Category Archives: Intellectual Property and Antitrust Law

The task of regulating Copyright Collecting Societies

By Monika Hasbún*

Understanding the basics

Intellectual Property (IP) refers to creative work which can be treated as an asset or physical property. This creative work can be represented in a variety of forms, such as inventions and literary and artistic work. Symbols, names and images used in commerce are also part of it. In order to protect these creations, IP law has established exclusive rights that permit its owners to obtain recognition and exploit these inventions and creations, seeking to establish a balance between the interest of innovators and public interest, so that creativity and innovation are fostered.

The primary, well known function of an IP right is to give its holder a competitive advantage in its commercial activities, by preventing unauthorized exploitation by thirds. The activities related to the management of intellectual property rights correspond, in essence, to the respective owners. But in certain cases and for certain types of use, individual management is practically impossible.

This is what happens in the case of copyright [1] and related rights. The impracticability of managing these activities individually created the need for collective management organizations. Imagine an artist created a song. This artist has the right to let other people use it or to prevent them from using it. There are a lot of activities involved in administrating the use of the work, for example, contacting and negotiating with every radio station that wants to play the song. On the other hand, it is also very difficult for every broadcasting organization to seek specific permission from every author for the use of every copyrighted work. With the purpose of facilitating this management, a very unique form of economic institutions was created: copyright collecting societies (CCS). These special societies license the use of copyright works, collect and distribute royalties, and monitor the use of copyrighted works.

Collective management can be seen generally as more beneficial than individual negotiations. Considering there are economies of scale in the administration of some copyrights, CCSs guarantee economic efficiency due to a centralized copyright management. From an economic point of view, their main rationale is the minimization of transaction costs both for creators (suppliers of copyright works) and for users (intermediate and final consumers). By exploiting the economies of scale in the administration of copyrights, a CCS can reduce transaction costs [2] substantially and make markets more efficient. [3]

CCSs as natural monopolies and their need for regulation

Collective licensing by CCS is viewed as a natural monopoly (or, in some cases, a natural oligopolistic market) in the sense that they are more efficient than if there was competition. As they offer their services bundled together it costs very little to offer these services to additional members once the initial investment in the structure of licensing, fee setting and monitoring is in place. It would be inefficient if several collecting societies were to exist side by side, as the economies of scale of a single actor, or just a few, billing and enforcing for all authors would be lost. Hence the natural monopoly. [4]

Natural monopolies are still monopolies and whether the existence of a single supplier is beneficial depends on how the CCS exploits this monopoly position. For example, CCSs acquire monopoly control of rights since they require the exclusive assignment of a specific bundle of rights. If a CCS manages all the rights in which a particular user is interested, they become the single license provider and hence gain monopoly power. For example, if the society’s tariffs are substantially higher than those of similar collecting societies in other countries, the exploitation of (but not necessarily an abuse) a dominant position may be suspected.

Regarding the problem of CCSs’ monopoly power, the economic literature offers three main mitigating factors: regulation, bilateral monopoly, and price discrimination [5] . On this occasion, the point of discussion will be regulation.

Regulation measures can range from political control or continuous scrutiny by specialized supervisory bodies to a simple application of competition and contract law. [6] How much regulation there should be is largely discussed. There are diverse examples of countries where the Administration has the faculty to supervise and control CCSs, for example in the case of tariffs. In Germany, CCSs are jointly authorized and supervised by the German Patent Office and the Antitrust Agency (Kartellamt). They can demand information on their activities, participate in their board meetings and fix their tariff rates. [7] In Spain CCSs are supervised by the First Section of the Intellectual Property Commission. According to article 158 bis. 4 of the IP Law (Texto refundido de la Ley de Propiedad Intelectual) this authority ensures that tariffs are equitable and non discriminatory. In other countries such as Peru[8], Ecuador [9] and Honduras [10], CCS are also obliged to register and publish their tariffs.

In El Salvador, for example, there are two operating CCSs, which up to this point have operated under no regulation. The Salvadorian Intellectual Property Law contains few provisions dedicated to these particular societies but they refer to their procedure of establishment and not their form of operation.

As a result of alleged abuses committed by CCSs in the tariffs offered for their services, the Parliament is now discussing a reform to the Intellectual Property Law, destined to regulate their operations. The main measure proposed in this project is to regulate the tariffs set up by these societies, so as to set ‘fair and reasonable’ tariffs, taking into account factors such as context and purpose of use of copyright material and its identifiable value. To what extent or if it is at all adequate to regulate their tariffs is the question. First of all, is there a suitable way to establish whether a collecting society’s tariffs are abusive? How can it be determined whether prices are too high?

So that a pertinent analysis can be made it is necessary to understand the rights they are managing and the principles governing the relationships between licensors and licensees. Their tariff and distribution structures are another important aspect. In the case of a “prototypical” case of monopoly rate regulation involving utilities, a tariff should ensure a reasonable return on its investment given its operating costs. Can this be applied in the case of music licenses, for example?

In the United States, rather than approaching this problem from a rate regulation perspective and trying to define an ideal rate, courts have defined the “reasonable” blanket fee as the price that would be charged in a competitive market for blanket licenses. Since such a competitive market does not exist, they opted for judicial rate setting. Given the absence of any other factual basis for setting a “reasonable” rate, courts have been forced to rely on historical prices, discounting them more or less, depending on the court’s own sense for the potential influence of undue market power and adjusting them for differences in circumstance. [11]

CCSs are complex institutions whose operation differs from country to country. In some countries such as the UK they are constituted as a corporate non-profit organization. In others, such as Italy, they operate under a government monopoly grant. In El Salvador, they operate under the form of commercial societies. The tariff regulation is just one example of how difficult it is to regulate the activities of these diverse types of societies. It is therefore important to analyze case by case if regulation is an appropriate measure to ensure an efficient operation of CCSs.

*The author is a lawyer and notary public in El Salvador, holds a bachelor of laws degree from the Universidad Dr. José Matías Delgado and has postgraduate degrees in public policy management and in law, economics, and business. She is currently a senior legal counsel in the Salvadoran competition authority.

[1] Copyright (or author’s right) is a legal term used to describe the rights that creator have over their literary and artistic works. Works covered by copyright range from books, music, paintings, sculpture, and films, to computer programs, databases, advertisements, maps, and technical drawings. World Intellectual Property Organization. “What is copyright” URL: http://www.wipo.int/copyright/en/

[2] The costs that arise out of the activities of a CCS can be divided in two groups: First the “search and information” costs concerning potential contracting partners and collecting and processing information about them. On the other hand, there are “bargaining and decision” costs related to the negotiations and conclusion of contracts. Zablocka, Adrianna. Antitrust and Copyright Collectives – an Economic Analysis. Yearbook of Antitrust and Regulatory Studies. Vol. 2008. Centre of Antitrust and Regulatory Studies, University of Warsaw. https://issuu.com/csair/docs/a._zablocka__antitrust_and_copyright_collectives

[3] Handke, C. Towse, R. (2007) Economic of Copyright Collecting Societies. 38 International Review of Intellectual Property and Competition Law. 937

[4] However, in the digital world, this affirmation is subject to discussion. There is the suggestion in various academic papers and official reports that digital technologies encourage competition in collective rights management and would break the natural monopoly justification for the single national society administering a specific bundle of rights. This is the case with online licensing and multi-territorial licensing. Towse, “The economic effects of digitization on the administration of musical copyrights.”

[5] Some studies suggest that a price discrimination approach is likely to be appropriate when analyzing the pricing behavior of collecting societies or other organizations who have a significant market power because of their breadth of copyright holdings. From a positive point of view, the standard argument is that compared to uniform monopoly pricing, price discrimination increases output and allocative efficiency as well as profit to the copyright owner. This way it has a desirable impact on the trade-off between incentives and access. Meurer, Michael J, “Copyright Law and Price Discrimination” . URL: http://www.bu.edu/law/workingpapers-archive/abstracts/2001/documents/meurerm061801_000.pdf

[6] Handke, C. Towse, R. (2007) Economic of Copyright Collecting Societies. 38 International Review of Intellectual Property and Competition Law. 937

[7] On 24 May 2016 the Collecting Societies Act (Verwertungsgesellschaftengesetz – VGG) was adopted. This act transposes Directive 2014/26/EU on collective management of copyright and related rights and replaces the previous Copyright Administration Act (Urheberrechtswahrnehmungsgesetz). This new act simplifies aspects such as the fixing of tariff rates and the participation in general meetings of members. Iacino, Gianna. “Germany New law for collecting societies”. URL: http://merlin.obs.coe.int/cgi-bin/article.php?iris_r=2016%206%2010&language=en

[8] Article 153, letter a), of the Legislative Decree 822

[9] Article 35 of the Regulations on the Intellectual Property Law

[10] Article 148 of the Intellectual Property Law

[11] See U.S. v. BROADCAST MUSIC, INC. 426 F.3d 91 (2005). This appeal arises from a decision of the United States District Court for the Southern District of New York (Stanton, J.), acting under the Broadcast Music, Inc. (“BMI”) Consent Decree,1 to set a rate for Music Choice’s licensing of BMI’s music. The license would apply to BMI music used by Music Choice on its cable, satellite, and Internet services between October 1, 1994 and September 30, 2004. Since BMI and Music Choice were unable to agree on a rate, the Consent Decree required the court to set one.

 

 

 

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The Relationship between Intellectual Property and Innovation: Do Patent Rights Always Spur the Creation of New Products and Technologies?

By Monika Hasbún*

It is generally acknowledged that patent rights, in an economic sense, work as an incentive to promote innovation. Nevertheless, it must also be acknowledged that this incentive can also generate inefficiencies. For this reason it is necessary to question and evaluate the scenarios in which patent rights do not necessarily promote innovation but can actually be detrimental to it.

The World Intellectual Property Organization defines a patent as “…an exclusive right granted for an invention, which is a product or a process that provides, in general, a new way of doing something, or offers a new technical solution to a problem”. The protection is granted for a limited period, generally 20 years from the filing date of the application. Any product or procedure that receives this protection, cannot be commercially made, used, distributed, imported or sold by others without the patent owner’s consent.

The main argument to justify patents is the necessity to stimulate invention. Innovation is based on the idea of producing knowledge. Knowledge, considered as a public asset, has two attributes: First, the amount of available knowledge does not diminish when others use it (“non-rivalrous good”). Besides, once it has been produced, others can benefit from it (“non-excludable good”). These aspects produce a market failure so that not sufficient incentives are available that encourage economic agents to innovate.

To solve this dilemma, the patent system establishes two mechanisms that permit inventors to maximize their externalities: (i) The granting of a temporary monopoly on the invention, which works as a protecting mechanism that allows the right owner to obtain a retribution because of his dominant position, for a determined period of time and geographic area; and, (ii) The requirement to publish the invention. The right owner has to disclose and publish the details of its innovation. This way a patent right offers, in principle, an incentive for the study of new technologies by allowing the right owner to exclude competitors from the market and requiring the publication of the innovation details. Nevertheless, there are some cases in which patent rights do not necessarily act as an incentive to innovation.

The first aspect to be addressed is the quality of the patent right that is granted. The basic idea is the following: If everything is patentable, there is no innovation. If products or services that are not novel or innovative are patentable, those that truly are, might not obtain the required protection. This strategic use of the patent system of doubtful quality impedes third parties to innovate and compete in the creation of products that are truly innovative. For example, regarding pharmaceutical products it is extensively discussed whether simple chemical or formula changes should be considered as an authentic innovation. In this case, patent applications should be thoughtfully and carefully analyzed, so as to guarantee that the proposed innovative product presented in the patent application deserves to be recognized with a monopoly right.

It should also be considered, that depending on the sector where innovation needs to be promoted, patent rights may result unnecessary. For example, according to conducted research, patents do not seem to be essential to promote innovation in the service sector. In Japan, for example, the percentages of firms holding patents are 39.2% for manufacturing firms and 9.8% for service firms, a large and statistically significant difference.[1] This suggests that appropriation mechanisms other than patent filing, such as secrecy and lead-time, play an important role in this matter. The benefits provided by the advantages of arriving first to the market, complementary assets and network externalities result, at times, sufficient so that inventors in service companies recover their research and development investment costs and decide to innovate. It is even acknowledged that a patent right may result unnecessary as long as an invention can be maintained in secret without further ado.

In a similar manner, innovation in SMEs is commonly conducted by more “informal” means. This sector usually deals with incremental improvements or minor modifications to existing products which respond to concrete demands of the market. For small enterprises it is difficult to destine resources to obtain a patent right, since doing this would imply that less resources are destined to their innovation activities per se. For this reason they prefer to use alternative strategies of protection, such as the launching time in the market, investing in complementary assets, among others.

Finally, a country’s development level is also a key factor when analyzing the efficiency of patent systems. The existing asymmetry in the innovation capacities among developed and developing countries has an impact in the way agents in these countries respond to the patent protection system. In the case of developing countries, different from developed countries, companies demand and consume more technology than that which is internally produced, so that they become “technology importers”. Their investment in research and development is extremely limited, so that the granting of patent rights is practically non-existing. Companies in such countries tend to limit to the imitation and adaptation of technologies, so that patent rights result unnecessary and can even act as a barrier to the import of different technologies. Besides, developing countries do not generally have patent protection systems that are sufficiently mature so as to act as an actual incentive to innovation.

Patent rights and competition are closely connected. On the one hand, patent legislation seeks to promote innovation by awarding an exclusive right that prevents the patented invention from being commercially exploited by third parties. On the other side, competition legislation seeks to impede the abuse that such right owners could perform.

Considering that patent rights could act as a legal instrument that obstructs competition, it should be evaluated, according to the previously exposed ideas, that its justification is not always legitimate. It is not always the case that patent rights promote innovation. In determined cases patent rights may result unnecessary and even harmful to attain it. For this reason, so as to achieve an adequate patent system and the rewards it offers, without excessively restricting competition, the context in which the patent right is being granted should be carefully evaluated so as to determine its efficiency.

*The author is a lawyer and notary public in El Salvador, holds a bachelor of laws degree from the Universidad Dr. José Matías Delgado and has postgraduate degrees in public policy management and in law, economics, and business. She is currently a senior legal counsel in the Salvadoran competition authority.

[1] Morikawa, Masuyaki. (2014) “Protection of intellectual property to foster innovation in the service sector”. Available at: http://voxeu.org/article/intellectual-property-and-service-sector-innovation

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