All Lathered Up About SOPA

The internet has been ablaze in recent weeks with dire warnings about The End of the Internet As We Know It due to the seemingly imminent passage of SOPA–the Stop Online Piracy Act.  The threat was so severe that Jimmy Wales, the pretentious, pompous, self-satisfied git who is also the founder of Wikipedia, is shutting down Wikipedia for a day–today, 18 January, 2012–in protest.  (Sorry all you high schoolers with term papers due on Thursday–I guess you’re SOL.)  This move is being followed by other sites outraged at the legislation.  But not Google–even though it is the main force behind the opposition to SOPA: more on this below.

The stated intent of SOPA is to deal with a real problem: the flagrant theft and sale of intellectual property by large, commercial operations, primarily in Russia and China.  It should also be noted that especially in Russia these enterprises are in a tight nexus with even more unsavory–disgusting, actually–web-based operations, including large-scale hacking-for-profit and child pornography.

SOPA gives the government and the owners of intellectual property the right to obtain injunctions against websites posting and selling stolen content.  It also empowers the USDOJ to obtain court orders requiring US-based ISPs, advertisers, and payment services to cease dealing with infringers.

I have much experience with intellectual property law (as an expert in some large patent litigations), and have read a good deal of the economic literature on the subject (with the Posner-Landes book being a great source).   As a result, I am aware of the difficulties and limitations of IP law.  It is a very difficult task to trade-off between providing protections that reward creators, but which are not overly broad and therefore limit potential for combining or expanding on existing creations to develop new ones.  I also understand that there is a lot of rent seeking involved in IP and IP litigation.  The system is not perfect, by any means.

But the targets of SOPA are definitely malign, and damage legitimate creators: this is not a borderline call.  They currently operate largely outside the reach of the law.  Legislation and enforcement that curtail their activities would be an unmitigated gain.

The question is whether SOPA’s reach would be limited to such obvious, large-scale crooks, or would also ensnare individuals or small websites that inadvertently post copyrighted material.  This is the gravamen of the opposition to SOPA.

Much of this opposition is, to be blunt, hysterical and overwrought.  The opponents argue that SOPA represents the descent of the dark night of fascism over the internet.

I am deeply suspicious of state regulation and intervention, but the over the top screeds of the opponents make me suspicious.  Exaggeration and volume are often used to cover up a lack of substance.  And that appears to be the case here.

So I thought it would be worthwhile to examine SOPA more soberly, using some economics.

The most important aspect of the legislation is that it would reverse the burden of proof.  Presently, a copyright holder has the burden to prove somebody infringed before enjoining the infringer’s operations.  Under SOPA, the government or a copyright holder could go to court asking for an injunction, and the alleged infringer would have the burden to prove it did not infringe.

In most US legal actions, the moving party has the burden, so SOPA is somewhat unusual in that it reverses that.  Is that exception to the rule justified?

The burden of proof is important because information is limited, and any judicial procedure is subject to error: burden wouldn’t matter if information were costless and judges infallible.  But it does matter when errors are possible: burden affects the likelihood of errors, and the type of errors, in a legal proceeding.

In this context, there are two kinds of mistakes: (1) a false positive, where a legit website that does not infringe is cut off by ISPs, payment services, etc., and (2) a false negative, where a large-scale thief is allowed to continue to operate.

Putting the burden on the moving party (the copyright holder) presumes that the costs of false negatives are lower than the costs of false positives.  This makes sense in criminal cases, for instance.  The state’s interest in a conviction is the deterrent effect, which is likely to be small for any given case.  The individual defendant’s interest is his or her freedom or perhaps life.  Here the asymmetry between the cost of errors makes it efficient to err on the side of letting the guilty go free.  The benefit to the state of letting a single criminal go free is small, but the cost to an innocent person from incarceration or death is large.

But that asymmetry does not hold in all instances.  It is quite likely untrue in this instance.  Sometimes the asymmetry cuts the other way.  A large-scale infringer can impose huge losses on legitimate copyright holders.  Indeed, these losses are likely far larger than the profits of legitimate website operators: in a competitive industry (the legal resale sale of copyrighted material) these profits are close to zero, and customers are typically not harmed when one site is shut down because there are alternative legitimate sources of content.  Thus, the presumption in favor of letting the potential infringer walk does not necessarily hold.  Indeed, the asymmetry in this instance suggests that it is efficient to shift the burden because the losses from false negatives are larger than the losses from false positives.

Moreover, the burden should depend on the cost of producing information.  The system should impose a greater burden on the party with the lower cost of providing information that would allow the trier-of-fact to make a correct judgment.

A legitimate commercial site that is paying the copyright holder should have no problem proving that.  Show records of payments received for content sold, and records of payments made to copyright holders.  All kinds of businesses do that every day.  End of story.  At worst, SOPA imposes a burden to keep good records and be punctilious about paying royalties.  Which is kind of the point.

The fears that small-time, perhaps inadvertent, infringers will be targeted are overblown.  The benefit to cracking down on such an infringer are small, and the cost of obtaining an injunction are probably not that much higher than would be involved in going after a big-time Russian or Chinese pirate site, meaning that copyright holders have a strong incentive to concentrate their efforts on the big infringers, and let the small fry swim away.  And even if economics don’t make it unattractive for a content owner to pursue a small-time infringer, the clear legislative intent to attack large-scale commercial infringement by major foreign operators will constrain judges.  It would likely take some time for the precedents to be established, but eventually it is likely that SOPA enforcement would have very few false positive errors.

But that is likely all academic–figuratively, not literally, in the sense that the previous analysis was academic.  Obama has hinted that he opposes SOPA.  The White House blog had a post over the weekend stating that the administration opposes legislation that “reduces freedom of expression” or harms “the dynamic, innovative global Internet.”  This is widely interpreted as a White House whistle calling off the SOPA dogs.   Although it has broad support in Congress, its passage is now problematic.  (Note the typical Obamaesque voting present slipperiness here.  As with the Keystone XL Pipeline, he doesn’t have the political or moral courage to kill something he doesn’t like forthrightly and honestly, instead strangling it stealthily while attempting to leave no fingerprints behind.)

And why oh why did he do that?  One can imagine the angst this caused him, for this issue pits Obama’s and the Democrat’s biggest money constituents against one another: big media (“Hollywood”) on the one hand, and Silicon Valley, on the other: SoCal vs. NoCal.  And by Silicon Valley/NoCal, I mean primarily Google.  This is a Dem Donor Civil War.

Google has been fiercely opposed to SOPA.  No surprise there.  Lowering the price of content raises the demand for the services of those who connect users to content.  Google is the most important presence in the connecting business.  Google need not engage in piracy directly to profit from it.  Moreover, Google bridles at incurring costs to enforce the property rights of others.  Hence its fervent opposition.

And hence Obama’s opposition to SOPA.  As the net neutrality debate demonstrates, when Google says “jump,” Obama responds: “how high?”

And like its support for net neutrality, Google’s strident opposition to SOPA illustrates that its true credo is definitely not “don’t be evil.”  Instead, it is: “what is mine is mine, and so is what is yours.”  Google defends its asserted intellectual property quite aggressively, thank you: see its record in patent litigation, and its wars against search engine optimizers.  But it shows no such respect for the property of content owners (in the case of SOPA) or the owners of networks, cable companies, etc. (Net Neutrality).  It benefits when content is pirated, increasing the derived demand for it as an entity that connects content with users.  It benefits when the terms on which the owners of the networks–another element in the chain connecting content with users–can provide their services are limited (as is the case with net neutrality, which is effectively a form of price control that transfers the property of network owners to network users, and suppliers of services complementary to these networks.)

So before you fall for the histrionics over SOPA and the End of the Internet As We Know It, consider the possibility–the likelihood, actually–that you are being played by a company with the most Orwellian credo ever.  Do you want to be a chump for Google, which would be pretty ironic given the heavy anti-corporate rhetoric of many of the SOPA boxers?  Fall for the histrionics surrounding SOPA, and you will be.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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