The JIPEL Blog features articles on new developments and current challenges within the areas of IP and entertainment law, written by students, professors, and legal practitioners. If you would like to discuss writing a guest post, you can get in touch with us via email at firstname.lastname@example.org.
WikiLeaks released another draft of the Trans-Pacific Partnership’s intellectual property chapter. As you might have guessed, many are displeased.
Congratulations, European librarians! You can digitize your books without infringing copyrights.
Access to the internet does not imply access to a given copyrighted work.
Google Google: verbification isn’t enough to make a trademark generic.
Be careful when aiming for “green” marks.
Is it a retro sneaker, or is it a Chuck Taylor? And where is fashion to look for IP protection?
SCOTUS refused to clarify whether eBay applies to trademark, and the Federal Circuit has been asked to review its decision that Raging Bull applies to patent.
After 25 years on the USTR’s Special 301 priority watchlist, India still wants nothing to do with the current process.
Zombie Cinderella is different enough from Disney Cinderella to merit a trademark. But what about Vampire, Ghost, and Werewolf Cinderella?
Cort Welch is a J.D. candidate, ’15, at the NYU School of Law
“Whether Division I student-athletes hold any ownership rights in their athletic performances does not depend on the scope of broadcasters’ First Amendment rights but, rather, on whether the student-athletes themselves validly transferred their rights of publicity to another party.”
- U.S. District Judge Claudia Wilken, Pre-Trial Ruling
In Marshall v. ESPN, NCAA student-athletes are testing just how much clout Judge Wilkin’s words have. The suit, which is primarily a right of publicity claim aimed at television networks, rests on the premise that current contracts between Division I athletes and the NCAA are unconscionable.
Given the terms and the “sign or sit out” option given by the agreement, it’s possible that the court may side with the plaintiffs on the contract issue. But the convoluted nature of the dispute renders it hard to determine why this suit is different than Keller and O’Bannon, both of which also addressed student-athlete likeness rights. In sum, the type of violation alleged here is different than that addressed in previous suits because it is not dependent on the antitrust determination. Rather, it builds off of the O’Bannon holding that the NCAA may not bar student-athlete revenue, and demands relief from the major networks for profiting off athlete names, images, and likenesses—a right that the broadcasters claim does not belong to the athletes.
Prior to O’Bannon, it was somewhat assumed that the right of publicity for sports broadcasts did not belong to the athletes but rather to the producers, and the NCAA barred the receipt of compensation for the use of player likeness for athletic promotion, rendering the issue moot. However, Judge Wilkin’s comment in O’Bannon challenges this notion and has created a new legal battle with consequences that may stretch beyond NCAA major sports coverage.
As in O’Bannon and Keller, the Marshall plaintiffs allege that the NCAA has “conspired with [the networks] to create an anticompetitive market where students are powerless to realize the commercial value of their names, images, and likeness.” The collusion of the broadcasters and the NCAA locks the revenue for the athletes at zero in a market where athletes sell their services to the broadcasters. However, because this agreement does not affect vertical competition, it is unlikely to succeed. When addressing the same argument in O’Bannon, Judge Wilken determined that “teams of student-athletes would never actually compete against each other as sellers of group licenses even if the challenged NCAA rules no longer existed.” This follows because the publicity rights will be sold in packages only by the participating teams and the buyers will freely compete for those rights no differently than they do now.
It isn’t pragmatic for broadcasting companies to individually contract with players, so the rights would have to be signed over to the school, conferences, or some third party representing the larger group. Given the necessity of packaged deals and the need for on-field competition amongst college teams in Division I athletics, the royalty amount would have to be fixed, ultimately creating the same competition for rights that already exists. In other words, the network agreements, which may otherwise be unlawful, are not anticompetitive because they do not inhibit competition. The Tennessee district court is likely to make the same determination.
The stronger claim in this action, foreseen by critics and broadcasting networks alike, is the right of publicity violation. In order to obtain the rights of the athletes, networks typically purchase licenses to use the intellectual property of the participating schools and conferences as well as the names, images, and likenesses of the participating student–athletes. The rights are given to the colleges by the athletes via Form 08-3a, a contract student-athletes must sign annually in order to compete. Plaintiffs allege that because they have no alternative to signing the contract, and the language is generally ambiguous, the agreement is void, and the use of plaintiffs’ names, images, and likeness by the networks illegal. This is a strong assumption by the plaintiffs, but given the nature of Judge Wilkins quote above, there may be some validity to the claim.
But the merits of the suit lie beyond the contract dispute. Plaintiffs seek to assert a right of publicity claim. Right of publicity has generally been akin to trademark. It relates to the unlawful use of one’s general identity for profit. The most famous and prominent cases typically relate to famous impersonations, such as if an Arnold Schwarzenegger replica pretended to be Arnold in a commercial without his consent. In this example, the commercial infringer would theoretically profit off of Arnold’s publicity, therefore violating the statute.
In Marshall, it is unclear whether the use of college athlete’s publicity is violated when the coverage is of that person. Television networks will likely make two primary arguments: that there is no violation because they do not provide any merchandise, goods, or services, but rather cover the contest; and that the right of publicity belongs to the producers in live sports broadcasts, rather than the athletes.
Both arguments have merit. The use of the publicity is directly related to the promotion of the student-athletes, and there is no misappropriation of the publicity to make a profit. Networks believe that if plaintiffs’ argument is allowed, “referees, coaches, cheerleaders, team mascots, or even fans — will probably demand the same rights as the athletes if it is determined that they owe athletes compensation for coverage of themselves.” Though it is unlikely that the scope of the coverage can cover this far, the networks’ point is strong.
Additionally, as stated in an Amicus Brief during the O’Bannon litigation, networks will argue that “the right of publicity simply does not fit and cannot be logically extended to the circumstance of the broadcast of a sporting event. If each participant in a game with hundreds of ‘performers’ had the exclusive right to license their individual appearance in the game, then by definition there could be no exclusivity in the game as a whole.” This argument is more along the lines that the purchasers of the exclusive rights own all rights to the contest, because such rights do not exist until the broadcast is promulgated. Networks will claim that the contracts that student-athletes sign do not represent rights of publicity for live broadcasts.
It is difficult to separate these arguments from the networks’ likely First Amendment claim, the argument that succeeded when former NFL players brought essentially the same suit against the NFL. In essence, the television networks’ premise is that coverage of noteworthy events, such as sports, does not have an element of individual publicity for the athletes to own. This will be an interesting issue for the court to consider, and if the plaintiffs win on a broad holding, it can have a large impact on the coverage of athletic events.
A secondary question raised by this suit is what position the broadcast networks will take in the litigation, primarily if the court finds that the athletes own their right of publicity. The networks will have to decide whether to stand strong with the NCAA or switch sides and push for player rights.
The former pushes for the implementation of a reformed contract that would legally transfer the rights to the colleges. This would allow the system to remain as is, with the broadcast networks bargaining with the universities on behalf of the student-athletes to create a deal that compensates the athletes.
However, given the NLRB’s recent determination that student-athletes may be recognized as employees rather than amateurs, the latter option may be the best bet for television networks. If players were to unionize, the broadcast networks would strike a deal directly with the union who would likely own the rights of publicity. Although the merits of a union are highly debatable, the determination that the student-athletes are employees combined with intellectual property law makes a union preferable, even if only to retain their rights which would otherwise belong to the college under work for hire. This option would allow the networks to bypass the conferences and colleges, and possibly retain more revenue.
It’s unclear how the issue will ultimately shape up. However, as some have professed, the recent decision in the Northern District of California may signal the beginning of the end for the NCAA.
Jakarri Hamlin is a J.D. candidate, ’16, at the NYU School of Law.
 Tenn. Code Ann. § 47-25-1105 states: “Any person who knowingly uses or infringes upon the use of another individual’s name, photograph, or likeness in any medium, in any manner directed to any person other than such individual, as an item of commerce for purposes of advertising products, merchandise, goods, or services, or for purposes of fund raising, solicitation of donations, purchases of products, merchandise, goods, or services, without such individual’s prior consent, or, in the case of a minor, the prior consent of such minor’s parent or legal guardian, or in the case of a deceased individual, the consent of the executor or administrator, heirs, or devisees of such deceased individual, shall be liable to a civil action.”
A successful trademark can provide more than just brand recognition or notoriety. In fact, Forbes reports that the 10 most valuable trademarks have a collective worth of over $300 billion. That figure is greater than the GDP of all but the 44 wealthiest countries in the world. Clearly that little ® can mean something, but as renowned economist Christopher Wallace notes, “more money regularly entails more problems.” Even the mere pursuit of the ® can melt the wings off soaring companies. Just ask popular photo-sharing pioneer Twitpic, which is abruptly closing up shop in the wake of Twitter—now with its own photo-sharing process—threatening to ban Twitpic if it to continued pursuing a trademark. Though trademarks chiefly convey pecuniary benefits, they can provide security beyond the financial realm, like when you attempt to prevent a porn company from releasing your alleged sex tape because it uses your trademarked stage name in its title.
But the struggle doesn’t stop once a company secures a trademark. Trademarks occasionally become so intertwined with a specific product that the trademark-protected brand name usurps the generic in everyday parlance. We all know that most people ask for a Band-Aid after suffering a freak Velcro accident, or Google tips on Photoshopping their latest Crockpot dinner before Tweeting it. All of those names are trademarked, but they’ve become so entrenched in our popular lexicon that using their generic names seems awkward and stilted. Who asks for cyanoacrylate adhesive when they just want some Superglue?
Companies experiencing the double-edged sword of such immense success actively—and often, aggressively—advertise in trade publications to stress the importance of not using trademarks to refer to generic products. Trademarks don’t enable their holders to completely dictate the approved usages of their brand names, though. Fair use principles allow journalists to employ trademarked names when referring to the actual trademarked products or companies, an idea accurately called “nominative fair use.” New Kids on the Block spurred the seminal nominative use case when they sued USA Today for running a story about the band including a reader poll. The 9th Circuit determined that journalists can employ a trademarked name referentially when identifying the product or service would prove too difficult in the absence of doing so, but only if the reference doesn’t suggest endorsement and only uses the trademark as necessary. Nominative fair use expanded the classic fair use principle, which prevented companies deriving trademarks from pre-existing words or objects—think Apple, for example—from fully appropriating the use of such terms. Despite classic fair use serving as the foundation for nominative fair use, it still retains its own grey areas, such as when yogurt companies and business ethics consulting companies have trademark clashes centered around the use of the word “how.”
The nominative fair use exception does not cover the apparently reckless brand dilution that blurring the trademarked-generic border entails, however. This means that we live in a world where a journalist might have to warn of the environmental dangers of extruded polystyrene foam, or the health hazards of cooking on high heat with pans coated in polytetrafluoroethylene, rather than potentially facing liability for using the trademarked names nearly everybody associates with these products (Styrofoam and Teflon, respectively). Perhaps this seems fair in usages that suggest a negative characteristic of a product, but trademark holders do not stop there. In one of the trade publication ads discussed above, Rollerblade, Inc. implores journalists to not refer to the generic act of inline skating by the company’s trademarked name. Is it fair to believe that the average consumer will mistakenly believe that any sort of inline skate will produce the same experience as a Rollerblade? Most of us understand that a company must protect the integrity of its brand and guard against its dilution and corruption, but do we really want this to force journalists to use outmoded generic terminology that seems artificial and pedantic? Unless companies complaining of this type of usage can show that it causes some sort of quantifiable damage to trademark value, it seems as though a more common sense approach to nominative fair use should emerge.
Vincent Cesare is a J.D. candidate, ’16, at the NYU School of Law.
Good luck trademarking McAnything. The TTAB is pretty sure you’ll just be confused for McDonald’s.
California state copyright law may give owners general performance rights for pre-1972 songs. It just took lawyers 30 years to notice.
With en banc review off the table, SCOTUS may have a few thoughts on the Federal Circuit’s ruling that patent owners lack standing when co-owners don’t voluntarily join suit.
Sherlock Holmes is both public domain and not public domain. It just depends on which of his traits your version has.
Dennis Crouch discusses Judge Wu’s invalidation of lip-syncing animation technology, one of the first applications of Alice Corp. to non-business-method claims.
Turns out, Lara Croft’s personal brand of archaeology probably isn’t legal. But what about Indiana Jones? (via Law and the Multiverse)
Cort Welch is a J.D. candidate, ’15, at the NYU School of Law
What does Jay-Z’s “Run this Town” have in common with Eddie Bo’s “Hook and Sling?” Certainly not contemporary popularity, and even listening to them several times doesn’t provide an easy answer. But those with keen ears—or a copyright and a litigious bent—may notice the split-second sample of the word “oh” from the third second of “Hook and Sling” that forms the basis for TufAmerica’s claim of copyright infringement against Jay-Z and his recording affiliates. This is just the latest in a series of infringement claims brought by TufAmerica and others based on an artist’s sampling of earlier works. And the scary thing is: they have a chance at winning.
Granted, it’s unlikely. Courts generally exhibit restraint in upholding infringement claims based on sampling. TufAmerica’s loss on a series of composition and sound recording infringement claims just last year demonstrates this general restrained approach. The court employed a test based on substantial similarity, asking whether the copying “goes to trivial or substantial elements” of the sampled work and considering “the qualitative and quantitative significance of the copied portion in relation to the plaintiff’s work as a whole,” the quantitative analysis of the material being done “in the shadow of [its] qualitative nature.” So while small samples are not conclusively unprotected, copying that is “small or common must be ‘especially unique or qualitatively important.’” The court dismissed TufAmerica’s claim based on a three second drum sequence, but not a two-word utterance of the shouted title that was repeated three times in the song. Under this framework, TufAmerica’s current “oh” claim is unlikely to succeed.
But this approach is not universal, as exemplified by the Sixth Circuit’s troubling rule that any direct sampling, regardless of its size, constitutes infringement. Understanding the sampling itself as evidence of the sampled portion’s value, that court commanded artists to “[g]et a license or do not sample.” The Sixth Circuit “[does] not see this as stifling creativity in any significant way,” as “the market will control the license price and keep it within bounds.” Many critics, including New York University School of Law’s Professor Christopher Sprigman, suggest otherwise.
First, Professor Sprigman points out the infirmities of the Sixth Circuit decision in terms of statutory interpretation. The court uses Section 114(b) of the Copyright Act as a guide to determine the exclusive rights of a copyright holder under Section 106, and focuses on the insertion of the word “entirely” in Section 114(b)’s statement that holder’s rights “do not extend to the making or duplication of another sound recording that consists entirely of an independent fixation of other sounds, even though such sounds imitate or simulate those in the copyrighted sound recording.” Professor Sprigman criticizes this as reading the acknowledged de minimis limits out of the statute to produce a ridiculous result that doesn’t serve the purposes of copyright law.
The Sixth Circuit’s approach also stifles creativity without a corresponding furtherance of the goals of copyright law. As Professor Sprigman points out, broad restraints on sampling will not deter people from investing in the creation of new works. They encourage opportunistic behavior by plaintiffs such as TufAmerica who are in the suing business and want a cut of the profits generated by samples without contributing to the underlying creative efforts. Those later efforts add immense value and often involve speeding a sample up, changing its pitch, or otherwise altering it so as to be unrecognizable from the original work for which such plaintiffs have earned protection.
License requirements provide a windfall to original copyright holders at the expense of all later artists, who must negotiate with owners and deal with litigation, but this is especially true for new entrants without Jay-Z’s deep pockets. And regulating the license market to ensure fair results is expensive and inefficient. Professor Sprigman highlights how systems for monetizing transactions, such as that employed in the context of online music, result in people spending massive amounts of money fighting over prices. Coordinating widespread artistic communities to reach an agreement and establish a schedule of prices is a daunting task.
Moving forward, Professor Sprigman and many others argue for more openness to sampling, and fair use constitutes one promising route. While Professor Sprigman feels it would be a credible defense, Jay-Z’s recent motion to dismiss does not raise a fair use defense. In Campbell v. Acuff-Rose Music, Inc., the Supreme Court of the United States overturned summary judgment in favor of the plaintiff based on the fair use factors, suggesting that fair use in the sampling setting “should be evaluated as it is in all others.”[i] These factors, stemming from Section 107 of the Copyright Act, include the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of use upon the potential market or value of the copyrighted work. Professor Sprigman argues that the last prong especially provides a valuable guide and a means of ensuring that regulation of sampling aligns with the purposes of copyright protection. While the fair use defense has not yet been raised and interpreted in the sampling context, many artists such as Girl Talk appear eager to make the argument and optimistic as to the result.[ii] Though the Sixth Circuit dismissed it as an exception that would swallow the rule against infringement in sampling, it may fare better in courts taking a less restrictive approach. But Professor Sprigman points out that the absence of fair use defense arguments may rest in defendants like Jay-Z seeking to win outright on the de minimis analysis. Still, it seems worth a try.
Fair use in sampling makes sense. It presents a promising means of achieving the openness with regard to sampling that Professor Sprigman and others deem vital to the future of hip-hop. It would ensure that courts are prohibiting only what it makes sense to—copying that interferes with or impairs the value of the original artist’s work. After all, that is the purpose of copyright law. It recognizes the importance of allowing valuable creative efforts by later artists, while remaining attentive to the creative incentives promoted by protecting the original artist’s work.
Eliza Marshall is a J.D. candidate, ’16, at the NYU School of Law.
You’re Terminated!: Termination and Reversion of Copyright Grants and the Termination Gap Dilemma.
By Pierre B. Pine*
The 1976 Copyright Act (the “Act”) went into effect on January 1, 1978. The Act provided authors (and some heirs, beneficiaries, and representatives) with the right to terminate prior grants of their copyrights under certain conditions and within specific timeframes. Begining, on January 1, 2013, many artists and musicians who transferred their copyright rights after the Act was enacted 35 years ago have finally gained the opportunity to terminate those transfers.
The purpose and rationale underlying the termination provisions is clearly equitable in nature, to allow authors or their heirs a second opportunity to share in the economic success of their works. The House Report accompanying the Act explains that the provisions are “needed because of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work’s value until it has been exploited.” Furthermore, the Congress that enacted the Act specifically recognized the necessity of “safeguarding authors against unremunerative transfers” as justification for its providing authors with the opportunity to subsequently terminate prior transfers.
The termination provisions involve very specific and formulaic time frames and notification requirements for two types of grants: (1) those made prior to January 1, 1978 (the effective date of the Act), and (2) those executed on or after such date. An overview of both is detailed below. However, despite what was clearly the best intentions of Congress to provide authors and/or their heirs with a second bite of the proverbial apple, an unfortunate oversight on Congress’s part in drafting the Act has created a dilemma that could prove costly for many authors and heirs looking to exercise their termination rights.
The dilemma involves how the Act’s termination provisions apply, if at all, to what have come to be known as “gap works.” Gap works are works that were transferred and/or assigned by an agreement dated before the effective date of the Act (January 1, 1978) but not actually created until on or after January 1, 1978. This “gap dilemma,” unless clarified by Congress, could adversely affect authors by, among other things, stemming a multitude of litigation, which may defeat the purpose of the Act and deter authors from seeking to enforce their reversion rights by making it cost-prohibitive to do so. more »
Concussion lawsuits have become an increasingly hot topic over the past decade as we’ve learned more about the long-term dangers concussions can pose to the human brain. While NFL concussion lawsuits for workers’ compensation have been highly publicized, less attention has been paid to NCAA players with similar injuries. Lawsuits for sports-related injuries at this level have been largely unsuccessful due to the “amateur” model that controls and defines college sports. This post will examine two current issues dealing with college athletes’ rights that could profoundly impact availability of workers’ compensation for student-athletes. However, I will ultimately argue that from a purely workers’ compensation perspective, there is a much easier and less disruptive way for athletes to get paid for their injuries.
Workers’ compensation statutes were enacted to provide compensation to employees or their estates for job-related injuries. Each state generally has its own very specific statute and most of them require that the recipient of the workers’ compensation be defined as an employee. At a basic level, workers’ compensation for collegiate athletes hinges on whether an employer-employee relationship exists between athletes and their schools.
Up until recently, attempts at finding an employer-employee relationship between athletes and universities were consistently rejected by courts. There were a few early cases where athletes prevailed, but the holdings lost their relevance as the NCAA introduced its amateur rules.
Currently, there are two major happenings that threaten to override the existing case law. First, in In Re: NCAA Student-Athlete Name and Likeness Licensing Litigation (“O’Bannon”) former UCLA basketball star, Ed O’Bannon, filed suit against the NCAA and others for failure to compensate him during and after his collegiate athletics career for commercial use of his name, image and likeness. If O’Bannon succeeds, college athletes could be compensated for their athletic services and an athlete could then be considered an employee and become entitled to workers’ compensation under many state laws.
Second, the National Labor Relations Board (“NLRB”) recently granted Northwestern football players the right to unionize, noting that they were “employees” of the university. This decision only affects Northwestern and it will likely be appealed to the NLRB proper, and if necessary, to federal court. If collegiate unionization survives on appeal and/or in court, which I don’t think it will, the logistics of the union will be very difficult to navigate. Given the disparities in profits across sports, difficult (and perhaps impracticable) decisions would have to be made regarding the criteria necessary for unionization, which athletes should be grouped into a given bargaining unit, and whether the NCAA, the conference or each individual university should serve as the “employer.” If student-athletes are allowed to unionize, they could potentially go on strike, which would impact the college program, waste student-athletes’ eligibility and negatively affect their athletic career and development. Further, there will be administrative costs due to player turnover that will inevitably occur every year.
There is no doubt that a decision for the players at Northwestern and in O’Bannon would be a positive outcome for the numerous athletes who are arguably risking millions of dollars in future earnings by participating in college sports. It would also provide equitable relief to players with injuries like concussions that last well beyond their time in college. On the other hand, the implications of viewing athletes as employees will have profound costs and administrative concerns for universities, including those related to Title IX and universities’ eligibility for taxation as “amateur athletic organizations.” The existence of an employer-employee relationship could ultimately destroy the amateur model and college sports as we know them.
In my view, there is an easier way to compensate collegiate athletes for their injuries. Given the potentially complicated and detrimental results of the Northwestern case and O’Bannon, perhaps the most realistic and equitable solution to the workers’ compensation problem is to provide some sort of injury reimbursement for athletes without creating an employer-employee relationship. For example, the current health insurance program for college athletes is complicated and inadequate. Although almost all NCAA schools provide insurance for their student-athletes, there are still some schools that don’t provide coverage. In these instances, student-athletes can be left with significant personal medical bills. Even where coverage is provided, it can be very specific and often doesn’t cover everything. For very severe injuries, athletes may be entitled to care under the NCAA’s “Catastrophic Insurance Program,” which provides coverage for athletes whose injuries result in $90,000 or more of medical bills. In 1990 the NCAA implemented the Exceptional Student-Athlete Disability Insurance Program (“ESDI”), which provides disability insurance to athletes that will likely be selected in the first three rounds of the NFL, MLB, NHL, NBA, or WNBA drafts. Unfortunately, the ESDI is not as effective as it could be due to its high cost, inadequate coverage of “non-total disability” injuries, and the fact that it only covers certain athletes based on sport and talent level.
The most effective solution to the workers’ compensation issue will not try to force the complex and potentially catastrophic employer-employee relationship on the college athletics model. Rather, it will address the gaps in the current medical insurance model by decreasing deductibles and providing some sort of remuneration for long-lasting injuries like concussions. In this way, we can find a way to win for both athletes and the NCAA.
Elizabeth Polido is a J.D. candidate, ’15, at the NYU School of Law.
Patents, prizes, government grants, and R&D tax incentives are ways to reward and incentivize innovation. One of the ways in which these schemes differ is the timing of the reward. Patent holders are rewarded after the product is developed and patented over the course of 20 years (length of the patent) but only if the product is commercialized (since rents are earned from the market). Prize-winners are awarded according to the competition rules although it is almost always after some sort of result. Government funding and tax incentives is granted throughout or before the development period and often before any final results are produced. R&D tax incentives have a slight delay from the process of getting through the tax system to realize those benefits.
Crowdfunding, most popularly embodied by Kickstarter, leverages small contributions from the masses to finance various projects and presents an interesting timing issue. Crowdfunding and patents are similar in that rents are collected from the private market but there is a slight shift in timing. Projects may vary in what stage they are in, but on Kickstarter, most if not all creators seem to have at least some prototype if not the actual product developed before their campaign launch. Kickstarter sets out additional requirements and guidelines for hardware and design products, and while there is no requirement what stage the project must be in, the language seems to assume that there is at least a working prototype. Since the ideation step is often completed by the time a crowdfunding campaign happens, crowdfunding incentivizes dissemination and commercialization, and there is questions on whether this is a good thing.
As far as incentives go, crowdfunding more directly encourages the dissemination of technology rather than the creation of it. This begs the question of whether crowdfunding and patents as incentive schemes overlap to a point of inefficiency and whether crowdfunding may undermine the justifications and existence of a patent system under certain circumstances.
This dichotomy of “ex ante” versus “ex post” rewarding calls into question many of the philosophical underpinnings of intellectual property regimes. The “ex-post justifications” for IP claims that without IP protection, innovators will not, upon ideation and initial development of the IP, continue to further invest in the improvement or commercialization of the product. It is the same sort of argument found in property law for the privatization of land in hopes of internalizing both the costs and benefits of the land thus resulting in efficient use. The traditional/ideation justification of IP is that innovators have expended significant costs to develop the innovation thus putting them at a disadvantage in a competitive market against others who have made no such contribution to innovation. But at the production and distribution stage, the intellectual property already exists and the additional dissemination costs are dictated by internal efficiency, which is how a competitive markets function. As long as people are willing to pay a price equal to marginal cost, some firm will distribute it, and we theoretically won’t see the kind of market failure that would occur with ideation.
Perhaps, crowdfunding and patents together provide excessive incentives to innovate and commercialize. Or perhaps this incentive to disseminate creates ex ante incentives to innovate. It is difficult to parse out the difference.
Christine Shim is a J.D. candidate, ’15, at the NYU School of Law.
Just as our hourly mood statuses (www.twitter.com), tedious errands (www.taskrabbit.com), and restaurant conundrums (www.yelp.com) have been progressively fulfilled and/or publicized by various social technology platforms, the want of capital has also turned to social networks sprawled across the internet as an alternative to the traditional financing entities. Crowdfunding, most popularly embodied by Kickstarter, leverages small contributions from the masses to finance various projects. While it generates the most traffic in the creative arts with film & video, music, and publishing categories having the highest volume of launched projects, Kickstarter has cultivated several noteworthy technology products. E-paper watches synced to smartphones, high-resolution desktop 3D printers, 3D pens, and temperature-regulating dress shirts are some of the success stories, with money pouring in through contributions from thousands or even tens of thousands of people accumulating funds that surpass the initial goal by up to a hundred-fold. Kickstarter is said to be the ultimate democratization of product development, but is product development an activity for the masses? Are good decisions being made?
Creators have information on the costs of their innovation, and this information is conveyed to some degree through the crowdfunding campaign webpage and any other communication between the creator and the funders. Creators, with projected costs and value in mind, will set a funding goal. If the creator fails to reach the funding goal, the creator receives nothing, so creators should set an attainable goal. A ludicrously high funding goal would also signal to potential funders that the creator is dishonest, delusional, or otherwise incompetent, and such reputation-based quality signals are very powerful determinants of campaign success.
Potential funders then use whatever information they have to decide what this project is worth to them. If the collective value that funders find in this project matches or exceeds the creator’s funding goal, the innovation will be further developed and commercialized. On one hand, we can view the crowd as pure consumers speaking on behalf of the market. In this scenario, the crowd compares the set funding goal against how it would price the product on the market. A presale rewards model of crowdfunding in particular may mimic the private consumer markets, whose consumptive behavior determines reward amounts and recipients in the patent system. That being said, crowdfunders represent a relatively small slice of active Internet users and thus are not necessarily good representations of the consumer population.
Alternatively, we can view the aggregate crowd as a central planner that decides which innovations are worth bringing to market. Crowdfunders often contribute without expectation of a direct reward or have a higher willingness to pay for the product than regular consumers, and this behavior suggests that crowdfunders find value in backing projects beyond mere consumption. Perhaps this crowdfunding mechanism is able to capture some of the social value that the standard market may miss. In this scenario, the crowd compares the set funding goal against a value that includes intrinsic value.
Realistically, the crowd probably acts as some combination of a market consumer and a central decision-maker. And if we are relying on crowds to direct the course of our innovation and consumer products markets through funding decisions, we need to determine if crowds are dependable. We are already concerned that crowdfunders represent a small segment of the public at large; active social network and Internet users are a subset of the general population and crowdfunders are an even limited subset of active Internet users. While free-riding and collective action problems exist, the sheer number of crowdfunders could make up for the fact that each crowdfunder is not individually performing adequate due diligence. With more eyes looking over projects, there is a higher chance that at least one pair will notice something wrong or something ingenious about the project.
This potential advantage to having a crowd decide whether or not to bring an innovation to market speaks to the “wisdom of crowds,” coined by James Surowiecki in The Wisdom of Crowds—the notion that aggregating the knowledge and information of a large number of people could make the aggregate answer more robust. The idea is that an individual’s opinion or guess, no matter how amateur, has two components: an informational piece and an error piece. Upon aggregation, the errors cancel out and something closer to pure information is left behind. It is important to note that this concept is a statistical phenomenon rather than a social or psychological one, and social influence is more likely to undermine the wisdom of crowds than enhance it.
There are four requirements that need to be met for a crowd to be wise. First, a crowd must be diverse. Diversity brings a large range of perspectives and considerations and also helps the group focus on facts in the decision-making process by diffusing herding effects that might arise from the imbalance of power and influence within the group. Homogenous groups of people are more likely to converge on an conclusion, less likely to entertain outside input, and more confident in their collective judgment. There is a higher pressure, even if unintentional, for individuals within the group to conform. Diversity also helps foster independence within the group which in turn feeds back and contributes in maintaining diversity.
Independence is the second condition for a wise crowd. It refers to the freedom and distance individuals within the group maintain from other members of the group. The more independent individuals are, the less likely it is that the same errors and biases are perpetuated throughout the group.
Decentralization is also very important in maintaining the independence and specialization in a crowd. Power and influence must not be concentrated in one location but rather spread out among “local” subgroups of the crowd. Decentralization is more relevant in some circumstances more than others, such as coordination activities.
Finally, the fourth condition of wise crowd decision-making is that there be some mechanism by which to aggregate information while maintaining the diversity and independence of it.
In addition to being wary of the quality of the collective conclusion, it is important to note confidence the group has in that answer. As opinions converge, individuals in the group, and hence the group as a whole, becomes more confident in the aggregate answer regardless of a whether or not there was an improvement in accuracy.
The crowdfunding mechanism, in its most common setup, is not conducive to gathering wise crowds. Most problematic is the lack of independence among funders. People considering whether to fund a project or not can see how much others have funded the project over what period of time and can calculate what the average contribution per funder was. Sequential group decision-making creates an information cascade in which latter funders mimic early funders assuming that the early funders have the correct information. As the cascade continues, it is building upon previous, uninformed decisions, and collectively the group decision is really the decision of a few of the earliest funders. Information cascades can be socially useful in spreading good ideas if imitation is done intelligently. If sequential decision-making occurs among a diverse group of people and at least some people are willing to made decisions against the cascade, information cascades can be halted. However, this depends on particularly confident or particularly risk-averse people to resist imitating the mass opinion, and sequential decision-making as a whole is not reliable. One additional wrinkle is that because funding is not anonymous, people’s consumption changes when others are watching.
In sum, while crowds may be able to provide accurate information about market demand from consumers, crowds are likely not well-suited to make decisions about innovation and whether a product should be brought to market.
Christine Shim is a J.D. candidate, ’15, at the NYU School of Law.
The Oculus Rift is one of the new technologies that has many techies buzzing. Videos are all over YouTube, fan pages have sprung up, and even the Game of Thrones exhibit in New York City is using the technology to immerse visitors.
And with good reason. The Oculus Rift promises to satisfy one of the holy grails of the technology world: virtual reality (VR). Though the modern concept of VR has been pursued since the 1980s, it is fair to say that no one had ever really done it right. That all changed when John Carmack and Palmer Lucky launched a Kickstarter campaign to fund their attempt at VR. Benefitting from generations of technological advances, the Oculus Rift boasted the ability to smoothly track head movements and provide the wearer with a high definition display across her field of vision. The campaign earned an astounding $2.4 million dollars from about 10,000 backers, making it the 17th highest funded Kickstarter at the time of writing. Considering their funding goal was only $250,000, the community’s enthusiasm for the project was unmistakable. For a donation of $300 or more, backers would receive a developer prototype of the device, an option many took.
The community reaction to the Oculus Rift since the Kickstarter campaign was overwhelmingly positive. Important players in the industry made plans to incorporate the technology, over 50,000 developer kits were sold (causing a supply shortage), and consumers anxiously waited for the chance to get their hands on a final product.
This all changed on March 25th, 2014 when Facebook announced its acquisition of Oculus. An outcry could be heard across the internet. Many who had originally “invested” in Oculus, some with money, others with their vocal support, felt betrayed. They viewed the acquisition as their hope for VR gaming selling out to the corporations who want to plaster their computer screens with targeted advertisements. They felt that they had provided Oculus with enough backing to make selling out to the social networking giant unnecessary.
What’s more, many felt that they had rights when it came to how the company was operated, as they helped fund the launch of the project. However, exactly what rights do these “investors” have as Kickstarter backers? For example, are they similar to the rights given to equity investors of startup companies (which often include a vote on a sale of the company)?
This is unfortunately where it would have done many of them a favor to read the fine print. Kickstarter explains the benefits of “backers” (note: not “investors”) under its FAQ section:
“Backers that support a project on Kickstarter get an inside look at the creative process, and help that project come to life. They also get to choose from a variety of unique rewards offered by the project creator. Rewards vary from project to project, but often include a copy of what is being produced (CD, DVD, book, etc.) or an experience unique to the project.
Project creators keep 100% ownership of their work, and Kickstarter cannot be used to offer equity, financial returns, or to solicit loans.”
Thus, despite the fact that they did give money to a company in order to “invest” in its future, they did not (and could not) invest in a traditional sense. Typically, equity investors are entitled to voting power as shareholders in a mixed buyout financed by cash and shares (like the Facebook buyout of Oculus). However, Kickstarter is purely a donation website where creators may or may not offer rewards to donors. This distinction should be an important consideration for all backers on Kickstarter going forward. It may also potentially be an advantage for certain startups with “projects” they can advertise to the public as this “no-strings-attached” form of crowd-funding avoids some problems of finding investors traditionally. Regardless, it will be interesting to see what the future holds, both for the Facebook-owned Oculus and for crowd-donation services in general.
Luke Smith is a J.D. candidate, ’15, at the NYU School of Law.