[DMCA-Activists] FT: James Boyle on Database Data Exclusive Rights

[Seth Johnson]

> http://news.ft.com/cms/s/4cd4941e-3cab-11d9-bb7b-00000e2511c8.html


James Boyle: A natural experiment


By James Boyle
November 22 2004 17:34


Imagine a process of reviewing prescription drugs which goes like
this: representatives from the drug company come to the
regulators and argue that their drug works well and should be
approved. They have no evidence of this beyond a few anecdotes
about people who want to take it and perhaps some very simple
models of how the drug might affect the human body. The drug is
approved. No trials, no empirical evidence of any kind, no
follow-up. Or imagine a process of making environmental
regulations in which there were no data, and no attempts to
gather data, about the effects of the particular pollutants being
studied. Even the harshest critics of drug regulation or
environmental regulation would admit we generally do better than
this. But this is often the way we make intellectual property
policy.

So how do we decide the ground-rules of the information age?
Representatives of interested industries come to regulators and
ask for another heaping slice of monopoly rent in the form of an
intellectual property right. They have doom-laden predictions,
they have anecdotes, carefully selected to pluck the heartstrings
of legislators, they have celebrities who testify - often
incoherently, but with palpable charisma - and they have very,
very simple economic models. The basic economic model here is “If
you give me a larger right, I will have a larger incentive to
innovate. Thus the bigger the rights, the more innovation we will
get. Right?” Well, not exactly. Even without data, the models are
obviously flawed - copyrighting the alphabet will not produce
more books, patenting E=MC2 will not yield more scientific
innovation. Intellectual property creates barriers to, as well as
incentives towards, innovation. Clearly the “more is better”
argument has limits. Extensions of rights can help or hurt, but
without economic evidence beforehand and review afterwards, we
will never know. In the absence of evidence on either side, the
presumption should obviously still be against creating a new
legalised monopoly, but still the empirical emptiness of the
debates is frustrating.

This makes the occasion where there actually is some evidence a
time for celebration. What we really need is a test case where
one country adopts the proposed new intellectual property right
and another does not, and we can assess how they are both doing
after a number of years.

There is such a case. It is the “database right.” Europe adopted
a Database Directive in 1996 which both gave a high level of
copyright protection to databases, and conferred a new “sui
generis” database right even on unoriginal compilations of facts.
In the United States, by contrast, in a 1991 case called Feist,
the Supreme Court made it clear that unoriginal compilations of
facts are not copyrightable. (The case is not as revolutionary as
it is claimed to be. Most of the appeals courts in the United
States had long held this to be the case. In fact, a tenet of the
US intellectual property system is that neither facts nor ideas
can be owned.) Since 1991 the U.S. Congress has managed to resist
frenzied attempts by a few database companies to create a special
database right over facts. Interestingly, apart from academics,
scientists and civil libertarians, many database companies, and
even those well-known communist property-haters, the U.S. Chamber
of Commerce, oppose the creation of such a right. They believe
that database providers can adequately protect themselves with
contracts, technical means such as passwords, can rely on
providing tied services and so on. Moreover, they argue that
strong database protection may make it harder to generate
databases in the first place; the facts you need may be locked
up. The pressure to create a new right continues, however, aided
by the cries that US must “harmonise” with Europe. So here we
have our natural experiment. Presumably the government economists
are hard at work both in the US and the EU, seeing if the right
actually worked? Umm.... No.

Despite the fact that the European Commission has a legal
obligation to review the Database Directive for its effects on
competition (they are three years late in issuing their report)
no attention appears to be being paid to the actual evidence of
whether the Directive helps or hurts in the EU, or whether the
database industry in the US has collapsed or flourished. That is
a shame, because the evidence is there, and it is fairly
shocking.

Intellectual property rights are a form of state-created monopoly
and “the general tendency of monopolies,” as Macaulay pointed
out, is to “make things dear, to make them scarce, and to make
them bad.” Monopolies are an evil, but they must sometimes be
accepted when they are necessary to the production of some good,
some particular social goal. In this case, the “evil” is
obviously going to be an increase in price of databases, and the
legal ability to exclude competitors from their use – that, after
all is the point of granting the new right. The “good” is that we
are supposed to get lots of new databases, databases that we
would not have had but for the existence of the database right.

If the database right were working, we would expect positive
answers to three crucial questions. First, has the European
database industry’s rate of growth increased since 1996, while
the US database industry has languished? (The drop off in the US
database industry ought to be particularly severe after 1991 if
the proponents of database protection are correct; they argued
the Feist case was a change in current law and a great surprise
to the industry.)

Second, are the principal beneficiaries of the database right in
Europe producing databases they would not have produced
otherwise? Obviously if a society is handing over a database
right for a database that would have been created anyway, it is
overpaying - needlessly increasing prices for consumers and
burdens for competitors. This goes to the design of the right -
has it been crafted too broadly, so that it is not being targeted
to those areas where it is needed to encourage innovation?

Third, and this one is harder to judge, is the right promoting
innovation and competition rather than stifling it? For example,
if the existence of the right allowed a one-time surge of
newcomers to the market who then to use their rights to
discourage new entrants, or if we promoted some increase in
databases but made scientific aggregation of large amounts of
data harder overall, then the database right might actually be
stifling the innovation it is designed to foment.

Those are the three questions that any review of the Database
Directive must answer. But we have preliminary answers to those
three questions and they are either strongly negative or
extremely doubtful.

Are database rights necessary for a thriving database industry?
The answer is a clear “no.” In the United States, the database
industry has grown more than 25-fold since 1979 and - contrary to
those who paint the Feist case as a revolution - for that entire
period, in most of the United States, it was clear that
unoriginal databases were not covered by copyright. The figures
are even more interesting in the legal database market. The two
major proponents of database protection in the United States are
Reed Elsevier, the owner of Lexis, and Thomson Publishing, the
owner of Westlaw. Fascinatingly, both companies made their key
acquisitions in the US legal database market after the Feist
decision, at which point no one could have thought unoriginal
databases were copyrightable. This seems to be some evidence that
they believe they could make money even without a database right.
How? In the old-fashioned way: competing on features, accuracy,
tied services, making users pay for entry to the database and so
on.

If those companies believed there were profits to be made, they
were right. Jason Gelman, one of our students, points out in a
recent paper that Thomson’s Legal Regulatory division had a
profit margin of over 26% for the first quarter of 2004. Reed
Elsevier’s 2003 profit margin for LexisNexis was 22.8%. Both
profit margins were significantly higher than the company average
and both are earned primarily in the $6 billion US legal database
market, a market which is thriving without strong intellectual
property protection over databases. (First rule of thumb for
regulators: when someone with a profit margin over 20% asks you
for additional monopoly protection, pause before agreeing.)

What about Europe? There is some good news for the proponents of
database protection. As Hugenholtz, Maurer, and Onsrud point out
in a nice article in Science Magazine, there was a sharp,
one-time spike in numbers of companies entering the European
database market immediately following the implementation of the
Directive in member states. Yet their work, and “Across Two
Worlds,” a fascinating study by Maurer, suggests that the rate of
entry then falls back to levels similar to those before the
Directive. Maurer’s analysis shows that the attrition rate is
also very high in some European markets in the period following
the passage of the Directive - even with the new right, many
companies drop out.

At the end of the day, the British database industry - the
strongest performer in Europe - adds about 200 databases in the
three years immediately after the implementation of the
Directive. In France there is little net change in the number of
databases and the number of providers falls sharply. In Germany,
the industry added nearly 300 databases immediately following the
Directive - a remarkable surge - about 200 of which rapidly
disappeared. During the same period the US industry adds about
900 databases. Bottom line? Europe’s industry did get a one-time
boost, and some of those firms have stayed in the market; that is
a benefit, though a costly one. But database growth rates have
gone back to pre-Directive levels, while the anti-competitive
costs of database protection are now a permanent fixture of the
European landscape. The US, by contrast, gets a nice steady
growth rate in databases without paying the monopoly cost.
(Second rule of thumb for regulators: Do no harm! Do not create
rights without strong evidence that the incentive effect is worth
the anti-competitive cost.)

Now the second question. Is the Database Directive encouraging
the production of databases we would not have got otherwise? Here
the evidence is clear and disturbing. Again, Hugenholtz et al,
point out that the majority of cases brought under the Directive
have been about databases that would have been created anyway -
telephone numbers, television schedules, concert times. A review
of more recent cases reveals the same pattern. These databases
are inevitably generated by the operation of the business in
question and cannot be independently compiled by a competitor.
The database right simply serves to limit competition in the
provision of the information. Last week, the European Court of
Justice implicitly underscored this point in a series of cases
concerning football scores, horse-racing results and so on.
Rejecting a stunningly protectionist and one-sided opinion from
its Advocate General, the court ruled that the mere running of a
business which generates data does not count as “substantial
investment” enough to trigger the database right. It would be
nice to think that this is the beginning of some scepticism about
the reach of the Directive, scepticism that might even penetrate
the Commission’s review of the Directive’s anti-competitive
effects. Yet the Court provides little discussion for the
economic reasons behind its interpretation; the analysis is
merely semantic and definitional, a sharp contrast to its
competition decisions.

So what kinds of databases are being generated by this bold new
right? The answer is somewhere between bathos and pathos. Here
are some of the wonderful “databases” that people found it
worthwhile litigating over: A website, consisting of a collection
of 259 hyper-links to “parenting resources,” a collection of
poems, an assortment of advertisements, headings referring to
local news, charts of popular music. The sad list goes on and on.
The European Commission might ask itself whether these are really
the kind of “databases” which we need a legal monopoly to
encourage, and that we want to tie up judicial resources
protecting. The point that many more such factual resources can
be found online in the United States without such protection,
also seems worthy of note. At very least, the evidence indicates
that the right is drawn much too broadly and triggered too easily
in ways that are profoundly anti-competitive.

Finally, is the database right encouraging scientific innovation
or hurting it? Here the evidence is merely suggestive. Scientists
have claimed that the European database right, together with the
perverse failure of European governments to take advantage of the
limited scientific research exceptions allowed by the Directive,
have made it much harder to aggregate data, to replicate studies,
and to judge published articles. In fact, academic scientific
bodies have been among the strongest critics of database
protection. But negative evidence, by its nature, is hard to
produce; “show me the science that did not get done!” Certainly,
both US science and commerce have benefited extraordinarily from
the openness of US data policy. This is an issue I will deal with
in a later column.

I was not always opposed to intellectual property rights over
data. Indeed, in a book written before the enactment of the
Database Directive, I said that there was a respectable economic
argument that such protection might be warranted and that we
needed research on the issue. Unfortunately, Europe got the right
without the research. The facts are now in. If the European
Database Directive were a drug, the government would be pulling
it from the market until its efficacy and harmfulness could be
reassessed. At the very least, the Commission needs a detailed
empirical review of the Directive’s effects, and needs to adjust
the Directive’s definitions and to fine-tune its limitations. But
there is a second lesson. There is more discussion of the
empirical economic effects of the Database Directive in this 2000
word column than there is in the 600 page review of the effects
of the Directive that the European Commission paid a private
company to conduct. That is a scandal. And it is a scandal that
is altogether typical of the way we make intellectual property
policy. President Bush is not the only one to make “faith-based”
decisions.

The writer is William Neal Reynolds Professor of Law at Duke Law
School, a board member of Creative Commons and the co-founder of
the Center for the Study of the Public Domain