Download mirror: Copyright and Innovation The Untold Story
It reads like a series of cases studies of how horribly the current legislation is being abused.
Copyright has an innovation problem. Judicial decisions, private enforcement, and
public dialogue ignore innovation and overemphasize the harms of copyright infringement.
Just to pick one example, “piracy,” “theft,” and “rogue websites” were the focus of debate
in connection with the PROTECT IP Act (PIPA) and Stop Online Piracy Act (SOPA). But
such a debate ignores the effect of copyright law and enforcement on innovation. Even
though innovation is the most important factor in economic growth, it is difficult to observe,
especially in comparison to copyright infringement.
This Article addresses this problem. It presents the results of a groundbreaking study of
31 CEOs, company founders, and vice-presidents from technology companies, the recording
industry, and venture capital firms. Based on in-depth interviews, the Article offers original
insights on the relationship between copyright law and innovation. It also analyzes the
behavior of the record labels when confronted with the digital music revolution. And it
traces innovators’ and investors’ reactions to the district court’s injunction in the case
involving peer-to-peer (p2p) service Napster.
The Napster ruling presents an ideal setting for a natural experiment. As the first
decision to enjoin a p2p service, it presents a crucial data point from which we can trace
effects on innovation and investment. This Article concludes that the Napster decision
reduced innovation and that it led to a venture capital “wasteland.” The Article also
explains why the record labels reacted so sluggishly to the distribution of digital music. It
points to retailers, lawyers, bonuses, and (consistent with the “Innovator’s Dilemma”) an
emphasis on the short term and preservation of existing business models.
The Article also steps back to look at copyright litigation more generally. It
demonstrates the debilitating effects of lawsuits and statutory damages. It gives numerous
examples, in the innovators’ own words, of the effects of personal liability. It traces the
possibilities of what we have lost from the Napster decision and from copyright litigation
generally. And it points to losses to innovation, venture capital, markets, licensing, and the
“magic” of music.
The story of innovation in digital music is a fascinating one that has been ignored for
too long. This Article aims to fill this gap, ensuring that innovation plays a role in today’s
D. Personal Liability: Experience
The concerns about the effects of personal liability are not theoretical.
Several of the innovators I interviewed relayed the harrowing experience of
being personally sued. The first described a “process server that broke into the
office” and “knocked on the door like it was the police.”414
“Everything about it was meant to psychologically intimidate,” “it made a huge
impact on me,” and “I am going to do what I can the rest of my career to avoid
being in that situation again.”415
Another innovator explained that the labels said “we’re not going to sue the
company, we are going to sue you personally” since “we can make all kinds of
allegations and it’s your job to prove you’re not infringing” and “the lawsuit is
going to cost you between 15 and 20 million bucks.”416
The innovator decided
that he could “find better uses” for his money “than to give it to lawyers.”417
A third respondent noted how “stressful” it was when he was sued
personally. It was “definitely very scary” when they came with the “multiple
inch lawsuit for a couple billion bucks.”418
The innovator was afraid of the
“unknown” and worried that he could have a judgment “the rest of [his] life.”419
A fourth participant relayed a comment from a high-ranking official in the
recording industry who said “it’s too bad you have” children “who are going to
want to go to college and you’re not going to be able to pay for it.”420
innovator recognized a “real undisguised intimidation factor” and commented
on the “thug-like nature” of the “behavior of the record companies.”421
A fifth innovator knew that the personal lawsuit was “part of the game,”
but still thought it was a “slimy, scummy thing to do.”422
He was disappointed
since he was not a “‘free anarchist’ kind of guy” but was “quite the opposite,”
trying to “do things that [we]re positive for the industry.”423
however, “just make up stuff to slander you and disparage people.”424
made partners “very hesitant,” since few would work with a company that was
sued and could go out of business.
The personal attacks were potent, and “most people do not have the
intestinal fortitude to weather [them].”425
One respondent “could list a dozen
people who have been sued and say ‘I want to fight,’” but then “just go away”
and “close up shop, even if they’re doing something that is reasonable.”426
A sixth respondent explained that “by far the most significant factor
worrying the [company’s] founders” and “frankly the thing that pushed them
over the edge to stop the business rather than fight on appeal” was “the
prospect that they could be personally liable.”427
There was “no reason” to sue
the company founder individually, and the plaintiffs made “fairly ludicrous
But the “mere fact” that the allegations were “out there” meant
“the CEO had to watch his step” and could “risk losing his house and his
family’s life savings.”429
There was “no question” that the personal lawsuit
“had the deterrent effect it was intended to have on innovation.”430
Today’s front-page stories and front-line battles on copyright have focused
on issues of piracy and theft. Given the figures of lost profits and jobs bandied
about by the entertainment industry, that is not surprising. But any discussion
of these harms must consider the countervailing argument.
Overaggressive copyright law and enforcement has substantially and
adversely affected innovation. This story has not been told. For it is a difficult
story to tell. It relies on a prediction of what would have happened if history
had taken a different course. We cannot pinpoint these losses with certainty.
And this gap is no match for piracy harms, which have been proclaimed with
the loudest of megaphones.
This Article addresses this age-old problem. It treats the Napster decision
as a case study to ascertain the effects of the decision on innovation and
investment. By interviewing 31 CEOs, company founders, and VPs who
operated in the digital music scene at the time of Napster and afterwards, it
paints the fullest picture to date of the effect of copyright law on innovation.
The Article concludes that the Napster decision stifled innovation,
discouraged negotiation, pushed p2p underground, and led to a venture capital
“wasteland.” It also recounts the industry’s mistakes and adherence to the
Innovator’s Dilemma in preserving an existing business model and ignoring or
quashing disruptive threats to the model. And it shows how the labels used
litigation as a business model, buttressed by vague copyright laws, statutory
damages, and personal liability.
Innovation is crucial to economic growth. But the difficulty of accounting
for it leads courts and policymakers to ignore it in today’s debates. Any
discussion of the appropriate role of copyright law must consider the effects on
innovation. This Article begins this process.