Counterfeiting and piracy are frequently presented as relatively minor costs of doing business for a small number of otherwise highly profitable industries, such as high-end designer labels, motion picture studios and record labels or pharmaceutical and software giants. Rarely are they acknowledged as a threat to the nation’s economy.
In fact, counterfeiting and piracy are far more pervasive than they once were, having evolved into a “sophisticated global business involving the mass production and sale of a vast array of fake goods,” according to the U.S. Trade Representative’s annual review of the global state of intellectual property rights, protection and enforcement (“2011 Special 301 Report“).
The fake goods deprive U.S. intellectual property rights holders of billions of dollars per year, many believe. Since the income they would have earned will never be taxed, nor can it be used for investments in new capacity and to expand employment, their economic losses affect all of us.
No one is sure of the extent of the losses. The Organisation for Economic Co-operation and Development (OECD) estimated that counterfeit and pirated tangible goods in international trade may have amounted to $250 billion in 2007. This figure does not include non-tangible pirated digital products, nor any domestically produced and consumed products.
Pirated digital products account for unknown additional losses, which could be very significant. One study estimates that reducing the piracy rate for personal computer software alone by 2.5% per year for four years could create $142 billion in new economic activity while adding nearly 500,000 new high-tech jobs and generating roughly $32 billion in new tax revenues in 42 countries. A high percentage of these benefits would accrue to the U.S.
In China, for example, counterfeiting is known to encompass a diverse set of product categories.
[A]pparel and footwear, mobile phones, pharmaceuticals and medical equipment, herbal remedies, wine and liquor, other beverages, agricultural chemicals, electronic components, computer and networking equipment, software and related products, batteries, cigarettes, cosmetics, home appliances, cement, and auto parts, as well as merchandise based on copyrighted works.
China is also where an estimated 99% of all music downloads are illegal, according to unidentified sources cited by the U.S. Trade Representative. But China is not alone. There are 42 countries in which particular intellectual property problems exist. China, India and Russia are among 12 countries on a “priority watch list” of top offenders.
Senators Patrick Leahy (D-VT), Orrin Hatch (R-UT) and Chuck Grassley (R-IA) have introduced a bill, “Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act,” or PROTECT IP Act (S. 968) in an attempt to capture more of the fruits of American ingenuity, creativity and productivity for the benefit of the U.S. economy.
So far, many commentators seem to be focusing not on the jobs this bill could create or save throughout the nation’s economy, but on how it might impact an Internet culture that wants to believe Internet content ought to be free. Of course the Internet reduces transaction and distribution costs. The Internet places downward pressure on the prices for many products and services. But nothing is free. There are laws of economics just as there are laws of physics.
The bill targets domain names accessing foreign Internet sites that harm holders of U.S. intellectual property. A domain name is a familiar website address in a www.___.com or similar format. It points to a numeric, machine readable Internet Protocol address, such as 00.00.00.000. Servers containing domain name look-up tables automatically convert familiar addresses to machine readable addresses.
The PROTECT IP Act allows the Attorney General to seek permission of a court to require third-parties, including Internet service providers, payment processors, online advertising network providers and search engines, to either prevent access to foreign infringing sites or to cease doing business with the sites.
ISPs and search engines, for example, would sever the link between familiar addresses and machine readable IP addresses. A query using a familiar address would be redirected to a website containing a notice stating, in so many words, that access is denied pursuant to a court order obtained by the Attorney General. A query utilizing a numeric, machine readable IP address, however, would not be affected. In other words, the foreign infringing website itself would not be compromised, but without the aid of familiar referring addresses on look-up tables residing on key servers in the U.S., incoming traffic would be seriously impaired as a practical matter. Commentators refer to this as DNS filtering. They point out that it is not a 100% solution, and no one disagrees.
“Follow the money”
The bill would also authorize rights holder themselves to bring an action against both domestic and foreign Internet sites dedicated to infringement and to obtain a court order requiring third-parties such as payment processors and online advertising networks to cease doing business with the site. Third-parties who have the means of preventing access to an infringing site, such as Internet service providers and search engines, would not be affected by a court order obtained by a rights holder, only one obtained by the Attorney General.
David Sohn at the Center for Democracy & Technology, for one, argues that the best way to hamper counterfeiters and pirates is to make it “unprofitable to run infringement hubs by blocking their access to payment systems and advertising networks.” He may be right. If “following the money” proves to be the most effective approach, as Sohn predicts, most of the enforcement action will gravitate to the payment processing and network advertising side. If Sohn’s prediction proves incorrect, however, a back up strategy may prove useful. Considering how rapidly technology progresses and how rarely Congress gets involved in these issues, alternative enforcement mechanisms probably are a a good bet.
Senator Ron Wyden says “no”
Although a previous version of this legislation (“Combating Online Infringement and Counterfeits Act [COICA],” S. 3804) was reported out of the Senate Judiciary Committee unanimously last year, and despite numerous improvements, Senator Ron Wyden (D-OR) has placed a “hold” on the PROTECT IP Act.
By ceding control of the Internet to corporations through a private right of action, and to government agencies that do not sufficiently understand and value the Internet, PIPA represents a threat to our economic future and to our international objectives.
In an otherwise thoughtful interview three months ago, Wyden told Nate Anderson at Ars Technica that COICA represented “creeping corporate control of the Internet.”
Corporations are merely vehicles which have permitted private investors to finance both the network and much of its most appealing content. They are entitled to a competitive return on their investment — although some people have a problem with this concept, if not in theory, at least in practice. The senator did not reveal what he meant by his remark.
Wyden also expressed concern about how to define an “infringing” website and about preserving the Internet’s current architecture.
Targeting the “worst-of-the-worst”
Some have expressed concern that the PROTECT IP Act would allow rights-holders to target sites that contain lawful as well as infringing content, or that merely contain unsolicited links to infringing sites — such as in the reader comments section of a blog. “[U]ntil there is a bright line about what constitutes the distribution of infringing content,” Wyden says, “the government ought to stop seizing websites that allegedly distribute infringing goods.”
“The PROTECT IP Act narrows the definition of a rogue website” compared to what was in COICA, according to the sponsors, “while ensuring that law enforcement can get at the “worst-of-the-worst” websites dedicated to selling infringing goods.” The bill defines an ”Internet site dedicated to infringing activities” as a site that has “no significant” other uses or a site that is used, “primarily as a means for engaging in, enabling, or facilitating” counterfeiting or piracy. This does not sound like a mandate for imposing punitive liability for trivial or inadvertent oversights.
Although the senator raises a good point, there are always details to be worked out. We depend on agencies and/or judges to apply reason and discretion to fill in the some of the blanks.
Threat to the Internet?
Some also argue that protecting the rights of intellectual property holders will somehow ruin the Internet. According to Sen. Wyden, for example,
[U]sing domain name systems to redirect consumers away from [infringing] websites [is] basically like taking down or putting up misleading street signs; it threatens the integrity and the architecture of the ‘Net.
If inaccurate street signs are posted in key servers located in the U.S., both users and operators of infringing sites will likely respond to DNS filtering by redirecting users’ DNS settings to points outside of the United States, according to David Dagon, Dan Kaminsky, Danny McPherson, and Paul Vixie.
They argue that if traffic is pushed to potentially rogue offshore servers, (1) a rogue resolver could easily return spurious results for sensitive queries; (2) ISPs will lose domain name server data that currently provides an important and accurate picture of both traffic patterns and security threats on their networks, which in turn is vital for both business planning and network protection; and (3) users could be routed to offshore servers for content also, undermining precisely the benefits content delivery networks (CDNs) provide by optimizing traffic distribution to account for proximity of client and server.
But George Ou points out that the goal of an officially-sanctioned, highly-centralized, monopolistic and bureaucratic (my words, not his) DNS system operated by the Internet Assigned Numbers Authority, (IANA) is not realistic.
In response to the domain name seizures in 2010, content pirates proposed a workaround that would create a new .P2P name space that complements rather than replaces the official IANA system. The system would be free to operate because it uses peer-to-peer (P2P) distribution and the system would still have its users use IANA for official top level domains like .COM. It’s also noteworthy that there are hundreds of thousands of private “Intranet” business DNS domains that complement the IANA DNS system. A pirate DNS system will not endanger the IANA DNS system anymore than the hundreds of thousands of Intranet DNS systems operated by businesses.
In conclusion, the PROTECT IP Act is not a nefarious piece of special interest legislation. The unanimous vote in the Senate Judiciary Committee last year reflects the fact that better enforcement of intellectual property rights is in the national interest, particularly during a period of high unemployment. Ultimately, the PROTECT IP Act is about protecting jobs and private investors. Objections to the bill, including the possibility of collateral harm to “innocent” websites and catastrophe if the Internet’s highly centralized domain name system unravels, seem a bit overblown.