making precedents that are being set here. 25. The absentee proxy for the public interest — who is mandated by law to watch out here — is the Commissioner of Competition — who has basically never become involved in Board matters, even though there are many situations where such involvement might may be warranted. Moreover, the Board itself could and arguably should look out more for the public interest and play a more proactive inquisitorial role. Instead, it treats most proceedings as adversarial. In the result, the administrative law process is often more adversarial than actual litigation. 26. If there is no attempt at judicial review, it may be because there is no immediate and direct cost/benefit advantage to any of the objector parties. If so, this will not be the first time that the public interest has been left behind by a simple cost/benefit analysis by the objectors and the unwillingness of the Board or the Commissioner of Competition to fully pursue their roles in the guardianship of the public interest. 27. The real danger is that this ruling on communication to the public by telecommunication will serve as a springboard — both legally and in terms of a quantitative proxy — for the forthcoming attempts by SOCAN and the music publishers and eventually others to add large amounts to the cost of online music obtained from iTunes, and other Internet music modes, etc. The current 6% solution is far from a “low” rate. Given the size of the ringtone industry, it will be a lot of money and an important precedent and building block in other files to come. 28. It is not known why it took the Board 14 months to render this decision. Meanwhile, the CMRRA/SODRAC (“CSI”) attempt to add 15% to the cost of online music is about to start hearings on September 6, 2006 and will hopefully confront some of the “double payment” issues that are now looming larger than ever. That hearing is based upon the reproduction right. The SOCAN attempt to ratchet up the price of paid downloads by 25%[31] based upon the allegedly applicable communication right is lurching along at full speed — albeit with several notable drop outs — including clients of mine once again. The SOCAN hearing in particular stands to be profoundly effected if there is successful judicial review of the current decision. 29. Finally, it’s frankly disappointing that the full Board did not hear this case. We had the benefit of the Chairman’s presence (he is a Court of Appeal judge from Saskatchewan). However, two of the most experienced Board members did not sit on this matter, which is potentially one of the most important that the Board has heard in a very long time. Since I wrote the above,32 the judicial review process is well underway and the memoranda have been filed. The issue concerning “communication” has indeed been raised.

31 32

See http://cb-cda.gc.ca/tariffs/proposed/ma20052006-b.pdf at 14. See http://excesscopyright.blogspot.com/16 2006/08/ringtones-observations-on-6-solution.html.

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In fact, this is how I compared the Canadian ringtones decision to the American one,33 which followed shortly thereafter, on my blog on October 18, 2007:34 Ringtones REDUX — US & Canada compared Here’s an update of my earlier posting and a brief take on yesterday’s American decision. The US Register of Copyrights has just rendered a very important decision on ringtones, which can be found here. The proceeding was commenced on August 1, 2006. After written submissions received on September 14, 2006 and a brief oral hearing on October 4, 2006, she yesterday issued a detailed 35 page single spaced decision with 137 footnotes, one of which refers to the recent Canadian decision on a small point. Bill Patry has a good analysis of the decision on his blog. Here’s my quick take on a very complex and very important decision, from Canada’s standpoint: Canadians should note: 1. Providers of ringtones in the USA may avail themselves of the compulsory license regime found in s.115 of the US Copyright Act. Canada, probably unwisely, abolished the compulsory mechanical licensing regime for musical works in 1988. Not only has the USA retained its compulsory license for mechanical reproductions — but has created a new compulsory license regime in the form of the Digital Performance Right in Sound Recordings Act of 1995, which was held to apply in most cases to the provision of ringtones as songs or portions thereof as a “digital phonorecord delivery” or “DPD.” The argument that the compulsory license applies only to a whole song and not a portion thereof was rejected. Generally speaking, it appears that there will be a one stop shop mechanism for ringtone providers to get a compulsory license for monophonic, polyphonic and mastertone ringtones, except in the presumably rare case that a ringtone comprises sufficient originality to be a “derivative work” under American law, or is an newly created composition and recording never before distributed to the public. 2. Although the actual rates are not yet determined, they will likely be MUCH lower than in Canada — where an initial 6% solution was imposed (essentially half way between SOCAN’s number and the objectors’ number). And Canada has not seen the end of ringtone tariff costs, because the 6% goes to SOCAN and the other “colleges” of rights holders will soon want their piece of the pie in addition. Some points worthy of note: 앫 Not everything about US copyright law is bad. Au contraire. This decision illustrates an example of what is good about it — namely it is much more technologically neutral in the result than we see in Canada in this instance. It may turn out as well that that Congress saw more clearly into the digital future in 1995 in some respects than Canada has yet managed to do. Canada is still grappling with some of the less desirable last century aspects of US law, such as the DMCA — while ignoring what is sometimes better and more prescient about US copyright law. 앫 The Copyright Office has shown its ability to deliver a very learned decision very quickly. The process — which involved referral of a question of law by the Copyright Royalty Board to the Register of Copyrights — started on August 1, 2006 and resulted in the ruling of October 17, 2006 — less than three months. The lengthy delay of 14 months in the rendering of the Canadian ringtones decision — this following a two year lead up of preliminary matters — will have a ripple effect on other Board hearings, especially since the Canadian decision is now the subject of judicial review and could be 33 34

See http://www.copyright.gov/docs/ringtone-decision.pdf. See http://excesscopyright.blogspot.com/2006/10/ringtones-redux-us-canada-com pared.html.

118 SESSION II: COPYRIGHT overturned. To be fair, the Canadian Copyright Board heard a lot of factual evidence that was apparently not dealt with in the American proceeding which was on certain legal issues only, and has determined a rate — which also has not yet happened in the USA. 앫 But it should be asked whether Canada’s Copyright Board should bifurcate more often Not every instance will turn out to be as much of a problem as Tariff 22. In fact, an early determination of some of the obvious legal questions in de novo tariffs — based upon a minimum evidentiary record if indeed needed — might save a lot of time and money overall. In some cases, tariffs have been so poorly conceived that the Board ought to find a way at the outset to say “try again next year” — and save everyone a lot of bother. 앫 The American case illustrates the ongoing complexities and ironies of internecine warfare in the music industry. However, Congress and the Copyright Office appear to have a good understanding of how this works. One can only smile that the RIAA also has been caught, yet again, sucking and blowing. It often deplores the concept of compulsory licenses when it is on the receiving end, but is apparently quite happy to take advantage of them when it suits its needs. 앫 The American decision is expected to result in falling prices to consumers in the “mobile industry” — whereas Canadian prices are clearly heading upwards due to high and layered tariffs. 앫 This decision illustrates by contrast that Canada has a much more costly and complex system. That seems to be the Canadian way. This renews the question about whether or not the Canadian Board can or should do something to stop this costly and complex layering of tariffs. Paying much higher tariffs overall to more parties in Canada — when most of the money will go the USA and Europe anyway — is not very obviously in Canada’s national interest, to say the least. 앫 Do we need another judicial commission to sort out what the bureaucrats, Parliament and the Copyright Board are all unwilling or unable to confront? … C. CSI ONLINE DECISION — MARCH 16, 2007

CSI (roughly the equivalent to the Harry Fox Agency) sought a tariff for online music based on permanent downloads, limited downloads and on-demand streams. The CSI decision has recently been rendered by the Copyright Board on March 16, 2007.35 This matter was heard by the Board in September, 2006 and the decision was rendered approximately six months later in accordance with the new benchmark announced by the Board’s Chairman in a speech last year. The six-month benchmark is based upon a comparison the Judge made in a recent speech with the pendency of Supreme Court of Canada proceedings.36 This is a significant improvement over the fourteen months it took to render the Ringtones decision. This is decision that will not likely provoke much controversy. Although the Board rejected much of the theory advocated by CSI for valuing its tariff rates,37 it gave CSI a goodly proportion of what it wanted in terms of actual numbers. For example, with respect to permanent downloads, which will surely prove to be the most important aspect of this tariff, CSI had asked for 15 percent of gross revenues with a minimum of 10 cents 35 36 37

See http://cb-cda.gc.ca/decisions/i16032007-b.pdf. See http://cb-cda.gc.ca/aboutus/speeches/20060823.pdf. In particular, CSI’s attempt to use the recently established Mastertone rate as a proxy.

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per download. The Objectors suggested 5.3 percent and 3.85 cents, respectively. In the result, the Board awarded 8.8 percent of gross revenues with a minimum of 5.9 cents for this category — better than half of what CSI had asked for. There appears to have been little discussion of legal issues, and in particular the question of double payments. The point of potential overlap with SOCAN’s Tariff 22 appears to have been made by the Objectors but dismissed in short order by the Board.38 The Copyright Board apparently took a very hands-on approach in devising wording for the tariff that it believes will be viable — which involved much communication after the hearing between the Parties and Board counsel. The final tariff wording is very different from what was published initially in the official Canada Gazette. One positive outcome is that the Board declined to incorporate any reference to TPMs or minimum security requirements, noting that Puretracks, a major Canadian provider, has begun to offer DRM-free music.39 D. SOCAN TARIFF 22 — PHASE II

In a few days, on April 17, 2007, the Board will resume hearings on SOCAN’s Tariff 22. There will be many uncertainties about this hearing. Mostly, there will be uncertainty about the “communication” right — because that is still pending before the Federal Court of Appeal. There will also be uncertainty because some parties that should be there won’t be there — including clients of mine and others. Here is part of the blog entry I posted on March 2, 2006: “Fallout” at the Copyright Board? Two significant players in Canada’s copyright scene have just conspicuously withdrawn in protest from two major Copyright Board hearings. They are Archambault (the Quebec music retailer) and Canoe (an internet portal), which are both part of the giant Quebecor empire. The hearings involved music on the internet. One is the decade old and still inchoate SOCAN Tariff 22 tariff. The other is the CMRRA/SODRAC (CSI) proposed webcasting tariff. Archambault had earlier withdrawn from the CSI proposed online music tariff. Efforts on the part of objectors to somehow consolidate or rationalize these three closely interrelated tariffs have proven fruitless. In an 8 page letter from their counsel, Me Jean-Philippe Mikus, Archambault and Canoe stated that they had to take: the least harmful path given the untenable constraints now being imposed on objectors wishing to express their point of view before the Board. Archambault and Canoe are compelled to withdraw because their participation in the Board’s proceedings would imperil their key financial information invaluable trade secrets critical technological information strategic information concerning development and marketing plans and projects, and a host of other information in respect of which the utmost secrecy is essential for their survival. They point out that “. . . the mere participation in the Board’s hearings is in and of itself a very considerable burden on a number of levels. The mass of information that collectives systematically seek to obtain from objectors brings about exorbitant costs both in terms of collecting the information and then processing it.” They suggest: When collective societies holding monopolies or quasi-monopolies are involved in infighting and then formulate grossly exaggerated claims and multiply instances before the Board, including unreasonable requests for disclosure of irrelevant or marginally relevant 38 39

See http://cb-cda.gc.ca/decisions/i16032007-b.pdf, ¶ 84. See http://cb-cda.gc.ca/decisions/i16032007-b.pdf, ¶¶ 134, 158.

120 SESSION II: COPYRIGHT highly confidential information, some measure of control must be exercised. The Board should be the first line of defense to avoid that exclusive copyrights established by Parliament and concentrated in the hands of collective societies be an instrument of oppression (to paraphrase Lord Justice Lindley in Hanfstaengl v. Empire Palace (1894) 3 Ch. I09). The experience of Archambault and Canoe leave the bitter impression that the Board is failing at this task and that this failure is already causing extremely serious harm to businesses that have had the courage to jump into untested waters. Significant reform is both necessary and urgent to end the abuses that threaten the very foundation of Canadian businesses offering legal alternatives for the use of music on the Internet. At this stage, it appears that such reforms can only originate from the government or Parliament; it is unfortunate to say that our clients no longer hold out any hope that the Board is able or wiling to address these concerns. They conclude by reserving the right to seek judicial review “on the basis inter alia that they have not been given the right, reasonably exercised, to be heard in these proceedings.” While none of this is particularly new to those experienced with Board practice, the letter is a potentially very important development. It was copied to the very long list of objectors in both files and to both Ministers responsible for the copyright file. The current Ministers may prove to be more sympathetic to the concerns of objectors than their predecessors, given this Government’s potentially different perspective on regulation and the costs thereof imposed upon business. The fundamental dilemma is that virtually all objectors have many issues to worry about other than fighting copyright tariffs. And almost all of them balk at the incredibly high costs of pursuing objections, which routinely run into the six figures and can go beyond. Resulting direct financial savings are often hard to quantify since most collectives overreach to an often absurd extent in the initial proposed tariff. For these and many other reasons, the economics of objecting are not alluring to many entities, even though they may be directly affected. And trade associations aren’t always the answer. In fact, the sad demise of the CCTA, after so many years of valiant and competent contributions to Copyright Board and appellate jurisprudence, shows the difficulties faced by even the most sophisticated and substantial of objectors. The collectives, on the other hand, have usually only one purpose on their mind, which is increasing Copyright Board tariffs and lobbying for the statutory rights that make this possible. Their costs are paid for — not surprisingly — from the Copyright Board tariffs that are paid by objectors. The more the collectives spend, the more they make — and vice versa and so on. This is classic asymmetrical warfare, in which a relatively small single purpose and highly strategic entity can win major victories against a much larger opponent. As the letter points out, it is very difficult for an objector to play a limited role in a hearing. It is basically all or nothing: The approach adopted by the Board so far is very much akin to an “all or nothing” approach. There is simply no way of participating in the Board’s work if a party wishes to both put forward its point of view usefully before the Board and be concerned about the confidentiality of its business information. Parties are expected to be subjected to a full inquiry by collective societies, in the presence of all their competitors. The issuance of confidentiality orders does not justify such inflexibility. There have been other withdrawals in the past, including MOVISO (for whom I acted), which was perhaps the largest supplier of ringtones in Canada and the world. It withdrew during the interrogatory phase from a major hearing on SOCAN’s proposed ringtone tariff, where staggering amounts of money and important legal issues were at stake. The Board and the Canadian public lost the benefit of their participation. ADISQ recently withdrew from the CSI Online Music Services Tariff proceedings. ADISQ is a professsional association

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which represents hundreds of independent Quebec undertakings working in various aspects of the record, entertainment and video industries, including record producers, distributors, publishing firms, performers’ managers, entertainment producers, booking agencies, playhouses, video clip production firms, etc. There are still many problems with SOCAN’s proposed Tariff 22. It is still inchoate and unfocused. As framed, it can lead to absurd results. Anyone who posts a tiny amount of music is liable for a minimum of $200 a month to SOCAN. That is absurd. Meanwhile, it is going forward. The Supreme Court of Canada has opened a potential Pandora’s box of uncertainty in terms of extraterritorial application of the tariff, as noted above. It will be interesting to see if SOCAN attempts to enforce its potential extraterritorial reach against major foreign providers, such as MSN, Yahoo!, etc. It is fairly safe to assume that SOCAN’s Tariff 22 quest will continue long into the future before there is any resolution. Meanwhile, we have no idea what webcasting will cost in Canada. Or how much SOCAN will add to the already existing costs of delivery of a song from iTunes, etc. Or how many more multiple payments we will see for the same transaction. And SOCAN’s Tariff 22 isn’t the end of the matter. We have yet to hear from CMRRA/SODRAC, whose webcasting tariff was withdrawn on March 22, 2006. I assure you that they have not gone away and that they will return. III. PROS AND CONS OF CANADIAN APPROACH The Canadian copyright landscape is probably more akin to a labyrinth, and is one of the most complex in the world. In the recent CSI hearing, the Board heard from the interestingly named Eddy Cue, head of the iTunes project worldwide for Apple. The Board found that: [58] Mr. Cue compared the way in which iTunes clears rights in Canada, the United States and Europe. In the United States, record labels generally provide all necessary rights for one fee, having secured the right to reproduce the musical work. In Europe, iTunes must purchase the rights for the sound recording and for the musical work separately, but is able to purchase the right to reproduce and communicate the work in a single transaction. In Canada, iTunes must licence separately the right to reproduce the musical work, the right to communicate the musical work and the right to reproduce the sound recording. And even this fails to point out the obvious — that Canada has neighbouring rights and a vast number of active collectives. The complexities in Canada have only started. Canada has about ten times the number of organized collectives as the United States. And the Government is encouraging this proliferation. This is not the fault of the Copyright Board. Canada’s Parliament has handed the Board a mandate that consists of some generally sketched and inevitably overlapping rights deliberatively designed to catch just about every activity anyone can imagine. Canada’s government has directly and indirectly subsidized many of the collectives — in ways ranging from direct subsidies of electronic activity to very favorable licensing deal that provided millions in start up cash flow in the case of Access Copyright. That said, the Copyright Board, however, has not done everything it can to confront the issue of double, triple and more payments. It tends to “value” each usage on its own, often reaching back for proxies based upon previous Board decisions. This shows the tremendous importance of inaugural tariffs.

122 SESSION II: COPYRIGHT There has been little or no interest on the part of the Commissioner of Competition in the activity of the Copyright Board, despite a clear role for the Commissioner that is set out in the legislation. This is in complete contrast to the approach of the European Union and the United States — where there is an innate antitrust-based skepticism of collectives. The Canadian approach is also highly inbred. In some cases, the same parties that form together to make one collective or coalition find themselves opposing each other in another hearing. This leads to interesting situations — such as the same law firm effectively acting both for and against the same client in different files before the Copyright Board. Odd coalitions of apparently sophisticated clients come and go — but I sometimes wonder if they all really understand just how small a world it has become in Canada. And it need not be this way. And from a public interest standpoint, it probably shouldn’t be this way — because some important arguments may fall by the wayside in this process. Canada’s Supreme Court may soon have something to say about this, in a pending and potentially landmark decision concerning alleged conflict of interest by a major law firm.40 This is especially worrisome in view of the increasing convergence taking place between content owners and users, and the decreasing level of competition — as evident in the recent rapid approval by Canada’s Competition Bureau of the merger of two major broadcasting entities, namely CTV and CHUM. There are also a number of problems concerning the way the Board deals with interrogatories, hearsay evidence and evidence from witnesses who may indeed have some expertise but little or no independence. However, these are issues for another day. IV. SLOW ROLL-OUTS BUT MUCH SUCCESS IN CANADA Canada has had a slower roll out of online services than the USA. There are many possible explanations for this and there has been a lot of finger pointing. However, certain music industry statistics are very interesting. According to Michael Geist: The success of the Canadian music industry is also being replicated online. Nielsen SoundScan Canada reports that digital download sales in Canada grew by 122 percent last year, well above the growth rates in both the U.S. (65 percent) and Europe (80 percent). Moreover, the Canadian market now features twice as many online music sellers as the U.S. when measured on a per capita basis.41 According to Nielsen Soundscan Canada, there was a 9.8 percent growth in music industry sales overall in 2006 based on units sold, including the spectacular 120 percent or so increase in online sales.42 Interestingly, CRIA’s Web site that normally reports such statistics is now several months behind.43 The Canadian statistics are clearly rather awkward for the music industry — since there is obvious success of online music in particular and the industry overall in Canada despite its protestations that the sky is falling. The need for urgent and draconian copyright revision based upon a ten-year-old American model DMCA approach seems even less compelling now — not that it ever was. 40 41 42 43

See http://205.193.81.30/information/cms/case_summary_e.asp?30838. See http://www.michaelgeist.ca/content/view/1856/159/. See http://excesscopyright.blogspot.com/2007/01/sky-isnt-falling.html. See http://cria.ca/stats.php.

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V. THE DRM DEBATE IN CANADA Speaking of DRM and DMCA, it is well known that the Canadian government is under much pressure from the international recording industry and the American government to ratify the 1996 WIPO treaties and implement tough DMCA-style legislation to force the acceptance of DRMs and TPMs. Much can be said about this — but Bruce Lehman has probably said it best and most eloquently at a recent conference at McGill.44 This is what he said, according to Michael Geist: The most interesting — and surprising — presentation came from Bruce Lehman, who now heads the International Intellectual Property Institute. Lehman explained the U.S. perspective in the early 1990s that led to the DMCA (ie. greater control though TPMs), yet when reflecting on the success of the DMCA acknowledged that “our Clinton administration policies didn’t work out very well” and “our attempts at copyright control have not been successful” . . . Moreover, Lehman says that we are entering the “post-copyright” era for music, suggesting that a new form of patronage will emerge with support coming from industries that require music (webcasters, satellite radio) and government funding. While he says that teens have lost respect for copyright, he lays much of the blame at the feet of the recording industry for their failure to adapt to the online marketplace in the mid-1990s. In a later afternoon discussion, Lehman went further, urging Canada to think outside the box on future copyright reform. While emphasizing the need to adhere to international copyright law (i.e. Berne), he suggested that Canada was well placed to experiment with new approaches. He was not impressed with Bill C-60, seemingly because he does not believe that it went far enough in reshaping digital copyright issues.45 I shall have more to say about the Canadian legislative environment in another panel at this year’s conference. VI. THE GLOBAL FUTURE It is clear that online music industry revenues have not yet replaced the declines in traditional sources of revenues for record companies. Is this bad news? If so, what is the cause? I would suggest that the music business is remarkably healthy — but the major record industry is wallowing in potentially suicidal self-destruction. People are still spending lots of money on music that frankly isn’t very good. And they are doing so in sprite of intense competition from DVDs, cable TV fees, video games, and other sources of competition for household entertainment dollars. Gone are the days when disposable income was dissipated only at the movie theatre and the record store. There is compelling econometric evidence and analysis from Oberholzer and Strumpf that P2P activity has at most a negligible effect on music industry revenues and may actually help the record companies.46 Perhaps the problem with the music industry — and particularly the major recording industry because the music industry is far from monolithic — is that it has come to 44 See http://mediasite.campus.mcgill.ca/mediasite2/viewer/Viewer.aspx?layoutPrefix= LayoutTopLeft& layoutOffset=Skins/Clean&width=800&height=631&peid=6e197c68-0b63-4474-ac3b-f770e220de0e&pid=2276 b8bb-0299-4f9e-9be8-d83d3539f313&pvid=501&mode=Default&shouldResize=false&playerType=WM64Lite. 45 See http://www.michaelgeist.ca/content/view/1826/125/.

124 SESSION II: COPYRIGHT assume that it is entitled to a constant rate of return and rate of growth. That is not so — unless it wishes to be treated as a government-regulated monopolist — and there are few of those left. In most competitive industries, it is clear that the road to success lies not in extracting the most possible monopoly rents but rather in acquiring inputs for the least possible price and selling outputs for the least possible margin that will suffice to undermine the competition and still yield a sufficient profit. A small margin on billions can be worth much more than a large margin on millions. That is the open secret of success of many of many clients in the retail sector today. It wasn’t always this way. Perhaps the record companies will learn this lesson before it is too late. However, I doubt it. VII. ALTERNATIVES? There is proverbial talk about “alternative compensation systems,” models involving “trusted Intermediaries,” and other systems that depend on the notion that the public will be willing — or at least obliged — to pay a little each that will add up to a lot overall. Two current variations on this theme emanate from credible sources. Both are preferable to traditional levies because they come closer to the mark in terms of exacting payment from those who actually engage in copying. However, both depend essentially on content owners being economic rationalists and acting in their best interests, which experience shows is unlikely to happen. A. THE EFF SCHEME

The Electronic Frontier Foundation (EFF) has a scheme that would involve voluntary low monthly payments that would give the right to a sort of “all you can eat” license to download copyrighted material. This is what the EFF calls “A Better Way Forward: Voluntary Collective Licensing of Music File Sharing.”47 In the words of the EFF: The concept is simple: the music industry forms a collecting society, which then offers file-sharing music fans the opportunity to “get legit” in exchange for a reasonable regular payment, say $5 per month. So long as they pay, the fans are free to keep doing what they are going to do anyway—share the music they love using whatever software they like on whatever computer platform they prefer—without fear of lawsuits. The money collected gets divided among rights-holders based on the popularity of their music. In exchange, file-sharing music fans will be free to download whatever they like, using whatever software works best for them. The more people share, the more money goes to rights-holders. The more competition in applications, the more rapid the innovation and improvement. The more freedom to fans to publish what they care about, the deeper the catalog. The problem with this is that, absent a more or less complete catalog, there is little incentive for either content owners or users to sign up. Users will not be immune from lawsuits for statutory damages if one of more of the litigious major record companies stay outside of the scheme. To the average user, it makes little difference if they are sued for one million or four million dollars. Either claim, if successful, will have the same result. So, why pay “insurance” to eliminate only part of this risk? 46 47

See http://excesscopyright.blogspot.com/30 2007/02/statistically-indistinguishable-from.html. See http://www.eff.org/share/collective_lic_wp.pdf.

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B. THE NOANK SCHEME

The Noank scheme emanates from Harvard and is led by Paul Hoffert and Terry Fisher. It would entail the payment by commercial ISPs, universities, etc. to a trusted intermediary — i.e., Noank — of small sums collected from each user — for the right to download ad libitum. Eighty-five percent of this money would find its way to the appropriate content owners. However, once again, this will only be attractive to anyone if virtually all of the major content owners in a particular category — such as music — are onboard. Noank claims to be making progress in China, with Canada next on the horizon. This effort seems to trace back in some ways to the mid-1990’s. In Mr. Hoffert’s own words: In the 1990s, I was director of CulTech Research Centre at York University, where I led teams that investigated digital content distribution on broadband networks. We followed both the technology and cultural impacts of the information revolution. In 1996, in Ontario, we undertook one of the most extensive digital communities trials to date. In Newmarket, a suburb of Toronto, we took 100 homes and spent approximately $100 million: so it actually cost us a million dollars per home to do the trial. We wanted to see what would happen, how these users would react to content. We gave them advanced digital devices throughout their homes and watched it become, on many levels, a highly integrated community — a community in the broadest sense.48 The Noank scheme would work as follows: In brief, here’s how the system works: In each country, copyright owners (record companies, music publishers, film studios, etc.) authorize Noank to distribute digital copies of their works. Noank, in turn, enters into contracts with major network service providers: broadband consumer ISPs; mobile phone providers; and universities. Noank provides the service providers’ end-users with unlimited downloading, streaming, and copying licenses. In return, each access provider pays Noank a fee on behalf of each of its end-users (consumers, students, employees). 85% of the money collected from these content fees is distributed to content copyright owners. A small software program on the users’ device counts the content use. That information (automatically aggregated to protect users’ privacy) is used to determine the amount of money paid to each copyright owner. Implementation of the system is currently most advanced in China and Canada. Once it is up and running in those countries, we plan to launch in other countries.49 Noank has the Harvard halo over it. Harvard is the largest shareholder. It has no government funding. Thus far, it has also no major Western content owners on-side. This may succeed to an extent in China, because China is quite eager to show respect for intellectual property and at least some enforcement activity. However, I suspect that this will be a much tougher sell in North America and the rest of the world. In addition to the Newmarket project, Mr. Hoffert led an earlier effort to simplify the licensing process for musical rights in Canada. It cost a lot of money; however, the music industry did not sign on. It exists now only as a demo Web site.50 Content owners and collectives were not really interested in simplifying transactions, and are certainly not interested in loss of control. 48 Hoffert, P., Action, Canadian Journal of Communication [Online], Jan. 1, 2002, at 27(4), available at http://www.cjc-online.ca/ viewarticle.php?id=741. 49 See http://www.noankmedia.com/index.html.

126 SESSION II: COPYRIGHT C. IF YOU BUILD IT, WILL THEY COME?

The problem with these approaches lies in the notion that the content industries willing be willing to accept small payments from large numbers of people in exchange for massive loss of control and loss of exclusive rights. This has never been the case and it unlikely to happen in the absence of severe coercion by Government and major revision of international treaties. In other words, it likely won’t happen. There will have to be major market failures before it happens. These utopian visions are unlikely, in my view, to work out. This is because these concepts must inevitably involve either or both of the “C” word and the “D” word, as I call them. More on this below. D. OTHER IDEAS THAT MIGHT WORK

In my view, the only future approaches that may work in the foreseeable future are either or both of the following. 1. “A Nickel a Schtickel” The first and most obvious is that of the Sandy Pearlman approach, namely lowering the price of an authorized download to a nickel or some other irresistible price point. Some New Yorkers and others may understand what I mean when I call this a “nickel a schtickel” approach. The idea is very simple. If one lowers the price, the demand will increase and the quantity sold could increase far more than the factor of price reduction. The price elasticity of demand of online music is very likely quite high. So, if Pearlman is right, the price can be lowered by a factor a twenty to a nickel and the quantity sold would increase by forty or more — a huge net gain. And the increase would be pure profit because the incremental costs for additional downloads are — or ought to be — or will be — close to zero. This is really simple Economics 100. But it won’t happen soon. In fact, it probably can’t happen in Canada in the foreseeable future. This is because the Copyright Board has set minimum royalties that already exceed the retail price of the “nickel a schtickel” model. The Canadian Copyright Board has been nothing if not consistent in rejecting “ad valorem” royalty rates in the digital context — with the result that Canadian pay almost twice as much for blank CDs than Americans — the difference being the $0.21 Canadian levy which is almost half the retail cost of the product in Canada. These minimum rates are effectively fixed for years at a time. In my view, the Copyright Board should not be setting minimum rates in an era where prices can free fall fast in a truly free market. For example, hard-drive storage is now less than $0.50 per gigabyte at the retail consumer level. It wasn’t long ago that PCs and laptops were sold with hard drives that measured in the few or few hundred megabytes and sold for much more than the price of today machines. Even in 2003, the CPCC was seriously proposing a levy of $21 per gigabyte on hard-drive memory in MP3 players. If it had succeeded, today’s 80-gigabyte iPod would presumably have a levy or “tax” on it of $1,680, when it now sells retail for less than $400. And we can now buy external terabyte hard drives for under $500, for example — US$350 here in NYC now,51 and even in Canada for less than $500.52 That is a lot of memory. It translates, in the words of one seller, to: up to 284,000 digital photos, up to 250,000 songs, up to 76 hours of digital video. The message ought to be clear — a free market with low royalty rates could result in 50

See http://www.rightsclearinghouse.ca.

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bountiful profits to everyone. Minimum royalty rates — either through regulation or industry price fixing to which antitrust authorities turn a blind eye — are a definite disincentive to efficiency in the digital age. 2. Wait and See Then, there is the “wait and see” alternative. It worked rather well in the movie industry — despite the efforts of Jack Valenti, who saw the VCR as analogous to the Boston Strangler. Governments resisted his efforts to get a rental right written into the copyright law. The U.S. Supreme Court resisted the effort to ban the time shifting technology of the VCR. Many economists said that if prices were lowered, good things would happen. Finally, the prices of Hollywood movies came down from $150 wholesale to about $20 retail. The rest is history. And the Valenti/VCR melodrama once again shows that the entertainment industry can be capable of some very irrational economic behavior that gets them acting against their own fiscal best interests. This has happened since the earliest days of technology. The industry almost always tries to lobby and litigate to preserve its then current business model. Fortunately for them, they rarely succeed in the end. The entertainment industry is often motivated by an instinct to preserve control — and that is not always good economics. When consumers decided how they wanted to use commercially recorded videos and VCRs, the industry prospered. Why won’t the industry let go of digital music and let the consumers decide best how to use it, along with the hardware and software that promises a bountiful feast of choice? VIII. THE “C” WORDS The main “C” word is “compulsory licensing.” It is what we have in effect in Canada in many respects, through various Copyright Board tariffs. It is what Noank and the EFF will ultimately need for their ideas to work. It is as old as copyright law — but as fresh as tomorrow’s guru vision. It’s just that one can’t use this term anymore. The big record companies love to hate the idea of a compulsory mechanical license — but seem to be quite addicted to the concept as long as it is called something else. And this is notwithstanding the fact that they now own an enormous share of the music publishing business. Compulsory licenses can work and are sometimes needed, as long as one dare not speak their name and as long as the rate is set by legislators or a truly independent authority that will look out for and be held accountable to the public interest. Another “C” word is “control.” The major content owners don’t want to hear any discussion about schemes that would see them losing any “control” of their property. Still another “C” word is that of “collective” — which can be stretched to have a socialist or even Communist sense. Indeed, in some minds, some of the utopian schemes based upon alternative licensing compensation schemes smack somewhat of payment “from each according to their ability and to each according to their need.” Graham Henderson, the CEO of CRIA (CDN counterpart to RIAA), reportedly referred at a conference to Terry Fisher, a Harvard professor, author of a book that deals with alterative compensation schemes53 and a founder of Noank, as “Comrade Fisher.”54 51

See http://www.jr.com/JRProductPage.process?Product=4112 488. See http://www.costco.ca/en-CA/Browse/Product.aspx?Prodid=10299356&whse=BCCA&topnav= &browse=. 53 William W. Fisher III, Promises to Keep (2004). 54 See http://www.michaelgeist.ca/resc/html_bkup/feb212005.html. 52

128 SESSION II: COPYRIGHT IX. THE “D” WORDS The “D” word these days may be either or both of DRM and DMCA. At the EMI/Apple news conference of April 2, 2007, I don’t know how many times I heard Steve Jobs and EMI Group CEO Eric Nicoli refer to “DRM-Free” music. It seems that DRM is becoming the “D” word — even in the highest corporate musical circles. Interestingly, Jobs himself kept repeating that DRMs can already be stripped form iTunes songs by making a CD copy — which lots of folks know. This is a “hassle” as he calls it, but not an insurmountable one. It will disappear now — but for a price. Jobs also explicitly mentioned the Sony root kit episode as an example of how DRM doesn’t work. Nicoli conceded that file sharing might become easier now. The implication here is that any losses due to increased private copying due to file sharing will be more than capitalized into the purchase price of the download. It will, of course, be difficult to separate out what relative premium consumers notionally allocate to the two improvements — i.e., “DRM free,” and higher fidelity. It remains to be seen what the take up will be. The DMCA is also a term that can evoke mixed reactions. As noted above, its father and architect, Bruce Lehman, is distancing himself from it. The DMCA can have some perverse results — especially with respect to DRM. At the time of the Sony root kit disaster, where Sony’s DRM and TPM scheme negligently infected thousands of computers, it was observed by many that any attempt to rescue or repair one’s computer would — strictly speaking — be illegal under the DMCA. True, the Librarian of Congress, on the recommendation of the Register of Copyrights, came to the rescue and provided an exemption under rule-making power55 to cover this type of situation. However, one should not need recourse to such a mechanism. The concept of mandating the approval of limits on technology and actually penalizing persons or prohibiting devices that can reach beyond those limits is deeply troubling and is getting very far removed from any underlying notion of what copyright is or ought to be. In any event, with very credible people running for cover and distancing themselves from DRMs, and even the DMCA, there would seem to be no need for any country to rush into new legislation that embraces these concepts. Especially — as in the in the case of Canada — when sales are improving. Could it be that Canada’s music and record industry — at least the independent part of it that is opposed to a DRM and DMCA approach — is so healthy because of the absence of DMCA type of legislation? Last year, most of the important independent record companies split from CRIA and formed their own coaltion, called the Canadian Music Creators Coaltion. Some very well known artists, such as Steve Page of Bare Naked Ladies, have become outspoken and articulate advocates for a brand of copyright protection that the majors don’t want. In its own words, the Coalition says: Suing Our Fans is Destructive and Hypocritical Artists do not want to sue music fans. The labels have been suing our fans against artists’ will, and laws enabling these suits cannot be justified in artists’ names. Digital Locks are Risky and Counterproductive Artists do not support using digital locks to increase the labels’ control over the distribution, use and enjoyment of music or laws that prohibit circumvention of such tech55

See http://www.copyright.gov/1201.

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nological measures. Consumers should be able to transfer the music they buy to other formats under a right of fair use, without having to pay twice.56 One of the main forces behind this coaltion is Nettwerk Records, whose artists include Sarah McLachlan and Avril Lavigne. In a move bound to raise eyebrows in multinational record industry circles, the Canadian government has just announced a direct funding of $650,000 for this innovative and brave company,57 which is also funding the defense of one of the victims of the American RIAA litigation campaign. According to Nettwerk’s press release on the RIAA litigation: In August 2005, the Recording Industry Association of America (RIAA) filed a complaint against David Greubel for alleged file sharing. Greubel is accused of having 600 suspected music files on the family computer. The RIAA is targeting nine specific songs, including “Sk8er Boi” by Arista artist Avril Lavigne, a Nettwerk management client. The RIAA has demanded Greubel pay a $9,000 stipulated judgment as a penalty, though it will accept $4,500 should Greubel pay the amount within a specific period of time. “Suing music fans is not the solution, it’s the problem,” stated Terry McBride, C.E.O of Nettwerk Music Group. Nettwerk became involved in the battle against the RIAA after 15-year-old Elisa Greubel contacted MC Lars, also a Nettwerk management client, to say that she identified with “Download This Song,” a track from the artist’s latest release. In an e-mail to the artist’s website, she wrote, “My family is one of many seemingly randomly chosen families to be sued by the RIAA. No fun. You can’t fight them, trying could possibly cost us millions. The line ‘they sue little kids downloading hit songs’ basically sums a lot of the whole thing up. I’m not saying it is right to download but the whole lawsuit business is a tad bit outrageous.”58 And that leads to the third “D” word — which is “dystopia.” In 2005 I wrote about a “policy dystopia of levies + litigation + TPMs + statutory damages + overlapping potential tariffs at the Copyright Board.”59 The word was also part of the title of a recent conference on these issues at McGill.60 The concept is simple: we could be in a best of all possible utopian digital world. The celestial jukebox is a good idea — not an evil one. It just came to soon for some people and there are strong forces that want to prevent this from happening. At the highest levels, they are seeking curbs and limits on new technology and the resurrection and perpetuation of a business model that died a long time ago. At its worst, it involves lawsuits against children and their devastated parents. These lawsuits carry clout because of the regrettable availability of statutory damages against individuals for commonly accepted, practised, and even inadvertent behaviour. In fact, even Edgar Bronfman, who runs one of the four major record companies, has admitted that his own kids are guilty of the behaviour for which he is busy suing other kids and families. This is from a recent Reuters interview and report:

56

See http://www.musiccreators.ca/wp/?page_id=8. See http://www.pch.gc.ca/newsroom/index_e.cfm?fuseaction=displayDocument& DocIDCd=CR061625. 58 See http://www.marketwire.com/mw/release_html_b1?release_id=107623. 59 (2005–06) 6 I.E.C.L.C., available at http://www.moffatco.com/pages/publications/BMG%20Case %20-%20E-Commerce.pdf. 60 Musical Myopia, Digital Dystopia: New Media and Copyright Reform, available at http://www.cipp. mcgill.ca/en/events/past/. 57

130 SESSION II: COPYRIGHT We asked Edgar Bronfman, the head of the world’s fourth largest music company, at the Reuters Summit whether any of his seven kids stole music. “I’m fairly certain that they have, and I’m fairly certain that they’ve suffered the consequences.” We couldn’t begin to guess what that means. He explained to our Second Life reporter, Adam Pasick: “I explained to them what I believe is right, that the principle is that stealing music is stealing music. Frankly, right is right and wrong is wrong, particularly when a parent is talking to a child. A bright line around moral responsibility is very important. I can assure you they no longer do that.”61 Great, but what did he do to them? “I think I’ll keep that within the family.” I don’t recall any of the 20,000 or so lawsuits having a defendant by the name of Bronfman. The feature of American and Canadian law which permits such law suits must be reformed — because it has been violently and shamefully abused by the record industry. These lawsuits are a low point in corporate and legal behavior. They will ultimately cause a great deal of damage and backlash — which could adversely affect the many creators and content owners who are responsible and who use their rights with more wisdom and maturity. X. THE APPLE/EMI MOVE On April 2, 2007, Apple and EMI announced that they would offer “DRM-free” music — but at a higher price. Many pounced on the higher price, and noted that the move should be towards a lower one. I’ve already talked about that. There were other interesting aspects to the news conference. Jobs himself admits that less than 5 percent of tunes on an iPod are paid for from iTunes. So where do the other 95–98 percent come from? Isn’t this is a bit like asking where babies come from? Most of us know the answer. The other 95–98 percent of the songs come from P2P and from CDs already owned by music fans, who are being sued in massive quantities in the United States for enjoying their music in the way that the industry is encouraging them. Besides, does anyone seriously think that a device that can hold 20,000 or so songs is going to be filled up with 20,000 songs at $0.99 each — so that it can left on a subway or dropped from a bicycle? These are fragile and allegedly not very reliable machines — and I doubt that even Edgar Bronfman would spend $20,000 or more to legally fill one up with songs from the iTunes store. Of course, one way of increasing the percentage of paid for music would be to drastically lower the price. But that would be too easy. Moreover, iPods are used for lots of things other than music, e.g., podcasts, photos, videos, and even movies. That, however, is not stopping the CPCC from seeking a levy of up to $75 on these devices. I’ve already mentioned the very basic res judicata legal issue. XI. TECHNOLOGICAL NEUTRALITY Everyone believes in technological neutrality — but rarely in their own back yard. At some point, there needs to cogent answers to questions such as: 61

See http://blogs.reuters.com/2006/12/01/the-most-dangerous-download-of-all/.

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앫 Why does the music cost more when delivered over the Internet than when sold as a CD — and sound worse — and include DRM? 앫 Why can consumers import CDs but not iTune files over the Internet? 앫 Why does making a webcast cost so much more than broadcasting from a radio transmitter? 앫 Why are levies and royalty rates on digital delivery modes seeming to be going up when hardware (particularly memory) and software technology and traditional CD and DVD prices are dropping? 앫 Why is there an apparent digital penalty and not a digital dividend? XII. THE EU ANTITRUST AND FREE TRADE INITIATIVES The day after the EMI/Apple announcement last week, the European Union indicated it would press ahead with an investigation as to why songs on iTunes cost more in some countries than others. Many at this conference would roll their eyes and say that, of course, it’s obvious that there are differences because copyright laws and licensing deals are still primarily territorial in nature. Except that we are dealing now with Europe, and that principle has long been under attack with tangible goods — such as normal plastic CDs and books. If these physical objects can travel freely across borders in order ensure free trade inside the European Union, why shouldn’t electronic files? The European Union is making progress on EU-wide deals for collective licensing and even perhaps on an EU patent system. The music industry’s series of country-specific fortresses is under attack. And if it falls in Europe, it may well fall elsewhere. And many observers have wondered aloud whether the Apple/EMI move that would give consumers a DRM-free option for a price isn’t some sort of attempt to distract the European Union and several concerned countries from ongoing concerns about interoperability.62 Time will tell. XIII. CONCLUSION Revenue-generating online music has a great future — perhaps the only future for big music as we know it. But this will only happen if, and only if: 앫 There are no artificial minimum royalty prices imposed; 앫 True competition is allowed and, if necessary, imposed at both a national and international level; 앫 Technological neutrality is honored in spirit and result and not simply in name; 앫 Compulsory licenses are utilized when necessary — and are not repressed out of ideological principle; 앫 DRMs and TPMs are not given life support and mandatory deference by legislation and treaty law. * * * MR. SCHWARTZ: We now have about twenty minutes for discussion. Let me use the Chair’s prerogative to point out two things. The first is a rights clarity case, as much about enforcement as licensing. It is the case of 62 Ed Felten has a good blog on some of the possible strategies behind the Apple/EMI move. See http://www.freedom-to-tinker.com/?p=1141.

132 SESSION II: COPYRIGHT Elektra v. Barker;63 oral arguments were held in this Southern District of New York case in January and the case is now awaiting a decision. At issue is the application in the United States of the distribution right and the right of making available. The question, simply put, is: If someone uploads or makes available copies of illegal files but the copies do not move from point A to point B, is there an infringement of the right of distribution? If the answer to the question is “no,” then the United States is going to have a problem with its compliance with the WIPO digital treaties64 and the requirement of those treaties to provide a making-available right. I suspect that, whatever the court determines, we can expect it to be appealed to the Second Circuit. The second point is for me to clarify what another speaker mischaracterized this morning. That is the business decision by EMI to sell its music on iTunes without DRMs. The mischaracterization suggested that this is the demise of DRMs in the music industry, across the board. In fact, different applications of rights and different business models exist for different music services. What EMI did was to take DRMs off of its download-only service. They are not taking DRMs off of the subscription services because, for those services, the DRMs are effective. Further, although I cannot speak for them, I imagine that the other labels will simply sit back and see whether or not what EMI did works in this instance or not and judge accordingly. Note that what EMI is offering is DRM-free music, but at a higher cost. They are experimenting with cost differentials for higher and lower quality music as well. All the other labels, I am guessing, will wait and see how these new business models work. I see I have already provoked questions from the audience. David Carson and David Jones have some comments. I see Shira Perlmutter has a comment as well. PARTICIPANT [Shira Perlmutter, IFPI Secretariat, London]: It wasn’t a question, just a correction. EMI was taking DRM only off of certain downloads, which are then sold at a higher price. So it is even more complex than that. MR. SCHWARTZ: Thank you, Shira. Let me turn to the two Davids for comments on anything you have heard so far, and then we will open it up for questions from the audience. MR. CARSON: Let me talk a little bit about what we have been doing at the Copyright Office. Unfortunately, we have been working for several years on this issue. I have had endless conversations with Mr. Jones here when he was, until very recently, on the staff of the Judiciary Committee, and I am sure I will have many more conversations in the years to come with his successors, the way things are going. Trying to solve the music licensing issue has proven to be a very difficult question. One way of looking at it, perhaps, particularly since we don’t have the DiMA person here — I won’t exactly put a DiMA hat on; I don’t have that hat to put on — but we can sympathize to some degree with some of the positions taken by DiMA. Put yourself in the shoes of an online music provider who wants to engage in the service of offering downloads or streaming or whatever of large numbers of existing musical works. As we all know, there are two sets of rights — actually, as we will develop, there are more than two sets of rights, but let’s start at the first cut with two sets of rights — that 63

Elektra Entm’t Group, Inc. v. Barker, No. 05CV7340 (KMK) (THK) (S.D.N.Y. filed Aug. 18, 2005). World Intellectual Property Organization, Copyright Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 65 (1997) [hereinafter WCT]; World Intellectual Property Organi-zation, Performances and Phonograms Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 76 (1997) [hereinafter WPPT], available at http://www.wipo.org. 64

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they have to worry about: the rights in the sound recordings, the record companies; and the rights in the musical works themselves that are recorded. As we understand it, and as we are told, it is not that difficult to clear the rights for the sound recordings, for the records themselves. You go to the record company, and you can usually figure out which is the record company that owns the rights to a particular sound recording — that’s not so difficult usually — and you go and you get a license. That license allows you to do whatever you need to do. Turn around and try to clear the musical rights and it is a very different situation. First of all, we are told it is often far from clear who owns those rights. If you can figure out who owns those rights, fine, you go to them and you try to get a license. Maybe you can; maybe you can’t. If they are represented by Harry Fox Agency, as very many of them are, you might be able to get a license.65 If they are not, then good luck to you. And there is the problem of multiple owners and how do you pay the multiple owners, and can you just pay one of them or not, and that becomes difficult as well. So it is very difficult simply on the logistical level to actually clear those rights. It is not so difficult with the record companies. Then, as we have heard, there are also issues with respect to the specific exclusive rights that you have to clear with respect to those works. We have heard about public performance rights and we have heard about the reproduction right. I don’t think we have heard today, but certainly Jacqueline will tell you, that when you are dealing with streaming, for example, music publishers will say there is a distribution right implicated as well. How do you clear those rights? Well, with the record company it is real easy. The record company owns all the rights. You get the license, you pay the value of those rights, and you’ve got the license and you are off and running. Well, you are not quite off and running, because you still have to deal with the music publishing rights. What do you do for that? Well, you don’t just go to the music publisher typically and have the music publisher say, “Fine, whatever rights you need, here’s the price, you’ve got the license.” You go for the public performance rights to a performing rights society — ASCAP, BMI, or SESAC — and they will be happy to license those rights to you. Then you go to a music publisher — or Harry Fox if you are lucky — and they will license to you the reproduction and distribution rights. Each of them is more than happy to license those rights to you for exactly the same conduct that you are doing. So if you are streaming, you will be paying a public performance license to one set of intermediaries and you will be paying a reproduction and distribution license to another set of intermediaries. And, as we have heard, if you want to engage in the business of downloading, you can certainly pay for the reproduction and distribution. And, assuming there is a public performance in a download, which is a fair question — I think you can interpret our law either way as to whether there is or there isn’t, and Elliot sort of rehearsed those arguments for you — you can also pay ASCAP or BMI or SESAC for the public performance that they say is part of that download. But what happens is that you are paying all sorts of people for the same rights essentially, for the right to do the same conduct. It is a much more complicated and difficult 65 The Harry Fox Agency, Inc., a subsidiary of the National Music Publishers Association and the leading musical work licensing agency, released a notice in 2004 informing all licensees of its stated position that Section 115 does not cover ringtones or mastertones. See Mario F. Gonzales, Are Musical Compositions Subject to Compulsory Licensing for Ringtones?, 12 UCLA ENT. L. REV. 11, 11–12 (2004).

134 SESSION II: COPYRIGHT transaction for you when you are trying to get the musical rights than when you are trying to get the rights to the sound recordings. There are all sorts of costs associated with that. At least from the point of view of online musical services, there is a perception that “I am often being forced to pay someone for rights that I am really not exercising, but I’ve got to, otherwise they’re going to sue me.” So it is much more complicated on the music side than it is on the sound recording side. We have tried in advising Congress over the last several years to figure out how to address this. It would take me more time than I have to go over the various solutions we have offered. The blanket licensing scheme, along the lines of Section 114, would seem to work reasonably well for non-interactive streaming of sound recordings. That is a very good model, and it is not so far off from what was in SIRA last year.66 That is one thing we have talked about. MR. SCHWARTZ: David, let me interrupt you to get a prediction from you. Do you think that we are closer to or farther from Section 115 reform now than we were a year ago? MR. CARSON: We are closer only in terms of the fact that we started talking about it several years ago. When we finally do resolve it — perhaps in our lifetime — we are closer to that time now than we were then. I don’t think we are very close to resolving it. As Marybeth essentially said to Congress three weeks ago:67 It’s time for you folks to make some decisions. We have had attempts over the last several years to get the parties together, to have them work on an agreement. Congress always prefers to do that, particularly in copyright law. It is relatively rare for Congress to actually pick winners and losers in copyright with respect to legislation. They always want people to work it out. It’s just not going to happen. I think the experience with SIRA tells us that. So Congress has to make some hard choices. MR. SCHWARTZ: Unfortunately, Congress has also made it clear that this is the year of patent reform. Copyright reform is following behind that, so any copyright law reforms are unlikely this year. MR. CARSON: I Am not predicting they are going to do it. In fact, if I had to predict, I would not predict that they will do it this year. MR. SCHWARTZ: David, comments? MR. JONES: Perhaps it would be useful to step back and note some of the similarities between the fights in different countries. I find it fascinating how similar the behavior of the music industry, or the various components of the music industry, is from country to country. One of the things that you see country by country is a strict focus on the technical aspects of copyright law that frequently overrides the economic interests of the rights holders, at least in my opinion. You get these fights in the United States over what’s a performance, what’s a download. The second one is the rights clarity issue, which is a serious issue. The copyright laws, at least in the United States, are predominantly about commercial exploitation of works. There are other things built into it, but that is primarily what it is about. Our rights system is based on a time when the main revenue streams were live perfor66 67

See SIRA, supra note 12. See Statements of Marybeth Peters, supra note 11.

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mances, piano rolls, and sheet music. So the rights system that we have now, and the way that it is administered, no longer match up with the valuable economic transactions that people want to have happen in the marketplace. That causes real problems when you have entrenched middlemen, as more than one person has referred to them, administering those rights separately for a single copyright holder. When you have to go to multiple places to get all these arcane rights that actually do not match up with anything that makes sense in the real world today, or especially the online world today, you drive up transaction costs. Anyone who is in the online music will tell you that the transaction costs are what kill it. It is a pennies business, not a dollars business. So if you are blowing 30, 40, 50 percent of the money you are spending on administering the system, then rights holders lose out and the users ultimately lose out as well. Another thing that you see fairly frequently both here and abroad are agency problems. This is a somewhat delicate subject. Having, as David mentioned, worked for the Senate Judiciary Committee doing intellectual property issues, you would frequently see the agents of the copyright holders come and argue for things that were very clearly not in their best interests. So you get fights between people who, very understandably, want to retain their position in the world, want to retain their job and their ability to feed their family. But that gets in the way of significant reforms that actually would make everybody ultimately better off. MR. SCHWARTZ: Let’s open up the discussion to the audience. You have been chomping at the bit. Go ahead. QUESTION [Richard Pfohl, Canadian Recording Industry Association, Toronto]: Thanks. I’ve been chomping at the bit. Frankly, I found Howard’s presentation a bit onesided. I wanted to address a couple of points that he made and correct a couple of misstatements. The first misstatement is he said that all downloading in Canada is legal because the Copyright Board said that if you put it on a hard drive it is legal. Actually, the closest that the Copyright Board got to that was the hard drive that is embedded in an iPod. That case went to the Federal Court of Appeal in Canada. The Federal Court of Appeal said that that hard drive is not an audio recording medium and, therefore, is not covered by the private copying exception. So if you make a copy onto the hard drive of your iPod, it is not covered by the exception. I would argue that if an iPod hard drive is not covered, then certainly the hard drive of our PC is similarly not an audio recording medium and is not covered. So not only is uploading not legal in Canada, downloading is not legal in Canada, according to the Federal Court of Appeal. MR. KNOPF: Everybody should read pages 20 and 21 of the Copyright Board’s decision from 2003. It is all explained there.68 QUESTIONER [Mr. Pfohl]: Everyone should read the Federal Court of Appeal decision.69 MR. KNOPF: And that too. QUESTIONER [Mr. Pfohl]: That reversed that decision. MR. KNOPF: No it didn’t. And read Judge von Finckenstein’s decision, which was not 68 See BMG Canada Inc. v. John Doe (F.C.), [2004] 3 F.C. 241, available at http://www.canlii.org/ca/cas/ fct/2004/2004fc488.html. 69 See BMG Canada Inc. v. John Doe (F.C.A.), [2005] F.C.A. 193, available at http://reports.fja.gc.ca/en/2005/ 2005fca193/2005fca193.html.

136 SESSION II: COPYRIGHT reversed by the Federal Court of Appeal. Anyway, Richard, reasonable minds can disagree on this. MR. SCHWARTZ: And obviously some do. QUESTIONER [Mr. Pfohl]: Secondly, Howard noted that online revenues in Canada are increasing. Well, of course they are increasing. They were zero a couple of years ago. The fact is, though, online revenues in Canada are about 2 percent of what they are in the United States. Now, they ought to be about 10 percent, so they are about five times worse if you take historically what we sell in relative CDs. So we are doing about five times worse than the United States. Why is that so? Howard said independents are doing well. They are not. They actually have the worst profit margins of any record companies in Canada. Their profit margin is at about 0.5 percent. The reason is because the legal landscape is terrible. The OECD has said that Canada has the highest per capita unauthorized downloading rate in the world. Canada is number one. Why is that so? It was mentioned earlier by Elliot Peters that the United States has challenges with its legal landscape. Walk into Canada. It is much worse in Canada. Just to briefly quote one independent, Grant Dexter runs Maple Music. That’s one of the leading independents in Canada. He said: “We recently launched our music label. It was damn near impossible to raise money from the typical sources that entrepreneurs look to. We live in a country in which copyright laws do not protect businesses like mine and in which courts support the proposition that downloading and uploading of music is legal.” So in other words, it is confused. Howard does have that right. “As a result of this,” he said, “raising capital to grow our business was almost impossible. Prospective investors view the music industry as a no-fly zone, and they will continue to until we get the proper laws to protect developing businesses like mine.” That’s what the independents think in Canada. On DRM, Howard counts on, I guess, that we reject the WIPO approach in Canada, which Canada has not yet ratified. Frankly, Eric, you pointed out the sole success story in the music industry is ringtones. They are a success because they are a walled garden and we are able to protect them. You cannot steal them. MR. KNOPF: Right, at the moment. QUESTIONER [Mr. Pfohl]: Finally, I’ve got to correct a comment that was taken out of context. I was at the conference where Howard quoted my boss, Graham Henderson, as referring to Terry Fisher as “Comrade Fisher.” They were on a panel together. They were joking. It’s as if you were to say that Hugh Hansen is prejudiced against French people. Terry Fisher laughed. MR. SCHWARTZ: I am not even going to go there. I will let that be the last word. Thank you very much. Other questions? Are there other questions from the audience? QUESTION: David, in 2007 do I understand the testimony of Marybeth Peters as saying that we should now move to a scheme of sublicensing where record labels would be licensing songs from publishers that they put on their CDs and sound recordings? MR. CARSON: What she suggested this year, having made some much more far-reaching suggestions — which are probably our preferred suggestions from a policy point of view — in the past on how to solve this problem, was: Think small. Try to do as little as you need to to fix the major problems that are really confronting us. After you have done that, come back and maybe we can try to fix things in other realms. She made two suggestions with that in mind. One was take the existing model in Section 114 and move it over to Section 115, the blanket licensing approach.

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The other one was to take the existing provision in Section 115, which appears to already give record companies the right to sublicense the musical composition rights. In other words, when a record company licenses you the right to engage in online reproduction and distribution of the sound recording, if the record company has taken a license for the musical composition, it may sublicense to you the rights to that musical composition as well. That seems to be what is happening to a large degree in the marketplace now. Let’s clarify that, give the record companies a little bit of the protection they think they need in order to do that. That is another way in which, with just a few strokes of the pen, you can fix that aspect of the problem. MS. CHARLESWORTH: I just want to comment on the pass-through license. There exists what we call “pass-through” license in Section 115, which in the digital realm does allow record labels to pass through our rights to third parties. Publishers very much dislike this piece of the copyright law. In fact, one of our primary goals in the SIRA legislation was to change it. We do not like having the labels — no offense intended — act as our middlemen. And there is a lack of transparency, there are no audit rights. It is very problematic. I just wanted to comment a little bit further on the Register’s proposal. I think that the assumption there is that the labels will continue to be the primary distributors of recorded music. I think as we are moving into this new space to assume that — rather than that there will be a proliferation of distributors, that you will have individuals distributing music, and many small companies distributing music — I am not sure that in the future that would end up being in any way an efficient model because you would have to go to each sound recording owner, someone who is probably going to be capable of distributing content on the Internet themselves without necessarily going to a major record label. It just seems like a perpetuation of a system that is already in flux, on an assumption that it will stay the same, when I think it probably will not. I just wanted to comment a little bit further in response to what the two Davids said about licensing reform. As I said, we agree that there are issues with music licensing. But I think we do have an existing system, we do have separate rights that are implicated. One way to solve that problem is to grant an all-in license and let the performance side and the mechanical rights side whack it out. That is the approach that is taken in Great Britain. Rather than choosing between the rights, there is an understanding that both may be implicated in online delivery, but let the respective interests or the performance side and the mechanical side divide it up. The other thing is right now you do have to go to four major record labels and do deals. Granted, they have a lot of MFNs in them, but they are separate deals. Plus that only covers 80 percent of the sound recording market. There is another 20 percent that are independent labels. So I do not think we should oversimplify the label licensing process. I have heard some about this from my colleagues at DiMA. I think, assuming that the mechanical rights side moves to a blanket system, it would really be one more stop. Certainly, DiMA embraced that as a potential solution. I do not know that we need to move to a system where the record labels are entirely controlling the distribution of music. QUESTIONER: Let me ask this. In the distrust that the publishers have for the labels, one of the ways to stop distrust is to write a good contract between you that would resolve some of the terms of distrust. Can you envision any contract that you would write, any terms that you could write, by which this idea of the record labels conveying publishing rights through their sale of the sound recording, can you imagine any way you could write the terms of an agreement that would enable that to happen?

138 SESSION II: COPYRIGHT MS. CHARLESWORTH: Yes. MR. SCHWARTZ: That was a part of the NMPA-RIAA 2001 agreement,70 right? MS. CHARLESWORTH: Yes. The 2001 agreement was governed by Section 115,

which already grants that right. We operate under a compulsory license, so unfortunately we do not have the privilege of writing contracts. MR. PETERS: Jacqueline, there are a lot of voluntary agreements out in the marketplace. Look, I wear two hats at my company, but when I’m wearing the record label hat and I am negotiating against the publisher — I think earlier you said they have little leverage. That is not exactly how I feel. Actually, when I am negotiating on behalf of Chappell, I feel rather empowered. So I do think there are a lot of protections based in marketplace agreements that are out there covering video product, covering — MS. CHARLESWORTH: Right. I was going to finish my comment by saying that in some instances, for example under voluntary ringtone licensing agreements or agreements outside of Section 115 — the agreements you are referring to tend to be maybe some compulsory uses mixed with video and things that are clearly outside the compulsory, which gives the publisher greater leverage to control the terms of the deal, whether there is an audit right. In some cases, the ringtone agreements might provide for pass-through to the ringtone provider. I have actually been involved in some of those negotiations that included audit rights. But that is just not something that can effectively happen for the most part under a compulsory license. We live by the rules that are in the statute. MR. JONES: That certainly did seem to be the case from the record that was compiled on Capitol Hill on music licensing. For anything that the Section 115 license clearly covers the record labels have little or no incentive to actually cut a reasonable deal. That will only apply where other rights are implicated that are not covered by the statutory license. MR. SCHWARTZ: Marybeth. QUESTION [Marybeth Peters, Register of Copyrights, U.S. Copyright Office, Washington, D.C.]: Jackie, isn’t it true that Section 115 really sets the limit with regard to the rate but that very few deals are really compulsory licenses? MS. CHARLESWORTH: I think people use the term differently. Harry Fox represents, depending on whom you ask, from 60 to 70 percent of the market. A Harry Fox license is what is called a variation on the compulsory license. Courts have held for the most part that it really is a statutory license. It very much tracks the Copyright Act, although it does vary certain terms, like the accounting from thirty days to forty-five days. Whether you call that a variation on the compulsory or a compulsory, I think is sometimes a semantic question. QUESTIONER [Ms. Peters]: I think we call it a voluntary license. MR. SCHWARTZ: So, Marybeth has the last word, unless there are any other questions or comments. No other questions? Let me again thank very much all of the speakers.

70 See Digital Millennium Copyright Act § 104 Report, House of Representatives, (Dec. 13, 2001), available at http://commdocs.house.gov/committees/judiciary/hju7666

SESSION III: PATENT PART A: NON-OBVIOUS AND INVENTIVE STEP

SESSION III: PATENT

Part A: Non-Obviousness and Inventive Step: A Comparative View

Moderator NORMAN ZIVIN

Cooper & Dunham LLP (New York)

Speaker JOHN RICHARDS

Ladas & Parry LLP (London)

Panelists HON. KLAUS GRABINSKI

STEVEN J. LEE

Presiding Judge, District Court (Düsseldorf)

Kenyon & Kenyon LLP (New York)

RT. HON. LORD JUSTICE JACOB

HON. RANDALL R. RADER

Court of Appeal, Royal Courts of Justice (London)

Judge, U.S. Court of Appeals, Federal Circuit (Washington)

EIJI KATAYAMA

HERBERT F. SCHWARTZ

Abe, Ikubo & Katayama (Tokyo)

Ropes & Gray LLP (New York)

MR. ZIVIN: Good afternoon, ladies and gentlemen. I’m Norman Zivin of Cooper & Dunham. I’m the moderator for this session is on “Non-Obviousness and Inventive Step.” Let me introduce the panel. We have Judge Grabinski from Düsseldorf and Lord Justice Jacob from the United Kingdom, both of whom were on a panel this morning, so I will not further introduce them; Mr. Eiji Katayama from Tokyo, who will tell us the Japanese view; from the American side, Steve Lee from Kenyon & Kenyon, Judge Randall Rader from the Federal Circuit Court of Appeals, and Herb Schwartz from Ropes & Gray. We are going to hear first from Mr. John Richards of Ladas & Parry, who will talk about the differences (or non-differences) between non-obviousness and inventive step.

140 S E S S I O N I I I : P A T E N T MR. RICHARDS: We heard this morning a lot of discussion about whether the patent system is broken or not. I think how we resolve the non-obviousness/inventive step issue is going to be a big factor in whether, in ten years’ time, we have decided that the system was broken or whether in fact we are just suffering from a temporary aberration. The question I want to pose is: What is the non-obviousness/inventive step/inventive activity requirement for? I am going to look at how the law has developed in a few countries — not spending too much time on the United States, because I think most people here are aware of the developments in the United States — to give us some clues as to what the answer to that question might be. Let me kick off with a couple of U.S. cases, which I think set off the two rival approaches. In Atlantic Works v. Brady in 1883,1 the Supreme Court said the test is: Did the alleged inventor make “a selection and combination of elements” which would not have occurred to anyone “of ordinary skill” in the field in question? In Hotchkiss v. Greenwood,2 the case on which we focus a lot nowadays, a somewhat earlier case, the Supreme Court said the test was that unless more ingenuity and skill is applied to the new invention than is possessed by an “ordinary mechanic acquainted with the business,” there was an absence of that degree of skill and ingenuity which constitute essential elements in every invention. So are we in a situation where what we are trying to prevent from being patented is something that would have occurred to anyone of “ordinary skill in the art,” or do we need some measure of ingenuity, some sort of quasi-subjective test, in order to determine what it is that we regard as being patentable? I fear that we are drifting towards a more subjective approach that people have been trying to adopt for the last few years. I aim to put that in its international context. The state law in most countries did not specifically address the question of non-obviousness until the mid-twentieth century. In the early days in this country, we had a requirement that something was “new” and “useful.”3 In the United Kingdom, it was simply that it needed to have “a manner of new manufacture.”4 Over the years, the courts added into that novelty/usefulness requirement the idea that there had to be subject matter or there had to be “inventivity,” deriving simply from the use of the word “invention. That came into the U.K. statute in 1932, which, as far as I can see, was the first statute to specifically deal with this, where the requirement was that the invention should not be obvious and should involve an “inventive step.”5 We did not get similar legislation in the United States until 1952, with the enactment of 35 U.S.C. 103,6 which specifically says that the way in which the invention is created should not determine whether something is to be regarded as being obvious or not, overruling the Supreme Court’s 1940 decision in Cuno, which talked about a “flash of creative genius” being required in order to establish patentability.7 In France, we did not get an addition of a requirement for non-obviousness/inventive step until the 1968 statute,8 but prior to that the French courts had created a concept of “patentable novelty.” Patentable novelty was not strict novelty, in the sense that the 1

Atlantic Works v. Brady, 107 U.S. 192 (1883). Hotchkiss v. Greenwood, 52 U.S. (11 How.) 248 (1851). 3 Patent Act of 1790, ch. 7, 1 Stat. 109-112 (Apr. 10, 1790). 4 See, e.g., Losh v. Hague, 1 Webster’s Pat. Cas. 202, 208 (1838). 5 Patents and Designs Act, 1932, 22 & 23 Geo. 5, c. 32 (Eng.). 6 Patent Act of 1952, Pub. L. No. 593, 66 Stat. 792, 798 (1952). 7 Cuno Eng’g Corp. v. Automatic Devices Corp., 314 U.S. 84, 91 (1941). 8 Law No. 68-1 of Jan. 2, 1968, Journal Officiel de la République Française [J.O.] [Official Gazette of France], Jan. 3, 1968, ¶ 13, translated in 67 Pat. & Trade Mark Rev. 100, 100–09, 128–36 (1969). 2

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Anglo-American tradition looks at it and says that something is new if it is not specifically disclosed in prior art. The French concept of novelty had a penumbra of things that were evident from the prior art being included as within what was to be regarded as lacking in novelty. In Germany, the courts early on, after the 1878 statute,9 started to add in two additional requirements beyond “new” and “industrially applicable,” which were the two specific things required in the German statute at the time: namely, that there should be a measure of “inventivity” [erfindung shöhe] and also there should be a “technical advance” [technischem Fortschritt].10 That remained the German law up until harmonization with the European Patent Convention11 in 1981. So we have this background against which the question of whether one is looking at preventing patents from being granted for that which lies in the way of the development of the industry, or whether there is a need for some creativity beyond just looking at what is a natural development. The word “obvious” itself comes from the Latin ob via [in the way]. The European Patent Office set out to create a definition of inventive step when it was created. Now, the words “inventive step” are unfortunate in the English version of the European Patent Convention. The German text, Erfinderische Tätigkeit, and the French text, activité inventive, both effecttively mean “inventive activity” rather than “step.” So when we talk about “inventive step” in the Anglo-American approach, we are, in fact, perhaps misunderstanding what the intention was behind the original language of the European Patent Convention. Now, the courts have recognized this and attempt to deal with it. Nevertheless, to the average practitioner this idea of a “step” rather than “activity” can at times be confusing. The approach adopted by the European Patent Office was based on the way in which things were done in Germany to some extent. At the time when the European Patent Convention was set up, there was a famous paper given by the president of the European Patent Office, who said that since the Dutch standard for inventive step is too high and the British standard is too low, we are going with the German standard. Now, there is a difference between standard and the methodology that you employ in order to get to a result. The approach adopted by the European Patent Office is based on a so-called “problem and solution” approach, defining the problem and then looking to see whether what is done creates a solution to that problem. That comes out of the German jurisprudence. However, the European Patent Office has gone beyond what I understand to be the German approach, at least to some extent, by saying that you have to identify a single piece of prior art which is the point of reference for determining what the problem is to be solved. The European Patent Office says that the problem to be solved can change as you go through the case, so if different additional prior art comes up of which the inventor was not aware at the time the application was written, then you can redefine the problem; and as long as you can derive the problem somehow from the documents filed, then you have a problem which needs to be solved. You then go to the knowledge of one skilled in the art and see whether there is something that bridges that gap. Much of the recent case law in Europe, and also in Germany, has focused on what the 9

Patentgesetz [Patent Act], May 25, 1877, RGBI I at 501 (F.R.G.). Patentgesetz [Patent Act], May 5, 1936 RGBI II at 117 (F.R.G.). 11 Convention on the Grant of European Patents, signed at the Munich Diplomatic Conference for the Setting up of a European System for the Grant of Patents on Oct. 5, 1973, 13 I.L.M. 270 (1974), 1160 U.N.T.S. 231 [hereinafter European Patent Convention], available at http://www.epo.org/patents/law/legal-texts/epc.html. 10

142 S E S S I O N I I I : P A T E N T nature of that problem needs to be. As pointed out, it must be a “technical problem.”12 This has caused some difficulty in the computer software area and the things that border on business methods which are not quite business methods, as to defining exactly what is a “technical problem.” The law in the United Kingdom — Sir Robin, I’m sure, will correct me if I am wrong — still seems to be somewhat uncertain. LORD JUSTICE JACOB: No. MR. RICHARDS: No? You think it is certain. I tried to derive some sort of rational principle out of some of the recent decisions that have come down. Nevertheless, in the English jurisprudence one starts off by doing a so-called Windsurfing analysis. 13 The Windsurfing analysis has four steps to be taken: (1) identify the inventive concept, which may or may not be the same as the problem; (2) thereafter the court has to assume the mantle of the “normally skilled but unimaginative addressee” of the art at the priority date and impute to him the “common general knowledge of the art” at that date; (3) identify what, if any, are the differences between the matter cited as known or used and the alleged invention; and (4) finally, the court has to ask itself whether, viewed without any knowledge of the alleged invention, those differences constitute something that could have been obvious to the skilled man or required any degree of invention. That test really ducks the question of exactly what is obvious. The case law, until Sir Robin corrected it recently,14 has led people to believe that being “obvious to try” was something that met that conclusion. He addressed this in 2004 and said that the “obvious to try” test is in fact not normally to be regarded as being an indicia of obviousness in the United Kingdom, unless it is absolutely evident that it is going to work.15 So we come to a situation somewhat similar to the “reasonable expectation of success” test that is used elsewhere. In Germany, as I said before, the issue is whether there is “inventive activity.” My reading of the law is that one addresses the problem and the solution, but one does not necessarily have to focus on the closest piece of prior art in order to determine whether inventive activity has taken place in moving from that to the invention claimed. In Canada, the leading case, Beloit Canada Ltd. v. Valmet Oy,16 says: The test for obviousness is not to ask what competent inventors did or would have done to solve the problem. Inventors are by definition inventive. The classical touchstone for obviousness is the technician skilled in the art but having no scintilla of inventiveness or imagination; a paragon of deduction and dexterity, wholly devoid of intuition; a triumph of the left hemisphere over the right. The question to be asked is whether this mythical creature (the man in the Clapham Omnibus of patent law) would, in the light of the state of the art and of common general knowledge as at the claimed date of invention, have come directly and without difficulty to the solution taught by the patent.”17 Basically taking the view there that it is something that has to be a natural development; therefore, for the purposes of the non-obviousness requirement is simply to prevent the 12 See Case T 0641/00, COMVIK GSM AB v. DeTeMobile Deutsche Telekom Mobile Net GmbH (Technical Bd. of App. Sept. 26, 2002), available at http://legal.european-patent-office.org/dg3/pdf/t000641ep1.pdf. 13 Windsurfing Int’l Inc. v. Tabur Marine (Great Britain) Ltd., [1985] R.P.C. 59, 73–74 (C.A. (Civ.) 1984). 14 Angiotech v. Conor, [2007] E.W.C.A. Civ. 5 (Jacob, J.). 15 See Saint-Gobain v. Fusion Provida, [2005] E.W.C.A. Civ. (Jacob, J.). 16 Beloit Canada Ltd. v. Valmet Oy, [1986], 8 C.P.R. (3d) 289. 17 Id. at 294.

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public from being deprived of something that might otherwise naturally have developed. No focus on creativity or “inventivity” at all. The Australians, as Sir Robin commented this morning, have gone backwards in time and gone back to English law before anything virtually. In the Aktiebolaget Hässle v. Alphapharm Pty. Ltd. case,18 they say: “Would the notional research group at the relevant date, in all the circumstances, which include a knowledge of all the relevant prior art and of the facts of the nature and success” and other approaches to the same problem “directly be led as a matter of course to [the claimed invention] in the expectation that it might well produce a desired result?” Finally, Japan. Basically, the guidelines of the Japanese Patent Office set out a number of factors to be looked at when determining questions of inventive step: whether the invention was a simple selection or an optimization; whether there is probable cause or motivation to take the step clamed; and finally, whether there are any advantageous effects beyond those which would be foreseen by those skilled in the art in order to establish whether there was inventive activity or not.19 MR. ZIVIN: Thank you, John. We are now going to go to discussion. Maybe we can start off with comments by anyone who wishes to talk about whether there is any difference between the obviousness test in the United States and the inventive step test as applied in Europe or in Japan. Anyone? JUDGE GRABINSKI: I have a lot of sympathy for the remark made by the Canadian judge this morning.20 We have to be aware that the question of inventiveness concerns a highly fictitious situation. We are dealing with two kinds of fiction. First, we have to determine what is inventiveness — or inventive step, or whatever notion you may like to use — from the point of view of the “average person skilled in the art.” I always wanted to meet once in my life the “average person skilled in the art.” LORD JUSTICE JACOB: He’s a very boring chap. JUDGE GRABINSKI: Unfortunately, I didn’t meet him or her, and probably I will not do so in the future. The question that the judge has to establish is what is the average knowledge, the average ability, of a person who is dealing with the particular technology. That is the first fiction. The second fiction has to do with time. When you have to determine inventiveness, it is always later. You always have a perspective post the decisive point of time, meaning the priority date. These two fictions have, first of all, to be recognized. This also opens quite a range of interpretation, and also a range for some distinction, in deciding whether there is inventiveness in a particular case, yes or no. I would like to tell you briefly how the German courts deal with it, in particular the Supreme Court. The Supreme Court decides on appeals from decisions of the Federal Patent Court in nullity proceedings. These are de novo appeals. At the Federal Patents Court (first instance level) you have technical judges and legally qualified judges on the bench, whereas at the Supreme Court (on the appeal level) you only have legally qualified judges; therefore, they will in 95 percent of all cases appoint an expert. 18

Aktiebolaget Hässle v. Alphapharm Pty. Ltd., (2002) 212 C.L.R. 411. Examination Guidelines for Patent & Utility Model, Japanese Patent Office, pt. II, ch. 2, § 2.4, available at http://www.jpo.go.jp/tetuzuki_e/t_tokkyo_e/Guidelines/PartII-2.pdf. 20 See remarks of The Hon. Roger Hughes, Federal Court of Canada, supra this issue, Session I Part D, The Next Ten Years in Patents. 19

144 S E S S I O N I I I : P A T E N T They will ask in a written decision questions to the expert. They will ask with regard to the question of inventiveness: 앫 Who is the person skilled in the art, the “average person?” 앫 They will ask the expert about novelty. Novelty is now not the subject. 앫 Then, they will ask him which steps the person skilled in the art had to do in order to get the solution of the patent, hoping that the expert makes an analysis of the documents of the state of the art that have been put on the table, and then explains the steps that are led from the state of the art to the alleged invention. 앫 The next question is: Has the person skilled in the art reason to start with consideration in that direction, in the direction of the steps that are leading to the invention? 앫 In the next question, the expert will be asked: What are the pros and cons that the person skilled in the art would get to the solution of the patent on the basis of these kind of considerations? 앫 Then, you have different aspects that may be of importance, but must not be of importance in the particular case: for example, whether there has been a certain prejudice in the state of the art that had to be overcome, and other aspects; whether there are particular advantages. These may give some indication whether there is inventiveness or not. Then the expert will write his opinion. The judges and the parties will also ask questions to the expert in a final hearing. But in the end it is the judge — or in the case of the Supreme Court, the panel of judges — who will decide on inventiveness. It is also recognized that this is a question of law, so it will not be the expert but it will be the judges who will decide. Of course, at a certain point there is some discretion, and there I come back to the remark of our Canadian colleague, who said that at a certain point you have to decide whether there is inventiveness or not. MR. ZIVIN: Thank you. Mr. Katayama, could you tell us a bit about what the law is at present in Japan? MR. KATAYAMA: The present situation in Japan is that the level of inventive step that the Patent Office or the court has to find to clear for patentability21 is too high. That is a general criticism. But this kind of thing is a bit difficult, because in the 1990s there was very severe criticism on the opposite side. People said then that the Japanese patent law did not have a provision, other than novelty, for obviousness. So historically speaking, unfortunately, the level of inventive step varied. This is probably true. In a certain era it was easy, but in these days it is difficult. That is the present status. Whether too difficult or not is a matter of policy, I think. That is the position that industry supports and likes. On the other hand, the problem for the practitioners especially is the level varies much in the short period, or it varies from continent to continent. In these days, as you know well, business is cross-border. You should not have that situation. In that sense, harmonization of the level is very important. I do not think there is a very substantial difference between deciding the elements to consider in the patentability and obviousness issue. So it is a matter of overall perception as to whether it is too difficult or it is too easy. That is a brief view from Japan. Thank you. 21 See Patent Act, Act No. 121 of 1959, art. 29(2), translated in http://www.cas.go.jp/jp/seisaku/hourei/ data/PA.pdf.

PART A: NON-OBVIOUS A ND INVENTIVE STEP MR. ZIVIN: Steve, do you agree with that? MR. LEE: I have no knowledge about the law

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of Japan, so I cannot comment on that. I would like to address the question that was asked. We have inventive step, which is defined as being non-obviousness, and we have obviousness in the United States. The statutes seem very similar. Are the results very similar? I think that, quite clearly, the results are not similar. We have systems that use the same words but mean almost completely different things. In my narrow area of pharmaceutical law, I see patents that are held invalid under the European standards that are held valid as being non-obvious in the United States, but not the reverse. I have yet to find a case — and I would love it if somebody would bring one to my attention — of a patent that was found obvious in the United States but was upheld as valid in Europe. Of course, because I have clients that are trying to sell essentially the same products in markets in the United States, in Japan, and in Europe, these different standards are a problem for them — and a problem for me, because they say, “If my European attorneys can do so well, how come you can’t find a way around this U.S. patent? I can go into specifics, but I do not think it is probably warranted here. I would love to hear what other people think about the standards. Even though the words are the same, the tune seems to be different in the United States and around the world. MR. ZIVIN: Judge Rader? JUDGE RADER: First, let’s understand what we are really doing. We are trying to ascertain whether an advance in technology is sufficient to warrant an exclusive right. We are going to give this inventor an incredibly valuable monopoly. We want something in exchange for it. What we want in exchange is a significant advance in the art, not the advance that would have come by virtue of the natural evolution in the step-by-step process that would happen anyway. We want an inventive contribution. How do you assess that? You are correct, I think. The words are sometimes similar, sometimes different. I think there are differences. The problem/solution approach, for instance, used in Europe seems to me to have a little problem because often the definition of the problem is a significant part of the inventive contribution. You recognize the problem; the solution then becomes easy. My favorite example [indicating]. Is that inventive? You like that invention? MR. LEE: I use it every day. MR. ZIVIN: Everybody uses it. JUDGE RADER: Yes. Obvious prior art in each case. Once you understood the problem, replacing paper clips or whatever you want to define the problem as, the invention was itself the solution. So it seems to me, as I say to my students whom I teach every year, “I can teach you the rules in about five minutes. It is going to take you about fifteen years before you are any good at all at assessing obviousness.” It is a combination of understanding technology and law. It requires complete immersion in the prior art, an ability to ascertain the trajectory and pace of change in that art over time, and then using that as the baseline — and by the way, the “person of ordinary skill in the art” is a magnificent invention in patent law and a great advance. It’s the “reasonable person” in negligence law. It is the objectification of the standard and a great help to us. What it does for us, thinking in the terms I am suggesting, is that it allows us to project that trajectory and pace and then make some kind of a judgment as to whether there has been a significant deviation therefrom that warrants an exclusive right. It is going to

146 S E S S I O N I I I : P A T E N T require judgment. It is not going to be done by changing the formulation of words or reorienting the test that you use. You are still going to have to have some way, without taking the invention itself into consideration or the problem itself into consideration, of measuring that trajectory and trend and ascertaining the merits of the deviation. MR. ZIVIN: Herb, what comments do you have on this? MR. SCHWARTZ: To me one of the interesting questions will be: When and if the words change, if the words were changed, in the United States, how will that affect the process ultimately? It is interesting to look at the most recent decision of Lord Justice Jacob, which he issued a few weeks ago.22 He basically said that there really is no single test that you can apply, and he goes through the litany of basically different cases requiring different tests — maybe motivation is important sometimes; maybe commercial success is important sometimes, maybe it’s not. I don’t know if I am mischaracterizing him, but I think that he is basically saying you cannot reduce this to a simple rubric. My sense of reading what the Supreme Court has said is that they are really in the same place. When you read particularly some of the words of Justice Breyer, to me he says: Well, you can’t have a non-exclusive list; you really have to look at a variety of different factors and decide which ones fit which case. It seems to me, although I can’t read tea leaves, that ultimately the Supreme Court will move away from that. 23 Whether that will really change what happens in the application is the interesting question, as to how that will really change the result. I think to the extent that people have been critical of the Federal Circuit for having a formulaic rule of teaching/suggestion/motivation (TSM), I think that those factors will still be important and prevalent but they won’t be an all-encompassing test. How this will affect the result I don’t know, but I am somewhat sympathetic to Lord Justice Jacob’s broad view of it, namely that there is no “one size fits all” basically. JUDGE RADER: Whether you call it TSM, teaching/suggestion/ motivation — whatever labels you put on it, — if you are going to extract hindsight from the analysis, you have to somehow evaluate the evidence that occurred before the time of invention. You are going to have to evaluate the prior art to that trajectory/trend/pace that I was talking about. Maybe we’ll change the words to “trajectory, trend, and pace” instead of “teaching, suggestion, and motivation.” But if you are going to assess inventiveness and the contribution to an area of technology of an invention, you are going to have to take the invention out of the equation, remove hindsight from the equation. Whether you call it TSM or not, you are going to be making an evaluation of those factors that allow you to read the prior art without the invention. MR. ZIVIN: Sir Robin? LORD JUSTICE JACOB: I think Herb has accurately summarized my view, that you 22

Angiotech v. Conor, [2007] E.W.C.A. Civ. 5 (Jacob, J.). See KSR Int’l v. Teleflex, Inc., 127 S. Ct. 1727 (2007) (holding that Graham v. John Deere Co., 383 U.S. 1 (1966), controls obviousness; that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws”; and warning that a rigid application of the teaching/suggestion/motivation test as a litmus test for obviousness is inconsistent with the Graham framework, but stopped short of rejecting the TSM test outright. Simply put, the TSM shortcut for an obviousness analysis is no longer available. The Court’s decision immediately focuses the obviousness spotlight back onto the framework that has controlled the issue for more than forty years, forcing everyone who has grown comfortable with the TSM litmus test shortcut to return to full Graham analyses when assessing the obviousness of patent claims. The Court’s opinion touches on several other issues, including the roles of “hindsight bias” and common sense in an obviousness inquiry, a question about the rationale for affording a presumption of validity to the patent-in-suit, which avoided a Graham analysis during prosecution, and a rejection of the rigid rule that “obvious to try” is per se insufficient to show obviousness), available at http://www.supremecourtus.gov/opinions/06pdf/04-1350.pdf. 23

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cannot take this word “obvious,” put it in other words, and come up with a formula that tells you what the word “obvious” means. Ultimately, it is a multifactorial assessment. I think one of the most interesting cases in recent years is one of Hugh Laddie’s.24 It is a splendid case, full of human interest, the invention of the “Anyway Up” cup. Now, nobody who has had small children before that invention would say anything other than that was a bloody good idea. What was the idea? Putting a valve on top to stop something leaking. It is a children’s cup. You put drink inside it, they have it in their cot, it goes on the side, they go to sleep, it doesn’t leak all over the place. Now, by any kind of criteria which you could think of, once you state the problem and ask people to start thinking of a solution, putting a valve on was the only way you can think of an answer, and you could find the suitable valve. And yet it was a good idea. There is a lovely story that goes with the case. The people who invented it had very little money, they didn’t know how to market this, so what they did was to put some Ribena [a British sticky drink] in the cup, put the whole thing inside an empty shoebox, posted it to the marketing manager of one of the big companies, and said, “If this has leaked we’ve shot ourselves in the foot.” It was a brilliant way of selling the thing. But if you try to think of it in terms of patent law — any formula — you are going to say that was obvious. And yet it was not. In the end, I do not think there are big differences at all. I think the big danger is trying to create a formula. So I do not like the European Patent Office trying to invent a problem. That seems to me to be inventing a complicated way of answering the question in the first place, a lot like translating something into Swahili and then translating it back again. You’ve got to ask whether this was a good idea or not, that’s all. Randy is right. If I may say so, Lord Justice Hoffmann in STEP v. Emson,25 who got ticked off by a subsequent court of appeal, was also right — does this chap deserve a monopoly for twenty years? JUDGE RADER: Excuse me, Lord Justice. “Is this a good idea or not?” What you have just done is factored the invention into your test for non-obviousness and decided whether you’re getting a “gee whiz” reaction from it or not. LORD JUSTICE JACOB: No. JUDGE RADER: That’s exactly the problem of hindsight. You have to ignore whether this was a good idea or not from your vantage point. You are irrelevant. You have to get yourself back into the world of this technology without the invention and see what was happening, and not whether this was a good idea measured after the fact. LORD JUSTICE JACOB: You can measure it at the time. I am not disagreeing with that. JUDGE RADER: No. LORD JUSTICE JACOB: Here is the guy sitting there, this nerd — I called him “a nerd” in one judgment, the “unimaginatively skilled man”26 — and somebody says, “What about so and so? He says, ‘Hey, that’s a good idea.’” JUDGE RADER: It is not a good idea unless you have a context in which to place it as a good idea. In other words, you have to be able to evaluate what was the nature of all ideas in that technology that preceded it and is this one somehow “deflecting the trajectory,” to use my term. 24 Case CH 2003/APP/0035, Mandy Haberman v. The Comptroller General of the Patent Office and Playtex Prods., Inc., [2003] E.W.H.C. 430 (Pat.) (5 Mar. 2003) (Laddie J.), available at http://www.mandyhaberman.com/ vpp/haberman_v_comptroller.htm. 25 STEP v. Emson, [1993] R.P.C. 513. 26 Rockwater Ltd. v. Technip France SA & Anor, [2004] E.W.C.A. Civ. 381 (Jacob, J.).

148 S E S S I O N I I I : P A T E N T MR. LEE: And if you solve that question, then you have a good solution of the particular case that is before the court, which is of course the primary job of the court. But it doesn’t really help those people who are trying to predict whether this patented invention is obvious or not so that they can make commercial decisions as to whether to invest millions of dollars on this if, as the most recent decision of the Federal Circuit pointed out, every case, particularly those raising the issue of obviousness under Section 103, must necessarily be decided upon its own facts. If these cases are each one sui generis, each one to be decided by somebody trying as hard as they can, honestly, to figure out whether there was a real invention there, then all of the rest of us are left trying to guess what is going to happen, with the result that the transactional costs of investing in the marketplace and expensive patent litigation just keep going on and on. Even though we cannot make a formulation which is going to accurately cover what obviousness means, if we do not, we run the opposite risk of leaving everything up in the air for the most clever and persuasive advocate. JUDGE GRABINSKI: I think what we are having is a general problem in the law. You have the general notion of non-obviousness, inventiveness. In other areas, you may also have a general notion, like equity. And then you have different kinds of situations where you say, “Well, it is obvious; it is non-obvious.” For example, if there was in a particular case a certain prejudice in the state of the art and it has been overcome by the idea, then it is an invention and it is inventive. But there are also other kinds of situations imaginable. For example, as has been mentioned, you have a certain trend in technology, and suddenly someone is there who had a new idea and this led into another direction. Then it is also inventive. So you have different kinds of situations that do not always apply in every case but which can be an argument to say it is inventive or it is not inventive. MR. ZIVIN: When I first started practicing a few years ago, we used to talk a lot about the objective tests of obviousness — commercial success, failure of others, long-felt need. I have not heard one mention of any of those factors in this discussion. Are they still alive? JUDGE GRABINSKI: Yes. MR. SCHWARTZ: I think they are very much in Robin’s exposition, which is what I think I discussed, and I think they are very much alive in the Federal Circuit. I do not have any problem with that at all. Although I sympathize with Steve Lee, and I have similar problems advising clients, I don’t think that this is something that is necessarily going to lend itself to a simple solution. It seems to have almost come full circle to going back now to where the statute was, rather than trying to find some simple solution of “one size fits all.” MR. ZIVIN: Thank you. MR. KATAYAMA: I think it is more so, especially if you think about, for example, pharmaceuticals. At this moment, you can make any chemical compound, but the important thing is to find out what is good and the result. If that is very good for cancer, that is an invention. I think now, while invention and discovery historically speaking are said different, now I think discovery means the finding of the good result, and who did it is given the monopoly. That is my feeling. I would like to stress that. MR. ZIVIN: Thank you. We have about one minute left. Maybe we’ll have something new, a question from the audience. Anybody have any questions?

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QUESTION [Prof. Jay Thomas, Georgetown University Law Center, Washington, D.C.]: How will we know if the U.S. Supreme Court gets it right? What is the optimal level of obviousness? JUDGE RADER: We will ask the law professors to tell us that. I will wait for your law review article, Jay. LORD JUSTICE JACOB: It is a serious question. It is one of the things that we all sit down and say what should it be, and we actually have no real idea what the impact on industry really is. We do it by gut feeling, that somehow industries should be allowed to compete and this is a good enough idea. But we really have no idea. JUDGE RADER: What is hidden in Jay’s question is the fact that we have been talking around, and that is that the standard has different effects in different industries. By definition, you have to apply the same standard of law to every set of facts you encounter. But it has significantly different effect in the electronics industry than it does in the pharmaceutical. That is, I think, where Eiji’s thoughts are going to come into play. Those unexpected results are going to have tremendous impact in the chemical world. They do not have much to say at all to the electronics industry, or less so anyway. But I think that is a little bit what Jay is pointing out, that, no matter what they decide, it will have a little different effect in one place than another. There probably is no way to say ever that the Supreme Court got it right. It will get it right for some and it will get it wrong for others. It will be left to the Federal Circuit to try to figure it out. MR. LEE: I do not think that they are going to reach a standard where what they tell you is concrete enough so you can even decide what the effect is going to be for many years afterwards. Whatever the Supreme Court says, you are going to have to decide what that means in a concrete, practical case. JUDGE RADER: That is what they will do anyway. They will send it back to us to decide what it means. MR. ZIVIN: Thank you, panel.

SESSION III: PATENT PART B: EXTRATERRITORIALITY AND RELATED PRINCIPLES

SESSION III: PATENT

Part B: Extraterritoriality and Related Principles: To What Extent Have and Should National Courts Apply their Domestic Patent Laws and Policies to Activities in Other Countries?

Moderator JOHN RICHARDS

Ladas & Parry LLP

Speakers NICHOLAS GROOMBRIDGE

JOHANN PITZ

Weil Gotshal & Manges LLP (New York)

Vossius & Partners (Munich)

HON. ROGER HUGHES

PROF. JOHN R. THOMAS

Judge, Federal Circuit Court of Canada (Ottawa)

Georgetown University Law Center (Washington, DC)

Panelists HON. KLAUS GRABINSKI

RT. HON. LORD JUSTICE JACOB

Presiding Judge, District Court (Düsseldorf)

Court of Appeal, Royal Courts of Justice (London)

DAVID PERKINS

Milbank Tweed Hadley & McCloy LLP (London) MR. RICHARDS: We will now move to the panel on “Extraterritoriality and Related Principles: To What Extent Have and Should National Courts Apply their Domestic Patent Laws and Policies to Activities in Other Countries?” We have three newcomers: David Perkins, Nicholas Groombridge, Johann Pitz. Jay Thomas will kick off.

152 S E S S I O N I I I : P A T E N T VODA V. CORDIS1 John R. Thomas Georgetown University Law Center INTRODUCTION Technology knows no borders. Globalization trends have resulted in expanding international trade, growing ability to share information, and increasingly dispersed manufacturing facilities. One consequence of these trends is that innovators increasingly find U.S. patent rights insufficient by themselves. Patents must instead be procured abroad, on a nation-by-nation basis. International agreements, such as the Paris Convention,2 Patent Cooperation Treaty,3 and the European Patent Convention,4 have eased the burden of acquiring foreign patents. Yet they have made scant progress towards redressing infringement of those rights. Although patents held in different nations increasingly resemble one another, the combination of their formal independence and territorial limitations have traditionally compelled patent holders to bring suit on each one individually. The result has been costly, piecemeal litigation that burdens innovators and the world’s judicial systems alike. In recent years, the jurisprudence of the Federal Circuit Court of Appeals has reflected these increasing strains upon the international patent regime. Thus far the Federal Circuit’s response has been to augment the scope of U.S. patents to cover foreign activity. In Eolas Technologies v. Microsoft Corp.5 the court interpreted 35 U.S.C. § 271(f ) in a manner that will increasingly allow U.S. patents to regulate foreign manufacturing.6 Similarly, in NTP, Inc. v. Research in Motion, Ltd.7 the court concluded that infringement occurs under 35 U.S.C. § 271(a) where the “control and beneficial use” of a patented combination occurs within the United States — even when a component of that combination is physically located abroad. At the same time, the Federal Circuit has voiced considerable suspicion over the propriety of enforcing foreign patents via domestic litigation. In Mars, Inc. v. KabushikiKaisha Nippon Conlux8 the court held that a U.S. district court lacked jurisdiction to entertain claims of infringement of a Japanese patent. That decision was reached under the particular circumstances of that case and did not announce a per se rule that foreign patent infringement claims may never be heard in U.S. courts. Yet the tenor of the opinion is unmistakably that such claims are disfavored. In the opinion of amici, this international intellectual property policy merits further reflection. Rather than increasingly imbue U.S. patents with extraterritorial effect, the Federal Circuit should, in appropriate cases, allow the assertion of foreign patents in U.S. 1 This article is an excerpt from the Argument in John R. Thomas, Brief for Amici Curiae Law Professors in Support of the Appellee, in Appeal No. 05-1238, Jan K. Voda, M.D. v. Cordis Corp., in the United States Court of Appeals for the Federal Circuit (July 29, 2005). The complete Brief in pdf format, including the list of Amici Law Professors, Statement of Interest, and Table of Authorities, is available at the Fordham IP Conference Web site, www.fordhamipconference.com. 2 Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, as last revised, Stockholm, July 14, 1967, 21 U.S.T. 1583, 423 U.N.T.S. 305, available at http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html. 3 Patent Cooperation Treaty, June 19, 1970, 28 U.S.T. 7645, 9 I.L.M. 978. 4 Convention on the Grant of European Patents, Oct. 5, 1973, 13 I.L.M. 268. 5 399 F.3d 1325 (Fed. Cir. 2005). 6 See AT&T Corp. v. Microsoft Corp., slip op. 04-1285 (July 13, 2005) (Rader, J., dissenting). 7 392 F.3d 1336, 1370 (Fed. Cir. 2005). 8 24 F.3d 1368 (Fed. Cir. 1994).

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courts. Respecting the legitimately granted proprietary interests of other nations, rather than imposing U.S. patents upon foreign markets, would best achieve the goal of respecting the sovereign interests of other nations, while at the same time addressing the needs of the innovative community within a global economy. And in so doing the court would follow a line of decisions issued by leading foreign tribunals, including those of Düsseldorf, the Hague, and Tokyo, certain U.S. courts; and indeed its own predecessor. Application of ordinary principles of supplemental and diversity jurisdiction establish that, in appropriate cases, the federal courts possess the authority to resolve disputes concerning patents issued by an entity other than the U.S. Patent and Trademark Office (PTO). Further, application of the act of state doctrine, forum non conveniens, and the “exceptional case” restriction of 28 U.S.C. § 1367(c)(4) fail to justify either discouraging, or rejecting per se, the pursuit of foreign patent infringement claims in U.S. courts. Amici therefore respectfully counsel the court to articulate appropriate factors that courts should consider in deciding whether or not to exercise supplemental jurisdiction over assertions of foreign patent infringement. ARGUMENT I. U.S. COURTS POSSESS THE ABILITY TO HEAR FOREIGN PATENT INFRINGEMENT CLAIMS UNDER ESTABLISHED JURISDICTIONAL PRINCIPLES. A. U.S. AND FOREIGN INFRINGEMENT CLAIMS MAY SHARE A COMMON NUCLEUS OF OPERATIVE FACT SO AS TO FULFILL SUPPLEMENTAL JURISDICTION STANDARDS

The standards of supplemental jurisdiction are familiar to the Federal Circuit. 28 U.S.C. §367(a) provides, in part, that: In any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Under the well-known standard articulated in United Mine Workers v. Gibbs,9 causes of action that share a “common nucleus of operative fact” with the federal claims may be heard under the doctrine of supplemental jurisdiction. The only decision of the Federal Circuit applying these principles towards a claim of foreign patent infringement is Mars, Inc. v. Kabushiki-Kaisha Nippon Conlux.10 The Mars panel identified the following factors as relevant to determining whether a “common nucleus of operative fact” existed between the domestic and foreign causes of action: The similarity of the foreign patent claims to those of the U.S. patent; the similarity of the accused devices; and whether the infringement was direct or induced.11 Upon analyzing these factors, the Mars panel ultimately concluded that “the foreign patent infringement claim at issue here is not so related to the U.S. patent infringement claim” that supplemental jurisdiction was appropriate.12 Yet other cases, involving different facts, may well fulfill the Mars standard. Not only may a differently pleaded complaint involve only assertions of, say, direct infringement, 9

383 U.S. 715, 725 (1966). 24 F.3d 1368 (Fed. Cir. 1994). 11 Id. at 1375. 12 Id. 10

154 S E S S I O N I I I : P A T E N T any well-traveled individual is aware that multinational firms commonly sell products that are similar or identical on an international basis. As a result, each assertion of patent infringement may well involve substantially similar, if not identical, products or processes. As well, the claims of different national patents will in certain cases be similar, if not entirely the same, as a consequence of the mechanisms commonly used to acquire patents worldwide. Under the international priority system established by the Paris Convention, inventors ordinarily file a patent application in their home patent office. Up to twelve months later, they may then file one or more patent applications claiming entitlement to the filing date of their earlier domestic application. In order to serve as an effective priority document for a later foreign application, however, the first application must fully disclose the invention that is later claimed abroad. Additional subject matter that is incorporated into the subsequent foreign applications does not receive the benefit of the earlier filing date.13 As a result, a patent’s written description will be substantially related to, if not identical to, its foreign priority document. Given this relationship, the claims of these patents will necessarily share common traits, and will not infrequently be identical or substantially similar themselves.14 Under the Federal Circuit’s existing precedent, then, no per se rule establishes that U.S. and foreign patent infringement cases can never possess a “common nucleus of operative fact.” Rather, where the asserted claims, accused infringements, and the nature of the infringing acts are sufficiently related, the basic requirements of supplemental jurisdiction may be fulfilled. B. DIVERSITY OF CITIZENSHIP PROVIDES AN ALTERNATIVE BASIS FOR JURISDICTION

Whether or not supplemental jurisdiction is fulfilled in a particular case, jurisdiction founded upon diversity of citizenship provides an additional mechanism for federal courts to hear foreign patent infringement cases.15 For cases arising under 28 U.S.C. § 1332, there is no question that courts possess broad authority to resolve claims arising under foreign law.16 This result holds even though foreign legislation grants jurisdiction to hear such cases to a particular forum.17 Even in cases where supplemental jurisdiction standards are not fulfilled, then, diversity jurisdiction provides an alternative basis for judicial power to address claims of foreign patent infringement. II. PRUDENTIAL DOCTRINES BY NO MEANS COMPEL THIS COURT TO BAR OR DISCOURAGE JURISDICTION OVER FOREIGN PATENT CLAIMS The usual standards governing both supplemental and diversity jurisdiction will, in many cases, grant U.S. courts the authority to entertain claims of foreign patent infringement. Nonetheless, certain prudential doctrines, such as forum non conveniens and the act of state doctrine, allow courts to refuse to exercise this authority in particular cases. In the opinion of amici, the Federal Circuit should establish no special rules for patent cases, but rather apply established jurisdictional principles in a neutral way. In particular, the court 13

See In re Gostelli, 872 F.2d 1008, 1010 (Fed. Cir. 1989). Particularly in fields where technical nomenclature has become standardized — for example, chemistry — parallel patents from around the world commonly employ the same established terms and illustrations to define new compounds. 15 As in Mars, the plaintiff in this case has not pleaded jurisdiction on the basis of diversity of citizenship, although this circumstance appears to exist. 16 See Peter Nicolas, The Use of Preclusion Doctrine, Antitrust Injunctions, and Forum Non Conveniens Dismissals in Transnational Intellectual Property Litigation, 40 VA. J. INT’L L. 331, 352 (1999). 17 See Randall v. Arabian Am. Oil Co., 778 F.2d 1146, 1149–50 (5th Cir. 1985). 14

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should refrain from either discouraging the hearing of foreign patent infringement claims, or from announcing a per se rule that categorically rejects such jurisdiction. The court should also establish clear standards for the application of these restraining doctrines on a case-by-case basis. A. THE PATENT ACT REQUIRES U.S. COURTS TO DETERMINE THE SCOPE OF FOREIGN PATENTS

Concerns have arisen that U.S. courts are not well suited to determine the scope of protection that should be accorded foreign patents. This belief is belied by the fact that the U.S. patent statute has, for well over a century, compelled precisely this inquiry. As stipulated by the Patent Act of 1870, and currently codified at Section 102(d) of the Patent Act of 1952, a U.S. patent may not issue when: The invention was first patented or caused to be patented . . . by the applicant or his legal representatives or assigns in a foreign country prior to the date of the application for patent in this country on an application for patent . . . filed more than twelve months before the filing of the application in the United States. As the Federal Circuit has explained, the Section 102(d) bar operates when three conditions are met: First, the applicant must file an application on the invention in another country. Then, more than twelve months later, the applicant must file for a patent on the same invention in this country. Third, the foreign patent must issue before the applicant filed the U.S. patent application.18 To be clear, then, Section 102(d) does not simply mandate a review of the entirety of the disclosure of the foreign patent instrument, as do paragraphs (a) and (b) of Section 102. By its express wording, Section 102(d) instead requires U.S. patent authorities to decide whether an invention has been “patented . . . in a foreign country . . ..” This inquiry necessarily requires a parsing of the claims of a foreign patent, followed by a determination of the extent of their coverage under the law of the jurisdiction that issued the patent.19 A review of the policy goals of Section 102(d) buttresses this conclusion. As the Patent Office Commissioner explained in 1870: The intention of [C]ongress obviously was to obtain for this country the free use of the inventions of foreigners as soon as they became free abroad. This is indicated by the use of the phrase, “first patented, or caused to be patented, in a foreign country,” for it was presumable that American citizens would obtain their first patent here, while a foreigner would first patent his invention in his own country. The statute was designed to prevent a foreigner from spending his time and capital in the development of an invention in his own country, and then coming to this country to enjoy a further monopoly, when the invention had become free at home. The result of such a course would be that while the foreign country was developing the invention and enjoying its benefits, its use could be interdicted here; while, if the term of the monopoly could be further extended here, the market could be controlled long after the foreign nation was prepared to flood this country with the unpatented products of the patented process.20 18

Bayer AG v. Schein Pharms., Inc., 301 F.3d 1306, 1312 (Fed. Cir. 2002). See In re Kathawala, 9 F.3d 942, 944 (Fed. Cir. 1993) (construing claims of Greek and Spanish patents). 20 Bate Refrigerating Co. v. Sulzberger, 157 U.S. 1, 27 (1895) (quoting Ex parte Mushet, 1870 Comm’r Dec. 106, 108 (1870)). 19

156 S E S S I O N I I I : P A T E N T Congress therefore endeavored to limit circumstances where a particular invention was subject to patent protection in the United States, but was “off-patent” overseas, by encouraging the prompt filing of domestic patents vis-à-vis their foreign counterparts. Achieving this policy goal necessarily requires U.S. authorities to comprehend the extent of the proprietary interest afforded by a foreign patent within the context of the relevant national law.21 Section 102(d) of course relates to the validity of a U.S. patent, rather than the infringement of a foreign patent. Nonetheless the basic inquiry compelled by that statute — determination of the scope of a foreign patent within the parameters of foreign law — has been a feature of U.S. patent law since the nineteenth century. This longstanding statute belies claims of the lack of expertise of U.S. courts to resolve such issues, and also the lack of congressional interest in having U.S. courts review the patent instruments and laws of other nations. B. FEDERAL CIRCUIT’S PREDECESSOR IS AMONG THOSE THAT HAVE ADJUDICATED CLAIMS OF FOREIGN PATENT INFRINGEMENT

As the Federal Circuit weighs concerns over judicial competence to adjudicate issues of foreign patent law, it should recall its own history. Its own predecessor in fact engaged in this exercise over seventy years ago. The occasion was a congressional enactment that provided, in part: Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the United States Court of Claims be, and it is hereby authorized and directed to hear and determine the claim of Elwood Grissinger for compensation for any unlawful sale by the United States, and any unlawful sale by others for the United States, either in the United States or elsewhere, for any use outside the United States and exclusive of any use by the United States, or certain long-distance telephone repeaters and of a system for the use of any repeaters on transmission lines, as disclosed and described in certain letters patent granted to said Grissinger by the United States, and also as disclosed and described in patents granted to him by certain foreign countries and competent jurisdiction is hereby conferred upon said court in this matter.22 The Court of Claims responded by issuing a reported decision adjudicating the validity and infringement of parallel French, Italian, British, and Belgian patents.23 The Grissinger case stands beside a small number of other judicial opinions, including Ortman v. Stanray Corp.24 and Distillers Co. Ltd. v. Standard Oil Co.,25 that have reasoned that 21 In Kathawala the Federal Circuit affirmed the USPTO Board’s refusal to assess the validity of a Greek patent that a U.S. patent applicant contended had been improvidently granted. This holding was consistent with the requirement of § 102(d) that the invention merely be “patented” abroad. As the court explained: “When a foreign patent issues with claims directed to the same invention as the U.S. application, the invention is ‘patented’ within the meaning of section 102(d); validity of the foreign claims is irrelevant to the section 102(d) inquiry.” Kathawala, 9 F.3d at 945. The panel in Kathawala went on to explain that a contrary holding would require the USPTO to “engag[e] in an extensive exploration of the fine points of foreign law.” Id. This statement confirms that the choice-of-law rule under § 102(d) is the law of the jurisdiction that granted the foreign patent. As a result, the express wording, policy grounding, and governing precedent pertaining to § 102(d) each compel the conclusion that U.S. patent authorities must apply foreign patent law in order to determine whether the invention “pat-ented” abroad is the same as the one for which a patent is sought in the United States. 22 See Grissinger v. United States, 77 Ct. Cl. 106, 17 U.S.P.Q. (BNA) 95 (Ct. Cl. 1933). 23 Id. 24 371 F.2d 154 (7th Cir. 1967). 25 150 U.S.P.Q. (BNA) 42 (N.D. Ohio 1964).

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U.S. courts possess jurisdiction to resolve claims of foreign patent infringement under more traditional grounds. The modest number of U.S. opinions addressing claims of foreign patent infringement is augmented by those of foreign courts. A German court reportedly resolved an infringement dispute concerning a British patent.26 Dutch courts have been well known for their relatively broad view of their own competence to address claims of foreign patent infringement, particularly in the pan-European context.27 Japanese courts have also resolved such claims.28 In one recent case, a Tokyo court applied the rule of prosecution history estoppel announced in Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co.29 to decide that a U.S. patent was not infringed.30 These proceedings have no infrequently involved U.S. firms.31 In the view of amici, this experience provides four important policy implications. First, the contention that Congress has never created an express cause of action to litigate foreign patent law claims in federal court is incorrect as a matter of historical fact. Admittedly, this legislation did not invoke diversity jurisdiction, or the predecessor doctrines to what today is termed supplemental jurisdiction. Yet this episode demonstrates that federal jurisdiction over cases of foreign patent infringement cannot fairly be characterized as unprecedented, lacking legislative imprimatur, or somehow raising vexing constitutional issues. Second, both U.S. and foreign courts have proven capable of managing consolidated multinational infringement proceedings. In particular, it strains belief to conclude that in the seven decades since the Grissinger opinion issued, the ability of U.S. courts to resolve claims of foreign patent infringement has not improved drastically. Third, foreign tribunals require no invitation from the Federal Circuit to adjudicate infringement disputes involving U.S. patents. They have already done so. Concerns that assumptions of jurisdiction over foreign patent infringement claims by the U.S. courts would be out of step with international developments, or would for the first time cause courts overseas to recognize such claims, are misplaced. Finally, to the extent that foreign courts are more amenable to resolving claims of foreign patent infringement than those of the United States, U.S. industry will face a comparative disadvantage. Firms based overseas will be able to rely upon their own national judicial apparatus for consolidating multinational patent infringement claims. U.S. firms would instead be required to litigate before less familiar fora. This reality further counsels against the announcement of rules disposed against entertaining foreign patent infringement claims.

26

See James A. Forstner, Managing International Patent Litigation, Litig. Y.B. 1995 at 3, 6 (1995). See John R. Thomas, Litigation Beyond the Technological Frontier: Comparative Approaches to Multinational Patent Enforcement, 27 L. & Pol’y Int’l Bus. 277, 299–305 (1996). The European Court of Justice is currently considering the future availability of jurisdiction under the Brussels Convention to address pan-European patent infringement disputes. See Gesellschaft für Antriebstechnik GmbH v. Lamellen und Kupplungsbau Beteiligungs KG (GAT v. LuK), Case C-4/03, European Court of Justice. This proceeding is limited to interpretation of art. 16.4 of the Brussels Convention, however, an agreement that applies only to members of the European Union. The impact of that litigation upon the jurisdiction of the European courts to resolve matters involving states that are not members of the European Union remains to be seen. 28 See Shoichi Okuyama, Competition/International Jurisdiction/Infringement on a US Patent, 29 AIPPI Japan J. 72 (Jan. 2004). 29 535 U.S. 722 (2002). 30 K.K. Coral Corp. v. Marine Bio K.K., Case No. 1943(wa)/2002 (Tokyo District Court, Oct. 16, 2003). 31 See, e.g., Expandable Grafts P’ship v. Boston Scientific BV, [1999] F.S.R. 352 (Ct. App. The Hague, Apr. 23, 1998). 27

158 S E S S I O N I I I : P A T E N T C. CONSOLIDATED MULTINATIONAL PATENT ENFORCEMENT CAN BE MORE EFFICIENT FOR BOTH COURTS AND LITIGANTS

Patent litigation is expensive, time-consuming, and resource-intensive. As a consequence, intellectual property policy has long reflected concerns about subjecting patent proprietors, accused infringers, and the judicial system alike to the burdens of duplicative litigation. In Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation,32 for example, the Supreme Court squarely identified “the goal of limiting relitigation of issues where that can be achieved without compromising fairness in particular cases.” Justice White further explained: [A] second infringement action raising the same issue and involving much of the same proof has a high cost to the individual parties. . . . These moneys could be put to better use, such as further research and development. The alleged infringer . . . is forced to divert substantial funds to litigation that is wasteful.33 The Blonder-Tongue Court’s reasoning related to defensive non-mutual issue preclusion, of course, rather than consolidated multinational patent enforcement. The Court’s policy discussion nonetheless applies with equal force in this context. Although the costs of fragmented national infringement trials are apparent, concerns have been expressed that few benefits would flow from judicial assumption of foreign infringement claims. In the experience of amici, however, the most time-consuming tasks related to patent litigation are achieving an understanding of the technologies at issue, as well as making a detailed review of the specific wording of the asserted patent instruments. To the extent that the patent instruments, accused infringements, and relevant prior art are similar or identical, there seems little doubt that consolidating domestic and foreign infringement claims would reduce the burdens of all participants in the international system. As explained by the court in Distillers Co. Ltd. v. Standard Oil Company: Even if the application of foreign tort law might be necessary . . . this does not pose as serious a problem as that which would confront the parties if the claims . . . . were left for separate trials in separate tribunals. The law is in the books, and may be found conveniently if not easily. The facts are the elusive elements of lawsuits. If the parties must collect and interpret facts for one action, we might properly make every effort to adjudicate all the claims arising out of the facts in one forum at one time.34 It should also be noted that even wholly domestic patent litigation has, under the Federal Circuit’s stewardship, become increasingly concerned with foreign patenting activity. For virtually its entire history, the court has held that “representation[s] to foreign patent offices should be considered . . . when [they] comprise relevant evidence.”35 In particular, statements made to foreign patent examiners are permissibly employed as evidence of the scope of that applicant’s U.S. patent claims.36 Similarly, the court has closely scrutinized a U.S. patent holder’s conduct before foreign patent offices in order to determine whether inequitable conduct occurred in this country or not.37 In view of this longstanding case law, every U.S. patent infringement case potentially involves a detailed inquiry into activities at foreign patent offices. Indeed, a U.S. patent 32 33 34 35 36 37

402 U.S. 313, 328 (1971). Id. at 338. 150 U.S.P.Q. (BNA) 42, 48 (N.D. Ohio 1964). Caterpillar Tractor Co. v. Berco S.p.A., 714 F.2d 1110, 1116 (Fed. Cir. 1983). See Tanabe Seiyaku Co. v. United States Int’l Trade Comm’n, 109 F.3d 726, 733 (Fed. Cir. 1997). See Molins PLC v. Textron, Inc., 48 F.3d 1172 (Fed. Cir. 1995).

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attorney who fails to review parallel foreign patent instruments and their prosecution histories may well have failed in his professional obligations as an advocate. The deep involvement of U.S. patent enforcement with foreign patenting activity again suggests that the burdens of adjudicating foreign infringement suits may be less than have been suggested. D. DIFFERENCES AMONG NATIONAL PATENT LAWS EXIST, BUT SHOULD NOT BE OVERSTATED

The world’s patent laws are converging. The North American Free Trade Agreement (NAFTA),38 the TRIPs Agreement,39 and various Free Trade Agreements,40 in combination with domestic law reform, have harmonized world patent laws to an extent unimaginable to an earlier generation of patent attorneys. As a result, while differences between U.S. and foreign patent laws continue to exist, they by no means compel rules that discourage or prevent the assumption of jurisdiction over foreign patent infringement claims. Comparative studies between U.S. and foreign patent laws have suggested a substantial, and increasing, conformity among the world’s patent laws. Seven years ago, Federal Circuit Judge Newman was able to state: “[O]n review of specific cases that have been litigated in countries in addition to the United States, it seems to me that the differences in result and in analysis are no greater than the differences among the judges of the Federal Circuit.”41 Studies conducted between the USPTO, Japanese Patent Office (JPO), and European Patent Office (EPO) have also demonstrated the substantial similarity of patent examination results among those jurisdictions. An exchange of examiners between the JPO and USPTO, reported seventeen years ago, allowed these offices to “confirm[] that standards of inventive step and novelty are substantially the same in the JPO as they are in the USPTO.”42 A similar exercise between the EPO and USPTO led to the following result: [I]t should be emphasized that this evaluation including patentability determinations of a total of 112 independent and dependent claims, which resulted in a different patentability determination of only a single dependent claim . . ..43 Further, distinctions that did arise in examination approaches and outcomes were frequently attributed to reasonable differences between individual examiners — the same sort that might arise between two examiners employed by the USPTO.44 Remaining gaps between U.S. and foreign patent laws appear to be on the verge of narrowing. Recently introduced legislation would adopt several common features of foreign patent laws. The proposed Patent Act of 2005, H.R. 2795, would, among other measures adopted from overseas practice, adopt a first-inventor-to-file priority system and prior user rights; eliminate the best mode requirement from U.S. law; and encourage 38

North American Free Trade Agreement, Dec. 17, 1992, 107 Stat. 2057, 32 I.L.M. 289. Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Annex 1C, 33 I.L.M. 1197 (1994) [hereinafter TRIPs Agreement]. 40 See, e.g., United States-Chile Free Trade Agreement, June 6, 2003, 42 I.L.M. 1026. 41 Pauline Newman, On Global Patent Cooperation, 8 Fordham Intell. Prop. Media & Ent. L.J. 3, 6 (1997). 42 JPO-USPTO Examiner Exchange Program Final Report (Pt. I), 70 J. Pat. & Trademark Off. Soc’y 449, 484 (1988). 43 EPO-USPTO Examiner Exchange Program Final Report, 72 J. Pat. & Trademark Off. Soc’y 5, 28 (1990) (emphasis in original). 44 E.g., id. at 621, 654. 39

160 S E S S I O N I I I : P A T E N T the adoption of a one-year grace period within the European Patent Convention and Japanese Patent Act.45 As a result, it is simply inaccurate to assert that assumption of foreign patent infringement claims will invariably lead U.S. courts into unknown landscapes. Core doctrines of the leading patent-issuing states are substantially similar to the point of identity; other determinations, such as the prior art status of a particular reference under a firstinventor-to-file system, will differ from U.S. law but would nonetheless be straightforward to apply. In sum, given the convergence between domestic and foreign patent laws, and the increasing likelihood these regimes will coalesce even further in the near future, a generally exclusionary or per se rule against hearing foreign patent infringement claims would be inappropriate. E. COMITY CONCERNS DO NOT COMPEL A CONTRARY RESULT

Comity concerns should also not lead to the usual or unvarying conclusion that jurisdiction over claims of foreign patent infringement should be denied. History offers an important lesson in this context. Amici are unaware of even a single instance in which any state has reacted unfavorably to a foreign court assuming jurisdiction to decide an infringement suit involving its national patents. Given that courts of several nations have asserted such jurisdiction over a period of many years, the lack of articulated political concerns offers compelling evidence that comity concerns have been overstated in this context. This experience reflects the fact that all patent-issuing states share an interest in the efficient and fair disposition of multinational enforcement litigation. In contrast, the Federal Circuit’s approach of applying U.S. patent law to foreign activity has proven more controversial. Earlier this year, in NTP, Inc. v. Research in Motion, Ltd.,46 the court for the first time concluded that infringement occurs under 35 U.S.C. § 271(a) where the “control and beneficial use” of a patented combination occurs within the United States — even when a component of that combination is physically located abroad. This lone decision attracted an amicus curiae brief from the Government of Canada stating that the Federal Circuit’s interpretation of Section 271(a) “is susceptible of interpretations that may have unfortunate, and unintended consequences, affecting Canada’s interests, as well as the interests of Canadian companies carrying on multi-jurisdictional operations.”47 More formal legal analysis supports this experience. In particular, established judicial precedent indicates that the act of state doctrine is not an appropriate basis for denying U.S. courts the ability to entertain foreign patent infringement claims in the majority of cases. As appropriately recognized by the court in Mannington Mills,Inc. v.Congoleum Corp.,48 patent infringement disputes typically constitute affairs of private, commercial law, and do not provide an essential ordering of political conditions, set forth the organization of the state, or dictate the relations between the role of individuals and the government in a fundamental way. To the contrary, sovereign activity forms “merely . . . the background to the dispute or in which the only governmental actions were the neutral 45 For a more detailed discussion of pending patent reform legislation, see Wendy H. Schacht & John R. Thomas, Patent Reform: Innovation Issues (Congressional Research Service July 15, 2005), available at http://patentlaw.typepad.com/patent/RL32996.pdf. 46 393 F.3d 1336, 1370 (Fed. Cir. 2005). 47 Amicus Curiae Brief of Canadian Government, NTP, Inc. v. Research in Motion, Ltd., Appeal No. 03-1615, at 2 (Jan. 13, 2005). The Canadian Government’s amicus brief may be conveniently found at http://patentlaw. typepad.com/patent/files/CAGovBr.pdf. 48 595 F.2d 1287, 1294 (3d Cir. 1979).

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application of the laws,” circumstances in which courts have reasoned that the act of state doctrine does not apply.49 It should also be appreciated that the grant of a patent is less of a governmental act than a governmental reaction. Private parties initiate the process of patent prosecution by filing an application. Whether this application will ultimately mature into a granted patent or not is hardly a discretionary matter. Reflecting the obligations o the TRIPs Agreement, world patent statutes instead establish that patents must be granted to applicants who fulfill the statutory conditions. While surely not every patent examiner would respond to a given application in an identical way, these individual differences can occur as much within a single national patent office as among several different patent offices. Although such idiosyncrasies are inevitable, they should hardly be considered a political act of central concern to a sovereign power.50 This is not to say that the patent law does not reflect more holistic concerns over innovation policy. But these concerns are more typically addressed by national legislatures in setting forth broad principles of patentable subject matter, standards of inventive activity, the term and scope of protection, and other substantive patent law doctrines. U.S. courts can fully respect these choices by properly applying them. Nor would the exercise of jurisdiction of foreign patent infringement claims cause U.S. courts to strike down patents issued by agencies other than the USPTO. Previous U.S. courts that have concluded that foreign patents were improvidently granted have not formally declared them invalid. They have instead avoided comity concerns through the straightforward mechanism of enjoining one litigant from enforcing those rights against another.51 As a result, exercise of jurisdiction to hear foreign patent infringement claims would by no means cause U.S. courts to assume full supervisory authority over the work product of patent offices other than the USPTO. None of this is to say that foreign patent infringement cases will never raise concerns over comity. Patents that a foreign government asserts or is accused of infringing may present special considerations, for example. Comity concerns are nonetheless a factor that is appropriate for consideration on a case-by-case basis, and by no means compel the conclusion that jurisdiction over foreign patent infringement claims should be disfavored or simply rejected out of hand. III. THE FEDERAL CIRCUIT SHOULD ARTICULATE SOUND GUIDELINES TO GUIDE DISTRICT COURTS IN RESOLVING FUTURE CASES Amici are of the view that no fundamental barriers prevent U.S. courts from hearing claims of foreign patent infringement. Under these circumstances, it is incumbent upon this court to identify factors that courts should consider in deciding whether or not to assert jurisdiction over claims of foreign patent infringement. Amici encourage this court to review prudential considerations developed within two of patent law’s allied disciplines: Trademark law52 and antitrust law.53 Space limitations associated with this brief prevent a more detailed discussion of these considerations. Broadly speaking, amici nonetheless believe that courts should consider the following factors when determining 49

Clayco Petroleum Corp. v. Occidental Petroleum Corp., 712 F.2d 404, 406 (9th Cir. 1983). Thomas, supra note 26, at 1–2. 51 See Forbo-Giubiasco S.A. v. Congoleum Corp., 516 F. Supp. 1210, 1218 (S.D.N.Y. 1981) (the court’s judgment that foreign patents were unenforceable because they were procured via inequitable conduct did not lead to comity concerns because the holding “would affect only the rights between Congoleum and Giubiasco, not Congoleum’s foreign patent rights generally”). 52 See Ocean Garden, Inc. v. Marktrade Co., 953 F.2d 500 (9th Cir. 1991). 53 See Timberline Lumber Co. v. Bank of Am. Nat’l Trust & Savings Ass’n, 549 F.2d 597 (9th Cir. 1976). 50

162 S E S S I O N I I I : P A T E N T whether they should decline to hear cases in which supplemental or diversity jurisdiction exists: 1. The nationality of the litigant. The Supreme Court has long acknowledged that “Congress in prescribing standards of conduct for American citizens may project the impact of its laws beyond the territorial boundaries of the United States.”54 This factor is responsive to comity concerns. Further, U.S. nationals should expect their cases to be tried at home and possess familiarity with the U.S. judicial system. 2. Whether a U.S. patent is being asserted. Although Congress expressly authorized the Court of Claims to hear a dispute that exclusively involved foreign patents,55 the presence of a patent issued by the USPTO increases the legitimacy of the assertion of jurisdiction over parallel foreign patents. 3. The relative importance of any asserted U.S. patent infringement as compared with the infringements asserted abroad. In cases where the courts of several nations may hear claims of multinational infringement, jurisdiction is more appropriately asserted in states where the infringing activity is comparatively significant. 4. The similarity of the accused infringements in the United States and abroad. The goal of avoiding repetitive multinational litigation, as well as unwieldy litigation in the United States, are fulfilled only where the accused infringements are identical or substantially similar. 5. The similarity of the asserted patents in the United States and abroad. Significant similarities between different national patents is more likely to occur when the different asserted national patents share a common international priority document. 6. The similarity of the prior art in the United States and abroad. In many, if not most, cases, the prior art applicable to the U.S. and foreign patents provide the identical or similar teachings. Courts nonetheless should have the power to decline jurisdiction in individual cases involving complex technologies. 7. Potential conflicts with foreign law or policy. The existence of parallel foreign proceedings, in a foreign court or patent office, increases the potential for conflicts between U.S. and foreign law. 8. Whether a potential U.S. judgment could be enforced domestically and, if necessary, by foreign courts. To the extent that the accused infringer possesses sufficient assets in the United States, foreign recognition of the judgment of a U.S. court may prove unnecessary. If foreign enforcement is likely, however, it should be recognized that many foreign systems recognize judgments only upon the basis of reciprocity. It is thus necessary to determine whether a U.S. court had previously recognized a judgment from a court within the appropriate foreign jurisdiction. CONCLUSION For the foregoing reasons, this court should both hold that foreign courts possess supplemental jurisdiction over foreign patent claims in appropriate cases, and identify the circumstances under which that inquiry should proceed. * * * Thank you, Jay. Next up is Judge Hughes from the Federal Court of Canada.

MR. RICHARDS:

* 54 55

*

*

Steele v. Bulova Watch Co., 344 U.S. 280 (1952). See Grissinger v. United States, 77 Ct. Cl. at 106, 17 U.S.P.Q. (BNA) at 85.

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JURISDICTION OF THE STATE: RESPECTING THE INCORPOREAL Caterina Chiocchio56 Law Clerk to the Honourable Mr. Justice Roger T. Hughes I. INTRODUCTION The focus of this paper is a discussion of the exercise of national courts’ and, in particular, the Federal Court of Canada’s jurisdiction in extraterritorial matters in civil disputes in relation to maritime and Internet law through a discussion of international practices. This paper will consider two questions: (1) When does the Federal Court of Canada have extraterritorial jurisdiction; (2) If yes, should the Federal Court of Canada exercise its extraterritorial jurisdiction? The first question considers statutory grants of authority, and common law principles with a view to resolving conflict of law issues. The second question is more narrow, in that it applies principles of comity, judicial economy, fairness, and the doctrine of forum non con-veniens. The principal of territoriality provides that a modern sovereign state has jurisdiction over its territory. In Canada, however, under the Statute of Westminster,57 Parliament has jurisdiction to enact legislation that has been granted extraterritorial jurisdiction. Whether there is express authority or not, courts have developed tests by applying principles of territoriality to court-made tests, so as to advance the common law. These early principles were: ratione materiae (jurisdiction over the subject matter), ratione personae (jurisdiction over the person), and ratione loci (jurisdiction over the territory). Where the material or subject matter, the person, or the location of an event had a connection to a sovereign state, a court could have extra-territorial jurisdiction in one of those three instances. These principles have been extensively applied in maritime law. “Connection” was, and perhaps still is, a crucial element in these principles, such that both the United States and Canada have adopted the “most substantial and real connection” test to determine if a court has jurisdiction over a proceeding, or whether they should exercise their legislated authority, having regard to the principles of comity, fairness, judicial economy, and the doctrine of forum non conveniens. In Tolofson v. Jensen58 Justice La Forest emphasizes that the “real and substantial connection test” is an appropriate way to “prevent overreaching . . . and [to restrict] the exercise of jurisdiction over extraterritorial and transnational transactions.” More recently, the “most and substantial connection test” found its way into other federal matters, such as patents and Internet privacy rights. As the “real and substantial connection test” is applied to the incorporeal, the first fundamental issue is: How will courts use to establish “connection” to multi-jurisdictional issues or “borderless” transactions?” The second question is: How and when should courts restrict the exercise of their discretion to assert extraterritorial jurisdiction; how will traditional principles comity, fairness, forum non conveniens, and judicial economy be applied? II. DOES THE FEDERAL COURT OF CANADA HAVE EXTRATERRITORIAL JURISDICTION? A. MARITIME LAW — OUR HISTORICAL ROOTS

Maritime law historically was based on the principle of territoriality. The Federal Court 56 57 58

Supervised by the Honourable Mr. Justice Hughes. 1931 (U.K.), 22 Geo V, C.4. [1994] 3 S.C.R. 1022 at 1049.

164 S E S S I O N I I I : P A T E N T has jurisdiction in maritime law matters under Sections 91(2) and 101 of the Constitution Act of 1867,59 and generally under the Federal Courts Act.60 The Federal Courts Act expressly authorizes the Court to exercise extraterritorial jurisdiction in the enumerated subject areas under Sections 23, 43, and 44. The Supreme Court of Canada in Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd.61 outlines the common law test used to resolve disputes over the Court’s jurisdiction in a particular subject area. The test is that “the subject matter is so integrally connected to maritime matters as to be legitimate Canadian maritime law within federal competence.” 2. Maritime Liens Maritime liens are specialized actions in maritime law because possession is not needed in order to exert a claim. Rather, they are a proceeding in rem, where the lien follows the object to which it attaches, such as a vessel or its cargo. This proposition was first enunciated in the “Bold Buccleugh”62 by Sir John Jervis, whose definition of a maritime lien remains the current standard in Canadian maritime law today. Sir John Jervis states: A maritime lien does not include or require possession. The word is used in Maritime Law not in the strict legal sense in which we understand it in Courts of Common Law, in which case there could be no lien where there was no possession, actual or constructive; but to express, as if by analogy, the nature of claims which neither presuppose nor originate in possession . . .. A maritime lien is the foundation of the proceeding in rem, a process to make perfect a right inchoate from the moment the lien attaches; . . . a maritime lien exists, which gives a privilege or claim upon the thing, to be carried into effect by legal process. This claim or privilege travels with the thing, into whosesoever possession it may come. It is inchoate from the moment the claim or privilege attaches, and when carried into effect by legal process, by a proceeding in rem, relates back to the period when it first attached.63 Despite express statutory enactments concerning jurisdiction, this historic principle of “possession following the thing” has called upon the courts to resolve conflict of law issues for nations to exert jurisdiction or for the enforcement of foreign laws. In Holt Cargo Systems Inc. v. ABC Containerline N. V. (Trustees of)64 a Belgian ship was arrested in the Halifax harbor under an arrest warrant issued by the appellant, Holt Cargo, the U.S. creditor. The Belgian bankruptcy court requested the Quebec Superior Court to enforce a bankruptcy order. Meanwhile the U.S. creditor filed an action and arrested the ship, claiming that it was to be reimbursed for stevedoring services rendered. The Supreme Court of Canada held that the Federal Court had jurisdiction because the claim was based in maritime law and not in bankruptcy law. The Supreme Court found a sufficient connection between the parties and the subject matter to the Federal Court of Canada so that the Federal Court of Canada could assert extraterritorial jurisdiction, as defined by the Federal Courts Act and the common law. The Supreme Court states in obiter that the lack of connection of an object to the territory is an inherent part of maritime law; therefore, the principle of ratione loci was rejected. The second issue was whether the Federal Court could adjudicate foreign laws where 59

Constitution Act, 1867 (U.K.), 30 & 31 Vict., c.3, reprinted in R.S.C. 1985, App. II, No. 5, §§ 91(2), 101. Federal Courts Act, R.S., 1985, c. F-7. 61 [1997] 1 S.C.R. 779 at 795. 62 (1850–51), 7 Moo. P.C. 267 (P.C.), quoted in Imperial Oil v. Petromar Inc., 2001 FCA 391 (Imperial Oil). 63 The Bold Bucculeigh was significantly influenced by the views of Story J. in The Nestor, 18 F. Cas. 9 (No. 10,126) (C.C.D. Me. 1834). 64 2001 SCC 90. 60

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there was no equivalent law in Canada.65 The Supreme Court held that a maritime lien validly created under foreign law will be recognized and given the same priority in Canada as a maritime lien created in Canada under Canadian maritime law “unless opposed to some rule of domestic policy or procedure which prevents the recognition of the right.”66 Since there is nothing offensive in the U.S. law to allow maritime liens for stevedoring services, Canada recognized the foreign right as though the lien has originated in Canada. The Federal Court was thus able to adjudicate over a foreign law. The third question was whether the Court should exercise its jurisdiction. The Supreme Court of Canada stated it was open to the Federal Court to decide whether it should exercise extraterritorial jurisdiction based on the principles of comity, convenience, and the protection of the rights of its own citizens or other persons who are under the protection of our laws. Quoting from Amchem Products v. ABC Containerline N.V. (Trustees of),67 the Supreme Court of Canada stated that the “natural forum” is not only that with the “most real and substantial connection”; it also includes several factors, such as: issues of public policy; potential loss to the plaintiff of a juridical advantage sufficient to work an injustice of the proceedings were stayed; the place or places where the parties carry on their business; the convenience and expense of litigating in one forum or the other; and the discouragement of forum shopping. Professor Tetley, a noted Canadian maritime law lawyer and academic, identifies that in the absence of statutory or contractual directions . . . facts and circumstances of the problem . . . are “connecting factors” or “contacts” and are the basic “raw materials” of conflict of laws. . . . It is these factors that the court uses to link the particular set of circumstances of the case to a particular law. Usually there are many connecting factors to consider. They may be the place of the contract, the place of the delict or tort, the place of carrying out of the contract, the flag of the ship, the nationality of the crew, the domicile of the vessel owners or the domicile of the charterers. All the connecting factors must be ascertained and valued in order to determine the applicable law amongst the laws of the competing states. This same reasoning used in maritime lien matters was applied by Justice Binnie of the Supreme Court of Canada in SOCAN v. CAIP,68 where copyright infringement was the subject of transnational communication by way of music available over the Internet. The Supreme Court had to determine whether copyright liability for Internet service providers extended beyond the territorial limits in Canada, for music available over the Internet. The Supreme Court applied the “real and substantial connection” test, but also concluded that certain aspects of transnational jurisdictional issues are to be considered on the facts of each case. Therefore, copyright infringement may be actionable even if the location of an object is not physically located within the geographic territory of a nation. B. TECHNOLOGY AND THE INTERNET — THE MODERN ERA

How does one determine the jurisdiction of a country where there are no boundaries? In maritime law the jurisdiction follows the vessel or “thing,” that is, the physical object. What happens when there is no material property or geographic territory to define property boundaries? 65

Canadian maritime law does not recognize liens for claims for stevedoring services. Holt Cargo Sys., Inc. v. ABC Containerline N.V. (Trustees of ), 2001 S.C.C. 90, ¶ 41 (Holt Cargo). 67 [1993] 1 S.C.R. 897; quoted in Holt Cargo at ¶ 91. 68 Society of Composers, Authors and Music Publishers of Can., and others v. Canadian Ass’n of Internet Providers and others, 2004 S.C.C. 45, [2002] 2 S.C.R. 427 (SOCAN). 66

166 S E S S I O N I I I : P A T E N T The new challenge for courts in the era of borderless transactions is to apply existing common law tests, to create a new set of flexible yet consistent principles that are not overreaching and are compatible with domestic and international norms. In the cases that follow, the trend is for courts to decide narrowly on the given set of circumstances of each particular case. This includes considering where a signal commences, who is the receiver, and how the parties use the technology to determine answers to the two questions posed in this paper. What arises is a balancing of rights between individuals and commercial interests. 1. Supreme Court of Canada The Supreme Court of Canada in SOCAN notes that: “Parliament made a policy distinction between those who use the Internet to supply or obtain content such as ‘cheap music’ and those who are part of the infrastructure of the Internet itself. Parliament decided that there is a public interest in encouraging intermediaries that make telecommunications possible to expand and improve their operations without the threat of copyright infringement.” Paragraph 2.4(1)(b) intends that Internet intermediaries are not “users” for purposes of the Copyright Act. In SOCAN the appellants the Society of Composers, Authors and Music Publishers of Canada (SOCAN) sought to impose liability on Internet service providers (ISPs) located in Canada for royalties, where an ISP was the source of the signal transmissions. The question asked of the Supreme Court was whether Canada could exercise copyright jurisdiction in respect of transmissions originating in Canada and abroad (having been received in Canada). The short answer is yes. Justice Binnie, speaking for the majority, expanded traditional common law tests founded in Canadian maritime by taking a contextual approach based on the “circumstances of a case.” The Court held that where there is “[a] real and substantial connection to Canada to support the application of our Copyright Act to international Internet transmissions in a way that will accord with international comity and be consistent with the objectives of order and fairness.” The Court applied several factors, including: the situs of the content provider, the host server, the intermediaries, and the end user, in keeping with national and international copyright practice.69 The Court states that the weight to be given to any particular factor will vary with the circumstances and the nature of the dispute.70 The Court reasoned that the Copyright Act was intended to have extra-territorial effect after conducting an analysis on the statutory interpretation of Paragraph 2.4(1)(b). The Supreme Court, however, did not limit liability only to circumstances where the ISP was located in Canada. Justice Binnie noted that liability may still attach to a server or ISP located abroad, but it will depend on the circumstances of the transmission.71 The Supreme Court held that a telecommunication occurs in Canada where there is a transmission and destination within Canada. A server need not be in Canada for a finding that there has been a telecommunication. The Court found that this understanding was based on the ordinary language in the Copyright Act and was consistent with other Internet law regulation. Finally, the Supreme Court considered whether it would exercise its extraterritorial jurisdiction on every participant with a “real and substantial connection” to Canada. The Court answered this generally in the negative, after undertaking statutory interpretation 69 70 71

Id. at 61–63. Id. at 77. Id. at 105, 106.

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of Paragraph 2.4(1)(b), reading the Section in its ordinary and grammatical sense. As long as a provider only acts as a conduit, then it fulfills its role as providing “the means of telecommunication necessary” and is caught within the exception under Paragraph 4(1)(b). Copyright liability for royalty payments will attach to an ISP in Canada if it stores or caches or uses hyperlinks of the content.72 Justice LeBel, in dissent, maintained traditional principles of “territoriality” in interpreting Parliament’s intent, if any, of conferring extra-territorial jurisdiction under the Copyright Act. Justice LeBel commented that it is well-settled law that Parliament has power to legislate with extra-territorial effect. A common law presumption is that Parliament does not intend to give extraterritorial effect to legislation unless it is expressly stated in statute. Justice LeBel stated that there is nothing express or implied under Paragraph 3(1)(f )73 of the Copyright Act that demonstrates Parliament’s intent that copyright law would extend beyond Canada’s (geographical) territory. The Court relied on the situs of the host server within its territorial borders in order to determine whether an ISP will attract the protection under Paragraph 3(1)(f ). This is consistent with the principle of territoriality and international conventions. 2. United States Supreme Court This traditional approach of restricting jurisdiction within geographic boundaries was also expressed in patent law in the 1972 decision by the U.S. Supreme Court in Deepsouth Packing Co. Inc. v. Laitram Corp.74 The appellant, Deepsouth, was exporting individual components of shrimp deveiners from the United States to foreign jurisdictions. When the components were assembled by the customer, it amounted to the patented invention. Laitram claimed that this activity amounted to patent infringement. The Supreme Court of the United States took a literal restrictive interpretation of 35 U.S.C. § 271,75 defining patent infringement, and concluded “[t]he statute makes clear that it is not an infringement to make or use a patented product outside of the United States.” The Supreme Court stated “combination patent protects only against the operable assembly of the whole and not the manufacture of its parts.” The majority judgment of the Supreme Court concluded that the unassembled export of the elements did not constitute infringement. The majority emphasized that they could not expand patent rights where the language of the code was unambiguous and the U.S. patent system did not contemplate any extraterritorial effect. It appears that the Supreme Court made this decision so as to remain consistent with the previous case law. It also perhaps served as a warning to Congress that the U.S. Code needed some amendments in order to adequately deal with situations of exporting component parts. After the decision in Deepsouth, Congress enacted 35 U.S.C. § 271(f ), which provides that “anyone who supplies, or causes to be supplied, components or substantial portions of components of a patented invention, where such components are uncombined in whole or in part or adapted for use outside of the United States, the supplier will be liable for infringement of the patented invention as though such infringement took place in the United States.” If the steamship was the “it” invention of the nineteenth century, and the “computer” 72

Id. at 102. Section 3(1)(f) of the Copyright Act is one part of the scope of protection of a copyrighted musical, literary, dramatic, or artistic work; that is, copyright protection extends to works that are communicated to the public by telecommunication. 74 406 U.S. 518, 92 S. Ct. 1700 (1972) (Deepsouth). 75 Title 35, Patents, Pt. III, Patents and Protection of Patent Rights, Ch. 28; Infringement of Patents, Preceding § 271, United States Code Service. 73

168 S E S S I O N I I I : P A T E N T is the invention of the twentieth century, then perhaps the BlackBerry can be touted as the next great invention of the twenty-first century, at least so far — a handheld computer that allows you to communicate with third parties, either in writing or by telephone. This technology also is paving the way to a new perspective on the law of extraterritorial jurisdiction. In the 2005 decision from the U.S. Court of Appeals for the Federal Circuit (CAFC), NTP Inc. v. Research in Motion Ltd (RIM),76 the Court had to decide whether the trial court had properly determined that the Canadian Company, RIM, infringed on the U.S. patents held by NTP, a U.S. company. The patents at issue transmit e-mails on “wireline” systems with radio frequency wireless communication networks. RIM’s relay is located in Canada and routes emails from the BlackBerry relay to the partner’s wireless network, which then transmits the messages to the person’s handheld BlackBerry. NTP claimed that RIM infringed on its system and method claims in several of its patents. RIM argued that a component of its system, the relay device, was located in Canada, which is the “control point” of RIM’s system (this relay/control point was likened to the “interface” device in the U.S. patents). The CAFC had to determine if the trial court was correct in finding that, despite RIM’s relay being located in Canada, it was not a bar for determining infringement. The CAFC commenced with statutory interpretation of Section 271(a) of the United States Code, Title 35, authorizing District Court special jurisdiction to hear extraterritorial matters. The CAFC concluded the trial court did have jurisdiction to consider the issue of extraterritorial patent infringement.77 The next question was whether there was infringement. The trial judge held RIM accountable for contributory and induced infringement because the jury found that the customers are direct infringers of the claimed systems and methods claims.78 RIM argued that the infringing activity had to occur within the United States, as outlined in Section 271(a), based on the literal interpretation of that section rendered on Deepsouth. Instead of engaging in statutory interpretation, as in Deepsouth, the CAFC rephrased the issue to determine whether there was “use” of the patented invention in the United States and applied contextual factors to Section 271(a). The CAFC distinguished Deepsouth on its facts and instead applied another case, Decca Ltd. v. United States,79 where the United States operated transmitting stations located in Norway that used the following patented invention: “a radio navigation system requiring stations transmitting signals that are received by a receiver, which then calculates position by the time difference in the signals.”80 The Court in Decca based its decision on several factors to determine if the act of infringement occurred where the United States “used” the invention. The factors were: (1) ownership of the equipment by the United States; (2) control of the equipment from the United States; and (3) the actual beneficial use of the system within the United States. Even though Decca was decided under Section 1498, dealing with use of a patented invention by the United States, the CAFC in RIM stated that Section 271(a) was also implicated because the decision led to direct infringement. In RIM the Court used the 76

418 F.3d 1282, LEXIS 15920 (Fed. Cir. 2005) (Appeal to the U.S. Supreme Court pending) (RIM). 35 U.S.C. § 271(a): “Except as otherwise provided in this title, whoever without authority makes, uses, or offers to sell or sells any patented invention, within the United State or imports into the United States any patented invention during the term of the patent therefore, infringes the patent.” 78 There must be direct infringement before contributory or inducing infringement can be found. 79 544 F.2d 1070 (Ct. Cl. 1976) (Decca). 80 RIM, 418 F.3d at 1317. 77

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Decca factors as a framework for interpreting infringement under Section 271(a), i.e., “use,” “offers to sell, or sells,” and “imports into the United States” for the system and method patents. They also relied on case law that the analysis for patent infringement will “differ for different type of infringing acts, and will depend on the differences between the different claims.”81 Furthermore, the CAFC found that non-parties, customers who used RIM’s technology, were the infringers, and that RIM was a contributory and inducing infringer. The approach is different from the Canadian approach in SOCAN, in that users who cache the music on their hard drives and make it available to the public are the real infringers of copyright. a. Use of the Invention — Systems Claims The Court of Appeal reviewed the case law to determine whether RIM “used” the patented invention.82 In interpreting “uses . . . any patented invention within the United States” in Section 271(a), the CAFC concluded the situs of the infringement is where the act is committed. The situs of the infringing act is a physical occurrence. Courts have interpreted “use” broadly, given its ordinary meaning; use was defined as “put into action.” Thus, under Section 271(a), the use is “where the patented invention is put into service (i.e., the place where control of the system is exercised and beneficial use of the system obtained.)” The answer to this question under traditional approach would be Canada, since that is where the relay was located, and the relay is what constituted the patented invention. Yet, in applying common law factors in Decca, the CAFC concluded that customers in the United States had the control and benefit from the exchange of information, so they were direct infringers; the location of relay in Canada did not, as a matter of law, preclude infringement. With the requisite direct infringement found, RIM was liable for contributory and inducing infringement. In RIM it was the “location of use” and not necessarily the location of the relay that led to a finding of patent infringement for the system claims. b. Use of the Process — Method (Process) Claims The Court found differently concerning the process claims. The process could not be said to have been “used within” the United States, as required by §271(a). The CAFC distinguished that the use “of a whole operable assembly” could not exist for a process claim.83 For infringement of a process claim, “all steps and stage of the claimed process are utilized.”84 Since the relay was located in Canada, the Court concluded not all processes had been performed in the United States, and there could be no infringement. III. CONCLUSION: WHEN DOES THE FEDERAL COURT OF CANADA HAVE EXTRATERRITORIAL JURISDICTION? does a court have jurisdiction over extraterritorial matters? When dealing with maritime law, the question was dependent on the common law test that relates to the connection to the territory. The link was based on a “real and substantial connection” between the people, subject matter, or physical location in a territory. Maritime liens expanded these traditional legal tests by applying contractual law factors, commercial interest, and contextual factors, such as the intention of the parties, and whether a foreign law 81 82 83 84

Id. Id. 1316, 1317. Id. Id. at 1318.

170 S E S S I O N I I I : P A T E N T “offends” Canada’s domestic law. As this common law principle is applied to the incorporeal with Internet or radio communication signals, a more contextual approach is used to attempt to connect invisible transmissions to a physical object, person, or place. In SOCAN, where there is no physical subject matter, the Supreme Court of Canada first determined whether there something express or implied in the Copyright Act that Parliament intended that copyright laws or the court could apply extraterritorial jurisdiction. Then the Supreme Court applied the “real and substantial test” to determine a sufficient connection to Canada by applying the test first used in maritime law. In recognizing that maritime law could have limited application in cases where there was no physical object attached to a claim, the Court left the door open by applying a contextual approach that “depends on the circumstances of the case” when an ISP will be liable for copyright infringement when it is not located in Canada. In RIM the CAFC first separated the patents into system claims and process claims. Where there were system claims, the court applied common law factors and a broad interpretation of “use” of a patented invention in the United States, through the customers. There was ownership, control, and beneficial use by customers in the United States, and through this analysis contributory and inducing infringement attached to RIM despite the invention itself (the relay) being located in Canada. IV. WHEN SHOULD A COURT EXERCISE ITS AUTHORITY? Turning to the second questions posed in this paper, the following discussion addresses when a court should or should not use its discretion to exercise extraterritorial jurisdiction. 1. U.S. Court of Appeals for the Federal Circuit (CAFC) a. Voda v. Cordis Corporation In Voda v. Cordis Corporation85 Dr. Voda, the inventor of the patents, alleged infringement of his U.S. patents relating to guiding catheters for use in interventional cardiology. During the proceeding the appellant filed a motion to amend his claim to include European, Canadian, and Japanese patents. The Respondent asserted it was beyond the jurisdiction of the U.S. District Court. The District Court, pursuant to 28 U.S.C. § 1367, granted leave to Dr. Voda to assert infringement of the foreign patent claims. Was the U.S. District Court correct in exercising its discretion that it had extra-territorial jurisdiction over foreign patents? Or had the District court abused its discretion under Section 1367(c)? The Court of Appeal determined that the lower court had abused its discretion. Under 28 U.S.C. § 1367(a), U.S. district courts have supplemental jurisdiction to consider extraterritorial matters, with certain exceptions. Subsection (c) outlines when a court may decline to exercise that supplemental discretion. The CAFC first conducted a review of the case law, concluding that “district courts of the United States . . . are ‘courts of limited jurisdiction.’ They possess only that power authorized by Constitution and statute . . .. District courts may be obligated not to decide stay law claims (or to stay their adjudication) where one of the abstention doctrines articulated by the [Supreme] Court applies.”86 Paragraph 1367(a) authorizes supplemental jurisdiction to district courts, except as provided otherwise by Federal statute. This constitutes a first exception. A second exception is found at Subsection (b), where district courts have original jurisdiction founded solely on “diversity.” The third exception, found at 85 86

476 F.3d 887, 904 (Fed. Cir. 2007) (Voda). Id. at 11.

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Subsection (c), is the discretionary provision where district courts may decline to exercise supplemental jurisdiction in certain circumstances. Generally, though, Section 1367(a) also grants supplemental jurisdiction to district courts where claims are “so related to claims in the action within such original jurisdiction.” (1) Discretion, Section 1367(c) — Abuse of discretion This Section provides that district courts may decline to exercise supplemental jurisdiction over a claim under Subsection (a) if: (1) The claim raises a novel or complex issue of state law; (2) The claim substantially predominates over the claim or claims over which the district court has original jurisdiction; (3) The district court has dismissed all claims over which it has original jurisdiction; or (4) In exceptional circumstances, there are other compelling reasons to decline jurisdiction. It was stated by the United States Supreme Court in City of Chicago v. International College of Surgeons “when deciding whether to exercise supplemental jurisdiction, a federal court should consider and weigh in each case, and at every stage of the litigation, the values of judicial economy, convenience, fairness and comity.”87 Based on these factors, as well as those outlined in Section 1367(c), the Court of Appeal held that the trial court had abused its discretion in refusing to exercise its discretion. (2) International Treaties The CAFC held that by exercising its discretion the trial court disregarded the international treaties to which the U.S. was a signatory and consequently “supreme law.” Nowhere in the treaties did it permit the United States to adjudicate on foreign registered patents. (3) Comity The CAFC in Voda defined “comity” as the “spirit of cooperation in which a domestic tribunal approaches the resolution of cases touching the laws and interest of other sovereign states.”88 Quoting from Société Nationale Industrielle Aerospatiale v. U.S. District Court for the S.D. of Iowa, the United States Supreme Court stated that “it is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.”89 The CAFC held in Voda that the trial judge ought to have been sensitive to the possibility that the Court does not prejudice the rights of other governments or their citizens.90 Dr. Voda did not have an international duty that would require the District Court’s intervention. There was no evidence that his rights were jeopardized, or that those foreign countries could not provide adequate patent protection. There was no evidence that the foreign governments consented to the adjudication by the United States of Dr. Voda’s international patents. The CAFC applied the “local doctrine action” that applied to trespass or title to real property. They found that “while our Patent Act declares that

87 88 89 90

522 U.S. 156, 173, 118 S. Ct. 523 (1997) (emphasis added). SOCAN, 2004 SCC at 35, 36. 482 U.S. 522 (1987). Id. 36–40.

172 S E S S I O N I I I : P A T E N T ‘patents shall have the attributes of personal property,’” exercising supplemental jurisdiction could prejudice the rights of foreign governments.91 The CAFC also expressed that, under statutory interpretation, the goal is to “construe ambiguous statutes to avoid having unreasonable interference with the sovereign authority of other nations.”92 Patent law was “not intended to operate beyond the limits of the United States.”93 (4) Judicial Economy In Voda the CAFC also found the trial court’s decision offended the principle of judicial economy. To adjudicate on several foreign patents where the law is different than that of the United States would not only confuse juries and precedent, it would likely have the same “magnitude of litigation” as if each patent was adjudicated in the country of registration. (5) Convenience The doctrine of forum non conveniens favors the court declining to exercise its supplemental jurisdiction. Several reasons are that the costs of interpreters and experts in foreign law mitigate towards declining jurisdiction. (6) Fairness — “Act of State” doctrine The CAFC in Voda held that the “act of state doctrine” made it unfair to exercise supplemental jurisdiction. The doctrine “requires that, in the process of deciding the acts of foreign sovereigns taken within their own jurisdiction shall be deemed valid.”94 The CAFC was not persuaded that the granting of a patent was not indeed “an act of state.” As such, the U.S. courts would be prevented from “inquiring into the validity of a foreign patent grant and require only . . . to adjudicate patent claims regardless of validity or enforceability.” The CAFC used principles of common law, such as international treaties, comity, fairness, judicial economy, and the doctrine of forum non conveniens, to conclude that even where this is a statutory grant of supplemental jurisdiction, and limits to that jurisdiction, common law principles can be an “exceptional circumstances” such that it would constitute an abuse of authority under Section 1367(c). 2. Federal Court of Canada a. Phillipa Lawson v. Accusearch Inc, and others In the most recent Internet case heard by the Federal Court of Canada, Lawson v. Accusearch, Inc. DBA Abika.com and others,95 the Court had to resolve whether the Assistant Privacy Commissioner of Canada (the “Assistant Commissioner”) had extraterritorial jurisdiction to investigate complaints on the collection, use, and disclosure of personal information of Canadians under the Personal Information Protection and Electronics Documents Act (PIPEDA).96 The applicant requested her personal information from a U.S. company running an Internet information service, Abika.com. The respondent is a database company with offices located in Wyoming; its Internet server is located in Delaware. The Respondent 91

Id. at 40, 41. Id. at 41, also meaning that patents are not intended to operate beyond the territorial limits of a nation. 93 Id. at 42. 94 Id. at 47, 48. 95 2007 FC 125 (Lawson). 96 The Personal Information Protection and Electronic Documents Act (Apr. 12, 2000) ch. 5, updated Mar. 3, 2006, available at http://www.privcom.gc.ca/legislation/02_06_01_e. asp. 92

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obtained personal information from various databanks in Canada and would “sell” the information to anyone who made the request and paid (Cdn)$119.00. Even though the respondent owns a “.ca” Web site, its only function is to route a user to the “.com” Web site. The Commissioner found that the respondent did not have a “real and substantial” connection to Canada, and concluded that she did not have jurisdiction to investigate the complaint. The applicant filed a judicial review against the Assistant Privacy Commissioner to investigate her complaint that the respondent had contravened the provisions under PIPEDA. Commencing with its interpretation of the relevant statute, the Court analyzed whether there was express or implied provisions in the PIPEDA showing Parliament’s intent to legislate with extraterritorial effects. The Court concluded that Parliament did not intend that PIPEDA apply extraterritorially, nor that it conferred extraterritorial jurisdiction on the Commissioner. The Court then considered whether there were any common law principles that conferred extraterritorial jurisdiction on the Assistant Commissioner to investigate companies of foreign jurisdiction. The Court commenced with the traditional common law principles related to maritime law and the “real and substantial connection test” with regard to ratione materiae (over the subject matter), ratione personae (over the person), and ratione loci (over the territory).97 In reviewing if the Assistant Commissioner had ratione materiae jurisdiction, the Court first noted that even if a decision maker has jurisdiction over the subject matter, that tribunal may decline to exercise its jurisdiction where a party has an insufficient connection to the subject matter, the location of the event, or if they are not themselves connected to Canada (by citizenship or residency).98 The Court also stated that ratione materiae may only be conferred by Parliament, and consequently rejected finding a conferral of extraterritorial jurisdiction on this ground. In considering the Assistant Commissioner’s jurisdiction of ratione personae, Justice Harrington noted that courts have used restraint when exercising jurisdiction over foreign parties to a proceeding when they have not been served in Canada and the matter does not have a connection to Canada. If there is no equivalent Canadian law, then a decision maker may still have jurisdiction over the person but he or she should be mindful of the principle of forum non conveniens when exercising extraterritorial jurisdiction.99 The Court in Lawson concluded that no conflict of law principle or provision in PIPEDA would allow the Assistant Commissioner to exercise extraterritorial jurisdiction. After reviewing the Commissioner’s ratione loci jurisdiction, the Court found that PIPEDA was not intended to stretch beyond Canada’s borders. The Court noted that PIPEDA does grant to the Assistant Commissioner jurisdiction to investigate every complaint; the Assistant Commissioner erred by misinterpreting her investigative authority for the enforcement; and, since PIPEDA did not have such effect, she could not investigate the matter. The Court concluded that, as a matter of statutory interpretation, Parliament had granted the Assistant Commissioner a duty to investigate every complaint, even where effective enforcement was beyond her control. As a result, the Assistant Commissioner cannot decline to investigate a complaint brought before her on the basis of extraterritoriality. If the Assistant Commissioner concludes that Accusearch breached PIPEDA, then 97 98 99

Lawson, 2007 F.C. at 29. Id. 30, quoting Bangoura v. Washington Post, (2005), 258 D.L.R. (4th) 341 (Ont. Ct. App.). Id. 34, 36, quoting Tropwood A.G. v. Sivaco Wire & Nail Co., [1979] 2 S.C.R. 157.

174 S E S S I O N I I I : P A T E N T it would be incumbent on the applicant to file the Assistant Commissioner’s decision with the Court for enforcement. Lawson engages maritime law principles with statutory interpretation to decide how privacy law and Internet commerce is to be regulated. The Court in this case distinguished the exercise of extraterritorial jurisdiction with the enforcement of extraterritorial jurisdiction. The Court indicated that where Parliament does not intend to authorize extraterritorial jurisdiction, the courts in reviewing the common law should not attempt to read in such jurisdiction. Where a statutory duty exists to exercise some type of power, the decision maker may take such measures so as to fulfill its statutory obligation, even if the method of enforcement is not effective. In Lawson the Court was reluctant to turn a privacy law issue into an Internet commerce proceeding. 3. House of Lords a. West Tanker Inc. v. RAS Riunione Adriatica de Scicurta SpA and another In the recent decision of the House of Lords, West Tankers Inc. v. RAS Riunione Adriatica di Scicurta SpA and another,100 the Court had to decide whether a court of a Member of the European Union may grant an injunction against a person bound by an arbitration agreement to restrain that person from commencing or prosecuting proceedings in breach of the agreement in a court of another Member State which has jurisdiction under European Council (EC) Regulation 44/2001. One of the vessels owned by the appellant had collided with another vessel owned by Erg Peroli SpA and caused damage to the latter vessel at Syracuse. Erg made a claim to its insurers, Ras Riunione Adriatica di Sicurta SpA and Generali Assicurazioni Generali SpA. The insurers brought a claim against West Tankers, pursuant to a statutory right of subrogation under Article 1916 of the Italian Civil Code, to the Tribunale de Siracusa to recover the amounts paid to Erg. The appellant West Tankers commenced an application to the English Court of Appeal for an injunction to prevent the insurers for taking further proceedings and for declarations that the insurers were bound by the agreement to refer the matter to arbitration in London. The Court of Appeal granted both injunctions and referred the matter to the House of Lords to determine whether as a matter of discretion an English court should refuse to restrain a proceeding in another Member state. The House of Lords affirmed the Court of Appeals’ decision. However, their decision was not based on principles of maritime law, but instead was based upon statutory interpretation and common law principles involving commercial interest. Moreover, in the exercise of discretion the Court held that this was within the principles of comity. The House of Lords determined that the English courts had jurisdiction under British statute, in particular Section 37(1) of the Supreme Court Act of 1981, and that the “High Court had regularly exercised this jurisdiction to restrain parties to an arbitration agreement from commencing or continuing proceedings in the courts of other countries.”101 The House of Lords held that the law is settled that Article 1(2)(b) of EC Regulation 44/2001 not only excludes arbitration agreements but also court cases where arbitration is the subject matter before the court.102 The Court noted the Regulation’s provision is “entirely unsuited” to arbitration agreements where the parties intend to agree to a situs 100 101 102

[2007] H.L. 4, [2007] All E.R. (D) 249 (Feb) (West Tankers). Id. at 8–11. Marc Rich & Co. AG v. Societa Italiana Impianti PA, [1991] E.C.R. 1-2855 (“the Atlantic Emperor”).

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and a governing law based on “neutrality, availability of legal services and the unobtrusive effectiveness of the supervisory jurisdiction.”103 The House of Lords granted both injunctions on contractual principles of autonomy of the parties to choose the appropriate forum for resolving commercial disputes.104 The House of Lords stated that “Member States should trust the arbitrators or the court exercising supervisory jurisdiction to decide whether the arbitration clause is binding and then to enforce that decision by orders which require the parties to arbitrate and not litigate.”105 The Court concluded that Member States must realize that commercial competition is on a global scale and that when other jurisdictions (such as New York, Bermuda, and Singapore) exercise this same jurisdiction — that is, to enforce arbitration clauses — a court is not acting beyond their jurisdiction, because it is in keeping with principles of international commerce and there is no prejudice to the European Community to allow courts to make such determinations. By approaching this case as a question of commercial interests founded in the law of contracts, the House of Lords, after considering statutory interpretation and common law tests on extraterritorial jurisdiction, decided that jurisdiction was permitted since one of the parties was from England and could apply to those courts to enforce their contractual rights. V. CONCLUSION National courts must decide whether they have jurisdiction of a person, place, or thing when it extends beyond their geographic territorial limit. This examination commences with statutory interpretation of enabling legislation. Common law tests have been used to assist in statutory interpretation where there are gaps or ambiguities. It could be the traditional method that the person, place, or thing have a “real and substantial connection” to the sovereign power exerting jurisdiction or, more broadly, by taking a contextual approach and applying the specific facts and circumstances to a common law or statutory test (the majority in SOCAN). Other factors by which a court may exert extraterritorial jurisdiction include ownership, control, and beneficial use of an object (RIM); or jurisdiction through contracts and commercial interests (West Tankers). In some cases, national courts take a restrictive view of determining whether they have extraterritorial jurisdiction (Deepsouth, the dissents in SOCAN and Lawson) by defining the proceedings restrictively under the enabling legislation. In Canada common law and international law principles determine the limit of the Court’s discretion in applying extraterritorial jurisdiction and when courts ought not to act extraterritorially. Principles such as comity, judicial economy, fairness, doctrine of forum non conveniens, and more recently commercial expectations, are commonly used throughout North America and Britain. In the United States there must first be a statutory analysis under 28 U.S.C. § 1367(a)(c) that permits district courts supplemental jurisdiction with exceptions, and further situations when the court may decline to exercise its jurisdiction. A review of the law demonstrates that courts have flexibility to apply existing law and principles to encompass changing technology. These cases can be influential in assisting governments to review or amend statutes to ensure global competitiveness while main103 104 105

West Tankers, [2007] H.L. 4 at 12. Id. 17–21. Id. 20.

176 S E S S I O N I I I : P A T E N T taining protection for its citizens and commerce. Courts ought to be cautious not to exceed their statutory grant of power or to interpret a section so broadly that it would create unfair consequences either domestically or internationally.

MR. RICHARDS:

* * * Next we have Johann Pitz from the Vossius firm in Munich. *

*

*

EXTRATERRITORIALITY OF GERMAN PATENTS Dr. Johann Pitz I. THE PRINCIPLE OF TERRITORIALITY In principle, a German patent or a European patent granted by the European Patent Office with effect in Germany can be infringed only by acts performed in Germany. Section 9 of the German Patent Act defines the uses constituting direct patent infringement under German law as making, offering, putting on the market, or using a product that is the subject of the patent, or importing or stocking a product for such purposes, and the use of a patented method or process in Germany. A German patent and a European patent granted for Germany are not generally affected by acts committed exclusively in other countries. Regarding contributory or indirect patent infringement, Section 10 of the Act provides for extended liability in cases of supplying or offering to supply means related to essential elements of an invention. Indirect patent infringement even requires a double reference to German territory: both the supply or offer to supply by the indirect patent infringer, and the expected use by the consumer, must take place in Germany in order to establish contributory infringement of the German patent. In view of economic globalization and increasing technical activities across national borders the question arises, whether the existing principle of territoriality is still appropriate to face multinational infringing activities. In contrast to the concept of cross-border litigation, where one national court could have international jurisdiction to decide on infringement of foreign patents based on foreign patent law, the question here is whether infringing activities abroad are covered by German Patent Law. The presentation will focus the relevant case law in order to draw a line between non-infringing and infringing activities relating to Germany. II. PRODUCTION OF PARTS IN GERMANY BUT ASSEMBLY IN FOREIGN COUNTRIES It is undisputed that a German patent is infringed by producing combination products protected by patents in Germany, and also when the product is exported to other countries where no such patent protection exists.106 Most legal experts believe that a German patent is also infringed by the production of parts of a patented device for delivery to a country where no patent protection exists, provided that these parts are only suitable for 106

11.

Case BGHZ 23 100, 106; OLG Hamburg GRUR 1985, 923; Benkard/Bruchhausen, Patent Act, § 9, Margin

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and intended to be assembled to form the device patented in Germany.107 In such cases the Supreme Court has concentrated on the commencement of production of the complete device in Germany, even if completion takes place in another country. This view is upheld by the case law of the Federal Supreme Court. In the Diarähmchen-V decision108 regarding a device consisting of a combination of parts, the Federal Supreme Court expressed the view that the production or delivery of parts of the patented device constitutes direct — and not just contributory — patent infringement if the parts are specifically made to be used for the patented device. To fulfil this requirement, these parts must not be readily usable in any other way than in the patented device and must have been designed to work with the patented device. As it is the commencement of production in Germany that is important, an act of use in Germany is affirmed even if the patented product is never put on the market in Germany. The Federal Supreme Court’s broad interpretation of the terms “making” and “producing” protects the patent owner against obvious attempts to circumvent the patent by delivering parts of a patented device to another country for assembly, since the completion of the patented device in Germany is no longer the decisive issue for assuming patent infringement. These legal principles are also applied by other German courts in agreement with the prevailing legal commentaries.109 III. COMPLETION BY THIRD PARTIES IN FOREIGN COUNTRIES In accordance with the courts’ broad interpretation of the term “making,” the making of a product also occurs when a party starts making parts in such a way that the patented product necessarily results from the making. Therefore, a party that does not commit an act directly leading to the creation of the patented product may nonetheless be considered as a manufacturer infringing the patent if it controls the completion of the product by a third party. According to case law by the Düsseldorf District Court, the same applies for a process patent.110 This case law states that direct patent infringement — and not merely contributory infringement — is affirmed when the acting party does not itself perform the very last partial act of the patented process but uses, as a tool for this purpose, a third party which completes the process predictably, necessarily, and independently of any knowledge of the invention. Therefore, it is not decisive for assessing infringement whether the very last partial act of the protected process or of the production of a patented device is carried out in Germany or by a customer abroad. IV. ACTIVITIES ABROAD RESULTING IN GERMAN PATENT INFRINGEMENT German and foreign companies have repeatedly been held liable for activities outside Germany in cases where these activities resulted in an infringement in Germany. In particular, this holds true for cases where the making and distribution of patented products has been wholly or partially transferred to foreign countries. 107

Busse/Keukenschrijver, Patent Act, § 9, Margin 132; RG GRUR 1901, 152; BGH GRUR 1957, 231. GRUR 1971, 78. 109 See Benkard/Bruchhausen Patent Act, § 9, Margin 33; Schulte, Patent Act, § 9, Margin 27; Busse/ Keukenschrijver, Patent Act, § 9, Margin 68, for an assessment of “making” according to the Patent Act. 110 BGH GRUR 1977, 250, Kunststoffhohlprofil; GRUR 1982, 165, Rigg; LG Düsseldorf, Entscheidungssammlung (Collected Decisions) 1999, 75, Verglasungsklotz; LG Düsseldorf, decision Nov. 7, 2000, InstGE 1, 26, Cam-Carpet. 108

178 S E S S I O N I I I : P A T E N T A. “RADIO-CONTROLLED CLOCK I”

According to the principles laid down in the Federal Supreme Court decision in Funkuhr I (“Radio-Controlled Clock I”),111 each activity adequately resulting into a patent infringement in Germany can also be considered as an infringement or as a participation therein. The defendant — which was aware of the patent at issue — produced radio-controlled clocks in Hong Kong and passed them on to the customer (also in Hong Kong) for transportation to Germany, where the customer delivered them to third parties. The defendant was held liable for patent infringement in Germany. The court held that not only is a person who illegally uses a patented invention in Germany liable for patent infringement in Germany, but a person who contributes to the marketing of the product in Germany is also liable. Therefore, in cross-border cases the foreign manufacturer of patent-infringing devices shares liability for patent infringement when it supplies the products to a foreign customer that will offer the infringing devices in Germany and will import them into Germany for marketing purposes.112 The consequences of this far-reaching liability are considerable. As a result, a supplier acting in another country will be held responsible for its customers’ infringing acts, even though it does not supply products within or from Germany or use the patent in Germany. This also applies to activities performed exclusively abroad if only the infringement occurs in Germany. Therefore, a manufacturer offering goods in foreign countries should determine the countries to which the customer plans to deliver the goods. If the products are aimed at the German market, the manufacturer can preclude liability under German patent law by drawing the customer’s attention to the German patent laws so that the customer will not market the products in Germany. B. “RADIO-CONTROLLED CLOCK II”

Unlike direct infringement and by its very nature, indirect patent infringement only covers the acts of offering or delivering of parts suitable for exploiting the patent protected invention. Indirect infringement requires a so-called “double reference” to the German territory. Delivery or offer must take place in Germany and the customer must further intend to make use of the invention inside Germany. Both delivery and intended use must take place in Germany. There is no liability for indirect infringement in cases where offer or supply of parts takes place abroad. An offer in Germany is not sufficient to establish liability based on indirect patent infringement in cases where use and/or intended use by customers take place abroad. Not required is, however, that direct infringement actually takes place in Germany. It is therefore not necessary that the parts are finally used to exploit the invention. In the past, export business regarding such parts with foreign customers was not considered as an act of contributory infringement. In its recent judgement of January 30, 2007, “Radio-Controlled Clock II,” the Federal Supreme Court changed this view.113 According to the Federal Supreme Court, the delivery of parts from Germany abroad has to be considered as an infringing act within Germany under the precondition that patent-protected use in Germany is intended by the foreign customer. This was true in the Radio-Controlled Clock II case, where a German company delivered detection devices for 111

Mitt 2002, 416. LG Düsseldorf, InstGE 1, 154 – Rohrverzweigung; LG Düsseldorf – Herz-kranzgefäß-DilatationsKatheter. 113 Case X ZR 53/04, Funkuhr II (Radio-Controlled Clock II), BGH (Jan. 30, 2007). 112

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a patented protected-radio clock to its customer in Hong Kong that produced radio clocks and delivered them into Germany. In the Radio-Controlled Clock II decision the Federal Supreme Court compared the legal requirements of direct and indirect patent infringement in cases of delivery of parts from Germany abroad. Whereas the mere causation of patent infringement without any negligence or intention is sufficient for direct infringement, it is required for contributory infringement that the supplier of parts knows or has to know (because it is obvious from the circumstances) about the customer’s intention to exploit the invention. The court stated as a general principle that such a delivery may be considered principally both as an act of indirect infringement and as a support of direct infringement. The court, however, underlined that the limitations for indirect patent infringement must not be circumvented. As a consequence delivery of parts from Germany abroad is only considered as an act of patent infringement if the requirements of indirect infringement are fulfilled. This leads, according to the Federal Supreme Court, to the result that such deliveries can only be considered as an act of indirect infringement in case of negligence. * * * Thank you. Next we have Nicholas Groombridge. MR. GROOMBRIDGE: One of the great things about transnational patent enforcement is that there is nothing like it as a topic to get people riled up. It is one of those hot-button issues where, all of a sudden, you bring it up and a big fight breaks out. That is one of the things that, I guess, brings us all here today, so we can have some fireworks. I want to start off by talking about the RIM case114 (the BlackBerry case), which has been alluded to twice, because it is paradigmatically very good. It almost perfectly embodies one of the threads that runs through this whole topic, which is a deep-seated belief that “my country does this right and your country does it wrong, and if we did it in my country, we would get a better answer.” I wrote down one of the things that Roger Hughes said. He said all of the important part transactions took place in Canada. That is the Canadian view of the world in the BlackBerry case. The U.S. view of the world is that all of the important transactions took place in the United States. So let’s look at what was going on there and see what this tells us about transnational enforcement in general. The BlackBerry case got a huge amount of publicity, largely as an injunction issue — bad patents, big threat of injunction; non-practicing patent owner can shut down the poor little innovator there, and it’s bad for everybody. But inside that is the transnational issue that got some play, a good deal less than the injunction question. Inside that are some issues that really need to be teased out, because they didn’t get much play at all. Look at the system that is involved there. We are all familiar with these; we are all addicted to them. The way this thing works is, basically, the system starts off with my desktop computer with some software sitting in it. When I get an email, it pushes that email out over a landline network and it goes to Canada. It goes to a relay system — basically, a server farm — in Canada. This is very much the Canadian perspective: That’s where all the important transactions take place. That’s the engine that runs the BlackBerry system. MR. RICHARDS:

114 NTP Inc. v. Research in Motion Ltd., 418 F.3d 1282, LEXIS 15920 (Fed. Cir. 2005) (appeal to the U.S. Supreme Court pending) (RIM).

180 S E S S I O N I I I : P A T E N T I don’t know if you know this, but every time you use one of these devices to send or receive a message, that message has traveled through Canada. This system doesn’t work without the stuff that is going on in Canada. From Canada, it goes through the relay systems and is switched, pushed back out into a wireless network and delivered to my handheld device sitting here in my pocket. From my perspective, the important bits of this system are not the server farm in Canada; they are the desktop on my desk back in the office and the handheld in my pocket. When we look at the decision, the decision says, in essence, those are the important bits of the system. Because the important bits of the system are in the United States, the infringement is in the United States, and we can seize for ourselves the jurisdiction and do whatever we want with it. Is that a change in the law? Part of what is built into the BlackBerry decision’s reasoning is based on an earlier Court of Claims decision in 1976, Decca Ltd. v. United States,115 which involved a system that was a somewhat primitive ancestor to modern GPS. That system required a number of transmission stations, one of which was based outside the United States, in Norway. There was a patent claim that was directed to the system. So we had a system that was mostly in the United States but one little piece of it was outside the United States. The Court of Claims, the predecessor of the Federal Circuit, said, “That does not matter. This system is being used in the United States and it is an infringement.” In the BlackBerry case, the Federal Circuit extends that logic. A good issue in there is: Is that a qualitative change or not? I would suggest that it is a qualitative change, because what we have now, at least arguably, is a regime in which you can have the guts of the system outside the United States and it is still an infringement. That is going to be more and more important as we move forward and we start to see the technology that surrounds the flow of information through the world depending on broader, more distributed systems with global pieces. There is a related issue that we down in the trenches in patent litigation are beginning to see more and more frequently: Apart from any transnational issues, what about the situation where I have a claim to a system involving various parts and the system is being used without my authorization, but it is being used by several entities? There is no one single infringer. We have this combination infringement. Maybe it involves a telecommunications network that is operated by somebody, some service somewhere. We put all those pieces together, and there is an infringement, but there is no one single infringer I can go after. If that problem is arising — and I can tell you, it is arising with repeated frequency — then it does not take much imagination to say it is only a matter of time before you start to get the same issue in which one or more of the component pieces is located outside the United States. That begs the question: How do we deal with this? How much of the infringing activity has to be within the jurisdiction in order for it to be an active infringement? One of the things I would like to ask my learned colleagues here is: If we looked at this BlackBerry case, how would that be decided under the law of, let’s say, England or Germany? And if we changed the paradigm just a little bit, what would the impact be on infringement? This is a very real-world change. When the BlackBerry case was pending, hanging there 115

Decca Ltd. v. U.S., 544 F.2d 1070 (Ct. Cl. 1976).

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like the sword of Damocles, all of us who are, perhaps, addicted to these things started to get worried. And some people made contingency plans. They asked: “How about if I move this operation so every bit of it is offshore except for the handheld device? For example, I have a big data center in London, so I could run everything out of there, and the only thing that will be in the United States is the handheld device. Is that still an active infringement or not?” A pretty tough question to answer. It would be interesting to know. I was going to engage Jay on Voda,116 because I can’t resist, but perhaps I am out of time. I would just say there that maybe we should look at the practical problems there. What would happen in Voda if the Eastern District of Texas assumed jurisdiction and decided that a whole handful of European patents were invalid, let’s say? What would the European Patent Office or the national authorities in the various countries have to do? I suspect, when we look at it in that way, there is a reason why all of the practitioners and the bar associations and so on look at the Voda case and say, “You’ve got to be kidding. I don’t care how we get there, but the result has to be that you cannot sue for infringement of a European patent in Marshall, Texas.” MR. RICHARDS: One of the points to note about the RIM case is there are two sets of claims in there, method claims and system claims. The systems claims were found to be infringed because they were used in the United States, but the method claims were found not to be infringed. So a note for those who draft to bear in mind for how to deal with this. David, I don’t think we have heard from you yet this conference. Do you have any thoughts on any of this? MR. PERKINS: To the benefit of everybody else. It seems to me that the RIM case is not dissimilar, Robin, to your Menashe case.117 Is it? LORD JUSTICE JACOB: It is exactly the same. MR. PERKINS: There you had a gaming system and the claims required both a host computer and a player terminal. The players, the punters, were all in the United Kingdom. Their handheld terminals and the host computer were in Antigua, and then it was shifted to the Netherlands Antilles, or some other fairly soft jurisdiction. It was held, for different reasons by Robin at first instance, then by the court of appeal, that it was the system that was being infringed through the player terminals in the United Kingdom so the U.K. court had jurisdiction. But on the finer points of that I will defer to Robin. It seems to me on the Voda case that one of the answers is if you find your European patents being hijacked by the court in the Eastern District of Texas, you might try an anti-suit injunction in your home territory. I would be interested to know how the English court would view that. Would you be interested in it, English court? LORD JUSTICE JACOB: They are two things. They are quite different things under discussion here. One is the assertion of a national patent in the national court against certain extraterritorial effects. It is an assertion that the national patent is infringed. All the German cases we heard were cases of infringement of the German patent. A quite different thing is asking a national court to enforce some other country’s patent. In principle, if it can, there is no need even for there to be a national patent in the country concerned. You simply say, “I’ve got you here, you are French, you are in the 116

Voda v. Cordis Corp., 476 F.3d 887, 904 (Fed. Cir. 2007). Menashe Bus. Mercantile Ltd. & Anor v. William Hill Org. Ltd., [2002] E.W.H.C. 397 (Pat.) (Mar. 15, 2002), first instance judgment available at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/ EWHC/Patents/2002/397.html; Menashe Bus. Mercantile Ltd. & Anor v. William Hill Org. Ltd., [2002] E.W.C.A. 1702 (Civ.) (Nov. 28, 2002), Court of Appeal judgment available at http://www.bailii.org/cgi-bin/markup.cgi? doc=/ew/cases/EWCA/Civ/2002/1702.html. 117

182 S E S S I O N I I I : P A T E N T United States now, we are suing you for infringing the French patent and the German patent,” and so on and so forth — “We’ve got you here, we can sue you.” That seems to me to be a very dangerous thing to be doing. I am not going to go into the legalities, but the Eastern District of Texas is a serious threat. If the position is that you can sue European companies for infringement for doing things in Europe in the Eastern District of Texas with an American plaintiff in front of a Texan jury, something seriously is at risk. I am asked could the court want an anti-suit injunction? It wouldn’t be for me to say at this moment, would it? MR. RICHARDS: Jay, maybe you want to say something on that. I know this is an issue close to your heart. PROF. THOMAS: I’ve received a number of challenges. Let me try to respond to them in series. The first question is: How would a U.S. court notify foreign patent-granting states about the invalidity of a patent? The answer is quick and ready. It’s what the Dutch courts have done, which is they are not declaring the patent invalid; they are simply declaring that this act of infringement is not going to proceed because the right is unenforceable, without questions of the infringement position. So it is simply a matter of as between these parties whether the patent is enforceable. For those of you who know U.S. law well, this is the situation that existed in the United States prior to the Blonder-Tongue case in 1971,118 where patents were enforced regionally; there was no estoppel effect upon losing a single patent judgment. The other comments are basically ones that disparage particular courts. Certainly I am familiar with the debate in Europe about whether we ought to designate certain courts in different countries. I simply will not traffic in that conversation. It seems to me that courts are capable of resolving patent disputes and other courts don’t want to enforce the judgment because they doubt the integrity or the legitimacy of the tribunal, and they can do so. But I generally will not proceed in that conversation. In terms of the nautical reference, I took maritime law in law school. One of the big cases we read was Smith v. Condry,119 an 1843 decision from the U.S. Supreme Court that involved two U.S. ships that collided in the Liverpool harbor. The U.S. court applied British law to determine liability under the torts laws of the place where the accident occurred. So it just seems to me that, applying the maritime principles or any general principles of civil law, that there is no per se rule against litigating foreign patents. I believe the Supreme Court has made it very clear that per se rules in patent cases are inappropriate. MR. RICHARDS: Judge Hughes? JUDGE HUGHES: That troubles me, because your Voda case, as I read it, turned on the assumption or statements that courts like Canadian courts and European courts are respectable courts and quite capable of looking after patent matters themselves. What if you had instead of the case of a Syrian or a North Korean or an Iraqi patent? Would the Eastern District of Texas be quite cheerful and everybody else supporting them on the way up in declaring liability and so forth in that case? PROF. THOMAS: Well, I think extreme examples don’t overcome the general proposition. Of course I’m not advocating a uniform adoption of jurisdiction. But what I am saying is that there are factors we are capable of considering on a case-by-case basis. 118 119

Blonder-Tongue Labs., Inc. v. University of Ill. Found., 402 U.S. 313 (1971). Smith v. Condry, 42 U.S. 28 (1843).

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Is it a controversial subject matter, such as a business matter or a living invention? As a Canadian jurist knows well, the United States and Canada basically have the same statute on subject matter but they have come to very different conclusions on higher life forms. That’s the kind of area in which on a discretionary basis a court couldn’t proceed. The comment that I usually get at this point is, “Well, how will U.S. industry like it when foreign courts hear the cases?” The answer to that is simple: foreign courts do not require the permission of U.S. courts to adjudicate U.S. patents, and in fact they have already done so. For example, recently the Tokyo court adjudicated a U.S. patent and found that there was no infringement under the doctrine of equivalence, applying the Festo Rules.120 We have cases in the United States. The Federal Circuit’s predecessor adjudicated foreign patents, and we have plenty of other cases that have done so. So again, I think there is a temptation among patent specialists — and I count myself among you — that patent cases are really special, complex, and that we shouldn’t dabble in each other’s affairs, even though, of course, we are quite commonly resolving each other’s contract laws, tort laws, usury laws, insurance laws, and all manner of other disciplines. I can go to the courts of Canada and London and find all sorts of cases on U.S. laws. Again, I just do not think a special patent exemption is warranted. MR. RICHARDS: Judge Grabinski, do you want to say something on this point, because you haven’t had a chance to say anything yet? JUDGE GRABINSKI: Perhaps a comment on what Robin said about the differentiation between the cases, where a national patent is concerned, before the court of that country — infringement of a German patent being brought before a German court; or an infringement case for a U.S. or a U.K. patent being brought before a German court. In terms of the consolidation question in Europe, Professor Thomas referred to the jurisdiction of the Dutch courts. There was some sympathy among some German courts for this law. But this has come to an end. Last year we had the GAT v. LuK decision by the European Court of Justice (ECJ).121 In this decision the ECJ said: Under the Brussels Regulation, it is possible if you have, let’s say, a German defendant, that you can sue him not only for the German but also for the U.K. part, for example of a European patent; but if then, as a defense, the defendant attacks the validity of the U.K. part of the European patent, then the German court has declared itself incompetent to decide in this matter; has no longer jurisdiction. This is now the end of this cross-border jurisdiction. There have been some proposals by some scholars to amend the respective provisions of the Brussels Regulation. But this is only a proposal; it is far from becoming law. As long as the situation is as such, we will say we have no jurisdiction in these kinds of cases. Also, in practice, we never got a new case in that regard, because any defendant would say, “We question the validity of the foreign part of the European patent” and that’s the end. The other kind of situation is where it is about the infringement of a German patent but it concerns also activities outside Germany. There the German courts tend to have a rather generous approach to it. For example, a rather typical situation is that you have a big car maker in Germany someplace and you have, for example, a factory in Portugal, and they are producing an 120 Coral Corp. v. Marine Bio K.K., Case No. 1943(wa)/2002, Tokyo Dist. Ct. (Oct. 16, 2003). An English summary and comment of the case by Toshiko Takenaka are available at http://www.law.washington.edu/CASRIP/ Newsletter/Vol10/newsv10i3jp2.pdf. 121 Case C-4/03, Gesellschaft für Antriebstechnik mbH & Co. KG v. Lamellen und Kupplungsbau Beteiligungs KG, E.C.J. (July 13, 2006) (GAT v. LuK).

184 S E S S I O N I I I : P A T E N T item that is used for the car that is produced in Germany and it is also provided for the German market. In this kind of situation, if the Portuguese company knows that the item will be used for the production of the car and then the car will be distributed in Germany, I think we will accept jurisdiction with regard to the infringement of the German patent because there is a kind of contributory act, contribution to the infringement of the German part. Another kind of situation is if a company is selling its product on the Internet, maybe the company is situated in the United States, and they offer to send the product to Germany, then of course it also may be considered an infringement of a German patent. MR. RICHARD: David, I think you wanted to say something. MR. PERKINS: I think a not entirely flippant remark on this is that this perhaps indicates that international arbitration of multinational patent disputes is something that parties who are routinely in litigation between each other should seriously consider. I mean Airbus and Boeing have publicly entered into a dispute resolution mechanism where no injunctions are obtainable, only higher rates of royalties. It has been approved for competition purposes by the European Commission. It seems an entirely sensible way of resolving one’s patent disputes without the vagaries of courts in various parts of the world. There is another example, which I think is fairly public, as a result of the diaper wars between Procter & Gamble and Kimberly-Clark. They have a not dissimilar patent pact that they will go through the ADR route rather than be litigating, as they did in the United States, Holland, the United Kingdom, and probably elsewhere several years ago. LORD JUSTICE JACOB: This is providing work for judges who are retired. MR. PERKINS: I am hoping for a favorable appeal judge. LORD JUSTICE JACOB: As a volunteer. MR. RICHARDS: Nicholas, did you want to say something? MR. GROOMBRIDGE: Following on David’s remarks, I think what it shows is it seems to me there are two drivers to this. One is entirely legitimate, and it’s exactly the type of thing Jay was talking about, where there is a significant pull from the user community to say, “Look, this is just going to be better and more efficient if we do this in one proceeding. Where we have significant commonality here, why should we have to traipse around to litigate these things in a whole bunch of different national systems and have to coordinate all of that and the run of risk of this? I have already hired David White. Why should I have to come and hire Nicholas Groombridge to do a different case somewhere else?” That in itself is a perfectly legitimate goal. In fact, patents lend themselves to this. You heard Klaus’s remarks about contracts and so on. There are very few other examples where you have corresponding legal rights that are generated out of the same underlying set of facts in different national systems. That is all fine and good. But in addition to that, there is a separate strand, which is a kind of procedural arbitrage, which is one party looking for an advantage by saying, “If I am in that forum, it is going to be better for me. If I am in the Eastern District of Texas or if I” — we used to hear about “Belgian torpedoes” and such like — “that is going to work better for me, and I am going to get an advantage that I cannot get in my native system or in whatever forum I am already litigating.” That would seem to be a very good matter for what we heard this morning. That is a disturbance in the force. If what is going on here is people trying to get an unfair advantage, then the system is ultimately not going to reward that, nor should it. MR. RICHARDS: Do we have anybody from the Eastern District of Texas who wants to speak on this?

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QUESTION [Martin Adelman, George Washington University Law School, Washington, D.C.]: I have a question for Nick. I am going to defend Jay. Nicholas, let’s go back to Voda for a moment.122 The patents are actually the same and there was no language issue. For the only German patent the English version is the official version. So it is all in English. The first six figures are all the same. So we all agree on that. What if Dr. Voda, instead of — I think he was playing games, and I would have rejected his claim if I was the judge — had come in as an honest man and said, “I want it all heard in this court. I am waiving, of course, any right to a jury trial. Naturally I’m not entitled to a jury trial. I understand that. I’m not gaming the system. I want efficiency. I understand that the judge will decide damages, and that’s all we’re talking about, enhancement of damages.” Would you have the same feeling about this case? LORD JUSTICE JACOB: Me? QUESTIONER [Prof. Adelman]: No, I am talking to Nicholas because he was ranting about it. Not you, Robin. MR. GROOMBRIDGE: I may have been being a little flippant. My strong feeling is that if you have a really honest desire to try to make the system more efficient because we’ve got a lot of commonality, that’s totally fine. In fact, it really does make sense to have some form of unified adjudicatory mechanism. Incidentally, I am not suggesting that there is an institutional problem with the Eastern District of Texas or anywhere. I am only referring to the idea that seems to be prevalent, that people go to those jurisdictions because they think it is going to be better. QUESTIONER [Prof. Adelman]: Everybody goes to a jurisdiction that they think is going to be better. MR. GROOMBRIDGE: Yes, they naturally do. There is nothing wrong with that. My view, Marty, is that it makes a heck of a lot of sense. In fact, you see sophisticated users where they have the means to do exactly what David was referring to. If you see that going on, isn’t that extremely good evidence that there is a significant pull for this? People are going out and actually creating what amount to parallel systems for themselves where they can. I think that is entirely good. MR. PERKINS: But if you are the defendant, Marty, presumably, if you had any sense, you would rush off to one of the quick courts, like the English High Court, and go for a declaration of non-infringement and revocation. If you were a defendant in Eastern Texas, there is no way the Eastern Texas judge could stop you from doing that, I assume. QUESTIONER [Prof. Adelman]: That may be. But Cordis might not have been upset at having a qualified federal judge decide it all. I am assuming that Cordis honestly believes that it has a good case and there is no gaming — you are not trying to get a jury to decide damages on an English patent or a Canadian patent. You are not going to get that. You come in and don’t talk about that. You just want it in one place. Cordis may have wanted it in one place. But if I were Cordis, I would go to a district court and there is going to be a jury trial, and, instead of one patent, I am allegedly infringing four patents before a jury. That is crazy, and obviously they are going to fight it. MR. RICHARDS: Robin, you set that up. Do you want to say anything? QUESTIONER [Prof. Adelman]: I’m helping Jay because if he would get Voda to waive the jury trial and be honest, he might have a stronger case, or en banc. LORD JUSTICE JACOBS: Several things. One is, of course, there is nothing to stop parties saying, “We’ve got a dispute on. We are not going pay for an arbitrator. We won’t have a retired judge because they cost so 122

Voda v. Cordis Corp., 476 F.3d 887, 904 (Fed. Cir. 2007).

186 S E S S I O N I I I : P A T E N T much. We will just abide by the judge’s decision in one country and we will agree that it applies for everywhere.” There is nothing to stop people from doing that. Secondly, there is quite clearly the possibility of either anti-suit injuncttions if there is an assertion of infringement of a British patent or a German patent in a foreign country where nobody likes what’s going on there. The implications are quite serious. Take damages. The levels of damages are different in different places. I may even say that, by and large, they are the same principle, compensatory in the United States and in the United Kingdom; going to be compensatory, or practically gotten there, in Germany, although they are still pretty mean. JUDGE GRABINSKI: You are right. LORD JUSTICE JACOB: So what happens next? Do you now have a case even about the level of damages in Germany in front of an American trial judge? And then you have other things to consider. You on the whole might prefer to go in front of a judge who knows about patents if you think you’ve got a good case and go in front of a judge who doesn’t know about patents if you have a weak case. Everybody tries that game. The whole thing is going to be lawyers playing games, trying to get jurisdiction in one court or another court. Very weak courts might be brought into play. Nobody has done that yet. You know, the Slovakian court may come in sooner or later. There are problems about recognition of the judgment. Often you can get around that by saying, “We can recognize the judgment because this chap has got money.” That would be the way of the Americans with the Voda v. Cordis case. It is difficult. It is opening up a whole can of worms. The alternative, and one of the reasons I am deeply opposed to it in Europe, is that we’ve got to create a common jurisdiction. If you weaken that, you weaken the case for a common jurisdiction. PROF. THOMAS: Let me just add a few remarks. Regarding GAT v. LuK 123 — and I’m glad you put it into an acronym because the names are completely unpronounceable — sadly, the United States is not a member of the European Union, and in fact that holding does not apply to suits brought on U.S. patents in Europe. Indeed, it wouldn’t apply to any patents of EU Member States before European courts. It will be interesting to see, for example, if the Dutch courts continue their practice of adjudicating foreign rights, including at times U.S. rights, despite GAT v. LuK , because again we are not a party to that regulation. Marty, with the jury trial it is quite traditional that each tribunal uses its own procedures. When our Canadian jurist friend decides a case under New York contract law, I rather doubt he raises the Stars and Stripes and trades his charming accent of the north for something sounding more like Tony Soprano. Indeed, we all use our own procedures. So do federal courts when they apply U.S. state law. So I guess we are going to have to agree to disagree on that. Actually one important point. We should hire law professors rather than retired judges as arbitrators. I think you will get a much better hearing. It just strikes me again that firms, whether they engage in elaborate arbitration procedures or not, commonly operate, innovate, license, operate in different jurisdictions on the assumption that the patent rights are essentially going to provide them with the same right, which is the right to prevent competition. Now, it is true the subtleties and nuances 123 Case C-4/03, Gesellschaft für Antriebstechnik mbH & Co. KG v. Lamellen und Kupplungsbau Beteiligungs KG, E.C.J. (July 13, 2006) (GAT v. LuK).

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differ, but the way commerce acts is that you will obtain multiple patents and parallel rights in multiple jurisdictions and you will market on that basis. It is saddening to me that as lawyers we are unwilling to serve our clients and to recognize that commercial reality. The real interest, the elephant in the room, is that lawyers don’t want to lose business to the Dutch or to the Americans. That is the reality of why so many obstacles to this approach are cited, rather than the obvious advantages of consolidating what in many contexts has already been brought together. MR. RICHARDS: Anybody not from the Eastern District of Texas in the audience who has any comment or question they want to raise on this? JUDGE HUGHES: I’ll give you an example. Before I was appointed, I was an arbitrator, along with a U.S. arbitrator and a British Q.C. We had British patents, U.S. patents, and Canadian patents. We were kind of like “fries with that” when you go to McDonald’s, the Canadian patent. But we were deciding essentially the same factual subject matter, the same infringement activity, the same patent validity, and so on, but it was in an arbitration circumstance. We picked people from different jurisdictions, heard witnesses, and the whole bit. MR. RICHARDS: Any other comments or questions from the audience or the panel? LORD JUSTICE JACOB: I have just one extra comment, which Klaus Grabinski has whispered to me. In Germany judges can be arbitrators, but only once a year. QUESTION: Robin Pearson. I’m a student at Fordham. I was just wondering how the panelists feel about software, in terms of the fact that you can export it and that can be considered an infringement, and it can be replicated as a wholly foreign activity? It is before the court right now in the United States in AT&T v. Microsoft.124 I just wanted to know what your impression was of software and the nature of recreating that invention? MR. RICHARDS: I think this is part of a more general question: Exactly what is “use” from an infringement point of view? We have not really explored that in recent years. Jay? PROF. THOMAS: I am relatively unimpressed with the case. They admitted infringement in the United States of a whole disk. Under Rite-Hite Corp. v. Kelley,125 and its “but for” damage principle, they owe they entire amount as damages. So I am relatively unimpressed by the Section 271(f ) issue. I think that it could be done through common law principles. MR. PERKINS: Is your point that when it is replicated it will be brought back into the United States? QUESTIONER [Ms. Pearson]: No. The point is if we are going to consider infringement the exporting of the actual software and then the duplication of that software and then the repeated sale of that software also being considered an infringement, at least from my perspective of U.S. patent law, that is regulating wholly foreign activity. MR. PERKINS: I will give you a partial answer and pass it down the table, as usual. There was a decision by a certain judge in England in 1998, Union Carbide v. BP Chemicals,126 which I think said developing a process that was done in the United Kingdom for licensing abroad is not an infringing use in the United Kingdom. So I think you wouldn’t get the uses. I don’t see what you are doing outside the jurisdiction would be a use within 124 AT&T Corp. v. Microsoft Corp., 2004 WL 406640 (S.D.N.Y. Mar. 5, 2004), aff’d, 414 F.3d 1366 (Fed. Cir. 2005), cert. granted, 127 S. Ct. 467 (U.S. Oct. 27, 2006), argued Feb. 21, 2007, decided Apr. 30, 2007 (slip op.), available at http://www.supremecourt us.gov/opinions/06pdf/05-1056.pdf. 125 Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3rd 1538 (Fed. Cir. 1995) (en banc). 126 Union Carbide Corp. v. BP Chems., Ltd., [1999] R.P.C. 409; 22(2) I.P.D. 22012, (Ct. App.), reversing in part [1998] R.P.C. 1 (Pat.).

188 S E S S I O N I I I : P A T E N T the jurisdiction where you want to sue. I think it would be much the same principle, wouldn’t it, Robin, as you decided then? LORD JUSTICE JACOB: I remember nothing about it whatever. Did I decide that? Software is a particularly difficult example because software is only patentable in the United States. So you are assuming somebody sends out of the United States an infringing copy of software, which goes to Europe or China or wherever, where it is replicated in vast quantities. Presumably, the question is: Can you get damages for the one export or damages for the vast amount of replication that went on following? Well, that may depend on a lot of other facts too. If it was possible to get hold of this some other way, take out a lawful copy, then there would be no damage if it was subsequently replicated across China, because it is not unlawful in China to do that. It may be copyright infringement, but put that on one side. So it may be you are in a position to say there are no damages except the single sale. I would have thought that might be a reasonable answer. But a lot depends I think on the facts in some detail. MR. RICHARDS: Thank you. Time is up.

SESSION III — PATENTMATTER PART C: PATENTABLE SUBJECT

SESSION III — PATENT

Part C: Patentable Subject Matter: The Road Ahead for Software and Business Method Patents

Moderator PROF. MARTIN J. ADELMAN

George Washington University Law School (Washington, D.C.)

Speakers BART EPPENAUER

DAVID J. KAPPOS

Chief Patent Counsel, Associate General Counsel, Microsoft Corporation (Redmond, WA)

Vice President & Assistant General Counsel, Intellectual Property, IBM Corp. (Armonk, N.Y.) RON MARCHANT

Former CEO, U.K. Patent Office (London)

Panelists DR. ANNE FITZGERALD

PROF. JOHN R. THOMAS

Queensland University of Technology (Brisbane)

Georgetown University Law Center (Washington, D.C.)

PROF. ADELMAN: We are going to start the last session so that we can finish promptly at 6:00 o’clock and enjoy a drink or two afterwards. We had a lively session earlier. Now we are going to discuss patentable subject matter, software and business method patents, maybe even broader than that, because reading for this session I read the Bloomberg opinion of Mr. Justice Pumfrey.1 He has a whole section there that essentially slams the U.S. Supreme Court (at least Justices Breyer, Stevens, 1 Joined Cases Nos. CH/2006/APP/0487 & CH/2006/APP/0481, Patent Applications of Pablo Cappellini and Bloomberg Ltd., [2007] E.W.H.C. 476 (Pat.) (Pumfrey J.) (holding that mental act exclusion could be avoided by “tethering” the claim to a physical article (confirming his earlier decision in Halliburton v. Smith, [2006] R.P.C. 653) (Mar. 13, 2007)), available at http://www.bailii.org/ew/cases/EWHC/Patents/2007/476.html.

190 S E S S I O N I I I — PA T E N T Souter, dissenting) in LabCorp.2 I do not know if he did it intentionally (I suspect he did), but it shows that this issue of subject matter may have broader implications than software and business method patents. We have a really incredible panel here: Bart Eppenauer, Chief Patent Counsel for Microsoft; David Kappos, Vice President and Assistant General Counsel for Intellectual Property at IBM; and Ron Marchant, who is the former CEO of the U.K. Patent Office, who already met earlier this morning. As panelists we have Dr. Anne Fitzgerald from Queensland University of Technology and Jay Thomas of Georgetown University Law Center, with whom I was fighting just a few moments ago in the previous panel. I am going to focus on why we have any of these limitations at all. Normally, they make a mess of the law. If you really want to talk about a mess, look at the exclusion for medical methods. The Europeans, in order to deal with the exclusion for medical methods, have to declare under the European Patent Convention that certain prior art isn’t prior art.3 And then, the Swiss have to invent a new claim form that nobody understands, which we understand avoids this exception for medical methods.4 I was doing some research on the sulfa drugs, because actually that is one of the great inventions of the twentieth century. It started all the pharmaceuticals from the dye industry in Germany. It turned out that sulfanilamide, which was the first, actually was not patentable as a medical method because that wasn’t patentable at the time and somebody had published a paper on sulfanilamide. They didn’t know what it was; they just had made it. That, of course, voided patentability.5 It created all kinds of problems. We are going to hear from our distinguished speakers on the question we keep asking: Why do we have any exclusions at all in patents? Why isn’t everything patentable — except that it has to be nonobvious (and we should have a vigorous nonobvious standard); obviously it has to have utility; and it has to meet the patent specification, it has to meet all the proper standards of the claims? With that, Bart, do you want to start off ? MR. EPPENAUER: While this panel has a focus on software and business methods, the larger theme of the Conference is “Intellectual Property Law Over the Next Ten Years” and, in that context, taking a look at patentable subject matter. Clearly, I believe, and I think many would believe, that software and business methods are not going to be the final frontier in terms of new patentable subject matter that we grapple with over the next ten years. We can already see today some issues developing around examining, defining, and patenting new innovative areas, such as folded proteins or increased mergers of biotechnology and information technology. Certainly from my perspective, as you might imagine, some of the greatest innovations over the last twenty years have occurred with respect to computer software, computer hardware, telecommunications, Internet-based services. If you disagree, just ask yourself what you would do without your BlackBerry, your SmartPhone, your iPod, or whatnot. Life would be maybe harder, or maybe easier — I don’t know; sometimes I wonder. These new inventions in these areas have certainly transformed the way we work and the way we 2 Laboratory Corp. of Am. Holdings v. Metabolite Labs., Inc., 126 S. Ct. 2921, slip op. (June 22, 2006) (Breyer, Stevens, and Souter, J., dissenting), available at http://www.supremecourtus.gov/opinions/05pdf/04-607.pdf. 3 Convention on the Grant of European Patents, signed at the Munich Diplomatic Con-ference for the Setting up of a European System for the Grant of Patents on Oct. 5, 1973, 13 I.L.M. 270 (1974), 1160 U.N.T.S. 231, art. 52 [hereinafter EPC], available at http://www. epo.org/patents/law/legal-texts/epc.html. 4 Switzerland Patent Law (Jan. 1, 1996), available at http://www.jpo.go.jp/shiryou_e/s_sonota_e/fips_e/ switzerland/pl/mokuji.htm. 5 German Patent Act (last amended by Laws of July 27 and Aug. 6, 1998), available at http:// www.ip-firm.de/patentact.pdf.

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live, and they are creating some widespread societal impact. The patent system needs to address these areas of innovation in the same way it has addressed areas of innovation in the past that have caused controversy. It should also be equipped to handle new frontiers of innovation that will follow in the future. In that respect, we really need to ensure that the patent system can adapt to and assimilate new, innovative technologies, handle them in a rapidly advancing way, and not shut them out. With that, just some brief historical context. If you look at, particularly, U.S. history, whenever there has been a major industrial renaissance and new domains of innovation have arisen, there have been questions about the expansion of patentable subject matter and controversy around that. If you look at the telephone era, in the latter 1800s, railroads, telegraphs, patenting started increasing substantially, and there were calls for outright limitations or complete elimination of the patent system, and, particularly with respect to those new technologies, questioning the quality of those patents and providing some sort of limitations on those patents. At that time, Congress and the courts recognized that the answer was not to eliminate the patent system, or even limit the subject matter of patents, but instead to adapt to the new technological era by reforming the system and reforming both the courts and the Patent Office through procedural reforms and other reforms in patent examination, such as more resources for the Patent Office.6 As we sit here today at this Conference, in the twenty-first century, it seems that we could conclude that we are dealing with a brand-new situation that has not been addressed before — in fact, a lot of commentary and rhetoric seems to indicate that that is the case. But, in fact, I would submit that there are very close parallels between what we are talking about today, with the rapid technological advancement and asking questions about patentable subject matter, and what has been dealt with as long ago as the latter 1800s. This Conference has discussed some of the driving forces behind the calls for reform or attacks on intellectual property. A lot of those could be competitive. They could be ideological. I think, from the information technology perspective, for certain, litigation and the increase in litigation has really been a key driver in the call for reforms. There has been a significant increase in patent litigation. I think that is well recognized. Recent estimates show that the number of patent lawsuits filed annually in the U.S. has grown in the last few years from under 1,000 in the 1980s to over 2,500 today. Certainly, from Microsoft’s perspective, we see things from both sides. On the one hand, we invest $6 billion in research and development annually, and we are a very large intellectual property holder. But on the other hand, due to our balance sheet and our popular products, we are the largest target of patent litigation in the country. We typically spend up to $100 million annually to defend thirty-five to forty patent infringement lawsuits at a time, nearly all of which involve companies that do not really make products and do not really sell anything or have any business, other than suing for a lot of money. In our experience with litigation, there really is a very wide chasm between the patent that is issued by the Patent Office and the patent examiner, on the one hand, what a patent holder much later will assert is the scope of the patent, and then what might be deemed to be the construction of the claims by the district court. So what we really need is a clear and consistent claim construction between what a patent examiner actually allows and what the courts construe the claims to be. 6

See Patent Act of 1870, Ch. 230, 16 Stat. 198–217; Patent Act of 1897, Ch. 391, 29 Stat. 692–694.

192 S E S S I O N I I I — PA T E N T It is a challenging issue. One way to improve that would be more specialized judges or magistrates at the district court level. That is a subject of some recent legislation, Representative Darrell Issa’s bill in the House and Senator Orrin Hatch’s bill in the Senate, which we support.7 Certainly damages issues in the information technology space have become very problematic, in particular, what the proper royalty base for patent damages is when you have complex products and systems involving hundreds or thousands of component parts. A very recent jury verdict, unfortunately for Microsoft, to the tune of $1.52 billion (just a jury verdict right now; certainly we are trying to turn that around) relating to MP3 audio technology does not quite seem to have a proper valuation. I think it is indicative of some problems with damages law that we are trying to address.8 So taking a look at patentable subject matter, where should we go from here? First, the Supreme Court is asking questions and taking a lot of patent cases. It would seem natural to look at the Supreme Court for guidance on where to go in the next ten years. I think it is well understood for Section 101 analysis. In Diamond v. Chakrabarty9 the Court recognized Congress’s intent that Section 101 extend to “anything under the sun made by man,” and that is the test. Similarly, if you look at cases such as Gottschalk v. Benson10 and Diamond v. Diehr,11 they seemed to make clear that a patentable process must meet some physical requirements. To be patentable, the process should be tied to the use of some physical apparatus or it must transform an article, which is a physical thing, into some different state or thing. This could be thought of as, perhaps, a physicality requirement. Cases in the Federal Circuit also recognize this. Marty asked the question, Why should there be any limitations? The limitations on mathematical algorithms by themselves, laws of nature, natural phenomena — that is recognized, understood, and that seems appropriate. But short of that, I tend to agree that the law ought to be that “anything under the sun made by man” is patentable, and then you look to the rest of the patent statute to determine patentability. One area that would really help along those lines is a stronger enforcement and application of Section 112. That is particularly true for patents that use broad functional language with higher levels of abstraction to cover their embodiments, but also perhaps embodiments that aren’t disclosed by their patents. In those sorts of functional cases, which we often see in litigation against us, where claims are expressed with words at a high level of abstraction, which clearly don’t cover anything that is disclosed in the specification, it would be appropriate to apply Section 112, paragraph 6, to the construction of those claims, even where those claims may not be written as a means for or a step for performing a particular function.12 That would put limits on the claims to just those disclosed in a specification and their equivalents. That is consistent with two recent

7 H.R. 34, 110th Cong.: To establish a pilot program in certain United States district courts to encourage enhancement of expertise in patent cases among district judges (passed by House, Feb. 2, 2007), available at http://www.govtrack.us/congress/bill.xpd?bill=h110-34. This bill is identical to S. 3923 (introduced Sept. 1, 2006), available at http://www. govtrack.us/congress/bill.xpd?bill=s109-3923. 8 Alcatel-Lucent Tech. v. Microsoft Corp., 470 F.Supp.2d 1180, 2007 WL 172221, at *1 (S.D. Cal. Jan. 12, 2007) (verdict set aside Aug. 6, 2007). 9 Diamond v. Chakrabarty, 447 U.S. 303 (1980). 10 Gottschalk v. Benson, 409 U.S. 63 (1972). 11 Diamond v. Diehr, 450 U.S. 175 (1981). 12 35 U.S.C. § Section 112 ¶ 6 (allows an applicant to express an element in a claim for a combination as a means or step for performing a specified function without the recital of structure in the claim).

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Federal Circuit cases, Lizard Tech13 and Phillips,14 where the court emphasized the importance of looking at the specification in assessing construction and written description and adequacy of the claim. This solution should also help prevent a situation where, years later, someone drafts claims that have no relationship to the disclosed embodiment whatsoever. To conclude, in our view we should not move down a path where we create special rules or limitations on new and innovative technologies. Instead, we should look to reform the system on clear sets of principles, ensuring patent quality, more work sharing and collaboration between global patent offices, and minimizing litigation abuse where it occurs. PROF. ADELMAN: Thank you, Bart. And thank you for the correction. I didn’t mean to say science or algorithms per se, but any use of them or scientific principles, in spite of what Mr. Justice Breyer said in his poorly reasoned objection to the denial of Certiorari in LabCorp.15 Let’s move on now. I think we will go first with David, and then we will finish with the Patent Office. MR. KAPPOS: Thanks for inviting me to speak. Let me start off by saying that it is a pleasure to be at the Fordham International IP Conference, where you see this tremendous diversity of views and a little bit of fun debate going on that we do not see so much at IP conferences these days. I will try to help that along by taking some different views than what you have just heard from Bart on a few of these subjects. What I am going to do is go very practical, by just sort of ticking off the answers to some of the questions that Hugh Hansen posed in the agenda item, and offering my view that the answer to the “dilemma” of business method patents and software patents is far from unifaceted. In fact, it involves lots of different portions of a solution coming together, some involving what I will call tinkering with the statutory subject matter requirement, some involving very practical things that need to go on in the U.S. Patent Office to address patent quality; and at least one involving the KSR case that we are all waiting to hear about here.16 I will start by separating business method patents from software patents in the analysis because I think that you have very different policy concerns that come about between the two of them. In the area of software patents, the way I look at their relationship as statutory subject matter is that software is just a language — it’s like French, it’s like Spanish, it’s like English — it is a medium of expression for an algorithm. If the underlying algorithm happens to be an invention, there is absolutely no policy-based or principle-based justification for removing it from patent eligibility because it happens to have been expressed in “French,” software in this case. We see that all the time in the information technology industry, where we regularly see ideas initially embodied, proven out in software, then implemented in hardware, then later moved into software again, then later moved into ASICs. It’s all an issue of where the technology is most effectively implemented. It has nothing at all to do with the quality of the invention. 13 LizardTech, Inc. v. Earth Resource Mapping, Inc., 424 F.3d 1336. (Fed. Cir. 2005) (Rader, J., dissenting), available at http://www.fedcir.gov/opinions/05-1062.pdf. 14 Phillips v. AWH Corp., 376 F.3d 1382 (Fed. Cir. 2004), available at http://www.fedcir.gov/opinions/ 03-1269.pdf. 15 Laboratory Corp. of Am. Holdings v. Metabolite Labs., Inc., 126 S. Ct. 2921, slip op. (June 22, 2006) (Breyer, Souter, and Breyer, J., dissenting), available at http://www.supremecourtus.gov/opinions/05pdf/04-607. pdf. 16 KSR Int’l v. Teleflex, Inc. et al., 127 S. Ct. 1727 (2007). [Note: See Supreme Court decision, Apr. 30, 2007, available at http://www.supremecourtus.gov/opinions/06pdf/04-1350.pdf.]

194 S E S S I O N I I I — PA T E N T So I can’t get my head around how you would discriminate against an invention based on the medium in which it is instantiated, how you would say “we don’t want patents in Spanish but we are okay with having them in Portuguese.” So that is to me the issue with software patents. I think they absolutely should not be discriminated against. Business method patents are a lot trickier subject in my view. The analysis, in my view, cannot actually close. It comes down to almost an article of faith or a decision as to whether you feel that innovative business methods need to be protected by patents or not. There are certainly arguments on both sides of that issue. But there are a couple of things that uniquely trouble me about business method patents. One of them is that they seem to have a pernicious side effect. This is not an issue of obviousness-based examination or whether they meet some criterion for being fine inventions or not. It goes to the fact that, because business methods are inherently not tethered to technology, they tend to preclude all technical solutions to the problem that is covered by the business method. So I see a fairly uniform problem with business method patents where the “problem” winds up being the subject of the patent claim, not a solution to the problem. The effect of that is that all technical ways to solve the problem wind up being encompassed by the patent claim. That is a unique problem that causes me to be more cautious about business method patents than about software-based invention. The other question — and this really comes down to an article of faith — is whether you feel incentives are needed for non-technological business method innovation. I will not claim to know the answer to that question. Every time I think the answer is “no,” then I see some great business method innovation come along and I find myself saying, “God, I wish I would have thought of that.” So I am not going to try to answer that question. I am going to say that question, though, is much more in debate for business methods than it is for technology-based innovation. So that’s business methods and software patents. Now I will very briefly address some of the other questions that were posed in Hugh’s subject matter materials for us. What are the other parts to the solution? Strengthening the obviousness standard is clearly one of them. The Patent Office is clearly challenged, the courts are clearly challenged, all of us in industry are challenged, to understand where the obviousness standard is, especially applied to software innovation and business method patents. I think that the teaching/suggestion/motivation (TSM) test is fine. But, as will hopefully see from the Supreme Court in KSR, it does not need to be the only test.17 I think that, particularly in the software and business method area, applying some kind of rebuttable presumption that a person having ordinary skill in the art would have been automatically motivated or would have known to combine references together if they’re both in the same field as the problem that the invention addressed, I think some kind of presumption like that that could be rebutted by the patentee, thereby reducing into the written record the debate for it to be challenged openly or not challenged openly later, is a sensible part of the solution to the obviousness issue. Lastly, I will say the other part of the solution to business method patents and software 17 See id. [Note: The decision held that Graham v. John Deere Co., 383 U.S. 1 (1966), controls obviousness; that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws”; and warned that a rigid application of the teaching/suggestion/ motivation test as a litmus test for obviousness is inconsistent with the Graham framework, but stopped short of rejecting the TSM test outright. Simply put, the TSM shortcut for an obviousness analysis is no longer available. The Court’s decision requires a return to full Graham analyses when assessing the obviousness of patent claims. Importantly, the Court’s opinion touches on several other issues, including the roles of “hindsight bias” and common sense in an obviousness inquiry, a question about the rationale for affording a presumption of validity to the patent-in-suit, which avoided a Graham analysis during prosecution, and a rejection of the rule that “obvious to try” is per se insufficient to show obviousness.]

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patents clearly lies in improving the patent examination process. That is where you get to some of these tools that the U.S. Patent and Trademark Office (PTO) is now looking at using: peer-to-patent, or what is also sometimes known as public patent review, that the PTO has undertaken. A number of companies in the industry, including Bart’s and mine, are trying to help the PTO find a way to tap into the almost inexhaustible supply of technical expertise all over the world that can pinpoint prior art and direct it into the Patent Office to help examiners in a very, very effective way. A terrifically practical project. It has got to be able to work. It can advance us a long ways in helping the PTO examiners, and I’ll say also in the Japanese Patent Office (JPO), the European Patent Office (EPO) — really every patent office that wants to use this technique. One other example I will give, which I think is a very practical thing that the Open Source community is working on, is turning those many, many millions of lines of Open Source software out there, which are already by definition in the public domain, into searchable prior art so that patent examiners and members of the public can find it and direct it to the examination of patent applications, obviously particularly in the software area, helping the PTO to do a much better job. I think if we apply this combination of some practical approaches that could help the PTO improve patent quality, along with strengthening the obviousness standard, and again tinkering with statutory matter, we can go a long way toward finding whatever the right answer is to business method patents, and certainly for software patents, making sure that the patents that come out of the PTO are good ones and not bad ones. PROF. ADELMAN: Let’s hear from Ron now. MR. MARCHANT: Being a non-lawyer, I feel somewhat intimidated being sandwiched between two lawyers here on this topic. You should have been listening to Bob Hart at this point, but Bob couldn’t turn up, so they asked me to stand in and talk about the U.K. experience. The downside to that is that Bob was an expert witness in the Aerotel/Macrossan case18 and knows what he is talking about. The upside is that, as well as getting Bob’s paper,19 I hope you will also get a view of what it means on the ground for the U.K. Patent Office and where that might be heading in Europe too. I think it is important to start from the comment Hugh made yesterday. In the United Kingdom, we come from a general background that patents are an exception to the ideal of competition and that we need a justification for creating monopolies. Therefore, within both the U.K. law and the European Patent Convention, we have exceptions to patentability, almost ideological statements of “we will not grant patents for the following.” In the United Kingdom it is Section 120 and in the European Patent Convention (EPC) it is Article 52.21 It is important to bear that in mind. I remember a few years ago, when I first became Director of Patents, we had a Chief Executive and Controller General who was going around the world saying to people that you couldn’t get patents for software in the United Kingdom. We had to correct, that because you could obtain patent protection if there was a technical effect. But we were 18 Aerotel Ltd. v. Telco Holdings Ltd. and Others and Patent Application by Neal William Macrossan, [2006] E.W.C.A. (Civ.) 1371, ¶ 1, available at http://www.bailii.org/ ew/cases/EWCA/Civ/2006/1371.html. 19 Robert Hart’s paper, Patentable Subject Matter: The Road Ahead for Software and Business Method Inventions in Europe and the U.K., is included as Appendix A to this Session. It also available in pdf format at the Conference Web site, http://www.Fordhamip conference.com. 20 U.S. Patents Act 1977, as amended Apr. 29, 2006, § 1, Patentable Inventions, available at http://www. jenkins-ip.com/patlaw. 21 EPC, art. 52, Patentable Inventions, available at http://www.european-patent-office.org/legal/epc/e/ ar52.html#A52.

196 S E S S I O N I I I — PA T E N T troubled by defining this whole question of “technical effect.” I will be coming back to that. As time went on, we became concerned that we were getting engaged in form rather than substance. People were saying things like, “Well, you can have a patent for software if is claimed on a carrier,” such as a disk carrying a program. Intellectually that is pretty thin, not only because you are actually looking in the wrong direction, but a lot of software these days, as you know, doesn’t come on a carrier at all; you download it over the Net onto your PC. So we issued a Practice Note basically saying we would take claims directed to programs as well as carriers providing they had a technical effect.22 We were aware that we weren’t doing things quite the same way as the EPO, partly because of precedent decisions in the U.K. courts, but by and large — and I think you have heard this said before — we were getting similar results to the EPO. There was lots of confusion. Therefore, we welcomed the European Commission’s initiative for the Computer-Implemented Inventions Directive.23 The stuff really hit the fan at that point, because our ministerial post bag was bigger than it has ever been before or since, mainly letters from anti-patent lobbyists. Our Minister, Lord Sainsbury, at the time took a very courageous step. He decided to tackle this head-on and called in to a series of meetings all the people who had written, almost uniformly saying we should just ban patents for software, or even patents altogether. I have never seen as many anoraks in the same place other than on the top of a mountain. It was really quite incredible. Lord Sainsbury was very courageous. He engaged in a debate and he said, “What we are trying to do here is clarify, not extend, patent protection.” But as you know, the European Parliament didn’t buy the proposition. The governments of Europe and the IT industry I think were comprehensively out-lobbied by the anti-software lobby. Several lessons were learned, not the least of which, I think, was that the European Commission retired hurt into a shell, and we are not getting very much in the way of strong leadership in terms of IP these days. So it didn’t help us. We still have confusion. So what happened next? The next thing is the independent Gowers Review.24 I am not going to say much because Gowers himself doesn’t say much. In the Report, almost without context, there was an almost throwaway line, “The U.K. should continue its current policy vis-à-vis software, business methods, and genetic patenting.” No real argumentation beyond that. So that set the political scene. We than had Aerotel/Macrossan,25 which for us basically settles the situation for the foreseeable future. Aerotel/Macrossan looked at a new four-step test for us to apply in terms of patentability: 앫 Step 1: Construe the claim, actually assess what the claim is saying. That sounds pretty obvious. 앫 Step 2: Identify the actual contribution embodied in that claim. Okay, that’s going to 22 U.K. Intellectual Property Office, Practice Note, Patents Act 1977: Patentable Sub-ject Matter, Nov. 3, 2006, available at http://www.patent.gov.uk/patent/p-decisionmaking/p-law/p-law-notice/p-law-notice-subjectmatter.htm. 23 EC Proposal for Directive on Patentability of Computer-Implemented Inventions, available at http://ec.europa.eu/internal_market/indprop/comp/index_en.htm. 24 U.K. Treasury, Gowers Review of Intellectual Property (Dec. 2006), available at http://www.hm-treasury. gov.uk/media/6/E/pbr06_gowers_report_755.pdf. 25 Aerotel Ltd. v. Telco Holdings Ltd. and Others and Patent Application by Neal William Macrossan, [2006] E.W.C.A. (Civ.) 1371, available at http://www.bailii.org/ew/ cases/EWCA/Civ/2006/1371.html.

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be provisional because at this stage you haven’t done the search and you are basically taking the alleged contribution plus the examiner’s judgment. 앫 Step 3: Ask whether that contribution covers the excluded area. If it fails that test, it is rejected. 앫 Step 4: If it passes that test — and it can pass that test even if it partially covers the excluded area — you then assess whether the contribution is technical. So that test that we were originally trying to put up front is now the last of a series of tests. What does that mean? We won’t be starting to search every single claim for software just to check the contribution. We will take this initial decision because we are entitled to say “a search will form no useful purpose,” and examiners will continue to make that judgment. We have never accepted, despite it being argued a few times, that a useful purpose is somebody deciding whether to file abroad in a country where claims are allowed for software. The other thing is that the decision makes clear that Article 52 of the EPC is not a list of exceptions as such but a positive category of things that are not patentable. That means that the principle of interpreting exceptions now does not apply in this case. That actually means less flexibility in one sense, because we will not be giving the same benefit of the doubt on interpretation of law as we had been previously. If there is an interpretation in questions of fact, it may well come along. The decision doesn’t cover mental acts and schemes, rules, and so on, but it does indicate that perhaps the non-patentability does not apply to electronic means for doing mental calculations. The form of the claim will probably be more significant now than in the past, because you can put a question of carrier, the program itself, or use. It may well be that people will think very carefully about how they formulate the claim and the form now will be more important than it was when we had our original practice correction, which in a way we have had to partly reverse. We did some tests on old decisions and adopting the new approach. If you look on our Web site, http://www.patent.gov.uk, you will find that by and large we thought the outcome was probably going to be the same again. As I think you know, Lord Justice Robin Jacob asked the EPO Enlarged Board of Appeal to make a decision so we get some consistency across Europe. The president was advised not to take that course because there was no legal need for it at the moment.26 Not many people in the United Kingdom — the attorneys, ourselves, and I think Robin, though I can’t speak for him — are terribly happy with that. So I think it’s a “watch this space,” because there is now a discrepancy between the way we will be doing work and the way the EPO is likely to be doing work. That will have an impact in terms of people choosing where and how to file. So it is clear for us. It is not consistent across Europe. We have a very clear political direction from the government’s acceptance of the Gowers Review that we stay roughly where we are ideologically. My answer to the question that was asked at the beginning of this session — what is the road ahead for business methods and software? — is that in the United Kingdom it is short and rocky, and potentially we are not heading anywhere other than where we are. 26 See Letter from Alain Pompidou, president of the EPO, to Lord Justice Jacob, advising that he has “decided that at the moment there is an insufficient legal basis for a referral under Article 112(1) (b),” and that “the appropriate moment for a referral would be where the approach taken by one Board of Appeal would lead to the grant of a patent whereas the approach taken by another Board would not,” available at http://www.patent.gov.uk/ patent/p-decisionmaking/p-law/p-law-notice/p.law-notice-subjectmatter/p-law-notice-subject matter-letter.htm.

198 S E S S I O N I I I — PA T E N T PROF. ADELMAN: We now have found out that the United Kingdom is engaging in this four-step enterprise to determine whether the claim is statutory. I am not sure what is achieved by all of that and whether it is really very wise, but perhaps it is what they have to do because of the decisions. We have a couple of panelists who may want to comment. Is a standard that everything is patentable if they meet the patentability standards, including some of the suggestions made by our speakers, is that better than the English four-step test? Jay, since you’ve never been a fan of software patents, you probably like it. But maybe you don’t. I don’t know. PROF. THOMAS: I will just offer a few observations on your comments. [Slide] I put this slide up a few minutes ago. Some of you are probably wondering what exactly that photo was. It is a patent diagram that proprietizes the method of making a drawing and performing a psychological analysis. Have a rather Spartan décor in your New York hotel room? Well, if you would like something that is a little more aesthetically pleasing, I’ve got the patent solution for you. [Slide] Wonder what this image is? Some of you have probably seen it before. It describes the product of the process that is laid out there for you. It may seem a little unusually aesthetic. [Slide] This patent claims a technique of exercising your mouth by moving your tongue within your mouth. PROF. ADELMAN: Jay, we need some argument, not silly patents that are obvious. PROF. THOMAS: Of course, the plot is thickening as the story line patents proceed through the Patent Office. Why do we have statutory subject matter limits? I think, Marty, your question was “Why do we have any at all?” But then you conceded that mathematical equations, scientific principles were not patentable. PROF. ADELMAN: No, no. I have only conceded the mathematics on pieces of paper. PROF. THOMAS: Okay. So you conceded there are some spaces that are not patentable. PROF. ADELMAN: Science. PROF. THOMAS: So the question is: Are there other spaces that are not patentable? Let me reframe your question. Marty, I know you started out in anti-trust, so the concept of rule of reason and per se rules are apparent to you. For those of you who are not steeped in our rather obscure antitrust doctrines, we have a per se rule of antitrust violation. We recognize that sometimes a prohibitive per se rule is going to block conduct that is not anti-competitive. But we do it because of our long history recognizing that such conduct is likely to be anticompetitive, and also to promote ease of decision-making. Similarly, the statutory exclusions for patentability operate in the same way. I would certainly like to ally myself with David Kappos and his remarks about certain patents claiming all solutions to a problem. I would add the patent system is increasingly encroaching upon our traditional liberties to speak, to talk, and to move our bodies. I think we should think very carefully before we allow the patent system to embrace these areas. Statutory subject matter is a very important principle in patent law, unlike copyright, because in copyright there are a number of ameliorating doctrines —a fair use privilege exists, and there are dozens of compulsory licenses written into the statute. But not so in patent. So when we make the subject matter decision, the resulting patent enjoys all the potent proprietary interests that all other patents get. It would be easy to say that all subject matter, “anything under the sun,” is patentable. But that is not what our statute says. That is also not what over two centuries of our traditions and the traditions we inherited from the Statute of Monopolies says.

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Marty, you have made fun of Swiss-style claims and other approaches, saying that it is hard. I think some hard things are worth doing, so I defend that practice. PROF. ADELMAN: I am in favor of the Swiss form claims, but they should not be necessary. PROF. THOMAS: I also would like to ally myself with the U.K. Patent Office. In fact, your Practice Note on Software and Business Method Patenting is obligatory reading in my International IP class.27 I also think that statement’s perspective on the role of the patent system in our competitive market is the most appropriate one concerning the patent system. I also come from a “competition first” perspective. If we do not know what we are doing when we allow the patent system to enter disciplines that it has traditionally not approached, I think we ought to be chary and proceed with caution. PROF. THOMAS: Anne? DR. FITZGERALD: Marty, you asked the question should we have exclusions from the scope of patentability at all. Well, the reality is you are actually looking at it. In Australia, we actually have virtually no exclusions from the scope of patentability. There is essentially only one, which is human beings and processes for their generation. This applies to the standard patents. We have an innovation patent system as well. And what’s more, we do not actually have a real definition of invention, or we have a very fuzzy definition of invention, which was purposefully kept there when our Act was redrafted in 1990.28 So we actually have invention defined in terms of manner of manufacture, referring specifically to Section 6 of the Statute of Monopolies from 1623.29 In fact, the leading case that interprets what that means basically, as many of you would know, is the High Court’s NRDC case in 1959,30 which basically says that the question to actually ask is: Is this a proper subject of a patent according to the principles which have been developed from the application of Section 6 of the Statute of Monopolies? The Australian courts have been quite reluctant to actually draw limits. Our legislature has been reluctant to draw limits. We have had software patents granted in Australia since the IBM decision in 1991.31 We have had business method patents implemented in software and hardware. We have not had any pure business method patents granted. The Advisory Council on Intellectual Property looked at this issue a couple of years ago and came out with a report in 2004 saying we should keep the law as it is.32 They specifically looked at whether we should go the U.K. route of introducing, essentially, a technical effects test and rejected that. The other factor that we have operating in our jurisdiction is the fact that as of 2004 we entered into the U.S.-Australia Free Trade Agreement.33 So essentially, if there were to be 27 U.K. Intellectual Property Office, Practice Note, Patents Act 1977: Patentable Subject Matter, Nov. 3, 2006, available at http://www.patent.gov.uk/patent/p-decision making/p-law/p-law-notice/p-law-notice-subjectmatter.htm. 28 Patents Act 1990, available at http://www.austlii.edu.au/au/legis/cth/consol_act/ pa1990109. 29 Statute of Monopolies 1623, available at http://www.ipmall.fplc.edu/hosted_resources/lipa/patents/ English_Statute1623.pdf. 30 National Research Dev. Corp. v. Commissioner of Patents, (1959) 102 C.L.R 252. 31 IBM v. Commissioner of Patents, (1991) 22 I.P.R. 417. 32 Advisory Council on Intellectual Property, Patents and Experimental Use (June 17, 2004), available at http://www.ausbiotech.org/data/downloads/GM%20Crops%20-%20Preparing%20a%20Pathway%20to%20Mar ket.pdf; see also Advisory Council on Intellectual Property, Report on a Review of the Patenting of Business Systems, available at http://www.acip.gov.au/library/bsreport.pdf. 33 U.S.-Australia Free Trade Agreement, May 18, 2004, available at http://www.ustr. gov/Trade_Agreements/ Bilateral/Australia_FTA/Final_Text/Section_Index.html.

200 S E S S I O N I I I — PA T E N T any major disparity between U.S. and Australian practice in this area, I think it would certainly act to our economic detriment. We are operating in this context where I think it is most likely that our law is going to continue to actually track the U.S. law. For us, then, it becomes important to look at the methods or the steps that are actually being taken at the moment to really address the deficiencies of the U.S. system. I think that the Community Patent Review and some of the Open Source initiatives are going to be quite important. They are not very high-profile, people are not really talking about them yet in Australia, but I think that that kind of system is going to be relevant. We have an open and transparent patent application system. Applications are in fact published no later than eighteen months after they are filed. So there is actually opportunity for objection to be made to the grant of a patent before it is granted. There is also opportunity for post-grant revocation proceedings. So there is actually a lot built into the system to guard against the grant of patents that really are not warranted. MR. MARCHANT: May I comment? There is a huge philosophical debate about exclusions. I do agree that the silly patents seriously color that debate and they almost divert attention. Silly patents bring the whole issue into disrepute. That is why we were pleased when Gowers said the United Kingdom would join in the peer review scheme, and we are working on doing that. The other thing is that, like Australia, we have publication within eighteen months, at which point Section 21 of our legislation kicks in, where third parties can bring prior art to the attention of the examiner. They do not become party to the proceedings by doing so, but they just bring it to our attention. It is very rarely used. I remember that from the time when I was an examiner. Again, the Gowers Review said that we can find a way, perhaps using IT, to make that an easier job. I think it is really important that we do improve the overall grant process. Daft patents, regardless of which field they are in, but particularly when they are in this area, really make the system look disreputable. And trivial patents exist in all areas. I was in Washington not long ago. If you go to the art gallery in the old USPTO building, there is a little corner where they have some USPTO exhibits. I took a picture. It says: “Many people regard patents granted by the USPTO as trivial.” It was some sort of egg-cooking device. So we have not moved on that much in a couple hundred years. PROF. ADELMAN: Sandwiches.34 MR. MARCHANT: But I think it is important. Put the philosophical to one side for the moment, because we are not going to shift; given the political situation in the United Kingdom, given Gowers, we are not going to move. What we are going to do is try to use the peer-review patent to get a sensible situation moving here. PROF. ADELMAN: With our corporations here that operate world-wide, do you have any problems in Australia, which does not have any limitations? MR. EPPENAUER: I do not think we have any problems actually. We tend to try to focus our inventions in much the same way as we are able to in the United States or in Europe or in Japan. We have to tune claims to different laws, but in essence we do not encounter problems as such. DR. FITZGERALD: I think you will find that it would be quite rare for a patent not to be granted in Australia. 34 In December 1999, two independent inventors, Len Kretchman and David Geske, were granted U.S. Patent 6,004,596, “Sealed Crustless Sandwich,” for an improved peanut butter sandwich.

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PROF. ADELMAN:

For subject matter? Yes, that’s right. I can think of a recent example, a company that I am aware of in Queensland, which actually was knocked back in the U.K. Patent Office, whereas it was granted a patent in the United States early last year for a translation kind of software. PROF. ADELMAN: Jay, do you have any comment on the Australian situation? PROF. THOMAS: I think Professor Fitzgerald can handle that well. Perhaps we should just briefly talk about the Metabolite case.35 May I spend just a moment on that? PROF. ADELMAN: Absolutely, if you can defend it. PROF. THOMAS: The claim that was at issue in Metabolite is what would be called a “diagnostic method.” Of course, there is a lot of case law coming out from Europe that essentially gets rid of the diagnostic method limitation, unless you can perform the method by visual inspection, so effectively there is no limitation. The subject matter patentability of this invention really depended on how you looked at it. One way was: When we detect this substance in the blood, that substance indicates a certain medical condition. Under that approach, this invention merely claims a scientific truth. Another way to look at the invention is: The compound we are searching for just does not drop out of the sky. We have to do a lot of synthesis and chemical maneuvering to identify that compound, so we are performing a number of physical steps here. That is hardly a scientific truth. It is a practical method and has this beneficial result. The Supreme Court took the case. There was a great hue and cry over the Section 101 issue. By the way, the Federal Circuit opinion covered, I think, just about every other issue in patent law except for Section 101, so it really was not that properly vetted below.36 The Court ended up dismissing the case as improvidently granted. After the Supreme Court agreed to hear the case, they later decided that it hadn’t been such a great idea. There was a dissent from the order to dismiss the case by Justice Breyer, joined by Justices Stevens and Souter, who felt the case was a slam dunk, not patentable subject matter. So who cares? Well, remember that three judges present 60 percent of five votes, which is the majority of the Court, and 75 percent of four votes, which is enough to grant Certiorari. Given the number of lower court cases pending — and we could talk for a long time about those — in fact this is an issue that may go before the Supreme Court. I think even two or three years ago we would have laughed off Section 101 as a really serious topic of discussion for patentability in the United States, but in fact it does seem to be very much ripe now. PROF. ADELMAN: I think Jay is absolutely right about that. To have three judges be so wrong is a real threat to the patent system. Let me just read to you from Sir Nicholas Pumfrey. This is from his Bloomberg decision talking about pension benefits in the EPO: DR. FITZGERALD:

The basic reasoning appears to have been that the Technical Board of Appeal considered that contributions to inventive step lying in excluded matter should not be taken into account in considering the obviousness of the claim. I really cannot see how this is permissible reasoning, if only because a vast class of inventions depend for their 35

Laboratory Corp. of Am. Holdings v. Metabolite Labs., Inc., 126 S. Ct. 2921, slip op. (June 22, 2006). Metabolite Labs., Inc. v. Laboratories Corp. of Am. Holdings, 370 F.3d 1354 (Fed. Cir. 2004), available at http://www.ll.georgetown.edu/Federal/judicial/fed/opinions/ 03opinions/03-1120.pdf. 36

202 S E S S I O N I I I — PA T E N T non-obviousness on a new discovery of some property of nature — such a discovery being excluded subject matter.37 Now, I do not know whether he was writing this to simply counter the three Justices on the U.S. Supreme Court. I asked Lord Hoffmann about this, and he said, “Oh yes, of course that is obvious, that has to be correct,” and told me that Mr. Justice Whitford had said that earlier,38 before Mr. Justice Pumfrey. So I said to Lord Hoffmann, “Please, maybe you can talk some sense into these people. Maybe they will listen to you.” But Jay is right. This is a very serious situation where three Justices do not understand that there are many inventions where somebody makes a scientific discovery and then there is an application of that discovery, like there. It actually is quite an important invention. When I read this in a case about a computer programming invention, I thought, “Is he trying to say something beyond what he is doing here?” MR. MARCHANT: I think one thing you have to remember is that since the British banned fox hunting judges have to kill something. About the Technical Board of Appeal, talking to U.K. patent attorneys, there are concerns that the Technical Boards of Appeal go their own way and they are unpredictable. They have no influence over one another. They are often very jealous territorially of their own cases. So the United Kingdom has unsuccessfully, I regret to report, been trying to say that we need to reform the whole appeal process in the EPO because it is rather hit-and-miss at the moment. I think it is heavily over-engineered at the Technical Board level and under-engineered at the Enlarged Board of Appeal level. PROF. ADELMAN: Does anybody in the audience have a question? Let’s start back here. QUESTION: I was going to actually ask Dr. Fitzgerald if she would say anything of the recent decision in the Australian Full Federal Court in the Grant case?39 DR. FITZGERALD: This is an interesting case. I was not going to mention this. It is, in fact, parallel to the U.K. Macrossan case. Neal William Macrossan is an Australian lawyer. There has been an application in Australia for a patent. The Macrossan case, for those of you who are not aware, involves a method of incorporating companies, not done by software, but the steps and the documents that you need. Ron, you might be able to tell us more about that. MR. MARCHANT: Just very briefly — and I’m not really an expert on this — it was basically a way of assembling the documentation you need to incorporate a company. It had a decision tree in it. In response to the questions you answered, it would then direct you to the next set of questions, and at the end of it were the forms you need to incorporate a company. PROF. FITZGERALD: Right. My theory is that there is a group of Australian lawyers going around the world targeting different jurisdictions, trying to actually succeed in getting a patent for a method of performing legal services. Now, you have to remember that in Australia we have actually had cases in recent years that have said that you can in fact patent a method of medical treatment. My gut feeling about it is that these guys have really gotten up their nose, as it would in Australia, the way that doctors and lawyers hate each other so much. 37 Joined Cases Nos. CH/2006/APP/0487 and CH/2006/APP/0481, Patent Applications of Pablo Cappellini and Bloomberg Ltd., [2007] E.W.H.C. 476, ¶ 8 (Pat.) (Pumfrey J.), available at http://www.bailii.org/ew/cases/ EWHC/Patents/2007/476.html (emphasis in original). 38 See American Cyanamid Co. v. Berk Pharms., Ltd., [1976] R.P.C. 231, 257 (Whitford J.). 39 Grant v. Commissioner of Patents, [2006] FCAFC 120.

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They have not tried to do this by means of software. I would not even call it a business method. They are actually legal services methods. They are much more specific. There may, in fact, be one like this going through the U.S. courts. I do not know. What they actually had here was what they called an “asset protection method.” It is a method for structuring a financial transaction, the effect of which is to protect an individual’s assets presumably against the lawful claims of the individual’s creditors. Essentially, it was a way of protecting assets against bankruptcy claims. I am just going to read you Claim 1 so you can see how basic it is: “An asset protection method for protecting an asset owned by an owner, the method comprising the steps of (a) establishing a trust having a trustee, (b) the owner making a gift of a sum of money to the trust, (c) the trustee making a loan of said sum of money from the trust to the owner, and (d) the trustee securing the loan by taking a charge for said sum of money over the asset.” Now, not surprisingly, at every level — in the Patent Office, at first instance Justice Branson [phonetic] in the Federal Court, and in the full court of the Federal Court of Australia — that was actually held to be not patentable, that it was not actually a matter of manufacture within the concept of Section 6 of the Statute of Monopolies. Just about every judge that considered it gave a different reason, so we have a whole bunch of different reasons given in the single judgment in the full Federal Court, as opposed to what Justice Branson said at first instance and then yet again different reasons back in the Patent Office. I think it is pretty obvious that this is the kind of thing that you are not going to grant a patent for. There are many, many reasons as to why you can say that. In my view, unfortunately, what the full Federal Court did is it went further and actually introduced a physical effects test, which I think was unwarranted here. It could have actually been struck out on a whole bunch of other reasons without having to go that far. I think there is some danger in deciding to go down that physical effects route because it starts taking you into the territory of technical effects, and I think that could actually lead us into water that the High Court very distinctly warned us about in NRDC in 1959.40 I think you have to be very careful when you start building in these kind of limitations. PROF. ADELMAN: Shamnad? QUESTION [Shamnad Basheer, George Washington University Law School, Washington, D.C.]: I found most of the perspectives really interesting. I just wonder whether, particularly in the context of countries that have explicit subject matter exclusions in the statute, part of the confusion really arises because we have different kinds of exceptions to patentability that are exceptions for different reasons. This goes back to Marty’s point that he would readily concede that some stuff is not part of patentable subject matter because in some way it derives from our jurisprudence on the notion of what an invention really ought to be. So a literary work, like a poem, no matter how good it makes you feel, is clearly excluded by the European Patent Convention, and the U.K. Patent Act as well, as a mental method. On the other hand, you have a method of medical treatment, which seems like an invention insofar as we understand an invention to be technology of some sort, that I think is really excluded for a public policy reason. It has created some confusion, because they linked it up to lack of utility, which is not really a credible enough reason. But I 40

National Research Dev. Corp. v. Commissioner of Patents, (1959) 102 C.L.R. 252.

204 S E S S I O N I I I — PA T E N T think it mainly has something to do with public policy. Business methods may again fall within that realm. We have now countries like India, in the context of pharmaceutical patents, saying: “This entire class of pharmaceutical patents that are new salt forms are just obvious; unless you show that it has increased efficacy, we are not going to grant a patent.” But they club it as a patentable subject matter exclusion, just for the sake of convenience, because I think when you are examining it is much easier to exclude something at the first level rather than going down to novelty and nonobviousness. So there seem to be different reasons driving us to what is an exception or what is not a patentable subject matter. I am just wondering, if you make those explicit, as opposed to the European Patent Convention, which plainly says “these are not inventions,” whether we might get a little further on this debate. PROF. ADELMAN: Anybody have a comment? MR. MARCHANT: Yes. I think you are absolutely right. There is just a common view “yeah, that’s not patentable.” There are others where we are all agreed “yes, this is in some way or other patentable.” We are desperately keen not to try to use the word “physical” in that. That is where we found onion layers of definition. We are trying to avoid saying “this is physical” because that is not where we are going. Then there is this public policy, and probably quite different shades of public policy. I think the Indian example is a good one. When Dr. Mashelkar was asked to look at whether or not the interpretation of the new law could be adapted and still stay within TRIPs, he came up with an answer that was fairly quickly jumped on. The answer has been put on the back shelf for a while. I think that is driven by public policy.41 Also, in Europe we have a Biotechnology Directive,42 which was pointing at stem cells not being patentable. There was a bit of a dilemma there, because it said biotechnology is an industry, therefore deserving of patenting, but anything that will turn up as a human embryo is not patentable. We were getting applications and needed to find an answer. We went back to the Dame Mary Warlock Commission on Stem Cell and Embryology Research to see if could we find a non-slippery slope argument. We came up with a Practice Notice saying: yes, we will grant patents for stem cells to a certain stage, a stage that can be objectively defined and does not lead to a slippery slope.43 But that is very uncommon in Europe, because our public policy motivation was medical research. It was also partly economic — let’s be honest, we are talking about attracting and being the home of biotechnology research, whereas for many European Member States there is a fundamental religious reason why anything to do with the Biotech Directive is anathema. I do not think we will get the clarification you asked for. It would be nice if we did, but I just do not think we will. PROF. ADELMAN: Question? QUESTION [John Richardson, Arbitrator and Mediator, New York]: I wanted to get back to Martin and Jay on the LabCorp case, because there is something I do not understand, and maybe you or the panel can help me. 41 Balachandra Mashelkar, Report of the Technical Expert Group on Patent Law Issues (Dec. 2006), available at http://spicyipindia.blogspot.com/2007/01/mashelkar-committee-report-on-patents_28.html. 42 Directive 98/44/EC of 6 July 1998 of the European Parliament and of the Council on the legal protection of biotechnological inventions, 1998 O.J. (L 213) 13, available at http://europa.eu.int. 43 U.K. Intellectual Property Office, Practice Notice, Inventions Involving Human Embryonic Stem Cells (April 2003), available at http://www.ipo.gov.uk/patent/p-decision making/p-law/p-law-notice/p-law-noticestemcells.htm.

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As I understand it, irrespective of the discovery of a correlation between homocysteine and low levels of vitamin B, which I think has an impact on cardiovascular disease, apparently homocysteine was a known substance that independently had certain medical consequences. Apparently, homocysteine was a causal agent in various diseases way before this came along. There were numerous tests to determine the presence and the level of homocysteine. My question is: Couldn’t they have written a better claim? They are talking about an assay. But they had a way of determining homocysteine. If somebody used it, fine. But apparently the defendant decided it would use a prior, maybe less-efficient method of determining the level of homocysteine. So what was the real defect in the claim? Couldn’t they have claimed that correlation better? PROF. THOMAS: John, as somebody who used to write claims for a living, of course claims could be better written, and just about any claim I wrote could have been better written. I think your inquiry points to the higher policy perspective: Do we conduct a novelty inquiry within the statutory subject matter inquiry, or do we in fact conduct them seriatim? The latter approach is the current U.S. technique, so we are supposed to look at the subject matter not in regard to the prior art. For a brief period we did, in the Parker v. Flook era.44 That, again, seemed to be an era to which we could not return just a few years ago. Do we just look at what is new, the inventive contribution, and look at that in terms of its subject matter; or are we supposed to look at the claim as a whole, which basically eviscerates the requirement? So I think that we may be back to that debate at the Supreme Court in days yet to come. PROF. ADELMAN: I think Jay is absolutely right. In terms of the claim, homocysteine is old and people tested for it. This patent had a new way of doing it. But that wasn’t Claim 13. Claim 13 went to the specific discovery of the correlation. Apparently it is quite important, because you really have to accurately diagnose pernicious anemia, if my memory serves me correctly. All the other diagnostic tests were quite inaccurate for pernicious anemia. If it is not diagnosed, you die. This was a much better way of doing that. That is very important. It is a very important practical effect. I have talked to people who have studied the patent, studied the record, and they say that this was an important invention. We have to assume that, because we are assuming it is not obvious. The issue is not that, but that, even though it is non-obvious, a great invention, maybe worthy of a Nobel Prize, you cannot get a patent on it. That is what we are talking about. Any further questions? We have two minutes left, but we could use it for drinking. I want to thank everybody.

44

Parker v. Flook, 437 U.S. 584 (1978).

206 S E S S I O N I I I — PA T E N T APPENDIX A Patentable Subject Matter: The Road Ahead for Software and Business Method Inventions in Europe and the UK. Robert Hart INTRODUCTION I have to open my remarks by saying that the road is very restricted and is subject to considerable diverging routes when the journey at the EPO, using autoroutes and autobahns, is compared with U.K. motorways. Firstly, I need to review those issues that have appeared during the last year following the demise of the Commission’s proposal for a Directive on the patentability of Computer-Implemented Inventions (CIIs).45 You will recall that the draft Directive, the intention of which was to harmonize the law on the patentability of CIIs in Europe without any sudden change in the legal position and without extending patent protection to computer programs as such, was decisively thrown out when the European Parliament voted with a majority of 648 of the 680 MEPs present. Three issues have occurred during the last twelve months, two having a political effect and the third being of considerable legal consequence. The first of these issues, of considerable political significance, was the publication on December 6, 2006 of the Gowers Review of Intellectual Property,46 which included the recommendation for the “Maintenance of the current policy not to extend patent rights beyond their present limits within the area of software, business methods and genes.” The second issue was the submission to the U.K. Prime Minister of an e.petition47 signed by 2,216 signatures (one of which is a Dr. Robert Hart, not me nor any relation I hasten to add). The petition asked the Prime Minister to “make software patents clearly unenforceable.” In the annex to my paper I have reproduced the e.petition reply. The e.petition was organized by the Open Source community, which of course was very active in lobbying at the European Parliament against the proposed CII Directive. I turn now to the third issue, and as far as the law is concerned, the most significant occurrence of 2006, the Court of Appeal decision in Macrossan and Aerotel.48 It is ten years since the Court of Appeal has reviewed the test for what is to be properly regarded as patentable subject matter for computer programs and business methods. I have to declare more that a passing interest in this decision as I was retained as the technical expert for Aerotel and it was my expert witness statement that was misinterpreted in the lower Court leading the Judge to construe the equipment of the patent “as known” and “used in a way that amounts to no more than a method of conducting business.” Fortunately for me, the Court of Appeal recognized that that was not what I had said in my witness statement. The Court of Appeal Judgment at 56 states: What Mr. Hart actually said was: “The Patent provides a new method and system for facilitating telephone calls. A skilled reader of the Patent in 1985 would have been able to implement the described special exchange using an electron ic control exchange of the kind that was available in the UK and elsewhere at that time.” 45 46 47 48

2002 O.J. (C 151) 129, Inter-institutional file, COM 2002/0047 (COD) (Feb. 20, 2002). See http://www.hm-treasury.gov.uk/independent_reviews/gowers_review_intellectual_ property. Available at http://www.number-10.gov.uk/output/Page11077.asp. [2006] E.W.C.A. Cir. 1371.

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Facts The first case involved Aerotel and the defendant Telco. Aerotel sought the restoration of its patent for a telephone system incorporating a special exchange arranged to hold information on the subscribers to the Aerotel system together with telephone call credit for each subscriber on the system. In operation a subscriber to the Aerotel system dials the special exchange from any suitable telephone line and inputs his or her identity code together the telephone number of the called party. The special exchange verifies the caller’s identity code and establishes if sufficient credit is available for the required call. Upon successful verification of sufficient credit the call is completed by the special exchange. The special exchange monitors the call decrementing the credit and terminates the call if credit runs out. The telephone line from which the call is made is not debited with the cost of the call. As identified above the Patents Court rejected the patent as being for a method of doing business. The second case involved a patent application from an Australian inventor (Neal Macrossan) for an automated method of acquiring the documents required to incorporate a limited company. The method operated by asking the user a series of questions with subsequent questions taken from a data base depending on the responses to previous questions. The application had been rejected by the U.K. Patent Office as being a method of performing a mental act and for being a computer program as such. On appeal, the Patents Court restored the application. The Court of Appeal Judgment The first thing to note is that the Court chose to use the wording of the European Patent Convention (EPC) rather than the Patents Act 1977. The aim of the Court was to produce a judgment that would contribute to achieving a unified position across Europe. To this end the Court of Appeal thoroughly reviewed the existing law together with TRIPs and the approaches adopted in countries outside the European Union including the United States. The Court noted that the exceptions referred to in the U.S. cases (e.g., laws of nature) had some equivalents in Article 52(2) EPC but that they by their very nature were incapable of being the subject of a legal monopoly and gave no guide to the interpretation of Article 52 EPC. The Court summarized the various approaches employed by the EPO Boards of Appeal so far as follows: 1. The contribution approach. In this approach it was necessary to decide if the inventive step resided only in the contribution of excluded matter. If it did Article 52(2) EPC applies and the invention is not patentable. 2. The technical effect approach. In this approach it was necessary to decide if the invention as defined in the claim made a technical contribution to the known art. If it did not Article 52(2) applies and the invention is not patentable. 3. The “any hardware” approach. In this approach it was necessary to decide if the claim involved the use of or was to a piece of physical hardware. If it was article 52(2) did not apply. The Court identified three variations of the latter approach: 3(i) Where a claim to a method which consists of an excluded category, it is excluded by Article 52(2) even if hardware is used to carry out the method. But a claim to the apparatus itself, being “concrete” is not so excluded. The apparatus claim is nonetheless bad

208 S E S S I O N I I I — PA T E N T for obviousness because the notional skilled man must be taken to know about the improved, excluded, method. This is the EPO Board of Appeal Pension Benefits49 approach: 3(ii) A claim to hardware necessarily is not caught by Article 52(2). A claim to a method of using that hardware is likewise not excluded even if that method as such is excluded matter. Either type of claim is nonetheless bad for obviousness for the same reason as above. This is the EPO Board of Appeal Hitachi50 approach, expressly disagreeing with Pension Benefits. 3(iii) Simply ask whether there is a claim to something “concrete,” e.g., an apparatus? If yes Article 52(2) does not apply. Then examine for patentability on conventional grounds – do not treat the notional skilled man as knowing about any improved excluded method. This is the EPO Board of Appeal Microsoft/Data Transfer51 approach. The Court of Appeal discussed the above identified approaches rejecting the “Any Hardware” and the “Contribution” approaches. The “Any Hardware” approach was rejected mainly because it could lead to contradictory results and the “Contribution” approach because it was bound by its own precedents: that decided in Merrill Lynch,52 Gale,53 and Fujitsu.54 Accordingly, the Court followed the “technical effect” approach, with the rider that any “technical contribution” could not reside in the novel or inventive purely excluded matter and identified a four-step test suggested during the hearing on behalf of the U.K. Patent Office. The Four-Step Test: 1. Properly construe the claims. 2. Identify the actual contribution (the invention makes). 3. Ask whether it (the contribution) falls solely within the excluded subject matter. 4. Check whether the actual or alleged contribution is actually technical in nature. The Application of the Four-Step Test to Aerotel and Macrossan In applying the test in Aerotel, the system as a whole was found to be new in itself, “not merely because it is to be used in the business of selling phone calls.” The contribution of Step 2 is a new system (a new physical combination of hardware). Step 3 is satisfied because the new system is more than just a method of doing business and the new combination of apparatus is clearly technical in nature. The above reasoning was initially applied to the apparatus claims of the Aerotel patent and then to the method claims. The main apparatus and method claims are reproduced in the annex to this paper. In the Macrossan case, the assessment of the inventor’s contribution under Step 2 was 49 50 51 52 53 54

(2000) T-931/95. (2004) T-258/03. (2006) T-424/03. Merrill Lynch’s Appn, [1989] R.P.C. 561. Gale’s Appn, [1991] R.P.C. 191. [1997] R.P.C. 608

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that he had thought of an interactive system that did a job that might otherwise have been done by a solicitor or company formation agent. Before the Examiner this was found to fall within the excluded subject matter — a scheme or rule for doing business. The “potentially” issue arose because of question 4 and that it would be necessary to decide whether or not there was anything technical in character about the claim. The Examiner found there was none and rejected the claim. On appeal, the Patents Court restored the claim citing the EPO authorities and taking the view that the Macrossan system was a tool used within a business. The Judge also thought that it was implicit that some form of transaction must take place for there to be a business method. The Court of Appeal had no difficulty with Step 1. Step 2 was also straightforward; it was to provide a computer program that could be used to carry out the method. Step 3 was also found to be easy, in that the contribution was simply the running program. The contribution was not technical (Step 4) so the exclusion applied and the Court of Appeal rejected the application. Proposed Questions for an Enlarged EPO Board of Appeal In following Merrill Lynch, the Court of appeal anticipated a clash with the EPO. Accordingly, although the Court stated it had no power itself to make a referral to an Enlarged Board of Appeal, the Court suggested questions the EPO Enlarged Board of Appeal might like to consider as follows: (1) What is the correct approach to adopt in determining whether an invention relates to subject matter that is excluded under Article 52? (2) How should those elements of a claim that relate to excluded subject matter be treated when assessing whether an invention is novel and inventive under Articles 54 and 56? (3) And specifically: (a) Is an operative computer program loaded onto a medium, such as a chip or hard drive of a computer, excluded by Art. 52(2) unless it produces a technical effect, if so what is meant by “technical effect?” (b) What are the key characteristics of the method of doing business exclusion? These questions have been responded to in a letter55 from Alain Pompidou, president of the EPO, to Lord Justice Jacob, advising that he has “decided that at the moment there is an insufficient legal basis for a referral under Article 112(1) (b),” and that “the appropriate moment for a referral would be where the approach taken by one Board of Appeal would lead to the grant of a patent whereas the approach taken by another Board would not.” The Aftermath of Aerotel and Macrossan The U.K. Patent Office has issued a practice notice56 announcing a change in the way patent examiners will assess whether inventions are for patentable subject matter conforming to the Court of Appeal Four Step Test. The Patents Court in Cappellini and Bloomberg57 has used the Four-Step Test to reject 55 Available at http://www.patent.gov.uk/patent/p-decisionmaking/p-law/p-law-notice/p.law-notice-subject matter/p-law-notice-subjectmatter-letter.htm. 56 Available at http://www.patent.gov.uk/patent/p-decisionmaking/p-law-notice-subject matter.htm. 57 [2007] E.W.H.C. (Pat.) 476.

210 S E S S I O N I I I — PA T E N T a claim to a method of distributing data in which the data transmitted to a user is mapped (using a record relating to the applications that that user has access to) to a form suitable for the application to be used by the user in question. The Court found that the contribution of the Bloomberg application “lies in the idea of appropriately treating data to match the requirements of a particular end user prior to its transmission to that end user,” which did not satisfy the fourth step of the test (i.e, technical effect). The Court noted that it was not helpful to draw a distinction with the RIM case.58 “In RIM the whole purpose of the server-side treatment of the data to be transmitted was to reduce the information content to ensure more rapid transmission over reduced bandwidth channels.” This was considered to be a technical effect. No such limitation could be found in the Bloomberg application and, therefore, the application failed the fourth-step test. The Cappellini application related to a novel algorithm for determining the routes to be taken by a carrier when delivering packages, the permitted routes being variable to allow two carriers to deviate, meet and transfer one or more packages. The application included claims to: (i) A relay detection and coordination system for a computer-implemented geographically-simulated network of flexibly defined paths corresponding to paths of real transportation carriers each having a predefined degree of geographical operational flexibility, which are to be coordinated using the computer-implemented detection algorithm; (ii) A method of coordinating a transportation process; (iii) A network relay transportation system and (iv) A method of processing loads. The Court decided that the relay detection and coordination system was a pure manipulation of data without the production of any physical or real world effect thereby failing steps 3 and 4 of the four step Aerotel/Macrossan test. The Court considered that both the method of coordinating a transportation process and the network relay transportation system were a “method of performing a set of journeys” and considered these claims to be “a method of doing business”. The method of processing loads was considered closest to comprising patentable subject matter. However, the Court decided that there was no technical effect in merely moving vehicles and their cargos around according to a routing algorithm. Conclusions The U.K. Patent Office is operating a strict line so that applications for patents in technologies, such as source code compilers,59 geo-coded databases,60 security features for internet transactions61 and the classification or indexing of items of information62 have all been found to be non-statutory subject matter. The Aerotel/Macrossan judgment has highlighted that applicants for U.K. patents must carefully consider the wording of their applications to clearly identify the contribution to the art and why that contribution is of technical effect. This I think should have particular resonance here in the United States, where the practice of filing in the United Kingdom the same text as filed in the United States may no longer be appropriate. 58 59 60 61 62

RIM v. Inpro, [2006] E.W.H.C. (Pat.) 70. Intel Corp., BLO/187/06. Overture Services Inc., BLO/331/05. Fair, Isaac & Co., BLO/329/05. Canon, BLO/045/07.

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During the “discussion” section of the judgment in the Aerotel/ Macrossan case the issue of computer programs “as such” was reviewed. The Court of Appeal decided that the narrow view, as identified by the three EPO Board of Appeal decisions (i.e. computer program as such means just the set of instructions as an abstract thing albeit they could be written down on a piece of paper), was not one they could use to qualify the exception. They took the view that the “framers of the EPC really meant to exclude computer programs in a practical and operable form. They (the framers) meant to exclude real computer programs, not just an abstract series of instructions.” It is my opinion that the framers of the EPC did not so intend. My reading of the various reports of discussions63 under the exclusion for computer programs is that the intention was that inventions representing a technical progress or technological improvement should be patentable but those which were purely abstract should not. Taking the Court of Appeals view into account, the four-step test can only be interpreted, in my opinion, as excluding all computer-implemented inventions that do not have an external effect. Patents granted on operating systems, for example, at the EPO will have a good chance of being revoked if litigated in the United Kingdom. So how do the events of 2006 affect the Road Ahead? As far as patents for computerimplemented inventions are concerned, there is a roadblock if that invention has no external effect beyond the computer. In addition, even if a computer-implemented invention does have a technical effect beyond the computer, claims to the program on a carrier will not be allowed in the United Kingdom, and therefore unauthorized export of a program incorporating that technical effect, cannot be addressed under infringement in the United Kingdom. The consequences of the Aerotel/Macrossan judgment are likely to have a severe effect on U.K. creators of computer-implemented inventions, putting them at a disadvantage with respect to their other European counterparts who are already open to online infringement risks from U.S. patent holders. The only way in which the position can change is if the application of the “four-step test” is challenged up to the House of Lords or is modified during the discussions currently taking place over the implementation of the European Patent Litigation Agreement. In the light of the failure of the CII Directive directly as a result of the European Parliament, this latter course, I believe, is unlikely to change the position in the United Kingdom and may even lead to the modification of the position under the EPC.

ANNEX Aerotel Claims “1. A method of making a telephone call from any available telephone, comprising: obtaining a special code by making a prepayment; inserting the prepayment in a memory in a special exchange and being allocated to the special code in the memory for use in verifying a calling party call; dialing the special exchange when a telephone call connection is desired; inputting the special code for verification; inputting the number of called party; verifying at the special exchange by checking the special code and comparing the prepayment less any deductions for previous calls in the memory with the minimum cost of a call to the called party station; connecting the called and calling parties’ stations in response to said verification; monitoring the remaining prepayment less deductions for 63

See Keith Beresford, Patenting Software Under the European Patent Convention (2000).

212 S E S S I O N I I I — PA T E N T the running cost of the call; and disconnecting the call when the remaining prepayment has been spent by the running cost of the call. “9. A telephone system for facilitating a telephone call from any available telephone station, comprising: means for coupling a calling party station to a special exchange; memory means in the special exchange for storing customer special codes and prepayment information individual to each customer; means for verifying the calling party responsive to a code transmitted from the calling party station to the special exchange so as to verify that the code matches the special customer code in the memory means and the calling party has unused credit; and means for connecting said calling party station to a called station responsive to the verification.” Software Patents — e-Petition Reply 26 February 2007, we received a petition: We, the undersigned, petition the Prime Minister to make software patents clearly unenforceable. Software patents are used by convicted monopolists to threaten customers who consider using rival software. As a result, patents stifle innovation. Patents are supposed to increase the rate of innovation by publicizing how inventions work. Reading a software patent gives no useful information for creating or improving software. All patents are written in a sufficiently cryptic language to prevent them from being of any use. Once decoded, the patents turn out to be for something so obvious that programmers find them laughable. It is not funny because the cost of defending against nuisance lawsuits is huge. The UK patent office grants software patents against the letter and the spirit of the law. They do this by pretending that there is a difference between software and “computer-implemented inventions.” Some companies waste money on “defensive patents.” These have no value against pure litigation companies and do not counter threats made directly to customers. 앫 Read the e-petition: http://petitions.pm.gov.uk/softwarepatents/ 앫 Petitions home page: http://petitions.pm.gov.uk/ Read the Government’s Response The Government remains committed to its policy that no patents should exist for inventions which make advances lying solely in the field of software. Although certain jurisdictions, such as the United States, allow more liberal patenting of software-based inventions, these patents cannot be enforced in the United Kingdom. The test used to discern between patentable and non-patentable subject matter in the UK has recently been clarified by the courts, and is applied rigorously by the Patent Office. Under this test, the true nature of the advance being claimed in a patent application must be determined, and if this advance lies solely in the field of software, or another non-technical field such as methods of doing business, the patent will not be granted. If the advance being made by an invention does lie in a technical field, it must also be non-obvious and sufficiently clearly described for the invention to be reproduced before a patent will be granted by the Patent Office. The recently published Gowers Review of Intellectual Property, an independent review commissioned by the Government, recommended that patent rights should not be extended to cover pure software, business methods and genes. The Government will

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implement those recommendations for which it is responsible, and will therefore continue to exclude patents from areas where they may hinder innovation: including patents which are too broad, speculative, or obvious, or where the advance they make lies in an excluded area such as software. 앫 Read the Gowers Report: http://www.hm-treasury.gov.uk/independent_reviews/ gowers_review_intellectual_property/gowers review_index.cfm 앫 The Patent Office: http://www.patent.gov.uk

SESSIONPART IV: ANTITRUST/COMPETITION LAW & INTELLECTUAL PROPERTY A: STANDARD SETTING AND COMPETITION ISSUES

SESSION IV: ANTITRUST/COMPETITION LAW & INTELLECTUAL PROPERTY

Part A: Standard Setting and Competition Issues

Moderator ANDREAS P. REINDL

Executive Director Fordham Competition Law Institute (New York)

Speakers NICHOLAS BANASEVIC

GEOFF OLIVER

Deputy Head of Unit, Information Industries, Internet and Consumer Electronics Unit, DG Competition, European Commission (Brussels)

Assistant Director for Anticompetitive Practices U.S. Federal Trade Commission (Washington, D.C.)

ROY HOFFINGER

JOHN TEMPLE LANG

Vice President & Legal Counsel, Qualcomm, Inc.

Cleary Gottlieb Steen & Hamilton (Brussels)

Panelists VICTORIA A. ESPINEL

DAVID J. KAPPOS

Assistant U.S. Trade Representative for Intellectual Property and Innovation, Office of the U.S. Trade Representative (Washington)

Vice President & Assistant General Counsel, Intellectual Property Law IBM Corporation (Armonk, NY)

RONDAL MOORE

SeniorAttorney, Microsoft Corporation

216 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY MR. REINDL: Good afternoon. Welcome to the panel on standard setting and competition issues. My name is Andreas Reindl. I am with the Fordham Competition Law Institute. I welcome you all. Since we are running a little late, let me briefly introduce the panel. Nick Banasevic, from the European Commission, DG Competition, works in the unit that deals with intellectual property, including standard setting. Roy Hoffinger is with Qualcomm. Geoff Oliver, from the Federal Trade Commission, was involved in standard-setting cases, as he will explain. John Temple Lang is with Cleary Gottlieb in Brussels. David Kappos is with IBM. Rondal Moore is with Microsoft. Victoria Espinel is with the Office of the U.S. Trade Representative (USTR) in Washington, where she is responsible for IP issues. An outstanding panel, with knowledge of many issues. Standard setting has raised a broad range of issues with respect to antitrust and competition law enforcement that. We have decided to limit the issues that we want to cover and focus primarily on general policy and rate-setting issues — if there is a standard being developed and intellectual property rights are involved, how can companies come to an agreement on issues related to license terms? In the second part of the discussion, we want to talk about the strategic use of intellectual property rights in the course of standard-setting negotiations or afterwards, once a standard has been agreed upon. Those are the two areas that we will cover this afternoon. Without further ado, I turn it over to Nick for his initial remarks. MR. BANASEVIC: Thank you very much, Andreas. It is a pleasure to be here today. I have to stress that the views that I express today are not necessarily those of the European Commission, but my personal views. As Andreas said, I have been working in the Antitrust Unit in the Competition Directorate General of the European Commission, which deals with antitrust issues in the IT sector. We are responsible for the Microsoft investigation, amongst others, as well as a number of standard-setting cases. That is what I want to focus on today. I am going to give a brief overview of why, on occasions, it may be necessary for a competition authority to involve itself in standards issues and standards cases, what type of approach that should be, and how proactive it should be. Essentially, that is the framework of my presentation. Just as a very brief introduction — and we see it through the cases that cross our door — standards cases and standards issues have over the past few years increased exponentially in prominence and importance. We see many more cases coming to us. This reflects, I think, the importance of standards, particularly in the IT sector, in the global economy. The basic economic and legal framework in which we examine standards:

앫 The economic framework is based on papers by Carl Shapiro, a very prominent antitrust economist.1 He says the cost of standards is that they limit product variety, because one particular technology is chosen to the exclusion of others; hence, there is potential market power for the company that controls the standards. The benefits that result from open standards: 앫 Certainty for the businesses involved. 앫 Network effects, which result from the standard allowing everyone to make sure that 1 See Carl Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard Setting, in Innovation Policy and the Economy (Adam Jaffe, Joshua Lerner & Scott Stern, eds., National Bureau of Economics, 2001); Carl Shapiro & Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (1999); Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, Standard Setting, Patents, and Hold-Up (forthcoming, 2007), available at http://faculty.haas.berkeley.edu/shapiro/standards2007. pdf.

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their products are interoperable with each other, so the market can grow on that basis. 앫 Consumer benefit, which is protection from stranding. The consumer can switch a product, safe in the knowledge that it will still be compatible with the other products in the market. I would say that economic approach is encapsulated in the European Commission’s legal framework, which comes through a range of various legal instruments, mainly the antitrust guidelines.2 Of course, the context of standardization is very specific. As I said, it is companies coming together and agreeing to choose one alternative, to the exclusion of others. So if you were taking a very literal approach, that is something that a competition authority would have concerns about. But, of course, in this context the benefits are generally recognized, in line with what I outlined in terms of what Professor Shapiro said. But, of course, as the guidelines stress, it is important that the process is transparent, that there are no restrictions that are not indispensable, and that the standard is open and available to all who wish to enter and participate. One specific question that is asked — and, indeed, that informs whether and how much we should involve ourselves in specific cases — is whether a standard or ownership of a standard (in other words, a company having an essential patent in a standard) confers market power. Not in itself, I would say, but it can do so. That depends on two things: 앫 First, the commercial importance of the standard in the market. If it is commercially indispensable to comply with a particular standard — if you cannot, in fact, sell your products in the market without complying with it — that is an important factor. 앫 Second, there is the question of lock-in, whether it is easy to change to another standard. That in itself, I would say, depends on whether costs have been sunk into investment related to the standard and whether there are associated network effects deriving from the standard. In those circumstances, I would say that it is possible for a standard to confer on an essential patent holder market power or a monopoly that, absent the standard, it may not have obtained. I think the key framework for our analysis in this area is whether or not the standard confers a degree of market power that otherwise would not be there. There are possible implications, as a result of this, on the price that is charged, i.e., the royalty that is charged for the essential technology. That is what I am going to focus on. The second part of my presentation was going to be on patent ambush, which looks at things in a very similar framework, but Geoff is going to talk about that in greater detail. In terms of pricing, we have seen complaints coming to us — through a number of mobile operators initially, but also through a range of other companies — that ( precisely because it is the view of certain companies that standards confer market power that otherwise would not be attributed to companies) there are excessive royalties due to complementary essential patents. One idea they have suggested to overcome this issue is so-called ex ante royalty setting, ex ante pricing. What is meant by this? Traditionally, in a standards body, companies are obliged to declare before the standard is agreed whether or not they believe they have essential intellectual property in the standards. Ex ante pricing goes one step further. 2 European Commission, Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No 1/2003, (2006), O.J. (C 210) 2–5, available at http:// eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=OJ:C:2006:210:0002:0005:EN:PDF.

218 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY Under this system, companies would declare, at the same time, not only that they have essential patents in the standard that is being developed, but the royalties that they would charge for that standard. The proponents of this scheme say that this prevents precisely the problem of ex post excessive royalties because it allows ex ante competition, not only on technology, which has always been traditionally the case, but also on price. If you have a number of potential ex ante suppliers, then you can have price and technology competition, which would, ex ante, push the royalty rate, before the standard is agreed, down to a competitive level and prevent the potential problem of ex post monopoly pricing. It is not for the European Commission or any antitrust authority, I believe, to prescribe what kind of standard scheme industry should have. That may vary according to different sectors, according to different needs of industry. All we can do is say that we do not see a problem in this kind of scheme. It is important that that context is recognized, because traditionally there has been some pushback against this type of scheme. The idea has been that talking about prices together in a standards context may raise some suspicions of collusion and price fixing. But in itself, if the purpose is different and if companies are not going to do that which otherwise would be sanctionable, then I do not see why that would be a problem, and it can avoid the potential costs of ex post monopoly pricing. Of course, if there is only one alternative before the standard is agreed, then it still allows the innovator to reap the rewards for that innovation, because the price that it would get would be the same ex post and ex ante, if it is the only one alternative. The same approach was encapsulated by the U.S. Department of Justice (DOJ), which issued a formal Business Review Letter for a specific type of ex ante scheme, the VMEbus International Trade Association (VITA) standards body scheme, where they indeed said that there could be benefits from an ex ante pricing/royalty-setting scheme.3 I will stop there. I will just say, in conclusion, that our role as a competition authority should not be prescriptive intervention. In other words, we should not be prescribing to standards bodies how they set their rules. It is for them to design their rules in the most efficient way, subject, of course, to their complying with the competition regime. But when we do intervene, it is important that we do have the appropriate framework to do so, because there are specific issues that can be raised. MR. REINDL: Thank you very much for a very good introduction and overview of the first set of issues. We have heard now from a policymaker and competition law enforcer. Let’s hear now from two counsel, one outside counsel and one in-house counsel, about the issues of rate setting and royalties in the context of standard setting. John, may I ask you first for your remarks? Then Roy will speak as an in-house counsel who is also involved in this issue.

3 Letter from Thomas O. Barnett, Assistant Att’y Gen., U.S. Dep’t of Justice, to Robert A. Skitol (Oct. 30, 2006) (hereinafter VITA Business Review Letter), available at http:// www.usdoj.gov/atr/public/busreview/ 219380.pdf.

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LICENSING, ANTITRUST AND INNOVATION UNDER EUROPEAN COMPETITION LAW Dr. John Temple Lang4 I. AGREEMENTS ON STANDARDS A. EX ANTE DISCLOSURES ARE LAWFUL

Provided that certain rules are respected,5 agreements to set up standards are procompetitive. They often involve the companies in choosing between alternative technologies for the functions of the end product. These choices are usually made on the basis of the relative technical merits of alternative technologies. It may be difficult, or impossible, before the technical features of the standard have been agreed, to estimate what revenues or profits will be available from using the standard, or what each patent owner’s share should be. But neither EC nor U.S. competition law prohibits owners of patents that are likely to be essential from saying what royalty they would expect to charge if their technology is chosen.6 If the owners do this, there are various benefits, and it is useful in deciding what royalties are reasonable after the standard is adopted (“ex post”). If there is a choice on technical grounds between technologies, and if the owners have stated what royalties they intend to charge (independently, without collusion), the choice of technology may be influenced by the royalties proposed. A technology that was subject to competition ex ante would get a lower royalty than one that was not. Because a less technically satisfactory technology would tend to be offered at a very low royalty, the royalty for the technically better technology would tend to be driven down to a level based on its relative value; that is, how much better it was than the second-best. II. CONSEQUENCES OF A STANDARD A. LEGAL CONSTRAINTS ON ESSENTIAL PATENT OWNERS

When important companies agree on a standard, the result is usually to restrict or end competition between technologies. The value of patents is, therefore, greatly increased when they become technically essential for a standard. Every essential patent becomes a potentially blocking patent. Owners of essential patents obtain market power of which, unless constrained, they could take advantage, to discriminate between users, to prevent use by other parties by refusing to license, or to charge excessive royalties. Under European Community law, their freedom to do this is limited by three legal principles: (1) Owners of patents that they claim are technically essential are requested by stan4 Cleary Gottlieb Steen and Hamilton LLP, Brussels and London; Professor, Trinity College, Dublin; Visiting Senior Research Fellow, Oxford. John Temple Lang represents Nokia. 5 Competition law requires standard-setting procedures to be “open, transparent, and non-discriminatory.” They should not oblige manufacturers to comply with the standard unless that is part of a wider agreement to ensure compatibility. EC Commission Notice on Horizontal Agreements, 2001 O.J. (C 3) 2. Standards should be no more detailed or restrictive than necessary, and must not lead to horizontal agreements on prices or exchange of sensitive market information. Competition law also prohibits manipulation of standard-setting procedures. See Maurits Dolmans, Standards for Standards, 26 FORDHAM INT’L L.J. 163 (2002). 6 Commission Regulation (EC) No. 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements, 2004 O.J. (L 123) 11, available at http://europa.eu/eur-lex/ pri/en/oj/dat/2004/c_101/c_10120040427en 00020042.pdf. See Deborah Platt Majoras, FTC Chairman, Recognizing the Procompetitive Potential of Royalty Discussions in Standard Setting, Presentation Before Standardization and the Law: Developing the Golden Mean for Global Law, Stanford Univ. (Sept. 23, 2005), available at http://www.ftc.gov/speeches/majoras/050923stanford.pdf; see also VITA Business Review Letter, supra note 3.

220 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY dards organizations to give commitments that they will grant licenses on fair, reasonable, and non-discriminatory (FRAND) terms. In exchange for the advantages of having their patents made essential for a standard, the patent owner limits its remedies to those allowed by FRAND contracts. If a FRAND commitment is given (it is voluntary), this is a binding contractual obligation, which must be effectively enforceable to prevent “hold-up,” and to prevent every essential patent becoming a blocking patent.7 (2) If Article 81 EC applies, and if licenses were not granted on non-discriminatory and reasonable terms, the agreement would infringe Article 81(3)(b).8 (3) Under Article 82 EC, patent owners that are in dominant positions, obtained by giving FRAND commitments to get their patents made essential for a standard, have a duty to grant licenses on non-discriminatory and reasonable terms.9 These three legal constraints have similar or identical legal effects and economic objectives, although they differ in scope. All three are intended to allow undistorted downstream competition. (For convenience, they are treated as the same here.) Courts can, if necessary, decide what the legal consequences of these obligations are in individual cases. If FRAND contracts are carried out, competition law will not normally be needed in this respect. It is well-established in EC competition law under Article 81 (3) that members of a patent pool, joint venture, or a group of companies agreeing on a substantial restriction of competition, such as a standard, may have a legal duty to license non-parties on non-discriminatory and reasonable terms. If this is not done, the agreement becomes unlawful.10 This would be so even if there was no contractual commitment to grant licenses, or if a contractual commitment was ineffective. A company that owns patents that are technically essential for a standard is not necessarily in a dominant position as a result.11 Its market power might be constrained by its interest in ensuring that its downstream operations are profitable, or the standard might be subject to competition from another standard, the patents for which are owned by other companies, or by carrying out its FRAND obligations or its Article 81 obligations. Its technology might be declining in value. But blocking patents, plus lock-in to the standard, especially if a company has no downstream operations, is likely to lead to dominance. Licensees are entitled to the more favorable of the two requirements of “non-discriminatory” and “fair and reasonable.” 1. “Non-discriminatory” Terms In the case of a second or subsequent license, it is usually easy to determine whether the later terms are equivalent to the earlier terms, if both sets of terms are known. In such 7 If FRAND commitments were unenforceable, most agreements to set standards would be illegal under art. 81, because the overall effect would be to restrict competition without safeguards or compensating benefits. 8 Article 81 applies where no alternative standard exists or is likely to be developed, the principal companies in the industry are parties to the standard-setting agreement, and products not complying with the standard would not in practice find a market. Consten and Grundig shows that companies cannot use IP rights to do what they cannot do by agreement. Joined Cases 56 & 58/64, Etablissements Consten SA and Grundig-Verkaufs GmbH v. EEC Commission, 13 July 1966, [1966] E.C.R. 299, [1966] C.M.L.R. 418, C.M.R. 8046. 9 This duty arises under art. 82(e) (no discrimination), art. 82(b) (no foreclosure of rivals), and art. 82(a) (no unfair prices), in each case if harm to consumers results. 10 See, e.g., Salora-IGR Stereo Television (1981), European Commission, Eleventh Report on Competition Policy ¶ 94 (1982); British Interactive Broadcasting/Open, Case No. IV/36.539, 1999 O.J. (L 312) 1. For a list of similar cases, see 1999 Fordham Corp-orate Law Institute 447–49 (Barry Hawk ed., 2000). 11 See Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006).

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cases “non-discriminatory” is often more precise than “fair and reasonable.” There may however be some complications: 앫 The fact that a later licensee has to pay the gross royalty rate, and has no right to get royalties under a cross-license, does not involve discrimination. 앫 Lump-sum payments, rather than royalties, are not inherently discriminatory. 앫 If the earlier terms were not “reasonable,” it is no defense that the later terms are the same.12 앫 The later licensees might knowingly agree to terms less favorable in some respects in exchange for terms more favorable in other respects. 앫 Licensors are not free to discriminate in favor of their own downstream operations (e.g., they must be treated as charging them the same royalty as they charge third parties). 앫 In general, changed circumstances do not necessarily justify different royalty rates. The first licensee knows that there will be later licensees on the same terms. The later licensees have the advantage of seeing how the market is developing, but they have lost any early-mover advantage. “Non-discriminatory” terms are necessary to ensure that the downstream market is competitive and that all licensees are on equal terms. 앫 A licensor cannot justify more favorable treatment for licensees that agree to buy components or raw material from the licensor, or otherwise do separate deals. A licensor cannot justify discrimination between its licensees by means of arrangements outside the scope of the license agreements themselves. Discrimination by a licensor is unlawful whether or not it is apparent on the face of the licenses of the technically essential patents.13 앫 Higher royalties cannot be justified by obliging a licensee to take and pay more for licenses of patents that it does not want. 앫 Justifications for different treatment must be for legitimate (i.e., not anticompetitive) purposes, must be appropriate and effective for that purpose, no less-restrictive alternatives must be available, and the balance of interests must be considered (a trivial purpose does not justify a serious competitive disadvantage). 앫 Non-discrimination duties may need to be certified, e.g., by auditors of the licensor company. 2. “Fair and Reasonable” Royalty Terms A royalty must be “reasonable” in comparison with both (1) the aggregate royalties on all genuinely essential patents, and (2) the royalties being claimed by other owners of essential patents for the same standard. So the fact that the aggregate royalty is reasonable does not necessarily mean that each licensor’s royalty is reasonable. If some licensors are charging low royalties, customers should benefit. Another licensor should not be allowed to expropriate the sums involved. In the abstract, “fair and reasonable” may imply a range of possibilities. What is FRAND for one standard is not necessarily lawful for another. It always means that the aggregate royalty must allow an efficient licensee to make a reasonable profit.14 A series 12 If it became clear that earlier terms were too high to be reasonable, the licensor could always refund the excess. 13 For example, if a licensor gives one licensee of technically essential patents more favorable treatment than another, by giving the first licensee better terms in a separate license of “commercially essential” patents, that might be discriminatory.

222 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY of tests may need to be used to decide whether an individual licensor’s royalty is “reasonable” in any specific context: 앫 Is it approximately the royalty rate that would have resulted from an agreement ex ante between a willing licensor and a willing licensee? 앫 Does the rate correspond to the extent to which the patent licensed was more valuable ex ante than the next best?15 (If not, the licensor is trying to expropriate part of the value added by the standard,16 and denying to users the full benefits of the standard contrary to Article 81(3).) A patent that was exposed to competition ex ante should get a lower royalty ex post. 앫 Is the royalty at the rate (if any) that the patent owner said ex ante that it would charge? 앫 Is the rate per patent similar to that charged by other licensors, in particular to those charged by other owners of essential patents (or claimed essential patents) for the same standard comparable in number and value? 앫 If all owners of essential patents charged the same rate per essential patent (or claimed essential patent), would the aggregate royalty be uneconomic for licensees?17 (If so, the licensor is charging a disproportionate royalty, and creating a margin squeeze.) 앫 Are there reasons for regarding some or all of the licensor’s patents as especially valuable, or as less valuable? 앫 Has the royalty been influenced by anticompetitive or other unlawful practices, by the licensor or by other companies? 앫 Is the royalty similar to those charged by the licensor, or by other companies, in similar but competitive markets?18 앫 Is the royalty equal to that applied in cases of infringement of patents where no FRAND commitment had been given, under Georgia Pacific19 or similar principles? If so, it is too high, because a FRAND commitment gives a legal right to a license on reasonable terms, and must lead to some reduction of the royalty which would be payable if there were no right to a license. 앫 Does the royalty rate create a margin squeeze for licensees? If a royalty is so high as to be contrary to a FRAND commitment, or to Article 81 or 82, harm to consumers would necessarily result.

14 The European Court of Justice has repeatedly said that a price must not exceed the “economic value” of what is given, and a royalty that made a license uneconomic would by definition exceed the economic value of the license. An exclusionary royalty rate would pre-vent or interfere with use of the standard. 15 In re Rambus, Inc., Docket No. 9302 (F.T.C. July 31, 2006), available at http://www.ftc.gov/os/adjpro/ d9302/index.shtm; see also Daniel Swanson & William Baumol, Reasonable and Non-discriminatory (RAND) Royalties, Standards Selection, and Control of Market Power, 73 Antitrust L.J. 1 (2005). 16 Mark Patterson, Inventions, Industry Standards and Intellectual Property, Paper Presented at Symposium on Patent and Related Issues in Standard Setting, George Washington Univ. Law School (Apr. 19, 2002), available at http://www.ftc.gov/opp/intellect/ 020418markpatterson.pdf; see also Mark Patterson, Antitrust and the Costs of Standard Setting: A Commentary on Teece and Sherry, 87 Minn. L. Rev. 1995 (2003). 17 Siemens v. Amoi, judgment of Feb. 13, 2007, Landgericht Düsseldorf. 18 See Case 395/87, Ministère Public v. Tournier, [1989] E.C.R. 2811. 19 Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). See Roy J. Epstein & Alan J. Marcus, Economic Analysis of the Reasonable Royalty: Simplification and Extension of the Georgia-Pacific Factors, 85 J. Pat. & Trademark Off. Soc’y 555 (July 2003).

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B. NOT ALL PATENTS CLAIMED AS TECHNICALLY ESSENTIAL ARE REALLY ESSENTIAL, OR EVEN VALID

Some companies claim that many of their patents are essential, and make FRAND commitments on that basis. Other companies claim that they have essential patents only when there are clear reasons for saying so (which leaves them contractually free to claim higher royalties for implementation patents or “commercially essential” patents if they can. FRAND commitments are voluntary, although obligations under competition law, if they apply, are not). 1. Patents About to Expire, or artificially multiplied or subdivided, or in force only in some countries, should not be treated as having equal value Some patents are needed only for secondary, optional, or unimportant functions. Patents that need to be licensed only to ensure interoperability are less valuable than patents with substantive functions. A patent should be valued in the technical and economic context in which it is used, including the total number of essential patents, the value of the other technologies in the complete product, and the value of the patent in question. The total number of essential patents is the first factor to be looked at (but of course not the only one). III. “FAIR AND REASONABLE” NON-ROYALTY TERMS It would be impractical to try to list exhaustively all the kinds of non-royalty terms that would be anticompetitive or extortionate or otherwise would not be “fair and reasonable.” In general, terms should not distort competition in technology or downstream competition. However, the following examples can be given: 앫 In general, any terms that enable a licensor indirectly to escape its obligations not to discriminate and not to charge excessive royalties would be unreasonable. 앫 Forcing licensees to allow the licensor to use their patents royalty-free, or to cross-license their non-essential patents.20 This would be particularly likely to be unlawful if the licensor could pass on the IP rights so surrendered to selected other companies at its discretion, or if licensees were obliged to surrender their technologies irrespective of substantial differences in their value, or if the benefit of the licensees’ rights was given to customers (rather than licensees) of the licensor. It is particularly anticompetitive and likely to discourage innovation if the licensees are obliged to give up their future patent rights. (Of course, a normal, balanced, fully reciprocal “patent clearance” arrangement or patent pool between patent owners is lawful.) 앫 It may be illegal for a company to insist that, if a licensee challenges any of the licensor’s patents or asserts its patents against the licensor, the license will terminate. 앫 Licenses must not be given on exclusionary conditions, e.g., must not give lower royalty rates to licensees that buy components or raw materials exclusively from the licensor, or on other terms that raise rivals’ costs. 앫 A licensor with patents that are essential for two competing standards may have a duty not to favor one standard rather than the other, or at least a duty not to obstruct or to make uneconomic the standard in which it has the lesser interest. 20 See Siemens v. Amoi, supra note 16 (holding the ETSI reciprocity obligation applies only to patents claimed to be essential).

224 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY 앫 Any terms (other than offering better bargains) by which the licensor creates or increases the disincentives for competitors, licensees or customers to innovate is likely to be illegal. IV. OTHER LEGAL CONSEQUENCES A. “PATENT AMBUSH”

If a company which is a member of a standard-setting organization is aware that a proposed standard is being discussed, and does not claim before the standard is adopted that it holds essential patents, (or if it makes a FRAND contract and does not carry it out), it has obtained market power by deception, and in breach of its contractual obligations, and would probably infringe each of the three legal rules mentioned above. In both cases the company has prevented alternative technologies being considered. It presumably would lose, wholly or partly, its right to whatever FRAND rate of royalty it might otherwise have been entitled to claim. (It must get less than it could have got if it had given and carried out a FRAND commitment). B. NO INJUNCTIONS AGAINST A WILLING LICENSEE OF ESSENTIAL PATENTS

A FRAND commitment creates a license or a contractual obligation to grant a license, and Articles 81 and 82, when they apply, create an obligation to grant a license (or at least prevent enforcement of IP rights except on FRAND terms). So a licensor that is subject to a FRAND obligation has no right to seek an injunction against a company that is willing to take a license on FRAND terms. It cannot refuse to license, and it can license only on FRAND terms.21 C. COURTS DO NOT NEED TO WRITE LICENSES

A court does not need to write a patent license under these rules. Even in the case of a first license, the court only needs to determine whether the terms offered by the licensor are, or are not, within the FRAND range in the circumstances, and so consistent with its legal obligations. If not, the licensor cannot enforce those terms. In the case of a second or subsequent license, the non-discrimination principle provides a standard of comparison, provided that the previous license was on lawful terms. * * * MR. REINDL: Perfect, John. Thank you very much. A great presentation of the topics, and really setting it up for Roy to give us his perspective. We can open up the floor afterwards for panelists and for your questions. MR. HOFFINGER: Thank you, Andreas. It is great to be here. We appreciate you all coming out. I am going to talk about two major subjects: first, rate regulation; second, something that Mr. Banasevic touched on, SDO ex ante policies. When Mr. Temple Lang talks about “fair, reasonable, and non-discriminatory” rates, he is referring to something that in Europe is called FRAND. In the United States, it is “reasonable and non-discriminatory,” which is called RAND. 21 See Joseph Scott Miller, Standard Setting, Patents, and Access Lock-in: RAND Licensing and the Theory of the Firm, 40 Ind. L. Rev. 351 (2006) (if there is a legal duty to give a license, seeking an injunction against a willing licensee can only be a means of pressure to increase the royalty).

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That is an undertaking on the part of an owner of essential patents to license on fair, reasonable, and nondiscriminatory terms. The FRAND regime has been very successful. It has been in effect for a number of years. Remarkably, there have been very few disputes that have required the intervention of courts or agencies. That accounts for the almost complete absence of case law on the subject. Contrary to my good friend’s claim, there is absolutely no support in either United States antitrust law or Articles 81 and 82 in Europe that addresses FRAND or the reasonableness of royalties. We can dispute what these cases say. I would urge you to read them yourself, to the extent that it is relevant to what you are doing or of interest to you. The simple fact is, patent owners and licensees or implementers have negotiated thousands upon thousands of licenses, without any dispute or the need for any kind of judicial or regulatory intervention. The only case that actually does address the subject is Broadcom, Inc. v. Qualcomm Inc, decided by a New Jersey federal court last year. This case involved a claim that failure to

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offer FRAND rates violated the Sherman Antitrust Act. The court simply dismissed the claim, saying that it may be a breach of contract claim, but it is not an antitrust claim.22 Another highly relevant case is Trinko, which was decided by the U.S. Supreme Court a couple of years ago.23 That case held that a complaint alleging violations of a statutory duty to enter into agreements to lease portions of local telephone networks, on “fair, reasonable, and non-discriminatory terms” —did not state a claim under the antitrust laws. If the violation of a statutory duty to deal on reasonable terms cannot be the basis of an antitrust claim, then, a fortiori, a violation of such a duty imposed by a private contract cannot be the basis of an antitrust claim. So in the United States I think there is now a settled body of law where an allegation that terms offered by the licensor are not FRAND or RAND does not state an antitrust claim. As for Europe, the cases cited by Mr. Temple Lang have nothing to do with FRAND or reasonable royalties. In addition to having no support in existing precedent, using antitrust law to enforce FRAND is also horrible public policy. What we are talking about here are simply commercial disputes over licensing terms. We are not talking about a failure to disclose the existence of essential patents. In contrast to disputes over license terms, some U.S. antitrust cases suggest that the intentional concealment from a standard-setting organization of patents that are essential to a standard may in certain circumstances give rise to antitrust claims. None of those cases, however, involved a dispute over license terms, much less a good-faith dispute over such terms. One of many reasons why the Supreme Court in Trinko refused to create antitrust liability based on a violation of a statutory duty to deal on “reasonable” terms is that courts do not regulate rates. Mr. Temple Lang responds to this concern by observing that the enforcement of a FRAND commitment by an antitrust court is not rate setting, because the court would not be “establishing” a “precise” rate. With regard to burden and institutional competence, however, which were the concerns of the Trinko Court, there is no meaningful difference between determining the reasonableness of a proposed rate and establishing a rate. Finally, and most fundamentally, using antitrust law to enforce 22 Broadcom, Inc. v. Qualcomm, Inc., 2006 U.S. Dist. LEXIS 62090 (D.N.J. 2006), memorandum opinion, filed Aug. 31, 2006, available at http://isites.Harvard.du/fs/docs/ icb.topic131566.files/Broadcom_Qualcomm_NJ_ Dismiss_Order_83106.pdf; see also Townshend v. Rockwell Int’l Corp., 2000 WL 433505 (N.D. Cal. 2000). 23 Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko LLC, 539 U.S. 980 (2003).

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FRAND would either replace commercial negotiations with litigation or give to licensees a huge advantage in negotiations with licensors. Rather than negotiate in good faith with the licensor, a licensee might choose instead to file a lawsuit in the hope that the a jury would not like the licensor’s offer and award treble damages to the licensee. The licensee, however, faces no corresponding risk. The same considerations apply in Europe, except the concern is fines and penalties, not treble damages. Further, under Mr. Temple Lang’s view, pending a decision by the court on compliance with FRAND, the licensee would be able to use the patents without fear of an injunction, and pay nothing until country-by-country litigation on the reasonableness of the licensor’s offer. In that circumstance, the licensor has to wait forever to realize any royalties, and if the court should happen to find that its offer was noncompliant with FRAND, pay treble damages, at least in the United States.

I would like to comment on the argument of Mr. Temple Lang and others that the maker of a FRAND commitment is legally foreclosed from obtaining an injunction against patent infringement. The theory underlying that argument is that the FRAND commitent itself is a license. But it plainly is not. The relevant standard-setting organization (SSO) rules and policies, and the written commitments themselves, state that the licensor is prepared to offer or negotiate licenses. Those same rules and policies also state that the license must be negotiated between licensor and licensee. A no-injunction rule would allow users of patented technology to bleed licensors to death by paying them nothing until the licensor is forced to litigate, potentially on a country-by-country basis, to establish that it has made a FRAND offer. If the court comes back and says the offer does not comply with FRAND, then the patent owner must make another offer, which is likewise subject to challenge by the licensee, making the process potentially an endless one unless the patent owner capitulates to the demand of the licensee. Otherwise, the licensee continues to use the patent, and the licensor gets no revenue. What kind of scheme is that? It substitutes regulation for any chance of marketplace negotiation, and eliminates the incentives for investment that the patent laws were designed to create.

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Wholly apart from the question of whether breach of commitment gives rise to antitrust liability, FRAND does not, and was never intended to, mandate or authorize rate regulation of intellectual property. Mr. Temple Lang’s notes set forth no fewer than twenty rate regulation principles that supposedly are embodied in FRAND. Most, if not all, of these bear striking similarity to the most onerous form of rate regulation: public utility regulation. Again, there is no support in precedents or SSO IP policies for applying public utilitytype rate regulation to intellectual property. Indeed, that would stand on its head the concept that patent owners should be allowed to establish the compensation for which they make their intellectual property available to others. The fact of the matter is that FRAND regimes were not adopted to authorize rate regulations. What FRAND was about, when you go back to its origin, was a concern that licensors would keep the technology to themselves and thus would be the only entity able to produce and sell products in the downstream market. In other words, FRAND was intended to promote the availability of licenses, and was not addressed to particular terms

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of licenses, including royalties, except to the extent that the terms of an offer to license amount to a constructive refusal to license. What we see here is you are going from a situation where intellectual property laws are designed to encourage innovation by giving patent owners a fair amount of latitude with regard to their rates, and now you are going to the opposite extreme and purporting to subject them to government-type regulation.

There are many, many constraints — I will not go through them — on the practical ability of a licensor to extract unreasonable rates. That those constraints exist and are effective is confirmed, again, by the relative absence of disputes and case law on the subject. Finally, there has been this notion that the way to determine a reasonable rate is simply by counting all the essential patents, having some industry segment decide an aggregate royalty that would be allocated to patent owners based on the numerical proportion of the essential patents they own, without regard to relative value of the patents. There is no support in case law, economics, or industry practice for the arbitrary determination of an arbitrary aggregate royalty, or determining whether a royalty is reasonable based on the number of patents owned by a licensor. Very recently, Nokia and Ericsson stated in a case in Europe that that no member of the wireless industry, for example, determines royalties in that manner. My outline addresses SDO IP policies other than FRAND, the absence of any evidence of so-called patent hold-up through unreasonable license terms, and the dangers that proposed SDO IP policies to encourage or permit groups of licensees to jointly negotiate license terms with licensors will have the same anticompetitive effects as buyer cartels. Thank you very much for your attention. MR. REINDL: Thanks very much, Roy, for that spirited presentation. If you had any doubts that there are different views of standard setting, now these doubts should be all removed. John, there was so much direct back and forth between the two of you. I will give you the opportunity to respond very briefly. MR. TEMPLE LANG: The first point that Roy made was the absence of disputes. That is true, in the sense that there is an absence of recorded cases and judgments, which I

230 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY pointed out. What happens in practice frequently is that there is arbitration. Ultimately, if there has been a dispute, it gets resolved in that way. Roy is, I’m afraid, wrong when he says there is no support for the views that I have put into my notes. He has not read the cases. There are plenty of cases in Europe. They are referred to indirectly. There are rather a lot of them in the footnotes to my paper. There is, however, a more important point that I think is implicit in what he is saying, which he did not make clear. If I am misunderstanding him, no doubt he will correct me. What he is saying, basically, is that the issue of whether a rate of royalty — or, I assume, also other non-royalty terms — in a license which is subject to a FRAND commitment is not at all a justiciable matter. If that is really what he is saying, then it is certainly not the law in Europe, and I would be surprised if it was the law in the United States. He referred to a judgment of a First Instance Court in New Jersey, which I happen to know is on appeal, but which, as he mentioned, recognized that a FRAND commitment might be a contractual obligation. If a FRAND commitment is a contractual obligation, then it must be justiciable, however you do it. MR. HOFFINGER: Let me clarify. MR. REINDL: Let me get to a couple of other speakers first to make sure that we hear other views as well. We have twenty minutes for discussion on this point Geoff or Nick, you have two very different views about whether competition authorities should get involved in FRAND issues at all. Any views from your side? MR. OLIVER: More generally, let me say, first, I felt very comfortable with everything that Nick was saying. I think we have very different views, generally, in terms of whether to get involved. I would respond to the last two presentations on a couple of points, if I may. First, on the idea that RAND may be a contract issue but not an antitrust issue, at least in my own personal view, the two are not necessarily mutually exclusive. Indeed, I think there is some mistaken understanding in United States case law because of the way that issue tends to have come up in private litigation. You can have, of course, a contractual dispute between two parties, but if you have a very similar contractual dispute among many parties to the point that it affects an entire marketplace, that can also be an antitrust issue. So I would dispute the idea that it is either/or. I certainly would agree that the idea of setting RAND is a very difficult proposition. It is certainly one that an antitrust authority would not undertake lightly. However, if necessary, it can be done. I point to the Federal Trade Commission’s recent remedy decision in the Rambus case24 as an instance in which the Federal Trade Commission was forced to, and did, determine what a reasonable royalty was. Finally, on the question on antitrust selectivity and the balance, because it involves treble damages or penalties, that, of course, would be true of private actions in the United States, but that would not be the case with respect to a government enforcement action in the United States. MR. REINDL: Thank you. Nick? MR. BANASEVIC: Just briefly, I would go back to my basic proposition, that a potential way — in a sense, the most economically pure way — for these issues to not have to come to an antitrust agency’s or a court’s attention is precisely this ex ante scheme. It is the 24 In re Rambus, Inc., Docket No. 9302 (F.T.C. July 31, 2006), available at http:// www.ftc.gov/os/adjpro/d9302/ index.shtm.

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market deciding in advance, on the basis of technology and price, what the solution should be, avoiding this debate about whether there is an ex post unreasonable monopoly price. Again, it is not for an antitrust agency to start recommending that kind of thing, because we do not know which specifics of each industry and each standards body are best. It is for industry to push that itself and decide if it wants to go down that route. I am interested in what Roy might have to say. I am not sure that there is a concern per se that that would lead to collusion. If collusion is going to happen, collusion will happen, whether or not you have an ex ante regime. I do not see any potential problems in that respect. I think that is what the DOJ said as well. MR. REINDL: We will make sure we can get to this topic at the end. Let me ask our other panelists, David or Rondal: Are there more disputes about standard setting than before? Is it becoming a more important issue? From your own practical involvement and the views that you heard, how does rate setting in the standard-setting settings play out? MR. KAPPOS: I am happy to address that. I think in the information technology industry, where my client is active, we are unquestionably seeing more issues involving standard setting. The reason for that is not rooted in the fine legal discussions that we are having here today. It is rooted in the proliferation of standards, standard bodies, and technical people involved in them. In the case of my client alone, we are involved in literally thousands of standard-setting efforts simultaneously, with tens of thousands of our employees, who cannot possibly be policed by lawyers in an effective way. That amount of standard setting is accelerating over time. We have all of that going on, rooted on the base of need for product interoperability that did not exist with anywhere near the same level of intensity that it does now. When you have that coupled with the network effects, the lock-in effects that occur after standards get set and proliferate — whether you think Rambus was right or not, whether you like the Broadcom-Qualcomm dispute or not, or whose side you are on — there clearly is lots of tension coming up. It is not rooted in the legal issues; it is rooted in people needing products to work together. So to answer your question, yes, there is a lot of tension at the interface between standard setting, intellectual property laws, and competition laws. The other comment I will make, listening to all the other speakers, is that I think that regulators do play a role — and should play a role, particularly right now, when there is all this confusion — when different standards bodies are having so much trouble coping with understanding where the bright lines are and where the not-so-bright lines are. I do not disagree with what people are saying. You want the regulators to play a relatively judicious role and to regulate only when there is tremendous clarity to be gained from doing so. In the setting of royalty rates, in particular, product prices, those kinds of things, it is probably the place where it is the most difficult for regulators to become involved. One example of where you see some real value in a little bit of clarity is indeed ex ante, which was mentioned a couple of times. The reason I say that is because I think the VITA letter,25 the statements of FTC Chairman Majoras,26 the recent statement of another U.S. government lawyer in China,27 all supporting the concept that ex ante is procompetitive, 25

VITA Business Review Letter, supra note 3. See, e.g., Majoras, supra note 5. 27 See Gerald F. Masoudi, Dep. Ass’t Att’y Gen., U.S. Dep’t of Justice, Key Issues Regarding China’s Antimonopoly Legislation, Address at the International Seminar on Review of Antimonopoly Law, Hangzou, China, May 19, 2006, available at http://www. usdoj.gov/atr/public/speeches/217612.pdf. 26

232 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY are really going to have the effect of settling down that part of the confusion. I think that is the kind of place where the regulator can play a positive role without getting too involved. MR. REINDL: Just one quick question. You speak generally about standard setting, and we talk about standard setting. Are the practices between various organizations very different in that sense? We do not really have, I think, a lot of empirical data about how different standard-setting organizations work. Do you see that there is a more common policy evolving, or are there still very different policies around today? I think Professor Merges28 once did a study that showed that things are very different. I wonder whether this all now converges a little bit more. MR. MOORE: There has been some move towards organizations becoming more harmonized in their IP policies. Just recently, ISO, IEC, and ITU agreed to merge and harmonize their IP policies, which was, I think, a good thing. To the extent that the rules are the same in every game that you are playing in, at least it is a lot easier, with the proliferation of standards organizations, to deal with that. However, there are other organizations that are very different. — W3C, OASIS, the Institute of Electrical and Electronics Engineers (IEEE), and Internet Engineering Task Force (IETF) — that all have very different rules, some of them more developed, some of them less developed. There is a lot of flux in the rules right now because of this whole process of harmonization and the governments being involved, whether it is governments being involved through DG Comp and DOJ writing letters saying that they really like this idea or they do not, or governments becoming involved by choosing to put purchasing preferences into laws, based on the use of certain standards or standards with a certain set of characteristics to them. Because of that, you are going to see more pressure on standards organizations and more pressure on people to participate in standards organizations and to expand the subject-matter standards, which may not be in anybody’s best interest. MR. REINDL: Victoria, welcome to the panel. I wonder whether you can add something at this point in the discussion. MS. ESPINEL: Sure, I am happy to. My office oversees intellectual property and innovation issues generally. I think this issue, where you have intellectual property rules, trade rules, and competition rules all intersecting, is a very interesting one. From the USTR’s perspective, our overarching goal, and the goal of the World Trade Organization (WTO), is to try to reduce market barriers generally and try to increase global competition in a way that has a positive impact on consumer welfare. We are seeing this issue come up more and more at international fora, including at the WTO, but also places like the Asia-Pacific Economic Cooperation (APEC). We have some concerns with the extent to which certain governments may or may not involve themselves in this process, particularly governments that are considering policies that 28 See, e.g., Robert P. Merges, Contracting Into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 Cal. L. Rev. 1293, 1340–58 (1996) (noting that patentees use patent pools as a form of private ordering to clear mutually blocking patent portfolios that would otherwise halt commercialization in a valuable market space); Robert P. Merges, Institutions for Intellectual Property Transactions: The Case of Patent Pools, in Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society 123, 146–54 (Rochelle Cooper Dreyfuss et al. eds., 2001) (discussing the MPEG-2 and DVD pools); Robert P. Merges, From Medieval Guilds to Open Source Software: Informal Norms, Appropriability Institutions, and Innovation 4, 18–19, Presentation at Conference on the Legal History of Intellectual Property, Univ. of Wisc. Law School Inst. for Legal Studs. (Nov. 13, 2004), available at http://ssrn.com/ abstract=661543 (noting the similar institutional function of patent pools and SSOs).

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would benefit their domestic industries in a way that would severely limit foreign competition. Much of this is being developed. I think, for the next few years, it will be an interesting area, to watch certain countries, in particular, as they are internally considering what their policies in this area are going to be and trying to work those into their own domestic innovation policies. MR. REINDL: Roy, you had to hold back. Just very briefly, another comment. Then we can open up the floor. MR. HOFFINGER: Thank you for giving me the opportunity to clarify. This is not a justiciability issue. You are correct that FRAND is enforceable as a contract. What we disagree about is exactly what the contract is. The contract binds patent owners and implementers to negotiate license agreements in good faith. Compliance with that obligation is judiciable. But that is very different than rate regulation. The other thing I want to say, in response to Nick’s statement about SDO ex ante policies, is that the danger of collusion occurs from such policies that encourage or permit multiple implementers or prospective licensees to discuss terms upon which they would be willing to license patents essential to a standard. That is classic cartel behavior, and settled antitrust law prohibits such cartels even when the participants are buyers, not sellers. Although that was not the subject of DOJ’s Business Review Letter on the VITA policy — and, indeed, there was an express, unqualified, and unambiguous prohibition on discussions between multiple licensees of royalties and other license terms— IEEE’s current request before DOJ for a Business Review Letter expressly encourages discussion of those very subjects.29 It is notable that general counsel for IEEE has written an article about why he believes multiple licensees should be able to discuss and agree among themselves on license terms they will accept. He calls this “coordinated buyer power.”30 MR. REINDL: Thanks. Perhaps we will have a chance to get back to this issue towards the end of the panel. Let me open up the floor and see whether there are any questions, primarily on these issues that we have discussed, rate setting, FRAND, and license commitments. QUESTION [James Love, Knowledge Ecology International, Washington]: A lot of businesses have expressed to us their feeling that the standard-setting process is in trouble, that it is more and more difficult to consolidate intellectual property rights or to develop certain kinds of interfaces, and the extent to which they feel that intervention by governments, in terms of addressing things like norms in terms of royalties and things like that, is appropriate. Why is it so self-evident that it is such a difficult thing to do in the context of pools, in terms of what a pool might charge? The reason I say that is because it seems, in reading the literature, that pools that result in royalties that are single digit, in the course of negotiations seem to be applauded as being a successful negotiation. Again, if you have an idea of what constitutes, through market transactions, an appropriate outcome, wouldn’t you save yourself a lot of time in terms of transaction costs by just having some guidelines by the government as to what would constitute some sense of what would be an appropriate cap in terms of royalties for certain kinds of pools in certain kinds of areas? In other words, if you do not feel like you can control patent quality or the proliferation of patents, it just becomes completely out of control. There is just no other way to think about it. 29 Letter from Thomas O. Barnett, Assistant Att’y Gen., U.S. Dep’t of Justice, to Michael A. Lindsay (Apr. 30, 2007), available at http://www.usdoj.gov/atr/public/bus review/222978.pdf. 30 Robert Skitol, Concerted Buying Power: Its Potential for Addressing The Patent Holdup Problem in StandardSetting, 72 Antitrust L.J. 727 (2005).

234 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY If the patent landscape becomes a huge problem in some areas, what would be wrong with the government basically saying, “We are just going to tell you that if pools are fixed in this area and 6 percent of the revenue goes to patent owners, this would fit into some norm?” Wouldn’t that allow some compression of time for the negotiations? Wouldn’t that force people into compulsory licensing arrangements? I think Europe does a lot of this, in the sense that they have these compulsory licensing issues that are in the background of negotiations, more so than they have in the United States. Wouldn’t you say that the European refusal-to-license doctrines and compulsory licensing statutes provide, in some sense, a less transparent set of norms that drives things in a direction that just does not exist in the United States, for example? MR. REINDL: Thanks. Any direct response from the representatives of the two agencies? MR. OLIVER: From my point of view, speaking just as an individual, I think we are very concerned about a couple of different things: first, ensuring that innovation continues to be encouraged going forward, on an ongoing basis; and second, that free markets are allowed to work and to operate and find their own equilibrium dynamic. In my own personal point of view, the idea of a government stepping in and setting a cap on royalties risks discouraging future innovation. It also could interfere with market forces. As an example, the idea of trying to determine what a patent is worth or what an invention is worth — certainly a government antitrust agency is not in a good position to be able to do that. That is what I referred to in my earlier comments when I said that I think if an antitrust agency feels it is absolutely necessary, it might be able to step in, as it did in the Rambus case, and determine what a reasonable royalty might be. But it is a measure of last resort. MR. BANASEVIC: I would agree with everything that Geoff said. I am not sure that the compulsory-licensing doctrine rules are as prevalent in Europe as you might imagine. It is true that we have had, most recently, the Microsoft case, which is only the third case ever.31 It is true that we have also come to the preliminary conclusion that the royalties that Microsoft is charging, which is the remedy in the liability decision, are unreasonable. But I think that serves to illustrate the general point that every case is different. That is the special context of an exceptional antitrust liability case that deals with monopolization, That illustrates, more generally, that in standards bodies you may have different rates, different market equilibria, that would come out through a dynamic process. For the government to be starting to impose or recommend certain general rules, I think, would not be appropriate. MR. REINDL: Thanks. Let’s move on to the second topic. We should have time at the end, too, and you can ask your questions. I just want to make sure we do have enough time for an also very interesting and controversial topic in standard-setting organizations. Geoff, do you want to talk about Rambus? MR. OLIVER: Thank you very much. I am delighted to have the opportunity to speak here today. I plan to give a brief overview of the Rambus case.32 What I thought I would do is give 31 Case COMP/C-3/37.792, Microsoft Corp. v. Commission, Decision of Mar. 24, 2007, available at http://europa.eu.int/comm/competition/antitrust/cases/decisions/37792/ en.pdf. 32 In re Rambus, Inc., Docket No. 9302 (F.T.C. July 31, 2006), available at http:// www.ftc.gov/os/adjpro/ d9302/index.shtm. Opinion of the Commission (Pamela Jones Har-bour, Cmm’r), available at http://www.ftc.gov/ os/adjpro/d9302/060802commissionopinion.pdf.

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a quick overview not only of the legal context, but actually of some of the exhibits that came up during the course of the trial, just to give a more concrete sense of what this case was about and a concrete sense of what the concerns were underlying the decision that the Commission issued. Unfortunately, because of the time limits today, I will have to be very fast, I will have to be grossly over simplistic, and I will be one-sided. I apologize, but I am happy to take more balanced questions at the end. The views I express here are mine, and mine alone, and do not necessarily reflect the views of the Commission, of any Commissioner, or the FTC staff. To start, what are the antitrust concerns with standard setting? A standard, as Nick was saying, can represent an agreement among competitors to limit their competition. As the Supreme Court has stated, a standard is implicitly an agreement not to compete in certain ways.33 Furthermore, members of SSOs are not always altruistic. It is possible for one member to capture the power of a standard, and thereby exclude competitors or harm competition.34 So why then does antitrust law permit standards? As the Supreme Court has noted, when done properly and when procedures prevent the standard-setting process from being biased by members interested in stifling competition, standards can have procompetitive benefits.35 But, as the Supreme Court has emphasized, “[T]he hope of procompetitive benefits depends upon the existence of safeguards to prevent the standard-setting process from being biased by members with economic interests in restraining competition.”36 In the Rambus matter, what safeguards did the standard-setting organization, the Joint Electron Device Engineering Council (JEDEC), have in place to prevent the standardsetting process from being biased by a member with an interest in restraining competition? JEDEC’s antitrust safeguards consisted of three layers: First, their basic rules governing EIA and JEDEC standardization programs. Second, on top of that, JEDEC’s commitment to avoid patented technologies where possible, or at least to secure a rate commitment before incorporation of a patented technology in a standard. Third, specific JEDEC procedures require disclosure of patents. JEDEC’s basic rule number 5 is almost a statement of antitrust law: JEDEC programs “shall not be proposed for or indirectly result in ... restricting competition, giving a competitive advantage to any manufacturer, [or] excluding competitors from the market.”37 Multiple witnesses confirm that JEDEC’s basic purpose was to develop open standards that are available on equal terms to everybody in the industry.38 The evidence confirmed that, to ensure that standards would be open to all, JEDEC sought to avoid using patented technology when possible. As Richard Crisp, the Rambus representative at JEDEC, explained to others within Rambus, “The job of JEDEC is to

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Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1988). See American Soc’y of Mech. Eng’rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 571 (1982) (“[A] standardsetting organization like ASME can be rife with opportunities for anticompetitive activity. … When the great influence of ASME’s reputation is placed at their disposal, the less altruistic of ASME’s agents have an opportunity to harm their employers’ competitors through manipulation of ASME’s codes.”). 35 Allied Tube, 486 U.S. at 501. 36 Id. at 509. 37 JEDEC Manual of Organization and Procedure, JEP21-I (Jan. 2005), available at http://jedec.org/Home/ manuals/JM5.pdf. 38 See, e.g., Appleton, Tr. 6328; Bechtelsheim, Tr. 5781–2, 5785; Rhoden, Tr. 536; Williams, Tr. 761. 34

236 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY create standards which steer clear of patents which must be used to be in compliance with the standard whenever possible.”39 To ensure that its members could make fully informed decisions, JEDEC imposed an “obligation on all participants to inform the meeting of any knowledge they may have of any patents, or pending patents, that might be involved in the work they were undertaking.”40 The JEDEC Committee Chairman, Jim Townsend, opened each meeting with a statement of the disclosure policy. Multiple witnesses testified that his statements were consistent with the Manual.41 The evidence also showed that the Committee Chairman kept a running list of all patents that were disclosed, and that list was published in each of the minutes. The Chairman also sent follow-up memoranda to patent holders requesting additional information about their patents. Richard Crisp of Rambus informed others at Rambus of an uproar that occurred within JEDEC when JEDEC members learned that Texas Instruments had started enforcing, against a JEDEC standard, a patent that Texas Instruments had failed to disclose at JEDEC. Let’s turn now to Rambus’s conduct and whether, in the circumstances of JEDEC, Rambus’s conduct was anticompetitive. Rambus started by consulting its outside patent counsel to discuss, first, pre-planning before accusing others of infringement, and second, advising JEDEC of its patent applications. Rambus’s CEO held a strategy meeting regarding JEDEC, at which he asked two key questions: First, what additional patent claims should Rambus file? Second, what obligations does Rambus have to inform JEDEC? On the first question, the handwritten notes of Rambus’s outside patent counsel confirm that Richard Crisp, Rambus’s representative at JEDEC, sought to add patent claims based on work that Richard Crisp had observed taking place at JEDEC. An internal Rambus business plan confirmed that Rambus representatives believed that JEDEC-compliant products would infringe claims in Rambus’s pending patent applications and that Rambus could file additional claims to cover features in the JEDEC standard.42 Rambus’s action was to move ahead with those claims. On the second question, Richard Crisp, Rambus’s representative at JEDEC, answered the question: “I know that JEDEC takes the position that we should disclose.”43 Indeed, in a deposition he answered a question as follows, “Well, they [JEDEC] wanted to know about both patents and patent applications that might relate to the works that were going on within JEDEC.”44 Indeed, Rambus’s outside patent counsel advised Rambus that there could be an equitable estoppel problem if Rambus creates the impression on JEDEC that it would not enforce a patent or patent application against JEDEC-compliant products. But Rambus did not inform JEDEC that it had a patent and multiple patent applications relevant to specific JEDEC work. Why not? As Richard Crisp explained, in a slightly different context but also arising directly out of JEDEC, “If it is not a really key 39 Response of Complainant, In re Rambus, Supplemental Spoliation Memorandum, CX0903, available at http://www.ftc.gov/os/adjpro/d902/050330ccsuppmemeorespoliation.pdf. 40 Id. at 16, n.12. 41 See, e.g., Lee, Tr. 6597; Landgraf, Tr. 1698–99; Williams, Tr. 786–87; G. Kelley, Tr. 2406–07; Rhoden, Tr. 332; Williams, Tr. 788–89. 42 CX 543a at 14–17, Rambus 1992-97 Business Plan. 43 CX 5105 (Dec. 1992 Crisp email). 44 CX 2104 at 852–53 (Micron Dep.)

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issue, then I think it makes no sense to alert them to a potential problem that they can easily work around.”45 Rambus’s CEO stated it more succinctly, in an email sent to other Rambus employees: “do NOT tell customers/partners that we feel [JEDEC-compliant products] may infringe — our leverage is better to wait.”46 So what were the effects of Rambus’s conduct? Before the standards were adopted, Rambus’s technology was merely one of a number of competing technologies in the marketplace. After the standard was adopted and implemented by the industry, over 90 percent of all DRAMs complied with the JEDEC standards. As a result of that, Rambus acquired the power to charge royalties on over 90 percent of all DRAMs. As Subcommittee Chairman Gordon Kelley wrote in response to Texas Instruments’ enforcement of undisclosed patents, “I am and have been concerned that this issue can destroy the work of JEDEC. If we have companies leading us into their patent collection plates, then we will no longer have companies willing to join the work of creating standards.”47 That, of course, is just a very small portion of the evidence introduced in the Rambus case. Obviously, this is the evidence only supporting the Commission decision, but this gives a small taste of why the Commission had concerns here and a sample of why the Commission issued a ruling of liability against Rambus and issued a remedy that Rambus should be enjoined in the future, going forward, from charging royalties greater than reasonable royalties on JEDEC-compliant products. I will be happy to answer questions. Thank you very much. MR. REINDL: Thank you very much. It is like a little detective story that you have developed here. Very interesting. Let me ask our panelists a question. I do not want an opinion of whether the FTC was right or not — we just heard that it was right. Based on your involvement in standard setting, generally are these issues that you see coming up? What should or could authorities or the courts do about it? MR. MOORE: I am curious. I will open up a question to the audience: How many people think that having an ex ante disclosure policy would have stopped Rambus? Nobody. I do not think it would have either. Rambus is held up as sort of the poster child for what is wrong with standard-setting organizations. But, in fact, they should be held up as the poster child, maybe along with Texas Instruments — I do not know, since I am not sure what happened to that part of this instance. They are a bad actor. They do bad things. They lied. They withheld information from people when they knew that they were asking for it. They would have lied about an ex ante disclosure, too. It sounds like they would lie to their grandmother if they had to. The problem is that there is a lot more pressure being put on standards organizations and the people using standards. Because of that, more and more products are going to be built around standards, just because they are standards. I heard my colleague from IBM say that the issue was interoperability. I think Andreas, and even Nicholas, said that, too. I think what people should be focusing on is how interoperable products are. Standardization is one way to do that, but there are lots of other ways as well. 45 46 47

CX 711 at 73. CX 919. CX2384, Letter from Gordon Kelley, IBM.

238 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY MR. KAPPOS: I will take another cut at the question of whether an ex ante policy would have caused the case to come out differently. I actually think it could have, not because Rambus necessarily would have done anything differently. But if there would have been clear disclosure rules on the part of the JEDEC, if it would have been clearly documented and all the appropriate legal terminology used, people forced to sign documents — the things that we would do if we had lawyers hovering over these standard-setting activities — Rambus still may have done whatever it is they did, but I think the case would have been resolved much more expeditiously, effectively, maybe not requiring several years of government intervention. I think, moreover, the remedy would have been able to be more effective than it is going to turn out to be in that case. By getting clarity, you could have wound up with a much quicker and more pro-consumer resolution than you wound up with in that case. MR. REINDL: Just a brief follow-up question. Everyone on the panel has emphasized that there is more and more standard setting going on and it is becoming more and more interesting. You three are from organizations that are on both sides of the standardsetting process. Your IP is involved in the standards, but also you license the standards from other companies. Should we believe that just because it is a more repeat game, and more and more of these things develop, companies overall tend to be more cooperative, because they know if bad behavior becomes the standard, they may be on the receiving end, too? MR. MOORE: Yes. I am sure responsible standards participants generally would like everybody else to be responsible standards participants. I would say that, probably five years ago or more, that was the norm in standards organizations, where engineers just went to standards groups, they collaborated on things, and standards were released. The IP policies were very much like JEDEC’s, ones that encouraged disclosure, but did not have lots of rules and forms that you had to fill out. That system has worked, by and large, even through today. How many Rambuses can we point to? Not many. Again, I think the problem is, the more important you make standards, the more likely you are to create another Rambus. You make it so important for standards to be standard, and you make it so important for people to get their IP into standards — we are seeing more and more that standards are bloating in terms of how many patents are involved and how much technology is involved, how many complementary solutions there are. Many more standards these days have the mandatory way and then five or six or more optional ways of doing some particular function. It is because everybody wants to donate their solution, because everybody wants their solution to be standardized. Again, okay, but it just makes it a lot more complicated. It makes trying to figure out what patents you should disclose, and when, a lot more complicated. It is going to start to break the backs of people that are participating broadly in standards. It is very expensive for them to do. MR. REINDL: Any other speakers? John? MR. TEMPLE LANG: If a standard-setting organization wished to do so, it could amend its normal rule encouraging FRAND commitments to specify that any company that had a patent at the date of the adoption of a standard that he had not disclosed would, for the purposes of that standard, as a matter of contract, to insist on any royalties being paid by any company using that standard. That would be possible. That would be something that a standard-setting organization could say, if it wished to do so. It could specify that, even without requiring companies disclosing that they own essential patents to specify in advance what patent royalties they want to charge. That, I think, has to be optional, because I think there are many circumstances in

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which you just cannot do that in any sort of meaningful sense until after the standard is adopted. But there is no reason why you cannot impose by contract a penalty — maximum royalty X or no royalties at all — for failure to disclose. MR. REINDL: Roy, you are looking at me like something is burning. MR. HOFFINGER: Just two comments. I want to, first, draw a distinction between failure to disclose patents, which is the Rambus case and most of the other cases that have dealt with the issue, and mandatory disclosure and joint negotiation among implementers of license terms. With regard to disclosure of essential patents, I do not have a problem with devising and applying appropriate remedies. But I do think we need to exercise caution, especially when we talk about draconian remedies, such as royalty-free licensing. And bear in mind that identifying essential or potentially essential patents is a difficult undertaking. Again, you want to be careful to make sure that the policy is balanced and reasonable, and that good-faith mistakes — we are not talking about Rambus here — are not punished, so that we do not chill innovation and participation in standards bodies. The idea that you must disclose your license terms raises issues. John mentioned one of them: How do you know what your terms should be at a given point in the standarddevelopment process? Beyond that, if the disclosed terms are discussed among implementers, you raise the concerns about collusion. MR. REINDL: We have a few more minutes for one, or perhaps two, quick questions. QUESTION: Good afternoon. I would like to ask the panel their thoughts on the scenario — if we assume, as Mr. Moore suggests, that the ambush or hold-up problem is really more the exception than the rule, what is the panel’s thinking regarding whether all this discussion about IPR policies and SDOs is more motivated by business strategies and business-model issues than by real fears of a hold-up? MR. MOORE: I would say that is absolutely true. Whenever anybody is suggesting anything to you, part of the thought process that should go through your mind is: Why are they asking me this? Many companies and many individuals will put forward solutions to problems because that advantages their business model. Again, that comes back to preferences in purchasing, making these things that much more commercially required, and part of the process of trying to steer their business model into the fast lane of the commerce highway. MR. BANASEVIC: I would agree. We have followed over the last year discussions on whether or not the European Telecomms Standardization Institute (ETSI) should change its rules; and, if so, how. From our outside perspective, we saw that there were clearly different streams, according to the commercial interests of the companies involved, depending on, amongst other things, the strength of their patent portfolio. I would go back and say more generally, though, that these issues that have come up — these problems, if you like — have nevertheless lent themselves to companies coming forward, just as a general policy interest, and getting clarification to avoid these kinds of problems arising. As well as what you might call their company-specific interests, there is also, I think, a desire to clarify things, to avoid problems like this coming up. MR. OLIVER: If I may also comment, I do not know what the answer is. Clearly, there is a lot of this that is being motivated by a business strategy. However, we have also heard from quite a number of standard-setting organizations as well. It is impossible for us to tell whether those organizations are, in turn, reacting to business pressure, or whether the organizations truly see a problem and are trying to do

240 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY the right thing, or both. I suspect probably both. That leads me to conclude that, even though business strategy might be driving a lot of it, I think it is more than just that. MR. REINDL: We have time for one quick question. QUESTION: Do you think there could be a role for WIPO, in the multilateral context, to help do a better job of managing the disclosure process for patents on standards, for example, through a multilateral agreement that if people would fail to disclose patents against a standard which was widely advertised, they would not be able to subsequently try to enforce the patent against the standard. That might help deal with the ambushing problem, and reach outside the people within the standard-setting organization, who are not always the problem in some of these cases? MR. OLIVER: My personal response is that I am rather skeptical that one size fits all, regardless of where it is done or where it takes place. I think there is a potential for a lot of variation from one industry to another, from one organization to another, and maybe even from one standard to another. I would be prepared to give quite a bit of deference to an organization, and its members, to know what is best for that particular situation and to be prepared to give a certain amount of flexibility to the organization to craft the procedures that it thinks work best in that setting. MR. REINDL: Any other quick reactions? MR. MOORE: I would also say that, most often, standards are beginning to be implemented long before they actually are finished and published as standards. By the time you finish, publish something, and then give people this idea that it is widely available, that standard, if it is going to be a successful one, is already in that zone where people could be held up over it. So you are probably past the place where you could do that. MR. REINDL: Thank you. We have reached the end of this panel. Let me thank the speakers and the panelists for a very lively and informative discussion. Thanks very much.

APPENDIX Competition Policy and the European Commission: CDMA Standards and Qualcomm Michael A. Einhorn, Ph.D.48 I. INTRODUCTION Regulatory authorities in the United States and Europe now approach the antitrust issues of exclusive dealing, predatory pricing, and other potentially anticompetitive actions in a somewhat different manner. In the United States, the competitive process is viewed as a powerful check upon the unbridled exercise of producer power. Competition then is a process that forces rival producers to be responsive to consumer needs, as well as a selection mechanism that rewards producer efficiency and innovation. When enforcing antitrust laws, U.S. competition authorities then examine purported contested competitive tactics for their effect upon consumer prices and overall economic efficiency, rather than profit losses and other hardships imposed on direct competitors. The situation is somewhat different in Europe. Here, the same antitrust authorities of the European Commission more often regard competitive harm as dangers that may recur to market rivals. In particular, producer competitive actions may actually be regarded as economically harmful if they have the effect of taking market share from a less-efficient rival in the industry. If the initiator is a producer in control of a particular 48

Advisor, CONSOR Intellectual Asset Management.

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technology that is patented or otherwise necessary, the contested practice may be limited or disallowed by competition authorities at the European Commission. The difference is highlighted in an ongoing matter initiated before the Commission in 2005. In that year, six major technology companies (Broadcom, Nokia, Ericsson, Panasonic Mobile Communications, and Texas Instruments) requested the Competition Directorate of the European Commission to enjoin Qualcomm from certain practices in the licensing of patented technologies now used in the European standard for third-generation cell phones. In the plaintiffs’ view, Qualcomm failed to meet prior commitments to license its technologies on terms that were fair, reasonable, and non-discriminatory (FRAND), and apparently required by the standards agreement. Along with two South Korean companies, two plaintiffs — Texas Instruments and Broadcom — also filed similar complaints with the Korean Fair Trade Commission. A related action in the United States was dismissed in summary judgment, but is now pending appeal. In 1989 Qualcomm publicly introduced the concept that a digital communication technique, called code division multiple access (CDMA), could be commercially successful in wireless communication applications. Along with the market-dominant GSM (Global System for Mobile Communications) and TDMA (Time Division Multiple Access), CDMA became one of three voice-only digital wireless technologies that displaced analog techniques in Europe in a second generation of phone technology. Subsequently, variations of each technology would become competing third-generation (3G) wireless standards that would be capable of carrying both data and voice traffic. Indeed, the International Telecommunications Union (ITU) in May 2000 adopted a 3G standard (IMT-2000) that now encompasses five different technology modes. Three such technologies — CDMA 2000, W-CDMA, and TDD — implicate CDMA protocols and utilize Qualcomm’s intellectual property in core components. These operating modes are separately implementable and are not interchangeable from a technological perspective. The United States and Asia have moved to implement CDMA-2000, while the European Community has focused on the W-CDMA alternative. Compared with the Europe-dominant standard GSM, CDMA remains a smaller technology in Europe. As a lead developer of CDMA, Qualcomm now licenses to original equipment manufacturers (OEM) technologies from a menu of 1000 patents; the company now has over 1700 patent applications pending in the United States. For W-CDMA, licensees include leading equipment providers, such as Siemens, Nokia, Ericsson, Motorola, Lucent, Samsung, and LG Electronics. As the standards use technology from different technology owners, licenses for the sharing of technology are established under the governance of the ITU. The licenses regarding W-CDMA specify that licensing terms must be fair, reasonable, and non-discriminatory As compensation for patented technology used in integrated circuits, Qualcomm generally receives royalties that are paid as a percentage (e.g., 5 percent) of the selling price (net of permissible deductions) of the equipment. The company also performs contract R&D for specific projects on behalf of various government agencies and commercial contractors. In the plaintiffs’ eyes, Qualcomm’s licensing practices fail to meet the necessary FRAND criteria for two reasons. First, the company set lower royalty rates to handset customers who buy chipsets exclusively from Qualcomm (which is the largest provider of CDMA chips but a relatively small provider in Europe where CDMA is not dominant). Second, the company fixed the same royalty rate on W-CDMA handsets as it did for CDMA2000 3G handsets, although it contributed less technology to the former standard.

242 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY II. SELECTIVE DISCOUNTING In examining the issue, we face a key distinction between aggressive competition and harm to a particular group of competitors. By any stretch, selective discounting by a market competitor is vigorously competitive. Qualcomm is a small player in the overall European chipset market, which is dominated by manufacturers that produce for the larger GSM standard Accordingly, if Qualcomm lowers the price of its licensed technology to buyers that agree to purchase its CDMA chipsets, it evidently expands the market share of CDMA in this wider competitive market, to the detriment of larger chipset manufacturers (such as Texas Instruments) that produce for the dominant standard. An astute analysis of a related matter appeared in a U.S. decision written by Judge Frank Easterbrook in the Seventh Circuit, in the matter of Gary Schor v. Abbott Laboratories.49 The facts of the case were as follows. Defendant Abbott Labs owned a patent on Norvir, a protease inhibitor that slows down the progress of the HIV-AIDS virus. Because Norvir can cause serious side effects, it is commonly used in combination with other inhibiting drugs that mitigate these dangers. Abbott now offers one such combination cocktail under the brand name Kaletra, but also makes available Norvir as a standalone product for use with other competitive components. In its pricing practices for its pharmaeceutical portfolio, Abbott sold the combination Kaletra at a higher price than the standalone Norvir, and sold both above their respective average variable cost (AVC) 50.

Even though Kaletra was priced higher than Norvir, Plaintiff Gary Schorr contended that Abbott’s pricing was anticompetitive; i.e., Norvir was priced too high and Kaletra too low. To Schorr’s view, Abbott’s intent was to obtain a monopoly for the other competitive inhibiting drugs now sold as part of the Abbott cocktail. Per the plaintiff ’s reasoning, competitive manufacturers would be driven from the market. At this point, Schorr anticipated that Abbott would increase the price of Kaletra, expectedly to the level of a monopoly. In Judge Easterbrook’s view, Abbott’s strategy in and of itself would violate no antitrust laws unless it implicated a definable anticompetitive act that had already led to, or presented a real possibility of, monopolization in at least one particular market.51 This was not the case here. As the exclusive owner of a lawfully acquired patent, Abbott had under U.S. law the right to charge whatever the market will bear, or even refuse to sell or license its patented invention to another.52 That said, were the other components of Kaletra not made available at reduced prices, users such as Mr. Schorr would actually

49 Case No. 05-3344 (7th Cir. July 26, 2006), available at http://caselaw.lp.findlaw.com/data2/circs/7th/ 053344p.pdf 50 This eliminates the price-squeeze claim in United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945), in which the defendant producer sold processed aluminum (a “combination product”) below the price of raw aluminum. It also eliminates the predatory price claim. 51 These terms appear as Section 2 of the Sherman Act, an antitrust statute passed in 1890 for the purpose of protecting against harm to competition. “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.” 15 U.S.C. § 2, available at http://www.usdoj.gov/atr/foia/division manual/two.htm#a1. 52 See, e.g., CSU et al. v. Xerox Corp., 203 F.3d 1322, 1326 (Fed. Cir. Feb. 17, 2000), available at http://www.ll. georgetown.edu/federal/judicial/fed/opinions/99opinions/99-1323. html.

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have had to pay more to other competitive producers for much the same inhibiting components offered in the Kaletra cocktail. But Easterbrook also realized a larger theoretical point. As a patent owner with the exclusive right to price its product, Abbott had presumably priced Norvir in a manner that would maximize its profits. Once that price is set, the company could have maintained the same profit level simply by pricing the related components of Kaletra at the market-bearing price of Abbott’s competitors, i.e., not discounting the cocktail from its competitive level elsewhere charged in the market. By pricing Kaletra below this level, Abbott actually was reducing its short-run profits. In Judge Easterbrook’s view, there was no danger of any monopoly being established in the long run as a consequence of this competitive price move. The upshot of Easterbrook’s analysis is this: with the right to price Norvir as it saw fit, Abbott actually set the price of other inhibiting components below the prevailing market level — thus benefiting consumers and harming competitors. A ruling for the plaintiff would have offset these competitive effects. III. FUNDING RESEARCH AND DEVELOPMENT Plaintiffs also contended that Qualcomm’s licensing practices were unfair for yet a second reason; Qualcomm affixes the same royalty fee on each CDMA phone regardless of whether it is CDMA2000 or W-CDMA. That is, Qualcomm did not then give discounts to W-CDMA users, despite the fact that W-CDMA used fewer components contributed by Qualcomm. Accordingly, this gives the appearance that Qualcomm is charging higher rates for the use of individual components in W-CDMA. Some financial analysis will shed some light on the practice. Qualcomm earned the following revenues and operating incomes in the past five fiscal year (ending December): Revenues (in millions, except per share data) 2006

2005

2004

2003

2002

$7,526

$5,673

$4,880

$3,847

$2,915

In fiscal 2006, Qualcomm earned 34.9 percent of its total revenue (or $2.63 billion) through the operations of Qualcomm Technology Licensing, which licenses patented technology to some 135 providers that use CDMA. The remainder of the company’s revenues were earned by segments of the company that perform manufacturing, services, and strategic investment management operations — Qualcomm CDMA Technologies (QCT), Qualcomm Wireless & Internet (QWI), and Qualcomm Strategic Initiatives (QSI). The overall importance of technology licensing to Qualcomm has increased in the past three years, as QTL revenues accounted for only 27.2 percent ($1.33 billion) of total consolidated revenues in fiscal 2004.53 Besides the expanding importance of its licensing operations, there is yet is another discernible complicating trend in Qualcomm’s business. As CDMA has made wider inroads into new markets, the company’s revenue base has moved away from its historically strong markets in South Korea, Japan, and the United States where CDMA had its early breakout. Combined revenues from customers in South Korea, Japan, and the United States have decreased as a percentage of total revenues, from 82 percent in fiscal 53 QCT revenues comprised 58%, 58%, and 64% of total consolidated revenues in fiscal 2006, 2005, and 2004, respectively. QWI revenues comprised 9%, 11%, and 12% of total consolidated revenues in fiscal 2006, 2005, and 2004, respectively.

244 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY 2004 to 76 percent in fiscal 2005 and 66 percent in fiscal 2006. Meanwhile, Europe accounted for a growing share of Qualcomm revenues — from 11 percent in 2004 to 17 percent in 2006. Qualcomm’s revenues from sales and licensing cover, among other items, the company’s expenditures for research and development, which is performed in various locations throughout the world in order to advance technologies related to CDMA. R&D expenditures are then related to the design of new integrated circuit products and other initiatives designed to support lower-cost phones, multimedia applications, high-speed wireless Internet access and multimode, multiband, multi-network products and technologies. The company’s R&D expenditures in fiscal 2006, 2005, and 2004 totaled approximately $1.5 billion, $1.0 billion, and $720 million, respectively, and therefore accounted for about 20 percent of revenues, and 60 percent of operating income Although Qualcomm does perform contract R&D, a large percentage of the company’s expenditure is on pooled efforts not intended for any one user. At the time when Qualcomm starts a particular research undertaking, company engineers cannot know exactly what part of an activity will actually be used in subsequent devices and what the final market yield will be. To avoid the danger of under-compensating investments, the company must necessarily determine a way to recover or monetize total investments over the sales of all products to which it contributes. Much like the historic Bell Laboratories and the major pharmaceutical companies that have funded pooled research of this nature, Qualcomm recovers its considerable costs of research by earning revenues on the smaller group of technologies that it can actually patent and bring to market. Predictably, returns on some technology components would appear to exceed some informal breakdown of costs that would attempt to apportion general R&D to individual final components of the process. But the real economic causality between market winners and starting costs is tenuous. Fact is, technology winners must cover all R&D costs if the company is to cover also the costs of failures that it cannot reasonably anticipate at the outset. Accordingly, Qualcomm would evidently fail to recover ongoing costs if it were to reduce license fees ex post for the smaller users of W-CDMA. Qualcomm’s financing situation then is much like an amusement park that charges visitors fixed fees for an all-day or all-season pass; the park does not reduce fees for individuals who only ride roller-coasters, Ferris wheels, or merry-go-rounds. The park’s overall revenues would be deficient if the company were to allow individual visitors the right to “creamskim” their favored rides without compensation for the wider costs of running the enterprise. Much like the amusement park, Qualcomm offers its technology through a “one size fits all” arrangement that makes all technology available for a fee unrelated to components finally in use. There are two key benefits to such a financing arrangement. First, the company does not have to worry about market conditions for individual technologies that may deplete ex post the amount of funds available to finance ongoing R&D. Second, users face no incremental cost to adopt any one additional component of the Qualcomm IP portfolio. With no incremental cost to migrate to new technologies, equipment manufacturers have the opportunity to build out CDMA technology in the most rapid fashion. As an amusement park may choose instead to sell tickets for individual rides, it is certainly possible that Qualcomm could offer an alternative licensing deal that might indeed be more favorable to particular users. But to suggest that they be legally compelled to do so defies economic sense.

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IV. STANDARDS GOVERNANCE Problematic would be efforts by the plaintiffs or other companies to amend or modify the intellectual property policies of standards organizations regarding the proper licensing procedures for component technologies that are now used in industry standard portfolios. In this context, some participants have indeed suggested that standards organizations establish maximum aggregate royalty rates for revenues paid by each OEM, and to apportion the affixed ceiling amount to each technology donor based upon the size or value of its particular contribution to the industry standard. While apparently fair, such a proposal would actually put different technology donors into a “zero sum” game with one another; one company can gain a larger share of the fixed royalty rate only if another one loses. Whatever apportioning procedures are designed, the suggested rule is also heedless of the underlying costs of developing portfolio of particular technologies. V. CONCLUSION The issue highlights the crossroads at which European competition law now finds itself. In criticism of European antitrust policies, the Economic Advisory Group for Competition Policy (EAGCP), a group of seven European academic economists, wrote a position paper in 2005 entitled “An Economic Approach to Article 82.” The paper was commissioned by the Chief Economist of DG Comp but remained independent of the organization’s review process. Per the EAGCP study, DG Comp must come to recognize that certain practices, such as discriminatory prices and preferential deals, may have different effects upon consumers and other producers; the overall net benefits that could be expected may also depend upon circumstantial details. When gauging market harm, authorities must not confound the protection of competitors with the protection of consumers; it is the satisfaction of consumer needs that should be the “ultimate yardstick of competition policy.” Regulators may then consider the possible beneficial effects of Qualcomm’s tactics. First, the company is now competing with the predominant GSM standard by lowering the price of its chips, admittedly selectively, in a manner that benefits the buyers of cellphone handsets. Second, the company is funding research efforts that provide new technologies with a stable revenue source that is appropriate given the nature of applied research in this industry. We do hope that a balanced and nuanced approach will ultimately prevail in this investigation. How about one would hope that a balanced and nuanced approach will ultimately be adopted by the European Union’s competition authorities, including in this ongoing investigation? ABOUT THE AUTHOR: Michael A. Einhorn is a leading economic expert active in the areas of intellectual property, media, entertainment, licensing, valuation, and antitrust. He is a Senior Advisor at CONSOR Intellectual Asset Management, a member of the Gerson Lehrman Group, and the author of the book Media, Technology, and Copyright: Integrating Law and Economics (Edward Elgar Publishers). In media and intellectual property, he has consulted to inventors, publishers, songwriters, composers, cartoonists, sculptors, photographers, architects, artists, record labels, movie producers. and screenwriters. Dr. Einhorn has designed and applied innovative techniques related to damage estimation, valuation, licensing, and strategy in transactional and litigation matters involving patents, copyrights, trademarks, trade secrets, and publicity rights. He has testified, counseled, published articles, or lectured in music rights, fair use, data mining, royal-

246 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY ties, damages, hyperlinking, file-sharing, and digital rights management. Michael Einhorn received a B.A. from Dartmouth College and a Ph.D. in Economics from Yale University. He taught at Rutgers University and worked at the U.S. Department of Justice, Broadcast Music, Inc., and Bell Laboratories. He served as an Adjunct Professor of Communications and Media in the Graduate School of Business at Fordham University and a Research Fellow and Adjunct Professor at Columbia University. He is also a frequent lecturer in Continuing Legal Education programs. CONSOR Intellectual Asset Management (http://www.consor.com) is an international consulting firm that specializes in valuation, management, and licensing of intellectual property and entertainment assets. The company operates offices in San Diego, New York, London, and Hamburg. With work experience that spans nearly twenty years, CONSOR uses real-world evidence, marketing criteria, and proprietary programs to assist clients in measuring and maximizing the value of their intellectual property and intangible assets. Results at CONSOR are applicable to tax strategy, bankruptcy, corporate reorganization, collateral, damages, donation/sale, investment fund security, and litigation.

SESSION IV: ANTITRUST/COMPETITION & INTELLECTUAL PROPERTY PART B: REFUSALSLAW TO LICENSE

SESSION IV: ANTITRUST/COMPETITION LAW & INTELLECTUAL PROPERTY

Part B: Refusals to License

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law

Speaker DARYL LIM

Allen & Gledhill (Singapore)

Panelists HEINZ GODDAR

SUSAN MANNING

Boehmert & Boehmert (Munich)

Managing Director COMPASS/FTI Consulting (Washington, D.C.)

PROF. VALENTINE KORAH

JOHN TEMPLE LANG

University College (London)

Cleary Gottlieb Steen & Hamilton (Brussels)

PROF. HANSEN: Welcome to the panel on refusals to license, which is certainly an interesting topic, and one that is being thought about and litigated throughout the world. Our speaker is Daryl Lim. His biography is in the materials. He is now at Allen & Gledhill in Singapore, but is moving to a career in think-tank academia in the future. He is a very good candidate for that. We are also very fortunate to have an excellent panel: Heinz Goddar, from Boehmert & Boehmert in Munich; Valentine Korah, from University College London; Susan Manning, Managing Director of COMPASS/FTI Consulting, an economist; and John Temple Lang, who used to run EU competition law for many years at DG IV, now DG Comp, and is now in private practice with Cleary Gottlieb in Brussels. MR. LIM: Thank you, Hugh. Good afternoon, ladies and gentlemen. Thank you for coming. I am very privileged to be here. New York is a far-away place. I did not think I would be here speaking at the Fordham IP conference. But this has happened as part of the fact that we live in an ever-shrinking world, and this will be an important theme.

248 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY Beyond Microsoft: Intellectual Property, Peer Production and the Law’s Concern with Market Dominance Daryl Lim1 I. INTRODUCTION In the last decade, cases arising at the interface between intellectual property rights (“IPRs”) and antitrust/competition law (“the Interface”) seem invariably related to subject matter which pre-existing IPRs have expanded to encompass.2 These have sprung from technological advances, as well as the purported need to preserve the ability of owners to take advantage of their investments, and thereby their incentives to innovate for the benefit of society.3 The growth of IPRs has occurred despite doubts that have been raised as to the force of these justifications fuelling its growth.4 As IPRs are strengthened, lengthened, and expanded over new categories of works, a concern arises that intellectual property (“IP”) owners have an unprecedented ability to distort competition in the marketplace.5 At the heart of the Interface arguably lies the issue of refusals to license.6 Anticompetitive abuses involving refusals to supply licenses may occur when the dominant undertaking denies an actual or potential licensee access to an input to exclude it from participating in an economic activity.7 IPRs are legal barriers and may limit the 1 LLM (National University of Singapore), B.Sc. Economics and Management, London School of Economics. I thank Professor Hugh Hansen for the opportunity to contribute to this important forum. It is hoped that my thoughts and observations may be put down in the best and simplest way. All views expressed are my own, and should not be attributed to Allen & Gledhill or its clients. I welcome comments, questions, or criticisms, and may be contacted at [email protected]. All Web site references were visited in April 2007. 2 These cases include IPRs over databases and software. See United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001); Attheraces Ltd. v. British Horseracing Bd., [2007] EWCA (Civ) 38 (Eng.) (horseracing data); Case C-241/91, Radio Telefis Eireann v. Comm’n, 1995 E.C.R. I-743 (television program schedules); Case C-418/01, IMS Health GmbH v. NDC Health GmbH, [2004] E.C.R. I-5039 (German pharmaceutical market data); Case T-201/04, Comm’n v. Microsoft, 2004 E.C.R. II-4463. 3 It has been argued that digitization and the Internet allowed instantaneous perfect replication. IPRs therefore had to grow. See Jessica Litman, Digital Copyright (2001). In 2005, the U.S. Supreme Court expanded the Copyright Act to cover a form of liability it had never before recognized in the context of copyright—providing technology that induces copyright infringement. MGM Studios v. Grokster, Ltd, 545 U.S. 913, 940 n.13 (2005) (ruling against Grokster’s peer-to-peer file sharing program). 4 See Don Tapscott & Anthony D. Williams, Wikinomics: How Mass Collaboration Changes Everything 179 (Portfolio 2006). In the case of software, product life-cycles have historically been somewhere between 5 and 15 years. Still, copyright protection of computer programs follows today the same terms as those of any artistic work and is currently multiple times over product lifetimes. Yale M. Braunstein et al., Economics of Property Rights as Applied to Computer Software and Data Bases, in Technology and Copyright 231, 241–42 & n.11 (George P. Bush et al. eds., 1979) (questioning whether efficiency gains would outweigh administrative costs of multiple protection terms in copyright legislation). Recently, leading U.S. economists published a well-argued note in a legal case challenging the copyright term extension in the United States from 50 to 70 years. See, e.g., Brief for George A. Akerlof et al. as Amicus Curiae Supporting Petitioners, Eldred v. Ashcroft, 239 F.3d 372 (2003), available at http://eon.law.harvard.edu/openlaw/eldredvashcroft/supct/amici/economists.pdf. 5 The Directorate-General for Competition recognizes that “[t]he impact of intellectual property rights on expansion and entry depends on the nature and actual strength of the intellectual property right held by the allegedly dominant undertaking.” DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, at 13 (2005), available at http://ec.europa.eu/comm/competition/antitrust/ art82/discpaper2005.pdf [hereinafter DG Competition Paper]. 6 Refusals to license generally occur where a company that has exclusive control over a scarce resource owns access that is indispensable to compete in the same market or closely related market. The undertaking takes advantage of such a strategic position and employs it in order to preserve or strengthen its dominant position in that market or to acquire it in the second-related market. 7 Refusals to supply can take several forms. It can be a simple refusal (halting existing supplies or refusing to deal) or a constructive refusal (pricing so that it becomes economically unviable for the buyer to continue its activ-

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number of market participants. Foreclosure may be of concern to competition law when efficient rivals are discouraged from entry or encouraged to exit.8 The ability for IP owners to do so stems from their market power, typically characterized by sustained high levels of market shares,9 as well as barriers to entry and expansion faced by competitors. Antitrust authorities look at whether the latter would have been sufficiently immediate and persistent to prevent the abuse of market power.10 This area is highly contentious because in some cases, antitrust/competition policy requires dominant undertakings to grant competitors access to valuable IPRs in order to ensure that effective competition is maintained.11 This raises the question of whether and how antitrust/competition law can be used to counterbalance informational bottlenecks that could become a form of abuse.12 There is a need for clear and economically robust rules to regulate the amorphous boundaries of innovation. United States jurisprudence has a long history of examining such issues in sectors involving IPRs as well as more traditional infrastructure.13 It has settled on a deferential approach. In the absence of immediate consumer harm, antitrust law is reluctant to ities, calc ulated delays in supplying, exclusive dealing or tying arrangements). It can also be horizontal (where the dominant undertaking attempts to exclude a rival at its own level in the supply chain) or vertical (where the dominant undertaking attempts to exclude a active or potential participant in a downstream market). 8 That is not to say that any time an efficient rival is discouraged from entry or encouraged to exist there is a foreclosure and/or an abuse because of IPR. However, it is a weighty factor affecting the conclusion of the analysis. 9 See Commission Notice on the Definition of the Relevant Market, 1997 O.J. (C 372) paras. 54–55. 10 E.U. authorities recognize that this assessment depends on the characteristics and dynamics of the market — factors such as capacity constraints, the history of frequent and successful entry and entry costs. DG Competition Paper, supra note 5, at 13–14. 11 An additional explanation for this conflict stems from competition law’s focus on attaining competitive market conditions not particular outcomes, as opposed to intellectual property law’s preoccupation with ensuring the optimum amount of innovation. Competition law assumes that deterring monopolies will lead to the attainment of economic efficiency, while intellectual property law assumes that efficiency will be achieved only if regulators correctly estimate the proper mix of incentive and access to copyright as needed to provide the optimal amount of innovation. See David McGowan, Regulating Competition in the Information Age: Computer Software as an Essential Facility Under the Sherman Act, 18 Hastings Comm. & Ent. L.J. 771, 773–74 (1996); Thomas F. Cotter, Intellectual Property and the Essential Facilities Doctrine, 44 Antitrust Bull. 211, 227–28 (1999). 12 See, e.g., Frank L Fine, European Community Compulsory Licensing Policy: Heresy versus Common Sense, 24 Nw. J. Int’l L. & Bus. 619, 620 (2004) (describing “a stormy debate on both sides of the Atlantic as to whether compulsory licensing, on antitrust grounds, is an appropriate means of breaking monopolies that owe their existence, to a large extent, to the ownership of valuable intellectual property”); see also Alberto Heimler & Antonio Nicita, Intellectual Property Right-Based Monopolies and Ex-Post Competition: Some Reflections on the Essential Facilities Doctrine, at 26–28 (2000) (noting the growing number of cases involving IPRs and competition law). 13 Section 2 of the Sherman Act punishes, with a fine or by imprisonment or both, “monopolization” and “attempts to monopolize.” Monopolization occurs when the owner wilfully acquires monopoly power in the relevant market or maintains the power without any superior product, business acumen, or historic accident. See Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1353 (Fed. Cir. 1999). American antitrust treatment of monopolization cases in general tends to focus its attention exclusively on the market where the conduct under analysis displays its effects. This means that the monopolization claim under § 2 will be framed (as monopolization or attempt to monopolize) pursuant to the degree of market power held by the company in the market that will be ultimately affected by the anticompetitive conduct. Attempt to monopolize regards conduct that aims at achieving monopoly power in a certain market. These are harder to prove because every firm tends to achieve a position of strength in the market. Thus liability is found when there is proof of: 1) predatory or anticompetitive conduct, 2) a specific intent to monopolize, and 3) a dangerous probability of success. Spectrum Sports Inc. v. Shirley McQuillan, 506 U.S. 447, 455–56 (1993); see, e.g., Verizon Commc’ns Inc. v. Law Offices of Cutris V. Trinko, L.P., 540 U.S. 398 (2004); United States v. Terminal R.R. Ass’n of St. Louis, 224 U.S. 383 (1912); Indep. Serv. Orgs. Antitrust Litig. CSU, LLC. v. Xerox Corp., 203 F.3d 1322 (Fed. Cir. 2000); Image Technical Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997); Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147 (1st Cir. 1994); BellSouth Adver. & Publ’g Corp. v. Donnelley Info. Publ’g, Inc., 719 F. Supp. 1551 (S.D. Fla. 1988). 14 The locus classicus of this is Data Gen. Corp., 36 F.3d at 1186–87, where the court held: 1) neither the antitrust

250 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY compel access where an owner unilaterally refuses to license.14 Proof of such approach is evident in Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP. (“Trinko”), where the Supreme Court held that a company with monopoly power had no duty to open an infrastructural facility to its competitors because compelling it to share the source of its own advantage lessens the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.15 This suggests that U.S. jurisprudence accepts the philosophy that markets are best placed to determine an efficient equilibrium. On May 1, 2002, the Federal Trade Commission (“FTC”) and U.S. Department of Justice (“DOJ”) conducted a round of hearings on single firm conduct with respect to refusals to deal.16 The discussion focused on views on the nature of IPRs compared to property rights, as well as on the conditions to rebut a presumptively valid justification for an owner to refuse access to its IPRs. This was followed by another round of hearings on July 18, 2006.17 This discussion focused on proposed tests, as well as on the competence of courts to determine harm to markets and consumers and to regulate the terms of access. There was also recognition that economic analysis has not developed sufficiently to provide clear rules.18 The E.U. has chosen a different approach to regulating innovation. Influenced by the German ordoliberal school, it sees competition law as an instrument to ensure freedom of action and participation from all market players.19 It has developed tests to determine when an IPR owner exceeds the basis of IPRs granted to it. An IP owner had the duty to license its IPRs where refusing a ccess to indispensable proprietary content would stifle a nor IP legislation worked to erode the scope of other, 2) the limited copyright monopoly was based on Congress’ intent that the right to “exclude others from using their works creates a system of incentives that promotes consumer welfare in the long term by encouraging investment in the creation of desirable artistic and functional works of expression,” and 3) IPRs, although granted by the State, were not exempt from the application of antitrust law. See Emanuela Arezzo, Intellectual Property Rights at the Crossroad Between Monopolization and Abuse of Dominant Position: American and European Perspectives Compared, 24 J. Marshall J. Computer & Info. L. 455, 505 (2006) (noting that “the United States intends to protect competition by preserving a dominant firm’s incentives to compete and innovate; in order to do so, U.S. antitrust authorities think it is necessary not to force a dominant firm to deal or to license its competitors because they fear this might reduce its incentives to invest and compete to gain a monopolistic position”). 15 540 U.S. 398 (2004) [hereinafter Trinko]. 16 Participants in this session discussed “the extent to which refusals to license intellec tual property create competitive concerns, how recent case law on refusals to license is being interpreted, and whether this recent case law appropriately balances the interests of intellectual property law and antitrust law.” A list of the participants, as well as a transcript of the proceedings can be found at http://www.ftc.gov/opp/intellect/detailsandparticipants. htm#May%201 (last visited Oct. 12, 2007). 17 Federal Trade Commission/Department of Justice Hearings, Federal Trade Commision, http://www.ftc. gov/opa/2006/07/section2july.htm (last visited Oct. 12, 2007). 18 Jeffrey K. Mackie-Mason, What to Do About Unilateral Refusals to License, Federal Trade Commision, http://www.ftc.gov/opp/intellect/020501mackie2.pdf (“The optimal balance between innovation incentives and protection against static monopoly harm is not knowable to any reasonable degree of precision. Economists may be able to identify some special cases in which the desired rule is unambiguously knowable, but these cases will be few.”). 19 The core principles and ideas of the ordoliberal school can be found in: David Gerber, Law and Competition in Twentieth Century Europe 241–46 (Oxford University Press, 2001) (1998). In essence, ordoliberal theory focuses on the importance of a stable and transparent framework of rules for the efficient functioning of a private market economy, as embodied by the notion of “complete competition” in which no firm can engage in abuses of monopoly positions and other forms of coercion in a given market, emphasizing the need for the state to ensure that the free market produces results close to its theoretical potential. Article 82 of the E.C. Treaty governing this area of European competition law provides a list of examples of abusive conduct, but E.C. founders purposefully left both the concepts of dominance and of abuse to be further developed by the Court of Justice and Member State courts. See Treaty Establishing the European Community, art. 86, Mar. 25, 1957, 298 U.N.T.S. 3. [hereinafter E.C. Treaty] This was similar to the Warren Court’s antitrust populist approach which focused on freedom of action but with concern focused on autonomy for small players in market.

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new product from being offered in a related market for which there was real consumer demand.20 As economic theory was introduced into European competition analysis, its tests became more ambitious. Most recently in Commission of the European Communities v. Microsoft, the Commission was purportedly able to weigh the loss in incentives to the owner to innovate by providing access against an aggregate gain in incentives to innovation in the relevant markets identified.21 At the time of this writing, the Court of First Instance has not pronounced on the substantive merits of the case. In December 2005, the European Commission initiated a public consultation to review the application of Article 82 of the E.C. Treaty to exclusionary abuses and treatment of refusals to license, followed by a public hearing on June 14, 2006.22 It adopted an effectsbased analysis grounded on economic principles rather than per se prohibitions, which was roundly welcomed.23 However, respondents were also concerned that an effects-based analysis would be hard to implement.24 There were numerous requests for clearer rules to assist businesses in self-assessments of lawful conduct,25 including “white areas.”26 DG Competition has indicated that IPRs and their effects will be carefully evaluated.27 However, as in the U.S., a concern has also been expressed that economic theory in this area had not developed to an extent where the impact of such refusals can be sufficiently understood for regulators to intervene with confidence.28 These actions of the Commission and the responses thereto are important and have contributed to an understanding of the Interface. Nevertheless, beyond a rough measure, there are still difficulties in deciding when and whether it is right for mandatory access to be granted to IPRs. Moreover, the approaches to solving this puzzle are likely to be heavily influenced by socio-economic infrastructures including fairly entrenched views about the role of capitalism and socialism.29 Solutions will not come easily and, even if forthcoming, might not be consistent in different jurisdictions. 20

Case C-241/91, Radio Telefis Eireann v. Comm’n, 1995 E.C.R. I-743 at para. 2. Case C-3/37.792, Comm’n v. Microsoft, 2004 E.C.R. at para. 782. Intriguingly, an observation has been made that “[t]he possibilities of even the US and EU to influence the behavior of the world’s biggest computer and software companies are limited.” Mikko Välimäki, The Rise of Open Source Licensing: A Challenge to the Use of Intellectual Property in the Software Industry, 79 n. 207 (Helsinki, ed., Turre Publishing 2005). 22 Exclusionary abuses refer to “behaviours by dominant firms which are likely to have a foreclosure effect on the market . . . to actual or potential competitors and which ultimately harm consumers.” DG Competition Paper, supra note 5, at 4. 23 See, e.g,, Baker & McKenzie Response to DG Competition’s Article 82 Consultation, 1 (Mar. 31, 2006), http://ec.europa.eu/comm/competition/antitrust/art82/076.pdf (stating that “we welcome the proposal by DG Competition to adopt an effects based approach grounded on foreclosure analysis. While we comment on how the Paper should be clarified and expanded, we agree with the broad thrust of the Paper in applying economic principles to Article 82”). 24 See, e.g., Common Position of Cercle de l’Industrie on Revision of the Application of Articles 82 EC Treaty to Exclusionary Abuses, para. 9 (Mar. 31, 2006) [hereinafter Common Position of Cercle], http://ec.europa.eu/comm/ competition/antitrust/art82/008_en.pdf. 25 This is supported by Douglass C. North, Structure and Change in Economic History 162–66 (W.W. Norton & Co., 1981). 26 See Common Position of Cercle, supra note 24, at para. 28. 27 According to the DG Competition, it is “sufficient” that competitors are “disadvantaged and consequently compete less aggressively . . .” while E.U. “enforcement policy toward refusals to supply will take into account both the effect of having more short-run competition and the possible long-run effects on investment incentives” though less weight will be given to future efficiencies compared to present efficiencies. DG Competition Paper, supra at note 5, paras. 58, 213. See also Arezzo, supra note 14, at 457 (asserting that “European antitrust law has endorsed a more restrictive attitude, holding that when exceptional circumstances do exist, the exclusive faculty of the IP-owner can be curtailed in favor of a more competitive structure of the market”). 28 See Public Hearing on Article 82 Before the European Comm’n (14 June 2006) (testimony of Damien Geradin, Global Competition Law Centre), available at http://ec.europa.eu/comm/competition/antitrust/art82/en_42.wmv. 29 For example, the DOJ and FTC have adopted a decidedly more capitalistic approach, preferring not to disincentivize IP owners with vague and complicated rules. In doing so, there is a risk that the state of innovation 21

252 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY It will continue to be important to try to work out the test for dominance and with it, the role of IPRs in the antitrust and competition law context. But, it is possible also that non-legal and non-traditional economic development will make it more likely that economic dominance will be less likely to occur in market situations. This means that it is possible that collective social and economic activities without traditional economic incentives will make it more likely that competitiveness and consumer welfare will thrive in markets driven by IP products and services. Up to now the market, and together with it the propertisation of information, have become integral mechanisms to efficiently allocate scarce resources. Economic rewards have been considered necessary to promote the creation of artistic or inventive works. But there is evidence that the needs for those economic rewards are changing. We know that some creativity such as cave drawings has been historically without the need for personal economic incentives. But dissemination of creative works almost always required incentives and operate through a downward dissemination of information goods. For some time, there has been evidence that at least some types of creativity and dissemination do not fit into this traditional mould. Open source is perhaps the most well-known example. The law has often lagged behind technology and economic changes. The law of the Interface is no exception. Thus, while competition authorities in the U.S. and E.U.—both global leaders in IP and competition policy—apply themselves assiduously to the task of ironing out the analytics of abuses of dominant positions including the refusals to license,30 the world had moved quietly and quickly forward. In 2006, Time Magazine selected “You” to be Person of the Year.31 It did so because it saw “collaboration on a scale never seen before . . . wresting power from the few and helping one another for nothing and how that will not only change the world, but also change the way the world changes.”32 Traditionally, the sunk costs of innovation and commoditization were generally high in nearly every commercially valuable IP market.33 IP markets are traditionally organized along national boundaries according to strict hierarchical lines of supply, and customers and consumers are confined to relatively limited economic roles—whether as passive consumers or corporate customers trapped beneath IP owners in organizational hierarchies.34 Owners with substantial market power could may reflect the reality of geopolitics that too much information will be controlled by the hands of a select few. DG Competition has been influenced by a more socialist perspective of IP ownership, and a general distrust for broad IPRs. Thus dominant IP owners are under a “special responsibility” not to distort the competitive structure, weakened by their presence, further by abusing their dominance. Commission Decision 98/531/EC, 1998 O.J. (246), para. 267. 30 See supra notes 6–11 and accompanying text. 31 Lev Grossman, Time’s Person of the Year: You, Time, Dec. 13, 2006, available at http://www.time.com/ time/magazine/article/0,9171,1569514,00.html. 32 Id. 33 Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organisation 531 (Pearson 2005) (1990) (citing examples of investment outlays by major multinationals as a percentage of revenue: “In 2002, Microsoft (software) (invested) 15.2%; Advanced Micro Devices, 30.3% (microprocessor chips); Biogen (biotechnology), 32%”). 34 IP exploitation is essentially based on two rights which have been codified in national legislation through the impetus of international treaties. The first is the right to own and sell ideas. The second is the right to control the use of those ideas after sale. These create vertical relationships which content protected by IP is traded on the marketplace for payment, whether in the form of a royalty or a license fee. As an example, see Accenture Global Convergence Forum 2005: Plenary Session, available at http://www.accenture.com/Global/About_Accenture/ Business_Events/By_Industry/Communications/DigitalMeet.htm (noting that “in the current value chain in the digital world we look for content creation to come from the media and entertainment industry, distribution from the communications and retail world, while end users are dependent on consumer electronics for delivery”). See also Richard Whish, Competition Law 734 (Oxford University Press 2005) (1989) (“Generally speaking, intellectual property rights are the product of, and are protected by, national systems of law, although the growth of in ternational commerce has resulted in an increasing measure of national cooperation.”).

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exclude competitors by unilaterally refusing to license their proprietary content in primary or secondary markets.35 Barriers to entry were high, and the risk of consumer harm could be great. Antitrust analysis took place in these paradigmatic, vertical silos of innovation. While these vertical hierarchies remain, changes in technology are giving rise to new models of production based on collaboration and self-organization rather than on hierarchy and control.36 Technology has “increase[d] access to information, and [brought] us closer to” an ideally “efficient, frictionless global market.”37 Ordinary individuals have platforms to collaborate and share content at very little cost.38 Critically, it potentially reduces the reliance on dominant firms and markets to respectively create and trade the goods and services they desire, and with them the anticompetitive market effects of a refusal to license.39 This new mode of innovation and value creation is called “peer production” or “wikinomics.”40 Peer production has reached a tipping point where new forms of mass collaboration are changing the production and exploitation of IP. Economies of scale and scope—which gave dominant undertakings a highly developed distribution network and wide geographical coverage—are vanishing.41 In other words, capacity constraints due to the prohibitive cost of sunk investments are becoming less important. The power to disseminate products and ideas rather than just passively consuming them fundamentally reshapes the flow of innovation.42 Critically, it potentially reduces the reliance on dominant firms and markets to respectively create and trade the goods and services they desire, and with them, the anticompetitive market effects of a refusal to license.43 It follows that if there is an alternative system of innovation that creates more market players on a continuing basis, it should result in less dominance and, consequently, less need for intervention by competition authorities in IP markets. II. WIKINOMICS: ANOTHER WAY FORWARD? Peer production is emerging as an alternative model of innovation that harnesses human ingenuity efficiently and effectively. Two examples are open source 44 and crowd35

See DG Competition Paper, supra note 5, at 67–69. See generally Tapscott & Williams, supra note 4. 37 Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century 237 (Farrar, Staus & Giroux 2006) (2005). 38 Tapscott & Williams, supra note 4, at 12. 39 Friedman, supra note 37, at 93–95. 40 The term “peer production” describes what happens when masses of people and firms collaborate openly to drive innovation and growth, and was coined by Professor Yochai Benkler in his 2003 paper, Coase’s Penguin, or Linux and the Nature of the Firm. See Yochai Benkler, Coase’s Penguin, or, Linux and the Nature of the Firm, 112 Yale L.J. 369, 375 (2002). The term “wikinomics” was coined by Don Tapscott and Anthony D. Williams. See generally Tapscott & Williams, supra note 4. 41 Tapscott & Williams, supra note 4, at 10–11. 42 Michael Sandel observed that this phenomenon was first identified by Karl Max and Friedrich Engels in the Communist Manifesto, published in 1848. While the shrinking and flattening of the world constitute a difference of degree from what they saw happening then, it is nevertheless part of the same historical trend they observed — the inexorable march of technology and capital to remove all barriers. See Friedman, supra note 37, at 234. 43 As Thomas Friedman put it, “communities of geeks are now collaborating to design new software and then to upload it to the world. . . . The genesis of the flat world platform not only enabled more people to author more content, and to collaborate on that content. It also enabled them to upload files and globalize that content . . . without going through any of the traditional hierarchical organisations or institutions.” Friedman, supra note 37, at 93–94. 44 Wikipedia describes “open source” as “a set of principles and practices that promote open access to the design and production of goods and knowledge. The term is most commonly applied to the source code of software that is made available to the general public with relaxed or non-existent intellectual property restrictions. 36

254 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY sourcing.45 The collective knowledge, capability, and resources embodied within broad horizontal networks of participants can be mobilized to accomplish more than one firm acting alone. More importantly, the ability to integrate the talents of dispersed individuals and organizations could potentially mitigate the anticompetitive effects of refusals to license by dominant undertakings.46 Indeed, it may reshape the strategies through which dominant undertakings exploit their IPRs, so that instead of refusing access, they actively seek out other stakeholders to in a new model of collaborative proprietary innovation. It is important to clarify, however, that peer production does not merely encompass altruistic community efforts like those from the contributors of Wikipedia or some open source software projects. As will be seen, peer production also offers a platform for commercially viable, sometimes highly successful, business models.47 At least two factors made this possible. First, in the 1990s, Windows-enabled computers made it possible for individuals to author their own content from their desktops in digital form.48 With the steady advance of telecommunication, they were able to disseminate their own digital content in new ways to many more people. At the same time, computers became cheaper and more available all around the world. There was also an explosion of software that allowed work to be dissected, sent for remote development, and reassembled.49 People discovered that they could connect their computers to their telephones and emails through the Internet. The diffusion of computer, faxes, Windows, and modems connected to a global telephone network came together in the 1990s to create a basic platform that started the global information revolution.50 Second, the dotcom bubble that stimulated the overinvestment in fibre-optic cable communications allowed competitors and consumers to use networks to link to Internet services.51 Glass and radio waves are woven into intercontinental fibre-optic nerves that This allows users to create software content through either incremental individual effort or through collaboration.” Open source, Wikipedia, http://en.wikipedia.org/wiki/Open_source (last visited Oct. 7, 2007). 45 Wikipedia describes “crowd sourcing” as “a neologism for the act of taking a job traditionally performed by an employee or contractor, and outsources it to an undefined, generally large group of people in the form of an open call. . . . In some cases the labor is well-compensated. In other cases the only rewards may be kudos or intellectual satisfaction. Crowdsourcing may produce solutions from amateurs or volunteers working in their spare time.” Crowdsourcing,Wikipedia, http://en.wikipedia.org/wiki/Crowd_sourcing (last visited Oct. 7, 2007). 46 As Thomas Friedman put it, “Everywhere you turn, hierarchies are being challenged from below or are transforming themselves from top-down structures into more horizontal and collaborative ones. ‘Globalization’ . . . is not simply about how governments, business, and people communicate, not just about how organizations interact, but is about the emergence of completely new social, political, and business models. . . . [T]here is something about the flattening of the world that is going to be qualitatively different from the great changes of previous eras: the speed and breadth with which it is taking hold. The introduction of printing happened over a period of decades and for a long time only affected only a relatively small part of the planet. . . . This flattening process is happening at warp speed and directly or indirectly touching a lot more people on the planet at once.” Friedman, supra note 37, at 48–49. 47 See, for example, infra Parts II.A.2 and II.B.2. 48 See Friedman, supra note 37, at 54–55. 49 See id. 50 See id. at 53. From a geopolitical perspective, the opening up of China, India, and Eastern Europe coincided with the growth of the global communications platform. There was nothing to stop the digital representation of everything—words, music, photos, data, and video—and the global exchange of all that digital information. This coincidental breakthrough suddenly gave individuals both reach and scale—reach because they could create content in so many new and different ways, and scale because they could share their content with so many more people. See id. at 51–52. 51 The dot com bubble happened shortly after Netscape went public in 1995 and made the Internet accessible to everyone. The more alive the Internet was, the more different people demanded computers, software, and telecommunications networks that could easily digitize words, music, data, and photos and transport them through the Internet to anyone else’s computer. In that year, another catalytic event took place. Windows ’95 was rolled out with a built-in browser that allowed all PC applications to interact with the Internet. This set off an explosion in

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wire up disparate individual undertakings into a grand network.52 Unlike the first generation of companies, companies today can plug-and-play because a lot of the essential infrastructure is free.53 The Internet significantly lowered entry barriers. From this came a collaborative interface for wikinomics—a global, Web-enabled platform for multiple forms of collaboration. A. SCHUMPETER, CREATIVE DESTRUCTION, AND WIKINOMICS

Underlying the trade-off between free competition and exclusive IPRs is Joseph Schumpeter’s theory that it may sometimes be necessary to forego static efficiency for greater gains in dynamic efficiency.54 Schumpeter described the process of “creative destruction” and the dynamics of innovation as the most important drivers of the competitive process.55 Technical progress makes market power a temporary phenomenon, more than compensating for static welfare losses.56 Further, without proper regard for incentives, the result of competition will be insufficient innovation. It follows that since innovation is the engine that powers competition and ensures consumer welfare, the goal of competition law should be to encourage broad IP protection to foster and support firms’ incentives to innovate.57 While Wikinomics might call into question to some extent Schumpeter’s view on the need for ince ntives for innovation, it might prove him right on the role of creative destruction. In any case, Wikinomics has the potential to supercharge the process of “creative destruction” in at least some IP markets. The most important question is whether Wikinomics will lead to a transformation of the competition-law landscape.

demand for all things digital and sparked the Internet boom, because everything was going to be digitized and transported and sold on the Internet. Then the demand for Internet-based products and services would be infinite. As investors watched this mad rush to digitize, they realized that the demand for web service companies and fiber-optic cables to handle all the digital stuff was going to be limitless. It sparked an overinvestment in fiber-optic cables which dramatically drove down the cost of making a phone call or transmitting data anywhere in the world. And thus was the dot com bubble born. See id. at 57–66. 52 See id. at 66–69. 53 See id. at 181. The ready availability of well-honed and free Linux software, the Apache Web server, the MySQL database, and the PHP and Perl scripting languages — collectively known as the LAMP stack — means significantly lower capital investments. See LAMP (software bundle), Wikipedia, http://en.wikipedia.org/wiki/ LAMP_(software_bundle) (last visited Oct. 7, 2007); see also Plug-and-play, Wikipedia, http://en.wikipedia.org/ wiki/Plug-and-play (last visited Oct. 7, 2007). 54 Static efficiency occurs when firms compete within an existing technology to streamline their methods, cut costs, and drive the price of a product embodying that technology down to something close to the cost of unit production. Static goals lead to a focus on short-run marginal cost, to the exclusion of long run efficient capital investments in research and development (“R&D”). Static efficiency is a powerful force for increasing consumer welfare, but economists tell us that an even greater driver of consumer welfare is dynamic efficiency. Dynamic efficiency refers to gains that result from entirely new ways of doing business. See generally Joseph A. Schumpeter, Capitalism, Socialism and Democracy (Harper & Brothers Publishers, 2d ed. 1947). 55 See id. at 82–85. Creative destruction is describes the process of transformation that accompanies radical innovation. In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power. “Economists are at long last emerging from the stage at which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organisation in particular, that practically monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but competition from the new commodity, the new technology, the new source of supply, the new type of organisation . . . — competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profit and outputs of existing firms but at their foundations and their very lives.” Id. at 84. 56 See id. at 97 n.13. 57 Phillip Beutel, The Intersection of Antitrust and Intellectual Property Economics: A Schumpeterian View, in Economics Of Antitrust: New Issues, Questions, And Insights, 133, 133 (Lawrence Wu ed., 2004).

256 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY Below the question is asked in the context of some landmark cases and new factual scenarios. 1. Microsoft In the E.U. Microsoft case, the Commission found that Microsoft was a “superdominant” undertaking which used its market power to exclude competition and destroy the incentive for competitors to innovate.58 It found that in the past, Microsoft competitors were deterred from introducing new application programs for the Microsoft workgroup server operating systems.59 This is because if they now did not have interface protocols for Windows, their only market was Microsoft who might buy it and introduce it into the system.60 Moreover, the Commission did not disclose its interface information to competitors who could or had designed competing programs. This locked consumers into Microsoft’s server market.61 In an interim hearing, the Court of First Instance denied Microsoft’s request for a stay of the Commission’s fine of nearly 500million, the largest ever imposed on a single firm.62 However, what was perhaps more important to Microsoft is that the CFI also denied its request for a stay of the Commission’s order for Microsoft to disclose interface information on reasonable and non-discriminatory terms.63 Specifically, the Commission ordered Microsoft to disclose to competitors the interface specifications of the Windows workgroup server operating systems so as to enable them to achieve full interoperability with Microsoft’s desktop Windows operating systems.64 The Commission in Microsoft opined that since access to the source code was not being required, Microsoft’s fears of cloning were not justified.65 It followed that Microsoft’s incentives to innovate would not be affected.66 This order covers past, present, and future Microsoft products without any time limitation.67 This means that Microsoft must continually update this information as it brings to market new versions of its products. This remedy has been criticized as extraordinary, both in terms of the significant loss in the strategic value of its copyright and trade secrets as but also the fact that competition authorities are involved in the first place in determining how much a company should disclose.68 This contrasts with the 58 Case COMP/C-3/37.792, Comm’n of the European Comtys. v. Microsoft Corp., 2004 O.J. (L 32) para. 435 (“Microsoft, with its market shares of over 90%, occupies almost the whole market — it therefore approaches a position of complete monopoly, and can be said to hold an overwhelming dominant position.”). It should be recognized from the onset that the Commission took great care in preparing its case against Microsoft, even subjecting the file to peer-review. Valentine Korah, Intellectual Property Rights and the EC Competition Rules 166 (Hart Publishing 2006). 59 Workgroup server operating systems be understood as software that manages the sharing of the resources of several computers within a linked network. The operating system processes raw system data and user input, and responds by allocating and managing tasks and internal system resources as a service to users and programs of the system. See generally, William Stallings, Operating Systems, Internals and Design Principles (Prentice Hill, 2005). 60 See Case COMP/C-3/37.792, Comm’n v. Microsoft, 2004 O.J. (L 32) paras. 453, 779. 61 See id. at para. 694. It should be recognized from the onset that the Commission took great care in preparing its case against Microsoft, even subjecting the file to peer-review. See Korah, supra note 58, at166. 62 Korah, supra note 58, at 150; see also Microsoft hit by record EU fine, CNN.com, available at http://edition. cnn.com/2004/BUSINESS/03/24/microsoft.eu/ (Mar. 25, 2004). 63 Korah, supra note 58, at 162. 64 Case COMP/C-3/37.792, Comm’n v. Microsoft, 2004 O.J. (L 32) para. 999. 65 Id. at paras. 713–22. 66 Id. at para. 729. But see Korah, supra note 58, at 162 (saying that: “the incentive must have been considerably reduced”). And if Microsoft’s cutback on R&D is anything to go by, Korah is probably right. Microsoft’s Annual Reports for 2000 and 2005, available at http://www.microsoft.com/msft/ar.mspx (last visited Oct. 8, 2007) (showing that Microsoft reduced R&D expenditures from $3.775 million in 2000 to $1.241 million in 2005). 67 Case COMP/C-3/37.792, Comm’n v. Microsoft, 2004 O.J. (L 32) paras. 1000–03. 68 See Ian S. Forrester, Article 82: Remedies in Search of Theories?, 28 Fordham Int’l L.J. 919, 927, 931 (2005)

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result in the U.S. DOJ antitrust action against Microsoft, where the DOJ made similar claims against but were only able to achieve more modest results.69 Microsoft’s conduct reduced the incentives of competitors and potential competitors to undertake R&D because “they know that Microsoft will be able to limit the rewards from any resulting innovation . . . .”70 However, the theory that market power can be leveraged to significantly stifle innovation may now be questionable as an absolute rule. Since the elimination of Netscape,71 Microsoft did not experience any real competition in the Web browser market. In 2004, Netscape was reborn as Firefox, an open-source Web browser.72 Firefox allows users to alter the code and create plug-ins and customized “extensions” that can then be downloaded by any user.73 Web-surfers adopted Firefox rapidly, despite Internet Explorer coming pre-installed with every copy of Microsoft’s dominant Windows operating system. And Firefox is a viable alternative to Windows Internet Explorer.74 Downloads (drawing a parallel with Syfait v. GlaxoSmithKline AEVE, Case C-53/03, 2005 ECR I-4609 where “GSK, a pharmaceutical company, [was] under an affirmative duty to supply unlimited orders from wholesalers active in the trade of certain prescription drugs from low-price to high-priced Member States,” but distinguishing Microsoft because it goes further and represents the most expansive inroad of E.C. competition law enforcement into the protection of IPRs in Community legal history). 69 Essentially, the U.S. case revolved around the allegation that Microsoft had illegally tied its operating system to its Internet browser, thereby extending its monopoly power in both markets. The DC Circuit Court of Appeals found that Microsoft prevented computer manufacturers from modifying or removing pre-bundled icons. See United States v. Microsoft Corp., 231 F. Supp. 2d 144, 202 (D.D.C. 2002). In addition, the court found that Microsoft entered into agreements with Internet Access Providers and Independent Software Vendors to promote its browser exclusively, and also to use its Java Virtual Machine instead of Sun Microsystems’ Java programming. Id. The trial ended in settlement, with Microsoft agreeing not to prohibit computer manufacturers and vendors from adding features that could divert users away from Microsoft products. Final Judgment, United States v. Microsoft Corp., No. 98-1232 (D.D.C. 2002), available at http://www.usdoj.gov/atr/cases/f200400/200457.htm. The agreement also prohibits Microsoft from entering into exclusionary agreements with Internet Access Providers prohibiting the use of products that compete with Microsoft’s products. Id. Microsoft also cannot discriminate against internet access providers, independent software vendors, and internet content providers who choose to use competing products. Id. Finally, the agreement also stipulated that Microsoft disclose to Independent Software Vendors how its operating system interoperated with its middleware products. Id. This allows competitors to use Windows for their own programs. Id. In contrast, the E.U. investigations were more narrowly tailored to issues of server compatibility and the bundling of its media player software with its Windows operating system. See generally Case COMP/C-3/37.792, Comm’n v. Microsoft, 2004 O.J. (L 32). 70 Complaint at 12, United States v. Microsoft Corp., No. 98-1232 (D.D.C. 1998), available at http://www. usdoj.gov/atr/cases/f1700/1763.htm (last visited Oct. 5, 2007). 71 Mozilla, Wikipedia, http://en.wikipedia.org/wiki/Mozilla (last visited Oct. 5, 2007). 72 “The Firefox project went through many versions before 1.0 was released on November 9, 2004. In addition to stability and security fixes, the Mozilla Foundation released its first major update to Firefox 1.5 on November 29, 2005. On October 24, 2006, Mozilla released Firefox 2. This version includes updates to the tabbed browsing environment, the extensions manager, the GUI, and the find, search and software update engines; a new session restore feature; inline spell checking; and an anti-phishing feature which was implemented by Google as an extension and later merged into the program itself.” See Mozilla Firefox, Wikipedia, http://en.wikipedia.org/wiki/ Firefox (last visited Oct. 5, 2007). 73 For example the Bugmenot feature allows users to bypass compulsory registration for sites such as the New York Times. It automatically enters account details from its database, so that users do not have to go through the entire registration process. Bugmenot.com, Frequently Asked Questions, http://www.bugmenot.com/faq.php (last visited Oct. 9, 2007). 74 In same year Firefox was introduced, Forbes called Firefox “the best Web browser.” Arik Hesseldahl, Better Browser Now The Best, Forbes, Sept. 29, 2004, available at http://www.forbes.com/2004/09/29/cx_ah_0929tentech. html (last visited Oct. 5, 2007). PC World named Firefox the “Product of the Year” in 2005 on their “100 Best Products of 2005” list. PCWorld.com, The 100 Best Products of 2005, http://www.pcworld.com/article /id,120763-page,12/article.html (last visited Oct. 2, 2007). After the release of Firefox 2 and Internet Explorer 7 in 2006, PC World reviewed both and announced that Firefox was the better browser. Erik Larkin, Radically New IE 7 or Updated Mozilla Firefox 2 — Which Browser Is Better? PC World, Oct. 24, 2006, available at http://www. pcworld.com/article/id,127309-pg,1-RSS,RSS/article.html (last visited Oct. 9, 2007). A report in mid-2006 by

258 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY have continued at an increasing rate; as of February 2007, Firefox had been downloaded over 300 million times.75 Internet Explorer has seen a steady decline of its usage share since Firefox’s release.76 With Microsoft releasing version 7 of Internet Explorer (“IE7”) that same month, Firefox’s share growth might have been expected to slow, but IE7 has instead gained share mostly at the expense of older versions of IE.77 What is perhaps more remarkable about Firefox is that two people in particular are most responsible for the browser’s success: a 19-year-old Stanford sophomore and 24-year old New Zealander working in an open-source community for free, starting from both ends of the world and without having ever met, produced a browser that took 15% of the browser market in about three years.78 This raises the question whether any analysis of Microsoft’s market power as a vertical silo of innovation would be accurate today without taking into consideration peer produced alternatives such as Firefox. 2. Trinko In Verizon Communications Inc. v. Law Offices of Curtis v. Trinko, LLP., Verizon was the incumbent local exchange carrier (“ILEC”) in New York.79 The 1996 Telecommunications Act requires that ILECs sell unbundled parts of their local networks at cost to competitive local exchange carriers (“CLECs”), so that ILECs share their networks to give new competitors a toehold in the market.80 The Federal Communications Commission asserted that Verizon breached its duty by inadequately providing access to the customers of its CLEC competitors, one of which is AT&T.81 Trinko was an AT&T customer.82 Trinko alleged that Verizon discouraged customers from becoming or remaining customers of CLECs like AT&T, and claimed that Verizon’s breach of its duties under the Telecommunications Act to grant access to AT&T constituted an antitrust violation.83 While the Supreme Court ultimately found that Verizon had no duty to license,84 it again raises the question how the analysis of the case would have been altered when viewed through the lenses of wikinomics. OneStat stated that almost 13% of Internet users around the world now use Firefox, up from 8% in 2005. Melissa Tan, How to switch to Mozilla Firefox, Straits Times Interactive, Apr. 3, 2007, available at http://www.straits times.com. 75 Mozilla Firefox, supra note 72. This number does not include downloads using software updates or from third-party websites. They also do not represent a user count, as one download may be installed on many machines, or one person may download the software multiple times. Mozilla Vice President of Products Christopher Beard estimates that Firefox had 70 million to 80 million users as of October 2006. Elizabeth Montalbano, Final Version of Mozilla Firefox 2 Available Today, PC World, Oct. 24, 2006, available at http://www.pcworld.com/ article/id,127603-c,mozilla/article.html (last visited Oct. 5, 2007). 76 According to Dutch web analytics firm OneStat, by July 2006, Firefox was the second most widely-used browser, with 12.93% of global usage share, a percentage that has remained steady. OneStat.com, Mozilla Firefox Global Usage Share Remains Stable, http://www.onestat.com/html/aboutus_pressbox44-mozilla-firefox-hasslightly-increased.html (last visited Oct. 5, 2007). By December 2006, according to data made available by U.S. firm NetApplications, Firefox’s market share had grown to 14% globally. Gregg Keizer, Firefox Continues Growth, PC Chat, Jan. 17, 2007, http://www.pcchatshow.com /articles/showarticle.php?ArticleID=642. 77 Gregg Keizer, Despite 100 Million IE 7 Installs, Microsoft’s Browser Still Loses Ground, InformationWeek, Jan. 16, 2007, available at http://www.informationweek.com/news/showArticle.jhtml?articleID=196901142 (last visited Oct. 10, 2007). 78 Int’l Monetary Fund, Transcript of an IMF Book Forum—The World Is Flat: A Brief History of the TwentyFirst Century, Apr. 8, 2005, available at http://www.imf.org/external/np/tr/2005/tr050408bf.htm (last visited Oct. 9, 2007). 79 540 U.S. 398, 401 (2004) [hereinafter Trinko]. 80 See id. 81 See id. at 403, 413. 82 Id. at 404. 83 See id. at 404–05. 84 See id. at 415–16.

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Since its inception, companies have charged for communications by telephones based on the length of time and distance across which the call was made. However, this pricing scheme might not last much longer. In 2003, Niklas Zennström and Janus Friss founders of the file sharing application Kazaa, launched Skype.85 Skype’s software harnesses the collective computing power of peers, allowing them to speak with each other free of charge via the Internet.86 Skype competes against existing open Voice over Internet protocol service (“VoIP”) providers.87 Skype’s business model creates a self-sustaining telecommunications system that requires no central capital investment. Skype went from 100,000 to 100 million registered users in two years, and was acquired by eBay for US$2.0 billion in 2005.88 Today, “Skype claims that about 30% of Skype accounts are business accounts.”89 Internet communications in business reduce costs and increase productivity within a company. It also promotes collaboration among a company’s different groups that may be located in different locations, and enhances the way a company communicates with its suppliers, vendors, and customers. Skype’s broad feature set of voice and video calling, conference calling, in stant messaging, and file transfer is applicable in many of these situations.90 At present, every business and personal phone call to anywhere in the world is as cheap as a local call.91 As consumers get more choices, the competition will be such that the negative effects of undertakings refusing access to CLECs like AT&T will be diluted. “What phone companies will compete over, and charge for, will be the the add-ons.”92 While customers may not pay for calls, they will pay for premium services such as making calls to a landline network or for voice and video messaging. But even as peer-to-peer internet telephony wires consumers to anyone in the world with a phone, the causeways of information become ever wider. The WiFi93 revolution 85 Skype, http://www.skype.com; About Skype, http://about.skype.com/; Jeremy Caplan, Bringing TV to the Web, Time, Mar. 1, 2007, available at http://www.time.com/time/nation/article/0,8599,1595049,00.html (last visited Oct. 5, 2007). 86 Skype Help, http://support.skype.com/?_a=knowledgebase&_j=subcat&_i=3 (follow link “What is Skype”). 87 VoIP allows consumers to make phone calls over the Internet by turning voices into data packets that are sent down Internet networks and converted back into voices on the other end. Anyone who subscribes to the service through a phone company or private operator can receive unlimited local and long-distance phone calls, via the Internet — over his personal computer, laptop, or PDA — with just a small microphone attachment. See Federal Communications Commission Consumer Facts, Voice over Internet Protocol (VoIP), http://www.fcc.gov/cgb/ consumerfacts/voip.pdf (last visited on Oct. 5, 2007). In contrast, “Skype operates on a peer-to-peer model, rather than the more traditional server-client model. The Skype user directory is entirely decentralised and distributed among the nodes in the network, which means the network can scale very easily to large sizes . . . .” See Skype, Wikipedia, http://en.wikipedia.org/wiki/Skype (last visited Oct. 5, 2007). 88 Nate Mook, eBay Acquires Skype for $2.6 Billion , BetaNews.com, Sept. 12, 2005, http://www.betanews.com/ article/eBayAcquires_Skype_for_26_Billion/1126540985 (last visited Oct. 11, 2007); see Tom Sanders, Skype Signs Up 100 Millionth User, Computing.co.uk, May 1, 2006, http://www.computing.co.uk/vnunet/news/2155074/ skype-signs-100-millionth-user (last visited Oct. 11, 2007). In February 2007, Skype reported its 500 millionth user download. See Paul D. Kretkowski, Skype Roadmap 2007, VoIP News, Feb. 20, 2007, http://www.voipnews.com/interviews/skype-qa-oberg-022007/ (last visited Oct. 5, 2007). 89 See Kretkowski, supra note 87. 90 “Skype already has more than 50 leading hardware manufacturers producing more than 160 Skype Certified devices and accessories, including desktop Internet phones, cordless phones, headsets and WiFi phones. In addition, Skype for Windows Mobile works on more than 120 different Pocket PC and Smartphone devices. In fact, it has been downloaded more than 5 million times, making it one of the most popular Windows Mobile applications to date.” Id. 91 Voice Over IP, Wikipedia, http://en.wikipedia.org/wiki/Voice_over_IP (last visited on Oct. 6, 2007). 92 Posting of Bill Binning to Jaduka blog, http://blog.jaduka.com/archives/34-Its-the-Services,-Stupid!.html (Feb. 27, 2007, 8:41 EST) (quoting Friedman, supra note 37). 93 WiFi “is a set of product compatibility standards for wireless local area networks (“WLANs”) based on the IEEE 802.11 specifications. . . . Wi-Fi enables a person with a wireless-enabled computer or personal digital

260 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY allows consumers to use Skype on mobile devices.94 Yet even now, WiFi could be made obsolete by the presence of WiMax95 processors which will have the potential to cover a much greater range than WiFi—in the order of several kilometres.96 This means that our mobile communication lines may soon take place over peer-to-peer network providers like Skype rather than LECs. But Skype is not without its potential antitrust controversies. “Skype has been criticized over its use of a proprietary protocol, instead of an open standard . . . since this makes it much more difficult, if not impossible, for other developers to interact with Skype.97 Some have theorized that the decision was made to prevent competition over business with SkypeOut,”98 which “allows Skype users to call traditional telephone numbers, including mobile telephones, for a fee.”99 While this potentially raises access concerns of its own, the point remains that entry is free to all who can provide a new and better alternative to traditional LECs. 3. Magill In Radio Telefis Eireann (RTE) v. Comm’n of the European Comtys (“Magill”), three broadcasting companies were dominant over the listings of its own programs.100 This dominance was achieved through questionable copyright protection granted in the United Kingdom and Ireland for TV listings.101 “When Magill started to publish comprehensive weekly listings for all three stations, each TV station successfully sued for copyright infringement.”102 Each station had refused to license its listing information to anyone.103 The European Court of Justice (“ECJ”) found that the refusal to license “amounted to an abuse of a dominant position over the programme information.”104 The copyright for the non-creative listing of facts allowed each station a monopoly over the use of those facts or lists.105 Under E.U. law, the Court of Justice cannot rule on the correctness of Member State copyright laws unless that Member State protection falls within the subject matter for an E.U. copyright directive.106 Copyright in television assistant (“PDA”) to connect to the Internet when in proximity of an access point. The geographical region covered by one or several access points is called a hotspot.” Thefreelibrary.com, Wi-Fi, http://www.thefreelibrary. com/Wi-Fi-a0163332784 (last visited Oct. 11, 2007). “[H]otspots only have an effective range of 300 metres.” James Brown, Vnunet, Mar. 16, 2006, http://www.vnunet.com/computing/analysis/2152089/wifi-provide-answer. 94 Compare Accessories and Devices, http://skype.com/help/accessories/devices.html# wifiphone (last visited Oct. 12, 2007). 95 “WiMAX is an acronym that stands for Worldwide Interoperability for Microwave Access, a certification mark for products that pass conformity and interoperability tests for the IEEW 802.16 standards. WiMAX is a standards-based wireless technology that provides high-throughput broadband connections over long distances.” Human Law Mediation: WiFi on the Rise, but WiMax Poised to Take Over, http://www.human-law.org/human law/2006/03/wifi_on_the_ris.html (Mar. 17, 2006). 96 Id. 97 Skype, Wikipedia, supra note 87. 98 Id. 99 Id. 100 See Case C-241/91, Radio Telefis Eireann (RTE) v. Comm’n of the European Comtys., 1995 E.C.R. I-743 [hereinafter Magill]; Korah, supra note 58, at 138. 101 Magill, 1995 E.C.R. I-743. 102 Korah, supra note 58, at 138. 103 Id. at 139. The stations had only provided programme information to daily newspapers on a limited basis. Magill, 1995 E.C.R. I-743 at para. 9. 104 Korah, supra note 58, at 138. 105 Id. 106 As the ECJ in Magill noted, “In the absence of Community standardization or harmonization of laws, determination of the conditions and procedures for granting protection of an intellectual property right is admittedly a matter for national rules and the exclusive right of reproduction forms part of the author’s rights, with the result that refusal to grant a licence, even if it is the act of an undertaking holding a dominant position, cannot in itself constitute abuse of a dominant position.” Magill, 1995 E.C.R. I-743 at para. 49 (citing judgment in Case C-238/87, AB Volvo v. Erik Veng (UK) Ltd., 1988 E.C.R. I-6211 at paras 7–8).

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listings had not been the subject of any E.U. directive. But many people think that the Court of Justice viewed the British and Irish protection for television listings as suspect, and used a novel application of competition law to do i ndirectly what it could not do directly.107 The Court held that: 앫 The television stations were the only sources of the basic information,108 their refusal to supply this information prevented the appearance of a new product which the stations did not offer and for which there was constant consumer demand;109 앫 There was no justification for the refusal;110 and 앫 The stations reserved to themselves the secondary market of weekly TV guides, by excluding all competition on that market.111 Television stations, whether broadcast, cable, or satellite, need television listings to serve their consumers. To the extent that a competitor wants to use those listing, the market would be defined again as the station’s TV listings. If the listings were still protected by copyright, then stations would continue to have dominance even if peer production of video alternatives were rampant. Thus, on the sui generis facts of Magill, the result would be the same. However, the potential role of peer production in the production of video products that can compete with traditional television shows is strong. YouTube and similar sites promise to provide an Internet-based alternative to local television stations.112 YouTube was started as an “angel-funded enterprise” in garage with an initial investment of US$3.5 million.113 In November 2006, Google announced that it had reached a deal to acquire the company for US$1.65 billion in Google’s stock.114 “YouTube’s pre-eminence in the online video market is staggering.”115 While it has some copyrighted works 107 Duncan Curley, Balancing Intellectual Property Rights and Competition Law in a Dynamic, KnowledgeBased European Economy, in The Intellectual Property Debate: Perspectives from Law, Economics and Political Economy 220 (Edward Elgar 2006) (noting that “(i)n consequence of the ruling in Magill and the particular facts of that case, there was much subsequent debate in the literature about whether ‘exceptional circumstances’ might apply to force compulsory licensing of IPRs in circumstances where IPRs were thought to be undeserving of legal protection, without the requirement to demonstrate that other unilateral conduct as well”). 108 Magill, supra note 194, at para. 53. 109 Id. at para. 54. 110 Id. at para. 55. 111 Id. The European Court of Justice’s judgment was extremely vague. The precise scope of “exceptional circumstances” remains unknown even to this day. Whether this was because of a shrew desire to preserve wiggle room to refine the conditions for access or otherwise will remain for all time, a matter for academic speculation. See Korah, supra note 152, at 139. 112 According to Wikipedia, “YouTube is a popular video sharing website where users can upload, view, and share video clips.” YouTube, Wikipedia, http://en.wikipedia.org/wiki/Youtube (last visited Oct. 6, 2007) [hereinafter YouTube, Wikipedia]. “Videos can be rated, and the average rating and the number of times a video has been watched are both published.” YouTube, Simple English Wikipedia, http://simple.wikipedia.org/wiki/YouTube (last visited Oct. 11, 2007) [hereinafter YouTube, Simple Wikipedia]. The New York Times reported that Hollywood producers are already placing a full television series, “Quarterlife,” on MySpace, another free access community site. Michael Ciepley, Show Series to Originate on MySpace, N.Y. Times, Sept. 12, 2007, available at http://www.nytimes.com/2007/09/13/business/media/13quarterlife.html (describing the show as “a regular television series, made by network-caliber writers, directors and production crews”). 113 See YouTube, Wikipedia, supra note 112. 114 Google closes $A2b YouTube deal, Reuters, Nov. 14, 2006, available at http://www.theage.com.au/news/ Busness/Google-closes-A2b-YouTube-deal/2006/11/14/1163266548827.html. 115 “According to a July 16, 2006 survey, 100 million clips are viewed daily on YouTube, with an additional 65,000 new videos uploaded per 24 hours. The site has almost 20 million visitors each month, according to Nielsen/NetRatings; . . . [a]ccording to the website Hitswise.com[sic], YouTube commands up to 64% of the UK online video market.” Mysite.cc, http://www.mysite.cc/ (quoting http://en.wikipedia.org/wiki/YouTube) (last visited Oct. 11, 2007). See also USATODAY.com, YouTube Serves up 100 Million Videos a Day Online, Reuters, July 16, 2006, available at http://www.usatoday.com/tech/news/2006-07-16-youtube-views_x.htm? (last viewed Oct. 6, 2007); YouTube, Wikipedia, supra note 112.

262 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY uploaded in full without permission, its main attraction are the massive independently produced videos of members of the public, or excerpts chosen and edited by members of the public of copyrighted works. This creative force has been unleashed and will be difficult to stop. It has already created a huge audience that otherwise would most likely would be watching traditional television programs. As the sophistication of these public creators increases, the product will improve. We might see sophisticated shorts and, perhaps, full length programs that will cut sharply into the market share of traditional shows.116 As a mark of its importance in setting the tone for the way media will be consumed in future, YouTube was named Time magazine’s “Invention of the Year” for 2006.117 With the emergence of digital video on demand,118 the need to rely on national broadcasters, and consequently, their indulgence in providing access to their television listings, will be obviated. As long as this emerging trend of independent global network of content providers sustains itself, Magill-type cases will not likely re-emerge. 4. FairPlay Apple developed the iPod, a portable music player, and iTunes, an online music store.119 Apple has sold more than three billion songs on iTunes,120 and accounted for 82% of legal downloads in the U.S. in May 2005.121 Apple has sold over 100 million iPods,122 and has over 70% market share of all mp3 players.123 It agreed to provide FairPlay,124 its digital rights management (“DRM”) protection,125 to the big-four music companies in order to entice them to make their music content available on iTunes. However, “Apple’s tight control over FairPlay” has prevented its users from playing files “bought from other 116 BBC Joins Forces with YouTube, ZDNet UK, Reuters, Mar. 2, 2007, available at http://news.zdnet.co.uk/ internet/0,1000000097,39286149,00.htm (BBC director-general Mark Thompson noted that “[i]t’s essential that the BBC embraces new ways of reaching wider audiences with nonexclusive partnerships such as these . . .”). 117 Lev Grossman, Best Inventions 2006: Invention of the Year, Time, Nov. 13, 2006, at 62, available at http://www.time.com/time/2006/techguide/bestinventions/inventions/youtube.html. 118 See Video on demand, Wikipedia, http://en.wikipedia.org/wiki/Video_on_demand (last visited Oct. 23, 2007). 119 Apple – iPod + iTunes, http://www.apple.com/itunes (last visited Oct. 7, 2007). 120 iTunes Store Tops Three Billion Songs, http://www.apple.com/pr/library/2007/ 07/31itunes.html (last visited Oct. 6, 2007). 121 MacDailyNews, Apple’s iTunes Music Store Passes 430 Million Downloads, Market Share Increases to 82-Percent in May, http://macdailynews.com/index.php/weblog/comments/5967/ (last visited Oct. 6, 2007). 122 Apple Introduces New iPod Classic, http://www.apple.com/pr/library/2007/09/ 05classic.html (last visisted Oct. 6, 2007). 123 Phillip Cruz, U.S. Top Selling Computer Hardware for January 2007, BLOOMBERG.COM, Mar. 13, 2007, http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=AAPL:U.S.&sid=ap0bqJw2Vpw I (last visited Oct. 6, 2007). 124 FairPlay, Wikipedia, http://en.wikipedia.org/wiki/FairPlay (last visited Oct. 23, 2007). 125 Digital rights management technologies attempt to control use of digital media by preventing access, copying or conversion to other formats. Digital rights management systems have received some international legal backing by implementation of the 1996 WIPO Copyright Treaty. See http://www.wipo.int/treaties/en/ip/ wct/trtdocs_wo033.html (last visited Oct. 6, 2007). Article 11 of the Treaty requires contracting parties to enact laws against DRM circumvention. Id. The U.S. has implemented the Digital Millennium Copyright Act (DMCA), while Europe has implemented the Directive 2001/29/EC (directive on the harmonisation of certain aspects of copyright and related rights in the information society), which requires E.U. member states to implement legal protections for technological prevention measures. See Digital Millenium Copyright Act of 1998, available at http://www.copyright.gov/legislation/dmca.pdf; Council Directive 2001/29/EC, para. 47, 2001 O.J. (L 167) 10 (EC), OJ 2001 L167/10 (Westlaw). Wikipedia describes digital rights management as follows: “Digital rights management (DRM) is an umbrella term that refers to access control technologies used by publishers and other copyright holders to limit usage of digital media or devices. It may also refer to restrictions associated with specific instances of digital works or devices. To some extent, DRM overlaps with copy protection, but DRM is usually applied to creative media (music, films, etc.) whereas copy protection typically refers to software.” Digital rights management, Wikipedia, http://en.wikipedia.org/wiki/Digital_rights_management (last visited Oct. 23, 2007).

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online services.”126 It also prevents iTunes rivals from providing interoperable content.127 The French enterprise Virgin Media accused Apple of abusing its dominance by refusing to license its FairPlay digital rights management system in France.128 It claimed that in order to be a viable provider of online music, it had to be able to sell to iPod users.129 This meant access to FairPlay. In November 2004, the French Competition Commission rejected the complaint.130 It first held that because the market was rapidly expanding, new competitors were entering, prices were decreasing, and functionalities increasing, present market share did not reflect actual market power.131 Second, it held that FairPlay was not indispensable.132 There were other uses of pay-per-song and several other music portable players on the market. Finally, the DRM was easily circumvented by burning the song onto a compact disc, and ripping it into another format.133 In the U.S., a class action suit was brought against Apple in the U.S. District Court of Northern California.134 It was accused of leveraging its monopoly on the iTunes market to thwart competition in its iPod market.135 Pandora and Last.fm are potential alternatives to the DRM protected music from iTunes. These are essentially automated music recommendation and Internet radio services.136 “Users begin by entering a song or artist that they enjoy, and the service responds by playing selections that the program thinks are musically similar.”137 “Songs played are added to a log from which personal top artist/track bar charts and musical recommendations are calculated.”138 Users are then able to provide feedback on the individual song choices . . . which the system takes into account for future selection. Over 400 different musical attributes or genes are considered when selecting the next song. These 400 attributes are combined into larger groups called focus traits. There are 2,000 focus traits.139 126 Natali Helberger, Virgin Media versus iTunes, 2 Indicare Monitor 16, 16 (2005), available at http://www.indicare.org/tiki-read_article.php?articleID=150 (last visited Oct. 2, 2007). 127 See id. 128 See id. at 17. 129 See id. 130 See Didier Deneuter, No Abuse of Market Dominance by Apple According to the French Competition Council, EuroJuris International, Dec. 12, 2004, http://www.eurojuris.net/eng/article-detail.asp?ArticleId=206. 131 See Helberger, supra note 126, at 18. 132 Id. 133 See Terrence O’Brien, The New Weapon Against Online Music Theft?, Switched, Aug. 20, 2007, http://www.switched.com/2007/08/20/a-new-weapon-aganst-online-music-theft/ (last visited Oct. 2, 2007). In March 2006, the “[French Senate passe[d] a watered[-]down DRM bill” forcing suppliers of DRMs to provide information necessary for interoperability. Marc Perton, French Senate Passes Watered Down DRM Bill, Engadget, May 11, 2006, http://www.engadget.com/2006/05/11/french-senate-passes-waterd-down-drm-bill/ (last visited Oct. 2, 2007). 134 Tucker v. Apple Computer, Inc., 493 F. Supp. 2d 1090 (N.D. Cal. 2006). 135 See id. at 1094; see also Nancy Gohring, Apple faces US lawsuit over iTunes-iPod link, Infoworld, Jan. 2, 2007, http://www.infoworld.com/article/07/01/02/HNapplelawsuit_1.html (“Apple faces a lawsuit in the U.S. . . . over tying its iTunes music store to the iPod digital music player. . . . The suit was filed by a user, Melanie Tucker, and seeks class-action status. It alleges that Apple violates antitrust laws by refusing to allow music bought in its iTunes store to be played on any digital music player besides the iPod. It also charges Apple with not making it clear to customers that music from the iTunes store and the iPod are incompatible with music and devices offered by other companies. The suit asks that Apple be forbidden to continue to support the exclusive tie-in between iTunes and the iPod and that Apple pay damages to anyone who has bought an iPod or music from the iTunes store after April 28, 2003.”). 136 See Last.fm, http://www.last.fm (last visited Oct. 4, 2007); Pandora, http://pandora.com (last visited Oct. 4, 2007). 137 Pandora Users Groups at Last.fm, http://www.last.fm/group/Pandora+Users (last visited Oct. 4, 2007). 138 This is termed “automatic track logging scrobbling.” Last.FM, Wikipedia. http://en.wikipedia.org/wiki/ Last.fm (last visited Oct. 4, 2007). 139 See Pandora Users Groups, supra note 137.

264 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY These allow consumers to get the songs they want, as well as other similar samplings which they may enjoy for free anywhere and anytime they are connected to the Internet. With increasing penetration of WiFi and WiMax, consumers listening are able to enjoy the selection and convenience of songs downloaded from iTunes while on the move in their cities without any anticompetitive concerns with respect to interoperability. B. THE COMPETITIVE PROCESS IN A COLLABORATIVE WORLD

New low-cost collaborative infrastructures allow competitors and entrants to access markets in ways that only large corporations could manage in the past. The information and tools are available with a small amount of capital—dominance has been downsized.140 Indeed, as a growing number of firms see the benefits of mass collaboration, this new way of organizing could eventually displace traditional corporate structures as the economy’s primary engine of wealth creation. However, two issues should be resolved. First, it may be argued that evidence of change in the way IP markets operate is scanty. This suggests that the examples cited earlier are isolated occurrences or that they may only have minimal impact on the market power and strategies of dominant undertakings. Second, even if wikinomics could have a significant impact on analysis at the Interface, the business model could upset the traditional IP mechanism of rewarding innovation through temporary exclusivity. 1. Where Has Peer Production Succeeded Commercially? An argument may be validly raised that the impact of peer production on traditional dominance in the market is speculative. For example, open source has not seen significant success in personal computer desktop software so far.141 Market shares have not changed much.142 While there have been reliable open source software alternatives in major application software categories, it has proved difficult to gain any relevant market share from the dominating Microsoft products.143 The short answer is that changes in market behavior take time and happens in markets with suitable conditions. When computers were first introduced into offices, some expected a significant boost in productivity.144 However, Professor Paul David explained such a lag by pointing to a 140 For example, for a fee, SalesForce.com gives small and medium enterprises (“SMEs”) access to a library of Web-based business applications, which can be tapped into online to run their businesses. See On-Demand CRM Applications, http://www.salesforce.com/products/appexchange-applications/ (last visited Oct. 3, 2007). These applications operate like traditional software programs and can handle a wide range of business tasks. The big difference is that these management tools are stored remotely on the SalesForce.com platform. Because they are delivered over the Internet and written in standard Web formats, they are accessible to anyone who has an Internet connection and are easily interoperable with any business. Microsoft has taken notice. The New York Times reported on 9 November 2005 that several Microsoft internal memos from senior executives suggested that “Microsoft must fundamentally alter its business or face being at a significant competitive disadvantage to a growing array of companies offering Internet services. . . . [A few days later], Microsoft . . . announced that it would offer two new services—Windows Live and Office Live . . .” which are essentially Business Web versions of its more popular products. John Markoff, Internet Services Crucial, Microsoft Memos Say, N.Y. TIMES, Nov. 9, 2005, at C5, available at http://www.nytimes.com/2005/11/09/technology/09soft.html. 141 Mikko Välimäki & Ville Oksanen, The Impact of Free and Open Source Licensing on Operating System Software Markets, 22 Telematics and Informatics 97, 98 (2005). 142 “If one uses searches made on Google as an indicator, during June 2001 and October 2003, a steady 1% of all searches came from computers using Linux as the operating system. The market share of Mac OS has been around 3–4% while other non-Windows operating systems gaining another 4%. The rest of Google queries, that is over 90%, were made from computers running Microsoft Windows.” Id. at 99 n.1. 143 Mikko Välimäki, The Rise of Open Source Licensing: A Challenge to the Use of Intellectual Property in the Software Industry 19 (Fin. Turre Publ’g 2005), available at http://pub.turre.com/openbook_valimaki.pdf. 144 See Paul A. David, The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox, 80 Am. Econ. Rev. 355, 355 (1990). The noted economist Robert Solow quipped that “[w]e see the computers everywhere but in the productivity statistics.” Id.

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historical precedent.145 He noted that while the light bulb was invented in 1879, it took several decades for electrification to permeate the industrial process.146 Only when there was a critical mass of experienced factory architects, electrical engineers, and managers who understood the complementarities among the production line did electrification really deliver a productivity breakthrough.147 In the same way, while the impact of wikinomics is already beginning to be felt, changes in antitrust analysis may only be present necessary in limited technology and telecommunications markets. It may take some years before there is a critical mass of business models based on peer collaboration for antitrust analysis as a whole to be altered significantly. Yet it is significant that wikinomics has already found a willing audience in the governmental IP framework. The U.S. Patent and Trademark Office (“USPTO”) will soon begin experimenting with a wikinomics approach to reviewing patent applications.148 The Community Patent Review project aims to create an online system for peer review of patents.149 “It will support a network of experts to advise the Patent Office on prior art as well as to assist with patentability determinations.”150 By using social software, such as social reputation, collaborative filtering and information visualization tools, this project aims to “make it easier to protect the inventor’s investment while safeguarding the marketplace of ideas.”151 While there remains a risk that the system could be gamed, an opaque patent review system would likely be more susceptible to abuse than one where a community of peers can review and rate each others comments on a given patent application in an open and transparent forum.152 But the progressive march of wikinomics is not without its opponents. There are at least three reasons why it might be derailed. First, intrinsic to peer production is a continuing supply of willing collaborators. Many open source software collaborators are driven by a desire to counterbalance the dominance of software corporations such as Microsoft and the desire to be part of creating a better system. Idealism alone limits the quality and 145

Id. Id. at 356. 147 See id. at 358. 148 Posting of Anthony D. Williams to Wikinomics: The Blog, A Wikinomics Approach to the Patent System, http://www.wikinomics.com/blog/index.php/2007/03/05/a-wikinomics-approach-to-the-patent-system/ (Mar. 5, 2007, 19:26 EST). 149 Id. 150 Id. 151 Id. 152 Id. “The quality of patents has sharply decreased as underpaid and overwhelmed patent examiners struggle with a backlog of over 600,000 applications and growing.” Id. “Companies try to patent things that other people or companies will unintentionally infringe and then they wait for those companies to successfully bring products to the marketplace.” Id. Undertakings who file these patents and extract license fees from successful businesses play the patent system like a lottery. Id. “The real danger is that these questionable patents will end up driving up the costs of innovation by generating an increasing number of lawsuits, or threatened lawsuits, that genuinely innovative companies cannot avoid.” Id. The problem is so endemic in fields like software and electronics, “low-quality patents have become a serious drag on the technological and scientific progress that the patent system was designed to promote.” Id. See also U.S. Patent & Trademark Office, United States Patent and Trademark Office 2007–2012 Strategic Plan 13 (2007) (“We believe that partnership with stakeholders is crucial to defining, in a collaborative manner, solutions that will benefit the entire IP system. We also believe that such partnerships can offer keys to global IP solutions, as American inventors, entrepreneurs, and businesses have global issues to consider. As an example, in fiscal year 2006, the U.S.PTO cooperated with a private sector-led group that chose to focus on so-called ‘peer review’ as a possible means of improving the quality of patent application packages received by the USPTO. Private sector-initiated and -led efforts may provide the USPTO with important data and feedback that will help us, as stewards of the public trust, improve patent, trademark, and other IP systems for the benefit of all.”) (emphasis added), available at http://www.uspto.gov/web/offices/com/strat2007/stratplan20072012.pdf. 146

266 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY quantity of alternatives available to consumers. In order for peer production to become a fully sustainable alternative to current business models, it will need to incorporate elements of a structured system of financial rewards in the way forward thinking organizations such as Skype and P&G have done.153 Second, a large part by successful commercial models of peer collaboration relies in part of the use of copyrighted works. The trend then hinges on whether the law will provide for continued use of these works in some fashion through doctrines such as fair use or whether copyright owners will succeed in seeking to curtail use of their works. For instance, in March 2007, Viacom filed a $1 billion lawsuit against YouTube and Google, alleging massive copyright infringement.154 Viacom said in its complaint: YouTube’s brazen disregard of the intellectual-property laws fundamentally threatens not just plaintiffs but the economic underpinnings of one of the most important sectors of the United States economy.155 ... YouTube has deliberately chosen not to take reasonable precautions to deter the rampant infringement on its site . . . because YouTube directly profits from the availability of popular infringing works on its site, it has decided to shift the burden entirely onto copyright owners to monitor the YouTube site on a daily or hourly basis to detect infringing videos.156 Third, the progressive march of wikinomics rests in large part on a presumption that the Internet remains affordable for the large body of collaborative creators. Like the media industries, telecommunications firms “need to recoup their investments in maintaining and upgrading the telecommunications infrastructure.”157 Telecommunications firms may charge fees in exchange for giving faster service. Users who are used to fast service might become disaffected with collaborative sites that are too slow. Thus, those sites might lose both creators and viewers. On the other hand, the slower sites should have a market of people who cannot afford the faster service. There is no reason to think that those who cannot afford the faster service will no longer participate in the collaborative creative process or view it. This tiered Internet with different levels of service has created a strong debate on the merits “net neutrality.” Some have predicted very dire consequences.158 This structure 153 Another successful model of peer production is Google. See David Post & Bradford C. Brown, On the Horizon: ‘Peer Production’ Promises to Leap in Importance, InformationWeek, Jan. 2, 2002 (“Google . . . shows another side of peer production. It has become, almost overnight, the gold standard for search engines. What makes Google different from and better than other search engines is that it evaluates the usefulness of each of the billions of Web pages out there and the relevance of each page to a particular query by counting and analyzing the links leading into the page in question. In other words, it lets the network do the hard work of ranking Web pages. It’s as though everyone who builds a Web page and links to other pages is working for Google, helping it provide better service to its customers.”), available at http://www.informationweek.com/story/showArticle.jhtml?article ID=6500771. 154 Complaint, Viacom Int’l Inc. v. YouTube, Inc., No. 1:2007cv02103 (S.D.N.Y. Mar. 13, 2007), available at http://ngdaly.googlepages.com/ViacomvYouTube.pdf. 155 Id. at para. 2. 156 Id. at para. 6. 157 Tapscott & Williams, supra note 4, at 273. 158 Id. As Don Tapscott and Anthony Williams dramatically put it, “[i]f Yahoo pays the freight, BellSouth users will find Yahoo’s search engine works faster and better than Google’s. So, in effect, BellSouth becomes a gatekeeper for the types of services that thrive on the Internet. . . . This is not just a war against the open Internet; it’s a war against economic development, a war against competitiveness, and a war against innovation. In short, it’s a war against the future.” Id. at 273. In the wake of this statement, the Australian Competition and Consumer Commission has alleged that Google has deceived consumers by not differentiating between its organic search

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underlying much of the technological progress we take for granted today may collapse and choke the lifeblood out of the current and future collaborative creative process afforded by cheap and ready access to tec hnological infrastructure.159 If it does, society may have to turn to antitrust and competition law for a possible solution in the form of the essential facilities doctrine.160 2. Is Peer Production a Threat to the IP Mechanism of Rewarding Innovation Through Temporary Exclusivity? There is a view that “if innovators are not going to be financially rewarded, the incentive for path-breaking innovation will eventually dry up, as will the money for deep R & D that is required to drive [technological] progress.”161 To this concern two responses may be given. First, peer production offers an open technological infrastructure.162 Most open source solutions like Linux provide the basic infrastructure on which software developers can build applications and businesses.163 It allows commercial entities to compete in areas to which they can add value without being inhibited by lack of access to basic technological infrastructure. Competitors will still have to develop a unique product or service, and a unique way to apply technology to areas of core value. This means competitors will still need proprietary insights, innovations and proprietary software tools to build unique products or services. As a consequence, durable competitive advantages in R&D-intensive industries will still be rooted in the growth of deep domain-specific knowledge. IBM shows how IP can be treated like a mutual fund—a balanced portfolio of some results and those which are being displayed because Google has received payment from an advertiser. See John Collins, Google Antitrust Case Opens in Australia, Irish Times, Sept. 11, 2007, available at http://contentagenda. com/articleXml/LN667905952.html?industryid=45174. 159 Here an irony may be observed. The Internet was created to facilitate the transfer of information, offering a communications network that could potentially survive a nuclear war. Yet it remains pitifully vulnerable to technological bottlenecks which could be put in place by service providers seeking to profit by auctioning information to the highest bidders. 160 The Essential Facilities Doctrine (“EFD”) grew out of cases where a vertically integrated owner had exclusive control over some facility, and used that control to gain advantage over competitors in an adjacent or downstream market. Herbert Hovenkamp et al., Unilateral Refusals to License, 2 J. Competition L. & Econ. 1, 10 (2006). It was first discussed in the U.S. in United States v. Terminal Railroad Ass’n, in which a set of railroads formed a joint venture owning a key bridge across the Mississippi River and excluded non-member competitors. 224 U.S. 383 (1912). In the E.C., the EFD was first discussed in Sea Containers v. Stena Sealink, where a port owner was prohibited from imposing competitive constraints on downstream customers. 1994 O.J. (L 15) 8 (1994). The doctrine has also surfaced in cases involving such “bottleneck” inputs as sports stadiums, warehouse spaces, and newspaper distribution systems. However, recent cases have focused on technological knowledge for access to networks. These include physical networks like electricity or telecommunications, where there are clear elements of natural monopoly and the presence of explicit regulation, as well as “virtual” networks. Richard N. Langlois, Technological Standards, Innovation, and Essential Facilities Toward a Schumpeterian Post-Chicago Approach 4–5 (U. Conn. Dep’t Econ., Working Paper No. 1999-07, 1999), available at http://www.econ.uconn.edu/working/ 1999-07.pdf. 161 Friedman, supra note 131, at 109. For example, “Microsoft’s success in creating the standard PC operating system produced the bankroll that allowed Microsoft to spend billions of dollars on R & D to develop Microsoft Office, a whole suite of applications” that it can now sell for a few hundred dollars. Id. As Craig Mundie, Microsoft’s Chief Research and Strategy Officer, put it: “The virtuous cycle of innovation, reward, reinvestment, and more innovation is what has driven all big breakthroughs in our industry. The software business as we have known it is a scale economic business. You spend a ton of money up front to develop a software product, and then the marginal cost of producing each one is very small, but if you sell a lot of them, you make back your investment and then plough profits back into developing the next generation. But when you insist that you cannot charge for software, you can only give it away, you take the software business away from being a scale economic business.” Id. 162 Id. at 91 (“Commercial software companies have to start operating further up the [software] stack to differentiate themselves. . . . The open source community is basically focusing on infrastructure.”) (quoting Jack Messman, chairman of Novell, Inc.). 163 Tapscott & Williams, supra note 98, at 91–92. See also Linux, http://www.linux.org.

268 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY protected and shared IP assets.164 “At a time when reliability and trust were the big question marks surrounding Linux, IBM indemnified client risk.”165 “Because it was reliable and free, Linux became a useful operating system for computers hosting Web servers, and ultimately databases, and today many companies consider Linux an enterprise software keystone.”166 Linux offers a viable platform uniquely tailored to bus iness needs for 20% of the cost of proprietary operating systems.167 A company that was proprietary, insular, and vertically integrated fifteen years ago now partners extensively with the open source community and is considered a positive force for collaboration and openness. IBM enjoys the goodwill of thousands of independent and corporate developers who are committed to the Linux vision and community growth. IBM’s partnering and collaboration with communities it does not directly control are strategic tools competitors have yet to master.168 In doing so, IBM gained a viable alternative to the Windows server on Intel-based platforms. Just as important, IBM has gained experience and knowledge in a vital new model of value creation. Today, Linux services and hardware represent billions of dollars in revenue. IBM estimates it has saved nearly a billion dollars per year compared to what it would have to spend on creating and maintaining an operating system in-house.169 More than that, supporting open source has enabled IBM to undercut competitors who charge for proprietary operating system software. Though Linux is free to use or modify, it has been embedded in all kinds of profitable products and services developed by large companies like BMW, IBM, Motorola, Philips, and Sony.170 Contributing to the commons is not altruism. Rather, it promotes vibrant business ecosystems that harness a shared foundation of technology and knowledge to accelerate growth and innovation. But in-house innovation alone will not be enough to survive in a fast changing and intensely competitive economy. The speed and complexity of change is such that no one firm can create all the innovations needed to compete in information technology, or in any other industry. With a little time and effort, most technology can be invented around. Firms that make the boundaries of innovation porous to peer collaboration have a better chance to outper form competitors that rely solely on internal resources and capabilities. As Joel Cawley, head of IBM’s strategic planning unit, put it: What we are seeing in so many different fields . . . is that the next layers of technical innovation involve the intersection of very advanced specialities. The cutting edge of technical innovation in every field is increasingly specialized. . . . Therefore to come up with any valuable new breakthrough, you have to be able to combine more and more of these increasingly granular specialties. That is why collaboration is so important.171

164 Id. at 26, 120. “For example starting in 1999, more than a dozen pharmaceutical firms abandoned their proprietary R&D projects to support open collaborations such as the SNP Consortium and the Alliance for Cellular Signaling. Both projects aggregate genetic information culled from biomedical research in publicly accessible databases. They also use their shared infrastructures to harness resources and insights from the for-profit and not-for-profit research worlds. Nobody gives up their potential patent right over new end products, and by sharing some basic intellectual property the companies bring products to market more quickly.” Id. at 27. 165 Id. at 82. 166 Id. at 24. 167 Id. at 81. 168 Id. at 82. 169 See id. at 78. 170 See id. at 65. 171 Friedman, supra note 37, at 439; see also Tapscott & Williams, supra note 4, at 297–98 n.6 (noting that “as

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Between 2001 and 2006, the pace of innovation has doubled in the pharmaceutical industry alone.172 When Procter & Gamble (“P&G”) realized that its army of 7,500 researchers was no longer enough to sustain its lead, it sourced 50% of its new product and service ideas outside their payroll, including the InnoCentive network.173 Ninety thousand scientists around the world are collaborating “to solve tough R&D problems for a cash reward.”174 P&G thus posts “R&D problems on the InnoCentive Web site, while ‘solvers’ submit their solutions in a bid to capture cash prizes ranging from $5,000 to $100,000.”175 In 2006, “more than 35% of [P&G’s] products in market ha[d] elements that originated from outside P&G . . . . And 45% of the initiatives in [its] product development portfolio ha[d] key elements that were discovered externally.”176 At P&G, R&D productivity had increased by nearly 60%, while “R&D investment as a percentage of sales [wa]s down from 4.8% in 2000 to 3.4% . . . “ in 2006.177 “Five years after the company’s stock collapse[d] in 2000, [it] . . . doubled [it’s] share price and ha[d] a portfolio of 22 billion-dollar brands.”178 This shows that our increasingly complex and interconnected world has made wikinomics not merely be an intriguing alternative to current models of IP exploitation, but their evolutionary successor. III. CONCLUSION In today’s IP markets, the war between stakeholders will be less over prices and output as it will be over the ownership and access to information. In this regard, it is important to recognize that protection and expansion of IPRs are means of serving a wider social purpose of promoting innovation, rather than satisfying an economic end in themselves. Properly conceived, they are tools for preserving and enhancing a system of free enterprise and free competition. Nevertheless, IPRs improperly constructed or applied may cumulatively yield unacceptably high social costs by compromising the competitive process. As Don Tapscott and Anthony D. Williams put it: Of course, as authors and business people we recognize that rewarding creativity and investment is central to promoting innovation. In theory, intellectual property law exists to do just that. But expansion in the law’s breadth, scope, and term over the last thirty years has resulted in an intellectual property regime that is radically out of line with modern technological, economic, and social realities. This threatens the chain of creativity and innovation on which we (and future generations) depend. In today’s economy we need an intellectual property system that rewards invention global complexity increases so do the list of challenges we face that are unsolvable by individual organizations acting alone. . . . There is simply no end to the requirements or possibilities for innovation. These complex problems demand cross-disciplinary and interorganizational solutions. Even comparatively simple products are becoming more complex. All of this complexity is fueling an increase in the requirement for openness and boundary-spanning collaborations”). 172 See Tapscott & Williams, supra note 4, at 13. 173 Id. InnoCentive is an open innovation company that takes research and development problems in the sciences, frames them as challenge problems, and opens them up for anyone to solve them. They give cash awards for the best solutions to scientists who meet the challenge criteria. See David Wessel, Prizes for Solutions to Problems Play Valuable Role in Innovation, Wall St. J. Online, Jan. 25, 2007, available at http://webreprints. djreprints.com/1657770067525.html. 174 Tapscott & Williams, supra note 4, at 13. 175 Id. at 98–99. 176 Larry Huston & Nabil Sakkab, Connect and Develop: Inside Procter & Gamble’s New Model for Innovation, Harv. Bus. Rev., Mar. 2006, at 58 para. 15. 177 Id. 178 Id.

270 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY and encourages openness—one that fuels private enterprise and sustains the public domain.179 If the legal incentives provided by IPRs stimulate the first-comer’s investments at the expense of second comers who wish to make investments on follow-on applications, IP laws would have traded one kind of market failure for another. This is the fear competition authorities have. However, wikinomics and the conditions that facilitate it are ushering us toward a world where knowledge, market power, and productive capability will be more dispersed than at any time in our history—a world where innovation will be fast, fluid, and persistently disruptive. Dominant undertakings which fail to grasp this will find themselves cut off from collaborative networks that are sharing, adapting, and updating knowledge to create value. But the idea of monopoly power being broken by individual effort is hardly new. The Roman Catholic Church had long been a predominant source of biblical knowledge.180 Then, in 1522, Martin Luther translated the New Testament from Greek to vernacular, and suddenly, the common man had access to the Holy Scriptures.181 This catalysed a huge incentive to read and find out spiritual truths for themselves, and it in turn created the impetus toward the development of the printing press.182 As Don Tapscott and Anthony D. Williams observed, wikinomics works best when at least three conditions are present: 1) [t]he object of production is information or culture, which keeps the cost of participation low for contributors; 2) [t]asks can be chunked out into bite-size pieces that individuals can contribute in small increments and independently of other producers. . . . . This makes their overall investment of time and energy minimal in relation to the benefits they receive in return. And, finally, 3) [t]he costs of integrating those pieces into a finished end product, including the leadership and quality-control mechanisms, must be low.183 Collaborative networks will grow as they are free. Switching costs are overcome by people who have a strong reason to do so. When innovators give consumers a new way of connecting, they will punch through any technical barrier. However, this may take several years. Significant shifts in market share take time, as there needs to be a critical mass for market tipping to occur. While wikinomics has not yet generated sufficient examples to justify an overhaul competition analytics in refusals to license cases, the point remains that some competitors and entrants now have easy access to business tools that only large undertakings could afford a few years ago and is setting the stage for a revolutionary change in the balance of power. This should be taken into account in the analysis of the anticompetitive potential of a refusal to license. As wikinomics penetrates the production and sale of IP products and barriers to entry are lowered, it may become increasingly more difficult to succeed in a complaint of abuse of dominance or monopolization. As competition becomes increasingly globalized, vague and interventionist competition laws will repel investors who can move their businesses offshore on short notice. In doing so, they will take with them invaluable technology which will give national economies a much needed edge.184 When

179 180 181 182 183 184

Tapscott & Williams, supra note 4, at 179. See The Dictionary of Bible and Religion, Bible Versions, 134, 135 (William H. Gentz ed., 1986). See The New Encyclopædia Britannica, Biblical Literature, Macropædia Volume 14, at 916 (15th ed. 1994). See id. Tapscott & Williams, supra note 4, at 70. See Korah, supra note 58, at 172 (“I remain concerned that the EC position is in many ways stricter than

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the dust settles, a new legal architecture may emerge that is better suited to vastly different economic realities of information, and to the technology upon which it subsists. *

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PROF. HANSEN: Heinz, you had some things you wanted to say about refusal to license. MR. GODDAR: There are many experts on European competition law here. I wanted just to add two comments from the German viewpoint. Even in Germany we have an Act185 against competition restraints — competition law, if you like. We had in 2004 a very interesting decision, called “Standard Barrel.”186 Some of you may have heard of it. What happened there was that there was a certain company that had developed with the German chemical industry, all over the place more or less, a new standard plastic barrel that was now the only “accepted” barrel the chemical industry could use for waste purposes in Germany. In its wisdom, that company had given licenses to three German companies to also make these barrels and to deliver them to German industries. German industry was happy with this. They had now four sources of supply, and this is usually what industry likes. Then came an Italian company who also wanted a license. The patentee that had patented the “standard barrel” said no. The Italian company was unhappy about this. The case came to the German Federal Supreme Court, which said, in essence, the following: If you have a dominant position — for example, by having a de facto standard, or even worse, if you have developed it in, let’s say, collusion (I could also say conspiracy) with the industry, with the market — you are fine if you don’t grant any license. That’s perfectly okay. If you are the patentee and you are the only source of supply, you can enjoy your intellectual property right, your patent. There is nothing wrong with this under German law. The first day you give the first license, however, you come into trouble. From then on, if you read the reasoning of that 2004 decision rightly, you are even suspicious from a prima facie view, as we say, to conduct a discriminatory act against Article 21 of German Law against Competition Restraints if you don’t grant further licenses to others, rather “discriminate” by not doing so, without justified reason. So I always tell people: Enjoy in Germany your patents! As long as you don’t license, you are fine. No problem — except, of course, in Magill 187 or IMS Health188 cases. That is a different story. German courts did not address this aspect in Standard Barrel. But as soon as you have granted a first license, in the case of a de facto standard situation, you

that in the U.S. This may encourage firms to perform their R&D and produce the results outside the Common Market, exporting the products to the Common Market. This avoids the wider scope of Article 82 and the special responsibility of dominant firms to give access to essential facilities.”). A recent reminder of this came from a South Korean competition case against Microsoft. Microsoft threatened to withdraw its Windows operating system from the Republic when its national competition authority imposed an order requiring Microsoft to remove code or redesign Windows uniquely for the Korean market. For reasons known best to itself, Microsoft later decided otherwise. See South Korea Fines Microsoft $32m, BBC News, http://news.bbc.co.uk/1/hi/business/ 4505698.stm (last visited Oct. 6, 2007). 185 Gesetz gegen den unlauteren Wettbewerb [Act against Unfair Competition] July 3, 2004, BGBl. I 2004 32/1414 (UWH). 186 Standard-Spundfass [Standard-Bung Barrel], Fed. Sup. Ct., [2004] GRUR 966; KZR 40/02. 187 Joined Cases C-241 & C-242/91 P, Radio Telefis Eireann and Independent Television Publ’ns v. Commission, [1995] E.C.R. I-743, [1995] 4 C.M.L.R. 718 (Magill). 188 Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, [2004] E.C.R. I-5039 (Apr. 29, 2004), available at http://curia.eu.int/jurisp/cgi-bin/gettext. pl?lang=en&num=79959570C19010418& doc=T&ouvert=T&seance= RRET& where=().

272 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY are in trouble. You must grant further licenses; there is no chance anymore to enjoy your monopoly situation in a discriminatory manner. QUESTION: A quick question. Do you have to sell them at the same price? If you sold a license to one person for $10.00, could you then sell a license to another person for $100.00? MR. GODDAR: Unfortunately, the Federal Supreme Court did not go into that detail. They only said you must, in principle, also give the possibility to manufacture or supply to some other licensees. They did not go so far as to say that all the licenses have to be under the same conditions, but they must be under conditions — this is a clear outflow of that decision — which are similar enough not to make the product of the fourth or fifth licensee “unwished” by the market, i.e., that you would give him such unfavorable license conditions that the product could not, in fact, anymore compete. The latter is a well-known “ETSI problem,” where such wonderful clubs give everybody the possibility — to a Chinese newcomer in the mobile phones market, for example — to enjoy the standard. But he has to pay something like 53 percent “stacked” royalties, which makes a product virtually unsalable in Europe. So you would not have to do it at the same price. The licenses may have different prices, but it must not be so different that entry into the market would be unduly difficult and actually even impossible. This would be the outflow of that decision. PROF. HANSEN: How different is this than the law in many countries? Is this unique? How would you characterize it? MR. GODDAR: I think that in Europe it would not be unique. I think Germany was the only country, outside of the European Court of Justice (ECJ) and its jurisdiction, that I am aware of where this problem came up. This is why it became pretty famous in Germany. And Germany is not an unimportant market in Europe. QUESTION: What I understand is that if you do not license your patent, you are fine. If you license it once and somebody comes and asks for a license, you have to give it. MR. GODDAR: Yes. QUESTIONER: It amounts to compulsory licensing for the second and third and so on. MR. GODDAR: The Supreme Court made an interesting remark. The first defense, of course, of the German company and patentee was that this is compulsory licensing. Compulsory licensing is regulated in Article 24 of the German Patent Act. This regulation is TRIPs-compliant compulsory licensing. The patentee argued that there would be no other way to give a compulsory license. The Federal Supreme Court said, however, in a crystal-clear manner, even in one of the two headlines of the decision, that Article 24 of the German Patent Act describes one possibility for compulsory licensing, which is often used in Germany — never decided, but a nice leverage to facilitate the voluntary licensing, let’s say, in our Patent Act — but this does not mean that there are not other reasons, based on competition law, for granting compulsory licenses. This is the basis of the decision of the Federal Supreme Court. PROF. HANSEN: Any further comments on this? Valentine, do you want to talk about a different topic? PROF. KORAH: I have a different topic. PROF. HANSEN: Go ahead. PROF. KORAH: I can’t resist mentioning the GlaxoSmithKline case,189 because the Court 189 December 2006, T-168/01, Appeal lodged to ECJ; Case C-515/06 P, Glaxo Smith-Kline Servs. Unlimited v. Commission of the European Communities, 2007 O.J. (C 56) 31, available at http://www.cgsh.com/files/tbl_ s5096AlertMemoranda%5CfileUpload5741% 5C693%5C83-2006.pdf.

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of First Instance (CFI) says that in Consten and Grundig190 the ECJ said that when looking to the object of the agreement — I am not talking about its effect — one must take into account the economic and legal context. I do not know anyone who took that view of the Consten and Grundig case at any time before they read the Glaxo decision. The Glaxo judgment is only from the CFI. I think Chris Stothers was saying that there were four appeals from that decision. It is a fairly recent judgment, so it is going to be a couple of years, I suppose, before we get anything from the ECJ. But it seems to me the beginning of a complete change. In GlaxoSmith Kline we didn’t get everything. The CFI said that the dual-pricing agreement did not have the object of restricting competition and the Commission had to establish much more about the economic context. Nevertheless, when it came to look at the effect, it said that dual pricing did have an anti-competitive effect. This is one of those pharmaceutical cases where the maximum price is controlled in every Member State, one way or another. Consequently, in Greece, where the control was at the lowest level, and Spain all the wholesalers were buying far more than they needed in order to sell it in the countries where the control was at a higher level. Glaxo admitted that its intent in requiring of the dealers — and the dealers signed a contract — different prices for different destinations was to avoid parallel trade. Even so, one has one of the sacred cows of the competition department of the Commission saying that this is bad, and the CFI knocked it down as regards object. Nevertheless, the main destination of the parallel trade was the United Kingdom, and the U.K. government did grab back some of the savings that the wholesalers made by buying from Greece. The CFI said that there was a detriment to consumers and that the agreement infringed Article 81(1), though it had a very small effect. It also upheld the refusal by the Commission to grant an exemption under Article 81(3). I do not know how one can reconcile these three bits of the judgment. But we live in interesting times. PROF. HANSEN: What do you think of the chances on appeal? PROF. KORAH: We don’t know which members of the ECJ will sit, do we? Judge Vesterdorf retires in the summer, so he won’t. I think it’s the year when the mission of a third of the judges ends. Some may, of course, be repeated, but others will not. PROF. HANSEN: I thought you said this was a CFI case. PROF. KORAH: This is a CFI case. PROF. HANSEN: It has gone to the Court of Justice. PROF. KORAH: It has been appealed by four people. PROF. HANSEN: So what does Vesterdorf have to do with it?191 PROF. KORAH: You were asking what would happen at the next stage, on the appeal. PROF. HANSEN: Yes, but that is in the Court of Justice. Judge Vesterdorf is in the CFI. PROF. KORAH: Yes, sorry, I should not have mentioned Vesterdorf. But up to half the judges in the ECJ may be retiring in the summer. The appeal is likely to be heard by three or five judges. I think it is theoretically important. It will be heard by at least five judges, and possibly even a full court. I do not think one can possibly prejudge that. 190 Joined Cases 56 & 58/64, Etablissements Consten SA and Grundig-Verkaufs- GmbH v. EEC Commission, [1966] E.C.R. 299, [1966] C.M.L.R. 418, C.M.R. 8046 (July 13, 1966). 191 Case C-501/06 P, Appeal brought on 11 Dec. 2006 by GlaxoSmithKline Servs. Unlimited (GSK), anciennement Glaxo Wellcome plc against the judgment of the Court of First Instance (Fourth Chamber, Extended Composition) delivered on 27 Sept. 2006 in Case T-168/01, GlaxoSmithKline Servs. Unlimited v. Comm’n, 2007 O.J. (C 42) 11, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri =OJ:C:2007:042:0011:0011: EN:PDF.

274 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY PROF. HANSEN: So the jurisprudence of this is slim. It is going to be a case of first impression in the Court of Justice. PROF. KORAH: No. There have been lots and lots of cases where the Court has referred to the consumer. The Commission says that the agreement has the object of restricting competition because it controlled the freedom of buyers to sell in other countries. There is lots of jurisprudence the other way. PROF. HANSEN: So why is it so hard to predict? PROF. KORAH: Competition policy has changed immensely. We started liberalizing vertical agreements with the distribution regulation eighteen years ago.192 The Commission has started to rethink everything and many people are saying that economics is now important. We have a chief economist advising the Commission. There is an attitude that is much closer to that in America. The pharmaceutical industry is very, very special. They have regulation as to distribution. Once they have started to distribute, they cannot restrict the supply, under national law. The maximum prices are regulated at different levels in each Member State. If one goes back to the Syfait opinion of Francis Jacobs a couple of years back, everything is different.193 He even sets out Ramsey pricing,194 which the Commission has never done. No one did in the court, as opposed to the advocate general (he is a member of the court). Producers of pharmaceuticals have very high overheads, very high fixed costs, virtually no marginal costs. This is a case where I think almost any economist would want discrimination.195 It wasn’t Glaxo that has split the Common Market; it was the regulation in Member States. PROF. HANSEN: We have a weak CFI decision, a lot of things going in the other direction. So is there a decent chance the ECJ will reverse? PROF. KORAH: I just don’t know how decent the chance is. But this could affect all patent licenses in the pharmaceutical industry because it is the industry where there are the huge investments in R&D and it is the industry where the splitting of the Common Market is done by the national regulation. PROF. HANSEN: Susan, as an economist, what does an economist have to contribute that is going to enlighten us on this? Are you an economist who thinks like a lawyer or thinks like an economist? MS. MANNING: I am an economist who worked for a law firm for seventeen years, so I have been well indoctrinated. I am of the view that economics can shed quite a bit of guidance and light, not only on the issue of refusal to deal, not only in terms of firms trying to understand what the limits are that they have, but also helping to inform judges and juries. I always go back to three basic economic principles and apply those when I am looking at restraints of trade, something like refusal to deal. I go back to consumer welfare. I go 192 Commission Regulation (EC) No 2790/99, December 22, 1999, on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, 1999 O.J. (L 336) 21, available at http://eur-lex. europa.eu/LexUriServ/LexUriServ.do?uri =OJ:L:1999:336:0021:0025:EN:PDF. 193 Case C-53/03, Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. GlaxoSmithJline (Opinion of Advocate General Francis Jacobs, Oct. 28, 2004), available at http://curia/europa. eu/en/actu/communiques/cp04/aff/cp040087.en.pdf. 194 Ramsey pricing, a linear pricing scheme designed for the multiproduct natural monopolist, is concerned with prices that maximize the sum of industry consumer surplus and profits. See Frank Ramsey, A Contribution to the Theory of Taxation, 37 Econ. J. 47 (March 1927). 195 That is probably because most economists believe in total welfare, whereas the agencies in Europe and the EC profess belief in consumer welfare.

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back to the ultimate competitive objective that we have. In the United States and in Europe, it is substantial lessening of competition. Then I look clearly at the economic incentives that are involved in the parties and their refusal to deal, not only the licensor, but also the licensee, in wanting a license. So let’s start with the economic incentives of the licensor and the licensee. As an economist, we believe that if you can identify what the economic incentives are of the parties, then you can quantify them, or at least approximate them. That is an important step in looking at the competitive aspects of refusals to deal. If you can estimate what the economic incentives are, the gains and losses, the benefits and the harms, to each of the parties, then you can look at it in terms of consumer welfare, simply weighing those objectives. When you look at it in terms of consumer welfare, you are looking at pricing issues, you are looking at output issues, and you are also looking at economic efficiency and, most importantly in intellectual property, innovation and incentives to innovate. All of those can be identified, I think — not always perfectly, but at least they can be approximated. I think once you have sort of set out that paradigm, where you have looked at consumer welfare of offsets, you can weigh those. Then you can apply the third principle, and that is whether or not there has been a substantial lessening of competition. For economists, in situations such as refusals to deal, we are not really looking at it in terms of whether a license enhances competition. Rather, we are looking at it from a little different perspective — that is, whether the refusal to license harms competition. I, as an economist, think that that is probably a reasonable standard, or economic principle, to look at and not necessarily just the image of whether or not there has been an enhancement of competition, the fact of whether competition is harmed. PROF. HANSEN: To what extent does the law reflect your analysis? MS. MANNING: I think, in some respects, when you look at refusals to deal, they are looking at whether or not it has a competitive effect. When you go to apply the law — and I am certainly not a lawyer — I think you can look at it in terms of whether or not there is an adverse effect in the market from refusing to license. If you look at it from the reverse perspective and only look at whether you are enhancing competition, then I think you are getting into not necessarily what I would call the basic principles of what underlies consumer welfare. PROF. HANSEN: That is your view as an economist in the United States. MS. MANNING: Yes. PROF. HANSEN: What would be the view in Europe of that approach? Do you know? MS. MANNING: I am not as familiar with Europe. PROF. HANSEN: They are pretty ignorant in Europe of economics, aren’t they? [Laughter] MS. MANNING: But as Valentine says, they are becoming more interested in economics. There is a role for economics to play. Underlining our basic system of antitrust is the notion of competition — perfect competition, monopoly, consumer welfare. PROF. HANSEN: Not everything is consumer welfare. Daryl mentioned in his talk that there is a much more open view about refusals to deal in Europe. One of the issues in Europe is small-firm autonomy. They want them to be players, and usually small firms have less economic clout and less ability to get deals. Basically, they need government to help them. It is really not even necessarily consumer-enhancing. It is more of a populist view about how you run an economy with small firms. MS. MANNING: But I think that does go to consumer welfare. If you think of consumer

276 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY welfare as also incorporating an element of lack of innovation or disincentives to innovation — PROF. HANSEN: No, no. Look at WalMart. Look at A&P. They basically got rid of, as a result of their consumer-enhancing prices, the mom-and-pop stores, the wholesalers — all driven out of business. Consumers got more selection, cheaper prices. Looking at it strictly from a consumer-enhancement view, you are going to get a different view than if you are saying, “We want wholesalers. We want mom-and-pop stores. We want all of these things.” MS. MANNING: But the result that you are talking about is the difference between short-term consumer welfare and long-term consumer welfare. You could certainly argue that the appropriate economic incentives are there. Long-term consumer welfare arguably may not have been enhanced by the refusal to deal or restraints of trade in that situation, although there may have been some positive short-term benefits in consumer welfare. PROF. HANSEN: John Temple Lang, you have been quiet over there, which is actually not your style, so it worries me. What do you have to say about this? MR. TEMPLE LANG: First of all, on the last point it seems to me that it is quite right to say that a compulsory license can be given only if a refusal has a positively harmful effect on competition. It is not the business of competition law to require a license merely because somebody thinks there would be more competition if there was a license. So there has to be a proof of an abuse, and the compulsory license, if it is to be ordered at all, must be the remedy. PROF. HANSEN: You are talking about the European Union now? MR. TEMPLE LANG: Correct. Apart from that, I want to make three quick points, and I have a problem. The first point: Do remember that a great many of the cases that have actually been dealt with under EC law have been discrimination cases and not cases of refusal to grant a first license. That is important for understanding purposes. Secondly, bear in mind that you ought to be able to identify the principle under Article 82 with which you are concerned. The principle with which you are primarily concerned, except in distribution cases, is the clause that says that it is illegal for a dominant company to limit the marketing, production, or technical development of its competitors. Those words have been added by case law; they are not in the Treaty.196 But that’s what it means — in other words, foreclosure. In a foreclosure case, if there is sufficient harm for consumers, a compulsory license may be the appropriate remedy. The last point: Don’t be fooled into believing that the only possible kind of exclusionary behavior that harms consumers is the suppression of a new kind of product for which there is an unsatisfied demand. That’s just one specific example, which has arisen in a couple of cases, but you shouldn’t take it as the only case. Now, let me put forward my problem, which concerns the new type of product. I represent a company that has an idea for a new kind of product and we need a license from a dominant company. I go to the dominant company and I explain this. The dominant company says, “That’s very interesting, but we don’t know whether we have an obligation to give you a license, because you haven’t told us what your idea for the new product is.” I say, “Well, I’m not going to tell you, because if I told you, you would go ahead and make it yourself. You have all the technology that you require to do that.” 196 Treaty Establishing the European Community, Feb. 7, 1992, 1992 O.J. (C 224) 1 , [1992] 1 C.M.L.R. 573, 626 [hereinafter EC Treaty], incorporating changes made by Treaty on European Union, Feb. 7, 1992, 1992 O.J. (C224) 1, [1992] 1 C.M.L.R. 719. The EC Treaty was amended by the Treaty of Amsterdam, Oct. 2, 1997, 1997 O.J. (C 340) 1.

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How do I overcome that problem? It seems to me that I am not able to overcome that problem and that a dominant company is in the position to play stalling tactics, unless I can actually get a blocking patent of my own which will prevent the dominant company from making use of my idea. If I get a sufficiently effective blocking patent, I can solve the problem. Am I right? PARTICIPANT [Prof. Hugh Laddie, University College London]: No. You are wrong. You say you need a blocking patent. The idea would be that if the big company went off and used your idea, you could sue them. So you are contemplating an environment in which you are prepared to sue the big company. If that is the case, then you do not need a blocking patent at all, because certainly, under common-law principles, if you went to a big company and said, “I will tell you in confidence the details of my product so that I can obtain the license. You mustn’t use this except for the purpose of deciding whether to grant me a license,” and they went off and made the product or used your idea, you would sue them for breach of confidence. On the assumption that you are prepared to sue, it makes no difference. You would be protected anyway. It is well-established under common law that you can sue somebody for misusing information which was given for one purpose by using it in another way. It’s the same with patents. MR. TEMPLE LANG: That’s fine if you can prove it. But suppose the dominant company says, “That’s very interesting. We just had that idea ourselves, and we are developing it?” PARTICIPANT [Prof. Laddie]: You know what? I have not actually seen a single case where a company has gotten away with that one. They all say they thought of it themselves, and they never prove it. PROF. KORAH: Is that the same under German law? MR. GODDAR: I was just thinking about this. In principle, this would also apply in Germany, of course. But don’t forget, countries like Germany — I don’t wish to bring Germany into the foreground here — where we do not have discovery, where it is so difficult to find out what really behind the scene took place in the dominant company in this case, whether they independently, “unfortunately,” had this idea — how would you ever find out? They never paid any attention to the wonderful invention, and they would say, incidentally, this is the proposal they just got here, and you will probably not be able to find out the truth. So I fully agree with what you are saying, if you can prove it. But I would feel better for my client if I would, as a life insurance policy, have deposited a nice patent application on this improvement, just to make life easier. PARTICIPANT [Prof. Laddie]: Heinz, you may not have discovery in Germany, but you don’t have gullible judges. PROF. HANSEN: Do you agree with that? MR. GODDAR: I would agree with that. QUESTION: I have a question for Ms. Manning. In all the refusal-to-deal cases, the best cases are those where you have an industry standard or you have an interface-type thing that is protected by IP. In all these “good” cases, as I call them, the IP in question protects subject matter that actually creates a barrier to market entry, essentially. You need access to the industry standard, you need access to the interface subject matter, in order to get into the market. What are the efficiency justifications for allowing these sorts of barriers to market entry to continue? What sort of arguments would an economist put forward to justify the refusal to deal? In doing so, you basically perpetuate the existence of these barriers to market entry. MS. MANNING: I think that is, in fact, a very difficult case. When you are looking at the

278 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY incentives of the licensor who is refusing to deal or to license his product, that is a pretty high threshold, as to why it is in his economic interest to prevent that market entry. You could say it is because, as we have just been talking about, “I can introduce a substitute product or get a head start on you.” But as the patent holder refusing to license, what you are really looking at is whether or not, in refusing to license, I am worse off or better off. The only circumstances I can think of where it would be economically justified, from an efficiency standpoint, is if the licensor was in a position to be able to introduce a competitive product. But even then, you can look at whether or not the monopoly rents from the introduction of that patent could be essentially offset by the fees or royalties that he would obtain by licensing that product. It seems to me that the license holder has to look at whether or not he is better off or worse off by the license. In most terms, that would be quantified in dollars or euros. Other than his introducing a product that would be competitive and achieve those monopoly rents himself, I cannot see why it would make sense from an economic perspective to refuse to license. PROF. HANSEN: Let me ask a question. The premise of Daryl’s talk in the beginning was that we are entering a brave new world in which we have this collaborative creativity, low market barriers to entry. We have Firefox taking large market share in a short amount of time, competing with Internet Explorer. Therefore, the normal rules that we have applied about dominance and other things may become irrelevant because of the marketplace scenario. I am not sure in Europe that would make a difference. It is almost like telling someone the sun doesn’t revolve around the earth. They are just going to reject it, and maybe hang you for it. In Europe it is almost a secular religion that “big is bad” — Microsoft is “badder” — and even if the facts do not support those allegations, especially in the Commission, they are going to go after them. That may just be my hunch. The Warren Court’s approach to antitrust was not changed by hardcore people in DOJ or FTC; it was changed by the Reagan Administration changing the heads of the agencies and putting judges into the courts. He was able in a short amount of time to bring in a modified Chicago School approach. Europe is much more entrenched in the Commission, in terms of hierarchies and everything else. I know a number of “young Turks” have been disappointed in the Commission because it was not moving fast enough to what they thought was a law in economics. To what degree does the real world matter, if it is almost a political issue about “size is bad” and the activities of “size is bad?” That is a neutral question, John. MR. TEMPLE LANG: It sounded neutral to me. I think there are two answers. One, we are going to know more in another few weeks, when the Commission publishes a revised version of its guidelines on Article 82.197 I do not know what is going to be in them, but I hope they will be substantially better than the last lot. I think they will be better in the direction that you would like to see. The other point is a different one and concerns the court. Both the CFI and the ECJ have been very slow to pick up on economic thinking on competition matters and have been slow to criticize the Commission for not having done so. I think that we can expect that, if and when the Commission takes the lead and says something better than it has done in the past on Article 82 — the rest of its thinking on economics is not too bad, but it is still, judging by the last discussion paper, very unsatisfactory on exclusionary abuses under Article 82 — if the Commission takes a stiff drink 197

See http://ec.europa.eu/enterprise/pharmaceuticals/pharmacos/docs/doc2007/2007 _03/recom_cabr.pdf.

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and says the right things, I think we can expect the Court to follow. But the Court has not led the Commission so far. PROF. HANSEN: Valentine, do you have a view on that? PROF. KORAH: Yes. I heard that it wasn’t going to be published until early next year, but that it’s going to Member States fairly soon. We all hope that it will leak, but I hear people in the Commission telling me it won’t this time. I am bit doubtful about that. I think there is a bloody battle going on. The Ordoliberals did some wonderful things for competition. They said that we should attack national monopolies; we shouldn’t be worried about vertical agreements in the absence of strong market power. These were all very positive and helpful things that they said. But they also had an idea of Article 82, based on their experience under the Nazis and the loss of freedom, that people were entitled to get into the market, and that was part of their constitutional rights. That side of it is much more worrying. We get statements from the members of the Commission saying that competition is all about the proper allocation of resources and consumer benefit. There are some statements in the quarter to that effect. Are we going to have an American-based idea — and, indeed, I think it includes the common-law countries — that what we are concerned about is consumer welfare and efficient production and distribution, or are we concerned with the freedom of my wholesalers in Greece making a huge profit on selling in England? Clearly, I am on the American side of this, but I don’t know whether you are. PROF. HANSEN: I think God is, too, frankly. [Laughter] QUESTION: I am interested in whether there is indeed this perception in the United States that Europe still has this “big is bad” mindset. I am biased because I worked in the Commission on the Microsoft case. We did conduct a detailed economic analysis of the incentives of Microsoft, the concomitant harm to competition, what I would call an effects-based new approach, whatever you want to call it. So it’s interesting coming to the United States and hearing that there may still be this perception. I think there is recognition that we are moving forward. MR. TEMPLE LANG: I think there is undoubtedly a perception in the United States, and I think it’s almost entirely due to public-relations propaganda that has been put out by Microsoft and by various other companies, which has been very pervasive and, in a lot of cases, quite well concealed. There are now large numbers of academics, both in Europe and in the United States, who are being paid by larger American corporations, of which Microsoft is one, to make statements of the kind that we have just heard referred to, which I don’t think have any justification at all. I never heard the word “Ordoliberalism” until I read Dave Gerber’s book.198 I do not think it is true to say that there is still a view, derived from German inter-war competition-policy theory or economic theory, that says that everybody has a right to enter the market. The Treaty itself says that consumer harm is essential. That is said both in Article 81 and in Article 82, paragraph (b), the one that I was quoting a few minutes ago. I think it is extremely important for those of you who live on this continent that you should not be misled by the propaganda of large corporations. A friend of mine recently was asked whether he would be kind enough to write an article for, I think, the Financial Times, expressing a certain view, which they thought he agreed with. He said, yes, he would write the article, but he would have to say that he was 198

See Gerber, supra note 19.

280 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY being paid by this particular corporation to write the article. They said, “Thank you very much. In that case, we won’t bother you.” PROF. HANSEN: John, you can’t be serious about this crap you are giving out here. Are you? You actually believe it? MR. TEMPLE LANG: Yes. PROF. HANSEN: Then you are one of the most ridiculous conspiracy theorists I have ever heard. The idea that Microsoft is generating all this, and that, all of a sudden, exonerates everyone over there, and you can go about your business of doing the same old stuff you have been doing, nailing anybody who is big and bad. MR. TEMPLE LANG: I didn’t say that. PROF. HANSEN: I have heard this for years from people in DG IV, when it was DG IV. Come on. What is this Microsoft stuff ? You have millions of people who left your Commission because they were so upset with the reluctance of people in power there to switch to any sort of law and economics. This is not made up by Microsoft now. This is ridiculous. And try to stay neutral on this. MR. TEMPLE LANG :Yes, just as you are. There is a great deal of propaganda being put out by companies like Microsoft. This is a systematic business. There are academics who are being paid by American companies to argue that the Commission is wrong. Now, maybe the Commission is wrong on specific issues. I didn’t say the Commission was infallible. I am not saying that. I certainly didn’t say that the Commission knows all the economics it needs to know and acts on all the economics that it needs to act on. I said you have to be very careful — and I meant this — not to accept the popular prejudice against the European Commission, which has been put out as propaganda by some big American corporations. That is an important thing for you to bear in mind. PROF. HANSEN: It’s important that you don’t have to address the merits, but you just do an ad hominen attack. Anyone who goes to ad hominem — or ad corporem — usually can’t defend himself on the merits. That’s why you drop down to that, isn’t it? When you attack the person rather than answer the question — whether the Commission is actually doing it, and show examples of it — it’s usually because you can’t answer the question. If you don’t have the facts, attack the person making the allegation. MR. TEMPLE LANG: How long do you want me to go on for? PROF. HANSEN: Actually, I don’t want you to go on anymore if it’s going to be the same stuff you are saying. I have never heard that in my life, and I am old enough to be your son. [Laughter] I am shocked. I have to say I am completely shocked. If that’s what you are spewing forth in Europe, it’s kind of pathetic, actually. I am trying to stay relaxed. But I think there are legitimate arguments and legitimate cases. That, of course, is the perception, because that’s exactly what the Commission has been doing for years. The fact that it’s changing is great. But the idea that all this is just propaganda is nonsense. I know people in DG IV, Valentine knows people in DG IV, who left DG IV because they were getting nowhere with any sort of situation. Now it’s DG Competition. Maybe now, hopefully, it is changed. I was just asking the question, generally, of what you thought about the hierarchy or the rigidity of change in DG Competition — or at least there used to be — and whether there is any change or not. The fact of the matter is I get $100,000 a year from Microsoft, and it doesn’t influence me a bit. [Laughter] MS. MANNING: I think one of the problems that may exist at DG Comp at this point is the fact that they have hired economists, but the last time I spoke with one of the major

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economists there, they dispersed those economists throughout DG Comp, rather than having, as in the United States, a focused bureau of economics, as in the FTC, or an economic analysis group, as in the DOJ. When you disperse that analysis, sometimes you don’t get as strong a viewpoint to counter some of the factors that you are raising in a more united voice. PROF. HANSEN: Why don’t you tell us? QUESTION: That is not the case. There is a specialized kind of thing which is growing. We could go on for a long time, I guess. But in the United States as well, at least in the refusal-to-supply case, the case of the remedy, it is actually the same. Are you still convinced that there is some European Ordoliberalism? PROF. HANSEN: I am not convinced at all. I just asked the question. I don’t know enough, currently, about what is going on to make a judgment. QUESTIONER: Then the point is, it is exactly the same remedy for the same type of information in the European Union as the United States. So I would say that it has changed. PROF. HANSEN: Any final thoughts from the audience? QUESTION [James Love, Director, Knowledge Ecology International, Washington, D.C.]: On the refusal to license, the Italian government has issued three compulsory licenses for refusal to license since 2005 on pharmaceutical drugs, two on Merck products and one on a GlaxoSmith Kline product. The most recent was March 21, 2007.199 The European Commission filed a complaint against Taiwan on their compulsory license, which is a refusal-to-license case involving the CD-ROM patents on which Phillips had previously filed a complaint.200 The last thing I want to mention is that the eBay decision201 seems to be fertile ground in the United States for refusal-to-license cases. Microsoft has a compulsory license on the z4 patents on its digital rights management (DRM) technology. While they are complaining about the EU compulsory licenses on their protocols, they asked for and received a compulsory license on the z4 patents, after losing an infringement case in the United States.202 So I think there are a lot of different things going on in the refusal-to-license field right now. PROF. HANSEN: I think a moment of silence would be good to commemorate this session. John, any final word? MR. TEMPLE LANG: No. PROF. HANSEN: John, I apologize for getting overexcited. 199 Press Release, Italian Competition Authority, Italian Competition Authority ruled Merck must grant free licenses for Finasteride (Mar. 26, 2007), available at http://www.agcm.it/ agcm_eng/COSTAMPA/ E_PRESS.NSF/92e82eb9012a8bc6c125652a 00287fbd/28653b373e56772ac12572ab003a4d68; Press Release, Italian Competition Authority, Italian Competition Authority ruled Merck must license manufacture of Imipenem Cilastatine (June 21, 2005), available at http://www.agcm.it/agcm_eng/COSTAMPA/E_ PRESS.NSF/92e82eb9012a8bc6c125652a00287fbd/4d1b5a8692226567c125702800540 161?OpenDocument& Highlight=2,patent; Press Release, Italian Competition Authority, Italian Competition Authority press release, Pharmaceuticals: Antitrust says Glaxo has made amends and abuse of dominant position discontinued — Granting of license opens ways for manufacture of generic migraine drugs (Sumatriptan succinate) (Feb. 26, 2006), available at http://www.agcm.it/agcm_eng/COSTAMPA/E_PRESS.NSF/92e82eb9012a8 bc6c125652a 00287fbd/634fe21d.c342c220c125711d003692c3?OpenDocument&Highlight=2,p. 200 See Press Release, European Commission, European Commission launches investi-gation into granting of compulsory licences for CDRs by Taiwan (Mar. 1, 2007), available at http://trade.ec.europa.eu/doclib/ docs/2007/march/tradoc_133480.pdf. 201 eBay Inc v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006). 202 z4 Technologies, Inc. v. Microsoft Corp., 434 F. Supp.2d 437 (E.D. Tex. 2006).

282 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY MR. TEMPLE LANG: It’s that $100,000. PROF. HANSEN: I’m sure John will be going

around saying, “Hansen’s getting $100,000 a year.” Obviously, that was a joke. If I was getting $100,000 a year from Microsoft, I might not be here today. Thanks to the panel. Thanks to Daryl.

APPENDIX: European Competition Law and Refusals to Licence Intellectual Property Rights Dr. John Temple Lang203 The Relevant EU Legal Rules Any comprehensive view on compulsory licensing must give due importance to all the relevant legal principles stated in the Treaty: 앫 Article 4 (competition is an EU objective). 앫 Article 10 (the duty of Member States not to endanger the achievement of EC objectives). 앫 Article 98 (Member States accept the principle of an open market economy with free competition). 앫 Article 81 (a duty to licence on a non-discriminatory basis, as a condition for fulfilling Article 81(3)). 앫 Article 82(b) (a duty to licence, to prevent foreclosure or limitation of competitors if there would otherwise be harm to consumers). 앫 Article 82(c) (a duty to licence, to prevent discrimination). 앫 Article 295 (the Treaty does not affect national rules on ownership of property). Articles 81–2, the competition Articles, must be interpreted and applied in the light of the general Articles in the Treaty. An intellectual property right creates a legal monopoly, but does not necessarily create a dominant position. This is because the scope of a patent is not necessarily coextensive with the scope of the relevant product market. There may be unpatented products or processes which are substitutable for the patented product or process, and there may be other patents protecting products or processes which are substitutable for the product subject to the first patent. A patent can be “invented around.” Intellectual property rights may cost a lot to produce, but they can be used at very low marginal cost, so a price above marginal cost does not indicate market power. Two other basic principles are accepted by everybody. First, dominance, in itself, is never illegal. Only abuse of a dominant position is prohibited. European competition law gives no power to break up a legally acquired monopoly. Second, a dominant enterprise is free to compete, as long as it does not use exclusionary or exploitative methods. It is legitimate and procompetitive for even an already dominant company to develop or acquire intellectual property rights, and to exercise them in cases of infringement, even if the 203 Cleary Gottlieb Steen and Hamilton, Brussels and London; Professor, Trinity College, Dublin; Visiting Senior Research Fellow, Oxford. Some of the points made here are ex-plained in detail in John Temple Lang, Anticompetitive Non-pricing Abuses Under European and National Antitrust Law, in 2003 Fordham Corporate Law Institute 235 (Barry Hawk ed., 2004). Cleary Gottlieb represents Nokia.

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intellectual property rights give it an important competitive advantage. “The fact that a dominant trader has, by virtue of his dominance, a competitive advantage over competitors is not an abuse.”204 In practice, a distinction must be drawn between a dominant company which acquires the patent or other right from another company, and a dominant company which creates the intellectual property right itself. It is in the former cases that competition law is most likely to intervene. Foreclosure, First Licences and Discrimination in Later Licences Under Article 82(b), there is a duty to grant access if refusal of access would harm consumers by “limiting” the production, technical development, or marketing of competitors,205 either in a way in which it would not otherwise be limited, or if consumers are harmed because the emergence of a new kind of product, for which there is a clear demand, is being prevented. Under Article 82(c), there may also be a duty to grant access to the facility to a second or subsequent licensee, on non-discrimination grounds. It is primarily under Article 82(b), in the case of compulsory first licences, that controversy arises. Most of the reported cases have been discrimination cases under Article 82(c), although this has not always been clear. The distinction between foreclosure and discrimination is important because: 앫 There can be a duty to give access for the first time only under Article 82(b), which expressly requires proof of harm to consumers, for illegality.206 앫 The most useful test of exclusionary conduct is whether it “limits” possibilities otherwise open to competitors. These two points make Article 82(b) the legal basis for all cases of exclusionary or anticompetitive abuse, much the commonest kind of abuse cases. But the requirement of “limiting” rivals’ possibilities must be applied with care in cases involving intellectual property. In general, the law on discrimination under Article 82(c) is regarded as being clearer 204 Getmapping v. Ordnance Survey, High Court, England, H.C. 02C 00521, [2002] E.W.H.C. 1089 (Ch) (quoting Mr. Justice Laddie, from the judgment dated May 31, 2002). 205 Joined Cases 40-48/73, Suiker Unie and others (Sugar Cartel), [1975] E.C.R. 1663, ¶¶ 399, 482–83, and in particular ¶¶ 523–27; Case 41/83, Italy v. Comm’n (British Tele-communications), [1985] E.C.R. 873; Case 311/84, Telemarketing CBEM, [1985] E.C.R. 3261, ¶ 26; Case 53/87, CICR and Maxicar v. Renault, [1988] E.C.R. 6039; Case 238/87, Volvo v. Veng, [1988] E.C.R. 6211; Joined Cases C-241/91P, RTE & ITP (Magill), [1995] E.C.R. I-743, ¶ 54; Case C-41/90, Höfner and Elsner, [1991] E.C.R. I-1979, 2017–018, and in particular ¶ 30; Case C-55/96, Job Centre, [1977] E.C.R. I-7119 at 7149–150, ¶¶ 31–36; Case C-258/98, Carra, [2000] E.C.R. I-4217. See John Temple Lang, Abuse of Dominant Positions in European Community Law, Present and Future: Some Aspects, in Fifth Annual Fordham Corporate Law Institute 24, at 52, 60 (Barry Hawk ed., 1979). This point is not mentioned in Jonathan Faull & Ali Nikpay, The EC Law of Competition 194 (1999), but is correctly stated in, e.g., Bellamy & Child: European Community Law of Competition 754 (5th ed., 2001), and in Lennart Ritter, W. David Braun & Francis Rawlinson, EC Competition Law — A Practitioner’s Guide, 362 (2d ed., 2000), in Michel Waelbroeck & Aldo Frignani, European Competition Law 551 (1999), and in Mercier, Mach, Gilliéron & Affotten, Grands Principes du Droit de la Concurrence 260 (1999), among others. In Arkin v. Borchard Lines and others, High Court, London, [2003] E.W.H.C. 687 (Apr. 10, 2003), Colman J. said (at ¶ 293) “quite simply, an undertaking in a dominant position must not reduce or attempt to reduce the ability of other parti-cipants in the market or of the would-be entrants into the market to compete. This principle palpably underlies the reasoning of the European courts in all the authorities . . . .” See also Luc Gyselen, Abuse of Monopoly Power Within the Meaning of Article 86 of the EEC Treaty: Recent Developments, in 1989 Fordham Corporate Law Institute 597, at 613–17, 635–36 (Barry Hawk ed., 1990); Thomas E. Kauper, Whither Article 86? Observations on Excessive Prices and Refusals to Deal, in 1989 Fordham Corporate Law Institute 651, at 668–85 (Barry Hawk ed., 1990). 206 There are strong reasons for saying that harm to consumers is also necessary for an abuse under Article 82(c), but the question has not been decided.

284 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY and less controversial than the law under Article 82(b), except for one important issue. Surprisingly, it is not clear whether harm to consumers is a necessary element of an abuse under Article 82(c), as it clearly is under Article 82(b).207 If so, it would have to be harm to consumers resulting from the discrimination (and not merely because consumers would benefit if all the prices were at the lower level). The keys to understanding the case law are: 앫 Many of the cases involve discrimination against second or later applicants for access, not first applicants, so Article 82(c) applied. 앫 Article 82(b) (foreclosure due to discrimination in favour of the vertically integrated company’s own downstream operations) is stricter than Article 82(c) (discrimination between non-associated companies). 앫 Any exclusionary practice causing harm to consumers (including intermediate commercial or industrial users) can lead to a compulsory licence as a remedy. The abuse does not need to be suppression of a new product. 앫 Standard-setting agreements come under Article 81(3). The EU Case Law on Compulsory Licences Nungesser,208

the Court said that under Article 81 restrictions on the licensor and other In licensees would be justified if, without the restrictions, a rational licensee would not take the licence, and competition would not be increased. Competition authorities should not presume that a licence would have been granted even without the restriction which they object to. In Salora v. IGR Stereo Television,209 German manufacturers of television equipment pooled their patents for a stereo television system, and their system was approved by the German authorities. They refused to licence Salora, a small Finnish company, until after most viewers would have bought new sets. The Commission ordered the German companies to grant Salora an immediate licence without quantity limits. No formal decision was adopted, which was a pity because the case was important. The Commission dealt with the Salora case under Article 81 (then 85), but it could have been dealt with under Article 82 (then 86). A duty to licence on non-discrimination grounds can arise under Article 81. In the leading case Volvo v. Veng and CICRA v. Renault,210 the Court said that the freedom of the owner of an intellectual property right to refuse to licence was the core of the right, and therefore a refusal to licence in itself could not be contrary to Article 82. Refusal could be an abuse only if there was some “additional abusive conduct,” e.g., the refusal to supply spare parts to independent repairers, or stopping sales of spare parts for models still in widespread use, or charging excessive prices for the spare parts. In Tetra Pak I (BTG Licence),211 the Commission decided that the acquisition by a

207

See John Temple Lang, Anticompetitive Non-pricing Abuses Under European and National AntitrustLlaw, in

2003 Fordham Corporate Law Institute 235, at 250–53 (Barry Hawk ed., 2004). 208

Case 258/78, Nungesser v. Comm’n, [1982] E.C.R. 2015. European Commission, Eleventh Competition Policy Report 63 (1981). The duty to supply under art. 81 may be similar to the duty under art. 82(c) and is wider than the duty under art. 82(b), which normally arises only if there is no other source available, and because under art. 81(3) non-discriminatory licensing may be necessary to avoid the parties having the possibility of eliminating competition in respect of “a substantial part” of the products in question. A basis of comparison is available if the parties have received licences, and a refusal to licence can amount to a collective boycott. See also Case 22/78, Hugin Cash Registers v. Comm’n, [1979] E.C.R. 1869, and OECD, Competition policy and intellectual property rights, DAFFE/CLP(98)18, (1998). 210 Case 238/87, Volvo v. Veng, [1988] E.C.R. 6211; Case 53/87, CICRA v. Renault, [1988] E.C.R. 6039. 211 1998 O.J. (L 272) 27; Case T-51/89, Tetra Pak v. Comm’n, [1990] E.C.R. II-309. 209

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dominant company of an exclusive licencee of the principal alternative technology was contrary to Article 82. Magill,212 the television programs case, is the other leading case, and the only case so far in which a compulsory licence of an intellectual property right has been required under EU competition law. The television companies in Britain and Ireland each published weekly program magazines listing their own programs. They refused to give lists of their next week’s television programs to an independent weekly TV magazine Magill, which wanted to publish all the programs on all the channels for the whole week in one magazine. The television companies claimed that their programme lists were copyright. The Court repeated that normally refusal to licence an intellectual property right is lawful. However, the television companies were ordered to give Magill the information, on the basis of Article 82. The Court gave three reasons for ordering disclosure: 앫 The information was indispensable for the production of a comprehensive TV program guide covering all the TV channels, a new type of product for which there was a clear and unsatisfied consumer demand. 앫 The TV companies, by refusing to provide essential information, were monopolising the separate market for TV program magazines. 앫 There was no objective justification for the refusal. The essential points to note are: 앫 Magill magazine needed the information. The copyright issue was raised only as a defence, by the television companies.213 The control of the information was not based on copyright. The issues would have been the same if there had been no copyright, if the companies had simply refused to give Magill the information. 앫 The only provision of Article 82 which could apply was Article 82(b). 앫 The Court did not say whether two of the conditions for a compulsory licence (preventing the sale of a new kind of product for which there was an unsatisfied demand, and monopolising a second market) were alternative or cumulative.214 (Later, in IMS Health v. NDC,215 the Court said they are cumulative.)

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Case C-241/91P, RTE & ITP v. Comm’n, [1995] E.C.R. I-743. In Philips Elecs. v. Ingman and Video Duplicating, High Ct. London, May 13, 1998, C.H. 1997 P.No. 4100, Mr. Justice Laddie said (¶ 52) about Magill: “Even if Irish copyright law did not protect the type of low-level information which Magill wanted to publish, the television companies were the only source of it. If they chose not to distribute the information at all, it was not obtainable elsewhere. Similarly, if they chose to distribute the information in small packages and only at the last possible moment, it might have crippled Magill’s nascent business. The information was the raw material from which television guides were made. The television companies therefore held a dominant position both in the information itself and in the guides made from it quite independently of any copyright they might own. It was that dominant position which was being abused. The copyright was merely the tool used to effect the abuse.” Later he went on (¶ 55): “Furthermore, on the basis of CICRA v. Renault and Volvo v. Veng, I do not accept that the defendants have pleaded an arguable case of abuse . . . the proprietor of an intellectual property right is entitled to go as far as refusing to licence even if it is offered reasonable terms. Based on the cases referred to above it is not an abuse of a dominant position to refuse to licence an intellectual property right on reasonable terms. Even if the royalties sought by the plaintiff are objectively unreasonable and have the effect of destroying the competitiveness of the defendant, it is not an abuse of a dominant position defined by reference to the existence of the intellectual property right. Indeed the proprietor may offer terms which no reasonable competitor could accept. It is difficult to see how that can be worse, or commercially different, to offering no terms at all — i.e., to refusing a licence — a course the rights owner is entitled to take.” 214 See Case T-184/01R, IMS Health v. Comm’n, [2001] E.C.R. II-3193, ¶ 104. 215 Case C-418/01, [2004] ECR I-____, Apr. 29, 2004. 213

286 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY 앫 The copyrighted information was of no literary or artistic value in itself (although the timetables were no doubt the result of planning and market research). 앫 The comprehensive magazine was not merely a new product, but a new kind of product, which was clearly better than any existing kind of television magazine.216 Ladbroke217 claimed that it was contrary to Article 82 for French horse racecourses to refuse to licence Ladbroke to transmit live pictures of French races in its betting shops in Belgium. The Court said the refusal was lawful because the French racecourses were not on the separate Belgian market (so they were not discriminating in favour of their own operations on that market), and Ladbroke was on the Belgian market (and so live pictures could not be essential to be present on that market). Bronner,218 primarily because of the Advocate General’s opinion, is an important case on “essential facilities,” though not concerned with intellectual property. A newspaper publisher which had the only home delivery service in Austria refused to provide delivery services for a competing newspaper. The Court said that the refusal would be unlawful only if it would eliminate all competition by the plaintiff, without objective justification, and if the service was indispensable because there was no actual or potential substitute. But there were alternatives to home delivery, and it was possible to develop a competing home delivery system. There was no proof that it would be uneconomic for competitors, acting jointly if necessary, to set up a second system on a scale similar to the existing system. The IMS Health decision of the Commission is discussed below.219 The Court confirmed that a refusal to licence cannot be an abuse in itself. For an abuse, the company seeking the licence must intend to offer a new product, not offered by the dominant company, for which there is a potential consumer demand, and for which a licence is indispensable. The refusal must also reserve the market to the dominant company by eliminating all competition, and there must be no objective justification for refusal 3 in other words, the Magill requirements are cumulative. There must be at least two stages of production. The Principle of a Duty to Contract – Under Article 82(b) The conventional theory is that compulsory licensing of intellectual property rights under 216 The Magill judgment effectively required a new kind of product, not merely one more product of the same kind as that already available (which would lead to a duty to licence in every case, if the other conditions were fulfilled). This means that the demand for the new kind of product must be unsatisfied as well as clear. The more explicit phrase is used in this paper. The point is discussed below. There was an element of discrimination in Magill, since the television companies were supplying programme information to daily (but not weekly) newspapers, but this does not seem to have been important. The Court did not consider whether it made a difference that Magill needed to get programme information compulsorily from several sources rather than only one. The television companies did not claim that they would jointly produce a comprehensive magazine, which would have been a valid defence if it had been true. 217 Case T-504/93, Tiercé Ladbroke v. Comm’n, [1997] E.C.R. II-923. The Court said: “The refusal to supply the applicant could not fall within the prohibition laid down by Article 86 unless it concerned a product or service which was either essential for the exercise of the activity in question, in that there was no real or potential substitute, or was a new product whose introduction might be prevented, despite specific, constant and regular potential demand on the part of consumers.” Id. at ¶ 131. The Court does not seem to be suggesting that either of these alternatives are sufficient conditions for a duty to supply, it is merely saying that one or the other is a necessary condition. 218 Case C-7/97, Bronner v. Mediaprint, [1998] E.C.R. I-7791; see also joined cases T-374/94 and Others, European Night Services, [1998] E.C.R. II-3141. 219 O.J. (L 59) 18, Feb. 28, 2002: withdrawn, O.J. (L 268) 69, 2003; Case C-418/01, IMS Health v. NDC Health (Judgment dated Apr. 29, 2004); Case T-184/01R, [2001] E.C.R. II-3193.

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Article 82 is a specific example or subset of essential facilities cases.220 When the supposed essential facility is an intellectual property right, the usual rules about essential facilities are supplemented by an additional rule. The characteristic feature of an “essential facility” case is that when the abuse has been identified, there is a duty to give mandatory access to the input which is necessary in the downstream market. The rules, as they have been understood, say that there is a duty under Article 82(b) to give a first contract on non-discriminatory terms when all the following conditions are met: 앫 A company is dominant on the market for the supply of a product or service which is essential for competitors operating on a second (downstream) market. 앫 There is no other actual or possible source of the essential product or service, or of a satisfactory substitute for it: competitors could not produce it themselves. 앫 Objectively, competitors cannot even offer their products on the second market without access to the product or service. If they can offer their products, even subject to a serious disadvantage, the advantageous facility cannot be essential. 앫 A refusal to supply the product or service would harm consumers (this is required by Article 82(b). 앫 This could be because it creates, confirms or strengthens the company’s dominance on the second market221 (as a seller on that market, and not merely because of its control of an essential factor of production). This usually would be by “limiting” or reducing existing competition in some way in which it would not otherwise have been restricted. It might also be by preventing the emergence of a new type of product or service offering clear advantages for consumers222 which would compete with the dominant company’s product. There cannot be a duty under Article 82(b) to contract for the first time unless there has been an identifiable abuse.223 It is not an abuse to refuse access merely because the applicant would be better off if it was given access, or because there would be one more competitor. 앫 A less obvious but important point is that there must be scope for substantial non-price competition on the second market, that is, it must not be merely resale or distribution of products or services. More competition must be promoted by a duty

220 See John Temple Lang, Defining Legitimate Competition: Companies’ Duties to Supply Competitors, and Access to Essential Facilities, in 1994 Fordham Corporate Law Institute 245 (Barry Hawk ed., 1995); John Temple Lang, The Principle of Essential Facilities and its Consequences in European Community Competition Law, in Regulatory Policy Institute, Oxford, Essays in Regulation No. 7, at 19–46 (1996); John Temple Lang, The Principle of Essential Facilities in European Community Competition Law — The Position Since Bronner, 1 J. Network Indus. 375 (2000); Barry Doherty, Just What Are Essential Facilities?, 38 Common Mkt L. Rev. 397–436 (2001); see generally OECD, The Essential Facilities Concept, OCDE/GD(96)113 (1996). 221 If the dominant enterprise is not present on the second market, there can be no foreclosure in its favour, and so only art. 82(c) can apply; Case T-504/93, Ladbroke, [1997] E.C.R. II-923. 222 In Magill and in Sea Containers-Stena Sealink, 1994 O.J. (L 15) 8, there were new kinds of product or service for which there was a clear and unsatisfied demand, which could be met only if the proposed supplier was given access to the facility (information or harbour). The Sea Containers case could be regarded as coming under art. 82(c), as access was already being given to a third company. In both Magill and Sea Containers there was harm to consumers as a result of limiting competitors’ possibilities, prohibited by art. 82(b). But if competitors’ possibilities are not being limited in a way in which they would not otherwise be limited, that is, if the conduct does not reduce competition, there must be harm to consumers through suppression of a new kind of product. 223 All of the cases in which compulsory access has been ordered have involved an identifiable abuse, either discrimination in favour of the dominant company’s downstream product, cutting off supply, creating a handicap for a rival, or depriving consumers of a new kind of product for which there was a clear demand, to protect the incumbent from competition.

288 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY to contract than would be discouraged by the loss of the incentives of the parties to improve the facility or to develop a new facility (apart from the effect of discouraging investment in general). 앫 There is no objective justification for the refusal to contract.224 The “essential facility” label does not create a different kind of infringement or different rules. Nor does it create an abuse where no abuse would otherwise exist. Although this is not widely understood, the essential facilities rule is based on Article 82(b), and so it is subject to the constraints of that clause: there must be some “limitation” of rivals’ possibilities, e.g., exclusionary conduct, which harms consumers.225 A dominant company is never required to compensate its competitors for disadvantages which they have (unless, of course, it caused them). If there is a duty to give access, it is a duty to give access on non-discriminatory terms, that is, on terms corresponding to those given to the dominant company’s downstream operations (because less favourable terms would cause some degree of foreclosure contrary to Article 82(b)). If there are no such operations but Article 82(c) applies, the terms must be sufficient to comply with the requirements of Article 82(c).226 The Additional Rule on Intellectual Property Rights The additional rule, added to the essential facilities principle to deal with intellectual property rights, says that when a licence of an intellectual property right is asked for, the refusal to licence is unlawful only if there is some other “additional abusive conduct,” as well as the refusal to licence. This additional rule was based on two principles. First, under Community law dominance is never illegal. So even if dominance is due to intellectual property rights, competition law cannot be used to bring the dominance to an end, as compulsory licensing might do. Second, refusal by a dominant company to licence an intellectual property right could not normally be an abuse, because that would mean that dominant companies would be effectively prevented from acquiring and keeping intellectual property rights. It cannot be illegal for even a dominant company to use intellectual property rights as they are designed to be used. So a compulsory licence can be required only in some situations, and could not be required in all. So a dominant company which owns an intellectual property right is not obliged, merely because it is dominant, to licence the right, even if the right causes the dominance.

224 Some possible justifications for refusing to contract are listed in John Temple Lang, The Principle of Essential Facilities in European Community Competition Law — The Position Since Bronner, 1 J. Network Indus. 375, at 385–88 (2000). Not all of these would be relevant to intellectual property rights. In OFT decision No. CA 98/07/2003, Sept. 9, 2003, E.I. du Pont de Nemours v. Op. Graphics (Holography), it was held to be a justi-fication for refusal to supply film for graphic arts uses that the supplier was withdrawing from that market to use the technology only for security applications. 225 It was decided in Joined Cases 40-48/73, Suiker Unie, [1975] E.C.R. 1663, 1983, 2004, that art. 82(b) prohibits “limiting” rivals’ possibilities. Commission decision, British Telecommunications, 1982 O.J. (L 360) 36, ¶ 34; Notice on the application of the competi-tion rules to access agreements in the telecommunications sector, 1998 O.J. (C 265) 2, ¶ 88. Case 85/76, Hoffmann LaRoche, [1979] E.C.R. 461, and Case 322/81, Michelin, [1983] E.C.R. 3461, should be regarded as based on art. 82(b). When the Court describes a particular type of conduct as contrary to art. 86, it often does not say which paragraph it is contrary to: joined cases C-395/96P, Compagnie Maritime Belge, [2000] E.C.R. I-1365, ¶¶ 112 ff. 226 In non-intellectual property cases, the dominant company may not discriminate in favour of its own downstream activities. But if the essential facility is an intellectual property right, it may licence its own downstream activities without licensing rivals”: the difference in treatment is not “additional abusive conduct.” Otherwise there would always be a duty to licence rivals if the dominant company was using its own intellectual property, which has never been suggested.

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Mere refusal to grant a licence of an intellectual property right is not unlawful under Article 82. Any other rule would be inconsistent with the concept of intellectual property, and with the principle that Article 82 can apply only if an abuse is being committed. It would also be inconsistent with Articles 4 and 98 EC, which must allow a dominant enterprise to compete, and to invest in intellectual property in order to do so. One defect of the conventional theory is that it does not say what kind of additional abuse is required, or how it must be linked to the refusal to contract. Except for the obvious point that a refusal to licence cannot, by itself, be an abuse, the theory does not provide a clear approach for use in future cases. It simply provides some examples of situations in which there is “additional abusive conduct.” Apart from typical two-market essential facility situations, in which the dominant company is monopolising a clearly distinct downstream market,227 the example which arose in the Magill television licensing case228 is where the refusal to licence deprives consumers of a new kind of product, not being produced by the dominant company, for which there is a clear unsatisfied demand.229 So What is “Additional Conduct?” The refusal, even if there is additional “abusive conduct,”230 is unlawful only if the refusal is linked to the separate abuse in some way.231 A wholly unrelated abuse could not affect the lawfulness of the refusal to licence. The other abuse may be outside the market to which the intellectual property right primarily relates, and the abuse in question can be relevant only (because of Article 82(b)) if the harm to consumers is serious enough. The characteristic of “essential facility” cases is that when an abuse has been identified, the

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Case 238/87, Volvo v. Veng, [1988] E.C.R. 6211. Joined Cases C-241/91P, RTE and ITP v. Comm’n, [1995] E.C.R. I-743 (Magill). 229 The question has been asked whether the new product, not being produced by the dominant company, and for which there is a clear unsatisfied demand, is in the same or a dif-ferent market from the dominant company’s downstream product. If it is accepted that what is needed is a new kind of product, the question of the market does not seem to be useful. It is necessary to define a product market to measure market power, or dominance. It is not necessary in order to assess whether consumers are being denied a new product, or a new kind of product, for which there is an unsatisfied demand. In practice, the proposed new product is likely to be in the same market, because if it did not compete with the dominant company’s product, that company would presumably either produce the new product itself, or licence some other company to produce it. But this is a practical comment, not a legal requirement: the dominant company might have some other reason for refusing to licence. 230 The phrase “abusive conduct” was used in Case C-241/91P, RTE and ITP, [1995] E.C.R. I, ¶ 823. 231 There are a number of cases under art. 82 in which conduct which might have been lawful in isolation was unlawful because it was combined with other behaviour making up an exclusionary strategy: Case 27/76, United Brands, [1978] E.C.R. 207; Case 53/87, CICRA v. Renault, [1988] E.C.R. 6039, 6073; Case T-83-91, Tetra Pak, [1994] E.C.R. II-755, and [1996] E.C.R. 5951; T-65/89, British Gypsum, [1993] E.C.R. II-389; Case T-228/97, Irish Sugar, [1999] E.C.R. II-2269; Case C-395/96P, Compagnie Maritime Belge, [2000] E.C.R. I-1365; Commission Merger Regulation decision, Microsoft/Liberty/Telewest, Thirtieth Report on Competition Policy 186–187 (2000) (the Commission argued that Microsoft regularly set up working groups to influence buyers’ choice of software). In predatory prices cases under the second Akzo rule (price between average variable costs and average total costs, and evidence of intention to exclude a competitor) the evidence will necessarily be cumulative. In Pitney Bowes v. Francotyp–Postalia, (1991 F.S.R. 72) the U.K. court held that the owner’s ability to enforce its intellectual property right could be limited if the right created or strengthened the dominant position which was being abused. See also Rensburg GEMA v. Electrostatic Plant Sys., [1990] F.S.R. 287; IBM v. Phoenix Int’l, [1994] R.P.C. 251; Chiron Corp. v. Murex Diagnostics, [1994] F.S.R. 187. But if the intellectual property right creates the dominant position which is being abused, a compulsory licence might put an end to the dominant position as well as to the abuse, and if there was only one market involved, this would normally be disproportionate. The compulsory licence should only be the appropriate remedy for the “additional abusive conduct,” as it was in the Magill case. 228

290 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY remedy is to order mandatory access to the facility, not merely to stop the abuse. So there must be a relationship between the abuse and the compulsory access.232 The view that the “additional abusive conduct” must be itself an identifiable abuse that is contrary to some provision of Article 82 makes the law clear. Unless “additional abusive conduct” means “a separate abuse,” it is not easy to see what it could mean. If it does mean “a separate abuse,” there is no reason why it should be limited to any particular type of abuse, whether exploitative or exclusionary. But if it is exclusionary, it must be something more than the mere exercise of intellectual property rights. The Remedy Principle The second theory is an explanation of all of the case law of the Community Courts and the Commission, but which has not been explicitly stated officially. This theory says that although it is never an abuse to refuse to give a licence of an intellectual property right, if the dominant company has committed an abuse, a compulsory licence may be the appropriate remedy. One defect of the conventional theory has already been mentioned. A second defect is that it does not account for the comment of the Court and the Advocate General in Volvo v. Veng that a refusal to licence may be illegal if it is combined with excessive prices which are contrary to Article 82(a).233 On the conventional theory this comment is hard to understand, because excessive prices have nothing to do with essential facilities, and would be an abuse in the same market as that for which the compulsory licence would be granted. That would be inconsistent with the well-established and undeniably correct principle that in essential facility cases there must be two markets (if there were not, the dominant firm would be compelled to share a competitive advantage with a direct competitor). So there is already in the case law a second principle, which applies to exploitative abuses, and which is a general principle which provides an overall explanation of the cases. This second principle is that if an abuse has been committed, mandatory access may be an effective and appropriate remedy. 232 See concerning copyright, Case 158/86, Warner Bros., Inc. and Metronome Video ApS v. Erik Viuff Christiansen, [1988] E.C.R. 2605 ¶¶ 12–13; and concerning patents, Case 19/84, Pharmon B.V. v. Hoechst AG, [1985] E.C.R. 2281 ¶ 26. In Volvo the Court stated: “It follows that an obligation imposed upon the proprietor of a protected design to grant to third parties, even in return for a reasonable royalty, a licence for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right.” Case 238/87, AB Volvo v. Erik Veng (UK) Ltd., [1988] E.C.R. 6211, ¶ 8. The Commission has reached the same conclusion in a case concerning a request for compulsory licensing of intellectual property (relating to hepatitis) in the market to which it primarily relates: “it is highly doubtful whether one could impose an obligation upon a dom-inant firm (in an eventual EC bulk intermediate Hep B market), as a remedy to ensure the maintenance of effective competition in the national Hep B markets, to share its intellectual property rights with third parties to allow them to develop, produce and market the same products (i.e., multivalent containing the Hep B antigen) which the alleged dominant firm was also seeking to develop, produce and market.” Complaint by Lederle-Praxis Biologicals, XXIV Competition Report, point 353 (1994). The court rejected an essential facilities claim in the U.K. case CH 1997 P No 4100, Philips Electronics NV v. Ingman, May 13, 1998. See Pat Treacy, Essential Facilities—Is the Tide Turning?, Eur. L. Rev. 501–05 (1998); Abbott B. Lipsky Jr. & J. Gregory Sidak, Essential Facilities, 51 Stan. L. Rev. 1187, 1219 (1999). This led the authors to conclude that essential facilities principles should not apply to intellectual property under U.S. law. Simon Bishop & Mike Walker, The Economics of EC Competition Law 119–120 (1999); Derek Ridyard, Essential Facilities and the Obligation to Supply Competitors Under UK and EC Competition Law, 8 Eur. Comp. L. Rev. 438, 446 (1996). 233 See also Case 78/70, Deutsche Grammophon v. Metro, [1971] E.C.R. 487. On the view suggested in the text, essential facility cases would be a sub-set of the cases in which compulsory access or a compulsory licence is the appropriate remedy, not vice versa.

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There are a number of arguments of law, economics and policy for this way of looking at the subject, which cumulatively are extremely strong:234 앫 It involves no new rules or concepts. It is based on the express words of Article 82(b), “limitation” (of the possibilities of rivals) and “prejudice” to consumers. Conduct which limits possibilities of rivals only in ways in which they would anyway be limited cannot be illegal. Rivals are anyway limited by having to respect intellectual property rights. 앫 It provides a rational, coherent and comprehensive basis for the relevant legal and economic principles, which should be broadly acceptable to both competition lawyers and intellectual property lawyers, since it does not regard the two bodies of law as conflicting. 앫 It confines the concept of “abuse” under Article 82 to the three correct, useful and traditional areas under European competition law: exploitative abuses (Article 82(a)), foreclosure of competitors (Article 82(b)), and unjustified discrimination between companies not otherwise associated with the dominant company (Article 82(c), which is primarily to prohibit protectionist discrimination by State enterprises).235 앫 It answers the two questions: what “additional abusive conduct” is enough, and why, if refusal to give access is only illegal when linked to such conduct, not simply prohibit the separate abuse? The only answer is: because a compulsory licence, when appropriate, is a more effective remedy. 앫 It encourages use of a market-based remedy requiring little antitrust supervision (which would be particularly useful in excessive pricing cases). 앫 It creates a rule with built-in limiting principles: there would be no new concept of abuse and, as in the case of any other remedy for an abuse under Article 82, the remedy must be an appropriate, proportionate and effective remedy to put an end to the abuse. This question arises on any view of the law. 앫 It provides a basis for distinguishing cases where the dominant company developed the property itself (normally, no duty to give a first licence, and no duty except under Article 82(c)), cases where it acquired the property and then deprived its competitors of access to it (a duty to licence is appropriate if the dominant company is restricting 234 See judgment of Mr. Justice Laddie in Philips Electronics v. Ingman and Video Duplicating, High Ct. London, May 13, 1998, CH. 1997P No. 4100 ¶ 37: “The existence of the intellectual property rights may facilitate anti-competitive behaviour, but such behaviour consists of abusive interference with the market for a product . . . . In prohibiting the conduct the court may have the power to intervene in the manner in which the intellectual property rights are exploited by the proprietor. This is to ensure that the proprietor does not continue the abusive conduct in relation to the products by the back door route of using the intellectual property rights.” The remedy theory does not solve, but does not increase, the difficulty of deciding the rate of royalty in a first compulsory licence. It does not imply that the royalty should be low-ered to compensate the licensee for any losses caused by the abuse: the two questions should be kept separate. In an interface disclosure or “patent thicket” case, or if the intellectual property had been illegally obtained, a royalty-free licence might be appropriate. In the case of a standard, “fair reasonable and non-discriminatory” (FRAND) terms might be based on other licences. The dominant company need not be compensated for loss of its monopoly. See John Temple Lang, Anticompetitive Non-pricing Abuses Under European and National Antitrust Law, in 2003 Fordham Corporate Law Institute 235, at 302–03 (Barry Hawk ed., 2004). 235 John Temple Lang & Robert O’Donoghue, Defining Legitimate Competition: How to Clarify Pricing Abuses Under Article 82 EC, 26 Fordham Int’l L.J. 83 (2002). The Court in Case T-191/98, Atlantic Container Line, [2003] E.C.R. II-___, ¶ 1460, said that the “special responsibility” of dominant companies merely means that art. 82 applies only to them. By implication, there is no fourth kind of abuse. Tying under art. 82(d) should be regarded as an example of foreclosure under art. 82(b).

292 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY existing competition), and cases when the dominant company harms consumers by foreclosing competition. 앫 It gives the phrase “additional abusive conduct” a clear meaning, that of “abuse.” 앫 It confirms that, in principle, it is never illegal in itself to refuse to licence an intellectual property right, as the Court has repeatedly said. 앫 It has the important advantage that it would not lead to protecting competitors rather than competition, or using competition law for (whether officials realise it or not) regulatory purposes, or discouraging investment or innovation. 앫 It provides a rationale for saying what almost all lawyers believe is the law, that a dominant company has no duty to facilitate companies which wish to add on or imitate devices unless it has taken steps to exclude them or create difficulties or handicaps for them. 앫 It allows a variety of justifications for refusal to licence. 앫 It seems to be an approach on which European and US law could agree. This is important because it is often said that intellectual property rights are an area on which they diverge (which may or may not prove to be correct). 앫 It allows a distinction to be drawn between a compulsory licence in a single market situation (e.g., excessive pricing), which can be appropriate only if the abuse is in that market and which requires a strong justification (since it would lessen or eliminate dominance, as distinct from ending abuse), and a compulsory licence in a second distinct market, which is more likely to be proportional. 앫 It does not involve trying to use competition law to correct any defects which may exist in intellectual property law. 앫 It provides a relatively uncontroversial rationale for the result in the Magill television programmes case. Licensing as Remedies in Other Kinds of Cases The remedy principle is not limited to any particular kind of abuses. Apart from cases of suppression of a new and desirable kind of product, a compulsory licence might be an appropriate remedy for excessive pricing contrary to Article 82(a), as the Court suggested, and of course in disrimination cases. Compulsory licences would be appropriate if the company had committed itself to grant licences for the purposes of a standard. If a dominant company makes two products which must work together, it may be required to licence any intellectual property rights involved in the interface making them do so, so as to enable competitors to make each product compatible with the other (but not to copy either product). This would be a natural part of a remedy in a tying case under Article 82(d) or in a “bundling” case. In a fraud or “patent thicket” case (deliberate multiplication of doubtfully valid patents to obstruct competitors), a compulsory licence of all the patents might be the only effective remedy. If a dominant company unjustifiably acquired intellectual property rights, it might be required to licence them. In addition, if an intellectual property right was used to supplement or reinforce an exclusionary abuse committed in some other way, the right could not be used to achieve the illegal result.236 It is well established in European competition law that behaviour that in isolation might be 236 Cases 56 & 58/64, Consten and Grundig, [1966] E.C.R. 299 (an art. 81 case, but the same principle must apply under art. 82); Philips Elecs. v. Ingman, High Ct. London, May 13, 1998 CH. 1997P, No. 4100, ¶ 37; see also Case T-30/89, Hilti, [1991] E.C.R. II-1439, ¶¶ 95–119; Case C-53/92P, [1994] E.C.R. I-667 (other situations involving art. 82 and intellectual property rights).

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legal can be unlawful if it combined with unlawful conduct in a single exclusionary strategy. However, in cases in which the abuse is monopolisation of a second, downstream, market, the essence of the abuse is suppression of existing competition, and if there is no competition to suppress, there is normally no abuse. Intellectual property rights entitle even a dominant company to refuse to open a market to its competitors. The IMS Health Case237 IMS Health provides pharmaceutical companies with information on sales of pharmaceutical products in Germany, among other countries. This information is used as the basis for paying sales representatives. These representatives talk only to doctors, and patients who get prescriptions often buy the prescribed drugs where they live or work and not from pharmacies in the neighbourhood of the doctor. So collecting and presenting the information in a way that best allows the pharmaceutical companies to measure the effectiveness of their sales representatives is complex and difficult. European data privacy laws do not permit sales data to identify the sales of any individual pharmacist. IMS Health solved this problem by producing a map of Germany divided into areas, drawn so as to group together in each area a full range of specialist doctors and the pharmacists to whom their patients are likely to go. IMS Health then collects sales data from wholesalers which sell to the pharmacists, and supplies the data to pharmaceutical companies on the basis of each area. These areas are used as the basis of the representatives’ sales territories. When it appeared that competitors of IMS Health were using the area structure which IMS had developed, (in which Germany was divided into 1860 areas), IMS sued for copyright infringement, and the German courts accepted that the map of 1860 areas was copyright. The competitors complained to the European Commission, arguing that because the pharmaceutical companies insisted on using the 1860 map, the use of IMS’s structure was essential for them to supply sales information to pharmaceutical companies. By an interim measures decision in July 2001, the Commission, ordered IMS to grant a copyright licence to its two competitors. IMS appealed, and in October 2001 the decision was suspended by Order of the President of the Court of First Instance.238 This Order 237 Case C-418/01, IMS Health v. NDC Health (Opinion of Advocate General Tizzano, 2 Oct. 2003) (Judgment dated Apr. 29, 2004). 238 Case T-184/01R, [2001] E.C.R. II-2349 and 3193. The IMS Health case has given rise to a great deal of comment and criticism. See Jurgen Schwarze, Der Schutz des geistigen Eigentums im europäischen Wettbewerbsrecht, Europäische Zeitschrift für Wirt-schaftsrecht 75 (March 2002); Robert Pitovsky et al., The Essential Facilities Doctrine Under U.S. Antitrust Law, 70 Antitrust L.J. 443 (2002); Paul D. Marquardt & Mark Leddy, The Essential Facilities Doctrine and Intellectual Property Rights: A Response to Pitovsky, Patterson & Hooks, 70 Antitrust L.J. 847 (2002); E. Derclaye, Abus de position dominante et droits de propriété intellectuelle dans la jurisprudence de la Communauté européenne: IMS survivra-t-elle au monstre du Dr. Frankenstein?, 15 Les Cahiers de Propriété Intellectuelle 21 (2002); Christian Koenig, Andreas Bartosch & Jens-Daniel Braun, EC Competition and Telecommunications Law 133, 151 (2002); Sergio Baches Opi, The Application of the Essential Facilities Doctrine to Intellectual Property Licensing in the European Union and the United States: Are Intellectual Property Rights Still Sacrosanct?, 11 Fordham Intell. Prop. Media & Ent. L.J. 409 (2001); David W. Hull, James R. Atwood & James B. Perrine, Compulsory Licensing, Eur. Antitrust Rev. 36 (2002); Matthias Casper, Die wettbewerbsrechtliche Begründung von Zwangslizenzen, Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht, 166 Band 685 (Dezember 2002); Donna M. Gitter, The Conflict in the European Community Between Competition Law and Intellec-tual Property Rights: A Call for Legislative Clarification of the Essential Facility Doctrine, 40 Am. Bus. L.J. 217 (2003); Maurits Dolmans & Daniel Ilan, A Health Warning for IP Owners: The Advocate General’s Opinion in IMS and its Implications for Compulsory Licensing, 11 Comp. L. Insight 12 (2003); Alessandra Narciso, IMS Health or the Question Whether Intellectual Property Still Deserves a Specific Approach in a Free Market Economy, Intell. Prop. Q. 445 (2003); E. Derclaye, Abuses of Dominant Position and Intellectual Property Rights: A Suggestion to Reconcile the Community Courts Case Law, 26 World Comp. 695 (2003); Bruno Lebrun, IMS v.

294 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY says that a judge should “normally treat with circumspection a Commission decision imposing, by way of interim measures . . . an obligation . . . to licence the use of [an] intellectual property right . . . . The Commission’s provisional conclusion that the prevention of the emergence of a new product or service for which there is a potential consumer demand is not an indispensable part of the notion of “exceptional circumstances” developed by the Court of Justice in Magill constitutes, at first sight, an extensive interpretation of that notion . . . .” The Order added that the requirements in Magill may be cumulative. (This was later confirmed by the Court of Justice). In April 2002 the President of the European Court of Justice dismissed an appeal against the Order of October 2001, substantially confirming all the findings made in the earlier Order.239 Also in 2001, the German courts, which had concluded that European competition law did not entitle the competitors to copyright licences or prevent IMS from claiming its rights under copyright law, referred to the Court of Justice several questions intended to resolve the conflict between the judgments of the German courts and the decision adopted by the Commission. By a decision in August, 2003, the Commission withdrew its interim measures decision (but not retroactively), giving as the reason that NDC had made contracts with some big customers. However, NDC had always been free to offer any structure which did not infringe copyright and unfair competition law, and had argued that only by using IMS Health’s 1860 structure could it get customers to contract with it. The Court240 confirmed that refusal to licence cannot in itself be an abuse. For an abuse, the product or service must be indispensable for carrying on a business, the company seeking the licence must intend to offer new products or services, not offered by the copyright owner, for which there is a potential consumer demand, the refusal must reserve the market to the copyright owner by eliminating all competition on that market, and the refusal must not be justified objectively. There must be new products, rather than merely products with different characteristics. The Court also said that there must at least be two different stages of production, so that the upstream product is indispensable for supply of the downstream product. The refusal must prevent the development of the secondary market to the detriment of consumers. Microsoft — Interoperability Information The now well-known issues in the Microsoft case are different from those in IMS Health, because the abuse here relevant as found by the Commission was refusal to supply interoperability information, using the monopoly of desktop operating systems software to monopolise workgroup server software products. The Commission based the order to licence on the need for interoperability, the risk of elimination of competition on the secondary market, the ill effects on innovation, the harm to consumers, and the absence of justification. So there was, the Commission said, an abuse in addition to the refusal to supply. Microsoft went further than was necessary to fulfill the essential function of the right, by reducing innovation. The key exceptional circumstances are the abuse itself (although there were others). NDC: Advocate General Tizzano’s Opinion, Eur. Intell. Prop. Rev. 84 (2004); David Aitman & Alison Jones, Competition Law and Copyright: Has the Copyright Owner Lost the Ability to Control his Copyright?, Eur. Intell. Prop. Rev. 137 (2004); Beatriz Conde & Dimitrios Riziotis, Comment, 5 Int’l Rev. Intell. Prop. & Competition L. 564 (2004). 239 Case C-481/01P(R), [2002] E.C.R. I 3401. 240 Apr. 29, 2004, Case C-418/01, IMS Health v. NDC Health, [2004] E.C.R. I-___.

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On this basis, the intellectual property right does not need to apply to the downstream product, or can be only an element in it. It concerns the “interface.” A key finding was that for other companies reverse engineering was not a solution, not merely because it is time-consuming and costly, but because at any time Microsoft could alter the relevant characteristics of the software, and recreate the handicap again. To be prohibited under Article 82, the conduct must lead to a serious, permanent and inescapable handicap, even if the companies disadvantaged have not been forced to leave the market. The Microsoft case was not based on the argument that a new kind of product, for which there was a clear and unsatisfied demand, was being suppressed. That is not the only situation in which harm to consumers occurs: other kinds of harm to competition are enough. It seems (but we must wait for the judgment) that a refusal to licence as a remedy for an abuse would be justified only if it seeks to achieve a legitimate aim, it is necessary and reasonably suitable to achieving it, and the procompetitive aim outweighs the anticompetitive effects.

SESSION IV: ANTITRUST/COMPETITION LAW & INTELLECTUAL PROPERTY PART C: PARALLEL TRADE

SESSION IV: ANTITRUST/COMPETITION LAW & INTELLECTUAL PROPERTY

Part C: Intellectual Property and Competition Policy on Parallel Trade

Moderator THOMAS HEIDE

Berwin Leighton Paisner (London) Speakers CHRISTOPHER STOTHERS

JAMES B. KOBAK JR.

Milbank Tweed Hadley & McCloy LLP (London)

Hughes Hubbard & Reed, LLP (New York)

Panelists PROF. VALENTINE KORAH

JOHN TEMPLE LANG

University College London

Cleary Gottlieb Steen and Hamilton (Brussels)

SUSAN MANNING

THOMAS CHENG

Managing Director, COMPASS/FTI Consulting

University of Hong Kong

MR. HEIDE: Good afternoon, and welcome. This is the session on Intellectual Property and Competition Policy on Parallel Trade. I am Thomas Heide from Berwin Leighton Paisner in London. Let me introduce the panelists. First and foremost, Chris Stothers will be giving the main paper. This is the book that he has just published.1 We have a couple of panelists from the last session: John Temple Lang, Susan Manning, and Prof. Valentine Korah. James Kobak has joined us, as has Thomas Cheng. Hugh has asked me to give a very quick, whistle-stop tour of parallel trade, and I will do so. What are we talking about when we talk of parallel trade? It is essentially about a good being put on one market ending up in another market. Who does this? Consumers do it, intermediaries — or, as they are often better known as, parallel traders. 1 Christopher Stothers, Parallel Trade in Europe: Intellectual Property, Competition and Regulatory Law (2007).

298 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY Is it a good thing? It depends whom you are talking to. For the consumers, yes, if they get what they want at a cheaper price. For parallel traders, most certainly yes. They have a business. They get to arbitrage between different markets, and often they make lots of money. For manufacturers or brand owners, the answer is most certainly no. Why is that? It’s because their products from low-price countries end up in high-price countries. That affects their bottom line. Not only that, many times it can affect their goodwill and brand value. That might happen, for instance, where a product with certain specifications or functionality is sold in one country and then gets imported into another country, where consumers are confused, because what they are used to experiencing from that product is not the same. That may actually tarnish the brand and hurt the company’s goodwill. How about governments? Generally, there is a cautious “yes” in terms of being for parallel trade. Certainly if we look back at the late 1990s, when there was a huge debate in Europe about parallel trade of consumer products, particularly CDs and music, Sweden and the United Kingdom were very much pro parallel trade. These days, of course, a big topic of discussion is that of pharmaceuticals. Here in the United States, as in most countries around the globe, there are strong interests in government lowering the price of pharmaceuticals. But there is also a certain caution. That caution essentially comes down to one point: that is the fact, as was mentioned this morning, that fakes are finding their way into the distribution chain. So pharmaceuticals being parallel traded is okay. However, if fakes end up in the stream of commerce, this is quite a problem. Intellectual property rights, as you know, are territorial in nature. These rights give the rights owner the right to stop infringing products at the border. In law, whether by legislation or case law, we have the exhaustion doctrine. That doctrine essentially limits what a right owner can do once products containing or bearing the IP rights have been placed on the market and are free to circulate. In the United States, it is called the first-sale doctrine; in Europe, we call it the exhaustion doctrine. There are a couple of different flavors of exhaustion. There is international exhaustion. That means a product put on the market anywhere on the globe is essentially deemed to exhaust the rights of the right holder. Then we have regional exhaustion, or, as we call it in Europe, Community exhaustion, which means that any product put on the market anywhere in Europe exhausts the rights vis-à-vis that good within the European Union. We also have national exhaustion, which is the case here in the United States, by virtue of the Jazz Photo case of 2001,2 with regards to patents. Under national exhaustion, the IP rights are exhausted only within the boundaries of the country in issue when a product is put on that national market. Where does antitrust come into the picture? You can imagine that many rights holders are not very enthusiastic about parallel trade. They would like to control their distribution networks. They commonly look to contracts to do so where you will find various provisions — for instance, export bans, territorial restrictions, or exclusivity — being used as a means to control parallel trade. Other means can also be used. Pricing — where there is one price for local consumption and another price if products are being exported — Chris will talk about shortly. Limiting quantities, or stock-allocation schemes, for example, where a manufacturer looks at what is consumed locally and only supplies on the basis of the local history of consumption, is another means of controlling parallel trade. 2 Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002).

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These various means can be attacked through competition law. In the United States, it is the Sherman Act.3 In the European Union, it is Articles 81 and 82 of the EC Treaty.4 But it does not have to be done through competition law. It can also be done by legislation. One of the points that James Kobak will talk about is how parallel trade can be addressed through legislation. There are some very interesting debates in the United States at the moment focusing on the Pharmaceutical Market Access and Drug Safety Act.5 I think we have a very promising lineup. Chris is going to start and give more of a forensic analysis of some of the points that I have just given you a whistle-stop tour of. I know that Susan is quite keen on providing some economic perspectives to parallel trade. James is going to give the background from the United States. There will be some very practical perspectives from John with regard to stock-allocation schemes, in terms of what companies can lawfully do under the law in the European Union. Chris, over to you. MR. STOTHERS: Thanks, Tom. Good afternoon. Who are parallel traders? Certainly, if you listen to brand owners, they are pirates; they are leeches; they are WAGs (for those unfamiliar with soccer, WAGs are the wives and girlfriends of the England football team). The picture on the slide is of Wayne Rooney’s girlfriend, Coleen McLoughlin, who was caught bringing far too much shopping back from the United States and forced to paid customs duty and VAT. As for “lying bastards,” these aren’t my words. It is the title of a book by a parallel trader explaining what parallel traders do and describing them as “lying bastards.”6 Of course, the title itself rather suggests that the book might not be the whole truth. As for the last one — “You?” — I am somewhat disappointed that Hugh Hansen is not still here, because I was going to point out that, as a frequent visitor to the United Kingdom, Hugh Hansen as a shopper might be one of the biggest parallel traders in the world. I. BACKGROUND Moving on, what I really want to talk about today about is the overlap or linkage between IP and competition policy when it comes to parallel trade. In most cases, there is no conflict and the policy goes the same way, but that is not always the case. Within the European Community, can you use IP to block parallel trade? In general, no you cannot. Community Exhaustion — Can you use other measures? Probably not, because they are very likely to involve an anticompetitive restriction. Article 28 of the EC Treaty states that: “Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.”7 Article 30 then gives a limited range of exceptions as follows: “The provisions of 3

Sherman Antitrust Act, ch. 647, 26 Stat. 209 (1890) (codified as 15 U.S.C. §§ 1–7). Treaty Establishing the European Community, Feb. 7, 1992, O.J. (C 224) 1 (1992), [1992] 1 C.M.L.R. 573, 626 [hereinafter EC Treaty], incorporating changes made by Treaty on European Union, Feb. 7, 1992, O.J. (C 224) 1 (1992), [1992] 1 C.M.L.R. 719. The EC Treaty was amended by the Treaty of Amsterdam, Oct. 2, 1997, O.J. (C 340) 1 (1997). After the amendment introduced by the Treaty of Amsterdam, Articles 85 and 86 of the EC Treaty have become Articles 81 and 82, respectively. 5 Pharmaceutical Market Access and Drug Safety Act of 2007, S. 242 & H.R. 380, 110th Cong. (2007) (introduced Jan. 10, 2007 to amend the Federal Food, Drug, and Cosmetic Act with respect to the importation of prescription drugs), available at http://www.govtrack.us/congress/bill.xpd?bill=h110-380. 6 Ricky George, Lying Bastards: Confessions of a Grey Market Trader (2004). 7 EC Treaty, supra note 4, art. 28. 4

300 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY Articles 28 and 29 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of . . . the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.”8 Goods coming from outside Europe into Europe? For these it is the other way around. There is no international exhaustion — in fact, it is prohibited. And restrictions are unlikely to be regarded as anticompetitive because there is unlikely to be an effect on trade between Member States. As for the United States, although people like to say the approach to parallel trade is entirely different, I think it is actually similar to that in Europe. Within the United States, there is an awful lot of parallel trade, which is supported by the first-sale doctrine and by antitrust. However, parallel trade of goods from outside the United States raises different issues, and certainly on the competition/antitrust side restrictions are far less likely to trigger sanctions. So what are the clouds on the horizon? Why am I bothering to talk about this if IP and competition policy on parallel trade are the same? In brief, there is some divergence between IP and competition policy on parallel trade in certain cases, and I feel these divergences indicate some dissatisfaction with either or both policies. I want to pick out just three examples today, in this relatively limited time: pharmaceuticals, online transactions, and what people like to grandly title “Fortress Europe.” II. PHARMACEUTICALS Starting off with pharmaceuticals, why are there problems and policy disagreements? Well, we have discussed earlier today that the prices in Europe are set at the Member State level, or interfered with at the Member State level, but the single-market imperative still applies as a general rule. So even though companies cannot choose to set their prices freely across Europe, they still have to bear the brunt of the internal market. You get similar policy disagreements between the United States, where there is freemarket pricing of pharmaceuticals, and Canada, where there is more interference with pricing and visibly lower prices. That, in turn, leads to a lot of unhappiness, particularly for consumers who cannot easily afford the U.S. prices. So we have policy disagreements relating to pharmaceuticals. How do we deal with them? In Europe, Community exhaustion applies, as I said. But then the courts start playing slightly funny games with repackaging. When we talk about repackaging, we are talking about the fact that pharmaceuticals sold in Greece have Greek packaging and Greek instructions. Those pharmaceuticals cannot simply be imported and sold in the United Kingdom. Regulatory provisions require English packaging and English instructions for patients. There are fairly important and obvious public-health reasons why that is the case. Therefore, it is necessary to repackage in order to parallel import. However, if you repackage, that amounts to trademark infringement under Community law, and thus parallel imports are restricted under Community law. This is one example where the courts have given something back to the pharmaceutical industry, rather than simply applying the full brunt of the Community exhaustion rules. On the other hand, a parallel trader, like anyone else, needs a marketing authorization to put a pharmaceutical on the market. There is a simplified approach for parallel imports, where you do not have to go through the whole rigmarole of carrying out tests 8

Id. art. 30.

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on rodents and so on. But, although there is this simplified approach, there remain significant delays, which again restricts parallel trade of pharmaceuticals within Europe. On the competition side, the European Commission applies normal competition principles and pharmaceutical companies are just as much at risk from the rules. However, Advocate General Jacobs and the Court of First Instance (CFI) have both suggested a slightly lighter touch may need to be applied in the pharmaceutical sector in Syfait 9 and GlaxoSmithKline,10 respectively. The Syfait case is now going back to the European Court of Justice (ECJ). If you remember, that is the case where Advocate General Jacobs cunningly tried to divide the baby so that Community competition law still applies in general but some special conditions are permitted for pharmaceuticals. The ECJ ducked the question and said it was not allowed to hear the reference because it came from the Greek Competition Commission, which was not a court of tribunal. The Greek courts have come back and said, “Well, here’s a whole handful of cases, all with exactly the same reference. Now you are going to have to hear it, because we definitely have permission. We are definitely allowed to refer our cases.”11 Other distribution models for pharmaceuticals are also raising issues. Pfizer’s distribution model, in particular, was the subject of AAH Pharmaceuticals v. Pfizer12 and also the Office of Fair Trading (OFT) study that was announced recently.13 Pfizer wants to supply to the market through a single wholesaler, and various other wholesalers are objecting. The case is not just about parallel imports, but one of the complaints is that the system will restrict parallel exports from the United Kingdom, because other wholesalers simply will not be able to get Pfizer products. The U.S. system, as James will pick up in due course, also restricts pharmaceutical parallel imports from an IP and regulatory perspective. However, again there are various administrative, legislative, and individual initiatives seeking to allow parallel trade in some cases, particularly from Canada. Before I move on to online transactions, is there a resolution to pharmaceuticals? I am not very positive that there is. This debate has been going on for years and years and years. There does not seem to be any great inclination to have legislative action to resolve it. There is a basic problem, in that the EC Treaty provides no special treatment for pharmaceuticals despite the impact of pricing intervention. So it is very difficult, without some legislative reform, or even Treaty reform, to find a solution that will allow different treatment for pharmaceuticals while keeping the rest of the single market intact. The other obvious solution would be to have all the Member States give up interfering with prices and have single pricing throughout Europe. That is not going to happen. III. ONLINE TRANSACTIONS So on to online transactions. This is far sexier than pharmaceuticals — well, I think so at 9 Case C-53/03, Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. Glaxosmith-kline, 2005 E.C.R. I-4609 (Opinion of Advocate General Francis Jacobs, Oct. 28, 2004), available at http://curia/ europa.eu/en/actu/communiques/cp04/aff/cp040087.en.pdf. 10 Case T-168/01, GlaxoSmithKline Services Unlimited v. Commission of the European Communities, 2007 O.J. (C 42) 11, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2007:042:0011:0011: EN:PDF. 11 Cases C-468/06 to C-478/06, Sot. Lélos kai Sia EE v. GlaxoSmithKline (all pending). 12 [2007] E.W.H.C. 565 (Ch). 13 U.K. Office of Fair Trading, Distribution of Medicines in the UK, OFT914 (Apr. 4, 2007), available at www.oft.gov.uk/shared_oft/reports/comp_policy/oft914.pdf.

302 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY least. Particular factors here are the reduction of search and transaction costs and the introduction of new business models. The first basically means that consumers can now go on the Internet, they can see how much something costs in another country, and, all else being equal, they can order it from that country and get it posted across to them. They do not have to physically travel to the other country, learn the language, and then go traveling around to find the cheapest price. It is much easier to do it via the Internet. Equally, we have distribution of media electronically rather than in physical form. By virtue of being a very different business model than the one in place when the “free movement of goods” doctrine was developed, this raises serious new issues, which really have not been dealt with properly (yet). So what happens with online transactions? Individuals are unlikely to infringe IP rights themselves, but Web sites that are allowing them to purchase can infringe. A recent case in the English High Court, Sony Computer v. Pacific Game Technology,14 concerned a Web site in Hong Kong selling Sony products that was clearly aimed at the U.K. market. It was found that the Web site owners were issuing copies in the United Kingdom, and thus infringing copyright in the United Kingdom, even though they were based in Hong Kong and doing everything in Hong Kong, because the Web site was targeted at the United Kingdom. This is not the only example of cross-border purchasing by consumers. Another recent case in a slightly different field is Joustra,15 which was about a group of wine lovers in the Netherlands who were trying to buy their wine in France as a group. The ECJ was asked whether the purchasers had to pay Dutch excise duty on the wine, which was relatively high, or French excise duty, which was relatively low. In that case, they were not physically going to France to pick up the wine themselves — in which case they would have paid French excise duty. They were getting a third party to import it and, as a result, they had to pay the higher Dutch excise duty. All very inefficient! What about services? Well, exhaustion has not typically applied to services. We have the old Coditel cases16 and various cases about collecting societies. A lot of those cases were really about people trying to use the copyright work in question without any payment at all, and so it was not really surprising that exhaustion was rejected. But as a result of those decisions, we now have the situation where it is somewhat unclear whether exhaustion will apply to modern services, such as iTunes, where people are downloading music and putting it onto their own iPods, and whether people can resell without infringement. The issue is also arising, to a certain extent, in relation to licenses for computer software, particularly in Germany. But it is still quite early days to say what is going to happen. However, this issue is very important, because if companies are able to divide up the European market and charge different prices in each Member State then it undermines the goal of the rules that apply to the parallel trade of goods. The Commission is also getting rather excited the competition side of online transactions at the moment. In particular, various regulations (block exemptions) and guidelines attack any attempt to restrict online sales. However, sometimes these are a bit naïve or, at least, by the time they are published, they are already outdated. Collecting society models for online use are also being considered, but with a slightly 14

[2006] E.W.H.C. 2509 (Pat.) (the “Lik Sang” case). Case C-5/05, Staatssecretaris van Financiën. v. B.F. Joustra, [2006] E.C.R. I-11075. 16 Case 62/79, Coditel v. Ciné Vog Films, 1980 E.C.R. 881 (Coditel I); Case 262/81, Coditel SA v. Ciné-Vog Films SA, [1982] E.C.R. 3381 (Coditel II). 15

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different approach in each field. There is no real consistency between the way collecting societies are viewed by the Commission officials responsible for intellectual property and the way they are viewed by those responsible for competition. Until there is some sort of consistency, we do not know what types of models are going to develop. Finally, people are getting quite excited about the iTunes investigation. That is an investigation into iTunes for charging different prices in different Member States. In itself that isn’t necessarily problematic. What is problematic is that iTunes apparently includes measures to try to make sure consumers use only their own national iTunes Web site, rather than another one — for instance, to stop consumers in, say, the United Kingdom going on to the French iTunes Web site and downloading their songs from that Web site. A statement of objections against that has been issued by the Commission under Article 81.17 Restrictions on cross-border purchasing also appear in other service areas, particularly airlines and rental rights, where suppliers try to charge different prices in different countries and to make sure the prices that are paid are determined by the residence of the consumer rather than the Web site that the consumer is using. By way of example, the sorts of measures enforced would be only allowing payment by credit cards registered in the country at which the Web site is targeted — so not allowing a U.K. consumer to use a U.K. credit card on a French Web site. For the few consumers who also have a French credit card, that is not going to be a problem, but for the majority of consumers that is going to block them using the French Web site. In the iTunes case, the Commission has suggested that the agreements required for the purpose of Article 81 are between the music producers and Apple.18 However, with other services, there may not be any such agreements, and so there may be no infringement of Community competition law even if the Commission’s case against Apple is successful. So what is going to happen on the online transaction issue? The area to watch is the competition side. I do not think anything particularly exciting is likely on the IP side, although any developments there are most likely to occur in Germany, particularly in terms of the resale of software licenses. IV. “FORTRESS EUROPE.” The third of today’s examples is “Fortress Europe.” The Silhouette decision19 confirmed that the Trademark Directive20 prohibited international exhaustion, thus allowing brand owners to prohibit parallel import from outside the European Economic Area. Several Member States were unhappy after Silhouette, and as others realized what it actually meant, more and more Member States were unhappy. The European Parliament was also very unhappy, and there were plenty of fairly pointed questions asked in Parliament. The national judges were unhappy after Silhouette. One former national judge, who 17 See COMP/39.154, MEMO/07/126, Press Release, European Commission, European Commission confirms sending a Statement of Objections against alleged territorial restrictions in on-line music sales to major record companies and Apple (Apr. 3, 2007), available at www.europa.eu/rapid/pressReleasesAction.do? reference=MEMO/07/126. 18 Id. 19 Case C-355/96, Silhouette Int’l Schmied GmbH & Co. KG v. Hartlauer Handels-gesselschaft GmbH, [1998] E.C.R. I-4799 (July 16, 1998), available at http://curia.europa.eu/en/actu/communiques/cp98/cp9849en.htm. 20 1989 Community Trademark Directive: First Council Directive 89/104 (EEC) Dec. 21, 1988 to approximate the laws of the Member States in relation to trademarks, 1989 O.J. (L 40) 1, available at http://eur-lex.europa.eu/ LexUriServ/site/en/consleg/1989/L/01989 L0104-1991123-en.pdf.

304 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY shall remain nameless — but the fact that he is a former national judge probably gives the game away — is particularly unhappy with Silhouette and is said to have offered a medal to anyway who can find a way around it. There are also judges in the English Court of Appeal who remain fairly unhappy with the effect of Silhouette. That said, other Member States are entirely happy with the Silhouette approach, and the Commission itself has been fairly unwilling to change the legislation. In particular, the Commission has avoided some of the demands by Parliament to investigate the issue further. The unhappiness on the IP side with the prohibition of international exhaustion can be seen in a number of recent cases.21 I will not go through the details today. They are just examples of the fact that, although international exhaustion is prohibited in theory, in practice people are not always happy with that policy choice. In terms of competition, we have the Javico case,22 which is really the only case we have on point. The ECJ said there was no effect on trade between Member States in the case and, therefore, no competition infringement. That, for most cases of restrictions in parallel trade from outside the Community, is going to be the end of the matter. However — and this is very much my speculation, as there is little case law — a number of the free trade agreements entered into by the European Community contain competition provisions and say they must be interpreted in line with Articles 81 and 82. It will be interesting to see — as I say, perhaps the English judges want to play with a new toy — whether they will try to play with those agreements and use their competition provisions as a way of trying to allow parallel imports, or at least to block restrictions on parallel imports from outside the Community. You have had the mandatory plug of my book – Parallel Trade in Europe, published this month by Hart Publishing. I will hand it back over to Tom. MR. HEIDE: Thank you very much, Chris. I think it would be a good idea if, James, you would give a view of what is happening in the United States with regard to pharmaceuticals. As Chris was just talking about, there is a hotbed of activity there, all the cases before the European Court. Over to you. *

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An Update on the Law, Politics and the Re-Importation of Pharmaceuticals in the United States James B. Kobak Jr. & Ramsey Chamie23 I. BACKGROUND This draft paper summarizes developments affecting the controversial and important issue of gray market importation of patented and branded pharmaceutical products into the United States. Prices at which a medication are sold in one country may be substan21 See, e.g., Case C-244/00, Van Doren v. Lifestyle Sports, [2003] E.C.R. I-3051; Case C-16/03, Peak Holding v. Axolin-Elinor, [2004] E.C.R. I-11313; Case C-405/03, Class Int’l v. Unilever, [2005] E.C.R. I-8389; Sun v. Amtec, [2006] E.W.H.C. 62 (Ch); Mastercigars Direct v. Hunters & Frakau, [2007] E.W.C.A. 176. 22 Case C-306/96, Javico Int’l and Javico AG v. Yves Saint Laurent Parfums, [1998] E.C.R. I-1983. 23 James Kobak is Partner, Hughes Hubbard & Reed LLP and Adjunct Professor, Fordham Law School. Ramsey Chamie is a Hughes Hubbard & Reed LLP Associate.

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tially lower than in a neighboring country because of government price controls or purchasing practices as well as differences in currency valuation. Purchasers in the low-price country may profit by resale into the higher-priced country, with some reduction in price to some consumers of that medication in the higher-priced country. But these benefits for the gray market importers and the consumers who choose to deal with them may do little to reduce overall price levels in the high-price country and may come with costs: these include the adverse effect on revenues for the pharmaceutical manufacturers that develop the products; attendant diminution of resources and incentives for research and innovation; adverse economic and health consequences to consumers in the country where the medication is originally sold; and potentially adverse health consequences to consumers in the destination country. Manufacturers and rights holders in the United States, where many research-based international pharmaceutical companies are headquartered or maintain substantial operations, have taken steps to limit supply to wholesalers or distributors or to place restrictions against resale into the United States in their contracts with distributors. These efforts have been directed particularly at Canada, where government-mandated prices are substantially lower than in the United States and from which the logistics of U.S. importation and Internet advertising are relatively simple and inexpensive. This paper focuses on the limits that antitrust, competition law, or other administrative procedures or legislative initiatives may place on efforts, such as those now being undertaken to limit imports into the United States. II. RECAP OF THE INTERNATIONAL EXHAUSTION DOCTRINE As explained in previous work, the historical doctrine of international exhaustion has yielded to a rule of national exhaustion of patent rights in the United States as a result of a decision by the U.S. Court of Appeals for the Federal Circuit, the court that ultimately decides most issues of U.S. patent law.24 The Federal Circuit has recently confirmed that it has “expressly limited first sales under the exhaustion doctrine to those occurring in the United States.”25 Efforts by IP rights holders to take advantage of these newly recognized rights to exclude imports may include infringement suits or invocation of administrative procedures, such as International Trade (ITC) procedures. There are, however, practical limitations to these remedies. Infringement suits are costly, cannot be instituted until after imports have appeared, and often suffer from the inability to identify, obtain personal jurisdiction over, or effecttively enforce judgments against, significant parties in the distribution chain. Administrative trade remedies, such as ITC exclusion orders, avoid some of these limitations but still cannot be invoked until some significant infringement has occurred. The trade laws that govern these procedures also require that significant manufacturing operations be conducted in the United States to satisfy the domestic inquiry requirement of the law26 and have practical limitations. (These limitations include the less than infinite resources of the ITC and U.S. Customs and Border Protection and an intentional loophole in the U.S. trade law permitting importation by individuals for personal 24 Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002); Fuji Photo Film Co., Ltd. v. Jazz Photo Corp., 249 F. Supp. 2d 434 (D.N.J. 2003). See also James B. Kobak Jr. & Robert P. Reznick, Recent Developments of Interest to Patent Licensors, Licensees, and Their Lawyers, Licensing J. 12, 15–16 (June–July 2003); Daniel Erlikhman, Jazz Photo and the Doctrine of Patent Exhaustion: Implications to TRIPS and International Harmonization of Patent Protection, Hastings Comm. & Ent. L.J. (Winter 2003). 25 Fuji Photo Film Co., Ltd. v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005). 26 10 U.S.C. § 1337(a).

306 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY use). In the 1980s, the ITC, at the urging of the U.S. Federal Trade Commission (FTC), refrained from instituting measures to attack gray market goods proactively under trademark laws.27 IP rights owners and manufacturers may, therefore, seek to supplement their pure IP rights by resorting to contractual restrictions and business strategies, such as restricting supply to a few reliable pharmacies wholesalers and refusing to deal with others. The question is whether these efforts could or should be trumped by regimes, such as antitrust law, or by specific legislation designed to encourage pharmaceutical imports. III. DEVELOPMENTS IN THE UNITED STATES Pharmaceutical imports from Canada, in particular, remain a significant political issue in the United States because of price disparities between patented pharmaceutics in the United States and Canada. These disparities have arisen, in part, because of differences between the Canadian and U.S. dollars, but, more significantly, because of the effect of government purchases and price regulation in Canada. The ultimate importance of these imports can easily be overstated because drugs purchased in Canada (with its much smaller population) represent only a small portion of U.S. purchases. Nevertheless, in individual cases differences may be significant and are well publicized.28 A number of U.S. states and cities are seeking, and in some instances have implemented, plans to purchase or facilitate the purchase of imports on a regular basis for their citizens despite Food & Drug Administration (FDA) statements that such actions might violate federal law. These imports even became an issue in the 2004 U.S. presidential debates from which other significant domestic issues, such as the environment and the impact of the Patriot Act on individual rights, were almost entirely absent. As the dollar fell and U.S. demand increased, some Canadian Web sites offering drugs from Canada reportedly began to fill orders with product from Europe and other parts of the world.29 Indeed, some Web sites are actually only faux Canadian — consisting in reality of facilities located in places, such as the Bahamas, that fill orders with products originating in Asia.30 As a result, FDA has warned customers not to buy or use prescription drugs from Canadian Web sites.31 A recent FDA operation found that, of the drugs being promoted to consumers as “Canadian,” 85 percent came from outside Canada, and several of the pharmaceuticals sampled were counterfeit.32 In October 2006, one month before congressional mid-term elections, Congress passed the Department of Homeland Security Appropriations Act, 2007, H.R. 5441. A provision in the Act allows individuals returning from Canada to carry into the United States up to a ninety-day supply of prescription medicines for personal use. An additional provi27 Comments of the Bureaus of Competition, Consumer Protection and Economics of the Federal Trade Commission on Gray Market Options Facing the United States Custom Service (Oct. 17, 1986). 28 See United States Department of Health & Human Services Task Force on Drug Importation, Report on Prescription Drug Importation (Dec. 2004), available at http://www.hhs.gov/importtaskforce [hereinafter HHS Task Force Report], at 67 (con-cluding that savings on an individual’s purchases may be substantial but that overall savings would amount to at most 1–2 percent); Congressional Budget Office, Economic and Budget Issue Brief, Would Prescription Drug Importation Reduce U.S. Drug Spending? (Apr. 29, 2004). 29 FDA Operation Reveals Many Drugs Promoted as “Canadian” Products Really Originate from Other Countries, FDA News (Dec. 16, 2005), available at http://www.fda.gov/bbs/topics/NEWS/2005/NEW01277.html. 30 HHS Task Force Report, supra note 27, at 19–20. 31 FDA Warns Consumers Not to Buy or Use Prescription Drugs from Various Canadian Websites that Apparently Sell Counterfeit Products, FDA News, Aug. 30, 2006, available at http://www.fda.gov/bbs/topics/ NEWS/2006/NEW01441.html. 32 FDA News, supra note 29.

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sion offered by Rep. Chet Edwards (D-Texas) would have also permitted importation of prescription drugs from Mexico, but did not make it into the bill. Because this narrow exception applies only to those transporting prescription drugs “on their person” — as opposed to through the mail or another third party — it is unlikely to have a significant impact on the vast majority of U.S. citizens who do not live close to the U.S.-Canada border. The law also requires that imported drugs from Canada comply with the Federal Food, Drug, and Cosmetic Act (FFDCA). This provision is ambiguous, and potentially problematic, because FDA has never identified a Canadian drug that would be consistent with the requirements of the FFDCA, and recently the Eighth Circuit held that the requirements for Canadian drugs are different from those applicable in this country.33 Concurrently with the passage of H.R. 4551, the U.S. Customs and Border Protection (CBP) reversed its policy regarding the handling of prescription drugs mailed from Canada to the United States for personal use. In years past, CBP would send imported prescription drugs to FDA for a determination whether they should be allowed to enter the United States. FDA has for a number of years permitted individual importation for personal use in limited quantities (ninety days’ supply) of potentially life-saving drugs not otherwise readily available in the United States. On November 17, 2005, CBP began to seize shipments of imported drugs and notify intended recipients of the seizure by mail. Customers had thirty days to request that their packages be sent to FDA for an admissibility determination; otherwise the packages were destroyed. Several members of Congress expressed concern that this policy shift harmed consumers, particularly senior citizens.34 Perhaps due to political pressures, CBP recently reinstituted its previous policy; beginning October 9, 2006, CBP has once again been referring imported prescription drugs from Canada to FDA, where admissibility standards are expected to be more relaxed.35 This policy emerged historically as a matter of administrative discretion, not a legal or regulatory requirement. Apart from the limited individual transport for personal use exception, the importation of foreign pharmaceuticals remains illegal.36 Congress in 2000 first passed legislation authorizing pharmaceutical re-importation of a limited range of products, but only if the Secretary of Health and Human Services (HHS) certified that importation would pose no additional risk to health and public safety. In 2003 Congress passed legislation that provides a prescription drug benefit for seniors. This statute again includes a provision that would allow wholesalers and pharmacists to import prescription drugs from Canada to the United States. The statute also includes for the first time an individual use exception. As did its predecessor, the 2003 statute continues to contain provisions that require the HHS Secretary to certify that there is no public safety risk before the importation provisions will become effective. Under both statutes, Secretaries of HHS in both the Clinton and Bush administrations have consistently refused to make such a certification; they have instead threatened, and in a few instances taken, enforcement action against Internet pharmacies and U.S. entities offering to sell patented medications from Canada.37 33

In re Canadian Import Antitrust Litig., No. 05-3873, 2006 U.S. App. LEXIS 29394 (8th Cir. Nov. 30, 2006). Christopher Lee, U.S. to Stop Seizing Prescription Drugs Imported for Personal Use, Wash. Post, Oct. 5, 2006. 35 Susan Heavey, FDA Role Restored Over Mail-Order Drug Imports, Reuters, Oct. 5, 2005. 36 In re Canadian Import Antitrust Litig., 470 F.3d 785 (8th Cir. Nov. 30, 2006). 37 See Peter L. Glossop, Drug Importation from Canada: What Does Canadian Competition Law Have to Say?, 5 Antitrust & Intell. Prop. 30 n.13 (Fall 2004) (Newsletter of the Intellectual Property Committee of the ABA Antitrust Section) (citing letter from William K. Hubbard, Associate Comm’r for Pol’y and Planning, U.S. Food & Drug Admin., to Robert P. Lombardi, Esq., The Kullman Firm (Feb. 12, 2003), available at http://www.fda.gov/ ora/import/kullman; HHS Task Force Report, supra note 27, at nn.17 & 18; United States v. Rx Depot, Inc., 297 F. Supp. 2d 1306 (N.D. Okla. 2003). 34

308 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY This January, Congress introduced the Pharmaceutical Market Access and Drug Safety Act of 2007 (H.R. 380; S.242), a far-reaching bill that would amend the Federal Food, Drug, and Cosmetic Act (FFDCA)38 to allow for U.S.-licensed pharmacies and drug wholesalers to import qualifying medications from Canada, Europe, Australia, New Zealand, and Japan, and individual consumers to purchase prescription drugs for personal use from FDA-inspected Canadian pharmacies. A similar bill with the same name was presented in 2005 but never made its way out of committees; however, the result could be different this time, in part, as a result of heightened political sensitivity to demands for lower-priced pharmaceuticals. Under the proposed legislation, a qualifying drug — one for which there is a corresponding U.S. label drug — may be imported by a registered importer or from a registered exporter. The bill would establish requirements for registration and command the FDA to inspect places of business and facilities, and verify chains of custody for imported drugs. It also would waive the FFDCA’s limitation on re-imported prescription drugs, thereby creating a new prescription drug exception to the rule of national exhaustion of patent rights established in Jazz Photo39 and subsequent decisions of the U.S. Court of Appeals for the Federal Circuit. The proposed bill inserts the following sentence into the U.S. Code Title 35 – Patents: It shall not be an act of infringement to sue, offer to sell, or sell within the United States or to import into the United States any patented invention under section 804 of the [FFDCA] that was first sold abroad by or under authority of the owner or licensee of such patent.40 In addition, unlike prior bills, the proposed legislation does not require HHS Secretary safety certification. A study by HHS mandated by the 2003 statute concludes that safe importation of a few widely recognized drugs through recognized wholesalers in Canada (but not from anywhere else) could be possible at a realistic cost, but that its benefits for U.S. consumers would be small and would require extensive record-keeping and regulation as well as cooperation by Canadian entities.41 The report concludes that most of the cost savings relate to higher-priced branded pharmaceuticals and that savings many times greater could be saved by more widespread use of generics, which actually cost substantially less in the United States than they do under the price control regimes of foreign countries. This point was also made in a Department of Commerce study transmitted to Congress at the same time as the HHS Task Force Report.42 The Commerce Department report concluded that price controls in OECD countries deterred desirable innovation. It also noted — more debatably — that group purchasing through drug discount cards for the elderly might reduce some of the current disparity in pricing of well-known branded pharmaceuticals. A few years ago Congress also considered, but did not enact, legislation that, provided some safeguards were met, would have prevented pharmaceutical companies from refusing to supply established Canadian customers or to deny them permission to import even when the manufacturer believes there is far more product ordered than is needed for 38

Federal Food, Drug, and Cosmetic Act (FFDCA), 52 Stat. § 1040 (1938). Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002). 40 S. 242, § 4 (a)(d)(1)(B). 41 HHS Task Force Report, supra note 28. 42 U.S. Dep’t of Commerce, Int’l Trade Admin., Pharmaceutical Price Controls in OECD Countries: Implications for Consumers, Pricing, Research and Development, and Innovation (Dec. 2004), available at http://www. ita.doc.gov/drug pricingstudy. 39

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Canadian consumption. The proposed Pharmaceutical Market Access and Drug Safety Act would similarly prohibit pharmaceutical companies from engaging in selective dealing with foreign wholesalers and other tactics designed to limit parallel trade despite the fact that HHS and Commerce had both recommended against any such provisions in jointly transmitting their respective reports to Congress. One important question is whether affirmative efforts by pharmaceutical companies to limit imports from Canada presently comply with U.S. and Canadian antitrust or other law. Efforts by some companies to date have included limiting supply, placing restrictions against resale into their contracts for the sale of drugs sold in Canada, and terminating or threatening to terminate distributors who refuse to limit sales. These efforts have been attacked under antitrust and other laws, principally on the allegation that the companies acted in concert. These theories premised on an agreement among the competing companies do not seem well founded even on their face given the disparities in the timing and scope of actions taken and individual interest of each of the companies. In November 2006, the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal of antitrust allegations on the ground that the commerce affected was illegal under U.S. law to begin with and could not confer standing on those excluded from participating.43 The court held that because the Canadian prescription drugs at issue were not labeled in conformity with the FFDCA, they are “unapproved,” and their importation is prohibited by law. The Court explained that its focus on mislabeling as a source of illegality was a “manifestation of a congressional plan to create a ‘closed system’ designed to guarantee safe and effective drugs” for American consumers.44 Even though no federal statute bans expressly the importation of prescriptions drugs from Canada, “such an explicit country-by-country prohibition is unnecessary” because Congress has already “precluded importation of these drugs” through FFDCA restrictions.45 Thus, the absence of competition from Canadian sources in the U.S. pharmaceutical market is attributable to the fact that it is prohibited by federal law, rather than the conduct of defendant pharmaceutical companies. On a unilateral basis, under present law it is unlikely that efforts by pharmaceutical companies would be held to constitute a patent misuse either. (Misuse is a doctrine of U.S. patent law under which attempts to extend the rights conferred by patent law in an unreasonable or anticompetitive manner may make the patent unenforceable.46 As a preliminary matter, as the Eighth Circuit explained in its recent decision, the antitrust laws do not create liability for alleged efforts to restrain unlawful trade of commerce — here, Canadian drug imports that are likely both to violate the FFDCA and to constitute patent infringement. Even apart from this basic issue, vertical territorial restrictions are in general analyzed under the antitrust rule of reason and would be regarded as presumptively in aid of patent rights as well as in the legitimate business interests of the IP owners under Jazz Photo47 and earlier Federal Circuit case law.48 Indeed, if the restrictions are 43 In re Canadian Import Antitrust Litig., 470 F.3d 785 (8th Cir. 2006). One of the authors is a partner in, and the other was until recently associated with, a law firm that represents one defendant in this action and argued for all defendants in the Eighth Circuit. 44 Id. at 790. 45 Id. at 790–91. 46 American Bar Association, Section of Antitrust Law, Intellectual Property Misuse: Licensing and Litigation 1–3, 33–35 (2000). 47 Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002). 48 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992); see also Eveready Wholesale Drugs Ltd. v. Pfizer, Inc., 2004 U.S. Dist. LEXIS 20546 (S.D.N.Y. Oct. 13, 2004).

310 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY deemed to be related to patent rights, and if they are clearly expressed, they may conceivably fall within the exclusive jurisdiction of the Federal Circuit or at least be governed by Federal Circuit interpretations of antitrust and misuse law — interpretations generally favorable to patent owners.49 Certain conduct, such as pure refusals to supply, might be held to be permissible in any event.50 The proposed Pharmaceutical Market Access and Drug Safety Act, however, would in effect reverse the Eighth Circuit’s decision. Specifically, the bill would undermine the court’s grounds for dismissing the antitrust allegations by eliminating congressional intent to create a “closed system” by expanding the national exhaustion principle for drug patents to qualifying countries. The proposed legislation not only would allow for the import of qualifying prescription drugs from a number of countries, but also would prevent pharmaceutical companies from taking actions in order to limit parallel trade, and authorizes the FTC to seek treble damages for violations of its provisions. The bill’s expansive definition of “unfair and discriminatory acts and practices” includes: charging a higher price for a prescription drug to a registered exporter in a permitted country; denying, restricting or delaying supplies of a prescription drug to a registered exporter; refusing to do business with a registered exporter; causing there to be a difference (including a difference in active ingredient, route of administration, dosage form, strength, formation, manufacturing establishment or process) between a prescription drug for distribution in the United States and in a permitted country; refusing to allow FDA inspection of manufacturing plants; entering into a contract that restricts, prohibits, or delays the importation of a qualifying drug; and engaging in any other action to restrict, prohibit, or delay the importation of a qualifying drug.51 The legitimization of parallel trade between the two countries has been seen by some in the Canadian government (outside sparsely populated Manitoba, where several Internet pharmacies are located) as adversely affecting the interests of Canadian consumers. Canadian officials have expressed concern with the Internet drug export market and oppose becoming the drugstore for the United States because this role is inconsistent with the purposes of its pricing regime, jeopardizes supply to Canadian consumers, and ultimately undermines incentives to innovate in Canada and elsewhere.52 In addition, Canadian pharmacist associations and patients advocacy groups have lobbied both Canadian and U.S. governments in opposition to the U.S. Congress’s recent proposal to legalize bulk imports of Canadian prescription drugs.53 The HHS Task Force, noting the apparent lack of enthusiasm by any foreign government to assume duties designed to assure safety for U.S. consumers, predicted, “there will be significant pressure on foreign governments, including the Canadian government, to take actions to protect their supply of inexpensive pharmaceutical products.”54 An unusual trade issue could arise if the United States were to forbid private efforts to prevent U.S. resales by such means as the proposed legislation, while at the same time Canada determined that facilitating those 49 American Bar Association, Section of Antitrust Law, Report on the United States Court of Appeals for the Second Circuit (July 2002). 50 S. 1392, 109th Cong., 1st Sess. (2005), approved by a Senate Subcommittee as a rider to reauthorization of the FTC’s budget in July, 2005, but never enacted, would have established a reporting and monitoring regime for licensed importers from Canada and some other parts of the world and would specify that qualifying imports do not infringe patent rights. 51 S. 242, § 4(n). 52 Clifford Krauss, Internet Drug Exporters Feel Pressure in Canada, N.Y. Times, Dec. 11, 2004, at A-1, col. 3, A-5. 53 Canadian Groups Protest U.S. Bid to Legalize Bulk Drug Imports, The Canadian Press, Mar. 7, 2007). 54 HHS Task Force Report, supra note 28, at 77.

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sales to the U.S. was contrary to its national health and welfare interests. Strong legislation, such as that described above, would be necessary because it seems unlikely that the current administration in the United States will change policy. The Department of Justice (DOJ) has undertaken a significant initiative to stem imports that violate IP rights and has noted the possibility of a link between that activity and sale of counterfeits.55 VI. CONCLUSION Those judging the validity of efforts to limit parallel trade ought to engage in a serious rule of reason analysis that addresses the specific economic peculiarities of the pharmaceutical sector. Prices of pharmaceutical companies may still be determined largely by competitive forces in the United States — at least for now — but they cannot freely negotiate on an undistorted price to their Canadian customers any more than they can in Europe. The effect on Canadian consumers is ultimately likely to be detrimental if Canada becomes the drugstore for U.S. citizens rather than Canadian ones; in fact, because of Canada’s relatively small volume of sales, pharmaceutical companies could conceivably begin to refuse to sell important products there, and Canada would cease to be much of a drugstore for anyone. (Even the most far-reaching proposed legislation would condemn discriminatory treatment against qualified exporters to the United States in a country where a company makes sales but would not require a company to make any sales at all in a given country). In addition, the economic benefits even for U.S. consumers generally are likely to be small. In the first place, some of the price differential is likely to disappear into shipping, advertising, record keeping, and monitoring costs and intermediary profits. Second, even apart from the administrative cost, the volume of supply that will ultimately be siphoned off from Canada or other parts of the world will likely be a small proportion of total U.S. pharmaceutical sales, and it will likely have an equivalently small effect on overall prices for U.S. consumers. As noted, the HHS Task Force calculated that even if the laws were changed to encourage such imports, the maximum likely overall savings would be in the range of no more than one to two percent. And this modest savings comes with a substantial potential cost in terms of the quality and safety of re-imported products. Indeed, over thirty of the pharmaceuticals tested by the FDA in a recent operation were determined to be counterfeit.56 Encouraging re-importation of pharmaceuticals from Canada or other countries is an expedient panacea for a politician to announce to his or her constituents. This is not the place to argue whether pharmaceuticals are overpriced or debate all the things that the U.S. government could do to make better use of purchasing power and reduce inefficiency. Even on the assumption that U.S. pharmaceutical prices are in some meaningful sense too high, re-importation is not the appropriate remedy. Since the supply of pharmaceuticals for re-importation is finite at best, re-importations are not likely to have a significant impact on overall price levels. Already their growth has spawned fraud, profiteering, and outright counterfeiting, a serious concern of both industry and government. The long-term consequences of encouraging this conduct could be even more grave. They include loss of patent rights; health risks; reduction in innovation, production and investment; and the exacerbation of trade and diplomatic frictions between such countries as the United States and Canada. 55 U.S. Dep’t of Justice, Task Force on Intellectual Property Report (December 2004), available at http://www. usdoj.gov/criminal/cybercrime/IPTaskForceReport.pdf. 56 FDA News, supra note 29.

312 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY * * * Thank you very much. Panel, can I turn it over to you? PROF. KORAH: I spoke enough in the last one. I will keep quiet. MR. HEIDE: Fair enough. Susan? MS. MANNING: I think parallel trade is quite interesting, particularly because there is considerable harm that can emerge from parallel trade, in terms of consumers thinking that they are getting one product and, in fact, not getting that product, but getting another product. I think that is particularly true in the case of pharmaceuticals, but it is also true in other types of goods that come in. I was working with one client who was faced with a parallel-trade situation. In this case, they had a distribution network set up that was independently owned, and they had goods coming from Europe into the United States. Those goods were coming in. They had significant price erosion. What was occurring there was the situation where people who were buying these very expensive goods thought they were getting one product, and in fact they were getting that product — it was the same OEM product that was manufactured by the original equipment manufacturer — but what they did not know is that once that good came into the United States, it was not supported by the infrastructure in terms of servicing and maintenance, because they did not buy it from a dealer in the United States. As a result, they were getting a good price off of the original equipment, but they were paying through the nose because their product was not getting the free service, the free maintenance, and checks that they needed. There we had consumer harm — in my view, probably consumer fraud. I think these are situations where perfect information is not out there. When you get into situations with parallel trade, you really have to not only look at whether or not there is competitive enhancement with lower prices, but also look in the long term as to what the underlying, maybe not so obvious consumer harms are that are occurring. MR. HEIDE: And do you think economics can help? I am just referring back to what happened in Europe, where NERA was commissioned to do a report for the Commission and actually looked at different economic arguments. I think there were lots of arguments on either side. Perhaps it all boils down to just helping to clarify the issue. Or can you take it further than that? MS. MANNING: Of course, I am an economist, so I believe economics always helps. But I think what you can do in this case with economics, as, probably, NERA did in the study that you were mentioning, is look at all the different harms quantitatively and see whether or not parallel trade is helpful for the economy and for consumers, or if you look at it in the long run, taking into account all the potential consumer harm — lack of information and other types of things — whether or not the price erosion that benefits consumers in that market actually bears out in the long run. MR. HEIDE: John, would you like to give a perspective on the practical steps? MR. TEMPLE LANG: I want to make four points. First of all, I think it is worth saying that the price of pharmaceutical products is regulated in different countries in Europe, not because governments simply like regulating things, but because they are paid for by the national social welfare systems, and part of the regulation of the cost of providing the social welfare is to regulate the price of pharmaceuticals. I think it is important. That explains why it is difficult to alter the existing system. Secondly, I think it must be clear that a pharmaceutical company, even if it is dominant MR. HEIDE:

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for a particular product, must have a right to integrate forward and to distribute its own product right down to the retail level, if it so wishes. If you accept that, then you realize that there is no need for a pharmaceutical company to maintain an independent network of distributors, which would give rise to the kind of problem we are talking about. The third point: It seems to me that any pharmaceutical company now — and I think, probably, they were all doing it anyway before the GlaxoSmithKline judgment57 — should have a comprehensive policy on sales in Europe by which it will sell in the low-price companies at a price that, presumably, gives rise to a small profit but does not enable it to make a substantial contribution, or perhaps any contribution at all, to its research and development expenditures. That has to be paid for by the prices charged in the higher-price countries. It seems to me that if a pharmaceutical company has a rational policy that provides sources of funds for R&D in Europe, it can maintain the regime by which it supplies limited quantities to the low-price countries so as to maintain that setup. The last point, on the idea that the competition clauses of free trade agreements might be used to interfere with restrictions on parallel trade: I think there is no chance of that, because there have been several cases over the years which said that those clauses are not directly applicable. Therefore, I would have thought it was impossible for a national court to interpret them any other way. MR. HEIDE: Thank you very much. Thomas? MR. CHENG: In terms of allowing parallel trade, it is important to realize that there are certain types of goods for which there are special concerns of consumer protection, pharmaceuticals being one of them. But I think there is also a category of goods for which there really are not a lot of consumer-protection concerns. I do not see a lot of justification for imposing restrictions on parallel trade. For iTunes music, it does not seem to me that there is a compelling consumer-protection concern. Even for goods with substantial consumer protection issues, I wonder if relying on consumer protection laws would just be a better way of dealing with the issue — allowing parallel trade; and then, if there are consumer protection issues, using consumer protection laws to deal with them. At the same time, I think it is important to consider what would happen if there was unfettered parallel trade. I would imagine, from a producer’s perspective, you would start setting the price at a weighted average of what your perceived market is. If there was unfettered parallel trade in Europe, you would probably just set your price at a median or weighted average of some kind across Europe, which means that certain consumers will be priced out and certain consumers will be paying less. I wonder if that is something we want to happen. Particularly in the pharmaceuticals context, if there is relatively unfettered trade internationally, that could very well happen. Some pharmaceutical companies have been more willing to allow prices to drop, or even allow licensing, in developing countries. But if there is, increasingly, a great flow of parallel trade, and drugs produced in Third World countries start going into First World countries, things will change, and the pharmaceutical companies will just change their policy of allowing lower prices for developing countries. MR. HEIDE: Thank you very much. 57 Case T-168/01, GlaxoSmithKline Services Unlimited v. Commission of the Euro-pean Communities, 2007 O.J. (C 42) 11, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2007:042:0011:0011: EN:PDF.

314 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY We will open it up to questions. One issue I am quite keen to get James’s perspective on: If we look at what is happening in Europe with regards to pharmaceuticals, a lot is being driven by competition law — the dual-pricing case that Chris was talking about, and also the Syfait case with regards to stock-allocation schemes.58 In the United States, they seem to be looking to legislation, doing it that way, rather than resorting to the antitrust rules. Do you think that is a better approach? Is it likely to yield a better result? MR. KOBAK: Asking whether our Congress will yield a better result is a pretty loaded question on any count. There is a potential antitrust issue. But because of the way our Food and Drug Act works and the way it has been interpreted in an Eighth Circuit case,59 there is really not much occasion for it to come into play. I think if HHS were ever to say, “Yes, there are some groups of products form some parts of the world that can come into the United States” — and companies do now put different restrictions on people — I think at that point you would get to the question of whether competition law or applied. In the United States, we also have a doctrine of patent misuse that might apply. I personally think it would probably be hard for antitrust law to reach that conduct the way it is presently interpreted under the rule of reason, and particularly with the Jazz Photo case,60 where you would always have a defense that what you were doing was more or less in aid of your patent rights. That is not to say that you might not have something like a big block-buster pharmaceutical product that was pretty much its own market, and maybe in those circumstances, antitrust law would reach it. But that really has not been tested in the United States. Until our law changes, I really do not see how it will be tested, at least in the pharmaceutical area. MR. HEIDE: What I also find interesting about the proposed U.S. law is that it is essentially trying to address part of the problem by expanding the personal-use exception. MR. KOBAK: There are a lot of states and cities and so forth that have actually passed statutes saying that their citizens can do that or they will purchase for them. It is all preempted by the federal laws. But that has a lot of appeal to a politician, to say to the seniors — and more and more of us are qualifying as seniors every day — “Under this statute, you could go to Canada and you could, if you could show that it was for your own use, buy a ninety-day supply and get cheaper drugs.” So I think you might see something like that getting passed at some point. But I am not an expert on the politics behind this. Obviously, there is a lot of lobbying going on, on both sides. MR. HEIDE: May I open it up to the floor at this stage? Questions, please. QUESTION [Philip Carpio, U.S. Customs and Border Protection]: I am with the U.S. Customs and Border Protection, so the pharmaceutical issue is of interest to my agency. This question is for Mr. Kobak. Other than the pharmaceuticals, are you aware of any other issues of parallel trade occurring in the United States for domestically manufactured goods? That is obviously something that we want to keep an eye on, if in fact it is occurring. Part B to this question: It seems like the focus here has been on the antitrust remedies that might be available or the patent remedies that might become available. But if these 58 Case C-53/03, Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. GlaxoSmithKline, [2005] E.C.R. I-4609 (Opinion of Advocate General Francis Jacobs, Oct. 28, 2004), available at http://curia/ europa.eu/en/actu/communiques/cp04/aff/ cp040087.en.pdf. 59 In re Canadian Import Antitrust Litig., 470 F.3d 785 (8th Cir. 2006). 60 Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002).

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are, in fact, licensed, correctly trademarked goods, there are importation restrictions on marking that would allow our agency, for example, to seize marked goods that would be redirected back into the country. I am curious as to whether there are any other issues like that. MR. KOBAK: I think there are issues. Pharmaceuticals have attracted a lot of attention. For a long time, people have been concerned about that. My personal feeling, just from clients that call up and ask questions about ITC proceedings and so forth, is that people are starting to think about that more than they have in the past. I am not too sure to what extent they are actually availing themselves of those remedies. I know a lot of times the problems that you have, even with being able to stop something at the border, is that when people realize they have a counterfeit problem, it is after the stuff is in the United States. So one of the things people are always looking for is a way to kind of restrict the distribution chain, to limit the extent to which it will happen. That is where the antitrust focus is. QUESTION: The opposite of parallel trade in the United States is around the regulatory issues about the safety of the product. Europe has a fairly well-developed system of regulating parallel traders. Repeatedly in Europe you hear people saying that quality is not really an issue in the European parallel trade market. It just seems like an obvious solution to the quality issue is to do what Europe has done, which is to license the parallel traders, so you have some assurance of the quality. That seems like a fairly manageable problem. I think there are seventy votes in the Senate now in favor of parallel trade. The last vote I looked at, every single Democrat and about half the Republicans were supporting parallel trade in the U.S. Senate, on a straight up-and-down vote. The bigger issue in pharmaceuticals is, looking forward: Should Americans be paying considerably higher prices than people in other high-income countries for the same products? Is that good public policy or bad public policy? Pharma’s position is that it is good public policy, because they just want high prices. You cannot blame them for wanting that. Why wouldn’t they want that? But in terms of public policy, does it make much sense for prices to be radically different between high-income countries? I can understand the concern about countries that are lower-income — Eastern Europe, for example, or Mexico or other places. But just in that area, I think that is the important public policy issue. If you had more liberalized parallel trade with the United States and other highincome countries, you would probably see an increase in the prices in those countries as well, because people would anticipate that if they accept a certain price in another country, it would be imported back to the United States. I am sure it will probably raise prices some places and lower prices other places. MR. KOBAK: I tend to represent drug companies. I do not think you can belittle counterfeiting. Maybe if you had a really good system of inspection and so forth, that would alleviate that. But certainly my clients have begun seeing a lot of that. People go to buy on the Internet, and it turns out that it is not only from Canada, but it is not Viagra, or whatever it was supposed to be. I think that is a problem that you can’t belittle. QUESTIONER: From what I hear about counterfeiting in Europe, it was high-quality counterfeits, not imitating parallel-traded products or generic products, but imitating the local thing. You have the capacity to do pretty slick packaging — counterfeiters do. One of the problems in counterfeiting is that you have no barrier between the prices of the drugs and the cost of manufacturing, so it attracts a criminal element. It is almost like

316 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY counterfeiting cash to counterfeit a drug. You could even make a high-quality product fairly cheaply. Another approach people have we talked about, and some people in the European Commission have talked to us about, is the idea of a different business model for innovation that does not tie the R&D incentive to the price of the drug, but rather directly rewards drug developers for the impact of the invention on health-care outcomes. In that kind of situation, you could have very different contributions coming from, say, Poland, Hungary, Mississippi, the Bronx, and Manhattan, or wherever. You have a reward system for inventors that is not tied to the product. You have a competitive generic market for the products, but you would have highly differentiated contributions from countries based upon their percapita incomes. That is a radical change over the current system. But if the numbers are right, it could be designed to be just as profitable for the pharmaceutical industry as the current system. MR. HEIDE: May I come in just in relation to that, not from the U.S. perspective, but from the European one? It is always very good to hear people say what Europe is doing is good and the United States should follow. It does not tend to happen that way round very often. But, in terms of marketing authorizations, although within Europe you can paralleltrade without the need to get a full marketing authorization, if you try to parallel-trade from outside Europe, like from the United States, then you will need one. So it is actually quite similar to the United States, if you treat the whole European Union in a similar way to the United States. I would just pick up on that point. But I take the general point. It may be that, once America copies Europe, Europe will have to copy America, if people go down that line. The other point I wanted to pick up on, which is a more general one, is in relation to Ramsey pricing,61 which Val had mentioned earlier — this idea that we have this pot of R&D to pay for somehow, and discriminatory pricing is a good way of paying for it. Ramsey pricing was about paying for utilities, where there was a set amount that had to be recovered. Obviously, the difficulty of applying Ramsey pricing to pharmaceuticals is that there is no cap to the overall recovery. It is not that someone is saying, “This is how much we are going to recover, and now we are going to divide it up among the countries or consumers.” The second thing is, dividing it up by countries is a fairly rough and ready way of price discriminating. To say to consumers who are rich in the United States, “You are in a rich country; therefore, you have to pay more” might be acceptable. To say to poorer consumers in the United States, “You happen to live in a rich country, so tough luck; you have to go with the high prices” — there is not a lot of sensitivity to applying Ramsey pricing to pharmaceuticals. QUESTION: A lot of people, when they say Ramsey pricing — my background is in economics, and I used to do a lot of regulatory work — they do not like to say monopoly pricing. It just sounds more elegant and higher-tech to say Ramsey pricing. But they leave out an important part of what Ramsey did, which was the revenue constraint. Ramsey pricing is the idea that you have some fixed cost and that you allocate it among people, in the same way that a monopolist would, up to the point where you have to to cover that, but not beyond. Monopoly pricing is just monopolists following their natural 61 Ramsey pricing, a linear pricing scheme designed for the multiproduct natural monopolist, is concerned with prices that maximize the sum of industry consumer surplus and profits. See Frank Ramsey, A Contribution to the Theory of Taxation, 37 Econ. J. 47 (March 1927).

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instincts to just get as much as they can. Most people, when they refer to Ramsey pricing, really mean monopoly pricing, but they just do not want to sound like they are saying monopoly pricing. A real way to do Ramsey pricing is through price distributions as they relate to linking the R&D incentive and price. You really can decide how much money you want to pay for innovation, as an innovation reward. Is it $100 billion from the U.S. market? What would the number be from Europe, where prices are quite a bit lower right now? Then you let prices really fall to the marginal costs. That way, the poor person in the rich country would not face an access barrier. Counterfeiters would not find it that interesting to enter the market. You would have an efficient product market, but you would have a highly differentiated distribution of payments from the country, and you get closer to what I think Ramsey was looking at. You would charge more in Germany per capita than you would in, say, Hungary or some country like that. But I do not think the current situation is completely sustainable. I think it is really: What is the business model for paying for innovation in the area of medicine, where the Internet is making prices much more transparent and where there are all sorts of other problems? I think Europe is facing a lot of problems in Eastern Europe right now. The accession is really going to change their views eventually, when the accession countries get more political power. A lot of the very strong IP regimes in Europe now are causing problems in Eastern Europe, like the orphan drug extensions, the eleven-year data exclusivity, et cetera. They are really causing a lot of resentment. There are ten states in Europe that have less than half the per-capita income than the rest of the countries do. It is interesting to see how Europe is going to play things out with the accession. I know there are restrictions on parallel trade from Eastern Europe to Western Europe, but those will eventually be phased out, too. MR. HEIDE: Val, in the last session you made some comments about the dual-pricing case. I think they are quite important, and it would be a good idea to give a synopsis of those points now. It is a very important case in terms of what the court has actually done, moving things from the object box — or, as the Americans say “per se” — into an effects analysis, or the “rule of reason,” as they call it here in the United States. PROF. KORAH: One used to think that certain things had the object of restricting competition, where they limited the freedom of people to do what they want, such as the liberty of the wholesaler to sell in the most profitable way. Parallel trade was a very important aspect of the Common Market. There was no hope of a significant export ban or deterrent being upheld. Now the CFI seems to have changed that. Dual pricing no longer necessarily has the object of restricting competition. The Commission, or whoever is alleging illegality — it might be in a private action before a court — is going to have to prove that it does harm competition. They are not probably going to have to prove it precisely, but at least they are going to have to produce some sort of case. That is, I think, a completely radical U-turn from what started in Consten and Grundig.62 Consten and Grundig itself was a U-turn from La Technique Minière63 three weeks earlier. But there were only five judges in La Technique Minière. There were seven, a full court, in Consten and Grundig. Consten and Grundig has been held treated as the bible 62 Joined Cases 56 & 58/64, Etablissements Consten SA and Grundig-erkaufs-GmbH v. EEC Commission, 13 July 1966, [1966] E.C.R. 299, [1966] C.M.L.R. 418, C.M.R. 8046. 63 Case 56/65, Société La Technique Minière v. Maschinenbau Ulm GmbH, 30 June 1966, [1966] E.C.R 235, [1966] C.M.L.R. 357, C.M.R. 8047.

318 SESSION IV: A NTITRUST/COMPETITI ON LAW & INTELLECTUAL PROPERTY for many years. From the date of its decision in 1966 until about ten years ago, it was considered a serious heresy to deny this. That, at any rate, has changed in the view of this case in the CFI. It was a chamber of extended composition. There were seven of them, not the normal three. How important it is, I think, must depend on what the ECJ decides later. It is, of course, a vertical restraint. Vertical restraints, for many years, were considered by DG IV, as it then was, as being particularly dangerous, because they divided the Common Market. Producers tended to have one distributor for the whole of a Member State . This is not the current thinking about vertical restraints. The Commission went into a great debate internally from the late 1980s. We did not know about it much outside the Commission. I am sure John Temple Lang, who was in the Commission, must know all about it. It appeared, at any rate, by the end of the 1990s, that the Commission had quite changed its views on vertical restraints. In its Guidelines on Vertical Restraints64 it pointed out the efficiencies those agreements might bring. That does not mean to say that all vertical restraints were good, but it was very far from the thinking in the 1960s and 1970s. I have not seen any signs of the Commission going back on that. The CFI judgment is interesting, because if the Commission was minded to change from Consten and Grundig and the Court allows it a wide margin of appreciation, it and just might follow it. Perhaps that would take rather more years than we are likely to have before the judgment of the ECJ in the GlaxoSmithKline case,65 or whatever it comes to be called. MR. HEIDE: Thank you very much. If the Court does actually follow it — and this is for John, Val, and Chris — do you think it is restricted on its facts just to pharmaceuticals, or do you think this argument — something that is not in the object box could actually be put into the effects box — could apply more generally? I think that would be very helpful to a lot of companies. Clients that I advise in terms of distribution in Europe are often constrained by the rules and find them too restrictive. Those rules were referred by Chris before, the EC Vertical Restraints Block Exemption under EC Competition Law. Any comments? PROF. KORAH: I think it is going to be very limited. The first chink in the armor, I suppose, was the opinion of Advocate General Jacobs in Syfait, and he made it quite clear that what he was saying was confined to the pharmaceutical industry. It might be extended — I do not know enough about the industry — to something like pesticides or herbicides, where consumers would probably want the producer to have very considerable control over its products after they have gone to the wholesaler. I am not going to say there is no other industry, but I would be very surprised if there were many other industries found. Again, in the GlaxoSmithKline case, the recent one, the CFI was very narrow in what it was talking about. But all things change. It was unthinkable that Consten and Grundig would be doubted, until about ten years ago. Joliet doubted it in 1967;66 I doubted it in 64 European Commission, Guidelines on Vertical Restraints (13 Oct. 2000), 2000 O.J. (C 291) 1; [2000] 5 C.M.L.R. 1074; available at http://europa.eu/scadplus/leg/en/lvb/l26061.htm. 65 Case T-168/01, GlaxoSmithKline Services Unlimited v. Commission of the European Communities, 2007 O.J. (C 42) 11, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2007:042:0011:0011: EN:PDF. 66 See Rene Joliet, Rule of Reason in Antitrust Law 174 (1967).

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1972;67 then Ian Forrester and Christopher Norall produced a very interesting Common Market Law Review article.68 Slowly, more and more people have doubted it. So it is very difficult to judge what will happen in ten years’ time. MR. STOTHERS: Just picking up on that, I think the CFI’s decision is very interesting because it is so heretical. But I do wonder what the practical impact is going to be. It is a bit of what they describe in software patents as “The Lord giveth and the Lord taketh away.” Essentially, what they have done now is to say the object may not be anticompetitive (in pharmaceuticals and perhaps in certain other sectors), but then look for an effect in the form of consumer harm. In virtually any case of parallel trade, the parallel trader is either selling at a lower price or providing something that consumers could not get access to. So in almost every case there is likely to be an effect. It is going to be a fairly unusual case where there is no consumer harm and, thus, no anti-competitive effect. From my perspective, I think the Court has wasted an awful lot of pages coming up with this sort of petty heresy. It is like the little boy who rings the doorbell and then runs away. Now the Commission and the courts are going to have to spend a lot of paper going through the economic analysis each time, but I am not sure it is ever going to come to a different conclusion than it would under the per se rule. MR. HEIDE: I would disagree with that, because to be able to say to a client that they can actually come up with some justifications, instead of just being faced with “that’s in the object box,” is absolutely crucial. It may require more lawyers’ time, of course. But if they feel that they can actually come up with some justifications for what they are doing, that is very, very important. MR. STOTHERS: That is justification under Article 81(3). Under Article 81(1), there is still going to be an effect on consumers. You may be able to justify that effect, but the object/effect debate I think is pretty sterile. MR. HEIDE: I disagree with that. PROF. KORAH: One should also add that under Article 81(3), the onus is on the person alleging legality, whereas under Article 81(1), it is on the person alleging illegality. It seems to me a pretty heavy onus of proof. So it does make a difference whether it is Article 81(1) or Article 81(3) — less than it used to, before the new procedural reg. MR. HEIDE: John, any comments? MR. TEMPLE LANG: Only one comment. The special circumstances in the pharmaceutical industry, I think, do not arise anywhere else. But they are the justification, if there is one — and I think there is — for what pharmaceutical companies can do, if they do it cleverly. But I do not think it is an object-and-effect problem. I think it is proving a justification under 81(3). MR. HEIDE: Thank you very much. MR. STOTHERS: May I ask a question? The panel might want to pick it up, or others in the audience may. Has anyone got a good reason, when you are talking about parallel trade, why an individual is allowed to parallel import for personal consumption, up to fairly high levels, so long as they do it in person; but if they do it over the Internet, in exactly the same volumes, they are not allowed to do it — beyond blocking parallel trade? MR. KOBAK: Because Congress says so. That is the only justification I can see. MR. HEIDE: I think the drinks are awaiting. With that, thank you very much. Please join me in giving a hand of applause to everybody. 67

See Valentine Korah, EC Competition Law and Practice 125 (6th ed. 1997). Ian S. Forrester & Christopher Norall, The Laicization of Community Law: Self-Help and the Rule of Reason: How Competition Law Is and Could Be Applied, 21 Common Mkt. L. Rev. 11, 22 (1984). 68

SESSION IP V: PATENT PART A: JAPANESE DEVELOPMENTS

SESSION V: PATENT

Part A: Japanese IP Developments

Moderator JOHN RICHARDS

Ladas & Parry LLP (London)

Speakers Prof. Kazuo Makino Omiya Law School (Omiya, Japan)

TSUYOSHI ISOZUMI

Deputy Director, International Affairs Division, Japan Patent Office (Tokyo) EIJI KATAYAMA

PROF. TETSUYA OBUCHI

Abe, Ikubo & Katayama (Tokyo)

Faculty and School of Law, University of Tokyo

HON. KOICHI TANAKA

Judge, Intellectual Property High Court of Japan (Tokyo)

Panelists PROF. SOUICHIRO KOZUKA

HAROLD C. WEGNER

Faculty of Law, Sophia University (Tokyo)

Foley & Lardner LLP (Washington, D.C.)

MR. RICHARDS: Good morning. Our panel discussion this morning is on recent developments in Japan. We have a very distinguished panel: Mr. Isozumi from the Japan Patent Office will speak first; followed by Judge Tanaka from the Intellectual Property High Court in Tokyo; Eiji Katayama, a very well-known and well-respected patent practitioner; and Professor Obuchi. After that we will have a discussion with the remaining panel members. Without saying anything more, Mr. Isozumi, please start.

322 SESSION V: PATENT Mutual Utilization & Enhanced Work-Sharing Patent Prosecution Highway and New-Route Proposal Tsuyoshi Isozumi Japan Patent Office Thank you. Good morning, everyone. My name is Tsuyoshi Isozumi. I am from the Japan Patent Office. Today I would like to introduce to you the activities of the Japan Patent Office, especially the mutual utilization of search and the examination of results and enhanced work sharing. First, let’s look at some statistics for 2005. Worldwide, 1,600,000 patent applications were filed. Look at the patent activity figures for the Trilateral Region. The Trilateral Offices are the Japan Patent Office (JPO), the European Patent Office (EPO), and the U.S. Patent and Trademark Office (USPTO). You may be very surprised at the number of patent applications filed with and duplicated among the Trilateral Offices. In 2005, 950,000 patent applications were filed with the Trilateral Offices. Of these 950,000, there was an overlap of 230,000 applications. Therefore, harmonization and mutual utilization are very important for improving the infrastructure for processing global applications.1 In terms of harmonization, the discussion of substantive patent law harmonization is still in progress. This will result in greater predictability in obtaining patents abroad. Mutual utilization of examination results in reduced applicants’ burden. I will explain. PATENT PROSECUTION HIGHWAY One of the major developments is the Patent Prosecution Highway (PPH). The Patent Prosecution Highway is a framework between two offices. If a patent application has been determined to be patentable in the office of first filing (OFF), the corresponding application is qualified for accelerated examination in the office of second filing (OSF). Users benefit in numerous ways from the PPH Network. For example, users can obtain a patent quickly. Let me explain. With regard to the PPH applications in Japan coming from the United States, the time required for the JPO to issue an OFF action has been reduced from twenty-six months to two-to-three months. The twenty-six months is the time required for the processing of a normal application. If you use the PPH, it will be reduced to two-to-three months. In addition, the mutual utilization of examination results improves the examination quality because examiners in the OSF refer to the examination results of another OFF. So the quality is improved. The PPH is now spreading worldwide. Japan and the United States started a pilot project in July 2006.2 Japan and Korea started a PPH in April 2007.3 The Japan-United 1 The Standard Format of patent application was agreed upon at the Trilateral (JPO-USPTO-EPO) Conference held in November 2006. The Trilateral Offices will conduct a pilot program from a practical perspective with the cooperation of users during FY2007, and take necessary measures, including revision of PCT regulations and national regulations with the aim of the coming into use of the Standard Format in April 2009. 2 At a Jan. 8, 2007 meeting held between Minister of Economy, Trade and Industry Akira Amari and Carlos M. Gutierrez, Secretary of U.S. Department of Commerce, the JPO and USPTO agreed the full implementation of the PPH to start in July 2007, based on the result of the PPH pilot program. The JPO and USPTO will encourage other countries’ participation, aiming to establish a PPH Network centered around the JPO and USPTO based on the Joint DOC-METI Initiative for Enhanced U.S.-Japan Cooperation on IPR Protection and Enforcement and other Global Issues, agreed upon between the two ministers at the Jan. 8, 2007 meeting. 3 At a conference held on Dec. 27, 2006, the JPO and the Korea Intellectual Property Office (KIPO) agreed upon the launch of the PPH in April 2007.

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Kingdom PPH is planned to begin in July of this year. The United States and the United Kingdom are now discussing the start of a PPH. Such a global network of PPHs will provide applicants and users with expeditious, inexpensive, high-quality patent protection. The JPO is also proposing a new route in the context of enhanced work sharing. The new route is similar to the Patent Cooperation Treaty (PCT),4 but there is no international phase. The new route has three main features: 앫 A filing with the OFF (applicant’s home country) is to be considered a “simultaneous filing” with the IP offices of other countries. This will reduce filing costs. 앫 The OFF examines the application first. Thereafter, the OSF utilizes the search and examination results of the OFF. This avoids duplication of search/examination and the applicant’s procedural cost is reduced. 앫 The applicant defers submission of translation to the OSF until search/ examination results of the OFF have been verified. Thus, there is no unnecessary cost of translation. Applicants are given a thirty-month period in which to make a decision. We believe this proposal will enhance work sharing and provide sufficient flexibility for users and applicants.5 As I said, the mutual utilization of search and examination results is now expanding globally. Therefore, the JPO has created guidelines for examiners to effectively exploit the search and the examination results of foreign patent offices.6 This will help examiners to utilize the examination results of other offices. Through effectively exploiting the search and examination results of foreign patent offices, we have been trying to reduce the examination workload and improve examination quality. Especially, the search and examination results should be exploited effectively for applications examined under the PPH. Following the guidelines, examiners take into account the prosecution history and examination results of a foreign patent office and conduct an additional prior art search, if necessary. Due to time constraints, I cannot explain the details of the contents, but important points include: 앫 The examiner does not need to conduct an additional prior art search when he/she can conduct an examination appropriately and efficiently by utilizing the search/examination results of the foreign patent office which pertain to the related invention in the application being examined. 앫 When the examiner conducts an additional prior art search, he/she is supposed to refrain from searching in an area in which the foreign patent office has already conducted a search unless he/she is convinced that a search in such an areas is necessary.

4 World Intellectual Property Organization, Patent Cooperation Treaty, Done at Washington on June 19, 1970 (enacted Jan. 21, 1978), amended Sept. 28, 1979, modified Feb. 3, 1984 and Oct. 3, 2001 (effective Apr. 1, 2002) [hereinafter PCT], available at http://www.wipo.int/pct/en/texts/pdf/pct.pdf. 5 The JPO has formulated and released Implementation Plans to Achieve Mid-Term and Long-Term Goals for Expeditious and Efficient Patent Examination based on the Intellectual Property Strategic Programs. For FY2007 the JPO will adopt the AMARI Plan 2007 as the replacement of an Implementation Plan, and will basically apply the same approach for FY2008 and thereafter. 6 Japan Patent Office, Guidelines Concerning the Use of Prior Art Search/Examination Outcomes of Foreign Patent Offices, available at http://www.jpo.go.jp. See also Ministry of Economy, Trade and Industry (METI), Advanced Measures for Accelerating Reform and Innovation Plan in Patent Examination (Jan. 25, 2007), available at http://www. jpo.go.jp/torikumi_e/hiroba_e/pdf/amari_plan/amari_plan.pdf [hereinafter METI Plan].

324 SESSION V: PATENT 앫 In considering the prior art of a foreign patent office or other aspects regarding the patentability of an invention, the examiner is supposed to take into account the prosecution history and examination results of the foreign patent office. If you would like to learn more about the PPH7 or our new route, please feel free to contact me or the Japan Patent Office. MR. RICHARDS: Judge Tanaka.

Speedy and High Quality Disposition IP High Court Judge Koichi Tanaka Intellectual Property High Court of Japan (Tokyo) I. INTRODUCTION A. TWO CATEGORIES OF PATENT LAWSUITS

In Japan, there are two categories of patent lawsuits. The first category involves infringement lawsuits seeking injunction and damages. The other category is lawsuits that seek the cancellation of decisions made by the Japanese Patent Office Appeal Board over the patentability or validity of patents. The IP High Court, which entered its third year since its establishment, enjoys exclusive jurisdiction over both types of cases, so we can render unified judgments when the two types of the case are pending before the IP High Court. B. STATISTICS

We accept about 600 newly filed lawsuits against appeal/trial decisions made by the Japanese Patent Office Appeal Board each year, while we accept about 100 appeal cases from district courts. I would like to focus my speech on the former, which comprise over 80 percent of all cases. Concerning the cancellation cases, the average period from filing to disposition is about nine months, and we enjoy the reputation of high quality of our judgments. In my opinion, the first main reason for this “speedy and high-quality” service has been the more intensified case management system taking root in the IP High Court. The second main reason for it has been the ample technical aid resources. I would like to comment these two factors. II. CASE MANAGEMENT A. PROPOSAL Efforts to improve management of lawsuits against Patent Office Appeal Board decision had already started during the era of the IP Divisions of the Tokyo High Court. In 2002 a project team of judges was established. After they studied the existing case management methods, they proposed a more intensified case management system in their published report. Those proposals were brought into practice by the IP Divisions in 2003. The main contents of the proposal was as follows: first, the court should encourage parties to submit briefs and evidence by the date of a hearing agreed upon by the parties;

7 For information on detailed procedures for applying the PPH pilot program before the JPO, see http://www.jpo.go.jp/torikumi/t_torikumi/pdf/highway_pilot_program/ 1e.pdf.

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second, judges and parties should discuss factual and legal issues intensively in the hearing; third, parties should be given enough time in the hearing to give explanations on technical or scientific aspects of the case to the judge. B. GUIDELINES

The establishment of the IP High Court triggered further efforts by judges across divisions to improve our case management, which ended up in the guidelines for parties of cancellation lawsuits. The contents of the guidelines are mainly based on the proposal that I referred to the above. However, they have special contents. That is, the guidelines contain a very concrete case management method. The method aims at completing discussions on basic technical matters, factual issues, and legal issues in virtually two hearings as a whole. C. CURRENT PRACTICE

One model proceeding is as follows: The first hearing is held after the plaintiff submits evidence and the first brief, in which the plaintiff discusses its allegations in detail. In the first hearing, a judge discusses with parties the first brief of the plaintiff and sets deadlines for the defendant’s evidence, the first brief, and the plaintiff’s second brief. In the second hearing, the judge and the parties intensively discuss the issues of the case. After the second hearing, the final hearing is held for the case to be concluded. Written judgment is rendered soon after the final hearing. For example, in the second division’s practice, the period is about a week. Roughly speaking, the period from filing to the first hearing is about two months, the period from the first hearing to the second is about three months, and the period from the second to the final hearing is about three months. The judgment is rendered soon after the final hearing. As attorneys are aware of the importance of well-tried and speedy trials in terms of the business decision-making process, not only for plaintiffs but also for defendants, they are cooperative with judges in this area. III. CONDUCTING PROCEEDINGS AND NARROWING ISSUES FROM A JUDGE’S POINT OF VIEW A. FROM FILING TO THE FIRST HEARING

The judge utilizes this period in order to understand the patented invention and compare the invention with the prior art and relevant basic technical knowledge around the case. We read through claims, specifications, drawings, prosecution history, and other documents and analyze them in advance. As the plaintiff should express what part of the decision can be admitted and what part cannot and clarify the concrete grounds of reversal of the Patent Office’s decision, the court can assume what is the genuine issue of the case to some extent. To ascertain what is the genuine issue from the lawyer’s point of view is crucial. To do that, claim construction always becomes the starting point. The objective of the first hearing is to define and narrow the genuine issue appropriately by clarifying the alleged grounds of reversal of the Patent Office’s decision. The court sets deadlines when both parties should submit their documents. B. FROM THE FIRST HEARING TO THE SECOND HEARING

After clarifying the alleged grounds of reversal thorough the first hearing, the defendant starts to prepare his or her first brief against the plaintiff’s brief and evidences. When the defendant submits the brief, the judge can grasp a total image of the case and understand

326 SESSION V: PATENT the issues and the parties’ assertions correctly. In this period, the judge thinks over the case from many perspectives. The judge can be given more detailed help by court research officials and expert commissioners. When the plaintiff’s second brief is submitted, the case image becomes clearer than before. The second hearing is crucially important because the judge gets a concrete impression of which side’s assertion is more persuasive. C. FROM THE SECOND HEARING TO THE RENDERING OF A WRITTEN JUDGMENT

When the second hearing is over, the judge can have a clear picture of which side is to win the case and what is the proper reasoning of the consequence. The judge then starts to write the judgment. The judge can receive report written by judicial research officials. However, to write a judgment is a big burden on judges, as even the in the average type of the case the amount of pages is over thirty. The judge should write, on average, one judgment per week. IV. JUDICIAL RESEARCH OFFICIALS AND EXPERT COMMISSIONERS How to get scientific knowledge is also a big problem for the court. Judges are lay persons with respect to technology, so we need assistance in understanding technical and scientific matters. Judicial research officials are full-time court employees. They are appointed mainly from the staff of the Japanese Patent Office, and a few are patent attorneys in private practice. There are seven research officials at the Tokyo District Court, three at the Osaka District Court, and eleven at the IP High Court. The judicial research official usually submits his or her report on the case to the judge. The expert commissioner system was introduced in 2004. They are part-time staff of the court, and are appointed from a list of more than 200 registered scientists, such as university professors and research institute researchers. When a particular technology becomes the center of dispute in a case, the judge will appoint three relevant expert commissioners for the case. The appointed commissioners will then provide their specialized knowledge and contribute to the smooth progress of the case. The expert commissioner is different from the expert witness in that the expert commissioner is not expected to comment on the conclusion of the case. The main difference between them is that judicial research officials cover a relatively wider area of general science; on the other hand, expert commissioners are expected to play a role in a very advanced and specialized area of technology. This two-tier system is expected to raise the courts’ ability to deal with difficult cases. V. CONCLUSION Intensified case management and various technical aids are driving factors that lead to speedy and high-quality disposition of cases by reducing unnecessary time in the proceeding and by getting attorneys’ cooperation. Also from now on, the IP High Court has to continue innovating upon the dispute resolution system. * * * MR. RICHARDS: Thank you. Mr. Katayama, from the practitioner’s point of view. * * *

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Japanese Patent Recent Developments: View from Industry and Attorney Eiji Katayama Abe, Ikubo & Katayama (Tokyo) My given theme is recent developments in Japanese patent from the practitioner’s view. I would like to cover these issues: 앫 The obviousness issue was discussed yesterday, but if I have some time I will touch on the question: Is it too harsh or not? 앫 Claim interpretation — Different standards for validity and infringement. 앫 Injunctive relief — Whether to restrict patent right for research tool and technical standard? 앫 Protection of licensee in licensor’s bankruptcy. I. CLAIM INTERPRETATION The first issue is claim interpretation, now in dispute in Japan. Here in the United States you have a Markman Hearing8 and you determine what the meaning of the claim is for both validity and infringement purposes. You have a unanimous interpretation as a result of a Markman Hearing. On the other hand, in a country like Japan, where the basic idea is a dual system for invalidity and infringement, we have a different way of interpreting the claim language when facing infringement and when facing invalidity. Historically speaking, the Japanese court, especially the infringement court, tried to restrictively interpret the claim based upon the description in the patent specification. In that way, sometimes a very narrow interpretation of the claim language occurred. On the other hand, when you file a patent application to the Patent Office, the patent examiner likes to read the claim literally. This is natural, I think. In the appeal from the Patent Office decision, the court says that the claim language should be interpreted literally. So if you have a certain specification and if the claim language is too broad as compared to the disclosure in the specification, then the patent is rejected. That has been the historical approach, in which two ways of interpreting the patent claim language existed in Japan. Whether that is okay or not is the issue now being discussed in Japan. This very issue was to be argued and determined in the Grand Panel of the Intellectual Property High Court recently in the Hynix Semicionductor v. Toshiba case. Unfortunately (or fortunately), the case was settled. I was representing one of the parties. So, unfortunately, the Grand Panel opinion on this interesting issue did not come. II. INJUNCTIVE RELIEF The next issue rather repeatedly argued in Japan is, like in your case, whether injunctive relief is really preferable or not. Or can the court reject injunctive relief requests when it is

8 Pre-trial hearing during which a judge hears testimony from both parties on the appropriate meanings of the relevant key words used in the claims of a patent, the infringement of which is alleged by the plaintiff. A Markman Hearing in patent infringement cases has been common practice since it was determined in Markman v. Westview Instruments, Inc., 116 S. Ct. 40 (1995), that the language of a patent is a matter of law for a judge to decide, not a matter of fact for a jury to decide.

328 SESSION V: PATENT in appropriate? Under the Japanese law, patent right is an exclusive right, so you have a legal right to injunction against the infringement. 앫 On the other hand, what is argued here is whether in the case of, for example, an invention such as a research tool, a technical standard for telecommunications, or the so-called patent troll, the injunctive relief might bring a bad influence to the society. 앫 The issue is whether “too strong” patent rights that stop development of research might hinder the advancement of the technology. 앫 Whether the court can reject this type of relief request or not is argued. There are some legal measures under the Japanese law. 앫 One is so-called doctrine of abuse of right. This exists, I think, all over the world. Another is whether a compulsory license for the public interest can be used under Japanese law. These two measures, however, have not yet been realized in an actual case in Japanese patent litigation. However, if the case comes, these issues will be vigorously argued. III. PROTECTION OF LICENSE IN BANKRUPTCY The third issue is protection of license in bankruptcy. It is quite a different issue here. This kind of thing differs from country to country very much. In the United States, if you go through the history of the bankruptcy law, you will find that a certain amendment was made in the 1990s. That is, under the bankruptcy law the trustee or the debtor in possession can reject the so-called executory contract. A licensing agreement is a typical executory contract. The U.S. law protects the licensee, even if the bankrupt trustee rejects a license contract. This has been followed in present Japanese law. Recently, the Japanese bankruptcy law was amended in order to protect “registered” licensees. However, in the real world, in the industry, it is quite uncommon to register a license in Japan. The reason is, number one, the parties, especially patent holders, do not like to disclose to a third party that they are licensing something to somebody else. The Patent Office fee to register a license is substantial. As you can imagine, a certain licensing agreement, especially a cross-licensing agreement between two electronics companies, includes hundreds, sometimes thousands, of patents that each party has. That type of cross-licensing is not uncommon in that industry. Here the cost becomes very substantial to register. Even the parties themselves cannot recognize or identify which patents are licensed and which are not. The brand-new law made by the Ministry of Economy, Trade and Industry (METI) will start this year, the registration of agreement itself. This is quite a new idea to the Japanese patent law. In this way, Japan decided to protect the licensees, especially those cross-licensing in certain industries. IV. OBVIOUSNESS IN JAPAN Coming back to the first obviousness issue, let us look at some figures: The first figure, 33/37, represents judgments in 2006 of patent infringement suits at the district court level. Among thirty-seven, thirty-three were defeated; the patent holder lost the case. Among the thirty-three lost cases, in twenty-two the court declared the patent invalid, and in nineteen of the twenty-two because of obviousness. This figure has a certain strong impact. The way of argument in obviousness is not much different, I think, in the three jurisdictions, Japan, the United States, and the European Union. But the result is different. That is the reason why the industry is now

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criticizing the Japanese standard of obviousness as being too high. I do not know exactly whether that is really too high or not, but the figure speaks for itself. A. STRUCTURE OF DETERMINING OBVIOUSNESS IN JAPAN

The structure of determining obviousness in Japan includes: 앫 Find basic prior art. 앫 Find difference between patent and prior art. 앫 Find second prior art to cover difference. 앫 Find whether reasonable logic leads to patented invention. 앫 Total determination of obviousness in consideration of various factors. One interesting thing that I would like to add is that Judge Sato of the IP High Court, who is a colleague of Judge Tanaka, published a very interesting article in AIPPI Japan Journal (April 2007) analyzing and comparing the Japanese approach with the U.S. Federal Circuit Court of Appeal (CAFC) approach in DyStar:9 앫 U.S. approach is to find each element of claim in prior arts and find motivation to combine; 앫 Japanese approach is to bind a basic (nearest) prior art first; and 앫 Motivation is examined in the context of hindering element in Japan. 앫 The U.S. and Japanese approaches are becoming similar, especially if the CAFC may find implied motivation in the problem itself, common knowledge among people in art, etc. 앫 Opposite criticism: Japanese industry criticizes Japanese standard as being too harsh. Thank you very much. * * * Thank you for that superb timing. Professor Obuchi.

MR. RICHARDS:

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Japanese Patent and Copyright Law Developments Prof. Tetsuya Obuchi University of Tokyo My name is Tetsuya Obuchi. After serving as a judge for fifteen years, I quit the Tokyo High Court judgeship and joined the University of Tokyo, in 1999. Now I teach intellectual property law, mainly patent law and copyright law. Today I will talk on both patent law and copyright law, because the title of this session is “Japanese IP Developments.” Because time is so limited, I would like to focus on major issues in which I hope you will be interested. In patent law, I have chosen the important

9 Dystar Textilfarben GMBH & Co Deutschland KG v. C.H. Patrick, Co., 64 F.3d 1356 (Fed. Cir. 2006), cert. denied, 127 S.Ct. 2937 (2007). The Federal Circuit’s Oct. 3, 2006 opinion is available at http://www.fedcir.gov/ opinions/06-1088.pdf.

330 SESSION V: PATENT topics to be discussed later. In copyright law, I have chosen the topic of private copy exception and levy for private recording. This topic and the issue of copyright term extension are the most controversial copyright issues in Japan today. After discussing the topic of private copy, I would like to briefly touch upon the issue of copyright term extension. I. PATENT LAW IN JAPAN On the whole, I feel that the patent law in Japan today seems to be rather stable, at least when compared with copyright law, after a series of substantial legislative changes during the last ten years. I am going to briefly touch on six major, important issues: patentable subject matter, inventive step, injunctions, technical expertise of the court, interplay between the court and the Patent Office, and problems concerning actions against decisions of the JPO Board. A. PATENTABLE SUBJECT MATTER

I talked on this topic in the patent Plenary Session yesterday,10 but I would like to add one point. According to current Japanese patent law, even a computer program, as such, can be patentable subject matter. Thus, actually the issue of subject matter loses its practical importance significantly. However, because the threshold of patentable subject matter has become lower, inventive step, disclosure, and other requirements have become more and more important these days for computer programs. B. INVENTIVE STEP AND INJUNCTION

I would like to skip inventive step. Injunction is certainly a very interesting issue, but since Mr. Katayama talked about it, I will skip it, too. C. TECHNICAL EXPERTISE OF THE COURT

The next issue is technical expertise of the court. Through the substantial legislative changes during the past ten years, now the Japanese patent judiciary, such as the IP High Court and the Tokyo and Osaka District Courts — we have only three courts for patent cases — enjoy an extremely high level of jurisdictional concentration (namely, exclusive jurisdiction) and of technical expertise. The technical expertise has been assisted by an advanced level of technical support through a good combination of judicial research officials and newly introduced expert commissioners. D. INTERPLAY BETWEEN THE COURT AND THE PATENT OFFICE

The next topic is the interplay between the court and the Patent Office. The significant increase of technical expertise of the court actually changes the traditional distribution of power between the court and the Patent Office regarding the power to find a patent invalid. Now we have two routes for finding a patent invalid in Japan. In addition to the invalidation procedure of the JPO Board, the possibility of attacking a patent through a defense regarding invalidity in infringement litigation is available. It is very interesting that the United States and Japan approach the problem from opposite directions. The United States starts from the defense of invalidity at the court, while Japan starts from the invalidation procedure at the Patent Office. Nevertheless, both

10 See supra, Session I Part D, The Next Ten Years in Patents: Some Thoughts on the Future of Intellectual Property Protection.

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the United States and Japan are now heading in the same direction — namely, a combination of defense of invalidity at the court and administrative proceedings at the Patent Office invalidating a patent, such as the reexamination in the States and the invalidation proceedings in Japan. Certainly, an effective mechanism for invalidating a patent that is actually invalid is of great importance. E. PROBLEMS CONCERNING ACTIONS AGAINST JPO BOARD DECISIONS

The last question is the problem concerning actions against the JPO Board decisions. There are two types of patent litigation. The first type is an action against a decision of the JPO Board. The second type is an infringement action, as was just mentioned. An action can be filed before the IP High Court, with exclusive jurisdiction, against a decision of the JPO Board, such as a decision on invalidity or a decision of rejection of patent application, etc. According to the Supreme Court Grand Bench decision of March 10, 1976, the scope of examination and decision of the IP High Court in an action against a JPO Board decision is strictly limited to the grounds of invalidity or rejection already examined and decided upon by the JPO Board.11 This strict limitation of the scope of examination and decision of the court in the action against the JPO Board decision causes a socalled “catch-ball phenomenon,” in which the case goes back and forth between the JPO Board and the court. I hope all of you are familiar with this baseball-based terminology. The second point to be examined is comparison with the position in the infringement procedure. As I told you, in infringement procedures, the whole patent dispute, including the issue of validity, can be solved in a single infringement litigation procedure, through a defense regarding invalidity. However, in an action against a decision of the JPO Board, the dispute is actually split up into small pieces in terms of new grounds of invalidity and causes the “catch-ball phenomenon.” I believe that one of the most important tasks of the IP High Court in the future will be how to deal with the “catch ball phenomenon.” II. COPYRIGHT LAW IN JAPAN I will turn to copyright. Article 30 of the Japanese Copyright Act12 is a provision on reproduction for private use. Article 30, paragraph (1) provides a limitation of copyright, and paragraph (2) is a provision on levy for private recording. According to Article 30, paragraph (1), reproduction for private use enjoys an exclusion from the copyright protection, except in two cases: (1) by automatic reproducing machines available for use by the public; and (2) by the circumvention of technological protection measures. A. DIGITAL RECORDING LEVY

I will briefly discuss the levy for private digital audio or visual recordings. Those who make digital audio or visual recordings for the purpose of private use should pay compensation to the copyright holder, etc., which is actually added in advance to the price of digital recording machines and media. The private copy exception of Article 30, paragraph (1) presupposes that a private copy in analog form will not cause serious damage to 11 Stocking Machine, Sup. Ct. (Grand Bench), Mar. 10, 1976, Minshu 30-2-79 (holding that parties are prohibited from submitting new publicly known references other than those already submitted and discussed before the Appeal/Trial Board). 12 Copyright Act, Act. No. 48 of 1970 (English version), available at http://www.cas.go.jp/jp/seisaku/ houri/data/CA.pdf.

332 SESSION V: PATENT the interest of the copyright holder. However, a digital private copy is substantially different and can cause serious damage to the interest of the copyright holder, especially in the area of audio or visual recording. Therefore, the system of levy for private digital audio or visual recording was introduced to compensate for such damage in the 1992 amendment, after a long, long debate. Recently, the technology of digital rights management (DRM), has increasingly progressed. Thus, some commentators strongly argue that, because the technology that enabled the right clearance with respect to private digital copying did not exist, a levy for private recording had to be introduced. But now the situation has completely changed, and the right clearance with respect to private digital copying can be done through the new technology of DRM. Thus, the levy for private recording — called “rough justice” — is no longer needed and, therefore, should be abolished or substantially diminished. Actually, three kinds of arguments are made: 앫 The first argument is simply to abolish the private copy exception itself. 앫 The second argument is to abolish the levy for private recording, substituting DRM for it. 앫 The third argument is to maintain the levy for private recording. It seems to me that the first argument is not realistic. As the coverage of DRM is increasing, the area where the right clearance with respect to private recording is possible is expanding. Yet there is still a substantial area where the right clearance with respect to private recording is not feasible. This kind of situation is very difficult to deal with. In 2005 the Japanese government tried to expand the scope of the levy for private recording to include iPod-type machines/media — namely, the devices having both functions of machines and media for recording — in such scope, but it did not succeed because there was strong opposition against the current system of levies for private recording. Now a serious discussion is going on at the government advisory committee as to whether the current levy system should be improved or should be abolished, and whether the DRM should address the question of right clearance with respect to private recording. Now two major points are discussed. The first point is how much the scope of Article 30, paragraph (1) should be reduced. The second point is whether, after reducing the scope of Article 30, paragraph (1) — namely, private copy exception — the possible damage to the interest of the copyright holder should be addressed, and if so, how — by levy or by DRM? It seems to me that people’s attitudes towards DRM have become more realistic these days. B. COPYRIGHT TERM EXTENSION

The last very important issue is copyright term extension. Under current Japanese copyright law, the copyright term is lifetime plus fifty years. In the past, several times requests for copyright term extension by up to lifetime plus seventy years have been made by the right holders, but always failed. However, this time such a request for the copyright term extension to lifetime plus seventy years is strongly made. The argument for such extension emphasizes international harmonization, saying that both Europe and the United States have extended the copyright term up to lifetime plus seventy years, in the interest of creators. The argument against such extension emphasizes that such extension does not serve as an incentive to creators but impairs the interests of the users.

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Now this issue is becoming extremely controversial in Japan. In this regard, I am very much interested in hearing why both Europe and the United States have extended the copyright term by up to lifetime plus seventy years, and what actually happened to Europe and the United States after copyright term was extended, and whether or not Europe and the United States are happy with the results. I am very much interested in the opinion of the audience. Thank you for your attention. * * * Thank you. Professor Kozuka. PROF. KOZUKA: Thank you. I thought that I was a panelist rather than a speaker, but having heard the previous speakers talk about patents, and with Professor Obuchi mentioning copyright in the last minute, I thought that some reference may be useful with regard to trademarks. There was an important amendment to the Trademark Law of Japan in 2005.13 That is the addition of a provision on local brands. A local brand is a brand for a product that is unique to some geographic area, say, “New York bagel” — I am not sure whether a bagel is unique here or not, but it is just an example. This has been introduced with the intent of stimulating the local activities in areas other than the urban cities in Japan, especially of promoting trade in agricultural or traditional handicraft products. The idea is if that brand is unique to some geographical area and is used by most of the producers there, that brand may be registered, notwithstanding that all the conditions for registration of a brand are not met. What is the difference from ordinary trademarks? The difference lies in that the requirement for distinguishing the product is lessened. If the brand distinguishes a product that is unique to a producer, then of course it can be registered as a normal trademark of that producer. If the brand is not sufficient for distinguishing one product but is unique enough to designate a product of that local area, then it can be registered as a local brand by the producers in the area. This amendment entered into force last April. I have heard that many local brands have been applied for registration with the JPO since then. MR. RICHARDS: Thank you. Professor Makino, do you have some comments on what we heard? PROF. MAKINO: Good morning. My name is Kazuo Makino. I am now teaching IP law at Omiya Law School in Japan, but previously I was working as in-house counsel for multinational companies for many years and recently joined the faculty. Let me give you just one comment. As you can see from the excellent presentations today, in Japan there are so many developments in many areas, not only in patent but also in copyright and trademark. Did they incidentally happen simultaneously? Or did they intentionally occur? This development was actually intentionally created. In Japan, beginning in 2002, the Japanese government established a national strategy to strengthen IP rights.14 This began in 2002. All of the developments occurred based on this strategy. Of course, the establishment of the new IP High Court is one of the major developMR. RICHARDS:

13 14

Trademark Law Amendments (2005), available at See METI Plan, supra note 6.

334 SESSION V: PATENT ments. Also, promoting a fast-track prosecution system is one of these developments. We can see more developments in the future. Let me add one thing. This strategy of Japan actually was following U.S. pro-patent strategies. Back in 1985, during the Reagan Administration, your country established a pro-patent strategy to recover from a bad economy. As you know, in the 1990s Japan experienced bad economies for many years. We were struggling. How to survive, how to recover from bad economies? One of the answers was to follow the pro-patent strategy of the United States. It was a very successful story. As you can see, IBM, Microsoft, many IT companies, were very successful through utilizing this strategy. That is why we started. We have just started. We can see more important developments in the future. Under the Cabinet, they have a working office to promote Japan’s IP strategy. Every year since 2003, at least once a quarter, they meet to discuss and finalize the activity list. Every year more than 200 action items are listed. This is too many. Every year it was announced to the public, so all the governmental ministries were working to implement all of them. I have one concern. Looking at Mr. Katayama’s figures for 2006, I am a little bit concerned. The invalidity rate is very high. When you started your pro-patent strategy in the United States, you established the Federal Circuit Court of Appeals. In the CAFC the invalidity data was very high. But in Japan we have just started. I hope in the future this invalidity rate will be much lower. It should be improved. It is very important to implementing pro-patent strategies. Thank you very much. MR. RICHARDS: Thank you very much. Hal Wegner from Foley & Lardner. MR. WEGNER: Two very brief questions. The first question: With respect to the thirty-three of thirty-seven cases found non-infringed or invalid, what is the rate of reversal or affirmance at the Intellectual Property High Court? So if you took, for example, a cross-section of 100 cases from the Tokyo District Court on infringement/invalidity, either way, what percent is reversed at the Tokyo High Court, approximately? JUDGE TANAKA: I do not have exact statistics, but approximately 20 percent of cases are reversed in total. I think that that 20 percent is not different from appeal cases, infringement cases, and lawsuits on cancellation. MR. WEGNER: I was very fascinated by both Professor Obuchi’s and Mr. Katayama’s discussion of trolls and research tools. In the case of a classic troll, where the plaintiff owns a patent but does not practice the invention, what is your prediction as to what type of relief the troll may get in Japan when this issue is resolved? What do you predict, Professor Obuchi and Mr. Katayama? PROF. OBUCHI: Do you mean if we had a patent troll and then the patent troll tried to enforce his rights? MR. WEGNER: Yes. Let’s say he wins the case in the district court, the troll is infringing. What relief will he get? Will he get an injunction or will there be some other relief ? PROF. OBUCHI: Generally speaking, a patent holder can get both injunctive relief and damages. If we want to deny the remedies, then we have to use the doctrine of abuse of rights. If such an exercise of right amounts to abuse of rights, then that exercise of right should be denied. Actually, the real application of abuse of rights is very much limited to extremely special cases.

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MR. WEGNER: So do you see any possibility this will happen, either of you, Professor Obuchi or Mr. Katayama? MR. KATAYAMA: Patent troll itself is not such a clear concept. You cannot recognize the difference between a patent troll or a personal inventor or universities, that sort of thing. First of all, I would not say that the patent troll itself is the reason for abuse of rights. If the only reason is the patent troll, that is probably not abuse of rights. You need to have a more serious result, like a technical standard injunction because of patent troll litigation. In that kind of case, I think I can argue the case on quite a reasonable basis and the court might agree with me. MR. WEGNER: That is a very interesting point. In the case of a technical standard, where one patent might block the technical standard, this might be a case where abuse of right might be found? PROF. OBUCHI: It could be. It would depend on the facts. MR. WEGNER: Of course. Another point you raised was on research tools. As I understand Article 69(1), some research tools may be exempt, experimentation on the subject. But you mentioned also the possibility of compulsory license relief. That is very difficult to get, isn’t it, procedurally? Do you see any special way this could be used or broadened? MR. KATAYAMA: Historically, it was difficult in the past — actually not difficult; it was impossible; there was no case. However, I think there is a possibility. The United Kingdom used this approach, although the royalty rate is very high. Yet, I think this is fine. Especially for research tools, usually, the patent holder seeks the so-called “reach-through royalty.” It is in that sense that the patent holder has no objection to have a compulsory license, so long as they have money. So there is that possibility. PROF. OBUCHI: I am sure that most of you are very interested in Mr. Katayama’s number, that shocking number of thirty-three out of thirty-seven. But you have to take into account the very important factor that patents in today’s patent litigation were granted long ago, like ten years ago or whatever. The problem is that at that time the level of inventive step in Japan was much lower than today. Actually, that low standard was very much criticized by the Japanese industry. Then the Patent Office changed their practice. So now the level of inventive step required is very high. But in the past it was low. That is why the invalidation rate is this high. Please take this into account. MR. KATAYAMA: I agree with that opinion. Yet, the figure is shocking in a sense. If you compare it with the figure in the United States, there is a great difference. MR. WEGNER: I think the British judiciary must be very happy not to be the target again. MR. RICHARDS: With that note, and since the next panel is on Europe, I think we have to conclude. Thank you all very much.

SESSION V: RELATED PATENT DEVELOPMENTS PART B: EU LEGISLATIVE AND

SESSION V: PATENT

Part B: EU Legislative and Related Developments

Moderator DAVID PERKINS

Milbank Tweed Hadley & McCloy LLP (London)

Speakers HARRIE TEMMINK

HON. KLAUS GRABINSKI

Administrator, Industrial Property Unit, DG Internal Market, European Commission (Brussels)

Presiding Judge District Court (Düsseldorf)

Panelists ERIK NOOTEBOOM

PROF. ALAIN STROWEL

Head of Unit, Industrial Property Unit, DG Internal Market, European Commission (Brussels)

Saint-Louis University; Covington & Burling LLP (Brussels)

MR. PERKINS: This is the EU Legislative and Related Developments session. You might have thought, after listening to the discussion yesterday morning, that this session would be utterly redundant, because I think the message we were left with was probably that we were going back to the beginning and a period of stagnation was foreseen in Europe. I have a slightly rosier view of the future than that. Just to perhaps start off with a couple of thoughts before I hand you over to Harrie Temmink, I looked back on the Community Patent discussion. In 2003, a Commission Communication estimated the cost of obtaining a patent in fifteen Member States was five times the cost of obtaining a patent in the United States.1 Now something very strange has happened. There has been hyper-inflation in Europe. Charlie McGreevey’s Communication in March this year put the cost, four years later, at eleven times the cost of obtaining a patent in the United States and thirteen times the cost of obtaining a

1 European Commission, Memo 03/47, Results of the Competitiveness Council of Ministers (Mar. 3, 2003), available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/03/47&format=PCF&aged= 1&language=EN&guiLanguage=en.

338 SESSION V: PATENT patent in Japan.2 So something has gone seriously wrong in Europe — or the statistics, as ever, are capable of being interpreted in more than one way. In terms of enforcement, you will hear from Klaus Grabinski that the cross-border phenomenon is pretty much dead. We still do have, though, forum shopping in Europe, by reason of the doctrine that the court first seized has primacy and other courts are not able to pursue parallel litigation at the same time. I will leave you with one comment on this which I particularly like. It is from Hugh Laddie, who is obviously hiding somewhere else so I can give it to you. This is from the days when he was a judge, in the case called Sepracor v. Hoescht Marion Roussel.3 Talking about this forum-shopping phenomenon in Europe, he said: “As it is, there is a positive incentive to commence proceedings in countries where they are not likely to come to a hearing within a reasonable period, or in countries which have no relationship to the acts of infringement, or, as in this case, both.” He finished by saying: “A less sensible system could not have been dreamt up by Kafka.” I will now hand over to Harrie Temmink to unravel Kafka for you. Harrie reminded me that he spoke here three years ago, but I assured him everyone has very short memories so he will not be picked up on anything he said then. He will take you through legislative developments in the Community. MR. TEMMINK: Thank you very much. Good morning, everybody. I will start off by reflecting on what has just been said about the inflation of the European figures and the different kinds of interpretation. The present cost figures are based on a very thorough study that was conducted, not by the European Commission, but by someone else, Mr. van Pottelsberghe, a Chief Economist from the European Patent Office (EPO). He is also a professor. He is highly respected in the field of patents. He came up with these statistics. He made a thorough comparison of the costs in the United States and Japan, on one hand, and in the European Community, on the other hand, based on an average of thirteen designations per European patent.4 I will give you an overview of the state of play: Where are we, and how did we come to that? How will the future look? The future, according to some — perhaps even the majority — is not very bright. I do not share that feeling, overall. I will explain why in a couple of minutes. It also gives me an opportunity now to come back to some of the elements that were expressed yesterday, which I will try to put in a more proper context. I will come to that in a minute as well. If we look at the initiatives on the Community patent, which is what we are basically talking about right now, there are several key moments: 앫 First of all, the proposals of the Commission on the Community Patent of 2000.5 앫 The political agreement in the Council of 2003, which failed in 2004.6 2 Communication from the Commission to the European Parliament and the Council, COM/2007/0165 final (Mar. 4, 2007), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2007:0165:FIN:EN: HTML. 3 [1999] F.S.R. 746. 4 Bruno van Pottelsberghe & Didier Francois, The Cost Factor in Patent Systems, CEPR Discussion Paper No. 5944 (Nov. 2006), available at http://ssm.com/abstract= 954607. 5 Commission of the European Communities, Proposal for a Council Regulation on the Community Patent, COM(2000)412 (final) (Jan. 8, 2000), available at http://mineco.fgov.be/intellectual_property/presidency/ patent_reglement_en.pdf. 6 Proposal for a Council Decision conferring jurisdiction on the Court of Justice in disputes relating to the Community patent, COM/2003/0827 (final) CNS 2003/0326, available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:52003PC0827: EN: HTML. Proposals before the Council (May 2004), available at http://ec.europa.eu/ internal_market/ indprop/patent/index_en. htm.

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앫 After that, in 2006 the Commission relaunched the debate by organizng a consultation on the future patent policy in Europe. Very important here is to mention that a Competitiveness Council took place in the beginning of December and a European Council in mid-December, where the issue of patents, and in particular the issue of litigation, was addressed. On the basis of this past, the Commission very recently published a Communication Enhancing the Patent System in Europe.7 I will focus mainly on that Communication. First, let me talk about the 2000 Commission Proposal. It is history, but it is important to understand that it is the Commission that proposes but it is the Council that adopts. If we look at the Proposal of the Commission in 2000, we can see that the petitioners and people who are, on a day-by-day basis, working with patents were fairly happy with the proposals of the Commission. Why? One of the main reasons was that we had a language regime in the proposals that was based on the EPO regime. We had then three working languages: German, French, and English. We also had, of course, references to the EPO. For the Community patent, the procedure would be absolutely the same as for European patents, but once a Community patent would be granted, then, of course, the effects would be different. Instead of having a bundle of national patents for the Community patent, we have one single patent with validity throughout the European Union, and with the same consequences in the whole territory of the European Union, now twenty-seven Member States. In our proposals we also had a centralized court structure. I will come back to that later. Then, in March 2003, we had a breakthrough in the Council. The breakthrough was based on a couple of features. I will not mention them all, but there are two main issues here for you to remember. First of all, the language regime was different from that proposed by the Commission. Instead of having a language regime based on three working languages, the Council decided that it would be best to have equal respect for all the official languages of the European Union. That would mean, in practice, that the claims — not the descriptions — of the patents would have to be translated into all official languages. That would, in practice, mean that there would be more costs on the basis of the Council political agreement than there would have been under the Commission proposal. Another thing to bear in mind is that the Council decided that there should be a centralized court system, centralized in terms of having only one seat in Europe for patent litigation, for validity and for infringement cases on the Community patent. The creation of a judicial panel was foreseen at the Court of First Instance in Luxembourg. That would be the first-instance court, and then the second-instance court would be the CFI. The proposal of March 2003 in the Council was followed by some detailed proposals of the Commission in December 2003. We did our homework on the basis of the instructions of the Council. The Commission proposed in December 2003 a full-fledged proposal on the creation of a Community patent court at the Court of Justice in Luxembourg. 7 Communication from the Commission to the European Parliament and the Council, COM/2007/0165 (final) (Mar. 4, 2007), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2007:0165:FIN:EN: HTML; Communication from the Commission to the European Parliament and the Council – Enhancing the patent system in Europe (Mar. 29, 2007), available at http://ec.europa.eu/internal_market/indprop/docs/patent/ strategy_en.pdf; see also Press Release, European Commission, Patents: Commission sets out vision for improving patent system in Europe (Mar. 4, 2007), available at http://europa.eu/rapid/pressReleasesAction.do?reference= IP/07/463&format=HTML&aged=0&language=EN&guiLanguage=en.

340 SESSION V: PATENT But, as we all know, the negotiations stalled in the Council in 2004. Actually, the proposals that the Commission made in December 2003 were never discussed in the Council. So we had these proposals, but no debate took place in the appropriate political forum, which is the Council. The next step was the Consultation of last year.8 In order to relaunch the debate, as a Commission, we decided to put the question to the stakeholders: What do you want? What do you want as far as the Community patent is concerned? What do you want as far as the European Patent Litigation Agreement (EPLA)9 is concerned? What do you want as far as further harmonization in the field of patents in Europe is concerned, et cetera? We had a bundle of questions. We got an enormous response. We got more than 2,500 responses. Of these responses, about 1,500 were originals. We got some very interesting messages from the stakeholders. First of all, as far as the Community patent is concerned, there was almost unanimity about the wish to have a Community patent, as we do have a Community trademark and a Community design. An overwhelming majority of people said: “Yes, the best thing we could have in Europe is the Community patent. But it should be an affordable Community patent. It should be a legally secure Community patent.” Then, of course, the problems begin. It is very important to stress that a Community patent for the stakeholders remains number one. It is also very important to stress that the political agreement of 2003 was not considered as the best way forward by the stakeholders, for two reasons: the high cost of translation, and excessive centralization of the jurisdictional system. As far as the existing patent system in Europe is concerned, we also got some messages. A considerable number of stakeholders were in favor of rapid achievement of EPLA. It was certainly not unanimous, but there were a considerable number of stakeholders who were in favor of EPLA. There were also a considerable number of stakeholders who were in favor of the adoption of the London Protocol,10 which is supposed to reduce costs even more under the present system. But I will not discuss that issue now. What did we do, then, on the basis of that consultation? We proposed to follow up in the form of a Communication, the Communication I referred to in the beginning, which is the Communication of April 3, 2007. What is new in that Communication is that, first of all, we wish to restart negotiations on the Community patent. I have to refer to something that was said yesterday, that the Communication does not address the Community patent in a serious matter. That is incorrect. If you look at the Communication, you will see that the Community patent remains objective number one for the Commission — except, of course, that we do not wish to pursue the debate on the same basis as the political agreement of 2003. That is what we learned from the consultation. So what we propose, actually, is to have a fresh look at the language arrangement and to explore, together with the Member States, new ways forward. How should that be done? That is something that we will discuss with the Member States now. 8 Public Hearing on Future Patent Policy in Europe, Brussels, launched July 12, 2006. Agenda, Speeches and PowerPoint Presentations, Preliminary Findings, and Final Report available at http://ec.europa.eu/internal_ market/indprop/patent/ hearing_en.htm. 9 European Patent Litigation Agreement, available at http://www.epo.org/patents/law/legislative-initiatives/ epla.html. 10 The London Agreement: European Patents and the Cost of Translation, Agreement on the Application of Article 65, EPC (Oct. 17, 2000), available at http://www.epo.org/about-us/publications/general-information/ london-agreement.html.

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There should be more flexibility in the language regime, that is for sure, not the translation of all the claims in all official languages. That is far too expensive. We have to seek ways to make that system more flexible. But we could also perhaps think about alternatives — for example, fee reductions for small and medium enterprises (SMEs) or machine translations. What is the role of machine translations right now? So it is not only the flexibility as such; we might find and explore other ways to actually make the language regime more acceptable. The second thing is that as far as litigation is concerned, the idea of having a centralized court in Europe that would take first- and second-instance litigation in the field of Community patents is also obsolete now. It is very clear that all stakeholders want to have a first-instance court decentralized at the Member State level, and a centralized court somewhere in Europe that would then take the litigation in second instance. These ideas on litigation we also explore in our Communication. Apart from the Community patents and the litigation ideas, there is a third element, which we call the flanking measures or the supplementary measures of a non-legislative nature. There, we explore some possibilities for the future in the field of the quality of patents, in the field of petitions of SMEs, in the field of enforcement, in the field of technology transfer, or, as it is called nowadays, knowledge transfer. It is no longer “technology transfer”; nowadays it is “knowledge transfer.” These non-legislative ideas will be explored more in detail in a Communication that will be published by 2008, a broader Communication on IP rights in general. Let me turn now to the litigation arrangements. It is very important to understand that at the Council meetings in December 2006 there was a discussion of litigation agreements and there was a discussion of EPLA. One of the participants said that it was a bloodbath. It means that there was no dancing in the street for either of the options that you could have in the field of litigation, EPLA, or a more Community-like system. Now we as a Commission are actually trying to build a bridge between the two polarized positions that we have in Europe in the Member States. There is one group of Member States, an important group of Member States, that is dealing with EPLA. EPLA will be discussed later. There are two things I want to say here about EPLA. First of all, EPLA is fine, but it only foresees litigation in the field of European patents, validity and enforcement of European patents. It does not consider the validity and enforcement of future Community patents. Second — and this is something that was said yesterday, but I would like to stress it — whatever EPLA may be, the Community should be involved. Why is that? It is not because the Commission thinks that the Community should be involved; it is because of the way the EU Treaties work that the Community, and in particular the Commission, should be involved in EPLA. EPLA is covering competencies of the Community. In the field of enforcement, we have an Enforcement Directive11 that deals with procedures, remedies, and measures in the field of, for example, taking evidence, damages, et cetera. That’s Community “acquis,” as we call it in Europe. That means that if a Member State wishes to conclude an international agreement with third countries, then what should happen is that it is not the Member State individually that should negotiate that, but it is the Member State in the 11 Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, 2004 O.J. (L 195) 32–36, available at http://europa.eu.int/eur-lex/pri/en/oj/ dat/2004/l_157/l_15720040430en00450086.pdf.

342 SESSION V: PATENT context of the Council that should ask the Commission to negotiate this area, because the area is a Community area. It is not a purely national area anymore. The same applies for the jurisdiction and enforcement of judicial decisions, where we have the so-called “Brussels I” Regulation.12 That is what I want to say about EPLA and the group of Member States that is in favor of concluding EPLA as soon as possible. The other thing that we have as the second option is a group of Member States that wishes to have it all “communitarized”; both the litigation on European patents and the litigation on Community patents should be dealt with within a purely Community context in first and second instance. So we have two groups of countries. One is in favor of EPLA; the other group is in a favor of Community jurisdiction for European and future Community patents. I will leave that for what it is. What is the Commission proposing? The Commission is proposing a realistic approach, which means a step-by-step approach. What we try to do in our Communication is to build a bridge between the two opposite views, the polarized views, that we have in Europe. What do we mean by step-by-step? It means that we say: Let’s start by having a look at those things we agree upon. Then we see, remarkably, that we agree already on a lot of issues: 앫 First of all, there should not be two different supranational courts in the field of patents. We should have one EU-wide patent court. There is a substantial amount of agreement on that. So you should not have one supranational court for European patents and then, afterwards, in the field of Community patents a Community court dealing with patents. It should be one EU-wide court. 앫 Second, this court should take cases of infringement and validity for both European patents and Community patents. 앫 Third, this court should work with first-instance chambers at a decentralized level — not at a centralized level — and a there should be a centralized appeal court. 앫 Fourth, there should be common rules of procedure for this court. 앫 Fifth, there should be both technically qualified judges and legally qualified judges. That was one of the criticisms that we were facing in 2003, when we made our proposals on the Community patent court, that it was only for lawyers and that there should also be technicians on the bench.13 We propose now that we should have in a future court both technically and legally qualified judges. 앫 Finally, when it comes to matters of EC law, it is the Court of Justice that should be the final arbitrator. I want to say one thing — maybe Erik will discuss this later — about why the European Court of Justice, when it creates a judicial panel, can be an absolutely competent court taking patent litigation. There are very good arguments for believing that, actually. What is next? That everyone wants to know. Now that we have the Communication, what is going to happen? 12 Council Regulation (EC) No. 44/2001 of 22 December 2000, on jurisdiction and the recognition of judgments in civil and commercial matters, 2001 O.J. (L 12) 1, available at http://europa.eu.int/eur-lex/pri/en/oj/ dat/2001/1_012/1_-1220010116en00010023.pdf. 13 Commission of the European Communities, Proposal for a Council Decision establishing the Community Patent Court and concerning appeals before the Court of First Instance, COM (2003) 828 (final) (Dec. 23, 2003), available at http://europa.eu.int/eur-lex/en/com/pdf/2003/com2003_0828en01.pdf.

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The German presidency already has scheduled three Council working parties, as we call them, three full-day meetings in May and the first of June, to discuss this Communication and to see how we can move forward the debate on the litigation issues, and perhaps also in the field of Community patent. So that is where we are now. I hope that it is not as dark as people thought yesterday. Thank you very much for your attention. MR. PERKINS: We are inevitably slipping, but we are now going to hear from one of the two signatories in this room to the Second Venice Resolution, which must have come, I hope, after very good pasta and Chianti in November last year.14 It is the European judges leading the charge towards a European court. So I will hand over to one of the chargers now, Klaus Grabinski, to explain it to you. JUDGE GRABINSKI: Ladies and gentlemen, good morning. I would like to start with a short overview of the current situation concerning patent litigation in Europe and then turn to the EPLA proposal. Starting with the current situation in Europe, we have first to notice that we have achievements so far. We have European patents, meaning there is one prosecution for a European patent. But as soon as the patent is granted, it splits up into a number of national patents. There the problem begins. We still have an opposition before the EPO, a unique opposition before the EPO, but at the same time we have national patents, and the national patents have to be litigated in the respective contracting states of the European Patent Convention (EPC).15 There was an attempt in the early 1990s to overcome this situation by national courts, particularly in the Netherlands, but also followed with some sympathy by German courts and courts of other Member States, but not all. This was on the basis of the Brussels I Regulation, which was preceded by the Brussels Convention.16 Courts accepted to decide not only on the infringement of the national part of the European patent of the state where the court was situated, but also on other parts, in particular, on the basis of Article 2, paragraph (1), which concerned the general jurisdiction, and also on the basis of Article 6, paragraph (1), which concerns special jurisdiction when a number of defendants are concerned. It was agreed, at least by Dutch courts, that one could also sue a group of companies that had their seats in different contracting states, to be sued before one national court for the infringement of different national parts of European patents. But this came to an end last year, on 13 July 2006, when the ECJ issued two decisions. The first one is the Roche v. Primus case.17 They denied cross-border jurisdiction with regard to a group of companies, with regard to a number of defendants, when a number of companies established in various contracting Member States commit allegedly European patent-infringing acts in one or more of those states, even if those companies 14 Principles Relating to the Rules of Procedure of the European Court pursuant to art. 17 of the Draft European Litigation Agreement (EPLA) and art. 17 of the Draft Statute of the European Patent Court “The Rules of Procedure”), San Servolo, Nov. 4, 2006 (Second Venice Resolution), available at http://ipgeek.blogspot. com/2006/11/european-patent-judges-agree-on-rules.html. 15 Convention on the Grant of European Patents, signed at the Munich Diplomatic Conference for the Setting up of a European System for the Grant of Patents on Oct. 5, 1973, 13 I.L.M. 270 (1974), 1160 U.N.T.S. 231 [hereinafter European Patent Convention], available at http://www.epo.org/patents/law/legal-texts/epc.html. 16 Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, 1927 O.J. (L 299) 32, amended by 1978 O.J. (L 304) 77, amended by 1989 O.J. (L 285) 1 (full text, English version, at 1978 O.J. (L 304) 77). 17 Case C-539/03, Roche Nederland B.V. et al v. Primus and Goldenberg, [2006] E.C.R. I-0000, 2006 O.J. (C 224) 1, available at http://eur-lex.europa.eu/LexUriServ/Lex UriServ.do?uri=OJ:C:2006:224:0001:0001:EN:PDF.

344 SESSION V: PATENT belong to the same group and have acted in an identical or similar manner, in accordance with common policy, elaborated by one of them. This was also the end of the so-called “spider in the web” theory that was developed by Dutch courts.18 For those who advocated cross-border jurisdiction, the day of 13 July 2006 was even worse, because there was also another decision of the ECJ in the GAT v. LuK case.19 This dealt with the question of whether a court that accepted cross-border patent litigation loses its jurisdiction as soon as the defendant raises the validity defense, as soon as he says the national parts of the European patent do not concern the state where the court has its seat. The ECJ, in a decisive sentence on this ruling, said the rule of exclusive jurisdiction laid down in Article 16, paragraph (4) of the Brussels Convention, which is now Article 22, paragraph (4) of the Brussels I Regulation, concerns all proceedings relating to the registration of validity of a patent, irrespective of whether the issue is raised by way of an action or a plea in objection. This means that as soon as the validity becomes an issue in a cross-border patent litigation lawsuit, the court has to declare it to be incompetent insofar as the infringement of national parts of the European patent are concerned that are not the parts where the court is situated. This is said by the court in, for example, paragraph 24 of the decision. This was the end of cross-border jurisdiction. I can tell you from real life that since this decision we have never gotten a cross-border case. There are still some open questions, such as whether this is also true with regard to interim injunctions. We will see how we will deal with this in the future. There are some proposals to adopt the Brussels I Regulation to get back to the situation before GAT v.LuK, but I do not know whether they will get a lot of political support. Let me also mention that the situation is so far unsatisfactory, that the law in Europe, the patent law, law in patent litigation, has only harmonized to some extent. Harmonization has been achieved insofar as the EPC is applicable. There has also been some harmonization in national patent law with regard to the 1989 Community Patent Convention, which itself was never enacted.20 Quite recently, there has also been some more harmonization with the introduction of the Enforcement Directive.21 But one has still to consider that harmonization has not been achieved to an important extent, in particular, when you think of the separation of

18 The Court of Appeal of the Hague on Apr. 23, 1998 in case Expandable Grafts, Ethicon & Cordis Europe v Boston Scientific, [1999] F.S.R. 352, held that art. 6 (1) does not allow to sue as joint defendants the Dutch infringer (for infringement of the Dutch patent) and the foreign infringers (for the infringement of the foreign patents belonging to the European bundle). One exception, however, was accepted: The court may derive jurisdiction from art. 6 (1) with regard to foreign defendants who infringe the foreign patents arising out of the European bundle, if these foreign defendants belong to the same group of companies and the European headquarters of that group of companies is located on the territory of the court. This approach to the limitation of the applicability has been named the “spider in the web” theory; the defendants can be sued as joint defendants if they form a web among themselves and the action has to be brought before a court located in the center of the web (the spider’s domicile). 19 Case C-4/03, GAT v. Lamellen und Kupplungsbau, [2006] E.C.R. I-0000, 2006 O.J. (C 224) 1, judgment available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri =OJ:C:2003:055:0014:0014:EN:PDF. 20 89/695/EEC: Agreement relating to Community Patents, done at Luxembourg on 15 Dec. 1989, 1989 O.J. (L 401) 0001–0027, available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:41989A0695(01): EN:HTML. 21 Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, 2004 O.J. (L 195) 16–26, available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:32004L0048R(01):EN: HTML.

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infringement action in Germany, in contrast to the situation in most other Member States. Also very important, in the Member States different rules of procedure apply. I think the main difference concerns whether oral or written proceedings are more important during the proceeding. German litigation tends toward written preparation of the case. It tends to say that the written proceeding is very important and the oral hearings are not so important. Other differences do concern the question of whether you have expert witnesses or court-appointed experts. Another very important point concerns different qualifications of judges. In some countries you have technical judges; in others you do not. Also you have in some countries judges with quite a lot of experience in dealing with patent litigation, and in other states you do not. Another point I want to make is the different interpretation of harmonized provisions — for example, Article 69 of the EPC, concerning scope of protection. This provision is differently interpreted and applied in different countries. Whether this really means that cases are decided differently, I doubt, at least to some extent. But one has still to notice that there are differences. It would be a better situation if we would interpret and apply Article 69 and other provisions of the EPC in a harmonized manner. Harrie already dealt with the Community patent court. I just want to mention that there have already been some attempts to get a Community patent in 1975. We are more than thirty years in dealing with this matter, and did not achieve it. So it is quite a problem. With regard to the common political approach, also mentioned by Harrie, of March 3, 2003, there are some features that are important.22 A centralized Community patent court was, I think, criticized with good reason. It is better to have a regional court system. I think the political approach was right in having technical experts. You may have technical judges or technical experts. It does not matter. What we have to have are technicians to be involved. Of course, the main failure of this common political approach is the language regime. They proposed that the language of the proceedings should be the language of the state where the defendant is domiciled. Just imagine: you have a defendant from Finland and then the whole litigation will take place in Finnish; and you have three judges that do not understand a word of the Finnish language. Now let me turn to the EPLA. EPLA’s main features are facultative accession by any contracting state of the EPC. So those who are not interested or who do not want to participate, or even want to block the whole process, do not have to. They can stay out. Another feature, quite important, is the language regime, which will mean the three official languages of the EPO. It will have a central division and regional divisions. In the regional divisions, one of the three official languages will apply. There will be one central court of appeal. This is very important for harmonization, of course. There will be a panel of an odd number of judges — if there are three, two legally qualified and one technically qualified, and from the respective technology, of course. Persons to be appointed as judges will, of course, be judges from the contracting states, but also members of a board of appeal of the EPO. This raised some criticism, because there was 22 COM/2003/0827 (final), CNS 2003/0326, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=CELEX:52003PC0827:EN:HTML.

346 SESSION V: PATENT a fear that the EPLA could be not sufficiently independent from the EPO. One has to rethink this point. It should be open to all possible solutions. Of course, exclusive jurisdiction of infringement and validity with regard to European patent effective in one or more of the contracting states; provisional substantive patent laws; the jurisdiction of the court and the effect of its decisions; and procedural provisions and so on. I just want to turn to a recent development with regard to the EPLA draft proposal. In October 2006, the European Parliament requested the Legal Service provide an interim opinion on EU-related aspects of the possible conclusion of EPLA by the Member States. The interim opinion of the Legal Service23 came to the following conclusion: Member States are not competent to conclude EPLA because the draft EPLA aims to lay down rules in which the Community has adopted internal rules — notably, the Enforcement Directive and the Brussels I Regulation, which is also called the acquis communautaire; therefore, Member States are not competent to conclude EPLA because acquis communautaires is concerned.24 The conclusion of EPLA would affect the uniform and consistent application of the Enforcement Directive and the Brussels I Regulation. What are possible ways out of this situation? I have to say that the Legal Service, in principle, seems to be right in this assessment. One possible way out, of course, is the accession of the Community to the EPLA system. But I am not sure, after more than thirty years of struggle in this field, whether all Member States can agree on an accession of the Community to EPLA. If this is not possible, due to the opposition of some Member States, there seems to be another way possible. I have to say that this proposal does not go back to myself, but the merits for this idea belong to Anthony Arnull and Robin Jacob.25 They thought of the following: Amendment of the draft EPLA by excluding all provisions that concern matters governed by the Enforcement Directive or the Brussels I Regulation, and contracting states that take an interest confer to the European Patent Court the status of a national court by virtue of national law. We have already an example of this kind of court in the Benelux Trademark Court. If the attempts of the Commission fail, in order to bring concert among Member States, then there is also this possibility. I do not know whether those states that are interested in EPLA could agree in going this way, but I think it is a possible way. It is worth mentioning it and introducing it in the discussion. Then we will see what the future will bring on this. Thank you very much. MR. PERKINS: Thank you very much, Klaus. We started off with no time problems at all and now we are in dire problems. I have a couple of words, but I will ask Erik to follow on from Harrie’s point, and then maybe, Alain, you can follow on. MR. NOOTEBOOM: As you have learned from the earlier speakers, the debate in the European Union on the creation of a Community patent and a specialized patent jurisdiction go back some forty years. But, in order to place this in the right perspective, you 23 On Feb. 1, 2007, the Legal Service produced its opinion, available at http://www.ipeg.com/_UPLOAD %20BLOG/Interim%20Legal%20Opinions%20Legal%20Service%20 24 “Acquis Communautaire” means essentially “the EU as it is” — in other words, the rights and obligations that EU countries share. The acquis includes all the EU treaties and laws, declarations and resolutions, international agreements on EU affairs, and the judgments given by the ECJ. It also includes action that EU governments take together in the area of “justice and home affairs” and on the Common Foreign and Security Policy. 25 See Anthony Arnull & Robin Jacob, European Patent Litigation: Out of the Impasse?, 29 Eur. Intell. Prop. Rev. 6, 209–14 (2007).

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should be aware that when these discussions started, the European Union consisted of only six states, which altogether had only four official languages. By the time the discussions on the first Community patent project came to an end in the late 1980s, the number of Member States had doubled and altogether there were nine official languages. The agreement at the end of the 1980s foresaw the creation of a centralized specialized patent jurisdiction with a centralized appeal court with regional first-instance courts. On languages, it said that the Community patent should be translated fully into all of the languages of the participating states. That was the reason why business rejected that agreement very strongly, because it implied translations of Community patents into nine official languages in those days, and because they felt that the regional first-instance courts would not constitute sufficient harmonization and a reliable jurisdiction, in spite of the fact that there would be overview by a common appeal court. Then, the Commission, as you know, relaunched the debate after the adoption of the Lisbon Agenda to bring economic growth and more jobs to Europe.26 We took very careful note of the reasons for which business had rejected the agreement, which was concluded by the end of the 1980s. As a result of our continued efforts, after three years of negotiations in the European Council, we presented a proposal which was in both critical aspects much better than the result of the work that had been on the table before. On jurisdiction, the agreement provided exactly what business had always asked for, a centralized specialized patent jurisdiction, not only centralized at the appeal level but also at the first-instance level. On languages, there was a major breakthrough, because there was no longer an obligation for the patent holder to translate the patent fully into all the official EU languages; there was only an obligation to translate the claims of the Community patent into all of the official EU languages. Nevertheless, this agreement was also torpedoed by business. This time the reason was that the centralized first-instance courts were not welcomed any longer by businesses because they preferred that the element of proxmity to the citizens was taken into account; in other words, apparently, twenty years after the agreement was initially reached, the feeling now was that at the first instance level there should be regional courts to allow access at the local level. Appeals of court remained centralized. Also very important to note is that when this agreement in 2003 was adopted, the Community had enlarged even further, because at that very moment the European Union counted fifteen Member States and twelve official languages. The main reason, I think, why that agreement was rejected was because one of our Member States had a major difficulty with the centralization of the jurisdiction in Luxembourg. That is the current European Presidency [Germany]. They had big, big troubles with the fact that they had agreed before to do away with regional jurisdiction access at the local level, so they firmly rejected centralized first instance. That was a pity. I think that agreement would have been wholeheartedly supported by business if it had been concluded by the end of the 1980s, when we only had twelve Member States with nine languages. Anyway, we are now four years later. What has happened in the meantime? The number of Member States has basically doubled compared to 2003. Today we have twenty-seven Member States. Almost each of the new Member States that we welcomed brought with it a new official language. So today our discussions are taking place in a completely 26 Lisbon Agreement for the Protection of Appellations of Origin and their International Registration (Oct. 31, 1958, as revised at Stockholm on July 14, 1967, and as amended on Sept. 28, 1979), available at http://www. ipprolaw.com/english/article8.html.

348 SESSION V: PATENT different setting than we had a couple of years ago. Now, on languages, any decision that takes all the languages as official languages for the patent system implies translation into twenty-three languages. So as you see, the more time we lose, the more complex the whole issue becomes. Under these circumstances, the Commission has decided to give it a very, very last try to come to an agreement between all our Member States on a workable, accessible, and efficient single Community patent system, accompanied with an efficient and reliable jurisdiction. But it will not come as a surprise to you that, given the constant movement of the Union, every time welcoming new Member States with new languages, it has become ever more difficult to reach any sensible solution. I think the Communication we released last week, which Harrie elaborated so eloquently, is basically a document that merely serves to relaunch the debate for a last time. The elements that you will find in that Communication contain all the ingredients we think Member States should agree on in order to find an agreement that works. But I think we cannot lose much more time on this. It is a last call. We have learned that the very important projects under the European Patent Organization, the EPLA Project and the London Protocol, also have been bombarded recently by the Member State that initiated this work and which always proclaimed that it was a major step forward for the European patent system. That is France. France launched the EPLA discussion and it launched the London Protocol on languages. When we launched our consultation, which obliges all the Member States to show their cards on where they really stand, it appeared that all of a sudden France was no longer supporting the London Protocol nor EPLA. So the question really which we are facing today is: What do our Member States really want? Are they playing games with us, or do they really have serious concerns to work together to come to a solution? Therefore, what we will do is now to force Member States to play their cards in the official setting — that is, at the European Council of Ministers, at the highest possible level — to see whether there is really a willingness to move forward on this in a sensible way. It is evident that, as far as I am concerned, if within, let’s say, one year there is no hope on progress because we continue to turn in circles on languages and on either centralized or decentralized jurisdictions, and as Europe makes up its mind how it wants to shape its structure in patents for the future, if they are not able to do it together, we may well have to take a decision to allow the coalition of those who are willing to work together in a more restricted setting — that is, together with Member States that want to make progress — and I imagine those Member States will have a real interest in patenting and innovation. Because the European Union has grown so big, it will not be a surprise to you that some regions are more innovative than others, that some regions have more interest in an efficient patent system than others. That means that if our last efforts to stay all together fail, the time has come, to first think seriously about so-called reinforced cooperation. That is a process that is enshrined in the European Treaty,27 which allows Member States to go on a particular subject with a limited number of Member States that are ready and willing to do something together. That is a necessary step in order to, so to say, create the “Europe of two speeds.” If that would fail as well — because, again, this requires decision-making within the 27 Treaty Establishing the European Economic Community, Mar. 25, 1957, 198 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-II) [hereinafter EEC Treaty], amended by Single European Act, O.J. (L 169) 1 (1987), [1987] 2 C.M.L.R. 741, in Treaties Establishing the European Communities (EC Off’l Pub. Off. 1987).

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European Union, where all Member States are involved; that also means that Member States may create blocking minorities to obstruct reinforced cooperation — then there is one alternative left, and I think that Klaus Grabinski referred to that. That would possibly be that Member States decide to go on between themselves in an intergovernmental setting, carefully trying to bypass European acquis communautaire, European legislation. That is, if a court were to be created to deal specifically with patents, they would not touch upon questions that relate to so-called Community legislation. I think, David, that is in a nutshell what I wanted to say. So we have entered the last round. It should not be a long round. We basically have had forty years of discussions. If there is no hope of progress with twenty-seven states, then I would say let’s try it with a restricted number of Member States, those who are willing. But, of course, this all means that we are not really talking here about patents. We are talking here about the shaping of the future of Europe. It means that we are tackling here very sensitive political and important issues about the treatment of languages in Europe in the future and also the creation of specialized jurisdictions, not only for patents but possibly also in other fields. That makes this dossier extremely challenging, but at the same time sometimes frustrating. MR. PERKINS: Thanks very much, Erik. I think this will be a very interesting discussion in twelve months’ time at Fordham. I have an instant solution for you on the twenty-three languages. It is time to revive Esperanto as the compulsory language for Europe. Alain, have you got a very quick contribution? PROF. STROWEL: Yes, a few comments. First, let me recast the debate so as to make it more understandable for an American audience. A common judiciary, competent to consider issues of law and fact in civil matters, challenges the standard core competence of States. The situation we are facing in Europe is a very difficult one, and, at the end, it is not surprising that we did not reach some agreement after thirty years of discussions around the Community patent and the patent litigation arrangement. The adoption of a litigation arrangement has far-reaching consequences. It would be, for an American audience, like having a treaty on jurisdiction between all South American and North American countries that would allow, for instance, a Venezuelan judge to rule on the validity and infringement of a patent covering the United States; or, maybe worse, a Canadian judge ruling on this patent. (I am joking, because I think most of our Canadian friends are in a parallel session.) Just a remark on the possibility to revive EPLA. I think EPLA is dead. But, as we say in French, “The king is dead, vive le roi!” — it might survive in another way. I think it may be still possible — I am optimistic — to keep the substance of EPLA and to integrate it within the infrastructure of a Community jurisdiction system, as proposed in the French submission of November 2006. Before having a full Community jurisdiction system for patents, we could start with a system that would be a little bit like the Community trademark court system, where you have basically a national judge with Community competence. The existing Community trademark court system should, of course, be upgraded to fit in the French architecture, but this remains feasible. As you know, the Community trademark courts can rule on trademark issues and their rulings are valid in all countries of the European Union. In the case of the European patent jurisdiction system, the judge would only issue decisions valid for the countries that are designated in the European patent. That makes a difference. There are other differences with the current Community trademark court system. In

350 SESSION V: PATENT the Community trademark court system, there is an appeal before a national court of appeal and then eventually before the national supreme court. Of course, those two levels should be changed if we want to have a Community structure for the patent jurisdiction to be created. At first sight, the system could work with an appeal before a specialized chamber of the Court of First Instance, and eventually — but the relation should be further thought out — some kind of referral to the European Court of Justice. Of course, the language issue remains in that scheme. I do not know whether it would be possible to take the language solution of EPLA and to integrate it in this upgraded Community trademark court system. The right procedure to adopt the new judicial system and to avoid blocking minorities will be decisive to decipher the present conundrum. Whether “enhanced cooperation” or new procedural rules to be adopted in the mini Constitutional Treaty, now in preparation, will be followed remains to be seen. It is clear that, going forward, some institutional imagination will certainly be required. Thank you. MR. PERKINS: Just very quickly, it is not all black, it is not all bleak, in Europe. I think, despite the fact that we have not got a Community patent, a Community patent court, even an EPLA, in place, there are good signs in Europe. For example, on the practical side, you have a Regulation on cooperation between the courts of Member States in the taking of evidence in civil matters.28 It is a bit like accelerated letters of request, which actually works between Member States. That has now been in operation since 2001. There is an interesting case, Dendron GmBh v. Regents of University of California and Boston Scientific,29 in the British courts, where the British courts asked the court in Germany to take evidence on a prior use from a fact witness in Germany. It worked. It was very efficient. And it was used in other jurisdictions, in a parallel case in California, although the EPO said, “We are not interested in evidence; we are not going to accept it.” Klaus also had mentioned the Enforcement Directive that came into force in April 2006. Just about all Member States have enacted the Directive. I think Germany is a bit behind. JUDGE GRABINSKI: Yes. Nineteen out of twenty-seven. MR. PERKINS: It is quite interesting that it deals with things like the obtaining and preservation of evidence of infringement; it deals with the availability of provisional and precautionary measures, including preliminary injunctions, the seizure of goods, the Anton Piller-type seizures,30 the saisie contrefaçon type procedure,31 and the English Mareva injunction.32 All of these we have had in the United Kingdom since about 1970-something, but they have now been brought in as Community measures. 28 Council Regulation (EC) No 1206/2001 of 28 May 2001 on cooperation between the courts of the member states in the taking of evidence in civil or commercial matters, available at http://europa.eu/scadplus/leg/en/lvb/ l33130.htm. 29 [2004] E.W.H.C. 589 (Pat.). 30 An Anton Piller court order provides for the right to search premises and seize evidence without prior warning. The order is named for the case Anton Piller KG v. Manufacturing Processes Ltd., [1976] 1 All E.R. 779, [1976] Ch. 55 (C.A.), although the first order was granted by Templeman J. in EMI Ltd. v. Pandit, [1975] 1 All E.R. 418 (Ch.). Because such an order is essentially unfair to the accused party, Anton Piller orders are only issued exceptionally and according to the three-step test set out by Ormrod L.J. in the Anton Piller case: (1) there is an extremely strong prima facie case against the respondent; (2) the damage, potential or actual, must be very serious for the applicant; and (3) there must be clear evidence that the respondents have in their possession incriminating documents or things and that there is a real possibility that they may destroy such material before an inter partes application can be made. 31 This seizure is very efficient and is often used in practice. It is ex parte and, thus, made without any notifi-

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So at the procedural level I think you are going to see a lot of procedures will be harmonized. However, Klaus is right; there are still big differences between the common law system and the civil system, and the bifurcated system particularly in Germany. But I think we are on the road. The other thing is that there is much more cooperation now between patent judges. In fact, as a practitioner, there really is no hiding place. They are in touch with each other by email; they exchange views. They have even harmonized their approach to patent claim construction. We have the quintet of cases in Germany. We have Lord Hoffmann’s Amgen case,33 which somebody says is different from my Catnic case;34 but I think it is pretty much the same, it is just different packaging. So we are on the way. Finally, going back to twenty-five years ago when I was talking about the thenCommunity patent, which was “just around the corner,” there was great concern from the pharmaceutical industry that they would have a very valuable patent, let’s say, which could be invalided for all Member States by a nominated court in one of the countries with very little experience in patent litigation. It was asked, “What happens if your very valuable patent on Zantac, as it was in those days, was revoked by the district court judge in Thessaloniki?” There was a bit of laughter. Someone from the audience said, “So what’s the difference between that and your Justice Whitford?” So what you have to think about is our perception of other judges in less-experienced countries. I think actually they can sometimes bring a breath of fresh air. So I am ever the optimist, even though we are told the problem is bigger and bigger. Thank you all for listening. We have time for one question. QUESTION: I would like to make a comment and a bold suggestion. What if we strengthened the organic links between the European Union and the EPO to the extent that the EPO becomes an EU institution? JUDGE GRABINSKI: What about Switzerland? QUESTIONER: Forget about the difficult cases. I mean the 720-plus who are members of the European Patent Convention and not a member of the European Union. Let’s forget about them for just a minute and focus on the twenty-seven. MR. PERKINS: You have more contracting states in the EPC than you have members of the Community. So forget consensus on doing that. QUESTIONER: I know. Let’s forget about those just for a minute and focus on the twenty-seven that are both a member of the European Union and have signed the EPC. MR. NOOTEBOOM: That is an interesting suggestion. That only would tackle a particular issue, which is the democratic control over the EPO. But it does not introduce a cation to the alleged infringer. The holder of a patent or patent application must request an order from the president of the court of first instance of the place of the alleged infringement in order to be entitled to instruct a bailiff, assisted by a patent agent, to carry out investigations at the premises of the alleged infringer. The seizure may take the form of a certified description of the alleged infringement (saisie descriptive) or actually involve removing samples of any alleged infringing product (saisie réelle). It is extremely rare for the court to allow the seizure of all the infringing products. 32 The Mareva injunction (variously known also as a freezing order, Mareva order, or Mareva regime) in Commonwealth jurisdictions, is a court order which freezes assets so that a defendant to an action cannot dissipate their assets from beyond the jurisdiction of a court so as to frustrate a judgment. It is named for Mareva Compania Naviera SA v. International Bulkcarriers SA, [1975] 2 Lloyd’s Rep. 509, although the first recorded instance of such an order in English jurisprudence was in Nippon Yusen Kaisha v. Karageorgis in 1975, decided very shortly before the Mareva decision. The U.K. Civil Procedure Rules 1998 now define a Mareva order as a “freezing” order. It is widely recognized in other common-law jurisdictions and such orders can be made to have worldwide effect. 33 Kirin-Amgen Inc & Others v. Hoechst Marion Roussel Ltd. & Others, [2004] H.L. 46. 34 Catnic Components Ltd. v. Hill & Smith Ltd., (1982) R.P.C. 183.

352 SESSION V: PATENT Community patent, nor does it introduce jurisdiction in Europe to handle patent litigation. There is a third element of the long discussion in Europe that would be solved by that, which is that the EPO would come under the control of the European institutions. But it does not bring a single patent nor a single jurisdiction. MR. PERKINS: Thank you all, panelists.

SESSION V: PATENT PART C: COURTHOUSE RELATIONSHIPS

SESSION V: PATENT

Part C: Courthouse Relationships: The Federal Circuit and the Supreme Court, The Court of Appeal and the House of Lords, Member State Courts and the Court of Justice

Moderator PROF. MARTIN J. ADELMAN

George Washington University Law School (Washington, D.C.) Speakers PROF. JOHN DUFFY

LORD HOFFMANN

George Washington University Law School (Washington, D.C.)

Law Lord, House of Lords, Parliament (London)

Panelists HON. KLAUS GRABINSKI

HON. PAULINE NEWMAN

Presiding Judge, District Court (Düsseldorf)

Judge, U.S. Court of Appeals, Federal Circuit (Washington, D.C.)

PROF. SIR HUGH LADDIE

Hon. Randall R. Rader Judge, U.S. Court of Appeals, Federal Circuit (Washington, D.C.)

Rouse & Co. International; University College London

HAROLD C. WEGNER

Foley & Lardner LLP (Washington, D.C.) PROF. ADELMAN: We have an absolutely fascinating topic, the relationship between the high court and courts just below it. We have in the United States a very interesting issue, because the Federal Circuit was, in part, created to deal with the fact that Congress correctly believed the Supreme Court had done a dismal job in the patent area. To say that it was dismal would be to compliment the Supreme Court. But that was in 1982. Well, maybe the Supreme Court has forgotten why the Federal Circuit was created. In

354 SESSION V: PATENT any event, we have had some very interesting recent developments, one of them involving the KSR case,1 where the Supreme Court took a case that was unpublished, that was sent back. I have looked at the prior art. I think everybody agrees that maybe the Federal Circuit made a mistake, if you just take a piece of kluge, a piece of prior art you would never use, but it is obvious to modify it, and you get something within the claim. While most of the claim was actually directed at some useful device, this was a broad claim. It is invalid. It doesn’t matter what theory you have of obviousness; it is invalid. But it was unpublished. And I believe the Federal Circuit would have corrected it anyhow, because they sent it back to the lower court to make a few extra findings. At any rate, the Supreme Court took the case. The next thing that happens is the Dystar opinion comes from the Federal Circuit.2 Now, the Federal Circuit appeared to be writing a brief to the Supreme Court, explaining that it really was doing everything correctly. The patent was held invalid. If you look closely at the patent, you can make a pretty powerful argument that maybe it was valid. The art was close, but in 100 years BASF had never changed from practicing the prior art. Maybe there were good reasons why they did not change; maybe it was because the invention was non-obvious. Then a couple of weeks ago came the Pfizer case, involving the second-most-widelysold drug in the world, Norvasc®, which the Federal Circuit holds invalid.3 I have made a count of judges around the world who have ruled on this patent: Canada, three judges for validity, one judge for invalidity; three separate lower court federal judges in the United States held full trials on this case and they believed the patent was valid. However, three Federal Circuit judges said, “No, that’s wrong.” We could argue who is right or wrong. But there is an interesting effect, I believe, of the KSR case, which is still brooding in the Supreme Court. Maybe they realized that obviousness is more difficult than they thought from simply reading The Wall Street Journal’s or The New York Times’ relatively ignorant editorials on the subject. PROF. DUFFY: What do you really think, Marty? PROF. ADELMAN: We’ll see. If they produce a decent opinion, maybe they will add something. We can only hope and pray. At any rate, we have a very distinguished panel: Lord Hoffmann you know; my dear colleague, John Duffy, who I believe is one of the finest of the young patent academics — 1 KSR Int’l v. Teleflex, Inc., 127 S. Ct. 1727 (2007). [Note: After the conclusion on the Conference, the Supreme Court decision was handed down Apr. 30, 2007 (holding that Graham v. John Deere Co., 383 U.S. 1 (1966), controls obviousness; that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws”; and warning that a rigid application of the teaching/suggestion/motivation (TSM) test as a litmus test for obviousness is inconsistent with the Graham framework; but stopped short of rejecting the TSM test outright. Simply put, the TSM shortcut for an obviousness analysis is no longer available. The Court’s decision immediately focuses the obviousness spotlight back onto the framework that has controlled the issue for more than forty years, forcing everyone who has grown comfortable with the TSM litmus test shortcut (including the Federal Circuit, the Patent and Trademark Office, and the patent bar) to return to full and proper Graham analyses when assessing the obviousness of patent claims. Importantly, the Court’s opinion touches on several other issues, including the roles of “hindsight bias” and common sense in an obviousness inquiry, a question about the rationale for affording a presumption of validity to the patent-in-suit, which avoided a Graham analysis during prosecution, and a rejection of the rigid rule that “obvious to try” is per se insufficient to show obviousness. Decision available at http://www.supremecourtus.gov/opinions/06pdf/ 04-1350.pdf.] 2 Dystar Textilfarben GmbH & Co. Deutschland KG v. C.H. Patrick Co., 464 F.3d 1356 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 2937. 3 Pfizer, Inc. v. Apotex, Inc., 480 F.3d 1348, 2007 U.S. App. LEXIS 6623, 82 U.S.P.Q.2d (BNA) 1321 (Fed. Cir. Mar. 22, 2007), reh’g denied and reh’g en banc denied, 488 F.3d 1377, 2007 U.S. App. LEXIS 11886, 82 U.S.P.Q.2d 1852 (Fed. Cir. May 21, 2007), cert. denied, 128 S. Ct. 110 (2007).

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I say young because I think of him as young, but he is very mature and absolutely brilliant; then we have Judge Grabinski, from whom we have heard earlier; Hugh Laddie needs no introduction; Pauline Newman needs no introduction; Judge Rader needs no introduction; and Hal Wegner. With that, I turn it over to Lord Hoffmann. LORD HOFFMANN: The relationship between the higher courts and the lower courts — and also I am going to mention some courts that are outside our system altogether — depends very much upon whether you are an insider or an outsider. Reading what people outside say about the relationship between the U.K. Court of Appeal and the House of Lords, I frequently do not recognize it. I would suspect that this is equally true, even more intensely so, in the United States, where a great deal of effort is focused upon what the court thinks it is getting up to, what the different views are of the Justices in the Supreme Court, how they are likely to react — this, that, and the other. There is not a great deal of that in the United Kingdom, because we are pretty well anonymous. Nobody much cares. But it certainly does look different from outside. I can only give you an inside view. Therefore, that means that such questions as whether, as Marty said, the House of Lords, like the Supreme Court, did a dismal job on patents is not really for me to say. Occasionally, I read comments and criticisms and so forth by other people, but all I can say is how the matter looks to me. You cannot really compare the relationship between the House of Lords and the Court of Appeal with the relationship between the Federal Circuit Court of Appeals and the Supreme Court without taking into account who they are, where they come from, how they are actually appointed, and what their personal relationships are. In the United Kingdom, we have a House of Lords with twelve members. All of them have been members of the Court of Appeal for varying periods, sometimes as few as two years, sometimes as long as eight years. But they have all been members of the Court of Appeal or members of the equivalent court in Scotland or Northern Ireland. Of the twelve of us, two are Scots and one is Northern Irish. We come from the same background. We know the people who are in the lower courts. Likewise, everybody in the Court of Appeal has had a turn as a High Court judge — that is the equivalent of a federal district judge — and has done trial work, and has done that for periods varying between four and nine years. In my own case, I was seven years a High Court judge, I was two and a bit years in the Court of Appeal, and then for the last twelve years I have been in the House of Lords. We are small in number. There are twelve in the House of Lords. There must be just over forty in the Court of Appeal. In the High Court there are about a hundred. I will come in a moment to the question of those who are dealing with IP, where the matter is much more restricted. So the English judiciary is a village — or perhaps the more appropriate metaphor would be a monastery, because on leaving practice we all took a vow of poverty. [Laughter] But we all know each other, and have known each other since we were members of the bar litigating cases against each other. That makes a great difference to relationships between courts. You know the person personally and you have a respect for his opinions, not as a member of a particular court, but as a person. Coming to IP, that makes a great deal of difference to the way in which we deal with IP cases. We have had — I am looking back now over the last twenty years during which I have been a judge — powerful specialist IP judges at the first instance. In those twenty years, we have had William Aldous, Robin Jacob, Hugh Laddie, and now Nicholas

356 SESSION V: PATENT Pumfrey and David Kitchin. They are serious people, and one views what they say with great respect. When one comes to the Court of Appeal, specialization drops out. At any given moment, we are likely to have in the Court of Appeal, out of forty judges, one ex-specialist of those that I have mentioned (of those that I mentioned, three of them have gone at one stage or another to the Court of Appeal) and perhaps one, maybe two, what I might call amateurs — that is, those who did not specialize in IP but who had an interest in it and were occasionally drafted to deal with cases where, for example, the specialist judges were conflicted, because it was a case which had been going on for fifteen years, in which they had been advising when they were members of the bar. So there was need for these supplementary judges. In that way, some of us picked up an interest in IP. I was an amateur when I was in the High Court. I did, I think, one patent trial and a certain amount of IP work, and then got more interested in it when I went to the Court of Appeal. In the House of Lords, again, there are no specialist judges and only one amateur — that is me. Now we have just gained another one in the appointment of David Neuberger from the Court of Appeal. He was the trial judge in the Kirin-Amgen case,4 did what seemed to me to be an absolutely first-class job in that case, took an interest in the subject, did it in the Court of Appeal. He was only there for a very short time. Now he is in the House of Lords. He is going to be there for a long time. I am retiring in two years’ time. He is going to be there for another sixteen or seventeen years. So you are going to hear a lot about him. That personal relationship is, I think, very important to the way in which we deal with IP cases. But it is not just the relationship between the English courts. You must also bear in mind that, because we are members of the European Patent Convention,5 we pay the greatest attention to what is going on in the European Patent Office (EPO) and also what is going on in the domestic courts of other Member States. On the interpretation of the Convention, we do not want to get out of line. What we have there is what I hope might be called a dialogue between our courts and the EPO and the courts of the other Member States. We do not simply follow them blindly. We follow them if we think we possibly can. If we think that perhaps things could be put slightly differently, we will give a judgment that is addressed to them and then we wait and see how they react to that. For example, on the question of the patenting of business methods, Robin Jacob in the Court of Appeal has just given a judgment in which he has analyzed in the greatest detail decisions of the European Patent Office (EPO) over the past twenty years on this subject, pointed out that they go somewhat in different directions, and invited the EPO to reconsider the matter and to give a firm direction.6 If they give a firm direction, then I daresay we shall follow it.7 So there is a close link in that way. There are personal links. David Perkins was talking earlier about the personal relationships between the English judges who are interested in patents and those in Germany and 4

Kirin-Amgen, Inc. v. Hoechst Marion Roussel Ltd., [2005] R.P.C. 169. Convention on the Grant of European Patents, signed at the Munich Diplomatic Conference for the Setting up of a European System for the Grant of Patents on Oct. 5, 1973, 13 I.L.M. 270 (1974), 1160 U.N.T.S. 231, available at http://www.epo.org/patents/law/legal-texts/epc.html [hereinafter European Patent Convention]. 6 Aerotel Ltd. v. Telco Holdings Ltd. and Others and Patent Application by Neal William Macrossan, [2006] E.W.C.A. 1371 (Civ.) (Jacob, J.), available at http://www.ipo.gov.uk/2006ewcaciv1371.pdf. 7 See Letter from Alain Pompidou, EPO President, to Lord Justice Jacob, available at http://www.ipo.gov.uk/ patent/p-decisionmaking/p-law/p-law-notice/p-law-notice-subject matter/p-law-notice-subjectmatter-letter.htm. 5

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the Netherlands. For example, when I was having to draft the opinion in the Kirin-Amgen case, I sent, in confidence, a copy of that opinion before it was published to Peter Meier-Beck of the Bundesgerichtshof, their panel, and said to him: “What have you got to say about this? What do you think of it? What comments have you got to offer?” I was extremely anxious that we should stay in line. It does seem to me that the comparisons between the situation in Europe, as a matter of the relationship between courts and the relationship between judges, is very different from that which exists in the United States, where the judges come from different backgrounds, they are appointed in different ways, they have not necessarily come up, all of them, in this absolutely uniform way in which English judges are appointed, and possibly they do not know each other as well as we do. Thank you very much. PROF. ADELMAN: Thank you, Lord Hoffmann. John. PROF. DUFFY: Thank you, Marty. I have written previously about the relationship between the Federal Circuit, in particular, and the Supreme Court. In 2002 I predicted that the Supreme Court was in the process of returning to patent cases and the patent bar in general.8 At the time it was somewhat of a radical view. There were two competing views. There was an article published nearly simultaneously about the patent system in the age of the “invisible Supreme Court.”9 I think time has shown that, even then, you could see that the Supreme Court was reentering the patent system. That is history now. That is a point we can all agree on at this time. Even if Marty thinks it may not be a great thing that the Supreme Court is back, it certainly is back. The one point I want to talk about today is that at the very end of that article, I said that each case that comes to the Supreme Court of the United States from the Federal Circuit comes with a subtext about the proper relationship between the generalist Supreme Court and the specialist Federal Circuit. I suggested that the relationship between the courts would work best if each practiced the virtue of humility, to some degree. Lord Hoffmann used the word “respect.” I think that is a very similar concept. But the respect or humility that the courts need is not generated by personal relationships, as it is in the English system. Therefore, I think our judges have to be a little bit more self-conscious about trying to understand the perspective and the capabilities of the other court. With respect to the Supreme Court, I think its strengths are that it has a more general perspective and can put intellectual property law in a broader context with, let’s say, general property theory or general judicial theory of remedies. I think it tried to do that in many of its cases, most prominently the eBay case,10 where the Supreme Court said to the Federal Circuit: “The general rules granting injunctions are the general rules that you have to apply in your case law.” But the Court also did, I think, the correct thing, which was to remand the case back to the Federal Circuit, with a great degree of flexibility about how those general principles will actually apply in the specialized circumstance of the patent context. Indeed, they actually seemed to give the Federal Circuit two options, 8 See John R. Duffy, The Festo Decision and the Return of the Supreme Court to the Bar of Patents, 2002 Sup. Ct. Rev. 273 (2002). 9 See, e.g., Mark D. Janis, Patent Law in the Age of the Invisible Supreme Court, 2001 U. Ill. L. Rev. 387, 387 (2001). 10 eBay Inc v. MercExchange, LLC, 126 S. Ct. 1837 (2006).

358 SESSION V: PATENT in two concurring opinions, almost inviting the Federal Circuit to explain which of the options is the superior option in the patent context. The Federal Circuit’s strength is its expertise in the patent system and its day-to-day contact with all of the other actors in the patent system, including the Patent Office and the trial judges who have to try cases. The Supreme Court, I think, has the de jure position to control the pace of the law, the development of the law in the patent area, by establishing binding precedents for the nation. But, really, the Federal Circuit has the de facto ability to actually control the pace of the law and the implementation of the law, because the Federal Circuit sees so many patent appeals in a year. I think that without some degree of humility and respect for each institution’s strengths and each institution’s weaknesses, the relationship will not work very well. In terms of how the relationship is going, I think there are some mixed results. There are some rather famous cases, visible cases at least, where you might say that the courts have seemed somewhat hostile to each other. In the recent argument in KSR, the Chief Justice and Justice Scalia made comments that seemed — well, favorable to me, because I actually represented one of the parties —somewhat troubling. Justice Scalia said of the lower court’s law, “This is gobbledygook. It really is, it’s irrational.”11 I don’t think that was a terribly helpful comment. The Chief Justice, who is usually more reserved, actually said that “it’s worse than meaningless.”12 Though it was somewhat helpful for me in my narrow interest, because I was representing one side of that, as a professor, I thought this was not entirely consistent with what I had written in 2002 about how courts are supposed to respect each other and have some sense of their institutional limitations. I think if the Supreme Court cannot understand what the Federal Circuit is saying, it needs to try a little bit harder. So too with the Federal Circuit. If the Federal Circuit cannot understand what the Supreme Court is saying or cannot understand the more generalist perspective, it too needs to try a little bit harder. I want to close by talking about three more specific things about the relationship between the Supreme Court and the Federal Circuit in our system. In general, these three things, I think, go to the question of whether the two circuits are actually developing a good relationship. One is a statement that you hear quite often today, that the Supreme Court seems to be reversing the Federal Circuit an awful amount, and that that might be one indication that the Supreme Court has lost confidence in the Federal Circuit. I think this is pernicious. I think it is wrong. First of all, all circuits at the Supreme Court have an average of getting reversed more frequently than they get affirmed. That is just a function of the Supreme Court’s docket. The Supreme Court can choose which cases it hears, so it often chooses cases in which it thinks the lower court decided the issue incorrectly. So all circuits get reversed more than they get affirmed. Another important factor here is that the Court has increasingly asked the government — the Solicitor General’s Office and the Department of Justice — whether the Court should grant certiorari. The government is a very respected player at the Supreme Court and is very good at predicting which way the Supreme Court will come out on an issue. So 11 KSR oral argument, Tr. at 41, available at http://www.supremecourtus.gov/oral_arguments/argument_ transcripts/04-1350.pdf. 12 Id. at 40.

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they often, on important issues where I think the Supreme Court if it took the case would affirm the Federal Circuit, tell the Supreme Court not to take the case. They tell the Supreme Court that the approach taken by the Federal Circuit is correct and the Supreme Court denies certiorari. A fairly famous case of that was the case SmithKline Beecham v. Apotex, which was written by Judge Rader.13 The Supreme Court asked the Department of Justice whether it should grant certiorari. The Department of Justice came back and said, “No. This is perfectly correct. Everything that was said below is correct.” The Supreme Court denied certiorari. That does not go into the statistics of affirmances, so people do not see that. It is a little less visible. But it is a case in which I think the Supreme Court was confident that the Federal Circuit got it right, and that explains why certiorari was denied. The second major point that I want to make is that even though the Federal Circuit gets reversed on individual issues by the Supreme Court, individual judges on the Federal Circuit are oftentimes in agreement with the Supreme Court. For example, there is a case right now at the Supreme Court, Microsoft v. AT&T,14 which came from a split panel. Judge Rader dissented from the panel majority.15 No matter which way the Supreme Court rules, it is going to affirm the views of one side of that debate in the Federal Circuit.16 Also on issues of deference to the district court, there is a deep split right now on whether the Federal Circuit should defer to the rulings of a trial court. If the Supreme Court takes that case, which many people think likely, the Supreme Court, no matter which way it rules, will endorse one side of that debate. So it is not a complete rejection of the entirety of the Federal Circuit’s jurisprudence. Even on some of the individual issues that the two Federal Circuit judges here feel strongly about, the Supreme Court precedent is more in their favor, even though a majority of their colleagues are against them. I think that Judge Rader on the deference issue is probably more consistent with the Supreme Court law. Judge Newman’s opinions on infringement are very close to Supreme Court precedents in their basic approach. So those are issues where, if they do make it to the Supreme Court, the opinions of individual judges will triumph, even if the Federal Circuit loses. In closing, I have one last idea, which I have six seconds to deliver. I have written a paper suggesting that it would be helpful for this process of dialogue that at least one additional circuit court, one additional intermediate court, be created.17 I think that would create a dialogue at the intermediate appellate level, a dialogue among peer institutions. The dialogue between the Supreme Court and the Federal Circuit is a very difficult dialogue to have, for a variety of reasons. I think it would be helpful if another court had jurisdiction and could have a respectful dialogue with the Federal Circuit on the major issues of patent law of the day. I think that would be helpful, and I hope we have time to discuss that idea. 13

SmithKline Beecham v. Apotex Corp., 365 F.3d 1306 (Fed. Cir. 2004). Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007). 15 AT&T Corp. v. Microsoft Corp., 414 F.3d 1366 (Fed. Cir. 2005) (Rader, J., dissenting) (“Had Congress intended to give extraterritorial effect to U.S. patent laws, it would have expressly stated so. Instead, Title 35 expressly limits liability under § 271(f) to activities occurring in the United States that result in the literal shipment of components in or from the United States.”) Id. at 1374. 16 Microsoft, 127 S. Ct. 1746. [Note: The case was decided on Apr. 30, 2007 (holding that to be liable under § 271(f), a U.S. infringer must manufacture and ship tangible components from the United States that are later incorporated into an infringing device).] 17 Craig Allen Nard & John F. Duffy, Rethinking Patent Law’s Uniformity Principle, 101 Nw. U. L. Rev. 1619 (June 2007). 14

360 SESSION V: PATENT Thank you. PROF. ADELMAN:

Thank you, John. Let’s move on to Judge Grabinski. Perhaps you and Sir Hugh could talk about the relationship between the national courts in Europe and the European Court of Justice (ECJ) in the same way as we’ve heard from Lord Hoffmann and John Duffy. JUDGE GRABINSKI: Concerning the relationship between German courts and the ECJ, from my perspective, frankly, I cannot say too much, because I am practicing patent law, and patent law is not dealing with Community law. But we also deal with Community plant variety rights, and in this respect we once made a reference to the ECJ, and we also made some suggestion how to resolve the question we asked to the ECJ. In this particular case, the Advocate General obviously did not take the same line as we had. But then — and this is quite exceptional — the ECJ followed our line. So we were quite satisfied with the result of this case.18 PROF. ADELMAN: Let me then ask you about your relationship to superior courts in Germany. JUDGE GRABINSKI: This is to some extent similar to the situation in the United States, as I understood your talk, and to some extent similar to the situation in the United Kingdom. In Germany, you have a lot more judges than in the United Kingdom. If you look at the general situation, then you will rarely find a personal relationship between the judges of the three court levels. But the situation is quite different as soon as patent law is concerned, because obviously there are only a few courts that have jurisdiction, at least in the real life. In most cases, they only go to three or four district courts, and then they go from one district court — take the example the district court of Düsseldorf — to the respective court of appeal and then to the Supreme Court. Since there are only a few judges involved, they get to know each other quite soon, in particular if you are working for a long period in this field, and usually you do. Because you have to specialize, you have to gain experience. I can say that there is also this mutual respect that you find in the United Kingdom. So the situation is quite similar. PROF. ADELMAN: Hugh, do you want to comment on Lord Hoffmann’s comments? PROF. LADDIE: Yes. Can I talk about the relationship between the national courts? Of course, I talk from the perspective of the U.K. courts’ relationship with the ECJ. It is great stuff to read about. It is always painted in Technicolor — you know, there is this toe-to-toe fight; we try to hit the ECJ in the knees, then they thump us on the chin — it is great reading. It is not really like that at all, not most of the time anyway. I want to develop something Lord Hoffmann said. I think it is really quite important, particularly for those who are not judges and have never been judges, to appreciate that there is a remarkable consistency amongst judges, that they think that their job is to do the job properly for the benefit of the users of the system. So there is no place for petty rivalries and to say, “I’m just going to disagree with So-and-So because I don’t like him or her.” What you are trying to do is to apply the law correctly in relation to the case that is in front of you. That is, by far and away, the most important principle. In Europe, we have a quasi-federal state, I am glad to say, with effectively a federal supreme court, and that court tells us what the law is on European issues. I think it is essential that we have that and it is an extremely good thing for Europe. 18 Case C-305/00, Christian Schulin v. Saatgut-Treuhandverwaltungsgesellschaft mbH, EuZW 2003, 404, E.C.J. (Fifth Chamber) (Apr. 10, 2003), available at http://eur-lex.europa.eu/JOHtml.do?uri=OJ:C:2003:135: SOM:EN:HTML.

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But there is one other feature of British judges, which I think Lord Hoffmann did not refer to, which is worth putting into the equation. The overwhelming majority of U.K. judges were members of the bar for about twenty-five years before going on the Bench. When you get to the top of the bar, under the system that used to exist until about two or three years ago, you are invited by the government to become a judge. Barristers are, by training, exceedingly independent. They also become, unfortunately, extremely opinionated. That is a fact of life. So you end up with a judiciary made up of very, very independent-minded and very opinionated judges. Our system of giving judgments encourages the opinionated side because we do not give communal judgments; each judge expresses his or her view. So there is a real emphasis on being your own person. This has a remarkable effect, for example, when it comes to disputes between the government, cases against the government. Our courts are remarkably independent. They do not in any sense feel that it is their job to support the government because it is the government on legal issues. We think it is our job to look at the facts and the law independently. This has an impact on our relationship, I’m afraid, in the case of IP law and Europe. It is not telling any secrets that there have been differences of view as between the U.K. courts and the ECJ on IP issues. The ECJ would be, to use Lord Hoffmann’s words, made up of amateurs as far as IP is concerned. It is necessary that that is so because the ECJ has one judge from each country and it has to cover the whole spectrum of law that is covered by the European Union. What happens then is that very opinionated British judges think they understand what the law is. Matters are sent off to the ECJ. A group of what may be regarded, probably unfairly, as amateurs come to a conclusion, sometimes a conclusion that is extremely badly expressed so that it is not quite clear what is being said. Then you end up with the English courts not reacting as well as they ought to. The most recent example of this relates to repackaging of pharmaceutical goods. There was a big case called Boehringer. I sent a reference to the ECJ.19 They came to some conclusions that I thought were wrong.20 They sent the case back. I applied the law as I thought they had said it — even though I did not think it was right, that did not matter; that is what they had said — and sent it to the U.K. Court of Appeal.21 Lord Justice Jacob obviously did not like what the ECJ said, and so he sent the whole lot back again and asked them a whole new series of questions.22 It looks like he is asking new questions, 19 Glaxo Group Ltd v. Dowelhurst Ltd; Boehringer Ingelheim KG v. Dowelhurst Ltd; Boehringer Ingelheim KG v. Swingward Ltd; Eli Lilly & Co v. Dowelhurst Ltd; Glaxo Group Ltd v. Swingward Ltd; SmithKline Beecham Plc v. Dowelhurst Ltd., [2000] 2 C.M.L.R. 571, [2000] E.T.M.R. 415, [2000] F.S.R. 529 (28 Feb. 2000) (Laddie J.). Following his judgment, Mr. Justice Laddie referred a number of questions to the ECJ in relation to the “necessity” and “specific subject matter” (non-damaging to the trade mark) tests. 20 Case C-143/00, [2002] E.C.R. I-3759 (23 Apr. 2002) (holding that a parallel importer must fulfill all the BMS conditions even if the repackaging causes no harm to the specific subject matter of a trade mark; and that repackaging is necessary where effective access to the market is hindered as a result of strong resistance from a significant proportion of consumers to relabeled products). 21 Following the ECJ judgment, the cases went back before Mr. Justice Laddie, who gave his second judgment on Feb. 6, 2003. 22 Both parties appealed. Glaxo Group Ltd v. Dowelhurst Ltd., [2004] E.W.C.A. (Civ.) 290 (Mar. 15, 2004) (Jacob J.). The Court of Appeal referred questions to the ECJ concerning the following areas of continued uncertainty: (1) where the burden of proof should lie in relation to the BMS conditions; (2) whether the necessity test applies merely to the fact of repackaging or also to the manner of repackaging; (3) whether damage to the reputation of a trade mark encompasses anything, not just defective, poor quality or untidy repackaging or relabeling; (4) whether the BMS conditions apply to a product which has simply been over-stickered; (5) whether de-branding or co-branding are to be regarded as damaging; (6) whether failure by the parallel trader to give notice

362 SESSION V: PATENT but what he is really saying is “I don’t like what you said the first time around.” I am not sure that is a good way of proceeding, but I’m afraid it is the reality. As to the relationship between us and our European colleagues at the national court level, I think most people would be amazed at how much respect we give to our colleagues’ judgments. As far as we are concerned, they are treated as the product of really able lawyers at the same level as us. PROF. ADELMAN: Thank you, Hugh. Now I’m going to ask Judge Newman and Judge Rader about the relationship between the Federal Circuit and the Supreme Court and to comment on what Professor Duffy had to say. Polly, do you want to go first? JUDGE NEWMAN: I am pleased to follow Professor Duffy because he raises points that are important for all of us to have in mind when we consider our court and its context with the Supreme Court. The way one views how the Federal Circuit handles its cases depends on the background of the observer. Many people look at our court and call it “the patent court.” Many more people call it “the government contracts court.” Others know that we are the successor to the Indian Claims Commission and look at our court in terms of its jurisdiction of Native American claims. Or they will look at our tax cases —for instance, we recently declared unconstitutional the export tax — and see us as a dominant court in the tax area. Others look at our court as “the Customs court” because we receive all of the appeals from the Court of International Trade on Customs duties, countervailing duties, dumping cases, and so on. There also are the appeals of veterans’ claims. We are the exclusive appellate body for statutory and constitutional issues arising from the court of appeals for veterans’ claims. There also are the federal employment cases. We are the judicial body of appeals for federal employees, including military cases. The way to think about the court and the way to describe it is, yes indeed we are experts. We are experts in the defined statutes that are assigned to us. There are some twenty-five, I think. All of these cases have raised important policy questions that have taken the attention of the Supreme Court. The percentages, if one counts percentages — and I am benefiting from some of the counts that Professor Duffy has made because they are so complete — show that the ratio of patent cases that our Supreme Court has taken to review is in almost direct proportion to the percentage of patent cases that are decided in our court. Another interesting observation is, when you look at the number of petitions for certiorari in patent cases, as in others, that are taken to the Supreme Court, the ratio is even lower, less than 1 percent, I think; whereas in our Native American cases the Supreme Court has taken a significantly higher percentage of cases on appeal. Now, these are all very important issues, and they all raise important policy issues. This current agitation about the relationship between the Federal Circuit and the Supreme Court in patent cases has caused me to look at the overview. Since the beginning of the Federal Circuit twenty-five years ago, there has been a grant of certiorari petition to the trade mark owner per se means that all products subsequently imported are infringing, and, if so, what relief should be. Case C-348/04, Judgment of ECJ (Second Chamber), upon the second reference in the Boehringer Ingelheim v. Dowelhurst parallel import proceedings (Apr. 26, 2007), available at http://www.lawreports.co.uk/ WLRD/2007/ECJ/apr0.1.htm.

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in twenty-four or twenty-five cases — it has increased by one, a tax case, in the last couple of months. A quite small number overall. As you look at those cases in the patent field, they are policy issues, important questions of national commercial policy. For instance, how is industry or competition affected by precedent in the patent field, for in most of the areas in which the Supreme Court has accepted petitions concerning Federal Circuit cases, the Supreme Court has already spoken. There is a significant body of basic law in many of these areas in which, because of the fairly large number of appeals in recent years, there have been refinements and elaborations that can be challenged in the specific context of the case. I was interested to see that in one of the decades at the heart of the Industrial Revolution, in the 1870s or 1880s, our Supreme Court took 151 patent appeals. So if you look at the numbers, it is hard to make much out of where we are now. There is what I have called a “spike” in the last year or so, of six or seven petitions that have been accepted by the Supreme Court, preceded by a dearth of one or two per year in the preceding decade. So one can say that there is more interest. But much more likely, it seems to me, is that it has finally penetrated to those senior jurists what has happened in industry and in commerce and in technology in the United States and in the world; and in trade the increasing globalization of patent, copyright, and trademark issues; the increasing dependency on technological advance; the extreme importance to the nation and to the world of striking the right balance. I should say as an aside that I think we make a point on our court of speaking out and expressing and recording the differences of opinion among our judges, so the various viewpoints that have been considered and accepted or rejected are known to the public. It is hard to find an area of litigation within our court that is more pervasive in its policy impact on the nation, on the public interest, of the balance between competition among existing products and technological advance based on the new products. These are opposing poles of how the patent system works — the time limits on patent life, the criteria for patentability — that the Patent Office and the courts are attempting to apply, in searching for the optimum balance. Now, the losing party in these litigated issues always has something important to say. Those voices are more vigorous than they have been in the past because there is much more involved, much more at stake. As I said yesterday, I very much welcome the judicial and national attention that this debate is receiving because there is so much misinformation that has been spread, including misinformation spread by patent insiders who do not represent the larger picture. The courts, however, are concerned with the overall balance in the public interest, the balance between emphasis on technological advance and emphasis on competition on existing products, even if it slows technological advance. So when you look at the relationship between us and the Supreme Court, look at it in that context. It is not a personal relationship. It is not a matter of personalities. I see it as a matter of recognition of the burgeoning national interest in these areas and speaking out as well as we can to get it as right as we can. PROF. ADELMAN: Thank you, Judge Newman. Judge Rader? JUDGE RADER: Let me address the Federal Circuit’s identity crisis and whether or not the Supreme Court is the best therapist. With every case, with every major issue confronted by the Federal Circuit, we undergo an identity crisis battle. It is present in every en banc reconsideration, it is present in every case, as we try to decide, individually and as a court, are we just another court of appeals

364 SESSION V: PATENT taking in the confluence of federal jurisprudence appeals from lower courts, handling them according to standard procedures, and occasionally receiving review from the Supreme Court? Or are we a court of special creation, with a mission to achieve uniformity in the adjudication of patents, to ensure that patents are uniformly applied and enforced, even — if you go back to the 1982 creation and before — with a mission to improve competitiveness of the United States and rescue an economy with a policy of innovation? Does the Federal Circuit have an agenda, an economic competitive agenda, an uninformative agenda; or is it a neutral judicial body with the same powers as every other circuit? Let me show you how this plays out, for instance, with the big issue that is continually hashed over in this kind of conference, the standard of review for claim construction. If you believe the Federal Circuit is a circuit, just as the Ninth Circuit or the D.C. Circuit, then you will say, “Of course it receives determinations made by lower courts, gives them appropriate deference, particularly in areas where there has been fact finding,” and therefore you would perceive a need for deference. On the other hand, if the Federal Circuit has an agenda, a mission — it was given a mission by its creation — then it must maintain the discretion in each case to ensure that the patent is being properly and uniformly enforced, to ensure that competitive forces of innovation are properly being balanced with competition, the beautiful remarks of my colleague taken into consideration? Which is it? Well, the court has said both things. We have an identity crisis on occasion. Now, is the Supreme Court the best therapist for that great problem which confronts the Federal Circuit, because it is unlike not every other judicial institution in the United States, but every other judicial institution in the world? Where else in the world do you find the policy for an entire nation, indeed the most powerful economic nation in the world, on the cutting-edge of economic law, patent law and innovative products that form the marketplace for the global market, set by, on occasion, two out of three judges? That was an incredibly aggressive thing done by the United States in 1982. Is the Supreme Court the one, however, to step in and decide whether the Federal Circuit should pursue this agenda that it apparently was given in 1982, or whether it should with humility, to use the words of Professor Duffy, drop back into a position more like that of every other circuit? Now, the Supreme Court has, to use an ill-timed word here, an agenda in making that resolution. Its agenda is to, of course, do that which it is most comfortable with. It reviews every circuit according to a similar procedure. It feels like its mission, to use the thoughts of Professor Duffy, is to get the global view of the law, see the jurisprudential landscape, and put the Federal Circuit’s decisions in the proper box. But notice that identity crisis that puts them on one direct side of the equation. Is that the proper side? Well, perhaps. Perhaps you could argue that while in 1982 the uniformity was necessary, because of the aggressive economic competition, the balancing of the forces that my colleague discussed, maybe we have evolved to a point now where the Federal Circuit should reconsider whether that mission was really given to it and whether it has an agenda or not. But notice that the Supreme Court is not considering whether there was something given to the Federal Circuit to do in 1982. It has dismissed that point and is pursuing one side of the identity crisis. I think the best therapist is the one who approaches the identity crisis neutrally. Let’s hope that our psychiatrist is able to handle this particular patient. PROF. ADELMAN: Thank you, Judge Rader.

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Before we turn to Hal, as we are dealing with psychology here, I wonder why the Supreme Court allowed that. If you read the transcripts, which are now published, of the oral argument that day, it is amazing. Why do they allow it? In IP cases they should suppress it. They look so bad and the counsels are so bad. I can argue, even though Professor Duffy wants to defend the MedImmune case,23 that is a perfect example of not giving you one reason why they made that policy choice. Professor Duffy said they did not make a policy choice; they had some idea of what a case or controversy is and that is all they were thinking about, that they were not thinking about the implications of anything. But at least Mr. Justice Thomas told them what the implications were. So they rejected it all. Very embarrassing stuff. The KSR arguments you do not want to read.24 You really cannot read it on a full stomach. So I do not know how they actually are going to be the psychiatrist. Maybe they need some psychiatric help. Hal, and then I want to take questions from the audience. We have had a terrific discussion. MR. WEGNER: Just a couple points. First of all, the best therapist is not the Supreme Court. I have always been reluctant to see the Court take certiorari in patent cases because they deal so infrequently with patent cases. There are two views of Supreme Court reviews of patent cases. The predominant view, which I have heard expressed on this panel — and I heard it in California on February 20th and other places —shows that the jurisprudence of the Federal Circuit is very important. That is a good reason to grant certiorari. Indeed, we have various en banc Federal Circuit cases where ideas are developed very thoughtfully by both the majority and the dissenting opinions. I think that helps. But there is a second aspect. I think Professor Duffy did tantamount to calling the Supreme Court really the “en banc policemen.” In the Microsoft case,25 there has been balkanization of panel precedent in this area, and it forced the Supreme Court to play the role that the Federal Circuit should have done en banc. There are several areas where the Federal Circuit looks less than optimum in terms of its legal skills and scholarship, for example, the Voda v. Cordis case came out in February.26 Did you know that the Paris Convention27 was only implemented in the 1970s? Read the opinion. I could go on for about three or four hours on that majority opinion. The court must take responsibility for what it is doing. Claim construction has gone berserk in the Markey period.28 If you look at the twenty-five-year period of the Federal Circuit, break it into two eras: during the first ten years of the court there was 0.7, less than one, per year split panel, set of panels in claim construction per year; in the eight-year period Professor Moore had studied just before

23 MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (2005), vacated and remanded, 127 S. Ct. 764 (2007) (No. 05-608), available at http://www.supremecourtus.gov/opinions/06pdf/05-608.pdf. 24 KSR Oral Argument Transcript, available at http://www.supremecourtus.gov/oral_ 25 Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007). 26 Voda v. Cordis Corp., No. 05-1238, 2007 WL 269431, at *15 (Fed. Cir. 2007). 27 Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, as last revised, Stockholm, July 14, 1967, 21. U.S.T. 1583, 423 U.N.T.S. 305. 28 Howard T. Markey, first Chief Judge of the Federal Circuit (and the last Chief Judge of the Court of Customs and Patent Appeals), retired in 1991.

366 SESSION V: PATENT Phillips,29 it was 4.5 per year, thirty-six in eight years. Since Phillips it is at the rate of nine per year.30 The court has to do a better job of resolving its dirty laundry. If the view is, “We shouldn’t en banc cases because it exposes our cases to scrutiny,” it is much better to bring that out now and either rehear the case by a panel or do things en banc than to let scholars — if I wanted to have a whole-semester course, I would give Voda v. Cordis as a course. I imagine some professors are going to do that. My new name for that is the “Voda patent piñata.” It trumps everything else I have seen in years. The court will have a healthy relationship if it does en banc cases. PROF. ADELMAN: Hal, that one is not over in terms of what the Federal Circuit is going to do. MR. WEGNER: Then I don’t understand. PROF. ADELMAN: I do not want to get too far off-track here. We are talking about the relation to the Supreme Court. MR. WEGNER: All right. Let me just finish, Marty. I think that the importance of patents will require the Supreme Court to take cases. If they are properly presented, it will enhance the reputation of the Federal Circuit. PROF. ADELMAN: Let’s take some questions from the audience. Judge Hughes. QUESTION [Judge Roger Hughes, Federal Court of Canada, Ottawa]: In the Kirin-Amgen case that Lord Hoffmann referred to twice, the House of Lords took special instruction from a professor — I think from Oxford, possibly Cambridge — for one morning each of three successive Tuesdays in a very difficult area of biotechnological science. I think not only is the patent law difficult, but the subject matter of patents, especially when you get beyond the edge and into electronics and pharmaceuticals and biology, is very difficult too. What is your thought on the highest court getting in effect — and I am not going to call it fresh evidence — a refresher course, if I can call it that, on the subject matter of the lawsuit? PROF. LADDIE: It is very interesting. First of all, you must understand that the technical advisors who were supplied to the House of Lords were not there to tell them what the facts were at all. Indeed, if you read the House of Lords’ decision in the Kirin-Amgen case, it is not a decision about facts; it is about the policy to be applied when deciding what is the scope of patents. What they were using the technical advisor for was to put them in a position where they could actually understand the judgments below, because the judgments below included technology. If you read the Kirin-Amgen case, frankly you could get rid of all the science. The only value in that case is its direction given to U.K. courts, unfortunately, on how to construe patents. So it is not giving new evidence to the court. QUESTIONER [Judge Hughes]: Just to follow up, is that unique? Is that the first time it has ever been done? PROF. LADDIE: No. QUESTIONER [Judge Hughes]: Secondly, would you suggest that that is something that should be done in other cases? 29 Phillips v. AWH Corp., 363 F.3d 1207, 1216, 70 U.S.P.Q.2d (BNA) 1417, 1423 (Fed. Cir. 2004), vacated, 376 F.3d 1382, 71 U.S.P.Q.2d (BNA) 1765 (Fed. Cir. 2004). 30 Kimberly A. Moore, Judges, Juries, and Patent Cases – An Empirical Peek Inside the Black Box, 99 Mich. L. Rev. 365 (2000) (validity of litigated patents upheld in 67% of cases in study sample – 64% of bench trials; 71% of jury trials).

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PROF. LADDIE: It is not the first time it has been done. In one of the very first genetic engineering cases, the Court of Appeal had Sidney Brenner, a Nobel Laureate, as a technical advisor. And certainly when I was a judge, there was one case that involved a specialist type of electronics, and I asked for the Patent Office to send a technical advisor to sit with me. It was a disaster because they misunderstood the request and they sent me somebody who knew nothing about the technology at all. So it did not work very well in that case. That said, I think it is actually one of the weaknesses of the way patents are determined, certainly at first instance, and maybe also on appeal. Normally, one of the most important issues is obviousness. I think it is a weakness in the United Kingdom that the courts are entirely made up of lawyers. At the end of the day, who should be helping determine questions of obviousness should be those who are technically qualified. That is why I have a very great respect for the German system, where they do have proper technical assistants to help on determining scientific matters, not legal matters. JUDGE GRABINSKI: Very briefly, if it is about novelty, in the first instance we have the Federal Patents Court. There you have three technicians, technical judges, on the board that decide, and technicians from the respective technology. Then on the appeal level if it goes to the Supreme Court, it is still not only on law but also on facts. It is a very exceptional situation. In perhaps 98 percent of all cases they have a court-appointed expert before they decide. From this expert they get the necessary information in order to decide the case. This is for patentability; this is not for infringement. PROF. ADELMAN: We will take one more question. QUESTION: It may be for the next session, but what about the human rights? PROF. ADELMAN: That is next session. A perfect lead-in. What a straight man. This session is over. I want to thank all the speakers.

SESSION SESSION VI: VI: HUMAN HUMAN RIGHTS RIGHTS & & INTELLECTUAL INTELLECTUAL PROPERTY PROPERTY

SESSION VI: HUMAN RIGHTS & INTELLECTUAL PROPERTY

Moderator PROF. MARTIN J. ADELMAN

George Washington University Law School (Washington, D.C.)

Speakers ORIT FISCHMAN AFORI

PROF. LAURENCE R. HELFER

College of Management, Academic Studies Law School (Rishon Lezion, Israel); Visiting Scholar, University of California, Berkeley, School of Law

Vanderbilt University School of Law (Nashville, TN)

PROF. F. WILLEM GROSHEIDE

Prof. Geertrui Van Overwalle Centre for Intellectual Property Rights (CIR), Faculty of Law, University of Leuven

Chair, Centre for Intellectual Property Law (CIER) University of Utrecht

Panelists HANNU WAGER

PROF. PETER K. YU

Counsellor, Intellectual Property Division, World Trade Organization (Geneva)

Michigan State University College of Law (East Lansing, MI)

PROF. ADELMAN: Now we will turn to the human rights panel. This session is really the creation of Professor Grosheide, who had a wonderful conference in Utrecht last year where this was the main subject. That stimulated the idea that we ought to do something like that at Fordham and have some of Utrecht Conference1 participants here. We are going to discuss human rights and intellectual property and see if there really is something to be learned, something to help IP lawyers or help human rights lawyers in this intersection. Since the original idea of discussing this topic is Professor Grosheide’s, I am going to have him go first, after I introduce our distinguished panel. Immediately to my left is Professor Orit Fischman Afori, who teaches at an excellent private law school in Israel. Professor Willem Grosheide, as you of course know, is the head of a very large center at Utrecht. Professor Laurence Helfer teaches at Vanderbilt, a 1 The Human Rights Paradox in Intellectual Property Law Conference, Centre for IP Law (CIER), University of Utrecht, The Netherlands, July 3–4, 2006.

370 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y great law school in the United States. Professor Geertrui Van Overwalle teaches not only at Leuven, one of the most famous European universities, but at other universities in Belgium. Somebody has to teach patents, so she does it. It is one of the great deficiencies of European universities in my opinion. She is trying to single-person/ single-woman, take care of this problem. Hannu Wager is well known to all of us. Peter Yu runs a big IP program at Michigan State University in East Lansing and has written widely. Let me turn it over to Professor Grosheide.

The Human Rights Paradox Prof. F. Willem Grosheide Center for Intellectual Property Law, University of Utrecht PROF. GROSHEIDE: When we organized the Utrecht conference that Marty was kind enough to refer to, we used for it as a general theme the human rights paradox. As I look around here, I think those were well-chosen words. Being here is also paradoxical. We have the main room, but the attendance is not that great. PROF. ADELMAN: It is Friday. PROF. GROSHEIDE: It is Friday. But it is a paradox — the main room and modest attendance. I think that is very well chosen for the human rights issue today. Nonetheless, human rights are here to stay. That is the main theme of my talk today. I will not run through my slides because that will take too much of my time. They are in your materials. I may refer you, as a context, to my slides. What I will do is give some general information to introduce the theme of human rights and their relation to intellectual property law. I start with the observation that, traditionally, human rights, at least in the civil law context — it may be somewhat different in a common law context, but I am bound to the civil law context in this respect — relate to the vertical relationship between state and citizen. Human rights have been perceived for ages as something that protects citizens against governments, states, or however you want to think of that — vertical relationships. But in the last ten, twenty, thirty years, what we have seen is that, more and more, human rights have been introduced in horizontal relationships. That is a hot topic in Europe, I can say. We call that in Europe the constitutionalization of, particularly, private law. What is promoted most of all in Germany is that when we have private law relationships in front of us that should be subordinate to human rights issues. Take, for instance, contract law. In very famous German law decisions, the Bundesverfassungsgericht has said contracts should be subordinate to human rights issues. That is repeated also in intellectual property law now. When intellectual property law was first related to human rights law, that had to do with the vertical relationship. The first connection was, I would say, when copyright law was seen as a barrier to the freedom of expression. The first cases, at least in Europe, with regard to the relationship between intellectual property law and human rights law were in that domain — the freedom of speech, the freedom of expression. There, it was said that copyright law should not be a barrier to the freedom of expression. We have a very interesting case in the Netherlands, the Scientology case.2 There, the 2

Scientology v. XS4ALL, Karin Spaink et al., President District Court of The Hague, (12 Mar. 1996) (the

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Church of Scientology tried to block the distribution of documents of the Scientology Church that had come to someone who put them on the Internet, referring to its copyright in that particular material. Our Court of Appeals in The Hague said: “This is copyrighted material, but the freedom of speech should not be blocked by copyright reference here. It is of general interest that these documents are brought to the floor, are distributed, come to the knowledge of everybody.” So copyright law was set aside. Noody said that copyright law in itself is a human right. No. Copyright law was part of private law, was a sort of subsection of civil law, and that could not be interfering with the exercise of human rights. But that has changed over the last ten or fifteen years. Now what we see is that very often intellectual property rights themselves are categorized as human rights. In my perspective, that comes from two sources. The first is that we have come to learn about what I would call indigeous knowledge, traditional knowledge, folklore, all that kind of thing, which has to do with cultural identity, cultural diversity, and which falls out so far from the scope of traditional intellectual property rights, but which we think are worth protecting under some sort of intellectual property right scheme — these indigenous knowledge rights, so to say. In that discussion, it is very often said that we should call these positions of those native cultures and those who are the owners of the native culture as human rights. That is one venue from which intellectual property rights are seen as human rights nowadays. The other venue is that more and more we think that intellectual property law has become a tool within what I would call the “entrepreneurs rule the words.” Particularly in patent law and copyright law and trademark law, you will see that those rights are not anymore that much individual, personal rights, but are corporate rights. We heard that on Thursday. This is something that we really should take into account when we look at what we think intellectual property law is about. Even yesterday, Professor Jane Ginsburg said that in the next ten years maybe we will see more and more accent on the individual, on the personal rights aspect, in the domain of intellectual property law. That, I would say, is another venue alongside which we come to looking at intellectual property rights as human rights. That may be as it is. I have some observations to make here that are placing me in an ambiguous position. This is a good development, seeing intellectual property rights per se as human rights. I have three observations to make, three thoughts. The first is if we call intellectual property rights human rights, then I would suggest that we at least make a distinction between different intellectual property rights. If we speak about patents and copyrights, where you have a creative or an innovative structure, then I think that is all right. But speaking about database rights, as we have them in the European Union, or trademark rights from a human rights perspective I would not say is a good idea. What I would suggest is that if we accept a human rights approach to intellectual property rights, then we should make a distinction. We should have a tailor-made approach here and sort out which intellectual property rights are proper to be categorized as human rights and which are not. Second, if we call intellectual property rights human rights, we have a problem if we President ruled that an Internet provider, in granting access to copyright- protected materials placed on Internet Web sites, cannot be held liable for copyright infringement); Scientology v. XS4ALL, Ct. Ap, The Hague, [2003] AMI 217, I.E.R. 2003/6, 352 (4 Sept. 2003) (holding that in the absence of a statutory limitation that might cover Spaink’s extensive postings, Scientology’s copyright was trumped by the freedom of expression enshrined in art. 10 of the European Convention on Human Rights).

372 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y still accept that entrepreneurs refer to intellectual property rights and call them human rights. That, of course, is something we will not accept. Again here, we should make a distinction and we should sort out individual and personal copyright and patent law rights, and not allow entrepreneurs to refer to intellectual property rights, if they own them, as their human rights. That would be an anomaly, I would say, in using the term “human rights.” If we accept that intellectual property rights are categorized from now on as human rights, that is only acceptable, I would say, if we distinguish, if we tailor-make those intellectual property rights according to the kind of right. Not every intellectual property right can be categorized as a human right. And we should sort out who is the owner of the right. We should distinguish in that respect also between entrepreneurs and individual people. Thank you very much. * * *

Copyright and Human Rights: External Balance for Internal Benefit Orit Fischman Afori Visiting Scholar, University of California, Berkeley, School of Law Assistant Professor, School of Law, College of Management Academic Studies, Israel I. INTRODUCTION My entry ticket here is an article I wrote about the potential impact of human rights’ international norm on American copyright law.3 The relevant international norm is Article 27 of the Universal Declaration of Human Rights,4 which basically acknowledges two human rights: The first right is the right of every person to freely participate in cultural life — a right which includes both a passive element of access to culture and an active element of engaging in creative activity; therefore, the right might be called the right to “access and participation.” The second right is the right of authors to enjoy protection over moral and material interests with respect to their productions — a right which is a sort of intellectual property right.5 And I am deliberately avoiding the word “copyright.” Article 27, then, is comprised of two parts, which together create a package of rights called “cultural rights.” In my article I proposed the idea that, because the Universal Declaration reflects customary international law, or that is at least one source of inspiration, it should as such influence American internal copyright law. With respect to this proposition two basic questions might be posed — how and why: How can the Universal Declaration influence 3 Orit Fischman Afori, Human Rights and Copyright: Introduction of Natural Law Considerations Into American Copyright Law, 14 Fordham Intell. Prop. Media & Ent. L.J. 497 (2004) [Copyright Fordham Intellectual Property, Media & Entertainment Law Journal 2004.] 4 Universal Declaration of Human Rights, G.A. Res. 217A, U.N. GAOR, 3d Sess., Supp. No. 16, at 71, U.N. Doc. A/810 (1948). 5 Id. art. 27: 1. Everyone has the right freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits. 2. Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.

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domestic copyright law, given that the American Constitution’s Copyright Clause apparently allows only utilitarian perceptions, while the human rights underpinnings are from the field of natural law theory?6 Since I have discussed this and it relates only to the American realm, I will skip this fascinating discussion. The point I would like to stress today is the question of “why” — why should we get human rights involved in this already complex area of private law, and what benefit will stem from it? My notion is that the external human right norm might have a moderating effect on the development of internal, domestic copyright law.7 II. THE PROPOSED MODEL I will begin by sketching the proposed model in broad terms, and then I will explain the scheme in more detail. The international norm acknowledges two conflicting interests — the proprietary interests of owners and the liberties of users — as human rights. This begs the question how to reconcile the two — which right supersedes? The international instruments do not present a fixed formula, such as the primacy of one of these rights over the other, but see the benefit in the very basic acknowledgement of a specific human interest as a human right. This is where the marginal contribution of the external human right norm to the internal domestic balance comes into play: Though it is a common view that the domestic intellectual property statutes already contain a decisive balance between the conflicting interests, the truth is that in many cases it does not. The final balance — the fine tuning — is left up to the courts. However, the courts lack coherent guide line in order to prevent arbitrary decisions or forum shopping. In order to further the values of fairness and justice, the cultural rights scheme may function as such a guideline — I prefer to call it a “compass” — which will assist in finding the general preferred direction. This guideline is the following: whenever there are different options for interpreting or operating the domestic rule, courts should opt for the option that realizes best both of the competing human rights — taking into consideration the precise interest at stake, evaluating its true relevant human right strength or weight. The beneficial outcomes are numerous: the promotion of public access to knowledge as a balance to the industries’ intent to maximize profits, and the promotion of authors’ personal interests as individuals as a balance to entrepreneurs’ interests. Now I will explain the model in more details. I will refer to two themes: First, what exactly is the scope of cultural rights as human rights? Second, what are cultural rights’ potential functions as a moderating means? III. SCOPE OF CULTURAL RIGHTS: ACCESS AND PARTICIPATION AND COPYRIGHT As to the exact content of cultural rights as human rights, I will begin by mentioning that the cultural rights, being the “third generation” of human rights, are not yet being debated. However, the rights acknowledged in Article 27 of the Universal Declaration were also acknowledged in Article 15 of the subsequent International Covenant on 6

See Fischman Afori, supra note 3, at 530 ff. See id. at 539–48. 8 International Covenant on Economic, Social and Cultural Rights, G.A. Res. 2200A, U.N. GAOR, 21st Sess., Supp. No. 16, at 49, U.N. Doc. A/6316 (1966). Article 15(1) states: The States Parties to the present Covenant recognize the right of everyone: (a) To take part in cultural life; (b) To enjoy the benefits of scientific progress and its applications; (c) To benefit from the protection of the moral and material interest resulting from any scientific, literary or artistic production of which he is the author. 7

374 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y Economic, Social and Cultural Rights (ICESC), with more or less same wording.8 As to the right of “access and participation” as a human right, it is extremely significant that the right is located in a covenant that deals with social-economic rights, in contrast to civil-political rights. This, I believe, is the key for segregating the cultural right of access from the basic freedom of speech. The focus is not on political liberties but rather on making the concrete opportunities available for a person to realize his right of access to culture, by the creation of appropriate socioeconomic conditions.9 As to the content of copyright as a human right — which tends to be more problematic — the U.N. Committee on Economic, Social and Cultural Rights released one year ago “Comment 17,” referring to the author’s right as a human right.10 There are some important insights in this exceptional interpretive tool. First, copyright as a human right must not be identified with domestic civil law copyright. Only some aspects of domestic copyright law are appropriate candidates for consideration as a human right.11 For example, copyright as a human right can be claimed only by human beings and not by artificial legal entities.12 Furthermore, the Committee makes clear in Comment 17 that the protection of the material interests of authors does not compel property rights, nor maximum benefit from the work of authorship, rather only adequate standard of living.13 To conclude this point, the interests of authors which are acknowledged as human rights are different from the domestic copyright scheme, and only certain elements of the domestic law deserve the highest protection of a human right. IV. CULTURAL RIGHTS’ POTENTIAL FUNCTION AS A MODERATING MEANS: INFLUENCE ON OPERATING INTERNAL OPEN STANDARDS Here I come to the second theme, how the human rights scheme can promote the development of a more balanced domestic copyright law. The potential functions of the human rights scheme could be divided into two: functions which come into play during the legislation process itself, which might be titled “ex-ante functions”; and functions that follow the enactment of the statute, which might be titled “ex post functions.” My focus is on the second. The most fundamental ex-post function of the human rights scheme is its influence on the operation of the internal, domestic rule. Intellectual property laws in general, and copyright law in particular, are embedded with “open standard rules.” In “open standard rules” I refer to norms which propose a general framework for filtering different policy considerations; however the final crystallization of the rule is performed by courts on a case-by-case basis.14 In copyright law some of the most basic terms and doctrines are actually “open stan9 For the difference between social-economic rights and civil-political rights compare the International Covenant on Economic, Social and Cultural Rights, supra note 8, and the International Covenant on Civil and Political Rights, G.A. Res. 2200A, U.N. GAOR, 21st Sess., Supp. No. 16, at 52, U.N. Doc. A/6316 (1966). See also Matthew C. R. Craven, The International Covenant on Economic, Social, and Cultural Rights, A Perspective on Its Development 106 (1995). 10 Committee on Economic, Social, and Cultural Rights, Thirty-fifth Session (2005), General Comment No. 17 (2005): “The right of everyone to benefit from the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author” (Covenant art. 15 ¶ 1(c)), E/C.12/GC/17 (12 Jan. 2006). 11 Id. ¶ 2. 12 Id. ¶ 7. 13 Id. ¶¶ 15–16. This means that a movie production company does not enjoy a human right, nor can an individual author claim a human right of maximizing all possible profits from his or her writings. 14 For the function of open standard norms in contrast to strict rules, see Louis Kaplow, Rules Versus Standards: An Economic Analysis, 43(3) Duke L.J. 557 (1992).

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dards” — for example, the originality requirement;15 the idea/ expression dichotomy;16 the substantial similarity standard for infringement;17 and of course the fair use exemption.18 So the common view, accor ding to which in the intellectual property field the legislature has long since tilted the balance between the conflicting interests, is far from accurate.19 The balance is often constructed by courts according to the legislature’s mandate. The outcome is the known situation of arbitrary and unsystematic decisions. Though the gap is filled with the common law mechanism, still there is inevitably a missing bright-line rule, or “compass” — a directive tool for the final ad hoc balance. The proposition is that in operating the open norms, in proper cases, the courts might use the cultural rights scheme as a conduit to determining the proper balance of interests. There is no advance determination of “copyright” or “copy-left.” The final goal is promotion of holistic fairness and justice. In this respect, it should be noted that in operating the open standard rules, courts in any case are motivated by a human right impulse. Sometimes it is done on a completely intuitive basis.20 Therefore, it is a better policy to bring these considerations into light: it furthers transparency and the rule of law; and it enables a true inspection and review. V. CONCLUSION To conclude, in my view, there is much to gain from importing the external international norm into internal domestic copyright law, if cultural rights as human rights will be taken seriously. Thank you. *

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PROF. ADELMAN: Thank you. Professor Van Overwalle?

Human Rights’ Limitations in Patent Law21 Prof. Geertrui Van Overwalle Centre for Intellectual Property Rights (CIR), Faculty of Law, University of Leuven, Belgium There is no better way to introduce the topic of human rights and patent law than by quoting an eminent colleague, “the Pope of IP and Human Rights,” Laurence Helfer. 15 17 U.S.C. § 102(a). For the question what is an original work, see Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 2.01 (2006). 16 17 U.S.C. § 102(b). For the complexities in employing the idea/expression dichotomy, see Nimmer & Nimmer, supra note 15, § 2.03[d]. 17 For the complexities in employing the substantial similarity standard of infringement, see Nimmer & Nimmer, supra note 15, § 13.03. 18 17 U.S.C. § 107. For the open standard fair use defense, see id. § 13.05. 19 For such an approach, see e.g., Harper and Row Publishers, Inc., v. Nation Enters., 471 U.S. 539, 560 (1985). 20 In favor of author’s right, see e.g., Bleistein v. Donaldson Lithographing Co., 188 U.S. 239 (1903); Gilliam v. ABC, 538 F.2d 14 (1976). In favor of public’s access rights, see e.g., Time, Inc. v. Bernard Geis Assocs., 293 F. Supp. 130 (1968). For a somewhat similar opinion, according to which in this latter case Court was motivated by a freedom of speech impulse while the reasoning was based on an erroneous realization of the fair use doctrine, see Nimmer & Nimmer, supra note 15, § 1.10 [D]. 21 This paper is an abbreviated version of Geertrui Van Overwalle, Human Rights’ Limitations in Patent Law, in The Human Rights Paradox in Intellectual Property Law (F. Willem Grosheide ed., 2007 (in press)).

376 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y According to Helfer, “IP rights have remained a normative backwater in the burgeoning post-World War II human rights movement.”22 Only over the last decade has human rights discourse gained wider attention and have commentators started to explore the relationship between IP and human rights in more detail.23 I. TWO APPROACHES Professor Helfer points out that in bringing this topic to the attention of IP lawyers two approaches can be witnessed. A first school of thought claims that human rights and IP are in a fundamental conflict. Strong IP protection is undermining, and therefore incompatible with, a broad spectrum of human rights.24 This point of view is echoed in UN Resolution 2007/7.25 The only way to resolve the conflict is to recognize the normative primacy of human rights over IP law and to make IP rights the servant of human right. IP law can only exist if it is instrumental to the fulfillment of human rights objectives. A second line of thought argues that human rights and IP rights are essentially compatible, because they both share the same objectives and the same goals, namely, human welfare, social welfare, and benefit for society. Such an approach is echoed in the International Covenant on Economic, Social and Cultural Rights (ICESCR).26 II. A THIRD WAY In my view, human rights and patent law interact in a still different way. Indeed, human rights and IP law are two distinct, separate bodies of law. However, human rights are a necessary complement of patent law in those (rare) cases where patent law is focusing too one-sidedly on financial gain, market success, and monopoly power. Human rights may and must thus assist in defining the utter limits of patent law. This third way can be based on the line of reasoning explained hereafter. The patent system is represented as a balance, where a quid pro quo exists between the private interest of the inventor, on the one hand, and the public interest of society, on the other hand. The private inventor benefits through the grant of a temporary monopoly right, whereas the public interest benefits from the production of goods and services and the disclosure of information embedded in the invention. Although the debate on the legitimization of the patent system has a long and turbulent history, this consequentialist, utilitarian justi22 Laurence R. Helfer, Toward a Human Rights Framework for Intellectual Property, Vanderbilt University Law School Public Law and Legal Theory, Vanderbilt Public Law Research Paper 06-03, available at http://papers.ssrn. com/sol3/papers.cfm?abstract_id=891303, 40 U.C. Davis L. Rev. 971 (2007). 23 Cf. Laurence R. Helfer, Human Rights and Intellectual Property: Conflict or Coexistence?, 5 Minn. Intell. Prop. Rev., 24 (2003), available at http://mipr.umn.edu archive/v5n1/Helfer.pdf. 24 The multilateral trade negotiations in the GATT Uruguay Round, which were concluded in 1993 and resulted in the formation of the WTO, encompassed for the first time discussions on aspects of intellectual property rights. The result of those negotiations was embodied in the Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_3.htm. Membership in the WTO implies adherence to the TRIPs Agreement. 25 United Nations, Sub-Commission on the Promotion and Protection of Human Rights, Resolution 2000/7, Intellectual Property Rights and Human Rights (17 Aug. 2000), available at http://www.unhchr.ch/Huridocda/ Huridoca.nsf/0/c462b62cf8a07b13c256970006704e?Opendocument. 26 International Covenant on Economic, Social and Cultural Rights, adopted by the General Assembly, Resolution 2200A (XXI) of 16 Dec. 1966, and entered into force on 3 Jan. 1976, available at http://www.ohcr.org/ English/law/cescr.htm.

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fication is probably most accepted in economic literature.27 This justification theory is also reflected in case law. Indeed, Lord Hoffmann refers to the tradeoff underlying the patent system as a “social contract.”28 How do human rights feed into this patent equilibrium? Human rights fit into this framework in a twofold way. First of all, human rights may offer a foundation, a basis, for the private interest component of patent law. Human rights may offer a basis for claiming that patent rights are themselves human rights. This perspective is somewhat contested and will not be further developed here. Secondly, human rights feed into the public interest component of patent law. This proposition can be based on a reinterpretation of the notion of public interest in patent law. The traditional notion of public interest, echoed in many parliamentary debates taking place at the event of the establishment of a domestic patent system some 100–150 years ago, is very economically oriented. Public interest was understood to relate to economic expansion and technical progress. Patent law was put in place as an instrument to stimulate economic welfare. Given the current globalization trend and the North/South divide, this one-sided notion of public interest should be reassessed. A new, more contemporary interpretation and a more contemporary definition of public interest should be contemplated. One way to do so is to reflect upon a wide, general, abstract or holistic definition. Such an approach is rather complicated and not very helpful.29 An alternative method is to opt for a concrete approach, where the “sacred” and holistic notion of public interest is abandoned and the concept is disaggregated into its concrete components. In an effort to do so, the notion of public interest can be screened in various fields of law, ranging from administrative law, constitutional law, economic law, and competition law, in an effort to filter out what is meant when the notion “public interest” is being used. An extensive survey of current public interest interpretations in various legal regimes, indicates that the notion “public interest” irrefutably encompasses morality, public security, consumer protection, and the protection of the life of animals and plants.30 Furthermore, it includes notions of human dignity, food security, informed consent, and access to public health. This legal tour d’horizon offers a well-founded basis for my proposition that the public interest concept can rightly serve as a gateway to introduce human rights in patent law. III. HUMAN RIGHTS’ LIMITS TO PATENT LAW What kind of limits do human rights introduce in the patent law framework? There is a series of human rights that might be contemplated in this regard. These rights can be grouped according to the function they fulfill in patent law. Some human rights act as a basis to limit the coming into existence of patent rights in certain fields (see infra Part III.A). Other human rights act as a means to implement procedural guarantees in the patent application procedure (see infra Part III.B.). Yet other human rights serve as limitations with regard to the exercise of patent rights (see infra Part III.C.). 27 For more on this theory, as well as the other justifications theories, see Sigrid Sterckx, The Ethics of Patenting — Uneasy Justifications, in Death of Patents 175–211 (Peter Drahos ed., 2005). 28 See Lord Hoffman in the House of Lords Decision of 21 Oct. 2004, Kirin-Amgen, Inc. and Others v. Hoechst Marion Roussel Ltd. and Others, [2004] H.L. 46, ¶ 77, available at http://www.publications.parliament. uk/pa/ld200304/ldjudgmt/jd041021/kirin-3.htm. 29 See Geertrui van Overwalle, L’intérêt général, le domaine public, les commons et le droit des brevets d’invention, in l’Intérêt Général et l’Accès à l’Information en Propriété Intellectuelle, (2007 (in press)). 30 See Geertrui Van Overwalle, Klinische proeven en volksgezondheid. Naar een herijking van het algemeen belang in het octrooirecht, Tijdschrift voor Privaatrecht (TPR), 899–968 (2000).

378 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y A. HUMAN RIGHTS LIMITING THE COMING INTO EXISTENCE OF PATENT RIGHTS

The major right limiting the coming into existence of patent rights that comes to mind is human dignity. The basis of human dignity is well-established in contemporary law. Human dignity appears as a pivotal concept in a variety of international and European conventions. The relationship, however, between human dignity and patent law is rather recent. The credit for factoring in human dignity in patent law goes to the European Union and the EU Biotechnology Directive,31 which introduced the notion of human dignity into patent law and explicitly stated that human dignity should act as an outer limit of patenting subject matter related to the human person. A second human right that might act as a limit in patent law is the right to food. The basis of that right is clearly established as well: the right to food is proclaimed in the International Covenant on Economic, Social and Cultural Rights (ICESCR).32 Quite surprisingly, the relationship between patent law and the right to food is quite old. The right to food was contemplated explicitly when establishing patent acts in the nineteenth century. In the original patent acts of the Netherlands, Belgium, and Germany, for example, certain foods were excluded from patentability. Similarly, certain foods, such as soup vegetables, were banned from protection under the U.S. Plant Variety Protection Act.33 However, most food exemptions in patent law were repealed later. Nevertheless, the debate was reopened at the occasion of development of genetically modified organisms. Fortunately, nowadays, a strong legal basis allowing the exclusion of food from patentability can be found in Article 27 of TRIPs. B. HUMAN RIGHTS BURDENING THE COMING INTO EXISTENCE OF PATENT RIGHTS

A major human right burdening patent law is the right to informed consent. It is not crystal clear yet what the exact legal basis is for the right to informed consent. One school of thought claims that the right of informed consent is an accessory right of another fundamental human right, in particular, the prohibition of torture and inhuman or degrading treatment or punishment. Other human rights scholars take the view that the right of informed consent is an accessory right of the right for respect of physical integrity. Notwithstanding this lack of consensus about the exact legal basis of this human right, the relationship between the right to informed consent and patent law has recently been formalized. Once again the European Union and the Biotechnology Directive took the lead. Recital 26 stipulates that “if an invention is based on biological material of human origin or if it uses such material, where a patent application is filed, the person from whose body the material is taken must have had an opportunity of expressing free and informed consent thereto, in accordance with national law.” Unfortunately, the recital was not implemented in the patent law of the Member States. 31 Directive 98/44/EC of 6 July 1998 of the European Parliament and of the Council on the legal protection of biotechnological inventions, 1998 O.J. (L 213) 13, available at http://europa.eu.int. 32 International Covenant on Economic, Social and Cultural Rights, adopted by the General Assembly, Resolution 2200A (XXI) of 16 Dec. 1966, and entered into force on 3 Jan. 1976, available at http://www.ohcr.org/ English/law/ceser.htm. 33 Plant Variety Protection Act of 1970 (PVPA), as amended, 7 U.S.C. §§ 2321–2582, available at http://www. ams.usda.gov/SCIENCE/PVPO/PVPO_Act/PVPA2005. pdf.

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C. HUMAN RIGHTS LIMITING THE EXERCISE OF PATENT RIGHTS

A human right that is highly relevant in this context is the right of access to public health. The basis of the right of access to public health is well established. The right is proclaimed in the Universal Declaration of Human Rights of 1948 (UDHR),34 which stipulates that “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care.” The relationship between the right of access to public health and patent law was clearly established in the TRIPs Agreement, and especially in the Doha Ministerial Declaration35 and the various, subsequent national rules on compulsory licenses for public health. Also the right to education and research comes to mind in this context. This right is equally recognized in UDHR, which proclaims that “Everyone has the right to education” (Article 26 (1)). The relationship between the right to research and patent law is most cumbersome at present. However, safeguards for research against the overwhelming effect of patents have been established through the enactment of a research exemption in many domestic patent acts in Europe. Another hotly debated human right in this regard is the right of access to information. Both the UDHR and the ICESCR clearly place a discernible emphasis on the interests humans have in the access to knowledge. Applying principles of access to knowledge in a patent context does not seem to raise real concern, as patent law requires that the patented invention is disclosed in a manner sufficiently clear and complete for the invention to be carried out by a person skilled in the art.36 IV. CONCLUSION As has become clear from the exploration of the human rights framework, it is imperative that patent law takes into account human rights discourse. Human rights should feed into patent law in a moderate, complementary manner. Human rights are valuable and necessary complements of the patent system. They serve as a counterbalance of patent rights centering too one-sidedly on trade, access to markets, and economic calculus. For patent law to be widely accepted and generally recognized as a tool fostering both private and public interest, it is vital that current patent law regimes are inextricably linked with human rights discourse and that human rights assist in defining the utter limits of patent rights. * * * Thank you. I had to make sure that the talk ended in ten minutes because there would be nothing left of patent law if I gave her another five minutes. [Laughter] With that, we will turn to “the Pope?” PROF. HELFER: That’s quite an accolade. I’m not sure I will come close to living up to it. PROF. ADELMAN:

34 On Dec. 10, 1948 the General Assembly of the United Nations adopted and proclaimed the Universal Declaration of Human Rights. 35 World Trade Organization, Ministerial Declaration, Adopted at 4th WTO Ministerial Conference in Doha, Qatar, 9–13 Nov. 2001, available at http://www.wto.org/english/ thewto_e/minist_e/min01_e/mindecl_e.htm. 36 Cf. TRIPs art. 29 (1); European Patent Convention, Oct. 5, 11973, 13 I.L.M. 270, art. 83; and PVPA art. 112, 35 U.S.C. § 112 (utility patents).

380 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y We decided to rearrange the order, in part, because I am going to speak about a very specific instance of the interface between human rights and intellectual property.37 My colleagues, who have themselves published extensively on these issues, have talked mainly about the limits that human rights may place on existing intellectual property protection standards. We have also heard from Professor Grosheide about the rights that individual authors and inventors may have — the human rights, that is. I am going to speak about an instance in which, very recently, at the beginning of this year, the European Court of Human Rights recognized the right of property in a U.S. corporation over its trademarks and trademark applications. For some of you this may be a cause for rejoicing in the streets; for others it may make your blood run cold. Which of those outcomes you prefer — or anywhere in between those two polestars — is going to depend on what the European Court of Human Rights actually does with its new recognition that the right of property covers intellectual property, in all of its forms — copyrights, patents, trademarks, and presumably all of the other manifestations of intellectual property. For those of you who are not familiar with the European human rights system, let me highlight a few of its important features. The European Court of Human Rights is the most effective international human rights tribunal in the world. It has forty-six member countries. It issues hundreds of judgments a year. It awards monetary damages to prevailing parties. It has a new class action procedure. It has a very high rate of compliance with its judgments among the Member States. So we are not talking about guidelines or “soft law” or recommendations; we are talking about a court that has the power to issue legally binding judgments, which are very often implemented with the help of national courts. All in all, the court’s judgments are quite consequential and have a real impact in European countries. In January of this year, the Grand Chamber of the ECHR held that IP is protected by the right of property against unjustified government interferences.38 It made that ruling both with respect to existing intellectual property and applications to register intellectual property, in particular with respect to trademarks. This case was one skirmish in the decades-long litigation war between the American brewer Anheuser-Busch and its beer Budweiser and its archrival, Budejovicky Budvar, a Czech brewery. These two rivals have litigated in any court that you can name in Europe and elsewhere around the world. After losing one of these disputes in Portugal to its rival, which had registered a geographical indication in that country, Anheuser-Busch decided to file a complaint with the European Court of Human Rights. By doing that, it turned what was a private dispute between two IP owners into a public law dispute, and that altered the character of the case. Unlike the treaty provisions my colleagues have mentioned, the European Convention on Human Rights does not have a single clause that comprehensively balances the rights of innovators and creators against the rights of users and consumers. Instead, it has discrete and specific clauses that might allow the European Court either to expand the rights of intellectual property owners or to limit them — limit them in the name of free expression or privacy; expand them in the name of the right to property. Whereas much of the recent activity relating to human rights and intellectual property 37 Laurence R. Helfer, The New Innovation Frontier? Intellectual Property and the European Court of Human Rights, 49 Harv. Int’l L.J. _____ (forthcoming Winter 2008). Appendix A. The March 2007 prepublication draft is available on the Fordham IP Conference Web site, http://www.fordhamipconference.com. 38 Anheuser-Busch, Inc. v. Portugal, Application No. 73049/01 (Grand Chamber, 2007) [hereinafter Anheuser-Busch Grand Chamber Judgment].

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has been focused on the limits or constraints on intellectual property or redefining the intellectual property balance, the European Court intervened in the Anheuser-Busch case on behalf of business entities that were IP owners. With respect to the comment that Prof. Grosheide made about human rights not attaching to corporations or business entities, in general I am in agreement with that. But Article 1 of the First Protocol to the European Convention39 says that the right of property attaches to “legal persons,” as well as natural persons. Why on earth would the drafters of the Convention extent property protection to corporations? I will say more about that in a moment. Although the American brewer did not prevail on the specific facts presented in the Anheuser-Busch case, the European Court suggests two ways in which it might become an important player in shaping the region’s innovation and creativity policy, perhaps for good, perhaps for ill. First, the Court said to European governments that they must provide fair and effective judicial procedures to allow intellectual property owners to enforce their rights and to adjudicate infringement claims. In addition, the European Court has reserved to itself the power to review whether national court decisions that affect the right to property are arbitrary or manifestly unreasonable. The ECHR did not provide a detailed elaboration of these two points in the AnheuserBusch case. In my paper available on the conference Web site, I attempt to develop these points in greater detail. I trace the right-to-property jurisprudence since the ECHR’s founding, review the recent increase in right-to-property cases, and explain how the court has increased its scrutiny over property regulations in the wake of the accession of Eastern European governments, which have had quite a few property disputes left simmering from their socialist days. In the final section of my article, I sketch three potential futures for the right-toproperty jurisprudence and intellectual property jurisprudence of the European Court of Human Rights. I refer to these three paradigms as the rule-of-law paradigm, the intellectual property-enforcement paradigm, and the intellectual property-balancing paradigm. The first of these, the rule-of-law paradigm, is the most minimalist. It helps to explain why corporations’ property rights were also protected as human rights in the European Convention. The rule of law, one of the hallmarks of a democratic society, include, the protection of private property from arbitrary and unjustified government interferences. If the ECHR applies this model, it would only intervene in national intellectual property regulations in the case of genuinely ultra virus actions or failures to follow previously established legal rules – conduct that are clear violations of the rule of law and that fit within the rule-of-law cases that the court has decided with respect to real property and other forms of property, not only IP. The second paradigm, which is somewhat more intrusive, would have the ECHR articulate an obligation for national governments to provide adequate judicial, administrative, and criminal proceedings that would allow private owners to enforce their intellectual property rights effectively. For those of you who are thinking about the multilateral system, the analogy here is the domestic enforcement provisions of the TRIPs Agree39 Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature Mar. 20, 1952, 213 U.N.T.S. 262, 262. Article 1 of Protocol No. 1 states in its entirety: Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

382 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y ment. There have been allegations of widespread IP piracy in some countries that are members of the World Trade Organization (WTO) and members of the Council of Europe, and also some nations that are members of the Council of Europe and not yet members of the WTO, like the Ukraine and Russia. It is quite possible that the ECHR, using its class action procedure that it developed three years ago and using the new conception of the right to property from the Anheuser-Busch case, may allow private rights owners to petition directly to the ECHR rather than petitioning their trade ministries to bring an IP enforcement claim, whether that is a WTO proceeding or a special 301 complaint leading to unilateral trade sanctions by the United States. So this is the enforcement paradigm. It’s not yet clear that the Court is going down this road, but it’s certainly possible. The third and final paradigm is the intellectual property-balancing paradigm. Here, the ECHR would use, for example, the freedom of expression provisions in the European Convention to impose limits on, say, copyrighted works relating to political discourse. Such cases have been percolating for several years in national courts, for example in the Netherlands. Professor Christophe Geiger40 and others have written on these issues. If the ECHR applies this paradigm, it would set an upper limit on intellectual property, but also would set a floor, in which the right to property would prevent decision-makers in national governments in Europe from diminishing the exclusive rights of intellectual property owners with respect to preexisting works of intellectual property. Which one of these three visions or paradigms will prevail in the future is something I discuss in more detail in the paper. I would be happy to talk more about these issues with you during the question and answer period. Thank you. PROF. ADELMAN: Thank you. Hannu, do you want to make some comments? MR. WAGER: As I mentioned yesterday,41 in the WTO we tend to look at intellectual property matters in the broader context of the trade regime as embodied in the WTO. Therefore, I would first like to say a few words about the interlinkages between human rights and the trade regime in general. I will then turn to intellectual property more specifically, and comment on some points made by others. Let me make the customary disclaimer that these are very much my personal thoughts. These issues have not been discussed within the WTO. Last year I published a paper together with my college, Rob Anderson, on this topic about human rights and the WTO.42 In that paper, we argued that the rules and procedures of the WTO are directly supportive of civil rights in the sense of freedom to participate in markets and freedom from arbitrary governmental procedures. The system contributes to development and to the realization of economic, social, and cultural rights by stimulating economic growth, thereby helping to generate the resources that are needed for the fulfillment of such rights. In that sense, human rights instruments and the trade regime as embodied in the WTO 40 See, e.g., Christophe Geiger, “Constitutionalising” Intellectual Property Law? The Influence of Fundamental Rights on Intellectual Property in the European Union, 37 Int’l Rev. Intell. Prop. & Comp. L. 371, 382 (2006); Christophe Geiger, Copyright and Free Access to Information: For a Fair Balance of Interests in a Globalised World, 28 Eur. Intell. Prop. Rev. 366, 370 & n.44 (2006). 41 See, infra this issue, Session I, Part A, The Next Ten Years in WIPO and WTO. 42 Robert D. Anderson & Hannu Wager, Human Rights, Development, and the WTO: The Cases of Intellectual Property and Competition Policy, 9 J. Int’l Econ. L. 707 (2006).

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can be seen as part of a broader coherent international legal framework created after the Second World War. As regards the TRIPs Agreement, its Article 7, which refers to the objectives of IP protection, puts emphasis on the utilitarian rationale of IP protection. But it must be borne in mind that the TRIPs Agreement also incorporates by reference the provisions of the Berne Convention, and this includes the entire acquis of these provisions. Human rights considerations, together with utilitarian objectives, were guiding the discussions that eventually led to the adoption of the Berne Convention in 1886. You will find references to human rights or natural law already in the 1884 diplomatic conference documents. In that sense, the human rights aspect is nothing new to international IP law. Neither is it new to domestic laws. Just think for example the French revolution and the references to natural law as a justification of the first copyright law in 1791. This raises then the question to which some have already alluded: To what extent is a human rights approach helpful today in finding proper solutions to various evolving IP problems that we have been discussing at this Conference? I should say that one should not overstate the utility of the human rights approach in this regard. The UN Declaration on Human Rights and other instruments contain various rights or entitlements that need to be balanced against each other. The tensions inherent between various competing interdependent human rights are those that also underlie the considerations of balance in IP systems. If we base IP protection mainly on the utilitarian or public interest rationale, one can similarly argue that while the interests of the public are a reason for granting protection, they are also a reason for limiting it. Again, one ends up balancing between various legitimate public policy goals. So whether one lays emphasis on the human rights or public interest rationale, at the end one needs to rely on good judgment and available empirical evidence in determining whether any particular policy measures are effective in meeting the stated objectives. However, perhaps one could say that one conceptual difference between human rights and utilitarian approaches is that if we were to look at IP law through the human rights lens, we would need to move from state-centered international relations in this area towards increased focus on human beings and their empowerment domestically and across borders through adequate protection of their creative work. I guess this would be supportive of the notion of putting authors more at the center of copyright policy, an idea that Professor Ginsburg mentioned yesterday morning, and to which some others have also referred to, including Professor Grosheide. Professor Grosheide referred to the Scientology case43 as an illustration of a conflict between freedom of expression and copyright. I would like to say a few words on how I see the interface between freedom of expression and copyright. While there is a need to maintain balance between these two considerations, and at times some specific conflicts may arise that need to be resolved, freedom of expression and an appropriately formulated copyright system can generally be seen as being mutually supportive. Copyright systems maintain this balance through a carefully crafted scope of protectable subject matter. Under the idea/expression dichotomy, information and ideas remain free. We have the originality requirement, although it varies between different jurisdictions. The term of protection is limited. These features help to maintain a robust public domain on which follow-on creation depends. The limited scope and term of protection operate in conjunction with various excep43

See Scientology v. XS4ALL, supra note 2.

384 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y tions found in domestic laws and jurisprudence that allow quotations, reporting of current events, criticism, parody, and similar uses, even when the use would involve a part of the protected expression. Arguably, both the protection of exclusive rights and exceptions to it are, in the proper mixture, supportive of freedom of expression and the democratic process, the first by enabling the economic independence of the media and professsional authors, and the second by balancing the interests of authors and users in particular situations. One should bear in mind that freedom of expression would have little practical value without independent media.

PROF. ADELMAN:

* * * I know that Willem has a comment. Why don’t you make your

comment now? PROF. GROSHEIDE: Maybe I could comment on your introduction of the European Court of Human Rights decision, which I know and which I did not refer to because that decision, in my reading, does not introduce anything new. What it did was say that in this vertical relation, which I distinguished from the horizontal relation, intellectual property rights are property in the sense of the European Convention of Human Rights. So there is nothing new there. There is a decision that says when it comes to intellectual property rights states should take the same approach as they have to take towards other parts of property. So there is nothing new there. PROF. ADELMAN: Peter? PROF. YU: I am going to make three observations. The moderator is actually quite intimidating. First, I think it is time to bury the conflict or coexistence approach. People keep on talking about that, but I think there are a lot of problems with it. The main problem is that some attributes of intellectual property rights are considered human rights, whereas others do not have any human rights basis. That is why Professor Grosheide started off saying that we need to look at the different types of rights. So if you are thinking about copyright, trademarks, trade secrets, work made for hire, employee inventions, database protection, data exclusivity — all those are properties. Some have rights that have no human rights basis. So it is kind of a misnomer to consider that you elevate those rights to human rights status. The second observation I want to make is that you are likely to be surprised by the language used in those documents. Some of you are probably wondering why you are here. When you are listening to a lot of the discussion here, the language they usually use is somewhat alien to you. Intellectual property is a good example. I think it is very important for us to distinguish between the moral conception of the human right and the political conception of the human right. If you look at the documents, intellectual property is probably not the type of property you conceptualize as a moral right. You are probably thinking about the protection of property, like what you have a lot of here in the United States or in European countries. But it could be very different, because of the Cold War, because of a lot of political baggage they had when they were drafting those documents. So actually in the Universal Declaration you have the right to property alone and in association with others. Just imagine that. It is not just about private property. If you look at the international covenants, you do not even have the property provision. I think it is very interesting when you look at those documents that they are actually what Professor Fischman Afori was referring to as open standards. There is no scope and there is no format. You can decide whether you want to use the property approach; you

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can decide whether you want to go for liability rules; or you can go for rewards and prices; or you can just go for the moral protection of authorship. You can have different types of formats, and it is entirely up to you. The third observation is basically people are not going to like you if you are going to talk about human rights and IP, mainly because if you are going to talk about the material interest, you are going to lower the protection you have at the moment for intellectual property rights. So those people who are publishers, who are rights holders, are not going to like you. But if you are going to talk about the material interest, which is the second distinct interest in those documents, then those people who are proponents for access to knowledge, who are public domain advocates, and who are pro developing countries are also not going to like you because you are going to raise the standard. By saying that people cannot do any recording, people have to make sure that there is a disclaimer, they are not distorting a work, they are protecting the reputation of the authors, that is going to make it more difficult for people to actually reuse the content, to have access to the content. Those are my three observations. PROF. ADELMAN: So, Peter, nobody is going to like this? PROF. YU: I think on the whole people are not going to like you. They will probably like some of the points you raise but probably not the others. I think that is the biggest challenge. At almost all the conferences I go to, when I present human rights and IP issues, you always get questions from people who disagree with certain parts of the proposition but totally agree with others. PROF. ADELMAN: What about the human right to wealth that is created by the patent system? Questions from the floor? QUESTION: The opening speaker, Professor Grosheide, raised the issue of the connection between traditional knowledge and the human rights. I just want to make a couple of comments on that. Of course, I think that there is an important discussion to make all the connections between the human rights arena. Hannu Wager perhaps did not have time to mention the discussion in relation to Article 27(3)(b) of TRIPs, which has telescoped from what is essentially a human rights issue into a very direct way to amend the patent system to include the patentability criteria of access and benefit sharing, which is informed consent followed by access and benefit sharing. Although that is very much in the discussion phase, I think that there is an important connection to be made also to the presentation by Professor Van Overwalle about the link between Article 27(2) and the ordre publique and how this discussion has come to this very narrow concept within Article 27(3) of TRIPs. I would argue that Article 27(2) presents the opportunity for people to have that human rights aspect of patentability in their domestic laws and to be TRIPs-compliant at present. Then, of course, there is the question to put it in Article 27(3) to have an international field in that. I appreciate that is very early discussion, but I think it is very important, a different human rights context from the European one, to remember that in the international forum there is this very important discussion, which is essentially a human rights/IP face-off and how to make them work, so moving away from the conflict and how to make them work together. I just wanted to bring that in, if anyone wants to comment. PROF. ADELMAN: Why don’t we take the next question? That was a comment rather than a question.

386 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y QUESTION [Mustafa Safiyuddin, DSK Legal, Mumbai]: I disagree with Peter’s statement that nobody is going to like you. I think developing countries like India, particularly the pharmaceutical industry, are going to love you, not only going to like you, because they do not want strong patent protection for pharmaceuticals. PROF. ADELMAN: Not true. The responsible ones do. The irresponsible ones may not, but the responsible ones do. QUESTIONER [Mr. Safiyuddin]: The responsible ones are very few. The irresponsible ones are many. PROF. ADELMAN: They are the most important. Does anybody want to comment? PROF. YU: I think the pharmaceutical industry, especially the generic manufacturers, will like you if you focus on right to health. I think a lot of people in India, in Brazil, in China, in a lot of different countries, will like you if you focus on right to food. But if you are talking about the mature interest in authorship, they are not going to like you, because it is going to be more expensive for them to have software and textbooks. That is why I think you cannot strike the happy medium where everybody will like you. PROF. HELFER: Marty, may I respond? PROF. ADELMAN: Sure. PROF. HELFER: I want to just take up the point that Professor Grosheide was saying a moment ago, that there is nothing new here. I mostly disagree, but I agree on a couple of points. I agree that the European Court of Human Rights is thinking about intellectual property the way it thinks about other forms of property. That is certainly true. It is not engaging in a utilitarian calculus, as IP lawyers and policymakers do. PROF. ADELMAN: You mean the European Court of Human Rights? PROF. HELFER: Yes. It is the right of property under it. I also agree with Professor Grosheide that, as a formal matter, the European Court and the European Convention on Human Rights only concern a vertical relationship between the state and a private right holder. But it is very clear from reading the Court’s judgment that one of the things that can trigger the state’s responsibility is the way that its national legislators, and more particularly its national courts, adjudicate intellectual property disputes between private parties. So I believe that the Court has signaled, both as a substantive matter and even more so in terms of domestic judicial proceedings and enforcement, that it is going to view the inability for IP owners to enforce their IP rights on a widespread basis as a right to property problem. While I do not think that the European Court of Human Rights will deliberately try to reshape IP, as a practical matter, the Court’s intervention will have all sorts of interactive effects with the European Union and the World Trade Organization, and that will affect the substance of IP laws and regulations. PROF. VAN OVERWALLE: I believe that what seems to be obvious to both of you might be relevant in view of the European Charter.44 People who are familiar with the European Charter know that Article 17.2 is related to protection of intellectual property rights.45 44 Charter of Fundamental Rights of the European Union (Dec. 7, 2000), available at http://www.europarl. europa.eu/charter/pdf/text_en.pdf. 45 Id. art. 17: “Right to property. 1. Everyone has the right to own, use, dispose of and bequeath his or her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in good time for their loss. The use of property may be regulated by law in so far as is necessary for the general interest. 2. Intellectual property shall be protected.”

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The discussion so far has focused on the interpretation of Article 17.2. Is this a protection of a right that is granted, or is it already the protection of a right coming into being? So is it protection of a granted patent or a patent application? After having heard the case on Anheuser Busch, I would argue that the line in the European Charter for the European Union should be interpreted to encompass both existing rights and rights coming into being. In that regard, I think it is a very relevant decision. PROF. HELFER: That is a very good point. PROF. ADELMAN: Who would decide that? If we have some charter from the United Nations but there is no court, what exactly does it mean? Now, you are talking about the European Court of Human Rights. PROF. HELFER: Right. Marty, there is an interactive effect in the following sense. The European Court of Justice, which is the supreme court of the European Union in effect, and the European Court of Human Rights do engage in a dialogue over fundamental rights. The European Court of Justice has very often, in interpreting directives and European Community law, looked to the European Court of Human Rights and its jurisprudence to interpret the meaning of fundamental rights within the European Union. So Geertrui’s point is very well taken, because it suggests the opening for not just protection of recognized rights, but rather a right to intellectual property in some free-standing sense. Now, that is an expansion of existing IP rights, and I don’t know that either of the two courts would adopt it. But it would be enforced by both the European Court of Human Rights and the European Court of Justice. PROF. FISCHMAN AFORI: I would like to follow up the remarks and response to Peter. If nobody is going to love you, for sure the Court is going to love you, because I think that human rights can expand the Court’s mandate. So the Court is going to love you. PROF. VAN OVERWALLE: By the way, what I found a comforting idea is one of the closures of Professor Helfer’s article: “Maybe the others won’t like us, but we will like one another.” It is like IP and human rights becoming “intimate bedfellows.”46 I’m looking forward to that. PROF. ADELMAN: That’s a proposition. PROF. HELFER: I don’t know. I think I am just not going to go there. PROF. ADELMAN: Other questions? Annette? QUESTION [Annette Kur, Max Planck Institute for Intellectual Property, Munich]: The human rights discussion is here to stay. I cannot agree with those saying that nobody loves you when you deal with that topic. On the contrary, at least in the academic scene, this seems to be a very up-to-date, “fashionable” topic that can be found all over the place. And that is probably good, because there was not so much debate about all this previously. On the other hand, that does not mean that human rights have never played a role before. As a matter of principle, every country has its constitution, and national laws are bound to respect constitutional law. Constitutions, of course, are supposed to respect human rights. It seems to follow that IP laws that comply with their domestic constitutional law also can be supposed to respect human rights. What I want to say is that the topic may not be so new after all; it has always been there, it was just not articulated that much. There is, of course, a certain danger, that by trying to involve human rights aspects so intensely into the discussion about concrete topics, a sort of inflationary use is made of 46

Helfer, supra note 22, at 47.

388 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y these arguments. “Human rights” then could become a sort of catch-all phrase for all the interests one wants to see encompassed by IP laws. The notion might then be watered down. Or else, if one wants to maintain a rather strict and elevated notion of human rights, it may happen that those rules are discredited for which it is not possible to find a basis in human rights, as, for instance, limitations that are purely based on economic considerations. From my point of view, that would be an unfortunate result, because such limitations can be as legitimate as others. I want to make another point with regard to pharmaceuticals. It was said here that it is quite obvious what the result of a human rights approach to patent protection of pharmaceuticals should be. But even that is not really so obvious. One might have different views about these things. Of course, the interest of patients who are suffering from diseases right now is to get access to medicines that are cheap. Therefore, it is clear that they do not want patents. But one might also think about the interests of patients who are suffering from diseases for which no cure has been found. They want companies to invest in finding new cures. Those interests will be violated if patent protection is reduced to an extent that it would totally discourage further investments. What I want to say is that the discussion on IP and human rights must go on, but that we also need to be aware of the risks that the discussion involves. PROF. ADELMAN: I like Annette’s discussion very much because I, of course, would take human rights arguments and say that one has a right to have the pharmaceutical industry do its best to keep me alive the longest. That means strong patent rights. Of course, the wise people in India think the same way. On the other hand, if I do not want to pay, like Thailand, where you have a billion-dollar former prime minister who could pay for the drugs out of his petty cash fund but they have decided to steal drugs from Americans, they could make the human rights argument that “we don’t want to pay.” That leads me to wonder whether we get anything from this discussion, that each side uses it for its own purposes. PROF. HELFER: I would add on that point, Marty, that things evolve over time. We are taking the first steps of mapping out the interface between these two fields. Eventually, some arguments are going to be washed through the judicial systems of various countries and you will end up with some arguments that are going to be given primacy over others. Then we will have some resolution. This is quite common when any two previously unrelated fields bump up against each other. PROF. YU: I like the second half of your statement. But for the first half what I find problematic is that if you want to live longer, then you make a leap to strong patent rights. Some people would disagree with that, especially from developing countries. They might believe that if they want to live longer they probably need to have more access to medicines. I think the strongest human rights claim is actually the right to property and making sure that all inventions or investments will be protected. PROF. ADELMAN: No, Peter. I am saying for myself, for everybody in this room, our human rights interest is for strong patent rights. There may be people who cannot afford to pay, whose governments are unwilling to pay for them, mainly because they are irresponsible and squander their wealth, and, therefore, they will ask for the drugs now and make that claim. I didn’t mean to say that they would make that argument. I would say that everybody in this room has the human rights interest in strong patents because most of us would not be here, given our ages, if it were not for the developments

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of the pharmaceutical industry in the twentieth century. I dare say of this group very few would be here now. QUESTION [Prof. Coenraad Visser, University of South Africa]: Just one comment. I think the human rights law tried to say that no human right is absolute. You always have competing claims. I think a lot of human rights law is about resolving the limitations and the contrasting human rights claims. That, I think, informs intellectual property debate, because it informs the debate between rights holders and the other members of society who have different claims — access to education, access to health, that kind of debate. So I think from that perspective the human rights debate is a major informer of intellectual property policy. PROF. ADELMAN: Let’s take South Africa. It is a good example. Most of the claim that the pharmaceutical companies were terrible is that they actually wanted to charge for their drugs — in a country that has a great deal of wealth, that could have purchased those drugs, that could have an active anti-AIDS strategy — maybe it will develop it now — and, because of certain political considerations, decided not to do so. I am just wondering exactly how the human rights issues inform the whole debate. That is why we are having fun here. QUESTION: Marty, I wanted to turn your argument about the human right of stronger patent rights on its head. Actually, you could say that your claim — and this was said in a similar way, but I wanted to emphasize this — is in fact a claim for access to further and future medicine development, which is the same human rights claim as access to medicines. Therefore, it is a case that you actually have the same claim but a different economic situation. PROF. ADELMAN: I agree. QUESTIONER: So one does not have to pose them as conflict. I think that you touched on compulsory licensing. I will not, because we have a whole other panel on that. But that is an attempt to balance those two human rights claims. I agree with the speakers that there are many instances of human rights already present in the law in various ways. But I also just wanted to pick up on the point from the EC cases about the right to develop an intellectual property right. I would also put to you that there is a parallel there in some of the traditional rights holders’ and indigenous people’s claims about the right to develop their own intellectual property. I wonder down the chain what the outcome will be as the European jurisprudence develops and creates a certain international norm that has a flow over borders, how those two will deal with the apparent, but hopefully not too great, conflict. PROF. ADELMAN: One more comment. QUESTION [Mr. Safiyuddin]: I think the danger is in imposing American standards of patent protection in developing countries, which require different considerations in human rights. PROF. ADELMAN: You are certainly not including India in that, I hope, because India is a very advanced, scientific country with 300 or 400 million in the middle class, with a very wealthy class, many of whom can afford pharmaceuticals. And India might actually have developed something for the world if it had had a patent system in the last forty years. One of the great losses that we have had is, if people followed this gentleman’s direction, that India has hardly developed one new pharmaceutical. I do not know of anybody in this room who is alive today who was aided by an Indian pharmaceutical developed in the last forty years, even though it has one of the best scientific educational systems in the world and its chemistry and its biology are world-class.

390 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y We could spend a couple of hours arguing about the India situation,47 but we are going to close because we are going to have lunch and have some drinks. That is a human right.

APPENDIX A Human Rights and Copyright: The Introduction of Natural Law Considerations into American Copyright Law48 Orit Fischman Afori49 Hebrew University of Jerusalem and Tel-Aviv University, Israel INTRODUCTION Copyright law in the United States is predominantly based on utilitarian justifications.50 According to such justifications, copyright is aimed to benefit society as a whole.51 The main projection of utilitarian justifications for copyright in U.S. law is in the U.S. Constitution, according to which Congress has the power to legislate copyright laws in order “to promote the Progress of Science and useful Arts.”52 The emphasis on utilitarian justifications in the Constitution has greatly influenced the development of copyright law.53 The purpose of this Essay is to shed light on another “supernorm,” an alternative kind of constitutional norm that might be taken into consideration while shaping copyright law. This refers to Article 27 (“Article 27”) of the Universal Declaration of Human Rights (“Universal Declaration”),54 adopted and proclaimed by the General Assembly of the United Nations on December 10, 1948.55 Article 27 proclaims as follows:

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See, infra this issue, Session XII, Part C, India, IP Developments and TRIPs. This article was previously published in 14 Fordham Intell. Prop. Media & Ent. L.J. 497 (2004). A reprint of the article is available at the Conference Web site, http://www. fordhamipconference.com. 49 LL.B. (1996), LL.D. (2003), Hebrew University of Jerusalem. Lecturer, College of Management Academic Studies Law School, and Faculties of Law, Hebrew University of Jerusalem and Tel-Aviv University, Israel. The author wishes to thank Michael Birnhack, Guy Pessach, and Tamir Afori for their helpful comments. 50 See Paul Goldstein, Copyright: Principles, Law, and Practice § 1.1, ¶ 4 (1989); Paul Edward Geller, Must Copyright Be Forever Caught Between Marketplace and Authorship Norms?, Of Authors and Origins: Essays on Copyright Law 159 (Brad Sherman & Alain Strowel eds., 1994) (“Anglo-American copyright laws, in the usual course of affairs, rely on marketplace norms.”); Barbara S. Murphy, Note & Comment, The Wind Done Gone: Parody or Piracy? A Comment on Suntrust Bank v. Houghton Mifflin Co., 19 Ga. St. U. L. Rev. 567, 571 (2002) (“U.S. copyright law derives from the English, utilitarian theme by proposing to advance creative expression for the benefit of the public at large by granting a copyright to the individual author as both an economic incentive and a reward. . . . The ultimate aim was to promote broad public availability of literature, music, and the arts for the public good.” (citations omitted)). 51 See id. 52 U.S. Const. art. I, § 8, cl. 8 (“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries”). 53 One of the central examples of such impact is the Feist decision, where the Court interpreted the constitutional Copyright Clause as decisive for rejecting the “sweat of the brow” doctrine, namely, that investment of labor and effort by authors does not in itself justify a grant of copyright. See Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 354 (1991) (stating that “sweat of the brow” flouted basic copyright principles and that while copyright protection for labor may be appropriate under certain unfair competition principles, applying such protection solely on this basis “creates a monopoly in public domain materials without the necessary justification of protecting and encouraging the creation of ‘writings’ by ‘authors’” (quotations omitted)). 54 Universal Declaration of Human Rights, G.A. Res. 217A, U.N. GAOR, 3d Sess., Supp. No. 16, at 71, U.N. Doc. A/810 (1948), available at http://www.un.org/Overview/ ights.html (last visited Jan. 22, 2004) [hereinafter Universal Declaration]. 55 See id. 48

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1. Everyone has the right freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits. 2. Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.56 The underpinnings of the Universal Declaration are from the field of natural law theory, namely philosophical justifications that are concerned with individual benefit rather than societal benefit.57 The question to be addressed in this Essay is whether Article 27 of the Universal Declaration, along with its theoretical infrastructure, can influence American copyright law. Article 27 can be used as a conduit to introduce natural law considrations into American copyright law. For a long time there has been an ongoing debate on whether the justifications of copyright are utilitarian only or a merger of utilitarian and natural law justifications instead.58 This Essay will not discuss those questions. The sole aim is to point out a normative source that may be used as a means to introduce natural law perceptions into American copyright law in a balanced way. To be clear, the proposition of this Essay is instrumental in character and is aimed to reveal a new legal mechanism for introducing natural law philosophies into the copyright discourse, but not to re-evaluate such justifications. Even though Article 27 of the Universal Declaration might have great importance in the field of art and culture, it has been completely ignored in copyright discourse in the United States.59 A better comprehension of the complex interests expressed in Article 27 might influence its acceptance as a normative source in the domestic field. Article 27 embraces a balance of interests between authors’ proprietary rights over their works and the rights of other members of society to enjoy these works.60 Thus, the introduction of natural law considerations through Article 27 need not necessarily sway the balance in favor of authors; it might even advance the rights of members of society to enjoy works, and hence will contribute to copyright restraint. As a result, using Article 27 as a medium of introduction of natural law considerations into domestic copyright law can contribute to the development of copyright law in a balanced way, by enriching the different considerations taken into account. Nevertheless, prima facie, the proposed use of Article 27 of the Universal Declaration may be problematic in the United States due to the Constitution’s copyright clause (“Copyright Clause”),61 according to which utilitarian consider-

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Id. See Wendy J. Gordon, A Property Right in Self-Expression: Equality and Individualism in the Natural Law of Intellectual Property, 102 Yale L.J. 1533, 1544 (1993) [hereinafter Gordon, Property Right in Self-Expression] (“As individuals we can take actions that cause us to deserve more or less than these fundamental human entitlements would dictate. Most notably, if we work productively, our labor may entitle us to own more goods than less industrious people are entitled to have.”). 58 For examples of such debate, see Geller, supra note 1; Gordon, Property Right in Self-Expression, supra note 57, at 1607–08 (stating that “it remains to be specified what relationship should exist between natural rights arguments and the various other norms our law appropriately recognizes, particularly economic or utilitarian consequentialism”); Alfred C. Yen, Restoring the Natural Law: Copyright as Labor and Possession, 51 Ohio St. L.J. 517 (1990) (presenting a view that natural law should be restored to modern copyright jurisprudence to reflect the historical development of copyright law in which there has been a presence of both natural law and economic theory). 59 Present research indicates that U.S. copyright law has not been challenged in U.S. courts with arguments based on article 27 (“Article 27”) of the Universal Declaration of Human Rights (“Universal Declaration”). Additionally, Article 27 is completely neglected in academic discourse. For more on the neglect of rights contained in Article 27, see infra note 104. 60 Göran Melander, Article 27, in The Universal Declaration of Human Rights: A Commentary 429, 430 (Asbjørn Eide et al. eds., 1992). 61 U.S. Const. art. I, § 8, cl. 8. 57

392 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y ation should be taken into account in legislating copyright law.62 In other words, the question is whether the Copyright Clause (dictating utilitarian considerations) proscribes the proposed use of Article 27 (reflecting natural law considerations). As this Essay shall explain at length, the utilitarian values, as reflected in the Copyright Clause can be reconciled with natural law values to some extent. Therefore, the Copyright Clause does not have to be understood as a total exclusion of naturalistic perceptions. Moreover, the universal human right—the super-norm—can be a source of inspiration to infuse U.S. standards, reflected in the Constitution and in statutes. Consequently, Article 27 can function as a supplementary source of consideration for inserting natural law considerations into American copyright law. Part I of this Essay presents the legal instruments and doctrines that will be used in Part II, in order to outline the proposal. Part I will briefly explain the theoretical dichotomy in copyright underpinnings and contains an in-depth analysis of Article 27 of the Universal Declaration. Part II of this Essay contains an application of the proposal according to which Article 27 can be used to introduce natural law considerations into American copyright law. It sketches the proposed mechanism enabled via Article 27 and concentrates on resolving the problems posed by the U.S. Constitution. I. HUMAN RIGHTS AND COPYRIGHT The final aim of this Essay is to propose a mechanism that enables to introduce natural law considerations into American copyright law. To this end, the essential components for constructing such a mechanism will be presented in the following first part of the Article. Thus, the general debate over copyright underpinnings will be briefly presented, followed by a more thorough presentation of the human rights’ international norm to be used in the framework of the proposition regarding the introduction of human rights discourse into the copyright scheme. A. JUSTIFICATIONS FOR COPYRIGHT

One common justification for copyright is based on utilitarian considerations.63 Copyright, like any other property right, is aimed to benefit as many people as possible in society and, as a result, to benefit society as a whole.64 Concentrating on public welfare, and not on the individual, means that there is a justification for copyright as long as it benefits the public.65 Aside from the utilitarian theory, however, there are philosophical and moral theories which center on the individual.66 The basic idea in those theories is 62 See Melville B. Nimmer & David Nimmer, 1 Nimmer on Copyright § 1.03[A] (2003) (“The primary purpose of copyright is not to reward the author, but is rather to secure ‘the general benefits derived by the public from the labors of authors.’” (citing N.Y. Times Co. v. Tasini, 121 S.Ct. 2381, 2401 (2001)). 63 See id. 64 For a general discussion on the utilitarian theory and its justifications for property rights, see Lawrence C. Becker, Property Rights: Philosophic Foundations 57–67 (1977); James W. Harris, Legal Philosophies 36–48 (1st ed. 1980); Stephen R. Munzer, A Theory of Property 196–98 (1990). 65 See 1 Copinger and Skone James on Copyright 15 (Kevin Garnett et al. eds., 14th ed. 1999) [hereinafter Copinger]; Gillian Davies, Copyright and the Public Interest 7–11 (VCH Publishers 1st ed.1994); Wendy J. Gordon, An Inquiry into the Merits of Copyright: The Challenges of Consistency, Consent, and Encouragement Theory, 41 Stan. L. Rev. 1343, 1438 (1989) (discussing the view taken by many economically oriented commentators that a person could only claim property rights for their creation if those rights would help the public) [hereinafter Gordon, Inquiry into Copyright Merits]. For more information about a utilitarian justification for copyright, see J.A.L. Sterling, World Copyright Law 56–62 (1st ed. 1998); Robert M. Hurt & Robert M. Schuchman, The Economic Rationale of Copyright, 56 Am. Econ. Rev., Papers and Proceedings 421 (1966); William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. Legal Stud. 325 (1989). 66 See Jeremy Waldron, The Right to Private Property 13 (1988); see also Jonathan Drimmer, Hate Property: A

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that human beings have fundamental interests, which should not be sacrificed for public benefit, and that society’s well-being does not override those interests.67 Protecting those interests is deemed vital for maintaining individual autonomy, independence, and security.68 Acknowledgment of these interests, which are vital for the individual, has led to the emergence of the term “natural right”69 and the development of theories that justify the natural property right conferred on individuals.70 The naturalistic character of the right does not mean that a person is born with it; rather it means that other people—society—acknowledge the right morally or rationally even though there is no positive rule establishing the right.71 Thus, a natural right stems from the nature of human kind.72 Two central theories that are a part of general natural law theories are the labor theory and the personality theory.73 These theories explain the nature of interest that an author has with regard to his or her work and, as a result, justify the assertion of that right.74 Briefly, according to the labor theory, the justification for copyright is based on the assumption that the author has a natural right in the fruits of his or her labor.75 This justification is a development of a general and common justification for property rights, ascribed in the literature mainly to philosopher John Locke.76 According to Locke, every person has a right over his or her body, hence, also a right over the fruits of his or her labor.77 The product of a person’s labor, which is the result of labor investment with respect to resources that are part of the public domain, is that person’s property.78 The personality theory, like the labor theory, deals with the natural justification of ownership over Substantive Limitation for America’s Cultural Property Laws, 65 Tenn. L. Rev. 691, 728–31 (1998) (discussing Locke’s labor theory and Hegel’s personality theory, both of which focus on the individual). 67 Id. at 728 (“Traditionally, to own private property is to have individual, exclusive rights to possess, use, and dispose of that property as seen fit.”). 68 Id. (“Western property theories traditionally embrace private, individual ownership schemes, deemed to ‘represent[] and protect[] the sphere of legitimate, absolute individual autonomy.’” (citations omitted)). 69 See Waldron, supra note 66, at 19. 70 For a discussion of such theories, see id. at 13. 71 Id. 72 Id. at 19. 73 Lawrence C. Becker, Deserving to Own Intellectual Property, 68 Chi.-Kent L. Rev. 609, 610 (1993) (describing the Lockean labor theory and the Hegelian personality theory as strong justifications for intellectual property); Michael D. Birnhack, Copyright Law and Free Speech After Eldred v. Ashcroft, 76 S. Cal. L. Rev. 1275, 1293 (2003) (describing the Lockean labor theory as “a ‘just rewards’ intuition” and the Hegelian personality theory as emphasizing a “personal connection between a person and a physical object that embodies his or her free will”); Edwin C. Hettinger, Justifying Intellectual Property, 18 Phil. & Pub. Aff. 31, 36, 45 (1989) [hereinafter Hettinger, Justifying Intellectual Property] (“Perhaps the most powerful intuition supporting property rights is that people are entitled to the fruits of their labor. . . . Private property can be justified as a means to sovereignty. Dominion over certain objects is important for individual autonomy.”); see also Gordon, Property Right in Self-Expression, supra note 57, at 1544 (describing the Lockean labor theory as based, inter alia, on the notion of “desert”). 74 See Gordon, Property Right in Self-Expression, supra note 57, at 1544 (“To the extent that [the Lockean] theory purports to state a nonconsequentialist natural right in property, it is most firmly based on the most fundamental law of nature, the ‘no harm principle.’”). 75 See Hettinger, Justifying Intellectual Property, supra note 73. 76 See infra note 78 and accompanying text. 77 See Hettinger, Justifying Intellectual Property, supra note 73, at 37 “A person owns her body and hence she owns what it does, namely, its labor. A person’s labor and its product are inseparable, and so ownership of one can be secured only by owning the other. Hence, if a person is to own her body and thus its labor, she must also own what she joins her labor with — namely, the product of her labor.”). 78 John Locke, Two Treatises on Civil Government (London, Routledge 1884). For a general overview of Locke’s ideas, see Huntington Cairns, Legal Philosophy from Plato to Hegel 35–36 (Johns Hopkins Univ. Press 1949). For the labor justification for property rights, see Becker, supra note 64, at 32–56; Munzer, supra note 64, at 37–58; Waldron, supra note 66, at 137–253.

394 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y assets.79 The claim is that a person’s control over assets expresses that person’s personality and inner will, and that these are necessary for the realization of autonomy, freedom, and confidence.80 In order to enable proper self-development, the individual needs control over the surrounding resources.81 Sometimes, the self-determination of a person is done via external objects.82 In this context, acknowledging the right to property answers the expectation of a person for continuous control over his or her external identity.83 The personality theory functions also as an explanation for copyright, because the work reflects the personal expression, will, and identity of the author in the external world. Thus, the author should be given control over the work that represents the external expression of his or her personality.84 In European, or continental countries, the theories justifying the author’s natural right with respect to his or her work have great impact on copyright law.85 In the United Kingdom and the United States, natural right theories were used alongside utilitarian theories as a basis for justifying copyright.86 The U.S. Supreme Court decision rendered in Feist Publications, Inc. v. Rural Telephone Service Co.,87 however, was a significant turning point. According to the Feist decision, labor is not enough to confer proprietary

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See infra note 54 and accompanying text. Margaret J. Radin, Reinterpreting Property 44–48 (1993) [hereinafter Radin, Reinterpreting Property]; Waldron, supra note 66, at 20, 377–78; Hettinger, Justifying Intellectual Property, supra note 73; Margaret J. Radin, Property and Personhood, 34 Stan. L. Rev. 957, 957–59 (1982) [hereinafter Radin, Property and Personhood]. 81 Radin, Property and Personhood, supra note 80, at 957. 82 See Justin Hughes, The Philosophy of Intellectual Property, 77 Geo. L.J. 287, 333 (1988) (“Mental processes — such as recognizing, classifying, explaining, and remembering—can be viewed as appropriations of the external world by the mind. Cognition and resulting knowledge, however, are the world imposing itself upon the mind. The will is not bound by these impressions. It seeks to appropriate the external world in a different way — by imposing itself upon the world.”); see also Waldron, supra note 17, at 352–55; Radin, Property and Personhood, supra note 80, at 961–62. 83 Hughes, supra note 82, at 333; Radin, Property and Personhood, supra note 80, at 968. 84 This idea is mainly ascribed in literature to Hegel. See Georg Hegel, Hegel’s Philosophy of Right (Thomas M. Knox trans., Oxford Univ. Press, 1942), available at http://www.marxists.org/reference/archive/hegel/prindex. htm (last visited Jan. 22, 2004). For a brief overview of Hegel’s ideas, see Cairns, supra note 78, at 517–23. For justifications of property rights and copyright according to Hegel’s theory, see Becker, supra note 64, at 29–30; Peter Drahos, A Philosophy of Intellectual Property 73–90 (Dartmouth 1996); Munzer, supra note 64, at 67–70; Waldron, supra note 66, at 20; Hughes, supra note 82, at 332–38; Radin, Property and Personhood, supra note 80, at 971; Stewart E. Sterk, Rhetoric and Reality in Copyright Law, 94 Mich. L. Rev. 1197, 1239–42 (1996). 85 Robert P. Merges et al., Intellectual Property in the New Technological Age 4 (2d ed. 1997); Stephen M. Stewart, International Copyright and Neighboring Rights 6, 24–27 (2d ed. 1989). 86 Many scholars hold the opinion that the theoretical basis of Anglo-American copyright law is dualistic, and that utilitarian and natural rights theories are used in combination. See, e.g., Merges, supra note 85, at 4; Benjamin G. Damstedt, Limiting Locke: A Natural Law Justification for the Fair Use Doctrine, 112 Yale L.J. 1179, 1179 (2003) (“Courts also have a long history of using natural law justifications in intellectual property cases”) (citation omitted); Jane C. Ginsburg, Creation and Commercial Value: Copyright Protection of Works of Information, 90 Colum. L. Rev. 1865, 1874 (1990) (“[T]hroughout the nineteenth century and into the twentieth, the concept of original authorship embraced both original labor and original creative activity.”); Gordon, Property Right in Self-Expression, supra note 58; Stewart E. Sterk, Rhetoric and Reality in Copyright Law, 94 Mich. L. Rev. 1197, 1199 (1996) [hereinafter Sterk, Rhetoric and Reality] (“Early American enactments also focused on these twin goals: assuring authors their just deserts and encouraging authors to create and disseminate works of social value. . . . Over the ensuing two centuries, as copyright protection has expanded, each expansion has been accompanied by rhetoric championing the needs of the deserving author, emphasizing the need to induce creative activity, or both.”) (citations omitted); Alfred C. Yen, The Interdisciplinary Future of Copyright Theory, in The Construction of Authorship: Textual Appropriation in Law and Literature 159, 161–62 (Martha Woodmansee & Peter Jaszi eds., 1994); Diane Leenheer Zimmerman, Information as Speech, Information as Goods: Some Thoughts on Marketplaces and the Bill of Rights, 33 Wm. & Mary L. Rev. 665, 690–703 (1992) (discussing the strong natural law influence on early intellectual property law in the United States and England). 87 Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340 (1991). 80

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rights to the author.88 Furthermore, according to the Feist decision, labor investment does not replace the minimal degree of originality that is necessary for enjoying copyright.89 The Feist decision mainly turned on the Copyright Clause, which empowers Congress to legislate copyright law in order to promote science and useful arts for the benefit of society.90 The interpretation given to the Copyright Clause by the Supreme Court was that copyright protection was granted on the condition that there existed some originality, and this condition was articulated as a certain creativeness beyond mere labor investment.91 In contrast with the Feist decision, the labor theory is still in force in the United Kingdom and in other Anglo-Commonwealth jurisprudences.92 B. ARTICLE 27 OF THE UNIVERSAL DECLARATION OF HUMAN RIGHTS

The natural rights discourse is the background on which the human rights legal discipline developed.93 This legal discipline mainly deals with the legal means to realize natural rights.94 From human rights discourse emerged the recognition of “universal human rights.”95 The acknowledgment of fundamental basic rights, given to human beings wherever they are, reflects a wide philosophical and political position concerning the place of the individual in society and the need to entitle the individual with certain basic liberties.96 An expression of universal human rights may be found in the constitutions of several different countries97 and in treaties and international declarations regarding human rights. One of the most central sources for the recognition of global human rights is the Universal Declaration of Human Rights.98 The Universal Declaration is the fruit of philosophical and moral justifications of basic human rights, but in some ways has become the moral decree itself. The natural liberties that have an impact on positive rights are those acknowledged in countries’ constitutions, treaties, and international declarations; they are not those that are completely theoretical or which deal with a primeval world with no legal order at all.99 88 See id. at 352 (rejecting the “sweat of the brow” doctrine and requiring a showing of originality for copyright protection). 89 Id. at 340–41. 90 U.S. Const., art. I, § 8, cl. 8. 91 Feist, 499 U.S. at 340. 92 See Copinger, supra note 65, at 30; Report of the Comm. to Consider the Law on Copyright and Designs (Whitford Report), 1977, CMND 6732, at 3. It should be explained that although the seminal decision in the case of Donaldson v. Beckett, (1774) 1 E.R. 837, has stressed utilitarian justifications for copyright, naturalistic justifications were never abandoned. For example, see the decision held by the House of Lords in Ladbrook (Football) Ltd., v. William Hill (Football) Ltd., [1964] 1 W.L.R. 273, 277–78, according to which labor investment is a relevant threshold for conferring copyright. Recently, the appeals court of Australia laid down a decision according to which English law must be adopted continually, so labor theory continues to be a justification of copyright. See Desktop Mktg. Sys. Pty. Ltd. v. Telstra Corp. Ltd. (2002) 192 A.L.R. 433. In this case it was held that a telephone directory was copyrightable. 93 Louis Henkin, The Age of Rights 1 (1st ed. 1990) [hereinafter Henkin, Age of Rights]. 94 Therefore, the Human Rights discipline could not be classified as a “theory” standing on its own, because it does not give additional theoretical justification for acknowledging natural rights. For the position that the human rights legal movement is based on different values but is not in itself a philosophical theory, see id. at 1–2, 6, 31. 95 Jerome J. Shestack, The Jurisprudence of Human Rights, in 1 Human Rights in International Law: Legal and Policy Issues 69, 70–74 (Theodor Meron ed., 1985). 96 Discussion over the theoretical basis of universal human rights is beyond the scope of this Essay. It should be noted, however, that natural rights theories served as the main cause, although not the exclusive one, for the development of universal human rights. See id. at 85–101. 97 Henkin, Age of Rights, supra note 93, at 26–29. 98 See supra note 5 99 Jeremy Waldron, From Authors to Copiers: Individual Rights and Social Values in Intellectual Property, 68 Chi.-Kent L. Rev. 842, 869–70 (1993). The Universal Declaration manifests the general legal movement of human

396 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y Thus, the status and the great influence of the Universal Declaration turned it into a quasi-justification in itself for different human rights.100 Intellectual property rights, and in particular copyright, are also treated in the framework of the Universal Declaration.101 As cited previously, Article 27(2) of the Universal Declaration states that the material and moral interests of the author with respect to his or her work should be protected.102 In further protection of the author’s rights, Article 27(1) proclaims a basic and universal right, according to which “[e]veryone has the right freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits.”103 Thus, Article 27(1) includes a range of different rights, from freedom of creation to the right to enjoy existing works.104 The aim of Article 27(1) is to make it clear that culture must be within everyone’s reach and, therefore, it must be possible not only to access culture but to participate in its creation as well.105 This is a reason for referring to the rights proclaimed in Article 27(1) as rights of “access and participation.”106 Article 27 of the Universal Declaration, then, is comprised of two parts, which together grant a package of rights called “cultural rights.”107 This bundle of cultural rights includes the right to participate in cultural life, the freedom of creation, the right to enjoy culture, the right to enjoy the products of scientific progress, the freedom of scientific research, and the economic and moral rights the author has with respect to his or her work.108 It should be noted that after the acceptance of the Universal Declaration, the United Nations (U.N.) decided to formulate treaties on the issues related to the Universal Declaration.109 Accordingly, in 1966 two treaties were formed: one dealing with civil and political rights and the other with economic, social, and cultural rights.110 The package of cultural rights, proclaimed in Article 27, was acknowledged in the treaty regarding

rights in concrete and applicable terms. See Louis Henkin, The Universal Declaration at 50 and the Challenge of Global Markets, 25 Brook. J. of Int’l L. 17, 18–19 (1999) [hereinafter Henkin, Universal Declaration at 50]. 100 The Universal Declaration is deemed to be the prime document and constitution of the human rights movement, with a symbolic and ideological status. See Henry J. Steiner & Philip Alston, International Human Rights in Context: Law, Politics, Morals: Text and Materials 138–39 (2d ed. 2000). 101 Universal Declaration, supra note 54. 102 Id. 103 Id. 104 Francois Dessemontet, Copyright and Human Rights, in Intellectual Property and Information Law: Essays in Honour of Herman Cohen Jehoram 113, 117 (Jan J.C. Kabel & Gerald J.H.M. Mom eds., 1998). 105 See Audrey R. Chapman, A Human Right Perspective on Intellectual Property, Scientific Progress, and Access to the Benefits of Science, in Intellectual Property and Human Rights 127, 132 (1999). 106 See Mehmet Komurcu, Cultural Heritage Endangered by Large Dams and Its Protection Under International Law, 20 Wis. Int’l L.J. 233, 276–77 (2002) (discussing Article 27 and recognizing a person’s “right to participation in culture” and that “cultural rights should give priority to access to, and education about one’s own culture”) (emphasis added). 107 Ragnar Adalsteinsson & Páll Thórhallson, Article 27, in The Universal Declaration of Human Rights: A Common Standard of Achievement 575 (Gudmundur Alfredsson & Asbjørn Eide eds., 1999) (“Article 27 is usually said to proclaim cultural rights.”). 108 Id.; Yoram Dinstein, Cultural Rights, 9 Israel Yearbook of Human Rights 58 (1979). 109 See infra notes 110–13 and accompanying text. 110 International Covenant on Economic, Social and Cultural Rights, G.A. Res. 2200A, U.N. GAOR, 21st Sess., Supp. No. 16, at 49, U.N. Doc. A/6316 (1966); International Covenant on Civil and Political Rights, G.A. Res. 2200A, U.N. GAOR, 21st Sess., Supp. No. 16, at 52, U.N. Doc. A/6316 (1966). Besides those two treaties, in 1966 another declaration was made regarding the need for international cooperation on cultural issues. See United Nations Educational, Scientific and Cultural Organization (“UNESCO”), Declaration of the Principles of International Cultural Cooperation, reprinted in 1 Human Rights: A Compilation of International Instruments 595 (1994).

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economic, social, and cultural rights.111 The United States, however, is not a party to this treaty.112 Moreover, the cultural rights were also established almost identically in the 1948 American Declaration of the Rights and Duties of Man, adopted by the Organization of American States, of which the United States is a member nation.113 C. THE STATUS OF THE UNIVERSAL DECLARATION OF HUMAN RIGHTS

The Universal Declaration is not a treaty that states are parties to; rather, it is a declaration proclaiming universal rights that everyone should have wherever they are.114 The declaration is not aimed to bind states in particular, but rather society as a whole.115 The original intent of the framers of the Universal Declaration, at least of some of them, was that it would have mainly moral force and would be used as a source of inspiration and guidance in the field of human rights.116 At the time the Universal Declaration was formulated, however, there was no consent between its supporting states on its legal force.117 The superpowers of that time, the United States and the Soviet Union, as well as other states such as Great Britain and China, held that the Universal Declaration was only a moral source of inspiration and nothing more.118 Other states, such as France, Chile, and Lebanon, held the opposite position, that the Universal Declaration was a continuation of the U.N. Charter, and hence, had binding legal force.119 More than that, 111 Article 15(1) of the International Covenant on Economic, Social and Cultural Rights states that: The States Parties to the present Covenant recognize the right of everyone: (a) To take part in cultural life; (b) To enjoy the benefits of scientific progress and its applications; (c) To benefit from the protection of the moral and material interest resulting from any scientific, literary or artistic production of which he is the author. Article 15(2) of said covenant stipulates that the states parties are bound to take steps to promote said cultural rights. Article 15(2) is compatible with the general policy of the covenant, according to which the rights in the states parties are not “guaranteed,” and that the states parties should take measures to realize the rights, as part of an ongoing process. See Matthew C.R. Craven, The International Covenant on Economic, Social and Cultural Rights: A Perspective on its Development 106–52 (1995); David M. Trubek, Economic, Social, and Cultural Rights in the Third World: Human Rights Law and Human Needs Program, in 2 Human Rights in International Law: Legal and Policy Issues 205, 210, 212–14 (Theodor Meron ed., 1985). Article 15(3) stipulates that “[t]he States Parties to the present Covenant undertake to respect the freedom indispensable for scientific research and creative activity.” 112 International Covenant on Economic, Social and Cultural Rights, G.A. Res. 2200A, U.N. GAOR, 21st Sess., Supp. No. 16, at 4, U.N. Doc. A/6316 (1966). The United States is not a party to this treaty. 113 American Declaration of the Rights and Duties of Man, O.A.S. Res. XXX, International Conference of American States, 9th Conf., O.A.S. Doc. OEA/Ser. L/V/I.4 Rev. XX (1948). According to article XIII of the American Declaration of the Rights and Duties of Man: Every person has the right to take part in the cultural life of the community, to enjoy the arts and to participate in the benefits that result from intellectual progress, especially scientific discoveries. He likewise has the right to the protection of his moral and material interests as regards his inventions or any literary, scientific or artistic works of which he is the author. Id. It should be noted that this declaration precedes the Universal Declaration of Human Rights. 114 See Gudmundur Alfredsson & Asbjørn Eide, Introduction to The Universal Declaration of Human Rights: A Common Standard of Achievement xxx (Gudmundur Alfredsson & Asbjørn Eide eds., 1999) (“[The Universal Declaration] is not a convention subject to the ratification and accession requirements foreseen for treaties. Nevertheless, it is clear that [it] . . . carries legal weight far beyond that of ordinary resolutions or even other declarations emanating from the General Assembly [of the United Nations].”). 115 The framers of the Universal Declaration had an internal conflict on the question of whether it was best to shape it as an international covenant, which binds countries, or as a declaration, which has moral force only. Finally, the second option was adopted, with the support of different countries, including the United States and the (then) U.S.S.R. Ashild Samnøy, Human Rights as International Consensus: The Making of the Universal Declaration of Human Rights 1945–1948, 57–67 (1993). 116 The original framers who shared this view included the United States, China, Australia, Mexico, the Netherlands, New Zealand, Poland, the Union of South Africa, and the United Kingdom. Id. at 70–72. 117 Id. at 77 (“In the end, the Declaration was adopted with a variety of views on its legal value.”). 118 Id. at 70–72. 119 Id. at 76 (“Chile, France and Lebanon were the leading forces among those who saw the Declaration as binding.”).

398 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y many countries announced their obligation to the Universal Declaration, simply due to its importance.120 Therefore, the legal status of the Universal Declaration is controversial. Some hold the view that despite its moral importance it does not have binding status, while others hold the view that it reflects binding law, either because it continues the U.N. Charter or because it is part of customary international law.121 Even if the Universal Declaration has not become part of customary international law, however, at least it should have impact on interpreting domestic laws, due to its position as a moral source of inspiration.122 The fact that the status of the Universal Declaration is not assimilated into a binding treaty does not mean that any state simply can ignore it.123 In any case, the Universal Declaration manifests a variety of human rights, from basic freedoms to social and economic rights.124 Therefore, it is not made of one cloth, and a separate discussion can be held regarding the status of each one of the different rights included therein. For the purposes of the discussion here, it is assumed that Article 27 is of an inspirational nature.125 D. THE RIGHT TO PARTICIPATE IN CULTURAL LIFE AS A HUMAN RIGHT

The right to participate in cultural life is included in the package of cultural rights proclaimed in Article 27(1) of the Universal Declaration.126 The research on the right to participate in cultural life is limited.127 Different declarations and treaties are some of the 120

Henkin, Universal Declaration at 50, supra note 99, at 21. Paul Seighart, The International Law of Human Rights 14–19 (1983). For the status of the Universal Declaration in various countries, including the United States, and for the position that it has become part of customary international law, see Hurst Hannum, The Status and Future of the Customary International Law of Human Rights: The Status of the Universal Declaration of Human Rights in National and International Law, 25 Ga. J. Int’l & Comp. L. 287, 298, 301, 304–07, 322–24 (1995/1996); see also Samnøy , supra note 115, at 128–30; Richard B. Lillich, Invoking International Human Rights Law in Domestic Courts, 54 U. CIN. L. REV. 367, 394 (1985) (quoting one of the drafters of the Universal Declaration stating that “the Declaration has been invoked so many times both within and without the United Nations that lawyers now are saying that, whatever the intention of its authors may have been, the Declaration is now part of the customary law of nations and therefore is binding on all states”). For more on this issue, see Restatement (Third) of the Foreign Relations Law of the United States § 701–02 (1987) (invoking an obligation upon states to respect human rights and listing the customary international law of human rights) [hereinafter Restatement of Foreign Relations]. 122 Pieter van Dijk, The Universal Declaration Is Legally Non-Binding: So What?, in Reflections on the Universal Declaration of Human Rights: A Fiftieth Anniversary Anthology 108, 109 (Barend van der Heijden & Bahia Tahzib-Lie eds., 1998). For Tony Blair’s opinion on the practical aspects of the Universal Declaration, see Tony Blair, The Universal Declaration as a Source of Inspiration, in Reflections on the Universal Declaration of Human Rights: A Fiftieth Anniversary Anthology 65 (Barend van der Heijden & Bahia Tahzib-Lie eds., 1998); see also Edward D. Re, The Universal Declaration of Human Rights and the Domestic Courts, 14 St. Thomas L. Rev. 665, 680–81, 685–86 (2002) (discussing the moral and legal effect of the Universal Declaration, and the role of domestic courts in following the spirit of the Universal Declaration, inter alia, through interpretation of domestic statutes and constitutional provisions). 123 Oscar Schachter, The Twilight Existence of Non-Binding International Agreements, 71 Am. J. Int’l L. 296, 298 (1977); van Dijk, supra note 73, at 108. 124 See Universal Declaration, supra note 54. 125 Such view was held, obiter dictum, with respect to Article 27 of the Universal Declaration in a case discussing the status of the right to free elementary education, proclaimed in article 26(1). See In re Alien Children Educ. Litig., 501 F. Supp. 544, 593 (S.D. Tex. 1980), aff’d sub nom. Plyler v. Doe, 457 U.S. 202 (1982) (It should be noted that the reference in this case was made to Article 27(1), but the wording of Article 27(2) was quoted.). For scholarly acceptance of such a conclusion, see Lillich, supra note 121, at 407 n.189. 126 See Universal Declaration, supra note 54 (“[e]veryone has the right freely to participate in the cultural life of the community”). 127 This situation was described by leading commentators as “clear neglect of the specifically economic and social rights dimensions of cultural rights.” Steiner & Alston, supra note 100, at 248. “Cultural rights are [also] often qualified as an ‘underdeveloped category’ of human rights.” See Human Rights: Concepts and Standards 175 (Janusz Symonides ed., 2000) [hereinafter Symonides, Human Rights]. 121

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available tools for clarifying its content.128 Reference to the content and interpretation of said right may be found in the U.N. Educational, Scientific and Cultural Organization’s (“UNESCO”) 1986 recommendation titled Participation by the People at Large in Cultural Life and Their Contribution to It.129 In this recommendation, UNESCO determined that there are two key terms in this context: (1) Access to Culture: This is defined as “the concrete opportunities available to everyone, in particular through the creation of the appropriate socioeconomic conditions, for freely obtaining information, training, knowledge and understanding, and for enjoying cultural values and cultural property”;130 (2) Participation in Cultural Life: This is defined as “the concrete opportunities guaranteed for all—groups or individuals—to express themselves freely, to act, and engage in creative activities with a view to the full development of their personalities, a harmonious life and the cultural progress of society.”131 This recommendation actually refers to the connection between protection of cultural rights and guarantees for a modern, democratic society.132 UNESCO’s recommendation held that the right to participate in cultural life includes two central elements. One, passively characterized, concerns the right to have access to culture as a right to be exposed to knowledge, ideas, etc.133 The second element, actively characterized, concerns having a role in cultural life, by engaging in creative activity and communicating its product to the public.134 As a result of recognizing the right to participate in cultural life as an active right, or one of creative activity, there was a need to recognize the right to have the freedom of creation as well, because freedom of creation is essential for realizing 128 There are many declarations and treaties dealing with the subject of “cultural rights.” Despite the existence of these international legal instruments, it has been claimed that the international institutes responsible for their implementation have not made an effort to interpret them or to stimulate international discourse on the issue. See Chapman, supra note 105, at 134. For a review of the acts taken by UNESCO in order to promote the cultural rights discourse and implementation, see Symonides, Human Rights, supra note 78, at 176–79. The following are some international instruments referring to the subject of “cultural rights”: (1) The Declaration of the Principles of International Cultural Co-Operation, supra note 110, proclaims in article 1(2) that, “Every people has the right and the duty to develop its culture.” Id. Article 7(1) of this declaration proclaims that, “[b]road dissemination of ideas and knowledge, based on the freest exchange and discussion, is essential to creative activity, the pursuit of truth and for the development of the personality.” Id. (2) In 1980, a Recommendation Concerning the Status of the Artist was accepted by UNESCO, in which there is a commitment of states to protect artists, aid them, and ensure freedom of creation, by legislating these rights in domestic and international law concerning human rights. See Recommendation Concerning the Status of the Artist, UNESCO, 21st Sess., available at http://www.unesco.org/culture/laws/artist/ html_eng/page1.shtml (Oct. 27, 1980); see also Stephan P. Marks, Education, Science, Culture and Information, in 2 United Nations Legal Order 576, 613–14 (Oscar Schachter & Christopher C. Joyner eds., 1995). (3) The Declaration on the Right to Development, from 1986, states in article 1(1), inter alia, that the right to development is an inalienable human right, which confers on everyone the right to participate in cultural progress. See Declaration on the Right to Development, G.A. Res. 41/128, U.N. GAOR, Supp. No. 53, at 186, U.N. Doc. A/41/53 (1986), available at http://www.-unhchr.ch/html/menu3/b/74.htm (last visited Jan. 22, 2004). 129 Recommendation on Participation by the People at Large in Cultural Life and Their Contribution to It, UNESCO, 19th Sess., I.2 [hereinafter Recommendation on Participation in Cultural Life], available at http://www.unesco.org/culture/laws/nairobi/html_eng/page1. html (Nov. 26, 1976); see also Marks, supra note 128, at 599. 130 Recommendation on Participation in Cultural Life, supra note 129, I.2. 131 Id. 132 Marks, supra note 128, at 576, 600–01. 133 See Recommendation on Participation in Cultural Life, supra note 129, I.2(a) 134 See id. at I.2(b) (stating that “participation in cultural life . . . [means] the concrete opportunities guaranteed for all—groups or individuals—to express themselves freely, to act, and engage in creative activities with a view to the full development of their personalities, a harmonious life and the cultural progress of society”).

400 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y the right to creative activity.135 In an early draft of Article 27 of the Universal Declaration, the right was defined as the following: “Everyone has the right to participate in the cultural life of the community . . . .” After discussions, it was decided to add the word “freely” before the word “participate,” hence, without full freedom of creation there cannot be creative activity honoring human beings.136 Furthermore, in order to clarify the content of the right to participate in cultural life one must clarify the term “culture.” UNESCO’s recommendation mentions that the term “culture” is a very broad one, and does not only refer to works of art or to the products of the social elite—such as those exhibited in museums— but also to acquisition of knowledge, a demand for a way of life, and the need to communicate.137 Indeed, according to the working papers of the Universal Declaration, the term “culture” designated “high” culture.138 As later treaties are common and acceptable tools for interpreting prior treaties,139 however, the right to participate in cultural life should not be understood as limited to certain kinds of works.140 In any case, it is hard if not impossible to define the term “culture” accurately, and it was suggested to include in it the following: language, literature, religion, art, science, knowledge in general, and any spiritual endeavor.141 The term “culture” was thus given a flexible meaning, which includes art as well as science, according to the specific context.142 135 See id. at I.1 (“This Recommendation concerns everything that should be done by Member States or the authorities to democratize the means and instruments of cultural activity, so as to enable all individuals to participate freely and fully in cultural creation and its benefits, in accordance with the requirements of social progress.” (emphasis added)). 136 Adalsteinsson & Thórhallson, supra note 107, at 578–79. 137 On the preamble to UNESCO’s recommendation, the term “culture” is described or defined as a “social phenomenon resulting from individuals joining and co-operating in creative activities.” See Recommendation on Participation in Cultural Life, supra note 129, I.2(a). 138 This was namely culture as perceived by the social elite. See Adalsteinsson & Thórhallson, supra note 107, at 579. 139 According to article 31(3) of the 1969 Vienna Convention on the Law of Treaties, all late agreements between parties, late practice, and all relevant international rules applying to the parties should be taken into account while interpreting prior treaties. Vienna Convention on the Law of Treaties, opened for signature May 23, 1969, art. 31(3), 1155 U.N.T.S. 331, available at http://www.un.org/law/ilc/texts/treaties.htm (last visited Jan. 22, 2004). 140 Nowadays, a central implication of the broad interpretation given to the term “culture” is the recognition of rights of developing minorities. Over the last decade a lively discussion has been held on the issue of protecting folk culture and on the cultural rights of developing ethnic minorities as a group. For example, see John Mugabe, Intellectual Property Protection and Traditional Knowledge, in Intellectual Property and Human Rights 97 (1999); Carol M. Rose, The Several Futures of Property: Of Cyberspace and Folk Tales, Emission Trades and Ecosystems, 83 Minn. L. Rev. 129, 160 (1998) (“[F]ailure to recognize traditional people’s creative work—in which generations of people add incrementally to local legends, craft traditions, and cultivated products—has of course led a number of critics to assert that author- and inventor-centrism has the intended or unintended consequence of . . . permitting Western appropriators to plunder the work of traditional peoples. . . . [T]he creators of these collaborative works could benefit from property protection—not necessarily to cash in on their work, but sometimes simply to achieve recognition, and to prevent outsiders from appropriating and commercializing their emergent artistic products.”). In this spirit, there is also a recommendation of UNESCO: Recommendation on Safeguarding of Traditional Cultureand Folklore, UNESCO, 25th Sess., available at http://www.unesco.org/culture/laws/paris/ html_eng/page1.shtml (Nov. 16, 1989). It should be emphasized, however, that the right to participate in cultural life as a human right applies to individuals only, wherever they are, and not to groups of people, such as minorities or ethnic groups. See Dinstein, supra note 108, at 75. 141 Dinstein, supra note 108, at 74–75. For more on the different definitions and meanings of “culture,” see Symonides, Human Rights, supra note 127, at 179–81. 142 Dinstein, supra note 108, at 74. Accordingly, it was claimed that eliminating the term “art” from article 15(3) of the International Covenant on Economic, Social and Cultural Rights, supra note 110, does not reflect an opinion according to which the right of enjoying arts should not be recognized; rather it reflects the fact that the term “art” is superfluous since it is included in the broad term “culture.” Dinstein, supra note 108, at 75.

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As to the term “community” mentioned in Article 27(1), according to which there is right of participation in cultural life “of the community,” this wording replaced the words “of the society” that had appeared in an early draft of the article.143 The common view is that the words “of the community” do not limit the scope of the right, and some even support the view that it is superfluous.144 Other issues regarding the right to participate in cultural life require a brief explanation. The first issue concerns the aim of the right. The justification for the right mainly stems from the aim of developing and realizing a human being’s personality.145 This right is connected to the human right to dignity, which according to the preamble to the Universal Declaration is the basis of the human right to freedom.146 The second issue concerns the classification of the right. The right includes many other basic rights, such as the right to self-expression, to receive information, to use a language, and to education.147 All these rights enable a person to participate in the cultural life of his or her community.148 Because the right to participate in cultural life could be divided into further basic rights, some of which are recognized as independent rights, the need for another independent right containing those not recognized should be explained. As illustrated below, some scholars have suggested classifying intellectual property rights in general and copyright in particular as rights functioning as a means to realize primary universal human rights, such as freedom of expression.149 This kind of classification is also suitable for the right to participate in cultural life.150 E. COPYRIGHT AS A HUMAN RIGHT

Article 27(2) of the Universal Declaration establishes the status of the material and the moral rights of the author as human rights. Despite the content of Article 27(2) there is much criticism of viewing intellectual property rights in general and copyright in particular as universal human rights.151 143

Adalsteinsson & Thórhallson, supra note 107, at 579. Accordingly, some scholars claim that omission of the term “community” from article 15(1) of the Covenant on Economic, Social and Cultural Rights, supra note 110, is wise because of the conflicting views of commentators on how the term should be interpreted and whether it should be there at all. Adalsteinsson & Thórhallson, supra note 58, at 579. See also Dinstein, supra note 108, at 76–77 145 See Adalsteinsson & Thórhallson, supra note 107, at 576 (“[T]he basic idea of cultural rights is that all human beings shall be entitled to take part in cultural life. . . . Otherwise, they would not be able to develop themselves as individuals in society, and human society would not flourish.”). 146 Id. at 575–76. Support for this proposition can be found in article 22 of the Universal Declaration, which declares that realization of economic, social, and cultural rights is indispensable for a person’s dignity and free development of personality, and according to which the entire declaration should be interpreted. Universal Declaration, supra note 54. 147 See Adalsteinsson & Thórhallson, supra note 107, at 576 (“In its broadest sense, the expression ‘cultural rights’ thus understood engulfs much of human rights altogether. Freedom of speech, freedom of religion, freedom of association, the right to self-determination, the right to choose one’s identity, the right to receive information, the right to education, and the right to use the language of one’s choice can all be considered cultural rights.”). 148 Id. 149 See infra note 166 and accompanying text. 150 It should be mentioned that there are scholars who think that the correct classification of the right to participate in cultural life is a subsidiary civil and political right, and that placing it in the economic and social rights arena is not accurate. See Adalsteinsson & Thórhallson, supra note 107, at 577; Ann I. Park, Comment, Human Rights and Basic Needs: Using International Human Rights Norms to Inform Constitutional Interpretation, 34 UCLA L. Rev. 1195, 1229 n.136 (1987). For the distinction between the different kinds of rights, compare the International Covenant on Economic, Social and Cultural Rights with the International Covenant on Civil and Political Rights, supra note 110. 151 See Dessemontet, supra note 104, at 116–20 (discussing the concern that resulted from the Universal Declaration’s embrace of the freedom to create, which many countries, including the United States, found at odds with the protection of intellectual property rights); see also infra notes 152–62 and accompanying text 144

402 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y First, there is doubt as to whether property rights in general are human rights. This is because, inter alia, property rights are not absolute, but rather subject to public interests.152 Discussion of the question of whether property rights are indeed human rights is beyond the scope of this Essay; however, it is clear that such a discussion will have a crucial impact on the status of copyright as a human right.153 Apart from the difficulty of recognizing property rights as human rights, various characteristics of intellectual property rights, such as their non-perpetuity, have been claimed to undermine their validity as a basic human right.154 Second, in order to recognize copyright as a human right one must adopt the view that it is a natural right. As mentioned above, however, there is an ongoing debate on the subject.155 It is not enough that natural law doctrines influenced the development of intellectual property rights. The question remains as to whether intellectual property rights are natural rights or rights only made by positive law. Despite the fact that copyright is widely recognized, there are profound differences in the theoretical foundations on which the legal copyright system is based in each country. Therefore, there is great difficulty from a practical point of view in referring to copyright as a basic human right.156 A similar quandary exists in relation to other economic, social, or cultural rights, whose recognition as human rights are questioned because their justifications do not stem from natural law doctrines.157 Third, a common claim is that there is a difference between copyright law today, which is mostly dictated by developed countries in order to maintain their economic interests, and the rights and liberties proclaimed by international institutions.158 An example of 152 See Lynda J. Oswald, Property Rights Legislation and the Police Power, 37 AM. Bus. L.J. 527, 535 (2000) (“Protection of private property rights . . . has never been absolute in the U.S. legal system. The law constantly struggles to balance private property rights and public interests, with mixed results.” (footnote omitted)); see also infra note 153. 153 In a nutshell, it is possible to classify human rights into basic liberties everyone is entitled to, such as the right to life and freedom, and into basic rights that everyone has the option to be entitled to, such as a property right, although the first kind of basic liberties might not be realized. Economic, social, and cultural rights, including property rights, are classified as rights that everyone may have, but not everyone will actually have them. Furthermore, sometimes these rights impose positive obligations on society and, as a result, some state action is necessary, such as resource collecting. Thus, these rights are not absolute but contingent, and their realization is subject to different factors, such as source allocation by the state. See Becker, supra note 64, at 76; Craven, supra note 111, at 14; Waldron, supra note 66, at 4–5, 20. A basic claim against recognizing a property right as a human right is that it is not universal and absolute, and the list of universal human rights should reflect basic and absolute rights, which can not be restricted from time to time. Peter Drahos, The Universality of Intellectual Property Rights: Origins and Development, Intellectual Property and Human Rights 13, 25–27 (1999) [hereinafter Drahos, Origins and Development]; see also Craven, supra note 111, at 6; Michel Vivant, Authors’ Rights, Human Rights?, 174 Revue Internationale du Droit d’Auteur 60, 84 (M. Platt-Hommel trans., 1997). Moreover, it is claimed that the fact that the property right was included in the Universal Declaration should not be regarded as proof of its classification as a human right, and a property right does not deserve wide and universal protection because it causes socio-economic gaps. See Craven, supra note 111, at 11; Catarina Krause & Gudmundur Alfredsson, Article 17, in The Universal Declaration of Human Rights: A Common Standard of Achievement 359, 359–61, 378 (Gudmundur Alfredsson & Asbjørn Eide eds., 1999). Opposing these claims are scholars who classify economic rights, including property right, as “second generation” human rights, which arose from political ideas and legal perceptions that are not only rooted in natural law and have emerged in the modern era. In contrast to these rights, the “absolute” human rights are “first generation,” which were established from the eighteenth century on. See Craven, supra note 111, at 8, 10. For a critical review of this distinction between first and second generation human rights, see Park, supra note 150, at 1226–31 154 Drahos, Origins and Development, supra note 153, at 30. 155 See supra notes 152–4 and accompanying text. 156 Robert L. Ostergard, Intellectual Property: A Universal Human Right?, 21 Hum. Rts. Q. 156, 161–62 (1999); Vivant, supra note 153, at 70, 84. 157 Craven, supra note 111, at 10. 158 Edited Transcript of Discussion on Intellectual Property and the Right to Culture (Nov. 9. 1998), Intel-

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such differences between copyright as human right and existing positive copyright involves the issue of protection of an author’s copyright in foreign countries. For if copyright is a human right, then there is no need to codify rules according to which under some conditions authors could enjoy copyright protection outside their homeland, because the right should be given to them wherever they are.159 Another common claim is that intellectual property rights do not protect the traditional knowledge of developing countries, causing discrimination against part of the world population and undermining the moral foundations of those rights as universal human rights.160 There are even scholars who hold the view that the trend among international treaties concerning intellectual property rights is to broaden the scope of the rights and their field coverage, which is not necessarily compatible with cultural rights aimed to increase dissemination of works.161 Therefore, although copyright has universal recognition, it is not universally perceived as a human right.162 Following the criticism outlined above, Article 27(2) was not included in an early draft of the Universal Declaration.163 The article was added despite the view of opposing countries, including England and United States, that copyright and neighboring rights are not human rights.164 The context for the addition of cultural rights to the Universal Declaration of 1948 included the events of World War II and the public debate afterwards on the need for a universal ethical code to regulate the use of the fruits of science and cultural properties.165 Since copyright was added to the list of human rights despite the problems that arose, it was suggested to classify copyright as a means to realize other universal human rights, such as the freedom of expression or the right to self-dignity, and not as a basic human right.166 lectual Property and Human Rights 59, 63 (1999), available at http://www.wipo.int/tk/en/activities/1998/ humanrights/papers/index.html; Rochelle Copper Dreyfuss & Diane Leenheer Zimmerman, Convenors’ Introduction: The Culture and Economics of Participation in an Intellectual Property Regime, 29 N.Y.U. J. Int’l L. & Pol. 1, 1–9 (1996–1997). 159 Silke von Lewinski, Intellectual Property, Nationality, and Non-Discrimination, in Intellectual Property and Human Rights 175, 176–77, 188, 193 (1999), available at http://www.wipo.int/tk/en/activities/1998/humanrights/ papers/index.html. In France, in one particular case, the court concluded the existence of a moral right in favor of a plaintiff who was not a French citizen, due to the influence of the Universal Declaration. See Dessemontet, supra note 104, at 114–15 n.7. In that case, copyright in a Charlie Chaplin silent film was infringed by adding a soundtrack without permission. Id. 160 Drahos, Origins and Development, supra note 153, at 29–30; Mugabe, supra note 140, at 111–12. 161 Id., at 28–29. 162 See id. at 30–31. In order for a right be recognized as a universal human right, it is not enough that it is recognized all over the world; “human rights are held to exist independently of recognition or implementation in the customs or legal systems of particular countries.” James W. Nickel, Making Senses of Human Rights Philosophical Reflections on the Universal Declaration of Human Rights 3 (1987). 163 For a general summary of the concerns surrounding the drafting of Article 27(2), see Adalsteinsson & Thórhallson, supra note 107, at 577–80; Chapman, supra note 105, at 131–32. 164 Adalsteinsson & Thórhallson, supra note 107, at 579; Dessemontet, supra note 104, at 117. For the general objection to including economic rights, which incorporates property rights, in the Universal Declaration, see supra note 153 and Samnøy, supra note 115, at 79–85. 165 Chapman, supra note 105, at 131–32. For the general impact of World War II events on the Universal Declaration, see Samnøy, supra note 115, at 79. 166 Peter Drahos, Intellectual Property and Human Rights, 3 Intell. Prop. Q., 349, 367 (1999); see also Drahos, Origins and Development, supra note 153, at 31–32 (discussing the complementarities among clusters of rights: “[s]ome rights . . . are instrumental in securing the feasibility of claiming other types of rights.”); Vivant, supra note 153, at 78 (quoting Christian Mouly’s views on property: “The place given to it . . . can only . . . be explained by analyzing it as a legal procedure for protecting the other human rights. Property is not the expression of one of the three fundamental rights (freedom, equality, dignity), it is a guarantee of the human rights which are the expression of them.”). For the general view that all economic, social, and cultural rights function as means to realize other basic human rights, see Craven, supra note 111, at 13.

404 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y Despite the above criticism, some scholars do view copyright as a human right, in that copyright contains characteristics that justify recognition of a universal human right, and those characteristics do not refer specifically to purely proprietary elements.167 According to this proposition, the connection between copyright and the personality theory, focusing on the protection of the external reflection of the author within the work might justify recognition of copyright as a human right.168 Such personal interests of the author, aimed to protect his or her personality, might also be protected via tort law in some cases. For example, courts in the United States have used the traditional tort doctrines of libel and slander, invasion of privacy, and unfair competition in order to protect the personal bonds of authors to their respective works.169 This phenomenon demonstrates that the so-called moral interests of authors are not purely proprietary in nature, but are concerned with personal injury, and that the legal means to redress such injury might be tort law rather than property law.170 Therefore, the connection between copyright and the personality theory might be viewed as not purely proprietary in nature.171 Moreover, further support for the view that recognition of copyright’s status as a human right, stemming mainly from the personal attachment of an author to his or her work, may be evidenced in early drafts of Article 27(2) that were focused only on the moral aspects of the author’s right.172 Furthermore, there is great difference between the impact of natural law theories in general and the personality theory in particular on the recognition of the different intellectual property rights such as copyright and patents.173 Therefore, one should not refer to intellectual property rights as a whole, but inspect the underpinnings of each right separately.174 The underpinnings of copyright are twofold—natural law as well as utilitarian

167 See, e.g., Dane S. Ciolino, Moral Rights and Real Obligations: A Property-Law Framework for the Protection of Authors’ Moral Rights, 69 Tul. L. Rev. 935, 958 n.162 (1995) (quoting a letter in which A.N. Yiannopoulos “suggested that the ‘analytically preferable framework’ for the protection of authors’ moral rights would be to treat moral rights as ‘absolute rights in the framework of personality’”). 168 Id. 169 See Nimmer & Nimmer, supra note 62, § 8D.02[A] (“‘[T]he doctrine of moral right is not part of the law in the United States . . . except insofar as parts of that doctrine exist in our law as specific rights—such as copyright, libel, privacy and unfair competition.’” (citing Geisel v. Poynter Prods., Inc., 295 F. Supp. 331, 340 n.5 (S.D.N.Y. 1968))). 170 See Ciolino, supra note 167, at 959. 171 For an explanation of the common view regarding the non-proprietary nature of the moral right of authors and for a position rejecting this view, see id. at 958. In this context, the connection between copyright and the personality theory, briefly described above in notes 80–84 and accompanying text, is much more complex. The personality theory, which gives another justification for property right with respect to different assets in general, has special application with regard to authorial works. The need to give an author control over his or her work, namely over his or her intellectual endeavor, is not the same as the need to give a person control over tangible assets which he or she is attached to (such as a wedding ring). An authorial work is a special kind of asset because, through the work, the author expresses his and her thoughts and desires. Thus, the personality theory has a broader justification for copyright, beyond the one with regard to property rights in general, and in this specific context it might assimilate not purely proprietary argumentation. For a discussion on the connection between authors’ rights and the personality theory, see Drahos, supra note 84, at 80–81; David Saunders, Authorship and Copyright 110–15, 117–18 (1992); Jacob H. Spoor et al., Copies in Continental Copyright 1, 14–15, 55 (Kluwer Academic 1980). 172 See Vivant, supra note 153, at 92. In this context, article 22 of the Universal Declaration should be mentioned. According to article 22, everyone has a right to realize the economic, social, and cultural rights indispensable for their dignity and the free development of their personalities. Furthermore, personality theory justifies property rights per se, because control over one’s assets gives one independence and security. See Nickel, supra note 162, at 152; supra notes 82–85 and accompanying text. 173 See Drahos, Origins and Development, supra note 153, at 31. 174 See id. at 30–31.

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justifications175—while the underpinnings of patent rights are mainly utilitarian.176 Therefore, copyright might be a better candidate to be acknowledged as a human right than are patents. Among the different intellectual property rights, the patent right in particular is hard to accept as a human right mainly because it can bar access to supplies necessary for life and health.177 Accordingly, if copyright is to be recognized as a human right while patent is not, then the recognition of copyrights’ status would not be due to its proprietary characteristics, but rather to an original or creative activity of a person, and the impact of such activity on his or her personality.178 It should be borne in mind, however, that if recognition of copyright’s status as a human right stems from the personality theory, then a question arises in cases where copyright is not aimed to protect an author personally, such as where the owner of copyright is not the actual author of the work.179 A possible solution for such a difficulty is to recognize copyright’s status as human right only in those cases in which copyright serves the personal interest of the author.180 A different question, which is beyond the scope of this Essay, is which of the positive rights included in copyright serves the function of protecting the personal interests of the author. On this subject, it should be noted that traditionally a distinction has been made between the economic rights included in copyright, such as the exclusive right to reproduce a work or to publicly perform it, and the so-called moral right.181 The moral right is a right given personally to the author, which remains in his or her possession even after the transfer of the other rights included in copyright, in order to enable the author to protect some reflections of his or her personal ties with the work.182 Most known and 175

See supra Part I.A. The main justification for patents is that the right encourages inventors to develop new inventions, and many and varied inventions benefit society. See William R. Cornish, Intellectual Property: Patents, Copyrights, Trademarks and Allied Rights 129 (4th ed. 1999) (pointing out that the current debate over patent systems “concentrate[s] upon their role as a ‘public’ instrument of economic policy[,]” while “rewarding inventive ingenuity may seem little more than an incidental consequence of modern patent systems”); Richard A. Posner, Economic Analysis of Law 37–39 (Aspen Publishers 6th ed. 2003) (providing an example of how patents supply economic incentive for inventive activity and discussing the legal devices used within the patent system); Edmund W. Kitch, Property Rights in Inventions, Writings, and Marks, 13 Harv. J.L. & Pub. Pol’y 119, 121 (1990) (“Patent rights are viewed as entirely creatures of the statute[,]” not “as having emerged through a process of natural, customary or common-law development.”); Arnold Plant, The Economic Theory Concerning Patents for Inventions, 1 Economica 30, 32 (1934) (The aim to encourage inventing “is undoubtedly the expectation and hope of the vast majority of disinterested advocates of patents. . . . We are surely entitled, therefore, to attribute the existence of the patent law to a desire to stimulate invention.”), available at http://www.compilerpress.atfreeweb.com/ Anno%20Plant%20Patent.htm. 177 The right of access to knowledge is of great importance, and some hold that there is no justification to recognize intellectual property rights as natural human rights if they bar use of knowledge necessary to human life. A common example is a patent right over medication, which injures poorer people’s ability to obtain it. With regard to copyright, however, usually the problem of access to knowledge affecting human life does not arise. Therefore, it is claimed that recognition of intellectual property rights as a human right should not be unified and each specific right should be inspected according to how much it causes harm to essential needs for human life. See Ostergard, supra note 156, at 161, 169, 175–76. For a discussion of the problems patent rights pose for the health of the world’s population, see Silvia Salazar, Intellectual Property and the Right to Health, in Intellectual Property and Human Rights 65 (1999), available at http://www.wipo.int/tk/en/activities/1998/humanrights/papers/index.html. 178 See Vivant, supra note 153, at 74–76, 88–90. 179 See id. at 94. 180 Giving effect to human rights in a “graded” way is not so rare. For example, the right to freedom of expression is given effect to a different degree according to the kind of speech being referred to. Id. at 100–02. 181 See Henry Hansmann & Marina Santilli, Authors’ and Artists’ Moral Rights: A Comparative Legal and Economic Analysis, 26 J. Legal Stud. 95, 99 (1997) (“Independently of the author’s economic rights, and even after the transfer of said rights, the author shall have the right . . . to object to any distortion, mutilation, or other modification of, or other derogatory action in relation to, the said work, which would be prejudicial to his honor or reputation.”). 182 See id. 176

406 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y recognized are the right of attribution (the right of an author that his or her work be attributed to him or her) and the right of integrity (the right of an author that derogatory and other kind of changes shall not be made with respect to his or her work).183 Therefore, the center of copyright as a human right lies in the moral rights arena. Reducing the human right perspective of copyright to the protection of the personal interests of the author, however, does not mean necessarily that it only applies to moral rights. Other rights included in the economic bundle of copyright also may be used for the protection of the personal interests of the author.184 The best example is the exclusive right to prepare derivative works, such as translations, musical arrangements, and dramatizations,185 which might also function as a moral right because it enables authors to prevent unwanted changes in their works.186 To conclude this point, Article 27 of the Universal Declaration acknowledges the status of copyright as a human right. Nevertheless, this acknowledgment has been widely criticized. One possible compromise is to limit the acknowledgment of copyright’s status as a human right only to the aspects of the right that deals with protection of personal interests of authors with respect to their works. F. ARTICLE 27 OF THE UNIVERSAL DECLARATION, PROPERTY RIGHT, AND FREEDOM OF SPEECH

A question to be asked is whether recognizing copyright as well as the right to participate in cultural life is redundant since the Universal Declaration recognizes the general right of property at article 17 (“Article 17”)187 and the freedom of speech at article 19 (“Article 19”)188 as human rights. As to the relation between Article 27(2) (recognizing copyright as a human right) and Article 17, in discussions preceding the proclamation of the Universal Declaration some delegates claimed that the article concerning copyright was superfluous.189 Finally, it was accepted that the article concerning the general property right does not cover all the economic and moral rights of the author, hence, there was need to dedicate a separate article to those interests.190 In this context, special attention is drawn to the protection of the personal interests of authors with respect to their works—a goal

183 For a description of the origin of moral rights in Continental-European jurisprudence, see id.; Ciolino, supra note 167, at 938–48; Russell J. DaSilva, Droit Moral and the Amoral Copyright: A Comparison of Artists’ Rights in France and the United States, 78 Bull. Copyright Soc’y U.S.A. 1, 7–11 (1981). 184 Such rights include, inter alia, the exclusive right to prepare derivative works, as discussed in supra notes 185–86 and accompanying text. 185 Under U.S. copyright law: A “derivative work” is a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications, which, as a whole, represent an original work of authorship, is a “derivative work.” Copyright Act of 1976, 17 U.S.C. § 101 (2000). The exclusive right of a copyright owner to prepare derivative works is defined in 17 U.S.C. § 106(2). 186 For this possible function of the exclusive right to prepare derivative works, see Geller, supra note 50, at 193–95; Paul Goldstein, Adaptation Rights and Moral Rights in the United Kingdom, the United States and the Federal Republic of Germany, 14 Int’l Rev. Indus. Prop. & Copyright L. 43, 45–46, 49–50, 53–54 (1983); Hansmannand & Santilli, supra note 181, at 112–13; Neil Weinstock Netanel, Alienability Restrictions and the Enhancement of Author Autonomy in United States and Continental Copyright Law, 12 Cardozo Arts & Ent. L.J. 1, 42–44 (1994). 187 Universal Declaration, supra note 54. 188 Id. 189 Chapman, supra note 105, at 132. 190 Adalsteinsson & Thórhallson, supra note 107, at 579.

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mainly achieved by the moral right191—that are viewed as not purely proprietary in nature.192 It also has been claimed that the rights aimed to guarantee participation in cultural life in Article 27(1) could be realized, at least in part, through the freedom of speech clause in Article 19.193 Freedom of speech, generally speaking, protects the public’s interest in free access to information, as part of the democratic process and for the sake of revealing the truth, as well as protecting individual interests in self-expression as part of self-fulfillment.194 Therefore, freedom of speech could be used to protect the interest of participation in cultural and creative life. A possible segregation between the two rights could be done, however. First, despite the fact that works are often used to express an author’s personal opinion, it was claimed that freedom of creation was not entirely included within freedom of speech because, for example, some works lacked any “expression” or “message” at all. Namely, freedom of creation does not necessarily include “speech” in its simplest meaning, therefore, its inclusion in the scope of freedom of speech is not obvious.195 As 191

For the content of positive moral right, see supra note 183 and accompanying text. See supra notes 168–72 and accompanying text. 193 Chapman, supra note 105, at 140; Christine Steiner, Intellectual Property and the Right to Culture, in Intellectual Property and Human Rights 43, 48–49 (1999), available at http://www.wipo.int/tk/en/activities/1998/ humanrights/papers/index.html. 194 Eric Barendt, Freedom of Speech 8–23 (101 Productions 1985) (discussing three major theories of free speech: “the importance of open discussion to the discovery of truth”; free speech “as an integral aspect of each individual’s right to self-development and fulfillment”; and protection of “the right of all citizens to understand political issues so as to be able to participate effectively in the workings of democracy”); see also Frederick Schauer, Free Speech: A Philosophical Enquiry 15–86 (Cambridge Univ. Press 1982). 195 Although “political” speech stands at the heart of freedom of speech, there are additional kinds of expression that will be protected, on different levels, including “artistic expression.” Artistic expression is often included in freedom of speech. In the United States, after Brandenburg v. Ohio, 395 U.S. 444 (1969), speech could no longer be suppressed unless aimed at and likely to incite lawless conduct. Art “unlikely to trigger city-wide riots, seems on the whole protected.” For the European rule, see 31 Yearbook of the European Convention on Human Rights 143, 144 (Council of Europe ed., 1988) (summarizing the judgment in the case of Müller v. Switzerland, 13 E.H.R.R 212 (1988), in which the court stated that “Article 10 of the Convention included the freedom of artistic expression, ‘which affords the opportunity to take part in the public exchange of cultural, political and social information and ideas of all kinds’” (citation omitted)). For the rule in England, see Human Rights Act, 1998, c. 42, § 12(4) (Eng.) (“The court must have particular regard to the importance of the Convention right to freedom of expression . . . where the proceedings relate to . . . journalistic, literary or artistic material . . . .”), available at http://www.opsi.gov.uk/acts/acts1998/ukpga_19980042_en_1 (Nov. 13, 1988). For the rule in Canada, see Can. Const. (Constitution Act, 1982), pt. I (Canadian Charter of Rights and Freedoms), § 2(b), (“[F]reedom of thought, belief, opinion and expression” is included among the fundamental freedoms.), available at http://laws.justice.gc.ca/en/charter; Aubry v. Éditions Vice-Versa Inc., [1998] S.C.R. 591, 615–16 (The Supreme Court of Canada stated that “[i]t is our view that freedom of expression includes freedom of artistic expression.”). For the rule in Germany, see article 5 of the Basic Law art. 5 Nr. (3) GG (“Art and scholarship, research, and teaching shall be free.”), available at http://www.iuscomp.org/gla/statutes/GG.htm#5; Barendt, supra note 194, at 35. Even if artistic expression is included in freedom of speech, however, it is claimed that certain works do not include any expression, verbal or nonverbal, as referred to in the context of the freedom of speech right, because the work does not communicate any specific idea, message, or information. In those cases, therefore, freedom of creation will not fully be protected through freedom of speech. Actually, the claim is that there must be a separation between applying freedom of speech with artistic speech, and applying freedom of speech with freedom of creation in its broadest meaning. Freedom of artistic speech involves some sort of “speech,” hence it could be interpreted as included in the scope of freedom of speech. In contrast, freedom of creation does not necessarily include “speech” in its simplest meaning, therefore, its inclusion in the scope of freedom of speech is not obvious. See Paul Kearns, The Legal Concept of Art, 174–75 (1998) (“[N]ot all art can be protected as ‘symbolic speech’ if that term implied a cognitive or propositional content. Abstract art, for instance, seldom communicates a knowledge-based idea . . . .”); Mark A. Lemley & Eugene Volokh, Freedom of Speech and Injunctions in Intellectual Property Cases, 48 Duke L.J. 147, 210 (1998) (“Certain types of expressive works may not qualify as speech at all.”). The question of whether freedom of speech includes freedom of creation deals with setting limits to the 192

408 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y aforesaid, there are various justifications for freedom of speech,196 each one of them leading to a different interpretation as to the scope of the term “speech.”197 Nevertheless, it is clear that there is an overlap between freedom of speech as part of self-fulfillment and freedom of creation.198 Even though freedom of creation may be encompassed in the broad freedom of speech, however, freedom of creation should be treated distinctively in order to allow incorporation of the relevant considerations for its full fulfillment.199 In other words, proclaiming the right to access and participation in cultural life is not superfluous due to the recognition of the general freedom of speech; rather, it could be classified as a narrower, more specific form of freedom of expression, concerning particular interests in the field of art and culture. Second, it also may be claimed that the right to participate in cultural life, being a kind freedom of speech right and not with the principal question of whether those liberties should be maintained. In other words, the question discussed above is what is included in the term “speech,” and whether said kind of works, with no specific ideas, are to be regarded as “speech.” See Barendt, supra note 194, at 37–67. 196 See supra note 194 and accompanying text. 197 Barendt, supra note 194, at 8–23, 37–41; Dessemontet, supra note 104, at 117 (“[A] wide understanding of the freedom of speech shall encompass the freedom to create as a wide understanding of copyright shall attach not only to published productions, but also to unpublished ones.”); Schauer, supra note 194, at 91 (“The concept of free speech is far too complex for that, and at too many points the definition depends upon the resolution of undetermined behavioural, ethical and empirical issues from which any justification for freedom of speech must be resolved.”). 198 For a presentation of this view and criticism of it, see Fiona Macmillan Patfield, Towards a Reconciliation of Free Speech and Copyright, 2 Y.B. Media & Ent. L. 199, 206 (1996); see also Barendt, supra note 194, at 14–20. 199 Freedom of creation discourse might be focused on different considerations than those emerging out form a typical freedom of speech debate. An example is to be found in the European case of Müller v. Switzerland, 13 E.H.R.R 212 (1988), which was concerned with an obscene painting removed by the authorities form a public exhibition, according to a law against publication of obscenity. Up to this point, it seems to be a typical freedom of speech controversy, of posing limitation on artistic expression involving obscenity. The European court held that freedom of speech is not absolute, and rules against publication of obscene materials prevail. Id. at 226–29. For similar position in the United States and for more about art, obscenity, and free speech, see Barendt, supra note 194, at 269–72; Owen M. Fiss, The Irony of Free Speech 27–49 (Harvard Univ. Press 1996); Schauer, supra note 194. Another question was raised in the Müller v. Switzerland case, however, and that is whether confiscating the painting was legal. Court affirmed such confiscation, and held that it was compatible with limitations over free speech. Id. at 229–32. It is to be asked whether the court’s decision would have been the same in a case emphasizing freedom of creation instead of freedom of speech. A possible entitlement of an artist to keep a copy of his work in privacy could be derived from the freedom of creation discourse and its specific considerations, while examining such entitlement through the typical freedom of speech prism does not necessarily reveal its full complexity. Accordingly, another proposition with respect to a possible segregation between the two rights is that freedom of creation “is not freedom of opinion; although a creation may convey an opinion, that fact alone does not justify the freedom of creation. . . . [I]t appears that the freedom of creation is a condition precedent to the unfettered exercise of the freedom of speech and of opinion.” Dessemontet, supra note 104, at 117. Therefore, it might be that freedom to create is recognized even if eventually speech is restricted due to the prevailing ethic. See id. And, referring to the above example of the Müller v.Switzerland case, the artist has a right to create even if such art is doomed to be silenced. In other words, even if obscenity is “speech,” it might as well be restricted; however, it is still to be asked whether there is a right to create obscenity art, and consequentially possess such art in private. Dessemontet describes another situation, other than obscenity, in which speech might be restricted due to prevailing public interest, although creation in itself is allowed—that is, in a case of an exhibition of photos showing various bridges and other locations where suicide could be easy. Although no one would object to taking pictures at the various spots, still speech as a concrete message of the exhibition might be restricted. See id. Getting deeper into the possible philosophical differentiation between freedom of creation and freedom of speech according the self-fulfillment justification leads to the touchstone of “communication.” Freedom of speech is highly connected to the interest of both speaker and audience in communication of speech, see Barendt, supra note 194, at 18–19; Schauer, supra note 194, at 91, 95. Freedom to create, however, might be relevant also without any external communication of the creation at stake, and thus it is more connected to freedom of conscience and thought, and restrictions on such freedoms can be viewed as purely paternalistic. See Schauer, supra note 194, at 94. In this context, see also Jed Rubenfeld, The Freedom of Imagination: Copyright Constitutionality, 112 Yale L.J. 2, 4, 34 (2002) (discussing “freedom of imagination” as a right which is preliminary to the traditional freedom of artistic speech).

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of a socioeconomic human right and not a civil-political human right,200 is focused on the social and economic terms of people to obtain participation in cultural life.201 Therefore, for example, while in accordance to the traditional reasoning of the Supreme Court copyright does not conflict with freedom of speech,202 still it is open to be decided whether copyright conflicts with the right to participate in cultural life because “ the concrete opportunities available to everyone, in particular through the creation of the appropriate socioeconomic conditions for freely obtaining information”203 are not guaranteed. To conclude, although the interests protected by Article 27 of the Universal Declaration might be included in the scope of the general property right and the right to freedom of speech, Article 27 is not redundant. It is necessary because it focuses on the unique aspects of cultural subjects, creation, and science, and their special problems, such as the moral right protecting the personal interests of authors in their works, freedom to create works of art that do not include “speech” specifically, and the socioeconomic aspects of obtaining cultural products. II. THE PROPOSAL: THE INTRODUCTION OF NATURAL LAW CONSIDERATIONS INTO AMERICAN COPYRIGHT LAW As explained above, the status of the Universal Declaration is controversial.204 It is accepted, however, that it is at least a central source of inspiration and therefore has potential for great influence in the domestic field.205 Such influence might occur, for example, through the interpretation of domestic laws.206 As a result, the Universal Declaration has the potential to enable the insertion of its rights into domestic laws, accompanied by the natural law perceptions on which it is founded.207 Therefore, Article 27 of the Universal Declaration can be used to introduce its agenda into domestic copyright law, namely to embed natural law considerations in the existing theoretical infrastructure of American copyright law. 200 See Dessemontet, supra note 104, at 117 (“The freedom of creation is not first and foremost a political right, as is on the whole—but not only—the freedom of speech.”); supra note 101 and accompanying text. 201 See Recommendation on Participation in Cultural Life, supra note 129, at I.2(a) (“[A]ccess to culture . . . [means] the concrete opportunities available to everyone, in particular through the creation of the appropriate socioeconomic conditions, for freely obtaining information, training, knowledge and understanding, and for enjoying cultural values and cultural property.”) (emphasis added); see also Symonides, Human Rights, supra note 127, at 191 (“[G]overnments should help to create and sustain not only climate encouraging freedom of artistic expression but also the material conditions facilitating the release of creative talents.”); Recommendation on Participation in Cultural Life, supra note 129, at I.2(b) (stating that “participation in cultural life . . . [means] the concrete opportunities guaranteed for all—groups or individuals—to express themselves freely, to act, and engage in creative activities with a view to the full development of their personalities, a harmonious life and the cultural progress of society”) (emphasis added). 202 See Eldred v. Ashcroft, 537 U.S. 186, 212–13 (2003); Harper & Row Publishers, Inc., v. Nation Enters., 471 U.S. 539, 560 (1985). For the opinion that such reasoning is a denial of an existing conflict, see Yochai Benkler, Free as the Air to Common Use: First Amendment Constraints on Enclosure of the Public Domain, 74 N.Y.U. L. Rev. 354 (1999); Michael Birnhack, The Copyright Law And Free Speech Affair: Making-Up And Breaking-Up, 43 IDEA 233 (2003); Mark A. Lemley & Eugene Volokh, Freedom of Speech and Injunctions in Intellectual Property Cases, 48 Duke L.J. 147, 189 (1998); Lawrence Lessig, Copyright’s First Amendment, 48 UCLA L. Rev. 1057 (2001); Neil Weinstock Netanel, Locating Copyright Within the First Amendment Skein, 54 Stan. L. Rev. 1 (2001) [hereinafter Netanel, Locating Copyright]. 203 See Recommendation on Participation in Cultural Life, supra note 129, at I.2(a). 204 See supra Part I.B. 205 See supra notes 122, 125 and accompanying text. 206 See Re, supra note 122 (discussing the role of domestic courts in following the spirit of the Universal Declaration, inter alia, through interpretation of domestic statutes and constitutional provisions); see also supra note 125 and accompanying text. 207 See id.

410 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y Article 27 is not made of one cloth, however. Therefore, attention should be given to the meaning of inserting into the domestic field rights that may conflict with each other. Section C discusses this concern. As will be explained, the fact that Article 27 contains two opposing balancing rights should be considered in the introduction of natural law considerations into domestic copyright law in a balanced way. The natural rights included in Article 27 can be used to support both authors and users of works, and they serve the interests of both private individuals and the public at large.208 Thus, the natural rights perceptions reflected in the Universal Declaration can be integrated into the current American copyright system without changing the existing balance of interests, or even enhance the interests of users of works. The proposed mechanism for using Article 27 to insert natural law considerations into American copyright law might be seen as problematic in another dimension. As mentioned, Congress has the constitutional power to legislate copyright law in order “to promote the Progress of Science and useful Arts.”209 This could be taken to mean that the Constitution dictates the use of exclusively utilitarian considerations in legislating copyright law. As Section D will demonstrate, however, there is a way to interpret the Constitution so as not to exclude natural law perceptions in the field of copyright.210 Two questions still need to be answered before continuing. The first relates to why an enabling mechanism to insert natural law perceptions into American copyright law is needed. The second concerns exactly how Article 27 can be used as a source of influence in copyright law. A. THE QUESTION OF WHY

The first question we must ask is why we need an enabling mechanism to insert natural law perceptions into American copyright law. The relevance of this question is even greater if one accepts the proposition that the natural rights that Article 27 would insert into domestic law would not change the existing balance of interests,211 thus rendering Article 27 superfluous. There are several answers to this question. First, as explained above, there is an ongoing debate over the justifications for copyright.212 Adherents of the view that copyright may be justified by a combination of different theories213 might seek a path to introduce the natural law perceptions into positive law. Second, it is a known phenomenon that, even though American copyright law is deemed to be utilitarian oriented,214 it contains other elements as well.215 In existing copyright law and jurisprudence there is a notable presence of natural law perceptions and considerations, whether explicit or implicit.216 Some of the reasoning emanating from the 208

See discussion supra Part I.D–E and notes 126–86. U.S. Const. art. I, § 8, cl. 8. 210 See discussion infra Part II.D.1 and notes 269–301. 211 That is because the natural rights included in Article 27 can be used to support both authors and users of works, and they serve the interests of both private individuals and the public at large. 212 See discussion supra Part I.A and notes 63–92 (discussing utilitarian, moral, and natural right justifications). 213 See supra note 86 (acknowledging that scholars recognize the dualistic natural and utilitarian theoretical basis for Anglo-American copyright law). 214 See supra notes 50–53, 62 and accompanying text (discussing the utilitarian justifications of American copyright law). 215 See supra note 86 (as acknowledged by proponents of the dualistic view). 216 See, e.g., Ginsburg, supra note 86, at 1873–88 (addressing the history of labor and authorship in copyright law); Gordon, Property Right in Self-Expression, supra note 58, at 1592–04 (giving examples of natural law and Lockean labor theory in copyright cases); Sterk, Rhetoric and Reality, supra note 86, at 1198–1204 (addressing the dual rhetoric in the Supreme Court’s reasoning); Yen, supra note 58, at 529–31. 209

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U.S. Supreme Court is based on natural law considerations.217 Moreover, some of the rules codified by U.S. law reflect strong ties to natural law notions, a good example of which is the moral right, codified in 17 U.S.C. § 106A.218 The United States has acknowledged moral rights, to some extent, due to its international obligations after joining the Berne Convention for Literary and Artistic Works.219 Moral rights reflect natural law conceptions, and despite this they have found their way into American copyright legislation.220 How could Congress add these naturalistic rights to the copyright arena despite the utilitarian command of the Copyright Clause? The formal answer is that a utilitarian purpose underlies moral rights as well.221 Accordingly, Congress was convinced that the 217 An interesting recent example is the New York Times Co. v. Tasini holding in which the U.S. Supreme Court interpreted 17 U.S.C. § 201(c) of the copyright law as fortifying authors’ rights. 533 U.S. 483, 487–506 (2001). According to § 201(c), “[c]opyright in each separate contribution to a collective work is distinct from copyright in the collective work as a whole,” and unless agreed otherwise, “the owner of copyright in the collective work is presumed to have acquired only the privilege of reproducing and distributing the [separate] contribution of an author as part of the particular collective work . . . .” 17 U.S.C. § 201(c) (2000). The question in the Tasini case was whether the privilege of reproducing and distributing the separate contribution of an author as part of the particular collective work should enable a newspaper publisher to include the separate articles written by freelance journalists in an electronic database containing other articles published by the newspaper. See Tasini, 533 U.S. at 487. The Court held that the interpretation of the privilege given to the owner of the newspaper as a collective work is done through the prism of the fact that where a freelance author has contributed an article to a newspaper, copyright in this article vests initially in the freelance author. See id. at 496–97 (“[A]fter authorizing initial publication, the freelancer may also sell the article to others.”). Therefore, in order to preserve the right of the freelance author, the privilege of the publisher must be constructed narrowly, as not encompassing a right to include the article in an electronic database. See id. at 499. The Court was interested in protecting the author’s exclusive right from invasion. See id. This result might be explained by utilitarian tools. See id. at 495 n.3 (referring to the famous quotation from Mazer v. Stein, 347 U.S. 201, 219 (1954), according to which “encouragement of individual effort [motivated] by personal gain is the best way to advance public welfare”). The decision’s “aroma,” however, is naturalistic. Copyright is now more identified with the author than with the publisher. See id. (observing that the 1976 revision of the Copyright Act represented a break from the former tradition of identifying copyright more closely with publishers than with authors). Accordingly, the Court is concerned with preserving the authors’ interests to have control over the exploitation of their work. In natural law language, it could even be said that the Court is concerned about the (natural) expectations of authors to have such control. For more examples, see Ginsburg, supra note 86, at 1873–88; Sterk, Rhetoric and Reality, supra note 86; Yen supra note 58 at 529–31. 218 Copyright Act of 1976, 17 U.S.C. § 106A (2000). Moral rights include the right of attribution and the right of integrity. Id.; see also supra notes 183–86 and accompanying text (suggesting that moral rights also include the right to prepare derivative works). 219 See Berne Convention for the Protection of Literary and Artistic Works, July 24, 1971, 25 U.S.T. 1341, 828 U.N.T.S. 221 [hereinafter Berne Convention]; Visual Artists Rights Act of 1990, Pub. L. No. 101-650, tit.VI, 104 Stat. 5089, 5128–5133 (1990); see also 136 Cong. Rec. H3111, H3113 (1990) (statement of Rep. Kastenmeier) (stating that the Visual Rights Act grants “important new rights [to visual artists] based on those set forth in the Berne [C]onvention”). Representative Kastenmeier noted that although Congress, before joining the Berne Convention in March 1989, “decided that United States law was already sufficient to comply” with the Convention’s requirement that “its members . . . provide artists with a certain level of protection,” this did “not necessarily mean that [U.S. laws were] sufficient for all purposes.” Id. The obligation to recognize the attribution right and the integrity right under the Berne Convention is stipulated in article 6bis thereof. See Nimmer & Nimmer, supra note 62, § 8D.06[C][1] (affirming that the statutory language regarding visual artists’ right to prevent distortion, mutilation, or modification of their work was drawn from the Berne Convention). 220 See, e.g., 17 U.S.C. § 106A. 221 Many scholars have pointed out the aggregate economic rationale underlying moral rights. See, e.g., Thomas F. Cotter, Pragmatism, Economics and the Droit Moral, 76 N.C. L. Rev. 1, 27–96 (1997) (discussing a pragmatic and economic approach); Hansmannand, supra note 134, at 102, 104–05. Melville B. Nimmer, in a 1967 article, while discussing the needed revisions in American copyright law in order to accomplish the Berne Convention standard, noted that Congress has the constitutional power to legislate moral rights. Contrary to other topics, such as protection of unfixed works, acknowledgment of moral rights does not contain a constitutional problem. See Melville B. Nimmer, Implications of the Prospective Revisions of the Berne Convention and the United States Copyright Law, 19 Stan. L. Rev. 499, 519 (1967). Accordingly, Congress was presented with the view that the moral rights added by the Visual Artists’ Rights Act of 1990 would advance public aims, such as preservation of works, or general utilitarian aims, such as protection of artists’ reputations. See Nimmer & Nimmer,

412 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y narrow moral right to be legislated had a utilitarian justification and did not interfere with the realization of economic rights.222 Even if the formal answer as to the authority to legislate moral rights were focused on the possible incremental underlying utilitarian justification for moral rights and its non-interference with economic rights, the major source of these rights is grounded in natural law perceptions.223 Incidentally, moral rights were legislated only after the United States was driven to do so by international obligation, and this very obligation is rooted in natural law perceptions.224 It could be argued, therefore, that natural law has already colonized American copyright law. The alternative view, according to which moral rights are acknowledged in copyright law as long as there are utilitarian justifications, ignores reality and the background of legislation. In any case, the answer as to Congress’ power to legislate moral rights also can be found in the mandate to accomplish international obligations, which functions as an additional constitutional source of power, along with the power stipulated by the Copyright Clause.225 Aside from moral rights, there are other examples of natural law “footprints” in existing positive copyright law, such as the fair use doctrine,226 according to which an unauthorized use of copyrighted work might be allowed.227 The Copyright Act includes an exemplary list of considerations with which to inspect the fairness of the use of a supra note 62, § 8D.06 nn.58, 67 & 108. Statements drawn from congressional records demonstrate this insight. For example, Representative Robert Kastenmeier presenting the Visual Artists Rights Act for vote in the House of Representatives on June 5, 1990, explained two of the goals of the act as follows: “First, the act must protect the honor and reputations of visual artists. . . . The second goal was to protect the works of art themselves. Society is the ultimate loser when these works are modified or destroyed.” 136 Cong. Rec. H3111, H3113 (1990) (statement of Rep. Kastenmeier). Representative Pat Williams summarized the purpose of the Visual Artists Rights Act before the House of Representatives on June 13, 1990 in the following way: The Visual Artists Rights Act affords two main benefits. First, it would help prevent the destruction or mutilation of important works of art—art that is an invaluable part of American culture. Second, the legislation would give an artist legal recourse to prevent an individual from attributing his or her work to another and to prevent an individual from claiming that an artist was the creator of a work he or she did not create. 136 Cong. Rec. E1939 (1990) (extension of remarks of Rep. Williams). Another example of the utilitarian justification for moral rights from the Congressional Record is given by Melville B. Nimmer and David Nimmer in explaining the purpose of the attribution right, quoting from the House Report: “The purpose of these rights is both to provide basic fairness to artists and to ‘promote the public interest by increasing available information concerning artworks and their provenance, and by helping ensure that information is accurate.’” See Nimmer & Nimmer, supra note 62, § 8D.06[B][1] (quoting H.R. Rep. No. 101-514, at 14 (1990)). Hence, it seems that the legislation of moral rights via the Visual Artists Rights Act is consistent with the utilitarian constitutional command. See Nimmer & Nimmer, supra note 62, § 1.03[A], at n.1.1. 222 It was stated in the Congressional Record that the narrow moral right recognized in legislation was “designed to preserve and protect certain limited categories of works of visual art” and “to achieve this goal without interfering, directly or indirectly, with the ability of U.S. copyright owners and users to further the constitutional goal of ensuring public access to a broad, diverse array of creative works.” 136 Cong. Rec. H3111, H3114 (1990) (statement of Rep. Moorhead). 223 For the natural law conception underlying article 6bis of the Berne Convention, which acknowledges moral rights, see Sam Ricketson, The Berne Convention for the Protection of Literary and Artistic Works: 1886–1986, 455–59 (1987). See also Sterk, Rhetoric and Reality, supra note 86, at 1244 (“Beyond Hegel, it remains difficult to understand why the identity of artists and authors should be more bound up with their work than the identity of others who enjoy no protection against alteration of their work.”). 224 For the natural law conception underlying the right recognized by the Visual Artists Rights Act, adding a sort of “moral right” to the American copyright law, see Nimmer & Nimmer, supra note 62, § 8D.06[A][2]. See also 101 Cong. Rec. H3111, supra note 219. 225 See U.S. Const. art. I, § 8, cl. 3 (governing the regulation of commerce with foreign nations). In this context, see infra note 321 and accompanying text. For the legislation of moral right as a fulfillment of international obligations under the Berne Convention, see Nimmer & Nimmer, supra note 62, § 8D.02[B]–[D]. 226 Copyright Act of 1976, 17 U.S.C. § 107 (1996). 227 “[T]he fair use of a copyrighted work . . . for purposes such as criticism, comment, news reporting, teaching, . . . scholarship, or research, is not an infringement of copyright.” Id.

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work; however, it is left to the court’s discretion to weigh the balance of the fair use factors based on the specific facts of the case.228 There are leading theories that suggest a market-failure test to determine when a fair use defense ought to be accepted by the courts.229 Other theories advance the utilitarian attitude of the doctrine with other tests.230 Fairness, after all, is clearly not a purely utilitarian term.231 The advantage that stems from the proposed mechanism enabling the formal insertion of natural law perceptions is that it will contribute to the transparency of the American copyright system and will shed light on some of the basic and unavoidable “impulses” of copyright law.232 In this way, some of the considerations that are taken into account in any case will be legitimized, and there will be no need to disguise them rhetorically by artificial utilitarian justifications. Consequently, if legitimized, such argumentation also could be properly inspected and scrutinized. Section C will return to this question of why, and suggest further possible answers. B. THE QUESTION OF HOW

The second question to be asked is how exactly Article 27 can be exercised as a source of influence in domestic copyright law. Generally, international rights can be integrated into domestic law in several ways, such as enforcement of international agreements that are part of American law, or by recognizing the right at stake as part of customary international law and, hence, part of American law.233 As noted above, however, there is room for the view that the Universal Declaration has a non-binding status, and the status of each of the rights proclaimed in it must be inspected separately. Moreover, it is debated whether a state’s international obligations create legal obligations as to its own nationals.234 This Essay is interested in finding a mechanism that will enable courts to internalize Article 27 philosophies into the domestic scheme. If one accepts the presumption that Article 27 is of an inspirational nature,235 then a better answer to the question of 228 The statutory fairness considerations are: (1) the purpose and character of the use . . .; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for . . . the copyrighted work. Id. For a thorough description of the fair use doctrine, and the different considerations in examining the fairness of use of a copyrighted work, see William F. Patry, The Fair Use Privilege in Copyright Law (1995). 229 See Wendy J. Gordon, Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors, 30 J. Copyright Soc’y U.S.A. 253 (1983). 230 See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994) (accepting District Court Judge Leval’s approach that a “transformative” use is a better candidate for the fair use defense); see also Pierre N. Leval, Nimmer Lecture: Fair Use Rescued, 44 U.C.L.A. L. Rev. 1449 (1997) (finding the Campbell case has restored order and rediscovered the central meaning of fair use); Pierre N. Leval, Toward a Fair Use Standard, 103 Harv. L. Rev. 1105 (1990) (positing that the governing principles of fair use are “rooted in the objectives of the copyright law”). 231 For the non-utilitarian origins of the fair use doctrine, see Gideon Parchomovsky, Fair Use, Efficiency, and Corrective Justice, 3 Legal Theory 347, 350–54, 366–70 (1997). See also Damstedt, supra note 86, at 1213 (“The fair use doctrine in U.S. copyright law is similar in function and economic justification to the Lockean fair use right developed in this Note. . . . The functional application of the fair use doctrine in copyright law mirrors Lockean principles.”). 232 For a remarkable discussion of such “impulses,” see Wendy J. Gordon, On Owning Information: Intellectual Property and the Restitutionary Impulse, 78 Va. L. Rev. 149 (1992). 233 See Restatement of Foreign Relations, supra note 121, § 701 (describing how human rights have come to be a part of international and U.S. law). 234 According to the traditional view, the individual is only a “third party beneficiary” of the state’s obligation to another state. See Louis Henkin, International Human Rights Standards in National Law: The Jurisprudence of the United States [hereinafter Henkin, Human Rights Standards], in 49 International Studies in Human Rights: Enforcing International Human Rights in Domestic Courts 189 (Benedetto Conforti & Francesco Francioni eds., 1997). 235 See supra note 125 and accompanying text.

414 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y how will be that the perceptions found in Article 27 might be inserted into copyright law mainly through interpretive use. That is to say, these perceptions could be used in interpreting domestic law. Although doctrines of law interpretation is beyond the scope of this Essay, according to a basic interpretive principle, there are general values of the legal system that influence the interpretation of existing laws, including the Constitution’s provisions.236 These general values might be, for example, basic and universal rights and liberties recognized by all people. In other words, human rights norms can aid the interpretation of domestic norms.237 Scholarly writings adhere to the thesis that human rights norms should be used to infuse U.S. constitutional and statutory standards.238 It even was proposed that relevant human rights norms should be used in interpreting and applying constitutional provisions involving similar rights, because human rights are a positive external source of law and the Constitution should be interpreted according to a broader context rather than the purely domestic one.239 This thesis is directly connected to the argument concerning the nature of human rights in general, according to which human rights may be used to express the expectations of the community at large, even between a state and its own nationals.240 Namely, international human rights law is “national” law, because it is concerned with “rights which every human being enjoys, or should enjoy, in his or her own society and under its national law.”241 Human rights, therefore, might create an external source of law that applies domestically, which is beyond the traditional international law that is concerned only with interrelations between states. Even if the proposition viewing human rights as a positive external source of law is too ambitious, it is acceptable to view international human rights norms as sources of inspiration, whose influence is felt via the indirect route of interpreting domestic laws. Going back to the issue at stake, this means that the natural law perceptions reflected in Article 27 of the Universal Declaration, being a source of inspiration, can be absorbed in American copyright law by giving them proper weight when interpreting copyright law, including the Copyright Clause in a specific case. The following section illustrates the possible ways Article 27 can be brought to bear domestic copyright law. Section D will address why this proposed mechanism is not barred by the Copyright Clause itself. 236

See e.g., U.S. Const. art. I, § 8, cls. 3, 8. For this interpretive principle, see Robert S. Summers, Statutory Interpretation in the United States, in Interpreting Statutes: A Comparative Study 407, 417–18, 453 (D. Neil MacCormick & Robert S. Summers eds., 1991). Generally speaking, the American legal culture is open to value and policy judgments. See id. at 456–57; see also Committee Report: Judicial Education on International Law Committee of the Section International Law of the American Bar Association, 24 Int’l Law. 903, 907–09, 914 (1990) (submitted by Edward D. Re, Chairman). 238 See, e.g., Henkin, Human Rights Standards, supra note 234, at 189, 198; Lillich, supra note 121, at 408–11. For the important role courts have in implementing the rights and liberties proclaimed in the Universal Declaration, see Re, supra note 122 at 680–81, 686. For the potential role of courts in implementing the international instruments regarding human rights, especially via posing remedies, see Steiner & Alston, supra note 100, at 248, 275. For an example of the possible use of the interpretive tool in order to implement social welfare rights, as human rights, into American law, see Park, supra note 150, at 1243–46. 239 This was Professor Christenson’s proposition. See Gordon A. Christenson, Using Human Rights Law to Inform Due Process and Equal Protection Analyses, 52 U. Cin. L. Rev. 3, 4–5, 12–13 (1983). 240 See id. at 5–6 (discussing D’Amato’s thesis with regard to the impact of human rights in the domestic field); see also Anthony D’Amato, The Concept of Human Rights in International Law, 82 Colum. L. Rev. 1110, 1125–27 (1982) (discussing the place of human rights in international law and proposing to view human rights as entitlements affecting the domestic law referring to a nation’s citizens and not only to aliens). 241 Henkin, Human Rights Standards, supra note 234, at 189; see also supra note 115 and accompanying text (discussing the proposition that the Universal Declaration is not aimed to bind states but rather society as a whole). In this context another profound thesis should be noted, and according to which “the European Convention on Human Rights [though an international instrument] ought to be interpreted so that it is applicable where [people] face abuses from private actors.” Andrew Clapham, Human Rights in the Private Sphere 343 (1993). 237

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C. THE POTENTIAL OF A BALANCED USE OF ARTICLE 27

Article 27 of the Universal Declaration sets forth two human rights: (1) the right to participate in cultural life and, as a result, the freedom of creation, and (2) the author’s economic and moral right with respect to his or her work.242 Copyright, which represents the author’s economic and moral right, at times may conflict with the right to participate in cultural life. The basic conflict lies in that the owner of copyright is given the power to control the exploitation of his or her work and, to some extent, even the power to prevent the public free access to it.243 There are many situations illustrating this possible conflict. A conflict may arise, for example, when a person is interested in using a preexisting work as the basis for a new work, but is prevented from doing so due to rights of the preexisting work’s owner.244 As mentioned above, different countries, including the United States and the United Kingdom, objected to the inclusion of Article 27(2) because of conflicts with Article 27(1).245 Article 27, however, reflects the tension existing at the basis of copyright law. It is the tension between granting the author material and moral control over his or her work and enabling the public at large to obtain free access to works and information, including the possibility to use such materials that are necessary for cultural development. And this tension exists according to both natural law and utilitarian standpoint for justifying copyright.246 Thus, the recognition of the two conflicting rights included in Article 27 is neither surprising nor impossible. 242 See Universal Declaration, supra note 54. It should be mentioned that, according to the classic view, human rights are given to individuals and not to the public. See Mugabe, supra note 140, at 111–14 (discussing intersection of Universal Declaration with traditional knowledge of indigenous people). 243 See Copyright Act of 1976, 17 U.S.C. § 106 (1996) (defining the exclusive powers authorized by copyright). See also the additional powers given to copyright owners by the Digital Millennium Copyright Act of 1998. 17 U.S.C. § 1201 (1998). 244 One of the powers conferred by copyright is the right to control production of derivative works, which are works based upon preexisting works. See 17 U.S.C. §§ 101, 106(2). Another possible example of conflict between copyright (or the author’s right) and the right to participate in cultural life is when an author wishes to modify his or her work, but the public desires to prevent such modification in order to preserve a work of great public importance. These potential conflicts presume that the right to participate in cultural life could be interpreted as a right protecting public interest in artistic discourse, rather than a right protecting the individual’s interest. Furthermore, the clash between the two rights might include a situation in which society wishes to protect a work from its own creator. For this proposition, see Christoph B. Graber & Gunther Tubner, Art and Money: Constitutional Rights in the Private Sphere?, 18 Oxford J. Legal Stud. 61, 67–68 (1998). 245 See supra note 164 and accompanying text. 246 Many scholars have demonstrated the basic contradiction in the justifications for copyright, inspected from the natural law and utilitarian points of view. See Sterk, Rhetoric and Reality, supra note 86, at 1209, 1239 (“It is critical, however, that no efficiency justification—other than administrative simplicity—can support a copyright regime that gives authors protection that would not induce the creation of new works. Indeed, from an efficiency standpoint, the optimal copyright system would not seek to maximize the number of works created but, in recognition of the costs of copyright, would withdraw protection even when marginally more protection would result in marginal increase in creative activity . . . . For those who believe in the distribution of social wealth according to moral principle, copyright is problematic because the talents people are born with appear morally arbitrary. For those who believe the state should not intervene to redistribute the proceeds of natural talents, copyright is problematic because authors cannot rely exclusively on voluntary transfers to derive a return on their talents.”) (citation omitted); Richard A. Posner, Economic Analysis of Law 47 (5th ed. 1998) (“The greater the scope of copyright protection of the earlier works, the higher the cost of creating subsequent works. So while an increase in the scope of copyright protection will enhance an author’s expected revenues from the sale or licensing of his own copyrights, it will also increase his cost of creating the works that he copyrights.”); see also Glynn S. Lunney, Jr., Reexamining Copyright’s Incentives-Access Paradigm, 49 Vand. L. Rev. 483, 486 (1996) (stating that “[a]s a general proposition, a work’s desirability will indicate both the need to ensure the work’s creation and the need to secure its widespread distribution. The more desirable a work is, the greater the need to ensure the creation of the work and the greater the need to secure its widespread dissemination. If the need to ensure a work’s creation suggests a broad copyright, while the need to secure its widespread dissemination suggests a narrow copyright, then incentive and access will always oppose each other with exactly equal force.); Gordon, Property Right in Self-Expression, supra note 58.

416 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y If both copyright and the right to participate in cultural life are acknowledged as human rights, then there will be a need to develop a mechanism for striking a balance between them in the event of contradiction. Consequently, the question becomes: what is the relation between Articles 27(1) and 27(2)? More specifically: which of these two rights is the general prevailing principle, and which is regarded as the restrictive inferior right? Among the adherents of natural law justifications for copyright, there is a tendency to shape copyright as a primary right and to impose a general obligation not to harm it, subject to exemptions that are essential for the protection of the interest of participation in cultural life.247 An alternative view is that the right to participate in cultural life is cited as the first right by the Universal Declaration,248 and the right of the author with respect to his or her work is cited second.249 This order is not accidental.250 It supports the view that the right to participate in cultural life is the primary rule, and it is restricted by the individual’s copyright.251 Namely, conferring full significance on the right of participation means acknowledgment of a general right of everyone to participate in cultural life, except for the duty to refrain from doing so in certain cases, which are determined according to the need to protect the material and moral interests of the author. Giving the public’s cultural rights their proper importance may have great influence. Despite the pressure to enlarge copyright according to Article 27(2), there will be an 247 See Waldron, supra note 99, at 859 (describing two different interpretations that may be applied in shaping copyright). The German law is a good example of the view that property right including copyright is the main rule, but they should be limited in order to protect public interest. According to article 14 of the German Basic Law, property rights have constitutional status; however, property rights also pose obligations on their owners, aimed to protect public interests. See art. 14 Nr. (1)–(3) GG, available at http://www.iuscomp.org/gla; Gunnar F. Schuppert, The Right to Property, in The Constitution of the Federal Republic of Germany 107, 107–18 (Ulrich Karpen ed., 1988). It was held by a German court that injury to the property right is justified only for the sake of a public interest, after balancing the rights in conflict, and that such injury should be minimized according to the importance of the public interest at stake. See Davies, supra note 65, at 121–27; Donald P. Kommers, The Constitutional Jurisprudence of the Federal Republic of Germany 276 (1989) (providing case examples of German courts balancing these issues). A German case, known as the School Book Case, challenged a specific exemption to copyright, which allowed preparation of compilations for schools for educational purposes. It was held that the constitutional protection of copyright, as a kind of property right, does not guarantee the copyright owner’s absolute control over all exploitation of his of her work, and it was recommended that the legislature codify the proper balance between the author’s interests and public interest. Public interest in free access to cultural values justifies said exemption to copyright, but the author should not be deprived from the right of payment for such use of his or her work. The author should not be obliged to accept free use of his or her work only because such use is in the public interest, even if it is for educational interests. See In re Kästner et al., BVerfGE 31, 229 (1971); Kommers, at 271–75. The meaning of this decision is that in many cases, limitations to copyright that are a result of the need to balance conflicting interests should be determined as a compulsory license that enables use of a work subject to payment. See David P. Currie, The Constitution of the Federal Republic of Germany 298–99 (1994); Matthias Ruete, The ‘Kirchenmusik’ Judgment, Constitutional and Intellectual Property Rights, 2 Eur. Intell. Prop. Rev. 198, 198–99 (1980). 248 Article 27(1) states: “Everyone has the right freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits.” Universal Declaration, supra note 54. 249 Article 27(2) states: “Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.” Id. 250 Although the Universal Declaration is not a treaty signed by states, the rules of treaties’ interpretation are applicable, with cautions due to its special status. The interpretive rules of treaties are codified in the 1969 Vienna Convention on the Law of Treaties. Vienna Convention on the Law of Treaties, opened for signature May 23, 1969, art. 31(3), 1155 U.N.T.S. 331, available at http://www.un.org/law/ilc/texts/treaties.htm. One of the interpretive rules of treaties is the literal interpretation rule, according to which one must inspect the relevant norms in any treaty according to the order of their codification. Furthermore, the context, syntax, and wording should be taken into consideration. See Myres S. McDougal et al., The Interpretation of International Agreements and World Public Order: Principles of Content and Procedure 121, 273 (2d prtg. Martinus Nijhoff Publishers 1994) (1967). The different means for treaties’ interpretation, however, are aiding tools for revealing the parties’ true intent. See Lord McNair, The Law of Treaties 366 (Oxford: Clarendon Press 1986). 251 McNair, supra note 250.

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emphasis on the need to restrain this enlargement in order to implement the right of access and participation under Article 27(1).252 It also might be that such an inversion of priorities will lead to the same result existing in a system of exemptions to copyright; nevertheless, situating the right of participation as the primary right might be crucial in difficult decisions. In any case, it should be noted that the proposition of inversing the relation between the two rights at stake has no basis in actual law.253 The U.S. Constitution places the public’s interest first, and so it is not an example of a law that implements such a list of priorities. In the Constitution, the superiority of public interest stems from utilitarian theory and not from natural law perception regarding the priorities of natural and basic liberties.254 In international instruments and activities, however, the right to participate in cultural life, as a human right, is what is being stressed.255 Deciding which of the two rights is primary, and thus prevailing, would be rash. Human rights are relative and not absolute.256 Describing human rights as absolutes reflects a guiding principle and not a specific rule.257 Implementation of the guiding principle of any human right is made by setting limits to the right, even if such limitations do not appear explicitly in the articulation of the right.258 While shaping the scope of one human right, other human rights should be taken into account. Therefore, unless there is a severe and unresolved conflict between two rights, both rights should be embedded into a more or less coexisting pattern of norms. Whatever the way of resolving the conflict between the two rights proclaimed in Article 27 may be, the fact that both are recognized as human rights should in itself lessen the apprehension of using Article 27 to insert natural law considerations into domestic copyright law. The Universal Declaration acknowledges both the interest of the author with respect to his or her work and the interest of members of the public to enjoy works.259 Therefore, the fear of bias in favor of one of the interests, especially in favor of the author’s rights, is relieved. Article 27 can be used as a normative source for natural law consideration enhancing each one of the conflicting rights.260 Therefore, Article 27 can be used for balanced introduction of natural law considerations into domestic law, as well as a means for balanced development of copyright law. Section A posed the question of why a mechanism to insert natural law considerations into copyright law is needed. If Article 27 is used as a normative source for natural law considerations enhancing each one of the conflicting rights, another nourishing layer will be added to the theoretical discourse of copyright law. The practical meaning of this 252 See Davies, supra note 65, at 4 (discussing the twofold purpose of copyright systems); Jeremy J. Phillips et al., Whale on Copyright 17 (4th ed., Sweet & Maxwell 1993); Stewart, supra note 85, at 5; Chapman, supra note 105, at 153–56 (discussing the history of protections and creator rewards for database compilation); Yen, supra note 58, at 559 n.241. 253 See Chapman, supra note 56, at 161–62 (discussing the need for intellectual property lawmakers to undertake human rights as well as economic concerns in the future). 254 See U.S. Const. art. I, § 8; see also Drahos, Origins and Development, supra note 153, at 30–32. 255 For a review on such different activities and international instruments, see Symonides, Human Rights, supra note 127, at 176–79, 181–86, 189–90. See also supra note 128. 256 Dinstein, supra note 108, at 79. 257 See Jerome J. Shestack, The Philosophical Foundations of Human Rights, in Human Rights: Concepts and Standards 175, at 32–35, 44 (Janusz Symonides ed., 2000) (discussing the nature of human rights and distinguishing the core principles affirmed in human rights from the system of rights sought by international law). 258 For example, Dinstein points out two restrictions relating to intellectual property rights, such as human rights, which also apply to other human rights: (1) prohibition on misuse of human rights (a principle that is also proclaimed in article 30 of the Universal Declaration); (2) restriction of human rights in time of war or emergency. See Dinstein, supra note 108, at 80. 259 Universal Declaration, supra note 54. 260 For this conclusion, see infra text accompanying notes 328–30.

418 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y proposal is that in proper cases attention will be given to the extent of an interest from the point of view of human rights. This will confer proper weight to the liberty to participate in cultural life on one hand, and to the material and moral interests of the author on the other. After all, the reason for the inclusion of economic rights, including copyright, into the Universal Declaration despite the initial objection of some of the party states is due, inter alia, to the understanding that in some areas within the economic field, robust moral considerations function as guidance for individual as well as institutional behavior.261 In these areas, basing decisions only in terms of economic gain is improper.262 In other words, the economic human right can enrich the considerations taken into account while shaping an economic norm by adding moral aspects to the utilitarian ones. Hence, in the task of norm configuration, an effort should be made to settle the conflict between the different interests until a proper balance is achieved, and not to reject moral or natural law considerations entirely. For example, in certain cases in which the personal interest of an author with respect to his or her work is remarkable, as part of the expectation to have control over the external reflection of his or her personality, proper importance should be given to such interest as a human right, despite the utilitarian interest to limit such control for the sake of public benefit.263 In contrast, in other cases the basic right of members of the public to be exposed to works, or even to exploit them as part of creative activity, should be given proper weight, despite utilitarian interest to encourage creation of works by conferring exclusive rights on authors.264 These examples demonstrate that in any case, utilitarian 261

See Nickel, supra note 168, at 49. This explanation was suggested by Nickel. See id. 263 A more concrete example might be when artists wish to control the way their works are communicated to the public, and to prevent the media corporation that performs the work publicly to “edit” the work for its convenience in order to embed commercials. See Gilliam v. ABC, 538 F.2d 14 (1976) (The Monty Python comedy troupe sued the ABC network due to its film editing for insertion of commercial breaks and obscenity. The troupe had to use contractual tools, however, to prevent such modification and protect its so-called personal artistic interest); Graber & Tubner, supra note 244, at 61–62 (describing a dispute between the famous cinema director, Fellini, and the “media tycoon,” Berlusconi, where the director sued Berlusconi contending that numerous commercial breaks embedded into his film had interrupted the flow of the film’s artistic message and hence distorted it). This kind of interest is protected in many countries via the “integrity right, which is one of the known moral rights. For more on moral rights, see supra note 183 and accompanying text. 264 In this contrary situation, a more concrete example might be cases acknowledging a large “Lending Right,” enabling authors to prevent lending of lawful copies of their works in public libraries. Vast acknowledgement of such a right might be problematic, if the right to participate in cultural life is taken into consideration. It should be mentioned that, due to the fear that vast lending rights may impose an inappropriate interference with the availability and accessibility of books and other cultural goods in public libraries, the E.C. Directive on the subject left the member states flexibility with respect to legislation on lending rights, including the option to shape the lending rights to equitable remuneration, instead of an exclusive right enabling authors to prevent lending of copies of their works. See Jörg Reinbothe & Silke von Lewinski, The E.C. Directive on Rental and Lending Rights and on Piracy 12–13 (1993). By the same token, article 11 of the Agreement on Trade-Related Aspects of Intellectual Property Rights, which is part of the World Trade Organization scheme, obliges contracting states to acknowledge only a right to authorize or to prohibit commercial rental to the public, and such right relates only to computer programs, cinematographic works, and sound recordings. See Agreement on Trade-Related Aspects of Intellectual Property, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, Legal Instruments—Results of the Uruguay Round vol. 31, 33 I.L.M. 81 (1994) [hereinafter TRIPs Agreement]. Another somewhat surprising example concerns the issue of extending the copyright term, which was challenged in Eldred v. Ashcroft, 537 U.S. 186 (2003). The dichotomy presented in the Court’s holding, both by opinion of the Court and by dissenting opinions, is that extension of the copyright term complies with private interests and the question is whether in the long run such an extension will also comply with the public interest, which is the objective of the constitutional copyright clause. According to the opinion of the Court, the Court should not interfere with Congress’ decisions as to how best to achieve the public’s interests, and according to dissenting opinions such extension does not serve the public’s welfare. Id. Such a dichotomy of argumentation presents only one side of the coin. Human rights conceptions might also have insights on the subject matter. Thus, even though 262

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considerations can be manipulated in order to achieve the desired result, whether by emphasizing the public need in restraining copyright or by emphasizing the social need to give incentives for creative activity. Therefore, considering natural law interests, and reference to the rights of access and participation of members of the public as well as to an author’s right as human rights, might enrich and deepen the copyright discourse, without necessarily causing a dramatic change in existing balance of interests. As discussed above, this naturalistic discourse is important, even though it might not change the existing positive balance of interests, because it will advance legal transparency and will bring “natural impulse” reasoning to light. It should be mentioned in this context that when the Universal Declaration was announced in 1948, it reflected the values of natural law regarding the claims of individuals against the state, which represented society.265 Today, however, when centers of power have been transferred from the state to the open market, adjustments to the interpretation of the Universal Declaration should be made to limit the power of large-scale corporations, as opposed to the state. As mentioned above, the Universal Declaration does not bind states, but society as a whole. Therefore, such interpretive adjustments are possible and proper.266 Such an adjustment of Article 27 might be valuable in typical legal rivalries because it can empower authors and users of works by giving them legal tools in the battle against the large media corporations that, to a great extent, control cultural production and consumption.267 This is another answer to the question of why a mechanism for inserting natural law perceptions into the copyright arena is needed. Natural law considerations are mostly relevant for preserving individuals’ interests vis-à-vis large media corporations, and without such a mechanism courts will lack a powerful tool for achieving justice.268 D. THE CONSTITUTIONAL PROBLEM IN THE UNITED STATES

The above sections discussed the potential of using Article 27 of the Universal Declaration as a means for inserting natural law considerations into the American copyright discourse. The question to be asked at this stage is whether such use of Article 27 is permissible according to the U.S. Constitution. The Copyright Clause of the Constituextension of the copyright term might be justified by acknowledging the author’s natural material rights, such extension might be problematic due to acknowledging the basic human right of members of the public to enjoy culture and to participate in cultural life. Therefore, also according to natural law philosophies, there is a debate over whether extending the copyright term is justified. In addition, taking into consideration the naturalistic point of view might not change the final resolution; it might enrich and nourish the discourse, or might even change the balance of interests in favor of the public’s right to participate in cultural life. As a consequence, it would lead to denial of such term extension. 265 Samuel K. Murumba, Introduction to the Universal Declaration of Human Rights at 50 and the Challenge of Global Markets: Themes and Variations, 25 Brook. J. Int’l L. 5, 6 (1999). 266 Id.; see also Dessemontet, supra note 104, at 114–15 (discussing the direct application of Article 27 in French courts to defend artists’ moral rights in two examples, including one where a Charlie Chaplin film was changed by the addition of an unauthorized soundtrack and colorization). 267 For the proposition that constitutional protection of artistic interests should be shifted so as to constrain the power of large private economical entities, such as protecting artists from the large media corporations which control the public performance of their works, see Graber & Tubner, supra note 244, at 68–71, 72. 268 A good example for the relevance of natural law consideration in the relations between individual authors and large media corporations is in the Tasini case, described supra note 217. In this case, the Court was concerned with protection of the rights of freelance journalists against their publishers’ use of their articles. The anchor of the Court decision is the statute itself, i.e. 17 U.S.C. § 201(c), which reflects, inter alia, naturalistic perceptions. See N.Y. Times Co. v. Tasini, 533 U.S. 483, 496 n.3 (2001). Had the Court been equipped with the proposed mechanism for inserting natural law considerations into American copyright law, the reasoning might have been more enriching.

420 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y tion empowers Congress to legislate copyright law to promote the progress of science and the useful arts.269 The Supreme Court has interpreted this clause as a mandate to shape copyright law according to utilitarian considerations.270 Therefore, the question is whether introduction of Article 27 of the Universal Declaration, which is based on natural law values, into American copyright discourse contradicts the Copyright Clause’s utilitarian command. The basic rule in American law is that the Constitution supersedes any other law, federal or state, and any treaty or international obligation of the United States.271 Taking this into account, the following sections will outline propositions enabling the insertion of Article 27 of the Universal Declaration into American copyright discourse in a manner compatible with the Constitution. According to these propositions the Copyright Clause allows pluralistic considerations, to some extent, and Article 27 functions as the engine of the mechanism injecting natural law perceptions within such considerations. I. Interpreting the Constitutional Copyright Clause as Not Totally Rejecting Natural Law Conceptions To answer the question regarding the relationship between the Copyright Clause and Article 27 of the Universal Declaration, one must heavily depend upon the interpretation given to the Copyright Clause. Thus, part of the question is whether the Copyright Clause should be interpreted as non-flexible and completely rejecting any consideration of natural law values in the framework of copyright, or whether is there some interpretive way of embedding natural law considerations within the constitutional framework.272 There is an academic debate as to how the Supreme Court should interpret the Constitution, and as to the weight that should be given to the language of the text and the purported intention of the Framers in construing the meaning of a particular provision.273 The basic tension is between “originalism,” a method of interpreting the Constitution that concentrates on the original text and the Framers’ intentions, and “policymaking,” a method of interpretation concentrating on revealing the fundamental values of the Constitution and examining the purpose served by any particular provision therein.274 In practice, the Court’s constitutional interpretation is predisposed to the “policy-making” school,275 especially with regard to the Copyright Clause.276 Thus, the 269

U.S. Const. art. I, § 8, cl. 8. See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 575 (1994); Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 349–50 (1991); Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984) (discussing the objective of copyright monopoly which lies in the public benefit from the labor of authors); see also Nimmer& Nimmer, supra note 62, § 1.03[A]. For a thorough review of the steadfast rejection of the natural law theory of copyright by the Court, due to the interpretation given to the constitutional clause, see Marci Hamilton, Copyright at the Supreme Court: A Jurisprudence of Deference, 47 J. Copyright Soc’y U.S.A. 317 (2000). 271 U.S. Const. art. VI, § 2. Therefore, the Constitution also supersedes customary international law, sometimes viewed as part of common law. See Restatement of Foreign Relations, supra note 121, § 701–02. 272 The interpretation of the Constitution is a primary source of American constitutional law, because the provisions of the Constitution are general and broadly phrased and the actual meaning depends on how they have been interpreted by the Court. See Robert A. Sedler, United States — Constitutional Law, 5 Int’l Encyclopaedia of Laws 35 (Kluwer Law International 2000) [hereinafter Sedler, Constitutional Law]. 273 See Robert S. Peck, The Bill of Rights & the Politics of Interpretation 151–52 (1992) (discussing academic debate). 274 See a collection of essays on this issue in Constitutional Law (Mark V. Tushnet ed., 1992) (collected essays on constitutional interpretation); Walter F. Murphy et al., American Constitutional Interpretation 289–316 (1st ed. 1986) (addressing approaches, modes, and techniques to constitutional interpretation); Peck, supra note 273, at chs. 10–12 (1992) (discussing the interpretive trends of originalism and textualism). 275 See Sedler, Constitutional Law, supra note 272, at 35 n.1. 276 See, e.g., Burrow-Giles Lithographic Co. v. Sarony, 111 U.S. 53, 57–58, 60 (1884) (interpreting the word “writings” in the constitutional copyright clause as encompassing photographs, because such interpretation is in 270

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first explanation, outlined in Subsection (a) below, concentrates on the policy-making method and argues that revealing the fundamental values of the Copyright Clause and searching for the purpose it serves leads to the conclusion that the clause does not necessarily reject natural law philosophy entirely. The second explanation, outlined in Subsection (b) below, follows the originalism method,277 claiming that the Framers’ original intent was not to reject natural law philosophy in the field of intellectual property rights. This Essay’s proposal for settling the apparent conflict between the Constitution’s utilitarian command and the natural law perceptions reflected in Article 27 of the Universal Declaration may also be described as not applying the interpretive rule of expressio unius est exclusio alterius278 with regard to the Copyright Clause.279 This Essay’s contention is that the Copyright Clause does not totally exclude natural law considerations. Such interpretation is supported by either policy-making interpretation, seeking to reveal the purpose of the constitutional command, or by originalistic interpretation, tracking the legislative history of the Copyright Clause.280 a) The Utilitarian Objective Is Not Decisive Regarding the Specific Way of Achieving It The first way to reconcile the Copyright Clause with natural law perceptions is by interpreting the clause so that it explains the aim of copyright law, but does not determine a fixed standard of means to be used in shaping copyright.281 This insight leads to a possible philosophical standpoint from which to solve the conflict, so that both utilitarian and natural law justifications can be used in the field of copyright law. According to utilitarian theory, the goal is to achieve a social situation that benefits as many people as possible, and as a result, the optimal welfare of society as a whole is attained.282 Nevertheless, the utilitarian approach does not decide how to determine what people’s benefit is. Although economic or monetary tools are common measures of individual and aggregate welfare, they are not the only ones.283 Thus, possibly, if the protection of the natural accordance with the purpose of the clause). For more on the interpretation of the constitutional copyright clause by the Supreme Court, see Hamilton, supra note 270, at 336–40. 277 See Peck, supra note 273, at 161–78 (discussing originalism). 278 [Latin] “[T]o express or include one thing implies the exclusion of the other . . . .” Black’s Law Dictionary 476 (7th ed. 2000). 279 For this interpretive rule, see MacCormick & Summers, supra note 237, at 418. In this context it should be borne in mind that according to the Ninth Amendment of the Constitution, the enumeration of certain rights in the Constitution shall not prejudice other rights not so enumerated. See U.S. Const. amend. IX. 280 See Peck, supra note 273 (discussing originalism). 281 Nimmer & Nimmer, supra note 62, § 1.03; see also Paul M. Schwartz & William M. Treanor, Eldred and Lochner: Copyright Term Extension and Intellectual Property as Constitutional Property, 112 Yale L.J. 2331, 2336 (2003) (“Like numerous constitutional texts, these few words lead to innumerable debates. . . . If Congress’s power to provide copyright or patent protection is only proper if the exercise of that power advances certain ends, how tight must the fit between means and ends be?”). 282 See John Rawls, A Theory of Justice 20 (Harvard Univ. Press 1999) (“The main idea is that society is rightly ordered, and therefore just, when its major institutions are arranged so as to achieve the greatest net balance of satisfaction summed over all the individuals belonging to it.”) (citation omitted). For this basic utilitarian paradigm used with respect to justification of property rights in general, see Becker, supra note 64, at 57–67; Munzer, supra note 64, at 196–98. See also Frank J. Garcia, Global Trade Issues in the New Millennium: Building a Just Trade Order for a New Millennium, 33 Geo. Wash. Int’l L. Rev. 1015, 1030 (2001) (“Utilitarian theory provides that an act will be right insofar as it maximizes utility, here defined as the satisfaction of preferences. Essentially, utilitarianism claims that the principle of utility maximization follows naturally and compellingly from the simple fact that people have preferences and are happier to the extent to which such preferences are satisfied.”). 283 See Ruth Gana Okediji, Perspectives on Globalization from Developing States: Copyright and Public Welfare in Global Perspective, 7 Ind. J. Global Legal Stud. 117, 137 (1999) (stating, in the context of international economic policies and free trade, “[t]he market mechanism fails to yield true measurements of social welfare because it cannot account for values which shape an individual’s desires, and which must be accounted for in the calculation of social optimum”) (citation omitted).

422 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y rights of as many people in society as possible is achieved, optimal utilitarian welfare may be attained.284 In other words, utilitarian considerations do not necessarily reject the consideration of natural law values.285 The Supreme Court also has stressed that the immediate impact of copyright is conferring reward to the author, and the long-term aim of such reward is to advance public welfare.286 And recently, in the same context, the Court again has stressed that it is for Congress to decide how best to pursue the Copyright Clause’s objectives,287 referring to an enactment furthering the reward given to authors.288 It should be admitted, however, that although such an approach enables the embedding of natural law considerations within the constitutional framework, it grades natural law justification for copyright as inferior to the utilitarian one, and not as a pari passu justification. Adherents of the natural law justification for copyright might view this result as the lesser evil, and utilitarians as an unavoidable concession.289 It can further be argued that the utilitarian justification for copyright expressed in the U.S. Constitution is an example of what legal theorist John Rawls calls “overlapping consensus.”290 Namely, the Copyright Clause comprises the general framework or basic construction within which a variety of values might be integrated. The constitutional framework reflects the lowest common denominator of consensus, but it does not mean that in all cases other values should necessarily be rejected. Tracking the history of the Constitution reveals that the Copyright Clause itself is not made out of one cloth, and that there was no consensus among the Framers with respect to the theoretical justifica-

284 A central criticism of the utilitarian-economic approach, in general, and to copyright in particular is that wealth maximization raises the issue of resource allocation in society, and such allocation is dependent on distributive justice values. Therefore, a discussion according to the utilitarian-economic approach will be circular, because the basic decisions are made according to values that are external to this approach. Furthermore, the emphasis on economic efficiency has been criticized as ignoring additional socially important interests which cannot be estimated by economic or monetary tools. Therefore, such emphasis does not necessarily promote the benefit of as many people in society. See Gordon, Inquiry into Copyright Merits, supra note 65, at 1439; Neil Weinstock Netanel, Copyright and a Democratic Civil Society, 106 Yale L.J. 283, 288 (1996); Yen, supra note 58, at 541; see also Waldron, supra note 66, at 13. The common answer to this criticism is that economic tests aid in identifying the point of maximum social welfare, which also reflects non-monetary values. See Becker, supra note 64, at 67–74; Stanley M. Besen & Leo J. Raskind, An Introduction to the Law and Economics of Intellectual Property, 5 J. Econ. Persp. 3, 5 (1991). Another common answer is that economic efficiency is a central but not exclusive tool to determine ways of operation in order to promote social welfare. See Becker, supra note 64, at 57–67; Gordon, Inquiry into Copyright Merits, supra note 65, at 1388 n.206; Parchomovsky, supra note 231, at 354–55. Hence, even according to adherents of the utilitarian-economic approach, welfare maximization means considering, inter alia, non-utilitarian economic considerations. 285 See id. 286 See Eldred v. Ashcroft, 537 U.S. 186, 212 n.18 (2003); N.Y. Times Co. v. Tasini, 533 U.S. 483, 496 n.3 (2001); Mazer v. Stein, 347 U.S. 201, 219 (1954); see also Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975) (discussing reward to public); Nimmer & Nimmer, supra note 62, at § 1.03[A]; L. Ray Patterson & Stanley W. Lindberg, The Nature of Copyright: A Law of Users’ Right 47–55 (1991). 287 See Eldred, 537 U.S. at 204, 208, 222 (2003) (affirming the time extension of the copyright term by Congress). 288 See id. at 205–07 (describing the benefits of term extension to authors). 289 For an opposite view, according to which the language of the constitutional copyright clause clearly indicates that copyright power is limited and Congress cannot consider natural law proprietary rights for authors, see L. Ray Patterson, Understanding the Copyright Clause, 47 J. Copyright Soc’y U.S.A. 365, 369–74 (2000). This view follows Patterson’s conclusion that, according to the textual analysis of the clause, it contains three ideas with regard to copyright: (1) copyright is not to be used for censorship; (2) copyright protects public domain; and (3) copyright provides public access to learning materials. See id. at 367–68. As explained in the text above, in my view the clause should not be interpreted as limiting the ways to achieve final welfare, and it does not totally exclude naturalistic proprietary interests from copyright’s menu of considerations. Such a conclusion is also supported by the Court’s holdings. See supra note 286. 290 John Rawls, The Idea of an Overlapping Consensus, 7 Oxford J. Legal Stud. 1, 4–5 (1987).

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tions for copyright.291 This bolsters the notion that the Copyright Clause is outlined so as to contain a variety of values and philosophical attitudes, and is, therefore, a fruit of consent to articulate a provision encompassing incommensurable concepts, namely both utilitarian and naturalistic objectives.292 According to Rawls, an overlapping consensus containing utilitarian concepts, while problematic, is made possible by integrating the other concepts as a means to achieve the greatest welfare.293 If using these philosophical arguments to interpret the Copyright Clause, then the introduction of the underpinnings of Article 27 of the Universal Declaration into American copyright law is proper and suitable, especially in light of the view expressed above: that the interpretation of domestic laws, including the constitutional provisions, should be aided by human rights norms, especially if they involve similar rights. As explained, it is possible to view human rights as a positive external source of law and, therefore, the Constitution should be interpreted according to a broader context other than a purely domestic one.294 Furthermore, it is established that in cases of ambiguity the domestic norm should be interpreted in a way consistent with the law of all peoples, namely international law.295 Therefore, if possible, Article 27 should influence the interpretation given to domestic copyright law, even though it might not be regarded as 291 Edward C. Walterscheid’s research on the history of the copyright clause shows that it is not made out of one cloth, and that its theoretical basis of codifying is complex. See Edward C. Walterscheid, To Promote the Progress of Science and Useful Arts: The Background and Origin of the Intellectual Property Clause of the United States Constitution, 2 J. Intell. Prop. L. 1, 44–48 (1994) [hereinafter Walterscheid, Origin of the IP Clause]. Walterscheid claims that the first initiative to codify a clause empowering Congress to confer rights to authors and inventors was made by James Madison, who was especially interested in protection of scholars’ interests. See id. at 47–48. Recently, the Supreme Court has also referred to Madison’s insights with respect to copyright’s objectives, according to which “in copyright ‘[t]he public good fully coincides . . . with the claims of individuals.’” See Eldred, 537 U.S. at 212 n.18; see also Schwartz & Treanor, supra note 281, at 2385 (“[James Madison] did not view the purpose of the Copyright Clause as limited to encouragement of future production. . . . Madison was interested in a notion of reward for authors; he speaks of ‘recompence’ and ‘compensation for a benefit’ that could have been withheld. Also significantly, Madison’s focus with respect to the ‘limited Times’ provision is on patents, not copyrights. ‘The limitation is particularly proper,’ he writes, ‘in the case of inventions.’”) (citation omitted); Damstedt, supra note 86, at 1179 (“Lockean natural rights informed the Framers’ understanding of intellectual property law.”) (citations omitted). For more on Madison’s influence on the clause, see Patterson & Lindberg, supra note 286, at 53–54. For a thorough review of the history of the copyright clause, illustrating its complex underpinnings, see Schwartz & Treanor, supra note 281, at 2375–90 (concluding that the view according to which Framers intended the copyright clause to limit tightly Congress’s powers, and bind to pure utilitarian consideration is inaccurate and incompatible with historical facts). For more on the history of the clause, see Tyler T. Ochoa & Mark Rose, The Anti-Monopoly Origins of the Patent and Copyright Clause, 49 J. Copyright Soc’y U.S.A. 675, 685–95 (2002). Nimmer and Nimmer have also noted that the Founders did not reject the view that copyright is a natural right. See Nimmer & Nimmer, supra note 62, § 1.03[A]. They further note that the constitutional command to limit the term of intellectual property rights is aimed to strike a balance between the interest of the author in the fruits of his or her labor and the public interest in free access to materials needed for the development of society. See id. § 1.05[D]. In other words, the clause intends to balance the “natural” interests of the author and the “utilitarian” interests of society. For further discussion on the legislative history of the constitutional clause, see infra Part II.C. For an opposite view with regard to the origins of the constitutional clause, as purely based on public welfare objectives, see Patterson, supra note 279, at 374–84. For a further review of such opposite views, see Schwartz & Treanor, supra note 281, at 2339–42 (reviewing the “intellectual property restrictors” originalist and textualist interpretation of the copyright clause). 292 As John Rawls explains, overlapping consensus is not a mere modus vivendi, because it includes within one workable framework incommensurable philosophies, such as different religions. Therefore, the outcome of overlapping consensus is not a compromise, which is the outcome of political bargaining, but rather an agreement to encompass all concepts. See Rawls, supra note 290 at 9–12. 293 See id. at 12. 294 See supra note 239 (concerning Prof. Christenson’s proposal). 295 See Restatement of Foreign Relations, supra note 121, § 114 (according to which, where it is fair, a U.S. statute is to be construed so as not to conflict with international law).

424 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y binding international law. Hence, there exist both a legitimization in the Copyright Clause, allowing pluralistic consideration with regard to copyright, and a positive mechanism to accept the perceptions reflected in Article 27 into the clause. b) Interpreting the Constitutional Copyright Clause According to Its Legislative History The possibility of integrating natural law considerations into American copyright law, within the constitutional framework, is also supported by the legislative history of the constitutional Copyright Clause.296 As already mentioned above,297 the history of the Constitution reveals that the Copyright Clause itself is not made out of one cloth, and it had complex underpinnings, including natural law ones.298 Furthermore, Professor Edward C. Walterscheid argues that the aim of the Copyright Clause is to emphasize the issue of setting a time limitation to the rights.299 Namely, the need for a clause in the Constitution concerning intellectual property rights arose for the purpose of determining explicitly and specifically that the correct way to promote science and useful arts is by limiting the right vested with respect to such intangible resources.300 Beyond this, there is no need for an explicit constitutional mandate to regulate the protection of intellectual assets, because Congress is empowered to do so under its general regulative authority.301 Additionally, there are many different ways to promote science and useful arts, aside from nonperpetuity of intellectual property rights.302 It is, therefore, claimed that the inclusion of the Copyright Clause in the Constitution was done mainly over fear that without it Congress would lack the power to set a time limitation on intellectual property rights.303 Another asserted reason for the inclusion of the Copyright Clause in the Constitution is that it aimed to include the regulation of intellectual property in the federal sphere and not leave the subject to state regulation.304 As a result of this historical process, it is possible to argue that the clause is not specifically aimed to prevent considering natural law conceptions within the framework of copyright law. The Copyright Clause had objectives other than limiting the range of theoretical underpinnings of copyright. Therefore, it should not be interpreted as barring the introduction of natural law considerations into copyright law. 296 For a review of an opposite view with respect to the legislative history, see Schwartz & Treanor, supra note 281, at 2339–42 (reviewing the “intellectual property restrictors” originalist and textualist interpretation of the copyright clause). See also Ruth Okediji, Toward an International Fair Use Doctrine, 39 Colum. J. Transnat’l L. 75, 94–95 (2000); Patterson, supra note 279, at 374–84. 297 See supra note 291 and accompanying text. 298 Id.; see Nimmer & Nimmer, supra note 62, § 1.03[A]; Schwartz & Treanor, supra note 281, at 2375–90; Walterscheid, Origin of the IP Clause, supra note 291, at 44–48. 299 See Edward C. Walterscheid, Defining the Patent and Copyright Term: Term Limits and the Intellectual Property Clause, 7 J. Intell. Prop. L. 315 (2000) [hereinafter Walterscheid, Term Limits and the IP Clause]. 300 Id. at 316. 301 For example, Congress could do so under its power to regulate commerce. For a similar conclusion, see Schwartz & Treanor, supra note 281, at 2387 (“The interpretive approach reflected in these views about incorporation would suggest that for many, and perhaps most, of the Founders, the Copyright Clause was a clarification of a congressional power already existing under the Commerce Clause, perhaps in conjunction with the Necessary and Proper Clause, rather than a vesting of a new power in Congress.”). For more about Congress’s power in this context, see infra notes 320–22 and accompanying text. 302 Walterscheid, Terms Limits and the IP Clause, supra note 299, at 316. 303 Walterscheid, Origin of the IP Clause, supra note 291, at 33–34; Walterscheid, Term Limits and the IP Clause, supra note 299, at 318–20. For an opposite view with regard to the origins of the constitutional clause, as aimed to limit the power of Congress with policies to promote learning, namely to consider only public welfare objectives, see Patterson, supra note 279, at 374–84. 304 Nimmer & Nimmer, supra note 62, § 1.01; Rochelle Cooper Dreyfuss, A Wiseguy’s Approach to Information Products: Muscling Copyright and Patent into a Unitary Theory of Intellectual Property, 1992 Sup. Ct. Rev. 195, 231 (1992).

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2. Alternative Constitutional Basis Aside from the interpretative ways of inserting natural law conceptions reflected in Article 27 of the Universal Declaration into the framework of the Copyright Clause, as suggested above, uncertainty remains as to whether there is an alternative constitutional basis for introducing natural law philosophy into the intellectual property field, and furthermore, whether such circumvention of the Copyright Clause is possible. a) Possibilities for an Alternative Constitutional Basis As to the first question, whether there is an alternative constitutional basis for acknowledging copyright as a human right according to natural law perceptions, one must turn, arguendo, to the Fifth Amendment protection of property.305 As explained above, in Part I.F, the interests protected by copyright as a human right might also be protected, at large, through the vast property right also acknowledged in the Universal Declaration. In other words, the large scope of protection of property rights might include protection of intellectual property rights in general and copyright in particular. Therefore, it could be argued that protection of copyright as a property right, considering inter alia natural law considerations, could be achieved via the constitutional status of property rights. This vast topic of the constitutional status of property rights in American law is undoubtedly beyond of the scope of this Essay.306 Nevertheless, it should be noted that constitutional protection of property is interpreted broadly as embracing intangible property as well,307 and stems also from natural law perceptions.308 Such protection, however, is focused on the compensation that should be paid in cases of expropriation of private property for public use—known as “taking.”309 Therefore, bypassing the Copyright Clause through 305 U.S. Const. amend. V (“No person . . . shall be deprived of life, liberty, or property, without due process of law . . . private property . . . shall not be taken for public use without just compensation.”). 306 For a general review of the constitutional protection of property, see Erwin Chemerinsky, Constitutional Law: Principles and Policies 504–24 (1997). For a critical review of the legislative history of the Fifth Amendment, see H.N. Scheiber, The “Takings” Clause and the Fifth Amendment: Original Intent and Significance in American Legal Development, in The Bill of Rights: Original Meaning and Current Understanding 233 (Eugene W. Hickok, Jr. ed., 1991). For the difficulties underlying the doctrinal conception of property right’s status, see Andrea L. Peterson, The Takings Clause: In Search of Underlying Principles, 77 Cal. L. Rev. 1301 (1989). See also Frank Michelman, Property as a Constitutional Right, 38 Wash. & Lee L. Rev. 1097 (1981). 307 The Supreme Court held that trade secrets were property within the meaning of the Fifth Amendment. See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1002–04 (1984). For the broad interpretation given to the term “property,” including intangible proprietary interests, see also Chemerinsky, supra note 306, at 505, 519–22. According to some scholars, however, copyright should be characterized as speech regulation, rather than property right. See Netanel, Locating Copyright, supra note 202, at 39 (“Copyright is often characterized as a property right. As such, to some, copyright doesn’t sound like censorship, just people enforcing their lawful property rights. To be certain, rights in real property do enjoy at least qualified First Amendment immunity. One cannot generally trespass on privately-owned land in order to speak. But that, in First Amendment terms, is because real property rights are general regulations that impose only isolated and incidental burdens on speech. Where property rights are not in land, but in information, expression, or communicative capacity, they are more properly characterized as speech regulations.”) (citations omitted); Lemley & Volokh, supra note 202, at 184 (“Furthermore, consumption of intellectual property, unlike consumption of tangible property, is ‘nonrivalrous’ — one person’s use of a work does not prevent others from using it as well. This makes intellectual property sufficiently unlike tangible property that some courts that have faced the issue directly have even concluded that copyrights and trademarks are not ‘property’ within the meaning of the Takings Clause. Whether or not that’s correct, the nonrivalrous aspect of intellectual property infringement weakens the property rights argument.”) (citations omitted); see also infra note 319. 308 For the naturalistic roots of the constitutional protection over property, see Murphy et al., supra note 274, at 1070–71. Furthermore, constitutional protection over property might also be justified due to the “Personhood Function” of property rights, which is a naturalistic justification of property rights. See Chemerinsky, supra note 306, at 521; C. Edwin Baker, Property and Its Relation to Constitutionally Protected Liberty, 134 U. Pa. L. Rev. 741, 746, 761–64 (1986). 309 Much of the litigation concerning the Fifth Amendment has focused on the question: What is a “taking”?

426 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y the Fifth Amendment might be relevant and operative in particular circumstances that are analogous to a taking of a copyright, although some interpretive effort would be needed to do so.310 But in other circumstances, it might be even less clear whether the Fifth Amendment might function as a separate source of power for initial acknowledgement of proprietary rights with regard to copyrightable materials. Nevertheless, the Fifth Amendment is still an insufficient alternative to the Copyright Clause, not only because it might apply only to particular circumstances analogized to a taking, but also due to the non-proprietary aspects of some of the interests authors have with respect to their works. As explained above in Part I.F,311 devoting a special article in the Universal Declaration to copyright was not superfluous despite the existence of the general property right because there are special interests in the field of creation that deserve special attention. One of these interests is the protection of an author’s personal bond with his or her work, which is mainly acknowledged in positive law through moral right.312 Moreover, as explained above in Part I.E, it was suggested that the scope of copyright as a human right be restricted only with respect to the aspects of protecting the author’s personal interests in his or her work, and these interests are not purely proprietary in nature.313 The center of copyright as a human right lies in the moral right arena.314 Protection of the personal interests of authors, mainly through moral rights, cannot stem from the Fifth Amendment precisely because they are not proprietary in nature.315 Therefore, another constitutional basis for inserting natural law values accompanying moral rights must be found. Roughly speaking, there are two kinds of takings: (1) a “possessory” taking that occurs when the government confiscates or physically occupies property, and (2) a “regulatory” taking that occurs when the government’s regulation leaves no reasonably economically viable use of the property. See Chemerinsky, supra note 306, at 506. 310 For example, courts tend to emphasize the importance of parodies to the public and, therefore, approve their creation although they are created through exploiting a preexisting work, by the fair use doctrine, codified in 17 U.S.C. § 107 (1996). Thus, through the fair use “regulation,” courts approve the use of someone else’s property for free, for the benefit of the public. It seems that this situation can be seen, through the prism of the Fifth Amendment, as a kind of a regulatory taking. It should be noted that the interpretation of the Fifth Amendment might apply in such cases, because the “taking” may be considered to be for a “public purpose” even though the taking will also benefit a private entity. See Chemerinsky, supra note 306, at 522–23. Applying the Fifth Amendment in such cases, however, might be problematic due to the Lucas decision, holding that regulatory taking occurs in cases where the owner is deprived from any reasonable economic use of his or her property. See Lucas v. S.C. Coastal Council, 505 U.S. 1003 (1992). For the view that parodist use of a work should not be exempt from payment only because it concerns a use that the public is interested in, see Paul Goldstein, Derivative Rights and Derivative Works in Copyright, 30 J. Copyright Soc’y U.S.A. 209, 235–36 (1983); Richard A. Posner, When Is Parody Fair Use?, 21 J. Legal Stud. 67, 73 (1992). This question becomes more complicated in cases that are not clear-cut parodist uses of works, and which are accompanied with big profits gained by the user. The arguments against free use of works could be bolstered by the human rights perspective of copyright, according to which it is not fair that another shall enjoy something that originated from an author’s labor without paying the author. It does not mean that the user will be silenced and that the public will not enjoy parodies, rather that the author of the work being parodied will share some of the profits gained by the user. In other words, the author will get “just compensation” for the use of his or her property. As mentioned supra note 198, this attitude was held by the German Supreme Court in the School Book Case, regarding a specific exemption in statute. The author of this Essay does not think that allowing parodies through the fair use doctrine codified in federal law, however, is necessarily an illegal uncompensated taking. Rather, when natural law considerations are proper, such considerations hypothetically could have been taken into account via the window of the Fifth Amendment, if barred at the front door of the constitutional copyright clause. 311 See supra notes 189–92 and accompanying text. 312 For the content of moral rights, see supra notes 183–86. 313 See supra notes 189–192 and accompanying text. 314 But as explained above, this is not only in the moral rights arena. See supra note 186 and accompanying text. 315 As explained supra notes 169–71 and accompanying text, the common view is that moral rights protect against personal injury, for which the legal means of redress is tort law (i.e., libel, slander, etc.), rather than property law.

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Prima facie, and somewhat ironically, the situation concerning moral rights might not be so complicated. Moral rights represent an already “colonized” area of natural law in federal copyright law.316 As a result, it also could be argued that the search for an alternative constitutional basis for the introduction of natural law considerations is unnecessary, with respect to the personal interests of an author in his or her work, because Congress already has realized its power to acknowledge moral rights. In other words, the legislation of moral rights in federal copyright law serves as the gateway for inserting natural law considerations into domestic copyright law. It should be borne in mind, however, that the scope of the moral right recognized in American copyright law is narrow and only relates to certain visual works.317 This argument is problematic for another reason as well. Specifically, in the theoretical search for a constitutional authority for inserting natural law considerations into copyright law, the presence of natural law considerations in positive copyright law does not prove the existence of a constitutional authority.318 To claim so would be to assume the solution that is being sought. b) Circumvention of the Constitutional Copyright Clause Is Futile As to whether it is possible to use another constitutional provision to add to copyright law perceptions, prima facie, not falling within the mandate given by the Copyright Clause, there is no clear answer. The Fifth Amendment as an alternative to the intellectual property clause, in this context, has not been challenged in court.319 A similar issue, however, has been challenged, relating to the possibility of using the constitutional commerce clause320 as an alternative to the Copyright Clause. Professor David Nimmer explains at length the issue of using the commerce clause and other authority under the Constitution to enter into treaties as an alternative constitutional mooring for the Copyright Clause.321 He refers to the case of United States v. Moghadam,322 in which the defendant challenged the argument that the criminal anti-bootlegging amendments to the copyright statute, enacted according to United States obligations under the Agreement on Trade-Related Aspects of Intellectual Property (“TRIPs Agreement”),323 lies outside Congress’s Copyright Clause powers. The Court concluded that the commerce clause might be used in order to regulate matters lying within the copyright field, especially if such “interference” is not fundamentally inconsistent with the Copyright Clause.324 316

See supra notes 218–25 and accompanying text. See 17 U.S.C. § 106A (1996). 318 But recently the Supreme Court has acknowledged Congress’s practice of extending copyright terms and supported the constitutionality of such acts. See Eldred v. Ashcroft, 537 U.S. 186 (2003). According to Justice Stevens, reliance on congressional practice is mistaken, because if the practice is unconstitutional it should be invalidated. See id. at 235–39 (Stevens, J., dissenting). 319 As far as it is known to the author of this Essay. But see Lemley & Volokh, supra note 202, at 184 (stating that “some courts that have faced the issue directly have even concluded that copyrights and trademarks are not ‘property’ within the meaning of the Takings Clause”). The cases that authors Mark A. Lemley and Eugene Volokh refer to are A. College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, 148 F.3d 1343, 1347 (Fed. Cir. 1998), cert. granted, 144 L. Ed. 2d 575, 589 (1999), and B. Chavez v. Arte Publico Press, 157 F.3d 282, 286, 289 (5th Cir. 1998). Id. With respect to the question at stake, whether naturalistic approach could be introduced into American copyright law through the Fifth Amendment as an alternative to the intellectual property clause, the above-referred decisions are not decisive. 320 U.S. Const. art. I, § 8, cl. 3. 321 Nimmer & Nimmer, supra note 62, §§ 1.09[A]–[B], 8E.01[B]–[C], 9A.07[B], 18.06[C][3][a]. 322 175 F.3d 1269 (11th Cir. 1999), cert. denied, 529 U.S. 1036 (2000). 323 TRIPs Agreement, supra note 264. 324 United States v. Moghadam, 175 F.3d 1269, 1279–80 (11th Cir. 1999). Also, in In re Trade-Mark Cases, 100 U.S. 82 (1879), the question of using the commerce clause as an alternative authority to the intellectual property clause was applied. The Supreme Court held that the challenged trademark law had no connection to the subject matter of the intellectual property clause, so the only question was whether the trademark law at stake was duly 317

428 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y Hence, as Nimmer explains, the resolution is that using alternative constitutional mooring for achieving objectives that are in harmony with copyright doctrine is less problematic than using such alternatives in cases of fundamental inconsistency.325 By the same token, returning to the issue at stake, in order to examine whether it is possible to insert natural law values into copyright law, for example through the Fifth Amendment, the question one should ask is whether natural law perceptions regarding copyright as a human right are fundamentally inconsistent with copyright doctrine, as reflected in the Copyright Clause. In order to answer this question one must return to square one and inspect whether the Copyright Clause praising utilitarian aims may bear natural law considerations. In other words, if the possibility to use an alternative constitutional basis for inserting natural law considerations into domestic copyright law is dependent on whether such considerations are in harmony with the copyright scheme under the Copyright Clause, then one must return to the basic philosophical question of interpreting the Copyright Clause. Thus returned, the Copyright Clause can be interpreted so as to allow the consideration of natural law perceptions.326 Given the decision in United States v. Moghadam, however, it is clear that the constitutional adventure outlined above is not that helpful. If the journey outside the Copyright Clause in search of an alternative constitutional basis for inserting natural law conceptions into domestic copyright law leads one back to the internal question of interpreting the Copyright Clause itself, then that journey is futile. Either the Copyright Clause bears natural law considerations, or it does not. If it does, then the insertion of natural law considerations into domestic law may be done directly through the Copyright Clause itself, taking into account the particular checks and balances of the field, and there is no need to explore other constitutional clauses.327 In other words, the key to resolving the puzzle of using Article 27 of the Universal Declaration as a conduit to insert natural law considerations into American copyright law, despite the constitutional command to legislate copyright law according to utilitarian end, is to be found in the interpretation of such command as not rejecting natural law considerations completely, whether through a policy-making kind of interpretation or even through that of originalism, as sketched above. enacted according to the commerce clause. Therefore, the Moghadam court concluded that “the Supreme Court’s analysis in the Trade-Mark Cases stands for the proposition that legislation which would not be permitted under the Copyright Clause could nonetheless be permitted under the Commerce Clause, provided that the independent requirements of the latter are met.” Moghadam, 175 F.3d at 1269, 1278. Although the Moghadam court concluded that in some circumstances the commerce clause can be used by Congress to accomplish something that the intellectual property clause might not allow, it cannot be used, however, to eradicate a limitation placed upon congressional power in another grant of power. Therefore, the court evaluated whether the anti-bootlegging law was in harmony with the existing scheme that Congress had set up under the intellectual property clause. Id. at 1279–80. Another case to be decided, challenging the question of whether the copyright clause has a preemptive effect with respect to both the foreign commerce clause and the treaty clause, is Golan v. Ashcroft, Civil Action No. 01-B-1854. See Schwartz & Treanor, supra note 281, at 2361 n.195. 325 Nimmer & Nimmer, supra note 62, § 1.09[B]; see also Edward C. Walterscheid, Confronting the General Welfare Clause and the Intellectual Property Clause, 13 Harv. J.L. & Tech. 87 (1999). For an objection to the use of an alternative constitutional basis, see Cooper Dreyfuss, supra note 304, at 230. 326 To complete the example given supra note 261 concerning parodies, it could be argued that, while inspecting the fair use defense in a specific case, it is not contrary to copyright doctrine to take into account considerations that could be labeled as “natural law,” such as the right of the author to enjoy the fruits of his or her labor, and other personal interests of the author with regard to his or her work. As mentioned above, fairness is not a pure utilitarian term. See supra notes 231, 308. 327 By way of association, the Supreme Court has chosen a similar path in holding that the tension between copyright and the freedom of speech interests should be resolved within the internal framework of copyright law. See Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 560 (1985).

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CONCLUSION The Universal Declaration of Human Rights announces two fundamental rights in Article 27: (1) the right of everyone to participate in cultural life; and (2) the material and moral rights of authors with respect to their works.328 Article 27 has been neglected for decades, despite the status and importance of the Universal Declaration. Although the Universal Declaration may have no binding authority, it nevertheless functions at least as a primary source of inspiration, influencing domestic law, inter alia, by way of interpretation. Taking Article 27 seriously could be helpful in the field of copyright, where a constant debate over theoretical foundations and justifications is taking place. Acknowledgment of human rights is based on natural law theories.329 Thus, an additional factor that should be taken into account in such a debate is the possible status of the right of people to be exposed to works—and in some cases to exploit them—as well as the author’s moral and material rights, as human rights. The acknowledgement of author’s rights as human rights has been criticized. Nevertheless, a possible compromise is to limit this acknowledgement only to the aspects of the right that deals with protection of personal interests of authors with respect to their works. Therefore, the human rights discourse is relevant in the copyright field. This Essay has proposed using Article 27 of the Universal Declaration to conduct natural law considerations into American copyright law. The American copyright system stands to gain from such a use of Article 27, especially if the complex interests expressed in Article 27 are properly comprehended. Article 27 embraces a balance of interests between authors’ interests and those of the other members of society to enjoy works. More than that, it is possible to interpret Article 27 as emphasizing the right to participate in cultural life as the primary right. Therefore, used properly, Article 27 can enrich and enhance the theoretical discourse in the field of copyright in a balanced way, allaying the fears of favoring authors over users of copyrighted works. Furthermore, the adoption of the proposed mechanism, which opens an aperture in American copyright law for naturalistic philosophy, might also contribute to the system’s transparency. That is because the naturalistic considerations, which are in any case taken into account, could be legitimized, and as a result properly inspected and scrutinized. Article 27 also can arm both authors and users of copyrighted works with legal arguments vis-à-vis large media corporations and other entrepreneurs controlling the cultural market. Thus, the proposed mechanism to use Article 27 might nourish the American copyright discourse and have promising outcomes. Adoption of the proposed mechanism, however, encounters prima facie difficulties due to the Copyright Clause of the U.S. Constitution, which has been interpreted as determining a utilitarian framework for copyright. It is possible to solve the problem by interpreting the constitutional Copyright Clause as not rejecting natural law considerations completely. The interpretation of the Copyright Clause as not totally excluding natural law perceptions can be supported both by legislative history and policy-making interpretation. This interpretive path is possible because the Copyright Clause determines the objectives of copyright law, but is not decisive with respect to the way it is to be achieved. Consequently, the utilitarian aim reflected in the Copyright Clause both could serve as the lowest common denominator of consensus with respect to the general aim of copyright law, and at the same time bear natural law considerations. Introduction of the underpinnings of Article 27 into American domestic copyright law is also proper and 328 329

See supra notes 54–55. See supra note 57.

430 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y suitable in light of the view that the interpretation of domestic laws, including the constitutional provisions, should be aided by human rights norms, especially if such interpretation involves similar rights. The Copyright Clause thus allows the insertion of pluralistic values into the copyright scheme, and interpretative procedures provide a positive mechanism to introduce the perceptions reflected in Article 27. Moreover, another question is whether there is an alternative constitutional basis for introducing natural law philosophy into the intellectual property field, and furthermore, whether such circumvention of the Copyright Clause is possible. According to Court, the circumvention of the Copyright Clause is permissible only if it results in an outcome that is not fundamentally inconsistent with the copyright scheme under the Copyright Clause.330 Therefore, an attempt to insert natural law considerations into American copyright law via an alternative constitutional basis, such as the Fifth Amendment’s protection over property rights, is not helpful because there is no escape from the need to answer the basic and internal question of whether the Copyright Clause can be interpreted as not rejecting natural law conceptions. And, as outlined above, the answer is in the affirmative.

APPENDIX B The New Innovation Frontier? Intellectual Property and the European Court of Human Rights331 Laurence R. Helfer332 Vanderbilt University ABSTRACT

This article provides the first comprehensive analysis of the intellectual property case law of the European Court of Human Rights (ECHR). Within the last three years, the ECHR has issued a trio of intellectual property rulings interpreting the right of property protected by the European Convention on Human Rights. These decisions, which view intellectual property through the lens of fundamental rights, have important consequences for the region’s innovation and creativity policies. The cases are also emblematic of a growing number of controversies in domestic and international law over the intersection of human rights, property rights, and intellectual property. The article analyzes this trend and uses it to develop three distinct paradigms to identify the proper place of intellectual property issues in the European human rights system. It concludes that the ECHR should find a violation of the right of property in intellectual property disputes only in cases of arbitrary government conduct. I. INTRODUCTION In Europe, human rights law is intellectual property’s new frontier. This statement will no doubt surprise many observers of the region’s intellectual property system, which has 330

See supra note 318. The final version of this article is available on the Harvard International Law Journal website, www.harvardilj.org/print/131 332 Professor of Law and Director, International Legal Studies Program, Vanderbilt University Law School. E-mail: [email protected]. An earlier version of this Article was presented at the New York University Law School Colloquium on Innovation Policy. Thanks to Rochelle Dreyfuss, Jane Ginsburg, Anthony Reese, Katja Weckstrom, and Diane Zimmerman for their thoughtful and insightful comments. 331

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steadily expanded over the last few decades. The mechanisms of that expansion have included a litany of now familiar legal and regulatory tools—the negotiation and ratification of multilateral agreements, the promulgation of European Community (“EC”) directives, the rulings of the powerful European Court of Justice, and the revision of national laws and administrative regulations. The result of these cumulative and interrelated initiatives is a highly developed intellectual property system that is strongly protective of creators, innovators, and businesses. This regional intellectual property regime has developed in relative isolation from Europe’s other judicial powerhouse, the European Court of Human Rights (“ECHR” or “Court”).333 The ECHR began its existence modestly as an optional judicial review mechanism for European states which had ratified the Convention for the Protection of Human Rights and Fundamental Freedoms334 (“European Convention” or “Convention”) and its Protocols. But in the half century since its creation, the ECHR has evolved into something far more momentous — the judicial guardian of a “constitutional instrument of European public order.”335 The Court now reviews tens of thousands of complaints each year and its jurisdiction extends the length and breadth of the continent, encompassing 800 million people in forty-seven nations from Azerbaijan to Iceland and from Portugal to Russia.336 One might reasonably ask what an international human rights court and the human rights treaty it interprets has to do with intellectual property. The answer is the right of property, which appears in the European Convention together with more widely recognized civil and political liberties such as the prohibitions of slavery and torture, due process rights, and freedom of expression. Yet the protection of “the peaceful enjoyment of possessions” in Article 1 of Protocol No. 1 (“Article 1”)337 has long been considered among the weakest rights in the Convention system, affording governments broad discretion to regulate private property in the public interest.338 Partly for this reason, the ECHR and the European Commission on Human Rights (“European Commission” or “Commission”) for decades gave intellectual property issues 333 For a detailed discussion of the ECHR’s success and its influence on other international tribunals, see Laurence R. Helfer & Anne-Marie Slaughter, Why States Create International Tribunals: A Response to Professors Posner and Yoo, 93 Calif. L. Rev. 899, 917–22 (2005); Laurence R. Helfer, Adjudicating Copyright Claims Under the TRIPs Agreement: The Case for a European Human Rights Analogy, 39 Harv. Int’l L.J. 357, 399–410 (1998) [hereinafter Helfer, Adjudicating Copyright Claims]; Laurence R. Helfer & Anne-Marie Slaughter, Toward a Theory of Effective Supranational Adjudication, 107 Yale L.J. 273, 297–98 (1997). 334 Convention for the Protection of Human Rights and Fundamental Freedoms, Nov. 4, 1950, 213 U.N.T.S. 222 [hereinafter European Convention]. 335 Loizidou v. Turkey, 310 Eur. Ct. H.R. (ser. A) at 27 (1995). 336 See European Court of Human Rights, Survey of Activities 2006, http://www.echr.coe.int/NR/rdonlyres/ 69564084-9825-430B-9150-A9137DD22737/0/Survey_2006.pdf. 337 Article 1 of Protocol No. 1 states in its entirety: Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms art. 1, Mar. 20, 1952, 213 U.N.T.S. 262, 262 [hereinafter Article 1]. 338 See Arjen van Rijn, Right to the Peaceful Enjoyment of One’s Possessions, in Theory and Practice of the European Convention on Human Rights 863, 864 (Pieter van Dijk et al., eds., 4th ed. 2006) (“[T]he right of property has actually lost a good deal of its inviolability, also in the Member States of the Council of Europe, under the influence of modern social policy—Sozialstaat. This fact is reflected in the very far-reaching limitations which Article 1 allows.”).

432 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y a wide berth. Intellectual property claimants did not file any complaints alleging violations of property rights until the early 1990s. And when they did, the ECHR and the European Commission summarily dismissed their challenges. Applying a restrictive interpretation of Article 1, the two tribunals eschewed searching scrutiny of national courts and administrative agencies and allowed Europe’s intellectual property system to evolve largely unfettered by human rights concerns.339 This judicial reticence has now decisively ended. Within the last three years, the ECHR has issued a trio of decisions holding that patents, trademarks, copyrights, and other economic interests in intangible knowledge goods are protected by the European Convention’s right of property.340 The most recent of these rulings — a 2007 judgment of the Grand Chamber in Anheuser-Busch, Inc. v. Portugal — is especially striking.341 The case involved a dispute between two corporations, the well-known American brewer and its longstanding Czech rival, Budìjovický Budvar, over the exclusive right to market “Budweiser” beer in Portugal. The ECHR concluded that both registered trademarks and applications to register such marks fall within the ambit of the treaty’s property rights clause. On the particular facts presented, however, the Court found that the Portuguese government had not violated Article 1.342 Nevertheless, the analysis in Anheuser-Busch suggests that the ECHR recognizes the broader human rights implications of the region’s innovation and creativity policies and that its future rulings may influence intellectual property protection standards in Europe.343 From just this brief description, the Grand Chamber judgment in Anheuser-Busch v. Portugal may strike many observers as misguided in several respects. First, the decision protects the fundamental rights of multinational corporations rather than those of natural persons. For reasons I explain below, the adjudication of property rights claims by business entities is indisputably authorized by Article 1’s text and the intent of its drafters.344 Such cases nevertheless sits uneasily in a treaty whose principal objective is to protect the civil and political liberties of individuals. This is particularly true given that serious or systemic violations of those liberties are occurring in many countries.345 In 339

See infra Part III (reviewing intellectual property rulings of the ECHR and the European Commission). See Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 44 Eur. H.R. Rep. 836 [42], 846 (2005) (registered trademarks protected by Article 1); Melnychuk v. Ukraine, App. No. 28743/03 at 8 (2005) (admissibility decision) (intellectual property protected by Article 1); Dima v. Romania, App. No. 58472/00 at 20 (2005) (admissibility decision) (in French only; unofficial English translation on file with author) (copyrighted works protected by Article 1). All decisions of the ECHR and the European Commission on Human Rights are available at the ECHR Portal Search page: http://cmiskp.echr.coe.int/tkp197/search.asp? sessionid=10323833&skin=hudoc-en. 341 Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep. 830 [36] (Grand Chamber 2007). 342 The facts of the Anheuser-Busch case are complex. In essence, the ECHR concluded that Portugal had not interfered with the American brewer’s application to register the trademark “Budweiser” because the application had been contested by Budìjovický Budvar, the owner of previously-registered geographical indication for “Budweiser Beir.” For a more detailed analysis of the case, see infra Parts III.A. & III.A.2. 343 Intellectual property owners have heralded Anheuser-Busch as a watershed ruling, suggesting that the case may trigger the filing of new complaints alleging violations of Article 1. See, e.g., Arthur Rogers, Anheuser-Busch Hails European Court Ruling that Trademark Applications Get Protection, 24 Int’l Trade Rep. 72, 72 (2007) (characterizing the Grand Chamber 2007 judgment as a “landmark” decision); Burkhart Goebel, Geographical Indications and Trademarks in Europe, 95 Trademark Rep. 1165, 1179 (2005) (describing 2005 Chamber judgment as “remarkable and most important” in recognizing trademarks “as protected fundamental rights”). 344 See Article 1, supra note 337 (“Every natural or legal person is entitled to the peaceful enjoyment of his possessions”) (emphasis added). See also infra notes 355 and 502 and text accompanying (discussing the rationales for protecting the property rights of corporations and other business entities in the European human rights system). 345 See, e.g., Council of Europe Parliamentary Assembly, Comm. on Legal Affairs and Human Rights, Supplementary Introductory Memorandum (revised), Implementation of Judgments of the European Court of Human Rights, AS/Jur (2005) 55 rev, at 11-13 (Dec. 20, 2005), available at http://assembly.coe.int/CommitteeDocs/2005/ 340

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addition, since with the accession to the Convention of Eastern European states in the 1990s, the ECHR’s caseload has exploded. The result is a mountainous backlog of pending complaints.346 Adding intellectual property disputes to the Court’s already vastly overburdened docket will only make difficult for the judges to adjudicate other complaints that allege violations of fundamental rights. A second concern relates to the broader legal and political context in which the ECHR’s recent intellectual property rulings are situated. The last several years have seen an explosion of competing human rights claims relating to intellectual property—in Europe, in the United States, and in numerous international venues. There are two separate catalysts for these developments. On the one hand, the expansion of intellectual property protection standards raises numerous human rights concerns relating to the right to life, health, food, privacy, freedom of expression, and enjoying the benefits of scientific progress. International experts, government officials, judges, and scholars are responding to these concerns by analyzing the interface between the two legal regimes,347 and, in particular, whether human rights should serve as “corrective[s] when [intellectual property] rights are used excessively and contrary to their functions.”348 On the other hand, litigants, lawmakers, 20051220_Ejdoc55.pdf (assessing compliance with ECHR judgments involving widespread human rights abuses by the Russian military in Chechnya and massive structural failures of the Russian courts and the criminal justice system); Paul Mahoney, Speculating on the Future of the Reformed European Court of Human Rights, 20 Hum. Rts. L.J. 1, 4 (1999) (predicting that ECHR will increasingly be confronted with “serious human rights violations” such as “minorities in conflict with [a] central government” and cases relating to “terrorism, violence, and civil strife”); Menno T. Kamminga, Is the European Convention on Human Rights Sufficiently Equipped To Cope with Gross and Systematic Violations?, 12 Neth. Q. Hum. Rts. 153, 153–54 (1994) (analyzing the increasing number of systemic human rights abuses being challenged before the ECHR). 346 Lucius Caflisch, The Reform of the European Court of Human Rights: Protocol No. 14 and Beyond, 6 Hum. Rts. L. Rev. 403, 404 (2006) (“[T]he Court is presently confronted with an accumulated case-load of 82,600 applications, out of which 45,550 were made in 2005, the yearly capacity of absorption of the Court now being at around 28,000 cases.”). 347 See, e.g., U.N. Econ. & Soc. Council [ECOSOC], Sub-Comm’n on the Promotion and Cultural Protection of Human Rights, Realization of Economic and Cultural Rights, at 1, U.N. Doc. E/CN.4/Sub.2/2000/L/20 (2000) (identifying conflicts between intellectual property and “the right of everyone to enjoy the benefits of scientific progress and its applications, the right to health, the right to food and the right to self-determination”); ECOSOC, Comm. on Econ., Soc. & Cultural Rights, Substantive Issues Arising in the Implementation of the International Covenant on Economic, Social and Cultural Rights: Statement on Human Rights and Intellectual Property, U.N. Doc. E/C12/2001/15 (Dec. 14, 2001) (analyzing conflicts between intellectual property and the International Covenant on Economic, Social and Cultural Rights); The High Commissioner, Report of the High Commisioner on the Impact of the Agreement on Trade-Related Aspects of Intellectual Property Rights on Human Rights, U.N. Doc. E/CN.4/Sub.2/2001/13 (June 27, 2001). For more detailed analyses of these developments, see for example Christophe Geiger, “Constitutionalising” Intellectual Property Law? The Influence of Fundamental Rights on Intellectual Property in the European Union, 37 Int’l Rev. Intell. Prop. & Comp. L. 371, 382, 390–97 (2006) [hereinafter Geiger, Constitutionalizing Intellectual Property Law] (analyzing recent intellectual property cases from Belgium, France, Germany, the Netherlands, Switzerland, and countries outside of Europe that raise non-trivial freedom of expression issues); Christophe Geiger, Fundamental Rights, a Safeguard for the Coherence of Intellectual Property Law?, 35 Int’l Rev. Intell. Prop. & Comp. L. 268, 277 (2004) [hereinafter Geiger, Fundamental Rights Safeguard] (analyzing “decisions in the field of copyright in which the freedom of expression has been invoked to justify a use that is not covered by an exception provided for in [intellectual property] law”); Laurence R. Helfer, Toward a Human Rights Framework for Intellectual Property, 40 U.C. Davis L. Rev. 971, 1001–14 (2007) [hereinafter Helfer, Human Rights Framework] (analyzing recent treaty-making initiatives in the UN Educational, Scientific and Cultural Organization, the World Health Organization, and the World Intellectual Property Organization concerning the relationship between human rights and intellectual property); Laurence R. Helfer, Regime Shifting: The TRIPs Agreement and New Dynamics of International Intellectual Property Lawmaking, 29 Yale J. Int’l L. 1, 26–53 (2004) (analyzing intellectual property standard setting in the biodiversity, plant genetic resources, public health, and human rights regimes). 348 Geiger, Fundamental Rights Safeguard, supra note 347, at 278; see also Helfer, Human Rights Framework,

434 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y and courts are increasingly invoking fundamental rights—including the right of property—as a justification for protecting intellectual property and the corporations and individuals that own it.349 This countervailing trend is reflected in treaties,350 reports of international expert bodies,351 and judicial rulings in the Europe352 and in the United States.353 The ECHR’s entrée into this maelstrom of competing human rights-based claims to restrict or expand intellectual property raises important and difficult questions. For example, does intellectual property deserve to be treated as a fundamental right? And if it does, how does a human rights-inspired conception of intellectual property differ from existing rules that promote innovation and creativity? More concretely, what role, if any, should the ECHR play in shaping innovation and creativity policy in Europe? Should the Court favor the rights of corporate intellectual property owners over the rights of individuals users and consumers, or should it strike a distinctive human rights balance among these actors with competing interests? In this article, I consider one important dimension of these questions in light of the ECHR’s recent intellectual property rulings. I provide the first detailed assessment of the European human rights tribunals’ Article 1 intellectual property case law.354 And I develop a comprehensive proposal for the ECHR to adjudicate intellectual property disputes under the European Convention’s property rights clause. supra note 347, at 1017–18 (analyzing how international human rights law can be interpreted to impose “external limits on intellectual property”). 349 See, e.g., Michael A. Carrier, Cabining Intellectual Property Through a Property Paradigm, 54 Duke L.J. 1, 1 (2004) (“[o]ne of the most revolutionary legal changes in the past generation has been the ‘propertization’ of intellectual property”); Kal Raustiala, Density and Conflict in International Intellectual Property Law, 40 U.C. Davis L. Rev. 1021, 1032 (2007) (stating that “the embrace of [intellectual property] by human rights advocates and entities . . . is likely to further entrench some dangerous ideas about property: in particular, that property rights as human rights ought to be inviolable and ought to receive extremely solicitous attention from the international community”). 350 See Charter of Fundamental Rights of the European Union, 2000 O.J. (C 364) 1, art. 17 (“Everyone has the right to own, use, dispose of and bequeath his or her lawfully acquired possessions… Intellectual property shall be protected.”), available at http://www.europarl.europa.eu/charter/pdf/text_en.pdf. 351 See Comm. on Econ., Soc. and Cultural Rts., General Comment No. 17: The Right of Everyone to Benefit from the Protection of the Moral and Material Interests Resulting from Any Scientific, Literary or Artistic Production of which He is the Author (Article 15, Paragraph 1(c) of the Covenant), U.N. Doc. E/C.12/GC/17 General Comment No. 17 (Nov. 21, 2005) [hereinafter General Comment], available at www.ohcr.org/English/ bodies/cescr/docs/gc17.doc. 352 See, e.g., Thomas Crampton, Apple Gets French Support in Music Compatibility Case, N.Y. Times, Jul. 29, 2006, at C9 (discussing a ruling of the French Constitutional Council, the country’s highest judicial body, which “declared major aspects of the so-called iPod law unconstitutional.” The court’s decision “made frequent reference to the 1789 Declaration on Human Rights and concluded that the law violated the constitutional protections of property”); Joseph Straus, Design Protection for Spare Parts Gone in Europe? Proposed Changes to the EC Directive: The Commission’s Mandate and its Doubtful Execution, 27 Eur. Intell. Prop. Rev. 391, 398 (2005) (discussing 2000 decision of the Federal Constitutional Court holding that patents constitute property under the German Constitution). 353 See, e.g., Zoltek Corp. v. United States 442 F.3d 1345 (Fed. Cir. 2006), reh’g denied, 464 F.3d 1335 (Fed Cir. 2006) (rejecting a claim that the federal government’s uncompensated use of a patent amounts to a taking of private property in violation of the U.S. Constitution). 354 The few existing analyses of intellectual property in the European human rights system focus on treaty provisions that restrict intellectual property—such as the right to freedom of expression—or emphasize the European Convention’s influence on the intellectual property laws of a specific country. See P. Bernt Hugenholtz, Copyright and Freedom of Expression in Europe, in Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society 343 (Rochelle Cooper Dreyfuss et al. eds., 2001); Timothy Pinto, The Influence of the European Convention on Intellectual Property Rights, 24 Eur. Intell. Prop. Rev. 209 (2002). No comprehensive study of the European human rights tribunals’ intellectual property jurisprudence under the Convention’s property rights clause has ever been attempted.

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The article begins in Part II with an overview of the right of property in Article 1 and the decisions interpreting it. Part III develops a tripartite framework to analyze the ECHR’s intellectual property case law, including decisions that commentators have not previously identified. I use this framework to link together a series of seemingly disconnected rulings and to expose the many points of intersection between Europe’s human rights and intellectual property systems. Part IV analyzes three distinct paradigms that the ECHR may apply in future intellectual property disputes. I label these approaches as the rule of law paradigm, the enforcement paradigm, and the intellectual property balancing paradigm. Each paradigm finds support in the Court’s case law and its interpretive methodologies. However, the three paradigms have radically different consequences for innovation and creativity policy in Europe. I analyze these consequences and emphasize the systemic effects of overlaying two previously unrelated legal regimes. I argue that the ECHR should follow the rule of law paradigm and restrict its review of Article 1 intellectual property claims to cases of arbitrary government conduct. Part V briefly concludes. II. EUROPEAN CONVENTION ON HUMAN RIGHTS AND THE RIGHT OF PROPERTY This Part surveys the property rights jurisprudence of the European human rights tribunals, highlighting issues that are relevant to the more detailed analysis of the intellectual property case law that appears in the next Part of the article. Before turning to this survey, however, a brief introduction to the structure of the European human rights system and the ECHR’s interpretive methodologies are in order. The European Convention enshrines a broad catalogue of civil and political liberties. The primary beneficiaries of these liberties are natural persons, although certain rights of corporations also receive protection, including the right of property.355 In addition, the Convention is principally a charter of negative liberties that constrain the behavior of state actors. But it also imposes a limited set of positive obligations on European governments.356 When reviewing the actions of national governments, the ECHR gives pride of place to the Convention’s text, from which it has distilled a diverse array of bright line rules and multi-part balancing tests. But other interpretive methodologies have been equally vital forces in shaping European human rights jurisprudence. For example, the Court assesses the functional importance of particular rights in democratic societies, the rationale governments advance for restricting those rights, the arguments for and against deference to domestic decision makers, and the need for the Convention to evolve in response to legal, political, and social trends in Europe.357 As explained below, the Court has applied each of these doctrines and interpretive tools when analyzing the right of property.

355 See generally Marius Emberland, The Human Rights of Companies: Exploring the Structure of ECHR Protection (2006). 356 See generally Alastair R. Mowbray, The Development of Positive Obligations under the European Convention on Human Rights by the European Court of Human Rights (2004). For a discussion of “positive obligations” relating to the right of property, see infra Part IV.B. 357 See Helfer, Adjudicating Copyright Claims, supra note 333, at 407.

436 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y A. ARTICLE 1 OF PROTOCOL NO. 1: PROTECTING PEACEFUL ENJOYMENT OF POSSESSIONS

The protection of “the peaceful enjoyment of possessions” for “every natural or legal person” is one of the more controversial and obscure provisions in the European human rights system.358 The right appears not in the Convention’s primary text, but in Article 1 of its first Protocol.359 This placement, as well as the absence of any mention of the word “rights” in Article 1, reflects a disagreement among European governments over the inclusion of a property rights clause in the treaty as well as the scope and extent of protection it provides.360 The Convention’s drafters recognized that democratic governments need leeway to adopt or modify economic and social policies implicating private property rights without, in every instance, compensating adversely affected property owners. On the other hand, the drafters also understood that the rule of law in general and the stability and predictability of property rights in particular would be undermined if governments could arbitrarily deprive owners of their possessions.361 In attempting to reconcile these competing perspectives, the European Court and Commission have created a complex and intricate jurisprudence interpreting the right of property. B. THE SUBJECT MATTER AND TEMPORAL SCOPE OF THE RIGHT OF PROPERTY

A preliminary issue the tribunals faced was defining Article 1’s subject matter scope. The Court and Commission adopted a capacious interpretation of the word “possessions,” extending it to a broad array of “concrete proprietary interests” having economic value.362 Whether such interests qualify as possessions does not depend on their status in domestic law.363 Rather, Article 1 has an “autonomous meaning” that authorizes the ECHR to decide “whether the circumstances of the case, considered as a whole, may be regarded as having conferred on the applicant title to a substantive interest protected by” Article 1.364 Applying this expansive if amorphous standard, the Court has adjudicated restrictions on most economically important types of tangible and intangible property, including land, chattels, licenses, leases, contractual rights, corporate securities, business goodwill, and, as described in detail below, intellectual property.365 Article 1’s temporal scope extends to current and future proprietary interests. As the ECHR recently stated, “‘Possessions’ can be either (1) ‘existing possessions’ or (2) assets, including claims, in respect of which the applicant . . . has at least a ‘legitimate expectation’ of obtaining effective enjoyment of a property right.”366 The Court has extended the latter line of cases to enforceable debts, lease renewal options, final court judgments, and vested rights to social security and pension benefits.367 By contrast, the mere “hope of 358 For more detailed analyses of the right of property in the European human rights system, see Ali Riza Çoban, Protection of Property Rights within the European Convention on Human Rights 124–25 (2004), Camilo B. Shutte, The European Fundamental Right of Property (2004), and Rijn, supra note 338. 359 See Article 1, supra note 337. 360 See Çoban, supra note 358, at 124–25 (reviewing Article 1’s drafting history). 361 See id. at 127–37; Helen Mountfield, Regulatory Expropriations in Europe: The Approach of the European Court of Human Rights, 11 N.Y.U. Envtl. L.J. 136, 146-47 (2002). 362 Kopecky v. Slovakia, 2004-IX Eur. Ct. H.R. 125, 144 (Grand Chamber). 363 Kechko v. Ukraine, App. No. 63134/00, ¶ 22 (2005). 364 Öneryýldýz v. Turkey, 2004-XII Eur. Ct. H.R. 79, 127 (Grand Chamber). 365 Çoban, supra note 358, at 152-55 (collecting cases); David Anderson, Compensation for Interference with Property, 6 Eur. Hum. Rts. L. Rev. 543, 546 (1999) (same). 366 Kopecky, 2004-IX Eur. Ct. H.R. at 139–40 (enumeration added). 367 See Çoban, supra note 358, at 152–55 (collecting recent decisions).

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recognition of a property right which it has been impossible to exercise effectively” is not protected, nor is “a conditional claim which lapses as a result of the non-fulfillment of the condition.”368 Future interests must also have a solid basis in domestic law, such as a statute or a judicial ruling that recognizes their existence.369 C. INTERFERENCES WITH PROPERTY

If the ECHR determines that a possession falls within Article 1’s subject matter and temporal scope, it must then consider whether the government has interfered with the possession. The second and third sentences of Article 1 recognize two distinct categories of government interferences—deprivations of property and controls on its use.370 Deprivations are the more invasive of these two categories. They include expropriations, nationalizations, confiscations, and other comprehensive dispossessions. The ECHR has avoided finding a deprivation unless the government has effectively extinguished the owner’s property right. In contrast, controls on use encompass any lesser restriction on an owner’s possessory interests. The ECHR has adopted “a very broad concept of ‘control of use,’” thereby bringing “a wide range of regulatory measures within its jurisdiction.”371 D. ASSESSING THE LEGALITY OF INTERFERENCES

Where a state interferes with a possession, the Court must assess the validity of its actions. For an interference to be compatible with the Convention, it must be “provided by law” and pursue “a legitimate aim” in the public interest.372 Interferences must also achieve “a fair balance . . . between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights.”373 Striking this balance requires “a reasonable relationship of proportionality” between the means employed by the state and the objectives it seeks to achieve.374 Although this proportionality test is highly fact-specific, the ECHR has identified several considerations relevant to assessing whether the government has maintained the fair balance required by Article 1. These factors include the owner’s reasonable expectations;375 whether the restriction imposes an inequitable or excessive burden (especially on 368 Kopecky, 2004-IX Eur. Ct. H.R. at 140; see also Gratzinger v. Czech Republic, 2002-VII Eur. Ct. H.R. 399, 419–20 (Grand Chamber). The ECHR has often applied these principles to complaints seeking restitution of real or personal property seized by socialist governments in Eastern Europe. The Court has held that former property owners have no “legitimate expectation” of receiving restitution if they do not have “a currently enforceable claim that was sufficiently established,” for example because they do not meet “one of the essential statutory conditions” for recovery of previously-owned property or because there is “a dispute as to the correct interpretation and application of domestic law by the national courts.” Rosival v. Slovakia, App. No. 17684/02 at 12 (2007) (admissibility decision) (internal citations omitted). 369 Zhigalev v. Russia, App. No. 54891/00, ¶ 131 (2006); Kopecky, 2004-IX Eur. Ct. H.R. at 144. 370 Hellborg v. Sweden, App. No. 47473/99, 45 Eur. H.R. Rep. 29 [3], ¶ 45 (2006) (explaining this distinction); see also Çoban, supra note 358, at 174–86. The ECHR has also recognized a third category—interference with the substance of property. This category is reserved for government intrusions which, as a formal matter, “do[] not transfer the property to public authorities, nor . . . limit or control the use of the property.” Id. at 187. In practice, however, the Court has not applied this concept consistently or coherently. Commentators have also noted that the cases decided under this rubric could easily fit under the first two categories. Id. at 189; Anderson, supra note 365, at 551–52. For these reasons, I do not give separate treatment to “substance of property” claims. 371 Mountfield, supra note 361, at 146; see also Çoban, supra note 358, at 175–85 (analyzing deprivations and comparing them to controls on use). 372 Jahn v. Germany, App. No. 46720/99, 42 Eur. H.R. Rep. 1084 [49], ¶ 81, ¶ 88 (Grand Chamber 2005). 373 Kirilova v. Bulgaria, App. No. 42908/98, ¶ 106 (2005). 374 L.B. v. Italy, App. No. 32542/96, ¶ 23 (2002). 375 Pine Valley Developments Ltd. v. Ireland, 222 Eur. Ct. H.R. (ser. A) at 23 (1991).

438 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y non-nationals);376 the amount of compensation (if any) paid by the government;377 the uncertainty created by the regulation;378 and the speed and consistency with which the state acts.379 In assessing these factors, the ECHR affords governments considerable leeway to regulate private property in the public interest. Because states frequently impose property controls when implementing broader social and economic policies, “the national authorities” — which have direct knowledge of their society and its needs — “are in principle better placed than the international judge” to decide whether a regulation is necessary to achieve those policies.380 As a result, the ECHR gives significant deference to “the legislature’s judgment as to what is in the public interest unless that judgment is manifestly without reasonable foundation.”381 It also stresses the “wide margin of appreciation” that states enjoy “with regard both to choosing the means of enforcement and to ascertaining whether the consequences of enforcement are justified in the general interest for the purpose of achieving the object of the law in question.”382 This deference does not, however, amount to a blank check for European governments. To the contrary, as the docket of property rights cases has expanded exponentially over the last decade,383 the ECHR has pointedly refused to “abdicate its power of review” and has reserved to itself the final authority to “determine whether the requisite balance was maintained in a manner consonant with” the right of property.384 As a result of this European judicial supervision, the ECHR has found an increasing number of violations of Article 1 in the last few years.385

376 The Court has justified this differential treatment on public choice grounds, reasoning that non-nationals lack representation in domestic political processes and thus risk bearing a disproportionate share of the costs of property deprivations. See Lithgow v. United Kingdom, 102 Eur. Ct. H.R. (ser. A) at 49 (1986). 377 See Tom Allen, Compensation for Property Under the European Convention of Human Rights, 28 Mich. J. Int’l L. 287, 298–300 (2007). When the state deprives non-nationals of their property, Article 1’s reference to “the general principles of international law” mandates the payment of prompt, adequate, and effective compensation. Article Proposal 1, supra note 337, art. 1; Anderson, supra note 365, at 548. By contrast, Article 1 does not require compensation to be paid to nationals. Lithgow, 102 Eur. Ct. H.R., at 47–49. In practice, however, the Court has applied an equivalent standard of compensation to both types of takings. As a result, where a state deprives its own citizens of their property, it must normally pay “an amount reasonably related to its value,” and its failure to provide any compensation “can be considered justifiable under Article 1 of Protocol No. 1 only in exceptional circumstances.” Scordino v. Italy (No. 1), App. No. 36813/97, 45 Eur. H.R. Rep. 207 [7], 239 (Grand Chamber, 2006). 378 Hutten-Czapska v. Poland, App. No. 35014/97, 45 Eur. H.R. Rep. 52 [4], 108 (2006). 379 Kirilova, App. No. 42908/98 at ¶ 106; Broniowski v. Poland, 2004-V Eur. Ct. H.R. 1 (Grand Chamber). 380 Draon v. France, App. No. 1513/03, 42 Eur. H.R. Rep. 807 [40], 832–33 (2005) (internal quotations omitted). 381 Id. 382 Scordino, 45 Eur. H.R .Rep. at 239. 383 Çoban, supra note 358, at 258 (stating that over the last decade “both the magnitude and variety of the applications regarding [Article 1] have escalated significantly and the number of the judgments rose consequently”). Not surprisingly, this expansion followed the accession of Eastern European countries to the Convention in the 1990s. These governments have faced significant challenges in reallocating property rights during their transition from socialist to democratic governments. See Tom Allen, Restitution and Transitional Justice in the European Court of Human Rights, 13 Colum. J. Eur. L. 1, 13–29 (2006/2007). 384 Jahn, 42 Eur. H.R. Rep. at ¶ 93 (Grand Chamber 2005); see also Fedorenko v. Ukraine, App. No. 25921/02, ¶ 29 (2006) (asserting that the state’s “margin of appreciation . . . goes hand in hand with European supervision” which authorizes the ECHR to “ascertain whether the discretion afforded to the Government was overstepped”). 385 Kopecky, 2004-IX Eur. Ct. H.R. 125, 155 (dissenting opinion of Judge Strážnická) (“In the Court’s case-law from 2000 onwards, a tendency may be discerned to subject the application of national law to supervisory review by the Court.”); Çoban, supra note 358, at 258 (stating that the ECHR has found “more and more violations of [Article 1] in the last couple of years” and that it “is not as reluctant as it was before to find [a] violation”).

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III. INTELLECTUAL PROPERTY AND THE EUROPEAN CONVENTION’S RIGHT OF PROPERTY: A TRIPARTITE FRAMEWORK FOR ANALYSIS In this Part, I apply the general principles reviewed above to cases in which intellectual property owners alleged a violation of Article 1 of Protocol No 1. The analysis consists of three questions: First, does Article 1 apply to the intellectual property at issue, either because it is an existing possession or because the owner has a legitimate expectation of obtaining a future proprietary interest? If neither type of property exists, the government’s conduct, however egregious, cannot violate Article 1. In contrast, if the ECHR answers this question affirmatively, it must consider a second question: Has the government “interfered” with the possession? The absence of such an interference also requires a ruling for the respondent state. Conversely, the existence of an interference leads to a third and final question: Whether the interference is justified, i.e. has the state upset the fair and proportional balance that Article 1 requires between the interests of the public and the property owner’s rights? Analyzing the intellectual property jurisprudence of the ECHR and the European Commission using this tripartite framework helps to expose the numerous points of intersection—and of potential conflict—between the European human rights system and the region’s intellectual property laws. A. IS INTELLECTUAL PROPERTY PROTECTED BY ARTICLE 1?

In three decisions dating back to 1990, the European Commission has consistently held that patents and copyrights fall within Article 1’s subject matter scope.386 The Court did not directly address this issue until 2005,387 when it issued a trilogy of decisions applying Article 1 to intellectual property disputes.388 Anheuser-Busch, Inc. v. Portugal is the most well-known of these three rulings. In that judgment, analyzed in detail below, a sevenmember Chamber of the ECHR concluded that “intellectual property as such incontestably enjoys the protection of Article 1 of Protocol No. 1.”389 The case was reargued before a Grand Chamber of the ECHR in 2006. Review by this panel of seventeen judges is reserved for disputes which involve “a serious question affecting the interpretation or application of the Convention or the protocols thereto, or a serious issue of general importance.”390 In a judgment issued in early 2007, the Grand Chamber unanimously agreed with the Chamber’s conclusion, holding that Article 1 “is applicable to intellectual property as such.”391 The Grand Chamber’s statement is more measured than the language used by the Chamber. Nevertheless, its holding is an

386 See Lenzing AG v. United Kingdom, App. No. 38817/97, 94-A Eur. Comm’n H.R. Dec. & Rep. 136 (1998) (patent); Aral v. Turkey, App. No. 24563/94 (1998) (admissibility decision) (copyright); Smith Kline & French Lab. Ltd. v. Netherlands, App. No. 12633/87, 66 Eur. Comm’n H.R. Dec. & Rep. 70, 79 (1990) (admissibility decision) (patent). 387 In a 1995 ruling, British Am. Tobacco Co. Ltd. v. Netherlands, 331 Eur. Ct. H.R. (ser. A) (1995), the Court avoided deciding whether patent applications are possessions—an issue I discuss in greater detail below. See infra Part III.A.2. 388 See supra note 340. 389 Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 44 Eur. H.R. Rep. 836 [42], 856 (2005). I discuss the complex facts and procedural history of the case below. See infra Part III.A.2.a. 390 European Convention, supra note 334, art. 43. 391 Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep. 830 [36], 849 (Grand Chamber 2007). Both the concurring and dissenting judges agreed that Article 1 applies “to intellectual property in general and to a duly registered trade mark.” Id. at 853 (joint concurring opinion of Judges Steiner & Hajiyev); id. at 855 (joint dissenting opinion of Judges Caflisch & Cabral Barreto).

440 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y unequivocal endorsement of the view that the right of property protects the financial interests of intellectual property owners in their inventions, creations, and signs. The ECHR’s only justification for this conclusion is found in a brief quotation from the European Commission’s first intellectual property decision, in which the Commission stated that under Dutch law the holder of a patent is referred to as the proprietor of a patent and that patents are deemed, subject to the provisions of the Patent Act, to be personal property which is transferable and assignable. The Commission finds that a patent accordingly falls within the scope of the term “possessions” in Article 1 of Protocol No. 1.392 The Commission’s reasoning in this passage is sparse. But it suggests that the European tribunals place significant weight on the exclusivity of the exploitation and transfer rights that national laws confer on intellectual property owners.393 Inasmuch as these exclusive rights are standard features of national and international intellectual property systems, it is safe to predict that the ECHR will treat other forms of industrial and artistic property — such as new plant varieties, integrated circuits, performers’ rights, trade secrets, and the like—as “possessions” protected by Article 1. In addition, because Article 1 applies to fixed claims to future revenue and compensation,394 the Court will likely extend Article 1 to intellectual property rights that are subject to a statutory or compulsory license (i.e. a license that authorizes users to exploit protected works provided that they remunerate rights holders).395 These logical extensions of prior Article 1 case law suggest that there are no obvious jurisdictional limits on the ECHR’s power to review a wide array of intellectual property disputes under the rubric of the right of property. Outside of these broad jurisdictional parameters, however, the scope of Article 1 is much less certain. This is particularly true where Article 1 intersects with intellectual property subject matter and ownership rules, for example, where ownership is contested or where it is unclear whether an inventor, creator, or business has satisfied the requirements for protection under domestic law. I analyze these unresolved issues below. I begin with literary and artistic works that are protected from the moment of their creation or fixation. I then discuss industrial property whose eligibility for protection is determined by a registration procedure. 1. Literary and Artistic Works Consider first an easy case—literary and artistic works whose ownership and eligibility for protection in domestic law are undisputed. The creators of such works possess exclusive exploitation and assignment rights that fit comfortably within European tribunal’s jurisprudence recognizing various forms of intellectual property as protected by Article 1. In these cases of undisputed ownership and eligibility, the ECHR will simply defer to the national copyright or neighboring rights laws and conclude that Article 1 is applicable. 392 Smith Kline & French Lab. Ltd. v. Netherlands, App. No. 12633/87, 66 Eur. Comm’n H.R. Dec. & Rep. 70, 79 (1990) (admissibility decision). 393 See Laurent Sermet, The European Convention on Human Rights and Property Rights 13 (1998) (“patents have two characteristics—exclusiveness and transferability—which are also hallmarks of property”). 394 See supra Part II.B. 395 Compulsory licenses fit easily within the concept of Article 1 “assets,” even where the amount of compensation is determined ex post by a government agency or royalty tribunal. Broniowski v. Poland, 2004-V Eur. Ct. H.R. 1, 54 (Grand Chamber) (applying Article 1 to a right “to obtain. . . . compensatory property” notwithstanding the fact that the “right was created in a somewhat inchoate form, as its materialization was to be effected by an administrative decision allocating State property to him”).

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Yet such a deference may not always yield easy answers, particularly when domestic law provides limited guidance concerning a creator’s proprietary interests. a. Dima v. Romania Dima v. Romania,396 a 2005 admissibility decision previously unmentioned by commentators, highlights these complexities. The case concerned a graphic artist, Victor Dima, who created the design for a new national emblem and seal shortly after the fall of Romania’s communist regime in 1989. Dima developed a preliminary drawing of the state symbols in response to a public competition. A government commission selected his prototype over several other submissions and directed him to work with two history and heraldry experts to revise the design.397 The Romanian Parliament later adopted the revised design as the state emblem and seal, listing Dima as the “graphic designer” in a statute published in the country’s Official Journal.398 Inexplicably, however, the Parliament never paid Dima for his work. In addition to seeking to recover the compensation owed to him, Dima responded by asserting his rights as the graphic designer of the state emblem and seal. He turned first to Romania’s administrative agencies. The Patent and Trademark Office refused to register the design, relying on a provision of Romania’s industrial design statute which excludes from protection designs “whose purpose and appearance are contrary to morality or public policy.”399 Dima had better luck with the Copyright Agency, whose Director informed him in a series of letters that he was the author of the graphic design and enjoyed all of the rights in domestic copyright law. On the strength of these assertions, Dima filed three copyright infringement actions in the Romanian courts against two private businesses and a state-owned enterprise responsible for minting Romanian coins—all of which had reproduced and distributed the design for profit.400 The courts dismissed all three suits, holding that Dima did not own a copyright in the design of the state symbols. The decisive rulings were issued by the Romanian Supreme Court of Justice. The court acknowledged that Dima had personally created the design. But it held that the Parliament, which had commissioned the revision of the design, was the “author” of the works.401 Alternatively, the Supreme Court concluded that “symbols of the State could not be the subject of copyright,” neither under the 1956 copyright statute in effect at the time Dima created the design (which did not mention state symbols) nor under a revised 1996 statute (which expressly excluded such symbols from copyright protection).402 Finally, the Supreme Court rejected Dima’s argument that the

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Dima, App. No. 58472/00 at 20 (admissibility decision). The ECHR does not indicate whether Dima prepared his initial design for the competition, although that is the most plausible interpretation of the facts. See id. at 2. 398 Id. at 2 (“auteur des maquettes graphiques” in French). 399 The Patent and Trademark office also based its refusal on an unpublished internal rule which provided that industrial drawings and models representing the emblem of a state were excluded from copyright protection (“droit d’auteur”). Id. at 3. The ECHR did not explain why an industrial property office believed itself competent to interpret an issue of copyright law. However, settled grounds for rejecting the registration of state symbols as trademarks appear in Article 6 ter of the Paris Convention, which prohibits the registration and use of “armorial bearings, flags, and other State emblems” as such marks or as elements thereof “without authorization by the competent authorities . . . .” Although the Patent and Trademark Office did not rely upon this provision in denying Dima’s registration, Romania cited it in opposing his complaint to the ECHR. See id. at 7, 18. 400 See id. at 3–7. 401 The Supreme Court emphasized the collective process of the models’ creation and the decisive role played by the Parliament in selecting the final models. See id. at 4–5. 402 According to the ECHR, the 1996 statute was adopted to “modernize the field of copyright”after the fall of the socialist regime in 1989. See id. at 14–15. 397

442 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y lower courts had retroactively applied the 1996 statute to his design, since even under the earlier law Dima was not the author of “works of intellectual creation.”403 Dima challenged these rulings before the ECHR, alleging that the Romanian courts had deprived him of a possession in violation of Article 1.404 He invoked the subject matter and authorship rules of the 1956 copyright statute, which protected “all works of intellectual creation in the literary, artistic and scientific domain, whatever the contents and form of expression,” including “works of graphic art.”405 The statute further provided that the “author” of such works “shall be the person who has created” them and that the copyright “arise[s] the moment the work takes . . . concrete form.”406 Dima asserted that, as a result of these statutory provisions, his copyright in the graphic design arose at the moment he created it, or, at the latest, when he was listed as the graphic designer in the Official Journal.407 The ECHR began its analysis by stating that Article 1 protects copyrighted works. But this conclusion did not resolve whether Dima had “a ‘possession’ or at least a ‘legitimate expectation’ to acquire a ‘possession’” as the author of the graphic models he created.408 To assess that issue, the Court first turned to the subject matter rules of European copyright laws. It observed that “the majority of national legal systems, including that of Romania, provide that copyright arises upon the creation of an artistic work. Some jurisdictions require, in addition . . . that the work have a concrete form of expression.”409 These general principles, viewed in the abstract, appeared to support a ruling in Dima’s favor. Yet the Court also recognized that these principles did not answer all unsettled questions concerning the scope of national copyright law. In cases where the “existence or extent” of copyright is uncertain, the ECHR stated, it is the task of domestic courts to resolve any ambiguities.410 Only once those ambiguities have been resolved can the Court determine the extent of the applicant’s property right and whether the state had violated that right. The key question, therefore, was whether Romanian courts had decided that a graphic design of a state emblem could be protected by copyright prior to the adoption of the 1996 statute that expressly denied such protection. On this issue, the facts did not favor Dima. Although he was listed as the graphic designer in the official gazette and the subject matter provisions of the 1956 copyright law were ambiguous, he could not point to “a judgment in his favor, nor could he rely on any favorable case law concerning the ability to copyright models of the State emblem and seal.” In addition, the Supreme 403

Id. at 4. Dima’s complaint to the ECHR also raised two other claims: (1) the government’s failure to compensate him for his work, and (2) various procedural objections to the domestic infringement proceedings. As to the first claim, the ECHR ruled that Dima had failed to exhaust domestic remedies, thus precluding the Court from reviewing his allegations on the merits. Id. at 18–19. As to the second claim, the ECHR rejected all of Dima’s objections save one—a challenge to a report produced by an expert witness for one of the defendants. As to that issue, it declared Dima’s complaint admissible. Id. at 15–16. In November 2006, the ECHR concluded that Romania had violated the European Convention’s right to a fair hearing when the Romanian Supreme Court dismissed his appeal without addressing Dima’s challenge to the expert’s report. The Court awarded Dima 2,000 euros in damages. See Affaire Dima c. Roumanie, App. No. 58472/00 (2006); see also Press Release, Registrar, European Court of Human Rights, Chamber Judgments Concerning Azerbaijan, Bulgaria, Croatia, Italy, Lithuania, Romania and Russia (Nov. 16, 2006) (summarizing the ECHR’s judgment in English). 405 Decree No. 321 Relating to Copyright, June 18, 1956, art. 9 (Rom.) (copy on file with author). 406 Id. at art. 2. 407 See Dima, App. No. 58472/00 at 10. 408 Id. at 20. 409 Id. 410 Id. 404

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Court of Justice ultimately rejected Dima’s proposed interpretation of the 1956 statute (and, implicitly, that of the Copyright Agency, although the ECHR failed to mention this fact). In light of this rejection, Dima could not claim to have any “‘legitimate expectation’” of acquiring a possession, since such an expectation cannot arise where there is “a dispute as to the interpretation and application of national law, and . . . the applicant’s submissions [are] subsequently rejected by the national courts.”411 The ECHR concluded by reaffirming its “limited power” to review allegations of legal or factual errors committed by national courts when interpreting domestic law. Applying this deferential standard, the ECHR found “no appearance of arbitrariness” in the Supreme Court’s ruling. There was thus “no basis on which the [ECHR] could reach a different conclusion on the question of whether [Dima] . . . did or did not have a copyright” in the design he created.412 b. Implications of Dima for the Protection of Literary and Artistic Works Dima v. Romania raises several important issues regarding the application of Article 1 to literary and artistic works. Perhaps most significantly, the ECHR refused to second guess the Romanian courts’ interpretation of domestic copyright law in a case whose facts were sympathetic to the creator. Instead, it deferred to the authority of national courts of last resort to resolve contested legal issues that divide lower courts and administrative agencies. Yet the Court also signaled that its deference to these domestic decision makers would not be unlimited. A close parsing of the judgment suggests several issues which may engender more searching scrutiny by the ECHR in future cases. First, the ECHR in Dima did not address the issue of moral rights, a branch of copyright law that enables creators to control the attribution and integrity of their works. Inasmuch as moral rights protect the personal link between the creator and his or her intellectual creations, some commentators have argued that they have a stronger claim to protection as human rights than do copyright’s economic exploitation privileges.413 Scholars are divided, however, over whether Article 1 extends to moral rights.414 The Court did not resolve this debate, inasmuch as Dima’s challenge focused solely on his economic rights in the graphic designs. In future cases, however, creators may raise moral rights claims where the state misattributes authorship or distorts or damages a protected work.415 In such cases, the Court will need to consider whether national decision makers deserve less deference if they restrict a creator’s moral rights. Second, the ECHR refused to conflate subject matter standards from different branches of intellectual property law. In contesting Dima’s allegations before the ECHR, Romania had argued against the copyrightability of state symbols by citing to a trademark provision of the Paris Convention and Romania’s industrial design statute,416 both of 411

Id. at 21. Id. 413 See D. Beldiman, Fundamental Rights, Author’s Rights and Copyright – Commonalities or Divergences, 29 Colum. J. L. & Arts 60 (2005). But see General Comment, supra note 349, ¶¶ 30–34, 44–46 (emphasizing importance of economic exploitation rights for creators and innovators and their interdependence with moral rights). 414 Compare Çoban, supra note 358, at 149–50 (suggesting that Article 1 covers only the economic value of a possession), with Geiger, Constitutionalizing Intellectual Property Law, supra note 347, at 383 & n.54 (suggesting that Article 1 also protects moral rights). 415 Plausible examples of such claims include disputes over the government’s removal or destruction of sculptures, murals or other works of visual art from public buildings or parks. Cf. Rebecca Stuart, Comment, A Work of Heart: A Proposal for a Revision of the Visual Artists Rights Act of 1990 to Bring the United States Closer to International Standards, 47 Santa Clara L. Rev. 645, 659–76 (2007) (reviewing cases decided under U.S. moral rights law in which creators challenged the government’s removal, destruction or mutilation of works of visual art, and comparing U.S. law to the protection of moral rights in international agreements and in other countries). 416 See Dima, App. No. 58472/00 at 18–19. Dima challenged this government’s reliance on these authorities. Id. 412

444 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y which exclude such symbols as protectable subject matter.417 The ECHR studiously avoided any mention of industrial property, however, restricting its analysis to copyright law. Had the Romanian courts relied solely on industrial property principles to reject Dima’s copyright infringements claims, the case’s outcome before the ECHR might have been quite different. A broader implication of this approach is that the ECHR will interpret Article 1 in a manner that is appropriately sensitive to the distinct subject matter and protection standards of different fields of intellectual property law. Third, the ECHR signaled in Dima a concern with the retroactive application of domestic intellectual property laws. The ECHR recognized that copyright protection exists from the moment an author creates a work. Had the Romanian Supreme Court rejected Dima’s authorship claim based solely on the subsequently enacted 1996 statute, the ECHR’s recognition of this rule would have supported a finding that the retroactive application of the new law interfered with an existing possession. On the facts presented, however, Dima did not have a reasonable basis for claiming copyright protection even before the new statute took effect. There was no final judgment nor any favorable precedent that recognized the copyrightability of design models for state symbols. This raises the possibility that the ECHR may find in favor of authors and rights holders who rely on these legal authorities before a change in the applicable law. Fourth, the ECHR did not dismiss Dima’s complaint solely on the ground that he did not own a possession protected by Article 1. Although the Court emphasized that issue, it also considered whether the Romanian courts had acted arbitrarily, indicating that the Court was also implicitly addressing the second issue identified above—whether the government had “interfered” with a possession.418 Had Dima not been the owner of such a possession, no amount of arbitrariness by the Romanian courts could have justified the ECHR in finding a violation of Article 1. The Court’s willingness to consider the issue of arbitrariness suggests that in close cases it may assume arguendo that the complainant has an existing possession or a legitimate expectation in order to correct egregious errors of national courts in domestic intellectual property disputes. 2. Industrial Property A different set of ambiguities arises with respect to the ECHR’s treatment of industrial property. As mentioned above, the Grand Chamber’s judgment in Anheuser-Busch, Inc. v. Portugal definitively resolved the question of whether registered industrial property rights are existing possessions protected by Article 1. The Court also concluded that applications to register trademarks are similarly protected, overruling the Chamber’s conclusion that such applications are neither “existing possessions” nor “legitimate expectations.” This extension of Article 1 to trademark applications raises several important issues. I discuss those issues below, but first provide an overview of the case and the reasoning of the Chamber and the Grand Chamber. a. Anheuser-Busch, Inc. v. Portugal The ECHR’s judgment in Anheuser-Busch is one small skirmish in a longstanding litigation war between the American brewer of “Budweiser” beer and a rival Czech company, Budìjovický Budvar (Budìjovický), which also distributes beer under the “Budweiser Bier,” “Budweiser Budvar,” and similar brand names. Over the last quarter century, nearly fifty disputes between the two competitors have raged across Europe in industrial

417 418

See supra note 399 & accompanying text (discussing these two provisions). See supra Part II.C.

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property offices, domestic courts, and regional tribunals.419 These disputes raise difficult questions concerning the relationship between trademarks and geographical indications (“GIs”)420 and between national and international intellectual property laws. The Portuguese legal system confronted these conflicts in 1981 when Anheuser-Busch applied to the National Institute for Industrial Property to register “Budweiser” as a trademark. Budìjovický opposed the registration, citing its 1968 Portuguese registration of an appellation of origin421 for “Budweiser Bier.”422 The industrial property office refrained from acting on Anheuser-Busch’s application while the parties attempted to negotiate a licensing agreement. Eight years later, in 1989, after protracted negotiations proved unsuccessful, Anheuser-Busch asked the Portuguese courts to cancel Budìjovický’s registration. An additional six years elapsed before a lower court ruled in favor of the American company in 1995, canceling the registration on the ground that “Budweiser Bier” was not a valid appellation of origin.423 In the wake of this ruling, the industrial property office promptly registered Anheuser-Busch’s trademark.424 It was now the Czech brewer’s turn to petition the Portuguese courts, invoking a 1986 bilateral treaty between Czechoslovakia and Portugal that provided reciprocal protection for each country’s indications of source and appellations of origin. Budìjovický argued that the bilateral agreement required Portugal to register “Budweiser Bier” as a Czech GI. But the lower court held that only “ÈeskoBudìjovický Budvar”—a Czech phrase indicating a beer from Èeské Budìjovice, a town in the Bohemia region of the Czech Republic where the brewer is based—was an appellation of origin. The German name of that town—“Budweis or “Budweiss”—and the German translation of the phrase designating beer from that town—“Budweiser Bier”—was not.425 419 See European Rights Court Rejects Budweiser Bid for Protection Against Rival Czech Brand, 70 Pat., Trademark & Copyright J., 668, 668 (2005); Jeremy Reed, ECJ Protects Simple Geographical Indications for their Buddy, 27 Eur. Intell. Prop. Rev. 25 (2005); Budweiser Budvar, Disputes Concerning Registered Trademarks, available at http://www.budvar.cz/en/web/Znacka-Budvar/Znamka-Budvar.html. 420 The World Intellectual Property Organization (WIPO) defines a GI as a “sign used on goods that have a specific geographical origin and possess qualities or a reputation that are due to that place of origin.” WIPO, What is a Geographical Indication?, http://www.wipo.int/about-ip/en/about_geographical_ind.html#P16_1100 (last visited Oct. 15, 2007). The TRIPs Agreement has a similar definition. Agreement on Trade-Related Aspects of Intellectual Property Rights, art. 22.1, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, Legal Instruments—Results of the Uruguay Round, 33 I.L.M. 1125 (1994) [hereinafter TRIPs]. 421 The Lisbon Agreement defines an appellation of origin as “the geographical name of a country, region, or locality, which serves to designate a product originating therein, the quality and characteristics of which are due exclusively or essentially to the geographical environment, including natural and human factors.” Lisbon Agreement for the Protection of Appellations of Origin and Their International Registration, Art. 2(1), Oct. 31, 1958, last revised Jan. 1, 1994, 923 U.N.T.S. 205. For a discussion of the relationship between GIs and appellations of origin, see Felix Addor & Alexandra Grazioli, Geographical Indications Beyond Wines and Spirits: A Roadmap for a Better Protection for Geographical Indications in the WTO/TRIPS Agreement, 5 J. World Intell. Prop. 865, 867–69 (2002). 422 Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep. 830 [36], 833–34 (Grand Chamber 2007). The 1968 registration was filed pursuant to the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration, which was opened for signature on October 31, 1958. Id. 423 Id. at 834. The Lisbon Court of First Instance held that, under the terms of the Lisbon Agreement, appellations of origin were “reserved to the geographical name of a country, region, or locality, which served to designate a product originating therein . . . . ‘Budweiser’ did not come within this category.” Id. For a more detailed explanation of this issue, see infra note 93 and accompanying text. 424 Id. Budìjovický had filed an opposition to the application to register the Anheuser-Busch mark with the industrial property office. Notwithstanding this opposition, the office mistakenly issued a certificate of registration to the American brewer in June 1995. See id. 425 The translation from Czech to German is not serendipitous. Until the middle of the last century, a large German-speaking population resided in the Bohemia region of the Czech Republic (formerly Czechoslovakia

446 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y An intermediate appellate court reversed this decision and ordered the cancellation of Anheuser-Busch’s trademark. The Supreme Court of Portugal affirmed. It interpreted the 1986 bilateral treaty to protect each signatory’s national products in translation as well as in their original language.426 The German translation of ÈeskoBudìjovický Budvar— “Budweiser Bier”—was therefore eligible for protection as a GI under the 1986 treaty. Moreover, the refusal to register the American company’s mark in reliance on that treaty did not violate the trademark priority rules in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).427 With the Portuguese litigation at an end, Anheuser-Busch filed a complaint with the ECHR. The beer manufacturer alleged that Portugal had violated Article 1 by invoking the 1986 bilateral treaty to deny registration of its “Budweiser” trademark that the company had applied to register in 1981, six years prior to the treaty’s entry into force.428 In their respective judgments, both the Chamber and the Grand Chamber began by surveying industrial property treaties, EU directives, and domestic laws. These sources treat registration as the key to obtaining protection of a trademark. But they also confer “certain rights” on trademark applications, such as fixing the beginning of the mark’s period of validity and exclusivity. In addition, “in some countries, an application to register a mark . . . may be the subject of an assignment, security assignment or licence and (provided the mark is subsequently registered) create an entitlement to compensation in the event of fraudulent use by a third party.”429 These rights notwithstanding, most European states also authorize interested parties to oppose trademark applications and to bring actions to revoke or invalidate a mark within a set time period after its registration.430 The key issue facing the ECHR was whether, in light of this palimpsest of legal rules, Article 1 protects not only registered marks but trademark applications as well. The Chamber Judgment. By a five-to-two vote, the Chamber ruled that Article 1 was inapplicable to the dispute before it.431 The majority offered two justifications for this and, before 1918, a province of the Austro-Hungarian Empire). According to the Budweiser Budvar website, “Since the 14th century the official name of [Èeské Budìjovice] was Budweis. Only in 1918 was the name changed into the Czech name of Èeské Budìjovice. However, the indication Budweis is today the official translation of the name of the city into many foreign languages.” Budweiser Budvar, Information About Trademarks, http://www.budvar.cz/en/web/Znacka-Budvar/Znamka-Budvar.html (last visited Oct. 15, 2007). 426 Anheuser-Busch disputed that the appellation of origin “Èeskobudejovicky Budvar” corresponds to the German expression “Budweiser,” with the result that, even if the bilateral treaty applied to translations, it did not support the registration of “Budweiser Bier” as a geographical indication. The Supreme Court of Portugal rejected this argument. Anheuser-Busch, 44 Eur. H.R. Rep. at 848–49 (Chamber). 427 TRIPs, supra note 420, art. 24. Anheuser-Busch claimed a right of priority for its “Budweiser” mark application under Article 24.5 of TRIPs, which addresses a sub-set of the conflicts between geographical indications and trademarks. Article 24.5 gives priority to trademarks that have been applied for or registered in good faith before the entry into force of TRIPs or before the geographical indication is protected in its country of origin. The Supreme Court rejected the American company’s claim of priority under this provision. Anheuser-Busch, 44 Eur. H.R. Rep. at 848–49 (Chamber). For a more detailed discussion of the court’s decision, see Antonio Corte-Real, The Budweiser Case in Portugal, 24 Eur. Intell. Prop. Rev. 43, 46 (2002). 428 Anheuser-Busch, 44 Eur. H.R. Rep. at 853–56 (Chamber). The 1986 bilateral agreement entered into force for Portugal on March 7, 1987. Id. at 848. 429 Id. at 852; Anheuser-Busch, 45 Eur. H.R. Rep. at 841 (Grand Chamber). The Portuguese courts had held that “the mere filing of an application for registration conferred on the applicant a ‘legal expectation’…that warranted the protection of the law.” Anheuser-Busch, 44 Eur. H.R. Rep. at 852 (Chamber); Anheuser-Busch, 45 Eur. H.R. Rep. at 842 (Grand Chamber). This expectation was later codified in a provision of the Portugese Code of Industrial Property — enacted after after the conclusion of the domestic litigation between Anheuser-Busch and Budejovicky — that provided “provisional protection” to trademark applicants and authorized them to bring infringement actions on the basis of that protection. Id. 430 See Anheuser-Busch, 44 Eur. H.R. Rep. at 854–55 (Chamber); Anheuser-Busch, 45 Eur. H.R. Rep. at 843 (Grand Chamber). 431 Anheuser-Busch, 44 Eur. H.R. Rep. at 858 (Chamber).

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conclusion. The first rationale was limited to the case’s complex procedural history. Among the twists and turns of twenty years of litigation, two events stood out: first, that the American company’s right to use its mark in Portugal “was already contested by Budìjovický Budvar when [Anheuser-Busch first] filed its application” in 1981; and second, that the 1986 bilateral treaty had been in force for more than two years when the company first challenged Budìjovický’s GI registration in 1989.432 As a result of these events, Anheuser-Busch could not be sure of being the owner of the trademark in question until after final registration and then only on condition that no objection was raised by a third party. In other words, the applicant company had a conditional right, which was extinguished retrospectively for failure to satisfy the condition, namely that it did not infringe third-party rights.433 This narrow, fact-specific rationale was sufficient to support the Court’s conclusion that Article 1 was inapplicable. The Chamber went further, however, holding that Article 1 applies only “after final registration of the mark, in accordance with the rules in force in the State concerned.” Prior to that time, while an application to register is pending, the applicant has “a hope of acquiring” a possession. But it does not have “legally protected legitimate expectation” of a future proprietary interest.434 This second, categorical construction of Article 1 easily disposed of Anheuser-Busch’s principal argument—that the Portuguese Supreme Court had expropriated its property when it invoked the 1986 bilateral treaty to reject the company’s previously-filed application to register “Budweiser.” Under the majority’s second, broader holding, the court’s adherence to the later-in-time treaty was simply “irrelevant, since, when that Agreement entered into force . . . the applicant did not have a ‘possession.’”435 In contrast to the judges in the majority, the two dissenting judges believed that Anheuser-Busch had a legitimate expectation protected by Article 1.436 That expectation was based on the Portuguese Code of Industrial Property, which conferred three rights on trademark applicants: (1) a right of priority over subsequent applications, (2) a right to compensation for illegal uses of the mark by third parties, and (3) a right to have their “application[s] examined in accordance with the rules” in force when they file an application.437 The Portuguese courts had interfered with these rights by refusing to register the “Budweiser” mark in reliance on the 1986 bilateral agreement.438 The refusal resulted in a “total inability to exploit the mark commercially” in Portugal without the payment of compensation. For this reason, the interference did not strike a fair balance between the company’s property rights and the general interest.439 The Grand Chamber Judgment. Anheuser-Busch petitioned for a review of the Chamber’s ruling before the Grand Chamber. The ECHR granted the company’s request, received additional arguments from the parties, and issued a revised judgment in January 2007. By a fifteen-to-two vote, the ECHR held that Portugal had not violated Article 1. Unlike the Chamber judgment, however, the Grand Chamber advanced once step further 432 433 434 435 436 437 438 439

Id. at 857. Id. at 858. Id. Id. Id. at 858–60 (dissenting opinions of Judges Costa and Cabral Barreto). Id. at 859. Id. Id. at 859–60.

448 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y in the analytical framework outlined above.440 Specifically, the majority held that property rights in the European Convention apply to trademark applications as well as to registered marks.441 To reach this result, the Grand Chamber reviewed the “bundle of financial rights and interests that arise upon an application” to register a mark. These rights and interests enable applicants to enter into transactions (such as assignments or licensing agreements) that may have “substantial financial value.” The majority categorically rejected Portugal’s claim that these transactions have only “negligible or symbolic value,” citing the numerous rights that domestic law grants to trademark applicants. The economic value of trademark applications was especially likely in the case of Anheuser-Busch’s “Budweiser” mark, which the ECHR recognized as enjoying “international renown.”442 The Court next turned to the Chamber’s conclusion that trademark applicants possess only conditional rights prior to registration, a status that precludes their protection under Article 1. The majority acknowledged the conditional status of the rights that attach to trademark applications. But it reasoned that when it filed its application for registration, the applicant company was entitled to expect that it would be examined under the applicable legislation if it satisfied the other relevant substantive and procedural conditions. The applicant company therefore owned a set of proprietary rights . . . that were recognised under Portuguese law, even though they could be revoked under certain conditions.443 The Court thus held that Article 1 was “applicable in the instant case,” a conclusion that made it “unnecessary . . . to examine whether the applicant company could claim to have had a ‘legitimate expectation.’”444 b. The Significance of Anheuser-Busch’s Extension of Article 1 to Trademark Applications Before analyzing the next stage in the Grand Chamber’s analysis, it is worth pausing to consider the significance of the Court’s decision to overrule the Chamber and to apply European Convention’s property rights clause to Anheuser-Busch’s application to register the “Budweiser” mark. In particular, the Grand Chamber’s judgment raises at least three issues that will affect the future relationship between the European human rights system and national and regional intellectual property laws. The first issue concerns the European-wide influence of the Court’s ruling. As a formal matter, ECHR judgments only bind the parties to the dispute. They do not have binding precedential effect for future controversies involving other complainants or respondent states. In practice, however, many ECHR rulings have trans-jurisdictional consequences. These effects are especially pronounced when the Court departs from its normal practice

440 441

See supra Part III (introductory paragraph). Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep. 830 [36], 850 (Grand Chamber

2007). 442

Id. Id. 444 Id. The majority’s holding logically implies that trademark applications are “existing possessions,” the only other temporal category of property rights protected by Article 1. See supra Part II.B. It is uncertain, however, whether the Grand Chamber placed trademark applications in this category, since it stated only that such applications “g[i]ve rise to interests of a proprietary nature.” Anheuser-Busch, 45 Eur. H.R. Rep. at 850 (Grand Chamber). In contrast to the majority, the concurrence and dissent analyzed trademark applications under the rubric of “legitimate expectations.” Id. (joint concurring opinion of Judges Steiner & Hajiyev); id. at ¶¶ 5–6 (in the joint dissenting opinion of Judges Caflisch & Cabral Barreto). 443

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of resolving cases on narrow, fact-specific grounds and includes general statements of principle in its judgments.445 A close reading of the Grand Chamber’s analysis suggests that Anheuser-Busch is just such a case. Although the Court refers to facts specific to the dispute between the two brewers, such as the claim that “Budweiser” is a well-known mark, several aspects of the decision suggest that the judges intend the case to apply more broadly. These include the Court’s canvassing of international, regional, and national trademark treaties and statutes; its discussion of the economic value of trademark applications in a market economy; and the phrasing of its holding—that “the applicant company’s legal position as an applicant for the registration of a trade mark came within Article 1.”446 The Court’s inclusion of these general principles strongly suggests that its analysis of Article 1 applies to applications to register trademarks in all forty-seven European Convention member states. A second unsettled issue concerns the consequences of the Grand Chamber’s analysis for applications to register other forms of intellectual property, such as patents, industrial designs, plant varieties, and integrated circuits. The Court’s twin focus on (1) the priority, exploitation, and transfer rights that international, regional, and national laws grant to trademark applicants, and (2) the practical economic value that such applications possess, suggests that the ECHR will examine these same two factors to decide whether to extend Article 1 to applications to register these other forms of intellectual property. ` The Court’s judgment does not expressly delineate the relationship between the two factors. Its analysis strongly suggests, however, that the legal recognition of these exclusive rights creates a presumption of economic value, even if the applicant did not itself assign, license or otherwise derive financial benefit from the application.447 Thus, to the extent that patent, industrial design, and similar laws confer such rights upon applications to register, those applications will fall within Article 1’s ambit.448 By contrast, if the relevant legal rules do not confer such rights, applicants will need to prove that they in fact engage in “legal transactions, such as a sale or license agreement for consideration.”449 Such evidence demonstrates that applications to register these other forms of intellectual property are “capable of possessing . . . substantial financial value” even in the absence of formal legal protection.450 A third consequence of the Grand Chamber’s decision relates to the ECHR’s jurisdiction to review the refusal of domestic industrial property offices and domestic courts to

445 See Robert Harmsen, The European Convention on Human Rights After Enlargement, 5 Int’l J. Hum. Rts. 18, 32–33 (2001) (discussing ECHR’s common practice of issuing narrow, fact-specific rulings rather than broad statements of principle). The most recent past President of the ECHR has urged the Court to abandon this practice. See Luzius Wildhaber, A Constitutional Future for the European Court of Human Rights, 23 Hum. Rts. L.J. 161, 162–63 (2002). 446 Anheuser-Busch, 45 Eur. H.R. Rep. at 150 (Grand Chamber) (emphasis added). 447 The fact that the ECHR did not reference Anheuser-Busch’s attempt to license its trademark application to Budìjovický Budvar in its analysis of the scope of Article 1 supports this view. See id. at 834 and 849. 448 See, e.g., European Patent Convention, Oct. 5, 1973, 1065 U.N.T.S. 199, art. 67 (defining the rights conferred by a European patent application after publication) and arts. 71-73 (describing a European patent application as “an object of property” and enumerating rights of applicants including transfer, assignment, and licensing); Council Regulation No. 6/2002, Community Designs, 2002 O.J. (L 3/1) 1 (EC), available at http://oami. europa.eu/ en/ design/pdf/reg2002_6.pdf, art. 12 (term of protection exists from the date of filing of an application to register a Community design) and art. 34 (describing an “application for a registered Community design as an object of property”). 449 Anheuser-Busch, 45 Eur. H.R. Rep. at 850 (Grand Chamber). 450 Id.

450 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y register trademarks on grounds such as consumer confusion or lack of distinctiveness.451 These issues lurked in the background of the Anheuser-Busch case. The parties disputed whether the Portuguese courts had rejected the American brewer’s 1981 application to register “Budweiser” not only because it conflicted with the 1986 bilateral agreement, but also because it was confusingly similar to the Czech brewer’s appellation of origin.452 Neither the Chamber nor the Grand Chamber addressed this issue. But its importance to the parties—and to future ECHR intellectual property disputes—is easy to explain. Consumer confusion has long been accepted as a valid basis for refusing to register trademarks. Had such confusion in fact been the basis for the refusal to register “Budweiser,” Anheuser-Busch could not have argued that Portugal had interfered with its statutory right of priority by enforcing the subsequently adopted bilateral treaty. Rather, the American brewer could only have complained that the domestic courts had misjudged the reputation and consumer associations of the two companies’ brands in the Portuguese beer market. It is here that the consequences of the different approaches adopted by the Chamber and Grand Chamber are illustrated most starkly. By deciding that Article 1 is not implicated until after a trademark registration is final, the Chamber adopted a bright-line rule that categorically precluded the ECHR from reviewing national court and administrative agency decisions that refuse to register trademarks. By extending Article 1 to trademark applications (and, as I argue above, to applications for other registered rights) and holding that Anheuser-Busch was “entitled to expect that [its application] would be examined under the applicable legislation,”453 the Grand Chamber expanded the ECHR’s jurisdiction to review the denial of registrations on any ground recognized in national and regional intellectual property laws. As I explain below, the ECHR’s review of complaints challenging refusals to register is likely to be quite limited.454 It nevertheless creates an additional layer of European human rights scrutiny over domestic intellectual property registration systems. B. HAS THE STATE INTERFERED WITH A POSSESSION?

After concluding that a particular form of intellectual property qualifies as an “existing possession” or a “legitimate expectation” protected by Article 1, the ECHR and the European Commission must next consider the second question identified above—whether the state has “interfered” with such a possession or expectation. The tribunals have identified two distinct types of interferences: (1) government restrictions on the exercise of intellectual property rights, and (2) interferences that result from domestic intellectual property litigation between private parties.455 451 First Council Directive 89/104/EEC of 21 December 1988 to Approximate the Laws of the Member States Relating to Trade Marks, 1989 O.J. (L 40) 1, arts. 3–4 (setting forth mandatory and permissive grounds for denying registration of a trademark). 452 Compare Anheuser-Busch’s claim that during the domestic litigation, “there had never been any question of a risk of confusion with the Czech company’s products,” Anheuser-Busch v. Portugal, App. No. 73049/01, 44 Eur. H.R. Rep. 846 [42], 854 with Portugal’s response that the Supreme Court considered both the risk of confusion and the 1986 bilateral agreement in refusing to register the American company’s trademark, id. at 855. 453 Anheuser-Busch, 45 Eur. H.R. Rep. at 850 (Grand Chamber). 454 See infra notes 513, 516–17 and text accompanying. 455 The ECHR and the European Commission have also indirectly considered the interference issue in two other categories of Article 1 cases. In the first category, the tribunals decline to review a claim under Article 1 if they have already examined it under another provision of the Convention. See British Am. Tobacco Co. Ltd. v. The Netherlands, 331 Eur. Ct. H.R. (ser. A), ¶ 91 (1995) (refusing to consider Article 1 claim challenging denial of patent application where claim was “in substance identical to that already examined and rejected in the context of ” complainant’s Article 6 challenge to the independence and impartiality of the Appeals Division of the Dutch

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1. Restrictions on the Exercise of Intellectual Property Rights As explained above, government “interferences” with property rights take two principal forms—use controls and deprivations.456 The ECHR and the European Commission have considered state interferences with intellectual property on only two occasions. In both instances, the tribunals concluded that the government had restricted the exercise of intellectual property rights—that is, had controlled its use—but had not completely deprived rights holders of their possessions. The most recent analysis of use controls appears in the dissenting opinion to the Anheuser-Busch Chamber judgment. According to the two dissenting judges, the Portuguese Supreme Court’s “refusal to register” the Budweiser trademark in Portugal “indisputably amount[ed] to [an] interference with the applicant company’s right of property.” The dissenting judges rejected the American brewer’s claim that the refusal to register was an expropriation of its trademark. The state had not deprived Anheuser-Busch of its ownership interest but instead had prevented the company from “exploit[ing] the mark commercially” in the country.457 Fifteen years earlier, the Commission considered whether a compulsory license issued by the Dutch Patent Office amounted to an interference within the meaning of Article 1.458 The government argued that such licenses were not interferences because “patents are granted subject to the provisions of the Patent Act, which expressly limits the scope of the patent owners’ rights by providing for the grant of compulsory licences. . . .” The Commission disagreed. It reasoned that “a patent initially confers on its owner the sole right of exploitation. The subsequent grant of rights to others under the patent is not an

Patent Office); Dimitrievski v. The Former Yugoslav Republic of Macedonia, App. No. 26602/02, ¶ 7.2 (2006) (admissibility decision) (refusing to examine alleged violation of right of property where the complaint under Article 1 “relate[d] solely to the outcome of the proceedings” and was “in fact a restatement of the complaints under Article 6”). A second category of indirect interference has arisen in challenges to the authority of the European Patent Office (EPO) to review patent applications and register patents. Inventors file applications directly with the EPO, whose examiners decide whether the applications meet the eligibility requirements of the European Patent Convention (EPC). If the EPO grants the application, the patent is automatically protected in all states that have ratified the EPC. National industrial property offices and national courts may not deny a patent that that the EPO has granted nor grant a patent that the EPO has denied. In four cases, inventors whose patent applications were rejected challenged the state’s delegation of decision-making authority to the EPO. In each case, the European Commission rejected the challenge. The Commission highlighted the numerous benefits of the EPO’s centralized review and registration system and emphasized the EPC’s “procedural safeguards,” including an appeals procedure staffed by independent legal and technical experts. In light of these “equivalent protections” for the rights of patent applicants, the states’ delegation of authority to the EPO to review patent applications and register patents did not interfere with a possession in a manner proscribed by Article 1. Lenzing AG v. Germany, App. No. 39025/97 at 5–6 (1998) (admissibility decision); Lenzing AG v. United Kingdom, 94 Eur. Comm’n H.R. Dec. & Rep. 136, 144 (1998) (admissibility decision); Heinz v. The Contracting Parties also Parties to the Eur Pat. Convention, App. No. 21090/92, 76 Eur. Comm’n H.R. Dec. & Rep. 125 (1994) (admissibility decision); Reber v. Germany, App. No. 27410/95, 22 Eur. H.R. Rep. 98 (1996) (admissibility decision). The ECHR has never addressed this issue, although it recently cited the Commission’s case law with approval. See Bosphorus Hava Yollari Turízm ve Tícaret Anoním Şírketí v. Ireland, App. No. 45036/98, 42 Eur. H.R. Rep. 1 [1], ¶¶ 108 and 155 (Grand Chamber 2005) (analyzing the delegation of authority by the European Convention’s member states to the European Union). 456 See supra Part II.C. 457 Anheuser-Busch, 44 Eur. H.R. Rep. at 859 (Chamber) (dissenting opinion of Judges Costa & Cabral Barreto). The two judges who dissented from the Grand Chamber’s judgment did not discuss whether Portugal’s refusal to give priority to the Budweiser trademark was a control of a possession or a more substantial deprivation of property. They merely concluded that, by applying the 1986 bilateral agreement retroactively, “the Portuguese authorities have objectively caused damage to the applicant company.” Anheuser-Busch, 45 Eur. H.R. Rep. at 857 (Grand Chamber) (joint dissenting opinion of Judges Caflisch & Cabral Barreto). 458 Smith Kline & French Lab. Ltd. v. Netherlands, 66 Eur. Comm’n H.R. Dec. & Rep. 70, 79 (1990).

452 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y inevitable or automatic consequence.” The Patent Office’s decision to grant a compulsory license thus “constituted a control of the use of property.”459 2. Interferences Resulting from Litigation Between Private Parties A second category of interference cases arises from domestic litigation between private parties. It is axiomatic that only states parties to the European Convention can violate the rights and freedoms it protects. The ECHR thus has “no jurisdiction to consider applications directed against private individuals or businesses.”460 When those individuals or businesses turn to national courts to resolve their property disputes, however, the decisions of those courts trigger the application of Article 1. The ECHR and the European Commission have thus recognized that domestic judicial rulings are a form of state action.461 At the same time, they have been wary of treating those rulings as “interferences” with property. The tribunals have considered the interference issue in three types of intellectual property disputes involving private parties: (1) cases in which national courts adjudicate a contract involving the licensing or transfer of intellectual property; (2) cases in which national courts reject an intellectual property owner’s infringement claims; and (3) cases in which national courts resolve competing claims of intellectual property ownership. I analyze these three categories of disputes below, highlighting the ways in which the Grand Chamber in Anheuser-Busch v. Portugal expanded member states’ obligations relating to domestic litigation between private parties. a. Adjudication of Intellectual Property Contracts Aral v. Turkey,462 a previously unnoticed admissibility decision, reveals the tribunals’ treatment of the first type of dispute—private contract claims involving the licensing or transfer of intellectual property rights. In Aral, the Commission dismissed a complaint filed by three artists who alleged that Turkey had violated Article 1 when its courts enforced a contract that governed the rights to cartoon characters that the artists had created.463 The Commission held that the case concerns a commercial dispute between private parties. The State’s intervention in the case only occurred through its courts. . . . [T]here is no interference with the right to peaceful enjoyment of possessions when, pursuant to the domestic law and a contract regulating the relationship between the parties, a judge orders one party to that contract to surrender a possession to another, unless it arbitrarily and unjustly deprives that person of property in favour of another.464 After briefly reviewing the domestic court decisions, which had interpreted the contract and Turkish intellectual property law to divide ownership of the cartoons between the

459 Id. The Commission’s conclusion raises the question of whether such a control is justified. I address this issue below. See infra Part III.C. 460 Reynbakh v. Russia, App. No. 23405/03, ¶ 18 (2005). Only one decision applies this principle to intellectual property. See Mihãilescu v. Romania, App. No. 47748/99, 5–6 (2003) (admissibility decision) (dismissing Article 1 claim by patent owner who was unable to enforce a domestic court damage award against a state enterprise which had been privatized and later declared bankrupt). 461 See S.Ö. v. Turkey, App. No. 31138/96, ¶ 1 (1999) (admissibility decision) (stating that a transfer of property ownership was “enforced by a court order and thus by an act of a State organ”). 462 Aral v. Turkey, App. No. 24563/94 (1998) (admissibility decision). 463 Id. at 2. 464 Id. at 6.

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parties,465 the Commission found no evidence that “the courts acted in an arbitrary and unreasonable manner. Accordingly, there is no shortcoming attributable to the State.”466 b. Rejection of Domestic Infringement Claims Melnychuk v. Ukraine467 exemplifies the ECHR’s analysis of the second category of private disputes—cases in which an intellectual property owner challenges a national court’s dismissal of its infringement claims against a third party. Melnychuk involved a dispute between a writer and a newspaper that published disparaging reviews of his books. The writer asked the newspaper to publish his reply to the reviews. When the newspaper refused, the author filed a complaint with the Ukrainian courts seeking “compensation for pecuniary and non-pecuniary damage caused by the publication” of the critical book reviews. He also claimed that the newspaper had violated his copyright, although he did not explain the basis for the alleged infringement. The trial court dismissed Melnychuk’s complaint in its entirety. As to the copyright claim, the court stated simply that his allegations were “unsubstantiated.”468 After exhausting all domestic appeals, Melnychuk filed a complaint with the ECHR. His complaint included a claim that “the newspaper articles about his books violated his copyright.”469 The Court rejected the claim, stating that “the fact that the State, through its judicial system, provided a forum for the determination of the applicant’s rights and obligations does not automatically engage its responsibility under Article 1 of Protocol No. 1.” Rather, the state’s responsibility in such cases is only triggered in “exceptional circumstances” for “losses caused by arbitrary determinations.” Melnychuk’s complaint did not meet this high threshold. To the contrary, “the national courts proceeded in accordance with domestic law, giving full reasons for their decisions. Thus, their assessment was not flawed by arbitrariness or manifest unreasonableness.”470 The European tribunals’ limited scrutiny of national court rulings in Melnychuk and Aral indicates that challenges to garden variety infringement and breach of contract actions will rarely succeed. The ECHR did not simply dismiss Melnychuk’s weak copyright claims out of hand, but instead emphasized the exceptionally narrow scope of review in such cases. This suggests that the Court will defer to domestic judges’ resolution of infringement and breach of contract disputes even where an applicant’s claims have greater merit. Such an approach is consistent with the European Convention’s core objective—preventing governments and public officials from violating civil and political liberties. As stated above, the treaty has no “horizontal effect” between non-state actors.471 The ECHR will thus only rarely find fault with “the determination of [property] rights in disputes between private persons.”472 465 Id. at 2. The Turkish court held that the magazine publisher owned cartoons which had been “published or which were unpublished but held in the archives of the magazines.” But it also held that the artists “could continue to draw the same characters . . . in association with other subjects and stories [and] in other magazines or newspapers.” Id. at 6. 466 Id. at 6. 467 Melnychuk v. Ukraine, App. No. 28743/03, (2005) (admissibility decision) 468 Id. at 3. 469 Id. at 8. 470 Id. 471 This contrasts with many provisions of EC law, which have both a “vertical effect (between the State and the individual), [and] a horizontal effect (between individuals).” Bosphorus Hava Yollari Turízm ve Tícaret Anoním Şírketí v. Ireland, App. No. 45036/98, 42 Eur. H.R. Rep. 1 [1], 32, and 34 (Grand Chamber 2005) (internal quotations omitted). It bears noting, however, that some national court decisions have given horizontal effect to certain provisions of the European Convention. See Geiger, Constitutionalizing Intellectual Property Law, supra note 15, at 384. 472 Voyager Limited v. Turkey, App. No. 35045/97, 10 (2001) (admissibility decision).

454 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y c. Resolution of Competing Ownership Claims A third category of Article 1 interference cases arises when national courts resolve competing claims of intellectual property ownership. This issue arose in Anheuser-Busch, a case in which the Portuguese courts confronted “the conflicting arguments of two private parties concerning the right to use the name ‘Budweiser’ as a trade mark or [as an] appellation of origin.”473 As explained above, the courts ruled in favor of the Czech owner of the appellation on the basis of a 1986 bilateral agreement between the two countries. The American brewer challenged that ruling before the ECHR, alleging that Portugal had violated the right of priority attaching to its previously-filed 1981 application to register Budweiser as a trademark.474 After concluding that trademark applications were protected by Article 1, the Grand Chamber considered whether the Portuguese courts had interfered with AnheuserBusch’s application to register Budweiser. In analyzing this issue, the ECHR struggled to knit together two previously unrelated strands of case law. One line of decisions concerned “the retrospective application of legislation whose effect is to deprive someone of a pre-existing asset.”475 The retroactivity of such domestic laws “may constitute [an] interference that is liable to upset the fair balance that has to be maintained between the demands of the general interest on the one hand and the protection of the right to peaceful enjoyment of possessions on the other.”476 Previously, the ECHR had applied this principle to interactions between the government and private parties.477 But in the year prior to the Grand Chamber’s judgment, the Court extended the principle “to cases in which the dispute is between private individuals and the State is not itself a party to the proceedings.”478 These decisions provided support for Anheuser-Busch’s claim that Portugal had violated Article 1 by applying the 1986 bilateral treaty retroactively to its 1981 trademark application. The American brewer’s complaint also intersected with a second strand of ECHR jurisprudence—cases challenging the interpretation or application of domestic law by national courts. When confronted with such challenges, the Court has consistently held that it cannot review errors of fact or law that domestic judges have allegedly committed. Rather, its jurisdiction is limited to ensuring that national court rulings “are not flawed by arbitrariness or otherwise manifestly unreasonable” and that their interpretations of domestic law do not violate the Convention.479 To the extent that Anheuser-Busch’s arguments were premised on the Portuguese courts’ misinterpretation of the bilateral treaty and the Code of Industrial Property, the ECHR had solid jurisprudential grounds for rejecting its complaint. The Grand Chamber reconciled these two lines of case law by emphasizing that the retroactive application of the 1986 bilateral treaty was itself an unsettled issue. Unlike prior decisions in which “the retrospective effect of the legislation [was] indisputable . . . [and] intentional,” the application of the bilateral treaty to pending trademark applications presented “difficult questions of interpretation of domestic law.”480 The complexities of the case were compounded by the fact that, at the time of the treaty’s entry into 473

Anheuser-Busch v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep. 830 [36], 852 (Grand Chamber). See supra Part III.A.2.a. 475 Anheuser-Busch, 45 Eur. H.R. Rep. at 852 (Grand Chamber) 476 Id. at 852. 477 See Kopecky v. Slovakia, 2004-IX Eur. Ct. H.R. 125, ¶¶ 45–47 (Grand Chamber) (reviewing case law). 478 Anheuser-Busch, 45 Eur. H.R. Rep. at 851 (Grand Chamber) (citing Lecarpentier v. France, App. No. 67847/01, ¶¶ 48, 51, and 52 (2006); Cabourdin v. France, App. No. 60796/00, ¶¶ 28–30 (2006)). 479 Anheuser-Busch, 45 Eur. H.R. Rep. at 851 (Grand Chamber) 480 Id. at 851–52. 474

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force, the appellation of origin was still registered and the parties were attempting to negotiate a license agreement. Given these unique circumstances, the ECHR concluded that the Portuguese Supreme Court’s rejection of Anheuser-Busch’s claim of priority and its interpretation of the bilateral treaty were neither arbitrary nor manifestly unreasonable.481 As a result, the Supreme Court’s ruling did not “interfere” with the application to register Budweiser as a trademark and thus did not violate Article 1. The ECHR’s narrow, fact-specific disposition of the case gives broad deference to national courts to interpret intellectual property statutes and treaties incorporated into domestic law. But the Grand Chamber did not limit its analysis to resolving the dispute between parties. In addition to affirming the difficulty of reconciling retroactive property restrictions with the Convention, the Court made the following general statement: [E]ven in cases involving litigation between individuals and companies, the obligations of the State under Article 1 of Protocol No. 1 entail the taking of measures necessary to protect the right of property. In particular, the State is under an obligation to afford the parties to the dispute judicial procedures which offer the necessary procedural guarantees and therefore enable the domestic courts and tribunals to adjudicate effectively and fairly in the light of the applicable law.482 The Grand Chamber did not elaborate upon these seemingly basic due process requirements. As I explain below, however, the Court’s statement has important implications for its future review of intellectual property disputes under Article 1. In particular, the ECHR may interpret these due process guarantees as requiring member states to provide statutory, administrative, and judicial mechanisms to enable intellectual property owners to prevent private parties from infringing their protected works.483 C. HAS THE STATE ADEQUATELY JUSTIFIED ITS INTERFERENCE WITH A POSSESSION?

If the ECHR concludes that a possession exists and that the state has interfered with that possession, it must then consider a third and final issue—whether the state has adequately justified that interference. The standard for assessing such justifications is well-settled. Every interference must be specified by law, pursue a legitimate aim, and achieve a fair and proportional balance between the rights of the property owner and the public interest.484 The European tribunals use this multi-part standard to assess the social policies and values that underlie state regulations of property.485 1. Dependent Patent Compulsory Licenses The ECHR has never applied this standard to intellectual property, and the European Commission has done so only once. In Smith Kline & French Laboratories, discussed above,486 the Commission upheld the grant of a compulsory license to the owner of a dependent patent to use a previously-registered invention. After the company that owned the dominant patent refused to negotiate a license, the dependent patent owner asked the Dutch Patent Office to award a compulsory license. The Office issued the license, which the Dutch courts upheld on appeal.487 481

Id. at 852. Id. at 851. 483 See infra Part IV.B. 484 See supra Part II.D. 485 See Çoban, supra note 26, at 195-210. 486 See supra Part III.B.1. 487 Smith Kline & French Lab. Ltd. v. Netherlands, App. No. 12633/87, 66 Eur. Comm’n H.R. Dec. & Rep. 70, 72–73 (1990) (admissibility decision). 482

456 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y The dominant patent owner then filed a complaint with the European Commission, alleging that the compulsory license violated its exclusive exploitation rights. The Commission agreed that the license interfered with a possession, but it held that the interference was justifiable and thus did not violate Article 1. The Commission first found that the compulsory license was provided by law — the Dutch Patent Act — and pursued the legitimate aim of “encouraging technological and economic development.” The Commission then emphasized that “many” European Convention member states restrict a patentee’s exclusive rights to enable “other persons to make use of a particular patented product or process . . . for the purpose of preventing the long term hampering of technological progress and economic activity.”488 As to the crucial issue of proportionality, the Commission emphasized the social benefits of granting compulsory licenses to dependent patent owners as well as the protections such licenses afford to dominant patent owners: [T]he Commission notes that the provision only comes into effect where such license is necessary for the working of a patent of the same or later date and the license should be limited to what is required for the working of the patent. Further, the owner of the dominant patent is entitled to royalties in respect of each compulsory license granted under the legislation and receives reciprocal rights under the dependent patent. . . . [T]he Commission finds that the framework imposed by the legislation is intended to prevent the abuse of monopoly situations and encourage development and that this method of pursing that aim falls within the margin of appreciation accorded to the Contracting State. The Commission accordingly finds that the control of use in the circumstances of this case did not fail to strike a fair balance between the interests of the applicant company and the general interest. . . .489 This short paragraph reveals a fairly sophisticated understanding of patent policy, especially for a human rights tribunal’s foray into substantive intellectual property law.490 It also appears to afford considerable leeway to national decision makers to restrict exclusive rights as a means of furthering intellectual property’s underlying social functions. As I explain in the next section, however, several factors limit the precedential value of the Commission’s analysis for future Article 1 disputes over the validity of exceptions and limitations to intellectual property rights. 2. Other Exceptions and Limitations to Exclusive Rights First, the Commission’s holding is narrow and fact-specific. The scope of a dependent patent compulsory license is carefully limited to the justifications for granting it. In addition, dominant patent owners receive considerable benefits in exchange for the diminution of their exclusive rights, including remuneration and a cross-license to exploit the dependent invention. Where these benefits are absent—such as for exceptions to exclusive rights whose substantive contours are more capacious and do not require remuneration—the ECHR may be less willing to defer to national decision makers in striking a balance between private property and the public interest. In this respect, it is noteworthy that the two dissenting judges in Anheuser-Busch believed that Portugal had violated Article 1’s proportionality requirement by failing to compensate the American company for the refusal to register its trademark application.491 488

Id. at 80. Id. 490 The Commission’s decision in Smith Kline was its first analysis of an intellectual property dispute under Article 1. See supra Part III.B.1 and note 386. 491 See Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 44 Eur. H.R. Rep. 836 [42], 858 (2005) (dissenting opinion of Judges Costa and Cabral Barreto). 489

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Second, the Commission upholds a limitation on patents that unambiguously protects both the rights of other intellectual property owners and the public interest in technological progress. The European Convention repeatedly refers to rights of others as a justification for limiting civil and political liberties.492 The Commission’s reasoning therefore suggests that other exceptions to intellectual property rights, such as private copying, parody, noncommercial uses, are more likely to be upheld if the ECHR interprets them as safeguards for protecting the human rights of users and consumers—an issue that the Court has yet to address. The subsequent history of Smith Kline & French Laboratories provides a third basis for giving limited precedential weight to the Commission’s analysis. Although the Commission rejected the dominant patent owner’s Article 1 claim, it was more troubled by the assertion that the Dutch Patent Office was not an independent or impartial tribunal.493 After the Commission decided to review this claim on the merits, the patent owner and the Dutch government entered into settlement negotiations. The chief component of the state’s settlement offer was a pending revision of Dutch patent law which vested the civil courts, rather than the Patent Office, with “the decision making powers for the grant or refusal of a compulsory license.” The amendment also restricted the compulsory licenses for dependent patent owners to “cases where the dependent, competing patent involves substantial technical progress in the field.”494 The Commission, which reviewed all proposed settlements to determine whether they manifest “respect for human rights,” approved the parties’ agreement.495 This suggests that its rejection of the company’s Article 1 claim was in fact a close question. It also suggests that the Commission was untroubled by the state’s decision to narrow the statutory exceptions to a patent owner’s exclusive rights without considering the social policies underlying such a change in the law. This Commission’s approval of the settlement thus leaves unresolved precisely how much discretion national decision makers enjoy to restrict intellectual property in the public interest. IV. FORECASTING THE FUTURE: THREE PARADIGMS FOR ECHR ADJUDICATION OF INTELLECTUAL PROPERTY DISPUTES to analyze the ECHR’s intellectual property case law under Article 1. Such a framework has three benefits. First, it provides an organizing principle to explain the relationships among a group of diverse judicial rulings, including several decisions that commentators have not previously analyzed. Second, it exposes the numerous points of intersection between European human rights law and international and domestic intellectual property law. And third, it provides an informed basis for predicting how ECHR intellectual property jurisprudence will develop in the future. 492 See European Convention, supra note 334, at arts. 8(2), 9(2), 10(2), and 11(2) (all recognizing “the rights and freedoms of others” as a legitimate basis for restricting rights). 493 Smith Kline, 66 Eur. Comm’n H.R. Dec. & Rep. at 78. 494 Smith Kline & French Lab. v. Netherlands, Application No. 12633/87, ¶ 11 (1991) (Commission Report). This revision was later enacted. See Patents Act of the Kingdom 1995, art. 57.4, Stb. 1995 No. 51 (Dutch Patent Act of 1995) available at http://www.wipo.int/clea/docs_new/en/nl/nl020en.html#JD_NL020_57_4 (authorizing dependent patent compulsory licenses only where “the patent for which the license is requested represents a considerable advance”). This clause implements a provision of TRIPs which requires dependent patent to contain “a considerable technical advance of considerable economic significance”in relation to the dominant patent. Id. at n.4 (paraphrasing TRIPs, supra note 420, art. 31(l)(i)). 495 Smith Kline, Application No. 12633/87 at ¶ 3 (1991) (Commission Report). After the Commission’s abolition in 1998, the ECHR performs this settlement review function and applies the identical legal standard. See European Convention, supra note 334, art. 38(b).

458 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y This Part forecasts the evolution of the ECHR’s intellectual property case law in greater depth. It does so by developing and analyzing three paradigms that the ECHR may apply when deciding future disputes relating to intellectual property. I label these approaches the rule of law paradigm, the enforcement paradigm, and the intellectual property balancing paradigm. These three paradigms, illustrated below with contemporary examples, provide competing visions of how to conceptualize intellectual property’s place in the European human rights system. Each paradigm finds support in the Court’s case law and in the interpretive methodologies that ECHR judges use to further he European Convention’s objectives and values.496 However, the three paradigms have radically different consequences for the region’s innovation and creativity policies. I analyze these consequences below, emphasizing the sometimes problematic effects of overlaying two previously distinct legal regimes. A. THE RULE OF LAW PARADIGM

Many legal scholars and philosophers recognize the importance of protecting property as a fundamental right, although they differ on the appropriate justification for and scope of that protection.497 As noted above, the decision to include a right of property in the European Convention was contested and controversial.498 The drafters did not endorse any single philosophical or theoretical rationale for property rights. But the history and text of Article 1 reflects a consensus on the basic proposition that protection of private property is essential to preserving the rule of law. The rule of law is a concept that suffuses the entire European Convention.499 But it is expressed with particular forcefulness in Article 1, which provides that deprivations of property must be “subject to the conditions provided for by law” and requires controls on the use of property to be based on “such laws as [the state] deems necessary.”500 The ECHR has interpreted this dual reference to law as establishing Article 1’s “first and most important requirement”—that “any interference by a public authority with the peaceful enjoyment of possessions should be lawful. . . . [T]he principle of lawfulness presupposes that the applicable provisions of domestic law are sufficiently accessible, precise and foreseeable in their application.”501 By compelling states to regulate property pursuant to previously established rules with these characteristics, the Court prevents arbitrary and excessive exercises of government power.502 The desire to uphold the rule of law also explains and justifies Article 1’s application to corporations, since arbitrary deprivations of property do not only affect natural persons.503 Under a rule of law paradigm, therefore, the ECHR would treat intellectual property no differently than any other type of real, personal, or intangible property protected by Article 1. The Court would not consider the public good qualities of intellectual property rights, nor would it concern itself with the social and cultural policies which justify the 496

See supra notes 355–7 and text accompanying (analyzing the ECHR’s interpretive methodologies). See generally Jeremy Waldron, The Right to Private Property (1990). For a comprehensive review of the literature, see Çoban, supra note 358, at 35–77. 498 See supra Part II.A. 499 See Emberland, supra note 355, at 44. 500 Article 1, supra note 337. 501 Edwards v. Malta, App. No. 17647/04, ¶ 60 (2006). See also Zlínsat, Spol. S R.O. v. Bulgaria, App. No. 57785/00, ¶ 98 (2006) (“The requirement of lawfulness . . . means not only compliance with the relevant provisions of domestic law, but also compatibility with the rule of law.”). 502 Emberland, supra note 355, at 46 (“When the Court invokes the rule of law as an interpretive argument, it emphasizes its capacity to prevent governmental arbitrariness and excessive wielding of public power.”) 503 See id. at 44 (“The rule of law also helps explain why corporate persons enjoy ECHR protection”). 497

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state’s protection of those rights. Instead, it would find fault only with arbitrary government conduct, such as ultra vires actions, failure to follow previously established rules and procedures, or laws that contravene the rule of law principles described above.504 The Court’s scrutiny of national decision makers would thus be minimal and unobtrusive. It would allow governments unfettered discretion to fashion their domestic innovation and creativity policies as they see fit, provided that they adhere to previously established rules embodying those policies. Does the ECHR believe that intellectual property complaints should be analyzed under the rule of law paradigm? The Grand Chamber intimated as much in Anheuser-Busch when it emphasized that it could not “take the place of the national courts, its role being rather to ensure that the decisions of those courts are not flawed by arbitrariness or otherwise manifestly unreasonable.”505 Similarly, in Melnychuck, the Court held that providing intellectual property owners with a judicial forum to adjudicate domestic infringement claims did not “automatically engage [the state’s] responsibility” under Article 1. Only “in exceptional circumstances” could the state “be held responsible for losses caused by arbitrary determinations.”506 These quotations suggest that the ECHR will avoid using Article 1 as a vehicle to review the micro-foundations of domestic intellectual property laws. Other than these general statements, however, neither the Court nor the Commission has considered how the rule of law paradigm applies to intellectual property. But the tribunals have frequently addressed arbitrary government conduct in other property rights contexts. For example, the ECHR has found fault with a domestic law that authorized an executive branch official to obtain a court order quashing a final, executed judgment that restored nationalized real property to its former owner.507 It has disapproved of a statute conferring unbounded discretion on a prosecutor to suspend a contract to privatize real property.508 It has criticized the withdrawal of a banking license without prior notice or a procedure for subsequent administrative or judicial review.509 It has condemned a state’s failure to comply with final judgments ordering it to pay pension and disability benefits.510 And it has found a violation of Article 1 when the eviction and continuing dispossession of a lessee was “manifestly in breach” of domestic law.511 Extrapolating from these cases, it is possible to predict how the ECHR would apply the rule of law paradigm to intellectual property disputes. Government agencies that themselves infringe intellectual property rights arguably provide the strongest case for finding a violation of Article 1 using this approach. A ministry that installs copyrighted software on all of its desktop computers without obtaining a license from the software’s owner provides a ready example. A state-owned enterprise’s failure to pay royalties to an inventor whose patented product or process it had previously licensed would be equally problematic from a rule of law perspective.512 504

See Çoban, supra note 358, at 196–97 (reviewing case law). Anheuser-Busch, Inc. v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep. 830 [36], 851 (Grand Chamber 2007) (emphasis added). 506 Melnychuk v. Ukraine, App.No. 28743/03, ¶ 4 (2005) (admissibility decision), 507 Brumãrescu v. Romania, 1999-VII Eur. Ct. H.R. 201, 209-26. 508 Zlínsat, Spol. S R.O. v. Bulgaria, Application No. 57785/00, at 23 (2006) 509 Capital Bank AD v. Bulgaria, App. No. 49429/99, 44 Eur. H.R. Rep 952 [48], 984–85 (2007). 510 Chebotarev v. Russia, App.No. 23795/02, at 6 (2006) 511 Iatridis v. Greece, App. No. 31107/96, 30 Eur. H.R. Rep. 97, 20 (Grand Chamber 2000). 512 In Mihãilescu v. Romania, App. No. 47748/99 (2003), a state-owned enterprise unilaterally reduced royalties to a patent owner whose invention it had previously licensed. Two decades later, a new government enacted a statute authorizing compensation to inventors whose royalties had been reduced. On the basis of the statute, the patent owner filed suit against the enterprise, which had recently been privatized. A domestic court awarded compensation to the patent owner, but the owner was unable to execute the judgment against the enterprise, which 505

460 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y Other instances of arbitrary government conduct may involve the judiciary. A domestic court that refuses to consider a trademark applicant’s plausible arguments in favor of registration illustrates one possible scenario.513 Another involves domestic infringement proceedings that are inexplicably or inexcusably prolonged, such that the right holder is effectively precluded from preventing unauthorized exploitation by third parties.514 In both instances, the state has failed to provide the minimal procedural guarantees to which property owners are entitled under the ECHR’s conception of the rule of law.515 The above examples must be distinguished from court decisions that invalidate a previously registered patent or trademark. It is an inherent feature of patent and trademark systems that third parties may challenge the validity and scope inventions and marks after administrative agencies have registered them. In fact, roughly half of all patents whose validity is later tested in litigation are found to be invalid.516 In this sense, registered rights are always conditional. Thus, although it is accurate to state that if a patent or trademark “is found invalid, the property right will have evaporated,”517 the dissolution of that property right raises no Article 1 concerns. Domestic laws that authorize governments to exploit patented inventions and copyrighted works without right holders’ consent present a closer question.518 On the surface, these statutes appear to authorize wholesale infringements similar to the software infringement and patent royalty examples described above. In fact, however, such laws allow governments to use private knowledge goods for the public’s benefit under previously specified conditions and for particular purposes.519 Because intellectual property rights are state-created monopolies, the ECHR should reject rights holders’ challenges to the application of these laws, provided that they are publicly available and drafted with sufficient prevision to enable rights holders to predict when the government may use their protected works.520 By contrast, the ECHR should find a violation of Article 1 where the state fails to comply with the conditions specified in these statutes, for example by refusing to pay the required compensation or by exceeding the scope of the privilege. had been declared bankrupt. The ECHR held that the enterprise was not a state actor and that, as a result, the patent owner’s inability to execute its judgment against it did not violate Article 1. Id. at 5–6. 513 Cf. Hiro Balani v. Spain, App. No. 18064/91, 19 Eur. H.R. Rep. 566, 572–73 (1995) (finding a violation of the right to a fair hearing where the Supreme Court failed to consider a trademark owner’s argument that its mark had priority over the trade name of a competitor that had successfully applied to cancel the mark). 514 See Stele v. Slovenia, App. No. 6549/02, 2 (2006) (friendly settlement) (approving the settlement of a complaint alleging a violation of Article 1 in which a domestic court had not acted on a patent owner’s infringement action for nearly 11 years). 515 See, e.g., Capital Bank AD v. Bulgaria, App. No. 49429/99, 44 Eur. H.R. Rep 952 [48], 984 (2007) (stating that although Article 1 “contains no explicit procedural requirements,” its provisions nevertheless imply that “any interference with the peaceful enjoyment of possessions must be accompanied by procedural guarantees affording to the individual or entity concerned a reasonable opportunity of presenting their case to the responsible authorities for the purpose of effectively challenging the measures interfering with the rights guaranteed by this provision.”). 516 Mark A. Lemley & Carl Shapiro, Probabilistic Patents, 19 J. Econ. Perspectives. 75, 76 (2005). 517 Id. at 75. 518 For summaries of such government use exemptions relating to copyright, see, for example, 2 Melville B. Nimmer & Paul E. Geller, International Copyright Law and Practice, GER § 8(2)(d)(iii) (2005) (Germany); id. ITA § 8(2)(b)(iii) (Italy); id. POL § 8(2)(c) (Poland); id. SWE § 8(2)(d)(iii) (Sweden); id. UK § 8(2)(c) (United Kingdom). For an analysis of foreign statutes authorizing government use of patented inventions, see LiLan Ren, Note, A Comparison of 28 U.S.C. § 1498(a) and Foreign Statutes and an Analysis of § 1498(a)’s Compliance with TRIPS, 41 Hous. L. Rev. 1659, 1664–69 (2005). 519 See Ren, supra note 518, at 1666, 1669 (reviewing European laws that provide for government use of patented inventions for purposes of, inter alia, national defense and producing or supplying drugs and medications). 520 Cf. De Graffenried v. United States, 29 Fed. Cl. 384, 387 (1993) (stating that a patent owner’s rights “do not include the right to exclude the government from using his or her patented invention” because “the statutory framework that defines a patent owner’s rights gives the government the authority to use all patented inventions.”)

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In summary, the rule of law paradigm as described above has several virtues. It enables the ECHR to police arbitrary excesses of state power and unambiguous violations of national law without interfering with domestic intellectual property systems. Application of the Court’s authority in such cases is fully consistent with the objectives of the European Convention and the shared intent of Article 1’s drafters. The disputes thus merit a place on the Court’s overloaded docket, whether the complaints are filed by individuals or by corporations. In addition, any violations that the ECHR finds in such cases would not exacerbate human rights concerns with capacious intellectual property protection standards. On the contrary, states would be free to either expand or reduce such standards without fear of violating Article 1, provided that the government did not itself infringe protected works and provided that the laws were precise, accessible, and foreseeable. B. THE ENFORCEMENT PARADIGM

There is solid support for the rule of law paradigm in recent ECHR jurisprudence. But the cases also contain a broader vision for the Court’s adjudication of intellectual property disputes. Embedded in the Grand Chamber’s Anheuser-Busch ruling are the seeds of an enforcement paradigm, in which the ECHR interprets Article 1 to require states to provide statutory, administrative, and judicial mechanisms that allow intellectual property owners to prevent private parties from infringing their protected works. Whereas the rule of law paradigm targets arbitrary government interferences with possessions, the enforcement paradigm emphasizes the state’s “positive obligations” to protect private property.521 Positive obligations require public authorities to take affirmative steps to ensure that rights holders can effectively exercise their rights. It is the state’s wrongful omission, not its wrongful action, that triggers its responsibility under international law.522 As applied to Article 1, positive obligations include “provid[ing] a legal system so that property rights can be enforced.”523 For example, the Court has required states to provide police assistance to landlords seeking to recover possession of leasehold property after the termination of a tenancy.524 States must also “afford judicial procedures that offer the necessary procedural guarantees and therefore enable . . . domestic courts and tribunals to adjudicate effectively and fairly any [property] disputes between private persons.”525 The Grand Chamber in Anheuser-Busch quoted this language almost verbatim, although it did not acknowledge that it was implicitly referencing the Court’s positive obligations case law.526 The ECHR’s application of positive obligations to private intellectual property disputes is likely to generate a fresh set of complaints by rights holders challenging the adequacy of domestic enforcement procedures. These complaints will require the Court 521 See Sovtransavto Holding v. Ukraine, App. No. 48553/99, 38 Eur. H.R. Rep. 911 [44], 938 (2004); see also Broniowski v. Poland, 2004-V Eur. Ct. H.R. 1, 56 (Grand Chamber). 522 See Mowbray, supra note 356. See also Clare Ovey & Robin White, Jacobs and White, The European Convention on Human Rights 51–52 (4th ed. 2006). 523 Çoban, supra note 358, at 164. 524 See Immobiliare Saffi v. Italy, 1999-V Eur. Ct. H.R. 73, 90-92 (Grand Chamber). 525 Sovtransavto Holding, 38 Eur. H.R. Rep. at 916 (“positive obligations may entail certain measures necessary to protect the right of property . . . even in cases involving litigation between individuals or companies”) (citation omitted). 526 See Anheuser-Busch Inc. v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep. 830 [36], 851 (Grand Chamber 2007) (“[T]he State is under an obligation to afford the parties to the dispute judicial procedures which offer the necessary procedural guarantees and therefore enable the domestic courts and tribunals to adjudicate effectively and fairly in the light of the applicable law.”).

462 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y to articulate with greater precision which mechanisms states must provide to enable rights holders to prevent and punish infringements by third parties. In determining Article 1’s implicit affirmative requirements, the ECHR may draw inspiration from the domestic enforcement provisions of the TRIPs Agreement.527 TRIPs requires countries to establish “fair and equitable” procedures that “permit effective action against any act of infringement of intellectual property rights,” including procedures to prevent and deter infringements.528 The treaty also contains detailed rules for civil and administrative remedies, provisional measures, border enforcement, and criminal penalties.529 Tempering these obligations, TRIPs acknowledges that intellectual property enforcement measures may vary from country to country depending upon the resources available for law enforcement in general.530 Several factors suggest that the ECHR may refer to TRIPs when defining the positive obligation to protect intellectual property. First, TRIPs binds thirty-seven of the fortyseven European Convention members.531 The Court has held that the Convention “must be applied in accordance with the principles of international law,” including treaties to which the respondent state is a party.532 For these thirty-seven countries, consulting TRIPs to interpret Article 1 would help to harmonize the states’ treaty obligations.533 Second, the ECHR has held that the Convention must be interpreted in light of regional and international trends in law and social policy.534 Thus, even for countries that are not WTO members, the ECHR may consult TRIPs to elucidate the domestic enforcement mechanisms that Article 1 requires. To be sure, the Court is unlikely to incorporate every nuance of TRIPs into Article 1, especially in cases involving countries that are not WTO members. Rather, the ECHR would use the treaty as a rough benchmark to aid it in fashioning minimum enforcement standards that respect “the fair balance that has to be struck between the general interest 527 As a formal matter, TRIPs protects only foreign intellectual property owners, whereas Article 1 protects the owners of all possessions regardless of nationality. As a political and practical matter, however, states rarely protect foreigner intellectual property owners without extending equivalent protections to domestic creators, innovators, and businesses. See Helfer, Adjudicating Copyright Claims, supra note 1, at 367 & n.38. As a result, the formal differences in scope between the two treaties are unlikely to deter the ECHR from consulting TRIPs when fashioning Article 1 positive obligations. 528 TRIPs, supra note 420, arts. 41(2), 41(1). 529 Id. arts. 42–51, 61. These provisions have resulted in substantial changes to domestic enforcement procedures in many countries. See J.H. Reichman, Enforcing the Enforcement Procedures of the TRIPS Agreement, 37 Va. J. Int’l L. 335 (1997). 530 Id. art. 41.5. For a detailed analysis of how WTO dispute settlement panels might draw on ECHR jurisprudence to interpret TRIPs’ enforcement obligations, see Helfer, Adjudicating Copyright Claims, supra note 333, at 416–20. 531 See Understanding the WTO: The Organization — Members and Observers, http://www.wto.org/english/ thewto_e/whatis_e/tif_e/org6_e.htm (last visited Oct. 15, 2007); Member States of the Convention for the Protection of Human Rights and Fundamental Freedoms, available at http://conventions.coe.int/Treaty/ Commun/ChercheSig.asp?NT= 005&CM=8&DF=2/23/2007&CL=ENG (last visited October 13, 2007). The ten European Convention members who have not yet ratified the WTO Agreement are Andorra, Azerbaijan, Bosnia and Herzegovina, Montenegro, the Russian Federation, San Marino, Serbia, Slovakia, the Former Yugoslav Republic of Macedonia, and the Ukraine. Id. 532 Guichard v. France, 2003-X Eur. Ct. H.R. 419, 431 (admissibility decision). See also Paradis v. Germany, App. No. 4783/03 (2003) (admissibility decision). 533 The case for using TRIPs as a benchmark is strengthened by the fact that both treaties require the rights they protect to be practical and effective. Compare TRIPs, supra note 420, art. 41(1) (TRIPs enforcement provisions aim “to permit effective action against any act of infringement of intellectual property rights”), with Artico v. Italy, 37 Eur. Ct. H.R. (ser. A) ¶ 33 (1981) (“the Convention is intended to guarantee . . . rights that are practical and effective”). 534 See Alastair Mowbray, The Creativity of the European Court of Human Rights, 5 Hum. Rts. L. Rev. 57, 60–71 (2005).

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of the community and the interests of the individual” and that do not “impose an impossible or disproportionate burden on the authorities.”535 Aware of the helpful analogies that TRIPs provides, rights holders are likely to invoke the treaty in three types of Article 1 enforcement cases. First, even where a domestic legal system in the aggregate satisfies the Convention’s rule of law requirements, rights holders may contest the remedies awarded in individual infringement proceedings. These challenges are unlikely to succeed. Disputes over issues such as the amount of damages, the denial of injunctive relief, or the failure to impound infringing articles are precisely the sort of case-specific applications of domestic law with which the ECHR rarely finds fault.536 In addition, nothing in TRIPs limits the discretion of national courts to tailor remedies to the facts and circumstances of individual disputes.537 Only in extraordinary cases, such as where national courts refuse to award a remedy mandated by domestic law, might the ECHR plausibly intervene. A second category of cases concerns a state’s failure to provide one of the enforcement measures that TRIPs requires.538 In the late 1990s, for example, the United States successfully challenged the lack of ex parte civil remedies in Denmark and Sweden.539 Most European countries now authorize ex parte orders.540 Some intellectual property owners claim, however, that the procedures for obtaining these orders are “unnecessarily complicated” and “costly” in some jurisdictions. These claims could be refashioned as arguments that the states concerned have failed to provide the effective enforcement measures required by Article 1. The third and most serious non-enforcement claim concerns the wholesale failure to prevent private infringements of intellectual property. Cases of this nature target pervasive, systemic defects in civil, administrative, or criminal procedures which prevent intellectual property owners from enforcing their rights. Such system-wide enforcement deficiencies exist principally (although by no means exclusively) in Eastern Europe.541 Piracy and counterfeiting in the Ukraine, Russia, and Turkey are especially flagrant.542 535

Özgür Gündem v. Turkey, 2000-III Eur. Ct. H.R. 1, 21. See supra Part III.B.2.b. 537 Cf. eBay, Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006) (emphasizing the discretionary nature of injunctive relief in patent infringement cases). 538 See Int’l Intellectual Prop. Alliance, Copyright Enforcement Under the TRIPS Agreement 5 (2004) (summarizing in chart form the TRIPs deficiencies found in national copyright laws and enforcement practices), available at http://www.iipa.com/rbi/2004_ Oct19_TRIPS.pdf. 539 See Notification of Mutually Agreed Solution, Denmark — Measures Affecting the Enforcement of Intellectual Property Rights, WT/DS83/2 (June 13, 2001); Notification of Mutually Agreed Solution, Sweden — Measures Affecting the Enforcement of Intellectual Property Rights, WT/DS86/2 (Dec. 11, 1998). 540 Int’l Intell. Prop. Alliance, supra note 538, at 3. 541 See Ed Bates, Supervision of the Execution of Judgments Delivered by the European Court of Human Rights: The Challenges Facing the Committee of Ministers in European Court of Human Rights: Remedies and Execution of Judgments 49, 84–96 (Theodora Christou & Juan Pablo Raymond, eds. 2005) [hereinafter ECHR Remedies] (describing systemic and structural problems, including lack of resources, infrastructure, and slow or corrupt domestic judicial processes, leading to widespread violations of the European Convention in Turkey and in several Eastern European countries). 542 According to a recent report, the deficiencies include the “lack of an effective and deterrent criminal enforcement system . . . , the lack of effective plant inspection [for optical media production and distribution…]; the lack of civil ex parte search procedures; an extremely porous border; delays in criminal prosecutions and adjudications; and infrequent destruction of seized pirate goods.” U.S. Trade Representative, Special 301 Report at 32 (2005), available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/ 2005_Special_301/asset_upload_file195_7636.pdf; see also id. at 24 (highlighting the need for Ukraine to “deter[] optical media piracy through adequate enforcement”); id. at 33 (highlighting “concerns over patent protection, copyright piracy, trademark counterfeiting, and IPR enforcement problems” in Turkey). Not coincidentally, both Russia and Ukraine have yet to be admitted to the WTO, in part because of their poor record of enforcing intel536

464 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y The ECHR recently established a “pilot judgment procedure” that is well suited to redressing widespread piracy of intellectual property rights. Under this new class action mechanism, the Court adjudicates a single case that represents a large number of similar human rights claims, and it uses the case to develop systemic reforms for the entire class. The ECHR first applied the procedure in a 2004 decision affecting nearly 80,000 real property claimants in Poland.543 It later approved a settlement of the dispute, but only after the state had enacted legislation to prevent future Article 1 violations and provide remedies to all affected property owners.544 The case publicized the Court’s determination to scrutinize systemic problems that affect large numbers of similarly-situated property owners.545 Intellectual property rights holders could invoke the pilot judgment procedure if they are unable, after reasonable diligence, to protect their works within the respondent state’s territory. If rights holders prove that piracy in the jurisdiction is pervasive, the ECHR could require the government to adopt system-wide reforms. Depending on the nature and scope of the violations, such measures could include enacting domestic legislation, streamlining judicial procedures or allocating additional resources to criminal or administrative enforcement actions. Here too the ECHR may turn to the TRIPs enforcement provisions for guidance in fashioning appropriate systemic remedies, although the Court should also be mindful of the statement that nothing in the agreement “creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.”546 Should the ECHR endorse the enforcement paradigm described above? The arguments in favor of its doing so are equivocal. On the one hand, once a government has recognized exclusive rights in knowledge goods, the owners of Article 1 possessions can reasonably expect the state to provide them with the means to prevent and punish infringements by third parties. This expectation is bolstered where the state is a WTO member and has accepted the obligation to conform its domestic laws to TRIPs. In addition, once a state has incorporated intellectual property enforcement mechanisms into its domestic legal system, rights holders can reasonably expect it to devote sufficient resources to make those mechanisms practical and effective. Yet the enforcement paradigm also raises troubling issues. The first relates to the different judicial access rules of the WTO and the ECHR. In the WTO dispute settlement system, only states can file complaints alleging violations of TRIPs. This limitation on WTO standing acts as a key political filter that limits the number and type of TRIPs controversies547 and colors how disputes are resolved.548 lectual property rights. See Gary G. Yerkey, Russia Needs to Do ‘Much More’ Before U.S. Will Sign Off on WTO Accession Agreement, 6 WTO Rep. (BNA) No. 184 (Sept. 22, 2006). 543 Broniowski v. Poland, 2004-V Eur. Ct. H.R. 1, 76 (Grand Chamber). The Article 1 violations in this case concerned the state’s failure to meet its positive obligations and its interference with property rights. Id. at 57. 544 Broniowski v. Poland, App. No. 31443/96, 43 Eur. H.R. Rep. 1, 19-20 (Grand Chamber 2005) (friendly settlement). 545 See Philip Leach, Beyond the Bug River — A New Dawn for Redress Before the European Court of Human Rights, 10 Eur. Hum. Rts. L. Rev. 148 (2005). The Court has since issued a pilot judgment involving an even larger number of property claimants. See Hutten-Czapska v. Poland, App. No. 35014/97, 42 Eur. H.R. Rep. 330 (2006) (holding that domestic legislation which prevented 100,000 landlords from raising rents to cover property maintenance for between 600,000 and 900,000 tenants violated Article 1). 546 TRIPs, supra note 420, art. 41.5. 547 See Alan O. Sykes, Public Versus Private Enforcement of International Economic Law: Standing and Remedy, 34 J. Legal Stud. 631 (2005) (analyzing “political filters” that allow states to limit WTO litigation to disputes that produce joint welfare gains). In the intellectual property context, governments litigate only a subset of TRIPs disputes that rights holders bring to their attention. In some cases, a state may decline to file a complaint

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The enforcement paradigm bypasses this political filter by allowing private parties to litigate breaches of TRIPs’ enforcement provisions in the guise of violations of Article 1’s positive obligations. As the years of ceaseless judicial battles between Anheuser-Busch and Budìjovický Budvar illustrate, many businesses have the incentive and the means to litigate in every available forum. The ECHR’s adoption of the enforcement paradigm would thus presage an increase in litigation of intellectual property enforcement disputes framed as human rights complaints, including cases that, under the current system, would not have been litigated or would have been resolved through politically palatable settlements. It is highly questionable whether these cases warrant a place on the Court’s already overcrowded docket. A second concern that the enforcement paradigm raises relates to the dissimilar remedies that the WTO and the ECHR award. Although both tribunals recommend responses for states that have violated their treaty commitments, the ECHR’s remedial powers are more expansive. Its recent judgments have included recommendations to reopen closed court proceedings, revise domestic statutes, and award restitution in kind.549 In addition, the ECHR awards “just satisfaction” to “injured parties.”550 Damage awards are usually less than 10,000 euros, and the Court has discretion to award no monetary relief. In property rights cases, however, pecuniary damage awards “can assume gigantic proportions,” the largest on record being nearly $31 million.551 Governments have promptly paid these sums in all but a handful of cases.552 The ECHR’s award of these remedies when states violate Article 1’s positive obligations could impose significant constraints on national legal systems. If countries do not adopt the remedies that the Court recommends, injured rights holders could file complaints with the Court seeking compensation. In addition, under the new pilot judgment procedure described above, the ECHR could recommend systemic reforms benefiting all similarly-situated rights holders. In counterfeiting and piracy cases, for example, the Court may award large monetary awards to an entire class of intellectual

because it fears a WTO countersuit. In others, it may refuse to do so because the probability of success is low or because victory will only marginally benefit domestic industries. In still others, geostrategic factors unrelated to trade or intellectual property may lead governments to refrain from litigating. In each instance, the “decision whether to challenge a practice of a member may be made only by another member government, not by the private party who is directly aggrieved by that practice.” Judith H. Bello, Some Practical Observations About WTO Settlement of Intellectual Property Disputes, 37 Va. J. Int’l L. 357, 358 (1997). 548 When governments do file TRIPs complaints, they often prefer politically palatable settlements or an ambiguous panel decisions to a definitive WTO Appellate Body ruling. Such compromises allow both sides to claim victory and resolve the litigation in ways that both states are willing to accept. See Notification of a Mutually Satisfactory Temporary Arrangement, United States – Section 110(5) of the US Copyright Act, WT/DS160/23 (June 26, 2003) (notifying WTO of lump-sum payment by United States to the EC to settle TRIPs copyright dispute in which the EC prevailed); see also Eva Gutierrez, Geographical Indicators: A Unique European Perspective on Intellectual Property, 29 Hastings Int’l & Comp. L. Rev. 29, 48–49 (2005) (stating that both the United States and EC claimed victory and did not appeal a WTO panel deision partially invalidating EC protection of GIs). 549 See Leach, supra note 545, at 149–51 (describing evolution of ECHR’s approach to remedies). 550 European Convention, supra note 334, art. 41. 551 Marius Emberland, Compensating Companies for Non-Pecuniary Damage: Comingersoll S.A. v. Portugal and the Ambivalent Expansion of the ECHR Scope, 74 Brit. Y.B. Int’l L. 409, 412 (2003); see also Çoban, supra note 26, at 228. In addition, the ECHR has “awarded monetary compensation for moral injury in almost all of the property cases where it found [a] violation of ” Article 1. Id. at 230. Moral damage suffered by corporations includes harm to business reputation, uncertainty in future planning, disruption in management, and inconvenience to directors and officers. Emberland, supra note 355, at 132. 552 Bates, supra note 541, at 74 (“in the vast majority of instances settlement is made, at the latest, within six months of the date due for payment expired”).

466 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y property owners if states do not improve domestic judicial procedures.553 These concerns suggest, on balance, that the ECHR should avoid interpreting Article 1 to provide an alternative mechanism for private parties to challenge noncompliance with TRIPs’ enforcement provisions. C. THE INTELLECTUAL PROPERTY BALANCING PARADIGM

If the merits of the enforcement paradigm are at best ambiguous, the Court’s adoption of an intellectual property balancing paradigm would have indisputably negative consequences for innovation and creativity law and policy. Such deleterious effects would result from the ECHR’s inevitably ad hoc interventions at the upper and lower boundaries of intellectual property protection standards. Under the balancing paradigm, the ECHR would interpret the European Convention to impose both a floor and a ceiling on domestic intellectual property rights. The Court would police the lower limits of protection by reviewing whether the government’s diminution of exclusive rights or expansion of exceptions and limitations satisfies Article 1’s fair and proportional balance standard.554 And it would police the upper boundary by assessing whether expansions of exclusive rights or restrictions on exceptions and limitations violate other European Convention provisions, such as freedom of expression and the right of privacy.555 The intellectual property balancing paradigm finds some support in recent European human rights jurisprudence. With respect to Article 1, the Court in both Anheuser-Busch and Dima suggested that retroactive laws that deprive intellectual property owners of an existing asset may violate Article 1. This concern extends not only to interactions between the state and rights holders, but also to disputes between private parties.556 With respect to other human rights, the ECHR recently decided a string of cases challenging the Austrian Copyright Act’s ban on public dissemination of “portraits of persons” that cause injury to “the legitimate interests of the persons portrayed.”557 In each case, the Court held that injunctions prohibiting newspapers from publishing photographs of politicians or individuals involved in matters of public interest violated the right to freedom of expression.558 In reaching this result, the ECHR stated that freedom of expression “protects not only the substance of ideas and information but also the form in which they are conveyed.”559 The Court also conducted a detailed and fact-intensive

553 See Hutten-Czapska v. Poland, App. No. 35014/97, 42 Eur. H.R. Rep. 52[4], 139 (Grand Chamber 2007) (partly concurring and partly dissenting opinion of Judge Zupanèiè) (stating that judgment finding a violation of Article 1 in a pilot judgment case “bind[s] the state to indemnify all” similarly situated rights holders). 554 See supra Part II.D. 555 European Convention, supra note 334, art. 10(1) (“Everyone has the right to freedom of expression. This right shall include freedom to . . . receive and impart information and ideas without interference by public authority and regardless of frontiers.”); id. art. 8(1) (“Everyone has the right to respect for his private and family life, his home and his correspondence.”). 556 See Anheuser-Busch v. Portugal, App. No. 73049/01, 45 Eur. H.R. Rep 830 [36] (Grand Chamber 2007); Dima v. Romania, App. No. 58472/00, 20-21 (2005) (admissibility decision). 557 Urheberrechtgesetz — UrhG. Bundesgesetz über das Urheberrecht an Werken der Literatur und der Kunst und über verwandte Schutzrechte. [UrhG] [Federal Law on Copyright in Works of Literature and Art and on Related Rights] [BGBI] No. 111/1936, § 78 ¶ 1 (Austria). (“Portraits of persons may not be exhibited or otherwise distributed in a manner which would make them available to the public if legitimate interests of the person portrayed, or, should he have died without authorizing or ordering the publication of the portrait, of a close relative would be prejudiced.”). 558 See, e.g., Österreichischer Rundfunk v. Austria, App. No. 35841/02 (2006); Verlagsgruppe News Gmbh v. Austria (No. 2), App. No. 10520/02 (2006); Krone Verlags GmbH & Co. KG v. Austria, App. No. 34315/96, 36 Eur. H.R. Rep. 1059 [57] (2003); News Verlags GmbH & Co. KG v. Austria, 2000-I Eur. Ct. H.R. 157. 559 Verlagsgruppe News Gmbh, App. No. 10520/02, ¶ 29 (citing additional cases).

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balancing analysis, weighing the interests of the individuals whose images were disseminated against the media’s interest in conveying information to the public.560 Several predictions follow from these two lines of decisions. The first concerns Article 1’s application to retroactive restrictions on property rights. When governments revise intellectual property protection standards, they generally apply the revisions to works already in existence as well as to those yet to be created.561 Where such modifications reduce the level of protection, they may upset rights holders’ reasonable expectations and investments made in reliance on the prior legal regime.562 Although expansions of exclusive rights have receive the lion’s share of attention in recent years,563 contractions are more widespread than is commonly believed. Consider a few examples of diminutions of intellectual property protection standards that apply to preexisting works. Belgium recently introduced a new research exemption and a compulsory license for public health uses of biotechnology patents.564 The United Kingdom eliminated perpetual protection for unpublished copyrighted works in 1989.565 Germany and Belgium amended their copyright statutes to implement a 2001 EC Directive on the harmonization of copyright.566 The new laws authorize users “to demand from the right holder any support required for the exercise of certain legitimate uses. This means that if a technical measure hinders a user in a use permitted by law, the user can ask a judge to enforce his limitation.”567 As applied to preexisting works, each of these statutory revisions interferes with an existing possession and thus raises the retroactivity concerns identified by the Grand Chamber in Anheuser-Busch. If rights holders challenge these laws as violating Article 1, the ECHR would need to address the third and most difficult issue in the tripartite frame560 See News Verlags GmbH, 2000-I Eur. Ct. H.R. at 175-77; Österreichischer Rundfunk, App. No. 35841/02, ¶ 62-73; Verlagsgruppe News Gmbh, App. No. 10520/02, ¶ 34–44. 561 Nothing in Article 1 or ECHR case law prohibits governments from prospectively reducing intellectual property protection standards. In practice, however, states rarely limit the application of revised standards of protection to inventions, creations, and signs that have yet to be created. 562 See Rochelle Cooper Dreyfuss, Patents and Human Rights: Where is the Paradox?, Molengrafica Series, at 9 n.43 (2006) (forthcoming), available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929498 (arguing against protecting patents as human rights but stating that “there is a grey area where investments made in reliance on a particular scheme of patent protection are frustrated by a change in regime; whether the change amounts to a taking of property is arguably a hard question.”). 563 See id. at 9–12. 564 See Geertruii Van Overwalle, The Implementation of the Biotechnology Directive in Belgium and its After-Effects, 37 Int’l Rev. Intell. Prop. & Comp. L. 889, 905–18 (2006) (describing the scope of the exemption and compulsory license in Belgium). 565 See R. Anthony Reese, The New Property, 85 Tex. L. Rev. 585, 608 (2007). The law provides a 50-year transition period, so that works unpublished in that year date will be protected until the end of 2039. 566 Directive on the Harmonization of Certain Aspects of Copyright and Related Rights in the Information Society, Council Directive 2001/29/EC, pmbl., 2001 O.J. (L 167) 10, 11 (EC). The Act of May 22, 2005 amended Belgium’s copyright legislation to implement the directive. Nimmer & Geller, supra note 518, BEL § 1 (Belgium). The Amendment of Sept. 10, 2003 implemented the directive in Germany. Id. GER § 1 (Germany). 567 Christophe Geiger, Copyright and Free Access to Information: For a Fair Balance of Interests in a Globalised World, 28 Eur. Intell. Prop. Rev. 366, 370 & n.44 (2006). Not all European countries have successfully limited intellectual property protection standards. In France, for example, a draft law implementing the EC Directive initially included a provision requiring Apple Computer to license its FairPlay digital rights management for use in devices that compete with its highly successful iPod. The Constitutional Council declared the provision to violate the right of property in the French Constitution. Crampton, supra note 352, at C9; Charles Jade, Parts of French “iPod Law” Ruled Unconstitutional, ars technica, July 29, 2006, available at http://arstechnica.com/ news.ars/post/20060729-7380.html. French courts are widely known for their strong support for authors’ rights. Hugenholtz, supra note 22, at 357. A similar law in a different jurisdiction might well survive a constitutional challenge, paving the way for rights holders to file a complaint with the ECHR.

468 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y work developed above—whether the laws strike a fair and proportional balance between the rights of intellectual property owners and the broader public interest.568 This inquiry raises questions whose answers have important systemic consequences. For example, what is the relationship between the fair and proportional balance standard and the “three-step test” that TRIPs uses to regulate exceptions and limitations in national copyright, patent, and trademark laws?569 If the Article 1 standard is more lenient than the three-step test, rights holders whose complaints are rejected by the ECHR could petition their governments to challenge the exceptions as a violation of TRIPs, taking what is, in effect, an appeal from the ECHR to the WTO. If the Article 1 standard is more restrictive than the three-step test, rights holders will have an incentive to challenge exceptions and limitations before the ECHR, bypassing the WTO dispute settlement system’s political filters570 and adding more cases to the Court’s docket. Even if Article 1 and the three-step test impose equivalent restrictions, their substantive standards will undoubtedly differ. This will create complexity and uncertainty for both rights holders and users and increase opportunities for protracted, duplicative litigation and forum shopping. These problems will only be compounded if the ECHR establishes an upper human rights boundary on intellectual property protection standards using other individual liberties. Although a detailed treatment of these issues is beyond the scope of this article, recent national court rulings and the writings of commentators suggest the kinds of cases that the ECHR may soon face.571 As one scholar has predicted: [F]reedom of expression arguments are likely to succeed against copyright claims aimed at preventing political discourse, curtailing journalistic or artistic freedoms, suppressing publication of government-produced information or impeding other forms of “public speech.” In practice, this might imply that the [ECHR] would be willing to find violations of Article 10 [protecting the right to freedom of expression] if national courts fail to interpret broadly or “stretch” existing copyright limitations to permit quotation, news reporting, artistic use or re-utilization of government information. The Court might also be willing to find national copyright laws in direct contravention of Article 10 if they fail to provide exceptions for uses such as parody.572 There are several reasons to be concerned about the ECHR imposing upper and lower limits on intellectual property protection standards. First, the rights and freedoms in the European Convention, even when viewed collectively, do not provide a coherent blueprint for the Court to undertake such a sensitive and policy-laden function. Unlike the Universal Declaration of Human Rights573 and the International Covenant on Economic, Social and Cultural Rights,574 the Convention does not contain a single provi568

See supra Part II.D. & III.C. For example, Article 13 of TRIPs confines exceptions and limitations to copyright to “certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder.” TRIPs, supra note 420, art. 13. See also id. art. 17 (trademark); art. 30 (patent). 570 See Sykes, supra note 547 (discussing how the restriction of judicial access to states functions as a political filter on WTO dispute settlement). 571 See Geiger, Constitutionalizing Intellectual Property Law, supra note 347, at 394–96 (discussing court decisions from Austria, the Netherlands, and Germany in which freedom of expression and the public’s right to information prevailed over claims for protection by copyright and trademark owners). 572 Hugenholtz, supra note 354, at 362. 573 Universal Declaration of Human Rights, G.A. Res. 217A (III), at 71, U.N. GAOR, 1st plen. mtg., U.N. Doc. A/810 (Dec. 10, 1948) [hereinafter UDHR]. 574 International Covenant on Economic, Social and Cultural Rights, arts. 15(1)(b) & 15(1)(c), Dec. 16, 1966, 993 U.N.T.S. 3, 9 [hereinafter ICESCR]. 569

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sion that expressly balances the rights of (human) authors and inventors575 against the public’s right to benefit from the scientific and cultural advances that knowledge goods can engender.576 In the absence of such a provision, the ECHR’s interventions at the upper and lower boundaries of protection will inevitably be ad hoc. They also create a risk of both underprotection and overprotection, depending on the vagaries of which cases are filed, in what order, and how the Court extends its jurisprudence over time.577 Second and more fundamentally, the European Convention does not provide a mechanism to address the utilitarian and social welfare arguments that are central to intellectual property law and policy.578 If the ECHR adopts the balancing paradigm, the disputes it reviews will be framed not in utilitarian terms but as clashes pitting one group of rights holders (intellectual property owners) against another (such as consumers or the media). The Court will respond to these competing claims by weighing one right against the other. Much has been written about the problematic nature of constitutional balancing methodologies.579 These concerns are even more compelling when rights claims are infused with the myriad contestations of economic and social policy that intellectual property disputes inevitably engender. A third and final reason to eschew the intellectual property balancing paradigm concerns the multiplier and feedback effects of ECHR rulings. Formally, the Court’s judgments are only binding as a matter of international law and only upon the parties to each dispute.580 But the influence of European human rights jurisprudence is far more sweeping in practice. In some countries, national courts give direct effect to ECHR judgments, a method of compliance that leaves little room for legislative compromises that preserve competing national values.581 In addition, legislators and courts across Europe 575 UDHR, supra note 573, art. 27(2) (“Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he [or she] is the author”); ICESCR, supra note 242, art. 15(1)(c) (recognizing the same right in nearly identical language). 576 ICESCR Article 15 recognizes “the right of everyone” to “enjoy the benefits of scientific progress and its applications,” and obligates states to take steps “necessary for the conservation, the development and the diffusion of science and culture.” ICESCR, supra note 574, arts. 15(1)(b) & 15(2). Similarly, the UDHR protects the right of everyone “freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits.” UDHR, supra note 573, art. 27(1). 577 The above statement does not imply that the authors’ rights provisions of the ICESCR and UDHR provide a fully coherent framework for a human rights-inspired conception of intellectual property. To the contrary, such a framework remains to be specified through, for example, additional general comments of the ICESCR Committee, the decisions of national courts, and the writing of commentators. 578 See Dreyfuss, supra note 562, at 13–18 (critiquing human rights approaches to intellectual property as ignoring utilitarian concerns). But see Geiger, Constitutionalizing Intellectual Property Law, supra note 347, at 388 (arguing that human rights “are effective tools to guarantee a balance development and understanding of IP rights and a remedy for the overprotective tendencies of lobby-driven legislation”). 579 See, e.g., T. Alexander Aleinikoff, Constitutional Law in the Age of Balancing, 96 Yale L.J. 943, 972–83 (1987) (critiquing case-by-case or ad hoc balancing standards in constitutional adjudication). The difficulties with balancing tests include determining which factors a court should weigh against each other and whether those factors can be measured on the same scale. More generally, balancing “expands judicial discretion [and] frees it substantially from the need to justify and persuade. . . . [I]t gives a view of judicial review that is intuitional, if not incomprehensible.” Louis Henkin, Infallibility Under Law: Constitutional Balancing, 78 Colum. L. Rev. 1022, 1047–49 (1978). 580 European Convention, supra note 334, art. 53(1) (“The High Contracting Parties undertake to abide by the final judgment of the Court in a case to which they are parties”). 581 See, e.g., Council of Europe, Committee of Ministers, Interim Resolution DH(2006)27 on Judgments by the European Court of Human Rights, ResDH(2006)27E, (June 7, 2006) (government of Greece stated that “the Convention and the Court’s case law enjoy direct effect in Greek law,” citing a 2005 Court of Cassation decision that “recognised and stressed the supra-statutory force of Article 1 of Protocol No 1 to the Convention”); see also Frank Hoffmeister, Germany: Status of European Convention on Human Rights in Domestic Law, 4 Int’l J. Const. L. 722, 726–28 (2006) (reviewing the legal status of the European Convention in member states).

470 S E S S I ON VI : HU MA N R I GHT S & I N T E L L E CTU A L PR OPE R T Y — including the European Court of Justice582 — consult ECHR case law when drafting or interpreting statutes and constitutions.583 These consultations extend the Court’s influence and further constrain the discretion of domestic decision makers to set national intellectual property policies.584 As a result, even if the ECHR intervenes in intellectual property issues only rarely, its rulings will likely have extensive regional effects. V. CONCLUSION

This article provides the first comprehensive analysis of the intellectual property jurisprudence of the European Court and Commission of Human Rights under the property rights clause of the European Convention on Human Rights. It organizes the tribunals’ decisions interpreting Article 1 of Protocol No. 1 into a tripartite framework that exposes the many points of intersection — and of potential conflict — between human rights and intellectual property. It also provides a vision of how the ECHR’s intellectual property jurisprudence may evolve in the future by developing three paradigms that the Court may follow, each of which has very different consequences for innovation and creativity policies in Europe. The article concludes that the rule of law paradigm, which targets arbitrary government conduct, presents the strongest justification for the ECHR to find in favor of intellectual property owners. Such a minimalist approach serves the core European Convention values of promoting predictability, certainty, and adherence to the rule of law. And it does so without unduly constraining the discretion of national legislators and judges to tailor domestic intellectual property rules to local circumstances. A more equivocal case can be made for the enforcement paradigm, which requires national governments to provide the minimal administrative, judicial, and criminal procedures necessary for intellectual property owners to challenge infringements of their protected works. Finding Article 1 violations where a state fails to adopt such procedures provides an alternative enforcement mechanism for rights holders to prevent widespread intellectual property piracy. But it does so by circumventing the political filter that prevents private parties from litigating intellectual property complaints in the WTO dispute settlement system. The intellectual property balancing paradigm presents the least persuasive case for ECHR intervention. Under this approach, the Court determines the legality of diminutions of intellectual property laws by applying Article 1’s fair and proportional balance standard. It assesses the legality of expansions of intellectual property laws under other European Convention provisions, such as freedom of expression and the right of privacy. Adoption of the balancing paradigm would create several interrelated problems, including greater complexity and uncertainty and increased opportunities for forum shopping. The paradigm would also transform the ECHR into an arbiter of intellectual property law and policy in Europe, a role that the Court is jurisprudentially and institutionally ill-suited to play. 582 See, e.g. Case C-347/03, Regione Autonoma Friuli-Venezia Giulia v. Ministero delle Politiche Agricole e Forestali, 2005 E.C.R. I-3785, ¶ 125 (referencing the “case-law of the European Court of Human Rights” as establishing the standard for assessing whether government controls on the use of property are compatible with European Community law); Case C-479/04, Laserdisken ApS v. Kulturministeriet, 2006 E.C.R. I-08089, ¶ 65 (stating that “intellectual property rights . . . form part of the right to property”). 583 See Tom Barkuysen & Michel L. van Emmerik, A Comparative View on the Execution of Judgments of the European Court of Human Rights 1, 15, 19, in ECHR Remedies, supra note 541. 584 See id. at 12 (describing Dutch legislative proposals that were modified to comply with Article 1 and stating that “in recent years the right to property, contained in Article 1 . . . seems to have been discovered in legal practice” and “is gaining more attention in the legislative process”).

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Finally, this article highlights the broader theoretical and doctrinal controversies over the intersection of human rights, property rights, and intellectual property. The boundaries between these three areas of law are increasingly overlapping, leading to contestations among rights holders, governments, consumers, and non-governmental organizations. These contestations are playing out in multiple venues, including domestic courts, international tribunals, national legislatures, and intergovernmental organizations. As these controversies become more contentious and more pervasive, government officials, scholars, and policymakers in Europe and elsewhere would benefit from the cautionary lessons that the ECHR’s intellectual property jurisprudence offers.

SESSION VII: TRADEMARK PART A: TRADEMARK LAW DEVELOPMENTS IN THE EUROPEAN UNION

SESSION VII: TRADEMARK

Part A: Trademark Law Developments in the European Union

Moderator CLAUS KÖHLER

Jones Day (Munich)

Speakers WILLIAM ROBINSON

DR. GAIL E. EVANS

Freshfields Bruckhaus Deringer (London)

Queen Mary Center for Commercial Law Studies, University of London

PROF. SPYROS MANIATIS

Queen Mary University of London

Panelists PROF. ANNETTE KUR

DAVID LLEWELYN

Max Planck Institute (Munich)

IP Academy, Singapore; White & Case LLP (London)

PROF. SIR HUGH LADDIE

PAUL MAIER

Rouse & Co. International; University College London

President, Boards of Appeal Office for Harmonization in the Internal Market (Alicante)

MR. KÖHLER: Good morning to everybody. I am Claus Kohler of Jones Day, Munich. Our first presentation will be on trademark developments in the European Union. When I prepared for this session, I found out that William Robinson did a perfect selection of cases, of course, on the basis that Picasso v. Picaro1 was discussed last year and Opel 2 will be discussed in detail later. The premium for this perfect selection is that he has three minutes per case.

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Case C-361/04P, Claude Ruiz-Picasso v. OHIM, [2006] E.C.R. I-643. Case C-48/05, Adam Opel AG and Deutscher Verband der Spielwaren-Industrie eV v. Autec AG, Judgment of the Court (First Chamber) of Jan. 25, 2007 available at http://curia.europa.eu/jurisp/cgi-bin/gettext.pl?lang= en&num=79929874C19050048&doc= T&ouvert=T&seance=ARRET) [2007]. 2

474 S E S S I O N V I I : T R A D E M A R K MR. ROBINSON: Good morning, everyone. Let me give you a quick overview of three essential areas I want to cover. Firstly, looking at a quick overview of the cases before the European Court of Justice (ECJ); and, in particular, looking at the statistics, looking at the case flow that the ECJ has had to deal with. Secondly, I will discuss five cases very briefly — as the Chairman said, three minutes each. Then, to conclude, some themes and conclusions about where the case law, to my mind, seems to be going over the last year. The statistics on the screen show the ECJ cases (the completed cases in bold, the line indicating the new cases) and the number of CFI cases (the completed cases in the block and the line indicating the new cases).3 Just a couple of things to flag here.

앫 There has been a general rise since 2001, which is to be expected. 앫 The number of cases has not achieved the predictions that the CFI put out in 1997, which was between 200 and 400 cases a year. 앫 Third, just to pick up on the flow of decisions, in 2006 there were approximately 80,000 applications for Community Trade Marks, of which 68,000 were registered; about 85 percent were registered in Alicante. Of the 68,000, 1,700 went to the Board of Appeal, approximately 2.5 percent; 143 cases went to the CFI, so about 8.5 percent of the Board of Appeal decisions go to the CFI; nineteen cases went to the ECJ, so about 13 percent of the cases from the CFI go up to the ECJ. Now, in real terms, the number of cases going from the CFI to the ECJ is actually a little more than that, given the number of cases that are dismissed by reasoned order. In real terms, about one-third of the substantive decisions of the CFI are being appealed to the ECJ. But when you look at this in absolute terms, taking the 80,000 applications for Community Trade Marks through to the nineteen cases lodged before the ECJ, you are looking at 0.024 percent of cases are getting to the ECJ. I think that shows the scale of the cases that are going through, and I think that is a real testament to Alicante and the Board of Appeal, to ensure that there is this level of appeals. That is not to say that they are not important. Let me go on to the key developments, looking at five cases. I am omitting Opel because Spyros Maniatis will discuss it in more detail later.

Levi Strauss & Co. v. Casucci SpA The first case I wanted to look at is Levi Strauss.4 The Levi Strauss case was an Article 234 reference from the Belgian Cour de Cassation. Levi’s “mouette” was registered in 1980. In 1997 Casucci created jeans with a similar mark on their pockets. Levi brought an application for an injunction and damages. Perhaps to its surprise, both at the first and second instance its application was rejected. The argument that prevailed was that Levi’s mark had become common. The critical issue was: Under Article 5(1) of the Trade Mark Directive,5 at what point in time should the reputation and the distinctiveness of the mark be assessed? Was it in 3 See, William Robinson, Christopher Pickup, Joanna Glenn, Community Trade Mark Jurisprudence of the European Community Courts, 1 January 2006 to 31 March 2007, infra Appendix A. 4 Case C-145/05, Levi Strauss, Inc. v. Casucci SpA, E.C.J. (Third Chamber, 27 Apr. 2006 (AG Ruiz-Jarabo Colomer), 2006 O.J. (C 143) 19, available at http://eur.lex europa.eu/LexUriServ/site/en/oj/2006/c_143/ c_14320060617en00190020.pdf. 5 First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States

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1997, when Casucci put its alleged infringing mark on the market; or was it later, namely the date at which the court was deciding the case? That was the critical issue that went up to the ECJ: What is the relevant time of assessment of likelihood of confusion? There were two additional questions, which were interesting, on procedural grounds: (1) whether or not a national court should order an injunction as a general rule; and (2) should it order an injunction where the trademark has lost its distinctive character due to an act or omission of the trademark owner? The ECJ was pretty clear and followed Advocate General Ruiz-Jarabo Colomer (and, indeed, followed the decisions of the Benelux court in the Quick case):6 앫 The time for assessment of likelihood of confusion must assess at the time the infringing use began (in this case in 1997); otherwise the infringing user “might take undue advantage of his own unlawful behavior,” essentially taking the benefit of its infringement by in fact creating the common use after that date up until the date of trial. 앫 On the procedural issues, the ECJ showed a real respect for national procedural autonomy — and, no doubt, with its eye also on the Enforcement Directive7 — to say that the national court itself must take appropriate measures to safeguard the trademark owner’s rights. That can include an injuncttion, but it did not prescribe that. Article 5(3) of the Trade Mark Directive sets out that an injunction is one possible remedy but does not prescribe it. 앫 However, the Court did go on in the third question to say that it is not appropriate to order an injunction if (1) the trademark has lost its distinctive character in consequence of acts of inactivity of the trademark owner so that (2) it has become a common name under Article 12(2) and has been revoked. So there is a temporal issue there: provided it has been revoked, you clearly cannot order an injunction. So, in fact, this argument becomes a little bit circular: if it is revoked, you cannot have an injunction; you do not have an infringement.

Dyson Ltd. v. Registrar of Trade Marks The next case is Dyson.8 This case was again an Article 234 reference to the ECJ. Dyson made an application to register the transparent bin on its vacuum cleaners. Interestingly, the mark was said to be “as shown in the representation.” Now, there is no representation in the application, because in fact it evolved into a generic application for transparent bins on vacuum cleaners. So, in fact, it was trying to register as a trademark a generic bin. The application was rejected. Dyson appealed to the High Court. An issue arose about acquired distinctiveness.9 The precise questions on acquired distinctiveness were: relating to trademarks, available at http://europa.eu.int/eur-lex/en/consleg/ pdf/1989/en_1989L0104_do_001.pdf [hereinafter Trade Mark Directive]. 6 Case T-348/02, Quick Restaurants SA v. OHIM, Ct. of First Instance (4th Chamber), 27 Nov. 2003, available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&ubmit=Submit&docrequire=alldocs&numaff= &datefs=&datefe=&nomusuel=quick&domaine=& mots=&resmax=100. 7 Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, 2004 O.J. (L 195) 32–36, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/ l_157/l_15720040430en00450086.pdf. 8 Case C-321/03, Dyson Ltd. v. Registrar of Trade Marks, E.C.J. 25 Jan. 2007 (AG Léger). 9 Trade Mark Directive, Art. 3(3).

476 S E S S I O N V I I : T R A D E M A R K 앫 Where a sign (which is not a shape) (1) consists of a feature which has a function and (2) forms part of the appearance of a new kind of product; and the applicant had a de facto monopoly in the product until the date of the application, is it sufficient for acquiring distinctiveness under Article 3(3) that a significant proportion of the relevant public have come to associate the relevant products with the applicant and no other manufacturer? 앫 If not, what else is needed to satisfy Article 3(3)? 앫 Is it necessary for the applicant to have promoted the sign as a trade mark? But that is not where this case is important. This case is important because the Commission intervened and said that the mark was not a “sign” under Article 2 of the Trade Mark Directive. So, even though the questions were posed on the basis of acquired distinctiveness, the Commission said you have to answer the prior question about Article 2. Dyson and the U.K. government said, “Well, hang on a minute. That is not the role of the court in this case. The national court has referred questions on Article 3(3). That is what you should be answering.” The ECJ decided that it should answer the question on the Article 2 basis, not on the Article 3(3) basis. So this comes back to the same sort of scenario as in Arsenal,10 where the Court decided to answer a totally different question to that which was posed. It said that the ECJ had discretion, essentially, to reformulate questions and to take into account issues that were relevant for the national court even though they had not been raised.11 So the Court believed that it was necessary for it to answer this question. In respect of the Article 2 issue, it said that, indeed, the application was not sufficient to be a sign; in other words, it failed the first Libertel criterion, that a proposed mark must be a sign.12 The Advocate General had also gone further, to say that this generic application was not capable of graphical representation. But again, it seems to me that this case is important because it gives a clear indication about how the ECJ has been prepared to step into the details of the case, and in fact come up with new arguments and deal with new issues, even those that have not been referred.

August Storck v. OHIM The third case is Storck.13 There were two cases on appeal from the CFI concerning a 3D representation of a sweet, a confectionary, and a 2D representation of the wrapper of those sweets. The Board of Appeal in Alicante rejected the applications and the CFI did

10 Case 206/01, Reference for a preliminary ruling by the High Court of Justice (England & Wales), Chancery Division, by order of that court of 4 May 2001, in the case of Arsenal Football Club plc against Matthew Reed, 2002 O.J. (C 333) 22; see also Arsenal Football League plc v. Matthew Reed, [2003] E.W.C.A. Civ. 696, May 21, 2003; [2003] E.T.M.R. 73 (CA) (on remand from ECJ), available at http://www.hmcourts-service.gov.uk/ judgmentsfiles/j1751/arsenal_v_reed.htm. 11 Applying Case C-299/99, Koninklijke Philips Electronics NV v. Remington Con-sumer Products Ltd [2002], E.C.R. 2002. 12 Case C-104/01 Libertel Groep v. Benelux Merkenbureau, 2003 E.C.J. 6 May 2003. Advocate General Léger’s opinion is published at [2003] E.T.M.R. (41) 508. 13 Case C/24/05 P, August Storck KG v. OHIM [3D application], E.C.J. (First Chamber), 22 June 2006, available at http://oami.europa.eu/en/mark/aspects/pdf/jj05024. pdf; Case C-25/05 P, August Storck KV v. OHIM, [2D application], E.C.J. (First Chamber), 22 June 2006, 2006 O.J. (C 212) 7, available at http://oami.europa.eu/ en/mark/aspects/pdf/ jj05025.pdf.

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likewise. It went up to the ECJ. Essentially, the questions concerned the relationship between the 2D and 3D representations of the mark. On distinctiveness, the issue was whether or not the CFI had correctly applied the “depart significantly from the norm or customs in the sector” test.14 The ECJ held that the CFI had done that correctly, but it said that the perception of the public could be different when you are looking at a name, a 2D representation, or a 3D representation. So the test is the same, and the correct test was applied, but its method of application could be different depending upon the type of mark in question. So, essentially, the Court is applying the same test but is clearly making it more difficult to apply on distinctiveness grounds for 2D and 3D marks.

Boehringer Ingelheim II I will move quickly on to Boehringer.15 The long-running repackaging saga continues. Everyone will be familiar with the Bristol-Myers Squibb (BMS) criteria.16 This case is on its second reference from the U.K. Court, this time from the Court of Appeal. The ECJ had already given guidance in its reply to the first reference from Mr. Justice Laddie.17 Again, quite a good dialogue going on between the two courts in this respect. It went back to the ECJ with further questions from Lord Justice Jacob, requesting more detail in respect of reboxing, overstickering, and the conesquences of breaching the notice requirement,18 and it asked very detailed questions about the burden of proof and exactly how the court should deal with this. Here are the questions: 앫 On reboxing, it looked at the burden of proof; exactly the requirements of “necessity” (is it just the reboxing or does it go further); what exactly did the BMS fourth 14 See Joined Cases C-456/01P & C-457/01, P. Henkel v. OHIM, [2004] E.C.R. I-5089, ¶ 35; Case C-136/02 P, Mag Instrument v. OHIM, [2004] E.C.R. I-9165, ¶ 30; Case C-173/04 P, Deutsche SiSi-Werte v. OHIM, E.C.J. 12 Jan. 2006, ¶27. 15 Case C-348/04, Boehringer Ingelheim and Others v. Swingward Ltd. and Boehringer Ingelheim and Others v. Dowelhurst Ltd., E.C.J., Apr. 26, 2007 [Boehringer Ingelheim II] (questions referred to the ECJ by the Court of Appeal (England and Wales), seeking further guidance on the effects of the judgment in Case C-143/00 (Feb. 28, 2000)). 16 Joined Cases C-427, 429 & 436/93, Bristol-Myers Squibb v. Paranova AS, July 11, 1996, [1997] 1 C.M.L.R. 1151. The “BMS Conditions” include: (1) necessary in order to market the product; (2) cannot affect the original condition of the product; (3) clearly state name of manufacturer and importer; (4) presentation not liable to damage the reputation of the trademark; (5) importer gives notice and (on demand) a specimen to trademark owner before sale. 17 Following his Feb. 28, 2000 judgment in the Dowelhurst cases, Mr. Justice Laddie referred a number of questions to the ECJ in relation to the “necessity” and “specific subject matter” tests. Case C-143/00, Boehringer Ingelheim v. Swingward and Dowelhurst, [2002] E.C.R. I-3759, 23 Apr. 2002 [Boehringer Ingelheim I] (holding that a parallel importer must fulfill all the BMS conditions even if the repackaging causes no harm to the specific subject matter of a trade mark; and that repackaging is necessary where effective access to the mar-ket is hindered as a result of strong resistance from a significant proportion of consumers to relabeled products). Following the ECJ judgment, the cases went back before Mr. Justice Laddie, who gave his second judgment on 6 Feb. 2003. The parties appealed both the judgments of Mr. Justice Laddie. 18 With its order of 17 June 2004, the Court of Appeal referred questions to the ECJ concerning the following areas of continued uncertainty: (1) where the burden of proof should lie in relation to the BMS conditions; (2) whether the necessity test applies merely to the fact of repackaging or also to the manner of repackaging; (3) whether damage to the reputation of a trade mark encompasses anything, not just defective, poor quality or untidy repackaging or relabeling; (4) whether the BMS conditions apply to a product which has simply been overstickered; (5) whether de-branding or co-branding are to be regarded as damaging; (6) whether failure by the parallel trader to give notice to the trade mark owner per se means that all products subsequently imported are infringing and if so what relief should be available.

478 S E S S I O N V I I : T R A D E M A R K requirement extend to when it looked at defective or poor quality packaging (was it just that or did it go further). 앫 Overstickering: Do the BMS conditions apply? 앫 Notice: What do you do if no notice is given? Running through the opinion of Advocate General Sharpston of April 6, 2006 very quickly, the Advocate General basically said: “Look, you’ve had the principles; now you should get on and apply them. We have to answer these questions because they have been referred. We hope that this is the last time this case comes before the Court. But here are the proposed answers.” The Advocate General was very, very good at trying to balance the previous case law, and in fact has departed from the previous case law in certain respects. 앫 Burden of proof: For the parallel importer, the first, second, third, and fifth BMS conditions; whereas the fourth is for the trademark owner.

Montex Holdings v. Diesel Very, very quickly, a fascinating case, Montex Holdings v. Diesel,19 about whether or not trademark owners can enforce in transit. Answer: No. It does not matter whether the country of origin or the country of importation has got trademark protection. I will leave it there. My time is up. Hopefully we can pick up on some of the themes a bit later. MR. KÖHLER: Thank you, William. Our next speaker is Gail Evans, Queen Mary University of London. Her presentation is on recent developments in the international protection of trade names in the European Union under TRIPs and the European Community law. *

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Recent Developments in the Protection of Trade Names in the European Union Gail E. Evans Reader in International Trade and Intellectual Property Law, Centre for Commercial Law Studies, Queen Mary University of London I. INTRODUCTION The prominence of the corporation within the global information economy is giving renewed emphasis to the international protection of trade names.20 Trade names provide consumers with an efficient means of acquiring information on the reputation of suppliers.21 The more new media facilitate the creation of corporate celebrity, the more 19 Case 281/05, Montex Holdings Ltd. v. Diesel SpA, E.C.J. (Second Chamber), 9 Nov. 2006, judgment available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=CELEX:62005J0281:EN:HTML. 20 Kerly’s Law of Trademarks observes that most modern authorities on trade names concern the names of limited companies rather than of individuals or of partnerships: David Kitchin et al., Kerly’s Law of Trademarks and Trade Names 15–161 (14th ed., 2005) [hereinafter Kerly’s]. A trade name is defined under the U.S. Lanham Act as “any name used by a person to identify his or her business or vocation.” 15 U.S.C. § 1127 (2007). 21 William M. Landes & Richard A. Posner, The Economic Structure of Intel-lectual Property Law 168 (2003).

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critical the management of the company’s image becomes to building a global brand. Where the company shares the same name as the trademark for the product, the opportunity for creating and sustaining brand loyalty will be commensurately greater. In optimizing their brand equity, companies wish to draw a distinction between a trademark that is used to indicate the source of the product and the asset that constitutes the company name. While the trade name has become an independent and valuable component of brand management, until recently the law has offered only limited means of protection. A trader may be eligible for trademark protection in respect of a variety of trade indicia, including the trade name of the company. In practice, this means that the name of the company is accorded legal protection against infringement on the same principles as trademarks. It therefore becomes necessary to draw a distinction between trademarks owned by a company in respect of goods or services, and the company name, which may or may not function as a trademark. Independently of its distinctiveness as a trademark, if the trade name is found to possess sufficient goodwill, it will be protected by the law of unfair competition and the tort of passing-off. When the WTO Appellate Body22 held that trade names comprised a separate category of intellectual property under the TRIPs Regime,23 the ruling significantly strengthened their recognition and legal effect. First, it promoted their status as a distinct object of intellectual property protection. A trade name with reputation is now an intellectual property right of indefinite duration. As personal property, the trade name may be licensed or assigned. As part of the TRIPs regime, trade names are now subject to the enforcement provisions of the Agreement and to the nondiscriminatory principles of national and most-favored-national treatment.24 This article examines the nature of strengthened international protection for trade names and their interrelationship with registered trademark rights. In the course of the analysis, it is argued that, given the new status of trade names as a distinct category of intellectual property under the TRIPs Agreement, adjudicators need to be all the more discriminating in interpreting the constituent elements of the action for trademark infringement. In elaborating this argument, Part I explains how trade names have become the latest category of intellectual property subject to the TRIPs Agreement and the legal effects of this enhanced status. It also considers how trade name rights may be asserted successfully as an existing prior right in an action for trademark infringement. Part II examines the nature the obligation to protect trade names under the Paris Convention25 and the extent 22 The World Trade Organization (WTO) Appellate Body functions as a quasi-judicial tribunal as constituted by the Dispute Settlement Understanding (DSU). Art. 17 of the DSU provides for the establishment of “a Standing Appellate Body, composed of seven persons, three of whom shall serve on any one case to hear appeals from panel cases.” Text available at http://www.wto.org/english/tratop_e/dispu_e/dsu_e.htm. 23 Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Marrakesh Agreement Establishing the World Trade Organization, signed at Marrakesh (Morocco), April 15, 1994 [hereinafter WTO Agreement], Annex IC, Agreement on Trade-Related Aspects of Intellectual Property Rights [hereinafter TRIPs Agreement or TRIPs], reprinted in The Results of the Uruguay Round of Multilateral Trade Negotiations — The Legal Texts, 1–19, 365–403 (GATT Secretariat, Geneva 1994). The “provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding” apply to consultations and the settlement of disputes under Article 64(1) of that Agreement. 24 National treatment, Art. 3; and most-favored-nation treatment, Art. 4. 25 Paris Convention for the Protection of Industrial Property of 20 March 1883, as last revised at Stockholm on 14 July 1967, (United Nations Treaty Series, Vol. 828, No 11847, at 108) [henceforth “the Paris Convention”]. Art. 1(2) concerning the scope of industrial property provides: “The protection of industrial property has as its object . . . trademarks, service marks, trade names, indications of source or appellations of origin, and the repression of unfair competition.”

480 S E S S I O N V I I : T R A D E M A R K to which it is satisfied by means of unfair competition law and the tort of passing off. Part III considers the extent to which the trademark proprietor can prevent third party use of an identical trade name. It analyzes the role of “trademark use” as defined by the European Court of Justice (ECJ),26 in calibrating the limits of trademark rights. Part IV examines the circumstances under which the trade name owner may affirm the right to use his own name as a defense to an action for trademark infringement. Part V evaluates the impact of the principle of the free movement of goods, as found in the TRIPs Agreement and the European Trademark Directive,27 on the scope of rights allowed trademarks and trade names independently. In view of the overlapping nature of the rights in play, the author advises a cautious approach to the adjudication of conflicting trademarks and trade names to include a more exhaustive analysis of the defendant’s honest commercial practice in adopting the trade name and the likely impact of the defendant’s use on the trademark at issue. II. TRADE NAMES AS A CATEGORY OF INTELLECTUAL PROPERTY SUBJECT TO THE TRIPs AGREEMENT A well-placed submission of the European Communities (EC) to the WTO Appellate Body in the case of the HAVANA CLUB trademark28 saw the status of trade names improve markedly, to the extent that the Appellate Body saw fit to declare trade names a distinct category of international intellectual property under the TRIPs Agreement. In the Havana Club case the EC argued that trade names comprise a category of intellectual property that should be protected under the provisions of the TRIPs Agreement. As trade names are not expressly protected in the TRIPs Agreement, this raised the question as to whether they are protected by means of the incorporation of Article 8 of the Paris Convention. The Parties agreed that the TRIPs Agreement incorporates an obligation to protect trade names in accordance with the Paris Convention but they disagreed as the legal effects of that incorporation. In the first instance, the submission of the European Communities was declined. The Panel29 interpreted the term “intellectual property” as it is found in the TRIPs Agreement to refer exclusively to the categories of intellectual property that are the express subject of Sections 1 through 7 of Part II as if that phrase read “intellectual property means those categories of intellectual property appearing in the titles of Sections 1 through 7 of Part

26 The ECJ is established pursuant to the Treaty Establishing the European Community Section 4, Articles 220–45. Consolidated Version of The Treaty Establishing The European Community, 2002 O.J. (C 325) 1, available at http://europa.eu.int/eur-lex/en/treaties/dat/ EC_consol.html. 27 First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trademarks, available at http://europa.eu.int/eur-lex/en/consleg/pdf/1989/en_1989L0104_do_001.pdf [hereinafter Trademark Directive]. 28 The U.S. law at issue in the case, § 211 of the Omnibus Appropriations Act of 1998, applies to a defined category of trademarks, trade names, and commercial names, specifically to those trademarks, trade names, and commercial names that are the same as or substantially similar to a mark, trade name, or commercial name that was used in connection with a business or assets that were confiscated by the Cuban Government on or after Jan. 1,1959. The effect of § 211 and the Cuban Assets Control Regulations (CACR) is to render “inapplicable to a defined category of trademark and trade names certain aspects of trademark and trade name protection that are otherwise guaranteed in the trademark and trade name law of the United States,” under both the U.S. Trademark Act (the Lanham Act) and common law. 29 Concerning WTO Panels, see, Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 of the WTO Agreement, in particular, Art. 6 concerning the “Establishment of Panels,” Art. 7 concerning the “Terms of Reference of Panels,” and Art. 8 concerning the “Composition of Panels.” Text available at http://www.wto.org/ english/tratop_e/dispu_e/dsu_e.htm. The Appellate Body reversed of the Panel’s opinion.

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II.”30 Drawing upon the purposive approach to treaty interpretation, the Appellate Body found that the Panel’s interpretation ignored the plain meaning of Article 1.2, in so far as it failed to take into account that the phrase “the subject of Sections 1 through 7 of Part II” of the Agreement deals not only with the categories of intellectual property indicated in each section title, but with other subjects as well.31 In order to justify the notion of including “other subjects of intellectual property” the Appellate Body found evidence of the potential breadth of intellectual property rights in the TRIPs Agreement. Drawing widely, it found evidence in a reference to sui generis protection for plant inventions in Article 27(3)(b). In a second, more oblique purposive reference, the Appellate Body invoked the redundancy rule to argue consequentially that, to adopt the Panel’s approach would be to deprive Article 8 of the Paris Convention (1967), as incorporated in TRIPs Article 2.1, of meaning and effect.32 When it reversed the Panel’s decision regarding the incorporation of trade names as a category of intellectual property, the Appellate Body did so on the basis that the Panel’s interpretation of the Agreement was contrary to the plain meaning of the words and was, therefore, not in accordance with the customary rules of interpretation prescribed in Article 31 of the Vienna Convention on the Law of Treaties.33 Thus, employing the plain meaning rule, the Appellate Body simply declared that it did “not believe” that the Panel’s interpretation of Article 1.2 [could] be reconciled with the plain words of Article 2.1 since that Article “explicitly incorporates Article 8 of the Paris Convention (1967) into the TRIPs Agreement.” The Appellate Body paired the plain meaning rule with the redundancy rule to create the inference that the meaning was fixed once and for all at the moment lawmakers drafted the treaty. It therefore reasoned: If the intention of the negotiators had been to exclude trade names from protection, there would have been no purpose whatsoever in including Article 8 in the list of Paris Convention (1967) provisions that were specifically incorporated into the TRIPs Agreement. To adopt the Panel’s approach would be to deprive Article 8 of the Paris Convention (1967), as incorporated into the TRIPs Agreement by virtue of Article 2.1 of that Agreement, of any and all meaning and effect. For the purposes of Article 32 of the Vienna Convention,34 it found that the negotiating history of the Agreement did not confirm the Panel’s interpretation of Articles 1.2 and 2.1. The rejection is based on a lack of specific reference in the records as to the inclusion of trade names in the TRIPs Agreement. On this basis the Appellate Body concluded

30 United States—Section 211 Omnibus Appropriations Act of 1998 (Havana Club), Report of the Appellate Body, WT/DS176/AB/R (WTO 2002), ¶ 334. 31 Id. ¶ 335. 32 Art. 2(1) of the TRIPs Agreement provides: “In respect of Parts II, III and IV of this Agreement, Members shall comply with Articles 1 through 12, and Article 19, of the Paris Convention (1967).” 33 The Convention entered into force 27 Jan. 27, 1980, in accordance with Art. 84(1). United Nations, Treaty Series, vol. 1155, at 331, available at http://fletcher. tufts.edu/multi/texts/BH538.txt. Pursuant to Art. 64 of TRIPs, adjudicators must interpret that Agreement in accordance with the Vienna Convention on the Law of Treaties 1969. WTO adjudicators therefore adopt a textualist approach in accordance with Art. 31 of the Vienna Convention, that a treaty must be interpreted in “good faith in light of (i) the ordinary meaning of its terms, (ii) the context and (iii) its objects and purpose.” This assumes that a good part of the time such meaning is plain, clear or unambiguous. The plain meaning rule presumes that lawmakers do not insert unnecessary, redundant language in their treaties. Likewise, see Art. 3.2 of the WTO Dispute Settlement Understanding. 34 Art. 32 of the Vienna Convention (Note 53), permits recourse “to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31.”

482 S E S S I O N V I I : T R A D E M A R K that trade names constitute a category of intellectual property for the purposes of the TRIPs Agreement.35 A. IMPLICATIONS OF APPLYING THE TRIPS ENFORCEMENT REGIME TO TRADE NAMES

The decision of the Appellate Body has the advantage that it defines with greater clarity the obligations of the TRIPs Agreement applicable to trade names. Undoubtedly, the most significant effect is that, like trademarks, trade names are now subject to the obligation in Article 41.1 requiring WTO Members “shall ensure that enforcement procedures as specified . . . are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement.”36 In so far as the trade name is protected as a registered trademark it will be subject to civil as well as criminal sanctions in cases of willful trademark counterfeiting on a commercial scale. In so far as the trade name is subject to protection under Article 10bis of the Paris Convention as incorporated, the decision strengthens the obligation to make available injunctions to prevent further breaches, and orders to pay financial compensation. Since the majority of successful actions for unfair competition and passing-off are disposed of upon an application for interim injunction, the provision of Article 44, requiring “judicial authorities shall have the authority to order a party to desist from an infringement,” will strengthen protection. However, absent further harmonization, the substantive law still shows a marked disparity in the level of protection available throughout Europe. 37 The national law of Members differs significantly in so far as some States protect trade names with a showing of mere use, while others require evidence of goodwill or some degree of public awareness. 38 Moreover, in so far as the name under which a business trades will almost invariably be eligible for protection as a service mark, there is likely to be far more call upon those provisions of registered trademark law that permit certain third-party uses.39 Just as the characterization of trade names as an industrial property right in Article 1(2) of the Paris Convention enabled their subsequent classification as a separate category of intellectual property for the purposes of the TRIPs Agreement,40 so the ruling of the Appellate Body facilitates their further substantive development. It does so by extending the substantive scope of protection to (a) rights which already existed but were not systematically categorized and; (b) rights newly recognized as a result of technological or economic development. 35 Panel Report, United States—Section 211 Omnibus Appropriations Act of 1998 (the “Panel Report”) WT/DS176/R (WTO 2001), ¶ 8.41. 36 Havana Club, Report of the Appellate Body, WT/DS176/AB/R (WTO 2002), ¶ 206. Art. 41.1 of the TRIPs Agreement mandates that WTO Members make available the enforcement procedures listed in the Agreement “so as to permit effective action against any act of infringement of intellectual property rights” covered by the Agreement. 37 Annette Kur, Future Challenges in the EU — Trademarks, Trade Names, IPR at the Crossroads, Helsinki, Sept. 6–8, 2006, available at http://www.iprinfo.com/tiedostot/ Kur_FutureChallenges.pdf. See also Annette Kur, Trade Names — A Class of Signs “More Equal” than Others?, available at http://www.iprinfo.com/page.php? page_id=36&action= articleDetails&a_id=280&id=22. 38 See Reuter v. Mulhens, (1953) 70 R.P.C. 235; Wright, Layman & Umney v. Wright, (1949) 66 R.P.C. 149. See also Kerly’s, supra note 20, at Ch. 15, ¶ 143. 39 See infra Part IV regarding the trade name holder’s right to the use of its own name under Art. 6 of the Trademark Directive. 40 The Paris Convention for the Protection of Industrial Property of 20 March 1883, as last revised at Stockholm on 14 July 1967, (United Nations Treaty Series, Vol. 828, No 11847, 108, ¶ 2: “The protection of industrial property has as its object . . . trademarks, service marks, trade names, indications of source or appellations of origin, and the repression of unfair competition.”

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B. TRADE NAMES AS EXISTING PRIOR RIGHTS IN RELATION TO TRADEMARKS

Subsequently, in the analysis of Anheuser-Busch Inc. v Budejovický Budvar, the ECJ was able to acknowledge the realities of modern commerce by recognizing that the public’s level of awareness of a trade name may allow the holder to establish priority over the competing rights of a registered trademark provided that the name possesses sufficient reputation.41 Since defendant Budvar had forfeited its Finnish trademark rights,42 the question was whether its trade name, used on labeling for beer, could be considered an “existing prior right” within the meaning of Article 16(1) of the TRIPs Agreement.43 In respect of the rights conferred on the trademark owner that Article provides as follows: The owner of a registered trademark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. The rights described above shall not prejudice any existing prior rights, nor shall they affect the possibility of Members making rights available on the basis of use. To this end the question was whether the basis for the trade name in question had arisen at a time prior to the grant of the trademark with which it was alleged to conflict. In fact, registration of the defendant’s trade name in the business register in Czechoslovakia predated the registration of Anheuser-Busch’s trademarks in Finland. Consistently with the decision of the Appellate Body, the Court began by affirming that trade names constitute a distinct category of intellectual property, whose protection is mandated pursuant to the TRIPs Agreement, as follows:44 It should be observed that a trade name is a right falling within the scope of the term “intellectual property” within the meaning of Article 1(2) of the TRIPs Agreement. Moreover, it follows from Article 2(1) of the TRIPs Agreement that the protection of trade names, for which specific provision is made in Article 8 of the Paris Convention, is expressly incorporated into that agreement. Therefore, by virtue of the TRIPs Agreement, the members of the WTO are under an obligation to protect trade names. As far as the first condition laid down in TRIPs Article 16(1), the defendant therefore possessed an existing right in the trade name falling within the temporal scope and, following the Appellate Body’s decision, subject to the substantive provisions of the 41 ITC Ltd. and ITC Hotels Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007); Grupo Gigante S.A. de C.V. v. Dallo & Co., Inc., 119 F. Supp. 2d 1083, at 1090, 1089–90, 1092. 42 Budvar was the proprietor in Finland of the trademarks BUDVAR and BUDWEISER BUDVAR, which designate beer and were registered on May 21, 1962 and Nov. 13, 1972, respectively, but the Finnish courts declared that it had forfeited those rights as a result of a failure to use the trademarks. 43 With respect to the application of Art. 8 of the Paris Convention as incorporated, there was no question that Budvar’s trade name possessed a right falling within the substantive and temporal scope of Art. 70(2) of the TRIPs Agreement. Further see Gail E. Evans, Substantive Trademark Law Harmonization by Means of the WTO Appellate Body and the European Court of Justice: The Case of Trade Name Protection, 41 J. World Trade L. (2007). 44 At which point the court referred to the Report of the WTO Appellate Body, United States — Section 211 of the Omnibus Appropriations Act, ¶¶ 326–41. Art. 19.2 of the Dispute Settlement Understanding states that Panels and Appellate Body “cannot add to or diminish the rights and obligations provided in the covered agreements.” While the international legal system is technically without a formal doctrine of binding precedent, as a matter of practice, the legal reality is otherwise. A record of the interpretations accorded the provisions of the TRIPs Agreement by the Panels and Appellate Body is maintained as the WTO Analytical Index: see Art. 16 as interpreted by the Appellate Body in Havana Club, available at http://www.wto.org/English/res_e/booksp_e/analytic_ index_e/trips_e.htm.

484 S E S S I O N V I I : T R A D E M A R K TRIPs Agreement.45 Pursuant therefore to Article 8 of the Paris Convention as incorporated, the defendant’s trade name was protected in Finland “without the obligation of filing or registration, whether or not it formed part of a trademark.” In a reversal of the principle of territoriality, if the trade name is registered in its home state A then it has priority in State B if the trade name owner has established a minimum of sufficient goodwill and reputation in that territory. Nonetheless, concerned as to the degree that its activism may tend to privilege trade names, by way of qualification, the Court’s reading of Article 8 does not preclude Member States laying down conditions relating to minimum use or minimum awareness of the trade name among the relevant public in their territory. EC Members may therefore provide that a trade name must have a certain level of repute in the country where the protection is sought. In the case of Budvar’s trade name, the court characterized the test as to whether the BUDVAR name was sufficiently well-known among relevant class of consumers in Finland. III. LACK OF HARMONIZED PROTECTION OFFERED TRADE NAMES BY UNFAIR COMPETITION LAW A. THE PROTECTION OF TRADE NAMES UNDER THE PARIS CONVENTION

In 1894 Sir Duncan Kerly remarked that the law applicable to trade names was not so clearly ascertained chiefly because, in the earlier stages of its development, the distinction between trademark and trade name was not adverted to.46 Article 8 of the original Paris Convention mandates the protection of trade names, independently of their entitlement to trademark protection, in the following unqualified terms: “A trade name shall be protected in all the countries of the Union without the obligation of filing or registration, whether or not it forms part of a trademark.” 47 As incorporated within the TRIPs Agreement, the implementation of Article 8 requires State A not only to protect trade names registered or established by use in that state but also foreign trade names which have been registered in State B of the Paris Union. In principle, foreign defendants claiming trade name protection in State A would rely on the law of the state in question and would receive the same protection as if they were citizens of the State A. While Article 8 does not precisely stipulate the way in which this protection for trade names has to be granted, most Members began to protect trade names in accordance with the principles of unfair competition as set out in Article 10bis.48 However the difficulty in this method of protection laid in the fact that Article 10bis of the 1911 Washington Act lacked provisions as to the precise character of the frauds, the appropriate remedies and the means of enforcement.49 With a view to addressing this deficiency, the Report of the 45

TRIPs Art. 70(2) concerning the temporal application of the Agreement to the dispute in question. Sir Duncan Kerly, The Law of Trade-Marks, Trade-Names, and Merchandise Marks 12–17 (1894). Sir Duncan continued: “These badges are generally numerous, and they comprise in particular the name under which he trades, that is, his trade-name; the names or titles by which his goods are referred to, that is, the trade-name of his goods; and the fashion or ‘get up’ in which the goods appear in the market, so far as these are distinctive of his trade and goods.” Id. at 13. Similarly, see Frank I. Schechter, The Historical Foundations of the Law Relating to Trademarks 5 (1925). 47 Paris Convention, Art. 8. 48 Although Art. 8 of the original Paris Convention of 1883 provided for the trade names to be protected without any requirement for registration, Art. 10bis concerning unfair competition was not added until 1911. The original Preamble simply referred to the desire of the contracting states to guarantee “la loyauté des transactions commerciales.” Further on the negotiating history of Article 10bis, see Christopher Wadlow, The British Origins of Article 10bis of the Paris Convention for the Protection of Industrial Property, at 7 (2002), available at http://www.oiprc.ox.ac.uk/EJWP0403.pdf. 49 Sir Hubert Llewellyn Smith, League of Nations Report of 1922, League of Nations Official J. 625–32, cited in Wadlow, supra note 48, at 14. 46

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Geneva Meeting of Experts of 1924 to the Economic Committee of the League of Nations50 recommended the drafting of two articles that would provide separately for trademark infringement and acts of unfair competition. In the event, the Hague Conference of 1925 saw the provision of a general proscription against unfair competition and acts contrary to honest practices in industrial or commercial matters. In addition, the London Conference of 1934 saw only the brief enumeration of specific abuses, notably “acts of such a nature as to create confusion by any means whatever with the establishment, the goods, or the industrial or commercial activities, of a competitor.” B. INADEQUATE PROTECTION OF TRADE NAMES BY MEANS OF PASSING-OFF

In the result, the lack of precision in respect of the level of protection to be accorded trade names left it open to the United Kingdom to implement Article 10bis to no greater extent than the acts expressly prohibited in Article 10bis(3) strictly required.51 Protection for the purposes of passing off was consistent with the narrower meaning of “unfair competition” and the specific prohibitions in Article 10bis against false allegations likely to confuse the public. Such acts will be actionable by means of the common law tort of passing off whenever the defendant company’s name is calculated to deceive, and so to divert business from the claimant, or to cause confusion between the two businesses.52 So it is that today the action for passing-off remains the chief means of defending trade names against unauthorized use. The common law tort of passing-off provides a remedy against the deceptive invasion of property in the goodwill or business, likely to be injured by the misrepresentation of the defendant passing off his goods as those of the plaintiff.53 In accordance with the modern formulation of the tort, the plaintiff must establish three essential elements: (1) that the business possesses sufficient goodwill; (2) that the defendant trader made a misrepresentation in the course of trade to customers or prospective customers of the goods or services concerned, which is likely to deceive them into believing that the goods or services the defendant offers are those of the plaintiff; and (3) that there exists a connection between the first and the second elements in so far as the misrepresentation causes actual damage to the plaintiff’s business or goodwill or will probably do so.54 If a later company takes the whole name of a subsisting company, even though that name is of a descriptive character, there is a high probability of deception.55 Thus, plaintiff Manchester Brewery Co. Ltd.56 had a brewery and a large business at Manchester. The court restrained the defendant, a new company which had acquired a brewery at Macclesfield with a business extending to Manchester, as well as other towns attached to it, from trading as the “North Cheshire and Manchester Brewery Co. Ltd.” on the ground that the use of the name would amount to a representation that the new company was connected with the business of the plaintiff. More recently, courts in the United Kingdom have extended passing-off to protect 50 These recommendations were elaborated in the three rough heads of Articles of Convention on Unfair Competition annexed to the above Report: Wadlow, supra note 48, at 14–16. 51 Wadlow, supra note 48, at 4. 52 Kerly’s, supra note 20, at 19–49. 53 Spalding & Bros. v. AW Gamage Ltd., [1915] 32 R.P.C. 273. 54 Reckitt & Colman Prods. Ltd. v. Borden, Inc., [1990] R.P.C. 341; Erven Warnink v. J. Townend & Sons (Hull) Ltd., [1979] A.C. 731, at 742. 55 Kerly’s, supra note 20, at 15–148. 56 Manchester Brewery v. North Cheshire, [1899] A.C. 83.

486 S E S S I O N V I I : T R A D E M A R K well-known trademarks and trade names. Thus, in British Telecommunications Plc and others v. One In A Million Ltd. Aldous L.J., having reviewed the history of passing off cases in which the defendant had taken a well-known trade name comprising plaintiff’s trademark, concluded that “there can be discerned from the cases a jurisdiction to grant injunctive relief where a defendant is equipped with or is intending to equip another with an instrument of fraud . . .. A name which will, by reason of its similarity to the name of another, inherently lead to passing off is such an instrument.”57 Absent goodwill however, the plaintiff has no cause of action.58 The Paris Convention does not create a general tort of unfair competition. As incorporated within TRIPs, the Convention requires that Members prohibit “[a]ny act of competition contrary to honest practices in industrial or commercial matters. In accordance with the principle of national treatment foreign nationals are entitled to the rights available under that treaty, as implemented in the domestic laws of Member States. The common law of passing off incorporates the provisions of the Paris Convention, but only to give foreign nationals the same rights to which nationals are entitled.59 In the United Kingdom, this may leave trade names outside the broader concept of unfair competition set forth in the Paris Convention’s injunction against competition that is “contrary to honest practices in industrial or commercial matters” as adopted by the more liberally constructed laws of France, Germany, or Switzerland. In the United Kingdom, the Gowers Review of Intellectual Property of 200660 pointed to a certain inadequacy in the protection accorded trade names in the United Kingdom, being of the view that “passing off does not go far enough” to protect many brands from misappropriation where the plaintiff has not been in business long enough to build up the goodwill required by the law of passing off.61 In such cases, new entrants may be prevented from adequately protecting their trade name and trademarks. Secondly, it can be difficult and costly to demonstrate that the misrepresentation is a sufficient cause of likely consumer confusion.62 C. ABSENCE OF HARMONIZATION UNDER THE COMMUNITY TRADEMARK DIRECTIVE

The position with respect the protection of trade names by means of unfair competition law is no more certain as a result of European trademark harmonization. Article 5(5) of the Trademark Directive reflects the absence of harmonization with respect to unfair competition law.63 It provides: 57

[1999] F.S.R. 1 at 18. Goodwill is defined as the good name and reputation of a business; it is the “thing” that attracts consumers to a particular business, product or service. IRC v. Muller & Co.’s Margarine, [1901] A.C. 217. The relevant date for proving goodwill in a claim for passing-off is the date of commencement of the conduct complained of. Cadbury Schweppes Pty Ltd. v. Pub Squash Co. Pty Ltd., [1981] R.P.C. 429. Gail E. Evans, Trade Marks, in New Oxford Companion to Law (P. Crane & J. Conaghan eds., forthcoming 2007). 59 See Empresa Cubana del Tabaco v. Culbro Corp., 399 F.3d 462, 484–85 (2d Cir. 2005); Grupo Gigante SA de CV v. Dallo & Co., Inc., 391 F.3d 1088, 1099–00 (9th Cir. 2004); Mattel, Inc. v. MCA Records, Inc., 296 F.3d 894, 908 (9th Cir. 2002); International Café, S.A. v. Hard Rock Café Int’l Inc., 252 F.3d 1274, 1277–78 (11th Cir. 2001). 60 In December 2005 the Chancellor of the Exchequer asked Andrew Gowers, a former editor of the Financial Times, to conduct an independent review into the U.K. intellectual property system, available at http://www. hm-treasury.gov.uk/media/583/91/pbr06_gowers_ report_755.pdf 61 Id. ¶ 5.84. 62 Id. (speaking with reference to the appearance of “copycats” in the market. 63 The sixth recital in the preamble states that the Trademark Directive of 89/104 does not exclude the application of provisions of law of the Member States other than trademark law, such as laws relating to unfair competition, civil liability or consumer protection. 58

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Paragraphs 1 to 4 shall not affect provisions in any Member State relating to the protection against the use of a sign other than for the purposes of distinguishing goods or services, where use of that sign without due cause takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the trademark. Consistent with its provisions, claimants must refer to the laws of a Member State where the unauthorized use of a trade name not being used as to distinguish the goods and services, takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the plaintiff’s trademark. Consequently, where the sign being a trade name is not used for the purposes of distinguishing goods or services, it is necessary to refer to national law to determine the extent and nature, if any, of the protection afforded to owners of trademarks who claim to be suffering damage as a result of use of that sign as a trade name or company name. 1. Robelco NV v. Robeco Groep NV The reference to national laws in respect of Article 5(5) was confirmed by the ECJ in Robelco NV v. Robeco Groep NV.64 Plaintiff company Robeco, founded in 1929, was well-established in the field of financial services. It had used the trade name ROBECO, a condensed form of the words Rotterdams Beleggings Consortium, since 1959. On May 21, 1987, it registered ROBECO as a word and figurative mark at the Benelux Trademark Office65 for financial services.66 Defendant Robelco NV was a Belgian company established in 1996. The company’s activity was largely based in the province of Flemish Brabant and involved property sales and promotion that included sales and leasing as well as the supply of loans and the financing of property developments. Robeco Groep NV brought an action against Robelco NV for trademark infringement under Article 13A(1)(d) of the Benelux Uniform Law on Trademarks (UBL),67 which is intended to implement Article 5(5) of the Directive in Benelux law. On February 9, 2000, the Commercial Court in Brussels granted the injunction and prohibited Robelco NV from continuing to use its trade name or any sign similar to the name Robeco. When Robelco appealed the injunction, given the lack of identicality of the respective signs and the services they signified, the national court asked the ECJ for a preliminary ruling as to the scope of trademark rights pursuant to Article 5(5). The ECJ ruled that where the allegedly infringing trade name is used for purposes other than distinguishing goods or services, it is necessary to refer to the legal orders of the Member States in order to determine the nature and extent of the protection afforded to trademark owners who have allegedly been injured as a result of such use. The Court found that Article 5(5) of the Directive must be interpreted as meaning that Member States may, in accordance with the prohibition on unfair competition in the Paris Convention, protect a trademark against use of a sign other than for the purposes of 64 Case C-23/01 on the interpretation of Article 5(5) of First Council Directive 89/104/ EEC of 21 December 1988 to approximate the laws of the Member States relating to trademarks, E.C.J. (Sixth Chamber) (Nov. 21, 2002), 1989 O.J. (L 40) 1. 65 Together with a number of other marks in a series, including ROLINCO, ROPARCO, ROTRUSCO. 66 In Class 36 for financial and monetary matters, including services relating to saving and investing. Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks of 15 June 1957, as revised and amended. 67 Art. 13A(1)(d) provides: “Without prejudice to any application of the ordinary law governing civil liability, the exclusive rights in a trademark shall entitle the proprietor to oppose: (…) (d) any use, in the course of trade and without due cause, of a trademark or of a similar sign other than for the purposes of distinguishing goods, where use of that sign without due cause takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the trademark.”

488 S E S S I O N V I I : T R A D E M A R K distinguishing goods or services, where such use without due cause takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the trademark. III. SCOPE OF TRADEMARK RIGHTS IN RELATION TO THIRD PARTY USE OF AN IDENTICAL TRADE NAME Following the decision of the ECJ in Robelco, some uncertainty remained concerning the extent to which the registered proprietor is able to invoke the exclusive rights conferred on the trademark in order to prevent third-party use of an identical trade name in relation to identical goods and services pursuant to Article 16(1) of TRIPs and 5(1) of the Directive.68 However it was not until the case of Anheuser-Busch Inc. v. Budejovicky Budvar69 in 2004 that the question appeared on the center stage of European jurisprudence, when the Supreme Court of Finland asked the ECJ for guidance in determining the scope of the plaintiff trademark owner’s rights in relation to a conflicting trade name. Plaintiff Anheuser-Busch was the proprietor in Finland of the BUDWEISER family of trademarks,70 which designate beer and were registered between June 5, 1985 and August 5, 1992. The first application for registration of those marks that for Budweiser, was filed on October 24, 1980. By an action brought before the Helsinki District Court of Finland on October 11, 1996, Anheuser-Busch sought to prevent Budvar from continuing or recommencing the use in Finland of the trademarks BUDEJOVICKÝ BUDVAR, BUDWEISER BUDVAR, BUDWEISER, BUDWEIS, BUDVAR, BUD and BUDWEISER BUDBRAÜ as signs for the marketing and sale of beer produced by Budvar. By the same suit, Anheuser-Busch sought a further order prohibiting Budvar from using in Finland the trade names BUDEJOVICKÝ BUDVAR NÁRODNÍ PODNIK, BUDWEISER BUDVAR, BUDWEISER BUDVAR NATIONAL ENTERPRISE, BUDWEISER BUDVAR ENTREPRISE NATIONALE, and BUDWEISER BUDVAR NATIONAL CORPORATION, on the ground that those names were

liable to be confused with its trademarks. Anheuser-Busch argued that the signs used by Budvar could be confused, within the meaning of the Tavaramerkkilaki,71 with its trademarks since those signs and trademarks designate identical or similar types of goods. Although defendant Budejovický Budvar had once been the owner in Finland of the trademarks BUDVAR and BUDWEISER BUDVAR, which designate beer and were registered on May 21, 1962 and November 13, 1972, respectively, those rights had been forfeited as a result of the company’s failure to use the marks. In counterclaim, the defendant therefore sought to rely on its trade names, arguing that it was entitled to the use of its trade names which had been duly registered in the Czechoslovakian commercial register on February 1, 1967. Budvar submitted that the signs used in Finland to market its beer could not be confused with Anheuser-Busch’s trademarks. It further submitted that, with respect to the sign BUDWEISER BUDVAR, the registration of its trade name in Czech, English and French conferred on it, pursuant to Article 8 of the Paris Convention, a right in Finland 68 Art. 5(1)(a) provides: “The registered trademark shall confer on the proprietor exclusive rights therein. The proprietor shall be entitled to prevent all third parties not having his consent from using in the course of trade: any sign which is identical with the trademark in relation to goods or services which are identical with those for which the trademark is registered.” The opinion of AG Sharpston in Céline of Jan. 18, 2007 is at pains to point out that the decision in Robelco in no way precludes a finding that Art. 5(1)(a) may be applied in respect of trade names. 69 Case C-245/02, [2004] E.C.R. I-10989. 70 The trademark registrations at issue also included BUDWEISER, BUD, BUD LIGHT and BUDWEISER KING OF

BEERS. 71 Paragraph 4.1 of the Tavaramerkkilaki provides: “The right to use a sign for a product under Paragraphs 1 to 3 of this law means that no one other than its proprietor may use commercially as a sign for his products a sign liable to be confused therewith, on the product or its packaging, in advertising or business documents or otherwise, including also use by word of mouth.” Law on Trademarks (7/1964) of 10 Jan. 1964.

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earlier than that conferred by Anheuser-Busch’s trademarks and that the earlier right was therefore protected under that Article. A. WHETHER THIRD PARTY USE AFFECTS THE ESSENTIAL FUNCTION OF THE MARK

Following its ruling in Arsenal v. Reed 72 the Court concluded that the exclusive rights conferred upon the registered trademark owner may be exercised where the defendant’s adoption of the trade name constitutes a trademark use within the meaning of TRIPs Article 16(1) and Article 5(1) of the Directive as follows: A trade name may constitute a sign within the meaning of the first sentence of Article 16(1) of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement). That provision is intended to confer on the proprietor of a trademark the exclusive right to prevent a third party from using such a sign if the use in question prejudices or is liable to prejudice the functions of the trademark, in particular its essential function of guaranteeing to consumers the origin of the goods.73 The trademark owner will be entitled to exercise his rights under Article 5(1)(a) of the Directive, if he can establish that the use of the sign is such (a) as to distinguish the goods concerned and (b) that it affects the his interests by “encroaching upon” the ability of the mark to fulfill its essential function of guaranteeing to customers the origin of his own goods.74 For the essential function of the mark to be affected it is necessary that the use in question must create the impression that there is a material link in trade between the proprietor of the mark and the goods offered for sale by the defendant. It must be established whether the relevant consumers are likely to interpret the sign, as it is used, as designating or tending to designate the undertaking from which the goods originate. The Court in Arsenal found that the essential function of the mark was jeopardized because of the defendant’s sale of unauthorized club merchandise gave the impression that there was a material link between the goods and plaintiff Arsenal Football Club, despite the presence of a disclaimer at the point of sale. The positive finding of the Court rested on the rationale that use of the defendant’s sign would deprive the mark of its distinctive character because it would no longer be capable of guaranteeing origin. B. THE RELATIONSHIP BETWEEN IDENTICAL GOODS AND THEIR RESPECTIVE MARKETS

In the case of Adam Opel AG v. Autec the scope of the trademark owner’s rights in Article 5(1) of the Directive were again at issue.75 The facts of the case were novel in the sense that the defendant was using the plaintiff’s trade name and trademarks concurrently with 72 Case C-206/01, Arsenal Football Club plc v. Matthew Reed, [2002] E.C.R. I-10273. Reference to the Court under Art. 234 EC by the High Court of Justice of England and Wales, Chancery Division, for a preliminary ruling in the proceedings pending before that court on the interpretation of Art. 5(1)(a) of the First Council Directive 89/104/EEC of 21 December 1988, ¶ 48. See also Arsenal Football Club plc v. Reed, [2003] E.W.C.A. Civ. 696, Ct. Ap., per Aldous LJ, ¶ 27. 73 Case C-245/02, [2004] E.C.R. I-10989. 74 As to the definition of the mark’s essential function, in Hoffmann-La Roche v. Centrafarm, Case C-102/77, [1978] E.C.R. 1978–139, the ECJ ruled that the essential function of a trademark is to guarantee to consumers the origin of the goods, by enabling them without any possibility of confusion to distinguish certain products from products which have another origin. See also Case 16-74, Centrafarm BV v. Winthrop BV, [1974] E.C.R. 1974–183, ¶ 8. 75 Case C-48/05, Judgment of the Court (First Chamber) of 25 Jan. 2007.

490 S E S S I O N V I I : T R A D E M A R K its own trade name and trademarks. The plaintiff, a famous car manufacturer and European subsidiary of General Motors, had used the “Opel-lightning” logo for many years. It had also registered the mark in respect of toys, in the event it might wish to use scale models of its automobiles for promotional purposes. In 2004 Opel discovered that a remote-controlled scale model of the Opel Astra V8 coupé, bearing the OPEL logo on its radiator grille was being manufactured by Autec and marketed in Germany. The plaintiff claimed that the defendant’s use of the OPEL logo on the scale models constituted an infringement of that trademark. It claimed, pursuant to Article 5(1)(a) of the Directive, that the mark was being unlawfully used for products identical with those in respect of which it is registered, namely toys. Defendant Autec manufactured remote-control model cars. It sold a model car that was a copy of Opel’s V8, including the registered logo on the radiator grill. The CARTRONIC trademark, accompanied by the symbol ®, was clearly visible on the front page of the user instructions accompanying each scale model and also on the front of the remote control transmitter. The defendant placed its own marks, AUTEC® AG and CARTRONIC®, on the front of the remote control transmitter and on the front page of the user instructions accompanying each scale model. In addition, the marks AUTEC® AG and AUTEC® AG D 90441 NÜRNBERG appeared on the back of the user instructions, the latter indication appearing also on a label attached to the underside of the remote control transmitter. The case raised the question whether third-party use of a trademark that the plaintiff has also registered in respect of “toys” constituted use as a trademark for the purposes of Article 5(l)(a).76 In this case the use of the sign identical to the mark was clearly in the course of trade, since it took place in the context of commercial activity with a view to economic advantage. The plaintiff argued that the public would assume that the manufacturer of scale model cars to which the mark was affixed manufactures and distributes them under a license from the proprietor of the mark. The defendant argued, with the support of the German Toy Industry Association, that affixing a protected trademark on scale models that were a true replica of vehicles of that mark did not constitute a trademark use as such. Applying Arsenal, the question was whether the defendant’s use of the sign affects or is liable to affect the functions of the plaintiff’s mark, in particular its essential function of guaranteeing to consumers the origin of the goods77 in circumstances where the defendant affixes a sign identical to a trademark registered for toys to scale models of vehicles pursuant to Article 5(1)(a). To answer this question, the ECJ considered that it was necessary to take account of the extent to which the average consumer of scale-model cars would associate the two marks and goods. Such an assessment required considering the public association of the marks and the goods concerned. In circumstances where the average consumer of scale-model vehicles was reasonably well-informed and accustomed to the standards of the toy industry’s faithful reproduction of scale-model vehicles the Court found that there was no cause for association, since the consumer would understand that the OPEL logo appearing on Autec’s products indicated that it was a reduced-scale reproduction of an Opel car. Liability under Article 5(1)(a) requires identicality not only in respect of the marks but 76 The use at issue was that of a sign affixed “in relation to goods” within the meaning of Art. 5(1)(a) of the Directive since it concerned the affixing of a sign identical to the trademark onto goods, offering the goods and putting them on the market within the meaning of Arts. 5(3)(a) and (b) of the Directive. 77 See Arsenal Football Club, at ¶¶ 40, 41 & 51; Case C-245/02, Anheuser-Busch Inc. v. Budejovický Budvar, Národní Podnik, November 2004, ¶ 59.

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also the goods at issue. The Court began by distinguishing Bayerische Motorenwerke (BMW).78 In that case the plaintiff’s mark was registered for vehicles but not for vehicle repair services. But as the vehicles in question constituted the subject matter of the defendant’s repair services, liability was held to follow upon “that specific and indissociable link between the products bearing the trademark and the services provided by the third party.” In BMW it was held that there may still be identicality in accordance with Article 5(1)(a) where the plaintiff’s goods constitute the subject of the defendant’s services. The Court’s response to the question whether the defendant used Opel’s logo in its capacity as a trademark Registered for motor vehicles, required consideration of the relationship between motor cars and scale-model cars. The Court held that the test for infringement under Article 5(1)(a) should focus upon the actual goods marketed or services supplied by the third party which are identical to those in respect of which the trademark is registered. Such an interpretation was found consistent with the text of Article 5(1)(a) in so far as it refers to “using . . . in relation to goods or services.” Since the model and its original did not belong to the same category of goods they were not found to be identical products. As Autec did not sell vehicles, there was no use of the OPEL logo by Autec as a trademark registered for motor vehicles. In Opel’s case the comparison of the goods was particularly significant, since model cars constituted a secondary market of the trademark owner. Advocate General Colomer’s Opinion in the Arsenal Football Club case advised that in determining the question of trademark use, the national court should take account of factors found in the 10th recital of the Trademark Directive, in particular, (a) the nature of the goods in question; (b) the structure of the market; and (c) the position in the market of the proprietor of the trademark. In subsequently rendering his Opinion as to whether the defendant’s application of the OPEL BLITZ logo affected the functions of the mark, Advocate General Colomer took account of the nature of the goods and the position of the proprietor in the market. With respect to the former, economic and cultural considerations were relevant. The German toy industry had a history of more than 100 years in the manufacture and sale of scale models cars. Culturally, the model cars had acquired during this time a symbolic link with childhood for discriminating adult customers.79 In contrast, the recent date of registration of its logo in respect of toys indicated that Opel AG had only lately recognised a potential market for the promotional use of model cars among its customers. In the circumstances, the plaintiff could not establish the requisite secondary meaning in respect of scale model cars needed to pursue an action for infringement.80 The Advocate-General therefore concluded that the plaintiff had failed to establish that consumers targeted interpreted the sign as designating the undertaking which had registered it. Moreover, with respect to the need for a material link, the plaintiff would have to show that the relevant consumers associated the OPEL logo on the miniatures manufactured by Autec, with the logo applied to the models marketed by Opel AG. Consumers were found to still connect the scale prototype with the real vehicle, not with the models manufactured for Opel AG by its licensees. The association was, therefore, one between goods of different classes. As Autec’s use did not create the impression that there was a material

78 Case C-63/97, Bayerische Motorenwerke AG (BMW) and BMW Nederland BV v. Ronald Karel Deenik, Judgment of the Court, February 1999, ¶ 61. 79 AG Colomer describes how the little cars have become the “Proust’s Madeleine” of adults seeking to relive their childhood experiences in short trousers, by indulging their fantasies: Case C-48/05, Opinion, ¶ 37. 80 Registration of the logo was extended in respect of toys in 1990.

492 S E S S I O N V I I : T R A D E M A R K link between the goods concerned and the mark of the plaintiff,81 it could not be inferred that the defendant’s use infringed. In the circumstances, including the size and clarity of the defendant’s marks on the product, the ECJ, following the Opinion of the Advocate General, found it highly unlikely that such use could affect the essential function of the OPEL logo as a trademark registered for toys. The case of Adam Opel indicates the limits of the exercise of the powers conferred by Article 5(1) of the Directive on the trademark proprietor, denying him the right to prohibit the use of an identical trade name if that use cannot affect his own interests as proprietor of the mark. IV. ENTITLEMENT OF A COMPANY TO USE ITS “OWN NAME” AS A DEFENSE TO TRADEMARK INFRINGEMENT Even where there is found to be a trademark use, the defendant may continue to use an identical sign if it is found to be merely using its own company name in accordance with honest business practice. Thus in the case of Anheuser-Busch Inc. v Budejovický Budvar defendant Budvar sought to rely on the defense that it was doing no more than using its own name. Under the trademark law of Finland:82 Any person may use, in the course of his trade, his name, address or trade name as a trade symbol for his products unless use of that symbol might give rise to confusion with the protected trademark of a third party or with a name, address or trade name lawfully used by a third party in his trading activities. Whereas Finnish law refers expressly to the defendant’s use of his “trade name,” Article 6 of the Trademark Directive refers only to a trademark owner not having the right to prohibit a third party from using in the course of trade “his own name or address.”83 In national courts throughout the European Union, there remained some uncertainty as to whether the defense should apply not only in respect of the name of a natural person but also that of a company or business name. Thus, in Scandecor Development AB v. Scandecor Marketing84 the House of Lords observed that the inclusion of company names in the ambit of the defense represented the “better view,” nonetheless holding that the matter was not acte clair. 85 As a matter touching the harmonized interpretation of the Directive, the Supreme Court of Finland referred the question to the ECJ.86 With respect to the question whether the “own name defense” may extend to corporate 81

Case C-48/05, Opinion, ¶¶ 54–57. Paragraph 3.1 of the Tavaramerkkilaki (Law on Trademarks) (7/1964) of Jan.10, 1964. 83 First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trademarks, Art. 6, 1989 O.J. (L 40) 1. “Name” is not restricted in the text. 84 [2001] 2 C.M.L.R. 30. Similarly, see Asprey & Garrard v. WRA (Guns), [2002] F.S.R. 310, 487, CA; WebSphere Trademark, [2004] E.W.H.C. 529 (Ch); [2004] F.S.R. 39, ¶¶ 37–38. In Scandecor the House of Lords referred the question to the ECJ, but as the case subsequently settled, the matter remained unresolved. 85 The Council of the European Union and the Commission of the European Communities issued a joint declaration, which was recorded in the minutes of the Council when Directive 89/104 was adopted, that that provision covers only natural persons’ names. Such a declaration is “without prejudice to the interpretation of that text by the Court of Justice of the European Communities.” See also to that effect Heidelberger Bauchemie *, ¶ 17; Antonissen *, [1991] E.C.R. I-745; Bautiaa and Société Française Maritime [1996] E.C.R. I-505). Under the U.K. Trademarks Act 1938, Trademarks Act 1938 § 8, protection extended to the use by a company of its registered name. Parker-Knoll v. Knoll Int’l, [1961] R.P.C. 345, CA; [1962] R.P.C. 265, H.L. 86 In the case of a company, the use of its own “name” will include its full corporate name and the name by which it is known to its customers — that is to say, omitting such words at the end of the name as “Limited,” “Corporation,” “Incorporated,” or other words or letters indicating corporate status. See, e.g., Reed Executive Pfc Ors. v. Reed Bus. Info. Ltd. Ors, [2004] E.W.C.A. Civ. 159 (Mar. 3, 2004), [2004] R.P.C. 40 ¶115; WebSphere Trademark, [2004] E.W.H.C. 529 (Ch); [2004] F.S.R. 39 ¶ 39. 82

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names, the ECJ began its analysis at the highest level of harmonization, by examining Article 17 of the TRIPs Agreement, which allows the members of the WTO to provide generally for limited exceptions to the rights conferred by a trademark as follows: Members may provide limited exceptions to the rights conferred by a trademark, such as fair use of descriptive terms, provided that such exceptions take account of the legitimate interests of the owner of the trademark and of third parties. The Court then proceeded to draw upon the authority of Community trademark law and jurisprudence, to reason that Article 6(1)(a) of the Directive, would similarly allow an exception in favor of trade names, though drafted more specifically as follows: The trademark shall not entitle the proprietor to prohibit a third party from using, in the course of trade, (a) his own name or address; . . . provided he uses them in accordance with honest practices in industrial or commercial matters. Invoking the canons of interpretation, the Court applied the ejusdem generis rule to the effect that where general words follow an enumeration of specific items, the general words must be read as applying to items of the same kind. Since company names are of the same class, its application permits the limitation of trademark rights to prohibit the use of not only personal names but also trade names. The Court therefore found that Article 6(1)(a) is not confined to the names of natural persons. The potential application of the exception is further broadened by reference to Community trademark jurisprudence concerning the interpretation of the proviso. The Court concluded that the defendant may, in principle, rely on the exception provided for in Article 6(1)(a) in order to be entitled to use, for the purpose of indicating his trade name, a sign which is identical or similar to a trademark, even if that constitutes a use falling within the scope of Article 5(1) which the trademark proprietor would otherwise be able to prohibit by virtue of the exclusive rights conferred on him by that provision. A. USE OF TRADE NAME DEPENDENT UPON HONEST COMMERCIAL PRACTICE

In Anheuser-Busch, Inc. the Court incorporated the reading of “honest practice” for the purposes of Community Law with the injunction in Article 17 to consider the legitimate interests of the trademark owner as follows: The condition of “honest practice” is, in essence, an expression of the duty to act fairly in relation to the legitimate interests of the trademark proprietor . . . It is therefore essentially the same condition as that laid down by Article 17 of the TRIPs Agreement. In the case of Bayerische Motorenwerke (BMW)87 the Court held that the condition constitutes a duty to act fairly in relation to the legitimate interests of the trademark owner. The ECJ set out the test as to whether the use was in accordance with honest practice.88 National courts must take into account first, the extent to which the use of the third party’s trade name is understood by the relevant public, as indicating a link between 87 Case C-63/97, Bayerische Motorenwerke AG (BMW) and BMW Nederland BV v. Ronald Karel Deenik, Judgment of the Court, February 1999, ¶ 61 (BMW); Case C-100/02, Gerolsteiner Brunnen GmbH & Co. v. Putsch GmbH, Judgment of the Court, 7th January, 2004, ¶ 24. 88 BMW, ¶ 61. In respect of Art. 6(1)(c)of the Directive, where it is necessary to indicate the intended purpose of a product or service, in particular as accessories or spare parts use of a trademark to advertise to the public the repair and maintenance of products covered, such a use does not constitute further commercialization for the purposes of Article 7 of the Directive, but use indicating the intended purpose of the service within the meaning of Article 6(1)(c).

494 S E S S I O N V I I : T R A D E M A R K the third party’s goods and the trademark owner and; secondly, the extent to which the third party ought to have been aware of that link.89 A third factor to be taken into account is whether the trademark concerned enjoys a certain reputation in the Member State in which it is registered and where its protection is sought — a reputation from which the third party might profit in marketing its goods. In BMW, where the defendant’s business was the second-hand sale and repair of BMW cars, “honest practice” meant avoiding any suggestion that the business remained affiliated to the BMW dealer network. In retrospect, BMW appears to have been the thin end of the wedge. In Gillette90 the Court offered a negative summation of factors relevant to the assessment. It held that use will not be in accordance with honest practices in industrial and commercial matters if, inter alia: (a) it is done in such a manner as to give the impression that there is a commercial connection between the user and the trademark owner; or (b) it affects the value of the trademark by taking unfair advantage of its distinctive character or repute; or (c) it entails the discrediting or denigration of that mark. In Gerolsteiner Brunnen GmbH & Co. v. Putsch GmbH 91 the ECJ further broadened the scope of “honest practice” for the purposes of the derogation in Article 6 of the Trademark Directive. The case concerned the use of the words KERRY SPRING on mineral water bottles, which might be in conflict with the mark GERRI for products of the same description. The defendant argued that the prominent display of KERRY SPRING on the product was justified under Article 6 (b) of the Trademark Directive92 since the water came from a source in county Kerry, Ireland. The ECJ found that the indication of geographical origin is used in accordance with honest practices in industrial or commercial matters if the defendant has acted fairly in relation to the legitimate interests of the trademark owner. The fact that there existed a likelihood of confusion between a word mark registered in one Member State and an indication of geographical origin from another Member State was insufficient to conclude that the use of that indication in the course of trade was not in accordance with honest practice. Conversely, a third party’s right to use its trade name will be lost where the use is not considered to be in accordance with honest commercial practice.93 In the case of Céline Sàrl v. Céline SA94 the ECJ was asked once again to consider the extent to which the plaintiff trade mark owner should be able to exercise its rights under Article 5(1) against 89 Case C-245/02, Anheuser-Busch Inc. v. Budejovický Budvar, Národní Podnik, E.C.J., November 2004, ¶¶ 54–55. 90 Case C-228/03, The Gillette Co. and Gillette Group Finland Oy v. LA-Laboratories Ltd. Oy, E.C.J. Mar. 17 2005. The case concerned the operation of Art. 6(1)(c) of the Trademark Directive (89/104/EEC), which provides that a person uses another’s trade mark where it is “necessary to indicate the intended purpose of a product or service, in particular as accessories or spare parts” provided that the use is “in accordance with honest practices in industrial or commercial matters.” A parallel provision for the Community Trademark exists in Art. 12(c) of the Community Trade Mark Regulation (40/94/EEC). 91 Case C-100/02, Gerolsteiner Brunnen GmbH & Co. v. Putsch GmbH, E.C.J. Jan. 7, 2004, ¶¶ 25 & 26. Further see Gail E. Evans & Michael Blakeney, The Protection of Geographical Indications after Doha: Quo Vadis?, 9 J. Int’l Econ. L. 575, 594 (2006). 92 Art. 6(1)(b) of First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trademarks. 93 Note: it is for the national court to carry out an overall assessment of all the relevant circumstances to determine whether the producer of the product bearing an indication of geographical origin is unfairly competing with the proprietor of the trademark. Further concerning the scope of Art. 6 and the concept of trademark use, see Opinion from Advocate General Colomer in Case C-48/05, Adam Opel AG v. Autec AG, March 2006. 94 Case C-17/06, E.C.J. Opinion, January 2007.

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the defendant’s adoption of an identical trade name. The plaintiff SA Céline is registered as a company in Paris in 1928 and carries on the business of making and selling clothing and fashion accessories. It registered the French word CÉLINE in 1948 as a trademark for a wide range of goods and services, including clothes and shoes. Defendant Céline Sàrl was registered as a company in Nancy on January 31, 1992, and carries on a business trading in clothing, lingerie, furs, and accessories under the name CÉLINE. Defendant first entered the name CÉLINE in the local trade register in 1950. Just over fifty years later, in 2003, Céline SA became aware of the existence of Céline Sàrl and of the similarity between their types of business. It then took action against Céline Sàrl for trademark infringement concerning the unauthorized use of its trade name. Céline SA bases its action solely on the use of the name CÉLINE to designate the entity Céline Sàrl and the business which it operates. The court of first instance found the defendant was liable for trademark infringement, ordering Céline Sàrl to change its company name and shop sign, and to pay the plaintiff damages in respect of both trademark infringement and unfair competition. Prima facie, under French law, given the broad implementation of Article 5(1)(a), there was little doubt that the plaintiff would be entitled to relief since an action for infringement lies whenever the distinctive elements of a trademark are reproduced, whatever use is made of them.95 Nonetheless, the Court of Appeal of Nancy considered that some doubt remained as to the applicability of Article 5(1)(a) in the circumstances where the sign in question is not affixed to the product.96 It therefore asked the ECJ for a preliminary ruling concerning the question whether Article 5(1) of the Directive may be exercised against a third party who without consent, has adopted the same name as a company name in the context of a business marketing goods of the same kind. Significantly, the case of Céline calls into question the proviso that the use must be in accordance with honest business practices, since the name Céline Sàrl was not adopted or used, either as a trade name or as a company name, until after Céline SA had registered its trademark CÉLINE. The plaintiff ’s registration of its trademark and trade name pre-dates that of the defendant. When it is heard by the Grand Chamber or full court of the ECJ, the question will be whether the adoption of the name CÉLINE for the business in Nancy as a trade name, after the registration of the trademark CÉLINE by the plaintiff and its subsequent use in relation to goods, is in accordance with honest practices in industrial and commercial matters. B. PRESUMPTION OF BAD FAITH ON SUBSEQUENT REGISTRATION OF TRADE NAME

As to the question whether there should be a presumption of bad faith in such circumstances, generally speaking, the condition of honest practice expresses a duty to act fairly in relation to the legitimate interests of the trademark owner. In Céline Advocate General 95 Art. L713-2(a) of the French Code De La Propriete Intellectuelle prohibits “la reproduction, l’usage ou l’apposition d’une marque, même avec l’adjonction de mots tels que: ‘formule, façon, système, imitation, genre, méthode’, ainsi que l’usage d’une marque reproduite pour des produits ou services identiques à ceux désignés dans l’enregistrement.” 96 See Case C-23/01, Robelco NV v. Robeco Group NV, [2002] E.C.J. ¶ 34. Further see § 10(4)(d) of the U.K. Trademarks Act, which provides that “a person uses a sign if . . . he . . . uses the sign on business papers or in advertising.” See also Section 10(5) of the UK Act to the effect that a “person who applies a registered trademark to material intended to be used for labelling or packaging goods, as a business paper, or for advertising goods or services, shall be treated as a party to any use of the material which infringes the registered trademark if when he applied the mark he knew or had reason to believe that the application of the mark was not duly authorised by the proprietor or a licensee.”

496 S E S S I O N V I I : T R A D E M A R K Sharpston’s Opinion referred to a presumption that there is bad faith where the defendant has subsequently adopted an identical or similar trade name. She advised that a person could not normally be said to be acting in accordance with honest commercial practice if he adopted a name to be used in trade for purposes of distinguishing goods or services which he knew to be identical or similar to those covered by identical or similar existing trademark.97 1. Applying Standards of Reasonable Diligence The question whether the defendant had actual or constructive knowledge of the name at issue is clearly critical to the assessment of honest practice. Honest practice in the choice of a name to be used in trade implies reasonable diligence in ascertaining that the name chosen does not conflict with an existing trademark, and thus in verifying the existence of any such mark. The defendant is expected to search in national and Community trademark registers and if the name is found to contact the plaintiff. If reasonable diligence was exercised, Advocate General Sharpston pointed out, and no such mark was found, then it is hardly possible to maintain the assertion that the defendant has acted contrary to honest practice.98 However, in the event a similar or identical trademark was found then the defendant’s entitlement to use the disputed trade name would depend upon the probity of his subsequent conduct. Honest practice implies giving notice to the trademark owner and seeking his response. Thereafter, if the trademark owner has an objection to the use of the name, based on one of the grounds of Article 5, the trademark owner’s rights would be subject to Article 6(1) of the Directive, given that its operation is conditional on the honesty of the user’s conduct. On the other hand, should the defendant continue to use the name in the face of the owner’s objection, presumably this would not be in conformity with honest commercial practice.99 If, on the other hand, the defendant contacted the trademark proprietor and, assuming the notification was received, no objection was made to the defendant’s use of the name after a reasonable period of time, it might then be open to the defendant to claim that the plaintiff had acquiesced or impliedly consented to such use, thus removing it from the scope of the prohibition of Article 5(1). To apply such criteria, it is submitted, would also be consistent with Article 5(2) of the Unfair Practices Directive which describes a commercial practice as unfair “if . . . it is (a) contrary to the requirements of professional diligence, and (b) it materially distorts or is likely to materially distort the economic behavior with regard to the product of the average consumer whom it reaches or to whom it is addressed, or of the average member of the group when a commercial practice.”100 V. INTERRELATIONSHIP BETWEEN THE FREE MOVEMENT OF GOODS AND TRADEMARK RIGHTS Trademark rights and derogations must be seen not only as a question of balancing the legitimate interests of the parties but also in the light of the overriding principle of the 97

Case C-17/06, Opinion, January 2007, ¶ 54. Id. ¶ 55. 99 Id. ¶¶ 56 & 64. 100 Id. ¶¶ 80 & 81. Note that (a) Art. 6 of the Trademark Directive adopts the express wording of Art. 10bis of the Paris Convention concerning “unfair competition”; (b) the linkage between the principle of the free movement of goods and the text of Art. 5(2) of the Unfair Commercial Practices Directive. See infra Part V. 98

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free movement of goods within the European Community.101 Principles relating to the free transborder movement of goods and services under the EC Treaty have a significant impact on the scope of rights accorded trademarks and trade names. In this regard, the principal aim of the Directive, expressed in the first recital in the preamble, is to harmonize the trademark laws of Member States with a view to eliminating “disparities which may impede the free movement of goods and freedom to provide services and may distort competition within the common market.”102 The ECJ justifies its interpretation of the limitation on the rights conferred by a trademark with reference, as follows. to the EC’s foundational principles: Article 6 seeks to reconcile the fundamental interests of trademark protection with those of free movement of goods and freedom to provide services in the common market in such a way that trademark rights are able to fulfill their essential role in the system of undistorted competition which the Treaty seeks to establish and maintain.103 Similarly, in Arsenal Football Club,104 the opinion of AG Colomer expresses the classic view that the essential function of a trademark is to identify and differentiate products on the basis of their trade origin should be seen as part of a broader objective, namely ensuring a system of genuine competition within the internal market.105 This overriding imperative strongly informs the exercise of trademark rights and the respective scope of privileged use accorded trade names.106 Gerolsteiner107 is instructive, since the breadth of the derogation in that case was justified not with reference to the mark as an indicator of source or quality but to that of the common market and the free movement of goods.108 Let us suppose that the situation in Céline concerned the subsequent registration of a similar trade name in another member state. In light of the preambular principles, such a situation would be unlikely to alter the resultant position of the plaintiff trademark

101 Concerning the free movement of goods and the extent of industrial property rights protection: see EEC Treaty, Art. 36; see also Art. 3 ¶¶ 1(a), 1(c), 14, 23–31, & 90. See further Case 16-74, Centrafarm BV et Adriaan de Peijper v Winthrop BV, Judgment of the Court of 31 October 1974. 102 Compare the first preamble to the TRIPs Agreement, which expresses the desire of Members “to reduce distortions and impediments to international trade, and taking into account the need to promote effective and adequate protection of intellectual property rights, and to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade.” 103 See HAG II, ¶ 13; Case C-63/97, Bayerische Motorenwerke AG (BMW) and BMW Nederland BV v. Ronald Karel Deenik, Judgment of the Court, February 1999, ¶ 62; Case C-245/02, Anheuser-Busch Inc. v. Budejovický Budvar, Národní Podnik, November 2004, ¶ 16. 104 See [2002] E.T.M.R. 975, ¶¶ 41–49. 105 Id. ¶ 42. 106 The ideology of free trade may come into conflict with that of the individual trademark owner’s right to the peaceful enjoyment of property. Council Regulation (EC) No 40/94 of 20 December 1993 on the Community trademark (CTMR) Art. 24; U.K. Trademarks Act, § 22. In Anheuser-Busch Inc. v. Portugal the applicant company complained of an infringement of its right to the peaceful enjoyment of its possessions in accordance with Art. 1 of Protocol No. 1 (protection of property) to the European Convention on Human Rights. The question for the Court was whether the decision of the Supreme Court of Portugal to apply the provisions of the Bilateral Agreement of 1986 to an application for registration filed in 1981 could amount to interference with the applicant company’s right to the peaceful enjoyment of its possessions. Having characterized the complaint as one concerned with the manner in which national courts interpreted domestic law in proceedings between two claimants to the same name, the Grand Chamber found no basis on which to conclude that the decision of the Supreme Court was affected by arbitrariness or that it was otherwise manifestly unreasonable. Consequently, it found no violation of Protocol No. 1, Article 1: (application no. 73049/01) January, 2007. 107 Case C-100/02, Gerolsteiner Brunnen, [2004] E.C.J. 108 An idea associated with the thinking of classical economists such as Adam Smith who emphasized the advantages of free trade policies for the improvement of living standards and the promotion of economic growth. Adam Smith, The Wealth of Nations (1776).

498 S E S S I O N V I I : T R A D E M A R K owner in Anheuser-Busch Inc. v. Budejovický Budvar.109 In keeping with principle, the Advocate General in Céline opined that an economic operator must be “be allowed to use the same personal, company or trade name throughout the Community, and not be prevented from doing so in one Member State by the subsequent registration in that Member State (or in the Register of Community trademarks) of a trademark identical or similar to the name in question.”110 This would also be the case in respect of the operation of the proviso with the effect that any “extension of the use of the name to a second Member State would be subject to the same requirement of honest practice in ascertaining whether a similar or identical trademark had already been registered in that Member State (or as a Community trademark) before the name was adopted.”111 The duty to observe honest practices therefore would not be affected if Céline Sàrl were a business in another Member State, entering the French market. A. ON THE NEED TO DEVELOP NUANCED CRITERIA WHEN ANALYZING TRADEMARK USE

Prima facie, the heightened protection of trade names is likely to facilitate the transborder movement of goods throughout the Community. Once the company name is recorded in the business register in State A, assuming that the defendant has acquired sufficient goodwill in State B, depending on how it is used in the course of trade, an identical or similar trade name will be allowed to coexist over an earlier registered trademark. The enhanced protection of trade names renders registration of the company name a valuable asset. Like a well-known trademark, a trade name having reputation will transcend the customary territorial constraints of trademark law. In the case of the trademark law of the United Kingdom, the recent jurisprudence of the Appellate Body and ECJ concerning the protection of trade names fills an evident lacuna. Prior to the 1994 Trademark Act there was no infringement where use was not of the owner’s mark but of the owner’s business name containing that mark. This lacuna appears not to have been filled by the 1994 Act unless a trade name is consider to be a “sign.” However, in mediating the respective rights of trademark and trade name holders, adjudicators would be well advised to develop more nuanced criteria. Considerations of trademark use require a discriminating analysis of character of the goods, the structure of the market and the respective positions of the parties within the market. In the interests of competition, a systematic analysis of the goods for identicality is particularly significant, where those goods constitute a possible secondary market for the plaintiff trademark owner. As the German Toy Industry Association submitted in the Adam Opel case, a finding that the affixing of a protected trademark on scale models which are true replicas of vehicles sold under that mark does indeed constitute use as a trademark as such, would have allowed Opel to reserve the market in model cars to its licensees. On the other hand, to “reconcile the fundamental interests of trademark protection” means recognizing that third-party use of an identical trade name may significantly erode the ability of the mark to function as a guarantee of origin. For example, consumers who buy clothes in the Céline shop in Nancy and who are given invoices, payment receipts, and possibly other material, bearing the name CÉLINE, will associate the clothes with the name CÉLINE, even though such name is not affixed to the clothes themselves. The impact is likely to be all the more significant where the same name is used as a trademark 109 Case C-245/02, Anheuser-Busch Inc. v. Budejovický Budvar, Národní Podnik, E.C.J. November 2004 , ¶¶ 54–55. 110 See Case C-17/06, Céline Sàrl v Céline SA, Opinion ¶ 60. 111 Id.

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and trade name on the store fascia. In this regard, the corporate name, trade name, and style will fulfill the same function as would a trademark, i.e., distinguishing the goods sold by the SARL Céline company.112 The nature and the extent of the use of the trade name needs to be weighed with care. Even where a trade name primarily serves to identify a company, it may also have the effect of indirectly serving to distinguish the products sold by this company, even though the name is not affixed to the products. It is also obvious that, if such trade name is identical to a competitor’s trademark, the essential function of the mark could be affected, where consumers are likely to consider that there is a material link between the goods or services of the defendant’s trade name and those of the plaintiff’s trademark. In a case such as Céline trademark law should provide a remedy. An injunction may be granted to restrain a defendant from trading under a name resembling or including the plaintiff’s trademark. Trademark law would be unduly limited if the use of the CÉLINE trade name by the defendant were to be considered as incapable of amounting to trademark infringement as defined in Article 5(1). Such a use would affect the essential function of the registered CÉLINE trademark in the same manner as would a use of this sign directly on the products, since consumers may be led to believe that the goods have the same origin. The more distinctive the registered trademark, as in Céline, the more likely this is to happen.113 Clearly, in such a case, if the mark is inherently distinctive most consumers will assume that any company with that mark in its name is either an offshoot of the owner of the mark or that owner having changed its name. 1. Distinguish Merely Formal Use Advocate General Sharpston in Céline, therefore, cautions against too broad an interpretation of infringement in relation to the use of a trade name. In such cases it may be necessary to distinguish, between the merely formal adoption of such a name and the way in which it is subsequently used.114 A company name need not necessarily be used “in relation to” goods or services which the company supplies “in the course of trade,”115 Its use may be confined to more formal circumstances, the company in fact trading under one or more other names, as in the case of an invoice in the company name for the sale of goods identified by a different brand name or trademark. Her cautionary advice is tendered in light of the framework for infringement in Article 5 of the Directive. Use within the meaning of Paragraphs 1–4 is use for the purpose of distinguishing goods or services, whereas in Paragraph 5 there is use other than for the purpose of distinguishing goods or services.116 An injunction may be refused in circumstances where the defendant is able to market the goods in connection with his name, by clearly distinguishing those goods from the goods of the plaintiff.117 Moreover, even where the company name is used in some relationship to goods or services in the course of trade that use will not necessarily be such as to create the impression of a material link in trade with the proprietor of an identical or similar trademark and therefore to designate their origin. 112

Opinion of Advocate General Sharpston delivered on 18 January 2007, Case C-17/06 Céline Sàrl v Céline

SA. 113

Case C-251/95, Sabel BV v. Puma AG, 1998 R.P.C. 199, 1998 E.T.M.R. 1 (1997), ¶ 24. Id. ¶ 21. 115 Opinion of Advocate General Sharpston delivered on 18 January 2007, Case C-17/06 Céline Sàrl v Céline SA, ¶ 23. 116 Id. ¶¶ 23 & 24. 117 As Lord Greene said in Saville Perfumery Ltd v. June Perfect Ltd., [1941] 58 R.P.C. 147: “the statutory protection is absolute in the sense that once a mark is shown to offend, the user of it cannot escape by showing that by something outside the actual mark itself he has distinguished his good from those of the registered proprietor.” 114

500 S E S S I O N V I I : T R A D E M A R K 2. Taking a Global Approach to the Assessment of Liability In order to sharpen the focus of analysis in Céline, Advocate General Sharpston suggests that the court might employ a global appreciation in respect of the factors pertinent to trademark use for the purposes of Article 5(1)(a). As a method of assessing liability, such an approach is more likely to promote a greater understanding of how the factors involved in testing for trademark use, may serve to complement or contradict each other. Consider for example the case of Opel, while the marks were identical, an analysis of the respective markets, the consumers to whom the goods were intended and, the position of the trademark owner in the market, meant that the requisite liability for trademark use was absent. Conversely, were there a greater approximation of goods and markets, liability would have been all the likelier considering the identicality and proximity of the marks. B. THE DIRECTIVE ON UNFAIR COMMERCIAL PRACTICES

In addition to the relief available under national unfair competition laws,118 trademark and trade name holders throughout the Community will shortly have recourse to the Directive on Unfair Commercial Practices.119 With the aim of facilitating cross-border trade by harmonizing national laws, the Directive applies to misleading commercial practices between business and consumers.120 In accordance with Article 6(2): A commercial practice shall . . . be regarded as misleading if . . . it causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise, and it involves: (a) any marketing of a product . . . which creates confusion with any products, trademarks, trade names or other distinguishing marks of a competitor . . . .121 The criteria are objective so that there is no need to prove that a consumer was actually misled. The possibility of deception alone can be considered misleading, if the other elements are present as well. There is no need to prove a financial loss. Article 11 of the Directive stipulates that legal action may be taken by “persons or organizations regarded under national law as having a legitimate interest in combating unfair commercial practices.” The remedies available include injunctions restraining or prohibiting the misleading act, even if no actual loss or damage can be shown.122 118 In this regard Art. 5(5) allows Member States to provide protection for unfair competition and passing off against use of a sign “other than for purposes of distinguishing goods or services.” 119 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market. Unfair commercial practices” include marketing that distorts consumers’ economic behaviour or harms consumers’ economic interests. It. at Art. 1 and Recital 11. In addition, Art. 1 lists specific examples of commercial practices that are regarded as automatically unfair, including “promoting a product similar to a product made by a particular manufacturer in such a manner as to deliberately mislead the consumer into believing that the product is made by that same manufacturer when it is not.” 120 According to Art. 2 (d), “business-to-consumer commercial practices” means “any act, omission, course of conduct or representation, commercial communication including advertising and marketing, by a trader, directly connected with the promotion, sale or supply of a product to consumers.” 121 Art. 6(1) contains a definition of a “misleading action.” If deemed to be a misleading action, a practice will automatically become an unfair commercial practice and will be prohibited. A misleading action is a practice that “contains false information and is therefore untruthful or in any way, including overall presentation, deceives or is likely to deceive the average consumer, even if the information is factually correct . . . and . . . causes or is likely to cause him to take a transactional decision that he would not have taken otherwise’. 122 Art. 13 provides not only for damages on a showing of loss but also for “effective, proportionate and dissuasive” monetary penalties. Art. 13 leaves it open to Member States to impose penalties for infringements of the rules introduced by the Directive.

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The Unfair Commercial Practices Directive is due to be implemented by October 2007.123 It remains to be seen therefore whether the unreliable protection accorded trade names by the action for passing-off will be offset when claimants are able to take alternative action against conduct that is misleading or deceptive. VI. CONCLUSION The visibility of the company within the new media, the corresponding rise of the corporate brand and the need to optimize brand equity have contributed to the development of trade name protection in Europe. The decision of the WTO Appellate Body to recognize trade names as a category of intellectual property subject to the TRIPs Agreement facilitated the work of the ECJ in bringing about their further harmonization. So much is evident from the case of Anheuser-Busch, which resulted in better-defined protection for the trade name of Budjovicky Budvar. As long as unfair competition law is not harmonized throughout the European Union, trade names will rely on the jurisprudence of the ECJ to determine appropriate standards of protection and mediate the scope of trademark rights. The protection of trade names continues to rely on general rules of unfair competition and civil remedies in accordance with Article 8 of the Paris Convention. In principle, a trade name that has been duly registered in its home state will be protected against a later conflicting trademark. Assuming the trade name possesses sufficient reputation, this may mean that where products or services are identical or similar, a certain degree of consumer confusion may be tolerated, allowing identical or similar trade names and trademarks to coexist. The overlapping nature of rights in trademarks and trade names, the need to determine the nature of honest business practice, and to consider the base line for entry into secondary markets, has given rise to the need for a more discriminating approach to adjudication.124 Necessary limits to the privileged scope of rights in the defendant’s use are marked by the proviso that the trade name has been established in accordance with honest business practice marks. Where registration of the trade name is later in time than the conflicting trademark, the holder of the trade name will have to show a standard of reasonable diligence in registering an identical or similar trade name, if protection is not to be lost. If the budding entrepreneur is to later affirm rights in the trade name, due diligence indicates that he or she would be well advised to conduct a European-wide trademark search prior to adopting and registering a company name in the local business register. While the principle of the free movement of goods favors the expansion of business into new national markets, this advantage comes at the price of higher policing and transaction costs. As a matter of regulatory theory, the reconciliation inheres in the view that promoting innovation and enterprise constitutes the common factor in protecting intangible property rights in both trademarks and trade names.125

123 The obstacle for brand owners who wish to use the Directive may still be the requirement for confusion. Nowhere does the Directive explain precisely what is intended by confusion as to commercial origin. Further see Gill Grassie, EU Directive on Unfair Commercial Practices — A UK Perspective, 1 J. Intell. Prop. L. & Prac. 103 (2006). 124 Gowers Report, supra note 60, at 1.28. 125 On the common element of all “intellectual property” as a “right over intangible property” or Immaterialgüterrecht, and on the latter twentieth-century provenance of the term, see Georges Koumantos, Reflections on the Concept of Intellectual Property, in J. Intell. Prop. & Info. L.: Essays in Honour of Herman Cohen Jehoram 39–45 (J.C. Kabel & Gerard J.H.M. Mom eds., 1998).

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MR. KÖHLER:

* * * Thank you, Gail. I am really curious to listen to your comments on the

Opel case. Spyros Maniatis, Queen Mary University of London, will present this case to us, “Opel: What Will it Mean for the Future?” *

*

*

Opel: What Will It Mean for the Future? Spyros Maniatis Professor in IP Law, Centre of Commercial Law Studies, Queen Mary, University of London I. INTRODUCTION Adam Opel126 offered the ECJ the opportunity to consider the fundamentals of trade mark infringement. For instance, does use of identical signs on identical products lead to an automatic finding or simply to an assumption of infringement? Are there any variations in the concept of confusion? Or, how can the type of use of the conflicting sign influence the outcome of an infringement case? Adam Opel was the registered proprietor in Germany of a figurative mark, the OPEL BLITZ for “motor cars” and “toys.” Autec manufactured remote-controlled model cars, marketed under the brand CARTRONIC, one of which was a replica of the Opel Astra V8 Coupé bearing the OPEL mark. The Court repeated that protection under Article 5(1)(a) was not unconditional: “. . . the affixing by a third party of a sign identical to a trade mark registered for toys to scale models of vehicles cannot be prohibited under Article 5(1)(a) . . . unless it affects or is liable to affect the functions of that trade mark.” Accordingly, if “the relevant public does not perceive the sign identical to the Opel logo appearing on the scale models marketed by Autec as an indication that those products come from Adam Opel or an undertaking economically linked to it, [the national court] would have to conclude that the use at issue in the main proceedings does not affect the essential function of the Opel logo as a trade mark registered for toys.” Regarding the scope of Article 6(1)(b), the Court concluded by attempting a balancing exercise. On the one hand, “[O]ne cannot … exclude a priori the possibility that that provision might authorize a third party to use a trade mark if such use consists in giving an indication concerning the kind, quality or other characteristics of products marketed by that third party, provided that use is made in accordance with honest practices in industrial or commercial matters.” Nevertheless “the affixing of a sign which is identical to a trade mark registered, inter alia, in respect of motor vehicles to scale models of that make of vehicle in order to reproduce those vehicles faithfully is not intended to provide an indication as to a characteristic of those scale models, but is merely an element in the faithful reproduction of the original vehicles.” The paper argues that, given the jurisdictional and jurisprudential limitations of the Court and the factual peculiarities of trade mark cases, the Court should take a step back 126 Case C-48/05, Adam Opel AG and Deutscher Verband der Spielwaren-Industrie eV v. Autec AG, E.C.J. (Jan. 25, 2007).

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and detach itself from the facts of each case and instead insist on the basic principles established by its jurisprudence: genuine and substantiated likelihood of confusion that influences or affects the behavior of customers at the point of sale is at the core of trade mark protection. In Opel this could have accommodated the use of identical signs on identical products, whereas in Picasso127 the Court would not have to appear to backtrack from its acceptance of post-sale confusion in Budweiser.128 II. ADAM OPEL — THE FACTS Opel came before the Court as a reference from the Landgericht Nürnberg-Fürth (Germany). Adam Opel AG (Opel) was the Registered proprietor in Germany of a figurative mark, the OPEL BLITZ, for a number of products including “motor cars” and “toys.” Autec AG (Autec), a manufacturer of remote-controlled model cars, marketed under the brand CARTRONIC, used the OPEL trade mark on the grille of a replica of the Opel Astra V8 Coupé. On the packaging, the instructions, and the remote control there were various indications linking the product with Autec. When Opel started trade mark infringement proceedings, the German court referred the following questions to the Court: 1. Does the use of a protected mark, including as a “toy,” constitute use as a trade mark under Article 5(1)(a) when the manufacturer of toy-scale cars produces a scale model of a car that actually exists, including the sign placed on the model of the owner of the brand, and markets this scale model? 2. If the answer to question 1 is yes: Does the means of use of the brand described in question 1 constitute a mention relating to the type or quality of the scale-model of the vehicle under the terms of Article 6(1)(a) of the Directive? 3. If the answer to the question under two is yes: What are, in a case of this type, the determining criteria for evaluating whether use of the brand constitutes honest use when the manufacturer of the scale model places on the packaging and on an accessory necessary for the use of the scale model a recognizable sign of its own brand for the public along with an indication of the offices of the company? III. THE JURISPRUDENTIAL CONTEXT A. THE IDENTITY ISSUE

In Hölterhoff v. Freisleben129 the Court had declined to support an automatic funding of infringement in the case of identity: “. . . in a situation such as that described by the national court, the use of the trade mark does not infringe any of the interests which Article 5(1) is intended to protect. Those interests are not affected by a situation in which: – the third party refers to the trade mark in the course of commercial negotiations with a potential customer, who is a professional jeweler; – the reference is made for purely descriptive purposes, namely in order to reveal the characteristics of the product offered for sale to the potential customer, who is familiar with the characteristics of the products covered by the trade mark concerned; – the reference to the trade mark cannot be interpreted by the potential customer as indicating the origin of the product.” In Arsenal v. Reed 130 Advocate General Ruiz-Jarabo Colomer had also opposed auto127 128 129 130

Case C-361/04P, Claude Ruiz-Picasso v. OHIM, [2006] E.C.R. I-643. Case C-245/02, Anheuser-Busch Inc. v. Budejovicky Budvar [2004] E.C.R. I-10989. [2002] E.C.R. I-4187. [2002] E.C.R. I-10273.

504 S E S S I O N V I I : T R A D E M A R K matic findings. There should only be a presumption of likelihood of confusion in the case of identity; but that presumption might be rebutted if “there is a possibility, however remote it may be, that in a specific case use of a sign identical with another registered as a trade mark may not be prevented by the proprietor on the basis of Article 5(1)(a).” In cases of identity between signs and products there is a “presumption iuris tantum that the use by a third party of the trade mark is use thereof as such.” The Court was less clear. It focused on the interests of the proprietor and trade marks appeared to become objects of property. However, it linked the proprietor’s interests with the protectable functions of a trade mark. “It follows that the exclusive right under Article 5(1)(a) of the Directive was conferred in order to enable the trade mark proprietor to protect his specific interests as proprietor, that is, to ensure that the trade mark can fulfill its functions. The exercise of that right must therefore be reserved to cases in which a third party’s use of the sign affects or is liable to affect the functions of the trade mark, in particular its essential function of guaranteeing to consumers the origin of the goods.” The mirror argument was that the proprietor might not prohibit uses that could not affect its “own interests as proprietor of the mark, having regard to its functions.” B. POST-SALE CONFUSION

The Court also hinted that confusion away from the point of sale — in this case post-sale confusion — could suffice: “. . . there is a clear possibility in the present case that some consumers, in particular if they come across the goods after they have been sold by Mr Reed and taken away from the stall where the notice appears, may interpret the sign as designating Arsenal FC as the undertaking of origin of the goods.” Justifying its position from the consumer’s perspective, the Court added that under these circumstances the guarantee that all goods bearing the same “trade mark have been manufactured or supplied under the control of a single undertaking which is responsible for their quality” would be impaired. Post-sale confusion was revisited in Anheuser Busch v. Budejovicky Budvar,131 which involved a conflict between a trade mark and a trade name. There the Court noted that using the latter sign in such a way as to create the impression of a material link in trade between a third party’s goods and the undertaking from which the original goods originated would be an infringement and appeared to endorse post-sale confusion. “It must be established whether the consumers targeted, including those who are confronted with the goods after they have left he third party’s point of sale, are likely to interpret the sign, as it is used by the third party, as designating or tending to designate the undertaking from which the third party’s goods originate.” However, the Court took a step back in Claude Ruiz-Picasso v. OHIM.132 From a positive perspective, the Court stressed that the level of consumer attention at the time of purchase would be higher for particular products. “Where it is established in fact that the objective characteristics of a given product mean that the average consumer purchases it only after a particularly careful examination, it is important in law to take into account that such a fact may reduce the likelihood of confusion between marks relating to such goods at the crucial moment when the choice between those goods and marks is made.” Undermining the relevance of post-sale confusion, the Court accepted that the post-sale effects do not “prevent the taking into account of the particularly high level of 131 132

[2004] E.C.R. I-10989. [2006] E.C.R. I-643.

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attention exhibited by the average consumer when he prepares and makes his choice between different goods in the category concerned.” And, revisiting Arsenal, it noted that it involved the application of a sign that was identical to the registered trade mark on identical goods. This, it stressed, should have been precluded according to Article 5(1)(a). The Court had only referred to the post-sale effect of the sign in order to assert that the message conveyed at the point of sale — regarding the source of the product — should not affect its interpretation of the provision. In a rebalancing exercise, the Court combined the factual background of the earlier case with the legal findings of Picasso in order to avoid a broad reading of Arsenal on post-sale confusion. Almost defensively, the Court stated: “In doing so, the Court did not in any way express a general rule from which it could be inferred that, for the purposes of an assessment of the likelihood of confusion . . . there is no need to refer specifically to the particularly high level of attention displayed by consumers when purchasing a certain category of goods.” C. DEFENSES

Turning to defenses, the Court of Justice had ruled in BMW AG & BMW Nederland BV v. Deenik133 that trade mark rights may be limited under Article 6(1)(c) if the marks are used by a third party to indicate the intended purpose of a product or service. The unauthorized, but legitimate under Articles 6 and 7, use of a trade mark would carry part of the aura surrounding the trade mark from its registered proprietor to the unauthorized user but this is the price for reconciling the exclusivity of trade mark rights with competition, free movement of goods, and freedom to provide services. In Gerolsteiner Brunnen — KERRY/GERRY 134 it added that Article 6(1)(b) does not distinguish between the possible uses of the indications to which it refers. The only test should be whether the indication of geographical origin is used in accordance with honest practices in industrial or commercial matters, equating to a duty to act fairly in relation to the legitimate interests of the trade mark owner. Thus, “the mere fact that there exists a likelihood of confusion between a word mark registered in one Member State and an indication of geographical origin from another Member State is . . . insufficient to conclude that the use of that indication in the course of trade is not in accordance with honest practices.” In Gillette v. LA-Laboratories135 the Court attempted another balancing exercise. It found that Article 6(1)(c) goes beyond the distinction between accessories and spare parts; it is not necessary to determine whether a product should be regarded as an accessory or a spare part. On the other hand, it narrowed the scope of the provision in two ways. First, by noting that what matters is whether the use in question is in practice the “only means” of providing such information; for example, the national authority would have to consider whether technical standards can convey similar messages. Second, by adding that the “honest practices” requirement would not be satisfied when: there is an impression of a commercial connection; unfair advantage of the trade mark’s distinctive character or repute; use that might discredit or denigrate the mark; there is an impression of an imitation or replica. National courts should take into account: the overall impression of the product, in particular the circumstances in which it is displayed; the distinction made between the marks, the effort to distinguish between the products. 133 134 135

[1999] E.C.R. I-905. [2004] E.C.R. I-691. [2005] E.C.R. I-2337.

506 S E S S I O N V I I : T R A D E M A R K III. THE OPINION OF THE ADVOCATE GENERAL A. USE OF A SIGN AS A REGISTERED TRADE MARK

Advocate General Ruiz-Jarabo Colomer noted that a basic characteristic of toys was that they constituted the representation of something else. Interpreting the jurisprudence of the Court, he linked the ruling in BMW, on the scope of trade mark rights under Article 5(1)(a), with Arsenal, finding that there the Court had followed a similar teleological approach by linking the exclusive right with the function of a trade mark and holding that use that did not harm the rights of the proprietor fell outside the scope of protection. In Opel the national court had to conduct a similar evaluation, recognizing the fact that the OPEL logo appeared on the body of the toy cars irrespective of whether the manufacturer was a licensee or a third party. B. OTHER USES OF A SIGN

Regarding the exceptions under Article 6(1)(b), he noted that they applied when third parties, for reasons dictated by the public interest, were allowed to benefit from the advantages deriving from the use of the sign as a trade mark. Citing Hölterhoff, he added that references for purely descriptive purposes did not constitute use as a trade mark because, in these conditions, there was no harm done to the interests that Article 5(1) aimed to protect. And he referred to his Opinion in Arsenal where he had included to non-fringing uses private use, use of symbols that failed to satisfy the requirements for their registration, and uses for educational purposes. He had also stated there that the national judge had to take additional factors into account, like the nature of the goods, the structure of the market, and the penetration of the brand. Concluding, he stated that uses outside the essential function of a trade mark would have to be assessed progressively, on a case-by-case basis. Looking at them from a broader theoretical and justificatory perspective, he remarked that, unlike the cases falling under Article 6(1), they did not require a restrictive interpretation, because they did not constitute derogations, but rather limitations on the use of ius prohibendi. IV. APPLICATION TO THE FACTS — ARTICLE 51(1)(a) Having set the legislative background, he went on to examine how the facts of the case fitted into it. He found that the application of the logo on the toy cars should not be linked with the protectable function of a trade mark for two reasons: first, because of the nature of the product and, second, because of consumer perceptions. Looking at the product market, he noted that miniature cars, trains, shops, and airplanes had been marketed widely since 1898; little cars were the “Proustian Madeleine” of adults reliving their childhood experiences. The audience for the product comprised children of different ages but had gradually also reached adult collectors. To satisfy demand the toys had to replicate even the tiniest details of the original car, including the signs appearing on them. The car industry had only recently been involved in this market, primarily in order to build customer loyalty through merchandising and advertising. As a result of the product market analysis, he concluded that it would be difficult to imagine that the public would automatically associate the signs appearing on the toy cars with the manufacturer. A monopoly over the use of the signs on toy cars, following a too rigorous interpretation of the ius prohibendi, would threaten the existence of the market for toy cars. The licensees of the car manufacturers “would be the only ones authorized to provide detailed replicas of the authentic vehicles, thereby unjustifiably restricting the freedom of competitors to conduct their business.”

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Regarding consumer perception, the Advocate General referred to Anheuser-Busch: the identification of possible harm caused by a third party’s use depended on the perception of a material link in the course of trade between the third party’s products and those of the trade mark proprietor. So, what courts had to do was assess whether the relevant consumers perceived the sign as designating the trade mark proprietor. The referring court had examined the link created by the sign and found that, as intended by the nature of the product, it established a link between the miniature prototype and the real car, but not with the toy models manufactured by Opel’s licensees. This should not constitute trade mark infringement. “This would only be the case if the consumer associated the Opel sign on the toy cars of third parties with the one figuring on the toy cars marketed by Opel.” The next remark of the Advocate General was that the toy car and the original car did not belong to the same category of goods; thus they did not constitute identical goods under Article 5(1)(a). In his concluding suggestion on how the first question should be answered, the Advocate General refocused on the importance of use as a trade mark. Use of a registered sign on toys should not constitute use as a trade mark under the terms of Article 5(1)(a) when the manufacturer of a model car reproduced on a smaller scale and marketed a replica of an actual existing model bearing the trade mark of the owner. A. THE APPLICATION OF ARTICLE 6(1)

Advocate General Ruiz-Jarabo Colomer looked briefly at the remaining two questions, in the hypothetical scenario of a negative answer to the first question, finding that Article 6 would also cover the use made by the toy manufacturer. The aim of Article 6(1) was to balance between the interests of the trade mark proprietor, on the one hand, and those of its competitors, on the other, seeking to secure the availability of descriptive signs. But, since it constituted an exception to the general rules on protection under Article 5, he accepted it had to be interpreted narrowly. Accordingly, he found it difficult to argue that the reproduction of the sign on the toy car qualified as an indication of the type or quality of the product. However, since the nature of a model necessitated the accurate and detailed copy of the original, the sign should be considered as falling within the scope of Article 6(1)(b) as describing other characteristics of the product because it achieved two objectives: it enhanced the information conveyed to consumers and ensured that the operators in the same product market competed under the same conditions. In essence, what the Advocate General suggested was that the market for each replica constituted a distinct product market. The third question concerned the remaining consideration for the application of Article 6(1)(b): had the sign been used in accordance with honest commercial or industrial practices. To answer that question, he went back to the jurisprudence of the Court in Gillette. The most relevant of the uses mentioned therein would be where the third party presented its product as an imitation or reproduction of the marked product. This would not, however, cover miniature toys because they did not imitate the miniatures manufactured by Opel licensees but the actual car manufactured by Opel. According to the Advocate General, compliance with the condition of honest practices should be determined, according to Anheuser-Busch, by making an overall assessment of the facts of the case and taking into account three particular factors: the extent that use of a commercial name would be understood by the relevant public as indicating a link between the third party’s products and the trade mark proprietor; the extent that the third

508 S E S S I O N V I I : T R A D E M A R K party should have been aware of this; and whether it possessed a reputation from which the third party could benefit in order to market its own products. The way Autec presented its products warranted the application of Article 6(1)(b); the inclusion of its own trade marks and indications was evidence of honest behavior in compliance with commercial practice. VI. THE JUDGMENT OF THE COURT OF JUSTICE A. THE FIRST QUESTION

The Court started by stating that under Article 5(1)(a), the “exclusive right entitles the proprietor to prevent all third parties, acting without his consent, from using in the course of trade any sign which is identical to the trade mark in relation to goods or services which are identical to those for which the trade mark is registered.” In this case it was undisputed that the use of the sign was use in the course of trade. “In so far as the Opel logo has been registered for toys,” this is moreover the case envisaged in Article 5(1)(a) of the Directive, namely that of a sign identical to the trade mark in question in relation to goods — toys — which are identical to those for which the trade mark was registered.” ’ It added though that protection was not unconditional: “. . . the affixing by a third party of a sign identical to a trade mark registered for toys to scale models of vehicles cannot be prohibited under Article 5(1)(a) . . . unless it affects or is liable to affect the functions of that trade mark.” Turning to the factual scenario, it noted that “the referring court has explained that, in Germany, the average consumer of the products of the toy industry, normally informed and reasonably attentive and circumspect, is used to scale models being based on real examples and even accords great importance to absolute fidelity to the original, so that that consumer will understand that the Opel logo appearing on Autec’s products indicates that this is a reduced-scale reproduction of an Opel car.” Accordingly, “[I]f, by those explanations, the referring court intended to emphasize that the relevant public does not perceive the sign identical to the Opel logo appearing on the scale models marketed by Autec as an indication that those products come from Adam Opel or an undertaking economically linked to it, it would have to conclude that the use at issue in the main proceedings does not affect the essential function of the Opel logo as a trade mark registered for toys.” The Court then considered the mark registered for motor vehicles. Distinguishing Opel from BMW, the Court noted that the latter “concerned the use of a sign identical to the trade mark for services which were not identical to those for which that trade mark was registered, since the BMW trade mark at issue in the main proceedings was registered for vehicles but not for vehicle repair services. However, the vehicles marketed under the BMW trade mark by the proprietor of that mark constituted the subject-matter of the services — the repairing of vehicles — supplied by the third party, so that it was essential to identify the origin of the BMW cars, the subject-matter of those services. It was having regard to that specific and indissociable link between the products bearing the trade mark and the services provided by the third party that the Court of Justice held that, in the specific circumstances of the BMW case, use by the third party of the sign identical to the trade mark in respect of goods marketed not by the third party but by the holder of the trade mark fell within Article 5(1)(a) . . ..” The Court then attempted to provide a broader principle: “Apart from that specific case of use of a trade mark by a third-party provider of services having as subject-matter the products bearing that trade mark, Article 5(1)(a) . . . must be interpreted as covering

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the use of a sign identical to the trade mark in respect of goods marketed or services supplied by the third party which are identical to those in respect of which the trade mark is registered. It looked at the provision, both from a literary and contextual/teleological perspective. “First of all, the interpretation whereby the goods or services referred to in Article 5(1)(a) . . . are those marketed or supplied by the third party followed from the wording of that provision itself, particularly the words ‘using . . . in relation to goods or services.’ Secondly, the contrary interpretation could lead to the words ‘goods’ and ‘services’ used in Article 5(1)(a) . . . designating goods or services of the trade mark proprietor, whereas the words ‘goods’ and ‘service’ appearing in Article 6(1)(b) and (c) . . . necessarily refer to those marketed or supplied by the third party, thereby leading, contrary to the scheme of the Directive, to interpreting the same words in a different way according to whether they appear in Article 5 or in Article 6.” Accordingly, and since Autec did not sell vehicles, it found that there was no use of the OPEL logo by Autec “as a trade mark registered for motor vehicles, for the purposes of Article 5(1)(a).” The Court then looked at the applicability of Article 5(2) in relation to the motor vehicles mark; “. . . subject to verification by the referring court, it is a trade mark well known in Germany for that kind of products, and, finally, a motor vehicle and a scale model of that vehicle are not similar products. Therefore, the use at issue in the main proceedings is also capable of being prohibited, in accordance with Article 5(1(a) of the Directive, if such use without due cause takes unfair advantage of, or is detrimental to, the distinctive character or the repute of that trade mark registered for motor vehicles.” The Court noted that Adam Opel had argued that it had an interest in the quality of scale models of Opel vehicles being good and the range of models being up to date. It found that this was a factual assessment. “It is for the referring court, where necessary, to determine whether the use at issue in the main proceedings constitutes use without due cause which takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the registered trade mark.” The Court concluded as follows: “Therefore, the answer to the first question must be that, where a trade mark is registered both for motor vehicles — in respect to which it is well known — and for toys, the affixing by a third party, without authorization from the trade mark proprietor, of a sign identical to that trade mark on scale models of vehicles bearing that trade mark, in order faithfully to reproduce those vehicles, and the marketing of those scale models: — constitute, for the purposes of Article 5(1)(a) of the Directive, a use which the proprietor of the trade mark is entitled to prevent if that use affects or is liable to affect the functions of the trade mark as a trade mark registered for toys; — constitute, within the meaning of Article 5(2) of the Directive, a use which the proprietor of the trade mark is entitled to prevent — where the protection defined in that provision has been introduced into national law — if, without due cause, use of that sign takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the trade mark as a trade mark registered for motor vehicles.” B. THE SECOND QUESTION

Here the Court ignored the specific reference to Article 6(1)(a) by the referring court: “Although, in its second question, the referring court requests interpretation of Article 6(1)(a) . . ., it is clear from the order for reference that it is in reality seeking an interpretation of Article 6(1)(b).” It also dismissed the applicability of Article 6(1)(c): “As a preliminary observation, it should be noted that the use of the Opel logo at issue in the main

510 S E S S I O N V I I : T R A D E M A R K proceedings cannot be authorized on the basis of Article 6(1)(c) . . . The affixing of that trade mark on Autec’s scale models is not designed to indicate the intended purpose of those toys.” Regarding the scope of Article 6(1)(b), the Court stated: “. . . the trade mark shall not entitle the proprietor to prohibit a third party from using, in the course of trade, indications concerning the kind, quality, quantity, intended purpose, value, geographical origin, the time of production of goods or of rendering of the service, or other characteristics of goods or services ... whilst this provision is primarily designed to prevent the proprietor of a trade mark from prohibiting competitors from using one or more descriptive terms forming part of his trade mark in order to indicate certain characteristics of their products.” The Court concluded by attempting a balancing exercise. On the one hand, “[O]ne cannot . . . exclude a priori the possibility that that provision might authorize a third party to use a trade mark if such use consists in giving an indication concerning the kind, quality or other characteristics of products marketed by that third party, provided that use is made in accordance with honest practices in industrial or commercial matters.” Nevertheless “the affixing of a sign which is identical to a trade mark registered, inter alia, in respect of motor vehicles to scale models of that make of vehicle in order to reproduce those vehicles faithfully is not intended to provide an indication as to a characteristic of those scale models, but it merely an element in the faithful reproduction of the original vehicles.” VII. THE WAY FORWARD: REVISITING THE PAST It is worth highlighting three points regarding the jurisdiction of the Court. First, it does not have the luxury of picking its cases. Second, at least in its interpretive function, it only looks at snippets of cases that are often characterized by very particular facts. It is not uncommon for the Court to get drawn into the facts when it should be dealing with basic principles. This distorts the rulings of the Court in two ways. From its own perspective the Court often appears to shift from one position to another in order to accommodate diverse factual scenarios. On the other hand the wider significance of a judgment can be lost because the audience is fixated on the facts or the particular question referred to the Court. Third, the Court has to speak with one voice; the embedding into the same judgment of potentially conflicting views means that basic principles are stretched to their limits or that succinct multifactor tests are lost into the balancing narrative. On the other hand the Court appears to have chosen a pragmatic approach, adjusting the scope of the right when it feels that it has perhaps gone too far and in a way functioning as an ultimate court of appeal. This, though, might create some uncertainty from an interpretive perspective. A possible solution is for the Court to take a step back and detach itself from the facts of each case and instead insist on the basic principles established by its jurisprudence: genuine and substantiated likelihood of confusion that influences or affects the behavior of customers at the point of sale is at the core of trade mark protection. In Opel this could have accommodated the use of identical signs on identical products, whereas in Picasso the Court would not have to appear to backtrack from its acceptance of post sale confusion in Budweiser. *

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MR. KÖHLER: Spyros, one key question is whether the case was correctly decided. We have identical marks. We have identical goods. PROF. MANIATIS: As an audience, trademark lawyers are getting too much hooked on the outcome of the case. I think, as an outcome, it was correctly decided. But I would say that it should have decided that case in that way under Article 6 rather than Article 5. MR. KÖHLER: May I ask you one additional question? How would you evaluate the following case: Local trains branded in white and red with the COCA-COLA logo were manufactured as scale-model toys. These trains exist in reality. But, of course, there are also other local trains not branded with the COCA-COLA logo. What would you think about that? PROF. MANIATIS: It could be a case where you want to protect a trademark that has a reputation used on similar goods. Then, as the courts in Opel highlighted, you do have also the possibility to protect your sign on the basis of Article 5.2. MR. KÖHLER: But the toy manufacturer will argue, “We want to reproduce this train, which is existing in reality.” PROF. KUR: Can you please answer me a question first? How did the court decide Opel? What is the outcome of the case? Nobody knows about that exactly because it goes back to the national court. The national court must find out how consumers perceive the mark. MR. KÖHLER: What will the outcome be? PROF. KUR: We do not know. But the Court, without having been asked, seemed to be quite convinced that consumers do not see this as indicating. This is another instance where the Court simply stepped in, in order to give guidance in something that it wasn’t even asked, and said, “But there is still Article 5(2); this could be an abuse of reputation”; and again, “Please, national court, you make up your mind whether this is so or not.” There is no guidance at all as to how the court should handle that particular argument. So nobody knows what will come out of it. I think there is a big chance, in this case and also in other cases, that the courts will say, “If the ECJ thinks that this is the reputed mark, and maybe because Opel cannot be so sure whether the quality of the cars is good or not, then let’s judge that this is an abuse of reputation.” There are a lot of things that need to be criticized about the Opel judgment. But throwing this stone into the water without having been asked, without saying anything about how this should then be judged, whether it is indeed something that is legally important that somebody who is a car manufacturer, who is identified and perceived by consumers as having no links with Opel at all — maybe that guy does not make very good cars. How can this affect the reputation of Opel, without people seeing any links? The Court does not say anything about how this should be legally assessed. It just gives the court the opportunity to do whatever it wants. MR. LLEWELYN: Even before you get into that difficult issue of Article 5(2), how do you reconcile this case with Arsenal? PROF. KUR: No way you can reconcile it. MR. KÖHLER: May I ask one question? David, do you think the Court is absolutely neutral about Article 5(2) in its finding? I would not say that. MR. LLEWELYN: No, I do not think it is neutral. I think it is almost saying, “If these were of a poor quality, then Opel might have the possibility of stopping it,” which is absurd. MR. KÖHLER: How can it be about quality? MR. LLEWELYN: I agree. MR. KÖHLER: I think the Court is not neutral, because there is a clear understanding of what the outcome should be.

512 S E S S I O N V I I : T R A D E M A R K PROF. LADDIE: May I just say there are going to be people in this audience who do not know the Opel case and are learning about it for the first time. I think it is quite important to realize that there were two marks, both for the OPEL logo. A shrunk-down version of the OPEL logo was put on the defendant’s toy cars, because they were imitations of Opel cars. The two trademarks owned by the Opel company were, first, that sign for motor cars and, second, that sign for toys. There are, therefore, two parts of the decision. It is very important to distinguish between the two parts. Insofar as the mark was for toys, you had the identical mark used on precisely the same goods. It is quite important to realize that. As a result of Arsenal, people would say it is used in the course of trade, it is a commercial use by the defendant, it is on identical products; therefore, it must be an infringement. It is important to realize that under our jurisprudence, when it is identical goods and identical marks, you do not need to show confusion. Therefore, identical goods, identical marks — bang, it must be an infringement. But what the Court said was no. There is an enormous argument now in Europe as to precisely why it said that. One of the arguments centers on a dispute as to whether the Court held that this was not trade mark use by the defendant. The sign was used to decorate the toy car, but nobody looking at the toy car would say that the little logo indicated who made the car. That takes us right back to Arsenal. If you ask a hundred trademark lawyers in Europe what Opel means, you will get 120 answers, at least. MR. KÖHLER: Let me add something. Opel has licensees and is licensing toy manufacturers. This is also important to know. In the judgment of the ECJ, the ECJ argues that consumers looking at the toy are not thinking about toys; they are thinking about the real car. Then it was over for Opel. PROF. MANIATIS: The Court said, “We do not want to get drawn into whether this is trademark use. This is why we will use the interests of the proprietor and the essential function of the trademark.” This use, the Court said, according to the German court, does not affect the interests of the proprietor, so it should not be covered even under Article 5(1)(a). I think the Court has to sometimes deal with unsatisfactory legislation. We have this distinction in Europe between identical marks/identical goods infringement, and identical or similar marks/identical or similar goods where you need to show confusion. The Court cannot do what the Supreme Court has done in the United States and say “We will have a multifactor test, where we will put everything into this melting pot and we will decide whether there is confusion or not at the end.” I think this is what the Court would like to do, and what the ECJ is trying to do. It is trying to say that the hard core of trademark protection is based on confusion; it is confusion that we should protect against. To some extent, it is introducing confusion into Article 5(1)(a) through the back door, by referring to the essential function of the trademark and to the protectable interests of trademark proprietors. DR. EVANS: The expression the Court used is “a material link.” So when the Court is determining whether the third party’s use affects the essential function of the plaintiff’s mark, it is saying that a part of the analysis is whether there is a material link in the minds of consumers. I have a brief anecdote that highlights the Opel case. I was teaching this case, and after the class a student came to me and he said, “This case is nonsense. I was shopping in Germany, in Berlin, on the weekend, as a matter of fact.” He went on to explain that he was aware that at issue was one of Autec’s word marks, CARTRONIC, the trade name

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Autec AG, as well as the OPEL ASTRA V8 logo on the grill (that is, the circle with the lightning through it). He said, “It is quite clear to me that there can be absolutely no confusion.” Indeed, if you look on the Internet, if you go to the Autec site, you will see that the packaging bears the word CARTONIC in large letters. Of course, for trademark lawyers, it is a matter of principle that we are talking about. But I think, as the panel has made quite clear, for consumers there is no question of confusion or, as we say with respect to Article 5(1) of the Trademark Directive regarding identicality, no “material link.” MR. LLEWELYN: Isn’t one of the problems, though, that trademark law in Europe has just lost touch with reality? One can, I think, understand the reason for having a provision that gets rid of the requirement of showing a likelihood of confusion where one is dealing with counterfeits. You can see why you warrant a provision like this, so that where you have a counterfeit, you do not have to go through those particular hoops. But the problem is that, in introducing a provision for a quite legitimate reason, the legislature did not think beyond that particular limited issue and think about how, once you divorce trademark law from either confusion or the likelihood of confusion, both in the case of identicality and in the case of dilution, that way lies madness. MR. KÖHLER: Annette? PROF. KUR: I just wanted to stress that the ECJ has now demanded that the use that is made of the mark is, in a way, conflicting with the functions of the trademark. But they say — and it is really important to the details — it must conflict with the functions of the trademark, in particular its essential function. So they leave the door open, even if it conflicts with other functions, like the advertisement function, which could also come into the picture. This is why you do not know what trademark law is about in Europe right now. I think that for the ECJ the situation is now very comfortable, because they have made so many statements in so many different ways, and they are so contradictory in what they have said, that, whatever they are going to decide in the future, they will find one or another decision that they can cite, where they can create the impression that they are still in line with what they have said before. I wanted to address one other thing that we have not been talking about. There was quite a lot in this awful decision. One of the points that struck me is that they obviously do not want to include any longer the referential use of trademarks, which is an important topic. We talked about that yesterday in the Plenary Session. One of the statements that they make is that the use that is made of the mark by the third party must relate to the goods or services offered by that third party and not by somebody else. So if you just use the mark in order to refer to somebody else, then it is not use that comes into Article 5. They make a distinction and say only the case where you are rendering services is one where it would be used as a mark, when you point towards the mark of the goods to which your services relate. They did not think about, for instance, Gillette.136 I asked myself, what about that decision? Gillette’s case was a case where somebody was selling replacement blades for razors, and where he was just pointing out that the blades he was selling under his trademark also fit the razors of Gillette he made reference to Gillette. That was considered to be trademark use. It was a referential use. They do not distinguish Opel from that case. Again I wonder, what is the situation now? Is Gillette included? Is it not included? Is 136

2005.

Case C-228/03, The Gillette Co. and Gillette Group Finland Oy v. LA-Laboratories Ltd. Oy, E.C.J. Mar. 17

514 S E S S I O N V I I : T R A D E M A R K referential use something they get rid of ? Is it only use for one’s own products that would count under Article 5? Then what about this O2 thing that goes up to the ECJ? In a comparative advertisement, you are also not using another’s mark for your own products or services; you are making reference to that guy. Is that under trademark law or not? We do not know where we are. They really created chaos. PROF. LADDIE: Once again, for those in the audience who are not familiar with these cases, can I just tie together two things that David and Spyros said? Spyros used a very interesting little expression in the course of his talk. He said that with identical marks, identical goods, there is an inference of confusing similarity. The whole point of our trademark legislation in Europe is, as David says, that it creates a special category of infringement — identical mark, identical goods — where you do not need to prove confusion. But most people believe that that was created not because it was creating a new super type of right, but it was saying it is not necessary to prove confusion where the defendant is using the same mark on the same goods. That is the idea. The trouble with it — and it is a problem that we have to face that has kept on resurfacing in Europe – is if you ignore questions of confusion and you simply ask, “Is the mark identical? Are the goods identical,” if the answer to those two questions is yes, it is a short step to a finding of infringement. You end up with a right like copyright. There is a well-known example used by lawyers. Let’s say the trademark is a question mark. It is registered for paper articles. Somebody writes a book with the title The End of the World? Is that an infringement? It has a question mark. It is the same sign and it is used on the same goods and it is used in the course of business. Most lawyers would say that cannot be an infringement. The problems created by Arsenal and by Opel are the recognition that there must be some limit on the scope of trademark rights. But the ECJ, in my view — and, I suspect, in Annette’s view — has failed conspicuously to make it clear what the limit is. As somebody who has an interest in trademark law, that is a most crucial failing. Of all the things that you need to know in trademark law, probably the most important is what is the scope of the rights that you acquire by getting a registered trademark. You have to know what monopoly rights, what exclusive rights, you get. That is not a peripheral question; it is central. Some of us did not like what is the ECJ said in Arsenal. I am one of them. But I am now in the happy position of saying Arsenal may have been wrong. Who knows? Had Opel been decided before Arsenal, Arsenal might have been decided a different way. We just do not know. It is a mess. And that is a real failing of the ECJ. MR. LLEWELYN: But I think another important point is that the ECJ actually said, as well, that the defense of descriptive use or referring to characteristics did not apply. I think that is a critical point as well. Everybody was thinking it doesn’t matter about the breadth of this “identical/identical, no-need-to-show-confusion” provision, because you have the defense of referring to a characteristic of the goods or being purely descriptive. But they said that does not apply. Therefore, where does that leave you? If, for example, you have on the front of a T-shirt a registered trademark, that does not refer to the characteristics of T-shirts, unless it happens to be the word “cotton.” So is that an infringement under Article 5? That, again, is one of the issues about which everybody thought, “Oh, no problem. It can’t be an infringement, can it?” It might be unfair competition, in my view, but whether it is trademark infringement I have great doubts about. But now where does this leave us? PROF. LADDIE: An example I like to give students is as follows: everybody knows that

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political parties now have to make money to support their election campaigns. Assume that in the United Kingdom the Conservative Party registers CONSERVATIVE with a little logo as a trademark for clothes and caps, and the Labour Party registers the word LABOUR — or NEW LABOUR as it is now called — as a trade mark for clothes and caps. Somebody who wants to support the Labour Party at the election has a golf cap and it has “Labour” written across the top. When Arsenal came out, somebody selling caps with the word LABOUR across the top would be an infringer. After Opel, who knows? PROF. KUR: May I say something? I think what David said is extremely important. The limitations are so important. The way in which the Court dealt with that point in Opel may be the worst one, although it is hard to decide which is the worst thing — not as regards the outcome; it may be that the court in Nuremburg will get it right. I am sympathizing with the carmaker, obviously. But one may have different opinions on that. I am not talking about the outcome of the concrete case, which is quite insecure, I think. But the decision as such has so many flaws. One of them is what they said about the non-applicability of the limitation concerning descriptive use in this case. Again, you find a clear contradiction of that statement, when you look into the Linde, Winward, Rado case, the case about registration of three-dimensional signs.137 One of the questions has been there whether the obstacle against registration applying to descriptive marks can be applied to three-dimensional signs. There were some doubts about that. Can you say that a three-dimensional object is descriptive, as to itself ? The Court said, yes, of course it can be descriptive. There is no reason to exclude a three-dimensional sign from falling under the obstacle against a descriptive mark. In Opel they said the affixing of the OPEL logo was an element in faithful reproduction of that scale model. I ask myself: When the scale model itself, as a three-dimensional object, can be descriptive of itself, being a scale model, and the OPEL sign being affixed to it is an element of that making of the toy model, why can that not be descriptive? So again, there is no consistency in what the Court is saying. MR. KÖHLER: Paul, OHIM was not involved in this case, so you can speak up freely. MR. MAIER: Yes, but with prudence. A number of criticisms that were raised here are certainly valid criticisms. But I would like to bring in some words of understanding for the ECJ and also for the CFI. The procedure of reference for a preliminary ruling in an infringement procedure is actually something perverse. Obviously, the judges get a very complete file. They know everything that happened in the first instance and in the appeal, how the questions came to arise. They, of course, have a very human reaction as to, “I would like to cite this one or the other one.” Very unfortunately, with what I called “the shrapnel approach” when speaking to David — picking out of a big box where all these principles cook, and where trademark lawyers, with a safe hand, pick the right one —sometimes they pick it wrong, that is true. But I think the criticism that is aired here is somehow exaggerated. You must simply know that things are like that. Then there is something very important that Spyros said. Of course, I have never worked for the Court of Justice, but I can tell you that when we sit together in the Grand Board, it is the same thing. The solution is one thing, how you get to it is another one, and how you draft a decision or judgment is yet another one. A number of things disappear in paragraphs or are exaggeratedly highlighted, just because, in our case, a vote is cast in one direction or another. That you have to understand. 137

Joined Cases C-53/01 to C-55/01, Linde, Winward, Rado, [2003] E.C.R. I-0000.

516 S E S S I O N V I I : T R A D E M A R K Another very, very basic thing — and I am saying this very much for Hugh Laddie — is that a sentence in a particular trademark decision has a value only in that decision and the facts against which it was taken. I know that may sound regrettable, but in Europe this is the situation that we have. To highlight this, I would give the following example on how things can go far and not far. The BMW case was a retailer who wanted to use the BMW brand and also the logo to show that he repairs BMW cars. It was considered fair use to be allowed to do it. There was a similar case — or thought to be a similar case — in France, where someone who was repairing Porsche cars and selling secondhand Porsche cars condemned by the Court of Appeal in Paris simply because the extent of use of the logo and the way it was used in the advertisement was manifest, as such, that he was going beyond the requirements of fair use. So from a purely theoretically identical case, you have — and you must have — a different solution. The problem is that these are supreme court decisions. Maybe the system is flawed somewhere. Maybe we should not just simply get there by a supreme court saying something, actually justifying itself more than motivating a decision, and coming to a particular conclusion. MR. ROBINSON: Just to pick up on a couple of points here, it seems to me that your last point is the critical one. What the Court has not achieved is either stepping back from the case and giving guidance at a level of principle or, on the other hand, getting into the facts, rolling up its sleeves, and taking a decision that truly is limited to the facts. Under the current system, it is not allowed to roll up its sleeves and get its hands dirty on the facts. But on the other hand, the current system, with the 234 references, puts you more into the position whereby it does hide behind the facts of the case, because it does not quite know the extent of where its ruling is going to take it. So it’s hiding behind the facts of the case, and the fact that it does have the full dossier, in order to protect itself in respect to future decisions. It is one of the unfortunate things about the system that we have at the moment. You are neither in the facts nor at the complete level of principle. This is where I think the issue that Advocate General Sharpston has raised again is particularly important. If the Court is going to be a true supreme court, then it needs to withdraw and go up to a level of generality. This is a two-way street. On the one hand, it requires the ECJ to go back to a level of principle. On the other hand, respectfully put, it requires national courts not to refer questions of absolute minute detail. This goes back to an opinion of Advocate General Jacobs in a case called Wiener in 1996,138 where he called for a principle of judicial restraint from national courts. He said national courts should be much more restrained about the types of questions they put to the ECJ. Unfortunately, that has not been reflected in the case law of the ECJ. Therefore, we are left, as Spyros was saying, with a situation whereby they have to answer every question, and the national courts still feel that they ought to put questions to the court where they have any doubt, as Lord Hoffmann was saying yesterday. So we are in this intermediary system. Picking up on what Paul was saying, I think there has to be an element of realism in respect to the court’s judgments. Individual sentences in the cases have to be taken with a pinch of salt. I know that is hugely unsatisfactory, but it is the system that we are working with at the moment. What are the chances of changing the system? Close to zero at the moment. That is my take on the constitutional arrangements. The European Union cannot even get agreement 138

Case C-338/95, Wiener SI, [1997] E.C.R. I-6495 (opinion of Advocate General Jacobs).

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about its political institutions to deal with twenty-seven Member States, let alone trying to deal with the nuances of the ECJ, particularly with regard to intellectual property cases. That is so far down the agenda that it is simply not going to be dealt with. We are going to have to work with the system that we have at the moment. MR. KÖHLER: Thank you, William. Before we take questions from the audience, I have a question. How would the Opel case have been decided in the United States? PARTICIPANT [John Richardson, Arbitrator & Mediator, New York]: There may be somebody in the audience who knows more about it. There is an American Honda case decided in California a couple of years ago, 2004, the Central District of California, which found infringement dilution.139 One of the facts was that Honda offered licenses for people to do this, and it offered the sort of labeling or reproductions of the mark that the defendant went out and procured for itself. The judge did not seem to like that very much. That is all I know of the case. I haven’t read it recently. MR. KÖHLER: Questions from the audience? QUESTION: May I discuss, very peripherally, the Nike case,140 because this case has something in common with Opel. We all know that NIKE is a brand owned by an American sportswear company, but in Spain, NIKE is owned by a Spanish local company, Cidesport, for some historical reason. This Spanish company entered into a contract with a Chinese company. The Chinese company produced sportswear under the trade mark NIKE in China. According to the contract, all the sportswear produced by this company would be exported to Spain. There was no sale in China and no sale anywhere else in the world, only in Spain. The question is whether the Chinese company infringed on the trade mark of NIKE. Nike China is a subsidiary of the American company. It has registered the trade mark NIKE in China. PROF. LADDIE: It depends. I think it depends on the domestic Chinese law, whether marking goods for export is included as an infringement. If your legislation says that it is an infringement to use a mark, a confusingly similar mark, and use includes putting the mark on for export, then you would infringe. QUESTIONER: It is very interesting. Chinese trade mark law learned a lot from the EC Directive on Trademarks. Article 52 of China’s trademark law says if there is an identical mark used on identical goods it is an infringement, but there is no mention of exportation.141 PROF. LADDIE: The question is what is meant by “use”? Most lawyers would say that when you talk about use, you are talking about use inside the jurisdiction covered by the legislation. But many trade mark acts go further and say that if you mark goods for export so that they will not actually touch the market covered by the law, but are exported from that 139

American Honda Motor. Co., Inc. v. Pro-Line Protoform, 325 F. Supp.2d 1081, 1085 (C.D. Cal. 2004). Comercial Ibérica de Exclusivas Deportivas, S.A. (CIDESPORT), Flora B.M. and Juan A.F. v. Nike Int’l, Ltd. and Am. Nike, S.A, Spain Sup. Ct. 28 Mar. 2005. 141 Trademark Law of the People’s Republic of China, as amended on Oct. 27, 2001, entered into force Dec. 1, 2001, available at http://www.chinaiprlaw.com/english/laws/ laws11.htm. Article 52: “Any of the following acts shall be an infringement of the exclusive right to use a registered trademark: (1) to use a trademark that is identical with or similar to a registered trademark in respect of the identical or similar goods without the authorization from the trademark registrant; (2) to sell goods that he knows bear a counterfeited registered trademark; (3) to counterfeit, or to make, without authorization, representations of a Regis-tered trademark of another person, or to sell such representations of a registered trademark as were counterfeited, or made without authorization; (4) to replace, without the consent of the trademark registrant, its or his registered trademark and market again the goods bearing the replaced trademark; or (5) to cause, in other respects, prejudice to the exclusive right of another person to use a registered trademark.” 140

518 S E S S I O N V I I : T R A D E M A R K market, nevertheless that can still be infringement. If that provision exists, it’s infringement. If it does not exist, it probably is not infringement. At least there is a good argument that it is not. QUESTIONER: Where is the confusion? There is no sale in China, so there is no confusion in China. PROF. LADDIE: Oh, sure. When you make rigid rules in your legislation — identical mark, identical sign, and covering exports — you will end up including within the scope of the trademark activities that do not cause confusion. But that is a result of putting in your legislation definitions that are very wide in scope. As I say, in the United Kingdom, if you have legislation that says that marking goods for export counts as use, and the rights cover identical marks for identical goods, it would be an infringement. It doesn’t matter that in the country you are exporting to there is no infringement. In your case, the question is not whether there would be infringement in Spain, because there clearly wouldn’t be. The question is only whether you fall within the scope of the monopoly rights created in China for activities in China. MR. KÖHLER: Any questions as to Opel or beyond that? QUESTION [Mustafa Safiyuddin, DSK Legal, India]: Sir Hugh is saying that the defendant’s toy car perhaps carried two marks, one the OPEL mark and the other the mark of the defendant. What you are saying is that the Court came to the conclusion that so far as the defendant’s mark is conerned that it was used in a trademark sense but so far as OPEL is concerned it was not used in a trademark sense. PROF. LADDIE: Yes, I think that is what it is saying. That goes right back to the argument that existed at the time of the Arsenal decision. That was one of my cases. I said that the word ARSENAL was used on clothing not to designate the manufacturer of the goods but, rather, it was a way the person who wore the clothes could show that he supported the Arsenal football team. I said that was not trademark use. What happened in the ECJ appeared to be a suggestion that as long as the mark was used in commerce on identical goods, it was infringement. Opel, I think, has gone back. QUESTIONER [Mr. Safiyuddin]: This case is slightly different. What you are saying is that the defendant could carry two marks, and not one mark. One is the OPEL mark and the defendant’s mark. PROF. LADDIE: No, no. The fact that it had its own trademark was irrelevant. The only issue that had to be considered was what the impact was of using the OPEL mark. QUESTIONER [Mr. Safiyuddin]: I agree that that was the impact. But the fact was that the toy carried two marks. Therefore, implicitly, the court held that the defendant’s mark was trade mark use. PROF. LADDIE: Let me give you an example. Let’s say the Ford Motor Company decided next week to produce a new car and it put the OPEL mark on the radiator grille. It would be no defense to Ford to say, “I also used the FORD mark, and everybody knows FORD is my mark.” You would have two marks, sure. That would still be an infringement. QUESTION [Veronica Barresi, University College London]: I would like to spend a word in favor of the ECJ. I think Opel confirms Arsenal in a way. What the Court is trying to do and what it wants to do is to get distance from the notion of trade mark use in relation to infringement in case of identical signs and identical goods. It wants to rely on a broader principle that it is trying to establish, which is that infringement would catch any use that affects or is liable to affect the essential function of a trade mark. I do not know whether this is wrong or right. But it is a way around the concept of presumption of likelihood of confusion, which is not only a principle in Europe, but is embodied in Article 16 of the TRIPs Agreement and one of the areas of the Directive,

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which says that in the case of identical goods and identical signs, the protection is absolute. QUESTION: I think Mustafa makes a very, very good point. The fact that the defendants have their own trade mark, in addition to the trade mark owner’s mark, surely should affect the way customers perceive that second trademark. In Arsenal the scarves had “Arsenal” in the corner and “Made by Gap,” or “Made by Marks & Spencer.” The presence of something else there would surely affect the way “Arsenal” is perceived. MR. LLEWELYN: That is just not the case. Indeed, replica football shirts are a classic example of why that is not the case. On a replica Arsenal football jersey and you have the Gunners’ logo; you have EMIRATES, BERGKAMP, or HENRY — registered trade mark; you have the number — registered trade mark; you have the “Nike swoosh” — registered trade mark. It is a whole mix of different signs. There is no way that just because it has EMIRATES on it or it has something else, you can say that is not infringement or that is infringement. You have to look at all these other things surrounding the sign. QUESTION [Philip Carpio, U.S. Customs and Border Protection, Miami, FL]: I do want to disclaim that this is not the position of the U.S. government, but this is my personal opinion, based on experience. Obviously, Customs has the responsibility of interdicting counterfeit or infringing items coming into the United States. Assuming that the OPEL logo is registered in the United States or the sports teams’ logos are registered in the United States, those toy cars or those sports T-shirts, it is highly likely that their importation would be seized as infringing. In the United States, there is no per se rule about identical marks on identical goods automatically infringing, but there is a very strong presumption to that effect. It would require some extraordinary evidence to try to rebut that. I just find it interesting that in Europe you are going through this effort to wrestle with this. In the United States, the analysis would be a lot shorter and a lot sweeter. QUESTION [Barton Beebe, Cardozo Law School, Yeshiva University, New York]: I wanted to follow up on the first question, which is how the U.S. courts would decide this issue, and pose to the panel possibly a more difficult question, which I suspect is coming. It is bubbling up through the American courts currently. That is the problem of virtual reality games, games where you drive through a city or you go through some sort of maze and commit acts of violence. Or, to follow up on David Llewelyn’s comments, what about a virtual reality game that involves soccer, or football? Let’s say it is a game where you get to play English Premier League teams. Because it is a virtual reality game, you want it to be as realistic as possible, so you have the Arsenal players with HENRY on the back, EMIRATES across the front, NIKE, and the rest. What are the rights? Are there any rights infringed in that situation? I am not sure that it is clear how the American courts will decide that. But I suspect, following from the Customs official’s and other comments, that the American courts would say that all of that is promotional use and permission must be gotten in order to use all of those marks — in a game that is, after all, just trying to represent reality. PROF. LADDIE: I have no doubt that Veronica Barresi would say that is an infringement. I would say that is not. One of the disasters is, at the moment, nobody has any idea what the ECJ would say. It is very difficult. PROF. KUR: I found that also quite interesting. They go back to saying that we have an infringement when there is a conflict with a trademark’s function, in particular the essential function, and they found a formula to wrap it all up. But that formula is vague and diffuse. Again, they talk about trademark functions, in particular the essential function. They can put anything into that. So you have nothing. They have a nice formula that

520 S E S S I O N V I I : T R A D E M A R K covers everything, but it does not tell you a single secure thing about where they are going. Article 16 of TRIPs talks about double identity giving rise to a presumption of likelihood of confusion. But we do not do that. We go beyond TRIPs. Our provision, double identity giving, as a matter of principle, absolute protection — at least that is how it could be read — originally meant to go beyond that. It was written that way, that after you establish double-identity goods and marks the game would be over, the file would be closed, unless you could get out of this by using the limitation. So I think TRIPs is not an argument. Whether we have a presumption or not, rebuttable or not, that is not something that you find so clearly in the European text. PROF. MANIATIS: Sometimes the Court, in particular the Advocate General, is very pragmatic. Ruiz-Jarabo Colomer was Advocate General in both Arsenal and in Opel. In Arsenal it was obvious that he wanted to protect the signs of Arsenal because football clubs make money out of them. In Opel perhaps he wanted to protect toy manufacturers because there is a very strong market, in Germany in particular, for toy manufacturers, so there should be no infringement. It is the pragmatic route that sometimes the Court is following. MR. KÖHLER: Two short questions from the audience. QUESTION: If an unauthorized seller of the Opel cars comes along and says, “I’m XYZ Motors, I’m a seller of Opel cars,” that will not be an infringement under BMW.142 But if he then goes on and takes a photograph of the Opel cars and, as part of that, takes a photograph of the grill — with the additional photograph, obviously there is no issue of copyright infringement — and he takes a photograph of his own car, would that amount to infringement? PROF. LADDIE: It depends entirely on whether or not the use he makes is considered to be unfair, not in accordance with business practice. If he uses the photograph to give the impression that he is an authorized dealer, which is false, then it would not be a fair use. If he just has a picture — let’s say I sell Porsches, Opels, Audis, and I have photographs of all of them — probably they will say that is in accordance with ordinary business practice and it would not be an infringement. MR. KÖHLER: Last question. QUESTION [Ilanah Simon, Brunel University, Uxbridge, England]: I wanted to agree with what Veronica was saying. I do not think the essential function is empty of content. It is clearly stated, first of all, in the case law and also in the Preamble, that what our trademarks should be doing is distinguishing. That is what the Court has read into Article 5(1)(a) that confusion is one embodiment of it. It also comes back in Article 5(2), our definition of “blurring”; you are damaging the distinctiveness of the trademarks. So this essential function is there, and it does seem to be shaping the entire ambit of infringement and beyond. MR. KÖHLER: Thank you very much for your patience.

142 Case C-63/97, Bayerische Motorenwerke AG (BMW) and BMW Nederland BV v. Ronald Karel Deenik, Judgment of the Court, February 1999.

Case and date

Mark(s)

C-29/05 P OHIM v Kaul GmbH/Bayer AG (Opinion 26.10.2006 (Sharpston)) 13.03.2007

C-214/05 P Sergio Rossi SpA/Sissi Rossi Srl (Opinion 16.03.2006 (Kokott)) 18.07.2006

3.

MISS ROSSI/SISSI ROSSI

ARCOL/CAPOL

QUANTUM/Quantième C-171/06 P T.I.M.E. ART Uluslararasi Saat Ticareti ve dis Ticaret AS/Devinlec Développement Innovation Leclerc SA (No Opinion) 15.03.2007

2.

1.

Judgments

A. Court of Justice of the European Communities

No

Opposition procedure Article 8(1)(b)

Opposition procedure (i) Article 42(3) (ii) Article 59 (iii) Rules 16(3) and 20(2) of Reg (iv) Article 62(1) (v) Article 74(2)

Opposition procedure (i) Article 8(1)(b) (ii) Article 7(1)(b)

Provisions allegedly infringed

Grand Chamber. Submission of facts and evidence to OHIM possible after expiry of time-limits in CTMR; late submission particularly justified where likely to be relevant to outcome of opposition or stage/circumstances of late submission does not argue against; Board of Appeal failed to exercise discretion as to whether to take into account late submission; appeal to Board of Appeal does not start new time-limit for submission running. CFI not required to give express reasons for evaluation of every piece of evidence; overall assessment of similarity and likelihood of confusion sufficient; ECJ has no jurisdiction to substitute its own assessment of facts for that of the CFI. Appeal upheld. Contested CFI judgment and Board of Appeal decision annulled

Appeal dismissed

Plea based on Article 7(1)(b) not admissible as not pleaded before CFI. Distinctiveness of earlier mark not an essential element of likelihood of confusion; conceptual difference between marks part of global assessment and not of predominant importance.

Comments

Appeal dismissed

Decision of Court

William Robinson, Christopher Pickup, Joanna Glenn FRESHFIELDS BRUCKHAUS DERINGER

APPENDIX COMMUNITY TRADE MARK JURISPRUDENCE OF THE EUROPEAN COMMUNITY COURTS 1 JANUARY 2006 TO 31 MARCH 2007 PA R T A : T R A D E MA R K LA W D E VE L OPME N T S I N T H E E U R OPE A N UN I ON

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Shape of a sweet (3D)

VITAFRUIT/VITAFRUT

C-24/05 P August Storck KG v OHIM (Opinion 23.03.2006 Colomer)) 22.06.2006

C-416/04 P The Sunrider Corp v OHIM (Opinion 15.12.2005 (Jacobs)) 11.05.2006

C-206/04 P Muehlens GmbH & Co KG/Zirh International Corp (Opinion 10.11.2005 (Colomer)) 23.03.2006

C-361/04 P Ruiz-Picasso/Daimler Chrysler AG (Opinion 08.09.2005 (Colomer)) 12.01.2006

5.

6.

7.

8.

Opposition procedure Article 8(1)(b)

Opposition procedure Article 8(1)(b)

PICARO/PICASSO

Opposition procedure (i) Article 43(2) (ii) Article 8(1)(b)

(i) Article 7(1)(b) (ii) Article 74(1) (iii) Article 73 (iv) Article 7(3)

(i) Article 7(1)(b) (ii) Article 74(1) (iii) Article 73 (iv) Article 7(3)

Provisions allegedly infringed

SIR/ZIRH

Sweet wrapper (2D)

C-25/05 P August Storck KG v OHIM (Opinion 23.03.2006 (Colomer)) 22.06.2006

4.

Mark(s)

Case and date

No

Appeal dismissed

Appeal dismissed

Appeal dismissed

Appeal dismissed

Appeal dismissed

Decision of Court

Likelihood of confusion to be assessed globally, taking into account all relevant factors; assessment of similarity, distinctiveness and level of attention paid by consumers at different times were questions of fact for CFI; level of attention likely to vary depending on product.

Likelihood of confusion to be assessed globally, taking into account all relevant factors including phonetic and aural similarities and visual and conceptual differences; assessment a question of fact for the CFI.

If TM owner claims that third party use is ‘genuine use’, it is presumed that he consented to such use. ‘Genuine use’ means use of a mark to guarantee origin and does not include token use to preserve rights; an overall assessment of use must be carried out.

Article 7(1)(b) : same test of distinctiveness for 3D marks as word/figurative marks; perception of relevant public not necessarily the same; potentially more difficult to establish distinctiveness for 3D mark. Article 7(3) : potentially more difficult to establish distinctiveness where 3D mark not visible (e.g. packaging); customers’ perception at time of purchase critical.

Article 7(1)(b): reasoning as 3D case. Article 7(3): market share and share of advertising investment are relevant factors not conditions; CFI correctly applied factors.

Comments

522 S E S S I O N V I I : T R A D E M A R K

C-173/04 P Deutsche SiSi-Werke GmbH & Co. Betriebs KG v OHIM (Opinion 14.07.2005 (Colomer)) 12.01.2006

9.1.

C-324/05 P POWER/Turkish Power Plus Warenhandelsgesellschaft mbH v OHIM 01.06.2006

C-235/05 P L’Oréal SA/Revlon (Switzerland) SA 27.04.2006

4.

5.

FLEXI AIR/FLEX

Applicant wrongly placed undue importance on distinctiveness of earlier mark; contrary to applicant’s claim, CFI fulfilled its obligation to state adequate reasons when assessing the similarity of the goods and the likelihood of confusion between the signs

Opposition procedure Article 8(1)(b)

Appeal manifestly Opposition procedure unfounded (i) Article 8(1)(b) (ii) Articles 36 and 53 of the Statute of the Court of Justice

Applicant sought to challenge the CFI’s assessment of the facts (visual, aural and conceptual differences between marks); these are questions of fact within the exclusive jurisdiction of the CFI

Applicant sought to challenge the CFI’s assessment of the facts (visual, aural and conceptual differences between marks); these are questions of fact within the exclusive jurisdiction of the CFI

Applicant sought to raise new facts and to question CFI’s factual assessment; contrary to allegations, CFI did take account of product’s link to fashion sector in its global assessment of similarity

ECJ decided CFI judgment based on Article 7(1)(b) not (c). Under 7(1)(b), same test for distinctiveness applies to 3D marks as word/figurative marks, but perception of relevant public not necessarily the same; CFI correctly applied this test; ECJ emphasised CFI’s decision based on lack of distinctiveness not monopoly on shape.

Comments

Applicant sought to challenge the CFI’s assessment of the facts (perception of average customers, likelihood of confusion); these are questions of fact within the exclusive jurisdiction of the CFI; factual differences between caselaw cited was sufficient basis for CFI’s conclusions

Appeal manifestly inadmissable

Appeal manifestly inadmissable

Appeal partly manifestly inadmissible and partly manifestly unfounded

Appeal dismissed

Decision of Court

Appeal partly manifestly inadmissable and partly manifestly unfounded

PC WORKS/W WORK PRO Opposition procedure Article 8(1)(b)

C-314/05 P Creative Technology Ltd/José Vila Ortiz 29.062006

3.

Opposition procedure Article 8(1)(b)

NICKY/NOKY, noky

C-92/06 P Soffass SpA/Sodipan SCA 13.07.2006

2.

Opposition procedure (i) Article 8(1)(b) (ii) Article 8(5)

EMIDIO TUCCI/EMILIO PUCCI

Article 7(1)(b) and (c)

Form of drinks packaging (stand-up pouches)

C-104/05 P El Corte Inglés, SA/Emilio Pucci Srl 28.09.2006

Provisions allegedly infringed

Mark(s)

1.

Orders

Case and date

No

PA R T A : T R A D E MA R K LA W D E VE L OPME N T S I N T H E E U R OPE A N UN I ON

523

C-82/04 P Audi AG v OHIM 19.01.2006

6.

T-230/05 Golf USA v OHIM 06.03.2007

T-501/04 Bodegas Franco-Espanolas, SA v OHIM 15.02.2007

4.

5.

(i) Article 7(1)(b) (ii) Article 7(1)(c) (iii) Article 7(3)

ROYAL BRANDE/ROYAL Opposition procedure FEITORIA (i) Article 8(1)(b)

GOLF USA

Opposition procedure (i) Article 43 (ii) Article 8(1)(b)

T-364/05 Saint-Gobain Pam SA/Propamsa, SA 22.03.2007

3.

PAM PLUVIAL/two figurative marks containing word element ‘Pam’

T-322/05 TERRANUS/figurative mark Opposition procedure (i) Article 8(1)(b) Carsten Brinkmann/Terra with word element ‘Terra’ Networks, SA 22.03.2007

2.

(i) Article 8(5) (ii) Article 74

(i) Article 7(1)(c) (ii) Article 7(3) (iii) Procedural irregularity

Provisions allegedly infringed

T-215/03 SIGLA SA/Elleni Holding BV 22.03.2007

VIPS/VIPS

TDI

Mark(s)

1.

B. Court of First Instance

Case and date

No

Applicant has no right to demand proof from opposing party of genuine use of mark at Board of Appeal stage where it has not done so beforehand. Goods covered by marks similar and marks also visually and phonetically similar due to ‘Pam’ being dominant element of both marks, leading to likelihood of confusion. Availability of each of ‘golf’ and ‘USA’ would be restricted by registration of this mark. ‘Golf’ is descriptive term devoid of distinctive character and ‘USA’ implies geographical origin. Similar registered marks distinguished from present mark.

Visually and phonetically similar - endings ‘nus’ and ‘a’ not sufficient to displace similarities. No marked conceptual differences. Therefore likelihood of confusion exists.

To point (i), no risk of dilution of distinctive character of earlier mark as abbreviation ‘VIP’ common term. No risk of detriment to reputation of earlier mark or risk of unfair advantage. To point (ii), Board of Appeal failed to fulfil obligations by failing to examine relative ground for refusal under Article 8(1)(b) put forward by applicant in good time and reiterated in observations.

Application for CTM withdrawn

Comments

Appeal upheld and The term ‘Feitoria’ suffices to distinguish one brand from contested decision the other despite the brands having the same same prefix annulled ‘royal’.

Appeal dismissed

Appeal dismissed

Appeal dismissed

Appeal dismissed in relation to Article 8(5) but upheld in relation to Article 74. Contested decision annulled

Appeal discontinued

Decision of Court

524 S E S S I O N V I I : T R A D E M A R K

T-88/05 Quelle AG/Nars Cosmetics, Inc 08.02.2007

T-317/05 Kustom Musical Amplification, Inc v OHIM 07.02.2007

T-477/04 Aktieselskabet/TDK Kabushiki Kaisha 06.02.2007

T-283/04 Georgia-Pacific Sàrl v OHIM 17.01.2007

9.

10.

11.

12.

Kitchen towel pattern and design

Word mark TDK/figurative and word mark TDK

Guitar model/shape

Figurative mark ‘Nars’/figurative mark ‘Mars’

T-256/04 RESPICUR/RESPICORT Mundipharma AG/Altana Pharma AG 13.02.2007

8.

(i) Article 7(1)(b)

Opposition procedure (i) Article 8(5)

(i) Article 73 (ii) Article 7(1)(b)

Opposition procedure (i) Article 8(1)(b)

Opposition procedure (i) Article 8(1)(b)

Opposition procedure (i) Article 8(1)(b)

CURON/EURON

T-353/04 Ontex NV/Curon Medical, Inc 13.02.2007

7.

(i) Article 7 (1)(b) (ii) Article 7 (1)(c)

HAIRTRANSFER

T-204/04 Indorata-Serviços e Gestão, Lda v OHIM 15.02.2007

6.

Provisions allegedly infringed

Mark(s)

Case and date

No

General impression created by marks differs considerably due to first letter of each, accentuated by fact that consumers are used to seeing sequence ‘e-u-r-o’. Conceptually, marks evoke different ideas (‘Europe’ vs. ‘cure’). No likelihood of confusion.

Implies transplant or implant of hair which does not reflect nature of product (epilation devices and hair/beauty products).

Comments

Some phonetic similarity but little visual similarity and no conceptual similarity. Phonetics not sufficient to show likelihood of confusion as visual perception more important in this market.

Appeal dismissed

Appeal dismissed

Pattern devoid of distinctive character – simple geometric shapes are typical of this type of product and commercial origin not distinguishable from this.

Earlier mark has enhanced distinctive character because of reputation. Risk that later mark would take unfair advantage over earlier mark if later mark applied to appear on sports clothing, given sports sponsorship activities of earlier mark.

Appeal upheld and Board of Appeal took into account facts not contested decision communicated to the applicant prior to the adoption of annulled its decision.

Appeal dismissed

Appeal upheld and For end consumers, marks are visually, phonetically and contested decision conceptually similar. Professional public will perceive annulled conceptual difference but not sufficient to counteract visual and phonetic similarities or eliminate risk of confusion.

Appeal dismissed

Appeal dismissed

Decision of Court

PA R T A : T R A D E MA R K LA W D E VE L OPME N T S I N T H E E U R OPE A N UN I ON

525

T-392/04 Salvatore Gagliardi/Norma Ledensmittelfilialbetrieb GmbH & Co AG 14.12.2006

T-81/03, T-82/03, T-103/03 Mast-Jägermeister AG/Licorera Zacapaneca SA 14.12.2006

T-43/05 Camper, SL/JC AB 30.11.2006

16.

17.

Appeal dismissed

Figurative mark ‘Brothers by Camper’/figurative mark ‘Brothers’

‘Brothers’ is dominant part of Camper mark. Marks are visually and aurally similar and conceptually identical – words ‘by Camper’ do not help in this regard. Nor do they help to eliminate likelihood of confusion.

Appeal upheld and Goods substantially identical (non-alcoholic beverages). decision annulled Presence of halo above deer’s head on earlier mark not sufficient to make marks visually and conceptually distinct, despite marks being phonetically different as earlier mark contains no word element. Differences not enough to eliminate likelihood of confusion.

Three figurative marks (black, Opposition procedure (i) Article 8(1)(b) white and gold respectively) depicting stag’s head including (ii) Article 73 word element ‘Venado’(meaning ‘deer’ in Spanish/figurative mark also depicting stag’s head Opposition procedure (i) Article 8(1)(b)

Contested decision partially annulled (to extent that refuses to register ‘Manu’ mark for products under class 25, and class 18 and 24.) Remainder dismissed.

Figurative mark ‘Manu’/word Opposition procedure mark MANOU (i) Article 74(1) (ii) Article 43(2)&(3) (ii) Article 8(1)(b)

Board of Appeal should have allowed registration of mark under ‘clothes’ category in class 25 and in classes 18 and 24. Sufficient evidence produced by intervener for use of mark only in relation to underwear and not to clothes in general. Analysis of likelihood of confusion therefore limited to underwear. In this regard, marks visually and phonetically similar, reinforced by fact that products sold in same isles/rows in shops. Therefore risk of confusion exists.

Marks visually and phonetically dissimilar. Conceptual comparison irrelevant as neither sign has any meaning in Germany. No risk of confusion.

15.

Appeal dismissed

Opposition procedure (i) Article 8(1)(b)

FERRO/FERRERO T-310/04 Ferrero Deutschland GmbH/Cornu SA Fontain 15.12.2006

14.

Comments

(i) Article 42 (3) Appeal upheld and Board of Appeal wrongly annulled decision of (ii) Article 74(1) (read in contested decision Opposition Division, and wrongly rejected applicant’s conjunction with Rule 20(3) annulled opposition as unfounded. EC 2868/95)

Decision of Court

T-53/05 Figurative mark ‘Calvo’/word Calavo Growers, Inc/Luis mark CALAVO Calvo Sanz SA 16.01.2007

Provisions allegedly infringed

13.

Mark(s)

Case and date

No

526 S E S S I O N V I I : T R A D E M A R K

T-483/04 GALZIN/CALSYN Armour Pharmaceutical Co./Teva Pharmaceutical Industries Ltd 17.10.2006

23.

Appeal dismissed in relation to Article 43(2) but upheld in relation to Article 8(1)(b). Contested decision annulled.

Appeal dismissed

STENIGE SLOTT/STENIGE Opposition procedure T-499/04 (i) Article 8(1)(b) Hammarplast AB/Stenige KERAMIK Slott AB 17.10.2006

22.

Opposition procedure (i) Article 43(2) and (3) (ii) Article 8(1)(b)

Appeal dismissed

Word mark BUD and two figurative trade marks (‘American Bud’ and ‘Anheuser Busch Bud’)/word mark BIT and various figurative marks ‘Bitburger’ and ‘Bitte ein Bit’

Opposition procedure (i) Article 8(1)(b) (ii) Article 8(5)

T-350/04 to T-352/04 Bitburger Brauerei Th. Simon GmbH/Anheuser-Busch, Inc 19.10.2006

21.

Board of Appeal was correct in taking into account only calcium-based pharmaceutical preparations but was wrong in concluding that similarities between marks do not give rise to likelihood of confusion.

Distinct purpose of goods (flowerpots v glass vases). Despite identical dominant element ‘Steinige’, this word only acquires significance as result of additional elements ‘Slott’ and ‘Keramik’ – key conceptual difference. Therefore no likelihood of confusion.

Goods identical, but only slight degrees of visual, aural and conceptual similarities, and therefore no likelihood of confusion. Lack of similarity means no basis for violation of Article 8(5).

Risk of confusion caused by visual and phonetic similarities - difference in pronunciation between the marks barely audible in most languages. No conceptual difference. Risk of confusions results.

Appeal upheld and Board of Appeal erred in its cost assessment, wrongly contested decision assuming that applicant would have been unsuccessful partially annulled party in proceedings between it and Laboratoire as it had been rejected in separate opposition proceedings.

Appeal dismissed

T-13/05 Castell del Remei, SL/Bodegas Roda, SA 25.10.2006

20.

Comments

Appeal upheld and Board of Appeal incorrect in concluding that products contested decision relating to each mark are different. Marks visually and partially annulled phonetically very similar – difference between ‘k’ and ‘p’ insignificant. Conceptual difference based on lack of meaning of ‘Yuki’ in Spanish also insignificant. Therefore cannot eliminate risk of confusion.

Decision of Court

Opposition procedure (i) Article 8(1)(b)

(i) Article 81(4) (ii) Rules 48(1)(c) and 49(1) EC 2868/95 principle of equal treatment (iii) Rules 21 and 51 EC 2868/95

LYCO PROTECT/LYCO T-32/04 Q10 Lichtwer Pharma AG/Laboratoire L.Lafon SA 16.11.2006

19.

ODA/RODA

Opposition procedure (i) Article 8(1)(b)

YUKI/YUPI T-278/04 Jabones Pardo, SA/Quimi Romar, SL 16.11.2006

Provisions allegedly infringed

18.

Mark(s)

Case and date

No

PA R T A : T R A D E MA R K LA W D E VE L OPME N T S I N T H E E U R OPE A N UN I ON

527

T-172/04 Telefónica SA/David Branch 27.09.2006

29.

Figurative mark ‘Emergia’ in Opposition procedure orange, white, green and (i) Article 8(1)(b) black/word mark EMERGEA

Opposition procedure (i) Article 15(2) (consideration of use of mark)

T-96/05 Monte di Massima SAS di Pruneddu Leonardo & C./J.M.Höfferle Internationale Handelsgesellschaft mbH 04.10.2006

28.

Figurative and word mark ‘Valle della Luna’/figurative and word mark ‘Valle de la Luna’

T-188/04 Freixenet SA v OHIM 04.10.2006

27.

(i) Article 73 (rights of defence) (ii) Article 7(1)(b) (iii) Article 7(3) (i) Article 73 (ii) Article 7(1)(b) (iii) Article 7(3)

T-190/04 Freixenet SA v OHIM 04.10.2006

26.

Opposition procedure (i) Article 8(1)(b)

Wine bottle which turns a matte gold colour like frosted glass when filled with sparkling wine Wine bottle which turns a matte gold colour like frosted glass when filled with sparkling wine

T-172/05 ARMAFOAM/ Armacell Enterprise/nmc NOMAFOAM SA 10.10.2006

25.

(i) Article 7(1)(b) (ii) Article 7 (1)(c)

MAP&GUIDE

T-302/03 PTV Planung Transport Verkehr AG v OHIM 10.10.2006

24.

Provisions allegedly infringed

Mark(s)

Case and date

No

Board correct to conclude that marks are visually and phonetically similar despite differing first components of marks (‘arma’ and ‘noma’). Marks definitely similar for non-English-speaking public so no need to consider whether marks similar for English-speaking public.

Mark devoid of distinctive character and merely descriptive of goods and services in question. Application did not differentiate between different kinds of computer programming or software.

Comments

Appeal dismissed

Appeal dismissed

Services relating to each mark very similar (both linked to telecommunications)

Even if Board of Appeal did not pay proper regard to Article 15, this is not sufficient to allow annulment of contested decision. Suspension of use of earlier mark for period of one year not enough to necessitate review of Board’s evaluation.

Appeal upheld and Board of Appeal neglected to submit list of bottle types contested decision and internet sites to applicant in order that applicant annulled might use this in preparing defence.

Appeal upheld and Board of Appeal neglected to submit list of bottle types contested decision and internet sites to applicant in order that applicant annulled might use this in preparing defence.

Appeal dismissed

Appeal dismissed

Decision of Court

528 S E S S I O N V I I : T R A D E M A R K

T-168/04 L&D, SA/Julius Sämann Ltd 07.09.2006

T-133/05 Gérard Meric/Arbora & Ausonia, SL 07.09.2006

T-6/05 DEF-TEC Defense Technology GmbH/Defense Technology Corporation of America 06.09.2006

VITACOAT/ T-277/04 VITAKRAFT Vitakraft-Werke Wührmann & Sohn GmbH & Co. KG/Johnson’s Veterinary Products Ltd 12.07.2006

31.

32.

33.

34.

Provisions allegedly infringed

Opposition procedure (i) Article 8(1)(b) (ii) Article 73

Figurative mark ‘First Defense Aerosol Pepper Projector’/word mark FIRST DEFENSE, figurative mark representing and eagle, and figurative mark ‘Def-Tec Products’

Opposition procedure (i) Article 8(1)(b)

Opposition procedure (i) decision of Opposition Division void as not duly signed (ii) Article 8(3) (consent for proprietor’s agent to make application)

Word mark PAM-PIM’S Opposition procedure BABY PROP/figurative mark (i) Article 8(1)(b) ‘Pam Pam’

Figurative mark in the shape of a tree with a verbal element/various tree-shaped figurative marks with verbal elements

Figurative mark ‘Metro’/word Opposition procedure mark METRO (i) Article 74 (esp. Rules 16 and 20 of the implementing legislation)

T-191/04 MIP Metro Group Intellectual Property GmbH & Co. KG/Tesco Stores Ltd 13.09.2006

30.

Mark(s)

Case and date

No

Comments

Marks visually similar and aural similarity not affected by difference in pronunciation by Spanish public or inclusion of words with secondary importance, i.e. ‘baby-prop’. Therefore likelihood of confusion existed.

Graphic/figurative element not dominant element and not sufficient to exclude importance of visual and phonetic similarities. Likelihood of confusion therefore results.

Appeal dismissed

‘Vitakraft’ and ‘Vita’ held not to be ‘distinctive as a result of public recognition’ due to insufficient evidence produced by applicant. Differences between ‘-kraft’ and ‘-coat’ outweighed the similarities. No likelihood of confusion.

First plea regarding Contested decision validly communicated to applicant. signing of decision Board of Appeal failed to have regard to validity of consent received by applicant from intervener. rejected; second plea regarding breach of 8(1)(b) upheld and contested decision annulled in this respect

Appeal dismissed

Appeal dismissed

Appeal upheld and Opposition division should have taken into account fact contested decision that protection of earlier mark expired before its decision. annulled Division did have power to request information on renewal of earlier mark after initial evidence filed. Relevant time for opponent to prove earlier right is time at which opposition division made its decision.

Decision of Court

PA R T A : T R A D E MA R K LA W D E VE L OPME N T S I N T H E E U R OPE A N UN I ON

529

T-153/03 Inex SA/Robert Wiseman & Sons Ltd 13.06.2006

T-323/03 LA BARONIE/BARONIA La Baronia de Turis, Cooperativa Valenciana/Baron Philippe de Rothschild SA 10.07.2006

38.

39.

T-247/03 Miguel Torres, SA/Bodegas Muga, SA 11.07.2006

37.

(i) Applicant’s demand for refusal to register (ii) Intervener’s request for partial annulment based on Article 8(4)/Article 8(1)(b) confusion (iii) Applicant’s demand for annulment based on Article 43(2)&(3); Article 8(4); Article 8(1)(b)

Opposition procedure (i) Article 8(1)(b) (ii) Violation of defence rights – procedural irregularity

(i) Regulations 40/.94 and 2868/95 (ii) Principle of equal treatment (iii) Principle of good administration

Opposition procedure Figurative mark/design (i) Article 8(1)(b) displaying black and white cowhide markings/milk bottle displaying black and white cowhide markings

Figurative mark ‘Torre Muga’/word mark TORRES

ASETRA/figurative mark ‘Caviar Astara’

T-252/04 Caviar Anzali SAS/Novomarket, SA 11.07.2006

36.

Opposition procedure (i) Article 8(1)(b)

MARCOROSSI/word sign MISS ROSSI and figurative sign ‘Sergio Rossi’

T-97/05 Sergio Rossi SpA/Marcorossi Srl 12.07.2006

35.

Provisions allegedly infringed

Mark(s)

Case and date

No ‘Rossi’ held not to be the dominant element of ‘Marcorossi’. Verbal similarities between ‘Marcorossi’, ‘Sergio Rossi’ and ‘Miss Rossi’ not sufficiently similar to cause likelihood of confusion.

Comments

Despite ‘torre’ being the dominant element of both marks, the overall impression shows more differences than similarities and the likelihood of confusion is low. To point (ii), a procedural irregularity can only cause a decision to be annulled if the outcome of the decision would have been different without such an irregularity. Here it would not have been different.

Appeal dismissed

Cowhide design not distinctive as strongly allusive to goods in question. Despite strong visual and some conceptual similarities, the design has very little imaginative content and is unlikely to lead to a likelihood of confusion.

Decision annulled on basis of omission to examine (i) Applicant’s demand rejected as evidence produced by applicant during time period specified in Article 59, thus violating Article 74. inadmissible (i) Intervener’s request rejected (iii) Contested decision annulled

Appeal dismissed

Appeal upheld and OHIM has right to allow recourse on basis of new facts; contested decision in this case the OHIM was obliged to consider evidence annulled later produced despite its power to disregard evidence not produced in ‘good time’. OHIM therefore wrongly interpreted general rules.

Appeal dismissed

Decision of Court

530 S E S S I O N V I I : T R A D E M A R K

T-388/04 Habib Kachakil Amar v OHIM 05.04.2006

T-344/03 Saiwa SpA/Barilla Alimentaire SpA 05.04.2006

T-202/04 Madaus AG/Optima Healthcare Ltd 05.04.2006

T-322/03 Telefon & Buch Verlagsgesllschaft mbH/HEROLD BUSINESS DATA GmbH & Co. KG 16.03.2006

42.

43.

44.

45.

(i) Article 73 (defence rights/right to hearing) (ii) Violation of confidence (iii) Article 7(1)(b) (iv) Article 7(3)

Opposition procedure (i) Article 8(1)(b)

(i) Article 7(1)(b) (ii) Article 7(1)(c) (iii) Article 7(1)(d)

ECHINAID/ECHINACIN

WEISSE SEITEN

Figurative mark and word Opposition procedure mark ‘Selezione Oro, Barilla’/ (i) Article 8(1)(b) word mark ORO and ORO SAIWA

Figurative mark in shape of a tick

(i) Article 7(1)(b) (ii) Article 74(1) (examination of evidence)

T-439/04 Eurohypo AG v OHIM 03.05.2006

41.

EUROHYPO

T-15.05 Twisted sausage design for gut (i) Article 7(1)(b) Wim De Waele v OHIM for making sausages 31.05.2006

Provisions allegedly infringed

40.

Mark(s)

Case and date

No

Appeal dismissed

Appeal dismissed

Appeal dismissed

Board of Appeal correct in concluding that mark was invalidly registered in respect of goods and services under classes 9, 16, 41, and 42. Words ‘Weisse Seiten’ had become customary as generic term for telephone directories for private individuals, and equally electronic directories. Mark therefore descriptive of such goods and devoid of distinctive character.

Prefix ‘Echina’ not distinctive but merely descriptive, as public concerned would regard marks as deriving from the plant Echinacea, i.e. composition of the product rather than its commercial origin.

Applicant could not use evidence relating to use of ‘Oro Saiwa’ to prove distinctiveness of ‘Oro’ as these are separate marks. Despite goods being substantially identical, similarities insufficient to lead to confusion.

Lack of evidence to prove violation of confidence. All relevant factors considered for purposes of Article 7(3).

Appeal dismissed

Appeal dismissed

Relevant market for assessment of distinctiveness of mark made up of both those in the charcuterie business and end consumers. Design devoid of distinctive character. Article 74 does not state how OHIM is to examine evidence; it was therefore sufficient that the Board applied the descriptiveness test and there was no obligation to produce evidence. ‘Eurohypo’ devoid of distinctive character.

Comments

Appeal dismissed

Decision of Court

PA R T A : T R A D E MA R K LA W D E VE L OPME N T S I N T H E E U R OPE A N UN I ON

531

Opposition procedure (i) Article 8(1)(b)

Opposition procedure (i) Article 8(1)(b) (ii) Article 73

T-35/04 Figurative and word sign ‘Ferro’/word mark Athinaiki Oikogeniaki Artopoiia AVEE/Ferrero FERRERO OHG mbH 15.03.2006

Figurative mark ‘Euromaster’/word mark EUROMASTER

Figurative mark ‘Bainbridge’/various figurative marks containing word element ‘Bridge’ and word mark BRIDGE

Figurative mark representing a Opposition procedure rabbit labelled ‘Quicky’/word (i) Article 8(1)(b) marks QUICK, QUICKIES and figurative sign ‘Quick’

T-31/04 Eurodrive Services and Distribution NV/Jésus Gómez Frías 15.03.2006

T-194/03 Il Ponte Finanziaria SpA v OHIM 23.02.2006

T-74/04 Société des produits Nestlé SA/Quick Restaurants SA 22.02.2006

48.

49.

50.

Appeal dismissed

Likelihood of confusion found. Phonetically identical as ‘s’ in ‘Quickies’ not pronounced in French. Where marks consists of both verbal and figurative elements, the former are more distinctive than the latter as consumer refers more easily to mark by citing it than by describing figurative element - here rabbit merely decorative and word element central.

To point (i), evidence failed to demonstrate consistent presence of mark on Italian market within relevant period. Article 15(2)(a) does not permit owners to circumvent their obligation of use by relying on use of similar mark covered by separate registration. To point (ii), despite some aural similarity, word ‘bridge’ not visually prominent enough to create likelihood of confusion.

Appeal dismissed Opposition procedure (i) Article 43(2)&(3), Article 15(2)(a), and Rule 22 EC 2868/95 (ii) Article 8(1)(b)

‘Ferro’ dominant part of figurative mark. Marks visually and phonetically dissimilar. Conceptual comparison irrelevant as neither sign has any meaning in Germany.

Shape of bottle devoid of distinctive character - particular features not sufficiently different from usual shape of bottles to enable it to indicate origin. To point (ii), Board of Appeal was correct in holding that earlier national registration not decisive (although it might be taken into consideration).

Comments

No similarity between goods and services relating to marks (repair and maintenance of land vehicles vs. sports event management services). Therefore no likelihood of confusion possible.

Appeal dismissed

Appeal dismissed

Decision of Court

Appeal dismissed

(i) Article 74(1) (ii) Article 6 of Paris Convention (iii) Article 73 (iv) Article 7(1)(b)

47.

Plastic bottle design

T-129/04 Develey Holding GmbH & Co. Beteiligungs KG v OHIM 15.03.2006

Provisions allegedly infringed

46.

Mark(s)

Case and date

No

532 S E S S I O N V I I : T R A D E M A R K

Figurative mark T-202/03 Alecansan, SL/CompUSA ‘CompUSA’/figurative mark ‘CompUSA’ Management Co 07.02.2006

T-206/04 Fernando Rodrigues Carvalhais/Profilpas Snc 01.02.2006

T-466/04 and T-467/04 Elisabetta Dami/The Stilton Cheese Makers Association 01.02.2006

T-317/03 Volkswagen AG/ Nacional Motor, SA 26.01.2006

52.

53.

54.

55.

Opposition procedure (i) Article 74(1) (ii) Article 8(1)(b)

VARIANT/DERBI VARIANT and VARIANTDERBI

As products bought by oral request, strong phonetic similarity was sufficient to create risk of confusion, despite visual and conceptual differences.

Despite visual and phonetic similarity, goods and services not similar (transport and travel services vs. computer software and hardware), nor in competition with one another. Parties’ customers not the same, nor did those consumers buy services in same places. Therefore no likelihood of confusion.

Sufficient statement of reasons for decision given by Board. Likelihood of confusion found. Polo-player device is dominant element most easily remembered by consumers and intrinsically highly distinctive in relation to all class 3 goods.

Comments

Contested decision partially annulled (to extent that refused to register ‘Variant’ mark for classes other than classes 7, 12 and 37). Remainder dismissed

Goods and services identical, and ‘derbi’ part of ‘Derbivariant’ not dominant element and not sufficient to displace visual and phonetic similarities. Both marks point to concept of ‘variant’. Likelihood of confusion therefore found.

Appeal upheld and Board of Appeal erroneously held that parties expressed contested decision common intention to bring proceedings before OHIM to annulled an end. Applicant expressly refused to restrict list of goods designated by mark according to terms of opposing party and submitted no express application to contrary effect. Therefore no factual basis for Board’s decision.

Appeal dismissed

Opposition procedure (i) Article 8(1)(b)

(i) Article 44(1)

Appeal dismissed

Contested decision partially annulled (to extent that allowed registration of ‘Royal County’ mark); remainder dismissed

Opposition procedure (i) Breach of duty to state reasons (ii) Article 8(1)(b)

Opposition procedure (i) Article 8(1)(b)

Decision of Court

Provisions allegedly infringed

GERONIMO STILTON/various marks corresponding to word ‘Stilton’ and relating to milk products

Figurative mark containing word element ‘Perfix’/figurative mark containing word element ‘Cerfix’

Figurative and word sign ‘Royal County of Berkshire Polo Club’ displaying horse and rider/word mark POLO and various figurative marks containing word element ‘Polo’ or horse and rider

T-214/04 The Royal County of Berkshire Polo Club Ltd/The Polo/Lauren Co. LP 21.02.2006

51.

Mark(s)

Case and date

No

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T-439/05 The Royal Bank of Scotland Group plc/Lombard Risk Systems Limited and Lombard Risk Consultants 12.03.2007

T-273/05 The Black & Decker Corporation/Atlas Copco Aktiebolag 06.03.2007

T-238/06 Pax AG/Premier Profiles Ltd 28.02.2007

1.

2.

3.

Orders

Figurative sign ‘Quantum’/two Opposition procedure T-147/03 Devinlec Développement figurative marks ‘Quantième’ (i) Rule 50 EC 2868/95 (ii) Article 8(1)(b) Innovation Leclerc SA/T.I.M.E. ART Uluslararasi Saat Ticareti ve dis Ticaret AS 12.01.2006

-

-

-

Marks which do not depart significantly from norm or customs of a sector must generally be held to be devoid of distinctive character. Here, shape applied for is normal for detergent tablets, and is combined with colours indicating different chemical agents rather than commercial origin of product.

Comments

Appeal removed from register

Appeal removed from register

Appeal dismissed as manifestly inadmissible

-

-

Applicant’s request did not conform to Article 44 and no evidence or documentation filed within fixed period.

Appeal discontinued by applicant

Appeal discontinued by applicant

Appeal upheld and Board of Appeal wrong in law in assessing likelihood of contested decision confusion by taking into account particular annulled circumstances in which applicant’s goods had been sold (namely in E. Leclerc shopping centres). Conceptual difference between the signs did not counteract the visual and phonetic similarity and likelihood of confusion found.

Appeal dismissed

Decision of Court

-

(i) Article 7(1)(b) (ii) Principle of equal treatment

57.

Design of dishwasher tablet comprising three colours and elements

T-398/04 Henkel KgaA v OHIM 17.01.2006

Provisions allegedly infringed

56.

Mark(s)

Case and date

No

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T-248/06 The Professional Golfers Association Limited/ Ladies Professional Golf Association (Corporation) 02.02.2007

T-124/06 MIP Metro Group Intellectual Property GmbH & Co. KG/MetroRED Telecom Group Ltd 24.01.2007

T14/06 K-Swiss,Inc v OHIM 14.12.2006

T-92/05 Figurative mark containing word element Movingpeople.net International BV/Thomas ‘Movingpeople.net’ Schafer 06.12.2006

T-366/05 Anheuser-Busch, Inc/Budejovicky Budvar, narodni podnik 15.11.2006

5.

6.

7.

8.

9.

BUDWEISER

Figurative mark consisting of five parallel stripes on side of shoe

-

-

LYCO PROTECT/ LYCO Q10

T-32/04 Lichtwer Pharma AG/ Laboratoire L.Lafon SA 14.02.2007

4.

Mark(s)

Case and date

No

-

-

-

-

-

-

Provisions allegedly infringed

Comments

Fact that mark applied for is not to be registered is sufficient to render action devoid of purpose.

Appeal discontinued by applicant

Action dismissed

No need to adjudicate on action

Arguments raised by applicant that ‘alcoholic beverages’ are different to ‘beer’ are not such as to call contested decision into question.

Following transfer of earlier mark and lack of arguments put forward by applicant, action has become devoid of purpose.

Action dismissed as Despite contested decision not having been notified to manifestly applicant in accordance with Rules 61 and 62 EC inadmissible 2868/95, present action still not brought within correct time period, as time period runs from date on which applicant deemed to receive notification.

No need to adjudicate on action

Appeal removed from register

Error in translation Applicant pointed out error in German translation; corrected defendant had no observations.

Decision of Court

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T-52/06 Harry’s Morato SpA/ Ferrero Deutschland GmbH 17.10.2006

T-461/05 L’Oréal S.A/Revlon (Suisse) S.A. 11.10.2006

T-323/03 REC La Baronia de Turis, Cooperativa Valenciana/ Baron Phillipe de Rothschild SA 06.10.2006

T-442/05 Biofarma/Anca Health Care Limited 06.10.2006

T-383/04 VITACAN Erich Drazdansky/ Bad Heilbrunner Naturheilmittel GmbH & Co 27.09.2006

11.

12.

13.

14.

15.

-

-

-

-

-

T-261/06 Suzuki Motor Corporation/Whirlpool Europe S.R.L 17.10.2006

10.

Mark(s)

Case and date

No

Errors corrected

No need to adjudicate on action Appeal removed from register

-

-

Opposition procedure

Appeal removed from register

No need to adjudicate on action

-

-

Appeal removed from register

Decision of Court

-

Provisions allegedly infringed

Opposition withdrawn by intervener following agreement between the parties

Applicant withdrew registration application rendering action devoid of purpose.

Applicant pointed out errors of print in documents.

Appeal discontinued by applicant

Following transfer of earlier mark, action has become devoid of purpose.

Appeal discontinued by applicant

Comments

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T-159/05 DELTA UNIPOR-ZieglMarketing GmbH/Ewald Dörken AG 29.06.2006

T-217/05 Marker Völkl International GmbH/Icon Health & Fitness Italia SpA 27.06.2006

21.

22.

Opposition procedure

Cancellation proceedings

-

ALLES, WAS UNS VERBINDET

T-18/06 Deutsche Telekon AG v OHIM 05.07.2006

20.

Opposition procedure

T-32/06 Justerini & Brooks Ltd/ Elia Canelo Gutierrez 05.07.2006

19.

-

T-45/05 Micronas GmbH v OHIM 06.09.2006

18.

Cancellation proceedings Article 8(2) and (3)

-

HENSOTHERM

T-366/04 Hensotherm AB/Rudolf Hensel GbmH 06.09.2006

17.

Opposition procedure

Provisions allegedly infringed

3D mark

EAGLE

T-340/05 Adler Mödemarkte GmbH/BVM S.p.A 12.09.2006

16.

Mark(s)

Case and date

No

Appeal removed from register

Appeal removed from register

Appeal removed from register

Appeal removed from register

Appeal removed from register

Appeal partly inadmissable and partly manifestly unfounded

Appeal removed from register

Decision of Court

Appeal discontinued by applicant

Opposition withdrawn by intervener following agreement between the parties

Applicant withdrew registration application rendering action devoid of purpose.

Appeal discontinued by applicant

Appeal discontinued by applicant

Board of Appeal did not err in rejecting the applicant’s appeal as inadmissable, as appeal was outside time limits; applicant unable to exercise Article 78(1) right of appeal where it has failed to act with all due care

Opposition withdrawn by intervener following agreement between the parties

Comments

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Mark(s)

T-72/05 Deutsche Telekom AG v OHIM 13.06.2006

T-62/05 Lotto Sport Italia S.p.A/Lotos Brillen Vertriebs-GmbH 07.06.2006

T-194/05 TELETECH and TeleTech Goldings, Inc/ TELETECH GLOBAL Teletech International SA VENTURES 11.05.2006

27.

28.

29.

-

-

T-362/02, T-363/02, T-364/02, T-365/02 and T-366/02 Muswellbrook Limited/Nike International Limited 14.06.2006

26.

-

T-306/03 CLIMATIC Volkswagen AG v OHIM 16.06.2006

25.

REDEFINING COMMUNICATIONS

T-453/05 Vonage Holdings Corporation v OHIM 26.06.2006

T-436/05 Ajinomoto Co., Inc/Kaminomoto Co., Ltd 26.06.2006

Case and date

24.

23.

No

-

-

-

Opposition procedure

-

Article 19 Statute of the Court of Justice

Opposition procedure

Provisions allegedly infringed

Action dismissed

Appeal removed from register

Appeal removed from register

Appeal removed from register

Appeal discontinued

Appeal manifestly inadmissible

Appeal removed from register

Decision of Court

Opposition Division rejected registration in entirety taking into account all applicant’s arguments. Correct that applicant not admitted to appeal to Board of Appeal.

Appeal discontinued by applicant

Appeal discontinued by applicant

Opposition withdrawn by intervener following agreement between the parties

Application signed by Swedish ‘lawyer’ (not a member of the Swedish Bar Association); as ‘lawyer’ was not authorised to practise before an EEA court, application is inadmissible; alternative lawyers would not be substituted at this stage Applicant withdrew registration application rendering action devoid of purpose.

Appeal discontinued by applicant

Comments

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T-377/03 ATI Technologies Inc/Asociacion de Tecnicos de Informatica-ATI 27.04.2006

T-322/04 Colgate-Palmolive Company v OHIM

30.

31.

T-330/05 Aqua-Terra Bioprodukt GmbH/De Ceuster Meststoffen N.V 08.02.2006

T-341/04 Datac AG/Datev Eg 06.02.2006

T-67/03 Henkel KgaA/Koen Brutsaert 17.01.2006

32.

33.

34.

21.03.2006

Case and date

No

-

-

-

-

-

Mark(s)

Appeal removed from register

Appeal removed from register Appeal removed from register

-

-

Appeal removed from register

Appeal removed from register

Decision of Court

-

-

-

Provisions allegedly infringed

Appeal discontinued by applicant

Parties decided between themselves re: withdrawal of registration application. Action had therefore become devoid of purpose.

Appeal discontinued by applicant

Applicant informed court that wishes to withdraw its registration application and defendant indicated that it had no observations.

Appeal discontinued by applicant

Comments

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SESSION VII:USES TRADEMARK PART B: THIRD-PARTY OF TRADEMARKS

SESSION VII: TRADEMARK

Part B: Third-Party Uses of Trademarks: Search Engines and Key Words

Moderator JOHN RICHARDSON

Arbitrator and Mediator (New York) Speakers PROF. GRAEME DINWOODIE

PETER RUESS

Chicago-Kent College of Law (Chicago, IL)

Freshfields Bruckhaus Deringer (Düsseldorf) Panelists

JEFFREY BUTLER

PAUL W. GARRITY

Kenyon & Kenyon LLP (New York)

Kelley Drye & Warren LLP (New York)

PROF. SUSY FRANKEL

PROF. MARSHALL LEAFFER

Victoria University of Wellington

University of Indiana School of Law (Bloomington, IN)

ILANAH SIMON

Brunel University (Uxbridge) MR. RICHARDSON: Good morning, ladies and gentlemen. My name is John Richardson. I am your moderator this morning. Before I introduce the speakers and the panelists, I want to explain briefly that the origin of this question goes back to the preparatory work for the conference, when a group of us came up with some ideas for questions. What has happened is, in fact, it was split into two. You heard earlier this morning a discussion of the recent trademark law developments in the European Union,1 and particularly the Opel case,2 and now you are going to hear about the Internet.

1

See infra this issue, Session VII Part A, Trademark Law Developments in the European Union. See Spyros Maniatis, Opel: What Will It Mean for the Future, id. Adam Opel AG and Deutscher Verband der Spielwaren-Industrie eV v. Autec. AG, [2007] E.C.J. (Opinion of Advocate-General Ruiz-Jarabo Colomer, May 7, 2006) (EU) (merchandising); Judgment of the Court (First Chamber) Jan. 25, 2007, available at http://curia. europa.eu/jurisp/cgi-bin/ gettext.pl?lang=en&num=79929874C19050048&doc=T&ouvert= T&seance=ARRET. 2

542 S E S S I O N V I I : T R A D E M A R K Alan Hartnick is an adjunct professor at Fordham. I was inspired by a very short article he wrote in the New York Law Journal in April 2006 about the notion of fair use in trademarks.3 I was not very happy, when I read some of the literature, about all this terminology we had. We have the notions of: 앫 Trademark use/non-trademark use 앫 Commercial use, use in commerce sufficient for registration, use in commerce sufficient for infringement 앫 “Classic” fair use, nominative fair use, the sort of fair use that is associated with comparative advertising 앫 Promotion of competition 앫 Parody, satire, commentary, criticism, free speech, commercial speech, creative artistic uses, the scope of permissible free riding 앫 Unjust enrichment short of physically affixing a mark to goods or packaging or sales materials 앫 Essential function of a trademark, which we know from the European context 앫 And, of course, trademark use under the European Directive.4 We were playing around with all these things. We had a large question, which then became two questions. With that, I would like to introduce the two speakers. Biographical information is available in your binders. To my immediate right is Professor Graeme Dinwoodie, ChicagoKent College of Law in Illinois. The second speaker is Peter Ruess from Freshfields Bruckhaus Deringer in Düsseldorf, Germany. They will be speaking for ten minutes each. Let me also introduce our panelists: Ilanah Simon, from the School of Social Sciences and Law, is a lecturer at Brunel University in Uxbridge in the United Kingdom; Jeffrey Butler is a Partner at Kenyon & Kenyon here in New York; Professor Susy Frankel is from Victoria University of Wellington in New Zealand; Paul Garrity is a Partner with Kelley Drye & Warren in New York; and Professor Marshall Leaffer is from the University of Indiana School of Law. I would like to thank, in particular, my committee members, Ilanah and Jeffrey, for their help in working through the weeks of coming up with these recommendations and questions. I would like to thank Scott Smedresman, who is a student at Fordham, who provided me with some notes on various parts of the literature, which is how I got to learn about Margreth Barrett and Martin Lemley and other people, some of whom maybe Graeme knows. With that in mind, I will introduce Prof. Graeme Dinwoodie. PROF. DINWOODIE: Thank you. The remarks I am going to make are based upon a paper in your materials that I wrote with Mark Janis.5 A revised version will be published in about a month’s time in Iowa Law Review, with a reply by Mark Lemley and Stacey

3 See Alan J. Hartnick, Fair Use, N.Y.L.J. (Apr. 6, 2006); see also Alan J. Hartnick, “Framing” the Internet Equivalent of Pirating?, N.Y.L.J. (Apr. 4 & 11, 1997). 4 First Council Directive 89/104 (EEC) of 21 Dec. 1988 to approximate the laws of the Member States in relation to trademarks, 1989 O.J. (L 40) 1, available at http://eur-lex.europa.eu/LexUriServ/site/en/consleg/1989/L/ 01989L0104-19911223-en.pdf [hereinafter Trade Mark Directive]. 5 Graeme B. Dinwoodie & Mark D. Janis, Confusion Over Use: Contextualism in Trademark Law, 92 Iowa L. Rev. 1597 (2007), available at http://works.bepress.com/cgi/ viewcontent.cgi?article=1001&context=graeme_ dinwoodie.

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Dogan,6 who argue the contrary position, and then a reply from us.7 It is hard to fit all of that content into the ten minutes I have here. However, I am really going to talk only about part of the paper. The paper has a lot of comparative material in it, because we use Arsenal8 and Opel9 and a few other cases to show why we think trademark use is a bad thing to require as an element of infringement. The paper is also about use generally and not just the sale of keywords. However, I am going to confine my remarks to the United States, and also confine them largely to key words and pop-up ads, which is the subject of this session. Peter Ruess is going to cover the situation in Europe. However, one preliminary point of comparison to the European Union has to be borne in mind. This fits with the discussion we had in the previous panel before the break about Opel. That is, we do not have the rigidity of Article 5(1)(a) of the Trademark Directive10 in the United States, so we do not have to try and find the “safety valve” out of the odd results that flow from the identity of goods/identity of marks problem. Therefore, there is not the same need in the United States to contort existing law to find a trademark use requirement. Moreover, in the United States we not have really an effective separate unfair competition law. The unfair competition law is effectively incorporated into and defined by the trademark law. So we end up forcing into trademark proper things which I think Europeans might see as things that should be dealt with by unfair competition law. But that is a consequence of the failure of the United States to have a viable unfair competition law. The problem we are addressing is really a problem of what can be called contextual advertising. In recent years, this phenomenon started with pop-ups, where pop-up ads reflected the Web sites you had visited and the search queries that you had made. Producers could pay to ensure that it was their ad that popped up, mapping ads to particular terms that you had input into the computer. That practice then migrated to the sale of keywords by search engines. Those are the two problems that we are going to look at in this session. I have just vastly generalized the practices involved in contextual advertising. There are many variations among the different search engines. That is actually an important point, because if the other side’s view on this comes to pass, then it does not matter what the variations are between different search engines, because every one would be immunized on the ground so that there would not be trademark use on the part of the search engines. 6 Stacey L. Dogan & Mark A. Lemley, Grounding Trademark Law Through Trademark Use, 92 Iowa L. Rev. 1669 (2007). 7 Graeme B. Dinwoodie & Mark D. Janis, Lessons in the Trademark Use Debate, 92 Iowa L. Rev. 1703 (2007), available at http://works.bepress.com/cgi/viewcontent.cgi?article=1040&context=graeme_dinwoodie. 8 Arsenal Football League plc v. Matthew Reed, [2001] R.P.C. 922 (Laddie J.) (finding no infringement); Case C-206/01, Reference for a preliminary ruling by the High Court of Justice (England & Wales), Chancery Division, by order of that court of 4 May 2001, in the case of Arsenal Football League plc against Matthew Reed, 2002 O.J. (C 333) 22 (suggesting that only use that jeopardizes the essential function of a trade mark is an infringing use); Arsenal Football League plc v. Matthew Reed, [2003] E.W.C.A. Civ. 696, May 21, 2003; [2003] E.T.M.R. 73 (CA) (on remand from ECJ), decision available at http://www.hmcourts-service.gov.uk/judgmentsfiles/j1751/arsenal_ v_reed.htm (reversing Laddie J. and finding infringement). 9 Adam Opel AG and Deutscher Verband der Spielwaren-Industrie eV v. Autec AG, [2006] E.C.J. (Advocate-General Ruiz-Jarabo Colomer, May 7, 2006) (EU) (merchandising), Judgment of the Court (First Chamber) of Jan. 25, 2007, available at http://curia.europa.eu/jurisp/cgi-bin/gettext.pl?lang=n&num=79929874 C19050048&doc=T&ouvert=T&seance= ARRET. 10 Trade Mark Directive, supra note 4. Under art. 5(1)(a) of the Directive, the owner of a registered trade mark can prevent the use of any sign which is identical with the earlier mark, provided the infringing goods or services are also identical with those registered. In the case of such identity, it is not necessary for a likelihood of confusion to be established for the owner of the earlier right to succeed.

544 S E S S I O N V I I : T R A D E M A R K Our approach would require some analysis of the different key word sales practices and presentation of search results. If you look at the suits that have been brought against both search engines and pop-up advertisers, on the one hand, and the purchasers of advertising on the other, on the whole, to the extent the cases have concluded, the search engines and the purchasers have won. But the defendants have won in two different ways, and that is the key here. We are debating not so much the outcome but more the means by which we get to the outcome. So the two ways in which the defendants have won are: 앫 First, by proving no likelihood of confusion and, therefore, no infringement. You have that result reached after trial in the GEICO v. Google case11 and you have it as a summary judgment matter in the Wentworth case.12 That is the way that Mark and I propose that we go about resolving these cases. 앫 The second way is probably now the majority view. It is certainly the majority view among scholars, and perhaps increasingly among courts. We have one appellate decision dealing with pop-up ads, and that court held that activity that does not constitute “use as a mark” does not implicate the trademark statute in the first place; there is absolute immunity regardless of any confusion that might occur. Mark and I take the position that, first, there is no such thing as a “use as a mark” requirement in U.S. law and, secondly, there should not be one. We would instead give much more importance to context and to an assessment of confusion. We believe that the “use as a mark” requirement does not achieve the goals that it claims it can achieve. In particular, it will not create certainty, because if there is one area of uncertain doctrine in U.S. law, it is the doctrines surrounding the concept of use. Secondly, we think that there are adverse effects that flow from imposing this sort of filter. In particular, it fails to regulate in any effective way the marketing and presentation of search results. On the descriptive question for a moment, there is no reference to “use as a mark” in the U.S. statute. There are plenty of references to different types of use, as we heard. There is “use in commerce,” the jurisdictional prerequisite. There is “use in connection with the sale of goods and services,”13 which cuts out many of the uses that are thrown up as nightmare scenarios that would occur if we do not have a trademark use requirement. But there is no reference to “use as a mark.” In fact, the only reference to something approaching “use as a mark” is in the fair use defense, where we find the phrase “use otherwise than as a mark.”14 I will come back to that in a second. So, given the paucity of language in the statute, some scholars have argued it is in the statute through incorporation of the common law. It was there at common law, the argument goes, even though no one actually talked much about it, and the Lanham Act15 was basically codifying what was there at common law.16 Even if you buy the argument that it was there at common law, the principal problem you have in interpreting the statute is Section 33(b)(4), which sets out the fair use defense.17 One element of the defense is that the defendant’s use is “use otherwise than as a mark.” If the “use as a mark” requirement in fact existed, you would not need Section 11

GEICO v. Google, Inc., 330 F. Supp. 700 (E.D. Va. 2004). J.G. Wentworth, S.S.C. L.P. v. Settlement Funding, LLC, 2007 U.S. Dist. Lexis 288 (E.D. Pa. Jan. 4, 2007). 13 See 15 U.S.C. §1114(1)(a) (registered mark); 15 U.S.C. §1125(a)(1)(A) (unregistered mark). 14 See 15 U.S.C. § 1115(a). 15 15 U.S.C. § 1127 (1994). 16 See, e.g., Stacey L. Dogan & Mark A. Lemley, Trademark and Consumer Search Costs on the Internet, 41 Hous. L. Rev. 777, 798 (2004). 12

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33(b)(4). So looking at the statute, and looking at the case law, we say that the trademark use requirement is not there as a descriptive matter. Prescriptively, we say it should not be there. If you look at use doctrines in the United States, they tend to be a proxy for many other parts of trademark analyses, particularly distinctiveness, which are immensely fact-dependent. We think, therefore, the certainty claims made by advocates of a trademark use requirement are simply illusory. In particular, the argument for the requirement necessarily wanders into the very contested debate about exactly what is “use as a mark.” Is merchandising use as a mark? Is copying a product design feature use as a mark? These difficult issues would come to the fore if the trademark use requirement were adopted. Moreover, we think that there will be adverse effects that come from taking trademark law and unfair competition law entirely out of the game by saying, “Just stop the analysis; this is not something trademark law gets into.” In particular, there is a decent debate to be had about whether more information is always good, which is the premise of trademark use advocates. And we also think that there is a need to recognize that different search providers market their advertising programs in different ways, making different claims, making different use of trademarks, and foisting trademarks on advertisers as key words in very, very different ways. To give an example, if you go back to the early Netscape cases18 where Netscape was sued, Netscape required those people advertising who were running adult Web sites to purchase “Playboy” as one of their key words. That strikes me, in terms of commercial ethics, as somewhat different from what Google is doing. Google is not positively trying to foist trademark key words on particular producers. If you say there is a threshold filter of trademark use, you cannot differentiate between any of these search engines because they all get off. If you instead look at confusion or you look at defenses that take into account honest commercial practices (or acting in good faith and fairly), you can differentiate between the conduct of different search engines that behave in different ways. That seems to me an appropriate form of regulation. The same argument applies with respect to the presentation of results. Some of the search engine pages that are produced in response to user queries clearly differentiate between sponsored and organic results. It is a good thing that we monitor and police the way that results are in fact presented. But if you have a trademark use filter you cannot police the different manner in which the results are actually presented to the public because every single search engine provider is immune from any regulation under the trademark statute. Yet, the manner of presentation surely can affect whether and in what way consumers are confused. Thus, trademark use advocates are essentially taking trademark law out of the game of regulating these practices. Now, some people might say that is a good thing. But let me just suggest to you that there are other ways in which the sale of key words could be regulated. I will give you two examples, one of which is really frightening. In the last month, 17 Section 33(b)(4) of the Lanham Act provides that it shall be a defense to an action for infringement of any mark That the use of the name, term, or device charged to be an infringement is a use, otherwise than as a mark, of the party’s individual name in his own business, or of the individual name of anyone in privity with such party, or of a term or device which is descriptive of and used fairly and in good faith only to describe the goods or services of such party, or their geographic origin. 18 Playboy Enters., Inc. v. Netscape Commc’ns Corp., 354 F.3d 1020 (9th Cir. 2004) (initial interest confusion actionable).

546 S E S S I O N V I I : T R A D E M A R K the State of Utah has enacted a law that purports to govern the sale of key words in the United States.19 If you are uncomfortable with the Lanham Act regulating the sale of key words, I guarantee you would not be happy with the Utah state statute. Alternatively, you could look at getting the Federal Trade Commission (FTC) involved. Frank Pasquale has argued that maybe there should be some FTC regulation of the way that key words are sold and the way that search engine results would be presented.20 I am not entirely averse to that idea, but I think that trademark law has a dynamic capacity, a flexibility, built into it that I think FTC regulation probably does not have. So the choices you are left with are: No regulation, which does not allow you to differentiate between different marketing of advertising or presentation of results; a form of regulation like the Lanham Act, which operates by reference to core purposes of trademark law; scattered state regulation, which is a nightmare prospect; or bureaucratic regulation by the federal government, which I think would be backward-looking and probably insufficiently dynamic. Thank you. MR. RICHARDSON: Thank you very much. Wonderful timing. I will now turn things over to Peter Ruess. I hope that you will get to the nightmare in Nanterre. DR. RUESS: Actually I have to start with one apology. The EU general part is in the materials. I was told that my slot, which was last year twenty-five minutes, is ten now. Since I cannot make up everything with speed like Graeme Dinwoodie can, I had to take out some content. Third-party uses — Google and eBay. I link these two because I have seen that in what we do for our clients these are issues that are interesting. I will try to focus on the use element. The background — I just need the name Graeme Dinwoodie. He already described the background, and I am certainly free riding on that. Let me show you what we are trying to do in the next minutes. Going through eBay, I am going to show you several examples of how, if you are looking for something on eBay and type in a trademarked term, it can maybe violate (or not violate) use as a mark (or not use as a mark) this trademark. I am going to move to keyword advertising and I am going to bother you with a little summary if I have time left. FIRST PROVIDER LIABILITY UNDER GERMAN LAW Section 11 of the German Teleservices Act21 exempts from liability host providers that are only storing third-party content. Is interesting to note that this provision in the German Act that stems from the EU Directive, so it is not peculiar to German law. For example, 19 See 2007 Utah Trademark Protection Act, SB 236 (Mar. 19, 2007), available at http://le.utah.gov/~2007/bills/ sbillamd/sb0236.htm. 20 See Frank Pasquale, The Law and Economics of Information Overload Externalities, 60 Vand. L. Rev. (2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 888410. 21 Teleservices Data Protection Act (Teledienstedatenschutzgesetz) of 1997, adopted 22 July 1997, entered into force 1 Aug. 1997, available at http://www.iid.de/iukdg/iukdge. html. Section 11— Storage of Information [Hosting]: “Providers shall not be responsible for third-party information that they store for a user if 1. they have no actual knowledge of illegal activity or information and, as regards claims for damages, is not aware of facts or circumstances from which the illegal activity or information is apparent, or 2. acts expeditiously to remove or to disable access to the information as soon as they become aware of such circumstances. Sentence 1 shall not be applied if the user is subordinate to or supervised by the provider.”

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eBay is a host provider, and they are hosting foreign content. That does not mean, however, that if you are eBay and somebody sends you a cease-and-desist letter, you can hold up your hands and say, “I don’t care,” as the Federal Supreme Court said in the ROLEX v. Ricardo decision.22 The exemption does not exclude injunctive relief. That means you do not have to pay damages. I will give you an example. Say you were Rolex and somebody is selling counterfeit watches, and if you type in “Rolex,” you see an offer of a blue plastic Rolex. You say, “There is no such thing as a blue plastic Rolex. I want you, eBay, to take that down.” Once put on notice, eBay has not only to take down this particular Rolex, but every blue plastic Rolex that they can find, certainly provided that this is technically possible. I would in this case argue that this is indeed technically feasible. There is a word filter system in place which eBay uses to target consumers. You just enter “blue” and “plastic” in conjunction with “Rolex,” and out these offers go. For the panel discussion, it may be interesting that the usual argument you always get from eBay is, “We have this verified rights owners program. It is sophisticated. It solves all your problems.” I am happy to go into further detail in the discussion session if you are interested. I would like to move on to how we can use search terms on eBay. USE ON eBAY The Frankfurt Higher Regional Court has a lot of decisions dealing with Cartier. In one case,23 someone who was selling gold jewelry activated the following search terms: “gold silver diamond rare rarity Cartier Bulgari Chanel.” Sounds like a dream shopping spree to some, I guess. The court said that linking “Cartier” as a search term for non-Cartier products that could theoretically be original — as in gold jewelry and as opposed to shoes — infringes the Cartier trademark, if no further clarifying statement is made in the context that Cartier is not used as a source indicator. The Frankfurt Court of Appeals said there cannot be a bright-line rule as to when a trademark counterfeit is used in commerce on Internet auction sites.24 Let’s try to find examples to clarify this further. There is a ridiculously expensive handbag my girlfriend wants to have. The reason she doesn’t get it is the price. You find a used one on eBay for $3,000, seventeen hours to go — ridiculous. If you were to buy this and it is a fake, I do not think we have to discuss that this is certainly objectionable. It is trademark infringement. A German came up with this one: “Very nice lady’s watch, Gucci imitation.” The argument was made, “I am not deceiving anybody. Whoever buys this knows perfectly well it is not a real Gucci watch.” That didn’t stand a chance in the court. The Federal Supreme Court said, “This is at the core of trademark infringement. You are using the 22 ROLEX v. Ricardo, Fed. Sup. Ct. (Mar. 11, 2004) (upholding lower court’s decision that the auction site operator was not “using” the ROLEX trademark and, therefore, was not directly liable for trade mark infringement). On Apr. 6 2000 Montres Rolex, S.A. filed a trademark claim with the Regional Court of Cologne against Ricardo in Germany, alleging that replica Rolex watches were being traded on Ricardo’s Web site. Under this claim Rolex sought an injunction preventing Ricardo from allowing further replica Rolex watches to be offered on its Web site, seeking a penalty fine of DM 500,000 for each infringement. On Oct. 31, 2000 judgment was made by the Cologne Regional Court prohibiting Ricardo from either selling or allowing replica Rolex watches to appear on its Web site. Rolex’s claim was dismissed by the Cologne Higher Regional Court on 2 Nov. 2001. Rolex is currently appealing this decision to the German Federal Civil Court in Karlsruhe. 23 Frankfurt Higher Reg. Ct., 6 U 252/04 (8 Sept. 2005), available at http://dejure. org/dienste/internet2?www. jurpc.de/rechtspr/20060040.htm. 24 Frankfurt Ct. App., 6 U 149/04 (7 Apr. 2005).

548 S E S S I O N V I I : T R A D E M A R K mark for something similar. It is not just about deceiving or not deceiving.” So this was overruled. What they are trying now is “look” or “style.” So you have this dress and somebody says it’s a “silky Gucci look.” That might work. There is another Frankfurt Higher Regional Court decision.25 Guess who sued? Cartier again. The seller advertised jewelry not made by Cartier with “Cartier-style.” That was not considered trademark infringement. Says the court, “It is not used as a trademark. It does not work as a source indicator.” It does not say “Cartier” anywhere. It just says it is “like Cartier.” It is a little bit the style and the design of Cartier. However, they lost, because it is comparative advertising, which under German rules26 is unlawful because the seller exploits the goodwill associated with the Cartier brand. I like this one, disclaiming the character is a genuine trademark. The text actually says, “The salesgirl swore it was authentic, but I don’t know.” No court decisions on this. Pragmatic legal advice: Violates eBay’s terms of use. You can get that taken down. In summary, on eBay use: 앫 Trademark use for non-trademark goods is infringement if it is used as a source indicator. That is not the case if you have “style” or “look.” 앫 Auctioneers are exempted from damages but have to take down whatever you tell them.27 앫 There is no exemption for injunctive relief. 앫 Take a look at the eBay policies (recently updated). KEYWORD ADVERTISING Let me use the four remaining minutes to go into keyword advertising. I unfortunately do not have to explain to you what that is. 앫 Search engines de facto the key to being or not being online. 앫 Advertising finances search engines. 앫 Advertising should target recipient appropriately and efficiently. 앫 In the 1990s, metatags (HTML elements used to provide structured metadata about Web sites) placed as tags in the head section of HTML. 앫 Influence on search results => considered unethical, used less today. Google has a trademark policy. I tried to get some harder information from them. It did not work. I just would like to draw your attention to the last line. It says, “Any potential confusion would come from the trademark in the text of an ad only.” If you enter a search term there, for example “Porsche,” and then on the right-hand side it says “Porsche cars” and there is no Porsche, then Google would see an issue. If you enter “Porsche” and it comes up “Peter’s Luxury Cars,” they would not see an issue. It is very questionable whether this visibility requirement, which is nowhere in the German Trademark Act or in the Trademark Directive, makes a huge difference. We do not have a European Court of Justice, Court of First Instance, or German Federal Supreme Court decision on keywords. There are some decisions on metatags. The Federal Supreme Court said that meta25

Frankfurt Higher Reg. Ct., 6 W 80/04 (27 July 2004). German Act against Unfair Competition, §§ 3, 6, subsect. 1. See also Case C-112/00, Toshiba Europe v. Katun Germany, [2001] E.C.R. 7945. 27 TDG § 11. 26

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tagging is illegal.28 Courts are now battling over whether this can be used as a precedent or not. No trademark infringement say two German higher regional courts.29 A funny thing is that in both of these cases the trial courts have precisely said what I stated before, which is that the keyword is not visible; therefore, it is not used as a trademark, and so not as a source indicator; it is not trademark infringement. The higher regional courts in both cases affirmed, but for rather procedural reasons. They tried to get their way around the real issue. In the Hamburg case, they had some procedural issues. In the Dresden case, they said the trademark is descriptive anyway. There is one higher regional court, which is the German appeals court level, that says use in commerce is no different from metatagging; it is an exploitation of the “pilot function” of the trademark.30 I personally think this is the most interesting point: Is the source indicator function, in terms of visibility, the only arbiter we go by, or can we say that if I build up goodwill and somebody uses this mark — enters “Rolex” and gets transferred to a site where they sell Cartier — that is just exploitation of what these people who invested in the trademark built up? It is not yet solved on the Federal Supreme Court level. So auction sites and search engines both profit from the guidance function, from this pilot function, of trademarks. The use in commerce is most likely the most relevant point on how to decide on whether you have a trademark infringement case or not. As we have seen with the auction sites, you have always infringement if you cannot disclaim it — such as “Gucci-look,” “Cartier-style” — which shows to the interested buyer that you are referring to a certain kind of design or style, but are not using the mark as a source indicator. As with the search engines, we have this issue of the visible use. If I get to these sites off Google, does it really make a difference whether I can see the mark or not? This very much leads into the point of what the consumer’s perception is. We can all guess whatever we want. There are people who say, “No way does the consumer ever link the term he entered with the commercials on the right-hand side.” Others say, “Yes, of course, because I do that.” I had a colleague who said he was looking for a children’s trolley and entered “Bugaboo” and was led to a site where they did not have it. He feels that that is just a waste of his time. That remains to be discussed. So what about the use to facilitate an effect on commerce? The trademark, as you see from the marketing perspective, decreases information costs. This pilot function is heavily disputed in Germany, but it makes sense from an approach of what trademark law is about. Then you have the initial interest confusion issue, which you know in the United States as well. There is the well-known example: You leave the highway because you want to go to a McDonald’s, and you end up at Burger King. The rest is open for discussion. My time is up. Thank you very much. MR. RICHARDSON: Thank you very much, Peter. We have five panelists. I think the fair thing to do is give each panelist two minutes now. That will leave us with fifteen minutes for an interchange with the audience and panelists. I will ask Marshall to start. 28

Federal Sup. Ct., I ZR 183/03 (13 May 2006). Hamburg Higher Reg. Ct., 3 U 180/04 (4 May 2006) (holding search engine cannot have knowledge of each case); Dresden Higher Reg. Ct., 14 U 498/05 (30 Aug. 2005) (trademark found descriptive). 30 Braunschweig Higher Reg. Ct., 2 W 177/06 (11 Dec. 2006). 29

550 S E S S I O N V I I : T R A D E M A R K PROF. LEAFFER: I urge you to read Mark Janis and Graeme Dinwoodie’s monumental work of scholarship and wonderful against a current notion of trademark use that captured the imagination of academics and some courts.31 I completely agree with Professor Dinwoodie’s functional approach to the AdWord issue. We are experiencing new forms of search engine technology — a technology that is a moving target. At the same time, consumer understandings change in tandem with this technology. Consumers are ever more sophisticated in their assessment of Web practices. Thus, I do not think a bright-line rule, as the French have done in condemning all uses of AdWords,32 is the right approach. Alternatively, I believe that our “use” theorists who call for complete impunity for most uses of AdWords are on the wrong track as well. My reason for condemning the bright-line approach is that AdWord practices from a global standpoint are difficult to characterize as being beneficial or detrimental to consumer interests. On the positive side, certain AdWord usages reduce search costs to the consumer by supplying them with useful information. At the other extreme, AdWords can be used deceptively, resulting in consumer confusion. Then there are other uses of AdWords that are ambiguous from a consumer welfare standpoint. Because we have not sorted out the varied world of AdWord effects, I do not think that a legislative fix should result at this time. I would prefer that the case law sort out the problem case by case, using a flexible approach based on likelihood of confusion. If this fails, Congress might consider establishing a safe harbor in the AdWords context modeled on Section 512 of the Copyright Act. Unfortunately, Congress might have to get into the act sooner rather than later because some states have taken or are considering the ill-advised — downright stupid — move of banning keywords. On March 19, 2007, Utah did so,33 and we may be entering a state law-induced chaos that will have to undone by Congress. MR. RICHARDSON: Thank you, Marshall. MR. GARRITY: Thank you, John. I think much of the semantics of arguing trademark use and what is or is not trademark use is completely lost upon the fact that if you go back and look at the studies and surveys that were done, both in the reported cases, starting from the Playboy case,34 which found north of 50 percent consumer confusion, all the way through to independent survey work that is being done today by the Pew Internet and American Life Project35 as well as Consumer WebWatch,36 it basically demonstrates unequivocally, in my estimation, the fact that consumers out there don’t know and understand that they are being served advertising when they are using search engines. Frankly, in my opinion — and I am representing a plaintiff against Google in the American Blind case37 — Google knows that and Google takes advantage of that. That is 31 Graeme B. Dinwoodie & Mark D. Janis, Confusion Over Use: Contextualism in Trademark Law, 92 Iowa L. Rev. 1597 (2007). See also Graeme B. Dinwoodie & Mark D. Janis, Trademarks and Unfair Competition: 2006–07); Graeme B. Dinwoodie & Mark D . Janis, Trademarks and Unfair Competition: Law and Policy Supplement, ch. 9 (2004) (collecting cases and materials on “Permissible Uses of Another’s Trademarks”). 32 See Google France Loses AdWords Appeal, Mar. 17, 2005, http://www.out-law.com/page-5395. 33 See 2007 Utah Trademark Protection Act, SB 236 (Mar. 19, 2007), available at http://le.utah.gov/~2007/bills/ sbillamd/sb0236.htm. 34 Playboy Enters., Inc. v. Netscape Commc’ns Corp., 354 F.3d 1020 (9th Cir. 2004). 35 See Pew Research Center, Pew Internet and American Life Project, Search Engine Users (Jan. 23, 2005), available at http://www.pewinternet.org/pdfs/PIP_ Searchengine_users.pdf [hereinafter Pew Search Engine Study]. 36 See, e.g., Consumer Union WebWatch Report, False Oracles: Consumer Reaction to Learning the Truth About How Search Engines Work (June 30, 2003), available at http://www.consumerwebwatch.org/dynamic/ search-report-false-oracles-ab stract.cfm. 37 Google, Inc. v. American Blind & Wallpaper Factory, Inc., 74 U.S.P.Q.2d 1385 (N.D. Cal. 2005).

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the reason why Google is basically going to sell $9 billion worth of search engine advertising this year. They are now basically taking advantage of the fact that when someone is looking for a “Bugaboo stroller,” they are going to search for it by name. There is goodwill that is attendant to that mark, to that brand, and they are specifically searching for a product by that name. For Google to say, “Oh well, if the context of the ad that is served is such that it does not include the trademark in the ad” — I think that is all bunk. I think at the end of the day you are going to the first thing that you see on the page. They know it. There are studies that back that up. I think, again, the empirical data that is out there shows and demonstrates the fact that most people do not know and understand that they get advertising served to them. That’s my take on it. MR. RICHARDSON: Thank you very much, Paul. PROF. FRANKEL: One of the issues, with either the American approach or the European approach, is that the laws are not really designed for the online world. The law is very terrestrial. I shall remind us of the international dimension a little here. I do agree with Graeme that consumer confusion is the better touchstone and that use is not. I think that, in part, this is an acknowledgement that trademark law is very fact-driven. When a court refers to “consumers,” which consumers are they talking about? The facts of a situation are determinative. To attempt to codify what is essentially a factual analysis is bound to give rise to difficulties, both within one jurisdiction and internationally. With that in mind, let’s contemplate the relevance, if any, of the TRIPs Agreement.38 In this situation it adds very little. Article 17 of the TRIPs39 Agreement is the attempt to bring the three-step test,40 which has been discussed much in relation to copyright law and patent law, to trademarks. What is fair use of a trademark? What is legitimate here? After setting out the three-step test, TRIPs then gives the specific example that “descriptive use” of the mark is acceptable.41 That begs the question of what is descriptive use? 38 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_3.htm. 39 Id. art. 17: “Members may provide limited exceptions to the rights conferred by a trademark, such as fair use of descriptive terms, provided that such exceptions take account of the legitimate interests of the owner of the trademark and of third parties.” 40 Id. art. 13: “Members shall confine limitations and exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the rights holder.” Pursuant to art. 9.2 of the Berne Convention (“three-part test”): “The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.” 41 Id. art. 16: “Rights Conferred” — 1. The owner of a registered trademark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. The rights described above shall not prejudice any existing prior rights, nor shall they affect the possibility of Members making rights available on the basis of use. 2. Article 6bis of the Paris Convention (1967) shall apply, mutatis mutandis, to services. In determining whether a trademark is well-known, Members shall take account of the knowledge of the trademark in the relevant sector of the public, including knowledge in the Member concerned which has been obtained as a result of the promotion of the trademark. 3. Article 6bis of the Paris Convention (1967) shall apply, mutatis mutandis, to goods or services which are not similar to those in respect of which a trademark is registered, provided that use of that trademark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered trademark and provided that the interests of the owner of the registered trademark are likely to be damaged by such use.”

552 S E S S I O N V I I : T R A D E M A R K There needs to be quite a lot of work at the international level to discuss the issues. It is all very well to say the French consumer believes this or an American consumer believes the other, but how do you assess consumer confusion in a worldwide market? So far we see technology being used so that a consumer may not be able to buy products if they reside in a particular area. There is a real thing that scholars need to engage in here. We cannot have the situation continuing forever with the French doing it one way, the Germans doing it another way, the Americans doing it another way, because there are consumers outside of those areas who buy from those countries. And the world trading system built on theories of comparative advantage encourage consumers to make international purchases. Trademark law is supposed to protect the consumer, but consumer confusion is rife. MR. RICHARDSON: Thank you, Susy. MR. BUTLER: I think that many trademark owners would argue that they are being shortchanged, at least in the United States, under the current laws. Maybe it is because the Lanham Act has not evolved as quickly as the Internet has — or at least the courts’ interpretation of the Lanham Act has not evolved as quickly. Let me argue their side here. Take the example where someone types the word “Allstate,” to use an American insurance company as an example, into a search engine and a bunch of insurance companies come up as sponsored links. To say that that is not “use” is really, I think, a stretch. It is a real stretch of the imagination to say that that is not trademark use of some sort. The problem in the case of sponsored links — probably with respect to metatags as well — is the notion that trademark owners are sort of “stuck” with the definition in Section 45 of the Lanham Act of “use in commerce.” Certainly, when someone types in the word “Allstate,” for example, and a sponsored link comes up for Joe’s Insurance Company, the word “Allstate” might not be there (visibly) in the sponsored link. It does not appear on the screen. It does not appear when you click on the sponsored link and open up the Joe’s Insurance Company Web site. You do not see “Allstate” at all. But I think that a trademark owner, such as Allstate in my example, would probably say that its mark is being used – without authorization – for commercial purposes to sell competing products or services. So, when we consider AdWare, and even, for similar reasons, when we consider spyware, phishing, gripe sites, metatags, sponsored links, et cetera — all of which are concepts that have evolved fairly recently — we need to consider also whether trademarks of others are being used in an actionable way. I think that, with respect to the issue of whether AdWare can amount to trademark use, we in the United States are perhaps going to end up having to deal with the law the way that we did when we grappled with anti-cybersquatting, where the U.S. Congress had to amend the Lanham Act in order to address that developing and quite nontraditional phenomenon. Similarly, with respect to AdWare and the like, if the courts are constrained in their ability to find “use” (that is, if they are constrained due to perceived limitations in the scope of the Lanham Act), then I suspect that the trademark owners will beseech Congress to amend the laws so as to make AdWare and other such utilizations of marks, actionable trademark “use” under the Lanham Act. MR. RICHARDSON: Thank you, Jeffrey. Ilanah? MS. SIMON: It seems to me unfortunate that we are basically fighting against two moving targets. On the one hand, as Marshall has said, we have to grapple with new technology. But we cannot even get the basics of offline trademark clear, particularly our

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trademark use question. As has been said, you do not need confusion in the European Union if you have identical goods and identical marks. You might think, “Wonderful. That means everything is going to be easy.” It is not easy. As no doubt you have learned from the previous session, we have this thorny issue of trademark use. As we have seen, the case law is not wonderfully clear. The correct test does not seem to be use to indicate origin. You do not seem to need that for trademark infringement, although some of the national courts have seemed to think that that has been the case. Instead, what you do seem to need is use that jeopardizes the ability to distinguish the trademark owner’s goods. You would think that use in keywords would be the paradigm example of that. If someone puts your trademark into a search engine and someone else’s goods come up, then your trademark just is not functioning to direct your consumers to your goods. That would seem to jeopardize the essential function. Again, so far, so good. But then we have an extra added dimension from Adam Opel.42 We have these issues of whether referential use is caught or not. I think we need some work on that. Just to finish up, the referential use issue would seem to be pretty fatal for any uses on eBay. Even if you say, “My goods look just like Burberry’s,” you are still referring back to Burberry. That is referential use. It is not use to refer to services. Therefore, it would seem to fall outside of infringement under Adam Opel. MR. RICHARDSON: Thank you, Ilanah. We have fifteen minutes for some audience and panel participation. Let me throw something out to start things off and see what people think. If you make the assumption that we are talking about a valid trademark, there is a case called 1-800 Contacts, decided by the Second Circuit in 2005.43 Does anybody think that is a good decision? PROF. DINWOODIE: That is why I said the position I was advancing was the minority position. 1-800 Contacts is the only appellate decision thus far. There are district court decisions, the American Blind decision44 and the GEICO45 decision. But 1-800 Contacts is the exact paradigm example and most authoritative example of what I was arguing against. So I disagree with the outcome. QUESTION [Andrew Bridges, Winston & Strawn, San Francisco]: Actually, I think it was well decided. I have a question for Mr. Butler. I own an Audi. I go to a Porsche/Audi dealer and I say, “I want a new stereo system for my car. I want a JVC.” He says, “Oh, but you really should look at the Blaupunkt.” Is that an infringement of the JVC mark? MR. BUTLER: By your Audi dealer? QUESTIONER [Mr. Bridges]: By the Audi dealer, to suggest an alternative when I suggest a brand. MR. BUTLER: I think one could argue that a person suggesting another brand like that is not infringing the trademark, just as when you walk into a store and you look for Coca-Cola brand beverage and right next to it is the Pepsi brand. There might be a Pepsi salesman there saying, “Please try Pepsi,” even though you went into the store looking for 42 Case C-48/05, Adam Opel AG and Deutscher Verband der Spielwaren-Industrie eV v. Autec AG, Judgment of the Court (First Chamber) of Jan. 25, 2007 available at http://curia.europa.eu/jurisp/cgi-bin/gettext.pl?lang= en&num=79929874C19050048&doc= T&ouvert=T&seance=ARRET). 43 1-800 Contacts, Inc. v. WhenU.com, Inc., 414 F.3d 400 (2d Cir. 2005). 44 Google Inc. v. American Blind & Wallpaper Factory, Inc., 74 U.S.P.Q.2d 1385 (N.D. Cal. 2005). 45 GEICO v. Google, Inc., 330 F. Supp. 700 (E.D. Va. 2004).

554 S E S S I O N V I I : T R A D E M A R K and thinking you wanted the Coca-Cola brand. I think you could make an argument that it is not infringement, but rather fair use. I would take issue, though, with the suggestion that 1-800 Contacts was not a well-decided case. All those kinds of pop-up ad cases, I think, have come out fairly consistently, some at the district court level and I think that one at the appellate court level by the Second Circuit. I think the consistency is helpful. The suggestion that it’s not trademark use in a pop-up ad like that I think needs to be examined. But I think the courts were confined with the laws as they read them, as they interpret the Lanham Act. QUESTIONER [Mr. Bridges]: I would like to follow up. I practice a lot of Internet law, but I actually do not think that it is special. I think law has always grappled with new technologies and new business models. Coming back to a regular, non-Internet example, you say that the suggestion of the Blaupunkt radio might not be an infringement, maybe because it is not confusing. Has the dealer used the JVC trademark when I ask for the JVC radio and he suggests a Blaupunkt? MR. BUTLER: Consumers benefit when they can identify products in order to make the right choices and proper decisions when they make a purchase. If one goes into a store and says, “I think I want a JVC brand radio,” and the salesperson says, “I don’t recommend the JVC; I recommend the Blaupunkt brand radio,” I am sure that there is no consumer confusion. And I am also sure that there is no a trademark infringement there. You are shaking your head. QUESTIONER [Mr. Bridges]: Right, because my question is not whether it is infringement. My question is whether there is trademark use of JVC, the brand I suggest. MR. BUTLER: I hear you. I think the differences between use and wrongful use — of course, it is use (in the sense of employment or utilization of something) if I go on the Internet and I am looking for radios and I type in the letters “JVC” and I then see a bunch of JVC brand radios. That is a use of a trademark, of course. I think the issue under the Lanham Act would be, in your hypothetical, whether there is a wrongful, unauthorized use that leads to the likelihood of confusion, et cetera. In that hypothetical instance, I am not thinking that I am buying a JVC brand Blaupunkt. I know I am buying Blaupunkt. So in a hypothetical like this, I think one could argue that it is a utilization of a trademark per se; but it is certainly not a Lanham Act wrongful “use.” In addition, in your example, the salesman might well argue that his mention of the mark of another is unactionable fair use (or descrip-tive use), for legitimate comparison purposes. QUESTION [Mark Traphagen, Traphagen Law PLC, Washington, D.C.]: I have a question that I think dovetails into Andrew’s observation, but it genuinely is a question. Isn’t there something in Section 43(a)(1) that establishes a cause of action, not just for what we would call use on the goods or services, but also some sort of representation in connection with advertising? Is that true or not? I would love to hear more about it. PROF. DINWOODIE: Just very quickly, there is the false advertising claim in Subsection (b). In fact, that can be used in a supplemental way if the actual text of the ad violated the relevant standards. That is an independent cause of action. It is an alternative cause of action. In fact, there are some people who will argue that that is one way to go. But it is much more limited, both in terms of the standing to bring suits and the ease of making out the case. MR. RICHARDSON: I see the gentleman from Customs, and then the lady back there. We will take the gentleman first. QUESTION [Philip Carpio, U.S. Customs and Border Protection Miami]: I’m not sure if

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I like to be known as “the gentleman from Customs.” [Laughter] I just happen to work for them. This question is generically for the panel, but specifically I was looking at the article by Professor Dinwoodie. I agree with a lot of it, that there is no kind of per se rule or strict liability for just use of a mark. But you did acknowledge in your article, I think, importantly, that use of a mark is still relevant evidence in the infringement inquiry. But as we know, use of a mark or weight of evidence is not all accorded equally to all the different factors. As a practical matter, in the case law that you are aware of and researched, do you find that the courts are according a kind of predominant weight to the concept of use and how the mark is used in determining whether or not a mark is infringing? It seems like that is kind of the primary focus now, at least in our most recent jurisprudence. PROF. DINWOODIE: Two responses. One is, to the extent that it is included, it is not as a direct independent factor. It informs other factors. The channels of advertising obviously reflect the nature of the use. Actual use rules reflect the nature of use. So use comes into all the different factors, informing all those factors. I probably should ask Barton Beebe, who has done empirical studies of which ones actually count, to give us the numerical, quantitative analysis of which factors play. But there is no autonomous use factor. It is a factor that informs almost every one of the multifactor tests in most of the circuits. In terms of the ontological classification of the nature of the use or the mark, you are more likely to see that not so much in the likelihood-of-confusion analysis, but maybe more in the fair use analysis, where courts actually will ask, is this functioning otherwise than as a mark? Is this actually describing the goods or services, or, in the nominative context, is this nominative? So you are going to see it inform the analysis of the likelihood of confusion, but not as an autonomous factor. QUESTION [Yee Fen Lim, Galexia Consulting Pty, Ltd., Sydney]: I have two questions. Basically, from what I understand, there was some reference to some empirical studies that indicate user perceptions on the Internet being confused and so on and so forth. I just wondered whether the survey subjects were actually from any particular age group or particular geographical areas. From my understanding, the U.K. courts anyway, since as far back as Catnic in 1982,46 have taken a far less patronizing attitude towards Internet users than the U.S. courts have taken. My second question goes to the relationship between some of the cases in the United States on metatags vis-à-vis what has been said this morning about using trademarks as search terms. I do remember – correct me if I am wrong — a case where, I think, a court said that the “Playboy” term, although it is a trademark owned by Playboy Enterprises, has become a generic word to describe certain activities and, therefore, the use of that as a metatag was not infringing.47 I was just wondering how that sits with particular use in search terms. If I type in “Playboy,” it may be that I am referring to Playboy Enterprises or I may be referring to more general concepts. MR. GARRITY: I will tackle the first question that you posed — that is, the survey evidence that is out there as it relates to confusion of consumers that use search engines. Certainly the surveys that have been done in the keyword advertising cases, the spyware cases, and also the banner advertising cases — that survey evidence has been done under appropriate safeguards, so that it would be expert testimony that would be admissible in a court in the United States. 46 47

Catnic Components v. Hill & Smith, [1982] R.P.C. 183 (H.L. 1980). Playboy Enters., Inc. v. Netscape Commc’ns Corp., 354 F.3d 1020 (9th Cir. 2004).

556 S E S S I O N V I I : T R A D E M A R K Again, I just want to stress that if you go back and look through that body of case law — granted, that is survey evidence in litigation — the evidence of confusion that is reflected in those surveys starts at about 50 percent and goes up from there. With respect to the non-litigation empirical data that I have seen, I can-not speak to the composition of who it is that was being studied. I am very familiar with the Pew study.48 I think that was surveying north of 2,500 people, taken from all walks of life. I think the only prerequisite for someone participating in that particular study was the fact that they had made a significant amount of use of Internet search engines in the preceding six months or year. PROF. DINWOODIE: I will just take a quick bite at the second part. “Playboy” has not been found to be generic. That is wrong. There was a case in which “Playmate of the Year” was used by the person who was Playmate of the Year and, therefore, it actually was a fair use.49 But that is a different conclusion from the conclusion that “Playboy” is generic. QUESTIONER: You are referring to the Terri Welles case. That is not the case I am referring to. PROF. DINWOODIE: “Playboy” is not a generic mark in the United States. With respect to the question of the studies, you are right about the Pew Study. But what is important, of course, is if you take the trademark use position, the studies do not matter. The point is, in fact, if you look at the studies that have been adduced in the litigation, in GEICO the defendant won. The studies showed insufficient confusion. That may be the case. But if you adopt the trademark use position, all those studies could say absolutely anything, and they would be irrelevant. PROF. FRANKEL: Referring to the study point and who is being studied, it makes sense in those cases to study the local market, because that might have been what was at issue. But it makes exactly no sense when you are trying to have an international market. That is also why I support what Graeme is saying. If you try to take a study of a particular state in the United States to demonstrate whether “Bugaboo” has been used fairly or is causing confusion, this does not clarify whether any confusion exists beyond that state. The geography of where the study takes place is very important. That is a fact-driven issue and why maybe Janis and Dinwoodie have a point. MR. RICHARDSON: Peter, you have been very patient. DR. RUESS: I just want to add one little thing that always comes up when you discuss skewed advertising, and somebody says, “Well, isn’t that about comparing product A to product B?” My theory is, no, it is not. It is the initial interest confusion. If you drive on a highway and you see a McDonald’s sign, you pull off, and you end up in the parking lot of a Burger King, you do not go away. Because you are hungry, you go in. Solely because online it is so easy, with a few clicks, we tried to revert the whole system that works in the offline world and say, “No, actually, that is not initial interest confusion. It is like two pieces that are offered on the same table.” That is not true. It is just not true. The metaphor with the comparison, although it comes every single time you discuss skewed advertising, I believe doesn’t fit. MR. RICHARDSON: I just have one closing comment. The most interesting part of 1-800 Contacts,50 I found, was the attempt to distinguish between “www.trademark.com” and plain “trademark.” It reminds me of a case that I was involved in when I was in practice. 48 49 50

Pew Search Engine Study, supra note 37. Playboy Enters., Inc. v. Welles, 7 F. Supp.2d 1098 (S.D. Cal. 1998). 1-800 Contacts, Inc. v. WhenU.com, Inc., 414 F.3d 400 (2d Cir. 2005).

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That the symbol for China is “cn.” The WWW.CNNEWS.COM was scotched by the Fourth Circuit as being an infringement of CNN.51 An interesting point. Thank you very much panelists, speakers, audience.

51 Cable News Network, LP, LLLP, v. CNNEWS.COM, 2003 WL 152846 (4th Cir. Jan. 23, 2003), available at http://www.eff.org/legal/cases/CNN_v_CNnews/021112.U.pdf.

SESSION VII: TRADEMARK PART C: DILUTION: A REVIEW OF RECENT DEVELOPMENTS

SESSION VII: TRADEMARK

Part C: Dilution: A Review of Recent Developments Moderator PROF. COENRAAD VISSER

University of South Africa (Pretoria) Speakers PROF. BARTON BEEBE

KENNETH A. PLEVEN

Benjamin N. Cardozo School of Law, Yeshiva University (New York)

Skadden Arps Slate Meagher & Flom LLP (New York)

DAVID LLEWELYN

ILANAH SIMON

IP Academy, Singapore; White & Case LLP (London)

Lecturer, School of Social Sciences and Law, Brunel University (Uxbridge) Panelists

PROF. VERONICA BARRESI

ANDREW BRIDGES

University College (London)

Winston & Strawn LLP (San Francisco)

SUSAN PROGOFF

Ropes & Gray LLP (New York) PROF. VISSER: Let’s move on to our next panel for a discussion of trademark dilution. Of course, it overlaps to a certain extent with the two previous sessions, and especially with what was already touched upon in the last session on the use of trademarks as keywords in search engines. Of course, it is entirely topical that we talk about dilution separately this morning, not only because of the trend of the new Trademark Dilution Revision Act here in the United States, but because of the continuing struggle of the courts in this branch of trademark law. The struggle is always to set the limits, I think, to the remedy. The court is clear. The limits are less clear. That, I think, will appear also in the presentations this morning. It is almost from decision to decision that the remedy contracts or expands. It is almost as if the courts never quite know exactly where the firm ground is for this in trademark remedies.

560 S E S S I O N V I I : T R A D E M A R K Let’s start with developments in the United States. We have two presenters here, Barton Beebe and Kenneth Plevan. Barton? PROF. BEEBE: Thanks very much for the introduction. In the next ten minutes, I plan to make a very modest sort of presentation that essentially will review the changes to U.S. federal antidilution law made by the Trademark Dilution Revision Act (TDRA).1 Then I will speak very briefly in general terms about some of the cases that have come down since the effective date of the TDRA, October 6, 2006. I apologize to many in the room because, based on the questions asked so far, I suspect that many in the room could give this presentation. It is very basic, but hopefully it will at least get things started for the new federal antidilution law in the United States. Much of what I will say is based on an article that I put together for a Symposium here at Fordham, entitled “A Defense of the New Federal Trademark Antidilution Law.”2 Apparently, that is why I am on this panel. I may be the only academic that Hugh knows who actually is willing to defend U.S. antidilution law. But, as one reader of this article said to me, with friends like me, the TDRA does not need enemies. I’m not sure if that’s true. I will first talk about the changes in the subject matter of antidilution protection. I realize that most of you who are familiar with TDRA know that it primarily reverses or overrides the Supreme Court judgment in Moseley 3 by establishing a likelihood-of-dilution standard in U.S. federal antidilution law. I want to start with the subject matter changes made by the TDRA because these are less in the headlines but I think equally as important. 앫 First, the TDRA quite clearly establishes that non-inherently distinctive marks may qualify for antidilution protection, which overrides a line of cases out of the Second Circuit Court of Appeals in New York and other states, most often associated with Judge Leval.4 But I have said here “But see Section 1125 (c)(2)(b)(ii),” because I think this provision of the TDRA still gives an avenue for the Judge Levals of the world to find a way to limit antidilution protection, to some extent, to inherently distinctive marks. 앫 Second, and very clearly, niche fame is held not to be sufficient by the TDRA, overriding Times Mirror,5 among other cases. Here I have also shown a “but see,” which refers to a case out of the Southern District of Texas from just a few weeks ago,6 which seemed not to know that the TDRA had been passed and was still referring to Fifth Circuit doctrine, which said that market fame is sufficient. This previews what I will say at the end of my presentation about the apparent unwillingness, or deliberate (or otherwise) ignorance, by most U.S. courts so far of the changes made by the TDRA. 앫 Third, the TDRA sets out new factors to determine whether a mark is sufficiently famous to qualify for protection under federal antidilution law. By the way, I keep using the term “U.S. federal antidilution law.” That is because we 1 Trademark Dilution Revision Act of 2006 (TDRA), Pub. L. 109-312, 120 Stat. 1730, 15 U.S.C. § 1051 (Oct. 6, 2006), available at http://www.informationtechnologylaw.com/materials/tmda.pdf. 2 Barton Beebe, A Defense of the New Federal Trademark Antidilution Law, 16 Fordham Intell. Prop. Media & Ent. L.J. 1143 (2006). 3 Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). 4 See, e.g., TCPIP Holding Co. v. Haar Commc’ns, Inc., 244 F.3d 88, 96 (2d Cir. 2001). 5 Times Mirror Magazines, Inc. v. Las Vegas Sports News, 212 F.3d 157, 167 (3d Cir. 2000). 6 Pet Silk, Inc. v. Jackson, No. 06-2465, 481 F. Supp.2d 824, 2007 WL 951635 (S.D. Tex. Mar. 28, 2007).

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still do not know how the TDRA will interact with state law. There is a big bomb, I put it to you, in current U.S. antidilution law, and that is the state-level antidilution protection given by, for example, the New York state statute;7 or California state statute,8 which have completely vague terms, highly undisciplined language. We do not know how that state language will affect antidilution law in the future. The old Federal Trademark Dilution Act (FTDA) offered eight factors,9 which were far too many for courts to handle. Now we have four new factors for fame: (i) The duration, extent, and geographic reach of advertising and publicity of the mark, whether advertised or publicized by the owner or third parties. (ii) The amount, volume, and geographic extent of sales of goods or services offered under the mark. (iii) The extent of actual recognition of the mark. (iv) Whether the mark was registered under the Act of March 3, 1881, or the Act of February 20, 1905, or on the principal register.10 One comment I will make on these factors is that factor (iii), the extent of actual recognition of the mark — is not this, after all, the main question that we are trying to determine by these fame factors? We get this a lot in U.S. trademark law, in these multifactor analyses, where one of the factors is actually the empirical question. What is the fact in the marketplace? Then we look at factors (i) and (ii) to help us try to estimate that fact in the marketplace — advertising or extent of sales. But the third factor, strangely, is really the main question. I think trademark lawyers would say, “No, wait. Actual recognition — this is an invitation for the submission of survey evidence.” But still it is a very awkwardly worded factor, and we see this as well in the test for blurring, which we will see in a moment, and also in the multifactor test for trademark confusion. Note, by the way, one other thing about this idea of famousness. The Act uses very sparingly the word “distinctive.” It very sparingly refers to the concept of trademark distinctiveness. Why? I think this is a very good move by the Act because distinctiveness, at least in U.S. federal law, is a meaningless concept. It has been given so many definitions as to mean nothing. Now the Act uses the term “recognition.” It is a new age, an age where we talk about the recognition given to marks. I think that is great, because “distinctiveness” was a disaster, almost as bad as the term “dilution” for antidilution law. Changes in the scope of antidilution protection made by the Act: 앫 First, and most notoriously, the Act establishes a likelihood of dilution standard, overriding the Moseley opinion.11 앫 Also the Act establishes definitions of blurring and tarnishment: (B) For purposes of paragraph (1), “dilution by blurring” is association arising from the similarity between a mark or trade name and a famous mark that impairs the distinctiveness of the famous mark. In determining whether a mark or trade name is likely to cause dilution by blurring, the court may consider all relevant factors, including the following: (i) The degree of similarity between the mark or trade name and the famous mark. 7

New York General Business Law § 360-l. California Business & Professions Code § 14330. 9 Lanham Act § 43(c)(1), 15 U.S.C. § 1125(c)(1). 10 TDRA § 2. 11 Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). 8

562 S E S S I O N V I I : T R A D E M A R K (ii) The degree of inherent or acquired distinctiveness of the famous mark. (iii) The extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark. (iv) The degree of recognition of the famous mark. (v) Whether the user of the mark or trade name intended to create an association with the famous mark. (vi) Any actual association between the mark or trade name and the famous mark. (C) For purposes of paragraph (1), “dilution by tarnishment” is association arising from the similarity between a mark or trade name and a famous mark that harms the reputation of the famous mark.12 Although we have this new definition of likelihood of dilution, I think most U.S. trademark lawyers in the room would say that we still do not know how courts are going to treat this. There is good empirical evidence13 that courts in the United States, Federal District courts especially, and also appellate courts — Judge Leval is an example — are hostile to antidilution protection. Just because we have this new likelihood of dilution standard, how will courts actually treat likelihood of dilution? Will they just say, “It says likelihood of dilution, but I am still going to write my opinion in such a way that I am basically asking for evidence of actual dilution?” I put it to you that the way the courts will do this — we already see some evidence of this in the Century 21 case,14 which Ken will talk about in much more detail — is they will take advantage of the definitions of “blurring” and “tarnishment” given in the Act. These definitions, I think, are the weakest points of the Act from the perspective of those who are against antidilution protection. Look at the definition of “blurring,” for example (and the same analysis can be done with “tarnishment”): “Blurring is association arising from the similarity between a mark or trade name in a famous mark that impairs the distinctiveness of the famous mark.” Arguably, this definition implies a four-step test for determining whether blurring has occurred: 앫 First, the plaintiff must show that the defendant’s speech qualifies as a mark or trade name. This raises all of the metaphysics that we were just talking about with “use in commerce,” but in slightly different terms. In other words, the plaintiff must show that, but for its dilution, the defendant’s mark is perceived by consumers as a designation of source — in other words, as a mark or a trade name. This raises the Louis Vuitton case15 (CHEWY VUITON), which we will get to in a moment, with which many in the room are quite familiar. 앫 Second, the plaintiff must show that consumers make an association between defendant’s mark and plaintiff’s mark. This goes to the whole debate of identity versus “identity plus” that came down after Moseley. Is mere similarity enough or is mere identity enough to show blurring — or, in other words, dilution? The wording of “dilution by blurring” definition suggests that no, it is not; not only must you show similarity; you must show that this similarity creates association. 앫 Third, you have to show that this similarity arises because of similarity from the marks, not the goods. 12

Id. See Clarisa Long, Dilution, 106 Colum. L. Rev. 1029 (2006). 14 Century 21 Real Estate LLC v. Century Ins. Group, 2007 WL 484555 (D. Ariz. 2007). 15 Louis Vuitton Malletier SA v. Haute Diggity Dog, LLC, 464 F.Supp 495, 2006 WL 3182468 (E.D. Va. Nov. 3, 2006). 13

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앫 Fourth, even if you have shown similarity that causes association, furthermore you have to show that this association impairs distinctiveness. The whole point is: Why include all these terms in this definition if all the plaintiff has to show is identity, and then we presume dilution? I think we are way past that old identity interpretation in U.S. trademark law. In the short time I have left, I will say also that the Act establishes new factors for determining a likelihood of blurring. Take a look at factor (ii), “the degree of inherent or acquired distinctiveness of the famous mark.” This is an invitation to Judge Leval and other judges to say, “Sure, we must give antidilution protection to non-inherently distinctive marks. The Act commands us to do so. However, going to the world of Feist16 on the copyright side, the protection we will give will be extremely thin. We will say that non-inherently distinctive marks, such as BRITISH AIRWAYS or AMERICAN AIRLINES, will receive extremely thin, wafer-thin — possibly nonexistent — protection.” What the TDRA gives on subject matter the judges will take away on scope. Finally, we will talk more about fair use in a moment, the various exclusions that are enhanced. In the forty seconds I have left, I want to point out to you a very strange glitch in the TDRA. Let me highlight for you the relevant language of Section 1125(c)(6) of the Act: (6) OWNERSHIP OF VALID REGISTRATION A COMPLETE BAR TO ACTION.—The ownership by a person of a valid registration under the Act of March 3, 1881, or the Act of February 20, 1905, or on the principal register under this Act shall be a complete bar to an action against that person, with respect to that mark, that— (A) (i) is brought by another person under the common law or a statute of a State; and (ii) seeks to prevent dilution by blurring or dilution by tarnishment; or (B) asserts any claim of actual or likely damage or harm to the distinctiveness or reputation of a mark, label, or form of advertisement. This language suggests that if you, as a defendant, have a registered mark, that is a complete bar to any action against you for dilution. The reason that we have this problem is that the “or” there should have been an “and.” But there was a mistake apparently made in the drafting — so we speculate — and so we have “or.” Registration is a complete bar to a dilution action against you. In conclusion, the best thing about the Act, in its defense, is that it offers blurring and tarnishment protection. It still uses the term “dilution,” but the term is so vague we should get rid of it altogether and just talk about anti-blurring and anti-tarnishment protection. One offshoot of that is to note that there is no misappropriation protection in American law under Section 43(c). We have had two chances to provide that, as the EC Directive17 does, and we have not. I will conclude with that. MR. PLEVAN: Where are we? What is the problem with the Federal Trademark Dilution Act? First is the difficulty in defining “dilution.” A little quick history. The Fourth Circuit said that it is a “dauntingly elusive concept” in Ringling Brothers.18 Professor McCarthy 16

Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., Inc., 111 S. Ct. 1282 (1991). First Council Directive to Approximate the Laws of the Member States Relating to Trade Marks, No. 89/104/EEC, 1989 O.J. (L 40) 1, Arts. 4(4)(a) and 5(2). 18 Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Utah Div. of Travel Dev., 170 F.3d 449, 451 (4th Cir. 1999). 17

564 S E S S I O N V I I : T R A D E M A R K said — time doesn’t permit use of the entire quote — that it is “a doctrinal puzzlement,” “judicial incomprehension,” “a daunting pedagogical challenge,” and that when he tries to talk to people, he is encountered with “blank stares of incredulity or, worse, nods of understanding which mask and conceal puzzlement and misconceptions.” That is Professor McCarthy, 2004.19 Along comes our own Professor Barton Beebe, who makes this observation in the Fordham Intellectual Property, Media and Entertainment Law Journal article to which he referred. Professor Beebe stated: “Understood in terms of typicality and consumer search costs, the blurring theory of dilution is relatively straightforward.”20 If anyone is litigating a case, particularly if you are a defendant, Barton’s article is a must-read. I agree that, as he defends the Act, Barton pretty much tells us all how to get out of it. Does dilution ever really happen? Professor Beebe notes that marks which are so famous as to deserve anti-blurring protection are essentially immune to blurring because of their overriding fame. So whether we call it a catch-22 or the irony of the statute, it is well-documented in Professor Beebe’s article. So here is the problem. Dilution is an elusive concept. Or it is easy to grasp in theory and difficult to prove in the real world. The owners, I would add, of the most powerful consumer brands in the world are simply not a sympathetic group. That probably is what led to the continuing unsympathetic attitude of the federal judiciary. We will have to see in the next six months to a year as to whether that attitude continues. I am just going to touch very briefly on three cases. Century 21 v. Century Surety21 is a lawsuit that was filed in 2003. The plaintiff had already lost all of its claims – summary judgment was granted dismissing the dilution claims and the trademark infringement claims. Lo and behold, there was still one issue left. The statute comes down, and so plaintiff moves for reconsideration based on the amended statute. CENTURY 21 is as strong a mark in the consumer area as you could imagine. The defendant, however, was a pretty obscure business that was issuing environmental hazard bonds and things like that — not known at all in the consumer area. The interesting thing is that the district court, in a decision in February this year, relied heavily on Ninth Circuit cases decided under the old statute, and basically said, “Look, this principle was not changed. You need to have an identical mark or a near-identical mark.” Even though “Century” and “Century” are identical, in the mark “CENTURY 21” the “21” was so important that, therefore, there was nothing close to a near-identical mark. That pretty much was dispositive. The court went on to address some of the other issues, such as the need for market association. The court said, “You have to prove association, and the plaintiff has no evidence of this.” These two marks had coexisted for at least fifteen years. The court said, “I do not see any likelihood of confusion.” You might say, why is that relevant to anything in dilution? The court said, “If for fifteen years you coexisted and there was not even a complaint from any of those franchisees out there from Century 21 about likelihood of confusion, then there could not have been any association, and so this is affirmative evidence that there is no association.” It is an interesting twist. Even though we quickly say, “What does likelihood of confusion have to do with likelihood of dilution,” here is a place where the court actually found the connection. 19 J. Thomas McCarthy, Proving a Trademark Has Been Diluted: Theories or Facts?, 41 Hous. L. Rev. 713, 726 (2004). 20 Beebe, supra note 2, at 1149. 21 Century 21 Real Estate LLC v. Century Ins. Group, 2007 WL 484555 (D. Ariz. 2007).

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The court did a full-factor analysis on the degree of recognition. Again, the court said, “The ‘21’ is so important. Yes, ‘CENTURY 21’ is a highly recognizable mark, but it is recognizable because of the ‘21’ part and not because of the ‘Century’ part. It is the combination. So even though it is a highly recognizable mark, I am not going to give it any points under this likelihood-of-dilution factor.” The lesson from this case is judges like to have precedent. The precedent that is out there is pre-amendment. If you want to find some help in the pre-amendment cases, it is worth citing Starbucks v. Wolfe’s Borough Coffee:22 I assume you have all heard of Starbucks. It needs no introduction. Wolfe’s is a New England-based coffee bean roaster, with a mail-order business and a couple of supermarket sales — not too much. It named one of its coffees MR. CHARBUCKS, a dark-roasted coffee. Why? It said because they were inspired by STARBUCKS. Everyone knows that STARBUCKS is a very strong coffee, so their strong coffee they called MR. CHARBUCKS. Interestingly enough, in the district court’s decision — again, this was a decision decided a year or two ago, before the statute was amended, when it was easy to get rid of dilution — the judge never mentions the word “parody.” Is it a parody? Is it a pun, a joke? Who knows? It’s clear that the logos do not look alike at all. So this is a good test for real pure dilution, as opposed to likelihood of confusion. Nobody is going to be confused. District Judge Swain went through the survey evidence, which, of course, we do not have access to — just from reading the opinion — and concluded that there really was not any kind of dilution case here. What is interesting is that the judge rejected dilution under the New York state statute. Arguably, she did do a likelihood of dilution analysis. The Second Circuit has now vacated per curiam and sent it back for Judge Swain to reconsider in the light of the new statute.23 I suggest that this is the kind of tough case that is going to decide what the new statute means, where there is absolutely no confusion, and yet certainly there must be an association. If you hear “Charbucks for strong coffee,” you are going to immediately think of Starbucks. It has to be near-universal association. Is it diluting? We will just have to wait and find out what happens on remand, and perhaps a second appeal if Starbucks loses again, as its resources are quite unlimited. Also, interestingly enough, the Second Circuit said that it is not clear that the New York statute is coextensive with the amended statute, a view that the International Trademark Association (INTA), which of course mostly wrote the statute, feels very strongly about. The Second Circuit decided that this was not something they were ready to deal with, and sent it back to the district court judge to let her try to decide whether or not likelihood of dilution in both statutes means the same thing, i.e., can you ignore the fact that the New York statute says virtually nothing else and the federal statute has all these other provisions. Then we have the Louis Vuitton case against Haute Diggity Dog,24 that extremely wellknown manufacturer of plush stuffed toys and beds for dogs under names that parody the products of other companies — for example, the well-known CHEWNEL NO. 5, SNIFFANY & CO. , and of course CHEWY VUITON. The humor here was apparently lost on Louis Vuitton. So a lawsuit was brought, followed by cross motions for summary judgment. The district court, having seen the new

22 23 24

Starbucks Corp. v. Wolfe’s Borough Coffee, Inc., 2005 WL 3527126 (S.D.N.Y. 2005). Starbucks Corp. v. Wolfe’s Borough Coffee, Inc., 477 F.3d 765 (2d Cir. 2007). Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 464 F. Supp.2d 495 (E.D. Va. 2006).

566 S E S S I O N V I I : T R A D E M A R K statute, nevertheless relied on the parody cases, such as the Hormel 25 and the Hilfiger 26 cases, which were mostly decided under the New York state statute, and accepted the argument that had been made previously, articulated by courts, that a parodic use depends on the continued association with the well-known mark. Tarnishment? Rejected on the conclusion that the usage was harmless, clean fun. So now the case is in the Fourth Circuit. INTA has filed an amicus brief.27 Since it wrote the statute — and may have screwed up the statutory language on a few points — it may have some insight as to what the new statute means. Some of the key points INTA argues: 앫 First, the district court should not be relying on parody. There is nothing in the statute on parody. Do not give it too much weight. 앫 Second — I love this one – by relying on New York dilution law, the decision undermines the clarity to litigants that the TDRA was expressly enacted to provide — suggesting presumably that most statutes were intended by Congress to be obscure, whereas this one was intended to tell litigants exactly where they stood. 앫 The TDRA was a legislative compromise. 앫 There is nothing in there about parody. 앫 The district court judge did not do a full factor analysis. 앫 Finally, fair use under the Lanham Act, INTA advises the Fourth Circuit, is distinct from fair use under the Copyright Act.28 So the question is: Why are they saying something that should be so obvious? Why is INTA, in effect, talking down to a Fourth Circuit panel of judges? Don’t the judges already know that copyright law is different from trademark law? I think the answer is, if you go back to the Campbell case29 — and I am certainly not an expert in copyright law — in addressing the four fair use statutory factors in the Copyright Act, the Supreme Court grabbed hold of parody and, in effect, promoted it to the status of a fifth factor. INTA is trying to say here: “Do not do that. It is not in the statute. Please do not give a lot of weight to parody.” I think the decision in this case will provide us with a lot of answers. This is a classic case where the defendant is using a famous mark as a mark and there is no question about the association. If INTA (and Louis Vuitton) lose this case, then I am not sure how much will really be left of the amended federal dilution statute. PROF. VISSER: Thank you. Now moving to the other side of the ocean, we have two speakers, Ilanah Simon and David Llewelyn. MS. SIMON: First of all, just to reassure you, we do actually have dilution protection in 25 Hormel Foods Corp. v. Jim Henson Prods., Inc. , No. 95 Civ. 5473 (S.D.N.Y. Sept. 22, 1995), available at http://www.inta.org/downloads/brief_INTA_LV.pdf. 26 Tommy Hilfiger Licensing, Inc. v. Nature Labs. LLC, 221 F. Supp.2d 410 (S.D. N.Y. 2002. 27 Brief of Amicus Curiae International Trademark Association in Support of Vacatur and Remand, Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 464 F. Supp.2d 495 (E.D. Va. 2006), appeal docketed, No. 06-2267 (4th Cir. Dec. 5, 2006), available at http:// www.inta.org/downloads/brief_INTA_LV.pdf. 28 Compare fair use provisions of the Lanham Act, 15 U.S.C. § 1115(b)(4) and § 1125(c)(3)(A), with Copyright Act, 17 U.S.C. § 107. The TDRA statute reads: “The following shall not be actionable as dilution by blurring or dilution by tarnishment . . . : Any fair use, including a nominative or descriptive fair use, or facilitation of such fair use, of a famous mark by another person other than as a designation of source for the person’s own goods or services, including in connection with — (i) advertising or promotion that permits consumers to compare goods or services; or (ii) identifying and parodying, criticizing, or commenting upon the famous mark owner or the goods or services of the famous mark owner.” 15 U.S.C. § 1125(c)(3)(A). 29 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994).

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Europe. You can find it in Directive 89/104.30 Article 4(4)(a) gives protection in opposition and Article 5(2) in infringement situations. A key point to note here is that you need identical or similar marks, and also we give protection against blurring, tarnishment, and also unfair advantage, although we have our own little European terms for these things. It is also worth noting that if you look at the express wording of the Directive, it says you need to have dissimilar goods. If you need to have dissimilar goods, you might think: What am I talking about — how is similarity of goods narrowing things? The European Court of Justice (ECJ) in the Davidoff v. Gofkid decision31 has told us that the Article, despite its express wording, also covers identical and similar goods. This has meant that we have had the door open to an overt, upfront role for similarity of goods, and our courts have, to some extent at least, taken that and run with it. But even beforehand, we did have it being given some importance in the United Kingdom, in particular. A recent example is the VIPs decision.32 In VIPs we have fast-food services versus computer services for hotels and restaurants. The Court of First Instance (CFI) expressly highlights that the opponent has provided no explanation why a mark that is used for fast foods would bring an advantage for computer services. So, really, it is saying there is no real link between the goods here. If there is no real link between the goods, how do you get your unfair advantage? What the court does say, as well, which slightly undermines what I am saying, is that similarity of goods is irrelevant to blurring. I do not really see why this should be the case. The way that the U.K. courts have taken things, and also the way that the Office for Harmonization in the Internal Market (OHIM) guidelines and certain Board of Appeal decisions have taken things, is to say that where the goods — even though they are not similar in a kind of confusion sense — where there is some link between them, there is more likely to be an association. We need that association for there to be any harm. If consumers are not associating the two marks, then how can the later mark harm the earlier mark? You need association for blurring. Similarity of goods helps you to have association. You need association for blurring. Therefore, similarity of goods, or some link at least between the goods, should be helpful in showing blurring. As I said, that is the approach that has been taken elsewhere in Europe, and in the United Kingdom in particular. One last comment on similarity of goods. I know that in the United States similarity of goods had been used in various of the pre-TDRA multi-factor tests. It is missing from the TDRA. One point for discussion might be: Why has it been taken out of the TDRA test? Should we in Europe be giving it a more prominent role if it is not really thought important in the United States? Moving on to the next trend, similarity of marks, I argue that the particular role that is being given to the conceptual aspect of trademarks in the comparison is meaning that dilution protection is actually wider. Just a recap on our test for similarity of marks: We find it from the ECJ in the Adidas v.

30

Trade Mark Directive, supra note 17. Case C-292/00, Davidoff & CIE SA, Zino Davidoff SA v. Gofkid Ltd. Hong Kong, [2003] E.T.M.R. 42 (9 Jan. 2003), available at http://curia.eu.int/jurisp/cgi-bin/form.pl?lang=en&Submit=Submit&docrequire= alldocs&numaff=c-292%2F00&datefs=&datefe=&no musuel=&domaine=&mots=&resmax=100. 32 Case T-215/03, SIGLA SA v. OHIM, Ct. of First Instance judgment 22 Mar. 2007, 2007 O.J. (C 95) 71, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= OJ:C:2007:095:0036:0037:EN:PDF. 31

568 S E S S I O N V I I : T R A D E M A R K Fitnessworld decision.33 The marks need to be similar enough to lead to an association or a link between the marks. To find this association or link, you have to look at the visual, aural, and conceptual elements of the two trademarks. It sounds like we have three equal things here. I am going to be saying that actually the conceptual aspect is getting an increasingly dominant position. These are the same factors as we use in our confusion test for similarity of marks, but not necessarily to the same extent. It seems that, certainly in the confusion cases, we have been a bit more evenhanded. We have not really pressed one of the three elements — the visual, aural, or conceptual — but even our confusion test does in some instances allow us to place particular importance on one of those factors in exceptional cases. How has this increase in the similarity of the marks case happened? I am going to trace a few recent U.K. decisions. First up, we have O2 v. H3G.34 The registered trademark is a kind of big flattish bubble. Hutchinson’s advert for its own mobile phone services has little bubbles, and as the advert goes on they spread along the screen. You might think, bubbles versus bubbles — kind of similar, and therefore qualifying for dilution protection. The court of first instance actually takes quite a wide view of similarity. Although there was an appeal on this decision, the dilution aspect was not appealed. The court here says, “We need similarity of marks, like the ECJ has told us. Similarity of marks means we need an association between the two marks. Basically, what we need is for the later mark to bring to mind the earlier mark.” “Bringing to mind” does not sound like a particularly onerous standard. That would seem, potentially, to give us quite wide protection against dilution, or at least allow us to go on to the further questions of whether there has been this detriment or unfair advantage, in a large number of cases. But the court has narrowed this down. The court looks particularly at what mark has a reputation. Rather than saying, “You, O2, earlier trademark owner, will get protection for the whole concept of bubbles and no one else can use the concept of bubbles because that will be similar to your mark,” the court says, “You only have reputation in that single embodiment, that one particular flattish bubble, and you can only stop the use of bubbles that are similar to that particular bubble.” So you don’t have a particularly strong role for the conceptual element of the comparison in that case. But the plot thickens, and our protection gets a bit wider. Next we go on to L’Oreal v. Bellure.35 This was a case about knockoff perfumes. Two knockoff perfumes I want to look at in particular. The original one is TRESOR (“tresor” meaning “treasure”). The defendant’s knockoff, LA VALEUR, uses a picture of a treasure chest. There were also two registered perfumes called MIRACLE and PINK WONDER. In this case the court is giving some emphasis to the conceptual elements of trademarks. So, yes, the court does emphasize the visual similarities. It says, yes, the coloring on the TRESOR and LA VALEUR marks are quite similar. We have the gold-on-black writing — again, quite similar. But the judge particularly notes that there is a treasure chest on the La Valeur packaging. As I said, “tresor” means “treasure” (treasure, treasure chest). We have the same concept there, even though the word “tresor” and a little picture of a treasure chest by no means look or sound the same. The same in the PINK WONDER/MIRACLE case. Again, the shapes are relatively similar, 33 Case C/408/01, Adidis v. Fitnessworld Trading Ltd., E.C.J. (6th Chamber) 23 Oct. 2003, available at http://oami.europa.eu/en/mark/aspects/pdf/JJ010408.pdf. 34 O2 Holdings Ltd. and O2 (UK) Ltd. v. Hutchison 3G Ltd., [2006] E.W.H.C. 534 (Ch). 35 L’Oreal v. Bellure, 2006] E.W.H.C. 2355 (Ch), [2006] All E.R. (D) 39 (Oct.), (Approved judgments), available at http://counterfeitchic.com/cases/LOrealvBellure_UK_ Oct42006.pdf.

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so we do have some visual similarity. But the judge particularly singles out that we have the word “miracle” being conceptually similar to the word “wonder,” even though they do not sound the same and they do not look the same. Again, we have this kind of wide definition of association, just looking for a link in the mind of the average consumer. The upshot of this case is, yes, we have given a quite prominent role to conceptual similarity, but we have not let it dominate. We have also looked at visual similarity and said that is pretty strong in these cases — for the overall packaging, that is, rather than for the particular word marks. Now the plot thickens even further. This is a decision of the Trademark Registry, eSure’s Application,Opposition of Direct Line.36 The case involved two rival insurance companies, Direct Line’s telephone on wheels and eSure’s rather cute little mouse on wheels. The hearing officer here says that there is a modest degree of visual similarity; they do look a bit the same; yes, they have both got wheels — but that is kind of as far as it goes. But at the same time, the hearing officer pulls out the conceptual content of the two marks and says we have this idea here of an electronic communication device with wheels. That concept sets the stage for him giving really quite wide protection. He says there is unfair advantage here; eSure, the junior user, is hitching a ride on the repeated idea of a communication device with wheels. But even more worryingly, they are saying that Direct Line, the senior user, is the only company on the market with the conceptual idea of a communication device on wheels and if you let anyone else use a communication device on wheels, that is going to reduce the distinctiveness of Direct Line’s mark. So what is our result here? Our result here is, effectively, a monopoly on the idea of a communication device on wheels. This seems rather wide. How did we get to this situation? To me, one possible reason is the fact that where we make our confusion comparison, when we look at similarity of marks, we ask: Are these marks similar enough to lead to confusion? If there is something else there that is stopping confusion from being there, then you stop; you cannot prove infringement. We do not have the same limits for dilution provisions. We just look at association in isolation. We ask: Are the marks similar enough to lead to association? All association is, is “bringing to mind.” More than that: If you just show one of the aspects, even if you show that the marks are not visually similar or do not really sound alike, even if the idea brings the other mark to mind, then that is enough; you have just fallen within the association criterion and you can move on to look at the other aspects of dilution. This seems to be pretty dangerous. We are giving protection for concepts. You seem to be able to have monopolies in whole themes of marks. So in that particular Direct Line case you have this monopoly in the whole idea of a communication device on wheels. If you took it to its extreme, I guess in the O2 case you would have your monopoly on this whole idea of bubbles as a trademark for communication services. To conclude, I want to draw an analogy. We do have a somewhat similar issue to that which we have in copyright. In copyright we have idea/expression dichotomy — our idea, our concept, is not protected; however, our expression is. Here it seems to be the same kind of thing that is happening — or rather, we do not have this limitation. You are able to get your monopoly over the idea, over the concept, but ideally your monopoly should be limited to the expression, the specific embodiment of your trademark. 36 eSure Ins. Ltd. v. Direct Line Ins. Ltd., [2007] E.W.H.C. 1557 (Ch.) 29 June 2007, available at http://www. bailii.org/ew/cases/EWHC/Ch/2007/1557.html.

570 S E S S I O N V I I : T R A D E M A R K MR. LLEWELYN: I am just going to say a few things about European law because Ilanah has covered the field very well. First of all, I want to express some surprise that Mr. Plevan was surprised that INTA is telling a court that copyright law is different from trademark law. We have just heard about protecting the concept of a communication device with wheels. Isn’t that what patent is there for, if it was novel? We are here suggesting that one can have everlasting protection, provided you pay your renewal fees every ten years, for something which is proper subject matter if it is in any intellectual property right for patents or possibly, say, registered designs — patents without end. We also have all these notions of copyright law being brought in. If you look at the L’Oreal v. Bellure case,37 it was about packaging of perfumes. I am really sorry, but I have a problem, because I think trademark law is about trademarks. That is a really basic misunderstanding that I suffer from. This morning I heard from Graeme Dinwoodie that the first thing you should say in a Trademarks Act is “this is about trademarks.” When the U.K. Parliament looked at this issue and it was suggested that there should be a requirement to use trademark use in a Trademark Act, they said, “It is so obvious that it is about trademarks and it is about trademark use that we should not put it in.” The law has lost touch with reality. So I am not surprised when I hear that judges squirm to avoid the provisions of dilution statutes. I think, as lawyers, we have a major problem when we start believing our own publicity. Trademark law should be relatively simple. Once we remove it from, however, likelihood of confusion, once we move it from trademark use, that is when we get the problems. Why do we get the problems? Because, actually, that is not how the real world works. If I pass a Dogs’ Act, I do not expect Section 1 to say, “This Act is not about cats.” Yet that is almost what we are saying here. If you come back to look at L’Oreal v. Bellure, where do some of the problems lie? They lie with the fact that this — it was characterized as a misappropriation provision, somewhat surprisingly, by Mr. Plevan — this dilution provision that is in EU law now was introduced because certain EU Member States do not have a law against unfair competition. In England and in Ireland — Scotland is different, of course — we have various other laws that comply with our obligations under Paris Convention Article 10bis.38 We do have a law against unfair competition, to catch those unfair practices that the “normal” man or woman in the street — I am not talking about lawyers here — would say are 37 L’Oreal v. Bellure, 2006] E.W.H.C. 2355 (Ch), [2006] All E.R. (D) 39 (Oct.), (Approved judgments), available at http://counterfeitchic.com/cases/LOrealvBellure_UK_ Oct42006.pdf. 38 Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, as last revised, Stockholm, July 14, 1967, 21. U.S.T. 1583, 423 U.N.T.S. 305, available at http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html. Art. 10bis, Unfair Competition: (1) The countries of the Union are bound to assure to nationals of such countries effective protection against unfair competition. (2) Any act of competition contrary to honest practices in industrial or commercial matters constitutes an act of unfair competition. (3) The following in particular shall be prohibited: (i) all acts of such a nature as to create confusion by any means whatever with the establishment, the goods, or the industrial or commercial activities, of a competitor; (ii) false allegations in the course of trade of such a nature as to discredit the establishment, the goods, or the industrial or commercial activities, of a competitor; (iii) indications or allegations the use of which in the course of trade is liable to mislead the public as to the nature, the manufacturing process, the characteristics, the suitability for their purpose, or the quantity, of the goods.

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unfair and should be enjoined. But in certain EU countries they do not have that — registration is all. Therefore, we now have the absurd situation that you can have Registered trademarks for banal shapes, as in the Nestlé Waters case,39 for all sorts of unconventional marks, which are then given broad protection under the dilution statute, even apparently where there is some sort of conceptual similarity, which is really something to be considered under copyright law or patent law or design law. We have gotten ourselves into a horrible mess, because under a law entitled “trademarks” we do not have the honesty to say, “This is actually an unfair competition law, with a requirement being registration.” So within Europe now we are in a mess. I am delighted, however, to hear that the United States appears to be in a mess as well. It is great for lawyers, for the law is an ass. PROF. VISSER: Thank you, David. We now have three panelists: Veronica Barresi, Andrew Bridges, and Susan Progoff. MS. BARRESI: I just want to briefly comment on two concepts, one of which is reputation, and explain to a non-EU audience why we have so many problems in defining what reputation is. First, it is because the relevant provisions on dilution in the Directive,40 the implementing national rules, and the Community Trade Mark Regulation41 are expressed in the twenty-three different languages of the European Union. Reputation, the first condition for the wider protection provided for in Article 5(2) of the Directive, is expressed by the words er renommeret in the Danish version of that provision; bekannt ist in the German version; goce de renombre in the Spanish version; jouit d’une renommée in the French version; gode di notorietà in the Italian version; bekend is in the Dutch version; goze de prestigio in the Portuguese version; laajalti tunnettu in the Finnish version; är känt in the Swedish version; and by the words “has a reputation” in the English version. Of course, the ECJ has reassured us that, despite linguistic differences, a knowledge threshold requirement needs to be satisfied. In an example of clarity, it held that for a mark to have a reputation in a territory, “the registered trademark has to be known by a significant part of the public concerned, in a substantial part of that territory, which part may consist of a part of one of the countries composing that territory.”42 This is just to point out that at least the United States just has to deal with fame. We have twenty-three concepts of reputation in the European Union! The second point I would like to make is on the VIPs case.43 It seems to me that, although on the facts of the case dilution was not found to be there, the CFI used a language very similar to that used in Arsenal 44 and Adam Opel 45 that we have discussed this morning. It has been argued this morning that the ECJ is trying to construe a general principle as to when, in case of identical goods and identical signs, a likelihood of confu39

Case T-305/02, Nestlé Waters France v. OHIM, [2003] E.C.R. II-5207. Trade Marks Directive, supra note 17. 41 Council Regulation (EC) 40/94 of Dec. 20, 1993, on Community Trade Mark, 1994 O.J. (L 11) 1. 42 Case C-375/97, General Motors v. Yplon (Chevy), E.C.J. 14 Sept. 1999, available at http://eur-lex.europa.eu/ smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc=61997J0375. 43 Case T-215/03, SIGLA SA v. OHIM, Ct. of First Instance judgment 22 Mar. 2007, 2007 O.J. (C 95) 71, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= OJ:C:2007:095:0036:0037:EN:PDF. 44 Case 206/01, Reference for a preliminary ruling by the High Court of Justice (England & Wales), Chancery Division, by order of that court of 4 May 2001, in the case of Arsenal Football Club plc against Matthew Reed, 2002 O.J. (C 333) 22. 45 Case C-48/05, Adam Opel AG and Deutscher Verband der Spielwaren-Industrie eV v. Autec AG, E.C.J., Judgment of the Court (First Chamber) of Jan. 25, 2007 available at http://curia.europa.eu/jurisp/cgi-bin/ gettext.pl?lang=en&num=79929874C19050048&doc=T&ouvert=T&seance=ARRET. 40

572 S E S S I O N V I I : T R A D E M A R K sion will be presumed together with infringement. The principle is based on the essential function of the trademark, which is that to guarantee origin. In the VIPs case, the CFI held that the scope of the dilution provisions in the Directive and the Community Trade Mark Regulation is to protect marks that have a reputation from other identical or similar marks that might “adversely affect its image.” According to the CFI, conveying an image is one of the essential functions of a trademark. Thus, do we have an essential function for every occasion — the origin function for the purposes of infringement (identical signs and goods or services) and the image function for the purposes of dilution? It seems to me that the CFI’s statements are quite broad. You can bring many things under the dilution provisions if you say that their scope is to punish use that adversely affects the image of your mark. MS. PROGOFF: I just had a couple of comments on things that have been raised in part of the discussion so far. First of all, I am not an expert in European law, so I am not going to address that. In the United States, a trademark is defined as “any word, name, symbol, or device that identifies the source or origin of a product or service.” It has been broadened out from word marks to things like the telephones on wheels. The key in the dilution area is: Is what is being litigated something that really functions to identify source or is it being used for some other purpose? If you look at the facts in the Haute Diggity Dog case,46 they are similar to many of the traditional parody cases that courts have dealt with under Section 43(a) of the Lanham Act for years. If the court thinks that what is happening is that somebody is making a joke and they are using a trademark or a takeoff of the trademark to do that, unless it deals with sex or drugs, generally the courts will allow it. I predict that when we get the appeal court’s decision in the Haute Diggity Dog case, we are going to find that the defendant’s activities in that case do not really fall within what the court views as dilution; I expect it is going to come down as a parody decision. But wait and see if I am right or wrong on that. I think the real problem with the dilution statute is how blurring is going to be interpreted by the courts in a more pragmatic sense. In other words, how are you going to prove it and what does it really mean? Does it mean association? There have been surveys under the old version of the statute where survey experts went out and said, “What does this bring to mind?” The courts have said that type of survey does not show dilution. I am not sure that anybody really knows how, in a pragmatic sense, you have to prove blurring to prevail on a dilution claim. The courts are a little reluctant to grant protection for blurring unless you have a truly famous mark. I think there will be some issues with acquired distinctiveness. Suppose you try to enforce a mark like AMERICAN AIRLINES, for example, against dilution. Does that mean you are going to be able to stop third parties from using AMERICAN? I don’t think so. So where do you get to the part where you actually will have some blurring? I think what you are going to need is a fairly unique mark, and the kinds of things the courts are going to look for are going to be very similar to what they look for in deciding whether there is a likelihood of confusion, because that’s a concept that judges feel comfortable with in protecting what they perceive as goodwill. MR. BRIDGES: I have a few comments. I would like to highlight one large-scale, pervasive problem with dilution law and then one particular problem. 46

Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 464 F. Supp.2d 495 (E.D. Va. 2006).

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The large-scale, pervasive problem is, following Mr. Llewelyn’s remarks, that there is some fundamental dishonesty here. The American dilution statute is a remedy in search of a justification. It is an exemplification of the biblical maxim, “To those who have plenty, more will be given.” One can compare the United States to Europe. At least Europe is honest that dilution is about taking unfair advantage. In the United States the question of taking unfair advantage only enters the calculation when assessing damages. U.S. law instead refers to the harm as the lessening of the distinctiveness of the plaintiff’s mark; it does not refer to dilution as the defendant profiting from associations with the mark. There may be some steps to get there, but the law is just not clear on that. There is an enormous paradox, that the strongest marks, as I think Barton Beebe said, may be immune to dilution harm. The paradox is that not only is that the case, but the worst forms of dilution are not actionable under the law. If The New York Times discusses “kleenexes” as a generic term, that is the most harmful thing that can happen to a trademark, but it is not actionable. So this is really sort of a make-weight type of case to give certain powerful companies an easier time to win their cases. What is the particular problem? This did not get fixed in the revised statute, after Victoria’s Secret.47 The Supreme Court put ammonia up the nose of most trademark lawyers by explaining to them that they did not understand dilution. We all thought — I thought — that dilution is when CHARBUCKS brings STARBUCKS to mind. The Supreme Court said, no, dilution is when STARBUCKS brings CHARBUCKS to mind because CHARBUCKS has diluted the distinctiveness of STARBUCKS ; that means when you see STARBUCKS, you start thinking about other things. It doesn’t mean that when you see the junior mark, you think about the senior mark. That has not been fixed. Whereas the standard has been changed from actual dilution to likelihood of dilution, and whereas what I call this upstream association (CHARBUCKS bringing STARBUCKS to mind) might be circumstantial evidence that eventually there will be what I call downstream association (STARBUCKS bringing CHARBUCKS to mind), you still have to prove that downstream association under the new statute. That is probably the toughest standard that exists of any of the elements to meet in dilution law. It was articulated well by the Supreme Court in Victoria’s Secret, and the statute did nothing to fix that. So that is the particular problem, in addition to the general resistance to dilution law caused by the dishonesty of the fact that it is really about free riding but it doesn’t talk about free-riding. Those are the two challenges for people bringing dilution claims. PROF. VISSER: That leaves us with eight minutes for discussion from the floor. Do you have any comments or questions to the panel? QUESTION: Is anybody aware of any actual empirical research that shows that dilution is a real phenomenon — in other words, that use by a third party of a well-known mark, or something similar to a well-known mark in fact has been shown to lessen the distinctiveness of the well-known mark? Of course, the point is, if we don’t know what actual dilution is, how are courts or litigators or survey experts who design surveys to assess whether dilution is likely? MR. BRIDGES: I don’t have survey information, but I do have, I think, some good anecdotal information. Unfortunately, now whenever I see a Dallas Cowboys cheerleader’s 47

Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003)

574 S E S S I O N V I I : T R A D E M A R K outfit, I think about the Dallas Cowboy Cheerleaders case.48 I think tarnishment is very different from blurring. I think it’s much easier in tarnishment cases. PROF. BEEBE: There actually is an empirical paper by Jacob Jacoby and Maureen Morrin.49 This paper does present, it says, empirical evidence of blurring. It doesn’t really address tarnishment, but it addresses blurring. This is the paper, however, that also presents strong evidence, very straightforward, that the strongest marks are impervious to blurring. I think, depending on your theory of dilution, if you believe dilution is what Frank Schecter intended it to be, which is a very mystical concept about uniqueness, then the Jacoby article has nothing to do with Schecter’s original idea of dilution.50 Instead, it’s about blurring, which is essentially consumer confusion inverted; it’s about search costs. That’s why blurring is so simple to understand and why judges tend to like it. Plaintiffs prefer the concept of dilution because they can fit misappropriation under it; they can slip it in. This is the best article we have so far that I know of on dilution. MR. PLEVAN: Which suggests that there is no real example of any major mark, or even a non-major mark, having lost its way because of a thousand small cuts or anything like that. Obviously, empirical research by Jacob Jacoby is not the same thing as “did it ever happen in real life?” QUESTIONER: I haven’t looked at the Jacoby article in some time, but I was working with him on a case where I think he developed a lot of these ideas, back in the early 1990s. I think what he was referring to was a situation where encoding of new information was made more difficult where words — again, not words that are already well-set in one’s mind, but words that are new to one — are not so well-known, and so the ability to encode that new information is rendered more difficult if they are competing for similar names. But again, I do not know of anything that addresses a well-known mark that is already encoded in one’s memory. PROF. BEEBE: I will respond to that very briefly. I am not sure the article would be helpful for lawyers talking to a wise case-law judge or jury, because the article essentially uses response times to figure out dilution. You expose the person to a new stimulus and then you show him the old trademark: How quickly does he associate that trademark with its typical product? This sounds a bit silly. It is like a video game. I can see how a defendant’s lawyer could make fun of the study. Nevertheless, Jacoby is a serious trademark expert, so, at least for his purposes that is what he has done. QUESTION: I have a question for the American speakers and panelists. One of the origins of the TDRA is actually part of the United States’ obligations, under a free trade agreement with Singapore,51 to implement the WIPO Joint Recommendations.52 Pardon my ignorance about the legislative process leading up to the enactment of the Act. But if you look at the WIPO Joint Recommendations concerning the protection of well-known trademarks, there is a specific misappropriation/unfair advantage type of thing there, which somehow does not seem to have made its way into the Act itself. Are there any comments or explanations as to how it slipped out? 48

Dallas Cowboys Cheerleaders, Inc. v. Pussycat Cinema, Ltd., 467 F. Supp. 366 (S.D.N.Y. 1979). Maureen Morrin & Jacob Jacoby, Trademark Dilution: Empirical Measures for an Elusive Concept, 19 J. Pub. Pol’y & Mktg 265 (2000). 50 Frank I. Schechter, The Rational Basis of Trademark Protection, 40 Harv. L. Rev. 813 (1927). 51 U.S.-Singapore Free Trade Agreement, May 6, 2003, ch. 16, available at http://www. wipo.int/export/sites/ www/about-ip/en/development_iplaw/pdf/pub833.pdf. 52 WIPO Joint Recommendation Concerning Provisions on the Protection of Well-Known Marks, adopted by the Assembly of the Paris Union for the Protection of Industrial Property and the General Assembly of the World Intellectual Property Organization (WIPO) at the Thirty-Fourth Series of Meetings of the Assemblies of the Member States of WIPO, Sept. 20–29, 1999, available at http://www.wipo.int/export/sites/www/about-ip/en/development_iplaw/pdf/pub833.pdf. 49

PA R T C: D I L U T I ON: A R E VI E W OF R E CE N T D E VE L OPME N T S MR. PLEVAN: I know little about that obligation, so I will pass. PROF. BEEBE: I exaggerate when I say that misappropriation does

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not fit under antidilution law in the United States. That is my wish, if you read the Act strictly. But I think if you look at even the old FTDA cases, a lot of those cases are misappropriation cases. As for this WIPO recommendation, the most recent reference to it is in the Bukhara Grill case,53 which Graeme Dinwoodie mentioned yesterday. But it is typical of American courts that when they refer to it, it is almost as this “exotic” document that maybe one of our state courts should look at. It has no real influence, I think, in U.S. law. MR. BRIDGES: I think that if we made free riding expressly part of the statute, it would open up a Pandora’s box. Free riding is not illegal under American law; you have to violate some other norm. If free riding is the problem, why are you limiting it to famous marks? If you are not limiting it to famous marks, then you are opening this up to the entire field of commerce, and that would never have passed Congress. MR. PLEVAN: Almost every state, I assume, has an unfair competition law. From time to time, I was asked to look at the issue, back in the old days before the federal dilution statute, whether you could make out an unfair competition case. I do not know that anyone has ever brought it. It would be very difficult, even though there are very strong and vibrant unfair competition statutes in, probably, every jurisdiction in the United States. PROF. VISSER: The last question. QUESTION: This is for the European members of the panel. The presentation about confusion of trade drafts being tackled under trademark law seems to make it very difficult for international companies to clear trademarks. I wonder what advice you might give to companies that are trying to clear trademark internationally from someplace other than Europe. MR. LLEWELYN: Get it to a good lawyer. In the front here we have a representative from OHIM itself. I might be a bit too sarcastic. Perhaps Paul has some advice for us. PARTICIPANT [Paul Maier, Office for the Harmonization in the Internal Market, Alicante]: To come back to what you said before, I wish, indeed, that different parts of the law in intellectual property were used for what they were made for, rather than organizing big mixtures. The ECJ has said, I don’t know how many times, that registering a three-dimensional trademark should not be more difficult than registering a two-dimensional trademark or word mark. But the reality of life is that things are not like that. It is true that it can be difficult. The easy answer is, file a registered community design. You will get protection. Only one in a thousand is rejected by filing, because you have not paid the fees or whatever. You will get your protection. That is the fast answer. MR. LLEWELYN: But to be serious, in answer to your question about what you do as a foreign company or business looking to find out whether you are infringing somebody’s rights if you are coming into the European Union, the answer is now it is very difficult to do that and be assured that you are not going to be on the receiving end of a legal action when you get there. The best way to find out is to do it. That is, unfortunately, becoming the only realistic advice, unless you are going to spend a heck of a lot of money analyzing your search reports. PROF. VISSER: With that, we have to conclude this discussion. I would like to thank the panel. 53

ITC Ltd. & ITC Hotels Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007).

SESSION VII: TRADEMARK MARKS PART D: PRODUCT CONFIGURATION

SESSION VII: TRADEMARK

Part D: Functionality and Protection of Product Configuration Marks Moderator PAUL W. GARRITY

Kelley Drye & Warren LLP Speakers PAUL MAIER

JONATHAN MOSKIN

Office for Harmonization in the Internal Market (Alicante)

White & Case LLP (New York)

Panelists PROF. GRAEME DINWOODIE

SUSAN PROGOFF

Chicago-Kent College of Law (Chicago)

Ropes & Gray LLP (New York)

PROF. KENNETH L. PORT

PROF. SUSAN SCAFIDI

William Mitchell College of Law (St. Paul, MN)

Visiting Fordham Law School; Southern Methodist University

MR. GARRITY: My name is Paul Garrity. I will be moderating this session on product configuration marks, and specifically product configuration marks and their relationship to the issue of functionality. I will briefly introduce who is here on the dais: Paul Maier from the Office for Harmonization in the Internal Market (OHIM) and Jonathan Moskin from White & Case, who will each speak for ten minutes. Joining us as panelists are Professor Graeme Dinwoodie from Chicago-Kent College of Law, Professor Ken Port from William Mitchell College of Law, Susan Progoff from Ropes & Gray, and Professor Susan Scafidi from Southern Methodist University and a visiting professor at Fordham. Without further ado, Paul. MR. MAIER: The question of functionality and the exclusion of trademark protection for functional features has given rise to important decisions in Europe over the last years. Some aspects of the question have been settled it seems, while others remain to be clarified.

578 S E S S I O N V I I : T R A D E M A R K The question will be presented in the light of the Decision of the Grand Board of Appeal of the Office for Harmonization in the Internal Market (OHIM) the “Lego Brick” case.1 The Grand Board had to decide whether the cancellation of the Community Trade Mark (CTM) for the Lego brick for construction toys should be overturned or not. Held: “the appeal is dismissed,” i.e., the decision to cancel the CTM for construction toys was confirmed. I. THE REGISTRATION OF THE LEGO BRICK. On 19 October 1999, Kirkbi A/S registered at the OHIM the following three-dimensional trade mark (“the Lego brick”):

The registration was requested for a number of goods from Class 9 (scientific, nautical and other instruments and apparatus) and Class 28 (games and playthings; gymnastic and sporting articles included in Class 28; decorations for Christmas trees). The registration claimed the “color red.” The Lego brick was accepted for registration on the basis of acquired distinctiveness pursuant to Article 7(3) of the Community Trade Mark Regulation (CTMR).2 By courier on 21 October 1999, Ritvik Holdings Inc. filed an application, pursuant to Article 51(1)(a) CTMR, for a declaration that the CTM registration was invalid in relation to “construction toys” in Class 28. The invalidity action was, in turn, based on Articles 7(1)(a), (e)(ii), (e)(iii), and (f ) CTMR. This cancellation request is the beginning of a still-unfinished legal marathon between these two parties before EU courts of first instance and it is in parallel with many other actions settled or still under way before national courts both in Europe and North America. The matter is still not finally decided before EU courts, as the decision of the Grand Board described and commented below has been appealed to the Court of First Instance of the European Union. II. PROCEEDINGS BEFORE THE CANCELLATION DIVISION OF OHIM After having had a look at the file, the Cancellation Division of OHIM stayed the proceedings. The reason for this is that the legal question of functionality and registration was central in a case before the European Court of Justice (ECJ), Philips v. Remington. The judgment in this latter case was rendered on 18 June 2002.3 Proceedings before the Cancellation Division were resumed on 31 July 2002. The relevant arguments of the cancellation applicant filed during the cancellation proceedings can be summarized as follows: 1

Case R 856/2004-G, Lego Juris A/S v. Mega Brands, Inc. (“Lego Brick”) (decision of 10 July 2006). Council Regulation (EC) No 40/94 of 20 December 1993 on the Community Trade Mark, 1994 O.J. (L 11) 1; O.J. OHIM 1/95, p. 52). 3 Case C-299/99, Koninklijke Philips Elecs. NV v. Remington Consumer Prods. Ltd., [2002] E.C.R. I-5475, available at http://www.ipo.gov.uk/mcps/philips1.htm. 2

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앫 The Lego U.K. patents, relating to the basic elements of the stud-and-tube bricks, are now expired. It follows that all technical means described in the relevant patents are now part of the public domain and are, consequently, freely available without limitation. 앫 The shape of the toy brick that is the subject matter of the CTM registration is necessary to achieve a technical result in that it allows multiple assembly and disassembly of toys. All the elements of the shape are essential, even optimal, for a toy brick stability and firmness of connection (“clutch power”). 앫 The subject matter of the Lego brick has been described and claimed, at least as a preferred embodiment of the respective inventions, in the U.K. Patents Nos. 529580, 587206, 633055, 673857, 866557, and 1231489, issued in 1940, 1947, 1949, 1950, 1961, and 1971, respectively. The subject matter of the Lego brick, therefore, constitutes a shape necessary to achieve a technical result within the meaning of Article 7(1)(e)(ii) CTMR. 앫 The bar to registration, pursuant to Article 7(1)(e) CTMR, is not overcome by establishing that there are other shapes that can obtain the same technical result. All that has to be shown is that the essential features of the shape are attributable only to the technical result. Progress has always found ways to come up with alternative forms or shapes that suit the same purpose as well or better than the original. 앫 All the features of the Lego brick are purely, exclusively, and necessarily functional. 앫 The CTM proprietor sought, through means of a trademark registration, an extension of a patent monopoly that hampers free competition. 앫 The possibility of distinctiveness acquired through use will not remedy a lack of distinctiveness falling under Articles 4, 7(1)(e)(ii) and (iii), and 7(1)(f ) CTMR. The proprietor’s arguments in defense filed during the cancellation proceedings and later on can be summarized as follows: 앫 The existence of one or more patents is irrelevant to the validity of a CTM registration. Patents, trade marks, copyrights, and designs are all independent rights, each governed by independent statutes that contain complete codes for regulation of the respective rights. 앫 The Lego brick design was never an inventive feature of any prior patent. U.K. Patent No. 529580 dated 25 November 1940, of “a toy building block” required “a block of hollow form.” This is not part of the Lego brick. There is nothing in the claim that defines the “bosses” in terms of the specific geometrical relationship and shapes that characterize the Lego brick. The “bosses” in the patent are said to be “round, square or other cross section so as to prevent rotation or lateral movement thereof.” The patent was not obtained for any particular arrangement of knobs or bosses on a toy building brick. It was for a functional relationship between knobs of a suitable shape. If something is shown in a patent but is not claimed in the patent, it is free for the public to copy. The presence of a design in an expired patent, even when the design is part of the preferred embodiment, does not of itself debar the patentee from claiming trademark rights. 앫 The Lego brick design is not necessary to obtain a technical result. Numerous alternative designs are available to competitors that are at least equal in efficiency and attractiveness and which would cost no more, or would cost less, to produce than the

580 S E S S I O N V I I : T R A D E M A R K Lego brick. The Lego brick is not primarily functional. It has strong visual appeal, which is not dictated by mere functional considerations. 앫 The features that make the Lego brick design attractive are unnecessary to achieve a technical result. These features appeal to the eye. 앫 During the period of time after the patents expired, the proprietor worked hard to build up goodwill and reputation in the Lego brick design. That design is now recognizable to many millions of people. 앫 It can be proved by expert evidence that the registered CTM is distinctive in fact. 앫 The history of the provision shows that it was not the intention of the legislators to exclude the large majority of shapes from trademark registration, which would be the result of the interpretation proposed by the Cancellation Applicant. Article 7(1)(e)(ii) CTMR, properly construed, excludes shapes from registration if, and only if, no other practical shapes are available for achieving a particular technical result. As almost all product shapes have some purpose that could be seen as a technical purpose, this would leave very little room for any trademark protection of product shapes, although these are explicitly referred to in Article 4 CTMR. On 30 July 2004, after considering all the submissions and evidence submitted by the parties, the Cancellation Division adopted Decision No. 63 C 107 029/1 (“the contested decision”) rejecting the CTM registration with respect to “construction toys” in Class 28. The reasons of the Cancellation Division were mainly based on the ruling of the ECJ in Philips v. Remington. III. PHILIPS v. REMINGTON The Philips v. Remington case is a reference for a preliminary ruling under Article 234 CE by the Court of Appeal of England and Wales4 on the interpretation of Articles 3(1) and (3), 5(1) and 6(1)(b) of First Directive 89/104/EEC to approximate the laws of the Member States relating to trade marks.5 The questions relate to a dispute between the above-mentioned parties in an action for infringement of a trademark that Philips had registered on the basis of use in the United Kingdom. The trademark in question is the graphic representation of the shape and configuration of the three-headed rotary shaver developed by Philips in the 1960s (i.e., three circular heads with rotating blades in the shape of an equilateral triangle). When Remington began to manufacture and sell in the United Kingdom its own three-headed shaver forming an equilateral triangle, Philips sued. The questions referred to the ECJ were mainly about functionality and the possibility to overcome this exclusion for trademark registration either by use or through the addition of capricious elements. The case gave the occasion to the Advocate General Ruiz-Jarabo Colomer to deliver landmark conclusions on 23 January 2001. The Advocate General began by making the difference between the reasons for excluding trade mark protection because of the absence of distinctive character or the generic nature of the sign or because the sign has become customary. Such exclusions can be overcome by acquired distinctiveness.

4

Id. First Council Directive 89/104 (EEC) of 21 Dec. 1988 to approximate the laws of the Member States in relation to trademarks, 1989 O.J. (L 40) 1, available at http://eur-lex.europa.eu/LexUriServ/site/en/consleg/1989/ L/01989 L0104-19911223-en.pdf. 5

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However, acquired distinctiveness cannot help to overcome the exclusion of protection for three-dimensional devices which have a functional character: “subparagraph (e) . . . applies to three-dimensional signs which arise solely from the nature of the goods themselves, seek to obtain a technical result or which give substantial value to the goods. The exclusion . . . reflects the legitimate concern to prevent individuals from resorting to trade marks in order to extend exclusive rights over technical developments” (par. 16). He went on to define the words “merely functional” as meaning “any function whose essential features are attributable to the achievement of a technical result.” Such features cannot be protected by trademark law as a trademark confers unlimited rights, whereas the “legislature has sought to make subject to limited periods” the protection of such matters through patent or design law (par. 30). The Advocate General goes on comparing the wording of the Trade Mark and the Designs Directives: “The wording used in the Designs Directive for expressing that ground for refusal (i.e., functionality) does not entirely coincide with that used in the Trademark Directive. That discrepancy is not capricious . . . the level of functionality must be greater in order to be able to assess the ground for refusal in the context of designs; the feature concerned must not only be necessary but essential in order to achieve a particular technical result: form follows function. This means that a functional design may, none the less, be eligible for protection if it can be shown that the same technical function could be achieved by another different form.” (par. 34) On the contrary, the AG considers that “the Trade mark Directive excludes all shapes necessary (in the sense ideally suited) to achieve a technical result” (par 35). In its decision, the ECJ largely followed the conclusions of its AG. It started by stating that “if a shape is refused registration pursuant to Article 3(1)(e) of the Directive, . . . it can in no circumstances be registered by virtue of Article 3(3)” (par. 57). In other words, acquired distinctiveness cannot overcome the functionality exclusion. In paragraph 78, the ECJ states that “the rationale of the ground for refusal of registration laid down in Article 3(1)(3) of the Directive is to prevent trade mark protection from granting its proprietor a monopoly on technical solutions or functional characteristics of a product which a user is likely to seek in the products of competitors.” And further in paragraph 79 it is stated that “that provision is intended to preclude the registration of shapes whose essential characteristics perform a technical function, with the result that the exclusivity inherent in the trade mark right would limit the possibility of competitors supplying a product incorporating such a function or at least limit their freedom of choice in regard to the technical solution they wish to adopt in order to incorporate such a function in their product.” The reasoning is crowned by the clear statement that the existence of other shapes which could achieve the same technical result is not indicated in the text of the law as allowing overcoming the exclusion (par 81). It concludes that “in refusing registration of such signs, . . . the Directive reflects the legitimate aim of not allowing individuals to use registration of a mark in order to acquire or perpetuate exclusive rights relating to technical solutions” (par 82).

582 S E S S I O N V I I : T R A D E M A R K IV. DECISION OF THE CANCELLATION DIVISION AND APPEAL Basically, the ECJ decision in Philips v. Remington gave most answers needed to solve the Lego case. The Cancellation Division thus concluded that: 앫 Article 7(1)(e)(ii) CTMR excludes from registration a sign that consists exclusively of the shape of goods which is necessary to obtain a technical result. 앫 Each of the elements of the shape of the mark, and thereby the shape of the mark as a whole, is necessary to obtain a result. 앫 It then looked into the detail of all patents that had been cited in the case to conclude that they demonstrate the functionality of the Lego brick and its various elements. 앫 According to paragraph 83 of Philips v. Remington, where the essential functional characteristics of the shape of a product are attributable solely to the technical result, registration of that sign is precluded, even if that result could be achieved by other shapes. 앫 Insofar as the ECJ uses the wording “where the essential functional characteristics of the shape of a product are attributable solely to the technical result,” it refers to nothing else than the question as to whether the functional characteristics of the shape serve the purpose of achieving the result, and whether they are essential in doing so. Furthermore, the term “essential” means that not all the elements of the shape must, in equal proportion, contribute to the technical result, but that the application of Article 7(1)(e)(ii) CTMR is not precluded if the shape as a whole contains other elements which are insignificant both for the technical result and the appearance of the shape as such. 앫 The rationale of Article 7(1)(e) CTMR is to protect third parties who want to achieve a technical result without being unfairly restricted by trade mark monopoly in their choice of shape. 앫 All the elements of the shape of the toy brick — that is, the shape as a whole — are necessary to perform a technical function. The fact that the LEGO brick is red does not alter that finding. 앫 For the goods concerned, one basic color on its own is not distinctive. 앫 Objections raised under Article 7(1)(e)(ii) CTMR cannot be overcome by evidence of acquired distinctiveness. On 20 September 2004, the proprietor filed a notice of appeal against the contested decision. On 7 March 2006, pursuant to Article 1(b)(3) of Commission Regulation (EC) No 216/96 of 5 February 1996 laying down the Rules of Procedure of the Boards of Appeal of the Office, the Presidium of the Boards of Appeal, on the proposal made by the President of the Boards of Appeal allowing the proprietor’s request, referred the appeal to the Grand Board. The referral was regarded as justified, since the outcome of the case may have major economic consequences given the considerable turnover generated by trade in the products in the shape of the Lego brick. A. SUBMISSIONS OF THE APPELLANT

Before the Board, the proprietor requests that the contested decision be set aside. It mainly focuses in its argumentation on the fact that its trademark for the Lego brick does not constitute a monopoly. Obviously, the arguments and reasoning of the ECJ and the

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Cancellation Division have been understood as having to be answered mainly on that subject. Its arguments can be summarized as follows: 앫 The Lego brick does not consist exclusively of a shape that is necessary to achieve a technical result. It does not entail a monopoly on a technical solution. The same technical solution can be embodied in different visual appearances. 앫 There is an “infinite” number of other technically equivalent toy bricks that employ the same technical solution to come to the same result. The freedom of competition is, therefore, not hampered in any way by Registration of the Lego brick shape. 앫 Where there is no compelling technical reason to use the same design as a competitor, one of various available designs for the same technical solution is not excluded from trade mark protection pursuant to Article 7(1)(e)(ii) CTMR. The rationale behind that provision is to prevent monopolies on technical solutions and not on individual designs. 앫 The fact that there are recent design registrations for stackable interlocking bricks proves that there is competition in the relevant market, without competitors monopolizing or attempting to monopolize technical solutions. 앫 There is no restraint on competition where the identical technical solution can be embodied in an infinite number of individual designs. In such a case there is no need to allow competitors to copy exactly the distinctive appearance of one of the competing products. It is too simplistic to say that the ECJ in Philips v. Remington has declared alternative shapes entirely irrelevant. It rather said that the application of the “functionality clause” could not be excluded by saying that the same result could be achieved with other shapes. Clearly, the new arguments put forward by the appellant did not convince the Board. In its decision the Board recalls first the Regulation and the relevant provisions that apply to functionality. It finds that Article 7(1)(e) CTMR explicitly singles out certain three-dimensional marks by listing specific grounds for refusing their registration. Under Article 7(1)(e), signs which consist exclusively of the shape which results from the nature of the goods themselves, or the shape of the goods which is necessary to obtain a technical result, or the shape which gives substantial value to the goods cannot be registered or, if registered, are liable to be declared invalid pursuant to Article 51(1)(a) CTMR. Article 7(1)(e) CMTR prevents a sign consisting exclusively of the shape of a product from being registered if any one of the criteria listed in that provision is satisfied. Furthermore, Article 7(3) CTMR cannot be applied to overcome the obstacle, because the rationale of Article 7(1)(e) is not the lack of distinctiveness but the public interest in the free use of the specific shapes of the products in question.6 (According to established case law, Article 7(1)(e)(ii) CTMR precludes from registration three-dimensional marks whose essential characteristics perform a technical function, because trademark monopoly on such marks would illegitimately restrict competitors trading in identical or similar goods which incorporated such a function. Such a monopoly would, at the very least, limit their choice to achieve a similar technical function for their own products. In other words, Article 7(1)(e)(ii) CTMR pursues an aim which is in the public interest, namely to bar from registration shapes whose essential characteristics perform a technical function, and were chosen to fulfil that function, hence allowing them to be freely used by all.7 6 7

Philips v. Remington, ¶¶ 74–76. Id., ¶¶ 79 & 80.

584 S E S S I O N V I I : T R A D E M A R K Three-dimensional shapes whose essential characteristics perform a technical function are inventions that can be protected under patent law only if they meet the strict patentability requirements, and then only for a limited period. Patented inventions fall into the public domain when the patent expires. These aspects of patent law are of public interest because they safeguard free competition, which is essential for the fair and unimpeded trade in the Community. These patent law safeguards would be vitiated if trademark protection were allowed to provide a back door to grant permanent protection to functional three-dimensional shapes either when they were not patentable or when the patent had expired. Furthermore, if a three-dimensional mark is found objectionable pursuant to Article 7(1)(e)(ii) CTMR, the fact that it has a color, even a highly distinctive colour, cannot overcome that objection. Such a mark performs a technical function when its essential features are attributable to the achievement of a technical result. A shape that contains an arbitrary element which, from a functional point of view, is minor, such as its color, does not escape the prohibition.8 The Board went on to further argue the relevance of the patents cited in the case. To do that it looked into the decision of the first instance but also at case law from the U.S. Supreme Court. Notably, it stated that it is difficult to argue that the expired patents pertaining to the Lego brick are unimportant. “On the contrary, these expired patents are key facts of this appeal, since a prior patent is practically irrefutable evidence that the features therein disclosed or claimed are functional, as the United States Supreme Court affirmed in similar terms in the case TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001).” National decisions were also looked into. It is underlined that in its depositions the cancellation applicant informed the Board that the Lego brick trade mark has — on essentially the same grounds as given above — either been denied registration or cancelled in France, Benelux, Sweden, Germany, Greece, and the United Kingdom. In Italy the registrations have been withdrawn. The Board considered these national decisions as important elements. Even if it first recalled that “as is well known, national decisions are not binding [on the Boards of Appeal of OHIM]; nevertheless in this case, taken as a whole, they cannot but help highlight a markedly consistent approach towards the registrability (or rather lack of it) of the proprietor’s mark.” The Board thus found further support for its already clear position that the brick should not be a registered trade mark for construction toys. What is more interesting is that for the second time in this decision the Board takes argument from a non-EU court decision, as it then goes on to state that “the same lack of registrability of the Lego brick is underscored by the recent judgement of the Supreme Court of Canada of 17 November 2005, which also found that the functional characteristics of the Lego brick were designed to achieve a technical end.” In view of the above, the Board finds that the Lego brick is not registrable by virtue of Article 7(1)(e)(ii) CTMR for “construction toys” covered by Class 28. V. CONCLUSION The Lego brick case and other decisions mentioned or referred to in the case allow us to come to some clear conclusions as to functionality as it is understood in EU trademark law. Firstly, functionality is a strict exclusion for the registration of CTMs or national trademarks. It is irrelevant that other technical solutions can be found to achieve the same 8

See id., Opinion of Advocate General Ruiz-Jarabo Colomer, in particular ¶¶ 27 & 28.

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result. If a shape of a three-dimensional sign is dictated by the technical result that is to be achieved, the exclusion will bar any trademark registration, and if such a registration had been granted beforehand it must be cancelled. Second, functionality cannot be overcome by intensive use contrary to descriptiveness or genericness. The nature of trade mark law protection and its function in the overall IP protection requires that functional elements cannot be subject to trademark registration and protection. One cannot obtain an indefinite protection of its patented inventions or reregistered designs through trademark protection. Third, both North American and European solutions are harmonized in this matter. The decisions of the other judicatures have been considered and taken into account by the Board of Appeal, and this fact is in itself of importance. This is all the more true in such a matter of principle. Fourth, patents are to be looked into to determine whether a particular feature of a trademark is functional. They constitute an essential element: “expired patents are key facts . . ., since a prior patent is practically irrefutable evidence that the features therein disclosed or claimed are functional.” The result is not absolute, though. It will indeed be difficult to argue that patented matter is not functional, but the Board does not exclude that in particular cases it will be possible to escape the exclusion. The same is true for the U.S. Supreme Court, which did not state an absolute rule either. Could one think of obsolete technology that has become “vintage?” Maybe the future will tell. MR. GARRITY: Thank you, Paul. Jonathan? MR. MOSKIN: Good afternoon. The subject is functionality of trade dress in designs. We are talking about physical things in the real world. Of course, a picture is thus worth a thousand words, and if I were to use a thousand words, I would use up all of my nine minutes and fifty seconds. Let me show you pictures of some of the products that have been involved in some of the more noteworthy cases in this area: First, let me show you a picture of the oval-shaped cable-head tie from the Thomas & Betts case,9 which was litigated up and down the appellate ladder in Chicago for I don’t know how many years. Next, the trailer pinch posts, which, as best I can tell, are these curved devices (numbered 27 and 28 as disclosed in Patent No. 5,518,261) at issue in Midwest Industries v. Karavan Trailers,10 although they were not expressly claimed in the patent. In each of these cases, for industrial products or designs shown within an actual patent, the courts could not make up their minds whether the designs were functional under U.S. law; whereas for a simple toy that all of us would immediately recognize and have known since childhood, without any hesitation, courts uniformly have held the LEGO building block is functional and not protectable.11 Admittedly, if one goes back to the patent claims, the language very broadly describes the functional nature of the interlocking mechanism. One could easily imagine, with the benefit of hindsight, that had they written

9

Thomas & Betts Corp. v. Panduit Corp., 138 F.3d 277, 46 U.S.P.Q.2d 1026 (7th Cir. 1998). Midwest Indus., Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed. Cir. 1999) (refusing to foreclose trade dress protection for previously patented curved pinch post for hitching boats to trailers). 11 U.S. Patent No. 3,005,282, “Toy Building Brick,” issued Oct. 24, 1961 to Interlego AG. See also Tyco Indus., Inc. v. Lego Sys., Inc., 5 U.S.P.Q.2d 1023 (D.N.J. 1987), aff’d 853 F.2d 921 (3d Cir.), cert. denied, 488 U.S. 955 (1988) (holding Lego building block design functional); Kirkbi AG v. Ritvik Holdings, Inc., (2005) 433 C.P.R. (4th) 385 (S.C.C.) (holding the design unprotectable based, in part, on the fact that the design has been claimed in a utility patent). 10

586 S E S S I O N V I I : T R A D E M A R K these patent claims more narrowly they could perhaps have escaped a later finding of functionality. But more broadly, my point is there is nothing intuitively obvious about what is or is not functional. I think, as a litigator, if you were to ask me what is functional, my answer would be that my adversary’s products are functional; my client’s products are nonfunctional. The courts have not done a very good job of line drawing. They have helped us identify two broad issues in assessing functionality — namely, whether protecting a design under trade dress law or trademark law will conflict with our patent system, and whether protecting designs will inhibit competition. But these two very different inquiries not easily reconciled. I think it is very telling to look at the language of one of the Supreme Court cases. In the Qualitex case,12 the Supreme Court said, “In general terms, a product feature is functional and cannot serve as a trademark if it is essential to the use or purpose of the article or if it affects the cost or quality of the article.” The Court then went on to say, “That is, if the exclusive use of the feature would put competitors at a significant non-reputation-related disadvantage.” Despite what the Court said, I do not see these as in any way equivalent statements. The first, I can understand, is addressed to the thing itself: in common parlance, does it have a function? Would it be more expensive to make it a different way? Is it essential to the use of the article? The second half of the formulation, however, is something entirely different. It is an economic analysis having nothing to do with the thing itself: Can you design it a different way? The courts have been rather frustrating in their inability to come to terms with these two distinct issues. If I can refer back to the comments of my partner, David Llewelyn, I think the real problem here is that we have a somewhat dysfunctional system, where product designs are not clearly protectable under trademark law, and the courts have also made very clear that under copyright law, design protection is extraordinarily limited, under the similar doctrine of utilitarianism. Although we have a design patent statute in the United States,13 design patents have been so limited as to have largely been deprived of their value. There are some instances where they have some meaningful enforceable value, but the courts have interpreted the scope of the design patent statute, somewhat questionably perhaps, as to say that design patents have no scope. Here is a very clear example which the Supreme Court was confronted with very directly in the TrafFix case.14 Many litigants urged it to hold that once something has been claimed in a patent it cannot thereafter be protected as trade dress law. This has a constitutional dimension in the United States because of the limited times provision of the Constitution. Yet, confronted with something that was clearly functional, and that the Court ultimately held was functional, and which had been the subject of a utility patent, the Supreme Court nonetheless declined to rule whether trade dress protection is precluded by patent protection. The Supreme Court has in other places made very clear its philosophy that there is a “carefully constructed bargain” among the different branches of intellectual property law. In homage to Kurt Vonnegut, who just passed away, perhaps One First Street, which is the address of the Supreme Court, is one of what Vonnegut described as a “chrono12 13 14

Qualitex Co. v. Jacobson Prods., 514 U.S. 159 (1995). 35 U.S.C. §§ 171–173, 102, 103, 112, 132; see http://www.uspto.gov/web/offices/pac/design/toc.html. TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001).

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synclastic infundibulum,” which are, he said, places in the universe where all truths come together.15 To the rest of us in the intellectual property bar, and to courts, it is far less clear. It is not carefully constructed. And, if you look at the litigants in the Thomas & Betts case and the years and years they spent litigating, it is not such a bargain either. There is a sense that maybe now, under our system in the United States, we can pass this down from the courts to the Trademark Office by requiring that the claimed trade dress owner first register its design as a trademark. In order to protect a design in litigation, it is indeed now the plaintiff’s burden to prove that a design is nonfunctional. So, under the recent revisions to the Lanham Act,16 one does need first to get a registration. I am not criticizing the Black & Decker court,17 but if one looks at this recent case, which really perhaps had more to do with ornamentation than functionality, the impression is that all Black & Decker had to do to get a trademark registration was simply to present in an ex parte forum some evidence from favored customers that its octagonal key-head shape had become associated with Black & Decker. If so, it is not clear how much of a benefit there is in shifting responsibility from the courts to the Trademark Office to decide functionality. On the other hand, once you get a registration, how good is it anyway? In the Fuji Kogyo case, decided recently by the Sixth Circuit,18 similar designs for fishing line guides, which are the little eyelets that are mounted on a fishing pole to guide the line through, had once been the subject of patent protection, not the identical designs. The designs at issue in the case were also the subject of trademark registrations. The court wasted little time, however, dispensing with the registrations, and gave no evidentiary weight to the fact that they were registered. So the law, despite anything the Supreme Court says, is extraordinarily unclear, and therefore a subject of continuing litigation and discussion. In conclusion, I do want to suggest that there is yet a third complicating factor. You may wonder why I have put up a picture of a Cohiba cigar. That is because there is also something unique about product configurations that may or may not have to do with functionality, but within the definition that Sue Progoff, quoted earlier: What is a trademark? It is a symbol that has come to identify the source of origin of a product. If one looks to the origins of the word “symbol,” it is derived from the Greek as “the present half of a broken tablet or coin, representing the missing part.” It is difficult conceptually for the mind to wrap itself around the notion that a particular thing is also a symbol for itself. The thing is itself; there is no missing part and it is awkward, at best, to say it is a symbol for itself. Therefore, why the cigar? Even Sigmund Freud, who I think most of us would agree knew more about symbolism (or thought he did) than most, recognized that sometimes a good cigar is simply a good cigar. MR. GARRITY: Thanks, Jonathan. Sue Progoff, do you have some thoughts? MS. PROGOFF: I do have a few thoughts about this. It is something that I think has become a much more unsettled area of the law than it used to be. From the early days of the Lanham Act until probably five to ten years ago, courts were expanding the kind of protection that they would give to product designs and product configurations under 15 16 17 18

See Kurt Vonnegut, Sirens of Titan (1959). 15 U.S.C. § 1124 (Supp. I 1984). Black & Decker, Inc. v. Pro-Tech Power, Inc., 47 U.S.P.Q.2d 1843, 1845–46 (E.D. Va. 1998). Fuji Kogyo Co. v. Pacific Bay Int’l, Inc., 461 F.3d 675 (6th Cir. 2006).

588 S E S S I O N V I I : T R A D E M A R K Section 43(a) of the Lanham Act. In view of a series of decisions by the Supreme Court, that has been cut back gradually. I think where things are going now is that the courts really do not like the idea of giving unlimited protection to product designs, and so functionality is really only the tip of the iceberg in terms of the problems that you have in protecting product configurations. Once you get past the functionality hurdle, you still have to show that the things that you say constitute the trade dress are things that consumers use to recognize the source of the product — in other words, those are the features that function as a trademark. I think with a product configuration that can be very difficult, because you have to define what your trade dress is. You cannot just say it is “the overall look of a product” anymore, which is what people used to say in the 1970s and 1980s. You have to be able to say, “It is this feature and this feature and this feature.” The next step in proving your case is to show that those particular features are the things that consumers look at to identify source. The third hurdle is to show that, because somebody copied those features, there is a likelihood of confusion. I think it is a very tough row to hoe. The decisions seem to be coming out more and more on the defense side in this area. The other thing I want to mention very briefly is that one of the questions in this area in terms of functionality also is the role that a design patent would play in determining whether or not something is functional, because a design patent can only cover something that is considered nonfunctional. There was a recent case that came down about a month or so ago in the Western District of New York, Keystone Manufacturing v. Jaccard Corp.19 The case involved trade dress in meat tenderizers. (I don’t know what meat tenderizers look like.) There were some expired patents and the court was asked to construe those. There were also some expired design patents. The court engaged in a fairly good discussion of where the law has been with respect to design patents and trade dress. They say, essentially, that it is relevant to non-functionality but it does not create a presumption. I am sure there is going to be more to come on that issue, but that is the most recent learning on that. MR. GARRITY: Thank you, Sue. Susan? PROF. SCAFIDI: I will keep my remarks especially brief, because my voice sounds like the consumptive soprano with one last aria before the curtain. I will loan you a meat tenderizer, Sue. It is a kind of hammer with little points on it. I was particularly inspired by Jonathan’s remarks to think of another recently dead guy, the French philosopher Jean Baudrillard, who wrote in Simulacra and Simulation20 about how the representation of the object can become more important than the object itself — indeed, the object can disappear, leaving only the representation. What it made me think of was what exactly we are asking trade dress to do. Trade dress is fine and works perfectly well if we really do limit ourselves to the idea that we are talking about source indicators. What it seems that many of us would rather do, and perhaps fairly so, is find a way to protect the designs themselves, which is why we keep reaching with trade dress to award design patents, to award copyright, to award other areas that would protect the underlying designs. It sounds as though, listening to both of you, a great deal of our underlying tension is because we are uncomfortable with trade dress merely being a subset of trademark and would like it to do more. I would love to hear both of you comment on that. 19

Keystone Mfg. Co. v. Jaccard Corp., 03-CV-648S (W.D.N.Y. Feb. 26, 2007). Jean Baudrillard, Simulacra and Simulation, in Jean Baudrillard, Selected Writings 166–184 (Mark Poster ed., 1998). 20

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Thank you, Susan.

Ken? PROF. PORT: To quote David Llewelyn, the law is an ass. I have no real reason to say that. I just am jealous that he got to say it first. [Laughter] Not that there is any connection between those comments and what I am about to say. I will provide the comparative perspective.21 The Japanese have adopted a very broad unregistered product configuration protection statute.22 In its entirety, that section of the statute says that selling, distributing, exporting, or importing goods that imitate the product configuration of another, excluding functional marks, are protected for a three-year period. What do they mean by “functional marks” there? That is obviously very broad protection. It seems that under the Japanese statute functionality is very clearly defined as competitive need for the good. If a manufacturer does not need to make a product look like your trade dress, it is okay to protect it. For example, one case I cite is the case where they have a pink sleeveless girl’s shirt, and the court says the fact that it is a sleeveless shirt does not make it functional. In fact, it is not functional, because there are so many different ways you could make a sleeveless shirt. Therefore, it granted protection for this pink sleeveless shirt. Although there is very broad protection under the Japanese statute, it is limited somewhat by this functionality concern. But when it is defined as competitive need, maybe it is a little broader than we would expect. MR. GARRITY: Thank you, Ken. Graeme? PROF. DINWOODIE: Just very quickly, a couple of points. First of all, to compare a little bit the position in Europe and in the United States, I would agree with Paul that the position the United States has reached in TrafFix 23 and Samara 24 is pretty close to where the ECJ is in Philips,25 even if the cases — in their final formulations — are very different. The United States has the formal requirement that for product design distinctiveness you have to show secondary meaning by demonstrating actual public association of the designs with a source. The ECJ gets to the same place. So I think we actually have two very similar laws. What is intriguing is, if you look at the mass of doctrine that exists at the level below that, you wouldn’t know you were on the same planet. One of the things that is really important in understanding functionality law in the United States is that the doctrine is 21 See Kenneth L. Port, Trademark Dilution in Japan (Nov. 2005), William Mitchell Legal Studies Research Paper No. 30 , available at http://www.ssrn.com/abstract=844189; Kenneth L. Port, Kenneth, Dead Copies Under Japanese Unfair Competition Prevention Act: The New Moral Right, William Mitchell Legal Studies Research Paper No. 37, available at http://www.ssrn.com/abstract=892008. 22 The Unfair Competition Protection Act, Law No. 14 of 1934, as amended by Law No. 47, promulgated on May 19, 1993, further amended by Law No. 116 of Dec. 14, 1994) (UCPA), available at http://www.wipo.int/ clea/docs_new/en/jp/jp005en.html. Art. 2(1)(iii) states: “As used in this Law, the term ‘unfair competition’ shall mean any act under the following: . . . (iii) The act of selling, distributing, displaying for the purpose of sell or distribute, exporting or importing goods which imitated the configuration (excluding a configuration which is commonly used for goods of the same kind (or, in the case where it is not the same kind of goods, goods which has an identical or similar function and utility of those of such other person) as that of such other person) of another person’s goods (excluding goods for which three years have elapsed from the date selling thereof first commenced);” see also Japan Design Law, art. 1, § 5.7.1; The Trademark Law, codified at Law No. 127 of 1959, as amended, art. 2. 23 TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001). 24 Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S. 205 (2000). 25 Case C-299/99, Koninklijke Philips Elecs. NV v. Remington Consumer Prods. Ltd., [2002] E.C.R. I-5475, available at http://www.ipo.gov.uk/mcps/philips1.htm.

590 S E S S I O N V I I : T R A D E M A R K all over the place. It is not all coherent. No one knows quite how all the different rules connect. But the reality is the courts have taken the message from TrafFix. I think Susan is quite right. Since TrafFix, the rules have been applied a lot more strictly. The trend is very, very clear, that there is reduced protection. So my cry to courts would be to not get so bogged down in trying to work out whether, for example, the evidentiary trigger from the TrafFix opinion is the central advance in the patent or whether it is in the claim or whether it is in the disclosure or whether it is in a hypothetical doctrine of equivalents. It is all fascinating, but not particularly edifying in working out what is functional. I just hope that we do not create more and more doctrine, as we seem to be doing, in trying to implement what are actually pretty basic purposes. On the subject of purposes, one other thing that I think courts should be doing a lot more of, which historically the U.S. Supreme Court did do, is to recognize that when you have something that serves source-identifying purposes, which should be potentially protected under trademark or unfair competition law, on the one hand, and the functionality doctrine suggesting otherwise on the other, you can balance those concerns by ensuring that the defendant is able to copy, but require some degree of labeling or other relief. I would like to see courts do a little bit more of that as a way of balancing the different demands of patent and trade dress law. MR. GARRITY: Thanks. I do not want to stand between anybody and lunch, but we have five or ten minutes for questions. There are a lot of hungry people out there. Susan, how about a red sole on the bottom of a pair of shoes? PROF. SCAFIDI: Like the ones I’m wearing? MR. GARRITY: Yes. PROF. SCAFIDI: This is very embarrassing. We have trade dress, I think. MR. GARRITY: Do you think that’s trade dress? PROF. SCAFIDI: I would think so. It is certainly a source identifier, and an effective one, since celebrities and so forth photographed wearing the shoes flash the hint of red. So I think we are going there. Is it functional? Probably not. MR. GARRITY: Jonathan? MR. MOSKIN: Wasn’t Judge Frankfurter’s Mishawaka case26 about a red plug in the heel of a shoe? MR. GARRITY: You are right. MS. PROGOFF: Also, there are a number of shoe companies now that are registering sole designs, both as design patents and trademarks. So there you go. MR. GARRITY: Thanks to everyone on the panel. Enjoy your lunch.

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Mishawaka Rubber & Woolen Mfg. Co. v. S.S. Kresge Co., 316 U.S. 203 (1942).

SESSION VIII: COPYRIGHT PART A: CANADA, AUSTRALIA AND NEW ZEALAND

SESSION VIII: COPYRIGHT

Part A: Canada, Australia and New Zealand

Moderator PROF. BRIAN FITZGERALD

Head of School of Law Queensland University of Technology (Brisbane) Speakers PROF. ROBERT BURRELL

PROF. SUSY FRANKEL

University of Queensland (Brisbane)

Victoria University of Wellington (New Zealand) HOWARD P. KNOPF

Macera & Jarzyna LLP (Ottawa) Panelists PROF. CHRISTOPH ANTONS

PROF. DANIEL J. GERVAIS

University of Wollongong (Australia)

Faculty of Common Law, University of Ottawa

PROF. ANNE FITZGERALD

HON. ROGER HUGHES

Queensland University of Technology (Brisbane)

Judge, Federal Court of Canada (Ottawa)

PROF. B. FITZGERALD : Good morning, everyone. Brian Fitzgerald is my name, Professor of Law at the University of Queensland in Australia. This morning we have a distinguished panel of people from Canada, Australia, and New Zealand, to discuss the recent developments in copyright law across those jurisdictions. I will just make a few opening comments, if I may. In Australia we have had significant copyright law reform over the last six months or so.1 A couple of comments that come out of the Australian experience apply generally to each of the jurisdictions that we are talking about today, and probably to many other jurisdictions in the world. 1

Copyright Amendment Act 2006 (Cth), G096v06, available at http://www.copyright. org.au/g096.pdf.

592 S E S S I O N V I I I : COP Y R I G H T The first thing about the implementation of the free trade and other copyright amendments in Australia was the speed with which they were introduced and the level of consultation that was available for the community to provide feedback on the amendments. The process was put into serious question in terms of the amount of legislation that was to be implemented and the time that people — experts, but anyone else in the community — had to review the legislation. It was very short. This, in turn, led to the second point that I would like to make. In this instance, there was a short but significant campaign to raise community awareness around the issues concerning the copyright amendments. They were reasonably successful, when you consider that the front page of The Sydney Morning Herald, one of our leading daily newspapers, ran a story with a photo on it of young people at a U2 concert with mobile telephones recording and taking photos, and the caption saying, “copyright criminals.”2 So the process, the level of community awareness, engagement, and concern around the amendments, was something that was very unique to this process. Thirdly, the amendments, in themselves, centered around balancing rights. We did introduce a new right, fair dealing, for the purpose of parody and satire. We were faced with many, many criminal provisions, a significant process of criminalizing copyright infringement, which really did cause alarm within the community. Eventually, the government backed down on that. To some extent, the provisions were reduced. I am sure some of the panel members will talk about that today. The scope of those criminal provisions was reduced. The other thing that was in question was the scope of technological protection measures. Pursuant to the U.S.-Australia Free Trade Agreement,3 amendments were made in this area. It seems that the legislation would take us beyond what the Federal Circuit would say the law is in the United States. It caused a lot of debate. But the amendment was made. I am sure some of the panelists or members of the audience today will talk about some of those issues. These are the broad issues for all jurisdictions in terms of copyright amendments. The process and time for consultation, consumer awareness and engagement in that process, and then the types of reforms that we have engaged in — fair dealing, technological protection measures, and criminalization of copyright infringement — are all significant issues for many jurisdictions throughout the world. Today in this panel we will focus very much on the three countries that we have represented here. Our speakers are Professor Robert Burrell from the University of Queensland, Professor Susy Frankel from New Zealand, and Howard Knopf from Canada. The panelists are: Professor Christophe Antons from the University of Wollongong, Professor Anne Fitzgerald from Queensland University of Technology, Professor Daniel Gervais from the University of Ottawa, and The Honorable Roger Hughes, Judge, Federal Court of Canada in Ottawa. Robert, I will hand it over to you. PROF. BURRELL: Thanks, Brian. I want to talk today about the U.S.-Australia Free Trade Agreement and the wisdom of current U.S. trade strategy. That is, I want to focus less on the consequences of the Free Trade Agreement (FTA) for Australia and concentrate instead on using the Australian experience as a case study through which to cast doubt on the wisdom of current U.S. trade strategy. What I want to suggest is that I have some doubts as to whether or not the 2

See Sydney Morning Herald, Nov. 20, 2006, at p.1, available at http://www.smh. com.au/.

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current strategy is sensible, even when you judge “sensible” solely in terms of narrow U.S. self-interest. Building on something that Brian said, I think it really is important to emphasize just how controversial the intellectual property chapter of the U.S.-Australia Free Trade Agreement became. I would say it probably became the single most controversial aspect of the Agreement. That seems to me to be fairly striking. Australia has long offered a high level of intellectual property protection. It is a party to most of the same international conventions as the United States. It even has an intellectual property system that is ultimately founded on the same logics. It is not even as if the United States was attempting to enter into a free trade agreement with a droit d’auteur country. So what is it about the FTA that caused such opposition in Australia? It seems to me that there are at least four things about the Agreement that are worth mentioning. First of all, when you read through the Agreement, it seems petty. It seems as if there is no issue that is too trivial to find its way into the FTA. I will give you an example. Our FTA contains a provision that seems solely designed to ensure that Australia doesn’t interpret the requirements of graphic representation for trademark law the same way as the European Court of Justice did in Sieckmann.4 Obviously, olfactory trademarks are such a vastly important type of mark to the U.S. economy that we had to have a special provision to deal just with scent trademarks. So it is petty. Secondly, it seems to me to be fairly patronizing. It ignores the fact that Australia has a long experience of working through problems for itself. You can see this in the sort of begrudging acceptance that it is not absolutely necessary to have a system of statutory damages in order to ensure that, in cases where there is difficulty of proof, plaintiffs still manage to get a sensible sum in damages. The third reason why I think the IP chapter created such controversy is that it locks Australia into a series of decisions that are controversial and decisions which over time may prove to have been misguided. I am thinking here particularly of those bits of the Digital Millennium Copyright Act (DMCA)5 that have just been dropped into the FTA. Finally (and I rather suspect this might be the most important issue) there is a widespread sense, whether fair or not, that the FTAs will simply be ignored by the United States if they subsequently turn out to be inconvenient. I think it is quite striking that when you are at a conference like this and you hear Americans, including American officials, talking about the possibilities of reform, the FTAs are simply never mentioned as something that might limit future U.S. freedom of movement. So it seems to me that it is fairly clear that the FTAs create a cost for the United States. They feed into an arguably crude, but nevertheless very real, form of anti-Americanism. They have radicalized the nongovernmental organizations in Australia. They have built support for what we might broadly call anti-intellectual property groups and commentators. That is one cost. A second cost of these FTAs is that they close off opportunities for legal experimentation from which the United States might subsequently benefit. Yesterday afternoon we 3 U.S.-Australia Free Trade Agreement, Signed May 18, 2004, available at http://www.ustr.gov/Trade_Agreements/Bilateral/Australia_FTA/Final_Text/Section_Index.html. 4 Case C-273/00, Dr Ralf Sieckmann v. Deutsches Patent-Und Markenamt, 12 Dec. 2002, E.C.J. (trademark denied for scent). 5 Digital Millennium Copyright Act of 1998, 1998), Pub. L. No. 105-314, codified at 17 U.S.C. § 512 (Oct. 28, 1998) (DMCA), full text available at http://www.copyright.gov/title17.

594 S E S S I O N V I I I : COP Y R I G H T heard about some of the problems that are still being encountered in relation to online licensing arrangements.6 If you take the view that the state might have a constructive role to play in facilitating the emergence of new licensing forms, one of the problems with things like the FTAs is that they close off some of the possibilities that might otherwise be available to a country. Again, given that we do not know how to deal with some of the issues like how best to arrange for online licensing, that may not be very desirable. I suppose the most striking thing about the FTAs, at least from the Australian perspective, is that the bulk of the provisions in the FTAs do not seem to me to achieve very much. There are some exceptions. Copyright term extension is one example. The provisions relating to test data are no doubt quite significant achievements for the United States. But you have to bear in mind that the bulk of the FTAs are not so much concerned with raising standards above multilateral thresholds. They are more about ensuring that existing multilateral standards are implemented in a very specific way, so that, for example, the provisions of the WIPO Copyright Treaty (WCT)7 are implemented in exactly the same way as the United States has chosen to implement those obligations. What is going on? What is the United States hoping to achieve? Most obviously, you would think that the United States is attempting to achieve substantive harmonization between its own laws and the laws of its trading partners. But if that is the aim, they certainly do not achieve very much. The FTAs do not touch on the really big issues, like ownership, originality, structure, and definition of rights. Secondly, even if you look at those things that are covered by the FTAs, you have to bear in mind that there are important differences between the different agreements. You only have to compare, for example, the provisions of the Australian FTA dealing with the transmissibility of copyright with the provisions of the Chilean FTA8 that deal with the transmissibility of copyright, and you will see there are some quite striking differences between the two agreements. I think the third reason why the FTAs are not going to do much to achieve harmonization is that countries are finding different ways of implementing their obligations under these agreements. In other words, despite the specificity of the language in these FTAs, countries are nevertheless finding different ways of implementing those agreements into their law. So I do not think it is very convincing to say that the current U.S. trade strategy is desirable because it achieves harmonization. Another possibility, then, is that the FTAs are designed to build support for various U.S. positions in multilateral fora. Again, I think there are some examples where that might be true, copyright term extension being one. But if you take, for example, the U.S. demand that copyright should be freely transferable, the real stumbling block is that that is just not how civil law countries approach the transmissibility of copyright in many cases. The real stumbling block to achieving that goal is the European Union, and what Australia does is neither here nor there. I think you have to also remember that many of the provisions in the FTAs are simply so specific, they read so much like a piece of domestic legislation dropped down into an international treaty, that they are simply not “multilateralizable” at all. My final reason why I doubt whether these FTAs are good strategy is that it is impor6

See infra this issue, Session II Part C, Copyright Issues in Online Music. World Intellectual Property Organization Copyright Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 65 (1997) [hereinafter WCT], available at http://www.wipo.org. 8 Chile Free Trade Agreement (2003), available at http://www.ustr.gov/Trade_Agreements/Bilateral/ Chile_FTA/Final_Texts/Section_Index.html. 7

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tant to bear in mind the way domestic politics intersects with implementation of the FTAs. We see in Australia, for example, that the process of getting the FTAs implemented into domestic law forces compromises. In particular, they force compromises in those areas of copyright law, for example, that are not regulated by the FTAs at all. So, as Brian mentioned, we see an expansion of the exceptions as part of the deal that was done to get the FTA implemented. Also the FTAs have had certain unlooked-for consequences. As a consequence of U.S. demands that Australia sign up to the WIPO Performances and Phonograms Treaty (WPPT),9 we are, in the very near future, going to get performers’ moral rights in Australia. I cannot imagine that either of those results — that is, expansion of the exceptions or the introduction of performers’ moral rights — are things that U.S. copyright owners would necessarily be very pleased with. Thank you. PROF. B. FITZGERALD: Thank you very much, Robert. I think I will ask Howard to go next. *

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RECENT COPYRIGHT ACTIVITY AND INACTIVITY IN CANADA Howard Knopf10 1. INTRODUCTION Not much was resolved in Canadian copyright over the last year or so. What did happen was positive on the whole. Overall, it was not dramatic. And what didn’t happen was very important. And much of it could happen later this year. Last year may well have been the lull before the storm, or the eye of the hurricane. Here is the year in review, beginning in December of 2005 and spilling over up to the current time in 2007 and looking beyond. This is a selective and personalized view of the period in question. I. MAJOR LITIGATION A. KRAFT V. EURO EXCELLENCE 11

On December 19, 2005 the Federal Court of Appeal upheld a trial-level decision that held that legitimate Toblerone chocolate bars could not be imported from Europe by a parallel importer without overlaying or covering up the copyrighted picture of a mountain.12 The related Kraft companies in Europe and Canada had arranged for Kraft Canada to get an exclusive license in certain parts of the artwork on the packaging of chocolate bars — such as the mountain on the Toblerone package. The “cover-up” remedy devised by the 9 World Intellectual Property Organization Performances and Phonograms Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 76 (1997) [hereinafter WPPT], available at http://www.wipo.org. 10 Counsel, Macera & Jarzyna, LLP, Ottawa, Canada; howard.knopf@macerajarzyna. com. These views are strictly my own. Some of this material is taken from my own blog at http://www.excesscopyright.blogspot.com or elsewhere as noted. 11 The author became involved in this case as counsel for the intervener Retail Council of Canada, which supported the Appellant but for some different reasons than those advanced by the Appellant in the Courts below. 12 Euro Excellence, Inc. v. Kraft Can., Inc. et al., [2005] F.C.A. 427.

596 S E S S I O N V I I I : COP Y R I G H T Trial Judge and upheld by the Federal Court of Appeal would result in the effective ban of a wide range of parallel imports, where the copyrighted elements comprise significant or essential parts of the packaging. The products would often be unsaleable after the “cover up.” Indeed, several prominent commentators have so confirmed, including Kraft’s own law firm. To suggest otherwise is just plain wrong. These law firms were quick to hold this decision out a means to “thwart” parallel importation by using copyright law to achieve what the Canadian courts, including the Supreme Court of Canada, have clearly held cannot be done using trademarks law. We argued that the provision of the Copyright Act relied upon by the Kraft plaintiffs was never meant to apply to product packaging. Indeed, Kraft has cited no Canadian case law dealing with Section 27(2)(e) or its predecessors that has dealt with anything other than books and sound recordings. Leave to appeal was sought and obtained from the Supreme Court of Canada on May 18, 2006. Oral argument took place on January 16, 2007 — just over a year from the date of decision appealed from. This is Canada’s closest counterpart to the U.S. Supreme Court’s Quality King13 case — but concerns foreign-made legitimate parallel imports, not domestic goods that were shipped out of the country and were then reimported. The Canadian case covers an even wider and more common fact situation than Quality King. There was much discussion of Australian and English law. The intervener that I represented put forward some important common law doctrines that had not been dealt with below, such as the hypothetical maker doctrine and the doctrine that a copyright owner cannot infringe its own copyright. The basic question that we put to the Supreme Court was this: Can copyright law be used to “thwart” the importation and distribution of genuine consumer goods not themselves protected by copyright and which are legally manufactured and packaged abroad (“parallel imports”) on the basis of a “strategy” to arrange for an exclusive license in certain artistic elements of the packaging for such goods to be given to a Canadian entity? The Supreme Court oral hearing was thorough, probing, and interesting for many reasons. For example, at the hearing, the Court asked several questions about certain aspects that were not canvassed in great detail in the written arguments. These included whether there was copyright misuse in the sense that Judge Posner had articulated up in the Seventh Circuit’s Wiredata14 decision. There were also questions about whether there should be some sort of incidental use exception. Both of these are interesting and important issues. All eyes are now focused on the Court. If the decision below is upheld, it will be a drastic change, in my view, to Canadian law and will surely result in a massive call for legislative correction. If the appeal succeeds, we will resume what most believe to be the status quo before the decisions below but all eyes will be on the reasoning. All nine of the Justices had penetrating questions. It would not surprise me if there is more than one opinion. The Supreme Court of Canada has recently heard several IP cases in which it has chosen to deliver broad and important messages and guidance for the future. The Canadian Supreme Court delivers its decisions, on average, about six months after the oral hearing.

13 14

Quality King v. L’Anza, 523 U.S. 135, 118 S. Ct. 1125 (1998). Assessment Technologies of WI, LLC v. Wiredata, Inc., 350 F.3d 640 (7th Cir. 2003).

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B. ROBERTSON V. THOMSON CORP.15

In 1995 the plaintiff, Heather Robertson, contributed two articles to the Globe and Mail, Canada’s leading national newspaper. She was a freelancer, and not a permanent employee. She subsequently discovered that her articles were incorporated into online databases and a CD-ROM product. She claimed that she had never given permission nor received payment for these subsequent electronic uses. She started a class action on behalf of freelancers and full-time employees of the Globe and Mail. Following what began as a motion for partial summary judgment and an injunction, the Supreme Court of Canada (SCC) rendered a split (5–4), complex, and nuanced decision on October 12, 2006 in Robertson v. Thomson Corp. This was the Canadian counterpart to the American Tasini16 case. The issue is whether a freelance journalist who had originally agreed to publication of her work as a traditional “newspaper” article has the exclusive right to permit reproduction of it as part of an online database or in a CD-ROM product. The SCC held, essentially, that the collective work resulting from the newspaper’s editorial efforts in assembling its daily edition had to yield to the individual right of each freelance author because the essence of the “newspaper” as a whole was lost when the individual articles are put into an electronic database where works are accessed and read one at a time and decontextualized to the point that they are no longer presented in a manner that maintains their intimate connection with the rest of that newspaper . . .. These products are more akin to databases of individual articles rather than reproductions of the Globe. Thus, in our view, the originality of the freelance articles is reproduced; the originality of the newspapers is not.17 Regarding the particular CD-ROM version of the database, the majority found that: The user of the CD-ROM is presented with a collection of daily newspapers which can be viewed separately. When viewing an article on CD-ROM after searching for a particular edition, the other articles from that day’s edition appear in the frame on the right hand side of the screen. To pass muster, a reproduction does not need to be a replica or a photographic copy. But it does need to remain faithful to the essence of the original work. And, in our view, the CD-ROM does so by offering users, essentially, a compendium of daily newspaper editions.18 The majority found that the full-time employees of the Globe and Mail had no entitlement to be part of the class action, since they had made no attempt to exercise whatever rights they might have had under the particular provisions of Section 13(3) of the Canadian Copyright Act that allow newspapers to use their work but allows the employee to restrain further publiccation unless it is in a “newspaper, magazine or similar periodical.”19 The majority also found that there could, in principle, have been an implied license to the newspaper to do what it did, and that any such license need not have been in writing — since only exclusive licenses need to be in writing. This could be of considerable practical importance to the future of this particular litigation, as the Court noted: 15 Robertson v. Thomson Corp., [2006] S.C.C. 43. My comments in this paper are a portion of my submission appearing in full in European Intellectual Property Review. 16 New York Times Co. v. Tasini, 533 U.S. 483 (2001). 17 Id., ¶ 41. 18 Id., ¶ 52. 19 Id., ¶¶ 62 and 63.

598 S E S S I O N V I I I : COP Y R I G H T If it is determined that freelance authors have in fact impliedly licensed the Globe the right to republish their articles in the electronic databases, this decision will, of course, be of less practical significance. Parties are, have been, and will continue to be, free to alter by contract the rights established by the Copyright Act.20 The minority found that the conversion and reproduction of all the articles in a newspaper in a database would “would clearly constitute an electronic reproduction of “any substantial part [of that day’s newspaper] in any material form whatever,” which is something that the owner of the collective work or compilation, i.e., the newspaper, is entitled to do.21 This was a close case, and both sets of reasons are strong and compeling. Moreover, there may be many more questions than answers at the end of the day. In particular, both the majority and minority were concerned with media neutrality. This is a careful and important judgment by both majority and minority. Both sides have much to be happy about. Ms. Robertson clearly won this battle, but the war is far from over. It may be a long time before she and her classaction colleagues see any money. Depending on how the implied license issue plays out, there may not be any money to see. And new contracts will govern the future in any case. It may even prove to be a Pyrrhic victory. III. CANADIAN POLITICS A. THE FEDERAL ELECTION

On January 23, 2006, there was a Federal Election. The Liberal Government lost, slipping from minority government status to opposition status. It had introduced a copyright reform bill, known as Bill C-60, that never proceeded to hearings. That bill was somewhat rushed in production and rough around the edges. For example, it arguably would have created liability for search engines, when its intention was probably to shelter them. But the Bill stopped well short of the American vision of WIPO Treaty22 implementation, particularly with respect to digital rights management (DRM) and Trusted Platform Model (TPM) provisions. It featured a notice and notice regime, and not a notice and takedown regime as the American government would prefer. It would have allowed circumvention for any purpose that would otherwise have been legal.23 It also stopped short of giving users some of the exceptions that some users wanted to see, particularly certain educational interests. It left the private copying scheme intact. It was somewhat flawed and incomplete, but a fairly balanced bill. Many of its faults could have resolved in committee. It should be noted that the Liberal Party has always depended for its success on keeping a political distance from the United States. This distance is sometimes more apparent than real, as under the recent Chrétien and Martin governments. But at times it has been quite dramatically real — as under the Trudeau government in the 1960s and 1970s, when Canada adopted its controversial compulsory licensing regime for pharmaceuticals. The Conservative Party became “Canada’s New Government” (as it calls itself ) — but 20

Id., ¶ 68. Id., ¶ 86. 22 World Intellectual Property Organization: Copyright Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 65 (1997) [hereinafter WCT]; World Intellectual Property Organization Performances and Phonograms Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 76 (1997) [hereinafter WPPT], available at http://www.wipo.org. 23 Except, in turn, for private copying, which is dealt with in Part VIII of Canada’s Copyright Act. 21

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only with a minority. Their March 19, 2005 Policy Declaration included an explicit promise to eliminate the controversial levies on blank media and to continue to legalize private copying. The text of their platform on copyright is as follows: 35. Copyright Legislation I) The Conservative Party believes that the objectives of copyright legislation should be: a) to create opportunities for Canadian creators to enjoy the fruits of their labour to the greatest possible extent; b) to ensure that the rights of Canadian creators are adequately protected by law; c) that these rights are balanced with the opportunity for the public to use copyrighted works for teaching, researching and lifelong learning; d) to continue to allow an individual to make copies of sound recordings of musical works for that person’s personal and individual use; and e) that enforcement is applied fairly and in accordance with international standards. ii) The Conservative Party believes that reasonable access to copyright works is a critical necessity for learning and teaching for Canadian students and teachers, and that access to copyrighted materials enriches lifelong learning and is an essential component of an innovative economy. iii) A Conservative Government will give consideration to educational public policy goals within the copyright framework. A Conservative Government will work with industry to increase awareness and develop a public education campaign to better inform users and creators on the copyright laws in Canada. iv) A Conservative Government will eliminate the levy on blank recording materials.24 Despite an explicit promise by one of the responsible Ministers for a copyright bill last year, there was no bill introduced — and there still has been no bill introduced. The lobbying continues unabated. In particular, the American recording industry through its Canadian representative, the Canadian Recording Industry Association (CRIA), has brought massive pressure on Ottawa to reverse the Liberal policies and probably key aspects of the Conservative Policy Declaration. The American motion picture industry — through the Canadian Motion Picture Distributors Association (CMPDA) (counterpart to the MPAA) — has its own high-power campaign underway for standalone anti-camcording legislation, preferably, in its view, in the Criminal Code. It seems that the CMPDA has little desire to hitch its wagon to the main copyright train that can’t get out of the station. B. THE BULTE AFFAIR

Copyright has become ultra-political in Canada. Even a decade ago, Bill C-32 was widely regarded as the most heavily lobbied piece of legislation in the history of Canada. In the January 23, 2006 election, a prominent member of Parliament, who clearly had ambitions to be the next Minister of Canadian Heritage, held a fundraising event on the eve of the election. She was a favorite of the content industry and would have had significant power over copyright reform if she and her party had been reelected. But she lost her seat in downtown Toronto, which had been considered a safe Liberal stronghold. She went from a comfy 3,000-vote lead to a decisive 3,000-vote loss. Most observers agree that the reason she lost her seat is because of her solicitous support of certain content owner lobbying groups — most particularly CRIA — and the 24

See http://www.conservative.ca/media/20050319-POLICY%20DECLARATION. pdf.

600 S E S S I O N V I I I : COP Y R I G H T strange fund-raising event that CRIA and others orchestrated for her on the eve of the election. The bloggers got hold of this. Rhetoric escalated. Litigation was threatened — but, of course, never materialized — against Professor Michael Geist, who led the charge. Even if Mme Bulte and her party had been elected, there would have been much trouble. She was already too much in the perceived thrall and influence of the American entertainment industry to have been an effective Canadian Minister. The so-called 2004 “Bulte Report” of the Parliamentary Committee that she chaired had been widely and soundly criticized for its excessive and apparently predetermined conclusions that played straight into the hands of the usual lobbying suspects. Her legacy may prove to be that copyright law in Canada is no longer an arcane little fiefdom for litigation lawyers and lobbyists who can go about their work in quiet obscurity. It is a public-interest area — and woe to any politician or government that gets too close to corporate, especially international corporate, interests without a sense of balance. The “Bulte Effect” will likely endure and grow. The bloggers are now effective and engaged in Canada — and the bloggers are generally anything but copyright maximalists. In fact, one of the world’s most successful and widely read bloggers, who happens to be a Canadian, is all over the copyright issue in Canada. That is Cory Doctorow, a founder of www.boingboing.net and a successful author in his own right. His blog is one of the world’s most popular Web sites.25 The Bulte Affair also showed that the bloggers’ work on copyright can quickly get into the mainstream media, which is what all politicians dread. With the Bulte fund-raising episode, this took only a few days. IV. THE NEXT BILL? Nobody knows when this will be introduced — or if anyone knows, nobody is saying. I would not be surprised if it were to come before the summer and indeed, quite soon. That does not mean it will go anywhere, but there is a lot of pressure to produce something sometime soon. The win-win scenario would be to introduce a bill soon but not to proceed with it. Unless the bill is brilliant and balanced at the outset, there is very little chance that the bill could get through the committee process — at least a properly devised and conscientious committee process along the lines I suggest below — in time for the election expected some time in the next year. If the bill is introduced, everyone can study it, debate it, and lobby to their heart’s content until the timing is right for proper consideration and passage of a good and balanced bill that keeps all reasonably deserving interests reasonably happy. Most of the pressure up to now for revision in Canada has come from the American music industry. With the Canadian music industry — pushed by the Canadian Indies — having a great time outperforming the rest of the world, there should be little sense of urgency because the sky is definitely not falling.26 The main issues that could be or, at least, should be in play are these: (1) To what extent will the Canadian government adopt a DMCA-type approach with respect to DRM and TPMs? On this point, I won’t say much because it has already been said many times over. Suffice 25 For a recent example of his attention to his home country, see http://www.boing boing.net/2007/03/30/ canadas_copyright_cz.html. 26 See http://excesscopyright.11blogspot.com/2007/01/sky-isnt-falling.html.

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it to say that the most important players in independent Canadian recording industry, some of Canada’s biggest stars — such as the very articulate Steve Page of Bare Naked Ladies, Steve Jobs, Apple/EMI, Canada’s most successful online music provider (Puretracks) — several European Governments, and, last and certainly not least, our friend Bruce Lehman, architect of the DMCA and WIPO treaties, have all come out and resiled from this approach. If any thing has become clear, it is that what the world needs now is protection from, and not for, DRM and TPMs. Hopefully, Canada will stand its ground on this issue — because time is on the side of the critics of mandatory protection for DRM and TPMs. I discuss this in greater detail in my other paper for this conference on Online Music.27 (2) Will the bill have a notice and notice provision, or a notice and takedown provision? The de facto “notice and notice” regime has worked well in Canada. The de jure “notice and take down” scheme in the United States has not worked out very well. It leads to countless examples of chilling effects, where perfectly legal material gets forced down with great regularity. This is well documented at the excellent Web site www.chillingeffects.org. Of course, it is ironic that the Viacom v. YouTube litigation28 between two giants could expose all of the policy quid pro quos that were allegedly made in the notice and takedown regime in the United States, which Viacom now seems to find inadequate and seeks to effectively undo through litigation. It would be unfortunate if Canada were to dive into this quagmire when the current system seems to work rather well. (3) Will the Government listen to the demands from a consortium of provincial education ministers 29 for a special exception for educational usage of the Internet? I have discussed this extensively on my blog, and others have taken up the issue and agree with me. This is what I had to say about it back on September 8, 2006: The educational exception for use of “publicly available Internet materials” is the copyright “cause célèbre” of the Council of Ministers of Education, Canada (CMEC). First of all, it is completely unnecessary. We have a March 4, 2004 Supreme Court of Canada decision (CCH v. LSUC) that extends the reach of fair dealing much further than CMEC has apparently recognized. The current 2005 edition of the CMEC flagship copyright publication, Copyright Matters!, written by CMEC’s Counsel, is devoid of any reference to, or even apparent consideration of, that landmark decision. And we have a deeply developed doctrine of “implied license” in intellectual property law that says that a user is entitled to use a product (in this case, publicly available Internet materials) in the manner intended — which clearly means browsing, downloading, saving, cutting, pasting, printing, and everything else we have all been doing for years in our offices, homes, classrooms, libraries, etc., whenever somebody posts something interesting. That’s the way the Internet works, and everyone who freely decides to post material without technical restriction knows it and probably intends it to work that way. If they don’t want their work to be used in this way, they can lock it up behind a pay wall or simply not post it. It would be very surprising if a Canadian court were to rule otherwise in respect of most of the uses that most of us — including educators, students, librarians and archivists — make of “publicly available Internet materials.” 27 28 29

Howard P. Knopf, Online Music 2007, infra this issue, Session II Part C, Copyright Issues in Online Music. Viacom Int’l, Inc. et al. v. YouTube, Inc. et al., Case 1:2007cv02103, filed Mar. 13, 2007 (S.D.N.Y.). Led by the Council of Ministers of Education, Canada (“CMEC”), http://cmec.ca/copyright/indexe.stm.

602 S E S S I O N V I I I : COP Y R I G H T Whatever may be the rationale for CMEC’s proposal, its potential effect is all too clear to those who see beyond the apparently “user friendly” rhetoric and the laudable goal of enhancing education and reducing costs and risks in the classroom. However, the proposal, if enacted, would almost certainly create a strong “a contrario” implication that everyone other than those in the educational community must now “pay” to use publicly available material — and Michael Geist reports that Access Copyright (a.k.a. “Excess Copyright”) is apparently trying to get Canadian Heritage to actually subsidize its work on a scheme that would help to pull this off. This initiative reminds one in many ways of the non-transparent back room activity at Canadian Heritage that led to the unsuccessful attempt to elongate the copyright term in posthumous works by up to thirty-four years. That was the Lucy Maud Montgomery Bill as it came to be called. When properly understood, that bill was defeated and I’m proud to have led that charge. It was another unnecessary solution in search of a problem — and the solution would have been a major blow to the public domain and benefit to publishers and, thus, Access Copyright. Once again, the educational Internet exception is a gratuitous and unnecessary initiative that will benefit Access Copyright — by sacrificing a relatively small amount of potential revenue from the educational community in order to confirm Access’s “entitlement” to a potentially huge amount of revenue from the rest of Canadians outside of the CMEC umbrella. CMEC may well have good intentions. And the Ministers no doubt genuinely believe that this is a “user friendly” initiative. But, in copyright law as in anything else, “The best laid schemes o’ mice an’ men gang aft aglay.” And to use another cliché, “the road to hell is paved with good intentions.” If the educators need any more legislated certainty, which is very doubtful, there are far more proven and precise formulations to give them what they want without collateral damaging consequences to the rest of Canadians. One could begin in no better place than the American legislation, which among other things, expressly recognizes that “multiple copies for classroom use” can be “fair.” (4) Will the bill deal with much needed broadening of fair dealing exceptions, such as the inexcusable and inexplicable absence of a satire and parody exception? Canada has some very unfortunate case law that holds that copyright law will generally trump any defense based on parody or satire. Parody and satire are techniques as old as literature itself that can be used effectively by many creators in all artistic genres. However, by its nature, parody necessarily involves an element of copying of the work being parodied. Canadian courts have consistently and regrettably refused to recognize a “parody” defense to copyright infringement.30 This is in stark contrast to the law in the United States, where the Supreme Court has found a blatantly commercial, and even offensive (to many), parody of the well-known song “Pretty Woman” to be a noninfringing fair use, on the basis that the parody was a “transformative” use for the purpose of criticism or comment, and that the transformative element was sufficient to supersede the commercial intentions of the parodists. This is particularly a problem for documentary filmmakers31 and composers. 30 Productions Av anti Ciné-Vidéo Inc. v. Favreau et al., 1 C.P.R. (4th) 129, reversing 79 C.P.R. (3d) 385; Cie Générale des Établissements Michelin-Michelin & Cie v. C.A.W.-Canada et al., 71 C.P.R. (3d) 348. The Michelin decision has been criticized with respect to its denial of freedom of expression and its refusal to allow constitutionally entrenched char-ter rights to trump non-entrenched rights under the Copyright Act. See J. Bailey, Deflating the Michelin Man, in In the Public Interest 140, (Michael Geist ed., 2005). 31 See Howard Knopf, The Copyright Clearance Culture and Canadian Documenta-rians (2006), available at http://www.docorg.ca/pdf/Dec3-06-20HPK%20White%20Paper%20Final%20November%2022%202006.pdf.

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In fact, it is said that the only serious opposition to a satire and parody exception in Canada comes from a certain Canadian music collective. Why would Canadians deny themselves a time-honoured right of free expression recognized by the Supreme Court of the United States? If it’s true that one entity (representing largely American interests who operate with a parody exception in the United States) is standing in the way of such a fundamental artistic freedom in Canada, that is inexcusable. The joke that Canada lacks a sense of humour is wearing thin. This is really becoming a very serious embarrassment to Canada and a real problem for Canadian creators. (5) Will the bill repeal the private copying levy scheme? It should — especially if Canada’s New Government wants to honour its policy declaration of March 19, 2005. This would also clear the decks for WIPO ratification by eliminating the acknowledged issue that the national treatment requirements of the WPPT would result in a doubling of the value of the levies and the potential outflow of hundreds of millions of dollars. I’ve noted many times that the scheme is completely self-contained in Part VIII of the Copyright Act, so it’s not hard to repeal it. Some minor adjustment would be needed to the statutory remedies provisions so that wrath of the RIAA through its Canadian counterpart does not descend on thousands of victims in the form of lawsuits based on statutory damages — which should be eliminated for personal noncommercial or educational activity. In any event, as noted above, Canada’s new government promised “to continue to allow an individual to make copies of sound recordings of musical works for that person’s personal and individual use.” II. THE PROCESS FOR THE NEXT BILL Once again, I’ve discussed this on my blog on November 20, 2006:32 If there is a copyright bill, and if it gets as far as committee hearings, it is imperative that it be considered by a balanced committee that represents the mandate of both of the sponsoring departments. The Heritage Committee alone cannot be entrusted alone with this task. Even with Mme Bulte gone, the institutional structure militates against both actual and apparent balance in the hands of that Committee alone. Even before Bulte, that Committee often gave the appearance of imbalance and of being too prone to influence by the Department of Canadian Heritage and the usual lobbying suspects. Indeed, the appearance probably reflected the reality. Clifford Lincoln may have appeared more balanced than Mme Bulte, but the result too often left much to be desired. The effective low point of copyright committee proceedings was back in the C-32 days in 1996–1997. The Bill that went into committee was a bad one — especially for the educators and broadcasters. But at least there were a few exceptions for users. When it came out of committee, it had exceptions to the exceptions that vitiated the exceptions. It was a dark day for users. And the process was not pretty. There are two structural improvements that would go a long way to ensuring both the appearance and reality of balanced and transparent committee hearings. They are cumulative and not alternative. 1. There should be a “special joint committee” that brings together all or at least the most knowledgeable and interested members of the Heritage and Industry committees. This would mirror the joint responsibility of the two Ministers and Departments. Such a Committee would have joint chairs. There is ample precedent for this approach. 32

See http://excesscopyright.blogspot.com/2006/11/parliamentary-committees-and-copyright.html.

604 S E S S I O N V I I I : COP Y R I G H T 2. There must be two or even three outside expert counsel to advise the Committee. Bill C-32 had only one outside counsel. For many reasons, the resulting product was a disaster for users. Likewise with the so-called “Bulte Report” in 2004. Fortunately, the Bulte Report had no immediate legal effect, though we may well see its influence infecting the forthcoming bill. In fairness to the counsel involved, we will never know for sure what transpired behind the scenes and whether the results were more because of or in spite of their work. This is simply too much responsibility to put on one person’s shoulders, given the polarization of policy views on copyright and even of expert opinions on legal copyright matters. For example, there is a great cacophony of divergent “expert” opinion on whether downloading P2P music files to a PC hard drive is legal. Another example is whether CCH v. LSUC protects, as fair dealing, much of the activity in the educational system that currently results in passive, massive and arguably greatly excessive payments of millions a year to Access Copyright and much of the internet related activity that CMEC is lobbying about. Whatever Committee considers this bill should have access to frank discussion of the range of opinions. That can only come from hearing all sides — not only from witnesses but from its own expert counsel. Frankly, I cannot think of any one person who is sufficiently knowledgeable, balanced, experienced, expert in both the common law and “droit d’auteur” perspectives, and who would generally be perceived to be both actually and apparently sufficiently neutral and independent to do the job of committee counsel on their own. It is no answer for the Government or Parliament to say that it will cost too much to have two or three counsel. How does the Department of Canadian Heritage justify twenty FTEs (full time employees) more or less to work on copyright policy? I suspect that this is probably more than any other government anywhere — and certainly far more than Industry Canada. Presumably, Heritage got the FTEs because copyright is important and because, as many believe, “copyright matters.” Well, if copyright matters, then the money will somehow be found and find its way into the right budget. There’s a huge surplus out there, and it just got bigger with the recent cuts. What is needed amongst the suggested two and preferably three special committee counsel is a real and perceived balance between common and civil law approaches, and between creators’, owners’, and users’ rights and interests. That is why there ideally should be three people. There should be one person who would have the confidence of creators, owners and collectives on the one hand and another who would have the confidence of users. We would likely need a third person to sit in the middle to facilitate communication and consensus. That person might be a sufficiently experienced, knowledgeable and neutral academic, or, if such a person could not be found, perhaps a retired judge with some good IP decisions under his or her belt. The committee counsel must have the experience and stature to be able to provide frank advice and guidance to committee members, and not simply serve as a passive research or drafting resource. Any relevant client or consulting interests regarding policy matters should be fully disclosed, not only to the committee but to the public. It will not be easy to implement these suggestions. There are a lot of vested interests who would love to replay Bill C-32 and go back to the Heritage Committee (and not a joint committee) and see it with only one outside expert counsel, as in 1996–1997. But we cannot allow that to happen. I have not forgotten about the official languages problem. That’s another issue and it may require a ruling from the Federal Court of Appeal and maybe even the Supreme Court of Canada. I’m working on that. However, whatever committee handles the

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copyright bill can temporarily solve the problem by agreeing, as many committees do, to accept written material in either official language and not demanding it in both — but unfortunately this has not been the practice of the Heritage Committee under the previous government. This is a real issue for less well financed interest groups (i.e. most user groups) who cannot afford the cost of translating essential documentation, which in many cases will exceed the cost of preparing or collecting it - even assuming there is time, which there invariably is not. Although this is a huge legal and political problem, it is not a structural one. It is simply a question of the committee following what many more expert than myself in official languages believe to be the law of Canada. As I’ve said before and will have to say again, “either” means “one or the other.” It does not mean “both.” BOTTOM LINE If there is to be a bill, we must have the best possible committee structure with the best and most balanced advice available. We must take the time to get this right. Currently, there are two lobby groups dominating and pushing the agenda. The one that appears to be in the most desperate hurry is CRIA, which has little or no connection with Canadian interests. The other most vociferous demandeur is CMEC, whose approach to copyright matters as reflected in Copyright Matters! is similar to that of Access Copyright as reflected in Captain Copyright, concerning which comparison Michael essentially agrees with me. Ironically, CRIA and CanCopy (the former name for Access Copyright) were the two big winners in Bill C-32. With all of these difficulties ahead, and the very real likelihood that the bill as expected cannot get through any committee process — fair and balanced or otherwise — before the next election, my judicial copyright commission project begins to look better and better. Even if there is a majority government after the next election, it may well wish to take the decisive step of calling for and properly constituting a judicially led commission. The current governance model of delegating arguably far too much law making power to the Copyright Board and leaving the ongoing development to be sorted out between two competing departments is not only far from ideal. In too many ways, it isn’t even working. Perhaps an independent and fully transparent judicial commission can come up with a better way. How should this be set up? We’ll go into that another day. Ministers may wish to take note. III. COPYRIGHT BOARD ACTIVITIES The Copyright Board rendered several decisions 2006. The most noticed, and probably most important, concerned Ringtones, which I discuss at some length in my other paper at this year’s Fordham Conference. There was also a lengthy and economically important decision concerning an inaugural tariff for background music payable to the neighbouring rights collective.33 There was a very interesting interim decision34 concerning commercial radio, which requires some background explanation.35 33 34 35

See http://cb-cda.gc.ca/decisions/m20061020-b.pdf. See http://cb-cda.gc.ca/decisions/m2006112 4-b.pdf. http://excesscopyright.blogspot.com/2006/10/cab-gets-socan-nrcc-radio-increase. html.

606 S E S S I O N V I I I : COP Y R I G H T On October 14, 2005 the Copyright Board gave SOCAN and NRCC an increase in the tariff payable by commercial radio stations amounting to about 30 percent by the Board’s own estimate. The hearing had taken place in May, 2004 — about eighteen months earlier. The Canadian Association of Broadcasters (CAB) — which was largely responsible for the establishment of the predecessor the Board to deal with the predecessor of SOCAN about seventy years ago — was very upset, calling the decision “aberrant and unreasonable” and referring, controversially, to the Board as “renegade.” After only one week of deliberation, the Federal Court of Appeal (FCA) on October 19, 2006 granted, with costs, a judicial review application by the CAB on the basis of “the inadequacies of the Board’s reasons respecting the quantification of the royalty increases attributable to both the historical undervaluation of music, and the greater efficiencies achieved by the industry through its use of music.” The FCA declined to reverse the Board on its alleged failure to take into account the “cumulative royalty burden” resulting from the “proliferation in the number of rights holders to be compensated.” This additional burden, of course, flows from the decision of Parliament in 1997 to recognize neighbouring rights. The decision was written by Mr. Justice John Evans, who is not only a judge of the Federal Court of Appeal but is the coauthor of the leading Canadian treatise on administrative law. He said: [16] The Board is entitled to the greatest deference in the exercise of its discretion to set a rate and, accordingly, the discretionary decisions lying at the heart of its expertise are reviewable only for patent unreasonableness. However. it must explain the basis of its decisions in a manner that enables the Court on Judicial review to determine on the basis of the reasons, read in context, whether the decision was rationally supportable. When an administrative tribunal’s decision is reviewable on a standard of reasonableness, its reasons are the central focus of a judicial review: Law Society at New Brunswick v. Ryan, [2003] 1 S.C.R. 247, 2003 see 20, at paras. 48–49, 54–55. [17] In my view it was not sufficient in the circumstances of this case for the Board to justify its quantification of the undervaluation by merely referring to the evidence taken as a whole. It is not enough to say in effect: “We are the experts. This is the figure: trust us.” The Board’s reasons on this issue served neither to facilitate a meaningful judicial review, nor to provide future guidance for regulatees. This appears to be a victory — for at least the time being — for the CAB. But the really interesting question is what effect this could have on the Board itself. The Board already takes considerable time — often well over a year — to render its reasons, which are invariably carefully written and which hitherto been considered close to “bulletproof ” in terms of appellate deference to rate calculation, review of the evidence, and the other matters in which the Board is presumed to have great expertise. Traditionally, the FCA has refused to get involved in such issues unless there is “patent unreasonableness” in the decision. Now, however, it seems that Board must now explain in greater detail how it gets to its bottom line. And in some respects, more detailed reasoning may open up even more possibilities for judicial review. Merely referring to the often voluminous evidence filed before it is no longer going to be sufficient. The new regime set forth by Justice Evans may also lead to the need for the Board to evaluate more critically and analyse the quality of the evidence it relies upon, and why it is being relied upon. Evidence at the Board is often less than convincing. It is sometimes hearsay by any measure and is sometimes submitted by persons whose independence as

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experts could be readily challengeable in a court of law because they have a close ties with the collective that retains them to testify before the Board. Below the tip of this iceberg is the fact that Parliament has chosen to largely delegate — some might say “abdicate” — a lot of power to the Board to not only determine terms, conditions, and rates of tariffs but to effectively make law from square one. This is in stark contrast to many royalty issues in the United States, which are spelled out in often gruesome detail. At the other end of the spectrum from broad lawmaking, the Board routinely rules on procedural matters such interrogatory disputes (the Board’s somewhat analogous procedure to discoveries — except that there is no oral examination). There are often significant disputes as to what is relevant or too burdensome. Almost invariably, the Board provides no or at most extremely brief reasons for its procedural rulings. Justice Evan’s decision will create a dilemma for the Board. There is already criticism that Board often takes over a year to render a decision. And the lead up to the hearing is often a couple of years. And in recent years, the Board’s panels have usually consisted of only three of its five members. The Chair of the Board, Mr. Justice Vancise, recently acknowledged in a Toronto speech that there are substantial delays. He said: I am not at all happy with the time it takes to render a final decision. I have tried to address the issue and I can assure you it will be resolved. If the Supreme Court of Canada can render a decision within six months of a hearing, there is no reason why this Board cannot do the same. My goal is to see that this occurs. The Judge certainly, and commendably, seems to be trying to help to move things along. Indeed, as I point out in my other paper, the recent CSI online music tariff decision took only about six months from the hearing to render. Of course, it’s not easy to compare statistics here. It’s an interesting question as to whether the Supreme Court of Canada is an appropriate proxy for a benchmark for pendency of Board decisions. But that is a subject for discussion elsewhere. The immediate question is whether the need for more detailed decisions could result in even longer delays in the release of decisions at the Copyright Board. Hopefully, the rather detailed CSI decision would suggest that the answer is no. It will be interesting to see what the Board will do about this particular CAB decision. Will the Board change the result — or will it reiterate its previous decision — but with more “adequate” reasoning? The interim decision, rendered on November 24, 2006, was necessary pending a re-examination by the Board, which is scheduled for June 26, 2007. The Board has made it very clear that the rates can only go up: The reasons for which CAB conceded before the Federal Court of Appeal that the three increases could be made may be irrelevant here. The consequences of these concessions, however, are clear. The only matter that remains to be reconsidered by a panel of the Board is how much more radio stations will pay.36 There were also a couple of relatively predictable judicial review decisions involving the Board. Ironically, CRIA, of all parties, took it upon itself to withdraw representation on behalf of its Canadian independent members in the CSI Online music file, ostensibly because of the burdensome interrogatory process. CRIA said: “When it became clear that

36

http://cb-cda.gc.ca/decisions/m20061124-b.pdf, at 7.

608 S E S S I O N V I I I : COP Y R I G H T the interrogatory process was too onerous to involve its smaller members, CRIA withdrew on their behalf.” The Board ordered CRIA to send the following notice to its indie members: CRIA recently opted to change the scope of its representation of its members’ interests in the forthcoming proceedings before the Copyright Board dealing with CSI’s proposed tariff for the reproduction of musical works by online music services. Subsequently, the Board ordered CRIA to advise you of the following: 1) In these proceedings CRIA has chosen to act only on behalf of (name of each member that CRIA represents). 2) As a result, CRIA will not be allowed to advance any argument or lead any evidence that relates to your situation in particular, or to the situation of any other member of CRIA that CRIA does not represent in these proceedings generally. CRIA went to the Federal Court of Appeal but the Court upheld the Board’s commendable attempt, under the circumstances, to ensure that the Indies were being thoroughly informed about how their interests were being dealt with at the Board. It will be interesting to see if the Board more extensively uses its confirmed powers under this section and more generally to be more proactive in the public interest or the interests of members of collectives.37 As I mention in my other Fordham paper this year, most of the Indies have now left CRIA and formed the Canadian Music Creators Coalition.38 In another interesting brief decision from the Federal Court of Appeal involving Access Copyright and CMEC,39 the Court ruled that the objectors (hundreds of them, for reasons which are far from apparent), did not have to answer particular interrogatories relating to a particular exception in the legislation and that the Copyright Board itself, not having made a final ruling on the point, could deal with later by the Board or on judicial review following the Board’s decision. Hopefully, this will empower the Board to allow objectors to refuse to answer dubious interrogatories more often. However, it could have the opposite effect by confirming that the Board’s normally cursory or even non-existent reasons for compelling interrogatory answers are even more bulletproof now from a judicial review standpoint. Another Board decision received little attention but involved much effort on the Board’s part. The Board took upon itself the challenge of shedding light on the meaning of what is “substantial” in the context of the use of an excerpt of literary work in a documentary film. The issue arose in the context of the Board’s mandate to issue licenses, when asked and if appropriate, where the copyright owner cannot be located. After ten months of deliberation, the Board issued a twenty-five-page split decision about the quotation in a film of eight excerpts comprising 325 words out of a 342-page book on World War II published in 1954 by Vantage Press, which is a vanity press.40 The recitation of the words comprised just over about five minutes of one forty-five-minute episode of a six-part series. All five members of the Board were involved in this decision, which is a rarity, if not a unique event. Three of the Board members thought the excerpts comprised a substantial part of the book. Two of the Board members disagreed. There was also a split on a procedural issue, which is whether the license can be given retro37

http://excesscopyright.blogspot.com/2006/1020/cria-rebuffed-from-bench_30.html. See http://www.musiccreato rs.ca. 39 [2006] F.C.A. 108. The actual style of cause is possibly longest in Canadian jurisprudence, listing — for unapparent reasons — it would seem almost every school district in the country. 40 Re Breakthough Films, Copyright Board, Mar. 6, 2006, available at http://cb-cda.gc.ca/unlocatable/ 156r-b.pdf. 38

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actively after the fact. That applicant finally did get its license retroactively — but only for five years. Unfortunately, the exercise will leave documentarians even more confused and uncertain than before over this important issue. There was some brief consideration of case law, some of which, in turn, is highly problematic.41 In fairness to the Board, it must be pointed out that this was not an adversarial proceeding and the Board may not have had the benefit of entirely satisfactory research.42 IV. THE CAPTAIN COPYRIGHT AFFAIR A lot of blog time, including my own, was devoted to Access Copyright’s ill advised and ill-fated attempt to launch its Captain Copyright campaign into Canadian K-12 schools. Access Copyright is roughly the equivalent of the American Copyright Clearance Center. This caped crusader was determined to educate kids — beginning in kindergarten — with the Access Copyright point of view. After looking at the Captain’s Web site, lots of folks quite decisively and correctly, in my view, characterized this not as education but as propaganda. It was full of not only doubtful and biased propositions but outright errors about copyright law — and what kids can and can’t do legally. Naturally, all of the problematic assertions favoured Access Copyright’s point of view and the overall proposition that almost everything needs permission and an Access Copyright license will solve the world’s problems, Some aspects of the exercise were simply comical — such as the Intellectual Property Notice and Disclaimer — which contains the following gem, amongst many others: Links from Other Websites … Permission is expressly granted to any person who wishes to place a link in his or her own website to www.accesscopyright.ca or any of its pages with the following exception: permission to link is explicitly withheld from any website the contents of which may, in the opinion of the Access Copyright, be damaging or cause harm to the reputation of, Access Copyright. In the event we contact you and request the link be removed, you agree to comply with that request promptly. If you link to or otherwise include www.captaincopyright.ca on your website, please let us know and create any link to our home page only. [Emphasis added] For a time, Access Copyright tried to defend this ludicrous linking policy and actually retained a law firm for further advice. But, in any event, Captain Copyright got taken down in fairly short order by Access Copyright. A blue ribbon committee was supposed to rehabilitate him and bring him back. But, for whatever reason, Access Copyright recently euthanised the Captain and his eulogy can be viewed at www. captaincopyright.ca. In all seriousness, mistakes do happen, and I seriously do commend Access Copyright for fairly quickly effectively admitting to a serious blunder. This is rare in the copyright world. If only the RIAA were as responsive, the music industry might get on with its life and the copyright world would be a better place. What are the lessons to be learned? First and most immediate is that Canada is 41 See, e.g., the Federal Court of Appeal’s unfortunate decision in Édutile Inc. v. Automobile Protection Association (APA), [2000] 4 F.C. 195, which conferred copyright on the two-column layout of a chart of used car prices. 42 See Howard P. Knopf, The Copyright Clearance Culture and Canadian Documentaries, available at http://www.docorg.ca/pdf/Dec3-06-%20HPK%20White%20Paper%20Final%20November%2022%202006.pdf, at 9, 23.

610 S E S S I O N V I I I : COP Y R I G H T different than other countries and that copyright “education” campaigns as used with some — though not much — subtlety in the United States and no subtlety whatsoever in Singapore and Hong Kong will backfire badly in Canada. The second lesson is that blogs matter. Canadian blogs took down the Honourable Sarmite Bulte, M.P. in the last election. And they also took down Captain Copyright. The activities of collectives, whether on the lobbying front or the propaganda front, are increasingly under scrutiny. Will the collectives become even less transparent as result? That is a danger — and some of their Web sites seem to be going in this direction. However, there are checks and balances that should hopefully keep some light shining on their activity — including the power of the Copyright Board — if it chooses — to ensure a degree of transparency, efficiency, and member democracy. If this doesn’t happen, legislation may be necessary. There are about three dozen collectives in Canada pulling in close to a half-billion dollars a year by my estimation. They do this through government-conferred monopolies that allow them to set tariffs that are enforceable by law. If that doesn’t require some transparency, I really don’t know what does. Another Access Copyright (AC) initiative started out with some excitement and promise. This involved a collaboration with Creative Commons on a public domain registry. Some notable people and organizations were involved, especially Creative Commons (CC) — both in the United States and Canada. I always wondered what was in this partnership for the CC organizations, since AC has no obvious particular expertise or comprehensive database of death dates to contribute to this effort. AC does have oodles of money — but I don’t know why a Wiki-based project would need to cost a lot of money. CC would appear to have much more to contribute than AC. On the other hand, the halo effect of a partnership with Larry Lessig, CC, etc., for Access Copyright was quite obvious. Anyway, I and others have waited to see what might materialize. So far, I’m not aware of any more specifics or publicly announced deliverables, or even a timetable. I’m confident that the project was conceived in good faith and with much enthusiasm, and would serve a useful purpose if it ever materializes. But so far, it appears to remain at the announcement stage. If it doesn’t show any signs of progress soon, it may begin to enter the realms of vapour ware.43 V. CONCLUSIONS AND PREDICTIONS My simplified and essentially positive conclusions about last year or so in Canada are these: (1) The Supreme Court rendered a helpful decision in Thomson v. Robertson and heard and gave careful consideration to the appeal of the Kraft decision. (2) The election brought in a Government that has made very good copyright promises — and the absence of any bill to date at least means that they have, at least not yet, explicitly broken these promises. (3) The election and the bloggers showed that Canadian politicians must look first to the public interest if they wish to be elected. Getting too close to corporate lobbyists — especially those not representing Canadian interests — can have fatal political consequences in Canada. (4) There was no bill. But no bill is much better than a bad bill — especially a passed and enacted bad bill. (5) The Copyright Board has hopefully begun to render its decisions quicker and will 43

http://excesscopyright.blogspot.com/262007/01/public-domain-registry-mclean-delivers.html.

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hopefully play a more active role itself in ensuring that hearings are conducted fairly and that the public interest and artists’ interests are more adequately protected. (6) A powerful collective made a big blunder — but effectively admitted it and relatively quickly corrected it. What should we watch for in the next year or so?44 (1) There will be a decision by the Supreme Court of Canada in the Kraft decision, possibly by the summer. (2) The next bill — if and when it comes —will be subject to intense scrutiny. The backroom deal days are likely over. Even if the politicians are willing to do deals, the bloggers are not willing to ignore such deals, especially if they don’t smell good. Given the current minority government situation in Canada, and strong possibility of another one to follow, there is a better chance of the public interest being protected. Introduction of a bill before an election — but without referring it to committee — would be highly desirable for all concerned. (3) The Copyright Board will hear two very important new cases: 앫 One involves the resumption on April 17, 2007 of SOCAN’s still ongoing attempt to collect money for use of music on the Internet. This has been going on since 1995 and has already been to the Supreme Court of Canada once. There are still a number of unresolved legal issues and the Internet is a very different place that it was in 1995. Overall questions will involve how many times and to how many collectives and how much must Canadians pay for the same thing — including Canadians who don’t use or consume music on or from the Internet in any way at all. 앫 The other main hearing will start on June 12, 2007. It is Access Copyright’s attempt to impose a $12-per-year fee on every kid in K-12 in Canada. This will be opposed by CMEC, even though that organization shares similar views on many copyright matters with Access Copyright. A big question to watch is the extent to which the 2004 Supreme Court of Canada decision in CCH v. LSUC that empowers a users’ right to engage in research and otherwise opens the horizons of fair dealing will be utilized by CMEC, which has so far shown no cognizance of it in its flagship publication, Copyright Matters!45 앫 The re-examination of the controversial commercial radio tariff will take place on June 26, 2007. 앫 A potentially interesting hearing about background music will take place on January 22, 2008. (4) Speaking of Access Copyright, the current round of post-secondary Access Copyright licenses expires this year. It’s interesting timing, considering what is happening at the Board on the K-12 front. Let’s see if the AUCC46 will try to use the CCH v. LSUC decision to significantly reduce the amounts payable and to use the savings to better purposes, such as putting more books in libraries and increasing the amount of information available to Canadian teachers, researchers and students, rather paying more and more times over for less material and less access. Let’s see whether CAUT47 does anything. (5) There is a vacancy at the Copyright Board. The appointment process has changed

44 45 46 47

http://excesscopyright.blogspot.com/272007/01/what-to-look-for-in-2007-in-canadian.html. See http://cmec.ca/copyright/matters/indexe.stm. See http://www.aucc.ca. See http://www.caut.ca.

612 S E S S I O N V I I I : COP Y R I G H T in at least one way. The vacancy was advertised on the Board’s Web site. As far as I know, it has not been filled. It seems to be taking a very long time to fill. (6) The Federal Court of Appeal will hear a judicial review application on the ringtones tariff. It will be interesting to see how the Court reacts to the objectors’ attempt to raise the issue of “communication by telecommunication” for the first time and if so, what the Court will do with it and what might be the impact on other major files. * * * Thank you very much, Howard. We will move on to Prof. Susy Frankel from Victoria University of Wellington in New Zealand. PROF. FRANKEL: I am going to talk about the New Zealand copyright reform. I would describe it as blatant discrimination on behalf of the United States. We are used to that in New Zealand because we are the small thing at the end. That’s why we do not like digital reform very much as well, related policy measures. The first slide lists objectives and policies of the reform. You can see the general idea of clarifying existent rights and exceptions in the digital environment. I put up my personal favorite paragraph from the overall object and purpose of the bill that is currently before Parliament. We have these long kind of political speeches that get printed at the front of the bill to state the policy. It is a bit longer than a sound bite. It is a bit unclear what it means, but it refers to “enhancing New Zealanders’ overall wellbeing.” “So we can think as we go through whether that is, in fact, something that occurs. There is a communication right and a relatively new definition of communication work. Many places in the United Kingdom and Australia and so on that have the communication right do not have the same communication work right. I do not want to spend too much time on that. There is a definition of “transient copying,” essentially the kinds of things that you would see in relation to transient copying. I think, in having this kind of specific definition, we are starting to move away from the technologically-neutral process that was highlighted at the beginning. There is the possibility of a technological trap here. I want to focus on the format-shifting right, the possibility that for private and domestic use a person can copy a sound recording that they own. This particular copying of a sound recording — I have paraphrased four or five sections of the proposed statute here — the idea is that you can make one for every device — so for your iPod, for your car, whatever form you want to copy. The sound recording cannot be borrowed and hired, if you are going to do this. Only one copy can be made for each device. The owner of the sound recording must be the owner of any copies. You cannot make one for your brother, your sister, your fifteen best friends, your uncle and aunt. Perhaps the most peculiar thing about this provision is the sunset clause. It is going to be around for two years. After two years, it is going to either have to be renewed by the legislative powers or by Order in Council, which, for those of you outside the British Commonwealth, is an executive power that does not need to go before Parliament. This is pretty much openly admitted to being the result of the long negotiation with the music industry — let’s have it for two years and see if the world caves in or not. TMP protection mechanisms: What New Zealand is trying to do here, I think, is pretty unique. I am not sure that the exact legislative framework, as it is drafted at the moment, entirely works. But it is before the committees of Parliament. There are lots of people making submissions, so some of the details of the wording may be tweaked. But the PROF. B. FITZGERALD:

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overall position is that TPM provisions are being created to allow copyright owners to take action against people who supply or manufacture devices. This first part is what exists in the law. It has been there since 1994. The bill extends the TPM prosecution provision to cover circumvention in all circumstances. Since 1994, it has only covered copying. Now it is intended to include communication to the public. The provisions stand in contrast to the United States and Australia, because there is no liability for the act of circumvention itself. The overall policy is that access controls can be circumvented, but not copyright controls, copying controls per se. The rationale for that is New Zealand allows parallel importing of many copyright goods. There are some provisions with relation to audiovisual works where you cannot parallel import until nine months after the release. So there is an opportunity for these things to show up in the theaters. The reason to allow circumvention is, therefore, you can parallel import the region-coded CD and you cannot play it — in New Zealand you can even buy Sony’s and everyone else’s DVD players with multi-region coding. The idea that there is no TPM protection over access controls is designed to uphold that policy. But the overall point is that we are also going to attempt to allow circumvention for permitted acts. We have British-style permitted acts rather than a broad fair use right. Where it is not possible for an individual to do this because of purported digital lockup, we can seek assistance of qualified people to do this. The qualified people, whom I have described as the elite, who are allowed to do this circumvention, are described as educational establishments, prescribed libraries, or archives. Those categories of people really reflect the categories of permitted acts that we are entitled to. I think the difficulty, and the reason I refer to these people as an elite, is that your standard research or private study exception for the individual who is outside of any of these — they have to seek the help of these people, regardless of whether they are involved with them or not. In particular, definitions of educational establishments, for example, might mean that if I am teaching a class, I can get the help of some technical person to allow me to circumvent. But if I was just doing this on my own, I could not. I will leave you with that thought. PROF. B. FITZGERALD: I am going to ask Judge Hughes whether he would like to make any comment. JUDGE HUGHES: Let me make a couple of observations. What you may have contrasted between Australia and New Zealand, on the one hand, and Canada, on the other, in the speeches that we have heard is that we do not get around to amending our Act very fast. There has been no discussion of copyright statutory amendment. To the extent that there are changes in the law, it comes about by the courts and by the Copyright Board. Elections simply are not won on amendments to the Copyright Act. The second thing is that there are very few pieces of true copyright litigation in the courts right now. There is the Copyright Board, which does a lot of work in the regulatory area and the setting of rates, but not in the courts. Last year I think there were just two honest-to-God copyright cases started, except for what we call Anton Piller,48 which is a civil search warrant sort of thing. When they come for a critical review before the courts, usually the so-called copyright owner has a lot of trouble proving their rights. So that seems to be the Achilles’ heel of that sort of thing when it comes to Anton Piller. I will just leave you with those thoughts. 48 An Anton Piller court order provides for the right to search premises and seize evidence without prior warning. Anton Piller KG v. Manufacturing Processes Ltd., 1976 1 All E.R. 779, [1976] Ch. 55 (C.A.).

614 S E S S I O N V I I I : COP Y R I G H T PROF. B. FITZGERALD:

Daniel? Thank you. Talking about the Copyright Board, we could have a hearing, looking around the room here. I just have time for a comment on one issue, namely on exceptions. What we have is, at least on the surface, a debate as to whether fair dealing is better than U.S.-type fair use for Canada. As you know — maybe some of the people in the room are not entirely familiar with the concept — fair dealing is a set of purpose-driven exceptions, such as criticism, private study, research, news reporting, and review.49 Those exceptions can be used as defenses by any user of a copyright work The Canadian Act also contains a number of exceptions that only apply to a specific class of users. There are not many of those, but a few — such as educational institutions, archiving, and museums. Then, of course, we have the famous “private-use” exception,50 which I think is of a different nature. There are those who argue that if we had the four U.S. fair-use criteria, all our problems would be solved. I want to challenge that view. First of all, if we were to import the four fair use criteria straight from Section 107 of the U.S. Copyright Act, that would mean telling our courts, basically “You must start from scratch,” which has a destabilizing effect. Actually, I do not think you could import all the hundreds of U.S. fair use cases since Folsom,51 simply because the context is so different. In addition, we have neither the First Amendment (though freedom of expression is constitutionally protected under Section 2(b) of the Canadian Charter of Rights and Freedoms) nor First Amendment versus copyright jurisprudence. And we do not have the same legal and judicial system — I think that is fairly obvious. Importing U.S. fair use would not solve the private-use issue. I have read so many times that “The U.S. Supreme Court in Sony52 said that private use is fair use.” I do not read the case that way. I read it as saying that sometimes it is fair use and that, by applying the “staple article of commerce” doctrine, the device manufacturer is not liable because a substantial number of uses are non-infringing. In addition, I am not sure which teachings from Sony on fair use — not on infringement, but on fair use proper – actually survived Campbell 53 and Grokster.54 It seems to me those cases have refocused fair use on transformative use. As a result, I am not very favorable to this idea of just photocopying Section 107, even though I know we can, because it is a government work in the United States, and we would not be sued. I think we should probably redesign some of our exceptions, but along the lines of fair dealing, perhaps the way Australia has done. I think distinguishing consumptive uses from transformative uses would be a very good place to start. But stay tuned, because fair use may be coming to Canada. I hope not. PROF. B. FITZGERALD: Thank you, Daniel. Susy, do you want to make a very quick comment? PROF. FRANKEL: Similarly to Australia and Canada, New Zealand has had debate about whether you have fair use or these permitted acts. The result of that sometimes is to try to craft these permitted acts in enormous detail. PROF. GERVAIS:

49 50 51 52 53 54

Copyright Act, R.S.C.1 985, c. C-42, §§ 29–29.2. Copyright Act, §§ 79–88. Folsom v. Marsh, 9 F. Cas. 342, 344–345 (Cir. Ct. Mass. 1841). Universal Studios v. Sony, 464 US 417 (1984). Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994). MGM v. Grokster, 545 U.S. 913 (2005).

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I agree with Daniel that to transfer American fair use is not the answer. But you have to be really careful about how much detail you put in. I would suggest that there is a little too much detail in Australia. The optimum might lie in a combination of the two, so you get some kind of guiding principles out of Section 107, but you do not get into, “Private use will be on this occasion, this occasion, and this occasion,” because then you would end up with the reverse problem. PROF. B. FITZGERALD: Especially in our new format-shifting provisions. Howard, you wanted to make a very quick comment in response to Daniel? MR. KNOPF: Yes, just a quick comment. Many in this room will be aware of a very important case we had in the Supreme Court in 2004, CCH v. Law Society,55 which took the word “research” in our fair dealing provision and interpreted it very liberally. The Court said the users’ rights should be given a large and liberal interpretation. It basically said that any research conducted by lawyers for their clients — and it could be by anybody else, presumably — even if it is done for commercial purposes (because lawyers want to make money), is fair dealing. In some cases, one can copy the whole of the work. In effect — now this is kind of confidential, so don’t tell anybody — we have the best of all possible worlds unfolding in Canada. We have a list of exceptions. Some of them are silly and stupid, and the Supreme Court just ignored them and went straight to the real issue. But we now have a wide-open research exception in Canada now. But even if research and other stated purposes are interpreted liberally, fair dealing is limited to the list of stated purposes. What is open is the list of criteria to determine “fairness,” unlike the four criteria in Section §107 of the U.S. Act. Professor Sam Trosow, whom some of you know, has come up with a very ingenious suggestion, which would cement this “best of all possible worlds” scenario, and perhaps expand it even further. He suggests simply adding to Section 29 (the main fair dealing provision in the Canadian Act) “fair dealing, for purposes such as the following,” and then leave it open to the courts to expand it even more.56 Finally, I wish we would get satire and parody into the Act, so we can have a sense of humor again in Canada. PROF. B. FITZGERALD: Thank you. I think the fair dealing for research and study is a critical one. The dissemination of research is an aspect of it that we also need to clarify a bit further. The Canadian court decision on it was very interesting. Anne, I might ask you to make a few comments, and then Christoph. PROF. ANNE FITZGERALD: In the recent Australian amendments, under the Copyright Amendment Act of 2006, to me one of the most striking sets of amendments were those that really expand the criminal infringement provisions. Going back ten years, we largely thought of copyright infringement as being a civil matter, compensable by damages. We did have a relatively small number of criminal infringement provisions in the Act. But what we have actually seen, progressively, in amendments, certainly within the last ten years, and now with the Copyright Amendment Act, is a massive expansion of the number of criminal offenses. For most of the offenses, there are, in fact, indictable, summary, and strict liability versions. The penalties that apply are really quite significant — a maximum penalty of $60,000 for individuals and $300,000 for corporations; terms of imprisonment for up to five years in the case of indictable offenses and two years in cases of summary offenses. Even the strict liability offenses can attract a penalty of up to 55

CCH v. Law Society of Upper Canada, [2004] S.C.C. 13 (Can). See, e.g., Samuel E. Trosow, Fair-Use in the Digital Age, in Global Issues in 21st Century Research Librarianship (Sigrun Klara Hannesdottir ed., 2002). 56

616 S E S S I O N V I I I : COP Y R I G H T $6,600. They are based on, essentially, an infringement notice system, so no need to prove the elements of the event. To me, this is really one of the most significant changes that has occurred. I think we have yet to fully understand what the ramifications of this will be. Considering that Australia has a fairly high level of copyright protection anyway — in fact, materials that would be protected under Australian Copyright Law would almost certainly not be protected in the United States — I am not quite sure what this is about. I do not think anyone has really taken a good look at this. Our Attorney General, when this was pointed out to him, basically said, “Well, look, we’ve already got criminal infringement provisions anyway. I don’t know what the fuss is about.” But they have gone from something like seven pages in the Act to seventy pages in the current Act. There is an amazing listing of provisions. I think copyright lawyers in Australia are going to have a very interesting time. Essentially, they have carved out a career for us for the next twenty years, prosecuting or defending these cases in the courts. There are lots of issues as to who is exactly going to bring these prosecutions. They are Commonwealth offenses. Essentially, the police forces are not at all geared up to begin going out and bringing large-scale copyright prosecutions. Interestingly, we have this huge artillery now lined up. This is the specter that people were, in fact, objecting to at the time that this bill was hastily brought before Parliament. A lot of the strict liability offenses relating to sound recordings and performances were, in fact, knocked out of the legislation as it went through Parliament in December, but there is still a vast array left. Essentially, in Australia I think the intention is to actually make copyright infringement move from civil to criminal. I think that we are probably the first jurisdiction in the developed world that has legislation in place now that takes copyright in that direction. Obviously, it says that a lot of the infringements were not really worthwhile bringing action against, in relation to the civil infringement, in terms of the amount of damages that would be attainable. But we are really going to go this criminal infringement route. I take some issue with Robert’s approach. I think that essentially the U.S.-Australia Free Trade Agreement is really a landmark event in our history. The aim of it and the real impact of it have yet to begin to be seen. We have some of these legislative amendments. But essentially it is, obviously, to much more closely integrate the Australian economy with that of the United States. I think that what this is really doing is setting Australia up as a very high-intellectual-property-protection country, with a move to the very, very easy method of enforcement, particularly by means of these strict liability offenses. PROF. B. FITZGERALD: Thank you. Christophe? PROF. ANTONS: I will be brief. I normally am not working on Australian copyright issues, but rather on IP reform in the surrounding Asian countries. However, let me throw in just a quick point on the issue that came up on fair dealing and fair use. That has been a big debate in the early stages of the discussion in Australia, and it is something that tends to come back every couple of years. We had a discussion in the context of the simplification proposal in the late 1990s to create a more broadly based fair use defense. It tends to get buried after a while. Basically, the issue seems to be for the government to choose between litigation and legislation. In the choice between these two, the government in this case again has played it safe and has amended fair dealing, as was pointed out by Brian and others before. It has given something to the private users — time shifting, space shifting, and so forth have been allowed — and it has significantly expanded the exceptions for educational use and

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cultural facilities and what are called in the Act “key cultural institutions.” So the educational sector and the private-user sector got something out of the bill. Perhaps the losers in the end are the Googles of this world. Google has already commented on the legislation, that it is not getting enough out of it. But as I said, it has been the choice between legislation and litigation. Certainly there is a lot of legislation, as Susy mentioned. The TPM schedule alone runs to twenty-nine pages. It doesn’t exactly make the new Act very readable. But that is, I think, the price to be paid. PROF. B. FITZGERALD: Thanks, Christophe. Susy, you had one quick comment, and then we are going to throw it open. PROF. FRANKEL: A brief comment on the Free Trade Agreement issue. It seems to me very clear that one of the reasons you get this type of extensive IP legislation in Australia after the Free Trade Agreement is the economic position of Australia. With this kind of Free Trade Agreement, Australia can fulfill any market access concessions that it negotiates in other sectors. The U.S. Free Trade Agreement model, where they give greater market access, in many countries raises the question of whether those countries can really make use of that access in a competitive way. For a developed country like Australia, it is clear that it can. The same applies to New Zealand. If we get more agricultural access to the United States, I am sure the government will give away our attempts to circumvent TPM protection and the like. Another point is that that region will change as a result of Australia’s Free Trade Agreement with the United States. We have a free trade agreement with Australia, albeit in a different form. New Zealand is probably the “biggest smallest” sufferer from the U.S.-Australia Free Trade Agreement. But all the Pacific islands around Australia will probably end up with a similar framework, whether we like it or not. PROF. B. FITZGERALD: Thank you. We will go to questions. I would ask people to please keep their questions short and succinct? QUESTION [Richard Pfohl, Canadian Recording Industry Association]: I was a bit surprised to hear Howard devote part of his remarks describing the legal landscape in Canada to attacking my association, including name calling. He did refer to us as the most influential lobbying force in Canada. I wish that were true. If that were the case, the legal landscape that Roger described would not exist. We would have ratified the WIPO Treaties back in 1997, when Canada signed on and said they were going to ratify them. I just want to clear up a couple of misstatements of Howard’s. One, he said that all of our leading independents had left CRIA. Actually, six of them left over an issue unrelated to copyright, the Canadian content rules with respect to airplay. They are at 35 percent now. CRIA wanted to keep them at that level but to encourage new artists. Those six independents wanted to raise the levels of Canadian content on Canadian airplay. What they said at the time in a letter to us was that they approve of what we are doing on copyright reform and they support our efforts. Howard is correct that one of those companies, Nettwerk, has since come out against digital copyright reform. A number of their artists have come out against, among other things, suing fans. But every one of the artists that Howard cited — including Avril Lavigne, Bare Naked Ladies, Steven Page, Sarah McLachlan — have made it clear that they do approve of suing the Groksters of the world. In fact, they filed an amicus brief in the Grokster case. They said: “Unauthorized file swapping threatens to destroy the ability of musical artists and others to sustain themselves economically and does irreparable harm to the ability of

618 S E S S I O N V I I I : COP Y R I G H T creators to protect the quality and artistic integrity of their works.” So they certainly believe in that. One other thing I wanted to address is what Howard referred to as the “Bulte affair.” Sam Bulte is a champion of the arts in Canada. In fact, the day after she lost, the Toronto Star, the leading circulating newspaper in Canada, came out with an editorial saying that Toronto has lost its leading champion of the arts. Apparently, Howard’s problem with this fund-raiser is that it was supported by creators and people who support creators. I was a bit surprised to see in his slides, frankly, pictures of my boss and his wife in there. Howard said that Mr. Henderson’s wife sang at the event. Mr. Henderson’s wife, for those of you who don’t know, is Margo Timmins, the lead singer of Cowboy Junkies. She sang at the event because she is an artist, because she supports Sam Bulte. I just want to say that I find it offensive to state that Margo Timmins is incapable of having a political opinion because she happens to be a married woman. MR. KNOPF: Nobody said that, Richard. PROF. B. FITZGERALD: I think we have given you sufficient time to make your comments. This is a conversation that could be usefully had outside the room. There is a question in the back. QUESTION: I understand there already is a format-shifting exception in Australia. Could somebody say when it went into effect and what its terms are? PROF. B. FITZGERALD: It was introduced in the recent amendments. Anne, do you want to comment on that? PROF. ANNE FITZGERALD: We have format shifting, device shifting, and time shifting. Format shifting is going from hard copy to digital, for example, copying newspapers into digital form. What I call device shifting is taking something that you bought, like a record, and making a digital version that you can play on your iPod. And then there is the time shifting. Essentially, those three are in the recent amendments. QUESTION: Daniel, has anybody in your country done an objective review of the American policy on fair use, to advise the Parliament as to whether it is reasonable thing to go to this further liberating step? MR. GERVAIS: I am discussing with people in this room a study that will be undertaken very shortly. But it seems to me that saying that adopting U.S. fair use will solve all our problems is a bit of an overstatement. It would probably create some issues. The U.S. fair use provisions are the result of a “very American” evolution, from Justice Storey’s famous pronouncements in Folsom in 1841,57 all the way to Grokster in 2005,58 with the 1976 Act59 in between. I don’t know that we want to import all of that history wholesale into Canadian jurisprudence, frankly. QUESTIONER: I was wondering if you reviewed it in the public document. MR. GERVAIS: In the public document, not yet. It is in progress. Let’s put it that way. PROF. B. FITZGERALD: Anne and Robert, do you want to talk about the Australian situation? PROF. ANNE FITZGERALD: The Copyright Law Review Committee in Australia, in its major review of copyright law simplification reference in 1998–99, actually did recommend that Australia adopt a U.S.-style fair use provision. Many major investigations into the issue have also made the same recommendation. The Attorney General had an 57 58 59

Folsom v. Marsh, 9 F. Cas. 342, 344–345 (Cir. Ct. Mass. 1841). MGM v Grokster, 545 U.S. 913 (2005). Copyright Act of 1976, Pub. L. 94-553, 90 Stat. 2541 (1976), §§ 101–810.

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inquiry into this last year, and they decided not to adopt the American-style fair use but to stick with the more specific set of exceptions. That’s why we have these breakout exceptions. But we also have another interesting one, which no one really knows the meaning of, Section 200(a)–(b), which brings the wording of the three-step test from the TRIPs Agreement60 specifically into our Act. PROF. BURRELL: Very briefly, I want to go back to something that Daniel said. I am quite skeptical about the benefits of fair use. But what I think was disappointing was that the Attorney General did not consider an intermediate option, like more flexible exceptions. The problem at the moment in Australia is that the exceptions are incredibly detailed, and often the exceptions are simply unusable because they are so detailed and so hedged around. So it was disappointing that the Attorney General’s department did not consider an intermediate option of the type that Daniel was referring to earlier. MR. GERVAIS: Yes, redesigned along existing lines. PROF. B. FITZGERALD: One of the things that we have to consider is the level of transformative use. We now have this new fair dealing provision for the purpose of parody and satire. That will go some way. That is an area where I think we would like to draw upon some of the doctrine under the fair use provision. But I would note that some people have questioned broad-scale adoption of it. Another question? QUESTION [Virginia Jones, Access Copyright]: I thank Howard for mentioning the Captain Copyright issue. Yesterday there was a lot of discussion about the need for education in schools. We tried. We received a lot of well-deserved criticism at the outset. We did make an honest attempt to try to rework the activities, bringing in a number of experts, consulting with a number of organizations, and inviting others to the table that eventually did not come. However, at the end of the day, what we learned from that exercise was that in order to have an educational campaign that is going to be successful and going to be well received, you need to be sure that you have all of the stakeholders at the table at the outset. I encourage anyone who is contemplating an educational initiative to keep that in mind as they move forward. Learn from the experience we had, which was negative in a lot of ways for our organization but a very good learning experience at the end of the day. If you can bring those stakeholders to the table, you can get a strong educational tool. Ours, unfortunately, is not being launched right now — it may not be launched in the future — because of the copyright reform situation in Canada and the fact that we are working with the educators now on a tariff proceeding that will take place in June. So there is a dichotomy there. MR. GERVAIS: This is not just a Canadian issue. If you look at the DMCA provision, the safe harbor for colleges and universities conditional on providing accurate copyright information,61 I do not think there is broad agreement as to exactly what fair use is — though the circulars and documents of the Copyright are, of course, accurate and perfect. 60 Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Marrakesh Agreement Establishing the World Trade Organization, signed at Marrakesh (Morocco), April 15, 1994 [hereinafter WTO Agreement], Annex IC, Agreement on Trade-Related Aspects of Intellectual Property Rights [hereinafter TRIPs Agreement or TRIPs], reprinted in The Results of the Uruguay Round of Multilateral Trade Negotiations — The Legal Texts, 1–19, 365–403 (GATT Secretariat, Geneva 1994). Article 13 states: “Members shall confine limitations and exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the rights holder.” 61 DMCA, § 512(d)(1)(c).

620 S E S S I O N V I I I : COP Y R I G H T But seriously, it is not easy to provide a document where everybody will say, “This is what copyright and fair use are.” It is not just a Canadian issue. PROF. B. FITZGERALD: Kim or David, you were both involved in the Australian process. You might have some different thoughts. Would either of you like to make a comment about that? PARTICIPANT [Kimberlee Weatherall, University of Queensland, Brisbane]: No, not really. I think most of the issues have been covered. One of the things I found most interesting about the criminal provisions is the fact that they really do not have anything to do with the FTA at all. They did not come from any of the provisions in the FTA. They came from a very domestic impulse to change our criminal law in accordance with general commonwealth criminal law policy. But they did all get revved up. This is one of the things that Robert talked about. When you have an FTA come in, when you have a series of strengthening provisions into a domestic situation, you are going to have a reaction against that, which led to a whole series of additional exceptions in Australian copyright, a broadening of the exceptions. In payback for that, in a sense, were the criminal provisions. So you had this kind of balancing and rebalancing and rebalancing occurring in this 200-page piece of legislation, not coming from the text of the FTA but as a domestic reaction to it. I think it is going to be fascinating to look at what happens in other countries, as you have that same sort of back-and-forward domestic process. I think it is something that the U.S. Trade Representative is perhaps not taking into account when negotiating these agreements. PROF. B. FITZGERALD: David, would you like to say anything? I am calling on my Australian colleagues because both Kim and David were involved at various levels and gave testimony before the Senate committee in relation to the bill. PARTICIPANT [David Brennan, University of Melbourne]: One perspective, I suppose, that I would have on the reform process in Australia is that the Attorney General, who really drove a lot of the exceptions discourse — now I am just speculating, but I think it’s fairly accurate speculation — took the view that if Australia was to have exported to it a lot of U.S.-style maximalist copyright protection, Australian citizens should, as a matter of principle, be able to enjoy the same exceptions to copyright as U.S. citizens, to try to maintain some symmetry. It seemed to me that his initial preference was to basically photocopy Section 107 and to import that into the Australian Copyright Act. But he was persuaded, for a variety of reasons that Daniel and Robert have expressed, that that would be undesirable, given the copyright tradition in Australia. So instead, the department seemed to look at U.S. fair use, particularly as it related to exceptions touching upon private individuals, to try to carve out black-letter law on equivalence for our purposes. You can debate whether or not they did that accurately and whether it is too technically detailed, but that was the main thing that was driving a lot of the new exceptions in Australia. PROF. B. FITZGERALD: Thank you very much. Please join me in thanking the panel.

VIII: COPYRIGHT PART B: THE RECASTINGSESSION OF COPYRIGHT AND RELATED RIGHTS IN THE EU

SESSION VIII: COPYRIGHT

Part B: The Recasting of Copyright and Related Rights in the European Union — What Should the EU Do? What Will the EU Do?

Moderator PROF. LIONEL BENTLY

Cambridge University Speakers PROF. P. BERNT HUGENHOLTZ

BARBARA NORCROSS-AMILHAT

Director, Institute for Information Law University of Amsterdam

DG Internal Market, European Commission (Brussels)

Panelists MIHÁLY FICSOR

ANDREAS P. REINDL

President, Hungarian Copyright Council; former Assistant Director General, WIPO (Budapest)

Executive Director, Fordham Competition Law Institute (New York)

THOMAS HEIDE

PROF. SILKE VON LEWINSKI

Berwin Leighton Paisner (London)

Max Planck Institute for Intellectual Property (Munich)

PROF. BENTLY: We have a very exciting session coming up. Our speakers are Bernt Hugenholtz from the Institute for Information Law at the University of Amsterdam and Barbara Norcross-Amilhat from DG Internal Market. Our panelists are Mihály Ficsor, Thomas Heide, Andreas Reindl, and Silke von Lewinski. PROF. HUGENHOLTZ: Good morning. The Institute for Information Law at the University of Amsterdam did a study for the European Commission, “The Recasting of Copyright and Related Rights for the Knowledge Economy.”1 We did not dream up that title; it was given to us by the Commission. I will present some of that Report. It is 250 pages. You can download it from our Web site or the European Commission’s. Let me give you a bit of background of that Report. 1 Institute for Information Law, University of Amsterdam, The Recasting of Copyright and Related Rights for the Knowledge Economy (Nov. 2006), available at http://www.ivir.nl/publications/other/IViR_Recast_Final_ Report_2006.pdf.

622 S E S S I O N V I I I : COP Y R I G H T We in Europe — people like Barbara Norcross and other colleagues at the European Commission — were extremely diligent in the 1991–2001 period, producing a set of seven copyright directives harmonizing European copyright law piece by piece, from software to the Internet and satellite and cable, in terms of protection and all sorts of other stuff in between.2 Those directives we like to call “the acquis communautaire.” That is what is there in European copyright law. In 2002 the European Commission convened a conference in Santiago de Compostela in Spain, where one of the questions that was raised was: Should we consolidate this; should we make these seven directives into a whole? There were certain inconsistencies that might justify such an operation. Should we update it? Should we do some new things? Professor Michel Walter presented an interesting paper there, with some suggestions.3 This was followed by a working paper by the European Commission in 2004,4 where the question again was formulated: Should we have a general copyright review in the European Union? The provisional answer was that there was no need for sweeping reform, but some updating and clarification could be useful. Then followed the inevitable consultation of stakeholders — the lobbyists, the rightholders, and the users — in 2005. They produced lots of input, which you can also find on the European Commission’s Web site, lots of suggestions for reform for new items to be looked at, et cetera.5 That whole package was more or less dropped into the lap of our Institute by the Commission. We were asked to do a study on a number of issues identified in the consultation and on the more general questions of recasting the European copyright acquis. Will there be an EC initiative, after all this preparation? That question will be answered by Barbara Norcross after me. (I’m not sure she knows yet.) What is in the study? A lot of stuff. We worked on it for a year. We really worked very hard, with a whole team of researchers. I cannot possibly discuss all this in the few minutes that I have. We looked at the acquis. We looked at inconsistencies and non-clarities. We looked particularly at the territoriality of rights. That still remains the cornerstone of European copyright law, even now, in 2007, with twenty-seven Member States. We have twenty-seven copyright acts, all having territorial effect. What that means is that if you 2 Computer Programs Directive, Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs, 1991 O.J. (L 122) 42; Rental Right Directive, Council Directive 92/100/EEC of 19 November 1992 on rental right and lending right and on certain rights related to copyright in the field of intellectual property, 1992 O.J. (L 346) 61; Term Directive, Council Directive 93/98/EEC of 29 October 1993 harmonizing the term of protection of copyright and certain related rights, 1993 O.J. (L 290) 9; Satellite and Cable Directive, Council Directive 93/83/EEC of 27 September 1993 on the coordination of certain rules concerning copyright and rights related to copyright applicable to satellite broadcasting and cable retransmission, 1993 O.J. (L 248) 15; Database Directive, Directive 96/9/EC of the European Parliament and of the Council of 11 March 1996 on the legal protection of databases, 1996 O.J. (L 77) 20; Information Society Directive, Directive 2001/29/EC of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society, 2001 O.J. (L 167) 10; Resale Right Directive, Directive 2001/84/EC of the European parliament and of the Council of 27 September 2001 on the resale right for the benefit of the author of an original work of art, 2001 O.J. (L 272) 32. 3 Michel M. Walter, Updating and Consolidation of the Acquis: The Future of European Copyright, Speech Before EC European Copyright Revisited Conference, Santiago de Compostela (2002), available at http://europa.eu.int/comm/internal_market/copyright/docs/conference/2002-06-santiago-speech-walter_en.pdf. 4 European Commission Staff Working Paper on the Review of the EC legal Framework in the Field of Copyright and Related Rights SEC (2004) 995, Brussels, 19 July 2004. 5 See http://forum.europa.eu.int/Public/irc/markt/markt_consultations/library?l=/copyright_neighbouring/legislation_copyright&vm=detailed&sb=Title.

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want to provide a service across the European Union online, for instance, you need to clear rights for twenty-seven territories. We also looked at certain specific issues identified by the stakeholders: 앫 Should there be a term extension of related or neighboring rights, particularly for producers of sound recordings? Our answer is no. 앫 Should there be an adjustment of the Term Directive taking into account the problem of expiration of copyright in respect of co-written musical works? The answer is again no. The term extension part is actually also a lot of fun. I can recommend that. I cannot talk about it, unfortunately. We don’t have time. 앫 Should we do something about management of rights in multimedia works? That, I think, is one of the more interesting parts of our study. 앫 We looked at orphan works in the context of the rights management problems. We suggest that indeed this might be a topic for some legislative activity, but possibly not at the European level immediately, because we are not convinced that the problem of orphan works has internal market dimensions justifying a harmonization initiative. But there is some scope for activity there. 앫 We also had to look at copyright awareness. Is there a need for sweeping copyright awareness campaigns in the European Commission? Again we say no, not really. There is awareness. There is also a lot of infringement, despite the awareness. The final part of our study, which I will present to you in the remaining minutes of this presentation, is about the future of harmonization and, more generally, the future of European copyright law. I personally think that is the most interesting part of our study, but you can pick whatever you like on this menu. We look at the pros and cons of harmonization. We have these seven Directives. What has it brought us? First, a look at the pluses, the upsides. There are a number of obvious benefits that harmonization has indeed produced, at a certain level of unification of national laws in selected areas: 앫 Computer software programs are protected roughly in the same way all across the European Union. That harmonization has been successful. 앫 Satellite and cable are regulated in largely the same way. You see the same rules popping up everywhere at the national level. 앫 The same, of course, is true for the term of protection. It is the same across the European Union, although there are some smaller differences here and there. 앫 Databases are protected by a sui generis right all over Europe, although not everywhere in exactly the same way. There are some divergences. But there is some unification. That’s admitted. 앫 There is the emergence of some common principles of what we could call European copyright law. There is an acquis out there. There is, unfortunately, very little European Court of Justice (ECJ) case law to support it. We have seen truckloads of trademark cases coming out of the ECJ mechanism, but very few copyright cases that interpret the harmonization directives. 앫 Another possible benefit is the export of EU norms to third countries. Depending on whether you really like these norms, you could also call it a negative. Reverse engineering you see in countries outside the European Union.

624 S E S S I O N V I I I : COP Y R I G H T 앫 Term of protection: Databases are protected outside of the European Union in a number of countries under the sui generis provision. 앫 There is the increased external competence of the European Commission in bilateral and multilateral situations. That is also based on the acquis, on this successful harmonization project. So those are the pluses. On the other side, a lot of minuses. You will see more minus bullet points than plus bullet points. That, of course, also reflects my inherent Dutch pessimism. But there are some serious downsides to harmonization: 앫 The cost of a complex and lengthy EU legislative process is not always fully appreciated. But it costs a bundle. It costs a lot of time. To go from green paper to adoption of a directive is a long and winding road and costs everyone, particularly in Brussels, a lot of headaches, a lot of energy, a lot of money. 앫 Even worse, after you have a directive, you need to transpose all the norms into national laws. That means changing the laws of twenty-seven Member States — changing them every time you have a directive in the books. What we have seen in practice over the last fifteen years is an almost nonstop process of revising the national laws of the EU Member States. That is very costly. 앫 Another downside is the very slow response time that the process of harmonization allows in response to technological development. That is quite obvious. It is a two-tier legislative process. 앫 Another big problem that we highlight in our study is that harmonization has left territoriality mostly intact. We still need to clear rights for twenty-seven territories, despite ten years of harmonization. 앫 Another problem that we also highlight is that harmonization always goes up, rarely goes down. If there is a certain level of protection in one country, that becomes the norm in all countries in Europe. You never see harmonization the other way. That means a tilting of the delicate balance between protecting rights and protecting user freedoms. 앫 Another problem: There is a lot of faux harmonization out there. There are twenty-one optional limitations in the Information Society Directive. That is not real unification. 앫 There is non-transparency in the legislative process that favors lobbies. 앫 There is a lack of quality control. Lots of costs and relatively few benefits, in our perspective. In the short term, we propose: 앫 Let’s not do any more harmonization, unless we really need it. 앫 Let’s clarify a couple of outstanding issues in “soft law.” There are a variety of soft-law instruments — recommendations, guidelines, interpretative notices or communications — that provide a quick response to technological development and that are certainly suitable for clarification and interpretation purposes. The downside: They have a limited normative effect, and there is no real obligation on Member States to transpose these “soft law” declarations. Then, of course, there is the democratic deficit that the European Parliament has underscored recently in

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response to the online music recommendation.6 The European Parliament and Council would be bypassed by more “soft law.” Whether it is politically feasible I’m not so sure. In the long term — and this is the very long term; this is the kind of long term that academicians do not fear, but politicians do — we believe that there is a need to really start thinking about a truly European copyright law, in the form of a Community Copyright Regulation that would preempt all twenty-seven national laws to a large extent. There is a Treaty basis in Article 30,7 possibly even in Article 295. There are a lot of advantages: 앫 You clean up the entire acquis. You can do away with the directives. 앫 You can increase transparency and legal certainty by clarifying norms that do not become fuzzy because of the implementation. 앫 You can remove the problem of territoriality just like that, which of course will affect collecting societies that are based in national monopolies. 앫 You can possibly restore the balance between rights and limitations. So what would a Community Copyright Regulation look like? This is just for thinking, for academic purposes. You could look at it in many ways. This is just a proposal: First of all, it would need to preempt national titles. In that respect, it would go a serious step further than existing regulations in the field of trademarks and design. It would provide for some basic economic rights, some basic limitations, based for instance on human rights, that are a common denominator in Europe, based on the effect on the internal market. But it would leave certain freedoms to Member States to regulate on top of that, some local exceptions. Moral rights, copyright, contract law, collecting societies — those things could be left outside, at least in the short run. These are just some thoughts that I would like to share with you. PROF. BENTLY: We are going to have a couple of minutes of questions for Bernt. QUESTION: I have just come from the trademark session, in which there is a complaint about a surplus of ECJ decisions with respect to trademarks and the conflicting nature and the over-referral of questions to the ECJ. Is there any explanation for why that has occurred? Is there an under-referral in the field of copyright? Are national courts feeling either more protective or more comfortable with their ability to base decisions on the IP? PROF. HUGENHOLTZ: That is a very interesting question, which we did not study in our Report. But it certainly merits some thought. It could be that the norms in the directives are a bit clearer than the norms that we have in the trademark sector. That could be one answer. Another answer could be that courts are less hesitant to interpret these norms them6 EC Working Document, Music Copyright: Study on a Community Initiative on the Cross-Border Collective Management of Copyright, available at http://ec.europa.eu/internal_market/copyright/management/ management_en.htm. 7 Treaty Establishing the European Economic Community, Mar. 25, 1957, 198 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-II) [hereinafter EEC Treaty], amended by Single European Act, O.J. (L 169) 1 (1987), [1987] 2 C.M.L.R. 741, in Treaties Establishing the European Communities (EC Off’l Pub. Off. 1987), available at http://europa.eu.int/eur-lex/en/treaties/dat/C_2002325EN.003301.html. Art. 30: “The provisions of Articles 28 and 29 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.” Art. 295: “This Treaty shall in no way prejudice the rules in Member States governing the system of property ownership.”

626 S E S S I O N V I I I : COP Y R I G H T selves. You do not always need to refer. You can just say, “This is our view of a certain European norm.” There is perhaps also another factor at play — but I am just guessing here — which is a certain lack of trust in the ECJ. Look at the famous SENA v. NOS case,8 which was about equitable remuneration in the neighboring rights sphere. That case has been bouncing up and down all the courts, from the lowest to the highest, in Europe. In the end, the ECJ said, “This is a harmonization notion, but you can do whatever you want at the national level.” That is not really helpful. So there are a couple of factors at work here. QUESTION [Howard Knopf, Macera & Jarzyna, Ottawa]: Bernt, I am looking forward to reading the Report. You talked about harmonization upwards. The Community famously harmonized upwards to life-plus-seventy, which was the German standard. Would it be legally possible, theoretically at least — I am not talking politically, but theoretically — if at some point in the future the Community said, “We made a mistake; we are going to go back to life-plus-fifty,” to do that? The reason I ask is that in the United States there is an issue. Under the Fifth Amendment in the United States, about taking of property, etc., it may not even be possible for the United States to roll that back without paying out, presumably, trillions of dollars in compensation to Microsoft and Disney and folks like that. Could the Europeans go backwards, at least in theory, on this? PROF. HUGENHOLTZ: In theory, yes. But I think you already indicated how problematic it would be. If, theoretically speaking, we would ever do this, then the legislature would certainly take into account the very long interim situation, where you would respect all the rights. But it is theoretically possible. QUESTIONER [Howard Knopf]: So there is no constitutional bar to it? PROF. HUGENHOLTZ: No. PROF. BENTLY: Tilman? QUESTION [Tilman Lueder, DG Internal Market, European Commission]: I have a question for Bernt. You have described very eloquently in your report how cumbersome and complicated the legislative process is in the European Union and how the result probably led to an ever-increasing, as you call it, ratcheting-up of protection. I was also very pleased to see that you noticed that in some areas it did relatively little for an internal market because, although some new rights were introduced under the auspices of harmonization, it did not lead actually to the free movement of any goods or copyrighted works that incorporate this. Quite to the contrary, by introducing a lending right that is not exhaustible, we have just created another trade obstacle that we did not have before. That is all very convincing, in my opinion. But then you go on to say that we should do more interpretative guidance, we should be doing more “soft law.” At the same time, you take up the trendy accusation that “soft law” is undemocratic and that “soft law “is somehow an abrogation of power by ourselves. The one “soft law” that is very trendy to criticize these days, of course, is the one piece of “soft law” legislation that actually does something for the internal market, because it introduces the freedom-of-choice principle and introduces the principle that you can choose a service provider across borders. Are you saying, on the one hand, that law is bad

8 Case C-245/00, Stichting ter Expoitatie van Naburige Rechten (SENA) v. Nederlandse Omroep Stichtung (NOS), [2003] E.C.R. I-1251; SENA v. NOS, [2003] All E.R. (D).

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because it is creating trade obstacles; but you are saying, on the other hand, that “soft law” is also bad, because once we apply the internal market principle, we have a democratic deficit? That begs the question: What possibly can we still do in this situation? PROF. HUGENHOLTZ: I pointed out the obvious. You know the report. We have been talking about it extensively. The report actually advocates “soft law.” So we are for it. But we see the risk. In fact, when we proposed the first draft of our study, we did not have the European Parliament’s position on the online music recommendation. You know very well that there is a political risk involved in “soft law.” I just wanted to point it out. I think you should go ahead with “soft law” — as far as it goes, of course. You cannot do a lot of new policies in “soft law,” but you can certainly base some interpretations on existing directives and give some more legal certainty to a market that really needs it, in a relatively short turnaround time. So I think it is an attractive proposition for the short term. I think it is good. PROF. BENTLY: Thank you, Bernt. Now we will hear from Barbara. MS. NORCROSS-AMILHAT: Thank you very much, Bernt, for that interesting alignment of all the ideas you have for the Commission to do. I am glad for the long-term one because that way I will be busy until I retire, and so I won’t have to worry about keeping myself busy Monday to Friday. I am supposed to say what the Commission is going to do. Of course, I don’t know. I do not think anyone particularly knows at the present time what we will do. As much as we do groundwork and data collection and put forward ideas, we at the working level are not the final deciders. Of course, that is much more political. Today I would like to take you through what we are doing on the impact assessment for the term extension for related rights. This is not necessarily a term extension, but what we are going to discuss. I just want to say that Bernt Hugenholtz and the University of Amsterdam have done a preparatory study for the Commission, but I have been informed that the view outside is that his study is actually the Commission’s view on all this. Just to make it clear: Of course, we thank him very much for his input and it will be useful. We have actually done a little bit of our own data collection, and we have been inviting comments from all sorts of people. It is not finished. We will take more comments anytime. Just get in touch with us. Bernt talked about the review process up until now. Let me talk about some of the details of the staff working paper.9 We received 139 comments. Seventy-six of those comments were specifically on the term. Twenty-five were in favor, twenty-nine against. But the twenty-five in favor actually do not include eleven papers from the International Federation of the Phonographic Industry (IFPI), national associations that duplicated their response. So we were fair; we counted it as twenty-five. We got a lot more arguments. I have tried to condense the arguments we received for an extension. I am sure a lot of them are very familiar, especially the ones that were perhaps

9 http://forum.europa.eu.int/Public/irc/markt/markt_consultations/library?l=/copyright_neighbouring/legislation_copyright&vm=detailed&sb=Title.

628 S E S S I O N V I I I : COP Y R I G H T already brought forward nearly ten years ago, when America was going through the Sonny Bono Act:10 앫 Other countries have extended — have strong local repertoire. 앫 Foreign competition — international protection — comparison of terms. 앫 Producers need longer to get return on investment — use revenue for A&R. 앫 Life spans increased. 앫 Losses due to piracy. 앫 Legal uncertainty (infringements, hamper developments of new business models). 앫 Longer protection outside the European Union — bad reflection on the importance of cultural heritage. 앫 Longer protection = greater incentive for creation and dissemination. 앫 Performers bring success to author’s work; author gets longer protection/>money. 앫 Performers have no control over use of their performances after fifty years. 앫 Film producers are assimilated as authors in some EU Member States. Some of the arguments we received against extension: 앫 Producers’ rights = investment; therefore, not to be assimilated to CR for creativity. 앫 U.S. protection = “work for hire” — comparison not easy. 앫 Ninety-five years introduced to align with EU harmonization to seventy years pma. 앫 In the United States, no performance royalties paid for non-digital radio; In the European Union, they are paid. 앫 World managed with different CR terms so far. 앫 U.S. special case — all countries with >50 years; only 5% of world music market. 앫 Fifty years enough to recoup outlay and make profit. 앫 Purpose of CR to stimulate creation; most artists affected no longer recording. 앫 Extension would assist high-profile and wealthy artists and their record companies. 앫 Artists who are also composers continue to get authors’ royalties. 앫 Record companies can reissue public domain works. 앫 Record industry tends to rely on popular back catalogue for profit, few new. Anyway, here we were at the end of 2004 with all these comments. We took them as fact of course, but emotional pleadings as well. The Commission has new rules now. We cannot, unfortunately, propose directives the way we want or do what we want. We now have to justify ourselves even more. We have a better regulation system. This means that we are having to do an impact assessment. The basis for all this is to promote competitiveness and growth and jobs and the economic and social cohesion within Europe. That is good on the one side, but we also have a very big influence on the cultural side. We have to be very attentive to cultural diversity. We have twenty-seven Member States, and they all have very strong attachments to their cultural identities. We have to be very

10 Sonny Bono Copyright Term Extension Act of 1998, Pub. L. 105-298 (Oct. 27, 1998), available at http://www.copyright.gov/title17/92chap3.html.

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careful to make sure that whatever we propose will be able to stimulate and keep that cultural diversity going. We did some independent data gathering. This has been going on for about a year. We have, luckily, had access to some very interesting studies, in addition to the IvIR Report, from Liebowitz,11 PriceWaterhouseCoopers,12 Akerlof,13 Allen Consulting Australia,14 Posner and Landes,15 DG EAC,16 and others. Those are a few there that I am sure many of you are aware of, notably, the one from Mr. Hugenholtz. The United Kingdom did a study as well, the Gowers Review, in which they reviewed all intellectual property, but there was a bit on term as well.17 We decided also to talk directly to stakeholders and all interested parties. We have had a series of interesting interviews, where we have gathered a lot of information. We are in a bit of a straitjacket in the Commission now, in that we have a certain model we must follow for these impact assessments. I can just tell you how it is going to be set out (unless, of course, it is changed afterward): 앫 We are going to start off by describing the value of the cultural Industries. I think, still, a lot of people do not realize that the cultural industries are a very valuable asset and do employ a lot of people, certainly in Europe. 앫 Set out as much as we can the actual financial situation of the cultural industries over the past few years. We are trying to access information. I think people are still going to come forward with information — we hope. 앫 Judge the European length of protection against what is happening elsewhere in the world. 앫 Look at the disparity between authors and performers. 앫 Look at cultural diversity. 앫 Look at the drivers. The drivers are things like the transition from the analog to the digital environment, the fact that music is global now, the fact that performers live longer and start creating younger. 앫 We have to increase the awareness of the importance of performers in the success of a work because of the media. I don’t know about you, but I certainly remember the person who sang the song rather than the author. I apologize to the authors. I should perhaps talk about the potential policy options that we have been looking at.

11 Stan J. Liebowitz, What are the Consequences of the European Union Extending Copyright Length for Sound Recordings, Study Prepared for IFPI (May 2006). 12 PriceWaterhouseCoopers, Music Collecting Societies: Evolution or regulation? (November 2005), available at ec.europa.eu/.../docs/replies/phonographic_performance_ltd__ppl_and_video_performance_ltd__vpl_en.pdf. 13 G.A. Akerlof, K.J. Arrow, T.F. Bresnahan, J.M. Buchanan, R.H. Coase, L.R. Cohen, M. Friedman, J. R. Green, R.W. Hahn, T.W. Hazlett, C. S. Hemphill, R.E. Litan, R.G. Noll, R. Schmalensee, S. Shavell, H.R. Varian, and R.J. Zeckhauser, The Copyright Term Exten-sion Act of 1998: An Economic Analysis, AEI-Brookings Joint Centre for Regulatory Studies (2003), available at http://www.aei-brookings.org/admin/authorpdfs/ page.php?id=16. 14 Allen Consulting Australia, Copyright Term Extension (July 2003), available at http://www.allenconsult. com.au/resources/MPA_Draft_final.pdf. 15 William M. Landes & Richard A. Posner, The Political Economy of Intellectual Property Law, AEI-Brookings Joint Center for Regulatory Studies (2004). 16 Directorate General for Education and Culture, Position Paper, Access Rights for E-Learning Content: Creating, Sharing and Re-using e-Learning Content (October 2004), available at http://ec.europa.eu/education/ programmes/elearning/doc/workshops/elearning%20content/position%20papers/luetke_entrup_monika_en.pdf. 17 U.K. Treasury, Gowers Review of Intellectual Property (December 2006), available at http://www. hm-treasury.gov.uk/media/6/E/pbr06_gowers_report_755.pdf.

630 S E S S I O N V I I I : COP Y R I G H T This is the fun part of it, because we can do what we like, basically, and then of course they will all be hammered by somebody else. The first one is do nothing; in other words, we leave it to the marketplace to get on. There are two or three pages in there where we have to say how it would all evolve if we just leave it. We can base ourselves on some of the studies we have and a bit of imagination. These are the ones that concern the Term Directive: 앫 We could extend by an extra forty-five years. (Some people will be happy in the room.) 앫 We could change it to just for performers and give them the fifty years they have or life. That way, if they live longer, they do not have to worry about seeing their performances being used in ways they do not like. 앫 We could have fifteen years’ increase times three, to get it up to the forty-five, but under conditions of registration or payments. In the European Union we do not have registration of copyright. But I did notice in the Gowers Review that one of their recommendations was to set up voluntary registration of copyright. So if somebody is thinking about it, why not? We could perhaps build on that, and perhaps also in that way, as happened apparently in the United States a long time ago — only 13 or 15 percent of copyrights were actually renewed. So the public domain wouldn’t suffer, perhaps, too much. 앫 Or we give a one-off extension of five years to cover digitization. We keep hearing about how expensive it is to adapt to the digital world. It has been a very costly exercise. 앫 We could extend only for new works. In other words, we keep the incentive for creation and we don’t extend works, because then there would be no incentive to create it anymore, since it already exists. Specifically for performers — because a lot of input came about how difficult their situation was in comparison to authors — we have suggestions for other policy options that we are putting forward: 앫 Strengthen moral rights. 앫 Improve social security coverage. 앫 Improve copyright contracts; “best practice” in the European Union. 앫 Introduce “use it or lose it” clause in national copyright contracts. 앫 Align term calculation to that for phonogram producers. The more interesting one is that we are now going to focus more on labor law and social security rather than intellectual property. We are going to have to discuss all this internally. I can assure you that the thing will change many times. Of course, we will have to come down to very small policy options in the end, and then one will have to be chosen. But I reckon that won’t happen before the end of the year or next year. Before the policy option is adopted, there will be more public consultation, so everybody will get a say. I invite you to visit our Web site http://ec.europa.eu/internal_market/copyright/ index_en.htm. There is an evaluation of the Information Society Directive that is ongoing this year as

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well, so a lot of the issues on limitations and exceptions and territoriality and other things will be dealt with in there. There is an embryonic IP rights strategy that is on the books for next year. That is, perhaps, our equivalent to your long-term thinking. That would be our long-term thinking. We will see if it coincides, but I don’t know. PROF. BENTLY: Let’s now turn to our panelists. Each has three minutes. We will start with Mihály Ficsor. MR. FICSOR: Thank you very much. First, I would like to say that, in general, I do agree with the description and analysis contained in Bernt’s study. But there are some aspects with which I do not agree. I think a difference of opinion is a very useful thing. It makes possible such nice things as horserace betting and discussions at Fordham. There is a basic issue the panel has to deal with — namely, the copyright policy, and perhaps the cultural policy, of the European Union. There are some elements that are not clear yet. I think there are three political options, basically. We have to answer the question which one we prefer. Should we choose the one that takes into account the traditions, the cultural heritage, and the rich creative capacity of Europe — and, thus, which is in favor of an adequate, if necessary high-level, and effective copyright protection? Should we be lukewarm, following a middle-of-the-way, reactive rather than proactive, line? Or should we rather follow the “Copyleft” trend, this very fashionable current, and thus should we join those who promote a lower level of protection. I don’t have too much time to comment on these options, but we have a saying in Hungary: Only dead fish swim always with the current. [Laughter] So my answer is yes, Europe, with all these considerations that I have mentioned, should be in favor of adequate and efficient protection — what Bernt might call a toohigh-level protection. But yes, if necessary, it should be high. I will mention three things in the report with respect to which I agree and three with respect to which I do not agree. First, I do agree that there are inconsistencies in the acquis. Second, I do agree there are exaggerations, for example, certainly in the Database Directive. Third, I do agree that an open system of limitations and exceptions would be more acceptable. And now the other list. First, I do not agree that the European acquis should be adapted to the Dutch law and, not to the contrary, with respect of temporary copies. Second, I do not agree that we should change the border line between private and public, extending the concept of private. Third, I am not persuaded by the arguments presented in the study concerning the question of extension of the term of protection of the rights of performers and phonogram producers. Otherwise, I am not persuaded by the Gowers Review either. I would like to mention specifically the issue of the term of protection of co-written musical works. It is the point where I would like to persuade Bernt to change a little bit the position, and, having read his report, it seems that this is not completely hopeless. I think that the problem is not negligible. The problem is actual. I think that we could eliminate the quite serious problems in the internal market caused by this confusion of the different bases for the calculation of the terms of protection of such works. I think that harmonization may be done in the spirit of the beautiful principle of proportionality, along the lines of the solution applied in the Term Directive regarding audiovisual works. PROF. BENTLY: Thank you. Let’s go to Silke next.

632 S E S S I O N V I I I : COP Y R I G H T PROF. VON LEWINSKI:

Thank you very much. In general, I do agree with Bernt’s main conclusion that it is better to not further harmonize copyright laws for the time being. I believe there are times that are not favorable to norm-setting, as we saw yesterday also in the general political context of the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO). The same applies to the EC, and maybe in countries worldwide. In general, I believe that in the area of copyright, discussions today are much too emotionalized and not sufficiently based on facts and legal arguments. In addition, it is not the best time for norm-setting, especially if you care for individual creators of works, because they find themselves squeezed between the demands of consumers to restrict copyright protection as much as possible on the one hand, and corporations that often take advantage of their stronger bargaining position and leave authors with most extensive assignments of their rights and limited payments, on the other side. If you care for creators, it may be wiser not to legislate now. Especially in the European Community, legislative activities in general have become quite cumbersome and difficult, given its increased size of twenty-seven Member States. In addition, the recent tendency of the European Commission to exclusively focus on the internal market is not very favorable to authors but mainly to major industries. Of course the Commission has to work on the achievement of the internal market but, at the same time, it also must take account of cultural aspects. Indeed, it is an obligation under the EC Treaty for EC institutions to take account of consequences of its measures in the area of culture, including cultural diversity. Also, as a long-term goal, I would not advocate much more extensive harmonization or even work towards a regulation. We have already seen that it is difficult to go through the process of adopting directives. More importantly, we should maintain to some degree our cultural diversity in the field of law because, in my view also, law is a reflection of different cultures. That is what Member States like to see. It is not necessary to melt all grown legal differences into one uniform law that replaces national laws. Member States ever more insist on the subsidiary character of EC versus national norm setting. Also, the competence of the EC for a regulation would have to be carefully scrutinized in every detail. Therefore, I do not agree with the goal of a regulation in the long term. Otherwise, very briefly, I agree with the very well-considered, thorough, and pertinent arguments of the study submitted against the prolongation of the term of protection for neighboring rights — even regarding performers, whose rights in practice are usually and largely in the hands of producers and other businesses. But I do not agree with Bernt’s proposal to introduce a non-exclusive list of limitations, because with an open list everything is allowed, so that there is no harmonization at all; in this case, you can simply forget about any harmonization exercise and spare your time and effort. An open list would mean the same as no list or other provision at all. So, it would not make sense: either you harmonize, at least partially (as does the Information Society Directive, even if some tend to deny this fact), or you leave it. One needs to be consistent. Thank you. PROF. BENTLY: Thank you. Thomas? MR. HEIDE: Thank you very much, Lionel. The report by Bernt’s Institute points out the territoriality of copyright as a key problem to overcome in creating an internal market for copyright-based goods and services in Europe. Is there another way than going through a long, drawn-out legislative

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process? What I want to do is just talk very briefly about the EC’s iTunes investigation,18 announced only last week. There is very little on the public record, so I won’t be able to say much. We do know that four Statements of Objections, which is a pretty serious instrument, have been sent to Apple and to the major labels. What is at issue? Territorial restrictions, based on copyright, allegedly carving up the European Union. We are not talking about all the other issues that are being thrown at Apple currently, such as fair play, digital rights management (DRM), interoperability, lack of portability, Apple’s pricing, or any allegation that Apple is abusing a dominant position. As I was saying, territorial restrictions are at issue. The concern is that consumers can only buy music from the online store in their country of residence. They cannot shop around. This means, to use competition law wording, that there is consumer harm. There is not great availability as to the various options in terms of music and they cannot get the best price. According to Commission officials quoted in the press, the concern is that an arrangement is being imposed on Apple by the record labels. Apparently, this arrangement, in part — I’m sure there are other aspects of it — means that Apple needs to account for royalties on a country-by-country basis. This is structured so that it will be easy for Apple to account for the royalties. Apparently, it is impossible to do this if consumers from other countries buy in a country where they are not located. From a competition law perspective, there may be something here if the European Union is actually being carved up. If it falls within the specific subject matter of copyright, it should be all right. If not, it may restrict competition, unless there is some sort of justification for doing this. A Commission official was saying in the press that in the vast majority of cases the majors own the rights across Europe. So it may be a bit suspicious in this case, and it may be the case that the arrangement is in place to actually carve up the European Union. So what will happen? It’s hard to say. It could end up in another long, drawn-out case, such as with Microsoft or Intel. But under the competition law — and this is the important nub of the point — there is also the possibility of reaching a negotiated settlement. That means the Commission could negotiate with Apple and the labels, come up with some “soft law,” and use that as a precedent for actually applying it to other areas and opening up other digital distribution markets. PROF. BENTLY: Thank you. MR. REINDL: I will be brief and essentially echo what the previous two speakers have said. Also from a competition perspective, I have great skepticism about the idea of going ahead and thinking about adopting a regulation to overcome problems of territoriality where it is not really clear that all the efforts will be worth the cost. As Thomas already said, perhaps greater focus should be put on the question of whether the markets can overcome the existing problems. Allowing parties to contract around existing territorial rights might be, in the end, a much more efficient way of creating a harmonized market in a much less costly way, rather than going through an exercise that tries to legislate all of the problem. 18 Press Release, European Commission, Competition: European Commission confirms sending a Statement of Objections against alleged territorial restrictions in on-line music sales to major record companies and Apple, MEMO/07/126, Apr. 3, 2007, available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/ 07/126; see also Stephen Winters, EC Takes Another Shot at Apple’s iTunes, iWIRE, Apr. 3, 2007, available at http://www.itwire.com/content/view/11064/53/.

634 S E S S I O N V I I I : COP Y R I G H T I will stop there. That leaves us one minute for questions. PROF. BENTLY: Fantastic. Are there any questions? QUESTION: This is directed to Prof. Hugenholtz and Mrs. Norcross. First, I happen to have noticed that there wasn’t a great deal of data in Professor Hugenholtz’s Report, nor in the Gowers Review. I understood that one of the things the Commission was looking for was data in the term area. I am wondering if there have been any developments in that area. PROF. HUGENHOLTZ: We often hear that we should provide more data. I think it starts here. There are stakeholders claiming a term extension. Should the person studying that claim provide the data to support that or to discredit those claims? No. I would say quite the opposite. I think that those claiming a term extension or those claiming that the issue of co-written musical works is burning should provide the data. Surprisingly, they have not. There is lots of stakeholder input, but very, very little data. We have actually asked the music publishers, “Show us the blood when it comes to the co-written musical works issue.” We didn’t get much. So I think this is a question of a rule of evidence, you might say. I want to make one other point. I didn’t say much about term extension for sound recordings. I just said that we are not in favor of it; we are not convinced by the arguments. Our main argument against it is looking at the justification, the rationale, of why we have related rights or neighboring rights for record producers in the first place. These were invented to act as incentives for investment in sound recordings. They are investment-based. The purpose of these rights is not to protect value in existing catalogues in perpetuity. There is no natural rights argument underlying these rights. That is our main point. We have many other points, economic and non-economic, but that is actually our main argument. MS. NORCROSS-AMILHAT: I do apologize. I was going to come around to the co-written works. It is being studied in a separate impact assessment from the one concerning term extension per se. I am not involved. There are another couple of colleagues doing that. Of course, they have a certain amount of data. I think you provided a certain amount, and they have been doing their independent data-gathering exercise as well. But I would actually agree, for once, with Bernt. We are a little bit disappointed also in some of the data gathering we have been trying to do. Some of the voices that are very strong for all these issues are not very forthcoming afterwards with robust data to justify some of the things they are wanting. So it has been a considerable effort to try to find data ourselves, from all sorts of sources. Data gathering is still a problem. If there is more data that can be brought in, we are still looking for it. PROF. BENTLY: Shira? QUESTION [Shira Perlmutter, Global Legal Policy, IFPI]: I will be very brief. But a couple of points. One is on this idea about needing to provide sufficient evidence to prove a case, whether it’s for term extension or any other change in the law. It is worth pointing out, first of all, that this is a relatively new concept, that anyone looking for a change in the law has to not only provide logical reasons for why it makes sense, but also actual factual evidence. I am not saying it is not a good thing, but it has not been done before. The question is: How much evidence is required to back up a logical claim, and of what nature? It is very difficult, especially on something like term extension, where you are talking about what the impact will be in the future, to pull together enough economic evidence.

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There have certainly been efforts. The Liebowitz Study was an example of at least an economic analysis looking at some actual data.19 So I will say that this is an issue that arises going forward, especially as the Commission uses evidentiary impact assessments as the basis for legal change from now on. What is enough evidence, and what type of evidence is required, especially in the copyright field? The second point is, I don’t think anyone in the recording industry is suggesting that there should be rights in perpetuity. But it’s very reductionist to say that rights in sound recordings are about nothing other than investment. There is a great deal of creativity that goes into the recording process. That is one of the reasons why in the United States there has been a determination to protect sound recordings through copyright. I would invite Bernt or anyone else to come and actually watch the recording process sometime and see the kind of work that goes into making a record. It’s not simply a question of coming up with money. But certainly the question of the mix of creativity and investment that is involved in IP protection is something that is the case for many other areas, not just sound recordings. For example, for films, for book publishing, we are protecting both things. The mix of creativity and investment is always there. PARTICIPANT: There was an amicus brief filed before the Supreme Court in the Eldred case20 by eighteen economists that calculated the additional incentive that you get by extending copyright from fifty years to seventy years after the author’s death.21 I think we all know what the evidentiary analysis of that was. So from an a priori logical standpoint there is none. PROF. HUGENHOLTZ: Just one more piece of evidence. There is a very good study by Lionel’s institute. Lionel is too modest to point it out, but I will point it out. It is part of the Gowers annexes. It is really good. PROF. BENTLY: A final point? MR. FICSOR: We have not spoken about performers. Actually, the rights of performers and phonogram producers are very much interwoven. Of course, in the case of performers, you cannot say that there are no human-rights elements involved. It cannot be said that they are absolutely wrong when they say that there is a certain discrimination between human beings who contribute to culture in a creative way — actually, people frequently buy CDs not on the basis of studying who the authors are, on the basis of who the performer is. I think that as soon as we can establish the justification for the extension of the term of protection for performers, the extension of term of protection of phonogram follows automatically since these two categories of rights should go together. PROF. BENTLY: Thank you, panelists. Thank you, audience.

19

See Liebowitz, supra note 11. Eric Eldred v. Ashcroft (formerly v. Janet Reno), 239 F.3d 372 (D.C. Cir. 2001), reh’g and rehearing en banc denied, 255 F.3d 849 (D.C. Cir. 2001), cert. granted, 534 U.S. 1126 (2002), order granting cert. amended, 534 U.S. 1160 (2002), 537 U.S. 186 (2003), reh’g denied, 538 U.S. 916 (2003). 21 Brief of George A. Akerloff, Kenneth J. Arrow, Timothy F. Bresnahan, James M. Buchanan, Ronald H. Coase, Linda R. Cohen, Milton Friedman, Jerry R. Green, Robert W. Hahn, Thomas W. Hazlett, C. Scott Hamphill, Robert E. Litan, Roger G. Noll, Richard Schmalensee, Steven Shavell, Hal R. Varian, and Richard J. Zeckhauser as Amici Curiae in Support of Petitioners, May 20, 2002, available at http://cyber.law.harvard.edu/ openlaw/ eldredvashcroft/supct/amici/economists.pdf. 20

SESSIONTREATY VIII: COPYRIGHT PART C: WIPO BROADCASTING AND INTELLECTUAL PROPERTY

SESSION VIII: COPYRIGHT

Part C: WIPO Broadcasting Treaty and the Politics of Intellectual Property Moderator DAVID O. CARSON

Associate Register for Policy & International Affairs United States Copyright Office (Washington, D.C.) Speakers MICHAEL S. KEPLINGER

JAMES LOVE

Deputy Director General, World Intellectual Property Organization (Geneva)

Director, Knowledge Ecology International (Washington, D.C.)

JULIE SAMNADDA

Member, Legal Service European Commission (Brussels) Panelists ANN CHAITOVITZ

SHIRA PERLMUTTER

Attorney-Advisor, Office of International Relations, U.S. Patent & Trademark Office (Alexandria, VA)

Executive Vice President, Global Legal Policy, IFPI (London)

TOM RIVERS

External Legal Adviser, Association of Commercial Television, Europe, Media Consultant (United Kingdom) MR. CARSON: The top priority this year for the World Intellectual Property Organization (WIPO) in the copyright area is discussions and negotiations on the WIPO Broadcasting Treaty (“the Treaty”).1 You couldn’t imagine a better group of people to talk about it than those we have here today. All of them have been very actively involved, on

1 WIPO Standing Committee on Copyright and Related Rights, Revised Draft Basic Proposal for the WIPO Treaty on the Protection of Broadcasting Organizations, SCCR/15/2, July 31, 2006, available at http://www.wipo.int/edocs/mdocs/sccr/en/sccr_15/sccr_15_2.pdf. See also Note, infra note 11.

638 S E S S I O N V I I I : COP Y R I G H T behalf of various governments or other entities, in the discussions in Geneva about the Broadcasting Treaty. Most of them have previously been introduced, so I will just very quickly introduce them. First, we have Mike Keplinger, Deputy Director General at WIPO, who is responsible for at least trying to shepherd this Treaty through to a successful conclusion. Prior to that, when he was at the Patent and Trademark Office as Senior Copyright Counsel, he was very much responsible for the U.S. position on the Treaty. Next to him is Jamie Love, from Knowledge Ecology International, who has also been actively involved in the discussions. Our third speaker is Julie Samnadda, who until very recently was with the Copyright and Knowledge-Based Economy Unit in DG Internal Market at the European Commission and was one of the primary people at the Commission with responsibility for the Treaty. She has now moved over to Legal Service, but she is still offering her services to her old unit with respect to the Broadcasting Treaty. Our panelists are: Ann Chaitovitz, who is at the Patent and Trademark Office and is serving with me as part of the U.S. delegation in discussions on this Treaty; Shira Perlmutter, of IFPI, who has also been actively involved; and Tom Rivers, an external legal adviser for the Association of Commercial Television, who has been one of the major advocates for the Treaty, and for what I think he would probably say is a strong treaty. So we have a variety of points of view. We are going to start with Mike Keplinger, who will give us the viewpoint from WIPO. MR. KEPLINGER: Thanks, David. The Broadcasting Treaty process, indeed, has a long history of negotiation at WIPO, for about ten years now. Hopefully, we are close to fruition on this work. I would like to describe briefly where we are now and how we got there. Serous negotiation on the Broadcasting Treaty began after the conclusion of the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT)2 in 1996 and the attempt to achieve an agreement on protecting audiovisual performers’ rights in 2000.3 The next issue that WIPO’s Member States turned to was broadcasters’ rights. For those of you from the United States, where the neighboring rights tradition is not followed, there are three traditional holders of neighboring rights: producers of phonograms, performers, and broadcasting organizations. The principal justification for the protection of neighboring rights is the protection of the investment that an entity makes in bringing this product to the market. Neighboring rights are somewhat similar to copyright rights, because this suits the nature of the object and the kind of protection that is required, but they are not exactly the same as the rights granted under copyright and may be slightly more limited in some respects due to the fact that they stem from a different source. To a certain extent, the United States and other

2 World Intellectual Property Organization: Copyright Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 65 (1997) [hereinafter WCT], and World Intellectual Property Organization Performances and Phonograms Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 76 (1997) [hereinafter WPPT], available at http://www. wipo.org. 3 World Intellectual Property Organization, Basic Proposal for the Substantive Pro-visions of an Instrument on the Protection of Audiovisual Performances to be Considered by the Diplomatic Conference, World Intellectual Property Organization Diplomatic Confer-ence on the Protection of Audiovisual Performances, U.N. Doc. IAVP/DC/3 (Aug. 1, 2000). After much debate, negotiators from over 120 nations met in the December 2000 Diplomatic Conference. Agreement was reached on nineteen of the twenty proposed articles that comprise the treaty. Consensus could not be reached on an appropriate manner with which audiovisual performers would transfer their rights to producers so as to allow producers greater ease in administering and licensing rights to the audiovisual production. See http://www.wipo.int/documents/en/document/iavp/index.htm.

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common-law countries have tended not to follow the neighboring rights tradition, relying more on copyright to provide the necessary level of protection. The rights of broadcasting organizations are currently protected under the Rome Convention,4 a 1961 agreement that was negotiated when cable television was just beginning to emerge and there was no sign of the world of satellites and the Internet. It has been felt for some time that that the Rome Convention needed updating to take into account new developments in technology and in the market. Also, at the time when the Rome Convention was negotiated, state broadcasting was the norm in much of the world and private broadcasting only existed in some countries. Things have changed a great deal since then. There is now competition in the broadcasting industry across Europe and most of the world. There is a need to adjust the rights of broadcasters to this new world of increasingly varied business models, and of increasing levels of technological sophistication that enable the transmission of information and communication to the public using an entirely new and broad spectrum of means. Broadcasting serves an important public interest. It makes information accessible to the public. In view of that, there is a social justification for the protection of the broadcasters’ rights. There is also, certainly, an economic justification. It costs money to develop the programming. It costs money to put together a broadcast day. It costs money to run a traditional broadcasting organization because of the investment in hardware and the electricity to power it. An examination of cable systems reveals much the same situation. Programming today is brought into the home not only by over-the-air broadcasting, but by cable-originated programming, which similarly requires a tremendous investment. Programming is also now brought into the home over the Internet through various means, by simulcasting, through Web-originated broadcasting, and the like. When this latest treaty process began, I was working in the U.S. government. The U.S. government was a relative latecomer to the idea of putting forward a broadcasting treaty proposal, as there was felt to be no need. In the United States broadcasters receive strong protection under national telecommunications law. At the international level, protection has been dealt with to a certain degree by the development of the Brussels Satellite Convention,5 which deals with unauthorized retransmissions of certain satellite signals. However, it was eventually felt that the United States should participate in this broadcasting treaty process. After other countries had made proposals at WIPO, the United States submitted its own proposal. The original proposals at WIPO for the protection of broadcasting organizations largely relied upon the WIPO Performances and Phonograms Treaty (WPPT) as a model,6 substituting “broadcasters” for “producers of phonograms,” and thereby sought to grant broadcasters essentially the same rights as phonogram producers. The United States examined the earlier proposals and found that they did not agree with their approach. Instead, the United States looked at what was required to be granted 4 International Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations, Oct. 26, 1961 [hereinafter Rome Convention], available at http://www.wipo.int/treaties/en/ip/rome/ trtdocs_wo024.html. 5 Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite. Done at Brussels May 21, 1974; entered into force Aug. 25, 1979, T.I.A.S. 11078. 6 WPPT, supra note 2. 7 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of

640 S E S S I O N V I I I : COP Y R I G H T to broadcasters by the Rome Convention and the TRIPs Agreement7 and decided to look very carefully at what additional rights should be provided on top of those agreements. The original U.S. proposal suggested that protection should be granted to any type of broadcaster — cable caster, webcaster, or traditional broadcaster — and that it should be at the level provided under the Rome Convention, with a few added rights to prohibit certain actions, but not including broad rights to authorize or prohibit. The U.S. proposal created quite a stir when it was introduced at WIPO, and resulted in a great deal of discussion about webcasting and how it should be handled. It was finally decided that webcasting should be dealt with in a separate instrument, not as part of the Broadcasting Treaty, and that the Broadcasting Treaty should be technologically neutral to a degree, in that it should apply to the protection of cable-originated programming, as well as over-the-air programming. Even then, there remained significant controversy. The Chairman of the Standing Committee on Copyright and Related Rights had drafted one text that consolidated all Member States’ proposals. It was a very complex document with dozens of options for protection. Even after two years of discussion, the Standing Committee was unable to simplify this document. Consequently, at its last meeting, the WIPO General Assembly directed the Standing Committee to convene two special meetings, with the aim of agreeing on a new text that would provide the basis for a Diplomatic Conference. The first meeting, in January 2007, began to move discussions on the Treaty from a rights-based approach towards a signal-based approach. That meeting achieved a great deal of consensus on the general direction and meaning of a “signal-based approach.” The Chairman was asked to prepare a draft working paper for the June meeting that would reflect this signal-based approach. The resulting Chairman’s paper was published and opened for comments on the WIPO Web site, and a significant number of comments were received. The Chairman’s paper essentially proposed to protect the active broadcast signal and provide certain levels of protection that went beyond the Rome Convention. It was geared towards technological neutrality and sought to work in the new environment and to accommodate existing and any new business models that may emerge. This is a summary of the process on the proposed Broadcasting Treaty to date. Thank you. MR. CARSON: Just one clarification, Mike. What I thought I heard you say might have suggested that you are still open for comment on the non-paper. Is that true? MR. KEPLINGER: No. MR. CARSON: I didn’t think so. Okay. Next on the list is Jamie Love. MR. LOVE: I am going to talk about the same Treaty. As we see the status right now of this Treaty discussion, it is a norm-setting exercise in search of a rationale. I think Michael covered a lot of the history of the negotiations. There is this idea that the whole set of digital copyright instruments is not complete until you deal with this broadcasters’ package. Some people refer to it as “the trinity.” They have these other two treaties; they have to add this. The initial focus was very much on taking the 1961 Rome Convention,8 a paradigm that is forty-six years old, and then expanding it with more rights, longer terms, technoTrade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_e.htm. 8 Rome Convention, supra note 4.

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logical protection measures (TPMs), and things like that. Then the United States got involved and wanted to have the Treaty applied to the Internet. Then there was some backlash against the treaty exercise. Should it be extended to the Internet? Is this a good idea? The Internet is an area where information is repurposed. It is where information is published in ways that are quite different than people were used to in 1961 or 1995, with radio and television. It is an area where people create their own content, where they create new works, where things appear in a completely different kind of format. So the question was: What is the harm to the Internet of taking extending the Rome Convention? There was a big debate on that. In the context of the negotiation, initially there was a very inclusive policy-taking process. So there is this very long, over 100-page draft, of this Treaty, SSRC/15/2, which can do almost anything. There have been attempts recently to narrow it down. Last fall, the WIPO General Assembly essentially abandoned the approach that had been taken before and endorsed the approach that groups like ours and a number of countries had taken, and that the U.S. government had actually taken in 2006, to have the Treaty only deal with the area of signal protection. The big debate is this difference between a rights-based approach, on the one hand, and a signal-theft approach, on the other. Under the rights-based approach — Americans aren’t really too familiar with it — the idea, following the Rome Convention, is that if you transmit information, if you schedule and broadcast information, you get an intellectual property right that should be on top of the copyright. It would be a layer of rights. If you wanted to use the work, you would need permission from both copyright owner and the owner of this related right. The main beneficiaries of the current proposal — because it has been extended from television and radio to cable companies and satellite TV — are the companies that own all these channels. A small number of companies own quite a few. Time Warner has a whole series of channels, as do Viacom and News Corp. There are these big companies. They would get this intellectual property right and be able to share in some of the money that collection societies get in some areas by scheduling and distributing the content. The basic critique is that the layering of IP rights increases transaction costs, it creates more orphan works, and it makes it more legally risky to repurpose works. I think now a lot of us think that the value that is being created in the knowledge economy is by people collaborating, by people sharing things, by people repurposing things. You have this 1961 paradigm and you have this religious commitment to extending intellectual property rights further and further, as kind of an unthinking mission of the agency, at a time when the entire business model for using information is dramatically changing, the technology is changing, and the costs of transmitting information are falling through the floor. The value that has been created is being created by people reusing, repurposing, and sharing works. This runs against the grain. This is the wrong way to think about where we are going. What has emerged is a school of thought that what the people working on this Treaty need is an exit strategy. The negotiators have worked on this for so long, and they have their reputations and so much work involved, that they have to produce something. They can’t just say, “Whoops, we made a mistake for the last seven or eight years by working on a treaty that is not really needed.” Now there is a search for things that can make the Treaty acceptable. One idea is let’s make it an antitheft treaty. We are actually some of the people saying

642 S E S S I O N V I I I : COP Y R I G H T that. They are claiming it is about piracy because they do not want to talk about the intellectual property rights. They want to talk about piracy. We say, “Fine, let’s make it an anti-piracy treaty. Let’s make a treaty that makes it illegal to use HBO without paying for it or use cable service without paying for it.” We are all standing up and saying, “Yes, we are all for anti-piracy.” Of course, it is already illegal to do all of those things everywhere, not just in the United States. There is nowhere where it is legal to use pay services for television or radio without paying for them. It is protected both by copyright and the kinds of regulatory regimes that Michael talked about. It is considered stealing in some places, before you even get to the issue of copyright infringement. To the extent that information goes from television to YouTube or something like that, we have something called copyright, which protects content in those circumstances. To the extent that the work is not protected by copyright, that is because it is a good idea not to protect the content by copyright. We actually have exceptions and user rights for a reason. It would interfere with that. We hear the complaint from the broadcasters that “The copyright owners’ work is being pirated, but they don’t care. We care, and we want to sue. So we want a treaty that allows us to go around suing people, even when the copyright owner doesn’t really care.” Sometimes it is just a business problem. They have to get the right from the copyright owner to sue people, as part of a contract or a license that they need if they want to broadcast the work for commercial purposes. They do not want to have to negotiate that. They want the Treaty to basically give them the default position that they have these kinds of legal rights. So what you have are politically powerful broadcasters, people that put politicians on TV; and you have WIPO negotiators, who are afraid of people on radio and television shows because they think they will say nasty things about them when elections come. They have an extraordinary amount of political concerns. They have almost zero rationale for the basic need for the Treaty. The business models are changing. Nobody knows what the technology looks like. All of the piracy issues are already addressed through instruments like copyright and the WCT and the WPPT. The copyright owners, generally speaking, have opposed the Treaty, but a lot of the copyright owners are conflicted. The main trade associations have big corporate members that wear many hats — they are ISPs, they are broadcasters, they own cable channels, they do recorded music, they do a lot of different things. So it is a complicated conversation with some of the content owners. But basically the copyright owners have generally opposed the Treaty. Every consumer group, every technology group — now the tech sector is coming in and getting involved in this dispute. It would be our hope that we could find some meaningless treaty that we could move through WIPO to be an exit strategy so we can move on and do some other more meaningful work within the WIPO context. MR. CARSON: Julie, has Jamie covered everything you were going to say, or do you have anything to add? MS. SAMNADDA: For one and a half years, I was involved in the Broadcasting Treaty on behalf of DG Internal Market, which represented the European Commission in the negotiations. I moved, as David said, to the Legal Service a month ago, where I now do something very different, anti-trust and mergers. However, in the one and a half years that I was involved in this treaty-making process with Tilman Lueder, as one of a team of two, we made a great deal of progress, thanks in part to the efforts of Mrs. Rita Hayes, whom we found, as the Deputy Director General, a

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very lovely person to work with. We very much hope that Mike will be able to follow in her shoes, and I am sure he will. It started off, as you know, as an attempt to update the rights of broadcasting organizations, as per the Rome Convention, which only deals with wireless means. WCT and WPPT added the Internet for other groups of right-holders. Broadcasting organizations have always been the last in the chain, along with performers, who have not had the full-blown rights to cover the Internet. As Mike explained, this process has come to a halt. We are currently focusing on the rights of traditional broadcasting organizations. I would like to remind you that the TRIPs Agreement provides, in Article 14(3), that broadcasting organizations should have a minimum set of rights: fixation, reproduction, and rebroadcasting. Again, it only covers wireless means. If you fail, as a Member State or contracting party to TRIPs, to provide those rights, you should give the owner of the relevant copyright the ability to act in the shoes of the broadcaster. The European Union represents twenty-seven Member States when we negotiate within WIPO. The European Union as an institution does not have a vote. We are a member of WIPO, but we do not have a vote. We bring with us, though, the twenty-seven votes of our Member States, and of course the accession states, whoever those may be at this time. The last attempt at a treaty within WIPO failed in 2000. The Diplomatic Conference on the Audiovisual Protocol was a pretty dismal failure. The repercussions of that failure are still being felt within the institution that I represent here today. The blame as to who has responsibility for that failure goes backwards and forwards. I am told it is the European Union. Within my institution I am told it is the United States. One major lesson we ought to learn from what happened in 2000 is that in the future all treaties would be adopted by consensus. That means that if anyone puts their flag up to object, that is not consensus — the treaty fails. The European Union put their flag up in 2000 because we were fed a bitter pill that we could not swallow — or we were outmaneuvered, as Mike would say. There is a question of who is to blame. The lesson is everyone has to agree for there to be a treaty. Europe is made up of three distinct parts: Northern and Central Europe, Southern Europe, and our new entrants in Eastern Europe. Our Northern and Central European Member States are firm supporters of the multilateral treaty-making process. They are firm supporters of WIPO. They would not like to see it fail as an institution. Our Eastern European Member States would like a treaty very much, not necessarily for the same reasons. Before their accession to the European Union, they had not been traditional donors and supporters of WIPO. The Northern and Central European Member States have doubts about the bilateral treaty-making route. Southern Europe is more sanguine about the current process. But, on the whole, we are all supporters of WIPO as an institution and we would not like to see it fail. Who are the players? In no particular order, we have the European Union, the United States, Japan, India, Brazil, South Africa, and Nigeria. Others include Russia and the Islamic Republic of Iran. Japan is firmly aligned with the European Union. They want a treaty. They are not happy with the Chairman’s paper — or non-paper — largely because it diverges from the exclusive-rights approach. Japan is a civil-law country in the area of copyright. We see them as a firm supporter of our position. India is a difficult proposition. India is a common-law country. It does not have common-law copyright per se, it has statutory copyright, but their tradition is entirely common-law copyright-based. India gives rights to broadcasters basically through copyright. It is my personal opinion that the views of the Indian delegation in opposing a

644 S E S S I O N V I I I : COP Y R I G H T treaty that would update the rights of broadcasting organizations to have a defensive right over the Internet is largely based on the fact that this might give broadcasters at a national level greater protection than they would like to have as a country that is overseeing a burgeoning broadcasting industry Brazil is another major player in this process. Brazil is a proponent of Articles 2, 3, and 4 — the infamous, from the point of view of certain delegations, Articles 2, 3, and 4 — and SCCR/15/2. These are the so-called public-interest articles, which include a reference to the Cultural Diversity Convention;9 a reference to competition, in similar terms to that of Article 40 of TRIPs but not in identical terms; and what I call a “wrecking amendment,” the access-to-knowledge clause, which is drafted in such a way that, if it were to be included as an article in any future treaty, it would allow the rights of the broadcasting organization to be overridden in the interest of access to knowledge. Briefly, who are we trying to protect, and what is the problem? What exactly is a broadcasting organization? Does it include a channel provider? A broadcasting organization, as we understand it in the European Union, is a public broadcaster or a private broadcaster in the traditional sense — the one that provides the infrastructure, et cetera, and emits the signal for broadcast to the public. Lately, the term “channel provider” has been coined to include the likes of the Disney Channel, Paramount Channel, and Comedy Channel. That has come as a bit of a surprise to us. I would have thought they would be content providers. They would not be, as we would consider it, similar to the likes of the BBC or TF2, which have a considerable infrastructure and emit a signal for broadcast to the public, even though it might be done via an intermediary. What is the problem? The problem for us, why we would like to update the rights of broadcasting organizations, is primarily to prevent the simultaneous retransmission of the broadcaster’s signal on media other than the media by which it emits this signal into the same market served by the broadcast. To wit: Think about the English Premier League. When it is broadcast over certain channels, the signal is picked up and it is retransmitted back into England via, for example, Japan. That is the problem. Unless they are able to protect the signal that is deflected over the Internet and retransmitted back into the main market, they would not be able to recoup the investment that is spent in acquiring the rights for such things as sports events. MR. CARSON: Thank you, Julie. Let’s start by asking whether any of our three panelists would like to respond to anything that they have heard from the three speakers. Tom, anything you want to say? MR. RIVERS: The title of the panel is “Politics of Intellectual Property,” but I am not sure that what we have heard so far really gives the audience a sense of what is going on in terms of politics. I think part of the problem is that WIPO itself, in some sense, is suffering from psychosis. There is a bipolar relationship between consensus and content. That is to say, the more you have of one, the less you can have of the other. You can have a lot of consensus and little content, or you can have a lot of content and little consensus. WIPO is stuck in the middle there, trying to resolve that. To start with, at the beginning of the process, if you look at this in historical terms, we 9 UNESCO Convention on the Protection and Promotion of the Diversity Cultural Expressions, Paris, Oct. 20, 2005, available at http://portal.unesco.org/en/ev.php-URL_ID=31038&URL_DO=DO_TOPIC&URL_ SECTION=201.html.

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had nine full-length treaty proposals, all of which, including the proposal by the United States, essentially were rights-based. Mike obviously suffered a momentary amnesia about the content of the U.S. proposal, which I have here. The original U.S. proposal included seven exclusive rights and went beyond the Rome Convention. It is not true to say that the U.S. proposal was confined to Rome. It updated Rome in ways that the broadcasters thought were important and valuable. So there were nine full-length proposals, all of which were rights-based. If you now look at the Chairman’s non-paper and the submissions by the fourteen countries that have responded to the Chairman’s non-paper, the Chairman’s non-paper cuts down the exclusive rights to three. Of the fourteen countries that have made submissions, four are rights-based (the European Union, Japan, Korea, and Colombia). There are four submissions that are clearly hostile to any rights-based content. Those are the proposals of India (because essentially the rights that broadcasters are to have under the Indian proposal are restricted to derivative rights, that is to say rights acquired from the content owners); Brazil, which would delete all rights provisions (essentially, the exclusive rights provisions in Article 8.1 of the Chairman’s non-paper); Iran; and Indonesia. Again, simply looking at the politics, you have four major players that are saying the Treaty should be rights-based and you have four significant players that are saying there should be no rights. How do you achieve consensus between those two positions? — which is what the Chairman has said he will do. He has put out his non-paper, which provides for both a rights-based approach and for an approach that is not rights-based. There are now eight submissions, four of which go in one direction and four of which go in the other direction. I am here representing broadcasters. The question I need to ask myself is: Supposing there is consensus, so that there is agreement within the terms of the General Assembly Resolution to recommend the holding of a Diplomatic Conference. Is it likely, on the basis of the proposals that are on the table, that there will be anything more than vacant space actually in the Treaty? To that extent, Jamie and I see the same problem. We probably do not see the same solution, but we certainly see the same problem. MR. CARSON: Let’s give the others a chance to speak. Shira, you wanted to say something? MS. PERLMUTTER: I would like to start by clarifying that, in fact, copyright owners have not opposed the Treaty. What the copyright industries have said, speaking as a coalition, is that they support the concept of a treaty and they would support a treaty if it were gotten right. By “gotten right” we mean something that provides broadcasters with the protection that they need in the new digital environment, while not having a negative impact on the rights of existing right-holders in the content, and not undermining existing, well-established copyright principles — for example, the three-step test and the consensus anticircumvention provisions in the WCT and WPPT. So that is where we have stood. We have been quite consistent in our approach. But the various drafts of the Treaty that have been discussed have come closer to or gone further from that ideal, so therefore it has been more likely or less likely that we have felt we would be able to be positive about it at the end of the day. In general, broadcasters have a reasonable case for needing some additional protection in the digital environment, in particular when you think about the retransmission of their broadcasts, which do represent a lot of work and a lot of investment, and can so easily be retransmitted over the Internet without authorization, in competition with their services.

646 S E S S I O N V I I I : COP Y R I G H T That is the crux of what is needed in the new technological environment to provide adequate protection beyond the Rome Convention. It is also the case that in all of the years that the Treaty has been discussed at WIPO, virtually every member country in the organization has expressed support for the concept of updating broadcasters’ rights to deal with the new technological realities. So there is a lot of support for this Treaty, and I think there is a good argument for a need for it. The question is whether it is possible to get it right. That is the question. What worries me a bit is that I am not sure that at this point the debate is even about substance. Just looking at it purely as a copyright lawyer who has drafted and negotiated treaties, I think we could find solutions, if everyone wanted to find a solution and was willing to compromise. Such a solution, in broad outline, would be clearly signal-based. That probably, although not necessarily, would mean getting away from exclusive rights, but certainly making sure that there was effective protection against the kind of misappropriation I have talked about and Julie has talked about — obviously, something that is much narrower than the original proposals that were put on the table. Second, it would have to avoid what I would call the range of poison pills that have been in various drafts — for example, saying that whatever obligations you agree to in this treaty you can avoid as long as you can assert that you are doing it to support cultural diversity or access to knowledge — or poison pills that would undermine the hard-fought international consensus on anticircumvention and the three-step test. So that is the outline of a solution. Obviously, the devil is in the details. I think that is a solution that could work for everyone, if broadcasters were willing to accept that they cannot get everything they would like to have and will take something that still could be valuable, even if small; and if countries that want something more, something that looks more like the EU acquis, can accept it because they recognize that it is just a minimum and they can still have exclusive rights, or convince other countries that they should have exclusive rights, but it just won’t be required by the treaty. Finally, the question is: Are there people who are determined to block progress, without explicitly saying so, whether it is for ideological reasons or for political reasons, that do not necessarily relate to intellectual property but might relate to other issues going on in the World Trade Organization or elsewhere? A final point: I do think, after the failure of the Audiovisual Performers’ Rights Treaty, it would not be a good thing for WIPO to have another failure. We certainly support strongly the organization and its work. But we should all look at it, if it does come to that and there is no treaty, not as a failure of WIPO as an organization, but as a failure of the multilateral process in the current difficult political environment. MR. CARSON: Ann? MS. CHAITOVITZ: I am going to be highlighting lots of things that were already said because everybody said something that I believe is very important and that the U.S. government would agree with. We are very pleased that the General Assembly has given us direction to focus on a signal-based treaty. Jamie, unfortunately, after saying that, went on to characterize it as “signal theft.” I don’t think that is what the General Assembly said. They said “signalbased.” His examples of unauthorized reception— as he said, you can deal with that. You do not need an international treaty to deal with somebody who is receiving HBO illegally. The real threat that the United States sees, which a signal-based treaty can address, is the unauthorized interception and retransmission of these signals.

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Julie gave the example of taking the Premier League — being a U.S. person, I do not even know what sport that is — MS. SAMNADDA: Football. [Laughter] MS. CHAITOVITZ: — and retransmitting it back into England. Those are the real threats that this Treaty needs to address. Most of that retransmission is now done on the Internet. So the Treaty must protect against retransmissions on the Internet. That is the threat that needs to be updated. A treaty that does not do that is not really updating the rights that need to be protected in this day and age. Another real concern of the United States was talked about by both Julie and Shira — Shira called them the poison pills. She described the provisions. We also have a concern with the intent of these provisions, as Julie described, which is that these are going to be used to rewrite copyright law, that they are not really to address the goal of the provision, but really will limit copyright law and create harmful precedents in copyright law treaties and in other international intellectual property treaties. So it is not even just the copyright area, but also the patent area. Those are just some of the things that I thought we should highlight and tell you what the U.S. government is thinking. MR. CARSON: Tom, Julie expressed some doubt as to whether the Treaty should extend to what she called channel providers — The Disney Channel and HBO and so on. Do you share that view? MR. RIVERS: No. MR. CARSON: Would you like to explain? MR. RIVERS: I think it is a concern that the U.S. government addresses in its own submission. The language that the United States has suggested inserting makes it clear that both those who provide the programs and those who make arrangements would be entitled to protection as broadcasters. I think, as the U.S. government says in its submission, that is consistent with the existing business models. MR. CARSON: Anyone else want to address that? Julie certainly does. MS. SAMNADDA: May I reply to that? If you take the example of the BBC, which is the example I know, the BBC emits programs that are not its own. In that sense, it is a broadcaster and it has a limited related right in the broadcast. Where the BBC holds rights in the program that is obviously its own, it is a content provider and it has full-blown copyright. We think that distinction needs to be maintained. We are protecting here the rights of broadcasters. Content providers already have copyright, full-blown copyright. It should not be extended to include a thin layer of broadcasting protection. For developing countries that simply emit broadcasts and have very little underlying content provision that is their own, the need is to provide protection for the emission of the broadcast, not a further layer of content protection. MS. CHAITOVITZ: I want to talk about the U.S. position. We do believe that the channels are broadcast organizations. Think of a channel like Lifetime. They are equivalent to the BBC. They produce some of their programs, in which case they are content owners and have all the protections that are granted to copyright owners. But other things that are broadcast on Lifetime channels they do not own; they are just scheduling and arranging. I do not know how they get it to the cablecaster that actually gets it to the public. The way the business structures are set up in the United States, the station is, in essence, a broadcaster, but the actual organization that is doing the broadcast to your house may

648 S E S S I O N V I I I : COP Y R I G H T be Cox Cable or something like that. So, really, Lifetime is just like the BBC. In the United States, in some places, BBC comes via Cox Cable. MS. SAMNADDA: I think this issue will divide the European Union and the United States. We see it as the U.S. film and television content industry essentially pushing for a further channel of protection. On top of everything else, Europe has a plethora of porn channels. They already have a collecting society for performance rights. And there is a collecting society in Germany. MR. LOVE: I would like to respond to the reference to sports that was made by Tom and by Ann and by Julie. There was a point when the Treaty was falling apart when it was resurrected, in a sense, over the idea of sports broadcasting. You had endless people giving talks about how important cricket and soccer matches were in their countries and what a tragedy it is that all these things are unprotected. The theory was that anywhere in the world you could make copies of sporting events and freely copy them and that was not already illegal under existing law. We have had conversations. Bernt Hugenholtz has looked at this issue in Europe. I just think it is completely dishonest to suggest that there is anywhere where sports broadcasts are not protected under existing laws. It is not true that you can take sports broadcasts and retransmit them without getting the rights from the person that owns the sports broadcasts, under whatever legal regime they have in the country they broadcast them from. That is a truth of the Treaty in general. There is all this talk about piracy and protection, but nobody at the U.S. Patent and Trademark Office on this panel today, including Ann, has addressed what are these practices that are really not already protected under copyright. The effort of the Treaty is to create an intellectual property right for people that merely schedule and transmit information. It is going way too far in terms of the rewards you should give as an intellectual property right. Nobody has any problem with saying that you cannot steal a paid service. It is insane to say that once you actually pay to have a paid service, you also give the person, on top of the money that you give for subscribing to the service, some kind of intellectual property right for the great, heroic deed they did of selling you the service, which is basically access to somebody else’s copyrighted work in most cases. So I think people should just ask: What is it that is already protected under copyright or under regulatory regimes — or, in the case of Europe, under their related rights regimes — that you already have in the Rome Convention? If the things are already protected, what is it the Treaty is supposed to do that is not already being done? Is there double-talk to obscure the rent-seeking activity by some people in the cable industry and in the broadcast industry by passing it off as addressing some bona fide piracy issue? MR. CARSON: Tom, I have heard you express a different view with respect to sports. Looking at the clock, can you take no more than one minute to let the rest of this group hear what you have to say on that? MR. RIVERS: I will try to deal with that in thirty seconds. Before I do that, I think it is reasonable to remind this audience that the Rome Convention has, at last count, eighty-six Contracting Parties that signed up to protect the rights of broadcasters — not because they are rent-seeking, but because they make an investment in providing the programs, and it has been thought reasonable, at least by those eighty-six countries, that that investment should be protected. As far as the protection that is provided under the Rome Convention, there is essentially no difference between the protection that is provided for broadcasters and the

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protection that is provided for phonogram producers. And, indeed, in Europe the protection that is provided for film producers. As to sports rights, the issue is, straightforwardly, that in civil law countries it is not invariably the case that the recording of a sporting event will be protected as a work of authorship. It may, therefore, be that the only protection that is available in relation to a transmission of the sports event is the protection afforded to the broadcaster. That is the rationale for having protection for the broadcasters in relation to the broadcasting of sports events. As people who are involved in this know perfectly well — but perhaps other people don’t know — the normal arrangement between the broadcaster and the sports organization is that, other than the rights in the territory where the broadcaster is granted his exclusive right to show the program, the other rights in the broadcast are normally assigned to the sports organization. The sports organization can protect itself and can relicense those rights in other territories. MR. CARSON: Let’s give the audience an opportunity. Bernt has raised his hand. QUESTION [Prof. P. Bernt Hugenholtz, Director, Institute for Information Law, University of Amsterdam]: I would like to reply to this immediately. I think Jamie asked a fair question, aren’t these sportscasts already protected fully under copyright? Doesn’t that deal with the problem that, for instance, Julie gave as an example of what you want to defeat with this treaty, the reimportation of Premier League soccer into the United Kingdom via Japan? The answer, of course, is these kinds of sportscasts are fully protected under copyright, certainly in a civil-law system, where I come from, but arguably also in a common-law system. They are audiovisual works of high class. I actually know what Premier League soccer is. (It’s soccer for you; it’s football for us.) I know the way it is done in the United Kingdom. It is done brilliantly, with a lot of cameras, with a lot of expertise, with a lot of creativity, a lot of humor. These are fantastic television programs. They are copyrightable all over the world, everywhere. I can take an oath on the Berne Convention to confirm that. So if you use the argument that sportscasts are not protected, it is a dishonest argument. MS. SAMNADDA: That is absolutely incorrect. The United Kingdom and Ireland would protect them by copyright. We have never suggested otherwise. None of our civil-law countries — perhaps the Netherlands is an exception — protect them by copyright. All of our civil law countries have told us that. QUESTIONER [Prof. Hugenholtz]: Then they have misinformed you. I can give you a couple of cases. MS. SAMNADDA: No, no, no. And you know in the Television Without Frontiers Directive the same issue is at stake for sportscasts.10 QUESTIONER [Prof. Hugenholtz]: Are you really saying that in Europe sportscasts are not copyright-protected? MS. SAMNADDA: A pure broadcast of a sports event, with no accompanying music, nothing else, no commentary, et cetera, which are the images that are currently being retransmitted back into the United Kingdom, would not get copyright protection 10 Directive 97/36/EC of the European Parliament and of the Council of 30 June 1997 amending Council Directive 89/552/EEC on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the pursuit of television broadcasting activities, 1997 O.J. (L 202) 60–70 (“Television Without Frontiers Directive”), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:31997L0036:EN:NOT.

650 S E S S I O N V I I I : COP Y R I G H T anywhere. Cut the sound, cut the commentary, cut the interviews in the box — that would not be protected. We will not give it to you, Bernt. MR. CARSON: We are about to explode, in more ways than one. Time is up. I’m sorry. I know there were more people who had questions. There were more questions I had. I will mention one thing, primarily for those of you from the States, but for others as well. Just yesterday, the Copyright Office and the Patent and Trademark Office announced that on May 9, 2007 we will be holding a Roundtable at the Library of Congress on the Broadcasting Treaty to help inform the U.S. Delegation of the views of various interests with respect to what we should be doing in June, when we go to the final round of the Standing Committee, before the next step of the Diplomatic Convention in November or December. I will tell Tilman, who was kind enough to allow me to come to the hearing that they had in Brussels a couple months ago, that you or your representatives are more than welcome to come to our Roundtable. If you want to come to the Roundtable, you need to contact us. We have room for fifty people around the table and a few more in the audience. Go to the Copyright Office Web site or to our Federal Register page and you will see the announcement.11 Thank you very much.

11 Note: After the conclusion of the Fordham Conference, on May 1, 2007, WIPO published in its Web site its latest ten-page draft of the Broadcast Treaty. This draft is backdated Apr. 20, 2007, and titled “Non-paper on the WIPO Treaty on the Protection of Broadcasting Organizations,” available at http://www.wipo.int/edocs/ mdocs/sccr/en/sccr_s2/sccr_s2_paper1.pdf. It supersedes the WIPO’s Mar. 8, 2000 draft. For a summary of the March 8 draft, see story titled “Copyright Office and USPTO to Hold Roundtable on Draft WIPO Broadcast Treaty” in TLJ Daily E-Mail Alert No. 1,564, Apr. 11, 2007. For a discussion of the latest draft and the USPTO’s May 9, 2007 Roundtable, see http://www.techlawjournal.com/topstories/2007/20070509a.asp.

SESSION VIII:V.COPYRIGHT PART D: EXCLUSIVE RIGHTS GLOBAL REMUNERATION

SESSION VIII — COPYRIGHT

Part D: Exclusive Rights v. Global Remuneration

Moderator MIHÁLY FICSOR

President, Hungarian Copyright Council (Budapest) Speakers TILMAN LUEDER

TED SHAPIRO

Head of Unit, Copyright And Knowledge-based Economy DG Internal Market, European Commission (Brussels)

Deputy Managing Director, Vice President & General Counsel-Europe Motion Picture Association (Brussels) Panelists

Prof. Daniel J. Gervais Faculty of Common Law, University of Ottawa

FRED VON LOHMANN

Senior Intellectual Property Counsel, Electronic Frontier Foundation (San Francisco)

SHIRA PERLMUTTER

Executive Vice President, Global Legal Policy, IFPI (London) MR. FICSOR: Ladies and gentlemen, this is the panel on Exclusive Rights vs. Global Remuneration. I think this is further proof of the progress of globalization. We have had so far global economy, global infrastructure, global warming. In Budapest, there is the Global Travel Agency, which has just gone bankrupt. We have also global licensing. There was an attempt in France to introduce global licensing, and the fate of that attempt was very similar to that of the travel agency. I wouldn’t say that I was absolutely heartbroken about that. I recommend a principle for the panel: We should differentiate between de lege lata and de lege ferenda approaches (what the law is, as opposed to what the law ought to be). It is true that there are many, many bright new ideas, an overproduction of new ideas. At the same time, it is also true that the majority of these ideas will not apply. That is very good news. I hope that the legislature will keep its sober state of mind, and that also courts will

652 S E S S I O N V I I I : COP Y R I G H T do what they have to do — they will apply law, and not necessarily the ideas of those who do not like the law. The law may be changed, but as long as it exists, it should be applied. In that context, I would like to mention something to which I would like to draw the attention of the members of the panel. We are discussing what is happening in this triangle of exclusive rights, compulsory licenses, and collective management. WIPO made an analysis about one issue involved in collective management — namely, mandatory collective management. In the Berne Convention1 there are only two provisions that allow the imposition of conditions of exercising exclusive rights. In the other cases, it is not allowed to introduce compulsory licenses and mandatory collective management. Also in the acquis communautaire,2 there are certain cases where it is possible — in one case, obligatory; in the other two cases, only possible. A contrario, in the other cases it is not possible. This is an interesting aspect and I would like to commend this to your attention. I give the floor to the first speaker, Ted Shapiro. MR. SHAPIRO: I thought it would be interesting to examine this issue by looking at the near-miss in France and then looking a little bit, as suggested by the moderator, at how that would play under international and European norms, and then think a little bit about how it would have impacted, potentially, on the film sector, in particular because so much of the debate centered around the music industry and music. What happened in France that the moderator was referring to? On December 21, 2005, quite late at night, in the Assemblée Nationale, the deputies — and there were only about fifty-nine of them there (apparently several were in the bathroom at the time as well) — voted two identical amendments,3 much to the dismay of Culture Minister Donnedieu de Vabres, the shock of the government, and, for that matter, all of the different stakeholders. They would have formed the first part of a package of amendments that would have brought into place compulsory licensing for films and music on the Internet, effectively by legalizing file sharing of those works. The amendments were adopted 30-to-28. There was one abstention. The debate in the Assemblée was very interesting, and not just on this issue. All of the issues of digital copyright came to a head. We talked about this last year at Fordham, so I won’t go into it too much. Deputy after deputy got up and moaned about the music industry — in particular, the heavy-handed efforts of the music industry to throw France’s youth in jail. The fact is that no one has ever gone to jail for file sharing — or has ever been fined, even. They also seemed to be suggesting that the music industry was trying to prevent artists from finding success on the Internet and that the “global license,” as they called it, would solve all of these problems. The global license has several components: 앫 I mentioned that the first two bits were adopted. They related to extending the private-copy exception to cover copies from any source from the Internet, on the

1 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 U.N.T.S. 218, revised June 2, 1928, 123 U.N.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 114, 1967, 102 Stat. 2853, 828 U.N.T.S. 221. 2 The term acquis communautaire, or EU acquis, refers to the total body of EU law accumulated thus far. 3 Amendments 153/154, establishing the “global license,” including a “right to the exception for private copy,” to amend Loi sur le Droit d’Auteur et les Droits Voisins dans la Société de l’Information (DADVSI) (Law on Authors’ Rights and Related Rights in the Information Society), available at http://www.assemblee-nationale.fr/ 12/amendements/1206/2060053.asp.

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condition that a levy would be paid — basically extending the existing private levy system in France. 앫 They also needed to deal with the other part of file sharing, so they were going to hobble the making-available right. Actually, interestingly enough, the French have not implemented the making-available right. Like the Americans, they have said they already had it under a broad construct of the droit de représentation. 앫 The other thing is that there was a voluntary aspect to this global license. Apparently, consumers could decide whether they would opt in. ISPs, of course, would be brought into the existing private-copy structure and have to pay each month (probably they would be passing it on to consumers) and that the money would then be divvied up by collecting societies using different formulae that they apply already for things like private-copy money. 앫 The text made no distinction between music and film. That is where it stood. The debate was stopped before Christmas. The government realized that they had a bit of an issue on their hands. They went back to the drawing board, suspended debate. In the intervening period, there was a very interesting decision handed down by the Cour de Cassation, the French supreme court, the “DVD Mulholland Drive” case, applying the Berne three-step test,4 saying that there was no right to private copy, and clarifying that the exception did not extend to the back-to-back copying of DVDs.5 The Assemblée Nationale rejected this global license6 and, on March 21, 2006, adopted a raft of other provisions,7 which we can talk about in the hallway if you like. 4 Pursuant to art. 9.2 of the Berne Convention (three-part test): “The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.” 5 Cour Cassation, première chamber civile, Arrêt n°549 du 28 février 2006, Cases 05-15.824, Studio Canal SA v. M. Stéphane X et autre, and 05-16.002 Universal Pictures Video de France et autres v. M. Stéphane X et autre (“DVD Mulholland Drive”) (granting prohibition on DVD copy protection devices as incompatible with private copying rights). Decision available (in French) at http://www.courdecassation.fr/article8777.html. This decision reversed the Cour d’appel de Paris decision of 22 Apr. 2005 in Perquin and UFC Que Chiosir v. SA Films Alain Sarde, Ste Universal Pictures video France et al., 36 IIC 148 (2005) (holding TPMs illegal), available at http://www.juriscom.net/documents/caparis20050422.pdf. The Cour de Cassation sent the case back to the Court of Appeals for reexamination. The Paris Court of Appeals, on remand, upheld TPMs (Apr. 4, 2007). See http://www.zdnet.fr/actualites/informatique/0,39040745,39368472,00.htm. 6 Examination of the text by the Assemblée Nationale resumed in March. The Minister of Culture announced that the government would use its prerogative to withdrawn its own draft law in order to withdraw the Article to which amendments 153/154 applied, and propose in its stead a “1 bis” article. This was supported by President of the National Assembly Jean-Louis Debré, who presided at the sitting.The next day, the government announced that it would not withdraw the article, following a communication by president of the Constitutional Council Pierre Mazeaud that the move’s constitutionality was unclear. The Assembly then proceeded with the remaining amendments to Article 1, voted down Article 1, then examined art. 1bis. The “global license” was thus removed from the text, which established a “right to the exception for private copy.” See Amended Intellectual Property Code (IPC) available at http://www.legifrance.gouv.fr/Waspad/UnCode?code=CPROINTL.rev; in English at http://www.legifrance.gouv.fr/html/codes_traduits/cpialtext.htm. In order to fight piracy, DADVSI modified the IPC by introducing a new criminal offense against providers of P2P software for “knowingly, publishing, distributing, making available, or promoting (including through advertising) to the public software designed for the illegal dissemination of protected works,” punishable by a three-year jail sentence and a €300,000 fine (IPC, art. L. 335-2-1). Making available illegal copies to the public through the act of uploading is also classified as copyright infringement and entails a sentence of up to three years in jail and a 300,000fine (Id., arts. L.122-4, L.122-5, L.335-3, L.335-4). 7 See Circulaire de présentation et de commentaire des dispositions pénales de la loi n 2006-961 du 1er aout 2006 relative au droit d’auteur et aux droits voisins dans la société de l’information et d’action publique dans le

654 S E S S I O N V I I I : COP Y R I G H T Another Cour de Cassation decision, this time from the criminal chamber, came down on May 30th, overturning a court of appeal decision on the issue of downloading from illegal sources8 — in effect, rejecting part of what the Assembly wanted to do. Finally, the law was adopted, in August 2006, after a big hunk of it was removed by the Constitutional Council,9 thereby restoring the honor of France. [Laughter] So how would it have played out if this global license had gone through, which is basically a form of compulsory licensing but really more a form of mandatory collective licensing of the reproduction right, in a sense, by extending the private-copy exception and the making-available right? The question is: How would this play under European and international law? I think the moderator already touched on the fact that it would violate the Berne Convention.10 The list (i.e., permissible scope) for mandatory collective licensing does not include, particularly for audiovisual works, the making-available right. I think that extending the scope of the private-copy exception to cover copies from any sources would flunk the three-step test. It probably explains why a lot of people would like to change the threestep test.11 This would also leave it open to a TRIPs challenge.12 For similar reasons, this would domaine de la lutte contre les atteintes a la propriété intellectuelle au moyen des nouvelles technologies informatiques. Garde des Sceaux, 3 janvier 2007, available at http://www.juriscom.net/documents/circulaireDAVDSI.pdf. 8 Cour de Cassation chambre criminelle, audience publique du 30 mai 2006, Ministère public, SEV, FNDF, Twentieth Century Fox, Buena Vista Entertainment, Gaumont et a. c/ Aurélien D. (copie privée), available at http://www.juritel.com/Ldj_html-1160.html; see also court of appeal case, Cour D’Appel de Monpellier, 3ème chambre correctionnelle, le 10 mars 2005, Ministère Public, FNDF, SEV, Twentieth Century Fox et a. c/ Aurélien D., available at http://www.juriscom.net/jpt/visu.php?ID=650. 9 On July 7, 2006, the Socialist deputies, three Green deputies, four Communist deputies, and two UDF deputies filed a recourse before the Constitutional Council, which blocked the signing of the law. The recourse included the following claims of lack of constitutionality, based on the Declaration of the Rights of Man and of the Citizen: The clarity and sincerity of the legislative process was jeopardized by: · The maneuver of the government of withdrawing article 1 after mendments that it disapproved were voted down; · The mixed parliamentary commission significantly introducing amendments neither in the Assembly nor in the Senate text; · A number of clauses of the law infringe on the rights of citizens; · The definition of some crimes are unclear, whereas citizens should be able to understand what is a crime and what is not; · Exceptions to copyright are vaguely restricted by the Berne three-step test, now made explicit in French law, whereas ordinary citizens cannot guess how to interpret this test; however, copyright infringement is a crime; · Computer programs “manifestly designed for spreading copyrighted works” are criminalized, but no definition is given as to what this means, and the exceptions to this prohibition are also vaguely defined, thus citizens cannot know whether such or such program is illegal or not; · The voted text of the law admits “interoperability” as a valid goal for exemption from the prohibition of circumvention of DRM protection measures, but, unlike earlier drafts, does not define this word; · No guarantee is given as to the modes of proof and investigation of the crimes defined in the law. Décision du Conseil constitutionnel n° 2006-540 DC du 27 juillet 2006 (partiellement conforme), available at http://www.conseil-constitutionnel.fr/decision/2006/2006540/2006540dc.htm. After the decision of the Constitutional Council the law was submitted to President Jacques Chirac for signature on Aug. 1, 2006 and became law on Aug. 4, 2006. 10 See Berne three-part test, supra note 4. 11 See, e.g., Haochen Sun, Overcoming the Achilles’ Heel of Copyright Law, and discussion in Session X, Part B, The Three-Step Test: Is It Out of Step?, infra this issue. 12 Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Marrakesh Agreement Establishing the World Trade Organization, signed at Marrakesh (Morocco), April 15, 1994, Annex IC, Agreement on Trade-Related Aspects of Intellectual Property Rights [hereinafter TRIPs Agreement], reprinted in The Results of the Uruguay Round of Multilateral Trade Negotiations—The Legal Texts, 1–19, 365–403 (GATT Secretariat, Geneva 1994); see the three-part test in Article 13: “Members shall confine limita-

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likely fall afoul of European law. The making-available right is established in Article 3(2) of the Copyright Directive13 as an exclusive right. The three-step test was imported into the Copyright Directive,14 and now has found its way — indeed, was there already — into several members’ national legislation. Interestingly enough, in many of the countries that have not specifically implemented the three-step test into their national laws their courts have already been applying it. I am thinking, for example, of the Netherlands, Austria, Germany. So it seems pretty clear that what the French were trying to do would have violated European and international law. But that does not mean that it couldn’t have gone through, of course. If you want to get it sorted out in TRIPs — well, we are still waiting for the U.S. government to meet its TRIPs obligations in one respect. These things take a long time. The same thing for a challenge at the European level. What would have been the impact on the film sector? The French film sector, in particular, was not comforted by statements that were made by many deputies, “This is only about music. Don’t worry.” They thought that they would not be spared the wrath of the global license. How does the film sector function in France? How do they engage in a very important cultural policy for them, one that is now protected by the UNESCO Convention?15 The basis for funding of French films is a very complex mix of direct subsidy, contribution from broadcasters and other players in the chain, and private money. Media chronology plays a very important role in this regard. Indeed, there is a statutory window for DVD release six months after theatrical release. In this regard, they viewed the global license as being inimical to audiovisual creation and return on investment. The effect would have been to value each work in the same way, remove arm’s-length bargaining between distributors and producers, and, therefore, perhaps dampen investment in future works. It has been said that this might have generated additional revenue for some film-rights holders. It is worth mentioning that the performers’ collecting societies agreed with the global license —they, in part, developed it — whereas the authors and producers were not supporting it. It is hard to imagine investing €150 million in a film, selling it once to one exhibitor in one country, then someone goes in and “camcords” it off the screen (the leaks are now only occurring in the cinemas), and then you would have to rely on checks from collecting societies for a return on your investment and the money to make your next film — or, I guess, you could just start watching YouTube. All this came at a time when we have a myriad of new services popping up that are supported by direct licensing. The same technology that the deputies wanted to harness with their global license we can harness through individual rights management. If they had adopted this global license, it would have, in essence, frozen the competitive landscape in favor of those existing unauthorized services, many of which we were talking about yesterday. tions and exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the rights holder.” 13 Directive 2001/29/EC of 22 May 2001 on the harmonization of certain aspects of copyright and related rights in the information society, 2001 O.J. (L 167) 10. 14 See Id. Private copying is recognized as a legal exception to copyright but not as an absolute right. In accordance with the three-step test established in the EC Copyright Directive, such an exception cannot be applied when it conflicts with the “normal exploitation” of a work. 15 UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions, Paris Oct. 20, 2005, available at http://portal.unesco.org/en/ev.php-URL_ID=31038&URL_DO=DO_TOPIC&URL_ SECTION=201.html.

656 S E S S I O N V I I I : COP Y R I G H T Vive la France! MR. FICSOR: Ladies and gentlemen, the next speaker will be Tilman Lueder. MR. LUEDER: [Oral remarks replaced by paper by Mr. Lueder in Appendix A.] MR. FICSOR: Daniel Gervais is also from a copie privée country, but it is a bilingual country. So either in French or in English, please, Daniel. MR. GERVAIS: I could do a traditional Canadian speech and change language every three sentences, and speak both languages, as many of our politicians do. There are two questions that I think they need to be dealt with somewhat separately. One is: Can one enforce exclusive rights on the Internet? — a purely empirical question — Will it work? We all know the debate about P2P and what can and cannot be stopped. Parenthetically, I think the problem of camcorder piracy is going to be solved by technology, not law. As soon as digital projectors are in cinemas, that problem is going to go away. Back to the main point: Can you stop something that is on the Internet from further dissemination? Can you actually say, “I have an exclusive right; you should stop?” Well, of course you can say it. But will it work? I do not have the time to go into all the evidence, but we all know it is not easy. End users are no longer end users — they are users, they are reusers — and they have rights that, for the first time, are being confronted with copyright rights, such as privacy, which was rarely, if ever, an issue before the Internet. As a right-holder, when you deal with a broadcaster, you do not worry too much about the privacy rights of the broadcasters. It is a professional entity; it is a business relationship. But when you are dealing with individuals, that changes things. So there is that issue. Then there is the more important issue, probably, from our perspective, the “should” question, the true normative question: Should one have exclusive rights to begin with? Should one have the right to say “No?” There are obviously a number of ways to tackle this question. One way is to ask: What is the duty of a rights holder? Is it to minimize the number of times something is copied illegally, or to maximize the number of times it is used legally? Minimizing unauthorized uses in itself probably will not increase authorized uses. Ideally, the authorized uses should match the “demand” that was met by the unauthorized service. What I have been advocating since 2001 or so is a system whereby you would have “compliant networks,” where you would have people belonging to a network where they pay for the content that is circulating on the network, perhaps on a monthly basis, where there is privacy and compliance, privacy-compatible tracking of what is circulating. I agree that we want to avoid the private copying/distribution situation that we have witnessed in some countries. Obviously, such a system needs to be entirely voluntary. You don’t want to be in conflict with the Berne Convention or TRIPs. But, is the system of single-download transactions, à la iTunes, in many cases with digital rights management (DRM) that will prevent use beyond the initially negotiated terms, really the only model that we should be looking at on the Internet? I think the answer is no. I think there is room for something more than that. I just hope that develops. Actually, I think it is being developed. MR. FICSOR: Thank you, Daniel. The next speaker will be Fred von Lohmann. I must tell you that I do not always agree with the Electronic Frontier Foundation (EFF) — and this may even be a euphemism — but the EFF has got a very interesting idea, which I like very much: The problems of the transmissions of music through the Internet should be solved on the basis of voluntary

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collective management. As long as it is truly voluntary, I have no problem with that. However, I never heard about the details; perhaps this time Fred will give them to us. MR. VON LOHMANN: I do not see any tension between collective solutions and exclusive rights. In fact, as I think many here well know, the one often is the enabler for the other. I think what we are likely to see — and, in my view, what we should begin seeing — is more collective management of rights in particular industries for particular works. I don’t think that is a terribly revolutionary thing to say. I agree with Daniel that we have to confront reality. I just saw a survey that suggests that 18 percent of American personal computers currently have LimeWire installed and one in five people have that particular peer-to-peer file-sharing software installed.16 Years after the lawsuits against individuals, years after the Grokster decision,17 years after all that has gone on, including the Apple iTunes Music Store and the rest, peer-to-peer file sharing is still essentially the bulk of the digital music industry. That does not appear likely to change. What, then, would be wrong with having the record labels, and hopefully the owners of the musical compositions as well, create one or more collecting societies that would grant blanket licenses to end users in exchange for a fee? I think the reality — and this was reflected a bit in both Tilman’s and Ted’s talks — is that there is going to be a growing drumbeat of consumer demand. I think you are going to see more and more of that, unless some reasonable solutions are worked out. The nice thing about a voluntary collective management approach is that it obviously poses no Berne Convention difficulties. It may pose some antitrust questions. We have been able to iron that out in other contexts I actually think that in the United States the ASCAP/BMI/SESAC experience, while perhaps not perfect, suggests that there are ways to develop relatively efficient — certainly more efficient than suing your customers one at a time — solutions for these particular “market failures.” Actually, I think a collecting society approach is not indicative of “market failure”; it is indicative of success, of people maximizing their revenues in a way that makes sense. In fact, if you want to talk about legal reform, rather than talk about compulsory licenses, which will be highly controversial, I think one of the best things you can do is tailor the law to smooth the path toward collective solutions. The U.S. Copyright Office’s suggestion a year and a half ago in the Section 115 reform discussion was very helpful.18 The proposal at the time was to have those who grant digital performance rights in musical works to grant the complete bundle that would be necessary to enable creative new licensing approaches. In other words, the proposal would end the fight between reproduction-right administrators and performance-right administrators, and instead, try to create a world where the actual rights holder, who should be paid by both of those at the end, will be able to have their interests served more efficiently. I think that is the kind of legal reform we need right now. It is not forcing anyone to create a collective, but it is making a collective possible, where the interests of certain entrenched incumbents might otherwise be blocking that alternative. So where music is concerned, I think in the next five years we will start seeing voluntary collective approaches, perhaps in the United States, perhaps abroad. There are already 16 See Online Music Survey, Berman Center for Internet and Society, available at http://cyber.law.harvard.edu/ home/onlinemusicsurvey. 17 MGM Studios v. Grokster Ltd., 545 U.S. 913 (2005). 18 See Statement of the United States Copyright Office before the Subcomm. on Courts, the Internet, and Intellectual Property, Comm. on the Judiciary, United States House of Rep., 109th Congress, 2d Sess., May 16, 2006, Section 115 Reform Act (SIRA) of 2006, available at http://www.copyright.gov/docs/regstat051606.html.

658 S E S S I O N V I I I : COP Y R I G H T experiments in China. I expect experiments in Brazil. I think the more you recognize the reality that Daniel mentioned — that your exclusive rights don’t do you any good in an environment where you cannot effectively control them piece by piece — you will start seeing other approaches. After all, that is exactly what happened with the public performance right. When it was initially granted, artists realized that they would not be able to sue every hotel, every bar, every restaurant, every radio station, every performing space one at a time, song by song. Rather than give up, they came up with a better solution. MR. FICSOR: Insha’Allah. The last speaker — last but not least — will be Shira Perlmutter. Her views are very relevant, from the viewpoint of global licensing, about everything that is global. As executive vice president, she is responsible for global legal policy at IFPI. Shira, you have the floor. MS. PERLMUTTER: Thank you, Mihály. I would like to start by coming back to the two themes I struck yesterday in the panel on Copyright Ten Years in the Future — that is, choice and diversity. I think both of those things are quite consistent with what my fellow panelists have been talking about this morning. The most fundamental problem with the French version of global remuneration or the global license, as Ted described it, is that, on the one hand, it was mandatory for rights holders, and on the other hand, payment by users was optional. That is a pretty poisonous combination, and it is not going to lead to a happy outcome. When you look at the situation today, the ideal, of course, is that users should pay just for the content they want to enjoy, and only for the ways in which they want to enjoy it. If they want to listen to music once, they should pay a different amount than if they want to keep a copy forever. If they want to have a movie available to watch for twenty-four hours, they should pay a different amount than if they want to keep it and watch it whenever they want. It’s also ideal that rights holders should be able to decide when and how they want to make their works available, and those rights holders whose works are more popular or used more should make more money. I think most people in the room would agree with those two concepts. We are in a situation now where technology is giving us a lot of options for making those goals a reality, and where we are having a broader and broader range of different licensing approaches being tried in the various different industries. The trouble with the French concept of global remuneration, which did not pass, is that it really means giving up on those goals. I think any version of that is not just a last resort, but essentially saying that “we give up on copyright and we are moving to a system of social support for artists,” I do not think we are there yet. The other problems, of course, are: 앫 Is there a feasible business model there? I have not yet seen anything that would raise enough money to support all the different types of rights holders that contribute to works. 앫 You have treaty-obligation problems. 앫 You have serious issues about transaction costs and how the system would actually function. Last year someone talked about these models as being utopian, that they might work if it weren’t for the messy realities of real life. But that does not mean there aren’t elements of things that have been discussed since

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the French approach that could be useful to continue to think about. Clearly, we do want to maximize legal uses on the Internet, and not just stop illegal uses. We stop illegal uses so that we can develop a legal market. We also want to have as many different models out there as possible, and not just the one model where you pay some set fee and then you get a copy. So what does that mean? Certainly, as an industry, the music industry is open to all workable solutions that are voluntary in nature. That is really the key. When I talk about choice and diversity, that will lead to the greatest diversity, and it allows people to choose what they want, both rights holders and users. We want to figure out how to ensure that music can continue to be a viable business model on the Internet. That could be done in many ways. Various different record companies are pursuing lots of different models for trying to — I hate the word — “monetize” music. That could even include something like a monthly payment to Internet service providers (ISPs) for certain types of online uses. But it has to be negotiated as part of an overall picture and it has to be voluntary. It could be collective or not collective, depending on what different rights holders want to do. Again, choice and diversity. I think it is possible. I do not think it is easy, but I think it is possible. Certainly, the French approach is not the way to achieve those goals. MR. FICSOR: Thank you very much. I would like to ask the members of the panel whether they wish to react to what the others have said. MR. LUEDER: I want to make one model calculation for you on the global license. Let’s assume that there are 280 million people in the United States and they all pay a monthly fee of $20 when they subscribe to the Internet. That would create $5.6 billion for all the copyright industries together. Now, $5.6 billion times twelve — you can calculate yourself — would be a horrendous sum. I was just asking Ted what is the domestic turnover of the U.S. film industry. Ted says it is about $15 billion. There you go. In my model, they would have more turnover if there was a license fee. MS. PERLMUTTER: You are leaving a lot out of the model. MR. SHAPIRO: There is a little bit more to it than that. What we are talking about is not $20 per person. And, obviously, not everyone in the United States has Internet yet. There are three or four that do not. What you are leaving out there is that it would then be divvied up amongst all the different sectors and all the different rights holders. There would be transactional costs that were referred to before for collecting and distributing. At the end of the day, there would also be an impact on other modes of distribution. As I said in my example, you sell it to one cinema and you are done; you just sit around and wait for this check that you now need to pay for the first film, all the different rights holders involved, and use to fund the production of new films. And that just wouldn’t cut it. MR. FICSOR: I think that your forecast is too optimistic. Sooner or later, the tax authorities will consider it the way the public does, as a kind of tax. There will be a tax reform, and then it will be less. MR. GERVAIS: First of all, you have to count broadband households, not individuals. That is the first point. Second, you also have to show what the price point is for a film in the 500-channel cable universe, where you have all these old and not-so-old movies being shown on television. What is the price point that consumers are willing to pay for the “other part?” That obviously would not cover theatricals. I am not saying the idea is wrong. Quite the contrary. I think there is potential. But

660 S E S S I O N V I I I : COP Y R I G H T there are significant issues on price, and also calculating the way you did, by adding individuals instead of broadband households. MR. VON LOHMANN: We can all bicker about transaction costs and price points, but at the end of the day the question is, compared to what? Today, most of the digital content is being downloaded for a price of zero and rights-holders are left to divide an empty pot. Anything would be an improvement. I think it is fair to start with the music industry, because I think the music industry is rapidly approaching the point where there is literally nothing else that is going to work They have tried everything else. The public has seen the thousands of lawsuits. We just had several months of law-suits against college students in the United States — not exactly the most popular target, America’s youth, and the ones in college no less. We are going to see further declines in CD sales, see the digital music marketplace stumbling. If authorized services fail to replace the lost revenues, and fail to make gains against peer-to-peer file sharing, and fail to offset hand-to-hand CD copying and hard drive-to-hard drive copying, the music industry will have to try something different. In fact, I think it is nearly inevitable, as the technology is going very rapidly in one direction and the music industry’s current approaches are very rapidly being left behind. In that environment, a voluntary collective system may make sense. In the video market, I think things may be different. I am encouraged that major motion picture companies, television studios, and other creators of video content have been far more proactive about entering the market, about offering consumers good alternatives at reasonable prices — lots of price points, lots of sources. Hopefully, that will succeed and you will have the kind of utopian vision that Shira has mentioned for video. I hate to say it, but in the music space, it sure looks like it is too late for that now. MR. FICSOR: I promised the floor to Howard Knopf. Howard, so far the discussion has been very harmonious, so please do not elaborate on the activities of the Canadian Recording Industry Association. QUESTION [Howard Knopf, Macera & Jarzyna LLP, Ottawa]: We have a kind of mini-version of all of this in Canada in the music field through our private copying scheme. I do not think it works very well. Of course, I am very unbiased about this, as everybody knows. It does not work very well, except for the lawyers and consultants and employees of the collective that administers it. It works very well for them. And that fits into the notion of cultural diversity, because they actually are very creative people. They have come up with some amazingly creative theories as to why they should be collecting money and they are being rewarded very handsomely for their creativity. So in that sense cultural diversity is being rewarded in Canada through our private copying levies. I do not know any artists who have done particularly well by it, or even seen a check. But that is another matter. The idea of shifting it away from people who make CDs or sell CDs or devices — even worse — onto ISPs makes a little bit more sense, because it does come a little closer to home, to actually tying it into actual usage. But it is still an extremely rough justice, at very best, because a lot of people who use the Internet do not download music or care about music or films at all. There is also the issue of national treatment, which a brilliant author of a book on the WIPO treaties has identified quite well.19 All of these schemes will inevitably require 19 Mihály Ficsor, The Law of Copyright and the Internet: The 1996 WIPO Treaties, Their Interpretation and Implementation (Oxford University Press) (2002).

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national treatment, which will end up shipping enormous amounts of money from small countries to a certain country where we are now being hosted and wined and dined. Noank and EFF are great ideas — wonderful, utopian. They will not work unless there is compulsory licensing. Shira has said that that is out of the question. It should work. The music industry, however, is possibly even more irrational than, with all respect, the film industry. Now that Jack Valenti is gone, maybe Ted will take over. But if Jack Valenti had gotten his way, there would be no VCRs, there would be no time shifting, and there would probably be no movie industry. MR. SHAPIRO: That’s bull. In fact, he wanted to introduce a private copy levy on those. QUESTIONER [Mr. Knopf]: I am talking about history. He tried to outlaw the technology. He tried to have a rental right stuck into copyright laws around the world. Fortunately for your industry, he miserably failed. Anyway, that is just history. MR. FICSOR: Ladies and gentlemen, our time is up.

SESSION VIII: COPYRIGHT PART E: DEVELOPMENTS IN THE COPYRIGHT OFFICE AND CONGRESS

SESSION VIII: COPYRIGHT

Part E: Developments in the Copyright Office and Congress

Moderator PROF. MARY W.S. WONG

Franklin Pierce Law Center Speakers MARYBETH PETERS

DAVID O. CARSON

Register of Copyrights U.S. Copyright Office (Washington, D.C.)

Associate Register for Policy & International Affairs U.S. Copyright Office (Washington, D.C.)

PROF. WONG: The two speakers on this panel need no introduction. Because we have limited time, I want to turn it over to them as quickly as possible. As everybody knows, since the significant and oft-discussed legislative amendments in the United States in 1998 with regard to term extensions1 and the Digital Millennium Copyright Act (DMCA),2 there have also been other legislative enactments and developments. Two that come to mind are the Technology, Education, and Copyright Harmonization Act (TEACH Act)3 with respect to educational limitations and exceptions and, more recently, the Family Entertainment and Copyright Act.4 Since those enactments, there have been proposals with regard to protection for fashion design.5 Another one, in which the Copyright Office had a lot of involvement and input, was the proposal to take care of orphan works.6 Most recently, as was discussed yesterday

1 Sonny Bono Copyright Term Extension Act of 1998, Pub. L. 105-298, available at http://www.copyright.gov/ title17/92chap3.html. 2 Digital Millennium Copyright Act of 1998, Pub. L. No. 105-314 (codified at 17 U.S.C. § 512) (DMCA), available at http://www.copyright.gov/title17. 3 Technology, Education, and Copyright Harmonization Act of 2001 (TEACH Act), Pub. L. No. 107-273, 116 Stat. §§ 1758, 1912 (amending §§ 110(2) and 112 of the Copyright Act), available at http://www.copyright.gov/legislation/pl107-273.html. 4 Family Entertainment and Copyright Act of 2005, Pub. L. 109-9, 119 Stat. 218 (enacted Apr. 27, 2005) (codified at various sections of 17 and 18 U.S.C.). 5 H.R. 5055, 109th Cong., To Amend Title 17 of the U.S.C. to Provide Protection for Fashion Designs (introduced Mar. 30, 2006), available at http://www.govtrack.us/congress/bill.xpd?bill=h109-5055. See Protection of Fashion Design: Statement Before the Subcomm. on Courts, the Internet, and Intellectual Property, of the H. Comm. on the Judiciary, 109th Cong., 2d Sess. (July 27, 2006) (statement of Marybeth Peters, U.S. Copyright Office), available at http://www.copyright.gov/ docs/regstat072706.html. 6 Register of Copyrights, Report on Orphan Works (January 2006), available at http://www.copyright.gov/ orphan/orphan-report.pdf.

664 S E S S I O N V I I I : COP Y R I G H T — and perhaps we will have some discussion on this right now — there is the possibility of changing Section 115 of the Copyright Act or otherwise to deal with music download, streaming, and so forth.7 As everybody also knows, the Copyright Office has been very active in other arenas and activities — for example, the anti-circumvention rule-making under the DMCA decision on ringtones8 (we heard something about ringtones earlier today and yesterday as well) and also the Section 108 Study Group,9 which is attempting to deal with the rights and the archiving potential of libraries and other such institutions in the digital age. So lots and lots to think about and talk about. I believe that Marybeth and David have divvied up between themselves who is going to speak on what. Without much further ado, Marybeth Peters, the Register of Copyrights. MS. PETERS: Thank you very much. Most of you know that typically I have done a luncheon speech. Hugh called and said, “You know, we can’t do luncheon speeches.” I said, “Oh, great. I think that I really don’t need to participate.” He said, “Well, yes, you will. You will give your report, and this is the way it will be done.” I enlisted my very able former General Counsel, who is now Associate Register for Policy & International Affairs. We have split up the thirty minutes. I am going to give you some of the highlights, focusing on some of the more day-to-day operations, and David can do our more interesting activities. I think everyone knows — though I read recently that a well-known person wrote that we were in the Executive Branch — that the Copyright Office is actually in the Legislative Branch of the government. We are an agency within the Library of Congress. We have about 500 employees. We have already mentioned that we use our Web site as a way of making information available, www.copyright.gov. David mentioned the Roundtable with regard to the Broadcasting Treaty on January 3, 2007. We put up activities as quickly as we possibly can. You mentioned the Section 108 Study Group. Mary Rasenberger is back there. I will talk a little bit about it. We also have a link to that site, with all of their materials. Most of what we do deals with registering authors’ claims, publishers’ claims to copyright, recording documents related to copyrighted works. We have a statutory licensing part of our operation where we take in money from three statutory licenses and oversee others. Then, of course, we have public information services. A lot of what David and I do is policy activities, regulatory activities, and international affairs. I will start out by telling you a little bit about the scope of the work that has been done. I am going to end up asking you to pray for us in the months ahead. [Laughter] With regard to registering claims, many people actually do register their claims. There 7 Section 115 Reform Act of 2006, To Amend Section 115 of Title 17, United States Code: To Provide for Licensing of Digital Delivery of Musical Works, and for Other Purposes, H.R. 5553, 109th Cong. (introduced June 8, 2006), available at http://www.govtrack. us/congress/bill.xpd?bill=h109-5553. See Reforming Section 115 of the Copyright Act for the Digital Age: Hearing Before the Subcomm. On Courts, the Internet, and Intellectual Property of the H. Comm. on the Judiciary, 110th Cong., 1st Sess. (Mar. 22, 2007) (Statement of Marybeth Peters, Register of Copyrights), available at http://www.copyright.gov/docs/regstat032207-1.html. 8 In the Matter of Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, Before the U.S. Copyright Office, Library of Congress, Docket No. RF2006-1, (Memorandum Decision, Oct. 17, 2006), available at http://www.copyright.gov/docs/ ringtone-decision.pdf. 9 Copyright Office and Patent and Trademark Office, Section 108 Study Group, information and transcripts available at http://www.copyright.gov/newsnet/2006/303.html.

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are benefits. We registered over 1 million works that were represented in over 525,000 applications. We have group registrations. A single photographer can give us 25,000 photographs with one application and fee. Last year we instituted a pre-registration, which really is no registration at all. It is a notice of intent to register, but it protects the work (at least it gets you certain damages should the work be infringed) before it is commercially distributed. It is limited to categories of works that are being prepared for commercial distribution and are likely to be ripped off before they are made available. This much-demanded service resulted in 309 such pre-registrations. We also, thanks to Congress, register claims in mass works or the design of integrated circuits — not much related to typically copyrighted works. We actually only registered about 300 of those. Kindly, Congress gave us registration of the design of vessel hulls.10 We actually registered sixty-one of those. But the bulk of the work really is copyrightable-type works. Sometimes they are not copyrightable. Sometimes we say the work is not registrable. Obviously, when we do that, there are certain repercussions for the applicant who gets such a notice. Of course, we have an appeals procedure. It is really a reconsideration procedure. We break it into two stages. For the first stage, it stays within what is now the Examining Division. You are about to hear that we will have no more examiners and no more Examining Division. But at the moment, the Examining Division hears the first request for reconsideration. Last year they looked at 465 works where there were first appeals, and 117 of those 465 were registered. So 25 percent were overturned on first appeal, which is down. Last year it was a third. If, in fact, you still get “We will not register your work,” there is a board of reconsiderations. It is made up of the Register, the General Counsel, and a third person named by the Register. Right now that is the Special Assistant for Reengineering, who used to be Chief of the Examining Division. This is one of the duties that David has moved away from, since he is no longer General Counsel. He’s smiling, because it was never one of his favorite duties. We met once a month last year. We looked at Section 107 applications. We denied registration in 100 of those works and we registered seven of those. We do not put our final appeal letters up on our Web site, but they are on the Franklin Pierce Web site.11 You have an IP Mall as part of your Web site. PROF. WONG: That’s right. MS. PETERS: They have all kinds of wonderful information on the Web site. They have our practices, which are not on our Web site, because we believed they were outdated, though still being used. They have them on their Web site, so you actually can look at the reason for denials. Almost all appeals involve pictorial, graphic, or sculptural works. It is jewelry designs, furniture, a lot of works that are utilitarian in nature, where you cannot find separable authorship. We have had interesting furniture cases. They are not in any of the other classes, and they are very, very difficult. You get a line of forty items of jewelry and you say, “These are clearly not copyrightable and these are clearly copyrightable,” and then you have all of this in the middle that you spend a lot of time dealing with. 10 11

The Vessel Hull Design Protection Act, 17 U.S.C. 13 (Oct. 28, 1998). See http://www.ipmall.fplc.edu/.

666 S E S S I O N V I I I : COP Y R I G H T With respect to statutory licenses, we took in last year $227 million. They come from cable operators, satellite carriers, and people who manufacture or import recorded digital devices and media. With respect to our information services, we respond to letters, telephone calls, email requests, and people who walk into our office. So we are busy doing all of those things. I am going to turn to something that has, in some ways, relieved us of some duties and brought new ones. Many of you will remember that there was something known as the CARP system. This was an arbitration system that dealt with the statutory licenses that are in our law. It dealt with the rates and the terms and conditions of those statutory licenses and, when we took the money in and the parties couldn’t agree on how to split it up, how that money was distributed. It was a cumbersome process. There were ad hoc administrators that were named by the Librarian. Two were named and they selected a third from a predetermined list. After they did their work, the decision came to the Copyright Office, which spent hundreds of hours going over what they did. Then the Copyright Office made a recommendation to the Librarian, and that became the official decision. There was a reform of that system. It put in place a copyright royalty judge system. It was enacted in December 2004 and went into effect in May 2005. There was an interim judge. Last January, the three judges were appointed. The Register plays a role in the selection of those judges. I am the one who makes the recommendation to the Librarian. Those judges have been in place for a little over a year. They have staggered terms. There is a six-year term for the chief judge, who is supposed to run trials. There is an economics specialist, who has a four-year term. There is a copyright specialist who has a two-year term, so we will have to deal with that next year. They have been up and running for a year. These royalty judges, who have looked to Canada and call themselves the Copyright Royalty Board — have been very, very busy. Their first decision dealt with rates for webcasters, which is very controversial. People are filing petitions for reconsideration. With respect to the Copyright Office and their role with regard to the decisions they issue, we have sixty days to review them for legal sufficiency. It has nothing to do with whether we agree with them or not; it’s whether they applied the law correctly. Another part of the law is that when the parties believe that there is a novel question of law that is coming up — for example, whether or not ringtones are within a Section 115 license — the parties can suggest that the Copyright Office be asked to resolve this novel question of law; or the judges on their own, even if nobody asks them, can refer novel questions of law. The ringtone question came from the record industry. It was presented to the judges. The judges make the decision on whether or not to refer that question. When we got that issue, it was one that we had certainly thought about previously, but not in the depth that we had to deal with it. We have thirty days in which to issue a decision. The decision that we issue is binding on the royalty judges. You heard yesterday that the music publishers very much disagree with our decision. They filed an appeal. But that appeal is essentially premature, until probably next year, when the rates are decided. I think it is fair to say that when we looked at whether or not those ringtones were part of the statutory license, we did it totally on the basis of the language of the law. It was an interpretation of the statute. For people who attended the music session yesterday, we did not say all ringtones are within the statutory license. We said that if you have a recorded performance of a musical composition and it has been made available to the public and the ringtone is simply grabbing a snippet, trun-

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cating a piece of it — which frequently is the hook, the piece that you know the best — there is no derivative work created, because if there is a derivative work, it would be outside the scope of the license. So for those works where there is no new copyrightable authorship in the recasting of that work — no new lyrics, no new sounds, no new musical pieces — they fall within the statutory license. But if there are legitimate derivative works, they are outside. We will see how that plays forward. We actually did get another question from them, which is a very esoteric question involving another statutory license in Section 114. Before I turn this over to David, I am going to say one thing about reengineering. We are in the process of reengineering all of our processes. In reengineering all of our processes we are going all electronic. Everybody’s job is changing, beginning this summer. I think the effective date of all the job changes is June 21. Some of us are offsite, two miles from Capitol Hill. We will be moving back. We will be introducing a new IT system for all that we do. Our facilities have been reconstructed. Most people — not necessarily David — like the new facilities and the new furniture. I’m joking. He doesn’t like the color of our new furniture. The real challenge is electronic service and turning on the system, saying to people, “You can come and you can file electronically. We will accommodate you. It will be faster. It will be much more efficient. It will be cheaper. It will be $10.00 cheaper than a registration that is made through paper.” All of this will be put on our Web site. We are not exactly sure when it will be ready. That was the “pray” part. My staff has told me July 1. I am not sure that is right. They are going off next week for two days in a retreat, staying overnight and working all night if they have to. They have to come up with a definite date and backup plans. The bottom line is we will go electronic. I hope that it works smoothly. It probably won’t. No major IT change like this ever works totally smoothly, but we will do the best we can. I am going to turn to legislation. You heard yesterday that we are involved in a lot of legislative issues. Fashion design is one that we worked on last year, but didn’t take a position. You will hear more about that in this afternoon’s panel. Music licensing has consumed my life for about three years. I hoped it had gone away, but it has not. I am not sure that it will make it through. The House is very much interested. The Senate is focusing much more on another issue that we care very much about, which is orphan works. This is what you do when you can’t find the copyright owner. At this point, I am going to turn it over to David, who will pick up on orphan works, which is Senator Leahy’s priority for copyright. Everyone has made it clear to us that this is “Patent Reform Year,” and so we will see about orphan works. He is also going to take you through something that a year of our time was devoted to, with some interesting results, which is the triennial rulemaking on exceptions to technological measures that are used by copyright owners to protect access to their works. MR. CARSON: I have just over twelve minutes to talk about two topics, each of which would take a half hour at the very least to begin to explain to you. So this presentation is going to be rather cursory. If you were here last year, we had a whole panel on orphan works, so I am going to assume that you have a pretty good background in it and I am just going to skip through it fairly quickly. What is an orphan work? It is a work protected by copyright whose copyright owner

668 S E S S I O N V I I I : COP Y R I G H T cannot be identified or, if they can be identified, cannot be located by someone who wants to use the work. The point of an orphan work solution would be not to allow you to use a work without finding the copyright owner; to encourage you to find the copyright owner; but acknowledge that if you really do try and you cannot find the copyright owner, that there may be some way in which you still can use the work. The next point is one that if you are outside the U.S. context may not have much meaning for you. Contributing to the orphan works problem here are changes we have had in our law since 1976, as we have watered down our formalities. Whatever you think about formalities, one thing formalities like registration and notice do is to let other people know who owns a work. That is rather useful when other people want to license rights to works. Lengthening of copyright term, whatever you think about it, also creates problems with respect to orphan works, because, all other things being equal, the older a work is, the less likely you are to be able to find its current owner. In light of those changes and in light of problems that we were aware of and that others have brought to us, we did a study, at the request of Senators Hatch and Leahy, on the nature and extent of the orphan works problem, and, assuming we concluded that it was a problem, on what kind of solutions there might be to the problem. I am not going to go into what we found because I just don’t have time. I will just state that we did conclude, based upon a lot of input from the public, including many copyright owners, that there is a real problem with orphan works. Many people want to make uses of works and would be happy to license those uses in many instances, but they simply can’t locate the copyright owner. So these are works that are just sitting out there, protected by copyright, but with no one to claim the copyright. Therefore, they are really withdrawn from public view, in many respects. How do you address it? The solution we came up with, which was a solution that I think most of the people who participated in the study coalesced around, was a limitation-on-remedies approach, an approach that essentially had two steps. The first one was, anyone who wants to make use of an orphan work must first make a good-faith, reasonable attempt to find the copyright owner. If you do that and you can’t find the copyright owner, then you may go ahead and use the work. You must give attribution if you at least know who the copyright owner is, and you must give attribution to the author if you know who the author is. But if you cannot locate the copyright owner, then you may go ahead and use the work. What happens, then, if the copyright owner appears, surfaces, and says, “Hey, that’s my work. You’re using it”? What happens depends on your status in some respects. First, there will in most cases — at least in many cases — still be an opportunity for the copyright owner to get monetary relief, but it will be reasonable compensation. For example, statutory damages are off the table if you have made a reasonably diligent search and have not located the copyright owner. So there would be no statutory damages, but only reasonable compensation. By “reasonable compensation,” we mean — and this is reflected in some case law — the amount the user would have paid to the owner if they had engaged in negotiations before the infringing use commenced. However, in certain cases our recommendation was that there should be no monetary relief available. That would be in cases where the infringement was being made without any purpose of direct or indirect commercial advantage. One example might be a museum that is publishing a catalogue of an exhibition that includes orphan works. The other condition would be that if the copyright owner appears and asserts a claim of infringement, you cease that infringement immediately or expeditiously.

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With respect to injunctive relief, the recommendation was that if someone has taken an orphan work and then created a derivative work out of it — recast, transformed, or adapted that work — but added a significant amount of his or her own expression, in recognition of the fact that he or she has put a lot of his or her own authorship into that new derivative work, injunctive relief would not be available if the copyright owner resurfaced. However, that is conditioned upon the infringer’s (because they are still an infringer) payment of reasonable compensation for the continued use of the work. That is the basic recommendation. Last year we had hearings in the House and the Senate. Representative Lamar Smith, who at the time was the chairman of the House Subcommittee on Courts, the Internet, and Intellectual Property, sponsored an orphan works bill, which was introduced in May. His subcommittee quickly sent it to the full Judiciary Committee. In September, it was consolidated with music licensing legislation, which was probably what doomed it not to be enacted last year, into what was called the Copyright Modernization Act.12 As I said, it didn’t go any further, if for no other reason than because it was coupled with music licensing legislation. You have heard enough about that to know that that’s enough to be the seal of death for the bill. This year we are told that we will see orphan works legislation introduced again. While the House was the center of attention for orphan works last year, it’s pretty clear that Senator Leahy, the new Chairman of the Senate Judiciary Committee, will be taking the lead on this. We have been told that this will be his top copyright legislation priority. I did say “top copyright legislation priority.” It has been made quite clear that patent reform is going to be Congress’s primary intellectual property focus. For those of you who read the newspapers, the Judiciary Committee has a couple of other things on its mind as well. So when they will actually get around to doing anything on orphan works is unclear. We have been told since the beginning of the year that it’s just a matter of a couple of weeks until the legislation gets introduced. It may be a matter of a couple of weeks for the next few months. I am not going to go through the details of what we understand might be some of the changes. Nothing major, but some tweaks to the basic recommendation that we made. It is our understanding that it is going to be along the lines of the recommendation we made last year, along the lines of what was in the legislation that was introduced last year. But there are still some outstanding issues. One of the nice things about the orphan works legislation is that it is legislation on which many copyright owners and users agree. In fact, one of the reasons we thought this was such a wonderful project to engage in was that at a time when there seems to be such polarization on so many copyright issues, this was one where, in fact, users and copyright owners did see eye to eye in many respects. Think of publishers, for example, who publish books that use photographs and other things for which they can’t necessarily find the copyright owner all the time. There are some — particularly, I think it is fair to say, photographers and those in the visual arts — who have a lot of difficulties with the legislation. There are certainly serious attempts being made in discussions, in crafting this year’s version, to try to address their objections, at least to some degree. Given that I have four minutes left, I will move on to the other issue that I want to talk 12 Copyright Modernization Act of 2006: To Amend Title 17, United States Code, to Provide for Licensing of Digital Delivery of Musical Works and to Provide for Limitation of Remedies in Cases in Which the Copyright Owner Cannot be Located, and for Other Pur-poses, H.R. 6552, 109th Cong. (introduced Sept. 12, 2006), available at http://www.govtrack.us/congress/bill.xpd?bill=h109-6052.

670 S E S S I O N V I I I : COP Y R I G H T about, our Section 1201 rulemaking. I will, given the time, assume that you know that the basic framework of the rulemaking is to implement our requirement under the WIPO Copyright Treaties13 to provide adequate protection for the technological measures that copyright owners and authors use to protect their works. The provision in our law that this rulemaking relates to is the provision you see in front of you, which says you cannot engage in the act of circumventing a technological measure that effectively controls access to a work protected by copyright. However, there is an exception, one that is fairly difficult to comprehend. One day I think I may comprehend it. It says the prohibition does not apply to persons who are users of a copyrighted work which is in a particular class of works, if those persons are or in the next three years are likely to be adversely affected by that prohibition on circumvention in their ability to make non-infringing uses of that particular class of works. I’m sure that’s crystal-clear to all of you. Basically, what it means is that we engage in a rulemaking every three years. People come to us and say, “This is a particular kind of work with respect to which I haven’t been able to engage in non-infringing uses because the law prevents me from cracking through the access controls that are preventing me from engaging in this non-infringing use.” We have done this three times now, most recently last November. I think the first time there were two classes that we exempted, the second time four, and this time it was six. I don’t know what that tells us about the next time. We will see. I want to talk about one issue that we have addressed in the past because it is an issue that became very much in play this year: What is a particular class of works? We exempt non-infringing uses of classes of works. What we concluded in the earlier rulemakings was that a class of works has to be based on attributes of the works themselves, not by reference to external criteria, such as the intended use or users of the works. In our first rulemaking, for example, people wanted us to exempt “fair-use works.” If you think about it, any work could be a “fair-use work,” because for any kind of work, you could imagine that there is some kind of fair use. So we sort of drew a line and said, no, you have to start with the categories of works that are enumerated in Section 102 of our statute — sound recordings, literary works, musical works, etc. — and then you can refine that by reference to other things, for example, the medium on which the works are distributed or maybe the access-control measure applied to them — for example, motion pictures distributed on DVDs protected by the content-scrambling system. We have never done that one, but that would be a good example of how you would do that. Our first case this year broke those rules: Audiovisual works included in the educational library of a college or university’s film or media studies department, when circumvention is accomplished for the purpose of making compilations of portions of those works for educational use in the classroom by media studies or film professors. The case that was made to us was made by media studies and film professors, who made a pretty compelling case that in the course of a college-level film studies class, a professor might need to show short clips from a number of motion pictures to make a point about whatever subject he or she is talking about. Sometimes that subject might be the use of light in a particular kind of motion picture — the point being that in some

13 World Intellectual Property Organization, Copyright Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 65 (1997), and Performances and Phonograms Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 76 (1997), available at http://www.wipo.org.

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cases you really do have to show a pretty good-quality clip of a film in order to make the point you are trying to make. They made a pretty compelling case that there really is no way to do that in this day and age, when motion pictures are distributed predominantly on DVDs and DVDs are protected by the content-scrambling system. The only way to get those clips off the DVDs and put them in a PowerPoint pre-sentation, for example, or some similar presentation — requires circumvention. The point they made was that to show a number of clips, there is no other way to do it. You can’t shuffle DVDs in and out of a DVD player. That takes up the entire class, just trying to get one DVD out and another DVD in and then get to the part of the film you want to show. So we concluded that they made the case that for that particular context, there really was a need for them to be able to circumvent in order to do what they needed to do. Our dilemma was: if we followed our old rules, we would be exempting motion pictures on DVDs protected by the content-scrambling system, which wouldn’t make the motion picture industry very happy and which would, in fact, be an invitation for all sorts of hacking for all sorts of reasons, which really hadn’t been justified to us. Just to cut to the final conclusion, here was a case where we finally were persuaded that you should be able to refine a class by reference to the users and/or the use, after going through the first cut, which is to look at the nature of the work, the category of work, and maybe look at the medium on which it appears, and so on. But ultimately you can refine that class by reference to use or user, when appropriate. In this case, had we not done that, we would have had a very difficult dilemma. We either would have granted the exemption, which might have created all sorts of havoc, or we would have had to say, “Gee, you have made a real good case for your use, but in light of the other harm that would result from creating such a broad class, we are going to deny it in any event.” Neither seemed very satisfactory. I am going to mention one other one, because it got us into a lawsuit, the first lawsuit we have had under this provision. The class is: Computer programs in the form of firmware that enable wireless telephone handsets to connect to a wireless telephone communication network, when circumvention is accomplished for the sole purpose of lawfully connecting to a wireless telephone communication network. So you see that we have embraced our new interpretation of class wholeheartedly. This was about cell phones, which is not what you would imagine a circumvention rule designed to protect copyright to be all about. The short version of the story is that while most cell phones technically should be able to work with any cell phone network if you choose to subscribe to another network, most cell phone carriers, at least in the United States — will usually prevent you from getting access to that part of the cell phone’s firmware that allows you to connect to another carrier, because they do not want you to connect to another carrier; they want you to stay with them. We actually had some information that suggested that in some cases this is a very valid and consumer-friendly business model. But the question for us was: What does this have to do with protecting copyrighted works? We concluded that it had absolutely nothing to do with protecting copyrighted works. They technically had, in fact, a decent case that, under Section 1201, someone who circumvented the access controls that were keeping that person from getting to the part of the firmware that allows them to connect to another network was in fact violating Section 1201(a)(1) by its very terms, because the firmware they are trying to get access to is a copyrighted work. But the point of the whole implementation of the access control was not to protect the copyrighted work; it was to

672 S E S S I O N V I I I : COP Y R I G H T keep you using the original cell phone carrier. That seemed to have no relationship whatsoever to what Section 1201 was all about. That is a very shorthand version of our analysis was, but that is essentially our analysis. For that reason, we exempted it. As I said, we are now in litigation over that, which is largely on procedural grounds, rather than substantive grounds. The court just heard our motion to dismiss earlier this week, and we will see whether that survives. MS. PETERS: The name of the case is? MR. CARSON: TracFone Wireless v. Billington — and Peters.14 [Laughter] PROF. WONG: Thank you to Marybeth and to David. I believe lunch awaits everybody.

14 TracFone Wireless, Inc. v. Billington, No. 06-22942, ILRWeb (P&F) 3204, Complaint Filed Dec. 5, 2006 (S.D. Fla.) (challenging software exemption under DMCA), available at http://www.eff.org/IP/DMCA/ tracfone_v_billington_complaint.pdf.

IX: PATENT PART A: ASESSION VIEW FROM THE TRENCHES

SESSION IX: PATENT

Part A: A View From the Trenches

Moderator CHARLES FISH

Vice President & Chief Patent Counsel Time Warner, Inc. (New York)

Speakers BRIAN W. NOLAN

HON. JED S. RAKOFF

McDermott, Will & Emery LLP (New York)

U.S. District Judge Southern District of New York

BASIL IMBURGIA

Senior Managing Director, FTI Consulting (New York)

Panelists HON. KLAUS GRABINSKI

Presiding Judge District Court (Düsseldorf)

Hon. Koichi Tanaka Judge, Tokyo IP High Court (Tokyo)

BRIAN MURPHY

TONY YEO

Morgan Lewis & Bockius LLP (New York)

Director, Drew & Napier LLC (Singapore)

MR. FISH: We are very honored to have this panel here today. In addition to three of the smartest and most-hard-working judges that anyone will have the pleasure of working with, we have three practitioners who will also help present a very interesting insight into patent litigation, both in the United States and in other jurisdictions. The title of our panel is “Patent Litigation: A View from the Trenches.” As a graduate of the Naval Academy and an amateur military historian, I thought I would take just a minute to think about that military metaphor and whether it is important or appropriate when we are talking about patent litigation today.

674 S E S S I O N I X : PA T E N T Military historians teach us that you find forms of warfare that are more static, that are more in favor of the sort of situations that you find in trench warfare, when technology is strongly on the side of defense. So, for example, the walls of Byzantium do not fall until the Turks can deploy cannon against them; or the armies in World War I find themselves locked in immobile positions until new technology, such as armor and the deployment of aircraft, can break that stalemate. I would suggest to the audience and to the panel that that metaphor, “a view from the trenches,” is singularly inappropriate, at least for patent litigation as it occurs in the United States today. In fact, what we see in the United States today, if you want to continue the military metaphor, is something much more like the light cavalry of the Mongol horde sweeping out of the steppes of Asia, or perhaps the integration of close air support with armor that you find in a blitzkrieg. In fact, most of the technology, most of the procedures, seem to benefit the offense, rather than the defense, in patent litigation today. Whether or not this “view from the trenches” military metaphor is appropriate, it is still a good topic to talk about. The second thing I wanted to say in introduction before we get to our distinguished panel is that we have been told by several commentators that the discussion of the patent system, and specifically discussions around patent reform and what is wrong with patent litigation in the United States today, has become perhaps a little bit too heated and a little bit too uncivil. So, for example, there are people who like to use the “T” word and brand their opponents as “patent trolls,” and that that is somehow inappropriate. I grew up in a tradition that said the marketplace of ideas is a messy place, and sometimes even a rude and obnoxious place, but that that is how we advance intellectually. In the interest of civil dialogue, I am going to ask the panel, and also the audience when we get to your questions, to please refrain from using the phrase “patent troll.” There was a white paper that was put out by fifteen leading American research universities at the beginning of March on best practices for university licensing.1 Point 8 on their nine-point plan was “be mindful of the implications of working with patent aggregators.” So the universities, some of whom have perhaps on occasion been called patent trolls — that’s the last time we’ll use that phrase, if that’s okay with the audience — made the point that there are two types of patent aggregators: there is a beneficial “value-added” patent aggregator, which is something that they defined as an entity that brings technology and rights together, bundles them for sale, making it more likely that technologies will be deployed, sort of advancing progress; and then there is what they called a “not beneficial patent aggregator (also known as a ________)” — I can’t use the word anymore because I told you we weren’t going to say it anymore. So if someone in the audience feels that you need to use that phrase, or other similarly uncivil phrases, we would ask you to use “type 2 aggregator” rather than “patent troll” for today’s discussion. With that, I would like to move to the panel. Brian is going to start off. *

*

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1 Association of American Universities, In the Public Interest: Nine Points to Consider in Licensing University Technology (Mar. 6, 2007), available at htp://www.aau.edu/ research/TechTransfer_Pts_to_Consider.pdf.

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The Real-World Effect of EBay, Inc. v. MercExchange, L.L.C. Brian W. Nolan2 I. INTRODUCTION Almost eleven months ago, a unanimous Supreme Court reversed the Federal Circuit’s decision granting MercExchange’s motion for a permanent injunction.3 The Justices agreed that in reviewing a motion for a permanent injunction in a patent case, a court must apply the traditional four-factor test. A plaintiff must show (1) that it has suffered an irreparable injury; (2) that the remedies available at law are inadequate to compensate the injury; (3) that the balance of hardships between the plaintiff and the defendant warrants an equitable remedy; and (4) that a permanent injunction does not disserve the public interest.4 In two concurring opinions, however, the Justices provided differing advice to lower courts concerning the application of the four-factor test. Chief Justice Roberts, joined by an unusual pairing of Justices Scalia and Ginsburg, directed lower courts to the history of permanent injunctions in patent cases. The Chief Justice noted that courts had issued injunctions in the overwhelming majority of cases since the early 19th century.5 In applying the four-factor test, lower courts should understand that “a page of history is worth a volume of logic.”6 By contrast, Justice Kennedy, joined by Justices Stevens, Souter, and Breyer, discounted the historical trend of granting injunctions. These Justices opined that times have changed through the arrival of patent trolls, business method patents and patents that cover a small component in a larger device.7 For these reasons, district courts should consider whether the historical practice of normally granting injunctions fits the present circumstances of patent cases.8 Considering the conflicting advice provided by the concurring opinions, it is no wonder that some district courts appear to be taking diverging paths. Although the majority of courts still grant permanent injunctions after a finding of infringement of a valid patent claim, some district courts have denied permanent injunctions and fashioned awards similar to compulsory licenses. Irrespective of a district court’s penchant to grant injunctions, courts are undertaking in-depth analyses of the four-factor test before rendering a decision. This practice has forced patent litigators to modify their approach to litigation. Now parties must undertake additional discovery to compile evidence concerning the four factors. A party must modify its trial presentation to include witnesses that support its view of the four factors. These modifications may include additional tasks for expert witnesses. Finally, because a district court must make findings concerning the four-factor test, the court may undertake new procedures for taking evidence concerning these factors. For example, some district courts have held hearings after the trial so that the court may hear testimony specific to the injunction, or have denied injunctions until the 2 Mr. Nolan is a partner at McDermott Will & Emery LLP in New York City, where he practices in the area of intellectual property litigation. The views expressed are solely those of the author and should not be imputed to his firm, clients or any other party. Brian may be reached at [email protected] or 212.547.5400. 3 eBay Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006) (Alito, J., did not participate in this decision). 4 Id. at 1839. 5 Id. at 1841. 6 Id. at 1842. 7 Id. 8 Id.

676 S E S S I O N I X : PA T E N T parties had the opportunity to marshal evidence supporting the grant of an injunction.9 One wonders if district courts will begin bifurcating permanent injunction proceedings, as they do with other equitable issues, such as inequitable conduct. II. THE eBAY v. MERCEXCHANGE CASES A. LOWER COURT PROCEEDINGS

1. The District Court Decision MercExchange, L.L.C. sued the popular Internet auction site eBay, its wholly-owned subsidiary Half.com, and ReturnBuy for infringement of three patents assigned to MercExchange. The dispute surrounded eBay’s “buy-it-now” feature, which allows customers to purchase an auctioned product at a fixed, list price before the expiration of the auction. After a five-week jury trial, the jury found that eBay and Half.com willfully infringed two patents.10 The jury awarded MercExchange $35 million in damages. After the jury’s verdict, the district court considered the plaintiff’s motion to permanently enjoin the defendants from further infringement. In reviewing the plaintiff ’s motion, the district court noted the Federal Circuit’s position that once a plaintiff establishes infringement, a court should issue an injunction absent sufficient reason for denying it.11 The Federal Circuit has supported this position by recognizing the property right embodied in a patent and that the essence of property is the right to exclude others from enjoyment of that property.12 In light of this Federal Circuit precedent, the district court performed an analysis of the traditional four factors identified above. To start, the district court presumed irreparable harm, since MercExchange had established infringement of valid patent claims.13 The district court, however, recognized that a presumption does not confer a finding of irreparable harm on behalf of a patentee, but is simply as stated a presumption of irreparable harm.14 eBay persuaded the district court that MercExchange would not experience irreparable harm, because MercExchange did not practice the patents. Instead, MercExchange had shown a propensity to license the patents-in-suit.15 The district court held these facts, along with statements made by MercExchange to the media, rebutted the presumption of irreparable harm. The district court reviewed the remaining factors and determined that (1) an adequate remedy at law exists in the form of a monetary award; (2) the public interest favors neither party because the patents cover business methods not practiced by MercExchange; and (3) the balance of hardships favors eBay because the plaintiff exists solely to license its patents or sue to enforce its patents, and not to develop or commercialize them. A monetary award can remedy any injury due to the defendant’s continued infringement.16 The district court went on to note the contentious relationship between the parties and envisioned the parties continually requesting court hearings to 9 See, e.g., Finisar Corp. v. DirecTV Group, Inc.., 2006 U.S. Dist. LEXIS 76380 (E.D. Tex. July 7, 2006) (denying injunction after holding a hearing in which three experts testified); IMX, Inc. v. Lendingtree, L.L.C., 2007 U.S. Dist. LEXIS 1972, at *59–60 (D. Del. Jan. 10, 2007). 10 eBay, Inc. v. MercExchange, L.L.C., 275 F. Supp. 2d 695, 698 (E.D.Va. 2003). 11 Id. at 711. 12 Id. 13 Id. at 711–12. 14 Id. 15 Id. at 712 (“Substantial evidence was adduced at trial showing that the plaintiff does not practice its inventions and exists merely to license its patented technology to others.”). 16 Id. at 713–14.

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adjudicate allegations of violations of the injunction.17 Based on the above, the district court denied MercExchange’s motion for a permanent injunction.18 2. The Federal Circuit’s Opinion The Federal Circuit reversed the district court. Writing for a panel that included Chief Judge Michel and Judge Clevenger, Judge Bryson noted, “the general rule is that a permanent injunction will issue once infringement and validity have been adjudged.”19 Courts refuse to enter injunctions only in rare instances where they must protect the public interest.20 The Federal Circuit stated that these rare instances include where a patentees’ failure to practice an invention frustrates an important public need, such as using the invention to protect the public health.21 In the Federal Circuit’s view, the present case did not offer circumstances that supported the denial of an injunction. The Federal Circuit discounted the district court’s concerns respecting the effects of business-method patents on the public and the possibility of numerous contempt motions regarding whether eBay’s redesigns violated the injunction.22 Further, the Federal Circuit disagreed that MercExchange’s willingness to license the patents foreclosed its ability to seek a permanent injunction.23 The Panel saw no reason to depart from the “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.”24 The Federal Circuit reversed the district court’s denial of MercExchange’s motion for a permanent injunction. B. THE SUPREME COURT’S OPINION

The Supreme Court granted certiorari and vacated the judgment of the Court of Appeals.25 The Court unanimously agreed with Petitioners eBay, Inc. and Half.com, Inc. that the traditional four-factor test applies in disputes arising under the Patent Act.26 The Supreme Court rejected the Federal Circuit’s view that a general rule exists in patent cases that requires the issuance of a permanent injunction absent exceptional circumstances.27 Nothing in the Patent Act indicates that Congress intended courts to depart from the long tradition of applying the four-factor test of (1) irreparable harm; (2) inadequate remedy at law; (3) balancing the hardship between the parties; and (4) effect on the public interest.28 The Act states that an injunction may be issued, but does not require an injunction.29 To support the Court’s position, Justice Thomas turned to the Court’s treatment of injunctions under the Copyright Act.30 The Court has consistently rejected invitations to replace the traditional equitable considerations in favor of automatic injunctions in copyright actions and extended this position to patent cases. Therefore, the Federal Circuit should not have departed from the traditional equitable factors by applying a general rule unique to the Patent Act.31 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Id. at 714. Id. at 715. MercExchange, L.L.C. v. eBay, Inc., 401 F.3d 1323, 1338 (Fed. Cir. 2005). Id. Id. Id. at 1339. Id. Id. eBay Inc. v. MercExchange, L.L.C., 126 S. Ct. at 1837, 1838–39. Id. Id. at 1839, 1841. Id. at 1839. Id. Id. at 1840. Id. at 1841.

678 S E S S I O N I X : PA T E N T Justice Thomas did not limit his criticism to the Federal Circuit, but indicated that the district court had swung the pendulum too far in the other direction and would exclude a large swath of patent cases from potential injunctions.32 The majority opinion rejected the district court’s generalization that a patentee’s willingness to license a patent establishes that the patentee would not suffer irreparable harm from continued post-trial infringement.33 Such a rule would subject self-made inventors or universities that may prefer licensing revenues to practicing their invention to a categorical denial of injunctions that does not square with the principles of equity adopted by Congress. Although Justice Thomas’ opinion holds that both the Federal Circuit and the district court failed to apply the correct test, the majority opinion provides no guidance for courts to determine when they should grant permanent injunctions. In two concurring opinions, the remaining Justices attempted to do precisely that. Chief Justice Roberts, in an opinion joined by Justices Scalia and Ginsburg, directed district courts to apply the traditional four-factor test with an eye towards historical practices concerning permanent injunction in patent cases.34 Since at least the early 19th century, courts had granted permanent injunctions after a finding of infringement in the vast majority of cases. Chief Justice Roberts suggests, although history does not justify a general rule, when applying the equitable factors, district courts should understand “a page of history is worth a volume of logic.”35 Clearly, this opinion suggests that district courts should continue the practice of granting injunctions in the vast majority of patent cases. By contrast, the remaining participating Justices advise district courts to apply the historical practices only in cases that bear substantial parallels to traditional patent litigations.36 Justice Kennedy, in an opinion joined by Justices Stevens, Souter and Breyer, expressed concerns that certain changes have occurred in patent cases that call into question the historical practice of granting injunctions in the vast majority of cases. In particular, the presence of patent trolls, business-method patents and patents that cover a small component in a large device requires district courts to rethink the application of the equitable factors.37 This opinion clearly directs district courts to be leery of granting injunction in accordance with historical practices. III. DISTRICT COURTS’ APPLICATION OF eBAY v. MERCEXCHANGE In the year since the Supreme Court’s ruling, district courts have taken heed of the Supreme Court’s warning. Following the traditional four-factor test, the majority of district courts have granted permanent injunctions to patentees that have proven infringement of valid claims.38 At least six courts, however, have denied injunctions or held deci32

Id. at 1840. Id. 34 Id. at 1841. 35 Id. at 1841–42. 36 Id. at 1842. 37 Id. 38 Wald v. Mudhopper Oilfield Servs., Inc., 2006 U.S. Dist. LEXIS 51669 (W.D. Okla. July 27, 2006); 3M Innovative Props. Co. v. Avery-Dennison Corp., 2006 U.S. Dist. LEXIS 70263 (D. Minn. Sept. 25, 2006); Am. Seating Co. v. USSC Group, Inc., 2006 U.S. Dist. LEXIS 59212 (W.D. Mich. Aug. 22, 2006); Black & Decker, Inc. v. Robert Bosch Tool Corp., 2006 U.S. Dist. LEXIS 86990 (N.D. Ill. Nov. 29, 2006); MPT, Inc. v. Marathon Labels, Inc., 2007 U.S. Dist. LEXIS 3992 (N.D. Ohio Jan. 19, 2007); Novozymes A/S v. Genencor Int’l, Inc., 2007 U.S. Dist. LEXIS 10577 (D. Del. Feb. 16, 2007); Rosco, Inc. v. Mirror Lite Co., 2006 U.S. Dist. LEXIS 73366 (E.D.N.Y. Sept. 28, 2006); Smith & Nephew, Inc. v. Synthes (U.S.A.), 466 F. Supp. 2d 978 (W.D. Tenn. 2006); Telequip Corp. v. Change Exch., 2006 U.S. Dist. LEXIS 61469 (N.D.N.Y. Aug. 15, 2006); TiVo Inc. v. Echostar Comm’ns Corp., 446 F. Supp. 2d 664 (E.D. Tex. 2006); Transocean Offshore Deepwater Drilling, Inc. v. GlobalSanteFe Corp., 2006 U.S. Dist. LEXIS 93408 (S.D. Tex. Dec. 27, 2006); Visto Corp. v. Seven Networks, Inc., 2006 U.S. Dist. LEXIS 91453 (E.D. Tex. Dec. 19, 2006). 33

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sions in abeyance until the patentee can provide additional evidence. Many of these courts appear to be following the logic of Justice Kennedy’s concurring opinion that questions the applicability of permanent injunctions in certain patent cases. The Eastern District of Texas, a court favored by many patentees, has shown a willingness to deny successful patentees injunctions.39 Not long after the Supreme Court’s decision, Judge Davis denied a successful plaintiff’s motion for a permanent injunction in z4 Technologies, Inc. v. Microsoft Corp.40 z4 Technologies, Inc. sued Microsoft Corp. and Autodesk for infringement of two patents. These patents claimed methods for limiting the unauthorized use of computer software.41 After a 9-day trial, the jury concluded that the defendants willfully infringed three claims of the patents. The jury awarded the plaintiff $133 million.42 z4 sought a permanent injunction to prevent the importation and sale of Windows XP and Office products that contained the infringing component. Confronted with z4’s request, the district court, following the guidelines of the Supreme Court’s decision in eBay, undertook an analysis of the traditional four-factor test. At the outset, the district court rejected z4’s contention that a finding of infringement entitles a plaintiff to a rebuttable presumption of irreparable harm.43 Instead, the district court placed the burden on z4 to prove irreparable harm.44 The district court rejected z4’s argument that it suffered irreparable harm because Microsoft’s continued infringement does not inhibit z4’s ability to market, sell or license the patented technology. The competition does not result in lost profits to z4, loss of brand recognition, or loss of market share. Since future reasonable royalty payments could compensate z4 for any loss, it could not show that it will suffer irreparable harm in the court’s eyes. When considering whether z4 has an adequate remedy at law, the court turned to Justice Kennedy’s concurrence.45 Since the patents cover a small component in Microsoft’s products, following Justice Kennedy’s suggestion, the district court held legal remedies sufficient to compensate z4. Upon balancing the hardships, the district court tipped the scale in Microsoft’s favor.46 Developing a redesigned product, sans the infringing component, required Microsoft to devote significant resources, time and expense. Commitment of such resources would delay the release of Microsoft’s new product, Windows Vista. This product does not contain the infringing component and Microsoft scheduled a launch of this product for January 2007. Any continued infringement would be shortlived. Finally, the district court found the public would suffer negative effects through the entry of an injunction.47 After denying the injunction, the district court ordered z4 to file a new complaint for post-verdict infringement. The court ordered Microsoft to answer the complaint and file quarterly reports in the new action indicating the number of infringing products it sold. Similar to z4, two other courts in the Eastern District of Texas rejected successful patentees’ requests for injunctions.48 In Paice LLC v. Toyota Motor Corp. the plaintiff 39 See, e.g., z4 Technologies, Inc. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex. 2006) (Davis, J., presiding); Finisar Corp. v. DirecTV Group, Inc., 2006 U.S. Dist. LEXIS 76380 (E.D. Tex. July 7, 2006) (Clark, J., presiding); Paice L.L.C. v. Toyota Motor Corp., 2006 U.S. Dist. LEXIS 61600 (E.D. Tex. Aug. 16, 2006) (Folsom, J., presiding). 40 z4 Technologies, Inc. v. Microsoft Corp., 434 F. Supp. 2d 437, 444 (E.D. Tex. 2006). 41 Id. at 438. 42 Id. 43 Id at 439–40. 44 Id. at 440. 45 Id. at 441. 46 Id. at 442–43. 47 Id. at 443–44. 48 Paice L.L.C., 2006 U.S. Dist. LEXIS 61600, at *19-20; Finisar Corp. v. DirecTV Group, Inc., 2006 U.S. Dist. LEXIS 76380 (E.D. Tex. July 7, 2006).

680 S E S S I O N I X : PA T E N T sought a permanent injunction.49 The court rejected the request, because the plaintiff’s evidence failed to establish irreparable harm. Paice conceded it sought to license the patents, as opposed to practice the patents, but argued it still was irreparably harmed by Toyota’s continued infringement. This irreparable harm flowed from others’ refusal to license the patented technology. Many other companies had refused to enter into license agreements with Paice until the resolution of the case against Toyota. Without the threat of a permanent injunction, these companies may still refuse to license the technology. The court rejected Paice’s evidence on this point.50 Further, the court found that continued infringement would not affect the plaintiff’s market share or brand recognition.51 Paice’s evidence failed to satisfy the first factor of the test.52 After considering the remaining factors, the court found that the factors weighed in favor of not granting an injunction. Echoing Justice Kennedy, the court noted that the patents cover a small component in Toyota’s hybrid vehicle.53 The court reasoned that monetary damages could compensate the plaintiff, especially in light of the plaintiff’s continued offers to license the patents after the verdict.54 Toyota successfully convinced the court that the balance of hardships tipped in its favor, because Toyota had recently introduced two of the infringing hybrid vehicles. An injunction on the sale of these cars would have an effect on several other parties, such as car dealerships and suppliers, along with damaging Toyota’s reputation.55 In lieu of an injunction, the court ordered Toyota to provide quarterly accountings and pay $25.00 per vehicle. In Finisar Corp. v. DirecTV Group, Inc. a district court in the Eastern District of Texas also rejected the plaintiff’s request for an injunction.56 The court conducted an evidentiary hearing concerning the issuance of a permanent injunction in which three expert witnesses testified. At the conclusion of the hearing, Judge Clark denied the plaintiff’s request from the bench. The court found that Finisar had failed to prove irreparable harm because it did not practice the invention.57 Since Finisar did not practice the invention, a monetary award could compensate Finisar for any damages. Further, an injunction would have an effect on the public. DirecTV has a large customer base and many customers in rural areas have no other option for television service.58 The court noted antitrust concerns created by the removal from the marketplace of one of two companies that provide this service.59 Considering these facts, the court rejected the plaintiff’s request. The court ordered DirecTV to pay in excess of $100 million for past damages and required a compulsory license of $1.60 per set top box for the remainder of the patent-life.60 The Eastern District of Texas is not the only court that has denied plaintiffs’ requests for permanent injunctions. In Voda v. Cordis Corp., the court denied a request for a permanent injunction, since the plaintiff failed to show either irreparable injury or that 49

Paice L.L.C., 2006 U.S. Dist. LEXIS 61600, at *19–20. Id. at *12–13 51 Id. at *14. 52 Id. 53 Id. at *15. 54 Id. at *16. 55 Id. at *16–17. 56 Finisar Corp. v. DirecTV Group, Inc., 2006 U.S. Dist. LEXIS 76380, at *4 (E.D. Tex. July 7, 2006). 57 See Transcript of Hearing at 123-24, Finisar, No. 1:05-CV-264 (E.D. Tex. July 6, 2006), available at http://www.fr.com/news/Finisar-v-Directv_Transcriptl.pdf and http://www.fr.com/news/Finisar-v-Directv_ Transcript2.pdf. 58 Id. at 125–26. 59 Id. at 124. 60 Finisar Corp. v. DirecTV Group Inc., 2006 U.S. Dist. LEXIS 76380, at *4-5 (E.D. Tex. July 7, 2006). 50

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monetary damages could not adequately compensate for any damages.61 The plaintiff had argued that it was entitled to a presumption of irreparable harm and that an injunction was necessary to prevent harm to its exclusive licensee Scimed. The court noted that eBay had removed the presumption and that Scimed had elected not to enforce its patent rights.62 In Sundance, Inc. v. Demonte Fabricating Ltd.the plaintiff sought an injunction to prevent harm to its licensees.63 The court denied the request. The plaintiff had delayed in filing the lawsuit and could not prove that its licensees were losing sales directly due to the defendant’s infringement. The court ruled that Sundance had an adequate remedy at law in view of its licensing activity and its pre-trial offer for a license to the defendant. Two additional cases denied injunctions based upon the evidence currently before the tribunal.64 The first case noted that the patentee failed to provide evidence, such as market or financial data, that supports statements that the defendant’s infringement results in irreparable harm.65 The court went on to find that the evidence did not support a finding that the defendant’s infringement affected the plaintiff’s ability to license the patent, and noted the plaintiff’s willingness to license the patent.66 The plaintiff’s invention, however, was not a small component of the infringing product.67 Based on the evidence presently before it, the court denied the motion for a permanent injunction. Concerned with what amounted to the court imposing a ten-year compulsory license on the plaintiff, the court gave the plaintiff the opportunity to reapply for an injunction and present additional evidence in an attempt to show that it could meet its burden of satisfying the four-factor test.68 In another recent case, the district court held its decision in abeyance until it could conduct an evidentiary hearing.69 The patent claimed a method for genotyping for hepatitis C virus.70 The defendants sold a genotyping assay test kit that practices the invention. The court found that defendant’s infringement affected plaintiff’s reputation as an innovator and market leader.71 The court rejected the defendant’s argument that the plaintiff’s willingness to license the product supported a finding that an adequate remedy at law exists.72 The plaintiff’s expenditures of significant time and money in developing the patented invention swung the balance of hardships in its favor.73 Although the district court found that the first three factors of the traditional four-factor test favor granting an injunction, the court did not grant the injunction. The court hesitated to grant an injunction because of a concern that the plaintiff might not be capable of fulfilling the market’s needs for the devices.74 The court scheduled an evidentiary hearing to determine if an

61

Voda v. Cordis Corp., 2006 U.S. Dist. LEXIS 63623, at *18-20 (W.D. Okla. Sept. 5, 2006). Id. at 19. 63 Sundance, Inc. v. Demonte Fabricating Ltd., 2007 U.S. Dist. LEXIS 158 at *7–9 (E.D. Mich. Jan. 4, 2007). 64 See IMX, Inc. v. Lendingtree, L.L.C., 2007 U.S. Dist. LEXIS 1972 at *59–60 (D. Del. Jan. 10, 2007); Innogenetics N.V. v. Abbott Labs., 2007 U.S. Dist. LEXIS 193 at *75–76 (W.D. Wis. Jan. 3, 2007). 65 IMX, 2007 U.S. Dist. LEXIS 1972 at *54–55 (rejecting plaintiff’s attempts to rely on a presumption of irreparable harm in lieu of evidence of harm). 66 Id. at *56. 67 Id. at *57. 68 Id. at *59–60. 69 See Innogenetics N.V. v. Abbott Labs., 2007 U.S. Dist. LEXIS 193, at *75–76 (W.D. Wis. Jan. 3, 2007). 70 Id. at *4–5. 71 Id. at *72. 72 Id. at *72–73. 73 Id. at *74. 74 Id. 62

682 S E S S I O N I X : PA T E N T injunction presented a serious risk to the public health. After the evidentiary hearing, the court did issue an injunction.75 The Innogenetics court’s action of carefully considering all of the factors follows the practice of the majority of district courts who have confronted permanent injunction decisions post-eBay. A review of these courts’ analysis of the four-factor test shows definite trends regarding the evidence that sways a court’s decision to grant an injunction. The existence of direct competition between the plaintiff and the defendant leans toward a finding that the plaintiff will experience irreparable harm.76 Further, district courts have identified evidence of loss of market share, damage to reputation, price erosion and reduced ability to generate a customer base as reasons for finding irreparable harm and an inadequate remedy at law.77 IV. THE eBAY EFFECT ON PATENT LITIGATION A plaintiff must be cognizant of these findings as it will influence its decision to bring suit and the cost associated with successfully enjoining the infringing activities. Gone are the days where injunctions, for all intents and purposes, were issued as a matter of right. Instead, through its chosen patent litigator, a plaintiff must put forward evidence sufficient to carry its burden of proving the four-factor test. In particular, district courts posteBay have held that evidence concerning loss of market share, lost profits and damage to a plaintiff’s reputation supports a finding of irreparable harm. Patent litigators should now structure their cases to introduce this evidence, which they may not have put forward in certain cases before eBay. For example, if the market in which the alleged infringing product competes includes several non-infringing alternatives, a patent litigator may counsel a client to seek a reasonable royalty as the measure of damages. Since a reasonable royalty analysis does not consider loss of market share or lost profits, this evidence may have been absent from the case. Similarly, in the past, litigators may not have put forward evidence concerning the plaintiff’s reputation in the industry or harm to its reputation. Any litigator that chooses to forgo this type of evidence today risks limiting potential remedies for successful plaintiffs. In order to ensure that a plaintiff is not foreclosed from putting forward this evidence, the plaintiff must ensure that it produces market share information and evidence concerning the plaintiff’s position and reputation within the market during discovery. Expert reports must analyze the market and the effects that the infringement has to the intangible aspects of the plaintiff’s assets. Finally, patent litigators must consider these four-factor tests when considering which witnesses to call and the scope of the witnesses’ testimony. Patent litigators will have to ensure that the corporate witness can discuss the cost of developing the product, how the invention affects the market’s view of the plain75

Innogenetics N.V. v. Abbott Labs., 2007 U.S. Dist. LEXIS 3148, at *8-9 (W.D. Wis. Jan. 12, 2007). See, e.g., O2 Micro Int’l, Ltd. v. Beyond Innovation Tech. Co., Ltd., 2007 U.S. Dist. LEXIS 25948, at *7-8 (E.D. Tex. Mar. 21, 2007) (“This court has recognized the high value of intellectual property when it is asserted against a direct competitor in the plaintiff’s market”); TiVo, Inc. v. Echostar Commc’ns Corp., 446 F. Supp. 2d 664, 669 (E.D. Tex. 2006); Trans-ocean Offshore Deepwater Drilling, Inc., 2006 U.S. Dist. LEXIS 93408, at *12 (“GSF has not cited any case in which a continuing infringer in direct competition with a patent holder has not been permanently enjoined from using the patented invention to compete against the patent holder.”); Visto Corp. v. Seven Networks, Inc., 2006 U.S. Dist. LEXIS 91453, at *12 (“The parties to this case are direct competitors, and this fact weighs heavily in the court’s analysis.”). 77 See, e.g., Smith & Nephew, Inc., 466 F. Supp. 2d at 982-983; TiVo Inc., 466 F. Supp.2d at 669–70; Transocean Offshore Deepwater Drilling, Inc., 2006 U.S. Dist. LEXIS 93408, at *11–14; Black & Decker, Inc. v. Robert Bosch Tool Corp., 2006 U.S. Dist. LEXIS 86990, at *11–13; Wald v. Mudhopper Oilfield Servs., Inc., 2006 U.S. Dist. LEXIS 51669, at *16. 76

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tiff and the plaintiff’s position within the market. Expert witnesses’ testimony will expand commensurate with the additional areas included with expert reports as a result of courts’ requirements that the plaintiff prove the existence of the four factors. Plaintiff and patent litigators are not the only ones forced to change in light of eBay. Considering that courts must now take evidence concerning the four-factors, courts may change the manner in which they consider permanent injunctions. Instead of deciding a plaintiff ’s request for a permanent injunction based upon the trial evidence and the post-trial papers, courts may bifurcate these issues as it does other equitable issues, such as inequitable conduct rulings. After bifurcating the issue, courts may allow the parties to conduct further limited discovery concerning the four-factors and conduct mini-bench trials to determine whether the facts warrant the issuance of an injunction. Courts may choose to follow this approach because, in many instances, the evidence presented at trial provides an insufficient basis for a court to determine the four-factor test. For example, despite the Supreme Court’s remand to the district court in the eBay case, that court has still not resolved the permanent injunction question. Instead, a review of the docket sheet in the eBay district court case shows that the court remains confronted with a myriad of discovery disputes. Although the majority of plaintiffs still enjoy a permanent injunction after the successful conclusion of a patent litigation, eBay has clearly raised the bar for plaintiffs in obtaining this relief. The decision results in a need to undertake additional discovery and present more evidence at trial. Also, a court must undertake an additional analysis and support its decision to grant or deny an injunction by reviewing evidence on all the factors. The additional evidence required and steps to put forward that evidence has lowered the likelihood of a court granting an injunction slightly, but probably has raised the cost of litigation, if an injunction is the plaintiff’s goal. * MR. FISH:

*

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Thank you very much. Next we have Basil Imburgia. MR. IMBURGIA: My topic is advanced damages. It is very related to Brian’s discussion. For smaller components and bigger products, damage analysis has to be done a little bit differently. I am going to cover: lost profits, which is one of the methods of getting damages from the standpoint of a plaintiff; reasonable royalty; damages done in a combination. I will run through this in summary form. Normally, when you have a plaintiff and a defendant, the plaintiff is going to do a “but-for” task. This may be in a simple, two-supplier market, where there is a patented technology, a patented product, and an infringing product. “If you pull the infringing product out of the market,” the plaintiff says, “I would have made all those sales.” That’s simplistic. The patent is the product. That is basically the but-for test when you are doing economic damages to be able to claim lost profits. You may also consider whether there are any other products that are functional equivalents. Maybe you can make a claim for those through convoyed sales, if they are functional with the patented technology. Market share analysis: If there are three participants in this market — the patented technology, a substitute, and the infringer — you may take the infringer out of the market and split the market share with the substitute. There is price erosion. In the two-player market, if I pull the infringer out of the market, I may be able to get higher prices. That is your price erosion. Reasonable royalty. In a situation where maybe you have capacity issues as a plaintiff, you can’t distribute it — you don’t have the distribution ability to do the West Coast if

684 S E S S I O N I X : PA T E N T you are on the East Coast, those kinds of limitations — you may be limited to just a reasonable royalty. Now you are dealing with a hypothetical negotiation as a damages expert, and really what that rate is going to be. Georgia-Pacific factors78 — basically you go through and talk about all the different factors you need to consider. Are there comparable licenses? Are there convoyed sales that are going to come in where you may pay a higher rate? I am going to discuss the “entire market value” rule and apportionment of profits. Generally, the “entire market value” rule is: if I have a patented product that gets sold with, as a group, other products that are not patented, I can claim lost profits on that bundle of products. The “entire market value rule” is a situation where there may be a patented feature in a product that has a lot of other patents in it as well; I can claim lost profits on that entire product. We will discuss that. Apportionment of products is basically in a situation where you will have a patented product and there may be one feature that has a certain amount of demand that causing those customers to come and buy that product, but there are other features and other reasons why those customers are buying that product, you may need to apportion the profitability between those features. That, if you think about it, becomes very judgmental for a damages expert. They need to gather up sufficient proof. This is just the standard case law. You can get adequate compensation for the infringement, but no less than a reasonable royalty. We talked about the components of lost profits, reasonable royalty. It could be a combination of the two for the damages. For example, if I only sell on the East Coast and a West Coast infringer is out there, I may have limitations. I may get lost profits on the East Coast piece of its sales and royalties on the West Coast piece. The “entire market value rule” covers what I have discussed previously. You can get a royalty or lost profits on the entire value. I have some examples in here that I want to cover. Some of the case law says that the patented product must be a functional unit with the entire product. I did damages fifteen years ago in the Festo case.79 It was a pneumatic cylinder, but what we had were accessories. The accessories were float-through valves that blew the pneumatic cylinder back and forth. We were able in that case to make a claim for those valves because they were functional products. We were able to show, through all the evidence, that when customers are buying these cylinders, they are also buying these accessories. I think that was even before the Rite-Hite case.80 This is what is very important in proving the “entire market value” rule and whether you can actually make claims for this. You have to prove that the patented feature is really driving the demand. It is really important that you gather up enough evidence for that. As 78 Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified and aff’d, 446 F.2d 295 (2d Cir.), cert. denied, 404 U.S. 870 (1971). Fifteen “Georgia Pacific factors” serve as a starting point for determining a reason-able royalty: The royalties received by Georgia-Pacific for licensing the patent, proving or tending to prove an established royalty; the rates paid by the licensee for the use of other similar patents; the nature and scope of the license, such as whether it is exclusive or non-exclusive, restricted or nonrestricted in terms of territory or customers; Georgia-Pacific’s policy of maintaining its patent monopoly by licensing the use of the invention only under special conditions designed to preserve the monopoly; the commercial relationship between Georgia-Pacific and licensees, such as whether they are competitors in the same territory in the same line of business or whether they are inventor and promoter; the effect of selling the patented specialty in promoting sales of other Georgia-Pacific products; the existing value of the invention to Georgia-Pacific as a generator of sales of nonpatented items; and the extent of such derivative or “convoyed” sales; the duration of the patent and the term of the license. Id. 79 Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. (Festo I), 1994 WL 1743984 (D. Mass. 1994). 80 Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1545, 35 U.S.P.Q.2d 1065, 1069 (Fed. Cir. 1995) (en banc).

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a damages expert, I jump right into the sales departments, the marketing departments. I try to get their correspondence with their customers, their marketing material. We may even survey customers to find out what is really driving the demand. If we can prove, with all that data, that what is really driving the demand is the patented feature, then we can really jump out and claim damages off of the entire product. Let me show you an example. Product A is the patented product. Other functional components a lot of times are significantly larger in dollars. This is a royalty calculation, showing the “entire market value” rule. What you have as a damage base are sales of $110,000. On a royalty rate of 10 percent, you get $11,000 in damage. Not applying that calculation, you get $1,000 in damage, because you are leaving out the other functional components. But if you are going to make a claim like this, you have to show that product A is really driving the sales of $110,000. This covers a lot of the discussions that I talked about, about the technology really being a functional equivalent. In the Fonar case81 the patented feature was the basis for that demand. When you are negotiating a license rate, what you end up with is that, in those hypothetical negotiations, the sales of the other units are being considered by the parties because of the drive of that product and that feature. Let’s just go to an example. This is an actual case where the patented product was in the subwoofer. What you found, based on the evidence, was that, number one, these products, sold by Bose, always sold together. They never sold a subwoofer separately. They always sold the speaker set for $900 or the part with the actual amplifier, as well, for $1,500. In this case, they were able to prove that these always sold together, they were functioning together, and the demand was driven by the subwoofer. Of course, you get a bigger base. This is a case one of my partners worked on. If I just took a person, a person would be probably half the size of that conveyor belt. So these are big units. The plaintiff was selling the whole structure and the components, the computers up top. At the end of the day, the proof showed that the reason companies were buying this product was that these computers made this whole unit 35–40 percent more cost-effective. That was the driver. This was about a $30,000 unit up top, the computers. The whole unit cost about $1 million. That was a case where we were able to get damages on the whole unit and prove that that was the reason why they were buying. Let me talk now about apportionment. This is a case involving a software provider. My client was selling matching software. That was the infringing technology. The data that was being sold was pharmaceutical data that was bought by my client. They sold it, but they needed to use this software to clean it up. We had to do apportionment in a number of different ways. Number one, we asked: Of all the reports that were sold, which ones were sold with the patented product and which ones were sold without the patented product? At the end of the day, we ended up looking at the computer programs, apportioning that way; looking at the products, apportioning that way; and then looking at the cost. That is the breakdown of how we did it. Thank you very much. MR. FISH: Thank you very much. Now we have Judge Rakoff from the Southern District of New York. JUDGE RAKOFF: Thank you very much. I want to start by making the necessary disclaimer that nothing I am saying here today is being said in my judicial capacity. Accordingly, I will try to make my remarks as injudicious as possible. 81

Fonar Corp. v. General Electric Co., 107 F.3d 1543, 41 U.S.P.Q.2d 1801, 1804 (Fed. Cir. 1997).

686 S E S S I O N I X : PA T E N T In anticipation of this little talk, I did a survey of some of my colleagues at the District Court of the Southern District of New York. I asked them: “What do you like about patent cases? What do you dislike about patent cases? What do you like about patent lawyers? What do you dislike about patent lawyers?” I am going to give you the results. I should stress this is a very unscientific survey. It basically consisted of a couple of lunches with some of my colleagues. It is about as substantiated as a rape charge in North Carolina. It would not pass the Daubert test.82 It is very unscientific. But hopefully it will be of some interest to you. The first thing is, all my colleagues — and I certainly join with them in this — have a very high opinion of the patent litigators who practice in patent cases in our court. Of course, this may be a commentary on the rest of the lawyers in other cases. But my colleagues stressed how professional, how courteous, how credible the patent lawyers were. I attribute this entirely to the fact that they are mostly engineers. Of course, you all know the exception to this description. That is your adversary in your current case, who is a total bum. But in all honesty, we judges have a very high opinion of the lawyers who practice in the patent cases before us. My colleagues’ dislike with respect to the patent lawyers was the overuse of jargon, the tendency that I think anyone has when they are in a particular specialty to use, without even being conscious of it, the particular terms of art of that specialty, without recognizing that they are meaningless, or even gibberish, to someone who is not deeply into that same specialty. An example would be the term “reads on,” as in “the device reads on the claim,” or “the claim reads on the prior art.” In plain English, this makes no sense. It’s a term of art. Of course, it does have a meaning, which most judges become familiar with after a while. Juries almost never do. Therefore, my colleagues’ one modest suggestion to the patent lawyers, as to others, is, refrain from using terms of art; if at all possible, use plain English. When it comes to the cases, you may be interested to know that my colleagues unanimously said that they enjoy patent cases. This again may be somewhat surprising, but any of you who have ever had the misfortune to litigate an ERISA case will know that patent cases are terrific by comparison. The complications in patent cases do not come from the law. Patent law is not without its difficulties, as you all know, but it is not one of the more arcane laws that judges in the district court have to deal with. The complexities come in the facts or, more often, in the technical background that one needs to have in order to begin to understand what a particular patent is about. In a Markman hearing83 that I had at least seven or eight years ago, the lawyers first, on the morning of the hearing, jointly presented me with an agreed-upon PowerPoint presentation as to what the basic technology was that underlay the patent and the claims and the disputes that they had. This was immensely valuable. I have now taken to pretty much 82 See Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 113 S. Ct. 2786, 125 L. Ed. 2d 469 (1993). A Daubert ruling substitutes a reliability test for a relevancy test. There are four requirements: (1) Whether theory will help fact-finder (whether the theory has or can be tested); (2) Whether theory has been peer reviewed; (3) Whether the theory has a significant rate of error; (4) Whether the theory is “generally accepted” by the scientific community. Id. 83 A pre-trial hearing during which a judge hears testimony from both parties on the appropriate meanings of the relevant key words used in the claims of a patent. Holding a Markman Hearing in patent infringement cases has been common practice since it was determined by the Supreme Court in the case of Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996), that the language of a patent is a matter of law for a judge to decide, not a matter of fact for a jury to decide.

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asking the lawyers in every patent case to do that for me, often well before the Markman hearing, to get me into the basic technology. If you have a situation where the law is not that complicated, but the facts are, you have the kind of case that is very typical of the kinds of cases that we deal with in the Southern District of New York across the board. Therefore, my colleagues and I are very much opposed to the notion that is sometimes raised that there ought to be a specialized court for trying and hearing at the district court level patent cases. I would go a step further and say that I have never actually understood the rationale for the Federal Circuit. The purported rationale at the time of its creation was that there were splits among the circuits and we needed some certainty. I thought that was why we had a Supreme Court. But the danger that you always get when you have a specialized court is that that court will take a narrow view of the law before it and not look at the implications for the broader development of law in society that a court of more general jurisdiction looks at. It is, I think, a well-known fact, and a disturbing fact, that the Federal Circuit reverses district courts between 35 and 40 percent of the time. This compares to other courts of appeals reversing district courts approximately 5 percent of the time. It could be, of course, because district courts are so dumb that we can’t understand patent cases. But another possibility might be that the district courts take a much broader, often equity-based view of the cases before them and are not as tethered to the technicalities of the case as the Federal Circuit is. I can’t disguise that my colleagues and I take a certain pleasure whenever we see the Supreme Court reversing the Federal Circuit, which has become a frequent phenomenon. The eBay case, which was mentioned earlier, is a good example, I think, of the Federal Circuit trying to pretend, if you will, that patent law is different from the basic rules of equity that had governed the granting of injunctive relief since at least 500 years ago. In any event, this is so much gnashing of teeth on my part, because the Federal Circuit is clearly here to stay. But what is also clearly here to stay are jury trials in patent cases. Let me throw at you another statistic that I think is kind of interesting. Thirty years ago, the lawyers jointly chose to have patent trials tried by the judge, not a jury, in 85 percent of all patent cases that went to trial. Now that figure is 45 percent. There has been a huge shift. A slight majority of patent trials now are jury trials, and it has been an increasing percentage. There are many reasons for this trend. But what my colleagues said when I questioned them about it — and what I also again agree with — is that it’s a good thing. It’s a good thing because judges, like every other kind of human being, are fallible, have prejudices, have policy inclinations that they disguise as matters of law, have fallibilities and predilections that are personal and that sometimes impinge upon their decision making. When you have a jury, and when, as in the federal system, the jury must be unanimous, those fallibilities tend to wash out. They balance off, and you get something that is much more akin to a fair sense of the community. The usual knock on jury trials in patent cases is, “Oh, it’s all too technical. The jury can’t understand all this technical stuff.” This, of course, assumes, incorrectly, that the judges can understand all this technical stuff. I have one colleague, who will go nameless, who refuses, for example, to use email. You can see where his technological instincts remain. But my experience — and again, I am reporting not just my experience, but those of the colleagues I talked to — is that juries can definitely deal with the technical aspects of a patent case if the judge is hands-on and makes sure that the necessary steps are taken to

688 S E S S I O N I X : PA T E N T explain it to them as it was explained to him. For example, something that most of my colleagues do is, they have an initial precharge. At the very beginning of the case, they tell the jury what the basic law is, rather than waiting until the end of the case. Something that I am planning to do in a patent case I am trying this summer with a jury is to have the lawyers, before they even open, give the same sort of basic undisputed PowerPoint presentation of the basic technology that they gave to me during the Markman hearing, laying out the technical background that the jurors will need to understand what the case is about. There are a lot of other things that can be done. You, the judge, can make sure that, instead of twenty experts per side, there are maybe two experts per side. You can make sure that the lawyers, as I mentioned before, use plain English rather than jargon. (As my mother used to say, you should eschew jargon and then spit it out.) Another thing that I think is helpful in patent cases is time limits. As this very session demonstrates, if you force someone to a tight time limit, you will force them to focus on the most important concepts, the most central aspects of a case, and that will greatly clarify things for the jury. There are many other things that can be done. One thing I am also thinking of experimenting with — this is a little bit more controversial — is stopping the music at various places in the trial and asking the jury, “Is there anything you don’t understand at this point,” and have them respond. Then, if there is something they don’t understand, we will have the lawyers, in effect, deal with it. The variation on that that I have already used in many patent cases is to call the lawyers over to the sidebar, out of the hearing of the jury, and say, “It’s clear to me from looking at Juror 3 and Juror 6 that they’re lost, and we have to go back and repeat and find out what it is that they don’t understand, so that they can be with the others in deciding this case.” Actually, my time is not quite up, but I am going to stop at this point, because I think I have made the point I wanted to make, which is that patent law is not rocket science. It’s an extremely important law, but it’s not that difficult. Patent cases are difficult only because there is a technical background that is peculiar to each and every case that has to be put before the judge and jury. Patent lawyers are terrific folks, who are very well able to do that. I know in the Southern District of New York, all my colleagues and I look forward very much to seeing all of you in our courts trying these cases. Thanks very much. MR. FISH: Thank you very much, Judge Rakoff. We now have a half-hour for questions. If there aren’t any questions, we’ll see if we can get it started. In the United States at least, it seems pretty clear that patent litigation is a growth business. It is undisputable that current numbers of patent suits filed in the United States are more than two-and-a-half times historical numbers. So the question is: Do you think it is likely to change in the next ten years, which is Hugh’s conference theme? How, if at all, do you see the number of suits impacting innovation? What do you think these U.S. trends portend for the worldwide economy, if anything? MR. MURPHY: The answer to the first question is no, it is not going to change. If anything, I think the number of cases will continue to grow. The second question is really quite difficult. I think the question of the utility or benefit to the economy, to competition, from having so much patent litigation is a very important question that is going on right now in the federal government, at the Federal Trade Commission (FTC), at the Supreme Court — I think eBay is a reflection of that —

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certainly at the district court level, with the burgeoning caseload. There really isn’t a major district court in the country where the judges do not have a number of patent cases that they have to deal with. So I think on balance we are going to see more litigation. I think we are going to see an increasing involvement of the Supreme Court to try to re-strike the balance so that the litigation that does make its way through the court system is on balance worthwhile litigation. The last question, I disclaim expertise to really answer. I am a patent litigator, so I confine myself to what I think I can fairly opine on. MR. FISH: Great. Thank you. Next to Brian is Judge Tanaka Koichi from the Tokyo High Court. Judge Tanaka, maybe we can ask you the same question. JUDGE TANAKA: The number of patent litigation cases has continued to grow higher and higher also in Japan. Twenty years ago, we had about 600 patent cases. Now, at present, we have about 1,200 cases. So the number has doubled. The trend is continuing to increase the number in my opinion. MR. FISH: Tony, you are next down the line. What do you see in your practice? MR. YEO: I am from Singapore. Our Patents Act is relatively new.84 We have had our own patents only since 1995. Before that, we used the British Patents Act. Since 1995, we have seen growth in the number of patent cases coming to court. Many, of course, are flawed and many are settled. The number of cases that actually go all the way to trial has actually increased tremendously. I think there is definitely a lot of growth coming up in this area as well. MR. FISH: Do we have a question from the audience? QUESTION: My question is for Judge Rakoff. The Federal Circuit was created because it didn’t work when we had multiple circuits adjudicating patent law. JUDGE RAKOFF: It didn’t work, as I understand it, because there were significant differences among the circuits. But I think the blame, if that’s the right word, has to be on the Supreme Court. There are circuit splits in most areas of law that the Supreme Court has historically taken to resolve. In the patent area, they were less assiduous in taking them. Of course, as you know, there has been a more general trend of the Supreme Court not taking cases generally. I think if you extrapolate the trends fully, you will see that in about fifteen years the Supreme Court will have a docket of zero, which will be good for our district courts. But being more directly responsive to your question, I think the cure should have been that the Supreme Court should have resolved those splits rather than create a whole new court. MR. FISH: Another question? QUESTION: This is a question for whoever wants to answer it, but in particular both the judge and the litigators. As part of the patent reform debate, people have suggested making apportionment mandatory in a number of different ways, at least making the analysis mandatory on the district court. My understanding is there are a number of rationales that have come out of that. One is to create a better record, as well as a legal basis for reversal up on review by the appellate court. One is to look beyond the patent claims to what the actual innovation was and have the plaintiff demonstrate the value. My question is: Generally, do you think that mandatory apportionment is a good idea; 84 Singapore Patents Act 1994, available at http://statutes.agc.gov.sg/non_version/cgi-bin/cgi_retrieve.pl? actno=REVED-221&doctitle=PATENTS%20ACT%0A&date=latest& method=part.

690 S E S S I O N I X : PA T E N T and, if so, why; if not, why; and what practical consequences in litigation do you think would flow from mandatory apportionment? MR. FISH: Anyone like to answer that? MR. MURPHY: I’ll just throw in my two cents. My gut reaction is I never like it when anything is mandatory in how I present my case. I think it is really up to the attorneys who are litigating the case to make the decision. Can they prove, for example, the entire market value theory? It is easy to say; it is not that easy to prove. And if you cannot prove it, you probably should not assert it. So if you have to drop down to some type of apportionment or more limited royalty calculation that is non-speculative, that is the lawyer’s job. It is the job of the fact finder, whether it be the judge or the jury, to weigh the evidence and ultimately conclude what is the value of the innovation. So my gut reaction is I do not think it is a good idea whenever you require mandatory presentations. On the other hand, it is a salutary benefit to both the parties and the appellate court when the fact finder, at least in bench trials when they have findings of fact, when you have a clear record. That always helps the appellate court reach a better decision. So sure, that is a good thing. But that is something that the trial lawyers should be aware of and addressing during the presentation of the evidence. MR. FISH: Judge Rakoff, did you have anything to add? JUDGE RAKOFF: I agree right down the line with what was just said. And again, I hesitate to push too hard on the fact that the law is a seamless web, but the experience in many areas of the law is when you make something mandatory, when you make it rigid, when you make it obligatory, you sooner or later create some injustice in some case. So I would not make it mandatory. MR. FISH: Thank you, Judge Rakoff. I would like to ask along that line Judge Grabinski from the court in Düsseldorf to tell us about damages practice in his court. Do you have the same sort of “doors wide open,” “anything the experts think they can prove” approach that some charge we have in the United States? JUDGE GRABINSKI: In German practice, we have to differentiate. We have first infringement proceedings that are directed to an injunction, to an order to render account, to the destruction of the infringing product, and the declaration that the infringer is liable for all damages the patent holder has incurred due to the patent infringement. If the plaintiff can prove that there is a patent infringement the court will issue a respective judgment. No calculation of damages at this point of time. After such a judgment on the liability of the patent infringer most parties settle the case outside the court. Only a small number of cases come back, and then there is a new proceeding about the calculation of damages incurred by the patent holder. There are three ways how to calculate damages: there are reasonable royalties; there is loss of profit; and third is return of profits made the infringer. The patent holder, or maybe also the exclusive licensee, is free to choose between these three ways. Then, of course, it depends whether he can prove that, for example, in the case of reasonable royalties, the parties would have agreed on a certain amount of royalties, or whether, in the case of lost profits, he can prove some of the losses that were caused by the infringement. But he can also say, “I want to get, in the first place, my losses compensated, and in the second place I want to get reasonable royalties, if this is higher, if I cannot prove in the first way how to calculate damages.” It depends. In some cases, we decide that we have to take evidence on the amount of

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damages, and then we will appoint an expert. In other cases, we may also feel quite secure that we can render a judgment without consulting an expert; it depends. But very often I try to settle the case. The percentage of cases that are settled is rather high. It is much higher than in the original infringement proceedings. MR. FISH: Thank you very much. We still have time for questions. QUESTION: This question is directed to the whole panel. I am just wondering how many patent infringement cases that come before you deal with pharmaceutical patents or technical patents. MR. FISH: I’m sorry. The categories are “pharmaceutical” and “all other”? QUESTIONER: Yes. MR. NOLAN: I think, especially in the United States, we have a cottage industry on pharmaceutical patent litigations under the Hatch-Waxman Act85 and what may be additional litigations if Congress passes a follow-on Biologics Act.86 Some attorneys will spend a good portion of their career on it. I know some of the people on this panel have spent a good portion of their career on that. Patents drive the pharmaceutical industry in the United States. The amount of profit that the pharmaceutical industry pulls out of the United States is enormous. The preservation of patent protection is a vital aspect of the innovator’s business and as such litigation will continue. If a follow-on Biologics Act does get passed, you will see more and more pharmaceutical and technical patents coming before district courts. JUDGE GRABINSKI: The Düsseldorf court, where I am coming from, dealt with about 500 cases last year. Of these cases, my estimation is that about 10 percent of all cases concerned pharmaceutical patents. In the last hearing day I had before coming to this conference we dealt with six or seven patent cases. Three of them concerned pharmaceutical patents. MR. MURPHY: Just one comment. In the United States, there is pending legislation that may actually increase the already increasing number of pharmaceutical patent cases under the Hatch-Waxman Act, as Brian mentioned. There is pending legislation that will prohibit certain types of settlements that have traditionally been used to resolve the litigation either short of trial or after trial.87 JUDGE RAKOFF: On the grounds that it is collusive. MR. MURPHY: On the grounds that it is collusive, yes, what they call reverse payments or exclusionary payments. The legislation proposes to eliminate that manner of settling pharmaceutical patent cases. There is other legislation that proposes to outlaw another settlement tool that is used, which is to authorize a generic to compete with the generic industry once they obtain Food and Drug Administration (FDA) approval for a non-authorized generic. Those are two useful tools. They have been heavily criticized certainly by the FTC and most antitrust lawyers.88 They have been supported by people 85 Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585, codified as amended at 21 U.S.C. § 355 and 35 U.S.C. §§ 156, 271, 282 (1984) (Hatch-Waxman Bill for Patent Restoration). 86 S. 1695, 110th Cong., Biologics Price Competition and Innovation Act of 2007: A bill to amend the Public Health Service Act to establish a pathway for the licensure of biosimilar biological products, to promote innovation in the life sciences, and for other purposes (introduced June 26, 2007), available at http://www.govtrack.us/congress/bill. xpd?bill=s110-1695. 87 H.R. 1902, 110th Cong., Protecting Consumer Access to Generic Drugs Act of 2007 (introduced Apr. 17, 2007), available at http://www.govtrack.us/congress/billtext.xpd? bill=h110-1902. 88 See, e.g., Jonathan D. Leibowitz, Commissioner, Federal Trade Commission, Exclusion Payments to Settle Pharmaceutical Patent Cases: They’re B-a-a-ack! The Role of the Commission, Congress, and the Courts,

692 S E S S I O N I X : PA T E N T like me, who tend to be the patent lawyers. But it is a hot debate. That legislation may or may not get legs this year, but if it ever does that will absolutely increase pharmaceutical patent litigation because you can’t settle them. MR. NOLAN: Don’t sound too upset about that, Brian. MR. MURPHY: Either way is fine with me. JUDGE RAKOFF: It’s an interesting question you put. I don’t have a hard statistic for my district, but I’m going to guess about 10–15 percent, something in that order, because of the Hatch-Waxman Act, because of the huge amounts of money involved, and because of the tension, which has been alluded to already, between the patent law and the antitrust law. That, of course, is true not just in the pharmaceutical area, but it is particularly pointed perhaps in that area because of the desire of generic manufacturers to get into the act so to speak. So probably we see more pharmaceutical patent cases than any other particular category of patent cases. JUDGE TANAKA: I come from Japan. I think about 10 percent of our cases are relating to pharmaceuticals. There are many types of pharmaceutical cases, generic cases, patent infringement, or patent nullity cases. But we have also many patent cases that relate to the machines. MR. YEO: I come from Singapore. I would group pharmaceutical cases under biotech cases. The Singapore government has been pushing very hard for Singapore to be a biotech hub in Asia. Many companies have now registered their biotech industry patents in Singapore. It is a hugely growing pillar of the economy in Singapore. Of the eighteen-to-twenty patent cases that have come to trial over the past twelve years since our Patents Act came into force, about three cases pertained to biotech cases, the most recent being a case involving the HIV-II patent.89 MR. FISH: We have a question over here. QUESTION [Herb Schwartz, Ropes & Gray LLP, New York]: This is for Judge Rakoff. One of the big bottlenecks in patent litigation is the so-called Markman hearing and Markman rulings. There have been at least a couple of proposals recently to deal with that. One of them is an interlocutory appeal. Another one is for the Federal Circuit to change their de novo review standard to something a little more reasonable. Do you have any views on that or how this situation might be alleviated? JUDGE RAKOFF: I don’t like the idea of an interlocutory appeal because as it is these cases go on too long. I was comparing notes with my colleague from Germany before we got started this afternoon. Things move there with much greater rapidity, which I think is to the benefit of society as a whole not to have these things drag on forever, and also usually to the benefit of the particular parties to know where they stand, even if they lose, but particularly of course if they win. I wish the Federal Circuit gave greater deference to the district court in Markman hearings. But in fairness, the way we got to Markman hearings is that the Supreme Court said this is an issue of law. Classically, an appellate court has de novo review of issues of law. It has always seemed to me that it is really a mixed issue of law and fact and that ought Remarks Before Second Annual In-House Counsel’s Forum on Pharmaceutical Antitrust (Apr. 24, 2006); Thomas B. Leary, Antitrust Issues in the Settlement of Pharmaceutical Patent Disputes, Part III, Address Before the ABA Spring Meeting (Mar. 29, 2006), available at http://www.hhlaw.com/files/News/05ac83577511-43c9-1927-2c7e06a-ecde/Presentaton/NewsAttachment/fd869e0b-b58a-451d-ad8d-2e110dbb796b/LearyA BASpringMeetingSpeech.pdf. 89 See, e.g., Institut Pasteur & Anor v. Genelabs Diagnostics Pte Ltd. & Anor, [2000] S.G.H.C. 53; Genelabs Diagnostics Pte Ltd. v. Institut Pasteur and Anor, [2001] 1 S.L.R. 121.

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to be appreciated. But, of course, once you go down that road, you get into Seventh Amendment jury issues. That is why the Supreme Court, I think, has not been attracted to that position. While I wish there were a better solution than I am offering, I see some difficulties with both the solutions you are suggesting. Some of my colleagues no longer allow Markman hearings until after summary judgment, on the theory that there are many cases that could be disposed of on summary judgment regardless of how the claim is construed. I haven’t gone that route, but I think there is something to that. That may be one way to, in some cases at least, move the process along. MR. FISH: I would like to pick up on something that Judge Grabinski said, talking about the three methods of proving damages that are available in the German law. The third of those that he mentioned, recovery of the profits of the infringer, used to be a part of the American damages law. I think the law was amended in 1946. It was there from the 1922 statute and then I think it was amended in 1946 when we got the current law. So now, as Basil’s presentation said, we have a very high-level statute that says basically the patent owner will be compensated for the infringement and receive not less than a reasonable royalty for the use of the invention made by the infringer. So we have a route that talks reasonable royalty, we have a route that talks lost profits. And then there are other things that are grafted onto it — the notion of convoyed sales, the notion of the “entire market value” rule that Basil mentioned, and other things like that. I have a question for the panel. There was a question earlier about apportionment, and we have been talking a little bit about the “entire market value” rule. Do you think that really the “entire market value” rule and apportionment are intertwined, are essentially the same thing; that is, that the “entire market value” rule is the situation in which the value that is apportioned to the patent that was infringed, to the use made by the infringer, is very, very high, perhaps very near 100 percent? You can think of other things along the spectrum, where perhaps there are 100 patents and only one of them is infringed, so the harm done to the plaintiff, and as a result the damages, don’t really have very much to do with a lot of the product. Let me throw that open and see if there is anybody who wants to comment. MR. IMBURGIA: I will just comment on that to start, just from a damages perspective, the “entire market value” rule. You may have a situation where you have a patented product and, let’s say, $10 is what I sell it for, and it sells with other components like my example there, and that may be a $50 product. So now you have taken that $10 product and — MR. FISH: Basil, can I stop your hypothetical and clear it up? Are we talking about a low-patent-density product, so one patent covers this product that you are calling a $10 one? MR. IMBURGIA: Yes, in that example. The “entire market value” rule lets you reach out to other things that are not patented and pull them in. I think of apportionment as starting with that $10 patented product and starting to break it apart and say: “Okay, this $10 product may have ten patents in it. Here are all the features, and now I’m going to say one-tenth is applicable.” The answer may be yes, because in a situation where you can’t get to that middle point, that $10 product, you may be stuck with this is one product selling at the $50 price, and now the only way to get it down to the right dollar value is apportionment. So you start out with entire market value and then you bring it down by apportionment. So it is very linked. MR. FISH: Anyone else have an opinion?

694 S E S S I O N I X : PA T E N T I’d like to ask Brian if he has a question for Judge Rakoff. MR. MURPHY: It is really two questions. One is alluding to Markman hearings that we heard mentioned. I have had judges who request or require a technical tutorial well in advance of the Markman hearing. Either the parties show up at court on an assigned day, they give either competing tutorials, or if they can agree, they give an agreed tutorial. MR. FISH: Or you make DVDs and send them to the clerk. MR. MURPHY: The question is: What does the judge really do with that DVD? JUDGE RAKOFF: This is why we have the Fifth Amendment. MR. MURPHY: I raise this as a practical problem, only because in my experience, at least in bigger cases, it is expensive to do those things. My real question is: Do you find it useful to do it well in advance of the Markman hearing, or a combined Markman/summary judgment hearing, or would you rather extend, let’s say, your Markman/summary judgment hearing by a few hours and just have the lawyers start out with their technical presentations, so you are hot on the technology, you have had a chance to read the briefs beforehand? I’m just curious as a practical matter whether you have a preference or whether you have done it either way, and what do you think? JUDGE RAKOFF: I have done it both ways. I think a lot of it is just the particular case. I think, and I think most of my colleagues would feel the same way, there are cases where it is sufficiently simple that you can pick it up on the morning of the Markman hearing and be ready to go right into the Markman hearing. There are other cases where, if you don’t have it to chew over some weeks in advance, you really won’t understand the Markman hearing. The burden I really think is on the judge to let the lawyers know what kind of schedule he or she would like. With the DVD approach, in all honesty, I think there is a danger that a judge will say, “Alright, I’ll take that home and look at it tonight,” and then the Yankees will be on and the choice is obvious. I like to do it in court for another reason, which is so that I can ask questions. If there is something I do not understand from the tutorial, I can ask it right then and there. I do press hard on the lawyers to have this as an agreed unified presentation. I think it is a very rare case where good lawyers can’t agree on the basics of what the technology is, even if they disagree on everything else. MR. FISH: Judge Grabinski. JUDGE GRABINSKI: We have, of course, the same problem if we want to get to know about the technology of each case. As I said, in one hearing day we deal with about seven cases. As presiding judge, I have time — maybe ten days, maybe two weeks — between each of the hearing days to prepare the cases. We simply rely on the parties. It is a bit like a dialectic process. The claimant starts, giving an introduction to the technology and explaining the patent and explaining why he thinks there is an infringement. Then, the defendant will also give an introduction to the technology if they have different ideas on it, or simply give some additional remarks, and then he gives his view on the question of infringement. Then, they exchange once again briefs. We decide as a panel of three judges. The reporting judge and I, as presiding judges, carefully read each of the files. By this we get a quite precise idea of the case. Maybe we know that there is an infringement or not infringement. Maybe we get to the point that we decide we have to establish more facts, because the parties quarreled about facts, and that we have to take evidence.

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With this idea, we go into the hearing and I try to identify the problems in the opening remark, telling the lawyers what is the provisional idea of the court. Then, in particular, the party who is probably going to lose the case has a last chance to present their case, and maybe also, if we misunderstood something, to put it right. That does not happen all too often, but it happens from time to time. On this basis we either decide the case on the merits or we decide that we have to take evidence. That is the way we deal with it and how we get involved and get to know about the technology that the case is about. MR. FISH: Thank you very much. We have just a little bit of time remaining and I want to give people a break before the next panel comes up here. Judge Rakoff was talking about an interesting idea, to sort of pre-educate the jury by showing them the same presentation. I think the broader version of that question is: What is the best way to educate the fact finder, whether it is the judge or the jury? I wonder if the panel would talk about that question a little bit — I think Judge Grabinski did just a bit — perhaps with a view to the role of special technical advisors or people like that. We can start down on the end so you guys don’t fall asleep. Tony? MR. YEO: In a recent patent infringement case that we did, like I said before, we found that spending about $40,000 on a DVD presentation was most useful because finally the patent judgment actually came out in our favor. The judge who heard the case said right at the beginning of his judgment that he found the DVD presentation extremely useful, he found that it was very illuminating, and it was very easy to get into the case very quickly once the parties were able to present their DVD presentation. Of course, there is no point in the lawyers doing it. It is always much more useful if the expert himself is the one who actually goes to a DVD presentation and tells the judge what is the technology all about. Of course, the other side has a chance to rebut later. So we found that, by and large, if you have a visual presentation with an expert presenting the video presentation, you can cut down the number of hearing days. Instead of maybe three or four days, where the judge may be falling asleep trying to listen to what the technology is all about, with a visual presentation it is very useful, very helpful. In fact, it actually came out in the judgment. So we found it very useful. Eventually, after we won the case and we went to prepare the bill for the case, the other side argued that $40,000 for a video presentation was way too much and tried to have the amount cut down on the basis that it was unreasonable. All we did was we waved the judge’s decision and said, “Look, even the judge himself found that the presentation was most useful.” So in that sense I think it is most useful to have the technical expert prepare a video presentation, and I think it will cut down actually the number of hearing days. MR. FISH: Would that ours only cost $40,000. Judge Tanaka? JUDGE TANAKA: We have a court research official system and expert commissioner system. The court research officials are dispatched from the Japanese Patent Office and they serve three years as a member of the court and support the technology for the judges. The expert commissioner system was introduced only two years ago by the revision of the civil procedure law. That is similar to the court-appointed expert. We appoint university professors or members of a research institute, or maybe a patent attorney, and that expert commissioner is appointed on a case-by-case basis. MR. FISH: Thank you very much. I would like you to join me in thanking very much our excellent panel.

SESSION IX: PATENT PART B: MEDIMMUNE

SESSION IX: PATENT

Part B: MedImmune: What Is a Case or Controversy Without Reasonable Apprehension? Implications for Licensors, Licensees and the Rest of Us

Moderator JOHN R. LANE

Frommer Lawrence & Haug LLP (New York)

Speakers STEVEN J. LEE

HAROLD C. WEGNER

Kenyon & Kenyon LLP (New York)

Foley & Lardner LLP (Washington, D.C.)

Panelists CHARLES FISH

HERBERT F. SCHWARTZ

Vice President & Chief Patent Counsel, Time Warner, Inc. (New York)

Ropes & Gray LLP (New York)

MR. LANE: Good afternoon. We are getting into the late innings here, but I will keep pitching. Welcome. We have a more specific topic, the implications of the MedImmune case, which is, I think, driven mostly by its timing and its pertinence on many levels. Let me first introduce the panel. I am John Lane. I am in private practice with Frommer Lawrence & Haug across Central Park here in New York. We also have Steve Lee, an experienced litigator from Kenyon & Kenyon; Hal Wegner, from Foley & Lardner, who you all know, who has spoken throughout the Conference; Charles Fish, who moderated the previous panel, Vice President and Chief Patent Counsel at Time Warner; and Herb Schwartz, from Ropes & Gray. We will be focusing on the MedImmune, Inc. v. Genentech, Inc. et al.1 case. There are other cases relating to it. This is the Supreme Court case that is on everyone’s lips of late — or I should say at least every U.S. patent lawyer’s lips of late. It is being actively and promptly applied by the Federal Circuit. There have been two significant decisions that 1

549 U.S. __, 127 S. Ct. 764 (2007) (Scalia, J.).

698 S E S S I O N I X : PA T E N T followed within four days of each other, SanDisk Corp. v. STMicroelectronics, Inc.2 and Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceuticals Corp.,3 decided on March 26th and March 30th, respectively. In these cases the Federal Circuit has confirmed that the MedImmune case has abolished the long-relied-upon “reasonable apprehension” test for declaratory judgment (DJ) jurisdiction in patent cases.4 In particular, there is a significant footnote, which you may have heard about in some of the other sessions, Footnote 11 of MedImmune, which in a sense effected the rejection of this test — in other words, lowering the threshold for bringing a DJ action by an interested party to challenge the validity or infringement of a patent.5 I am going to let most of the speaking be done by Steve Lee. For those who, particularly from outside the United States, may not have familiarity with the facts, I am just going to go through the facts of the case. I read the case at least five or more times. I have a case that is going on appeal that is circulating around MedImmune. When I first read it, I thought it was quite an unremarkable case and very narrow, but upon each iteration I began to slowly realize the full consequences of this case. Let me very quickly take you through the facts so you have the background, and then I will hand it over to Steve Lee to go through, not only the implications of MedImmune, but the other two cases that the Federal Circuit has decided. The issue was whether the “cases” and “controversies” requirement set forth in Article III of the Constitution requires a licensee to terminate or breach the patent license prior to seeking a declaratory judgment of invalidity, unenforceability, or non-infringement of the licensed patent.6 The “reasonable apprehension” test7 was the conventional legal wisdom used by the Federal Circuit, particularly as it was applied in the Gen-Probe case,8 which was that the licensee had to essentially breach the license in order to establish DJ jurisdiction. That was the framing of the issue. What are the facts? It is an interesting case on its facts. In some cases, it is not really the typical licensee/licensor dispute. MedImmune entered into a license agreement in 1997 with Genentech for an issued patent, ”Cabilly I,” and a pending patent application, “Cabilly II,” directed to certain immunoglobulin chains in recombinant host cells, a biotech patent. MedImmune and Genentech maintained a healthy licensor/licensee relationship, had no apparent disputes as to the terms of the license on the “Cabilly I” patent. But, after issuance of the “Cabilly II” patent, which occurred in 2001, Genentech advised 2 ___ F.3d ___, 2007 WL 881008 (Fed. Cir. Mar. 26, 2007) (Bryson, Linn, Dyk, JJ.) (with concurring opinion by Bryson, J.). 3 ___ F.3d ___, 2007 WL 942201 (Fed. Cir. Mar. 30, 2007) (Mayer, Friedman, Gajarsa, JJ.) (with concurring opinion by Friedman, J.). 4 MedImmune, Inc. v. Centocor, Inc., 409 F.3d 1376 at 1379 (Fed. Cir. 2005) (“There must be both (1) a reasonable apprehension on the part of the declaratory judgment plaintiff that it will face an infringement suit and (2) present activity by the declaratory judgment plaintiff which could constitute infringement.”). 5 MedImmune, 127 S. Ct., at 774 n.11. 6 U.S. Const., Art. II, § 2: “The judicial power shall extend to all cases, in law and equity, arising under this Constitution, the laws of the United States, and treaties made, or which shall be made, under their authority; – to all cases affecting ambassadors, other public ministers and consuls; – to all cases of admiralty and maritime jurisdiction; – to controversies to which the United States shall be a party; – to controversies between two or more states; – between a state and citizens of another state; – between citizens of different states; –between citizens of the same state claiming lands under grants of different states, and between a state, or the citizens thereof, and foreign states, citizens or subjects.” 7 MedImmune, Inc. v. Centocor, 409 F.3d at 1379. 8 Gen-Probe, Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004) (Rader, J.).

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MedImmune that it was obligated to pay royalties because “Cabilly II” covered another product, Synagis®, manufactured and marketed by MedImmune, which was a very significant product for Med Immune. It is a medication used to prevent respiratory tract disease. It accounted for up to 80 percent of MedImmune’s revenues. MedImmune objected. It asserted the “Cabilly II’s” claims were invalid, unenforceable, and not infringed. But they did continue to pay royalties under protest. So they did not in fact breach the agreement. MedImmune did not want to risk breaching the license in view of the possibility of the significance of its revenue from this product. While still paying royalties under protest, they filed in federal district court a DJ action challenging the validity and asserting non-infringement.9 I do not know what the basis of the unenforceability claim was; I suppose it was inequitable conduct. So what did the district court do? They applied the law as it then was, which was significantly announced in Gen-Probe, which was there was nothing they could do, and dismissed the DJ claims for lack of subject matter jurisdiction. The holding was that a licensee in good standing cannot establish a case or controversy because the license agreement eliminates any “reasonable apprehension” of suit. That was the rationale of Gen-Probe. The Federal Circuit, that being their own case, affirmed.10 What did the Supreme Court do? They reversed. The holding, in short, was that a petitioner is not required, insofar as the cases or controversies part of the Constitution is concerned, to terminate its 1997 license before seeking the DJ case. The key reasoning was, in an opinion written by Justice Scalia, that the DJ Act was designed to address situations in which plaintiff’s self-avoidance of imminent injuries was coerced by threatened enforcement action.11 The applicable rationale applied by the Supreme Court related to cases where the criminal statutes were involved in the past, where Supreme Court precedent did not require a DJ plaintiff to expose itself to prosecution by breaking a law to test its constitutionally, and then, in the private threat cases, similarly, a plaintiff should not be required to expose itself to treble damages, attorney’s fees, an injunction, and loss of its business to test a patent’s validity. I will stop there and I will leave the implications for Steve. He can talk about the other cases as well. *

*

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MedImmune: What Is a Case or Controversy Without Reasonable Apprehension? Implications for Licensors, Licensees and the Rest of Us Steven J. Lee On June 16, 1969, in Lear, Inc. v. Adkins,12 the Supreme Court held that a licensee under a patent was not estopped from challenging the validity and/or infringement of that patent after the licensee had repudiated the license, revoking the doctrine of “licensee estoppel.”

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MedImmune, Inc. v. Genentech, Inc., 2004 U.S. Dist. LEXIS 28680 (C.D. Cal. 2004). MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (Fed. Cir. 2005). 11 MedImmune, 127 S. Ct. at 776 (quoting 28 U.S.C. § 2201(a): “[t]he Declaratory Judgment Act provides that a court ‘may declare the rights and other legal relations of any interested party,’ . . . not that it must do so.”). 12 395 U.S. 653 (1969). 10

700 S E S S I O N I X : PA T E N T On January 9, 2007, in MedImmune, Inc. v. Genentech, Inc. et al.,13 the Supreme Court held that federal courts had jurisdiction to hear an action for a declaratory judgment of patent invalidity and non-infringement brought by a person licensed under that patent, without repudiating the license. In doing so, the Supreme Court rejected the Federal Circuit’s “reasonable apprehension” test for declaratory judgment jurisdiction. We here consider (a) the likely effect of MedImmune on licensors, licensees, and patent licenses; (b) the effect of the MedImmune decision on Federal Circuit declaratory judgment jurisdiction (1) generally and (2) in the specific context of the Waxman-Hatch Act. I. THE MEDIMMUNE DECISION AND RATIONALE MedImmune was a licensee under a Genentech patent (“Cabilly I”) and related application (“Cabilly II”). MedImmune developed a product (Synagis®), which it contended did not infringe Cabilly I, and paid no royalties under the license. Synagis®’s sales grew. When the Cabilly II application issued as a patent, Genentech wrote to MedImmune stating its belief that Synagis® infringed and requesting royalties under the license. MedImmune paid the royalties “under protest” and brought an action for a declaration that the Cabilly II patent was invalid, not infringed, and unenforceable. The district court dismissed the action for lack of jurisdiction, which the Federal Circuit affirmed.14 The Declaratory Judgment Act, codified at 28 U.S.C. § 2201, states in pertinent part that (a) In a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such. Supreme Court precedent had clarified that “case of actual controversy” means the same thing as “Cases” and “Controversies” that are justiciable under Article III.15 Supreme Court precedents have required that the dispute be “definite and concrete, touching the legal relations of parties that have adverse legal interests”; that it be “real and substantial” and “admit[t] of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.”16 “Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”17 The Federal Circuit had held that for jurisdiction over a declaratory judgment claim [t]here must be both (1) a reasonable apprehension on the part of the declaratory judgment plaintiff that it will face an infringement suit and (2) present activity by the declaratory judgment plaintiff which could constitute infringement.18

13

49 U.S. ___ (2007) (“et al.” is City of Hope). MedImmune, Inc. v. Genentech, Inc., 2004 U.S. Dist. LEXIS 28680 (C.D. Cal. 2004); MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (Fed. Cir. 2005). 15 Aetna Life Ins. Co. v. Haworth, 300 U.S. 227 (1937). 16 Id. at 240–41. 17 Maryland Cas. Co. v. Pacific Coal & Oil, 312 U.S. 270, 273 (1941). 18 MedImmune, Inc. v. Centocor, Inc., 409 F.3d 1376 at 1379 (Fed. Cir. 2005). 14

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While this “reasonable apprehension” test is grounded in a long chain of lower court decisions going back to 1845,19 in MedImmune the Supreme Court rejected the “reasonable apprehension” test on the grounds that (a) in declaratory judgment actions against the Government, the Court does not require the declaratory judgment plaintiff to destroy a large building, risk treble damages in a patent infringement action, to or “bet the farm” to obtain jurisdiction; and even in actions against other persons, the Court has not required a licensee to cease royalty payments to render his request for a declaration of patent invalidity justiciable.20 Thus, even though MedImmune was under no apprehension that it would face an infringement suit (imminent or not), the Supreme Court found that the dispute was a case of actual controversy: Genentech asserted the patents were valid and infringed by MedImmune’s product, and MedImmune disagreed. A. THE LIKELY EFFECT OF MEDIMMUNE ON THE USE AND TERMS OF PATENT LICENSES

Everybody seems to agree that patent licenses are a good thing.21 The respondents and their amici argued that allowing MedImmune to bring a declaratory judgment action while continuing to pay royalties would fundamentally decrease the value of a license to the licensor (and increase the value to the licensee) and would, therefore, tend to increase the cost of the license to the licensee, or, in the extreme, prevent licensing altogether. Their briefs explain that the availability of such declaratory judgment actions would permit licensees to litigate more often. The increased potential for litigation would necessarily become an inherent cost of the license, which, in turn, would be passed on to the licensee in the form of higher royalty costs.22 In its amicus brief, the Government argued that licensors and licensees will be capable of adjusting the terms of their licenses to reflect the different value of a license, stating that “a patent owner may be able to negotiate license provisions that anticipate and ameliorate the effects of a declaratory judgment action by a licensee.”23 This contention was challenged by the respondent and amici, who not only questioned the legal ability of parties to contract around this rule,24 but also asserted that such contractual provisions would most likely appear in the form of required up-front payments, which would preclude many potential licensors from entering into licenses.25 In fact, many existing licenses have some such protections.26 For many or most existing licenses that have already been negotiated, the prospective 19 Woodworth v. Stone, 30 F.Cas. 593, 594 (C.C.D. Mass. 1845) (Story, Cir. J.). A more recent expression of the test requires apprehension of “imminent”suit. Teva Pharms. USA, Inc. v. Pfizer, Inc. 395 F.3d 1324, 1333 (2005). 20 Altvater v. Freeman, 319 U.S. 359 (1943). See MedImmune, 549 U.S. ___, slip. op. at 15. 21 See, e.g., Brief of Respondent Genentech, Inc. at 44–50, Brief for Respondent City of Hope at 40–47, Amicus Brief of New York Intellectual Property Law Association at 12–17. 22 See Brief of Respondent Genentech, Inc. at 46–47; see also Amicus Brief of Group of Law Professors at 7–9. 23 See Amicus Brief for the Untied States at 28. 24 See Amicus Brief for Qualcomm Inc. and Interdigital Communications Corp. at 25 (“The impact of this rule change on future behavior will depend, in part, on whether a licensor and licensee could contract around the new rule.”); see also Brief for Respondent City of Hope at 49 (“[I]f the license terms were controlling, they would bar this suit.”). 25 See Brief for Respondent Genentech, Inc. at 47–48 (“[P]atent holders would inevitably respond to MedImmune’s rule by requiring paid-in-full up-front licenses … which will price many prospective licensees … out of the market entirely.”); see also Brief for Respondent City of Hope at 44 (“[F]ully paid licenses is economically unrealistic in many industries.”). 26 See Amicus Brief of 3M, General Electric, Procter & Gamble, E.I. Du Pont de Nemours at 15, noting that their licenses include alternative dispute resolution provisions.

702 S E S S I O N I X : PA T E N T effect of the MedImmune rule is irrelevant. For licenses that are being negotiated now, or will be, we expect that licensors will attempt to ameliorate the effect of MedImmune by contractually limiting licensees rights or incentives to challenge the patent. It is not clear, however, to what extent such contractual provisions will be enforceable. Some courts have held that no-challenge clauses in licenses were unenforceable.27 Other courts suggest that any legal obstacles to challenging the patent are unenforceable.28 It is, therefore, an open question as to whether some of the following license provisions could be used to limit the licensee’s ability to challenge the patent, or the result of that challenge: 앫 No Challenge provision (but see supra note 26); 앫 Termination of license upon patent challenge;29 앫 Arbitration provision.30 Arbitration of patent disputes is specifically allowed by statute.31 An arbitration clause could provide, for example, that the arbitrator(s) will not issue a written decision on validity or infringement, but merely a decision that one side or the other prevails, thus limiting the preclusive effect of such a determination. 앫 Raising royalty percentage or amount upon patent challenge. 앫 Representation by licensee that it has had a full opportunity to investigate the validity of the patent and admission by licensee that the patent is valid, enforceable, and is infringed by licensor’s existing product. C. DECLARATORY JUDGMENT JURISDICTION OVER NON-LICENSEES AFTER MEDIMMUNE

Following MedImmune, the Federal Circuit has already revised its reasonable apprehension of imminent suit test for declaratory judgment jurisdiction in two cases involving (1) license negotiations and (2) the Waxman-Hatch Act.32 1. Sandisk: Declaratory Judgment Jurisdiction Based on Licensing Negotiations The first case, Sandisk,33 involved two parties in the process of negotiating a license. The description of the interaction between patentee and potential licensee goes on for five pages. After a good deal of back-and-forth as to whether a meeting to discuss licensing 27 The legality of no-challenge clauses is questionable. See Amicus Brief for Qualcomm Inc. and Interdigital Communications Corp. at 25 (citing to Lear, Inc. v. Adkins, 395 U.S. 653, 673 (1969); Pope Mfg Co. v. Gormully, 144 U.S. 224, 235 (1891); United States v. Glaxo Group Ltd., 410 U.S. 52, 57 (1973); Kraly v. Nat’l Distillers & Chem. Corp., 502 F.2d 1366, 1369 (7th Cir. 1974); Massillon-Cleaveland-Akron Sign Co. v. Golden State Adver. Co., 444 F.2d. 443, 427 (9th Cir. 1971)). 28 See Timely Prods. v. Costanzo, 465 F. Supp. 91, 95 (D.CN) (“Lear holds not only that a licensee must always be permitted to challenge the validity of a patent but that he must also be free of any legal obstacles that remove all incentive to mount such an attack.”). 29 The legality of such a termination provision is also unclear. See supra note 27. 30 See Amicus Brief of 3M, General Electric, Procter & Gamble, E.I. Du Pont de Nemours, supra note 26, at 15. 31 35 U.S.C. § 294(a): “A contract involving a patent or any right under a patent may contain a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract. . . . Any such provision or agreement shall be valid, irrevocable, and enforceable, except for any grounds that exist at law or in equity for revocation of a contract.” 32 Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585 (codified as amended at 21 U.S.C. § 355 and 35 U.S.C. §§ 156, 271, 282 (1984) (also known as the Hatch-Waxman Bill for Patent Restoration). 33 SanDisk Corp. v. STIMicroelectronics Inc, __ F.3d __ (Fed. Cir. Mar. 26, 2007); Teva Pharms. USA, Inc., v. Novartis __ F.3d. __ (Fed. Cir. Mar. 30, 2007).

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was necessary, a meeting was held. Among other things, the Federal Circuit points out that: 앫 the patentee did not contract to prevent the licensee from using the meeting as a basis for a declaratory judgment action.34 and that 앫 the patentee disclaimed an intention to sue (or imminently sue) after the meeting.35 앫 The district court reasoned that – SanDisk had no objectively reasonable basis for its apprehension of suit. – SanDisk has presented no evidence that ST threatened it with litigation at any time during the parties’ negotiations. – SanDisk did not show other conduct by ST rising to a level sufficient to indicate an intent on the part of ST to initiate an infringement action. – the studied and determined infringement analyses that ST presented to SanDisk did not constitute the requisite “express charges [of infringement] carrying with them the threat of enforcement.” – the totality of the circumstances did not evince an actual controversy because ST told SanDisk that it did not intend to sue SanDisk for infringement. – even if it did have jurisdiction, it would exercise its discretion and decline to hear the case. The Federal Circuit recognizes that its reasonable apprehension test is dead, and states that: The Supreme Court in MedImmune addressed declaratory judgment jurisdiction in the context of a signed license. In the context of conduct prior to the existence of a license, declaratory judgment jurisdiction generally will not arise merely on the basis that a party learns of the existence of a patent owned by another or even perceives such a patent to pose a risk of infringement, without some affirmative act by the patentee. But Article III jurisdiction may be met where the patentee takes a position that puts the declaratory judgment plaintiff in the position of either pursuing arguably illegal behavior or abandoning that which he claims a right to do.36 Within the five pages of description of the interaction of the parties, the Federal Circuit finds bases for DJ jurisdiction in this case, finds that the district court did not have discretion in this case to decline jurisdiction, and states generally:

34 Id., n.1: “To avoid the risk of a declaratory judgment action, ST could have sought SanDisk’s agreement to the terms of a suitable confidentiality agreement. The record before us reflects that the parties did not enter into such an agreement. Rather, ST sought to condition its open licensing discussions and the infringement study on adherence to Federal Rule of Evidence 408. That rule expressly relates to evidence of efforts toward compromising or attempting to compromise a claim in litigation and does not prevent SanDisk from relying on the licensing discussions and infringement study to support its claims. See Fed. R. Evid. 408. Furthermore, ST’s presentation was made outside the context of litigation, and there is nothing on the record to indicate that it could be properly considered an ‘offer’ to settle a claim which was then in dispute.” 35 Id. at 5: “According to SanDisk, Jorgenson indicated (in words to this effect): I know that this is material that would allow SanDisk to DJ [ST] on. We have had some internal discussions on whether I should be giving you a copy of these materials in light of that fact. But I have decided that I will go ahead and give you these materials.” Id. Jorgenson further told Thompson that “ST has absolutely no plan whatsoever to sue SanDisk.” Id. Thompson responded to Jorgenson that “SanDisk is not going to sue you on Monday” and that another meeting might be appropriate. Slip op. at 15. 36 Id., slip op. at 15.

704 S E S S I O N I X : PA T E N T We need not define the outer boundaries of declaratory judgment jurisdiction, which will depend on the application of the principles of declaratory judgment jurisdiction to the facts and circumstances of each case. We hold only that where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise and the party need not risk a suit for infringement by engaging in the identified activity before seeking a declaration of its legal rights.37 The Federal Circuit explained that: ST communicated to SanDisk that it had made a studied and determined infringement determination and asserted the right to a royalty based on this determination. SanDisk, on the other hand, maintained that it could proceed in its conduct without the payment of royalties to ST. These facts evince that the conditions of creating “a substantial controversy, between parties having adverse legal interest, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment” were fulfilled. Md. Cas., 312 U.S. at 273. SanDisk need not “bet and continuing in the identified activity before seeking a declaration of its legal rights, ‘the farm’ so to speak — and risk a suit for infringement by cutting off licensing discussions.38 The Federal Circuit was not swayed by ST’s representation that it would not sue: We decline to hold that [ST]’s statement that ST would not sue SanDisk eliminates the justiciable controversy created by ST’s actions, because ST has engaged in a course of conduct that shows a preparedness and willingness to enforce its patent rights despite Jorgenson’s statement. Having approached SanDisk, having made a studied and considered determination of infringement by SanDisk, having communicated that determination to SanDisk, and then saying that it does not intend to sue, ST is engaging in the kinds of “extra-judicial patent enforcement with scare-the-customerand-run tactics” that the Declaratory Judgment Act was intended to obviate.39 Finally, the Federal Circuit held that under the circumstances the district court did not have discretion to dismiss the case: Although the district court is given the discretion, in declaratory judgment actions, to dismiss the case, there are boundaries to that discretion. . . . In this case, the district court noted, without explanation in a footnote, that “[a]s an alternative basis for its ruling, the Court concludes that even if it had subject matter jurisdiction over the instant claims, it would exercise its discretion and decline to decide them.” SanDisk, slip op. at 17 n.30. That decision, however, was made in the context of our “reasonable apprehension” precedent without the benefit of the Supreme Court’s views in MedImmune. Given the change reflected in MedImmune and our holding in this case, we discern little basis for the district court’s refusal to hear the case and expect that in the absence of additional facts, the case will be entertained on the merits on remand.40 Although the opinion of the court is based on plenty of facts and circumstances, Judge Bryson, concurring, sees nothing in the particular facts surrounding this licensing negotiation that triggers jurisdiction; rather that the application of the test: 37 38 39 40

Id. (emphasis added). Id. at 17–18. Id. at 18. Id. at 19.

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will not be confided to cases with facts similar to this one. … it would appear that under the court’s standard virtually any invitation to take a paid license relating to the prospective licensee elects to assert that its conduct does not fall within the scope of the patent. … even a representation by the patentee that it does not propose to fie suit against the prospective licensee will not suffice to avoid the risk that the patentee will face a declaratory judgment action. Thus Judge Bryson sees a “sweeping change in our law regarding declaratory judgment jurisdiction”: I see no practical stopping point short of allowing declaratory judgment actions in virtually any case in which the recipient of an invitation to take a patent license elects to dispute the need for a license and then to sue the patentee. 2. Declaratory Judgment Jurisdiction in the Waxman-Hatch Context Declaratory judgment actions have been an integral part of the Waxman-Hatch Act since it was signed into law in 1984.41 The Waxman-Hatch Act, which created a mechanism for approval of Abbreviated New Drug Applications (ANDAs) modified the Declaratory Judgment Act, 28 U.S.C. 2201, by limiting the right of such applicants to bring declaratory judgment actions.42 More recently, 2003 amendments to the Waxman Hatch Act expanded the ability of such applicants to bring declaratory judgments, by removing a district court’s discretion to dismiss such actions,43 to prevent an improper effort to delay infringement litigation between generic drug manufacturers and brand-name drug companies.44 The reason for the amendment was the failure of district courts to find that such applicants had a reasonable apprehension of suit on patents which the brand-name companies had submitted to the FDA on the grounds that they could reasonably be asserted against a generic version of their brand-name products,45 but which had not been asserted against the generic companies. One such case was Teva Pharmaceutical USA v. Pfizer,46 in which the Federal Circuit affirmed the dismissal of Teva’s action for a declaratory judgment against a Pfizer patent covering Pfizer’s Zoloft®. Teva had submitted an application to the Food and Drug Administraion (FDA) to sell a generic version of Zoloft®, which included the patent 41

Pub. L. 98-417 (1984). 28 U.S.C. § 2201(b) and 21 U.S.C. § 355(j)(5)(B). 43 35 U.S.C. § 271(e)(5). 44 H.R. 108-391: The conferees expect that courts will find jurisdiction, where appropriate, to prevent an improper effort to delay infringement litigation between generic drug manufacturers and pioneer drug companies. The conferees expect courts to apply the “reasonable apprehension” test in a manner that provides generic drug manufacturers appropriate access to declaratory judgment to the extent required by Article III. Through the modifications in this Act, the conferees do not intend for the courts to modify their application of the requirements under Article III that a declaratory judgment plaintiff must, to the extent required by the Constitution, demonstrate a “reasonable apprehension” of suit to establish jurisdiction. See, e.g., Fina Oil and Chemical Co. v. Ewen, 123 F.3d 1466, 1471 (Fed. Cir. 1997). The conferees expect the courts to examine as part of their analysis the particular policies served by the Hatch-Waxman Act. In determining whether a reasonable apprehension of suit exists where an ANDA has been filed with a paragraph IV certification and the patentee has not brought an infringement suit with the 45 days, the conferees expect courts to examine these specific factors as part of the totality of the circumstances. See, e.g., Vanguard Research, Inc. v. Peat, Inc., 604 F.3d 1249, 1254 (Fed. Cir. 2002). In any given case, the conferees expect a court may or may not find a reasonable apprehension of suit where these two specific factors are present. Text copied from Kenyon & Kenyon’s HATCHMAN.HLP, a hypertext Waxman-Hatch Act. 45 21 U.S.C. § 355(b)(1). 46 395 F.3d 1324 (Fed. Cir. 2005), reh’g en banc denied, 405 F.3d 990 (Fed. Cir. 2005), cert denied, 126 S. Ct. 473 (2005). 42

706 S E S S I O N I X : PA T E N T number and expiration date for a patent which Pfizer contended could be reasonably be asserted against a generic version of Zoloft®, such as Teva’s. Pfizer’s patent was duly published (“listed”) by the FDA in it’s “Orange Book,”47 and Teva gave detailed notice to Pfizer of its grounds for asserting that the patent was invalid, unenforceable, or would not be infringed by Teva’s proposed product. Pfizer did not sue, and Teva timely brought an action for a declaration of invalidity and non-infringement. The district court found that Teva had no objectively reasonable apprehension that Pfizer would imminently sue on the listed patent, and the Federal Circuit agreed: Teva takes the position that the requirements of the reasonable apprehension prong of the two-part test are satisfied in virtually every case in which: (1) the NDA applicant has listed a patent in the Orange Book; (2) a generic manufacturer has submitted an ANDA which includes a paragraph IV certification for a drug covered by that patent; and (3) the NDA-holder or patentee has not brought an infringement suit within 45–days of receiving notice of the paragraph IV certification. Teva’s reliance on Pfizer’s listing of the ’699 patent in the Orange Book is misplaced. The listing of a patent in the Orange Book by an NDA filer is the result of a statutory requirement. Without more, Pfizer’s compliance with the Hatch-Waxman listing requirement should not be construed as a blanket threat to potential infringers as far as Pfizer’s patent enforcement intentions are concerned. The Orange Book is a listing of patents with respect to which claims of infringement “could be reasonably asserted . . ..” 21 U.S.C. § 355(b)(1), (c)(2) (emphasis added). More is required for an actual controversy than the existence of an adversely held patent, however. We are not prepared to hold that listing a patent in the Orange Book evinces an intent to sue any ANDA filer who submits a paragraph IV certification with respect to the patent.48 Teva argued that the totality of the circumstances49 included Pfizer’s history of suing Teva on its patents covering other products, and its refusal to grant Teva a covenantnot-to-sue on this product. The Federal Circuit found neither circumstance dispositive, and that suit was not “imminent.” Finally, the Federal Circuit held that the 2003 amendments to the Waxman-Hatch Act did not confer jurisdiction under the circumstances, because: the plain language of the statute, as well as the legislative history,50 support the conclusion that Congress did not intend for the Medicare Amendments to cause courts to alter the requirement of the two-part test that a declaratory judgment plaintiff must demonstrate a “reasonable apprehension” of suit to establish Article III jurisdiction. Our traditional two-part test remains good law, and, as discussed above, we see no error in the district court’s application of the test.51

47 Nicknamed for the orange cover of the FDA publication Approved Drug Products with Therapeutic Equivalelence Evaluations, which can now be found on-line at http://www.fda.gov/cder/ob/default.htm. 48 Id. at 1332–33 (internal citations omitted). 49 Id. at 1333 (citing Arrowhead Indus. Water, Inc. v. Ecolochem, Inc., 846 F.2d 731, 736 (Fed. Cir. 1988) (which quoted Goodyear Tire & Rubber Co. v. Releasomers, Inc., 824 F.2d 953, 955 (Fed. Cir. 1987)). 50 An early version of the bill (S.1) was broader, providing that the submission of a patent to the FDA, and the failure to bring suit on that patent shall establish an actual controversy between the applicant and the patent owner sufficient to confer subject matter jurisdiction in the courts of the United States in any action brought by the applicant under section 2201 of title 28 for a declaratory judgment that any patent that is the subject of the certification is invalid or not infringed. See 395 F.3d. at 1336. 51 Id. at 1337.

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Of course, the traditional two-part test is no longer good law, and in the second case decided by the Federal circuit after MedImmune, Teva Pharmaceuticals USA, Inc., v. Novartis Pharmaceuticals Corp. et al.,52 the Federal Circuit readdressed declaratory judgment jurisdiction in the context of the Waxman-Hatch Act. Novartis had submitted five patents for listing in the Orange Book, one covering its product, four covering methods of using its product. Teva certified that it intended to seek approval before the expiration of all five, because they were either invalid, or would not be infringed. Novartis sued only on the product patent, and Teva brought an action for a declaratory judgment on the other four patents. Novartis successfully moved to dismiss the complaint, on the grounds that Teva had no reasonable apprehension of being sued on those four patents. The Federal Circuit, reviewing the question of jurisdiction in light of MedImmune, reiterated that, “the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy between the parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”53 Judge Gajarsa, writing for the panel, identified five circumstances, three of which, together, were sufficient to show the existence of such a substantial controversy. The five circumstances were: 1. The listing by Novartis, of the five patents in the Orange Book. “While this conduct on its own may not be sufficient to establish an Article III controversy, it is a circumstance to be considered …”; 2. Teva’s submission of its ANDA containing certifications that it did not infringe any of the five patents, or that they were invalid; 3. The statutory civil action to obtain patent certainty, 355(j)(5)(C); the statutory ANDA declaratory judgment provision, 35 U.S.C. 271(e)(5) and the purpose of the Waxman-Hatch Act;54 4. Novartis’s pending patent infringement action on the product patent; and 5. The possibility of future litigation on the four method-of-use patents. However, three of them were sufficient: A justiciable declaratory judgment controversy arises for an ANDA filer when [1] a patentee lists patents in the Orange Book, [2] the ANDA applicant files its ANDA certifying the listed patents under paragraph IV, and [3] the patentee brings an action against the submitted ANDA on one or more of the patents. The combination of these three circumstances is dispositive in establishing an actual declaratory judgment controversy as to all the paragraph IV certified patents, whether the patentee has sued on all or only some of the paragraph IV certified patents.55 Judge Friedman, concurring in the judgment, would have found jurisdiction on the basis of Novartis’ listing of the five patents in the Orange Book, and Teva’s paragraph IV certifications on all five, that is, on the basis of only the first two factors. 52

App. No. 06-1181. MedImmune, ___ U.S. ___, slip op. at ___. 54 Id. The “civil action” was “intended … to adjudicate the very controversy Novartis has created here. … A central purpose of the Waxman-Hatch Act and the subsequent ANDA declaratory judgment amendment to that Act is “to enable competitors to bring cheaper, generic … drugs to market as quickly as possible. … Novartis actions frustrate this purpose and create a basis for finding a justiciable controversy.” (internal citations omitted). 55 Id. 53

708 S E S S I O N I X : PA T E N T The difference between the majority and concurring opinions is significant. Under the concurring opinion, there would have been jurisdiction over the Teva v. Pfizer action, even though Pfizer had not sued Teva on any patent listed in the Orange Book; under the majority opinion, in the absence of the combination of the three dispositive factors, the court would have to look at the totality of the circumstances. One such circumstance might be Pfizer’s suit against another ANDA filer on the same Orange Book patent as to which Teva sought a declaration. The Teva v. Pfizer fact pattern (brand company sues first ANDA filer, but none of the subsequent filers) is a problem which the 2003 Amendments to the Waxman-Hatch Act, including the action for patent certainty, and the new declaratory judgment provisions, were designed to address.56 Since those provisions are one of the circumstances identified by the majority, and in view of Judge Friedman’s concurring opinion, we predict that the Federal Circuit, if now faced with the Teva v. Pfizer facts, would find jurisdiction. II. DISCRETION TO DECLINE JURISDICTION As the Supreme Court recognized in MedImmune, the declaratory judgment statute gives district courts discretion to dismiss declaratory judgment actions in most cases. However, “in the usual circumstances, the declaratory judgment is not subject to dismissal”57 and the exercise of such discretion must be supported by a sound basis.58 One sound basis for the exercise of discretion is the pendency of another action which would resolve the issues. In Cellco v. Broadcom,59 the Federal Circuit recently (post MedImmune) affirmed a district court’s discretion to dismiss a declaratory judgment action on these grounds. There was a pending ITC action, and a separate patent infringement action brought by Broadcom against another party, which had been stayed pending decision in the ITC action, and in which Cellco, the declaratory judgment plaintiff could seek to intervene when it resumed. Because Cellco had not shown sufficient harm to require immediate resolution of its case, the Federal Circuit affirmed the discretionary dismissal of the declaratory judgment action.60 A declaratory judgment action brought under the Waxman-Hatch statute is not subject to dismissal on discretionary grounds.61 * * * Thank you very much. I will turn now to Hal Wegner. Why don’t you just make a few comments, and then I have a few questions in general for you. MR. LANE:

*

*

*

56 The first to file an ANDA with a paragraph IV certification is entitled to market its generic product for 180 days free from competition from other paragraph IV filers. By delaying the approval of the first ANDA by delaying resolution of the patent infringement action, the Brand company can creak a bottleneck which effectively prevents approval of all the ANDAs. 57 Wilton v. Seven Falls Co., 515 U.S. 277, 289 (1995). 58 See SanDisk. slip op. at 19. 59 Cellco P’ship v. Broadcom Corp. (non-precedential) (Fed. Cir. Mar. 26, 2007). 60 See also Judge Brynson’s concurrance, suggesting that the district court should have been allowed to dismiss the Cellco action on similar grounds. 61 35 U.S.C. § 271(e)(5). See 149 Cong. Rec. S15885–86 (Nov. 25, 2003).

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MedImmune: The Federal Circuit Fills in the Blanks62 Lynn E. Eccleston & Harold C. Wegner I. OVERVIEW MedImmune! This has been the rallying cry for patent and licensing executives for more than a year seeking to turn back the clock on the nearly forty-year-old Lear,63 which opened the door to a patent licensee challenge of the validity of a patent and which — in the case presented to the Court — sought to further widen the door to permit a licensee to retain its license by paying royalties while simultaneously challenging the patent. Yet, the Supreme Court in its landmark opinion in MedImmune64 left the merits and policy-based Lear issues largely untouched. Instead, the Court chose MedImmune as a vehicle to return Federal Circuit declaratory judgment jurisdiction back to the judicial mainstream; it overruled the lower court’s precedent that had denied standing to bring a declaratory judgment action in cases that lacked a “reasonable apprehension” of a near-term infringement suit. Reversing this line of case law solely on the issue of standing, many issues remain open for clarification either by the Federal Circuit or by statutory reform. Within the first three months after MedImmune — and all within the month of March — the Federal Circuit has taken decisive action to start to fill in the blanks in the law and practice created by the Supreme Court: The Federal Circuit has remanded the MedImmune case itself to the trial court, so no new law should be created from this particular case.65 It has also issued three opinions that consider MedImmune: The lead case is SanDisk,66 which was followed four days later by Teva v. Novartis;67 and, one week before SanDisk, the court expressed dictum in the nonprecedential opinion in Cellco.68 The factual issues in MedImmune remain before the Federal Circuit in the companion MedImmune II69 that remains before that court and — so far — has not been returned to 62 This paper has been prepared for the presentation by Hal Wegner for the presentation, MedImmune: What Is a Case or Controversy without Reasonable Apprehension? Implications for Licensors, Licensees and the Rest of Us, Presented Before Fifteenth Annual Conference International Intellectual Property Law & Policy, Apr. 12–13, 2007, Fordham University School of Law. The views expressed in this paper are those of the authors and do not necessarily reflect the views of any colleague, organization or client thereof. Lynn E. Eccleston is with McGuire Woods LLP, Tysons Corner, Virginia. The author is a former Law Clerk to the late Oscar H. Davis of the Federal Circuit and is involved in appellate matters in the patent area. [[email protected]]. Harold C. Wegner, Foley & Lardner, LLP. Former Director of the Intellectual Property Law Program and Professor of Law, George Washington University Law School. [[email protected]]. 63 Lear, Inc. v. Adkins, 395 U.S. 653, 673 (1969). 64 MedImmune, Inc. v. Genentech, Inc., 549 U.S. __, 127 S. Ct. 764 (2007) (Scalia, J.). 65 MedImmune, Inc. v. Centocor, Inc., 127 S. Ct. 1118 (2007) (per curiam) (GVR) (“On petition for writ of certiorari to the United States Court of Appeals for the Federal Circuit. Petition for writ of certiorari granted. Judgment vacated, and case remanded to the United States Court of Appeals for the Federal Circuit for further consideration in light of MedImmune, Inc. v. Genentech, Inc., 549 U.S. __, 127 S. Ct. 764 (2007).”). 66 SanDisk Corp. v. STMicroelectronics, Inc., __ F.3d __, 2007 WL 881008 (Fed. Cir. Mar. 26, 2007) (Bryson, Linn, Dyk, JJ.) (with concurring opinion by Bryson, J.). 67 Teva Pharms. USA, Inc. v. Novartis Pharms. Corp., __ F.3d __, 2007 WL 942201 (Fed. Cir. Mar. 30, 2007) (Mayer, Friedman, Gajarsa, JJ.) (with concurring opinion by Friedman, J.). 68 Cellco P’ship v. Broadcom Corp., __ Fed. Appx. __, 2007 WL 841615 (Fed. Cir. Mar. 19, 2007) (Mayer, Plager, Prost, JJ.) (per curiam) (nonprecedential). 69 MedImmune, Inc. v. Centocor, Inc., 127 S. Ct. 1118 (2007) (per curiam) (GVR) (“On petition for writ of certiorari to the United States Court of Appeals for the Federal Circuit. Petition for writ of certiorari granted. Judgment vacated, and case remanded to the United States Court of Appeals for the Federal Circuit for further consideration in light of MedImmune, Inc. v. Genentech, Inc., 549 U.S. __, 127 S. Ct. 764 (2007).”).

710 S E S S I O N I X : PA T E N T the trial court.70 SanDisk is particularly important as the first precedential opinion to interpret MedImmune.71 MedImmune arose as the product of controversy over the denial of declaratory judgment actions in several areas; the Court had before it in 2006 two very different petitions for certiorari. The MedImmune petition opened the door to reconsideration of cases such as Gen-Probe where standing was denied because of a lack of a “reasonable apprehension” of a near term infringement suit.72 Whether a generic manufacturer could sue for invalidity of a pioneer drug holder’s patent was raised in Apotex, where — under existing practice — the pioneer manufacturer would often refrain from suit on all of its patents until the generic entered the market.73 (See Part II, The “Questions Presented” in MedImmune and Apotex.) The MedImmune petition was widely heralded in initial press reports as opening the door to declaratory judgment actions to challenge patent validity by paying patent licensees. On the merits the decision did nothing of the sort; rather, MedImmune addressed the more fundamental issue of whether the licensee has an actual controversy and has standing to bring the suit: whether the suit will continue to reach the merits is subject to a variety of factors, including the discretionary power of the trial court to entertain such an action. (See Part III, Standing, the Limited MedImmune Holding.) Following the lead of Apotex, the Court made its biggest mark in “footnote 11,”74 which will long be remembered as the most important part of the opinion. Footnote 11 repudiates the Federal Circuit’s standard for a justiciable controversy. (See Part IV, The Now Overruled “Imminent Suit” Test.) Repudiating Teva v. Pfizer, the Court in dicta in footnote 11 clearly sent the message that the Court would not countenance continuation of the Federal Circuit requirement for a “reasonable apprehension of imminent suit” as a condition precedent for standing for a declaratory judgment action.75 (See Part IV.A, Blunt Repudiation of Teva v. Pfizer.) While footnote 11 is dictum, this hardly detracts from the stern and unequivocal message sent by the Court — as recognized by the most experienced Supreme Court expert on the Federal Circuit, former Acting Solicitor General Friedman who was involved in more than 100 Supreme Court cases on behalf of the Department of Justice. (See Part IV.A.1, Judge Friedman’s Concurrence in Teva v. Novartis.) Yet a second Acting Solicitor General added his concurrence as well. (See Part IV.A.2, Judge Bryson’s Concurrence in SanDisk.) Indeed, there are four Supreme Court experts on the Federal Circuit, including two who clerked at the Court, three former 70 Medimmune, Inc. v. Centocor, Inc., __ F.3d __, 2007 WL 779342 (Fed. Cir. Feb. 27, 2007) (per curiam) (Schall, Bryson, Gajarsa, JJ.) (Order setting briefing schedule for issues on remand from the Court). 71 Teva v. Novartis, slip op. at p. 4 (quoting Tex. Am. Oil Co. v. U.S. Dep’t of Energy, 44 F.3d 1557, 1561 (Fed. Cir. 1995) (en banc)) (“This court respects the principle of stare decisis and follows its own precedential decisions unless the decisions are ‘overruled by the court en banc, or by other controlling authority such as an intervening ... Supreme Court decision.’” Tex. Am. Oil Co. v. U.S. Dep’t of Energy, 44 F.3d 1557, 1561 (Fed. Cir. 1995) (en banc).”). The court acknowledged the prior decision in SanDisk, see Teva v. Novartis, slip op. at p. 5 (“[B]ecause the Supreme Court in MedImmune cautioned that our declaratory judgment ‘reasonable apprehension-of-suit’ test ‘contradict[s]’ and ‘conflicts’ with its precedent, these Federal Circuit tests have been ‘overruled by ... an intervening ... Supreme Court decision.’ Tex. Am. Oil Co., 44 F.3d at 1561; see also, SanDisk Corp. v. STMicroelectronics, __F.3d__, 2007 WL 881008 (Fed. Cir. Mar. 26, 2007).”). 72 MedImmune, 127 S. Ct. at 768 (“Gen-Probe [Inc. v. Vysis, Inc., 359 F.3d 1376, 1381 (Fed. Cir. 2004),] had held that a patent licensee in good standing cannot establish an Article III case or controversy with regard to validity, enforceability, or scope of the patent because the license agreement ‘obliterate[s] any reasonable apprehension’ that the licensee will be sued for infringement.”). 73 Apotex Inc. v. Pfizer, Inc., Sup Ct. No. 05-1006; Apotex, Inc. v. Pfizer, Inc., 126 S. Ct. 2057 (2006) (order asking for the views of the Solicitor General (CVSG)), 127 S. Ct. 379 (2006)(denying certiorari). 74 MedImmune, 127 S. Ct. at 774 n. 11. 75 Id. (quoting Teva Pharms. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, 1333 (2005)).

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Acting Solicitors General, and the head of a major Supreme Court appellate practice group; all were on panels that approved the broad construction of the now-famous footnote 11. (See Part IV.A.3, Concurrence of all Four Supreme Court Experts.) Judge Bryson fully concurs in the new standard announced by the Federal Circuit, as he views the court as being compelled to do by MedImmune; he nevertheless notes the extreme breadth of the new law of the Federal Circuit: “[U]nder the [Federal Circuit]’s standard virtually any invitation to take a paid license relating to the prospective licensee’s activities would give rise to an Article III case or controversy if the prospective licensee elects to assert that its conduct does not fall within the scope of the patent.” (See Part IV.B, The Bryson Open-Ended Slippery Slope.) Indeed, a possibly not so extreme ruling of the case law is that the Federal Circuit standard would appear to provide that a justiciable controversy to open the door to a declaratory judgment action is triggered by any affirmative action by the patentee that suggests the possibility of patent infringement. (See Part IV.C, The Patentee’s Affirmative Action Trigger.) A variety of questions remain for resolution. (See Part V, Post-MedImmune Open Questions.) The most significant open area is the question of discretion to entertain a declaratory judgment action. Will bright-line rules be announced by the Federal Circuit? Will a case-by-case determination be made at the trial level that will then percolate up to the Federal Circuit? (See Part V.A, The Discretion of the Trial Judge.) A nuanced approach that can only be gained through case-by-case determinations at the trial level that percolate up to the Federal Circuit is undoubtedly the best approach that can be taken. As a paradigm for why this is important, a detailed consideration is given to the “vacatur-on-demand” case law that had evolved at the Federal Circuit in the early 1990s. (See Part VI, The Vacatur-on-Demand Paradigm: Nuances.) The Federal Circuit had a brief history of vacatur practice that isolated it from the mainstream that was, finally, seemingly put to an end in Cardinal Chemical 76 and Bancorp.77 Yet, before that time, the Federal Circuit granted vacatur-on-demand in the notorious Tamoxifen Citrate I case,78 which has now made its way to the Supreme Court in the Tamoxifen Citrate II “reverse payment” patent anti-trust dispute.79 (See Part VI.A, Genesis of Federal Circuit Vacatur-on-Demand.) The MedImmune case involves a settlement that invokes Tamoxifen Citrate I, a voluntary settlement of parties to an interference that includes a determination by the parties to have the decision of the administrative body vacated, with the result that a patent is granted to the party determined below as the losing party. The switch in who would win the patent resulted in the parties gaining an 76 Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83 (1993) (overruling Vieau v. Japax, Inc., 823 F.2d 1510 (Fed. Cir. 1987). 77 U.S. Bancorp Mortgage Co. v. Bonner Mall P’ship, 513 U.S. 18 (1994) (Scalia, J.). 78 Tamoxifen Citrate I is a brief procedural opinion styled as Imperial Chemical Industries, PLC v. Heumann Pharma GmbH & Co., 991 F.2d 811, 1993 WL 118931, slip op. at *1 (Table) (Fed. Cir. 1993) order) Michel, J.) “Imperial Chemical Industries PLC (ICI) and Barr Laboratories, Inc. (Barr) jointly move to vacate the July 21, 1992 judgment of the United States District Court for the Southern District of New York and to remand with instructions to the district court to dismiss without prejudice pursuant to F.R.Civ.P. 41(a).”). Certiorari was granted in Izumi on Feb. 22, 1993; the Heumann Pharma order was entered Mar. 19, 1993, just 25 days later. 79 Joblove v. Barr Labs., Supreme Court No. 06-830, proceedings below, In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006). Presently, there is an outstanding order from the Court asking the Solicitor General for the certiorari views of the government (“CVSG”). Vacatur is an integral factual issue in the Tamoxifen Citrate case, but is not directly part of the Question Presented (“Under what circumstances is an agreement by a brand pharmaceutical manufacturer (and patent holder) to share a portion of its future profits with a generic market entrant (and alleged patent infringer), in exchange for the generic’s agreement not to market its product, a violation of the antitrust laws?”).

712 S E S S I O N I X : PA T E N T additional period of years of patent exclusivity. (See Part VI.B, The MedImmune Settlement: Whither Bancorp?) The grant of certiorari this past year in MedImmune generated a renaissance in policy debates over Lear, which have gone unanswered by the procedural holding of the case. (See Part VII, The Untouched Policy Considerations of Lear.) The country remains with the unfortunate situation that the United States lacks an administrative patent revocation system that can provide the basis for patent invalidity challenges that would make it possible to meet the policy objectives of Lear without “licensee estoppels.” Amici seeking to turn the clock back on Lear have been naïve in thinking that the Court would do so even if it were to address the merits . In the nearly forty years since Lear there has been no successful effort to provide a method for culling out clearly invalid patents. If anything, the negative image of the patent system has been amplified by business interests seeking a weakening of the rights of the patentee, a voice that has been heard by the Court in its pronouncements over the past year. Lear has not disappeared as an anachronistic old case; rather, Lear continues to be cited by the Court as bedrock principle. (See Part VII.A, Public Policy, Blonder-Tongue and Beyond.) More than twenty years ago, Professor Rochelle Cooper Dreyfuss had suggested that Lear should be overturned, particularly because of the then-new reexamination system that offered the expectation — at the time — that an alternative to litigation had been found to cull out invalid patents. Post-grant patent reform of a meaningful nature could provide the alternative that is called for by Lear. To the extent that meaningful legislation can be crafted to provide post-grant review, then an essential element of such legislation could provide a statutory override of Lear. (See Part VI.B, “Dethroning Lear ” Through Patent Reform.) Indeed, the United States is far behind the United Kingdom, Germany, and Japan in terms of providing a cheap, effective and prompt judicial or administrative vehicle to cull out invalid patents. (See Part VI.C, A Comparative View: A Different Approach Abroad.) The United States would do well to take a page from the British system, where declaratory relief has fared better and has been found manageable, as manifested in the Nokia case.80 (See Part VII, The Future: Lessons from London.) II. THE “QUESTIONS PRESENTED” IN MEDIMMUNE AND APOTEX Two petitions for review were filed concerning the scope of the right of a patent challenger to bring a declaratory judgment action for a determination of patent invalidity, MedImmune and Apotex. The Question Presented to the Court in MedImmune did not directly deal with Lear,81 but rather with the more fundamental issue as to whether there exists a justiciable controversy where a patent licensee operating under his license and therefore not under a threat of an infringement suit presents a justiciable controversy when he sues for a declaratory judgment of invalidity.82 Following on the heels of MedImmune, Apotex asked the Court to consider whether a generic manufacturer seeking to go onto the market has a right to a declaratory judgment 80 Nokia Corp. v. InterDigital Technology Corp., [2006] E.W.C.A. Civ. 1618, Ct. App. (Civ. Div.), ¶ 30 (Carnwath, L.J.) (quoting Messier Dowty Ltd. v. Sabena SA, [2001] 1 All E.R. 275, 285). 81 Lear, Inc. v. Adkins, 395 U.S. 653 (1969). 82 The Question Presented in MedImmune: “Does Article III’s grant of jurisdiction of ‘all Cases … arising under … the Laws of the United States,’ implemented in the ‘actual controversy’ requirement of the Declaratory Judgment Act, 28 U.S.C. § 2201(a), require a patent licensee to refuse to pay royalties and commit material breach of the license agreement before suing to declare the patent invalid, unenforceable or not infringed?”

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action,83 frontally assaulting the Federal Circuit’s “immediacy” test of Gen-Probe84 as amplified in the context of generic drug litigation in Teva v. Pfizer,85 cases which the Court later tied together in MedImmune.86 The extreme holding in Teva v. Pfizer is far more difficult to defend than the far more reasonable merits denial of an invalidity challenge by a paying licensee, a point that is forcefully brought out in the dissent in the Teva v. Pfizer proceedings at the Federal Circuit.87 A. APOTEX HANDWRITING ON THE WALL

The handwriting was on the wall for the death of Teva v. Pfizer when the Court in Apotex issued an order asking the Solicitor General to opine on whether to grant review,88 whereupon the patentee surrendered for that case by giving in to Apotex to moot the controversy,89 which was then followed by denial of certiorari.90 83 The Question Presented in Apotex: “whether … a suit [brought by a generic drug manufacturer seeking a declaratory judgment that a generic equivalent will not infringe a patent held by the brand-name manufacturer] states a justiciable controversy when … the failure to secure a court judgment prohibits the federal government from approving the generic equivalent and the prospect of massive patent liability deters the generic manufacturer from entering the marketplace.” 84 Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004) (Rader, J.). 85 Teva Pharms. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324 (Fed. Cir. 2005) (Schall, J.); cf. Teva, 395 F.3d at 1339 (Mayer, J., dissenting). As pointed out in the petition, “Teva [Pharms. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324 (Fed. Cir. 2005) (Schall, J.),] concerned the justiciability of another manufacturer’s declaratory judgment action against Pfizer regarding this same drug product — a generic competitor. … A divided panel of the Federal Circuit [(Mayer, J., dissenting, 395 F.3d at 1339)]. The petition frontally assaulted “Teva [which] concerned the justiciability of another manufacturer’s declaratory judgment action against Pfizer regarding this same drug product — a generic competitor. … A divided panel of the Federal Circuit [(Mayer, J., dissenting, 395 F.3d at 1339)], tightening its already rigorous requirement for finding a justiciable case or controversy, held that a court may adjudicate a declaratory judgment action only if the generic competitor faces an ‘imminent’ suit by a brand-name manufacturer. Teva, 395 F.3d at 1333. Like the district court in this case, the Federal Circuit in Teva did not doubt that a generic manufacturer is directly and immediately injured by this state of affairs. Rather it was dispositive that ‘Teva virtually concedes that Pfizer will not bring immediate suit’ because it ‘does not wish to expose the patent to the possibility of a noninfringement or invalidity determination.’ Id. at 1333–34” (record citations omitted). 86 MedImmune, 127 S. Ct. at 768 (“The District Court [in the proceedings below in MedImmune] granted respondents’ motion to dismiss the declaratory-judgment claims for lack of subject-matter jurisdiction, relying on … Gen-Probe … . Gen-Probe had held that a patent licensee in good standing cannot establish an Article III case or controversy with regard to validity, enforceability, or scope of the patent because the license agreement ‘obliterate[s] any reasonable apprehension” that the licensee will be sued for infringement.’ [359 F.3d ] at 1381. The Federal Circuit affirmed the District Court, also relying on Gen-Probe. 427 F.3d 958 (2005).”). 87 The dissent takes an “economics and common sense” approach to permitting a declaratory judgment suit to proceed. Teva, 395 F.3d at 1339 (Mayer, J., dissenting.) (“[The patentee] Pfizer … has a history of asserting its patent rights against infringers of other patents. Considering [its] patent [covering] the brand name drug Zoloft [that] produced nearly 3 billion dollars in profit in 2002, economics and common sense dictate that Pfizer may well bring suit.”). The dissent furthermore explains a public policy rationale that is not effectively rebutted in the majority ruling: Allowing Teva’s declaratory judgment action is consistent with the “case or controversy” requirement of Article III of the Constitution because the suit will achieve a final determination that resolves the entire controversy between Teva and Pfizer. Subsequent ANDA applicants suffer a real and defined harm when uncertainty exists as to their rights to manufacture and sell a generic drug product free from infringement allegations. By permitting generic companies to bring declaratory judgment claims, Congress has not sought to create a hypothetical injuryin-fact; it has simply recognized the harm that exists absent such relief. Consequently, under the Hatch-Waxman regime, Teva’s injuries are traceable to Pfizer’s conduct and those injuries could be redressed by a favorable decision. Therefore, Teva maintains a reasonable apprehension of suit sufficient to confer jurisdiction under the Declaratory Judgment Act. 88 Id. 89 Supplemental Brief for Respondent, 2006 WL 2569797 (“Pfizer sent to counsel for Apotex an unconditional covenant not to sue Apotex with respect to th[e] patent . . .. This covenant ensures that Apotex will never face any risk of a lawsuit by Pfizer under the subject patent.”). 90 Apotex, Inc. v. Pfizer, Inc., 126 S. Ct. 2057 (2006) (order asking for the views of the Solicitor General (CVSG)), 127 S. Ct. 379 (2006)(denying certiorari).

714 S E S S I O N I X : PA T E N T III. STANDING, THE LIMITED MEDIMMUNE HOLDING A. THE CONTROVERSY IN MEDIMMUNE

While the MedImmune case generated considerable attention in the patent and licensing communities over the continued viability of the Lear doctrine, it is important to note that the Court gave no answer to the question as to whether a paying — or “nonrepudiating”91 — licensee has a right to challenge the validity of a patent through a declaratory judgment action. Justice Scalia summarizes the controversy in MedImmune: The District Court granted [the patentee’s] motion to dismiss the declaratory-judgment claims for lack of subject-matter jurisdiction, relying on the decision of the United States Court of Appeals for the Federal Circuit in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004). Gen-Probe had held that a patent licensee in good standing cannot establish an Article III case or controversy with regard to validity, enforceability, or scope of the patent because the license agreement “obliterate[s] any reasonable apprehension” that the licensee will be sued for infringement. Id., at 1381. The Federal Circuit affirmed the District Court, also relying on Gen-Probe. [MedImmune,] 427 F.3d 958 (2005).92 The holding of the Court in MedImmune is that the petitioner-licensee MedImmune “has raised a contractual dispute . . .. It has done so” and has brought forth a justiciable controversy.93 B. THE MEDIMMUNE HOLDING

The court in SanDisk acknowledged that the Supreme Court in MedImmune has overruled the Federal Circuit test: “[I]n MedImmune, [the Court] addressed the ‘reasonable apprehension of suit’ aspect of this court’s two-part test and concluded that it conflicts with Aetna Life Insurance and Maryland Casualty, and is in tension with Cardinal Chemical Co. v. Morton International, Inc., 508 U.S. 83, 98 (1993).”94 The court in SanDisk explained the fundamental conflict with the now overruled Federal Circuit test: In Aetna Life Insurance, an insurer sought a declaratory judgment that the insured was not relieved of his duty to continue to pay insurance premiums and that, since the insured had stopped making the payments, the insurance policy had lapsed. In that case, the Supreme Court first upheld the constitutionality of the federal Declaratory Judgment Act. 300 U.S. at 240–41. The Supreme Court then held that, although the insured party gave no indication that he would file suit, id. at 239, the case nevertheless presented a controversy under Article III because the parties had taken adverse positions with regard to their obligations, each side presenting a concrete claim of a specific right-the insured claiming that he had become disabled and therefore was relieved of making insurance premium payments and the insurer claiming that the insured was not disabled and that the failure to make payments caused the policy to lapse, id. at 244. Similarly, in Maryland Casualty, the declaratory judgment plaintiff, an insurance company which had agreed to indemnify and defend the insured against actions brought by third parties against the insured, sought a declaration that it had no duty to 91 92 93 94

127 S. Ct. at 769. Id. at 768. Id. at 770. SanDisk, slip op. at p.6 (citing MedImmune, 127 S. Ct. at 774 n.11).

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defend or to indemnify the insured. 312 U.S. at 272. In that case, the insured could not have sued the declaratory judgment plaintiff without first obtaining a judgment against the third party and the underlying action against the third party “[a]pparently ... ha[d] not proceeded to judgment.” Id. at 271. Nevertheless, the Supreme Court held that “[i]t is clear that there is an actual controversy between petitioner and the insured” since the insured was in the process of seeking a judgment and had a statutory right to proceed against the declaratory judgment plaintiff if such judgment were obtained and not satisfied. Id. at 274. Finally, in Cardinal Chemical, the Supreme Court held that this court’s affirmance of a judgment of noninfringement does not necessarily moot a declaratory judgment counterclaim of patent invalidity. 508 U.S. at 98. The Supreme Court’s rationale for holding that the declaratory judgment action can proceed consistent with Article III was that a contrary result would create the potential for relitigation or uncertainty with regard to the validity of patents and would be contrary to Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313 (1971).95 The court expressly acknowledged that “[t]he Supreme Court’s opinion in MedImmune represents a rejection of our reasonable apprehension of suit test.”96 It is explained in SanDisk that: The Court first noted that “the continuation of royalty payments makes what would otherwise be an imminent threat at least remote, if not nonexistent …. Petitioner’s own acts, in other words, eliminate the imminent threat of harm.” MedImmune, 127 S.Ct. at 772. The Court nonetheless concluded that declaratory judgment jurisdiction existed relying in particular on its earlier decision in Altvater v. Freeman, 319 U.S. 359 (1943). There, the patentee brought suit to enjoin patent infringement, and the accused infringer filed declaratory judgment counterclaims of invalidity. The district court found that there was no infringement and that the patent was invalid. Id. at 362. The appellate court affirmed the finding of noninfringement but vacated the finding of invalidity as moot. Id. The Supreme Court held that the declaratory judgment counterclaims were not mooted by the finding of noninfringement. Id. at 365–66.”97 C. LEAVING LEAR UNTOUCHED

The Court noted the similarity of the case to Lear where, as here, the licensee was required to pay royalties until the end of the patent term.98 But here the licensee was seeking to have a holding that as a paying — or “nonrepudiating” — licensee it could bring suit for invalidity. This the Court refused to decide.99 The holding explicitly leaves open whether the MedImmune or other cases should be able to proceed, leaving the door

95

Id. at 6. Id. at 7. 97 Id. 98 127 S. Ct. at 769 (“But the license at issue in Lear, Inc. v. Adkins, 395 U.S. 653, 673 (1969), similarly provided that ‘royalties are to be paid until such time as the patent ... is held invalid,’ and we rejected the argument that a repudiating licensee must comply with its contract and pay royalties until its claim is vindicated in court.”). 99 Id. at 769–70 (“We express no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent’s validity-that is, on the applicability of licensee estoppel under these circumstances. Cf. Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed. Cir. 1997) (‘[A] licensee ... cannot invoke the protection of the Lear doctrine until it (i) actually ceases payment of royalties, and (ii) provides notice to the licensor that the reason for ceasing payment of royalties is because it has deemed the relevant claims to be invalid’).”). 96

716 S E S S I O N I X : PA T E N T open to various equitable, prudential, and policy arguments as well as merits-based defenses.100 IV. THE NOW OVERRULED “IMMINENT SUIT” TEST A. BLUNT REPUDIATION OF TEVA V. PFIZER Perhaps the most significant part of MedImmune in terms of the broad sweep of its reach is found in the discussion in “footnote 11,” a repudiation of the Federal Circuit’s test of a “reasonable apprehension of imminent suit”: The SanDisk court stated that: the Court specifically addressed and rejected our reasonable apprehension test [of Teva v. Pfizer]: “[e]ven if Altvater could be distinguished …, it would still contradict the Federal Circuit’s ‘reasonable apprehension of suit’ test (or, in its evolved form, the ‘reasonable apprehension of imminent suit’ test, Teva Pharm. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, 1333 (2005)). A licensee who pays royalties under compulsion of an injunction has no more apprehension of imminent harm than a licensee who pays royalties for fear of treble damages and an injunction fatal to his business. The reasonable-apprehension-of-suit test also conflicts with our decisions in Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941), where jurisdiction obtained even though the collision-victim defendant could not have sued the declaratory-judgment plaintiff-insurer without first obtaining a judgment against the insured; and Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239 (1937), where jurisdiction obtained even though the very reason the insurer sought declaratory relief was that the insured had given no indication that he would file suit. It is also in tension with Cardinal Chemical Co. v. Morton Int’l, Inc., 508 U.S. 83, 98 (1993), which held that appellate affirmance of a judgment of non-infringement, eliminating any apprehension of suit, does not moot a declaratory judgment counterclaim of patent invalidity.”101 B. CONTROLLING, POWERFUL DICTA

1. Judge Friedman’s Concurrence in Teva v. Novartis To be sure, the repudiation of Teva v. Pfizer is found in dicta unnecessary to the Question Presented in the petition. Yet, the blunt wording of “footnote 11” simply cannot be ignored. In Teva v. Novartis the Friedman concurrence acknowledged that the statements of footnote 11 (quoted in SanDisk) represent “dicta,”102 yet “the Court apparently was telling us that it rejected our ‘reasonable apprehension of imminent suit’ test [of Teva v. Pfizer] for determining declaratory judgment jurisdiction in patent cases, and that the broader general rules governing declaratory judgment jurisdiction also govern patent cases.”103 Thus, even though dicta, “in [such] unusual circumstances, where the Supreme Court went out of its way to state its disagreement with our “reasonable apprehension of imminent suit” test, which was not an issue in the case before it, it appears incumbent on us to stop using that test and hereafter to apply the general declaratory judgment standards that the Supreme Court applied in Medimmune.”104 100

Id. at 777. SanDisk slip op. at 7 (quoting MedImmune, 127 S. Ct. at 774 n.11). 102 Teva v. Novartis, Friedman Concurrence at 12. 103 Id. (emphasis in original). Prior to this blunt statement, the Friedman concurrence had quoted from the strong language in “footnote 11.” 104 Id. (emphasis in original). 101

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2. Judge Bryson’s Concurrence in SanDisk Judge Bryson, too, implicitly recognized that “footnote 11” represented dicta, yet he, too, saw the need to follow this directly stated guidance from the Supreme Court: Footnote 11 of the MedImmune opinion, however, went further and … criticized this court’s “reasonable apprehension of suit” test for declaratory judgment jurisdiction. I agree with the court that the footnote calls our case law into question and would appear to make declaratory judgments more readily available to parties who are approached by patentees seeking to license their patents. In particular, the reasoning of the MedImmune footnote seems to require us to hold that the district court in this case had jurisdiction to entertain SanDisk’s declaratory judgment action. For that reason I concur in the judgment of the court in this case reversing the jurisdictional dismissal of the complaint.105 3. Concurrence of all Four Supreme Court Experts The Friedman and Bryson Concurrences represent the opinions of two of four of the most experienced members of the Federal Circuit in terms of pre-existing Supreme Court background and practice,106 while a third expert was a member of the SanDisk panel and the fourth was part of the per curiam panel in Cellco. Thus, all four of the current members of the Federal Circuit with an extensive Supreme Court background were involved in a post-MedImmune opinion.107 B. THE BRYSON OPEN-ENDED SLIPPERY SLOPE The broad sweep of MedImmune is emphasized in the concurrence by Judge Bryson in SanDisk: [I]t is important… to point out the implications of … footnote [11] in MedImmune as applied here, because the implications are broader than one might suppose from reading the court’ opinion in this case. While noting that it is not necessary to define the outer boundaries of declaratory judgment jurisdiction, the court holds that ‘where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license,’ the party may bring a declaratory judgment action. … In practical application, the new test will not be confined to cases with facts similar to this one. If a patentee offers a license for a fee, the offer typically will be accompanied by a suggestion that the other party’s conduct is within the scope of the patentee’s patent rights, or it will be apparent that the patentee believes that to be the case. Offers to license a patent are not requests for gratuitous contributions to the patentee; the rationale underlying a license offer is the patentee’s express or implied suggestion that the other party’s current or planned conduct falls within the scope of the patent. Therefore, it would appear that under the court’s standard virtually any invitation to take a paid license relating to the prospective licensee’s activities would give rise to an Article 105

SanDisk, slip op. at 11 (Bryson, J., concurring). Judge Friedman argued countless cases before the Supreme Court; his name as counsel in Westlaw on the SCT database shows 172 hits, including numerous cases where he argued before the Court. 107 Three members of the Federal Circuit have served as the Acting Solicitor General (Judges Friedman and Bryson and the late Oscar Hirsch Davis). Judge Dyk headed an appellate practice for a major law firm and argued about ten cases before the Court; both he and Judge Bryson are the only former Supreme Court Law Clerks on the Federal Circuit, while, for several years, Judge Mayer was Special Assistant to the Chief Justice. Judges Bryson and Dyk were members of the SanDisk panel, while Judge Mayer was a member of the Cellco panel. 106

718 S E S S I O N I X : PA T E N T III case or controversy if the prospective licensee elects to assert that its conduct does not fall within the scope of the patent. Indeed, as the court makes clear, even a representation by the patentee that it does not propose to file suit against the prospective licensee will not suffice to avoid the risk that the patentee will face a declaratory judgment. And if there is any uncertainty on that score, all the prospective licensee has to do in order to dispel any doubt is to inquire of the patentee whether the patentee believes its activities are within the scope of the patent. If the patentee says “no,” it will have made a damaging admission that will make it very hard ever to litigate the issue, and thus will effectively end its licensing efforts. If it says “yes” or equivocates, it will have satisfied the court’s test and will have set itself up for a declaratory judgment lawsuit.108 C. THE PATENTEE’S AFFIRMATIVE ACTION TRIGGER

The SanDisk court also noted that there must be some affirmative act by the patentee to raise a justiciable controversy under MedImmune: [D]eclaratory judgment jurisdiction generally will not arise merely on the basis that a party learns of the existence of a patent owned … or even perceives such a patent to pose a risk of infringement, without some affirmative act by the patentee. But Article III jurisdiction may be met where the patentee takes a position that puts the declaratory judgment plaintiff in the position of either pursuing arguably illegal behavior or abandoning that which he claims a right to do. We need not define the outer boundaries of declaratory judgment jurisdiction, which will depend on the application of the principles of declaratory judgment jurisdiction to the facts and circumstances of each case. We hold only that where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise and the party need not risk a suit for infringement by engaging in the identified activity before seeking a declaration of its legal rights.109 V. POST-MEDIMMUNE OPEN QUESTIONS While the door is wide open for a declaratory judgment plaintiff to seek an invalidity ruling as a matter of standing, it is yet another matter whether the trial court will exercise its jurisdiction to hear the action. The Court was very careful to note that the patentee is free to present arguments on the merits against continuation of the lawsuit. As to the discretion of the trial court to entertain the declaratory judgment action, the Court expressly “leave[s] the equitable, prudential, and policy arguments in favor of . . . a discretionary dismissal for the lower courts’ consideration on remand.”110 There also may be arguments on the merits perhaps based upon contractual provisions that may be basis for a defense to a declaratory judgment action. Thus, “[s]imilarly avail108

SanDisk, slip op. at 11 (Bryson, J., concurring). SanDisk, majority slip op. at 7 (emphasis added). The court immediately after this quotation acknowledges a case as being contra, Contra Cygnus Therapeutics Sys. v. ALZA Corp., 92 F.3d 1153 (Fed. Cir. 1996), characterized by the court as “holding that declaratory judgment jurisdiction was not supported where the ‘patentee does nothing more than exercise its lawful commercial prerogatives and, in so doing, puts a competitor in the position of having to choose between abandoning a particular business venture or bringing matters to a head by engaging in arguably infringing activity.’” Id. 110 MedImmune, 127 S. Ct. at 777. 109

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able for consideration [beyond equitable, prudential and policy arguments] . . . are any merits-based arguments for denial of declaratory relief.” 111 A. THE DISCRETION OF THE TRIAL JUDGE

The Court expressly “leave[s] the equitable . . . arguments in favor of . . . a discretionary dismissal for the lower courts’ consideration . . ..”112 Thus, beyond any contractual or other legal arguments against letting a declaratory judgment action proceed, it should above all be up to the District Court to make a case by case determination whether to invoke the discretion of the court to entertain the declaratory judgment action.113 Merely because there is a justiciable controversy between licensor and licensee, does not mean that a trial court should or must entertain a declaratory judgment action by the licensee against the patentee. As explained by the Court, “[t]he Declaratory Judgment Act provides that a court ‘may declare the rights and other legal relations of any interested party,’ … not that it must do so.”114 This provision “has long been understood ‘to confer on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants.’”115 B. FEDERAL CIRCUIT GUIDANCE IN SANDISK AND BEYOND

In the post-MedImmune era and with specific citation to that case, the Federal Circuit has provided guidance on the equitable discretion of the trial court in two different cases and mentioned the topic in three: 1. SanDisk Guidance on Discretion In SanDisk the Federal Circuit has quite correctly emphasized the issue of a trial court’s discretion: Thus, “[a]lthough the district court is given the discretion, in declaratory judgment actions, to dismiss the case, there are boundaries to that discretion.”116 Thus, “[w]hen there is an actual controversy and a declaratory judgment would settle the legal relations in dispute and afford relief from uncertainty or insecurity, in the usual circumstance the declaratory judgment is not subject to dismissal.”117 The court also points to Electronics for Imaging118 and Capo v. Dioptics119 as providing guidance for the proposition that “the exercise of discretion must be supported by a sound basis for refusing to adjudicate an actual controversy.”120 The court has made it clear that “[w]hen there is an actual controversy and a declaratory judgment would settle the legal relations in dispute and afford relief from uncertainty or insecurity, in the usual circumstance the declaratory judgment is not subject to dismissal.”121

111

Id. Id. 113 Id. at 776 (quoting Wilton v. Seven Falls Co., 515 U.S. at 289) (“We have found it ‘more consistent with the statute’ however, ‘to vest district courts with discretion in the first instance, because facts bearing on the usefulness of the declaratory judgment remedy, and the fitness of the case for resolution, are peculiarly within their grasp.”). 114 Id. at 776 (quoting 28 U.S.C. § 2201(a)) (emphasis added by the Court). 115 Id. (quoting Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995); also citing Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 95, n.17 (1993); Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494–96 (1942)). 116 SanDisk, __ F.3d at __, slip op. at 10 (citing Wilton v. Seven Falls Co., 515 U.S. 277, 289 (1995)). 117 Id. (quoting Genentech v. Eli Lilly & Co., 998 F.2d 931, 937 (Fed. Cir. 1993)). 118 Electronics for Imaging, Inc. v. Coyle, 394 F.3d 1341, 1345 (Fed. Cir. 2005) (Gajarsa, J.). 119 Capo, Inc. v. Dioptics Med. Prods., Inc., 387 F.3d 1352, 1357 (Fed. Cir. 2004) (Newman, J.). 120 SanDisk, __ F.3d at __, slip op. at 10 121 Electronics for Imaging, 394 F.3d at 1345 (quoting Genentech v. Eli Lilly & Co., 998 F.2d 931, 937 (Fed. Cir. 1993)). 112

720 S E S S I O N I X : PA T E N T 2. Cellco Discretionary Dismissal of a DJ Action Cellco represents the first post-MedImmune decision of the Federal Circuit to confirm the standing of the declaratory judgment plaintiff but to affirm a trial court dismissal, finding “no abuse of discretion [by the trial judge] in dismissing the case.”122 But, there were circumstances unique to the Cellco case which clearly warranted the dismissal: “In light of [various] other [pending] proceedings . . ., the trial court determined that entertaining Cellco’s declaratory judgment action would be ‘an inappropriate use of multiple judicial districts.’ Because of potential judicial efficiency, and because Cellco has not shown sufficient harm to require immediate resolution of its case prior to the conclusion of these other proceedings[.]”123 3. Teva v. Novartis, The Special ANDA Case Teva v. Novartis does not deal with the issue of discretionary dismissal of a declaratory judgment action. There is, however, a footnote acknowledgment of the issue of discretion.124 Yet, there is perhaps little room for discretion in the context of this case. Thus, Teva v. Novartis involves the special factual pattern of an Abbreviated New Drug Application (ANDA) and involves a specific statutory provision that was amended in 2003. The 2003 amendment law would appear to make the holding in Teva v. Pfizer wrong even without a consideration of MedImmune, as emphasized by the dissent in the opinion in that case.125 While the majority opinion in Teva v. Novartis acknowledges the 2003 amendment,126 the majority does not go so far as to indicate that the 2003 amendment gives a right, by itself, to a declaratory judgment action.127 Yet, much of the lengthy majority opinion must be regarded as dicta; it remains to be seen whether the Congressional intention as manifested in the language quoted in the dissent will be followed by a future panel of the Federal Circuit to give the broad scope of relief that is stated in the legislative history. VI. THE VACATUR-ON-DEMAND PARADIGM: NUANCES So far, the Federal Circuit has refrained from issuing any bright-line rules as to when a trial court may abuse its discretion by entertaining a declaratory judgment action. Absent such guidance, the trial courts will have a certain degree of freedom to entertain policy and other arguments for the dismissal of a declaratory judgment action for invalidity, as has already been affirmed in the Cellco case. Whether the post-MedImmune practice will evolve with a nuanced case-by-case 122

Cellco, __ F.3d at __, slip op. at 1. The Federal Circuit noted that “[t]he same patents at issue here are also the subject of a pending International Trade Commission (“ITC”) proceeding, which was instituted by Broadcom . . . against Qualcomm . . .. Qualcomm manufactures the chips used by Cellco . . .. That proceeding raised many of the same issues as Cellco’s declaratory judgment action, including the validity of the patents. Although the ITC’s findings lack preclusive effect and cannot conclusively resolve the controversy between Cellco and Broadcom, they can be considered by federal courts for their persuasive value. Texas Instruments v. Cypress Semiconductor Corp., 90 F.3d 1558, 1568–69 (Fed. Cir. 1996). In addition, a separate district court proceeding raising similar issues was pending between Qualcomm and Broadcom in the Central District of California. As required by statute, that case was stayed at Qualcomm’s request until the ITC’s determination becomes final. 28 U.S.C. § 1659(a); see In re Princo Corp., __ F.3d __, 2007 WL 610732 (Fed. Cir. 2007) (order). When that suit resumes, it will have the benefit of the ITC’s determinations, and Cellco can seek to intervene.” Id. 124 Teva v. Novartis, Gajarsa Majority, slip op. at 4 n.3 (“However, unlike non-declaratory judgment actions, even if there is an actual controversy, the district court is not required to exercise jurisdiction to address the merits of the action, as it retains discretion under the Act to decline declaratory judgment jurisdiction. Public Serv. Comm’n v. Wycoff Co., 344 U.S. 237, 241 (1952); Spectronics Corp. v. H.B. Fuller Co., 940 F.2d 631, 634 (Fed. Cir. 1991) (“When there is no actual controversy, the court has no [jurisdiction and no] discretion to decide the case. When there is an actual controversy and thus jurisdiction, the exercise of that jurisdiction is discretionary.”)”. 123

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approach keyed to the discretion of individual trial court judges or whether the court will now issue bright-line, one-size-fits-all rules remains to be seen. However, as a cautionary note as an example straight from the underlying facts of MedImmune itself, the paradigm of the Federal Circuit vacatur practice should be considered. A. GENESIS OF FEDERAL CIRCUIT VACATUR-ON-DEMAND

If ever there were a case with facts to demonstrate the need for a nuanced, case-by-case approach, it is MedImmune itself, which brings together conflicting policy issues that were considered by the Court more than ten years ago in Izumi128 and Bancorp — both on the heels of the overruling of the notorious Vieau practice in Cardinal Chemical.129 Before Izumi was dismissed by the Court and the appeal was still pending, the vacatur practice overruled in Bancorp was basis for vacatur-on-demand in Tamoxifen Citrate I.130 Conceivably, the vacatur practice of Tamoxifen Citrate I could provide underlying grist for consideration of antitrust issues keyed to that vacatur as early as the next term of the Court in the Tamoxifen Citrate II case.131 Two different vacatur policies were in operation at the Federal Circuit of the early 1990s: First, there was the Vieau practice, overruled in Cardinal Chemical, where the court sought to preserve the validity of patents that had been lost on both noninfringement and invalidity at the trial level and where the trial level decision was affirmed on the basis of noninfringement: Here, to save the patentee to be able to sue again, the court ordered vacatur of the “moot” invalidity issue, a result that was introduced in the Cardinal Chemical case at the Federal Circuit sua sponte without briefing by the parties.132 125 Teva Pharms. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, 1339 (Fed. Cir. 2005) (Mayer, J., dissenting) (“Regardless of whether the [Federal Circuit test] is a constitutional necessity or not, the legislative history voices Congress’ intent to apply the ‘reasonable apprehension’ portion of the test in determining whether a court may determine the rights of an ANDA filer seeking relief. See H.R. Conf. Rep. No. 108-391, at 836 (2003) (‘Through the modifications in this Act, the conferees do not intend for the courts to modify their application of the requirements under Article III that a declaratory judgment plaintiff must, to the extent required by the Constitution, demonstrate a ‘reasonable apprehension’ of suit to establish jurisdiction.’).”). 126 Teva v. Novartis, __ F.3d at __ , slip op. at 7 (Gajarsa majority opinion) (“Novartis listed its [ ] patents in the Orange Book. By so doing, Novartis represents that ‘a claim of patent infringement could reasonably be asserted if a person not licensed by the owner engaged in the manufacture, use or sale’ of generic [drug] covered by the claims of its listed [ ] patents. 21 U.S.C. § 355(b)(1); see Pfizer, 395 F.3d at 1341 (Mayer, J., dissenting).”). 127 Id. (“While this conduct on its own may not be sufficient to establish an Article III controversy, it is a circumstance to be considered in determining whether a justiciable controversy exists under the totality of the circumstances.”). 128 Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S. Philips Corp., 510 U.S. 27 (1993). 129 Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83 (1993), overruling Vieau v. Japax, Inc., 823 F.2d 1510 (Fed. Cir. 1987). 130 Tamoxifen Citrate I is a brief procedural opinion styled as Imperial Chemical Industries, PLC v. Heumann Pharma GmbH & Co., 991 F.2d 811, 1993 WL 118931, slip op. at *1, Tbl 1. (Fed. Cir. 1993) (order) (Michel, J.) (“Imperial Chemical Industries PLC (ICI) and Barr Laboratories, Inc. (Barr) jointly move to vacate the July 21, 1992 judgment of the United States District Court for the Southern District of New York and to remand with instructions to the district court to dismiss without prejudice pursuant to Fed.R.Civ. P. 41(a).”) Certiorari was granted in Izumi on Feb. 22, 1993; the Heumann Pharma order was entered Mar. 19, 1993, just twenty-five days later. 131 Presently, there is an outstanding order from the Court asking the Solicitor General for the certiorari views of the government (CVSG). Vacatur is an integral factual issue in the Tamoxifen Citrate case, but is not directly part of the Question Presented (“Under what circumstances is an agreement by a brand pharmaceutical manufacturer (and patent holder) to share a portion of its future profits with a generic market entrant (and alleged patent infringer), in exchange for the generic’s agreement not to market its product, a violation of the antitrust laws?”). 132 Morton Int’l, Inc. v. Cardinal Chem. Co., 967 F.2d 1571, 1571–72 (Fed. Cir. 1992) (Nies, J., dissenting from denial of reh’g en banc) (“[Patentee] Cardinal … sought and obtained a declaratory judgment that [the patents]

722 S E S S I O N I X : PA T E N T The Bancorp decision overruled the practice of Tamoxifen Citrate I, where the court vacated a trial court ruling of invalidity133 of an important anticancer drug patent based upon the “reverse payment” of more than $20 million by the patentee to the successful generic litigant so that the patent would remain in force and could be used against the industry and so that — as part of the settlement — even the successful generic litigant would honor the exclusive marketing position of the patentee: Critical to the success of the settlement was the participation of the court in Tamoxifen Citrate I in granting vacatur. Under Bancorp, it is clear that “mootness attributable to a voluntary act of a nonprevailing party ordinarily does not justify vacatur of a judgment under review[.]”134 The topic had generated much controversy in the period leading up to Bancorp.135 But, the settlement in Tamoxifen Citrate I took place just before Bancorp, at a time when the Second and Federal Circuits permitted vacatur in situations like that of the tamoxifen case.136 owned by Morton … were invalid. On appeal, a majority of the panel reasoned that because it affirmed the district court’s finding on Morton’s infringement claim that Cardinal did not infringe the subject patents, it ‘need not address the question of validity.’ Citing Vieau v. Japax, Inc., 823 F.2d 1510 (Fed. Cir. 1987) as authority, the majority, sua sponte, vacated the judgment of invalidity entered on Cardinal’s declaratory counterclaim.”). 133 Imperial Chem. Indus., PLC v. Barr Labs., 795 F. Supp. 619, 629, Conclusion of Law no. 3 (S.D.N.Y. 1992) (“U.S. Patent 4,536,516 . . . covering tamoxifen is invalid and is unenforceable by the plaintiff ICI because ICI deliberately, knowingly and fraudulently with purpose to deceive and mislead with respect to material matters[.]”). The decision more properly should be characterized as a holding of unenforceability based upon such patent fraud. 134 Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 195 n.6 (2000) (citing Bancorp). Furthermore, “it is far from clear that vacatur of the District Court’s judgment would be the appropriate response to a finding of mootness on appeal brought about by the voluntary conduct of the party that lost in the District Court. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994) (mootness attributable to a voluntary act of a nonprevailing party ordinarily does not justify vacatur of a judgment under review); see also Walling v. James V. Reuter, Inc., 321 U.S. 671 (1944).” Id. See also Arizonans for Official English v. Arizona, 520 U.S. 43, 71–72 (1997) (Ginsburg, J.) (“When a civil case becomes moot pending appellate adjudication, ‘[t]he established practice . . . in the federal system . . . is to reverse or vacate the judgment below and remand with a direction to dismiss.’ United States v. Munsingwear, Inc., 340 U.S. 36, 39 (1950). Vacatur ‘clears the path for future relitigation’ by eliminating a judgment the loser was stopped from opposing on direct review. Id. at 40. Vacatur is in order when mootness occurs through happenstance – circumstances not attributable to the parties — or . . . the ‘unilateral action of the party who prevailed in the lower court.’ U.S. Bancorp Mortgage Co., 513 U.S. at 23; cf. id. at 29 (‘mootness by reason of settlement [ordinarily] does not justify vacatur of a judgment under review’).”). 135 See William P. Atkins, The History And Subsequent Demise of Vacatur Upon Settlement by the Federal Circuit. 78 J. Pat. & Trademark Off. Soc’y 295, 296 n.6 (1996) (“Kendrew H. Colton & Michael W. Haas, Patent Law Developments in the United States Court of Appeals for the Federal Circuit During 1992, 42 Am. U. L. Rev. 909, 924–28 (1993); Marcia Coyle, Corporate Giants Lock Horns Over Granting of Vacatur, Nat’l L.J., Oct. 25, 1993, at 21; Elizabeth Bowen, Routine Vacatur: The Supreme Court Strikes the Balance in Favor of Finality, 3 Fed. Cir. Bar J. 259 (1993); Stephen R. Barnett, Making Decisions Disappear: Depublication and Stipulated Reversal in the California Supreme Court, 26 Loyola L. Rev. 1033, 1073 (1993); Michael W. Loudenslager, Erasing The Law: The Implications of Settlements Conditioned Upon Vacatur or Reversal of Judgments, 3 Wash. & Lee L. Rev. 1229 (1993); Harold C. Wegner, “Vitiat[ing] ... Blonder-Tongue” Nestle Vacatur-on-Demand, 75 J. Pat. & Trademark Off. Soc’y 671 (Sept. 1993); Stephen McG. Bundy, The Policy in Favor of Settlement in an Adversary System, 44 Hastings L.J. 1 (1992); Kipp D. Snider, Vacatur: The Vacatur Remedy For Cases Becoming Moot Upon Appeal: In Search of A Workable Solution For the Federal Courts, 60 Geo. Wash. L. Rev. 1642 (1992); Jill E. Fisch, Rewriting History: The Propriety of Eradicating Prior Decisional Law through Settlement and Vacatur, 76 Cornell L. Rev. 589 (1991); Henry E. Klingeman, Settlement Pending Appeal: An Argument for Vacatur, 58 Fordham L. Rev. 233 (1989); William D. Zeller, Avoiding Issue Preclusion by Settlement Conditioned upon the Vacatur of Entered Judgments, 96 Yale L.J. 860 (1987); Stuart N. Rappaport, Collateral Estoppel Effects of Judgments Vacated Pursuant to Settlement, 1987 U. Ill. L. Rev. 731 (1987).”). 136 Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S. Philips Corp., 510 U.S. 27, 30 n.2 (1993) (dismissing certiorari as improvidently granted) (“Like the Federal Circuit, the Second Circuit will generally grant motions to vacate when parties settle on appeal. See Nestle Co. v. Chester’s Market, Inc., 756 F.2d 280, 282–284 (2nd Cir. 1985). The Third, District of Columbia, and Seventh Circuits will generally deny such motions. See Clarendon Ltd. v. Nu-West Industries, Inc., 936 F.2d 127 (3rd Cir. 1991); In re United States, 927 F.2d 626 (D.C. Cir. 1991); In re

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B. THE MEDIMMUNE SETTLEMENT: WHITHER BANCORP?

Contrary to the policy of Bancorp, a review of the facts of MedImmune show that the Cabilly patent that is the subject of the underlying patent validity issue was granted after there had been a ruling by the administrative patent judges that had determined that a patent should be awarded to the first inventor — the opposing party — and not Cabilly. But, if a Cabilly patent were granted instead, then the patent term would extend far longer and permit a longer flow of royalties. As a result of a settlement agreement where the parties privately determined that the decision by the administrative patent judges was wrong, the parties were able to obtain a settlement that permitted Cabilly to gain the patent. VII. THE UNTOUCHED POLICY CONSIDERATIONS OF LEAR A. PUBLIC POLICY, BLONDER-TONGUE AND BEYOND

Lear provides that, despite a contractual proscription on a licensee challenging patent validity, such a “licensee estoppel” contractual provision is unenforceable in substantial part because of the dearth of a simple inter partes mechanism for the public to challenge patent validity: Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.137 Yet, Lear cannot be simply dismissed as an old precedent. Lear represents one of the major Supreme Court patent precedents of the past forty years, one that is not forgotten and which has uniformly been cited with approval by the Supreme Court in later decisions. It must be remembered that the Blonder-Tongue rule on collateral estoppel is today one of the leading cases in general jurisprudence, yet the case arose in a patent context.138 A root cause for the Court changing its law on collateral estoppel in the dramatic fashion of Blonder-Tongue may be traced to Lear: When the[ ] judicial developments are considered in the light of our consistent view – last presented in Lear, Inc. v. Adkins — that the holder of a patent should not be insulated from the assertion of defenses and thus allowed to exact royalties for the use of an idea that is not in fact patentable or that is beyond the scope of the patent monopoly granted, it is apparent that the uncritical acceptance of the principle of mutuality of estoppel expressed in Triplett v. Lowell is today out of place. Thus, we conclude that Triplett should be overruled to the extent it forecloses a plea of estoppel by one facing a charge of infringement of a patent that has once been declared invalid.139 Memorial Hospital of Iowa County, Inc., 862 F.2d 1299 (7th Cir. 1988). The Ninth Circuit requires district courts to balance ‘the competing values of finality of judgment and right to relitigation of unreviewed disputes.’ Ringsby Truck Lines, Inc. v. Western Conference of Teamsters, 686 F.2d 720, 722 (1982).”). 137 Lear, Inc. v. Adkins, 395 U.S. 653, 670–71 (1969). 138 Blonder-Tongue Labs., Inc. v. University of Ill. Found., 402 U.S. 313, 349–50 (1971). 139 Id. at 349–50.

724 S E S S I O N I X : PA T E N T Lear continues to be cited by the court as a cornerstone for patent policy in the United States. As stated in Bonito Boats, “all ideas in general circulation [should] be dedicated to the common good unless they are protected by a valid patent.”140 Quoting Lear in Devex, “[a] patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office. Moreover, the legal conclusion is predicated on factors as to which reasonable men can differ widely. Yet the Patent Office is often obliged to reach its decision in an ex parte proceeding, without the aid of the arguments which could be advanced by parties interested in proving patent invalidity.”141 Citing a nineteenth-century precedent, “a patent challenge in the courts permits a more informed decision regarding the merits of a particular patent. And, as we have long recognized, ‘It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly; . . .’.”142 The court in Quick Point Pencil summarizes Lear, where the Court “held that a person licensed to use a patent may challenge the validity of the patent, and that a licensee who establishes that the patent is invalid need not pay the royalties accrued under the licensing agreement subsequent to the issuance of the patent. Both holdings relied on the desirability of encouraging licensees to challenge the validity of patents, to further the strong federal policy that only inventions which meet the rigorous requirements of patentability shall be withdrawn from the public domain.”143 In Kewanee Oil it was pointed out that “the Court [in Lear] thought that an invalid patent was so serious a threat to the free use of ideas already in the public domain that the Court permitted licensees of the patent holder to challenge the validity of the patent. Better had the invalid patent never issued.”144 The Court noted in Glaxo Group that [because of the public interest in free competition, the Court] had repeatedly held that the private licensee-plaintiff in an antitrust suit may attack the validity of the patent under which he is licensed even though he has agreed not to do so in his license. The authorities for this proposition were Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173 (1942); Edward Katzinger Co. v. Chicago Metallic Mfg. Co., 329 U.S. 394 (1947); and MacGregor v. Westinghouse Electric & Mfg. Co., 329 U.S. 402 (1947). The essence of those cases is best revealed in Katzinger where the Court held that, although a patent licensee (under the then-controlling law) was normally foreclosed from questioning the validity of a patent he is privileged to use, the bar is removed when he alleges conduct by the patentee that would be illegal under the antitrust laws, absent the patent. The licensee was free to challenge the patent in these circumstances because the ‘federal courts must, in the public interest, keep the way open for the challenge of patents which are utilized for price-fixing . . .’ 329 U.S., at 399. Katzinger and Gypsum were much in the tradition of Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234, 12 S.Ct. 632, 636, 36 L.Ed. 414 (1892): ‘It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly . . .,’ a view most recently echoed in Lear, Inc. v. Adkins, 395 U.S. 653, 663 (1969).145 140

Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 159–60 (1989) (quoting Lear, 395 U.S. at 668). General Motors Corp. v. Devex Corp., 461 U.S. 648, 658 (1983) (Stevens, J., concurring) (quoting Lear, 395 U.S. at 670). 142 Id. (Stevens, J., concurring) (quoting Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234 (1892)). 143 Aronson v. Quick Point Pencil Co., 440 U.S. 257, 264 (1979) (citing Lear, 395 U.S. at 670–71). 144 Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 488-89 (1974). 145 U.S. v. Glaxo Group Ltd., 410 U.S. 52, 57–58 (1973). 141

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B. “DETHRONING LEAR” THROUGH PATENT REFORM

Less than a decade after Lear, the most respected senior scholar knowledgeable about patents and procedures advocated “dethroning Lear,” in large measure because the problem identified in Lear had been dealt with through enactment of patent reexamination legislation.146 Yet, while that view may prospectively have been realistic, the failure of the current reexamination system manifests the continued need to address the policy concerns of the Court in Lear. Yet, reexamination remains a viable option to meet the challenge of Lear if there were appropriate legislation.147 Indeed, if there were a meaningful post-grant patent review system instituted as part of patent reform efforts, thereby eliminating a root cause for Lear, then it would be logical to legislatively overrule Lear at such a time. C. A COMPARATIVE VIEW: A DIFFERENT APPROACH ABROAD

When contrasted with the patent regimes of Germany, the United Kingdom, and Japan, the critical failing mentioned in Lear is missing: Each of these systems has a highly reliable and efficient method for weeding out invalid patents in a far shorter time and with greater predictability and less expense than in the costly patent litigation system of the United States. The High Court in the United Kingdom is able to swiftly and with great judicial expertise sort through patent validity challenges. The German Bundespatentgericht in Munich is able to provide an expertise and speed of purely invalidity determinations in its Nichtigkeitsklagen. Japan has totally revamped its administrative post-grant review system at the Japan Patent Office to provide a roughly one inter partes proceeding at its Board of Appeals. Swift appellate review is possible at the Court of Appeal, the Bundesgerichtshof, and the Intellectual Property High Court, each manned by a patent-experienced group of jurists. VIII. THE FUTURE: LESSONS FROM LONDON Keeping the door open to the discretion of the trial court to entertain declaratory judgment actions should be followed to the exclusion of bright line rules established from an appellate tribunal. It would be useful to follow the wisdom from the recent British Nokia case:

146 Rochelle Cooper Dreyfuss, Dethroning Lear: Licensee Estoppel and the Incentive to Innovate, 72 Va. L. Rev. 677 (1986). 147 Kimberly A. Moore, Jury Demands: Who’s Asking, 17 Berkeley Tech. L.J. 847, 849 n.8 (2002) (citing Dreyfuss, id., at 754 n.277) (“ Of course, reexamination procedures exist as a present alternative to litigation, but they are infrequently chosen because of their estoppel effects on litigating validity issues. Opposition proceedings prior to patent issuance presently do not exist. However, if enacted, they could help reduce subsequent litigation by minimizing the issuance of invalid patents.”). Professor Moore also cites several other authorities: “Gregory Gelfand, Expanding the Role of the Patent Office in Determining Patent Validity: A Proposal, 65 Cornell L. Rev. 75, 98–102 (1979); Mark D. Janis, Rethinking Reexamination: Toward a Viable Administrative Revocation System for U.S. Patent Law, 11 Harv. J.L. & Tech. 1 (1997) (suggesting further examination of foreign nullity, opposition, and revocation proceedings as potentially advantageous over the present scheme of resolving validity disputes via litigation); Mark A. Lemley, Rationale Ignorance at the Patent Office, 95 Nw. U. L. Rev. 1495, 1525 (2001) (discussing the costs and benefits of an opposition proceeding for patents); Robert P. Merges, As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform, 14 Berkeley Tech. L.J. 577, 610–12 (1999); Craig Allen Nard, Legitimacy and the Useful Arts, 10 Harv. J.L. & Tech. 515, 557 (1997) (suggesting that the PTO is better suited to resolve patent validity issues than a judge or lay jury); Joel M. Freed & Thomas C. Reynolds, The New Patent Landscape, 18 Computer & Internet L., Dec. 2001, at 1, 2–4 (reporting on a congressional bill that would establish opposition proceedings for business method patents).”Id.

726 S E S S I O N I X : PA T E N T The development of the use of declaratory relief in relation to commercial disputes should not be constrained by artificial limits wrongly related to jurisdiction. It should instead be kept within proper bounds by the exercise of the courts of discretion.”148 Against the argument that the “floodgates” of more litigation would be opened by broadening the scope of declaratory relief,149 “there has not been a flood of applications . . .. Moreover, if cases involving too many patents at one time were brought the Court has ample machinery for cutting the cases down to size or splitting them into manageable portions. And if in the end the whole thing became unmanageable that might [at that time] be a reason to decline jurisdiction . . ..”150 *

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MR. LANE: Let’s turn to someone who deals with the realities in industry. Chuck, with a

big company like Time Warner, where there are a lot of existing licenses, in your view does this new jurisprudence represent a welcome and much needed change in the law, or do you see this as more of an inappropriate intrusion into private contractual rights? MR. FISH: I actually see it as of a piece with several other things, which is really sort of much ado about nothing. It may be that there are industries other than the ones that I have worked in where this is a big deal. I tend to not believe that it is a big deal because it is my experience that there are those people who write “the sky is falling, the sky is falling” amicus briefs, and then they don’t even get hit with acorns. And it doesn’t take being hit in the head with an acorn to get them to go around and claim that the sky is falling. So I don’t know that I trust some of those industry groups. I think it is without doubt true that the patent system operates differently for different industries. But in this context, what I really see is a kind of “So what?” MR. LANE: What about “it’s about time?” The reasonable apprehension test was a bit of a snake that you had to wrestle with. MR. FISH: That’s unfair, though. MR. LANE: There was a lot of dancing around. MR. FISH: I would say the reasonable apprehension test was probably as good an example of Federal Circuit industrial policymaking as several. They decided to favor the licensing industry for some reason, and that was their policy. I don’t know that it was entirely clear that it was outside the mainstream of all other American law, because I think when you read the MedImmune case you might honestly scratch your head and say, “Okay, I was pretty sure I didn’t understand justiciability when I was in law school, I was really sure when I was a law clerk, and now I don’t know anything.” That might be a fair answer. But it is not unknowable. It seems to me that the suggestions that Steve makes are all good ones. MR. LANE: Do you think any of those are legally invalid? For example, there are arbitration clauses in hundreds of agreements. Do you think there is anything in MedImmune and its progeny SanDisk151 that would render such clauses invalid legally? MR. FISH: I’m not aware of it. MR. LANE: Have you seen anything? 148 Nokia Corp. v. InterDigital Technology Corp., [2006] E.W.C.A. Civ. 1618, Ct. App. (Civ. Div.), ¶ 30 (Carnwath, L.J.) (quoting Messier Dowty Ltd. v. Sabena SA, [2001] 1 All E.R. 275, 285). 149 Id. ¶ 21(Jacob, L.J.). 150 Id. ¶ 22. 151 SanDisk Corp. v. STIMicroelectronics Inc, __ F.3d __ (Fed. Cir. Mar. 26, 2007).

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MR. FISH: I might disagree with Hal. I’m not even sure that you are pushing the envelope too hard to put in a licensee estoppel clause, as long as you have a severability clause. You know, you can keep the rest of the agreement. It’s not some sort of a per se violation. I thought the SanDisk opinion was very interesting. Maybe the rest of the panel can help me. One thing that I didn’t understand about the SanDisk opinion was Footnote 1.152 Basically, you had the kind of back-and-forth licensing exchange that people would come to expect — “Hi, I’m your friend, let’s have a meaningful business discussion. Oh, by the way, I have a revolver in my pocket — not that I’m going to use it.” It’s not quite Tony Soprano, but it gets close. The Federal Circuit drops a footnote in and they say, “To avoid the risk of a declaratory judgment action, STMicro could have sought SanDisk’s agreement to terms of a suitable confidentiality agreement.” I’m not sure why that matters. MR. LANE: I can understand it, but I still don’t get it. MR. FISH: So sure you agree to some confidentiality agreement. Or as often happens, there are companies that have broad confidentiality agreements covering large areas of discussions, and somebody comes in and tries to shake you down with a patent. MR. LANE: What I thought they might have meant is the parties agree — like when you have a Federal Rule of Evidence 408 discussion, ratchet it up another notch — that the discussions cannot be used to start a lawsuit. But I don’t know how. MR. FISH: Right. And that is where I disagree with Steve. I do not think there was — and the Federal Circuit made that clear — any sort of “yes we agree there is a dispute, yes we agree that Federal Rule of Evidence 408 and the non-admissibility of this discussion and everything applies.” There was none of that, I think. Let’s say that somebody comes in and they send you a licensing package, and it is detailed enough that you can know — which in our industry is a little bit harder than it is if you just look at the Orange Book and decide — if you infringe. One scenario is they send you a licensing package, and it is detailed, and it is stamped “Confidential.” Another scenario is they send you a licensing package, and it is detailed, and you have some sort of a broad confidentiality agreement in place, and they have stamped it “Confidential.” That is different. MR. LANE: So what? MR. FISH: Worst case, they have a breach of contract action for whatever the damages are, and I would be willing to submit that the damages probably are not their legal fees for defending the DJ. So I don’t get what they are talking about there, but I also don’t think it is much of a big deal. MR. LANE: Let me turn to Herb. A quick question: Is the case and controversy test, in terms of factual reality, now a nonentity? What do you have to do or not do in order to justify filing of a DJ action, particularly in view of SanDisk? MR. SCHWARTZ: I have less of a professional background in dealing with license agreements that have been talked about. I spent some time in litigation over the years. I think 152 Id., n.1: To avoid the risk of a declaratory judgment action, ST could have sought SanDisk’s agreement to the terms of a suitable confidentiality agreement. The record before us reflects that the parties did not enter into such an agreement. Rather, ST sought to condition its open licensing discussions and the infringement study on adherence to Federal Rule of Evidence 408. That rule expressly relates to evidence of efforts toward compromising or attempting to compromise a claim in litigation and does not prevent SanDisk from relying on the licensing discussions and infringement study to support its claims. See Fed. R. Evid. 408. Furthermore, ST’s presentation was made outside the context of litigation, and there is nothing on the record to indicate that it could be properly considered an “offer” to settle a claim which was then in dispute. See, e.g., Deere & Co. v. Int’l Harvester Co., 710 F.2d 1551, 1556–57 (Fed. Cir. 1983).

728 S E S S I O N I X : PA T E N T one of the things that certainly I have dealt with with clients since this is: What can you really tell anybody when you have a patent? An awful lot of litigation now is forum shopping. That is almost a numero uno. All of the people want to be in the Eastern District of Texas. Query: Can you write someone a letter saying, “I own patent umpty-ump” and is that a basis for a DJ suit in Texas? I would question that. If you write someone a letter and say, “You might look at this patent in connection with your new widget,” I think you have a problem under the law. I think you are subject to a DJ suit. So I think the dynamics have changed. I think they have really changed with respect to what you call your Type 2 aggregators, if I understood the phrase, because I think the notion of broad-based accusations to people about “Come and let’s talk about this” or “Let’s deal with my patents” — it is plainly an invitation for a DJ suit. Whether someone wants to engage in it is a nice question. But it is going to change the dynamics as to where suits are brought. I think that is one of the more important pieces of this. MR. LANE: Looking at it a little cynically, turning away from this, I thought: Well, all you have to do as a patent owner is say “patent,” and then the prospective licensee or existing licensee says “No.” MR. SCHWARTZ: Just about. MR. LANE: Let me throw out a hypothetical, unless you want to say something. MR. WEGNER: Chuck mentioned “floodgates.” That very word was used by Lord Justice Jacob in Nokia last year.153 He said he opened the door wider to challenge the validity of patents that are called “essential” as part of standard setting. More broadly, you have a pretty easy shot at revocation proceedings in Japan and Europe. Europe and Japan are operating quite well, thank you. You don’t have everybody running to the Patent Office or to the courts trying to invalidate every patent. I think the sky is not falling. MR. FISH: I don’t know that I actually disagree with Herb. MR. LANE: I don’t either. MR. SCHWARTZ: I am not saying “the sky is falling.” I am just saying maybe this is the place where the rubber hits the road in litigation. MR. LANE: Well, this will indeed lead to more litigation, won’t it? MR. SCHWARTZ: It will. MR. LANE: Absolutely. MR. FISH: I think it may or it may not. Where I am certain that I agree with you is that even a lot of the people who complain about Marshall, Texas as a venue seem to be the 153 Nokia Corp. v. InterDigital Technology Corp., [2006] E.W.C.A. Civ. 1618, Ct. App. (Civ. Div.), ¶¶ 21–22 (Jacob, L.J.), available at http://www.bailii.org/ew/cases/EWCA/ Civ/2006/1618.html: 21. Mr Watson raised a “floodgates” argument. He submitted that if the Court took jurisdiction in a case such as this there would be a flood of similar applications, not only in relation to the 3G or other ETSI standard, but also in relation to similar standards, e.g. for MP3 and a host of other standards which are agreed for various technologies. He also said that even in this case if Nokia were allowed to proceed, InterDigital would counterclaim for similar declarations in relation to patents declared by Nokia to be “essential.” Moreover he said that his clients would invoke some sort of remedy under European competition law. 22. I am moved by none of this. Since the decision in the first Nokia case in December 2004 (Pumfrey J) and April 2005 (this Court) there has not been a flood of applications, though we were told there was one in relation to MP3. Moreover, if cases involving too many patents at one time were brought the Court has ample machinery for cutting the cases down to size or splitting them into manageable portions. And if in the end the whole thing became unmanageable that might be a reason to decline jurisdiction, I do not decide either way. That is not said to be the case here.

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ones who choose it when they are a plaintiff. My friends at IBM and my friends at HP both filed these suits there recently. MR. LANE: We will talk about that in Patent Reform.154 MR. FISH: Right. So I think it is difficult to believe that it really increases litigation risk. I think it theoretically increases the risk of these declaratory judgment actions. I think practically it doesn’t increase it. MR. LANE: Let me put some factual meat on the bones here real quick. I thought this could be somewhat profound for existing licenses that expire before the expiration of the patent. So how about this? You have a situation where you have an existing license. The licensee and the licensor licensor have no real disputes over, say, ten or twenty years (it was maybe entered into while it was an application), and then, seeing that the expiration of the license is coming up, the licensee files a DJ, and, knowing that there are going to be some negotiations and changes in the terms, does not tell the licensor and does not serve the DJ at that time. What about that? Is that no jurisdiction? Is there in reality a case or controversy there? And then, let’s just say they engage in negotiations to renew some of the terms of the license. MR. LEE: I am not going to speak to the substantive part of your question. MR. LANE: Sorry for the complicated hypo. MR. LEE: But the idea that you can file a case and then you can hide it, which I think we used to do way back when I started — I don’t think you can do that anymore. Everything is on Public Access to Court Electronic Records (PACER), everything is electronic, everything gets picked up. I just don’t think you can hide the ball anymore. MR. FISH: And all the law firms have marketing arms, so everybody who is an actual party gets ten emails saying “Can I please represent you?” before they even know they have been sued. MR. LANE: Well, let’s just say the licensor does not find out. I guess what I am getting at is, particularly in SanDisk, where they say in the holding — and I am taking that as being the new standard that we have to play with here — that “the prospective or existing licensee contends that it has a right to engage in the accused activity without a license.” Now, that is what I am getting at. Do you have to at least join issue with the licensee? And, if you have a secret filing of a complaint, how can you do that? Again, I think you have to look at the time you file. The court does look at the time that the action is filed, not when it is served. MR. FISH: It is rather circular, but if there isn’t an actual case or controversy when you file the suit, that seems like it is relevant to me. MR. LANE: I would argue that. MR. FISH: And then, the other thing is I don’t think we need — at least this is my reading of the Supreme Court case and of what the Federal Circuit has written so far — to assume that every sort of far-out-there-on-the-fringes case automatically passes muster with district court judges. MR. WEGNER: Discretionary. MR. LANE: I am going to throw the question to Hal because I think you raised this in your paper. Okay, there’s no jurisdiction, there is no standing of the potential litigant here in my hypo. But there is the other part, which Cellco155 addresses, even though it’s nonprecedential: What about the court’s discretion? In that hypothetical situation, don’t you 154 155

See infra this issue, Session X, Part C, Patent Law Reform. Cellco P’ship v. Broadcom Corp. (non-precedential) (Fed. Cir. Mar. 26, 2007)

730 S E S S I O N I X : PA T E N T see the court looking at that cynically and saying, “I’m not going to take this case, and I have the discretion to do that?” MR. WEGNER: Yes. There is a lot of law on discretion on DJs outside of patents. That is going to be a lot of where the game is going to go. But I think it is a lot of much ado about nothing. MR. LANE: Let me throw out some questions, or have we beat this horse to its proper death? QUESTION: Instead of the no-contest-clause stipulation, do you see any way to infringe it while you are negotiating a license? MR. LANE: Well, who would do that? MR. LEE: Sure. That is one of the things I offered in my presentation. You now, you have a representation that you infringe and that the patent is valid. You could ask that. It is a typical clause that will go into a consent judgment. Somebody — and I’m not sure where this comes from — suggested that in order to get that kind of clause into a license everybody is now going to be litigating so that they can have a consent judgment instead of just a license. MR. WEGNER: I wanted to add one point. There are two MedImmune cases. The second one is MedImmune v. Centocor, which was sitting at the court waiting for the first case to come down. Both cases have now been remanded to the trial court.156 So we will not have the uncertainty that we have had in Merck v. Integra, where the Federal Circuit is still sitting on the case on remand twenty-two months after the Supreme Court decision.157 Those cases have gone back down. On the MedImmune facts, I can see a good reason to have the court not deny jurisdiction, because the “Cabilly II” patent and controversy came along later. There was a good reason for that. But if we are just dealing with a garden-variety licensing situation, if you are the patent owner and you fully disclose all of the weaknesses of your patent, all the prior art, everything else, then you are going to build up a stronger case for the court denying discretion to hear the case. MR. LANE: Let me see if there are any more questions. MR. WEGNER: It’s dead. MR. LANE: It’s dead. Long live the new standard.

156 See MedImmune v. Centocor , Inc., 409 F.3d 1376 (Fed. Cir. 2005); MedImmune, Inc. v. Centocor, Inc., 127 S. Ct. 1118 (2007) (per curiam) (GVR) (“On petition for writ of certiorari to the United States Court of Appeals for the Federal Circuit. Petition for writ of certiorari granted. Judgment vacated, and case remanded to the United States Court of Appeals for the Federal Circuit for further consideration in light of MedImmune, Inc. v. Genentech, Inc., 549 U.S. __, 127 S. Ct. 764 (2007).”) 157 Merck KgaA v. Integra Lifesciences I, Ltd. et al., 331 F.3d 860, 2003 U.S. App. LEXIS 11335 (Fed. Cir. 2003); 545 U.S. 193, 125 S. Ct. 2372 (2005); on writ of cert. to United States Court of Appeals for the Federal Circuit, on remand at Integra Lifesciences I, Ltd. v. Merck KGaA, 2005 U.S. App. LEXIS 17342 (Fed. Cir. Aug. 17, 2005).

IX:PATENT PART SESSION C: PATENT LAW REFORM

SESSION IX: PATENT

Part C: Patent Law Reform

Moderator JOHN R. LANE

Frommer Lawrence & Haug LLP (New York)

Speakers JOHN R. LANE

BRUCE A. LEHMAN

Frommer Lawrence & Haug (New York)

Akin, Gump Strauss Hauer & Feld LLP (Washington, D.C.)

Panelists CHARLES FISH

HERBERT F. SCHWARTZ

Vice President & Chief Patent Counsel, Time Warner, Inc. (New York)

Ropes & Gray LLP (New York)

STEVEN J. LEE

JOHN A. SQUIRES

Kenyon & Kenyon LLP (New York)

Chief Intellectual Property Counsel, Goldman Sachs & Co. (New York)

MR. LANE: It is late innings, the score is 10–1, and the crowd has slowly left. Here we are. Thank you for joining us. Let me introduce the panel. I will leave the expert details to the person who knows most and best, and that is Bruce Lehman from Akin, Gump Strauss Hauer & Feld and, as many of you may know, the former Commissioner of the U.S. Patent and Trademark Office under the Clinton Administration. We also have other distinguished members from industry and private practice with us: Chuck Fish, who was with us in the MedImmune panel, from Time Warner; Steve Lee from Kenyon & Kenyon; Herb Schwartz from Ropes & Gray; and John Squires, who is the Chief Intellectual Property Counsel of Goldman Sachs & Co. You have probably heard discussions throughout the Conference about changes in the U.S. patent law. Issues have been percolating for quite some time on various aspects of the U.S. patent law relating to reform.

732 S E S S I O N I X : P A T E N T Last year we had a similar panel. I interspersed it more with foreign judges and practitioners to get the comparative view. I remember some of the comments that were made last year on this panel talking about the likelihood of certain reform legislation being enacted. That was then. This is now. And guess what? Nothing legislatively has passed, in terms of the principal patent reform bills that you had seen or perhaps heard about that were floating around in both houses of Congress, in the House of Representatives and in the Senate. This goes back to even well before that. I will touch on some highlights. I would like to just make a few points. I am not going to go through every slide. I am just going to update everybody on what either has happened or has not happened. This process started in the 109th Congress in 2005. It started with an outcry that the U.S. patent litigation and certain aspects of the Patent and Trademark Office (PTO) practice were out of control — or broken, as you have probably heard if you read the patent blogs. There was a very ambitious bill introduced in the House in 2005.1 It did not pass. When things became a little complicated with that bill, in my understanding, the Senate introduced a bill in 2006,2 saying, “We are going to try to take the reins here.” It was very similar to the House bill in many substantive aspects. New hearings were initiated in the 110th Congress by the House Committee on the Judiciary’s Subcommittee on Courts, the Internet, and Intellectual Property. The other issue, which I think we will discuss, is: Due to the vacuum or void in legislative change that we see now, has the Supreme Court picked up the ball and moved on issues that Congress has either stalled on or dropped? See, as you have heard throughout the conference, cases like eBay v. MercExchange3 on the injunction issue; KSR4 on validity challenges and the obviousness/inventive step standard; MedImmune v. Genentech,5 which we discussed in the previous session, inducing easier ability to challenge the validity of patents; and, maybe to a lesser degree, Microsoft v. AT&T,6 which was just argued before the Supreme Court, having to do with Section 271(f ), shipping a component for assembly overseas. That was hotly debated by the Supreme Court. These bills are saying get rid of that Section. The reasons we hear about why we need U.S. patent law reform include: 앫 Not very helpful — the U.S. patent system is broken. 앫 The PTO is issuing far too many patents of doubtful validity. 앫 Minimize the effect of lawsuits by patent trolls. 앫 Provide a more effective and less costly way to challenge the validity of an issued patent. 앫 Reduce uncertainty and cost for litigants in patent suits. 앫 Minimize abusive and intrusive litigation tactics and patent practices. These are the things that you read about in the blogs and in the summaries of the bills in the 1 The Patent Reform Bill of 2005: To amend Title 35, United States Code, relating to the procurement, enforcement, and validity of patents, H.R. 2795, 109th Cong. (introduced June 8, 2005), available at http://www.aipla.org/ Content/ContentGroups/Legislative_Action/109th_Congress/House1/HR2795.pdf. 2 Patent Reform Act of 2006, S. 3818, 109th Cong. (introduced Aug. 3, 2006), available at http://www. govtrack.us/congress/bill.xpd?bill=s109-3818. 3 eBay Inc v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006). 4 KSR Int’l v. Teleflex, Inc., 550 U.S. ____, 127 S. Ct. 1727 (2007). 5 MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007). 6 Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007).

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United States. When you talk to foreign lawyers, they nod vigorously when you talk about how U.S. patent litigation has gotten out of control and has gotten very costly — many believe due to intrusive or excessive litigation tactics that are allowed under certain aspects of the patent statute, which you will see. 앫 Balance increasingly drastic effect of injunctions and monetary damages. This issue has been pretty much dealt with by eBay. 앫 Complete harmonization of U.S. law with the rest of the world (first to file vs. first to invent). Although this often gets lost in the shuffle, it was the real reason why these bills were first introduced, at least in my understanding. Bruce can touch on that as well. Here is a short timeline of what has happened: 앫 In June 2005 the first bill was introduced, H.R. 2795. There were debates and hearings. Lamar Smith was then the Chairman of the House Subcommittee on the Courts, the Internet, and Intellectual Property of the Judiciary Committee. That was redlined, based on a lot of the comments and debates that occurred. 앫 A form of the bill was then put to an industry group coalition, which consisted of a very diverse group of people from private practice and from industry, to come up with their own revised draft, which was done in July 2005. 앫 Then, when things got all bollixed up and nothing was moving, in December 2005 the Senate said, “We are committed to doing a patent reform statute,” and they presented their own bill, S. 3818, in August 2006. 앫 The House then came up with a “me too” bill in April 2006, H.R. 5096, Patents Depend on Quality Act of 2006, which was also a much more watered-down version.7 Two things have happened since this conference last year. Bruce can tell you about some other, more insider things that he can give you a perception about. 앫 The House Subcommittee on the Courts, the Internet, and Intellectual Property, in the newly constituted 110th Congress, with a new Democratic Chairman, Howard Berman, started a round of hearings in February. 앫 The one thing that did pass is H.R. 34, a bill to establish a pilot program in certain district courts.8 I am going to touch on that briefly, if I have time. I have broken down the main issues addressed in these bills, rather simplistically, into those that are Patent Office related and those that are litigation related. Those that are Patent Office related have to do with: 앫 Priority of invention, to harmonize our statute with the rest of the world, which is a first-to-file system instead of a first-to-invent system. 앫 Creation of a post-grant opposition procedure. You have heard lots of talk throughout the course of this conference about the pros and cons of this. 앫 Changes to the prior art standards. 앫 Third-party participation during the course of prosecution — that is, submitting 7 Patents Depend on Quality Act of 2006, H.R. 5096, 109th Cong. (introduced Apr. 5, 2006), available at http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.05096. 8 H.R. 34, 110th Cong. (introduced Aug. 3, 2006, to establish a pilot program in certain United States district courts to encourage enhancement of expertise in patent cases among district judges), available at http://www. govtrack.us/congress/billtext.xpd?bill= h110-34.

734 S E S S I O N I X : P A T E N T material prior art to give the greatest extent of substantive examination as possible before a patent is granted. 앫 Limitations on our famous continuation application practice, which There were rules that were promulgated but I don’t think have been invoked. I believe they are being buried, but I don’t want to say anything inaccurate. I’ll let Bruce comment about that. 앫 The big outcry you hear from industry and others is about the litigation-related issues, that we have too many subjective statutes and tests that can be used tactically and expensively in litigation. The main issues addressed in the bills include: 앫 Elimination of Best Mode requirement, which is a very subjective test. 앫 Regulation of inequitable conduct claims, which are used in many cases. 앫 Changes to the willful infringement standard, which again has been done to some large extent by the courts. 앫 Balanced application of injunctive remedies. The injunctive remedies are a really off the table, I think, in the statutory scheme, because it has been dealt with by the Supreme Court in eBay. 앫 Apportionment of damages. You heard a little about this in the first patent session, about changing our notions of analyzing and dealing with damages determinations by apportioning the damages based on the value of the contribution of the invention in the patent. 앫 Venue — limit district court forum shopping. This is the famous “Marshall, Texas issue” that was discussed earlier. These bills propose a reining-in of the choices in district court venues. I do want to touch on H.R. 34, the bill that the House passed on February 12, 2007, which is aimed at enhancing the expertise of District Judges in hearing patent cases. It is a pilot program to have a designated group of Federal District Court judges — not appellate judges — act as patent judges for that particular district. Bruce can explain the details and we can discuss this. I will now turn it over to Bruce Lehman. MR. LEHMAN: Thank you very much. I don’t think it is possible to talk about all the details in ten minutes. I think you have just heard a good overview of what the issues are in patent law reform in the United States and the history of patent law reform in the last couple of years to the present. First, before I say anything more, I want to make a disclaimer. Any opinion I express during the course of this panel is my own observation. It does not necessarily represent the view of a client or my law firm. I would like to say just a word about my own experience in this matter. I was the Assistant Secretary of Commerce and head of the USPTO for nearly six years under the Clinton Administration. During that period of time, we developed a number of pieces of legislation and sent them to Capitol Hill. I also, at the very beginning of my career as a lawyer in Washington, I was Counsel to the House Judiciary Committee and Counsel to the very subcommittee that is responsible for passing intellectual property legislation for nine years. My very first assignment, when I started as a young lawyer in 1974 and knew nothing about patent or intellectual property law, was to work on the patent policy provisions of the Non-Nuclear Energy Research and Development Act of 1974. When you

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start getting into things like that, you learn pretty quickly. That was over thirty years ago. So I have developed a little experience in the matter by now. I think I have a pretty good feel for how the legislative process works. Indeed, in the course of my practice I have been involved in a good share of the intellectual property legislation that has been enacted into law, and some that has not been enacted into law. I would like to talk about the context of legislation and how intellectual property bills get passed in the United States, and then move from that into what I think is happening today with respect to the specific patent reform proposals that you have heard outlined that were introduced in the last Congress. First, patent law, and intellectual property law generally, is not a partisan matter in the United States. There is not a Democratic position on patent law or a Republican position. Indeed, you will see in these pieces of legislation coalitions of members of both parties. In the last Congress one of the major comprehensive bills — in fact, the comprehensive bill — that was introduced in the Senate, S. 3818, was introduced under the co-sponsorship of Senator Orrin Hatch, a Republican, who was then Chairman of the Senate Judiciary Committee, and his Democratic counterpart, the Democratic Leader on the Committee, Senator Patrick Leahy. I can tell you that they, along with the new ranking Republican on the Committee, Senator Arlen Specter, are indeed working and collaborating on introducing a new bill in this current 110th Congress. The names will probably just be reversed. Instead of being “Hatch-Leahy,” it will be “Leahy-Hatch.” I think it will probably be “Leahy-HatchSpecter,” even though technically Senator Specter outranks Senator Hatch, simply because Senator Hatch has been the person on the Senate Judiciary Committee for many years who has really been the leader on the Republican side on intellectual property issues. I think there has been a lot of debate about what the issues are in patent law reform. First, starting outside the Congress itself, we had a study a couple of years ago by the National Academy of Sciences (NAS).9 Over sixty experts worked on that study. They made a series of recommendations. Many of those recommendations were embodied in the legislation that you have just heard about. The NAS had two principal areas on which they focused. One was on litigation — that is, taking the subjective elements out of litigation that they felt drove up costs and complicated things. That included things like the best-mode provision of our law, inequitable conduct, and our current willfulness standard. The other area that the NAS was very interested in was international harmonization. They very strongly recommended that the United States go to a first-to-file system. Of course, there are a lot of people and interests in the country that have been beseeching the legislature to make other reforms. There has been a lot of concern about the Patent Office and the quality of patents. You saw all of those concerns expressed in the various pieces of legislation that John just described to you that were introduced in the last Congress. But if you look at who was actually lobbying for the bills in the last Congress, who testified before the committees, it was largely the professsional associations, like the American Intellectual Property Law Association (AIPLA) and the Intellectual Property Owners Association (IPOA). There wasn’t really any of what I would call high-powered, big-time lobbying on these measures in the last Congress. 9 Nat’l Academy of Sciences, A Patent System for the 21st Century (2004), available at http://books.nap.edu/ catalog.php?record_id=10976#toc.

736 S E S S I O N I X : P A T E N T I think that has shifted now. I think the issues have become sufficiently important that now various industry groups are starting to put considerable resources into lobbying the Congress. In fact, just this morning, in one of the email services that I get, I saw that the Tech Council of ten Silicon Valley CEOs has patent law reform as one of their top ten legislative issues that they are concerned about in this Congress. So you can see that it is becoming a fairly big deal. I can give you some insider information. Right now there is no bill pending in Congress. Nothing has been introduced. But as we are sitting here, staff people for the committees are at work, thinking, doing research, consulting with other members’ staffs, and drafting a bill. I think we can expect to see a bill introduced next week, probably April 18th or 19th. I think that will clarify at least the starting point for the debate on this legislation. I am told that the bill is going to be introduced in the House and the Senate at the same time and that it will be the identical bill in both chambers. Certainly, the sponsors will be the chairmen of the two relevant committees. In the Senate, the subject matter is dealt with at the full Committee level. In the House, it is the Subcommittee on Courts, the Internet, and Intellectual Property of the Judiciary Committee. The Chairman of that Subcommittee is Congressman Howard Berman of California. The Ranking Member is Congressman Howard Coble of North Carolina. So I think we will be off and running next week.10 I think the House is going to move faster on this legislation than the Senate. I have been told that there is the intention on the House side to have very limited hearings, perhaps only one day of hearings, on the bill. That would be very early, within, probably, the next couple of weeks after introduction. I assume that there is at least an intention to try to have a markup on the bill at the subcommittee level before the Memorial Day recess of Congress at the end of May. A markup is when the committee votes on the bill. Members of the subcommittee can offer amendments to it. That would be in the House. I think the Senate is going to go a little more slowly. The way this legislation works is that it is processed by the subcommittee, then the full committee. They vote and then they send it to the floor. That happens in each house of our legislature. They resolve their differences in what we call a conference. Both houses vote on the conference version again. Then the measure is sent to the president for his signature. He can veto it, sign it, or let it go into law without his approval. If you look at the history of intellectual property legislation, particularly patent legislation, because it is not a partisan issue, generally legislation gets passed only if there is a fairly broad consensus. If you look at the history of these bills, the Senate sort of makes up its own rules as it goes along, because the senators are all “princes,” so to speak, in our

10 On Apr. 18, 2007, the House and Senate introduced two patent reform bills which are substantially identical. Senator Leahy (D. Vt.) introduced S. 1145, 110th Cong., Patent Reform Act of 2007: To Amend Title 35, United States Code, to Provide for Patent Reform, available at http://www.fr.com/news/2007/April/COE07702_xml.pdf. Representative Berman (D. Cal.) introduced H.R. 1908, 110th Cong., Patent Reform Act of 2007: To amend Title 35, United States Code, to provide for patent reform, available at http://www.fr.com/news/2007/April/ BERMAN_013_xml.pdf. A redlined version comparing the Patent Reform Act of 2007 (S. 1145) against the Patent Reform Act of 2006 (S. 3818) is available at http://www.fr.com/news/2007/April/FR%20S3818-S1145 Comparison.pdf. On July 24, 2007, Rep. Steven Chabot (R. Ohio) introduced H.R. 3155, 110th Cong., Intellectual Property Enhanced Criminal Enforcement Act of 2007: To amend Titles 17 and 18, United States Code, to strengthen the protection of intellectual property, and for other purposes, available at http://www.govtrack.us/congress/billtext. xpd?bill=h110-3155.

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society and have comity with one another. But in the House of Representatives it is much more rule-oriented. Generally speaking, the procedure that is used for passing intellectual property legislation is called suspension of the rules, meaning that you suspend the rules of the House of Representatives and, therefore, have very limited debate. There is usually forty minutes of debate, twenty minutes each for proponents and opponents, after which there is a vote. But the bill must pass by two-thirds vote, so that means there has to be a consensus. On a highly technical piece of legislation — the typical member of Congress would find it very difficult to explain the arcana of Section 271(f )(4), whether we should have multiple second windows for post-grant opposition or not — generally speaking, there has to be, in my view, fairly broad consensus. It is very difficult for intellectual property legislation to be sustained in a situation where cards and letters and lobbying are coming from multiple constituencies all over the country. I think that if this process is to go forward successfully, what you will have to see in the end is some of the major interest groups interested in this legislation coming together and agreeing on what they want to see enacted into law. I am sure some of my colleagues will have specific views on the merits of some of the proposals. We can talk about that as we go through this session. MR. LANE: Yes. Let me ask a couple of questions. I will be a little provocative. To the industry people, first of all: in one of the more popular patent law blogs, one sees lots of commentary. There was commentary on the recent Intellectual Property Owners Association’s backing of the apportionment of damages notion, which has appeared in all these bills. The scathing remark that came out of this by a blogger — I will not name any bloggers — was throwing mud at the PTO for the problems that we have. The comment was: The system is broken because of the abuses of parties with power to abuse the system, which in most cases means rich companies with poor inventive track records that have to steal in order to have anything worthwhile to their stock value. Small inventors in tiny companies simply cannot wreak the kind of havoc that is being witnessed. Technology historians believe that the mess is the smoke-and-mirrors whining of megacorporations when they get caught stealing, whose main purpose is to confuse. The other reason, when you see reform — let’s look at that cynically and say when you see reform attached to bills floating around Congress — it usually means that the wrongdoers are trying to get away with doing more wrong. Consider the tort reform and the litigation reform or insurance reform. These are often promulgated by the powers that be for the purpose of reducing their exposure. Discuss. Chuck, would you like to start? Is there some evil notion here, that we are reaping what we sow in terms of the tactics that some companies have indulged in? MR. FISH: I would say, first of all, that bloggers ought to be named. But if you hadn’t told me it came from a blogger, I would have guessed it was either Fox News or Lou Dobbs, I’m not sure which. It’s hard to tell sometimes. I think there are plenty of good historical examples that show that that is just not true. One that I would point people to is the Patent Reform Act of 1870,11 which was not passed under a suspension of the rules and was actually quite contentious. The interesting thing about the patent reform bill of 1870, I think, is the analogy between the groups that

11

Patent Act of 1870, Ch. 230, 16 Stat. 198, Sec. 55 (July 8, 1870).

738 S E S S I O N I X : P A T E N T supported it and opposed it then and those who support it and oppose what we are talking about now. In 1870, as you’ll recall, though none of us were there — Bruce wasn’t even in government yet — the one networked industry in the world at the time, the railroads, was having a big problem with some crazy damages cases. The court of appeals in Chicago was saying that the measure of damages in patent cases should be how much money did you save, which doesn’t sound like a bad idea as a general rule. But then, when you apply it, for example, to safety devices, they were saying to the railroads, “Well, look at how many fewer crashes you had. Now, each crash would cost this much money. Therefore, the measure of your damages is this huge number.” For that, and other reasons, there was patent speculation going on at the time. Inventors discovered what they needed to do was go out and buy other patents, which were the ones that they were going to enforce against people, not practicing them. There was all sorts of chicanery going on. You know, it’s America. That’s business. MR. LANE: And wasn’t there Supreme Court case law that came out of that on apportionment of damages?12 MR. FISH: There was some Supreme Court case law that came out on apportionment of damages. But the interesting thing was you had, on the one hand, the networked industry, and their partners at the time were the ones that you never would have guessed. One was the Grange, the most powerful organization that was representing farmers. The reason was there were people going around with patents holding up farmers and making them pay on frivolous claims — there was a patent for a driven well, so if you pounded a pipe into the ground to get water out on your farm, they’d give you a cease-and-desist letter and say, “Here, you pay me twenty bucks or it will cost fifty bucks to go to court.” The farmers were paying and they weren’t happy about it. So, on the one hand, you had the networked industry, the railroads, and the Grange. On the other hand, you had the entrenched East Coast patent bar — at that time, it was more centered in Boston than it was here, but there were New York lawyers involved and others — and you had old manufacturing industries that had made peace with the way the patent system had shaken out. Some of them actually made things — George Westinghouse did make air brakes that made trains safer — but others didn’t make very much. That was the alignment in 1870. News flash: The law passed, the measure of damages changed, the economy got better. MR. LANE: Was it or was it not apportionment that came out of that? MR. FISH: There was a change in the Supreme Court law. If you jump ahead 137 years, what you see is predominantly, although not only, the networked industries of today — whether it is my friends in financial services or my friends in telecommunications or my friends who make software that gets spread around through networks — saying that the patent system hasn’t been updated to deal with the networked economy. And, interestingly enough, I saw a letter that was recently sent to the Hill that said five of the biggest organizations in agriculture — the American Corn Growers, the American Farmers Association, and several others — are joining to say that there should be patent reform. So I think it’s wonderful that what goes around comes around. 12 Between 1853 and 1913, the Supreme Court addressed apportionment in more than thirty-five cases and in every case held that a patentee’s recovery was limited to the economic value contributed by the patented invention.

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I don’t think it is true that anybody is necessarily engaged in the effort only to harm their opponents. MR. LANE: But don’t companies want to have their cake and eat it too? MR. FISH: What I was going to say is, on the other hand, this is America. We have First Amendment rights to engage in this sort of activity. People try to create a law that makes the environment beneficial. They know best about themselves. Hopefully, if they are acting in the public spirit, they are trying not to harm others. But that’s normal, it’s good, and it’s what is happening. MR. LANE: Let me turn to John. Let’s turn to a different issue, which I think is germane to your industry, business method patents. Has that been wreaking havoc in terms of the Patent Office is churning out all of these patents that people are saying are of dubious validity? Isn’t that just exacerbating the problem and instigating the patent reform that people are screaming about, some louder than others? MR. SQUIRES: Interesting. Of all the reform components in the legislation, subject matter and business method patent is not one of them. I always love hearing people say that the Patent Office is issuing too many patents. I am reminded of the scene in “Amadeus” where after Mozart has played, the Emperor said, “Too many notes! Just remove a few.” Mozart replied, “Which few did you have in mind, Majesty?” The same is true for patents. People are acting in their self-interest. If they have invented it, they are applying for rights in it because they like the bargain of disclosure for exclusivity. They are really saying there is a quality issue. I think on business method patents it is, in one respect, too soon to tell. In many instances, the Patent Office cannot get out of its own way on business method patents. The pendency times are five years, seven years, and growing. So you are only now seeing granted patents, like light traveling from a star, that left five, six years ago now being granted. I don’t lay that at the feet of business method patents as a subject matter category at all. MR. LANE: What do you feel about stemming in the continuation practice that PTO has? Someone refresh my memory. The rules came out, they were going to be invoked, and then the Commissioner pulled back because there was debate about this, about drastically stemming the practice. You can file unlimited continuations in the United States, as many of you know, and the rules that were to be promulgated by the PTO would limit to one continuation application and a total of ten claims, unless you had material good cause to have more. I guess the examiner would have discretion. Bruce, do I have that right or wrong? What is the status of that? MR. LEHMAN: First of all, that was not a legislative issue, although it was related to legislation. One of the questions is: Does the head of the PTO, indeed, have the statutory authority to make that change? One of the bills introduced last year by Congressman Smith originally gave the Director broader rule-making authority, but then that was taken out of later versions. That is one of the issues. MR. LANE: Partly because of the Federal Circuit. MR. LEHMAN: But I also think it was because of feedback from particularly the Biotechnology Industry Association and others, who were concerned about this change in the continuation practice at the USPTO. I don’t want to take anything away from my colleagues, but there have been some reports on the Internet that the PTO sent a rules package to the Office of Management and Budget (OMB) for clearance. So we may see something on that in the next couple of

740 S E S S I O N I X : P A T E N T months. It will have to be approved by all the federal agencies and OMB. I am not at all certain that what they have sent over to the OMB is anything like what they originally published, because they have gotten a lot of comments and feedback and so on and so forth. MR. LANE: Quite watered down, in other words? MR. LEHMAN: I would guess that it is considerably watered down, but I don’t know. MR. LANE: Let’s go to some litigators here. First of all, Steve, what about the statement that patent litigators and companies can abuse the subjectively related parts of the statute, like best mode and inequitable conduct? Should those be removed? Should we just say: “Let’s get real with the rest of the world — it’s infringement/it’s validity — and get rid of all this other stuff and reduce the amount of discovery in U.S. cases?” MR. LEE: I’m glad you asked me that. I have a very simple answer to this. MR. LANE: I knew you were the guy to ask this question. MR. LEE: This is, in my opinion, throwing the baby out with the bathwater. Yes, you can remove a subjective element, but these elements are very, very important. In my business, which relates to pharmaceutical patents, I can easily see the disclosure of a broad genus of compounds that includes some very wonderful drug, without the disclosure of the wonderful drug itself, holding back, and then ten years later filing a patent on that wonderful drug. That is what can happen if you don’t have a best mode requirement. I think that the United States is the only country that has it. I think it is great. I think that if “We, the people” are going to give a monopoly to somebody for the technology involved in their patent, they owe it to us to tell us what the best mode is of carrying that out. I do not think that has been abused. There are really very few cases in which a failure of best mode has been found, but when it is I think the public has been damaged. I want to know what that best mode is. MR. LANE: What about inequitable conduct? Come on. Everybody raises inequitable conduct. I’ve had clients get buried in inequitable conduct discovery. MR. LEE: There is an often-repeated dictum that “the habit of charging inequitable conduct in almost every major patent case has become an absolute plague.”13 We represent a generic company, called Teva. In preparation for the hearings on the bill, we reviewed our experience with inequitable conduct. Out of twenty-seven litigations for Teva, we found that we had alleged inequitable conduct in thirteen of those cases, 48 percent. In many of those cases, we did not allege inequitable conduct at the beginning, but we alleged it after the course of discovery, when new facts had come to light that we didn’t know before. So in 48 percent of the cases we have raised it. It is not every case. Then, the question is: Is it too many? So we looked to see what the disposition of those cases was. Of thirteen cases in which we had alleged inequitable conduct, seven of them were resolved or settled without a decision, so we don’t know. Of the remaining six, we won three and we lost three. It seems to me, first of all, that this shows, at least in our business, inequitable conduct is a valuable tool. It is not rare. Three times out of six the courts have agreed with us that there was inequitable conduct involved. This is a very useful tool, and in our hands it is not overused. But the issue in the bills that are pending before Congress is they would say, “Yes, you can bring an inequitable conduct charge, but only if there is a claim that is found to be invalid.” 13

Burlington Indus., Inc. v. Dayco Corp., 849 F.2d 1418, 1422, (Fed. Cir. 1988).

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MR. LANE: So it’s a procedural range. But isn’t that good, because then if it is booted you don’t have to get into that? MR. LEE: It is not just a procedural change. What happens is this: I am a patent owner and I have a narrow invention, but by failing to disclose material information I get a broad claim that prevents people not only from practicing my invention, but prevents them from practicing other things that they shouldn’t be prevented from practicing. I also have a narrow claim that covers my invention. Now, I go to court and I sue a company. What do I do? I sue them on that narrow claim. That is the only claim that gets into the case. I never get a chance to challenge the broad but unasserted claim. Should that claim, which has been inhibiting commercialization and innovation in this area, be immunized from attack because it is not later asserted? MR. LANE: Let me turn to Herb. MR. SCHWARTZ: I would like to start with a very different point of view. I belong to an organization called the American Law Institute. One of the main things they say about debate is you leave your clients at the door and then you come in and you have a reasoned discussion on the merits. Steve has basically put forth the view of the generic industry. He is entitled to do that, but I don’t think it really goes very far if you are considering this an academic discussion. MR. LANE: Do you agree with getting rid of some of these defenses? MR. SCHWARTZ: No. I am saying something different. We are now in an area where there are two very big industries that have diametrically opposed views. It is really not clear what the ultimate fair result is. You have big pharma on one side; you have the generic industry on the other side. I think it is a lot different than some of the minor disputes in the legislative area. It is not really clear to me where some of this ought to come out. There are a lot of other external pressures. I think you see that not only here, but you see it in the biologics bill and you see it in other bills. MR. LANE: We would need another whole session to get into the biologics bill and everything else. MR. SCHWARTZ: I don’t quarrel with Steve’s advocacy, but I don’t think it leads to a reasoned discussion of what you ought to do from a best practices point of view. MR. LANE: Can we talk about willful infringement? Isn’t it about time for that to be buried? We spend a lot of money on discovery. The Federal Circuit just can’t seem to get it right in terms of the waiver issue. There is now another en banc order, In re Seagate,14 as to what is the scope of the waiver. We thought we had buried a lot of these problems with Knorr-Bremse,15 but we haven’t. MR. SCHWARTZ: I represent both plaintiffs and defendants. I am not really on one side, although in pharma I do represent big pharma only. You cannot represent the other if you do. As far as willful infringement, I think the way it now exists is what has to be changed. It makes no sense to me to have it as part of the basic litigation, the discovery rules, the other rules. It could be put aside and left to something separate for the judge to deal with when the case is over. 14 In re Seagate Tech., LLC, Misc. Docket No. 980 (Fed. Cir. Jan. 26, 2007), available at http://www.fedcir.gov/ opinions/M830.pdf. 15 Knorr-Bremse Systeme Fuer. Nutzfahrzeuge GmbH v. Dana Corp & Haldex Brake Prods., 344 F.3d 1336 (Fed. Cir. 2003) (en banc), available at http://www.ll.georgetown.edu/federal/judicial/fed/opinions/01opinions/ 01-1357.pdf.

742 S E S S I O N I X : P A T E N T MR. LANE: So perhaps bifurcate it. MR. SCHWARTZ: That issue, yes. Then

it takes on a different light and can be discussed on a more rational basis, trying to harmonize both sides. MR. LANE: That is part of one of the proposals. MR. SCHWARTZ: It is part of it. I think if you are going to make any sense out of it that is what you have to do. You have to cut it out of where it is now because it has been abused now. It started with some courts that forced you to have discovery on everything immediately and tried everything together. They did that as a vehicle to force settlement. I think it developed into a lot of terrible law that really has not sorted out yet. I think you have to come back full circle and look at it fresh and say, “What’s fair for both side?” To me what’s fair is to kick it out. MR. LANE: If you could. MR. LEE: If I can advocate for a second again — MR. LANE: And you’ve done it very well. MR. LEE: — I think it would be great for the public at large if willful infringement was gone. The reason I say that is because it would allow attorneys to give more balanced and candid opinions to their clients about whether there is likely to be a risk of infringement. Right now, unfortunately, a lawyer risks being candid because that opinion may surface and the fact finder may find that, because it is candid and balanced and it deals with a number of issues on either side, it cannot reasonably support a lack of willful infringement. Unfortunately, the provisions that I see in the Patent Reform Acts of 2005 and 2006 do not do that, so that you always run the risk that at some point your opinion is going to be used against your own client. I think either you get rid of it altogether, so that you can have candid opinions of counsel, or this patent reform is not helping. MR. LANE: We can’t get over the Hobson’s choice of attorney opinion disclosure. I think it is almost untenable in my view. Do you agree, Chuck? MR. FISH: I don’t. I think it is simple. That is, I think if we stop thinking in a patent-centric way and we try to think a little bit bigger picture about the issue of punitive damages — willfulness is a special case of punitive damages — this is where I am hopeful that the Federal Circuit taking the Seagate case and all is helpful, and that the legislation will help. We would never in the general law throw out punitive damages on the theory that there were a few cases that had abused, or many cases that had abused, punitive damages because we know that punitive damages are important in some contexts. But on the other hand, we wouldn’t let it run rampant. What the Supreme Court has done — and what we can do with the combination of the Federal Circuit and the Congress getting it right — is to return this area of the law, like so many others, back to the mainstream and say “If you engaged in reprehensible pre-litigation conduct ——.” MR. LANE: That is intentional copying usually, or intentional acts. But what about the attorney-client privilege problem? MR. FISH: My answer to that is that is simple too. MR. LANE: Herb? MR. SCHWARTZ: Just reinforcing what you say, when you get out of the patent area, there is no such thing as discovery of attorney’s opinions. MR. LANE: Yes, that doesn’t happen. MR. SCHWARTZ: General lawyers look at patent laws and think: “This is crazy. Why are these people forcing all this stuff to be discovered? We never allow any of this.” It never

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happened before the Federal Circuit. This whole body of law has to get kicked out. That’s what I was saying. You ought to be able to write an opinion for your client and not have it discovered. But there still should be the ability to have some punitive remedy when it is appropriate. That is true in other areas of the law. It probably was true in patent law many years ago, but it certainly is not true today. MR. LANE: Well then, should we limit it to only cases where there is evidence of intentional copying possibly? MR. SCHWARTZ: No. I think, like other things, you have to have the right circumstance. But you do not allow the things that we have — you don’t let it become part of a jury trial, you don’t let any disclosure of opinions happen, and you don’t make the fact of a nondisclosure in any way punitive. MR. FISH: There is something interesting that we can learn from cases where we did what Herb suggested before. For reasons that escape me, some people think that the Southern District of New York’s decision in 1970 in the Georgia-Pacific case16 is a good one and we ought to be following it. But leaving that aside, if you look at that case and what happened there with the willfulness issue, basically that was a situation where the court found that the defendant had copied a patented product knowing it to be patented. Back in 1970, the court had no problem with that. The court said: “Well, he went out and he got an opinion from his counsel.” There were two sentences in the opinion, and that’s all the discussion was. I do not think it helps to look at the specific patent fact patterns, although that might very well in other cases be a fact pattern that is deserving of punishment and punitive damages. I think if you just bring it back to the mainstream, then patent lawyers can practice like other lawyers. Antitrust lawyers will send you an opinion on a complex question and it is five pages long. If you ask patent lawyers a simple question about a patent that is obviously silly on its face, their opinion is this thick [indicating]. It just doesn’t make sense. MR. LANE: Let me switch to a different subject right now. Is part of the problem here the U.S. litigation procedure? I mentioned the patent judge pilot program earlier.17 Is that a Band-Aid or is that something that can really help? The notion there is to have a select group of judges within a district be the go-to judges on patent cases. There would be discretion. Any judge who gets a patent case through the normal balloting system, random system, would kick the case over to the designated judges. Is that sort of a nothing thing? It has been passed by the House. People expect it to be passed by the Senate. Herb, would you like to comment on that in terms of our litigation practice? MR. SCHWARTZ: I think it is a Band-Aid. I was tempted to ask Judge Rakoff about this in the earlier panel discussion, but I didn’t. But I have talked to other judges in the Southern District of New York. If you were to ask judges here, they would all tell you, “I am competent to hear a patent case. We don’t need to select five people and take me out of the loop. I’ll hear it myself. This is a lot of nonsense.” It does not apply to the districts that are small. It has no effect on Delaware, for instance; probably no effect on Marshall, Texas. All it really does is it gives some judges who do not want to handle a patent case a way to bounce it. Most of those judges know how to do that now anyway. They put it on their docket. When a new judge gets 16 17

Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). See supra note 8 and accompanying text.

744 S E S S I O N I X : P A T E N T appointed, they ship all the patent cases out to the new judge. They solve it that way. So I really don’t see it doing much of anything. I think Judge Ellis has pretty much said the same thing publicly. He doesn’t see it. He is, I would say, a pretty patent-savvy judge in Virginia. I think it is well-intentioned. I don’t have a problem with that. I think Congressman Issa is interested in intellectual property. MR. LEHMAN: Darrell Issa is an inventor and an engineer and a businessman, so he’s the real deal. MR. SCHWARTZ: I think he sincerely wants to help the system. But I think in terms of what we are trying to fix it is a Band-Aid. MR. LANE: Let me ask Bruce. Since there were major substantive issues raised in 2005 and 2006, in the first round of bills, what makes you think it is going to change now, particularly since there is going to be a suspension vote and it has to pass by two-thirds? MR. LEHMAN: That was my view as to what is going to happen. MR. LANE: I hate to crystal ball it too much. MR. LEHMAN: First of all, we have to start with the fact that I think there is a general view across industry sectors that the patent system needs reform. There are a lot of things a lot of people agree about. The bill really falls into three different categories. One is international issues, harmonization. The second is what I would call pure litigation issues, things like willfulness, inequitable conduct, apportionment, and so on. Then, finally, you have issues about the Patent Office and how the Patent Office works. At the first hearing that Congressman Berman held this year, he had an economist from Brandeis University, who I thought made an extremely good presentation. In fact, he was asked quite specifically by Members about whether we should eliminate business method patents and so on and so forth. He basically said we really do not need any fundamental changes in the patent statute if we have better quality patents being issued from the USPTO. He said — and I thought this was a very interesting observation — that the system has become so complex, the volume of prior art is so enormous now, that the best examiners cannot possibly catch everything in an ex parte examination procedure. Therefore, to have improved quality patents we have to have some kind of inter partes procedure that would be established in a system of post-grant opposition in this country. There would be a selection process. Obviously, those would be the more important patents. I think there is widespread agreement on that. The problem is in the details. MR. LANE: Does anyone in the audience have a question now? QUESTION: I have a question. Would you explain the bill concerning the specialized district court judges? It is difficult for me to get a concrete image of that. For example, if the particular judge is designated to deal with the patent case, in that case can that judge serve as the IP judge? MR. LANE: It is an experimental program that Congress is proposing. The idea is to have a pilot program in at least five U.S. district courts. They are going to gather empirical data on how this works — in terms of reversal rates, speed of cases, etc. — from at least five U.S. district courts, at least three judicial circuits, choosing from the biggest districts in the country. There must be at least ten judges in the district court. At least three judges must request to be designated within that court. It is a program that is going to go on for ten years. The other aspect of it is to allocate money for clerks, like you have Federal Circuit clerks, who are usually scientists or engineers, to help the judges.

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As that goes into place, what happens is that most of the cases in that particular district will go to that group of judges. They will be assigned. MR. SCHWARTZ: I don’t agree with that at all. MR. LANE: You don’t agree with doing that? MR. SCHWARTZ: No. I don’t agree that is the way it is going to work. Basically, cases come into courts and in most districts they get assigned randomly out of a wheel, and then they go to a judge. MR. LANE: Right. That will still happen, as I understand it, under this. MR. SCHWARTZ: My view is that if they go to a judge who is not on that panel, he or she has no obligation to kick it to the panel. MR. LANE: It says “they may.” MR. SCHWARTZ: They can keep it themselves. I think a lot of the judges will keep it themselves. I think it also will depend on who gets appointed to that select five. If the judges are not moved by that select five, they won’t send them any cases. When you know the inner workings of a district, then you know the way they get along with one another. It’s just hard to know. But I don’t think it necessarily means that those five judges — they certainly will not get all the patent cases, and I don’t even know if they will get more than their fair proportion. They will get some out of the wheel and they will get some from judges who do not want to handle patent cases. My sense is that in the Southern District of New York most every judge would keep the patent cases, as a matter of pride, if nothing else. They would say — you heard this from Judge Rakoff — “I’m smart enough to deal with that. Why do I have to send it off to somebody else?” MR. LANE: So as a matter of reality, are you saying that we will not get much data out of that? MR. SCHWARTZ: I don’t think we are going to get a narrow selection. MR. LANE: Does anyone else have a question right now? I wanted to discuss oppositions, because that is a big aspect of these bills. John, do you want to comment on that in terms of business method patents — or any patents for that matter? Do you think this will help to improve quality in the patent system, in the validity of patents? And is it really going to be inexpensive, by the way? Fast-forward to the European Patent Office. MR. SQUIRES: We have said through our industry association, the Securities Industry and Financial Markets Association — which is basically Wall Street, the broker-dealers — that industry has a role in patent quality. It is very difficult now, especially in business method areas, if you want to categorize what we do that way. Patents are new to us since State Street Bank.18 We have a lot of prior art behind our organizations and there is no real way to inject it onto the system where it can do some good. An opposition practice, from our parochial standpoint, I think would be a good thing. The real debate now is— and I think it is tied into some other issues — should there be one window or two windows to oppose a patent: a window following grant (nine-to-twelve months, I think, is what has been talked about); but there should be a second window, what people call a “notice” window — that is, you can now oppose a patent once you are on notice and know about the patent, and then industry can oppose it at that time. That is an interesting question. In general, I think it is related to the value chains, where 18

State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).

746 S E S S I O N I X : P A T E N T you otherwise would know of a patent. For example, you have the Orange Book under the Hatch-Waxman Act.19 It is pretty clear as to what is coming. It is listed in the Orange Book, you know the patents, and you can deal with it that way. In technology, media, our industry, it is very difficult to know. MR. LANE: You would also be an advocate to opening up prosecution and allowing for art to be submitted. MR. SQUIRES: Yes. MR. LANE: I think that makes sense. That is a low-cost way. MR. SQUIRES: Front end or back end, back in the opposition. MR. LANE: Last year we had some of our European colleagues from England and Germany. Heinz Goddar said: “I don’t know. You may not want to go down that road because it is expensive, it is complicated, and it is just another increase in litigation in some respects.” MR. SQUIRES: I think there is certainly an argument to be made that it is mini-litigation. But I think it is a chance to narrow issues in that forum and not have “all or nothing” in the litigation world, as it is now. MR. SCHWARTZ: Can I go back to one thing on the topic of judges? Five to seven years ago, when I was the president of the New York Intellectual Property Law Association (NYIPLA), the judges in the Southern District came to NYIPLA and they said: “We like patent cases. We would like to have more patent cases. What can we do to get more? We like patent lawyers.” I actually sat down, with some of the other board members of NYIPLA, with the judges. We talked frankly with them about how they could make the rules more friendly. The bench — not only Judge Rakoff, but a collection of district judges — said: “These are interesting cases. They are important cases. We would like to have more of them here.” This isn’t the notion of people who are incompetent to do it. These are very bright, good federal judges in a major jurisdiction who really want to do this. To put in something that says, “We think you’re a bunch of dumb turkeys and you shouldn’t do any of this; we’ll give it to five of you,” is really crazy to me. And as I say, especially we heard publicly from Rakoff as to what he said, and I have talked about this with some other judges. MR. LANE: Isn’t the bigger problem in terms of the deference that is not, but should be, given to the district court in a lot of ways? Now the Federal Circuit is going to deal with that. MR. SCHWARTZ: That is a wholly different issue. MR. LANE: Let’s talk about the Supreme Court. In my view, in Markman20 they said that it was a mixed question, and so there should be factual findings involved there. What do people feel about that? The larger issue in patent reform is: Has the Supreme Court been doing the patent reform, or is that just coincidental? Chuck, you look like you want to answer that. MR. FISH: I think Herb probably knows more. MR. SCHWARTZ: In a recent Federal Circuit case, Israel Bio-Engineering Project v. Amgen, Inc.,21 six judges said they want to revisit it. They think that this idea of de novo 19 Hatch-Waxman Amendment to the Food Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585 (1984) (codified at 15 U.S.C. §§ 68b–68c, § 70b (1994). 20 Markman v. Westview, 116 S. Ct. 1384 (1996). 21 Israel Bio-Eng’g Project v. Amgen Inc., 401 F.3d 1299, 1304–05 (Fed. Cir. 2007) (opinion of Jan. 29, 2007) available at http://www.fedcir.gov/opinions/06-1218.pdf.

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review is not working. I think the Federal Circuit is going to revisit de novo review and is going to change it. MR. LANE: Judge Rader has said as much. MR. FISH: I think the Federal Circuit has been a little bit ham-handed about review, as if standards of review were sort of digital — you know, it’s “on” or “off.” I think standards of review are much more analog than that. I think the Federal Circuit is capable of crafting a standard of review that respects the fact that a competent judge who was closer to the facts made a legal ruling, and treat that differently from an interpretation of one of their decisions, for example. MR. LEHMAN: My paper is fairly extensive and goes through all the issues.22 It should be available to you if you want to know what the issues are in patent law reform. MR. LANE: We have no time to go over the detail of that, but the paper does very well summarize that. Thank you for submitting that. Does anyone else have questions? QUESTION [John Duffy, George Washington University Law School, Washington, D.C.]: In a lot of these issues that we are trying to reform, one theme seems to be that the Federal Circuit’s precedents have not been entirely good. So a lot of the reform legislation is targeted in the inequitable conduct area or willfulness towards things that the Federal Circuit could change and that really are not in the statute right now. They are figments of the Federal Circuit’s precedent. I wonder if any of the panelists would like to comment on a broader issue, which is how they think the Federal Circuit experiment is going. The Federal Circuit is an experiment in specialized and concentrated jurisdiction. It is very innovative. But as we know from technology, innovations are not always perfect the first time out. So I wonder about that. There is a paper that I co-authored that is coming out that suggests that perhaps actually two or three patent courts — in other words, giving some jurisdiction to some general intermediate appellate courts — would be a good idea.23 So that Congress in 1982 was right to think that thirteen appellate courts, all with some jurisdiction over the patent system, was wrong, but maybe actually they went too far to the other end. MR. LANE: Steve, do you want to first comment on that? You have been quiet for a while. Do you think the Federal Circuit is good or should we get rid of it? MR. LEE: I think the Federal Circuit does a great job — not perfect, and there are some things that drive you crazy, like product by process claims. How am I supposed to interpret them? I do not think that the problem is going to be solved by more courts. There is such a difference between individual judges on the Federal Circuit that, if you knew what your panel was going to be in advance, you could predict that certain panels are going to rule one way and certain panels are going to rule another way. To the extent that that happens and is not corrected by internal collaboration on the Federal Circuit, it leads to uncertainty. Uncertainty is bad because it increases the transaction costs, it prevents people from being able to predict what is going to happen, and it leads to more litigation. I do not think putting more courts in the mix is going to help that. MR. LANE: Or more specialized judges. Herb, would you like to comment on that too? MR. SCHWARTZ: I have heard of your suggestion, John [Duffy], and I think it is very 22 See infra Bruce A. Lehman, Bracing for the Impact of Patent Reform: Prospects for Legislation in the 110th Congress, Appendix A. 23 Craig Allen Nard & John F. Duffy, Rethinking Patent Law’s Uniformity Principle, 101 Nw. U. L. Rev. (June 2007).

748 S E S S I O N I X : P A T E N T interesting. I am, unfortunately, old enough to have litigated patent cases for many years in the regional courts of appeals. They also have their own issues, and there are issues with their willingness to deal with some of these things. I think the notion that you put forward, of having two or three regional courts hear some patent appeals and see what they do with them, is very intriguing and would give us some sense of how the experiment is working. I am not for just throwing it out. I think it is a bit unreasonable to throw it out. If you just throw it open to all the circuits, I think you are nowhere. I saw some reference to it. I would really be interested in reading your article. I am basically intrigued by the notion. MR. SQUIRES: I have a quick comment on that. I saw on the way up an article about an ABA conference that took place in the past few days with Judge Lourie and Judge Dyk.24 Judge Lourie commented that the structure is backwards, that the specialization court should be underneath the district courts. MR. LANE: At the trial level? MR. SQUIRES: Yes, at the trial level and at the Federal Circuit. So I think there is some open-mindedness to that, at least even amongst the Federal Circuit judges. MR. LANE: What about getting more trial lawyers on the Federal Circuit? They do bring guest judges in every once in a while from different district courts, which I think is a good idea. MR. SQUIRES: It is a question of new blood. But there is an argument to be made that the Federal Circuit has acted somewhat like a captured agency of recent. I think that is why we are seeing some of the Supreme Court reaching. MR. LANE: Does anyone else have any questions? We are down to the finale here. Thank you very much. I hope this was helpful. We tried to fit a lot into a short space of time.

APPENDIX Bracing for the Impact of Patent Reform: Prospects for Legislation in the 110th Congress Bruce A. Lehman25 In 2004 the National Academy of Science published a 171-page study, entitled A Patent System for the 21st Century, prepared under the auspices of the National Research Council (NRC) of the National Academies.26 The study and recommendations written by the NRC staff, synthesized the views of more than 160 experts, including government officials, judges, law professors, economists, practicing patent attorneys, corporate executives, university technology transfer officers, independent inventors and academic researchers. The work was overseen by the NRC’s Board on Science, Technology, and Economic Policy and contained recommendations of its Committee on Intellectual Property Rights in the Knowledge-Based Economy, co-chaired by Richard C. Levin, 24 ABA, Intellectual Property Law Section, 22d Annual Intellectual Property Law Conference, Apr. 12–14, 2007. See http://www.abanet.org/intelprop/bulletin/2007_02-03/index.shtml. 25 Senior Counsel, Akin Gump Strauss Hauer & Feld, Washington, D.C.; Chairman, International Intellectual Property Institute, Washington, D.C. 26 Nat’l Academy of Sciences, A Patent System for the 21st Century (2004), available at http://books.nap.edu/ catalog.php?record_id=10976#toc [hereinafter NAS Study].

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President of Yale University and Mark B. Myers, Professor at the Wharton School of the University of Pennsylvania. Both the Committee on Intellectual Property Rights and the experts consulted represented a broad and diverse range of philosophies and perspectives on the patent system. The National Research Council study concluded that, “the intellectual property system is working well and does not require fundamental changes,” but that the “patent system . . . merits periodic examination to help ensure the vitality of the national innovation system.”27 This NRC study and recommendation provide provided the starting point for the patent reform legislation that was introduced in the 109th Congress that ended last year. We now have a completely new Congress under the control of a different political party. However, it is likely that the NRC Report will continue to provide the framework that defines the issues involving patent reform legislation in the 110th Congress. Legislation introduced in the 109th Congress focused on three distinct categories of issues. These are: 앫 International harmonization issues; 앫 Changes in the patent law that would modify the rights of litigants in patent infringement cases; and 앫 Changes in the internal procedures of the USPTO. The following is a discussion of these three categories of issues that will be the focus of patent reform in the 110th Congress that convened on January 4 of this year. I. INTERNATIONAL HARMONIZATION ISSUES A. FIRST-INVENTOR-TO-FILE

Currently, the United States is the only country in the world that grants patents on the basis of proof that the applicant was the first person to invent the claimed invention. In all other countries patents are granted to the inventor who is first to file the patent application. While in all but a tiny percentage of cases the first inventor is also the first to file, there are situations in which more than one person independently invents something and there is a dispute about who invented first. When two or more inventors file patent applications on the same invention, the USPTO convenes what is called an “interference proceeding” and an administrative litigation is commenced to determine who actually is the first inventor and entitled to the patent. This anomaly in U.S. law has made it difficult to harmonize global patent law and procedures in negotiations with our major trading partners. Changing to a first-to-file system would remove this impediment to harmonization. However, the simplification of the U.S. system by adoption of first-to-file also is important to other elements of patent reform, such as shifting to an opposition procedure. This change was strongly recommended in the National Research Council Report and by the American Bar Association28 and was contained in all of the bills introduced in the 109th Congress. It is highly likely to be included in legislation to be considered in the new 110th Congress. B. PRIOR USER RIGHTS

Related to a change to a first-inventor-to-file system is the advisability of expanding the 27

Id. at 19. Id. at 124; see also American Bar Association Section of Intellectual Property Law, A Section White Paper: Agenda for 21st Century Patent Reform, Jan. 4, 2007 [hereinafter ABA White Paper]. 28

750 S E S S I O N I X : P A T E N T scope of current law regarding prior user rights. Several years ago, the Congress amended the law to create a personal defense for anyone who was using the patented method of doing or conducting business. However, it is not uncommon that someone may actually have invented something before the patentee, but has chosen instead to keep the invention as a trade secret. If such a person chooses neither to file for a patent nor publicly disclose the invention, he or she risks liability for infringement in an action by someone who later files and obtains a patent on the same invention. While originally intended to ameliorate the negative consequence of expanding patent rights to cover a new subject matter and industries that were unaccustomed to patents, expansion of prior user rights to include all categories of patentable subject matter would address any inequities that might arise from adoption of a first-inventor-to-file system because a first inventor who had not filed a patent application would be able to continue to practice his or her invention without fear of a later patent on their invention. S. 3818 and H.R. 2795 (109th Congress) included language expanding the prior user right to all categories of inventions. It is likely that this issue will be debated in the context of legislation introduced in the 110th Congress. C. PUBLICATION OF ALL PATENTS AT 18 MONTHS

Currently all patent applications are published 18 months after filing unless an applicant has filed no corresponding foreign applications and specifically request that the application not be published. The requirement of publication at 18 months and the exception available to domestic-only filers dates to the American Inventors protection Act of 1999. At the time the legislation was enacted there was concern that publication prior to issuance of a patent might give notice to potential infringers so that they could seek to exploit another’s invention before his rights had fully matured so an exception was made for domestic-only filers. Experience has shown this not to be a problem. Therefore, it is time to remove this anomaly from U.S. law. Further, it has resulted in an unnecessary administrative burden on the USPTO. Also, given lengthening pendency at the USPTO, publication at 18 months serves to put others in the marketplace on notice of impending rights in a timely manner and, therefore, is likely to reduce rather than increase the likelihood of inadvertent infringement. All of the bills introduced in the 109th Congress contained provisions dealing with this issue. It is likely that this issue also will be included in legislation to be considered in the 110th Congress. II. LITIGATION ISSUES IDENTIFIED BY THE NATIONAL RESEARCH COUNCIL Another major focus of the NRC study and recommendations was the current system of litigation of patent disputes in the Federal Courts. The report emphasizes “that reform in this area would increase predictability of patent dispute outcomes and reduce the cost of litigation without substantially affecting the underlying principles that these aspects of the enforcement system were meant to promote” and concludes that the factors that most increase costs and decrease predictability in patent litigation are those “that depend on the assessment of a party’s state of mind at the time of the alleged infringement or the time of patent application.”29 Specifically cited were (1) assertions of “inequitable conduct” in the prosecution of the patent applications in dispute, (2) adjudication of whether the patentee had disclosed the “best mode” for practicing the invention, and (3) willfulness as a deter29

NAS Study, supra note 26.

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minant of damages. It can be expected that the 110th Congress will focus on these issues as it addresses reforms in the system of patent litigation. A. UNENFORCEABILITY DEFENSE BASED UPON “INEQUITABLE CONDUCT” ALLEGATIONS

Inequitable conduct is a judicial doctrine not found in the statutory law. Its original intent, developed at a time when patents were prosecuted in secret and were not subject to post grant opposition, was to place a fiduciary duty on patent applicants to disclose the most pertinent information known to them to the USPTO, and to otherwise deal candidly with the patent examiner. The Director of the USPTO thus promulgated Rule 56, which requires a duty of candor and good faith by a patent applicant in making representations to the Patent Office.30 The NRC report found that the inequitable conduct doctrine was one of three “subjective” elements that contribute to cost and uncertainty in patent litigation and recommended that Congress either eliminate the doctrine or change the way it is implemented. Two bills introduced in the 109th Congress would have defined the doctrine of inequitable conduct in the statutory law and limited how it is to be applied in an effort to address its abusive use in patent litigation. H.R. 2795 (109th Congress) would have referred inequitable conduct determinations to the USPTO, given the USPTO the power to sanction patent attorneys and agents engaging in such conduct, made fraud by patent attorneys and agents not attributable to the patent owner and limited a finding of unenforceability of a patent to situations in which a claim would not have been allowed but for the misconduct of the applicant. A counterpart bill, S. 3818 (109th Congress), would have limited a finding of unenforceability to situations in which a claim was found invalid. In this case however, allowance of the claim did not have to result from the misconduct of the applicant. In addition, S. 3818 would have limited a finding of unenforceability in situations where a patent applicant or his or her agent had “an informed good faith belief ” that the information not disclosed was “not material” or where the patentee had “no actual or constructive knowledge of the misconduct” or established “good faith by other evidence a court may find sufficient.” Both bills would have precluded pleading this defense until at least one claim was found invalid. It is likely that the elimination of the “inequitable conduct” defense will be an issue as the 110th Congress considers patent reform legislation. B. BEST MODE

The third factor contributing to cost and uncertainty in patent litigation that was identified by the NRC is the requirement in Section 112 of current patent law that a patent application “set forth the best mode contemplated by the inventor for carrying out his invention.” It should be noted that US patent laws existed from 1790–1952 without the best mode requirement. Further, the “best mode” requirement is in addition to the requirement in the same section of a “written description . . . [that would] enable any person skilled in the art . . . to make and use . . . the invention.” See 35 U.S.C. § 112. Section 112 is the provision in the patent law that carries out the policy objective of disclosing to the public what otherwise might be a trade secret were it not for the bargain the patent applicant must strike to share his knowledge with the world at large in return for a limited period of exclusivity. On the basis of this disclosure, others may invent

30

37 C.F.R. § 1.56.

752 S E S S I O N I X : P A T E N T around the patent so as to come up with an even better invention and have full access to the invention after the patent term expires. In all other countries in the world, this requirement to disclose the invention is satisfied simply by the obligation to provide a written description that can be understood by anyone skilled in the art. The NRC found that because the best mode provision in Section 112 is so subjective, it can needlessly complicate patent disputes and function as a “wild card” that introduces uncertainty in litigation in the United States. Patent applications often are filed at an early stage in the innovation process when a new invention is first made by the applicant. As the R&D process continues, various improved “modes” may be identified for actually practicing the invention, but there is no requirement to disclose them. Indeed, the best mode may evolve only many years after the patent has been issued on the basis of the experience of those who are manufacturing and using the invention. Therefore, the concept of best mode in the modern world is of little practical use in industry. Its primary value is to an infringer who can try to get off the hook for unfairly expropriating another’s invention by arguing that the applicant did not include the best mode at the time he or she filed his or her patent application. The NRC concluded that the best mode requirement of Section 112 is an anachronism that needlessly complicates and prolongs patent litigation and strongly recommended that Congress delete this provision from the statute. This is likely to be an issue seriously considered as the 110th Congress debates Patent Reform. C. WILLFULNESS

Section 284 of the patent statute authorizes a court to award up to three times the amount of damages for a defendant’s willful infringement of a patent – that is, the defendant knew about and infringed the patent without a reasonable basis for doing so. In hearings before the Federal Trade Commission, some witnesses explained that they do not read their competitors’ patents out of concern for such potential treble damage liability. Whether one agrees with this response or not, willfulness is having unintended consequences. Failure to read competitors’ patents can jeopardize plans for a noninfringing business or research strategy, encourage wasteful duplication of effort, delay follow-on innovation that could derive from patent disclosures, and discourage the development of competition. In some well-publicized (and fortunately isolated) instances, patentees have created a business model based entirely on their ability to threaten litigation seeking treble damages (without regard to the actual value of the underlying inventions) in an attempt to coerce the payment of licensing revenue or substantial settlements. A technique commonly employed in these attempts is to send blanket mailings alleging infringement to companies marketing products in the field of technology covered by the patent. Often these letters are sent with no knowledge of actual infringement. However, under current law such notices can serve as a basis for a finding of willful infringement and the award of treble damages in the event the patentee eventually prevails in a law suit. As a result, these letters can have a chilling effect on companies that are actively developing products of value to consumers. The costs associated with responding to them can divert resources from product development and lead to agreements to pay royalties simply to avoid the enormous costs of patent litigation. Depending on the amount of the royalty sought, it may simply be cheaper to pay than fight. The subjectivity inherent in a willfulness determination under present law increases the risk to a defendant who conscientiously believes

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that he has not infringed and can encourage plaintiffs to initiate litigation with little real knowledge that defendants have infringed. For this reason, the FTC recommended the enactment of legislation to require, as a predicate for liability for willful infringement, either actual, written notice of infringement from the patentee, or deliberate copying of the patentee’s invention. The NRC report also recommended that Congress establish tighter standards for willfulness determinations as part of reducing the subjectivity plaguing the current patent litigation system. In the 109th Congress, Congressmen Berman and Boucher introduced legislation (H.R. 5096) that included provisions very similar to recommendations of the American Bar Association that would require greater specificity in letters alleging infringement, eliminate willfulness as an issue for juries, and restrict a pleading alleging willfulness until after the patent had been determined valid, enforceable and infringed. Congressman Berman is now the Chairman of the Intellectual Property Subcommittee of the House Judiciary Committee. Therefore, it is highly likely that any legislation that he introduces and supports in the 110th Congress will be similar to his and Congressman Boucher’s bill in the 109th Congress. III. OTHER LITIGATION ISSUES A. REASONABLE ROYALTY DAMAGES One of the issues that has arisen in the debate over patent reform is the method of determining damages in a patent infringement case. In some cases, it may be entirely just to award reasonable royalty damages calculated upon the value of a single component, step or feature of a product (as for example where the invention adds little to the value of the product as a whole), whereas in others it may be just to expand that calculation to include all products or processes sold to satisfy the market demand for the invention. Because the statutes do not directly address these issues, courts have been called upon to consider the relationship of the patented elements in the infringing product to the non-infringing elements in determining reasonable royalty damages. In the 1970 case of Georgia-Pacific Corporation v. U.S. Plywood-Champion Papers, Inc., the Southern District of New York held that a factor that should be considered in assessing damages is “[t]he portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.”31 In 1991, the Court of Appeals for the Federal Circuit accepted this factor as a basis for determining reasonable royalties along with 15 others from the same case in Smithkline Diagnostics, Inc. v. Helena Laboratories Corp.32 This decision followed the Federal Circuit’s adoption a year earlier of the “entire market value rule” which permits recovery of damages based on the value of an entire apparatus containing several features only where the patented feature is the basis for customer demand for the entire product.33 In the 109th Congress, H.R. 2795 attempted to codify the rule in the Georgia-Pacific case. However, the decision in Georgia-Pacific related to the circumstances under which the value contributed by components and features of a product not claimed in the patent may be excluded from a reasonable royalty calculation. But H.R. 2795 went further. It 31 32 33

318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). 926 F.2d 1161 (Fed. Cir. 1991). State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573 (1990).

754 S E S S I O N I X : P A T E N T extended this concept to include claimed elements of the invention and would have authorized a court to parse the elements of the claim and consider only those that were the “inventive contribution” as opposed to those elements that were not. A counterpart Senate bill, S. 3818, took a somewhat similar approach. Specifically, it provided that one of the three factors that must be considered by a court in determining reasonable royalty damages is the economic value that should be attributed to the novel and non-obvious features of the invention. This approach, like H.R. 2795, would have required a court to parse the elements of a claim in making its determination. The apportionment of damages provisions of H.R. 2795 (109th Congress) and S. 3818 (109th Congress) appear to be a response to concerns that patent claims directed to a computer programmed to perform a novel method may result in excessive royalties because the basis for determining royalties would be the entire computer when the invention involved really was the method. However, both of these approaches to apportionment of damages drew the opposition of the American Bar Association which took the position that the existing precedent of the Federal Circuit enables the courts to deal equitably with this issue without the necessity of statutory change.34 It is highly likely that the 110th Congress will craft legislative language that would resolve this issue to the satisfaction of all stakeholders in the patent system. B. INTERLOCUTORY APPEALS OF MARKMAN DECISIONS

S. 3818 (109th Congress) contained a provision allowing interlocutory appeals of decisions in which a trial court defines how it will interpret the claims of the patents at issue in a litigation. These decisions are called “Markman Rulings” after the judicial precedent that recognized the procedure.35 In introducing S. 3818, Senator Orrin Hatch stated that his intent in including provisions on interlocutory appeals of Markman Rulings was “to generate discussion about the interplay between the Federal district and appellate courts.” He emphasized that he was “not wedded to any particular approach or combination of approaches” and that experts held a wide variety of views on the subject.36 Subsequent to the introduction of S. 3818, the American Bar Association expressed strong opposition to any change in the law which would permit interlocutory appeals of Markman rulings.37 The ABA reasoned that permitting interlocutory appeals would flood the Federal Circuit, causing significant delays in the resolution of appeals cause District Courts to routinely stay proceedings pending resolution of interlocutory appeals thereby delaying resolution of patent disputes and conflict with current treatment of claim construction by the Federal Circuit. Finally, the ABA concluded that mechanisms exist to permit appeals when necessary, namely, stipulation to a judgment and appeal of claim construction via the stipulated judgment. During the last session of Congress, the House passed H.R. 5418 which would establish a pilot program in certain United States district courts to encourage enhancement of expertise in patent cases among district judges to address this topic (among others), and it has been reintroduced in the 110th Congress as H.R. 34. The American Bar Association is on record as opposing interlocutory appeals of Markman Rulings would delay the resolution of patent cases – an outcome that most stakeholders oppose. The ABA agrees with the Court of Appeals for the Federal Circuit 34 35 36 37

ABA White Paper, supra note 28, at 48. Markman v. Westview Instruments, Inc. 517 U.S. 370, 372 (1996). Cong. Rec., Aug. 3, 2006 at S. 8831. ABA White Paper, supra note 28, at 63.

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that such a change would invite piecemeal litigation that is “strictly precluded by the rule of finality for patent cases as it is for any other case.”38 Nevertheless, this is an issue likely to be debated in the context of patent reform in the 110th Congress. C. VENUE

Many patentees commence infringement actions in the U.S. District Court for the Eastern District of Texas both because local rules provide for swift trials and because this jurisdiction has gained a reputation of having patentee friendly juries. Many manufacturing companies have been sued in this jurisdiction. Legislation introduced in the 109th Congress contained provisions directed at this issue. S. 3818 required that all patent cases be brought only in the judicial district where either party resides or the district where the defendant has committed acts of infringement “and has a regular and established place of business.” (emphasis added) H.R. 5096, introduced by Congressmen Berman and Boucher, contained language that would address this concern by requiring transfer of venue on motion of a party to “a more appropriate forum, including any judicial district where a party has substantial evidence or witnesses.” Exceptions would be situations in which the patentee or alleged infringer resides or maintains a principal place of business in the jurisdiction, or is incorporated in the state of that jurisdiction. The American Bar Association opposes any statutory change in the venue rules for patent cases. As justification for its opposition, the ABA noted that the legislation appeared to focus on a single judge in a single court in the Eastern District of Texas and that, like other phenomenon of litigation the rush to sue in this particular court cannot reasonably be expected to be long-lasting. The ABA concluded that existing jurisprudence under 28 U.S.C. § 1404(a) is “well established and appears to serve patent litigants well when transfer of venue is appropriate. The ABA also observed that the proposed amendments apply only to patent infringement actions brought by a patentee and would not apply to counterclaims asserted in a declaratory judgment action brought by an accused infringer. The bottom line for the ABA is that existing transfer law “works well, is settled, and allows a district court to consider a more complete accounting of the factors relevant to a transfer analysis . . . [and that any change] will likely create uncertainty and questions in its application.”39 This issue can be expected to be debated in the context of any legislation considered in the 110th Congress. D. REPEAL OF SECTION 271(F)

Section 271(f ) is a provision of the U.S. Patent Law that permits a patent-holder to obtain damages in an infringement action for supplying or causing to be supplied from the United States all or a substantial portion of the components of a patented invention in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States infringer. Currently, Microsoft is involved in litigation as to whether this provision applies in the case of a master disc containing computer software that is sent overseas and there reproduced for installation on computers manufactured overseas where such installation, if done in the United States, would constitute an infringement.40 38

Nystrom v. Trex Co., Inc., 339 F. 3d 1347, 1350 (2003). ABA White Paper, supra note 28, at 67–71. 40 AT&T Corp. v. Microsoft Corp., 414 F.3d 1366 (Fed. Cir. 2005), cert. granted, 127 S.Ct. 467 (2006) (No. 05-1056). 39

756 S E S S I O N I X : P A T E N T If so, damages would be based on all of the computers incorporating the software, not just the single, master disc supplied to the computer manufacturer. The Court of Appeals for the Federal Circuit has determined that Section 271(f ) does apply to the replication and installation abroad of software supplied overseas on such a master disc. The Supreme Court has granted certiorari in this case, and will soon make a ruling which could diffuse this issue. S. 3818 (109th Congress) would have statutorily repealed section 271(f ). No legislation on the House side in the 109th Congress addressed the issue. The American Bar Association opposes repeal of Section 271(f ) on the grounds that it “will likely harm start-up companies and smaller inventors while wealthier patentees will be able to protect themselves to some measure through foreign patents.” The ABA noted that in passing Section 271(f ), “Congress . . . was seeking to avoid encouraging assembly [of products based on U.S. patents] outside the United States.” The ABA further observed that “[a]ccounting for the cheaper labor costs in many foreign countries, repealing Section 271(f ) may encourage manufacturers to move assembly operations outside of the United States for goods intended to be sold in foreign countries.”41 The Supreme Court’s forthcoming decision in the Microsoft case may diffuse the issue. However, if it does not, this issue may find its way into legislation in the 110th Congress. E. ATTORNEY’S FEES

Section 285 of the current patent law permits a court to award a prevailing party attorney’s fees “in exceptional cases.” S. 3818 (109th Congress) would have amended this provision to require that a court “shall award, to a prevailing party, fees and other expenses . . . unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust.” The American Bar Association opposes this “loser pays” amendment.42 Current patent law already permits prevailing parties to recover fees in “exceptional cases.” To extend the collection of fees to more routine cases is controversial within the IP community, and thus should be instituted only after it has been clearly demonstrated to be in the best interests of justice. This issue may find its way into the legislative debate in the 110th Congress. IV. CHANGES IN PROCEDURES OF THE USPTO A. POST-GRANT OPPOSITION

At the present time, with the exception of a limited right to request reexamination of a patent, the only way to fully challenge the validity of an issued patent or individual claims to the patent is full-fledged litigation in a United States District Court. By contrast, the legal systems of our major trading partners, Europe and Japan, have an administrative law option where patents can be challenged in the patent office itself. This is known as “post-grant opposition” or “revocation.” Many multinational companies have become accustomed to this option and prefer it as a much less expensive and onerous method of resolving patent disputes. The National Research Council report recommended establishing such a system in the United States.43 Moreover, all of the bills introduced in the 109th Congress contained provisions establishing some sort of post-grant opposition system, although each bill took a different approach to this issue. All of the 109th Congress bills permitted the filing of a request for the reconsideration 41 42 43

ABA White Paper, supra note 28 at 57. Id. at 75. NAS Report, supra note 26, at 95.

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of the claims of a patent within a relatively short period after it is granted. In S. 3818, the period for challenge was 12 months. In H.R. 5096, it was nine months. There is significant disagreement, however, over the circumstances in which, and conditions for, filing cancellation petitions later in the life of the patent should be permitted. S. 3818 would have permitted a cancellation petition at any time during the life of the patent by anyone “who establishes substantial reason to believe that the continued existence of the challenged claim causes or is likely to cause the petitioner significant economic harm.” (emphasis added) H.R. 5096 permitted a petition for cancellation within “6 months of receiving notice from the patentholder alleging infringement of the patent . . .” While there is little controversy over the lower burden of proof for oppositions brought within nine month’s of the issuance of a patent there can be expected to be strong opposition in the 110th Congress to applying this evidentiary standard to patent challenges brought many years after patent issuance. Also, there strong opposition can be expected to any legislation that provides an open-ended ability to file cancellation petitions more than nine months after the patent is granted. Opponents to such open ended opportunities to challenge patents administratively argue that this would be contrary to the emerging consensus that reforms should result in less litigation rather than more and that the result should be a stable system where all stakeholders can have confidence that patents in force have received a quality examination, are valid, and appropriately enforceable. Apart from the time periods in which oppositions may be commenced, other issues involving the proposed post-grant opposition system involve burden of proof and discovery. S. 3818 (109th Congress) simply provided that “the party advancing a proposition . . . shall have the burden of proving that proposition.” And, it established a “presumption” that the patent is valid. H.R. 5096 (109th Congress) provided that the party opposing the patent has the burden of proof of invalidity and must meet that burden “by a preponderance of the evidence.” With regard to discovery in opposition proceedings, H.R. 5096 (109th Congress) limited discovery to depositions of “each person submitting an affidavit or declaration” on behalf of a party, except where the hearing panel determines that “additional discovery is required in the interest of justice.” By contrast, S. 3818 (109th Congress) gave the USPTO Director broad authority to “prescribe regulations for discovery.” These issues can be expected to receive a thorough debate in the 110th Congress. B. PRE-GRANT SUBMISSION OF PRIOR ART

Currently, applicants are only given two months from the date of publication of an application in which to submit information to examiners, an unreasonably short period of time. In addition, third-party submitters are not allowed to make any kind of statement regarding the relevance of the information they submit. In the 109th Congress H.R. 5096, H.R 2795, and S. 3818 all would have expanded the time for the submission of prior art to examiners and would allow third parties to explain the relevance of the information submitted. Legislation considered in the 110th Congress is likely to change the current law to allow third-party submissions to ensure that patent examiners have the best possible information before making decisions whether to grant a patent. C. RULE-MAKING AUTHORITY OF THE USPTO DIRECTOR

S. 3818 (109th Congress) would have given the USPTO Director broad new authority to

758 S E S S I O N I X : P A T E N T issue rules interpreting substantive patent law. Current law gives the Director the authority to establish “regulations not inconsistent with law, which . . . govern the conduct of proceedings in the Office.”44 The Court of Appeals for the Federal Circuit has interpreted this as a limited grant of authority holding that the Director does not have “the authority to issue substantive rules . . . [b]ecause Congress has not vested the Commissioner [Director] with any general substantive rulemaking power . . . .”45 The American Bar Association is on record as opposing any change in the rule making authority of the Director for the reason that “[p]ublic policy determinations are properly made by Congress with judicial interpretation. The patent laws reflect a delicate balance of competing policies.”46 This remains controversial and it is unlikely that interest groups other than the USPTO will lobby congress to include expanded USPTO rule making authority in the current session.

44 45 46

35 U. S.C. § 2(b)(2)(A). Merck & Co. v. Kessler, 80 F. 3d 1543 (1996). ABA White Paper, supra note 28, at 72.

SESSION X: COPYRIGHT PART A: INTELLECTUAL PROPERTY LAW AND DESIGN

SESSION X: COPYRIGHT

Part A: Intellectual Property Law and Design

Moderator PROF. SUSAN SCAFIDI

Visiting Fordham University School of Law Southern Methodist University Speakers PAUL MAIER

ALAIN COBLENCE

President, Boards of Appeal Office for Harmonization in the Internal Market (OHIM) (Trade Marks & Designs) (Alicante)

Coblence & Associates (Paris & New York)

JACK B. HICKS

HARRIE TEMMINK

Womble Carlyle Sandridge & Rice (Greensboro, N.C.)

Administrator, Industrial Property Unit, DG Internal Market, European Commission (Brussels) Panelists

PROF. KENNETH L. PORT

MARK TRAPHAGEN

William Mitchell College of Law (St. Paul, MN)

Traphagen Law PLLC (Washington, D.C.)

PROF. SCAFIDI: Ladies and gentlemen, thank you so much for curtailing your lunch to come to “Intellectual Property Law and Design.” Of course, thanks always to Hugh Hansen for organizing this wonderful conference every year here at Fordham. Were he here, he would remind you that it is always the week after Easter. Mark your calendars for next year. I am sure you have heard that quite frequently over the past couple of days. IP and design, or industrial design or applied art or the protection of product configuration trade dress, or maybe simply shape — we had trouble knowing what to call this panel. In a way, it’s an awkward fit with the nice copyright, trademark, and patent threads that we have been following for the past three days. Our problem with design is that we don’t know whether it is simply an emanation, an overlap, of those formal categories of intellectual property, or whether it is and should be

760 SESSION X: COPYRIGHT treated as a fourth category altogether — of particular difficulty, given that it affects so many industries. My personal interest is in looking back at why that is, why we have this awkward fit. Naturally, that would take us back to the Enlightenment and our separation between art and craft, between the aesthetic and expressive and the functional, and the way that separation was embodied in the intellectual property system. But, of course, our task today is not to ask why or to ask philosophical questions, but to ask a “how” question, a very practical question: Given that we do have this division between the aesthetic or the expressive and the functional within the IP system, how do we deal with it? We have a fabulous panel today to help answer that question. Consistent with the standards of this conference, our introductions will be extremely brief. I shall refer you, of course, to the materials for the much longer and distinguished biographies of all of our panelists. Jack Hicks has come to us from North Carolina, from Womble Carlyle Sandridge & Rice, and also from Apple, where he is an officer. Apple has, of course, decided to make this a fourth category, properly. MR. HICKS: Thank you, Susan. I am pleased to be here and so proud that we got a slot, not only right after the lunch hour, but after a lunch at which wine was served. We will try to speak up and not dim the lights. Just as a courtesy to some of the folks here, my bio is not in the materials. I’m proud to say that I first appeared on Broadway as a deaf, dumb, and blind kid, and some of those characteristics I still possess. I will let you decide which ones. My task, as a practitioner, is to give an overview of the design-protection options available in the United States, concluding with a brief comment on the state of the U.S. ratification attempts of the Geneva Act.1 My practice is based in North Carolina, but I address the same issues that a lot of practitioners do. A client comes to you with a design and you have to act like a landscape architect. You have to look at the tools you have available to give that client what he needs — that is, to give him protection for aspects of his product that warrant protection, but principally to make sure that his competitors do not profit from his innovations. So, depending on what is given to you, you have to look through the five major categories in the United States to protect a design. Starting briefly with trademarks and trade dress, as we heard in an earlier panel today, there is currently both registered and unregistered protection for packaging and for product configuration. The packaging protection, or the get-up, is available if your packaging is inherently distinctive.

1 Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs (adopted by Diplomatic Conference July 2, 1999), available at http://www.wipo.int/hague/en/legal_texts/ wo_haa_t.htm. On Nov. 13, 2006, the Bush Administration submitted the Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs to the U.S. Senate for ratification. President Bush’s letter and recommendations in support of ratification and State Department letter with recommendations are available at http://www.fryer.com/WGABushSt.htm. The treaty was transmitted to the Senate, which considered the treaty and accompanying document as having been read for the first time, then referred to the Committee on Foreign Relations and ordered to be printed. Cong. Rec., Daily Digest, Senate, Nov. 13, 2006, S10886, available at http://Thomas.loc.gov/ (search the Congressional Record database, for the 109th Congress, key words “Geneva Act Hague Agreement”). Information on the status of U.S. Geneva Act Ratification is available at http://www.fryer.com/WGASRA.htm.

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Some common registered packaging trade dress examples are shown here. It is an easier task if a client comes to you that has packaging and you want to protect him. Trademark and trade dress protection are available.

Among the hundred or so registrations that Coca-Cola has, of course, is its packaging.

It gets more interesting in the product configuration arena. Supreme Court precedent makes it clear that to get trade dress protection in the product configuration, you must be able to demonstrate that secondary meaning has been established and there is no essential functionality that dictates the design.

762 SESSION X: COPYRIGHT These are the dress designs from the WalMart stores that were found incapable of acquiring secondary meaning, and hence not applicable for trade dress.2 On the right is the sign from the Traf-Fix case,3 where the trade dress was attempted to be proved in the double-hinged method of this sign that can flex to the wind but still come back upright. That was the subject of an expired utility patent. Those two items, of course, did not merit trade dress protection.

Two more traditional product configurations: the Weber grill and the Coleman lantern.

As you advise clients that seek to get trade dress protection in product configuration, it is essential to encourage them to do what is called “look-for advertising,” where you use your product configuration as a trademark, as a source designator. Of course, Weber and Coleman have listened well to this advice, as has Coca-Cola, so you will see their product configurations in many of their advertisements.

2 3

Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S. 205 (2000). Traffix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23 (2001).

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I think it has changed over the years. Well before the Supreme Court cases, the trademark law was a little more liberal in giving product configuration trademark registrations — hence, this bed, registered in 1995. I daresay it would not have been successful today. But as clients come to us, we also want to look at the product to see if there are some indicia where we can still give them protection. You really register that as an ornamentation on a product.

Here is an example of an automobile where a C-scoop was registered on the side.

This is similar to a lot of my clients that have furniture designs. They come to me and say, “We have this new sectional. How can we protect it?” If you look on there, you see the common elements of the three parallel lines. So we apply for a trademark registration, without secondary meaning. It’s on the supplemental register now, but at least that is an opportunity for some protection on the trademark database for that design.

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Copyrights are a wonderful vehicle in terms of speed and cost and length of protection — unfortunately, with designs, of course, prohibited for use for articles in non-separable elements. In my industry, furniture, if you have a lot of good or fanciful designs, the Copyright Office will welcome that application.

It is similar for carvings that are separable.

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We register copyrights for chair back designs. However, the design needs to be fairly fanciful.

There is a view against geometric shapes. I tussled with the Copyright Office and Marybeth’s folks for quite a while on attempting to register this cascading series of ovals in a very successful collection that helped to found a large furniture group that is still selling today. But we were unable to get copyright protection for the hardware.

Similarly, you can imagine what happened to this copyright application. But for the $45.00, we filed it and got a nice rejection, as being simple geometric shapes.

766 SESSION X: COPYRIGHT For new collections, I probably will not be going for copyright protection for those.

A brief mention of the Vessel Hull Protection Act.4 We do have clients that sell things that float. I am informed by our good Register that the mere fact that it floats does not merit vessel-hull protection. There have been rejected floating targets, for example. I kidded her that some of my clients’ furniture will float, and couldn’t I register it this way? She said, “No, don’t try that, Jack.” But if you have other clients that make various vessel-hull shapes, you will have a lot of success there.

As Alain will share with us, there are attempts now to amend the Vessel Hull Act.5

4

The Vessel Hull Design Protection Act, 17 U.S.C. 13 ( 1998). H.R.5055, 109th Cong., 2d Sess. (Mar. 30, 2006), To amend title 17, United States Code, to provide protection for fashion design, available at http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.5055:. 5

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When I first heard about this, I thought it was fantastic. I am glad that people are finally looking at protection of fashion as on boat hulls, because Katharine Hepburn’s puffy shirt needs protection. I’m glad Alain is on top of that.

The African Queen (1952) Starring: Hunphrey Bogart, Katherine Hepburn Dirstor: John Huston

Contract, of course, is another option with your customers or your suppliers, to just bind them from selling elsewhere. With so many industries sourcing in China, with non-dedicated factories, we have found many instances where we are bringing a lawsuit against a company and find out that the supplier who is giving the product to us out the front door is selling out the back door to our competitor, in spite of our contracts.

Finally, the patent area: Utility patents can protect some aspects of designs. We frequently will pursue utility patents to get a little broader protection.

768 SESSION X: COPYRIGHT An example of a utility patent for furniture.

In the same item, we can get a utility patent, as we did here with this televisionmounted canopy bed, but then also go to a design patent for the specific embodiment, to give us protection there.

A great advantage in the United States is use of dashed lines to claim just that portion of the design that is not only new and novel and non-obvious, but is that which a competitor may knock off.

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There is Coca-Cola’s original design patent as well, sort of going to some of the TrafFix decision. How in the world can you have trademark protection in something that has been patented? Coca-Cola has proven that you can.

Design patents have some flexibility, in that you can get one design patent.

This is a high-end collection of accessories or case goods, where we filed one patent application, one patent that covered, in effect, about ten different pieces, by just identifying the door components of indefinite length, indefinite width.

770 SESSION X: COPYRIGHT Similarly, again with furniture: If what is novel about it is just the arm, you just patent the arm.

Chair back — this is a situation where we got both design protection and copyright.

Also design patents — you can do ornamentation that may not merit trademark protection, but still give some degree of protection to the key elements.

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Apparel has been qualified for design patent protection for a while. With Susan’s assistance, each one of the panel members is wearing one of these fashion articles that has been patented. I will let you figure out who is wearing which patent. Susan showed us her shoes earlier. But it’s not her shoes. You have to figure out who has which patent on.

A large problem with design patents, of course, is related to recent decisions. I have been a huge proponent of design patents for many, many years. It has been my go-to form of protection for most articles, to be the broadest I can and make use of hidden lines.

Recent decisions have not boded well for patent protection. The Lawman decision in the Federal Circuit6 pretty much limited about 500 of the patents that I have applied for in the furniture area, out of about 500 — a bad decision. They amended it somewhat by trying to limit it to its facts, but it is already having some bad consequences in the courts.

6 Lawman Armor Corp. v. Winner Int’l, LLC, No. 05-1253, slip op. (Fed. Cir. Feb. 22, 2006), available at http://www.fedcir.gov/opinions/05-1253.pdf.

772 SESSION X: COPYRIGHT Many other recent decisions and the PTO practice are making design patents not the best vehicle.7

Many in the bar are looking at a new form of protection that may be similar to what Europe is doing. We may have some discussion on that.

Finally, U.S. ratification is in the Senate.8 It was sent to the Foreign Relations Committee. Even if it comes out of that Senate committee, there will still be a lot of work to do with amendments to the rules to comply with various publication inconsistencies with what The Hague wants to do in design patents that are not published.

7 See, e.g., PHG Techs., LLC v. St. John Cos., Inc., 469 F.3d 1361 (Fed. Cir. 2006), available at http://www. fedcir.gov/opinions/06-1169.pdf. 8 See supra note 1.

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PROF. SCAFIDI: Thank you very much. Next we have Alain Coblence, who practices in New York and in Paris. I am going to bend the rules slightly, not to add to the bio, but to give you a relevant anecdote. Earlier this week, I was privileged to attend a ceremony in which Alain was made a chevalier of the French Legion of Honor. In granting this honor to Alain — most deserved, I believe — the French ambassador mentioned the legislation that Alain is about to discuss. When he mentioned that legislation, he gave his perspective on it using a classic French idiom: “fingers crossed.” So somewhere in Washington, there sits an ambassador whose fingers are probably cramped by now. But here in New York we have Alain to tell you about the proposed fashion protection in the U.S. Congress.

***

The Design Piracy Prohibition Act Alain Coblence Coblence & Associates I. THE NEED FOR PROTECTION A. THE U.S. SYSTEM IN CONTEXT

Shortly after the Copyright Act of 1976 (“the Copyright Act”)9 was adopted, Barbara Ringer, the Register of Copyrights, commented that “the full range of design protection issues stands as one of the most significant and pressing items of unfinished business now on the Congressional agenda.”10 Thirty years have passed. Even though it is undisputable that garment designs are “original works of authorship fixed in a tangible medium of expression,”11 U.S. law does not allow any protection to designers. In Europe and in Japan, however, original works of design are given unconditional copyright protection. In 1998 in an amendment to the Copyright Act, Congress made a significant step by adding the principle of the “Protection of Original Design” of useful articles, as a separate chapter in the Copyright Act.12 The new statute provided a comprehensive framework to enable the protection of all designs. Original designs of vessel hulls were the first to be enumerated under that statute and were provided protection for ten years.13 B. MEANWHILE: THE EUROPEAN SYSTEM

1. European Community Regulation In Europe, registration is not a prerequisite of the protection. There is a quadruple layer of protection: (1) EU reg. Unregistered Designs (2) EU reg. Registered Designs (3) Domestic Design Protections (4) Domestic Copyright Protections 9 Copyright Act of 1976, Pub. L. 94-553, 90 Stat. 2541 (enacted Oct. 19, 1976) (codified at 17 U.S.C. § 101 et seq.), available at http://www.copyright.gov/title17/ 92chap1.html. 10 Barbara Ringer, The Unfinished Business of Copyright Revision, 24 UCLA L. Rev. 951, 976 (1977). 11 17 U.S.C. § 102(a). 12 Digital Millennium Copyright Act of 1998 (DMCA), Pub. L. No. 105-304, 112 Stat. 2860, (codified at 17 U.S.C. § 512) (enacted Oct. 28, 1998), available at www.coyright.gov/title17. 13 The Vessel Hull Design Protection Act, 17 U.S.C. 13 (1998).

774 SESSION X: COPYRIGHT In some Member States, Design Protection and Copyright Protection are totally cumulative; in some partially; and in some design protection and copyright are totally separate. C. WHY TODAY?

The fashion design industry in America used to be more or less based on designs imported from Europe, but in recent history the American Industry has grown independently. The American fashion design industry used to be that which was imported from Europe or manufactured here under license agreements from the European designers. It has only been in recent history that the American industry has gained a global leadership role. It has only been recently that American fashion has been pirated abroad. New York City’s Fashion Week, with its runway shows in Bryant Park, is only a little over ten years old, and yet the fashion industry of New York is the second largest and most profitable economic sector after Wall Street. While the ability of designers to create new garments may not have been affected significantly by the lack of copyright protection in the United States, it has caused a real deficit of originality. The careers of some of the most cutting-edge and original American fashion designers, from Charles James in the 1930s and 1940s to Stephen Burrows in the 1970s, have been obliterated by this lax system. Because of their level of individuality, the dilution of their creative output and the dissolution of their originality by systematic knock-offs have prevented them from establishing a viable business. While in Europe, the originality of the creation, the individual “brand DNA” constitutes the foundation on which successful businesses have been built, historically many of the truly original American fashion designers have sunk, their careers destroyed by the prevalence of the knock-off market which robbed them of their chances to build that foundation. D. THE IMPACT OF TECHNOLOGY

The development of new technologies in the last few years has considerably worsened this problem since, via the Internet, counterfeiters and pirates have immediate access to all fashion creations the minute they are viewed by the public. Furthermore, having no domestic legislation protecting such designs, the U.S. Customs is unable to top the import and distribution of pirated goods originating from Asian countries, which are notorious counterfeiters. Technology has improved the speed and precision of the design piracy. Perfect 360º photographic images are transmitted from the runway shows via the Internet to China and other places, where they are copied and then the garments are shipped back into this country within a very short timeframe. As a result the “knock-offs” are offered to the public weeks — sometime months — before the originals reach the legitimate distribution outlets. Whereas it used to take six weeks to create the prototype of a lady’s dress from a rough sketch, now it can be done in just three hours. American Fashion also needs this protection because without domestic legislation forbidding design piracy, U.S. Customs will have no authority to stop the considerable influx of pirated goods from the Far East. In that respect, as of today and until we adopt a domestic legislation in harmony with Europe and Japan, the United States will remain the weak link, the “Trojan Horse” of design piracy in the industrial world. In a globalized world, American fashion cannot survive and jobs cannot be preserved, if its creations are pirated by Chinese manufacturers, and reach U.S. distribution at a tenth of the price, before the original American designs are even released on the market.

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Protection is also necessary because design piracy being the central component of counterfeiting presently constitutes a serious loophole of the fight against counterfeiting. As it threatens the apparel industry, counterfeiting also is posing a serious challenge to the growth of fashion design in America. Counterfeiting cannot be significantly enforced without attacking design piracy because design piracy constitutes counterfeiting without the label. There is no marketable counterfeit without the design component which will mislead the public. II. THE REVISION OF CHAPTER 13 A. THE LEGISLATION — H.R. 2033

Designs Protected Sections 1301 (a) and (b) are amended to add fashion design to those designs enumerated for protection and “an article of apparel” to the chapter’s list of “useful articles” to be protected. Language is also added to define the terms “fashion design” and apparel.” –A “fashion design” is the appearance as a whole of an article of apparel, including its ornamentation; –The term “apparel” means (a) an article of men’s, women’s or children’s clothing, including undergarments, outerwear, gloves, footwear and headgear, (b) handbags, purses and tote bags, (c) belts, and (d) eyeglass frames. Designs not Subject to Protection The time allowed for registration of original vessel hull designs is two years with ten years of protection. Because original fashion designs will only be protected for three years, the time allowed for registration was adjusted accordingly. A designer has six months from the date the original design is first made public to register for design protection. Three-year Term of Protection A designer needs one year of make use of their original design as couture and one year to make use of their original design as “ready-to-wear” line. Generally, the first public exhibition of a fashion design is held about six months in advance of the retail season. For example, a fashion show or private viewing in early 2006 will generally preview designs for the Fall 2006 retail season. This three-year term of protection allows designers an appropriate amount of time to recoup their financial investment in the creation of an original fashion design. What Constitutes Infringement? An infringing article can be created from an actual design or from an image of the design. Few people are at the runway when new fashions are rolled out. Most people see the new fashions through pictures and images. However, an infringing article is not “an illustration or picture of a protected design in an advertisement, book, periodical, newspaper, photograph, broadcast, motion picture, or similar medium.” Designs not subject to protection The bill co-sponsors are committed to the fact that inspiration has been a part of the industry’s creative process from the beginning. Under the statute, “a design cannot be granted protection if it is staple or commonplace, standard, prevalent or ordinary, or

776 SESSION X: COPYRIGHT different only in insignificant details or elements.” The bill is intended to capture only those original designs that are truly unique. Other Exclusions in defining infringement H.R. 5055 would bar third parties from manufacturing or importing for safe or use in trade protected designs. The protection is qualified by exclusions for sellers and distributors who act without knowledge and for reproduction for teaching or analysis. In addition, there are other broad general exclusions for acts without general knowledge. Originality As the bill is about to be reintroduced, we are actively engaged in a dialogue with the industry to further perfect its drafting and ensure that it completely allows for inspiration and trends, while keeping the language tight enough that it protects against a pirate taking a design and making an actual copy. The general concept is that a design should not be deemed to have been copied from a protected design if it is original and “not closely and substantially similar in overall visual appearance to a protected design.” III. MAIN ISSUES RAISED BY THE REVISION A. THE ORIGINALITY ISSUE

No area of copyright, or any other area of intellectual property, has a bright-line rule or encyclopedic resource that distinguishes between what is a copy and what is not. The same questions might be asked regarding paintings, or musical compositions. In the case of fashion design, on the overall appearance of the article as well as on distinctive details. In other words, it is a fact-based inquiry. As a practical matter, both ordinary consumers with an interest in fashion and members of the industry are able to identify copies, and regularly do so. Ultimately this law will force would-be copyists — all of whom are professionals in the industry — to err on the side of caution. In other words, they’ll have to be creative, which is the goal of the IP system anyway. B. THE AFFORDABILITY ISSUE

Design protection will only encourage more diversity and more creativity at all levels of the market including in the most affordable distribution channels. This legislation is not about protecting an elitist market for the rich. The mass chain-stores will have access to the creativity of the best designers, by purchasing products from legitimate manufacturers rather than pirates, or by licensing arrangements compensating the creators rather than stealing their creations. Again, if we look abroad, although all other industrial nations have design protection, it has not prevented mass-market apparel companies from flourishing in Europe or in Japan. In fashion, as in other industries, production volume drives prices down, accessibly-priced fashion is where designers can amortize the enormous investment they have to make in the launch of the higher-priced collections. This bill will ensure that it is the designer who reaps the benefit of their investment and of their creativity. C. THE LITIGATION PROLIFERATION ISSUE

As said previously, no area of intellectual property has a bright-line rule which distinguishes between what is a copy and what is not. In the case of fashion design, it depends on the overall appearance of the article as well as on distinctive details. It is no different

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from a song or a book. That being said, there are several features of the bill which will avoid frivolous law suits, such as the exclusion from any protection of design staples (e.g., a button-down shirt, or bell-bottom pants) which are commonplace, lacking in originality, and essentially part of the public domain. The best answer to those afraid of a proliferation of law suits is to refer to what happens in Europe. The level of litigation there is very low because the highly protective legislation acts as a deterrent and very few cases are brought to Court. Statistics concerning fashion design infringement litigations in the Courts of Appeal of France show that these litigations are rare. Out of some 308 appeal cases concerning infringements of protected designs in 2005, only ten concerned registered designs in the fashion category. We fully expect that the legislation will act as a powerful deterrent in this country as well. Our conversations with leading retailers indicate that as soon as design piracy will be illegal, they will actively enforce its ban in their stores. IV. WHERE WE STAND IN THE PROCESS As the bill is about to be reintroduced, we are actively engaged in a dialogue with the industry to further perfect its drafting and ensure that it completely allows for inspiration and for trends, while keeping the language tight enough that it protects against a pirate taking a design and making an actual copy. The general concept is that a design should not be deemed to have been copied from a protected design if it is “original and not closely and substantially similar in overall visual appearance to a protected design.” Today, the law is about to be reintroduced. We introduced it in the old Congress, in March 2006. There was, of course, a large hiatus in the process because of the campaign and the elections. The new Congress is now in place. By the beginning of next week, our law will be reintroduced in the House and introduced in the Senate a few weeks later. Since my time is up, I will have to reserve the rest of my status report for questions. Thank you very much. PROF. SCAFIDI: Thank you. As you have heard, the United States is playing with various areas of intellectual property protection in order to achieve some kind of unified design protection. In Europe, however, there has been for the last several years, as most of you know, a centralized and unified design protection. Here to give us an update on how exactly that is going and working, we have two wonderful panelists. The first who will speak, Harrie Temmink, comes to us from the Directorate General of the Internal Market in Brussels. Thank you so much, Harrie. MR. TEMMINK: Thank you very much. I will discuss the legislative developments in designs. You have already heard that we in the European Union have protection levels at two stages. First, you can ask for protection at the national level; there we have, since 1998, a harmonized system of national design laws. At the EU level, we have had since 2002 a Regulation for registered and unregistered Community designs.14 This system became operational in the beginning of 2003. It has been shown to be a big success in several respects. First of all, of course, in the meaning of the outcome, the number of designs that are registered in Alicante, in Spain. There have been now about 200,000 designs that have been processed since the beginning of 2003. It is perhaps interesting to note that, according to a recent users’ satisfaction survey, the Community design 14

Council Regulation No. 6/2002 of 12 Dec. 2001 on Community Designs, 2002 O.J. (L 3) 1.

778 SESSION X: COPYRIGHT and the Community design registration in Alicante, Spain is one of the main strengths of the Trademark and Design Office in Alicante. Users seem to be happy with the system as it works, the way that the Office is dealing with the registration of designs. What kinds of legislative developments do we have? Do we have a lot of developments? No, we have not. But I consider that as being a good thing. Because the system is relatively new, and also because users, as we always hear, are very keen on having legal security — not changing every year or every two years — it may be a good thing that we do not have too many changes. Having said that, we do have some legislative developments I will discuss them with you briefly. First, the accession to the Geneva Act. The United States is planning to become a contracting party of the Geneva Act, which is formally the Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs.15 It is perhaps better known as the system that we have at WIPO level, in parallel to the Madrid Protocol for Trade Marks,16 in the field of designs. It can be expected that this Geneva Act and The Hague system will become more important and better known in the future. Basically, what you can do with The Hague system or with the Geneva Act is, as an applicant, instead of having to apply to individual countries for registration of your designs, you have one single procedure for application in order to obtain protection of your designs. Then, after the processing, you will get protection in the contracting parties of the Geneva Act that you designate. That has enormous advantages. First of all, you file only in one language, which should be French or English. You only pay one single set of fees. The substantive assessment is left to the national authorities, to the national offices. But, still, once you have an international registration that is accepted, your protection will be exactly the same as when you would apply directly at national offices. So there is a huge advantage there. Also after registration, when you have to pay renewal fees, for example, there is only one set of renewal fees. When you change your address, it only requires one single letter to Geneva in order to get this done for all the countries where you have asked for protection. The Geneva Act was adopted in 1999. It had two objectives: first of all, to make the system of international registration of designs more attractive for certain countries (the United States, for example, with a design examination system; but also, for example, Japan); second, the Geneva Act was meant to make it possible for international organizations to become a contracting party of The Hague system. That last modification actually triggered the debate on the EC accession to the Geneva Act. The European Commission launched a consultation in 2004.17 We wanted to ask the stakeholders — businesses, in particular — What do you think if the Community would adhere to the Geneva Act and there would then be a link between the international route and the Community design? The response was very clear. There was an overwhelming majority of stakeholders who were in favor of this accession. I say “over-whelming”; it is actually bordering on unanimity. Everyone agreed that it was a good thing for Europe to adhere to the Geneva Act. 15 Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs, adopted by Diplomatic Conference July 2, 1999, available at http://www.wipo.int/hague/en/legal_texts/wo_haa_t. htm. 16 Protocol relating to the Madrid Agreement Concerning the Internal Registration of Marks, adopted at Madrid June 27, 1989, amended Oct. 3, 2006, available at www.wipo.int/madrid/en/legal_texts/trtdocs_wo16. html. 17 EC Consultation: Commission seeks views on accession to the international deposit system (Hague Agreement), Jan. 30, 2004, available at http://ec.europa.eu/internal_market/indprop/design/index_en.htm.

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The Commission then proposed the legislation that is necessary to arrange that accession, including an impact assessment in 2005. One of the things that happens in practice is that when we as a Commission propose legislation, we have to translate all the documents into all the official languages of the European Union. There are twenty-three languages now. That means that if one of you is interested in having the Latvian translation of the Geneva Act, it is available. The European Community has taken care of that translation. Then the legislative process itself: On December 18, 2006, the Council adopted the two main instruments for accession: (1) a decision to approve the accession of the EC to the Geneva Act; (2) an amendment of the Community Design Regulation.18 Some operational choices had to be made. For example, one of the questions that any contracting party has to answer is: Would you have only direct filing to the WIPO, to the International Bureau of WIPO; or do you also accept indirect filing, which means that the applicant can first go to a national office and then the national office takes care of the communication with Geneva? Here we decided, as most contracting parties do, not to have indirect filing. That would make the system only more cumbersome. That means, in practice, that anyone who is applying the international route and wants to have protection for the Community needs to go directly to the International Bureau of WIPO. A second choice that we had to make had to do with fees. The question was whether we would let all the fees be decided in Geneva, or whether the EC would also be establishing part of the fees. We decided to do the latter, to choose the option to have individual design fees. We already have an agreement on that. The Commission will also have to propose some changes of the implementing rules, the fees regulation, and the implementing rules Regulation. We will propose these amendments very soon. The main question is then, of course: When will the Community adhere to the Geneva Act; when will it become operational? Our aim is now that, as of January 1, 2008, applicants from the Contracting States of the Geneva Act can apply for the international route and also apply for protection in the Community. That is the Geneva Act, which is the most important development in the legislative field. Very quickly, I will touch on some other issues. The fees were very briefly mentioned yesterday, but I think it is an important development. The Commission issued a Communication on December 22, 2006 on the financial perspectives of the Office for Harmonisation in the Internal Market (OHIM).19 In the short term, what we would like to see is the introduction of a method of regular and automatic fee review, in line with the development of the budget of the OHIM Office in Alicante. What do I mean by that? The Office in Alicante is self-financed. When it gets a lot of money into the system, a lot of revenues from the fees, and it controls its expenditures, then it has money in stock. At this very moment, ladies and gentlemen, there are 200 million euros in a bank in Spain, just because the OHIM is making too much money! 18 Council Regulation (EC) No. 1891/2006 of 18 December 2006 amending Regulations (EC) No. 6/2002 and (EC) No. 40/94 to give effect to the accession of the European Community to the Geneva Act of The Hague Agreement concerning the international registration of industrial designs, 2006 O.J. (L 386) 14; Council Decision of 18 December 2006 approving the accession of the European Community to the Geneva Act of The Hague Agreement concerning the international registration of industrial designs, adopted in Geneva on 2 July 1999, 2006 O.J. (L 386) 28, available at http://europa.eu.int/eur-lex/lex/JOHtml.do?uri=OJ:L:2006:386:SOM:EN:HTML. 19 Communication from the Commission to the European Parliament and the Council, The Financial Perspectives of the Office for Harmonisation in the Internal Market (Trade Marks and Designs), COM(2006) 865 final (Dec. 22, 2006), available at http://oami. europa.eu/en/office/pdf/ohim_EN.pdf.

780 SESSION X: COPYRIGHT What we propose as a Commission is that this money in the future will not accumulate in the way it does right now. If the estimates are that in the future there will be too much money in the budget, then automatically the fees for the applicants, for the users, should become lower. Hopefully we will soon introduce a system of automatic and regular fee review for trademarks. For designs, we decided to exclude this from the proposal, simply because the design system is very young, and also because the income at Alicante for the registration of designs is relatively modest. It only accounts for about 10 percent. Ninety percent is trademarks; 10 percent is designs. So it will not make much of a difference. My time is up. But I think I have covered the most important things. For those of you who want to know, the Spare Parts Proposal20 is blocked in the Council, but there are developments in the European Parliament. The JURI Committee will soon vote a Draft Report.21 Basically, the European Parliament is in favor of the proposal of the Commission, but I have no time for details, so I will leave it there. Enforcement of design rights — why not? I will leave that for the questions, if anyone has a question. Thank you. * * * Thank you very much. Of course, where there is legislation and where there are legislative developments, there are disputes that have to be resolved. We have with us Paul Maier, the President of the Boards of Appeal of the Office for Harmonization in the Internal Market, who is apparently sitting on 200million that he hasn’t told us about. PROF. SCAFIDI:

Design Law: An Update on Decisions in the OHIM Paul Maier22 President of the Boards of Appeal, OHIM The new legislation on designs protection in the European Union dates back to 1998 with the adoption of Directive 98/71/EC of the European Parliament and of the Council on the legal protection of designs.23 The Council Regulation (EC) No. 6/2002 on Community designs24 introduced new unitary titles protecting designs in the entire European Union: the registered Community design (RCD) and the unregistered Community design (UCD). This paper will deal with registered designs merely but the legal notions studied equally apply to the unregistered design. Since 2003, when the first designs were registered in the Office for Harmonization in the Internal Market (OHIM), many decisions have been taken. They now give a first good 20 European Commission, Proposal for Directive Amending Directive 98/71/EC on the Legal Protection of Designs, COM(2004) 582 final (Jan. 4, 2005), available at http://www.tmpdf.net/cms/images/newsimages/ 05_%20PP01%20spareparts.pdf. 21 See European Parliament Committee on Legal Affairs, Draft Report on the Proposal for a Directive of the European Parliament and of the Council Amending Directive 98/71/EC on the Legal Protection of Designs, COM(2004)0582, C6-0119/2004 2004/0203(COD), Provisional 2004/0203(COD) (Dec. 6, 2006), available at http://www.europarl.europa.eu/meetdocs/2004_2009/documents/pr/640/640008/640008en.pdf. 22 The views expressed in this paper are personal and can in no way be considered to be official positions of the Boards of Appeal or OHIM or any other institution or body of the European Union. 23 1998 O.J. (L 289) 28. 24 2002 O.J. (L 3) 1.

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idea on how the design right looks like in Europe and how some of the important novelties introduced by the Directive and the Regulation should be interpreted. National courts have been less active in the registered design field. Only few decisions have been rendered so far. This paper reviews the decisions of OHIM, both by the Invalidity Divisions (which from an organizational point of view are part of the Designs Department and constitute the first instance) and the Third Boards of Appeal.25 Only one decision of the Third Boards of Appeal (the one exclusively competent in design matters in OHIM) has been further appealed to the Court of First Instance in Luxembourg.26 The decision of the Court of First Instance (CFI) has not been handed down yet. There is therefore no Supreme Court jurisprudence in design matters so far. I. GENERAL INFORMATION ON DESIGN ACTIVITY IN OHIM High levels of RCD filings remain the norm in the OHIM. It is expected that more than 70,000 designs will be filed for registration in 2007 after about 69,000 in 2006. The success of the system is therefore confirmed and the constant increase of filings should continue. The OHIM has maintained its efforts in order to improve the examination of design applications and their publications both in terms of quality and speed. Whereas in early days publication was promised within three months from filing, the OHIM now publishes more than 80 percent of RCDs in less than eight weeks. This time will continue to be shortened over the coming months. Soon RCD publication will happen daily (instead of every week) which will significantly contribute to shorter times for the treatment of applications. In 2006 the activity in invalidity cases has also augmented greatly. As the tables below show,27 OHIM received 161 invalidity applications last year. Even with this important increase, the level of invalidity activity still remains rather low though compared to the 214,000 registered designs by the end of 2006. However, it allowed for a number of decisions to be made which constitute a major step forward in defining the substance of design law in the European Union. This low percentage of invalidity actions also has another consequence as it confirms that even if the design right is not examined, the certainty given by its registration is very high. Less than 120 designs had been declared invalid by the end of 2006, which corresponds to much less than one in a thousand. Total

2006

2005

Variation 2006/2005

Invalidity applications received

161

115

+40%

Invalidity cases closed

156

64

+244%

Invalidity cases closed by decision

144

44

+327%

12

20

–40%

Invalidity cases closed without decision

25 Decisions by the Invalidity Divisions are found on the OHIM Web site, http://oami.europa.eu/en/design/ decispending.htm. Appeal decisions of OHIM Boards are searchable directly at http://oami.europa.eu/search/ legaldocs/la/en_BOA_index.cfm. Unfortunately, technical problems presently hamper the full search for design decisions by the Boards of Appeal. The matter is being dealt with by the technical services of OHIM and a solution should be found soon. The reader should also be aware that due to the need to keep some decisions confidential, the Board may decide not to make them available online. 26 Appeal no. R 2001/2005-3 of 27 Oct. 2006. CFI case T-9/07. 27 Tables are taken from the Web site of OHIM, http://www.oami.europa.eu.

782 SESSION X: COPYRIGHT The Invalidity Divisions have also progressed greatly in the speed at which their files are dealt with and decisions are handed down. On average, it takes fewer than nine months to decide on RCD invalidity cases in the first instance of OHIM. It is generally accepted that such speed is necessary as registrations are ever faster. Indeed, the system cannot only be fast to register designs, it must also be capable to clean the register speedily from invalid designs if it is to be balanced and deal fairly with all interests at stake. A. QUANTITATIVE EVOLUTION OF INVALIDITY ACTIVITY

Invalidity applications in 2006 and 2005 fluctuated quite significantly over the months. The average per month in 2006 was thirteen new cases.

B. QUALITATIVE EVOLUTION

1. The process timing (from reception to ready for decision and decision-taking) In 2006 the shortest time to take a decision in invalidity proceedings was 2.1 months (6.3 months in 2005), whereas the longest it took was 21.4 months (18.4 months in 2005). 65.3% of the cases were settled in ten months or less (27.3% in 2005), 25.0% of them were settled between eleven and fifteen months (34.1% in 2005) and 9.7% of the cases took more than sixteen months (38.6% in 2005).

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Average time taken (in months)

2006

2005

Variation 2006/2005

Invalidity decisions taken

144

44

+327%

From reception to commencement of proceedings

1.0

1.2

–16.7%

Adversarial part

6.2

8.3

–25.3%

Decision-taking

1.5

3.4

–55.9%

Total process time

8.7

12.9

–32.5%

2. Appeals Against Invalidity Decisions The rate of appeals is not an appropriate indicator of the quality of decisions made by the Invalidity Divisions but it gives an idea of the level of acceptance of decisions by parties. From 2004 until October 2006, a total number of 160 invalidity decisions were taken. Taking into account the two-month delay for filing an appeal, these decisions generated a total of thirty-one appeals by the end of December 2006. This represents an appeal rate of 19.4%. As of early April 2007 a total of seventy-eight appeals had been filed in design matters. II. CASE LAW OF THE INVALIDITY DIVISIONS AND THE BOARDS OF APPEAL OF OHIM A. DISCLOSURE

Disclosure is one of the essential elements of design law. As a design will eventually be compared to earlier designs to determine its novelty and individual character, disclosure must be determined with a maximum of legal certainty. Article 7 (1) of the CDR defines it the following way: For the purpose of applying Articles 5 and 6, a design shall be deemed to have been made available to the public if it has been published following registration or otherwise, or exhibited, used in trade or otherwise disclosed,…, except where these events could not reasonably have become known in the normal course of business to the circles specialised in the sector concerned, operating within the Community. The design shall not, however, be deemed to have been made available to the public for the sole reason that it has been disclosed to a third person under explicit or implicit conditions of confidentiality. The provision contains several elements that need to be looked into. The case law of the Invalidity Divisions and the Board have dealt with some of them. The first important element is that the place where disclosure takes place is not limited geographically. Worldwide disclosure is the rule. The criteria is, however, relative in the sense that such making available to the public will not be a disclosure under the Regulation if it “could not reasonably have become known” to EU business circles. This provision qualifying disclosure has two major consequences. It first is a rule of fairness for those operating on the EU market. They cannot be held responsible for not having known designs that were created and disclosed in remote places of the world or in such conditions that one would have had to make uncommon efforts to find those out.

784 SESSION X: COPYRIGHT This rule of fairness for businesses operating inside the European Union is in balance with the rule of fairness that worldwide disclosure brings with itself. Indeed, fair trade at a global level requires that world wide disclosure is taken into account. It would not be acceptable that a jurisdiction takes no account of designs traded in other countries and just accepts that they be protected and registered in its own jurisdiction against the earlier foreign designs. The second important consequence of this provision is that it will be of great help in legal actions against importers and traders of counterfeits who try to escape their liability by providing catalogues or others proofs that are meant to demonstrate that the designs marketed are actually based on earlier disclosed designs in a foreign country. The method is the following: when sued for infringement some defendants submit to the courts in Europe catalogues or other commercial material that they declare to have been published or distributed in the foreign country much earlier than the protected design on the basis of which the action against them is based. Judges had great difficulty with such cases as one could not simply dismiss such elements just because they had been published abroad of the EU even if there may in some cases even have been doubts about their veracity. The advantage of the new provision of the Regulation is that such value or veracity is no longer at stake. It will suffice to argue and convince the judge that the catalogues or other proof could not have been known to the interested circles in the European Union anyway. This will normally be easy in the light of the factual elements of the case (e.g. catalogues in languages other than EU languages, manifest small number of copies available). 1. Methods of Disclosure: The Problem of Proof Except in cases of official publication in a gazette of an IP office of the European Union, disclosure and the proof of disclosure are major problems in design law. The question has thus been discussed in many invalidity cases in OHIM and the following examples can be given to show the general line of approach taken by OHIM.28 In case ICD 420, Sunstar Suisse S.A v. Dentaid S.L. of 27 June 2005 (toothbrushes), the earlier design relied on had been published as a registered design in the Japanese Gazette. The Invalidity Division considered that this should be considered as a disclosure since the Japanese PTO is “one of the world’s most important industrial property offices in terms of volume of applications and registration of designs.” The importance of the PTO that publishes the earlier design therefore seems to be of importance. It is considered that the circles specialized in the Community must know about such publications. The same holds true of design patents published by the USPTO (see ICD 594 of 20 December 2005). Not only designs publications have been taken into account by the Invalidity Divisions as valid disclosures. In a number of cases, they have taken into account as validly made available to the public disclosures of utility models in the corresponding publication of the national Office (e.g., ICD 206 of 20 July 2004 in which the earlier design is based on a Spanish utility model). It must, however, be specified that only the graphic representations included in the publication are taken into account to compare the earlier designs to determine the novelty and individual character of the RCD which is subject to the invalidity request. The fact that verbal claims are not to be taken into account was expressly confirmed in two other cases involving Spanish utility models (ICD 40 and ICD 57 of 14 June 2004). The representation of the earlier utility models for sponges used in surgery to disinfect the skin 28 OHIM Boards of Appeal decisions, available at http://oami.europa.eu/search/LegalDocs/la/en_BoA_ index.cfm.

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before an operation were far from giving the same overall impresssion as the RCD. The invalidity applicant therefore argued that his protection went beyond the mere representation shown in the publication and that his accepted verbal claim for other similar disinfection sponges or various shapes in the utility model must allow him to obtain the invalidity of the RCD. The Invalidity Division firmly rejected this argument and underlined that only the representations can be taken into account under EU design law to invalidate an RCD. Earlier trademark publications are also taken into account, as is the case in ICD 65 of 3 December 2004. The design used to cancel the RCD was a published Community trademark (CTM 998450). This case is also interesting as the decision of the Invalidity Division was confirmed by the Boards of Appeal (R 216/2005-3 Isogona, S.L. v. Centrex, S.A.U. of 8 November 2006). The Board rejected all arguments made that the earlier trademark had not been invoked as a trademark to invalidate the design and stated that “the only relevant element is the image reflected in the Community trademark and whether the Community design is identical to it.” As one can see, official publications of IP titles can be valid earlier designs that can be fully opposed to RCDs. But are all official publications in the European Union and abroad valid earlier rights and/or valid disclosures to destroy the novelty or individual character of RCDs? The fact that the Invalidity Division specified in the case of the Japanese publication that it is one of the major IP offices in the world may lead to the conclusion that such publications will not automatically be taken into account. One can doubt whether a publication in a small and remote country would satisfy this criteria. However, one must also question whether it would be acceptable to disregard designs published in member countries of the Paris Convention and the TRIPs Agreement. Future decisions will have to clarify this important question. 2. Other Publications Publication in general clearly is a means of disclosing designs. The question is rather under what conditions a publication must have taken place to satisfy the criteria of Article 7, i.e. the knowledge by interested circles operating inside the European Union. Whether a publication or reproduction of the design in a trade document or other publication constitutes disclosure is a matter of facts and there can be no automatic rule. Actually, the Invalidity Divisions are rather severe in the evaluation of proofs of disclosure. One can for example not say that the representation of a design in a catalogue will always be considered a disclosure. In the case ICD 149 (decision of 08/09/2004 Leng d’Or SA v. Recot Inc.), a catalogue of possible models of pasta was considered to be a professional document used only in a restricted manner. Such a disclosure was not considered to fulfil the conditions of Article 7 CDR, which states in the last sentence of its paragraph 1 that “the design shall not, however, be deemed to have been made available to the public for the sole reason that it has been disclosed to a third person under explicit or implicit conditions of confidentiality.” The facts are that the manufacturer of pastas used its catalogues of possible shapes to show to his clients, on an individual face to face basis, the models he could produce. The amplitude of such disclosure was therefore not sufficient. It must be added in this particular case that the invalidity division wrote to the applicant to ask him for further details on the use he made of his catalogue. The request was left unanswered which also explains why his proof was rejected. Catalogues to be accepted must clearly have been distributed to the public in the

786 SESSION X: COPYRIGHT European Union and must bear a date of distribution or contain other elements that will allow the Invalidity Division to determine with a sufficient degree of certainty the time of disclosure. Indications of volume of print and distribution are important elements to convince the Invalidity Divisions of the reality of disclosure. Publications in newspapers or generally distributed publications normally constitute good evidence of disclosure. They bear a date of publication and their volume of distribution can be indicated with sufficient credibility. An example of such evidence can be found in ICD 1014 of 20 January 2006 in which the design of a building had been reproduced in a magazine. In this same case, the evidence was completed by the reproduction of a trade brochure that was also accepted as valid evidence. An important element when providing such evidence is to make sure that the quality of the copies provided is sufficient to really show the design. In case ICD 65 mentioned above, the invalidity division had refused some elements of evidence because of a quality problem. The applicant then gave better evidence before the Boards of Appeal to reinforce its case. The original catalogues were actually submitted to the Board. The Invalidity Divisions have been criticized for being severe on the proofs of disclosure. As was mentioned above, the Third Boards of Appeal seems to be more open or at least it gives parties a second chance to bring more evidence in case of doubt (see case R 216/2005-3 mentioned above29). 3. Trade Fairs Exhibition of a product or design in a trade fair is another typical case in which difficulties of proof may arise. Several questions need to be answered among which the geographical location of the fair, the participation and the importance for the sector concerned operation in the Community. The recognition of the fair as a major one for the sector concerned operating in the Community is essential. Such recognition will be evident for fairs taking place in the EU territory and for which participation goes beyond the mere local business circles. Until now, the office has not had to deal with disclosures at fairs in the European Union that are of such limited significance that the conditions of Article 7 were considered not to be fulfilled. The question arises more when one has to deal with fairs taking place outside the EU territory. However, the question of the recognition of the fair is not such a difficulty. In most sectors, the international fairs are recognized and demonstrating their importance is not an issue (e.g. the Geneva or Detroit motor shows unambiguously are fairs that are important to the EU automotive sector and any disclosure there must be considered as qualifying to satisfy the requirements of Article 7 CDR). Also, the international design fair in Hong Kong was expressly accepted as being a forum where disclosure must be known to the circles operating inside the Community (ICD 107, 115 and 123 for lamps). What is more problematic in many cases, is that the parties to invalidity cases do not provide conclusive evidence of the disclosure (e.g. the ICDs 107, 115, and 133 mentioned above): it must clearly prove that the design in question (i.e. exactly the one at stake in the invalidity case and not some earlier or later version) has been on display at that particular fair, at that date and in conditions that allowed visitors to see it. Photographic and 29 “Además, el modelo comunitario carece de novedad porque es también idéntico a una cafetera fotografiada en revistas y catálogos facilitados por la solicitante. La Sala menciona como especialmente relevantes el catalogo de Navidad 1998 ‘Vitocha’ en el que se representan varios artículos de cocina, entre los que figura, en la página 4, una cafetera de aluminio y la revista ‘La Casa de Marie Claire’ de noviembre de 2001, en cuya página 103 aparece la publicidad de la misma cafetera.” These elements had been refused in first instance for lack of quality of the copies, which did not allow to clearly recognize the design.

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matching bibliographic elements (notably the day and place on which the photographs were taken) will have to be produced in such a way as to convince the Invalidity Division that there is no doubt as to the disclosure of that particular design. In some cases, parties have produced affidavits that were accepted but it must be said that such was the case because they were not challenged by the other party. The safest way is a declaration by a notary or a certificate of the organizers provided they are complete and respond to the criteria mentioned above. Such certificates are normally delivered by the organizers of such fairs. B. NOVELTY AND INDIVIDUAL CHARACTER Novelty and individual character are the two conditions a design must fulfill to be protected in the European Union. Novelty is defined by Article 5 CDR in the following terms: 1. A design shall be considered to be new if no identical design has been made available to the public: . . . (b) in the case of a registered Community design, before the date of filing of the application for registration of the design for which protection is claimed, or, if priority is claimed, the date of priority. 2. Designs shall be deemed to be identical if their features differ only in immaterial details. When looking at the invalidity cases both the first instance and the Boards of Appeal deal with novelty and individual character separately. The Boards of Appeal expressed the relation between the two concepts in the following terms (Case R 196/2006-3): . . . both parties have addressed the issues of novelty and individual character jointly without striving to make a clear distinction between the two concepts. It is in any event clear that novelty and individual character, although presented as separate requirements in Articles 4 to 6 CDR, overlap to some extent. Obviously, if two designs are identical except in immaterial details, they will produce the same overall impression on the informed user. It is equally obvious that, if two designs produce a different overall impression on the informed user, they cannot be identical. In spite of the overlap between novelty and individual character, there are certain differences between the two requirements. The test for novelty is essentially of an objective nature. The Board simply has to decide whether two designs are identical. The only area where difficulties of interpretation might arise is in relation to the term “immaterial details.” The test for individual character is less straightforward and is likely to give rise to slightly more subjective appraisals. The Board is required to take into account the overall impression on the informed user, having regard to the degree of freedom of the designer in developing the design. Presumably this means that if the designer had relatively little freedom in developing the design, especially on account of technical constraints, even small differences in relation to earlier designs may be sufficient to endow the design with individual character.30 These statements by the Board should not be interpreted as meaning that novelty and individual character are interchangeable or that their overlap would have the consequence that they do not need to be checked separately. The reality is that the parties to invalidity 30 Case R 196/2006-3, Daka Research, Inc. v. Ampel 24 Vertriebs-GmbH & Co. KG, (3d Bd. of App. 22 Nov. 2006) ¶ 20, available at http://oami.europa.eu/LegalDocs/BoA/2006/en/R0196_2006-3.pdf.

788 SESSION X: COPYRIGHT cases often mix both notions and leave it to the Invalidity Division or the Board to make their decision on the basis of the arguments put forward. It has been the policy of the Invalidity Divisions to always accept to take a decision on substance even if the ground invoked by the parties was vague or even wrongly worded. For example, on many occasions, the parties invoke a lack of “originality” (even if copyright is not even in play) or “distinctiveness” (even if no trademark right is invoked) even if obviously it is novelty or individual character that are meant. It is to be understood that the Board in Case R 196/2006-3 did not mean anything else but that it will evaluate both conditions even if the parties have mixed them up. The Boards thus seem to endorse the liberal attitude of the first instance in matters of concepts invoked. Such an open stance is actually necessary if one does not want to have to dismiss too many cases on rather formal grounds. The Board clearly expresses that novelty is a narrower concept than individual character. Indeed, the idea that “identity” is more limited than “same overall impression” seems irrefutable. Looking at two designs and deciding whether they are identical is thus a merely objective verification. As the Board states, the only uncertainty may be with the notion of immaterial detail. For the rest one only has to look at both designs and state the obvious: they are identical or not. It is worth noting that the Board largely confirms the case law of the Invalidity Divisions when it states that the novelty check is “of an objective nature.” 1. Individual Character Individual character is defined by Article 6 CDR: 1. A design shall be considered to have individual character if the overall impression it produces on the informed user differs from the overall impression produced on such a user by any design which has been made available to the public: (a) . . . (b) in the case of a registered Community design, before the date of filing of the application for registration or, if a priority is claimed, the date of priority. 2. In assessing individual character, the degree of freedom of the designer in developing the design shall be taken into consideration. Individual character introduces three notions that should be defined further. The first is the “overall impression” on which one must base the test of individual character. It is to be opposed to a mere point to point comparison. The second is the concept of “informed user” which was unknown to European IP law before the new design legislation was introduced. Last but not least, the “freedom of the designer in developing the design” is of central importance. 2. Overall Impression In the case cited above (R 196/2006-3) the Board had to go into more detail as to the notion of overall impression: In the contested decision the Invalidity Division held that the contested RCD lacked individual character because it produced the same overall impression on the informed user …, as a result of a number of differences between the handles of the underwater scooter shown in the two designs. The appellant has listed these differences and described them in great detail ... The appellant recognizes that the RCD is an updated version of the earlier design. The updating concerns only the handle element but that, according to the appellant, is sufficient to confer individual character on the updated design as a whole.

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The appellant could have sought design protection for the handle alone, since it is a component part of a complex product which remains visible in normal use (see Articles 3(c) and 4(2)(a) CDR). The question then would have been whether the handle in the earlier design and the redesigned handle produce the same overall impression on the informed user. The question might well have received an affirmative answer in view of the differences enumerated by the appellant. Since, however, the contested RCD concerns the underwater device as a whole (and not merely the handle), the comparison must be effected between the whole of the earlier design and the whole of the contested RCD. If the two designs are looked at as a whole, the conclusion must be that they produce the same overall impression on the informed user. They have the same body, the same propeller, and the same propeller shroud. The contours of the handle may vary but the position and general configuration of the handle are the same. In both designs the handle appears to be centrally attached to the body, a plate extends outwards beyond the sides of the body and two grips sweep down at a similar angle.31 The Board’s review of the overall impression first looks at what is to be evaluated. On the one hand, the defendant argues that only a part of the design (the handles) is to be considered whereas the other party defines the design at stake as the entire underwater device. The Board follows that latter thesis as the design is registered for the entire design and not for parts of it. The Board underlines that the holder of the design could have sought protection for the handles only. Since he did not choose to do that, he cannot validly argue that the design should be limited to that. The arguments of the appellant on the relative importance of the handles were rejected by the Board in the following: The appellant contends that the handle merits greater attention because that is the area where the designer enjoys the greatest margin of freedom, the design of the other elements being dictated by their technical function. That argument is not convincing. The shape of the body and the propeller shroud could differ significantly without compromising their technical function. The body could be more elongated or more bulbous. The propeller shroud could be broader or narrower and could slope at a different angle. It could incorporate ornamented features that would not affect its function. It follows that there is no reason to focus attention on the handle element rather than on the design as a whole.32 This shows how important filing strategies are. If a newer version of a design is to be protected, the filer will have a vested interest in limiting his application to the new elements (as the legislation allows him to do since the definition of the design includes “a part of a product”) and not to the product as a whole. Indeed, if the overall impression which is the impression given by the entire product is not different because the modifications are not important enough, the entire protection will be lost. To evaluate the overall impression, the Board and the Invalidity divisions look at the elements of a design one by one and in there combination to make their judgment. Some elements will be more striking than others and their relative weight will be proportionate. The decision on the overall impression may also depend on the functionality. In this case the defendant argued that the other elements could not have been much different as their shape depends on their function. Such an argument could have been of value except 31 32

Id. ¶¶ 20–24. Id. ¶ 25.

790 SESSION X: COPYRIGHT that in this case the Board remained unconvinced. The decisions of OHIM often make reference to this element of freedom to evaluate the importance of differences (see below). Last but not least, the overall impression will be a subjective judgment of the informed user. It is when looking at the two designs to be compared as they are side by side that the decision can be made. It is a human being having over average knowledge of particular types of products that will decide whether two different designs are sufficiently distinct to consider them to give a different overall impression. As was stated by the first instance in ICD 24 of 27 April 2004: “To assess the overall impression, the design must be compared both on their various features taken individually and on the weight of the features according to their influence on the overall impression.” The notion of overall impression is central to design law as it defines the scope of protection of a design compared to earlier ones. It also serves to define whether a design is “in conflict with” earlier designs that have been published later, i.e. cases in which Article 25 (1) (d) comes into play: 1. A Community design may be declared invalid only in the following cases: ... (d) if the Community design is in conflict with a prior design which has been made available to the public after the date of filing of the application or, if a priority is claimed, the date of priority of the Community design, and which is protected from a date prior to the said date by a registered Community design or an application for such a design, or by a registered design right of a Member State, or by an application for such a right; … As the Board of Apeal stated in case R 1001/2005-3: The term “in conflict with” in Article 25(1)(d) is not defined in the legislation. The Invalidity Division took the view that a conflict arises when the two designs produce the same overall impression on the informed user. In other words a conflict exists when the earlier design would, if it had been made available to the public before the filing date (or priority date) of the later design, have deprived the later design of individual character within the meaning of Article 6 CDR. That interpretation has been accepted by both the parties and is clearly correct. It may in addition be noted that a conflict would also exist, for the purposes of Article 25(1)(d), if the two designs were identical within the meaning of Article 5 CDR. Thus the basic issue that the Board has to resolve is whether the contested RCD and the respondent’s RCD produce the same overall impression on the informed user.33 3. The Informed User In all its decisions the first instance avoided to give a specific definition of the informed user, e.g. a trader or particularly skilled person or consumer. It was always said that the informed user is someone between the professional or designer and the average consumer. It is a legal construction, not a person in particular. It is interesting to see that when confronted to the question by the parties in case R 1001/2005-3, the Board has answered in the same direction. The informed user of the products in question could be a number of different persons. It could be a child in the approximate age range of 5 to 10 years, since the products are 33 Case R 1001/2005-3, Pepsico, Inc. v. Grupo Promer Mon-Graphic, S.A. (3d Bd. of Appl., Oct. 27, 2006) ¶¶14–15, available at http://oami.europa.eu/LegalDocs/BoA/ 2005/en/R1001_2005-3.pdf.

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promotional items intended for young children. Alternatively the informed user could be a marketing manager in a company that makes biscuits or potato snacks, since these are the typical products which are promoted by giving away small flat disks known in Spanish as tazos and in English as “rappers” or “pogs.” It makes little difference which of these categories of person is treated as the informed user. The point is that both will be familiar with the phenomenon of rappers.34 As can be seen, the person who could be the informed user is irrelevant. What matters is what is known by such a person.35 The notion put forward by the Board is that the informed user “will be familiar” with the product and in this case “with the phenomenon of rappers.” When assessing the overall impression of designs, the first instance always looks at the evidence provided by parties but also other equivalent designs as they can be found in reference books or the Internet. They work on their overall “culture” in the field concerned. This should not be considered as anteriority searches but merely the educational move to ensure that one is capable to know about the major features of a type of product and/or design. It allows the members of an Invalidity Division to know what features are normally found in such products and their importance for the functionality of the product. It helps them to exercise an “informed” judgment. None of the designs found during such searches is ever expressly mentioned in the decisions as the office is not allowed to bring additional elements to the file constituted by the submissions of the parties. The parties are thus the ones that will define the scope of the case. The elements submitted by them will heavily influence how the case will be decided. The above mentioned rapper case is the perfect illustration of this. In the first instance the informed user considered the market to which the design pertains as the market of promotional toys in general. The consequence of this is a rather important degree of freedom for the designer. However, because of the new elements brought forward by the parties, the Board has departed from this notion of “promotional toys” to restrict it to “rappers.” The change by the Board was explained as follows: The appellant proved by means of documents annexed to its reply that it has been marketing its tazos since 1995 and that Spanish newspapers were talking about tazomanía as early as 1998. Both the parties have submitted examples of rappers and there has been much debate about the relevance of such examples. Obviously the Board must base its decision on a comparison of the contested RCD and the respondent’s RCD. The designs as registered are the starting point, not the products actually marketed. None the less the examples of products actually marketed and the products talked about in the press are relevant inasmuch as they condition the overall impression that the registered designs will have on the informed user. All the rappers or tazos that have been discussed in this case have a number of features in common. They consist of small flat or slightly curved disks which may be made of plastic or of metal. The actual products used in commerce all seem to bear coloured images of a type that will appeal to young children, although the registered designs owned by the parties are devoid of any such embellishment. In determining whether two designs produce the same overall impression on the 34

Id. ¶¶ 16–17. Justice Lewison of the High Court of England and Wales came to a similar conclusion in The Procter & Gamble Co. v. Reckitt Beckiser (UK) Ltd., [2006] E.W.H.C. 3154 (Ch.) (Lewison, J.). 35

792 SESSION X: COPYRIGHT informed user it is obviously necessary to disregard elements that are totally banal and common to all examples of the type of product in issue. Two designs for cars do not produce the same overall impression simply because they have four wheels, headlamps, red lights at the back, a windscreen and side and rear windows and so forth. The informed user will automatically discard such features when appraising the overall impression caused by two designs and will concentrate on features that are arbitrary or different from the norm.36 The consequence of this new approach to the product to be looked at is that the Board overturned the decision of the Invalidity Division. Actually, the question of the product or design to which one is an informed user comes close to the notion of relevant market known in competition law. Whether the product or type of product is broadly defined or not will condition the solution arrived at. 4. Freedom of the Designer The same elements have a strong bearing on the freedom of the designer when he/she creates the design. The Board has expressed this relation in the following way: At this point something needs to be said about the degree of freedom of the designer in developing the design. The contested decision ruled that the degree of freedom of a designer of promotional items is limited only in so far as these items must be inexpensive, safe for children and fit to be added to the promoted products. That might be correct if the discussion were extended to all types of promotional item. However, this case is about a particular type of promotional item, namely tazos or rappers. The contested RCD and the respondent’s RCD belong indisputably to that category. The issue then is what degree of freedom the designer enjoys if his brief is to design a promotional item in the nature of a rapper. Obviously if the matter is approached in that light the designer’s freedom is severely constricted. The paradigm for this type of product is a small flat or nearly flat disk on which coloured images can be printed. Often the disk will be curved toward the centre, so that a noise will be made if a child’s finger presses the centre of the disk. A rapper that does not possess these characteristics is unlikely to be accepted in the marketplace. A designer working within these constraints has little freedom. It follows that even relatively small differences suffice to create a different overall impression.37 As can be seen, the Board has accepted the idea that the designs to be compared are those of rappers and not those of promotional items in general. Such a choice is dictated by the elements of the case as they were provided by the parties. Even if this may not seem so apparent from this part of the decision, the background is essential. The appellant showed through press cuttings that rappers had been a market for themselves as from almost 10 years when the designs were filed. To accept that the market is constituted by rappers is also essential if one wants to grant protection to such products at all more than ten years after that they have been invented and first put on the market. Indeed, when the first rappers were marketed they were a new type of product among promotional items which for the latter would have been totally different in design. The fact that rappers as such were then later copied and sold in many versions of approaching shapes changes this situation. The existence on the market of competing rappers that are no longer design protected (or for which at least no 36 37

Case R 1001/2005-3, supra note 33, ¶¶ 16–19. Id. ¶ 20.

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one has claimed protection in this particular case) is an essential fact. If the creator or the holder of the right of the first rapper had sued all competitors on the basis of his or her design right (national rights were available even if, of course, the EU right has been available since 2002 only!) to keep them out of the market, one would not have encountered so many versions of that product in 2005. The scope of protection of the design would thus have been broader. Therefore, rappers may nowadays be protected by a design right, but their scope of protection will be limited as all earlier ones and the differences they show create a crowded market. It is thus legitimate to want to create a new rapper and the differences one can build into the new design will necessarily be more limited with every new design being introduced. The Board expresses this by saying that “the issue then is what degree of freedom the designer enjoys if his brief is to design a promotional item in the nature of a rapper.” This should not be understood as meaning that it suffices to give a brief to a designer to copy someone else’s earlier design to avoid to enter its scope of protection and therefore be in conflict with it. The situation of the prior art is an objective one. There must be a number of earlier designs of products that are as such considered as the relevant type of product. Whether a broad type of product or a more limited one will be taken into account will depend largely on the submissions of the parties and on the knowledge of the informed user. The subjective instruction given to a designer or his or her wish to copy a successful product cannot immunize him from earlier designs. Following up on its development the Board concluded: Having clarified the above points, the Board is in a position to compare the contested RCD and the respondent’s RCD with a view to deciding whether they produce the same overall impression on the informed user, bearing in mind the limited freedom of the designer in developing the design. Both the designs consist of small disks that are almost flat. The respondent’s disk, when seen from above, has two concentric circles, one very close to the edge and the other approximately one third of the way from the edge to the centre. If the design is viewed in profile it appears that the concentric circle situated close to the edge is intended to convey the idea that the disk curls over all the way round the edge. The other concentric circle is intended to convey the idea that the central area of the disk is raised slightly. The raised part is flat and extends over at least two-thirds of the surface area of the disk. The contested RCD has two additional concentric circles when compared with the respondent’s RCD. The true significance of these additional concentric circles only becomes apparent when the disk is viewed in profile. They are intended to show that the raised area is not flat but slopes upward in the direction of the centre. The difference in the contours of the raised area in the centre of the disks can hardly be dismissed as insignificant. It changes the appearance of the disks in a manner that will not go unnoticed by an observant user. Given the limited freedom of the designer in developing the design, that difference in the profile of the two designs is sufficient to mean that they produce a different overall impression on the informed user.38

38

Id. ¶¶ 21–24.

794 SESSION X: COPYRIGHT III. CONCLUSION: WHAT FUTURE FOR DESIGN LAW IN THE EU? It is precisely this last case that has been appealed to the Court of First Instance in Luxembourg. The judges will therefore have a good occasion to specify some of the notions mentioned above. Since the CFI controls the legality of the decision of the Board, new factual elements submitted by the parties will not be allowed. It is hoped that a decision will be handed down within a year that will give further clarity. With the increasing number of cases before the Third Boards of Appeal it is also likely that further cases will be appealed to the CFI this year. We should thus have a better view of design law in the European Union in the next two years. * * * Thank you. Now we have two wonderful commentators, who, sadly, have only two minutes apiece: Professor Ken Port, the Director of the Intellectual Property Program at William Mitchell, and Mark Traphagen, who is also a professor at American University and practices law in Washington, D.C. Ken will give us the comparison to Japan, which has had protection for even longer than Europe, and then Mark will bring us full circle back to the United States and give us the front-row view from Washington on what Congress is really thinking about all of this. PROF. PORT: Thank you. Two minutes, so I guess I have to dispense with humor — although two minutes itself is funny enough. I tried bartering my time a little while ago, but no one would take me up on it. The Japanese, since 1993, have had, clearly, the broadest unregistered design protection act in the world — since 1993, quite a while ago. That reminds me of an earlier statement that was made by Dinwoodie, that America’s real problem isn’t the protection or not of designs; the real problem is that America doesn’t have an unfair competition protection act, like a lot of countries do, and if we just had an unfair competition protection act, we wouldn’t have to try to saddle Section 43 with all these things or manipulate the copyright statute, maybe, in places where it wasn’t designed to go. At any rate, it seems to me that the solution is to have an unfair competition prevention act, like Japan. It is defined in Article 2 of the Japanese Unfair Competition Prevention Act as “selling, distributing, exporting, importing goods which imitate the product configuration of another, excluding those that are functional.”39 Earlier it was mentioned that it is unconditional. It is not exactly unconditional. It precludes protection of functional designs. Product configuration is defined as “the shape of a good or the shape of a good combined with a design color, luster, or mass, the distinctiveness of which is perceptible by a consumer through normal use.” Am I telling you that are able to protect luster under this statute? That is correct. The term “imitation” actually means creating a product configuration that depends upon, and is essentially identical to, that configuration. It is a very interesting, very broad statute. You would expect thousands of cases, because, after all, the protection of designs is so fundamentally, incredibly important, and we have to have this. But that is not what you find. My wife goes to Tokyo all the time. She loves coming back and telling me what designs we are going to be wearing in America in eighteen months. They are very conscious about fashion. They are very sophisticated about fashion protection. Yet the cases you see in PROF. SCAFIDI:

39 Japan Unfair Competition Prevention Act No. 47 of 1993. English translation available at http://www. asianlii.org/jp/legis/laws/ucpa1993an47o1993407/.

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Japan are about a cutesy teddy bear or towel set, about the protection of a pink woman’s blouse. You don’t see mega-corporations suing mega-corporations. In fact, other than this one shirt design, I don’t know if I came across any other clothing design cases at all. As an academic, I think that balance is the key. I am not sure — to criticize everybody else — that we are presenting a truly balanced perspective here. I think protection of design is a really controversial issue. If in the United States we are going to protect design, then it seems to me that the Copyright Act is not the right place for it. If it is an Unfair Competition Prevention Act type of legislation, then it seems to me we need to amend the Constitution. I will respond to questions. PROF. SCAFIDI: I think there will be some questions about that. Mark, please. MR. TRAPHAGEN: Thank you, Susan. Thanks to Fordham for the opportunity to speak today. My intent here is not to express an opinion on any particular proposal or the need for any proposal. Rather, I would like to provide you with some observations, based on my experience with helping to guide intellectual property legislation, like the Digital Millennium Copyright Act (DMCA),40 through the U.S. Congress. We have heard several issues raised today. I have heard them over the weeks. Several problems: 앫 Design patent protection is slow and expensive. 앫 Copyright protection is effectively unavailable for an entire class of products — in this case, apparel. 앫 Copyright protection may be difficult to obtain for certain types of designs, particularly those that are minimalist rather than more traditional or more decorative. These problems may not be amenable to the same solution. They may require some different measures. I think that is something to keep in mind as we go along. As far as my second observation goes, what is the general mood on Capitol Hill with respect to this? It’s impossible to give an overall opinion on 545 or so members of Congress, but, based on my conversations, there is an interest in the question of legal protection for designs. I think there is an openness to hearing the case made that there is a lack of protection that is leading to harm for U.S. industry. There is also an inclination to look at this issue in a broader way than just a sectorial way — perhaps evaluating what different types of product sectors need this type of protection and how best to do it. In that respect, I would probably keep a couple of things in mind and ask the proponents of any measure to be prepared to answer these questions: 앫 Be prepared to identify the innovation and to quantify the harm that results from not having it protected. 앫 How will protection affect legitimate competitors, as opposed to pirates and counterfeiters? 앫 How will this affect consumers? Once you get out of patents, trademarks, and copyrights, you also have to be prepared for a measure to perhaps be reviewed by more than just the judiciary committees, but also by committees that may have jurisdiction over other areas that are related to these topics. 40 Digital Millennium Copyright Act of 1998 (DMCA), Pub. L. No. 105-314, codified at 17 U.S.C. § 512 (Oct. 28, 1998), available at http://www.copyright.gov/title17.

796 SESSION X: COPYRIGHT PROF. SCAFIDI: Thank you. I do think we have some time for questions. Are there questions from the audience? QUESTION: I am very pleased to hear that the registration of community design is going so smoothly. I was also very pleased to hear that you are very clear as to how to compare two designs, as to whether or not they create the same overall impression on an informed user. But I am sorry to have to tell you that the English High Court, at least, is not taking that approach. The English High Court has recently ruled that the way to do the comparison is to have a look at the registered design, put it aside, and then decide whether or not the new design, the alleged infringement, has the same qualities that “stick in the mind” as the registration.41 We are so confused by that that we are taking it to the Court of Appeal, because we do not know how to assess what sticks in the mind when you look at any particular design on the register. But it is not at all the same as the side-by-side test that you are proposing. I shall mention it when we do get to the Court of Appeal, that the Invalidity Division thinks you should have both designs in front of you at the same time. MR. HICKS: I will offer that that standard is similar to what several in the United States refer to as the Gorham test,42 an 1819 Supreme Court decision on design patents, which said that the test of infringement is “substantial similarity” and “likelihood of confusion.” But, depending on which side of the case you are on, you advocate that you show the patented design first, then take that one out of the room and bring the other one in. It is not as settled, apparently, as it appears there. Several of our judges are wrestling with that same issue. MR. MAIER: There is nothing in writing. It is just the way that we have proceeded to do that. We want it to be very clear that it is different from the likelihood of confusion or incorporating the likelihood of association of trademark law. This is why we do it this way. We will see how that goes. We have a couple of decisions from British judges that go very much in our direction as well. Notably, the definition of the “informed user” was accepted recently, fully in line with what we do. I would like to offer one comment with regard to what Kenneth said. I would definitely not measure the importance of intellectual property by the sheer number of litigation cases that you encounter. I think this is a wrong criterion. The Community design is litigated, to some extent, in front of the national courts. We constantly hear how helpful it is to say to a bona fide competitor, “Listen, this is my registration certificate. You stop this or there’s going to be trouble,” and if you come with a certificate, he takes his product away from the market, and there is no need for litigation. So the sheer number of cases in front of the judges is not, I think, a good measurement criterion. It is certainly not the unique criterion that you should take into account. Notably, the registration certifications are formidably helpful if you want to enforce border measures. If you have such a certificate, a Customs officer will definitely stop the product on the basis of that, and a number of your problems will be solved. I can assure you that a counterfeiter will not even let it go to the court. It is lost in advance for him. The registered community design has a presumption of validity that is not rebuttable. The only way you get off the hook is to obtain the invalidity of the design by the judge. 41 42

The Procter & Gamble Co. v. Reckitt Beckiser (UK) Ltd., [2006] E.W.H.C. 3154 (Ch.) (Lewison, J.). Gorham Co. v. White, 81 U.S. (14 Wall.) 511, 528 (1871).

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This is how helpful a right can be, and not only going to the Supreme Court with a case. MR. COBLENCE: It is a deterrent, in other words. MR. MAIER: Yes. QUESTION: I think we really have to add on to that a little bit. Of course that is a very useful thing to have. You have a right which is well-registered, and just because it is registered, it is already forceful and it has this presumption of validity. On the other hand, that is, of course, also the dangerous thing about it. Let’s remember that the Community design right is totally unexamined. You just file something with the office, you get your stamp, and then you have your right. Nobody has ever looked into the validity of that right. We do not know whether it is novel. We do not know whether it has individual character. It may be totally valueless. When you look into the files of what is registered to Alicante, with all due respect, you find all sorts of things where you wonder how anyone could think that this could be protected as an Industrial design. I am not arguing against the system. It is, of course, the only way to get a cheap and efficient system going. But then, of course, you have the back side of that, that this will be efficient, although it may not be valid at all. I just wanted to mention that as being the downside of the advantages that such a system also has. MR. MAIER: I must agree, to some extent, with what you say. Except, of course, France and Germany, for many, many years, have had the same sort of very fast and automatic registration systems, with between 50,000 and 75,000 design filings every year. There has been no collapse. There has been no civil unrest. It functions reasonably well. There have undoubtedly been abusive filings in front of our Office. We know of some. There is nothing we can do about them. We must register such filings; we cannot refuse them. But living with the French and German experience, I think the positive sides of the system far outweigh the negative ones. The last thing I would like to say is that it is not only the way to get fast registration, it is actually the only way to get a registration. The definition of design under European law is very broad: “any product or part of a product that is new.” You cannot search that. It is impossible. So the myth of the clean registries, the myth of examiners doing their work and finding the earlier designs and making sure that no wrong design is registered, should be forgotten. I think the European legislature has taken the step of saying said, “Okay, let’s forget about clean registries. It’s not feasible. We will forget about it and we will see how we live with the system.” Until now, we have been living with it pretty well. PROF. SCAFIDI: We have time for one more question. QUESTIONER: One last point about the comparison with the prior German and French systems. That was only protection against imitation, barring effect, meaning that anything that came later was automatically infringement just on the basis of priority. The prior German and French systems were different. They had a different legal ground. I just wanted to add that. PROF. SCAFIDI: Are there any final comments from the panel? MR. MAIER: That is only true for the German system. PROF. SCAFIDI: All right. On that note, thank you all very much.

SESSION X: COPYRIGHT PART B: THE THREE-STEP TEST: IS IT OUT OF STEP?

SESSION X: COPYRIGHT

Overcoming the Achilles’ Heel of Copyright Law: The Case for the Creative Destruction of the Three-Step Test

Part B: The Three-Step Test: Is It Out of Step?

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker HAOCHEN SUN

Fellow, Berkman Center for Internet & Society Harvard Law School (Cambridge, MA) Panelists PROF. JANE GINSBURG

TED SHAPIRO

Columbia Law School (New York)

Deputy Managing Director, Vice President & General Counsel–Europe, Motion Picture Association (Brussels)

PROF. P. BERNT HUGENHOLTZ

PROF. COENRAAD VISSER

Director, Institute for Information Law University of Amsterdam

University of South Africa (Pretoria)

PROF. ANNETTE KUR

PROF. MARY W.S. WONG

Max Planck Institute (Munich)

Franklin Pierce Law Center (Concord, NH)

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PROF. HANSEN: Welcome to the session entitled “The Three-Step Test: Is It Out of Step?” I would like to introduce our panelists: Professor Jane Ginsburg, Columbia Law School; Professor Bernt Hugenholtz, whom you all know from a previous session, Director of the Institute for Information Law at the University of Amsterdam; Professor Annette Kur, Max Planck Institute in Munich; Ted Shapiro, who has also spoken earlier, Deputy Managing Director, Vice President and General Counsel–Europe, Motion Picture Association; Professor Coenraad Visser, a longtime friend of Fordham, from the University of South Africa; Professor Mary Wong, Franklin Pierce Law Center. I’m Hugh Hansen, Fordham Law School. Our speaker is Haochen Sun, a Fellow at the Berkman Center for Internet & Society, Harvard Law School. He is going to start us off on a discussion of the three-step test, which I think he has — I’m guessing — reservations about. Then we will have a panel discussion and questions.

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Overcoming the Achilles’ Heel of Copyright Law Haochen Sun1 Men are fond of power, especially over what they call their own; and all men conspired to make the powers of property as extensive as possible. ––Lord Kames2 [The] zealous defense of the copyright owner’s prerogative will, I fear, stifle the broad dissemination of ideas and information copyright is intended to nurture. ––Justice Brennan3 I. INTRODUCTION Here comes the breaking news: the American fair use doctrine may have violated the so-called three-step test, a core minimum standard for copyright protection. Why? According to a recent World Trade Organization (WTO) panel’s decision,4 the three-step test requires that any given limitation on copyright be “clearly defined” and “narrow in its scope and reach.”5 Therefore, the broad and flexible nature of the fair use doctrine may 1 Fellow, Berkman Center for Internet & Society, Harvard Law School. I am deeply grateful to Terry Fisher for his guidance and encouragement, without which this article would not have been written. The flash of inspiration sparked by Jerry Frug during our lunchtime conversations was crucial in developing the jurisprudential thoughts discussed in this article. I also benefited greatly from Bill Alford’s and Janet Halley’s comments on my earlier projects which laid the foundation of this article. Thanks also go to Gerald Dworkin, Reto Hilty, and George Wei, who greatly inspired me to explore the fundamental issues concerning copyright law at the very early stage of this project. Jane Bestor, Christophe Geiger, Daryl Lim, and Eric Priest provided helpful comments on an earlier draft. All errors and omissions, however, remain my own. This project was funded by the Berkman Center for Internet & Society. 2 I. Henry Home (Lord Kames), Sketches of the History of Man 123 (2d ed. 1778). 3 Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 579 (1985) (Brennan, J., dissenting) [hereinafter Harper & Row]. 4 Panel Report, United States—Section 110(5) of the U.S. Copyright Act, WT/DS160/R (June 15, 2000) [hereinafter Panel Report]. 5 Id., ¶ 6.112.

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render it violative of the three-step test. The very power wielded by the three-step test, much to the surprise and shame of American jurists, can indeed ring the death knell for the fair use doctrine, which was proudly invented in the United States. To be sure, as the strongest supporter of enhancing international copyright protection, the United States is not the only country that is facing the imminent three-step test challenge. In fact, the challenge looms large for all European Union (EU) members. For example, in a recent decision, a Dutch court boldly asserted that “the limitation or restriction imposed on the copyright . . . will only be applicable if [the] preconditions [set out in the three-step test] are met.”6 Historically, the three-step test was not imbued with such sweeping power. Rather, it was generally designed to shield authors’ reproduction right under the Berne Convention for the Protection of Literary and Artistic Works (Berne Convention).7 Yet, with the recent proliferation of international, regional, and bilateral treaties associated with copyright protection, the three-step test has been hailed as the panacea for measuring the legality of all limitations on copyright. For example, this test is incorporated into the Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPs Agreement),8 the WIPO Copyright Treaty (WCT),9 and the WIPO Performances and Phonograms Treaty (WPPT).10 Based upon its tripartite conjunctive structure, the three-step test mandates that copyright limitations shall: (1) be confined to certain special cases; (2) not conflict with a normal exploitation of the work; and (3) not unreasonably prejudice the legitimate interests of the right holder. While the three-step test has been widely adopted as a “one size fits all” standard measuring the validity of limitations on copyright,11 the creation of copyright limitations is a highly dynamic legal process that richly embodies a host of economic, social, cultural, and political values. This is because copyrights “are limited in nature and must ultimately serve the public good.”12 Underneath the limitations on copyright lies the state’s police power to regulate the exercise of property rights in order to “advance a substantive conception of a just and attractive intellectual culture.”13 Hence, “[b]oth property and liberty,” surely including copyright, “are held on such reasonable conditions as may be

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De Nederlandse Dagbladpers v. Netherlands, Case No. 192880, ¶ 15 (The Hague, Mar. 2, 2005). Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, as last revised, July 24, 1971, 828 U.N.T.S. 221. 8 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement. Establishing the World Trade Organization, Annex 1C, art. 28.1, 31 Legal Instruments — Results of the Uruguay Round, 33 I.L.M. 81 (1994) [hereinafter TRIPs Agreement]. 9 WIPO Copyright Treaty, Dec. 20, 1996, 36 I.L.M. 65 (1997) [hereinafter WCT]. 10 WIPO Performances and Phonograms Treaty, 20 December 1996, 36 I.L.M. 76 (1997) [hereinafter WPPT]. 11 Ruth Okediji, The International Copyright System: Limitations, Exceptions and Public Interest Considerations for Developing Countries in the Digital Environment (Draft), Issue Paper No. 12 for UNCTAICTSD Capacity Building Project on Intellectual Property Rights and Sustainable Development 24 (2006) (“Any exercise of sovereign discretion that introduces a limitation or exception to the reproduction right is automatically subject to appraisal under the three-step test.”), available at http://www.iprsonline.org/unctadictsd/docs/Okediji_ Copyright_2005.pdf. 12 Fogerty v. Fantasy, 510 U.S. 517, 526 (1994); see also, Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975) (“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.”); Sony Corp. of Am. v. Universal City Studios, 464 U.S. 417, 429 (1984) (“The monopoly privileges that Congress may authorize are neither unlimited nor primarily designed to provide a special private benefit. Rather, the limited grant is a means by which an important public purpose may be achieved.”) [hereinafter Sony]; UNCTAD-ICTSD, Resource Book on TRIPs and Development 196 (2005) (“[Copyright] exceptions serve the purpose of ensuring that the protection of exclusive rights in copyrighted works does not harm the public interest.”). 13 William W. Fisher III, Reconstructing the Fair Use Doctrine, 101 Harv. L. Rev. 1661, 1744 (1988). 7

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imposed by the governing power of the [s]tate.”14 To be sure, the state’s exercise of such police power inextricably implicates a close examination of “the safety, health, morals, and general welfare of the public.”15 The pluralistic nature of this examination, in turn, begs the question of whether simply reducing normative deliberation to a monistic calculus, such as the three-step test, will provide a desirable benchmark for evaluating the validity of all copyright limitations. The following two questions are of paramount importance when considering the desirability of supporting the three-step test’s recent heyday. First and foremost, is the three-step test a legitimate rule per se? Judging from a textual reading of the three-step test, it is patently clear that the touchstone of the test is a single rhetorical mode that deems copyright holders’ economic interest unquestionably sacred and virtuous. Yet the rhetorical mode of this type would definitely gives rise to the concern that, by acting as merely the agent of copyright holders’ interest, the architects of the three-step test might have swept matters concerning public interest under the rug of their negotiating table. This places at risk the set of public interest-oriented copyright limitations that have been traditionally adopted in national copyright systems.16 When it comes to developing countries, “[a] central question is whether the exemptions and limitations within the existing framework of international rules allow developing countries to set the right balance in protecting copyright while addressing their special development needs.”17 If the three-step test is indeed a copyright holder-centered standard, its implementation would surely discourage developing countries’ initiatives to tap into copyrighted works to facilitate the realization of their development agenda. The second question concerns whether the three-step test is capable of creating a dynamic, public welfare-oriented adaptation of the traditional copyright limitations that could be applied to the novel circumstances of copyright exploitation facilitated by advances in digital technology. It seems that the expansion of the three-step test has been premised upon the notion that the easier a copy can be made and disseminated, the smaller the scope of copyright limitations should be. Indeed, the three-step test has acted as a catalyst for narrowing the scope of copyright limitations.18 Nonetheless, others take the stance that the ultimate value of technology and copyright law lies in the well-being of the public at large, arguing that it is not necessary to shrink the scope of copyright limitations in the context of digital technology. Given the myriad opportunities for enhanced access to information and the flourishing of new business models for exploiting copyrighted works,19 the limitations on copyright should be carved out in a broad 14

Lochner v. New York, 198 U.S. 45, 53 (1905). Id. at 53. 16 Sarah E. Henry, The First International Challenge to U.S. Copyright Law: What Does the WTO Analysis of 17 U.S.C. § 110(5) Mean to the Future of International Harmonization of Copyright Laws Under the TRIPS Agreement?, 20 Penn St. Int’l L. Rev. 301, 324 (2001) (arguing that the three-step test “may serve to invalidate existing member nations’ exceptions, or to restrict their scope so much that the underlying policy objectives are thwarted.”). 17 Commission on Intellectual Property Rights, Integrating Intellectual Property Rights with Development Policy 99 (2002) (hereinafter CIPR Report). 18 By relying upon the need to comply with the three-step test, the EU Copyright Directive points out that “the scope of certain exceptions or limitations may have to be even more limited when it comes to certain new uses of copyright works and other subject-matter.” Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the Harmonization of Certain Aspects Copyright and Related Rights in the Infor-mation Society, 2001 O.J. (L 167) 10 Recital 44 [hereinafter EU Copyright Directive]. 19 See Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913 (2005) (Breyer, J., concurring) (pointing out that “lawful music downloading services—those that charge the customer for downloading music and pay royalties to the copyright holder—have continued to grow and to produce substantial revenue”). 15

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manner.20 Among various proposals offered, the most powerful one is the alternative compensation system (ACS) invented by Professor William Fisher.21 To bring this proposal to fruition, he suggests that a new list of broad-based copyright limitations should be added into national and international copyright law.22 This article argues that the inquiry into the legitimacy of the three-step test affords the very vehicle through which all the aforementioned questions could be reconsidered in a critical way. Based on an analysis of the relevant problems underlying this rule, I contend that the three-step test as the final arbiter of the validity of copyright limitations has gone too far in shielding the sanctity of copyrights. As I will demonstrate, the three-step test reeks of fundamental misconceptions, unfounded absoluteness, and unnecessary arbitrariness, making it the Achilles’ heel of the copyright regime. I therefore introduce a proposal to reshape the three-step test. To this end, Part II provides a historical review of how the three-step test, a rule initially laid down to shield the reproduction right in the analog world, has been made applicable to the whole bundle of exclusive rights provided for in the current multilateral and bilateral copyright treaties and national copyright laws. Part III demonstrates that the three-step test wields the power to strike down copyright limitations that promote public interest. Based on the construction of the three-step test rendered by the WTO Panel Report on Section 110(5) of the U.S. Copyright Act, this Part first elucidates the nature and scope of each condition set out in the three-step test and shows how the test might be applied in measuring the legality of copyright limitations. It then demonstrates that the copyright limitations made vulnerable by the threestep test include the U.S. fair use doctrine, copyright misuse doctrine, the U.K. public interest defense, and the private use exemption and reverse engineering exemption available in almost all jurisdictions. Based upon the foregoing exploration of the nature and scope of the three-step test, Part IV encourages the “creative destruction”23 approach, in order to reconstruct this standard in a manner conducive to the promotion and protection of the public interest. It is suggested that the three-step test should be replaced by a new test that would fully integrate public interest into its ambit: “Members may provide limitations on the exclusive rights, provided that such limitations take account of the legitimate interests of right holders and of third parties.” More importantly, the reshaping of the three-step test, as I will argue in Part IV, necessitates a careful reexamination of the conventional wisdom of copyright law in general and the nature of copyright limitations in particular. This examination will inquire into how we might reimagine the legal status of users in the field of copyright law and whether right holders should take on certain social responsibilities, such as a quid pro quo for being granted with exclusive rights. In this sense, the inquiry

20 See, e.g., Neil Weinstock Netanel, Impose a Non-Commercial Use Levy to Allow Free Peer-to-Peer File Sharing, 17 Harv. J.L. & Tech. 1, 6 (2003); Rebecca Tushnet, Copy This Essay: How Fair Use Doctrine Harms Free Speech and How Copying Serves It, 114 Yale L.J. 535, 587 (2004) (arguing that copyright law “might exempt noncommercial or at least small-scale noncommercial copying (private use) along with transformative use”); Molly Shaffer Van Houweling, Distributive Values in Copyright, 83 Tex. L. Rev. 1536, 1569 (2005) (suggesting that “the existing collection of narrow legislative exemptions for specified users and uses of copyrighted works” should be expanded in the digital age). 21 See William W. Fisher III, Promises To Keep: Technology, Law, and the Future of Entertainment 199–258 (2004). 22 See id. at 246–49. 23 According to Schumpeter, “creative destruction” is the process of industrial trans-formation that accompanies radical innovation. Joseph A Schumpeter, Capitalism, Social-ism, and Democracy 81–86 (1976).

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into how we could reshape the three-step test also provides a window on the potential alterations to the traditional theoretical and structural landscape of copyright law. II. UNIVERSALIZING THE THREE-STEP TEST: A HISTORICAL PERSPECTIVE A. AT THE INTERNATIONAL LEVEL

1. Berne Convention The 1967 World Intellectual Property Organization (WIPO) Stockholm Conference, aimed at revising the Berne Convention, planted the seed of the three-step test. Prior to the Stockholm Conference, the right of reproduction, albeit recognized as the most fundamental right accorded to authors, was not expressly provided for in the Berne Convention.24 This loophole resulted in a conundrum for international copyright protection because Berne Union members “were free to impose whatever restrictions they wished on reproduction rights, or even to deny protection altogether.”25 High on the agenda of the Stockholm Conference, therefore, was to set out a specific provision concerning the reproduction right in the Berne Convention.26 Indeed, it was this effort that created the opportunity to usher the three-step test into the arena of international copyright law. To bring this legislative agenda to fruition, the preparatory work for the Stockholm Conference mapped out guidelines for modifying the Berne Convention with respect to the right of reproduction. On the one hand, it was proposed that a broad-based reproduction right be created to shield copyright holders’ economic interest.27 On the other hand, the Conference recognized that “a satisfactory formula would have to be found for the inevitable exceptions to this right.”28 To these ends, the Study Group commissioned by the Conference submitted that the new provision should entail a sweeping definition of the reproduction right integrated with a general benchmark for allowable limitations. Accordingly, the proposed provision provided that “it should be a matter for legislation in countries of the Union, having regard to the provisions of this Convention, to limit the recognition and the exercising of [reproduction] right, for specified purposes and on the condition that these purposes should not enter into economic competition with the works.”29 This proposal is the precursor of the three-step test. As the pre-Conference discussions proceeded, the variety of preexisting limitations on the reproduction right provided for in national copyright laws30 made it difficult to design 24

See Sam Ricketson, The Berne Convention for the Protection of Literary and Artistic Works 369–70 (1987). WIPO, Study on Limitations and Exceptions of Copyright and Related Rights in the Digital Environment 20 (2003). 26 See WIPO, Records of the Intellectual Property Conference of Stockholm 1143 (1971) (“The Program proposed that a general right of reproduction should be recognized in Article 9(1).”). 27 See id. at 111 (“[I]t was obvious that all the forms of exploiting a work which had, or were likely to acquire, considerable economic or practical importance must in principle be reserved to the authors”). 28 Id. 29 Id. at 112. 30 See WIPO, supra note 25, at 20 (“In practice, reproduction rights were universally recognized under national legislation, but the exceptions to these rights varied considerably from country to country.”). The Study Group’s report concluded that the then prevalent limitations “most frequently recognized in domestic laws” pertained to the following works or methods of use: (1) public speeches; (2) quotations; (3) school books and chrestomathies; (4) newspaper articles; (5) reporting current events; (6) ephemeral recordings; (7) private use; (8) reproduction by photocopying in libraries; (9) reproduction in special characters for the use of the blind; (10) sound recordings of literary works for the use of the blind; (11) texts of songs; (12) sculptures on permanent display in public places, etc; (13) artistic works used as a background in films and television programs; (14) reproduction in the interests of public safety. WIPO, supra note 25, at 112 n.12. 25

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a uniform rule that would govern the imposition of limitations. The 1965 Committee of Governmental Experts, after careful scrutiny, suggested a somewhat different provision that would be presented at the Stockholm Conference. The draft provision provided that: (1) Authors of literary and artistic works protected by this Convention shall have the exclusive right of authorizing the reproduction of these works, in any manner or form. (2) It shall be a matter for legislation in the countries of the Union to permit the reproduction of such works (a) for private use; (b) for judicial or administrative purposes; (c) in certain particular cases where the reproduction is not contrary to the legitimate interests of the author and does not conflict with a normal exploitation of the work.31 Compared with the Study Group’s suggestion, the above proposal embraced a stricter test with the inclusion of an additional benchmark—“not contrary to the legitimate interests of the author. At the same time, it explicitly itemized, as shown above, two kinds of specific limitations that were allowed to be carved out in national copyright laws. This proposal, however, was not deemed fully tailored to the varied needs of participating countries at the Conference, leading to a bitter dispute over how it could be reformulated. Generally speaking, there were three types of proposals that were considered at the Stockholm Conference: 앫 To restrict the specific limitations set forth in the draft provision. For example, the French delegation suggested that the expression “private use” be replaced by “individual or family use.”32 The proposal of this type was made by a wide range of delegations, including Germany,33 Italy,34 and The Netherlands.35 앫 To extend the scope of the permissible limitations set forth in the draft provision. This proposal was made by India,36 Romania,37 and South Africa38 in order to open the door for countries to impose compulsory licenses on the reproduction right. Particularly, the Indian delegation forcefully argued that the provision of compulsory licensing would promote “public interest”39 and prevent “the growth of monopolies and the creation of obstacles to the spread of knowledge and culture.”40 앫 To narrow the scope of the permissible limitations set forth in the draft provision. The United Kingdom held the position that the specific limitations listed in the draft provision should be eliminated and the possible limitations adopted by countries should be circumscribed by their proposed test—“in certain special cases where the reproduction does not unreasonably prejudice the legitimate interests of the authors.”41 31

Id. at 113. Id. at 615. 33 Id. at 618. 34 Id. at 623. 35 Id. at 691. 36 The Indian delegation proposed that the following paragraph should be inserted into the second part of the draft provision: “in cases not covered by (a), (b) or (c) above, on payment of such remuneration which, in the absence of agreement, shall be fixed by competent authority.” Id. at 692. 37 See id. at 691. 38 See id. at 629 (“The use of words attached to a musical work should also be subject to a compulsory license in paragraph (2) or local legislation should be permitted to provide for it.”). 39 See id. at 804. 40 See id. at 806. 41 Id. at 687. In addition, the Belgian delegation proposed that “[a] more restrictive formula should therefore be sought for Article 9, paragraph (2)(c).”). See id. at 612. The Danish delegation made a similar proposal. See id. at 615. 32

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In the midst of this vehement debate, it seemed that the UK proposal evinced the capability of “embrac[ing] all possible exceptions within a single generalized exception”42 and therefore won the full support of the Main Committee of the Conference.43 This gave birth to Article 9(2) of the Berne Convention, which is now widely referred to as the three-step test: It shall be a matter for legislation in the countries of the Union to permit the reproduction of such works in certain special cases, provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author. In the context of the Berne Convention, it is self-evident that the three-step test is designed to be only applicable to the limitations on the right of reproduction.44 Therefore, it does not create any parameters for carving out potential limitations on other categories of economic rights, for example, the so-called minor reservations;45 nor does it apply to moral rights under the Berne Convention.46 More importantly, the three-step test, as shown by its negotiating history, does not govern the specific limitations on reproduction rights that are scattered in various parts of the Berne Convention,47 including its Appendix’s compulsory licensing provisions. It should be noted that the three-step test, as its negotiating history shows, is founded upon the following twin objectives. On the one hand, it tacitly allows Berne signatories to retain their limitations on reproduction rights that they had carved out before the Stockholm Conference. As the Study Group bluntly pointed out before the Stockholm Conference, “it should not be forgotten that domestic laws are already contained a series of exceptions in favor of various public and cultural interests” and that “it would be vain to suppose that countries would be ready at this stage to abolish these exceptions to any appreciable extent.”48 On the other hand, the three-step test expressly emphasizes the priority of protecting the right holder’s economic interest. Although a moderate diversity of the existing copyright limitations was accommodated, there was indeed a bottom line underpinning the Berne Convention: the sustained operation of these limitations should not act as a trump overriding the right holder’s economic interest. Therefore, the three-step test directly constrains Berne members’ power to relax the standards for users to avail themselves of these limitations or to carve out any new limitations. 2. TRIPs Agreement Despite WIPO’s strenuous efforts to improve the international intellectual property system since its inception, a string of treaties administered by this organization have lacked the teeth to provide comprehensive and up-to-date minimum standards for the protection and, in particular, the enforcement of intellectual property at an international 42 Ricketson, supra note 24, at 481; see also, Martin Senftleben, Copyright, Limitations, and the Three-Step Test: An Analysis of the Three-Step Test in International and EC Copyright Law 51 (2004) (pointing out that the United Kingdom adopted it owing to “its openness [and] the capacity to encompass a wide range of exemptions and forms a proper basis for the reconciliation of contrary opinions”). 43 See also WIPO, supra note 25, at 1145 (“The Working Group decided to adopt the amendment proposed by the United Kingdom, with some slight alterations in the English version.”). 44 See id. at 1144 (pointing out that Article 9(2) “contained the general exceptions to the right of reproduction”). 45 For an introduction to “minor reservations,” see Sam Ricketson & Jane C. Ginsburg, International Copyright and Neighbouring Rights: The Berne Convention and Beyond 830–35 (2006). 46 Ricketson, supra note 24, at 489. 47 See Berne Convention, arts. 2bis(2), 10, 10bis, and 13(1). 48 WIPO, supra note 25, at 111–12.

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level. At the same time, as many developed countries marched toward knowledge-based economies, intellectual property gradually become the pivot of their increased global competitiveness. The confluence of these factors gathered the very momentum of integrating intellectual property as an indispensable part of the new international trade regime wrought by the Uruguay Round of multinational trade negotiation. After seven years of bargaining, the TRIPs Agreement ushered in brand-new building blocks for the international protection of intellectual property that are parallel to the WIPO mechanism. The culmination of the TRIPs Agreement achieved, among other things, a vast expansion of the scope of the three-step test. Based upon some modifications of its precursor contained in the Berne Convention,49 the three-step test became a universal minimum standard governing the imposition of limitations on the protections of copyright,50 trademarks,51 industrial designs,52 and patents.53 In the sphere of copyright, looming large over the discussion of how to incorporate the three-step test into the TRIPs Agreement was the proposal to constrain the application of compulsory licensing. For example, the Brussels Draft, in addition to the three-step test, provided that “[t]ranslation and reproduction licenses permitted under the Appendix to the Berne Convention (1971) shall not be granted where the legitimate local needs of a party could be met by voluntary actions of right holders but for obstacles resulting from measures taken by the government of that party.”54 Moreover, the July 1990 Draft expressly prohibited the granting of compulsory licenses for private use of computer software, set out new conditions for invoking compulsory licensing under the Berne Appendix, and emphasized the need to create a new mechanism aimed at ensuring prompt payment of licensing fees.55 However, all these additional limitations were abandoned at the final stage of adopting the TRIPS Agreement,56 leading to direct inclusion of the three-step test into Article 13, which provides that: Members shall confine limitations or exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder. The three-step test’s expansion facilitated by the TRIPs Agreement has profound implications for the strengthening of copyright protection. First and foremost, the three-step test becomes applicable to a whole bundle of the exclusive economic rights vested in authors, including the rental right, a new right set forth in the TRIPs Agreement. The architecture of the TRIPs Agreement is based on the Berne Convention. By incorporating the Berne Convention,57 the TRIPs Agreement mandates that all limitations eroding authors’ exclusive economic rights under the Berne Convention and TRIPs Agreement should be subject to the three-step test. In so doing, the TRIPs Agreement sets additional parameters for the imposition of limitations not governed by Article 9(2) 49 For example, the range of the beneficiaries of the three-step test was expanded from “authors” under the Berne Convention to “right holders” under the TRIPs Agreement. The latter concept is regarded as broader than the former. 50 See TRIPs Agreement, art. 13. 51 See id., art. 17. 52 See id., art. 26.2. 53 See id., art. 30. 54 See Daniel Gervais, The TRIPs Agreement: Drafting History and Analysis 147 (2003). 55 Gervais, supra note 54. 56 Gervais, supra note 54. 57 See TRIPs Agreement, art. 9.1.

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dealing only with reproduction right. Nevertheless, it should be noted that the TRIPs Agreement does not make the three-step test applicable to authors’ moral rights provided for in the Berne Convention.58 Nor does it apply to the economic rights vested in performers, phonogram producers and broadcasting organizations under the TRIPs Agreement59 and the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations.60 Second, drawing upon the rules set out in international trade law, the TRIPs Agreement puts teeth into the three-step test. First, the combination of the most-favored-nation treatment61 and the national treatment62 prohibits any discriminatory standards that impose limitations upon copyrights on the basis of right holders’ geographic locations. This increases the possibility of harmonizing the copyright limitations carved out in national copyright laws. Second, the notification and review mechanisms are set up to keep the TRIPs Council informed of the changes made to members’ national laws and regulations63 and to enable the TRIPs Council to review their potential compatibility with the Agreement.64 These procedures definitely enhance the transparency of national legislation with respect to copyright limitations and the ways in which they are enforced. Third, and most importantly, the trade dispute settlement mechanism can order a member to modify or repeal any given limitation on copyright provided that a violation of the three-step test is found. This fosters increased compliance with the test and provides the very dynamics to the copyright regime under the TRIPs Agreement. 3. WCT and WPPT The last decade of the twentieth century witnesses a flurry of unprecedented advances in digital technology, whose power has revolutionized the conventional way of exploiting works and has, in turn, rocked the very foundation of copyright protection and enforcement in the analog world. In the course of the Uruguay Round negotiations on the TRIPS Agreement, no forward-looking heeding was undertaken to cope with the potential challenge posed by digital technology to the protection and enforcement of copyright. Therefore, digital copyright protection has not been specifically addressed by the TRIPs Agreement. On the other hand, the very fear of being marginalized by the WTO in the arena of international protection of intellectual property pushed WIPO to tap into the new treaty-making opportunities to regain its status as the premier global intellectual property regime. The culmination of the WCT and WPPT at 1996 WIPO Diplomatic Conference convened in Geneva generally brought the international copyright law on a par with the developments in digital technology. In so doing, the WCT and WPPT mainly set out provisions protecting the new right of making available,65 and the use of technological measures66 and rights management information67 by right holders. Parallel to the issues associated with the expansion of copyright protection was the way in which the scope of copyright limitations could be readjusted. Because the three-step 58

Id. Id., art. 14.6. 60 Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, Oct. 26, 1961, 496 U.N.T.S. 43. 61 See TRIPs Agreement, art. 4. 62 See id., art. 3. 63 See id., arts. 63.2 & 63.3. 64 See id., art. 63.2. 65 See WCT, art. 8; WPPT, arts.10 & 14. 66 See WCT, art. 11; WPPT, art. 18. 67 See WCT, art. 12; WPPT, art. 19. 59

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test had been incorporated into the TRIPs Agreement, it seemed undoubtedly workable that this test should also be inserted into the then proposed WCT and WPPT.68 Article 10 of the WCT provides that: (1) Contracting Parties may, in their national legislation, provide for limitations of or exceptions to the rights granted to authors of literary and artistic works under this Treaty in certain special cases that do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the author. (2) Contracting Parties shall, when applying the Berne Convention, confine any limitations of or exceptions to rights provided for therein to certain special cases that do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the author. At the same time, capitalizing on the three-step test, the WPPT provides a similar provision.69 Taking account of the identical language used in these two provisions, the integration of the three-step test into the WCT and WPPT carries significant ramifications for strengthening international protection of copyright. To be sure, the inception of the WCT and WPPT represents the biggest leap forward in expanding the scope of the three-step test. First, akin to the TRIPs Agreement, the WCT and WPPT make the three-step test applicable to all the copyrights originally provided in the Berne Convention. Second, the three-step test targets any limitations that constrain the exercise of the new economic rights (e.g., the right of making available) as well as the broadened reproduction right under the WCT and WPPT.70 Third, the WPPT, which partially updates the Rome Convention, incorporates the three-step test as the check on members’ discretion in carving out limitations on the economic rights provided for thereunder. Hence, the three-step test has, for the first time, entered the most entrepreneurial sphere of copyright law, namely the set of rights granted to performers, phonogram producers, and broadcasting organizations. Fourth, the three-step test has been channeled into the field of moral rights protection afforded by the WCT and WPPT. Unlike the TRIPs Agreement, these two Treaties embrace an adequate protection of moral rights by simply connecting them to the Berne Convention71 or setting out specific provisions for shielding right holders’ moral interests.72 The WCT and WPPT may have also facilitated the use of the three-step test to evaluate any limitations on legal protection of technological measures. At the 1996 Diplomatic Conference, the delegation from Singapore, for example, raised the question of whether the three-step test could be applicable to the limitations on the protection of technological measures.73 But it seemed this concern did not attract the attention of other participating delegations and, therefore, no clear response was made at the Conference. One might argue that the general structure of the WCT and WPPT implies that no such appli68 WIPO, Basic Proposal for the Substantive Provisions of the Treaty on Certain Questions Concerning the Protection of Literary and Artistic Works to be Considered by the Diplomatic Conference (1996), ¶ 12.04 (“The conditions of Article 9(2) of the Berne Convention concerning the right of reproduction have been incorporated in Article 13 of the TRIPS Agreement as general principles governing limitations of and exceptions to rights.”). 69 See WPPT, art. 16. 70 Under the WCT and WPPT, copies in digital form are brought into the scope of the scope reproduction right. See, e.g., Agreed Statement Concerning Article 1(4) of the WCT. 71 See, e.g., WCT, art.1(2) (stating that “Nothing in this Treaty shall derogate from existing obligations that Contracting Parties have to each other” under the Berne Convention). 72 WCT, 11bis1(2); WPPT, art. 5. 73 For example, the Singapore delegation pointed out that there was a need to clarify whether the three-step test would apply to the protection of technological measures. See WIPO, supra note 68, at 705.

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cation is allowed. This is because the provisions containing the test are put before those associated with the protection of technological measures. Yet, one can reach the contrary conclusion based on the spirit of the Treaty, which attaches great importance to the effective and adequate protection of digital copyright.74 Against this backdrop, it seems that the scope of the three-step test in this respect hinges upon how the nature of legal protection of technological measures is perceived. If one thinks that this form of protection confers a new exclusive right upon creators75 or provides a new cause for filing an action,76 the three-step test can certainly come into play. Conversely, if one sees it as granting a paracopyright,77 the result would be different because the three-step test can, and should, be applied only within the sphere of pure “copyrights” provided in the WCT and WPPT. B. AT THE REGIONAL AND NATIONAL LEVELS

Interestingly, the expansion of the three-step test at the international level has triggered a rapid incorporation of this test into regional and national copyright treaties or laws so as to strengthen copyright protection in the digital age. 1. NAFTA The North American Free Trade Agreement (NAFTA)78 for the first time built a systematic framework for intellectual property protection under regional trade agreement. On the one hand, the inception of NAFTA gave the momentum to the final conclusion of the TRIPs Agreement. On the other hand, as NAFTA provides broader protection of intellectual property than the TRIPs Agreement, it laid the foundation for setting up TRIPs-plus standards in future free trade agreements. Not surprisingly, the three-step test was incorporated into NAFTA’s copyright provisions.79 Since NAFTA is a trade agreement, its inclusion of the three-step test produces the same results as the TRIPs Agreement. However, the scope of the exclusive rights provided in NAFTA is broader than that of the TRIPs Agreement. The three-step test under NAFTA, therefore, governs the imposition of limitations on the exclusive rights that are not prescribed in the TRIPs Agreement, e.g., the right of importation.80 2. European Union In 2001 the European Union adopted the Directive on Harmonization of Certain Aspects Copyright and Related Rights in the Information Society81 aimed at enhancing the copy74 The Preamble of the WCT, for example, states the need of “emphasizing the outstanding significance of copyright protection as an incentive for literary and artistic creation” in the digital age. 75 See, e.g., Jane Ginsburg, From Having Copies to Experiencing Works: The Devel-opment of an Access in U.S. Copyright Law, 50 J. Copyright Soc’y 113 (2003). 76 See Chamberlain Group, Inc. v. Skylink Technologies, Inc., 381 F.3d 1178, 1194 (2004) (concluding that the Digital Millennium Copyright Act’s (DMCA) anti-circumvention provisions “introduce new grounds for liability in the context of the unauthorized access of copyrighted material.”); Kabushiki Kaisha Sony Computer Entm’t, Inc. v. Ball, E.C.D.R. 33, ¶ 39 (2004) (ruling the anti-circumvention law “creates a tort of strict liability”). 77 Some commentators hold that a paracopyright—anti-circumvention right— has been set up through the legislation like the DMCA. Targeted to controlling access to works, this new right has drastically altered the landscape of copyright law by superseding many forms of traditional copyright protection. See Dan L. Burk, Anti-Circumvention Misuse, 50 UCLA L. Rev. 1096–110 (2003). 78 North American Free Trade Agreement, Dec. 17, 1992, Can.-Mex.-U.S., 32 I.L.M. 296 & 32 I.L.M. 605 (1993). 79 See id., arts. 1705.5 & 1706.3. 80 Under NAFTA, right holders have the right to authorize or prohibit “the importation into the Party's territory of copies of the work made without the right holder's authorization.” See id., art. 1705.2(a). This right, however, is not provided for in the TRIPs Agreement. See TRIPs Agreement, art. 6. 81 See EU Copyright Directive, supra note 18.

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right harmonization and implementing the WCT and WPPT within the EU Member States.82 One of the Directive’s striking features is its structure of copyright limitations that are allowed to be carved out in each EU Member State’s domestic copyright law. First, the Directive itemizes an exhaustive string of the specific limitations on copyright.83 Second, the Directive expressly prescribes that the three-step test governs the imposition of these limitation in EU Member States’ domestic law.84 Third, it channels the three-step test into85 the Directive on Rental and Lending Rights.86 The inclusion of the three-step test in the EU Copyright Directive represents a leap forward in sharpening the three-step test’s power. Unlike NAFTA, the Directive taps into the three-step test’s potential to constrain national legislative power that may curtail digital copyright.87 More importantly, the Directive encourages domestic courts in EU Member States to directly invoke the three-step test when dealing with any disputes associated with copyright limitations.88 Currently, courts in The Netherlands89 and France90 have directly applied the three-step test. 3. FTA The past couple of years have seen a proliferation of free trade agreements (FTAs) that enhance intellectual property protection at the regional or bilateral level. Guided by the so-called Bush doctrine—“how can we use our superpower resources to protect our vulnerability”91—the United States has played a leading role in capitalizing on FTAs so as to ratchet up standards for copyright protection and enforcement. On the other hand, the United States has been confronted with intense pressure from the international campaign against stringent intellectual property (IP) standards led by developing countries and nongovernmental organizations (NGOs).92 As an alternative to a multilateralism approach to copyright protection, the bilateralism approach provides the most efficient vehicle with which the United States can exert the maximum leverage to create higher IP standards than those set forth in the TRIPs Agreement and the 1996 WIPO Treaties. Although strategy of this type was utilized a couple of years ago,93 it was not until the recent proliferation of FTAs concluded between the United States and its trading 82

See id., Recitals (1)–(15). See id., arts. 5.1–5.4. 84 See id., art. 5.5. 85 See id., art. 11.1(b). 86 Council Directive 92/100/EEC, Rental Right and Lending Right and on Certain Rights Related to Copyright in the Field of Intellectual Property, art.10, 1992 O.J. (L 346) 61 (November 19, 1992). 87 See Jo Oliver, Copyright in the WTO: The Panel Decision on the Three-Step Test, 25 Colum. J.L. & Arts 119, 138 (2002) (“There is evidence that intention of the EC Directive is to further restrict existing exceptions, both at the level of EC law and the law of member states.”). 88 Id. at 139 (“The wording in [the Directive’s three-step test] appears to refer to the application the exceptions to an actual case, presumably by a domestic court.”). 89 De Nederlandse Dagbladpers v. Netherlands, supra note 6 (holding that copyright limitation carved out in Dutch copyright law should be in line with the three-step test). 90 See Perquin and UFC Que Chiosir v. SA Films Alain Sarde, Ste Universal Pictures video France, 36 IIC 148 (2005). For a comment on this decision, see Christophe Geiger, The Private Copy Exception, and Area of Freedom (Temporarily) Preserved in the Digital Environment, 37 IIC 74 (2006). 91 Harold Hongju Koh, Rights to Remember, The Economist (Nov. 1–7, 2003) at 23. 92 This backlash can be epitomized by the recent campaign that sought to provide an increased access to patented drugs for the least-developed countries. See generally, Laurence R. Helfer, Regime Shifting: The TRIPs Agreement and New Dynamics of International Intellectual Property Lawmaking, 29 Yale J. INT’L L. 1 (2004). 93 The United States and Jordan entered into a free trade agreement in 2000. This FTA, however, does not establish the basic framework for digital copyright protection as comprehensively as those contained in its progenies concluded in 2003 and 2004, respectively. 83

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partners, including Singapore, Chile, Australia, Central American countries, and Morocco, that the far-reaching and stringent standards for IP protection and enforcement have been formally created. By tapping into the convergence of authors’ rights and related/ neighboring rights and the simplified entitlements vested in right holders, these recently concluded FTAs significantly simplify the legal framework for copyright protection. Drawing upon the WCT and WPPT, copyright provisions set out in the FTAs primarily deal with the cluster of exclusive rights that are core to the protection of copyright in the digital environment, including the rights of reproduction,94 communication to the public,95 and distribution.96 Therefore, the three-step test governs the scope of the limitations that can be carved out for these rights enjoyed by authors, performers, and phonogram producers. More importantly, FTAs set forth WCT and WPPT-plus standards. For example, it is mandated that temporary copies should be protected in the Member States. 4. China The recently overhauled Chinese copyright law marks the first time that the three-step test has been embedded into the letters of municipal copyright law. The Regulations for the Implementation of the Copyright Law, revised in 2002, introduced a quasi-three-step test aimed at providing guidance to courts in considering the legality of the use of limitations permitted by the Copyright Law 2001. Pursuant to Article 21 of the Copyright Regulations 2002, the use of published works on the grounds of fair dealing exemptions or compulsory licenses should neither “conflict with the normal exploitation of the work” nor “unreasonably prejudice the legitimate interests of the author.”97 In light of the fact that the Copyright Law 2001 embraces a closed list of limitations and specifies the circumstances in which the public can use the works, the limitations are generally formulated in a manner compatible with the first condition of the three-step test, namely “in certain special cases.” C. SUMMARY

This Part sketched the trajectory of the expansion of the three-step test in the realm of the international, regional, and national copyright laws. What has been ushered in is the transformation of the three-step test from a rule applied in the narrow sphere of the reproduction right into a core standard governing the manner in which limitations on various categories of copyrights could be carved out. Throughout this transformation process, the architects of copyright law, however, have been preoccupied with the notion that copyright law should be shaped as a utilitarian instrument aimed at solely protecting copyright holders’ interest. III. THREE-STEP TEST’S CHILLING EFFECTS In this Part, I consider whether the three-step test wields the power to strike down certain public interest-oriented limitations on copyright. The WTO Panel Report on Section 110(5) of the U.S. Copyright Act,98 marks the first time the international adjudicative

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See, e.g., Singapore FTA, art 16.4.1. See id., art.16.4.2. 96 See id., art.16.4. 3. 97 Copyright Regulations 2002, art. 21. 98 See Panel Report, supra note 4. In this dispute, the European Union claimed that § 110(5)(A) and (B) of the U.S. Copyright Act violated, inter alia, Art. 13 of the TRIPs Agreement, namely the three-step test. 95

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body has interpreted the three-step test.99 The Panel Report elucidates the nature and scope of the three-step test and provides insightful guidance as to how the test could be applied in measuring the legality of copyright limitations. This Part, therefore, first considers whether the copyright limitations selected below, for example the fair use doctrine, can meet the conditions set out in the three-step test. Moreover, this inquiry only examines the validity of a selected limitation on copyright by comparing it with only one condition set forth in the three-step test. This is because the three-step test is applied in a cumulative manner and, thus, the violation of any condition set forth therein would result in invalidation of the copyright limitation concerned. A. THE FIRST PRONG

1. Its Nature and Scope The first part of the three-step test mandates that the limitations on copyright shall be “confined to certain special cases.” According to the Panel Report, this condition implicates the following three elements as essential. First, limitations on copyright provided for in national legislation should be “clearly defined.”100 This requirement “guarantees a sufficient degree of legal certainty.”101 Nonetheless, it is not necessary for national legislation to “identify explicitly each and every possible situation to which the exception could apply, provided that the scope of the exception is known and particularized.”102 Second, limitations on copyright should also be “narrow in its scope and reach.”103 This means limitations “must be limited in its field of application or exceptional in its scope.” Put differently, in order to guarantee a sufficient degree of legal certainty, a limitation should be maintained in a quantitatively and qualitatively narrow way.104 Third, the examination of public policies underlying a limitation is not a necessary part of the inquiry into whether the first condition of the three-step test is met.105 A finding that the above-mentioned two requirements are met will suffice to show a given limitation’s compliance with the first prong of the three-step test, even though no public policy underlying the limitation in question could be discerned.106 However, the avowed public policies purpose embodied in the limitation “may be useful from a factual perspective for making inferences about the scope of a limitation or exception or the clarity of its definition.”107 This means that the public policy scrutiny is of “subsidiary relevance” to the inquiry into whether the first condition of the three-step test is met. For example, the Panel Report, after examining the public policies Section 110(5) of the U.S. Copyright Act, concluded that its legislative history “indicate an intention of establishing an exception with a narrow scope.”108 It seems that the first prong of the three-step test is construed by the Panel Report in a 99 See Jane Ginsburg, Toward Supranational Copyright Law? The WTO Panel Decision and the Three Step Test for Copyright Exceptions, 187 Revue Internationale du Droit d’Auteur 3, 5 (2001). 100 Panel Report, supra note 4, ¶¶ 6.108 &. 6.112. 101 Id., ¶ 6.108. 102 Id. 103 Id., ¶¶ 6.109 & 6.112. 104 Id., ¶ 6.109 (“In other words, an exception or limitation should be narrow in a quantitative as well as a qualitative sense.”). 105 Id., ¶ 6.112 (“The wording of Article 13’s first condition does not imply passing a judgment on the legitimacy of the exceptions in dispute.”). 106 Id. (pointing out that “a limitation or exception may be compatible with the first condition even if it pursues a special purpose whose underlying legitimacy in a normative sense cannot be discerned”). 107 Id. 108 Id., ¶ 6.157.

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correct way. Both the European Union and the United States, the two parties involved in the dispute, admitted that a copyright limitation must be “clearly defined and narrow in its scope and reach” in order to achieve the full compliance with first condition.109 Moreover, the Panel Report’s construction has won overwhelming support by commentators. For instance, Jane Ginsburg argues that the first prong of the three-step test only accommodates limitations that “are sufficiently narrow” and there is no need to pursue “normative inquiry” into their underlying public policy.110 Sam Ricketson changed his original position that the first prong entails the inquiry into “some reason of public policy.”111 After learning of the Panel Report’s construction, he now “find[s] it difficult, and indeed unnecessary, to maintain [his] earlier interpretation of the expression ‘certain special cases’ as requiring also that these have an underlying public policy justification.”112 The Panel Report’s construction of the first prong of the three-step test appears reasonable. 2. Fair Use Doctrine The condition that requires copyright limitations be “clearly defined” and “narrow in scope and reach,” calls into question whether the first prong of the three-step test will strike down the copyright limitations that are by nature flexible and open-ended. This Part examines whether the fair use doctrine is in line with the three-step test. To so do, it first maps the nature and scope of the fair use doctrine as codified in Section 107 of the U.S. Copyright Act 1976. It then juxtaposes Section 107 and relevant judicial decisions with the first prong of the three-step test in order to show whether the fair use doctrine is “clearly defined” and “narrow in scope and reach.” a. Nature and Scope of the Fair Use Doctrine (1) Purposes of Codification First and foremost, the legislative purpose behind Section 107 connotes that the codification of the fair use doctrine is by no means intended to shape a fine-grained contours of the doctrine. Historically, the fair use doctrine was first announced in U.S. copyright law by Folsom v. Marsh,113 a decision written by Justice Story in 1841. Since then, gallons of ink have been devoted to delineating the proper contours of this doctrine in a host of cases.114 Over one hundred years of judicial development of and commentary on the nature of the fair use doctrine, however, has not produced a consistent and clear-cut definition of this doctrine,115 giving rise to a “long controversy over the related problems of fair use.”116 It was not until 1976 that this judicially made doctrine was given express statutory recognition in the U.S. Copyright Act. Obviously, the codification aimed to dispel the discrepan109 According to the Panel Report, the United States “acknowledges that the essence of the first condition is that the exceptions be well-defined and of limited application.” See id., ¶ 6.103. With respect to the European Union, it is submitted that “an exception has to be well-defined and narrow in scope to meet the requirement under the first condition.” See id., ¶ 6.104. 110 Ginsburg, supra note 99. 111 Ricketson, supra note 24, at 482. 112 Sam Ricketson, The Three-Step Test, Deemed Quantities, Libraries and Closed Exceptions 31 (2002). 113 9 F. Cas. 342 (C.C.D. Mass. 1841) (No. 4901). See also Harper & Row, 471 U.S. at 550 (1985) (“As early as 1841, Justice Story gave judicial recognition to the [fair use] doctrine . . . .”). 114 For an examination of these cases, see William F. Patry, The Fair Use Privilege in Copyright Law 19–62 (1995). 115 House Report, H.R. Rep. No. 94-1476, 94th Cong., 2d Sess. 65–66 (1976) (“Al-though the courts have considered and rule upon the fair use doctrine over and over again, no real definition of the concept has ever emerged.”). 116 Id.

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cies in the judicial construction of the fair use doctrine so as to inject some degree of certainty and predictability into its application.117 While the codification was indeed imbued with the aforementioned ambition, Congress nevertheless did not intend to shape the fair use doctrine as “bright-line rules”118 governing the resolution of all the tricky problems that are likely to cloud the judicial ruling. The reasons why Congress preserved the malleability of the doctrine are twofold: First and foremost, the fair use doctrine is seen as “an equitable rule of reason.”119 Thus, it is impossible to render a “generally applicable definition,” given that “each case raising the question must be decided on its own facts.”120 Second, the fair use doctrine is also regarded as an embodiment of “law and fact.”121 As a panacea for evaluating the lawfulness of the use of works, the doctrine per se should be capable of dealing with an ocean of different circumstances under which the access to and use of works are achieved. Therefore, “the endless variety of situations and combinations of circumstances that can arise in particular cases precludes the formulation of exact rules in the statute.”122 The combination of these two factors led the Congress to shy away from proffering a fine-grained definition of the fair use doctrine.123 On the one hand, what were supposed to be itemized in Section 107 are merely the relevant factors gleaned from prior judicial experience dealing with fair use issues.124 In this sense, the codification was not intended to “change, narrow, or enlarge [the doctrine] in any way.”125 At the same time, a parallel objective of the codification was to make the wording of Section 107 flexible and broad enough to confer upon courts the considerable discretion to “adapt the doctrine to particular situations on a case-by-case basis.”126 On this basis, Section 107 is designed to work in tandem with the judiciary so as to “accommodate new technological innovations.”127

117 Id. (pointing out that the criteria for deciding fair use had been “stated in various ways” by the pre-1976 courts and Section 107 “offers some guidance to users in determining when the principles of the doctrine apply.”). 118 See Sony, 464 U.S. at 450 (noting that Congress had “eschewed a rigid, bright-line approach to fair use”). The Sony opinion in this respect has been consistently endorsed by the Super Court’s decisions pertaining to fair use. See Harper & Row, 471 U.S. at 588; Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 577 (1994) (pointing out that “[t]he task of [section 107] is not be simplified with bright-line rules”) [hereinafter Campbell]. See also, Nimmer on Copyright § 13.05[A](13–159) (arguing that nothing in Section 107 provides “a rule that may automatically be applied in deciding whether any particular use is ‘fair’”). 119 House Report, supra note 115. This vision of the fair use doctrine has been reaffirmed by the Supreme Court’s decisions. See Sony, 464 U.S. at 448; Harper & Row, 471 U.S. at 588. 120 House Report, supra note 115; see also Time Inc. v. Bernard Geis Assocs., 293 F. Supp. 130, 144 (S.D.N.Y. 1968) (“The doctrine is entirely equitable and is so flexible as virtually to defy definition.”); Michael J. Madison, A Pattern-Oriented Approach to Fair Use, 45 Wm. & Mary L. Rev. 1525, 1597 (2004) (arguing that “the ‘equitable’ nature of the doctrine renders it incapable of precise definition”). 121 Harper & Row, 471 U.S. at 560 (“Fair use is a mixed question of law and fact.”); Nimmer on Copyright § 13.05[A](13–159) (“Fair use is said to constitute a mixed issue of law and fact, but what facts will be sufficient to raise this defense in any given case is not easily answered.”). 122 House Report, supra note 115. 123 See Nimmer on Copyright § 13.05[A](13–158) (“Section 107 does not attempt to define ‘fair use.’”). 124 Harper & Row, 471 U.S. at 549 (“The statutory formulation of the defense of fair use in the Copyright Act reflects the intent of the Congress to codify the common-law doctrine.”). 125 House Report, supra note 115. 126 Id. (emphasis added); Sony, 464 U.S. at 450 (citing Hours Report); Harper & Row, 471 U.S. at 560 (“The drafters resisted pressures from special interest groups to create presumptive categories of fair use, but structured the provision as an affirmative defense requiring a case-by-case analysis.”); Campbell, 510 U.S. at 577 (holding that the task of the codification “like the doctrine it recognizes, calls for case-by-case analysis”). 127 House Report, supra note 115; Atari Games Corp. v. Nintendo of Am., Inc., 975 F.2d 832, 843 (Fed. Cir. 1992) (“The bill endorses the purpose and general scope of the judicial doctrine of fair use, but there is no disposition to freeze the doctrine in the statute, especially in a period of rapid technological change.”).

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(2) Structure of Codification Informed by the aforementioned legislative purpose of codifying the fair use doctrine, the structure of Section 107 is inevitably shaped in a flexible and open-ended manner. On the one hand, the list of the specific examples of presumptively fair use (i.e., criticism, comment, news reporting, teaching, scholarship, or research128) is ostensibly non-exhaustive.129 This is because Congress intended to preserve the broad and fact-specific nature the fair use doctrine130 and to channel to the courts to base the fair use analysis on the consideration of four factors listed in the other part of Section 107.131 Moreover, Section 107 tacitly allows courts to instill into their fair use scrutiny any relevant factors other than the four listed in Section 107. In doing so, it does not provide any hint of the benchmark with which courts can channel additional factors into the fair use analysis. Hence, ample wiggle-room has been left to courts in deciding other relevant factors that can be brought in play. To date, courts have considered “public benefit,”132 “First Amendment,”133 and “the way in which the defendant use the allegedly infringing work”134 as the additional factors. (3) Application of Four Factors The inconsistencies in the courts’ construction of the four factors itemized in Section 107 further heighten the ambiguity that surrounds the fair use doctrine. i. The First Factor The first factor directs courts to consider the purpose and character of the secondary use. In this respect, courts routinely weigh by either of the two criteria—whether the allegedly infringing copies are made for a commercial/noncommercial use and whether copies serve a transformative purpose. In some cases, the defendant’s state of mind has also been taken into account. In considering these sub-factors, however, courts have not dispelled any “murky waters” lingering in this area of their fair use analysis. (a) The Commercial/Noncommercial Distinction. With respect to the nature of commercial purpose, Harper & Row and its progeny center their inquiry on “whether the user stands to profit from exploitation of the copyrighted material without paying the customary price.”135 Therefore, a user’s indirect profit-making motivation,136 including 128

See 17 U.S.C. § 107. See Harper & Row, 471 U.S. at 561 (“The listing was not intended to be exhaustive, or to single out any particular use as presumptively a ‘fair’ use.”) (citation omitted); Nimmer on Copyright § 13.05[A]13–159. 130 Campbell, 510 U.S. at 584 (“Congress resisted attempts to narrow the ambit of this traditional enquiry by adopting categories of presumptively fair use, and it urged courts to preserve the breadth of their traditionally ample view of the universe of relevant evidence.”). 131 See 17 U.S.C. § 107. 132 See, e.g., Sony, 464 U.S. at 454 (pointing out that the conclusion that time-shifting is fair use is “buttressed by the fact that to the extent time-shifting expands public access to freely broadcast television programs, it yields societal benefits.”); Mattel v. Walking Mountain Prods., 353 F.3d 792, 806 (9th Cir. 2003) (finding fair use based partially upon the policy that “the public benefit in allowing artistic creativity and social criticism to flourish is great.”) [hereinafter Mattel]. 133 Wojnarowicz v. American Family Ass’n, 745 F. Supp. 130, 146 (S.D.N.Y. 1990) (concluding that “it is highly significant to the scope of fair use that plaintiff accepted public funds to support his artwork. This fact broadens the scope of the fair use exemption because of the strong public interest, protected by the First Amendment, in free criticism of the expenditure of federal funds.”). 134 DC Comics Inc. v. Unlimited Monkey Bus., Inc., 598 F. Supp. 110, 119 (D.C. Ga. 1984). 135 Harper & Row, 471 U.S. at 562. 136 See, e.g., A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1015 (9th Cir. 2001) (“Direct economic benefit is not required to demonstrate a commercial use. Rather, repeated and exploitative copying of copyrighted works, even if the copies are not offered for sale, may constitute a commercial use.”) [hereinafter Napster]; American Geophysical Union v. Texaco, Inc., 37 F.3d 881, 890 (2d Cir. 1994) (finding that the commerciality factor disfavor 129

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the purposes of gaining illegitimate cost saving,137 recognition among his peers and authorship credit,138 is sufficient to prove the commercial nature of the use. Alternatively, Sony viewed direct profit-making motivation as the only key factor for drawing the dividing line between the commercial or noncommercial use of works, rejecting the analogy of “jewel theft” that lends support to the Harper & Row approach.139, 140 Regarding the extent to which the commerciality factor can determine the outcome of fair use analysis, Sony141 and Harper & Row142 held that any commercial use of works ought to be regarded as “presumptively unfair.” A series of later decisions,143 including Campbell, however, did not buy into this conclusion and contended that “hard evidentiary presumption”144 of this type “would swallow nearly all of the illustrative uses listed in the preamble paragraph of § 107.”145 Furthermore, it was submitted that the commercial or noncommercial character of a work “is not conclusive,” and this factor shall be “weighed along with others in fair use decisions.”146 (b) Transformative/Nontransformative Use Distinction. Whether the use of works is transformative in nature is reckoned as a crucial factor in deciding a potential finding of fair use.147 Transformative use, according to Campbell, consists of the acts of “adding something new, with a further purpose or different character, [and alteration] of the first with new expression, meaning, or message.”148 Yet, Campbell did not articulate a benchthe defendant because it “reaps at least some indirect economic advantage from its photo-copying scholarly articles) [hereinafter Texaco]. 137 Napster, 239 F.3d at 1015 (“[C]ommercial use is demonstrated by a showing that repeated and exploitative unauthorized copies of copyrighted works were made to save the expense of purchasing authorized copies.”); Worldwide Church of God v. Philadelphia Church of God, 227 F.3d 1110, 1118 (9th Cir. 2000) (holding that church that copied reli-gious text for its members is commercial use because it almost gains an advantage or benefit at no cost, e.g., the increase in the number of church members). 138 Weissmann v. Freeman, 868 F.2d 1313, 1324 (2d Cir. 1989) (“Particularly in an academic setting, profit is ill measured in dollars. Instead, what is valuable is recognition because it so often influences professional advancement and academic tenure. The absence of a dollars and cents profit does not inevitably lead to a finding of fair use.”). 139 This analogy was put forward by Professor Laurence Tribe, who argued that: “jewel theft is not converted into a noncommercial veniality if stolen jewels are simply worn rather than sold.” Sony, 464 U.S. at 450. 140 See id. at 450 (rejecting the argument that “consumptive uses of copyrights by home VTR users are commercial even if the consumer does not sell the homemade tape because the consumer will not buy tapes separately sold by the copyright holder”). 141 See id. at 451 (“every commercial use of copyrighted material is presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright”). 142 Harper & Row, 471 U.S. at 540 (“The fact that the publication was commercial as opposed to nonprofit is a separate factor tending to weigh against a finding of fair use.”). 143 See, e.g., Hustler Magazine, Inc. v. Moral Majority, Inc., 796 F.2d 1148, 1552 (9th Cir. 1986) (“Even assuming that the use had a purely commercial purpose, the presumption of unfairness can be rebutted by the characteristics of the use”); Maxtone-Graham v. Burtchaell, 803 F.2d 1253, 1262 (2d Cir. 1986) (holding that the commerciality factor is not controlling in the fair use analysis and “[t]he commercial nature of a use is a matter of degree, not an absolute . . . .”); Rogers v. Koons, 960 F.2d 301, 309 (2d Cir. 1992) (holding that “whether the profit element of the fair use calculus affects the ultimate determination of whether there is a fair use depends on the totality of the factors considered”); Sega Enters. Ltd. v. Accolade, Inc., 977 F.2d 1510, 1522 (9th Cir. 1992) (arguing that “the presumption of unfairness that arises in [commercial use] cases can be rebutted by the characteristics of a particular commercial use”) [hereinafter Sega]; Texaco, 37 F.3d at 889 (upholding the undispositive nature of the commerciality factor). 144 Campbell, 510 U.S. at 570. 145 Id. at 584; see also Sony, 464 U.S. at 592 (Brennan, J., dissenting) (drawing the same conclusion). 146 Campbell, 510 U.S. at 584. 147 See id. (holding that “the more transformative the new work, the less will be the significance of other factors, like commercialism”); Mattel, 353 F.3d at 801–02; SunTrust Bank v. Houghton Mifflin Co., 268 F.3d 1257, 1271–74 (11th Cir. 2001). 148 Campbell, 510 U.S. at 584.

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mark for measuring the degree to which the use of work is “transformative” enough to be regarded as fair use. The absence of such a benchmark leads courts to swing between whether transformative use should be strictly be confined to the direct alteration of the original work at issue,149 which considerably adds new content to the original,150 or broadly include the use of work that simply adds new purposes and characters to the original.151 (c) Defendant’s state of mind. Swayed by the notion of “fairness” that underpins the fair use doctrine,152 Harper & Row states that “[f]air use presupposes good faith and fair dealing,”153 making it impossible for users with “unclean hands”154 to invoke the fair use defense.155 On the contrary, courts have also stated that bad faith is no bar to finding fair use. It is suggested in Campbell that “[g]ood faith should not be a factor in weighing fair use defense.”156 Following Campbell, the court in NXIVM Corp. v. Ross Institute held that “[f]air play is no defense to infringement; Bad faith should be no obstacle to fair use.”157 ii. The Second Factor The second factor listed in Section 107 directs the court to consider “the nature of the copyrighted work.” It seems that this factor is less contentious. Courts routinely examine

149 Video Pipeline, Inc. v. Buena Vista Home Entm’t, Inc., 342 F.3d 191, 198–99 (3d Cir. 2003) (holding that “[t]o the extent that the character and purpose of the clip previews and the original full-length films diverge, [th]e clips share the same character and purpose as Disney's derivative trailers”); Los Angeles News Serv. v. Reuters Television Int’l, Ltd., 149 F.3d 987, 993 (9th Cir. 1998) (“Although defendants’ service does have a news reporting purpose, its use of the works was not very transformative. Reuters copies footage and transmits it to news reporting organizations; Reuters does not explain the footage, edit the content of the footage, or include editorial comment.”). 150 This view is based upon the holding in Folsom v. Marsh that fair use “must be a real, substantial condensation of the materials, and intellectual labor and judgment bestowed thereon; and not merely the facile use of the scissors, or extracts of the essential parts, con-stituting the chief value of the original work.” 9 F. Cas. 342, 345 (C.C.D. Mass. 1841) (No. 4901) (emphasis added). For a case that supports this view in dealing with transformative use issues, see Los Angeles News Serv. v. CBS Broad., Inc. 305 F.3d 924, 938–39 (concluding that it is not transformative use which does not add anything new to the original work, citing Folsom v. Marsh). The court also asserted that Campbell confirms this standard. Id. at 939. 151 See, e.g., Kelly v. Arriba Soft Corp., 336 F.3d 811, 818 (2003) (holding that displaying search results as “thumbnail” version (much smaller, lower-resolution images) of copyrighted pictures by search engine is transformative use, because it “serv[es] an entirely different function”than the copyright holder’s original images). 152 Judge Mansfield held that “[n]o court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.” See Holman v. Johnson, 1 Cowp. 341, 343 (1775); see also Time Inc. v. Bernard Geis Assocs., 293 F. Supp. 130, 144 (S.D.N.Y.1968) (“Despite [exclusive] rights, the courts have nonetheless recognized that copying or other appropriation of a copyrighted work will not entail liability if it is reasonable or ‘fair.’”) (emphasis added). 153 Harper & Row, 471 U.S. at 562–63 (“Knowing exploitation of purloined manu-script not compatible with ‘good faith’ and ‘fair dealings’ underpinnings of fair use doc-trine.”); see also Marcus v. Rowley, 695 F. 2d 1171, 1176 (9th Cir. 1983) (holding that “fair use presupposes that the defendant has acted fairly and in good faith”). 154 See, e.g., Iowa State Univ. Research Found., Inc. v. American Broad. Cos., Inc., 621 F.2d 57, 62 (2d Cir. 1980) (“Our conclusion that the fair use defense is unavailable to [the defendant] is bolstered by the equitable considerations”); Atari Games, 975 F.2d at 832, 843 (“To invoke the fair use exception, an individual must possess an authorized copy of a literary work.”) (emphasis added). 155 Jane Ginsburg, Copyright Legislation for the “Digital Millennium,” 23 Colum.-VLA J.L. & Arts 137, 140 (1999) (observing that “it may be fair use to make nonprofit research photocopies of pages from a lawfully acquired book; it is not fair use to steal the book in order to make the photocopies”). 156 Campbell, 510 U.S. at 585 n.18; see also Pierre Leval, Toward a Fair Use Standard, 103 Harv L. Rev. 1105, 1126–127 (1990) (arguing that good faith is irrelevant to fair use analysis); Lloyd Weinreb, Fair’s Fair: A Comment on The Fair Use Doctrine, 103 Harv. L. Rev. 1137, 1147 (1990) (“The utilitarian worth of the use, not the user’s motive, is all that matters so far as copyright is concerned.”). 157 NXIVM Corp. v. Ross Inst., 364 F.3d 471 (2d Cir. 2004). This case indicates that defendant’s bad faith could be altogether ignored in the fair use analysis.

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two issues: whether the work is published or not; and whether the work is factual or creative.158 iii. The Third Factor The third factor entails the consideration of “the amount and substantiality of the portion used in relation to the copyrighted work as a whole.” Although courts do not set up any ceiling for the amount of taking, they divide with regard to the quantitative and qualitative standards that are embraced for gauging the third factor. As to the quantitative standard, first of all, there is a split as to whether wholesale copying, would be allowed. Sony and some other decisions held that fair use can accommodate verbatim copying of the entire work.159 In sharp contrast, guided by Harper & Row,160 some courts have insisted that “[w]hile ‘wholesale copying does not preclude fair use per se,’ copying an entire work ‘militates against a finding of fair use.’”161 Moreover, the use of quantitative standard has led to a further rift over the permissible amount of taking in the case of parody. While near-verbatim copying of the popular song “Pretty Woman”162 and the substantial appropriation of the famous novel Gone with the Wind 163 are allowed, copying of a well-known principal character of “the Nightmare film series” into the music video is deemed too excessive to be within the limit of the third factor.164 With respect to graphic images, wholesale copying of Barbie and Mickey Mouse generates different legal consequences. While the former was deemed to fall within the ambit of the third factor,165 the latter was not.166 On the other hand, swing positions as to the qualitative standard have appeared in fair use decisions. It seems that the majority of court judgments are in agreement about the inference that the qualitative standard, rather than the quantitative standard, governs the third factor analysis.167 Accordingly, if the copied portion is unquestionably the heart of the copyrighted work, even a small amount of copying would tilt the third factor against the defendant.168 158

See, e.g., Harper & Row, 471 U.S. at 563–64. See Sony, 464 U.S. at 450–51; Sega, 977 F.2d 1526–27; Williams & Wilkins Co. v. United States, 487 F.2d 1345 (1973). 160 Harper & Row, 471 U.S. at 565. 161 Worldwide Church of God, 227 F.3d at 1118 (internal quotation marks omitted); Kelly v. Arriba Soft, 227 F.3d at 820–21. 162 Campbell, 510 U.S. at 588 (“Parody’s humor, or in any event its comment, nec-essarily springs from recognizable allusion to its object through distorted imitation . . . . When parody takes aim at a particular original work, the parody must be able to ‘conjure up’ at least enough of that original to make the object of its critical wit recognizable.”) (emphasis added). 163 SunTrust Bank, 268 F.3d at 1271–274. By relying upon Campbell, the court held that defendant’s taking of characters, plot and major scenes from Gone with the Wind did not violate the third factor. 164 New Line Cinema Corp. v. Bertlesman Music Group, Inc., 693 F. Supp. 1517, 1527 (S.D.N.Y. 1988) (“Because [the character copied] is a widely recognized major character in the Nightmare series, very little would have been needed to bring the image of [the character at issue] and the Nightmare series into the minds of the music video viewers.”). 165 See Mattel, 353 F.3d at 792. In this case, the defendant’s parody copied the Barbie figure and head. The court held that “[w]e do not require parodic works to take the absolute minimum amount of the copyrighted work possible.” Id. at 804. 166 See Walt Disney Prods. v. Air Pirates, 581 F.2d 751 (9th Cir. 1978). In this case, the defendant published two comic cartoon magazines entitled “Air Pirates Funnies.” They pictorially parodized Walt Disney company’s cartoon characters, like Mickey Mouse and Donald Duck, as “as active members of a free thinking, promiscuous, drug ingesting counter-culture.” Id. at 753. The court held that “By copying the images in their entirety, defendants took more than was necessary to place firmly in the reader's mind the parodied work and those specific attributes that are to be satirized.” Id. at 758. 167 Goldstein on Copyright 12:64 (2005) (arguing that “[q]ualitative measures outweigh quantitative measures in determining the weight to be given the third factor.”). 168 See, e.g., Harper & Row, 471 U.S. 564–66. 159

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Some other courts, however, do not buy into this position. To them, the near-verbatim copying, as well as taking the heart of the work for a parodic purpose, could be justified because parodists need to “conjure up” the original work.169 In the Campbell decision’s terms, “the extent of permissible copying varies with the purpose and character of the use.”170 iv. The Fourth Factor The fourth factor begs the question of “effect of the use upon the potential market for value of the copyrighted work.” The trajectory of judgments shows that no principled way to analyze this factor has been produced by the courts. Generally speaking, courts’ decisions fall into four camps in the spectrum of their analysis: (1) “far left”; (2) “left”; (3) “center”; and (4) “right.”171 The first two camps center upon the examination of the economic impact on copyright holders’ current market rather than potential market or both. The “far left” judgments chiefly rule that, even if the user enters into economic competition with the right holder, no economic losses incurred on the latter can be assumed or ascertained. This is because the fourth factor does not allow the right holder to weed out the legitimate competition mounted by the user.172 On the other hand, the “left” group decisions reckon that “It is wrong to measure the detriment to plaintiff by loss of presumed royalty income—a standard which necessarily assumes that plaintiff had a right to issue licenses.”173 Therefore, the fourth factor scrutiny should be limited to the impact on the current market.174 The “center” group decisions consider the economic impact on both the current and potential markets, or the potential market alone. For example, Harper & Row holds that the fourth factor inquiry “must take account not only of harm to the original but also of harm to the market for derivative works.”175 With respect to the noncommercial use of works, Sony centers upon the consideration of the impact on the potential market.176 According to this group of decisions, the inquiry into “some meaningful likelihood of future harm”177 is sufficient. Therefore, it seems that the right holder needs to demonstrate that there is a very strong likelihood that the potential market will be “traditional, reasonable, or likely to be developed.”178 Only showing a tenuous connection between the current and potential markets would not necessarily result in the harm on the potential market. Nor could the potential market be deemed presumptively in existence. The “right” group decisions envision that the harm to the potential market is the core of the fourth factor inquiry. In Iowa State University Research Foundation, Inc. v. American Broadcasting179 the Second Circuit held that the defendant’s copying and broadcast of a small portion of a student-produced film biography of a champion wrestler usurped an extremely significant market that was then controlled by the defendant and other derivative markets in which the plaintiff could license their film.180 Yet 169

See Campbell, 510 U.S. at 586–89; Mattel, 353 F.3d at 801–02; SunTrust Bank, 268 F.3d at 1271–74. Campbell, 510 U.S. at 586–87 171 In the following discussion, I simply summarize different judicial rulings on this issue, and the uses of the terms like “left” and “right” have no political connotations. 172 See Sega, 977 F.2d at 1523–24. 173 See Williams & Wilkins Co. v. United States, 487 F.2d 1345, 1357 n.19 (1973). 174 See Goldstein on Copyright 12:69 (2005). 175 Harper & Row, 471 U.S. at 568. 176 Sony, 464 U.S. at 451 (“What is necessary is a showing by a preponderance of the evidence that some meaningful likelihood of future harm exists.”). 177 Id. 178 Texaco, 37 F.3d at 897. 179 621 F.2d 57 (2d Cir. 1980). 180 Id. at 61. 170

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before making such an inference, the court did not inquire into whether the plaintiff had any intention to exploit the film in question through a licensing agreement. Rather, it seems that the court assumes that once the work is finished, its derivative market necessarily exists. It seems that such an assumption has been tacitly accepted by UMG Recordings v. MP3.com181 and Los Angeles Times v. Free Republic,182 in which the court did not examine whether the plaintiffs had the intention to open up the derivative market envisaged by the court before the suits were filed. Judging from Section 107’s legislative purpose and structure, and the discrepancies in courts’ approaches to apply the four factors, the fair use doctrine is indeed vague, flexible, and open-ended. Not surprisingly, it has been lamented that “the issue of fair use . . . is the most troublesome in the whole law of copyright”183 and “[n]o doctrine in copyright is less determinate than fair use.”184 This suggests that the fair use doctrine is incapable of acting as well-shaped radar “separating the fair use sheep from the infringing goats.”185 Therefore, the malleability of the fair use doctrine, as many commentators have pointed out, runs sharply counter to the letter and spirit of the first prong of the three-step test.186 3. Other Common-Law Defenses The fair use doctrine’s violation of the first prong of the three-step test begs the question of whether the uncodified common-law doctrines constraining the exercise of copyright run afoul of the first prong. As Justice Souter has pointed out, “[c]ommon-law method tends to pay respect instead to detail, seeking to understand old principles afresh by new examples and new counter examples.”187 Common-law doctrines are generally flexible and open-ended in nature, and thereby are vulnerable to the three-step test challenge. As will be shown below, at stake are the copyright misuse doctrine and public interest defense, two quintessential common-law doctrines available in the United States and United Kingdom, respectively. a. Copyright Misuse Doctrine Compared with the long-entrenched fair use doctrine, the copyright misuse doctrine is a relatively “young” defense aimed at neutralizing the monopolistic control of works that may well run contrary to the promotion of public interest. Drawing upon the equitable doctrine of unclean hands188 and patent misuse doctrine,189 Lasercomb America, Inc. v. Reynolds190 for the first time stated that misuse of copyright was a valid defense to copyright infringement. As long as the right holder uses his copyright “in a manner violative of the public policy embodied in the grant of a copyright,”191 his conduct would amount to copyright misuse and, therefore, the defendant in question would not be held liable for

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92 F. Supp. 2d 349, 351 (S.D.N.Y., 2000). 54 U.S.P.Q.2d 1453, 1469-71 (C.D. Cal. 2000). 183 Dellar v. Samuel Goldwyn, Inc., 104 F.2d 661 (2d Cir. 1939). 184 Goldstein on Copyright 12:3 (2005). 185 See Campbell, 510 U.S. at 586. 186 See, e.g., Tyler G. Tyler, Note, What’s Fair Here Is Not Fair Everywhere: Does the American Fair Use Doctrine Violate International Copyright Law, 51 Stan. L. Rev. 1633, 1660 (1999); Robert Burrell & Allison Coleman, Copyright Exceptions: The Digital Impact 270–72 (2005). 187 Washington v. Glucksberg, 521 U.S. 702, 770 (1997) (Souter, J., concurring). 188 Goldstein on Copyright 11:40 (2005) (“Copyright misuse, like patent misuse, originated in the equitable defense of unclean hands.”). 189 See Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 493 (1942) (courts “may appropriately withhold aid where the plaintiff is using the right asserted contrary to the public interest.”). 190 911 F.2d 970 (4th Cir. 1990) [hereinafter Lasercomb]. 191 Id. at 978. 182

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the alleged infringing act.192 Since then, the copyright misuse doctrine has been applied to the cases in which the right holder is deemed to be abusing economic rights, e.g., leveraging monopoly to commit anticompetitive action that facilitates the control of the areas outside the monopoly,193 or abusing judicial process including lodging an action to achieve an “improper extension and overstatement ” of copyright.194 At the same time, courts have made clear certain standards for determining misuse of copyright. For example, there is no need for the defendant to prove whether the right holder has violated antitrust law195 or the injury caused by the purported conduct of copyright misuse.196 Yet the copyright misuse doctrine is still fraught with uncertainties. As Goldstein has pointed out, this doctrine “is still in its infancy . . . and the challenge for courts is to mark the doctrine’s boundaries with some measure of predictability.”197 The uncertainty surrounding the copyright misuse doctrine, by and large, stems from the potentially indeterminate nature of the copyright law’s public policy, the violation of which results in misuse of copyright. One should note that the public policy underlying copyright law, for example “to increase the store of human knowledge and arts”198 or “to stimulate artistic creativity for the general public good,”199 is by nature very broad. This would give rise to at least the following three problems, which make the copyright misuse doctrine relatively unpredictable and amorphous.200 First, it remains unclear what specific types of improper exercise of copyright can constitute misuse of the right concerned. Like the fair use doctrine, courts are reluctant to finalize a complete list that contains various copyright misuse acts. While some courts would spontaneously find misuse of copyright without the petition for such a finding made by the party in question,201 some are not inclined to do so even in the circumstance where the right holders’ violation of copyright public policy have been found.202 Second, the role of public policy in the copyright misuse adjudication seems relatively fluid. For example, one decision on copyright misuse is not rendered based upon the consideration of copyright public policy that underpins the copyright misuse doctrine.203 192

Id. at 972–73. See, e.g., id. at 976–79; DSC Commc’ns Corp. v. DGI Technologies, Inc., 81 F.3d 597, 601–02 (5th Cir. 1996) [hereinafter DSC Communications]; Practice Mgmt. Info. Corp. v. American Med. Ass’n, 121 F.3d 516, 520–21 (1997), amended, 133 F.3d 1140 (9th Cir. 1998) [hereinafter Practice Management Information]; Alcatel USA. v. DGI Technologies, 166 F.3d 772, 792–95 (5th Cir. 1999); Napster, 239 F.3d at 1026 (“The misuse defense prevents copyright holders from leveraging their limited monopoly to allow them control of areas outside the monopoly”). 194 See, e.g., Qad., Inc. v. ALN Assocs., Inc., 770 F. Supp. 1261,1266 (N.D. Ill. 1991), aff’d in part, dismissed in part, 974 F.2d 834 (7th Cir. 1992) [hereinafter Qad]; Assessment Technologies of WI, LLC v. WIREdata, Inc., 350 F.3d 640, 647 (7th Cir. 2004) [hereinafter Assessment Technologies]. 195 Lasercomb, 911 F.2d at 979 (“The question is not whether the copyright is being used in a manner violative of antitrust law (such as whether the licensing agreement is “reasonable”), but whether the copyright is being used in a manner violative of the public policy embodied in the grant of a copyright.”). 196 Id.; see also Qad, 770 F. Supp. at 1267; Video Pipeline, Inc. v. Buena Vista Home Entm’t, Inc., 342 F.3d 191, 204 (3d Cir. 2003) (“To defend on misuse grounds, the alleged infringer need not be subject to the purported misuse.”) [hereinafter Video Pipeline]. 197 Goldstein on Copyright 11:41 (2005). 198 Lasercomb, 911 F.2d at 976. 199 Video Pipeline, 342 F.3d at 204; DSC Communications, 81 F.3d at 601; Qad, 770 F. Supp. at 1266–67; Assessment Technologies, 350 F.3d at 647. 200 Note, Clarifying the Copyright Misuse Defense: The Role of Antitrust Standards and First Amendment Values, 104 Harv. L. Rev. 1289, 1308 (1991) (“[The] cryptic ‘public policy’ charge left open the question of exactly what courts should be trying to accomplish when adjudicating misuse defenses.”). 201 See, e.g., Assessment Technologies, 770 F. Supp. at 1266. 202 See, e.g., Sega Enters. v. Accolade, Inc., 977 F.2d 1510, 1523–24 (9th Cir. 1992); Sony Computer Entm’t, Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000). 203 See, e.g., Practice Management Information, 121 F.3d at 521. 193

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Third, puzzles and perplexities still persist throughout the inquiry into the extent to which an improper exercise of copyright would result in a violation of public policy. The court in Video Pipeline held that the right holder’s act of restricting the user’s right to level criticism on its copyrighted films did not amount to a violation of public policy. In so doing, the court, however narrowly focused its lens on this single case.204 Rather, the court did not consider, in a broad picture, whether the conduct of this type, which is lawful in their eyes, if it becomes commonplace in the subsequent similar licensing practice (e.g., applicable to every other licensee), would actually suppress any public criticism on works and thereby trigger a violation of the public policy that shapes copyright law in ways that promote free speech. b. Public Interest Defense In the United Kingdom, the public interest defense concerns the “case where it is in the public interest that the words in respect of which another has copyright should be published without any sanction.”205 Considerable uncertainty, however, surrounds this defense. First, courts in the United Kingdom do not consistently hold that the public interest defense is indeed a general defense available to the defendant in any given infringement action. Hyde Park Residence Ltd. v. Yelland206 is generally seen as the borderline case between whether the public interest defense actually exists or not. The public interest defense, according to the pre-Yelland decisions, acted as a general defense against copyright infringement claim.207 However, the court in Yelland simply ruled that no such general defense is available in the U.K. copyright system.208 In Ashdown v. Telegraph Group Ltd,209 a post-Yelland decision, although the availability of the public interest defense was affirmed,210 the court reckoned that this defense could be invoked merely in “very rare” circumstances.211 Second, even if Yelland can be seen as having been overruled by Ashdown, it does not necessarily mean that courts in the United Kingdom have drawn clear-cut contours of the public interest defense in a way that sufficient certainty and predictability of its application are afforded. For instance, courts have not elucidated the type of, and the extent to which, information can be disclosed or published without authority. The said the definitional problem with the public interest defense stems largely from the fact that “public interest,” the essence upon which this defense is based, is not amenable to precise definition.212 Accordingly, commentators observed as follows: [The public interest] defense would be too unpredictable. That is, even if we can trust judges to arrive at the right result in any given case, the overall effect of such a defense

204

Video Pipeline, 342 F.3d at 206. Burrell & Coleman, supra note 186, at 80 (defining the public interest defense as “a defense sitting out with the statutory regime that would justify the publication of copyright material in certain circumstances”). 206 [2001] Ch. 143 (hereinafter Yelland). 207 See Lion Labs., Ltd. v. Evans, [1985] Q.B. 526. 208 See Yelland, ¶ 43 (holding that the law “does not give a court general power to enable an infringer to use another’s property, namely his copyright in the public interest.”). 209 [2002] Ch. 149 (hereinafter Ashdown). 210 See id., ¶ 56 (“[W]e think it clear that on the facts of the case he considered that there was a potential public interest defense to both breach of confidence and breach of copyright”). 211 See id., ¶¶ 47 & 59 (“It will be very rare for the public interest to justify the copying of the form of a work to which copyright attaches.”). 212 Judge Mance, in his dissenting opinion in Yelland, bluntly pointed out that “the circumstances in which the public interest may override copyright are probably not capable of precise categorization or definition.” Yelland, ¶ 83. 205

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would be to make the law uncertain. From this perspective, abandoning the relative certainty of the statutory permitted acts is a high price to pay for the flexibility.213 B. THE SECOND PRONG

1. Its Nature and Scope Pursuant to the second condition of the three-step test, any limitation on copyright should not “conflict with a normal exploitation of the work.” The Panel Report first held that normal exploitation involves “less than full use of an exclusive right” by the copyright holder.214 Moreover, normal exploitation “should be judged for each exclusive right individually.”215 The non-absolute nature of copyright and the severability of the exercise of rights, therefore, are seen as the premise to scrutinize whether the second condition of the three-step test is met. Having said that, the Panel Report concluded that a conflict with normal exploitation of the work will arise when the privileged user enters into “economic competition” with the right holder concerned. The “economic competition” should be capable of preventing the right holder from “normally extract[ing] economic value” from his copyright, thereby depriving him of “significant or tangible commercial gains.”216 Furthermore, the Report pointed out that, in examining the copyright holder’s commercial losses wrought by the privileged use of works, both their gains in the current as well as potential markets should be integrally taken in account. In this regard, the Panel elaborated three standards to consider the extent to which the economic competition between users and right holders would amount to the conflict with a normal exploitation of the work: 앫 The current exploitation of works refers to those that presently produce “significant or tangible revenue” to right holders.217 With respect to the potential exploitation of works, only circumstances in which the use of a work is likely to generate “considerable economic or practical importance” for the right holder can fall into the ambit of the “normal exploitation,”218 앫 There is a need to consider the extent to which actual users together with potential users would become the beneficiary of the allegedly invalid limitation on copyright.219 앫 A normal exploitation of works has the dynamics of expanding the copyright control commensurate with technological and market developments.220 The privileged use’s effect on the potential market opened up by technological development for new ways of exploiting works, or the changes in consumer preferences, should be taken into consideration.221 To sum up, a violation of the second prong of the three-step test will be triggered if any given limitation on copyright causes the right holder to suffer “significant or tangible” commercial losses in either their current or potential market. Because of the use of the 213

Burrell & Coleman, supra note 186, at 111 (emphases added). Panel Report, ¶ 6.167. 215 Id., ¶ 6.173. 216 Id., ¶ 6.183. 217 Id., ¶ 6.180. 218 Id. 219 Id. ¶ 6.186. 220 See id. ¶ 6.178 (“We described this aspect of normalcy as reflecting a more normative approach to defining normal exploitation, that includes, inter alia, a dynamic element capable of taking into account technological and market developments.”). 221 See id., ¶ 6.187. 214

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term “tangible,”222 the threshold for violating the second condition may be relatively low. As long as “noticeable effect”223 on market substitution can be detected, a given limitation would be invalidated by the second prong. In other words, only those that cause a de minimis economic loss to the right holder can survive the second prong’s test. Since the Panel Report centers on the protection of right holders’ economic interests and pays no heed to the users’ interest, public policy analysis simply plays no role in inquiring into the compliance with the second prong. Furthermore, the negotiating history of the three-step test lends strong support to the Panel Report’s construction of the second prong. As the record of the Stockholm Conference shows, the architects of the three-step test reckoned that “it was obvious that all forms of exploiting a work which had, or were likely to acquire, considerable economic or practical importance must in principle be reserved to the authors.”224 On the other hand, the Panel Report’s construction based upon “economic normative considerations” has won the firm support from leading commentators in the area of copyright law, though they point out that the Report fails to embrace “non-economic ‘public policy’ considerations.”225 Commentators have demonstrated that the second prong of the three-step test may strike down the copyright limitation that permits classroom performance226 and fair use exemption that permits copying, translation and display of newspaper excerpts.227 My inquiry into the chilling effects of the second prong of the three-step test, therefore, centers upon the other copyright limitations that permit private copying and reverse engineering for software interoperability. 2. Private Copying In the shadow of the second prong of the three-step test, the first limitation on copyright that will come under fire is the one that allow users to copy works for the private use purpose. To a large extent, there is de facto and de jure recognition of the limitation with respect to private copying. The reasons for the continuous existence of this limitation are twofold. On the one hand, it is believed that private copying has almost no adverse effect a on right holder’s normal exploitation of copyright.228 This creates little incentive for the right holder to sue individual users. In the analog world, the confluence of the inconvenience to copy works, the limited scope of disseminating copies, and the unavoidable degradation in the quality of copies229 naturally creates the so-called “state-of-the-art” limitation230 on reproducing and disseminating works. At the same time, it largely impels consumers to purchase, instead of copy, physical copies of works. Therefore, copyright 222 According to the Longman Dictionary of Contemporary English, one of the meanings of “tangible” is “clear enough or definite enough to be easily seen or noticed.” 223 This term is used in Sony v. Bleem. The court infers that the defendant’s the allegedly infringing act “have no noticeable effect on” the plaintiff’s ability to market their products. See Sony Computer Entm’t Am., Inc. v. Bleem, LLC, 214 F.3d 1022, 1029 (9th Cir. 2000). 224 WIPO, supra note 25, at 111. 225 Ricketson & Ginsburg, supra note 45, at 767–73. 226 See Pamela Samuelson, The U.S. Digital Agenda at WIPO, 37 Va. J. Int’l L. 402 n.185 (1997). 227 See Neil W. Netanel, The Next Round: The Impact of the WIPO Copyright Treaty on TRIPs Dispute Settlement, 37 Va. J. Int’l L. 441, 486–87 (1997). 228 See, e.g., Jane Ginsburg & Yves Gaubiac, Private Copying in the Digital Environment, in Intellectual Property and Information Law: Essays in Honour of Herman Cohen Jehoram 149 (J.C. Kabel & Gerard J.H.M. Mom eds.,1998) (arguing that “in the analogue world, private copying could be understood as non-infringing because it was de minimis”). 229 See William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 41 (2003) (“The copy may be of inferior quality and hence not a perfect substitute for the original.”). 230 See I. Trotter Hardy, Property (and Copyright) in Cyberspace, 1996 U. Chi. Legal F. 217 (1996).

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law or courts take a rather lenient control of private copying. On the other hand, copyright holders are faced with the virtually insurmountable difficulty in wiping out private copying. In most circumstances, people make copies in a place that is not accessible to others. Therefore, it is prohibitively costly for right holders to detect and then sue individual users, making it almost impossible for them to have door-to-door enforcement of copyright. The arrival of the digital age, however, has fundamentally altered the landscape that fits the private copying exemption comfortably into whole picture of copyright law. The driving force making this exemption in direct conflict with the normal exploitation of works is derived from the following two shifts in copyright law. a. Expansive Scope of Economic Right Advances in digital technology pave the way for ushering in new forms of economic rights aimed at vesting in copyright holders increased control over private copying. With the inception of the WCT and WPPT, right holders are conferred with the right of making available and legal protection of the technological measures applied by them. These forms of copyright protection beef up right holders’ ability to pursue the new business model of exploiting works. Unlike the traditional communication right regulating non-interactive and point-to-multipoint dissemination of works, the new right of making available enables copyright holders to communicate their works on an interactive and pointto-point basis. This permits them to authorize “members of the public” to access protected subject matter from “a place and at a time individually chosen by them.”231 The ramifications of setting up this new right are twofold: first, the use of works for time- or place-shifting purpose should now generally come under copyright control; and, second, the concept of “the public” has been broadened in a way that it incorporates many, if not all, who make noncommercial use of works in a private setting. At the same time, the legal protection of technological measures forbids non-permissive circumvention of access-and-copying control.232This unprecedented form of copyright protection, to a large extent, legally closes the door for exempting users from making private copying. b. Expansive Interpretation of the Marketability of Works By and large, the commercial/noncommercial distinction acts as a crucial benchmark for drawing the line between the public and private use of works.233 This is because private use is routinely noncommercial in nature and occasions almost no economic harm to the marketability of works of authorship. Therefore, courts did not hold those involved in use of works for noncommercial purposes liable. For instance, Sony ruled that “time-shifting” of copyrighted television shows with video tape recorders (VTR) constitutes fair use,234 primarily because it does not have negative effects upon the current and in particular potential market for the copyrighted works.235 Relying upon Sony, Recording Industry Association of America v. Diamond Multimedia Systems236 held that copying for space231 WCT art. 8; WPPT arts. 10 & 14. Put differently, the targeted acts of commu-nication can be measured by whether they are carried out in a manner so that any member of the public is enabled to determine individually where and/or when they wish to gain access to and use of protected subject-matter concerned. 232 See WCT art. 11; WPPT art. 18; Digital Millennium Copyright Act, (DMCA), Pub. L. No. 105–304, 112 Stat. 2860 (1998). 233 Goldstein on Copyright 12:38 (2005). 234 Sony, 464 U.S. at 454–55 (“When these factors are all weighed in the ‘equitable rule of reason’ balance, we must conclude that this record amply supports the District Court’s conclusion that home time-shifting is fair use.”). 235 Id. at 454 (“No likelihood of harm was shown at trial, and plaintiffs admitted that there had been no actual harm to date.”). 236 180 F.3d 1072 (9th Cir. 1999) (hereinafter Diamond).

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shifting purpose is “paradigmatic noncommercial personal use entirely consistent with the purposes of the [Copyright] Act.”237 However, it seems that the Sony-based vision of the impact of private copying on the potential market for copyrighted works has been undermined by courts dealing with recent cases on private copying issues. The court in Napster took a leap forward in redefining the line between commercial and noncommercial uses. It was held that “commercial use is demonstrated by a showing that repeated and exploitative unauthorized copies of copyrighted works were made to save the expense of purchasing authorized copies.”238 Indeed, Napster promotes the idea that, in the digital age, copyright should be extended “into every corner where consumers derive value from literary and artistic works.”239 This way of setting up the commercial/noncommercial dichotomy, by and large, sounds the death knell for the private use exemption that allows use of works for the time- or space-shifting purpose. The combination of the aforementioned two aspects of the shift in landscape of copyright law definitely erodes the traditional adoption of private use. In fact, the private use exemption plays a catalytic role in usurping copyright holders’ normal exploitation of works, making it violative of the second prong of the three-step test. In this regard, Ginsburg and Gaubiac bluntly point out that private copying exemption violates the second prong of the three-step test in that: [The] feature [of exploiting works] illustrates the potential anomaly of recognizing a private copying exemption in the digital world: individual copies can no longer be considered de minimis. Private copying in perfect copies does substitute for sales of the work . . . . If there is a market for private copying, then unauthorized private copying would conflict with this norm. Because more and more works are marketed directly to end users, private copying should no longer be characterized as “certain special cases”: it is becoming a leading mode of exploitation. As a result, Berne member nations might be foreclosed from authorizing private copying in the digital environment.240 3. Reverse Engineering for Software Interoperability Computer programs are generally distributed in machine-readable object code form.241 Their human-readable source code form, however, is locked up in software developers’ pockets. This definitely gives rise to the problem that, if the source code is not accessible to other software developers, there will be no linkages interconnecting various kinds of computer programs in the web of the digital world. Hence, the spontaneous efforts to build up the necessary “bridges” for the interoperable applications of object codes are of critical importance to sustaining and enhancing a healthy digital environment. In order to bring this objective to fruition, reverse engineering for software interoperability enables the architects of digital technology to decompile or disassemble object code. By and large, 237

Id. at 1079. Napster, 239 F.3d at 1015. 239 Paul Goldstein, Copyright’s Highway: The Law and Lore of Copyright from Gutenberg to the Celestial Jukebox 236 (1994). 240 Ginsburg & Gaubiac, supra note 227, at 150–51; see also, Christophe Geiger, Right to Copy v. Three-Step Test: The Future of the Private Copy Exception in the Digital Environment, CRI (2005) (drawing the conclusion that the private copying exception violates the second prong of the three-step test); Alison Evans, Private Copying in the EU: Technological Protection and the “Three-Step Test,” 21 Copyright Rep. 36, 41–42 (arguing that the private copying exemption violates the three-step test). 241 See Sega, 977 F.2d at 1525 (“Computer programs, however, are typically distributed for public use in object code form, embedded in a silicon chip or on a floppy disk.”); Pamela Samuelson & Suzanne Scotchmer, The Law and Economics of Reverse Engineering, 111 Yale L.J. 1575, 1608 (2002). 238

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this limitation on copyright would blossom into enhanced development of new software and further produce positive externalities for consumer welfare in the digital age.242 Nevertheless, this limitation is highly vulnerable to the challenge posed by the second part of the three-step test. It can be argued, in the WTO Panel Report’s terms, that it breeds and facilitates the “economic competition” between the developer and decompiler of the software in question, occasioning the loss of “significant or tangible revenue” to the former. Under the Panel’s construction of the second prong, the loss of royalties suffered by software developers calls into question the validity of the copyright limitation that allows reverse engineering for software interoperability purpose. To be sure, software developers’ investment in developing computer programs would justifiably allow them to offer business licensing of the interfaces to those who want to bring their software into compatibility with the original programs. Instead of reverse engineering, the “decompiler” can actually enter into licensing agreement with the copyright owner of the software. As long as the terms of the licensing agreement are reasonable, to achieve interoperability would not turn out to be prohibitively costly for many software developers. Indeed, the reasonable licensing practice of this type has been deemed legally acceptable. In Atari Games Corp. v. Nintendo of America, Inc. the court held that the licensing terms laid down by the copyright holder were lawful and could not be subject copyright misuse challenge.243 By decompiling the computer program at issue, the defendant presumptively caused irreparable harm to the right holder of the computer program.244 Atari Games epitomizes the software developer’s legitimate interest in the marketing channel of software through licensing their program code to the “latecomers.” It also would close a loophole in Sega Enterprises v. Accolade: the failure to consider both direct and indirect harm to the software developer’s licensing market.245 However, in the case where copyright holders leverage their monopoly by setting up unreasonable licensing terms, copyright misuse doctrine can be brought into play to remedy the potential hardship faced by other software developers.246 To be sure, for those who choose to keep their software’s interfaces closed, these measures are carried out “not only as a defensive measure against the [software] being commoditized, but as an offensive measure to capture the market.”247 This business strategy allows firms to achieve 242 The court in Sega pointed out that the reverse engineering at issue “has led to an increase in the number of independently designed video game programs offered for use with the plaintiff’s work.” See Sega, 977 F.2d at 1523. 243 Atari Games, 975 at 846 (“The record does not demonstrate, as a matter of law, that [the licensing] restrictions restrain the creativity of [licensees] and thereby thwart the intent of the patent and copyright laws.”). In Sega, the plaintiff “licenses its copyrighted computer code and its “SEGA” trademark to a number of independent developers of computer game software. Those licensees develop and sell Genesis-compatible video games in competition with Sega.” See Sega, 977 F.2d at 1514. 244 See Atari Games, at 847. 245 See, e.g., Stanley Lai, Recent Developments in Copyright Protection and Software Reverse Engineering in Singapore: A Triumph for the Ultra-Nationalists, 19 Eur. Intell. Prop. Rev. 525, 532 (1997) (criticizing the Sega decision on the grounds that the court “did not consider the potential harm caused to Sega’s existing licensing market, despite its knowledge that other developers had already purchased Sega’s licences.”). 246 “Accolade explored the possibility of entering into a licensing agreement with Sega, but abandoned the effort because the agreement would have required that Sega be the exclusive manufacturer of all games produced by Accolade.” Sega, 977 F.2d at 1514. Although the Sega court did not render the ruling under the umbrella of the copyright misuse doctrine, it did hold that the plaintiff’s action to monopolize the market is illegal. This may have opened door to expose Sega’s licensing practice to copyright misuse doctrine. See id. at 1523–24 (“In any event, an attempt to monopolize the market by making it impossible for others to compete runs counter to the statutory purpose of promoting creative expression and cannot constitute a strong equitable basis for resisting the invocation of the fair use doctrine.”). 247 Samuelson & Scotchmer, supra note 241, at 1617.

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exclusivity of their products in the market. Drawing up the “network effects,”248 the copyright owners can enhance their market penetration and dominance. Opening the door to the reverse engineering, however, would definitely kill this business strategy, even in their very embryonic stage. Therefore, in face of significant economic losses, copyright owners like Sega249 and Sony250 had to wage lawsuits against the “decompilers.” In these two disputes, courts found the “decompilers” not liable partly because no significantly adverse impact on the original software developer’s market could be ascertained.251 This conclusion, however, is not compelling per se and incongruous with the second prong of the three-step test. First, courts seemed to assume that certain degree of economic loss occasioned by the competition was no bar to finding fair use. Nonetheless, as the “tangible” economic loss could be definitely perceived in these two cases, it is hard to deny that the “decompilers” did not adversely affect the normal exploitation of the programs at issue. Second, even though no significant harm was caused to the current market of the software developers, it does not necessarily follow that their potential market would not suffer significant economic loss. The three-step test compels the consideration of the harm to the potential market by at least taking into account the potential users who would become eligible beneficiary of the limitation and the potential economic loss to the right holders. Opening the door to the initial reverse engineering would necessarily allow a succession of followers to decompile the software. As the number of “decompiler” increases, it is very likely that right holder would suffer significant economic loss due to the drop in product price or number of purchasing consumers.252 Therefore, by standing in the shoes of consumers, both Sega253 and Sony v. Connectix254 opened the door for reverse engineering for interoperability purpose based upon consumer welfare. By contrast, the second prong of the three-step test, according to the panel’s interpretation, centers solely on shielding copyright holders’ economic interest. The need to consider countervailing interests, e.g., consumer welfare, is by no means embedded into the second prong. Without being tempered by such a consideration, its focus on shielding copyright holders’ economic interest can surely strike down the limitation that permits reverse engineering for software interoperability. As one commentator bluntly pointed out, “[a] WTO panel could find that the ability to freely decompile a computer program under Sega conflicts with copyright owner’s ability to license its programs for that purpose, or that its use in the creation of a noninfringing, but nevertheless competing, work conflicts with the normal exploitation of the original program.”255

248

Id. See Sega, 977 F.2d at 1510. 250 See Sony Computer Entm’t, Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000). 251 See id. at 607; Sega, 977 F.2d at 1523. 252 As to this point, Stanley Lai questioned the basis on which these two cases were decided by observing that: “[T]he court erred in believing that Sega's market value could go unscathed because it thought consumers typically might buy more than one video game of the same type. Most consumers cannot afford to, nor would be inclined to purchase two similar video games. Sega would suffer significant losses as more companies followed in Accolade’s footsteps to manufacture games which are Genesis-compatible. There was also the effect of widespread conduct which the court did not examine — the decision focused only on the [allegedly] infringing use of one competitor, Accolade.” Lai, supra note 244, at 532. 253 See Sega, 977 F.2d at 1523–24 (“In any event, an attempt to monopolize the market by making it impossible for others to compete runs counter to the statutory purpose of promoting creative expression and cannot constitute a strong equitable basis for resisting the invocation of the fair use doctrine.”). 254 See Sony, 203 F.3d 596 at 607 (“Sony understandably seeks control over the market for devices that play games Sony produces or licenses. The copyright law, however, does not confer such a monopoly.”). 255 Tyler, supra note 186, 1660. 249

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As to the third prong of the three-step test, which provides that a limitation shall not “unreasonably prejudice the legitimate interests of the right holder,” the Panel Report set out three conditions with which copyright limitations should satisfy: First, broader than the economic interests, right holders’ “legitimate interests” cover “those that are justifiable in the light of the objectives that underlie the protection of exclusive rights.”256 This connotes that, moral rights, albeit estranged from the TRIPs regime, can be seen as the part of right holders’ legitimate interests. Second, right holders’ legitimate interests are unreasonably prejudiced, “if an exception or limitation causes or has the potential to cause an unreasonable loss of income” to the right holder.257 In computing the loss of income, the panel reiterates that both actual and potential effects on the right holder’s market should be taken into consideration.258 Third, unreasonable prejudice can be offset by the payment of compensation from the entrenched compulsory licensing system.259 In this regard, the third prong of the threestep test “highlight[s] the need for care, moderation, and constraint in constructing any compulsory licensing scheme under national law.”260 Because the Panel Report admitted that the above approach is incomplete and conservative,261 weighing the validity of a copyright limitation based upon economic loss suffered by a right holder, therefore, does not foreclose the other means by which “unreasonable prejudice” can be measured. If the three-step test is brought into play in the context of the WCT and WPPT, one possible inquiry that may arise on the horizon is to examine whether the limitation in question would constitute unreasonable prejudicial to right holders’ “honor or reputation,” namely the moral interests embodied in their moral rights. However, one should note that the third prong of the three-step test per se is a relatively lenient standard. On the one hand, the “unreasonable prejudice” standard is generally far less strong and strict than the “normal exploitation” standard set out in the second prong of the three-step test. On the other hand, it is prescribed that an appropriate payment of compensation that is potentially lower than that under the “normal exploitation” standard, can redress the “unreasonable prejudice” effect. Although the Panel Report does not elaborate on the normative content of the “legitimate interests” that the objectives of the copyright law support, it seems that the following two points are quite clear. First, “an author would not have a ‘legitimate’ interest in preventing publication of an unfavorable book review,”262 for this act runs afoul of the free speech right that copyright law supports. Second, allowing the transformative use serves the objective of the copyright law and, therefore, might not be deemed violative of the third condition of the three-step test. This is because “the more a right-holder’s assertion of rights tends to prevent others making transformative use of it, the less likely that assertion is to involve ‘legitimate’ interest.”263 Hence, it seems that public policy scrutiny is embedded into the third prong of the three-step test in determining the scope of “legitimate uses.” 256

Panel Report, ¶ 6.224. Id., ¶ 6.229. 258 Id., ¶ 6.247. 259 Id., ¶ 6.229 (noting that “in cases where there would be serious loss of profit for the copyright owner, the law should provide him with some compensation”). 260 Ricketson & Ginsburg, supra note 45, at 777. 261 Panel Report, ¶ 6.247. 262 See Ginsburg, supra note 99, at 7. 263 Oliver, supra note 87, at 167. 257

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IV. THE CREATIVE DESTRUCTION OF THE THREE-STEP TEST Given the three-step test’s chilling effect on the existence of the abovementioned limitations on copyright,264 this Part delves into how the test could be changed in manner conducive to the protection and promotion of public interest. To do so, I propose that the three-step test should be replaced by the following new test: Members may provide limitations on the exclusive rights, provided that such limitations take account of the legitimate interests of right holders and of third parties. The creative destruction of the three-step test,265 as shown above, is put forward on the basis of Article 17 of the TRIPs Agreement, which prescribes the condition with which “exceptions to the rights conferred by a trademark” should comply.266 Moreover, the test sets forth two interdependent conditions. On the one hand, copyright holders’ legitimate interest should not be “unreasonably prejudiced.” Put differently, the legitimacy of any given limitation on copyright hinges partly upon the condition that it would not be unreasonably prejudicial to the legitimate interest of right holders. On the other hand, users’ legitimate interest that underpins the imposition of copyright limitations should be fully taken into account when the three-step test is invoked. From this perspective, the new test fully embraces the public policy scrutiny as an indispensable standard of review. In this sense, my proposal designed to reshape the three-step test is entirely different from those put forward by Ruth Okediji267 and Daniel Gervais.268 In the following discussion, I expound on the reasons why the three-step test should be replaced by the new test proposed above. To do so, the first section considers the problems inherent into the first prong of the three-step test, while the next two sections explore the ways in which the second prong of the test go astray by not opening the door for public policy scrutiny. The last section then discusses the extent to which the new test put forward above would facilitate the realization of the development agenda. In addition to the aforementioned objectives, the following discussion aims to give a response to some leading copyright commentators’ proposition that the public policy consideration should not be integrated into the review of copyright limitations based upon three-step test, in particular its first prong.269 In my opinion, they ostensibly erred in this argument because they turn a blind eye to the fact that the mandate of public policy scrutiny has already been set out in other quasi three-step tests under the TRIPs Agreement.270 More importantly, I will provide a set of new perspectives to demonstrate that 264 The explanations about why such chilling effect is bad are scattered in the first and second subsections of this Part. 265 For an explanation of “creative destruction,” see supra note 22. 266 Article 17 of the TRIPs Agreement provides that “Members may provide limited exceptions to the rights conferred by a trademark, such as fair use of descriptive terms, provided that such exceptions take account of the legitimate interests of the owner of the trademark and of third parties.” 267 See Ruth Okediji, Towards an International Fair Use Standard, 39 Colum. J. Transnat’l L. 79 (2000). 268 See Daniel J. Gervais, Towards A New Core International Copyright Norm: The Reverse Three-Step Test, 9 Marq. Intell. Prop. L. Rev. 1 (2005). 269 Professor Ginsburg posits that the drafters of the three-step test did not intend to incorporate a policy justification into the first condition and that “the Panel decision cor-rectly eschewed inquiry into the motivation for a particular exception” on the grounds that “WTO may be ill-suited to condemn local giveaways” in this respect. Ginsburg, supra note 99; see also, Oliver, supra note 87, at 150 (arguing that the Panel should be limited to consider whether there is a rational basis for a national exception, without considering its legiti-macy, due to the limited expertise of WTO panels in examining policy issues). 270 See, e.g., TRIPs Agreement, arts. 17, 30, and 26.2. Under these provisions, the con-sideration of “the legitimate interests of third parties” is mandatory. Another Panel Report in which Article 30 of the TRIPs is interpreted contends that public policy issues should be taken into account when considering the scope of the “the

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their proposition is fundamentally myopic and entirely based upon a misguided perception of the nature of copyright law in general and copyright limitations in particular. A. ACCOMMODATING THE OPEN TEXTURE OF COPYRIGHT LIMITATIONS

As shown in Part III, since the first prong of the three-step test requires the any limitation on copyright should be “clearly defined” and “narrow in scope and reach,” it wields the power to strike down the fair use doctrine and some other common-law doctrines, all of which are flexible and open-ended in nature. In response to the possible demise of these public interest-oriented doctrines, this Part questions the desirability of conferring such sweeping power upon the three-step test. To do so, I argue that, given the pervasive indeterminacy inherent in legal norms, it is unrealistic and meaningless to set up the standard as stringently as the first prong of the three-step test does. 1. The Open Texture of Law In The Concept of Law Hart forcefully contends that a number of legal norms, to a large extent, are vague and indeterminate. He labels this phenomenon as “open texture” problem that is rooted into the fabric of legal system: Whichever device, precedent or legislation, is chosen for the communication of standards of behavior, these, however smoothly they work over the great mass of ordinary cases, will, at some point where their application is in question, prove indeterminate; they will have what has been termed as open texture.271 The reasons why “open texture” is seen as an inherent characteristic of legal system could be understood from the following three perspectives: linguistic indeterminacy, the limit in human capacities, and the structural need to keep the legal machinery in motion. a. Linguistic Indeterminacy Language is the vehicle through which law conveys its regulatory signals to the public at large. Therefore, linguistic determinacy forms the basis of legal determinacy, which acts as the engine generating predictability for people involved in the enterprise of building law and complying with law. Yet, language, per se, under many circumstances, is fraught with uncertainties and indeterminacies that undermine its signaling function. Hence, as long as the linguistic indeterminacy persists, the seeds of open texture problem would keep flowing around in the ocean of legal norms. Drawing on the philosophical theory of language established by Wittgenstein272 and Waismann,273 Hart explicates the ways in which linguistic indeterminacy brings about the open texture of law: [I]n the case of legislation, as a general feature of human language[,] uncertainty at the borderline is the price to be paid for the use of general classifying terms in any form of communication concerning matters of fact. Natural languages like English are when so used irreducibly open-textured.274 legitimate interests of third parties.” See WTO Panel Report, Canada — Patent Protection for Pharmaceutical Products, WT/DS114/R (Mar. 17, 2000), ¶ 7.69 (“To make sense of the term "legitimate interests" in this context, that term must be defined in the way that it is often used in legal discourse—as a normative claim calling for protection of interests that are ‘justifiable’ in the sense that they are supported by relevant public policies or other social norms.”) (emphasis added). 271 Hart, The Concept of Law 127–28 (1994). 272 Id. at 125 and the footnote on page 297. 273 Id. at 128 and the footnote on page 297. 274 According to Felix Cohen, “A definition is in fact a type of insurance against certain risks of confusion. It

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Clearly, Hart reckons that “[v]agueness is an ineradicable feature of our everyday language, and its pervasiveness in the law is the most commonly invoked reason for thinking that the law is indeterminate.”275 b. Facing Impossibility: The Limits of Human Capacities Locating everyday social life in the ocean of legal norms with the company of tens of millions of “lighthouses” (regulatory signals) does not necessarily mean that we comfortably “dwell in possibility.”276 Rather, we still dwell in impossibility due to the limits of human abilities277 in foreseeing what will occur in the future and then figuring out how we can deal with them beforehand. Hence, the letters of the law, no matter how general or specific they are, do not provide definite and exhaustive answers in order to sidestep any future legal pitfalls. Accordingly, Hohfeld observed that “[t]he strict fundamental legal relations are, after all, sui generis; and thus it is that attempts at formal definition are always unsatisfactory, if not altogether useless.”278 Hart, in explicating law’s “open texture” problem, was fully mindful of the correlation between legal indeterminacy and the limits in human abilities, as he straightforwardly acknowledged that “we are men, not gods.”279 To Hart, the limits in human abilities to clear away the cloud of legal indeterminacy is attributable to the two handicaps we the human beings unfortunately suffer: It is a feature of the human predicament (and so of the legislative one) that we labor under two connected handicaps whenever we seek to regulate, unambiguously and in advance, some sphere of conduct by means of general standards to be used without further official direction on particular occasions. The first handicap is our relative ignorance of fact; the second is our relative indeterminacy of aim.280 Patently, these two handicaps, in Hart’s vision, are the very roots of the open-textured nature of law. This is because “human legislators can have [no] knowledge of all possible combinations of circumstances which the future may bring. This inability to anticipate brings with it a relative inde-terminacy of aim.”281 In this respect, Hart himself unwittingly generalizes Justice Marshall’s emphatic expounding of indeterminacy as the inherent nature of constitutional law to the universe of law: It was impossible for the framers of the Constitution to specify, prospectively, all these means, both because it would have involved an immense variety of details, and because cannot, any more than can a commercial insurance policy, eliminate all risks. Absolute certainty is as foreign to language as to life. There is no final insurance against an insurer’s insolvency. And the words of a definition always carry their own aura of ambiguity. But a definition is useful if it insures against risks of confusion more serious than any that the definition itself contains.” Felix S. Cohen, Transcendental Nonsense and the Functional Approach, 35 Colum. L. Rev. 809, 836 (1935) (emphasis added). 275 Christopher L. Kutz, Note, Just Disagreement: Indeterminacy and Rationality in the Rule of Law, 103 Yale L.J. 997, 1004 (1994). For an insightful discussion of Hart’s theory of legal indeterminacy, see Michael Steven Green, Dworkin’s Fallacy, or What the Philosophy of Language Can't Teach Us About the Law, 89 Va. L. Rev. 1897 (2003), Timothy A.O. Endicott, Vagueness in Law (2000); Brian Bix, Law, Language, and Legal Determinacy (1993). 276 Emily Dickinson, I Dwell in Possibility, in Complete Poems of Emily Dickinson (1993). 277 Yehezkel Dror, The Capacity to Govern: A Report to the Club of Rome 118 (2002) (“Certainly, humanity has not reached the limits of its potential for management of itself and its environment, there being scope also for improving capacities to govern and build a better future.”). 278 Wesley N. Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning, 23 Yale L.J. 16, 30 (1913). 279 278 Hart, supra note 271, at 128. 280 Id. 281 Id.

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it would have been impossible for them to foresee the infinite variety of circumstances, in such an unexampled state of political society as ours, for ever changing and for ever improving. How unwise would it have been, to legislate immutably for exigencies which had not then occurred, and which must have been foreseen but dimly and imperfectly!282 c. Structural Need of the Legal System To be sure, the whole legal system deals with the nuances and complexities embedded into the web of human behaviors which are fraught with uncertainties and indeterminacies.283 The structure of legal system, therefore, should and must be designed in a manner sufficiently responsive to an ocean of ever-changing circumstances and unpredictable factors that occur in the social machinery.284 This is because a legal system that accommodates “allocations of institutional responsibility” should be understood as “a rich, fluid, and evolving set of norms for effective governance and dispute resolution, not as a positivist system of fixed and determinate rules.”285 From this perspective, certain degree of flexibility and fluidity of legal norms, to a large extent, stems from the structural need to maintain the legal system open and broad enough to grapple with an extremely wide range of legal matters. Such flexibility within particular applications of legal norms helps stabilize the legal system as a whole. The design of constitutional law epitomizes the open texture problem derived from the structural need of legal system. In order to promote governmental efficiency and to prevent tyranny,286 the notion of separation of powers becomes the heart of modern constitutional law which distributes power horizontally and vertically. However, in the U.S., the constitutional framework of power separation “has been sufficiently flexible over the past two centuries”287 in that “[t]he enumeration [of power] presupposes something not enumerated.”288 The reason to do so was expounded by McCulloch v. Maryland: A constitution, to contain an accurate detail of all the subdivisions of which its great powers will admit, and of all the means by which they may be carried into execution, would partake of the prolixity of a legal code, and could scarcely be embraced by the human mind . . .. That this idea was entertained by the framers of the American constitution, is not only to be inferred from the nature of the instrument, but from the language.289 Moreover, in United States v. Lopez290 Justice Rehnquist highlighted the structural need-based reasons why the Commerce Clause has been operated within the framework of legal indeterminacy ever since the judiciary’s duty “to say what the law is” was declared by Marbury v. Madison:291

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McCulloch v. Maryland, 17 U.S. 316, 385 (1819), (Marshall, Ch. J.) [hereinafter McCulloch]. See Russell Hardin, Indeterminacy and Society 1 (2003) (arguing that “indeterminacy is real,” pervasive and intractable in virtually all social contexts). 284 See Cohen, supra note 274, at 884 (“Law is a social process, a complex of human activities and adequate legal science must deal with human activity, with cause and effect, with the past and the future . . . . Legal system, principles, rules, institutions, concepts, and decisions can be understood only as functions of human behavior.”). 285 See Richard H. Fallon, Reflections on the Hart and Wechsler Paradigm, 47 Vand. L. Rev. 953, 965 (1994). 286 Geoffrey R. Stone et al., Constitutional Law 359 (2005). 287 Id. at 339. 288 Gibbons v. Ogden, 22 U.S. 195 (1824). 289 McCulloch v. Maryland, 17 U.S. at 407. 290 514 U.S. 549 (1995) [hereinafter Lopez]. 291 Marbury v. Madison, 1 Cranch 137, 177, 2 L.Ed. 60 (1803) (Marshall, Ch. J.). 283

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Admittedly, a determination whether an intrastate activity is commercial or noncommercial may in some cases result in legal uncertainty. But, so long as Congress’ authority is limited to those powers enumerated in the Constitution, and so long as those enumerated powers are interpreted as having judicially enforceable outer limits, congressional legislation under the Commerce Clause always will engender “legal uncertainty.” . . . The Constitution mandates this uncertainty by withholding from Congress a plenary police power that would authorize enactment of every type of legislation. . . . Any possible benefit from eliminating this “legal uncertainty” would be at the expense of the Constitution’s system of enumerated powers.292 2. The Open Texture of Copyright Law The problem of legal indeterminacy, as the foregoing discussion showed, is inherently pervasive in the letters of law. In this respect, commentators have boldly proclaimed that “[legal] certainty is only an illusion”293 and “law is necessarily vague.”294 While the radical indeterminacy of law, as the critical legal scholarship suggests,295 is still contestable, the fact that law has different degrees of moderate indeterminacy is now universally accepted.296 When it comes to copyright law, there are legal norms that are determinate on their face. For example, it is prescribed that the term of copyright spans to the life of the author plus seventy years after his death. Yet the copyright statute, by and large, is awash with a host of vague standards and concepts, many of which form the lifeblood of copyright protection. As a threshold standard for copyright protection, the idea/expression dichotomy exemplifies the open texture problem inherent into copyright statutes. The idea/expression dichotomy297 teaches that only the expression of ideas, rather than ideas, is copyrightable. Yet charting the boundaries between idea and expression is no easy work in many cases. On the one hand, while the idea/expression dichotomy is hailed as a universal standard for setting the threshold of copyright protection, no efforts as to what elements of works would fall into the two baskets of “idea” and “expression” respectively have ever been done in any national or international copyright law. The absence of this kind of line-drawing effort stems from the fact that the making of such “tangible baskets” is entirely beyond the human capacities. Given the extremely rich, fast-changing, ever-expanding nature of the pluralist society, it is impossible for legislators to exhaust all the past, current, and future circumstances in which ideas are created, and then draw the dividing line for every category of ideas and their expressions. Hence, Judge Learned Hand lamented: “Nobody has ever been able to fix [the] boundary [between idea and expression], and nobody ever can.”298 Moreover, one should note that the creation of “ideas” defies any artificial interference into the universe of innovation 292

514 U.S. 549 (1995) [hereinafter Lopez]. Oliver Wendell Holmes, Privilege, Malice and Intent, 8 Harv. L. Rev. 1, 7 (1894). 294 Timothy Endicott, Law is Necessarily Vague, 7 Legal Theory 379 (2001). 295 See, e.g., Joseph William Singer, The Player and the Cards: Nihilism and Legal Theory, 94 Yale L. J. 1 (1984); James Boyle, The Politics of Reason: Critical Legal Theory and Local Social Thought, 133 U. Pa. L. Rev. 685 (1985); Gray Peller, The Metaphysics of American Law, 73 Cal. L. Rev. 1151 (1985). 296 See Lawrence B. Solum, On the Indeterminacy Crisis: Critiquing Critical Dogma, 54 U. Chi. L. Rev. 462 (1987); Ken Kress, Legal Indeterminacy, 77 Cal. L. Rev. 283, 284 (1989) (arguing that legal “indeterminacy is at most moderate”). 297 See, e.g., 17 U.S.C. § 102(b) (“In no case does copyright protection for an original work of authorship extend to any idea.”); TRIPs Agreement, art. 11; Baker v. Selden, 101 U.S. 99, 103 (1879); Mazer v. Stein, 347 U.S. 201, 217 (1954). 298 Nichols v. Universal Pictures Corp., 45 F.2d 119, 121 (2d Cir. 1930). 293

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and creativity. Indeed, ideas are created by the sparks of human mind that know no boundaries and are kindled by the spirit of freedom of thinking. On the other hand, it seems that the nature of many non-literary forms of works renders it increasingly difficult to perceive the dividing line between idea and expression. For example, with respect to the artistic work, it becomes routinely hard to determine what is the “idea” conveyed therein and what is the “expression” that functions to communicate such “idea” to the public. The court in Mannion v. Coors Brewing Co.299 gives up the attempt to carry out the typical line-drawing effort to deal with the idea/ expression dichotomy. It simply acknowledges that the distinction between idea and expression “breaks down” in the case of artistic work: For one thing, it is impossible in most cases to speak of the particular “idea” captured, embodied, or conveyed by a work of art because every observer will have a different interpretation. Furthermore, it is not clear that there is any real distinction between the idea in a work of art and its expression. An artist’s idea, among other things, is to depict a particular subject in a particular way. As a demonstration, a number of cases from this Circuit have observed that a photographer’s “conception” of his subject is copyrightable. By “conception,” the courts must mean originality in the rendition, timing, and creation of the subject – for that is what copyright protects in photography. But the word “conception” is a cousin of “concept,” and both are akin to “idea.” In other words, those elements of a photograph, or indeed, any work of visual art protected by copyright, could just as easily be labeled “idea” as “expression.”300 Given the aforementioned factors, courts facing the task of differentiating between idea and expression have been tormented by dealing with the pitfall of drawing such a dividing line. As a result, there is no shortage of the statement echoing in courtrooms that laments that the idea/expression dichotomy is “elusive”301 and “an imprecise tool.”302 Against this backdrop, William Patry initiates a postmodernist critique of the mechanical interpretation of the idea/expression dichotomy: [W]e are better off if we appreciate that the idea-expression dichotomy is not an analytical tool; it is not a test; “idea” and “expression” are simply labels that reflect that some material is protected and some isn't, and that determination is always after-the-fact . . . . “Idea” and “expression” are not categories that have content; they do not express set characteristics; they are just metaphors by which we pretend we are reasoning a priori, when in truth we are engaged in fact-finding.303 To be sure, the idea/expression dichotomy is by no means the only standard that has no clear contours in the realm of copyright law. A host of other standards, like “originality,” “fixation,” and so forth, have bedeviled the rule-makers in a way that they make the copyright law’s reservoir full of poorly-shaped “filters.” For example, In the Da Vinci Code case, Justice Smith simply acknowledged that “originality” as the threshold standard for copyright protection is “potentially confusing.”304 Also, “the test for infringement of a

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2005 U.S. Dist. LEXIS 14686. Id. 301 Williams v. Crichton, 84 F.3d 581, 587–88 (2d Cir. 1996). 302 Durham Indus., Inc. v. Tomy Corp., 630 F.2d 905, 912 (2d Cir. 1980). 303 William Patry, Football and the Idea-Expression Dichotomy, http://williampatry. blogspot.com/2005/08/ football-and-idea-expression-dichotomy.html. 304 Michael Baigent & Richard Leigh v. The Random House Group, Ltd., [2006] E.W.H.C. 719 (Ch) ¶ 142. 300

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copyright” is deemed “of necessity vague.”305 Yet these standards tacitly allow courts to adjust the shape of the “filters” in response to specific facts involved in hard cases. This is exactly what Hart envisions as to the role of courts/judges in dealing with legal indeterminacy when adjudicating hard cases. In this respect, he succinctly concluded that “[t]he open texture of law means that there are, indeed, areas conduct where much must be left to be developed by courts or officials striking a balance, in the light of circumstances, between competing interests which vary in weight from case to case.”306 3. The Open Texture of Copyright Limitations Generally speaking, there are two competing modes of copyright limitations. The fair use doctrine, representative of the first mode, is embedded with the broad and flexible approach to carve out limitations on copyright. As long as the general conditions are met, any unauthorized act of using works would be exempted from the potential liability. Thus, the doctrine per se does not set out the whole range of the privileged uses of works. Apart from the United States, several other countries have adopted307 or are considering the feasibility of including this doctrine in their copyright systems.308 By contrast, the second mode, represented by the EU Copyright Directive, itemizes an exhaustive list of specific limitations on copyright and prescribes specific conditions under which each limitation could be invoked. The privileged use of works, under this carefully designed regulatory hierarchy, should closely follow the specifics of instructions given by the law. Equipped with the preset detailed limits, the radar screen of the latter mode of law is designed to facilitate rapid detection of those users who have gone beyond the preview of allowable uses. As demonstrated in Part III, the first mode runs afoul of the requirements set forth in the first prong of the three-step test, namely copyright limitations should be “clearly defined” and “narrow in scope and reach.” By contrast, it seems that the second mode could square comfortably with the first prong of the three-step test, given its endeavors to keep the legal rules “clearly defined” and “narrow in scope and reach.” Therefore, such requirements contained in the first prong would potentially bring about a radical shift in the legislative structure of copyright law simply by forcing countries that accept the first mode to embrace the second mode. Given the pervasiveness of legal indeterminacy in legal norms in general, and copyright statutes in particular, one would naturally question whether the three-step test is legally sound and reasonable enough to be instilled the sweeping power to weed out the first mode of copyright limitations. To do so, one would need to consider whether the first mode of copyright limitations represented by the fair use doctrine is consistent with the fundamental justifications for the existence of open texture of law. First, as language is the vehicle through which copyright limitations are put in motion, linguistic indeterminacy necessarily begets the open-texture problem for the fair use doctrine. This also means that even the second mode of copyright limitations would necessarily “suffer from” the open-texture problem no matter how earnestly the legislators draft the law in painstaking detail with respect to the ways in which specific conditions should be met. Second, the legislative inability to foresee and deal with all potential circumstances 305

Peter Pan Fabrics, Inc. v. Martin Weiner Corp., 274 F.2d 487, 489 (2d Cir. 1960). Hart, The Concept of Law 134. 307 Singapore has recently introduced the fair use doctrine into its copyright law. See Section 35 of the Singapore Copyright (Amendment) Bill 2004, which came into force on January 1, 2005. 308 In Australia and Canada proposals have been put forward to introduce the fair use doctrine into their copyright laws. 306

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makes it understandable that the fair use doctrine is structured in an open-ended and flexible manner. In contrast with the second mode, the indeterminacy carried by fair use doctrine becomes the advantage of first mode. This is because the fair use doctrine’s open-ended nature has the advantage of adapting copyright limitations to potentially novel ways of exploiting works, making the framework of copyright law largely coterminous with the needed legislative changes spawned by continuous development in technology.309 Third, because copyright law is dealing with complicated and ever-changing legal relation in exploiting works of authorship, it is natural that a certain degree of flexibility ought to be imbedded into its whole legislative framework. More importantly, copyright limitations are geared to serve public interest, which is not amenable to definition because of the heterogeneity and variety of general human needs it conveys.310 For example, framers of the U.S. Constitution were unsure about what “freedom of speech” means, as Benjamin Franklin acknowledged that “Few of us, I believe, have distinct Ideas of Its Nature and Extent.”311 Moreover, Justice Rehnquist straightforwardly pointed out that “the ‘liberty’ specially protected by the Fourteenth Amendment—never fully clarified, to be sure, and perhaps not capable of being fully clarified.”312 In dealing with the case concerning the public interest defense, Judge Mance inferred that “the circumstances in which the public interest may override copyright are probably not capable of precise categorization or definition.”313 Therefore, there is a structural need to keep the copyright limitations flexible enough to accommodate the malleability of “public interest.” Having said that, it seems that the first prong of the three-step test, imbued with the power to strike copyright limitations carved out in the first mode, is utterly at odds with the phenomenon of open texture, which is the intrinsic hallmark of legal system in general and copyright law in particular. More importantly, it should be pointed out that the three-step test, per se, is no “bright line”314 rule and, therefore, is fraught with uncertainties.315 For example, the Israeli delegation reminded the Stockholm Conference of “the uncertainty that surrounds the words ‘in certain particular cases,’ ‘legitimate interests,’ and ‘normal exploitation.’”316 As long as legal indeterminacy is the “gene” inherent into the legal system and could not be eliminated within the boundaries of human capabilities, it is safe to draw the conclusion that the first prong of the three-step test is founded upon the misconception that all the open-texture problems underlying copyright limitations should be “genetically modifiable and modified” by national legislators. 309 Dan L. Burk & Julie E. Cohen, Fair Use Infrastructure for Rights Management Systems, 15 Harv. J.L. & Tech. 41, 43–47 (2001) (summarizing “the social functions of fair use” and, in particular, pointing out that “fair use adapts copyright to new technologies that pose challenges for the traditional copyright framework”). 310 Lucas v. Forty-Fourth General Assembly of State of Colo., 377 U.S. 713, 751 (1964) (Stewart, J., dissenting) (pointing out that “the public interest is composed of many diverse interests”). 311 Benjamin Franklin, The Court of the Press (1789), reprinted in 10 The Writings of Benjamin Franklin 37 (Albert Smyth ed., 1907). Moreover, Alexander Hamilton wrote in The Federalist Papers: “What signifies a declaration that ‘the liberty of the press shall be inviolably preserved?’ What is the liberty of the press? Who can give it any definition which would not leave the utmost latitude for evasion?” The Federalist No. 84, at 514 (Alexander Hamilton) (Clinton Rossiter ed., 1961). 312 Washington v. Glucksberg, 521 U.S. 702, 722 (1997). 313 Hyde Park Residence Ltd. v. Yelland, [2001] Ch. 143, 172 (CA). 314 Ricketson & Ginsburg, supra note 45, at 777. 315 See Carlos M. Correa, TRIPS Agreement: Copyright and Related Rights, 25 Int’l Rev. Indus. Prop. & Copyright L. 543, 549 (1994) (arguing that the three-step test “fails to give useful guidance on how to tackle some of the more complex issues involved in the applications of exceptions to exclusive rights”); David J. Brennan, The Three-Step Test Frenzy — Why the TRIPS Panel Decision Might be Considered Per Incuriam, 2 I.P.Q. 212, 224 (2002) (arguing that the test does “create uncertainty”). 316 WIPO, supra note 26, at 622.

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The inquiry into the legitimacy of the second prong of the three-step test begs the question of whether it is valid for the test to fill up its gravitational field solely with the instruments whose mission is to protect copyright holders’ interests. In other words, should the need to protect the interest of the users at large be integrated into the test’s skein? This Part delves into the extent to which users’ interests ought to be protected under the framework of copyright law. First of all, I explore the ways in which users’ rights could be fit into the landscape of copyright law in general, and copyright limitations in particular. In contrast to the approaches embraced by recent literature discussing the status of users’ rights in copyright law,317 I capitalize on rights discourse in the framework of human rights law to explore the importance of users’ rights in the field of copyright law. Second, I then center on my inquiry into the nature of copyright limitations and the extent to which users’ interests can and should be embedded into them. In so doing, I question the legitimacy of the second prong of the three-step test by demonstrating that it leaves too little room for the protection of users’ rights in its measuring the legality of the limitations on copyright. 1. Building Users’ Rights within the Human Rights Framework Human rights law provides an excellent framework within which rights talk concerning intellectual products could be animated in a way to bring about a more lucid and intimate understanding of the nature of competing rights enjoyed by creators and users. Based upon the major international human rights treaties, e.g., the Universal Declaration on Human Rights (UDHR), the International Covenant on Economic, Social and Cultural Rights (CESCR), and the International Covenant on Civil and Political Rights (ICCPR), the following discussion itemizes and canvasses the major human rights enjoyed by creators and users respectively. a. Creators’ Rights According to UDHR and CESCR, “Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.”318 Therefore, the creators of original works shall be entitled to this form of human right, namely the right to benefit from the protection of creative work. Intellectual property in general, and copyright in particular, are afforded a limited term of protection that can be waived, licensed, and transferred in most circumstances. By contrast, human rights represent the “timeless expressions of fundamental entitlements of the human person”319 and are by nature inalienable. From this perspective, copyright, together with other forms of intellectual property, therefore, does not fit comfortably into the human rights skein.320 Yet copyright is an indispensable and the most important vehicle through which the right to benefit from the protection of creative work is respected, protected, and fulfilled. In this sense, copyright can be seen at least as a quasi-human right. On the other hand, a large number of users who create new works by tapping into others’ intellectual fruits can and should become the beneficiaries of the same human rights protection. 317 See, e.g., Joseph P. Liu, Copyright Law’s Theory of the Consumer, 44 B.C. L. Rev. 397 (2003); Julie E. Cohen, The Place of the User in Copyright Law, 74 Fordham L. Rev. 347 (2005). 318 UDHR, art. 27.2; CESCR, art.15.1(c). 319 Committee on Economic, Social and Cultural Rights, The Right of Everyone to Benefit from the Protection of the Moral and Material Interests Resulting from Any Scientific, Literary or Artistic Production of Which He Is the Author (art. 15(1)(c) of the Covenant), Draft General Comment No. 18 (Nov. 15, 2004). 320 Id.

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b. Users’ Rights While human rights law provides affirmative protection of creators’ interest in their intellectual products, it does not necessarily follow that users of copyrighted works are powerless. Rather, they are conferred a series of human rights, the conferral of which is not conditioned by their identity as users of copyrighted works. Among the whole bundle of human rights they enjoy, the following four categories of rights, in my view, are the most relevant to the rights talk associated with copyright law. In order to reveal the true nature of each right discussed below, I capitalize on Isaiah Berlin’s theory of negative and positive liberties.321 In Berlin’s terms, the vision of negative liberty seeks to answer the question “What is the area within which the subject—a person or group of persons—is or should be left to do or be what he is able to do or be, without interference by other persons?” When it comes to positive liberty, we instead attempt to answer the question “What, or who, is the source of control or interference that can determine someone to do, or be, this rather than that?”322 From this perspective, while negative liberty concerns the extent to which individuals or groups should not suffer interference from “external bodies”323 (usually the government), positive liberty deals with the how “internal factors”324 affect the degree to which individuals or groups can act autonomously. As Justice Brandeis has pointed out, we “valu[e] liberty both as an end and as a means.”325 Therefore, the pursuit of assuring negative liberty can be seen as the means to the ends of achieving positive liberty. (1) The Right to Freedom of Expression The freedom “to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers”326 is hailed as the one of the fundamental human rights universally enjoyed by all human beings. On the one hand, it has been universally accepted that government shall be prohibited from abridging the freedom of speech.327 The ban of this type guarantees the negative liberty for all human beings, insulating them from unwarranted coercion that suppresses their speech. Mill contends that the “peculiar evil of silencing the expression of an opinion is that it is robbing the human race, posterity as well as the existing generation—those who dissent from the opinion, still more than those who hold it.”328 Therefore, censoring speech would always lead to public silence and further breed the abuse of power by the government. From this perspective, without governmental intervention, people can freely search for the light of truth. According to Justice Holmes, “the best test of truth is the power of the thought to get itself accepted in the competition of the market, and that truth is the only ground upon which their wishes safely can be carried out.”329 Regarding Holmes’s “marketplace of ideas” metaphor, Justice Brandeis further added that “freedom to think as you will and to speak as you think are means indispens-

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Isaiah Berlin, Four Essays on Liberty (1969). Id., at 121–22. 323 Ian Carter, Positive and Negative Liberty, in The Stanford Encyclopedia of Philosophy (Edward N. Zalta ed., 2003), available at http://plato.stanford.edu/archives/spr2003/entries/liberty-positive-negative/. 324 Id. 325 Whitney v. California, 274 U.S. 357, 375 (1927) (Brandies, J., concurring). 326 UDHR art. 19; CESCR art. 19. 327 This means that only under extremely limited circumstances can the government adopt measures regulating speech. For example, government may regulate speech that is deemed as incitement of illegal activities, fighting words, or obscenity. 328 John Stuart Mill, On Liberty 76 (1859). 329 Abrams v. United States, 250 U.S. 616, 630 (1919) (Holmes, J., dissenting). 322

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able to the discovery and spread of political truth.”330 Hence, serving as an essential checking value on government’s power, free speech is of paramount importance to the building and enhancing of democratic society. On the other hand, the free speech right further promotes the realization of the positive freedom for all human being, providing them with the sufficient “breathing room” for expressing their own ideas. Facilitated by the practice that “debate on public issues should be uninhibited, robust, and wide-open,”331 free speech protection hugely promotes autonomy. As Justice Thurgood Marshall pointed out, free speech “serves not only the needs of the polity but also those of the human spirit—a spirit that demand self-expression.”332 By experiencing self-expression and self-determination,333 people “acquire intelligence, integrity, sensitivity, and generous devotion to the general welfare.”334 Moreover, the protection of free speech is essential to the fostering of tolerance, which enhances the solidarity and coherence of our society. This is because the free speech principle “involves a special act of carving out one area of social interaction for extraordinary self-restraint, the purpose of which is to develop and demonstrate a social capacity to control feelings evoked by a host of social encounters.”335 Indeed, nurturing tolerance contributes to shaping “the intellectual character of the society.”336 (2) The Right to Education People are nurtured and cultivated by education throughout their life. From this perspective, education is indeed “a necessity of life.”337 The right to education, therefore, is heralded as the one of the fundamental human rights, as it is declared that “[e]veryone has the right to education.”338 The negative liberty dimension of the right to education indicates that the state has the affirmative duty to facilitate the development of education at various levels. The Universal Declaration of Human Rights states that “Education shall be free, at least in the elementary and fundamental stages. Elementary education shall be compulsory. Technical and professional education shall be made generally available and higher education shall be equally accessible to all on the basis of merit.”339 Moreover, the International Covenant on Economic, Social, and Cultural Rights elaborates the additional duties for the state to promote and protect the right to education: “Fundamental education shall be encouraged or intensified as far as possible for those persons who have not received or completed the whole period of their primary education; The development of a system of schools at all levels shall be actively pursued, an adequate fellowship system shall be established, and the material conditions of teaching staff shall be continuously improved.”340 On the other hand, the right to education has its “positive liberty” dimension. Education, in de Tocqueville’s view, is capable of “arousing a sleeping population, and of giving 330

Whitney v. California, 274 U.S. 357, 375 (1927) (Brandeis, J., concurring). New York Times Co. v. Sullivan, 376 U.S. 254, 270 (1964). 332 Procunier v. Martinez, 416 U.S. 396, 427 (1974). 333 Edwin Baker, Scope of the First Amendment Freedom of Speech, 25 UCLA L. Rev. 964, 994 (1978) (pointing out that “[t]o engage voluntarily in a speech act is to engage in self-definition or expression.”). 334 Alexander Meiklejohn, The First Amendment Is an Absolute, 1961 Sup. Ct. Rev. 245, 255. 335 Lee C. Bollinger, The Tolerant Society: Freedom of Speech and Extremist Speech in America 9–10(1986) (emphasis added). 336 Id. at 120. 337 John Dewey, Democracy and Education 1 (1997). 338 UDHR, art. 26; CESCR, art. 13. 339 UDHR, art. 26.1. 340 CESCR, arts. 13.3 (d)–(e) 331

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it passions and knowledge which it does not possess.”341 In Brown v. Board of Education342 education was seen as “a principal instrument in awakening the child to cultural values, in preparing him for later professional training, and in helping him to adjust normally to his environment.”343 Consequently, Brown forcefully concludes that education forms “the very foundation of good citizenship.”344 Indeed, the “positive liberty” dimension of the right to education is highlighted by the Universal Declaration of Human Rights, which states: “Education shall be directed to the full development of the human personality and to the strengthening of respect for human rights and fundamental freedoms. It shall promote understanding, tolerance and friendship among all nations, racial or religious groups, and shall further the activities of the United Nations for the maintenance of peace.”345 (3) The Right to Cultural Participation “Human development is a cultural process. As a biological species, humans are defined in terms of our cultural participation.”346 Indeed, this vision of human development lays the very foundation for the human right to cultural participation.347 On the one hand, the state should facilitate, rather than impede, individuals’ freedom to cultural participation. The Universal Declaration of Human Rights places much emphasis on the requirement that states should allow citizens to enjoy full latitude in “freely [participating] in the cultural life of the community.”348 In this sense, cultural participation is the very realm of life that is free of unreasonable state surveillance, interference, and coercion. Pursuant to the International Covenant on Economic, Social and Cultural Rights, states shall adopt various measures to “achieve the full realization of [the] right [to cultural participation].”349 The measures include “those necessary for the conservation, the development and the diffusion of science and culture.”350 Moreover, states shall “respect the freedom indispensable for scientific research and creative activity.”351 On the other hand, the very freedom to take part in the cultural life enhances the human ability to think and provides numerous bridges that culturally connects individual from all various walks of life. Thus, the right to cultural participation nurtures human functional capabilities of “[b]eing able to use imagination and thought in connection with experiencing and producing self-expressive works and events of one’s own choice, religious, literary, musical, and so forth.”352 (4) The Right to Benefit from Scientific and Technological Development The intervening one hundred years have witnessed an unprecedented shift in human life brought about by scientific and technological developments. To be sure, the development of science and technology serves to promote human wellbeing and provides people with enhanced capabilities to pursue their own good life. As the convenience afforded by science and technology become an indispensable part of human life, the right “to share in 341 342 343 344 345 346 347 348 349 350 351 352

Alexis de Tocqueville, Democracy in America 75 (Bevan Trans. 2003). Brown v. Bd. of Educ., 347 U.S. 483, 493 (1954). Id., at 493. Id. UDHR, art. 26.2. Barbara Rogoff, The Cultural Nature of Human Development 3 (2003). See UDHR, art. 27.1; CESCR, art. 15.1(a). UDHR, art. 27.1. CESCR, art. 15.2. Id. Id. art. 15.3. Martha C. Nussbaum, Women and Human Development: The Capabilities Approach 79 (2000).

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scientific advancement and its benefits” has been enshrined in human rights treaties.353 The “negative and positive liberties” dimensions of this right are closely akin to those of the right to cultural participation.354 2. The Nature of Copyright Limitations “Can we create meaning for our lives without demeaning the lives of others?”355 Indeed, behind this perplexing metaphysical question lies a phenomenon called “conflict of rights.” From a utilitarian perspective, human beings have an inherent inclination to fulfill their desires, maximize their satisfaction, and minimize their pain and sufferings. “[T]he grand governing law of human nature” is, Mill reckoned, to “render the persons and properties of human beings subservient to our pleasures.”356 The society as a whole, therefore, is formed by individuals who seek ultimate utility from their environments. Yet, resources available are scarce and cannot do justice to all the desires harbored by utilitarianism-minded persons. Hence conflict of rights is inevitable when the interested parties claim they have stronger interest in certain resources than others do. Indeed, conflicts of rights are pervasive in an increasingly pluralistic society, due to the diversity and heterogeneity of people’s values and beliefs. When it comes to copyright law, the conflict of rights enjoyed by creators and users respectively looms large in the everyday production, dissemination and consumption of copyrighted works. As a set of exclusive rights vested in creators, copyrights would surely prevent users from reproducing and distributing works of authorship. However, users can assert that, without being allowed to take any of the above actions, their human rights to freedom of expression, education, cultural participation, and the benefit from scientific and technological development would be unquestionably undermined and eroded. This because the fulfillment or realization of these human rights, as they argue, cannot be achieved without being given an appropriate degree of freedom to use the copyrighted work concerned. For example, a parodist who affirmatively exercises his free speech right,357 as Justice Souter has pointed out, would necessarily need to “‘conjure up’ the original in order to parody it.”358 Against this backdrop, copyright legislators and policymakers “confront the issues at stake and can then settle the question by choosing between the competing interests in the way which best satisfies us.”359 The limitations on copyright, therefore, are designed by copyright legislators and policymakers to deal with the conflict of rights in this context. Guided by the principle that “[t]he primary objective of copyright is not to reward the labor of authors, but ‘[t]o promote the Progress of Science and useful Arts,”360 they 353

UDHR, art. 27.1; CESCR, art. 15.1 (b). These two rights actually are provided for in the same provisions of UDHR and CESCR, respectively. 355 Thomas Stephen Szasz, The Manufacture of Madness 287 (1977). 356 James Mill, Essay on Government, Essay iv (1824). 357 See Dr. Seuss Enters., L.P. v. Penguin Books USA, Inc., 109 F.3d 1394, 1400 (9th Cir. 1997) (holding that parody is “a form of social and literary criticism,” and it has “socially significant value as free speech under the First Amendment.”); Mattel, 353 F.3d at 807 (holding that “First Amendment concerns in free expression are particularly present in the realm of [parodies as] artistic works”). 358 Campbell, 510 U.S. at 573. 359 H.L.A. Hart, The Concept of Law 187 (2d ed., 1997); Guido Calabresi and A. Douglas Melamed, Property Rules, Liability Rules and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089, 1090 (1972) (“Whenever a state is presented with the conflicting interests of two or more people, or two more groups of people, it must decide which side to favor.”). 360 Feist Pub’n, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 349–50 (1991); see also, H.R. Rep. No. 2222, 60th Cong., 2d Sess., 7 (1909) (“The enactment of copyright legislation by Congress under the terms of the Constitution is not based upon any natural right that the author has in his writings, . . . but upon the ground that the welfare of the public will be served and progress of science and useful arts will be promoted by securing to authors 354

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exercise the state police power to intervene in many circumstances, if not all, giving the trump card to users’ rights and thereby setting out limitations to circumscribe the exercise of copyrights and to facilitate the materialization of users’ human rights. In this sense, the limitations on copyright could be seen as users’ privileges,361 because the state allows them to act affirmatively to use works for the purpose of fulfilling their underlying human rights. According to Hohfeldian Jural Relations, “a privilege is the opposite of a duty, and the correlative of a ‘no-right.’”362 Therefore, in Hohfeld’s terms, a user has the privilege to use a work. As long as he acts within the boundaries of the permission conferred by the state, the copyright holder can not interfere with such use of his work. In other words, the user in question has no duty (to the right holder) not to use the work. The aforementioned decision adopted by the state reflects the notion that “the right of the owner to use his property is not absolute. . . . [U]ses, once harmless, may, owing to changed conditions, seriously threaten the public welfare.”363 Against this backdrop, “the legislature has power to prohibit such uses . . . and the power to prohibit extends alike to the manner, the character and the purpose of the use.”364 In granting users the privilege to use copyrighted works, the state has two arrows on its quiver. On the one hand, the state can grant fair use-typed privileges. To do so, it allows users to invade an entitlement without the right holder’s consent and paying the damages to them. On the other hand, the state can grant a less strong privilege that allows users to copy works without the right holder’s authorization yet with the requirement to pay an appropriate amount of remuneration to the right holder. In short, the granting of such two types of privileges largely reflects the notion that the fundamental rights including the right to private property can be reasonably restricted by “lawful regulations necessary or proper for the mutual good of all.”365 However, the making of the abovementioned limitations on copyright necessarily begs the question of the extent to which a state’s exercise of police power is legitimate. Put differently, given that the governmental power should be limited in any given democratic society, there is a need to set up a mechanism as the check on the state’s exercise of its police power to invade copyright which is as a species of private property. To gauge the legitimacy of the exercise of state power in this regard, there are generally three types of tests that have been widely deployed as standards of review in the framework the American constitutional law: 앫 Strict scrutiny.366 Any given limitation on copyright is deemed lawful if it is proved necessary to achieve its objective for a compelling government purpose. Under this test, the government needs to prove that there is a compelling governmental interest for limited periods the exclusive rights to their writings . . . .”). A similar conclusion can be found in other cases. See Fox Film Corp. v. Doyal, 286 U.S. 123, 127 (1932); United States v. Paramount Pictures, 334 U.S. 131, 158 (1948); Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975) Sony, 464 U.S. at 429; Fogerty v. Fantasy, Inc., 510 U.S. 517, 526 (1994); Computer Assocs. Int’l v. Altai, Inc., 982 F.2d 693, 711 (2d Cir. 1992). 361 This soundness of seeing copyright limitations as users’ privileges has been confirmed by a recent decision rendered by the Canadian Supreme Court. See CCH Can., Ltd. v. Law Soc’y of Upper Can., 1 S.C.R. 399 (2004) (“The fair dealing exception, like other exceptions in the Copyright Act, is a user’s right.”); see also Nimmer on Copyright 13–15 n.4 (2005) (arguing that fair use “is better viewed as a right granted by the Copyright Act of 1976”); Burrell & Coleman, supra note 185, at 279 (proposing that fair dealing provisions should be “styled as users’ rights”) (2005). 362 Hohfeld, supra note 278, at 32. 363 Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 417 (1922) (Brandeis, J., dissenting). 364 Id. 365 Slaughter-House Cases, 83 U.S. 36, 116 (1873) (Bradley, J., dissenting); see also, Corfield v. Coryell, 6 F. Cas. 546, 552 (1823) (holding that “the government may justly prescribe for the general good of the whole”). 366 See, e.g., Korematsu v. United States, 323 U.S. 214 (1944).

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to carve out the limitation and it has taken the less-restrictive measure to achieve the governmental interest in protecting certain kinds of human rights enjoyed by users. 앫 Intermediate scrutiny.367 Any given limitation on copyright is deemed lawful if it is proved substantially related to an important government purpose. Under this test, the government needs to prove that there is an important governmental interest to carve out the limitation and a substantial correlation between the limitation on copyright and the governmental interest in protecting certain kinds of human rights enjoyed by users. 앫 Rational basis test.368 Any given limitation on copyright is deemed lawful if it is proved rationally related to a legitimate government purpose. Under this test, the government needs to prove that there is a legitimate governmental interest to carve out the limitation and a rational correlation between the limitation on copyright and the governmental interest in protecting certain kinds of human rights enjoyed by users. Among the above three tests, in my opinion, the last one—rational basis test—is most reasonable to become the check on the state’s exercise of its police power. The reasons for choosing the last test, the minimum level of scrutiny and most deferential to government policies, are as follows. First, compared with tangible property, copyright as a species of intangible property has a much stronger direct relation to the public at large.369 When it comes to tangible property, the private/public distinction may be applicable, in that it has no public goods nature. On the contrary, the private/public distinction may not fit comfortably into the sphere of intellectual products due to their nature of being public goods. Generally speaking, intellectual products can be consumed by different users at the same time; and each user’s consumption of the product does not diminish its quality. On the other hand, the public goods nature of intellectual products indicates that they have a much closer correlation to public interest than tangible property. Given their immanence in each user’s daily life, intellectual products, albeit subject to creators’ proprietary control, have taken their roots deep into users’ capabilities to think, to study, and to express their own ideas. As Justice Thurgood Marshall has pointed out, “Ownership does not always mean absolute dominion. The more an owner, for his advantage, opens up his property for use by the public in general, the more do his rights become circumscribed by the statutory and constitutional rights of those who use it.”370 Hence, copyrights in intellectual products shall enjoy much lower level of protection than tangible property does, and the state has stronger police power to regulate the former property rights than the latter. Second, users’ human rights to which the state is intended to afford protection, carry the fundamental values of our human society. The promotion and protection of human rights, as the Universal Declaration of Human Rights has stated, is to fulfill “the inherent dignity and [the] equal and inalienable rights of all members of the human family.”371 To do so, we human beings collaborate with one another with the mutual intention to lay “the foundation of freedom, justice and peace in the world.”372 From this perspective, 367

See, e.g., Craig v. Boren, 429 U.S. 190 (1976). See, e.g., New Orleans v. Dukes, 427 U.S. 297 (1976). 369 For further discussion about the distinction between property and copyright, see Fisher, supra note 21, at 143–54. 370 Marsh v. Alabama, 326 U.S. 501, 506 (1946). 371 UDHR, Pmbl. 372 Id. 368

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human rights protection is “the highest aspiration of the common people.”373 Moreover, if we see human rights as “the function of man,”374 human development is formed by “a combination of various ‘doing and beings,’ with quality of life to be assessed in terms of the capability to achieve valuable functionings.”375 Therefore, the promotion and promotion of human rights is to facilitate the pursuit of happiness as “a virtuous activity of the soul,”376 and further to fulfill the value of functioning as a real “social being.”377 Therefore, the capability approach to human rights protection directs “government to think from the start about what obstacles there are to full and effective empowerment for all citizens, and to devise measures that address these obstacles.”378 As “knowledge, information and communication are at the core of human progress, endeavor and wellbeing” in the digital age,379 the governmental has a very strong legitimate interest in allowing users’ human rights to override creators’ copyrights in certain circumstances. Third, certain eminent domain cases lend strong support to the rational basis test. On the one hand, they infer that courts should show sufficient deference to government’s public policy for taking property on the grounds of public use. For example, in Kelo v. City of New London380 Justice Stevens emphatically argued the case for a deferential standard of review, by concluding that “Without exception, our cases have defined that concept broadly, reflecting our longstanding policy of deference to legislative judgments in this field. . . . For more than a century, our public use jurisprudence has wisely eschewed rigid formulas and intrusive scrutiny in favor of affording legislatures broad latitude in determining what public needs justify the use of the takings power.”381 On the other hand, the rational basis test has been overwhelmingly employed in the eminent domain cases. 382 In Kelo Justice Kennedy’s concurring opinion contended that “demanding level of scrutiny . . . is not required simply because the purpose of the taking is economic development.”383 In other words, in the case involving taking property for economic development that benefits the public at large, the rational basis test could be presumptively applicable. The ruling of Kelo in this regard, therefore, indicates that invading property rights for the general public interest should not be subject to high level of scrutiny. The deferential standard of review is appropriate because protecting public interest is of paramount importance to the development of the society as a whole. This practice can also be applied to measuring the legitimacy of the state’s exercise of policy power to lay down limitations on copyright because copyright, as shown above, has its intimate connection to the promotion of public interest. Moreover, the protection of

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Id. Aristotle, The Nicomachean Ethics 16 (Penguin Classics, 2004). Aristotle sees “the function of man” as “an activity of or series of actions of the soul,” which implies “a rational principle.” 375 Amartya Sen, Capability and Well-Being, in The Quality of Life 30, 31 (Martha Nussbaum & Amartya Sen eds., 1990). 376 Aristotle, supra note 374, at 16. 377 Id. at 14. 378 Martha C. Nussbaum, Capabilities as Fundamental Entitlements: Sen and Social Justice, 9 Feminist Econ. 33, 39 (2003) (emphasis added). 379 World Summit on the Information Society, Declaration of Principles: Building the Information Society: A Global Challenge in the New Millennium (December 2003) ¶ 8; 379 125 S. Ct. 2655 (2005). 380 125 S. Ct. 2655 (2005) [hereinafter Kelo]. 381 Id. at 2663. 382 See, e.g., Hawaii Housing Auth. v. Midkiff, 467 U.S. 229 (1984); Berman v. Parker, 348 U.S. 26 (1954). 383 Kelo, 125 S. Ct. at 2670 (“This taking occurred in the context of a comprehensive development plan meant to address a serious city-wide depression, and the projected economic benefits of the project cannot be characterized as de minimis.”). 374

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users’ human rights, in many cases, is exceedingly significant to promote freedom and justice in our society. 3. Eldred When weighing competing interests, some courts come to the erroneous conclusion that copyright as a form of property is necessarily stronger than users’ rights. In Eldred v. Ashcroft,384 while the lower court’s holding that copyrights are “categorically immune from challenges under the First Amendment” was rejected,385 Justice Ginsburg, who penned the majority opinion, declined to examine whether the expansion of copyright at issue would impinge upon users’ free speech right. This, she argued, is because the presence of the built-in mechanisms in the realm of copyright law, including the fair use exemptions, has already reconciled the conflict of rights in the area of copyright law. Moreover, she offered the perspective as to how the potential conflict between copyright and free speech right could be addressed: The First Amendment securely protects the freedom to make — or decline to make — one’s own speech; it bears less heavily when speakers assert the right to make other people’s speeches. When, as in this case, Congress has not altered the traditional contours of copyright protection, further First Amendment scrutiny is unnecessary.386 Yet one can easily note that the Court’s very reluctance to revisit whether the so-called “built-in First Amendment accommodations” would sufficiently protect users’ free speech right is actually based upon the foregoing dubious premise that the free speech right is necessarily inferior to property right when the two are in conflict with each other. In so doing, the Court implicitly embraces the premise that fair use exemption acts merely as the “affirmative defense” available to users in the proceedings. The “affirmative defense” premise, however, would give rise to the problem that users’ rights are automatically “ranked” lower than copyrights. In treating users’ rights “with indifference,”387 Justice Ginsburg entirely neglected Justice Brandeis’s concurring opinion in Whitney v. California, which emphatically argued that “[t]he fact that speech is likely to result in some violence or in destruction of property is not enough to justify its suppression.”388 Moreover, she also turned a blind eye to Marsh v. Alabama, which forcefully the case for free speech right’s gaining primacy over property right at issue: To act as good citizens they must be informed. In order to enable them to be properly informed their information must be uncensored. There is no more reason for depriving these people of the liberties guaranteed by the First and Fourteenth Amendments than there is for curtailing these freedoms with respect to any other citizen . . .. When we balance the Constitutional rights of owners of property against those of the people to enjoy freedom of press and religion, as we must here, we remain mindful of the fact that the latter occupy a preferred position.389

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37 U.S. 186 (2003). See id. at 219. 386 Id. at 219 (emphasis added). 387 Tushnet, supra note 20, at 562. 388 Whitney v. California, 274 U.S. 357, 378 (1927) (Brandies, J., concurring). 389 326 U.S. 501, 508–09 (1946) (emphasis added and citations omitted); see also Amalgamated Food Emp. Union Local 590 v. Logan Valley Plaza, 391 U.S. 308 (1968) (holding that the mere fact of private ownership in shopping center proprietors did not justify their exclusion of peaceful non-employee picketing of store in center). 385

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Furthermore, courts in Europe have dealt specifically with the conflict between copyright and the free speech right, holding that the former right can take precedence over the latter in the cases concerned. In Ashdown v. Telegraph,390 a watershed decision on the U.K. public interest defense, Lord Phillips explicitly stated the free speech right can override copyright: Now that the Human Rights Act 1998 is in force, there is the clearest public interest in giving effect to the right of freedom of expression in those rare cases where this right trumps the rights conferred by the [UK Copyright, Designs and Patents Act 1988].391 In addition, based upon Article 10 of the European Human Rights Convention, which provides that freedom of expression is a fundamental right, Church of Scientology v. XS4ALL392 ruled that the right to freedom of expression could trump copyright at issue. The combination of the aforementioned cases clearly indicates that the free speech right can override the property right under some circumstances. They teach that, in oscillating between rights enjoyed by copyright holders and users respectively, courts should not presuppose that copyright is necessarily stronger than users’ rights. By envisioning that fair use is merely the affirmative defense available to users, courts actually water down the importance of protecting public interest. In stark contract, putting fair use exemptions into the “power station” that produces the “electricity” formed of users’ privileges means that courts should be fully mindful of and adequately sympathetic to the importance of protecting users’ human rights. This is because granting privileges of this type aims to provide breathing room to users, thereby obviating the chilling effects of proprietary control on users’ enjoyment of human rights to freedom of expression, education, cultural participation, and so forth. To sum up, limitations on copyright are a vehicle through which users’ fundamental rights could be respected, protected and fulfilled in the case where such rights are in conflict with creators’ copyrights. Careful and intimate consideration of users’ fundamental rights that lay the foundation for the state’s public policy, as the lesson drawn from Eldred teaches, must be necessitated in gauging the validity and legitimacy of any given copyright limitation. Yet the second prong of the three-step test, by focusing solely on the scrutiny over whether copyright holders’ interest is adequately protected, completely places such kind of consideration outside its orbit. For example, the second prong of the three-step test can simply strike down Section 110(5)(B) of U.S. Copyright Act on the grounds that it fosters economic competition between right holders and the beneficiaries of this copyright limitation.393 However, this “death sentence” decision was made without any consideration of the fact that Section 110(5)(B) is imbued with great free speech value.394 Moreover, it seems that the second prong of the three-step test together with its first prong creates the strict scrutiny test aimed at measuring the validity of any given limitation on copyright. The strict scrutiny test, this section demonstrates, is an improper standard of review that is capable of striking down public interest-oriented limitations on copyright.

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Ashdown v. Telegraph, [2002] Ch. 149. Id. at 170. 392 C04/020/HR (2005). 393 See Panel Report, ¶ 6.209. 394 See Eldred, 537 U.S. at 190–91(holding that § 110(5)(B), which “exempts small businesses from having to pay performance royalties on music played from licensed radio, television, and similar facilities,” carries the “traditional First Amendment safe guards”) (emphasis added). 391

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C. TAKING COPYRIGHT HOLDER’S SOCIAL RESPONSIBILITIES SERIOUSLY

The inquiry into the legitimacy of the second prong of the three-step test begs another question of whether it is appropriate for test to keep itself estranged from the scrutiny of the extent to which copyright holders have the social responsibilities in return for being granted a set of exclusive rights. Based upon the above discussion on the protection of users’ fundamental rights, this section considers the grounds upon which social responsibilities ought to be imposed upon copyright holders. It then argues that, while wrestling with the formula restricting the scope of copyright limitations, the architects of three-step test unfortunately turned a blind eye to the social responsibilities that should have been imposed upon copyright holders. 1. Copyright and Social Responsibilities a. Reciprocity Human beings are not insulated from one another; rather, we live in a social web of interdependence and cooperation. The synergy sparked by human interaction and collaboration provides the very momentum to sustain and enhance the machinery of human society. From this perspective, Nussbaum points out that it is “reciprocity” that forms the fundamental nature of human life: The core idea of [human nature] is that of the human being as a dignified free being who shapes his or her own life in cooperation and reciprocity with others, rather than being passively shaped or pushed around by the world in the manner of a “flock” or “herd” animal.395 Moreover, in the realm of societal relations, “reciprocity” can be seen as “a moral virtue.” As a moral principle that human beings should subscribe themselves to, it teaches that “[w]e ought to be disposed, as a mater of moral obligation, to return good in proportion to the good we receive, and to make reparation from the harm we have done.”396 When it comes to legal relations, Hart famously made the following statement by drawing on the principle of reciprocity: When any number of persons conduct any joint enterprise according to rules, and thus restrict their liberty, those who have submitted to these restrictions when required have a right to similar submission from those who have benefited by their submission. Obviously, Hart sees legal relations as the joint social enterprise collectively pursed by people with the aim to achieve the common good. In a reciprocity-based society, the mutual responsibility to act in accordance with legal rules is entrenched as crucial vehicle through which law can be capitalized on so as to advance the social development in a healthy way. When it comes to the field of property, Hart’s vision of joint social enterprise is buttressed by the Rawlsian political principle of reciprocity: [I]n a property-owning democracy the aim is to carry out the idea of society as a fair system of cooperation over time among citizens as free and equal persons. . . . To see the full force of the difference principle it should be taken in the context of property-owning democracy (or of a liberal socialist regime) and not a welfare state: it is a principle of reciprocity, or mutuality, for society seen as fair system of cooperation among free and equal citizens from one generation to the next.397 395 396 397

Nussbaum, supra note 352, at 72 (emphasis added). Lawrence C. Becker, Reciprocity 3 (1986). John Rawls, A Theory of Justice xv (rev. ed., 1999) (emphasis added).

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The very importance placed by Rawls in the above statement is indeed the “natural duties [of] mutual respect.”398 According to him, only through entrenching the principle of reciprocity deep into the fabric of property protection system can the institution of democracy allow freedom and equality to flower. Consequently, “Every man is bound to use his own property in such a manner as not to injure the [rights] of his neighbor”399 becomes the very motto in the so-called property-owning democracy. More importantly, property-owning democracy based upon the principle of reciprocity should be engineered to produce fair equality of opportunity for citizens. This means that property owners shall cooperatively participate in the joint scheme of redistributing opportunities with others.400 Copyright law is also a joint enterprise in which creators and users work together in the social machinery to achieve law’s ultimate aim of promoting the general public interest.401 Within this joint enterprise, users submit themselves to copyright law, which requires them to respect the copyright vested in creators. In this way, they contribute to the progress of science and useful arts, because the protection of copyright promoted by users’ showing of respect for such form of property rights, would result in sustained and enhanced provision of works by creators. This would further foster a flowering of knowledge for human development. According to the principle of reciprocity, as long as users act in a manner respectful of copyright, creators should and must be required to do something positive to the promotion and protection of users’ rights. In this sense, the grant of copyright to creators, therefore, intrinsically entails the social responsibilities imposed upon them. Put differently, users can thereby forcefully petition creators to exercise their rights in a manner conducive to the pursuit of public good. From this perspective, copyright holders are required to come to terms with socially beneficial use of their works by the public at large. Under certain circumstances, they are further required to facilitate such kind of use of copyrighted works. 2. Equality Intellectual products are public goods in that they can be consumed in a non-exclusive and non-rivalrous manner. As economists have pointed out, however, the maker of intellectual products suffers from the so-called free-rider problem.402 When the number of free riders keeps increasing, intellectual products “are likely to be produced at socially suboptimal levels,”403 for the makers of such products would not reap their investment due to the competition brought about by free riders.404 Market failure occurs in this context because resources for producing intellectual products are not allocated to the person who directly and positively contributes to making of such products. Given the risk of potentially inadequate provision of intellectual products, government confers exclusive rights, including copyright, upon creators, as one of the means of dealing with public goods problem.405 Through the grant of monopoly in the form of property rights, govern398

Id. at 447. Francisco v. Department of Institutions and Agencies, 180 A. 843, 845 (N.J.Ch. 1935) (citing Justice Mellor). 400 See Richard Krouse and Michael MacPherson, Capitalism, “Property-Owning Democracy,” and the Welfare State, in Democracy and the Welfare State 79, 88–94 (Amy Gutmann ed., 1988). 401 For the cases in which is it ruled that the ultimate objective of copyright law is to serve public interest, see supra note 360. 402 See, e.g., Gregory Minkiw, Principles of Economics 226 (2004). 403 Fisher, supra note 21, at 200. 404 See Landes & Posner, supra note 229, at 37–41. 405 For a summary of various means used by governments to deal with public goods problem, see Fisher, supra note 21, at 200–01. 399

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ment aims to ameliorate the adverse effects arising from the competition wrought by free riders of intellectual products. In this sense, conferring copyright is tapped into as the means to the ends of fostering efficiency in producing, disseminating and exploiting intellectual products. Yet one should note that the efficiency-oriented approach to address the public goods problem is by no means free of problems. Efficiency, as the economists themselves have acknowledged, at times leads to the inequality in the distributing the wealth among citizens. As Gregory Mankiw observed, “efficiency refers to the size of the economic pie, and equity refers to how the pie is divided. Often, when government policies are being designed, these two goals conflict.”406 In this regard, Felix Cohen, one of the foremost American legal realists, provided a fresh insight into the potential inequality wrought by the monopolization of public goods: Language is socially useful apart from law, as air is socially useful, but neither language nor air is a source of economic wealth unless some people are prevented from using these resources in ways that are permitted to other people. That is to say, property is a function of inequality…. So, if courts prevent a man from exploiting certain forms of language which another has already begun to exploit, the second user will be at the economic disadvantage of having to pay the first user for the privilege of using similar language or else of having to use the less appealing language (generally) in presenting his [expressions] to the public.407 Indeed, this vision of the negative externalities produced by property approach to deal with public goods problems is also applicable to copyright protection of works, for language used in any given work is the “bread and butter” used by people to bring to fruition the self-expression need. Against a backdrop of monopolistic control over the expressions of ideas, at high stake are users’ rights to free speech, education, cultural participation and so on. Therefore, the monopolistic control over expressive words gives rise to unequal distribution of public goods between copyright right holders and users. As Justice Bradley pointed out in his dissenting opinion in the Slaughter-House cases, “[the] granting of monopolies lies, or exclusive privileges to individuals or corporations, is an invasion of the right of others to choose a lawful calling, and an infringement of personal liberty.”408 Without any social welfare-oriented measures counteracting this inequality problem, users are destined to be marginalized in the digital age. From this perspective, it is likely that copyright provides economic protection for creators at the expense of public interest and social welfare relating to the use of works of authorship. In order to counteract the foregoing inequality problem occasioned by proprietary control of expressive words, imposing social responsibilities upon copyright holders is a means of achieving “broad notion of equity” that copyright law is designed to serve.409 From the perspective of the Lockean natural rights justification for property protection, the equality-based social responsibilities are twofold. On the one hand, Locke’s theory teaches that the right to property, as the monopoly in a common mixed human labor, can sustain only if “there is enough and as good left in common for other.”410 This 406

Minkiw, supra note 402, at 4. Cohen, supra note 274, at 816 (1935). 408 Slaughter-House Cases, 83 U.S. 36, 120 (1872) (Bradley, J., dissenting). 409 Joseph E. Stiglitz, Knowledge As a Global Public Good, in Global Public Goods: International Cooperation in the 21st Century 308, 316 (Inge Kaul et al eds. 1999). 410 John Locke, Two Treatises of Government 288, bk. II, § 27 (Peter Laslett ed., 2d ed. 1967). 407

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is widely known as the “sufficiency proviso.” Central to this provision is the assumption that the eligibility to become property owner depends upon whether others are left with sufficient opportunities to use the common. In this respect, property owner has the social responsibility to eliminate the negative effects (occasioned by his exclusive possession of certain products) on others’ wellbeing that is dependent upon a reasonable degree availability of such products. This is because those who claim property rights in certain products “should not do harm to other peoples’ claim to the common.”411 If he or she does not carry out the social responsibilities in question before or after being conferred upon exclusive rights in certain products, he would surely be ineligible to be vested with property rights. As copyright is a form of property rights, the social responsibility requirement should also be applies to copyright holders. In this respect, Gordon’s explication of the “sufficient provision” lends strong support to the social responsibility requirement as the quid pro quo for the grant of exclusive rights to creators: The provision that “enough and as good [be] left” lies at the center of natural rights justification for copyright protection: that creators should have property in their original works, only provided that such grant of property does no harm to other person’s equal abilities to create or to draw upon the preexisting cultural matrix and scientific heritage. All persons are equal and have an equal right to the common.412 On the other hand, the creators’ social responsibilities to use the works in a socially beneficial manner is also based on the Locke’s “no spoilation” proviso, which was envisaged by him as the inherent requirement for laborers’ continuous enjoyment of the property right in a common mixed with their labor: [I]f either the Grass or his Inclosure rotted on the ground, or the Fruit of his planting perished without gathering, and laying up, this part of Earth, notwithstanding his Inclosure, was still to be looked on as Waste, and might be the Possession of any other.413 The “no spoilation” proviso, therefore, makes clear that a person’s property right can be invalidated “if he fails to exercise it or exercises it in such a ways as to prevent the [property] from ever being useful in any way to anyone at all.”414 In this sense, the owner of property shall not use property in a manner harmful to the promotion of social wellbeing. This proviso, when applied to copyright, does requires that the creators as the holder of copyright, shall not abuse their exclusive rights in ways that unreasonably constrain users’ exercise of their pertinent human rights. 3. Eldred In Eldred the Supreme Court acknowledged that social responsibilities are imposed upon right holders as the quid pro quo for vesting them with patent rights.415 Yet, it rejected that

411 Wendy J. Gordon, A Property Right in Self Expression: Equality and Individualism in the Natural Law of Intellectual property, 102 Yale L. J. 1533, 1561(1993). For a contrary view, see Jeremy Waldron, The Right to Private Property 211 (1988) (“When Locke does refer to it, the fact of sufficiency for all is spoken of as an effect of the early operation of the Spoilation Proviso rather than as a limitation in its own right.”). 412 Gordon, supra note 411, at 1561–62. 413 Locke, supra note 410, bk. II, § 38. 414 Waldron, supra note 411, at 207–08. 415 Eldred, 537 U.S. at 216 (holding that the disclosure requirement for patentees should be seen as “the price paid for the exclusivity secured”).

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the same idea could be applied to copyright.416 In doing so, the Court based their denial on the distinction between the protections afforded to copyright and patent: We note [that] patents and copyrights do not entail the same exchange, and that our references to a quid pro quo typically appear in the patent context…. [C]opyright gives the holder no monopoly on any knowledge. A reader of an author’s writing may make full use of any fact or idea she acquires from her reading. The grant of a patent, on the other hand, does prevent full use by others of the inventor’s knowledge.417 Yet the Supreme Court’s reasoning of whether the social responsibilities should be imposed upon copyright holders is flawed in that a simple juxtaposition of patent and copyright rights cannot necessarily lead to the foregoing conclusion. Without digging deep into other aspects of the nature of copyright protection and its accompanied social problems as discussed in the above two subsections, the Court’s ruling against the requirement of social responsibilities is unquestionably dubious. With the recent expansion of copyright protection, it is not necessarily true the protection afforded to copyright holders, according to the letters of copyright law, does not enable them to monopolize any knowledge. As Sega has pointed out, “the fact that computer programs are distributed for public use in object code form often precludes public access to the ideas and functional concepts contained in those programs, and thus confers on the copyright owner a de facto monopoly over those ideas and functional concepts.”418 Moreover, the Court failed to bear in mind that the legal protection of technological measures and nonoriginal databases actually confers monopoly over ideas upon right holders. On the other hand, in overemphasizing the distinction between patent and copyright protections, the Court failed to realize the very fact that copyright holders, in effect, wield the monopoly to exercise their right in a manner contrary to the public interests. While it is crystal clear that the exclusivity of patent rights is generally stronger than that of copyright, it does not necessarily follow that the public are no longer vulnerable to the misuse of copyright committed by copyright holders in various occasions. Indeed, the copyright misuse doctrine is actually the outgrowth the judicial effort to bring a halt to the copyright holders’ monopolistic behaviors. In this sense, this doctrine is instrumental in curbing the copyright holder’s monopoly in exercising their rights in a way that it runs counter to the ultimate aim of copyright law, i.e. “to stimulate artistic creativity for the general public good.” While great importance was attached to the line between patent and copyright protections, the Supreme Court skirted around the crucial issue as to whether the copyright may well be exercised in way contrary to the public interest. Worse still, it failed to realize that the copyright misuse doctrine is borrowed from its counterpart in the patent law. In Lasercomb, the Fourth Circuit invented the copyright misuse doctrine on the basis of the vision that the monopolies possessed by the holders of patents and copyright are relatively similar in nature: 416 In this case, the petitioner argued that “The author of an original work receives an ‘exclusive Right’ for a ‘limited Tim[e]’ in exchange for a dedication to the public thereafter. Extending an existing copyright without demanding additional consideration, petitioners maintain, bestows an unpaid-for benefit on copyright holders and their heirs, in violation of the quid pro quo requirement.” See Eldred, 537 U.S. at 214. In my opinion, the petitioner, however, had a very narrow understanding of the copyright holders’ social responsibilities. On the one hand, they did not use term “social responsibility,” which offers stronger case for protecting users’ human rights than the term they used, “quid pro quo.” On the other hand, they argued that the “quid pro quo” requirement exists after the expiration of the copyright protection and, therefore, failed to make it clear that copyright holders have social responsibilities throughout the term of copyright protection. 417 Id. at 216–17. 418 Sega, 977 F.2d at 1527 (emphasis added).

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It is significant [that] the framers of our Constitution continued … considered in tandem [the] property rights protectable by copyrights and those protectable by patents. In giving Congress the power to create copyright and patent laws, the framers combined the two concepts in one clause, stating a unitary purpose-to promote progress.…[S]ince copyright and patent law serve parallel public interests, a “misuse” defense should apply to infringement actions brought to vindicate either right….[T]he similarity of the policies underlying patent and copyright is great and historically has been consistently recognized. Both patent law and copyright law seek to increase the store of human knowledge and arts by rewarding inventors and authors with the exclusive rights to their works for a limited time. At the same time, the granted monopoly power does not extend to property not covered by the patent or copyright.419 Therefore, by relying upon the distinction between copyright and patent, Court turned a blind eye to the common nature shared by these two forms of intellectual property: the monopolistic control of subject matter concerned breeds abuse of rights. From this perspective, if the social responsibility requirement applies to patent, the Supreme Court cannot, and should not, rule out the same requirement for copyright. To sum up, the above discussion demonstrated that social responsibility is the very quid pro quo for granting a bundle of exclusive rights to creators.420 The consideration of the social responsibilities that are imposed upon copyright holders is essential to the healthy development of copyright law. This is because law cannot be advanced in the single direction to enhance copyright holders’ interests. The building of copyright holders’ social responsibilities is intended to facilitate pursuit of copyright law’s ultimate value. It is critically important that such responsibilities shall be woven into the fabrics of copyright law. Akin to Eldred, the second prong of the three-step test, however, alienates copyright holders’ social responsibilities from its scrutiny over the validity of any given limitation on copyright. V. CONCLUSIONS In Mending Wall Robert Frost poetically rejected the hardheaded notion that “[g]ood fences make good neighbors.”421 He thought that those who are zealous in building good fences would sadly “mov[e] in darkness.”422 Indeed, what is implied in Frost’s lamentation is that the so-called “good fences” protecting property rights would not necessarily make a community awash with vibrancy, exuberance, and coherence. Some eighty years later, by stating the case for “building communities without building walls,”423 Jerry Frug forcefully reminds us again that “good fences” are by no means the very nostrum to “make good neighbors.” The arrival of the digital age ushers globally connected information superhighways into the universe of human flourishing, mainstreaming, and electrifying information as the lifeblood of any given knowledge-based society. Thus, a robust flow of information has become the electricity that provides the very energy to allow a host of new ideas to flower beyond the orbit of conventional wisdom. Yet one should bear in mind that technology, if manipulated by certain kind of centralized power, may well act as the invisible 419

Lasercomb, 911 F.2d at 975, 978. For different justifications for imposing responsibilties on right holders, see Jacqueline Lipton, Information Property: Rights and Responsibilities, 56 Fla. L. Rev. 136 (2004). 421 Robert Frost, Mending Wall, in The Poetry of Robert Frost 33 (Edward Connery Lathem ed., 1979). 422 Id. 423 Gerald E. Frug, City-Making: Building Communities Without Building Walls (1999). 420

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“wall” bringing a halt to the flowing of information that reaches the hearts and minds of people at a lightning speech in the digital age.424 Copyright law might well represent one strand of such kind of centralized power, in that it “regulates expressive activity.”425 In this regard, it has been pointed out that, while digital technology interconnects people at all corners of the world into a digital global village, “[c]opyright has emerged as one of the most important means of regulating the international flow of ideas and knowledge-based products.”426 Hence both international and national copyright laws “affect[t] the gains are shared, and in doing so affect[t] the pace of development within less developed countries.”427 By and large, the three-step test has become the catalyst for the continued strengthening of copyright protection at the international, regional and national levels. As this article has shown, the expansion of the three-step test has been premised on the rhetoric that the unprecedented convenience of having access to and making use of works afforded by digital technology, would necessarily mean that the copyright protection should be beefed up by significantly narrowing down the scope of the limitations on copyright. Put in Justice Breyer’s words, we can boil down the dangers of keeping this test intact as follows: [The three-step test] will cause serious expression-related harm. It will likely restrict traditional dissemination of copyrighted works. It will likely inhibit new forms of dissemination through the use of new technology. It threatens to interfere with efforts to preserve our … historical and cultural heritage and efforts to use that heritage, say, to educate our … children. It is easy to understand how the statute might benefit the private financial interests of corporations or heirs who own existing copyrights. But [we] cannot find any constitutionally legitimate, copyright-related way in which the statute will benefit the public. Indeed, in respect to existing works, the serious public harm and the virtually nonexistent public benefit could not be more clear.428 The copyright holder-centered premise upon which copyright law has been advanced, however, is fundamentally flawed. As shown in this article, the promotion and protection of users’ interest is indeed the heart of copyright law. Copyright limitations, as the privileges granted to users and the social responsibilities imposed upon right holders, are engineered to protect users’ human rights so as to foster an enhanced promotion of free speech, education, cultural participation, and so on. Indeed, this perspective opens up a new vision of the nature of copyright limitations and of the way in which the current right holder-centered copyright law could be altered. The change of the three-step test, therefore, can be seen as the first crucial step to usher in user-centered copyright law. By rooting out the substantive and structural defects inherent into the three-step test, the creative destruction model put forward in this article would open a new chapter of tapping into the role of copyright in advancing the dissemination of information and further delivering on the promise to afford an enhanced promotion of public interest. As 424 This trend is known as “Information Enclosure Movement.”See Yochai Benkler, Free as the Air to Common Use: First Amendment Constraints on Enclosure of the Public Domain, 74 N.Y.U. L. Rev. 354 (1999); James Boyle, The Second Enclosure Movement and the Construction of the Public Domain, 66 Law & Contemp. Prob. 33 (2003); Peter Drahos & John Braithwaite, Information Feudalism: Who Owns the Knowledge Economy? (2003); David Boller, Silent Theft: The Private Plunder of our Common Wealth (2002); Christopher May, A Global Political Economy of Intellectual Property Rights: The New Enclosures? (2000). 425 Van Houweling, supra note 20, at 1546. 426 UNESCO, World Information Report 320 (1997). 427 Stiglitz, supra note 409, at 317. 428 Eldred, 537 U.S. at 266 (Breyer, J., dissenting).

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a new idea, it yet reflects a two-hundred-year-old wisdom that has sunk to the bottom of the pool of copyright thoughts: “a man may fairly adopt part of the work of another; he may so make use of another’s labors for the promotion of science, and the benefit of the public.”429 To be sure, the recent amendment to the TRIPs Agreement triumphantly brought about the global coalition against patent protection that has been anti-humanitarian,430 sparks the aura of “creative destruction” of the three-step test. This worldwide campaign clearly shows that, as long as people are united together with a steadfast commitment to combating an illegitimate rule, the hurdle to usher in a paradigm shift is by no means insurmountable.431 Hence, it is highly time for us to create a revolutionary earthquake to break down the very foundation on which the three-step test is founded. We shall also bear in mind that our post-earthquake task is to build up the user-centered copyright law that grants broader privileges to users and imposes social responsibilities upon right holders. Armed with a resounding denial of the right holder-centered copyright law, our Manifesto for waging this “revolution” urges that “Users of copyrighted works in all countries, unite!”432 * * * Thank you. Haochen. Your paper will be substituted in the book for your oral remarks. It is extensive and goes into great detail. His first point was that the language of he three-step test is too indeterminate which is a disadvantage for legislators, courts or others, who actually want to comply with it. Would anyone like to address that point? Coenraad? PROF. VISSER: If you look at implementation, especially from the point of view of developing countries, the fact that you have an open-texture language in the three-step test gives you the route. You can adapt to different levels of national protection by using the open-texture terms like “special cases,” “legitimate interest,” “normal exploitation of the work.” So I think, from a developing country perspective, it is important to have that kind of open texture at this level of implementation. When you move to national legislation, it is different. I think there open texture becomes a problem. I think at the international level, it is a plus. PROF. HANSEN: Certainly the user side could take advantage of it. PROF. VISSER: Yes. PROF. HANSEN: But Haochen would say that perhaps the owner side could take advantage of it. Anyone else have a thought on that? PROF. KUR: I think the three-step test, as it is, has room for flexibility. I particularly agree with the paper in that the three-step test was developed by the panels into a one-step PROF. HANSEN:

429 Cary v. Kearsley, 4 Esp. 168, 170–171 (1803). Lord Ellenborough further pointed out that “While I shall think myself bound to secure in every man the enjoyment of his copyright, one must not put manacles on science.” Id. 430 See Press Release, WTO, Members OK Amendment to Make Health Flexibility Permanent, Press/426 (Dec. 6, 2005), available at http://www.wto.org/English/news_e/ pres05_e/pr426_e.htm. 431 Based upon a proposal offered by Argentina and Brazil, WIPO recently set up the Development Agenda. See WIPO, IIM Discusses Proposals on a Development Agenda (June 24, 2005); see also Rochelle Cooper Dreyfuss, TRIPS-Round II: Should Users Strike Back, 71 U. Chi. L. Rev. 21 (2004) (urging that the future multilateral negotiations should add explicit provisions protecting users’ interest in the international intellectual property). 432 The last word of The Communist Manifesto is “Working men of all countries, unite!” See Karl Marx & Friedrich Engels, The Communist Manifesto (2002).

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test. What they did was coming back, more or less, to one and the same issue on all three steps. With all due respect, I have seldom seen such a lengthy paper with so little substance. It is true that the copyright as well as the patent panel have emphasized that these are three separate steps, all of which independent from each other, and that redundancy should be avoided. But actually, the arguments they use on all three steps are repetitive. What the panels do, both in the copyright field and in the patent field, is just assess how much is detracted from a full right. They do it on the first step, under the heading of “limited exceptions” in the patent field and of “certain special cases” in the copyright field. They apply the same test when it comes to “normal exploitation” on the second step. Then they come back to it when assessing the prejudice. It is always the same. In essence, what they are doing is very similar to the minor exceptions doctrine that was applied before the three-step test was entered into the Berne Convention (and which, according to the copyright panel, may still be applied alongside the three-step-test). This cannot be the right way forward; we need to get away from that. It is hardly imaginable that when the three-step test was inserted into TRIPs, the intention only was to implement something like the minor exceptions doctrine. But even if that should have been the intention at the relevant time, we need to take into account that we are now at a post-Doha stage. The Doha Declaration433 has brought other aspects into TRIPs. It has made the point that the Objectives and Principles stated in Articles 7 and 8 have to be taken into account when assessing the flexibilities that can be found in the text.434 One can no longer approach the problems in an isolated fashion, anxiously clinging to the exact wording of the provisions, as the panels did. Instead, the issues need to be appraised in the larger context of the Objectives and Principles. Therefore, our primary concern should be to get away from what the panels have declared the three-step test to mean. Let’s free our minds from that and let’s take a fresh approach. Then we might see that the three-step test leaves enough room for a flexible interpretation. I happen to be in a group that tries to develop a text that brings out exactly that kind of subtext. Maybe we could discuss that. PROF. HANSEN: Does the test need amendment, or are you just saying a better interpretation? PROF. KUR: Amendment would be nice, of course, but there is no political consensus about amendment whatsoever in the near future. There could be a recommendation. There could be a protocol. “Soft law” could be generated and agreed upon under the aegis of WIPO, in the form of a Joint Recommendation on how to understand the three-step test. It could, of course, be the subject of much academic writing and effort. The European Court of Justice (ECJ) might decide on the three-step test, which it will probably have to do in the near future. PROF. HANSEN: Mary? PROF. WONG: I want to agree, and emphasize that we probably should not fixate on the panel’s interpretation of the three-step test. In my opinion, not only would that be tragic, but it would probably be wrong. For example, when we talk about the first step, “certain special cases,” even if you agree that those certain special cases need to be clearly defined, that does not mean that they have to be specific, listed, exhaustive, much less so certain 433 WTO Ministerial Declaration on the TRIPs Agreement and Public Health WT/MIN(01)/DEC/1, Adopted by the 2001 WTO Ministerial Conference in Doha (Nov. 14, 2001), available at http://docsonline.wto.org/ imrd/directdoc.asp?DDFDocuments/t/WT/ Min01/DEC2.doc. 434 See TRIPs Agreement, supra note 7, Art. 7 (Objectives) and Art. 8 (Principles).

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that you know exactly what they are supposed to mean. Part of Haochen’s paper is that, by that token, if you take that seriously, the U.S. style of fair use would fail the three-step test. That can’t be right — or at least we hope it is not going to be right. The other point I wanted to make is that, assuming that we stick with the three-step test, or some variant of it, my problem with it is that it is still phrased as an exception and a limitation. You are still proceeding from a position of strength where the rights holders are concerned, and then the users have to burrow into some category that you create as a limitation and exception. I think that if you look at Article 7 of TRIPs, for example, and some of the developing jurisprudence, like human rights, we can do a lot better than that. PROF. HANSEN: Ted, I imagine you might have a different point of view. MR. SHAPIRO: Yes. A standard has been developed at the international/European/ national level now, a key test that does indeed take into account the public interest. The fact that you have an exception or a limitation for a particular category of beneficiaries of exceptions means that you have already taken into account the interests of third parties; therefore, that part of the addition that you wish to put into the test is redundant. We talk about the notion that certain exceptions should rise to the level of human rights. What we were talking about in the case of the WTO panel was the human rights of restaurants, I guess. So it is not quite compelling in that regard. I would point out, of course, that copyright owners are copyright users as well. I just wanted to point out a national-level decision that just was handed down last week in the “Mulholland Drive” case,435 to which you allude in your paper, the decision coming from the Court of Appeal on the remand from the Cour de Cassation, the French supreme court. In that case, arguments were made that private copying amounts to a human right. The court of appeal was not willing to accept that it was a right at all. MR. SUN: I think it deals with privacy concerns, the right to privacy. MR. SHAPIRO: You are assuming that you have intervened and violated somebody’s privacy merely by saying that there should not be a private copy right. MR. SUN: I want to sing a song in my bathroom. I don’t want copyright owners to interfere with that. MR. SHAPIRO: Sing away. PROF. HANSEN: Hold on, Haochen. Let Ted finish. We are going to go one at a time. MR. SHAPIRO: I want to cite part of this ruling that basically says not only is it not a human right, it’s not a right; therefore, you don’t even have standing to assert it. I did want to say with respect to the three-step test that it doesn’t necessarily mean — and this particular case showed it as well at the Cour de Cassation level — that an entire exception must be executed. It could be, for example, in the case of the private copy exception, that part of the exception is lopped off. In that regard, you still have a private copy exception (e.g., time-shifting television programs), but you can’t back-to-back copy 435 Cour deCassation, première chamber civile, Arrêt n°549 du 28 février 2006, Cases 05-15.824, Studio Canal SA v. M. Stéphane X et autre, and 05-16.002 Universal Pictures video de France et autres v. M. Stéphane X et autre (“DVD Mulholland Drive”) (granting prohibition on DVD copy protection devices as incompatible with private copying rights), (in French), available at http://www.courdecassation.fr/article8777.html. This decision reversed the Cour d’appel de Paris decision of 22 Apr. 2005 in Perquin and UFC Que Chiosir v. SA Films Alain Sarde, Ste Universal Pictures video France et al., 36 IIC 148 (2005) (holding TPMs illegal), available at http://www. juriscom.net/documents/caparis2005 0422.pdf. The Cour de Cassation sent the case back to the Court of Appeals, which, on remand, upheld TPMs (Apr. 4, 2007). See http://www.zdnet.fr/actualites/informatique/ 0,39040745, 39368472,00.htm. For a further discussion of this case, see infra Session VIII, Part D, Exclusive Rights v. Global Remuneration.

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a DVD. So it doesn’t have to kill the whole exception. It might just kill only part of it. That is, in a sense, part of the beauty of the three-step test. PROF. HANSEN: Bernt? PROF. HUGENHOLTZ: I would like to follow up on the last part of Mary’s intervention. She mentioned human rights. I think there is, indeed, a certain arrogance to the three-step test, with copyright taking center stage — a logical thing for us, of course, copyright people, but not necessarily from a broader perspective. Limits are the exceptions. But the copyright is not necessarily the center of the legal universe. The three-step test is ultimately part of the copyright framework, a meta-norm of copyright, no more, no less. Think of competition law. We are getting used to the idea that there are limits in IP imposed externally by competition law. I do not think we have to subject these limits to the three-step test. Or, for a more powerful example — Mary’s example, actually — human rights, free speech, look at Article 10.2 of the European Convention on Human Rights.436 There, it says limits to free speech, including copyright, need to be necessary in a democratic society. So that is the reverse norm, so to speak. From that perspective, copyright, including its meta-norm, the three-step test, is just a limit to free speech. That must fulfill that meta-norm. So this is about the hierarchy of norms. To make a short comment even shorter, limits based on free speech or competition law may, in exceptional cases, actually be permitted, even if they do not fit the straitjacket of the three-step test. PROF. HANSEN: That is pretty broad. It is not as fine-tuned as you would have in one that was internal to copyright law. I understand your point. But in terms of actually trying to solve a problem within copyright law, do you see the same problems that Haochen sees in the three-step test? PROF. HUGENHOLTZ: I agree with a lot of what he says. He tries to reformulate the three-step test in a way that makes it easier to fit in with societal interests. I think there is a need for that. I also agree, more pragmatically perhaps, with Annette when she says we do not really need to reformulate the three-step test; we just need to reinterpret it. There is a lot of flexibility in it. If you do not take the second step as the decisive factor, which has the potential of killing off all limitations — if you don’t take that too seriously, so to speak — then there is a lot of room in the third step for competition law, for interests based in human rights, and other things. PROF. HANSEN: Jane? PROF. GINSBURG: I have the feeling that we are getting into “my norm trumps your norm:” we have copyright rights being trumped by free speech rights, which in turn may 436 Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR), Rome, 4.XI.1950. The ECHR text has been amended by Protocol No. 3 (ETS No. 45) (entered into force 21 Sept. 1970); Protocol No. 5 (ETS No. 55) (entered into force 20 Dec. 1971; and Protocol No. 8 (ETS No. 118) (entered into force 1 Jan. 1990) and comprised also the text of Protocol No. 2 (ETS No. 44) which, in accordance with Article 5, paragraph 3 thereof, had been an integral part of the Convention since its entry into force on 21 Sept. 1970. All provisions which had been amended or added by these Protocols are replaced by Protocol No. 11 (ETS No. 155), (entered into force 1 Nov. 1998). As from that date, Protocol No. 9 (ETS No. 140) (entered into force 1 Oct. 1994) was repealed and Protocol No. 10 (ETS No. 146) has lost its purpose. Full text available at http://conventions. coe.int/treaty/ en/Treaties/Html/005.htm. ECHR, Art. 10, Freedom of Expression: “2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.”

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be being trumped by property rights. The ECJ honors property rights, even in trademark applications. I am not sure that norm-naming is really going to advance the discussion. On the three-step test, I agree with Bernt that the second test, “normal exploitation,” has a lot of room for creative interpretation, since nobody knows what “normal” means and the WTO panel did not foreclose an interpretation of “normal” that would take into account normative considerations, including various societal benefits. Then, of course, the third step, does take into account exactly the things that were being urged to take into consideration. The inquiry under the third step is whether the limitation “unreasonably prejudices the legitimate interests of the author.” “Unreasonable,” implies that some prejudice to authors can be permissible. The “legitimate interests” element also addresses the reasons for which the author seeks to prohibit copying, communicating to the public, and so forth. Some reasons (for example, preventing criticism) might not advance “legitimate interests.” PROF. HANSEN: Haochen, do you want to respond to any of these comments? MR. SUN: I want to emphasize something about human rights. The WTO copyright panel struck down the limitation on public performances, which was carved out in copyright action in the United States. So there are still very important human rights implications embedded in that limitation. We can find the U.S. Supreme Court decision about copyright term extension.437 In that case, Justice Ginsburg says that Section 110, which exempts more businesses from having to pay performance royalties on music played on licensed radio and television and similar facilities, carries the tradition of First Amendment safeguards. I think she is talking about free speech values. We can also find that there are people trying to provide justification for this limitation. People say that this limitation, the right of public performers, protects mom-and-pop businesses, which play an important role in American social fabric, because they offer economic opportunities for women, minorities, immigrants, and welfare recipients for entering the economic and social mainstream. So there is a kind of affirmative action implication in it. I just wanted to reemphasize that. PROF. HANSEN: Let me ask this question: In the United States, does anyone actually care about the three-step test? Most copyright lawyers in the United States or even people from the U.S. in this audience could actually tell us the three-step test. Certainly Congress never cared. None of these conventions have direct effect in the United States, including Berne. And Congress took pains in the Berne Implementation Act to say it does not have the force of law. Is there any practical aspect to this question — other than, perhaps, a panel decision from WTO — internally, within the United States? Jane, is there any practical effect in the United States? PROF. GINSBURG: There could be, to the extent that our courts are willing to look at how other courts are elaborating similar norms. That is a topic of some contention, at least when it comes to constitutional norms. This is not a constitutional norm. I think the second and third factors, particularly the second, have some echoes in Section 107. “Normal exploitation” and the fourth fair use factor (impact on the potential market for the work) might be considered to be somewhat related.438 Other jurisdictions will be applying their versions of the three-step test: the 2001 Information Society Directive439 includes the test and many of the national implementing laws have adopted it, sometimes verbatim. Thus there could be quite a flowering of interpretations of the 437

Eldred v. Ashcroft, 37 U.S. 186 (2003). See 17 U.S.C. § 107. 439 Directive 2001/29/EC, The Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 10 (May 22, 2001). 438

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three-step test by other national courts. I think it is perfectly possible, and even desirable, that U.S. courts look to how other courts are elaborating these considerations in their cases involving exceptions and limitations. So, yes, it can be relevant, if we are willing to be not totally isolationist and xenophobic. PROF. HANSEN: Of course, that would require American lawyers to know about it and to use it in their copyright litigation. I have urged my students to use Berne or TRIPs provisions as persuasive support for arguments when they get into practice. We are going to go to the audience now. QUESTION [Mihály Ficsor, President, Hungarian Copyright Council, Budapest]: I was one of the three members of the first WTO panel to interpret the Article 30 version of the three-step test440 — exceptions, not limitations, to patent rights.441 It is different. Although it is very similar, the first step is different. It says “limited cases,” not “special cases.” The second step also refers to “normal exploitation.” The third step is practically the same, except that it added what you also want to add, that, in addition to the interests of owners, interests of third parties should be taken into account. In this panel, we considered that it is also in Article 13.442 You can only decide about the question of whether something unreasonably prejudiced the alleged interests of owners of rights if you take into account other interests. As far as the second test, we did state that it includes both descriptive and normative elements. As far as the first step is concerned, I do not agree that this clearly defined expression means that the three-step test is in conflict with the U.S. Copyright Act, and in particular with the provisions on fair use. I spoke about this once at an AIPPI Congress. I would like to say that this is the interpretation of the word “certain.” They found one definition in the Oxford Dictionary, but “certain” doesn’t mean that in this context. It means “some.” So there is the terror of the Oxford Dictionary in WTO panels. PROF. HANSEN: Thank you, Mihály. QUESTION [Richard Rudik, International Publishers Association]: I was somewhat surprised that the discussion hasn’t touched on the purpose of copyright, whether it be to foster creativity, promote the arts and sciences — as Lincoln put it, add “the fuel of interest to the fire of genius.”443 Maybe the concept of what the purpose of copyright is comes back in connection with the words “legitimate interests.” I cannot think of any law in which public policy is not relevant or does not bear on it in some way. It’s a question of just how it works and whether we have the right words and principles in the three-step test to enable public policy to be considered. There hasn’t been much discussion of the purpose of copyright, how it relates to the three-step test, whether it be through the concept of legitimacy or otherwise. Does anybody have any reactions? 440 Panel Report, Dispute brought by European Commission: Canada—Patent Protection of Pharmaceutical Products, WT/DS114/R (Mar. 27, 2000) (World Trade Organization) available at http://www.worldtradelaw.net/ reports/wtopanelsfull/canada-pharmaceuticals(panel)(full).pdf. 441 TRIPs Art. 30: “Exceptions to Rights Conferred — Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties.” 442 Id. Art. 13: “Limitations and Exceptions — Members shall confine limitations and exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the rights holder.” 443 Abraham Lincoln, Lecture on Discoveries and Inventions Jacksonville, Illinois, Feb. 11, 1859, in Abraham Lincoln: Speeches and Writings, 1859–1865, at 10–11 (Don E. Fehrenbacher ed., 1989).

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MR. SHAPIRO: It is in the paper. QUESTION [Michael Keplinger,

World Intellectual Property Organization, Geneva]: Speaking in my role as a former member of the U.S. government, I was one of the negotiators on the TRIPs Agreement. I, certainly, in arguing for the inclusion of the three-step test, thought it was perfectly compatible with the U.S. copyright law including fair use. When you talk about social policy, a legislature makes a social policy decision when it determines to have a right and when it determines to have an exception to that right. Then what the three-step test does is guide you in how you have to construct such an exception and what limitations must be applied to the exception. Fundamentally, to me, what it says is that you cannot construct exceptions that gut a right that you have provided in the law. That’s fundamentally what it says PROF. HANSEN: Thanks, Mike. QUESTION [Prof. Tim Wu, Columbia Law School]: I wanted to follow up on Jane’s answer to your question about whether the three-step actually matters in the United States. If people don’t care about the WTO, there is obviously, at some point, the possibility of sanctions from the WTO and trade remedies. To the extent that Europe or another aggravated party is able to target, let’s say, the orange juice industry, it can change the internal political economy of copyright if orange growers are against or in favor of the three-step test, depending on remedies. The other thing is the degree to which the United States goes along with or does not go along with the three-step test or TRIPs affects how other countries decide how they are going to behave. The United States, by passing certain laws, can set an example that might be followed by other countries, as a practical matter, as to how they think about what they have to do under TRIPs. I just wanted to add that. PROF. HANSEN: Thank you, Tim. QUESTION [Michael Einhorn, Senior Consultant; Advisor, CONSOR Intellectual Asset Management, New York]: Mr. Sun, I am confused. When I read your surrogate test, the new test that you would use — and you say you would allow consideration of third parties — I find the whole Treaty eviscerated entirely. It seems to me that you are opening the door to every conceivable kind of action. Someone could say, “Well, I considered the rights of the rights owner and the rights of a third party. In my estimation, loading stuff up on Napster meets the three-step test. I considered the balancing and, in this particular case, the right to privacy and the right to share overwhelm the right of the rights owner.” I do not see anything substantive left in the Berne Convention. MR. SHAPIRO: That’s the idea behind it. [Laughter] MR. SUN: No. I talk about taking account of the legitimate interests of rights holders. QUESTIONER: But you balance it with anything. MR. SUN: Yes. [Laughter] QUESTIONER: That’s my point. MR. SUN: I don’t believe in balancing as such. We need to sometimes tilt the balance. I want to say that we need to tilt the balance toward users. PROF. HANSEN: I think we got that, Haochen. Time is up, but I have one final question. And we only have time for a yes or no answer. Would you agree that there is no chance of your test being adopted by courts or legislatures unless there is some amendment of Berne or TRIPs? MR. SUN: I cannot really say. PROF. HANSEN: Okay. Thank you very much, Haochen, our panelists and our audience for an interesting and stimulating session.

SESSION LAW X: COPYRIGHT PART C: COPYRIGHT IN THE 21ST CENTURY

SESSION X: COPYRIGHT

Part C: Copyright Law in the 21st Century: Some Empirical and Theoretical Considerations Concerning Fair Use, Tolerated Use, Indeterminate Protection, and Compulsory Licensing

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law Speakers PROF. BARTON BEEBE

PROF. SOUICHIROU KOZUKA

Benjamin N. Cardozo School of Law, Yeshiva University (New York)

Faculty of Law, Sophia University (Tokyo)

MICHAEL A. EINHORN, PH.D.

MICHAEL S. SHAPIRO

Senior Consultant; Advisor, CONSOR Intellectual Asset Management (New York)

Office of Intellectual Property Policy & Enforcement U.S. Patent & Trademark Office (Alexandria, VA)

PROF. TIM WU

Columbia Law School (New York) Panelists PROF. LIONEL BENTLY

PROF. JANE GINSBURG

Cambridge University

Columbia Law School

STANLEY PIERRE-LOUIS

Kaye Scholer LLP (New York)

864 SESSION X: COPYRIGHT PROF. HANSEN: Welcome. We are going to start our final session in copyright, “Copyright Law in the 21st Century: Some Empirical and Theoretical Considerations Concerning Fair Use, Tolerated Use, Indeterminate Protection, and Compulsory Licensing.” It should be exciting. We have five very interesting speakers, and an excellent panel. We will begin with an empirical analysis of case law with regard to the fair use factors by Professor Barton Beebe of Cardozo School of Law. After a discussion of his presentation, we will hear from Tim Wu of Columbia University on “Tolerated Use.” Then follows “Alternatives to Fair Use” by Michael Einhorn, economist, senior consultant and adviser to CONSOR Intellectual Asset Management; “Copyright’s Winter of Discontent: A Few Thoughts on the Public Policy Process,” by Michael Shapiro, Acting Senior Counsel, Copyright Group, Office of International Relations of the USPTO; and finally, “Copyright Law and the Digital Agenda in Japan,” by Professor Souichirou Kozuka of the Faculty of Law at Sophia University in Tokyo. Our panelists are Lionel Bently from Cambridge University, Jane Ginsburg from Columbia Law School, and Stanley Pierre-Louis of Kaye Scholer. We will conclude with a discussion that will include questions from the audience. Barton, please proceed. PROF. BEEBE: Thanks very much, Hugh. I am very honored that Hugh is my moderator. I am also a bit concerned, especially because the data that I have to present that will support something he said yesterday — and flatter him as a result — only comes at the end of my presentation, and by then I will probably have run out of time, if Hugh enforces the time limits. The presentation I am going to make may be only of real interest to U.S. copyright lawyers or to students of U.S. law in general. However, it may also be of interest to you if you are interested in how courts generally use multifactor tests, not just in copyright law, but also in trademark or patent law. The three-step test1 is not really a multifactor test in the way that the fair use test is in the U.S. law.2 Nevertheless, having just talked about the three-step test,3 I suppose it is appropriate now, as Jane Ginsburg mentioned, to talk about the four-factor fair use test.4 I will present to you a few of the highlights from a paper that will be published later this year in the University of Pennsylvania Law Review. You can also get a working paper version of this article from my Web site, if you are interested.5 What I will talk about in the next eleven minutes is: First, a bit of background on Section 107, the fair use Section of the Copyright Act, which I am sure is familiar to 1 Pursuant to art. 9.2 of the Berne Convention (“three-part test”): “The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.” The test in TRIPs art. 13 reads: “Members shall confine limitations and exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the rights holder.” 2 Section 107 of the Copyright Act of 1976, Pub. L. No. 94-553, 90 Stat. 2541 (codified as amended at 17 U.S.C. §§ 101) (2000), established the affirmative defense to copyright infringement of “fair use.” 3 See infra, Session X, Part B, “Overcoming the Achilles’ Heel of Copyright Law: The Case for the Creative Destruction of the Three-Step Test.” 4 Section 107 does not define “fair use,” but enumerates four broadly worded factors that courts “shall” consider in determining whether a use is “fair” and thus uninfringing: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.” 5 Barton Beebe, An Empirical Study of U.S. Copyright Fair Use Opinions, 1978–2005 (working paper), 156 Pa. L. Rev. __ (2007) (forthcoming), available at http://www. bartonbeebe.com[hereinafter Beebe, Copyright Fair Use Opinions].

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many of you in the room. Then I will then talk about the research questions I had in mind when I began this project and say a word or two about the data set. I will also go into the results and give you some highlights in the nature of summary statistics about the opinions I collected, talking about how the four factors interacted among each other. Finally, I will say just a word or two confirming something Hugh said yesterday about the courts’ analysis under the specific factors. As far as background, the four-factor test is set out in Section 107. It was mentioned in the previous session by Jane. A court is instructed, in determining whether a defendant’s use is a fair use, to consider: (1) The purpose and character of the defendant’s use; (2) The nature of the plaintiff’s work; (3) The amount and substantiality that the defendant has taken from plaintiff’s work; (4) Finally, the effects of defendant’s use upon the potential market for or value of the plaintiff’s work. When I approached the case law that had applied these four factors, I essentially wanted systematically to collect all of the opinions from the U.S. federal courts that made substantial use of this four-factor test. I defined “substantial use” as referring to at least two factors, from the effective date of the 1976 Act, January 1, 1978, to the end of 2005. I may continue the project now to include 2006. I ended up with 306 opinions. When I started reading these opinions systematically, I had a bunch of questions for which I wanted to try to develop some data in an effort to answer. The questions were fairly straightforward: 앫 Which of the factors were the leading factors? Which correlated most highly with the outcome of the test? If we apply regression analysis, can we say something about which factors drive the outcome of the test? 앫 Second, how do the factors interact with each other? If one factor goes one way, does that cause other factors also to go that way? 앫 I also wanted to know about the extent to which courts stampede the factor outcomes. Do courts, as David Nimmer suggests,6 decide what the fair use outcome should be and then conform the factor outcomes to that overall test outcome? 앫 I wanted to look just basically at fair use win rates among the circuits and see if there is any inter-circuit or inter-district variation. 앫 As far as factor-specific questions, if you know the fair use case law, you know that there are many sub-factor doctrines under each of the four factors. I wanted to see how they worked out in practice. 앫 Then, I wanted to look at ideology, age, gender, and tenure of the judges to see if that had any effect on the outcome of the case. 앫 Finally, there is a theoretical aspect to the project, which I pursued in a related trademark paper,7 which goes to how judges use multifactor tests. One thing that I want to bring to your attention in this short time is Dan Simon’s idea of “coherence-based reasoning,”8 which I develop much more in this other paper. 6 David Nimmer, “Fairest of Them All” and Other Fairy Tales of Fair Use, 66 Law & Contemp. Probs. 263 (2003) 7 Barton Beebe, A Defense of the New Federal Trademark Antidilution Law, 16 Fordham Intell. Prop. Media & Ent. L.J. 1143 (2006). 8 See generally Dan Simon, A Third View of the Black Box: Cognitive Coherence in Legal Decision Making, 71 U. Chi. L. Rev. 511 (2004).

866 SESSION X: COPYRIGHT The idea here is, in essence, that “decision-making processes progress bidirectionally. Premises and facts both determine conclusions and are affected by them in return.”9 This goes especially to the idea of stampeding: Do you decide the outcome of your four-factor test and then conform the factors to that outcome? Or do you actually, in good faith, consider first the first factor, and then independently the second, and then independently the third and fourth, and at the end finally synthesize your understanding? The data set: Very briefly, I collected opinions from the Lexis and Westlaw databases using the search strings indicated.10 There were some cases in Westlaw that were not in Lexis and vice versa. After filtering out overlaps, I ended up with 578 opinions that met these search criteria. I filtered that down to 372 opinions that referred to copyright fair use in some way, and finally came up with 306 opinions overall that made substantial use — that is, referred to two factors — of the four-factor test. I coded them into Excel. I used Stata for the statistical analysis and an amazing program called ATLAS.ti, which will revolutionize the study of case law for qualitative data analysis. A big problem with my project is that I did all of the coding myself. For serious empiricists, this is appalling behavior – and certainly, if I had the resources, I would have done it differently. I admit that I should probably just be calling this study some kind of treatise-like undertaking, but with a little bit more systematicity to it. In my defense, though, take a look at this extraordinary figure, which will make sense especially to U.S. copyright lawyers. This is a twenty-opinion moving average of the proportion of opinions, explicitly stating the valence of each factor from the four-factor test, and otherwise explicitly summarizing at the end of the factor analysis how the test came out.11 If you are unfamiliar with American fair use opinions, you might be shocked to realize that judges treat the four-factor test very mechanically. They go through the first factor and then tend to say, “This factor favors plaintiff ”; go through the second factor, “This factor favors defendant”; third, “plaintiff ”; fourth, “plaintiff.” Then they summarize these various factor outcomes and come out with an overall test outcome. I suggest that this rhetorical practice began soon after the Harper & Row opinion.12 Justice O’Connor, in her majority opinion, was very principled and thorough in her reasoning in applying the four-factor test, but she did not engage in this mechanical rhetoric.13 Instead, it was Justice Brennan, in his dissent14 — interestingly, perhaps, a quite influential dissent, in various ways, and also at the level of rhetoric — it was his dissent which, I think, set American courts on this very mechanical use of the four-factor test, which made coding of the cases relatively easy. So as far as the results: This figure15 shows you the number per year of fair use district court opinions and fair use appellate opinions. It does not show you Supreme Court opinions, which we had in 1984, 1985, 1990, and 1994. There is a significant run-up in the number of fair use opinions beginning in 1990. You can make your own explanation for why that might have occurred. 9

Id. at 511. I ran the following Lexis search in the Lexis Federal Court Cases, Combined database: copyright and “fair use” and 107 and date(geq (1/1/1978) and leq(12/31/2005). I then ran the following Westlaw search in the Westlaw All Federal Cases database: copyright & “fair use” & 107 & da(aft 1977) & da(bef 2006). For more information on the collection of opinions, see Beebe, Copyright Fair Use Opinions, supra note 5, Appendix. 11 See id., fig. 1. 12 Harper & Row v. Nation Enters., 471 U.S. 539 (1985). 13 See id. at 549–69. 14 See id. at 619–635 (Brennan, J., dissenting). 15 See Beebe, Copyright Fair Use Opinions, supra note 5, fig. 2. 10

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Not shown here are a couple of statistics that will be of interest to New York lawyers. The Second Circuit absolutely dominates U.S. fair use case law. It accounted for 38.6 percent of our circuit court Section 107 opinions, while the Southern District of New York alone accounted for 31.3 percent of our district court Section 107 opinions. I also studied the extent to which courts in various circuits cited courts from other circuits in their fair use analysis. The idea here was the import and export of citations among the various American circuits and American districts. The Second Circuit, of course, boasts a huge trade surplus in this sort of citation trade. If you look at the trade surplus of the Southern District of New York and compare it to the Ninth Circuit, when you compare the average number of times courts outside of the Ninth Circuit cited to the Ninth Circuit in their fair use discussion to the average number of times courts outside of the Second Circuit cited to the Southern District of New York in particular, you see that there is essentially the same trade ratio. This emphasizes the significance of the Southern District in fair use case law, not just in numbers, but also in the influence of the cases, albeit through this very rough measure of citations. One side note for academics in the room is the surprisingly low number of opinions, 306 over a twenty-eight-year period. That averages out to about eleven per year. If you look at the ratio of law review articles per year with “fair use” in their title that address copyright fair use as against the actual number of reported opinions per year engaging Section 107 in a substantive way, you end up with about 2.5 law review articles per year, two for every actual case engaging fair use. The conventional wisdom in American fair use case law is that our case law is a total mess — reversals and dissents are commonplace, and there are lots of appeals. In fact, to make a long story short, the reversal, dissent, and appeal rates in the opinions I studied — and, of course, there is a selection-bias problem in my data set — were almost exactly like the national reversal, dissent, and appeal rates for cases overall. There is nothing special about our fair use case law as far as reversals and dissents. As far as fair use win-rates, they were relatively low for preliminary injunction and bench trial postures, much higher for summary judgment postures.16 Which factors drive the outcome of the fair use test in the American courts? Again, I am the first to admit that a lot of this statistical method is a bit half-baked. Nevertheless, it gives us at least some data on these cases. Instead of just speculating about the leading cases, we can look at all of the cases. This correlation analysis17 confirms the conventional wisdom that factor four correlates very highly with the outcome of the overall test. Factor one also correlates very highly. Factor two correlates barely at all. There is a statistically significant correlation, but it is not that special. You can also see how for factor two the outcome correlates very weakly with the outcomes of all the other factors. This strongly suggests that factor two is somewhat peripheral to the outcome of the test. For copyright geeks in the room, this18 is the proportional word count devoted to each factor in a court’s fair use analysis over time. If you are familiar with the transformativeness doctrine in copyright law, 19 you see a massive run-up following the 16

See id., tbls 3 and 4. See id., tbl. 5. 18 See id., fig. 5. 19 See Pierre N. Leval, Toward a Fair Use Standard, 103 Harv. L. Rev. 1105, 1106–07 (1990) (encouraging courts to attend more closely in their fair use analyses to the degree to which a defendant’s use was “transformative”); see also Jeremy Kudon, Form Over Function: Expanding the Transformativeness Use Test for Fair Use, 80 B.U. L. Rev. 579, 605 (2000). 17

868 SESSION X: COPYRIGHT Campbell opinion20 in the proportion of a court’s fair use discussion that it devoted to factor one. The other interesting point here is that factor two quite frequently gets short shrift. Factor four has sort of plodded along. You can give various reasons for these bumps, but it may be that they are just noise. Now, stampeding: It is conventional wisdom that courts stampede the factors.21 I think Hugh probably thinks that as well. I certainly did. The first time I presented a working-paper version of this paper, I thought there was stampeding, and I presented evidence in favor of that. Now I am here to suggest to you that there is no good evidence of stampeding. Courts appear, in good faith, to call the factors as they see them. Though we have certain leading cases where the district court goes all four one way, the appellate court all four the other way, the Supreme Court all four yet another way, in general, among the basic body of our fair use case law, courts engage in a good-faith application of these factors, call them as they see them. We see a lot of 3–1 decisions, 2–2 decisions — very balanced decisions.22 I have run out of time just when I was about to move to factor-specific analysis, but perhaps we can talk about that another time. PROF. HANSEN: Thank you, Barton. That was very interesting. “Stampeding is an interesting way to express the thought that judges might be making up their minds about fair use and then purposely slant the factor analysis to reach the predetermined results. Assuming that judges are introspective enough to realize that this is what they are doing, they might also be clever enough to hide the fact by giving one or two factors to the losing party.. Who knows? But you have done us all a service with this valuable empirical research. Any comments? MR. PIERRE-LOUIS: I wondered if there was some regionalism that you saw. There is a concept of the Second Circuit’s being a little bit more copyright owner-friendly and the Ninth Circuit’s developing a lot of law that looks at new technologies. So maybe fair use might be higher or more accepted in the Ninth Circuit. I do not know if there was any data on that. PROF. BEEBE: The problem with the study is that I tried always to be very disciplined and not revert to qualitative analysis — just treatise-level, basic legal scholarship. To be very honest, the statistics will not support any sort of inter-circuit variation in terms of the differences in fair use outcomes. You can eyeball the statistics and you can say, “Good God, the Seventh Circuit, in particular the district courts of the Seventh Circuit, at least in the opinions I found, never found fair use. They simply never found fair use, across all of the case law.” But if you 20

See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 578–79 (1994). The metaphor of stampeding is adopted from Barton Beebe, An Empirical Study of the Multifactor Tests for Trademark Infringement, 95 Cal. L. Rev. 1581 (2006). The hypothesis is that judges decide the outcome of a multifactor test based on a limited number of core factors, possibly only one; the judge then tends to insure that the most if not all of the remaining factors follow the lead of this dispositive factor. Alternatively, the hypothesis is that certain multifactor tests are by their own nature prone to stampeding, primarily because the factors are redundant of each other. The idea of stampeding is based in part on the “coherence-based reasoning model” proposed by Dan Simon and others, see, e.g., Dan Simon, A Third View of the Black Box: Cognitive Coherence in Legal Decision Making, 71 U. Chi. L. Rev. 511 (2004), and in part on the fast-and-frugal heuristics research of Gerd Gigerenzer and others, see, e.g., Gerd Gigerenzer & Daniel G. Goldstein, Reasoning the Fast and Frugal Way: Models of Bounded Rationality, 103 Psych. Rev. 650 (1996). Cf. Nimmer, supra note 6, at 281 n. 62 (“Alternatively, as courts work their way through the four factors, at some point they decide what the ultimate conclusion should be — which, in turn, molds the way that they reach resolution as to which direction each factor points.”). 22 See Beebe, Copyright Fair Use Opinions, supra note 5, fig. 6. 21

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apply a basic statistical significance test to this — the sample is small, eleven opinions — it is not enough to say statistically that the Seventh Circuit is especially hostile to fair use. I really wanted to be able to say “the Ninth Circuit does this” and “the Second Circuit does that.” The way I have tried to do it, though I do not think this really would hold up under extreme scrutiny, is shown in this regression analysis, which I have saved for last. If you run a regression analysis of various factual findings and include whether the case was litigated in the Second Circuit, you see that there is a higher likelihood in the Second Circuit that fair use will be found, taking all of these other factual findings in the Ninth Circuit into account.23 But I am not sure that that is the kind of data you would actually choose your forum based on, to be quite honest. PROF. WU: I wanted to hear about the ideology in gender. PROF. BEEBE: I could not find any statistically significant coefficients, or whatever the jargon is, unless they were quite suspicious. In the study using the multifactor test in trademark law, I came up with a coefficient that suggested that women are less likely to find consumer confusion than men. You could do with that what you want, but that is silly. It is just silly. When I first presented this case at Berkeley last year, I came up with a similar kind of gender-based coefficient for fair use, and I could tell the room was just, like, “You’ve got to be kidding.” So I have not really pursued that. PROF. HANSEN: You have been scared off that? PROF. BEEBE: Yes. PROF. HANSEN: It seems to me that what you have found about the effects of the first and fourth factors make sense also on a basic policy approach or even on a gut level. If the copyright owner is going to be hurt by this unauthorized and unpaid for use, courts are much less likely to find fair use. On the other hand, if there is no harm and there is some sort of transformative use, they are more likely to find fair use. In short, the first and certainly the fourth factor represent the default or natural policy analyis going in. Without hurting the result a judge could easily say the second and third factors go the other way. PROF. BEEBE: I will give the statistics on the fourth factor. I argue in the paper that it goes so far as to suggest that the fourth factor is essentially a meta-factor, where the courts synthesize their analysis of the first three factors under the fourth factor. Here is the basic data. Of the 141 opinions that found that factor four disfavored fair use, 140 found no fair use. The one outlying opinion is a crazy opinion that you can make fun of.24 Then, of the 116 opinions that found that factor 4 favored fair use, all but six found fair use. It is almost a dispositive factor. I sympathize with Hugh on this. It sounds a lot like factor four is the outcome of the test, and there is a lot of circularity at that point. PROF. WU: May I follow up on that question? Some people have suggested that, positively or normatively, fair use should look more like a categorical test. Sometimes judges are looking at whether this is a parody. If it is a parody, then it is probably going to run one way, unless it is completely out of control. If it is a quotation in a regular work, it is probably going to go that way.

23

See id., tbl. 9. See Religious Tech. Ctr. v. Netcom On-Line Commc’n Servs., 923 F. Supp. 1231 (N.D. Cal. 1995) (finding no fair use where factors two and three disfavored fair use while factors one and four favored fair use). 24

870 SESSION X: COPYRIGHT Do you have statistics that suggest that these kinds of decisions — it is another meta question — are in that category, that they are driven by Supreme Court precedent? PROF. BEEBE: Yes. It is very interesting. I tried to analyze this under factor one, where courts traditionally look at the preambular language and ask as part of the factor one analysis: Does this fit into one of the categories of the preambular language?25 I don’t think my answer addresses the spirit of your question, but I will just give you a tiny bit of data.26 It turns out, if you look at the win rates for certain categories — research purpose, critical purpose, news reporting, or educational purpose — it turns out that the win rate in news reporting was quite high, 77.8 percent (in other words, lots of fair use found there); research purpose, 40.9 percent; educational purpose, 48.2 percent (this was only when the court explicitly found there was an educational purpose; even if it was obvious to me, I would not code it as educational purpose unless the court explicitly found it). That does not really answer your question. Going to the much more theoretical question of whether we should adopt a sort of categorical approach, I can say that at least the data suggest that courts do not find that to be a comfortable way of proceeding, perhaps because they have the four factors in front of them. The preamble was not mentioned that often in these opinions. PROF. GINSBURG: What do you do about cases that settled? PROF. BEEBE: This is the selection bias problem, which is very serious. There are something like 20,000 copyright cases filed per year in the American courts, on average. I have gotten basically eleven opinions per year. So I am dealing with a very small data set. That is why, to be careful, I always try to say “our case law” and “our opinions” is what I am studying. It is not fair use controversies, but just our opinions. I am trying to study just the doctrine. The beautiful study is what Clarisa Long, one of your colleagues, has done in the trademark context, which is actually studying complaints in the antidilution context.27 I do not have the wherewithal to do that kind of thing, at least not yet. PROF. GINSBURG: I was kind of curious to know — and it sounds like you do not have the answer to this — how often in an Answer to a complaint you get a fair use argument. PROF. BEEBE: I have no answer to that, I’m afraid. PROF. HANSEN: From the audience, any questions, any thoughts? [No response] Have you have read all these opinions on parody? PROF. BEEBE: Yes. PROF. HANSEN: I have two thoughts on parody. First, if the judge likes the parody, it is fair use; if he does not like the parody, it is not. If it is pornographic, he does not like it, up until now. Maybe younger judges are going to be different. PROF. BEEBE: What about Barbie?28 PROF. HANSEN: Barbie was, I think, a very weird exception. But do you find a correlation with approval or disapproval of the parody? PROF. BEEBE: Yes. But I used to teach my students that if it is parody, it is dispositive 25 Section 107 volunteers in its preamble certain examples of fair purposes. Spe-cifically, it provides that the defendant’s use of the plaintiff’s expression might be deemed fair if it is made “for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research.” 26 See Beebe, Copyright Fair Use Opinions, supra note 5, tbl. 10. 27 Clarisa Long, Dilution, 106 Colum. L. Rev. 1029 (2006). 28 Mattel, Inc. v. Walking Mountain Prods., 353 F.3d 792 (9th Cir. 2003); 2004 U.S. Dist. LEXIS 12469 (D. Cal. 2004).

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for fair use; if it is satire, it is dispositive for not fair use. I do not have the statistics at hand, but in fact the statistics do not bear that out entirely. There are a few exceptions. I cannot give you the citations off the top of my head. In general, however, if parody, it is quite likely the court will find fair use. PROF. GINSBURG: How do you know if it is a parody or satire? PROF. BEEBE: That is the circularity problem. Where you want to find fair use you call it a parody. MR. PIERRE-LOUIS: It seems to me that one of the issues here is how do you weigh each of these. Based on what you are finding, does it make sense to create a weighted system, like one of these voting schemes that got Lani Guinier nominated for a federal job? It seems that two of them are being completely discounted and two of them are being weighed. But the Supreme Court has said that you are supposed to treat them all equally and balance it out —put it in a big magic machine and come out with a gumball, Willie Wonka-style. Should we create this weighted system, so we can determine the outcomes in some systematic way, rather than the stampeding that you discussed? PROF. BEEBE: One approach I will take to your question is that one hope of the regression analysis, or even a stepwise regression analysis, is to try to figure out how courts weight certain factual findings, as a matter of how those factual findings affect the outcome of the fair use analysis. If you look at the paper, there are times when I probably do too much with the statistics. I say that, based on the regression analysis, if the work is found to be creative rather than factual, that increases the chances of finding it fair use by 75 percent. That is based on certain pretty obvious statistical tools. I am not sure that the size of the data set supports that, but that is what I have tried to do as far as weighting. PROF. HANSEN: Our time is up. Thank you very much, Barton. Now Tim Wu is going to speak on tolerated use. PROF. WU: My name is Tim Wu. I teach at Columbia, along with Jane and Clarisa Long, who was mentioned earlier, and Hal Edgar. This paper is called “Tolerated Use and the Return of a Certain Form of Notice-Based Copyright.” It is an effort to do three things: First, it is not a normative paper. It is an effort to look at something that is going on in the copyright world right now and to try to understand it and give a different way of understanding it. Second, try to understand what I see as a trend in the evolution of the law and the return of a particular, unusual kind of notice-to-copyright regime in the various places. Third, I discuss where and when the return of what I call ex post notice or safe-harbor schemes might be useful. Let me go through all these trends in turn. If you have been anywhere near the copyright world, you have noticed a certain trend, which is that enforcement patterns and infringement patterns have changed over the last ten or twenty years. No one disagrees with that. If you looked to an earlier era and looked at what kinds of uses were out there, we could break things down basically into four categories: infringing, non-infringing, privately licensed, or publicly licensed (a compulsory license). A trend that I think we have seen more of — and people are trying to get a grip on what it means — is the existence of infringement that could be discovered, and sometimes is obvious, but nonetheless is not enforced — in other words, infringement of copyright that is tolerated by the owner of the copyright. I have no doubt that this has existed since time immemorial. Obviously, copyright has never had a perfect enforcement scheme. But the relative ease of violating copyright today means that a lot of the use of copyright is in a category which is called tolerated use. That is, it is infringement that is certainly, literally,

872 SESSION X: COPYRIGHT in violation of the copyright law, but is not being actively pursued by the owners of copyright. That does not always mean that people will not necessarily pursue the enforcement later. Nonetheless, for a certain period of time, they do not pursue it. Let me give you an example of something that might fall into the category of tolerated use. The Internet is a source of a lot of examples of tolerated use. One example you might have is where you have a fan site, where people use the copyright characters. They create various forms of derivative work, such as additional chapters, fan fiction, fan art, and so on. There is some enforcement against some of this activity, but some of it is just tolerated so long as it does not represent a commercial threat to the originator. Some of it ends up being tolerated. If it does grow so large or so popular, maybe then the owner of the work will take action against it. I think more and more work in the world is falling into that middle category of technically illegal but not enforced. That is just taxonomy and a way of describing some of what is going on. Tolerated use, or its tolerance, I think is an interesting phenomenon on the part of rights owners. The obvious, usual thought if you are a property rights person, particularly if you are legal staff responsible for policing rights, is that infringement is something that you should be careful of, whether it is trademark, copyright, or whatever, because these are corporate assets and important to the company. On the other hand, sometimes there can be a lot of tension between the legal side of a corporation and the marketing side of a corporation. In other words, sometimes the marketing division within a corporation will say, “Yes, it is true that we want to uphold the integrity of our rights, but on the other hand, through not enforcing this right, we are receiving a large degree of publicity for this particular thing.” So I think there is some tension between legal and marketing inside individual corporations that may lead to this rise of tolerated use. One thing you definitely see when you talk to people about YouTube is a kind of classic response: “Our work has been downloaded a million times.” “It is a disaster,” says the legal department. The marketing department says, “Our work has been downloaded a million times. This is the best thing that has ever happened to us.” So there is this kind of internal divide inside certain media corporations. To get to how this changes the law, I have suggested that there have arisen over the last year a number of regimes — and this is really just a starting point — that seem to take a slightly different approach to the issue of tolerated use, or even the issue of mass infringement. Traditionally in copyright, people talked about the choice between a property rule and a liability rule. In many of the historic instances of mass infringement (e.g., sheet music, the piano player piano, record players, radio, cable television, all these developments) the usual answer, in one way or another, has been a compulsory license or an antitrust-created version of the compulsory license through antitrust remedies limiting ASCAP rates — some kind of liability regime. Liability regimes have not been particularly popular, since the 1980s at least. What we see in the law, instead, is the emergence and the proposal of two actual regimes and two proposed regimes. As opposed to normal property or copyright law, the copyright owner has to step in and, first, give the person who is infringing some kind of notice before the right, in effect, activates. This is most obvious in Section 512: If a secondary party is the legitimate hoster of material, they usually do not obtain liability until they are given notice. This is the famous notice-and-takedown scenario. This part of Section 110 is somewhat obscure, but it gives copyright owners the right to complain about a nonprofit use of their work. They

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cannot do anything about it. They have to give notice first and then they can demand that the nonprofit work stop. Orphan works proposals have a similar structure.29 Some of the proposals for orphan works create a “safe harbor” or an allowance to use the work unless someone complains about it, in which case then things may happen. But you begin by giving the party who wants to use it the right to use it in a limited way and be free from some of the worst damages. What I predict will be Google’s main defense in its Book Search case also proposes a similar scheme. That is, Google wants to have the library, and it says — and I think this may be important for the fair use defense — that should a book owner not want their book in the library, they can complain about it and Google will take it down. But Google wants the right, to begin with, to use the work, subject to later objection. The property theory point here is that these kinds of schemes that have what you might call an ex post notice right — that is, the right activates after you give notice — are an alternative to liability rules. They are a different proposal for liability rules that will deal with the potential problem of mass infringement. In other words, if we look at radio and we look at cable and we look at all instances of mass literal infringement of copyright (depending on how you read Teleprompter30) solved by various forms of liability or compulsory licensing regimes, what seem to be more popular today are proposals where you let the user use it until the owner objects. Whether that is good or bad, I do not have a universal answer. Some people will have strong feelings one way or another. I think they might be useful in some scenarios. Part of what I plan to do in my longer paper is describe situations where they might be useful. Most of the situations where they might be useful tend to be situations where there are high transaction costs. The thing that is preventing the product from being made — just like radio, where you think you need a million songs or something like that that you are going to play over ten years — the transaction costs themselves, the effort to get the licenses, are what are blocking the work. I am saying that sometimes these can be useful in similar situations. The difference — and possibly an advantage in some cases over compulsory licenses or liability rules — is that liability rules fix a price for the whole country, fix a price for all the similar works. It is basically government price-setting, which tends to overvalue some works, undervalue other works. The notice regime systems rely on people, who otherwise might be asleep at the wheel, speaking up and saying, “This property right is very valuable. That is why I would like to be paid for it.” Otherwise, it is assuming a zero value. In some instances, that might be useful; in some instances, not. That’s all I am going to say about the issue. I have a paper that I will put up on SSRN sooner or later, called “Tolerated Use.” Thank you very much. PROF. HANSEN: Anyone want to comment on what Tim said? What about Google opt-out, which of course is extremely controversial, as a solution? I think it is a great solution. You have a great public benefit. You have a really minor obligation. It seems to me an eminently reasonable solution to this situation. But I know people disagree with me. 29 See H.R. 5439, 109th Cong., Orphan Works Act of 2006: To amend title 17, United States Code, to provide for limitation of remedies in cases in which the copyright owner cannot be located, and for other purposes (introduced May 22, 2006), available at http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.5439; U.S. Copyright Office, Report on Orphan Works (2006), available at http://www.copyright.gov/orphan/orphan-report-full.pdf. 30 Teleprompter Corp. v. Columbia Broad. Sys., Inc., 415 U.S. 394 (1974).

874 SESSION X: COPYRIGHT QUESTION [Richard Rudick, formerly Wiley, International Publishers Association]: I think it might be a great solution in some circumstances. What is bothering publishers about Google is the volume and the cost of identifying the material and Google’s refusal to accept a blanket opt-out. You have to identify each piece individually. The comment about this working in some cases and not in others I think is very apt. The comment on transaction costs is very apt. I think it is fair to say that if rights holders in situations like this do not like opting out, they have an obligation to try to reduce the transaction cost. It can be done. It goes back to the discussions we have had over the last couple of days about collectives. Focusing on transaction costs and thinking about how that relates to the purpose of copyright and practical issues and business models is a good way of deciding where an implied license should be regarded as having been granted and where not. PROF. WU: The system imposes more costs on publishers, I agree. It imposes certain costs on copyright owners, in the sense that they have a choice. If someone is using their work, if they do not speak out about it, then the amount of money they get is zero. Otherwise, they have to do something about it. So yes, it solves the problem by putting more of the transaction costs on the copyright owner. I happen to think that can be a useful solution in some cases, if you have a lot of rights, most of which are extremely low-value — that is, the person does not value the right at all — and occasionally a right which is of extremely high value. If you look at, for example, physics papers from the 1950s, most of them are going to have zero value, while a couple of them are going to have value huge. The problem with the compulsory license is that it guesses that they are all worth ten bucks or two cents or something, which is probably wrong for almost all of them. Some of these notice-based, speak-up-later regimes allow things that are truly valuable to get more compensation and things that really are not valuable to get nothing. PROF. HANSEN: Comments from the panel? MR. PIERRE-LOUIS: I have a question. Do you distinguish between direct infringement and secondary infringement? When you are talking about the online world, you are largely talking about some kind of online service provider. One of the changes that happened in terms of an injunction in the Napster case,31 for example, was that the court said you have to give them a notice and then they have an opportunity to take it down, and if it comes back then they are liable. That differed very much from a lot of the blanket strict-liability preliminary injunctions we were used to getting in copyright law. But that is mainly because, with respect to direct claims, it is strict liability. There is no intent. There is no harm required, none of that. So how does that change it? How do you distinguish between secondary liability, particularly contributory infringement, where knowledge is an element, and the strict liability regime? PROF. WU: I am going to give an answer that is not particularly satisfying. Because I am just looking at the policy here, I have squeezed together both secondary and primary regimes. Section 512 is obviously secondary, Google is somewhat in the middle, and these are primary. In general, that they treat these differently. How does it change the analysis from the economic perspective that I have taken here? The economically relevant actor in a Section 512 case, the person who is really going to matter in terms of whether this work is taken down or not or whether you get any kind of compensation, is the secondary infringer. So perhaps the analysis is not affected so long 31

A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D. Cal. 2000).

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as we are talking about the economically significant actor. I am not sure that is a complete answer. It is certainly not a legal answer. It is just an answer from the way I have looked at this in this paper. PROF. HANSEN: Jane? PROF. GINSBURG: One of the significant transaction costs that this system puts on authors and copyright owners is the cost of finding the infringer. If that is a high cost, then this does seem to be a very significant, possibly pernicious reversal of the copyright default. PROF. WU: I do not propose this as the general rule for copyright, for just that reason. First of all, I am trying to document what is going on. As you are suggesting, this turns copyright into a very different kind of right if it is the general answer for all of copyright. It is actually a rare species of property right that is like this. For the property theorists in the room, this is a weird kind of thing. With property, usually you get liability when you touch the right. That is it. You do not usually have to wait for someone to tell you. There are some exceptions, for example, hunting, where you have to post notice so people cannot come onto your land and shoot whatever they want. I think that is one reason, for example, that this pokes up in something like an orphan works context, where you assume that most of these rights are low value and occasionally one is going to be of high value. You let people use it on the guess that if it really is a high-value right then someone is going to speak up. But I agree that imposes costs on the people that own the rights to notice that something has been done with their right. There you go. PROF. HANSEN: Thank you. We are going to move on now to Michael Einhorn’s presentation. We will have more discussion later, so you can ask Tim more questions at the end. MR. EINHORN: Thank you very much, Hugh. Thank you to Fordham University for making it possible for me to be here. My paper is in the binder.32 I cannot go through all of it here. To make a long story short, you can find my comments on whether market harm is an important criterion of fair use. I regret to say that I do not think it meets much of an economic consideration the way it is actually being done. That is summarized in the section called “Ambiguities of Market Harm,” where I review, among other things, the Faith Ringgold case33 and the Texaco case34 and also, I believe, the NIH case35 way back at the beginning. My conclusion is that very often what they call market harm is very ipsi dixit. There is no real analysis. The judges try to go through the motions and they define market harm in a certain manner. I want to quickly go through the idea of transformative use and alternatives to licensing transformative use, in much the way in which Tim Wu suggests. The interesting thing is that Tim and I did not correspond about our papers at all prior to today, nor did I read the text of the prospective Orphan Works Act36 until last week. So it is curious that all these things are coming to the same constellation, if we are making sense, and people are saying it independently of one another. 32

See Michael Einhorn, Alternatives to Fair Use, Appendix A infra this session. Ringgold v. Black Entm’t Television, 1996 WL 535537 at *4 (S.D.N.Y. 1996). 34 American Geophysical Union v. Texaco Inc., 60 F.3d 913 (2d Cir. 1994). 35 Williams & Wilkins Co. v. United States, 487 F.2d 1345, aff’d by an equally divided court, 420 U.S. 376 (1975) 36 H.R. 5439, 109th Cong., Orphan Works Act of 2006: To amend title 17, United States Code, to provide for limitation of remedies in cases in which the copyright owner cannot be located, and for other purposes (introduced May 22, 2006), available at http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.5439. See also U.S. Copyright Office, Report on Orphan Works (2006), available at http://www.copyright.gov/orphan/orphan-report-full.pdf. 33

876 SESSION X: COPYRIGHT The idea of transformative use stems from Alex Kozinski. He gave a Brace Lecture in 1999 in which he suggested that we move to a way of expediting the use of transformative works in some way by which you can move to a compulsory license regime for those works that are deemed transformative.37 I called up Judge Kozinski’s clerk, Christopher Newman, who actually wrote the article, and I said, “What do you mean by transformative?” He said, “Well, I didn’t really think about that.” I said, “Let me ask you this. If I make Rocky I and you make Rocky II, are you allowed to call that a transformative work?” He said, “Yes, I guess so.” I said, “I have to reject this. You have to make a distinction between a transformative work and something deeper, which really changes the meaning of a work. Let me suggest that if this is all going to have any meaning, we have to talk about a transformative work being a work that really changes the meaning of the original. If we cannot get past that, we are not going to have anything at all on the table. By “changing the meaning” I mean works that include satires, parodies, criticisms, comments, book reviews, classroom materials, news articles, and research that add substantial new meaning to existing characters and plots. You say, “What’s wrong with that? All of that is transformative.” The fact of the matter is that some of that has been shot down on fair use. We know for sure that, based on the distinction between parody and satire, which was originally written up by Judge Posner in 1992 in a law review article,38 there is dictum in Campbell v. Acuff-Rose that says something like, “parodies yes, satires no.”39 And courts have taken that seriously. In 1999 there was a case, called Williams v. Columbia Broadcasting System,40 which involved a “spirit message” from an Army unit that was broadcast during the 1997 Army/Navy football game. The message showed an animated clay “Sailor Bill” experiencing trauma at the hands of the Army. “Sailor Bill” was based on a character named “Mr. Bill,” who was sort of this nebbish that people stomped on. Every time “Sailor Bill” did something wrong, he got slapped around by someone in the Navy. The purpose of this was not to make fun of “Mr. Bill”; the purpose was to satirize attitudes in the U.S. military. That is clearly satire. The court saw that as a copyright infringement. They said, “That is not parody. You are not making fun of Mr. Bill. You are making fun of the Navy. It is not fair use.” I thought the use of “Mr. Bill” to ridicule the Navy was a particularly good way of doing it. To suggest that they find some other way of ridiculing them would be very diffi37 Alex Kozinski, What’s So Fair About Fair Use?, The 1999 Donald C. Brace Memorial Lecture, 46 J. Copyright Soc’y 513 (1999) (with Christopher Newman), available at http://alex.kozinski.com/articles/Whats_So_Fair_ About_Fair_use.pdf. 38 Richard A. Posner, When is Parody Fair Use?, 21 J. Legal Stud. 67–78 (January 1992) (for a parody to be considered fair use, there must be three qualifications. (1) The parody uses the parodied work only as a target not a weapon. (Posner divides parody into two categories: “weapon” parodies, where the target is not the original work but rather uses the copyrighted work to comment on something else; and “target” parodies, which comment on the original work itself. The latter should be allowed to claim fair use (assuming it meets the other two qualifications) but the former should not). (2) The parodist should not be allowed to take a portion of the copyrighted work such that the parody becomes “a substitute for that work.” (3) The fact that a parodist only takes a small amount of copyrighted material should not be relevant to fair use. 39 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 590 (1994), available at http:// supct.law.cornell.edu/ supct/html/92-1292.ZS.html. 40 Williams v. Columbia Broad. Sys., Inc., 57 F. Supp. 2d 961, 969–70 (C.D. Cal. 1999), order vacated by settlement agreement, 1999 WL 1260143 (C.D. Cal.) (rejecting a parody defense, finding that “Sailor Bill,” used by Army soldiers to mock Navy personnel, did not comment on the misfortunes of the copyrighted clay figure, “Mr. Bill,” by Army soldiers to mock Navy personnel was not a parody because the object of ridicule was not “Mr. Bill,” finding that such use was fair use. The Williams court refused to let the satire/parody distinction determine the outcome of the fair use test.).

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cult thing. It is a bit like telling Jimi Hendrix, “You wanted to satirize American militarism, we understand. But did you have to use The Star-Spangled Banner? Why didn’t you use America, the Beautiful? Why didn’t you use My Country, ’Tis of Thee? Why didn’t you go give a speech or write a letter to the editor?” The fact of the matter is, he found his best vehicle, and his best vehicle was the The Star-Spangled Banner. It could not be surpassed. But the height of all frivolity was reached in the Suntrust v. Houghton Mifflin decision.41 Of course, we know that as “The Wind Done Gone decision.” In this case the court seriously considered enjoining The Wind Done Gone because at the beginning they found it not to be a parody of Gone With the Wind (who could possibly parody that?) but to be a parody of southern history (who would dare do that?). So because Ms. Randall parodied southern history and used The Wind Done Gone as a vehicle to parody southern history — “Well, that is out of the question. You cannot do that. That is not a parody; that is a satire.” She changed her tune as well. At the beginning, she said it was a satire of southern history. Then she said, “Oh, no, no. I meant that it was a parody of Gone With the Wind. I wanted everyone to have a belly laugh at Gone With the Wind.” Then the circuit court got wind of David Lang, and they all got together and said, “Okay, this is a parody and she is going to get fair use.” But that was too close to call. That was really too close to call. Williams v. CBS and Suntrust are two clear examples of where the distinction between parody versus satire is going in the wrong direction. What does Judge Kozinski say? Let’s go back to what he said: Widen the use, but make sure it is in fact licensed. Provide a way in which works can be licensed. I suggest a way to do that, based on what we heard from Tim — even though I did not speak to him ahead of time, so he may disown this. What it is based is on the ideas in the orphan works legislation. This is based on expedited use made possible by orphan works. Let me first suggest that we define in a statute a three-part test: 앫 First, the idea of a transformative work, a work that adds new meaning to previous copyright content, with a further purpose or different character, altering the first with new expression, meaning, or message. I believe all I am doing here is quoting Pierre Leval. Under transformative works, I would itemize the uses: satires, parodies, criticisms, comments, book reviews, classroom materials, news articles, and research. If there is anything else you want to do there, put definite things on the table. If you do not want sequels to Rocky I in there, then keep them out. But if you want to allow someone to make a satire of Rocky, to ridicule boxing in general, then be my guest and put it in there. There is a distinction to be made there. 앫 Once you define this limited use, this limited group of works, you can go on and put on a test for expedited use. The test is very similar to orphan works: (1) The prospective user must submit to the copyright owner ahead of time, or designated agent, a written statement of the intended use of the work. The statement should acknowledge access to the underlying work and sufficient similarity of use. You may or may not want to require that the person give up the right to claim fair use afterward. If you are going to go one way, you might disallow going the other way. (2) The statement must be submitted before the actual publication of the transformative work. We are not going to allow someone to pull this thing up at the last minute and say, “Oh, it is transformative.” Upon receipt of a written request, the copyright owner must, within some period of days, advise the prospective user in writing of a reasonable licensing fee or the information that it would require to make such a determina41

Suntrust v. Houghton Mifflin, 268 F.3d 1257 (11th Cir. 2001), 136 F. Supp.2d 1357, 1363 (2001).

878 SESSION X: COPYRIGHT tion. Anyone who knows anything about ASCAP and BMI would understand that that is exactly how arbitration proceedings work at ASCAP and BMI. 앫 If the parties are unable to reach agreement within the designated period, the prospective user may indicate intent to publish the work. Rights owners can, if they want — push has now come to shove — seek an injunction to stop the publication. Of course, the judge will review the injunction. If, in fact, the work falls within categories of a protected transformative work, no injunction can be granted. If it is superseding or derivative or anything else outside of the category, the injunction comes through. But no injunction is granted, otherwise. At that moment, if the publication is not enjoined, the user can publish it. The rights owner may be able to seek actual damages under certain circumstances. You have to decide that. What you may want to do is suggest or require that everybody at that moment to go into arbitration. If they cannot resolve it in arbitration or by themselves, they would bring it back in front of the court and the court will appoint an expert to determine a reasonable fee. This is only going to be an actual licensing fee; it is not going to be anything based on punitive damages or statutory damages or confiscation of defendant profits. You may or may not want to include a side group of works, let’s say, that are nonmonetary, which are entirely passed through with no license fee at all. Presumably, they would have qualified for fair use in the first place. To expedite matters further, as I said, you can have arbitration procedures. Courts can get involved in it. One reasonable way of establishing an arbitration procedure is to have each side submit a bid. We come in with one price; you come in with another. If you can agree to halve the difference, we are done; if not, we appoint a third-party arbitrator to make the choice. Whoever loses the arbitration pays for the arbitrator. These ideas are all based on both the idea of the rate courts from ASCAP and BMI and also the orphan works work — the idea that Tim Wu himself has proposed. I think we are all getting to the solution here that going into litigation is not the way we want to stop certain works that clearly are on the periphery of free speech and copyright, which we really have to work through very carefully. PROF. HANSEN: Thank you very much. A lot to think about. Panel? MR. PIERRE-LOUIS: What is the criterion for coming into what I will call the “Einhorn rate court” (ERC)? If you want to get to the ERC, what is the criterion? Is it a parody work? DR. EINHORN: Anything you define. I just gave you one idea. The idea was based on the statutory construction. There is some group of expedited uses that would presumably include parody, satire, and criticism, to be sure. That would be a short list. And perhaps sequels that really transform the meaning of characters. For example, in The Wind Done Gone, I do not want to have to argue whether Scarlett O’Hara was a parody or whether she entirely transformed the story. The novel was clearly a transformative work. It did not interfere with the original market for the original work, which was of course Gone With the Wind. MR. PIERRE-LOUIS: That is just arbitration, though. Why wouldn’t you limit it to, say, orphan works, where it really is about a rate discussion, as opposed to the other things that courts really do? This is really arbitration, but with a specialized court, it seems. DR. EINHORN: I could limit it to orphan works. But I am obviously bothered by something deeper. When I talk about Williams v. CBS(NBC) and SunTrust v. Houghton

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Mifflin, I am concerned there about what I consider to be First Amendment issues — i.e., speech that would otherwise be protected. In the particular works that I talked about there, CBS did not harm “Mr. Bill” in any way, nor did Alice Randall harm the Margaret Mitchell estate, but for the fact that someone could otherwise have collected a fee had they chose to license. However, it is not clear that the plaintiffs otherwise would have harmed anyone. Hence, we have a transactions lock that is recognized as a justification for fair use. Therefore, Stan, I am trying to take the orphan works idea and go further into First Amendment issues. PROF. WU: As I understand it, you are proposing an alternative fair use doctrine, where the fair use doctrine in a judicial decision would be a 1–0 decision — either it is a complete zero (you do not pay anything and you get to use it) or it is something where a certain category of use goes into arbitration. DR. EINHORN: Entirely so. I would prefer to call this expedite use, instead of fair use, to represented that a license fee will be paid. PROF. WU: The first question you have to ask is what falls into that category. DR. EINHORN: I am giving you an example here. But you understand my basic point of view on that. PROF. WU: I just wonder whether you have thought that through. When defendants would go to fair use versus going to the panel, what would that mean for the fair use doctrine? DR. EINHORN: Depending on what you do with conventional fair use, I guess we would have a conflict. What I am hoping for is that at least commercial defendants would say, “Look, I do not want to play games with fair use. I have to make a decision here. I have to decide whether to put up a lot of cash to invest in this book.” I would bet at least commercial defendants would say, “Look, we will pay them a licensing fee, just to make sure we can publish the book.” Noncommercial defendants, people who have private uses — fine if you want to keep the fair use doctrine around for that. But I am hoping that this becomes — I hate to use this word — a rich man’s fair use. This is the important point: It gives the security that you need for people to make investments in intellectual property, a very key consideration, which is a real problem right now as I see it with major commercial users arguing about fair use and enabled to speak only if they get lucky before the Court. PROF. WU: It is a little bit like a statutory version of footnote 10 in the Campbell case.42 DR. EINHORN: I think I cited that, actually.

42

Campbell v. Acuff-Rose Music, 510 U.S. 569 n.10 (1994) (Souter, J.). n.10:

Because the fair use enquiry often requires close questions of judgment as to the extent of permissible borrowing in cases involving parodies (or other critical works), courts may also wish to bear in mind that the goals of the copyright law, “to stimulate the creation and publication of edifying matter,” [Leval, Toward a Fair Use Standard, 103 Harv. L. Rev. 1105, 1134 (1990) (hereinafter Leval)], are not always best served by automatically granting injunctive relief when parodists are found to have gone beyond the bounds of fair use. See 17 U.S.C. 502(a) (court “may . . . grant . . . injunctions on such terms as it may deem reasonable to prevent or restrain infringement”) (emphasis added); Leval 1132 (while in the “vast majority of cases, [an injunctive] remedy is justified because most infringements are simple piracy,” such cases are “worlds apart from many of those raising reasonable contentions of fair use” where “there may be a strong public interest in the publication of the secondary work [and] the copyright owner's interest may be adequately protected by an award of damages for whatever infringement is found”); Abend v. MCA, Inc., 863 F.2d 1465, 1479 (9th Cir. 1988) (finding “special circumstances” that would cause “great injustice” to defendants and “public injury” were injunction to issue), aff’d sub nom. Stewart v. Abend, 495 U.S. 207 (1990). Id.

880 SESSION X: COPYRIGHT PROF. WU: Right. The Ninth Circuit did this in the Sony case43 before it was overturned by the Supreme Court. But you want to have it as statutory. DR. EINHORN: Judges Pierre Leval and Alex Kozinski both said this thing, but no one ever did the scut work to say “and this is what it would look like.” So I certainly can rely upon dicta from judges who give the Brace Lectures and build from there. QUESTION [Alan Hartnick, Abelman, Frayne & Schwab, New York]: Documentarians would like some sort of small claims procedure because, unless there is a small claims procedure for fair use, the cost of litigation is too high. I think the Copyright Office was to do any study of a kind of small claims procedure, to have something so that documentarians, nonfiction writers, and others can make use of fair use. Fair use is something that really does not exist, because you are not going to know it until the court determines it. I do not know if anybody is here from the Copyright Office. The Copyright Office was supposed to do a study on that. Perhaps Jane knows the answer. MR. PIERRE-LOUIS: I think what you are suggesting is the opposite. I think you are suggesting copyright redlining, which is a kind of corporate welfare. You are representing a small claim, so the opposite, saying that litigation is expensive, even in copyright cases. DR. EINHORN: I disagree with that characterization. PROF. HANSEN: I am sorry but I’m afraid we are going to have to stop here and go on to our next talk. We can resume all of this at the very end. Michael Shapiro.

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Copyright’s Winter of Discontent? Some Thoughts on the International Public Policy Process Michael S. Shapiro44 This panel is about copyright law in the 21st Century. But I would like to begin my presentation a few centuries earlier. In the 16th Century, William Shakespeare wrote in Richard III: “Now is the Winter of our Discontent/Made glorious summer by this son of York.” In the 20th Century, the phrase “Winter of Discontent” was used to describe the British winter of 1978–1979. During that cold winter, there were widespread strikes by trade unions demanding larger pay rises for their members. Piles of garbage were dumped in the paths of Finsbury Park during a strike of refuse workers. British voters were angry. The government was unable to contain the strikes, which, according to some accounts, led to the victory of Margaret Thatcher’s Conservative Party in 1979. In the 21st Century, British citizens again were in an angry mood. However, this time the cause of citizen discontent appeared to be neither low wages nor mounting piles of trash in public parks. For many British citizens, those material concerns seemed to be fading memories of the 20th Century, perhaps the tail end of Britain’s great age of manufacturing. 43

Sony Corp. of Am. v. Universal City Studios, Inc., 659 F.2d 963 (9th Cir. 1981). Michael S. Shapiro is an Attorney-Advisor in the Office of Intellectual Property Policy and Enforcement, U.S. Patent and Trademark Office (USPTO), where he specializes in international copyright policy issues. The former General Counsel of the National Endowment for the Humanities, Dr. Shapiro has lectured widely and written extensively on copyright and cultural policy. The views expressed in this essay are his own and do not necessarily reflect those of the U.S. government. 44

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As the digital age became a reality for many British citizens, it was the United Kingdom’s intellectual property system that was the somewhat surprising target for citizen discontent. The U.K. copyright system came in for especially harsh criticism, with many British consumers complaining that they could simply get no digital satisfaction. To put things in perspective, citizen unhappiness did not bring down the government. Nonetheless, the British government was taking the complaints of British citizens seriously. In fact, the government issued a high-level report, the Gowers Review of Intellectual Property,45 calling for possible reform of the U.K. intellectual property system. Meanwhile, from its unique economic and cultural observatory in Paris, the Organization for Economic Cooperation and Development (OECD) was beginning to observe an unusual, new behavior pattern across broadband networks. Once passive “users” were transforming themselves into active “creators!” Had the long-heralded “user-creator” of the 21st Century finally arrived? By year’s end, Time magazine seemed to confirm the OECD’s preliminary conclusions, naming “You” Time’s person of the year for 2006.46 More important, OECD economists began to ponder the potential significance of the sudden appearance of the “user-creator” for OECD countries. Were there unnecessary bottlenecks to such creativity and use? What policy changes, if any, might be needed to encourage the creation and dissemination of user-created content (UCC)? Wasting little time, the OECD released a paper, entitled “Participative Web: User-Created Content,” replete with suggestions for nurturing the creative “You” in OECD countries. 47 Strictly speaking, my contribution to today’s panel is neither empirical nor theoretical. Instead, I would like to share some preliminary thoughts on how empirical and theoretical research is being integrated into international copyright policy documents such as the Gowers Review and the OECD UCC study. In particular, consistent with the theme of this panel, I would like to focus on the proposals in these reports that call for the creation of a “transformative use” exception in the European Union. I will conclude with a few preliminary thoughts on the challenges and opportunities for the international copyright policy process in the 21st Century. I. THE GOWERS REVIEW OF INTELLECTUAL PROPERTY In tune with changes in public attitude, the British Chancellor of the Exchequer asked Andrew Gowers to form a Commission to undertake a review of the once “obscure and distant domain” of the United Kingdom’s intellectual property (IP) system. British policymakers seemed to have little doubt that the U.K.’s comparative advantage lay in “high value-added, knowledge-intensive goods and services.” The question before the Commission, broadly stated, was whether the British IP system was up to the task of meeting the challenges and opportunities of the knowledge economy of the 21st Century. After consulting with a wide range of stakeholders in the IP system, the Commission issued a high-level report, the Gowers Review of Intellectual Property. The Gowers Review concluded that the U.K.’s IP system was not “in need of radical overhaul.”48 Just the 45 U.K. Treasury, Gowers Review of Intellectual Property (December 2006), available at http://www.hmtreasury.gov.uk/media/6/E/pbr06_gowers_report_755.pdf [hereinafter Gowers Review]. 46 Lev Grossman, Time’s Person of the Year: You, Time, Dec. 13, 2006, available at http://www.time.com/ time/magazine/article/0,9171,1569514,00.html (“In 2006, the World Wide became a tool for bringing the small contributions of millions of people making them matter.”). 47 Organisation for Economic Co-operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Participative Web: User-Created Content, DSTI/ICCP/IE(2006)7/FINAL (12 Apr. 2007), available at http://www.oecd.org/dataoecd/57/14/38393115.pdf [hereinafter OECD UCC Report]. 48 Gowers Review, supra note 45, at 1.

882 SESSION X: COPYRIGHT opposite was the case. The Commission found that the British IP system continues to provide an essential framework to promote innovation and creativity for British industry and artists. Nonetheless, the Commission recommended a few changes in the British IP system to better serve the interests of “consumers and industry alike.”49 In broad outline, the Commission recommended strengthening IP enforcement, providing additional support to British companies using the IP system, and “improving the balance and flexibility” of IP rights in the digital age. Government reports are hardly known for their passion. Yet, between the lines of the Review, the frustration of stakeholders with the U.K.’s copyright system is palpable. For different reasons, British artists and other creators, consumers, and users of protected works, cultural and educational institutions, and researchers all seemed unhappy with their copyright law. “Copyright in the U.K. presently suffers from a marked lack of public legitimacy,” the Review stated. “It is perceived to be overly restrictive, with little guilt or sanction associated with infringement”50 But what was the cause of such citizen unhappiness? To answer the question, the Commission followed an “evidence-based approach,” which largely consisted of conducting surveys of representative groups.51 British consumers were upset because they could not “format shift” legitimately purchased content (for example, from a CD to an MP3 player). British libraries, museums, and educational institutions were unhappy because they were unable to copy and “format shift” master copies of works in their collections. British researchers were cranky because the exceptions for research in Britain’s copyright’s law were not clear. British artists and other creators were demanding more freedom to create new “transformative” and parodic works from the creative works of others. Even Sir Paul McCartney, once hailed as a harbinger of Britain’s emerging creative economy, was in sour mood. The copyrights in sound recordings made during Britain’s golden age of rock and roll were about to expire. Would the government really allow the “Yellow Submarine” to be lost forever under the waves, the Davy Jones’s Locker for such public domain works? The Commission, however, rejected a proposal to increase retrospectively the copyright term of sound recordings from the present term of fifty years (having found no evidence that an increase in term would provide an increased incentive to for musicians to create new works). Although the Gowers Commission found that the U.K.’s intellectual property system was “broadly performing satisfactorily,” the Commission made a number of “pragmatic recommendations” to improve the system for all stakeholders.52 To meet the demands of the “digital age,” for example, the Review recommended a number of possible amendments to the United Kingdom’s copyright law.53 For the digitally downtrodden consumer, the Commission prescribed a limited private 49

Id. Id. at 39. 51 The Commission supplemented its “Call for Evidence” with quantitative data and analysis, including A Review of the Economic Evidence Relating to an Extension of the Term of Copyright in Sound Recordings, an independent, in-depth analysis of relevant economic data commissioned from the Centre for Intellectual Property and Information Law (CIPIL), University of Cambridge (2006), available at http://www.openrightsgroup.org/ orgwiki/index.php/Review_of_the_Economic_Evidence_Relating_to_an_Extension_of_the_Term_of_Copyrigh t_in_Sound_Recordings_-_Centre_for_Intellectual_Property_and_Information_Law,_University_of_ Cambridge [hereinafter CIPIL Report]. 52 Gowers Review, at 4. 53 Copyright, Designs and Patent Act, 1988 (CDPA). 50

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copying exception for “format shifting (for example, from CD to MP3) without accompanying levies for consumers. To mitigate the apparent harshness of digital discrimination, the Review endorsed a private copying exception for researchers covering all forms of content. For the digitally dissatisfied library, the Commission recommended ways to facilitate digital archiving and preservation strategies in British libraries. For the digitally disobedient, the Review recommended the creation of an exception for the purpose of caricature, parody or pastiche. The Commission also did not shy away from making recommendations that would require changes to the EU Information Society Directive, which sets forth a list of twenty limitations to the exclusive rights of copyright owners.54 In particular, the Review endorsed adding a new exception to the Directive for “creative, transformative, or derivative works.” The Review does not have much to say about the purpose of the new exception, other than to note in passing that such an exception could “spur innovation” and “even create new markets.” It is not clear which “new markets” the Commission has in mind, the market for the original work or the market for the derivative work. Assuming that the Commission intends to encourage the production of derivative works by follow-on creators, there is no hint (much less discussion) that such a new exception also could harm (or even destroy) the derivative market for the underlying work.55 The Review presents no economic evidence or analysis to support the recommendation presented.56 Instead, the background music for this recommendation is set forth in a Box 4.6, ominously entitled the “rise and fall of creativity in Hip Hop.”57 Here the Commission takes due note of a widely discussed U.S. copyright case that found that digital samples of three notes of a sound recording is per se infringement), sending a stern message to American hip hop artists: “get a license or do not sample.”58 In particular, the Commission seems to be worried that, if the U.K. courts follow the lead of U.S. courts, rising transaction costs (obtaining licenses) could have a similar stifling effect on hip hop culture in Great Britain. Nonetheless, without presenting any economic evidence to support its concerns, the case for the proposed exception is hardly compelling. What is missing, to revert to an important theme of this panel, is a solid empirical basis for copyright policy formation. The Review comes up short on copyright theory.59 In calling for a new, European transformative use exception, the Review seems to have in mind the seminal U.S. case, Campbell v. Acuff-Rose Music, Inc.,60 which involved the popular rap music group 2 Live Crew’s “Pretty Woman,” a playful version of Roy Orbison’s classic rock ballad “Oh, Pretty Woman.” In Campbell, the Supreme Court stated that transformative works “lie at 54 Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society, 2001 O.J. (L 167) 10–19, available at http://eur-lex.europa.eu/Lex UriServ/LexUriServ.do?uri=CELEX:32001L0029:EN:HTML. 55 See Paul Goldstein, Derivative Rights and Derivative Works in Copyright, 30 J. Copyright Soc’y 209, 216 (1983) (arguing that section 106(2) of the Copyright Act “enables prospective copyright owners to proportion their investment in a work's expression to the returns expected not only from the market in which the copyrighted work is first published, but from other, derivative markets as well.”). 56 This lack of evidence contrasts with the impressive report setting out the economic evidence to support the Review’s recommendation on extension of copyright term for sound recordings). See CIPIL Report, supra note 52. 57 Gowers Review, supra note 45, at 67. 58 See Bridgeport Music Inc. v. Dimension Films, 230 F. Supp.2d 830, 841 (M.D. Tenn. 2002) (granting summary judgment for defendant), rev’d, 383 F.3d 390 (6th Cir. 2004), reh’g granted in part and opinion amended, 401 F.3d 647 (6th Cir. 2004), available at http://fsnews.findlaw.com/cases/6th/04a0297p.html. 59 The Review seems to compound the problem by conflating de minimis copying and fair use issues. 60 See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994), available at http://www.law.cornell.edu/ copyright/cases/510_US_569.htm.

884 SESSION X: COPYRIGHT the heart of the fair use doctrine’s guarantee of breathing space within the confines of copyright.”61 Such works, the Court said, add “something new, with a further purpose or different character, altering the first with new expression, meaning and message,” rather than merely “supplanting” the original.62 Almost twenty years later, it is fair to say, transformative use has transformed fair use analysis in U.S. courts. As Professor Barton Beebe demonstrates in his impressive empirical research, the transformative use notion took the U.S. courts by storm after 1994, and the doctrine has figured prominently in U.S. fair use cases ever since.63 It was one thing for courts to invoke transformative use as a talisman. But it is quite another to define it with precision and to devise a test that would produce predictable outcomes and legal certainty. Twenty years out, I think it is also fair to say that the meaning of this enigmatic phrase remains as illusive as ever, while its reach has steadily extended to encompass “transformative uses” as diverse as appropriation art,64 criticism and commentary,65 parody,66 and even the “robotic retrieval” of copyrighted works through Internet search engines.67 Adding sex is generally transformative,68 but subtracting it is not.69 One leading commentator put it well when he observed that transformative use remains “very much in the eye of the beholder,” leading him to conclude that the wide range of applications and the inherently subjective value judgments associated with this doctrine have led to “great unpredictability in judicial outcomes.”70 With a view toward creating a more precise, predictable and certain legal framework, Dr. Michael Einhorn has proposed creating statutory category of transformative works, which would be part of a larger administrative procedure designed to facilitate the production of transformative works by expediting the licensing process.71 Arguably, the adoption of Dr. Einhorn’s proposal could have the unintended consequence of nudging the American open-ended approach to fair use questions a little closer to the more categorical approach of the European Union. What about the reverse, the incorporation of a copyright exception for transformative use as one of the enumerated exceptions in the Information Society Directive, as recommended by the Gowers Commission? Is a European riff on the almost musical American phrase “transformative use” in our transatlantic future? By suggesting that transformative works somehow qualify for a separate limitation, the Review may have misread U.S. copyright case law. Rather, the U.S. transformative use inquiry is part and part parcel of the overall, four-factor fair use statutory framework.72 Properly viewed, 61

Id. at 579 Id. 63 Barton Beebe, An Empirical Study of U.S. Copyright Fair Use Opinions, 1978–2005 (working paper), 156 Pa. L. Rev. __ (2007) (forthcoming), available at http://www. bartonbeebe.com. 64 Blanch v. Koons, 467 F.3d 244 (2d Cir. 2006). 65 Castle Rock Entm’t v Carol Publ’g Group, Inc., 955 F. Supp. 260, 274 (S.D.N.Y. 1997) (the Seinfeld case). 66 Leibovitz v. Paramount Pictures Corp. 137 F.3d 109, 114–15 (2d Cir. 1998). 67 Perfect 10, Inc. v. Google, Inc., 416 F. Supp. 2d 828 (C.D. Cal. 2006), available at http://www.ca9.uscourts. gov/ca9/newopinions.nsf/DE8297F56287C0BC882572DC007DA CC6/$file/0655405.pdf. The phrase “robotic retrieval” is from William Patry. William F. Patry, Patry on Copyright, at 10-189 (2007). 68 See Mattel, Inc. v. Walking Mountain Prods., 353 F.3d 792 (9th Cir. 2003); 2004 U.S. Dist. LEXIS 12469 (D. Cal. 2004) (fee award decision), available at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/ 6205C146C29519CC88256E0B005D8100/$file/0156695.pdf?openelement. 69 See Clean Flicks, LLC v. Soderbergh, 433 F.2d 1236 (D. Colo. 2006). 70 Robert A. Gorman, Copyright and Aesthetic Judgments: Abuse or Necessity?, 25 Colum. J.L. & Arts 1, 15–16 (2001). 71 See Michael Einhorn, Alternatives to Fair Use: Can Kozinski Replace Posner, Appendix infra this chapter. 72 The four factors are: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and 62

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transplanting this dynamic element in the U.S. fair use analysis into European soil may be easier said than done. II. THE OECD UCC REPORT Like the Gowers Commission, the OECD has been acutely aware of the shift from manufacturing physical items to producing high value added, knowledge intensive goods and services across OECD economies. In particular, over the last several years, the OECD has conducted research and disseminated reports on developments in the so-called “digital broadband content” industries, including studies on online computer and video games,73 music,74 scientific publishing,75 and mobile content.76 With a view toward assisting policymakers in OECD countries to better understand the “basic creative infrastructure of the knowledge economy,” each study provides a wealth of information on the industry structure, evolving business models, and possible barriers to the development, delivery and use of digital content in OECD countries. The latest contribution to the OECD digital broadband content series is called “Participative Web: User-Created Content.”77 The OECD is perhaps best known for its economic data-rich studies of information technology (IT) studies at the national and firm levels. In this study, however, the OECD focused on the “new behavior pattern” of both individuals and companies. In essence, the OECD found that more and more network users were creating, adapting, and disseminating more and more content over the Internet through such online services as podcasts, blogs, and chat rooms. In the process, network users were transforming themselves from passive consumers to active participants. The fruit of such creative activities, UCC, admittedly was difficult to define. Nonetheless, as a working definition, the OECD described UCC as content that is substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors. 17 U.S.C. § 107. 73 Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information E conomy, Digital B roadband C ontent: T he O nline C omputer and Video Game Industry, DSTI/ICCP/IE(2004)13/FINAL (12 May 2005), available at http://www.oecd.org/ dataoecd/19/5/34884414.pdf. 74 Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Digital Broadband Content: Music , DSTI/ICCP/IE(2004)12/FINAL (13 Dec. 2005), available at http://www.oecd.org/dataoecd/13/2/34995041.pdf. 75 Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Digital Broadband Content: Scientific Publishing, DSTI/ICCP/IE(2004)11/FINAL (Sept. 2, 2005), available at http://www.oecd.org/dataoecd/42/12/35393145.pdf. 76 Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Organisation for Economic Co-Operation and Development, Directorate for Science, Technology and Industry, Committee for Information, Computer and Communications Policy, Working Party on the Information Economy, Digital Broadband Content: Mobile Content — New Content for New Platforms, DSTI/ICCP/IE(2004)14/FINAL (3 May 2005), available at http://www.lessig.org/blog/archives/OECD_Games.pdf 77 OECD UCC Report, supra note 48.

886 SESSION X: COPYRIGHT made publicly available over the Internet, that reflects a “certain amount of creative effort,” and that is “created outside of professional routines and practices.”78 The typical OECD document, long on facts and short on narrative, is rarely considered a “good read.” This time, however, the OECD produced a study that is short on facts but long on narrative. But what a great story it is! Once passive couch potatoes, today’s network users are taking advantage of new devices, such as digital cameras, microphones, and video editing tools to create and post digital content. Throwing off the shackles of traditional media companies, these creative proletarians are beginning to offer their wares directly to mass audiences over the Internet. The user-creator content story, however, is not entirely rosy. The OECD identified persistent questions about the “value” and “quality” of user-creator content. Nonetheless, as a new contributor to the creativity and cultural values in OECD countries, the OECD extended a warm welcome to the user-creator. “A likely greater supply of creative content on a greater number of active and published creators is available,” the OECD wrote, “potentially in a lower or greater diversity of technical and content quality, yet engaging viewers.”79 Measuring user-creator content using existing data was neither easy nor straightforward. Moreover, the OECD found it difficult to measure the actual size and economic impact of user-generated content on OECD economies, much less its future direction, given the paltry statistical evidence. To hear OECD tell it, however, venture capital investment in “participative Web technologies,”80 along with such dazzling transactions as Google’s acquisition of YouTube for about $1.65 billion,81 suggest that a strong economic locomotive is driving this creative train. The OECD presented little or no solid economic or business evidence that OECD countries were under-producing UCC. To the contrary, the anecdotal evidence of vibrant markets for creation and dissemination of user-created content suggested just the opposite. But despite its rapid rise, popularity, and increasing monetization, the OECD raised concerns that user-created content might just as quickly disappear. Would UCC be an “enduring phenomenon” or just an “ephemeral fashion?”82 Should OECD countries encourage the creation and dissemination of UCC? Were there unnecessary bottlenecks to user creativity in OECD economies? To foster the creation of user-created content, the OECD was convinced that closer attention would need to be paid to its regulatory environment, including important issues of copyright law and policy. OECD catalogued a broad range of questions that might attract the attention of policymakers in OECD countries. How should “fair use” and other copyright exceptions be defined? What are the effects of copyright on new sources of creativity? How does IPR shape the coexistence of market and non-market creation and distribution of content? Should UCC platforms hosting unauthorized user-created content be potentially liable for contributory copyright infringement? Of these questions, the OECD’s brief discussion of the application of copyright exceptions and limitations to UCC is highly instructive. The OECD report gives short shrift to 78

Id. at 4. Id. at 22. 80 OECD UCC Report, supra note 48, at 14. 81 What the OECD does not say is that about $200 million (over 12% of the purchase price) was put into escrow to cover potential legal liability. Press release filed on Google, Inc. Form 8-K, Nov. 13, 2006, available at http://www.secinfo.com/d14D5a.v78nv.htm. 82 See OECD, Directorate for Science, Technology and Industry, OECD Technology Information Outlook 2006, 196, available at https://www.oecd.org/ document/10/0,3343,en_2649_34223_37486858_1_1_1_1,00.html. 79

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the “current legal interpretation” that existing exceptions and limitations are working well.83 The OECD also glides by the argument that courts, by determining the new boundaries of exceptions and limitations, will “produce clarity in the UCC context.” Thus, the OECD suggests that policy makers in OECD countries may need to consider amending existing limitations. The OECD then brings us full circle by pointing with apparent approval to the recent proposal by the Gowers Review to amend applicable EU law to provide for creative, transformative, and derivative works, arguably reducing uncertainty and unpredictability. 84 III. CONCLUSION At the outset of this conference, a number of speakers reflected on changes in international copyright policy process. Not too many years ago, establishing international copyright policies and norms was largely confined to small group of experts working in familiar institutions such as the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO). Professor Hugh Hansen put it well when he called this “the boutique approach to policymaking.”85 The age of the experts, if it ever really existed, is probably a thing of the past. Today the international copyright process, for better or for worse, is much more inclusive. By more inclusive, I mean more international organizations (both intergovernmental and nongovernmental), representing more stakeholders, across a wider range of interests, are actively involved in the international copyright policy process. Enlarging the copyright tent has provided an opportunity for new participants to enter, bringing their fresh insights and enriching the debate. One challenge for copyright policy makers is to avoid the so-called “babble effect” (when everyone can speak, no one can be heard). Another challenge is to produce original economic evidence, or marshal existing persuasive empirical and theoretical research, in support of sound copyright public policy recommendations. This panel has focused on leading-edge empirical and theoretical research. Other panels have begun to explore the uncharted waters of allocating the evidentiary burden in the copyright policy process as new participants enter the process.86 At the beginning of the 21st Century, in the winter of copyright’s discontent, both the Gowers Review of Intellectual Property and the OECD’s Participative Web: User-Created Content reflect these deeper challenges and opportunities facing the international intellectual property community. *

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PROF. HANSEN: Thoughts, comments? Lionel first, then Stanley. PROF. BENTLY: I am happy to say a couple of things relating to Michael’s

talk. Since you mentioned the Gowers Review,87 I thought I would mention one problem and three good things about the Review. The Gowers Review, as you all know, was conducted in the United Kingdom by a team 83 OECD UCC Report, supra note 48, at 46 (citing Jane C. Ginsburg, How Copyright Got a Bad Name for Itself, 26 Colum. J.L. & Arts (Oct. 18, 2002), http://ssrn.com/abstract= 342182). 84 Id. at 47 (citing Lawrence Lessig, Free Culture (2004); William W. Fisher III, Promises to Keep: Technology, Law, and the Future of Entertainment (2004); William W. Fisher III, Speech Before OECD Italian government Conference on The Future Digital Economy, Digital Content, Creation, Distribution and Access, 30–31 (Jan. 2006), Rome, Italy, available at http://www.oecd.org/dataoecd/16/44/36138608.pdf. 85 See infra Session I, Part A: The Next Ten Years in WIPO and WTO. 86 See, e.g., Remarks of Barbara Norcross-Amilhat, supra Session Part VIII, Part B: The Recasting of Copyright and Related Rights in the European Union: What Should the EU Do? — What Will the EU Do? 87 Gowers Review, supra note 46.

888 SESSION X: COPYRIGHT from the Treasury. The Treasury is not the government department that deals with IP – that is the DTI (Department of Trade and Industry — but the Treasury set up this review. So it was a review by people who had little background in IP. They worked hard to find out something about IP in the time available to them, which was under a year, I think. They were covering the whole of IP – designs, patents, and trade marks as well as copyright. So it was absurdly ambitious. It was an example of how not to conduct a review. Having said that, there are three good things that come out of it, I think. One is that it is recognized in there that the British limitations to copyright are unreasonably narrow, in various respects. In particular, U.K. law has three “fair dealing” defenses in Sections 29 and 30 of the 1988 Act.88 These are limited by reference to purpose and couched with a host of qualifications. So, for example, the fair dealing for criticism defense only applies to published works — no criticism of review of secret government documents then. Moreover, to avail oneself of this defense there must be sufficient acknowledgment: the defendant must identify author and work. While the Gowers Review rightly criticized the exceptions as unduly limited, they proposed to supplement them with some kind of transformative use defense. This presumably comes from some misunderstanding of the U.S. fair use defense. The proposal is so badly thought through it is not even worth reading. But the good thing is that they recognize that there is a problem. The second thing they did that was really good was that they came out against the extension of term of copyright in relation to sound recordings. They did so by responding to a report by my Institute on the economics of term extension, which recommended exactly the same thing. The third thing, which was very welcome, was that they recommended the institution of ongoing review of intellectual property. They promised funding — not great funding, some hundreds of thousands of pounds — for that. That is a step forward. So though the Review itself was an example of a bad review, I think it points the way towards a future where law review in the IP field will be more carefully conducted. MR. PIERRE-LOUIS: Professor Barton looked at sort of the judicial view of fair use and where it is going, which I am looking forward to reading more about in his article. Professor Wu talked about some of the statutory schemes that look at tolerated use, which could be a new form of fair use. Michael Einhorn looked at a possible new mechanism for making decisions. In your policymaking, is there a sense of where the policymakers think fair use needs to go, in conjunction with congressional action, international action? There is some legislation, like H.R. 107, trying to expand fair use with respect to the use of burning CDs.89 I know there have been various attempts at legislation that have not gone through. Is there a policy view with respect to where fair use is going that you see forming, one way or the other — either growing fair use a little bit or shrinking the public domain? MR. SHAPIRO: It was clearly also my winter of discontent. My primary complaint was that the reports that I commented on presented half-baked policy proposals, without an adequate empirical or theoretical foundation. I think that point has been graciously confirmed by another member of this panel That leads me to another complaint, which I call the “echo chamber effect of interna88

Copyright, Designs and Patents Act 1988. H.R. 107, 108th Cong., Digital Media Consumers’ Rights Act of 2003: To amend the Federal Trade Commission Act to provide that the advertising or sale of a mislabeled copy-protected music disc is an unfair method of competition and an unfair and deceptive act or practice, and for other purposes (introduced Jan. 7, 2004), available at http:// Thomas.loc.gov/cgi-binquery/z?c108:HR.107. 89

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tional copyright policy.” In today’s policy discussions there is endless repetition of ideas that are not fully discussed or debated at international levels. A third problem is the subject matter competence of international organizations considering copyright policy issues. The World Intellectual Property Organization (WIPO), the organization with, arguably, the deepest expertise to explore issues related to copyright exceptions and limitations seems to be in its own winter of discontent, leading these policy considerations to drift off to other international fora. PROF. HANSEN: Thank you. Now we will move on to our next speaker, Professor Souichirou Kozuka, who is going to talk about the copyright law and some ideas about the digital agenda in Japan. *

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Copyright Law and the Digital Agenda in Japan: Some Thoughts about Change Souichirou Kozuka90 I. INTRODUCTION In Japan, as in many other countries, how to adapt the copyright law to the developments of digital technology has been one of the most debated issues for more than a decade. Yet nothing but rather minor amendments has been made to the Copyright Law.91 Nor has the trade in digital contents experienced an expected boom so far. Apparently those engaged in the contents-related business, including intellectual property lawyers, have failed to turn the technological developments into an innovation in the business and trade. It was against these backgrounds that a study group was set up at the Institute of Intellectual Property (IIP), specialized research institute in Tokyo, on the contours of legal system conducive to the trade in digital contents. The study group, chaired by the author, published a Proposition for the enactment of a new Digital Contents Act,92 followed by the roundtable discussions examining the issues to be cleared when the proposed law is enacted.93 This article outlines the Proposition with some insights into the background. II. THE PROPOSITION FOR THE DIGITAL CONTENTS ACT A. THE TEXT

The Proposition in English reads as follows:94 90

Professor, Sophia University, Japan. B.A., University of Tokyo, 1992; Ph.D. in law, University of Tokyo,

2006. 91 As regards the recent amendments to the Copyright Law in Japan, see Souichirou Kozuka, The Role of Japan in World-wide Copyright Protection, in The Future of Intellectual Property in the Global Market of the Information Society (Frank Kotzen ed., 2003); Agency for Cultural Affairs, Outline of the Law for Partial Amendment of the Copyright Law, 30 AIPPI 148 (2005); Copyright Division, Commissioner’s Secretariat, Agency for Cultural Affairs, Law to Revise a Part of the Copyright Act, 32 AIPPI 123 (2007). 92 Proposition was published in the Journal of IIP. On the Protection of and Trade in Digital Contents, 65 Chizaiken Forum 2 (2006) (in Japanese). 93 Roundtable discussion, On the Protection of and Trade in Digital Contents (Part 1), 67 Chizaiken Forum 2; (Part 2), 68 Chizaiken Forum 10 (2007) (in Japanese). 94 English translation by the author.

890 SESSION X: COPYRIGHT Part 1. Basic Ideas — In order to facilitate the development of the contents business, it is needed to have a comprehensive legal regime including not only copyrights but also related property rights, such as the right to likeness or images. — The aim of such a regime is to establish the cycle of creation and exploitation of intellectual works. Neither a shortsighted protection of authors’ interests nor upholding of interests of current distributors will encourage creation and distribution of contents. — For the cycle of creation and exploitation of intellectual works to run, it is vital to ensure, above all, freedom in transaction and fair competition. To this end, a policy that ensures the effective competition in the related market is necessary and the legal infrastructure that is conducive to commercial transactions must be introduced. — The copyrighted works to date have been dominated by their cultural value and emphasis has been put on their personal nature. The current law on copyrights reflects such characteristics of traditional works. It is, therefore, appropriate to introduce a business-oriented legal scheme with a scope limited to digital contents, which are less cultural and less personal. Those interested in the enhanced trade of digital contents can opt for this scheme by registration. — In order to achieve the above goals, we hereby propose enacting the “Digital Contents Act” as follows. Part 2. The outline of the proposed Digital Contents Act (1) Scope of Application — The Digital Contents Act shall be applicable to digitized contents with the commercial value, including works, likeness and other properties. — The Digital Contents Act applies only to the commercial use of digital contents. In order for this Act to be applicable, a Registration or public notice shall be required. (The technological system for the registration or public notice that is convenient for both the rightholders and users shall be developed.) (2) Enforcement of Rights — As regards the digitized contents regulated by the Digital Contents Act, the enforcement organization (to be called the “SEC (Securities and Exchange Commission) for Intellectual Properties”) shall be established that takes actions promptly against the unpaid usage of them, such as the piracy goods or counterfeits, in order to enforce protected rights effectively and maintain orders of the market for contents. If necessary, a provision is included that assures that the freedom of general users is not unfairly interfered by this organization. (3) Limitations on Rights — With regard to the digital contents that are protected as copyrighted works, rules conducive to their creation and use shall be introduced, within the limits of the Berne Convention and other international agreements to which Japan is a State Party. For example, with regard to the moral rights of the author, the modification of works shall be allowed as long as it would not be “prejudicial to the author’s honor or reputation.” — The provision on the reproduction for “private use” shall be non-mandatory and be stated explicitly as such: provided, however, that a careful consideration is given to the regulation of unfair terms and conditions that restrict the freedom of individuals excessively. — The provisions on limitations of rights for public purposes, such as the press or education, shall be realigned after reviewing the purposes of each provision and be

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redrafted avoiding too complicated regulations. (The general wordings employed in the arts. 30, 32 of the current Japanese Copyright Law are preferable.) — The provisions on the free uses shall be applicable to rights to likeness and other properties as long as consistent with their nature. — A modest catch-all clause for the free use shall be introduced after a line of provisions on limitations of rights, such as “other kinds of uses of digital contents that may not unreasonably interfere with the interests of the rightholder.” (4) Term of Protection — The term of protection for digital contents shall not be unreasonably long. (5) Dispute Resolution — In order to resolve disputes involving digital contents, the award system that is convenient to relevant parties shall be introduced. The award system shall work out the appropriate consideration for the use of the protected work according to the principle of RAND (reasonable and non-discriminatory) and ensure its payment, unless the right at issue is prejudiced severely. — When there is a protected right on a fraction of the digitized content with a large commercial value belonging to another party, such as the case of right to the likeness or copyright held by a person that appears in an audiovisual work by chance, the consent by such a rightholder shall be presumed, on condition that the payment of a reasonable consideration is offered. Thus, the abusive claim of the right shall be excluded. B. THE PROCESS

In the course of shaping the Proposition, the Study Group interviewed a number of people representing various sectors related to the entertainment, telecommunications or broadcasting business. It turned out that most of them are not satisfied with the current situation of the trade in digital contents and wish to see more transactions. Yet, they run into various difficulties in practice, finding that they lose many opportunities for business. The Study Group noted that not all of the difficulties raised were legal ones. It means that changing the law cannot assure the increase in the trade of digital contents. However, it was obvious that the current situation is not satisfactory. Lawyers may need to think differently if the existing system does not meet the business demands and many people seek for the circumstances more conducive to the trade. This is the background that led the Study Group to the publication of the Proposition. III. MAIN FEATURES OF THE PROPOSITION A. THE BASIC IDEA

The Proposition declares in its Part 1 that there is a need for a “business-oriented legal scheme.” The idea itself might be controversial, as the copyright law has traditionally emphasized the cultural value of works and the moral nature of the rights granted to the author. The policy goal of facilitating trade in works and contents could come into conflict with this traditional view of copyright. Therefore, the Study Group took a practicable approach and proposed that the scope of the new law be limited to digitized works. Though the distinction of digitized or non-digitized works does not correspond to the difference of their business or personal nature, there is a good probability that the contents ready to be traded are produced in a digitized form, at least from now on.

892 SESSION X: COPYRIGHT B. MARKET SOLUTION

Having defined the aim of the proposed Digital Contents Act as facilitating the business related to digitized contents, the Study Group noted that the aim would not be achieved if one of the interested parties would take all the fruits from the transactions. It is obvious that the party excluded from the benefits of the transactions will be discouraged from engaging in the business. In this sense, striking a balance among the creators, distributors and users shall be sought. The Proposition confirms this point by citing a phrase “cycle of creation and exploitation” of intellectual works, used in the Strategic Program for the Creation, Protection and Exploitation of Intellectual Property95 of the Japanese Government. The real issue is, of course, how to find the right balance. The copyright law in Japan does not have a general clause or doctrine of “fair use ” that enables the case-by-case decision.96 Whether such a general clause is preferable depends on the ability of the courts in finding a right balance in each case. It was found by the Study Group that nobody in the industry appears to be in favor of the general clause, which reveals the distrust in the ability of the court held by people in practice. On the other hand, it is not assured that the legislator is in a better position in finding the right balance: in particular, too detailed rules about the limits of the right in the current Copyright Law may reflect, at least partly, the complications brought about by the political process in the course of law-making. Therefore, elaborating further on such rules was considered as no good solution, either. The Proposition thus takes the position that the balance shall be best found by the market. If the starting point is to affirm that the economic value of digital works prevails over their cultural value, with the aim of facilitating their trade, it will be the market that is in a best position to measure such value. To be more concrete, providers of contents may or may not attach conditions and limitations on the use of their contents and compete with each other. A simple example is a music file with limitations on copies for a lower price and one without such limitations for a higher price competing with each other in the market. Users ’ preference may differ depending on various factors, such as the nature of the work (pop music or classic), the way how to use them (simple listening by consumers or use by another creator for a secondary work), the extent of the limitations attached to the former one (copy restricted to one hundred times may be equivalent to copy-free for consumers) or the difference in price. All these factors will be reflected in the equilibrium achieved by the market. C. NON-MANDATORY RULES

Such competition is possible only when the limitations and conditions on rights to digitized works are subject to private arrangements. In other words, rules on the limits of rights under the proposed Digital Contents Act shall be basically non-mandatory. There may be a reason to enforce mandatory limitations in some respects: for example, use by a broadcasting company may be justified to some extent for the sake of the freedom of press; private use may also need to be guaranteed in certain cases in order not to interfere with the privacy of individuals. However, these situations cannot justify jumping to the conclusion that the limitations on copyrights shall be mandatory. An arrangement that could unduly restrict these kinds of uses of contents can be addressed in a different way, such as the regulation of unfair contract terms or rules protective of 95 96

Available at http://www.ipr.go.jp/suishin/030919suishin-e.pdf. As regards the Copyright Law of Japan, see Japanese Copyright Law (Peter Ganea et al. eds., 2005).

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consumers. Based on such analysis, the Proposition takes up the issue of reproduction for private use in particular and suggests that the relevant provision in the Digital Contents Act be non-mandatory. D. THE COMPREHENSIVE SYSTEM

Another unique feature of the Proposition is that it includes other rights than copyrights in the scope of the proposed Digital Contents Act. It is in response to the finding by the Study Group that, in order to facilitate trade in digitized contents, it is not sufficient to take up copyrights only. A person appearing in films may claim their right to publicity; the logos and symbols used in the advertisements and merchandizing must also be protected from unauthorized use. Under the current law in Japan, these “rights” are protected to some degree by the case law, relying on the more general rules of torts or moral right of personality.97 The Proposition finds it appropriate to explicitly admit these rights as protected rights under the Digital Contents Act. Subjecting them to the same scheme as copyrights will make it possible for the secondary users and distributors to negotiate and make arrangements over these rights with the original rightholder at the same time with the copyright with the effect of promoting the trade in digitized contents. Extending the scope of the Digital Contents Act to such kinds of “rights” as are currently not founded in statutes has a theoretical implication as well. Instead of merely revising the current Copyright Law, the Digital Contents Act has to be constructed from a clean slate in order to be comprehensive enough as to apply to both copyrights and other rights. Still, the law on copyrights provides a good basis, not the least because any proposal for a new legal scheme must be in conformity with the existing international conventions on copyrights as long as Japan remains the State Party to them. E. DISPUTE RESOLUTION

As any business is carried out under a time constraint, the Proposition mentions the mechanisms of dispute resolution as well. Two issues are distinguished in this regard. First, the dispute over a right under the Digital Contents Act shall be subject to a dispute resolution procedure out of court (“award system”). In this procedure, a “reasonable and non-discriminatory” compensation is calculated and awarded to the rightholder, if found appropriate. The result is close to the unilateral expropriation of a right. Since, as discussed below, it is merely optional for a holder of digitized contents to subject them to the Digital Contents Act, there is no problem with introducing the mandatory “award system.” The second issue is a minor right existent on a fraction of a digitized work. If, for example, a person that appears by chance in a documentary film could claim his or her right to likeness (right of publicity) later and enjoin the use of the whole work, the transactions would be intimidated. The Proposition addresses this problem by introducing a “buy-out” system of such a fractional right: the consent of the holder of a minor right shall be presumed when a reasonable consideration is offered. The “buy-out” system is justified as long as the exercise of such a minor right is found to be abusive, considering the far larger value of the whole work. F. OPT-IN BY REGISTRATION

Although the Study Group is convinced that the proposed Digital Contents Act was a 97 With regard to the case law on the right to publicity, see Tamotsu Takura, Right of Publicity in Japan, 27 Law in Japan 37 (2001).

894 SESSION X: COPYRIGHT better system for the sake of promoting business in digitized contents, it also understood that not all of the contents are intended for the commercial use. Therefore, the Proposition designed the system as one to be opted-in; only the contents registered by the rightholder shall be governed by the Digital Contents Act. The result is that the proposed scheme will be in competition with the existing scheme. The Digital Contents Act provides an enhanced or expanded protection of rights in some respects, while introducing limitations or restrictions for the sake of a better distribution and use of contents. The rightholder can choose either the current law or the new one, judging the benefits and disadvantages of each scheme. Here again, the answer lies in the hands of the market, not of the legislator or judges. IV. CONCLUSION Having seen little progress in the law reform after discussions about how to adapt to the developments of digital technology for more than a decade, we may need a radical shift in thinking is needed, instead of incremental revision of the existing law. On the other hand, there are legal or political factors that impede such a radical leap from being made. The Study Group that published the Proposition thought that the impediments can best be overcome by introducing an optional new scheme, not forcing it as mandatory. If there is a serious request for change, people desiring more activated trade in contents will opt for the new scheme. In order for that result to be achieved, the proposed scheme must be sufficiently radical. This is what has been done by the Proposition: it is now time to see whether and how it works. * * * Comments, thoughts? MR. PIERRE-LOUIS: I actually like the Chicago School motif that you have in there. One of the things that American copyright law does is it kind of creates bargaining leverage, because there is this big hammer you have. Even if you are the David to the Goliath, if someone has used your work, you have this leverage. How do you create leverage? When Michael was talking before, I think you were really talking about sort of an efficient ADR system, so that people could get a result in a way that did not cost a lot of money. You probably can even have an opt-out, where if it is not working out, fine; let’s just go to court. And that is always the threat. How does yours balance out that leverage? Or does it matter whether or not you have any leverage for the guy walking by to say, “You know what? I do not want two bucks. I am a famous person. I am Paul McCartney. I am very upset because my copyrights are about to expire, and I could not get term extension. I was in Japan and you filmed me. I should get more than two bucks.” How do they bargain? Is it, just because he is Paul McCartney, he gets more? How do you imagine that working, in the dream world? It does not have to be in the current world. PROF. KOZUKA: If a proposal is to replace the current copyright laws, then that should not be an issue because it would affect everyone. But the proposal regards the business world, so it is among those people who have interest in making more trade. Paul McCartney might allege his right and he might require a huge amount of money. But then if he sticks to that and there is no one who dares to pay that, then he would lose the Japanese market, with 100 million people. That is the market solution. PROF. WU: I can see your emphasis on market solutions, but isn’t copyright for the welfare of authors? If that is so, if you want to have a pure market system, you might as PROF. HANSEN:

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well just get rid of copyright and let people trade for whatever. Where are the interests of authors reflected in what you are proposing? I guess that is what I am curious about. PROF. KOZUKA: I do not get your point clearly. PROF. WU: It seems to me that your proposal thinks that the economically relevant actors in the system are basically the rival disseminators. I wonder if there is any thought in your proposal as to the economics of authorship and how authors would make money in your scheme, or whether you have thought about that as a challenge for this proposal? It is just the basic “how does an author make money” problem. PROF. KOZUKA: Of course, the author may also be interested in the promotion of the business. So if they require too protected rights, then that would, in the end, harm their economic interests. That is what is really happening in the market now. So they may also find it in their interest to move to that another world. But, of course, there might be the balance-of-power issue. So authors might be individuals — although their works are more adaptive to the business, they are still individuals and the disseminators are big companies. That might be addressed by authors by making associations. Then they have a good position for bargaining. PROF. HANSEN: Going back to Michael Einhorn’s presention, he mentioned the Wind Done Gone98 and the Acuff-Rose99 cases when he was talking about parody. I think there are some principles we can draw from those cases. They are not broad principles at all. The idea that they really cared whether it was parody or satire in those two cases I do not think had much to do with it. In the Acuff-Rose case, Luther Campbell tried to get a license. Then he tried to get a mechanical license. His lawyer, about a year later, came up with the idea that it was a parody. So it is almost like “the emperor’s new clothes” — in the end we cannot really say anything about the fact that it wasn’t a parody. Barton got it right, I think, when he said that it is a parody when the courts want it to be a fair use. I think also the same thing can be said about the Wind Done Gone case. The author was not thinking of parody. It was a serious discussion, from a young black woman’s point of view the racial situation in the South, using these well-known characters. I do not think it was even a satire, let alone a parody. There is a lot to be said for maybe allowing these types of transformative uses; certainly more than we do today. But the fair-use doctrine does not allow it as a general rule. Recognizing that, the Eleventh Circuit wanting to broaden the types of transformative uses in its preliminary opinion used a first amendment argument that would have allowed a lot more derivative uses than the normal fair use analysis. Later, they abandoned that first amendment basis and in the final opinion simply called it a parody and used the fair use doctrine. They lost their nerve, actually, and backtracked doctrinally. This will make it more difficult to allow these types of transformative uses in the future unless a court is going to be intellectually dishonest and call things parodies when they aren’t. I think what drove both Acuff Rose and those cases were the defendants: a hip-hop black artist and a young earnest black artist. On some level these judges wanted to give more leeway because of an ad hoc concern to allow a minority cultural or political voice. I think there would have been different results if in Acuff Rose there had been a country singer as defendant or in the Wind Done Gone, if there had been a white male author. In short, these defendants got a pass but I am not sure the precedents will mean a broader category of works will be allowed as a general matter. 98 99

Suntrust v. Houghton Mifflin, 268 F.3d 1257 (11th Cir. 2001), 136 F. Supp. 2d 1357, 1363 (2001). Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 590 (1994).

896 SESSION X: COPYRIGHT DR. EINHORN:

Wait. I am just trying to say that I think fair use doctrine was a device to achieve certain ends that did not normally fit into that doctrine. Many commentaries on these cases are seeing precedents that are braoder than I think they are. I think Justice Kennedy’s concurrence is instructive.100 He is saying, “Look, Luther Campbell got a pass on this. The reality is, the next time and in another situation we are really going to look to see whether it is a parody or not.” But what about the idea that maybe we should allow Luther Campbell or the author of The Wind Done Gone to do that in a more explicit way? Just say, “You know what? For good policy reasons, these are statements that we should allow.” There would be some way we can create something in copyright to do it. What do you think? MR. PIERRE-LOUIS: Can I disagree with your premise? I am taking this in a different direction. Two things. One, with respect to the Campbell case, there was vehement disagreement from the district court on up. I happened to clerk for Judge David Nelson of the Sixth Circuit the year after he case was decided. He wrote the dissent after it was reversed in the Sixth Circuit. Then it got re-reversed, I guess, by the Supreme Court. You have this white Republican judge in his sixties wearing headphones, listening to Roy Orbison, then listening to Luther Campbell. I think people are trying to make a call. I do not think it is necessarily stampeding for a political agenda or anything like that. I think people are really trying to figure it out. If that is not good enough, there is another Sixth Circuit case talking about hip-hop and fair use.101 Sampling, obviously, has been a huge issue ever since De La Soul used about ninety samples in ten songs and got sued into submission. But it was a brilliant album. So fair use has been sort of back and forth on the sampling front. When you look at the Bridgeport decision, which essentially says, with respect to sound recordings, that there is no such thing as a de minimis use, that it is automatically infringement. Other circuits not following suit. I think it is going both ways. So I do not know if the premise is right. It may be convenient that these two cases happened to represent similar atmospherics. But it seems like, with respect to the case law — and I really have to turn to Barton to do some analysis on this down the road — I bet you that there is no rhyme or reason, one way or the other, as to how the courts decide these cases. It is probably more trying to struggle with how the facts really bear out. I do not buy into the premise, just because there are so many cases going the other way. PROF. HANSEN: My premise is that no one in their right mind would have thought that Luther Campbell’s work was was a parody of the song by Roy Orbison’s. Luther Campbell certainly did not think that. Similarly, no one also would have or did think originally The Wind Done Gone was a parody. So if that is true, then how did we get the court to say it is a parody? I do not think they are putting on headphones, saying, “Ah ha, this is a parody.” They are putting on headphones — but maybe what they are thinking is that this is bad, a rip-off, or kind of neat and should be allowed So I do not think it is just “Okay, what’s the law? What’s fair use? Let’s figure this out.” I do not think anyone seriously would say either of those works are a parodies. Maybe, and only maybe, Luther Campbell could be in the satire range. But I think it was simply a statement about his view of women using someone else’s work to make that statement PROF. HANSEN:

100 101

Id. at 571, available at http://supct.law.cornell.edu/supct/html/92-1292.ZC.html. Bridgeport Music, Inc. v. Dimension Films, 383 F.3d 390 (6th Cir. 2004).

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stand out. Similarly, Alice Randall’s wanted to make a profound statement about racial issues and history in the South. Using someone’s else work to make that statement was an interesting and more provactive way to do it. I happen to think it is kind of neat that they are doing it, and maybe we should allow it. But I think if you take approach the issue simply on a doctrinal basis, you are never going to be able to predict a case. If you really believe that the courts determined these were parodies, you will then try to figure out in your case if they the defendant’s work is a parody. But is highly unlikely that this is what at least the majority of the judges will be doing. They are much more likely to decide the case based on other reasons. All I am saying is I think people should be aware that if they are giving advice about similar fact patterns, if they limit themselves to asking if this is a satire or a parody, they are not going to be very predictive of the outcome. That is all I am saying. I am not even saying that the issue is simply whether it is a parody or satire, as I don’t think that either work was even a satire.. PROF. GINSBURG: May I ask Barton a question? Is there, in fact, a stark breakdown between fair use cases that are labeled parodies, and therefore, if parody, fair use; and if merely satire or some other kind of social humor, not fair use? Does it break down that way? PROF. BEEBE: I was just looking at the numbers on my computer. In fact, the breakdown is not as stark as I had represented. Actually, there were apparently just two opinions where parody was found not to be a fair use, but there is a handful of opinions where satire was found to be fair use. Whatever your political commitments are, I tend to think that is great. I do not know why we ever thought satire should not also qualify as fair use. I am sure the Court had lots on its mind at the time, but it is unfortunate that one implication we take away from the Campbell opinion102 is that satire is not allowed. That is the factual answer to your question. I am not sure where you are going with that. If I may just follow up briefly, though, on Hugh’s comment, as a clerk at the district court level, I think courts do say, “This is parody. This is satire, according to the Supreme Court. Let’s try to apply this test.” Maybe that is just a district court experience, where you do not have time to think about the cultural context or the politics. To the extent you do, it is subconscious or it is part of the ideology you bring to the case. But otherwise, one’s experience is, “Give me the doctrine quickly. I have to decide this quickly. I do not want it to be reversed. I do not want to do anything crazy. So I will just try to follow the doctrine.” Maybe it is nice that it turns out well in the end. PROF. HANSEN: I clerked in a district court as well as well as the Second Circuit and I found a difference in approach. I agree with you that in the district court, the judges have very little time. They do want the doctrine and they don’t want to be reversed. But what grabs them intuitively, if not instinctively, is who is the good guy and who is the bad guy.“I see blood in the water and I see a victim. I’m going to make sure the victim is okay.” PROF. BEEBE: It is rarely that clear. There is rarely clarity as to good and bad in these cases. PROF. HANSEN: I suppose it depends on a full spectrum of things — I do not mean evil and pure good. But if you look at the major cases that have gone to the Supreme Court, the district courts were clearly on a good guy/bad guy mode. For instance, look at Victo-

102

Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994).

898 SESSION X: COPYRIGHT ria’s Secret103 and Wal-Mart.104 The district court judges went after them in a way that indicated severe disapproval of the defendants. The court of appeals affirmed with some modification or certainly less disapproval. Then the Supreme Court might as well have been looking at different cases. Broader policy issues prevailed with little concern for the nature of the particular parties. Of course, this makes sense as the Supreme Court’s precedents are going to be applied to a broad range of factual situations. The district courts are down in the trenches and the Supreme Court is flying over head certainly not as concerned as to what is happening “on the ground.” Down in the district court it is a battle. In the Supreme Court it is much more of an intellectual and policy exercise. A military metaphor might be illustrative. You can think about the district court as the company commander, wanting to protect everyone in the company and wanting to stop the enemy from hurting or continuing to hurt his troops. The circumstances of necessity produce some black and white types of decisions. The court of appeals is the regional commander. They are aware of the factual issues that are compelling to the company commander but they have the time and the need to think of the broader ramifications of their decisions. The welfare of the personnel in the company is important but there are other people and lives they have to think about as well. In fact, a company might have to be sacrificed to save the battalion — for the greater good, however reluctant they might be to do so. Then the Supreme Court is much more like the Supreme Allied Commander in WWII — 200 feet below the surface in London. Cannot see, hear or feel the results of any of the actions in the military theaters. The possible loss of a whole regiment becomes a dispassionate balancing decision, human emotion plays a more limited role. You might have to consider political or other consequences which have nothing to do with victory, for instance barring pursuit of the retreating enemy into China during the Korean War for political reasons. This difference in approaches in the district courts and higher courts is particularly evident in slander and liable cases. PROF. WU: You are saying you are a legal realist. PROF. HANSEN: I am a legal realist. PROF. WU: One thing that I think this panel has in common is an interest in the fair use doctrine, whether it is studying it or understanding it, or other doctrines, and how they look to the people who are about to invest in making something that might or might not be an illegal use. This is an interesting question. I think something useful that people in the copyright community could wonder about is: What are the conditions facing people thinking about investing in a work that is potentially fair use or potentially licensable or potentially in that position? That is the question of our day. Hopefully, we can discuss that and find something. That seems to be the question of our day. PROF. HANSEN: Michael, you are almost going crazy in your seat. DR. EINHORN: The only thing I would say is that hearing this conversation for the past ten minutes convinces me that I am right. I cannot imagine that anybody who is seriously considering investing in a controversial LP or a controversial movie or a controversial book would say, “Well, you know, it depends which judge we get. If we are in the district court level, they are going to judge things based on personality. But the Supreme Court is going to fly all over the country.” If what Hugh describes is true, this is exactly the reason why you have to clear the landscape and make signals clear for the artists and the investors who put in the cash and time 103 104

Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). Wal-Mart Stores, Inc. v. Samara Bros., 529 U.S. 205 (2000).

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to create the works in the first place. If you want to talk about a democracy, many of the institutions of any democracy are not Jib Jabs on the Internet, with all due respect to semiotic democracy. It is still the fact that someone has to come through with movies, books, and LPs, and invest a lot of time and cash. Holding this fair use bomb brings back that famous statement of one pundit: Copyright law, not horseracing, is the sport of kings. Exactly so. PROF. HANSEN: Let’s give a hand to our excellent speakers and panelists.

APPENDIX A Alternatives to Fair Use: Can Kozinski Replace Posner? Michael A. Einhorn, Ph.D.105 I. INTRODUCTION This article will develop the idea of expedited use that can be applied to transformative adaptations of works where users add new meaning to copyrighted materials. In this application, I continue ideas developed by Circuit Court Judges Pierre Leval and Alex Kozinski, who have both suggested that the copyright system is prone to too many injunctions and that courts may facilitate exchange by setting reasonable royalties.106 As these authors never presented any greater detail on their suggestions, I shall provide a more precise legal framework to implement this general strategy and a practical means for implementing it. My suggested process is similar to new legislation — the Orphan Works Act of 2006 (H.R. 5439) — that would expedite the use of orphan works where rights owners are diffi-

105 Senior Advisor, CONSOR Intellectual Asset Management. The paper is an abridged version of Chapter 2 of Media, Technology, and Copyright: Integrating Law and Economics (Edward Elgar Publishers, Northampton, Mass.). It appears with the permission of the publisher. The author can be reached at 973-618-1212, mae@media techcopy.com. Michael A. Einhorn is a leading economic expert active in the areas of intellectual property, media, entertainment, licensing, valuation, and antitrust. He is a Senior Advisor at CONSOR Intellectual Asset Management, a member of the Gerson Lehrman Group, and the author of the book Media, Technology, and Copyright: Integrating Law and Economics (Edward Elgar Publishers). In media and intellectual property he has been a consultant to inventors, publishers, songwriters, composers, cartoonists, sculptors, photographers, architects, artists, record labels, movie producers, and screenwriters. Dr. Einhorn has designed and applied innovative techniques related to damage estimation, valuation, licensing, and strategy in transactional and litigation matters involving patents, copyrights, trademarks, trade secrets, and publicity rights. He has testified, counseled, published articles, or lectured in music rights, fair use, data mining, royalties, damages, hyperlinking, file-sharing, and digital rights management. Michael Einhorn received a B.A. from Dartmouth College and a Ph.D. in Economics from Yale University. He taught at Rutgers University and worked at the U.S. Department of Justice, Broadcast Music, Inc., and Bell Laboratories. He served as an Adjunct Professor of Communications and Media in the Graduate School of Business at Fordham University and a Research Fellow and Adjunct Professor at Columbia University. He is also a frequent lecturer in Continuing Legal Education programs. 106 Pierre N. Leval, Toward a Fair Use Standard, 103 Harv. L. Rev. 1105, 1132 (1990) (“there may be a strong public interest in the publication of the secondary work [and] the copyright owner’s interest may be adequately protected by an award of damages for whatever infringement is found.”); Alex Kozinski, What’s So Fair About Fair Use?, The 1999 Donald C. Brace Memorial Lecture, 46 J. Copyright Soc’y 513 (1999) (with Christopher Newman), available at http://alex.kozinski.com/articles/Whats_So_Fair_About_Fair_use.pdf (“The best way to promote production of valuable intellectual works is to give authors and inventors the ability to demand and receive compensation for the values they create . . . . The best way to do this is to grant property rights that give their products exchange value.”).

900 SESSION X: COPYRIGHT cult to locate.107 To qualify for expedition, a prospective user must perform some discernible due diligence before use of the work. Where necessary diligence requirements have been met, Section 2 of the prospective law would remove the use of injunctions against valid uses and allow rights owners to recover damages only to the level of actually demonstrated losses. Defendants would not then be obliged to disgorge any additional defendant profits. With limited downside liability, the law encourages secondary users to make liberal use of orphan works, provided they dutifully attempt beforehand to locate the proper rights owner(s). I shall suggest that a similar framework can be designed for transformative works. In a modified version of Title 17, a new statutory category of transformative works would be established for material that adds sufficient new meaning to copyrighted material. Extending beyond traditional fair use, implicated works might reasonably include parodies, satires, criticisms, comments, news reports, research articles, and classroom materials. Restrictions on the use of such works would be eased. Steps would be taken to insure diligence, reduce injunctions, and limit liability to actual damages that the plaintiff can demonstrate. Among such works, claims for actual damages may be adjudicated through arbitration procedures that would compensate works based on existing market benchmarks. Rate arbitration could only be operational for works that are demonstrably transformative (i.e., new meaning) but may include some material that does not now qualify for traditional fair use. In widening the range of allowed uses, we may create greater legal assurance that transformative works that add new meanings are produced, and that copyright owners get paid for their contribution. II. THE ECONOMICS OF FAIR USE Beginning with 17 U.S.C. § 107, Chapter 1 of the Copyright Act specifies restrictions aimed to balance user and buyer rights inherent in the copyright domain. The fair use limitations on copyright appear in Section 107,108 which extends the “privilege in other than the owner of a copyright to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly granted to the owner.”109 The introduction of Section 107 clearly establishes that transformative works are the primary concern of the fair use doctrine; “the fair use of a copyrighted work . . . for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright.”110 The four factors to be considered for identification of fair uses are: 1. The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes.111 107 H.R. 5439, 109th Cong., Orphan Works Act of 2006: To amend Title 17, United States Code, to provide for limitation of remedies in cases in which the copyright owner can-not be located, and for other purposes (introduced May 22, 2006), available at http://thomas. loc.gov/cgi-bin/query/z?c109:H.R.5439; see also U.S. Copyright Office, Report on Orphan Works (2006), available at http://www.copyright.gov/orphan/orphan-report-full.pdf. 108 17 U.S.C. § 107 (2000). 109 Rosemont Enters., Inc. v. Random House, Inc., 366 F.2d 303, 306 (2d Cir. 1966), cert. denied, 385 U.S. 1009, 87 S. Ct. 714, 17 L. Ed. 2d 546 (1967). 110 17 U.S.C. § 107 (2000). 111 The purpose and intent implicates the introduction to Section 107, which identifies a category of uses of key concern to the drafters of the Copyright Act. The distinction regarding commerciality seems sometimes ambiguous. See Worldwide Church of God v. Philadelphia Church of God, Inc., 227 F.3d 1110 (9th Cir. 2000), Marobie-FL, Inc. v. National Ass’n Fire Equip. Distribs., 983 F. Supp. 1167 (N.D. Ill. 1997).

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2. The nature of the copyrighted work.112 3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole.113 4. The effect of the use upon the potential market for or value of the copyrighted work. Damage estimates can legally include displaced unit sales and licensing opportunities, as well as any additional profits that the defendant may have earned. Legal justifications for “fair use” now bear an economic nuance that tends to focus on the transactions costs that are implicated in the use of protected work. A seminal academic article in 1983 by Wendy Gordon contributed notably to this transformation, arguing that “an economic justification for depriving a copyright owner of this market entitlement exists only when the possibility of consensual bargain has broken down in some way.”114 A. MARKET DEFINITION

Courts now implement the four-part test of Section 107 with a “sensitive balancing of interests”115 that weights and resolves opposing factors into a blunt vector of “yes” or “no” that frequently reduces to injunction or fair use. As there are no precise definitions of these considerations, what is ostensibly a sensitive balancing is actually quite often an arbitrary one. As alluded to earlier, the market harm test is very subjective. To avoid market harm (per Campbell v. Acuff-Rose), a defendant must prove that there is no market for either unit sales or use-licensing of a particular work.116 This evidently requires, ab initio, a proper definition of a market, and a subsequent finding that the defined entity does not exist for the application at hand. No clear definition of a copyright market has ever been stated, nor is it evident what such a definition might look like. The implicit notion of a market generally used in copyright law does not comport with either basic economic theory or antitrust law, which considers actual or potential cohabitation of economic markets by two different identified goods or services that are reasonable substitutes for one another (most often measured by high cross-price elasticities of demand117 or the reasonable potentiality of competitive entry118). 112 “The scope of fair use is more limited with respect to non-factual works than factual works; the former necessarily involves more originality and creativity than the reporting of facts.” New Era Publ’ns v. Carol Publ’g Group, 904 F.2d at 157. Factual works are believed to have a greater public value and unauthorized uses of them are more readily tolerated by copyright law.” Salinger v. Random House, Inc., 811 F.2d 90, 96 (2d Cir. 1987). 113 Generally, “the larger the volume (or the greater the importance) of what is taken, the . . . less likely that a taking will qualify as a fair use.” Leval, supra note 106, at 1122. However, “there are no absolute rules as to how much of a copyrighted work may be copied and still be considered a fair use.” Maxtone Graham v. Burtchaell, 803 F.2d 1253 (2d Cir.), cert. denied, 481 U.S. 1059, 107 S. Ct. 2201, 95 L. Ed.2d 856 (1987). 114 Wendy J. Gordon, Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors, 82 Colum. L. Rev. 1600 (1982). The author continues: “Only where the desired transfer of resource use is unlikely to take place spontaneously, or where special circumstances such as market flaws impair the market’s ordinary ability to serve as a measure of how resources should be allocated, is there an economic need for allowing nonconcensual transfer.” Id. at 1615. A similar point is made by William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. Legal Stud. 325, 357 (1989). 115 Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 454, 194 S. Ct. 774, 795 (1984). 116 Campbell, 510 U.S. at 591: “Since fair use is an affirmative defense, its proponent would have difficulty carrying the burden of demonstrating fair use without favor-able evidence about relevant markets.” 117 “The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Brown Shoe v. United States, 370 U.S. 294, 325, 82 S. Ct. 1502, 1523, 8 L. Ed. 2d 510 (1962); see also United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 400 (1956). 118 United States v. Falstaff Brewing Corp., 410 U.S. 527 (1973).

902 SESSION X: COPYRIGHT However, this economic definition of a market based on entry and substitution is not easily extended to copyright markets, where a protected work frequently has no real legal substitutes, actual or potential. Rather, legal analysis in copyright law implicates cohabitation of copyright markets by comparing different kinds of exchanges that may come of a protected work. Definitions of economic and copyright markets then implicate two entirely different conceptual frames. And while economic/antitrust definitions implicate consumer or producer behavior that is often quantitatively discernible — if not statistically measurable — copyright definitions are considerably more subjective. As a second consideration, market analysis in copyright law now considers not only demonstrable actual exchanges, but also those that are likely to be developed.119 In this regard, an assessment of likelihood must determine which conceivable events can reasonably be expected to evolve and which are largely imaginable. An appropriate market definition would then require some delineation of standards useful in defining a market. However, establishing such standards for a copyright market can be a tall order, even for bilateral transactions, due to the openness and inherent unpredictability of responses. B. THE AMBIGUITIES OF MARKET HARM

The problem of economic definition in copyright markets can be illustrated through a number of practical examples. 1. Bilateral Transactions A conceptual difficulty of market definition in a matter of bilateral exchange appeared in Ringgold v. Black Entertainment Television, where artist Faith Ringgold sued a television network for using a poster of her work in the visual background of a program. Holding for the defense, the District Court found that the program’s use did not create a market substitute and would not therefore affect the artist’s ability to license her work elsewhere.120 The Circuit Court reversed after Ms. Ringgold claimed that she had been asked on a number of occasions to license her work.121 However, Ms. Ringgold did not claim to have actually concluded any such transaction for the work in question.122 This outcome could have been an indication that exchange was possible but not particularly likely, an intuitive indicator of market failure. In upholding Ringgold, the Court found potentiality of market exchange to be based on the act of “asking,” rather than in the likelihood of any action actually arising. 2. Licensing Institutions When licensed uses have not yet congealed, the resulting market definition is heuristic and often circular. A dissent in Texaco identified the problem: “the [required] market will not crystallize unless courts reject the fair use argument . . . but, under the statutory test, we cannot declare a use to be an infringement unless . . . there is a market to be harmed.”123 The Texaco dissent brought forth considerable more uncertainty about the likelihood that viable licensing arrangements would eventually result in a manner that would accommodate Texaco’s actual needs. The Copyright Clearance Center (CCC) licensed only 30 percent of Texaco’s journals in use, and the CCC’s per-transaction and blanket licenses had particular features that might have interfered with likelihood of licensing had Texaco 119 120 121 122 123

Leval, supra note 106, at 1178. 1996 WL 535537, at *4 (S.D.N.Y. 1996). 126 F.3d 70 (2d Cir. 1997) (quoting Affidavit of Faith Ringgold, at 13–14). Id.; see also Leval, supra note 106, at 1161. American Geophysical Union v. Texaco Inc., 60 F.3d 913 (2d Cir. 1994) (Jacobs, J., dissenting).

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tried.124 Whether the shortfall of content and the ease of licensing might have changed was, to the dissenters, anyone’s guess. There was no great assurance that licensing procedures would accommodate every reasonable concern. 3. Excluded Beneficiaries Professor Wendy Gordon warns that a “potential user may wish to produce socially meritorious new works by using some of the copyright owner’s material, yet be unable to purchase permission because the market structure prevents him from being able to capitalize on the benefits to be realized.”125 Particularly in cyberspace, the licensing of a shared project among a distributed base of noncommercial users may be quite difficult. That is, an informal association of permanent or transitory “cyber-pals” would face the daunting task of assigning licensing costs to contributing participants, who may have different degrees of commitment and willingness to donate to the project. Market failures in club or public goods can result if each consumer acknowledges personal gain but fails to internalize the broader gains of other parties in the common-use coalition. As a practical matter, it would be difficult to gauge what licenses will be negotiated in the first place and which will remain sustainable through subsequent strategizing by individuals who attempt to reduce their contributions. 4. Business Models It is difficult to judge market harm when business models are unformed or evolving. Both the district and the circuit court recognized the complications of disrupted business models in the Napster cases, where unauthorized individuals reproduced and distributed through the Internet the contents of copyrighted sound recordings.126 The defense had contended that the Napster system could actually have stimulated record sales and improved profits.127 For their part, the labels presented evidence that confirmed their intent to enter the digital services market, and argued that their prospective business models would be hurt.128 The Court was evidently invited to a fair bit of subjective consideration regarding actual and imaginable events. 5. Widespread Harm In examining market harm, courts in copyright cases also consider how unrestricted and widespread conduct similar to the defendant’s would adversely affect the potential market for the original work.129 This consideration explicitly moves the notch from demonstrated likelihood (however judged) to mere possibility. There is nothing particularly economic or rational about considering harms from conceivable events without due regard to their respective costs and eventual practicality. III. STATUTORY CATEGORIZATIONS Given the ambiguities of market harm, it may be appropriate to replace the existing fourth criterion (i.e., market harm) of Section 107 with a clause that directly implicates three types of use — superseding, derivative, and transformative. We must recognize that 124

Id. Gordon, supra note 114, at 1631. 126 A&M Records, Inc. v. Napster, Inc., 114 F. Supp.2d (N.D. Cal. 2000); 239 F.3d 1004 (9th Cir. 2001). 127 For example, see Defense Report of Peter S. Fader, Napster, 239 F.3d 1004, available at http://news. findlaw.com/hdocs/docs/napster/napster/fader_070300.pdf. 128 The argument was made principally in confidential expert testimony submitted by David Teece. Id., Teece Report. 129 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 590 (1994). 125

904 SESSION X: COPYRIGHT market forces and interfaces may evolve differently with respect to statutory protections for each. Courts have distinguished three categories of secondary use of copyrighted materials: (1) superseding works that directly supplant original sales;130 (2) derivative works that recast copyrighted material to a new medium “that creators of original works would in general develop or license others to develop [in] traditional, reasonable, or likely to be developed markets”;131 and (3) transformative works that “add something new, with a further purpose or different character, altering the first with new expression, meaning, or message.”132 In clear statutory framing, Section 101 of the Copyright Act defines the term “derivative.”133 So defined, derivative works may include, inter alia, translations, musical arrangements, dramatizations, fictionalizations, motion picture versions, sound recordings, art reproductions, abridgments, or condensations.134 I suggest that two definitions can be added to Section 101. Reworking the Supreme Court’s definition and wording in 17 U.S.C. § 107,135 a “transformative work” could be similarly defined in the following manner: A transformative work is a work that adds new meaning to previous copyrighted content with a further purpose or different character, altering the first with new expression, meaning or message. Transformative works would include satires, parodies, criticisms, comments, book reviews, classroom materials, news articles, and research that adds substantial new meaning to existing characters and plots. Finally, an additional definition of superseding could be added to Section 101: A superseding work is a direct reproduction or performance of a work that is expected to directly substitute for actual sales or existing licensing opportunities. Legal protections against superseding and derivative takings are appropriately strong. While production costs of a superseding technology (e.g., file-sharing) can admittedly be economically efficient in the short run,136 rights owners can be harmed in the process if they fail to capture gains to compensate for primary investment costs. Superseding uses (i.e., illegal downloads) may also present potential damage to developing business models that have yet to congeal (music services). The resulting harms may present considerable loss of incentive to create new works. While derivative works do not necessarily supersede sales of original materials (and at times actually may promote them), derivatives take substantially from the heart of a copyrighted product and may interfere with the primary owner’s rights to penetrate the market, or license predictable uses; even if a “film producer’s appropriation of a composer’s previously unknown song . . . turns the song into a commercial success, the boon to the song does not make the film’s . . . copying fair.” 137 In this respect, copyright protection in derivative markets enables coordination effects that permit content producers — such as movie studios and record labels — to synchronize better their production and marketing opera130

Folsom v. Marsh, 9 F. Cas. 342 (No. 4,901) (CCD Mass. 1841). Campbell, 510 U.S. at 592. 132 Id. at 579. The decision quotes Leval, supra note 106, at 1111. 133 17 U.S.C. § 101 (2000). 134 Id. 135 17 U.S.C. §107. 136 Stanley R. Besen, Private Copying, Reproduction Costs, and the Supply of Intel-lectual Property, RAND Report No. N-2207-NSF. (1984). 137 Campbell, 510 U.S. at 591, n.21. 131

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tions. Without protection of derivatives, primary producers might purposely but inefficiently delay product launches simply to ensure that secondary products are lined up for immediate release and entry, or close gaps by speeding up secondary production. Made necessary by the lack of copyright protection, the resulting strategizing nonetheless may be economically inefficient. IV. TRANSFORMATIVE WORKS In contrast to superseding and derivative works that displace predictable licensing opportunities, transformative uses implicate works with substantially new meaning, where “market substitution is at least less certain, and market harm may not be so readily inferred.”138 From an economic perspective, these distinctions are of primary importance may build on previous works to create an understood context from which advocates may more powerfully criticize or comment on social beliefs and institutions; e.g., the reuse of a patriotic or religious melody can add punch to a criticism aimed at a government or church. Sometimes tasteless, transformative uses have included a number of song parodies,139 a comedic reuse of a photographic pose,140 a music collage involving a U2 recording,141 the Seussian “Cat NOT in the Hat.”142 adult versions of Disney,143 a burlesque of the movie Gaslight,144 a satiric sequel of Gone with the Wind,145 and postmodern visual art that appropriated recognized images for social criticism.146 As alluded to earlier, the use of implanted public icons may actually increase the emotional impact of political and social comment, particularly if explored by artists and musicians not given to scholarly or prosaic expression. For example, Alice Randall criticized southern history and racial attitudes in The Wind Done Gone far better as an author than she might have as an historian, and Jimi Hendrix protested militarism far better with his Woodstock version of “The Star Spangled Banner” than he could ever have in a speech or leaflet. In this respect, the Supreme Court held that a restriction on the form of communication — regarding a t-shirt that said “Fuck the Draft” — amounted to a restriction on speech itself by defusing the speaker’s anger.147 It is then unrealistic to 138

Id. at 591. Elsmere Music, Inc. v. National Broad. Co., 482 F. Supp. 741 (S.D.N.Y. 1980) (“I Love New York”); MCA v. Wilson , 425 F. Supp. 443 (S.D.N.Y. 1976), aff’d, 677 F.2d 180 (2d Cir. 1981) (“Boogie Woogie Bugle Boy”); Fisher v. Dees, 794 F.2d 432 (9th Cir. 1986) (“When Sonny Sniffs Glue”); Grand Upright Music, Ltd. v. Warner Bros. Records, Inc. 780 F. Supp. 182 (S.D.N.Y. 1991) (“Alone Again Naturally”); Campbell, 510 U.S. 569 (“Pretty Woman”). 140 Annie Leibovitz v. Paramount Pictures Corp., 137 F.3d 109 (2d Cir. 1998). 141 Island Records and Warner-Chappell Music, Inc. v. SST Records (1991). 142 Dr. Seuss Enters. v. Penguin Books 109 F. 3d 1394 (1995). 143 Walt Disney v. Air Pirates, 581 F.2d 751 (9th Cir. 1978); see also Walt Disney Prods. v. Mature Pictures Corp., 389 F. Supp. 1497 (S.D.N.Y. 1975) (X-rated movies with actors wearing Disney hats and clothing). 144 Benny v. Loew’s Inc., 239 F.2d 532 (9th Cir. 1956). 145 Suntrust v. Houghton Mifflin, 268 F.3d 1257 (11th Cir. 2001), 136 F. Supp.2d 1357, 1363 (2001). 146 Famous examples of appropriation art using copyrighted works (many of which settled out of court) include Andy Warhol’s silkscreen prints of Henri Dauman’s photograph of Jacqueline Kennedy, painter George Pusenkoff’s use of an outline of a nude from a Helmut Newton photograph, Robert Rauschenberg’s taking of Morton Beebe’s Pull, Susan Pitt’s visual adaptation of material from DC Comics, David Salle’s taking of visual art from Cockrill and Hughes, Jeff Koon’s sculptural reproductions of comic strip drawings by James Davis and photographs by Art Rogers and Barbara Campbell, and Damian Loeb’s appropriation of photography by Lauren Greenfield. See William M. Landes, Copyright, Borrowed Images, and Appropriation Art: An Economic Approach (unpublished manuscript) (2000). See also Rogers v. Koons, 960 F.2d 301 (2d Cir. 1994); United Feature Syndicate, Inc. v. Koons, 817 F. Supp. 370 (S.D.N.Y. 1993); and Campbell v. Koons, 91 Civ. 6055 (S.D.N.Y. 1993). 147 Cohen v. California, 402 U.S. 15, 25, 91 S. Ct. 1780, 1789; 29 L. Ed. 2d 284, 294 (1971); see also Neil W. Netanel, Copyright and a Democratic Civil Society, 106 YALE L. J. 283 (1996) (“It should not be forgotten that the Framers intended copyright itself to be the engine of free expression.”). 139

906 SESSION X: COPYRIGHT contend that transformative artists who access a work do so simply to “avoid the drudgery in working up something fresh,”148 or that they may otherwise find an equally effective weapon by finding a different original that would be willingly licensed.149 Though protective of parody in Campbell v. Acuff-Rose Music, Inc.,150 courts have generally held that transformative works that use existing works as weapons to direct criticism at institutions and social norms do not qualify for fair use. In Williams v. Columbia Broadcasting Systems, Inc.,151 defendants used the comic figure of “Mr. Bill” to ridicule attitudes in the U.S. Navy. Holding for the plaintiffs, the court ruled that a transformative work “does not gain protection of the fair use doctrine if it merely uses the protected work as a means to ridicule another object [citing Campbell v. Acuff-Rose Music, Inc., 510 U.S. at 580].”152 The idea that a targeted parody of the original work is appropriately exempt, while more general satiric or critical use is not, is consistent with Richard Posner’s distinction between “target” and “weapons” applications; the former criticizes the original work while the latter uses the original to criticize something else.153 Posner, too, would protect only the parody, as he contends the satiric use would predictably be licensed in a voluntary transaction and therefore “there is no objection to letting the market make the tradeoff.”154 Posner’s distinction regarding the transactional ease of licensing satire seems contrived. Parody or satire, copyright owners can be expected to strongly resist licensing secondary uses involving sexual or lowbrow comedy, political content, artistic style, musical idiom, or cultural/historical criticism that they find tasteless, disrespectful, inartistic, or impolitic. They may invoke some expanded idea of moral rights beyond the limited rights of attribution and integrity that the 17 U.S.C. § 106(a) of the Copyright Act now extends only to visual art. As such, transactions costs may be equally formidable obstacles that block a wider variety of transformations. From an economic perspective, the case for a balanced resolution of these alternative forms of expression may resolve negotiating difficulty and reduce producer uncertainty. The Supreme Court itself is ambiguous on the distinction regarding the special protection of parody. Indeed, the Supreme Court acknowledged the potential for a wider definition of fair use in Campbell v. Acuff-Rose, albeit fleetingly in a footnote.155 Yet the Court elsewhere makes a distinction: “parody needs to mimic an original to make its point, and so has some claim to use the creation of its victim’s imagination, whereas satire can stand on its own two feet and so requires justification for the very act of borrowing.”156 This dictum would form the foundation for the later ruling in Williams v. Columbia Broadcasting System.157

148

See Leval, supra note 106, at 1172. As argued by Julia Bisceglia, Parody and Copyright Protection: Turning the Balancing Act into a Juggling Act, 34 Copyright L. Symp. (ASCAP) 1, 25 (1987). 150 Campbell, 510 U.S. at 578. 151 57 F. Supp. 2d 961 (C.D. Cal. 1999). 152 Id. at 968–69. 153 Richard A. Posner, When is Parody Fair Use?, 21 J. Legal Stud. 67, 70–72 (1992). 154 Id. at 73. 155 “When there is little or no risk of market substitution . . . taking parodic aim at an original is a less critical factor in the analysis, and looser forms of parody may be found to be fair use, as may satire with less justification for the borrowing than would otherwise be required.” Leval, supra note _1_, at n.14. 156 Campbell, 510 U.S. 585. 157 Williams v. Columbia Broad. Sys., 57 F. Supp. 2d 961 (C.D. Cal. 1999). 149

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A. ECONOMIC ANALYSIS

Any process that awards injunctions against transformative works with new meaning necessarily suppresses new product and, in so doing, produces outcomes that are economically inefficient. If published, such works would widen consumer choice, contribute to political awareness, and heighten cultural sensibility. Moreover, transformative works with new meanings tend to reach largely new audiences, and do not predictably displace sales of primary goods or interfere with later undertakings of derivative licenses. Accordingly, it is unlikely that any creator’s incentive to produce primary work depends on whether a small class of transformative uses can be published or not, or that an idiosyncratic use will cause producers to modify their coordination tactics or business models. Other aspects of the present fair use test are problematic for transformative undertakings that have new meanings. Though Congress “eschewed a rigid, bright line approach to fair use,”158 the present doctrine of fair use treats a commercial nature as a negative factor. Carrying a negative factor, commercial publishers who are unsure of clearing this and other legal hurdles may shy away from publishing transformative works. By contrast, a facilitating attitude toward commercial presentation may actually encourage wider production and dissemination of artistic comment and criticism. With greater potential profit, it evidently chills free speech to penalize commercial distribution, which greatly enhances the production incentive and the likelihood that a work will be produced. As another complicating consideration, creators and publishers may face a daunting criteria in the third fair use factor, which is related to the allowable amount and substantiality of the taking. Courts now do not require that takings for parody be minimal; rather, a non-minimal taking is permitted to present a reasonable “conjuring up” of a copyrighted work to make its wit recognizable.159 However, the application of the “conjuring up” rule can be highly subjective and is economically problematic; additional material that exceeds the necessary conjuring may broaden or deepen the punch of a critical work. It is evidently chilling to restrict such deeper criticisms that may broaden market appeal. Moreover, works that borrow excessively create tedium and may suffer harsh review and reduced demand. Consequently, the market itself has incentives to generate the efficient amount of borrowing. As a famous example of the last point, a published comic book in 1978 showed famous Disney characters engaged in sex and drug use. Although a parody, the work was enjoined nonetheless because the defendants took more “than was necessary to place firmly in the reader’s mind the parodied work and those specific attributes that [were] to be satirized.”160 In attempting to gauge the reader’s mind, the court here failed to consider the possibility that the added material could have actually been humorous to the intended audience, and therefore capable of increasing the appeal of the new product. As a general consideration, the matter begs a rule that would allow a broader variety of uses than the present fair use rule. The upshot is clear. Present legal distinctions regarding commerciality, conjuring, and parody/satire are often ambiguous and may then depress incentives for presentation or publication of speech and expression. Moreover, as overseers of creative processes, transformative artists and publishers should be encouraged to offer their best interpreta-

158

Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, at 449 n.31 (1984). Elsmere Music Inc. v. National Broad. Sys., 482 F. Supp. 741 (S.D.N.Y.1979), aff’d, 623 F. 2d 252 (2d Cir. 1980); Fisher v. Dees, 794 F.2d 432, 438–39 (9th Cir. 1986). 160 Walt Disney v. Air Pirates, 581 F.2d 751 (9th Cir. 1978). 159

908 SESSION X: COPYRIGHT tion rather than mince words with clipped messages that may diminish intended meaning, market appeal, and a strong adherence to the First Amendment.161 V. ECONOMIC DAMAGES Infringements of copyright are often stopped through the issuance of preliminary injunctions. Generally speaking, the single most important prerequisite for the issuance of a preliminary injunction is the showing of irreparable harm.162 While Courts outside of copyright cases have found that contended irreparable harm must be “likely and imminent, not remote and speculative,” and that the injury must be something beyond simple monetary damages,163 the task in copyright is considerably less onerous. In the copyright domain, “a showing of a prima facie case of copyright infringement or reasonable likelihood of success on the merits usually raises a presumption of irreparable harm for preliminary injunction purposes.”164 The requirements to make a prima facie case are simple; plaintiff must show copyright ownership, and that defendants have engaged in unauthorized copying or violated exclusive owner rights.165 Moreover, “once a prima facie case of copyright infringement is established, the allegations of irreparable injury need not be very detailed because such injury is generally assumed [emphasis added].”166 A. SUPERSEDING AND DERIVATIVE WORKS

From an economic perspective, there is no reason to believe that acts of unauthorized copying necessarily lead to irreparable market harm to the original rights owner. Nonetheless, the use of injunctions and statutory damages may be economically justified for superseding and derivative applications. For their part, superseded businesses may be hurt to the core by repeat infringement, which can be widely distributed in a worldwide market. Ex post economic damages would be difficult for plaintiffs to measure and courts to confirm.167 Moreover, measuring damage to actual and potential markets from derivative infringements would be equally difficult, if not more so, as these markets may take some time to congeal. Under 17 U.S.C. § 504, a court may reasonably award for copyright infringement either actual damages plus additional defendant profits not previously take into account, or statutory damages.168 Judge Richard A. Posner offers a sophisticated rationale for the compensation structure: 161 The connection between copyright and the First Amendment is made tellingly by Melville Nimmer, Does Copyright Abridge the First Amendment Guarantees of Free Speech and Press?, 17 U.C.L.A. L. Rev. 1180, 1199 (1970); see also E. Kenley Ames, Note, Beyond Rogers v. Koons: A Fair Use Standard for Appropriation, 93 Colum. L. Rev. 1473, 1475–476 (1993) (“Art created from existing imagery is a valid form of criticism and com-ment should be protected by copyright law against suits for infringement. To do otherwise is to chill unnecessarily the development of artistic expression and to grant an individual copyright holder undue power over the secondary artist’s choice of source material.”). 162 Mamiya Co. v. Masel Supply Co., 719 F.2d 42, 45 (2d Cir. 1983). 163 NAACP v. Town of East Haven, 70 F.3d 219, 224 (2d Cir. 1995); JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 79 (2d Cir. 1990) (holding that “possibility” of harm in insufficient). 164 106 F. Supp.2d 1132, 1139 (D. Colo. 2002). 165 Hasbro Bradley, Inc. v. Sparkle Toys, Inc., 780 F.2d 189, 192 (2d Cir. 1985); Sandoval v. New Line Cinema Corp., 973 F. Supp. 409, 412 (S.D.N.Y. 1997). 166 Hofheinz v. AMC Prods., 147 F. Supp.2d 127, 134 (E.D.N.Y. 2001) (quoting ABKCO Music, Inc. v. Stellar Records, 96 F.3d 60, 64 (2d Cir. 1996); Wainwright Secs., Inc. v. Wall Street Transcript Corp., 558 F.2d 91, 94 (2d Cir. 1977), cert. denied, 434 U.S. 1014, 98 S. Ct. 730, 54 L. Ed.2d 759 (1978). 167 Country Kids ’n City Slicks, Inc., v. Sheen, 77 F.3d 1280, 1288–89 (10th Cir. 1996). 168 A circuit court has also upheld the value of an infringer’s use as a permissible basis for estimating actual damages, while distinguishing this value from total infringer profits and the list price of the infringer’s product. Deltak, Inc., v. Advanced Sys., Inc., 767 F. 2d 357, 361 (1985).

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If the infringer makes greater profits than the copyright owner lost . . . the owner is allowed to capture the additional profit even though it does not represent a loss to him. It may seem wrong to penalize the infringer for his superior efficiency and give the owner a windfall. But it discourages infringement. By preventing infringers from obtaining any net profit, it makes any would-be infringer negotiate directly with the owner of a copyright that he wants to use, rather than bypass the market.169 From a perspective of short-run allocative efficiency, any compensation that exceeds actual damages deters efficient transfers that would otherwise take place. Nonetheless, Posner correctly points out that the higher penalty is nonetheless useful to dissuade brazen and repeated violators who may otherwise profit from infringement, but who scoff at negotiating. From a long-run perspective, the additional protection is economically efficient if it can provide greater security and stimulate additional production. B. TRANSFORMATIVE WORKS

As a vehicle for new meaning, transformative work incorporates considerable social value. Moreover, higher transactions costs can be reasonably expected for transformative use, as engaged parties attempt to assess the relative added worth of a work with little chance of displacement, but some considerable appropriation of moral right. Injunctions here may be the inappropriate resolution. Based on a distinction by David Haddock and Fred McChesney,170 copyright judges may well distinguish transformative works based on a distinction in tort law between trespass and nuisance.171 There is no balancing in trespass of relative costs and benefits; the defendant will be subject to liability regardless of whether he caused actual financial harm to the other party. Courts in trespass actions then award injunctions and punitive damages and make no exception for de minimis harm. By contrast, nuisance is actionable only if demonstrable harm outweighs utility gained; paid damages are based on economic loss. In nuisance cases, “failure to show actual damages … usually results in the denial of all relief because of the failure to satisfy the ‘substantial harm’ requirement for liability.”172 So long as damages are paid, injunctions are rare. The authors point out that assets which can be appropriated through efficient negotiation are best protected by property rules, while those that may encounter predictable licensing difficulties should be subject to liability rules and ex post compensation. The key determinant would be the expected transactions cost needed to obtain agreement. Based on expected transactions costs, it is then entirely reasonable to consider different means of compensating rights holders, depending on whether or not copying is transformative, market exchange is expected, and negotiation is “thin.” The distinction regarding reasonable transactions costs can implicate transformative works. In view of predictable negotiation difficulties, Courts may forgo injunctions and 169

Taylor v. Meirick, 712 F.2d 1112, 1120 (1983). David D. Haddock & Fred S. McChesney, Do Liability Rules Deter Takings?, in The Economic Consequences of Liability Law: In Defense of Common Law Liability 29–59 (Roger E. Meiners & Bruce Yandle eds., 1991). 171 Thomas W. Merrill, Trespass, Nuisance, and the Costs of Determining Property Rights, 14 J. Legal Stud. 3, 18 (1985) (trespass applies to invasions of space by unauthorized persons and tangible objects, while nuisance applies more to indirect interferences that affect the enjoyment of that space (e.g., noise, odor, pollution). The principal distinction between trespass and nuisance is the standard of care applied to determine whether the interference is actionable; i.e., whether Marshall may enjoin and/or received damages from the action of Taney, or Taney may practice his intrusion without exclusion from Marshall. To establish an actionable trespass Marshall must show that Taney has invaded his space.). 172 Id. 170

910 SESSION X: COPYRIGHT limit plaintiff awards for transformative infringement to actual damages or reasonable royalties, which correspond to demonstrated lost profits or foregone license fees.173 Plaintiff rights to receive statutory damages for transformative uses may be entirely restricted.174 From a short-run economic perspective, efficient compensations for transformative uses are efficiently based upon actual damages. Moreover, if transformative infringements are compensated with amounts that exceed the true social cost (i.e., actual damages), it is difficult to believe that such confiscatory assessments will elsewhere stimulate more primary works, or facilitate their coordination. Rather, higher prices may actually depress the level of transformative creation. Accordingly, compensation here would reasonably be based on the short-run optimum (i.e., identifiable actual damages). VI. EXPEDITED USE I shall now argue that Section 107 might be improved if Congress establishes optional liability rules that secondary users may attempt to invoke for some uses that are demonstrably transformative. The suggested modification of Section 107 would require two key modifications in Title 17; i.e., a list of qualifying transformative works must be defined and administrative procedures must be established, as described in Part III of this paper. The motivation for a liability rule is based on the economic and political notion that such transformative works that add new meaning have more protective certainty and a widened market outlet. Moreover, there is a moral notion that primary rights owners are equitably entitled to just deserts for contributions made to the value of a work.175 In implementing liability rules, we can arbitrate royalties as is elsewhere done in present copyright system.176 A. DEFINITIONS

We must modify Section 101 to establish a definition of transformative works that must be coverable through liability rules. As stated above in Part III, a statutory definition would establish a precise list of uses that qualify as transformative. This statutory definition would parallel the statutory definition of derivative works that now appears in 17 U.S.C. § 101. A necessary factor to determining what is a transformative element in the list of uses is the infusion of new meaning, rather than artistic creativity per se. The concept of “new meaning” evidently admits some subjective judgment, but is preferable to other related concepts that have been used or suggested elsewhere as a justification for fair use. In this regard, suggested vagaries from judges and writers have included allowances for “produc173

Davis v. The Gap, Inc., 246 F.3d 152 (2d Cir. 2001). Copyright plaintiffs may press for actual or statutory damages. 17 U.S.C. § 504(a) (2000). Higher statutory rewards are possible if the plaintiff can demonstrate willfulness. 17 U.S.C. § 504(c)(2)(2000). A plaintiff must make a choice between actual or statutory compensation only before the final verdict is rendered. This may encourage the defendant to settle, but may actually serve as a disincentive to the plaintiff, as it leaves the possibility of more money on the table. The presence of statutory royalties provides incentives for rights owners to gamble for higher compensation unrelated to the actual market value of the misappropriation. Furthermore, the additional uncertainty of higher statutory damages can serve as an additional deterrent on the publication of the transformative work. 175 Wendy J. Gordon, An Inquiry into the Merits of Copyright: The Challenges of Consistency, Consent, and Encouragement Theory, 41 Stan. L. Rev. 1343, 1353 (1989). 176 E.g., Copyright Royalty Tribunals now set license fees for performances in juke-boxes, secondary mechanical reproductions, distant retransmissions of cable and satellite con-tent, and performances of sound recordings used in digital audio transmissions. 174

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tive copying,”177 “socially laudable purposes,”178 copying for “a different purpose from the original,”179 “the prevailing understanding of the community,” 180 or “customary practice.”181 With this imposing lineup, “one cannot help but suspect that, as a test, ‘transformative in purpose’ provides little more guidance to a judge than would be supplied by his or her own set of personal values.”182 Seemingly confirming the last point, Judge Leval stated in Texaco that photocopying of a single article might be fair if a scientist could avoid carrying a whole journal, but would not be fair if used to save space in one’s filing cabinets.183 As a final point, the “community understanding” and “customary practice” standards of Lloyd Weinrib provide no ethical vision and would apparently justify unauthorized downloading of music files on college campuses less accommodative of copyright law. The purpose of the statutory definition of transformative works then is to include as many works that are legally practical, without necessarily committing to all possibilities. In this respect, it may then be necessarily to exclude certain applications entirely, even though such uses may be arguably transformative. For example, while protection of satires may be liberalized, advertising uses — where modified cartoons, jingles, character names, etc, are used to convey a commercial message — do not shed sufficient new cultural meaning to permit a whole class of takings. B. ARBITRATION

The administrative process for royalty setting for expediting the production of transformative works can be modeled upon arbitration procedures negotiated between ASCAP and the U.S. Department of Justice.184 Any user of a copyrighted work may request expedition from a court in the following manner: (a) The prospective user must submit to the copyright owner or a designated agent a written statement of an intended use of the work. The statement should acknowledge access to the underlying work and sufficient similarity of use. (b) The statement must be submitted before the actual publication of the transformative work. (c) Upon receipt of a written request, the copyright owner must within some period of days advise the prospective user in writing of a reasonable license fee, or the information that it would require to make such a determination. (d) If the parties are unable to reach agreement within the designated period, the prospective user may indicate intent to publish the work. Rights owners may immediately seek an injunction to stop publication. (e) Courts may review request for injunctions in the usual legal manner. The court 177 Which may include, inter alia, copying to prepare lecture notes, to enrich professional understanding, improve citizen awareness, personal entertainment, or space or time-shifting. Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 455 n.40 (1984). 178 Id. at 478–79 (Blackmun, J., dissenting). 179 802 F. Supp. 14–15 (1994). 180 Lloyd L. Weinrib, Fair’s Fair: A Comment on the Fair Use Doctrine, 103 Harv. L. Rev., 1137, 1143–44 (1990). 181 Id. 182 Diane L. Zimmerman, The More Things Change, The Less They Seem “Transformed”: Some Reflections on Fair Use, J. Copyright Soc’y 251, 262 n.55 (1998) (“To the best that I can determine, they are uses the court in question likes.”). 183 802 F. Supp. 14–15 (1994). 184 U.S. Dep’t. Justice, Antitrust Div., Second Amended Final Judgment, available at http://www.usdoj.gov/ atr/cases/f63000/6395.html.

912 SESSION X: COPYRIGHT may grant no injunction if the work is deemed transformative, as defined by a revised 17 U.S.C. § 101. (f ) If publication is not enjoined, rights owners may yet seek to recover actual damages, which would be expectedly determined to be a reasonable licensing fee or demonstrated losses that the plaintiff must prove. (g) To expedite matters further, judges may commend the parties to attend mediation or non-binding arbitration for the purpose of determining reasonable royalties and other actual damages. Alternatively, the court may appoint an expert to determine a reasonable licensing fee. Arbitrators and experts may base their decisions using data gleaned from licensing databases, such as the Royalty Source Intellectual Property Database,185 which gathers data on licensing from public financial records, news releases, and other articles and references. In resolving disputes, arbitrators may deploy procedures that are now used in buyout valuations among joint ventures. One suggested method is as follows.186 Each disputant must retain a valuation expert to value the work in question, or measure the resulting market harm. If the two valuations are within a designated percentage of one another, the average of the two is a conclusive value. Otherwise, a third valuation is necessarily performed by an appointed third party. The appropriate valuation is the party fee nearest to the arbitrators, or the average of the two. Courts may award legal costs to the prevailing party. This would presumably be the party whose proffered license is closest to that of an arbitrator or the special expert appointed by the court. Were they adopted, liability rules based on reasonable royalties or actual damages might have been reasonably deployed in a number of cases. For example, in Suntrust the District Court recognized that the copyright owners administered a well-established market for licensed sequels that could have been extended to provide a reasonable royalty benchmark for The Wind Done Gone.187 Alternatively, using data from the Royalty Source Intellectual Property Database, this author suggests that characters or plots of existing works are appropriately licensed with royalties that range between 8 and 10 percent of book revenues.188 As another example, a reasonable apportionment of royalties for reproductions and performances of recognized melodies in transformative musical compositions would be evenly divided between the original composer and the new lyricist. This would award equally the contributions made by the composer of the melody and the transformative lyricist who creates the imaginative change in words that sells the work to a new audience. As a general rule, arbitrated licensing fees can be expected to range between 5 and 10 185

AUS Consultants, Moorestown, NJ, available at http://www.royaltysource.com. Keith Sharfman, A New Procedure for Resolving Valuation Disputes, 88 Minn. L. Rev. 357 (2003). Sharfman contends that variations of such methods are now used for buy-out valuation in joint ventures by Merck/Schering and Verizon/Vodaphone. 187 The “fair price to be paid for the right to publish a sequel to the work has already been set by two publishers who have agreed to pay, or be paid, substantial advances and royalties for the right to create its sequels.” Suntrust v. Houghton Mifflin, 136 F. Supp. 2d 1357, 1373–74, n.12 (2001). 188 In 1999 Brighter Child Interactive acquired rights to use the characters from the television program “Adventures with Kanga Roddy” in connection with its interactive software production. In 1997 Kideo Productions, Inc. acquired the rights to publish personalized storybooks using Disney Standard Characters for a $25,000 up-front and a 10% royalty rate. The license contract specified a $20,000 up-front payment plus a royalty amount based on 8% of net revenues. In the same year, ClubCharlies.com, Inc. acquired screenplay rights to an original story plot entitled “The Misadventures of Charlie Chance,” for which rates were $150,000 up-front and 10 % of net revenues. 186

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percent of the new sales price. Admittedly, a number of allowed uses may go badly compensated for lack of a good benchmark (although no price seems as deliberately ignorant of the market as the present choice of null or infinite price, i.e., fair use and injunction). This said, business practices and institutions will have the greatest opportunity to fill out only if exchangeable property rights are first defined, possibly with court encouragement. By establishing respective rights for creators to exchange in free or administered markets, courts then establish the requisite institutional support for complementary databases and negotiating agents. Arbitration of reasonable royalties then provides the greatest opportunity and incentive for these logical operations to “thicken.” VII. CONCLUSION There may be some continued room for fair use, particularly in some noncommercial applications, where paid alternative mechanisms are impractical. As more information is learned, initial categorizations of works into protected use, fair use, and expedited exchange may prove problematic. Consequently, the borders that delineate rights and exemptions for particular applications can be suitably modified through common law or statute. Practitioners may adopt a perspective on the role of law and economic policymaking that is purposely incrementalist and experimentalist; the game is open-ended and relevant information is slowly revealed in the play.

XI: TRADEMARK FROMSESSION COMMUNICATION TO THING

SESSION XI: TRADEMARK

From Communication to Thing: When Were Trademarks First Conceptualized and Treated as Property. Does it Matter?

Moderator PROF. MARSHALL LEAFFER

University of Indiana School of Law (Bloomington)

Speaker PROF. LIONEL BENTLY

Cambridge University

Panelists ANDREW P. BRIDGES

PROF. JUSTIN HUGHES

Winston & Strawn LLP (San Francisco)

Benjamin N. Cardozo School of Law, Yeshiva University (New York)

PROF. LEAFFER:

I want to welcome you all to our trademark panel. We are going to focus on a paper by Lionel Bently, entitled “From Communication to Thing: Historical Aspects of the Conceptualization of Trademark as Property.” A group of academics in this country lament the fact that trademark law has become imbued with the rhetoric of property rights. The current trend is to refer to trademarks as things valuable in themselves, instead of focusing on, what many believe to be the “proper” function of trademark law, which is to protect against consumer deception. According to these academics, the use of this “property” rhetoric—this “propertization” of trademark law, if you will — has led to an undue expansion of trademark rights beyond its proper role. We are going to hear Lionel Bently’s thoughts on this issue, largely from an historical standpoint, about how this concept has evolved in British law. I present you Lionel Bently from Cambridge University. Lionel, it’s all yours. *

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916 S E S S I O N X I : TR A D E M A R K From Communication to Thing: Historical Aspects of the Conceptualization of Trade Marks as Property Lionel Bently1 It is a common criticism of contemporary trade marks law (and one almost certainly represented by other papers and presentations in this volume) that legislatures and judges have expanded the rights of trade mark owners too far, at the expense of the needs or interests of other traders and the public interest.2 More specifically, it is argued that trade marks are granted too readily, that the rights granted to trade mark owners are too strong, that the situations in which trade marks rights are capable of being invalidated or revoked are too limited, and that the grounds on which a defendant can escape liability are too narrowly formulated or restrictively interpreted. For many of these commentators, the criticism is normative: positive law now affords trade marks owners broader and stronger rights than can be justified by reference to principle or policy. Sometimes, however, commentators attempt to explain the dynamics that have led to this (undesirable) expansion of trade mark rights.3 Chief amongst these explanatory narratives is the assertion that one of the root causes of expansion is that trade marks are increasingly described of as “property.”4 Trade marks law, originally conceived as a legal mechanism for preventing fraud or protecting consumers has been reconceptualized as “property,”5 and this, in turn, has caused the law to shed traditional limits on the regulation of the use of trade marks. At the same time, the property label exerts an irresistible force towards expansion of trade mark rights from rights to prevent uses of signs which are likely to confuse consumers’ understandings of the origin of the goods bearing the sign to what William Blackstone described as “sole and despotic dominion”6 and what Professor Tony Honoré referred to famously as the “full liberal conception of ownership.”7 The power of 1 *Herchel Smith Professor of Intellectual Property and Information Law, University of Cambridge. A version of this paper was previously presented at the ATRIP meeting in Parma in September 2006, and at the London School of Economic in March 2007. I am grateful to Anne Barron, Robert Burrell, Graeme Dinwoodie, Dev Gangee, Mark Janis, Phil Johnson, and Jamie Stapleton for their comments. 2 Rochelle Cooper Dreyfuss, Expressive Genericity: Trademarks as Language in the Pepsi Generation, 65 Notre Dame L. Rev. 397, 399 (1990) (“[T]he changing legal climate has tended to grant trademark owners ever greater control over their marks”); in the U.K., see Jennifer Davis, European Trade Mark Law and the Enclosure of the Commons, Intell. Prop. Q. 342 (2002) [hereinafter Davis, Enclosure of the Commons]; Jennifer Davis, To Protect or Serve? European Trade Mark Law and the Decline of the Public Interest, Eur. Intell. Prop. Rev. 180–07 (2003). 3 Davis, Enclosure of the Commons, supra note 2. 4 See, e.g., Glynn Lunney, Trademark Monopolies, 48 Emory L.J. 367 (1999) (identifying a shift from viewing a trademark as a source of information about a product (“deception-based trademark”) to viewing the trademark as the product (“property-based trademark”), and suggesting that such “property mania” has induced “a radical and ongoing expansion of trademark protection, both in terms of what can be owned as a trademark and in terms of what trademark ownership entails.”); Mark Lemley, The Modern Lanham Act and the Death of Common Sense, 108 Yale L.J. 1687 (1999) (“Commentators and even courts increasingly talk about trademarks as property rights; as things valuable in and of themselves.”); id. at 1697 (“Courts seem to be replacing the traditional rationale for trademark law with a conception of trademarks as property rights, in which trademark ‘owners’ are given strong rights over the marks without much regard for the social costs of such rights.”). 5 Lunney, supra note 4, at 417, for example, states that “[o]riginally, trademark law was justified on grounds of preventing consumer deception. Lemley, supra note 4, at 1697, also refers to the courts “replacing the traditional rationale for trademark law with a conception of trademarks as property.” These appeals to “original conception” and “tradition” are problematic in the face of the history, which is certainly messy. 6 William Blackstone, Commentaries on the Laws of England (1765–1769). 7 Tony Honoré, Ownership, in Oxford Essays in Jurisprudence 107, 113 (A.G. Guest ed., 1961) (the right to possess, use, manage, receive income, to capital, to security; the power of transmissibility; the absence of term; the prohibition on harmful use; liability to execution; and the incident of residuarity).

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the proprietary model of trade marks is to cause its metamorphosis into “strong, unfettered property rights.”8 In this chapter I want to set this analysis of contemporary developments in some historical context, particularly that of the second half of the nineteenth century. During this period, British law witnessed the conceptualization of trade mark protection as property. At mid-century, there were many laws, some general and some specific, which regulated the uses of signs in trade, but the most important was the general protection provided by the Common Law and the supplementary protection of the Chancery courts against misrepresentation in trade.9 The protection afforded by both sets of courts was communication-based: the Common Law action, understood by Courts and commentators in this period to have derived from deceit,10 requiring a demonstration of an intention to deceive, the Chancery regime requiring a misrepresentation, that is communicative act, of the defendant likely to mislead. However, during the 1860s a debate emerged as to whether trade marks were to be seen as property. In the judicial field, as also amongst legal commentators, the question arose in the context of the expanded protection afforded by the Chancery courts (as opposed to the Common Law courts) after Millington v. Fox. The question for these jurists was whether this extended protection rendered the signs “property” and with what consequences. The question of “property” took on further significance in the discussions over the Trade Mark Registration Bill of 1861, which proposed that trade marks that were registered be property. This proposal was met with opposition in the Select Committee of 1862, on the assumption that such a characterization would render trade marks a mechanism for perpetrating (rather than preventing) fraud. As a result of case law developments, particularly during the 1860s, and finally the adoption of a Trade Mark Registration Act in 1875, trade marks came to be widely recognized as property. There seems no doubt that certain consequences flowed from the fact that trade marks were widely accepted as property by the mid-1870s. For example, trade marks started to be treated as part of a law of “industrial property,” included in legislation relating also to patents and designs, and, before long, in the first significant multilateral international treaty, the Paris Convention. Moreover, perceived as “property,” trade marks were frequently compared and contrasted by commentators with analogous but distinct laws of patents and copyright. Courts too occasionally were prepared to reason from an understanding of trademarks as property when developing applicable rules, for example, on “abandonment.”11 But while designation of trade marks as “property” was important, 8

Lemley, supra note 4, at 1694. See Lionel Bently, The Making of Modern Trade Marks Law: The Construction of the Legal Concept of Trade Mark (1860–80), in Trade Marks and Brands: An Inter-disciplinary Critique (Lionel Bently & Jane Ginsburg eds., 2007). 10 Cresswell, J., characterised the action as one for deceit in Crawshay v. Thompson, (1842) 4 Man. & G. 356, 385–86. The issue was raised in Rodgers v. Nowill, (1847) 5 C.B. 109, 116, by Maule, J., Montagu Chambers (responding that “there is no other title under which such an action shall be classed”); see also Edward Lloyd, On the Law of Trade Marks No. I, Solic. J. & Rep. 486 (May 11, 1861) [hereinafter Lloyd No. I.]; Edward Lloyd, On the Law of Trade Marks No. II, Solic. J. & Rep. 523 (May 25, 1861) [hereinafter Lloyd No. II]; Cartier v. Carlile, (1862) 31 Beav. 292, 296–97 (counsel for the defendant); Edelsten v. Edelsten, (1863) 1 De. G. J. & S. 185, 199 (Lord Chancellor Westbury stating that “[a]t law the proper remedy is by an action on the case for deceit”). Whether the early cases were really actions for deceit is a topic worthy of serious investigation (but unfortunately is one beyond the scope of this paper). Most accounts of the history of the common law of deceit suggest that deceit was handled largely as part of what we would consider the law of contract until Pasley v. Freeman, (1789) 3 T.R. 51; see, e.g., S.F.C. Milsom, Historical Foundations of the Common Law 361–66 (2d ed. 1981). If this is so, it is difficult to see how the action for wrongful use of a trade mark might have been considered as deceit. 11 Mouson v. Boehm, (1884) 26 Ch.D. 398 (Chitty J.) (drawing analogy with easements and goods). 9

918 S E S S I O N X I : TR A D E M A R K no one in the 1870s or 1880s would have inferred from this that trade mark rights extended to the use of the protected sign on dissimilar goods. Revisiting this period of the historical development of trade marks in the light of the today’s commentaries on the significance of property rhetoric in current developments in the law of trade marks clearly raises certain questions. If the mere designation of trade marks as “property” has the power attributed to it, why has trade marks jurisprudence taken so long to develop into its maximal incarnation? Have the consequences attributed to the notion of “property” changed in the intervening 130 or so years? Or has the “handling” of the concept of property by the courts (and policymakers) altered in that time? Alternatively, does the history suggest that contemporary accounts overemphasize the role of property rhetoric as a causal factor in the expansion of trade marks law? In my conclusion, I will return to some of these questions. I. THE EMERGENCE OF TRADE MARKS LAW PRIOR TO 1860: TRADE MARKS AS COMMUNICATIONS At mid-century, the most significant laws regulating misrepresentation in trade were the action on the case (it seems, for deceit) at Common Law, and Equity’s intervention by way of injunction in support of the Common Law right in plain cases.12 Both regimes were premised on the idea that the courts should intervene where one trader fraudulently used a mark associated with another. The Common Law action preventing use of a mark associated with one trader by another has often been traced back to the late sixteenth-century case of JG v. Samford, a Common Pleas decision of 1584, where two of the presiding judges stated that an action would lie against use of a mark on cloth which had been used by another manufacturer who had gained great reputation for his cloth.13 While the significance of Samford (or rather its subsequent citation in 1618 in Southern v. How, a case brought by a purchaser of counterfeit jewels against the vendor) is heavily contested,14 it seems clear that by the late eighteenth century the Common Law courts were prepared to permit traders to bring actions based on intentional, damaging, misrepresentations of this sort. 15 Lord Mansfield’s manuscripts contain details of two actions by a London chemist relating to his lozenges: Greenough v. Dalmahoy in 1769, where the plaintiff recovered £50 damages, and Greenough v. Lambertson in 1777, in which he was awarded £20.16 In the first reported 12 For discussion of the wide array of other laws protecting specific designations in particular trades, as well as criminal remedies, see Bently, supra note 9. 13 (1584) B. & M. 615 (Baker & Milsom, Sources); see also John Hamilton Baker, An Introduction to English Legal History 459 (4th ed. 2002). The two other judges argued that it was legitimate for a trader to use whatever mark he wished. The Samford case was referred to in Southern v. How, (1656) Pop. R. 144 where it is stated that Doderidge, J. held that the action would lie, and it was from this source that caused it to be later relied on. The report of Southern in Cro. Jac. 471 has the action being brought by the purchasers of cloth. 14 Frank Shechter argues that Southern v. How is a dubious authority for the modern law of passing off: “the sole contribution of that case was at best an irrelevant dictum of a reminiscent judge that he remembered an action by one clothier against another for the misuse of the former’s trade-mark.” Frank I. Schechter, The Historical Foundations of the Law Relating to Trade-Marks 123 (1925). But the case was cited in a number of cases, as well as influential commentaries, and thus cannot be so readily ignored. See, e.g., Blanchard v. Hill, Crawshay v. Thomson, (1842) 4 Man. & G. 357, 386 (Cresswell J); Burgess v. Burgess, (1853) 3 De.G. M. & G. 896, 902 (Knight Bruce, L.J.); Hirst v. Denham, (1872) 14 L.R.Eq. 542 ; Lloyd No. I, supra note 10, at 486 (stating that the case “gives us all the elements of the law which governs this subject”). 15 John Baker also refers to two seventeenth-century cases that are mentioned in Girdler’s manuscripts in Cambridge University Library, Waldron v. Hill (1659) (in which a scythe-maker brought an action for use of his mark) and W.E. v. R.M. (1670) (relating to cheese-making). Baker, supra note 13, at 459. 16 1 James Oldham, The Mansfield Manuscripts and the Growth of English Law in the Eighteenth Century 741, 746 (James Oldham ed., 1992) (transcriptions of Mansfield’s notes and accounts of reports in the London

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case, Singleton v. Bolton, the claimant failed in his action to prevent the defendant from using the designation DR JOHNSON’S YELLOW OINTMENT for his medicine. Lord Mansfield stated that “if the defendant had sold a medicine of his own under the plaintiff’s name or mark, that would be a fraud for which an action would lie,” but the plaintiff did not establish entitlement to the mark, for though the designation had been used by his father prior to his death there were no “letters of administration” passing the father’s rights to the plaintiff.17 Two cases from the Common Law courts in the first decades of the nineteenth century are notable because they recognize and accept claims going beyond simple misrepresentations directed at potential purchasers. First, in Sykes v. Sykes,18 a King’s Bench decision of 1824, the Court held that the action could be brought against a defendant manufacturer who sold it products, bearing a mark generally associated with the plaintiff, to retailers all of whom knew that the products they were buying were not made by the plaintiff. The plaintiffs had stamped their goods, shot-belts, and powder flasks with the mark SYKES PATENT and the defendant made an inferior version marked with the same terms in the same way. The retailers themselves sold the marked goods to customers “as and for the goods manufactured by the plaintiffs” and the plaintiff’s sales declined. The Court of King’s Bench took the view that giving the goods fraudulently marked to a third party so that they could sell them as the genuine goods was “substantially the same thing” as selling the goods directly to those customers. Second, in Blofield v. Payne,19 the Common Law courts granted relief even where the claimant failed to prove damage to its reputation: the Court of King’s Bench declined to overrule a decision finding in favor of the plaintiff manufacturer of metal hones for sharpening razors and against a defendant who sold its hones in the plaintiff’s packaging — envelopes resembling those of the plaintiff and containing the same words — even though claimant had failed to prove damage by showing that defendant’s hones were inferior.20 After some hesitation,21 the Equitable action was developed in support of the extended Chronicle, 14 Dec. 1769, and Morning Chronicle, 23 Dec. 1777); J. Adams, Intellectual Property Cases in Lord Mansfield’s Court Notebooks, J. Legal Hist. 18 (1987); see also Cabrier v. Anderson, St. James Chronicle, Dec. 4, 1777. 17 3 Douglas 293 (“DR JOHNSON’S YELLOW OINTMENT”); see also Henry Ludlow & Henry Jenkyns, A Treatise on the Law of Trade-Marks and Trade-Names 10 (1873) (“The first reported case of any real importance was decided by Lord Mansfield in 1783.”). 18 (1824) 3 B. & C. 541; (1824) 107 Eng. Rep. 834 (K.B.). 19 (1833) 4 B. & Ald. 410; 110 Eng. Rep. 509 (K.B.). 20 Other reported cases involving actions at Common Law are Morison v. Salmon (1841) 2 Man. & G. 385 (action for use of mark MORISON’S UNIVERSAL MEDICINE succeeded, and appeal on basis that declaration did not disclose sufficient cause of action was unanimously rejected); Crawshay v. Thompson, (1842) 4 Man. & G. 356; Rodgers v. Nowill, (1847) 5 C.B. 109; Lawson v. The Bank of London, (1856) 18 C.B. 84 (promoter of The Bank of London failed to establish liability for defendant who traded as Bank of London because there was no evidence that the plaintiff had carried on business). 21 The first trade mark case in Chancery is often thought to have been Blanchard v. Hill, (1742) 2 Atk. 484, in which Lord Hardwicke declined to grant an injunction preventing the defendant from using Blanchard’s mark, a picture of the “Great Mogul,” the emperor of Delhi, with the words THE GREAT MOGUL above, on playing cards. The report, in Atkyns reports, is particularly unclear and the refusal of injunctive relief by Lord Hardwicke, a judge sympathetic to developing equitable principles to prevent fraud, has puzzled scholars. The case has now been subjected to a fascinating analysis by Norma Dawson, English Trade Mark Law in the Eighteenth Century: Blanchard v. Hill Revisited — Another “Case of Monopolies?”, 24 J. Legal Hist. 111, 125 (2003), who not only places it in the context of the regulation of heraldry by the court of Chivalry, but also through a close analysis of the pleadings, explains why Lord Hardwicke found as he did, rather than adopting the Attorney General’s arguments (which were based on Southern v. How). These pleadings reveal that Blanchard based his title to the mark on the rules of the Company of the Makers of Playing Cards in the City of London, granted by Charles I on Oct. 22, 1628. Indeed, Blanchard had, prior to seeking the assistance of the Court of Equity, already sought the

920 S E S S I O N X I : TR A D E M A R K Common Law action for deceit. The advantage of suing in Equity was the possibility of injunctive relief, a remedy not available in the common law courts, and the first recorded case in which such relief was granted was Day v. Day, in 1816, where a manufacturer of blacking was ordered to refrain from using labels in imitation of those employed by the plaintiff.22 By 1841, Maule J. could state that applications “are frequently made to the Court of Chancery to enjoin one manufacturer from imitating the mark of another.”23 However, Equity only acted in such cases in aid of evident legal right:24 any doubt over the right led the Chancery judges to require an action at law first.25 Consequently, for the most part, Equity acted upon the same principles as the Common Law courts. Importantly, prior to 1860, the basis for the action was explicitly described in terms of fraud (not property). Lord Langdale MR, who was Master of the Rolls from 1836–1851,26 gave five deciassistance of the Court of the Company, and the pleadings were interpreted by the defendant, and Lord Hardwicke as an attempt to enforce the judgment of the Company court. Lord Hardwicke saw the Charter as an illegitimate monopoly, and as the claim was directly based on the rules and practices under the Charter he refuse to grant injunctive relief. 22 See R.H. Eden, A Treatise on the Law of Injunctions 314 (1821). Eden also mentions a second case of injunctive relief, Sedon v. Senate, 2 V. & B 220, in which “the defendant, having sold a medicine to the plaintiff, set up another under a similar description, and in his advertisement adopted verses which had been attached to the original medicine.” II. J.E. Hovenden, A General Treatise on the Principles and Practice by Which Court of Equity Are Guided as to the Prevention or Remedial Correction of Fraud 70 (1825) (stating, without citing authority, that “[e]quity will restrain a fraudulent attempt by one man to invade another’s property, or to appropriate the benefit of a valuable interest, in the nature of goodwill, consisting in the reputation of his trade or production. Or, the encroaching party, by representing himself to be the same person, or his trade or production to be the same as that first established, combines imposition on the public with injury to the individual.” J. Chitty, The Law and Practice of the Law in All Its Principal Departments 721 (2d. ed. 1834) (referring to another case of injunctive relief, Gout v. Aleopogla, (1833) 6 Beav. 69, note, in which the defendant was enjoined from exporting to Turkey watches with the term “Pessendede” (which means “warranted”) thereon “in imitation of the watches of the plaintiff, by which they had for very many years been distinguished, and by which he had obtained great credit in the Turkish trade.” See also Hogg v. Kirby, (1803) 8 Ves. 215 (per Lord Eldon LC); Motley v. Downman, (1837) 3 My. & Cr. 1, 14 (per Lord Cottenham LC). 23 Morison v. Salmon, (1841) 2 Man. & G. 385, 394. 24 See On Fraudulent Trade Marks, Solic. J. & Rep. 820 (1861) (reporting paper of John Morris given to the Metropolitan and Provincial Law Association, Worcester) (“[T]he Court of Chancery rarely ever grants an injunction until the legal right to the trade mark has been established by an action or issue at law”). Cf. Anonm, Untitled Article, 17 The Jurist 141 (Apr. 23, 1853) (“[I]n cases of infringement of trade marks, Courts of Equity do not proceed on the doctrine of relief being only ancillary to legal title, but on the doctrine of prevention of fraud, quite independently of legal title.”). 25 See Pidding v. How, (1836) 3 Sim. 477 (Shadwell, V-C, said he would have granted the plaintiff injunctive relief to prevent the defendant selling its tea under the same name, HOWQUA’S MIXTURE, but for the false representations made by the plaintiff. He said the court ought not to interfere until the Plaintiff had established his rights at Law); Perry v. Truefitt, (1842) 6 Beav. 66; 49 Eng. Rep. 749 (Lord Langdale said that, had the plaintiff not misrepresented the identity of the inventor of its hair-grease and that its ingredients came from Mexico, he would have stayed the motion while the issue was tried at law); Spottiswoode v. Clark, (1846) 1 Coop. T. Cott. 254; Farina v. Silverlock, (1855) 1 K. & J. 509, 517, 69 Eng. Rep. 560, 564 (Page-Wood VC remarking that “if the Plaintiff’s right to the use of his trade mark is not established in this case without a trial at law, I do not know how anyone can ever obtain an injunction without a previous action to try the right.”); (1856) 6 De G. M. & G. 214, 43 Eng. Rep. 1214 (on appeal, Lord Cranworth dissolving injunction with liberty to the plaintiff to bring an action at law); for injunction following success at law, see 4 K. & J. 650, (1858) 70 Eng. Rep. 270. See also Welch v. Knott, (1857) 4 K. & J. 747, 753, Eng. Rep. 310, 312 (Page-Wood, V-C, refused an injunction but gave per-mission to the plaintiff to bring an action at law); Brook v. Evans, The Times, July 12, 1860, where plaintiff had delayed five years before bringing action, VC insisted the claimant establish its rights at law. 26 At this stage, the Master of the Rolls was a first instance judge in Chancery. The appellate position of the Master of the Rolls dates from 1881. The position of Vice-Chancellor was created in 1814, and two further Vice-Chancellors were added from 1841. The Lord Chancellor operated primarily at an appellate level from 1851, when a court of appeal was established from the Master of the Rolls or the Vice-Chancellors, comprising two Lord Justices of Appeal or the Lord Chancellor or the three combined.

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sions in which he explicitly based Equity’s interference in support of the Common Law action by reference to the prevention of fraud. In the first case, Knott v. Morgan,27 he granted an injunction preventing a coach company from operating an omnibus service in imitation of the plaintiff’s LONDON CONVEYANCE COMPANY. In the second, Perry v. True-fitt,28 he declined to grant relief to a hairdresser who had for six years sold hair-grease as PERRY’S MEDICATED MEXICAN BALM against a rival hairdresser and perfumer also hair-grease as TRUEFITT’S MEDICATED MEXICAN BALM. In the third, Croft v. Day,29 an injunction was granted to the executors of Day, a well-known maker of blacking preventing the deceased’s nephew from selling blacking under the same name, DAY AND MARTIN. In the fourth case, Franks v. Weaver,30 an injunction was granted preventing the defendant from selling medicine with various testimonials which referred favorably to the claimant’s product, FRANKS’ SPECIFIC SOLUTION OF COPAIBA, even though the defendant’s product used the descriptive name CHEMICAL SOLUTION OF COPAIBA. The testimonials were “so craftily employed as to be calculated to produce, in the minds of ordinary readers, the impression that the … solution … sold by the defendant is … the ... solution of the Plaintiff.” Finally, in Holloway v. Holloway,31 Lord Landgale enjoined the defendant Henry Holloway from selling pills as H. HOLLOWAY’S PILLS in boxes and with labels similar to those of the claimant, Thomas Holloway, who had for some years previously sold pills as HOLLOWAY’S PILLS AND OINTMENTS. In all these five cases, Lord Langdale grounded the intervention of Equity in fraud.32 In Knott33 the question was whether “the defendant fraudulently imitated the title and insignia used by the Plaintiffs for the purpose of injuring them in their trade,” and he found it had. In Perry he indicated that he did not think “a man can acquire property merely in a name or mark”; but he had “no doubt that another person has not a right to use that name or mark for the purposes of deception, and in order to attract to himself that course of trade or that custom which, without that improper act, would have flowed to the person who first used or was alone in the habit of using the particular name or mark.” In Croft v. Day34 he explained again that “no man has a right to sell his own goods as the goods of another” for “it is perfectly manifest, that to do [so] … is to commit a fraud, a very gross fraud.” Given that the defendant shared the name Day with the deceased, Lord Langdale reiterated that the basis of intervention was not “any exclusive right … to a particular name, or to a particular form of words” but a right “to be protected against fraud.” In Franks v. Weaver the Master of the Rolls characterized the “crafty adaptation” of the testimonials as a kind of fraud, a concept he famously 27

(1836) 2 Keen 213. The decision was affirmed on appeal by the Lord Chancellor. See (1836) 2 Keen 213 at

220. 28 (1842) 6 Beav. 66, 49 Eng. Rep. 749. Relief was refused because the claimant’s sign itself misrepresented the product as Mexican. 29 (1843) 7 Beav. 84. The defendant, whose name was Day, had found a partner named Martin to help him justify using the name DAY AND MARTIN. 30 (1847) 10 Beav. 297. 31 (1850) 13 Beav. 209. 32 In a sixth case, Clark v. Freeman, (1848) 11 Beav. 112; 8 L. MAG. 236, where the defendant sold its goods as SIR J. CLARKE’S CONSUMPTION PILLS and the defendant’s actions were characterised as “disgraceful,” Lord Langdale MR nevertheless rejected Clark’s claim on the basis that the action required damage “to property by the fraudulent misuse of the name of another, by which his profits are diminished.” If Clark had been “in the habit of manufacturing and selling pills,” that property would have existed. However, he was not. Langdale said that the gist of Clark’s complaint was, thus, “in the way of slander” and the Court had no jurisdiction “to stay the publication of a libel.” 33 (1836) 2 Keen 213, 219. 34 (1843) 7 Beav. 84, 88.

922 S E S S I O N X I : TR A D E M A R K explained as being indefinable because “it is so multiform.” And in Holloway, while noting that the defendant was perfectly entitled “to constitute himself a vendor of Holloway’s pills,” “he has no right to do so with such additions to his own name as to deceive the public and make them believe he is selling the Plaintiff’s pills,” the “law protects persons from fraudulent misrepresentations,” and the evidence revealed “as clear … a fraud as I ever knew.” Lord Langdale MR’s analysis was adopted by Page-Wood V-C, who from 1853–1868 was one of three Vice-Chancellors sitting in the Courts of Chancery,35 and who over his career was to decide at least twenty-eight trade mark cases.36 (The late 1850s and 1860s 35 Lord Langdale was succeeded as Master of the Rolls by Sir John Romilly (who occupied that role from 1851–1873), who gave trade mark decisions in Shrimpton v. Laight, (1854) 18 Beav. 164 (evidence of deception); Burgess v. Hately, (1858) 26 Beav. 249 (costs awarded to successful plaintiff ); Hall v. Barrows, 32 L.J.K.B. 548, 551 (Ch. 1863); Moet v. Couston, (1864) 33 Beav. 578 (innocent sale of counterfeit Moet’s champagne); The Colonial Life Assurance Co. v. The Home and Colonial Life Assurance Co., (1864) 33 Beav. 548 (no trade mark in descriptive term COLONIAL); Banks v. Gibson, (1865) 34 Beav. 563 (ownership of Banks & Co on dissolution of partnership); and Bass v. Dawber, (1869) 19 L.T.N.S. 626 (injunction refused but suggesting that in an appropriate cases costs against defendant who intentionally sailed close to the wind). The two other Vice-Chancellors were Kindersley and Stuart. Sir Richard Kindersley V-C sat from 1851–1866 and gave trade mark decisions in Collins v. Walker, (1859) 7 W.R. 222; Glenny v. Smith, (1865) 2 Dr. & Sm. 476 (injunction granted preventing ex-employee from using THRESHER AND GLENNY on his new shop). Stuart, V-C, in Collins v. Reeves, (1858) 6 W.R. 717; Clement v. Maddick, (1859) 5 Jur. 592 (proprietor of paper Bell’s Life in London granted injunction against competing paper Penny Bell’s Life). 36 Flavel v. Harrison, (1853) 10 Hare 467 (injunction refused preventing defendant selling stoves as FLAVEL’S PATENT KITCHENER because claimant’s designation misrepresented goods as patented); Edelsten v. Vick, (1853) 11 Hare 78 (solid headed pins); Farina v. Silverlock, (1855) 1 K. & J. 509, 69 Eng. Rep. 560 (copies of plaintiff’s labels for its eau de cologne); Welch v. Knott, (1857) 4 K. & J. 747, Eng. Rep. 310; Collins Co. v. Brown, (1857) 3 K. & J. 423, and Collins Co. v. Cohen, (1857) 3 K. & J. 428 (both granting relief to U.S. claimant against use of its name COLLINS & CO.); Mappin v. Mappin, (1860); The Times, May 31, 1860, at 11; Henderson v. Jorss, SOLIC. J. & REP. 154 (June 22, 1861); Dent v. Turpin, (1861) 2 J. & H. 139 (one of two firms selling watches under the sign DENT, LONDON granted injunction to prevent unconnected firm using same designation for its watches); Cartier v. May (July 12, 1861), Solic. J. & Rep. 154 (1862); Woolam v. Ratcliff, (1863) 1 H. & M. 259 (refusing injunction against defendant for tying up its silk in the same way as the plaintiff because there was no proof of fraudulent intent); Batty v. Hill, (1863) 1 H. & M. 264 (injunction refused when one pickle manufacturer complained that a competitor had affixed the designation PRIZE MEDAL, 1862 to its pickles); Braham v. Bustard, (1863) 1 H. & M. 447 (injunction granted preventing defendant from selling its soap as BUSTARD & CO.’S EXCELSIOR WHITE SOFT SOAP, in light of reputation developed by claimant for des-ignation EXCELSIOR WHITE SOFT SOAP in six months); M’Andrew v. Basset, (1864) 33 L.J. Ch. 561 (injunction granted preventing defendant using term ANATOLIA for liquorice); Williams v. Osborne, (1865) 13 L.T. 498 (relief refused to purchasers of business of deceased perfumer, Robert Hendrie, as regards sales by ex-employees of Hendrie of perfume in similar boxes and with similar names); Ainsworth v. Walmsley, (1866) 1 L.R. Eq. 518; Blackwell v. Crabb, (1867) 36 L.J.Ch. 504; Morgan v. M’adam, (1866) 36 L.J.Ch. 228; Scott v. Scott, (1866) 16 L.T. 143 (injunction restraining former partner from representing his business was old partnership business); Liebig’s Extract v. Hanbury, (1867) 17 L.T.N.S. 298 (refusing injunction to prevent defendant calling its meat extract LIEBIG’S EXTRACT OF MEAT, given that Liebig was the inventor and the product was known by that name); Taylor v. Taylor, 23 L.J.Ch. 255; Browne v. Freeman, (1864) 12 W.R. 305 (chlorodyne); Stephens v. Peel, (1867) 16 L.T. 145 (injunction granted to plaintiff who sold ink as STEPHENS’ BLUE BLACK WRITING FLUID against defendant who was selling its ink in similar size of bottle with label of similar appearance as STEELPENS BLUE BLACK); Harrison v. Taylor, 11 Jur. N.S. 408; Southorn v. Reynolds, (1865) 12 L.T.N.S. 75 (injunction by plaintiff, manufacturer of clay pipes who used mark E. SOUTHORN, BROSELEY to prevent defendant, manufacturer of pipes, selling them as REYNOLDS’ PURIFIED CLAY PIPES, MADE BY SOUTHORN, FROM BROSELEY); Young v. Macrae, 9 Jur. N.S. 322 (refusing injunction for plaintiff, who was patentee of process for producing liquid paraffine, and called it PARAFFINE OIL to prevent defendant, who used a different process from callings its oil PARAFFINE OIL); Standish v. Whitwell, (Mar. 9, 1866) 14 W.R. 512; Beard v. Turner, (1865)13 L.T. 746 (no protection of words NE PLUS ULTRA; in the light of evidence that many manufacturers in Redditch used phrase; no infringement of plaintiff’s crest of coronet and elephant, by coronet and lion, especially given that no-one purchased goods by reference to crest so no one was likely to be deceived); Lamplough v. Balmer (V-C Wood, Dec 3, 1867). Page-Wood, V-C, was made Lord Chancellor in 1868 and thereafter was known as Lord Hatherley. In this capacity he presided in Wotherspoon v. Currie, (1871–1872) L.R. 5 H.L. 508. For biographical background relating to Page-Wood, including and incomplete autobiographical sketch, see W.R. Stephens, A Memoir of Lord Hatherley (1883).

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for example, the Claimant an edge-tool manufacturer from Connecticut brought action against the Sheffield-based defendant complaining that the latter had been stamping its goods with the Plaintiffs designation. The defendant demurred, arguing that the American claimant had no property right. Page Wood V-C held that it was “settled law that there is no property whatever in a trade mark” and that the right to prevent others using a mark was based on fraud “and witnessed a surge in case law on trade marks, fuelled by important economic and social shifts.37 In Collins Co. v. Brown38 any fraud may be redressed in the country in which it is committed, whatever may be the country of the person who has been defrauded.” He therefore found for the claimant. Although Equitable jurisdiction, like its Common Law counterpart, was widely justified on the basis of preventing fraud, theoretical problems with this approach were raised by Lord Cottenham’s 1839 decision in Millington v. Fox.39 This case was brought by a firm of steel-makers, which had been operating for over fifty years, and one of whose businesses was known as The Crowley Works. The plaintiff sold steel bearing the signs CROWLEY, CROWLEY MILLINGTON, and I.H. The defendant, sometime steel-makers and vendors, sold steel bearing these signs with their own mark FOX BROTHERS, and the plaintiffs sought equitable relief in the form of injunction, account and delivery up. The defendants argued that the term CROWLEY was understood as synonymous with the word “faggot” and not as designating the manufacture of any particular trader. Equally, CROWLEY MILLINGTON, it was contended, had been used generally to refer to a kind of steel. Some witnesses gave evidence in support of this claim. (In modern trade mark parlance, the argument was that the signs had become “generic”; that is, they no longer indicated a product from a particular source, but rather a genus of product). The Lord Chancellor granted an injunction, explaining that although the defendant had not acted fraudulently, [T]here is no evidence to shew that the terms “Crowley” and “Crowley Millington” were merely technical terms, yet there is sufficient to shew that they were very generally used, in conversation at least, as descriptive of particular qualities of steel. In short, it does not appear to me that there was any fraudulent intention in the use of the marks. That circumstance, however, does not deprive the Plaintiffs of their right to the exclusive use of those names.40 The decision in Millington v. Fox that injunctive relief was available to a claimant even where there was no reason for thinking that there had been any fraudulent use by the 37 In 1850 a writer in The Jurist attributed the rise in the importance of trade marks to “the progress of the useful arts” and predicted increased importance “as national and international intercourse extends the value of commercial and manufacturing character, and consequently, of the mark or sign by which it is denoted and guaranteed.” Anon., Trade Marks, 14(2) The Jurist 223 (1950). There is plenty of evidence in the Select Committee that adoption of trade marks was, for many businesses, a relatively new phenomenon. On more general changes, in the U.S. context, see Robert G. Bone, Hunting Goodwill: A History of the Concept of Goodwill in Trademark Law, 576–79 (forthcoming, B.U. L. Rev.), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=874788. 38 (1857) 3 K. & J. 423; see also Edelsten v. Vick, (1853) 11 Hare 78, 84 (“[T]here must be an intention to deceive the public or this Court will not interfere”); Dent v, Turpin, (1861) 2 J. & H. 139, 144 (“[E]ach of the persons entitled to the mark has a right of action for the fraud, . . . a right which this Court would struggle to protect . . . by granting an injunction”); Woolam v. Ratcliff, (1863) 1 H. & M. 259 (refusing injunction in case of imitation of trade dress (tying up of silk), stating that the “[c]ourt is not to presume a fraudulent intention unnecessarily”). 39 (1838) 3 Myl. & Cr. 338; 40 Eng. Rep. 956. In principle, as Lord Chancellor, Lord Cottenham’s views carried more authority than those of Lord Langdale MR or the Vice-Chancellors (from whom the Lord Chancellor would hear appeals), but in Millington he, too, was sitting at first instance. 40 Id. at 352, 962.

924 S E S S I O N X I : TR A D E M A R K defendant was a radical extension of the Equitable action from its Common Law origins. Such an extension raised difficult questions of principle, particularly about the relationship between Law and Equity,41 and the status of the case as an authority was by no means secure.42 In Perry v. Truefitt,43 for example, Lord Langdale MR seemed to cast doubt on Millington when he said he was “not aware that any previous case carried the principle to that extent” and in Edelsten v. Vick Page-Wood V-C had stated that “there must be an intention to deceive the public, or this Court will not interfere.”44 Nevertheless, Millington was not overruled, and by the 1860s was regarded, at the very least for that reason, as binding authority in Chancery by Page-Wood V-C in Welch v. Knott, and even a court of Common law held it good law in Dixon v. Fawcus.45 Page-Wood V-C, in particular, thought the inconsistency between Millington and the idea that Equitable jurisdiction was based on fraud was more apparent than real, arguing on a number of occasions that even if a defendant was innocent when it commenced use of a particular mark, by the time Equity interfered to grant injunctive relief the defendant could no longer plead ignorance, and any continued use of a sign which misled consumers would thereafter amount to fraud. In other words, both Common Law and Equitable jurisdictions were based on fraud, but in the case of the Common Law which was concerned with the status of past acts and the damage they might have caused it was necessary to establish the defendant’s knowledge and intent; whereas because Equity was concerned with future behaviour, the fact that the proceedings indicated that the continued use of the signs would be likely to deceive the public was sufficient to establish the requisite fraud.46 II. TOWARDS TRADE MARKS AS PROPERTY Understood as being based in the law of deceit, the rationale for the protection of signs used in trade derived from their communicative significance: were the signs intended to, 41 Subsequent case law reiterated the orthodoxy that Equity acted only in an ancillary role, and that relief was contingent on establishing a case at law. Rodgers v. Nowill, (1846) 6 Hare 325 (Wigram, V-C). In Welch v. Knott, (1857) 4 K. & J. 747. 751, Eng. Rep. 310, 312, Page-Wood, V-C, recognized the problem of reconciling these positions (“How far that doctrine is capable of being reconciled with cases at law in which the scienter has been held to be essential in order to enable the Plaintiff to recover, it is not material to consider . . . .”). 42 Crawshay v. Thomson, (1842) 4 Man. & G. 357, 383 (Maule, J.); Dixon v. Fawcus (1861) 3 El. & El. 537 (Crompton, J., at 546: “That decision … has been questioned in subsequent cases.”) (Hill, J., at 547: “Millington v. Fox, which, however much it may have been questioned, has not been overruled.”); Anon., Untitled Article, 17 The Jurist 141 (Apr. 23, 1853) (“[T]he authority of that case [Millington v. Fox] has been doubted.”). But cf. Vice-Chancellor Bacon, writing two decades later in Singer Manufacturing Co. v. Loog, (1879) 18 Ch.D. 395, 407 (stating that Millington “has never been questioned”). 43 (1842) 6 Beav. 66, 73; 49 Eng. Rep. 749, 752; see C.S. Drewry, Points on the Law and Practice of Injunctions, 10(2) The Jurist 230, 231 (1846) (noting Lord Langdale MR’s criticism of Millington and observing that “[i]t will not, however, be forgotten, that that case was most fully argued, and that the judgment is one of the most careful of the many elaborate judgments delivered by the eminently cautious judge who pronounced it.”). 44 (1853) 11 Hare 78, 84 (no mention is made of Millington in that case); see also (1857) 4 K. & J. 747, 751, Eng. Rep. 310, 312 (“In this Court the rule is clear as laid down in Millington v. Fox.”). The case was cited with approval in Clement v. Maddick, (1859) 5(1) Jur. 592 (Stuart, V-C). 45 Dixon v. Fawcus, (1861) 3 El. & El. 537, 546 (Crompton J., “That decision … has never been overruled; and is binding in this Court”); id. at 547 (Hill J., “Millington v. Fox . . . has not been overruled, is a direct authority that the plaintiff was liable to a suit in equity.”). 46 See, e.g, Leather Cloth Co., Ltd. v. American Leather Cloth Co., Ltd., (1863) 1 H. & M. 271. Sir John Romilly MR in Cartier v. Carlile, (1862) 31 Beav. 292, 297, stating “I consider the rule at law and in equity to be the same,” awarded account of profits against innocent defendant. It seems that Sir John Romilly’s understanding that the rules were the same had a different basis, namely that in Equity an intention to deceive would be imputed from the determination that the defendant’s mark was a colourable imitation of that of the claimant. Anon., Untitled Article, 8(2) The Jurist 471 (Oct. 18, 1862); see also Singer Mfg. Co. v. Wilson, (1877) L.R. 3 H.L. 376, 400 (Lord Blackburn).

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and likely to, deceive?47 Would their continued use be likely to deceive the “ordinary run of persons”48 so that a court of Equity would step in and prevent such frauds? However, in the 1860s this communication-based model started to be challenged by a model of protection based upon ideas of property. That is, trade mark law started to be reconceptualized as protecting a trade mark as an asset, rather than fixing on particular qualities of communicative act. The transformation occurred in the context of calls for legislative protection of traders, in developing case law, and in the increasing number of commentaries. A. LEGISLATIVE ACTIVITY: THE 1861 BILLS, THE SELECT COMMITTEE, AND THE 1862 ACT

Calls for recognition of trade marks as property first emerged in the late 1850s as part of a more general campaign for legislation strengthening the rights of traders against piracy.49 In 1862 a Bill (the so-called “Sheffield Bill,” so named because it was drafted on behalf of the Sheffield Chamber of Commerce) was introduced into the House of Commons that proposed that trade marks be expressly recognized as “property.” Clause 9 stated that a registered trade mark “shall be deemed the personal property of the proprietor, and shall be transmissible according to the ordinary rules of law affecting personal property.”50 The Government of the day considered that the issue of trade mark protection generally warranted further investigation, and a Select Committee was convened.51 The Select Committee, comprised of “lawyers and mercantile men of great experience and representing different interests,”52 met and heard evidence from a wide range of traders, merchants, bureaucrats, and lawyers. 47 “Fraud in law consists in knowingly asserting that which is false in fact, to the injury of another,” Crawshay v. Thompson, (1842) 4 Man. & G. 357, 387 (Cresswell, J.). 48 Croft v. Day, (1843) 7 Beav. 84; Shrimpton v. Laight, (1854) 18 Beav. 164 (Sir John Romilly, M.R., clarifying that the relevant persons were the public rather than manufacturers themselves); Singer v. Wilson, (1876) L.R. 2 Ch. 434, 447 (Jessel, M.R., considering “ordinary English people” rather than “fools or idiots”); (1877) L.R. 3 H.L. 376, 390, (Lord Cairns referring to the need to consider the reactions not merely of experts on sewing machines but also “the case of the common workman and workwomen having very few and very limited ideas, and a very imperfect knowledge upon the subject of such machines” id. at 392) (Lord Cairns referring to “unwary purchasers” id. at 394) (Lord O’Hagan suggesting that the “multitudes who are ignorant and unwary . . . should be regarded in considering the interests of traders who may be injured by their mistakes”); Singer v. Loog, (1882) L.R. 8 H.L. 15 at 18 (Lord Selborne referring to misleading of the unwary rather than “a person who carefully and intelligently examined and studied” the trade mark). 49 The main lobbyists were the Chambers of Commerce, particularly those in the industrial centres of Sheffield and Birmingham. See, e.g., Trade Marks, (1858) J.S.A. 595 (Aug. 20, 1858) (reporting meeting of Birmingham Chamber of Commerce unanimously approving motion that improper use of trade marks was wrong and should be discouraged in every way by the Chamber). Arthur Ryland, The Fraudulent Imitation of Trade Marks, Transactions of the Nat’l Ass’n for the Promotion of Social Science 229, with responses at 269 (1859). See On Fraudulent Trade Marks, Solic. J. & Rep. 820 (1861) (reporting paper of John Morris given to the Metropolitan and Provincial Law Ass’n, Worcester); The Registration of Trade Mark, id. (reporting paper by Arthur Ryland to the same Association). 50 A Bill to Amend the law relating to the counterfeiting or fraudulent use or appropriation of trade marks, and to secure to the proprietors of trade marks in certain cases the benefit of international protection, Bill No. 17 (Feb. 18, 1862), Parliamentary Papers, Bills (Public) Vol. 5. 51 Hansard, 165 Parl. Deb. 1231 (Mar. 7, 1862); 165 Parl. Deb. 1280 (Mar. 10, 1862); 165 Parl. Deb. 1489 (Mar. 13, 1862). 52 Poland, at 7. Chaired by John Arthur Roebuck, MP for Sheffield (d. 1879), the Committee comprised three barristers (Selwyn and Hugh Cairns, Sir Francis Goldsmid, a lawyer — indeed the first Jewish barrister — and MP for Reading (d. 1878)), two members of the government (Milner Gibson, President of the Board of Trade, and Sir William Atherton, the Attorney General), manufacturers (Sir Francis Crossley, a carpet manufacturer and MP for Halifax (d. 1872. MP for Halifax from 1852, liberal); Alderman William Taylor Copeland, Alderman in Bishopsgate, a pottery manufacturer and MP for Stoke (d. 1868); Edmund Potter, a calico printer and MP for Carlisle (d. 1871); George Moffatt, a tea broker and MP for Dartmouth, Ashburton, Honiton and Southampton

926 S E S S I O N X I : TR A D E M A R K The question whether trade marks should be regarded as property was a key issue in the Select Committee investigation. The frequently expressed concern with recognizing trade marks as property was not (as might be expected) consequences in terms of the potential breadth of the rights, but rather related to the issue of transferability. If trade marks were property, it was assumed (indeed, the Sheffield Bill was explicit) that the trade mark would be transferable. Many of those who gave evidence were concerned about this notion. In particular, it was objected that a law that purported to be designed to suppress fraudulent practices, would be transformed into one that would facilitate such practices. This was because most witnesses understood a trade mark as a sign or emblem that goods came from a particular trade source (or place): if the rights in the sign associated with trader A could be transferred “as personal property” to another trader, trader B, members of the public who continued to rely on the mark as an indication that the goods came from the former owner (A) would be induced into buying the goods of B. For most of those who gave evidence to the Committee, such action was not merely likely to give rise to disappointment on the part of the public, but to truly amount to a fraud on them.53 As John Dillon (of the London dealers in female attire, Morrison, Dillon & Co) explained, a mark implied “a certain fact, that it is an established manufacture by a certain man or firm, at a certain place. If you alter the place or the person, that destroys the mark. I have heard of people attempting to sell their trade marks, but I should as soon think of a soldier selling his medal.”54 Likewise, seeing trade marks as indicators of origin from which purchasers could infer quality, solicitor Joseph Travers Smith argued that transferability “might be productive of very considerable danger” because “the trade mark ceases to be any guarantee of origin … I do not say that in every case it must be so; but that if a trade mark were made personal property, it would be open to serious risk.” In his view it would be immoral for the Legislature to render trade marks vendible as property, since this would “allow the perpetration of a fraud with a statutory sanction.”55 While it was argued by the proponents of the Bill that in fact the public could be equally “defrauded” if the original trader altered the quality of the goods (and no-one was suggesting that a trader who used a mark would be bound thereafter to retain exactly the same quality standards or systems of production), the Committee was considerably more nervous about the prospect of such “misrepresentations” being carried out by transferees. The argument that all the trade mark indicated was that the sign had been placed on the goods with the agreement of whoever happened to be the current legal owner of the trade mark rights carried no weight.56 This was almost certainly because the premise of the proposed reforms was that the law should be modified to reflect trade practices and consumer understandings. Following its deliberations, the Committee decided to press the Sheffield Bill57 but to (1810–1878; 1845–1852, Dartmouth; 1852–1859, Ashburton; 1860–1865, Honiton; 1865–1868, Southampton, a liberal); Humfrey Crum Ewing, MP for Paisley (1802–1887, elected 1857, a radical). 53 Select Committee, 2280 (Dillon, “the trade mark ought to be a mark only, and not a property which a man can sell and dispose of’); Select Committee, 2435 (Morley, “I confess that I rather tremble at the consequences of universally making a property out of those miserable marks, as some of them are likely to facilitate misrepresentation); Select Committee, 2657, 2667 (Travers Smith, “basically transferability . . . would be immoral”); Select Committee, 2773, 2824 (Hindmarch, “unnecessary to begin with and I think it is fraught with mischief”). 54 Select Committee, Q. 2282. 55 Select Committee, Q. 2655, 2665, 2667. 56 Ludlow & Jenkyns, supra note 17, at 2 (“A trade-mark . . . may signify no more than this … that the article to which it is affixed has passed into the market through the hands of the person entitled to use the mark . . . .” 57 Hansard, 167 Parl. Deb. 1418 (July 4, 1862).

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back the Government’s suggested alternative which created new criminal offences for uses of mis-descriptions in trade with intent to defraud, and specifically referred to misuse of trade marks, which were defined broadly.58 The Act was, at least to contemporary thinkers, consistent with a view of trade mark protection as a communication-based wrong, rather than a proprietary offence. A proprietary wrong pointed conventionally to civil relief rather than criminal,59 but “there is no real distinction between using the name of another in a bill of exchange with the intention to defraud, and using the trademark of another for a similar purpose; if there is any distinction it is merely one of degree — both offences come under the same categories — they are forgeries.”60 B. JUDICIAL ACTIVITY

While the attempt to obtain legislative recognition for trade marks as property had (temporarily) failed, Richard Bethell, who was Lord Chancellor Westbury 1861–1865, elaborated a theory of trade marks as property in a series of cases beginning with Edelsten v. Edelsten.61 In so doing, he expressly rejected the analysis of Lord Langdale MR and Page-Wood V-C, and provided an explanation for Millington v. Fox.62 In Edelsten v. Edelsten63 the plaintiff was a manufacturer of wire, and from 1852 adopted the device of an anchor as his trade mark, which he stamped upon the metal labels (tallies) attached to each bundle of wire. The claimant’s wire thus came to be known as ANCHOR BRAND WIRE. Suspecting that the defendant, a Birmingham firm (coincidentally, it seems, called Edelsten Williams and Edelsten) was selling wire as ANCHOR BRAND WIRE, the plaintiff asked one of his travelers to order some such wire from the defendants. By so doing it became clear that the defendants were using a mark comprising a crown and an anchor, and the claimant brought an action for an injunction and an account of profits. The defendant sought to argue that an anchor was a common mark, and that the crown and anchor was readily differentiable from it. Lord Westbury LC took the opportunity provided to state the law of trade marks in proprietary terms: “The questions are whether the Plaintiff had property in the trade mark … and, if so, whether the mark of the Defendants is substantially the same as the trade mark of the Plaintiff, and therefore an invasion of his property.” He continued by observing that while “[a]t law the proper remedy is by action on the case for deceit and proof of fraud on the part of the Defendant is of the essence of the action,” the Court of Equity “will act on the principle of protecting property alone, and it is not necessary for the injunction to 58 Merchandize Marks Act 1862, § 1: “[A]ny Name, Signature, Word, Letter, Device, Emblem, Figure, Sign, Seal, Stamp, Diagram, Label, Ticket or other Mark of any other Description lawfully used by any person to denote any chattel, to be the Manufacture, Work-manship, Production or Merchandise of such Person.” 59 John Morris, in a paper delivered to the Metropolitan and Provincial Law Association, Worcester “A trademark is a species of private property and there certainly seems no more reason why that should be protected by the criminal law than copyright, patents or designs.” On Fraudulent Trade Marks, Solic. J. & Rep. 820 (Oct 26, 1861). 60 Anon., Untitled, 8(2) The Jurist 471, 472 (Oct. 18, 1862). 61 Westbury gave decisions in Edelsten v. Edelsten, (1863) 1 De. G. J. & S. 185, Hall v. Barrows, (1863) 4 De G. J. & S. 150, M’Andrew v. Basset,(1864) 4 De. G. J. & S. 380, as well as in the House of Lords in Leather Cloth, (1863) 1 H. & M. 271, and Wotherspoon v. Currie, (1871–1872) L.R. 5 H.L. 508. 62 Other cases hinting at proprietary analysis include Clement v. Maddick, (1859) 5(1) Jur. 592 (Stuart, V-C) (granting injunction in favour of proprietor of BELL’S LIFE IN LONDON against defendants who were selling magazine as THE PENNY BELL’S LIFE magazine, stating that he “considered this application in the light of one to support a right of property.”) and Cartier v. Carlile, (1862) 31 Beav. 292, 298 (Sir John Romilly, MR, where the defendant’s mark is found to be a colourable imitation of the claimant’s trade mark, “there must be imputed to a person imitating a trade mark a desire to gain the advantages which are attached to the use of that particular trade mark, and which is the private property of another person.). 63 (1863) 1 De. G. J. & S. 185, 199.

928 S E S S I O N X I : TR A D E M A R K prove fraud in the Defendant.” Having stated these principles, Lord Westbury LC found that the defendant knew of the claimant’s mark and had deliberately adopted an essential part of it for use in relation to the defendant’s wire,64 and this was “piracy” of the plaintiff’s trade mark. Westbury reiterated his treatment of trade marks as property in Hall v. Barrows, a case which arose from dissolution of a partnership. The partnership deed had specified that when one partner died, the other could purchase all the stock, and this was defined to include “property belonging to the business.” The Master of the Rolls, Sir John Romilly, had ordered a sale,65 but on appeal Lord Chancellor Westbury considered the scope of any valuation, in particular whether it was to include the trade mark BBH surrounded by a crown. He said that Millington indicated “the principle that the jurisdiction of the Court in the protection of trade marks rests upon property, and that fraud in the Defendant is not necessary for the exercise of that jurisdiction.”66 The Lord Chancellor then reviewed the history of the trade mark in question, namely the letters BBH surrounded by a crown. BBH had stood for Bradley, Barrows and Hall, but had long since stopped indicating that goods were manufactured by that partnership — it had been used by Hall and Barrows since 1847, and had, according to the evidence only ever been understood as a “brand of quality.” According to Westbury, the trade mark “is a valuable property of the partnership as an addition to the Bloomfield Works and may be properly sold with the works, and therefore properly included as a distinct subject of value in the valuation of the surviving partner.” Westbury explained statements that there is no property in a trade mark as merely indicating that “there can be no right to the exclusive ownership of any symbols or marks universally in the abstract.” But he reiterated that there could be property in the sense that “a trade mark consists in the exclusive right to the use of some name or symbol as applied to a particular manufacturer or vendible commodity … such exclusive right is property.” Imposition on the public — the communicative aspect of trade marks — was “the test of the invasion by the Defendant of the Plaintiff’s right of property … but the true ground of this Court’s jurisdiction is property … .” On the same day as Westbury decide Hall v. Barrows, he also decided the appeal from Page-Wood V-C’s decision of July 1863 in Leather Cloth Co., Ltd. v. American Leather Cloth Co., Ltd.67 However, in contrast with Hall, this decision was further appealed to the House of Lords, which thus had its first opportunity to explain the law of trade marks, and to indicate whether it preferred Lord Westbury’s proprietary analysis to that of Page-Wood V-C.68 Curiously, Lord Westbury himself was one of the three-judge tribunal, In this case, the claimant claimed protection of the court for a mark comprising a circle including the words CROCKETT INTERNATIONAL LEATHER CLOTH CO. EXCELSIOR. TANNED LEATHER CLOTH, PATENTED JAN 24 1856. JR & CP CROCKETT & CO. MANUFACTURERS, NEWARK NJ USA WEST HAM ENGLAND. Crockett had invented “leather cloth”

and, as of 1855, manufactured the product both in New Jersey and in West Ham, through a company called The Crockett International Leather Cloth Co. Although one of Crockett’s partners had developed a patent for tanning leather cloth, which was assigned to the Company, this had been allowed to expire. In 1857 the Crockett Company sold all its plant and property in West Ham to the plaintiff, including its goodwill and the right of using the trade mark. Soon after, two of Crockett’s former agents established a competing 64 65 66 67 68

Id. at 201–02. These findings might appear to render the rest of Lord Westbury LC’s judgment obiter. 11 W.R. 525; (1863) 32 L.J.Ch. Hall v. Barrows, (1863) 4 De. G. J. & S. 150. (1863) 1 H. & M. 271 (Page Wood, V-C). Leather Cloth Co., Ltd. v. American Leather Cloth Co. Ltd., (1865) 11 H.L.C. 523.

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“leather cloth” business in the Old Kent Road, and on the dissolution of this, the defendant manufactured leather cloth from the same premises. Its device was a semicircle including the words AMERICAN LEATHER CLOTH COMPANY. SUPERIOR LEATHER CLOTH MANUFACTURED BY THEIR MANAGER LATE WITH JR & CP CROCKETT 12 YDS OLD KENT ROAD, LONDON. Wegelin, the defendant’s manager, had been employed by

Crockett for six months in 1856–1857. The claimant brought an action seeking injunctive relief. Three matters called for decision: whether the claimant could rely on rights in the trade marks developed by Crockett; whether the plaintiff’s and defendant’s marks were sufficiently similar to raise a question of infringement; and whether the plaintiff was disentitled to relief on the basis that its marks referred to patents that had lapsed. At first instance, Page-Wood VC held for the claimant. First, he rejected the view that it was not possible to transfer the right to use the trade mark. The plaintiff’s were the only persons in England using the mark to attract themselves customers. The question was not one of property but whether the act of the Defendant is such as to hold out his goods as the goods of the Plaintiff.69 He insisted that even in cases where the defendant was innocent “the ground of the interference is still fraud” because if the defendant continue to do the act, although previously done innocently, he will be committing a fraud). In this case, the plaintiff’s “having purchased the business, are perfectly entitled to use the trade mark formerly used by their vendors.” Second, the Vice-Chancellor compared the signs, holding in various respects that they were similar, particularly as regards the defendant’s reference to Crockett, which he held was unjustified on the facts. Thirdly, he examined whether the plaintiff had disentitled himself to relief for lack of good faith in its reference to the patent. He thought it would have been better had this not been used on untanned leather, but that in such cases no one would be deceived. On appeal,70 Lord Westbury reversed finding for the defendant, primarily because in his view the plaintiff had made significant misrepresentations to the public. However, before discussing these objections to the plaintiff’s claim, Lord Westbury was quick to correct the “uncertainty and want of precision … as to the ground on which a Court of Equity interferes to protect the enjoyment of a trade mark, and also on the question whether the right to use a trade mark admits of being sold and transferred by one man to another.” In particular, Lord Westbury contradicted existing analysis of trade mark protection as based on fraud rather than property (which he attributed to both Lord Langdale MR and Page-Wood V-C’s). While Westbury admitted that at law the remedy “for the piracy of a trade mark” was deceit, a remedy “founded on fraud,” in Equity the remedy was based not on fraud but property. This was indicated by two facts: first, because the remedy was not available for fraud alone but required “some pecuniary loss or damage,”71 and, second, because the remedy was available even where there was no “fraud or imposition practised by the Defendant at all.”72 While it was necessary for the Defendant to use the mark on the same goods as the Plaintiff so that it may be mistaken in the market for the Plaintiff’s, “imposition on the public, becomes the test of property in the trade marks having been invaded and injured, and not the ground on which the Court rests its jurisdiction.” The “exclusive right … to use any particular mark or symbol” in “connection with the sale of some commodity” was property, and “the act of the Defendant is a violation of such right of property, corresponding with the piracy of copyright 69 70 71 72

(1863) 1 H. & M. 271, 286. (1863) 4 De G. J. & S. 136. Citing Clark v. Freeman, 11 Beav. 112. Citing Millington v. Fox, (1838) 3 My. & Cr. 338, and Welch v. Knott, (1857) 4 K. & J. 747.

930 S E S S I O N X I : TR A D E M A R K or the infringement of the patent. I cannot therefore assent to the dictum that there is no property in a trade mark.” Having set the record straight as to the jurisdictional basis and nature of trade mark protection, Lord Westbury LC held that the plaintiff’s mark contained five misrepresentations,73 the most significant of which were that the goods were tanned and patented. He rejected Page-Wood VC’s analysis that the representation as to tanning in relation to untanned goods would not deceive any one, taking the view that a person should be liable for even those falsehood which were “so gross and palpable” that no one would be deceived by them. Given all the misrepresentations, it could not be said that the Plaintiff had “clean hands” and relief was refused. On appeal,74 the (three-judge) House of Lords affirmed Lord Westbury LC’s decision, Lord Cranworth and Lord Kingsdown both employing the language of property. Lord Cranworth acknowledged Lord Westbury’s concern that the law of trade marks “has not been well-defined, and has not been made to rest on any satisfactory principles,” and importantly affirmed the use of the language of property. Lord Cranworth stated that if the word property was aptly used in relation to copyright, he could see no reason for objecting to the use of the term in relation to trade marks. Moreover, he stated that the right to a trade mark “may, in general, treating it as property or as an accessory to property, be sold and transferred upon a sale and transfer of the manufactory of the goods on which the mark has been used to be affixed, and may be lawfully used by the purchaser.”75 While thus seemingly giving his imprimatur to the conception of trade marks as property, he in fact chose to affirm Westbury’s decision on a different basis from that of the Lord Chancellor: namely that the plaintiff and defendant’s marks were not so similar as “to deceive a purchaser using ordinary caution”; “to any one at all acquainted with the Plaintiff’s trade mark in this case, I can hardly think that even on the most cursory glance there could be any deception.”76 One was a circle, the other semicircular; both contained representations of eagles, but each very different from the other; both contained the name and address of the manufacturers, but these were different. Lord Kingsdown agreed that the appeal should be dismissed on the ground that the defendant’s trade mark did not resemble the plaintiff’s closely enough as to be calculated to deceive incautious purchasers and also on the basis that the plaintiff’s mark contained misstatements of material facts which were calculated to deceive the public. Although Lord Kingsdown provided no lengthy exegesis on the conceptual nature of trade marks, he acknowledged in passing that “a man may have property in a trade mark, in the sense of having a right to exclude any other trader from the use of it in selling the same description of goods.” Given that the third member of the Lords was Lord Westbury LC himself, the overall tenor of Leather Cloth amounted to a ringing endorsement of trade marks as property.

73 Namely, that the articles are the goods of Crockett International; that they have been made by J.R. & C.P. Crockett; that they are tanned leather cloth; that the articles were patented; and that they were made in the USA or in West Ham. 74 (1865) 11 H.L.C. 523. Lord Westbury also gave a speech, affirming his own decision, but agreeing with his colleagues specifically on the point that the defendant’s label was not so similar as to amount to infringement of the plaintiff’s label. 75 Id. at 534. 76 Cf. Glenny v. Smith, (1865) 2 Dr. & Sm. 476, 481 (Kindersley, V-C) (stating that the test is whether the “unwary, the heedless, the incautious portion of the public would be likely to be misled”). Lord Cranworth, as Lord Chancellor, reiterated the “ordinary purchaser acting with ordinary caution” test in Seixo v. Provezende, (1866) 1 Ch. App. 192, 196 (L.R.).

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C. RESPONSES OF COMMENTATORS

Even before Lord Westbury’s judicial intervention, proprietary analysis of trade marks had gained support amongst commentators. In one of the earliest systematic commentaries on trade marks serialized in the Solicitors’ Journal and Reporter for 1861–1862, Edward Lloyd observed that the fraud model of trade mark protection was still being held fast to by the courts. He explained that “the constant leaning of the Court of Equity has been to protect the right to use a trade mark on the ground not of the existence of any property in a mark or name; for it holds that any manufacturer has a right to use whatever mark or name he pleases to distinguish his manufacture, but with this limitation, he must not use such a distinctive mark as will induce a purchaser to buy his article on the supposition that it is the manufacture of another man.”77 In contrast with the judiciary’s “anxiety to guard against anything like a recognition of property in a trademark,”78 Lloyd himself advocated recognition that the equitable action was based on protection some kind of “quasi-property.”79 Lloyd explains that while there is no property in a mark by itself, when a mark is associated with a trader’s goods a “compound property” emerges.80 After examining Millington v. Fox, he concluded that: “There is therefore sufficient authority for saying that in consideration of the court of equity the right of property in a trademark is something more direct and specific than it can be deemed to be at law. At law it consists of a right to be protected against fraud; in equity it challenges some of the peculiar characteristics of property; but as it has been laid down more than once that a person cannot acquire property in a mere name, it must be deemed a species of property qualified rather than absolute; still sufficiently precise to enable the subject to obtain a substantial protection.”81 After 1863 most commentators were quick to embrace Lord Westbury LC’s theory of trade marks as property. Writing in 1864, the Solicitors’ Journal welcomed Lord Westbury’s contribution to the jurisprudence relating to trade marks, asserting that “under his authority, the extent of the jurisdiction of courts of equity in granting injunctions has been defined in a broad and philosophical manner.”82 The Journal acknowledged that the decision in Millington “can only be explained on the principle that the plaintiffs had an exclusive right of property in the name which has been violated,”83 and concluded that with Lord Westbury’s decisions “the doctrine that the exclusive use of a trade name or mark in connexion with a particular article of manufacture is rightly classed under the head of ‘property’ [was] thus established by the highest authority.” Two other commentators in the 1860s, E.M. Underdown and Wybrow Robertson, also reiterated the proprietary conception of trade marks. In a paper to the Royal Society of Arts in 1866,84 Underdown, a barrister, wrote that “all lawyers knew how that principle had been fought through every court — how gravely one decision after another had been 77

Edward Lloyd, On the Law of Trade Marks No. IX, Solic. J. & Rep. 153 (Jan. 4, 1862) [hereinafter Lloyd No.

IX]. 78 Edward Lloyd, On the Law of Trade Marks No. V, Solic. J. & Rep. 613 (July 6, 1861) (“[N]o one who reads their decisions will fail to be struck by a species of timidity in their expressions, by an anxiety to guard against anything like a recognition of property in a trade-mark.”). 79 Lloyd’s opinions were influenced by U.S. case law, which he describes in id. In particular, he describes Partridge v. Menk, 2 Sand. Ch. 622, where he says it was held that “the right of a trader in the use of his mark is regarded as a species of goodwill which he acquires in his business (which is undoubtedly a proprietary right).” 80 Lloyd No. I, supra note 10, at 486. 81 Id. at 486. 82 Trade Names and Marks, Solic. J. & Rep. 175, 177 (1864). 83 Id. at 176. 84 E.M. Underdown, On the Piracy of Trade Marks, J. Royal Soc’y Arts 370 (Apr. 11, 1866).

932 S E S S I O N X I : TR A D E M A R K given that there was no property in such things — and how the House of Lords had, in the case of the Leather Cloth Company, decided that there was such a distinct property in trade marks. If there was such a property established, the common law of England would come to protect it.” Commenting on Underdown’s paper,85 the patent lawyer, Thomas Webster, approving of the reinterpretation of the action as based on property, indicated that the next essential step was legislative action to reinforce the interest thus recognized through a register.86 Three years later, in 1869, Wybrow Robertson, gave a further paper on trade marks to the Society,87 observing that: “A most important point for notice is that a trade mark is property. Since 1863, it has been clearly laid down … that the right to a trade mark is a right to the exclusive use of it; that it is, therefore, property and will be protected by the court as if it were property… .”88 Finally, in the early 1870s two textbooks appeared on the law of trade marks, both recognizing that trade marks were property. In the first, Ludlow and Jenkyns89 described a trade mark as a “jus in rem” because, even though it has no “material subject,” it imposes duties on all men.90 They rejected the “fraud” analysis as unhelpful because the fraud is on the public not the trader. In the second text, Frank Mantel Adams observed that “there can be no doubt at the present day that the true ground for interference of a court of equity for the protection of a trade mark is, with respect to the plaintiff, property and the protection of property.”91 D. LEGISLATIVE ACTIVITY: THE 1875 ACT

The property analysis seemed to come to be accepted in the late 1860s, and was reinforced by the passage of the 1875 Act which established a registration system for trade marks, and made the existence of such Registration equivalent to public use.92 It is important to note that, in contrast with later trade marks Acts, this one did not purport to establish a self-contained or exhaustive scheme. Rather, the 1875 Act built upon the existing common law system –—the Act led to a presumption of public use, but the consequences of such public use for other traders remained governed wholly by the judicially-developed law of trade marks. In contrast with the 1862 Sheffield Bill, this instrument did not 85 In a similar vein, another barrister, Edward M. Daniel Q.C., 14 J. Royal Soc’y Arts 370, 377 (Apr. 11, 1866), wrote: “Lord Cottenham . . . established as a principle of law that there was property in trade-marks, when he held that an individual who innocently and unknowingly adopted a mark which belonged to another could not continue to use it. That principle had been followed up by Lord Westbury, when he held that if a man had a particular emblem by which he denoted the results of his own labour, the law protected him in the exclusive use of that emblem, and to that extent it became a property.” 86 Thomas Webster said, “It was truly stated that this was a question of property . . . Property was an empty name unless it was protected by law . . . the great objects to be sought were a proper record of the property in trade marks and proper remedies in cases of infraction . . . of that property.” 14 J. Royal Soc’y Arts 370, 377 (Apr. 11, 1866). 87 Wybrow Robertson, On Trade Marks, J. Royal Soc’y Arts 414 (Apr. 23, 1869). 88 Note the qualification: “But though a trade mark is undoubtedly property, it is not so for all purposes; for a proprietor of a trade mark cannot prevent another person from using he same mark for other description of goods; and, even when applied to the same goods, he must show in an action at law that there has been a false representation, calculated to mislead the public.” 89 Ludlow & Jenkyns, supra note 16, 3–6. 90 The authors added that one cannot assume “anything as to the general transferableness of a trade mark or as to the remedy of a person whose right is infringed” from this designation. Id. at 5. 91 F.M. Adams, A Treatise on the Law of Trade Marks 13 (1874). But Adams was quick to qualify this: “that property is not the ownership of the symbols which constitute the trade mark, but that which is the result of the exclusive right to apply them to a particular class of goods.” Id. at 16 (no right to apply them to goods of any other description). 92 An Act to Establish a Register of Trade Marks, (1875) 38 & 39 Vict. C. 91.

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expressly, declare registered trade marks to be “personal property” and while it permitted assignments of trade marks, section 2 of the Act limited transmissibility of a registered mark “only in connexion with the goodwill of the business concerned in such particular goods or classes of goods.” While the 1875 Act did not declare trade marks to be property, it did introduce proprietary language: the registrant became the registered proprietor of the trade mark, the relationship being described in the language of “title.”93 Consequently, it was widely understood as reinforcing the reconceptualization (developed particularly by Lord Westbury) of trade marks as property.94 Moreover, the effect of the introduction of the bureaucratic structure was to cement the previously recognized status of trade marks as property (as well as to alter certain of the dynamics of that property).95 Indeed, the use of the registration system gave a sense of closure and certainty to the subject matter of protection: being defined through the representations required by the Registry, trade marks appeared as visualized forms, capable of allocation as “objects” to particular owners. Trade marks evolved from communications to things.96 The Times welcomed the new Registration Act in language of property, referring to the great assistance it would be in alleviating “the enormous costs incurred by owners of trademarks in their attempts to defend their property.”97 Similarly, J. Seymour Salaman, solicitor to the Trade Mark Protection Society, which had lobbied for the Act, claimed that “[r]egistration gives a parliamentary property in a trade mark,”98 “a thoroughly valuable right and property not again liable to be interfered with … .” Edward Morton Daniel, in his commentary on the 1875 Act, stated that the 1862 and 1875 Acts had “established in the most solemn manner the right of property of this description.” He elaborated, “the species of property possessed by as man in the signs or means by which he indicates to the public that certain goods are sold with any reputation he may have acquired pledged to them, has become in many cases of great importance, and has received full recognition in the Courts of Justice and in Parliament”99 Looking back from the mid-1880s,100 101 Lowry White said: 93

Trade Mark Registration Act 1875, §§ 2 & 3. Some commentators saw that judicial recognition of trade marks as property as a pre-requisite for the legislative enactment of a registration system. Consequently, it was said that one of the reasons why a registration system could not be adopted in 1862 was that too much uncertainty hung over the legal status of trade marks. See, e.g., the comments of Dundas Gardiner in the Journal of the Society of Arts at 376 (1866) that he “thought he could understand how it was that the registration of trade marks had been so long postponed. He believed it was owing to the fact that up to a recent period the law courts were divided in opinion as to whether or not there was any property in them . . . .” Certainly, judicial recognition buttressed the claim for registration. In a similar vein, Thomas Webster argued that judicial recognition that trade marks were property was a first step, and that legislative action was required to establish a “proper record of the property in trade marks and proper remedies in cases of infraction . . . of that property.” 95 Lloyd predicted in 1862 that registration would consolidate and affirm the status of trade marks as property: “By registration I have no doubt many frauds that are now attempted would be restrained, and the adoption of such a system would afford a reasonable ground for giving new legal forms of protection to a species of property which would then be recognised and defined by a specific enactment.” Lloyd No. IX, supra note 77, at 154. Bow v. Hart, [1905] K.B. 592 (C.A.) (noting that the 1883 Act “assumes that in a sense there may be property in a trade mark, and provides for the protection of that property by a statutory system of registration” (Vaughan Williams, L.J., 598). 96 Brad Sherman & Lionel Bently, The Making of Modern Intellectual Property Law, 197–98 (1999). 97 The Times, Sept 10, 1875, at 8A (emphasis added). 98 J. Seymour Salaman, A Manual of the Practice of Trade Mark Registration 31 (1876). 99 Edward M. Daniel, The Trade Mark Registration Act 1875 at 2 (1876); M. E. Bigelow, Elements of the Law of Torts 50 n.2 (1889): “The subject of trade marks is being gradually assimilated to the law of property, and actions for deceit are apparently becoming infrequent under the influence of a better right.” 100 J. Lowry Whittle, The Late Earl Cairns, 11 L. Mag. & L. Rev. (5th ser.) 133, 150 (1886–1886). 94

934 S E S S I O N X I : TR A D E M A R K The nature of this property being once established, the next step was to give it statutory recognition, and supply facilities for securing it protection, and this Lord Cairns undertook in the Trade Marks Act 1875, which for the first time established a system of Registration of Trade Marks in accordance with the practice of Foreign countries, in which perhaps English Trade Marks are, from the reputation of the English manufacturer, a property more important even than in the British dominions. III. THE SIGNIFICANCE OF TRADE MARKS AS PROPERTY If the period between 1860 and 1875 witnessed a transformation in the way in which trade marks were conceived — from one example of fraudulent trading to objects of property — one might have expected that transformation to bring with it significant consequences. Indeed, in The Making of Modern Intellectual Property Law,101 Brad Sherman and I identified this shift as one component that informed the evolution of the modern categorical schema of intellectual property, with its familiar tripartite division into copyright, patents and trade marks. We argued that registration of trade marks,102 and their conceptualization as property, enabled the law of trade marks to be perceived first as part of a law of industrial property and then as a category of intellectual property — a process of categorization which would have been less fluid (if at all possible) as long as trade marks law was seen as concerned with deceit, forgery, fraud or communication more generally. While the shift to property may have been important in the context of the fabrication of legal categories, what seems remarkable to the modern commentator is how little effect this shift seems to have had on substantive legal doctrine. Although it is difficult to establish a method by which to gauge the impact of a particular conceptual scheme on the development of substantive law (especially in an era where the detailed application of the law was still in the process of being elaborated) — so that the following analysis is as much one of impression as anything else — it seems that reconceptualizing trade marks as property had no significant impact on the delineation of rights or breadth of protection conferred on trade marks owners. Despite widespread use of proprietary language,103 over the two decades following Lord Westbury LC’s intervention, the rights of trade mark owners and the breadth of protection remained limited. Attempts by plaintiffs to expand these rights often employed the rhetoric of property, but were readily rebuffed. Perhaps the best example of the limited effect of proprietary rhetoric can be seen in the House of Lords decision in Singer v. Loog,104 where it was argued that the use of the description SINGER SYSTEM on circulars, invoices, instructions for use, and price lists directed at wholesalers, infringed the plaintiff sewing machine manufacturer’s rights in the word SINGER. In effect, the claimant was seeking to prevent all trade uses of the word 101

Sherman & Bently, supra note 96, at 196–99. A tripartite scheme of “intellectual property,” we argued, could be seen to develop around about the 1840s and 1850s, but the three categories of intellectual property were copyright, patents and designs. By the end of the century, the three main categories of intellectual property had transformed into copyright, patents and trade marks. In part, this was because through the establishment of a registration system, trade marks had started to look like patents and designs. All defined their objects through processes of representative Registration. This was reinforced by the fact that the registries for patents, designs and copyright were all located in the same buildings (the Trade Mark Office had been at Quality Court, Chancery Lane under the supervision of the Commissioner of Patents, in 1881 was moved to the Patent Office in Southampton Buildings), and, in 1883, became governed by the same body of legislation (until 1905). Id. 103 Maxwell v. Hogg, (1867) 2 Ch. App. 307, 310 (L.R.) (Cairns, L.J.), 313–14 (Turner, L.J.); Singer Mfg. Co. v. Wilson, (1876) 2 Ch.D. 434, 454 (L.R.) (Mellish, L.J., stating that “no doubt there is in a certain sense a property in a trade mark”), 396 (Lord O’Hagan); Singer v. Loog, (1882) 8 H.L. 15, 33 (L.R.) (Lord Blackburn). 104 (1879) 18 Ch.D. 395, 398–99 (L.R.); (1882) 8 H.L. 15. 102

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not just those in which the mark was applied to goods in a way that indicated trade origin to the relevant audience. Counsel for Singer focused on the existing judicial recognition of trade marks as property to argue that these kinds of uses should be prohibited unless the defendant could provide a justification – which might either be based on a right to use the name or use in a descriptive fashion (where a person is unable to designate the article in any other way than by its known name). At first instance, Vice Chancellor Bacon was persuaded by the property analysis.105 He concluded that “the Plaintiffs are entitled to an injunction which will protect them in the enjoyment of the property which has been theirs all these years, against which, neither by their negligence nor acquiescence, has any other person acquired a title.”106 On appeal, however, the decision was reversed. James LJ quickly got to the point: “there is no such thing as a monopoly or a property in the nature of a copyright, or in the nature of a patent, in the use of any name.”107 The House of Lords too reiterated that even though a trade mark might be regarded as property,108 the test of infringement remained (as it had always been) one of deception.109 The defendant’s use of the term SINGER was not likely to cause any such deception: firstly, because the material was aimed at wholesalers who would understand the product was not manufactured by the Singer Manufacturing Co; and second because these uses themselves were not ones that suggested the machines had been made by Singer.110 Relief was thus denied to the plaintiff. The second situation in which proprietary language seems to have no significant impact on the scope of trade mark rights relates to the question of use on different goods. While it is a key claim of contemporary academic commentators that the “property” conception of trade marks is linked with the expanded protection of trade mark rights to encompass uses on dissimilar goods where there is dilution or tarnishment, no such tendencies are discernible in the 1870s or 1880s. To say that a trade mark used by a trader on one particular good was property, did not mean that he could stop another trader using the same mark on different goods. In Leather Cloth Co v. American Leather Cloth,111 for example, Lord Westbury stated that “there is no exclusive ownership of the symbols which constitute a trade mark apart from the use or application of them,”112 and the right was only invaded by use on “the same kind of goods” in such a way as to cause “buyers in the market” to mistake the defendant’s goods for those of the trade mark owner.113 Elaborating on this, he explained that “property in a trade mark is … the right to the exclusive use of some mark, name or symbol in connection with a particular manufacture or vendible commodity. Consequently, the use of the same mark in connection with a different article is not an infringement of such right of property.”114 Page-Wood V-C, although by the late 1860s prepared to acknowledge (as precedent required of him) that SINGER,

105 (1879) 18 Ch.D. 395, 402, 403 (L.R.). He treated the historical basis of the common law action as an action for trespass (rather than deceit). 106 Id. at 411. 107 Id. at 412. 108 (1882) 8 H.L. 15, 33 (L.R.) (Lord Blackburn) (“I think it settled by a series of cases, of which Hall v. Barrows is, I think, the leading one, that both trade-marks and trade-names are in a certain sense property.”). 109 Id. at 39 (Lord Watson). 110 Id. at 20 (Lord Selborne, L.C.). 111 (1863) 4 De. G. J. & S. 136; see also Hall v. Barrows (Lord Westbury said that there could be property in the sense that “a trade mark consists in the exclusive right to the use of some name or symbol as applied to a particular manufacturer or vendible commodity”; “there can be no right to the exclusive ownership of any symbols or marks universally in the abstract.”). 112 Id. at 142. 113 Id. at 141. 114 Id. at 144.

936 S E S S I O N X I : TR A D E M A R K trade marks had been recognized as property gave a clear example of the limited breadth of the property rights in Ainsworth v. Walmsley:115 “If he does not carry on a trade in iron, but carries on a trade in linen, and stamps a lion on his linen, another person may stamp a lion on iron.” In fact, it is notable that just as there are uses of the “property” concept to attempt to expand protection, there were also cases where attempts were made to use the concept to limit the availability of protection. One example of this was M’Andrew v. Bassett.116 Here the claimant was a manufacturer of liquorice and from August 1861 had stamped the liquorice with the word ANATOLIA, an area where liquorice-root was grown. In September the defendant, also liquorice makers, received an order from a third party for 5 cwt of liquorice and a request that it be marked ANATOLIA, which the defendants did. The plaintiffs brought an action, and the defendants sought to argue that insufficient use of the mark had been made to establish it as property. Lord Westbury LC was quick to reject the argument: the mark had been applied by the claimant, reached the market, and was now being imitated, so these facts themselves led to the conclusion that the trade mark was property. Moreover, he rejected any argument that the sign, being geographical, was a word common to all. He referred to a fallacy that he had “frequently had occasion to expose,” that “property in a word for all purposes cannot exist; but property in that word, as applied by way of a stamp upon a particular vendible article, as a stick of liquorice, does exist the moment the article goes into the market so stamped, and there obtains acceptance and reputation whereby the stamp gets currency as an indicator of superior quality, or of some other circumstance which renders the article so stamped acceptable to the public.” IV. CONCLUSION The contrast between the limited impact of proprietary language in the late nineteenth century, and its supposed effects in recent trade marks jurisprudence, prompts two further potential lines of enquiry. The first is to revisit the critical accounts of contemporary trade marks law and consider whether these attribute too much causal power to proprietary language. If so, what are the real causes of the expansionist tendencies in trade marks law? The second line of enquiry is to consider why it is that proprietary language has so much more impact today than in previous periods? A historical investigation such as this is not the place to assess whether contemporary critics of trade mark expansionism are attributing too much power to the language of property,117 but historical material does provide four indications as to why acceptance of trade marks as property did not have a particularly radical transformative effect on the scope of protection in the late nineteenth century. The first is because, at least for some jurists, such as Page-Wood V-C, the property analysis remained unpersuasive and the real basis for intervention was fraud. While in the decisions he gave as Vice-Chancellor after Leather Cloth he acknowledged that trade marks must be treated as property,118 once he was himself elevated to Lord Chancellor 115

(1866) 1 L.R.Eq. 518 (L.R.). (1864) 4 De. G. J. & S., 38 L.T.N.S. 445. 117 Certainly, there are commentators who have argued that some of the developments are justifiable under traditional understandings of trade marks function. For example, Robert G. Bone has argued that many of the recent expansions of trade-marks law in the United States fit “core information transmission policies” when those policies are supplemented by a concern about limiting high enforcement costs. Cf. Robert G. Bone, Enforcement Costs and Trademark Puzzles, 90 Va. L. Rev. 2099, 2121–22 (2004). 118 M’Andrew v. Basset, (1864) 33 L.J. Ch. 561; Ainsworth v. Walmsley, (1866) 1 Eq. 518 (L.R.). 116

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(Hatherley), the use of the word “property” is conspicuously absent. In Wotherspoon v. Currie,119 eight years after Leather Cloth, the House of Lords heard its second trade mark case. The plaintiff, who had formerly manufactured starch from the Scottish village of Glenfield but had since moved to Paisley, had an established reputation as the maker of GLENFIELD STARCH. The plaintiff sought an injunction to prevent the defendant from selling its CURRIE ROYAL PALACE STARCH with the word GLENFIELD prominently on label for. The defendant sought to do so on the basis that he himself resided in Glenfield, but the defendant’s business address was in fact elsewhere. The House of Lords had no hesitation in granting relief. What is interesting for our purposes is that while Lord Westbury described the designation GLENFIELD for starch as being the property of the claimant, so the sole question was whether the property had been infringed, Lord Hatherley nowhere referred to property, consistently being interested in the honesty of the defendant and the deception likely to result from its behavior. Other judges may well have shared Lord Hatherley’s skepticism.120 Certainly, towards the end of the century a different justification for Equitable intervention emerged in place of the idea of property in the mark itself, namely that of protecting the trader’s goodwill — a proprietary interest distinct from any in the mark itself. After Lord Parker’s famous speech in Spalding v. Gamage in 1915,121 this idea that protection of trade marks at common law was really a mechanism for protecting “goodwill” as property became the orthodoxy in England (as indeed it did in the United States). While U.S. law professor Bob Bone argues that it was the fluidity that the concept of goodwill provided that enable trade marks law to commence down its expansionist road, the importance of this later transformation here is that it indicates that there was a level of discomfort with the analysis of trade marks as property developed in the 1860s. How deep, widespread or longstanding this skepticism about trade marks being property is difficult to gauge. A less skeptical, but perhaps more prevalent and influential, view of Lord Westbury’s property analysis was that it was really a matter of form rather than substance. Not long after Edelsten and Hall v. Barrows, Page-Wood VC had referred to the use of the term “property” to describe trade marks122 as “a mere question of nomenclature,” or, as a commentator in the Law Times of 1864 wrote, a “point of legal science.”123 In other words, the “difference between the Lord Chancellor’s view and the view taken by preceding judges appears … to be theoretical rather than practical. After all, the property in a trademark is not absolute like other property… .”124 The adoption of the language of property (at least for some time) may have had little substantive impact because it was recognized that the “property” label was just that, a label. It was a label adopted to solve a specific problem: that of explaining Equity’s extended jurisdiction beyond that of the 119

(1872) 5 H.L. 518 (L.R.). See also Singer Mfg. Co. v. Wilson, (1877) 3 H.L. 376, 400 (L.R.) (per Lord Blackburn, declining to determine whether the basis of the action was fraud or property, and asserting that “[n]either position has . . . ever been the ground on which a decision of this House has proceeded.”). But see Lord Blackburn’s concession in Singer v. Loog, (1882) 8 H.L. 15, 33, that it was well-settled that trade marks were property. See also Singer v. Loog, (1880) 8 Ch.D. 395, 412 (L.R.) (per James, L.J., no property in the use of any name equivalent to the property granted by copyright), 425 (per Lush, L.J., emphasizing fraud as basis of action). 121 (1915) 32 R.P.C. 273. 122 M’Andrew v. Basset, (1864) 33 L.J. Ch. 561 (ANATOLIA for liquorice) (“whether it is property or not is not material.”) 123 See Law Times (1864); Charles Stewart Drewry, The Law of Trade Marks xi (1878) (“But from recent decisions, it is now to be collected that the right to a trade mark is a right of property. It is not however always practically of much importance whether a trade mark is legally property or not.”). 124 Anon., The Marking of Merchandise in Equity, Law Times 123 (Jan. 16, 1864). See also Law Times 348 (June 4, 1864) (the commentary on M’Andrew v. Bassett). 120

938 S E S S I O N X I : TR A D E M A R K Common Law and the availability of injunctive relief at all. Adoption of that label did not mean that trade marks were property, like land or goods, or even like copyright or patents. Indeed, in Leather Cloth Lord Cranworth indicated that the term property was used “in a sense very different from what is meant by it when applied to a house or a watch.”125 Later, Mellish LJ and Lord Blackburn would describe trade marks as property but only “in a certain sense.”126 To say that the question was merely one of “nomenclature” or “legal science” may also be to suggest that the property designation was understood, for the most part, as a matter of analytic rather than normative jurisprudence. That is, the property designation was adopted to explain existing characteristics of trade marks law, particularly the case-law holding innocent traders liable where use of a mark was liable to confuse the public, or the fact that infringement could result in injunctive relief. Although, there are a few scattered examples of jurists (notably Lord Westbury LC himself ) and commentators who suggest trade mark protection is justified on the same basis as protection of other properties, such as protecting the products of labour and effort,127 or natural rights in one’s name, for the most part the normative justifications of trademark protection is not linked to the normative justification of copyright, patents or property in tangibles and realty. The final reason why the property analysis of trade marks may have had so little impact in this period is because judges and commentators were scrupulous first to distinguish this property from others (whether copyright, patents, or more importantly tangibles and land);128 and second, to emphasize that while a right may have some of the characteristics of property, one could not conclude from this designation that it would carry other such consequences. Property had a number of functions, and many jurists were capable of distinguishing, and alert to distinguish, between them. In the context of trade marks, “property” variously was significant in determining: whether injunctive relief was available;129 whether the right was enforceable against innocent third parties;130 whether the 125

(1863) 4 De. G. J. & S. 136, 533. Singer Mfg. Co. v. Wilson, (1876) 2 Ch.D. 434, 454 (L.R.) (Mellish L.J.); Singer v. Loog, (1882) 8 H.L. 15, 33 (L.R.) (Lord Blackburn). 127 For example, Richard Bethell, then a leading Chancery barrister and MP, later Attorney General and Lord Chancellor, Lord Westbury, commented publicly in 1859 that counterfeiting “is in effect theft . . . . The thief obtains at once the fruits, probably, of a life of labour, invention and industry . . . .” Fifteenth Ordinary Meeting, J. Royal Soc’y Arts 262 (1859). The comments were made in his capacity of Chairman at a meeting of the Royal Society of Arts at which Professor Leone Levi gave a paper highlighting deficiencies in the existing legal protection of trade marks. Speaking at the Royal Society of Arts in 1866, Edward M. Daniel QC, said at: “Lord Westbury . . . held that if a man had a particular emblem by which he denoted the results of his own labour, the law protected him in the exclusive use of that emblem, and to that extent it became a property.” Daniel, supra note 85, at 377. 128 Singer v. Loog, (1880) 8 Ch.D. 395, 412 (L.R.) (per James L.J., trade marks not property in sense of patents and copyrights). Some differentiated between “qualified” property and “absolute” property. See, e.g., Lloyd No. 1, supra note 10, at 523 (calling trade marks “qualified property” and “quasi-property”); see also Lionel B. Mozley, Trade Marks Registration: A Concise View of the Law and Practice (1877) (“It is settled, at any rate, that there is a certain qualified right of property in a trade mark, as applied to particular goods or articles, and that it possesses many of the ordinary incidents of property, such as that of being made the subject of a sale, except where it is a personal trade mark …. And there are dicta in certain decisions . . . which would lead to the conclusion that there is an absolute property in a trade mark, so that no one else may use the mark as applied to the goods in connection with which it is used, whether he does so honestly or in a way intended to deceive or not . . . .”). 129 In the high-profile decision in Emperor of Austria v. Day and Kossuth, (1861) 3 De. G. F. & J. 217, 45 Eng. Rep. 861, the Court of Chancery reiterated that it could only grant injunctions in protection of property rights. The facts of the case had little to do with trade marks, the action being brought by the King of Hungary to restrain the defendant from having notes manufactured purporting to be money usable in Hungary. The notes, which were not imitations of any notes circulating already in Hungary, were created on behalf of Kossuth, (formerly minister of Finance to Ferdinand V), an exile who claimed the government in Hungary was unconstitutional and who hoped to make the notes usable after a revolution. Lord Campbell, the Lord Chancellor, considered whether this matter was one over which the Court of Chancery had jurisdiction by injunction, noting that while the Court 126

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interest was capable of assignment; whether the rights could be raised in an English court,131 and, if so, whether this included the County Court; whether a defendant had to produce a justification for using the mark;132 and, of course, the scope of protection.133 Decisions over whether a trade mark was property for each purpose, or what it meant for a trade mark to be property in such a respect, was (perhaps surprisingly) one over which judges and jurists took considerable care.134 This was true even (or perhaps, particularly) of the great property advocate, Lord Westbury. In Hall v. Barrows, for example, Westbury was keen to ensure that his judgment, forthright and categorical as it was, could not be taken to indicate that trade marks could be sold “in gross”: Nothing that I have said is intended to lead to the conclusion that the business and iron works might be put up for sale by the Court in one lot, and the right to use the trade mark might be put up as a separate lot, and that one lot might be sold and transferred to one person and the other lot sold and transferred to another, the case requiring only that I should decide that the exclusive right to this trade mark belongs to the partnership as part of its property and might be sold with the business and works and as a valuable right, and if it might be sold it must be included in the valuation to the surviving partner. Similarly, in Leather Cloth Co. v. American Leather Cloth,135 Lord Kingsdown stated that “Though a man may have property in a trade mark, in the sense of having a right to exclude any other trader from the use of it in selling the same description of goods, it does not follow that he can in all cases give another person the right to use it, or to use his name.” Most jurists had a similar propensity to scrupulousness, distinguishing between the various ways in which the label of property might be used. In 1866, Wybrow Robertson highlighted the limited nature of the property right, saying that while “a trade mark is undoubtedly property, it is not so for all purposes; for a proprietor of a trade mark cannot prevent another person from using he same mark for other description of goods.”136 In their treatise,137 Ludlow and Jenkyns, who argued that a trade mark was a could not prevent crimes nor libels, “this Court has jurisdiction by injunction to protect property from an act threatened, which if completed would give a right of action.” Id. at 240, 870. The issue of the money was regarded as just such an act. Turner, L.J., reasoned to the same end that the King could bring an action on behalf of his subjects where there was impending injury to the private property rights of those subjects, and found the possible introduction of the currency to be just such a threat. This was because the introduction of the currency was likely to endanger the existing currency, and thus to affect directly all the holders of Austrian bank notes, and indirectly, if not directly, all the holders of property in the State.” Id. at 253, 875. 130 Mozley, supra note 128 (“Much discussion has taken place as to whether a trade mark can be said to be property, or to speak more correctly, whether a right of property exists in a trade mark. The importance of the distinction arises from the fact that if it is property, strictly so called, the owner is entitled to be protected in the enjoyment of it absolutely, but if it is not property he must obtain a remedy on some other ground, such as that of fraud.”). 131 Collins Co. v. Brown, (1857) 3 K. & J. 423. 132 On abandonment, see Mouson v. Boehm, (1884) 26 Ch.D. 398 (Chitty, J.). 133 Could protection extend to sale of labels? See, e.g., Farina v. Silverlock. 134 While some U.S. academics, such as Professor Bone, Hunting Goodwill, supra note 37, at 562, have been quick to accuse the nineteenth-century jurists of formalism, the evidence from the U.K. points towards the opposite view. 135 (1865) 11 H.L.C. 523. 136 Robertson, supra note 87, at 414. 137 Ludlow & Jenkyns, supra note 16, at 5. But see Solic. J. & Rep. 177 (1864) (“The doctrine that the exclusive use of a trade name or mark in connexion with a particular article of manufacture is rightly classed under the head of ‘property’ being thus established by the highest authority, it must be accepted with all its consequences. The proprietary right must carry with it the right of alienation. Cujus est dare ejus est disponere.”).

940 S E S S I O N X I : TR A D E M A R K “ius in rem,” wanted to make clear the limits of this analysis, in particular, that it would not be right to assume from this “anything as to the general transferableness of a trade mark or as to the remedy of a person whose right is infringed.” If formalistic reasoning was a characteristic of late-nineteenth century reasoning, it is notably absent from virtually all discussion of trade marks as property. Perhaps the most articulate example of the judicial rejection of formalistic analysis was in the Court of Appeal in the first English Singer decision, Singer Manufacturing v Wilson.138 As with Singer v. Loog (discussed previously) this case concerned use of the name SINGER on pricelists, though not on the defendant’s machines, which were marked with its mark of St George and the Dragon and name Newton Wilson & Co. Jessel MR, at first instance, found that the plaintiff had not established a prima facie case and declined to hear the arguments of the defendant. He explained that where a sign was not being applied to the goods themselves, it was for the claimant to establish that deception had occurred and that fraud existed. The public, reading the price-lists, would appreciate that these machines had been manufactured by the defendant rather than the Singer Manufacturing Co. The Court of Appeal affirmed, on this occasion not bothering to hear the arguments of the respondent, the defendant. Mellish LJ highlighted the dangers:139 You first say the right to use the name or the mark can be made the subject of purchase, and therefore, it is a property, and the you proceed to draw the further inference, that, as it is a property, whether it is used in a way that is calculated to deceive or not, you can prevent anyone else from using it. That, to my mind, would be going further than the English courts have ever gone. Although the House of Lords overturned the decisions of the Court of Appeal and Jessel MR, this was done on the basis that the Courts had mistakenly distinguished tests applicable for liability through applying a mark to goods and other uses, requiring a demonstration of fraud in the latter cases.140 The majority of the members of the House did not think fraud was a requirement and took the view that on the proper test a prima facie case made out.141 The House said nothing to cast doubt on Mellish LJ’s criticism of formalistic reasoning, and Lord Cairns reiterated the test of liability as whether the advertisements “were calculated to mislead an unwary purchaser of the machines.” If these reasons help us to understand how the “property” conceptualization of trade marks in the late nineteenth century did not bring with it any obvious expansion in trade mark rights, they may simultaneously point towards possible explanations for such expansionist tendencies (inasmuch as they exist) today. If property rhetoric has had the influence that commentators like Lemley and Lunney claim, is it because judges and policymakers are less careful, and more susceptible to formalism than their nineteenth-century precursors? Or is it because they consider trade marks as property normatively, as a product of labor deserving strong protection, rather than in terms of legal nomenclature? * 138

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(1876) 2 Ch.D. 434 (L.R.); (1877) 3 H.L. 376 (L.R.). Id. at 456. Mellish, L.J., could see that formalistic reasoning was deployed in an attempt by traders to broaden protection beyond what he considered to be justified: “although it is perfectly right to protect the use of trade-marks and trade-names, yet it is impossible not to see that persons do try to use their right in trade-marks and trade-names for the purpose of getting a monopoly in particular articles, just as if they had a patent for the goods they manufacture.” 140 Id. at 452 (James, L.J.). 141 (1877) 3 H.L. 376, 391, 396 (L.R.) (fraud not necessary); cf. Lord Blackburn at 400. 139

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Very good. Thank you, Lionel. Now I want to turn to the panel, and I will get to them immediately. Andrew Bridges, I’m sure you have some choice comments to make about this. Andrew is a prominent member of the bar and is never at a loss to tell us what he thinks. MR. BRIDGES: I may never be at a loss for words, but I am at a loss for a voice today. I apologize. Excuse me for the gender-exclusive phrase I am about to invoke, but this discussion reminded me of the phrase “a man’s brand is his castle.” I do not know why that sounds odd to me, but it does. It is the property concept. I think Lionel’s paper was excellent and is very nuanced and thorough in its analysis. I really appreciate it. I will give a U.S.-centric view. I have never liked the term “intellectual property” at all, because I think it disguises a number of fundamental differences. Patents and copyrights are constitutional concepts; trademarks are not. Patents and copyrights in the United States both involve negative monopolies; one can preclude others from exploiting them without exploiting them oneself. When I have to explain the use requirement to clients I explain that trademark law is like the childhood game of “King of the Mountain” — you cannot own the mountain; you cannot be king of the mountain without being on the mountain; if you leave it and somebody else goes on it, it is their mountain. That’s the way trademarks work. So why are trademarks included in the concept of intellectual property? First, I think it may result from the historical accident of inclusion of trademarks with patents in the U.S. Patent and Trademark Office. This is where I’m cynical. I think it is a good marketing tool for patent lawyers to inflate their résumés with apparent expertise in other areas. I tend, as somebody who focuses a great deal on trademarks, to be reluctant to entrust trademarks to patent lawyers who call themselves intellectual property lawyers. Consumer protection and unfair competition are clearly at the core of trademark law in the United States. These are not property concepts. However, we do have what Reich called the “new property” in his seminal article,142 and we have the Supreme Court case of Goldberg v. Kelly,143 which discussed property rights and an expectation of welfare benefits and property rights that may be deprived by the government only with due process of law. So the word “property” can be very expansive. But the question is: When it becomes so expansive, does it become meaningless? Now, I do agree that the power of language is very important. Legal reasoning thrives on analogy. Analogy often thrives on metaphor. I think that ontological error often derives from careless uses of metaphor. I love the metaphors. People in the Internet world, where I practice a lot, will talk about “this company is really successful; this company has 20 million eyeballs.” When I hear that a Web site has 20 million eyeballs, I don’t think that they have some storage facility with eyeballs. What they are talking about is that they have a subscriber base. Do they own a subscriber base? Is that property? In some senses yes, but in some senses no. Companies talk about owning mind share or owning market share. I don’t think of that as a property concept. Where I think it is actually pernicious right now in trademark law is the discussion that 142 143

Charles A. Reich, The New Property, 73 Yale L.J. 773 (1964). 397 U.S. 254 (1970).

942 S E S S I O N X I : TR A D E M A R K companies are selling trademarks or are selling key words. In fact, they are selling advertising. If a search engine sells me a key word, I am not taking dominion over that key word in the traditional sense of property. But, as a practicing lawyer and a litigator — and this goes to your point, Lionel — I ask: What is the relationship between nomenclature and doctrine? I actually think that nomenclature flows from a lawyer’s or a judge’s choice of the most persuasive way to justify a result. Maybe nomenclature dictates results, but I think actually results often dictate the nomenclature that is used to help persuade or sell a result. So we really have to look at what are the various policies that underlie trademark protection. Are they competing or complementary approaches? I think it is a fallacy to think that there needs to be only one approach. In a pluralistic society, we can have multiple motives for different people agreeing to converge on a common result, the result here being trademark enforcement. So obviously, the approaches are: consumer protection to protect against consumer deception as a public good; a tort theory of remedying lost sales; an equity theory of remedying unjust enrichment; and a property theory, which I think seems to derive implicitly from some investment or some action to cause the property to come into existence. I wonder if a property theory is necessarily justified where the public creates the trademark and the vendor does not. So if you are looking at “Big Blue” or “Coke” or “FedEx," which for IBM and Coca-Cola and Federal Express were brands thrust upon them by the public, not created by them, the goodwill, but not the brand, was created by the company, in which case we ought to be talking about the goodwill as property rather than the brands as property. Anyway, these are all the different justifications. But I think it is important to say that there doesn’t have to be just one justification. I don’t think we have to fight whether it is or is not property. We can just throw it into the mix and say there are a bunch of justifications and different people will converge to support them for different reasons. The motive is usually related to an enforcement goal; it is not related to a pretty registration certificate that you put up on the wall. I think the main thing we all have to guard against, which some lawyers want to create, is some unthinking, unreflective, knee-jerk reaction to some sort of talismanic language that is going to capture the field of discourse. I think, rather than worrying too much about what category it is, we just need to make sure that we are not responding in that sort of talismanic fashion. I really thank you for your paper. Thanks. PROF. LEAFFER: Thank you, Andrew. Now I want to turn the program over to Justin Hughes, who teaches at Cardozo University. PROF. HUGHES: Thanks. I thought Lionel’s paper was fantastic too. I have a vested reason for that. Unbeknownst to Lionel, we actually have worked on geographical indications (GIs)144 in parallel, on opposite sides of the Atlantic. I have been doing the same thing in copyright, showing that the understanding of copyrights as property, contrary to what a lot of academic writing you have been reading or academic commentary, the use of the property 144 See, e.g., Justin Hughes, Champagne, Feta, and Bourbon: The Spirited Debate About Geographical Indications, 58 Hastings L.J. 299 (Dec. 2006).

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concept for copyright law, is quite old also. So I think Lionel’s paper is absolutely wonderful. The important thing that you get out of Lionel’s paper is (a) the understanding of trademarks as property is quite old, and (b) despite that understanding, quoting from his paper, “it seems that reconceptualizing trademarks as property had no significant impact on the delineation of rights or breadth of protection conferred to trademark owners.” Those are both very important things. Now, as to first point, that trademarks were always understood as property, I think that should give us a word of caution about academics. Professors are like everyone — we see something and we think the phenomenon is new because we are seeing it for the first time, when in fact the phenomenon is not new; it is we who are new. It is an old phenomenon to call these things property and there is a rich historiography here that Lionel is tapping into. I think that is great. Now, Lionel is completely right when he gave us his list for the reasons of property rights expanding. But what I didn’t see on that list, Lionel, which I think is more where I would go, and where Jamie Boyle145 would go, is to say trademarks are the ultimate postmodern intellectual property. They are the New Age economy intellectual property. As you have this movement of value away from tangible goods into symbols, it is no surprise that this area gets an enormous amount of pressure — not conceiving of it as brands or international harmonization, but conceiving of it as just the movement of the economy into intangibles, and that this is the receptacle through which that protection will occur. Now, one thing I have done that is similar to Lionel’s paper — I am going to be absolutely blatant here — is I wrote a paper in which I discuss copyrights that appeared recently in Southern California Law Review.146 One point is worth exploring with the people who say, “It is the word ‘property’ that is causing this expansion.” One thing to ask is: “How? Can you tell us how it is happening?” There are different ways you could imagine that the trope (or the construct) of property is somehow causing an expansion of rights. 앫 One is that, by using “property,” it is easier to appeal, as Andrew would probably say, to the analogy of real property and the absoluteness — or our perceived absoluteness, although we as lawyers know it is not absolute — of real property rights and the clear boundaries of real property rights. Maybe the property construct has an effect of empowering or strengthening or expanding this area in that way. 앫 Another possibility is to appeal to natural rights. Labeling something as “property” gives you more traction in a natural rights argument. 앫 Third one, which is arguably the best one because it was not present in the nineteenth century, by labeling something “property” you get to lock into a lot of law-andeconomic arguments. Those law-and-economic arguments exist in a very developed, rich, robust literature, with a powerful following, that did not exist when property was first being used to describe trademarks and copyrights. So I think that when we respond to those people who say, “Yes, ‘property’ is part of the 145 James B. Boyle, William Neal Reynolds Professor of Law and co-founder of the Center for the Study of the Public Domain at Duke University School of Law, is one of the founding Board Members of Creative Commons. See James B. Boyle, Shamans, Software and Spleens: Law and Construction of the Information Society (1996). 146 See Justin Hughes, Copyright and Incomplete Historiographies — of Piracy, Prop-ertization, and Thomas Jefferson, 79 S. Cal. L. Rev. 993 (2006), manuscript available at http://papers.ssm.com/sol3/papers.cfm?abstract_ id=934869.

944 S E S S I O N X I : TR A D E M A R K problem, or the word ‘property’ or the construct of property is part of the problem,” we should give them the benefit of the doubt and say, “Okay, then describe the causal mechanism that you think is really at work.” I think that all those are possibly at work. But, as Andrew said, there are counter-arguments here. Lionel thinks that the property concept was not that strong or not that absolute, as I understand him, in the nineteenth century. I would go the opposite direction and say that when you live in a world in which your Supreme Court has told you that welfare rights are property, that social security is property, that hunting licenses are property, you will start to understand that property is not such a hot thing. It has a lot of limitations, a lot of exceptions, and it doesn’t give you very much absolutely of anything. If that is the kind of world you live in — and that is the kind of world we do live in, as Andrew said, in the new property world following Charles Reich’s phenomenal 1964 article147 — then maybe the property construct shouldn’t do that much. I want to make last two comments. It is certainly true, and one thing that is worth studying if you do think that the property construct has some talismanic value, is what I have done, although not done completely. There are scholars who argue that members of Congress’s referring to copyright as property causes the strengthening of copyrights. The problem is, if you go back into the Congressional Record and look for the occasions when they do refer to copyrights as property, copyrights are usually on the losing end of the proposition; in other words, it is usually a limitation to copyright that prevails. The property rhetoric in relationship to copyright in Congress is most visible in legislation like the TEACH Act,148 where it is a limitation on the copyrights that are passed; or the Music Licensing Act,149 where there is a clear rhetoric of property being put up, but it fails, it doesn’t carry the day. So to the degree we think that this is a dangerous and talismanic concept, it is worthwhile to look into the record and find that as many times as it is trotted out it fails as it succeeds. PROF. LEAFFER: I think we have a few minutes for questions. I can’t wait to hear some of the comments from the audience. Who would like to start off here? QUESTION: I have a question for Lionel. Did you think about seepage into U.S. trademark law after the 1860s if the reconceptualization occurred in England? At least in copyright and patents, especially copyright, U.S. courts were heavily influenced by British law. But, at least based on my knowledge, that probably did not occur in the context of the trademark notion of not being property and being more of an unfair competition kind of concern. PROF. BENTLY: I’m very sorry, but I cannot help you there. I have not done the work. I would like to do the work on this. The only thing that I have come across that would link that so far is the treaty that I mentioned with the United States, where reciprocal recognition of each other’s rights is in 1877 put in terms of property. So that would suggest some talking to one another at that kind of level about trademarks in terms of property rights. Of course, the United States has this rather distinctive history in terms of the constitutionality of trademarks. There is no point in my saying anything when I haven’t done the work. PROF. LEAFFER: Another question? QUESTION: I think the connection between property and the fraud roots is quite interesting. I think what came to mind when I was listening to you was the fact that we were 147 148 149

See Reich, supra 141. Technology, Education and Copyright Harmonization Act, Pub L. No. 107-273, 119 Stat. 1910 (2002). The Fairness in Musical Licensing Act, Title II of Pub. L. No. 105-298, 112 Stat. 2827 (Oct. 27, 1998).

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talking about fraud to the public, where the victims are the public, public interest and the like. I was wondering whether in looking at history you encountered whether this sort of fraud is understood in a way that is different from the way fraud is understood in the early patent and copyright cases, where the victim of the fraud really is the rights owner, the inventor, the author. To what extent these roots that lead back to fraud as it is understood in this context can be severed, if at all, or do you think they form a permanent, indelible sort of connection to how the concept of property is to be understood? This connection is there. It was reconceptualized, but are there any lingering effects? PROF. BENTLY: Certainly the concerns of the Select Committee of 1862, that making trademarks transferable would make them facilitators of fraud as much as preventers of fraud, continued because trademarks in the 1875 Act were only made transferable with the business. The rule of no transfer of trademarks in gross was familiar to any lawyer until 1994. So there are some indelible imprints of fraud. And of course, the test of infringement of trademarks for a long time, at least until the 1938 Act, in the United Kingdom was based around the same test, likelihood of deceiving consumers. So yes, the imprint of fraud did carry through, despite the conceptualization of property. PROF. LEAFFER: Andrew Bridges has a comment he would like to make. MR. BRIDGES: Yes. On the effect of language and discourse and how it is used to justify, let me move into the copyright realm, where I think it is no accident that Jack Valenti and many other persons like to refer constantly to “theft,” as opposed to “infringement.” I think that is because they believe that word triggers an emotional response. Fortunately, none of my clients has been accused of murder. However, my IP case clients have been accused of rape by plaintiffs saying that my clients were engaging in “artistic rape.” Why is the language used? It is used like a smoke bomb to be thrown in to a courtroom to stun the judge and say, “Oh okay, we’ll go along with it.” When I defended the MP3 player in a case, just the creation of an MP3 player, the antecedent of the iPod, the word “piracy” was used throughout, and the plaintiffs loved to roll the word “rip” off their tongues to talk about the process of creating a computer file from a CD. There is a reason for this. Of course, the granddaddy of them all is Jack Valenti invoking, not merely “rape” but also “murder,” when saying that the Sony VCR/Betamax “is to the American public as the Boston Strangler is to the woman home alone.”150 If this language is not effective in perverting the discourse, then why do people use it? I think they use it because they expect it to pervert the discourse. I see right now an interesting development in copyright law, the import of negligence concepts into secondary liability. You wouldn’t know this, but Justice Cardozo in the New York Court of Appeal in the Palsgraf case said: “We all know that copyright owners are in the zone of foreseeable danger for infringement.”151 And Learned Hand, in the Carroll Towing case, tells us that the expected cost of avoiding the infringement by the technology provider is “less than the expected harm to the person in the zone of foreseeable danger.”152 Then, under Learned Hand’s B < p × L formula,153 there is now a negligence 150 Home Recording of Copyrighted Works: Hearing on H.R. 4783, H.R. 4794, H.R. 4808, H.R. 5250, H.R. 5488, and H.R. 5705 Before the Subcomm. on Courts, Civil Liberties and the Admin. of Justice of the H. Comm. on the Judiciary, 97th Cong., 2d Sess. (Apr. 12, 1982) (statement of Jack Valenti, President, Motion Picture Association of America, Inc.), available at http://cryptome.org/hrcw-hear.htm. 151 Palsgraf v. Long Island R.R. Co., 248 N.Y. 339; 162 N.E. 99 (Ct. of Appeals of N.Y, 1928). 152 United States v. Carroll Towing, 159 F.2d 169 (2d Cir. 1947). 153 The calculus requires that financial liability should be imposed for a negligent tort only if the burden of preventing the injury does not exceed the magnitude of the injury multiplied by its likelihood of occurring. The rule, also sometimes referred to as the “Hand Test,” finds negligence when the actor’s burden (B) is less than the probability (p) of harm, multiplied by the degree of loss (L): B < p × L.

946 S E S S I O N X I : TR A D E M A R K duty from defendants to a plaintiff. These concepts are used very, very forcefully, and I think we have to watch out for them. PROF. LEAFFER: Justin, you have something to say? PROF. HUGHES: Yes. First of all, Andrew, you have gone from words to concepts. I don’t think saying a negligence test, or concepts brought from negligence over, is the same thing as critiquing someone’s use of loaded language. I think those are vastly different things. You may disagree that the negligence test or the negligence analysis applies, but it is a rigorous analysis. It is not the same thing as the complaint you might bring against the use of piracy or rape or murder, et cetera. Now, I regret that we are still talking about Jack Valenti, and I am sure, Andrew, you never use any kind of strong metaphors in your defense of clients. But in the world of low protection it is amazing how listening to Britney Spears is constantly referred to as “freedom.” MR. BRIDGES: I don’t use that. PROF. HUGHES: But there are strange metaphors applied on both sides. The only thing, though, that I did want to take you to task for is no one should walk out of this room thinking piracy is a new spin. The use of the word “piracy” to describe infringement in trademark law and copyright law extends at least back to the 19th century, and in the case of copyright law or in the case of authors’ rights the truth is the word “piracy” was more ubiquitously used in the United Kingdom before the rise of the word “copyright.” So don’t let anyone give you the shimsham that “piracy” is a new word being foisted upon you. It might load the discussion, but the discussion has been loaded since the eighteenth century. So don’t let anyone tell you that about the new word “piracy.” It is not new. It is older than “copyright.” MR. BRIDGES: My point wasn’t that it was new. My point is that was shimshamming. PROF. LEAFFER: Andrew, you got the last word. Thank you very much. A big hand for our panel and for the audience.

SESSION TRADE PART A: THAILAND ANDXII: COMPULSORY LICENSES

SESSION XII: TRADE

Part A: Thailand and Compulsory Licenses

Moderator PROF. SUSY FRANKEL

Victoria Univerity of Wellington (New Zealand) Speakers JAMES LOVE

RICHARD KJELDGAARD

Director, Knowledge Ecology International (Washington, DC)

Associate Vice President, International Intellectual Property, PhRMA (Washington, DC)

JEFFREY P. KUSHAN

Sidley Austin LLP (Washington, D.C.) Panelist PROF. SIR HUGH LADDIE

Rouse & Co. International; University College London Contributor WEERAWIT WEERAWORAWIT

Ministry of Commerce (Bangkok, Thailand) PROF. FRANKEL: Welcome to the Thai Compulsory Licenses session. I’m Susy Frankel. I am the moderator for this session. We have three excellent speakers, James Love, Richard Rjeldgaard, and Jeffrey Kushan, who I will leave to tell you their points of view as we progress. And we have Professor Sir Hugh Laddie as a commentator. My task is to introduce this subject by summarizing the international legal framework relating to compulsory licensing. The speakers will then give their various perspectives. As I understand it, the issue before us is the creation of three pharmaceutical compulsory licenses under Thailand’s law. Two of the pharmaceuticals concerned can broadly be

948 S E S S I O N X I I : T R A D E described as AIDS drugs and one for the treatment of heart disease.1 Some of the discussion that we are likely to hear from Jamie Love relates to the World Health Organization’s distinctions between these types of illnesses.2 The implications of making any sort of distinction provides a very interesting political and policy background to this discussion. The international law in play here is primarily the TRIPs Agreement, Article 31.3 The Thai laws4 that led to these licenses would need to comply with Article 31 of TRIPs. That Article is not entitled “compulsory licenses,” but, as many of you know, is entitled “Other Use Without Authorization of the Right Holder.” There are historical reasons for that. In TRIPs, the word “compulsion” did not have “a diplomatic air.” I am not sure that “without authorization” does not have its own implications. Under Article 31(b), the right holder should be consulted about such licensing.5 However, that consultation requirement is waived in the case of “national emergency of other circumstances of extreme urgency, or in cases of public non-commercial use.” It is 1 During 2006, the Thai government granted compulsory licenses for three patented drugs to the Government Pharmaceutical Organization of Thailand: On Jan. 26, 2006, for the heart disease drug clopidogrel (Aventis-Sanofi’s Plavix®) and the HIV/AIDS drug, lopinavir/ritonavir (Abbott’s Kaletra®); Nov. 29, 2006 for the HIV/AIDS medicine, efavirenz (Merck Sharp & Dohme’s Stocrin®). The compulsory licenses were granted on the ground that Thailand is suffering a health emergency and the same are necessary for the government to fulfill its obligations of providing universal access to medicines to its people. 2 See World Health Organization, Medicines Policy and Standards, Technical Cooperation for Essential Drugs, available at http://www.who.int/topics/essential_medicines/en/; see also World Health Organization, Public Health, Innovation and Intellectual Property Rights, Report of the Commission on Intellectual Property Rights and Public Health (Apr. 25, 2006), available at http://www.who.int/intellectual property/report/en. The World Health Organization has recommended the use of compulsory licenses where there is “abuse of patent rights or a national emergency” in order to ensure that drug prices are consistent with local purchasing power. UNAIDS has also recommended the use of such licenses, as provided under the TRIPs Agreement, “such as in countries where HIV/AIDS constitutes a national emergency. See http://www.southcentre.org/publications/publichealth/publichealth-12.htm#P1471_149764. 3 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_e.htm. “Other Use Without Authorization of the Right Holder — Where the law of a Member allows for other use [other than that allowed under art. 30] of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected.” Id. art. 31. 4 See Thai Patent Law, available at http://www.jpo.go.jp/shiryou_e/s_sonota_e/fips_e/pdf/thailand/patents_ act.pdf. Under Thai Law, § 46(2) states that an “applicant for [compulsory] license must show that he has made an effort to obtain a license from the patentee . . . .” However, this is only in case of commercial ventures. § 51 provides for compulsory license to “relieve a severe shortage of food, drugs or other consumption items . . . ” and does not require prior negotiations with the patentee. 5 TRIPs Agreement, art. 31(b): “Such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use. In situations of national emergency or other circumstances of extreme urgency, the right holder shall, nevertheless, be notified as soon as reasonably practicable. In the case of public non-commercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly.” See also TRIPs Agreement, art. 31(c) (“the scope and duration of such use shall be limited to the purpose for which it was authorized, and in the case of semi-conductor technology shall only be for public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive”); TRIPs Agreement, art. 31(d)–(e) (license is non-exclusive and non-assignable); TRIPs Agreement, art. 31(g) (the licenses must terminate when the circumstances that led to their issuance have ceased to exist and are unlikely to recur); TRIPs Agreement, art. 31(h) (the country must pay adequate remuneration for each use of the license, taking into account the economic value of the authorization); see also discussion of Article 31(k), supra note 37 and accompanying text.

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“public non-commercial use” that forms the background to the Thai compulsory licenses. Possibly a “national emergency”6 could have been declared, but I understand that such a declaration has not been made. Before I hand over to the speakers, it is important that you appreciate the more recent TRIPs Amendments. Article 31bis,7 which resulted from the Doha Declaration,8 is not the relevant provision here. The interesting nuance is the manufacturers of the licensed pharmaceuticals are in India. Nonetheless, it is not a 31bis license because the pharmaceuticals were not patented in India. In terms of the international relationship, that is an important distinction. This is an Article 31 relationship. I would like to hand over to our first speaker, James Love, who needs no introduction. MR. LOVE: How many people here have read something in the newspapers or seen something on the Internet about the fact that Thailand has issued compulsory licenses on patents on medicines? How many people here have read that in March of this year the Italian government issued compulsory licenses on a prostate drug that has a secondary use for male pattern baldness? That’s very good, okay. I think we are having a discussion here today about Thailand because there is an uneasiness that people in the North have that people in poor countries should be allowed to issue compulsory licenses on AIDS drugs. It is almost a paternalistic kind of thing: Can we really allow people in Thailand to just do whatever they want with patents? Maybe that would be some threat to the system. Here are some facts about the Thailand situation. They have probably three times the infection rate that the United States does for people that have AIDS. First-line AIDS treatments cost nowadays between $110 and $150 per year. The reason they are first-line is because they are cheap and they are generally available off-patent in lots of countries. When they develop resistance to those products, they are moved on to drugs that are referred to as second-line products. One of the drugs for which Thailand issued a compulsory license was a product manufactured by Abbott, a government-funded invention called Kaletra®. Kaletra was costing over 11,000 baht per month in Thailand, or close to $4,000 a year. And that’s just for one drug that you need in a cocktail. You need two other drugs to make the cocktail. Moving people from a regime that costs $100-to-$150 a year to a regime that is going to cost $4,000 a year is a huge fiscal shock, as you can imagine, to the country that is trying to provide AIDS treatment. There are probably a couple of million people in developing countries that are on 6 Article 5(c) of the Doha Declaration states: “Each member has the right to determine what constitutes a national emergency.” 7 See Annex to the Protocol Amending the TRIPs Agreement, available at http://www.worldtrade law.net/ misc/tripsamendment.pdf. Article 31bis: “1. The obligations of an exportng Member under Article 31(f ) shall not apply with respect to the grant by it of a compulsory licence to the extent necessary for the purposes of production of a pharmaceutical product(s) and its export to an eligible importing Member(s) in accordance with the terms set out in paragraph 2 of the Annex to this Agreement. 2. Where a compulsory licence is granted by an exporting Member under the system set out in this Article and the Annex to this Agreement, adequate remuneration pursuant to Article 31(h) shall be paid in that Member taking into account the economic value to the importing Member of the use that has been authorized in the exporting Member. Where a compulsory licence is granted for the same products in the eligible importing Member, the obligation of that Member under Article 31(h) shall not apply in respect of those products for which remuneration in accordance with the first sentence of this paragraph is paid in the exporting Member.” 8 World Trade Organization, Ministerial Declaration, Adopted at 4th WTO Ministerial Conference in Doha, Qatar, 9–13 Nov. 2001, available at http://www.wto.org/english/the wto_e/minist_e/min01_e/mindecl_e.htm.

950 S E S S I O N X I I : T R A D E AIDS treatments. Almost all of them were started out on the very cheap regime of nevirapine/d4T/3TC. They are all going to burn through that initial regime at some point and have to move on to the second regime. So what we need, on the one hand, is a pipeline of new products. On the other hand, you have to be able to afford the costs of doing this. Thailand figured, I think correctly, that there was no way that they could move people from a first-line to a second-line regime — and a lot of other countries are in the same position — unless they dealt with something in the high-cost (second-line) regime. Thailand issued compulsory licenses on efavirenz on World AIDS Day and on Abbott’s product. Even though they had had discussions about pricing of the products, they did it under a provision of the national law that allowed them to issue the license without having formally gone through a negotiation on making the patent available on “reasonable commercial terms.” Susy mentioned two grounds under which you can do this. First, to say non-commercial public use — sometimes generically referred to and defined in the law in the United States as “government use”9 and in the United Kingdom as government use or “crown” use.10 Second, as she also mentioned, in cases of an emergency. There is a third case, and that is when the license is issued as a remedy to an anticompetitive practice,11 including, for example, on a refusal-to-license case12 or if the price is excessive. The Italian case I mentioned at the beginning was the third compulsory license in Italy since 2005 on a pharmaceutical drug.13 One was on a migraine drug, one was on Proscar, and the third one was on an antibiotic. All three of those cases were refusal-to-license cases, which permitted export of the product from generic manufacturers in Italy to other countries in the European market. None of those have really received any attention in the Western press. In all three of those cases, there was no obligation specifically in the TRIPs for prior negotiation of “reasonable commercial terms.” A lot was made in the Thai case about the fact that the companies were saying that they wanted a period of negotiation. What the companies were primarily trying to do was just stop Thailand from issuing the compulsory licenses. One way they thought they might do that was if there was a period when it was announced that they were talking about a 9 Pursuant to 28 U.S.C. § 1498, the government may use patents without a license, and the patent owner’s sole remedy is to seek compensation. 10 U.K. Patent Law, art. 48(A)(1)(b). 11 The United States is probably the country with the richest experience in the granting of compulsory licenses to remedy anticompetitive practices and for governmental use, including national security. More than one hundred such licenses have been granted. For a list of compulsory licenses granted in the United States prior to September 2001, see http://www.cptech.org/ip/health/cl/us-cl.html. See also F.M. Scherer, Comments in Competition Policy and Intellectual Property Rights in the Knowledge-based Economy (Robert Anderson & Nancy Gallini eds. 1998). 12 This ground is contemplated, for instance, in the U.K. Patent Law (Art. 48(3)(d)) and in China’s Patent Law (Art. 51). 13 See Press Release, Italian Competition Authority, Italian Competition Authority ruled Merck must grant free licenses for the active ingredient Finasteride (Mar. 26, 2007), available at http://www.agcm.it/agcm_eng/ COSTAMPA/E_PRESS.NSF/92e82eb9012a 8bc6c125652a00287fbd/28653b373e56772ac12572ab003a4d68; Press Release, Italian Competition Authority, Italian Competition Authority ruled Merck must license manufacture of the antibiotic Imipenem Cilastatine (June 21, 2005), available at http://www.agcm.it/agcm_eng/ COSTAMPA/E_PRESS.NSF/92e82eb9012a8bc6c125652a00287fbd/4d1b5a8692226567c125702800540161? OpenDocument&Highlight=2,patent; Press Release, Italian Competition Authority, Pharmaceuticals: Antitrust says Glaxo has made amends and abuse of dominant position discontinued – Granting of licence opens ways for manufacture of generic migraine drugs [Sumatriptan succinate], (Feb. 26, 2006) available at http:// www.agcm.it/ agcm_eng/COSTAMPA/E_PRESS.NSF/92e82eb9012a8bc6c125652a00287fbd/634fe21dc342c220c125711 d003692c3?OpenDocument&Highlight=2,patent.

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compulsory license. They could then get the United States Trade Representative (USTR),14 or they could get the European Commission or some of the Member States in Europe, to put some pressure on the Thai government not to do it. The next thing that I think really catapulted this into a higher level of publicity was when the Thai government issued a compulsory license for a non-AIDS drug, Plavix®, a drug for heart disease. Plavix® was priced by the patent owner at $2.00 a day in Thailand, a price that the Thai government said 80 percent of the people that needed the drug could not afford. The Thai government issued a compulsory license on January 26, 2006. They bought a cheap version of the product from an Indian supplier. They make it available in the public health service in Thailand, but they do not compete with the patent owner in the private sector for people that can afford to pay the higher price. A lot of people have suggested that maybe people in Thailand should not get treatments for heart disease, because it is not an AIDS drug, as if there is something magical about AIDS. I was thinking, before AIDS, maybe nobody in developing countries ever got sick of anything, because, apparently, in the view of some people, AIDS is the only basis under which you might consider a compulsory license. But it is an absurd notion that only AIDS would be a public health concern in a developing country. In fact, I think it is an appalling assertion that anybody would even assume that only a handful of diseases would be of importance to a country like Thailand. Heart disease is, in fact, the leading killer of men and women in the world, North and South. But even without those kinds of numbers, what Thailand is trying to do is to establish that people that live in Thailand have access to medicine, something the United States agreed to in 2001 when they signed the Doha Declaration. My time is up, but the one thing I want to say is that there is nothing in the World Trade Organization (WTO) agreement and there is nothing, in our opinion, in the Thai patent law that is inconsistent with what the Thai government did.15 In fact, if they had not issued these licenses, the consequence would be threatening the sustainability of its AIDS program. In terms of their efforts to move to patents on heart disease drugs and cancer products, they are trying to make a more general statement about access to medicine. Thank you. PROF. FRANKEL: Thank you. Next we have Jeff Kushan. MR. KUSHAN: When I was asked to participate, I thought I would take a more mechanistic look at the TRIPs Agreement and look at the issue of government/public non-commercial use, because that seems to be the justification that the Thai government is pointing to for exercising the path that they did take in the compulsory licensing procedure. I do not know all the details, in part because, it seems, not all the details are actually known by anybody. That is part of the problem that exists in this kind of process, which is somewhat top-down decision making from a government agency.16 In the TRIPs Agreement, before you get to Article 31, you have a first speed bump, and 14 On the USTR’s engagement in the Thai case, see Letter from U.S. Trade Representative Susan Schwab to Knowledge Ecology International, Feb. 8, 2006, available at http://www.cptech.org/ip/health/c/thailand/schwab_ letter.pdf. 15 See Thailand Ministry of Public Health and The National Security Office, Facts and Evidences on the 10 Burning Issues Related to the Government Use of Patents on Three Patented Essential Drugs in Thailand, Document to Support Strengthening of Social Wisdom on the Issue of Drug Patent (February 2007), available at http://eng.moph.go.th/SpecificHealth/index.php [hereinafter 10 Burning Issues]. 16 See id.

952 S E S S I O N X I I : T R A D E that is Article 30.17 That is essentially saying that there are certain types of intrusions on the patent right that are going to be allowed to occur because they do not have an impact on the exercise of those rights. Then you get into Article 31, “Other Use Without Authorization of the Right Holder.”18 Historically, my recollection is that there may have been a few motivations for how we ended up with that title. One is that there were these classes of intrusions that were called “compulsory licenses.” Then the U.S. government woke up at some point in the process of the negotiaions and said: “Wait, we have some other stuff that we have to have captured by the Article 31 authority because it is stepping over the boundary of what Article 30 was designed to protect,” and that is where the U.S. government is going to be infringing the patent and asserting that defense against an injunction being imposed against it to prevent it from carrying out its “government function.” In the United States, we have that authority under 28 U.S.C. § 1498.19 It is actually a very, very old statute, enacted in 1910. It was designed at the time to let patent owners get something out of the government instead of just watching the government claim sovereign immunity. That was the original motivation for Section 1498. As it is applied, Section 1498 in the United States looks at the actions that are necessary for the government to carry out its function. In the vast majority of instances, it is going to be a setting (typically, a military contracting provision) where the government operation is conducting an activity and it simply cannot be interrupted by the impact of a patent injunction.20 In the course of that exercise of government authority, what the government says is: “Under 1498, you cannot necessarily get an injunction against me, but we will pay you the value of what we have stepped on in terms of your patent rights.” So they use a concept of compensation that is designed to reflect the value of the authorization, perhaps more in line with an eminent domain theory than what you might see in terms of a conventional licensing analysis. In Article 31 of the TRIPs Agreement, you see a very common structure governing the intrusion on the patent right by a third party. If the government is going to issue a compulsory license to a third party, there is a whole boatload of provisions that have to be walked through. But one of the concepts that was embedded in the Article 31 structure was that there are the “normal” settings, where that exercise of authority is going to be invoked to issue a compulsory license, and then there are going to be “extraordinary” settings. One is the national emergency justification, where it is impractical to enter into or impose a requirement for initial consultations with the patent owner. Then you had the United States saying: “Wait. We have public noncommercial use. That is not really a compulsory license, in the sense that we, the U.S. government, are not going to be making products and entering the market to compete with the patent owner’s 17 TRIPs Agreement, art. 30 (“Exceptions to Rights Conferred — Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties.”). 18 Id., art. 31(h) (“[T]he right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization.”). Section 48 of the Thai Patent Act states that: “Where a compulsory license is granted under Section 46, 47 or 47bis, the patentee shall be entitled to remuneration.” Section 46(2) provides little interpretative guidance, as it states that the remuneration must be “reasonably sufficient under the circumstances.” 19 See supra note 9. 20 For a discussion of compulsory licensing, government use under Section 1498, see http://www.cptech.org/ ip/health/cl/us-1498.html.

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product. We are just stepping on your patent rights in the course of carrying out one of our government programs.” In that setting, the licensing structure was akin to the nontraditional compulsory licensing process. Finally, for all the other situations, everybody is assuming there is going to be some interchange between the patent owner and the desirers of the license before there is a mandatory license from the government. In that setting, Article 31(b)21 is the rational way of addressing the use of a patented invention: You go talk to the patent owner and you see if you can secure a license on reasonable commercial terms. If you cannot and it is impossible to do that, then you can invoke this path through the government to force the licensing. The thing that is striking about the scenario in Thailand is that it seemed to come out of the blue. Instead of there being some effort to define a need for a certain volume increase in procurement of a drug product, it just was, “We are going to do this.” The reason that is incompatible way with a healthy way of using these patent rights and using the systems around the patent rights is that it is simply not providing the easiest path forward. If there were a need for a product in Thailand that was outside of the budget or outside the constraints of the Thai government, the first step should have been to contact the producer of the product — they are actually selling the product there now — and see if there could be some remedy provided. I will leave it at that. I wanted to give just a little bit of background on the public non-commercial use, just from my historical experience with it. PROF. FRANKEL: Thank you. Richard. MR. KJELDGAARD: Thank you very much. I work for Pharmaceutical Research and Manufacturers of America (PhRMA). My responsibility is intellectual property issues outside the United States. PhRMA, as most of you know, is the trade association for the research-based pharmaceutical industry. I am going to comment on some of the rationales that have been provided for the compulsory licensing activity that has occurred in Thailand. The situation there has been analogized by some authors to be similar to the denial of injunctive relief in patent-infringement suits which is occurring in the United States, and secondly, analogous to antitrust remedies or conditions that are imposed on merger situations in the antitrust context by the Department of Justice or the Federal Trade Commission.22 In my view, neither of those situations is at all analogous to what is occurring in Thailand or serves as a rationale of any sort for that activity.23 Let me turn first to injunctive relief, and the denial of injunctive relief, post eBay.24 Most of you are familiar with that decision. It’s a decision of the Supreme Court that remanded to the Federal Circuit a case in which injuncttive relief had been granted. The Supreme Court said, “You have to ensure, Federal Circuit, that you take into account all four of the standard criteria applied in all other cases of equity to determine whether or not injunctive relief is available.” Since that time, there have been, I believe, twenty-four cases decided on permanent

21

Their scope of use must be limited to the purpose for which the license was authorized. See supra note 5. E.g., U.S. Antitrust authorities ordered compulsory licenses in the Ciba-Geigy and Sandoz merger (1997) in relation to cytokine products, and as a condition for approval of Dow Chemical’s acquisition of shares in RugbyDarby Group Companies. 23 See Press Release, PhRMA, Protecting Patent Rights in Thailand (Dec. 1, 2006), available at http://www. phrma.org/news_room/press_releases/protecting_patent_rights_in_thailand/. 24 eBay Inc v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006). 22

954 S E S S I O N X I I : T R A D E injunctive relief and preliminary injunctive relief under eBay.25 In twenty-one of those cases, injunctive relief has been granted; in five cases, injunctive relief has been denied. So in other words, in about 75 percent of the cases so far, injunctive relief has been granted. When you crack open the cases that are being relied on to provide an analogy to the Thai situation, you have to crack into those five cases in which injunctive relief has been denied. When you look at those, you will benefit from reading, first, the concurring opinion of Justice Kennedy in the eBay case, where he said he thought it likely that the most frequent situations in which injunctive relief would be denied would be those (2) in which the parties weren’t competitors, (2) where the patented invention formed merely a component or a small part of the accused device, or (3) potentially, business method patents. When you look at the five — potentially six, but I think it is five — cases in which injunctive relief has been denied, you will see that they are indeed cases where the parties are not direct competitors and the patented thing forms a component of the whole thing that is accused of infringement. Why does that matter? It is pretty clear that in the situation where injuncttive relief is being denied there is no real change being imposed on the competitive situation. The parties are not direct competitors. In the Thailand situation, it is quite the contrary. A dramatic change in the competitive environment is being imposed. The patent owner there is being crowded out. Essentially, the asset is being destroyed. The asset is not being destroyed in the context of a denial of injunctive relief in these cases. Let me turn briefly to the antitrust context, which is even more distantly related to the Thailand situation. As you know, the government has wide authority to impose remedies as sanctions for situations where companies are found to have violated the antitrust or anti-competition laws. Those remedies include transfer of assets, transfers of property, including licenses of intellectual property. That has occurred on occasion. What is important in those situations is that when confronted with the finding that you have been in violation, you really have two choices as a patent owner: to go along with the transfer of the assets or face a fine. So you do have something of a choice in those situations. In the merger context, there is a condition sometimes imposed by the regulatory authorities to grant approval for a merger, which includes the spinning-off of certain assets, which can include intellectual property rights. There again, you come to the point of decision making with the regulatory authorities on whether or not you are going to go through with the merger, based on that conditionality. You are either willing to pay that price or not. It is a voluntary situation. Prior to making that final decision, you engage in negotiations with the government. In both those situations — that is, the enforcement of the antitrust laws and the merger situation — the government has to prove that you have done something wrong and that you have created some sort of injury to competition. In the Thailand situation, neither of those situations occurs. You have no opportunity at all to influence the outcome. That is, there is no discussion. Certainly they don’t prove anything at all. You have no choice in the end, as you do in the merger context, or even in the enforcement context. Your asset is destroyed in Thailand; it is not destroyed in the United States. When the assets are transferred from one company to another, it is for the 25 For a discussion of cases, see Virginia K. Demarche, Injunctions After eBay v. MercExchange, available at http://www.fenwick.com/docstore/Publications/Litigation/Injunctions_After_eBay.pdf.

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purpose of promoting competition, with the full expectation that those assets are going to be asserted vigorously, as they normally are here in the United States. So, actually, it is more the antithesis of what Thailand is doing, rather than providing an analogy. From a policy standpoint, I would like to say that the access-to-medicines discussion seems too often to be posed as one where you have to choose either access or intellectual property protected innovation. That is a false premise. In fact, we need both, and we need to find ways of doing both. There are a lot of policy options that should be considered before choosing one. In the Thailand situation, when the government took over, they cut the Ministry of Health’s budget by $12 million, increased the salaries of government officials by $9 million, and started destroying properties to help make up the difference. You know, that is not necessarily something that one should applaud. We should actually be encouraging Thailand to spend more on health care. Health is a much broader problem than simply access to drugs. But there are a lot of policy options that are in play. This isn’t a single-variable equation. There are multiple variables. Unfortunately, in these debates, those other variables are too rarely discussed. Thank you very much. PROF. FRANKEL: Thank you. Shortly we will turn to questions, but before we do so we have Sir Hugh Laddie with some commentary. PROF. LADDIE: This topic actually raises fundamental questions about IP rights. The great thing about patents is that you secure a monopoly, and because you secure a monopoly you can command whatever price you like, subject of course to the customer going somewhere else and finding an alternative. If you make a better photocopying machine, you can put the price up as high as you like — a million dollars a photocopying machine. It won’t work because the consumer can go and get a photocopying machine from somebody else. Of course, in the case of patents for pharmaceuticals, that competitive restraint doesn’t work terribly well in many cases because, partly for emotional reasons but sometimes for good scientific reasons, there may be no alternative for the new treatment which is being developed, and only developed, because of the promise of large returns on the research that is being put into making the new product. So the result of patents in the pharmaceutical field is that prices can be very, very high. What is a mistake, I think, is always to look at this as a problem which pits the developing world against the developed world. It is not. I did not know about Italian compulsory licenses, but in a way that is but an example of what goes on in Europe all the time.26 Every country in Europe effectively has a compulsory license system. It’s not called a compulsory license system. What European governments do is they say to the owners of the patents for drugs that they have to suppress their prices; governments set the prices that companies can charge for their drugs. This is not even a new consideration. Until we joined the European Patent Convention,27 we in the United Kingdom had extensive compulsory licensing provisions in relation to pharmaceutical products. They were used frequently. Italy didn’t have pharma26

See http://www.cptech.org/ip/health/cl/recent-examples.html. Convention on the Grant of European Patents, signed at the Munich Diplomatic Conference for the Setting up of a European System for the Grant of Patents on Oct. 5, 1973, 13 I.L.M. 270 (1974), 1160 U.N.T.S. 231 [hereinafter European Patent Convention], available at http://www.epo.org/patents/law/legal-texts/epc.html. 27

956 S E S S I O N X I I : T R A D E ceutical patents at all, because they thought it was in their national interest not to have them. The idea that you have some control over the upper end of prices for pharmaceuticals occurs everywhere. At the moment, in the United Kingdom there is a heated debate because some medical treatment test kits and pharmaceuticals have such a high price that the government, which pays most of the bill, has decided it cannot afford them all. So some treatments are not being made available on the National Health Service. This is causing extreme anger. But it is not happening just in the United Kingdom or Europe. You will see exactly the same thing in the United States. Busloads of people are going north to Canada to buy their drugs cheaper. I was not here at the time, but I am told that at the time of the anthrax scare in this country the television programs were full of commentators saying, “We are going to make anti-anthrax drugs compulsory if those nasty Europeans charge too much for them.”28 It is a real problem. That’s why I actually agree with Jeffrey’s point. It is not a matter of excluding IP rights, because if you exclude IP rights you will not get the research funds to make the new drugs. But — and it is an enormously important but — if you do not make pharmaceuticals or a medical treatment available at a price which allows them to be acquired, the tension will be enormous and the result will be that most countries, not just developing countries, will adopt government-inspired mechanisms to either force the price of the treatment down from the proprietor or make available alternative sources other than from the proprietor. It is no use burying your head in the sand. You cannot in the case of Thailand charge $4,000 a year for a treatment. It is not realistic. The tensions caused inside Thailand by trying to do it will result in government intervention. So what has happened in Thailand may not be the best answer, but it is an example of what is inevitable. PROF. FRANKEL: Hugh, I am going to thank you. That is a useful comparison. One of the features of this panel is that Mr. Weerawit Weeraworawit, Minister of the Ministry of Commerce, was scheduled to participate in this session. He, unfortunately, was not able to make it due to personal reasons.29 However, in his absence I would like to get the questions rolling by addressing a point that Jeffrey first raised. He suggested that this compulsory licensing “came out of the blue.” I will ask James Love to give us a bit more of the background of where this came from. Did it really come out of the blue? MR. LOVE: There were discussions between the Ministry of Health and the companies about prices all the time. There have been intense discussions about the price particularly of the second-line AIDS drugs. So there were certainly a lot of conversations about the AIDS drugs per se. I think in terms of the actual compulsory licensing procedure, a lot of the complaints 28 The anthrax scare in the fall of 2001 led DHHS Secretary Thompson to seek a large enough stockpile of ciprofloxacin (Cipro) to treat 10 million people. This quantity was far greater than the supply, and Bayer lacked the capacity to produce such a large quantity in a timely manner. October 16, 2006 Senator Schumer asked Thompson to issue compulsory licenses to generic manufacturers under 28 U.S.C. § 1498. See Press Release, Office of Senator Charles Schumer, New Cipro Source Could Dramatically Increase Supply — Federal Law Allows US to Purchase Generic Versions of Cipro Directly from Manufacturers; Would Significantly Reduce Prices, Increase Supply (Oct. 16, 2001), available at http://www. senate.gov/~schumer/SchumerWebsite/pressroom/press_releases/ PR00728.html; see also Executive Order to amend Executive Order 10789 (Oct. 20, 2001), available at http://www.whitehouse.gov/news/releases/2001/10/20011022-15.html 29 Weerawit Weeraworawit, Thailand Ministry of Commerce, submitted a paper, which is included as an Appendix to this chapter.

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that the companies have raised have been about the procedural issues, about the way the licenses were issued. Thailand basically chose a provision under “government use,” which they thought it was the best legal mechanism. One of the reasons they chose the mechanism they did is because the Health Ministry could go a government use authorization in Thailand, but if they used a different compulsory licensing mechanism, it would have been the Minister of Commerce or the head of the Patent Office that had to do it. There was a split in the government in Thailand between different parts of the government, which is not an uncommon thing for people to observe in government. So the Health Ministry preferred this system where the Health Minister could actually be a decision maker, which was the basic government use provision.30 I think at the end of the day it is less about the procedure than the fact that they did it at all. I think that has been the big issue. PROF. FRANKEL: I want to give an opportunity for questions from the audience. Perhaps during that there will be some responses. Does anyone have a question or comment? QUESTION [Prof. Martin Adelman, George Washington University Law School, Washington, D.C.]: Does Thailand have any mechanism for providing adequate compensation? You can get, as Jeffrey did, into the argument whether this is government or not. But let’s say the government simply does it. The United States could do it. We essentially threatened to do it with Cipro during the anthrax scare in 2001 and went to Roche. Then somebody told Tommy Thompson, “Yeah, you can do that, but you are going to be before the Federal Circuit paying big damages to Roche. Do you really want to do that?” Now, I have not heard of any mechanism in Thailand for getting adequate compensation for these good AIDS drugs, which would cost a lot of money. The last time I looked, the former Prime Minister of Thailand, who was deposed, is a billionaire. He could probably pay for it out of petty cash. Is there a proceeding where you can go and say, “Okay, you’ve stolen this, but to make yourself legal and not be a thief you will be required to pay adequate compensation?” PROF. FRANKEL: I will let Jamie and anyone else on the panel respond to that. I would like to channel their comments by saying Article 31 does require the payment of a reasonable remuneration. Your question is about that mechanism. QUESTIONER [Prof. Adelman]: Right. MR. LOVE: The obligation under TRIPs is that they have adequate remuneration. That is an issue that could be litigated before the WTO by a Member State if they wanted to. Now, the initial royalties were very low in the Thailand cases. We criticized the Thai government because we thought the royalties were too low. They were 0.5 percent of the generic price.31 We complained to the Thai government about it. They said that these were just their opening offers. If you read the Thai Act, the process is the government makes an offer and then the 30

See 10 Burning Issues, supra note 15. The Thai government has offered the patent holder a royalty of 0.5% under the compulsory licenses. Neither TRIPs nor the national law of Thailand expressly lay down what constitutes minimum or reasonable royalty. However, TRIPs Article 31(h) provides that “the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization;” and Section 48 of the Thai Patent Act states that “[w]here a compulsory license is granted under Section 46, 47 or 47bis, the patentee shall be entitled to remuneration.” Section 46(2) provides little interpretative guidance, stating that the remuneration must be “reasonably sufficient under the circumstances.” 31

958 S E S S I O N X I I : T R A D E companies are supposed to come back and make a counter-offer. It is actually just a negotiation. The legal mechanism by the rule of law in Thailand under the Thai law — as opposed to, say, for example, the American law, which is not the law that rules in Thailand — is the patent owners have the right to negotiate, and there is a process for doing it and an appeal process within the Thai system. The companies have really not done that. They are just not interested in negotiating the royalty on the product. What they prefer to do is to pick up the phone and ask USTR or the Secretary of Commerce of the United States to put pressure on the government to back down.32 They have not expressed much interest in negotiating the royalty.33 PROF. FRANKEL: Richard or Jeffrey, do you want to add to that? MR. KJELDGAARD: I will say this. I can’t address the specifics of discussions between companies and Thailand. As a trade association, we don’t do that. However, there was no apparent opportunity to appeal, at least the initial license, which was granted relative to the Merck product; it was just announced that that’s what it is. There is supposed to be one — and there may in fact be one — that could be put together in Thailand. But things are not as transparent as you might be accustomed to in the U.S. context. That does not mean that they won’t allow it in the future, but it isn’t apparent to us. Secondly, as to negotiations, once they announced these, there is just a flat-out dispute as to whether or not there is any real opportunity to discuss them.34 I don’t know if you have ever been in a room with Thai officials for thirty-to-forty-five minutes, but if you consider that a meaningful negotiation — well, you have to get into that kind of detail to really assess it. PROF. FRANKEL: Jeffrey, do you want to comment on that at all from the TRIPs perspective or any perspective? MR. KUSHAN: All I saw was a press release that just announced “this is the 0.5 percent royalty rate of the generic price.” That seemed to be designed to be the lowest possible price you could conceive of and still call it a royalty of some kind. QUESTIONER [Prof. Adelman]: One-half percent? MR. KUSHAN: Of the generic price. QUESTIONER [Prof. Adelman]: That’s an embarrassment. Don’t make an offer. MR. KUSHAN: Very quickly, the standard in TRIPs is that it is supposed to reflect the value of the authorization, which, even in the Thai equation, 0.5 percent of the generic price is not. Whatever the number is, it has to look at what the value would be if you had granted a voluntary license to somebody. PROF. FRANKEL: We have a quick right of reply from James and then a question over here. MR. LOVE: You should quote the actual provision of TRIPs rather than editing it in 32 On Dec. 21, 2006, more than 140 organizations and individuals sent a sign-on letter to U.S. Secretary of State Condoleezza Rice, and USTR Susan Schwab, asking the U.S. to stop any interference with the Thai efforts, after it was revealed that the U.S. embassy in Bangkok and the USTR offices in Washington had asked the Thai government to enter into negotiations with Merck before they execute a compulsory license on the AIDS drug. See http://www.cptech.org/ip/health/c/thailand/riceschwabthailand21dec06.pdf 33 Article 31(b) of TRIPs generally permits issuance of compulsory patent licenses only after the country has “made efforts to obtain authorization from the right holder on reasonable commercial terms . . . .” Nevertheless, the country may waive the negotiation requirement in cases of national emergency, extreme urgency, and public non-commercial use. Thailand appears to have waived the negotiation requirement under the argument that the licenses will be used for public non-commercial use. 34 See 10 Burning Issues, supra note 15.

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that way. The obligation of TRIPs is there has to be “adequate remuneration” and it has to take into consideration the “economic value of the authorization.” But it does not say what you said it does in the second part. And it certainly does not go down the road that the U.S. has in its eminent domain statutes. It is a different standard. It is a different country. It is actually not that much different in the Thai law than it is under the U.S. law regarding compulsory licensing of clean air patents or for civilian nuclear patents, which have a separate compulsory licensing authority that is completely different than Section 1498.35 MR. KJELDGAARD: What has been our experience under those provisions? MR. LOVE: The statutes are what the statutes are. MR. KJELDGAARD: We have never invoked those provisions. MR. KUSHAN: I want to comment on the eBay decision. If there is any compulsory licensing system on the planet that is inconsistent with TRIPs, it is the eBay decision. The eBay decision is not TRIPs-compliant at all. There is no obligation in the eBay decision to negotiate “reasonable commercial terms.” I will give you two royalties on this that you can look at: in the Toyota case, $25 per automobile transmission,36 and in DirecTV $1.60 per set-top box.37 Those are cases decided in the last six months in the United States by judges. PROF. FRANKEL: I am going to allow some more audience questions. QUESTION: I am curious if the panelists can express their opinion or maybe answer a question. I am not going to judge the wisdom of compulsory licenses, but it seems that there is a legal process under TRIPs if a country declares a health emergency. Forgive me if I have the facts wrong on this case. It does not seem that in this Thai case study, or in any other case that I know of, a TRIPs member has declared a crisis. Is that because it is too much trouble, or because they are dealt with by different ministries? PROF. FRANKEL: Is the non-commercial use the primary reason, rather than the national emergency? Does anyone want to add to that? MR. LOVE: A lot of countries do not like the national emergency provision because in some countries a national emergency, for example, means the suspension of civil rights. Thailand is actually a country that is not in a good situation in that respect right now. National emergency is a particular grounds. Noncommercial use is a different grounds. Remedy to anticompetitive practice is a different one. There is absolutely no obligation of TRIPs that you limit compulsory licenses to cases of public health emergencies. That is sort of the newspaper version of what TRIPs says; that is not the TRIPs version of what TRIPs says, and it is certainly not the WTO version of what TRIPs says. 35 See Clean Air Act, 442 U.S.C. § 7608 (mandatory licensing of air pollution prevention inventions); under Title 42, the Public Health and Welfare; 42 U.S.C. § 2183 (nuclear energy) (“The Commission may, after giving the patent owner an opportunity for a hearing, declare any patent to be affected with the public interest if (1) the invention or discovery covered by the patent is of primary importance in the production or utilization of special nuclear material or atomic energy; and (2) the licensing of such invention or discovery under this section is of primary importance to effectuate the policies and purposes of this chapter.”); see also NASA Office of Technology Commercialization Program Office, Note on Governmental Use as Eminent Domain (Oct. 25, 1999); National Institutes of Health, Report of the National Institutes of Health (NIH) Working Group on Research Tools (June 4, 1998) (“As a government agency, NIH may use and manufacture any patented invention, whether or not developed with federal funds, and authorize its use and manufacture by others for the United States, without a license, subject to liability for ‘reasonable and entire compensation.’”). 36 Paice LLC v. Toyota Motor Corp., No. 2:04-211, 2006 U.S. Dist. LEXIS 61600 (E.D. Tex. 2006), aff'd in part, vacated in part, 504 F.3d 1293 (Fed. Cir. 2007) (The appellate court vacated and remanded the portion of the district court's final order insofar as it related to the imposition of an ongoing royalty at a rate of $25 per infringing vehicle. In all other respects, the decision was affirmed). 37 Finisar Corp. v. DirectTV Group, Inc., No. 1:05-CV-264 (E.D. Tex., decided June 26, 2006).

960 S E S S I O N X I I : T R A D E MR. KUSHAN: I think one thing is difficult to pull out of this glossing over of the authority under Article 31(b). Speaking about national emergency, the public noncommercial use, the antitrust remedies — these are the pathways that bypass the interaction with the patent owner and take away the obligation to secure or an effort to get a license under “reasonable commercial terms.” The reason they are so narrow is that it is a very clear message throughout the TRIPs Agreement, in all the countries that are under the TRIPs Agreement, that you should try to interact with the patent owner before you take away their property right, because it is a very severe sanction to impose on the patent owner. The path of least resistance is to be in the setting where you are exempt from talking to the patent owner, because typically the patent owner and the person who wants a solution can, if they are forced to go into a room, find a solution. Now, that may not be attractive because it seems to be contingent on cooperation and interaction with the patent owner, but that is what the TRIPs Agreement envisioned. It says you must go and make an effort to get a license on reasonable commercial terms; only when that fails do you go down the path of taking away and suppressing the patent right through the compulsory license. MR. LOVE: Except for these three cases. MR. KJELDGAARD: That’s what I said. The point is you do not start with those and try to cram everything through an exception. You look at the solution as probably the most efficient solution, which is talking to the person who is selling the product in the market. That’s what seemed to be missing here. PROF. FRANKEL: I would add that Section 31(b) does not say you have to negotiate first. It says actually that you negotiate first, and then it says “except in certain circumstances,” which includes these exceptions. However, it does require there to be a time when you come back to the patent owner and negotiate the reasonable commercial terms. So there is a gateway at both of those points to address some of the concerns. MR. LOVE: I think it is understood that the standards for remuneration are different from when the government is using the patent than in a normal compulsory licensing case. There is a third case, too, which is Article 31(k) of the TRIPs, which waives the requirement for prior negotiation.38 It has a different system for remuneration under remedy to anticompetitive practice. The Italian compulsory license that was done on March 26, 2007 on the Merck product Finasteride was a zero-royalty compulsory license.39 It was actually lower than the Thai compulsory license. That was because it was a punitive remedy by the Italian Competition Commission because it was the second time they brought a refusal-to-license case against Merck in two years.40 PROF. FRANKEL: Does anyone else have any questions? 38 TRIPs Agreement, art. 31(k) (“Members are not obliged to apply the conditions set forth in subparagraphs (b) and (f ) where such use is permitted to remedy a practice determined after judicial or administrative process to be anti-competitive. The need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases. Competent authorities shall have the authority to refuse termination of authorization if and when the conditions which led to such authorization are likely to recur.”). 39 See Press Release, Italian Competition Authority, The Italian Competition Authority ruled Merck must grant free licenses for the active ingredient Finasteride (Mar. 26, 2007), available at http://www.agcm.it/agcm_eng/ COSTAMPA/E_PRESS.NSF/92e82eb9012a 8bc6c125652a00287fbd/28653b373e56772ac12572ab003a4d68. 40 See Press Release, Italian Competition Authority, The Italian Competition Authority ruled Merck must license manufacture of the antibiotic Imipenem Cilastatine (June 21, 2005), available at http://www.agcm.it/agcm_eng/COSTAMPA/E_PRESS.NSF/92e82eb9012a8bc6c125652a00287fbd/ 4d1b5a8692226567c125702800540161?OpenDocument& Highlight=2,patent.

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MR. KJELDAARD: The thing I would point out about Italy is, again, that was an antitrust remedy situation, which is not analogous at all. Yes, there was some apparently anticompetitive behavior in connection with a baldness therapeutic. That was important to the Italian regulatory authorities. QUESTION: I just wonder what lessons we learned since 2000 with the South African retroviral situation.41 It seems to me that six years later we haven’t really learned anything from that. Ultimately, it is all going to be decided in the newspapers and by publicity. It is going to go to a double-tiered pricing scheme. No one is going to deal with it in these situations, which is so controversial. What have both sides learned since those decisions? MR. LOVE: I think the idea that the newspapers are important is true. The primary norm-setting forum for compulsory licensing today is not the WTO dispute resolution process, where nobody goes on compulsory licensing disputes; it’s the Financial Times, BBC, CNN, and The Wall Street Journal. They are the places where people debate whether you should do compulsory licensing. That is where they just kind of make up what the legal norms are. Countries actually listen to that. I think probably half the people in this room get most of their information about the TRIPs Agreement from popular newspaper stories, which are just spinning by different people. PROF. FRANKEL: We will have a quick closing comment from Hugh. We will then take a break before the next TRIPs session. PROF. LADDIE: The problem will not be solved unless and until pharmaceutical companies and those who are users sit down and try to solve these problems before they get to this sort of dramatic event. But it has to be so. You cannot ask very poor countries to pay very high prices. On the other hand, poor countries must recognize that there has to be an inflow of funds to pharmaceutical companies to fund research. If you allow it to continue to be determined by this sort of extreme action, you will end up with people being polarized and people like Marty Adelman talking about theft. PARTICIPANT [Prof. Adelman]: It is theft. Call a spade a spade. PROF. FRANKEL: We will now have a break. Thank you. The next TRIPs session is in here, where I am sure many similar issues will be discussed. Please join me in thanking the panelists.

APPENDIX A Weerawit Weeraworawit Ministry of Commerce, Thailand, Bangkok (LEAVE ESTIMATED 12 PAGES FOR PAPER TO BE SUBMITTED)

41 South Africa granted compulsory licenses to the cocktail drugs for HIV/AIDS under the amendments to its Medicines and Related Substances Control Act in 1997. The Act allowed the import of unlicensed generic drugs to treat the millions of HIV and AIDS sufferers in South Africa. The Act also called for the creation of a committee to monitor drug prices and compel pharmaceutical companies to justify their prices. It proposes that doctors prescribe generic versions in place of brand-name drugs whose patents in South Africa have expired.

SESSION TRADE PART B: TRADE POLICY INXII: INTELLECTUAL PROPERTY

SESSION XII: TRADE

Part B: Trade Policy in Intellectual Property: Policy, Priorities, and Emerging Issues

Moderator ERIC H. SMITH

Smith, Strong & Schlesinger LLP (Washington, D.C.)

Speaker VICTORIA ESPINEL

Assistant U.S. Trade Representative for Intellectual Property and Innovation Office of the U.S. Trade Representative (Washington, D.C.) MR. SMITH: This panel is Trade Policy in Intellectual Property. We have a speaker who all of you know, who will be a speaker or a panelist for the next three sessions here. Victoria Espinel is Assistant U.S. Trade Representative (USTR) for Intellectual Property and Innovation. She is the key person on intellectual property issues for the U.S. trade agenda. Without further ado, let’s welcome Victoria. MS. ESPINEL: My name is Victoria Espinel. I’m the Assistant USTR for Intellectual Property and Innovation. My office is a relatively new office at USTR. In fact, we have not yet had our first-year anniversary. Of course, USTR has been involved in IP issues for a long time, but we decided, in June of last year, to create a separate office to focus on intellectual property issues, as well as more general issues of innovation, because IP has become such an important part of our trade agenda and, of course, it’s such a critical part of the U.S. economy. I thought I would touch briefly on some of the priorities that my office has at USTR, as well as some of the upcoming issues that I think will be priorities in the future, or will certainly be emerging issues for discussion. I am going to touch briefly on free trade agreements, on enforcement, and on regulatory barriers. This is sort of a subset of what the office does, but these are some of the key issues that we are going to be facing in the coming years.

964 S E S S I O N X I I : T R A D E I. FREE TRADE AGREEMENTS To start off with the free trade agreements, as many of you may already know, we have a very ambitious trade agenda at USTR. We have concluded sixteen free trade agreements since 2001 with trading partners in Latin America, in the Middle East, and in Asia.1 The most recent free trade agreement that was concluded was our free trade agreement with Korea, which was concluded twelve days ago.2 Like all U.S. free trade agreements, the Korea-U.S. Free Trade Agreement includes a very comprehensive intellectual property chapter.3 The IP chapter has provisions on international treaties that we will both sign up to. It has provisions on protection of trademarks, on protection of geographical indications, and on copyright, with particular attention given to some of the Internet and digital challenges that we face. There are provisions on patents, provisions on pharmaceutical data protection, and there are extensive provisions on enforcement that span civil enforcement, criminal enforcement, and customs enforcement. The free trade agreements that we conclude take the existing international agreements and then build on them. We view them very much as the gold standard for international IP agreements, both in terms of their scope and breadth and in terms of the high standards that they set. A. CONGRESSIONAL TRADE POLICY

Touching on one issue that has emerged recently that is related, at least in part, to the free trade agreements, some of you may be aware that the Democratic leadership of the House Ways and Means Committee recently announced a new trade policy.4 There are several aspects to this new trade policy. One aspect goes to possibly rethinking some of the provisions of recent free trade agreements concluded, in particular, with developing countries. The main focus of discussion has been on the free trade agreements that we concluded with Colombia,5 Peru,6 and Panama.7 I am not at liberty to discuss too many of the details of this, as there is ongoing discussion with our Congress about their trade policy and the best way to move forward on that. But it is, I think, something that will continue to be a hot topic as we move into the expiration of Trade Promotion Authorty (TPA).8 For those of you not familiar with TPA, it is legislation that gives us the authority to negotiate trade agreements. TPA also provides that when free trade agreements are concluded and they go to our Congress for a vote, they will be subject to an up-or-down vote. In other words, Congress cannot rewrite their provisions. They can look at the balance of the free trade agreement and decide if they support it overall to vote yes, or if they do not support it to vote no. 1

See http://www.ustr.gov/Trade_Agreements/Section_Index.html. Korea-U.S. Free Trade Agreement (KORUS FTA), concluded Apr. 1, 2007, signed June 30, 2007, available at www.ustr.gov/Trade_Agreements/Bilateral/Republic_of_Korea_FTA/Final_Text/Section_Index.html. 3 Id. ch. 18. 4 See, e.g., Press Release, U.S. House of Representatives, Ways and Means Committee, Senior Democrats Renew Call for Enforcement of Trade Laws, Mar. 9, 2007, available at http://waysandmeans.house.gov/news.asp? newstype=1&formmode=overview. 5 United States-Colombia Trade Promotion Agreement, signed Nov. 22, 2006, available at http://www. ustr.gov/Trade_Agreements/Bilateral/Colombia_FTA/Final_Text/Section_Index.html. 6 United States-Peru Trade Promotion Agreement, signed Apr. 12, 2006, available at http://www.ustr.gov/ Trade_Agreements/Bilateral/Peru_TPA/Final_Texts/ Section_Index.html. 7 United States-Panama Trade Promotion Agreement, signed Dec. 20, 2006, available at http://www.ustr.gov/ Trade_Agreements/Bilateral/Panama_FTA/Draft_Text/Section_Index.html. 8 The Trade Act of 2002, Pub. L. 107-210; 116 Stat. 933; 19 U.S.C. §§ 3803–3805 (also called the U.S. Trade Promotion Authority Act), available at http://www.state.gov/g/oes/rls/fs/2002/12953.htm. [Note: The President’s TPA authority expired July 1, 2007.] 2

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We believe TPA, while not absolutely essential to concluding free trade agreements, is critical to our ability to effectively do so. As I mentioned, the TPA legislation is set to expire at the end of June. As you are probably all aware, free trade can be a politically divisive issue in the United States. We at USTR believe very firmly that free trade is a benefit not just to the United States economy, but to the economies of our trading partners. We believe it creates alliances that we need, and we believe it creates economic opportunities, again, not just for the United States, but for our trading partners as well. Nonetheless, there are serious concerns in the United States that free trade can cause short-term losses for particular sectors or particular individuals. These are important concerns and they are ones that need to be addressed, but without forgetting the enormous benefits that the United States and the rest of the world get from increased competitive trade. I think these divisions over the U.S. trade agenda will likely be coming to a head in the next few months, as we move into the congressional debate over TPA, and intellectual property protection may well be a part of that debate. So I think this is undoubtedly set to be one of the hot issues in terms of trade and intellectual property over at least the next few months, if not longer. II. ENFORCEMENT A. ENFORCEMENT OF TRADE AGREEMENTS

Turning next to enforcement of trade agreements, this is something that is one of USTR’s main responsibilities. USTR is both the negotiator of trade agreements and also the enforcer of trade agreements. We work with our trading partners to both implement and enforce the obligations that they have under trade agreements, both at the World Trade Organization (WTO) under the TRIPs Agreement,9 and under the free trade agreements. We have various tools for enforcing trade agreements. One of the ones that is most well-known is something called the Special 301 Report that my office is in charge of. We are right in the midst of 301 season. The report comes out towards the end of April.10 The Special 301 Report has two parts. It sets out USTR’s IP policies and priorities for the coming year. It also ranks countries in terms of how they are doing or not doing in terms of protecting intellectual property. The Special 301 list has three categories. As I said, we are just a few weeks away from issuing the report, so we are very deeply engaged in internal government discussions over the outcomes under Special 301. When we are not able to reach agreement with our trading partners on their obligations, we do have another tool, which is dispute settlement, or litigation at the WTO and under the free trade agreements. Although USTR is criticized by some for not using dispute settlement freely enough or aggressively enough, our policy is to use it judiciously, when we feel we have no other option, when we feel we have no other way of resolving our differences with our trading partners, and it has become clear that dispute settlement is 9 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_e.htm. 10 Office of U.S. Trade Representative, Special 301 Report (Apr. 30, 20007), available at http://www.ustr.gov/ assets/Document_Library/Reports_Publications/2007/2007_Special_301_Review/asset_upload_file230_ 11122. pdf.

966 S E S S I O N X I I : T R A D E the only way for us to try to settle differences of opinion that we may have on the scope of obligations. As you may know, we recently filed two cases against China.11 We announced them on Monday of this week. They were filed in Geneva on Tuesday of this week. We filed these cases against China after lengthy consultations with the Chinese government. There is a panel coming up on this, and I will be talking about those in more detail shortly.12 But I mention them as the most recent example of one of the cases where USTR has decided it was necessary to move to dispute settlement. B. ENFORCEMENT AGAINST COUNTERFEITING AND PIRACY: COUNTERFEIT MEDICINES

In terms of enforcement, the term is also used generally to refer to counterfeiting and piracy. In that respect, I would like to refer to one issue that I think is of increasing concern and will be an increasing priority for our office, and that is the issue of counterfeit medicines. I think it’s impossible to overstate the social harm from counterfeit medicines. It is an area of counterfeiting which we fear is on the increase. We have various initiatives to try to address this problem, which I think is already quite serious, before it spirals even more out of control. Some of those are discussions with China and other trading partners, particularly on both increased enforcement actions and also control of the manufacture of ingredients that go into making legitimate medicines, but also, unfortunately, sometimes are filtered into counterfeit medicines. We are actively engaged in supporting existing international efforts to address counterfeit medicines, including efforts of the World Health Organization. We support as actively as we can some of our trading partners who are trying to address this. I would note in that respect India and Nigeria, in particular, both of whom are countries, among others, that are suffering very seriously from the problem of counterfeit medicines and are trying to take steps to address that.

11 Press Release, Office of the U.S. Trade Representative, United States Files WTO Cases Against China Over Deficiencies in China’s Intellectual Property Rights Laws and Market Access Barriers to Copyright-Based Industries (Apr. 9, 2007), available at http://www.ustr.gov/Document_Library/Press_Releases/2007/April/United_ States_Files_WTO_Cases_Against_China_Over_Deficiencies_in_Chinas_Intellectual_Property_Rights_Laws_ Market_Access_Barr.html. WTO Dispute DS362, filed by the United States Apr. 10, 2007: China — Measures Affecting the Protection and Enforcement of IP Rights. The four matters on which the United States requests consultations are: (1) the thresholds that must be met in order for cer-tain acts of trademark counterfeiting and copyright piracy to be subject to criminal procedures and penalties; (2) goods that infringe intellectual property rights that are confiscated by Chinese customs authorities, in particular the disposal of such goods following removal of their infringing features; (3) the scope of coverage of criminal procedures and penalties for unauthorized reproduction or unauthorized distribution of copyrighted works; and (4) the denial of copyright and related rights protection and enforcement to creative works of authorship, sound recordings and performances that have not been authorized for publication or distribution within China. Current information on this dispute can be accessed at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds362_e.htm. WTO Dispute DS363, filed by the United States Apr. 10, 2007: China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products. The United States requested consultations with China concerning: (1) certain measures that restrict trading rights with respect to imported films for theatrical release, audiovisual home entertainment products (e.g., video cassettes and DVDs), sound recordings and publications (e.g., books, magazines, newspapers, and electronic publica-tions); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications and foreign suppliers of audio-visual services (including distribution services) for audiovisual home entertainment products. C urrent infor mation on this dispute can be accessed at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds363_e.htm. 12 See infra Session XII, Part D, TRIPs and China: Should a Case Be Brought? Will It Be Brought?

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C. COUNTERFEITING — NEW CHALLENGES, NEW ACTIONS

The last thing that I will mention in the area of enforcement is that one of the challenges that we face today is the fact that the face of counterfeiting and piracy has changed rather significantly over the last ten years or so. Just to give a couple examples of that, the Internet has become much more prevalent. That is, of course, a great benefit in many ways, but it has created a scope and a distribution channel for piracy that can be quite difficult to combat. A second problem is the fact that counterfeiting and piracy have become increasingly sophisticated. It has become increasingly big business. The scale of counterfeit products and the scope of counterfeit products seem to be increasing. The packaging of counterfeit products, the sophistication with which they can compete with legitimate products in the retail chain and truly fool consumers, is increasing. This is a problem that we need to address, I think, in a new way. Part of that is trying to ensure that we have legal rules that are adequate to address the situation as it stands today. Part of that, as well, is increased international cooperation among our trading partners, because counterfeiting and piracy has become not a problem that just affects the country domestically, but has become very much of a global problem with a global distribution chain. One of the things that USTR has been and will continue to be very focused on is trying to increase international cooperation with our trading partners to try to address counterfeiting and piracy. I would mention that we have very active cooperation with Japan. We have been working closely with the European Union. We work closely, of course, with Canada and Mexico, two trading partners with whom we share borders. But we are reaching out and, in fact, are in active cooperation with a great number of other trading partners. That is something that I think we need to increase in the coming years, if we are to effectively get a handle on this problem. I believe there is a lot of interest from other countries in doing so. I think many countries have realized, like the United States has realized, that this is not something that we can do alone, domestically, that we have to have international cooperation if we are going to address it effectively. III. REGULATORY BARRIERS The third issue I will touch on is regulatory barriers. I think this is something that will become more and more of an issue. While this may not be pure IP, regulatory barriers can have an enormously negative impact on industries that depend on intellectual property. I will mention just very briefly a few areas: 앫 One is the area of competition law, antitrust law, and standards policy, and how that intersects with intellectual property rights. This area has already been discussed in earlier panels at this conference. I think this is going to become a bigger and bigger issue as we move forward, in terms of its implications for trade. 앫 Market-access barriers generally. In fact, one of the cases that we recently filed against China was on market-access barriers13 — again, not IP rules per se, but market-access barriers China had created that had a negative impact on the copyright industry and is at least an exacerbating factor in terms of why the rates of piracy in China are what they are. 앫 A third very general area is the debate over regulation versus market-oriented solu13

See Case DS362, supra note 11.

968 S E S S I O N X I I : T R A D E tions. There are many aspects of this, much more than I have time to get into today. But I think the recent debate over the French copyright law, DRMs, interoperability, and whether or not those are issues that should be driven by the market or those are areas that are appropriate for government regulation — I think those types of issues, which are already quite a focus today, will become even more so in the future. IV. CONCLUSION Besides the three issues that I have highlighted, my office oversees negotiations at the WTO and the Doha Round. We are engaged in probably fifty or sixty bilateral discussions at any given point in time, on a whole range of IP issues. We also have a range of enforcement mechanisms that I have not had the chance to touch on. I think I will close my remarks there. If there is time and interest in questions, I’m happy to take them. QUESTION: I wanted to ask a question about dispute settlement and the Free Trade Agreements. The angle that I come from is the U.S.-Australia Free Trade Agreement.14 In those provisions, as you know, there is the possibility of non-violation disputes. My first question is if that is in the Korea agreement. My second question, whichever way the first question is answered, is: from the USTR perspective, what kind of dispute is envisaged in terms of the fact that it is not a violation under TRIPs15 — and maybe the negotiations have not included TRIPs? MS. ESPINEL: There are no specific disputes that we have envisioned. It exists in TRIPs, as you know. There is currently a moratorium on bringing Non-Violation and Situation Complaint (NVNI) claims in place for the time being. NVNI provisions are part of most of our free trade agreements. I can’t talk too much about the details of Korea specifically, as the specific details are not yet public, although they will be very soon. But to go to your broader question, NVNI, as some of you probably know, is the ability to bring claims where there may not have been a specific facial violation, if a country’s policies or legislation nullify or impair the benefits that were expected to be achieved under the free trade agreements. There is, though, no specific violation or NVNI claim that USTR currently envisages with Australia, or with any of our trading partners for that matter. QUESTIONER: Since no one is asking, can I ask another question? Whilst there is no specific claim mentioned, one of the difficulties relating to the moratorium in TRIPs is to envisage how that would work with a minimum standards TRIPs Agreement. Given its origins in the GATT system and how that is more clear than a system that is designed to drive tariffs down rather than minimum standards, are you able to answer in a more broad sense how that works in that minimum standards framework, where it really is a transfer of a different kind of system that is part of the reason for the moratorium? Many people would argue it is difficult to visualize what that would look like in a TRIPs sort of situation. MS. ESPINEL: Certainly, USTR has no specific claim in mind at present. 14 U.S.-Australia Free Trade Agreement, Signed May 18, 2004, available at http://www.ustr.gov/Trade_Agreements/Bilateral/Australia_FTA/Final_Text/Section_Index.html. 15 Article XXIII of the GATT 1994 allows WTO members to make complaints about measures taken by other Members that nullify or impair benefits granted under a WTO Agreement, even if such measures do not conflict with the provision of the agreement or as a result of “any other situation” (“non-violation and situation complaints” or “NVNI”). Article 64.2 of the TRIPS Agreement, however, provides that non-violation and situation complaints “shall not apply to the settlement of disputes under this Agreement for a period of five years from the date of entry into force of the WTO Agreement.”

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I think it is true that it will work differently than if you were in a tariff situation. On the other hand, I think it is possible certainly for countries to set up a system where, while they may not be facially inconsistent with the agreement in TRIPs, they can essentially set up hurdles that would make it impossible to gain the benefits that were expected to be achieved under TRIPs. It is possible to speculate about examples of what those would be. I am hesitant to speculate because I think that would probably be interpreted as USTR having a particular agenda, and we don’t, on that. QUESTION [James Love, Director, Knowledge Ecology International, Washington]: I have two related questions. Last year, the number one complaint in the Special 301 Report list on the industrial property side had to do with efforts by the USTR to impose a system of exclusive rights on pharmaceutical test data in countries.16 Some people, including our group, have said that there need to be mechanisms in intellectual property regimes for pharmaceutical test data which permit something similar to a compulsory license that you do on a patent, so that you don’t have a situation where the test data is protected by a regime that is stronger than a patent effectively. I know that in the Andean Pact relations there were side letters and things like that. So one simple question is: Can a country that signed an FTA with the United States override the exclusive rights on pharmaceutical test data in the same way that they can override the exclusive rights on a patent? The second question I have is: We have on numerous occasions asked the USTR to consider chapters in FTA agreements that had to do with public goods and provision of public goods, and they think of those as a competing obligation to impose on our trade partners. It would be competing against, say, for example, higher IP rights all the time. In other words, it is a different way of thinking about the trade-related aspects of knowledge goods. One way is to just ramp up the IP rights all over the planet. The other idea is to try to get countries to do more in the public goods arena. I just wanted to know what your reaction to that was. MS. ESPINEL: Three things briefly. First, on the Special 301 Report, I would disagree — and I have heard this asserted before — that data protection is the number one issue. If you look at the 301 Report, it is mostly at this point focused on counterfeiting and piracy. That is not to say that USTR doesn’t believe pharmaceutical data protection is important and that it is not one of the priority issues we pursue. But just in terms of looking at the Report as a whole, at this point it is, I think, primarily focused on enforcement. By enforcement, I mean in this case counterfeiting and piracy. QUESTIONER [Mr. Love]: Can you override the exclusive right? MS. ESPINEL: As you mentioned, we have understandings with developing country trading partners with our free trade agreements. As you know, there are no international rules for exceptions to data protection the way there are for patents and copyrights and trademarks. There is certainly no generally accepted standard. That said, in the situation that you’ve described we certainly would not expect data protection to stand in the way. So, in recognition of that, we have entered into understandings with our developing country partners that make that explicit, that we do not believe that the FTA will stand in the way of countries taking necessary measures to protect public health. Many of our trading partners suffer from fairly significant public 16 Office of U.S. Trade Representative, Special 301 Report (Apr. 26, 2006), available at http://www.ustr.gov/ Document_Library/Reports_Publications/2006/2006_Special_301_Review/Section_Index.html.

970 S E S S I O N X I I : T R A D E health problems. We take those very seriously. We have had very intense discussions with our trading partners on those types of issues, and certainly we see the FTAs as being a benefit to the public health and not something that would stand in the way of what they felt they needed to do in public health. QUESTIONER [Mr. Love]: The last point was would you consider a provision in the FTA agreement on the provision of public goods? The current paradigm is to push in the IPR chapter strong privatization and exclusive rights in the area of knowledge goods. The idea of a public good thing would be to say, “The United States promotes open access to government-funded research by requesting people to put their research articles in publicly accessible archives on the Internet in a certain amount of time.” There are things that the United States does, like funding databases for the Human Genome Project or open source research on malaria vaccine and things like that, where the United States is trying to promote sharing of knowledge goods throughout the world. We would have an interest in having other people actually also do those similar kinds of things. We have asked on several occasions to have something like an access to knowledge chapter in the FTA agreements, or provision of public goods provisions in the FTA agreements. We have actually submitted comments on this several times, as you know, like in the Malaysian and Korean FTAs. I just wonder what your reaction has been to those repetitive filings we have made on these points. MS. ESPINEL: I think that they mostly come up with a public health focus. First of all, the overriding purpose of the IP chapter and the mandate that we have from our Congress, as you know, is to seek similar standards to the U.S. law. The U.S. law tends to have fairly high standards for intellectual property protection. So that is the overarching mission of the free trade agreements, and I think appropriately so. I know there is a desire to have USTR to some extent get involved in the public health arena in what seem like regulatory types of ways to me. I have to tell you that — and this is not a formal USTR response; this is an informal response as an IP lawyer — I don’t think our trading partners would appreciate, nor do I think it would be appropriate, for USTR to be involved in details of public health regulatory mechanisms. I don’t think that is our expertise and I don’t think it would be particularly appreciated by our trading partners. QUESTIONER [Mr. Love]: That is a somewhat surprising answer. We were not asking to push the regulatory provisions. In fact, I think in the Korean FTA you did push to have the United States very much involved in the reimbursement systems in Korea for pharmaceutical drugs. I thought that was really your initiative. Public goods is different. I was referring to knowledge goods that would be put in the public domain, or things that the U.S. government does through the NIH, things it does right now. MS. ESPINEL: At least in my experience, this has come up more in the medicines field, in terms of pushing certain aspects of the pharmaceutical regulatory regime that we have in the United States and getting into details of how countries are regulating the safety and efficacy and that type of thing. While we consider all comments given to us, it has never seemed to me that it was appropriate for us to be getting into that type of detail. Now, I think in terms of regulatory barriers we do work — not just in the pharmaceutical area but more generally — to try to make sure that market access is generally available to U.S. rights holders and to U.S. Industries, to make sure that those processes are transparent, and to make sure that they are fair. But we do not get into the precise details of regulation other than to try to make sure that there is more or less a level playing field.

SESSION XII: TRADE AND TRIPS PART C: INDIA, IP DEVELOPMENTS

SESSION XII: TRADE

Part C: India, IP Developments and TRIPs Moderator PROF. SIR HUGH LADDIE

Rouse & Co. International; University College London Speakers PROF. SHAMNAD BASHEER

VICTORIA ESPINEL

Visiting George Washington University Law School (Washington, D.C.)

Assistant U.S. Trade Representative for Intellectual Property and Innovation, Office of the U.S. Trade Representative (Washington, D.C.)

Panelists JAMES LOVE

HOWARD ZUCKER

Director, Knowledge Ecology International (Washington, D.C.)

Assistant Director-General, Health Technology and Pharmaceuticals Representative of the Director-General on Intellectual Property, Innovation and Public Health, World Health Organization (Geneva)

MUSTAFA SAFIYUDDIN

DSK Legal (Mumbai) ERIC H. SMITH

Smith, Strong & Schlesinger LLP (Washington, D.C.) PROF. LADDIE: Everybody knows that the last sessions on Friday are the ones to which nobody ever turns up. But Hugh Hansen reserved the highly contentious sessions for this afternoon, which is illustrated by the fact that there are so many of you here. There are going to be two back-to-back sessions, one on “India, IP Developments and TRIPs,” and then, following after that, there is going to be an extremely topical discussion of World Trade Organization complaints and China.1 I can’t wait to see the results of that. When I came here in the morning, I saw an ambulance outside, and I think it was preparing. It is very appropriate that India and China should be put back-to-back at the end of 1

See infra Session X Part D, TRIPs and China.

972 S E S S I O N X I I : T R A D E the Conference, because, as everybody will know, there were little local difficulties in getting India and China to sign up to TRIPs2 in the first place, because they had interests that they thought would be harmed by signing up to TRIPs. That is in the past — sort of. Some of those local concerns now manifest themselves in other areas, in the implementation of TRIPs. In particular, in relation to India, most of us will have heard of the amendments to the Indian Patents Act, which have at least two significant effects, one to apparently prevent second medical use patents and the other to prevent patents for salts and esters and so on of chemical entities, both of which could affect quite a number of pharmaceutical patents.3 That these are intensely important questions, not just legally, politically, but domestically, could not have been better illustrated than by the riots that took place outside the court when Novartis was challenging the constitutionality of this amendment to the Indian Patents Act.4 These are intensely felt issues. We are very lucky this afternoon. We have Shamnad Basheer, who is a Visiting Professor at George Washington University, and is, if I may say so from personal experience, an extremely bright chap. PARTICIPANT [Prof. Martin Adelman]: Everybody from GW is. PROF. LADDIE: With one noticeable exception. [Laughter] Victoria, I hope you don’t mind if I call you obviously a very bright chapess. MS. ESPINEL: I’m from Georgetown. PROF. LADDIE: We will start off with Shamnad. PROF. BASHEER: Most of you have had an intense two-day session here and will be sufficiently exhausted. Therefore, I thought I might start with a somewhat puzzling title. If I can’t puzzle you enough with the contents of the presentation, I thought I might give it a try with the title itself. Thank you, Hugh, for that wonderful introduction. I had the great privilege of sitting in court with Hugh Laddie once, under a special program called the Marshaling Program. I saw first-hand evidence of what I had heard about him previously — his razor-sharp mind and his ability to scare the toughest lawyers and IP brains in the United Kingdom. Why have I equated patent policy in India to a medical disorder? I was at a conference recently where a lady walked up to me and said, “Why is India so schizophrenic when it comes to intellectual property policy?” I thought a moment, and then said, “This certainly needs some reflection.” In the ten-odd minutes that I am speaking here, I thought I might try to delve into the issue — possibly the shortest time that anyone has devoted to a medical disorder of this nature. The more I thought about it, I thought: Is it really schizophrenia or is it reflective of 2 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_e.htm. 3 Patents Amendment Rules 2006, 455 The Gazette of India 1 (May 5, 2006), available at http://patentoffice. nic.in/ipr/patent/patent_rules_2006.pdf; The 2005 amendments are available at http://patentoffice.nic.in/ipr/ patent/patent_2005.pdf. 4 Novartis challenged Section 3(d) (which denies patents for minor or trivial improve-ments to known drugs) introduced via the 2005 Amendments to India’s Patent Act of 2005 Amendments. Patents Amendment Act 2005, available at http://patentoffice.nic.in/ipr/patent/patent_2005.pdf. [Note: Subsequent to the Conference, on Aug. 2, 2007, the Madras High Court dismissed Novartis’ claim. See Madras High Court Dismisses Novartis’ Petitions, The Hindu, Aug. 7, 2007, available at http://www.hindu.com/2007/08/07/stories/ 2007080771761100.html.]

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something else? Is it really reflective of the fact that thus far, to broadly generalize, we have had the “developing country” category that TRIPs and World Health Organisation (WHO) seem to endorse at some level? We have had separate norms applying to those in the literature, in international agreements, et cetera. Suddenly you have these countries coming up, the “emerging economies” (or, as some people call them, the “innovative developing economies”) — India, Brazil, China — that do not neatly fit within these categories. They are technologically superior in some areas, not quite in others. Take the case of India: strong in software, strong in Bollywood, the content industries, the pharmaceutical industry, and yet 26 percent below the poverty line, with significant public health concerns. Therefore, when you see this “emerging economy” status, you find that what is really happening is that a new set of norms are being developed by these countries that are finding that the old rules don’t apply well to them anymore. That is going to be the focus of my presentation. The dichotomy is classically expressed if we compare what is happening in the copyright area in India5 and then you look at patents.6 In the copyright area, it is remarkable that enforcement has been elaborate and extensive. Rights, such as the making-available right, which is a new right that was introduced by the WIPO Copyright Treaty in 19967 — India had this in 1994. When I heard this, I wondered why we made it to the coveted Special 301 list. There are some startling instances of extremely pro-right-holder norms being incorporated or inducted at a stage even before the international community picks it up; extremely strong ex parte orders; orders protecting rights over the Internet, at about the same time that the United States was protecting them. What is really driving all this is the content industries in India. Bollywood has a huge export market. The movies make more money now in the overseas market than they make in India. There is one beautiful movie about cricket, called Lagaan. Hugh has seen it and he says it is good. Indians are not too happy watching that now, given their premature exit from the World Cup. Nonetheless, this movie made much more money abroad than it made in India. Of course, there is the IT industry and the software sector, in which India gained preeminence abroad, having a steady supply of extremely skilled software programmers. We have Infosys and the Wipro. These industries are driving copyright protection to a level that is quite substantial, though not as much as perhaps the U.S. Trade Representative (USTR) would like, because there are still pockets where piracy and counterfeiting take place. But if you look at the enforcement before some of the major courts, especially the Delhi High Court, you can find that they are very, very pro-rightholder-oriented orders when it comes to copyrights and trademarks. Contrast that with patents. A little bit on the history, to help you appreciate the position. Contrary to what many people think, India did have a product patent in pharmaceuticals for almost 100 years, from the 1800s until 1970.8 It replicated the British 5 Copyright Act of 1957 (inclusive of amendments up to 1999), available at http://www.education.nic.in/ copyright/CprAct.pdf. Proposed amendments to the Act are available at http://www.education.nic.in/copyright/ cprsec/Material%20for-View%20Comments.pdf. 6 Patents Act 1970, available at http://patentoffice.nic.in/ipr/patent/patAct1970-3-99.html. 7 World Intellectual Property Organization, Copyright Treaty [adopted in Geneva, Dec. 20, 1996], 36 I.L.M. 65 (1997) [hereinafter WCT], available at http://www.wipo.org. 8 The East India Company introduced patent laws in India. The first Indian Patents Act was enacted in 1856 as

974 S E S S I O N X I I : T R A D E system to a large extent. It was about 1950 and 1960 that the government suddenly felt the need to do something about this industry.9 Most of the drugs were imported. The drug costs were really high.10 There was no domestic industry. So you had this case of a fabulous patent regime operating, but no industry. In the 1970s, they changed the patent regime11 after doing an extensive investigation, essentially by just two judges, who went out and interviewed industry and found out, “We’re really good with organic chemistry. We can take a drug and split it up and figure out how it works and make a copy. So get us a regime that will incentivize that.” They said, “Okay, we’ll take away product patents for pharmaceuticals and institute a regime that is process patent-oriented.” As a result of the regime, it worked well and India has a world-class generic industry now that is supplying to most parts of the globe.12 In 2005 the TRIPs Agreement mandated that this had to change. Thus, in 2005 India was obligated to change from a process patent regime in pharmaceuticals to a product patent regime.13 Quite obviously, there was resistance. There are a lot of reasons for that. One is, of course, the fact that there was a thought that it was an unequal bargain at some level. The counter to that was, “You signed up for it because you were getting access to markets for your cotton exports, textiles, et cetera.” Of course, India wanted copyright protection for its content industries. You see this resistance to TRIPs operating at several levels. For those of you familiar with WTO law on intellectual property, the first case that was brought before a panel on a result of the recommendations of the Lord Macaulay Law Commission. This Act was followed by a series of amendments, such as the 1859 amendment to introduce exclusive privileges for making, selling, licensing, and using inventions. The Patterns and Designs Protection Act of 1872 introduced legislation for the protection for industrial designs and was followed by the Protection of Inventions Act of 1883. The 1872 and 1883 legislations were combined into the Inventions and Designs Act in 1888. In 1911 the Indian Patents and Designs Act was enacted. 9 The Indian government set up law commissions to recommend legal reforms. The Patents Enquiry Committee (1948–1950) (Tek Chand Committee) and the Committee on the Revision of the Patents Law (1957–1959) (Ayyangar Committee) were appointed to review the adequacy of the Indian patent system and to adapt it to conform with national goals. The Tek Chand Committee recommended incorporating compulsory licensing provisions to minimize the potential for abuse of monopolies. The Patent Law was amended in 1950 to incorporate the recommendations regarding compulsory licensing. See N. Rajagopala Ayyangar, Report on the Revision of the Patents Law (1959). 10 Drug prices were so high that in 1961 Senator Estes Kefauver, Chairman of the U.S. Senate Committee, remarked that Indian drug prices ranked among the highest in the world (quoted in Shondeep Banerji, The Indian Intellectual Property Regime and the TRIPs Agreement, in Intellectual Property Rights in Emerging Markets 63 (Clarisa Long ed., 2000). 11 Indian Patent Act, 1970, available at http://patentoffice.nic.in/ipr/patent/patAct 1970-3-99.html. Based on the Ayyangar Report, the Act allowed differential treatment for food, medicine, and chemical inventions. Rights to inventions relating to food, medicine, and chemicals were limited to process patent protection. Article 27, Section 2(1)(j) provides that “invention means a new product or process involving inventive step and capable of industrial application.” Section 3 of the Act explicitly excludes certain categories of inventions from the scope of patentability, including plants, animals, parts of plants and/or animals, seeds, essentially biological processes, mathematical or business methods, computer programs per se, inventions based on traditional knowledge, methods of treatment, diagnostic, therapeutic, and surgical methods. 12 To promote indigenous manufacturing of medication as a means to control the expenditure on public health, the Indian government signed an agreement with UNICEF to locally manufacture penicillin and other antibiotics. The collaboration resulted in the establishment of Hindustan Antibiotics Limited in 1954 to manufacture low-cost generic drugs. As a result, India went from a country importing most of its medicines at some of the highest prices in the world to being self-reliant. India has been, and remains, the producer of choice for medications in most developing countries, producing medicines of assured quality that meet all international standards, at the lowest costs and highest volumes. 13 On Apr. 5, 2005, India’s Parliament enacted the third amendments to the 1970 Patent Act. Patent Amendments Act 2005, supra note 4. Section 3(d) modified the scope of patentability for pharmaceutical inventions.

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intellectual property was regarding India’s failure to implement the mailbox obligation. The panel clearly said, “India has failed in this regard and has to implement it.”14 It took about four years for the government to really get the legislation changed and to implement the mailbox obligation. The other obligation under TRIPs’ pipeline protection for pharmaceutical drugs was exclusive marketing rights (EMRs). Here again, you see a strong resistance. You have official statements made by secretaries and ministers that say, “Look, it’s only on paper. We’re not going to grant any of these rights.” Out of the fifteen-odd applications, they granted about four. So naturally, when you had the 2005 obligation to introduce pharmaceutical product patents, the government was keen on introducing a number of safeguards that would still help the generic industry. One of the safeguards is that the patentability criterion itself has been made much stricter, particularly in the context of pharmaceuticals, in Section 3(d). Those of you following the news know that this is the one that has created a huge controversy, with Novartis bringing a challenge before an Indian court, saying that Section 3(d) is not compatible with TRIPs. That is going on before the court right now. We expect an order sometime soon.15 What Section 3(d) does is to make explicit a non-obviousness standard that is, to some extent, applied in the European Union and the United States, which requires some sort of additional technical advance of economic significance. There are also requirements for automatic compulsory licensing in some cases and a patent reporting provision that is perhaps the widest in the world. These new norms have come about because of the special concerns that are prevalent in India. You have to also see it in the context of how the pharmaceutical industry has developed and what the patent regime has been. You also have public interest groups or patient groups extensively participating in patent applications, which is, again, something that is unique to India. The expectation is that you will see much more robust patent jurisprudence in the coming years. In conclusion, when I look back and ask, “Is it schizophrenic or is it really reflective of just the fact that some of these countries no longer fit within the traditional boxes?” I think that is a better way to look at this issue. On the one hand, the pharmaceutical industry wants more investment, wants more tie-ups, wants more partnerships, and wants a signal out that it has an appropriate patent regime that will protect all of this. On the other hand, you have significant public health concerns, and you have most of the big Indian pharmaceutical companies still relying on their generic model. Their proportion of revenue to R&D is still significantly low. Of course, you have countries like India and China and Brazil now trying to use the international regime to further interest in sectors that are important to them, such as biodiversity and traditional knowledge geographical indications,16 and using the international system now to further some interests within a proprietary framework. Given this entire context, I think what is likely is the evolution of new norms that we are going to see in the coming years that will cater appropriately to this special group of countries. 14 WTO Dispute Resolution Body, Report of the Appellate Body on India — Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R (Dec. 19, 1997). 15 See supra note 4. 16 Geographical Indications of Goods (Registration and Protection) Act of 1999, available at http://patentoffice.nic.in/ipr/gi/gi_act.pdf; Geographical Indications of Goods (Registration and Protection) Rules 2002, available at http://patentoffice.nic.in/ipr/gi/ Girule~1.pdf.

976 S E S S I O N X I I : T R A D E Thank you very much. PROF. LADDIE: Thank you very much, Shamnad. Because Victoria is also going to be presenting in the next session on China, she said she is going to keep her comments short so that she can be fired at less in this session. MS. ESPINEL: I didn’t fully recognize that I was also speaking on this panel until fairly recently. I will just give some brief remarks giving an overview of India. I find the intellectual property situation in India to be a fascinating one. While I wouldn’t describe it as schizophrenic, I do think that India is very much at a crossroads, at a very interesting place, in terms of its domestic intellectual property policies. US-INDIA TRADE POLICY FORUM The USTR, the U.S. government in general, is very engaged with India. India is a very important trading partner for us. About a year and a half ago, we established the U.S.–India Trade Policy Forum.17 It’s a formal mechanism to talk about a variety of trade issues. We don’t have many of these formal mechanisms. To give you a sense of perspective, we have one with the European Union, we have one with China, and now we have one with India. So it is a clear sign of the seriousness with which we take India in terms of our trading partners. Under the Trade Policy Forum, there is a group that is dedicated to intellectual property. We have a very broad agenda of issues that we are discussing, the whole range of IP issues — patents, trademarks, copyright, and enforcement. I will just touch briefly on some of the key areas. COPYRIGHT On copyright, it is absolutely the case that India has had strong copyright laws for some time. One area in which we believe they are not as strong as they could be is with respect to the Internet. Internet penetration in India right now is not that expansive. However, that will certainly change in the future. The United States would hope that that is something that India would address and would be consistent with its own tradition of having had strong copyright protection for quite some time. TRADEMARKS On trademarks, India recently took the formal decision to join the Madrid Protocol. India is currently working on amending its domestic trademark legislation18 in order to implement the Madrid Protocol, which I think will be a boon, not just to U.S. trademark holders, but also to Indian trademark holders.19 PATENTS In the area of patents, I’m sure some of the more controversial areas will be discussed in more detail. But one thing that I would note is that the Indian government appears to be very interested in trying to increase the efficiency of its patent system. They have devoted 17 Office of the U.S. Trade Representative, U.S.–India Trade Policy Forum, July 18, 2005, available at http://www.ustr.gov/Document_Library/Fact_Sheets/2005/US_-_India_Trade_Policy_Forum.html. 18 Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, June 27, 1989, WIPO Doc. MM/DC/27 Rev. (1989), available at http://www.wipo.int/madrid/en. 19 See Trade Marks Act 1999, available at http://patentoffice.nic.in/tmr_new/tmr_act_rules/tmr_act.pdf; Trade Marks Rules 2002, available at http://patentoffice.nic.in/tmr_new/ tmr_act_rules/tmr_rules_2002.pdf.

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a great many resources to this. They are in the process of hiring and training more patent examiners. This is an area where the U.S. government — the government as a whole and the USTR specifically — very much wants to support the Indian government’s efforts to increase both its patent and its trademark capabilities. You may be aware that India is interested in becoming an international search authority. This is something that the U.S. government supports and would like to work with India to help them achieve. DATA PROTECTION Pharmaceutical data protection is one area of controversy in India that I will just note generally because I’m sure there will be more discussion on this point. This is an interesting area, I think, domestically for India, because you have a situation, not so much where the Indian government is on one side and other governments, such as the U.S., are on the other, but where Indian domestic industry has different views of this. There are Indian pharmaceutical companies that are opposed to data protection, but there are also Indian pharmaceutical companies who see this as the future for them, who are very interested in extending the research capabilities that they have already started to invest in and see domestic protection as critical and necessary in order for them to do so. ENFORCEMENT The last topic I will touch on is enforcement. Just a few points in response to the comments that were just made. I don’t see Bollywood as driving copyright protection in India. I have met with a number of the Bollywood executives. In fact, I had a chance to meet with Aamir Khan, who was the star of the movie Lagaan. He is very concerned about the situation. He is very frustrated with his own industry for not being more focused on counterfeiting and piracy. I think this is an area that Bollywood has recently — and by that, I mean quite recently — decided that it may need to address. But, for various reasons, the Bollywood movie industry, the Indian movie industry more generally, has been somewhat fractured and has essentially not dealt with this problem and decided not to focus on it, which is unfortunate, because the music industry and the movie industry are incredibly vibrant in India and important to their economy. I think that is something that will change. Certainly the Indian music industry, I think, has been focused on this and has been trying to drive higher protection. But Bollywood, as such, has not yet done so. You mentioned the Delhi High Court. Just briefly, my impression, and I think the impression of others as well, is that one of the problems that India needs to grapple with is the fact that its civil judicial system, quite apart from intellectual property, has a number of challenges, and getting cases through the Indian civil judicial system, in any area, is quite difficult. I think the Delhi High Court does probably stand as the most efficient of the various court systems inside of India. But outside of Delhi, it can be quite difficult — and even inside Delhi, to some extent — to move cases through the system. This is obviously a problem that is not just specific to intellectual property. This is one of the overall problems that I think the Indian government is trying to grapple with right now. The last thing I will mention on enforcement is the fact that Indian enforcement is very decentralized. There are different states. They have different law enforcement authorities.

978 S E S S I O N X I I : T R A D E At this point, they tend not to cooperate with each other very well. That is another area that we have been discussing with India. I think that is an area where the Indian government, again, recognizes that that is not an effective way to have an enforcement system, particularly given the size of India and they are considering ways that they could better coordinate the various enforcement efforts that are going on at the state level inside of India. That is a very, very brief take on my impression of the Indian IP system. I am sure there will be much interesting discussion to come. PROF. LADDIE: This brings back memories of when I was a judge. I am now going to be brutal with the panelists. They are all going to be subjected to a guillotine because we are behind schedule. Justin Hughes is champing at the bit to get to the China session. I would like each of our speakers to just talk for two minutes so that we have time for a few questions from the audience. We will start off first with James Love. MR. LOVE: I think everyone recognizes how important India is in the area of medicine. I will focus on that. In February 2005, when they amended their Patent Law, there were several amendments that were done to the Patent Law that changed it quite a bit more than what people had anticipated. One of the amendments was a mandatory compulsory license on products that were manufactured in India before the Patent Law was changed, so that when the pipeline patents come into effect there will be a large number of mandatory compulsory licenses. There, there would be experience in compulsory licensing in India and in setting royalties on the compulsory licenses, which will be quite important. The math is that there are a lot of people in India. There is an upper class as well as a rising more affluent class, which creates huge disparities in India. Three years ago, Novartis said it thought of India as a country of 50 million customers, meaning they would be pricing their products for the top 5 percent of the population. I think now they have increased that number to 100 million or something. The basic idea is, unless India can find a solution to this problem, they will face the prospect of the bulk of the Indian population not having access to new medicines. I will close with what we have proposed in India, which we think is an interesting way for developing countries to think about resolving these disputes. India wants an entrepreneurial class, they want an R&D industry, but they also have a huge population that is very poor. Our proposal is that several countries, including India, implement a system of rewards for new drug developers for drugs that improve health care outcomes in India, but they don’t tie that to the price of the drug. They implement, as now Professor Stiglitz and a number of other people in our groups have said, a system of prizes to reward developers so that there is money as the reward for successful drug development related to the impact of the invention in India on consumers, but they don’t grant monopolies for the same thing. So it would be a system that could run with the patent system, but it would be a system of remuneration for inventions that did not involve exclusive rights. PROF. LADDIE: Thank you very much, Jamie. Next, Mr. Safiyuddin of DSK Legal. MR. SAFIYUDDIN: The question often asked is whether the Indian pharmaceutical product patent regime is TRIPs-compliant or not — or, more recently, whether the patent regime is psychotic or bordering on madness. I think that question is wholly inappropriate.

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First, the Indian patent regime does provide for pharmaceutical product patents. It will settle down in such a way that it prevents evergreening, but it will still grant what we call “incremental innovations.” These will be allowed to be patented. But what is crucial is to understand the uniqueness of the Indian drug industry. Today it is one of the largest manufacturers in the world. Its cost of manufacturing is amongst the lowest in the world. At the same time, it has a very, very large poor population. Apart from that, it has three basic kinds of industry: (1) the generic industry, millions of small-scale manufacturers that have no R&D facilities; (2) a few companies, like Ranbaxy and Cipla, that can afford research; and (3) multinational companies that have set their foot in India and are keen to introduce their research products in India. Apart from that, it has a very strong Ayurvedic medical industry for which patents are granted more easily than other drugs. Lastly, what it lacks in patent protection it makes up in other IP protection. It has one of the strongest trademark protection regimes in the world. I will give you two or three examples of this. One is in the Panadol case. In spite of the fact that there was a delay in the plaintiff bringing an action of over five years, an interlocutory injunction was granted against the Indian defendant.20 Second, in the Viagra case, the domain name Viagra.in was registered. Even at the interlocutory stage, the court ordered that Viagra should be transferred to Pfizer.21 Third, and very importantly, Indian courts are aware of the delay and the disadvantages of the Indian judicial system. Having recognized that, they are developing new methods to grant protection. For example, damages have been granted even when the plaintiff has failed to prove the quantum of damages. When defendants have just not appeared, the Indian courts have evolved a new theory whereby they will allow the grant of damages without the requirement of the plaintiff having to prove the quantum of damages. And lastly, in the Time Magazine case, even punitive damages have been granted.22 So what it lacks in the patent regime it easily makes up in the other intellectual property regimes. PROF. LADDIE: Thank you very much, Mr. Safiyuddin. Eric. MR. SMITH: This is somewhat of a reprise of the same panel at this conference last year. I made some suggestions then for improving the Indian copyright system. I am going to this year do the same, but in, I think, a much more humble way than I did last year, because everyone got very angry at me. The Indian copyright industry is unique in the world. Bollywood is 90 percent of the film industry and the U.S. industry is maybe 10 percent. The Indian music industry also has maybe 70–80 percent of the Indian market. So whatever is happening in India is basically benefiting or hurting Indian copyright owners. The problems in India are pretty severe on the enforcement side. Piracy rates are over 50 percent in every copyright area and losses are pretty high. That is not my view. If you talk to the Indian music industry, if you talk to Bollywood, people who follow this issue, they will tell you exactly the same thing. 20

SmithKline Beecham & Ors v. Sunil Singh & Ors, Delhi High Ct. (Apr. 12, 2001). Pfizer Prods., Inc. v. Atamash Khan et al., Delhi High Ct. (June 14, 2006). 22 Time, Inc. v. Lokesh Srivastava, 30 PTC 3, Delhi High Ct. (2005) (“[A]part from compensatory damages even punitive damages were awarded to discourage and dishearten law breakers who indulge in violation with impunity”). 21

980 S E S S I O N X I I : T R A D E What are some of the things that the Indian system could do to make it better, to make the environment better for copyrighted works in India — which, by the way, has an excellent law, except, as Victoria pointed out, in the area of the Internet. As Victoria indicated, the civil system is cumbersome. But I want to mention that, in the area of piracy, civil remedies are generally not very effective. In the last seven years, there have been only five criminal convictions for movie/video piracy, zero for software, zero for book piracy. Basically, the criminal system in India right now does not work. There is so much money to be made in piracy, unless that system is significantly improved, it is going to be very difficult to drive piracy rates down. A couple of things. 앫 We have suggested — and this is supported by the Indian industry across the board, I think — established specialized IP courts, clearing the dockets. Some of these judges have 10,000 cases on their dockets. They can’t possibly adjudicate cases. 앫 Yes, many, many cases go to injunctive relief but go no further. If you are a pirate, you kind of ignore injunctions. You may not in the trademark area, you may not in the patent area; in the copyright area it is a difficult situation. 앫 We think that India could benefit from adopting a system of statutory damages, to help settle cases before they go on forever. 앫 Create a national anti-piracy task force is something that the Indian industry has asked for, because of the state problem, the lack of coordination. 앫 Reinvigorate the IP cells that have been created in nineteen states in major cities, IP cells being police and prosecutors to prosecute piracy cases. These need to be fully funded and more manpower devoted to them. 앫 Increase the number of suo moto raids. What does that mean? Ex officio criminal raids against piracy. That is a much improved system in India. It is working. It just needs to be expanded. Hopefully, that will happen as part of the Trade Policy Forum discussions between the United States and India. PROF. LADDIE:

Thank you, Eric. Finally, Howard Zucker, who is Assistant Director-General, Health Technology and Pharmaceuticals Representative of the Director-General on Intellectual Property, Innovation and Public Health, World Health Organization. MR. ZUCKER: Very briefly, in one minute, I would like to tell you what WHO is doing on these issues, particularly as it relates to public health. The Commission on Intellectual Property, Innovation, and Public Health was established, to which we had to respond.23 In response to that charge, there is an intergovernmental working group, which met in December to address this. The real crux of the issue here is: How do you get medicines to be developed and how do you make sure R&D will move forward? This is the major concern that WHO is looking at. That particular intergovernmental working group is in the process now, which WHO is leading. We have a bureau. We have individuals from the different regions. We are looking at R&D development, how to prioritize, how to identify new research and development. Some of the charges that were put forth: 23 World Health Organization, The Commission on Intellectual Property Rights, Innovation and Public Health Report, Public Health Innovation and Intellectual Property Rights (2006), available at http://www.who.int/ entity/intellectualproperty/report/en.

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We originally had six groups working on this. We were asked to deal with the intellectual property component to this, as well as with the issues of technology transfer. These are moving forward. In the course of the next few months you will see, if you go online, that there is a forum24 where your information can be provided to us at WHO in preparation for the next intergovernmental working group, which will be in November. There is a draft plan, “Elements of a Global Strategy and a Plan of Action,”25 which will come out in July of 2007. We plan to take all the information that we get from the Web forum, plus from the Member States, plus from civil society, NGOs, and industry, and bring this together for the November meeting of the WHO Intergovernmental Working Group on Public Health, Innovation and Intellectual Property (IGWG). We will report back to the Executive Board in January of 2008, and then, ultimately, provide a report in response to this Commission that was put forth several years ago that charged us to move forward by May of 2008. The one question that I will put out, on which I would be curious to hear some of the responses from the panel and elsewhere, is the concern about patents in all these issues involving medicines. I was thinking about this the other day. The United States, when they moved forward on the Human Genome Project, set aside funds for the ethical, legal, and social implications of that project. Maybe one of the things that can be done is for industry and others to put some funds aside to address the ways to move this forward, particularly with respect to neglected diseases. I think that the primary charge here is to get the medicines out to people who need them. PROF. LADDIE: Terrific. Thank you very much, Howard. We have stolen twenty minutes from Justin’s session, which is very important. We have time for one question from the audience. Who is going to be courageous and put their hand up? QUESTION: I am curious whether the United States and the USTR has any position on Article 3(d) or has had any communications with the Indian government about that Section of the Patents Act that Novartis is challenging in the Indian courts. MS. ESPINEL: We have not on either one of those. We have not analyzed whether or not that Article is consistent with TRIPs, nor has this been one of the areas we have been discussing with India at present. PROF. LADDIE: Thank you very much indeed. This is a very important subject. If Justin has any time left at the end of his session, no doubt we can ask some more questions. But now we’ve got China to deal with, and that is going to be fun. Thank you very much.

24

See http://www.who.int/intellectualproperty/en. See World Health Organization, Intergovernmental Working Group on Public Health, Innovation and Intellectual Property, Elements of a Global Strategy and Plan of Action (Draft December 2006), available at http://www.who. int/gb/phi/PDF/phi_igwg1_4-en.pdf. 25

SESSION XII: TRADE PART D: TRIPS AND CHINA

SESSION XII: TRADE

Part D: TRIPs and China: Should a Case be Brought? — Will it be Brought?

Moderator PROF. JUSTIN HUGHES

Benjamin N. Cardozo School of Law, Yeshiva University (New York)

Speakers VICTORIA ESPINEL

ERIC H. SMITH

Assistant U.S. Trade Representative for Intellectual Property and Innovation, Office of the U.S. Trade Representative (Washington, D.C.)

Smith, Strong & Schlesinger LLP (Washington, D.C.) PROF. PETER K. YU

Michigan State University College of Law (East Lansing, MI)

Panelists PROF. SIR HUGH LADDIE

MARK TRAPHAGEN

Rouse & Co. International; University College London

Traphagen Law PLLC (Washington, D.C.)

PROF. QIAN WANG

Intellectual Property School, East China University of Politics and Law (Shanghai) PROF. HUGHES: Ladies and gentlemen, this is the last session of the day. My name is Justin Hughes. I teach at Cardozo Law School. It is much the same panel as you saw before. This time we have taken out some of the India hands and substituted some China hands, but otherwise they are all familiar faces.

984 S E S S I O N X I I : T R A D E As you see in your program, the topic is “TRIPs1 and China.” But I will tell you that just a few days ago, in one of the last iterations of the program, it said something like “Should a Case be Brought Against China?” So this is a very timely matter. As you know, the United States has been taking a more aggressive position in our trade policy with China. At the end of March, the Bush Administration decided to begin slapping countervailing duties on some Chinese products on the grounds that they are receiving subsidies.2Then, more recently, Office of the U.S. Trade Representative (USTR) has announced two cases against China involving intellectual property issues.3 The way we have organized this final wrap-up panel — the hottest topic of the Conference — is to have, first, a summary and an explanation of the case from Victoria Espinel at USTR. We will then have by two other speakers: Eric Smith will give us the case for a there being TRIPs violations in China; Professor Peter Yu from Michigan State University (who I must advertise is also a Cardozo graduate) will then give the case against there being TRIPs violations, or a viable TRIPs case against China for lack of intellectual property enforcement. After the presentations, we will have a panel discussion, which will involve everyone I have just mentioned as well as Professor Sir Hugh Laddie and Qian Wang, a professor at East China University of Politics and Law, who is already a familiar alumnus of the Fordham conferences. With that, Victoria, we are going to condense this. The secret program says that you get fifteen minutes, but can you do it in ten or twelve? Go for it.

TRIPs: The U.S. Cases Against China Victoria A. Espinel Office of the U.S. Trade Representative USTR’s short answer to the question in the panel’s original title, “Should a case be brought?” — obviously, we believe the answer to that question is yes. We announced on Monday of this week that we would be bringing two cases against China. Those cases were filed in Geneva on Tuesday of this week.4 One of them has to do with IP under the TRIPs Agreement5 and one of them relates to market-access barriers that have a partic1 Agreement on Trade-Related Aspects of Intellectual Property Rights, 33 I.L.M. 1197, in General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994 (333 I.L.M. 1125, Annex C) [hereinafter TRIPs Agreement], contained in an Annex to the WTO Agreement, available at http://www.wto.org/english/tratop_e/trips_e/trips_e.htm. 2 See Press Release, U.S. Dep’t of Commerce, Commerce Applies Anti-Subsidy Law to China (Mar. 30, 2007), available at http://www.commerce.gov/opa/press/Secretary_Gutierrez/2007_Releases/March/30_Gutierrez_ China_Anti-subsidy_law_application_rls.html. 3 Press Release, Office of the U.S. Trade Representative, United States Files WTO Cases Against China Over Deficiencies in China’s Intellectual Property Rights Laws and Market Access Barriers to Copyright-Based Industries (Apr. 9, 2007), available at http://www.ustr.gov/Document_Library/Press_Releases/2007/April/United_ States_Files_WT_ Cases_Against_China_Over_Deficiencies_in_Chinas_Intellectual_Property_Rights_Laws_ Market_Access_Barr.html. 4 On Apr. 10, 2007, the U.S. Trade Representative requested consultations with China at the WTO over protection of IP rights and barriers to trade in copyrighted items. For information on subsequent developments, see Press Release, Office of the U.S. Trade Repre-sentative, United States Requests WTO Panel in Case Challenging Deficiencies in China’s Intellectual Property Rights Laws (Aug. 13, 2007), available at http://www.ustr.gov/Document_Library/Press_Releases/2007/August/United_States_Requests_WTO_Panel_in_ Case_Challenging_Deficiencies_in_Chinas_Intellectual_Property_Rights_Laws.html. 5 WTO Dispute DS362, filed by the United States Apr. 10, 2007: China — Measures Affecting the Protection and Enforcement of IP Rights. The four matters on which the United States requests consultations are: (1) the

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ular impact on IP industries, specifically the copyright-based industry.6 I will briefly describe an overview of the claims in the cases. I want to start off, though, by saying that we have been working with Chinese officials for many years to try to address our concerns about intellectual property and market access. We recognize that China has made some improvements — has made, in fact, in some areas, significant progress — and has taken active steps to try to improve IP protection and enforcement. We also have in place a Strategic Economic Dialogue,7 which is a Cabinet-level discussion, instituted by Secretary Hank Paulson of the Treasury, as a forum to pursue a number of issues, including intellectual property, and generally creating a sustainable environment for innovation in China. We expect to continue and hope to continue discussions under the Joint Committee on Commerce and Trade, as well as the larger Strategic Economic Dialogue with China. However, right now, we see some very specific WTO problems that we have not been able to address through discussion and dialogue. We have decided to move those claims to the WTO. I will start off with the IP case.8 I think others on the panel may go into more detail, so I will try to do this fairly succinctly. There are three core points in the intellectual property case. The first has to do with thresholds. China’s laws set out certain thresholds in order for an individual or a business to be subject to criminal liability. Under current Chinese law, the lowest threshold — in other words, the lowest amount of piracy that can lead to criminal liability — is 500 infringing works. That is a relatively recent number. In fact, about a week ago, the threshold was 1,000 works. We understand that China’s Supreme Court issued a change to this rule, quite literally as China was being formally notified of the WTO consultations against it.9 Lowering the threshold from 1,000 to 500 is clearly a step in the right direction. However, we feel it does not go far enough to solve the fundamental problem. The pirates thresholds that must be met in order for certain acts of trademark counterfeiting and copyright piracy to be subject to criminal procedures and penalties; (2) goods that infringe intellectual property rights that are confiscated by Chinese customs authorities, in particular the disposal of such goods following removal of their infringing features; (3) the scope of coverage of criminal procedures and penalties for unauthorized reproduction or unauthorized distribution of copyrighted works; and (4) the denial of copyright and related rights protection and enforcement to creative works of authorship, sound recordings and performances that have not been authorized for publication or distribution within China. Current information on this dispute can be accessed at http://www.wto.int/english/tratop_e/dispu_e/cases_e/ds362_e. htm. 6 WTO Dispute DS363, filed by the United States Apr. 10, 2007: China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products. The United States requested consultations with China concerning: (1) certain measures that restrict trading rights with respect to imported films for theatrical release, audiovisual home entertainment products (e.g., video cassettes and DVDs), sound recordings and publications (e.g., books, magazines, newspapers, and electronic publications); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications and foreign suppliers of audiovisual services (including distribution services) for audiovisual home entertainment products. Current information on this dispute can be accessed at http://www.wto.org/english/ tratop_e/dispu_e/cases_e/ds363_e.htm. 7 See Press Release, Office of the U.S. Trade Representative, USTR Susan C. Schwab Welcomes Strategic Economic Dialogue with China (Sept. 20, 2006), available at http://www.ustr.gov/Document_Library/Press_ Releases/2006/September/USTR_Susan_C_Schwab_Welcomes_Strategic_Economic_Dialogue_with_China.html. 8 WTO Dispute DS362, supra note 5. 9 On Apr. 5, 2007, China’s Supreme People’s Court and Supreme People’s Procuratorate jointly issued rules, named Judicial Interpretation, on Several Issues in the Concrete Application of the Law in Handling Criminal Cases of IP Infringement, which lowered the threshold of IPR crimes in China. See Xinhua News Agency (CEIS), Apr. 6, 2007, summary available at http://www.chinatzone.com/news_dls.php?id=285&category=USITO %20Weekly%20China%20%20Summary.

986 S E S S I O N X I I : T R A D E and counterfeiters were well aware that the original threshold was 1,000; they will be well aware that this threshold is 500. Typically, raids in China netted just under the 1,000 threshold, in order, obviously, for the pirates to escape criminal liability. I expect that future raids will net just under 500, in order to avoid criminal liability for commercial reproduction and distribution. So the first claim is the threshold. In fact, the way China’s system works right now, by setting up these thresholds, they essentially create a safe harbor against criminal prosecution and they create a way for pirates and counterfeiters to be able to work in China without being subject to criminal liability or criminal enforcement. The second main claim has to do with customs enforcement. Under the WTO there are rules for what happens if customs authorities catch infringing goods at the border. One of those rules is that you can’t simply remove the logo or label and then release goods into the stream of commerce. In China, it appears that exactly the opposite is the rule. We think this is a significant enforcement problem. We believe this is a violation of China’s WTO commitments. That is the second main claim in the case. The third has to do with the intersection of copyright protection and censorship review in China. Censorship review is a controversial topic in China, outside of IP. But one of the aspects of the censorship review process in China is that there is no ability to enforce your copyright while your works are going through the censorship review process. In other words, if you are a copyright owner and you are subject to censorship review, which various industries are, including books, movies, and music, while the Chinese government is reviewing your product and making a decision on whether or not it will be legitimately distributed, you have no ability to enforce your rights in China. Of course, pirates don’t go through the censorship review process. Ironically, almost everything is available in China immediately after release on the streets, but there is no ability to enforce your rights in China right now during that process. That is a very significant problem, in the sense that you have a review process that slows down a right holder’s ability to get goods into the market, thereby creating a demand for pirate product and, at the same time, the same process takes away the ability to enforce your rights. The fourth is an additional problem that may exist under Chinese copyright law that goes to the scope of criminal liability under Chinese law and whether or not in China, if you were caught reproducing a work — say, a movie — you also have to be found to be distributing that movie. In other words, the concern is that, under current Chinese law, someone could be making literally thousands of pirate copies, but unless you can also prove that they are distributing them themselves, they may not be subject to criminal liability. Of course, with many pirates and counterfeiters, there are several steps in the chain, so the person who is manufacturing may not be the same person that is actually distributing. A requirement that a person must be not only making pirate copies but also distributing those copies would be a major hurdle in enforcement. We have very recently learned that the Chinese government may have decided to address that problem. That would be a welcome step. We have been discussing that particular issue with the Chinese government for quite some time. So, again, we would see that as one step in the right direction. We hope that, as we go through the WTO consultation process with China, that is something that will be clarified. I will touch briefly on the market-access claims. As I mentioned, there were two cases that were filed against China. One of them is the IP case. The second has to do with certain market-access barriers, basically two types of market-access barriers.10 10

WTO Dispute DS363, supra note 6.

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The first has to do with trading rights, which is essentially WTO-speak for importation rights. Under the WTO, when China joined the WTO, they made certain commitments on importation rights. They have, by and large, complied with their commitments — but not in the area related to copyright products, where there are still significant restrictions on copyright holders’ ability to import products. For example, under the current Chinese system, you can only import certain copyright products by using enterprises that are owned by the state. You can only do it, in fact, through one or two enterprises that are owned by the state. There is no ability to shop around for the best importer. That is something that we believe is in violation of China’s WTO commitments, as well as putting our right holders at a serious disadvantage in terms of getting their products into China in a timely way. The second main claim has to do with distribution rights. So, the first one is import rights, getting your products actually into the Chinese market, across the border. The second is distribution rights, your ability to freely distribute them around China. Again, China made commitments on distribution rights when it joined the WTO. It has largely removed the restrictions on distribution for most industries, but has failed to do so with respect to the copyright industry specifically. That is the second major claim in the market-access case. I want to close by saying, as serious as we consider these problems to be in China, we do not view the WTO cases as being hostile actions against the Chinese government. The United States and China have discussed these issues at great length, for many years, and we believe WTO dispute settlement is a normal part of a mature trading relationship and is, frankly, a normal part of being part of the WTO. In fact, I think the United States and the European Union stand as the two most sued countries ever at the WTO. We view dispute settlement as a mechanism that we can use when it becomes clear that discussion between the two governments is not going to be able to resolve an issue, that there may be a fundamental difference in the way our governments interpret certain obligations, and we can, in effect, turn to the WTO to take those issues and have a neutral arbiter decide what is the best interpretation of those obligations. As I said, we view these problems as serious. We view them as problems that should be remedied. But we also believe that there are many areas with China where we are having very constructive discussions, where we have lots of cooperation or potential for cooperation. So we view this as a way to try to resolve certain bilateral issues, while moving forward cooperatively on a much greater agenda. PROF. HUGHES: Victoria, before we turn to Eric and Peter, may I ask you a couple of questions clarifying the case? MS. ESPINEL: Sure. PROF. HUGHES: It sounds like the first part, the criminal thresholds going down from 1000 copies to 500 copies, and the last part, that you can’t get criminal enforcement unless you show reproduction and distribution, are TRIPs Article 6111 claims. Is that right? MS. ESPINEL: Yes. 11 TRIPs Agreement, supra note 1, art. 61: Members shall provide for criminal procedures and penalties to be applied at least in cases of willful trademark counterfeiting or copyright piracy on a commercial scale. Remedies available shall include impris-onment and/or monetary fines sufficient to provide a deterrent, con-sistently with the level of penalties applied for crimes of a corresponding gravity. In appropriate cases, remedies available shall also include the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offence. Members may provide for crimi-nal procedures and penalties to be applied in other cases of infringement of intellectual property rights, in particular where they are committed willfully and on a commercial scale.

988 S E S S I O N X I I : T R A D E PROF. HUGHES: But it sounds like the third one, that you are being denied copyright protection until censorship review, is more like a Berne formality point. MS. ESPINEL: I think there are a number of issues. I don’t want to preempt other panelists who may be speaking to this. I think there are some national treatment issues there, there are Berne Convention formalities issues there, and there is a more general problem with overall TRIPs Articles 4112 and 61 enforcement in terms of not having the ability to enforce. PROF. HUGHES: That is the last thing I wanted to extract from you for the audience. This case is not really a gestalt case about the enforcement system as a whole. I mean the enforcement system is not the subject of any claim here, just that there is a general lack of enforcement of whatever law is on the books. We are looking at laws that are actually on the books — the criminal threshold for CDs, the construction of the criminal liability statute. It is not really going after whether the administration of the system, regardless of what is on the books, is inadequate; is that correct? MS. ESPINEL: It is going after the fact that China’s system right now has in place particular hurdles that make it extremely difficult, or in some cases impossible, to get enforcement. The case is targeted at trying to address those particular hurdles the current Chinese law has set up. PROF. HUGHES: With that, let me turn to Eric Smith. Eric, tell us why this is a good case.

The Case for TRIPs Violations Eric H. Smith Smith, Strong & Schlesinger LLP Victoria has described the basic claims. I will add a couple of little fillips to it. I will also give you some additional background about the Chinese enforcement system in the context of the WTO cases, and something about TRIPs standards and dispute settlement in the intellectual property right (IPR) claims. First of all, in the interest of full disclosure, our firm is co-counsel to a coalition that 12 Id. art. 41: 1. Members shall ensure that enforcement procedures as specified in this Part are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement, including expeditious remedies to prevent infringe-ments and remedies which constitute a deterrent to further infringe-ments. These procedures shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse. 2. Procedures concerning the enforcement of intellectual property rights shall be fair and equitable. They shall not be unnecessarily com-plicated or costly, or entail unreasonable time-limits or unwarranted delays. 3. Decisions on the merits of a case shall preferably be in writing and reasoned. They shall be made available at least to the parties to the proceeding without undue delay. Decisions on the merits of a case shall be based only on evidence in respect of which parties were offered the opportunity to be heard. 4. Parties to a proceeding shall have an opportunity for review by a judicial authority of final administrative decisions and, subject to jurisdictional provisions in a Member’s law concerning the importance of a case, of at least the legal aspects of initial judicial decisions on the merits of a case. However, there shall be no obligation to provide an opportunity for review of acquittals in criminal cases. 5. It is understood that this Part does not create any obligation to put in place a judicial system for the enforcement of intellectual property rights distinct from that for the enforcement of law in general, nor does it affect the capacity of Members to enforce their law in general. Nothing in this Part creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.

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has worked closely with the U.S. government to develop the background to this case. The coalition is called the China Copyright Alliance (CCA) and consists of the Motion Picture Association, the record industry, the International Federation of the Phonographic Industry, AAP, book publishers, the Independent Film Producers, and the Arts Copyright Council. Co-counsel to the CCA is the firm of Greenberg Traurig, through Jim Bacchus, who is former Chairman of the WTO Appellate Body, and Ira Shapiro, who is former General Counsel of the USTR. I am here speaking in my own personal capacity and not as Counsel to the CCA or on behalf of CCA or its members. The TRIPs enforcement text was developed by WTO members to establish standards of enforcement that every WTO member must adhere to. It should be understood that this case was pursued by CCA and its members as a last resort, as Victoria has said, and is not based on the notion that China’s enforcement system is not improving, nor that China is not trying. We know that many officials in China are well aware that the situation in their country is in dire straits and that significant improvements are needed. But the TRIPs test is not about goodwill. The test under TRIPs has nothing to do with whether or not a country is successfully on the road to improving its enforcement system. It is, rather, about whether China is meeting its international obligations under the WTO trading system. That standard is set out in the enforcement text, and for the copyright industries, the ability to bring criminal actions against piracy is the essential mechanism to drive down piracy rates and open the market for trade in copyright goods. I might add, because Victoria mentioned that it is part of the case — and we are very pleased that it is part of the case — that the very close interrelationship between the phenomenon of piracy and the lack of effective market access into the Chinese market. The copyright industries are probably the most excluded sector of any from the Chinese marketplace. Without being able to get legal product in, in a meaningful way, it makes it almost impossible to deal effectively with the piracy problem. We cannot partner with the Chinese easily to help deal with the piracy problem. So both aspects of these cases are really important to the industry, and important to China, I believe. The standards that are involved here are set out in the enforcement text, in Articles 41 and 61. Article 61 involves the criminal law. The language in Article 61 is that China has to provide for criminal procedures and penalties in cases of willful trademark counterfeiting and copyright piracy on a commercial scale. The WTO IPR case is what is called an as-such case, or a case on the face of the law, as Justin said. What is going to be involved here, if it goes to a panel, is to define what piracy on a commercial scale is and whether or not the thresholds — and I will get to those in a minute — create a safe harbor for commercial-scale piracy which can’t be part of the safe harbor because, in fact, it has to be criminalized under China’s TRIPs obligations. Those sectors of the copyright industries that have been pursuing this case in cooperation with the USTR have sought to persuade China, just like the U.S. government has, to eliminate these thresholds to criminal liability so that the law would not insulate commercial-scale piracy. Since China joined the WTO in 2001, industry, with the support of the U.S. government, as I say, has sought to persuade the government to do this. I think you have heard me say at past Fordham conferences that we have never seen a country which has started with high piracy rates, where piracy is entrenched, which has been able to lower rates without effective criminal enforcement, and develop the kind of market in trade and copyrighted products that TRIPs envisions. We have cited countries like Korea, territories like Taiwan in the 1980s, where piracy rates were driven down significantly. Why did that

990 S E S S I O N X I I : T R A D E happen? It was because of effective and deterrent criminal enforcement, as TRIPs requires. The thresholds and the other aspects of this case are exactly as Victoria has stated it. These are hurdles that stand in the way of the Chinese government and us, in partnership with the Chinese government, bringing effective criminal actions against pirates in that country. The administrative system, which is the basic enforcement system that China relies on, simply has not worked. It has given rise to hundreds of thousands of raids and seizures of at least a half a billion units of pirate product, but it hasn’t made much of a dent in the marketplace. In fact, last year there was a so-called 100-day enforcement campaign, and we did a survey — the industry did. We looked at the results of it. Basically, the pirate product went from the front to the back of the store and some stores were closed. But most just opened up the next day. This is pretty much the story. We hope that this case, by eliminating these thresholds, by requiring the criminal law, hopefully, to be amended, and the claim against Article 4 of the copyright law, which says, basically, that you cannot protect copyrighted works which are prohibited from distribution in China — which is, by the way, a national treatment violation, because Chinese works aren’t subject to that, and a formality under the Berne Convention13 in violation of Article 5 of the Berne Convention. All of these Berne provisions are incorporated in the TRIPs agreement. The Article 4 claim is that you cannot fail to protect copyrighted works of foreigners on the basis of whether or not there is distribution in the marketplace. My time has run out. I wish I could say a lot more, but we will wait for the questions. Thank you very much. PROF. HUGHES: Thank you, Eric. Professor Yu, tell us why this is a bad case or not the right case.

Intellectual Property, Economic Development, and the China Puzzle Peter K. Yu14 I. INTRODUCTION Since the late 1980s, the Chinese economy has been growing at an enviable average annual rate of about 10 percent.15 China’s imports tripled, growing from $225 billion in 2000 to $600 billion in 2005, and the country accounted for about 12 percent of the growth of global trade, an impressive jump from only 4 percent in 2000.16 Today, China has become 13 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, as last revised, Paris, July 24, 1971, 828 U.N.T.S. 221. 14 Copyright © 2007 Peter K. Yu. Associate Professor of Law & Director, Intellectual Property & Communications Law Program, Michigan State University College of Law; Core Faculty, Asian Studies Center & Adjunct Professor of Telecommunication, Information Studies and Media, Michigan State University; Research Fellow, Center for Studies of Intellectual Property Rights, Zhongnan University of Economics and Law. Legal Studies Research Paper Series, Research Paper No. 04-23. This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection at http://ssrn.com/abstract=978301. 15 Cf. Center for Strategic and International Studies and the Institute for International Economics, China: The Balance Sheet: What the World Needs to Know Now About the Emerging Superpower 18 (C. Fred Bergsten, Bates Gill, Nicholas R. Lardy & Derek Mitchell eds., 2006) [hereinafter China: The Balance Sheet]. Some early research has placed China’s annual growth rate at a more modest rate of 7–8%. Symposium, China and the WTO: Progress, Perils, and Prospects, Colum. J. Asian L. 1, 3 (2003). 16 China: The Balance Sheet, supra note 15, at 73.

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one of the world’s largest surplus countries, possessing one of the most sizeable foreign exchange reserves in the world.17 Accompanying this unprecedented economic development and growth was the maturation of the modern Chinese intellectual property system. Since the reopening of its market to foreign trade in the late 1970s, China introduced its first modern copyright, patent, and trademark laws.18 A decade later, China revamped its intellectual property system in response to U.S. pressure and did so again in preparation for its accession to the World Trade Organization (WTO).19 At present, China is a proud member of many multilateral intellectual property agreements, including the Berne Convention, Geneva Convention, Paris Convention, the Patent Cooperation Treaty, and UPOV (International Union for the Protection of New Varieties of Plants).20 Notwithstanding these developments, the enforcement of intellectual property rights in China remains inadequate. Every year, U.S. industries are estimated to have lost billions of dollars due to piracy and counterfeiting in the country. As the International Intellectual Property Alliance stated in its recent Special 301 Report, copyright piracy in China resulted in $2.2 billion of U.S. trade losses in 2006 alone.21 Of particular concern is the considerable amount of the infringing products that have been exported to other foreign markets. To protect its industries, the U.S. administration is currently considering filing a formal WTO complaint against China for a general lack of intellectual property enforcement.22 Although commentators often link intellectual property protection with economic development, China thus far has presented an uneasy case that have puzzled those who study this link. While some commentators consider China a paradigmatic case for showing that rapid economic development can take place despite limited intellectual property protection,23 others have noted gradual improvements in the Chinese intellectual property system as the country became more economically developed. In fact, history suggests that China is now simply following the economic development paths of Hong Kong, Japan, Singapore, South Korea, Taiwan—or even Germany and the United States.24 It is a

17

Id. at 4. Peter K. Yu, From Pirates to Partners: Protecting Intellectual Property in China in the Twenty-First Century, 50 Am. U. L. Rev. 131, 136–41 (2000). 19 Id. at 141–51; Peter K. Yu, From Pirates to Partners (Episode II): Protecting Intellectual Property in PostWTO China, Am. U. L. Rev. 901, 906–23 (2006). 20 For a list of the international treaties to which China is a member, see Catherine Sun, China Intellectual Property for Foreign Business 8 (2004). 21 International Intellectual Property Alliance, 2007 Special 301: People’s Republic of China — Amended, at 96 (2007). 22 See Yu, supra note 19, at 923–946; Peter K. Yu, Still Dissatisfied After All These Years: Intellectual Property, Post-WTO China, and the Avoidable Cycle of Futility, 34 Ga. J. Int’l. & Comp. L. 143 (2005). 23 Frederick M. Abbott, Toward a New Era of Objective Assessment in the Field of TRIPS and Variable Geometry for the Preservation of Multilateralism, 8 J. Int’l Econ. L. 77, 81 (2005); Daniel C.K. Chow, The Role of Intellectual Property in Promoting International Trade and Foreign Direct Investment, in Intellectual Property and Information Wealth: Issues and Practices in the Digital Age 186, 199 (Peter K. Yu ed., 2007). 24 As one commentator noted: “From the start of the industrial revolution, every country that became economically great began by copying: the Germans copied the British; the Americans copied the British and the Germans, and the Japanese copied everybody. The thrust of the TRIPS Agreement is to ensure that this process of growth by copying and learning by doing will never happen again.” William Kingston, An Agenda for Radical Intellectual Property Reform, in International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime 653, 658 (Keith E. Maskus & Jerome H. Reichman eds., 2005) Similarly, Assafa Endeshaw noted: “Historically, each of the advanced countries today was determined to industrialize first before either ‘opening up’ to forces and interests that they might previously have dreaded and before calling for a stronger international IP system.”Assafa Endeshaw, Intellectual Property Policy for Non-industrial Countries 120 (1996). 18

992 S E S S I O N X I I : T R A D E matter of time before China will be converted from a pirating nation to a country that respects intellectual property rights. This chapter examines the relationship between intellectual property protection and economic development. It begins by exploring the conventional linkage between intellectual property protection and foreign direct investment (FDI).25 The first section argues that, even though intellectual property protection can attract FDI in a country that has a strong imitative capacity and a sufficiently large market, foreign investors are likely to be attracted to China because of its low production costs and considerable market potential. Drawing on recent research that focuses on the “push” explanation of FDI, this section also shows that the country’s inefficient economic system and preferential treatment of foreign investors have enticed local entrepreneurs to seek out FDI from firms in the Greater China. Thus, instead of considering China the proverbial exception to the causal relationship between intellectual property protection and FDI, this section contends that China illustrates rather well the ambiguity of that relationship and the complex interplay of the different location advantages that affect private investment decisions. The second section examines why China expanded its intellectual property protection even though such expansion was unnecessary for attracting FDI. Tracing the growing protection to both external pressure and internal push, this section underscores the intertwined relationship between intellectual property protection and economic development in China. While external pressure from the United States and the Chinese leaders’ willingness to align intellectual property reforms with the national modernization goals provided the momentum needed for early intellectual property reforms, the development of local stakeholders who benefited from stronger protection, the determination to develop a knowledge-based economy, the economic and reputational gains of China’s WTO accession, and the country’s increasing shift toward an export-driven economy were primary drivers for later reforms. This section agues that, even though stronger intellectual property protection was unnecessary for attracting FDI and, in fact, might have incurred significant social costs, such protection promoted economic development in certain parts of the country and resulted in the creation of local stakeholders who benefited from and lobbied for stronger protection. Despite the growing benefits of stronger intellectual property protection to China, it remains intriguing to see when China will find it in its self-interest to offer stronger intellectual property protection. To provide a more accurate forecast of when China will reach this crossover point and to better understand the socioeconomic impact of the expansion of intellectual property protection in China, the final section highlights the country’s regional and sectoral disparities, its inadequate development of an enabling environment for effective intellectual property protection, and its improvements in intellectual property protection at both the microscopic and qualitative levels. Taking account of these emerging developments is important, because a failure to do so not only would obscure the study of the relationship between intellectual property protection and economic development, but would also make it difficult for policymakers and rights holders to develop solutions to respond to the rampant piracy and counterfeiting problems in the country.

25 Keith Maskus, for example, defined FDI as “the act of establishing or acquiring a foreign subsidiary over which the investing firm has substantial management control.” Keith E. Maskus, The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology Transfer, 9 Duke J. Comp. & Int’l L. 109 (1998).

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II. INTELLECTUAL PROPERTY, FDI, AND THE CHINA EXCEPTION A. IN THEORY

Conventional wisdom holds that strong intellectual property protection is needed to attract foreign investment in less developed countries, because firms are reluctant to invest in a foreign country unless they are assured of protection of their intellectual assets and financial investment. However, recent empirical research questions this conventional wisdom. As Carsten Fink, Keith Maskus, Carlos Primo Braga, and other economists have shown, intellectual property protection will attract FDI only when two additional conditions are met.26 First, the country needs to have a strong capacity to imitate foreign products and technologies. If local competitors are unable to copy these products and technologies, the business interests of foreign firms are unlikely to be threatened, and intellectual property protection will be unnecessary. Second, the country needs to have a sufficiently large market to enable foreign firms to capture economies of scale or scope.27 In a country that lacks such a market, foreign firms are unlikely to find it advantageous to move their productions abroad. Even if these two conditions are met, policymakers still has to question what form of protection needs to be strengthened in order to promote economic development. Paul Heald and Keith Maskus suggested that firms that seek to establish manufacturing or research-and-development plants are unlikely to require more protection than what is needed to ensure the nondisclosure of technologies brought in by foreign firms.28 While these firms need trade secrets and contractual protection, firms seeking to establish markets for finished products need copyright, patent, and trademark protection instead. Thus, it is important to separate investment decisions that seek to relocate manufacturing or research-and-development facilities from those that seek to market finished products. While strong intellectual property protection is a main concern for the latter, a decision to relocate manufacturing facilities is likely to be determined by such “location advantages” as “market size and growth, local demand patterns, transport costs and distance from markets, low wage costs in relation to labor productivity, abundant natural resources, and trade protection that could encourage “tariff-jumping” investments.”29 Likewise, a decision to relocate research-and-development facilities is likely to be affected by “the level of education and training of the local workforce, the condition of its financial sector, the health of its legal system, and the transparency of governmental procedures.”30 To make things more complicated, firms have many different investment strategies, and FDI is only one of them. Using John Dunning’s ownership-location-internalization framework,31 economists have shown that, even in the presence of favorable location advantages, firms still need to decide whether they want to serve foreign markets through FDI, export finished products to the less developed market, conduct arm’s-length tech-

26 See, e.g., Keith E. Maskus, Intellectual Property Rights in the Global Economy (2000); Maskus, supra note 25, at 130–31; Carlos A. Primo Braga & Carsten Fink, The Relationship Between Intellectual Property Rights and Foreign Direct Investment, 9 Duke J. Comp. & Int’l L. 163, 164 (1998). 27 Paul J. Heald, Mowing the Playing Field: Addressing Information Distortion and Asymmetry in the TRIPS Game, 88 Minn. L. Rev. 249, 266 (2003). 28 Id. at 258–60; Maskus, supra note 25, at 119–28. 29 Maskus, supra note 25, at 123. 30 Heald, supra note 27, at 259. 31 John H. Dunning, International Production and the Multinational Enterprise 110–12 (1981).

994 S E S S I O N X I I : T R A D E nology licensing, set up joint ventures with local manufacturers or distributors, or ignore the foreign market entirely.32 As Carlos Primo Braga and Carsten Fink explained: In order for firms to invest abroad, two further conditions must be met. First, the foreign country must offer location advantages that make it more profitable to locate business abroad. Location advantages are usually associated with factors such as high transportation costs and tariffs, low input prices, access to distribution networks, and local regulatory environments. Second, it must be more profitable for firms to internalize production rather than to sell or license their intellectual assets to independent local firms in the foreign country. Internalization advantages take the form of avoiding transaction costs with potential licensees, controlling inputs, and protecting quality.33 While the strength of intellectual property protection will “influence a firm’s decision to internalize or externalize its intellectual assets,” it is only one of the many location advantages that influence such a decision.34 As Keith Maskus put it in the FDI context, “IPRs are an important component of the general regulatory system, including taxation, investment regulations, production incentives, trade policies, and competition rules. The joint implementation of an overall pro-competitive business environment matters most for FDI.”35 Paradoxically, the strengthening of intellectual property protection may encourage firms to conduct more arm’s-length technology licensing, which in turn will result in a reduction of FDI. As Primo Braga and Fink explained, intellectual property protection can affect foreign investment in two negative ways: “First, stronger IPR protection provides title holders with increased market power and could, at least theoretically, cause firms to actually divest and reduce their service to foreign countries. Second, higher levels of protection may cause TNCs to switch their preferred mode of delivery from foreign production to licensing.”36 Whether a firm will choose to license will depend on transaction costs—in particular, the robustness of the local regulatory regimes, the existence of a contracting culture and experience, and the availability of information needed to evaluate the transactions. In places where there is limited intellectual property protection, the firm’s need to internalize foreign production to maintain direct control over their proprietary assets may also affect licensing decisions.37 If the firm chooses to externalize its production through, say, licensing, stronger intellectual property protection arguably would have the “cancel out” effect of reducing FDI. Finally, most firms do not need to make the difficult decision between relocating their entire facilities or not relocating at all. They can simply decide which type of operations they want to relocate abroad and whether they want to combine FDI with other investment strategies, such as export, licensing, or joint ventures. Even if they choose to relocate abroad, they can still decide “where to invest and in what kind of facilities, whether to purchase existing operations or construct new plants (so-called “greenfield investments”), which production techniques to pursue, and how large an equity position to take with potential local partners.”38 32

Maskus, supra note 25, at 130. Primo Braga & Fink, supra note 26, at 170. 34 Id. at 171. 35 Maskus, supra note 25, at 129. 36 Primo Braga & Fink, supra note 26, at 172. 37 Id. (citing Michael J. Ferrantino, The Effect of Intellectual Property Rights on International Trade and Investment, 129 Rev. World Econ. 300, 303 (1993)). 38 Maskus, supra note 25, at 113. 33

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Economists generally distinguish between “horizontal FDI” and “vertical FDI.” While the former refers to the investment made when “firms establish plants abroad to produce the same or similar goods for local or regional markets,” the latter “occurs if plants in different countries produce outputs that serve as inputs in other plants.”39 Although intellectual property protection affects both horizontal and vertical FDI, the amount and composition of FDI varies according to the impact of such protection on the particular production process. For example, Edwin Mansfield observed in his influential study for the World Bank that, “[w]hile U.S. firms may be quite willing to invest considerable amounts in sales and distribution outlets and in rudimentary production and assembly facilities in countries with weak protection, their investments in R and D facilities or in facilities to manufacture components or complete products may be more likely to go to countries with stronger protection systems.”40 Because “[v]ertical FDI is more prevalent among MNEs that invest in developing (low-wage) economies, while horizontal FDI tends to characterize the investment decisions of MNEs operating across borders within the industrialized, developed nations,”41 the amount and proportion of each type of investment may fluctuate with the country’s economic development. As the country becomes more developed economically, the amount of horizontal FDI may increase while that of vertical FDI may decrease. In sum, countries that lack a strong imitative capacity and a sufficiently large market are unlikely to benefit from stronger intellectual property protection. However, even if countries meet these two prerequisites, stronger intellectual property protection may be unnecessary for attracting FDI. It depends on the complex interactions between the different location advantages, especially when some of these advantages are significant enough to compensate for the lack or ineffectiveness of strong intellectual property protection. Thus, the relationship between the strength of intellectual property protection and FDI remains theoretically ambiguous. B. IN PRACTICE

Commentators often consider China as an exception to the causal relationship between intellectual property protection and economic development. However, China is not the exception they suggested. Rather, it reflects the ambiguous relationship between intellectual property protection and economic development and the complex interplay of the different location advantages that can affect private investment decisions. To begin with, China has met the two prerequisites needed for a country to benefit from stronger intellectual property protection. Since the reopening of China’s market to foreign trade in the late 1970s, China has developed a strong imitative capacity. In fact, such capacity explains China’s ability to produce a large amount of pirated and counterfeit products. Moreover, China has seen tremendous economic growth in the past two decades. Today, China boasts a healthy market of hundreds of millions of customers, even though it has yet to offer one billion customers as some would hope. Nevertheless, intellectual property protection in the country remains inadequate and ineffective, and it is unlikely that foreign firms were attracted to China because of its intellectual property system. Instead, firms often relocate to China to take advantage of the lower production costs and the emerging market. To many of these firms, the lower 39

Primo Braga & Fink, supra note 26, at 172–73. Edwin Mansfield, Intellectual Property Protection, Foreign Direct Investment and Technology Transfer 17 (1994). 41 Maskus, supra note 25, at 120. 40

996 S E S S I O N X I I : T R A D E costs and the promise of an enormous market would easily make up for the losses incurred by ineffective intellectual property protection.42 While these firms certainly welcome greater intellectual property reforms, they do not find stronger protection a prerequisite for obtaining profits in the first place. In fact, many major Western firms — like Coca-Cola, Kodak, Motorola, and Procter & Gamble — have already been enjoying substantial profits for years despite serious piracy and counterfeiting problems.43 Thus, instead of seeing strong intellectual property protection as the necessary precursor to profitability, they see it more as a means to “increas[e their] already acceptable profit ratios.”44 Other firms, especially those that are new to China or are unfamiliar with the local conditions, have been less successful. Nevertheless, they consider the emerging Chinese market too large to ignore. While some consider the losses unavoidable as they build up their market share and improve their position in this emerging market, others write off their piracy-related losses as promotional expenses. The latter approach easily reminds one of the remark Microsoft’s founder Bill Gates made a few years ago. When questioned about the widespread piracy of Microsoft software in China, Gates observed: “Although about three million computers get sold every year in China, people don’t pay for the software. Someday they will, though. And as long as they’re going to steal it, we want them to steal ours. They’ll get sort of addicted, and then we’ll somehow figure out how to collect sometime in the next decade.”45 Recent research, however, has revealed a more complicated picture concerning FDI in China. The amount of FDI in a country does not depend on “pull” factors, but also on “push” factors, such as those that have made the country unappealing for local production. As Yasheng Huang pointed out in his provocative book, Selling China, the inefficiencies of the Chinese economic system and the country’s preferential treatment of foreign investors have led to the large amount of FDI in the country.46 Because commentators tend to focus on the attractions of the Chinese market, they often ignore how “[t]he poor profitability of the state sector, the credit constraints on the part of Chinese private firms, the insecurity of private property rights, and the weaknesses of domestic firms have all driven up China’s demand for FDI.”47 To Professor Huang, the considerable amount of FDI in China may reflect the weakness, rather than the strength, of the Chinese market. As he explained: “China’s low labor — and land — costs do not automatically motivate a Hong Kong firm to invest in China; instead, they motivate a Hong Kong firm (or any other firm) to do more business with China, as opposed to doing more business with, say, Mexico. China’s low labor costs tell us something about the location of a labor-intensive production facility, but not about who owns it.”48 Professor Huang therefore credited the superior regulatory and legal treatments of foreign-invested enterprises as an important motivation for private entrepreneurs in China to seek out FDI from its neighbors.49 His thesis also illuminates why a substantial 42 Paul Tackaberry, Intellectual Property Risks in China: Their Effect on Foreign Investment and Technology Transfer, J. Asian Bus. 34, 45 (Fall 1998) (quoted in Yahong Li, The Wolf Has Come: Are China’s Intellectual Property Industries Prepared for the WTO?, 20 UCLA Pac. Basin L.J. 77, 79 n.9 (2002)). 43 Id. at 4. 44 Sun, supra note 20, at 5. 45 Brent Schlender, Warren Buffett, Bill Gates, The Bill & Warren Show, Fortune, July 20, 1998, at 48. 46 Yasheng Huang, Selling China: Foreign Direct Investment During the Reform Era (2005). 47 Id. at 81. 48 Id. at 57. 49 Id. at 90.

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amount of investment was derived from businesses in Hong Kong and Taiwan as well as those owned by the Chinese diaspora.50 After all, if local firms have to reach out for FDI, they are more likely to turn to firms in the so-called Greater China. In sum, the drastically lower production costs, the country’s enormous market, its inefficient economic system, and the preferential treatment of foreign investors have all helped to attract FDI in China. Because these factors more than compensate for the country’s weak intellectual property protection, FDI in China increased substantially despite limited intellectual property protection in the country. China therefore is not an exception to the causal relationship between intellectual property protection and FDI, but an ideal case study to illustrate the ambiguity of this relationship and the complex interactions between the many location advantages that affect private investment decisions. After all, as Keith Maskus pointed out, if stronger intellectual property protection always led to more FDI, “recent FDI flows to developing economies would have gone largely to sub-Saharan Africa and Eastern Europe . . . [rather than] China, Brazil, and other high-growth, large-market developing economies with weak IPRs.”51 III. INTELLECTUAL PROPERTY AND ECONOMIC DEVELOPMENT “Since 1983, FDI [in China] has grown from less than $1 billion a year to more than $60 billion, and it is projected to soon reach $100 billion annually.”52 Today, China is one of the world’s largest recipients of FDI “with capital inflows of about $50 billion,” behind the United States and the United Kingdom.53 Such an influx of FDI not only provides China with the foreign capital needed for economic modernization, but also results in technology transfer, job creation, development of human capital, and generation of tax revenues.54 Although economists have pled for caution in considering the benefits of FDI to recipient countries,55 there is no denial that the influx of foreign capital has contributed to China’s recent rise to its status as an emerging economic superpower. As the previous section points out, strong intellectual property protection is not always needed for attracting FDI. In fact, stronger protection may reduce investment by encouraging investors to conduct arm’s-length transactions by licensing their products. Such protection would also reduce the net gains in economic welfare from increased FDI by incurring significant costs, such as administrative and enforcement costs, adjustment costs due to labor displacement, social costs associated with monopoly pricing, higher imitation and innovation costs, and potential costs resulting from the abuse of intellectual property rights.56 Stronger intellectual property protection therefore would drain the country’s scarce governmental resources, render cutting-edge foreign technologies inaccessible, and stifle the development of local industries.57 Given the significant costs of 50 See, e.g., Michael Enright, Edith Scott & Ka-mun Chang, Regional Power-house: The Greater Pearl River Delta and the Rise of China (2005); Willem Van Kemenade, China, Hong Kong, Taiwan, Inc.: The Dynamics of a New Empire (1998). 51 Maskus, supra note 25, at 129. 52 Peter Navarro, The Coming China Wars: Where They Will Be Fought and How They Can Be Won? 13 (2007). 53 Chow, supra note 23, at 198. 54 Robert M. Sherwood, Intellectual Property and Economic Development 191–99 (1990). 55 Maskus, supra note 25, at 146. 56 Keith E. Maskus, Sean M. Dougherty & Andrew Mertha, Intellectual Property Rights and Economic Development in China, in Intellectual Property and Development: Lessons from Recent Economic Research 295, 302–06 (Carsten Fink & Keith E. Maskus eds., 2005). 57 Tara Kalagher Giunta & Lily H. Shang, Ownership of Information in a Global Economy, 27 Geo. Wash. J. Int’l L. & Econ. 327, 331 (1993); Yu, supra note 18, at 189–90.

998 S E S S I O N X I I : T R A D E strengthening intellectual property protection, Chinese policymakers and commentators understandably were worried that stronger protection would slow down the country’s economic progress and therefore would make it difficult for the country to catch up with its Western developed neighbors. Indeed, as Rod Ralvey, Neil Foster and David Greenaway have shown recently, although intellectual property protection promotes innovation in high-income countries and technology flows in low-income ones, middle-income countries may suffer from offsetting losses due to reduced scope of imitation.58 Likewise, as the U.K.-based Commission on Intellectual Property cautioned: “rapid [economic] growth is more often associated with weaker IP protection. In technologically advanced developing countries, there is some evidence that IP protection becomes important at a stage of development, but that stage is not until a country is well into the category of upper middle income developing countries.”59 If the costs of strong intellectual property protection are not enough, the costs of introducing an inappropriate intellectual property system can be quite high for less developed countries. Although overprotection of intellectual property rights harm both developed and less developed countries, they usually harm less developed countries more than it would harm their developed counterparts. Many less developed countries lack the economic strengths and established correction mechanisms to overcome problems created by an unbalanced system.60 As the Commission on Intellectual Property Rights noted, “if anything, the costs of getting the IP system “wrong” in a developing country are likely to be far higher than in developed countries. Most developed countries have sophisticated systems of competition regulation to ensure that abuses of any monopoly rights cannot unduly affect the public interest.”61 Even if stronger intellectual property protection is beneficial to less developed countries in the long run, they may lack the needed wealth, infrastructure, and technological base to take advantage of the opportunities created by the system in the short run. In sum, all of these potential negative impacts of stronger intellectual property protection lead one to wonder why China introduced reforms to offer stronger intellectual property protection at all. After all, both theories and actual practice have suggested that China would have limited net economic benefits from stronger intellectual property protection during the first decade of the reopening of the Chinese market to foreign trade. Acknowledging that the Chinese leaders at that time were not particularly concerned about these net benefits, this section traces the intellectual property reforms to both external pressure and internal push. While external pressure from the United States and the Chinese leaders’ alignment of intellectual property reforms with the national modernization goals provided the momentum needed for early intellectual property reforms, the development of local stakeholders who benefited from stronger protection, the determination to develop a knowledge-based economy, the economic and reputational gains of China’s WTO accession, and the country’s increasing shift toward an export-driven economy were primary drivers for later reforms.

58 Rod Ralvey, Neil Foster & David Greenaway, Intellectual Property Rights and Economic Growth, 10 Rev. Dev. Econ. 700 (2006). 59 Commission on Intellectual Property Rights, Integrating Intellectual Property Rights and Development Policy: Report of the Commission on Intellectual Property Rights 22 (2003). 60 Peter K. Yu, The International Enclosure Movement, 82 Ind. L.J. (forthcoming, 2007); Peter K. Yu, TRIPs and Its Discontents, 10 Marq. Intell. Prop. L. Rev. 369, 382–83 (2006). 61 Commission on Intellectual Property Rights, supra note 59, at 4.

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A. EXTERNAL PRESSURE

Shortly after China reopened its market to foreign trade in the late 1970s, China and the United States signed the Agreement on Trade Relations Between the United States of America and the People’s Republic of China, which, among others, called for reciprocal protection of copyrights, patents, and trademarks owned by the nationals of the other party.62 Pursuant to this agreement, China became a member of the World Intellectual Property Organization (WIPO). It also promulgated a new trademark law in 1982 and a new patent law in 1984 and joined the Paris Convention in 1985. Notwithstanding these new developments, China afforded authors and inventors very limited protection, due to the leaders’ concern about establishing new private property interests in a socialist economic system, their belief that strong intellectual property protection inappropriate for a less developed country like China, and their inexperience with Western forms of intellectual property protection.63 While the new laws granted individuals rights in their marks and inventions, these statutes included so many limits that rendered the original grants largely insignificant. Concerned about the lack of intellectual property protection in China, copyright in particular, U.S. businesses lobbied their government heavily for stronger pressure on China. In the late 1980s and early 1990s, the U.S. government repeatedly threatened China with a series of economic sanctions, trade wars, non-renewal of most-favorednation status, and opposition to China’s entry into the WTO.64 Such threats eventually led to the issuance or signing of two memoranda of understanding in 1989 and 1992,65 an “agreement” regarding intellectual Property rights in 1995,66 which appeared in the form of an “exchange of letters” with an attached action plan, and an “accord” reiterating China’s commitment to strengthening intellectual property protection in 1996.67 Although the seldom-mentioned 1989 memorandum of understanding reassured the United States that China would strengthen its protection for computer software, the 1992 memorandum was the “first full bilateral IPR agreement” between China and the United States.68 In retrospect, that memorandum was effective in revamping China’s intellectual property system. Pursuant to the document, China acceded to the Berne Convention and ratified the Geneva Convention. China also amended its 1990 Copyright Law, issued new implementing regulations, and adopted a new unfair competition law that provided trade secret protection. Likewise, the 1995 agreement was effective in helping China create an institutional infrastructure conducive to protecting and enforcing rights created under this new intellectual property regime. The Agreement introduced the State Council Working Confer62 Agreement on Trade Relations Between the United States of America and the People’s Republic of China, PRC-US, 7 July 1979, 31 U.S.T. 4652. 63 William P. Alford, To Steal a Book Is an Elegant Offense: Intellectual Property Law in Chinese Civilization 66, 70 (1995); Andrew C. Mertha, The Politics of Piracy: Intellectual Property in Contemporary China 84–86 (2005). 64 Yu, supra note 18, at 140–51. 65 Memorandum of Understanding Between the People’s Republic of China and the United States (PRC-US, 19 May 1989), reprinted in PRC Agrees to Push for Copyright Law That Will Protect Computer Software, World Intell. Prop. Rep. (BNA) (July 1989) 3(7):151; Memorandum of Understanding Between the People’s Republic of China and the United States on the Protection of Intellectual Property, PRC-US, 17 Jan. 1992, 34 I.L.M. 677 (1995). 66 Agreement Regarding Intellectual Property Rights, PRC-US, 26 Feb. 1995, 34 I.L.M. 881 (1995). 67 China Implementation of the 1995 Intellectual Property Rights Agreement, PRC-US, 17 June 1996, available at http://www.mac.doc.gov/TCC/DATA/index.html. 68 Joseph A. Massey, The Emperor Is Far Away: China’s Enforcement of Intellectual Property Rights Protection, 1986–2006, 7 Chi. J. Int’l L. 231, 232 (2006).

1000 S E S S I O N X I I : T R A D E ence on Intellectual Property Rights, which was later replaced by the State Intellectual Property Office, and the Enforcement Task Forces.69 To protect CDs, laser discs, and CD-ROMs, the agreement established a unique copyright verification system, proposing to punish by administrative and judicial means any manufacturer of audiovisual products who failed to comply with the identifier requirement. The agreement also called for title registration with the National Copyright Administration and local copyright authorities of foreign audiovisual products and computer software in CD-ROM format. In addition, the agreement required customs offices to intensify border protection for all imports and exports of CDs, laser discs, CD-ROMS, and trademarked goods. The agreement further stipulated that relevant authorities would conduct training and education on intellectual property protection throughout China. Finally, the agreement provided that the Working Conference would develop a transparent legal system while compiling and publishing guidelines regarding application and protection in various areas of intellectual property law. Notwithstanding these two agreements, piracy remained rampant in China in the mid-1990s, and the United States was estimated to have lost $2 billion of revenues annually due to copyright piracy.70 To make things worse, the ineffectiveness of the coercive tactics used by the United States Trade Representative (USTR) has become apparent to not just Chinese negotiators and seasoned commentators, but also the U.S. industries and the American public. Although the two countries reached another “accord” in 1996, that document clearly revealed the limitation of the coercive approach. The document included neither significant new terms nor terms that improved market access of American products; instead, it merely reaffirmed China’s commitment to protect intellectual property rights made under the intellectual property agreement signed the year before.71 As industry support decreased, the Clinton administration abandoned its strong-arm tactics shortly after the 1996 negotiations.72 Although the United States continued to exert pressure on China during the negotiation of China’s accession to the WTO and undertook frequent consultations with Chinese officials, the United States has yet to revive its coercive approach—partly because of the approach’s limitations and partly because of its impracticality after China’s WTO membership. Under the WTO, countries are prohibited from taking retaliatory measures before they have exhausted all of the actions permissible under the rules.73 Except in areas that are outside the scope of the TRIPs Agreement, China’s WTO membership has greatly constrained the United States’s ability to exert external pressure on China in the intellectual property area. To make up for the lack of external pressure, U.S. businesses now exert pressure from within the country—through persuasion, business pressure, and alliances with local stakeholders and authorities. In February 2005, U.S. policymakers and trade groups again urged the administration to file a formal complaint with the WTO Dispute Settlement Body against China concerning inadequate intellectual property protection.74 A few months later, the United States, in conjunction with Japan and Switzerland, invoked article 63(3) of the Agreement 69

Yu, supra note 18, at 152. Seth Faison, China Turns Blind Eye to Pirated Disks, N.Y. Times, Mar. 28, 1998, at D-1. 71 Peter K. Yu, Piracy, Prejudice, and Perspectives: An Attempt to Use Shakespeare to Reconfigure the U.S.China Intellectual Property Debate, 19 B.U. Int’l L.J. 1, 14 (2001). 72 Peter K. Yu, The Copyright Divide, 25 Cardozo L. Rev. 331, 365 (2003). 73 Panel Report, United States — Sections 301–310 of the Trade Act of 1974, WT/DS152/R (22 Dec. 1999). 74 Yu, supra note 18, at 923. 70

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on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement) to formally request “clarifications regarding specific cases of IPR enforcement that China has identified for the years 2001 through 2004, and other relevant cases.”75 Despite this request and continuous political maneuvering, the United States has yet to file a formal complaint before the WTO. If the United States did so and if China were found to have violated the TRIPs Agreement, external pressure again might play an important role in unleashing and accelerating intellectual property reforms in China. B. INTERNAL PUSH

1. Alignment with the National Modernization Goals While researchers have explored extensively the relationship between intellectual property protection and economic development, they rarely examine the rhetorical effects of the claim that stronger intellectual property protection will promote economic development. The lack of such an examination is understandable considering the difficulty in quantifying and assessing rhetorical effects. Nevertheless, rhetoric is needed to persuade the populace to accept a new government policy and may also provide the direction and psychological incentives needed for promoting economic development. To some extent, the rhetorical significance of the claim that stronger intellectual property protection will promote economic development is similar to the significance of the claim that intellectual property is property. Despite the uneasy analogy of intellectual property to real property, intellectual property rights holders have widely used the rhetoric of private property to push for stronger protection.76 Meanwhile, foreign rights holders and governments have also used the economic development rationale to entice foreign leaders and policymakers to ratchet up intellectual property protection and, more specifically, to establish the TRIPs Agreement within the WTO. As Daniel Gervais recounted, developed countries and the lobbies that pushed for stronger intellectual property protection believed that “TRIPS was a difficult but essential measure to jumpstart global economic development,” while less developed countries “were told to overlook the distasteful aspects of introducing or increasing intellectual property protection and enforcement in exchange for longer-term economic health.”77 Similarly, Edmund Kitch argued that less developed countries agreed to stronger intellectual property protection during the TRIPs negotiations because they found such protection in their self-interests,78 although the negotiation records and the reactions of less developed countries offered very limited support. While the rhetorical linkage of intellectual property to economic development is important to induce less developed countries to offer stronger protection, it is particularly 75 Letter from Peter F. Allgeier, United States Trade Representative, to H.E. Mr. Sun Zhenyu, Ambassador, Permanent Mission of the People’s Republic of China to the World Trade Organization (Oct. 25, 2005), available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/asset_upload_file115_8232.pdf. 76 For discussions or critiques of the use of the private property rhetoric to expand intellectual property protection, see Tom W. Bell, Authors’ Welfare: Copyright as a Statu-tory Mechanism for Redistributing Rights, 69 Brook. L. Rev. 229, 273–77 (2003); Neil W. Netanel, Impose a Noncommercial Use Levy to Allow Free Peer-to-Peer File Sharing, 17 Harv. J.L. & Tech. 1, 22 (2003); Richard M. Stallman, Did You Say “Intellectual Prop-erty?” It’s a Seductive Mirage, Feb. 12, 2005, available at http://www.fsf.org/licensing/ essays/not-ipr.xhtml; Stewart E. Sterk, Intellectualizing Property: The Tenuous Connections Between Land and Copyright, 83 Wash. U. L.Q. 417, 420 (2005). 77 Daniel J. Gervais, The TRIPS Agreement and the Doha Round: History and Impact on Economic Development, in Yu, supra note 23, at 4:23, 43. 78 Edmund W. Kitch, The Patent Policy of Developing Countries, 13 UCLA Pac. Basin L.J. 166 (1994); Maskus, supra note 25, at 138. For my earlier discussion of the discussing the self-interest narrative, see Yu, supra note 60, at 376–79.

1002 S E S S I O N X I I : T R A D E important to a country like China, which has placed heavy emphasis on symbols and political movements and is emerging from autarky and diplomatic isolation. Since the reopening of the Chinese market to foreign trade in the late 1970s, Deng Xiaoping and other reformist leaders advocated a pragmatic “economics in command” approach to replace Mao Zedong’s “politics in command.” Seeing economic wealth as the foundation of China’s power, the reformist leadership believed “whether China could have a rightful place in the world of nations depended on China’s domestic economic development.”79 These leaders therefore vigorously pushed for the Four Modernizations to develop China’s world-class strengths in agriculture, industry, science and technology, and national defense.80 They also established Special Economic Zones to transform socioeconomic conditions in coastal areas and renewed diplomatic and commercial ties with the United States, Japan, and other Western developed countries.81 The 1979 U.S.-China trade agreement was a product of this urgent push for greater internationalization. While economic development was easily justified by the severe need for reforms following the Cultural Revolution, the death of Mao Zedong, and the subsequent arrest of the infamous Gang of Four, the justification for intellectual property reforms remained evasive. Indeed, when China reopened its market to foreign trade in the late 1970s, both the Chinese leaders and the populace considered intellectual property an alien concept transplanted from Western soil. As William Alford pointed out in his seminal work, To Steal a Book Is an Elegant Offense, the notion of intellectual property protection did not take root in China despite earlier attempts to transplant the concept onto the country through bilateral commercial treaties at the turn of the twentieth century and intellectual property reforms during the Republican era.82 Even if those reforms introduced the concept to the Chinese populace, the numerous class struggles, mass movements, and the Cultural Revolution that rejected ownership of private property virtually eliminated from public consciousness the concept of intellectual property.83 Thus, when this concept was reintroduced in the 1980s, justification for such a concept was badly needed. In his well-cited chapter concerning justifications for intellectual property protection, William Fisher identified four possible justifications—utility, labor, personality, and social planning.84 For a society that was making a transition from a command economy, rather than today’s socialist market economy, the first and second justifications were easily deemed unsuitable. Indeed, early Chinese intellectual property laws were filled with compromises that resulted in what commentators called “socialist legality with Chinese characteristics.”85 While the Chinese leadership was anxious to create a stimulus for inventions and to rehabilitate scientists, inventors, and academics to make up for the time lost to the Cultural Revolution,86 the leaders remained gravely

79 Yongnian Zheng, Discovering Chinese Nationalism in China: Modernization, Identity and International Relations 17 (1999). 80 For a comprehensive overview of the Four Modernizations, see Immanuel C.Y. Hsü, The Rise of Modern China 803–14 (6th ed., 2000). 81 For a discussion of the Open Door Policy adopted by the Chinese Communist Party in December 1978, see id. at 858–69. 82 Alford, supra note 63, at 36–55. 83 Yu, supra note 71, at 21–22. 84 William Fisher, Theories of Intellectual Property, in New Essays in the Legal and Political Theory of Property 168, 169–73 (Stephen R. Munzer ed., 2001). 85 Alford, supra note 63, at 70. 86 Id. at 65.

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concerned about the impact of new intellectual property rights on the country’s socialist economic system. The third justification, which was based on personality theories, was attractive to the Chinese, because it sat well with Communist ideology and the Soviet notion of non-property-based protection of authorship. Recent research by Mira Sundara Rajan, for example, has shown that the Russian Copyright Act of 1928 granted limited recognition to the authors’ property interests by “plac[ing] them within the broader context of a non-property theory of authorship.”87 As a 1938 commentary on the Russian Law noted, the Soviet author’s right “has the objective of protecting to the maximum the personal and property interests of the author, coupled with the assurance of the widest distribution of the product of literature, science and the arts among the broad masses of the toilers.”88 Nevertheless, the personality justification—in particular, its emphasis on moral rights—was inconsistent with foreign demands for stronger intellectual property protection, which reflected the interests of and the more utilitarian approach embraced by Western rights holders. The most suitable justification was therefore what Professor Fisher described as “social planning,” which ranges from the development of the economy to the nurturing of an attractive intellectual culture.89 As he explained, “[t]his approach is similar to utilitarianism in its teleological orientation, but dissimilar in its willingness to deploy visions of a desirable society richer than the conceptions of “social welfare” deployed by utilitarians.”90 This justification therefore fits well with China in the early 1980s, and economic modernization provided the needed “social planning” justification for a new intellectual property system. Since then, intellectual property reforms have been linked to the country’s rapid economic development and have benefited from the push for continuous economic reforms. Politically, backing the newly established intellectual property system with rhetoric that was consistent with the national modernization goals was very important. As David Zweig suggested, directions from the leadership and rhetoric that conveys these directions are critical to a country that is undergoing “a fundamental change in [its] international orientation.”91 Because the Chinese leaders were inexperienced with intellectual property protection and had to constantly struggle with unfamiliar concepts and models introduced during the transitional period, the alignment of intellectual property reforms with the national modernization goals also allowed leaders to defend intellectual property reforms on more familiar terms. In addition, because reformist leaders were constantly challenged by their more conservative counterparts, who were uncomfortable with the country’s rapid socioeconomic changes and the social ills brought about by these changes, the rhetoric allowed the reformist leaders to deflate criticisms of their kowtowing to foreign interests, especially in times of considerable external pressure from the United States. Instead, the leaders could highlight the economic benefits of stronger intellectual property protection and justify intellectual property reforms as an important leapfrogging 87 Mira Sundara Rajan, Copyright and Free Speech in Transition: The Russian Experience, in Copyright and Free Speech: Comparative and International Analyses 315, 333 (Jonathan Griffiths & Uma Suthersanen eds., 2005). 88 Id. at 333–34 (quoting A Text Writer’s Opinion, in 1 Grazhdanskoe Pravo, Civil Law 254–55 (1939) (translated in John N. Hazard, Materials on Soviet Law 35 (1947)) (emphasis added by Professor Rajan). 89 Fisher, supra note 84, at 192–93; Neil W. Netanel, Copyright and a Democratic Society, 106 Yale L.J. 283, 288 (1996). 90 Fisher, supra note 84, at 172. 91 David Zweig, Internationalizing China: Domestic Interests and Global Linkages 27 (2007) (quoting Charles F. Hermann, Changing Course: When Government’s Choose to Redirect Foreign Policy, 34 Int’l Stud. Q. 3 (1990)).

1004 S E S S I O N X I I : T R A D E tool to enable China to catch up with its more advanced trading partners. The reformist leadership could also tie the reforms to the growing nationalist sentiments that longed for China’s regaining its rightful place following centuries of humiliation and semi-colonial rule.92 Moreover, the fact that stronger intellectual property protection is unnecessary for attracting FDI does not mean that an increase in protection would not result in more economic development. Indeed, it would, at least in certain parts of the country or in selected industrial sectors. The more profits a firm can obtain, the more likely it is to expand its business, and the greater is its investment in or trade with the country. This is particularly true with respect to a country that has a strong imitative capacity and an enormous growing market. In fact, stronger intellectual property protection may also provide to foreign investors important signals of a favorable investment climate.93 As Claudio Frischtak noted, a country’s overall investment climate is often more influential on FDI decisions than the strength of intellectual property protection it offers.94 Likewise, Carsten Fink and Keith Maskus stated that “[a] poor country hoping to attract inward FDI would be better advised to improve its overall investment climate and business infrastructure than to strengthen its patent regime sharply, an action that would have little effect on its own.”95 Thus, stronger intellectual property protection might result in more foreign investment from existing investors as well as those who otherwise would not invest in the country. While serious questions remain concerning whether stronger protection would result in net gains in economic welfare within the country and whether such protection, on balance, would benefit the country, those questions do not negate the fact that stronger intellectual property protection would induce some economic development in the country. In sum, even though stronger intellectual property protection is unnecessary for promoting economic development, the claim that stronger intellectual property protection would promote economic development provided the needed internal push for intellectual property reforms in the first decade and a half following the reopening of the Chinese market to foreign trade. In retrospect, that claim, to some extent, was similar to what psychologists have termed a “self-fulfilling prophecy.” Although people might not be able to prove conclusively whether stronger intellectual property protection would lead to greater economic development, they would accept a higher level of protection if they believed such a link existed. This higher level of protection, in turn, would result in greater economic development in certain parts of the country and in selected industrial sectors. As more local stakeholders stood to benefit from stronger protection, they would lobby for even stronger protection. Eventually, the belief in the benefits of stronger intellectual property protection would result in more economic development, regardless of whether the link existed in the first place. And the cycle would repeat itself.

92 Hsü, supra note 80, at 660–61. As Professor Hsü noted, Mao Zedong and other Chinese leaders had “a burning desire to restore China’s rightful position under the sun, to achieve the big power status denied it since the Opium War, and to revive the national confidence and self-respect that had lost during a century of foreign humiliation.” Id. 93 Alford, supra note 63, at 68; Maskus, supra note 25, at 137–38. 94 Claudio R. Frischtak, Harmonization Versus Differentiation in Intellectual Property Rights Regime, in Global Dimensions of Intellectual Property Rights in Science and Technology 89, 99–100 (M.B. Wallerstein, M.E. Mogee & R.A. Schoen eds., 1993). 95 Carsten Fink & Keith E. Maskus, Why We Study Intellectual Property Rights and What We Have Learned, in Fink & Maskus, supra note 56, at 1, 7.

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2. Development of Local Stakeholders China experienced a major economic setback after Tiananmen in 1989 and the subsequent turbulent bilateral relationship with the United States and other Western countries. Fortunately, its economy quickly recovered following Deng Xiaoping’s famous “tour” of southern China in 1992. In March 1993, the National People’s Congress incorporated into the Chinese Constitution the concept of the socialist market economy, which contrasted powerfully with a command or centrally-planned economy.96 Four years later, the private sector was designated an important component of the changing economy, and “red capitalists” were invited to join the Chinese Communist Party at the Sixteenth Party Congress in 2001.97 Today, the Constitution stipulates that “[c]itizens’ lawful private property is inviolable,”98 and booming real estate markets appear in many major Chinese cities. Most recently, the National People’s Congress enacted the much-anticipated, yet controversial law to offer explicit protection to private property.99 Accompanying this rapid economic development and growth was the emergence of local stakeholders who stood to benefit from stronger intellectual property protection. Consider, for example, the software industry, which has experienced tremendous growth since the mid-1990s. By 1997, the value of the software market had doubled from RMB 6.8 billion in 1995 to RMB 12.6 billion.100 The Chinese government also has been active in developing the local software industry, establishing bases in Liaoning, Hunan, Shandong, and Sichuan Provinces and in Beijing, Shanghai and Zhuhai districts.101 Today, the number of private software companies has greatly increased. Although state-owned enterprises once dominated the Chinese economy, a large number of employees of these enterprises are now entering the private sector—or, in the Chinese parlance, “plunging into the sea” (xiàhai). As Zheng Chengsi and Xue Hong, two leading commentators on Chinese intellectual property law, observed: “In recent years . . . many software engineers resigned from state enterprises or research institutes, taking software products (finished or unfinished) created during the course of employment with them, and joined private software companies or established their own companies. These private companies immediately produced and marketed the software products, and became competitors of state software enterprises.”102 In the late 1990s, intellectual property reforms were given a further push by the emerging consciousness of the need to develop a knowledge-based economy. As Lester Thurow noted, “[k]nowledge is the new basis for wealth. . . . In the past, when capitalists talked about their wealth, they were talking about their ownership of plant and equipment or natural resources. In the future when capitalists talk about their wealth, they will be talking about their control of knowledge.”103 Perhaps under the influence of the Internet boom in other parts of the world, the phrase “knowledge economy” suddenly 96 The amended art. 15 now reads: “The state has put into practice a socialist market economy. The State strengthens formulating economic laws, improves macro adjustment and control and forbids according to law any units or individuals from interfering with the social economic order.” Xian fa 1982, art. 15 (amended 2004) (PRC) (emphasis added). 97 Clyde Prestowitz, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East 27 (2005). 98 Xian fa (1982), art. 13 (amended 2004) (PRC). 99 Joseph Kahn, China Approves Property Law, Strengthening Its Middle Class, N.Y. Times, Mar. 16, 2007, at A-1. 100 Hong Xue & Chengsi Zheng, Software Protection in China: A Complete Guide 8 (1999) [hereinafter Software Protection in China]. 101 Id. at 9. 102 Hong Xue & Chengsi Zheng, Chinese Intellectual Property Law in the 21st Century 104–05 (2002). 103 Lester C. Thurow, Building Wealth: The New Rules for the Individuals, Companies, and Nations in a Knowledge-Based Economy xiii (1999).

1006 S E S S I O N X I I : T R A D E began to appear in major Chinese newspapers, such as The People’s Daily and Guangming Daily. Government officials used the phrase frequently in their presentations,104 while Chinese businesses quickly adopted words like “e-commerce” and “e-business” to enhance public image and stock market value.105 Although the Internet bust a few years later slowed online developments throughout the world, the drive for the development of a knowledge-based economy in China continued, and the Chinese Internet population grew exponentially. In October 1997, there were only 299,000 computers connected to the Internet and 620,000 Internet users.106 Based on the most recent survey by the China Internet Network Information Center (CNNIC), there are now 58.4 million computers connected to the Internet and 137 million Internet users, second only to the United States.107 As the use of the Internet and new communications technologies continues to increase, Chinese policymakers have paid greater attention to issues concerning intellectual property rights in the digital environment. For example, the 2001 copyright law amendments addressed for the first time online copyright issues.108 In May 2006, the State Council promulgated the Regulations on the Protection of the Right of Communication Through Information Network.109 Most recently, China acceded to the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty. These developments make a lot of sense. Greater certainty over the scope of rights protected on the Internet is important to both local and foreign content providers and will greatly facilitate electronic commerce and broadband deployment. The biggest push for intellectual property reforms in the 1990s was China’s accession to the WTO. As China prepared to join the international trading body, it undertook a complete overhaul of its intellectual property system, amending the copyright, patent, and trademark laws.110 In addition, it introduced a large number of implementing regulations and administrative measures, such as those concerning the registration of computer software and those on the protection of layout-designs of integrated circuits.111 To help courts interpret these new laws and regulations, the Supreme People’s Court also issued a number of judicial interpretations.112 In November 2001, the WTO members finally approved the proposal to admit China to the international trading body during the Fourth Ministerial Conference in Doha, Qatar. After fifteen years of exhaustive negotiations, China formally became the 143rd member of the WTO on December 11, 2001. Although the accession process was complicated and involved many inextricable factors, it would not be far-fetched to argue that China might 104

Software Protection in China, supra note 100, at 7. Xue & Zheng, supra note 102, at xi. 106 Yu, supra note 72, at 371. 107 China Internet Network Information Center, 19th Statistical Survey Report on the Internet Development in China 5 (2007). 108 Copyright Law of the People’s Republic of China (Chinese Copyright Law), arts. 10(12), 37(6), 41, 47, available at http://www.sipo.gov.cn/sipo_English/flfg/xgflfg/200204/t20020416_34754.htm. 109 Regulations on the Protection of the Right of Communication Through Information Network (PRC), available at http://www.ncac.gov.cn/servlet/servlet.info.NatLawServlet?action=list&id=529 (in Chinese). 110 Chinese Copyright Law, supra note 94; Patent Law of the People’s Republic of China (PRC), available at http://www.sipo.gov.cn/sipo_English/flfg/zlflfg/200203/t2002 0327_33872.htm; Trademark Law of the People’s Republic of China (PRC), available at http://www.sipo.gov.cn/sipo_English/flfg/xgflfg/200204/t20020416_ 34755.htm. 111 Measures on the Registration of Computer Software, translated in http://www. chinagate.com.cn/ english/433.htm (last accessed 16 Nov. 16, 2005); Regulations on the Protection of Layout-Designs of Integrated Circuits (PRC), available at http://www.sipo. gov.cn/sipo_English/ flfg/zlflfg/t20020402_33873.htm (last accessed Nov. 16, 2005). 112 Sun, supra note 20, at 66–67. 105

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still remain outside the WTO had it not strengthened its protection of intellectual property rights.113 Indeed, some commentators considered the WTO membership a major impetus for China’s recent improvements in intellectual property protection. As Professors Zheng and Xue explained: In general, China’s entry to the WTO significantly influenced the speed and scope of the development of the Chinese IP law system. It is interesting to note that IP rights reforms kept pace with Chinese WTO negotiations. When the negotiations encountered obstacles, the IP rights reform slowed down; when the negotiations reached agreements to promote the accession process, the IP rights reform accelerated noticeably. Since China has become a member of the WTO, Chinese IP law reform has also peaked.114 To some extent, the economic benefits and reputational gains that were associated with China’s accession to the WTO far exceeded the socioeconomic costs incurred by increased intellectual property protection. By linking the two issues together, the Chinese began to understand that the stakes for the lack of intellectual property protection extended beyond the intellectual property arena, covering almost every other area that implicates international trade, including agriculture, banking, electronics, insurance, professional services, securities, telecommunications, and textiles.115 While they might not be excited about introducing stronger intellectual property protection, they certainly were reluctant to give up WTO-related trade benefits that were linked to such protection. Moreover, the costs of stronger protection required by the TRIPs Agreement were incomparable to the costs of other reforms required by the WTO accession. If the leaders and the Chinese public were willing to accept the costs of these other reforms, it was natural for them to accept the costs of TRIPs-related reforms. In fact, one could make a strong claim that China could easily recoup its losses in the intellectual property area by obtaining gains in such other trade areas as agriculture or textiles. Even critics of the overall economic benefits of China’s accession had a tough time responding to the strong nationalistic sentiments that considered the WTO accession an important means for China to regain its past glory, not to mention the general excitement, rejuvenation, and other psychological benefits brought about by the accession. Nevertheless, one needs to be cautious about how much one attributes the recent intellectual property reforms to China’s WTO accession. Although commentators and policymakers have widely credited the recent changes in the Chinese intellectual property system to the WTO accession,116 it is important not to overlook the many internal developments within the country, including the Chinese leaders’ changing attitude toward the rule of law, the emergence of private property rights and local stakeholders, the increasing concerns about ambiguities over relationships in state-owned enterprises, and the government leaders’ active push for modernization.117 While the WTO accession may be important, China’s guóqíng, or national conditions, continues to play a very important role in shaping intellectual property reforms in China. 113

Yu, supra note 72, at 372. Xue & Zheng, supra note 102, at xxxix. 115 Yu, supra note 72, at 371. 116 See, e.g., Office of the U.S. Trade Representative, 2005 National Trade Estimate Report on Foreign Trade Barriers 95 (2005), available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_ NTE_Report/asset_upload_file469_7460.pdf; Shi Miaomiao, China’s Participation in the Doha Negotiations and Implementation of Its Accession Commitments, in China’s Participation in the WTO 23, 32 (Henry Gao & Donald Lewis eds., 2005). 117 Yu, supra note 19, at 908. 114

1008 S E S S I O N X I I : T R A D E 3. Increasing Shift Toward an Export-Driven Economy Today, China is “the world’s fourth largest economy and the third largest trading nation.”118 Its factories “made 70 percent of the world’s toys, 60 percent of its bicycles, half of its shoes, and one-third of its luggage.”119 It also “builds half of the world’s microwave ovens, one-third of its television sets and air conditioners, a quarter of its washers, and one-fifth of its refrigerators.”120 As the Chinese economy becomes increasingly driven by exports to other countries, intellectual property protection will become even more important than it was a decade ago. As Daniel Chow explained: Global competitiveness in the modern age is directly linked to the level of technology in goods and services. Studies indicate that the higher the level of technology involved in goods and services, the higher the growth rate of exports. ... In the 1990s, China began to build a trade surplus with many nations based upon its low manufacturing costs. While China has been able to dominate in low-technology/labor-intensive industries, China realizes that to continue its growth in exports, it must move up the ladder into more technology-intensive goods and services. To do so, China must acquire access to advanced technology.121 Indeed, “China, like most nations, encourages exports because export sales contribute to a favorable trade balance and can earn U.S. dollars or other forms of hard currency.”122 While Chinese companies were content to serve as original equipment manufacturers (OEM) for foreign firms a decade ago, they have now moved into high-end technology markets, such as those for cars and regional jets, while seeking to maintain their competitive edge over low-cost products.123 Thus, some commentators and pundits suggested that China’s export-driven economic growth is likely to lead to greater future confrontations with the United States. As Peter Navarro observed, “[a]ny complete understanding of the Coming China Wars must begin with this observation: China’s hyper-rate of economic growth is export driven; and the ability of the Chinese to conquer one export market after another, often in blitzkrieg fashion, derives from their ability to set the so-called China Price.”124 Consider, for example, trademark protection, which is particularly important to an export-driven economy. The usual criticism of strong trademark protection in an emerging economy is that such protection would force local consumers to pay a premium for well-known foreign brands in exchange for no or very limited benefits. This is particularly true when local consumers are brand conscious or when their purchase decisions are distorted by their obsession in social status, which they sought to gain by buying or owning more expensive foreign products. Because most of the branded products are made in China, local consumers are often asked to pay a higher price even though the quality of the products is no different from that of those made by local brand owners. Moreover, by intentionally not offering trademark protection, countries may be able to take a free ride on the investment of foreign trademark holders by earning profits as if they were selling genuine goods that bear the infringing marks. As foreign brand owners 118

China: The Balance Sheet, supra note 15, at 3. Oded Shenkar, The Chinese Century: The Rising Chinese Economy and its Impact on the Global Economy, the Balance of Power, and Your Job 2 (2006). 120 Id. at 3. 121 Daniel C.K. Chow, Why China Does Not Take Commercial Piracy Seriously, 32 Ohio N.Y.U. L. Rev. 203, 206 (2006). 122 Id. at 214. 123 Id. at 207–08; Shenkar, supra note 119, at 161–62. 124 Navarro, supra note 52, at 2. 119

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continue to advertise and promote their products, the local copycats would also benefit from the goodwill of the original products without incurring any advertising expenses. Such a competitive strategy, however, is ill-advised, especially for a country that has now become one of the world’s largest exporters. As Professor Kitch explained, that strategy “will result in a parasitical business that will always be dependent on the willingness of the targeted countries to tolerate the infringing imports . . . [and that] will never have an established market position that can lay a foundation for the development of an internationally competitive business.”125 To be certain, local firms can ensure the marketability of their products in foreign countries by using noninfringing trademarks in foreign markets. Indeed, global firms have used that strategy to avoid infringement in selected markets. Nevertheless, such a strategy is costly, because it will not allow for the economies of scale commonly found in global production. That strategy also makes it difficult for local firms to learn how to establish market position by experimenting in the local market with brand development and trademark portfolio management. To some extent, one can see the local market as a “playground” for Chinese export businesses to acquire the needed skills to set up internationally competitive businesses. A case in point is the leading Chinese personal computer manufacturer, Lenovo (Liánxiang). When the company sought to expand business overseas a few years ago, it found out that its English name LEGEND had already been registered and used as a trademark or trade name in many foreign countries. To avoid potential infringement and to ensure that it could become an official sponsor of the 2008 Beijing Olympics, it had no choice but to develop the new LENOVO mark, which combined the first two letters of the LEGEND mark with the word “novo.”126 Interestingly, the LENOVO mark has now become famous as a result of the worldwide media coverage of its purchase of IBM’s personal computers division. LENOVO, however, is not the only one. Compared to a decade ago, a number of Chinese companies have now achieved prominence in the international market, with their trademarks being recognized as well-known outside of China.127 Examples of these famous local brands include GALANZ (for microwave ovens), HAIER (for household appliances), HUAWEI TECHNOLOGIES (for telecommunications equipment), KONKA (for televisions), and TCL (for televisions). As China increases its exports of goods branded with globally recognized local trademarks, the importance of intellectual property protection to the country’s future economic development cannot be ignored. From the standpoint of internal economic development in China, trademark protection is even more beneficial than the protection afforded by other forms of intellectual property. The development of globally recognized trademarks requires neither considerable technological expertise or initial heavy capital investment. Although the global market has been dominated by brands developed by major corporations in developed countries, less developed countries and smaller enterprises have their fair share of famous trademarks that are recognized throughout the world, especially in the fields of beer and liquor production — BACARDI (for Bermuda rum), CORONA (for Mexican beer), and

125

Kitch, supra note 78, at 168. Zhijun Ling, The Lenovo Affair: The Growth of China’s Computer Giant and Its Takeover of IBM-PC 334–35 (M. Avery trans., 2006). 127 For interesting profiles of successful Chinese local brands in the areas of information technology, telecommunications equipment and services, food and beverage, and electronic appliances, see Donald N. Sull with Yong Wang, Made in China: What Western Managers Can Learn from Trailblazing Chinese Entrepreneurs 8–13 (2005). 126

1010 S E S S I O N X I I : T R A D E (for Chinese beer) easily come to mind.128 In fact, according to Interbrand, “Bacardi is the world’s 75th most valuable global brand, and with a valuation in excess of $3 billion, is worth comfortably more than the GDP of the country which produces it.”129 From the standpoint of consumer welfare and economic self-sufficiency, it is also helpful to encourage local companies to catch up and compete with famous Western brands by developing more attractive products and better brand positioning.130 Instead, this brand building strategy “fits [well] with the government’s strategy of consolidating strategic industries . . . to create national champions that can hold their own in global markets and . . . to restore its imperial glory.”131 Compared to foreign firms, local firms thus far have been very successful in the Chinese market. In that dynamic, yet immature market, “consumers are still experimenting, and brands come and go with great speed.”132 As a result, local firms have the opportunity to attain market position and develop the next promising brands. The ability of local firms to improve consumer loyalty and establish market position has been further enhanced by the failure of foreign firms to understand or adjust to the local market conditions. Studies, for example, have “estimated that less than 10 percent of Chinese consumers have the level of disposable income that can afford to buy Western products.”133 Yet, many foreign businesses ignore this financial reality and insist on focusing on the high-end market, perhaps due to benefits from economies of scope and scale in global productions or to the firms’ reluctance to lower the quality, and often the international reputation, of their products. A case in point is the microwave market, which Galanz has overtaken recently. “[I]n 1993 only 1 per cent of Chinese consumers had microwaves. Consumption grew — but not in the pattern expected. By early 2000, nearly 90 per cent of the market was in cheaper models, with the Chinese company Galanz dominating.”134 Similarly, although Whirlpool and Kelon were competitors for the manufacture of washing machines, the local manufacturer quickly won the race.135 Today, “[a]fter losing more than $100 million and shutting down most of its factories, Whirlpool now manufactures washing-machines for Guangdong Kelon”136 — a scenario that Whirlpool certainly did not foresee when it began its investment in China. As China continues to increase exports and develop products under globally recognized trademarks, especially after the much-anticipated push around the 2008 Beijing Olympics (and again during the 2010 World Expo in Shanghai), the existence of effective intellectual property protection is likely to be of paramount importance. Significant improvement in trademark protection is therefore likely to be more important to China than similar improvement in the protection of other forms of intellectual property. In fact, the improved ability of Chinese businesses to develop globally famous brands may ultimately TSINGTAO

128 Janet H. MacLaughlin, Timothy J. Richards & Leigh A. Kenny, The Economic Significance of Piracy, in Intellectual Property Rights: Global Consensus, Global Conflict? 89, 104 (R. Michael Gadbaw & Timothy J. Richards eds., 1988). For a detailed discussion of emerging brands in less-developed countries, see Simon Anholt, Brand New Justice: How Branding Places and Products Can Help the Developing World 43–77 (2d ed. 2005). 129 Anholt, supra note 128, at 60. 130 Yu, supra note 19, at 996. 131 Shenkar, supra note 119, at 158. 132 Harold Chee & Christopher West, Myths about Doing Business in China 30 (2004); Rick Yan, Short-Term Results: The Litmus Test for Success in China, in Harvard Business Review: Doing Business in China 79, 95 (2004). 133 Chee & West, supra note 132, at 31. 134 Id. 135 Huang, supra note 46, at 193–94. 136 Anholt, supra note 128, at 64.

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hold the key to converting Chinese skeptics of intellectual property protection to global missionaries for greater intellectual property reforms. IV. THE SEARCH OF A CROSSOVER POINT Although piracy and counterfeiting problems remain widespread in China, history suggests that intellectual property protection will vastly improve when the overall benefits of such protection begin to outweigh its costs. After all, a similar change occurred in Japan in the 1970s and in Hong Kong, Singapore, South Korea and Taiwan in the 1980s. At some point in the near future, the development of the Chinese economy will reach a crossover point at which the country will gradually abandon its infamous pirating past to become a champion of intellectual property protection.137 Similar transformation, indeed, happened in virtually all developed countries, including the United States—a former haven for pirated works of Charles Dickens, Anthony Trollope, Gilbert and Sullivan, and many other British and French authors.138 Notwithstanding the importance of this crossover point and the considerable historical evidence suggesting the potential for such a dramatic change, there is little, if at all, empirical research concerning when this point will be reached. To provide a more accurate forecast of when China will reach this proverbial crossover point and to better understand the socioeconomic impact of the expansion of intellectual property protection in China, this final section highlights the country’s regional and sectoral disparities, its lack of an adequate enabling environment for effective intellectual property protection, and its improvements in intellectual property protection at both the microscopic and qualitative levels. A. REGIONAL DISPARITIES

The fact that China is not a homogenous country has been stated repeatedly since Westerners first encountered China many centuries ago. China is large, complex, diverse, and “sometimes internally contradictory.”139 The Chinese speak different languages, enjoy different cuisines, grow up with different cultures, and subscribe to different historical and philosophical traditions. Conditions in Beijing are often very different from those in Guangzhou, and the intellectual property strategies that are effective in Shanghai are likely to fail in a village in western China. The trade patterns found in the coastal areas are also very different from those found in the inland areas. To make things more complicated, during the rapid economic development in China in the past two decades, “some regions have been positively encouraged to become wealthy before others.”140 As Deng Xiaoping noted in the early 1980s in response to the country’s growing inequality, “some people have to get rich first.”141 As a result, there was across the country enormous disparities in the levels of wealth and income, the purchasing power of local consumers, and the stages of economic and technological development. The goods that are in high demand in the inland and rural areas are often very different from those in the major cities and the coastal areas. Because of these differing market conditions, local people in the less developed parts of China understandably are less aware of the importance of intellectual property protection. Nor do they have much need 137

Abbott, supra note 23, at 81–82. Yu, supra note 72, at 342. 139 J.J. Hamre & C.F. Bergsten, Preface, in China: The Balance Sheet, supra note 15, at ix. 140 David S. Goodman, The Politics of Regionalism: Economic Development, Conflict and Negotiation, in China Deconstructs: Politics, Trade and Regionalism 1 (David S. Goodman ed., 1995). 141 China: The Balance Sheet, supra note 15, at 31. 138

1012 S E S S I O N X I I : T R A D E for it. Those places are also likely to present greater structural problems for intellectual property enforcement, such as inefficient administration, low penalties, shortage of funds, local protectionism, and severe conflict of interests.142 In addition, the limited economic and technological developments in these areas have heavily constrained the local resources devoted to research and development efforts. Sadly, despite all of these divergent regional conditions, intellectual property developments in China are often analyzed as if the country were homogenous. While it is logical for policy analysts to swap analytical accuracy for practical convenience, the end result unsurprisingly presents only half of the picture—at times a very misleading, if not inaccurate, one. As the Chinese market expanded further away from the major cities and the coastal areas, a more complete and deeper analysis of the country’s regional economic developments is in order. In June 2006, the Office of the United States Trade Representative altered its decadesold emphasis on country-based assessments in China. Instead of calling for only information about the entire country, the Office requested for the first time information concerning provincial developments. As the announcement in the Federal Register stated, “[t]he goal of this [special provincial] review is to spotlight strengths, weaknesses, and inconsistencies in and among specific jurisdictions.”143 This new approach not only will promote the interests of U.S. rights holders, but also will help facilitate a better understanding of the divergent protection offered in different parts of the country. To some extent, China is what I have described as “a country of countries.”144 The economic conditions in different parts of this country are drastically different, and intellectual property protection and enforcement in each of these different parts are unlikely to be the same. Any overall nationwide assessment of intellectual property enforcement is likely to be misleading, if not meaning-less. Since the reopening of the Chinese market to foreign trade in the late 1970s, the country has become heavily decentralized, and problems of local protectionism are now widespread. Today, there are considerable differences between protection at the national, provincial, and local levels.145 As far as these differences are concerned, the Chinese proverb “The mountains are high, and the Emperor is far away” (shân gâo hu?ngdì yuan) could not provide a more accurate description. Joseph Massey, the former Assistant United States Trade Representative for Japan and China, recounted a senior USTR official’s visit to the southern part of China following the signing of the 1992 memorandum of understanding. In Guangdong province, the official “was told by a senior provincial government leader that ‘Beijing’s agreement’ with the US was ‘mei you guanxi’ (irrelevant) in that southern province.”146 Like the level of intellectual property protection, the level of innovation varies considerably among the different parts of China, adding another factor to this already complicated picture. For example, in 2000, “[r]esidents of Guangdong applied for more than 21,000 patents, while people in Hebei applied for only 3,848.”147 A regional breakdown of 1995 technology data supplied by the State Science and Technology Commission of China showed that while Beijing and Shanghai spent 2.6 and 1.4 per cent of the local 142

Maskus, Dougherty & Mertha, supra note 56, at 309. Office of the U.S. Trade Representative, Special Provincial Review of Intellectual Property Rights Protection in China: Request for Public Comment, 71 Fed. Reg. 34, 969 (June 16, 2006). 144 Yu, supra note 19, at 963. 145 Mertha, supra note 63, at 93–100. 146 Massey, supra note 69, at 235. 147 Maskus, Dougherty & Mertha, supra note 56, at 317. 143

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GDP, Sichuan and Liaoning, the provinces that came next, spent only 0.6 per cent.148 Given the interrelationship between intellectual property protection and economic development, the considerable regional disparities within the country will provide important clues to the future development of intellectual property protection in China. When China joined the WTO, commentators were divided as to their views of the impact of its accession to intellectual property protection. The so-called China optimists suggested that intellectual property protection in China would improve, because the WTO accession would lead to better economic and living conditions, which in turn would result in greater demand for higher-priced genuine products and luxury goods. When people are poor, they have limited disposable income and are more willing to settle for fake PRADA handbags, GUCCI shoes, or low-quality video compact discs (VCDs). When they become richer, however, they may start looking for better and fancier legitimate products, especially when they can distinguish between genuine and fake products.149 Indeed, Ernst & Young recently forecasted that the Chinese luxury market “is expected to grow 20%, annually until 2008 and then 10% annually until 2015, when sales are expected to exceed US$11.5 billion.”150 Thus, some optimists predicted that “pirates and counterfeiters will . . . gradually move into legitimate businesses[,] and the focus of counterfeiting and piracy will shift away from China to lesser developing countries, such as Vietnam.”151 By contrast, the so-called China pessimists suggested that intellectual property protection would be likely to deteriorate in China, due to an influx of foreign products, the growing economic disparity within the country, and the increased desire for products that many people could not afford. As these pessimists claimed, the growing access of foreign products to the Chinese market and the increase in foreign investment and trade would enhance the economic conditions that gave rise to piracy and counterfeiting in the first place.152 Even worse, the reduced restrictions on export privileges and the elimination of state monopoly over trading rights—both results of China’s WTO commitments—would further allow pirates and counterfeiters to trade more aggressively with markets that have “a strong appetite for low-priced counterfeit goods,” such as Southeast Asia and Eastern Europe.153 The WTO accession might also create a disincentive for the country to carry out further immediate reforms while providing China with “leverage against any future pressure to improve its piracy problem.”154 In the end, according to the pessimists, the market for counterfeit exports would grow substantially.155 As Professor Chow summarized: Recent estimates by the PRC State Council in 2001 indicate that the Chinese economy was flooded with counterfeits valued at $19–24 billion and that counterfeiting accounted for eight percent of China’s GDP. Multinational companies in China indicate that fifteen to twenty percent of their brands in China are counterfeit, causing annual losses in the hundreds of millions of dollars. Counterfeits made in China are now exported to markets in all parts of the world; there are indications that exports 148

Id. at 320. Chow, supra note 121, at 215. 150 Ernst & Young, China: The New Lap of Luxury 1 (2005), available at http://www.ey.com/global/ download.nsf/China_E/050914_Report_E/$file/China-The%20New%20Lap%20of%20Luxury_Eng%20 (Final).pdf. 151 Daniel C.K. Chow, A Primer on Foreign Investment Enterprises and Protection of Intellectual Property in China 254 (2002). 152 Id. 153 Id.; Chow, supra note 121, at 216. 154 Chow, supra note 151, at 253–54 155 Chow, supra note 121, at 205. 149

1014 S E S S I O N X I I : T R A D E from China will increase sharply for the foreseeable future. According to some accounts, China now accounts for eighty percent of all counterfeits in the world. Counterfeiting and commercial piracy are vital to the economy of many local municipalities and there are now millions of people in China involved in the counterfeiting industry.156 By now, it is quite clear that regional disparities in China have undermined the forecasts of both the optimists and pessimists. While stronger intellectual property protection and the emergence of intellectual property-based industries in Beijing, Shanghai, Guangzhou, and other major cities and coastal regions have led to greater improvement of protection in the affected places, piracy and counterfeiting have not migrated out of the country. Instead, they have spread to other parts of the country, whose conditions are no different from those of the big cities a decade ago when intellectual property protection began to strengthen. In light of this migration, intellectual property problems are likely to remain in the country in the near future, even if some of these problems have migrated to countries in South East Asia. Thus, it is misleading to look for nationwide solutions to China’s counterfeiting and piracy problems, and the USTR’s new provincial review offers a refreshing change for collecting information about intellectual property developments in the country. That approach is also attractive because it will help reduce the frustration of many Chinese, especially those in regions that have undertaken successful intellectual property reforms or made considerable sacrifices in the transition to a regime that is more respectful of intellectual property rights. While intellectual property protection continues to be a problem for foreign rights holders throughout China, one cannot deny the many important developments in the major cities and coastal areas in the last two decades. With the introduction in the early 1990s of specialized courts that are filled with judges who possess intellectual property expertise, courts in the major cities have also been greatly improved and now attract foreign rights holders to use the court system in lieu of the alternative approach of administrative enforcement. In 2002, for example, the total numbers of patent and trademark cases adjudicated were 2080 (an increase of 30.24% over 2001) and 707 (an increase of 46.68%), respectively.157 Moreover, a continued insistence on overall improvement in the country is unrealistic, ineffective, and counterproductive. By ignoring the important successes governments and businesses have made in major cities and coastal areas, such an insistence would create resentment among a large portion of the Chinese, which regard the repeated threats and demands “as American excesses.”158 Such insistence would also foster a misimpression among local Chinese leaders that, no matter what they do, the U.S. government and foreign businesses will never be satisfied. This misimpression will only erect further barriers to future cooperation, not to mention the lost opportunities for cultivating local allies. Finally, regional disparities may affect decisions by foreign investors on which provinces to invest, how much to invest, in what forms the investment should take, and what type of technologies will be used in the facilities in a particular region. As regional and local governments fight hard to attract FDI, the picture we will see in China is likely to be more complicated in the near future than it is today. Because gains in one region may also result in losses in another, many local authorities have been particularly concerned about 156 157 158

Id. at 204–205. Sun, supra note 20, at 12. N. Mark Lam & John L. Graham, China Now 321 (2007).

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the unemployment and labor displacement problems created by the closure of pirate and counterfeit factories.159 While the costs of adjustment to job losses and labor displacement are often limited, due to the fact that “copying is typically done in footloose firms with limited capital requirements . . . [and] that former unauthorized factories are [often] licensed to produce by copyright holders because of their expertise,”160 some regions will certainly suffer more job losses and unemployment than others, due to a lack of skilled labor, education, technological infrastructure, and training facilities.161 The closures induced by intellectual property reforms therefore may sometimes shift production out of a region or a locality. If problems are likely to linger for a significant period of time, rights holders are likely to encounter severe local resistance and lax enforcement. The divergent protection may even lead to “interregional disputes over intellectual property infringement and enforcement.”162 B. SECTORAL DISPARITIES

While regional disparities have greatly affected the analysis of intellectual property protection in China, the country’s divergent sectoral developments present challenges that are common for analyses of emerging, transition, and other less developed economies. Because industries develop at different paces and because not all industrial sectors can simultaneously benefit from strong intellectual property protection, these countries are unlikely to have a coherent national intellectual property policy. Instead, the positions taken by national governments often vary depending on the impact of the proposed protection on their fast-growing industries. For example, based on its existing developments, China is likely to prefer stronger protection of intellectual property rights in entertainment, software, semiconductors, and selected areas of biotechnology to increased protection in areas concerning pharmaceuticals, chemicals, fertilizers, seeds, and foodstuffs. This rather “schizophrenic” position is understandable because China has fast-growing movie, software, semiconductor, and biotechnology industries. These industries are likely to obtain greater benefits if intellectual property protection is strengthened. Even when policymakers fail to recognize the need for stronger protection, they will provide the needed information or to lobby for intellectual property reforms. By contrast, in fields concerning pharmaceuticals, chemicals, fertilizers, seeds, and foodstuffs, China is unlikely to benefit from greater protection, due to its huge population, continued economic dependence on agriculture, the worries about public health issues, and concerns about the people’s overall well-being. Indeed, because stronger intellectual property protection in these areas are likely to drain the country’s limited economic resources, local leaders would hesitate to use their hard-earned political capital to introduce reforms to provide benefits primarily for foreign rights holders and their export countries. The likelihood of success for the intellectual property reforms is also greatly reduced by the increased frustration among the local people who bear the costs of increased protection and the development of organized efforts against increased protection. Politics aside, it makes good economic sense for policymakers to develop intellectual property protection that is in line with the country’s economic development. For example, economists have shown that the “length of protection for a given product should be 159 160 161 162

Yu, supra note 19, at 954. Maskus, Dougherty & Mertha, supra note 56, at 305. Maskus, supra note 25, at 112. Maskus, Dougherty & Mertha, supra note 56, at 298.

1016 S E S S I O N X I I : T R A D E inversely related to the length of elasticity of demand and the social rate of discount, and positively related to R&D returns.”163 Edwin Mansfield also found that “[t]here is often little correlation between one industry’s evaluation of the strength or weakness of intellectual property rights protection in a particular country and another industry’s evaluation of the same country.”164 As he pointed out in his study for the World Bank, intellectual property protection played a major role in the chemical, pharmaceutical, machinery, and electrical equipment industries, but has only marginal significance for the transportation equipment, metals, and food industries.165 Likewise, Keith Maskus found that “[i]nvestment in lower-technology goods and services, such as textiles and apparel, electronic assembly, distribution, and hotels, depends less on the strength of IPRs and relatively more on input costs and market opportunities. Investors with a product or technology that is costly to imitate may also pay little attention to local IPRs in their decision making.”166 In recent works, Dan Burk and Mark Lemley have shown how policy levers in patent law have allowed courts to take account of the different types of innovation in different industries.167 As they noted, “there is no reason to assume that a unitary patent system will optimally encourage innovation in the wide range of diverse industries that it is expected to cover.”168 Likewise, Michael Carroll and Glynn Lunney highlighted the problem of uniformity cost in intellectual property law.169 As these commentators have recognized, the divergence of protection in different industrial sectors will allow a country to better tailor its intellectual property system to the needs of local industries. Such tailoring, in turn, would allow the country to take better advantage of its comparative and competitive advantages. After all, a country that has a strong pharmaceutical industry is more likely to benefit from an intellectual property system that is tailored to its needs than one that is designed to support a strong software industry. In addition, the problems an industry faces vary according to the nature of its products. In China, for example, “copying rates vary considerably across types of goods, with business applications software experiencing the highest rates and entertainment software next . . . [and] music recordings and motion pictures hav[ing] lower copying rates.”170 Thus, at least for China, there may be more urgent needs to strengthen the protection for business software applications than for music recordings and motion pictures. Under the TRIPs Agreement, countries are prohibited from offering discriminatory protection in the patent area. Article 27 states specifically that “patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced.”171 The TRIPs Agreement therefore prohibits countries from deciding whether they want to offer protection to the pharmaceutical industry without offering protection to the biotechnology

163

Frischtak, supra note 74, at 97 (citing William D. Nordhaus, Invention, Growth and Welfare (1969)). Mansfield, supra note 40, at 19. 165 Id. at 2. 166 Maskus, supra note 25, at 131–32. 167 Daniel L. Burk & Mark A. Lemley, Policy Levers in Patent Law, 89 Va. L. Rev. 1575 (2003). 168 Id. at 1577. 169 Michael W. Carroll, One for All: The Problem of Uniformity Cost in Intellectual Property Law, 55 Am. U. L. Rev. 856 (2006); Glynn S. Lunney Jr., Patent Law, the Federal Circuit, and the Supreme Court: A Quiet Revolution, 11 Sup. Ct. Econ. Rev. 1 (2004). 170 Maskus, Dougherty & Mertha, supra note 56, at 303–04. 171 TRIPs Agreement, art. 27(1), Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, Legal Instruments — Results of the Uruguay Round, Marrakesh, 15 Apr. 1994, 33 I.L.M. 1197 (1994). 164

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industry. Put differently, countries cannot pick and choose; they have to offer protection to all industries as long as they remain members of the WTO. Nevertheless, Article 27 allows all members, including those with great sectoral disparities, to carefully tailor the country’s protection to local needs. Because the TRIPs Agreement covers only minimum standards of protection offered by each WTO member,172 it does not dictate the scope of protection beyond what the agreement requires. The TRIPs Agreement also does not require countries to offer protection of equal scope and strength to all industries. As long as countries do not discriminate between national and foreign rights holders and between the different types of industries, countries are free to introduce legislation that provides additional protection to benefit local industries. In fact, the preamble of the TRIPs Agreement recognizes “the special needs of the least-developed country Members in respect of maximum flexibility in the domestic implementation of laws and regulations in order to enable them to create a sound and viable technological base.”173 Article 8 of the Agreement states that “Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement.”174 Moreover, as Professor Heald pointed out: Nothing in the TRIPS Agreement prevents other countries from similarly favoring local creators of sub-patentable innovation by protecting their work. Although a developing country is unlikely to have numerous strong sectors in its economy, it may have some modest innovators worthy of special protection from competition. For example, if a country has a strong textile industry that occasionally improves its dyeing and weaving techniques, protection of new (but obvious) methods should tend to favor local firms, even if protection is not discriminatory on its face.175 For example, commentators have described the benefits of offering sui generis or utility model protection, which offers protection of limited duration to minor or incremental innovations that involve low levels of novelty.176 “[S]tudies in Brazil and the Philippines suggested that effective systems of utility models can promote innovation. Another study demonstrated econometrically that Japan’s system of utility models and widespread licensing of new technologies contributed positively and significantly to its postwar rise in productivity.”177 In sum, if we are to fully understand the relationship between intellectual property protection and economic development, we need to pay attention to the different forms of intellectual property and the varying scope of protection each of them covers. It would be misleading to explore the impact of intellectual property protection as if all of these various forms of protection are based on identical models, offer protection of similar 172

Id. art. (1). Id. pmbl. 174 Id. art. 8(1). 175 Heald, supra note 27, at 270. 176 Commission on Intellectual Property Rights, supra note 59, at 21; Maskus, supra note 26, at 148; Maskus, Dougherty & Mertha, supra note 56, at 299; Jerome H. Reichman, From Free Riders to Fair Followers: Global Competition Under the TRIPS Agreement, 29 N.Y.U. J. Int’l L. & Pol. 11, 62–74 (1997). For a recent study of utility models, see Uma Suthersanen, Utility Models and Innovation in Developing Countries (2006), available at http://www.unctad.org/en/docs/iteipc20066_en.pdf. 177 Keith E. Maskus, The Economics of Global Intellectual Property and Economic Development: A Survey, in Yu, supra note 23, at 4:159, 164. 173

1018 S E S S I O N X I I : T R A D E scope and characteristics, and incur similar social costs. With increasing sui generis protection for new subject matters and technologies, a clear understanding of the impact on each industrial sector becomes even more important. Moreover, in China, the protection for different forms of intellectual property varies according to the xitong, or functional bureaucratic system, that governs each form of protection. As a result, the philosophies behind such protection and the support it receives from related industrial sectors may affect the level of protection in a particular area. As Andrew Mertha pointed out in his book, The Politics of Piracy, a better understanding of the different xitong will enable one to understand better the effectiveness of the protection involved and the potential resistance confronting the push for greater protection in the area.178 In fact, because of the different degree of effectiveness with respect to each form of protection, rights holders and their attorneys often have to plan their intellectual property protection strategies. As Keith Maskus, Sean Dougherty, and Andrew Mertha recounted: One person involved in enforcement claimed that although 90 percent of his investigations involve trademark allegations and 10 percent involve patents, up to 60 percent of these cases could be patent violations. However, enforcement is easier if the case is pursued as a trademark violation. One reason for this bias seems to be that, to date, Chinese authorities have been reluctant to entertain patent cases, evidently in the belief that patent infringement embodies technology transfer and helps meet national technology development goals.179 The differences inherent in each xitong may further affect the pace of reforms for each form of intellectual property. Out of the three dominant forms of intellectual property, trademarks present the least problems for intellectual property reforms.180 By contrast, copyrights encounter the greatest challenge because of their association with propaganda, thought work, and information control.181 Patents are somewhat in between, due to their considerable impact on technology transfer and the potential for slowing down the country’s modernization efforts by draining foreign exchange reserves in the form of royalty and license fee payments.182 As Professor Mertha explained, the copyright bureaucracy “is embedded within a xitong that concerns itself with cultural, ideological, and value-laden media and is therefore involved in a more politically sensitive environment, even if technical copyright issues themselves are no more or less “political” than those pertaining to patents or trademarks.”183 Thus, it is no surprise that trademarks have been protected even during the Cultural Revolution. When China reopened its market for foreign trade in the late 1970s, the trademark law was also the first to be (re)introduced. Meanwhile, the patent law was filled with compromises, while the copyright law was the last to be enacted. Had there not been continuous pressure from the U.S. government and the intention to rebuild international ties after Tiananmen, the introduction of the copyright law might not even take place in 1990.184 178

Mertha, supra note 63, at 15. Maskus, Dougherty & Mertha, supra note 56, at 310. 180 Yu, supra note19, at 995. 181 Mertha, supra note 63, at 140. For discussion of the Chinese censorship and the information control policy, see Yu, supra note 71, at 28–32. 182 Yu, supra note 19, at 995. 183 Mertha, supra note 63, at 133–34. 184 Id. 179

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In sum, like regional disparities, sectoral disparities greatly affect the analysis of the relationship between intellectual property protection and economic development. At times, sectoral disparities are the partial result of regional disparities. Taken together, regional and sectoral disparities not only affect the type of industry that are fast-growing in the region, but also the type of pirated and counterfeit products that will become available there. As one commentator suggested: According to the China United Intellectual Property Protection Centre (CUIPPC), a private business that has been representing Western companies like Coca-Cola, Microsoft and Kodak in China since 1994, there are even regional centres of counterfeiting expertise: imagine Silicon Valley for fakes. So if you are manufacturing in Chaosan, in Guangdong Province, your specialty is likely to be electronics, cigarettes, pharmaceuticals or CDs. For car parts, it’s more likely you’ll be in Wenzhou City or the Pearl River Delta. In Yuxiao County, the expertise is in manufacturing fake cigarettes; in Jintan City, it’s pesticides.185 C. INADEQUATE ENABLING ENVIRONMENT

With the expansion of intellectual property protection and the growing interdependence between different bodies of law, a focus on only intellectual property laws and enforcement alone often do not fully account for the full extent of such protection. Instead, one often needs to understand better the political, economic, and judicial environments that enable effective intellectual property enforcement—something I describe here as the enabling environment for effective intellectual property protection. So far, commentators have underscored the importance of these complementary factors. Edwin Mansfield noted that “one should recognize that a country’s system of intellectual property protection is inextricably bound up with its entire legal and social system and its attitudes toward private property; it involves much more than the passage of a patent or copyright law.”186 Robert Sherwood reminded us that “some things cannot be legislated.”187 As he put it bluntly, “until judicial systems in developing and transition countries are upgraded, it will matter little what intellectual property laws and treaties provide.”188 Paul Heald stated that “a rational strategy for developing countries must not only consider compliance options, but must also account for institutional competency—legislative, judicial, executive, and diplomatic—in order to make the most of available options.”189 As Maskus, Dougherty, and Mertha summarized in the Chinese context: Upgrading protection for IPRs alone is a necessary but not sufficient condition for th[e] purpose [of maximizing the competitive gains from additional innovation and technology acquisition over time, with particular emphasis on raising innovative activity by domestic entrepreneurs and enterprises]. Rather, the system needs to be strengthened within a comprehensive and coherent set of policy initiatives that optimize the effectiveness of IPRs. Among such initiatives are further structural reform of enterprises, trade and investment liberalization, promotion of financial and innovation systems to commercialize new technologies, expansion of educational opportunities to build human capital for absorbing and developing technology, and specification of rules for maintaining effective competition in Chinese markets.190 185 186 187 188 189 190

Tim Phillips, Knockoff: The Deadly Trade in Counterfeit Goods 59 (2005). Mansfield, supra note 40, at 20. Robert M. Sherwood, Some Things Cannot Be Legislated, 10 Cardozo J. Int’l & Comp. L. 37 (2002). Id. at 42. Heald, supra note 27, at 252. Maskus, Dougherty & Mertha, supra note 56, at 297.

1020 S E S S I O N X I I : T R A D E As they noted, the effectiveness of intellectual property protection in expanding economic growth and promoting technology development not only depend heavily on economic circumstances and the existence of a sufficiently developed technological base and infrastructure, but also on such complementary factors as “further structural reform to increase entrepreneurship and flexibility of enterprises; expanded liberalization of restrictions on trade, investment, and technology agreements; and additional steps to ensure competition in domestic markets among firms and across regions.”191 In China, the oft-cited barriers to intellectual property reforms include “the difficulties in monitoring a large territory, in collecting evidence of infringement, and in collecting judgments, widespread corruption, abuse by government officials, different values placed on intellectual property infringement, the indistinguishability between public and private entities, local protectionism, and the decentralization of government.”192 Ironically, yet crucially, none of these barriers is directly covered by the TRIPs Agreement or by the many international intellectual property treaties China has ratified. As I pointed out elsewhere, one of the major defects of the United States’s potential WTO complaint against China over its lack of general enforcement of intellectual property rights is the inability by the United States to show that China’s enforcement in the intellectual property area is worse than its enforcement in other areas.193 Article 41(5) of the TRIPs Agreement stated specifically that a WTO member state is not required to devote more resources to intellectual property enforcement than in other areas of law enforcement.194 If China were able to show that their enforcement problems with piracy and counterfeiting were no more excessive than their problems with, say, tax collection (which are very serious),195 China would be likely to prevail. After all, it is hard to imagine any country putting intellectual property protection ahead of tax collection. Nor does the WTO require it to do so. Finally, it is important not to ignore the additional protection that is offered outside the intellectual property regime. To protect their intellectual assets, rights holders have increasingly relied on mass-market contracts, such as shrinkwrap or clickwrap licenses.196 They have also used alternative technological protection measures, such as encryption technology for protecting copyrighted works in digital media197 and genetic use restriction technologies (GURTs) for protecting seeds.198 Whether this additional protection will help protect the important intellectual assets will ultimately depend on the additional legal protection in the contract area or in related areas that govern the circumvention of technological protection mechanisms. In sum, one has to look beyond the intellectual property system to examine the various complimentary factors that are needed to build an enabling environment for effective intellectual property protection. Although the addition of these factors will complicate 191

Id. at 307. Yu, supra note 18, at 230–31. 193 Yu, supra note 19, at 935. 194 TRIPs Agreement, art. 41(5). 195 For discussion of China’s problems with the collection of tax revenues, see John L. Chan, China Streetsmart: What You MUST Know to Be Effective and Profitable in China 103 (2003); John H. Jackson, The Impact of China’s Accession on the WTO, in China and the World Trading System: Entering the New Millennium 19, 27 (Debra D. Cass, Brett G. Williams & George Robert Barker eds., 2003); Dali Yang, Reform and the Restructuring of Central-Local Relations, in Goodman, supra note 140, at 59. 196 Peter K. Yu, Five Disharmonizing Trends in the International Intellectual Property Regime, in Yu, supra note 23, at 73, 91–94. 197 Peter K. Yu, Anticircumvention and Anti-anticircumvention, 84 Denver U. L. Rev. 13 (2006). 198 Timothy Swanson & Timo Goeschl, Diffusion and Distribution: The Impacts on Poor Countries of Technological Enforcement Within the Biotechnology Sector, in Maskus & Reichman, supra note 24, at 669. 192

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the analysis and make it more difficult to clearly identify the determinants for economic development, such addition will also provide a more complete analysis that more accurately and realistically assess intellectual property enforcement. D. MICRO-LEVEL, QUANTITATIVE IMPROVEMENTS

Bilateral intellectual property discussions are inevitably state-centered. As a result, documents emanating from these discussions tend to overemphasize developments at the macroscopic level, rather than the microscopic level. In February 2006, for example, the USTR completed a “top-to-bottom review” of U.S.-China trade relations.199 Although the importance of undertaking this comprehensive study cannot be ignored, the topdown approach used in conducting the study is somewhat misguided. First, studies that are conducted using the top-down approach often contain quantitative analyses that rely on the use of basic indicators as proxies for the effectiveness of the country’s intellectual property protection. For example, Section 301 submissions or similar reports are filled with information about which laws have been enacted, which new taskforces have been established, how many patents or trademarks have been applied or granted, how many intellectual property cases have been brought and tried, how cases have been disposed, and how many criminal prosecutions the local authorities have pursued. Likewise, reports supplied by the Chinese authorities are filled with similar, and often impressive, statistics as well as “war stories” about the efforts these authorities have launched or completed to crack down on piracy and counterfeiting. To be certain, proxy measures are sometimes needed,200 and basic indicators can be selected in a way that will tell not only “on the books” stories, but also how written laws have been translated into practice. In fact, these statistics may provide important and useful information about recent intellectual property reforms in China. Nevertheless, just like the various indices used often for ranking intellectual property protection in empirical surveys, the basic indicators are unlikely to “fully capture the complexities and multiple dimensions of modern IPR systems.”201 An overemphasis on quantitative analysis therefore will lead researchers to overlook the important developments that can only be revealed through qualitative or case-by-case analyses. Indeed, as seasoned China observers have pointed out, many of the most interesting developments in China were not taking place at the macroscopic level, but rather at the microscopic level. For example, commentators have suggested how village and township elections have provided hope for China’s democratic reforms,202 while the proliferation of bulletin boards, chat rooms, and Web logs has resulted in an expansion of free expression and political discourse in the country.203 One might even remember David Sheff ’s insightful observation in his book about the transformation of mass communication in China, in which the ringing mobile phone in the backroom of a Chinese restaurant belonged to a waiter, rather than the businesspeople inside.204 Had researchers focused

199 Office of the U.S. Trade Representative, U.S.-China Trade Relations: Entering a New Phase of Greater Accountability and Enforcement: Top-to-Bottom Review 4 (2006). 200 Commission on Intellectual Property Rights, supra note 59, at 21. 201 Primo Braga & Fink, supra note 26, at 180. 202 Jamie P. Horsley, A Legal Perspective on the Development of Electoral Democracy in China: The Case of Village Elections, in Understanding China’s Legal System: Essays in Honor of Jerome A. Cohen 295 (C. Stephen Hsu ed., 2003). 203 Benjamin L. Liebman & Tim Wu, Chinese Network Justice, 8 Chi. J. Int’l L. (forthcoming, 2007). 204 David Sheff, China Dawn: Culture and Conflict in China’s Business Revolution 91 (2002).

1022 S E S S I O N X I I : T R A D E solely on top-down developments or the statistics supplied by governments or industry groups, they would have missed these important developments. Like other reforms in China, the most interesting developments in the intellectual property area are now taking place at the microscopic and qualitative levels. For example, many of today’s copyright- or patent-based piracy cases are no longer disputes about verbatim copies of protected goods, although such disputes still exist and piracy of music, movies, and computer software remains rampant in the country. Many of these cases also do not involve underground or fly-by-night operations, but rather legitimate businesses that are either ignorant of intellectual property laws or are testing the limits of the law.205 This line of disputes include those concerning the unauthorized translation or adaptation of copyrighted works or the infringing use of patented processes in the manufacture of competing finished products. Moreover, although many of today’s intellectual property disputes may sound like traditional piracy stories, they have more complex storylines. Elsewhere, I have discussed how the recent invalidation of Pfizer’s patent on Viagra by the State Intellectual Property Office, which was later overturned by a Chinese court, has shown promising development in which local pharmaceutical manufacturers took the legal route to challenge the patent owned by a major foreign company. In the past, local manufacturers were likely to ignore the law and rely on counterfeits to compete.206 Similarly, the celebrated dispute between General Motors and Chery Automobile Company, in which General Motors claimed that the Shanghai-based automaker copied its Chevy Spark in designing the Chery QQ, was far from a typical intellectual property dispute. That dispute included complicated legal issues raised by the territorial nature of intellectual property rights, General Motors’s lack of patents in China, the complexity created by General Motors’s acquisition of Korea-based Daewoo Motor.207 Had the dispute been a simple infringement case, one has to wonder why it eventually took three years and required the “assistance” of the Chinese government to reach an out-of-court settlement to end the dispute.208 In addition to the nature of the disputes, one can explore whether and to what extent the consciousness of intellectual property rights have grown among the Chinese populace. One of the more promising copyright-related developments is the growth of private collective copyright administration bodies. The first of these bodies, the Music Copyright Society of China, was established on December 17, 1992. Today, it represents more than 2,500 “local stakeholders,” including Chinese singers, composers, music adaptors, heirs, music publishers and recording companies of Chinese nationality.209 Meanwhile, a few other collective bodies have been established since 2000.210 With the recognition of these private administration bodies in the recently revised copyright law, their number is likely

205

Yu, supra note 19, at 977. Id. at 986. 207 Id. at 950. 208 As reported, “GM and Chery extended their appreciation to Chinese government for helping to resolve the dispute.” Intellectual Property Battle Between GM and Chery Reaches Settlement, China IP Express, Dec. 1, 2005, available at http://www.iprights.com/publications/chinaipexpress/ciex_268.asp. Although Chery agreed not to use the CHERY trademark in the United States, which is likely to be confusingly similar to General Motors’s CHEVY trademark, Malcolm Bricklin, Chery’s American partner, claimed that “Chery [was] not required to pay any compensation to GM under the settlement agreement . . . [and that] the agreement clears the way for a smoother introduction of the newly designed, Chinese-made, vehicles into the United States, starting in 2007.” 209 Sun, supra note20, at 63. 210 Id. 206

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to grow substantially.211 In fact, one commentator has recently suggested the possibility for the institution of a private levy system in light of the country’s changing conditions.212 Finally, it is important to analyze the impact of changes in the intellectual property system on consumers, in both tangible and intangible forms. Are consumers getting products of better quality and higher reliability? Are they getting products that are more suitable or desirable? Do they have more confidence in shopping in the open market? Do they have more product choices? Do they respect others’ legal rights more than they used to? To some extent, finding the answers to some of these questions are just as difficult as examining whether Mark Twain was right that stronger copyright protection in nineteenth-century United States would have prevented young Americans from being polluted by foreign novels that “fill[ed] the imagination with an unhealthy fascination with foreign life, with its dukes and earls and kings, its fuss and feathers, its graceful immoralities, its sugar-coated injustices and oppressions.”213 Nevertheless, a better account of the many intangible improvements in intellectual property protection is likely to enhance the quality of the overall economic analysis. In the near future, the amount of intellectual property infringement in China is likely to be as important as the type of the infringement. Thus, the use of the top-down approach and the reliance on basic indicators are likely to be of limited use. Instead of questioning how often infringement takes place, one also has to examine what type of infringement has occurred. Because policy compromises are needed to respond to regional and sectoral variations within the country, region-based, sector-specific, microlevel, qualitative analyses are likely to be more illuminating than those focusing on nationwide, cross-sector, macro-level, quantitative developments. In fact, if researchers continue to use a top-down, nation-based approach, they will not be able to fully account for the progress China has made in recent intellectual property reforms. V. CONCLUSION Many commentators have considered China the proverbial exception to the causal relationship between the strength of intellectual property protection and economic development. This chapter rejects that position and contends that China illustrates rather well the ambiguity of the relationship and the complex interplay of the different location advantages that affect private investment decisions. Whether one can develop a complete and accurate picture of this relationship will depend on whether one understands and properly analyzes the many different factors that affect those decisions. Compared to other countries, the study of this relationship in China has been made particularly difficult by the uneven development and continuous economic transition. Nevertheless, a better understanding of this relationship will help provide a more 211 Article 8 of the revised copyright law provides that copyright holders “may authorize an organization for collective administration of copyright to exercise the copyright or any copyright-related right.” Chinese Copyright Law, supra note 108, art. 8. 212 Eric Priest, The Future of Music and Film Piracy in China, 21 Berkeley Tech. L.J. 795 (2006). 213 As Mark Twain wrote in Century Magazine in 1886: The statistics of any public library will show that of every hundred books read by our people, about seventy are novels—and nine-tenths of them foreign ones. They fill the imagination with an unhealthy fascination with foreign life, with its dukes and earls and kings, its fuss and feathers, its graceful immoralities, its sugar-coated injustices and oppressions; and this fascination breeds a more or less pronounced dis-satisfaction with our country and form of government, and contempt for our republican commonplaces and simplicities; it also breeds a longing for something “better” which presently crops out in the diseased shams and imitations of the ideal foreign spectacle: Hence the “dude.” Siva Aaidhyanathan, Copyrights and Copywrongs: The Rise of Intellectual Property and How It Threatens Creativity 61 (2001).

1024 S E S S I O N X I I : T R A D E accurate forecast of when China will reach a crossover point at which it will find stronger intellectual property protection in its self-interests. Interestingly, despite the urgency of finding when China will reach this crossover point and the importance of fully understanding the socioeconomic impact of stronger intellectual property protection, the relationship between intellectual property and economic development has been largely under-explored by commentators—Chinese commentators in particular. As Maskus, Dougherty, and Mertha observed: University scholarship in China (and in other countries) in IPRs is overwhelmingly addressed to legal issues. Many scholars are actively involved in assessing shortcomings in the law and in drafting revisions, and they also participate in training new intellectual property lawyers. Few economists study the processes of technical change in China and how they are affected by market structure, competition, and exposure to foreign technologies and investment. Fewer still examine the relationship between IPRs, technical development, and growth. Accordingly, economists in China either remain unaware of IPR issues or are skeptical about the potential for IPRs to increase technological advance and business development.214 Hopefully, this chapter, and the larger volume, will convince policymakers that intellectual property protection should be measured not only in legal terms, but also in socioeconomic ones. Although intellectual property protection may not be a prerequisite for economic development and growth, it is an integral and essential part of a complex innovation system that serves as a catalyst for economic development. The sooner Chinese policymakers understand the dynamics of this complex innovation system, the quicker they can harness the system to promote the country’s economic development. *

*

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PROF. HUGHES: We have heard from three Americans. Now let’s turn it over, mix it up a

little, and get some international reaction. Let’s first get a reaction from the wisdom of the bench. Hugh Laddie, what can you tell us about the propriety or thoughtfulness or wisdom of the United States taking this approach, going before the international tribunal on these issues? PROF. LADDIE: I would like to address the wisdom only. I think this is absolutely absurd. I think if it were the case that China were not trying to get up to speed, I could see the point in this. But anybody who has seen what China has done in a mere fifteen years, from zero, cannot but be impressed. They have hundreds of judges being trained to become IP specialists. How many judges in America are trained to be IP specialists? None. How many are trained in England? None. They have first instance judges who are IP specialists. How many first instance specialists are there in America? None. In America you have juries instead. That is a real sign of trying to tackle the problem. If you are talking about why the police don’t go and raid every single person with a small consignment of pirated goods, you could go across the road — I’ve been shopping here this week — and you can get pirated goods on every street corner. Why aren’t your police rounding up all these pirates? It is not practical. I happen to believe that China is doing a simply staggering job of going from nowhere to trying to be an IP-enforcing country. The suggestion that Chinese police and enforcement should direct their attention to 214

Maskus, Dougherty & Mertha, supra note 56, at 311.

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everybody with a pirate DVD or pirate recording would mean that they would probably have no police resources to deal with any other crimes in the country. That is the reality of the situation. Penultimately, the reality is, because of the way that China has developed over the years, it has a very large pirate industry. The Chinese know that. Everybody there knows that. That means there are a lot of people who are employed in that industry. We are talking about millions. If you try to stop it overnight, it will put millions out of work. It has got to be stopped, and the Chinese are doing their best to do it. But if you think that getting WTO on your side is going to make it acceptable for the Chinese to put millions, maybe tens of millions, out of work overnight, it’s just not realistic. And finally, if this goes against China, I can only assume that China will do exactly what America did when there was a WTO finding against it in relation to copyright. It simply ignored the finding. To this day it has not changed its law to become WTOcompliant. It has been like that for years. So at least the Chinese should do what America does. PROF. HUGHES: Hugh, in fairness, the United States pays a million dollars a year to the Irish in order not to bring our law into compliance. So if the Chinese will pay the appropriate sum, I think that our copyright Industries would let it go. Professor Wang, do you want to give us a perspective as wise and as amazingly, wonderfully succinct as Hugh Laddie? PROF. WANG: I totally agree with Sir Hugh Laddie. I would like to start with an example. There are thieves everywhere and there are many policemen pursuing thieves. If a thief is caught and he is fortunate enough to have stolen successfully valuable things, he can be put in jail for years. But will the tough law alone eliminate all thieves? Of course not. Thieves are the by-product of social problems. The effectiveness of the enforcement of law depends on a number of complicated factors, like the whole economy situation, the public awareness, the tradition, the culture. When the economy is good and the unemployment rate is low, there won’t be many thieves there. So enforcement law is not the only or the most effective solution to social problems. I think the same reasoning applies to piracy. As far as I know, the entertainment industry here in the United States is asking the Chinese government to prosecute hawkers of pirated copies on the street. We have to remember that most vendors of pirated copies on the street are unemployed workers. Most of them just do not understand why selling CDs or DVDs on which movies or software or music are fixed without license is equivalent to stealing. As long as they sell 500 pirated copies, they could be put in jail, in theory. But how many policemen do the Chinese government need to catch all street vendors? The government may motivate all policemen in the whole country one night to catch every vendor of pirated copies in Beijing or Shanghai. That may be true. But how about tomorrow? How about the day after tomorrow? Most policemen will go back to their old position to catch thieves, smugglers, robbers, and those vendors will go back to the street. Once again, enforcement of law is not the only or the best way to resolve complex social problems. In my opinion, what the U.S. government should do is not to press the Chinese government to take rough measures on those poor vendors who sell pirate copies on the street, but to provide much more assistance in raising the public awareness in China. I totally agree with what Sir Hugh said. We need time. PROF. HUGHES: I sense Eric wants to respond to that, but before we do we have a last

1026 S E S S I O N X I I : T R A D E panelist, Mark Traphagen, who is in practice in Washington and also has spent a lot of time thinking about these issues. Mark, do you want to give us a quick comment on this? MR. TRAPHAGEN: Yes. Thanks, Justin. I don’t have anything quite as colorful to say about this, but I did want to just underscore that this will be a very, very important case. That seems self-evident. It will be very important to the parties. It will be very important as well, however, to the WTO and the TRIPs regime. With that in mind, I think it is important to keep in mind a couple of things as the process works its way through. There will be a consultation period. Then it will be at a very important point in organizing the terms of reference for the panel, the specific questions that they will be asked to answer if the dispute goes forward. There will also be a panel selection process in which the panelists themselves will be selected. There will be opportunities for input from the interested WTO members in the panel composition. That panel, I think, will have a very great responsibility. I would like to suggest that they keep three things in mind if they get a chance to rule on these disputes. 앫 The first is they are going to be asked to interpret some standards. I think that they have a responsibility to make them real standards, to make it clear the TRIPs Agreement is not just aspirational but that it is concrete and real. 앫 Second, the standard should not be self-determined. 앫 The standards must have, finally, some sort of objective basis so that they can be measured. I think this is very important for the TRIPs Agreement to provide guidance and to remain effective in years to come with respect to the enforcement provisions. Thank you. PROF. HUGHES: I want to propose that we are going to go to 6:40, and we will take some questions and answers. Let me just make some initial moderator comments. Peter, I think Mark’s answer to you is partly you are right, the word “effective” hasn’t been interpreted in the TRIPs document and that it is high time we should. I guess you would probably say that that’s okay, and I would probably say I wish it had been the case against Macedonia. Peter, do you acknowledge that at some point we are going to have to interpret these words? PROF. YU: I think that’s a good thing, too. PROF. HUGHES: Hugh, let me ask you this. You voiced the observation that China has gone from zero to fifty in intellectual property recognition and efforts of enforcement in an amazingly short time. But the problem is that they committed in a treaty to go from zero to sixty, and the Americans say, “Where are our ten additional miles?” The Chinese are saying, “What are you talking about? We’ve done something no one else has ever done.” But I believe your perspective is that is good that the United States chose some very narrow issues, not trying to critique the system as a whole under Article 61, but they chose some very precise things that can have clean solutions. Would you agree with that? PROF. LADDIE: I wouldn’t have said “good” at all. Let me explain again. I think it is tactically wrong. If you think, as I happen to do, that China is busting a gut to do the job properly, what is the point of complaining to the WTO, to get an order which the Chinese can’t implement? I do not believe this is a sensible way of proceeding. As it happens, the firm that I am associated with does a lot of work in China. They do a lot of enforcement work in China. The situation is changing.

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What I am saying is if, as I believe and as I think many observers believe, the Chinese have done astonishing things to get as far as they have so far, what are you trying to achieve? Are you trying to get them to do more than is possible? If you come to the conclusion you are trying to get them to do more than is possible, then this is not a logical step to take. I am not surprised that the Chinese have said in response to this: (1) “We are very unhappy about it”; and (2) “What we have been saying over and over again is give us time. Look at our track record. We have shown earnest effort.” PROF. HUGHES: Hugh, can I ask you one question before opening up for general discussion? I know you’ve probably been to Beijing many times. Is it easier to find a DVD of a Tom Cruise movie or a DVD criticizing the Politburo? PROF. LADDIE: I think that’s an irrelevant question. PROF. HUGHES: Well, no, it is relevant to enforcement, if you have a will to enforce. PROF. LADDIE: I will tell you that it is easier to find a fake DVD in Beijing than in New York, but you don’t have to try too hard in either place. PROF. HUGHES: Are there any questions? QUESTION [Naigen Zhang, Fudan University/Georgetown Law Center]: I am a Chinese Fulbright Research Scholar at the Georgetown Law Center. I have two short questions, because time has run out due to too many comments by the moderator. I have, in particular for Victoria and Eric, two short questions. Does Article 1, Paragraph 1, first sentence of the TRIPs Agreement, on the international obligations, “Members shall give effect to the provisions of this Agreement,” give members rights to implement the TRIPs Agreement domestically, including the criminal punishment? That is a “yes” or “no” question. Second, a question for Victoria: Why does the United States’ request for consultation on the second issue, market accession, not mention the copyright issue? You talked about the second issue being related to copyright, but in the formal request it does not mention this is copyright. Why? You can look at the request. There is no mention of copyrights; it just says “market accession.” So these two short questions, first the “yes or no,” second the “why?” Thank you very much. MS. ESPINEL: To the first question, Article 1(1) says that you can implement. It does not say that you can violate your obligations. QUESTIONER: I understand. Would you say “yes” or “no?” MS. ESPINEL: Yes, you can implement. No, you cannot violate. QUESTIONER: Okay. So that means that you have the obligation to implement, but also you have the right to do it domestically. Like the United States has in its Copyright Act Section 115 on exceptions. So that is the same, two sides of the same coin. MS. ESPINEL: If I understand where you are going, you are saying that because the U.S. copyright law was found to be inconsistent in one area, therefore no other country has to implement their obligations under the WTO? QUESTIONER: Yes. MS. ESPINEL: I would disagree with that, but I suppose you could take that position. To be honest, I’m not sure I understood your second question. QUESTIONER: I mentioned that the formal request for the consultation does not mention the copyright issues. Why? MS. ESPINEL: I’m not sure what you mean. It does, in fact. There is an IP case and there is a market access case.

1028 S E S S I O N X I I : T R A D E QUESTIONER: No. The first case is the IP case. The second is the market accession case, but in this request I did not read anywhere the word “copyright.” PROF. HUGHES: What is the point whether or not the second one is there? QUESTIONER: Why? PROF. HUGHES: What’s your point? Who cares whether it says the word “copyright?” QUESTIONER: I asked Victoria because she talked about it. She talked about four points. The third and fourth points related to the second case and also related to copyright. But actually in the request, the formal position, it did not say that. Why? MS. ESPINEL: I was trying to explain the case in non-legal language. The consultation request will set things out in a much more formal way. The reality is that the market access barriers have a disproportionate impact on the copyright industry. There are reasons, I suppose, why China decided to leave those barriers in place for the copyright, the content industry in particular, where it chose to get rid of them for other industries it may view as less sensitive in terms of letting content into China. My description of the cases was not intended to be “legal WTO-speak” but to give people a sense of what was behind the cases and the claims. PROF. HUGHES: Is there another question? QUESTION [George Conk, Fordham University School of Law]: On the USTR’s action, I think it is an astonishing case of tone deafness. In a country where just a couple of years ago we managed to get the U.S. Supreme Court to stop millions of daily downloads of copyrighted material, we have now decided that we are going to file a complaint in the WTO because the Chinese have decided that they are only going to criminally enforce production and distribution of copyrighted materials at a threshold of 500. Why don’t we declare victory in response to that 500 and announce that this is a great step forward and do what we can to encourage progress in establishing that norm? MS. ESPINEL: I think you may have misunderstood slightly what I was saying. The question is not what China chooses to prosecute against. The question is that their copyright law creates essentially an exception from criminal liability if you don’t meet a certain threshold. To me it doesn’t seem like any great victory that you can set up a store that is clearly engaged in commercial pirate retail activity and by monitoring the number of products that you have on the shelves escape even the possibility of criminal prosecution. I’m not sure where the great victory in that is. QUESTIONER [Mr. Conk]: It just strikes me as a very routine prosecutorial-type discretion decision made by the Chinese Supreme People’s Court. MS. ESPINEL: Right. But that is an entirely different issue. QUESTIONER [Mr. Conk]: I think that when you have a threshold of 500, that the argument is plain that you have an effective system and you have made decisions regarding allocations of your prosecutorial resources. PROF. HUGHES : We have gone from question to commentary. Is there another question? QUESTION [David Llewelyn, IP Academy of Singapore]: Victoria, I was very interested to hear your description of the complaints. As a lawyer, they sound very persuasive. Ultimately you may win. In the short term, though, they clearly play well with certain constituencies in the United States. But what is your Office doing about winning the international opinion battle? I really think that there is a big problem here. We saw, immediately after the complaints, comments in the U.S. press that are misleading, which seem to suggest that you are doing what you now describe you are actually not doing. You are identifying certain things with which China is not complying. One can have debates as to whether it is the right way to

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deal with it. But you are losing the battle internationally, whatever might be happening here at home in the United States. Does USTR care about international public opinion? PROF. HUGHES: Just “yes” or “no,” Victoria. MS. ESPINEL: Sometimes. But I would say we don’t predicate all our actions on the media that we are likely to get. PROF. HUGHES: We have now run to 6:44. Is there one last question? Susy Frankel representing the entire Southern Hemisphere of the planet. QUESTION [Prof. Susy Frankel, Victoria University of Wellington]: I am on neither side, if it can be simplified like that. I did want to raise one point, which first came from Sir Hugh and was replied to by Justin. This concerns “do as the U.S. does.” When you are not part of a big country — and as you know, New Zealand is particularly small and there are many nations who are small, lots in between — this sort of “tit-for-tat” approach is unacceptable. I really like the USTR’s point about getting some issues out there. We should remember that part of the justification for the WTO regime is that it is a place for all. What is wrong with the copyright case is that although compensation is paid to the European Union, other members of the WTO might benefit if the law was repealed in accordance with the Panel’s decision. Are the other countries that do not benefit from Section 110(5)215 supposed to bring independent cases? Although I sympathize with the proposition “do as the U.S. does,” I wouldn’t want to encourage that because that is not helpful to the perception of the WTO dispute settlement process PROF. HUGHES: Where is the question mark? Put a question mark in there, Susy. QUESTIONER [Prof. Frankel]: Say the United States wins against China. What is the proposed enforcement? I suspect the answer is that China cannot do better than it is already doing on enforcement. So what is the perceived aim of filing the complaint? A WTO dispute, as you know, has the possibility of enforcement. What is the enforcement here? PROF. HUGHES: Question mark. Sir Hugh Laddie gets to answer the question. Go for it. PROF. LADDIE: Can I just say this? You misunderstood. When I said what I said, it was English humor or sarcasm. The message was that it was wrong for America to refuse to comply with the WTO ruling. But the reason it refused was because of the domestic and economic pressures. The same domestic pressures also exist but are far stronger in China now. That’s why the United States shouldn’t be launching a complaint, which, if they are successful will result in a ruling that China cannot enforce or cannot practically give effect to. PROF. HUGHES: We are now at the bad point where the comments are generating a need to respond. Eric, you get one minute. MR. SMITH: It will be no surprise that I don’t agree at all with Judge Laddie. Criminal enforcement is about quality, not quantity. Everybody argues here, “Oh, if you do this you are going to have to bring cases against everybody in the whole wide world.” No. 215 Copyright Law of the United States, codified at 17 U.S.C. § 110, available at http://www.copyright.gov/ title17/92chap1.html. See WTO Dispute Settlement DS160 (filed by the European Communities, Jan. 26, 1999). The EC requested consultations with the United States in respect of § 110(5) of the U.S. Copyright Act, as amended by the Fairness in Music Licensing Act, which was enacted on Oct. 27, 1998. The EC contended that § 110(5) permits, under certain conditions, the playing of radio and television music in public places (bars, shops, restaurants, etc.) without the payment of a royalty fee. The EC considered that this statute is inconsistent with U.S. obligations under art. 9(1) of the TRIPs Agreement, which requires Members to comply with arts. 1–21 of the Berne Convention. A summary of the dispute is available at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ ds160_e. htm.

1030 S E S S I O N X I I : T R A D E There have only been maybe in the last seven years five criminal cases involving copyrighted works of WTO members that have gone to the courts and where there was a conviction in China. You cannot have an effective system. This doesn’t go to the case, by the way. This is on-the-ground stuff. First, I think the Chinese can implement a WTO decision in this case. They have to lower the threshold. It is very simple. They can do it. They just did it.216 They can very easily do it again. Second, they do not have to enforce against every hawker or every retail store. Nobody does that. It’s quality, not quantity. Deterrent penalties — piracy rates will go down. We don’t get any of that in China. You get it here, you get it in the United Kingdom, you get it in every country almost in the world. You do not get it in China. I think China can do it. I think they want to do it. There was just a poll that was done showing that 52 percent of the 18,000 Chinese people surveyed said, “We think what the U.S. did was reasonable.” PROF. HUGHES: Victoria, one last word. MS. ESPINEL: I will just say in response that it sounds like, in spite of my incredibly clear and eloquent description of the case, there is still some misunderstanding about the claims that the United States brought. I think there are, as we described, very targeted, discrete hurdles that China has put in its criminal enforcement system, and they are things that China could very well remedy, and fairly easily in fact, if they chose to do so. They will certainly not require the police to sweep off everyone on the street, but it will require China to take away some of the road bumps that it has put into its enforcement system and its market access system at present. On the issue of Section 110(5), which I wasn’t going to address but that has been raised several times, I will just say that I don’t speak for all three branches of the government. I think USTR is generally in sympathy with the views that have been expressed here. I would direct you to the House Judiciary Committee. PROF. HUGHES: Which has, fortunately, a Democratic leader now. Thanks everyone.

216 On Apr. 5, 2007, China’s Supreme People’s Court and Supreme People’s Procura-torate jointly issued rules, entitled Judicial Interpretation on Several Issues in the Concrete Application of the Law in Handling Criminal Cases of IP Infringement, which lowered the threshold of IPR crimes in China. Xinhua News Agency (CEIS) (Apr. 6, 2007). Summary available at http://www.chinatzone.com/news_dls.php?id=285&category=USITO%20 Weekly%20China%20%20Summary.

APPENDIX THE NEXT TEN YEARS IN E.U. COPYRIGHT

Appendix

The Next Ten Years in E.U. Copyright: Making Markets Work Dr. Tilman Lüder*

I. Traditional Harmonization Policy so Far Policy in the field of copyright and related rights has traditionally been part of the European Community’s (hereinafter “the Community”) “Internal Market” agenda. According to Article 14 of the Treaty of Rome establishing the European Community (hereinafter “the EC Treaty”) the Internal Market “shall comprise an area without internal frontiers in which the free movement of goods, persons, services, and capital is ensured in accordance with the provisions of this Treaty.”1 Prior to the harmonization of national laws covering copyright and related rights — so-called “related” rights refer, e.g., to the rights of phonogram or film producers — there were major differences among the laws of the European Member States in the field of copyright and related rights. Indeed, some Member States did not foresee any protection for phonogram producers at all.2 Differences concerned, amongst others, the scope of exclusive rights, the proprietors of the exclusive rights, the term of protection, and the remedies available against infringement.3 Differences in the level and scope of protection, in the entities enjoying protection and in the duration of copyright terms caused considerable problems with the free movement of goods, and thus ran counter to the establishment of the Internal Market as codified in Article 14 of the EC Treaty.4 A PDF version of this article is available online at http://law.fordham.edu/publications/article.ihtml?pubID= 200&id=2576. Visit http://www.iplj.net for access to the complete Journal archive. *Head of the Copyright Unit, European Commission, Brussels. My thanks to Julie Samnadda and David Baervoets for providing many of the ideas that are incorporated in this article. The views expressed here are my own and do not necessarily reflect those of the European Commission. 1 Treaty Establishing the European Community, art. 14, Dec. 29, 2006, 2006 O.J. (C 321) 48 [hereinafter EC Treaty]. 2 See generally Case 78/70, Deutsche Grammophon Gesellschaft mbH v. Metro-SB-Großmärkte GmbH & Co. KG, 1971 E.C.R. 487, [1971] ECR 487 (Westlaw) (bringing to the fore the absence of protection for phonogram producers in France). A right for phonogram producers was only introduced in the French Intellectual Property Code on July 3, 1985. Collecting societies administering and enforcing phonogram producers’ rights were only established in the wake of this new right and the first royalty distributions for phonogram producers took place in 1989. Germany introduced producers’ rights by jurisprudence in 1936, but the precise scope of phonogram producers’ rights was only codified in the Copyright Act of 1965. In contrast, the United Kingdom copyright in a sound recording was recognised in the 1911 Copyright Act and a collecting society, Phonographic Performance Ltd. (PPL) has been active in this country since 1934. See Eric Keyser, Sound Recordings: The European Perspective, in Collective Licensing: Past, Present and Future 49, 49–52 (James M. Kendrick ed., 2002). 3 See generally Commission Green Paper on Copyright and the Challenge of Technology–Copyright Issues Requiring Immediate Action, COM (88) 172 final (June 7, 1998) [hereinafter Green Paper]. 4 See, e.g., Council Directive 93/98, ¶ 2, 1993 O.J. (L 290) 9 (EC), OJ 1993 L290/9 (Westlaw) (stating that “[w]hereas there are consequently differences between the national laws governing the terms of protection of

1032 A PPE NDIX Several examples illustrate how disparities among national laws interfered with the free movement of goods in the Internal Market. In Deutsche Grammophon, a sound recording had been placed on the market in France.5 France, at the relevant point in time, did not protect sound recordings.6 A German wholesaler tried to acquire the French sound recordings and sell them in Germany, undercutting the price fixed by the manufacturer, Deutsche Grammophon, for sales in Germany.7 Although it could be argued that the value of the phonogram would be undermined in Germany if goods that the manufacturer had put on the market in France without the benefit of copyright protection could be resold in Germany, the European Court of Justice (hereinafter the “ECJ”) gave priority to the free movement of goods.8 The goods could, therefore, be legally sold in Germany, undermining Germany’s protection of sound recordings.9 In that case, the rules on the free movement of goods were detrimental to the higher level of protection for sound recordings that prevailed in Germany. On the other hand, in EMI Electrola v. Particia Im-und Export, the copyright for a sound recording had expired in Denmark, but not in Germany.10 In this case, the proprietor of the right in the sound recording could prevent the importation into Germany of the goods sold without his authorization in Denmark.11 In contrast to Deutsche Grammophon, disparities in the term of protection were resolved in favor of the higher level of protection that was granted in Germany. In Warner Bros. v. Christiansen, the owner of a rental right in a film was able to enforce his right under Danish law in order to prohibit rentals of a video-cassette in Denmark, even though the video-cassette had been sold with his authorization in the United Kingdom — which at the relevant time did not recognise a right to control rentals of a film.12 Again, disparities in national rules were resolved in favor of preserving the higher level of protection that prevailed in Denmark. The European harmonization agenda launched in the mid-1990s introduced the higher level of protection that prevailed in some Member States across the Community. All Member States were obliged to introduce a lending right and the term of protection for authors was harmonized to life of the author plus seventy years, the standard that prevailed in Germany.13 European harmonization thus brought a high level of protection for a variety of proprietors of copyright and rights related to copyright. In this vein, the European Commission proposed — and the European Council and Parliament adopted — several directives harmonizing the substantive law governing copyright at the Community level. At present, copyright is governed by six sector-specific directives: Directive 91/250, granting protection to computer programs;14 Directive copyright and related rights, which are liable to impede the free movement of goods and freedom to provide services, and to distort competition in the common market; whereas therefore with a view to the smooth operation of the internal market, the laws of the Member States should be harmonized so as to make terms of protection identical throughout the Community”). 5 Deutsche Grammophon, 1971 E.C.R. 487, Grounds ¶ 2. 6 See sources cited supra note 2. 7 See Deutsche Grammophon, 1971 E.C.R. 487, Grounds ¶ 14. 8 See id. ¶ 13. 9 See id. ¶¶ 13, 19. 10 Case 341/87, EMI Electrola GmbH v. Patricia Im-und Export, 1989 E.C.R. 79, Grounds ¶ 3, [1989] ECR 79 (Westlaw). 11 See id. ¶ 14 (holding that a copyright holder can enforce rights in one Member State when the product was imported from a Member State where the holder is not entitled to those rights). 12 Case 158/86, Warner Bros. Inc. v. Christiansen, 1988 E.C.R. 2605, Grounds ¶¶ 18,19, [1988] ECR 2605 (Westlaw). 13 Council Directive 93/98, art. 1(1), 1993 O.J. (L 290) 9 (EC), OJ 1993 L290/9 (Westlaw). 14 Council Directive 91/250, 1991 O.J. (L 122) 42 (EC), OJ 1991 L122/42 (Westlaw).

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92/100, obliging Member States to introduce a rental and lending right for authors, performers, phonogram producers, and film producers and a series of rights related to copyright for performers, phonogram producers, film producers, and broadcasting organizations;15 Directive 93/83, introducing a broadcasting right for satellite transmissions and a clearance mechanism for cable retransmissions;16 Directive 93/98, harmonizing the term of protection for authors, performers, phonogram producers, and broadcasting organizations;17 Directive 96/9, on the legal protection of databases;18 and Directive 2001/84, introducing the artist’s resale right.19 Two more recent directives, the Information Society (2001/29)20 and Enforcement (2004/48)21 directives, are horizontal measures that apply to a variety of rights — reproduction, communication, “making available,” and distribution rights — and a variety of right-holders — authors, performers and producers. As the directives enumerated above show, traditional Internal Market policy was essentially concerned with substantive aspects of intellectual property. Such aspects include the beneficiaries of these rights — such as the introduction of producers’ or performers’ rights in Directives 92/100 and 2001/29 — and the term of protection for authors and owners of related rights — e.g., performers, record labels and film producers in Directive 93/98. E.U. directives focused on substantive copyright and related rights because at the time it was thought that harmonization would eliminate legal barriers to the free movement of protected goods or services across the Community.22 The E.U. copyright directives thus intend to end trade barriers that result from disparate national copyright rules.23 A. WHAT HAS E.U. HARMONIZATION ACHIEVED SO FAR?

While this policy of harmonization has significantly reduced the discrepancies between European copyright laws, there is still some doubt as ti whether it has facilitated the free movement of goods and services across the Community.24 It is, however, fair to say that European harmonization has resulted in a significant increase in the level of protection when compared to the national situations prior to harmonization. As the directives 15

Council Directive 92/100, 1992 O.J. (L 346) 61 (EC), OJ 1992 L346/61 (Westlaw). Council Directive 93/83, 1993 O.J. (L 248) 15 (EC), OJ 1993 L248/15 (Westlaw). 17 Council Directive 93/98. 18 Council Directive 96/9, 1996 O.J. (L 077) 20 (EC), OJ 1996 L77/20 (Westlaw). 19 Council Directive 2001/84, 2001 O.J. (L 272) 32 (EC), OJ 2001 L272/32 (Westlaw). 20 Council Directive 2001/29, 2001 O.J. (L 167) 10 (EC), OJ 2001 L167/10 (Westlaw). 21 Council Directive 2004/48, 2004 O.J. (L 157) 45 (EC), OJ 2004 L157/45 (Westlaw). 22 See, e.g., 1 David T. Keeling, Intellectual Property Rights in E.U. Law 45 (2003) (stating that “[t]he problem in Warner Brothers was due essentially to discrepancies in national laws. In some countries (notably Denmark and France) a separate right to control the rental of videos existed. In other countries no such right was recognised. The ideal solution to problems caused by such discrepancies would, of course, be to harmonise the national laws and ensure either that a rental right exists in all the Member States or in none of them.”). Such a solution was subsequently adopted on rental right and lending right and on certain intellectual property rights related to copyright. See Council Directive 92/100, 1992 O.J. (L 346) 61 (EC), OJ 1992 L346/61 (Westlaw). 23 See Green Paper, supra note 3, at 12 (citing the need to “eliminat[e] obstacles and legal differences that substantially disrupt the functioning of the market by obstructing or distorting cross-frontier trade in those goods and services as well as distorting competition”); Council Directive 92/100 ¶ 1 (stating that the directive is meant to rectify differences in the copyright laws of Member States which “are sources of barriers to trade and distortions of competition which impede the achievement and proper functioning of the internal market”). 24 See, e.g., Bernt Hugenholtz et al., The Recasting of Copyright & Related Rights for the Knowledge Economy 22 (2006) (“While successfully removing many of these disparities at the national level, the harmonisation process has left largely intact a more serious impediment to the creation of an internal market: the territorial nature of copyrights and related rights. The exclusivity that a copyright or related right confers upon its owner is strictly limited to the territorial boundaries of the Member State where the right is granted. This is a core principle of copyright and related rights, which has been enshrined in the Berne Convention and other treaties.”). 16

1034 A PPE NDIX mentioned above show, Member States must now grant protection to a variety of rightsholders, such as authors, performers, audiovisual producers, record companies, broadcasting organizations, or database producers. Due to the legislative efforts of the European institutions, the Community has now, in a global comparison, one of the most comprehensive and seamless levels of copyright and related rights protection. The European body of copyright framework laws — essentially so-called “Directives” — protects the basic copyright-relevant acts such as reproductions, communication to the public — e.g., via radio or TV broadcasting or web casting — and the “making available” online of literary, artistic or musical works, sound recordings, or films. In addition, the Community framework exceeds the international consensus level of the World Intellectual Property Organisation (WIPO) in various respects by granting exclusive rights for: 1. The rental and lending of literary, musical and audiovisual works for authors, performers, phonogram and film producers;25 2. Non-original databases like telephone directories and the like — so-called “sui generis” database protection;26 3. The resale of works of art;27 4. The reproduction and the “making available” online of broadcasts for broadcasting organizations;28 5. The reproduction and the “making available” online of audiovisual works for film producers;29 and 6. The reproduction and “making available” of performances, including audiovisual performances and performances contained in a phonogram.30 Arguably the most significant measure increasing copyright protection in the E.U. has come with the 1993 Directive harmonizing the term of protection of copyright and certain related rights.31 With this Directive, the Community has harmonized the duration of authors’ rights to the longest possible level that existed at that stage — the life of the author plus seventy years for authors and composers of any type of literary or artistic work.32 On the other hand, performers, record and film producers, and broadcasters enjoy a term of protection that stretches fifty years after the phonogram or film has either been published or after the recording took place.33 Moreover, the Community is a jurisdiction where “equitable remuneration” is due for broadcasting of commerical phonograms by wireless means and public communication of commercial phonograms.34 Many Member States have also made use of the possibility 25

See Council Directive 92/100, art. 1–2. See Council Directive 96/9, art. 7, 1996 O.J. (L 077) 20 (EC), OJ 1996 L77/20 (Westlaw). 27 See Council Directive 2001/84, art. 1(1), 2001 O.J. (L 272) 32, 34 (EC), OJ 2001 L272/32 (Westlaw). 28 See Council Directive 2001/29, art. 2(e), 3(2)(d), 2001 O.J. (L 167) 10, 16 (EC), OJ 2001 L167/10 (Westlaw). 29 See id. art. 2(d), 3(2)(c). 30 See id. art. 2(c), 3(2)(b). Protection under WIPO administered Treaties like the Rome Convention and the Performances and Phonograms Treaty (WPPT) is limited to performances fixed in phonograms. Audiovisual performances are not protected at the international level because parties to the Diplomatic Conference on a WIPO Audiovisual Performances Treaty could not agree on a provision governing the transfer of rights of performers to film producers. See Assemblies of the Member States of WIPO: Thirty–Sixth Series of Meetings, Geneva, Sept. 24-Oct. 3, 2001, Diplomatic Conference on the Protection of Audiovisual Performances: Memorandum of the Director General, ¶ 2, U.N. Doc. A/36/9 Rev. (Sept. 24, 2001). 31 See Council Directive 93/98, 1993 O.J. (L 290) 9 (EC), OJ 1993 L290/9 (Westlaw). 32 Id. art. 1(1). 33 Id. art. 3(1)–(4). 34 It is possible to exceed this level and grant an exclusive right covering all forms of broadcast performances. See, e.g., Copyright, Designs and Patent Act, 1988, c. 48, § 20 (Eng.), available at http://www.opsi.gov.uk (search 26

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granted in the Information Society Directive — Directive 2001/29 — to introduce “fair compensation” — mostly administered in the form of an equipment or blank recording media levy — for any copy done by consumers in the privacy of their homes.35 Currently, several E.U. Member States are extending analogue levy schemes to a variety of digital recording devices.36 But the precise scope of the equipment that attracts levies often remains subject to litigation. Court cases involve the application of levies on personal computers and printers37 or computer hard disks.38 In certain Member States, e.g., Greece, Portugal, and Spain, computer hard disks are exempted from levies by law.39 Despite several attempts, private copying levies and their scope of application have never been harmonized at Community level.40 B. HAS HARMONIZATION BENEFITED E.U. RIGHT-HOLDERS?

This allows for the following conclusions — E.U. harmonization of copyright and related rights rules has increased protection for a variety of right-holders, especially for authors and publishers of music and audiovisual works. Authors and composers are, in addition, often represented by powerful collecting societies.41 for “Copyright, Designs and Patent Act 1988”; then follow “Copyright, Designs and Patents Act 1988 (c. 48)” hyperlink under “Results”). 35 Stefan Bechthold, Directive 2001/29/EC: Information Society Directive, in Concise European Copyright Law, 343, 374–75 (Thomas Dreier & P. Bernt Hugenholtz eds, 2006). Should a Member State elect to provide for an exception covering private copying, it is required to provide for “fair compensation” to right-holders affected by this activity. In many Member States, the fair compensation requirement is implemented by a levy system. Levy systems may cover reprographic equipment like photocopiers or fax machines, as well as audio and video recording equipment, and audio and video cassettes. Id. at 373–74. 36 Id. at 374 (commenting that “[i]ncreasingly, levy systems are extended to digital recording equipment (scanners, CD and DVD burners, even computers) and media (hard drives as well as writable CD and DVD formats)”). 37 In response to the request by the German Writer’s Collecting Society (VG Wort) to impose a private copying levy of €30 on PCs, the Arbitration Board of the German Patent and Trademark Office (Deutsches Patent- und Markenamt, or DPMA) decided, on February 4, 2003, to set a levy of €12 on all PC systems sold in Germany. This decision was accepted by neither VG Wort nor the German IT industry. VG Wort then proceeded to take court action in April 2003 against the IT industry to seek to recover copyright levies at its original proposed rate of €30. On December 15, 2005, the district court in Munich ruled that a €12 levy per PC should be paid. This judgment is currently under appeal. Bernt Hugenholtz et al., Inst. for Info. Law, The Future of Levies in a Digital Environment 26 (2003). 38 Id. at 25–26. In the GERICOM case, the Austrian Supreme Court decided on July 12, 2005, that no levies are due on PCs since the hard disk of a PC is used in a multi-functional way. The Court reasoned that a significant proportion of the uses made of a PC hard disk were unrelated to the copying of protected works or other subject matter. In these circumstances, it would be difficult to find adequate criteria for applying the levy. The Court found that this was different for the hard disk of MP3 players, which fall under the scope of levies in Austria because MP3 players are, at least at present, overwhelmingly used to copy protected material. Oberster Gerichtshof [OGH] [Supreme Court] July, 12, 2005, 4 Ob 115/05y, 38 Entscheidungen des österreichischen Obersten Gerichtshofes in Zivilsachen [SZ] No. 4 (Austria) at 492. 39 See Ley 23/2006 (B.O.E. 2006, 162), available at http://www.boe.es/boe/dias/2006/07/08/pdfs/A2556125572.pdf (amending Spain’s Law of Intellectual Property. “Ley 23/2006, de 7 de julio, por la que se modifica el texto refundido de la Ley de Propiedad Intelectual, aprobado por el Real Decreto Legislativo 1/1996, de 12 de abril”). 40 Hugenholtz et al., supra note 24, at 6–7 (“[B]ut the thorny issue of levies that was already mentioned in the Green Paper of 1988, has remained on the Commission’s agenda until this day.”). 41 Commission Staff Working Document, Study on a Community Initiative on the Cross-border Collective Management of Copyright, at 21 (July 2005), available at http://ec.europa.eu/internal_market/ copyright/docs/ management/study-collectivemgmt_en.pdf [hereinafter Community Initiative]. In 2005 the Commission conducted a survey of European collecting societies active in the field of authors’ and producers’ rights in the musical sector. This survey identified 152 collective rights management societies acting on behalf of approximately 1.6 million right-holders and, in 2003, managing €4.9 billion of royalties per year. Out of this revenue collected, €3.8 billion was distributed. Cross-border distribution of royalties within the E.U. in 2003 amounted to €322 million. Distribution to third countries outside the E.U. amounted to €184 million. Out of the 152 societies

1036 A PPE NDIX The fifty-year term of protection for record companies has also benefited these industries, as broadcasting and other forms of communication to the public are subject to “equitable remuneration” under the 1992 Rental and Lending Directive — Directive 92/100.42 This contrasts with the United States, where broadcasters pay no remuneration for the use of commercial phonograms.43 In addition, with respect to other forms of communication, wide-ranging exceptions from the obligation to pay royalties apply in favor of drinking and eating establishments and shops in the United States.44 Some estimate that this right to collect equitable remuneration for television and radio broadcasting and for other forms of communication (“public communication”) more than makes up for the shorter term that performers and phonogram producers enjoy in the E.U. as compared to the United States.45 Even performers, arguably the least protected category of right-holders internationally, collect revenue — so-called “equitable remuneration” — for the broadcasting of their performances46 and private copying levies47 from the information and communication technology (ICT) industries. One issue remains: has this seamless web of protection also increased income levels for all right-holders that are endowed with either exclusive rights or rights to receive various forms of remuneration? In particular, collecting societies that represent performers argue that they have not earned any significant revenue from the online exploitation of their performances.48 This raises the issue that it may not appear identified, eleven achieve an annual turnover that exceeds €100 million. The six biggest societies were identified as the German society GEMA (€813.6 million), the French society SACEM (€708.5 million), the Italian society SIAE (€475.3 million), the U.K. society PRS (€400.4 million), the French society SDRM (€349.8 million), and the U.K. society MCPS (€325.5 million). Eighty-percent of the revenue generated with collective rights management arises from the exploitation of musical works and is generated by the top ten societies that are active in this field. The top four societies in terms of revenue are all authors’ rights societies. Two of the top eleven societies — PPL and GVL — are not classical authors’ societies, but represent record producers. Id. This study was later incorporated into the Commission services staff working paper of 11 October 2005, Commission Staff Working Document, Impact Assessment of Reforming Cross-Border Collective Management of Copyright and Related Rights for Legitimate Online Music Services, at 11 (Oct. 11, 2005), available at http://ec.europa.eu/ internal_market/copyright/docs/management/sec_2005_1254_en.pdf (last visited Sep. 11, 2007) [hereinafter Impact Assessment], that preceded Commission Recommendation 2005/737. Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC), OJ 2005 L276/54 (Westlaw). 42 Council Directive 92/100, 1992 O.J. (L 346) 61 (EC), OJ 1992 L346/61 (Westlaw). The main collection societies in this field, the German society GVL and the U.K. society PPL, in 2003, collected €147 and €114 million respectively. 43 See 17 U.S.C. § 110(5)(A) (2000). 44 See id. § 110(5)(B)(ii). 45 If the system in the United States was the same as in the E.U., a study cited in the Gowers Report suggests that European right-holders would receive $25.5 million per year for the broadcasting of their phonograms in the United States. From this the Gowers Report appears to conclude that it may be possible that the total revenue received from the broadcasting and other communication of commercial phonograms received in the E.U. is no less than, and may be even more than, the revenue received in the United States. See Andrew Gowers, Gowers Review of Intellectual Property 49–50 (2006), available at http://www.hm-treasury.gov.uk/media/6/E/pbr06_ gowers_report_755.pdf. 46 Record producers and performers have a right to equitable remuneration if commercial phonograms are communicated to the public. See Council Directive 92/100, art. 8(2). 47 According to a study undertaken by the Association of European Performers’ Organisation (hereinafter “AEPO”) collecting societies representing performing artists, in 2005, collected a total of €113.2 million in levies that compensate for private copying. According to AEPO this constitutes almost 38% of all sums collected by collecting societies administering performers’ rights. The biggest percentage, almost 57%, is derived from equitable remuneration for broadcasting and other forms of communication to the public. Els Vanheusden, Performers’ Rights in European Legislation: Situation and Elements for Improvement 74-75 (2007). 48 See, e.g., id. at 6 (“In the field of the Internet and new services, the introduction at European level in 2001 of a new right [of] making available to the public of services on demand has so far proved ineffective for performers . . . . [O]ut of the 10 countries surveyed, only [one] collective [rights] management society succeeded in collecting an overall amount of €32 for all performers in 2005[.] . . . At a time when more and more commercial services for

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sufficient to put in place a comprehensive and seamless web of protection, these rights must also be administered in an effective manner. Rights that are not effectively administered serve little purpose to their respective proprietors.49 In other words, the market for rights management, including rights licensing, must actually work for all the right-holders concerned. This brings us to the issue of territorial rights management in Europe.

II. A Challenge Remains: Territoriality and Rights Clearance The ambitious drive toward harmonization of substantial rules on copyright and related rights has not ended one European phenomenon — all harmonized titles granted remain national titles.50 In other words, there is no single E.U. title for any of the harmonized forms of protection, not even the Internet-tailored “making available” right. A. TERRITORIALITY OF INTELLECTUAL PROPERTY TITLES

There are many scholars who believe that the territoriality of national, but substantively harmonized, copyright laws remains a major obstacle preventing an integrated European digital marketplace.51 In this context, it is often pointed out that the Commission’s 2005 Recommendation on collective cross-border management of copyright and related rights for legitimate online music services — to be discussed below — is merely a first step toward E.U. licensing as it fails to overcome territorial rights management.52 Others argue that E.U.-wide management is not only necessary for rights in musical works or sound recordings, but also these principles should be further extended to audiovisual works as well.53 They argue that at this stage, due to inefficient licensing practices, performers in both musical and audiovisual works have not earned any significant revenue from the online exploitation of their performances.54 Better rights management is therefore indispensable to make the Internet a source of income for these rights-holders.

downloading are being developed, this sum highlights the obvious gap between the protection that the acquis [the harmonised body of Community copyright rules] intended to give to performers and the impossibility of the[m] actually enjoying it.”). 49 See, e.g., id. at 36 (“Furthermore, the royalties declaration documents handed over by producers to the main performers almost never include a line regarding “on demand” exploitation. Performers therefore have no idea about the way in which the right is exercised by producers and the revenues it generates.”). 50 See, e.g., Gowers, supra note 45, at 38 (noting the difficulty of protecting patent rights because “each European patent is a series of separate national patents subject to national jurisdictions”). See also Council Directive 2001/29, art. 3, 2001 O.J. (L 167) 10, 16 (EC), OJ 2001 L167/10 (Westlaw) (discussing requirements of Member States to provide authors the exclusive right as to “making available”). 51 See, e.g., Hugenholtz et al., supra note 24, at 218 (contending that “[t]he Achilles heel of the acquis remains the rule of territoriality. The seven directives have smoothed out some of the main disparities between the laws of the Member States, but largely ignored the single most important obstacle to the creation of an internal market in products of creativity: the territorial nature of the economic rights. This allows for the compartmentalisation of the internal market along geographic boundaries.”). 52 See, e.g., id. at 218 (“While the Commission’s more recent Online Music Recommendation — [Recommendation 2005/737] — does address some of the problems caused by territoriality in the field of collective rights management of musical works, even the Recommendation does not question the territorial nature of copyright and related rights as such.”). 53 See, e.g., Vanheusden, supra note 47, at 36. 54 See id.

1038 A PPE NDIX B. IS TERRITORIALITY THE PROBLEM?

Many stakeholders argue that “online” rights — e.g., the exclusive rights of reproduction, communication to the public and the right of “making available” online — can no longer be exercised or enforced on a national basis and that the entire body of E.U. copyright laws should be reworked to overcome territorial management or enforcement.55 The European Parliament has expressed a keen interest that legislation be proposed in this matter and believes that licensing principles should now be codified in an E.U. directive.56 Hugenholtz et al., in their report, argue that it might be time to consider overcoming territoriality by creating a European title of copyright.57 Some arguments in favor of a Community copyright imply that the main beneficiaries of the current practice of territory-by-territory licensing are European collecting societies tasked with administering most of these “national” rights.58 These are some of the reasons why Internal Market policy should focus more strongly on facilitating market entry by new online service providers that disseminate works and sound recordings on an E.U.-wide scale. While the legal level of territorial protection in the E.U. is very high, the complexity of administering the system might prevent rewarding those who enjoy the protection of the law. When the Commission consulted stakeholders in July 2005, this exercise revealed that the current management of copyright in musical works and phonograms — within defined territories that usually are national borders — was a source of considerable inefficiency more so than the territorial scope of the legal title.59 It was territorial management that was deemed to hinder the entry of new Internet-based services that rely on protected works and phonograms.60 Before we examine how copyright policy can ensure that the plethora of rights that exist at E.U. level lead to tangible revenue streams for the proprietors of these rights, we should briefly review the types of services that have the above-mentioned vocation to be supplied across the E.U., and thus constitute potential sources of considerable right-holder income.

55 Lucie Guibault et al., Study on the Implementation and Effect in Member States’ Laws of Directive 2001/29 on the Harmonization of Certain Aspects of Copyright and Related Rights in the Information Society 173 (2007). On June 9, 2006, Berlecon Research hosted a fact-finding workshop in which participants, in particular content providers and users, expressed their support for Community-wide licensing. A Community license for Internet and mobile services was seen to facilitate the emergence of innovative business models as diverging local laws were found to hinder effective cross-border licensing. See id. at 171–79. 56 Report on the Commission Recommendation of 18 October 2005 on Collective Cross-Border Management of Copyright and Related Rights for Legitimate Online Music Services, Eur. Parl. Doc. A6/0053 19 (2007), available at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+ A6-2007-0053+0+DOC+PDF+V0//EN (inviting “the Commission to make it clear that the 2005 Recommendation applies exclusively to online sales of music recordings, and to present as soon as possible — after consulting closely with interested parties — a proposal for a flexible framework directive to be adopted by Parliament and the Council in codecision with a view to regulating the collective management of copyright and related rights as regards cross-border online music services . . .”). 57 Hugenholtz et al., supra note 24, at 219 (“Long considered taboo in copyright circles, the idea of a Community copyright modelled after the Community rights that already exist in the realm of industrial property, is gradually receiving the attention it deserves, both in political circles and in scholarly debate.”). 58 See id. at 220 (“Surely, for collecting societies, the prospect of introducing a Community copyright and abolishing ‘national’ rights is unattractive, to say the least. Territorial rights are the bread and butter of most existing collecting societies.”). 59 See Commission Recommendation 2005/737, 2005 O.J. (L 276) 54, 54–57 (EC), OJ 2005 L276/54 (Westlaw). 60 See Hugenholtz et al., supra note 24, at 218.

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III. Emerging Online Business Models The Information Society added a variety of innovative services which are either provided electronically at a distance — e.g., webcasting, Internet-based television “IPTV” — or on specific request from the consumer — e.g., interactive “on-demand” retail services. A. DIGITAL SALES

Screen Digest estimates that consumer spending on online music more than doubled between 2005 and 2008.61 In 2006, digital retail services created revenue of 281million, 90% of which Screen Digest attributes to online retail services.62 According to IFPI there are currently 320 online music services in Europe.63 The online retail market for music downloads in the United States still by far exceeds the European market64 — this in spite of the fact that there are more broadband connections in Europe than in the United States.65 In the U.S. consumers “downloaded” more than half a billion single tracks in 2006 while the E.U. figure stood at roughly one fifth of that amount.66 On the other hand, the E.U.67 is ahead of the U.S.68 with respect to mobile phone subscriptions. U.S.

E.U.

Global Digital Music Market (m)

2005

2006

2005

2006

Broadband lines

43

57

68

94

Single tracks downloaded

353

582

62

111

Mobile phone subscriptions

174

194

622

656

3G mobile subscriptions

3

15

6

27

B. DOWNLOAD VERSUS SUBSCRIPTION

The introduction of new digital transmission platforms, such as web-based and other online delivery solutions, will lead to more cross-border provision of online music services. These new technologies have also led to the emergence of a new generation of service providers, ranging from “download-to-own” online shops, subscription services and web casters.69 “Among the major brand names, two distinct business models have emerged in digital music: [i] pay-per-download and [ii] subscription services. Pay-per-download services meet consumer demand to ‘own’ music, but with greater flexibility than CDs as tracks can be selected and downloaded on the spot.”70 According to Screen Digest, pay-per61

The Rise of the Online Music Market, Screen Digest, Jan. 2007, at 13, 14. Id. at 13. 63 Int’l Fed’n of the Phonographic Indus., IFPI: 07 Digital Music Report 5 (2007) [hereinafter IFPI 2007], available at http://www.ifpi.org/content/library/digital-music-report-2007.pdf (last visited September 21, 2007). 64 Id. 65 Id. 66 Id. 67 Id. 68 Id. 69 See, e.g., The Rise of Online Music in Europe, supra note 61, at 14. 70 Int’l Fed’n of the Phonographic Indus., IFPI: 05 Digital Music Report 7 (2005) [hereinafter IFPI 2005], available at http://www.beatsuite.com/pdfs/digital-music-report-2005.pdf (last visited September 21, 2007). 62

1040 A PPE NDIX download services still dominate the European digital market and, in 2006, accounted for over 90% of online music spending.71 Subscription services offer a wide choice of music for a monthly fee, allowing users to access all the music they want with the option to purchase selected tracks. [Subscription services] offer streaming and radio-play access for a monthly fee . . . . Downloads and burns are available for an extra per-track fee . . . . Some subscription services . . . allow[] ‘tethered downloads’ which are transferable to portable players for as long as the consumer remains a subscriber.72 Another subscription-based service is so-called “podcasting,” i.e., services that distribute syndicated programmes for consumption on portable devices, such as iPods — hence the term “podcasting.” But various other new business models are emerging as well. In 2006, advertisingsupported services became a new revenue stream for record companies. “Internet advertising is forecast by Forrester Research to overtake traditional radio advertising in 2010.”73

IV. Making Markets Work: The Case for E.U.-Wide Online Licensing In the era of online exploitation of works and sound recordings, commercial Internet shops that engage in retail of protected works or sound recordings need a licensing policy that is in line with the ubiquity of their respective on-line services. In 2004 record companies digitized and made available their repertoire in bulk. Now, they have started to market, promote and sell music for online applications such as download and subscription, across Europe.74 These services can be accessed across Europe and, in consequence, legal certainty for users requires copyright to be cleared throughout Europe. A. WHAT IS AT STAKE?

While the provision of music in the online environment has become international in scope, the traditional collective rights management structure in the E.U. has remained national and thus territorial in scope.75 But online retailers see the requirement of territory-by-territory management as an impediment to the roll-out of new cross-border online services.76 Rights-holders state that complications inherent in the licensing process deprive them of online revenue.77 Online retailers therefore require cross-border or transnational copyright clearance in line with their international reach and clearance services. These services cannot be provided effectively or efficiently when copyright clearing services remain mostly national in scope.78

71

The Rise of the Online Music Market, supra note 61, at 13. IFPI 2005, supra note 70, at 7. 73 IFPI 2007, supra note 63, at 12. 74 See The Rise of the Online Music Market, supra note 61, at 14. 75 See Guibault et al., supra note 55, at 173 (stating that “[e]xclusive rights are still drawn along national borders”). 76 See id. at 174 (noting that each E.U. Member State’s individual understanding of copyright limitations has forced content providers to ascertain the exact status of the law in every Member State, a process that undermines the flexibility that providers need to pursue online activities). 77 Impact Assessment, supra note 41, at 6. 78 See id. 72

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In light of the new online service offerings, Community copyright policy has now shifted toward streamlining the copyright licensing process. Simple and efficient rights clearance not only enables online service providers to achieve economies and efficiencies of scale, but it also leads to market entry by innovators, the development of new online services and, most importantly, has the potential to increase the revenue stream that flows back to the right-holders.79 B. IS THERE A NEED FOR NEW POLICY TOOLS?

In order to achieve these goals, E.U. policy tools as well as the management of copyright should also become more flexible. In 2005, the Commission decided to test a new instrument — the Commission recommendation. After conducting a preparatory study and an impact assessment of various options,80 the Commission, on October 18, 2005, adopted a recommendation on collective cross-border management of copyright and related rights for legitimate online music services (hereinafter “the Recommendation”).81 A recommendation is a non-binding instrument introduced under Article 211 of the Treaty Establishing the European Community (hereinafter “EC Treaty”).82 To that extent, it is introduced as part of the Better Regulation agenda.83 The Recommendation opted to interpret E.C. Treaty rules that apply to the cross-border management of certain “online” rights.84 It also recommends measures on transparency and governance.85 For obvious reasons of inter-institutional balance and its own participation in the decision-making process, the European Parliament would have preferred a binding legal instrument.86 A recommendation does not exclude recourse to legislation. It is often seen as a first step in preparing a subsequent legislative approach. “As the Recommendation opted for a ‘light touch’ non-binding approach to the matter of E.U.-wide online licensing,” the Commission has now published a “call for comments” with the aim of monitoring commercial developments.87 The Recommendation has triggered a consultative process not unlike a sector enquiry. Such an enquiry should allow all relevant policymakers to better understand what is happening in the marketplace and to better appreciate the technical features of collective licensing of online rights. If the monitoring reveals the necessity of adopting binding rules with respect to certain features 79 As mentioned above, the economic and societal impact of collective rights management in the musical sector in Europe is considerable. The Commission’s most recent survey identified 152 collective rights management societies, acting on behalf of approximately 1.6 million right-holders and, in 2003, managing €4.9 billion of royalties per year. Community Initiative, supra note 41, at 21. Copyright, in Europe is to a large extent characterised by the activities of collecting societies who “turn rights into money.” Walter Dillenz, Functions and Recent Developments of Continental Copyright Societies, 12 Eur. Intell. Prop. Rev. 191, 192 (1990). 80 See Impact Assessment, supra note 41, at 32; see generally Community Initiative, supra note 41 (examining problems posed by the traditional collective management system and predicting the impact and feasibility of various remedial options). 81 Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC), OJ 2005 L276/54 (Westlaw). 82 EC Treaty, art. 211. 83 See Better Regulation Conference, September 22–23, 2005, Edinburgh, Scot., Competitiveness and Consultation: Business at the Heart of Europe, at 7 (Nov. 2005), http://www.swyddfa-cabinet.gov.uk/regulation/ documents/europe/pdf/conference_report.pdf . 84 See Commission Recommendation 2005/737, passim 81. 85 See id. at 56. 86 See Report on the Commission Recommendation of 18 October 2005 on Collective Cross-Border Management of Copyright and Related Rights for Legitimate Online Music Services, Eur. Parl. Doc. A6/0053 4 (2007), available at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT +A6-2007-0053+0+DOC+PDF+V0//EN [hereinafter Report on the Commission Recommendation]. 87 European Commission Call for Comments of 17 January 2007, http://ec.europa.eu/internal_market/ copyright/docs/management/monitoring_en.pdf [hereinafter Call for Comments].

1042 A PPE NDIX of the licensing process, the monitoring would indicate what sort of rules are most suitable and wished for by the relevant operators in the different online markets. In order to increase the general understanding of the online licensing markets, the “call for comments” touches upon the following issues: 1. What are the tenders that are underway which envisage E.U.-wide licensing arrangements? 2. What are the E.U.-wide licensing arrangements that have been set up? 3. Which online service providers benefit from E.U.-wide licenses for their pan-European retail or other activities? 4. What types of online services are most interested in obtaining E.U.-wide licenses? 5. What legislative or other types of obstacles have been encountered in setting up E.U.-wide licensing arrangements?

V. What Are The Relevant “online” rights? A. THE LEGAL FRAMEWORK FOR COPYRIGHT AND RELATED RIGHTS IN THE DIGITAL ENVIRONMENT

The legal framework for copyright in the digital environment is the Information Society Directive 2001/29/EC88 (hereinafter “the Directive”). The stated aim of the Directive is to implement the Community’s obligations under the WIPO Copyright Treaty (“WCT”) and the WIPO Performances and Phonograms Treaty (“WPPT”), both adopted in 1996.89 These Treaties update copyright for the digital environment.90 Another aim was to harmonize certain aspects of copyright and related rights,91 including the exceptions to those rights.92 The Community’s international obligations in the area of copyright and related rights flow principally from the Agreement on Trade-Related Aspects of Intellectual Property 88

Council Directive 2001/29, 2001 O.J. (L 167) 10 (EC), OJ 2001 L167/10 (Westlaw). Id. at 11. Recital 15 of the Directive states that the those Treaties update the international protection for copyright and related rights significantly, not least with regard to the so called “digital agenda” and improve the means to fight piracy worldwide. Id. 90 See id. 91 See Opinion of Advocate General Sharpston, Sociedad General de Autores y Editores de España (SGAE) v. Rafael Hoteles SA, Case C-306/05, [2006] E.C.R. ¶ 43, available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:62005C03 06:EN:HTML. “It is clear that the Copyright Directive is intended to be a harmonising directive, designed above all to ‘help to implement the four freedoms of the internal market’ and ‘provid[e] for a high level of protection of intellectual property.’” Id. The Court of Justice meanwhile confirmed this conclusion in Case C-306/05, Sociedad General de Autores y Editores de España (SGAE) v. Rafael Hoteles SA, 2006 E.C.R. I-11519 ¶ 36. 92 See, e.g., Council Directive 2001/29, recital 31, at 12 (speaking to the balance of interests between the different categories of right-holders themselves, as well as between the different categories of right-holders and the users of protected works or sound recordings). This recital further mentions that existing differences in the exceptions and limitations to the rights granted by the Member States could have negative effects on the functioning of the internal market and that these differences could well become more pronounced with the further development of cross-border exploitation of copyright protected works. Id. For a critical evaluation of this harmonization approach, see Guibault et al., supra note 55, at 63. (“In view of the optional character of the list of limitations contained in articles 5(2) to 5(5) of the Directive, [the articles that govern exceptions and limitations], the harmonising effect is very modest at best . . . . In view of this mosaic of limitations in place throughout the European Community, it is safe to say that the aim of harmonisation has hardly been achieved and legal uncertainty persists.”). 89

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Rights (“TRIPs Agreement”).93 The other relevant conventions are the Berne Convention, the Rome Convention, the WCT, and the WPPT.94 Although the Community is not a party to the Berne Convention — and indeed could not be, since membership of the Berne Union is confined to the countries of the Union — it is required to comply with Articles 1–21 of the Berne Convention by virtue of Article 9 of the TRIPs agreement.95 In order to comply with the obligations introduced under the WCT and the WPPT, the Directive harmonizes: 앫 the exclusive right of reproduction which fully applies in the digital environment (Article 2 of the Directive and Article 1(4) WCT; Article 7, 11 and 16 WPPT and Agreed Statements);96 앫 The exclusive right of communication to the public (Article 3 of the Directive and Article 8 WCT);97 and 앫 the right of making available (Article 3 of the Directive and Article 8 WCT; Article 10, 14 WPPT and Agreed Statements).98 B. WHO OWNS THE RELEVANT “ONLINE” RIGHTS?

There are many right-holders — e.g., authors, composers, publishers, record producers and performers — and rights — e.g., communication to the public, reproduction and “making available” — that are involved in a single transaction involving the electronic provision of music. A separate license has to be sought from a different collective rights manager, i.e. an authors’ society, record producer’s society, and, possibly, a performing rights society, for every single transaction.99 It should also be noted that a license granted by a collecting society for one form of exploitation does not mean that any other form of exploitation is authorized. A separate license has to be negotiated for each form of exploitation.100 In the online environment authors’ rights comprise: (1) the right of reproduction; (2) the right to communicate musical works to the public including; (3) the “making available” of these works to the public.101 “Rights of performers, and record producers (record labels) are related rights and remunerate the producers and the performing artists for use of a sound recording.”102 앫 Performers have the exclusive right to allow: (1) the reproduction of fixations of their performances;103 (2) the right to receive equitable remuneration if a commercial phonogram is broadcast by wireless means or communicated to the public;104 and (3) the right to make their fixed performance available.105 93 Agreement on Trade-Related Aspects of Intellectual Property Rights, art. 1(1), Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, Legal Instruments — Results of the Uruguay Round, 1869 U.N.T.S. 299, 33 I.L.M. 1125, 1197 [hereinafter TRIPs]. 94 See id. 95 Id. art. 9(1). 96 See Council Directive 2001/29, art. 2, at 16. 97 Id. art. 3(1). 98 Id. art. 3(2). 99 See Impact Assessment, supra note 41, at 8. 100 Id. 101 Commission Recommendation 2005/737, 2005 O.J. (L 276) 54, 55 (EC), OJ 2005 L276/54 (Westlaw). 102 Impact Assessment, supra note 41, at 8. 103 Council Directive 92/100, art. (7)(1), 1992 O.J. (L 346) 61 (EC), OJ 1992 L346/61 (Westlaw). 104 Id. art 8(2). 105 Id. art. 9(1).

1044 A PPE NDIX 앫 Record producers have the right to authorize reproduction and the right to make available sound recordings.106 C. WHO ADMINISTERS THE RELEVANT “ONLINE” RIGHTS?

“Rights of authors [of musical works] are administered collectively by authors’ societies.”107 Authors, composers and publishers own the rights in the composition of the lyrics and/or the music.108 In most Member States, a single society administers the authors’ reproduction, public performance, and “making available” rights on a territorial basis.109 In some Member States, the right of reproduction and the rights of communication to the public are administered by separate societies — again, on a territorial basis.110 In most Member States, the performers’ and record producers’ right to receive equitable remuneration is administered by a collecting society.111 “Record producers . . . manage their ‘making available’ right for online on-demand services on an individual basis.”112 D. ARE TOO MANY RIGHTS INVOLVED IN AN ONLINE TRANSACTION?

The multitude of rights and right-holders (and collecting societies) that are involved in online retail transactions have raised the issue of whether online retail transactions involve too many different rights and right-holders (and collecting societies). Most recently, Hugenholt et al. criticized that the Community legislator’s drive for harmonization of copyright and related rights has introduced too many (overlapping) layers and categories of different rights.113 Indeed, a download service would need to license both the reproduction and the “making available” right from all right-holders who enjoy these 106

Id. art. 7(1), 9(1). Impact Assessment, supra note 41, at 7. 108 See id. (stating that “[a]uthors hold the rights in the composition of the lyrics/music”). 109 See Nanette Rigg, The European Perspective: Collective Management of Rights in Europe from 1777 to 2002: Why is it Necessary?, in Collective Licensing: Past, Present and Future, supra note 2, at 18, 22 (explaining how societies emerged in a “patchwork fashion” in Europe). In Germany and Switzerland societies tend to manage authors’ public performance, broadcasting and mechanical reproductions rights in one society while Britain or France have developed separate societies for authors’ performance rights — e.g., public performance and broadcasting — and mechanical reproduction rights. Spain and Italy, on the other hand, have each developed one society that operates on behalf of all right holders and all rights. Id. 110 See, e.g., Impact Assessment, supra note 41, at 41. (listing the collecting societies for each Member State, and the respective categories of rights and right-holders which they administer). 111 Vanheusden, supra note 47, at 27 (stating that “[i]n all [European] countries the right to remuneration is exercised through a collecting society”). 112 Impact Assessment, supra note 41, at 8. Individual management of copyright and related rights is not covered by the scope of the 2005 Commission Recommendations on online licensing. “With regard to the making available right necessary to be cleared for the provision of on demand services by broadcasters of their radio or television productions incorporating music from commercial phonograms as an integral part thereof,” Recital 26 of the Copyright Directive “states that collective licensing arrangements are to be encouraged in order to facilitate the clearance of the rights concerned.”Council Directive 2001/29, recital 26, 2001 O.J. (L 167) 10, 12 (EC), OJ 2001 L167/10 (Westlaw). On this basis, the European Broadcasting Union (EBU) advocates mandatory collective management of making available rights of producers and performers in commercial phonograms, in so far as such commercial phonograms are an integral part of TV or radio productions. Initial EBU Comments on ‘Commission Staff Working Document: Study on a Community Initiative on the Cross-Border Collective Management of Copyright,’ 19.8.2005/MB/HR 1, 2 (2005), available at http://www.ebu.ch (follow “Position papers” hyperlink; follow hyperlink dated 19.08.2005). 113 See Hugenholtz et al., supra note 24, at 164. “New categories of rights, introduced initially at national level and later confirmed in the copyright ‘acquis’, have added new layers of protection to existing cultural productions, and have brought new categories of right-holders into the realm of copyright and related rights. . . . As a result, a single object may now be protected by various layers of overlapping rights, each of which will be held by a different right owner.” Id. 107

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rights separately.114 In these circumstances there are calls for streamlining and consolidating the different rights.115 Two solutions are often mooted for this scenario: statutory presumptions on transfer of ownership and joint administration of different categories of rights. Statutory presumptions of transfer of rights are sometimes mooted as a tool to enhance efficiency of the clearance process.116 While transfer-of-ownership rules might facilitate the rights clearance process by introducing a “one stop shop” principle in rights management, a debate on the transfer of copyrights would almost certainly generate fierce political opposition. Many of the smaller and “weaker” rights holders — categories of authors or performing artists — are represented by collecting societies which trace their origins back to the perceived necessity to defend their interests independently from other right-holders. If rights would be systematically transferred to corporate entities, such as under the United States “works for hire” rule, collective representatives of these categories of right-holders would lose their role as an essential intermediary between individual right-holders and commercial users of protected material. Collecting societies therefore often describe their role as the defence of their members’ interests against “powerful corporate players.”117 Another solution proposed to address the variety of copyrights that need, e.g., to be cleared for downloading a music track is contained in the Gowers Review of Intellectual Property.118 According to Gowers, the public performance rights and mechanical reproduction rights of all rights holders — authors, performers, and record companies — should be managed by one entity and the respective rights should be licensed by means of a single license.119 A similar approach already bore some fruit with respect to the administration of private copying levies, where central umbrella societies administer private copying levies on behalf of a variety of beneficiaries and their collecting societies.120 However, joint administration of rights as advocated by the Gowers review, has to surmount considerable hurdles. Often different categories of right-holders are in an antagonistic relationship121 and the joint administration of their rights would create issues as to: (1) who is represented on the board of the joint management entities; (2) how would voting power be attributed to the various right-holders; and (3) how would revenue be distributed among the different right-holders.122 In addition, at least for copyright and 114 See Impact Assessment, supra note 41, at 8. “[T]here are many right-holders and rights that could be involved in a single transaction in the music industry. A licence granted by a CRM for one form of exploitation does not mean that any other from [sic] of exploitation is authorised and so a separate licence has to be sought from a different collective rights manager i.e. an authors’ society, record producer’s society and performing rights society for any single transaction. Management of online exploitation of musical works is complicated by the fact that a multitude of rights (e.g., communication to the public, reproduction and making available) belonging to a multitude of right-holders (e.g., authors, composers, publishers, record producers and performers) need to be cleared.” Id. 115 Some of these initiatives are described in Hugenholtz et al., supra note 24, at 170. 116 See id. 117 See, e.g., Thierry Desurmont, The Future of Collective Licensing, in Collective Licensing: Past, Present and Future, supra note 2, at 203, 205 (describing how authors have very little power against powerful users). 118 Gowers, supra note 45. 119 See id. at 94 (explaining that an agreement between collecting societies could benefit users). 120 See Hugenholtz et al., supra note 24, at 176. “To alleviate some of the problems that arise with respect to the accumulation of rights in a single work, rights clearance centres have been set up in various Member States . . . . This greatly facilitates the rights clearance of multimedia works.” Id. 121 See, e.g., Vanheusden, supra note 47, at 34 (describing the relationship between performing artists and their collecting societies on the one hand and record producers on the other hand). 122 See, e.g., id. at 23. (Table 1.2 gives the rules on revenue allocation between performing artists and record labels in the different E.U. Member States).

1046 A PPE NDIX related rights in the digital environment, the structure and scope of exclusive rights is such that each right-holder owns a specific right, even if these rights might overlap for certain online transactions. In these circumstances, the Recommendation did not argue for transfer of presumptions of the overnership or joint administration of different rights that pertain to different right-holders. Rather, this instrument focuses on practical issues on how to streamline the current multi-layered management of copyright.123 E. HOW DOES THE RECOMMENDATION DEAL WITH THE ONLINE RIGHTS?

The Recommendation refrains from inviting right-holders and collecting societies from “consolidating” the management of different exclusive rights. It takes a pragmatic approach in inviting right-holders and their representatives to streamline the management of “online” rights while acknowledging their distinct and independent character.124 The Recommendation refers to the above rights as the relevant “online” rights not in order to create new categories of rights, but because these rights are already harmonized at Community level with a view of facilitating cross-border exploitation of copyright protected works or phonograms.125 Therefore, the term “online rights” refers to those categories that are already present in the relevant body of Community directives.126 According to the Recommendation, the following exclusive rights are implicated in the provision of protected works or other subject matter electronically at a distance. 1. The Exclusive Right of Reproduction This right is defined in Article 2 of the Directive127 and “covers all reproductions made in the process of . . . online distribution.”128 The right of reproduction includes the right to reproduce the work by making intangible copies.129 Intangible copies include those made 123 See Commission Recommendation 2005/737, 2005 O.J. (L 276) 54, 54 (EC), OJ 2005 L276/54 (Westlaw) (explaining how commercial users must negotiate in each Member state, with each collective rights manager, for appropriate rights and stating the “need for a licensing policy that corresponds to the ubiquity of the online environment and which is multi-territorial”). 124 See id. This view appears to be in line with Panel Report, United States–Section 110(5) of the U.S. Copyright Act, ¶ 6.173 WT/DS152/R (June 15, 2000) (asserting that “in our view, normal exploitation would presuppose the possibility for right-holders to exercise separately all three exclusive rights guaranteed under the three subparagraphs of Article 11bis(1), as well as the rights conferred by other provisions, such as Article 11, of the Berne Convention (1971)”). 125 See Commission Recommendation 2005/737, art. 1, at 55. See also Council Directive 2001/29, recital 2, 2001 O.J. (L 167) 10, 10 (EC), OJ 2001 L167/10 (Westlaw) (stating that an earlier European Council meeting “stressed the need to create a general and flexible legal framework at Community level in order to foster the development of the information society in Europe. This requires, inter alia, the existence of an internal market for new products and services.”). 126 See Commission Recommendation 2005/737 at 55 (“‘[O]nline rights’ means any of the following rights: (i) the exclusive right of reproduction that covers all reproductions provided for under Directive 2001/29/EC in the form of intangible copies, made in the process of online distribution of musical works; (ii) the right of communication to the public of a musical work, either in the form of a right to authorise or prohibit pursuant to Directive 2001/29/EC or a right to equitable remuneration in accordance with Directive 92/100/EEC, which includes webcasting, internet radio and simulcasting or near-on-demand services received either on a personal computer or on a mobile telephone; (iii) the exclusive right of making available a musical work pursuant to Directive 2001/29/EC, which includes on-demand or other interactive services.”). 127 Council Directive 2001/29, art. 2, at 16. 128 See Commission Recommendation 2005/737, at 55. 129 See id. (stating that the exclusive right of reproduction provided in Directive 2001/29 applies to “intangible copies”); see also Directive 2001/29, art. 2, at 16 (stating that the reproduction right applies to a production “in any form”).

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by digital means;130 for example, upload and download, transmission in a network, or storage on a hard disk. Certain temporary copies are, however, exempted from the reproduction right by virtue of Article 5(3)(1) of the Directive.131 European courts tend to interpret the scope of the reproduction right widely and in a way that covers many activities taking place on the Internet. In a case concerning a personalised video recording service, the Cologne Court of Appeal held that both (1) digitizing the captured signal and (2) storage of that signal on the defendant’s server constituted infringing reproductions.132 The defendant operated a website that allowed subscribers to view the programmes of 20 German broadcasters at a time and place individually chosen by the subscribers. In order to offer such a service, the defendant captured the broadcaster’s signals and stored a digitized version of these signals on its server. Each subscriber then was allocated a space on the defendant’s server, the so-called personal video recorder (PVR). In Copiepresse v. Google,133 a collecting society representing French and German language newspaper publishers brought an action for copyright infringement against Google on the grounds that Google’s cache memory enabled users to access press articles which were no longer available for free on publishers’ web-sites. The Google cache memory enables the users to search and display the contents of a web-page by clicking on the link “cached,” even if the original page is no longer accessible (the cache version displays the contents of a web-site as last visited by the Google indexation robot). The Brussels Court of First Instance held that copying and storage of news articles and press photographs in the cache memory of Google servers infringed the reproduction right. The copy of a web-page stored in the memory of Google servers and the display of a link making the cached copy accessible to the public were held to constitute a material reproduction of protected works. While Google argued that it reproduced only the HTML code and not the images, the court reasoned that the only relevant fact was that a fixation of the webpage, in whatever form, had occurred. The Court thus held that authorization of the rightholders was needed 134 to operate such a fixation. According to a German line of cases reproductions of small images on the Internet, known as thumbnails infringe the images owners’ exclusive right of reproduction.135 In its “thumbnails” judgment, the Regional Court of Hamburg held that storage of “thumbnails” made available by a search engine on the Internet on a user’s computer in the German territory would entail the exclusive right of reproduction as guaranteed by the German Copyright Code (Urheberrechtsgesetz). Although it was each user who triggered the copy when visiting the search engine’s website, the search engine was held to have “initiated” the reproduction by making the thumbnails available on a website.

130 Follow-Up of the Commission of the European Communities to the Green Paper and Related Rights in the Information Society, at 12, COM (96) 568 final (Nov. 20, 1996), available at http://aei.pitt.edu/939/01/ copyright_gp_follow_COM_96_568.pdf [hereinafter Follow-Up to Green Paper] (stating that the Commission sought to “define the exact scope of the acts protected by the reproduction right . . . [and] clarify that the digitisation of works and other protected matter, as well as other acts such as scanning, or uploading and downloading of digitised material are, in principle, covered by the reproduction right. It would also cover for the same reasons, transient or other ephemeral acts of reproduction.”). 131 See Council Directive 2001/29, art. 5(3)(l), at 16. 132 Oberlandesgericht (Köln) (6 U 133/05) (September 9, 2005), GRUR- Rechtsspechungs Report, 2006/1, p5–7, for an English comment on this judgment, (2006) 17:2 Entertainment Law Review p. 17. 133 Google v. Copiepresse, Tribunal de 1ere instance de Bruxelles, Feb. 13, 2007. 134 In the U.S., in Field v. Google, 412 F. Supp 2d. 1106 (D. Nev. 2006), a court found that the making available of a cached copy amounted to fair use. 135 LG Bielefeld, Nov. 8, 2005, JurPC Web-Dok. 106/2006; LG Hamburg, Oct. 5, 2003, JurPC Web-Dok 146/2004.

1048 A PPE NDIX 2. The Exclusive Right of Communication to the Public This right is set out in Article 3 of the Directive and covers all communications of authors’ works to members of the public not present at the place where the communication originates, such as broadcasting, cable, and online transmissions.136 As evidenced by recital 23 of the Directive, this right does not cover local communication to the public such as public performances, recitations or the like.137 Apart from authors, only performers have an exclusive right of communication to the public, but the performers’ right is limited to live performances only.138 Performances that have already been broadcast or broadcasts from earlier fixations are specifically excluded.139 Arguably, performers therefore have no exclusive right of communication to the public that would apply to the online streaming of sound recordings.140 They do, however, have the exclusive right of “making available,” which would apply to online downloads.141 Some commentators appear to assume that the authors’ exclusive right of communication to the public only covers situations where the transmitter determines the timing of the communication.142 This would include webcasting,143 simulcasting, Internet radio, IPTV, and “near-on-demand” services.144 Communication to the public would occur irrespectively of whether musical works are communicated via personal computers, a tele136 See id. art. 3. The Court of Justice had interpreted the notion of public as an indeterminate number of potential spectators. Cf. Case C-306/05, Sociedad General de Autores y Editores de España (SGAE) v. Rafel Hoteles SA, 2006 E.C.R. I-11519 ¶ 37 (stating that “the term public[] refers to an indeterminate number of potential television viewers”). 137 Bechtold, supra note 35, at 360. 138 See Council Directive 92/100, art. 8(1), 1992 O.J. (L 346) 61 (EC), OJ 1992 L346/61 (Westlaw). 139 See id. art. 8 (stipulating that performers and phonogram producers possess a right to equitable remuneration with regard to broadcasting performances fixed in a commercial program by wireless means, thereby excluding cable broadcasts). But see id. recital 20, 1992 O.J. (L346) (Westlaw) (stating that Member States are free to provide performers broader protection and require “equitable remuneration” for cable or other wire-based broadcasts, such as webcasting or simulcasting of broadcasts on the internet). 140 See id. art 8(1); Council Directive 2001/29, ¶ 25, 2001 O.J. (L 167) at 12. The Copyright Directive grants neighbouring rights holders no exclusive right with respect to services such as webcasting or simulcasting, which are not fully interactive. See Council Directive 2001/29, recital 25, at 12. These rights are covered by national rules on neighbouring rights. In most countries, phonogram producers and performers only enjoy a right to receive equitable remuneration for the secondary use of phonograms, which may include webcasting. With respect to broadcasting by wireless means — but not cable-casting, simulcasting or webcasting — Directive 92/100, therefore, requires Member States to provide at least a right to ensure that equitable remuneration is paid for the secondary use of a phonogram by a broadcaster. 141 See discussion infra Part 5.5.3. 142 Compare Bechtold, supra note 35, at 361 (positing that “[i]f the work is offered in a way that the member of the public does not have individual control over when and from where to access the work (for example, normal TV and radio broadcasting, streaming content over the Internet, Internet radio stations and possibly near-on-demand pay TV), the right of making available to the public does not apply”), with Guibault et al., supra note 55, at 28 (“[I]t is difficult to give a definite interpretation of what constitutes ‘on demand,’ i.e. delivery at a time and place individually chosen by the user . . . . Precisely what level of interactivity it implies is not quite clear. In practice, dissemination on-line is done through models along a sliding scale of interactivity.”). 143 See Community Initiative, supra note 41, at 6 n.1. “A simulcast is a ‘simultaneous broadcast’, and refers to programs or events broadcast across more than one medium at the same time. Streaming allows data to be transferred in a stream of packets that are interpreted as they arrive for ‘just-in-time’ delivery of multimedia information. A webcast is similar to a broadcast television program but designed for internet transmission. A person/computer receiving information via a computer refers to it as a download. Online music provided on demand is a downloading service of musical works on demand against or without payment.” Id. 144 But see Proposal for a European Parliament and Council Directive on the Harmonization of Certain Aspects of Copyright and Related Rights in the Information Society, COM (1998) 628 final (Jan. 21, 1998), E.U.: COM(97) 628 (Westlaw) [hereinafter Proposal] (stating that near-video-on-demand, pay-per-view and pay-TV are not acts of making available).

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vision set or mobile telephones. In the “multi-channel” case, the Court of Appeal in Munich held that the transmission of music tracks without any commentary or advertising via cable and satellite was to be cleared as a communication to the public (broadcast transmission) and not as a non-physical delivery of music tracks, a form of online exploitation, which would nowadays have to be cleared under the “making available” right.145 3. The Exclusive Right of “Making Available” This right covers fully interactive “on-demand” services, such as making a work available by allowing for its downloading.146 The “making” available right also seems to apply to downloading on a portable device, such as “podcasting”.147 As opposed to the exclusive right of communication to the public, which is only granted to authors, the “making available” right is accorded to authors, performers and record producers.148 It is, in particular, the right to “make available” works or other subject matter “in such a way that members of the public may access them from a place and at a time individually chosen by them” that has introduced the “digital agenda” to copyright policy.149 The “making available” right, as it is known, is a right formulated with the Internet and cross-border exploitation of copyright in mind and thus most closely reflects the potential of the online environment and “on-demand” services made available online.150 In the realm of Internet services, the “making available” right was tailored to cover not only permanent “downloads” — potential substitutes for retail sales — but also “on-demand” streaming of works that can be permanently stored in the process.151 The legislative history of the Directive is very clear on this point. In the Explanatory Memorandum of the original proposal for the Directive, the Commission states: A range of such ‘on-demand’ services has already emerged in the European market, starting in 1995 and 1996, particularly in the United Kingdom, France and Germany, although still at the prototype or trial stage. Interactive ‘on-demand’ services are characterised by the fact that a work or other subject matter stored in digital format is made permanently available to third parties interactively, i.e. in such a way that users may order from a database the music or film they want; this is then relayed to their 145

Judgment of 20 April 2000 – Case no. 6 U 3729/99. See Council Directive 2001/29, art. 3, 2001 O.J. (L 167) 10,16 (EC), OJ 2001 L167/10 (Westlaw); see also Follow-Up to Green Paper, supra note 130, at 13 (stating Member State preference “to cover ‘on-demand’ transmissions — without prejudice to any acts of reproduction which are covered by a separate right – by a widely interpreted form of a right of communication to the public”). Electronic delivery would therefore form part of the family of “communication to the public” rights and not part of the family of other rights, such as the distribution right. The aim was to grant this right of communication to the same beneficiaries who enjoy the exclusive right of reproduction in the same digital environment. The stated objective was therefore that both the right of reproduction and the right of communication to the public would coexist alongside each other. But see Proposal, supra note 144 (stating in regard to protecting “on demand” transmission, “[i]n economic terms, the interactive on-demand transmission is a new form of exploitation of intellectual property. In legal terms, it is generally accepted that the distribution right, which only applies to the distribution of physical copies does not cover the act of transmission.”). 147 Dr. Joachim v.Ungern-Sternberg, in Urheberrecht Kommentar para. 20 n.46, at 403 (Professor Dr. Dr. h. c. mult. Gerhard Schricker ed., C.H. Beck’sche Verlagsbuchhandlung 1999) (1987). There are estimates that “50% of mobile content revenues will be from music.” IFPI 2005, supra note 70, at 3. Music services provided to mobile telephones also include the market for ring-tones and real-tones. See id. at 8. 148 See Council Directive 2001/29, art. 3, at 16. 149 Id. 150 See Case C-306/05, Sociedad General de Autores y Editores de España (SGAE) v. Rafael Hoteles SA, 2006 E.C.R. I-11519. 151 See Proposal, supra note 144. 146

1050 A PPE NDIX computer as digital signals over the Internet or other high-speed networks, for display or for downloading, depending on the applicable licence.152 Interestingly enough, this remains a valid description of the online market for music or film “downloads.” Downloads are still the predominant way in which consumers access music online.153 The Memorandum also shows that the Commission, already in 1997, had in mind to deal specifically with online delivery of music or films — activities which were already known at that time. There appears to be an emerging trend to interpret the “making available” right broadly. The Court of Appeal in Hamburg recently ruled that an act of making phonograms available did not even require that the download of a copy of the phonogram.154 The court qualified an act of on-demand streaming as covered by the “making available” right.155 The Court, by qualifying the “making available” as a sub-set of the right of “communication to the public”, concluded that “making available” of a sound recording did not require that the user obtained or retained ‘possession’ of a download. In another case, the Court of Appeal in Cologne ruled that an Internet service provider’s offer to save selected digitized television programmes for the user’s deferred viewing constituted an act of “making available.”156 The use of peer-to-peer software to distribute works over the Internet has also been held to be covered by the right to make available. In Polydor Ltd and others v Brown and others,157 proceedings were brought in the High Court of England and Wales against an Internet user who had used peer-to-peer software to offer more than four-hundred files for download. Under section 20 of the UK Copyright, Designs and Patents Act 1988,158 communication to the public includes broadcasting and “making available” to the public of the work by “electronic transmission.” ’159 The judge held that connecting a computer running P2P software to the Internet, and in which music files are stored in a shared directory, falls within section 20. The mere fact that the files were present and made available was sufficient to constitute infringement of this section. Similarly, the Dublin High Court held that peer-to peer software allowed copyright infringement by “making available” to the public a significant volume of sound recordings.160 This case law may reflect the fact that the “making available” right is the one right formulated in the Directive that specifically had Internet-based services and online infringements in mind. The above jurisprudence appears significant. Internet radio services that would traditionally be considered as web-casting or streaming-type services are increasingly com152

Id. (emphasis added). See The Rise of Online Music in Europe, supra note 61, at 13 (“Music is being consumed in increasingly diverse ways, ranging from ringtones to free-to-listen and podcasts. However, the digital retail model continues to dominate as it has since . . . 2004.”). 154 Oberlandesgericht [OLG] [Court of Appeal] July 7, 2005, Case No 5 U 176/04 BeckRS 2005 09130. 155 Id. 156 Oberlandesgericht [OLG] [Court of Appeal] Oct. 9September 2005 Case No 6 U 90/05 BeckRS 2005 12216. 157 [2005] EWHC 3191 (Ch.D.). 158 An unofficial, consolidated version of the Copyright, Designs and Patents Act 1988 is available at: http://www.ipo.gov.uk/copy/c-law/c-legislation.htm. 159 Cf. Section 20(2) of the Copyright, Designs and Patents Act 1988: “References in this Part to communication to the public are to communication to the public by electronic transmission, and in relation to a work include — (a) the broadcasting of the work; (b) the making available to the public of the work by electronic transmission in such a way that members of the public may access it from a place and at a time individually chosen by them.” 160 EMI Sony Universal and others v. Eirecom, BT Ireland [2006] ECDR 5, Dublin High Court, July 8, 2005. The proceedings were brought against the ISP for disclosure of information regarding certain customers, and the existence of copyright infringement was not challenged. 153

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peting with interactive services or “electronic retail” services, as envisaged by the “making available” right. For example, filtering software might well enable listeners of digital radio to screen a broadcast so as to obtain recordings which can later be digitally stored on mobile listening devices. The digital storage of selected songs would then fall under the “making available” right.161 F. IS A MORE GRANULAR APPROACH NECESSARY IN DEFINING “ONLINE” RIGHTS?

As seen above, the Recommendation defines “online” rights by reference to the harmonized terminology used in the E.U. directives.162 In line with the E.U. directives, “the Recommendation defines the types of rights in terms of the legal qualification of the right,”163 using the terminology of the relevant directives.164 “The Recommendation does not address the [potential] necessity for collective rights managers to further define the categories of ‘online rights’ by (1) specific forms of [‘near-on-demand’] exploitation” — e.g., . . . webcasting, IPTV, mobile transmissions, mobile television, video-on-demand, etc or (2) by reference to the type of [‘on-demand’] service offered (e.g., “download-to-own” or subscription-based services).165 Further monitoring must determine whether it was correct that the Recommendation used the term “online rights” in a way that refrained from defining specific forms of exploitation or even specific services that are offered online. It might become necessary — for example, when rights are assigned to a rights manager — to further delineate “online” rights according to forms of exploitation. For example, right-holders may well wish to be able to assign some forms of exploitation, e.g. some types of online service, to a collecting society while retaining other forms of exploitation without assigning them to a collective rights manager. This might become relevant for users of Creative Commons licenses, according to which only some forms of use may be reserved while other forms of exploitation are allowed. This “some rights reserved” approach makes it difficult for collecting societies to manage Creative Commons licensed works.166 It is alleged that collecting societies’ current management mandates do not provide right-holders the possibility to exclude specific forms of exploitation from the

161 Such a service was the subject of a recent German judgment by the Regional Court in Cologne in Case 28 O 16/07, judgment of 28 February 2007, BeckRS 2007 04401. In the case at issue, the service provider digitally stored radio programmes for later listening at a time chosen by its subscribers. This element of the service was offered for free. However, the service provider charged a subscription fee of €0.99 per day, if the online subscriber decided to download more than five tracks of the stored radio programmes per day. For a monthly fee of €2.99, the user could download an unlimited number of music tracks. As the service provider had failed to clear copyright for the use of the sound recordings, the court mentioned a possible infringement the right of ‘making available’ but left the matter unresolved because it held that, in any case, the service infringed the reproduction right in the sound recording. 162 See supra note 126. 163 Call for Comments, supra note 87, at 2. 164 See generally Commission Recommendation 2005/737, 2005 O.J. (L 276) 54, 54 (EC), OJ 2005 L276/54 (Westlaw). 165 Call for Comments, supra note 87, at 2. 166 See, e.g., Gowers, supra note 45, at § 5.66 (“Collecting Societies in the U.K. generally hold an exclusive license to collect royalties for the copyright works that they represent. Therefore, artists who are members of collecting societies are generally unable to license Creative Commons licensed individual works.”). But see Euan Lawson, Live Performances: Collecting Societies and the Public Performance Right, in Collective Licensing: Past, Present and Future, supra note 2, at 89, 93 (stating that the Performing Right Society Ltd. (“PRS”) in the United Kingdom does allow members to “contract out of exclusivity for particular live concert tours where the composer or publisher concerned can generate a royalty of £1,000 or more per event”).

1052 A PPE NDIX scope of collective management.167 Therefore, artists who are members of collecting societies often remain unable to use a Creative Commons license. The same might be true for the purposes of the withdrawal of rights. Rightholders may wish to withdraw only certain forms of exploitation while leaving others to be managed collectively.168 The principle of a more granular delineation of rights for the purposes of withdrawal from and entrustment of these rights to collecting societies has been studied recently in the rapport Levy-Jouyet on l’économie de l’immatériel.169 The report advocates that right-holders have the choice to withdraw all of their rights or only certain categories or forms of exploitation from collective managers.170 The third principle of the French recommendations goes even further in advocating that even a commercial user be given the choice to license only certain repertoire or “types of music” that he finds interesting — as opposed to receiving a “blanket license”171 covering all types of music. It is interesting to note that the report therefore seems to favor granular choice both at right-holders’ and at users’ levels. G. THE RELATIONSHIP BETWEEN BROADCASTING AND “ONLINE” RIGHTS

One form of exploitation that is not included in the Recommendation is broadcasting, including transmissions or retransmission by cable or satellite.172 This is because broadcasting and satellite or cable transmissions are not considered forms of “online” retail or “downloading” of music. The reason for this is as follows. For broadcasters, music has a function and value that may be different from the value of music for an online retail store. While online retail stores sell music downloads to the general public as their primary line of business, broadcasters only use music as background to their scheduled programmes. In other words, an online shop selling music is active on the “primary” music market, while a broadcaster exploits music on a “secondary” market. The Recommendation aims to facilitate E.U.-wide licensing for the primary market for music downloads.173 It may appear less tailored to creating new licensing models for the “secondary market” when music is used incidentally as background in broadcast

167 See Things to Consider Regarding Creative Commons Licensing, http://creativecommons.org/about/think (last visited Sept. 10, 2007). 168 This issue is addressed in Call for Comments, supra note 87, at 2 (“[S]hould rightholders be able to retain some types of use or forms of exploitation without assigning them to a collective rights manager?”). 169 See generally Rapport de la Commission sur l’économie de l’immatériel, Minefi (December 2006), available at http://www.minefi.gouv.fr/directions_services/sircom/ technologies_info/immateriel/immateriel.pdf [hereinafter Rapport de la Commission]. 170 Id. at 129 (“Premier principe, le créateur doit rester maître de ses droits. Comme c’est déjà le cas dans certaines sociétés telle la SACD, libre droit pour les créateurs de sortir des sociétés au bout d’un délai qui ne saurait dépasser deux ans ; aucune autre formalité ou condition n’est opposable à la demande, la sortie pouvant porter sur l’ensemble des droits ou sur certains d’entre eux seulement.”). 171 Id. (“Troisième principe, l’utilisateur doit pouvoir choisir la fraction du répertoire pour laquelle il souhaite obtenir une licence. L’utilisateur pourrait ainsi n’obtenir une licence que sur une partie du catalogue géré par la SPRD. Pour éviter une gestion trop fine de ces licences partielles, une « partie » pourrait ne s’appliquer qu’à un type de musique ou à un ayant droit plutôt que titre par titre et il reviendrait à l’utilisateur de mettre en place les outils de vérification nécessaires à la SPRD. Dans tous les cas, le prix de la licence partielle ne saurait dépasser le montant d’une licence complète.”). 172 See generally Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC), OJ 2005 L276/54 (Westlaw). 173 See the early focus on “pay-per-download” services in Community Initiative, supra note 41, at 6. “In 2004, online music revenue in Western Europe amounted to €27.2 million (€23.4 million attributable to “downloads” and €3.8 million to subscription-based services). The U.S. market amounted to €207 million, €155.9 million attributable to downloads and €51.1 million to subscription-based services).”Id.

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programmes.174 In this latter case, most jurisdictions in the Community grant phonogram producers and performing artists only a right to claim “equitable remuneration.”175 In these circumstances, traditional territorial rights management might well persist.176 As terrestrial broadcasting, satellite transmissions or cable retransmissions are not covered by the Recommendation, debate has arisen on how broadcasters or satellite operators should license the “on-demand” “making available” of earlier broadcasts for later viewing.177 Some commentators argue that the “on-demand” delivery of scheduled programming is a form of “time shifting.”178 This would imply that later viewing, even at a time individually chosen by the viewer, should be covered by the — often national — broadcast license. On the other hand, should the later programming viewed “on-demand” be covered by the “making available” right, broadcasters would benefit from the option of E.U.-wide right clearance as stipulated by the Recommendation. This is because the “making available” right is the only right that has a true pan-European vocation and is arguably the easiest right to administer at the E.U. level. In this way, on-demand versions of broadcasts could be transmitted for an audience that is wider than the original broadcast. The Recommendation does not specifically address the issue of how broadcasters license “on-demand” use of scheduled programme content.179 If the “on-demand” service covers a wider territory than the initial broadcast, a separate E.U.-wide or multi-territorial license might be the cheaper option. Some broadcasters might, however, be able to demonstrate that the audience interested in programmes made available “on-demand” after the initial broadcast has taken place is located in the same territory as the one watching the scheduled programme. In this case, negotiations could take place to include the “on-demand” time-shifts in the original broadcast license. This is an issue that parties will have to decide when negotiating the broadcast license.

VI. How are “Online” Rights Licensed? A. RECIPROCAL REPRESENTATION AGREEMENTS

Cross-border cooperation among E.U. collecting societies for the exploitation of works that are in the repertoire of a particular E.U. society by a society in another Member 174 See generally Commission Recommendation 2005/737. As mentioned above, this “secondary market,” in many E.U. Member States, is not covered by an exclusive right, at least as far as performing artists and phonogram producers are concerned. See supra note 139. The “equitable remuneration” due for the use of a commercial phonogram in broadcasting is administered at a national level. 175 See supra note 139. 176 See Hugenholtz et al., supra note 24, at 220–21 (suggesting that “[o]ne possibility, which would comply with the Commission’s current policy of creating a Community-wide market for online rights, would be to create a distinction between traditional rights of public performance and broadcasting that might remain territorial . . . and rights of making available online that need not be managed locally and would become Community-wide”). 177 The practical significance of this debate lies in its repercussion on E.U. right clearance. See Guibault et al., supra note 55, at 27. While broadcasting licenses or remuneration schemes are administered collectively, the phonogram producer’s rights involved in “on demand” services are cleared individually. See id. at 25–27. 178 See id. at 27 (defining “time-shifting” as “view[ing] or listen[ing] to content at a time other than that of the original delivery” and suggesting that “[d]igital video recorders greatly enhance this capacity [to time-shift] and also offer other control over content, e.g. allowing the user to pause or fast forward through a broadcast”). 179 See generally Commission Recommendation 2005/737; see also Call for Comments, supra note 87, at 2 (“The Recommendation defines the types of rights in terms of the legal nature of the right. The Recommendation does not address the necessity for collective rights managers to further define the categories of “online rights” by (1) type of use or (2) form of exploitation.”).

1054 A PPE NDIX State is conducted via “reciprocal representation agreements.”180 As the above groups of right-holders — authors, composers, publishers, performers, and, for “secondary uses,”181 also the record companies — ”tend to entrust their rights to collective rights management societies established in their home territory, these right-holder[s’] [sic] works become[] [sic] part of the repertoire of the collecting society in the territory where [they are] domiciled (the ‘management society’).”182 “If copyright works are [performed or sold online] in another territory, the [collecting] society active in that territory (the ‘affiliated society’) will enter into reciprocal agreements with the management society” that manages the work at issue.183 This allows the affiliated society to commercially exploit the management society’s repertoire, but only in its own territory.184 The management society still remains empowered to exercise the rights to this repertoire in its own territory and is able to entrust other societies to manage its repertoire in their respective territories.185 In effect, this means that along with its own national repertoire, an affiliate always obtains the right to license, in its own territory, the repertoire of the management society with which it has a bilateral arrangement. Via a network of bilateral reciprocal agreements, each local collective rights manager represents both its own repertoire and the repertoire of the collective with which has entered into a bilateral reciprocal agreement. But the representation mandate of the affiliated society is always limited to its national territory.186 In order to facilitate the creation of a network of the above bilateral reciprocal agreements, collective societies have formed alliances — e.g., CISAC187 for authors’ rights in musical works, BIEM188 for authors’ rights in mechanical reproduction, and SCAPR and IMAE189 for performers’ rights in musical works. Most collective societies belong to one of the principal umbrella organizations mentioned above. These alliances have led to model agreements which cover cross-border licensing, collecting and distribution of

180 See Community Initiative, supra note 41, at 8 & n.10 (“The term “reciprocal” in the context of these private agreements means ‘in return for [sic] an identical grant’. It does not connote ‘reciprocity’ for which there is a specific meaning in international law especially in the international copyright conventions i.e. where rights are granted by one country to its nationals, the nationals of another country can only have the benefit of those rights where there is commensurate recognition of these rights by the other country.”). 181 The right to equitable remuneration if commercial phonograms are broadcast by wireless means or communicated to the public as contained in Council Directive 92/100/EEC is a secondary use of a commercial phonogram. See Council Directive 92/100, art. 8(2), 1992 O.J. (L 346) 61 (EC), OJ 1992 L346/61 (Westlaw). 182 Study on Community Initiative, supra note 41, at 9. 183 Id. 184 Id. See also Lawson, supra note 166, at 91, for a brief discussion of the implications of reciprocal agreements (“Performing right societies have . . . developed networks of interlocking agreements by which music is cross-licensed between societies in different states. In this way, so the theory goes, the composer can sit at home and watch all of his income flow back through his membership of one society.”). 185 See Community Initiative, supra note 41, at 9. 186 See Impact Assessment, supra note 41, at 6. 187 CISAC is the International Confederation of Societies of Authors and Composers. See Rigg, supra note 109, at 22. It was founded in 1926 and initially represented eighteen collecting societies from eighteen countries. Id. Membership was limited to authors’ societies. Id. The organization currently includes 200 societies from ninety-eight countries, representing over 2 million authors. Id. 188 BIEM, the Bureau International des Sociétés Gérant Les Droits d’Enregistrement et de Reproduction Mécanique, was established in 1929 by Alphonse Tournier and currently represents forty-one societies in thirty-eight countries. See id. at 23. The organization negotiates a standard agreement with representatives of the recording industry (IFPI). Id.. See also Community Initiative, supra note 41, at 12–13 (analyzing CISAC and BIEM model representation agreements). 189 SCAPR is the Societies’ Council for the Collective Management of Performers’ Rights and IMAE is the Institut pour la tutelle des artistes-interprètes et exécutants. See Community Initiative, supra note 41, at 13 (defining SCAPR and IMAE, and analyzing their respective model agreements and restrictive provisions).

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royalties.190 On the basis of these model agreements, collective societies have concluded bilateral reciprocal representation agreements.191 Cross-border collective management of the rights thus entails management services that one collective rights manager, the affiliate society, provides on behalf of another collective rights manager, the management society.192 However, the model agreements and the corresponding bilateral reciprocal representation agreements apply a series of restrictions which are contrary to the fundamental E.U. principle that services, including collective management of copyright or individual services associated with the collective management of copyright, should be provided across national borders without restriction based on nationality, residence, or place of establishment.193 B. TRANSACTION COSTS IN RECIPROCAL ARRANGEMENTS

“The current practice of collective management of copyright on a national territorial basis . . . requires that each commercial user obtain a license from each and every relevant collective rights manager in each territory of the E.U. in which the work is accessible.”194 In order for these reciprocal representation agreements to cover at least the aggregate repertoire of all European collective societies for one particular form of exploitation of one particular right in all European territories — e.g. the making available right that has to be cleared to sell musical works online — it is necessary that European collective societies conclude among themselves a minimum of 351 bilateral reciprocal representation agreements.195 This figure is based on the hypothesis that there would be a minimum of one collecting society per Member State that is responsible for the “making available right.”196 This society would have to have a reciprocal representation agreement with all twenty-six other societies that administer this right in the other Member States.197 In order to determine the minimum total number of bilateral combinations necessary among twenty-seven European collecting societies, one needs to calculate the number of agreements among each of the twenty-seven entities — as “management societies” — with each of the other twenty-six societies — as “affiliate societies” — i.e., 27 × 26 = 702. However the result must be divided by two because the agreement between societies A and B is the same as the agreement between societies B and A — i.e., 702 / 2 = 351. Maintaining this network of reciprocal arrangements among twenty-seven societies comes at a considerable management cost. 190 See Rigg, supra note 109, at 22–24 (stating the role collective societies serve in issuing agreements and the functions of such societies according to the WIPO). 191 See Community Initiative, supra note 41, at 9. 192 See id. 193 Id. The Court of Justice has dealt with, and essentially accepted as compatible with the anti-cartel provisions of the EC Treaty, reciprocal representation agreements in the context of licensing of physical premises. See, e.g., Case 395/87, Ministère Public v. Jean-Louis Tournier, 1989 E.C.R. 2521, para. 16–24; Joined Cases 110/241 & 242/88 1989 Lucazeau v. Société des Auteurs, Compositeurs et Éditeurs de Musique (SACEM), 1989 ECR 2811. There is no jurisprudence on whether such provisions would also be allowed for online licensing. Nor is there jurisprudence on how such provisions affect the freedom to provide and receive cross-border services. 194 Community Initiative, supra note 41, at 8. 195 See id. 196 See id. (stating that each Member State would be represented by one collective society for each right). The study employs a different number because there were fewer Member States in 2005, but the principle behind the calculation is constant. 197 See id. Of course, in reality there is more than one collecting society in each Member State as often each category of right-holder is administered by a separate society and sometimes a particular right (reproduction) is administered by a society distinct from that which administers the right to communicate to the public.

1056 A PPE NDIX The description above shows that legal complications, more than technical hurdles, stand in the way of an efficient and seamless online licensing of protected works. That is because the arrangements in which copyright and related rights are managed never contemplated the plethora of new platforms of distribution that have emerged in the digital era. Indeed, there were no digital services when reciprocal arrangements that bind each collecting society to limit its activities to its national territory were set up.198 As reciprocal arrangements tend to oblige the partner collectives to limit their activities to one particular territory, they do not accommodate international business models. But most of the above-mentioned new digital services are potentially international in scope and therefore need to clear music rights in order to operate legally. In several E.U. jurisdictions, releasing or re-releasing music on the Internet on an international scale is not covered in the traditional licensing of musical works.199 This means that online music stores or broadcasters who want to offer services on the Internet need to return to the authors’ societies and the record companies to renegotiate licensing contracts or conclude new ones for the new digital platforms. Instead of negotiating Internet or mobile use on an E.U.-wide basis, the clearance of rights was again done territory-by-territory. But territorial rights management has an effect on the timeline of the launching of online services.200

198 The first collecting society for copyright in musical works was the French Société des auteurs, compositeurs et éditeurs de musique (SACEM). SACEM was established in 1851 and collected royalties for the public performance of music in bars, cafés and other local concert venues. See Rigg, supra note 109, at 19. SACEM, at times, collected royalties for the French repertoire it represented in Switzerland, Belgium and the United Kingdom. About SACEM, http://www.sacem.fr (follow “English” hyperlink; then follow “SACEM” hyperlink; then follow “History” hyperlink) (last visited Sept. 14, 2007). The practice of direct collection only ceased once the United Kingdom, in 1914, established its own society, the Performing Rights Society (PRS), which then collected on behalf of the French repertoire in the United Kingdom. Rigg, supra note 109, at 22. (“SACEM had caused resentment in Britain by attempting to enforce direct payment for the performance of French works in Britain. Instead of collecting directly, it made sense for SACEM to enter into arrangements with the U.K. societies to collect the U.K. income streams from the use of French works and vice versa.”). The practice of reciprocal representation agreements was born. For a brief review of the history of collective rights management, see Martin Kretschmer, The Failure of Property Rules on Collective Administration: Rethinking Copyright Societies as Regulatory Instruments, 24(3) Eur. Intell. Prop. Rev. 126, 129 (2002). 199 See, e.g., Urheberrechtsgesetz [UrhG] [German Copyright Act], May 8, 1998, § 31 no.4 (F.R.G.) (stating that an assignment of rights for new (future) types and means of exploitation which were not known at the time the contract was drafted is considered null and void). The aim of this provision is to protect authors against buy-outs for such new and unknown forms of exploitation and to prevent authors from losing revenue associated with these forms of exploitation. There is a certain trend to relax the strict interpretation of this provision. Recently, the German Supreme Court held that exploitation of a film on DVD did not constitute a new form of exploitation. See Günter Poll, New Types of Exploitation “The Magic Mountain” on DVD, 28(6) Eur. Intell. Prop. Rev. 355, 355 (2006). 200 The iTunes music store and its staggered introduction can be cited as evidence in this respect. This service was launched on 28 April 2003 in the all of the U.S. Apple Launches the iTunes Music Store, http://www.apple.com/pr/library/2003/apr/28musicstore.html (last visited Sept. 12, 2007) There was no single launch date for the European Union in 2003. Instead, the service was introduced over a year later in the United Kingdom, Germany and France on 15 June 2004. Apple Launches iTunes Music Store in the UK, France & Germany, http://www.apple.com/pr/library/2004/jun/15itunes.html (last visited Sept. 14, 2007). Consumers in Belgium, the Netherlands, Luxembourg, Spain, Italy, Portugal, Finland, Austria and Greece had to wait until 26 October 2004. Apple Launches EU iTunes Music Store, http://www.apple.com/pr/library/2004/oct/26itmseu.html (last visited Sept. 14, 2007). In Denmark, Norway and Sweden the service only became available on 10 May 2005 — over two years after the U.S. launch date. iTunes Music Store Launches in Denmark, Norway, Sweden & Switzerland, http://www.apple.com/pr/library/2005/may/10itms.html (last visited Sept. 12, 2007). It appears that iTunes is still not available in some of the 10 States that joined the Community in May 2004, such as Slovenia, the Slovak Republic, Hungary, Poland or the Czech Republic. Download iTunes - Apple (UK and Ireland), http://www.apple.com/uk/itunes/download/?ipod.html (see copyright notice indicating availability of iTunes Music Store) (last visited Sept. 12, 2007).

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C. RECIPROCAL ARRANGEMENTS IN THE ONLINE ENVIRONMENT

Due to the technical accessibility of an online service throughout the European territories, providers of online services require multi-territorial licenses for all of the “online” rights mentioned above.201 The market segment in which this appears most important is the growing market in interactive and on-demand services202 with an array of options for the users which are provided electronically at a distance. As mentioned above, most of these services appear to be governed by the “making available” right.203 Ensuring that optimal conditions exist for the proper management of the new “making available” right will ensure its smooth transition into the marketplace. Digital technology is fast rendering the old territorial system of managing intellectual property obsolete.204 New digital services mean easier delivery than in the analogue era. This includes easier delivery of services across the E.U. However, under the current system, content destined for the entire continent’s consumption may be subjected to clearance twenty-seven times through twenty-seven different national authorities. For online operators this constitutes a considerable administrative burden and in some Member States popular online services are not even available.205 Due to the technical accessibility of an online service throughout the European territories, innovative content providers require multi-territorial licenses as a way of insurance against copyright infringement claims in the different jurisdictions in which the services may be accessed.

201

Commission of the European Communities, Decision No. 2003/300/EC, O.J. L 107/58 (2003). See The Rise of the Online Music Market, supra note 61. 203 See supra text accompanying Part I.E.3. 204 See, e.g., David Wood, Collective Management and E.U. Competition Law, in Collective Licensing: Past, Present and Future, supra note 2, at 169, 170. 202

Indeed, the issues in the Tournier case were discussed on the basis of a set of facts established in the early nineteen-eighties. Put simply, this narrow interpretation is that given the practical impossibility for a collecting society in one Member State to duplicate its necessary monitoring and control activities in another Member State, collecting societies are not competitors in respect of these activities . . . . However, the question arises whether this analysis holds true if there are users in respect of whom monitoring and enforcement activities can feasibly be carried out by a collecting society in another Member State . . . . We have been told that since there is a simultaneous Internet broadcast or because the activity can be monitored by telephone, there is no technical reason why the monitoring cannot be carried out by a collecting society in another Member State to the Member State of reception. Id. Note, however that SACEM, the first European collecting society established in 1851, did not rely on reciprocal representation agreements to collect royalties on behalf of the French repertoire in other territories than France. At times SACEM collected royalties for the French repertoire it represented in Switzerland, Belgium and the United Kingdom. The practice of direct collection only ceased once the United Kingdom, in 1914, established its own society, the Performing Rights Society (PRS), which then collected on behalf of the French repertoire in the United Kingdom. See Rigg, supra note 109, at 22. As mentioned above, the main argument for reciprocal arrangements was resentment of foreign societies attempting to enforce direct payments abroad and not the duplication of monitoring and control activities. See id.; see also supra note 198 (discussing SACEM’s attempt to enforce direct payment in Britain). This would cast some doubt on the Tournier case law, even before electronic communications allowed for “distance monitoring.” 205

See supra note 200.

1058 A PPE NDIX D. HOW WOULD THE MARKET HAVE EVOLVED WITHOUT THE ONLINE RECOMMENDATION?

In 2005 the Commission reviewed how copyright and related rights are being commercially exploited across the E.U.206 This review focused on how the new “making available” right was licensed.207 Stakeholders were consulted in July 2005.208 This exercise revealed that the current management of [copyright in musical works and phonograms] — within defined territories that usually are national borders — is a source of considerable inefficiency. And it also hinders the entry of new Internet-based services that rely on [protected works and phonograms]. Stakeholders [stated] that for most forms of exploitation — in particular the new making available right — the Internal Market has become the appropriate [reference point]. The effect of digitisation which allows a protected work to be transmitted cross-border has been felt across all the copyright industries. This implies that, in the emerging multi-territorial environment of online exploitation of copyright-protected works, access to these works needs to be as efficient and simple as possible, while maximising the revenue that is transferred to right-holders. Stakeholders also stated that the ubiquity brought about by the Internet, as well as the digital format of products such as music files, are difficult to reconcile with traditional reciprocal agreements. The traditional reciprocal agreements among collecting societies did not foresee the possibility that the affiliated society would grant a licence beyond its home territory. As a consequence, the traditional reciprocal agreements require a commercial user wishing to offer e.g.[,] a musical work, online or offline to its clients to obtain a copyright licence from every single relevant national society.209 Before issuing the Recommendation, the Commission looked whether there were alternatives.210 In particular, previous attempts to amend traditional reciprocal agreements to make them a suitable basis for supplying multi-territorial copyright licenses were assessed.211 Multi-territorial licensing has been introduced through the Santiago Agreement for the authors’ right of online communication to the public including “making available” for the provision of music downloading or streaming use of authors’ rights.212

206 See generally Commission Recommendation 2005/737, 2005 O.J. (L 276) 54, 54 (EC), OJ 2005 L276/54 (Westlaw). 207 Id. at 55. 208 See Impact Assessment, supra note 41, at 4. 209 Tilman Lüder, Head of the Copyright Unit, European Commission, Working Toward the Next Generation of Copyright Licenses, Speech Presented at the 14th Fordham Conference on International Intellectual Property Law & Policy 13 (April 20–21, 2006), available at http://ec.europa.eu/internal_market/copyright/docs/docs/ lueder_fordham_2006.pdf. 210 See Impact Assessment, supra note 41, passim. 211 Lüder, supra note 209, at 13. 212 The Agreement was notified to the Commission in April 2001 by the collecting societies of the U.K. (PRS), France (SACEM), Germany (GEMA), and the Netherlands (BUMA), which were subsequently joined by all societies in the European Economic Area — except for the Portuguese society SPA — as well as by the Swiss society (SUISA). See Commission of the European Communities, Notice 2005/C200/05, O.J. C 200/11 (2005). See also http://europa.eu/rapid/pressReleasesAction.do?reference=IP/04/586&format=HTML&aged= 0&language=EN&guiLanguage=en (last visited Sept. 12, 2007).

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Multi-territorial licensing has been introduced via the BIEM/Barcelona Agreement for online reproduction, which covers webcasting, on demand transmission by acts of streaming and downloading.213 But the structure put in place by the parties to the Santiago and BIEM/Barcelona Agreements results in commercial users being restricted in their choice to the collecting society established in their own Member State for the grant of the multi-territorial licence. This restriction is described in the Agreements as the so called “authority to licence” and has the effect of allocating customers to the local collective [in the territory where] . . . the content provider has its economic residence or URL[.] . . . [The] “customer allocation clause” [is] . . . contrary to the fundamental freedom to seek cross-border services . . . .214 In addition, the Santiago Agreement expired at the end of 2004 and has not been renewed.215 This means that authors’ rights currently need to be cleared on a territoryby-territory basis. Furthermore, authors’ societies remain reluctant to adopt an E.U.-wide licensing model. They argued that authors are best served by a collective rights manager with physical proximity to the user.216 Collecting societies argue that enforcement cannot properly be provided at a distance, even with the use of digital technology.

VII. The Online Recommendation This is why the European Commission, on 18 October 2005, adopted a Recommendation on the management of online rights (the “Recommendation”).217 The Recommendation implies that one way toward achieving E.U.-wide coverage is to aggregate rights into attractive packages — “repertory.”218 This repertory can then be licensed to online music 213 For a description of both the “Santiago” and the “BIEM” agreements, see, Thierry Desurmont, The Future of Collective Licensing, in Collective Licensing: Past Present and Future, Reports Presented at the Meeting of the International Association of Entertainment Lawyers, MIDEM 2002, Cannes, supra note 117, at 206. See also Impact Assessment, supra note 41, at 9. 214 Lüder, supra note 209, at 14. 215 “According to GESAC [the European umbrella organization for authors’ collecting societies], the signatory societies to the Santiago and [BIEM/]Barcelona Agreements chose not to extend them further in 2005, because although never having been the subject of an official Commission decision, they were aware that the Commission was highly critical of the so-called ‘economic residence’ clause in them, which was in GESAC’s opinion, necessary to prevent the risk of ‘forum shopping’ by commercial users. As a result, GESAC acknowledges, authors’ societies are only able to give copyright exploiters clearance for the use of their own repertoire worldwide, and the world repertoire within the territory in which they carry on their own activity.” Impact Assessment, supra note 41, at 9; see also Community Initiative, supra note 41. 216 The antitrust implications of territory-by-territory collective rights management are addressed by David Wood. “Indeed, the issues in the Tournier case were discussed on the basis of a set of facts established in the early nineteen-eighties. Put simply, this narrow interpretation is that given the practical impossibility for a collecting society in one Member State to duplicate its necessary monitoring and control activity in another Member State, collecting societies are not competitors in respect of these activities . . . . However, the question arises whether this analysis holds true if there are users in respect of whom monitoring and enforcement activities can feasibly be carried out by a collecting society in another Member State . . . . We have been told that since there is a simultaneous Internet broadcast or because the activity can be monitored by telephone, there is no technical reason why the monitoring cannot be carried out by a collecting society in another Member State to the Member State of reception.” Wood, supra note 204, at 169. See also Press Release, Groupement Européen des Sociétés d’Auteurs et Compositeurs (July 7, 2005), available at http://www.gesac.org/ENG/NEWS/COMMUNIQUESDEPRESSE/ download/COMMUNIQUESEN_20050707_Collective%20Management%20of%20Copyright.doc. 217 See Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC), OJ 2005 L276/54 (Westlaw). 218 Id. at 56.

1060 A PPE NDIX shops by one collecting society on an E.U.-wide basis in a single transaction.219 Instead of twenty-seven local licenses, the Recommendation seeks to foster a single package comprising access to attractive repertoire at little overhead. A. RIGHTHOLDERS’ CHOICE

In order to achieve this goal, the Recommendation stipulates that right-holders should have the choice to authorize any existing collecting society, or even a newly created licensing platform, with managing their works directly across the entire E.U. 220 Right-holders’ choice should offer the most effective model for cross-border management because free choice gives right-holders an incentive to entrust their repertoire to the best E.U.-wide licensing platform available.221 In a first phase, existing societies or new licensing platforms compete to be the authors’, composers’ or publishers’ online licensing platform of choice.222 They do this by offering an efficient service, adopting a transparent policy on deductions and governance and by offering negotiating skill and even clout vis-à-vis commercial users.223 This first phase can be described as the “tender phase” — existing or new societies compete vigorously to be selected as the E.U.-wide music licensor of choice. Authors, composers and publishers have the choice of either mandating one society with the E.U.-wide management of their works or giving a mandate to several societies who again compete to license the entrusted repertoire to commercial users.224 In the “tender phase” competition therefore takes place “upstream” when societies compete for attractive repertoire. Naturally, authors or their publishers are free to re-tender their repertoire in regular intervals. B. USERS’ CHOICE

In a second phase, as good quality service is measurable and a reputation for good service travels quickly, this author expects that an efficient licensing platform will quickly assemble an attractive repertoire for E.U.-wide online licensing. In this second phase, competition will shift “downstream” because societies, on the basis of representing attractive repertoire, attempt to attract the business of important online users. This might well provide most authors, composers and publishers with an incentive to pool their repertoire into a major online licensing platform.225 To be commercially attrac219 This solution is inspired by Ariel Katz, who describes the formation of “cleared parcels” which greatly overcome fragmentation of copyright in a single song and thus render licensing much more efficient. See generally Ariel Katz, The Potential Demise of Another Natural Monopoly: New Technologies and the Administration of Performing Rights, 2(23) J. Competition L. & Econ. 245 (2006). 220 See Commission Recommendation 2005/737 at 56. 221 See id. at 55. 222 In a series of decisions referring to the German colleting society GEMA, the European Commission established the principle that any author should be free to assign only particular categories of rights — e.g., public performance, broadcasting, mechanical reproduction, and rights resulting from future technical developments or changes in the applicable laws — for collective administration or withdraw such categories from administration by GEMA. In particular, authors should be free to join collecting societies in other Member States to manage their rights directly. See O.J. L 134/20 (2007); O.J. L 166/24 (2007). 223 See Commission Recommendation 2005/737 at 56. 224 Id. 225 On January 21, 2007, the U.K. Music Publishers Association (MPA), representing small and medium sized music publishers, announced that their repertoire would be available for E.U.-wide online licensing through “Alliance digital,” run by the U.K. society MCPS/PRS. Press Release, The MCPS-PRS Alliance, MPA Unveils New Pan-European Digital Licensing Solution (Jan. 21, 2007), available at http://www.mcps-prs-alliance.co.uk/ about_us/press/latestpressreleases/mcpsprsalliance/Pages/MPA.aspx.

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tive, these platforms could well be structured as “open platforms,” which means that smaller publishers or smaller collective societies can pool their repertoire into the platform as well. If necessary, there could be an obligation for major platforms to also include so-called difficult or “niche” repertoire into the platform. It would then appear possible that the new E.U. online platforms could conclude “second tier” reciprocity arrangements among themselves in order to create one “single entry point” for E.U.-wide commercial users. This development would have an added efficiency benefit because a single entry point among three E.U. licensing platforms will come at a lower cost than a single entry point that has to be organised among twenty-seven collective societies. C. TRANSACTION COST IN THE NEW MODEL

As stated above, the total number of bilateral combinations necessary to create a single entry-point among twenty-seven European collective societies would, by means of reciprocal arrangements, be 351.226 Now, if you look at an online licensing market that only comprises three societies — to be determined in the competitive tendering process described above — only three possible agreements among three entities — AB, BC and AC — would be necessary to create a single entry point for E.U. licenses. What is, however, most important with the proposed new licensing platforms is that the emergence of these platforms will be the result of a competitive tendering process.227 This will be good for enhancing or maintaining the value of copyright and related rights in musical works. Allowing right-holders to choose a collecting society outside their national territories for the E.U.-wide licensing of the use made of their works considerably enhances right-holders’ earning potential. In this way the Recommendation focuses on striking the right balance between rewarding creators and fostering new digital platforms for the delivery of music.228 In lowering transaction costs of access to protected content, it will not compromise rightholders’ income. Better management of rights across the E.U. does not therefore need to lead to a “race to the bottom” with respect to the value of musical works and IP protection for creators.

VIII. Governance and Dispute Resolution The Recommendation also includes rules on governance, transparency, dispute settlement, and accountability of collective rights managers, whether they manage rights directly or by virtue of reciprocal arrangements. A. GOVERNANCE

Governance is not an end in itself. The Recommendation is based on the premise that governance rules setting out the duties that collective rights managers owe to both right-holders and users will introduce a culture of transparency and good governance.229 226

See supra text accompanying note 194–197. See supra Parts I.A, I.B. 228 See Commission Recommendation 2005/737 at 55. 229 Id. The Commission agrees with this analysis and believes that Option 3 can create a higher level of good governance and transparency for right-holders because the collective rights manager of their choice is accountable for all use made of works across the Community and for the redistribution of royalties in exact proportion to this use. Impact Assessment, supra note 41, at 37–38. “If the right-holder is not satisfied with the functioning of the 227

1062 A PPE NDIX Better governance should stimulate E.U.-wide licensing and promote the growth of legitimate online music services. Certain collective rights managers have begun to implement some of the provisions linked to governance — points 10–15 of the Recommendation.230 “In some cases, music publishers are being offered greater representation on the board.”231 In other instances, payments to right-holders, including music publishers, “switched from a yearly to a quarterly basis.”232 There appears to be an increased willingness to acknowledge or discuss deductions made by the rights manager for purposes other than the management services provided. The “rapport Levy-Jouyet” on “l’économie de l’immatériel” also stresses the link between more competition and better governance.233 B. DISPUTE RESOLUTION

Closely linked to the issue of governance is the effectiveness of dispute resolution. The Recommendation invites Member States to provide for effective dispute resolution mechanisms at national level.234 Effective dispute resolution should be available in relation to (1) tariffs; (2) licensing conditions; (3) entrustment; and (4) withdrawal of online rights. The applicable rules and principles in relation to dispute resolution might need to be strengthened in the future. As evidenced by its “Call for Comments,” the Commission is now minded to assess whether the Recommendation brought about changes in relation to transparency of rights management and whether it increased the effectiveness of dispute resolution.235 It is also necessary to assess whether the Recommendation brought about sufficient safeguards for individual right-holders with respect to (1) tariffs; (2) licensing conditions; (3) entrustment; and (4) withdrawal of online rights. Further analysis will be necessary to see whether the Recommendation should further address right-holders participation in setting deductions for purposes other than for the management services provided and whether it provides sufficient safeguards for commercial users.

IX. First Experience with the Recommendation First experience with the Recommendation shows that E.U.-wide online licensing will be offered by newly created platforms that are jointly operated by existing collecting societies. These platforms pool several publishers’ or societies’ repertoires and license them in one transaction across the E.U.236 Recent platforms include one for Anglo-American and relationship he has the choice to seek Community-wide clearance services elsewhere, a strong incentive to carry out optimal and transparent clearance and royalty payment services. In these circumstances, in order to retain or attract business, CRMs will have to adapt their business practices and become more efficient in relation to their management of services.” See Impact Assessment, supra note 41, at 21. 230 Lüder, supra note 209, at 18. 231 Id. 232 Id. 233 Rapport de la Commission, supra note 169, at 129. (“Deuxième principe, les coûts de la gestion collective doivent être transparents. La qualité des informations financières transmises aux créateurs doit être améliorée, notamment sur les frais de gestion bruts, le coût des différentes activités de collecte et les flux financiers entre sociétés. De même, à l’égard des utilisateurs, les critères de calcul des droits à payer pour l’usage des œuvres gérées par la SPRD devraient être affichés sur le site des SPRD.”). 234 See Commission Recommendation 2005/737 at 57. 235 See supra note 87 and accompanying text. 236 Lüder, supra note 209, at 17, 19.

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German repertoires and another one for the French and Spanish repertoires.237 A further announcement involves small and medium sized publishers mandating a collecting society to set up an E.U. online licensing platform for them.238 In addition, emerging E.U. licensing platforms do not appear to be limited to the repertoire of international music publishers.239 Despite all fears in this respect,240 E.U. direct licensing is not developing into the exclusive domain of Anglo-American music publishers. As mentioned above, platforms for the repertoire of small and medium sized publishers are emerging alongside those of the big music publishers. In addition, other platforms comprise the entire repertoire of existing collecting societies — big and small.241 That means that big and small repertoire will be available online at equal terms. The two examples above show that E.U. licensing, far from being a threat, can actually be a motor for cultural diversity. In light of this it is sometimes difficult to understand why direct licensing or tendering of repertoire for such a purpose would be perceived as a threat to cultural diversity. If a right-holder wishes for certain forms of exploitation, to license his repertoire directly by means of an intermediary of his choice, this should be a commercial option available in a market economy. His choice will be motivated by the attempt to safeguard the value of his music in the online space. Experience shows that direct licensing can nowadays be exercised by small and big publishers alike.242 Direct licensing is also an option that can be exercised both by Anglo-American publishers and Continental collecting societies — both the MCPS/PRS and SACEM/SGAE have set up licensing platforms. Cultural diversity does not appear in danger. On the other hand, the Recommendation does not force any right-holders to engage in direct licensing.243 In a functioning internal market, one should respect the freedom of those who choose this option. It is one way to safeguard the value of music in the online sphere. Finally, it appears prudent to wait and see how the tendering of repertoire for direct online licensing will develop in the future before extending this principle to other forms of exploitation. As the Recommendation is not a binding act, the national legislator is free to act in this respect, if he wishes to do so.244 237 On January 20, 2006, EMI Music Publishing and CELAS — a new online licensing joint venture set up by GEMA and MCPS/PRS — signed the E.U.-wide licensing arrangements. On January 20, 2006, the French society SACEM and the Spanish society SGAE announced the setting up of a joint venture for the E.U.-wide licensing of their respective repertoires. Id. at 18. 238 On January 21, 2007, the U.K. Music Publishers Association (MPA), representing small and medium sized music publishers, announced that their repertoire would be available for E.U.-wide online licensing through “Alliance digital,” run by the U.K. society MCPS/PRS. See Press Release, The MCPS-PRS Alliance, supra note 225. 239 Id. 240 The European Parliament appears especially afraid that the Recommendation’s prime beneficiaries are major, international music publishers that control the repertoire that is essential for successful online licensing. The Recommendation is seen as an instrument favouring large repertoire and allowing music majors to better exploit the Internet. See Report on the Commission Recommendation, supra note 86, at 11. 241 See Lüder, supra note 209, at 19–20. 242 On January 21, 2007, the U.K. Music Publishers Association (MPA), representing small and medium sized music publishers, announced that their repertoire would be available for E.U. wide online licensing through “Alliance digital,” run by the U.K. society MCPS/PRS. See Press Release, The MCPS-PRS Alliance, supra note 225. 243 See Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC), OJ 2005 L276/54 (Westlaw). 244 See EUR-Lex – Process and Players, http://eur-lex.europa.eu/en/index.htm (follow “Process and players” hyperlink under heading “About EU Law” on left of page) § 1.3.5.1 (last visited Sept. 16, 2007) (stating that “[a] recommendation allows the institutions to make their views known and to suggest a line of action without imposing any legal obligation on those to whom it is addressed . . .”).

1064 A PPE NDIX On the governance front, “[t]he international confederation of music publishers is working with GESAC, the E.U. umbrella of collectives, towards developing online E.U.-wide licensing activities within the framework of the Recommendation. The Recommendation has also triggered dialogue on improving governance principles with respect to all collective management of copyright.”245 Collecting societies have “also embraced some of the governance elements of the Recommendation.”246 In some cases, music publishers are being offered more seats on the board — in line with Point 13 of the Recommendation and the “economic weight” criteria — and accounting vis-à-vis publishers is being switched from a yearly to a quarterly basis — a concession which goes beyond the Recommendation.247 Of course, the emergence of a major online platform will require effective dispute resolution. Point 15 of the Recommendation addresses this issue.248 In the absence of an E.U. arbitration panel, Member States are invited to provide for adequate and effective means for resolving disputes, especially those that arise with respect to online tariffs.249 As evidenced by point 4 of its “Call for Comments,” the Commission remains inclined to further strengthen the Recommendation in this respect.250

Conclusion — The years ahead The 2005 Recommendation on E.U.-wide online licensing and the cross-border collective management of copyright across the E.U. is one example of the paradigm shift away from harmonizing rights, toward improving the way these (harmonized) rights are exploited commercially in the digital sphere across Europe. This approach should reduce the cost of music licensing without reducing income for Europe’s creators. The new focus on fostering market entry for interactive and on demand services will influence the way in which the Commission approaches copyright policy in the future. In order to foster innovation and market entry, policy makers must create a framework in which entrepreneurship, new business models, and risk-taking are rewarded. Policy regarding intellectual property should facilitate the development and dissemination of new interactive and on demand services. It is therefore essential that the framework for obtaining works that are protected by these intellectual property rights be organised as efficiently as possible. Licenses, as a default option, should comprise a territorial scope that is in line with emerging business strategies. But it is equally important that efficient online licensing gives creators an economic incentive to make their work available online. In order to achieve efficiency and market entry the Commission should, in the years ahead, focus on the management of intellectual property rights and engage in regular evaluation of the existing harmonized rights, especially the “making available” right.

245 Lüder, supra note 209, at 18; see also ICMP/CIEM GESAC, Common Declaration on Governance in Collective Management Societies and on Management of Online Rights in Musical Works, July 7, 2006, available at http://www.smff.se/pdf/ ICMPGESACDeclaration070706.pdf. 246 Lüder, supra note 209, at 18. 247 See Call for Comments, supra note 87. 248 See Commission Recommendation 2005/737 at 57. 249 See Call for Comments, supra note 87. 250 Id.

INDEX

INDEX

Index Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) see TRIPs Agreement AIDS/HIV medicinal treatment compulsory licences, 949, 950, 961 drugs, 949, 951, 956, 957 strategy, 389 Thailand, 949, 950 Antitrust/Competition law competition issues abuse of dominant position, 260, 271, 283 anti-competitive abuses, 248 anti-competitive agreements, 273 anti-competitive effects, 273, 275 barriers to market entry, 249, 253, 255, 271, 277, 278 competition law, 249, 250, 252 competition policy, 252, 274 consumer harm, 249, 253, 273, 280, 283, 284 discrimination cases, 276, 292 dominance, 252, 282, 283, 287, 289 dual pricing agreements, 273 EC/EU approach, 250, 251 economic dominance, 278 economic/legal context, 273 economic theory, 251, 252 efficient production/distribution, 279 foreclosure, 249, 283, 284 innovation costs, 252 mandatory access, 251 market power, 249, 252, 256, 257, 263, 270, 279, 282 market share, 249, 262, 264, 270, 278 parallel trade, 273 pharmaceutical industry, 273, 274, 281, 293 pricing issues, 275 vertical agreements, 274, 279 EC/EU law abuse of dominant position, 283 additional abusive conduct, 288–92 anti-competitive effects, 295 bundling cases, 292 case decisions, 284–87

compulsory licences, 284–87, 290, 292, 293 consumer demand, 294 consumer harm, 283, 284, 295 data privacy laws, 293 dominance, 282, 283, 287, 289 dominant position, 282 duty to contract, 287, 288 duty to licence, 282, 284 ECJ jurisprudence, 273, 274, 279 EC Treaty provisions, 251, 273, 276, 278–80, 282–8, 292 essential facilities doctrine, 287, 288, 290 European Commission, 251, 280, 281 excessive pricing, 292 foreclosure/discrimination distinction, 283 fraud cases, 292 indispensable services/products, 294 interoperability information, 294 legitimate aim, 295 limiting production/technical development, 283 mandatory access, 291 marketing of competitors, 283 market power, 282 new products/services, 294 objective justification, 286, 288, 294 pro-competitive effects, 295 remedy principle, 290–2 sales data, 293 tying cases, 292 parallel trade see Parallel trade refusal to licence see Refusal to licence standard-setting see Standard-setting US antitrust law per se rules, 198 refusal to licence 249, 250 rule of reason, 198 Australia copyright developments balancing rights, 592 consumer awareness, 592 copyright infringement, 592, 615, 616

1066 I N D E X fair dealing provisions, 592, 616, 619 format-shifting exception, 618 free trade considerations, 592–5 law reform, 591, 592, 615, 618, 620 level of protection, 593 public consultation, 592 technological protection measures, 592 US-Australia Free Trade Agreement, 592, 593, 616, 617, 620, 968 patent patentable subject matter, 199–203 patent law, 43, 143 Broadcasting organizations see also WIPO Broadcasting Treaty broadcasting rights, 639–41, 643, 645, 646, 648 TRIPs Agreement, 643 Canada copyright developments Bulte affair, 599, 600, 618 Captain Copyright affair, 609, 610, 619 case law, 595–8, 610, 611, 615 commercial radio, 605–7 Copyright Board decisions, 605–11, 613, 614 digital rights management, 123, 128, 130, 131, 136, 600, 601 documentary film-making, 608 educational use, 601, 602 electronic reproduction, 597, 598 exclusive licences, 660 fair dealing exceptions, 602, 614, 615 free lance authorship, 597, 598 hypothetical maker doctrine, 596 internet use, 601, 602 law reform, 600–3, 605, 610, 611 legislative process, 603–5 literary excerpts, 608 music industry, 600–2, 605–8, 617 notice provision, 601 own copyright infringement, 596 parallel imports, 595, 596 political issues, 598–600, 610 private copying levy scheme, 603 product packaging, 595, 596 recent developments, 595, 610 ringtones, 605 takedown provision, 601 technological protection measures (TPMs), 123, 128, 129, 131, 600, 601 extraterritoriality (patent)

borderless transactions, 165, 166 comity principles, 163, 165, 175 commercial expectations, 175 common law principles, 163, 166, 173, 175 convenience, 165 extraterritorial jurisdiction, 163 fairness, 163, 175 Federal Court jurisdiction, 163, 169–70 forum non conveniens, 163, 173, 175 international internet transmissions, 166 international law principles, 175 internet intermediaries, 166 internet privacy rights, 163, 172–4 judicial economy, 163, 175 maritime law example, 163–5 “most substantial and real connection”, 163, 166, 165, 169, 173, 175 ratione loci, 163, 164, 173 ratione materiae, 163, 173 statutory interpretation, 166, 173–5 telecommunication, 166 territoriality principles, 163, 167 online music see Online music China export-based economy global competition, 1008 trade balance, 1008 trademark protection, 1008–10 foreign direct investment (FDI) domestic market weakness, 996 “greenfield” investments, 994 horizontal, 995 increase, in, 997 investment strategy, 993, 994 location advantages, 993, 995, 996, 1023 manufacturing facilities, 993, 994 motivation, 996 preferential treatment, 996, 997 research and development facilities, 993 vertical, 995 intellectual property (enforcement) censorship review, 986, 988 copyright protection, 985, 986, 988, 990 counterfeiting, 986, 991, 996, 1011, 1013, 1014, 1020 criminal liability, 985–7, 989, 1028, 1030 customs enforcement, 986 deterrent penalties, 1030 effectiveness, 1024, 1025, 1030 enabling environment, 1019–21 evidence of infringement, 1020 intellectual property recognition, 1024–7

INDEX

judicial expertise, 1024 lack, of, 984, 988, 990, 991 legal/social system, 1019 monitoring difficulties, 1020 piracy, 985, 986, 989, 991, 992, 996, 1000, 1011, 1013, 1014, 1020, 1025 political/economic/judicial environment, 1019 reforms, 996, 1002, 1006, 1013, 1024–7 regional differences, 1012–14 thresholds, 985–7, 990, 10,28 TRIPs compliance, 1020 US pressures, 991 intellectual property (law) copyright, 991 development, of, 991 international agreements, 991 patent, 991 trademark, 991 intellectual property (protection) benefits/costs, 1011 border protection, 1000 computer software, 999, 1000, 1005 consumer welfare, 1010, 1023 copyright protection, 1018 copyright verification system, 1000 costs, 998 counterfeiting, 1011, 1013, 1014, 1020 digital environment, 1006 economic benefits, 998 economic conditions, 1013 economic development, 991–3, 995, 998, 1001, 1004, 1009, 1011, 1015–17, 1023, 1024 economic welfare, 1004 expansion, of, 992, 993, 998, 1004 export-driven economy, 1008–11 foreign direct investment (FDI), 992–5, 997, 1004 genetic use restriction technologies (GURTs), 1020 importance, of, 1010 intellectual property recognition, 1024–7 international pressure, 999, 1000 international treaties, 1006 internet use, 1006 judicial expertise, 1024 justifications, 1002, 1003 knowledge-based economy, 1005 lack, of, 995, 996 local stakeholders, 1005–7 mass-market contracts, 1020 modernization goals, 1001–4

1067

nature of disputes, 1022 negative impact, 998 online copyright issues, 1006 overprotection, 998 patent protection, 1018 piracy, 985, 986, 989, 991, 992, 996, 1000, 1011, 1013, 1014, 1020, 1025 private property rights, 1001, 1002, 1019 qualitative levels, 1022, 1030 quantitative improvements, 1021–3, 1030 reforms, 996, 1002, 1006, 1013, 1024–7 socioeconomic impact, 1024 technological development, 1020 technological protection measures (TPMs), 1020 trademark protection, 1008–10, 1018 transformation point, 1011, 1024 TRIPs compliance, 984, 988, 1001, 1007, 1026, 1027 US-China trade relations, 1021 US pressures, 998–1000 US/WTO action, 986, 989, 1000, 1024–6, 1028, 1029 market-access barriers copyright industry, 1028 distribution rights, 987 trade policy, 984–6 trading rights, 987 regional disparities differing market conditions, 1011 effects, of, 1013, 1014 economic development, 1011 foreign investment decisions, 1014, 1015 innovation, 1012 intellectual property enforcement, 1012–14 local protectionism, 1012 significance, 1011 US approach, to, 1012 sectoral disparities bureaucratic systems, 1018 copying rates, 1016 discriminatory patent protection, 1016, 1017 divergence of protection, 1016, 1017 impact, of, 1019 intellectual property policy, 1015 significance, 1015 sui generis protection, 1017, 1018 TRIPs Agreement, 1016, 1017 utility model protection, 1017 trade

1068 I N D E X economic growth/development, 990–3, 995, 998, 1001, 1002 “economics in command” approach, 1002 emerging market, 995–7 export-driven economy, 1008–11 foreign trade, 991, 995, 999, 1002, 1012 imitative capacity, 995 imports, 990 lower production costs, 995–7 market-access barriers, 984–7 Special Economic Zones, 1002 US-China trade relations, 1021 WTO accession, 998, 1000, 1006, 1007, 1013 TRIPs Agreement Berne Convention provisions, 990 compliance, 984, 988, 1001, 1007, 1020, 1026, 1027 criminal enforcement, 989, 990 dispute settlement, 988 enforcement standards, 988, 989 enforcement text, 989 implementation, 972 sectoral disparities, 1016, 1017 US/WTO action, 986, 989, 1000, 1024–6, 1028, 1029 violations, 984, 1001 US trade policy generally, 984, 987 international opinion, 1028, 1029 market-access barriers, 984–6 TRIPs Agreement, 984 US/China cooperation, 984, 987 US/WTO action, 986, 989, 1000, 1024–6, 1028, 1029 WTO dispute settlement, 987 Collecting societies role, of, 98–104 Competition law see Antitrust/Competition law Compulsory licenses AIDS/HIV treatment, 949, 950, 961 anti-competitive practices, 950, 954 consultation requirements, 948 Doha Declaration, 949, 951 EC/EU law, 284–7, 290, 292, 293, 955, 956 excessive pricing, 950 Germany, 272 injunctive relief, 953, 954 international legal framework, 947, 948 merger context, 954, 955 national emergencies, 948, 950, 959 pharmaceuticals, 947–53

public non-commercial use, 948–52, 959 refusal to licence, 272, 276, 281, 282, 950 see also Refusal to licence Thailand see Thailand (compulsory licences) TRIPs Agreement, 948–53, 957–61 UK experience, 955, 956 US law, 952, 954 Computer software copyright issues, 827–9 patent extraterritoriality issues, 187, 188 protection, 6, 40, 142 software patents, 40, 189, 190, 193, 194, 196, 197, 199, 206, 207, 209–13 software development consumer welfare, 829 copyright misuse doctrine, 828 decompilers, 828, 829 developers, 828 interoperability, 827, 829 source codes, 827 Copyright anti-piracy goals, 32 antitrust systems, 33 Australian developments see Australia benefits of protection, 88 Canadian developments see Canada collecting societies, 31 collective licensing, 32, 33 collective management, 652, 657, 659, 660 compulsory licenses, 31, 32, 652, 654, 661 see also Compulsory licenses computer software see Computer software consumer interests, 30, 31, 35 Creative Commons, 35, 36, 69, 76, 79 democratization of creativity, 68, 88 design law see Design law digital piracy, 34 digital rights management (DRM), 14, 30, 32, 33, 34, 123, 128, 130, 131, 136, 600, 601 digital technology, 30 economic assets, 13 economic contribution, 4 economic damages derivative works, 908 irreparable harm, 908 superseding works, 908

INDEX

transformative works, 909 equitable remuneration, 31 European experience, 32, 33, 35, 622–34 see also European Union (copyright developments) exclusive licences Canadian experience, 660 compulsory licensing, 661 national treatment, 660, 661 private copying schemes, 660, 661 exclusive rights antitrust issues, 657 Berne Convention, 652, 654 blanket licensing, 657 business models, 658, 659 choice and diversity, 658, 659 collective management, 652, 657, 659, 660 compliant networks, 656 compulsory licences, 652, 654 consumer demand, 657 end users’ rights, 656 file sharing, 652, 653, 657 film sector, 655, 659, 660 French experience, 652–5, 658 global licences, 652–5, 658, 659 individual rights management, 655 internet use, 656, 659 law reform, 657 mandatory collective licensing, 654 music industry, 652 private copying exception, 652 rights holders’ duties, 656 unauthorised use, 656 voluntary collective management, 657, 660 fair use doctrine (US) see Fair use doctrine (US) future developments, 30–6 global remuneration estimated size, 659 global licences, 652–5, 658, 659 price points, 659, 660 tax issues, 659 transactional costs, 659, 660 human rights see Human rights Indian developments, 973, 976–80 see also India injunctive relief, 908 international copyright policy, 881, 887–9 internet service providers, 32 Japan see Japanese developments (copyright)

1069

law reform, 36 moral rights, 36 Napster, 32, 35 negligence concepts, 945 new technology, 32, 34 New Zealand developments see New Zealand OECD UCC study, 881, 885–7 Office for Harmonization of the Internal Market (OHIM) see Office for Harmonization of the Internal Market (OHIM) online music see Online music ownership/exploitation authors 30, 31, 32, 34, 36, 73, 74 corporate dominance, 30, 34 performers, 30, 31, 2, 34 performing rights organizations, 32 piracy, 945, 946 purpose, of, 861 rights management, 34 social policy issues, 31 technological protection measures (TPMs), 32 term of protection, 6 three-step copyright test see Three-step copyright test tolerated use see Tolerated use (copyright) transformative use see Transformative use (copyright) UK experience digital use, 882, 883 fair dealing defences, 888 format-shifting, 882, 883 Gowers Review, 881–4, 887, 888 law reform, 881, 882 limitations to copyright, 888 ongoing review, 888 parody usage, 883 private copying, 883 term extension, 882, 888 transaction costs, 883 transformative use, 883, 884 unauthorized use collateral damage, 94, 95 collective licensing, 93, 95 collective societies, 91, 93, 95 consumer benefit, 77, 79 content identification, 81, 90, 94 copyright infringement, 86 direct financial benefit, 73, 78, 79

1070 I N D E X economic challenges, 90 fair use, 94 fingerprinting technologies, 77, 79 front-end filtering, 94 identification mechanisms, 82 knowledge of infringement, 74, 79, 80, 82, 83 licensing schemes, 69, 76, 81, 82, 86, 90, 93, 94 monitoring costs, 76, 80 new business models, 91 new technologies, 77, 80, 81, 86 performance rights, 76, 93 personal reproduction, 76 piracy, 80, 86, 88, 89 responsibility, 77, 82 secondary liability, 89 social issues, 77 takedown notices, 73, 75, 81, 92, 95 takedown process, 75, 77, 80, 81, 94 transformative derivatives, 76 transformative use, 77, 80 unauthorized adaptations, 88, 91, 92 unauthorized use on the web see Unauthorized use on the web US experience, 31, 32, 33, 35 see also US copyright video material copyright holder content, 75 copyright infringement, 74, 77, 79, 80 direct financial benefit, 78 fair use content, 77 hashing technology, 75 knowledge of infringement, 74, 79, 80, 82 private videos, 75, 92–4 takedown notices, 75 user uploads, 75, 81, 88, 93 WIPO Broadcasting Treaty see WIPO Broadcasting Treaty Copyright Office (US) activities, 664, 665 appeals procedure, 665 Examining Division, 665 information services, 666 legislative issues, 667 music licensing, 667 orphan works, 663, 667 pre-registration, 665 process reengineering, 667 registration of claims, 664, 665 ringtones, 664, 666 see also Ringtones royalty judge system, 666

status, 664 statutory licensing, 664, 666 Courthouse relationships European Union European Court of Justice (ECJ), 360 national courts, 360 Germany, 360, 367 UK experience Court of Appeal, 355, 356 European Court of Justice (ECJ), 361 House of Lords, 355 judicial expertise, 356, 366, 367 judicial independence, 361 professional relationships, 355–7 US experience assessment, of, 358 certiorari, grant of, 358, 359, 362, 365 claim construction, 364, 365 Federal Circuit, 353–5, 357, 358, 362, 363 general perspective, 357 identity issues, 363, 364 intermediate court, creation of, 359 judicial agreement, 359 judicial expertise, 358, 365, 366 misinformation, 363 mutual respect, 357, 358 policy issues, 363, 364 public interest, 363 relative strengths, 357, 358 reversals/affirmations, 358, 359 Supreme Court, 353–5, 357, 358, 362, 364, 365 Creative Commons benefits, 69, 76, 79 licensing system, 35, 36 Declaratory judgment (DJ) jurisdiction actual controversy, 700 expiration of license, 729 Federal Circuit requirement, 700 generic manufacturers, 712, 713 judicial discretion, 708, 718–21, 730 justiciable controversy, 712, 714, 718, 719, 727, 729 licensing negotiations, 702–4 non-licenses, 702–8 patent invalidity, 712 reasonable apprehension test, 698, 700–3, 714–17, 726 statutory provisions, 700 UK experience, 725, 726 Waxman-Hatch Act, 702, 705–8

INDEX

Design law aesthetic/function distinction, 760 design protection configuration, 760 design patents, 769–72 European system, 773 French experience, 797 German experience, 797 Japanese experience, 794, 795 packaging, 760 registered protection, 760 technological impact, 774, 775 UK experience, 796 unregistered protection, 760 US fashion industry, 774 US system, 773, 794 disclosure definition, 783 importance, 783 methods, 784 official publication, 784, 785 proof, 784, 785 publication in general, 785, 786 trade fairs, 786 worldwide, 783, 784 European Union see European Union (design law) Geneva Act, 760, 778, 779 intellectual property categorization, 759, 760 Office for Harmonization in the Internal Market (OHIM) see Office for Harmonization in the Internal Market (OHIM) trade dress product configuration, 761–3 protection, 760 registered packaging, 761 trademark, 760 US law reform affordability issue, 776 current position, 777, 795 litigation, 776, 777 originality issue, 776 unified design protection, 777 US legislation infringement, 775, 776 originality, under, 776 scope of protection, 775 term of protection, 775 utility patents, 767, 768 Developing countries access to medicines, 951, 955, 956, 961

1071

concerns, of, 2, 4 copyright law, 403 least-developed countries (LDCs), 7 parallel trade, 313 see also Parallel trade patents, 955, 956 Digital Millennium Copyright Act (DMCA) see also US copyright benefits, of, 91, 92 compliance, 76, 77 direct financial benefit, 73, 78, 79 internet service providers, 72, 73 interpretation, 70–3 safe harbour provisions, 72–4 takedown notices, 73, 75, 81, 92, 95 vicarious liability test, 82 Digital rights management (DRM) Canadian experience, 123, 128, 130, 131, 136, 600, 601 consumer interests, 87 copyright issues, 14 future developments 30, 32, 33, 34 hackers, 86 online music, 123, 128, 130, 131, 132, 136 see also Online music systems, 86, 87 use, of, 14, 86, 87, 89, 90, 91 US Supreme Court jurisprudence, 51 Doha Round see also World Trade Organization (WTO) agricultural subsidies, 5 agricultural tariffs, 5 compulsory licences, 949, 951 see also Compulsory licences future, of, 14 industrial tariffs, 5 intellectual property issues, 5 lack of progress, 5, 6 suspension, 5 TRIPs-related issues competition policy, 7 counterfeiting, 7 least-developed countries (LDCs), 7 piracy, 7 transfer of technology, 8 US trade policy, 968 Domain names dispute resolution, 5 European Convention on Human Rights (ECHR) see also Human rights balancing of rights, 468, 469

1072 I N D E X civil/political rights, 431, 432, 435 freedom of expression, 380, 382, 470 individual rights, 432 intellectual property owners, 380 judicial interpretation, 431, 466 peaceful enjoyment of possessions, 431, 436, 458 privacy rights, 380, 470 right of property, 380, 384, 430–2, 434, 435, 439, 440, 446–8, 458 see also Right of property rule of law, 458 European Court of Human Rights (ECtHR) see also Human rights balancing of rights, 468, 469 caseload, 431, 433 class actions, 380, 382 composition, 380 development, of, 431 enforcement paradigm class actions, 46 difficulties, with, 464, 465 dissimilar remedies, 465 domestic enforcement procedures, 461, 462 endorsement, of, 464, 465 judicial access rules, 464 pilot judgment procedure, 464 state’s positive obligation, 461, 462, 465 statutory/administrative/judicial mechanisms, 461, 462 support, for, 470 TRIPs Agreement, 462–5 importance, 380 intellectual property cases, 430, 432–4, 439–450, 457, 458 intellectual property balancing paradigm adoption, of, 466, 469 economic/social policy, 469 ECtHR rulings, 469, 470 exclusive rights, 467 freedom of expression, 466 negative consequences, 466–9, 470 pre-existing works, 467 protection standards, 467, 468, 470 public interest considerations, 466 reduced levels of protection, 467, 468, 470 retroactive restrictions, 467 support, for, 466 under-protection/overprotection, 469 judicial interpretation European Convention on Human Rights, 431, 466

freedom of expression, 382, 470 fundamental rights, 387, 432–4 industrial property, 444–50 literary and artistic works, 440–4 methodologies, 435 privacy rights, 470 trademarks, 445, 446, 448–50 legal/political considerations, 433 right of property, 380–2, 386, 430–8, 446–8 see also Right of property rule of law paradigm arbitrary government conduct, 459–61, 470 conditional rights, 460 deprivations of property, 458 domestic laws, 460 ECtHR jurisprudence, 459, 461 merits, 461 procedural guarantees, 460 ultra vires actions, 459 state interference, 451 European Court of Justice (ECJ) courthouse relationships, 360, 361 extraterritoriality issues, 183 fundamental rights, 387 intellectual property matters antitrust overlap, 60, 61 consistency, 61, 62, 64 copyright, 625, 626 EC/EU legislation, 60 fact issues, 65, 66 future developments, 60, 64, 65 harmonization issues, 60 institutional issues, 60, 61 language issues, 62 patent law, 56, 63–5, 343, 344 product configuration marks, 580, 581, 582, 589 specialist expertise, 62–4 trademark dilution, 567, 568, 571, 572, 575 trademark law, 20, 21, 63–5, 474–8, 480, 501–10, 511, 513–6, 518 judicial competence, 21, 22, 63–5 judicial conservatism, 64 jurisdictional issues, 61 national courts, relationship with, 60–2, 65 national procedural laws, 60 refusal to licence, 273, 274, 279 European Patent Litigation Agreement (EPLA) significance, of, 39, 40, 44, 340–6, 348, 349 supranational patent court, 64

INDEX

European Union (copyright developments) Community Copyright Regulation (proposal), 625 competition perspective, 633 consumer harm, 633 copyright awareness, 623 copyright contracts, 630 copyright policy, 629, 630, 631 co-written works, 631, 634 European Commission initiatives, 622, 627–31 European Court of Justice (ECJ), 625, 626 future development, 623 generally, 32, 33, 35 harmonization, 622, 623, 624, 626, 631, 632 impact assessment, 628, 634, 635 law reform, 622, 625, 631 legislative developments, 622, 626 moral rights, 630 multimedia works, 623 national legislation, 622, 623, 625 norm-setting, 632 online music, 625, 633 see also Online music performers’ rights, 630, 635 political options, 631 proportionality, 631 rights management issues, 623 soft law developments, 624–7, 633 term extension, 623, 626, 627, 628, 630, 632, 634 territoriality of rights, 622, 623, 632, 633 European Union (design law) application procedures, 778 Community design right, 777, 778, 796, 797 disclosure, 783–5 enforcement, 780 fairness rule, 783, 784 fee review, 779, 780 future developments, 794 Geneva Act, 778, 779 Hague system, 778 individual character, 787 legislative developments, 777, 778, 780 legislative process, 779 national design laws, 777 novelty, 787 Office for Harmonization of the Internal Market (OHIM), 779–94 see also Office for Harmonization of the Internal Market (OHIM) protection levels, 777 registered designs, 777, 778, 780

1073

renewal fees, 778 European Union (EU) enlargement, 62, 317, 347 language difficulties, 62, 338, 339, 340, 342, 347, 348 European Union (patent developments) Brussels I Regulation, 342–4, 346 centralized court system, 339, 341, 342, 345, 347 common political approach, 345 Communication (2007), 340–3, 348 Community competences, 341, 342 Community Patent, 39, 338, 340, 341, 345–7, 350, 352 Community Patent Review, 41 consultation process, 340 cost of applications, 337, 338 enforcement, 338, 341, 342 Enforcement Directive, 344, 350 EU enlargement, 347 EU Member State cooperation, 40, 44, 61 European Commission proposals, 338–40, 342, 347, 348 European Court of Justice (ECJ), 56, 342, 343, 344 European Patent Litigation Agreement (EPLA), 39, 40, 44, 340–3, 345, 346, 348, 349 European Patent Office, 38, 39, 44 expert witnesses, 345 forum shopping, 338 global collaboration, 45 harmonization, 40, 44, 344, 345, 351 infringement issues, 39 judicial cooperation, 351 judicial qualifications, 345 jurisdictional issues, 39, 342, 343, 344 knowledge transfer, 341 language issues, 39, 339, 340, 341, 345, 348 Lisbon Agenda, 347 litigation arrangements, 341–4, 349, 350 Member States, 348, 349 national courts, 343 national patents, 343 national procedural rules, 345 patent litigation, 40 quality issues, 341 reinforced cooperation, 348, 349 statutory interpretation, 345 supplementary measures, 341 validity issues, 39 European Union (trademark developments) acquired distinctiveness, 475, 476

1074 I N D E X appeal system, 20, 22, 23, 24 burden of proof issues, 477, 478 coherence, 22, 23 Community Trade Mark (CTM), 18, 22, 23, 28 damages, 474 defences, 505 EC/EU law, 22 enforcement in transit, 478 European Court of Justice (ECJ), 20, 474–8, 502–16, 518 identical marks, 502, 509, 511–14, 518, 519, 553 identical products, 503, 507, 508, 511–14, 518, 519, 553 identity issues, 503, 504 injunctive relief, 474, 475 judicial competence, 22 Madrid Protocol, 18 national courts, 475, 476 Office for Harmonization in the Internal Market (OHIM), 20, 22, 23, 24 post-sale confusion, 504, 505 procedural issues, 475 referential use, 513, 553 reputation/distinctiveness, 474, 475, 477 risk of confusion, 475 trademark applications, 474 trademark infringement, 502, 503, 507 trade name protection, 478–501 see also Trade name protection (EU) Extraterritoriality Canadian experience borderless transactions, 165, 166 comity principles, 163, 165, 175 commercial expectations, 175 common law principles, 163, 166, 173, 175 convenience, 165 extraterritorial jurisdiction, 163 fairness, 163, 175 Federal Court jurisdiction, 163, 169–70 forum non conveniens, 163, 173, 175 international internet transmissions, 166 international law principles, 175 internet intermediaries, 166 internet privacy rights, 163, 172–4 judicial economy, 163, 175 maritime law example, 163–5 “most substantial and real connection”, 163, 166, 165, 169, 173, 175 ratione loci, 163, 164, 173 ratione materiae, 163, 173 statutory interpretation, 166, 173–5

telecommunication, 166 territoriality principles, 163, 167 foreign patents comity concerns, 160–1 common nucleus of operative fact, 153, 154 diversity jurisdiction, 154, 162, 170 domestic litigation, 152 enforcement, 152 forum non conveniens, 154 infringement, 153, 154, 161, 162, 167, 168, 187 international priority system, 154 jurisdictional issues, 152–7 prudential doctrines, 154 recognition of foreign judgments, 162 sovereign interests, 153, 160 supplemental jurisdiction, 153, 154, 162, 170 US courts, 153–7, 160, 161 US patent infringement, 162 general issues anti-suit injunctions, 181, 186 arbitration, use of, 185–7 Brussels Regulation, 183 choice of forum, 182, 184–6 combination infringement, 180 computer software, 187, 188 contributory infringement, 184 damages awards, 186 efficiency considerations, 184, 185 equivalence doctrine, 183 European Court of Justice (ECJ), 183 forum shopping, 182, 184–6 international arbitration, 184 internet sales, 184 method claims, 181 multinational assembly/production, 184 national patent infringement, 181–3 part transactions, 179–81 patent validity, 182 procedural arbitrage, 184 recognition of foreign judgments, 162, 186 regional enforcement, 182 system claims, 181 trans-national enforcement, 179, 180 US jurisdiction, extent of, 180–3 German experience combination products, 176, 177 commencement of production, 177 contributory infringement, 178, 179 delivery of parts, 178, 179

INDEX

direct infringement, 176, 177, 179 extent of liability, 178 foreign-assembled products, 176, 177 foreign patent infringement, 177, 178 globalization effects, 176 indirect infringement, 176, 178, 179 negligent activity, 179 product distribution, 177 territoriality principle, 176 third party product completion, 177 UK experience arbitration agreements, 174 choice of forum, 175 comity principles, 174 common law principles, 174, 175 EU Member States, involving, 174, 175 injunctive relief, 174, 175 statutory interpretation, 174, 175 US experience comity principle, 171, 172 convenience, 171, 172 fairness, 171, 172 foreign patents, 152 globalization trends, 152 information-sharing, 152 international agreements, 152 international treaties, 171 judicial authority, 170 judicial discretion, 170, 171 judicial economy, 171, 172 method process claims, 169 supplemental jurisdiction, 153, 154, 170 systems claims, 169 US courts’ jurisdiction, 153–7, 170 US patents, 152, 153, 167–8, 186 Fair use doctrine (US) alternative proposal, 877–9, 899, 900, 910–13 arbitration procedures, 911–13 categorical approach, 869, 870 codification purposes, 814, 815 structure, 816 commercial/non-commercial distinction, 816, 817 defendant’s state of mind, 818 definition, 815 derivative works, 904 economic impact, 820, 901 expedited use, 910–13 four factor test case law, 865–70

1075

factor outcomes, 865, 867 good faith, 868 interaction, 865 judicial method, 866, 868–70 market impact, 820, 860, 865, 869, 875, 901–3 nature of work, 818, 865, 901 purpose/character of use, 865, 870, 900 “stampeding”, 866, 868 sub-factor doctrines, 865 substantiality in relation to whole, 819, 820, 865, 901, 907 theoretical aspect, 865 judicial development, 814, 901 law review articles, 867 legislative provisions, 864 market definition, 901, 902 market harm bilateral transactions, 902 business models, 903 excluded beneficiaries, 903 licensing institutions, 902, 903 widespread harm, 903 nature/scope, 814, 815 optional liability rules, 910 origins, 814 parody cases, 870, 871, 876, 877, 896, 897 qualitative standard, 819 quantitative standard, 819 regionalism, 868, 869 satire cases, 871, 876, 877, 896, 897 secondary use, 816 small claims procedure, 880 superseding works, 904 transformative/non-transformative use, 817, 818 transformative works, 904 US Supreme Court jurisprudence, 51 win-rates, 867, 870 Foreign direct investment (FDI) domestic market weakness, 996 “greenfield” investments, 994 horizontal, 995 investment strategy, 993, 994 location advantages, 993, 995, 996, 1023 manufacturing facilities, 993, 994 motivation, 996 preferential treatment, 996, 997 research and development facilities, 993 vertical, 995 France copyright law, 652–5, 658 design protection, 797

1076 I N D E X patent law, 140, 141 Free trade agreements (FTAs) access to knowledge, 970 data protection, 969 dispute settlement, 968 effect, of, 12, 13 exclusive rights, overriding, 969, 970 intellectual property, 964 Korea-US Free Trade Agreement, 964, 968, 970 non-violation and situation complaints, 968 parallel trade, 304, 313 see also Parallel trade pharmaceuticals, 969 political dimension, 965 public goods, 969, 970 public health, 970 scope, 964 US-Australia Free Trade Agreement, 592, 593, 616, 617, 620 968 US Congressional trade policy, 964, 965 Geographical indications extension, of 5, 6 registration, of, 7 right of property, 380, 445–7 see also Right of property TRIPs Agreement, 5, 6, 7 see also TRIPs Agreement Germany design protection, 797 extraterritoriality (patent) combination products, 176, 177 commencement of production, 177 contributory infringement, 178, 179 delivery of parts, 178, 179 direct infringement, 176, 177, 179 extent of liability, 178 foreign-assembled products, 176, 177 foreign patent infringement, 177, 178 globalization effects, 176 indirect infringement, 176, 178, 179 negligent activity, 179 product distribution, 177 territoriality principle, 176 third party product completion, 177 patent damages, 690, 693 infringement proceedings, 690, 691 injunctive relief, 690 loss of profit, 690 patent law, 141, 143, 144 pharmaceuticals, 691

reasonable royalties, 690 refusal to licence collusion, 271 competition law, 271 compulsory licensing, 272 dominant position, 271 lack of discovery, 277 licensing, effect of, 271, 272 Human rights AIDS/HIV strategy, 389 civil law context, 370 competing claims, 389 constitutional provisions, 414 copyright, as, 401–6 copyright law see also Copyright law access/participation right, 372, 374, 398–401 alternative constitutional basis, 425–8 authors’ rights, 374, 383, 385, 386 competing interests, 843, 847, 848 conflicting interests/rights, 375, 415, 843, 848 Copyright Clause (US Constitution), 391, 392, 411, 412, 414, 419–25, 427 – 30 copyright limitations, 843–7 cultural rights, 373–5 developed countries, 402 developing countries, 403 domestic copyright law, 374, 375, 409, 413, 414 economic interests, 402 economic rights, 412, 418 exclusive rights, 418 external international norm, 372, 373, 375 fairness and justice, 375 fair use doctrine, 375, 412, 413 ICESCR, 374, 839, 841, 842 idea/expression dichotomy, 375, 383 justifications for copyright, 392–5, 405, 410, 412, 413, 416, 412–23 liberty of users, 373 moral rights, 372, 391, 396, 401, 405–7, 411, 412, 415, 427 natural law considerations, 391–3, 402, 404, 409–14, 417, 419, 424, 425, 428, 429 open standards, 374, 375, 384 originality requirement, 375, 383 private copying, 858 proprietary interests, 373 protection, 403 public interest considerations, 417

INDEX

public welfare, 392 substantial similarity standard, 375 three-step test, 839–45, 847, 848, 855, 860 term of protection, 383 traditional knowledge, 403 Universal Declaration of Human Rights (UDHR), 372, 373, 390, 391, 395, 396 US Constitutional provisions, 419–22, 425, 426, 428, 430 US copyright law, 372, 373, 390–2, 409–14, 419, 423, 424, 248, 429 utilitarian justifications, 390 European Convention on Human Rights (ECHR) see European Convention on Human Rights (ECHR) European Court of Human Rights (ECtHR) see European Court of Human Rights (ECtHR) external source of law, 414 fundamental rights copyright law, 848 ECtHR jurisprudence, 387 ECJ jurisprudence, 387 European Charter of Fundamental Rights, 386, 387 horizontal relationships, 370 Human Rights Act (1998)(UK), 848 human rights norms, influence of, 414 intellectual property (generally) access/benefit sharing, 385 compatibility, 376 conditional rights, 448 consumer confusion, 450 copyright protection, 371, 441–4 corporate rights, 371 developing countries, 386, 389 differing intellectual property rights, 371, 372, 384 EC/EU developments, 431, 432 exclusive rights, 440 freedom of expression, 370, 383, 384, 433, 840, 841, 843, 848, 855, 859 freedom of speech, 370, 371, 374 fundamental conflict, 376 ICESCR, 374, 376, 379 industrial property, 444–50 interface, 380, 388, 433, 457, 470, 471 interference, with, 451 international laws, 445 literary and artistic works, 440–4 material interest, 385

1077

moral rights, 384, 443 national laws, 440, 442–5 ownership rules, 440, 444 personal rights, 371 public interest considerations, 383 right of property, 380–2, 434, 439, 439, 440, 446–8, 844 right to cultural participation, 842, 843, 845 right to education, 841, 842, 855 right to food, 433 right to life, 433 right to privacy, 433 trademarks, 445, 446,448–50 traditional knowledge/folklore, 371, 385 Universal Declaration of Human Rights (UDHR), 372, 373, 379, 383, 384 interference with property see Interference with property International Covenant on Civil and Political Rights (ICCPR), 396 International Covenant on Economic, Social and Cultural Rights (ICESCR), 374, 376, 379 moral conception, 384 patent law human rights discourse, 379 interaction, between, 376 justification theory, 377 private interests, 376, 377 public interests, 376, 377 patent rights access to information, 379 access to public health, 379 creation, of, 377, 378 exercise, of, 377, 379 human dignity, 378 human rights limits, 377–9 patent application procedure, 377 pharmaceuticals, 386, 388, 389 right to education, 379 right to food, 378, 386 right to health, 386 right to informed consent, 378 political conception, 384 privacy, 433 protection, 370 right of property see Right of property state/citizen relationship, 370 Universal Declaration of Human Rights (UDHR)

1078 I N D E X see Universal Declaration of Human Rights (UDHR) vertical relationships, 370, 386 WTO regime economic/social/cultural rights, 382 interface, 382 TRIPs Agreement, 383, 385 India copyright Bollywood, 973, 977, 979 civil remedies, 980 content industries, 973 counterfeiting, 973, 977 enforcement, 973, 977–9 internet use, 976 music industry, 97, 979 piracy, 973, 977, 979, 980 protection, 973, 977 economic development, 973 patent compulsory licences, 975, 978 data protection, 977 economic issues, 973 exclusive marketing rights, 975 non-obviousness standard, 975 patent examiners, 977 patent policy, 972 patent system, 976, 977 pharmaceuticals, 972–5, 978, 979 process patent regime, 974 product patent regime, 974, 978, 979 public health issues, 975 public interest groups, 975 second medical patents, 972 US support, 977 trademark developments, 976 Madrid Protocol, 976 protection, 979 TRIPs Agreement compliance, 978, 981 implementation, 972, 974, 975 obligations, 974, 975 US-India Trade Policy Forum, 976 Intellectual property (generally) collateral, use as, 3 commercialization, 3 development international level, 2 national level, 2 technological development, 2, 3, 4 financial issues, 3

importance/value, 3, 4 management issues, 3 securitization, 3 Intellectual property (protection) democratization, 3 domain names, 5 economic self-interest, 2 enforcement, 10 ideological views, 2 judicial role, 2 legislative protection, 2 multinational organizations 2, 6, 9, 10 opposition consumers, 2 developing countries, 2 internet service providers, 2 NGOs, 2 open source advocates, 2 private rights, 3 public good, 3 scope, of, 2 technology development, 2, 3 technological innovation, 9, 10 technological protection measures (TPMs), 4 treaties, 2 user access, 3 Interference with property see also Right of property competing ownership claims, 454, 455 compulsory licences, 451, 455, 456 see also Compulsory licences deprivations, 451 domestic infringement claims, 453 exclusive rights, 456, 457 government controls, 451 government restrictions, 450, 451 intellectual property contracts, 452, 453 litigation, 450, 452–5 rights, 451 justification, 455–7 International Covenant on Civil and Political Rights (ICCPR) human rights, 396, 839 International Covenant on Economic, Social and Cultural Rights (ICESCR) copyright law, 374 human rights, 374, 376, 379, 396, 397, 839, 841, 842 Internet China, 1006

INDEX

copyright exclusive rights, 656, 659 piracy, 967 tolerated use, 872 WIPO Broadcasting Treaty, 641, 647 counterfeit goods, 967 extraterritoriality issues international transmissions, 166 internet intermediaries, 166 internet sales, 184 privacy rights, 163, 172–4 India, 976 internet service providers (ISPs), 2, 32, 72, 73 trademark use consumer confusion, 545, 549–51, 555 contextual advertising, 543 control mechanisms, 546 eBay, 546, 547, 548, 553 first provider liability (Germany), 546, 547 Google, 546, 550, 551 keyword advertising, 545, 548–51, 555 metatags, 552, 555 pop-up advertising, 543–5 search engines, 543–6, 548, 550, 552, 555, 556 sponsored links, 552 trademark infringement, 552 trademark key words, 544–6, 548, 549, 553 unauthorized use on the web see Unauthorized use on the web Wikinomics, 254, 255, 266, 267 see also Wikinomics Japanese developments (copyright) author remuneration, 895 design protection, 794, 795 Digital Contents Act basic ideas, 890, 891 comprehensive system, 893 dispute resolution, 891, 893 enforcement of rights, 890 limitation of rights, 890 market solution, 892, 894 non-mandatory rules, 892, 893 opt-in by registration, 894, 895 proposal, 889, 890, 891 scope, 890 term of protection, 891 digital recording levy, 331, 332 digital technology, 889

1079

law reform, 889, 894 legislative provisions, 331 market solution, 892, 894 term extension, 332, 333 Japanese developments (patent) bankruptcy legislative measures, 328 protection of license, 328 registered license, 328 claim interpretation, 327 enhanced work sharing, 322, 323 expert commissioner system, 695 generally, 43, 44, 46 injunctive relief, 327, 328, 330, 334 inventive step, 335 Japanese Patent Office, 38, 322, 323, 330, 331, 332 law suits abuse of rights, 334, 335 cancellation of decisions, 324, 331 case law, 689, 692 case management, 324–6 damages, 334 dispute resolution, 326 expert commissioners, 326 infringement cases, 324, 331 judicial research officials, 326 jurisdiction, 324, 331, 333 proceedings, 325, 326, 331, 334 reversals/affirmations, 334 statistics, 324 non-obviousness, 143, 144 obviousness, 328, 329 patent law invalidation procedure, 330, 331 judicial expertise, 330 patentable subject matter, 330 Patent Prosecution Highway (PPH) development, of, 322, 323 examination quality, 322 patent applications, 322 patent examiners, 323 prior art search, 323, 324 search and examination results, 322, 323 user benefit, 322 pharmaceuticals, 692 pro-patent strategies, 334 research tools, 327, 335 technical standard, 327, 335 Japanese developments (trademark) product configuration marks, 589 see also Product configuration marks trademark law, 333

1080 I N D E X MedImmune Case affirmative action, 718 background, 698–700 certiorari, grant of, 712 conflicting case decisions, 714, 715 contractual dispute, 714 controversial issues, 714 declaratory judgment jurisdiction, 698, 700–2, 709, 711, 714, 716, 717 see also Declaratory judgment (DJ) jurisdiction District Court decision, 699 estoppel, 723, 727 exercise of jurisdiction, 718 Federal Circuit decisions, 699, 709, 711 implications, 698, 700, 701, 710, 71, 726 importance, 698, 709 invalidity challenges, 712–14, 718, 725 judicial concurrence, 716, 717 judicial discretion, 718–21 justiciable controversy, 712, 714, 727 Lear doctrine, 714–16, 723–5 patent licences, 701, 702, 710, 714 paying licensee, 714, 715 payment of royalties, 699, 701 public policy, 723 reasonable apprehension test, 698, 700, 701, 702, 709, 710, 714–17 Supreme Court decision, 699 vacateur-on-demand, 711, 720–3 Multinational organizations intellectual property protection, 10 role, of, 6, 9 New Zealand copyright developments communication right, 612 communication work, 612 fair use, 614, 615 format-shifting right, 612, 615 law reform, 612 technological protection measures, 612, 613 transient copying, 612 Non-obviousness Australian experience, 143 average knowledge/ability, 143 creativity, 141 exclusive rights, 145 French experience, 140, 141 German experience, 141, 143, 144 industrial applicability, 141 ingenuity, 140

inventive activity, 140, 142 inventive concept, 142 Japanese experience, 143, 144 novelty/usefulness requirement, 140 “obvious to try” test, 142 ordinary skill, 140 problem/solution approach, 141, 145 teaching/suggestion/motivation (TSM), 146, 194 trajectory/trend/pace, 146 UK experience, 140, 142 US experience, 140, 145, 146 Office for Harmonization in the Internal Market (OHIM) design law designer freedom design rights, 781 individual character, 787, 788 informed users, 790–3 legislative interpretation, 781 novelty, 787, 788 overall impression, 788, 789 registered copyright designs, 781 disclosure definition, 783 importance, 783 methods, 784 official publication, 784, 785 proof, 784, 785 publication in general, 785, 786 trade fairs, 786 worldwide, 783, 784 European trademark system, 20, 22, 23, 24 invalidity cases, 781–3 Invalidity Divisions, 781–5 qualitative evolution, 782, 783 quantitative evolution, 782 Third Boards of Appeal, 781, 783 Online music agency problems, 135 Canadian experience alternative compensation schemes, 124, 126, 127 Apple/EMI, 130–2 Canadian Music Creators Coalition, 128 collectives, 110, 121, 122 commercial successes, 122, 136 competition issues, 122, 131 compulsory licensing, 127, 131 controls, 127, 128

INDEX

Copyright Board, 121, 122, 126, 127, 129, 135 copyright reform, 122, 123 CSI Online Decision (2007), 118–9 digital locks, 128 digital rights management, 123, 128, 130, 131, 132 136 dystopia, 129 Electronic Frontier Foundation (EFF) Scheme, 124, 127 law suits, 128–30 legalized P2P downloading, 110, 111, 135 lower prices/increased demand, 126, 127 minimum rates, 126, 127, 131 neighbouring rights, 110, 121 Noank Scheme, 125, 127 online services, 122 online tariffs, 112–1 overlapping rights, 121 private copying levies, 110–12 Ringtones Decision (2006), 112–18 SOCAN tariff, 22, 112, 119–21 technological neutrality, 130–31 technological protection measures (TPMs), 123, 128, 129, 131 unauthorized downloading, 136 contract writing, 137, 138 DRM-free music, 130–2 European experience collecting societies, 98–104 competition law issues, 98, 100–3, 131 controlled competition, 100, 101, 103 cultural diversity issues, 99, 100, 101, 103, 104 differing solutions, 100 equal treatment, 100 European Commission recommendation, 98–100 European Parliament, position of, 99–101 freedom to provide services, 101 exclusive agreements, 100 legislative approach, 101, 103 music rights licensing, 99 one-stop approach, 100, 101, 103 rights owners, 98, 99, 100, 102 royalties, 100, 102 size of repertoire, 100, 102, 103 “soft law” approach, 100, 101 global future, 123–4 legislative reform, 134 licensing blanket licensing, 134, 136 pass-through licences, 137, 138

reform, 132–5, 137 sublicensing, 136, 137 rights cost considerations, 134, 135 distribution rights, 133 licensing process, 133, 137 musical composition rights, 137 musical rights, 133 music publishing rights, 133 overlapping rights, 133, 135 performance rights, 133 reproduction rights, 133 sound recordings, 133 ringtones, 104, 107, 138 US experience deciphering rights, 104 distribution right, 132 enforcement of rights, 105 licensing mechanisms, 109 licensing reform, 105, 107 musical services, 104 new business models, 109 payment options, 104 performance rights, 104, 106 public policy, 104 rate-setting, 105, 107 ringtones, 104, 107 rights clarity, 104, 106, 131, 134 server copies, 106 subscription rates service, 105, 107 technological development, 108 voluntary agreements, 138 Orphan works tolerated use, 873, 875 transformative use, 875, 878, 899 US copyright, 663, 667–9 see also US copyright Parallel trade benefits, of, 298 Canadian experience, 595, 596 consumers benefit, 298 harm, 312 protection, 313 counterfeiting, 315, 316 developing countries, 313 economic principles, 312 EC Treaty provisions import/export restrictions, 300 quantifiable restrictions, 299 European controls competition law, 299, 301, 314

1081

1082 I N D E X competition policy, 299, 300 contractual provisions, 298 dual pricing, 314, 317 “Fortress Europe”, 303, 304 legislative controls, 299 limiting quantities, 298 margin of appreciation, 318 pharmaceuticals, 298, 300, 301, 312, 313, 318, 319 pricing, 298, 312, 314 stock allocation, 298, 314 vertical restraints, 318 exhaustion doctrine Community exhaustion, 298–300 international exhaustion, 298, 300, 303–6 natural exhaustion, 298, 305, 310 free movement of goods, 302 free trade agreements, 304, 313 marketing authorizations, 316 meaning, 297 online transactions, 301–3 parallel traders, 297–9 price differences, 304–6, 310, 312, 315 public policy, 315 quality issues, 315 Ramsey pricing, 316, 317 refusal to licence, 273 see also Refusal to licence US controls administrative trade remedies, 305 antitrust law, 314 contractual restrictions, 306 Customs and Border protection, 314, 315 discriminatory treatment, 311 generally, 300, 301 infringement suits, 305 ITC procedures, 305, 315 legislative measures, 307, 308, 310, 311, 314 national exhaustion, 305, 310 personal use exception, 314, 319 pharmaceuticals, 304–15 price differences, 304–6, 310, 315 public policy, 315 refusal to deal, 306 Patent access to medicine, 951, 955, 956, 961 Australian experience, 43 business method patents, 40, 42, 43, 44, 56, 189, 190, 193, 194, 197, 199, 204, 206, 677, 678, 739, 745 Canadian experience, 43, 47 comparative jurisdictions, 44

competition issues, 46 confidentiality agreements, 727 courthouse relationships see Courthouse relationships cross-border litigation, 19 declaratory judgment jurisdiction see Declaratory judgment (DJ) jurisdiction developing countries, 955, 956 economic importance, 52 emerging markets, 46 European Union Brussels I Regulation, 342–4, 346 centralized court system, 339, 341, 342, 345, 347 common political approach, 345 Communication (2007), 340–3, 348 Community competences, 341, 342 Community Patent, 39, 338, 340, 341, 345–7, 350, 352 Community Patent Review, 41 consultation process, 340 cost of applications, 337, 338 enforcement, 338, 341, 342 Enforcement Directive, 344, 350 EU enlargement, 347 EU Member State cooperation, 40, 44, 61 European Commission proposals, 338–40, 342, 347, 348 European Court of Justice (ECJ), 56, 342, 343, 344 European Patent Litigation Agreement (EPLA), 39, 40, 44, 340–3, 345, 346, 348, 349 European Patent Office, 38, 39, 44 expert witnesses, 345 forum shopping, 338 global collaboration, 45 harmonization, 40, 44, 344, 345, 351 infringement issues, 39 judicial cooperation, 351 judicial qualifications, 345 jurisdictional issues, 39, 342, 343, 344 knowledge transfer, 341 language issues, 39, 339, 340, 341, 345, 348 Lisbon Agenda, 347 litigation arrangements, 341–4, 349, 350 Member States, 348, 349 national courts, 343 national patents, 343 national procedural rules, 345 patent litigation, 40 quality issues, 341

INDEX

reinforced cooperation, 348, 349 statutory interpretation, 345 supplementary measures, 341 validity issues, 39 extraterritoriality see Extraterritoriality foreign patents comity concerns, 160–1 common nucleus of operative fact, 153, 154 diversity jurisdiction, 154, 162, 170 domestic litigation, 152 enforcement, 152 forum non conveniens, 154 infringement, 153, 154, 161, 162, 167, 168, 187 international priority system, 154 jurisdictional issues, 152–7 prudential doctrines, 154 recognition of foreign judgments, 162 sovereign interests, 153, 160 supplemental jurisdiction, 153, 154, 162, 170 US courts, 153–7, 160, 161 US patent infringement, 162 forum shopping, 728 future developments, 38, 44, 45, 46, 47 German experience damages, 690, 693 infringement proceedings, 690, 691 injunctive relief, 690 loss of profit, 690 pharmaceuticals, 691 reasonable royalties, 690 human rights see Human rights Indian experience, 949, 972–9 see also India innovation/competition, 40, 41, 689 international trade issues, 46 inventive step computer software, 142 contributions, to, 201, 207 definition, 141, 143, 145 European patents, 141, 147 requirement, 38, 46, 47, 140, 142 Italian experience, 950, 955, 960, 961 Japan see Japanese developments (patent) judicial diversity, 53 judicial experience, 53 jurisdictional issues, 39, 52, 54, 55, 56 licensee estoppel, 699

1083

litigation foreign elements, 158, 159 litigant’s nationality, 162 litigation risk, 729 multinational enforcement, 158, 160 national laws, 158 parallel foreign proceedings, 162 US infringement cases, 158, 159 mandatory apportionment, 689, 690 MedImmune Case see MedImmune Case monopoly rights, 955 non-obviousness see Non-obviousness novelty, 140, 141 obvious meaning, of, 146–9 obviousness, 42, 43, 46, 56, 194, 201, 202, 354 Patent Cooperation Treaty (PCT), 41 patentable subject matter asset protection method, 203 Australian experience, 199–203 biotechnology, 204 business method patents, 40, 42, 43, 44, 56, 189, 190, 193, 194, 197, 199, 204, 206 consistency, 197 consistent claim construction, 191 contribution approach, 207, 208 damages issues, 191 diagnostic method limitation, 201 European Commission initiative, 196, 206 exclusions, 190, 192, 197, 199, 200, 203, 204, 209, 211, 213 form of claim, 197, 199 future developments, 190–2, 196, 200, 206, 211 generally, 42, 43, 45 Gowers Review (UK), 196, 197, 200, 206, 212, 213 historical perspective, 191 innovation, 191, 193 medical methods, 190, 203–5 new technology, 190, 191, 193 patentability test, 196–8, 206–11 patent application system, 200 patent examination process, 195 patent litigation, 191, 192 physical hardware, 207, 208 physicality requirement, 192 public policy considerations, 203, 204

1084 I N D E X software patents, 189, 190, 193, 194, 196, 197, 199, 206, 207, 209–13 specification/disclosure, 192, 193 statutory limits, 198, 203 statutory subject matter, 198 stem cells, 204 technical effect, 196, 207, 208 telephone systems, 207, 211 UK experience, 195–7, 200, 202, 206, 207, 209–12 patent law common features, 159 convergence, 159, 160 harmonization, 9, 40, 44, 47, 159 national laws, 14 technological innovation, 14 patent quality, 40–3, 45 pharmaceutical industry, 38, 43, 46, 386, 388, 389, 691, 692, 955 prior art, 190, 195, 205, 265, 323, 324, 354 protection computer software, 6 injunctive relief, 6 scope, 6, 38 quantity issues, 43, 45 revocation proceedings, 712, 728 scientific advances, 45, 46 Singapore experience, 689, 692, 695 software patents, 40, 189, 190, 193, 194, 196, 197, 199, 206, 207, 209–13 Solicitor General’s Opinions, 54 South African experience, 961 standard-setting see Standard-setting technological advances, 45, 46 US Federal Circuit decisions, 58 judicial diversity, 53 judicial experience, 53 jurisdiction, 52, 53, 56 US patents Patent Office of the United States (PTO), 38, 41 US/EU differences, 38 validity, 38, 39, 43 Patent litigation (US) see also US patent advanced damages apportionment, 685 “but-for test”, 683 damage analysis, 683 economic damages, 683

entire market value rule, 684, 685, 690, 693 lost profits, 683, 684 market share analysis, 683 price erosion, 683 reasonable royalty, 683, 684 business method patents, 677, 678, 739, 745 court system, 689 discovery, use of, 675, 682, 683 evidential issues, 675, 676, 679, 681–3 expert reports, 682, 683 expert witnesses, 675, 682, 683 growth, in, 688, 689 inequitable conduct rulings, 683 injunctive relief balancing of hardships, 675–7, 679, 680 burden of proof, 682 damage to reputation, 682 District Courts, 675, 678–81 equitable remedy, 675 evidential requirements, 675, 676,679, 681–3 inadequate remedies, 675–7, 679, 681, 682 irreparable harm, 675–7, 679, 680–2 market share information, 682 public interest considerations, 675–7 Supreme Court jurisprudence, 675, 677, 678 violations, 677 interlocutory appeals, 692 judicial perspective complex facts, 686, 687 judicial method, 694, 695 jury trials, 687, 688, 695 language issues, 686 professional practice, 686 technical advice, 694, 695 time limits, 688 law reform attorneys’ fees, 656 best mode, 751, 752 generally, 735, 750 inequitable conduct, 751 interlocutory appeals, 754, 755 reasonable royalty damages, 753, 754 supply of components, 755, 756 unenforceability defence, 751 venue, 755 wilful infringement, 752, 753 pharmaceuticals, 691, 692 Pharmaceuticals AIDS/HIV treatment, 949–51, 956, 957 competition issues, 273, 274, 281, 293

INDEX

compulsory licensing, 947–53 parallel trade European controls, 298, 300, 301, 312, 313, 318, 319 US controls, 304–15 patents, 38, 43, 46, 386, 388, 389, 691, 692, 995, patent litigation (US), 691, 692 refusal to licence, 273, 274, 281, 293 Thailand, 947–53 Piracy anti-piracy measures, 5 China, 985, 986, 989, 991, 992, 996, 1000, 1011, 1013, 1014, 1020, 1025 copyright, 945, 946 counterfeit goods, 967 India, 985, 986, 989, 991, 992, 996, 1000 internet use, 967 piracy rates, 11 unauthorized use, 80, 86, 88, 89 US enforcement, 966, 967 Product configuration marks acquired distinctiveness, 581 cancellation proceedings, 578, 579 comparative perspective, 589 dysfunctional system, 586 European Court of Justice (ECJ), 580–2, 589 functionality, 577, 578, 580–2, 584–9 Japanese experience, 589 national decisions, 584 OHIM decision (Legobrick), 578–80, 582–4 registration, 578, 580, 581, 583–5, 587, 590 representation of objects, 588 source of origin, 587–9 symbolism, 587 trade dress, 588, 590 US case law, 586–90 Refusal to license see also Antitrust/Competition law access to information, 269, 270 anti-competitive effects, 253 blocking patent, use of, 277 competition issues abuse of dominant position, 260, 271, 283 anti-competitive abuses, 248 anti-competitive agreements, 273 anti-competitive effects, 273, 275 barriers to market entry, 249, 253, 255, 271, 277, 278 competition law, 249, 250, 252 competition policy, 252, 274

1085

consumer harm, 249, 253, 273, 280, 283, 284, 295 discrimination cases, 276, 292 dominance, 252, 282 dual pricing agreements, 273 EC/EU approach, 250, 251 economic dominance, 278 economic/legal context, 273 economic theory, 251, 252 efficient production/distribution, 279 foreclosure, 249, 283, 284 innovation costs, 252 mandatory access, 251 market power, 249, 252, 256, 257, 263, 270, 279, 282 market share, 249, 262, 264, 270, 278 parallel trade, 273 pharmaceutical industry, 273, 274, 281, 293 pricing issues, 275 US law 249, 250 vertical agreements, 274, 279 compulsory licences, 272, 276, 281, 282 see also Compulsory licences consumer welfare, 275, 276, 279 EC/EU law abuse of dominant position, 283 additional abusive conduct, 288–92 anti-competitive effects, 295 bundling cases, 292 case decisions, 284–7 compulsory licences, 284–7, 290, 292, 293 consumer demand, 294 consumer harm, 283, 284, 295 data privacy laws, 293 dominance, 282, 283, 287, 289 dominant position, 282 duty to contract, 287, 288 duty to licence, 282, 284 ECJ jurisprudence, 273, 274, 279 EC Treaty provisions, 251, 273, 276, 278–80, 282–8, 292 essential facilities doctrine, 287, 288, 290 European Commission, 251, 280, 281 excessive pricing, 292 foreclosure/discrimination distinction, 283 fraud cases, 292 indispensable services/products, 294 interoperability information, 294 legitimate aim, 295 limiting production/technical development, 283 mandatory access, 291

1086 I N D E X marketing of competitors, 283 market power, 282 new products/services, 294 objective justification, 286, 288, 294 pro-competitive effects, 295 remedy principle, 290–2 sales data, 293 tying cases, 292 economic principles, 275, 278 economic/social reality, 270 essential facilities doctrine, 267 German experience collusion, 271 competition law, 271 compulsory licensing, 272 dominant position, 271 lack of discovery, 277 licensing, effect of, 271, 272 industry standard, 277, 278 innovation costs, 252 promotion, of, 269, 270 intellectual property rights, 248–51 interface subject matter, 277, 278 justification, 261 Ordoliberalism, 279, 281 Wikinomics see Wikinomics Right of property see also Human rights arbitrary government conduct, 430 compensation, 438, 440, 441, 460 domestic enforcement provisions, 381, 382 ECtHR jurisprudence, 380–2, 386, 430–5, 438 European Convention on Human Rights, 430–2, 434 existing possessions, 436, 440, 442, 444, 450, 455, 467 fundamental right, 430, 434, 458 geographical indications, 380, 445–7 government interference, 380, 437, 439, 450–5 intellectual property, 439, 440, 446–8 interferences with property, 437 see also Interferences with property legitimate aim, 437, 455 legitimate expectation, 436, 442, 443, 444, 447, 448, 450 margin of appreciation, 438 multinational corporations, 432, 435 property rights, 402 proportionality test, 437, 455

proprietary interests, 436, 439, 441 public interest, 437, 438 subject matter, 436, 437, 440 temporal scope, 436, 437 trademark applications, 380 trademarks, 380 Ringtones Canadian experience, 112–8, 605 online music, 138 see also Online music US experience, 104, 107, 664, 666 Rome Convention broadcasting rights, 639–41, 643, 645, 646, 648 Singapore patent patent litigation, 689, 692, 695 pharmaceuticals, 692 Skype development, of, 259, 260 Standard-setting see also Antitrust/Competition law absence of disputes, 225, 229 antitrust liability, 234–7 arbitration, use of, 230 competition authorities, 216, 218, 231, 233, 234, 237 competition law enforcement, 216 compulsory licensing issues, 234 see also Compulsory licensing consumer welfare, 232 contractual issues, 226, 230, 233 disclosure issues, 236–40 essential patents, 223 European experience agreement on standards, 219 competition authorities, 216, 218 context of standardization, 217 dominant position, 220 EC competition policy, 240, 241, 245 economic/legal framework, 216, 217 EC Treaty provisions, 219, 220, 225 ex ante disclosures, 219 ex ante pricing, 217, 218 fair, reasonable and non-discriminatory (FRAND) terms, 220–30, 233 joint ventures, 220 legal constraints, 219, 220 legal effects, 220–4 market power, 217, 219, 220 patent pools, 220, 223, 224 prescriptive intervention, 218 price charged, 217, 218

INDEX

ex ante policies, 238 fair, reasonable and non-discriminatory (FRAND), 220–30, 233, 238, 241 funding research and development, 243–4 general policy, 216 harmonization, 232 information technology, 231 injunctive relief, 224, 227 judicial role, 224 limit on competition, 234, 235 “patent ambush”, 224, 239 pro-competitive benefits, 235 rate-setting issues, 216, 218, 226, 233 safeguards, 235 selective discounting, 242–3 standard governance, 245 standard-setting negotiations, 216, 227 terms fair and reasonable, 221–4 non-discriminatory, 220, 221 non-royalty, 223–4 US experience antitrust liability, 226, 228, 230 damages awards, 227, 230 essential patents, 229 ex ante policies, 224, 230, 231, 233 public policy considerations, 226 rate regulation, 224, 226, 228, 229 reasonable and non-discriminatory (RAND) terms, 225, 226, 230 World Intellectual Property Organization (WIPO), 240 WTO objectives, 232, 233 Technological protection measures (TPMs) Australian experience, 592 Canadian experience, 123, 128, 129, 131, 600, 601 New Zealand experience, 612, 613 use of, 4, 32, 70 Thailand (compulsory licences) compensation mechanisms, 957 destruction of asset, 954 medical treatment access to medicines, 951, 955, 956 AIDS/HIV, 949–51, 956, 957 heart disease, 951 negotiation period, 950, 951 pharmaceuticals, 947–953 pricing considerations, 956 procedural issues, 957 public non-commercial use, 949–51, 957 royalty payments, 957, 958

1087

TRIPs Agreement, 948, 949 Three-step copyright test author’s reproduction right, 801 Berne Convention, 804–6, 857, 862 China, 812 common law defences copyright misuse doctrine, 821–3, 828 flexibility, 821 public interest defence, 823, 824 creative destruction/replacement human rights issues, 839–48 legitimate interests, consideration of, 831, 862 limitation on exclusive rights, 831 open texture of copyright limitations, 832–8 social responsibilities, 849–54 surrogate test, 831, 862 economic interests, 802 European Union, 810, 811 expression-related harm, 855 extension, of, 803–12, 855 fair use doctrine (US), 800, 801, 803, 814–21 see also Fair use doctrine (US) flexibility, 856–9 free trade agreements, 811, 812 historical perspective, 804–12 human rights issues see also Human rights competing interests, 843, 847, 848 conflicting rights, 843, 848 copyright limitations, 843–47 creator’s rights, 839 European Convention on Human Rights, 848, 859 freedom of expression, 840, 841, 843, 848, 855, 859 fundamental rights, 848 Human Rights Act (1998)(UK), 848 ICCPR, 839 ICESCR, 839, 841, 842 private copying, 858 public interest defence (UK), 848 public performances, 860 right of property, 844 right to cultural participation, 842, 843, 855 right to education, 841, 842, 855 scientific/technological development, 842, 843 state powers, 844, 845, 847 Universal Declaration on Human Rights (UDHR), 839, 841, 842

1088 I N D E X users’ rights, 840–5, 847, 848 influence, of, 801, 812 international level, 804–10 legitimate interests (“third prong”) public policy scrutiny, 830 right holders, 831 scope, of, 830 third parties, 831, 862 unreasonable prejudice, 830 WTO Panel Report, 830 legitimate rule per se, 802, 803 limitation and exception, 858, 859 limitations confined to special cases (“first prong”) clear definition requirement, 813, 832 common law defences, 821–4 fair use doctrine, 814–21 narrow in scope requirement, 813, 832 nature/scope, 813, 814, 857 limitations on copyright, 800–3, 812, 831–8, 858, 859 national levels, 810–12, 855 nature/scope, 803 normal exploitation (“second prong”) creative interpretation, 860 economic competition, 824, 828 economic right, 826 human rights issues, 839 legitimacy, 839, 849 marketability of works, 826 private copying, 825–7 significant/tangible commercial losses, 824, 825 social responsibilities, 849 software interoperability, 827–9 users’ rights, 839 WTO Panel Report, 824, 825, 827 North American Free Trade Agreement (NAFTA), 810 open texture of copyright limitations copyright law, 835–7 copyright limitations, 837, 838, 856 human capacities, limits of, 833 linguistic indeterminacy, 832, 856 national legislation, 856 “open texture” problem, 832, 833 structure of legal system, 834, 835 public interest considerations, 802, 803, 831 public policy considerations, 831 purpose of copyright, 861 regional levels, 810–12, 855 replacement, of, 803 social responsibilities

copyright holders, 849, 852–4 equality, 850–2 “no spoliation” proviso, 852 property rights, 850–2, 854 public goods, 850, 851 reciprocity, 849, 850 social welfare, 851 societal interests, 859 “sufficiency” proviso, 852 Supreme Court jurisprudence, 852–4 wealth distribution, 851 state powers competing interests, 843, 847 conflict of rights, 843 copyright limitation, 843–5 generally, 801, 802 intermediate scrutiny, 845 legitimacy, 844 public interest, 846 rational basis test, 845, 846 strict scrutiny, 844 US Constitution, 844–7 users’ human rights, 844, 845, 847 TRIPs Agreement, 801, 806–8, 831, 857, 858, 862 US attitude, towards, 860–2 WIPO Copyright Treaty, 808, 809, 810, 830 WIPO Performances and Phonograms Treaty, 801, 808, 809, 810, 830 WTO Panel Report, 800, 812, 813, 824, 825, 827, 830, 857, 861 Tolerated use (copyright) compulsory licensing, 873–4 see also Compulsory licensing corporate approach, 872 derivative work, 872 ex post notice right, 873 infringement contributory infringement, 874 direct infringement, 874 enforcement/infringement patterns, 871 secondary infringement, 874 internet use, 872 liability regimes, 872, 873 notice regime systems, 872, 873 orphan works, 873, 875 prevalence, 871 rights owners, 872 takedown regime, 872–4 transaction costs, 873–5 Trademark see also Trademark as property commerce, changes in, 18, 19

INDEX

competition law development, 26 constitutional issues, 52 consumers confusion, 450, 503–5, 512, 513, 518, 545, 549–51, 555, 869 deception, 915, 941, 945 protection, 941, 942 digital setting, 27 dilution see Trademark dilution distinctiveness, 450 electronic filing, 28 European Union see European Union (trademark developments) free riding, 26 future development, 18 goods/services affiliated, 19 complementary, 19 identical goods, 503, 507, 508, 518, 519, 553, 571 guarantee of origin, 498, 572 identical marks, 502, 509, 512, 518, 519, 553 identical signs, 571 indication of source, 24 infringement see Trademark infringement piracy, 945, 946 political climate, 19 product configuration marks see Product configuration marks property see Trademark as property protection goodwill, 24, 26, 27 international agreements, 28 international protection, 18, 19 international registration system, 28 overprotection, 52 proliferation of rights, 28 regional agreements, 28 widening of, 28 rights see Trademark rights similar marks, 21 substantive international norms, 18 trademark law appeals system, 18, 22, 23, 24 choice of forum, 21, 22 civil law systems, 21 common law, 21 development, of, 18, 19

1089

EC/EU legislation, 22 fair use, 19 harmonization, 20, 21, 28 infringement, 21 international commerce, 18, 19 Japan, 333 judicial competence, 21 political issues, 22, 25 referential uses, 19, 26 registered rights, 18 territorial nature, 18, 19 trade name protection (EU) see Trade name protection (EU) treaties procedural issues, 20 Singapore Treaty (2007), 20 substantive issues, 20 Trademark Law Treaty (1994), 19 unauthorized use, 19 unfair competition, 941 Uniform Domain Name Dispute Resolution Policy (UDRP), 18, 19 usage see Trademark usage US experience, 24–7 valuable per se, 915 Trademark as property action for deceit, 918, 920 analytic/normative jurisprudence, 938 Chancery Courts (UK), 917, 920, 921 commentators’ responses, 931, 932 common law developments, 917–21, 924 communicative significance, 924 conception of ownership, 916 conceptualization, 917, 940 copyright law, compared, 942–5 distinctions form/substance, 937 juristic, 938–40 theory/practice, 937 fraud, 921–3, 936, 944, 945 historical context, 917, 918, 943 industrial property, 917 injunctive relief, 918, 920, 921, 923, 938 judicial activity, 927–30 legislative activity, 925–7, 932–4 natural rights, 943 property “rhetoric”, 915–7, 942–4 proprietary language, 936 significance, of, 934–6 trademark law, 916 trader’s goodwill, 937 US perspective, 941, 942, 944

1090 I N D E X Trademark dilution blurring theory, 563 dilution case law, 564–6 concept, 563, 564 definition, 563, 564 distinctiveness, 573 unfair competition law, 570, 571, 575 EC/EU law association, 569 blurring, 567 confusion comparison, 569 dissimilar goods, 567 European Court of Justice (ECJ), 567, 568, 571, 572, 575 identical/similar marks, 567–9 OHIM Guidelines, 567 protection for concepts, 569, 570 registration process, 575 reputation, 571 tarnishment, 567 UK case law, 568–70 UK legislation, 570, 571 unfair advantage, 567, 573 unfair competition law, 570, 571 Trademark Dilution Revision Act (2006) actual recognition, 561 anti-dilution protection, 560, 561 blurring, 561, 562, 563, 572, 574 degree of recognition, 562 degree of similarity, 561 distinctiveness, 561, 562 effects, 19, 25, 560, 561 factors for fame, 561 likelihood-of-dilution standard, 560–2 origins, 574 state law, and, 561 tarnishment, 561–3, 574 US law association, 562, 572, 573 bar to action, 563 blurring, 561, 562, 563, 572, 574 Federal anti-dilution law, 559, 560, 561, 572 judicial remedy, 559 misappropriation, 574, 575 ownership of valid registration, 563 parody cases, 572 state law, 561 tarnishment, 561–3, 574 unfair advantage, 573, 574 Trademark infringement bad faith, 495, 496

constructive knowledge, 496 corporate names, 493, 495 guarantee of origin, 498, 572 honest commercial practice, 493–6, 498, 501, 507 injunctive relief, 499 internet use, 552 see also Internet own name defence, 492 reasonable diligence, 496, 501 subsequent registrations, 495, 496 Trademark rights competition objectives, 497 consumer confusion, 503–5, 512, 513, 518, 869 derogation, 496, 497 descriptive signs, 503, 506, 507, 509, 512, 513, 515 enhanced protection, 498 exclusive rights, 506, 508 expansion, of, 916, 943 export sales, 517, 518 freedom to provide services, 497 free movement of goods, 497, 501 identical goods, 503, 507, 508, 518, 519, 553, 571 identical marks, 502, 509, 512, 518, 519, 553 identical signs, 571 identity issues, 503, 504 internal market, 497 legitimate interests, 496 registered marks, 502, 508–10 subsequent registrations, 498 trademark functions, 519, 542 trademark infringement, 502, 503, 507, 512, 514, 517, 520 UK legislation, 498 Trademark usage absence of harm, 506, 508, 512 actual use rules, 555 brand penetration, 506 commercial use, 542 consumer confusion, 450, 503–5, 512, 513, 518, 545, 549–51, 555, 869 consumer perceptions, 502, 506–8, 511, 519 decorative use, 512 defences, 505 descriptive use, 551 element of infringement, as, 543 evidence, as, 555 export sales, 517, 518 extent of use, 507 fair use, 520, 542,544, 551, 554, 556

INDEX

false advertising, 554 honest commercial practice, 493–6, 498, 501, 503, 507 internet see also Internet consumer confusion, 545, 549–51, 555 contextual advertising, 543 control mechanisms, 546 eBay, 546, 547, 548, 553 first provider liability (Germany), 546, 547 Google, 546, 550, 551 keyword advertising, 545, 548–51, 555 metatags, 552, 555 pop-up advertising, 543–5 search engines, 543–6, 548, 550, 552, 555, 556 sponsored links, 552 trademark infringement, 552 trademark key words, 544–6, 548, 549, 553 licences, 506 market structure, 506 nature of goods, 506 nature of use, 555 post-sale confusion, 503–5 product market, 506 referential use, 19, 26, 513, 553 restrictive interpretation, 506 strict liability, 555 third party absolute immunity, 544 activity not use as mark, 544 benefit, 508 generally506, 508, 510, 512 internet use, 543–5 no likelihood of confusion, 544 toy replicas, 502, 503, 506, 507, 511, 512, 520 unfair competition law, 543, 545 unjust enrichment, 542 use as mark, 544, 545 US law, 543, 544, 552, virtual reality games, 519 Trade name protection (EU) brand equity, 501 brand management, 479 consumer confusion, 501 corporate celebrity, 478 European Court of Justice (ECJ), 480, 501 European Trademark Directive, 480, 486–8, 492 existing prior rights, 479, 483, 484 free movement of goods, 480, 496–501

1091

global brands, 479 Gowers Review (UK), 486 harmonization, lack of, 484–8 identical trade names, 480, 488–92, 498, 501 international protection 478, 479 own name use, 480, 492–6 Paris Convention, 479–81, 483, 484–6, 501 passing off, 480, 482, 485, 486 regulation of suppliers, 478 third party use, 480, 488–92, 494, 495, 498 trademark infringement bad faith, 495, 496 constructive knowledge, 496 corporate names, 493, 495 guarantee of origin, 498, 572 honest commercial practice, 493–6, 498, 501, 507 injunctive relief, 499 own name defence, 492 reasonable diligence, 496, 501 subsequent registrations, 495, 496 trademark protection, 479 trademark rights competition objectives, 497 derogation, 496, 497 enhanced protection, 498 freedom to provide services, 497 free movement of goods, 497, 501 internal market, 497 legitimate interests, 496 subsequent registrations, 498 UK legislation, 498 trademark use character of goods, 498 extent of use, 499 formal use, 499 global appreciation, 500 honest use, 503 identical goods, 498 market structure, 498 third party use, 498 TRIPs regime effect, of, 479, 482, 483, 501 existing prior rights, 483, 484 foreign trade names, 484 increased protection, 480–2 “intellectual property”, 480–2 interpretative issues, 481 passing off actions, 485, 486 unfair competition, 484, 485 Unfair Commercial Practices Directive cross-border trade, 500 implementation, 501

1092 I N D E X injunctive relief, 500 legitimate interest, 500 misleading commercial practices, 500 unfair competition law, 480, 482, 484, 485, 495, 500, 501 Trade policy US enforcement counterfeiting activity, 966, 967 counterfeit medicines, 966 data protection, 969, 977 international cooperation, 967 pharmaceuticals, 969, 977 piracy, 966, 967 trade agreements, 965, 966 US regulatory barriers adverse effects, 967 market access, 967, 970 market solutions, 967, 968 US trade agenda enforcement, 963, 965–7 free trade agreements, 963–5, 968–70 regulatory barriers, 963, 967, 968, 970 Trade Promotion Authority (TPA), 964, 965 US Trade Representative (USTR), 963, 965, 967, 970 US trade policy Doha Round, 968 public health issues, 970 US-India Trade Policy Forum, 976 WTO negotiations, 968 Transformative use (copyright) arbitration procedures, 878, 911–13 character of goods, 498 compulsory licensing, 876 see also Compulsory licensing definitions, 910, 911 derivative use, 895 European Union, 881 expedited use, 877–9, 910–13 extent of use, 499 formal use, 499 global appreciation, 500 honest use, 503 identical goods, 498 impact, of, 884 injunctive relief, 878 intended used statement, 877 liability rules, 910 licensing fees, 877–9 limited use, 877 market structure, 498 new meaning, 877

orphan works, 875, 878 parody, 876–8, 895–7 satire, 876–8, 895–7 third party use, 498 transformative works, 876, 878, 904, 910 unauthorized use, 77, 80 TRIPs Agreement broadcasting organizations, 643 China Berne Convention provisions, 990 compliance, 984, 988, 1001, 1007, 1020, 1026, 1027 criminal enforcement, 989, 990 dispute settlement, 988 enforcement standards, 988, 989 enforcement text, 989 implementation, 972 sectoral disparities, 1016, 1017 US/WTO action, 986, 989, 1000, 1024–6, 1028, 1029 violations, 984, 1001 compulsory licences, 948–53, 957 dispute settlement, 8, 988 Doha Round competition policy, 7 counterfeiting, 7 least-developed countries (LDCs), 7 piracy, 7 transfer of technology, 8 enforcement, 9, 988–90 geographical indications, 5, 6, 7 human rights, 383, 385 see also Human rights minimum standards framework, 968 origin of biological resources, 5, 6 origins, 968 patent protection, 6 public health, 7, 14 three-step copyright test, 801, 806–8, 831, 857, 858, 862 see also Three-step copyright test trade name protection effect, on, 479, 482, 483, 501 existing prior rights, 483, 484 foreign trade names, 484 increased protection, 480–2 “intellectual property”, 480–2 interpretative issues, 481 passing off actions, 485, 486 unfair competition, 484, 485 traditional knowledge/folklore, 5, 6

INDEX

Unauthorized use on the Web see also Internet acceptable practises, 68 accountability, 69 copyright education, 69 digital copies unauthorized acquisition, 71 unauthorized distribution, 71, 86, 87 fair use provisions, 68, 74, 76, 79, 83, 94 implied license, 68 infringement direct infringement, 69 knowledge of infringement, 74 responsibility, 73 secondary liability, 70, 89 lawful use, 68, 69 licensing schemes, 69, 76, 81, 82, 86, 93, 94 Napster, 70 non-copyright solutions copyright education, 86, 88, 89, 92 digital rights management (DRM), 86, 87, 89–91 legal content offerings, 87, 88 optical disks, 90 public awareness, 86, 89 rights management information, 90 source identification code, 90 technological solutions, 86 reforms best practice issues, 69 clarification of rights, 70 collective licensing, 69, 83 controversial changes, 68, 69 new business models, 69, 71, 72 non-controversial changes, 68, 69 private sector innovation, 69 technological protection measures (TPMs), 70 voluntary subscription models, 69 unarticulated rights, 70 unauthorized use collateral damage, 94, 95 collective licensing, 93, 95 collective societies, 91, 93, 95 consumer benefit, 77, 79 content identification, 81, 90, 94 copyright infringement, 86 direct financial benefit, 73, 78, 79 economic challenges, 90 fair use, 94 fingerprinting technologies, 77, 79 front-end filtering, 94 identification mechanisms, 82

1093

knowledge of infringement, 74, 79, 80, 82, 83 licensing schemes, 69, 76, 81, 82, 86, 90, 93, 94 monitoring costs, 76, 80 new business models, 91 new technologies, 77, 80, 81, 86 performance rights, 76, 93 personal reproduction, 76 piracy, 80, 86, 88, 89 responsibility, 77, 82 secondary liability, 89 social issues, 77 takedown notices, 73, 75, 81, 92, 95 takedown process, 75, 77, 80, 81, 94 transformative derivatives, 76 transformative use, 77, 80 unauthorized adaptations, 88, 91, 92 video material copyright holder content, 75 copyright infringement, 74, 77, 79, 80 direct financial benefit, 78 fair use content, 77 hashing technology, 75 knowledge of infringement, 74, 79, 80, 82 private videos, 75, 92–4 takedown notices, 75 user uploads, 75, 81, 88, 93 Uniform Domain Name Dispute Resolution Policy (UDRP) adoption, of, 18, 19 United Kingdom (UK) copyright digital use, 882, 883 fair dealing defences, 888 format-shifting, 882, 883 law reform, 881, 882 limitations to copyright, 888 ongoing review, 888 parody usage, 883 private copying, 883 term extension, 882, 888 transaction costs, 883 transformative use, 883, 884 courthouse relationships see Courthouse relationships design protection, 796 extraterritoriality (patent) arbitration agreements, 174 choice of forum, 175 comity principles, 174 common law principles, 174, 175 EU Member States, involving, 174, 175

1094 I N D E X injunctive relief, 174, 175 statutory interpretation, 174, 175 Gowers Review, 196, 197, 200, 206, 212, 213, 486, 881–4, 887, 888 Human Rights Act (1998), 848 patent declaratory judgment jurisdiction, 725, 726 patentable subject matter, 195–7, 200, 202, 206, 207, 209–12 patent law, 140, 142 public interest defence, 848 trademark Chancery Courts, 917, 920, 921 trademark dilution, 568–71 trademark rights, 498 Universal Declaration on Human Rights (UDHR) see also Human rights access/participation right, 372, 374, 391, 398–401, 407–9 balanced use, 415–18 conflicting rights, 415, 417 copyright issues, 396, 401–6, 839, 841, 842 cultural rights, 396–8 domestic copyright law, 409, 413, 414 freedom of creation, 407, 408 freedom of speech, 406–8 influence, of, 390, 391, 395, 396, 409, 419 interpretative adjustments, 419 moral rights, 372, 391, 396, 401, 407, 415 natural law theory, 391, 395 natural rights, 410 right of property, 406, 409, 426 see also Right of property status, of, 397–8, 409 US Constitutional provisions, 419–24 US copyright cell phones, 671, 672 classes of works, 670 Congress music licensing legislation, 669 orphan works legislation, 668, 669 Copyright Office activities, 664, 665 appeals procedure, 665 Examining Division, 665 information services, 666 legislative issues, 667 music licensing, 667 orphan works, 663, 667 pre-registration, 665 process reengineering, 667

registration of claims, 664, 665 ringtones, 664, 666 royalty judge system, 666 status, 664 statutory licensing, 664, 666 Digital Millennium Copyright Act (DMCA) benefits, of, 91, 92 compliance, 76, 77 direct financial benefit, 73, 78, 79 internet service providers, 72, 73 interpretation, 70–3 provisions, 663 safe harbour provisions, 72–4 takedown notices, 73, 75, 81, 92, 95 vicarious liability test, 82 fair use doctrine see Fair use doctrine (US) fair use works, 670 fashion design, 663, 667 see also Design law generally, 31, 32, 33, 35 law reform, 664 music downloads, 664 music licensing, 667 orphan works, 663, 667–9 ringtones, 664, 666 Section 1201 rulemaking, 670, 671 Supreme Court decisions digital rights management (DRM), 51 formal criteria, 50 Google Book Search Case, 50 pre-emption cases, 51 sampling cases, 50, 51 technology issues, 50, 51 term extension, 668 WIPO compliance, 670 wireless telephone communication works, 671 US patent compulsory licences, 952 extraterritoriality comity principle, 171, 172 convenience, 171, 172 fairness, 171, 172 foreign patents, 152 globalization trends, 152 information-sharing, 152 international agreements, 152 international treaties, 171 judicial authority, 170 judicial discretion, 170, 171 judicial economy, 171, 172 method process claims, 169

INDEX

supplemental jurisdiction, 153, 154, 170 systems claims, 169 US courts’ jurisdiction, 153–7, 170 US patents, 152, 153, 167–8, 186 international harmonization first-inventor-to-file, 749 prior user rights, 749 publication of patent applications, 750 law reform apportionment of damages, 737, 738, 744 attorneys’ fees, 756 business method patents, 739, 745 consensus, 736, 737 continuation practice, 739 Federal Circuit practice, 747, 748 harmonization, 744 inequitable conduct, 740, 744, 747, 751 interlocutory appeals, 754, 755 international issues, 744 judicial activism, 732, 738, 746–8 legislative process, 736, 737 legislative progress, 669, 732 litigation issues, 735, 750–6 lobbying, 735, 737, 738 National Academy of Science, 748 National Research Council, 748–50 non-political aspect, 735 opposition practice, 745 overview, 733 Patent Office-related, 733, 734, 756–8 reasonable royalty damages, 753, 754 quality of patents, 735, 736, 745 wilful infringement, 752, 753 procedural changes post-grant opposition, 756–7 pre-grant submissions, 757 rulemaking authority, 757, 758 reasonable royalty reasons, for, 732, 733 specialized judges, 744–8 unenforceability defence, 751 wilful infringement, 741–4, 747, 752–3 litigation, 674 see also Patent litigation (US) patent aggregators, 674 patent revocation system, 712 standard-setting see Standard-setting US Federal Circuit courthouse relationships, 353–5, 357, 358, 362, 363 decisions, 58 judicial diversity, 53

1095

judicial experience, 53 jurisdiction, 52, 53, 56 US Supreme Court copyright cases digital rights management (DRM), 51 formal criteria, 50 Google Book Search Case, 50 pre-emption cases, 51 sampling cases, 50, 51 technology issues, 50, 51 three-step copyright test, 852–4 courthouse relationships, 353–5, 357, 358, 362, 364, 365 see also Courthouse relationships intellectual property matters (generally) development, 50 fair use doctrine, 51 importance, 50, 57 judicial hostility, 51, 52 precedent, 55, 57 unanimous opinions, 54 patent cases MedImmune Case, 699 US Trade Representative (USTR) trade policy, 963, 965, 967, 970 Video material copyright holder content, 75 copyright infringement, 74, 77, 79, 80 direct financial benefit, 78 fair use content, 77 hashing technology, 75 knowledge of infringement, 74, 79, 80, 82 private videos, 75, 92–4 takedown notices, 75 user uploads, 75, 81, 88, 93 Wikinomics access to information, 269, 270 barriers to entry, 271 business models, 254 collaborative networks, 276 commercial success, 264–6 competitive process, 264–9 creative destruction (Schumpeter’s theory), 255 crowd-sourcing, 254 development, of, 265, 266 Fair Play, 262–4 favourable conditions, for, 270 future development, 269, 270 global information, 254 impact, of, 265

1096 I N D E X innovation, 267–70 internet services, 254, 255, 266, 267 Magill Case, 260–2 market dominance, 264 market power, 270 market share, 264, 270 Microsoft Case, 256–8 open source, 253, 258, 264, 266 patent applications (US), 265 peer production, 253 research and development, 268 Skype, 259, 260 technological development, 254, 255, 268, 269 Trinko Case, 258–60 willing collaborators, 266 WIPO Broadcasting Treaty background, 638–40 Brazilian position, 644, 645 business models, 642 cable companies, 641 channel providers, 644, 647 consensus, 643–6 Diplomatic Conferences, 640, 643, 645 EU Member States, 643 exit strategy, 641, 642 Indian position, 643, 645 internet, applied to, 641, 647 Japanese position, 643, 645 member states’ proposals, 640 nature anti-piracy treaty, 642 anti-theft treaty, 641 norm-setting, 640 political dimension, 643, 644, 646 protection, under, 4, 9, 11, 12, 35, 637 rights audiovisual performers, 638 broadcasters, 638, 639, 643, 646–8 neighbouring rights, 638, 639 rights-based approach, 640, 641, 645 Rome Convention, influence of, 639–41, 643, 645, 646 satellite TV companies, 641 signal-based approach, 640, 641, 646 sports broadcasting, 648, 649 technological protection measures (TPMs), 641 see also Technological protection measures (TPMs) transmission retransmission, 644–7 simultaneous transmission, 644

unauthorized interceptions, 646 US contribution, 639–41, 645 World Health Organization (WHO) intellectual property issues, 10 medicines access, to, 981 counterfeit medicines, 966 research and development, 11, 980, 981 US influences, 10, 11 World Intellectual Property Organization (WIPO) see also WIPO Broadcasting Treaty access to knowledge, 10 anti-competitive practices, 10 Development Agenda, 4, 10, 11 development work anti-piracy measures, 5 broadcasting organizations, 4, 9, 11, 12, 35 domain names, 5 enforcement issues, 5 genetic resources, 5 patent, 4 trademark, 5 traditional knowledge, 5 digital technology, 12 enforcement issues, 15 future developments, 3, 9, 11, 12 “guided development” period, 9 innovation industries, 11 internet treaties, 12 multinational organizations, 9 new product development, 12 North/South issues, 10 patent harmonization, 9 private rights, 3 public domain, role of, 10 public good, 3 role, of, 3, 240 standard-setting, 240 see also Standard-setting user access, 3 US influence, 11, 15 WIPO Copyright Treaty, 808, 809, 810, 830, 1006 WIPO Performances and Phonograms Treaty, 801, 808, 809, 810, 830, 1006 World Trade Organization (WTO) dispute settlement system, 5, 8, 9, 13, 14 enforcement issues, 13 future developments, 5, 6, 13, 14 membership, 8 multinational organizations, role of, 6, 9

INDEX

policy, 5 rule-making process, 5 standard-setting objectives, 232, 233 see also Standard-setting three-step copyright test, 800, 812, 813, 824, 830, 825, 857, 861

see also Three-step copyright test trade rules, 5 TRIPs-related issues, 5, 6, 7 see also TRIPs Agreement

1097