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No Statutory Damages for Secondary Liability

· January 30, 2014

Copyright law has been criticized in recent years. And no aspect has cried out for change as much as statutory damages. This remedy allows copyright owners to seek as much as $150,000 per infringing work.

While lawsuits against individual infringers have grabbed the headlines, the use of statutory damages against secondary infringers threatens to be even more dangerous. As applied to secondary infringers—those who do not directly infringe but potentially help others infringe, such as the creators of iPods, search engines, DVRs, storage lockers, and P2P software—these damages quickly escalate into the billions of dollars. Such a result (1) is not consistent with the reason we have statutory damages, (2) harms innovation, and (3) requires Congress to act.

The remedy of statutory damages has two purposes: assuring adequate compensation and deterring infringement. The primary purpose is to reimburse copyright owners “unable to prove the exact amount of injury.” The drafters were concerned with the difficulties of calculating profits lost from the copying of illustrations in magazines and articles in newspapers.

But such a purpose is not needed in the context of secondary infringers. Plaintiffs can demonstrate the amount of damages suffered, which equals (1) the revenues they would have gained absent infringement multiplied by (2) the number of infringed works. Statutory damages would help only if the plaintiff’s revenues could not be calculated and the statutory-damage award was in the ballpark of the injury suffered.

Neither of these conditions is true. Copyright owners can make the needed calculations. And a monkey throwing darts at a dartboard of potential lost value is more likely to award adequate compensation than a jury granting statutory damages.

The second purpose also is not needed. Statutory damages played a role in the early 20th century in deterring exhibitors that displayed movies at unauthorized times and places. But the remedy is not necessary today to deter infringement undertaken by secondary infringers, for whom actual damages are a sufficient remedy.

In addition to not being needed, secondary infringers suffer unique harms from statutory damages. The law of secondary liability is plagued by multiple, conflicting tests based on noninfringing use, contributory infringement, vicarious liability, and inducement. (It would be even more unclear under the Trans-Pacific Partnership Agreement (TPP’s) “aiding and abetting” standard).

The magnitude of statutory damages prevents companies even from determining secondary liability. Targets are pushed into settlement or bankruptcy. And no appeal is possible from adverse district court decisions if defendants are not able to post bond.

In addition to not being needed, statutory damages harm innovation. We are not able to witness abandoned innovations, which never reach the market. It is impossible to engage in counterfactual analysis. And litigated cases are only the tip of the iceberg.

My interviews of leading music industry officials and technology innovators revealed how statutory damages have harmed innovation. One respondent explained that statutory damages are “effectively infinite” and that “you’re dead” when charged with them. The fear of increased damages also has discouraged innovation, with another respondent explaining that companies are “reluctant to expand [their] service[s]” because of potential statutory damages.

An approach based on “error costs,” or the costs of wrong decisions, would err on the side of not stifling innovation. False positives in the copyright/innovation setting are devastating, with technologies shut down, and society never realizing what it is missing. In contrast, false negatives are less harmful, as observers can witness the effects of technology and target infringing activity through different mechanisms.

For all these reasons, Congress should exempt secondary infringers from statutory damages. Such damages are not needed to assure adequate compensation. They are not needed to deter infringement. And they are harmful to innovation.

There is literally no reason to apply statutory damages to secondary infringers. Of course, copyright owners relish having a Sword of Damocles they can wield against innovators. But if we as a society care about innovation, Congress must eliminate statutory damages for secondary infringers.

Michael A. Carrier is Distinguished Professor at Rutgers Law School and a leading authority in antitrust, copyright, patent, and innovation law. This post is adapted from his comments filed with the Department of Commerce’s Internet Policy Task Force. He previously guest-posted on DisCo about the innovation asymmetry.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.