Knockoff Economy session II

Yi Qian (Northwestern University Kellogg School of Management)

Misattribution of jokes to comedian Steven Wright: he says it didn’t affect his show; some are so horrible he was embarrassed by the misattribution, and some are amazing and he wishes he’d written them.  Does this reaction make sense for counterfeits?

Counterfeit sales are huge.  Research agenda: what are the consequences of weak IP laws?  What are the impacts, origins, and remedies of counterfeits?

Impacts of entry by counterfeiters: endogeneity of entry raises ID challenges.  Look for situations where some are infringed and some aren’t to see effects.  Unique features of counterfeits: usually illegal; similar appearance but usually inferior functionality; intent to deceive (intend to fool consumers; or buyers may intend to fool friends/signal status).

Key findings: authentic’s quality, as proxied by cost, increased. IP not necessary, just as it’s not sufficient, for innovation.  Authentic prices increased after initial drops.  Vertical integration of distribution channels was an effective defense. Advertising also became more informative.

Market is self corrective because private parties compensate for lack of public enforcement when counterfeits become pervasive; would establish offices to work with gov’t.  As compared to generic entry, counterfeits cause companies to invest more on improving searchable quality and less on experiential quality, which could be more valuable for some industries, e.g. fashion, than others, e.g. pharma.  Social welfare could be nonlinear as gov’t enforcement increases.

So, counterfeits can stimulate innovation. Low quality entrant may increase category or brand awareness (word of mouth), which may benefit everyone.  Increased purchases in core channels. May enable compensatory consumption: when low-power consumers have no resources, can compensate for feeling lack of power by consuming counterfeits, which is supported by field studies and lab experiments.  Network effects: Bill Gates said if there has to be piracy in China, let it be Microsoft.  Effects differ for different quality tiers.

After counterfeit enters: Average sales of medium-end product decreased mildly; significant drop in sales of low-end products; increase in sales of high-end products.  Even within brands: High-end Nike sales increased and low-end decreased.

Experiment: 62 participants: treatment group members were exposed to images of counterfeits.  Treatment group had lower purchase intent for the authentic low-end shoe when they see counterfeit alongside authentic and higher purchase intent for the authentic high-end shoe.  Stated motivation: “Brand is a guarantee for quality. I don’t know this brand, but it should be good if it has counterfeit followers.”  Some say they like variety; others say they don’t care about authenticity if they product fits needs.

Balance of advertising and incentive effects enhances authentic’s incentives to move up quality ladder; should prioritize enforcement to counterfeits for low-end product lines. Optimum IP protection could vary from country to country, brand to brand, product to product.  (Compare

Constantine V. Nakassis, Counterfeiting What? Aesthetics of Brandedness and Brand in Tamil Nadu, India, 85 Anthropological Quarterly 701 (2012) (discussing meaning of “brand” in Tamil Nadu).

Pam Sameulson (UC Berkeley School of Law)

Drury v. Ewing, old fashion case: Mrs. Drury was designated as the authress/inventress of a chart (the closest thing then in copyright’s subject matter to a dress pattern), copied by Ewing.  Defended on the ground that the drawings were different, but the argument was that the resulting dresses were the same; court found infringement.  From that decision, would have been a small step to say that instructions in magazine/drawing would be copyrightable and infringed by the derivative work/the dress.  Hard to call a dress a chart, but subject matter cases show that words like chart become elastic when occasion arises. Drone’s influential 1879 treatise endorsed Drury as the way to go, so when the SCt reversed in Baker v. Selden the course of the law changed.  Other legislative close calls on fashion followed.  Distinction between writings (copyright) and useful articles (essentially consigned to patent)—quasi-constitutional understanding, in part because of the use of “respective” in Art. I cl. 8 sec. 8.  This understanding was part of why semiconductor chip protection wasn’t pure copyright, even though Arthur Miller compared the layout of a chip to a Mondrian.

The KE is good because we no longer have that quasi-constitutional barrier; robust examples of lack of need for such protection is a good bulwark.  Claims exist for perfume, etc.; examples of thriving industry can show why we should restrict copyright subject matter.  Would a grant of exclusive rights encourage markets or not?  How well would a copyright regime fit onto the kind of subject matter at issue (synthetic biology is particularly terrible here)?  Are the kinds of creators doing this kind of thing like the creators we have in copyright already—are their processes and artifacts similar? Copyright should be reserved to communication of intellectual content to human beings; software doesn’t fit into that well, though it does fit some of her criteria.

Aaron Perzanowski (Case Western Reserve Law School)

Most of us have an impulse to move from the concrete to the abstract: come up with grand unifying theory explaining motivations for and substance of norms.  The KE gives us lessons from case studies, consistent across some industries, but we should still resist the urge to generalize for the time being. Most important lesson: importance and need to inform IP policymaking through facts on the ground.  Abstract theory can distract from that work.  The KE shows admirable restraint in this regard.

World of custom tattooing: unique, one of a kind, bespoke tattoos for individual clients.  One in 5 American adults has a tattoo (how many are custom? Market segmentation is the kind of thing I’m interested in).  Formal assertions of legal rights are incredibly rare.  Not because people are ok with copying or because they can’t establish effective legal claims against copyists.  They’re squarely within the Copyright Act. But they rely on social norms instead.

Norm: favor client autonomy.  They can even reproduce images for commercial purposes.

Norm: disfavor copying custom design by another tattooist.  Also violates norms for tattooer to reuse a custom design for a second client.

Fundamentally, both norms are driven by client demands and expectations.  Clients want custom tattoos, and they want to use them in whatever ways they choose.  Tattooists could defect from these norms, avoiding opportunity costs of designing new ones.  Extract rents from clients who want to post pictures on FB.  In the long run, that undermines the market for the industry as a whole.  Norms protect longterm collective/community interest.  (Though enforcement seems likely to be hard when you can get a big settlement from the producers of The Hangover.)

Norms influence output, but output influences norms. Similar to standup comedy: norms emerge at a time of radical transformation from your grandfather’s tattoos (hearts that say mom) aka flash to the model of more personal, narrative tattooing.  Causation probably runs in both directions.

What does that mean for innovation? We have more creative production/different creative production.  Is it better? Not sure of that answer.  Norms do favor one kind of expression over another.  Before, you could look at a sailor’s tattoo and know their life story—after 5000 miles you get a certain tattoo in a certain place; iconography was shared.  Today, more fractured/harder to interpret.

Also a distrust of lawyers—not edgy to hire a lawyer/lose street cred.  History of suppressive regulation on tattooing; most courts said tattoos weren’t speech but nonexpressive conduct. Both the substance of the norms and the motivation for relying on them is a function of particular facts and circumstances.

Dan Kelly (Notre Dame)

Sees two theses in the book: social norms and other substitutes for IP that may provide incentives to innovate.  Another stronger claim: copying actually accelerates innovation.  Convinced by first, more skeptical of second.  Is there a tension between these two aspects? 

Choices are generally thought to be good: many kinds of cheese are better than just one.  But if I have to wear a different suit to class every day, that may go too far.  (That’s not really the same thing: now you’re talking about pressure on the consumer to buy, instead of choosing her one suit from a wide range.  It’s true that there can’t be the pressure in the absence of the wide range, but we can easily see—I see it in class and in my closet v. my husband’s—that the pressure differs even if there’s a wide range available for women and for men.)  Financial innovation too can be problematic.  Focus on type or kind of innovation incentivized.

Chefs at the high end: they feel the need to innovate. But what’s the effect at the lower end?  Do we see innovators at the low end or are they driven out?  (One could ask the same about comics; there are of course the cruise ship/dinner speaker comics at the lower end.)

“No copying” is drilled into us as a social norm; maybe we should rethink that. 

Buccafusco: how do we think about norms in the shadow of law v. norms in the absence of law—tattoo artists don’t use available law.  Also, chicken & egg question—do people make anticopying claims because copyright law exists? Well, there’s a history of people making anticopying claims about cookbooks in the 15^th century, but it’s a reasonable question.

Tattoos: could this be handled by contract?  Wedding photography is a potential comparator, where contract seems to have come in to define the appropriate relationships.

Sprigman: worst thing for wedding photographer is that they sign contracts, then the mother of the bride digitizes the photos and sends them to everyone—contract is a partial tool, but not enough because that person isn’t bound by the contract.

Buccafusco: what’s the difference between wedding and fashion photography?

Sprigman: depends on where the photographer is on the scale—lower down, they want the models to use the headshots freely because they get attribution; at the top of the scale, you negotiate.

Perzanowski: tattoo artists aren’t particularly interested in ownership; one example involved an assignment (a failed attempt at a WFH agreement).  Mostly they don’t want people hiring lawyers, creating paperwork for everyone to fill out.  Initial reaction is often: “oh, they did that because copyright/law doesn’t really help them, doesn’t protect what they care about—premise of the joke, recipes, etc.”  We assume the law has failed, and thus conclude that they wouldn’t have to rely on poor substitutes if they had law; but here we have a group that has the law and says no thanks.

Kelly: most general level, some of the disagreement between pro and anticopying camp is about how effective Coasian bargaining is.  If transaction costs are low, then people shouldn’t be allowed to copy (why does that follow? If they’re really low, the right will go whereever it’s most valued), but if they’re high they should be.

Buccafusco: turns out even with apparently low transaction costs you get neither contract nor copyright.  (But doesn’t that suggest that the right is with the person who should have it—the consumer?)

Robert Ellickson: good way to get back to Beebe’s question.  Should we treat all this self-presentation with fashion, luxury goods, tattoos as an arms race in self-presentation that’s wasteful?  Possible argument: presents information about people; fashion churn means more information is available from clothes—see something absolute and see if individuals are responding to the churn.

RT: On “no copying” as a social norm: No, it isn’t!  “No copying of certain kinds” is drilled into us (which gets to Samuelson’s point about subject matter and how we really need to think hard about it to make the system work); but try telling your teacher that you’re no copycat so you aren’t going to copy the spelling previous people used, or the way of writing letters they used, or the essay structure, or the method of proving a theorem in geometry … That might make a good Calvin & Hobbes cartoon, but you will fail your grade.  Some things count as copying and others don’t, and the invisibility of the things that don’t affects how we think about “copying” in general.)

Qian: we often see brands launching low-end stores; this can benefit brands through awareness in the same way counterfeits do. Capture low-end consumers in vertical differentiation as well as advertising selves. 

McKenna: consumers are really good at segmenting and still believing that the high end is high quality.

Qian: counterfeiters could be seen as buzz agents advertising for the brand.  Brands don’t internalize the costs.  Can also show them what are viable markets if considering expansion.

Heller: Mike Tyson case?

Perzanowski: People see it as a real outlier.  Plaintiff is still somewhat consistent with the norm; he didn’t sue based on Mike Tyson’s presence in the first movie. It was when it moved to another actor in a commercial context.  It’s an interesting case because it demarcates the outer boundaries of the client autonomy norm.  Mike Tyson can do whatever he wants with his tattoo (except authorize a Mike Tyson-related storyline, apparently! As McKenna then said).

Fagundes: whether it matters in the shadow/not covered at all?  His suspicion is that it doesn’t: people were wrong about what the law was, in weird ways.  Derby girls: called it theft or copyright infringement.  These views were surprisingly persistent.  He could tell people the real rules, and they’d ignore him.  Lay views about the law are more strongly determined by norms/morals than by law itself.  Once they learned what the law was and that it could make an intervention, they were uninterested in using it even if they were infuriated by violation of social norms.  Outsider status was relevant.

Ellickson: hey, we (law professors) ignore copyright as we prepare for class too.  This is universal, not outsider.  If a law prof sued another prof for copying an article for class, that prof would be ostracized.

Raustiala: in the fashion industry, wrong lay beliefs are also common.  People think: if you copy 30% that’s fine.  They were resistant to true information, too.

Kelly: even if the individuals don’t know, presumably the legal department knows.

Raustiala: a lot of them don’t.  It’s all about size. Industry structure is important. Fashion has a lot of tiny little actors—150 in a factory and 2/3 at the top; big theme = we don’t want to get lawyers.

Avishalom Tor: Move from specific to general—look at quadrant where there is copying and success. What about the quadrants where we have copying and no success?  (Or no copying and no success?)  Questions about upfront costs—don’t tell me when it works, tell me when it works and when it doesn’t—what differentiates?

Raustiala: conceptually, if you really had a creative domain with no continued production, we’d want to look for that path. We don’t think that music, for example, is on that path, though a particular model of the music industry is declining.

Sprigman: the claim is that biologics will have this problem because you can’t get patents on them and yet there’s still high investment to produce commercial quantities.  He has no view on this as yet; wouldn’t be surprised to see a sui generis right.  But not an abundant literature on tech failures because of copying.

Tor: Steve Shavell’s book—patents/medieval example?

Samuelson: the semiconductor people had that story 1979-1984; Intel said it costs millions to make a chip and $50,000 to copy it.

McKenna: but that’s the form it usually takes—just a projection. Do we have evidence of a refusal to protect and subsequent collapse?

Samuelson: passage of Semiconductor Chip Protection Act stopped the copying and led to innovation; people inside the industry think that law led to more innovation—still copying, but now with tweaks in a constructive way.  Then it led to very different industry structure over time: design firms and separate mfg facilities where before it had been very integrated.

Sprigman: fab plant is expensive; design is also important—theorizing what you’re doing takes time/research. 

Samuelson: Intel had evidence that they were losing market share despite being innovators.  We were terribly worried about the Japanese.  Then they also went to branding—Intel inside—to guarantee quality.