Is Copyright Law Fit for Purpose in the Internet Era? An Economic and Legal Perspective

Abstract

This paper asks the question: “Is copyright law fit for purpose in the Internet era?” to inform the debate on the development of a sustainable, online ecosystem from an economic and legal perspective This paper concludes that the application of exceptions to copyright that benefit intermediary business models - combined with the limitation on the liabilities of intermediaries made possible in the Digital Millennium Copyright Act [DMCA] in the USA and the eCommerce Directive in Europe - has led to the situation where rights holders are prevented from giving full consent for use of their works as required under copyright law and that this is damaging to the economy as a whole. This paper argues that the unintended consequences of legislation that establishes safe harbours are the: encouragement of parasitic growth; distortion of markets and investment; reduction of competition; creation of barriers to entry; and limitation of the overall economic growth of the cultural and creative industries both now and in the future. Society as a whole is therefore worse off than it would have been had rights holders’ full consent for the use of their works on the Internet been required or had their lack of consent been compensated. By examining the relationship between intermediaries and rights holders in the light of the Coase Theorem, four relevant scenarios for growth were identified. The first, “Pareto-efficient growth”, illustrates the role of copyright law in promoting economically efficient growth. If Pareto-efficient growth is to be achieved, it is necessary that creators have the option of granting their consent for the distribution of their works on the Internet. The second, “Parasitic growth”, describes the actual unintended effects of safe harbour, exposing the flaws in the safe harbour model. It suggests that under these conditions the economy may stagnate in a mode favouring copying and counterfeiting. The third, “Chilling effects”, reflects the concerns that led to the current framework for copyright law, in which intermediaries enjoy safe harbour in order to facilitate innovation. This argument often relies for its economic and legal justification upon a misinterpretation of Schumpeter’s characterisation of the nature of the competitive process in a market economy. The fourth, “No dispute” section highlights that copyright exceptions need to be limited to uses that do not create harm. Current exceptions in legislation are now too wide and unfit for the digital age. Growth of incomes, the development of suitable alternative institutional arrangements, together with falling transaction costs, and the lower costs of copying associated with the digital age all imply a more limited or narrow and reducing role for exceptions on a case-by-case basis is now appropriate. There is a range of policy options available to achieve Pareto-efficient growth, including: i) changing the law to oblige the intermediary, who currently benefits from safe harbour, to seek the full consent of rights holders by licence or contract; ii) implementing a mechanism under existing law that would enable the uploader to obtain the full consent of rights holders; iii) requiring the intermediaries to pay fair compensation, freely negotiated by and distributed to, all rights holders to compensate for the harm described in this paper. The contrasting fortunes of intermediaries and creators in the Internet economy provides testament to the balance of interests between the parties, having settled in a place where the absence of full consent of rights holders for the transformation, mass usage and distribution by intermediaries of copyright works (in original, amended, parodied or remixed music and video, through extracts of and links to news and thumbnails) not only impacts negatively the economics of creation and production, but also, through free-riding on the investment made by creators, damages the whole economy. This paper seeks to provide an economic and legal perspective on copyright law in the Internet era and policy recommendations lie deliberately outside its scope, but if Pareto-efficient growth is to be restored and overall welfare maximised, policymakers must address the present imbalance between the interests of intermediaries and creators.