Don’t Give Up Yet on Property Rights for the Digital World

Published March 1, 2004

WASHINGTON, DC — Property rights, contracts, and voluntary markets have played a primary role in the development of our vibrant industries. In a new Cato Policy Analysis, University of California-Berkeley Law School professor Robert P. Merges argues that these “building blocks of all creative endeavors” are just as relevant in the digital era as ever, and, in fact, underpin the conditions for “future growth and diversification” in intellectual property.

In the study, “Compulsory Licensing vs. the Three ‘Golden Oldies’: Property Rights, Contracts, and Markets,” Merges dissects a concept in copyright law called “compulsory licensing,” which has developed a following among prominent intellectual property experts and users of digitally based technologies. Falling midway between granting full, unlimited copyright to owners of creative works, and denying it altogether, “compulsory licensing” forces copyright owners to allow use of their works under prices and use restrictions set by Congress.

Some supporters of compulsory licensing argue that full copyright gives creators too much control, while artists complain they have no incentive to create if they do not receive compensation for their work. To mitigate these differences, compulsory licensing regimes have been established in certain industries where “transaction costs”–the trouble of locating, negotiating with, and paying individual creators for their works–were too high. Merges argues there is no need to establish such a regime for digitized works, because the Internet has drastically reduced those costs.

Besides its unsuitability in today’s digital world, Merges argues there are two inherent weaknesses with compulsory licensing: First, because prices users pay to creators of works covered under the licensing regime are determined by Congress, the process of determining that price is subject to lobbying from self-interested parties. Second, once a price is set, it could be “locked-in” for decades, eventually becoming “unreflective of supply and demand.”

Merges points out that voluntary mechanisms for regulating intellectual property transactions, called “collective rights organizations” (CROs), already exist and have excellent track records. Examples include Broadcast Music Incorporated and the American Society of Composers, Artists and Publishers. “There is no reason to believe that CROs will not emerge in the Internet arena,” he writes.

Merges concludes that the three “Golden Oldies” will continue to play well in the digital era if legislators resist future compulsory licensing schemes, repeal existing schemes, and exempt voluntary collective rights organizations from antitrust laws to encourage their development.

The complete study can be found at The Cato Institute is a 501(c) 3 nonpartisan public policy research foundation.