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Research Shows Impact of Legal and Regulatory Ambiguity on Investment

· March 24, 2015

An expert panel convened on Capitol Hill this morning, discussing new research on the detrimental effect that regulatory uncertainty has on Internet investment (as well as additional copyright law and policy challenges, which we live tweeted on @DisCo_Project).

The new research quantifies the impact of Internet regulations, including intermediary liability limitations, by showing their effect on early-stage investment.  A new report by Fifth Era and Engine finds that legal uncertainties for digital content intermediaries discourage early-stage investment around the world, reinforcing findings from a 2011 report that found early-stage investors in the United States were considerably less likely to invest in new online services exposed to legal risks.

In a similar vein, another 2011 paper found that changes in copyright policy changes could spur demonstrable investment in new online services.  Comparing investment in online services in the U.S. and Europe in the wake of the 2008 Cablevision case — a federal appellate court ruling widely heralded as giving additional legal certainty to online platforms — researchers found that U.S. investment increased considerably.  In contrast, a follow-up study by the same authors explored the impact of judicial decisions in Europe that increased legal exposure for online platforms, and found decreased investment when applying the same methods.

The Fifth Era report reinforces this conclusion, providing further evidence that additional risk and uncertainty in the online environment decreases investment.  This conclusion is not entirely surprising — but the authors’ specific findings provide impressive data on how severely risk can stifle early-stage investment.

The report found that 85% of early stage investors surveyed agreed or strongly agreed that the risk of high statutory damages in IP cases is a major factor that makes them uncomfortable about investing in media platforms.  Additionally, 78% of investors would be deterred from investing in companies that allow users to upload music or video if new laws expose them to increased risk of secondary liability.

The negative effect of legal risk was surprisingly strong across different jurisdictions.  In all eight countries surveyed, investors viewed the legal environment as having the most negative impact — an average of 89% of investors surveyed said it had a modest or strongly negative impact, and an overwhelming 93% of U.S. investors had that response.

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.