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Patented Formula for Success: Private-Sector Solutions to IP Theft

by Pete Sepp / /

"At first glance, arcane legal terms like intellectual property,’ copyright infringement,’ and ‘patent protection’ would seem more at home in America’s courtrooms than in America’s living rooms. Yet, those words are now at the center of a debate that will have   a huge impact on current and future generations of everyday taxpayers and consumers.

Society is increasingly dependent on knowledge-based commodities, such as prescription   drugs and computer software. Many of these goods share a common economic bond: the ‘fixed’ costs of developing each product are very high but the ‘marginal’ costs of making an additional unit of that product are very low. The increased demand for high-fixed/low-marginal-cost goods, uniquely susceptible to appropriation by copy, has forced intellectual property issues into the mainstream."

Those words were written 12 years ago by William Orzechowski and Robert C. Walker in a National Taxpayers Union publication entitled “Stealing Innovation.” The “debate” at that time centered upon prescription drug formulas, yet the arguments NTU offered in favor of a robust intellectual property (IP) protection system remain relevant to numerous areas of the economy today.

We were reminded of one of these areas recently, when we received an important new report from the Digital Citizens Alliance (DCA) on the rising problem of content theft through so-called “cyberlocker” businesses. Make no mistake – these are not the kind of cloud-based storage services provided by Google or Dropbox that millions of people use every day. Cyberlockers are designed from the ground up to allow for anonymous downloading or access to streaming content.

The result, in the vast majority of cases, is the distribution of pirated material, including movies, games, and books. By DCA’s analysis, a minimum of 78.6 percent of the files from direct download cyberlockers and 83.7 percent of files on streaming cyberlockers were delivering stolen content. And the business is lucrative – the 30 entities studied had nearly $100 million in annual revenue combined.

How are these operations allowed to thrive? One cause, the report asserts, is “intermediaries that enable the efficient operation of cyberlockers by delivering access to advertising, facilitating the acceptance of online payments, and providing the tools and means to serve infringing content to users.”

Though DCA’s findings might be surprising, one major question from our readers is likely to arise: Why is the state of America’s intellectual property laws a limited government issue? For starters, look no further than the Constitution, one of whose 18 original enumerated powers given to Congress was “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.”

This bedrock principle, expressed in statutory law from 1793 onward, has served the nation well. A properly cultivated IP landscape fosters risk-taking among innovators, allowing them to reap rewards from their investments of time, effort, imagination, and capital. This in turn helps to nurture a vibrant free-market economy that creates jobs, boosts family incomes, and even delivers stable government revenue at palatable tax rates. Furthermore, these benefits accrue to the advantage of the U.S. as it competes with other nations around the world.

Plow that terrain improperly, however, and the seeds of statism can be more easily sown. When property rights become a weak afterthought, so do many salutary fiscal policies such as low taxes, and less onerous regulations. This is an outcome that champions of economic liberty should resist.

Fortunately, DCA contends, there are solutions that can avoid the weeds that always grow from excessive government intervention. For example, only one of the cyberlockers offering premium (paid) services accepted PayPal for the transactions, while many accepted credit cards. Voluntary cooperation among card providers to emulate PayPal’s practices would, the report points out, be a useful step in the right direction.

In the final analysis, government’s impulse to micromanage here must be restrained. Instead, government can maintain a framework that allows people of goodwill to resolve IP infringements in a reasonable, rational fashion. Such is the case now with cyberlockers, where Washington’s intervention can and should be studiously avoided. Voluntary reviews of business practices from companies that provide the infrastructure for cyberlockers can function much better.

In “Stealing Innovation,” Orzechowski and Walker cogently observed that “innovations [have] … happened here in large part because the U.S. has provided the incentives through laws that assign exclusive rights to intellectual property. We nourish those rights by trying to keep taxes, price controls, and regulations from strangling economic incentives.”

Conditions have changed since Orzechowski and Walker wrote that tract, and few of them for the better. Some individual tax rates have recently risen, while our terribly complex and burdensome corporate tax system has fallen further behind those of our closest competitor nations. The regulatory state has encroached more intrusively on the private sector – by the best estimate of our colleagues at Competitive Enterprise Institute,  rulemaking costs (for compliance and to the overall economy) added up to nearly $1.9 trillion in 2013.

These worsening conditions must be turned around; it is also important, however, to pay attention to the property rights portion of the mix and allow them to work as intended – elegantly and delicately balancing the protection of private innovation with access for the public good. It starts with respecting the Constitution, but it ultimately depends on common sense.