FAIR USE: Protecting Innovation

As lawsuits targeting new technologies in TV and music multiply, an industry executive supports a House bill to protect fair use rights

by Gary Shapiro

Calculating risk is a vital component of every new product launch, particularly in the consumer-electronics industry. Before going to market, a business not only must forecast high consumer demand and predict that buyers will pay a profit-sustaining price, it must also consider intangible risks such as litigation that may affect the bottom line.

So imagine a manufacturer that predicts high demand and profit potential for a legitimate new product, but could be sued under an obscure provision of federal law for literally billions of dollars for rolling a single prototype off the assembly line. No rational entrepreneur would launch that product.

If potential liability of billions of dollars for manufacturing a consumer-electronics device sounds crazy, meet the recording industry's biggest hit since the Beatles: massive copyright lawsuits against legitimate innovators and technologies. These lawsuits are not against pirates, but against so-called "secondary infringers."

Moving the Music

This is legalese for suing a manufacturer for something a consumer does unlawfully (even without the manufacturer's knowledge) using an otherwise lawful product. For example, when XM Satellite Radio (XMSR) made available to its subscribers an innovative satellite radio that allows listeners to time-shift their favorite music programs, the music industry sued. When Kaleidescape launched an innovative entertainment system that organizes and stores movies on a home server to be viewed in any room, the DVD industry sued.

Under a little-noticed change in law secured by record label lobbyists and the Recording Industry Association of America, the music industry trade association, such lawsuits can seek damages of $150,000 per copyrighted work infringed. Because a "work" can be defined as a single song, in the case of an audio device like an MP3 player that permits access to millions of songs, the potential risk is incalculable (see BW Online, 2/25/07, "Apple's International iTunes Controversy").

If this effort by copyright owners to squelch technology sounds familiar, it should. When the VCR was first introduced by Sony (SNE) more than three decades ago, the Hollywood studios tried to sue it out of existence. But the U.S. Supreme Court in the celebrated Betamax case found no secondary liability for a product that had substantial lawful use. The Court correctly rejected liability for unlawful use of an otherwise lawful product: Convicted drunk drivers don't sue to stop the manufacturing of automobiles. And given that Hollywood today makes most of its profit from movies watched in the home, the case against the VCR turned out to be a productive loss.

A Call for Legislation

Some in Hollywood are proving Machiavelli's maxim that "innovation makes enemies of all those who prospered under the old regime." In the technology sector, where digital media (including high-definition TV, satellite radio, next-generation DVDs, and portable MP3 and audio devices) are more popular than ever, copyright litigation is not only a risk—it's a near certainty. Technology companies that could profit from the seemingly insatiable consumer demand for new devices are deciding not to come to market because of the litigation risk.

But there is a bright light on Capitol Hill in the battle to protect innovation. Representatives Rick Boucher (D–Va.) and John Doolittle (R–Calif.) recently introduced H.R. 1201, the Freedom and Innovation Revitalizing U.S. Entrepreneurship Act of 2007 (FAIR USE Act). This legislation would amend the law to eliminate the abusive secondary infringement provisions that are deterring technological innovation.

This new legislation would protect the fair use rights of users of copyrighted materials, ensuring that consumers who purchase digital media can make full use of it without facing untold damages.