Report: Copyright and Innovation: The Untold Story (Michael A. Carrier)

Official loation.

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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

copyright debates.


Disgusting part:

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

He continued:

“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

The labels,

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.

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