A Copyright View of the Cathedral

I’m intrigued by Netanel’s proposal for replacing a property rule with a liability rule in the areas of derivative works and colorable but unsuccessful fair use, but I wonder whether uncertainties as to the type of use, the reasonable value of a license and negative effects on the underlying work might inhibit private bargaining in the shadow of the rule.

Distinguishing Fair and Derivative Uses

In the fair use arena, Netanel proposes first a broad, purposive definition that would allow a fair use defense wherever the appropriator adds new expression or value that “imbues the original with a different purpose or character in furtherance of distinct creative, critical, communicative, or informative objective” (191). Second, it would be the copyright holder’s burden to show that the appropriator had used more than necessary, which would seem a difficult burden given the plasticity of what might be deemed “necessary” to a given expression. And finally, damages for a colorable but unsuccessful claim of fair use would be limited to the reasonable license fee. (192)

For derivative works, as for colorable but unsuccessful fair use claims, Netanel proposes to replace an entitlement with a liability rule. He qualifies Jed Rubenfeld’s proposal that secondary authors should be free to distribute derivative works subject only to disgorgement of profits attributable to using the underlying work (197) by 1) exempting certain genres like screenplays, 2) providing for a limited period of exclusivity to preserve incentives (198), and 3) providing a kind of moral rights compensation for loss of creative control (215). To encourage private bargaining, the secondary author would be penalized for failure to notify the copyright holder or refusing to pay a price less than or equal to the judicially apportioned profits (i.e. if it refused to accept a reasonable or better-than-reasonable deal).  Likewise, the copyright holder would be penalized if the judicially determined fee falls a certain percentage short of its licensing offer (i.e. if it tried to charge too much).

One question I have is how these regimes would interact. Because Netanel’s definition of fair use is broad and purposive—“imbues the original with a different purpose or character in furtherance of distinct creative, critical, communicative, or informative objective” (191)—it seems that the line between fair use and derivative works might be difficult to police. Would the liability for a colorable but unsuccessful fair use claim (reasonable license fee) be the same as for a derivative work (profits attributable to using the underlying work)? If so, it would seem that appropriators would want to claim unsuccessful fair use whenever possible because of the lack of penalties for failing to notify and strike a reasonable bargain, and also because of the exemption from the period of exclusivity for derivative works.

Bargaining in an Uncertain Shadow

Replacing a property with a liability rule would seem to make sense for derivative and colorable but unsuccessful fair uses for the Calabresi-Melamed reason that transaction costs may be high where rights to the work are fragmented (i.e. the tragedy of the anti-commons). But I suspect that bargaining may also be inhibited by uncertainty about how much the secondary work owes to the original. Netanel cites a movie executive’s dictum, “Nobody knows anything,” for the proposition that the market for creative works is extremely uncertain. Under Netanel’s proposed derivative works regime, it would seem extraordinarily difficult to determine how much of the secondary work’s profits are “attributable to the underlying work.” It is easy to imagine a good deal of self-serving bias leading to a disparity in estimates of the value added by the underlying work, even assuming that the parties are bargaining in good faith. Of course, the parties will be bargaining in the shadow of sanctions if they fail to offer or accept a reasonable licensing deal, but I wonder whether parties will have any degree of certainty as to what percentage of profits a judge might deem attributable to the underlying work.

Another area of uncertainty, which admittedly can be easily clarified, has to do with the meaning of “profits attributable to the underlying work.” I think the “profits attributable to the underlying work” metric might be construed (perhaps a bit creatively) to capture something like the more traditional metric of the displacement effect of the secondary work on the copyright holder’s ability to enter the market occupied by the secondary work. In other words, the copyright holder could have entered that market if it added value 5 to its existing value in the underlying work 10 (total value of 15). To the extent that the derivative work displaces the copyright holder’s ability to enter the relevant derivative market, the secondary author owes the copyright holder a fraction of 10/15 or 2/3 of its profits. So if half the derivative market is taken by the derivative work, then the copyright holder is owed 1/3 of its profits. On reflection, however, it’s probably more likely that Netanel means “profits attributable to the underlying work” would apply even if there was no displacement of the copyright holder’s ability to enter the relevant derivative market. I think the first version is more favorable to secondary authors (no payment without displacement—and only payment to the extent of displacement), but the plain meaning of “profits attributable to the underlying work” would seem to suggest the latter interpretation.  (In favor of the latter approach is that there is only one step to the calculation, easing the information-gathering costs.)

I guess my point is that although liability rules are said to be good where parties have difficulty bargaining, it may be optimistic to hope that they will be able to bargain more effectively in the shadow of a liability rule that is fraught with uncertainties.

Negative Externalities

Another area of uncertainty which might tend to inhibit private bargaining is that of the negative externalities of the secondary work. Netanel briefly refers to the negative impact of loss of creative control in the moral rights context, suggesting that the price of licensing should reflect that negative impact. Another negative externality would be a derivative work that lowers the value of the original by, for example, mocking it.  (This is something we discussed a bit during the last class.)  If that lost value were incorporated into the cost of the license, it would seem to have adverse policy implications in terms of raising the cost of critical or satirical speech as compared to bland, non-controversial speech.  I guess this would be another reason to support a liability rule, where judges are instructed to ignore these externalities in setting the price of licenses—and also to support bargaining backed by sanctions in the shadow of this externality-blind rule. Still, I wonder how this hypothetical speech-protective, externality-ignoring rule lines up with the idea of moral rights. Wouldn’t an author feel that his moral rights were more infringed by a parody than a reverential treatment? Maybe the solution is a flat percentage for the loss of moral rights, regardless of the positive or negative impact on the underlying work.