Statutory damages are a vital part of the copyright system

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Earlier this year, the Internet Policy Task Force (IPTF) of the Department of Commerce issued its “White Paper on Remixes, First Sale, and Statutory Damages.” In this white paper, the IPTF made various recommendations on the reform of particular aspects of copyright law, including the use of statutory damages in certain contexts. The white paper is but one piece of a larger process to review copyright law in the digital age, including over 20 hearings and listening sessions held by the House Judiciary Committee in the past two years. While many seem to think that copyright is largely working, comments and testimonies submitted to the task force (and elsewhere) criticize the current system of statutory damages for copyright infringement, claiming that the standards for awards of such damages are too vague and provide inadequate guidance to the juries empowered to impose them. Further, these critics contend, the mere threat of statutory damages represents “an existential dilemma” for Silicon Valley entrepreneurs, chilling investment and innovation in new services that interact with copyrighted works.

{mosads}As provided in Section 504 of the Copyright Act, copyright owners fighting infringers in court may opt to seek statutory, rather than actual, damages. A feature of U.S. copyright law since the very first copyright statute in 1790, the purpose of statutory damages is to provide relief to copyright owners in those situations where it is difficult or impossible to measure actual damages. The statute sets out the range of statutory damages. For “regular” infringement, the jury may award from $750 to $30,000 per work infringed. But if the infringement is “willful,” then the jury may award up to $150,000 per work infringed. Moreover, if the jury finds that the infringement was not intentional, and certain other conditions are met, then “the court in its discretion may reduce the award of statutory damages to a sum of not less than $200.” The $150,000 figure stands at the center of complaints against statutory damages, causing at least one excitable advocate to claim that potential statutory damages resulting from a single copyright infringement case can be “as high as approximately $100+ trillion in 2015 dollars, almost twice the world’s current gross domestic product.” Such vacuous commentary is unfortunately characteristic of the debate over statutory damages, where emotions tend to run roughshod over clear thinking.

Critics’ “vagueness” complaint focuses on the statute, which says merely that the jury should award an amount within the range that it considers “just.” And if the bare statutory mandate was all that juries had to go on, then the critics would have a point. But the critics ignore reality: That is, jurors in copyright cases are not simply told to award a “just” amount, but are in fact given detailed instructions by the judge as to the factors they should consider. For example, the “Federal Civil Jury Instructions of the Seventh Circuit” provide this detailed set of instructions:

In determining the appropriate amount to award, you may consider the following factors:

  • the expenses that Defendant saved and the profits that he earned because of the infringement;
  • the revenues that Plaintiff lost because of the infringement;
  • the difficulty of proving Plaintiff’s actual damages;
  • the circumstances of the infringement;
  • whether Defendant intentionally infringed Plaintiff’s copyright; and
  • deterrence of future infringement.

And instructions can be more extensive in specific cases. For example, in Sony BMG Music Entertainment v. Joel Tenenbaum (a well-known case regarding statutory damages), the judge instructed the jury to consider eight factors in determining the amount of statutory damages. One proposal (of three) made in the IPTF’s white paper is to incorporate into the statute of list of factors for courts to consider, but the courts are largely doing so today.

Further, if the statute is really “too vague” and jury instructions are insufficient, then one might expect an epidemic of unreasonable statutory damages awards. Not according to the data.

Lex Machina, which recently released detailed data on intellectual property (IP) litigation (subscription required), found that from 2000 to 2015, total damages in copyright cases involving statutory damages were a little over $674 million (including legal fees, etc.), or about $45 million per year. Moreover, the top 28 cases accounted for $226 million, or 34 percent of the total damages. Put another way, about one-third of damages are accounted for by the top 2 percent of damage judgments.

And these large judgments aren’t against Silicon Valley innovators. The largest judgment in the sample — $37.5 million — was awarded in Elsevier, Inc. v. Does 1-10. This award was a default judgment in favor of Elsevier because the defendants never filed an answer to the complaint or otherwise appeared in court. The second largest judgment — another default judgment for over $28 million — was awarded in ABS-CBN Corporation et al. v. Both “Does 1-10” or “” were blatant piracy sites or their anonymous operators, not innovators.

But what about companies who, unable to overcome their “existential dilemmas,” never bring innovations to market? Here, again, the assertion seems dubious. For instance, looking at the U.N. Information and Communications Technology Development Index, the 24 World Intellectual Property Organization (WIPO) member countries that have statutory damages have innovative scores that are 10 percent higher than do countries without them, other things constant. And seven of the top 30 countries (23 percent) in the 179-country ranking have statutory damages.

Further, the example of Israel, which has statutory damages, makes plain the problems with suggesting they chill innovation. The 2015 Israeli ICT Industry Review states:

Israel has consistently been a global leader in innovation-related categories such as expenditure on research and development (R&D) as a percentage of GDP … and percentage of engineers among residents. Israeli start-up companies continue to raise significant amounts of funding from local and global investors. In fact, Israel is leading the world in terms of per capita venture capital (VC) investment, and is second only to the U.S. in terms of the number of start-ups.

Statutory damages are an important remedy available to American creators. And warnings by critics that they “chill” innovation are unsupported in the data. Alternatively, as our research has shown, IP theft lowers social welfare. Given the disparity in evidence, Congress and consumers would be better served by focusing on solutions to piracy, not weakening copyright protections.

Ford is the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.

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