Knockoff Economy: The Impact of Patents on Innovation

By TAP Staff Blogger

Posted on September 11, 2012


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Just as the new school year kicks off, we sat down with University of Virginia law professor Chris Sprigman to discuss his new book with Kal Raustiala, The Knockoff Economy. Chris currently teaches intellectual property law, antitrust law, competition policy, and comparative constitutional law. His scholarship focuses on how legal rules affect innovation and the deployment of new technologies. 
 
TAP: You joined the University of Virginia faculty in 2005. What brought you there?
 
Chris Sprigman: UVA was my first full-time job as a law professor – it was a wonderful opportunity for me and I was thrilled to have the opportunity. I came to UVA from Stanford Law School, where I was a fellow at the Center for Internet & Society. And I had come to Stanford from legal practice in Washington, DC. 
 
TAP: You believe that imitation sparks innovation, and to explain this, you use the fashion industry as an example. Could you share that with us?
 
Chris Sprigman: Sure. Kal Raustiala and I write about this in the first chapter of The Knockoff Economy. If you take a trip to the mall, you’ll notice that a lot of clothes on the racks look a lot alike. And that’s true pretty much every season. Why? Well, because there are trends in fashion, and trends are really just an instance where a popular design is widely imitated. So there’s a lot of copying in the fashion industry. You might ask how fashion firms can get away with copying a dress that someone else has designed?
 
The quick answer is that such copying is entirely legal in the United States. Copyright law views fashion designs not primarily as artistic works, but rather as “useful articles,” and useful things are not granted copyright protection.
 
That fashion firms can so readily knock off other firms’ designs may seem unfair, and designers do sometimes complain about copying. But just as often, designers – even elite designers – engage in copying themselves. And that’s a good thing. Copying, it turns out, provides some very important benefits for designers, consumers, and the entire fashion industry.
 
TAP: Some fashion designers are fighting for stronger IP laws, saying that rival fashion firms and retailers are taking their work and knocking it off for lower prices, which hurts their sales and diminishes incentive to innovate. What do you think about this notion?
 
Chris Sprigman: As we explain at the end of Chapter 1 of The Knockoff Economy, we are not fans of extending copyright to cover fashion. We think efforts to do so are both unnecessary and unwise. Unnecessary because for 70 years the American fashion industry has thrived in a world of free and easy copying. To be sure, some designers are unhappy with the status quo and support copyrighting fashion. Proponents point to the speed with which copyists replicate dresses, as well as the great success of repeat copyists like Forever 21, to argue that protection is essential. But while individual cases of harm certainly exist, intellectual property law is meant to be designed with the big picture in mind. Without clear evidence of systematic harm, the case for extending copyright to fashion design is very weak.
 
We also think doing so is unwise, because it would create serious risks for the industry. Extend copyright to the fashion industry, and designers are going to start fighting over who started a trend. Litigation of this sort is great for lawyers-and those firms who can afford good lawyers-but not great for small designers or start-ups, who can be easily cowed or crushed by a lawsuit. And in a field where many believe there is nothing new under the sun, creating monopolies in fashion designs is bound to lead to a lot of lawsuits.
 
There’s one last point to make here. Consumers benefit enormously from the fashion industry’s freedom to copy. Because of copying, the latest styles are not restricted to the wealthy – indeed, copying has played a major role in democratizing fashion.
 
TAP: Conventional wisdom holds that IP rights are essential for innovation. You argue against this idea and use Wikipedia and Encarta as examples. Can you elaborate a bit on that?
 
Chris Sprigman: Sure. In making the point about Wikipedia and Encarta, we took inspiration from Daniel Pink’s brilliant 2009 book Drive. In that book, Pink offers a fascinating thought experiment. He asks us to travel back to the last millennium – to 1995, to be exact. That’s the year that Wikipedia was started. That’s also the year that Microsoft released its proprietary encyclopedia, Encarta. Pink asks us to try to imagine, back in 1995, which encyclopedia will turn out to be the biggest and most widely used encyclopedia in the world, and which will no longer exist. Which is which?

You already know the answer. Microsoft shuttered its proprietary encyclopedia, Encarta, in 2009. The all-volunteer, open-source Wikipedia, on the other hand, has grown like kudzu.

In 1995, of course, virtually no one would have predicted the stunning success of Wikipedia. Wikipedia doesn’t charge for access, doesn’t pay contributors, and doesn’t take advertising. It relies on voluntary contributions. And Wikipedia invites people to copy and to edit the content that their volunteers create – the Wikimedia Foundation licenses, free of charge, all Wikipedia content to whoever wants it.

Wikipedia is just one example of a much larger method of innovation: what is usually known as open source. Open-source software is usually licensed in a way that allows users to tweak it, but bans any attempts to monopolize the code through copyright law. The point we make in The Knockoff Economy is that open source works to encourage the production of software without relying on IP rights. And open source isn’t limited to software. We see some version of the method at work in a wide variety of creative pursuits, including cuisine, football, and scientific research. Out in the real world there is a lot of serious intellectual production without, or with little, intellectual property.
 
TAP: Could you explain how social norms work in lieu of strong IP protection when it comes to industries such as food and comedy?
 
Chris Sprigman: We write about this quite a bit in Chapters 2 and 3 of The Knockoff Economy. I’ll focus on what we write about stand-up comedy, because that’s the easiest story to tell quickly. I should note that our discussion of stand-up comics is adapted from an academic article I wrote with my UVA colleague Dotan Oliar. (You can find that article on SSRN: There's No Free Laugh (Anymore): The Emergence of Intellectual Property Norms and the Transformation of Stand-Up Comedy.)

The short version of the story is that comedians have rules of their own about joke-stealing. And they impose their own punishments on thieves.
 
Why do comedians do this? In part, because they live in a world where intellectual property law – in particular, copyright – does not help them much when a rival comedian steals a joke. In theory, copyright law applies to jokes. But in the real world, lawsuits are simply too expensive and uncertain to work as an effective response to joke stealing. And even if a comic were angry enough to be tempted, there is a daunting legal barrier to a successful suit. Copyright protects original expression, but not underlying ideas. But often a great joke is built on a funny idea, which can be expressed in more than one way. So comics who “re-write” others’ jokes rather than simply appropriate them wholesale are, as far as current copyright law goes, perfectly safe.
 
For these practical reasons, comedians do not use copyright to protect their material. But that does not mean that stand-up comics are blasé about joke thievery. Today’s comics are intent on enforcing ownership rights. Yet they do so via social norms – informal but, nonetheless, powerful rules enforced by comedians on their peers.
 
What does this all mean? The story of stand-up tells us that, just as in the fashion world we have described, the law is not always necessary to foster creativity. Using informal group norms and sanctions, comedians are able to control joke-stealing.
 
TAP: You also talk about the financial industry, which you say is another example of innovation without IP. Can you explain that?
 
Chris Sprigman: The financial industry, which we talk about in Chapter 4 of The Knockoff Economy, is another example of high levels of innovation with low levels of IP. For much of the industry’s history, the most plausible form of legal protection, patent, was simply not available for many financial innovations. Nor could innovators rely on trade secrecy law for financial innovations that related to publicly traded securities. Because virtually all the details of a new security become public once the offering is filed with the Securities and Exchange Commission, secrecy is typically impossible.
 
In 1998, there was a major legal change that made patents much more available to the financial industry. In a case called State Street Bank and Trust Co. v. Signature Financial Group Inc., a federal court established for the first time that novel methods of doing business were patentable. The decision in State Street directly involved the financial industry – at the core of the case was a “hub and spoke” method of pooling mutual fund assets.
 
So how do we explain intellectual production without intellectual property in the financial services industry? Consider the market for a new type of investment security. In most cases, new securities are likely to be much more lucrative if they trade in markets big enough to become standardized and deeply capitalized. In practice, this typically requires a number of firms to enter the market. Patents, however, can act as a barrier to this. If the innovator patents the new security, potential market participants may hesitate to enter the market for fear that the patent might be used against them. This fear might persist even if the innovator is willing to license the patent to its rivals – especially if those rivals worry that, as a consequence of the license fees, they will face higher costs in marketing the security and will be hobbled in competing with the innovator. The result is that as a practical matter patents rarely figure in the development of new securities.

TAP: In a recent post you list some of the crazy ways that celebrities, athletes, and others exploit IP.
 
Chris Sprigman: Yeah, that post was fun to write, because some of these trademarks are pretty silly. Here’s some examples:
 
-- Los Angeles Lakers superstar Kareem Abdul-Jabbar has trademarked his hook shot. Really? Would another basketball player be sued by Kareem for using it in a game? Especially considering that Kareem didn’t invent it?
 
-- Tennis great John McEnroe has trademarked the phrase “You cannot be serious!”, which is a substantially cleaned-up version of what he used to scream at referees. I propose that the scores if not hundreds of refs McEnroe abused should get a cut of royalties.
 
-- And in perhaps the most insane entry in the list, boxing announcer Michael Buffer (who I’d never heard of before now even though I am a boxing fan) has trademarked the phrase “Let’s get ready to rumble!”, which is how he typically introduces a bout. And he’s apparently made over $400 million in licensing revenue from the trademark.
 
When Kal and I heard that, we had the same reaction: We are in the wrong business.
 
TAP: The music industry is having to deal with a lot of online piracy. What’s the future of the music industry if the copyright law can’t prevent this?
 
Chris Sprigman: In the last part of The Knockoff Economy, Kal and I apply what we’ve learned from looking at industries like fashion, food, finance, fonts, football, open source, databases, and the others we cover in the book to the music industry, which is struggling with Internet-enabled piracy. We think that the “low-IP” industries can teach the music industry a few things about how to survive in the face of copying.
 
One thing the music industry can do (and is already doing) is to emphasize the live performance, which can’t easily be copied, versus recorded music, which can be. In many ways, this is simply a return to the reality of the last two centuries of popular music. As Mick Jagger recently noted, the era of making riches off of recording was really just a brief window in the history of music. The past was, and the future is going to be, much more about performance. In this new world, recordings often function as more as ads for concerts than as money-makers themselves. (And sometimes are bundled with concert tickets, as Madonna’s latest album was.) As a result, copying looks a lot less fearsome. A copied ad is just as effective – and maybe much more so – than the original.
 
We have several additional recommendations, which I won’t detail here. (Read the book!) Suffice to say that we suspect that the music industry will find a way to survive piracy. And if they make some changes, they might even thrive.


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