February 3, 2003

By John T. Mitchell*

Today’s technology has simplified many day-to-day transactions through automation, but automation is also laying land mines that have the potential for ensnaring companies in antitrust violations.  This is particularly so in the area of digital distribution of copyrighted works, where the benefits of copyright law protection are counterbalanced by limits on the scope of copyright – limits intended to preserve free trade in copies of copyrighted works, and to prevent copyright owners from controlling certain uses of their works.

For example, the Copyright Act gives the copyright holder the exclusive right “to perform a work publicly,” but no exclusive right to perform a work privately has ever been recognized.  A theater owner needs permission to show (“perform”) a copyrighted movie at the public theater and a singer needs permission to sing a copyrighted song in public.  On the other hand, singing a copyrighted song in the shower, reading a copyrighted book aloud to a child, or playing a DVD movie in the family room, are all examples of private performances of copyrighted works, which copyright holders have no right to control.  In fact, though it may be a crime for someone to steal a DVD from a video store, it is not copyright infringement for the thief to play the movie at home.  So, what is the legal effect of using technology to control, suppress or charge for those private performances?

Similarly, the copyright holder can control the reproduction of a copyrighted work, and can also control the initial distribution of its own copies of a work, but Section 109(a) of the Copyright Act also makes clear that the owner of a lawfully made copy is entitled to sell it, lend it, trade it or give it away without the consent of the copyright owner. So, what is the legal effect of using technology to control, suppress or charge for those lawful transfers?

Generally, if a copyright holder, who has no right under the Copyright Act to prevent people from playing music or movies, and no right to prevent people from selling or trading their own lawfully made copies of copyrighted works, were to either enlarge the scope of its copyrights beyond the limits set by law, or to enter into agreements with others to prevent the lawful trade of copies authorized by Section 109(a), one would expect such conduct to give rise to liability under antitrust law and copyright law.  For example, back in 1908 the Supreme Court ruled that a book publisher could not use a notice to prevent a reseller from selling books for less than one dollar.[1]  And it is also clear that if the publisher had entered into an agreement with the reseller to not sell books for less than one dollar, that would constitute price-fixing that is ­per se illegal under antitrust law.  That is, copyrights do not immunize antitrust liability.[2]

If a copyright holder were to agree with the manufacturers of the systems for making lawful copies and of the systems for playing them to eliminate all trade in lawful copies unless each transaction (each resale, trade, gift or rental) has the consent of the copyright holder, there is of course no doubt that such agreement would constitute a naked restraint of trade.  If, instead, the copyright holder agreed with the manufactures of copying and playing technologies to deploy a system which simply obeys the instructions of the copyright holder (including instructions which have the purpose and effect of eliminating the resale, trade, gift or rental of the copy, or of enlarging the copyright monopoly by charging for private performances), then the agreement to have technology automatically do the deed is certainly no better than the first.  It is akin to a company saying to the prospective co-conspirator:  “Listen, I can’t agree with you to do what you are asking because my lawyers tell me it would be illegal, so what I’ll do is program my machine to do what you tell it to do, but just don’t tell me.”  Or, to place it in the context of actual negotiations over standards such as the Motion Picture Experts Group (“MPEG”), “Listen, I can’t agree to build a system for delivering and playing back your motion pictures that will prevent the owners of lawful copies from reselling them or renting them without your permission, so what I’ll do instead is agree to build a system that will process the management, playback, and similar handling of the bits ‘in compliance with rules declared by the content provider.’”[3]

Standard-setting to achieve interoperability of Internet networks, codecs, and media players (both hardware and software) certainly has its place as a potentially pro-competitive activity.  Traditional antitrust analysis would tend to focus on whether standard-setting might tend to suppress competing standards, yet would allow for the pro-competitive objectives of achieving interoperability among diverse products and systems.  What is passing “under the radar” is the creation of standards to enable “automated agreements in restraint of trade” along the lines of the examples above.  Perhaps due to the illegality of such automated agreements in restraint of trade, some are asking Congress for its blessing (and some leverage) in developing and enforcing such standards.[4]  Though the wisdom of such approach may be called into question, there can be no doubt that, without a legislative exemption from antitrust liability, the setting standards for automated agreements carries a particularly high legal risk if for no other reason than that the purpose and effect of the resulting automated agreements may not be known to some of the parties, who may be assuming that the automation is only about protecting copyrights rather than protecting anti-competitive business models.

There may be perfectly legitimate “rules” established by the copyright owner, but there is a big difference between rules which have the purpose and effect of authorizing (or not) actions which implicate the exclusive rights of the copyright holder, as set forth in Section 106 of the Copyright Act[5] and rules which have the purpose and effect of restraining trade in lawfully made copies or otherwise circumventing the statutory limits placed upon the copyright grant.  Because the latter could render a copyright unenforceable,[6] or could give rise to civil or criminal liability under antitrust laws,[7] businesses should take care that as they employ technology to prevent unlawful use of copyrighted works, they, too, not be found guilty of unlawful activity.