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Roger Clarke's Free Trade Agmt and 'I.P.'

The Economic and Cultural Impacts
of the Free Trade Agreement Provisions
relating to Copyright and Patent Law

Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Professor, Baker & McKenzie Cyberspace Law & Policy Centre, University of N.S.W.

Visiting Professor, E-Commerce Programme, University of Hong Kong

Visiting Fellow, Department of Computer Science, Australian National University

Draft of 15 March 2004, with enhancements of 17, 18, 19 March; 8, 14, 15, 19, 22, 27, 30 April; 5 May

© Xamax Consultancy Pty Ltd, 2004

Available under an AEShareNet Free for Education licence

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1. Introduction

The Australian and U.S. Governments have announced a Free Trade Agreement between the two countries. Chapter 17 is entitled 'Intellectual Property Rights'. It is available in PDF format. There are also two so-called 'side-letters', which constitute "an integral part of the Agreement", one on 'Aspects of IP', and the other on 'ISP Liability'.

The purpose of these Notes is to briefly summarise the effect of FTA 17, its impacts on Australian copyright and patent law, and its consequential impacts on the Australian economy and Australian society. The document is intended as a briefing paper on the matter, for consideration by public interest advocacy bodies, professional associations, industry associations, the media, and interested members of the public.

The document comprises the following sections:

References are available to resources provided by various organisations.

2. The International Strategic Background

'Intellectual Property Rights' is used to refer to a variety of rights in intangibles, especially copyright, patent, trademarks and designs.

The U.S. Government has sought the agreement of the Australian government and the Australian Parliament to the imposition on Australian law of the terms of U.S. copyright and patent law. The justification provided for these changes is that free trade requires harmonisation of Australian laws with those of the U.S.A.

The changes would be to the significant advantage of copyright-owners and patent-owners. These are overwhelmingly corporations, and overwhelmingly corporations domiciled in the U.S.A.

The Australian Government is of course fully justified in seeking to break down the high levels of U.S. protectionism, and to gain access to the U.S. market on more reasonable terms for Australian agricultural and pastoral goods.

But, in doing so, the Australian Government must not hold to ransom the country's burgeoning information industries, and the rights of its consumers and citizens.

3. Imposed Changes on Australian Law

It is not straightforward to extract from the documents the changes that would be forced on Australian law. In order to gain a clear appreciation of the impact, it is necessary to have a firm grasp of current laws, and then to map the specific terms of the FTA onto those laws. The following is a preliminary outline of what appear to be the key elements.

The key impositions on Australian copyright law appear to be as follows:

The key impositions on Australian patent law appear to be as follows:

The key impositions on Australian trademark law appear to be as follows:

4. The Need for I.P. Laws to be Justified

Copyright and patent laws are interventions into the natural order of economic and social activities. They create monopolies, and invite the owners of the monopolies to 'extract rents' from them, i.e. to exploit the law in order to generate higher revenue than they would normally earn, and to impose higher costs on competitors.

Considerable justification is needed for the meddling that is copyright, patent and trademark law. In the past, moral and ethical justifications have not been considered to be sufficient. The justification has been sought, and needs to be sought, in economics: these laws exist only to encourage innovation, and to do so by enhancing the scope for revenue flows to innovators.

The proper purpose of copyright and patent laws is emphatically not to create advantages for one corporation over another, or strategic advantages for one nation over another (although, depending on the nature of the meddling, that can be their effect). The argument for them is solely that 'the economy as a whole will work better that way, because there will be more innovation'.

5. The Lack of an Economic Case For the Changes

No convincing evidence has been presented in support of the argument that the digital era has undermined longstanding arrangements and that change is needed to sustain the status quo. The U.S. music industry has invented all manner of statistical arguments, which, when investigated, have been found seriously wanting. The same goes for the U.S. proprietary software industry, or at least for Microsoft. (Many other I.T. companies say that they see patent law in particular as being to the serious detriment of innovation in the industry).

Large corporations in mature industries tend to fight against technological change when it is driven by more nimble newcomers. For example, entertainment companies fought viciously against video-recording; but once they finally adapted to the new technology they made massive profits from it.

Music companies' equally vicious resistance against peer-to-peer (P2P) reticulation of recorded music is finally giving way to adoption of the technology. The corporations were clearly told 10 years ago that they will be able to achieve large turnover and high margins once they adopt a constructive approach to the new opportunities. The early signs from leading initiatives such as Apple's iTunes are that the pundits were right, and that consumers are prepared to pay high prices for such services.

The equally vicious opposition by Microsoft to open source software is just as ill-informed and unjustified. A healthy marketplace is emerging, based on value-adding by companies to publicly-available code. This has great benefits in terms not only of reduced costs to user organisations and consumers, but also far earlier discovery of integrity and security problems, and hence much-improved quality of software products.

The beneficiaries of the features of U.S. law that the U.S. Government wants to impose on Australian law are large U.S. corporations, in particular the large music and multi-media corporations generally, and Microsoft. But the case put forward by these corporations has been based on misinformation. No justification exists for the extensions to the monopoly rights that are being proposed.

6. The Economic Argument Against the Changes

Innovation is dependent on ready availability of information. Especially in the booming digital information industries, innovation rarely occurs in some 'big bang' manner. Rather, it is almost entirely cumulative. Successive small, step-wise refinements are made. Ideas are transported from one context to another, and adapted to new situations.

Moreover, there is seldom a sole-originator of an innovation, because modern industries are symbiotic. Manufacturers are dependent for many of their new product features on:

In short, innovation is seldom achieved by one organisation making a massive breakthrough, but by many organisations and a great deal of ongoing interaction. Rather than 'one person standing on the shoulders of giants', most progress is achieved by hordes of busy elves.

Information economics shows that innovators can achieve returns even if they only have quite limited monopoly rights. The prevention of mere imitation without enhancement is justified; but that requires no more than minor refinements to longstanding laws, the majority of which have already been made.

Process patents are an especial concern. Since the Carter Administration, patents have been an explicit weapon of U.S. international competitive strategy. The U.S. Patents Office has lowered the threshhold of innovation required of a patent application to the point that almost anything is approved. The 'contribution' can now be a minor and obvious refinement, it may relate to a mere 'business process' rather than an 'industrial process', and even vague generic claims are accepted. Progress in eBusiness is being seriously harmed by assertions of rights in fundamental ideas such as 'one-click shopping', 'reverse auctions', 'automated credit-checking' and even the notion of a 'hot-link'.

Innovation is also being seriously constrained by legal actions initiated by corporations opposed to innovation. Copyright and patent laws provide large copyright-owners and patent-owners with the ability to deflect the attention of innovators from their work, to impose years of delays and very high legal costs, and in some cases even to prevent innovation from taking place. There is strong evidence of patent-owners in particular using their legal rights as strategic weapons against competitors. An innovative Australian company recently described patents as "a worthless must-have", because every innovative company needs to have a small collection of them in order to counter-threaten competitors when they seek to delay the implementation of innovative products.

In short, the longstanding intention of copyright and patent law to stimulate innovation is being frustrated by the manner in which it is being used by its monopolist beneficiaries.

It is accordingly seriously against Australia's economic interest for copyright and patent laws to be extended at all, let alone in the manner that the U.S. is imposing on Australia through the terms of FTA 17.

7. The Social and Cultural Argument Against the Changes

Australian society has had a long and strong dependence on open information flows. This has been protected by an orientation towards open accessibility, and significant qualifications on the rights of copyright-holders.

A first concern is that enhancements to the powers of copyright-holders increase the incentive for organisations and individuals to exercise proprietary power over software, over multi-media, and over information more generally. This works against open source and open content thinking, increases both the purchase costs and the transaction costs to software and information consumers, and hence reduces the accessibility of software and information.

A further concern is that use of the draconian powers that the changes would grant to copyright-owners would result in information suppression through take-down notices. These are already having the effect in the U.S.A. of causing ISPs to automatically remove the web-pages and even whole web-sites of individuals and small companies, merely because they receive a threatening letter from a lawyer purporting to be acting on behalf of some major corporation.

It is important to note that the effect of the proposed changes would be even more serious in Australia than they already are in the U.S.A. One reason is that Americans enjoy a measure of protection because they have a Bill of Rights entrenched in their Constitution which includes freedom of speech provisions.

A second reasons is that U.S. copyright law qualifies the rights of copyright-holders with 'fair use' provisions that are much more substantial than the Australian law's 'fair dealings' clauses. There appears to be nothing in the FTA that requires strengthening of consumer protections, and hence Australians would suffer the worst excesses of the U.S. legislation without even the limited countermeasures that U.S. consumers have available to them.

The powers are also readily able to be used by corporations to oppress their opponents, including not only their economic competitors but also their economic and social critics. This can be achieved through threats of expensive litigation, and of invocation of the criminal law. The credibility of that oppressive behaviour would be greatly increased if the U.S.-dictated provisions were implemented in Australian law.

These are not mere theoretical or speculative arguments. The DMCA provisions have been used in the U.S.A. to seriously infringe the freedoms of a number of people. These include Russian Dmitry Skylarov (who was gaoled for months, but with the charges eventually withdrawn), Norwegian Jon Johansen (who was subjected to many months of prosecution in his homeland, which was eventually rejected by the courts, and who has been advised never to enter the U.S.A.), and American Ed Felten (who was threatened with prosecution if he presented a paper at a conference; a threat that was later withdrawn).

The obligations embodied in the FTA 17 requirements, if they were implemented, would seriously harm the public interest in openness, and hence damage both social processes and Australian culture.

8. Conclusions

If the Australian Parliament were to comply with the terms of FTA Chapter 17, they would have to make changes to copyright and patent law that are demonstrably against the interests of innovators, because they fundamentally change the character of those laws from stimulative to protective.

Among the many unreasonable U.S. impositions are:

Copyright and patents are legislated monopolies. They enable owners to prevent other organisations and individuals from being creative. Their sole justification has been the stimulation of innovation by providing a window of opportunity during which an innovator can exploit their ideas. The new philosophy pursued by the U.S.A. in its own economic interests is that owners of copyright should have greatly enhanced powers in order to make profits, and thereby benefit the U.S. economy at the expense of the economies of other countries.

There are well-established multilateral agreements in place concerning copyright and patent. The Australian Government has agreed to undermine those multilateral agreements by including within a bilateral trade agreement fundamental changes to its laws.

Moreover, there are well-established multilateral processes in place to enable debate about copyright, patents, trademark and design laws. These involve consultations, and specialist negotiators. The Australian Government has agreed to undermine those multilateral processes by overriding them with an ad hoc, bilateral trade negotiation process.

The Australian Parliament must reject these changes to copyright and patent law. They are economically, socially and culturally harmful to Australia. They serve the interests of U.S. corporations, not Australians.


Key Submissions to the JSCT

This section provides links to and quotations from Submissions to the Joint Standing Committee on Treaties (JSCT), in particular:

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