Congress Should Promote Copyright Protection Technologies

On December 20, 2022, Register of Copyrights Shira Perlmutter submitted to members of the Senate Subcommittee on Intellectual Property the U.S. Copyright Office's report on standard technical measures (STMs) under Section 512(i) of the Digital Millennium Copyright Act of 1998 (DMCA). The 118th Congress should take up the Copyright Office's recommendation to amend language Section 512(i) to facilitate adoption of STMs. 

Under the DMCA, an online platform receives legal immunity from copyright infringements on its websites, provided that it meets certain conditions. One such condition is that platform "accommodates and does not interfere with standard technical measures." STMs are technologies that are "used by copyright owners to identify or protect copyrighted works," that have been "developed pursuant to a broad consensus of copyright owners and service providers" in an "open, fair, voluntary, multi-industry standards process," that are made available on reasonable and non-discriminatory terms, and that do not impose substantial costs or burdens on online platforms.

But the problem with Section 512(i) is that it has never worked. As the Copyright Office's report acknowledges, no technology has ever been designated an STM under the law. Online platforms continue to receive the benefit of legal immunity for infringements on their sites without having to accommodate any STMs – because there are no STMs. 

In its report, the Copyright Office recommended that Congress amend Section 512(i) by: (1) clarifying that terms broad consensus and multi-industry "require substantial agreement, but not unanimity, and only of those industries directly affected by an STM"; (2) replacing "developed" with "designated" in order to confirm that they qualify if they're designated by broad consensus of copyright owners and online platforms, even if they originally were developed by a narrower subset of stakeholders or emerged through proprietary processes; and (3) list factors for weighing whether particular measure imposes substantial costs and burdens on service providers. The Copyright Office concluded that these amendments to the law could help facilitate Section 512(i) and thus give the provision a better chance at finally working. Congress should take up the Copyright Office's recommendation and make those changes to the law. 

 

The Copyright Office stopped short of recommending that Congress amend Section 512(i) by establishing an administrative process by which the Office would recognize designated technological measures (DTMs). Online platforms would be required to accommodate and not interfere with DTMs as a condition for receiving legal immunity for copyright infringement. Such an administrative process would serve as a supplemental or alternative approach to the current, unsuccessful voluntary process for STMs. The report raised staffing and resource concerns with a DTM process. 

 

But Congress shouldn't let the Office's report be the last word on DTMs. The idea of a establishing a DTM process within the Office has merit and deserves further attention by Congress. DTMs were the subject of my April 2022 Perspective from FSF Scholars, "SMART Act Would Help Prevent Online Copyright Infringement." The SMART Act, which was introduced in the Senate and in the House of Representatives last year, would have authorized the Copyright Office to recognize DTMs. The SMART Act ought to be reintroduced in the 118th Congress and hearings should be held on DTMs in order to give the proposal the full consideration that it deserves. 

George Washington: Pro-Copyright

Today, President's Day, the U.S. government observes George Washington's birthday. No doubt most people are aware of many of the accomplishments of the Father of our Nation. Yet comparatively few are aware that George Washington was pro-copyright. As President, he signed the first federal law protecting creative works – the Copyright Act of 1790. Free State Foundation President Randolph May and I discussed this and more in our 2016 Perspectives from FSF Scholars paper, "George Washington: Indispensable to Intellectual Property Rights in America."

Expect to hear more on copyright-related topics in 2020, as this month marks the publication of our new book with Carolina Academic Press, titled "Modernizing Copyright Law for the Digital Age: Constitutional Foundations for Reform." Hot off the press, our book is now available for order at CAP's website. 

United States Still Leads the World in Strong Protections for IP Rights

On February 7, 2019, the U.S. Chamber of Commerce’s Global Innovation Policy Center (GIPC) released the seventh edition of the International IP Index. Appropriately enough it's titled “Inspiring Tomorrow.” The Index rates the intellectual property (IP) systems of 50 countries, representing over 90% of the world’s gross domestic product. Scores were derived from several specific factors pertinent to gauging protection of intellectual property rights.

Thus, the GIPC Index is a valuable tool which allows policymakers to better understand where their countries stand in relation to others.

Although the U.S. ranks at the top of the International IP Index, its release nevertheless should prompt U.S. policymakers to strengthen our IP rights system. The Index identifies the lack of a targeted legal basis for addressing online piracy as a key area of weakness. Moreover, poor Index scores for IP rights systems in certain foreign countries should spur U.S. trade negotiators to seek stronger protections for Americans’ IP rights overseas. By seeking to bolster IP protections around the globe, the U.S. will further benefit from the strong relationship between strong IP rights and economic activity.

Scores in the 2019 International IP Index are based on eight key categories relating to IP rights: patent rights, copyrights, trademarks, trade secrets, commercialization of IP assets, enforcement, systemic efficiency, and membership in and ratification of international treaties. Those eight categories encompass 45 separate indicators pertinent to assessing the strength of an IP system.

Because scoring for this year’s Index is based on 45 indicators instead of 40 as in last year’s Index, a weighted-score was calculated to determine whether countries’ protections of IP rights were stronger or weaker than that calculated in last year’s Index. Among the 50 countries, 23 improved their weighted-scores in the 2019 Index. Many of the improved scores came from developing countries.

For the seventh consecutive year, the United States had the highest score. The U.S. IP system rated 42.66 out of 45. The United Kingdom and Sweden followed with scores of 42.22 and 41.03, respectively. The countries with the lowest scores were Egypt, Algeria, and Venezuela at 11.83, 10.28, and 7.11, respectively.

Despite the United States’ leadership, there are some areas of weakness discussed in the Index. For example, the United States has a perfect score with regard to encouraging creativity by virtue of strong copyright protections, but it lacks an effective enforcement regime to disable access to websites which facilitate pirated content and counterfeit goods. A 2017 report by the IP Commission found that the annual cost of counterfeit goods, pirated software, and theft of trade secrets to the U.S. economy is between $225 billion and $600 billion.

To combat online piracy, Congress can help by updating the Digital Millennium Copyright Act’s notice and takedown system under Section 512. My October 2018 FSF blog stated that the United States-Mexico-Canada Agreement (USMCA) strengthens IP rights protections and enforcement relative to the North American Free Trade Agreement’s (NAFTA) IP Chapter. However, the USMCA failed to address the outdated “notice and takedown” provision to improve its protection for creators' content.

Moreover, modernizing the U.S. Copyright Office by updating its technological capabilities to maintain a readily searchable database of copyright registrations would be helpful. So too would be giving the Copyright Office the authority to address Section 512 matters and establishing a process for adjudicating small infringement claims. Congress should act to modernize the Copyright Office to enable it to adequately address piracy issues and other copyright-related infringements.

While there was significant improvement among many of the developing countries in GIPC’s Index, the low scores in many developing countries reinforces the need for U.S. pursuit of trade agreements that better secure protections for IP rights holders internationally. As more countries adopt strong protections of IP rights through trade agreements, the entire global economy also will grow substantially, because legal institutions, including regimes that safeguard IP rights, constitute a positive externality for the global economy. The mutual gains from global trade increase when more nations adopt and enforce laws that protect IP rights.

Importantly, the Index emphasizes that there is a “strong correlation between the strength of the national IP environment and different types of economic activity, including rates of R&D spending, innovation, technology creation, and creativity.” Across all countries, the Index found several noteworthy correlations between strong IP protections and economic innovation and creativity. On average, IP-driven countries:

• Are 26% more competitive,

• Are 53% more likely to employ high-skilled and high-paid workers,

• Are 33% more likely to receive private-sector investment in R&D activities,

• Are 39% more likely to attract foreign investment,

• Have over 4 times more online and mobile content generated,And are twice as likely to produce and export complex, knowledge-intensive products.

Strong protections for IP rights incentivize investment in research and development, innovation, and creative content production because they ensure entrepreneurs have an opportunity to earn a return on their labors. And as economies with strong IP rights regimes grow and prosper, consumers are the ultimate beneficiaries as new goods and services, in whatever form they take, are brought to market.

In sum, the International IP Index provides U.S. and foreign policymakers a useful tool for assessing the need to improve their IP systems so that they can enhance innovation and creativity in today’s economy.

Copyright Industries Contributed Significantly to the U.S. Economy in 2017

U.S. Copyright Industries
Infogram

President Trump Signed the Music Modernization Act

Yesterday, President Trump signed the "Orrin Hatch-Bob Goodlatte Music Modernization Act" (H.R. 1551), which creates a compulsory blanket licensing system for music recordings, updates the rate standards applicable to music licensing, provides copyright royalties to pre-1972 artists, and provides compensation to producers, mixers, and sound engineers.

President Trump released the following statement when he signed the bill:

The Music Modernization Act closes loopholes in our digital royalty laws to ensure that songwriters, artists, producers, and providers receive fair payment for the licensing of music. 

Streaming has made music more accessible than ever, yet our laws have not kept up with the pace of technology.  As such, artists of all varieties and all career stages are losing out on revenue that they have rightly earned

This legislation will help ensure that artists from eras long ago, in addition to modern day, can retire in security, and that current and upcoming artists can make a living by creating amazing works that captivate their fans and entertain our nation — and the world. 

FSF scholars have advocated for Congress to pass the Music Modernization Act in order to better secure copyright protections and royalty payments for recording artists, songwriters, and other music professionals.

Further Readings:

Randolph May and Seth Cooper, "A Constitution Day to Strengthen Copyright Protection," Perspectives from FSF Scholars, Vol. 13, No. 35, (September 17, 2018).

Seth Cooper, "Senate Should Vote on the Bill to Modernize Music Copyright," FSF Blog, (August 9, 2018).

Seth Cooper, "Senate Should Advance Consensus Bill to Modernize Music Copyright," FSF Blog, (May 15, 2018).

Randolph May and Seth Cooper, "World IP Day – An Opportune Time to Modernize Music Copyright Protections," Perspectives from FSF Scholars, Vol. 13, No. 14, (April 23, 2018).

Robust Physical and Intellectual Property Rights Encourage Economic Activity

On August 8, 2018, the Property Rights Alliance published the 2018 International Property Rights Index (IPRI), ranking 125 countries around the world based on the strength of both physical and intellectual property rights. The countries included in the 2018 edition comprise over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Most notably, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic activity.

The IPRI includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property (IP) rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles scores from each of these components into a 0-10 scale for each of the 125 countries.

Finland ranks highest with a score of 8.69, followed by New Zealand and Switzerland with scores of 8.63 and 8.62, respectively. The United States ranks 14^th with a score of 8.12, which is exactly where it ranked in 2017. But its 2018 score did improve slightly from 8.07. On the other end of the scale, the bottom three countries are Venezuela, Yemen, and Haiti, with scores of 2.96, 2.79, and 2.73, respectively.

Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of IP rights, foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.833 with GDP per capita, 0.756 with gross capital formation per capita, and 0.904 with global entrepreneurship. Other strong positive correlations include a 0.900 coefficient with networked readiness/connectivity, 0.807 with telecommunication infrastructure, 0.842 with civic activism, and 0.818 with overall economic freedom.

With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $56,000, while the bottom 20% of countries have an average GDP per capita under $3,000.

 

Notably, China ranks 52^nd overall with a score of 5.91. As I stated in a blog last week, although China does not have the weakest IP system in the world, the size of its economy in conjunction with its lack of strong IP rights protections and enforcement means it is a major threat to U.S. creators and innovators. While the IPRI does not give specific policy proposals about how each country should improve its intellectual and physical property rights, it provides an aggregate view of how countries compare to each other and how strong property rights incentivize economic activity around the globe. The IPRI, along with the Global Innovation Policy Center’s (GIPC) International IP Index, provide policymakers useful tools for assessing ways to improve their country’s property rights systems.

From the correlations cited above, it is clear that robust physical and IP rights foster innovation and economic prosperity. As undeveloped and developing countries (like China, Mexico, and Haiti) continue to strengthen their property rights protections, U.S. companies will be more inclined to expand international trade with those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to strive to be a leader throughout the world by participating in free trade agreements that contain effective provisions that support the protection of property rights. The U.S. ranks first overall in GIPC’s International IP Index, but only 14^th in the IPRI. The United States’ lowest score was in the component of political stability, followed by judicial independence and ease of access to loans. While it may be difficult to create a stable political environment overnight, political instability often is the product of unemployment and a stagnant economy. Economic indicators suggest that unemployment is very low and the economy is growing. Expanding international trade and promoting innovation policy through the protection of property rights should stimulate the economy even further.

The United States should strive to improve its IPRI score even further. If it does, the effort should encourage additional entrepreneurship and economic activity.

Commissioner O'Rielly Asks eBay and Amazon to Remove Fraudulent TV Devices

On Friday May 25, 2018, FCC Commissioner Michael O'Rielly sent a letter to eBay CEO Devin Wenig and Amazon CEO Jeff Bezos to warn them about certain manufacturers of video television set-top boxes who fraudulently place the FCC's trusted logo onto devices that have not been approved by the Commission's equipment authorization process. Despite proactive steps by both eBay and Amazon to reduce theft of intellectual property (IP) from their websites, pirated goods, such as these fraudulent set-top boxes, are still sold on both online marketplaces, putting consumers at serious risk and legitimate manufacturers at an economic disadvantage.

Commissioner O'Rielly requests that eBay and Amazon continue to remove devices that fraudulently bear the FCC logo and to provide the FCC with any additional information that will help combat IP theft and consumer fraud.

Trade Negotiations Should Focus on IP Protections, Not Retaliation

The ongoing controversies regarding international trade, including the current negotiations over the North American Free Trade Agreement (NAFTA) that are coming to a head one way or the other, have increased attention on the economic importance of international trade. With the intense focus on the United States’ position in the current NAFTA talks and other negotiations, it is important to understand that economists across the political spectrum overwhelmingly favor free trade policies. At the same time, advocating for improved international protections for intellectual property rights is entirely consistent with promoting free trade.

The consensus among economists is that free trade policies are superior to tariffs and other protectionist measures in promoting economic growth and higher wages. Free trade can also lead to increasing returns to scale from larger markets, the exchange of ideas through communications and travel, and the spread of technology by exposure to new goods and production methods. Economists find that any localized economic benefits from protectionism tend to be short-lived, and in any event are greatly outweighed by the tremendous benefits spread throughout the rest of the economy.

Nonetheless, free trade policies are not nearly so popular among non-economists, on both the left and the right ends of the political spectrum. Opponents typically claim that free trade leads to fewer jobs, lower wages, and harm to domestic industries. Economists respond that if a country follows protectionist policies, it harms itself more than its trading partners, which can be seen in recent sharply negative reactions in financial markets to threats of trade wars. While it is possible that threats of retaliation can lead countries to back off from protectionist policies, such threats are risky because the country threatening retaliation will usually harm itself more than its trading partners if the threat is carried out.

Trade policies create unusual political alliances. Most Republican leaders in recent years have generally favored free trade policies. This view is shared by prominent Democrats like President Bill Clinton and many liberal economists like Paul Krugman. But President Trump campaigned against certain U.S. trade agreements, and in one of his first acts as President, he withdrew the United States from the Trans-Pacific Partnership (TPP). Fareed Zakaria, usually a harsh critic of the President from the left, recently expressed support for the current administration’s approach, stating: “Previous administrations exerted pressure privately, worked within the system and tried to get allies on board, with limited results. Getting tough on China is a case where I am willing to give Trump’s unconventional methods a try. Nothing else has worked.”

It should be noted that President Trump claims he is actually a supporter of free trade. In his 2017 State of the Union Address, President Trump said: “I believe strongly in free trade, but it also has to be fair trade.” If so, President Trump’s actions could be seen as seeking better deals from trading partners. Indeed, President Trump has indicated that he may be willing to reconsider the United States rejoining the TPP, which is a positive development.

None of this is to say that existing trade agreements, such as TPP and NAFTA, cannot be improved. This is certainly true, for example, with regard to the failure to protect intellectual property. Theft of intellectual property is rampant. A 2017 Organization for Economic Cooperation and Development report found that the global value of international and domestic trade in counterfeit and pirated goods in 2013 was between $710 billion and $917 billion, and the global loss in value of digital piracy in movies, music and software in 2015 was $213 billion.

But these opportunities to improve trade agreements do not undermine the benefits of policies favoring free trade. Strengthening measures to prevent such theft, rather than retaliation, should be the focus in negotiating multilateral or bilateral trade agreements. This certainly includes the ongoing NAFTA negotiations in which the Trump Administration thus far has not made strengthening IP protections the priority it should be. Well-defined and stronger protections in trade agreements for copyrights, patents, trademarks and trade secrets would help stimulate growth in IP-intensive industries, increase U.S. exports, and improve economic competitiveness without the economic harms that result from protectionism.

The modernization of NAFTA creates an opportunity to encourage cross-border free trade, while, at the same time, strengthening international intellectual property protections to make sure innovation and creativity are rewarded.

Senate Should Advance Consensus Bill to Modernize Music Copyright

On Tuesday, May 15, the Senate Judiciary Committee will hold a hearing on “Protecting and Promoting Music Creation for the 21st Century.” The hearing is timely because major aspects of music copyright law are outdated, unfairly depriving some copyright owners of financial rewards for their creative efforts.

The Senate Judiciary Committee should seize the opportunity to update music copyright law and finally provide protections that have long been missing. It should adopt legislation just like the Music Modernization Act (H.R.5447) that passed unanimously in the U.S. House of Representatives last month. H.R.5447 would improve the ability of recording artists, producers, and songwriters to exercise their rights in copyrighted music. For copyright owners of older sound recordings, the bill would also recognize their right to receive royalties when their recordings are publicly performed via digital audio transmission. 

Music copyright is grounded in the U.S. Constitution. The Article I, Section 8, Clause 8 “Copyright Clause” confers on Congress the power “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.” The Founding Fathers regarded copyright as a unique private property right, rooted in an author’s natural right to enjoy the fruits of his or her creative labor. Federal copyright protections in music help ensure that copyright holders, including music artists, enjoy exclusive rights to the potential proceeds from their creative labors.

Copyright protections provide critical economic incentive for the work and expense of creating new works, including music compositions and sound recordings. Indeed, sound recordings and musical compositions are extraordinary sources of value. Retail revenues from recorded music reportedly totaled $8.7 billion in 2017. According to a report by the Recording Industry Association of America: “Streaming music platforms accounted for almost 2/3rd of total U.S. music industry revenues in 2017, and contributed nearly all of the growth.” 

However, many copyright law provisions that touch on music compositions and sound recordings need to be brought up to speed with changes caused by digital technologies and the Internet. H.R.5447 would update music copyright law by: (1) establishing a streamlined process for producers, mixers, and sound engineers to directly receive royalty payments through an entity called SoundExchange; (2) enabling more timely and accurate payment of “mechanical license” royalties to songwriters when their compositions are publicly performed via digital audio transmission and also providing blanket licenses for digital streaming services; and (3) securing to copyright holders of sound recordings made before 1972 federal copyright protections for public performances of their recordings via digital audio transmission.

The need to secure copyright protections for pre-72 sound recordings deserves special emphasis. Without explanation, federal copyright law fails to secure public performance royalty rights in sound recordings made before February 15, 1972, in the same manner it secures such rights in later recordings. Digital music services, including Sirius XM and Pandora, have publicly performed pre-72 sound recordings – but without having to pay royalties to copyright holders like they routinely pay for post-72 sound recordings. 

There is no reason for denying public performance royalty rights to copyright owners of pre-72 sound recordings. The growing importance of digital streaming to copyright owners makes the loss of financial returns for pre-72 sound recordings all the more unjust.  

Recognizing federal copyright law’s unfair treatment of pre-72 recordings, a 2015 report by the U.S. Copyright Office concluded: “pre-1972 recordings should be brought under the protection of federal copyright law.” As the Copyright Office explained, federal recognition of public performance copyright protections in pre-72 sound recordings “would serve the interests of licensing parity by eliminating… market distortion.” 

If it becomes law, H.R.5447would finally provide equal protection for pre-72 sound recordings. Going forward, copyright owners of pre-72 sound recordings would receive royalties for public performances of sound recordings via digital audio transmissions. Those royalties would be based on negotiations with digital music services or – absent agreement – on rates established by the Copyright Royalty Board pursuant to its “willing buyer/willing seller” standard that seeks to approximate market prices.  

Further, H.R.5447 would clear up uncertainties tied to state copyright laws. Absence of federal protections for pre-72 sound recordings led to multiple lawsuits against digital music services based on state copyright laws. In short, the bill would preempt all state law claims against digital music service providers that pay royalties for all public performances of pre-72 sound recordings taking place during the last three years. 

On May 10, Senator Orin Hatch introduced the similarly-titled Music Modernization Act (S.2823). Reportedly, S.2823 mirrors the music copyright reform bill passed by the House. Consistent with the Constitution’s charge “to promote the Progress of Science and Useful arts” by securing the exclusive rights of authors – including music artists – the Senate Judiciary Committee should pass H.R.5447 or companion legislation like S.2823.

IP Theft Commission Calls for New Policies to Combat IP Theft By Chinese Companies

The IP Theft Commission has issued a slate of policy recommendations in connection with the Office of the U.S. Trade Representative’s current investigation of China’s practices relating to intellectual property (IP) theft and forced technology transfer.

As noted in a prior blog post, at the prompting of an August 2017 memorandum issued by President Trump, U.S. Trade Representative Robert Lighthizer opened the investigation pursuant to Section 301 of the Trade Act of 1974.

Among the IP Theft Commission’s recommendations:

• Use and expand the authority of the executive branch to deny access to the U.S. market and banking system to Chinese and other foreign companies that steal and benefit from stolen American IP.
• Create new national policy centers that coordinate efforts across relevant agencies, including the Department of Commerce and the Department of Treasury, to monitor and protect American IP.
• Establish multilateral policy dialogues with Japan, the European Union, Australia, South Korea, Singapore, and other states that share interests in protecting IP to strengthen policies to harmonize national, legal, and regulatory frameworks and to share information.

Congress Should Modernize Civil Copyright Enforcement for the Digital Age

Online infringement of copyrighted content – including sound recordings and motion pictures – is pervasive on popular Internet-based user-upload services. Numerous and repeated instances of infringement on sites such as YouTube deprive copyright owners of their exclusive right to the proceeds of their property and creative labors.

In our Perspectives from FSF Scholars paper “Modernizing Civil Copyright Enforcement for the Digital Age Economy: The Need for Notice-and-Takedown Reforms and Small Claims Relief,” FSF President Randolph May and I make the case for why Congress should update civil enforcement provisions regarding online infringements of copyrighted content.

In particular, the Digital Millennium Copyright Act of 1998 (“DMCA”) needs to be revised in order to keep pace with the last two decades of changes in Internet technology and online user habits. Among other things, the DMCA’s Section 512 “notice and takedown” provision should be updated in order to provide copyright owners with more efficient means for enforcing their exclusive rights and combating online infringement. Also, Congress should establish a U.S. Copyright Office-administered small claims court to resolve disputes over takedowns of infringing online content and other low-value infringement matters.

Read our paper for more. Also consider the principles and policies for copyright reform that we discuss in several other Perspectives from FSF Scholars papers on intellectual property (IP):

• Randolph J. May and Seth L. Cooper, “The Logic of International Intellectual Property Protection,” Perspectives from FSF Scholars, Vol. 11, No. 3 (January 13, 2016).
• Randolph J. May and Seth L. Cooper, “The Public Contract Basis of Intellectual Property Rights,” Perspectives from FSF Scholars, Vol. 11, No. 13 (April 19, 2016).
• Randolph J. May and Seth L. Cooper, “Liberty of Contract and the Free Market Foundations of Intellectual Property,” Perspectives from FSF Scholars, Vol. 11, No. 27 (July 29, 2016).
• Randolph J. May and Seth L. Cooper, “Intellectual Property Rights and Compulsory Licensing: A First Principles Approach to Reform,” Perspectives from FSF Scholars, Vol. 11, No. 39 (November 11, 2016).
• Randolph J. May and Seth L. Cooper, “The Common Purposes of Intellectual Property and Antitrust: Promoting Creative and Innovative Output,” Perspectives from FSF Scholars, Vol. 12, No.19 (June 6, 2017).
• Randolph J. May and Seth L. Cooper, “Modernizing the Copyright Office for the Digital Age Economy,” Perspectives from FSF Scholars, Vol. 12, No. 37 (October 30, 2017).
• Randolph J. May and Seth L. Cooper, “Unalienable Rights and Alienable Intellectual Property: Why ‘Moral Rights’ Should Not Be Imported into U.S. Copyright Law,” Perspectives from FSF Scholars, Vol. 12, No. 46 (December 11, 2017).

IP Theft Reduces Economic Activity

by Michael J. Horney

Free State Foundation scholars have said that strong protections of intellectual property (IP) rights encourage creativity, innovation, and economic activity. Moreover, the absence of strong protections of IP rights discourages creativity and innovation and leads to IP theft, like piracy or counterfeiting.

So, as we begin 2018, it seems appropriate to emphasize the extent of the economic losses due to theft of intellectual property. In this regard, it’s worth taking a close look at a 2017 report by Frontier Economics focusing on piracy. The report estimated that a one percentage point reduction in piracy in 2017 would lead to an additional $34 to $54 billion in economic activity for OECD countries.

In other words, strengthening IP rights protections and enforcements efforts reduces IP theft and this, in turn, promotes economic activity.

In a 2016 study, the OECD and the EU Intellectual Property Office found that, in 2013, trade in counterfeit and pirated goods accounted for as much as 2.5% of the value of international trade involving OECD countries, or $461 billion. The 2017 report by Frontier Economics, “The Economic Impacts of Counterfeiting and Piracy,” used the $461 billion figure to estimate additional findings regarding the impact of IP theft on OECD countries. Frontier Economics found that the value of domestically traded pirated and counterfeit goods was between $249 billion and $456 billion in 2013. This means the total value of pirated and counterfeit goods traded domestically and internationally among OECD countries was between $710 billion and $917 billion in 2013. These figures only include physical IP theft and, therefore, do not include online piracy, which obviously is a massive problem by itself.

IP theft negatively impacts job creation and economic growth because it discourages artists and innovators from creating new products and services. In 2013, the negative impact of counterfeiting and piracy on economic activity translated to a net loss of between 2 and 2.6 million jobs in the OECD. Frontier Economics also found that a one percentage point increase in the size of piracy reduces economic growth rates by 0.21 to 0.33 percentage points. Applying that to the nominal GDP of the OECD in 2017 means a reduction in economic activity by $34 to $54 billion.

Frontier’s 2017 report only estimates the value of physical pirated and counterfeit goods that were traded domestically or internationally among OECD countries. So when considering the additional harms created by online piracy, it is clear that IP theft is even a larger problem throughout the world than the Frontier estimates might imply.

The United States should continue to strengthen protections of IP rights and enforcement efforts to decrease the negative impact of IP theft. This would encourage additional innovation and economic activity. And reducing the size and scope of IP theft in the United States should encourage trading partners and other OECD countries to strengthen their own IP rights protections.