Part 25 (1/2)

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Daily politics cares little for the limitations imposed by const.i.tutions or for the structural principle the Court describes--that we should leave facts free for others to build upon. Since 1991, a few database companies have lobbied the Congress strenuously and continuously to create a special database right over facts. Interestingly, apart from academics, scientists, and civil libertarians, many database companies, and even those well-known property haters, the U.S. Chamber of Commerce, oppose the creation of such a right. They believe that database providers can adequately protect themselves with contracts or technical means such as pa.s.swords, can rely on providing tied services, and so on. Moreover, they argue that strong database protection may make it harder to generate databases in the first place; the facts you need may be locked up. We need to focus on the inputs as well as the outputs of the process--a point I have tried to make throughout this book. The pressure to create a new right continues, however, aided by cries that the United States must ”harmonize” with Europe, where, you will remember, compilations of facts are strongly protected by intellectual property rights, even if their arrangement is unoriginal.

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So here we have our natural experiment. One major economy rejects such protection and resists pressure to create a new right. A different major economic region, at a comparable level of development, inst.i.tutes the right with the explicit claim that it will help to produce new databases and make that segment of the economy more compet.i.tive. Presumably government economists in the United States and the European Union have been hard at work ever since, seeing if the right actually worked?

Well, not exactly.

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Despite the fact that the European Commission has a legal obligation to review the Database Directive for its effects on compet.i.tion, it was more than three years late issuing its report. At first, during the review process, no attention was paid to the actual evidence of whether the Directive helps or hurts the European Union, or whether the database industry in the United States has collapsed or flourished. That is a shame, because the evidence was there and it was fairly shocking. Yet finally, at the end of the process, the Commission did turn to the evidence, as I will recount, and came to a remarkable conclusion--which was promptly stifled for political reasons. But we are getting ahead of ourselves.

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How do we frame the empirical inquiry? Intellectual property rights allow the creation of state-backed monopolies, and ”the general tendency of monopolies,” as Macaulay pointed out, is ”to make articles scarce, to make them dear, and to make them bad.”

Monopolies are an evil, but they must sometimes be accepted when they are necessary to the production of some good, some particular social goal. In this case, the ”evil” is obviously going to be an increase in the price of databases and the legal ability to exclude compet.i.tors from their use--that, after all, is the point of granting the new right. This right of exclusion may then have dynamic effects, hampering the ability of subsequent innovators to build on what went before. The ”good”

is that we are supposed to get lots of new databases, databases that we would not have had but for the existence of the database right.

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If the database right were working, we would expect positive answers to three crucial questions. First, has the European database industry's rate of growth increased since 1996, while the U.S. database industry has languished? (The drop-off in the U.S. database industry ought to be particularly severe after 1991 if the proponents of database protection are correct; they argued the Feist case was a change in current law and a great surprise to the industry.) 20

Second, are the princ.i.p.al beneficiaries of the database right in Europe producing databases they would not have produced otherwise? Obviously, if a society is handing over a database right for a database that would have been created anyway, it is overpaying--needlessly increasing prices for consumers and burdens for compet.i.tors. This goes to the design of the right--has it been crafted too broadly, so that it is not being targeted to those areas where it is needed to encourage innovation?

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Third, and this one is harder to judge, is the new right promoting innovation and compet.i.tion rather than stifling it?

For example, if the existence of the right allowed a one-time surge of newcomers to the market who then use their rights to discourage new entrants, or if we promoted some increase in databases but made scientific aggregation of large amounts of data harder overall, then the database right might actually be stifling the innovation it is designed to foment.

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Those are the three questions that any review of the Database Directive must answer. But we have preliminary answers to those three questions and they are either strongly negative or extremely doubtful.

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Are database rights necessary for a thriving database industry?

The answer appears to be no. In the United States, the database industry has grown more than twenty-five-fold since 1979 and--contrary to those who paint the Feist case as a revolution--for that entire period, in most of the United States, it was clear that unoriginal databases were not covered by copyright. The figures are even more interesting in the legal database market. The two major proponents of database protection in the United States are Reed Elsevier, the owner of Lexis, and Thomson Publis.h.i.+ng, the owner of Westlaw. Fascinatingly, both companies made their key acquisitions in the U.S. legal database market after the Feist decision, at which point no one could have thought unoriginal databases were copyrightable. This seems to be some evidence that they believed they could make money even without a database right. How? In the old-fas.h.i.+oned way: competing on features, accuracy, tied services, making users pay for entry to the database, and so on.

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If those companies believed there were profits to be made, they were right. Jason Gelman, a former Duke student, pointed out in a recent paper that Thomson's legal regulatory division had a profit margin of over 26 percent for the first quarter of 2004.

Reed Elsevier's 2003 profit margin for LexisNexis was 22.8 percent. Both profit margins were significantly higher than the company average and both were earned primarily in the $6 billion U.S. legal database market, a market which is thriving without strong intellectual property protection over databases. (First rule of thumb for regulators: when someone with a profit margin over 20 percent asks you for additional monopoly protection, pause before agreeing.) 25

What about Europe? There is some good news for the proponents of database protection. As Hugenholtz, Maurer, and Onsrud point out in a nice article in Science magazine, there was a sharp, one- time spike in the number of companies entering the European database market immediately following the implementation of the Directive in member states.2 Yet their work, and ”Across Two Worlds,”3 a fascinating study by Maurer, suggests that the rate of entry then fell back to levels similar to those before the directive. Maurer's a.n.a.lysis shows that the attrition rate was also very high in some European markets in the period following the pa.s.sage of the directive--even with the new right, many companies dropped out.

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At the end of the day, the British database industry--the strongest performer in Europe--added about two hundred databases in the three years immediately after the implementation of the directive. In France, there was little net change in the number of databases and the number of providers fell sharply. In Germany, the industry added nearly three hundred databases immediately following the directive--a remarkable surge--about two hundred of which rapidly disappeared. During the same period, the U.S. industry added about nine hundred databases. Bottom line? Europe's industry did get a one-time boost and some of those firms have stayed in the market; that is a benefit, though a costly one. But database growth rates have gone back to predirective levels, while the anticompet.i.tive costs of database protection are now a permanent fixture of the European landscape. The United States, by contrast, gets a nice steady growth rate in databases without paying the monopoly cost.

(Second rule of thumb for regulators: Do no harm! Do not create rights without strong evidence that the incentive effect is worth the anticompet.i.tive cost.) 27

Now the second question. Is the Database Directive encouraging the production of databases we would not have gotten otherwise?

Here the evidence is clear and disturbing. Again, Hugenholtz et al. point out that the majority of cases brought under the directive have been about databases that would have been created anyway--telephone numbers, television schedules, concert times. A review of more recent cases reveals the same pattern. These databases are inevitably generated by the operation of the business in question and cannot be independently compiled by a compet.i.tor. The database right simply serves to limit compet.i.tion in the provision of the information. Recently, the European Court of Justice implicitly underscored this point in a series of cases concerning football scores, horse racing results, and so on. Rejecting a protectionist and one-sided opinion from its Advocate General, the court ruled that the mere running of a business which generates data does not count as ”substantial investment” sufficient to trigger the database right. It would be nice to think that this is the beginning of some skepticism about the reach of the directive. Yet the court provides little discussion of the economic reasons behind its interpretation; the a.n.a.lysis is merely semantic and definitional, a sharp contrast to its compet.i.tion decisions.

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So what kinds of creations are being generated by this bold new right? The answer is somewhere between bathos and pathos. Here are some of the wonderful ”databases” that people found it worthwhile litigating over: a Web site consisting of a collection of 259 hyperlinks to ”parenting resources,” a collection of poems, an a.s.sortment of advertis.e.m.e.nts, headings referring to local news, and charts of popular music. The sad list goes on and on. The European Commission might ask itself whether these are really the kind of ”databases” that we need a legal monopoly to encourage and that we want to tie up judicial resources protecting. The point that many more such factual resources can be found online in the United States without any legalized database protection also seems worthy of note. At the very least, the evidence indicates that the right is drawn much too broadly and triggered too easily in ways that produce litigation but little social benefit.

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Now, in one sense, these lawsuits over trivial collections of hyperlinks and headlines might be seen as irrelevant. They may indicate we are handing out rights unnecessarily--did we really need a legal monopoly, and court involvement, to get someone to compile hyperlinks on a Web page? But it is hard to see social harm. As with the patents over ”sealed crustless” peanut b.u.t.ter sandwiches or ”methods of swinging on a swing,” we may shake our heads at the stupidity of the system, but if the problems consist only of trivial creations, at least we are not likely to grieve because some vital piece of information was locked up.

But we should not be so quick to declare such examples irrelevant. They tend to show that the system for drawing the boundaries of the right is broken--and that is of general concern, even if the issue at hand is not.

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